1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 1-8174
DUCOMMUN INCORPORATED
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-0693330
- ------------------------------ ------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
23301 South Wilmington Avenue, Carson, California 90745
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 513-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------- ------------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
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The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $186 million as of January 31, 1998.
The number of shares of common stock outstanding on January 31, 1998 was
7,462,399.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Annual Report to Shareholders (the "1997 Annual Report") for the
year ended December 31, 1997, incorporated partially in Part I and Part II
hereof (see Exhibit 13), and
(b) Proxy Statement for the 1998 Annual Meeting of Shareholders (the
"1998 Proxy Statement"), incorporated partially in Part III hereof.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements in the Form 10-K and documents incorporated by
reference contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Any such forward-looking statements involve
risks and uncertainties. The Company's future financial results could differ
materially from those anticipated due to the Company's dependence on conditions
in the airline industry, the level of new commercial aircraft orders, the
production rate for the Space Shuttle program, the level of defense spending,
competitive pricing pressures, technology and product development risks and
uncertainties, product performance, risks associated with acquisitions and
dispositions of businesses by the Company, increasing consolidation of customers
and suppliers in the aerospace industry, and other factors beyond the Company's
control.
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PART I
ITEM 1. BUSINESS
During 1997, Ducommun Incorporated ("Ducommun"), through its
subsidiaries (collectively, the "Company"), manufactured components and
assemblies principally for domestic and foreign commercial and military aircraft
and space programs. Domestic commercial aircraft programs include the Boeing
717, 737, 747, 757, 767 and 777, and the MD-11 and MD-80/90. Foreign commercial
aircraft programs include the Airbus Industrie A330 and A340, Bombardier
Business and Regional Jets and Dash 8. Major military aircraft programs include
the Boeing C-17, F-15 and F-18, Lockheed Martin F-16 and C-130, various
Sikorsky, Bell and Boeing helicopter programs, and advanced development
programs. The Company is a subcontractor to Lockheed Martin on the Space Shuttle
external tank and a supplier of components for the Space Shuttle Orbitor, as
well as for Space Station Freedom. The Company manufactures components for
Atlas/Centaur, X-33, Delta and Titan expendable launch vehicles, Kistler K-1
reusable launch vehicles, and various telecommunications satellites. Through its
3dbm, Inc. ("3dbm") subsidiary, the Company also sells products for the wireless
telecommunications industry.
In June 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of MechTronics of Arizona, Inc. ("MechTronics").
Aerochem, Inc.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier
of close tolerance chemical milling services for the aerospace and aircraft
industries. Chemical milling removes material in specific patterns to reduce
weight in areas where full material thickness is not required. This
sophisticated etching process enables Aerochem to produce lightweight,
high-strength designs that would be impractical to produce by conventional
means. Jet engine components, wing leading edges and fuselage skins are examples
of products that require chemical milling.
Aerochem offers production-scale chemical milling on aluminum, titanium,
steel, nickel-base and super alloys. Aerochem also specializes in very large and
complex parts up to 50 feet long. Management believes that Aerochem is the
largest independent supplier of chemical milling services in the United States.
Many of the parts chemically milled by Aerochem are formed and machined by
AHF-Ducommun Incorporated.
AHF-Ducommun Incorporated
AHF-Ducommun Incorporated ("AHF"), another Ducommun subsidiary, supplies
aircraft and aerospace prime contractors with engineering, manufacturing and
testing of complex components using stretch forming and thermal forming
processes and computer- controlled machining. Stretch forming is a process for
manufacturing large, complex structural shapes primarily from aluminum sheet
metal extrusions. AHF has some of the largest and most sophisticated stretch
forming presses in the United States. Thermal forming
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is a metal working process conducted at high temperature for manufacturing close
tolerance titanium components. AHF designs and manufactures the tooling required
for the production of parts in both forming processes. Certain components
manufactured by AHF are machined with precision milling equipment designed and
constructed by AHF. AHF also employs computer-aided design/manufacturing systems
with three 5-axis gantry profile milling machines and three 5-axis
numerically-controlled routers to provide computer-controlled machining and
inspection of complex parts up to 100 feet long.
AHF has an integrated operation offering a broad range of capabilities.
From the design specifications of a customer, AHF is able to engineer,
manufacture, test and deliver the desired finished components. This process
depends on the skillful execution of several complex subtasks, including the
design and construction of special equipment. Management believes that the
ability of AHF to provide a full range of integrated capabilities represents a
competitive advantage.
Brice Manufacturing Company, Inc.
Brice Manufacturing Company, Inc. ("Brice"), a subsidiary of Ducommun,
is an after-market supplier of aircraft seating products to many of the world's
largest commercial airlines. Products supplied by Brice include plastic and
metal seat parts, overhauled and refurbished seats, components for installation
of in-flight entertainment equipment, and other cabin interior components for
commercial aircraft. Management believes that Brice is the largest company in
the United States supplying airline seating and other cabin interior components
exclusively for the after-market.
During 1998, Brice expects to introduce an original equipment
manufacture ("OEM") 16G aircraft seat. This new aircraft seat represents Brice's
first major OEM product.
Jay-El Products, Inc.
Ducommun's Jay-El Products, Inc. ("Jay-El Products") subsidiary
develops, designs and manufactures illuminated switches, switch assemblies and
keyboard panels used in many military aircraft, helicopter, commercial aircraft
and spacecraft programs, as well as ground support equipment and naval vessels.
Jay-El Products manufactures switches and panels where high reliability is a
prerequisite. Keyboard panels are lighted, feature push button switches, and are
available with sunlight readable displays. Some of the keyboard panels and
illuminated switches manufactured by Jay-El Products for military applications
are night vision goggle-compatible.
Jay-El Products develops, designs and manufactures microwave switches,
filters and other components used principally on commercial and military
aircraft and telecommunications satellites. Jay-El Products also has developed
several new products that apply its existing microwave technology to
nonaerospace markets, including the wireless telecommunications industry.
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MechTronics of Arizona Corp.
In June 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of MechTronics of Arizona, Inc., through a newly
formed subsidiary named MechTronics of Arizona Corp. ("MechTronics").
MechTronics is a leading manufacturer of mechanical and electromechanical
enclosure products for the defense electronics, commercial aviation and
communications markets. MechTronics has a fully integrated manufacturing
capability, including engineering, fabrication, machining, assembly, electronic
integration and related processes. MechTronics' products include sophisticated
radar enclosures, aircraft avionics racks and shipboard communications and
control enclosures.
3dbm, Inc.
Ducommun's 3dbm, Inc. ("3dbm") subsidiary develops, designs and
manufactures high-power base stations, expanders, repeaters, microcells and
other wireless telecommunications equipment used in cellular telephone networks
and other wireless communications applications. 3dbm also designs and
manufactures on a limited basis microwave components and subsystems for both
military and commercial customers.
During 1998, 3dbm expects to introduce a time division multiple access
("TDMA") digital high-power base station. This TDMA base station will be 3dbm's
first digital wireless communications product.
Defense and Space Programs
A major portion of sales is derived from United States government
defense programs and space programs. Approximately 31 percent of 1997 sales were
related to defense programs and approximately 10 percent of 1997 sales were
related to space programs. These programs could be adversely affected by
reductions in defense spending and other government budgetary pressures which
would result in reductions, delays or stretch-outs of existing and future
programs. In addition, many of the Company's contracts covering defense and
space programs are subject to termination at the convenience of the customer (as
well as for default). In the event of termination for convenience, the customer
generally is required to pay the costs incurred by the Company and certain other
fees through the date of termination.
Commercial Programs
Approximately 59 percent of 1997 sales were related to commercial
aircraft programs, and nonaerospace commercial applications. The Company's
commercial sales depend substantially on aircraft manufacturer's production
rates, which in turn depend upon deliveries of new aircraft. Deliveries of new
aircraft by aircraft manufacturers are dependent on the financial capacity of
the airlines and leasing companies to purchase the aircraft. Sales of commercial
aircraft could be affected as a result of changes in new aircraft orders, or the
cancellation or deferral by airlines of purchases of ordered aircraft.
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Major Customers
The Company had substantial sales to Boeing, Lockheed Martin and
Northrop Grumman. During 1997, sales to Boeing were $36,375,000, or 23.1% of
total sales; sales to Lockheed Martin were $17,455,000, or 11.1% of total sales;
and sales to Northrop Grumman were $6,568,000, or 4.2% of total sales. Sales to
Boeing, Lockheed Martin and Northrop Grumman are diversified over a number of
different commercial, military and space programs.
Competition
The Company competes with various companies, some of which are
substantially larger and have greater financial, technical and personnel
resources. The Company's ability to compete depends on the quality of goods and
services, competitive pricing and the ability to solve specific customer
problems.
Backlog
At December 31, 1997, backlog believed to be firm was approximately
$155,700,000, compared to $134,500,000 at December 31, 1996. Approximately
$100,000,000 of total backlog is expected to be delivered during 1998.
Environmental Matters
Aerochem uses various acid and alkaline solutions in the chemical
milling process, resulting in potential environmental hazards. Despite existing
waste recovery systems and continuing capital expenditures for waste reduction
and management, at least for the immediate future, Aerochem will remain
dependent on the availability and cost of remote hazardous waste disposal sites
or other alternative methods of disposal.
The Aerochem facility located in El Mirage, California has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination. Based upon currently available information, the
Company has established a provision for the cost of such investigation and
corrective action. Aerochem expects to spend approximately $1 million for future
investigation and corrective action for groundwater contamination at its El
Mirage location. However, the Company's ultimate liability in connection with
the contamination will depend upon a number of factors, including changes in
existing laws and regulations, and the design and cost of the construction,
operation and maintenance of the corrective action.
Ducommun's other subsidiaries are also subject to environmental laws and
regulations. However, the quantities of hazardous materials handled, hazardous
wastes generated and air emissions released by these subsidiaries are relatively
small.
The Company anticipates that capital expenditures will continue to be
required for the foreseeable future to upgrade and maintain its environmental
compliance efforts. The
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Company does not expect to spend a material amount on capital expenditures for
environmental compliance during 1998.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including matters
relating to environmental laws. In addition, the Company makes various
commitments and incurs contingent liabilities. While it is not feasible to
predict the outcome of these matters, the Company does not presently expect that
any sum it may be required to pay in connection with these matters would have a
material adverse effect on its consolidated financial position or results of
operations.
Employees
At December 31, 1997, the Company employed 1,291 persons.
Business Segment Information
The Company operates principally in only one business segment.
Information About Foreign and Domestic Operations and Export Sales
In 1997, 1996 and 1995, foreign sales to manufacturers worldwide were
$29,978,000, $21,155,000 and $23,497,000, respectively.
The amounts of revenue, profitability and identifiable assets
attributable to foreign operations are not material when compared with the
revenue, profitability and identifiable assets attributed to United States
domestic operations during 1997, 1996 and 1995. Canada is the only foreign
country in which the Company had sales of 4% or more of total sales, with sales
of $7,950,000, $4,906,000 and $4,518,000 in 1997, 1996 and 1995, respectively.
The Company is not subject to any foreign currency risks since all sales
are made in United States dollars.
ITEM 2. PROPERTIES
The Company occupies approximately 16 facilities with a total office and
manufacturing area of over 812,000 square feet, including both owned and leased
properties. At December 31, 1997, facilities which were in excess of 60,000
square feet each were occupied as follows:
Square Expiration
Location Company Feet of Lease
- ------------------------ ------------------- ---------- ------------
El Mirage, California Aerochem 74,300 Owned
Orange, California Aerochem 76,200 Owned
Carson, California AHF-Ducommun 65,000 1999
Carson, California AHF-Ducommun 108,000 Owned
Carson, California Jay-El Products 117,000 2002
Phoenix, Arizona MechTronics 90,900 2006
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The Company's facilities are, for the most part, fully utilized,
although excess capacity exists from time to time based on product mix and
demand. Management believes that these properties are in good condition and
suitable for their present use.
Although the Company maintains standard property casualty insurance
covering its properties, the Company does not carry any earthquake insurance
because of the cost of such insurance. Most of the Company's properties are
located in Southern California, an area subject to frequent and sometimes severe
earthquake activity.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information under the caption "Quarterly Common Stock Price
Information" on page 17 of the 1997 Annual Report is incorporated herein by
reference. No dividends were paid during 1996 or 1997 (see Exhibit 13).
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" appearing on
page 17 of the 1997 Annual Report is incorporated herein by reference (see
Exhibit 13).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing on pages 18 through
20 of the 1997 Annual Report is incorporated herein by reference (see Exhibit
13).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data under the captions
"Consolidated Statements of Income," "Consolidated Balance Sheets,"
"Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in
Shareholders' Equity," and "Notes to Consolidated Financial Statements,"
together with the report thereon of Price Waterhouse LLP
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dated February 13, 1998, appearing on pages 21 through 32 of the 1997 Annual
Report are incorporated herein by reference (see Exhibit 13).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
The information under the caption "Election of Directors" in the 1998
Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The following table sets forth the names and ages of all executive
officers of the Company (including subsidiary presidents), all positions and
offices held with the Company and brief accounts of business experience during
the past five years. Executive officers do not serve for any specified terms,
but are typically elected annually by the Board of Directors of the Company or,
in the case of subsidiary presidents, by the Board of Directors of the
respective subsidiaries.
Positions and Offices Other Business
Held With Company Experience
Name (Age) (Year Elected) (Past Five Years)
- ---------------------------- ----------------------------- ---------------------------
Norman A. Barkeley (68) Chairman of the Board (1989) Chief Executive Officer
(1988-1996) and President
(1988-1995)
Joseph C. Berenato (51) President (1996) and Chief Executive Vice President
Executive Officer (1997) (1995), Chief Operating
Officer (1995-1996), and
Chief Financial Officer
(1991-1996) of the Company
James S. Heiser (41) Vice President (1990), --
Chief Financial Officer
(1996), General Counsel
(1988), Secretary (1987),
and Treasurer (1995)
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Positions and Offices Other Business
Held With Company Experience
Name (Age) (Year Elected) (Past Five Years)
- ---------------------------- ----------------------------- ---------------------------
Kenneth R. Pearson (62) Vice President-Human --
Resources (1988)
Samuel D. Williams (49) Vice President (1991) and --
Controller (1988)
Robert A. Borlet (57) President of Jay El --
Products, Inc. (1988)
Paul L. Graham (53) President of 3dbm, Inc. President of Dynatech
(1995) Microwave Technology,
Inc. (1992-1994)
Bruce J. Greenbaum (42) President of Brice President and/or General
Manufacturing Company, Inc. Manager of Brice during
(1994) five years prior to
acquisition by Ducommun
Robert B. Hahn (54) President of MechTronics of President of Aerochem,
Arizona Corp. (1997) Inc. (1987-1997)
Robert L. Hansen (44) President, AHF-Ducommun --
Incorporated (1989)
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Compensation of Executive Officers"
in the 1998 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1998 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors" contained in
the paragraph immediately following the table in the 1998 Proxy Statement is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Ducommun
Incorporated and subsidiaries, included in the 1997 Annual Report,
are incorporated by reference in Item 8 of this report. Page
numbers refer to the 1997 Annual Report:
Page
----
Consolidated Statements of Income - Years ended December 31, 21
1997, 1996 and 1995
Consolidated Balance Sheets - December 31, 1997 and 1996 22
Consolidated Statements of Cash Flows - Years ended December 31, 23
1997, 1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity - Years 24
Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 25-31
Report of Independent Accountants 32
2. Financial Statement Schedule
The following schedule for the years ended December 31, 1997,
1996 and 1995 is filed herewith:
Schedule VIII - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not
applicable, not required, or the information has been otherwise
supplied in the financial statements or notes thereto.
(b) Reports on Form 8-K
During the last quarter of 1997, no reports on Form 8-K were filed.
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(c) Exhibits
3.1 Restated Certificate of Incorporation filed with the Delaware
Secretary of State on May 29, 1990. Incorporated by reference to
Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
3.2 Bylaws as amended and restated on October 19, 1996.
Incorporated by reference to Exhibit 3.2 to Form 10-K for the year
ended December 31, 1996.
4.1 Fifth Amended and Restated Loan Agreement between Ducommun
Incorporated, as Borrower, and Bank of America National Trust and
Savings Association, as Bank, dated June 23, 1997. Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended June
28, 1997.
4.2 First Amendment to Fifth Amended and Restated Loan Agreement
between Ducommun Incorporated, as Borrower, and Bank of America
National Trust and Savings Association, as Bank, dated as of
October 1, 1997.
4.3 Conversion Agreement dated July 22, 1992 between Ducommun and
the holders of the 9% Convertible Subordinated Notes due 1998.
Incorporated by reference to Exhibit 1 to Form 8-K dated July 29,
1992.
* 10.1 1981 Stock Incentive Plan as amended and restated March 21,
1990. Incorporated by reference to Exhibit 10.2 to Form 10-K for
the year ended December 31, 1989.
* 10.2 1990 Stock Option Plan. Incorporated by reference to Exhibit
10.4 to Form 10-K for the year ended December 31, 1990.
* 10.3 1994 Stock Incentive Plan, as amended May 7, 1997.
* 10.4 Form of Nonqualified Stock Option Agreement for employees
under the 1994 Stock Incentive Plan, the 1990 Stock Option Plan and
the 1981 Stock Incentive Plan. Incorporated by reference to Exhibit
10.5 to Form 10-K for the year ended December 31, 1990.
* 10.5 Form of Incentive Stock Option Agreement under the 1994 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.5 to Form
10-K for the year ended December 31, 1996.
10.6 Form of Nonqualified Stock Option Agreement for nonemployee
directors under the 1994 Stock Incentive Plan.
* 10.7 Form of Key Executive Severance Agreement entered with ten
current executive officers of Ducommun or its subsidiaries.
Incorporated by reference to Exhibit 10.7 to Form 10-K for the year
ended December 31, 1989. All of the
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Key Executive Severance Agreements are identical except for the
name of the executive officer and the date of the Agreement:
Executive Officer Date of Agreement
----------------- -----------------
Norman A. Barkeley January 2, 1997
Joseph C. Berenato November 4, 1991
Robert A. Borlet July 27, 1988
Paul L. Graham April 6, 1995
Bruce J. Greenbaum December 6, 1995
Robert B. Hahn July 27, 1988
Robert L. Hansen May 5, 1993
James S. Heiser July 27, 1988
Kenneth R. Pearson July 27, 1988
Samuel D. Williams June 21, 1989
* 10.8 Form of Indemnity Agreement entered with all directors and
officers of Ducommun. Incorporated by reference to Exhibit 10.8 to
Form 10-K for the year ended December 31, 1990. All of the
Indemnity Agreements are identical except for the name of the
director or officer and the date of the Agreement:
Director/Officer Date of Agreement
---------------- -----------------
Norman A. Barkeley July 29, 1987
Joseph C. Berenato November 4, 1991
James S. Heiser May 6, 1987
Kenneth R. Pearson July 27, 1988
Samuel D. Williams November 11, 1988
H. Frederick Christie October 23, 1985
Robert C. Ducommun December 31, 1985
Kevin S. Moore October 15, 1994
Thomas P. Mullaney April 8, 1987
Richard J. Pearson October 23, 1985
Arthur W. Schmutz December 31, 1985
* 10.9 Description of 1998 Executive Officer Bonus Arrangement.
* 10.10 Directors' Deferred Compensation and Retirement Plan, as
amended October 29, 1993. Incorporated by reference to Exhibit 10.9
to Form 10-K for the year ended December 31, 1993.
* 10.11 Ducommun Incorporated Executive Retirement Plan dated May 5,
1993. Incorporated by reference to Exhibit 10.2 to Form 10-Q for
the quarter ended July 3, 1993.
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* 10.12 Ducommun Incorporated Executive Compensation Deferral Plan
dated May 5, 1993. Incorporated by reference to Exhibit 10.3 to
Form 10-Q for the quarter ended July 3, 1993.
* 10.13 Ducommun Incorporated Executive Compensation Deferral Plan
No. 2 dated October 15, 1994. Incorporated by reference to Exhibit
10.12 to Form 10-K for the year ended December 31, 1994.
11 Reconciliation of the Numerators and Denominators of the Basic
and Diluted Earnings Per Share Computations
13 1997 Annual Report to Shareholders (not deemed to be filed
except as previously incorporated by reference).
21 Subsidiaries of Registrant
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
- ----------
* Indicates an executive compensation plan or arrangement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
DUCOMMUN INCORPORATED
Date: February 27, 1998 By: /s/ Joseph C. Berenato
-------------------------------------
Joseph C. Berenato
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: February 27, 1998 By: /s/ Joseph C. Berenato
-------------------------------------
Joseph C. Berenato
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 27, 1998 By: /s/ James S. Heiser
-------------------------------------
James S. Heiser
Vice President, Chief Financial
Officer, General Counsel, Secretary
and Treasurer
(Principal Financial Officer)
Date: February 27, 1998 By: /s/ Samuel D. Williams
-------------------------------------
Samuel D. Williams
Vice President, Controller and
Assistant Treasurer
(Principal Accounting Officer)
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DIRECTORS
By: /s/ Norman A. Barkeley Date February 27, 1998
----------------------------- ---------------------------
Norman A. Barkeley
By: /s/ Joseph C. Berenato Date February 27, 1998
----------------------------- ---------------------------
Joseph C. Berenato
By: /s/ H. Frederick Christie Date February 27, 1998
----------------------------- ---------------------------
H. Frederick Christie
By: /s/ Robert C. Ducommun Date February 27, 1998
----------------------------- ---------------------------
Robert C. Ducommun
By: /s/ Kevin S. Moore Date February 27, 1998
----------------------------- ---------------------------
Kevin S. Moore
By: /s/ Thomas P. Mullaney Date February 27, 1998
----------------------------- ---------------------------
Thomas P. Mullaney
By: /s/ Richard J. Pearson Date February 27, 1998
----------------------------- ---------------------------
Richard J. Pearson
By: /s/ Arthur W. Schmutz Date February 27, 1998
----------------------------- ---------------------------
Arthur W. Schmutz
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Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Ducommun Incorporated
Our audits of the consolidated financial statements referred to in our report
dated February 13, 1998 appearing on page 32 of the 1997 Annual Report to
Shareholders of Ducommun Incorporated (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Los Angeles, California
February 13, 1998
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DUCOMMUN INCORPORATED
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE VIII
Column A Column B Column C Column D Column E
- ----------------------- -------------- ----------------------------- -------------- -----------
Additions
-----------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
- ----------------------- -------------- ----------- -------------- -------------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1997
Allowance for
Doubtful Accounts $ 206,000 $ 290,000 $ - $ 137,000(b) $ 359,000
FOR THE YEAR ENDED DECEMBER 31, 1996
Allowance for
Doubtful Accounts $ 366,000 $ 28,000 $ - $ 188,000(b) $ 206,000
Deferred Tax Assets
Valuation Allowance $2,433,000 $ - $ - $ 665,000(d) $ -
$1,768,000(e)
FOR THE YEAR ENDED DECEMBER 31, 1995
Allowance for
Doubtful Accounts $ 182,000 $ 216,000 $ 13,000(a) $ 45,000(b) $ 366,000
Deferred Tax Assets
Valuation Allowance $5,150,000 $ - $ - $2,717,000(c) $2,433,000
(a) Collections on previously written off accounts.
(b) Write-offs on uncollectible accounts.
(c) Change in valuation allowance due to reevaluation of realizability of
future income tax benefit occasioned by the acquisition of 3dbm.
(d) Change in valuation allowance due to reevaluation of realizability of
future income tax benefit occasioned by the acquisition of MechTronics.
(e) Change in valuation allowance due to reevaluation of realizability of
future income tax benefit.
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EXHIBIT INDEX
3.1 Restated Certificate of Incorporation filed with the Delaware
Secretary of State on May 29, 1990. Incorporated by reference to Exhibit 3.1 to
Form 10-K for the year ended December 31, 1990.
3.2 Bylaws as amended and restated on October 19, 1996. Incorporated by
reference to Exhibit 3.2 to Form 10-K for the year ended December 31, 1996.
4.1 Fifth Amended and Restated Loan Agreement between Ducommun
Incorporated, as Borrower, and Bank of America National Trust and Savings
Association, as Bank, dated June 23, 1997. Incorporated by reference to Exhibit
10.1 to Form 10-Q for the quarter ended June 28, 1997.
4.2 First Amendment to Fifth Amended and Restated Loan Agreement between
Ducommun Incorporated, as Borrower, and Bank of America National Trust and
Savings Association, as Bank, dated as of October 1, 1997.
4.3 Conversion Agreement dated July 22, 1992 between Ducommun and the
holders of the 9% Convertible Subordinated Notes due 1998. Incorporated by
reference to Exhibit 1 to Form 8-K dated July 29, 1992.
* 10.1 1981 Stock Incentive Plan as amended and restated March 21, 1990.
Incorporated by reference to Exhibit 10.2 to Form 10-K for the year ended
December 31, 1989.
* 10.2 1990 Stock Option Plan. Incorporated by reference to Exhibit
10.4 to Form 10-K for the year ended December 31, 1990.
* 10.3 1994 Stock Incentive Plan, as amended May 7, 1997.
* 10.4 Form of Nonqualified Stock Option Agreement for employees under
the 1994 Stock Incentive Plan, the 1990 Stock Option Plan and the 1981 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.5 to Form 10-K for the
year ended December 31, 1990.
* 10.5 Form of Incentive Stock Option Agreement under the 1994 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.5 to Form 10-K for the
year ended December 31, 1996.
10.6 Form of Nonqualified Stock Option Agreement for nonemployee
directors under the 1994 Stock Incentive Plan.
* 10.7 Form of Key Executive Severance Agreement entered with ten
current executive officers of Ducommun or its subsidiaries. Incorporated by
reference to Exhibit 10.7 to Form 10-K for the year ended December 31, 1989. All
of the
20
EXHIBIT INDEX (Continued)
Key Executive Severance Agreements are identical except for the name of
the executive officer and the date of the Agreement:
Executive Officer Date of Agreement
----------------- -----------------
Norman A. Barkeley January 2, 1997
Joseph C. Berenato November 4, 1991
Robert A. Borlet July 27, 1988
Paul L. Graham April 6, 1995
Bruce J. Greenbaum December 6, 1995
Robert B. Hahn July 27, 1988
Robert L. Hansen May 5, 1993
James S. Heiser July 27, 1988
Kenneth R. Pearson July 27, 1988
Samuel D. Williams June 21, 1989
* 10.8 Form of Indemnity Agreement entered with all directors and
officers of Ducommun. Incorporated by reference to Exhibit 10.8 to Form
10-K for the year ended December 31, 1990. All of the Indemnity Agreements are
identical except for the name of the director or officer and the date of the
Agreement:
Director/Officer Date of Agreement
---------------- -----------------
Norman A. Barkeley July 29, 1987
Joseph C. Berenato November 4, 1991
James S. Heiser May 6, 1987
Kenneth R. Pearson July 27, 1988
Samuel D. Williams November 11, 1988
H. Frederick Christie October 23, 1985
Robert C. Ducommun December 31, 1985
Kevin S. Moore October 15, 1994
Thomas P. Mullaney April 8, 1987
Richard J. Pearson October 23, 1985
Arthur W. Schmutz December 31, 1985
* 10.9 Description of 1998 Executive Officer Bonus Arrangement.
* 10.10 Directors' Deferred Compensation and Retirement Plan, as
amended October 29, 1993. Incorporated by reference to Exhibit 10.9 to Form
10-K for the year ended December 31, 1993.
* 10.11 Ducommun Incorporated Executive Retirement Plan dated May 5,
1993. Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter
ended July 3, 1993.
21
EXHIBIT INDEX (Continued)
* 10.12 Ducommun Incorporated Executive Compensation Deferral Plan
dated May 5, 1993. Incorporated by reference to Exhibit 10.3 to Form 10-Q for
the quarter ended July 3, 1993.
* 10.13 Ducommun Incorporated Executive Compensation Deferral Plan No.
2 dated October 15, 1994. Incorporated by reference to Exhibit 10.12 to Form
10-K for the year ended December 31, 1994.
11 Reconciliation of the Numerators and Denominators of the Basic and
Diluted Earnings Per Share Computations
13 1997 Annual Report to Shareholders (not deemed to be filed except as
previously incorporated by reference).
21 Subsidiaries of Registrant
23 Consent of Price Waterhouse LLP
27 Financial Data Schedule
- ----------
* Indicates an executive compensation plan or arrangement.
1
EXHIBIT 4.2
FIRST AMENDMENT TO FIFTH AMENDED
AND RESTATED LOAN AGREEMENT
This FIRST AMENDMENT TO FIFTH AMENDED AND RESTATED LOAN AGREEMENT (the
"Amendment") dated as of October 1, 1997, is between Bank of America National
Trust and Savings Association (the "Bank") and Ducommun Incorporated, a Delaware
corporation (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Fifth Amended and
Restated Loan Agreement dated as of June 23, 1997 (the "Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this Amendment
shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 In Paragraph 6.10, the following is added at the conclusion
of such Paragraph:
"The EBITA used to determine the Leverage Ratio will be
calculated at the end of each fiscal quarter, using the results
of that quarter and each of the three immediately preceding
quarters."
2.2 In Paragraph 7.1(a), the reference to Paragraph 7.1(g) is
amended to read "Paragraph 7.1(i)."
3. Representations and Warranties. When the Borrower signs this
Amendment, the Borrower represents and warrants to the Bank that: (a) there is
no event which is, or with notice or lapse of time or both would be, a default
under the Agreement, (b) the representations and warranties in the Agreement are
true as of the date of this Amendment as if made on the date of this Amendment,
(c) this Amendment is within the Borrower's powers, has been duly authorized,
and does not conflict with any of the Borrower's organizational papers, and (d)
this Amendment does not conflict with any law, agreement, or obligation by which
the Borrower is bound.
1
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4. Effect of Amendment. Except as provided in this Amendment, all of the
terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
BANK OF AMERICA NATIONAL DUCOMMUN INCORPORATED
TRUST AND SAVINGS ASSOCIATION
By /s/ J. Thomas Fagan By /s/ K. R. Pearson
------------------------- -----------------------------------
J. Thomas Fagan Kenneth R. Pearson
Vice President Vice President - Human
Resources and Assistant
Secretary
By /s/ J. S. Heiser
-----------------------------------
James S. Heiser
Vice President,
Treasurer, Secretary
and Chief Financial
Officer
2
1
EXHIBIT 10.3
APPENDIX A
DUCOMMUN INCORPORATED
1994 STOCK INCENTIVE PLAN
(AS AMENDED MAY 7, 1997)
SECTION 1. PURPOSE OF PLAN
The purpose of the 1994 Stock Incentive Plan (the "Plan") of Ducommun
Incorporated, a Delaware corporation (the "Company"), is to enable the Company
and its subsidiaries to attract, retain and motivate their employees and
nonemployee directors by providing for or increasing the proprietary interests
of such persons in the Company.
SECTION 2. PERSONS ELIGIBLE UNDER PLAN
Any person who is an employee or a nonemployee director of the Company or
any of its subsidiaries (a "Participant") shall be eligible to be considered for
the grant of Awards (as hereinafter defined) hereunder.
SECTION 3. AWARDS
(a) The Board of Directors of the Company and/or the Committee (as
hereinafter defined), on behalf of the Company, is authorized under this Plan to
enter into any type of arrangement with a Participant that is not inconsistent
with the provisions of this Plan and that, by its terms, involves or might
involve the issuance of (i) shares of common stock, par value $.01 per share, of
the Company ("Common Shares"), or (ii) a Derivative Security (as such term is
defined in Rule 16a-1 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), as such Rule may be amended from time to time)
with an exercise or conversion privilege at a price related to the Common Shares
or with a value derived from the value of the Common Shares. The entering into
of any such arrangement is referred to herein as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and may
include, without limitation, sales or bonuses of stock, restricted stock, stock
options, reload stock options, stock purchase warrants, other rights to acquire
stock, securities convertible into or redeemable for stock, stock appreciation
rights, limited stock appreciation rights, phantom stock, dividend equivalents,
performance units or performance shares, and an Award may consist of one such
security or benefit, or two or more of them in tandem or in the alternative.
(c) Common Shares may be issued pursuant to an Award for any lawful
consideration as determined by the Board of Directors and/or the Committee,
including, without limitation, services rendered by the recipient of such Award.
(d) Subject to the provisions of this Plan, the Board of Directors and/or
the Committee, in its sole and absolute discretion, shall determine all of the
terms and conditions of each Award granted under this Plan, which terms and
conditions may include, among other things:
(i) a provision permitting the recipient of such Award, including any
recipient who is a director or officer of the Company, to pay the purchase
price of the Common Shares or other property issuable
A-1
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pursuant to such Award, or such recipient's tax withholding obligation with
respect to such issuance, in whole or in part, by any one or more of the
following:
(A) the delivery of previously owned shares of capital stock of the
Company (including "pyramiding") or other property, provided that the
Company is not then prohibited from purchasing or acquiring shares of
its capital stock or such other property,
(B) a reduction in the amount of Common Shares or other property
otherwise issuable pursuant to such Award, or
(C) the delivery of a promissory note, the terms and conditions of
which shall be determined by the Board of Directors and/or the
Committee;
(ii) a provision conditioning or accelerating the receipt of benefits
pursuant to such Award, either automatically or in the discretion of the
Board of Directors and/or the Committee, upon the occurrence of specified
events, including, without limitation, a change of control of the Company,
an acquisition of a specified percentage of the voting power of the
Company, the dissolution or liquidation of the Company, a sale of
substantially all of the property and assets of the Company or an event of
the type described in Section 7 hereof; or
(iii) a provision required in order for such Award to qualify as an
incentive stock option under Section 422 of the Internal Revenue Code (an
"Incentive Stock Option"), provided that the recipient of such Award is
eligible under the Internal Revenue Code to receive an Incentive Stock
Option.
SECTION 4. STOCK SUBJECT TO PLAN
(a) The aggregate number of Common Shares issued and issuable pursuant to
all Awards granted under this Plan shall not exceed 570,000, subject to
adjustment as provided in Section 7 hereof.
(b) For purposes of Section 4(a) hereof, the aggregate number of Common
Shares issued and issuable pursuant to all Awards granted under this Plan shall
at any time be deemed to be equal to the sum of the following:
(i) the number of Common Shares which were issued prior to such time
pursuant to Awards granted under this Plan, other than Common Shares which
were subsequently reacquired by the Company pursuant to the terms and
conditions of such Awards and with respect to which the holder thereof
received no benefits of ownership such as dividends; plus
(ii) the number of Common Shares which were otherwise issuable prior
to such time pursuant to Awards granted under this Plan, but which were
withheld by the Company as payment of the purchase price of the Common
Shares issued pursuant to such Awards or as payment of the recipient's tax
withholding obligation with respect to such issuance; plus
(iii) the maximum number of Common Shares issuable at or after such
time pursuant to Awards granted under this Plan prior to such time.
SECTION 5. DURATION OF PLAN
Awards shall not be granted under this Plan after March 17, 2004. Although
Common Shares may be issued after March 17, 2004 pursuant to Awards granted
prior to such date, no Common Shares shall be issued under this Plan after March
17, 2014.
A-2
3
SECTION 6. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by the Board of Directors of the
Company or a committee of the Board of Directors (the "Committee") consisting of
two or more directors, each of whom is a "nonemployee director" (as such term is
defined in rule 16b-3 promulgated under the Exchange Act, as such Rule may be
amended from time to time).
(b) Subject to the provisions of this Plan, the Board of Directors and/or
the Committee shall be authorized and empowered to do all things necessary or
desirable in connection with the administration of this Plan, including, without
limitation, the following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons are Participants and to which of such
Participants, if any, Awards shall be granted hereunder;
(iii) grant Awards to Participants and determine the terms and
conditions thereof, including the number of Common Shares issuable pursuant
thereto;
(iv) determine whether, and the extent to which, adjustments are
required pursuant to Section 7 hereof; and
(v) interpret and construe this Plan and the terms and conditions of
all Awards granted hereunder.
SECTION 7. ADJUSTMENTS
If the outstanding securities of the class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of securities, or if cash, property or securities are
distributed in respect of such outstanding securities, in either case as a
result of a reorganization, merger, consolidation, recapitalization,
restructuring, reclassification, dividend (other than a regular, quarterly cash
dividend) or other distribution, stock split, reverse stock split or the like,
or if substantially all of the property and assets of the Company are sold,
then, unless the terms of such transaction shall provide otherwise, the Board of
Directors and/or the Committee shall make appropriate and proportionate
adjustments in (a) the number and type of, and exercise price for, shares or
other securities or cash or other property that may be acquired pursuant to
Incentive Stock Options and other Awards theretofore granted under this Plan,
and (b) the maximum number and type of shares or other securities that may be
issued pursuant to Incentive Stock Options and other Awards thereafter granted
under this Plan.
SECTION 8. AMENDMENT AND TERMINATION OF PLAN
The Board of Directors may amend or terminate this Plan at any time and in
any manner, provided, however, that no such amendment or termination shall
deprive the recipient of any Award theretofore granted under this Plan, without
the consent of such recipient, of any of his or her rights thereunder or with
respect thereto.
SECTION 9. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of March 17, 1994, provided, however, that
no Common Shares may be issued under this Plan until it has been approved,
directly or indirectly, by the affirmative votes of the holders of a majority of
the securities of the Company present, or represented, and entitled to vote at a
meeting duly held in accordance with the laws of the State of Delaware.
A-3
4
SECTION 10. LEGAL REQUIREMENTS
No Common Shares issuable pursuant to an Award shall be issued or delivered
unless and until, in the opinion of counsel for the Company, all applicable
requirements of federal, state and other securities laws, and the regulations
promulgated thereunder, and any applicable listing requirements of any stock
exchange on which shares of the same class are then listed, shall have been
fully complied with. It is the Company's intent that the Plan shall comply in
all respects with Rule 16b-3 promulgated under the Exchange Act, as such Rule
may be amended from time to time. If any provision of the Plan is found not to
be in compliance with Rule 16b-3 of the Exchange Act, such provision shall be
null and void.
A-4
1
EXHIBIT 10.6
DUCOMMUN INCORPORATED
STOCK OPTION AGREEMENT
This stock option agreement ("Agreement") is made as of [date] (the "Effective
Date"), between DUCOMMUN INCORPORATED, a Delaware corporation (the
"Corporation"), and [name] ("Option Holder").
R E C I T A L S
This Option is being granted pursuant to the 1994 Stock Incentive Plan (the
"Plan"). This Option DOES NOT represent an incentive stock option as defined in
Section 422A of the Internal Revenue Code. This Option expires on [date] (the
"Expiration Date").
A G R E E M E N T S
1. Grant. The Corporation hereby grants to the Option Holder the right
and option to purchase, on the terms and conditions hereinafter set forth, all
or any part of an aggregate of 1,500 shares of the Common Stock at the purchase
price of $[ ] per share, being 100% of the fair market value of the Common Stock
on the date the option is granted, exercisable from time to time in accordance
with the provisions of this Agreement until the close of business on the
Expiration Date.
2. Definitions. Unless the context clearly indicates otherwise, and
subject to the terms and conditions of the Plan as the same may be amended from
time to time, the following terms, when used in this stock option agreement,
shall have the meanings set forth in this Section 2.
"Common Stock" shall mean the Common Stock, $.01 par value, of the
Corporation or such other class of shares or other securities as may be
applicable pursuant to the provisions of Section 7 of this stock option
agreement.
3. Conditions to Exercise. The Option Holder may not purchase any shares
by exercise of this option unless the Option Holder shall have served as a
director of the Corporation until at least [date]. On and after [date], until
this option expires, the Option Holder may purchase, by exercise of this option,
all or any part of the shares subject to this option. Provided, however, that
until this option expires, the Option Holder may purchase, by exercise of this
option, all or any part of the shares subject to this option at any time after a
"Change in Control" of the Corporation has occurred. For purposes of this stock
option agreement, a "Change in Control" of the Corporation shall mean a change
in control of a nature that would be required to be reported in response to Item
1
2
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"); provided that, without limitation,
such a change in control shall be deemed conclusively to have occurred if (i) a
tender offer shall be made and consummated for the ownership of 25% or more of
the outstanding voting securities of the Corporation, (ii) the shareholders of
the Corporation approve that the Corporation be merged or consolidated with
another corporation and as a result of such merger or consolidation less than
75% of the outstanding voting securities of the surviving or resulting
corporation shall be owned in the aggregate by the former shareholders of the
Corporation, other than affiliates (within the meaning of the Exchange Act) of
any party to such merger or consolidation, as the same shall have existed
immediately prior to such merger or consolidation, (iii) the shareholders of the
Corporation approve that the Corporation sell, lease, exchange or transfer
substantially all of its assets to another corporation, entity or person which
is not a wholly-owned subsidiary, (iv) a person, as defined in Sections 13(d)
and 14(d) (as in effect on the date hereof) of the Exchange Act, shall acquire
25% (or in the case of The Clark Estates, Inc., 30%) or more of the outstanding
voting securities of the Corporation (whether directly, indirectly, beneficially
or of record), (v) the shareholders of the Corporation approve a plan or
proposal for the liquidation or dissolution of the Corporation, or (vi) during
any period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for election by
the Corporation's shareholders, of each new director was approved by a vote of
at least two-thirds of the directors then still in office who were directors at
the beginning of the period. For purposes hereof, ownership of voting securities
shall take into account and shall include ownership as determined by applying
the provisions of Rule 13d-3 (as in effect on the date hereof) under the
Exchange Act
4. Exercise by the Option Holder. This Option may be exercised solely by
the Option Holder, except as provided in Section 5 below in the event of the
Option Holder's death.
5. Termination. This Option shall terminate if and when the Option
Holder shall cease to be a director of the Corporation, except as follows:
(a) Death. If the Option Holder dies while a director of the
Corporation, or while this Option was exercisable by him in accordance
with paragraph (b) below, this Option may be exercised (for not more
than the number of shares as to which the Option Holder might have
exercised this Option at the time of such death) by the personal
representative of the decedent, or by such person or persons as shall
have acquired the Option Holder's rights under this option by will or by
the laws of descent and distribution, at any time (i) prior to the
Expiration Date, in the event the Expiration Date is not more than one
year from the date of death, or (ii) within such one year, in the event
that the Expiration Date is more than one year from such date of death.
2
3
(b) Retirement or Other Termination. If the Option Holder retires
or if he ceases to be a director of the Corporation for any reason other
than by death, this option may be exercised (for not more than the
number of shares as to which the Option Holder might have exercised this
option on the date of his retirement or the date on which he ceased to
be a director) at any time (i) prior to the Expiration Date, in the
event the Expiration Date is not more than three months from the date of
such retirement or termination, or (ii) within such three-month period,
in the event that the Expiration Date is more than three months from the
date of such retirement or termination.
6. Method of Exercise. A person electing to exercise this option shall
deliver to the Secretary of the Corporation prior to the Expiration Date a
written notice of such election and of the number of shares such person has
elected to purchase and shall at the time of exercise tender the full purchase
price of the shares such person has elected to purchase.
7. Adjustments
(a) If the outstanding shares of Common Stock of the Corporation
are increased, decreased, or converted into or exchanged for a different number
or kind of shares or securities of the Corporation through recapitalization
(other than the conversion of convertible securities according to their terms),
reclassification, stock dividend, stock split or reverse stock split, an
appropriate and proportionate adjustment shall be made, or if the Corporation
shall spin-off, spin-out or otherwise distribute assets with respect to the
outstanding shares of Common Stock of the Corporation, an appropriate and
proportionate adjustment may be made in the discretion of the Board of
Directors, in (i) the maximum number and kind of shares as to which options may
be granted under the Plan, (ii) the number and kind of shares subject to
outstanding options, and (iii) the exercise price for each share under
outstanding options, without any change in the aggregate purchase price or value
applicable to the unexercised portion of the outstanding options.
(b) In the event of the dissolution or liquidation of the
Corporation, or upon any merger, consolidation or reorganization of the
Corporation with any other corporations or entities as a result of which the
Corporation is not the surviving corporation, or upon the sale of all or
substantially all of the assets of the Corporation or the acquisition of more
than 80% of the stock of the Corporation by another corporation or entity, there
shall be substituted for each of the shares of Common Stock then subject to the
Plan the number and kind of shares of stock, securities or other assets which
would have been issuable or payable in respect of or in exchange for such Common
Stock then subject to the Plan, as if the Option Holder had been the owner of
such shares as of the transaction date. Any securities so substituted shall be
subject to similar successive adjustments.
3
4
8. Legal Requirements. No shares issuable upon the exercise of this
option shall be issued or delivered unless and until, in the opinion of counsel
for the Corporation, all applicable requirements of federal and state law and of
the Securities and Exchange Commission pertaining to the issuance and sale of
such shares and any applicable listing requirements of any national securities
exchange on which shares of the same class are then listed, shall have been
fully complied with. In connection with any such issuance or transfer, the
person acquiring the shares shall, if requested by the Corporation, give
assurances satisfactory to counsel to the Corporation in respect of such matters
as the Corporation may deem desirable to assure compliance with all applicable
legal requirements.
9. No Rights as a Shareholder. Neither the Option Holder nor any
beneficiary or other person claiming under or through the Option Holder shall
have any right, title or interest in or to any shares of Common Stock allocated
or reserved for the purpose of the Plan or subject to this Agreement except as
to such shares of Common Stock, if any, as shall have been issued or transferred
to such person.
10. Withholding. The Corporation may make such provisions as it may deem
appropriate for the withholding of any taxes which the Corporation determines it
is required to withhold in connection with this Agreement and the transactions
contemplated hereby, and the Corporation may require the Option Holder or other
person exercising this option to pay to the Corporation in cash any amount or
amounts which may be required to be paid as withheld taxes in connection with
any exercise of this option or any other transaction contemplated hereby as a
condition to the exercise of this option and issuance of shares of the Common
Stock.
11. No Assignments. Neither this Agreement, nor this option, nor any
other rights and privileges granted hereby shall be transferred, assigned,
pledged or hypothecated in any way, whether by operation of law of descent and
distribution. Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of this Agreement, this option or any other right or privilege
granted hereby contrary to the provisions hereof, this Agreement, this option
and all of such rights and privileges shall immediately become null and void.
12. The Plan. The option hereby granted is subject to, and the
Corporation and Option Holder agree to be bound by, all of the terms and
conditions of the Plan as the same may be amended from time to time in
accordance with the terms thereof, but no such amendment may adversely affect
the Option Holder's rights under this Agreement. Option Holder acknowledges
receipt of a complete copy of the Plan.
13. Consideration. The consideration for the rights and benefits
conferred on Option Holder by this Option are the services rendered by the
Option Holder after and not before the grant of this Option.
4
5
14. Applicable Law. This option has been granted as of the effective
date set forth above at Los Angeles, California, and the interpretation,
performance and enforcement of this Agreement shall be governed by the laws of
the State of California.
DUCOMMUN INCORPORATED
By:
-----------------------------------
President and CEO
By:
-----------------------------------
Secretary
------------------------------------
Option Holder
By his or her signature, the spouse of the Option Holder hereby agrees to be
bound by all the terms and conditions of this written stock option agreement.
------------------------------------
Spouse of Option Holder
5
1
EXHIBIT 10.9
DUCOMMUN INCORPORATED
DESCRIPTION OF
1998 EXECUTIVE OFFICER BONUS ARRANGEMENT
The Ducommun Incorporated 1998 Executive Officer Bonus Arrangement (the
"Arrangement") is designed to reward achievement of annual operating plan
objectives in order to build profitability and provide competitive compensation
levels. The Arrangement contains a formula-based incentive plan driven by sales,
net income, cash flow and return on asset performance in excess of established
thresholds. The participants in the Arrangement are the five Ducommun corporate
officers and six subsidiary presidents or general managers.
The Arrangement provides for bonus awards ranging from 0 to 100% of
annual base salary depending on position. The targeted bonus award under the
Arrangement is half of the maximum bonus eligibility for each individual. Bonus
awards are based on a combination of total corporate performance and on
individual performance of executive officers. The subsidiary presidents and
general managers are also measured based upon the financial performance of their
operating units. All awards are subject to the approval of the Compensation
Committee of the Board of Directors.
1
EXHIBIT 11
DUCOMMUN INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF
THE BASIC AND DILUTED EARNINGS PER SHARE COMPUTATIONS
For the Year Ended December 31, 1997
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
BASIC EPS
Income Available to Common Stockholders $14,297,000 7,358,000 $1.94
============
EFFECT OF DILUTIVE SECURITIES
Stock Options - 553,000
7-3/4% Convertible Subordinated Debentures - -
-------------- ---------------
DILUTED EPS
Income Available to Common Stockholders
+ Assumed Conversions $14,297,000 $ 7,911,000 $1.81
============== =============== ============
For the Year Ended December 31, 1996
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
BASIC EPS
Income Available to Common Stockholders $10,285,000 6,594,000 $1.56
============
EFFECT OF DILUTIVE SECURITIES
Stock Options - 514,000
7-3/4% Convertible Subordinated Debentures 222,000 712,000
-------------- ---------------
DILUTED EPS
Income Available to Common Stockholders
+ Assumed Conversions $10,507,000 $ 7,820,000 $1.34
============== =============== ============
For the Year Ended December 31, 1995
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------- --------------- ------------
BASIC EPS
Income Available to Common Stockholders $ 5,046,000 4,500,000 $1.12
============
EFFECT OF DILUTIVE SECURITIES
Stock Options - 343,000
7-3/4% Convertible Subordinated Debentures 1,354,000 2,431,000
-------------- ---------------
DILUTED EPS
Income Available to Common Stockholders
+ Assumed Conversions $ 6,400,000 $ 7,274,000 $0.88
============== =============== ============
1
EXHIBIT 13
DUCOMMUN INCORPORATED
ANNUAL REPORT
The following portions of Ducommun Incorporated and Subsidiaries 1997 Annual
Report are incorporated by reference in Items 5, 6, 7, and 8 of this report.
Page
----
Selected Financial Data 17
Quarterly Common Stock Price Information 17
Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-20
Consolidated Statements of Income 21
Consolidated Balance Sheets 22
Consolidated Statements of Cash Flows 23
Consolidated Statements of Changes in
Shareholders' Equity 24
Notes to Consolidated Financial Statements 25-31
Report of Independent Accountants 32
2
SELECTED FINANCIAL DATA
Ducommun Incorporated
YEAR ENDED DECEMBER 31, 1997 1996(A) 1995(A) 1994(A) 1993
=============================================================================================================================
(in thousands, except per share amounts)
Net Sales $ 157,287 $ 118,357 $ 91,217 $ 61,738 $ 64,541
-------------------------------------------------------------------------------
Gross Profit as a Percentage of Sales 32.0% 32.6% 33.0% 28.8% 26.8%
-------------------------------------------------------------------------------
Operating Income 25,288 15,478 10,511 5,644 6,150
-------------------------------------------------------------------------------
Operating Income as a Percentage of Sales 16.1% 13.1% 11.5% 9.1% 9.5%
-------------------------------------------------------------------------------
Income Before Taxes and Cumulative Effect
of Accounting Change 24,653 14,325 6,941 3,177 3,427
Income Tax Expense (10,356) (4,040) (1,895) (973) (1,199)
Cumulative Effect of Accounting Change -- -- -- -- 8,000
-------------------------------------------------------------------------------
Net Income $ 14,297 $ 10,285 $ 5,046 $ 2,204 $ 10,228
===============================================================================
Earnings Per Share:
Income Before Cumulative Effect of
Accounting Change $ 1.81 $ 1.34 $ .88 $ .48 $ .48
Cumulative Effect of Accounting Change -- -- -- -- 1.09
-------------------------------------------------------------------------------
Diluted Earnings Per Share $ 1.81 $ 1.34 $ .88 $ .48 $ 1.57
===============================================================================
Working Capital $ 30,182 $ 17,286 $ 11,247 $ 6,710 $ 11,744
Total Assets 104,241 95,814 80,974 79,852 55,290
Convertible Subordinated Debentures -- -- 24,263 28,000 28,000
Long-Term Debt Including Current Portion 5,803 10,290 12,845 21,913 4,529
Total Shareholders' Equity 73,703 59,188 24,588 15,783 13,585
Cash Dividends Per Share -- -- -- -- --
(A) See Note 2 to the consolidated financial statements for discussion of
acquisitions.
QUARTERLY COMMON STOCK PRICE INFORMATION
1997 1996 1995
---------------- ---------------- ------------------
High Low High Low High Low
============================================================================================
First Quarter $25.25 $20.50 $14.13 $ 9.50 $ 6.25 $ 4.69
Second Quarter 29.38 23.63 14.88 12.88 7.75 5.75
Third Quarter 39.69 27.88 18.38 12.38 10.25 7.19
Fourth Quarter 38.69 28.75 24.38 16.63 10.50 8.88
The common stock of the Company (DCO) is listed on the New York Stock Exchange.
On December 31, 1997, the Company had approximately 702 holders of record of
common stock.
17
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ACQUISITIONS In June 1996, the Company acquired substantially all of
the assets of MechTronics of Arizona, Inc. ("MechTronics") for $8,000,000 in
cash and a $750,000 note. MechTronics is a leading manufacturer of mechanical
and electromechanical enclosure products for the defense electronics, commercial
aviation and communications markets. In January 1995, the Company acquired the
capital stock of 3dbm, Inc. ("3dbm") for $4,780,000 in cash and $400,000 in
notes. 3dbm supplies high power base stations expanders, microcells and other
wireless telecommunications hardware used in cellular telephone networks and
microwave components and subsystems to both military and commercial customers.
The acquisitions were funded from internally generated cash, notes payable
to sellers and borrowings under the Company's credit agreement with its bank
(see Financial Condition for additional information). These acquisitions
strengthened the Company's position in the aerospace industry and added
complementary lines of business.
RESULTS OF OPERATIONS 1997 Compared to 1996 -- Net sales increased 33% to
$157,287,000 in 1997. The increase resulted from a broad-based increase in sales
in most of the Company's product lines due to improved industry conditions and
new contract awards, as well as sales of $22,003,000 in 1997 compared to
$8,414,000 in 1996 from the MechTronics acquisition completed in June 1996. The
Company's mix of business was approximately 59% commercial, 31% military and 10%
space in 1997. Foreign sales increased to 19% of total sales in 1997 from 18% in
1996. Canada is the only foreign country in which the Company had sales of 4% or
more of total sales, with sales of $7,950,000 in 1997 and $4,906,000 in 1996.
The Company had substantial sales to Boeing, Lockheed Martin and Northrop
Grumman. During 1997 and 1996, sales to Boeing were $36,375,000 and $21,907,000,
respectively; sales to Lockheed Martin were $17,455,000 and $13,037,000,
respectively; and sales to Northrop Grumman were $6,568,000 and $7,843,000,
respectively. At December 31, 1997, trade receivables from Boeing, Lockheed
Martin and Northrop Grumman were $4,079,000, $1,659,000 and $551,000,
respectively. The sales and receivables relating to Boeing, Lockheed Martin and
Northrop Grumman are diversified over a number of different commercial, space
and military programs.
The Company's commercial business is represented on virtually all of today's
major commercial aircraft. During 1997, commercial sales increased primarily as
a result of increased commercial aircraft build rates, new contract awards and
increased airline seat refurbishment projects, as well as a full year of sales
from the MechTronics acquisition.
Military components manufactured by the Company are employed in many of the
country's front-line fighters, bombers, helicopters and support aircraft, as
well as many land and sea-based vehicles. During 1997, military sales increased
primarily as a result of new contract awards, as well as a full year of sales
from the MechTronics acquisition.
In the space sector, the Company produces components for the expendable fuel
tanks which help boost the Space Shuttle vehicle into orbit. Components are also
produced for a variety of unmanned launch vehicles. Sales related to space
programs were approximately $14,821,000, or 10% of total sales in 1997.
At December 31, 1997, backlog believed to be firm was approximately
$155,700,000 compared to $134,500,000 at December 31, 1996. Backlog growth has
been concentrated principally in the Boeing 737, 777 and C-17 aircraft.
Approximately $100,000,000 of the total backlog is expected to be delivered
during 1998.
Gross profit, as a percentage of sales, decreased to 32.0% in 1997 from
32.6% in 1996. This decrease was primarily the result of changes in sales mix.
The decrease was partially offset by economies of scale resulting from sales
increases.
Selling, general and administrative expenses, as a percentage of sales,
decreased to 15.9% compared to 19.6% in 1996. The decrease was primarily the
result of higher sales volume partially offset by an increase in related period
costs.
Interest expense decreased approximately 45% to $635,000 in 1997 primarily
due to the conversion of $24,263,000 of convertible subordinated debentures that
were outstanding during the first half of 1996 and lower debt levels.
Income tax expense increased to $10,356,000 in 1997 compared to $4,040,000
for 1996. The increase in income tax expense was primarily due to the increase
in income before taxes and an effective tax rate of 42% in 1997 compared to 28%
in 1996. From a cash flow perspective, however, the Company continued to use its
federal net operating loss carryforwards to offset taxable income. Cash expended
to pay income taxes was $4,932,000 in 1997, compared to $1,759,000 in 1996. At
December 31, 1997, the Company had federal tax NOLs totaling approximately
$528,000 and expects to fully utilize the balance of its federal net operating
18
4
Ducommun Incorporated
loss carryforwards to offset taxable income in 1998.
Net income for 1997 was $14,297,000, or $1.81 diluted earnings per share,
compared to $10,285,000, or $1.34 diluted earnings per share, in 1996.
1996 Compared to 1995 -- Net sales increased 30% to $118,357,000 in 1996. The
increase resulted from a broad-based increase in sales in most of the Company's
product lines due to improved industry conditions and new contract awards, as
well as sales from the MechTronics acquisition completed in June 1996. The
Company's mix of business was approximately 52% commercial, 38% military and 10%
space in 1996. Foreign sales decreased to 18% of total sales in 1996 from 26% in
1995. Canada is the only foreign country in which the Company had sales of 4% or
more of total sales, with sales of $4,906,000 in 1996 and $4,518,000 in 1995.
The Company had substantial sales to Boeing, Lockheed Martin and
Northrop Grumman. During 1996 and 1995, sales to Boeing were $21,907,000 and
$14,731,000, respectively; sales to Lockheed Martin were $13,037,000 and
$8,163,000, respectively; sales to Northrop Grumman were $7,843,000 and
$9,623,000, respectively. At December 31, 1996, trade receivables from Boeing,
Lockheed Martin and Northrop Grumman were $2,425,000, $1,541,000 and $647,000,
respectively. The sales and receivables relating to Lockheed Martin are
primarily for the Space Shuttle program. The sales and receivables relating to
Boeing and Northrop Grumman are diversified over a number of different
commercial and military programs.
The Company's commercial business is represented on virtually all of today's
major commercial aircraft. During 1996, commercial sales increased primarily as
a result of increased commercial aircraft build rates, new contract awards and
increased airline seat refurbishment projects, as well as sales from the
MechTronics acquisition.
Military components manufactured by the Company are employed in many of the
country's front-line fighters, bombers, helicopters and support aircraft, as
well as many land and sea-based vehicles. During 1996, military sales increased
primarily as a result of new contract awards, as well as sales from the
MechTronics acquisition. The Company's defense business is widely diversified
among military manufacturers and programs. The C-17 program accounted for
approximately $5,978,000 in sales in 1996.
In the space sector, the Company produces components for the expendable fuel
tanks which help boost the Space Shuttle vehicle into orbit. Components are also
produced for a variety of unmanned launch vehicles. Sales related to space
programs were approximately $11,544,000, or 10% of total sales in 1996.
At December 31, 1996, backlog believed to be firm was approximately
$134,500,000, including $24,291,000 for space-related business, compared to
$92,600,000 at December 31, 1995. Backlog growth has been concentrated
principally in the Boeing 777, 737-700/800 and C-17 aircraft.
Gross profit, as a percentage of sales, decreased to 32.6% in 1996 from
33.0% in 1995. This decrease was primarily the result of higher production costs
at MechTronics, which was acquired in June 1996.
Selling, general and administrative expenses as a percentage of sales
decreased to 19.6% compared to 21.5% of sales in 1995. The decrease in these
expenses as a percentage of sales was primarily the result of higher sales
volume partially offset by an increase in related period costs.
Interest expense decreased 68% to $1,153,000 in 1996 primarily due to the
conversion of $24,263,000 of convertible subordinated debentures that were
outstanding at December 31, 1995.
Income tax expense increased to $4,040,000 in 1996 compared to $1,895,000
for 1995. The increase in income tax expense was primarily due to the increase
in income before taxes. From a cash flow perspective, however, the Company
continued to use its federal net operating loss carryforwards to offset taxable
income. Cash expended to pay income taxes was $1,759,000 in 1996, compared to
$555,000 in 1995. At December 31, 1996, the Company had federal tax NOLs
totaling approximately $16,000,000.
Net income for 1996 was $10,285,000, or $1.34 diluted earnings per share,
compared to $5,046,000, or $0.88 diluted earnings per share, in 1995.
FINANCIAL CONDITION Liquidity and Capital Resources -- Cash flow from operating
activities for 1997 was $13,483,000, compared to $18,047,000 for 1996. The
decline in cash flow from operating activities resulted principally from an
increase in accounts receivable and work in process inventory due to the growth
in sales volume. During 1997, the Company spent $7,629,000 on capital
expenditures and repaid $4,487,000 of principal on its outstanding bank
borrowings, promissory notes, term and commercial real estate loans.
The Company's bank credit agreement provides for a $40,000,000 unsecured
revolving credit line with an expiration date of July 1, 1999. At December 31,
1997, the Company had $40,000,000 of unused lines of credit available.
19
5
MANAGEMENT'S DISCUSSION (continued)
See Notes to Consolidated Financial Statements, Note 6.
The Company continues to depend on operating cash flow and the availability
of its bank line of credit to provide short-term liquidity. Cash from operations
and bank borrowing capacity are expected to provide sufficient liquidity to meet
the Company's obligations during 1998.
Aggregate maturities of long-term debt during the next five years are as
follows: 1998, $920,000; 1999, $709,000; 2000, $496,000; 2001, $534,000; 2002,
$575,000.
The Company expects to spend approximately $16,000,000 for capital
expenditures in 1998. The Company plans to make substantial capital expenditures
for manufacturing equipment and facilities to support long-term aerospace
structure contracts for both commercial and military aircraft and space
programs. These expenditures are expected to place the Company in a favorable
competitive position among aerospace subcontractors, and to allow the Company to
take advantage of the off-load requirements from its customers.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
chemical milling services for the aerospace industry. Aerochem has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination at its El Mirage, California facility (the
"Site"). Aerochem expects to spend approximately $1 million for future
investigation and corrective action at the Site, and the Company has established
a provision for such costs. However, the Company's ultimate liability in
connection with the Site will depend upon a number of factors, including changes
in existing laws and regulations, and the design and cost of the construction,
operation and maintenance of the corrective action.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including matters
relating to environmental laws. In addition, the Company makes various
commitments and incurs contingent liabilities. While it is not feasible to
predict the outcome of these matters, the Company does not presently expect that
any sum it may be required to pay in connection with these matters would have a
material adverse effect on its consolidated financial position or results of
operations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS Any forward-looking statements made
in this Annual Report involve risks and uncertainties. The Company's future
financial results could differ materially from those anticipated due to the
Company's dependence on conditions in the airline industry, the level of new
commercial aircraft orders, the production rate for the Space Shuttle program,
the level of defense spending, competitive pricing pressures, technology and
product development risks and uncertainties, product performance, risks
associated with acquisitions and dispositions of businesses by the Company,
increasing consolidation of customers and suppliers in the Aerospace industry,
and other factors beyond the Company's control.
FUTURE ACCOUNTING REQUIREMENTS In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130, "Comprehensive
Income" ("SFAS 130"), and No. 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"). In February 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits" ("SFAS 132"). SFAS 130, 131 and 132 will become effective for the
Company in 1998. The adoption of SFAS 130, 131 and 132 is not expected to have a
material effect on the Company's financial statements.
YEAR 2000 In 1998, the Company commenced, for its systems, a year 2000 date
conversion project to address necessary code changes, testing, and
implementation. Project completion is planned for the begining of 1999 at a cost
that is not expected to be material to the Company. The Company expects its year
2000 date conversion project to be completed on a timely basis. However, there
can be no assurance that the systems of other companies on which the Company's
systems rely also will be timely converted or that any such failure to convert
by another company would not have an adverse effect on the Company's systems.
Maintenance or modification costs will be expensed as incurred, while the cost
of new software will be capitalized and amortized over the software's useful
life.
20
6
Ducommun Incorporated
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1997 1996 1995
===================================================================================================
(in thousands, except per share amounts)
Net Sales $ 157,287 $ 118,357 $ 91,217
---------------------------------------------
Operating Costs and Expenses:
Cost of goods sold 106,967 79,732 61,134
Selling, general and administrative expenses 25,032 23,147 19,572
---------------------------------------------
Total Operating Costs and Expenses 131,999 102,879 80,706
---------------------------------------------
Operating Income 25,288 15,478 10,511
Interest Expense (635) (1,153) (3,570)
---------------------------------------------
Income Before Taxes 24,653 14,325 6,941
Income Tax Expense (Note 11) (10,356) (4,040) (1,895)
---------------------------------------------
Net Income $ 14,297 $ 10,285 $ 5,046
=============================================
Earnings Per Share:
Basic earnings per share $ 1.94 $ 1.56 $ 1.12
Diluted earnings per share 1.81 1.34 .88
See accompanying notes to consolidated financial statements.
21
7
Ducommun Incorporated
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 1996
======================================================================================================
(in thousands, except share data)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,156 $ 571
Accounts receivable (less allowance for doubtful
accounts of $359 and $206) 19,189 14,722
Inventories (Note 3) 24,604 22,595
Deferred income taxes (Note 11) 4,612 4,597
Prepaid income taxes (Note 11) 2,877 --
Other current assets 2,053 1,850
------------------------
Total Current Assets 55,491 44,335
Property and Equipment, Net (Note 4) 30,594 27,051
Deferred Income Taxes (Note 11) 380 5,594
Excess of Cost Over Net Assets Acquired (Net of Accumulated
Amortization of $4,832 and $3,548) 16,907 18,326
Other Assets 869 508
------------------------
$104,241 $ 95,814
========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 6) $ 919 $ 1,117
Accounts payable 9,024 8,343
Accrued liabilities (Note 5) 15,366 17,589
------------------------
Total Current Liabilities 25,309 27,049
Long-Term Debt, Less Current Portion (Note 6) 4,884 9,173
Other Long-Term Liabilities 345 404
------------------------
Total Liabilities 30,538 36,626
------------------------
Commitments and Contingencies (Notes 2, 10 and 12)
Shareholders' Equity (Note 7):
Common stock -- $.01 par value; authorized 12,500,000 shares; issued
and outstanding 7,454,198 shares in 1997 and 7,301,428 in 1996 74 73
Additional Paid-In Capital 59,497 59,280
Retained Earnings (Deficit) 14,132 (165)
------------------------
Total Shareholders' Equity 73,703 59,188
------------------------
$104,241 $ 95,814
========================
See accompanying notes to consolidated financial statments.
22
8
Ducommun Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1997 1996 1995
=======================================================================================================
(in thousands)
Cash Flows from Operating Activities:
Net Income $ 14,297 $ 10,285 $ 5,046
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and amortization 5,340 4,473 4,382
Deferred income tax provision 5,200 2,014 934
Other 29 (186) 44
Change in Assets and Liabilities, Net of Effects
from Acquisitions:
Accounts receivable (4,467) 1,826 (3,413)
Inventories (2,009) (4,105) (1,651)
Prepaid income taxes (2,877) -- --
Other assets (429) (636) (581)
Accounts payable 681 2,310 (166)
Accrued and other liabilities (2,282) 2,066 3,491
----------------------------------------
Net Cash Provided by Operating Activities 13,483 18,047 8,086
----------------------------------------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (7,629) (6,691) (2,501)
Acquisition of Businesses -- (8,000) (4,427)
Other -- -- 34
----------------------------------------
Net Cash Used in Investing Activities (7,629) (14,691) (6,894)
----------------------------------------
Cash Flows from Financing Activities:
Repayment of Long-Term Debt (4,487) (2,555) (9,068)
Cash Premium for Conversion of Convertible
Subordinated Debentures -- (609) (258)
Other 218 8 22
----------------------------------------
Net Cash Used in Financing Activities (4,269) (3,156) (9,304)
----------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,585 200 (8,112)
Cash and Cash Equivalents, Beginning of Year 571 371 8,483
----------------------------------------
Cash and Cash Equivalents, End of Year $ 2,156 $ 571 $ 371
========================================
Supplemental Disclosures of Cash Flow Information:
Interest Expense Paid $ 720 $ 1,553 $ 3,719
Income Taxes Paid $ 4,932 $ 1,759 $ 555
Supplementary Information for Non-Cash Financing Activities:
During 1996, the Company issued 2,417,205 new shares of common stock upon
conversion of $24,263,000 of its outstanding 7.75% convertible subordinated
debentures. During 1995, the Company issued 374,446 new shares of common stock
upon conversion of $3,737,000 of its outstanding 7.75% convertible subordinated
debentures.
See accompanying notes to consolidated financial statements.
23
9
Ducommun Incorporated
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained Total
Shares Additional Earnings Shareholders'
Outstanding Common Stock Paid-In Capital (Deficit) Equity
===========================================================================================================================
(in thousands, except share data)
Balance at January 1, 1995 4,464,154 $ 45 $31,234 $(15,496) $15,783
Stock options exercised 20,125 -- 68 -- 68
Stock repurchased related to the
exercise of stock options (6,444) -- (46) -- (46)
Common stock issued upon conversion
of outstanding 7.75% convertible
subordinated debentures 374,446 4 3,733 -- 3,737
Net Income -- -- -- 5,046 5,046
-------------------------------------------------------------------------
Balance at December 31, 1995 4,852,281 49 34,989 (10,450) 24,588
Stock options exercised 43,200 -- 156 -- 156
Stock repurchased related to the
exercise of stock options (11,258) -- (147) -- (147)
Common stock issued upon conversion
of outstanding 7.75% convertible
subordinated debentures 2,417,205 24 24,100 -- 24,124
Income tax benefit related to the
exercise of nonqualified stock
options -- -- 182 -- 182
Net Income -- -- -- 10,285 10,285
-------------------------------------------------------------------------
Balance at December 31, 1996 7,301,428 73 59,280 (165) 59,188
Stock options exercised 269,117 3 1,030 -- 1,033
Stock repurchased related to the
exercise of stock options (116,347) (2) (4,134) -- (4,136)
Income tax benefit related to the exercise
of nonqualified stock options -- -- 3,321 -- 3,321
Net Income -- -- -- 14,297 14,297
-------------------------------------------------------------------------
Balance at December 31, 1997 7,454,198 $ 74 $59,497 $ 14,132 $73,703
=========================================================================
See accompanying notes to consolidated financial statements.
24
10
Ducommun Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation -- The consolidated financial statements include the accounts of
the Company and its subsidiaries, after eliminating significant intercompany
balances and transactions.
Cash Equivalents -- Cash equivalents consist of highly liquid instruments
purchased with maturities of three months or less.
Revenue Recognition -- Revenue, including sales under fixed price contracts, is
recognized upon shipment of products or when title passes based on the terms of
the sale. The effects of revisions in contract value or estimated costs of
completion are recognized over the remaining terms of the agreement. Provisions
for estimated losses on contracts are recorded in the period identified.
Inventory Valuation -- Inventories are stated at the lower of cost or market.
Cost is determined based upon the first-in, first-out method. Costs on fixed
price contracts in progress included in inventory represent accumulated
recoverable costs less the portion of such costs allocated to delivered units
and applicable progress payments received.
Property and Depreciation -- Property and equipment, including assets recorded
under capital leases, are recorded at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives ranging
from 2 to 40 years and, in the case of leasehold improvements, over the shorter
of the lives of the improvements or the lease term.
Income Taxes -- Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns.
Excess of Costs Over Net Assets Acquired -- The cost of acquired businesses in
excess of the fair market value of their underlying net assets is amortized on
the straight-line basis over periods ranging from 15 to 40 years. The Company
assesses the recoverability of cost in excess of net assets of acquired
businesses by determining whether the amortization of this intangible asset over
its remaining life can be recovered through future operating cash flows.
Environmental Liabilities -- Environmental liabilities are recorded when
environmental assessments and/or remedial efforts are probable, and costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Company's commitment to a formal plan
of action.
Earnings Per Share -- Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding in each year. Diluted earnings per share is computed by dividing
income available to common stockholders plus income associated with dilutive
securities by the weighted average number of common shares outstanding plus any
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock in each year. In
1997, 1996 and 1995, income available to common stockholders was $14,297,000,
$10,285,000 and $5,046,000, respectively, and income associated with dilutive
securities was $0, $222,000 and $1,354,000, respectively. In 1997, 1996 and
1995, the weighted average number of common shares outstanding was 7,358,000,
6,594,000 and 4,500,000, the dilutive shares associated with stock options were
553,000, 514,000 and 343,000 and the dilutive shares associated with the
outstanding 7.75% convertible subordinated debentures were 0, 712,000 and
2,431,000, respectively.
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). In accordance with the
implementation provisions of SFAS 128, the Company has restated earnings per
share in the Consolidated Statements of Income for the years ended December 31,
1996 and 1995. The unaudited quarterly data for the first three quarters of 1997
and for 1996 presented in Note 14 have also been restated to comply with the
provisions of SFAS 128.
Stock-Based Compensation -- Compensation cost attributable to stock option and
similar plans is recognized based on the difference, if any, between the closing
market price of the stock on the date of grant over the exercise price of the
option.
25
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has not issued any stock options with an exercise price less than
the closing market price of the stock on the date of grant.
Use of Estimates -- Certain amounts and disclosures included in the consolidated
financial statements required management to make estimates which could differ
from actual results.
NOTE 2. ACQUISITIONS
In June 1996, the Company acquired substantially all of the assets of
MechTronics of Arizona, Inc. ("MechTronics") for $8,000,000 in cash and a
$750,000 note. The Company may be required to make additional payments through
1999, based on the future financial performance of the business of MechTronics.
MechTronics is a leading manufacturer of mechanical and electromechanical
enclosure products for the defense electronics, commercial aviation and
communications markets.
In January 1995, the Company acquired the capital stock of 3dbm, Inc.
("3dbm") for $4,780,000 in cash and $400,000 in notes. 3dbm supplies high power
base stations, expanders, microcells and other wireless telecommunications
hardware used in cellular telephone networks and microwave components and
subsystems to both military and commercial customers.
The following table presents unaudited pro forma consolidated operating
results for the Company for the years ended December 31, 1996 and December 31,
1995, as if the MechTronics acquisition had occurred as of the beginning of the
periods presented. Pro forma results for 1995, assuming the acquisition of 3dbm
at the beginning of the period, would not have been materially different from
the Company's historical results for the period presented.
1996 1995
======================================================
(in thousands, except per share amounts)
Net sales $125,762 $107,424
Net earnings 10,166 5,294
Basic earnings per share 1.54 1.18
Diluted earnings per share 1.33 0.91
The unaudited pro forma consolidated operating results of the Company are
not necessarily indicative of the operating results that would have been
achieved had the acquisitions been consummated at the beginning of the periods
presented, and should not be construed as representative of future operating
results.
The acquisitions of MechTronics and 3dbm described above were accounted for
under the purchase method of accounting and, accordingly, the operating results
for MechTronics and 3dbm have been included in the Consolidated Statements of
Income since the dates of the respective acquisitions. The cost of the
acquisitions was allocated on the basis of the estimated fair value of assets
acquired and liabilities assumed. These acquisitions accounted for approximately
$5,004,000 of the Excess of Cost Over Net Assets Acquired at December 31, 1997
and December 31, 1996. Such excess (which will increase for any future
contingent payments) is being amortized on the straight-line basis over fifteen
years.
NOTE 3. INVENTORIES
Inventories consist of the following:
December 31, 1997 1996
==================================================
(in thousands)
Raw materials and supplies $ 7,717 $ 7,173
Work in process 17,058 14,841
Finished goods 1,041 631
-------------------
25,816 22,645
Less progress payments 1,212 50
-------------------
Total $24,604 $22,595
===================
Work in process inventories include amounts under long-term fixed price
contracts aggregating $10,500,000 and $7,537,000 at December 31, 1997 and 1996,
respectively.
26
12
Ducommun Incorporated
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Range of
Estimated
December 31, 1997 1996 Useful Lives
==================================================================
(in thousands)
Land $ 4,235 $ 4,235
Buildings & improvements 13,127 12,607 5 - 40 years
Machinery & equipment 38,368 34,613 2 - 20 years
Furniture & equipment 4,995 4,309 2 - 10 years
Construction in progress 2,696 2,626
------------------
63,421 58,390
Less accumulated de-
preciation & amortization 32,827 31,339
------------------
Total $30,594 $27,051
==================
Depreciation expense was $4,056,000, $3,410,000 and $3,252,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, 1997 1996
==================================================
(in thousands)
Accrued compensation $ 8,228 $ 7,803
Customer deposits 1,181 2,542
Provision for environmental
costs 1,663 1,870
Accrued state franchise &
sales taxes 288 648
Other 4,006 4,726
-------------------
Total $15,366 $17,589
===================
NOTE 6. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31, 1997 1996
==================================================
(in thousands)
Bank credit agreement $ -- $4,000
Term and real estate loans 5,181 5,294
Promissory notes related to
acquisitions 622 996
-------------------
Total debt 5,803 10,290
Less current portion 919 1,117
-------------------
Long-term debt, less
current portion $4,884 $9,173
===================
In 1996, the Company converted $24,263,000 principal amount of its 7.75%
convertible subordinated debentures. The Company paid cash of $609,000 for
the conversions.
The Company's bank credit agreement provides for a $40,000,000 unsecured
revolving credit line with an expiration date of July 1, 1999. Interest is
payable monthly on the outstanding borrowings based on the bank's prime rate
(8.50% per annum at December 31, 1997) minus 0.25%. A Eurodollar pricing option
is also available to the Company for terms of up to six months at the Eurodollar
rate plus a spread based on the leverage ratio of the Company calculated at the
end of each fiscal quarter (1.00% at December 31, 1997). At December 31, 1997,
the Company had $40,000,000 of unused lines of credit available. The credit
agreement includes fixed charge coverage and maximum leverage ratios, and
limitations on future dividend payments and outside indebtedness.
The weighted average interest rate on borrowings outstanding was 7.24% per
annum and 7.50% per annum at December 31, 1997 and 1996, respectively.
The carrying amount of long-term debt approximates fair value based on the
terms of the related debt, recent transactions and estimates using interest
rates currently available to the Company for debt with similar terms and
remaining maturities.
Aggregate maturities of long-term debt during the next five years are as
follows: 1998, $920,000; 1999, $709,000; 2000, $496,000; 2001, $534,000; 2002,
$575,000.
NOTE 7. SHAREHOLDERS' EQUITY
At December 31, 1997 and 1996, no preferred shares were issued or outstanding.
NOTE 8. STOCK OPTIONS
The Company has three stock option or incentive plans. Stock awards may be made
to directors, officers and key employees under the stock plans on terms
determined by the Compensation Committee of the Board of Directors or, with
respect to directors, on terms determined by the Board of Directors. Stock
options have been and may be granted to directors, officers and key employees
under the stock plans at prices not less than 100% of the market value on the
date of grant, and expire not more than ten years from the date of grant. The
option price and number of shares are subject to adjustment under certain
dilutive circumstances. At December 31, 1997, options for 418,071 shares of
common stock were exercisable.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans based on the fair
value method prescribed by SFAS 123. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS 123, the
Company's net income and earnings per share would be reduced to the pro forma
amounts indicated below:
27
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Year ended December 31, 1997 1996 1995
===========================================================
(in thousands, except per share amounts)
Net Income:
As reported $14,297 $10,285 $5,046
Pro forma 14,032 10,101 5,036
Earnings per common share:
As reported:
Basic $ 1.94 $ 1.56 $1.12
Diluted 1.81 1.34 .88
Pro forma:
Basic $ 1.91 $ 1.53 $1.12
Diluted 1.77 1.32 .88
These pro forma amounts may not be representative of future results since
the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997, 1996 and 1995, respectively: dividend yields of zero
percent; expected monthly volatility of 30.62, 31.75 and 30.83 percent;
risk-free interest rates of 6.38, 6.33 and 6.36 percent; and expected life of
four years for 1997, 1996 and 1995. The weighted average fair value of options
granted during 1997, 1996 and 1995 for which the exercise price equals the
market price on the grant date was $7.49, $4.85 and $2.74, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
At December 31, 1997, 376,351 common shares were available for future grants
and 613,858 common shares were reserved for the exercise of options. Option
activity during the three years ended December 31, 1997 was as follows:
Weighted
Average
Exercise Price
Number of of Options
of Shares Outstanding
=============================================================
Outstanding at January 1, 1995 712,075 $ 3.712
Granted 49,200 7.904
Exercised (20,125) 3.373
Forfeited (23,625) 4.174
-------
Outstanding at December 31, 1995 717,525 $ 3.995
Granted 181,000 14.094
Exercised (43,200) 3.635
Forfeited (3,000) 8.875
-------
Outstanding at December 31, 1996 852,325 $ 6.140
Granted 65,000 21.900
Exercised (269,117) 3.838
Forfeited (34,350) 13.235
-------
Outstanding at December 31, 1997 613,858 $ 8.421
=======
- --------------------------------------------------------------------------------
The following table summarizes information concerning currently outstanding
and exercisable stock options:
Number of Weighted
Range of Outstanding Average Remaining Weighted Average Number Weighted Average
Exercise Prices Options Contractual Life Exercise Price Exercisable Exercise Price
===============================================================================================================
$ 1.875 -- $ 4.990 370,658 3.2113 $ 3.932 365,233 $ 3.918
$ 5.000 -- $ 9.990 20,150 2.5359 7.544 10,075 7.544
$10.000 -- $14.990 150,050 3.3221 13.275 40,013 13.078
$15.000 -- $19.990 11,000 3.7947 19.750 2,750 19.750
$20.000 -- $24.990 62,000 4.0876 21.786 -- --
----------- -----------
Total 613,858 3.3152 $ 8.421 418,071 $ 4.987
=========== ===========
28
14
Ducommun Incorporated
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has an unfunded supplemental retirement plan that was suspended in
1986, but which continues to cover certain former executives.
The accumulated benefit obligations under the plan at December 31, 1997 and
December 31, 1996 were $658,000 and $688,000, respectively, which are included
in accrued liabilities.
The Company also provides certain health care benefits for retired
employees. Employees become eligible for these benefits if they meet minimum age
and service requirements, are eligible for retirement benefits and agree to
contribute a portion of the cost. As of December 31, 1997, there were 143
current and retired employees eligible for such benefits. Eligibility for
additional employees to become covered by retiree health benefits was terminated
in 1988.
The Company accrues postretirement health care benefits over the period in
which active employees become eligible for such benefits. The components of
periodic expenses for these postretirement benefits are as follows:
Year ended December 31, 1997 1996
================================================================
(in thousands)
Service cost $ 1 $ 1
Interest cost 46 49
Amortization of net transition
obligation 84 84
Net amortization and deferral (22) 9
-------------------
Net periodic postretirement
benefit costs $ 109 $ 143
===================
The actuarial liabilities for these postretirement benefits are as follows:
December 31, 1997 1996
================================================================
(in thousands)
Accumulated postretirement
benefit obligation:
Retirees $ 442 $ 488
Fully eligible active plan
participants 139 131
Other active plan participants 21 18
-------------------
Total 602 637
Unrecognized net transition obligation (655) (740)
Unrecognized net gain 320 322
-------------------
Accrued postretirement
benefit cost $ 267 $ 219
===================
The accumulated postretirement benefit obligations at December 31, 1997 and
1996 were determined using an assumed discount rate of 7.00% and 7.50%,
respectively. For measurement purposes, a 9% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998; the rate was
assumed to decrease gradually to 5.0% in the year 2006 and remain at that level
thereafter over the projected payout period of the benefits.
A 1% increase in the assumed annual health care cost trend rate would
increase the present value of the accumulated postretirement benefit obligation
at December 31, 1997 by $1,277, and the aggregate of the service and interest
cost components of net periodic post-retirement benefit cost for the year then
ended by $113.
The Company provides a retirement benefit to the Company's Chairman and
former Chief Executive Officer. The components of periodic expenses for this
postretirement benefit are as follows:
Year ended December 31, 1997 1996
================================================================
(in thousands)
Service cost $ -- $ 173
Interest cost 57 48
Amortization of prior service cost -- 25
-------------------
Net periodic cost $ 57 $ 246
===================
The actuarial liabilities for this postretirement benefit are as follows:
December 31, 1997 1996
================================================================
(in thousands)
Accumulated benefit obligation:
Vested active plan participant $ 836 $ 848
Unrecognized net gain (loss) 43 (26)
-------------------
Accrued cost $ 879 $ 822
===================
The accrued cost under this plan is included in accrued liabilities.
29
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. LEASES
The Company leases certain facilities and equipment for periods ranging from 1
to 10 years. The leases generally are renewable and provide for the payment of
property taxes, insurance and other costs relative to the property. Rental
expense in 1997, 1996 and 1995, was $4,156,000, $3,890,000, and $3,550,000,
respectively. Future minimum rental payments under operating leases having
initial or remaining noncancelable terms in excess of one year and related
income from a noncancelable sublease at December 31, 1997 are as follows:
Lease Sublease Net
Commitments Commitments Commitments
=========================================================
(in thousands)
1998 $ 3,060 $ 56 $ 3,004
1999 2,723 -- 2,723
2000 2,029 -- 2,029
2001 1,537 -- 1,537
2002 1,169 -- 1,169
Thereafter 2,959 -- 2,959
-------------------------------------
Total $13,477 $ 56 $13,421
=====================================
NOTE 11. INCOME TAXES
The provision for income tax expense consists of the following:
Year ended December 31, 1997 1996 1995
=============================================================
(in thousands)
Current tax expense:
Federal $ 3,390 $ 735 $ 210
State 1,766 1,291 751
----------------------------------
5,156 2,026 961
----------------------------------
Deferred tax expense:
Federal 5,171 2,230 845
State 29 (216) 89
----------------------------------
5,200 2,014 934
----------------------------------
Income tax expense $10,356 $4,040 $1,895
==================================
Deferred tax assets (liabilities) consist of the
following:
December 31, 1997 1996
=============================================================
(in thousands)
Federal NOLs $ 185 $ 5,470
Credit carryforwards 1,803 1,587
Employment-related reserves 2,170 2,196
Environmental reserves 565 610
Inventory reserves 1,582 1,353
Other 1,248 1,434
-------------------
7,553 12,650
Depreciation (2,561) (2,459)
-------------------
Net deferred tax assets $4,992 $10,191
===================
The principal reasons for the variation from the customary relationship
between income taxes and income before taxes are as follows:
Year ended December 31, 1997 1996 1995
=============================================================
(in thousands)
Statutory federal
income tax rate 35.0% 35.0% 35.0%
State income taxes
(net of federal benefit) 5.3 5.6 6.2
Goodwill amortization 1.2 2.1 4.5
Benefit of net operating
loss carryforwards
and carrybacks -- (12.3) (24.4)
Alternative minimum tax -- -- 3.0
Debt conversion -- 1.4 2.9
Other .5 (3.6) .1
----------------------------------
Effective income tax rate 42.0% 28.2% 27.3%
==================================
At December 31, 1997, the Company had federal tax net operating loss
carryforwards totaling approximately $528,000 which expire in the years 2003
through 2004. At December 31, 1997, the Company had federal tax credits totaling
approximately $1,803,000 of which approximately $473,000 expire in the years
1998 through 2003.
NOTE 12. CONTINGENCIES
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
chemical milling services for the aerospace industry. Aerochem has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination at its El Mirage, California facility (the
"Site"). Aerochem expects to spend approximately $1 million for future
investigation and corrective action at the Site, and the Company has established
a provision for such costs. However, the Company's ultimate liability in
connection with the Site will depend upon a number of factors, including changes
in existing laws and regulations, and the design and cost of the construction,
operation and maintenance of the corrective action.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including matters
relating to environmental laws. In addition, the Company makes various
commitments and incurs contingent liabilities. While it is not feasible to
predict the outcome of these matters, the Company does not presently expect that
any sum it may be required to pay in connection with these matters
30
16
Ducommun Incorporated
would have a material adverse effect on its consolidated financial position or
results of operations.
NOTE 13. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company provides proprietary products and services to most of the prime
aerospace and aircraft manufacturers. As a result, the Company's sales and trade
receivables are concentrated principally in the aerospace industry.
The Company had substantial sales to Boeing, Lockheed Martin and Northrop
Grumman. During 1997, 1996 and 1995, sales to Boeing were $36,375,000,
$21,907,000 and $14,731,000, respectively; sales to Lockheed Martin were
$17,455,000, $13,037,000 and $8,163,000, respectively; and sales to Northrop
Grumman were $6,568,000, $7,843,000 and $9,623,000, respectively. At December
31, 1997, trade receivables from Boeing, Lockheed Martin and Northrop Grumman
were $4,079,000, $1,659,000 and $551,000, respectively. The sales and
receivables relating to Boeing, Lockheed Martin and Northrop Grumman are
diversified over a number of different commercial, space and military programs.
In 1997, 1996 and 1995, foreign sales to manufacturers worldwide were
$29,978,000, $21,155,000 and $23,497,000, respectively. Canada is the only
foreign country in which the Company had sales of 4% or more of total sales,
with sales of $7,950,000, $4,906,000 and $4,518,000 in 1997, 1996 and 1995,
respectively.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
1997 1996
-------------------------------------------- --------------------------------------------
Three months ended Dec 31 Sep 27 Jun 28 Mar 29 Dec 31 Sep 28 Jun 29 Mar 30
========================================================================================================================
(in thousands, except
per share amounts)
Sales and Earnings:
Net Sales $ 42,116 $ 40,482 $ 39,384 $ 35,305 $ 35,918 $ 29,778 $ 28,869 $ 23,792
- ------------------------------------------------------------------------------------------------------------------------
Gross Profit 12,701 12,761 13,754 11,104 11,469 9,533 9,419 8,204
- ------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 7,370 6,401 6,344 4,538 5,627 3,815 3,341 1,542
Income Tax Expense (3,098) (2,686) (2,664) (1,908) (1,605) (1,068) (935) (432)
- ------------------------------------------------------------------------------------------------------------------------
Net Income $ 4,272 $ 3,715 $ 3,680 $ 2,630 $ 4,022 $ 2,747 $ 2,406 $ 1,110
========================================================================================================================
Earnings Per Share:
Basic $ .57 $ .51 $ .50 $ .36 $ .55 $ .38 $ .37 $ .21
Diluted $ .54 $ .47 $ .46 $ .33 $ .51 $ .35 $ .31 $ .18
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). The unaudited quarterly data presented
above for the first three quarters of 1997 and for 1996 have been restated to
comply with the provisions of SFAS 128.
31
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Ducommun Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Ducommun Incorporated and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE L.L.P.
Los Angeles, California
February 13, 1998
32
1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
As of December 31, 1997, the active subsidiaries of Ducommun were:
Aerochem, Inc., a California corporation
AHF-Ducommun Incorporated, a California corporation
Brice Manufacturing Company, Inc., a California corporation
Jay-El Products, Inc., a California corporation
MechTronics of Arizona Corp., an Arizona corporation
3dbm, Inc., a California corporation
1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-31777, 33-82164, 33-36415, 33-9383, 2-83732,
2-77309 and 2-64222) of Ducommun Incorporated of our report dated February 13,
1998 appearing on page 32 of the Annual Report to Shareholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 17 of this Form 10-K.
Price Waterhouse LLP
Los Angeles, California
March 2, 1998
5
1,000
YEAR
DEC-31-1997
JAN-01-1997
DEC-31-1997
2,156
0
19,548
359
24,604
55,491
63,421
32,827
104,241
25,309
0
0
0
74
73,629
104,421
157,287
157,287
106,967
106,967
25,032
0
635
24,653
10,356
14,297
0
0
0
14,297
1.94
1.81
