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, 1998
[ ] 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 24,613,666 shares of Common Stock outstanding as of
May 15, 1998.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, except June 30, 1997)
March 31, June 30,
1998 1997
------ ------
Assets
Current assets:
Cash and cash equivalents $ 2,019,000 $ 4,718,000
Accounts receivable, net 8,751,000 9,198,000
Costs and estimated earnings
in excess of billings on
uncompleted contracts 4,413,000 3,161,000
Inventories, net 2,515,000 3,211,000
Prepaid expenses 441,000 132,000
---------- ----------
Total current assets 18,139,000 20,420,000
---------- ----------
Property, equipment and
improvements, at cost:
Buildings and improvements 6,080,000 6,037,000
Plant equipment 14,947,000 14,962,000
Office and other equipment 2,136,000 1,952,000
---------- ----------
23,163,000 22,951,000
Less: Accumulated depreciation
and amortization (16,946,000) (16,161,000)
---------- ----------
Property, equipment and
improvements, net 6,217,000 6,790,000
---------- ----------
Other assets:
Goodwill, net 3,488,000 4,439,000
Deposits and other assets 234,000 231,000
---------- -----------
3,722,000 4,670,000
---------- -----------
$ 28,078,000 $ 31,880,000
========== ==========
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Continued)
(Unaudited, except June 30, 1997)
March 31, June 30,
1998 1997
------ ------
Liabilities and Stockholders' Equity
Current liabilities:
Bank lines of credit payable $ 3,272,000 $ 1,378,000
Current portion of
long-term debt 2,993,000 4,167,000
Accounts payable 6,837,000 9,084,000
Accrued payroll and
employee benefits 1,120,000 1,145,000
Other accrued liabilities 2,288,000 2,321,000
---------- ----------
Total current liabilities 16,510,000 18,095,000
---------- ----------
Long-term debt:
7% Convertible Subordinated
Debentures, less current
portion 387,000 398,000
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 3,284,000 5,842,000
---------- ----------
Total long-term debt 5,251,000 7,820,000
---------- ----------
Stockholders' equity:
Common stock 246,000 246,000
Additional paid-in capital 6,884,000 6,410,000
Accumulated deficit since
June 27, 1997 (204,000) -
Foreign currency translation
adjustment (609,000) (691,000)
---------- ----------
Total stockholders' equity 6,317,000 5,965,000
---------- ----------
$ 28,078,000 $ 31,880,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
------ ------
Sales $ 12,855,000 $ 13,580,000
Cost of goods sold 10,829,000 11,600,000
---------- ----------
Gross profit 2,026,000 1,980,000
---------- ----------
Operating expenses:
Administrative and selling 1,444,000 1,290,000
Goodwill amortization 317,000 317,000
---------- ----------
1,761,000 1,607,000
---------- ----------
Operating income 265,000 373,000
---------- ----------
Non-operating income (expense):
Interest income 22,000 16,000
Interest expense (251,000) (279,000)
Debt issue cost amortization - (124,000)
Other income (expense), net (45,000) 148,000
---------- ----------
(274,000) (239,000)
---------- ----------
Income (loss) before taxes (9,000) 134,000
Provision for income taxes (105,000) -
---------- ----------
Net income (loss) $ (114,000) $ 134,000
========== ==========
Basic and diluted earnings
(loss) per share $ - $ .01
==== ====
Shares used in computing
earnings per share:
Basic 24,610,000 23,074,000
========== ==========
Diluted 24,610,000 23,595,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
-----------------------
1998 1997
------ ------
Sales $ 37,576,000 $ 34,660,000
Cost of goods sold 31,615,000 30,161,000
---------- ----------
Gross profit 5,961,000 4,499,000
---------- ----------
Operating expenses:
Administrative and selling 4,048,000 3,653,000
Goodwill amortization 951,000 951,000
---------- ----------
4,999,000 4,604,000
---------- ----------
Operating income (loss) 962,000 (105,000)
---------- ----------
Non-operating income (expense):
Interest income 51,000 59,000
Interest expense (724,000) (844,000)
Debt issue cost amortization - (372,000)
Other income (expense), net (63,000) 140,000
---------- ----------
(736,000) (1,017,000)
---------- ----------
Income (loss) before taxes 226,000 (1,122,000)
Provision for income taxes (430,000) -
---------- ----------
Net loss $ (204,000) $ (1,122,000)
========== ==========
Basic and diluted earnings
(loss) per share $ (.01) $ (.05)
==== ====
Shares used in computing
basic and diluted earnings
per share 24,598,000 23,047,000
========== ==========
See accompanying Notes to Unaudited
Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
-----------------------
1998 1997
------ ------
Cash flows from operating activities:
Net loss $ (204,000) $(1,122,000)
Adjustments to reconcile net loss
to net cash used by operating
activities:
Depreciation expense 1,214,000 1,030,000
Amortization of goodwill and debt
issue costs 954,000 1,326,000
Gain on sale of assets (22,000) (128,000)
Utilization of pre-quasi-
reorganization tax benefits 430,000 -
Net increase in operating
working capital (2,837,000) (3,595,000)
Increase in deposits and
other assets (6,000) 100,000
Benefit of non-capital grants - (181,000)
Other 89,000 65,000
--------- ---------
Net cash used by operating activities (382,000) (2,505,000)
--------- ---------
Cash flows from investing activities:
Capital expenditures (431,000) (697,000)
Proceeds from sale of assets 16,000 202,000
--------- ---------
Net cash used by investing activities (415,000) (495,000)
--------- ---------
Cash flows from financing activities:
Proceeds from bank lines of credit 1,883,000 1,955,000
Proceeds from long-term debt 2,000,000 -
Payments of long-term debt (5,995,000) (556,000)
Proceeds from foreign government grants 123,000 467,000
--------- ---------
Net cash provided by (used in) financing
activities (1,989,000) 1,866,000
--------- ---------
Effect of exchange rate changes on cash 87,000 44,000
--------- ---------
Decrease in cash and cash equivalents (2,699,000) (1,090,000)
Cash and cash equivalents at
beginning of period 4,718,000 2,519,000
--------- ---------
Cash and cash equivalents at
end of period $2,019,000 $1,429,000
========= =========
See accompanying Notes to Unaudited
Consolidated Financial Statements.
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DDL Electronics, Inc. provides 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, 1997), 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, 1998 and its results of operations and cash flows for
the nine months ended March 31, 1998 and 1997.
The Company uses a 52-53 week fiscal year ending on the Friday closest to June
30, which for fiscal year 1997 fell on June 27, 1997. In the accompanying
consolidated financial statements, the 1997 fiscal year end is shown as June
30 and the interim period end for both years is shown as March 31 for clarity
of presentation. The actual interim periods ended on April 3, 1998 and March
28, 1997. The nine month period of fiscal 1998 consisted of 40 weeks compared
to 39 weeks for the same period of fiscal 1997.
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 1997 Annual Report to Stockholders as filed with the Securities and
Exchange Commission on October 10, 1997.
Certain reclassifications have been made to the interim fiscal 1997 financial
statements to conform with the fiscal 1998 financial statement presentation.
Such reclassifications had no effect on the Company's results of operations or
stockholders' equity.
Note 2 - EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to
SFAS 128 requirements.
A reconciliation of the numerator and denominator used in the computation of
diluted earnings per share follows:
Three Months Ended
March 31,
1997
------
NUMERATOR:
Net income $ 134,000
Add back net interest related to
convertible subordinated debentures 34,000
----------
Net income for diluted earnings computation $ 168,000
==========
DENOMINATOR:
Weighted average number of common
shares outstanding 23,074,156
Assumed exercise of options and warrants
net of shares assumed reacquired under
treasury stock method 211,078
Assumed conversion of convertible
subordinated debentures 310,206
----------
Total diluted shares 23,595,440
==========
The company reported net losses for the three and nine months ended March 31,
1998 and for the nine months ended March 31, 1997; hence, diluted earnings
per share for these periods as presented in the statements of operations
included herein is computed on the same basis as basic earnings per share.
For the nine months ended March 31, 1998 and 1997, the following securities
were outstanding but were not included in the computation of diluted earnings
per as they would have an antidilutive effect on earnings per share:
subordinated debentures convertible into 310,206 shares of common stock; and
options and warrants to purchase 5,421,809 and 4,988,128 shares of common
stock, respectively, at prices ranging from $0.50 to $2.25.
Note 3 - ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
March 31, June 30,
1998 1997
---- ----
Trade receivables $8,925,000 $8,810,000
Other receivables 21,000 546,000
Less allowance for doubtful
accounts (195,000) (158,000)
--------- ---------
$8,751,000 $9,198,000
========= =========
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,
1998 1997
---- ----
Costs incurred on uncompleted
contracts $30,801,000 $20,455,000
Estimated earnings 3,003,000 2,714,000
---------- ----------
33,804,000 23,169,000
Less: Billings to date (29,391,000) (20,008,000)
---------- ----------
$ 4,413,000 $ 3,161,000
========== ==========
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.
Note 5 - INVENTORIES
Inventories consist of the following:
March 31, June 30,
1998 1997
---- ----
Raw materials $2,239,000 $2,889,000
Work in process 475,000 654,000
Finished goods 310,000 160,000
Less reserves (509,000) (492,000)
--------- ---------
$2,515,000 $3,211,000
========= =========
Note 6- OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
March 31, June 30,
1998 1997
---- ----
Environmental liabilities $ 651,000 $ 684,000
Accrued taxes payable 790,000 794,000
Other 847,000 843,000
--------- ---------
$2,288,000 $2,321,000
========= =========
Note 7- FINANCING ARRANGEMENTS AND ACQUISITION COMMITMENT
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 (8.50% at March 31, 1998) plus
1.25%. At March 31, 1998, borrowings outstanding under this credit facility
amounted to $1,763,000. 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 3,000,000 pounds sterling
(approximately $5,000,000), and provides for interest on borrowings at the
bank's base rate (7.59% at March 31, 1998) plus 1.50%. At March 31, 1998,
borrowings outstanding under this credit facility amounted to $1,509,000.
On June 30, 1997 (which is subsequent to the year ended June 27, 1997), the
Company repaid its 10% Senior Notes due July 1, 1997 in the amount of
$5,300,000 plus accrued interest of $43,000. Of the funds used to repay the
10% Senior Notes, $2,000,000 was borrowed from a private investor (the
"Investor") on June 30, 1997 under an 8% note payable due February 1, 1999
which is secured by the common stock of SMTEK.
Following is pro forma information for certain consolidated balance sheet line
items presented as if the issuance of the $2,000,000 note payable and
repayment of the 10% Senior Notes had occurred on June 27, 1997:
June 27, 1997
---------------------------
As Reported Pro forma
----------- -----------
Assets:
Cash and cash equivalents $4,718,000 $1,375,000
Liabilities:
Current portion of long-term debt $4,167,000 $ 867,000
Other accrued liabilities $2,321,000 $2,278,000
Concurrent with issuing the $2,000,000 note payable on June 30, 1997, the
Company agreed to acquire all of the issued and outstanding shares of Jolt
Technology, Inc. ("Jolt"), a privately-held electronic manufacturing services
company controlled by the Investor, for nine million shares of the Company's
common stock. The acquisition of Jolt is subject to obtaining the approval of
the Company's stockholders. Upon consummation of the Jolt acquisition, the
maturity date of the $2,000,000 note payable will be extended from February 1,
1999 to October 31, 1999.
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,
---------------------
1998 1997
------ ------
Interest paid $ 610,000 $ 834,000
======= =======
"Net increase in operating working capital" is comprised of the following:
Nine months ended
March 31,
---------------------
1998 1997
------ ------
(Increase) decrease in
accounts receivable $ 324,000 $ (3,736,000)
Increase in costs and estimated
earnings in excess of billings
on uncompleted contracts (1,251,000) (1,418,000)
Decrease in inventories 689,000 779,000
(Increase) decrease in
prepaid expenses (309,000) 109,000
Increase (decrease) in
accounts payable (2,232,000) 1,225,000
Decrease in accrued payroll
and employee benefits (24,000) (30,000)
Decrease in other liabilities (34,000) (524,000)
--------- ---------
Net increase in operating
working capital $(2,837,000) $(3,595,000)
========= =========
Following is the supplemental schedule of non-cash investing and financing
activities:
Nine months ended
March 31,
---------------------
1998 1997
------ ------
Capital expenditures financed by
lease obligations $ 237,000 $ 710,000
Conversion of debt to equity $ 44,000 $ 153,000
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 as 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. 333-31349).
DESCRIPTION OF THE BUSINESS
The Company provides 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.
QUASI-REORGANIZATION
The Company, with the authorization of its Board of Directors, implemented a
quasi-reorganization effective June 27, 1997. The quasi-reorganization, which
did not require the approval of the Company's stockholders, resulted in an
elimination of the accumulated deficit of $23,678,000 by a transfer from
additional paid-in capital of an equivalent amount. This deficit was
attributable primarily to operations which were divested or discontinued in
prior years. Following a review and evaluation by management, no adjustment
was made to the carrying values of the Company's assets and liabilities
because such amounts were deemed to be not in excess of estimated fair values.
RESULTS OF OPERATIONS
The Company uses a 52-53 week fiscal year ending on the Friday closest to June
30. In the accompanying consolidated financial statements, the interim period
end for both years is shown as March 31 for clarity of presentation. The
actual periods ended on April 3, 1998 and March 28, 1997. The nine month
period of fiscal 1998 consisted of 40 weeks compared to 39 weeks for the
comparable period of fiscal 1997.
Consolidated sales for the three months ended March 31, 1998 were $12,855,000,
compared to $13,580,000 for the same period in the previous fiscal year. This
decrease is attributable to the Company's PCB operations, for which sales
decreased by 25% from the third quarter of last year. PCB sales in the 1997
quarter included a relatively large quick-turn contract that was not recurring
business. Sales of the EMS operations for the three months ended March 31,
1998 remained level from the prior year quarter.
Consolidated sales increased from $34,660,000 for the nine months ended March
31, 1997 to $37,576,000 for the latest nine months. Sales for the Company's
EMS operations for the latest nine months increased by $3,628,000 over the
comparable prior year period, and is attributable primarily to higher levels
of business with existing customers. Sales for the nine months ended March
31, 1998 for the PCB operations declined by 9% from the comparable period in
the prior year as a result of a fluctuation in business from a major customer
as well as the aforementioned quick-turn contract in the prior year period
that was not recurring business.
Consolidated gross profit for the nine months ended March 31, 1998 was
$5,961,000 (15.9% of sales), compared to $4,499,000 (13.0% of sales) for the
same period of the prior year. Gross profit of the EMS operations was
$4,244,000 for the nine months ended March 31, 1998, compared to $2,911,000
for the prior year. A change in the mix of business with lower direct
material costs as a percentage of sales contributed to the increase in EMS
gross profit, along with higher sales volume and increased productivity. For
the nine months ended March 31, 1998, gross profit from PCB operations
increased approximately 8% over gross profit for the comparable period of the
prior year despite the level volume of sales. This improvement is
attributable primarily to an increase in higher margin quick-turn orders,
material price reductions and processing cost savings.
Administrative and selling expenses for the three months ended March 31, 1998
were $1,444,000 compared to $1,290,000 for the same period in the previous
year. The increase is attributable to the addition of a key management
position at Irlandus Circuits, Ltd. in the fourth quarter of fiscal 1997, a
difference in the timing of a discretionary employer contribution to SMTEK's
401(k) plan, and an increase in corporate overhead expenses for the 1998 third
quarter compared to the 1997 third quarter.
Administrative and selling expenses for the nine months ended March 31, 1998
and 1997 were $4,048,000 and $3,653,000, respectively. The increase is
attributable to the key management position addition noted above and other
increases in administrative staff. The additional week of operations included
in the period ended March 31, 1998 as a result of the Company's 52-53 week
fiscal year also contributed to the increased administrative and selling
expenses in the latest nine-month period.
In the three and nine months ended March 31, 1998, consolidated operating
income was $265,000 and $962,000, respectively, compared to consolidated
operating income (loss) of $373,000 and ($105,000), respectively, for the same
periods in the previous fiscal year.
Interest expense decreased from $844,000 in the nine months ended March 31,
1997 to $724,000 in the nine months ended March 31, 1998 because the Company
repaid its 10% Senior Notes in the amount of $5,300,000 on June 30, 1997. Of
the funds used to repay the 10% Senior Notes, $2,000,000 was borrowed on June
30, 1997 under an 8% promissory note due February 1, 1999.
Debt issue cost amortization expense of $372,000 for the nine months ended
March 31, 1997 related to the 10% Senior Notes. There is no such amortization
expense in the latest quarter because these debt issue costs were fully
amortized as of June 30, 1997.
The provision for income taxes of $430,000 for the nine months ended March 31,
1998 arises as a result of the quasi-reorganization which was effected on June
30, 1997. Pursuant to quasi-reorganization accounting, as the portion of net
operating loss carryforwards and deferred tax benefits originating prior to
the effective date of the quasi-reorganization are utilized, the corresponding
tax effect ($430,000 for the nine months ended March 31, 1998) is credited to
paid-in capital instead of being treated as a reduction of the provision for
income taxes. Additionally, because the Company's goodwill amortization
expense is not deductible for income taxes, the provision for income taxes in
the three and nine months ended March 31, 1998 is greater than the amount
which would result from applying statutory tax rates to pretax income.
The net loss for the nine months ended March 31, 1998 was $204,000 or $.01 per
share, compared to $1,122,000 or $.05 per share for the nine months ended
March 31, 1997.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 130, "Reporting
Comprehensive Income" ("SFAS 130") in June 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. The Company will adopt SFAS 130 in the first quarter
of its fiscal year ending June 30, 1999. Management believes that the
adoption of SFAS 130 will not have a material impact on the Company's
financial position or results of operations.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in June 1997. SFAS 131 establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. It replaces the
"industry segment" concept of Statement of Financial Accounting Standards No.
14, "Financial Reporting for Segments of a Business Enterprise", with a
"management approach" basis for identifying reportable segments. SFAS 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The Company will adopt SFAS 131 in its fiscal year ending June 30,
1999. Management believes that the adoption of SFAS 131 will not have a
material impact on the Company's financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash equivalents,
which amounted to $2,019,000 at March 31, 1998, and its bank lines of credit.
During the nine months ended March 31, 1998, cash and cash equivalents
decreased by $2,699,000. This decrease consisted of cash used by operating
activities of $382,000, capital expenditures of $431,000, and net reductions
of long-term debt of $3,995,000, partially offset by cash proceeds from the
sale of assets of $16,000, bank lines of credit of $1,883,000, government
grants of $123,000 and the effect of exchange rate changes on cash of $87,000.
Components of operating working capital increased by $2,837,000 during the
first nine months of fiscal 1998, comprised of a $1,251,000 increase in costs
and earnings in excess of billings on uncompleted contracts, a $309,000
increase in prepaid expenses, and a $2,290,000 decrease in accounts payable
and other accrued liabilities, partially offset by a $324,000 decrease in
accounts receivable and a $689,000 decrease in inventories.
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 (8.50% at March 31, 1998) plus 1.25%. At March 31,
1998, borrowings outstanding under this credit facility amounted to
$1,763,000. 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 3,000,000 pounds sterling (approximately
$5,000,000), and provides for interest on borrowings at the bank's base rate
(7.59% at March 31, 1998) plus 1.50%. At March 31, 1998, borrowings
outstanding under this credit facility amounted to $1,509,000.
The Company's EMS and PCB fabrication businesses require continuing investment
in plant and equipment to remain competitive. In recent years, however, the
Company's financial position has severely restricted its ability to make
capital improvements in its facilities. Capital expenditures during fiscal
1997, 1996 and 1995 were approximately $2,210,000, $1,599,000 and $643,000,
respectively. The Company anticipates it will need to increase its capital
spending in the coming years in order to stay competitive as technology
evolves. Capital expenditures for the nine months ended March 31, 1998 were
$668,000. Management estimates that capital expenditures of as much as $2
million may be required in fiscal 1998. Of that amount, the substantial
majority is expected to be financed by a combination of capital leases,
secured loans and foreign government grants.
Management believes that the Company's cash resources and borrowing capacity
on its working capital lines of credit are sufficient to fund operations for
at least the next 12 months.
"YEAR 2000" ISSUES
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the year
2000. "Year 2000" issues affect virtually all companies and organizations,
including the Company. The Company is studying its information systems with a
view to upgrading and improving such systems. The Company's management
expects to identify and resolve its specific "Year 2000" issues as part of
this study, and believes that the resolution of these issues will not have a
material effect on its financial position or results of operations.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
27 Financial Data Schedule (electronic filing only)
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 26, 1998 /s/ Richard K. Vitelle
- --------------------------------- -----------------------------------
Date Richard K. Vitelle
Vice President -Finance
(Principal Financial Officer)
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 2019000
<SECURITIES> 0
<RECEIVABLES> 8925000
<ALLOWANCES> 195000
<INVENTORY> 2515000
<CURRENT-ASSETS> 18139000
<PP&E> 23163000
<DEPRECIATION> 16946000
<TOTAL-ASSETS> 28078000
<CURRENT-LIABILITIES> 16510000
<BONDS> 8244000
<COMMON> 246000
0
0
<OTHER-SE> 6071000
<TOTAL-LIABILITY-AND-EQUITY> 28078000
<SALES> 37576000
<TOTAL-REVENUES> 37576000
<CGS> 31615000
<TOTAL-COSTS> 36614000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 724000
<INCOME-PRETAX> 226000
<INCOME-TAX> 430000
<INCOME-CONTINUING> (204000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (204000)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
