SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: MARCH 31, 1997
[ ] 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 23,102,047 shares of Common Stock outstanding as of
May 5, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited, except June 30, 1996)
March 31, June 30,
1997 1996
------ ------
Assets
Current assets:
Cash and cash equivalents $ 1,429,000 $ 2,519,000
Accounts receivable 9,429,000 5,620,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 4,394,000 3,026,000
Inventories 3,433,000 4,014,000
Prepaid expenses and other
current assets 210,000 314,000
---------- ----------
Total current assets 18,895,000 15,493,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 5,926,000 5,604,000
Plant equipment 14,167,000 13,999,000
Office and other equipment 1,860,000 1,444,000
---------- ----------
21,953,000 21,047,000
Less: Accumulated depreciation
and amortization (15,527,000) (15,130,000)
---------- ----------
Property, equipment and
improvements, net 6,426,000 5,917,000
---------- ----------
Other assets:
Goodwill, net 4,756,000 5,708,000
Debt issue costs 162,000 533,000
Deposits and other assets 216,000 436,000
---------- -----------
5,134,000 6,677,000
---------- -----------
$ 30,455,000 $ 28,087,000
========== ===========
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Continued)
(Unaudited, except June 30, 1996)
March 31, June 30,
1997 1996
------ ------
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 1,969,000 $ -
Current portion of
long-term debt 5,960,000 603,000
Accounts payable 8,989,000 7,485,000
Accrued payroll and
employee benefits 774,000 777,000
Other accrued liabilities 2,601,000 3,114,000
---------- ----------
Total current liabilities 20,293,000 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 3,734,000 3,612,000
---------- ----------
Total long-term debt 5,723,000 10,935,000
---------- ----------
Stockholders' equity:
Common stock 231,000 230,000
Additional paid-in capital 29,456,000 29,304,000
Common stock held in escrow (1,325,000) (1,325,000)
Accumulated deficit (23,122,000) (22,000,000)
Foreign currency translation
adjustment (801,000) (1,036,000)
---------- ----------
Total stockholders' equity 4,439,000 5,173,000
---------- ----------
$ 30,455,000 $ 28,087,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------
1997 1996
------ ------
Sales $13,580,000 $10,501,000
Cost of goods sold 11,600,000 9,147,000
---------- ---------
Gross profit 1,980,000 1,354,000
---------- ---------
Operating expenses:
Administrative and selling 1,290,000 1,042,000
Goodwill amortization 317,000 317,000
---------- ---------
1,607,000 1,359,000
---------- ---------
Operating income (loss) 373,000 (5,000)
---------- ---------
Non-operating income (expense):
Investment income 16,000 8,000
Interest expense (279,000) (355,000)
Other income (expense) 24,000 (53,000)
---------- ---------
(239,000) (400,000)
---------- ---------
Income (loss) before taxes 134,000 (405,000)
Income tax benefit - -
---------- ---------
Income (loss) before
extraordinary item 134,000 (405,000)
Extraordinary item - gain on
debt extinguishment - 2,356,000
---------- ---------
Net income $ 134,000 $ 1,951,000
========== =========
Earnings per share:
Income (loss) before
extraordinary item $ 0.01 $ (0.02)
Extraordinary item - 0.12
---- ----
Total earnings per share $ 0.01 $ 0.10
==== ====
Shares used in computing
earnings per share 23,285,231 19,064,501
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
-----------------------
1997 1996
------ ------
Sales $34,660,000 $22,722,000
Cost of goods sold 30,161,000 19,985,000
---------- ----------
Gross profit 4,499,000 2,737,000
---------- ----------
Operating expenses:
Administrative and selling 3,653,000 2,937,000
Goodwill amortization 951,000 317,000
---------- ----------
4,604,000 3,254,000
---------- ----------
Operating loss (105,000) (517,000)
---------- ----------
Non-operating income (expense):
Investment income 59,000 208,000
Interest expense (844,000) (584,000)
Other income (expense) (232,000) 114,000
---------- ----------
(1,017,000) (262,000)
---------- ----------
Loss before income taxes (1,122,000) (779,000)
Income tax benefit - 1,110,000
---------- ----------
Income (loss) before
extraordinary item (1,122,000) 331,000
Extraordinary item - gain on
debt extinguishment - 2,356,000
---------- ---------
Net income (loss) $(1,122,000) $ 2,687,000
========== ==========
Earnings (loss) per share:
Income (loss) before
extraordinary item $ (0.05) $ 0.02
Extraordinary item - 0.13
---- ----
Total earnings (loss) per share $ (0.05) $ 0.15
==== ====
Shares used in computing
earnings (loss) per share 23,046,615 17,677,831
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
-----------------------
1997 1996
------ ------
Cash flows from operating activities:
Net income (loss) $(1,122,000) $ 2,687,000
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 2,356,000 1,152,000
Gain on debt extinguishment - (2,356,000)
Gain on sale of assets (128,000) -
Net increase in operating
working capital (3,595,000) (1,773,000)
(Increase) decrease in deposits
and other assets 100,000 (500,000)
Benefit of noncapital grants (181,000) (207,000)
Other 65,000 6,000
--------- ---------
Net cash used by operating
activities (2,505,000) (991,000)
--------- ---------
Cash flows from investing activities:
Capital expenditures (697,000) (696,000)
Proceeds from sale of assets 202,000 -
Purchase of SMTEK, Inc., net of
cash acquired - (7,638,000)
--------- ---------
Net cash used by investing activities (495,000) (8,334,000)
Cash flows from financing activities:
Proceeds from bank lines of credit 1,955,000 -
Proceeds from long-term debt - 8,800,000
Payments of long-term debt (556,000) (1,445,000)
Debt issue costs - (352,000)
Proceeds from issuance of common stock, net - 1,112,000
Proceeds from exercise of stock options - 492,000
Proceeds from exercise of warrants - 317,000
Proceeds from foreign government grants 467,000 231,000
--------- ---------
Net cash provided by financing activities 1,866,000 9,155,000
--------- ---------
Effect of exchange rate changes on cash 44,000 (98,000)
--------- ---------
Decrease in cash and cash equivalents (1,090,000) (268,000)
Cash and cash equivalents at
beginning of period 2,519,000 2,917,000
--------- ---------
Cash and cash equivalents at
end of period $ 1,429,000 $ 2,649,000
========= =========
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 March 31, 1997 and its results of
operations and cash flows for the nine months ended March 31, 1997 and 1996.
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 March 31 for clarity of
presentation. The actual periods ended on March 28, 1997 and March 29, 1996.
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 assemblies 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
<PAGE>
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:
March 31, June 30,
1997 1996
---- ----
Trade receivables $9,022,000 $5,456,000
Other receivables 568,000 296,000
Less allowance for doubtful
accounts (161,000) (132,000)
--------- ---------
$9,429,000 $5,620,000
========= =========
Included in other receivables at March 31, 1997 and June 30, 1996 are grants
due from the Industrial Development Board for Northern Ireland of $61,000 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:
March 31, June 30,
1997 1996
---- ----
Costs incurred on uncompleted
contracts $20,004,000 $11,181,000
Estimated earnings 2,024,000 1,544,000
---------- ----------
22,028,000 12,725,000
Less: Billings to date (17,327,000) (9,613,000)
Customer advances and
progress payments (307,000) (86,000)
---------- ----------
$ 4,934,000 $ 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.
<PAGE>
Note 5 - INVENTORIES
Inventories consist of the following:
March 31, June 30,
1997 1996
---- ----
Raw materials $2,782,000 $2,853,000
Work in process 953,000 1,263,000
Finished goods 65,000 146,000
Less reserves (367,000) (248,000)
--------- ---------
$3,433,000 $4,014,000
========= =========
Note 6 - OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31, June 30,
1997 1996
---- ----
Environmental liabilities $ 649,000 $ 728,000
Accrued taxes payable 795,000 951,000
Other 1,157,000 1,435,000
--------- ---------
$2,601,000 $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 March 31, 1997,
borrowings outstanding under this credit facility amounted to $863,000. 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 $1,875,000), and
provides for interest on borrowings at 1-1/2% over the bank's base rate. At
March 31, 1997, borrowings outstanding under this credit facility amounted to
$1,106,000.
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
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
<PAGE>
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
approximately 700,000 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.
Note 8 - INFORMATION RELATING TO STATEMENT OF CASH FLOWS
"Net cash used by operating activities" includes cash payments for interest
as follows:
Nine months ended
March 31,
---------------------
1997 1996
------ ------
Interest paid $ 834,000 $ 433,000
======= =======
"Net increase in operating working capital" is comprised of the following:
Nine months ended
March 31,
---------------------
1997 1996
------ ------
(Increase) decrease in
accounts receivable $(3,736,000) $ 226,000
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (1,418,000) (1,621,000)
(Increase) decrease in
inventories 779,000 (1,625,000)
Decrease in prepaid expenses 109,000 57,000
Increase in accounts payable 1,225,000 312,000
Decrease in accrued payroll
and employee benefits (30,000) (23,000)
Increase (decrease) in other
liabilities (524,000) 901,000
--------- ---------
Net increase in operating
working capital $(3,595,000) $(1,773,000)
========= =========
<PAGE>
Following is the supplemental schedule of non-cash investing and financing
activities:
Nine months ended
March 31,
---------------------
1997 1996
------ ------
Capital expenditures financed by
lease obligations $ 710,000 $ 619,000
Conversion of debt to equity $ 153,000 $ 124,000
Common stock issued as partial
consideration for purchase of
SMTEK, Inc. - $ 801,000
Common stock issued as debt
placement fee - $ 716,000
Common stock issued as collateral
for 10% Senior Notes - $1,325,000
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements made below are forward-looking in nature and reflect the
Company's current expectations and plans. Such statements involve various
risks and uncertainties that could cause actual results to differ materially
from those currently expected by the Company. Meaningful factors that might
cause such differences include, but are not limited to, significant
historical losses, limited capital resources and a continuing need for
financing, dependence on key personnel, concentration of revenues among major
customers, historical dependence on government business on the part of the
Company's U.S. operating unit and a recent shift into commercial business,
industry conditions, competition, environmental matters, dependence on
suppliers and other factors 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.
<PAGE>
RESULTS OF OPERATIONS
Consolidated sales for the three months ended March 31, 1997 were
$13,580,000, compared to $10,501,000 for the same period in the previous
fiscal year. Sales of DDL Electronics, Ltd. ("DDL-E"), the Company's
Northern Ireland EMS operation, increased $2,522,000 in the latest quarter
compared to the third quarter of last year. For the three months ended March
31, 1997, sales of SMTEK and Irlandus Circuits, Ltd. ("Irlandus"), the
Company's PCB operation, increased approximately 11% and 10%, respectively,
over sales for the comparable period of the prior year.
Consolidated sales for the nine months ended March 31, 1997 were $34,660,000,
compared to $22,722,000 for the same period in the previous fiscal year. The
sales increase results primarily from the acquisition of SMTEK, which
contributed revenues of $13,120,000 in the nine months ended March 31, 1997,
compared to $4,871,000 for the same period in the previous fiscal year.
Because the acquisition of SMTEK in January 1996 was accounted for using the
purchase method, SMTEK's operations prior to the acquisition are not included
in the Company's results. For the nine months ended March 31, 1997, sales of
DDL-E and Irlandus increased 40% and 5%, respectively, over sales for the
comparable period of the prior year.
Consolidated gross profit for the three months ended March 31, 1997 was
$1,980,000, compared to $1,354,000 for the comparable period of the prior
year. SMTEK's gross profit declined from $979,000 for the three months ended
March 31, 1996 to $689,000 for the three months ended March 31, 1997, despite
higher sales, due to higher direct material costs as a percentage of sales,
as well as an increase in the number of production employees handling the
higher sales volume. DDL-E's gross profit increased by $496,000 between
these two periods due to higher sales volume in the latest quarter and the
fact that DDL-E's gross profit in last year's third quarter was adversely
impacted by a ramp-up in the workforce and higher than normal equipment
maintenance costs. Irlandus' gross profit increased by $402,000 between
these two periods, due primarily to a reduction of indirect costs. The
Company's consolidated gross profit margin increased from 12.9% in the three
months ended March 31, 1996 to 14.6% in the latest quarter as a result of the
increase in gross profit margin of Irlandus and DDL-E.
Consolidated gross profit for the nine months ended March 31, 1997 improved
by $1,762,000 compared to the same period of the prior year. SMTEK's gross
profit of $1,861,000 for the latest nine month period, compared to $979,000
for the nine months ended March 31, 1996, accounted for $882,000 of the
increase. Gross profit of DDL-E and Irlandus for the nine months ended March
31, 1997 increased $298,000 and $582,000, respectively, compared to the same
period of the prior year. These increases were primarily attributable to the
factors cited above for the three month comparative periods. The Company's
consolidated gross profit margin increased from 12.0% in the nine months
ended March 31, 1996 to 13.0% in the nine months ended March 31, 1997, due
primarily to improvement in Irlandus' gross profit margin from 12.8% in the
nine months ended March 31, 1996 to 19.3% in the latest nine month period.
The improvement in Irlandus' gross profit margin is attributable to an
increase in higher margin quick-turn orders and a reduction of indirect costs
as a percentage of sales.
Administrative and selling expenses increased from $1,042,000 for the three
months ended March 31, 1996 to $1,290,000 for the three months ended March
31, 1997 due primarily to an increase in legal and consulting fees.
<PAGE>
Administrative and selling expenses for the nine months ended March 31, 1997
were $3,653,000, compared to $2,937,000 for the same period in the previous
year. This increase is principally the result of the acquisition of SMTEK in
January 1996.
In the three months ended March 31, 1997, consolidated operating income was
$373,000, compared to a consolidated operating loss of $5,000 in the three
months ended March 31, 1996. This improvement is primarily attributable to
increased gross profit of Irlandus and DDL-E.
Consolidated operating losses were $105,000 and $517,000 for the nine months
ended March 31, 1997 and 1996, respectively. A smaller operating loss was
incurred in 1997 despite an increase in goodwill amortization expense from
$317,000 in the earlier nine month period to $951,000 in the latest nine
month period. This operating loss improvement is principally the result of
increased gross profit in the latest nine month period.
Investment income for the nine months ended March 31, 1997 and 1996 was
$59,000 and $208,000, respectively. The 1996 amount includes nonrecurring
interest income of $106,000 received on income tax refunds.
Interest expense decreased from $355,000 in the three months ended March 31,
1996 to $279,000 in the three months ended March 31, 1997 because $3,500,000
of 10% convertible debentures issued in February 1996 were converted to
equity in May and June 1996. In the nine months ended March 31, 1997 and
1996, interest expense was $844,000 and $584,000, respectively. This
increase is attributable to interest on debt issued in 1996 to finance the
SMTEK acquisition.
Other income (expense) for the nine months ended March 31, 1997 and 1996 was
($232,000) and $114,000, respectively. The 1997 amount includes debt issue
cost amortization expense of $372,000 associated with the debt issued to
finance the SMTEK acquisition, offset by a gain on the sale of assets of
$128,000. The 1996 amount includes a $100,000 gain recognized upon the
negotiated settlement of a facility lease commitment at less than the amount
previously reserved.
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.
Income (loss) before extraordinary item for the nine months ended March 31,
1997 was ($1,122,000) or ($0.05) per share, compared to $331,000 or $0.02 per
share for the same period of fiscal 1996. Income (loss) before extraordinary
item for the fiscal 1996 period includes the $1,110,000 income tax benefit
discussed above.
<PAGE>
Net income (loss) for the nine months ended March 31, 1997 was ($1,122,000)
or ($0.05) per share, compared to $2,687,000 or $0.15 per share for the same
period of fiscal 1996. Net income (loss) for the first nine months of fiscal
1996 includes an extraordinary gain on debt extinguishment of $2,356,000
associated with the negotiated reduction in March 1996 of the Company's
obligations under several consulting and deferred fee arrangements with
certain former officers, employees and directors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash equivalents,
which amounted to $1,429,000 at March 31, 1997, and its bank lines of credit.
During the nine months ended March 31, 1997, cash and cash equivalents
decreased by $1,090,000. This decrease consisted of cash used by operating
activities of $2,505,000 and capital expenditures of $697,000, partially
offset by cash inflows of $1,399,000 from new borrowings net of debt
repayments, proceeds from government grants of $467,000, proceeds from the
sale of assets of $202,000, and the effect of exchange rate changes on cash
of $44,000.
Components of operating working capital increased by $3,595,000 during the
first nine months of fiscal 1997, comprised of a $3,736,000 increase in
accounts receivable, a $1,418,000 increase in costs and earnings in excess of
billings on uncompleted contracts and a $554,000 decrease in accrued
liabilities, partially offset by a $1,225,000 increase in accounts payable, a
$779,000 decrease in inventory and a $109,000 decrease in prepaid expenses
and other current assets.
Accounts receivable increased from $5,620,000 at June 30, 1996 to $9,429,000
at March 31, 1997. This increase results primarily from an increase in sales
from $10,414,000 in the three months ended June 30, 1996 to $13,580,000 in the
three months ended March 31, 1997.
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 March 31, 1997, borrowings outstanding
under this credit facility amounted to $863,000. 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 $1,875,000), and provides for
interest at 1-1/2% over the bank's base rate. At March 31, 1997, borrowings
outstanding under this credit facility amounted to $1,106,000.
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
<PAGE>
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
approximately 700,000 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 nine 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
$105,000 and negative cash flow from operating activities of $2,505,000
during the nine months ended March 31, 1997. In addition, at March 31, 1997
the Company had a working capital deficit of $1,398,000 as a result of
transferring the $5,300,000 10% Senior Notes maturing July 1997 from long-
term debt to current liabilities.
With the exception of the latest quarter, during which the Company generated
operating income of $373,000, the Company has incurred operating losses for a
number of years. Management anticipates that the Company could incur further
operating losses for at least the near term future due to the goodwill
amortization expense arising from the acquisition of SMTEK. Operating losses
could 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 such 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 profit-
ability, 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.
<PAGE>
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
March 31, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 12, 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
March 31,
1997 1996
------ ------
PRIMARY EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 134,000 $ (405,000)
Extraordinary item - 2,356,000
---------- ----------
Net income $ 134,000 $ 1,951,000
========== ==========
Weighted average number of common
shares outstanding 23,074,156 18,476,959
Assumed exercise of options and warrants
net of shares assumed reacquired 211,075 587,542
---------- ----------
Average common shares and common
share equivalents 23,285,231 19,064,501
========== ==========
Primary earnings per share:
Income (loss) before extraordinary item $ 0.01 $ (0.02)
Extraordinary item - 0.12
---- ----
Earnings per share $ 0.01 $ 0.10
==== ====
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $ 134,000 $ (405,000)
Add back net interest related to
convertible subordinated debentures 34,000 64,000
---------- ----------
Income (loss) before extraordinary item
for fully diluted computation 168,000 (341,000)
Extraordinary item - 2,356,000
---------- ----------
Net income for fully
diluted computation $ 168,000 $ 2,015,000
========== ==========
Weighted average number of common
shares outstanding 23,074,156 18,476,959
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 211,294 588,438
Assumed conversion of convertible
subordinated debentures 310,206 989,084
---------- ----------
Average fully diluted shares 23,595,656 20,054,481
========== ==========
Fully diluted earnings per share:
Income (loss) before extraordinary item $ 0.01 $ (0.02)
Extraordinary item - 0.12
---- ----
Earnings per share $ 0.01 $ 0.10
==== ====
<PAGE>
EXHIBIT 11
DDL ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
Nine Months Ended
March 31,
1997 1996
------ ------
PRIMARY EARNINGS PER SHARE:
Income (loss) before extraordinary item $(1,122,000) $ 331,000
Extraordinary item - 2,356,000
---------- ----------
Net income (loss) $(1,122,000) $ 2,687,000
========== ==========
Weighted average number of common
shares outstanding 23,046,615 17,053,331
Assumed exercise of options and warrants
net of shares assumed reacquired - 624,500
---------- ----------
Average common shares and common
share equivalents 23,046,615 17,677,831
========== ==========
Primary earnings (loss) per share:
Income (loss) before extraordinary item $(0.05) $ 0.02
Extraordinary item - 0.13
---- ----
Earnings (loss) per share $(0.05) $ 0.15
==== ====
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) before extraordinary item $(1,122,000) $ 331,000
Add back net interest related to
convertible subordinated debentures 101,000 131,000
---------- ----------
Income (loss) before extraordinary item
for fully diluted computation (1,021,000) 462,000
Extraordinary item - 2,356,000
---------- ----------
Net income (loss) for fully
diluted computation $(1,021,000) $ 2,818,000
========== ==========
Weighted average number of common
shares outstanding 23,046,615 17,053,331
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 248,285 722,213
Assumed conversion of convertible
subordinated debentures 310,206 545,876
---------- ----------
Average fully diluted shares 23,605,106 18,321,420
========== ==========
Fully diluted earnings (loss) per share:
Income (loss) before extraordinary item $(0.04) $ 0.02
Extraordinary item - 0.13
---- ----
Earnings (loss) per share $(0.04) $ 0.15
==== ====
Note: Fully diluted earnings per share are anti-dilutive for 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 1429000
<SECURITIES> 0
<RECEIVABLES> 9022000
<ALLOWANCES> 161000
<INVENTORY> 3433000
<CURRENT-ASSETS> 18895000
<PP&E> 21953000
<DEPRECIATION> 15527000
<TOTAL-ASSETS> 30455000
<CURRENT-LIABILITIES> 20293000
<BONDS> 5723000
<COMMON> 231000
0
0
<OTHER-SE> 4208000
<TOTAL-LIABILITY-AND-EQUITY> 30455000
<SALES> 34660000
<TOTAL-REVENUES> 34660000
<CGS> 30161000
<TOTAL-COSTS> 30161000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 844000
<INCOME-PRETAX> (1122000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1122000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1122000)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
