<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: DECEMBER 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
----------- ------------
Commission File Number: 1-8101
Exact Name of Registrant as
Specified in Its Charter: DDL ELECTRONICS, INC.
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization: DELAWARE Identification No.: 33-0213512
Address of Principal Executive Offices: 2151 Anchor Court
Newbury Park, CA 91320
Registrant's Telephone Number: (805) 376-9415
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
The registrant had 23,066,914 shares of Common Stock outstanding as of
February 5, 1997.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, except June 30, 1996)
December 31 , June 30,
1996 1996
------ ------
Assets
Current assets:
Cash and cash equivalents $ 1,052,000 $ 2,519,000
Accounts receivable 7,134,000 5,620,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 4,173,000 3,026,000
Inventories 3,394,000 4,014,000
Prepaid expenses and other
current assets 210,000 314,000
---------- ----------
Total current assets 15,963,000 15,493,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 6,081,000 5,604,000
Plant equipment 14,383,000 13,999,000
Office and other equipment 1,799,000 1,444,000
---------- ----------
22,263,000 21,047,000
Less: accumulated depreciation
and amortization (15,938,000) (15,130,000)
---------- ----------
Property, equipment and
improvements, net 6,325,000 5,917,000
---------- ----------
Other assets:
Goodwill, net 5,074,000 5,708,000
Debt issue costs 285,000 533,000
Deposits and other assets 578,000 436,000
---------- -----------
5,937,000 6,677,000
---------- -----------
$ 28,225,000 $ 28,087,000
========== ===========
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DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Continued)
(Unaudited, except June 30, 1996)
December 31, June 30,
1996 1996
------ ------
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 1,621,000 $ -
Current portion of
long-term debt 5,915,000 603,000
Accounts payable 6,999,000 7,485,000
Accrued payroll and
employee benefits 671,000 777,000
Other accrued liabilities 2,649,000 3,114,000
---------- ----------
Total current liabilities 17,855,000 11,979,000
---------- ----------
Long-term debt:
10% Senior Secured Notes - 5,300,000
7% Convertible Subordinated
Debentures, less current
portion 409,000 443,000
8-1/2% Convertible
Subordinated Debentures 1,580,000 1,580,000
Notes payable, capitalized
lease obligations and
other long-term debt,
less current portion 3,958,000 3,612,000
---------- ----------
Total long-term debt 5,947,000 10,935,000
---------- ----------
Stockholders' equity:
Common stock 231,000 230,000
Additional paid-in capital 29,408,000 29,304,000
Common stock held in escrow (1,325,000) (1,325,000)
Accumulated deficit (23,256,000) (22,000,000)
Foreign currency translation
adjustment (635,000) (1,036,000)
---------- ----------
Total stockholders' equity 4,423,000 5,173,000
---------- ----------
$ 28,225,000 $ 28,087,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
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DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
----------------------
1996 1995
------ ------
Sales $11,185,000 $ 6,029,000
Cost of goods sold 9,762,000 5,372,000
---------- ---------
Gross profit 1,423,000 657,000
---------- ---------
Operating expenses:
Administrative and selling 1,212,000 1,031,000
Goodwill amortization 317,000 -
---------- ---------
1,529,000 1,031,000
---------- ---------
Operating loss (106,000) (374,000)
---------- ---------
Non-operating income (expense):
Investment income 19,000 73,000
Interest expense (324,000) (114,000)
Other income (expense) (120,000) 67,000
---------- ---------
(425,000) 26,000
---------- ---------
Loss before income taxes (531,000) (348,000)
Income tax benefit - -
---------- ---------
Net loss $ (531,000) $ (348,000)
========== =========
Net loss per share $ (0.02) $ (0.02)
==== ====
Shares used in computing
net loss per share 23,048,233 16,485,249
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
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DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended
December 31,
----------------------
1996 1995
------ ------
Sales $21,080,000 $12,221,000
Cost of goods sold 18,561,000 10,838,000
---------- ----------
Gross profit 2,519,000 1,383,000
---------- ----------
Operating expenses:
Administrative and selling 2,363,000 1,895,000
Goodwill amortization 634,000 -
---------- ----------
2,997,000 1,895,000
---------- ----------
Operating loss (478,000) (512,000)
---------- ----------
Non-operating income (expense):
Investment income 43,000 200,000
Interest expense (582,000) (229,000)
Other income (expense) (239,000) 167,000
---------- ----------
(778,000) 138,000
---------- ----------
Loss before income taxes (1,256,000) (374,000)
Income tax benefit - 1,110,000
---------- ----------
Net income (loss) $(1,256,000) $ 736,000
========== ==========
Earnings (loss) per share $ (0.05) $ 0.04
==== ====
Shares used in computing
earnings (loss) per share 23,032,845 16,985,366
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
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DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
----------------------
1996 1995
------ ------
Cash flows from operating activities:
Net income (loss) $(1,256,000) $ 736,000
Adjustments to reconcile net income
(loss) to net cash provided (used)
by operating activities -
Depreciation and amortization 1,556,000 382,000
Net increase in operating
working capital (2,874,000) (755,000)
(Increase) decrease in deposits
and other assets (142,000) 7,000
Benefit of noncapital grants (119,000) (151,000)
Other 61,000 (60,000)
--------- ---------
Net cash provided (used) by
operating activities (2,774,000) 159,000
--------- ---------
Cash flows from investing activities:
Capital expenditures (207,000) (380,000)
---------- ---------
Cash flows from financing activities:
Proceeds from bank lines of credit 1,564,000 -
Reductions of long-term debt (388,000) (348,000)
Proceeds from exercise of stock options - 377,000
Proceeds from exercise of warrants - 21,000
Proceeds from government grants 290,000 139,000
--------- ---------
Net cash provided by financing activities 1,466,000 189,000
--------- ---------
Effect of exchange rate changes on cash 48,000 (57,000)
--------- ---------
Decrease in cash and cash equivalents (1,467,000) (89,000)
Cash and cash equivalents at
beginning of period 2,519,000 2,917,000
--------- ---------
Cash and cash equivalents at
end of period $ 1,052,000 $ 2,828,000
========= =========
See accompanying Notes to Unaudited
Consolidated Financial Statements
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DDL Electronics, Inc. provides integrated design and electronic manufacturing
services ("EMS") to original equipment manufacturers ("OEMs") in the
computer, telecommunications, instrumentation, medical, industrial and
aerospace industries. The Company also manufactures multilayer printed
circuit boards ("PCBs") for use primarily in the computer, communications and
instrumentation industries. The Company's EMS operations are located in
Southern California and Northern Ireland. The Company's PCB facilities are
located in Northern Ireland.
The accompanying consolidated financial statements, which have not been
audited by independent accountants (except for the balance sheet as of June
30, 1996), include the accounts of DDL Electronics, Inc. and its
subsidiaries. All significant intercompany transactions and accounts have
been eliminated in consolidation. In the opinion of the Company's
management, the accompanying consolidated financial statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the Company's financial position at December 31, 1996 and its results
of operations and cash flows for the six months ended December 31, 1996 and
1995.
The Company uses a 52-53 week fiscal year ending on the Friday closest to
June 30. In the accompanying interim consolidated financial statements, the
interim period end for both years is shown as December 31 for clarity of
presentation. The actual periods ended on December 27, 1996 and December 29,
1995. Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1996 Annual Report to Stockholders as filed with the Securities and
Exchange Commission on October 11, 1996.
Certain reclassifications have been made to the interim fiscal 1996 financial
statements to conform with the fiscal 1997 financial statement presentation.
Such reclassifications had no effect on the Company's results of operations
or stockholders' equity.
Note 2 - REVENUE AND COST RECOGNITION
The Company's Northern Ireland operating units recognize sales and cost of
sales upon shipment of products.
SMTEK, the Company's U.S. operating unit which was acquired in January 1996,
has historically generated the majority of its revenue through long-term
contracts with suppliers of electronic 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
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expense as incurred. In the period in which it is determined that a loss
will result from the performance of a contract, the entire amount of the
estimated loss is charged to income. Other changes in contract price and
estimates of costs and profits at completion are recognized prospectively.
This method recognizes in the current period the cumulative effect of the
changes on current and prior periods. The asset "Costs and estimated
earnings in excess of billings on uncompleted contracts" represents revenues
recognized in excess of amounts billed.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
December 31, June 30,
1996 1996
---- ----
Trade receivables $6,900,000 $5,456,000
Other receivables 401,000 296,000
Less allowance for doubtful
accounts (167,000) (132,000)
--------- ---------
$7,134,000 $5,620,000
========= =========
Included in other receivables at December 31, 1996 and June 30, 1996 are
grants due from the Industrial Development Board for Northern Ireland of
$127,000 and $251,000, respectively.
Note 4 - COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
The components of costs and estimated earnings in excess of billings on
uncompleted contracts are as follows:
December 31, June 30,
1996 1996
---- ----
Costs incurred on uncompleted
contracts $15,979,000 $11,181,000
Estimated earnings 1,628,000 1,544,000
---------- ----------
17,607,000 12,725,000
Less: Billings to date (13,302,000) (9,613,000)
Customer advances and
progress payments (132,000) (86,000)
---------- ----------
$ 4,173,000 $ 3,026,000
========== ==========
Costs and estimated earnings in excess of billings on uncompleted contracts
consists of revenue recognized under electronics assembly contracts which
amounts were not billable at the balance sheet date. Essentially all of the
unbilled receivables are expected to be billed within 90 days of the balance
sheet date.
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Note 5 - INVENTORIES
Inventories consist of the following:
December 31, June 30,
1996 1996
---- ----
Raw materials $2,777,000 $2,853,000
Work in process 886,000 1,263,000
Finished goods 13,000 146,000
Less reserves (282,000) (248,000)
--------- ---------
$3,394,000 $4,014,000
========= =========
Note 6 - OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
December 31, June 30,
1996 1996
---- ----
Environmental liabilities $ 679,000 $ 728,000
Accrued taxes payable 795,000 951,000
Other 1,175,000 1,435,000
--------- ---------
$2,649,000 $3,114,000
========= =========
Note 7 - FINANCING ARRANGEMENTS
Bank Line of Credit Agreements:
The Company has an accounts receivable-based working capital bank line of
credit for SMTEK, its U.S. EMS operation, which provides for borrowings of up
to $2,500,000 at an interest rate of prime plus 1.25%. At December 31, 1996,
borrowings outstanding under this credit facility amounted to $663,000. The
Company also has a credit facility agreement with Ulster Bank Markets for its
Northern Ireland operations. This agreement includes a working capital line
of credit of 1,150,000 pounds sterling (approximately $1,900,000), and
provides for interest on borrowings at 1-1/2% over the Bank's base rate. At
December 31, 1996, borrowings outstanding under this credit facility amounted
to $958,000.
Acquisition indebtedness:
In February 1996, the Company issued 10% Senior Secured Notes due July 1,
1997 in the aggregate amount of $5,300,000 (the "10% Senior Notes") as
partial financing for the acquisition of SMTEK.
The 10% Senior Notes are secured by (i) 1,060,000 shares of common stock and
(ii) warrants to purchase 1,060,000 shares of common stock (the "Collateral
Warrants"), all of which have been placed into an escrow account. In the
event the Collateral Warrants are required to redeem the 10% Senior Notes,
each warrant would be exercisable into one share of common stock at a price
which is 6% less than the market value of the Company's common stock at the
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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.
Note 8 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS
"Net cash provided (used) by operating activities" includes cash payments for
interest as follows:
Six months ended
December 31,
---------------------
1996 1995
------ ------
Interest paid $ 527,000 $ 225,000
======= =======
"Net increase in operating working capital" is comprised of the following:
Six months ended
December 31,
---------------------
1996 1995
------ ------
Increase in accounts receivable $(1,192,000) $ (425,000)
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (1,198,000) -
(Increase) decrease in
inventories 926,000 (561,000)
(Increase) decrease in
prepaid expenses 113,000 (956,000)
Decrease in accounts payable (900,000) (441,000)
Decrease in accrued payroll
and employee benefits (146,000) (115,000)
Increase (decrease) in other
liabilities (477,000) 1,743,000
--------- ---------
Net increase in operating
working capital $(2,874,000) $ (755,000)
========= =========
Following is the supplemental schedule of non-cash investing and financing
activities:
Six months ended
December 31,
---------------------
1996 1995
------ ------
Capital expenditures financed by
lease obligations $ 615,000 $ 47,000
========= =======
Conversion of debt to equity $ 105,000 $104,000
========= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements made below are forward-looking in nature and reflect the
Company's current expectations and plans. Such statements involve various
risks and uncertainties that could cause actual results to differ materially
from those currently expected by the Company. Meaningful factors that might
cause such differences include, but are not limited to, significant
historical losses, limited capital resources and a continuing need for
financing, dependence on key personnel, concentration of revenues among major
customers, historical dependence on government business on the part of the
Company's U.S. operating unit and a recent shift into commercial business,
industry conditions, competition, environmental matters, dependence on
suppliers and other factors discussed in the Company's Securities and
Exchange Commission filings, including other factors described as "Risk
Factors" in the Company's Registration Statement on Form S-3 (No. 333-02969).
DESCRIPTION OF THE BUSINESS
The Company provides integrated design and electronic manufacturing services
("EMS") to original equipment manufacturers ("OEMs") in the computer,
telecommunications, instrumentation, medical, industrial and aerospace
industries. The Company also manufactures multilayer printed circuit boards
("PCBs") for use primarily in the computer, communications, and
instrumentation industries. The Company's EMS operations are located in
Southern California and Northern Ireland. Its PCB facilities are located in
Northern Ireland.
The Company entered the EMS business by acquiring its domestic EMS operations
in 1985 and by organizing its European EMS operations in 1990. In fiscal
1995, the Company liquidated or sold all assets associated with its PCB and
EMS operations in the United States. In January 1996, as the first step
toward rebuilding a domestic presence in the EMS industry, the Company
acquired SMTEK, Inc. ("SMTEK"), a provider of integrated design and
electronic manufacturing services.
RESULTS OF OPERATIONS
Consolidated sales for the three and six months ended December 31, 1996 were
$11,185,000 and $21,080,000, respectively, compared to $6,029,000 and
$12,221,000 for the same periods in the previous fiscal year. The sales
increases result primarily from the acquisition of SMTEK, which contributed
revenues of $4,210,000 and $7,716,000 in the three and six months ended
December 31, 1996, respectively. Because the acquisition of SMTEK was
accounted for using the purchase method, SMTEK's operations are not included
in the Company's results for the three and six months ended December 31,
1995. Sales of DDL Electronics, Ltd. ("DDL-E"), the Company's Northern
Ireland EMS operation, increased approximately 25% in the latest quarter
compared to the second quarter of last year, while sales of Irlandus
Circuits, Ltd. ("Irlandus"), the Company's PCB operation, increased
approximately 11% between these same two periods. For the six months ended
December 31, 1996, sales of DDL-E and Irlandus increased 20% and 2%,
respectively, over sales for the comparable period of the prior year.
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Consolidated gross profit for the six months ended December 31, 1996 was
$2,519,000, compared to $1,383,000 for the comparable period of the prior
year. The inclusion of SMTEK in the latest six month period accounted for
$1,150,000 of the increase. Irlandus' gross profit increased $184,000 during
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the six months ended December 31, 1996 due primarily to an increase in higher
margin quick-turn orders, while DDL-E's gross profit declined $198,000
despite higher sales. The Company's consolidated gross profit margin
increased from 11.3% in the six months ended December 31, 1995 to 11.9% in
the six months ended December 31, 1996, primarily due to inclusion of SMTEK
in the results for the latest six month period and to improvement in
Irlandus' gross profit margin.
DDL-E's gross profit margin fell from 11.1% in the six months ended December
31, 1995 to 7.0% in the latest six month period. This decline was
attributable to several factors, including the loss of a large, profitable
assembly contract which had accounted for a significant portion of DDL-E's
sales in the first six months of last fiscal year. Also contributing to the
decline in gross profit margin was the fact that last year's first six months
included "consignment sales". Consignment sales, in which the customer
furnishes the materials and components to be assembled, typically have higher
profit margins than "turnkey" sales, in which the contract assembly company
procures the materials on the customer's behalf. DDL-E had no consignment
sales in the first six months of fiscal 1997. DDL-E also incurred start-up
training costs associated with several "box build" assembly contracts in the
latest six month period, which further depressed its gross profit margins.
Consolidated gross profit for the three months ended December 31, 1996 was
$1,423,000, compared to $657,000 for the comparable period of the prior year.
The inclusion of SMTEK in the latest three month period accounted for
$650,000 of the increase. Irlandus' gross profit increased by $231,000
between these two periods, while DDL-E's gross profit declined by $115,000.
The lower gross profit at DDL-E was attributable to the factors cited above
for the six month periods. Despite the lower gross profit margin at DDL-E,
the consolidated gross profit margin increased to 12.7% in the three months
ended December 31, 1996 from 10.9% in the three months ended December 31,
1995 due to inclusion of SMTEK in the results for the latest three month
period and to improvement in Irlandus' gross profit margin.
Administrative and selling expenses for the three and six months ended
December 31, 1996 were $1,212,000 and $2,363,000, respectively, compared to
$1,031,000 and $1,895,000 for the same periods in the previous year. These
increases are the result of the acquisition of SMTEK in January 1996, as the
1995 amounts consisted of administrative and selling expenses for solely the
Company's Northern Ireland operations and corporate office functions.
In the three and six months ended December 31, 1996, the consolidated
operating losses were $106,000 and $478,000, respectively, compared to
$374,000 and $512,000 for the same periods in the previous fiscal year.
Increased gross profit as a result of the SMTEK acquisition is the primary
reason for the lower operating losses in the latest three and six month
periods.
<PAGE>
Investment income for the six months ended December 31, 1996 and 1995 was
$43,000 and $200,000, respectively. The 1995 amount includes nonrecurring
interest income of $106,000 received on income tax refunds.
Interest expense increased from $114,000 in the three months ended December
31, 1995 to $324,000 in the three months ended December 31, 1996. In the six
months ended December 31, 1996 and 1995, interest expense was $582,000 and
$229,000, respectively. These increases are attributable to interest on debt
issued in 1996 to finance the SMTEK acquisition.
<PAGE>
Other income (expense) for the six months ended December 31, 1996 and 1995
was ($239,000) and $167,000, respectively. The 1995 amount includes a
$100,000 gain recognized upon the negotiated settlement of a facility lease
commitment at less than the amount previously reserved. The 1996 amount
includes debt issue cost amortization expense of $248,000 associated with the
debt issued to finance the SMTEK acquisition.
In fiscal year 1996, the Company recognized an income tax benefit associated
with application for federal tax refunds as permitted under section 172(f) of
the Internal Revenue Code. In the aggregate the Company applied for federal
tax refunds of $2,175,000, net of costs associated with applying for such
refunds. To date, the Company has received $1,871,000 of net refunds plus
interest on such refunds of $106,000, and has recognized as an income tax
benefit $1,110,000 net of certain expenses. Because of the possibility that
the tax returns underlying these refunds may be subject to audit by the
Internal Revenue Service and a portion of the refunds disallowed, the Company
has not yet recognized a tax benefit for the remainder of the refunds
received to date, or for the refunds still expected to be received.
Nonetheless, the Company feels that its claim for refund and carry back of
net operating losses can be substantiated and is supported by law, and that
the Company will ultimately collect and retain a substantial portion of the
refunds applied for.
The net loss for the six months ended December 31, 1996 was $1,256,000 or
$0.05 per share, compared to net income of $736,000 or $0.04 per share for
the same period of fiscal 1995. Net income for the fiscal 1995 period
includes the $1,110,000 income tax benefit discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash equivalents,
which amounted to $1,052,000 at December 31, 1996, and its bank lines of
credit. During the six months ended December 31, 1996, cash and cash
equivalents decreased by $1,467,000. This decrease consisted of cash used by
operating activities of $2,774,000 and capital expenditures of $207,000,
partially offset by cash inflows of $1,176,000 from new borrowings net of
debt repayments, proceeds from government grants of $290,000 and the effect
of exchange rate changes on cash of $48,000.
Components of operating working capital increased by $2,874,000 during the
first six months of fiscal 1997, comprised of a $1,192,000 increase in
accounts receivable, a $1,198,000 increase in costs and earnings in excess of
<PAGE>
billings on uncompleted contracts and a $1,523,000 decrease in current
liabilities, partially offset by a $926,000 decrease in inventory and a
$113,000 decrease in prepaid expenses and other current assets.
The Company has an accounts receivable-based working capital bank line of
credit for SMTEK which provides for borrowings of up to $2,500,000 at an
interest rate of prime plus 1.25%. At December 31, 1996, borrowings
outstanding under this credit facility amounted to $663,000. The Company
also has a credit facility agreement with Ulster Bank Markets for its
Northern Ireland operations. This agreement includes a working capital line
of credit of 1,150,000 pounds sterling (approximately $1,900,000), and
provides for interest at 1-1/2% over the Bank's base rate. At December 31,
1996, borrowings outstanding under this credit facility amounted to $958,000.
In February 1996, the Company issued 10% Senior Secured Notes due July 1,
1997 in the aggregate amount of $5,300,000 (the "10% Senior Notes") as
partial financing for the acquisition of SMTEK. The 10% Senior Notes are
secured by (i) 1,060,000 shares of common stock and (ii) warrants to purchase
1,060,000 shares of common stock (the "Collateral Warrants"), all of which
have been placed into an escrow account. In the event the Collateral Warrants
are required to redeem the 10% Senior Notes, each warrant would be
exercisable into one share of common stock at a price which is 6% less than
the market value of the Company's common stock at the time of exercise. If
the 10% Senior Notes are repaid from sources other than the Collateral
Warrants, then the Collateral Warrants expire and can no longer be exercised.
The Company plans to retire the 10% Senior Notes at or prior to maturity by
issuing new common stock. The note holders have the option to accept common
stock in lieu of cash. If the note holders do not so elect, then the Company
will endeavor to issue stock to other parties to raise the payoff amount. No
assurance can be given that the Company will be able to sell stock on
acceptable terms or at all. Under certain circumstances, as set forth in the
agreements governing the 10% Senior Notes, the Company can apply 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 would need
to be issued to fund the retirement of these notes depends on several
factors, including: (i) whether the notes are paid off prior to the maturity
date; (ii) if paid prior to maturity, whether the prepayment is partial or
complete; and (iii) the market price of the Company's common stock at the
time of issuance.
Cash and cash equivalents have declined steadily over the last six months,
primarily to fund increases in working capital necessitated by higher sales
and backlog levels. The cash decline is a matter of concern to management
and the Board of Directors, who are considering several means of addressing
the situation.
The Company's financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The Company incurred an operating loss of
$478,000 and negative cash flow from operating activities of $2,774,000
during the six months ended December 31, 1996. In addition, at December 31,
1996 the Company had a working capital deficit of $1,892,000 as a result of
<PAGE>
transferring the $5,300,000 10% Senior Notes maturing July 1997 from long-
term debt to current liabilities.
Management anticipates that the Company will continue to incur operating
losses for at least the near term future due to the goodwill amortization
expense arising from the acquisition of SMTEK. Operating losses are expected
to continue until such time as sales increase to a level sufficient to offset
goodwill amortization. No assurance can be given as to whether or when sales
increases may be achieved. Sales increases will depend in part upon
strengthening the Company's sales and marketing functions for its existing
operations and improving its price competitiveness in the EMS industry by
achieving economies of scale in the procurement of electronic components.
The achievement of sustained operating profitability is the most significant
internal factor to ensure the Company's long-term viability. No assurance can
be given that the Company will attain operating profitability or that cash
generated from non-operating sources will be adequate to fund future cash
needs. As a necessary step to ensure the Company's increased profitability,
the Company is actively pursuing strategic merger and acquisition candidates
that will help ensure growth of the Company in the markets and industries in
which it has expertise. No assurance can be given that any such merger or
acquisition will occur.
Management believes that the Company's cash resources and borrowing capacity
on its bank lines of credit are sufficient to fund operations at current
levels for at least the next 12 months.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
11 Computation of Earnings Per Share
27 Financial Data Schedule (electronic filing only)
b. Reports on Form 8-K:
There were no reports filed on Form 8-K during the three months ended
December 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 7, 1997 /s/ Gregory L. Horton
- --------------------------------- -----------------------------------
Date Gregory L. Horton
Chief Executive Officer and
President
February 7, 1997 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)
EXHIBIT 11
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Three Months Ended
December 31,
------------------------
1996 1995
------ ------
PRIMARY EARNINGS PER SHARE:
Net loss $ (531,000) $ (348,000)
========== ==========
Weighted average number of
common shares outstanding 23,048,233 16,485,249
Assumed exercise of options and warrants
net of shares assumed reacquired - -
---------- ----------
Average common shares and common
share equivalents 23,048,233 16,485,249
========== ==========
Earnings (loss) per share $(0.02) $(0.02)
==== ====
FULLY DILUTED EARNINGS PER SHARE:
Net loss $ (531,000) $ (348,000)
Add back net interest related to
convertible subordinated debentures 34,000 34,000
---------- ----------
Net loss for fully
diluted computation $ (497,000) $ (314,000)
========== ==========
Weighted average number of common
shares outstanding 23,048,233 16,485,249
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 224,219 815,175
Assumed conversion of convertible
subordinated debentures 310,206 663,992
---------- ----------
Average fully diluted shares 23,582,658 17,964,416
========== ==========
Loss per share $(0.02) $(0.02)
==== ====
<PAGE>
EXHIBIT 11
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Six Months Ended
December 31,
------------------------
1996 1995
------ ------
PRIMARY EARNINGS PER SHARE:
Net income (loss) $(1,256,000) $ 736,000
========== ==========
Weighted average number of
common shares outstanding 23,032,845 16,341,517
Assumed exercise of options and warrants
net of shares assumed reacquired - 643,849
---------- ----------
Average common shares and common
share equivalents 23,032,845 16,985,366
========== ==========
Earnings (loss) per share $(0.05) $ 0.04
==== ====
FULLY DILUTED EARNINGS PER SHARE:
Net income (loss) $(1,256,000) $ 736,000
Add back net interest related to
convertible subordinated debentures 67,000 67,000
---------- ----------
Net income (loss) for
fully diluted computation $(1,189,000) $ 803,000
========== ==========
Weighted average number of common
shares outstanding 23,032,845 16,341,517
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 266,890 704,683
Assumed conversion of convertible
subordinated debentures 310,206 673,135
---------- ----------
Average fully diluted shares 23,609,941 17,719,335
========== ==========
Earnings (loss) per share $(0.05) $ 0.05 (a)
==== ====
(a) Fully diluted earnings per share is anti-dilutive for fiscal 1996.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
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<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 1052000
<SECURITIES> 0
<RECEIVABLES> 6900000
<ALLOWANCES> (167000)
<INVENTORY> 3394000
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<PP&E> 22263000
<DEPRECIATION> 15938000
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<BONDS> 5947000
<COMMON> 231000
0
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<OTHER-SE> 4192000
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<SALES> 21080000
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<CGS> 18561000
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<OTHER-EXPENSES> 0
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<INCOME-PRETAX> (1256000)
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