<PAGE>
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_]CONFIDENTIAL, FOR USE OF THE SEC
ONLY (AS PERMITTED BY RULE 14a-
6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DDL ELECTRONICS, INC.
_______________________________________________________________________________
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
_______________________________________________________________________________
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-
11.
(1) Title of each class of securities to which transaction applies: Common
Stock, $.01 par value per share, of DDL Electronics, Inc. ("DDL Common Stock")
_______________________________________________________________________________
(2) Aggregate number of securities to which transaction applies: 9,000,000
shares of DDL Common Stock to be issued in exchange for all the outstanding
shares of Common Stock of Jolt Technology, Inc.
_______________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing
fee is calculated and state how it was determined): The average of the high
and low prices of DDL Common Stock, as reported by the New York Stock Exchange
for December 17, 1997, was $.78 per share.
_______________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
_______________________________________________________________________________
(5) Total fee paid:
_______________________________________________________________________________
[X] Fee paid previously with preliminary materials:
$1,404
_______________________________________________________________________________
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
_______________________________________________________________________________
(1) Amount Previously Paid:
_______________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
_______________________________________________________________________________
(3) Filing Party:
_______________________________________________________________________________
(4) Date Filed:
_______________________________________________________________________________
<PAGE>
[LOGO OF DDL ELECTRONICS, INC.]
2151 ANCHOR COURT
NEWBURY PARK, CALIFORNIA 91320 (805) 376-9415
June 12, 1998
DEAR FELLOW STOCKHOLDER,
The annual stockholders meeting of DDL Electronics, Inc. will be held at
10:00 a.m. Pacific time on June 26, 1998 at DDL's corporate offices located at
2151 Anchor Court, Newbury Park, California 91320.
At this meeting, stockholders will be asked to approve the following
proposals:
. Issuance of 9,000,000 shares of DDL's common stock for the acquisition of
Jolt Technology, Inc.
. Increase in authorized shares of common stock from 50 million to 75
million shares to facilitate additional acquisitions
. Election of two directors
Detailed information on all three proposals is contained in the accompanying
proxy statement.
Jolt Technology is an electronic manufacturing services (EMS) provider
located in Fort Lauderdale, Florida. Jolt has earned an excellent reputation
in the EMS industry for quality, on-time delivery and customer satisfaction.
Although Jolt's revenues are relatively small compared to DDL's, Jolt's
operating income is expected to contribute substantially to DDL's bottom line.
The acquisition of Jolt will also provide DDL with a strategic presence in the
Southeastern U.S. and is expected to be accretive to DDL's earnings per share.
In addition to the foregoing benefits, Jolt Technology will make DDL a
stronger company, thereby improving its ability to acquire additional EMS
providers. For this reason, the acquisition of Jolt is of vital strategic
importance to DDL. I URGE YOU TO VOTE FOR THE ACQUISITION OF JOLT TECHNOLOGY,
FOR THE INCREASE IN AUTHORIZED SHARES, AND FOR THE ELECTION OF THE TWO
DIRECTORS. PLEASE COMPLETE THE ACCOMPANYING PROXY CARD AND RETURN IT IN THE
ENVELOPE PROVIDED AS SOON A POSSIBLE.
DDL's management team has worked hard over the past two years to turn the
Company around. I am encouraged by the progress made to date, and very excited
about DDL's future. At the annual meeting I will present an overview of DDL's
recent financial and operating performance, business development and growth
plans. I hope to see you there.
Sincerely,
/s/ Gregory L. Horton
Gregory L. Horton
President and Chief Executive
Officer
IF YOU PLAN TO ATTEND THE ANNUAL STOCKHOLDERS MEETING IN PERSON, PLEASE
RSVP BY CALLING DDL TOLL-FREE AT 1-877-376-2595.
<PAGE>
DDL ELECTRONICS, INC.
[LOGO OF DDL ELECTRONICS, INC.]
2151 ANCHOR COURT, NEWBURY PARK, CALIFORNIA 91320
NOTICE OF 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 26, 1998
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Stockholders (the
"1997 Annual Meeting") of DDL Electronics, Inc., a Delaware corporation (the
"Company"), will be held at the offices of the Company located at 2151 Anchor
Court, Newbury Park, California 91320, at 10:00 a.m., local time, on June 26,
1998, to consider and vote on the following matters:
1. A proposal to approve the issuance of 9,000,000 shares of the Company's
common stock ("Common Stock") pursuant to that certain Agreement and Plan
of Merger dated as of May 28, 1998 (the "Agreement") among the Company,
Jolt Technology, Inc., a Florida corporation ("Jolt"), Jolt Acquisition,
Inc., a Delaware corporation and wholly-owned subsidiary of the Company
("Sub"), and Messrs. Thomas M. Wheeler and Mitchell Morhaim and Ms.
Charlene A. Gondek, pursuant to which Jolt will merge with and into Sub and
each share of common stock of Jolt will be converted into the right to
receive 435.6244 shares of Common Stock of the Company (the "Issuance of
the Merger Consideration"). A copy of the Agreement is attached to the
accompanying Proxy Statement as Appendix A.
2. A proposal to amend the Company's Certificate of Incorporation to increase
the number of shares of authorized Common Stock of the Company from
50,000,000 to 75,000,000 (the "Increase in Authorized Shares").
3. A proposal to elect one Class I Director to serve for a term of two years
and one Class II Director to serve for a term of three years or in each
case until their successors are duly elected and qualified (the
"Election").
4. To transact such other business as may properly come before the meeting or
any adjournment thereof.
The Board of Directors of the Company has fixed May 26, 1998 as the record
date for the 1997 Annual Meeting. Only holders of Common Stock of record at
the close of business on that date are entitled to receive notice of and vote
at the 1997 Annual Meeting or at any adjournment thereof. The presence in
person or by proxy of a majority of the outstanding shares of Common Stock of
the Company will constitute a quorum for the conduct of business at the 1997
Annual Meeting. The affirmative vote of a majority of the votes cast by the
holders of the Company's Common Stock at the 1997 Annual Meeting is required
to approve each of the Issuance of the Merger Consideration and the Increase
in Authorized Shares and to effect the Election.
Management sincerely hopes that you will attend the meeting. However, you
are requested to fill in, date, and sign the enclosed form of proxy and mail
it to the Company whether or not you expect to attend the meeting in person.
The prompt return of your proxy in the envelope enclosed for that purpose will
save expenses involved in further communication. Your proxy is revocable and
will not affect your right to vote in person in the event you attend the
meeting. The proxy may be revoked at the meeting by notifying the Secretary of
such revocation in writing prior to the voting of the proxy.
By Order of the Board of Directors
/s/ Richard K. Vitelle
Richard K. Vitelle
June 12, 1998 Vice President and Secretary
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY,
WHETHER OR NOT YOU PLAN TO ATTEND THE 1997 ANNUAL MEETING.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE ISSUANCE OF THE MERGER CONSIDERATION AND THE INCREASE IN
AUTHORIZED SHARES AT THE 1997 ANNUAL MEETING AND "FOR" THE INDIVIDUALS
NOMINATED FOR ELECTION AS DIRECTORS.
<PAGE>
PROXY STATEMENT
DDL ELECTRONICS, INC.
1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 26, 1998
This Proxy Statement is being furnished to the holders of shares (the
"Stockholders") of common stock of the Company (the "Common Stock") in
connection with the solicitation of proxies by the Company's Board of
Directors (the "Board") for use at the 1997 Annual Meeting of the
Stockholders, or any adjournment or postponement thereof (the "1997 Annual
Meeting"), to be held on June 26, 1998 at 10:00 a.m., local time, at the
offices of the Company at 2151 Anchor Court, Newbury Park, California 91320.
At the 1997 Annual Meeting, the Stockholders of the Company will be asked to
consider and vote upon (1) a proposal to issue 9,000,000 shares of Common
Stock of the Company pursuant to that certain Agreement and Plan of Merger
dated as of May 28, 1998 (the "Agreement") among the Company, Jolt Technology,
Inc., a Florida corporation ("Jolt"), Jolt Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of the Company ("Sub"), and Messrs.
Thomas M. Wheeler and Mitchell Morhaim and Ms. Charlene A. Gondek (the "Jolt
Shareholders") (2) a proposal to amend the Company's Certificate of
Incorporation to increase the number of shares of authorized Common Stock of
the Company from 50,000,000 to 75,000,000 and (3) a proposal to elect one
Class I Director and one Class II Director of the Company. See "1997 Annual
Meeting."
Upon consummation (the "Effective Time") of the merger of Jolt with and into
Sub pursuant to the Agreement (the "Merger"), each of the outstanding shares
of common stock, par value $1.00 per share, of Jolt (the "Jolt Common Stock")
will be converted into 435.6244 shares of Common Stock. The Common Stock is
being offered and sold to the Jolt Shareholders in a private placement, exempt
from registration under the Securities Act of 1933, as amended (the
"Securities Act"). The Company has agreed to register such Common Stock for
resale by the Jolt Shareholders as soon as possible following the Effective
Time and to file a registration statement covering such resales not later than
sixty (60) days following the Effective Time. See "The Merger--Restrictions on
Resales of Common Stock."
The last sale price of the Common Stock on the New York Stock Exchange (the
"NYSE") on May 28, 1998 was $ 5/8 per share and on July 1, 1997, the last
trading day preceding public announcement of the proposed Merger, was $1 3/16
per share. There can be no assurance as to the actual price of the Common
Stock prior to, at or at any time following, the Effective Time.
THIS PROXY STATEMENT AND THE ACCOMPANYING FORM OF PROXY ARE FIRST BEING
MAILED TO STOCKHOLDERS ON OR ABOUT JUNE 12, 1998.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
TO BE CONSIDERED IN EVALUATING THE MERGER.
----------------
THE DATE OF THIS PROXY STATEMENT IS JUNE 12, 1998.
----------------
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................................... iv
SUMMARY..................................................................... 1
General.................................................................... 1
The Companies.............................................................. 1
The 1997 Annual Meeting and Vote Required.................................. 1
The Merger................................................................. 2
Conditions to the Merger................................................... 2
Recommendations of the Board............................................... 2
Opinion of the Company's Financial Adviser................................. 2
Effective Time of the Merger............................................... 3
Termination; Expenses...................................................... 3
Waiver; Amendment.......................................................... 3
Certain Federal Income Tax Consequences.................................... 3
Interests of Certain Persons in the Merger................................. 3
Accounting Treatment....................................................... 4
Appraisal Rights........................................................... 4
Restrictions on Resales of Common Stock.................................... 4
Risk Factors............................................................... 4
Regulatory Approvals....................................................... 4
Share Information and Market Prices........................................ 4
Comparative Historical and Pro Forma Per Share Data........................ 5
RISK FACTORS................................................................ 7
Risks Associated with the Prospective Merger............................... 7
Risks Associated with Both the Company and Jolt............................ 7
Risks Associated with the Company.......................................... 8
THE 1997 ANNUAL MEETING..................................................... 11
General.................................................................... 11
Matters to be Considered................................................... 11
Solicitation of Proxies.................................................... 11
Record Date and Voting Rights.............................................. 12
Recommendation of the Board................................................ 12
Other Matters.............................................................. 13
PRICE RANGE OF THE COMMON STOCK............................................. 13
PROPOSAL ONE--THE MERGER.................................................... 14
Description of the Merger.................................................. 14
Background of the Merger................................................... 14
Reasons of the Company for the Merger...................................... 15
Certain Projections........................................................ 17
Opinion of the Company's Financial Advisor................................. 18
The Effective Time......................................................... 21
Conditions to the Merger................................................... 21
Representations and Warranties............................................. 23
Certain Covenants.......................................................... 23
Termination; Expenses...................................................... 23
Waiver; Amendment.......................................................... 24
Indemnification............................................................ 24
Certain Federal Income Tax Consequences.................................... 24
Interests of Certain Persons in the Merger................................. 26
Accounting Treatment....................................................... 26
Restrictions on Resales of Common Stock.................................... 26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Appraisal Rights.......................................................... 27
Regulatory Approvals...................................................... 27
SELECTED FINANCIAL DATA OF THE COMPANY..................................... 28
SELECTED HISTORICAL FINANCIAL DATA OF JOLT................................. 29
SELECTED PRO FORMA COMBINED FINANCIAL DATA................................. 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY................................................. 33
Introductory Statement.................................................... 33
Quasi-Reorganization...................................................... 33
Results of Operations..................................................... 34
Nine Months Ended March 31, 1998 vs. Nine Months Ended March 31, 1997..... 34
Fiscal 1997 vs. Fiscal 1996............................................... 35
Fiscal 1996 vs. Fiscal 1995............................................... 36
Recent Accounting Pronouncements.......................................... 37
Inflation................................................................. 38
Liquidity and Capital Resources........................................... 38
Cautionary Statement as to Forward-Looking Information.................... 39
JOLT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 40
Introductory Statement.................................................... 40
Results of Operations..................................................... 41
Three Months Ended March 31, 1998 vs. Three Months Ended March 31, 1997... 41
Fiscal 1997 vs. Fiscal 1996............................................... 41
Fiscal 1996 vs. Fiscal 1995............................................... 42
Liquidity and Capital Resources........................................... 42
Cautionary Statement as to Forward-Looking Information.................... 43
CERTAIN INFORMATION REGARDING THE COMPANY.................................. 43
European PCB Operations................................................... 43
EMS Contracts............................................................. 44
Directors and Executive Officers.......................................... 46
Board Meetings and Committees............................................. 47
Directors' Fees and Other Transactions.................................... 48
Section 16(a) Beneficial Ownership Reporting Compliance................... 48
Summary Compensation Table................................................ 48
Option Grants in Fiscal Year Ended June 30, 1997.......................... 49
Aggregated Option Exercises in Fiscal 1997 and Fiscal Year-End Option
Values................................................................... 49
Ten-Year Option/SAR Repricings............................................ 49
Employment Agreements and Executive Severance Arrangements................ 49
Report of the Compensation Committee...................................... 50
Compensation Committee Interlocks and Insider Participation............... 51
Stock Performance Graph................................................... 52
Principal Stockholders of the Company..................................... 53
Certain Relationships and Related Transactions............................ 54
CERTAIN INFORMATION REGARDING JOLT......................................... 54
Industry Overview......................................................... 54
Business Strategy......................................................... 55
Customers, Marketing and Sales............................................ 56
Manufacturing Services and Engineering.................................... 56
Technology Development.................................................... 57
Competition............................................................... 57
Employees................................................................. 57
Principal Shareholders of Jolt............................................ 58
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Summary Compensation Table................................................. 58
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................. 59
Common Stock............................................................... 59
Preferred Stock............................................................ 59
PROPOSAL TWO--AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION....... 60
PROPOSAL THREE--ELECTION OF DIRECTORS....................................... 61
STOCKHOLDER PROPOSALS....................................................... 62
EXPERTS..................................................................... 62
INDEPENDENT PUBLIC ACCOUNTANTS.............................................. 62
INDEX TO FINANCIAL STATEMENTS............................................... F-1
APPENDIX A--Agreement and Plan of Merger.................................... A-1
APPENDIX B--Fairness Opinion of Needham & Company, Inc...................... B-1
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN
CONNECTION WITH THE SOLICITATION OF PROXIES MADE HEREBY AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, SUB, JOLT OR THE JOLT SHAREHOLDERS. INFORMATION
CONTAINED IN THIS PROXY STATEMENT REGARDING THE COMPANY AND PRO FORMA
FINANCIAL INFORMATION HAS BEEN FURNISHED BY THE COMPANY, AND INFORMATION
HEREIN REGARDING JOLT HAS BEEN FURNISHED BY JOLT.
THIS PROXY STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH FORWARD-LOOKING
STATEMENTS DUE TO A VARIETY OF FACTORS. SEE "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
THE COMPANY" AND "JOLT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "SEC"). Reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the SEC's Regional Offices at Seven World Trade
Center, 13th Floor, New York, New York 10048, Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 5670 Wilshire
Boulevard, 11th Floor, Los Angeles, California 90036. The SEC maintains a
World Wide Web Site (http://www.sec.gov), which contains reports, proxy and
information statements and other information filed electronically through the
SEC's Electronic Data Gathering Analysis and Retrieval System (known as
"EDGAR"). Copies of all or any part of such materials may be obtained from any
such office upon payment of the fees prescribed by the SEC. Such information
may also be inspected at the offices of the Pacific Exchange at 233 South
Beaudry Avenue, Los Angeles, California 90012.
This Proxy Statement constitutes an annual report to security holders
pursuant to Rule 14a-3 under the Exchange Act. The Company will provide
without charge, to each person being solicited by this Proxy Statement, upon
the written request of any such person, a copy of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1997 as filed with the SEC
(excluding exhibits, for which a reasonable charge shall be imposed). All such
requests should be directed to DDL Electronics, Inc., 2151 Anchor Court,
Newbury Park, California, 91320, Attention: Richard K. Vitelle.
iv
<PAGE>
SUMMARY
THE FOLLOWING IS A SUMMARY OF ALL MATERIAL ASPECTS OF CERTAIN INFORMATION
CONTAINED ELSEWHERE IN THIS PROXY STATEMENT. REFERENCE IS MADE TO, AND THIS
SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION
CONTAINED ELSEWHERE IN THIS PROXY STATEMENT AND IN THE APPENDICES HERETO.
STOCKHOLDERS OF THE COMPANY ARE URGED TO READ CAREFULLY THIS PROXY STATEMENT
AND THE APPENDICES HERETO IN THEIR ENTIRETY.
GENERAL
This Proxy Statement, notice of the 1997 Annual Meeting to be held on June
26, 1998 and form of proxy solicited in connection therewith are first being
mailed to Stockholders on or about June 12, 1998. At the 1997 Annual Meeting,
holders of shares of Common Stock will consider and vote on proposals to issue
9,000,000 shares of Common Stock in connection with the Merger, to amend the
Certificate of Incorporation of the Company to increase the number of shares of
authorized Common Stock from 50,000,000 to 75,000,000 and to elect one director
in each of Class I and Class II of the Company. A copy of the Agreement is
attached hereto as Appendix A and is incorporated herein by this reference. See
"The 1997 Annual Meeting."
THE COMPANIES
The Company. The Company is an independent provider of electronic
manufacturing services ("EMS") for electronic equipment manufacturers. The
Company also manufacturers printed circuit boards ("PCBs") for use primarily in
the computer, communications and instrumentation industries. Its PCB facilities
are located in Northern Ireland while its EMS facilities are located in
Northern Ireland and Southern California. The principal executive office of the
Company is located at 2151 Anchor Court, Newbury Park, California 91320. Its
telephone number is (805) 376-9415.
Sub. Sub is a Delaware corporation and wholly-owned subsidiary of the
Company. It was recently organized by the Company for the purpose of effecting
the acquisition of Jolt. Sub has no material assets and has not engaged in any
activities except in connection with the proposed acquisition of Jolt.
Jolt. Jolt is an independent provider of customized integrated EMS, including
turnkey electronic assembly and manufacturing management services, to original
equipment manufacturers ("OEMs") in the electronics industry. Jolt's electronic
manufacturing services consist primarily of the manufacture of complex PCB
assemblies using surface mount technology ("SMT") and pin through-hole ("PTH")
interconnection technologies. Jolt, a Florida corporation, was organized in
1989. Its principal executive office is located at 6801 N.W. 15th Avenue, Ft.
Lauderdale, FL 33309. Its telephone number is (954) 968-8526.
THE 1997 ANNUAL MEETING AND VOTE REQUIRED
The 1997 Annual Meeting of Stockholders will be held on June 26, 1998, at the
offices of the Company located at 2151 Anchor Court, Newbury Park, California
91320, commencing at 10:00 a.m., local time. At that time, the Stockholders
will be asked to consider and vote upon (i) the issuance of shares of Common
Stock in connection with the Merger (the "Issuance of the Merger
Consideration"), (ii) an amendment to the Certificate of Incorporation of the
Company to increase the number of shares of authorized Common Stock from
50,000,000 to 75,000,000 (the "Increase in Authorized Shares") and (iii) the
election of one Class I Director and one Class II Director of the Company (the
"Election"). The record holders of Common Stock at the close of business on May
26, 1998 (the "Record Date") are entitled to notice of and to vote at the 1997
Annual Meeting. On the
1
<PAGE>
Record Date, there were approximately 1,500 holders of record of Common Stock
and 24,613,666 shares of Common Stock outstanding.
The presence, in person or by proxy, at the 1997 Annual Meeting of the
holders of a majority of the shares of Common Stock outstanding is necessary to
constitute a quorum at the meeting. The affirmative vote of the holders of a
majority of the shares of Common Stock voted with respect to the Issuance of
the Merger Consideration is required to approve the Issuance of the Merger
Consideration. The affirmative vote of the holders of a majority of all
outstanding shares of Common Stock is required to approve the Increase in
Authorized Shares. Under the laws of the State of Delaware and the provisions
of the Company's Certificate of Incorporation, all Stockholders are entitled to
cumulate their votes in the election of directors. Under the Delaware General
Corporation Law, as amended (the "DGCL"), and the Company's Certificate of
Incorporation, the nominees for election as directors who receive the greatest
number of votes cast for election of directors shall be elected as directors.
As of December 4, 1997, directors and executive officers of the Company
beneficially owned 3,340,294 shares of Common Stock, or approximately 13.6% of
the shares entitled to vote at the 1997 Annual Meeting. It is currently
expected that each such director and executive officer of the Company will vote
the shares of Common Stock owned by him or her to effect the Election and to
approve the Issuance of the Merger Consideration and the Increase in Authorized
Shares. See "The 1997 Annual Meeting."
THE MERGER
In the Merger, subject to the terms of the Agreement, Jolt will merge with
and into Sub, with Sub being the surviving corporation (as such, the "Surviving
Subsidiary"). Each share of Jolt Common Stock outstanding at the Effective Time
will be converted into the right to receive 435.6244 shares of Common Stock
(the "Merger Consideration"). Each share of Common Stock outstanding prior to
the Merger will continue to be outstanding after the Effective Time. Each share
of Sub common stock will be converted into one share of common stock of the
Surviving Subsidiary. See "The Merger--Description of the Merger."
CONDITIONS TO THE MERGER
The obligations of the Company and Jolt to consummate the Merger are subject
to the satisfaction of certain conditions, including, among others, approval of
the Issuance of the Merger Consideration by the Stockholders and receipt of
financial statements of Jolt meeting certain minimum criteria. See "The
Merger--Conditions to the Merger."
RECOMMENDATIONS OF THE BOARD
The Board has nominated the individuals who are the subject of the Election
and has approved the Agreement and the transactions contemplated thereby. The
Board believes that The Agreement, the Merger, the Issuance of the Merger
Consideration and the Increase in Authorized Shares are in the best interests
of the Company and its stockholders and recommends that such stockholders vote
"for" the director nominees and "for" approval of the Issuance of the Merger
Consideration and the Increase in Authorized Shares. Certain members of the
Board had conflicts of interest in voting to approve the Agreement, the Merger
and the Issuance of the Merger Consideration and in recommending the Issuance
of the Merger Consideration. See "The Merger--Interests of Certain Persons in
the Merger" for a more detailed discussion. For a discussion of the factors
considered by the Board in reaching certain of its conclusions, see "The
Merger--Opinion of the Company's Financial Advisor."
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Needham & Company, Inc. ("Needham") has acted as the Company's financial
advisor in connection with the Merger and has delivered its written opinion to
the Board dated November 25, 1997 to the effect that, as of
2
<PAGE>
such date and subject to certain assumptions and other matters described
therein, the consideration to be paid by the Company in the Merger is fair to
the Company from a financial point of view. The full text of Needham's opinion,
which sets forth the assumptions made, matters considered, and limitations on
and scope of the review undertaken, is attached as Appendix B to this Proxy
Statement and should be read carefully in its entirety. Needham's opinion is
directed only to the fairness to the Company, from a financial point of view,
of the consideration to be paid by the Company in the Merger, does not address
any other aspect of the Merger and does not constitute a recommendation to any
Stockholder as to how such Stockholder should vote at the 1997 Annual Meeting.
See "The Merger--Opinion of the Company's Financial Advisor."
EFFECTIVE TIME OF THE MERGER
As soon as practicable after satisfaction or waiver of the conditions to the
obligations of the Company, Sub and Jolt to consummate the Merger as set forth
in the Agreement, they will effect the Merger by causing the filing of (i) a
Certificate of Merger with the Secretary of State of the State of Delaware and
(ii) Articles of Merger with the Department of State of the State of Florida.
The Effective Time will occur at the time of such filings or at such later time
as may be specified in such filings with the prior written consent of the
Company, Sub and Jolt. See "The Merger--The Effective Time."
TERMINATION; EXPENSES
The Agreement may be terminated at any time prior to the Effective Time by
written consent of the Company and Jolt or if any court of competent
jurisdiction shall have issued an order, decree or ruling or taken any action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree or ruling shall have become final and non-appealable. Each party to the
Agreement has agreed to bear all expenses incurred by it in connection with the
Agreement and the transactions contemplated thereby. See "The Merger
Termination; Expenses."
WAIVER; AMENDMENT
The Company and Sub, on the one hand, or Jolt and the Jolt Shareholders, on
the other hand, may by a signed writing (i) extend the time for performance of
any of the obligations of the other, (ii) waive any inaccuracies in the
representations and warranties contained in the Agreement or in any document
delivered thereto or (iii) waive compliance with any of the agreements or
conditions contained therein. The Agreement may not be amended except by an
instrument in writing signed on behalf of the parties thereto.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is expected that the Merger will be treated for federal income tax
purposes as a reorganization described in Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that the Company, Jolt and
Sub will each be a "party to a reorganization" as such phrase is described in
Section 368(b) of the Code. The Company will recognize no gain or loss for
federal income tax purposes on the issuance of its Common Stock in exchange for
the Jolt Common Stock. The Jolt Shareholders will recognize no gain or loss for
federal income tax purposes by reason of conversion of the shares of Jolt
Common Stock into the shares of Common Stock to be received at the Effective
Time. The foregoing is a brief summary of certain of the material federal
income tax consequences of the Merger and is qualified in its entirety by the
discussion in "The Merger-- Certain Federal Income Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As described under "The Merger--Interests of Certain Persons in the Merger,"
certain officers or directors of the Company and Jolt have interests in the
Merger, apart from their interests as stockholders. In addition,
3
<PAGE>
certain members of the Board had conflicts of interest in voting to approve the
Agreement, the Merger and the Issuance of the Merger Consideration and in
recommending that the Stockholders approve the Issuance of the Merger
Consideration. On June 30, 1997, the Company borrowed $2,000,000 from Mr.
Thomas M. Wheeler, a private investor. The Company agreed to give Mr. Wheeler
two seats on its Board, which seats were filled by Mr. Wheeler and Charlene A.
Gondek. As a condition to obtaining the $2,000,000 loan from Mr. Wheeler, the
Company also agreed to acquire, subject to the satisfaction of certain
conditions, all of the issued and outstanding shares of Jolt. Failure to
consummate the Merger will not result in a breach of the Wheeler Note; in such
case, the Wheeler Note will be due and payable in full on February 1, 1999.
Upon consummation of the Merger, the maturity date of the Wheeler Note will be
extended from February 1, 1999 to October 31, 1999. In addition to his current
holdings of Jolt common stock, Mr. Wheeler will receive, immediately before the
Merger, 10,660 shares of Jolt common stock in exchange for the discharge of
indebtedness of approximately $2,050,000 owed by Jolt to Mr. Wheeler. As
shareholders of Jolt, Mr. Wheeler and Ms. Gondek will receive shares of Common
Stock as Merger Consideration if the Stockholders approve the Issuance of the
Merger Consideration and all other conditions to the consummation of the Merger
are either satisfied or waived. Mitchell Morhaim, President and a shareholder
of Jolt, will be a party to a five-year employment agreement with the Company.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a "pooling of interests" under
generally accepted accounting principles. See "The Merger--Accounting
Treatment."
APPRAISAL RIGHTS
The Stockholders have no appraisal rights relative to the Merger or the
Issuance of the Merger Consideration. If the Merger is consummated, then Jolt
Shareholders who do not vote in favor of the Merger will be entitled to certain
appraisal rights under Florida law with respect to their shares of Jolt Common
Stock for which they properly perfect such rights. Under the Agreement,
however, the Company is not obligated to consummate the Merger if any of the
Jolt Shareholders have exercised appraisal rights.
RESTRICTIONS ON RESALES OF COMMON STOCK
The shares of Common Stock to be issued to the Jolt Shareholders in the
Merger have not been registered under the Securities Act. The Common Stock is
being offered and sold to the Jolt Shareholders in a private placement, exempt
from registration under the Securities Act. The Company has agreed to register
such Common Stock for resale by the Jolt Shareholders as soon as possible
following the Effective Time and to file a registration statement covering such
resales no later than sixty (60) days following the Effective Time. See "The
Merger--Restrictions on Resales of Common Stock."
RISK FACTORS
An investment in the Company, and the Merger itself, are subject to a variety
of risk factors. See "Risk Factors."
REGULATORY APPROVALS
No federal or state regulatory requirements must be complied with and no such
regulatory approvals must be obtained as a condition to consummation of the
Merger. See "The Merger--Regulatory Approvals."
SHARE INFORMATION AND MARKET PRICES
The Common Stock is traded on the NYSE under the symbol "DDL." As of the
Record Date, there were 24,613,666 shares of Common Stock outstanding, held by
approximately 1,500 holders of record.
4
<PAGE>
The following table sets forth the last sale price reported by the NYSE for
shares of Common Stock on July 1, 1997, the last trading day preceding public
announcement of the proposed merger, and on May 28, 1998.
<TABLE>
<CAPTION>
COMMON
STOCK
-------
<S> <C>
July 1, 1997.............................. $1 3/16
May 28, 1998.............................. $ 5/8
</TABLE>
For additional information regarding the market prices of the Common Stock,
see "Price Range of the Common Stock."
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
Set forth below are basic and diluted income (loss) per share before
extraordinary item, cash dividends declared per share and book value per share
of the Company and Jolt on a historical basis, an unaudited pro forma combined
basis and on a per share equivalent pro forma basis. The information set forth
below should be read in conjunction with the financial statements of the
Company and Jolt that are included in this Proxy Statement.
<TABLE>
<CAPTION>
NINE MONTHS FISCAL YEAR ENDED JUNE
ENDED 30,
MARCH 31, ------------------------
1998 1997 1996 1995
----------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C>
DDL ELECTRONICS, INC. (HISTORICAL):
Basic and diluted income (loss) per share
before extraordinary item............... $ (0.01) $ (0.07) $(0.04) $ (0.15)
Cash dividends declared per share........ -- -- -- --
Book value per share (end of period)..... 0.26 0.24
<CAPTION>
NINE MONTHS FISCAL YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, ------------------------
1998 1997 1996 1995
----------- ------- ------ -------
<S> <C> <C> <C> <C>
JOLT TECHNOLOGY, INC. (HISTORICAL-
UNAUDITED, EXCEPT 1996):
Basic and diluted income per share before
extraordinary item (1).................. $ 47.80 $ 50.50 $53.54 $ 27.65
Cash dividends declared per share (2).... -- -- -- --
Book value per share (end of period)..... (12.40) (32.60)
<CAPTION>
NINE MONTHS
ENDED FISCAL YEAR (3)
MARCH 31, ------------------------
1998 1997 1996 1995
----------- ------- ------ -------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED (UNAUDITED):
Basic and diluted income (loss) per share
before extraordinary item (4)........... $ 0.03 $ (0.02) $ (.01) $ (0.09)
Cash dividends declared per share (5).... -- -- -- --
Book value per share (end of period)..... 0.24 0.22
EQUIVALENT PRO FORMA COMBINED PER JOLT
COMMON SHARE: (6)
Basic and diluted income (loss) per share
before extraordinary item............... $ 13.07 $ (8.71) $(4.36) $(39.21)
Cash dividends declared per share........ -- -- -- --
Book value per share (end of period)..... 104.55 95.84
</TABLE>
(Footnotes on following page)
5
<PAGE>
- --------
(1) Jolt, which is an "S Corporation" for income tax purposes, will become a "C
Corporation" upon consummation of the merger, and hence will become subject
to Federal and state income taxes. Pro forma basic and diluted income per
share for Jolt's fiscal year ended December 31, 1997 and for the nine
months ended March 31, 1998 have been computed after giving effect to pro
forma income tax expense at an effective tax rate of 37.7%, representing
Federal taxes of 34% and Florida state taxes of 5.5%, net of Federal
benefit.
(2) Jolt, which is an "S Corporation" for income tax purposes, has paid
dividends to its stockholders for income tax liabilities, but this practice
will be discontinued upon consummation of the acquisition when Jolt will
become a "C Corporation." For this reason, Jolt's historical cash dividends
per share date is not meaningful.
(3) Combines the Company's fiscal years ended June 30, 1997, 1996 and 1995 with
Jolt's fiscal years ended December 31, 1997, 1996 and 1995, respectively.
(4) Reflects the combination of the Company's basic and diluted income (loss)
before extraordinary item per share with Jolt's basic and diluted income
per share.
(5) The Company suspended the payment of dividends in 1989 and does not
anticipate paying cash dividends on its Common Stock in the foreseeable
future. Accordingly, pro forma cash dividend data is not meaningful.
(6) The equivalent pro forma combined data per Jolt common share represent the
pro forma combined data multiplied by an exchange ratio of 435.6244.
6
<PAGE>
RISK FACTORS
The following risk factors should be carefully considered by the
Stockholders in deciding whether to approve the Issuance of the Merger
Consideration and the Increase in Authorized Shares.
RISKS ASSOCIATED WITH THE PROSPECTIVE MERGER
Uncertainties Relating to the Integration of Operations. The Company and
Jolt have entered into the Agreement with the belief that the Merger will
result in beneficial synergies for the combined companies. The proposed
acquisition of Jolt entails a number of risks, including successfully managing
the integration of its operations, retaining key employees at Jolt and
managing an increasingly larger and more geographically disparate business.
There can be no assurance that the Company will successfully manage this
business or obtain anticipated customer synergies. In the event that the
Company is unsuccessful in integrating and managing the Jolt business, the
acquisition could require significant amounts of additional management
attention. If the Company is unsuccessful in integrating and managing the Jolt
business, then the Company's results of operations could be affected
materially and adversely.
Potential Dilutive Effect to Stockholders. There can be no assurance that
combining the businesses of the Company and Jolt, even if achieved in an
efficient, effective and timely manner, will result in combined results of
operations and financial condition superior to what would have been achieved
by the Company independently. Furthermore, there can be no assurance that the
issuance of Common Stock in connection with the Merger will not have the
ultimate effect of reducing the Company's net income per share and reducing
the market price of the Common Stock.
Stock Price Volatility. The trading price of the Common Stock is subject to
significant fluctuations in response to variations in quarterly operating
results, general conditions in the electronics industry and other factors. In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for the equity securities of many high technology
companies and that are often unrelated to operating performance.
"Year 2000" Issues. Many existing computer programs use only two digits to
identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results
by or at the year 2000. "Year 2000" issues affect virtually all companies and
organizations, including the Company. The Company is studying its information
systems with a view to upgrading and improving such systems. The Company's
management expects to identify and resolve its specific "Year 2000" issues as
part of this study.
RISKS ASSOCIATED WITH BOTH THE COMPANY AND JOLT
Industry Conditions. The industries and markets in which the customers of
the Company and Jolt compete are characterized by rapid technological change
and product obsolescence. As a result, the end products made by the customers
of the Company and Jolt have relatively short product lives. The ability of
the Company and Jolt to compete successfully will depend in substantial part
on their respective abilities to procure appropriate raw materials and
maintain their quality asset bases, to incorporate or respond to advances in
technology, to manufacture and price their products and services competitively
and to achieve significant market acceptance. Unexpected delays in completing
or shipping products, or design or production problems, may arise and could
adversely affect the Company and Jolt.
Concentration of Revenues Among Major Customers. In fiscal 1997, one
customer accounted for approximately 42% of the sales of DDL Electronics
Limited, a wholly-owned subsidiary of the Company located in Northern Ireland
("DDL-E"). In fiscal 1997, one customer accounted for more than 47% of the
sales of SMTEK, Inc., a wholly-owned subsidiary of the Company located in
Newbury Park, California ("SMTEK") and more than 50% of SMTEK's business was
generated by customers located in California. In fiscal 1997, four customers
each accounted for more than 10% of the sales of Jolt and Jolt's ten largest
customers accounted for
7
<PAGE>
more than 75% of the sales of Jolt. The loss of all or a substantial portion
of DDL-E's, SMTEK's or Jolt's revenues attributable to any of their major
customers that could not be offset by a new customer could have a material
adverse effect on the Company's or Jolt's financial condition and results of
operations.
Competition. The markets for the products and services of the Company and
Jolt are highly competitive. Competition is principally based on price,
product and service quality, order turnaround time and technical capability.
The technology used by each of the Company and Jolt in fabricating their
respective products and providing their respective services is widely
available. The Company and Jolt each have a large number of domestic and
foreign competitors, many of which are larger than each of the Company and
Jolt and possess much greater financial, marketing, personnel and other
resources. Each of the Company and Jolt also face competition from current and
prospective customers that evaluate the capabilities of each of the Company
and Jolt against the merits of manufacturing products internally. To remain
competitive, the Company and Jolt each must continue to provide
technologically advanced manufacturing services, maintain quality levels,
offer flexible delivery schedules, deliver finished products reliably and
compete favorably on the basis of price. Each of the Company and Jolt may be
at a competitive disadvantage as to price when compared to manufacturers with
lower cost structures, particularly manufacturers with established facilities
where labor costs are lower and with larger sales volume and resultant lower
unit costs.
Dependence on Key Personnel. The continued success of each of the Company
and Jolt depends to a large extent upon the efforts and abilities of key
managerial and technical employees. The loss of services of certain key
personnel of either the Company or Jolt could have a material adverse effect
on the Company or Jolt. The business of each of the Company and Jolt also
depends upon their respective abilities to continue to attract and retain
senior managers and skilled employees. Failure to do so could adversely affect
the operations of each of the Company and Jolt. Upon consummation of the
acquisition of SMTEK in January 1996, the President and Chief Executive
Officer of SMTEK, Mr. Gregory L. Horton, became the President and Chief
Executive Officer of the Company and a member of the Board. Mr. Horton's
experience within the industry in which the Company operates will continue to
be of considerable importance to the Company. Pursuant to the respective
employment agreements of Messrs. Horton and Richard K. Vitelle, Vice President
of Finance and Chief Financial Officer, Mr. Horton's term of employment
continues until November 1, 1999 and Mr. Vitelle's term of employment
continues until September 12, 2001, unless earlier terminated in accordance
with the terms and conditions of each respective agreement. With respect to
each such employment agreement, either the Company or Mr. Horton or Mr.
Vitelle, as the case may be, may terminate employment with or without cause,
although certain amounts are to be paid or forfeited to the other party in the
event of a termination of employment without cause. The Company is the
beneficiary of a "key-man" life insurance policy with respect to Mr. Horton in
the amount of $1.3 million. It does not intend to obtain a similar policy with
respect to any of its other officers or personnel, except for Mr. Morhaim,
Jolt's president.
Dependence on Suppliers. Certain components used by each of the Company and
Jolt are purchased from sources specified by their respective customers. An
interruption in delivery of these components could have a material adverse
effect on the Company and Jolt. SMTEK and DDL-E have been adversely affected
throughout their history by delays in production caused by delay in the
receipt of materials resulting in reduced overall profitability. There can be
no assurance that the same adverse conditions will not recur.
RISKS ASSOCIATED WITH THE COMPANY
Significant Losses. The Company has incurred significant losses repeatedly
in recent quarters and years. The net loss was $1,678,000 for the Company's
fiscal year ended June 30, 1997 ("fiscal 1997"). Operating losses totaled
$1,167,000, $4,970,000, $6,948,000 and $5,067,000 for the Company's fiscal
years ended June 30, 1996 ("fiscal 1996"), June 30, 1995 ("fiscal 1995"), June
30, 1994 ("fiscal 1994") and June 30, 1993 ("fiscal 1993"), respectively.
Indeed, with the exception of fiscal 1997, during which the Company generated
operating income of $118,000, the Company has incurred operating losses for
most of the last ten years. Operating losses could continue until such time as
sales increase to a level sufficient to cover costs and operating expenses. No
assurance can be given as to whether or when such sales increases or sustained
operating profits may be achieved.
8
<PAGE>
In attempting to maintain and improve operating profitability, management is
focusing on problems such as aggressive price competition throughout the
industry and the Company's need to strengthen its sales and marketing
initiatives. All three of the Company's operating units currently have
significant underutilized manufacturing capacity which management attributes
to these problems. There can be no assurance that the Company will be able to
maintain or improve operating profitability.
Possible Delisting of Common Stock; Adverse Effects on Liquidity. The Common
Stock is currently listed and traded on the Pacific Exchange ("PE") and the
NYSE. To maintain eligibility for listing on the NYSE, the Company must
satisfy certain continued listing criteria, including minimum levels regarding
(1) number of stockholders and shareholdings (1,200 holders and average
monthly trading volume of at least 100,000 shares), (2) number of publicly-
held shares (600,000), (3) average annual net income after taxes of at least
$600,000 for the past three years if the aggregate market value of shares
outstanding is less than $12,000,000, and (4) average annual net income after
taxes of at least $600,000 for the past three years if net tangible assets are
less than $12,000,000. The NYSE has notified the Company that, due to the
Company's failure to satisfy the average net income and net tangible asset
criteria, the Common Stock is subject to delisting. The NYSE has not yet taken
affirmative action to delist the Common Stock, but it has reserved the right
to take such action in the future. Delisting of the Common Stock from the NYSE
could have material adverse effects on the price and liquidity of the Common
Stock, depending upon, among other things, the Company's eligibility at that
time to continue listing the Common Stock on the PE or, failing that, to list
the Common Stock on the Nasdaq Stock Market ("Nasdaq") or some other exchange.
There can be no assurance that the Common Stock could be listed on Nasdaq or
any other exchange at any time.
Applicability of Low-Priced Stock Risk Disclosure Requirements. If the
Common Stock were not listed on Nasdaq or some other exchange, then it would
become subject to the SEC's "penny stock" rules. For these purposes, a "penny
stock" is defined as any equity security, subject to certain exceptions
(including an exception for securities listed on Nasdaq), that has a market
value (as defined) of less than $5.00 per share. For any non-exempt
transaction involving a penny stock, these rules require the delivery, prior
to the transaction, of a disclosure schedule prepared by the SEC relating to
the penny stock market. The broker-dealer is also required to disclose the
commissions payable to both itself and its registered representative, current
quotations for securities and information on the limited market in penny
stocks. If the broker-dealer is the sole marketmaker for the penny stock, the
broker-dealer is compelled to disclose this fact and must also disclose its
presumed control over the market. The broker-dealer is required to obtain a
written acknowledgment from the customer that such disclosures were provided
and must retain such acknowledgment for at least three years. Monthly
statements are to be sent disclosing current price information for penny
stocks held in the account. The rules also require a broker-dealer engaging in
a transaction in a penny stock to make a special suitability determination for
the purchaser and to receive the purchaser's written consent to the
transaction prior to the purchase. Accordingly, the SEC's penny stock rules
may materially and adversely affect the liquidity of the market for the Common
Stock by restricting the ability of the broker-dealers to sell the Common
Stock and the ability of Common Stock holders to obtain accurate price
quotations.
Limited Capital Resources; Continuing Need for Financing. The Company's
ability to maintain its current revenue base and to fund its business
operations is dependent on the availability of adequate capital. Without
sufficient capital, the Company's growth will be limited and its operations
will be adversely affected. As a result of significant operating losses in
recent years and the Company's repayment of its senior notes on June 30, 1997
in the aggregate amount of $5,300,000 (the "Senior Notes"), the Company
currently has limited capital. General market conditions and the Company's
future performance, including its ability to generate profits and positive
cash flow, will also impact the Company's resources. In addition, the
Company's future capital requirements will depend upon a number of factors,
such as competitive conditions and capital costs, that are not within the
Company's control. The Company anticipates that it may be required to issue
additional equity or debt securities and may use other financing sources to
fund growth and development. The sale of additional equity securities would
result in additional dilution to the stockholders of the Company. The failure
of the Company to obtain additional capital when needed could have material
adverse effects on the Company's business and future prospects. No assurance
can be given that additional financing will be available when needed on
acceptable terms or at all.
9
<PAGE>
Historical Dependence on Government Business; Recent Shift into Commercial
Business. A substantial portion of SMTEK's historical revenues have been
derived from contracts with United States government prime contractors, but
this historical dependency is changing. Approximately 18% and 36% of SMTEK's
net sales in fiscal 1997 and fiscal 1996, respectively, were derived from
sales to government contractors in the defense and space sectors. Business
with the United States and other governments is, in general, subject to a
variety of risks, including delays in funding and performance of contracts;
possible termination of contracts or subcontracts for the convenience of the
government; termination or modification of contracts or subcontracts in the
event of change in the government's requirements; policies or budgetary
constraints; adjustments as a result of audits; and increases or unexpected
costs causing losses or reduced profits under fixed-price contracts. There can
be no assurance that any or all of these risks will not come to fruition in
the Company's business.
The ongoing shift in SMTEK's revenue base from prime government contractors
to commercial OEMs is necessitating significant adjustments in operations,
including changes in project management, materials management and order
turnaround time. At the management level, significant shifts in internal
processes, including strategic planning, marketing and throughput planning,
are also required for a successful completion of this transition. There can be
no assurance that SMTEK will be able to adapt to any or all of these changes.
Environmental Matters. The Company's operations involve the use and handling
of environmentally hazardous substances. Aeroscientific Corp., which since
1991 has been an inactive, insolvent subsidiary of the Company, is a party to
certain lawsuits brought in connection with a waste disposal site in
California known as the "Stringfellow Superfund Site." Total cleanup costs for
the Stringfellow Superfund Site have been estimated at $600 million. Under a
proposed settlement agreement with respect to one such suit, Aeroscientific
Corp.'s probable liability for such cleanup costs is estimated at $120,000 and
a reserve has been established for this amount. It is impossible to determine
Aeroscientific Corp.'s ultimate liability for such cleanup costs. Its
allocated share of such cleanup costs could have a material adverse impact on
the Company's business, financial condition and results of operations.
In addition, the Company is currently involved in certain remediation and
investigative studies regarding soil and groundwater contamination with
respect to certain property in California previously leased by Aeroscientific
Corp. at its Anaheim printed circuit board manufacturing facility. Initial
estimates from environmental engineering firms indicate that it could cost
from $1,000,000 to $3,000,000 to fully clean up the site and could take as
long as ten years to complete. At June 30, 1997, the Company had a reserve of
$564,000, which represents its estimated share of future remediation costs at
this site. Based on consultation with the environmental engineering firms,
management believes that the Company has made adequate provision for the
liability based on probable loss. It is possible, however, that the future
remediation costs at this site may differ significantly from the estimates,
and may exceed the amount of the reserve. The Company's liability for
remediation in excess of its reserve could have a material adverse impact on
its business, financial condition and results of operations.
Proprietary Rights and Patents. The Company holds no copyrights, patents or
trademarks that are material to the sale of its products, and currently the
Company does not intend to obtain any copyrights, patents or trademarks with
respect to its intellectual property. There can be no meaningful protection
from competitors developing and marketing products and services competitive
with those of the Company. In addition, companies that obtain patents claiming
products or processes that are necessary for or useful to the development or
operation of the Company's products and services can bring legal actions
against the Company claiming infringement. Management is not aware of any
claim that either the Company or any of its subsidiaries infringes any
existing patent, but, in the event that in the future the Company is
unsuccessful against such claim it may be required to obtain licenses to such
patents or to other patents or proprietary technology in order to develop,
manufacture or market its products and services. There can be no assurance
that the Company will be able to obtain such licenses on commercially
reasonable terms or that the patents underlying the licenses will be valid and
enforceable.
Risks Associated with International Business. Revenues from international
business could continue to represent a substantial percentage of the Company's
total revenues. Such business is subject to various risks,
10
<PAGE>
including exposure to currency fluctuations, political and economic
instability, the greater difficulty of administering business abroad and the
need to comply with a wide variety of export laws, tariff regulations and
regulatory requirements. Such risks are amplified in the case of the Company
because a large portion of its assets and operations are located outside of
the United States.
No Dividends. There can be no assurance that the operations of the Company
will ever result in revenues sufficient to enable the Company to resume paying
dividends on its Common Stock, which were suspended in 1989. For the
foreseeable future, management anticipates that any earnings generated by the
Company's operations will be used to finance the Company's business and that
cash dividends on the Common Stock will not be paid to Stockholders.
THE 1997 ANNUAL MEETING
GENERAL
This Proxy Statement is first being mailed to Stockholders on or about June
12, 1998 and is accompanied by the Notice of 1997 Annual Meeting of
Stockholders and a form or proxy that is solicited by the Board for use at the
1997 Annual Meeting to be held on June 26, 1998 at the offices of the Company
located at 2151 Anchor Court, Newbury Park, California 91320, commencing at
10:00 a.m. local time, and at any adjournments and postponements thereof.
MATTERS TO BE CONSIDERED
At the 1997 Annual Meeting, the Stockholders will be asked, in accordance
with the shareholder approval requirements of the NYSE, to consider and vote
upon the issuance of 9,000,000 shares of Common Stock in the Merger. The NYSE
requires shareholder approval of such issuance because the number of shares of
Common Stock to be issued in the Merger exceeds 20% of voting power of the
shares of Common Stock outstanding immediately prior thereto. In addition, the
Stockholders will be asked to consider and vote upon an amendment to the
Certificate of Incorporation of the Company increasing the number of
authorized shares of Common Stock from 50,000,000 to 75,000,000, and the
Stockholders will also be asked to elect one Class I Director and one Class II
Director. The Stockholders may be asked to vote upon a proposal to adjourn or
postpone the 1997 Annual Meeting, which adjournment or postponement could be
used for the purpose, among others, of allowing additional time for the
soliciting of additional votes to approve the Issuance of the Merger
Consideration and the Increase in Authorized Shares.
SOLICITATION OF PROXIES
A holder of Common Stock may use the accompanying proxy if such Stockholder
is unable to attend the 1997 Annual Meeting in person or wishes to have his or
her shares voted by proxy even if such Stockholder does attend the meeting. A
Stockholder may revoke any proxy given pursuant to this solicitation by
delivering to the Secretary of the Company, prior to or at the 1997 Annual
Meeting, a written notice revoking the proxy or a duly executed proxy relating
to the same shares bearing a later date. A Stockholder may not vote in person
at the 1997 Annual Meeting without first revoking the proxy in writing prior
to or at the meeting. All written notices of revocation and other
communications with respect to the revocation of proxies should be addressed
to: Secretary, DDL Electronics, Inc., 2151 Anchor Court, Newbury Park, CA
91320. For such notice of revocation or later proxy to be valid, however, it
must actually be received by the Company prior to the vote of the Stockholders
at the 1997 Annual Meeting. All shares represented by valid proxies received
pursuant to this solicitation, and not revoked before they are exercised, will
be voted in the manner specified therein. If matters other than the Election,
the Issuance of the Merger Consideration and the Increase in Authorized Shares
properly come before the 1997 Annual Meeting, it is intended that shares
represented by proxies in the accompanying form will be voted or not voted by
the persons named in the proxies in their discretion.
11
<PAGE>
The entire cost of soliciting the proxies from the Stockholders will be
borne by the Company; provided, however, that the Company and Jolt have each
agreed to pay one-half of the printing costs of this Proxy Statement and
related materials. In addition to the solicitation of the proxies by mail, the
Company will request banks, brokers and other record holders to send proxies
and proxy material to the beneficial owners of the stock and secure their
voting instructions, if necessary. The Company will reimburse such record
holders for their reasonable expenses in doing so. If necessary, the Company
may also use several of its regular employees, who will not be specially
compensated, to solicit proxies from stockholders, either personally or by
telephone, telegram, facsimile or special delivery letter.
RECORD DATE AND VOTING RIGHTS
Pursuant to the provisions of the DGCL, May 26, 1998 has been fixed as the
Record Date for determination of Stockholders entitled to notice of and to
vote at the 1997 Annual Meeting. Accordingly, only holders of record of Common
Stock at the close of business on that date are entitled to notice of, and to
vote at, the 1997 Annual Meeting. On such date, there were approximately 1,500
holders of record of the 24,613,666 shares of Common Stock issued and
outstanding. In accordance with the DGCL, abstentions from voting will be
counted for purposes of determining whether a quorum exists at the 1997 Annual
Meeting. Furthermore, shares represented by proxies returned by a broker
holding such shares in nominee or "street name" will be counted for purposes
of determining whether a quorum exists, even if such shares are not voted in
matters where discretionary voting by the broker is allowed by the NYSE rules
("broker non-votes"). Broker non-votes will be deemed to have been cast "for"
the Increase in Authorized Shares and "for" each nominee for election to the
Board. Abstentions and broker non-votes with respect to the Issuance of the
Merger Consideration will not be deemed to have been cast either "for" or
"against" the Issuance of the Merger Consideration.
The presence, in person or by proxy, at the 1997 Annual Meeting of the
holders of a majority of the shares of Common Stock outstanding is necessary
to constitute a quorum at the meeting. Each share of Common Stock entitles the
holder thereof to one vote on each matter to be acted upon at the 1997 Annual
Meeting. The affirmative vote of the holders of a majority of the shares of
Common Stock voted with respect to the Issuance of the Merger Consideration is
required to approve the Issuance of the Merger Consideration. The affirmative
vote of the holders of a majority of all outstanding shares of Common Stock is
required to approve the Increase in Authorized Shares. Under the DGCL and the
provisions of the Certificate of Incorporation, all Stockholders are entitled
to cumulate their votes in the election of directors. A Stockholder may
cumulate votes by casting for the election of one nominee a number of votes
equal to the number of directors to be elected multiplied by the number of
shares owned by such Stockholder, or may distribute such votes on the same
principle among as many candidates as such Stockholder elects. If a proxy is
marked for election of directors, it may, at the discretion of the proxy
holders, be voted cumulatively in the election of directors. The nominees for
election as directors who receive the greatest number of votes cast for
election of directors shall be elected as directors. As of the December 4,
1997, 3,340,294 shares of Common Stock, or approximately 13.6% of the shares
entitled to be voted at the 1997 Annual Meeting, were beneficially owned by
the directors and executive officers of the Company. It is currently expected
that each such director and executive officer of the Company will vote the
shares of Common Stock owned by him or her to effect the Election and to
approve the Issuance of the Merger Consideration and the Increase in
Authorized Shares.
See "Certain Information Regarding the Company--Principal Stockholders of
the Company" for additional information with respect to beneficial ownership
of Common Stock by persons owning more than 5% of such stock and for more
detailed information with respect to beneficial ownership of Common Stock by
directors and executive officers of the Company.
RECOMMENDATION OF THE BOARD
The Board has approved the Issuance of the Merger Consideration, the
Increase in Authorized Shares, the Agreement and the transactions contemplated
thereby. The Board believes that the Issuance of the Merger Consideration and
the Increase in Authorized Shares are in the best interests of the Company and
the
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Stockholders and recommends that the Stockholders vote "for" the Issuance of
the Merger Consideration and the Increase in Authorized Shares. Certain
members of the Board had conflicts of interest in voting to approve the
Agreement, the Merger and the Issuance of the Merger Consideration and in
recommending the Issuance of the Merger Consideration. See "The Merger--
Reasons of the Company for the Merger," "The Merger-- Interests of Certain
Persons in the Merger" and "Amendment to the Company's Certificate of
Incorporation."
OTHER MATTERS
If any other matters are brought properly for consideration at the 1997
Annual Meeting, it is intended that the shares of Common Stock represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
PRICE RANGE OF THE COMMON STOCK
The Common Stock began trading on the NYSE under the symbol "DDL" in
September 1984. The following table sets forth, for the periods indicated, the
range of high and low per share sales (or bid) prices for the Common Stock as
reported on the NYSE Composite Tape.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------- -------------
HIGH LOW HIGH LOW
----- ----- ----- -------
<S> <C> <C> <C> <C>
First Quarter...................................... 2 1/8 1 1/2 2 1 1/8
Second Quarter..................................... 3 1 7/8 1 1/4 15/16
Third Quarter...................................... 2 3/4 2 1/4 1 1/4 7/8
Fourth Quarter..................................... 2 1/2 1 5/8 1 5/8 15/16
</TABLE>
On July 1, 1997, the last trading day prior to the date of the announcement
by the Company of the Merger, the last sale price per share of the Common
Stock, as reported on the NYSE Composite Tape, was $1-3/16. See the cover page
of this Proxy Statement for a recent closing price of the Common Stock.
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PROPOSAL ONE--THE MERGER
THE FOLLOWING SUMMARY OF MATERIAL TERMS AND CONDITIONS OF THE AGREEMENT IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE AGREEMENT WHICH IS INCORPORATED
HEREIN BY REFERENCE AND IS INCLUDED AS APPENDIX A TO THIS PROXY STATEMENT.
DESCRIPTION OF THE MERGER
At the Effective Time, Jolt will be merged with and into Sub, the separate
corporate existence of Jolt will cease and Sub will survive and continue to
exist as the Surviving Subsidiary. Subject to the satisfaction or waiver of
certain conditions set forth in the Agreement, the Merger will become
effective upon the filing of (i) a Certificate of Merger with the Secretary of
State of the State of Delaware and (ii) Articles of Merger with the Department
of State of the State of Florida. The Merger will become effective at the time
of such filings, and the Certificate of Incorporation and the Bylaws of Sub as
in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation and the Bylaws of the Surviving Subsidiary, respectively.
At the Effective Time, by virtue of the Merger and without any action on the
part of the holder of any share of Jolt Common Stock or the holder of any
share of Sub Common Stock: (a) each issued and outstanding share of Sub Common
Stock shall be converted into one share of common stock of the Surviving
Subsidiary, which shall constitute the only issued and outstanding shares of
capital stock of the Surviving Subsidiary; and (b) each issued and outstanding
share of Jolt Common Stock shall be converted into the right to receive
435.6244 shares of Common Stock (the "Merger Consideration").
BACKGROUND OF THE MERGER
In September 1996, Mr. Horton was introduced to Thomas Wheeler, Charlene
Gondek and Mitchell Morhaim, the three shareholders of Jolt, by Saul Reiss,
Ms. Gondek's attorney, in a meeting at the Company's offices. Mr. Horton has
known Mr. Reiss since the founding of SMTEK 12 years ago. The Jolt
shareholders indicated that they were interested in selling Jolt to the
Company. Mr. Horton stated that the Company was not interested in acquiring
Jolt. The meeting ended with the understanding that there was no basis for
further discussions concerning a merger.
No further contact occurred between the Company and any of the Jolt
shareholders until eight months later. On May 9, 1997, Mr. Horton met with Mr.
Wheeler to propose that Wheeler make a personal investment in the Company as a
means of raising funds to enable the Company to repay its Senior Notes. Mr.
Wheeler made no funding commitment at this time, nor was there any discussion
on this occasion of the Company acquiring Jolt.
On May 29, 1997, the Company and Century Electronics Manufacturing, Inc.
("Century") entered into an agreement in principal to merge, contingent upon
Century arranging a loan to the Company of $3,300,000 to enable the Company to
repay its $5,300,000 Senior Notes which were due on July 1, 1997. Concerned
that Century would not be able to provide the required financing, the Board
directed Mr. Horton to investigate alternative sources of financing. On June
26, 1997, Mr. Horton telephoned Mr. Wheeler to pursue a back-up financing
plan.
On the morning of June 27, 1997, the Company notified Century that the
Company would declare the agreement in breach if Century failed to provide the
loan of $3.3 million by 2:00 p.m. eastern time on June 27, 1997.
On June 29, 1997, Mr. Horton met with Mr. Wheeler and Ms. Gondek. Mr.
Wheeler proposed lending $2,000,000 to the Company, in immediately available
funds, if he could select two members of the Board and if the Company, subject
to the terms and conditions of a definitive agreement, would agree to acquire
Jolt. Thus, June 29, 1997 was the date on which the proposed business
combination with Jolt was first contemplated.
On June 30, 1997, the Company notified Century that it was being held in
breach of contract by the Company. Also on June 30, a meeting of the Company's
Board of Directors was convened with Mr. Wheeler
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<PAGE>
and Ms. Gondek present by invitation. Mr. Horton, on behalf of the Company,
and Mr. Wheeler negotiated the terms of a $2,000,000 loan to the Company.
Concurrently, Mr. Horton, on behalf of the Company, and Mr. Wheeler, on behalf
of Jolt, negotiated key business terms of the Merger. During the negotiations,
Ms. Gondek was accompanied by her attorney, Mr. Saul Reiss. The Company was
represented in person during the negotiations by Messrs. Horton and Vitelle
and Ms. Karen Brenner. The other members of the Board, Messrs. Melvin Foster
and Robert Wilson and Ms. Bernie Strom, participated in the negotiations via
telephone conference. In addition, throughout the negotiations the Company
conferred with its consultant, Mr. Peter Jonas, and its legal counsel, Mr.
Patrick Daugherty.
During the negotiations, Mr. Wheeler initially proposed that the
consideration for all outstanding shares of Jolt common stock be 15,000,000
shares of the Company's Common Stock. Mr. Wheeler based his proposal on his
assessment of the relative value of Jolt and the Company based upon, among
other things, their respective net tangible assets. Mr. Wheeler noted that,
upon the conversion to equity of his shareholder loan to Jolt, Jolt would have
net tangible assets of approximately $1.5 million, which was comparable to
that of the Company. He also considered Jolt's profitability and financial
strength in contrast to the Company's recent history of volatile operating
results and sustained losses. In response to Mr. Wheeler's proposal, the Board
assessed Jolt's value on the basis of its ability to strengthen the Company's
financial position. In particular, the Board considered the benefits of
increasing the Company's net tangible assets by $1.5 million, as well as
Jolt's positive cash flow and liquid resources ($600,000 cash balance). In
addition, the Board weighed Jolt's relatively small sales volume against such
factors as Jolt's relatively high proportion of value added services in
relation to its overall revenues and relatively high gross profit percentage.
Although an assessment of such factors could have supported a higher
valuation, the Board insisted that the Merger be accretive to the Company on
an earnings per share basis. Therefore, the Board made a counteroffer to Mr.
Wheeler of 9,000,000 shares of Common Stock, contingent upon Stockholder
approval, obtaining a fairness opinion and other terms and conditions.
The Company and Mr. Wheeler then agreed, subject to Stockholder approval,
obtaining a fairness opinion, and other terms and conditions, that the Company
would acquire all of the issued and outstanding shares of Jolt for 9,000,000
shares of Common Stock. As a condition of the Merger, the Jolt shareholders
agreed that Jolt would have on the closing date total tangible shareholders'
equity of at least $1,500,000 and cash of at least $600,000.
The terms of the Agreement and ancillary agreements, including an employment
agreement for Mr. Morhaim and affiliate agreements for each of the Jolt
Shareholders, were negotiated by representatives of the Company, Jolt and Mr.
Wheeler over the course of the next four months, during which time legal
counsel of each of the Company and Jolt were delegated the task of producing
the Agreement. The text of the Agreement was refined in discussions among
counsel to the parties during such time. On November 25, 1997, the Board met,
and, with Mr. Wheeler and Ms. Gondek abstaining, approved the Agreement, the
Merger and the Issuance of the Merger Consideration and recommended the
Issuance of the Merger Consideration to the Stockholders for their
consideration.
REASONS OF THE COMPANY FOR THE MERGER
The Board believes that the Agreement and the transactions contemplated
thereby are in the best interests of the Company and the Stockholders.
Accordingly, the Board has approved the Agreement, the Merger and the Issuance
of the Merger Consideration and recommends that the Stockholders vote "for"
the Issuance of the Merger Consideration. Certain members of the Board had
conflicts of interest in voting to approve the Agreement, the Merger and the
Issuance of the Merger Consideration and in recommending that the Stockholders
vote "for" the issuance of the Merger Consideration. See "The Merger--
Interests of Certain Persons in the Merger" for a more detailed discussion.
In evaluating a business combination with Jolt, the Board reviewed
presentations from, and discussed the terms and conditions of the Agreement
with, executive officers of the Company and the Company's legal and financial
advisors. In this connection, the Board considered a number of factors,
including, in addition to the factors identified in "--Background of the
Merger" and "--Opinion of the Company's Financial Advisor," the positive and
negative factors identified below, which together constitute the material
factors considered by the
15
<PAGE>
Board, in reaching its determination to approve the Agreement and the
transactions contemplated thereby. In view of the wide variety of factors
considered by the Board in connection with its evaluation of the Merger, the
Board did not consider it practicable to, and did not attempt to, quantify or
otherwise assign relative weights to the specific factors that it considered
in reaching its determination. In addition, individual members of the Board
may have given different weights to different factors.
The reasons why the Board believes that the Merger will be beneficial to the
Company and the Stockholders are as follows:
(i) Strategic Benefits in Consolidating Industry--The Board considered
management's view of recent trends in the electronic contract manufacturing
industry, particularly the trend toward consolidation, as well as
management's view that customers are demanding modern equipment, greater
integration of operations and more facilities--all of which tend to favor
larger competitors with stronger balance sheets than the Company without
Jolt. The Board also considered management's view that the Merger with Jolt
would further the Company's strategic objective of supplementing internal
growth with acquisitions to increase the Company's existing market presence
and expand its operations into new geographic markets.
(ii) Beneficial Synergies--In evaluating the terms of the Merger, the
Board took into account potential synergistic benefits, including (a)
purchasing power--the ability to improve operating results through
increased purchasing power, creating higher output and thereby reducing
material costs; (b) marketing power advantage--the ability of the combined
entity to offer its services to a broader customer base of OEMs in
different geographic regions; (c) financial strength--the combined entity's
increased financial strength permitting additional capital investment in
equipment and infrastructure; (d) expansion of service offerings--Jolt's
experience and success in providing quick-turn prototyping and repair and
support services, which would enable the combined company to offer a
broader range of high-mix services to its customer base; (e) improved
business systems--the combined company would benefit from the sharing of
management procedures and systems, such as logistics, materials management
and inventory control; and (f) reduced overhead allocation--the combined
company would be able to integrate financial and administrative functions.
(iii) Avoidance of Default--The Board considered Mr. Wheeler's
willingness to advance $2,000,000 to the Company pursuant to the terms and
conditions of the Wheeler Note provided that the Company acquired Jolt, and
the likelihood and consequences of the Company's default on its Senior
Notes absent such funding.
(iv) Information Concerning the Company and Jolt--In evaluating the terms
of the Merger, the Board considered, among other things, information
(including the results of its "due diligence" investigation) with respect
to the financial condition, results of operations, businesses and prospects
of the Company and Jolt and current industry, economic and market
conditions. The Board considered that the Merger would enable the
Stockholders to participate in the potential growth of Jolt and might
provide the Company with additional financial resources.
(v) Integration of Jolt--The Board considered the Company's record in
integrating and realizing the benefits of prior acquisitions, including
operational, marketing, administrative, financial and personnel issues,
with respect to the prospects for successfully integrating Jolt and
realizing potential benefits of the Merger.
(vi) Terms and Conditions of the Agreement--The Board considered in
detail the terms and conditions of the Agreement. Among other things, it
noted that the Merger is intended to qualify for pooling-of-interests
accounting treatment and as a tax-free reorganization under the Code. The
Board also considered the proposed arrangements with respect to Messrs.
Wheeler and Morhaim and Ms. Gondek as described under "-- Interests of
Certain Persons in the Merger."
(vii) Effect on Public Market for the Common Stock--The Board took into
account the effects of the Issuance of the Merger Consideration in
connection with the Merger. Among other effects, the Board considered that
the Issuance of the Merger Consideration would result in a more liquid
public market for the Common Stock, which would facilitate the Company's
ability to consummate future acquisitions by offering Common Stock to
potential acquisition targets.
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<PAGE>
The Board also considered a number of potentially negative factors in its
deliberations concerning the Merger, including in particular: the risks
associated with obtaining necessary approvals of the Merger and the
possibility that the Merger might not be consummated even if approved by the
Stockholders; the possibility of adverse effects on the price and market for
the Common Stock; and the risk that the potential benefits of the Merger might
not be realized. The Board concluded, however, that the benefits of the
transaction to the Company and the Stockholders outweighed the risks
associated with these negative factors.
The Board believes that each of the Company and Jolt currently is well-
managed and possesses management philosophies and a strategic focus that are
compatible with those of the other and that each company would contribute
complementary business strengths resulting in a better-diversified combined
company. The Board also believes that the Merger will enhance the ability of
the combined company to compete effectively in the rapidly changing electronic
contract manufacturing industry and to take advantage of opportunities for
growth and diversification that otherwise might not become available. There
can be no assurance, however, that the results sought by the Board in
approving the Merger will be achieved.
For a discussion of the ownership of the Common Stock by the Board, see
"Certain Information Regarding the Company -- Principal Stockholders of the
Company."
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE ISSUANCE OF THE
MERGER CONSIDERATION.
CERTAIN PROJECTIONS
THE PROJECTIONS BELOW WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR
IN COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE SEC OR THE GUIDELINES
ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
REGARDING PROJECTIONS OR FORECASTS AND ARE INCLUDED HEREIN ONLY BECAUSE SUCH
INFORMATION WAS PROVIDED TO NEEDHAM. SUCH PROJECTIONS AND STATEMENTS REGARDING
SUCH PROJECTIONS CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT AND ARE
SUBJECT TO THE SAFE HARBORS CREATED THEREBY. SUCH PROJECTIONS ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE PROJECTIONS. THE PROJECTIONS REFLECT NUMEROUS ASSUMPTIONS
AND ESTIMATES, ALL MADE BY MANAGEMENTS OF THE COMPANY AND JOLT, WITH RESPECT
TO INDUSTRY PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL
CONDITIONS AND OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT AND MANY
OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY AND JOLT. ACCORDINGLY, THERE
CAN BE NO ASSURANCE THAT THE ASSUMPTIONS MADE IN PREPARING THE PROJECTIONS
WILL PROVE ACCURATE, AND ACTUAL RESULTS MAY BE MATERIALLY DIFFERENT FROM THOSE
CONTAINED IN THE PROJECTIONS. NONE OF THE COMPANY, JOLT OR NEEDHAM HAS MADE,
OR MAKES, ANY REPRESENTATION TO ANY PERSON REGARDING THE INFORMATION CONTAINED
IN THE PROJECTIONS, AND NONE OF THEM INTENDS TO UPDATE OR OTHERWISE REVISE THE
PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO
REFLECT THE OCCURRENCE OF FUTURE EVENTS EVEN IN THE EVENT THAT ANY OR ALL OF
THE ASSUMPTIONS UNDERLYING THE PROJECTIONS ARE SHOWN TO BE IN ERROR.
Neither the Company nor Jolt as a matter of course makes public forecasts as
to its future financial performance. However, in connection with the Merger,
the Company and Jolt prepared and furnished each other with certain internal
financial projections and the Company and Jolt furnished such projections to
Needham. Such financial projections with respect to the Company indicate that
for the fiscal years ending June 30, 1998 and 1999, the Company may achieve
net revenues of $57 million and $69 million, respectively, and net income of
$1.1 million and $2.9 million, respectively. Such financial projections with
respect to Jolt indicate that for the fiscal years ending December 31, 1998
and 1999, Jolt may achieve net revenues of $3.2 million and $3.6 million,
respectively, and net income of $0.9 million and $1.2 million, respectively.
These projections have not been adjusted to reflect the costs, effects or
possible synergies of the Merger, and should be read together with the other
information, including the information under "Risk Factors," contained in this
Proxy Statement.
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<PAGE>
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated September 2, 1997 (the "Engagement
Letter"), the Company retained Needham to render an opinion as to whether or
not the consideration to be paid by the Company in the Merger was fair to the
Company from a financial point of view and to provide certain financial
advisory services to the Company. Needham was not requested to, and did not,
make any recommendation to the Board as to the amount of consideration to be
paid by the Company in the Merger, which amount was determined through arm's
length negotiations between the Company and Jolt. No limitations were imposed
by the Company on Needham with respect to the investigations made or
procedures followed by Needham in rendering its opinion.
At a meeting of the Board on November 25, 1997, Needham delivered its
written opinion that, as of such date and based upon and subject to certain
assumptions and other matters described in its written opinion, the
consideration to be paid by the Company in the Merger is fair to the Company
from a financial point of view. NEEDHAM'S OPINION IS ADDRESSED TO THE BOARD,
IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE AGREEMENT AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE 1997 ANNUAL MEETING.
Needham is not expressing any opinion as to the prices at which the Common
Stock will actually trade at any time. The complete text of the November 25,
1997 opinion (the "Needham Opinion"), which sets forth the assumptions made,
matters considered, limitations on and scope of the review undertaken by
Needham, is attached to this Proxy Statement as Appendix B, and the summary of
the material provisions of the Needham Opinion set forth in this Proxy
Statement is qualified in its entirety by reference to the Needham Opinion.
STOCKHOLDERS ARE URGED TO READ THE NEEDHAM OPINION CAREFULLY AND IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED,
AND THE ASSUMPTIONS MADE BY NEEDHAM.
In arriving at its opinion, Needham, among other things, (a) reviewed a
draft of the Agreement dated November 12, 1997; (b) reviewed certain other
documents relating to the Merger; (c) reviewed certain publicly available
information concerning the Company and certain other relevant financial and
operating data of the Company and Jolt made available from the internal
records of the Company and Jolt; (d) reviewed the historical stock prices and
trading volumes of the Common Stock; (e) held discussions with members of
senior management of the Company and Jolt concerning their current and future
business prospects; (f) reviewed certain financial forecasts and projections
prepared by the respective managements of the Company and Jolt; (g) compared
certain publicly available financial data of companies whose securities are
traded in the public markets to similar data for Jolt; and (h) reviewed the
financial terms of certain other business combinations that Needham deemed
generally relevant. Needham assumed and relied upon, without independent
verification, the accuracy and completeness of the information it reviewed for
purposes of its opinion. With respect to the Company's and Jolt's financial
forecasts provided to Needham by their respective managements, Needham assumed
that such forecasts have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of such managements, at the time
of preparation, of the future operating and financial performance of the
Company and Jolt. Needham also discussed with the Company's management its
liquidity position and noted the Board's belief that the sale by the Company
of a $2,000,000 note to an affiliate of Jolt, the purchase of which was
conditioned upon the agreement by the Company to the Merger, resulted in a
cash infusion that prevented the Company from defaulting on certain debt
obligations and the associated adverse consequences to the Company and the
Common Stock. Needham did not assume any responsibility for or make or obtain
any independent evaluation, appraisal or physical inspection of the assets or
liabilities of the Company or Jolt. Needham's opinion states that it was based
on economic, monetary and market conditions existing as of the date of such
opinion. It should be understood that, although subsequent developments may
affect Needham's opinion, Needham does not have any obligation to update,
revise or reaffirm its opinion.
Based on this information, Needham performed a variety of financial analyses
of the Merger and the consideration to be received by the Company's
Stockholders. The following paragraphs summarize the material financial
analyses performed by Needham in arriving at its opinion presented to the
Board.
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Contribution Analysis. Needham reviewed and analyzed the pro forma
contribution of each of the Company and Jolt to pro forma combined operational
and financial information as of September 30, 1997 and for the twelve months
ended September 30, 1997 ("LTM"), projected fiscal 1998 operating results,
projected calendar 1998 operating results, and projected fiscal 1999 operating
results. Needham reviewed, among other things, the pro forma contributions to
net sales, income before income taxes, net tangible assets and stockholders'
equity. Based on this analysis, Jolt contributed 4.5% of the LTM pro forma
combined net sales, 4.7% of the projected fiscal 1998 pro forma combined net
sales, 4.8% of the projected calendar 1998 pro forma combined net sales and
4.7% of the projected fiscal 1999 pro forma combined net sales. Needham noted
that unlike the Company's business, most of Jolt's revenues represent
electronics assembly work performed on a consignment basis in which the
customers furnish the electronic components and other materials to be
assembled, hence costs of materials are generally not included in net sales or
cost of sales and, accordingly, Needham believed that an analysis of the
relative contribution of Jolt to net sales of the combined company was less
relevant than the analysis of the relative contribution of Jolt to the other
financial items described herein. Needham's analysis showed that Jolt
contributed 38.9% of the projected fiscal 1998 pro forma combined income
before income taxes, 30.9% of the projected calendar 1998 pro forma combined
income before income taxes and 27.4% of the projected fiscal 1999 pro forma
combined income before income taxes. In addition, Jolt contributed 48.2% of
the pro forma combined net tangible assets as of September 30, 1997 and 20.8%
of the pro forma combined stockholders' equity as of September 30, 1997.
Jolt's percentage of the LTM pro forma combined net income was not meaningful
because the Company incurred a net loss during such period. Based on the
consideration to be paid pursuant to the Merger Agreement, Jolt's shareholders
will own approximately 26.8% of the Company after the Merger. The results of
the contribution analysis are not necessarily indicative of the contributions
that the respective businesses may have in the future.
Accretion/Dilution Analysis. Needham reviewed the pro forma effect of the
Merger on the Company's financial projections for the fiscal years ending June
30, 1998 and 1999. This analysis indicated that the Merger would be accretive
to the earnings per share of the Company for such periods. The analysis did
not give effect to any potential synergies that might result from the Merger.
The actual operating or financial results achieved by the combined entity may
vary from projected results and such variations may be material.
Selected Company Analysis. Needham compared selected operating and stock
market data and operating and financial ratios for Jolt to the corresponding
data and ratios for selected publicly traded companies in the electronics
contract manufacturing industry which it deemed have generally comparable
lines of business to the Company; there were no publicly traded companies
generally comparable to Jolt, which derives the majority of its revenue from
consignment assembly contracts. Such data and ratios included total market
capitalization to revenue, price per share to earnings per share and market
value to book value.
The selected companies for purposes of this analysis included Altron
Incorporated, Benchmark Electronics, Inc., Electronic Fab Technology Corp.,
IEC Electronics Corp., Plexus Corp., SigmaTron International, Inc., and Xetel
Corporation (collectively, the "Selected Companies").
Needham calculated ranges of multiples for Jolt based on per share prices of
the Common Stock ranging from $0.50 to $1.06. Needham used this range because
Needham believes that, due to the large number of shares of Common Stock to be
issued to the Jolt shareholders relative to the total number of outstanding
shares and the trading volumes of the Common Stock, and because of the trading
restrictions on such shares, a discount to the reported trading price of the
Common Stock should be applied when valuing such shares, although it is not
possible to quantify the exact amount of any such discount. In deriving the
range of per share prices, Needham noted that the last reported sale price of
the Common Stock on the trading day immediately prior to the public
announcement of the proposed Merger was $1.1875 and the last reported sale
price of the Common Stock on the date of the Needham Opinion was $0.75. Actual
values that may be realized by Jolt Shareholders upon the sale of such shares
may vary from the range of values used by Needham in this analysis, and such
variations may be significant. In addition, Needham is not expressing any
opinion as to the prices at which the Common Stock will actually trade at any
time and is not rendering an appraisal as to the value of the shares to be
issued in the
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Merger. In calculating the book value multiples for Jolt, Needham used a book
value for Jolt of $1.5 million, which is the minimum book value required as a
condition of closing the Merger.
For the Selected Companies, the multiples of market capitalization to
projected calendar 1997 revenues ranged from 0.3 to 2.1 with a mean of 1.0 and
a median of 1.0, as compared with a range of multiples for Jolt of 1.5 to 3.6;
the multiples of market capitalization to projected calendar 1998 revenues
ranged from 0.2 to 1.2 with a mean of 0.7 and a median of 0.8 (data was not
available for two of the Selected Companies), as compared with a range for
Jolt of 1.1 to 2.7; the projected calendar 1997 price-earnings multiples
ranged from 7.3 to 43.1 with a mean of 23.2 and a median of 22.7, as compared
with a range for Jolt of 6.6 to 14.0; the projected calendar 1998 price-
earnings multiples ranged from 12.0 to 23.5 with a mean of 16.3 and a median
of 15.7 (data was not available for one of the Selected Companies), as
compared with a range for Jolt of 4.9 to 10.4; and the multiples of market
value to historical book value ranged from 1.4 to 5.9 with a mean of 2.7 and a
median of 2.2, as compared with a range for Jolt of 3.0 to 6.4. Needham noted
that, due to the consignment nature of Jolt's business, and unlike the
Company's business, costs of materials are generally not passed through to
customers and therefore not included in net sales or cost of sales and,
accordingly, Needham believed that an analysis of the market capitalization to
revenues multiples of Jolt was less relevant than an analysis of the other
multiples reviewed. Needham also reviewed the projected 1997/1998 revenue
growth, last fiscal year revenue growth, five-year historical revenue
compounded growth rate, projected 1998 net margin, LTM net margin, three-year
average net margin, LTM gross margin, three-year average gross margin, LTM
operating margin, three-year average operating margin, ratio of long-term debt
to total capital and latest fiscal year return on average equity for Jolt and
the seven Selected Companies and noted that Jolt ranked first among the eight
companies in all percentages, margins and ratios reviewed, with the exception
of projected 1997/1998 revenue growth, last fiscal year revenue growth and
latest fiscal year return on average equity, where Jolt ranked second.
Selected Transaction Analysis. Needham also analyzed publicly available
information for mergers and acquisitions in the printed circuit board
industry, but placed substantially less emphasis on this analysis due to the
absence of publicly available data for such transactions in general and, in
particular, for transactions deemed generally comparable to the Merger (i.e.,
transactions involving businesses similar to that of Jolt and involving
transaction sizes similar to that of the Merger). Needham noted, however, that
certain financial information was publicly available with respect to seven of
20 mergers and acquisitions in the printed circuit board industry that had
transaction values in excess of $10 million and were completed since 1990
(information was not publicly available for transactions valued at less than
$10 million). The seven transactions analyzed by Needham were: Elexsys
International, Inc. / Sanmina Corporation; Zycon Corporation / Hadco
Corporation; ElectroStar, Inc. / Tyco International Ltd.; XCEL Corporation /
MicroTel International, Inc.; Circo Craft Co. Inc. / Viasystems Group, Inc.
(Hicks, Muse, Tate & Furst, Incorporated); Citation Circuits, Inc. / Sigma
Circuits, Inc.; and Advance Circuits, Inc. / Johnson Matthey PLC. In examining
these transactions, Needham analyzed certain income statement and balance
sheet parameters of the acquired companies relative to the consideration
offered, such as multiples of market value to LTM net income. Because Needham
placed substantially less emphasis on this analysis due to the absence of
publicly available data, Needham did not calculate the same multiples for
Jolt. However, Needham noted that, using the range of Common Stock prices
described above under "Selected Company Analysis," the multiples of market
value to projected 1997 net income for Jolt ranged from 6.6 to 14.0, while the
multiples of market value to LTM net income for the seven transactions ranged
from 10.5 to 29.2. Needham noted that the range of projected multiples for
Jolt falls generally in the lower end or below the range of those multiples
for the seven selected transactions. No further material assessments were made
by Needham with respect to such analysis for the DDL Board.
No company or transaction used in any comparable analysis as a comparison is
identical to the Company, Jolt or the Merger. Accordingly, these analyses are
not simply mathematical; rather, they involve complex considerations and
judgments concerning differences in the financial and operating
characteristics of the comparable companies and other factors that could
affect the public trading value of the comparable companies and transactions
to which they are being compared.
The summary set forth above does not purport to be a complete description of
the analyses performed by Needham in connection with the rendering of its
opinion. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant quantitative and qualitative methods
of financial analyses
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and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Accordingly, Needham believes that its analyses must be considered as a whole
and that considering any portions of such analyses and of the factors
considered, without considering all analyses and factors, could create a
misleading or incomplete view of the process underlying its opinion. In its
analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which
are beyond the control of the Company or Jolt. Any estimates contained in
these analyses are not necessarily indicative of actual values or predictive
of future results or values, which may be significantly more or less favorable
as set forth therein. Additionally, analyses relating to the values of
business or assets do not purport to be appraisals or necessarily reflect the
prices at which businesses or assets may actually be sold.
Pursuant to the terms of the Engagement Letter, the Company has paid Needham
a fee for rendering the Needham Opinion of $100,000. None of Needham's fee is
contingent on consummation of the Merger. The Company has also agreed to
reimburse Needham for its reasonable out-of-pocket expenses and to indemnify
it against certain liabilities relating to or arising out of services
performed by Needham as financial advisor to the Company.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation
of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes. Needham was retained by the Board to
act as the Company's financial advisor in connection with the Merger based on
Needham's experience as a financial advisor in mergers and acquisitions as
well as Needham's familiarity with the electronics contract manufacturing
industry. In the normal course of its business, Needham may actively trade the
equity securities of the Company for its own account or for the account of its
customers and, therefore, may at any time hold a long or short position in
such securities.
THE EFFECTIVE TIME
Subject to the satisfaction or waiver of certain conditions contained in the
Agreement, the parties will cause a Certificate of Merger to be filed with the
Secretary of State of the State of Delaware and Articles of Merger with the
Department of State of the State of Florida. The Effective Time shall be the
time of such filings or such later time as may be specified in such filings.
From and after the Effective Time, the holders of certificates theretofore
representing Jolt Common Stock shall cease to have any rights with respect
thereto. Their sole right shall be to receive Merger Consideration. At the
Effective Time, the stock transfer books of Jolt shall be closed, and no
transfer of any shares of Jolt Common Stock theretofore outstanding shall
thereafter be made.
CONDITIONS TO THE MERGER
The obligations of the Company, Sub and Jolt to consummate the Merger are
subject to the satisfaction or waiver of the following conditions at or prior
to the Effective Time: (i) such parties shall have received a copy, certified
by the Secretary of Jolt, of resolutions duly adopted (and not subsequently
modified or rescinded) by a majority of the members of the Board of Directors
of Jolt by the terms of which resolutions such directors shall have approved
the Agreement and recommended the Merger to the Jolt Shareholders and directed
the submission of the Agreement and the Merger to a vote of such shareholders;
(ii) such parties shall have received a copy, certified by the Secretary of
Jolt, of resolutions duly adopted (and not subsequently modified or rescinded)
by a majority of the shares of Jolt Common Stock present in person or
represented by proxy at a meeting of the Jolt Shareholders, a quorum being
present throughout such meeting, by the terms of which resolutions such
Shareholders shall have approved the Agreement and authorized the Merger;
(iii) such parties shall have received a copy, certified by the Secretary of
Sub, of resolutions duly adopted (and not subsequently modified or rescinded)
by a majority of the members of the Board of Directors of Sub by the terms of
which resolutions such directors shall have approved the Agreement and
recommended the Merger to the Company, as the sole stockholder of Sub, and
directed the submission of the Agreement and the Merger to a vote of such
stockholder; (iv) such parties shall have received a copy, certified by the
Secretary of the Company, of resolutions duly adopted (and not subsequently
modified or rescinded) by the Company, as the sole stockholder of Sub, by the
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terms of which resolutions such sole stockholder shall have approved the
Agreement and authorized the Merger; (v) such parties shall have received a
copy, certified by the Secretary of the Company, of resolutions duly adopted
(and not subsequently modified or rescinded) by a majority of the members of
the Board by the terms of which resolutions such directors shall have approved
the Agreement, recommended the Merger and the issuance of the Merger
Consideration to the stockholders of the Company and directed the submission
of the Agreement, the Merger and the issuance of the Merger Consideration to a
vote of such stockholders; (vi) the Agreement, the Merger and the issuance of
the Merger Consideration shall have been approved by all action necessary on
the part of the stockholders of the Company; (vii) there shall not be in
effect any preliminary or permanent injunction or other order by any federal
or state authority prohibiting the consummation of the Merger; (viii) there
shall have been obtained all other consents that, in the reasonable judgment
of each of the Company, Sub and Jolt, are necessary or desirable in connection
with the consummation of the transactions contemplated by the Agreement such
that, were they not obtained, it would be inadvisable to proceed with the
Merger; and (ix) the Merger Consideration shall have been listed on the NYSE,
subject to official notice of issuance.
The obligations of the Company and Sub to effect the Merger shall be subject
to satisfaction or waiver of the following additional conditions at or prior
to the Effective Time: (i) as of consummation of the transactions contemplated
by the Agreement (the "Closing"), Jolt's interim financial statements will (A)
reflect total shareholders' equity of at least $1.5 million and (B) not
include any liabilities owed to Jolt Shareholders; (ii) Jolt will have at
least $600,000 cash on its balance sheet at the Closing; (iii) each Jolt
Shareholder shall have executed and delivered to the Company an affiliate
letter, restricting the transfer of the Merger Consideration by the Jolt
Shareholders; (iv) the representations and warranties of Jolt and the Jolt
Shareholders set forth in the Agreement shall be true and correct in all
material respects as of the date of the Agreement and, except in such respects
as would have no material adverse effect on Jolt, as of the Effective Time (as
if made at such time); (v) Jolt and the Jolt Shareholders shall have performed
in all material respects the covenants and agreements required by the
Agreement to be performed by them at or prior to the Closing; (vi) the Company
shall have received from Jolt an officers' certificate, executed by the Chief
Executive Officer and the Chief Financial Officer of Jolt (in their capacities
as such) and dated the Closing date, confirming satisfaction of the conditions
stated in clauses (iv) and (v) above; (vii) the Company shall have received:
(A) an opinion letter of counsel to Jolt, dated the Closing date, conforming
to certain provisions of the Agreement; (B) an opinion letter of counsel to
the Company dated the Closing date in a form acceptable to the Company; (C) a
"cold comfort" letter from Jolt's auditors, dated the Closing date, in form
and substance reasonably satisfactory to the Company; (D) an opinion letter of
Needham to the Company to the effect that the Merger is fair to the
stockholders of the Company from a financial point of view; and (E) such other
documents as the Company may reasonably request, in each case reasonably
satisfactory in form and substance to the Company; (viii) no holders of Jolt
Common Stock shall have exercised appraisal rights; (ix) Mitchell Morhaim
shall have executed and delivered to the Company an employment and noncompete
agreement in a form acceptable to the Company; (x) Jolt shall have obtained a
policy of key-man life insurance for Mr. Morhaim in a form acceptable to the
Company; and (xi) Jolt shall have delivered to the Company audited financial
statements for the year ending December 31, 1997.
The obligation of Jolt to effect the Merger shall be subject to satisfaction
or waiver of the following additional conditions at or prior to the Effective
Time: (i) the representations and warranties of the Company and Sub set forth
in the Agreement shall be true and correct in all material respects as of the
date of the Agreement and, except in such respects as would have no material
adverse effect on the Company, as of the Effective Time (as if made at such
time); (ii) the Company and Sub shall have performed in all material respects
the covenants and agreements required by the Agreement to be performed by them
at or prior to the Closing; (iii) Jolt shall have received from the Company an
officer's certificate, executed by the Chief Financial Officer of the Company
(in his capacity as such) and dated the Closing date, confirming satisfaction
of the conditions stated in clauses (i) and (ii) above; and (iv) Jolt shall
have received: (A) an opinion letter of counsel to the Company, dated the
Closing date, conforming to certain provisions of the Agreement; (B) an
opinion letter of counsel of Jolt, dated the Closing date, in a form
acceptable to Jolt; and (C) such other documents as Jolt may reasonably
request, in each case reasonably satisfactory in form and substance to Jolt.
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To the extent permitted by applicable law, the Company and Sub or Jolt and
the Jolt Shareholders may waive any inaccuracies in the representations and
warranties contained in the Agreement or waive compliance with any agreements
or conditions contained in the Agreement after the Stockholders approve the
Issuance of the Merger Consideration or the Jolt Shareholders adopt the
Agreement and approve the Merger, as the case may be. Any agreement to waive
shall be valid only if set forth in a signed writing. In the event of a
material change to the Agreement as a result of such a waiver, the Company
will resolicit proxies.
REPRESENTATIONS AND WARRANTIES
The Agreement contains various representations and warranties (not all of
which apply to each) of Jolt, the Company and Sub relating to, among other
things: (i) organization and qualification to do business;
(ii) capitalization; (iii) the authorization, execution, delivery, performance
and enforceability of the Agreement and the absence of conflicts, violations
and defaults under charters and by-laws and certain other agreements and
documents; (iv) financial statements and other financial information; (v) the
absence of certain material differences; and (vi) the information furnished
for use in the Registration Statement and in this Proxy Statement.
CERTAIN COVENANTS
Jolt has agreed that, prior to the Closing, unless otherwise contemplated in
the Agreement or otherwise consented to in writing by the Company, it will
not: (i) hold any meetings of its Board of Directors, or any committee
thereof, or of its shareholders without inviting a representative selected by
the Company to attend such meeting; (ii) amend or restate its charter or
bylaws or split, combine or reclassify any of its securities, or declare, set
aside or pay any dividend or other distribution on any of its securities, or
make or agree to commit to make any exchange for or redemption of any of its
securities payable in cash, stock or property; provided, however, that Jolt
shall be permitted to declare, set aside or pay any dividend or other
distribution on any of its securities payable in cash, stock or property to
the extent that, as of Closing, Jolt's interim financial statements reflect
total shareholders' equity of at least $1,500,000 and Jolt will have at least
$600,000 in cash on its balance sheet; (iii) issue or agree to issue any
additional shares of, or options, warrants or other rights of any kind to
acquire any shares of, its capital stock of any class, or enter into any
contract, agreement, commitment or arrangement with respect to any of the
foregoing other than to issue Jolt Common Stock necessary to meet certain
financial requirements that are a condition to the Company's obligation to
consummate the Merger; (iv) terminate any material contract, agreement,
commitment or understanding; (v) create, incur or assume any long-term or
short-term indebtedness for money borrowed or make any capital expenditures or
commitment for capital expenditures in excess of $1,000; (vi) adopt, enter
into or amend any bonus, profit sharing, compensation, stock option, warrant,
pension, retirement, deferred compensation, employment, severance, termination
or other employee benefit plan, agreement, trust fund or arrangement for the
benefit or welfare of any officer, director, employee or consultant or agree
to any increase in the compensation (including any bonus) payable or to become
payable to, or any increase in contractual term of employment of, any officer,
director, employee or consultant; (vii) sell, lease, mortgage, encumber or
otherwise dispose of or grant any interest in any of its assets or properties;
(viii) enter into any material contract or agreement; (ix) enter into any
capital lease, operating lease or rental agreement for a term exceeding one
month; and (x) enter into any agreement, commitment or understanding, whether
in writing or otherwise with respect to the matters referred to in clauses
(iv) through (ix). In addition, Jolt has agreed to conduct its business
prudently, in the ordinary and usual course, use reasonable efforts to keep
intact its business organizations and goodwill and keep available the services
of its officers and employees and maintain good relationships with suppliers,
lenders, creditors, distributors, employees, customers and others having
business or financial relationships with it.
TERMINATION; EXPENSES
The Agreement may be terminated at any time prior to the Effective Time,
notwithstanding approval by the Stockholders and Jolt Shareholders, (i) by
written consent of the Company and Jolt or (ii) if any court of competent
jurisdiction in the United States or other United States governmental body
shall have issued an order,
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decree or ruling or taken any other action restraining, enjoining or otherwise
prohibiting the Merger, and such order, decree, ruling or other action shall
have become final and non-appealable.
Each party to the Agreement will bear all expenses incurred by it in
connection with the Agreement and transactions contemplated thereby.
WAIVER; AMENDMENT
The Company and Sub, on the one hand, or Jolt and the Jolt Shareholders on
the other hand, may at any time by a signed writing (i) extend the time for
the performance of any of the obligations or other acts of the other, (ii)
waive any inaccuracies in the representations and warranties contained in the
Agreement or in any other document delivered pursuant thereto or (iii) waive
compliance with any of the agreements, covenants or conditions contained
therein. The Agreement may be amended only by an instrument in writing signed
by the Company, Jolt, Sub and the Jolt Shareholders.
INDEMNIFICATION
The Jolt Shareholders joint and severally agree to indemnify, defend and
hold the Company, Sub and their respective affiliates, officers, directors,
agents, employees, successors and assigns and the Company agrees to indemnify,
defend and hold the Jolt Shareholders and their respective affiliates,
officers, directors, agents, employees, successors and assigns (collectively,
as the case may be, the "Indemnified Parties" or the "Indemnifying Parties")
harmless from, against and in respect of all claims, demands, suits,
proceedings, liabilities, judgments, losses, obligations, costs, expenses and
deficiencies, including legal fees incurred in litigation or otherwise
assessed (collectively, "Losses"), sustained or incurred by any of them at any
time before the Closing, as well as after the Closing, to the extent that such
Losses exceed $50,000, with respect to or arising out of, directly or
indirectly, (i) the failure of any representation or warranty made by the
Indemnifying Parties in the Agreement or in any other document delivered
pursuant to such agreement or (ii) the failure of the Indemnifying Parties to
perform and comply in all respects with each of their covenants and other
agreements in the Agreement or any other document delivered pursuant to such
agreement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This section is a summary of the principal federal income tax consequences
that are expected to result from the Merger and which might be considered
important by a Stockholder. It is impractical to comment on all aspects of
federal, state, local and foreign laws that may affect the tax consequences of
the Merger. Accordingly, this discussion does not address any aspect of
foreign, state or local income tax or federal estate or gift tax
considerations. Federal income tax consequences also may be affected by
matters not discussed below.
This summary is based on the current provisions of the Code, existing
regulations thereunder and administrative rulings and court decisions, all of
which are subject to changes that can be retroactively applied. Many of the
provisions of the Code that have been recently enacted or amended have not
been interpreted by the courts or the Internal Revenue Service (the
"Service"). No assurance can be provided that the opinions and statements set
forth herein (which do not bind the Service or the courts) will not be
challenged by the Service or would be sustained by a court if challenged.
THE DISCUSSION SET FORTH BELOW ADDRESSES THE MATERIAL FEDERAL INCOME TAX
CONSEQUENCES THAT ARE EXPECTED TO RESULT FROM THE MERGER.
The Merger. The Merger will be treated for federal income tax purposes as a
reorganization described in Section 368(a) of the Code (a "reorganization")
and Jolt, the Company and Sub will each be a "party to a reorganization" as
such phrase is described in Section 368(b) of the Code. Neither the Jolt
Shareholders, Jolt, Sub or Company will recognize gain or loss for federal
income tax purposes by reason of conversion of the shares of Jolt Common Stock
into the shares of Common Stock to be received at the date of the consummation
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of the transactions contemplated by the Agreement (the "Closing Date"). Such
treatment depends upon the plan or intention on the part of the Jolt
Shareholders to transfer the shares of Common Stock to be received upon
consummation of the Merger, plans on the part of the Company to undertake or
cause Sub to undertake transactions outside the ordinary course of business
and certain other technical requirements under the Code.
The above conclusions assume the veracity of certain representations that
the Jolt Shareholders will have a continuing proprietary interest through
stock ownership in the Company of a sufficient magnitude to satisfy the
"continuity of interest" requirement of a reorganization. This requirement
must be met in two respects. First, a significant part of the consideration
received by the Jolt Shareholders pursuant to the Merger must represent such a
continuing proprietary interest. If it were determined that the pre-Merger
dividend distributions received by the Jolt Shareholders are "boot" or "other
property," the Merger might not constitute a tax-free reorganization. Pre-
Merger dividend distributions are not likely to be treated as boot, however,
because such payments are being made by Jolt with its own funds, not by the
Company or Sub or not with funds of the Company or Sub.
The second aspect of the continuity of interest requirement depends on the
plans or intentions of the Jolt Shareholders at the time of the Merger to
sell, exchange or otherwise dispose of the Common Stock received by them in
the Merger. The above discussion assumes the veracity of the representations
of the Jolt Shareholders to the effect that the Jolt Shareholders,
individually and as a group, will have no plans or intentions at the Closing
Date to reduce their holdings in the Common Stock to a number of shares having
a value, as of the Effective Time, of less than 50 percent of all of the
formerly outstanding shares of Jolt Common Stock as of such date.
Should the continuity of interest requirement not be satisfied, (i) the
Merger would not qualify as a reorganization within the meaning of Section
368(a) of the Code, (ii) neither Jolt, the Company nor Sub would be a "party
to a reorganization" as such term is described in Section 368(b) of the Code
and the Jolt Shareholders, but not the Company, would incur a significant tax
liability and (iii) the Jolt Shareholders would recognize gain or loss on the
exchange of shares of Jolt Common Stock for shares of Common Stock, as if such
shares of Jolt Common Stock had been sold for an amount equal to the fair
market value of such consideration.
Jolt Shareholders. The Jolt Shareholders will not recognize gain or loss for
federal income tax purposes to the extent they exchange Jolt Common Stock for
Common Stock in the Merger. After the Merger, a Jolt Shareholder will be taxed
on distributions received from the Company, if any, with respect to the Common
Stock. Nonliquidating distributions with respect to such Common Stock will
constitute dividends taxable as ordinary income to the extent of any current
or accumulated earnings and profits (as calculated for federal income tax
purposes) of the Company. Any nonliquidating distributions with respect to
such Common Stock in excess of such current or accumulated earning and profits
of the Company, or any liquidating distributions received with respect to such
Common Stock will be treated as a tax-free return of capital to the extent of
such Jolt Shareholder's basis in such shares and as capital gain to the extent
of the balance, assuming that such shares are held as capital assets.
Holding Period. Assuming each Jolt Shareholder holds Jolt Common Stock as a
capital asset immediately prior to the exchange, such shareholder will have a
holding period for the Common Stock received pursuant to the Merger that will
include the holding period of the shares of Jolt Common Stock exchanged
therefor.
The Company, Sub and Jolt. No gain or loss will be recognized by the
Company, Sub or Jolt as a result of the Merger. Sub's tax basis in the assets
of Jolt acquired pursuant to the Merger will be equal to the tax basis of such
assets in the hands of Jolt immediately prior to the Merger, increased by any
gain recognized by Jolt. The Company's tax basis in the stock of Sub will be
equal to Jolt's tax basis in its assets plus the Company's initial tax basis
in Sub stock. If the Merger were not to qualify as a reorganization, the Jolt
Shareholders would recognize, in a taxable transaction, gain equal to the
excess of the fair market value of the Common Stock over Jolt's aggregate tax
basis in its assets transferred to the Company in the Merger.
Reporting Requirements. Each Jolt Shareholder who receives shares of Common
Stock pursuant to the Merger is required by Section 1.368-3(b) of the Treasury
Regulations to file with such person's federal income
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tax return for 1998 a statement that provides details relating to the cost or
basis of the stock or securities transferred in the exchange and the amount of
stock or securities and other property or money received from the exchange,
including any liabilities assumed upon the exchange and any liabilities to
which property received is subject. The Company is unable to predict whether
filing of such a statement by any person will enhance the likelihood of an
audit of such person's federal income tax return. If the Service were to audit
the federal income tax return of a person who receives Common Stock pursuant
to the Merger, the Service might propose adjustments that relate to the Merger
or that pertain to unrelated matters. Accordingly, each Jolt Shareholder is
urged to consult a tax advisor concerning the tax consequences of the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of December 4, 1997, directors and executive officers of the Company were
the record owners of 3,340,294 shares of Common Stock. The Company believes
that each of its directors and executive officers intends to vote or direct
the vote of all of the outstanding shares of Common Stock over which such
person has voting control in favor of the authorization, approval and adoption
of the Agreement and the transactions contemplated thereby. On June 30, 1997,
the Company borrowed $2,000,000 from Mr. Wheeler, a private investor, under a
secured, full recourse, non-negotiable promissory note bearing 8% interest.
The note matures on February 1, 1999, and is secured by a pledge of the common
stock of SMTEK. The Company agreed to give Mr. Wheeler two seats on its Board,
which seats were filled by Mr. Wheeler and Charlene A. Gondek. As a condition
to obtaining the $2,000,000 loan from Mr. Wheeler, the Company also agreed to
acquire, subject to the satisfaction of certain conditions (including (i)
approval of the Jolt Shareholders, (ii) Stockholder approval and (iii)
obtaining a fairness opinion), all of the issued and outstanding shares of
Jolt. Failure to consummate the Merger will not result in a breach of the
Wheeler Note; in such case, the Wheeler Note will be due and payable in full
on February 1, 1999. Upon consummation of the Merger, the maturity date of the
Wheeler Note will be extended from February 1, 1999 to October 31, 1999. In
addition to being directors of the Company, Mr. Wheeler and Ms. Gondek are
shareholders of Jolt. In addition to his current holding of Jolt common stock,
Mr. Wheeler will receive 10,660 shares of Jolt common stock immediately before
the Merger in exchange for the discharge of indebtedness of approximately
$2,050,000 owed by Jolt to Mr. Wheeler. Therefore, Mr. Wheeler and Ms. Gondek
will receive shares of Common Stock as Merger Consideration if the
Stockholders approve the Issuance of the Merger Consideration and all other
conditions to the consummation of the Merger are either satisfied or waived.
The principal executive officer of Jolt will be employed by the Company after
the Merger pursuant to an employment and noncompete agreement. Specifically,
Mitchell Morhaim, President and a shareholder of Jolt, will be a party to a
five-year employment agreement with the Company.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a pooling of interests under
generally accepted accounting principles. Under the pooling-of-interests
method of accounting, the recorded amounts of the assets and liabilities of
Jolt will be carried forward at their previously recorded amounts, and prior
period financial statements will be restated for all periods as though Jolt
and the Company had been combined at the beginning of the earliest period
presented. See the Unaudited Pro Forma Financial Statements and Notes thereto
included elsewhere in this Proxy Statement.
RESTRICTIONS ON RESALES OF COMMON STOCK
The shares of the Common Stock to be received by the Jolt Shareholders in
connection with the Merger have not been registered under the Securities Act.
The Common Stock is being offered and sold to the Jolt Shareholders in a
private placement, exempt from registration under the Securities Act. Such
shares of Common Stock may be resold by Jolt Shareholders only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act (or,
in the case of such persons who become affiliates of the Company, Rule 144
under the Securities Act) or as otherwise permitted under the Securities Act.
The Company has agreed to register such Common Stock for resale by the Jolt
Shareholders as soon as possible following the Effective Time and to file a
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registration statement covering such resales no later than sixty (60) days
following the Effective Time. See "The Merger--Restrictions on Resales."
In addition, pursuant to the Agreement, each Jolt Shareholder is required to
execute and deliver to the Company a letter providing that each Jolt
Shareholder (i) will agree not to sell, transfer or otherwise dispose of any
of the shares of Common Stock received by such person in the Merger until such
time as financial results covering at least 30 days of combined operations of
Jolt and the Company have been published and (ii) has no prearrangement, plan
or intention to transfer shares of Common Stock received in the Merger that
would cause the Merger to be treated as other than a tax-free reorganization
under Section 368 of the Code.
APPRAISAL RIGHTS
As a condition to the consummation of the Merger, no Jolt Shareholders shall
have exercised appraisal rights under the Florida Business Corporation Act.
REGULATORY APPROVALS
No federal or state regulatory requirements must be complied with and no
such regulatory approvals must be obtained as a condition to consummation of
the Merger.
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SELECTED FINANCIAL DATA OF THE COMPANY
The following tables set forth certain selected historical financial
information of the Company as of and for each of the years in the five-year
period ended June 30, 1997, and as of March 31, 1998, and for the nine months
ended March 31, 1998 and 1997. Such selected financial information has been
derived from the consolidated financial statements of the Company, which, for
each year in such five-year period, have been audited by KPMG Peat Marwick
LLP, independent certified public accountants, except for the first year in
such five-year period which was audited by Price Waterhouse LLP. The selected
data presented in the following tables for the nine-month periods ended March
31, 1998 and 1997, and as of March 31, 1998, are derived from the unaudited
consolidated financial statements of the Company included elsewhere herein.
The following financial information should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto as of June 30,
1997 and 1996, and for each of the years in the three-year period ending June
30, 1997, and the report thereon, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company" included
elsewhere in this Proxy Statement.
28
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31, YEAR ENDED JUNE 30,
------------------ ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Sales................... $ 37,576 $ 34,660 $ 48,919 $ 33,136 $ 29,576 $ 48,529 $ 57,883
-------- -------- -------- -------- -------- -------- --------
Costs and expenses:
Cost of goods sold.... 31,615 30,161 42,475 29,494 26,516 47,860 55,052
Administrative and
selling expenses..... 4,048 3,653 5,058 4,175 6,497 7,617 7,898
Goodwill amortization. 951 951 1,268 634 -- -- --
Restructuring charges. -- -- -- -- 1,533 -- --
-------- -------- -------- -------- -------- -------- --------
Total costs and
expenses............... 36,614 34,765 48,801 34,303 34,546 55,477 62,950
-------- -------- -------- -------- -------- -------- --------
Operating income (loss). 962 (105) 118 (1,167) (4,970) (6,948) (5,067)
-------- -------- -------- -------- -------- -------- --------
Non-operating income
(expense):
Interest income....... 51 59 83 246 109 168 280
Interest expense...... (724) (844) (1,105) (911) (883) (1,110) (1,107)
Debt issue cost
amortization......... -- (372) (937) (281) -- -- --
Gain on sale of
assets............... 24 128 142 -- 3,317 2 264
Earthquake expenses... -- -- -- -- -- (500) --
Other income
(expense), net....... (87) 12 21 245 61 34 --
-------- -------- -------- -------- -------- -------- --------
Total non-operating
income (expense)....... (736) (1,017) (1,796) (701) 2,604 (1,406) (563)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes.... 226 (1,122) (1,678) (1,868) (2,366) (8,354) (5,630)
Income tax benefit
(provision)............ (430) -- -- 1,110 -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations.. (204) (1,122) (1,678) (758) (2,366) (8,354) (5,630)
Income from discontinued
operations, less
applicable income
taxes.................. -- -- -- -- -- -- 603
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item..... (204) (1,122) (1,678) (758) (2,366) (8,354) (5,027)
Extraordinary item--Gain
on debt extinguishment. -- -- -- 2,356 2,441 -- 6,100
-------- -------- -------- -------- -------- -------- --------
Net income (loss)....... $ (204) $ (1,122) $ (1,678) $ 1,598 $ 75 $ (8,354) $ 1,073
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per
share:
Basic and diluted:
Continuing
operations......... $ (0.01) $ (0.05) $ (0.07) $ (0.04) $ (0.15) $ (0.59) $ (0.60)
Discontinued
operations......... -- -- -- -- -- -- 0.06
Extraordinary item.. -- -- -- 0.13 0.15 -- 0.65
-------- -------- -------- -------- -------- -------- --------
Total............. $ (0.01) $ (0.05) $ (0.07) $ 0.09 $ -- $ (0.59) $ 0.11
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
MARCH 31, ---------------------------------------------
1998 1997 1996 1995 1994 1993
----------- -------- -------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets.......... $ 18,139 $ 20,420 $ 15,493 $ 8,876 $ 12,018 $ 20,085
Current liabilities..... $ 16,510 $ 18,095 $ 11,979 $ 8,904 $ 21,277 $ 14,289
Working capital
(deficit).............. $ 1,629 $ 2,325 $ 3,514 $ (28) $ (9,259) $ 5,796
Current ratio........... 1.1 1.1 1.3 1.0 0.6 1.4
Total assets............ $ 28,078 $ 31,880 $ 28,087 $12,590 $ 23,258 $ 33,739
Long-term debt.......... $ 5,251 $ 7,820 $ 10,935 $ 7,030 $ 6,870 $ 20,393
Stockholders' equity
(deficit).............. $ 6,317 $ 5,965 $ 5,173 $(3,344) $ (4,889) $ (943)
Equity (deficit) per
share.................. $ 0.26 $ 0.24 $ 0.22 $ (0.21) $ (0.34) $ (0.08)
Shares outstanding
(000s)................. 24,614 24,587 22,999 16,063 14,469 11,973
</TABLE>
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF JOLT
The following tables set forth certain selected financial information of
Jolt as of and for each of the years in the five-year period ended December
31, 1997, and as of March 31, 1998, and for the three months ended March 31,
1998 and 1997. Such selected financial information has been derived from the
financial statements of Jolt, which, for the years ended December 31, 1997 and
1996, were audited by Brunt & Company, P.A., independent certified public
accountants. The selected data presented in the following tables for the
three-month periods ended March 31, 1998 and 1997, and as of March 31, 1998,
are derived from the unaudited financial statements of Jolt included elsewhere
herein. The following financial information should be read in conjunction with
the Financial Statements of Jolt and Notes thereto and "Jolt Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Proxy Statement.
JOLT TECHNOLOGY, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------ ------
(UNAUDITED, EXCEPT FOR 1997 AND
(UNAUDITED) 1996)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Sales................... $ 746 $ 518 $2,722 $2,354 $1,817 $1,269 $1,250
------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of sales......... 347 295 1,419 1,412 1,082 931 953
Administrative and
selling expenses..... 71 62 385 327 358 199 174
------ ------ ------ ------ ------ ------ ------
Total costs and
expenses............... 418 357 1,804 1,739 1,440 1,130 1,127
------ ------ ------ ------ ------ ------ ------
Operating income........ 328 161 918 615 377 139 123
------ ------ ------ ------ ------ ------ ------
Non-operating income
(expense)
Interest income....... 3 3 13 9 9 4 1
Interest expense...... (29) (34) (122) (134) (165) (157) (95)
Other income
(expense), net....... -- -- 1 1 -- -- --
------ ------ ------ ------ ------ ------ ------
Total non-operating
expense................ (26) (31) (108) (124) (156) (153) (94)
------ ------ ------ ------ ------ ------ ------
Net income (loss)....... $ 302 $ 130 $ 810 $ 491 $ 221 $ (14) $ 29
====== ====== ====== ====== ====== ====== ======
Basic and diluted income
(loss) per share....... $30.20 $13.05 $81.02 $53.54 $27.65 $(1.73) $ 3.67
====== ====== ====== ====== ====== ====== ======
Shares used in computing
basic and diluted
income (loss) per share
(000s)................. 10 10 10 9 8 8 8
====== ====== ====== ====== ====== ====== ======
Net income (loss) before
pro forma adjustments.. $ 302 $ 810
PRO FORMA ADJUSTMENTS
(1):
Income tax provision.. (114) (305)
------ ------
Pro forma net income.. $ 188 $ 505
====== ======
Pro forma basic and
diluted income per
share................ $18.80 $50.50
====== ======
Shares used in
computing pro forma
basic and diluted
income per share
(000s)............... 10 10
====== ======
</TABLE>
- -------
(1) Jolt, which is an "S Corporation" for income tax purposes, will become a
"C Corporation" upon consummation of the merger, and hence will become
subject to Federal and state income taxes. Pro forma basic and diluted
income per share for Jolt's fiscal year ended December 31, 1997 and for
the three months ended March 31, 1998 have been computed after giving
effect to pro forma income tax expense at an effective tax rate of 37.7%,
representing Federal taxes of 34% and Florida state taxes of 5.5%, net of
Federal benefit.
30
<PAGE>
JOLT TECHNOLOGY, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------------------------
1998 1997 1996 1995 1994 1993
----------- ------- ------- ------- -------- --------
(UNAUDITED) (UNAUDITED, EXCEPT FOR 1997 AND 1996)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets........ $ 1,615 $ 1,322 $ 950 $ 902 $ 532 $ 426
Current liabilities... $ 537 $ 489 $ 322 $ 334 $ 113 $ 246
Working capital....... $ 1,078 $ 833 $ 628 $ 568 $ 419 $ 180
Current ratio......... 3.0 2.7 3.0 2.7 4.7 1.7
Total assets.......... $ 2,038 $ 1,788 $ 1,411 $ 1,372 $ 890 $ 632
Shareholder loans
payable.............. $ 1,625 $ 1,625 $ 1,625 $ 1,625 $ 1,625 $ --
Long-term debt........ $ -- $ -- $ -- $ 117 $ 77 $ 1,297
Shareholders' deficit. $ (124) $ (326) $ (536) $ (704) $ (925) $ (911)
Deficit per share..... $(12.40) $(32.60) $(53.60) $(88.00) $(115.63) $(113.88)
Shares outstanding
(000s)............... 10 10 10 8 8 8
<CAPTION>
MARCH 31,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA BALANCE SHEET DATA (1)
Current assets........ $ 1,615
Current liabilities... $ 246
Working capital....... $ 1,369
Current ratio......... 6.6
Total assets.......... $ 2,038
Shareholder loans
payable.............. $ --
Long-term debt........ $ --
Shareholders' equity.. $ 1,792
Equity per share...... $ 86.74
Shares outstanding
(000s)............... 20.66
</TABLE>
- --------
(1) Pro forma balance sheet data of Jolt reflects (i) the conversion to
equity of shareholder loans payable in the amount of $1,625,000 and
accrued interest thereon of $397,000, and (ii) the accrual of estimated
dividends distributable to Jolt shareholders of $106,000, as if both
transactions had occurred on March 31, 1998. The conversion of
shareholder loans and accrued interest to equity will occur prior to the
Closing as a condition of the Merger. The dividends will be distributed
to shareholders to cover their personal income tax liabilities associated
with the taxable income of Jolt, which is an S Corporation.
31
<PAGE>
SELECTED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED JUNE 30,
MARCH 31, -------------------------
1998 1997 1996 1995
----------- ------- ------- -------
<S> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF EARNINGS
DATA:
Sales................................. $39,834 $51,089 $35,490 $31,393
======= ======= ======= =======
Operating income (loss)............... $ 1,806 $ 613 $ (552) $(4,592)
======= ======= ======= =======
Income (loss) before extraordinary
item................................. $ 1,032 $(1,212) $ (267) $(2,145)
======= ======= ======= =======
Per share information:
Basic and diluted earnings (loss)
before extraordinary item............ $ 0.03 $ (0.04) $ (0.01) $ (0.09)
======= ======= ======= =======
Shares used in computing earnings
(loss) per share (000s)
Basic............................... 33,598 32,150 27,180 24,150
======= ======= ======= =======
Diluted............................. 34,017 32,150 27,180 24,150
======= ======= ======= =======
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Total Assets............................ $30,116
=======
Long-term debt.......................... $ 5,251
=======
Stockholders' equity.................... $ 8,109
=======
</TABLE>
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
INTRODUCTORY STATEMENT
The Company provides customized, integrated EMS to original equipment
manufacturers in the computer, telecommunications, instrumentation, medical,
industrial and aerospace industries. The Company also fabricates multilayer
PCBs for use primarily in the computer, communications and instrumentation
industries. The Company's EMS operations are located in Southern California
and Northern Ireland. Its PCB facilities are located in Northern Ireland.
Historically, the Company was a diversified holding company with operations
in the areas of EMS and PCB fabrication, broadband communications equipment
and other businesses. The Company entered the EMS business by acquiring its
domestic EMS operations in 1985 and by organizing its European EMS operations
in 1990. The Company divested its non-EMS/PCB operations during 1989 to 1993.
In December 1994 and January 1995, the Company sold substantially all the
assets of its U.S. EMS and PCB operations and used the proceeds to pay off
debt.
In January 1996, as the first step toward rebuilding a domestic presence in
the EMS industry, the Company acquired SMTEK, a provider of integrated
electronic manufacturing services. SMTEK specializes in the design and
manufacture of complex printed circuit board assemblies and modules utilizing
surface mount technology for sale to government-related and commercial
customers.
With the exception of fiscal 1997, during which the Company generated
operating income of $118,000, the Company has incurred operating losses for a
number of years. These operating losses amounted to $1,167,000 and $4,970,000
in fiscal 1996 and fiscal 1995, respectively. Although the Company had net
income for fiscal 1996 and fiscal 1995 of $1,598,000 and $75,000,
respectively, fiscal 1996 net income included an extraordinary gain of
$2,356,000 and an income tax benefit of $1,110,000, while fiscal 1995 net
income included an extraordinary gain of $2,441,000 and a gain of on sales of
assets of $3,317,000.
The Company utilizes a 52-53 week fiscal year ending on the Friday closest
to June 30 which, for fiscal years 1997, 1996 and 1995, fell on June 27, June
28 and June 30, respectively. Throughout this Proxy Statement, the fiscal
year-end for all years is shown as June 30 for clarity of presentation, except
where the context dictates a more specific reference to the actual year-end
date. The interim periods for both years are shown as March 31 for clarity
purposes. The actual periods ended on April 3, 1998 and March 28, 1997. The
nine month periods ended April 3, 1998 and March 28, 1997 consisted of 40
weeks and 39 weeks, respectively.
QUASI-REORGANIZATION
The Company, with the authorization of its Board of Directors, implemented a
quasi-reorganization effective June 27, 1997. The quasi-reorganization, which
did not require the approval of the Company's stockholders, resulted in an
elimination of the accumulated deficit of $23,678,000 by a transfer from
additional paid-in capital of an equivalent amount. This deficit was
attributable primarily to operations which were divested or discontinued in
prior years. Following a review and evaluation by management, no adjustment
was made to the carrying values of the Company's assets and liabilities
because such amounts were deemed to be not in excess of estimated fair values.
In order to account for the Merger using the pooling method of accounting, the
quasi-reorganization effected by the Company on June 27, 1997 will be reversed
upon consummation of the Merger.
33
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's sales and other operating data
as percentages of revenues:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
JUNE 30, MARCH 31,
-------------------- ---------------
1997 1996 1995 1998 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold..................... 86.8 89.0 89.7 84.1 87.0
----- ----- ----- ------ ------
Gross profit........................... 13.2 11.0 10.3 15.9 13.0
Administrative and selling expenses.... 10.3 12.6 21.9 10.8 10.5
Goodwill amortization.................. 2.6 1.9 -- 2.5 2.8
Restructuring charges.................. -- -- 5.2 -- --
----- ----- ----- ------ ------
Operating income (loss)................ 0.3 (3.5) (16.8) 2.6 (0.3)
Interest income........................ 0.2 0.8 0.4 0.1 0.2
Interest expense....................... (2.3) (2.8) (3.0) (1.9) (2.4)
Debt issue cost amortization........... (1.9) (0.8) -- -- (1.1)
Gain on sale of assets................. 0.3 -- 11.2 0.1 0.4
Other income (expense), net............ -- 0.7 0.2 (0.3) --
----- ----- ----- ------ ------
Loss before income taxes............... (3.4) (5.6) (8.0) 0.6 (3.2)
Income tax benefit (provision)......... -- 3.3 -- (1.1) --
----- ----- ----- ------ ------
Loss before extraordinary item......... (3.4) (2.3) (8.0) (0.5) (3.2)
Extraordinary item--Gain on debt
extinguishment........................ -- 7.1 8.3 -- --
----- ----- ----- ------ ------
Net income (loss)...................... (3.4)% 4.8% 0.3% (0.5)% (3.2)%
===== ===== ===== ====== ======
</TABLE>
During fiscal 1995, the Company closed the operations of its A.J.
Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring
charges of $1,533,000 for the costs associated with the shut down and disposal
of the assets of A.J., including asset write-downs of $552,000, additional bad
debt write-offs of $136,000, lease termination costs of $211,000 and all other
exit costs totaling $634,000. Substantially all of the operating assets of
A.J. were sold in January 1995 for total consideration, in the form of cash
and debt assumption, of approximately $1,041,000.
In December 1994, the Company sold essentially all the assets of its
Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of approximately
$9,200,000 in cash and the assumption by the purchaser of approximately
$300,000 of capitalized lease obligations, which resulted in a gain of
$3,317,000. With the proceeds of this sale, the Company paid off $5,300,000 of
industrial revenue bonds and settled a $6,941,000 bank term loan for a cash
payment of $4,500,000, which resulted in an extraordinary gain on debt
extinguishment of $2,441,000.
NINE MONTHS ENDED MARCH 31, 1998 VS. NINE MONTHS ENDED MARCH 31, 1997
Consolidated sales increased from $34,660,000 for the nine months ended
March 31, 1997 to $37,576,000 for the latest nine months. Sales for the
Company's EMS operations for the latest nine months increased by $3,628,000
over the comparable prior year period, and is attributable primarily to higher
levels of business with existing customers. Sales for the nine months ended
March 31, 1998 for the PCB operations declined by 9% from the comparable
period in the prior year as a result of a fluctuation in business from a major
customer as well as a relatively large quick-turn contract in the nine months
ended March 31, 1997 that was not recurring business.
34
<PAGE>
Consolidated gross profit for the nine months ended March 31, 1998 was
$5,961,000 (15.9% of sales), compared to $4,499,000 (13.0% of sales) for the
same period of the prior year. Gross profit of the EMS operations was
$4,244,000 for the nine months ended March 31, 1998, compared to $2,911,000
for the prior year. A change in the mix of business with lower direct material
costs as a percentage of sales contributed to the increase in EMS gross
profit, along with higher sales volume and increased productivity. For the
nine months ended March 31, 1998, gross profit from PCB operations increased
approximately 8% over gross profit for the comparable period of the prior year
despite the decline in PCB sales. This improvement is attributable primarily
to an increase in higher margin quick-turn orders, material price reductions
and processing cost savings.
Administrative and selling expenses for the nine months ended March 31, 1998
and 1997 were $4,048,000 and $3,653,000, respectively. The increase is
attributable to a key management position addition and other increases in
administrative staff. The additional week of operations included in the period
ended March 31, 1998 as a result of the Company's 52-53 week fiscal year also
contributed to the increased administrative and selling expenses in the latest
nine-month period.
In nine months ended March 31, 1998, consolidated operating income was
$962,000, compared to a consolidated operating loss of $105,000 for the same
period in the previous fiscal year.
Interest expense decreased from $844,000 in the nine months ended March 31,
1997 to $724,000 in the nine months ended March 31, 1998 because the Company
repaid its 10% Senior Notes in the amount of $5,300,000 on June 30, 1997. Of
the funds used to repay the 10% Senior Notes, $2,000,000 was borrowed on June
30, 1997 under an 8% promissory note due February 1, 1999.
Debt issue cost amortization expense of $372,000 for the nine months ended
March 31, 1997 related to the 10% Senior Notes. There is no such amortization
expense in the latest quarter because these debt issue costs were fully
amortized as of June 30, 1997.
The provision for income taxes of $430,000 for the nine months ended March
31, 1998 arises as a result of the quasi-reorganization which was effected on
June 30, 1997. Pursuant to quasi-reorganization accounting, as the portion of
net operating loss carryforwards and deferred tax benefits originating prior
to the effective date of the quasi-reorganization are utilized, the
corresponding tax effect ($430,000 for the nine months ended March 31, 1998)
is credited to paid-in capital instead of being treated as a reduction of the
provision for income taxes. Additionally, because the Company's goodwill
amortization expense is not deductible for income taxes, the provision for
income taxes in the nine months ended March 31, 1998 is greater than the
amount which would result from applying statutory tax rates to pretax income.
The net loss for the nine months ended March 31, 1998 was $204,000 or ($.01)
per share, compared to a net loss of $1,122,000 or ($.05) per share for the
nine months ended March 31, 1997.
FISCAL 1997 VS. FISCAL 1996
Sales for fiscal 1997 were $48,919,000, compared to $33,136,000 for fiscal
1996. The sales increase results primarily from the acquisition of SMTEK,
which contributed revenues of $19,267,000 in fiscal 1997 compared to
$8,668,000 in fiscal 1996. Because the acquisition of SMTEK in January 1996
was accounted for using the purchase method, SMTEK's operations prior to the
acquisition are not included in the Company's results. Sales growth at DDL
Electronics, Ltd. ("DDL-E") accounted for most of the remaining increase in
consolidated sales. DDL-E added several new customers that have contributed to
sales growth and significantly increased sales to one of its existing
customers during fiscal 1997.
Gross profit (sales less cost of goods sold) for fiscal 1997 was $6,444,000
compared to $3,642,000 for fiscal 1996. SMTEK's gross profit of $2,774,000 for
fiscal 1997, compared to $1,600,000 for fiscal 1996, accounted for $1,174,000
of the increase. Gross profit of DDL-E and Irlandus Circuits Ltd. ("Irlandus")
increased by $810,000 and $821,000, respectively, compared to fiscal 1996.
DDL-E's gross profit increased due to higher
35
<PAGE>
sales volume and the fact that DDL-E's gross profit in fiscal 1996 was
adversely impacted by a ramp-up in the workforce and higher than normal
equipment costs. Irlandus' gross profit increased primarily due to a reduction
of indirect costs. The Company's consolidated gross profit margin increased
from 11.0% in fiscal 1996 to 13.2% in fiscal 1997, due primarily to
improvement in Irlandus' gross profit margin from 11.4% in fiscal 1996 to
18.6% in fiscal 1997. The improvement in Irlandus' gross profit margin is
attributable to an increase in higher margin quick-turn orders and a reduction
of indirect costs as a percentage of sales. SMTEK's gross profit margin
declined from 18.5% in fiscal 1996 to 14.4% in fiscal 1997 due to higher
direct material costs as a percentage of sales, as well as an increase in the
number of production employees handling the higher sales volume.
Administrative and selling expenses increased from $4,175,000 for fiscal
1996 to $5,058,000 for fiscal 1997. This increase is principally the result of
the acquisition of SMTEK in January 1996.
Operating income was $118,000 for fiscal 1997, compared to operating loss of
$1,167,000 for fiscal 1996. This improvement is primarily attributable to
increased gross profit of DDL-E and Irlandus.
Net non-operating expense increased from $701,000 in fiscal 1996 to
$1,796,000 in fiscal 1997. This change is attributable to increases in debt
issue cost amortization and interest expense, as the result of debt issued in
February 1996 to finance the SMTEK acquisition. Debt issue cost amortization
expense amounted to $937,000 in fiscal 1997 compared to $281,000 in fiscal
1996. Nearly all of the fiscal 1997 debt issue cost amortization relates to
the Senior Notes that were repaid on June 30, 1997 (which is subsequent to the
year ended June 27, 1997).
During fiscal 1996, the Company recognized an income tax benefit associated
with its application for federal tax refunds as permitted under section 172(f)
of the Code. In the aggregate, the Company applied for federal tax refunds of
$2,175,000, net of costs associated with applying for such refunds. Through
June 30, 1996, the Company had received $1,871,000 of net refunds plus
interest on such refunds of $106,000, and has recognized as an income tax
benefit $1,110,000 net of certain expenses. Because the tax returns underlying
these refunds are subject to audit by the Internal Revenue Service and a
portion of the refunds could be disallowed, the Company has not yet recognized
a tax benefit for the remainder of the refunds received to date, or for the
refunds still expected to be received. No additional refunds were received
during fiscal 1997. Nonetheless, the Company feels that its claim for refund
and carry back of net operating losses can be substantiated and is supported
by law, and that the Company will ultimately collect and retain a substantial
portion of the refunds applied for.
The net loss for fiscal 1997 was $1,678,000, or ($0.07) per share, compared
to net income of $1,598,000, or $0.09 per share, for fiscal 1996. Net income
for fiscal 1996 includes an extraordinary gain on debt extinguishment of
$2,356,000 associated with the reduction of the Company's outstanding
obligations to certain former officers, employees and directors in March 1996,
as further described in Note 8 to the Consolidated Financial Statements of the
Company.
FISCAL 1996 VS. FISCAL 1995
Sales for fiscal 1996 were $33,136,000, compared to $29,576,000 for fiscal
1995. Included in fiscal 1995 sales are revenues from A.J. and Aero Oregon.
A.J.'s operations were discontinued and ultimately liquidated in fiscal 1995,
and Aero Oregon's manufacturing facility and related assets were sold in
December 1994. Aero Oregon and A.J. represented $8,765,000 of fiscal 1995
sales. After excluding sales of Aero Oregon and A.J. from fiscal 1995
revenues, sales in fiscal 1996 increased $12,325,000 over sales of fiscal
1995. Of this increase, $8,668,000 represents revenues of SMTEK, which was
acquired in January 1996. Sales growth at DDL-E accounted for most of the
remaining increase in consolidated sales. DDL-E added several new turnkey
customers that contributed to sales growth in fiscal 1996 and reduced the
relative volume of sales made on consignment basis. For "turnkey" sales, DDL-E
provides all materials, labor and equipment associated with producing the
customers' products, while "consigned" sales are those in which the customers
furnish the materials and DDL-E provides only the labor and equipment to
manufacture the product. For DDL-E, material costs typically represent
36
<PAGE>
about 70% of the turnkey method's sales price. Thus, a shift in order mix from
consigned to turnkey can result in higher sales but lower gross profit
margins.
Gross profit for fiscal 1996 improved by $582,000 compared to fiscal 1995.
The acquisition of SMTEK in January 1996 accounted for $1,600,000 of the
increase, offset by a decline in gross profit of the Northern Ireland
operations of approximately $800,000. Gross profit as a percentage of sales
declined from 14.1% (after excluding the operations of Aero Oregon and A.J.)
for fiscal 1995 to 11.0% for fiscal 1996. DDL-E's gross profit declined by
$705,000, and its gross profit as a percentage of sales declined from 14.5% in
fiscal 1995 to 5.9% in fiscal 1996 due to a decrease in consignment sales and
an increase in turnkey sales volume. Also, the cost of direct materials as a
percent of turnkey sales in fiscal 1996 was higher than in fiscal 1995. An
increase in the number of production employees handling the higher sales
volume and additional costs incurred for previously deferred equipment
maintenance further contributed to the decline in DDL-E's gross profit
percentage. Gross profit of Irlandus decreased by $88,000 and its gross profit
percentage declined from 12.7% to 11.4% from 1995 to 1996. Irlandus' gross
profit declined primarily due to changes in product mix.
The operating loss for fiscal 1996 improved by $3,803,000, from a loss in
fiscal 1995 of $4,970,000 to a loss of $1,167,000 in fiscal 1996. The fiscal
1996 operating loss includes goodwill amortization expense of $634,000 arising
from the acquisition of SMTEK in January 1996. After giving effect to the
exclusion of Aero Oregon and A.J. from fiscal 1995 operating results, the
improvement in the operating loss was $1,059,000. A substantial portion of
fiscal 1995's operating expenses were attributable to accrual of restructuring
charges associated with the discontinuance of A.J.'s operations and disposal
of its assets. The restructuring charge of $1,533,000 in fiscal 1995 was
comprised of a writedown of assets to liquidation value, accrual of expected
lease termination costs and provision for operating expenses through A.J.'s
ultimate and final disposal.
Net non-operating income (expense) declined from $2,604,000 in fiscal 1995
to ($701,000) in fiscal 1996. This change is attributable principally to a
non-recurring gain of $3,317,000 on the sale of assets of Aero Oregon in
fiscal 1995.
As discussed further above, during fiscal 1996 the Company recognized an
income tax benefit of $1,110,000 net of certain expenses associated with its
application for federal tax refunds as permitted under section 172(f) of the
Internal Revenue Code.
For fiscal 1995, the loss before extraordinary item was $2,366,000, or
($0.15) per share. Excluding the operations of A.J. and Aero Oregon and the
non-recurring gain on the sale of Aero Oregon's assets, fiscal 1995 would have
shown a loss before extraordinary item of $2,764,000. For fiscal 1996, the
loss before extraordinary item was $758,000, or ($0.04) per share, which
includes the effect of the $1,110,000 income tax benefit discussed above.
Net income for fiscal 1996 was $1,598,000, or $0.09 per share, compared to
$75,000, or $0.00 per share, for fiscal 1995. Net income for fiscal 1996
includes an extraordinary gain on debt extinguishment of $2,356,000 associated
with the reduction of the Company's outstanding obligations to certain former
officers, employees and directors in March 1996, as further described in Note
8 to the Consolidated Financial Statements of the Company. Net income for
fiscal 1995 includes an extraordinary gain on debt extinguishment of
$2,441,000 associated with the retirement of the Company's senior bank debt in
December 1994.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130") in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and
its components in financial statements. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt SFAS 130 in the
first quarter of its fiscal year ending June 30, 1999. Management believes
that the adoption of SFAS 130 will not have a material impact on the Company's
financial position or results of operations.
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The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in June 1997. SFAS 131 establishes standards for the way public business
enterprises are to report information about operating segments in annual
financial statements and requires enterprises to report selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. It replaces the "industry
segment" concept of Statement of Financial Accounting Standards No. 14,
"Financial Reporting for Segments of a Business Enterprise", with a
"management approach" basis for identifying reportable segments. SFAS 131 is
effective for financial statements for fiscal years beginning after December
15, 1997. The Company will adopt SFAS 131 in its fiscal year ending June 30,
1999. Management believes that the adoption of SFAS 131 will not have a
material impact on the Company's financial position or results of operations.
INFLATION
Changes in product mix from year to year and highly competitive markets make
it difficult to accurately assess the impact of inflation on profit margins.
Management generally believes that business has not been affected materially
and adversely by inflationary increases in costs and expenses. On the other
hand, the current low inflationary environment has inhibited the Company's
ability to increase the price of its products and services.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are its cash and cash
equivalents, which amounted to $2,019,000 at March 31, 1998, and its bank
lines of credit. During the nine months ended March 31, 1998, cash and cash
equivalents decreased by $2,699,000. This decrease consisted of cash used by
operating activities of $382,000, capital expenditures of $431,000, and net
reductions of long-term debt of $3,995,000, partially offset by cash proceeds
from the sale of assets of $16,000, bank lines of credit of $1,883,000,
government grants of $123,000 and the effect of exchange rate changes on cash
of $87,000.
Components of operating working capital increased by $2,837,000 during the
first nine months of fiscal 1998, comprised of a $1,251,000 increase in costs
and earnings in excess of billings on uncompleted contracts, a $309,000
increase in prepaid expenses, and a $2,290,000 decrease in accounts payable
and other accrued liabilities, partially offset by a $324,000 decrease in
accounts receivable and a $689,000 decrease in inventories.
The Company has an accounts receivable-based working capital bank line of
credit for SMTEK which provides for borrowings of up to $2,500,000 at an
interest rate of prime (8.50% at March 31, 1998) plus 1.25%. At March 31,
1998, borrowings outstanding under this credit facility amounted to
$1,763,000. The Company also has a credit facility agreement with Ulster Bank
Markets for its Northern Ireland operations. This agreement includes a working
capital line of credit of 3,000,000 pounds sterling (approximately
$5,000,000), and provides for interest on borrowings at the bank's base rate
(7.59% at March 31, 1998) plus 1.50%. At March 31, 1998, borrowings
outstanding under this credit facility amounted to $1,509,000.
The Company's EMS and PCB fabrication businesses require continuing
investment in plant and equipment to remain competitive. In recent years,
however, the Company's financial position has severely restricted its ability
to make capital improvements in its facilities. Capital expenditures during
fiscal 1997, 1996 and 1995 were approximately $2,210,000, $1,599,000 and
$643,000, respectively. The Company anticipates it will need to increase its
capital spending in the coming years in order to stay competitive as
technology evolves. Capital expenditures for the nine months ended March 31,
1998 were $668,000. Management estimates that capital expenditures of as much
as $2 million may be required in fiscal 1998. Of that amount, the substantial
majority is expected to be financed by a combination of capital leases,
secured loans and foreign government grants.
The Company incurred negative cash flow from operating activities of
$382,000 during the nine months ended March 31, 1998. The achievement of
sustained operating profitability is the most significant internal factor
38
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to ensure the Company's long-term viability. No assurance can be given that
the Company will sustain operating profitability or that cash generated from
non-operating sources will be adequate to fund future cash needs. As a
necessary step to ensure the Company's increased profitability, the Company is
actively pursuing strategic merger and acquisition candidates that will help
ensure growth of the Company in the markets and industries in which it has
expertise. No assurance can be given that any such merger or acquisition will
occur.
With the exception of the five quarters ended March 31, 1998, during which
the Company generated cumulative operating income of $1,558,000, the Company
has incurred operating losses for a number of years. Operating losses could
return and persist until such time as sales increase to a level sufficient to
cover costs and operating expenses. No assurance can be given as to whether or
when sales increases may be achieved. Sales increases will depend in part upon
strengthening the Company's sales and marketing functions for its existing
operations and improving its price competitiveness in the EMS industry by
achieving economies of scale in the procurement of electronic components.
Management believes that the Company's cash resources and borrowing capacity
on its working capital lines of credit are sufficient to fund operations for
at least the next 12 months.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this Proxy Statement as to the Company's outlook for
sales, operations, capital expenditures and other amounts, budgeted amounts
and other projections of future financial or economic performance of the
Company, and statements of the Company's plans and objectives for future
operations, are "forward looking" statements and are being provided in
reliance upon the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Important factors that could
cause actual results or events to differ materially from those projected,
estimated, assumed or anticipated in any such forward-looking statements
include the factors identified as "Risk Factors" elsewhere herein.
39
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JOLT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTORY STATEMENT
Jolt is an independent provider of customized integrated EMS, including
turnkey electronic assembly and manufacturing management services, to OEMs in
the electronics industry. Jolt's electronic manufacturing services consist
primarily of the manufacture of complex PCB assemblies using SMT and PTH
interconnection technologies. In addition to assembly, turnkey manufacturing
management also involves procurement and materials management, as well as
consultation on printed circuit board design and manufacturability.
SMT and PTH print circuit board assemblies are printed circuit boards on
which various electronic components, such as integrated circuits, capacitors,
microprocessors and resistors have been mounted. These assemblies are key
functional elements of many types of electronic products. Circuit board
assemblies produced by Jolt generally require greater manufacturing expertise
and have shorter runs and delivery cycles than mass produced PCBs and
therefore typically have higher profit margins.
Jolt's annual and quarterly operating results are affected by a number of
factors, including the level and timing of customer orders, fluctuations in
material costs and the mix of material costs versus labor and manufacturing
overhead costs. The level and timing of orders placed by a given customer vary
due to the customer's attempts to balance its inventory, design changes,
changes in its manufacturing strategy, acquisitions or consolidations
affecting the customer, and variation in demand for the customer's products
due to, among other things, product life cycles, competitive conditions and
general economic conditions. In the past, changes in orders from customers
have had a significant effect on results of operations due to corresponding
changes in the level of overhead absorption. Other factors affecting Jolt's
annual and quarterly operating results include price competition, Jolt's level
of experience in manufacturing a particular product, the degree of automation
used in the assembly process, the experiences achieved by Jolt in managing
inventories and fixed assets, the timing of expenditures in anticipation of
increased sales, customer product delivery requirements and shortages of
components or labor.
Operating results are also affected by the levels of capacity utilization,
indirect labor, and selling, general and administrative expenses. Accordingly,
gross margins and operating income margins have generally improved during
periods of high volume and high capacity utilization. Jolt's operating results
are also affected by the degree of turnkey manufacturing. Turnkey
manufacturing currently represents an increasing proportion of Jolt's sales.
Turnkey projects, in which Jolt procures some or all of the components
necessary for production, typically generate higher net sales and higher gross
profit amounts but lower gross profit percentages compared to consignment
projects due to the inclusion in Jolt's operating results of sales and costs
associated with the purchase and sale of components. During the past few
years, Jolt has assembled products with varying degrees of material content,
causing Jolt's gross margin to fluctuate. In addition, the degree of start-up
costs and inefficiencies associated with new product launches has affected
Jolt's gross margin.
Jolt has continued to depend upon a relatively small number of customers for
a significant percentage of its net revenue. In the past, some of Jolt's
customers have significantly reduced or delayed the volume of manufacturing
services ordered from Jolt. There can be no assurance that present or future
customers will not terminate their manufacturing relationships with Jolt or
significantly change, reduce or delay the amount of manufacturing services
ordered from Jolt. Any such termination of a manufacturing relationship or
change, reduction or delay in orders could have an adverse effect on Jolt's
results of operations or financial condition.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net sales of certain items in the statement of income. The financial
information and the discussion below should be read in conjunction with the
Financial Statements and Notes thereto:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------- ------------------
1997 1996 1995 1998 1997
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 52.1 60.0 59.5 46.5 56.9
----- ----- ----- --------- ---------
Gross profit.................... 47.9 40.0 40.5 53.5 43.1
Selling, general and administra-
tive........................... 14.1 13.9 19.8 9.5 12.0
----- ----- ----- --------- ---------
Operating income................ 33.8 26.1 20.7 44.0 31.1
Other expense, including inter-
est............................ (4.0) (5.2) (8.5) (3.5) (6.0)
----- ----- ----- --------- ---------
Income before income taxes...... 29.8% 20.9% 12.2% 40.5% 25.1%
===== ===== ===== ========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 VS. THREE MONTHS ENDED MARCH 31, 1997
Net Revenue. Net revenue for the three months ended March 31, 1998 increased
by $228,000, or 44.0%, over the comparable period of the prior year. This
increase is mainly attributable to Jolt's focus on higher-complexity
customers, such as suppliers of aeronautical controls. In addition, there was
an increase in the volume of turnkey assemblies produced for a medical
equipment supplier.
Gross Margin. Gross margin increased from 43.1% for the three months ended
March 31, 1997 to 53.5% for the latest quarter, despite higher turnkey
revenues, which typically carry lower gross margins. The improvement in gross
margin during the first quarter of fiscal 1998 is primarily the result of
Jolt's focus on higher value-added products with increased complexity,
improvements in manufacturing efficiencies, and better absorption of fixed
costs due to the higher sales.
Selling, General and Administrative. Selling, general and administrative
expenses for the first quarter of fiscal 1998 were $72,000, or 9.5% of sales,
compared to $62,000, or 12.0% of sales, for the same period in fiscal 1997.
While the absolute dollar increase in selling, general and administrative
expenses was primarily the result of increased expenditures to support the
higher sales volume, the decrease in percentage of sales is due to better
absorption resulting from the increase in sales.
FISCAL 1997 VS. FISCAL 1996
Net Revenue. Over the past several years, Jolt's net sales have grown
significantly, primarily due to an increasing trend toward outsourcing in the
electronics industry, and Jolt's close relationships with its key customers.
Net revenue for fiscal 1997 increased by $368,000, or 15.6%, from fiscal 1996.
Jolt's largest customer during the past three fiscal years has been J-Tech,
averaging approximately 25% of Jolt's total net revenue. J-Tech has
experienced success with a new localized pager it has developed and
distributes to the restaurant industry. Jolt actively participates in product
design and turnkey manufacturing services for J-Tech. Jolt also provides
electronic printed circuit assemblies to Coulter Scientific for its medical
devices, representing approximately 15-20% of Jolt's total net revenue. In
addition, Jolt has had a long-standing relationship with International
Business Machines Corporation (IBM), particularly its advanced product
development activity in Fort Lauderdale, Florida. Jolt regularly participates
in the design, development and manufacture of specialty boards for IBM. This
total net revenue represents approximately 10-15% of Jolt's annual net sales.
41
<PAGE>
Gross Margin. Cost of sales includes the cost of materials as well as the
cost of labor and manufacturing overhead. Jolt's various customers typically
require different manufacturing services, resulting in different gross margins
depending upon (i) the mix of material costs versus manufacturing costs, (ii)
Jolt's experience in manufacturing a particular product, (iii) size and
complexity of the printed circuit board, (iv) the specified manufacturing
turnaround time and (v) the extent of design and engineering services
required.
Jolt typically realizes better gross margins on manufacturing-based revenue
than it does on materials-based revenue and better gross margins on
manufacturing products with which it has more experience due to increased
efficiencies achieved over time. Gross margins also fluctuate due to changes
in material costs.
Jolt's gross profit margin increased from 40% for fiscal 1996 to 47.9% for
fiscal 1997. The improvement in gross profit during fiscal 1997 is primarily
the result of better absorption of fixed costs due to higher sales and
improvements in manufacturing efficiencies.
Jolt's margins are also affected by the degree of turnkey manufacturing, as
these projects typically generate lower profit percentages than consignment
projects due to the inclusion in Jolt's operating results of sales and costs
associated with the purchase and sale of components. Turnkey manufacturing
currently represents an increasing proportion of Jolt's sales and Jolt
anticipates that this trend will continue as it increases the production
volume of existing turnkey projects and as additional contracts are obtained.
Selling, General and Administrative. Selling, general and administrative
expenses for fiscal 1997 increased to $384,000, or 14.1% of sales, from
$327,000, or 13.9% of sales, for fiscal 1996. The absolute dollar increase in
selling, general and administrative expenses was primarily the result of
increased expenditures to support higher sales volume.
Income Taxes. Jolt is currently taxed as an "S Corporation" under the
applicable provisions of the Code. Accordingly, Jolt's taxable income or loss
is reported by its shareholders in their individual returns, and Jolt does not
pay any federal income tax. Jolt's S Corporation election would be terminated
upon consummation of the Merger.
FISCAL 1996 VS. FISCAL 1995
Fiscal year 1996 was a period of rapid growth for Jolt as net revenue
increased 29.6% over fiscal 1995 to $2.35 million. The increase was due
primarily to manufacturing services provided to established customers, the
addition of two new customers and growth in Jolt's turnkey business.
Jolt's gross profit increased from $735,000 for fiscal 1995 to $941,000 for
fiscal 1996, due primarily to the increase in sales volume. Operating income
increased by 62.7% during fiscal 1996, to $615,000, from $378,000 during
fiscal 1995.
Selling, general and administrative expenses for fiscal 1996 decreased to
$327,000 from $358,000 and decreased as a percentage of sales revenue from
19.8% to 13.9%. The percentage decrease in expenses was due to increases in
sales volume that outpaced Jolt's growth in administrative and operating
expenses. This reflects Jolt's strategy of seeking sales growth while
maintaining or reducing operating expenses as a percentage of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Jolt's principal source of liquidity has been cash and cash equivalents,
which amounted to $929,000 at March 31, 1998. At March 31, 1998, working
capital was $1,078,000, an increase of 29.4% from the end of fiscal 1997.
Further expansion of Jolt's operations will require greater levels of capital
for the purchase of equipment and inventory. Jolt believes that current cash
balances and funds provided by operations will be sufficient to satisfy
working capital requirements for the next twelve months.
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<PAGE>
In addition, Jolt currently has two unsecured promissory notes payable to
Mr. Wheeler in the aggregate amount of $1.625 million (the "Shareholder
Loans"), comprised of an unsecured note in the amount of $100,000 bearing
interest at 8.25% and an unsecured loan in the amount of $1.525 million
bearing interest at the applicable federal rate plus 0.5%. Pursuant to an
agreement among the Jolt Shareholders, the Shareholder Loans and accrued
interest thereon will be converted into 10,660 shares of Jolt Common Stock on
or before the consummation of the Merger.
Jolt currently has no outstanding bank debt or outstanding credit
facilities. However, in the event that additional funding became necessary,
Jolt believes that it would be able to obtain such financing, since its assets
are presently unencumbered.
CAUTIONARY STATEMENT AS TO FORWARD-LOOKING INFORMATION
Statements contained in this Proxy Statement as to Jolt's outlook for sales,
operations, capital expenditures and other amounts, budgeted amounts and other
projections of future financial or economic performance of Jolt, and
statements of Jolt's plans and objectives for future operations, are "forward
looking" statements and are being provided in reliance upon the "safe harbor"
provisions of the Reform Act. Important factors that could cause actual
results or events to differ materially from those projected, estimated,
assumed or anticipated in any such forward-looking statements include the
factors identified as "Risk Factors" elsewhere herein.
CERTAIN INFORMATION REGARDING THE COMPANY
The Company manufactures PCBs, also called printed wire boards ("PWBs"), for
use primarily in the computer, communications and instrumentation industries.
The Company also is an independent provider of EMS for electronic equipment
manufacturers. Its PCB facilities are located in Northern Ireland and
primarily serve customers in Western Europe. Its EMS facilities are located in
Northern Ireland and Southern California. The Company's principal executive
offices are located at 2151 Anchor Court, Newbury Park, California 91320,
telephone (805) 376-9415.
All of the Company's products and services are "customized" insofar as they
are produced only after the Company has contracted for their design and sale.
The Company relies on customer specifications in manufacturing products. Such
specifications may be developed by the customer alone or may involve some
assistance provided by the Company. Customers submit requests for quotations
on each project. The Company prepares bids based on estimates of its costs.
EUROPEAN PCB OPERATIONS
The Company conducts its PCB business through a wholly-owned subsidiary,
Irlandus Circuits Limited ("Irlandus").
The PCB Industry. PCBs range from simple single- and double-sided boards to
boards with more than twenty layers. When joined with electronic components in
an assembly process, they comprise the basic building blocks of electronic
equipment. PCBs consist of fine lines of a conductive material, such as
copper, which are bonded to a non-conductive panel, typically laminated epoxy
glass. The conductive pathways in a PCB form electrical circuits and replace
wire as a means of connecting electronic components.
On technologically advanced multilayer boards, conductive pathways between
layers are connected with traditional plated through-holes and may incorporate
surface mount technology. "Through-holes" are holes drilled entirely through
the board that are plated with a conductive material and constitute the
primary connection between the circuitry on the different layers of the board
and the electronic components attached to the boards later. "Surface mount"
boards are boards on which electrical components are soldered instead of being
inserted into through-holes.
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<PAGE>
Although much more complex and difficult to produce, surface mount boards
can substantially reduce wasted space associated with through-hole technology
and permit greatly increased surface and inner layer densities. Single-sided
PCBs are used in electronic games and automobile ignition systems, while
multilayer PCBs find use in more advanced applications such as computers,
office equipment, communications, instrumentation and defense systems.
The development of increasingly sophisticated electronic equipment, which
combines higher performance and reliability with reduced size and cost, has
created a demand for greater complexity, miniaturization and density in
electronic circuitry. In response to this demand, multilayer technology is
advancing rapidly on many fronts, including the widespread use of SMT. More
sophisticated boards are being created by decreasing the width of the tracks
on the board and increasing the amount of circuitry that can be placed on each
layer. Fabricating advanced multilayer PCBs requires high levels of capital
investment and complex, rapidly changing production processes.
Since the mid-1980s, the Company has increasingly focused on the fabrication
of advanced multilayer PCBs. Management believes that the market for these
boards offers the opportunity for more attractive margins than the market for
less complex single and double-sided boards.
As the sophistication and complexity of PCBs increase, yields typically
fall. Historically, the Company relied on tactical quality procedures, in
which defects are assumed to exist and inspectors examine products lot by lot
and board by board to identify deficiencies. This traditional approach to
quality control is not adequate, however, in an advanced multilayer PCB
fabrication environment. Irlandus is now striving to minimize the occurrence
of product defects.
Market demand for PCBs historically has been driven by end-user product
demand. Market supply has followed a classic "boom and bust" cycle because
there are few barriers to entry. High margins triggered a flood of supply to
the market in the 1980s, which drove prices down until significant industry
consolidation occurred in the early 1990s.
Competition among PCB manufacturers is based on price, quality, order
turnaround speed and technical differentiation within the manufacturing
process. Virtually every order is bid competitively. The profit of an
individual manufacturer typically depends on its throughput mix; premium
panels generate higher margins. Both Irlandus and DDL-E have achieved "ISO
9002" certification, which is increasingly necessary to attract business.
Irlandus. Irlandus is located in Craigavon, Northern Ireland, where it
produces high-quality, high- technology, multilayer PCBs. Established in 1972
by Andrus Circuits, a German company, it was acquired by the Company in 1984
and currently employs approximately 160 people. Irlandus has a base of
approximately 150 active customers throughout Europe. In fiscal 1997,
Irlandus' largest customer accounted for approximately 22% of its total
revenues. No other customer represented more than 10% of Irlandus' fiscal 1997
revenues. Over 80% of its sales are made by a direct sales force; the
remainder are effected by independent sales representatives.
Since 1989, Irlandus has struggled to compete effectively in a marketplace
characterized by excess supply. In fiscal 1997, it did achieve an operating
profit, which management attributes to a new strategic focus on the high-
technology, prototype and premium fast-service end of the multilayer PCB
market. There can be no assurance, however, that Irlandus will continue to
profit from its implementation of this strategy.
EMS CONTRACTS
The Company conducts its EMS business in Western Europe through DDL-E and in
the United States through SMTEK.
The EMS Industry. EMS contracts in the United States are estimated to
generate more than $18 billion in revenues annually. The EMS market has three
segments: high-volume, medium volume and low volume. The
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<PAGE>
Company focuses on the medium-volume segment. Manufacturers in this segment
are highly fragmented and competitive. Customer bases tend to be highly
concentrated, with two or three customers typically accounting for most of the
typical manufacturer's revenue.
Two principal assembly techniques are employed in providing higher-margin,
higher-complexity contract manufacturing in the medium-volume EMS market
segment: SMT, which accounts for the majority of manufacturing, and through-
hole technology. Management believes that the medium-volume EMS market is
continuing to move toward SMT as the preferred manufacturing technique, mainly
because semiconductors have continued to decline in size, thereby lowering
manufacturing tolerances.
Competition in this market segment is driven by service, order turnaround
time and quality. Margins tend to be slightly higher here than in the high-
volume segment because of greater complexity and the generally higher price
associated with specialty products. Also, the customers in this segment tend
to be smaller firms, with less bargaining power. Such customers include
specialized equipment providers to the financial services, computer hardware,
medical services and telecommunications industries, among others.
DDL-E. DDL-E provides turnkey EMS using both SMT and through-hole
technologies. Under the turnkey process, DDL-E procures customer-specified
components from suppliers, assembles the components onto PCBs and performs
post-assembly testing. DDL-E provides EMS primarily for original equipment
manufacturers located in Western Europe and sells system assembly and
subassembly services to the same customer base. It does not fabricate any of
the components or PCBs used in these processes. Instead, after acceptance of
an order, it procures the necessary components from distributors.
In the past, DDL-E has procured a portion of its PCB requirements from its
affiliate, Irlandus, at prevailing commercial prices. Located approximately
two miles from Irlandus' facilities in Craigavon, Northern Ireland, DDL-E was
founded by the Company in 1989 to complement Irlandus' PCB business by adding
value to boards at the next level of manufacturing. DDL-E has traditionally
focused on customers who are major OEMs in global businesses across a wide
range of industries. Its customer base is highly concentrated; in fiscal 1997,
five customers accounted for 77% of sales. All of its sales are made by its
direct sales force.
Historically, there has been a high level of interdependence in the EMS/OEM
relationship. Since contracted manufacturing may be a substitute for all or
some portion of a customer's captive EMS capability, continuous communication
between the manufacturer and the customer is critical. To facilitate such
communication, DDL-E maintains a customer service department whose personnel
work closely with the customer throughout the assembly process. Engineering
and service personnel coordinate with the customer on product implementation,
thereby providing feedback on issues such as ease of assembly and anticipated
production lead times. Component procurement is commenced after component
specifications are verified and approved sources are confirmed with the
customer. Concurrently, assembly routing and procurement for conformance with
workmanship standards are defined and planned.
"In circuit" test fixturing also is designed and developed. In-circuit tests
are normally performed on all assembled circuit boards for turnkey projects.
Such tests verify that components have been properly inserted and meet certain
functional standards and that electrical circuits are properly completed. In
addition, under protocols specified by the customer, DDL-E performs customized
functional tests designed to ensure that the board or assembly will perform
its intended function. Company personnel monitor all stages of the assembly
process in an effort to provide flexible and rapid responses to the customer's
requirements, including changes in design, order size and delivery schedule.
The materials procurement element of DDL-E's turnkey services consists of
the planning, purchasing, expediting and financing of the components and
materials required to assemble a PCB or system-level assembly. Customers have
increasingly required DDL-E and other independent providers of EMS to purchase
all or some components directly from component manufacturers or distributors
and to finance the components and materials. In establishing a turnkey
relationship with an independent EMS provider, a customer must incur expenses
in
45
<PAGE>
order to qualify the EMS provider (and, in some cases, the provider's sources
of component supply), refine product design and EMS possesses and develop
mutually compatible information and reporting systems. With this relationship
established, management believes that customers experience significant
difficulty in expeditiously and effectively reassigning a turnkey contract to
a new assembler or in taking on the project themselves.
While the interdependence between EMS providers and OEMs may be a source of
stability in DDL-E's customer base, it also is an obstacle when DDL-E seeks to
attract new customers.
SMTEK. SMTEK is an EMS provider, specializing in SMT design and assembly of
circuit boards. Its operations range from analysis and design to complex
manufacturing and test services. Its services are marketed to the military,
medical, avionics, industrial and space industries and for high-end commercial
applications.
SMTEK's core competence includes: (i) mechanical thermal and structural
engineering analysis and design of printed circuit boards; (ii) full
procurement of all materials and components; and (iii) full in-circuit and
functional testing capabilities. Such operations are integrated with a
contract manufacturing capability that relies in substantial part upon factory
automation. SMTEK employs approximately 155 persons and conducts its
operations in a 45,000-square-foot facility located in Newbury Park,
California.
SMTEK was founded in 1986 by Mr. Horton, who became the Company's President
and Chief Executive Officer when the Company acquired SMTEK in January 1996.
Over the years SMTEK has focused on supplying circuit board assemblies to the
aerospace and avionics industry. Management believes that SMTEK's automated
production processes and design capabilities are a competitive advantage. Such
automated processes rely upon SMT, an unpatented design and production
technique believed by management to be less expensive and more efficient than
component through-hole insertion. SMTEK competes against companies that are
much larger and better capitalized than the Company. In the past, Mr. Horton
was able to increase the revenues of SMTEK by focusing on contracts of much
smaller size than those sought actively by its principal competitors. SCI
Systems is the leading firm in the EMS industry. Management believes that the
Company's largest direct competitor is Solectron Corporation.
SMTEK's backlog at June 30, 1997 amounted to approximately $15 million in
orders to be filled within six months under contracts with approximately 40
customers.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND YEAR FIRST
BUSINESS EXPERIENCE INCLUDING ELECTED A
NAME SERVICE ON OTHER BOARDS AGE DIRECTOR
---- ----------------------------- --- ----------
<C> <S> <C> <C>
NOMINEE FOR ELECTION TO CLASS I DIRECTOR FOR TERM EXPIRING IN
1999:
Charlene A. Gondek Director of Jolt Technology, Inc., a 36 1997
privately-held electronic manufacturing
services company
NOMINEE FOR ELECTION TO CLASS II DIRECTOR FOR TERM EXPIRING IN
2000:
Gregory L. Horton Chief Executive Officer, President and 41 1996
Chairman of the Board of Directors, DDL
Electronics, Inc.
CLASS III DIRECTORS TO CONTINUE IN OFFICE UNTIL THE 1998
ANNUAL MEETING:
Karen Beth Brenner President, Fortuna Advisors Inc., an 44 1996
investment advisory firm; director, Krug
International Corp. and Creative Bakeries,
Inc.
Richard K. Vitelle Vice President-Finance and Administration, 44 1996
Chief Financial Officer, Treasurer and
Secretary, DDL Electronics, Inc.
Thomas M. Wheeler President, TMW Enterprises, Inc., an 70 1997
investment holding company; director, Jolt
Technology, Inc.
</TABLE>
46
<PAGE>
Ms. Gondek was appointed a director on June 30, 1997 pursuant to an
agreement between the Company and Mr. Wheeler whereby Mr. Wheeler loaned the
Company $2,000,000. She serves as a member of the Compensation Committee of
the Board. She served as President of Jolt from 1992 to 1996 and has managed
her own investments and rental properties since 1996. Since 1992, she has been
a director and shareholder of Jolt.
Mr. Horton became the Company's President and Chief Executive Officer in
January 1996, following the Company's acquisition of SMTEK. He was appointed a
Class II Director in February 1996 and was appointed Chairman of the Board in
July 1997. He has also served as the President and Chief Executive Officer of
SMTEK since 1986.
Ms. Brenner was appointed a Class III Director of the Company in July 1996
and serves as a member of the Audit Committee and Compensation Committee.
Since January 1996 she has served as president of Fortuna Advisors, Inc., the
successor to Karen Beth Brenner, Registered Investment Advisor, a sole
proprietorship which she operated from 1984 to 1995. Ms. Brenner is also a
director of Krug International Corp. and Creative Bakeries, Inc., both Nasdaq-
traded companies.
Mr. Vitelle, a certified public accountant, was appointed Vice President,
Chief Financial Officer and Treasurer in January 1996 and was elected a Class
III Director in July 1996. From 1993 to 1996, Mr. Vitelle served as Chief
Financial Officer of InVitro International, a publicly held company engaged in
the development and marketing of in vitro diagnostic testing systems. From
1992 to 1993, he served as Chief Financial Officer of Chapin Medical Company,
a privately-held distributor of critical care pharmaceutical products. From
1986 to 1992, Mr. Vitelle served as Corporate Controller of the Company.
Mr. Wheeler was appointed a Class III Director on June 30, 1997 pursuant to
an agreement between the Company and Mr. Wheeler whereby Mr. Wheeler loaned
the Company $2,000,000. He serves as a member of the Audit Committee and
Compensation Committee. From 1970 until 1995, Mr. Wheeler was the founder,
chairman of the board and sole stockholder of Electro-Wire Products, Inc., a
manufacturer of automotive electrical power distribution systems. Since 1995,
Mr. Wheeler has been president of TMW Enterprises, Inc., a private investment
holding company. Since 1992, he has also been a director and shareholder of
Jolt.
Melvin Foster and Robert G. Wilson, whose terms of office expire at the
Annual Meeting, are not standing for reelection. Pursuant to a resolution of
the Board adopted at its meeting on November 25, 1997, the size of the Board
will be reduced from seven to five members upon the expiration of the current
terms of office of Messrs. Foster and Wilson.
Bernee D.L. Strom, who was elected a Class II Director in May 1995, resigned
from the Board of Directors effective June 30, 1997.
BOARD MEETINGS AND COMMITTEES
The Board of Directors held 13 meetings during fiscal 1997. The Company has
standing Audit and Compensation Committees of the Board. All of the directors
attended more than 75% of the Board meetings and meetings of committees of
which they are members.
The Audit Committee consists of Ms. Brenner, Mr. Wilson and Mr. Wheeler. Its
primary functions are to review with the independent auditors and management
the results of the annual financial statement audit, and to review the status
of internal accounting controls. The Audit Committee held one meeting during
fiscal 1997. In addition, the Audit Committee met informally, as appropriate,
in conjunction with regular meetings of the Board.
The Compensation Committee consists of Ms. Brenner, Ms. Gondek, Mr. Foster,
Mr. Wilson and Mr. Wheeler. The Compensation Committee establishes the levels
of compensation of the directors and senior management and also administers
the Company's option and incentive plans (except the 1996 Non-Employee
Directors Stock Option Plan). The Compensation Committee held six meetings
during fiscal 1997. The report of the Compensation Committee begins on page 50
of this Proxy Statement.
47
<PAGE>
DIRECTORS' FEES AND OTHER TRANSACTIONS
Directors do not receive cash compensation for their services on the Board
except for reimbursement of travel expenses.
Pursuant to the 1996 Non-Employee Directors Stock Option Plan (the
"Directors Plan"), annually on July 1 each non-employee director is
automatically granted, without further action by the Board, a stock option to
purchase 30,000 shares of the Company's Common Stock. The exercise price per
share of all options granted under the Director Plan is equal to 100% of the
fair market value of the Common Stock at the time of grant. Under the terms of
the Directors Plan, each option granted becomes exercisable six months after
the grant date. Each option grant has a ten-year term. In July 1996 options
covering a total of 120,000 shares were granted to four non-employee directors
at an option price of $1.63 per share, and in July 1997 options covering a
total of 150,000 shares were granted to five non-employee directors at an
option price of $1.06 per share.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under Section 16(a) of the Exchange Act, the directors and executive
officers of the Company and persons who own more than 10% of the Company's
Common Stock ("statutory insiders") are required to file reports of their
ownership of the Company's Common Stock on Form 3 and any subsequent changes
in that ownership on Form 4 or Form 5 with the SEC and the NYSE.
To the Company's knowledge, based solely upon its review of the copies of
such reports required to be furnished to the Company during or with respect to
fiscal 1997, the Company believes that all Section 16(a) filing requirements
applicable to its statutory insiders during or for such fiscal year were
satisfied.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation paid or accrued by the
Company, as well as certain other compensation, for fiscal 1997, fiscal 1996
and fiscal 1995, to the Company's Chief Executive Officer and to each of its
other executive officers whose compensation exceeded $100,000 for fiscal 1997
(together with the Chief Executive Officer, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ AWARDS:
NAME AND OTHER ANNUAL STOCK
PRINCIPAL POSITIONS(1) YEAR SALARY BONUS(2) COMPENSATION OPTIONS(#)
---------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gregory L. Horton............. 1997 $150,000 $97,000 (3) 100,000
Chairman, President and 1996 69,000 24,000 (3) 400,000
Chief Executive Officer 1995 -0- -0- -0-
Richard K. Vitelle............ 1997 $123,000 $37,000 (3) 200,000
Vice President Finance 1996 50,000 -0- (3) 185,000
and Administration, 1995 -0- -0- -0-
Chief Financial Officer and
Secretary
</TABLE>
- --------
(1) Mr. Horton joined the Company as Chief Executive Officer and President on
January 12, 1996. Mr. Vitelle joined the Company as Vice President-
Finance and Administration and Chief Financial Officer on January 25,
1996.
(2) Amounts shown include compensation earned and received by executive
officers as well as amounts earned but not paid until after the end of
the fiscal years indicated.
(3) Total perquisites did not exceed the lesser of $50,000 or 10% of the
executive's salary and bonus.
48
<PAGE>
OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 1997
The following table sets forth information concerning options granted to
each of the Named Executive Officers during fiscal 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
% OF TOTAL PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
---- ------- ------------------ ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Horton....... 100,000 5.8% $1.00 04/01/2007 $ 63,000 $ 159,000
Richard K. Vitelle...... 200,000 11.5% $1.25 09/12/2006 $ 157,000 $ 398,000
</TABLE>
AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning options held by each
of the Named Executive Officers as of June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN THE MONEY
SHARES UNEXERCISED OPTIONS AT FY-
ACQUIRED OPTIONS AT FY-END END
ON VALUE EXERCISABLE/ EXERCISABLE
NAME EXERCISES REALIZED UNEXERCISABLE(1) UNEXERCISABLE(2)
---- --------- -------- ----------------- ----------------
<S> <C> <C> <C> <C>
Gregory L. Horton......... -0- -0- 130,000 / 370,000 $6,000/$-0-
Richard K. Vitelle........ -0- -0- 111,666 / 273,334 $-0- / $-0-
</TABLE>
- --------
(1) All options listed in the table are exercisable at option prices equal to
fair market value on the date of grant.
(2) The value of unexercised in-the-money options is based upon the fair
market value for the Common Stock on June 30, 1997 of $1.06 less the
applicable option exercise price.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF EXERCISE LENGTH OF
SECURITIES MARKET PRICE PRICE AT ORIGINAL
UNDERLYING OF STOCK AT TIME OF OPTION TERM
OPTIONS TIME OF REPRICING NEW REMAINING
REPRICED OR REPRICING OR OR EXERCISE AT DATE OF
AMENDED AMENDMENT AMENDMENT PRICE REPRICING OR
NAME DATE (#) ($) ($) ($) AMENDMENT
---- -------- ----------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Horton....... 10/03/96 310,000 1.25 1.75 1.25 9 yrs. 9 mos.
Richard K. Vitelle...... 09/12/96 85,000 1.25 1.63 1.25 9 yrs. 8 mos.
09/12/96 100,000 1.25 1.75 1.25 9 yrs. 9 mos.
</TABLE>
EMPLOYMENT AGREEMENTS AND EXECUTIVE SEVERANCE ARRANGEMENTS
On January 12, 1996, Gregory L. Horton was appointed President and Chief
Executive Officer of the Company pursuant to an employment agreement dated
October 16, 1995. Mr. Horton's employment agreement provides for a base salary
of $150,000, subject to annual reviews of the Compensation Committee, and
annual bonus compensation ranging up to 200% of his base salary. Such bonus
compensation is to be based in part on increases in the Company's revenues and
profits and upon the achievement of other objectives and criteria as the Board
may establish. Mr. Horton's employment is "at will." Should he voluntarily
resign or be terminated for cause, Mr. Horton will not be entitled to
severance pay. He is entitled to 20 months' base salary if he is terminated
without cause. In May 1997, the Compensation Committee awarded Mr. Horton a
cash bonus of $60,000 for the period from January 1996 to March 1997, and a
cash bonus of 30% of his base salary for the
49
<PAGE>
period from April 1997 to March 1998. The Compensation Committee also approved
a special cash incentive payment to Mr. Horton of $50,000 which he became
entitled to receive when the Company repaid its Senior Notes on June 30, 1997.
Effective January 25, 1996, Richard K. Vitelle was appointed Vice President-
Finance and Administration, Treasurer and Chief Financial Officer pursuant to
an employment agreement with the Company. Mr. Vitelle's employment agreement
was renegotiated in September 1996 to provide for a base annual salary of
$125,000 and for a fiscal 1997 cash bonus of 30% of such base salary. Pursuant
to the September 1996 employment agreement, Mr. Vitelle was granted a stock
option covering 200,000 shares at $1.25 per share, which was the fair market
value on the grant date. Mr. Vitelle's employment is "at will." If his
employment is terminated by the Company for cause, then he is not entitled to
severance pay. However, he is entitled to 12 months' base salary and benefits
as severance if he is terminated by the Company without cause, or if he is
terminated as the result of a change in control of the Company. In addition,
if the principal place of Mr. Vitelle's employment is relocated to any site
beyond the 35-mile radius of the Company's present headquarters, then he may
resign at any time within the following 12 months, whereupon he will be
entitled to 12 months' severance payments and benefits.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board (the "Committee") administers the
Company's executive compensation programs and reviews and approves salaries of
the executive officers named above in the Summary Compensation Table. The
Committee is also responsible for administering the Company's stock option
plans (except for the non-discretionary 1996 Non-Employee Directors Stock
Option Plan) and making incentive awards. The Company's executive compensation
programs are designed to:
. provide competitive levels of base compensation in order to attract,
retain and motivate high quality employees;
. tie individual total compensation to individual performance and the
success of the Company; and
. align the interests of the Company's executive officers with those of
its stockholders.
Base Salary. Base salary is targeted to be moderate yet competitive in
relation to salaries commanded by those in similar positions in comparable
companies. The Committee reviews management's recommendations for executives'
salaries and examines survey data for executives with similar responsibilities
in comparable companies to the extent such data is available. Individual
salary determinations are based on experience, achievement of goals and
objectives, sustained performance and comparison to peer level positions
outside the Company.
Incentive Compensation Program. Compensation Program Incentive compensation
for the Company's executive officers is designed to reward such individuals
for their contributions to corporate and individual objectives. In addition,
the Company's three operating units maintain profit sharing plans under which
operating unit managers and other key employees receive incentive cash
compensation based on the performance and pre-tax profits of those operations.
The Company's executive officers named above do not participate in these
operating unit profit sharing plans.
Stock Options. Options. The Committee administers the Company's 1993 and
1996 Stock Incentive Plans, which are designed to align the interests of
management and other key employees with those of the Company's stockholders.
The number of stock options granted is related to the recipient's base
compensation, level of responsibility and accomplishments. All options have
been granted with an option exercise price equal to the fair market value of
the Company's common stock on the date of grant. The tables above set forth
information concerning options granted to named executives during fiscal 1997.
Because of the Company's financial condition and the importance of
conserving cash, the Company has tended to limit the level of cash
remuneration paid to executive officers and to increase the level of stock
option
50
<PAGE>
grants. Particularly during a period focused on operational and financial
turnaround, the Compensation Committee believes that stock options closely
align the objectives of management and the stockholders and provide a balance
given the limits placed on cash remuneration. In the future, the Compensation
Committee will continue to evaluate cash and stock incentive compensation
alternatives to best achieve the objectives of the Company's executive
compensation program.
Repricing of Stock Options. In September 1996, in connection with the
renegotiation of Mr. Vitelle's employment agreement, and in order to retain
the services of this key employee, the Compensation Committee lowered the
exercise price for 185,000 options held by him to $1.25, which options were
originally granted in May and June 1996 at exercise prices ranging from $1.63
to $1.75. The new exercise price was equal to the fair market value on the
date of repricing.
In October 1996, in order to retain the services of other key employees of
the Company, the Compensation Committee lowered the exercise price of 669,000
stock options held by 25 employees from $1.75 to $1.25, the fair market value
on the date of repricing. These repriced options included 310,000 options held
by Mr. Horton.
Compensation of Chief Executive Officer. Gregory L. Horton was appointed
President and Chief Executive Officer of the Company in January 1996. Mr.
Horton's cash compensation was negotiated with the Board and is described
above under the caption "Employment Agreements and Executive Severance
Arrangements." In May 1996, Mr. Horton was granted a stock option for 90,000
shares. These options are exercisable at $1.625, the fair market value on the
grant date. The shares covered by this option become exercisable in three
equal installments on January 12, 1997 and on the next two anniversaries
thereof. In June 1996, as an additional incentive to Mr. Horton and in order
to further align his interests directly with the interests of the
stockholders, Mr. Horton was granted a stock option under the Company's 1996
Stock Incentive Plan covering 310,000 shares at an exercise price of $1.75 per
share, which become exercisable in equal installments on the three
anniversaries of the grant date. As indicated above, the exercise price of
these options was lowered to $1.25 in October 1996. In April 1997, Mr. Horton
was granted a stock option for 100,000 shares which are exercisable in full
from the grant date at a price of $1.00 per share, the fair market value on
the date of grant. The number of shares underlying Mr. Horton's options may
change pursuant to certain anti-dilution provisions of the option agreements.
Submitted by the Compensation Committee: Karen Beth Brenner,
Melvin Foster, Charlene A. Gondek, Thomas M. Wheeler and Robert G. Wilson
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Wilson was appointed to the Compensation Committee in June 1995. Ms.
Brenner and Mr. Foster were appointed to the Compensation Committee in July
1996. Ms. Gondek and Mr. Wheeler were appointed to the Compensation Committee
in June 1997. None of these individuals were officers or employees of the
Company during fiscal 1997. Ms. Gondek and Mr. Wheeler as shareholders of Jolt
will receive, respectively, 1,742,498 and 6,386,254 shares of Common Stock
upon consummation of the Merger. Mr. Wilson served as Interim Vice President
of the Company from June 1995 until January 1996. There are no interlocks
between the Company and other entities involving the Company's executive
officers and directors who serve as executive officers or directors of other
entities.
51
<PAGE>
STOCK PERFORMANCE GRAPH
The following performance table compares the cumulative total return for the
period from June 30, 1992 through June 30, 1997, from an investment of $100 in
(i) the Common Stock, (ii) the Dow Jones Industrials as a group, and (iii) the
Dow Jones Computer Index group of companies (the Company's peer group). For
each group an initial investment of $100 is assumed on June 30, 1992. The
total return calculation assumes reinvestment of all dividends for the
indices. The Company did not pay dividends on its Common Stock during the time
frame set forth below.
[GRAPH OF DDL ELECTRONICS, INC]
The data points depicted on the graph are as follows:
<TABLE>
<CAPTION>
DOW JONES DOW JONES
DATE INDUSTRIAL AVE. COMPUTER INDEX DDL ELECTRONICS
---- --------------- -------------- ---------------
<S> <C> <C> <C>
06/30/92 100.00 100.00 100.00
06/30/93 105.95 75.48 150.00
06/30/94 109.23 76.54 75.00
06/30/95 137.29 132.01 108.33
06/30/96 170.40 148.95 133.33
06/30/97 231.66 230.88 75.00
</TABLE>
52
<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth as of December 4, 1997, except as otherwise
indicated, the number of shares and percentage of outstanding Common Stock
known by the Company to be beneficially owned by (i) each person who is known
by the Company to own beneficially more than 5% of the Company's outstanding
Common Stock, (ii) each of the Company's directors, (iii) each Named Executive
Officer and (iv) all executive officers and directors of the Company as a
group. Unless otherwise noted, shares are held with sole voting and investment
power. Holdings include, where applicable, shares held by spouses and minor
children, including shares held in trust.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
---------------------------------------------------
AS OF DECEMBER 4, UPON CONSUMMATION OF
1997 THE MERGER
----------------------------- ---------------------
NAME AND ADDRESS OF NO. PERCENT OF PERCENT OF
BENEFICIAL OWNER * SHARES CLASS NO. SHARES CLASS
------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
A.I.M. Overseas Ltd........ 1,670,000 6.8% 1,670,000 5.0%
c/o LIS S.A.
31, bd. Prince Felix
L-1513 Luxembourg
Karen Beth Brenner......... 1,110,654(1)(2)(3) 4.5% 1,110,654 3.3%
P.O. Box 9109
Newport Beach, CA 92658
Melvin Foster.............. 309,500(3) 1.3% 309,500 **
Charlene A. Gondek......... 30,000(4)(5) ** 1,772,498 5.3%
Gregory L. Horton.......... 1,058,333(6) 4.3% 1,058,333 3.1%
Richard K. Vitelle......... 166,666(7) ** 166,666 **
Thomas M. Wheeler.......... 30,000(4)(5) ** 6,416,254 19.1%
Robert G. Wilson........... 635,141(3) 2.6% 635,141 1.9%
Directors and Executive
Officers as a Group (7
persons).................. 3,340,294(8) 13.6% 11,469,046 33.3%
</TABLE>
- --------
* Unless otherwise noted, the beneficial owner can be contacted at DDL
Electronics, Inc., 2151 Anchor Court, Newbury Park, CA 91320.
** Represents less than 1% of the outstanding shares.
(1) This information is based upon a Schedule 13D/A dated September 30, 1997,
filed with the SEC on December 4, 1997. Such Schedule 13D/A states that
the beneficial owner has sole voting and dispositive power as to 178,400
shares and no voting and shared dispositive power as to 932,254 shares.
(2) Includes 46,495 shares underlying the Company's 8 1/2% convertible
subordinated debentures.
(3) Includes 60,000 shares underlying exercisable options and 75,000 shares
underlying exercisable warrants.
(4) On June 30, 1997, the Company agreed to acquire Jolt Technology, Inc., a
private company, for 9,000,000 shares of Common Stock, subject to the
approval of the Stockholders. Ms. Gondek and Mr. Wheeler, who are
shareholders of Jolt, will receive 1,742,498 and 6,386,254 shares of
Common Stock, respectively, upon consummation of the Merger.
(5) Includes 30,000 shares underlying exercisable options.
(6) Includes 133,333 shares underlying options exercisable within 60 days.
(7) Includes 161,666 shares underlying options exercisable within 60 days.
(8) Includes 534,999 shares underlying options exercisable within 60 days.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1997, the Company borrowed $2,000,000 from Thomas M. Wheeler, a
private investor, under a note payable bearing 8% interest. The note matures
on February 1, 1999, and is secured by a pledge of the common stock of SMTEK.
The Company agreed to give Mr. Wheeler two seats on the Board, which seats
were filled by Mr. Wheeler and Charlene A. Gondek. As a condition to obtaining
the $2,000,000 loan from Mr. Wheeler, the Company also agreed to acquire all
of the issued and outstanding shares of Jolt for 9,000,000 shares of Common
Stock. Upon consummation of the Merger, the maturity date of the $2,000,000
note payable will be extended from February 1, 1999 to October 31, 1999.
Jolt has borrowed approximately $1,625,000 from Mr. Wheeler. This
indebtedness of Jolt to Mr. Wheeler, in addition to approximately $427,000 in
interest thereon (including projected accrued interest through the date of the
consummation of the merger), will be converted to 10,660 shares of Jolt common
stock immediately prior to the Merger.
CERTAIN INFORMATION REGARDING JOLT
Jolt is an independent provider of customized integrated EMS, including
turnkey electronic assembly and manufacturing management services, to OEMs in
the electronics industry. Jolt's electronic manufacturing services consist
primarily of the manufacture of complex PCB assemblies using SMT and PTH
interconnection technologies. In addition to assembly, turnkey manufacturing
management also involves procurement and materials management, as well as
consultation on printed circuit board design and manufacturability.
SMT and PTH assemblies are printed circuit boards on which various
electronic components, such as integrated circuits, capacitors,
microprocessors and resistors, have been mounted. These assemblies are key
functional elements of many types of electronic products. Circuit board
assemblies produced by Jolt generally require greater manufacturing expertise
and have shorter runs and delivery cycles than mass-produced PCBs and
therefore typically have higher profit margins.
Jolt's customers include a diversified base of OEMs in the medical devices
and instrumentation, computer systems, aerospace and telecommunications
sectors. Jolt's assembly plant is located in Fort Lauderdale, Florida. Jolt
was founded in 1989, and its principal office is located at 6801 N.W. 15th
Avenue, Fort Lauderdale, Florida. Jolt's telephone number is (954) 968-8526.
INDUSTRY OVERVIEW
Jolt is benefiting from increased market acceptance of the use of
manufacturing specialists in the electronics industry. Many electronics OEMs
have adopted and are becoming increasingly reliant upon outsourcing
strategies. Jolt believes that the trend toward outsourcing manufacturing will
continue. Electronics industry OEMs use EMS specialists for many reasons,
including the following:
Reduced Time to Market. Due to intense competitive pressures in the
electronics industry, OEMs are faced with increasingly shorter product life-
cycles and therefore have a growing need to reduce the time required to bring
a product to market. OEMs can reduce their time to market by using a
manufacturing specialist's established manufacturing expertise and
infrastructure.
Reduced Capital Investment. As electronic products have become more
technologically advanced, the manufacturing process has become increasingly
automated, requiring a greater level of investment in capital equipment.
Manufacturing specialists enable OEMs to gain access to advanced manufacturing
facilities, thereby reducing the OEM's overall capital equipment requirements.
Focused Resources. Because the electronics industry is experiencing greater
levels of competition and more rapid technological change, many OEMs
increasingly seek to focus their resources on activities and technologies to
which they add the greatest value. By offering comprehensive electronic
assembly and turnkey
54
<PAGE>
manufacturing services, manufacturing specialists allow OEMs to focus on core
technologies and activities such as product development, marketing and
distribution.
Access to Leading Manufacturing Technology. Electronic products and
electronics manufacturing technology have become increasingly sophisticated
and complex. This is making it difficult for OEMs to maintain the necessary
technological expertise in process development and control. OEMs are motivated
to work with a manufacturing specialist in order to gain access to the
specialist's process expertise and manufacturing know-how.
Improved Inventory Management and Purchasing Power. Electronics industry
OEMs are faced with increasing difficulties in efficiently planning, procuring
and managing their inventories. This difficulty is due to frequent design
changes, short product life cycles, large investments in electronic
components, component price fluctuations and the need to achieve economies of
scale in materials procurement. By using a manufacturing specialist with
established material procurement capacities and infrastructure, OEMs can
reduce production and inventory costs.
The total market for the EMS industry in the United States is estimated at
$18 billion annually and is reportedly growing at a rate in excess of 20% per
year. This growth environment is a vigorous one in which Jolt is performing
well. Jolt primarily markets its manufacturing services to electronics
industry OEMs in the United States. The U.S. EMS industry is highly
fragmented, with several large manufacturers with over $500 million in annual
revenues. There are also numerous manufacturers with annual revenues from
under $10 million to several hundred million dollars.
BUSINESS STRATEGY
Jolt's objective is to provide OEMs with a total EMS solution. Jolt's
strategy encompasses several key elements:
Concentrate on High Value Added Products and Services for Leading OEMs. Jolt
focuses on leading manufacturers of advanced electronic products that
generally require custom-designed, more complex circuit assemblies and short
lead-time manufacturing services. By focusing on the complex and high-end
products, Jolt is able to realize higher margins than many other participants
in the EMS industry. Jolt strategically avoids accounts with simpler, high-
volume circuit assemblies that are typically pursued by the larger EMS players
since they are generally low-margin products.
Focus on High-Growth Customer Sectors. Jolt has focused its marketing
efforts on key OEMs in fast-growing industry sectors such as
telecommunications, networking, industrial and medical instrumentation and
high-end computer systems. Sales efforts will continue to focus on increasing
penetration of Jolt's existing customer base as well as attracting new
customers, diversifying revenues across a wider base.
Develop Long-Term Customer Relationships. Jolt seeks to establish
"partnerships" with its customers by focusing on state-of-the-art technology
and quick-turnaround manufacturing. Jolt also works closely with its customers
to help them manage their entire product design, development and manufacturing
process in order to reduce their time to market. As a testimonial to the level
of success Jolt has achieved with its customer partnerships, Jolt has received
the Surface Mount International Service Excellence Award for the past five
years, based upon customer ratings for technology, manufacturing quality,
dependability/timely delivery, responsiveness to requests and changes and
value for price.
Extend Technology Leadership. Jolt can provide services ranging from the
manufacture of electronic circuits to complete system assembly. In providing
these services, it utilizes a variety of processes and technologies. Jolt
strives for continuous improvement of its processes and has adopted a number
of quality measurement and improvement techniques to continually monitor its
performance. Jolt also has made significant capital expenditures during fiscal
1997 to upgrade its plant and equipment. It intends to stay on the leading
edge
55
<PAGE>
of technology development and will evaluate new interconnect and packaging
technologies as they emerge. Jolt's technical focus is currently moving to
double-sided surface-mount work with minimal through-hole assembly.
CUSTOMERS, MARKETING AND SALES
Jolt's customers include a diversified base of OEMs in the medical devices
and instrumentation, computer systems, aerospace and telecommunications
segments of the electronics industry. The following table shows the estimated
percentage of Jolt's fiscal 1997 sales in each of these segments:
<TABLE>
<S> <C>
Medical Devices and Instrumentation...................................... 30%
Computer Systems......................................................... 30%
Aerospace/Government Contracting......................................... 15%
Consumer Products........................................................ 15%
Telecommunications....................................................... 10%
</TABLE>
Jolt develops business through long-term relationships between its in-house
specialists and its key customers' managers and staff. Jolt's employees work
closely with Jolt's customers' engineering and technical personnel to better
understand their requirements. Sales efforts are augmented by manufacturer's
representative firms, which identify accounts and initiate new relationships.
Although Jolt seeks to diversity its customer base, a small number of
customers are responsible for a significant portion of its net sales. In
fiscal 1997, J-tech, IBM, Comtec Systems and Coulter Scientific each accounted
for more than 10% of Jolt's net sales. In addition, during fiscal 1996, Jolt's
ten largest customers accounted for approximately 75% of Jolt's net sales.
Although there can be no assurance that Jolt's principal customers will
continue to purchase products and services from Jolt at current levels, Jolt
expects to continue to depend upon its principal customers for a significant
portion of its net sales. Its customer concentration could increase or
decrease, depending upon future customer requirements, which will depend in
large part on market conditions in the electronics industry segments in which
its customers participate.
MANUFACTURING SERVICES AND ENGINEERING
Jolt specializes in manufacturing complex circuit board assemblies that are
used in sophisticated electronic equipment. It has been providing consignment
circuit assembly services since 1989. In 1995, it began providing turnkey
manufacturing management services, including the assembly and testing of
sophisticated electronic systems. For fiscal 1997 and 1996, approximately 95%
of Jolt's net sales consisted of consignment circuit assembly revenues, and
approximately 5% of Jolt's net sales consisted of turnkey manufacturing.
Jolt's relationships with its key customers are based upon providing a
responsive, flexible total manufacturing services solution. These services
include design and engineering, quick-turnaround prototype and manufacturing
and materials procurement and management. Jolt also evaluates customer designs
for manufacturability and test and, when appropriate, recommends design
changes to reduce manufacturing cost or lead times or to increase
manufacturing yields and quality of the finished product. Once engineering is
completed, Jolt manufactures prototype or preproduction versions of the
product on a quick-turnaround basis.
Jolt expects that the demand for engineering and quick-turnaround prototype
and preproduction manufacturing services will increase as OEMs' products
become more complex and as product life-cycles shorten. Materials procurement
and handling services provided by Jolt include planning, purchasing,
warehousing and financing of electronic components and enclosures used in the
assemblies and systems.
Prices for Jolt's SMT or PTH printed circuit boards and system assemblies
vary, depending upon their size and complexity and the specified manufacturing
turnaround time. Other factors affecting Jolt's pricing include the extent of
design and engineering services required, the market of the various electronic
components and the quantity ordered.
56
<PAGE>
The manufacture of SMT and PTH assemblies involves the attachment of various
electronic components, such as integrated circuits, capacitors,
microprocessors and resistors to printed circuit boards. Electronic components
used in producing SMT and PTH assemblies are purchased by Jolt; in certain
circumstances, Jolt may be required to bear the risk of component price
fluctuations. Jolt orders materials and components based upon purchase orders
received and accepted and seeks to minimize its inventory of materials or
components that are not identified for use in filling specific orders.
Shortages of electronic components have occurred in the past and may occur in
the future. Component shortages or price fluctuations could have an adverse
effect on Jolt's results of operations.
TECHNOLOGY DEVELOPMENT
Jolt's close involvement with its customers at the early stages of their
product development cycles is at the leading edge of technical innovation in
the manufacturing of SMT and PTH printed circuit board assemblies. Jolt
selectively seeks orders that require the use of state-of-the-art materials or
manufacturing techniques in order to further develop its manufacturing
expertise. Current areas of manufacturing process development include reducing
circuit sizes, establishing new standards for particle contamination and
developing manufacturing processes for use with new surface mount connector
and component designs.
Jolt holds no patents and believes that patents are not important
competitive factors in the market for contract electronics manufacturing. Jolt
believes its success depends more upon the creativity of its personnel than
upon patent ownership. Because of rapid technological change and the rate of
new patent issuance, certain of Jolt's products or processes may inadvertently
infringe upon others' patents. If that were to occur, Jolt believes that,
based upon industry practice, necessary licenses could be obtained without
material adverse impact, although there can be no assurance of that.
COMPETITION
Jolt competes against numerous EMS suppliers. It also occasionally faces
competition from customers that evaluate Jolt's capabilities against the
merits of internal manufacturing. Competition is intense and will continue.
Many competitors are larger than Jolt and have significantly greater
resources.
Jolt believes that competition in the market segments it serves is based
more on product quality and responsive customer service and support than on
price. This is in part because the cost of PCB assemblies that Jolt provides
is relatively low compared to the total cost of the finished electronic
products. In addition, greater importance is often placed upon product
reliability and prompt delivery to Jolt's key customers. Jolt believes its
primary competitive strengths are its ability to provide responsive, flexible,
short lead-time manufacturing services, as well as its engineering and
manufacturing expertise.
EMPLOYEES
At December 31, 1997, Jolt had 25 full-time employees. None of Jolt's
employees is represented by a labor union or collective bargaining agreement,
and Jolt has never experienced a work stoppage or strike. Jolt believes its
relationship with its employees is good. Jolt's success depends largely upon
the efforts and abilities of key managerial and technical employees. The loss
of services of certain key personnel could adversely affect Jolt.
57
<PAGE>
PRINCIPAL SHAREHOLDERS OF JOLT
The following table sets forth as of May 28, 1998, except as otherwise
indicated, the number of shares and percentage of outstanding Jolt Common
Stock beneficially owned by (i) each person who is known by Jolt to own
beneficially more than 5% of Jolt's outstanding Common Stock, (ii) each of
Jolt's directors, (iii) each named executive officer and (iv) all executive
officers and directors of Jolt as a group. Unless otherwise noted, shares are
held with sole voting and investment power. Stockholdings include, where
applicable, shares held by spouses and minor children, including shares held
in trust.
<TABLE>
<CAPTION>
SHARES OF JOLT
COMMON STOCK
NAME AND ADDRESS OF --------------------------
BENEFICIAL OWNER(1) NUMBER PERCENT OF CLASS
------------------- ------ ----------------
<S> <C> <C>
Thomas M. Wheeler................................. 14,660(2) 70.9%
Charlene A. Gondek................................ 4,000 19.4%
Mitchell Morhaim.................................. 2,000 9.7%
All executive officers and directors as a group... 20,660 100.0%
</TABLE>
- --------
(1) Each beneficial owner can be contacted at Jolt Technology, Inc., 6801
N.W. 15th Avenue, Fort Lauderdale, FL 33309.
(2) Amount includes 10,660 shares of Jolt Common Stock to be received by Mr.
Wheeler upon the conversion of Shareholder Loans and accrued interest
thereon to equity.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning the cash and
non-cash compensation awarded to, earned by or paid to Jolt's only executive
officer for the year ended December 31, 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
NAME AND ----------------------
PRINCIPAL POSITION SALARY BONUS
------------------ ----------- ----------
<S> <C> <C>
Mitchell Morhaim................................... $ 100,000 $ 10,000(2)
President and Secretary
</TABLE>
- --------
(1) Total perquisites did not exceed the lesser of $50,000 or 10% of Mr.
Morhaim's salary and bonus.
(2) Determined by the Board of Directors and paid to Mr. Morhaim prior to the
close of the fiscal year.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
COMMON STOCK
The Company's Certificate of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock. As of the Record Date May 26, 1998, there
were 24,613,666 shares of Common Stock issued and outstanding and
approximately 1,500 record holders thereof. All outstanding shares of Common
Stock are validly issued, fully paid and nonassessable. The shares of Common
Stock that constitute Merger Consideration will be validly issued, fully paid
and nonassessable upon consummation of the Merger. The holders of the Common
Stock are entitled to one vote per share on all matters to be voted upon by
the stockholders, except that stockholders are entitled to cumulate their
votes in the election of directors. Subject to the preferences that may be
applicable to any outstanding preferred stock, the Company's stockholders are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the Board out of funds legally available therefor. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all the assets remaining after
payment of liabilities, subject to prior distribution rights of preferred
stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock.
PREFERRED STOCK
The Board has the authority to issue preferred stock in one or more series,
to fix the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued shares of preferred stock and to fix the
number of shares constituting any series and the designations of such series,
without any further vote or action by the Stockholders. Although it has no
current intention to do so, the Board, without Stockholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power of the holders of Common Stock.
At June 30, 1997, 1,000 preferred stock purchase rights were outstanding.
Each right may be exercised to purchase one-hundredth of a share of Series A
Participating Junior Preferred Stock at a purchase price of $30, subject to
adjustment. The rights may be exercised only after commencement or public
announcement that a person (other than a person receiving prior approval from
the Company) has acquired or obtained the right to acquire 20% or more of the
Company's outstanding common stock. The rights, which do not have voting
rights, may be redeemed by the Company at a price of $.01 per right within ten
days after the announcement that a person has acquired 20% or more of the
outstanding common stock of the Company. The redemption period may be extended
under certain circumstances. In the event that the Company is acquired in a
merger or other business combination transaction, provision shall be made so
that each holder of a right shall have the right to receive that number of
shares of common stock of the surviving company which at the time of the
transaction would have a market value of two times the exercise price of the
right. The Company has authorized for issuance 150,000 shares of Series A
Junior Participating Preferred Stock, par value $1.00 per share.
59
<PAGE>
PROPOSAL TWO--AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION
The Company is currently authorized to issue 50,000,000 shares of Common
Stock. The Board has approved a proposed amendment to the Certificate of
Incorporation that would increase the number of authorized shares of Common
Stock to 75,000,000. The principal purposes of this proposed amendment would
be to position the Company to use Common Stock to finance its business, to
acquire other businesses and to effect stock splits in appropriate
circumstances.
It is the Company's intention to finance its operations through, among other
things, the issuance from time to time of various debt and equity securities
and to consider the issuance of additional shares of Common Stock through
stock splits and stock dividends in appropriate circumstances. Accordingly,
the continued availability of shares of Common Stock is necessary to provide
the Company with the flexibility to take advantage of opportunities in such
situations. The Common Stock also may be issued as consideration in future
acquisitions. There are, at present, no plans, understandings, agreements or
arrangements concerning the issuance of additional shares of Common Stock,
except for (i) the shares to be issued pursuant to the Merger and (ii) shares
presently reserved for issuance.
Authorized but unissued shares of Common Stock may be issued from time to
time to such persons and for such consideration as the Board may determine.
Holders of the then-outstanding shares of stock of the Company may or may not
be given the opportunity to vote on any such issuance, depending upon the
nature of the transaction, applicable law, the rules and policies of
applicable stock exchanges and the judgment of the Board regarding the
submission thereof to the Stockholders. Shareholders have no preemptive rights
to subscribe to newly-issued shares. Issuance of Common Stock (or the issuance
of authorized or unissued preferred stock or other capital stock) could have
the effect of discouraging an attempt to acquire control of the Company.
The Board believes that the proposed increase in the number of authorized
shares of Common Stock will provide flexibility needed to meet corporate
objectives and is in the best interests of the Company and its Stockholders.
The increase in the number of authorized shares of Common Stock will, if
approved by the requisite vote of Stockholders, be adopted by the Company
regardless of whether the Merger is consummated. Likewise, consummation of the
Merger is not conditioned upon stockholder approval of this proposal.
The affirmative vote of the holders of a majority of all outstanding shares
of Common Stock is required for approval of the Increase in Authorized Shares.
See "1997 Annual Meeting." Upon approval, officers of the Company will make
appropriate filings in the State of Delaware and will take any other action
necessary to implement the Increase in Authorized Shares.
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO AMEND THE
CERTIFICATE OF INCORPORATION.
60
<PAGE>
PROPOSAL THREE--ELECTION OF DIRECTORS
The Certificate of Incorporation provides that the Board shall be divided
into three classes, designated Class I, Class II and Class III. Such classes
shall be as nearly equal in number of directors as possible. The Board
resolved to reduce the number of directors from seven to five at its meeting
on November 25, 1997. Accordingly, at the 1997 Annual Meeting, one person will
be elected Class I director and one person will be elected Class II director.
The Class I Director shall serve on the Board for a term of two years ending
with the second annual meeting following such director's election, and the
Class II Director shall serve on the Board for a term of three years ending
with the third annual meeting following the election of such director, in
either case unless either such director shall have earlier resigned or been
removed.
All Stockholders are entitled to cumulate their votes in the election of
directors. A Stockholder may cumulate votes by casting for the election of one
nominee a number of votes equal to the number of directors to be elected
multiplied by the number of shares owned by such Stockholder or may distribute
such votes on the same principle among as many candidates as such Stockholder
elects. The nominees for election as directors who receive the greatest number
of votes cast for election of directors shall be elected as directors. Unless
otherwise directed, it is intended that shares represented by proxy will be
voted by the proxy holders in favor of the election of all the Board's
nominees, except that the cumulative votes represented by proxies will be cast
for all or fewer than all of the nominees for director in the discretion of
the proxy holders named therein in order to elect as many nominees as possible
under the circumstances prevailing at the meeting. Discretionary authority to
so cumulate votes is hereby solicited. Each of the nominees has consented to
be named as a nominee in this Proxy Statement and to serve as a director if
elected. Each of the nominees is at present a member of the Board. In the
event that any of the nominees for director should become unavailable to serve
as such, the proxies may be voted for such substitute or substitutes as may be
nominated by the Board.
The following table sets forth the name of each nominee for election to the
Board, such person's age, principal occupation and the name and principal
business of any corporation or organization in which such occupation is
carried on and the period during which such nominee has served as director.
See "Certain Information Regarding the Company--Directors and Executive
Officers" for a more complete description.
<TABLE>
<CAPTION>
SERVED
CONTINUOUSLY
PRINCIPAL OCCUPATION FOR FIVE YEARS AS DIRECTOR
NAME OF NOMINEE AGE AND DIRECTORSHIPS SINCE
--------------- --- ----------------------------------- ------------
<C> <C> <S> <C>
Charlene A. Gondek 36 Director of Jolt Technology, Inc., a 1997
Class I Director privately-held electronic
Term expiring 1999 manufacturing services company
Gregory L. Horton 41 Chief Executive Officer, 1996
Class II Director President and Chairman of the
Term Expiring 2000 Board of Directors, DDL
Electronics, Inc.
</TABLE>
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" BOTH OF THESE
NOMINEES.
61
<PAGE>
STOCKHOLDER PROPOSALS
Stockholders who wish to include proposals in next year's proxy statement
for action at the Company's 1998 annual meeting of stockholders anticipated to
occur in November 1998 must cause their proposals to be received in writing at
the Company's principal executive office (2151 Anchor Court, Newbury Park,
California 91320) no later than August 3, 1998. Such proposals should be
addressed to the Company's Secretary and may be included in next year's proxy
statement if they comply with certain rules and regulations promulgated by the
SEC. Use of certified mail is suggested.
EXPERTS
The consolidated financial statements of the Company as of June 30, 1997 and
1996, and for each year in the three-year period ended June 30, 1997, have
been included herein in reliance upon the report of KPMG Peat Marwick, LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The
financial statements of Jolt as of December 31, 1997 and 1996 and for the
years then ended have been included herein and in reliance upon the report of
Brunt & Company, P.A., independent certified public accountants, given upon
their authority as experts in accounting and auditing.
INDEPENDENT PUBLIC ACCOUNTANTS
KPMG Peat Marwick LLP has served as the Company's independent public
accountants since 1994. Representatives of KPMG Peat Marwick are expected to
be present at the 1997 Annual Meeting and will be afforded the opportunity to
make a statement and answer questions from stockholders.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996....... F-3
Consolidated Statements of Operations for the years ended June 30, 1997,
June 30, 1996 and
June 30, 1995.......................................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
June 30, 1996 and June 30, 1995........................................ F-5
Consolidated Statements of Stockholders' Equity for the years ended June
30, 1997, June 30, 1996 and June 30, 1995.............................. F-6
Notes to Consolidated Financial Statements.............................. F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY:
Consolidated Balance Sheets as of March 31, 1998 and June 30, 1997...... F-27
Consolidated Statements of Operations for the three months ended March
31, 1998 and
March 31, 1997......................................................... F-28
Consolidated Statements of Operations for the nine months ended March
31, 1998 and March 31, 1997............................................ F-29
Consolidated Statements of Cash Flows for the nine months ended March
31, 1998 and March 31, 1997............................................ F-30
Notes to Unaudited Consolidated Financial Statements.................... F-31
AUDITED FINANCIAL STATEMENTS OF JOLT:
Independent Auditors' Report............................................ F-35
Balance Sheets as of December 31, 1997 and 1996......................... F-36
Statements of Income for the years ended December 31, 1997 and 1996..... F-37
Statements of Cash Flows for the years ended December 31, 1997 and 1996. F-38
Statements of Changes in Stockholders' Equity (Deficit) for the years
ended December 31, 1997
and 1996............................................................... F-39
Notes to Financial Statements........................................... F-40
UNAUDITED FINANCIAL STATEMENTS OF JOLT:
Unaudited Balance Sheet as of March 31, 1998............................ F-43
Unaudited Statements of Operations for the three months ended March 31,
1998 and March 31, 1997................................................ F-44
Unaudited Statements of Cash Flows for the three months ended March 31,
1998 and March 31, 1997................................................ F-45
Notes to Unaudited Financial Statements for the three months ended March
31, 1998 and
March 31, 1997......................................................... F-46
Unaudited Balance Sheet as of December 31, 1995......................... F-47
Unaudited Statement of Operations for the year ended December 31, 1995.. F-48
Unaudited Statement of Cash Flows for the year ended December 31, 1995.. F-49
Notes to Unaudited Financial Statements for the year ended December 31,
1995................................................................... F-50
UNAUDITED PRO FORMA FINANCIAL STATEMENTS:
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1998..... F-53
Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended
March 31, 1998......................................................... F-54
Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended
March 31, 1997......................................................... F-55
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended June 30, 1997.................................................... F-56
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended June 30, 1996.................................................... F-57
Unaudited Pro Forma Consolidated Statement of Operations for the year
ended June 30, 1995.................................................... F-58
Notes to Unaudited Pro Forma Consolidated Financial Statements.......... F-59
</TABLE>
F-1
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
DDL Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of DDL
Electronics, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended June 30,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DDL
Electronics, Inc. and subsidiaries as of June 30, 1997 and 1996, and the
results of their operations and cash flows for each of the years in the three-
year period ended June 30, 1997 in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Woodland Hills, California
August 15, 1997, except for the second
paragraph of note 12, which is as of
September 22, 1997
F-2
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 3)....................... $ 4,718 $ 2,519
Accounts receivable, net (Note 5)........................ 9,198 5,620
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 6).......................... 3,161 3,026
Inventories, net (Note 7)................................ 3,211 4,014
Prepaid expenses......................................... 132 314
-------- --------
Total current assets....................................... 20,420 15,493
-------- --------
Property, equipment and improvements, at cost (Notes 8 and
12):
Buildings and improvements............................... 6,037 5,604
Plant equipment.......................................... 14,962 13,999
Office and other equipment............................... 1,952 1,444
-------- --------
22,951 21,047
Less: Accumulated depreciation and amortization.......... (16,161) (15,130)
-------- --------
Property, equipment and improvements, net.............. 6,790 5,917
-------- --------
Other assets:
Goodwill, net (Note 4)................................... 4,439 5,708
Debt issue costs, net.................................... 38 533
Deposits and other assets................................ 193 436
-------- --------
4,670 6,677
-------- --------
$ 31,880 $ 28,087
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank lines of credit payable............................. $ 1,378 $ --
Current portion of long-term debt (Notes 3 and 8)........ 4,167 603
Accounts payable......................................... 9,084 7,485
Accrued payroll and employee benefits.................... 1,145 777
Other accrued liabilities (Notes 3 and 11)............... 2,321 3,114
-------- --------
Total current liabilities.............................. 18,095 11,979
-------- --------
Long-term debt, less current portion (Notes 3 and 8)....... 7,820 10,935
-------- --------
Commitments and contingencies (Note 12)
Stockholders' equity (Notes 2, 8 and 10):
Preferred stock, $1 par value; 1,000,000 shares
authorized; no shares issued or outstanding ............ -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 24,586,858 and 22,998,879 shares issued and
outstanding in 1997 and 1996, respectively.............. 246 230
Additional paid-in capital............................... 6,410 29,304
Common stock held in escrow.............................. -- (1,325)
Accumulated deficit (deficit of $23,678,000 eliminated
effective June 27, 1997)................................ -- (22,000)
Foreign currency translation adjustment.................. (691) (1,036)
-------- --------
Total stockholders' equity............................. 5,965 5,173
-------- --------
$ 31,880 $ 28,087
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales............................................ $ 48,919 $ 33,136 $ 29,576
-------- -------- --------
Costs and expenses:
Cost of goods sold............................. 42,475 29,494 26,516
Administrative and selling expenses............ 5,058 4,175 6,497
Goodwill amortization.......................... 1,268 634 --
Restructuring charges (Note 4)................. -- -- 1,533
-------- -------- --------
48,801 34,303 34,546
-------- -------- --------
Operating income (loss).......................... 118 (1,167) (4,970)
-------- -------- --------
Non-operating income (expense):
Interest income................................ 83 246 109
Interest expense............................... (1,105) (911) (883)
Debt issue cost amortization................... (937) (281) --
Gain on sale of assets (Note 4)................ 142 -- 3,317
Other income (expense), net.................... 21 245 61
-------- -------- --------
(1,796) (701) 2,604
-------- -------- --------
Loss before income taxes......................... (1,678) (1,868) (2,366)
Income tax benefit (Note 9)...................... -- 1,110 --
-------- -------- --------
Loss before extraordinary item................... (1,678) (758) (2,366)
Extraordinary item--Gain on debt extinguishment
(Notes 4 and 8)................................. -- 2,356 2,441
-------- -------- --------
Net income (loss)................................ $ (1,678) $ 1,598 $ 75
======== ======== ========
Basic and diluted earnings (loss) per share:
Loss before extraordinary item................. $ (0.07) $ (0.04) $ (0.15)
Extraordinary item............................. -- 0.13 0.15
-------- -------- --------
Basic and diluted earnings (loss) per share...... $ (0.07) $ 0.09 $ --
======== ======== ========
Shares used in computing basic and diluted
earnings (loss) per share:...................... 23,150 18,180 15,150
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
------------------------
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(1,678) $1,598 $ 75
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 3,631 2,028 1,505
Gain on debt extinguishment...................... -- (2,356) (2,441)
Gain on sale of assets........................... (142) -- (3,317)
Net (increase) decrease in operating working
capital, net of effects of business acquired.... (1,547) (1,508) 4,009
(Increase) decrease in deposits and other assets. 124 (93) 2
Benefit of non-capital grants.................... (242) (265) (139)
Other............................................ 84 41 42
------- ------ -------
Net cash provided by (used in) operating activities.. 230 (555) (264)
------- ------ -------
Cash flows from investing activities:
Capital expenditures............................... (989) (910) (547)
Purchase of SMTEK, Inc., net of cash acquired...... -- (7,638) --
Proceeds from sale of assets....................... 202 -- 9,936
------- ------ -------
Net cash provided by (used in) investing activities.. (787) (8,548) 9,389
------- ------ -------
Cash flows from financing activities:
Proceeds from bank lines of credit................. 1,366 -- --
Proceeds from long-term debt....................... -- 8,800 612
Payments of long-term debt......................... (755) (1,870) (10,819)
Debt issue costs................................... -- (372) --
Proceeds from issuance of common stock, net........ 1,385 1,112 980
Proceeds from exercise of stock options............ 75 437 287
Proceeds from exercise of stock warrants........... -- 448 --
Proceeds from foreign government grants............ 605 229 202
------- ------ -------
Net cash provided by (used in) financing activities.. 2,676 8,784 (8,738)
------- ------ -------
Effect of exchange rate changes on cash.............. 80 (79) (10)
------- ------ -------
Increase (decrease) in cash and cash equivalents..... 2,199 (398) 377
Cash and cash equivalents at beginning of year....... 2,519 2,917 2,540
------- ------ -------
Cash and cash equivalents at end of year............. $ 4,718 $2,519 $ 2,917
======= ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JUNE 30, 1997, 1996 AND 1995
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK HELD
COMMON STOCK IN ESCROW FOREIGN TOTAL
--------------------- ------------------- ADDITIONAL CURRENCY STOCKHOLDERS'
PREFERRED PAID-IN ACCUMULATED TRANSLATION EQUITY
STOCK SHARES SHARES PAR VALUE SHARES VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
------------ ---------- --------- ---------- ------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June
30, 1994........ 450 14,468,718 $145 -- $ -- $ 19,646 $(23,673) $(1,007) $(4,889)
Net income...... -- -- -- -- -- -- 75 -- 75
Issuance of
common stock.... -- 760,000 8 -- -- 972 -- -- 980
Conversion of
debentures...... -- 43,000 -- -- -- 86 -- -- 86
Exercise of
stock options... -- 450,447 5 -- -- 282 -- -- 287
Shares retired.. -- (27) -- -- -- -- -- -- --
Conversion of
preferred stock. (450) 340,841 3 -- -- (3) -- -- --
Translation
adjustments..... -- -- -- -- -- -- -- 117 117
---- ---------- ---- ---------- ------- -------- -------- ------- -------
Balance at June
30, 1995........ -- 16,062,979 161 -- -- 20,983 (23,598) (890) (3,344)
Net income...... -- -- -- -- -- -- 1,598 -- 1,598
Stock issued as
partial payment
for SMTEK
acquisition..... -- 1,000,000 10 -- -- 791 -- -- 801
Stock issued as
debt placement
fee............. -- 572,683 6 -- -- 710 -- -- 716
Stock issued as
collateral for
10% notes....... -- 1,060,000 10 (1,060,000) (1,325) 1,315 -- -- --
Sale of common
stock........... -- 600,000 6 -- -- 1,106 -- -- 1,112
Conversion of
debentures...... -- 2,764,275 28 -- -- 3,292 -- -- 3,320
Exercise of
stock options
and warrants.... -- 918,942 9 -- -- 876 -- -- 885
Warrant
compensation
costs........... -- -- -- -- -- 196 -- -- 196
Other stock
transactions.... -- 20,000 -- -- -- 35 -- -- 35
Translation
adjustments..... -- -- -- -- -- -- -- (146) (146)
---- ---------- ---- ---------- ------- -------- -------- ------- -------
Balance at June
30, 1996........ -- 22,998,879 230 (1,060,000) (1,325) 29,304 (22,000) (1,036) 5,173
Net loss........ -- -- -- -- -- -- (1,678) -- (1,678)
Stock released
from escrow
account......... -- -- -- 1,060,000 1,325 -- -- -- 1,325
Shares retired.. -- (706,667) (7) -- -- (876) -- -- (883)
Sale of common
stock........... -- 2,000,000 20 -- -- 1,365 -- -- 1,385
Exercise of
stock options
and warrants.... -- 294,646 3 -- -- 295 -- -- 298
Translation
adjustments..... -- -- -- -- -- -- -- 345 345
Quasi-
reorganization
transfer........ -- -- -- -- -- (23,678) 23,678 -- --
---- ---------- ---- ---------- ------- -------- -------- ------- -------
Balance at June
30, 1997........ -- 24,586,858 $246 -- $ -- $ 6,410 $ -- $ (691) $ 5,965
==== ========== ==== ========== ======= ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
DDL Electronics, Inc. provides customized, integrated electronic
manufacturing services ("EMS") to original equipment manufacturers ("OEMs") in
the computer, telecommunications, instrumentation, medical, industrial and
aerospace industries. The Company also manufactures multilayer printed circuit
boards ("PCBs") for use primarily in the computer, communications and
instrumentation industries. The Company's EMS operations are located in
Southern California and Northern Ireland. The Company's PCB facilities are
located in Northern Ireland.
The consolidated financial statements include the accounts of DDL
Electronics, Inc. and its subsidiaries (collectively, the "Company"). All
significant intercompany transactions and accounts have been eliminated in
consolidation.
ACCOUNTING PERIOD
The Company utilizes a 52-53 week fiscal year ending on the Friday closest
to June 30 which, for fiscal years 1997, 1996 and 1995, fell on June 27, June
28 and June 30, respectively. In these consolidated financial statements, the
fiscal year-end for all years is shown as June 30 for clarity of presentation,
except where the context dictates a more specific reference to the actual
year-end date.
CASH EQUIVALENTS
For financial reporting purposes, cash equivalents consist primarily of
money market instruments and bank certificates of deposit that have original
maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of June 30, 1997, the carrying amount of the Company's cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their fair value because of the short maturity of those
instruments. The carrying amount of long-term debt (including current portion
thereof) was $11,987,000 and the fair value was $11,513,000 as of June 30,
1997. The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. All
financial instruments are held for purposes other than trading.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of money market instruments and trade
receivables. The Company invests its excess cash in money market instruments
and certificates of deposit with high credit quality financial institutions
and, by policy, limits the amount of credit exposure to any one issuer.
Concentrations of credit risk with respect to trade receivables exist because
the Company's EMS and PCB operations rely heavily on a relatively small number
of customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses, to date, have been within
management's expectations.
INVENTORIES
Inventories are stated at the lower of cost or net realizable value, with
cost determined principally by use of the first-in, first-out method.
F-7
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSETS
Property, equipment and improvements are stated at cost. Depreciation and
amortization are computed on the straight-line and declining balance methods.
The principal estimated useful lives are: buildings--20 years; improvements--
10 years; plant, office and other equipment--3 to 7 years. Upon the retirement
of assets, costs and the related accumulated depreciation are eliminated from
the accounts and any gain or loss is included in income. Property, equipment
and improvements acquired by the Company's foreign subsidiaries are recorded
net of capital grants received from the Industrial Development Board for
Northern Ireland.
Goodwill represents the excess of acquisition cost over the fair value of
net assets of a purchased business, and is being amortized over five years.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of"
("SFAS 121") was issued in March 1995. SFAS 121 requires that long-lived
assets and certain intangible assets be reviewed for impairment in value,
based upon undiscounted future cash flows, and that appropriate losses be
recognized whenever it is determined that the carrying amount of an asset may
not be recovered. The Company adopted SFAS 121 in fiscal year 1996 and such
adoption did not have a material effect on the Company's financial position or
results of operations.
REVENUE AND COST RECOGNITION
The Company's Northern Ireland operating units recognize sales and cost of
sales upon shipment of products.
SMTEK, the Company's U.S. operating unit which was acquired during 1996, has
historically generated the majority of its revenue through long-term contracts
with suppliers of electronic components and products to the federal
government. Consequently, SMTEK uses the percentage of completion method to
recognize sales and cost of sales. SMTEK determines percentage complete on the
basis of costs incurred to total estimated costs. Contract costs include all
direct material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Selling, general and administrative costs are charged to expense as
incurred. In the period in which it is determined that a loss will result from
the performance of a contract, the entire amount of the estimated loss is
charged to income. Other changes in contract price and estimates of costs and
profits at completion are recognized prospectively. This method recognizes in
the current period the cumulative effect of the changes on current and prior
periods. The asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. Included in SMTEK's sales and cost of sales amounts are revenues from
engineering design and test services, which are immaterial in relation to
consolidated revenue from product sales.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and credit carryforwards. In estimating future tax
consequences, all expected future events other than enactments of changes in
tax law or statutorily imposed rates are considered. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with
F-8
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
basic and diluted earnings per share. Basic earnings per share represents
income available to common shareholders divided by the weighted average number
of common shares outstanding for the period. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants, and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to SFAS 128 requirements.
As the Company reported a net loss for the year ended June 30, 1997 and a
loss before extraordinary item for the years ended June 30, 1996 and 1995, the
shares used in computing diluted earnings (loss) per share for these years is
equal to the weighted average number of common shares outstanding for the
period and excludes the dilutive effect of options, warrants and convertible
securities.
For the years ended June 30, 1997, 1996 and 1995, subordinated debentures
convertible into 310,206, 893,332 and 748,632 shares of common stock,
respectively, were outstanding but were not included in the computation of
diluted earnings per share.
For the years ended June 30, 1997, 1996 and 1995, options and warrants to
purchase 4,953,217, 3,648,163 and 1,356,619 shares of common stock,
respectively, at prices ranging from $0.50 to $2.25 for the year ended June
30, 1997 and from $0.50 to $4.88 for the years ended June 30, 1996 and 1995,
were outstanding but were not included in the computation of diluted earnings
per share.
FOREIGN CURRENCY TRANSLATION
The financial statements of DDL's Northern Ireland subsidiaries have been
translated into U.S. dollars from their functional currency, British pounds
sterling, in the accompanying statements in accordance with Statement of
Financial Accounting Standards No. 52. Balance sheet amounts have been
translated at the exchange rate on the balance sheet date and income statement
amounts have been translated at average exchange rates in effect during the
period. The net translation adjustment is recorded as a component of
stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK BASED COMPENSATION
Prior to July 1, 1996, the Company accounted for its employee stock
compensation plans in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded only if, on
the date of grant, the current market price of the underlying stock exceeded
the exercise price. On July 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for stock-based awards made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS 123
had been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS
123.
F-9
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CHANGES IN CLASSIFICATION
Certain reclassifications have been made to the fiscal 1996 and 1995
financial statements to conform with the fiscal 1997 financial statement
presentation. Such reclassifications had no effect on the Company's results of
operations or stockholders' equity (deficit).
NOTE 2--QUASI-REORGANIZATION
The Company, with the authorization of its Board of Directors, implemented a
quasi-reorganization effective June 27, 1997. The quasi-reorganization, which
did not require the approval of the Company's stockholders, resulted in an
elimination of the accumulated deficit of $23,678,000 by a transfer from
additional paid-in capital of an equivalent amount. This deficit was
attributable primarily to operations which were divested or discontinued in
prior years. Following a review and evaluation by management, no adjustment
was made to the carrying values of the Company's assets and liabilities
because such amounts were deemed to be not in excess of estimated fair values.
NOTE 3--SUBSEQUENT EVENTS
On June 30, 1997 (which is subsequent to the year ended June 27, 1997, as
the Company utilizes a 52-53 week fiscal year), the Company repaid its 10%
Senior Notes due July 1, 1997 in the amount of $5,300,000 plus accrued
interest of $43,000. Of the funds used to repay the 10% Senior Notes,
$2,000,000 was borrowed from a private investor (the "Investor") on June 30,
1997 under a note payable due February 1, 1999 which is secured by the common
stock of SMTEK. Because the Company borrowed $2,000,000 under a long-term note
to raise a portion of the funds needed to pay off the 10% Senior Notes,
$2,000,000 of the 10% Senior Notes has been classified as long-term debt in
the accompanying consolidated balance sheet.
Following is pro forma information for certain consolidated balance sheet line
items presented as if the issuance of the $2,000,000 note payable and
repayment of the 10% Senior Notes had occurred on June 27, 1997:
<TABLE>
<CAPTION>
JUNE 27, 1997
----------------------
AS REPORTED PRO FORMA
----------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents........................... $4,718,000 $1,375,000
Liabilities:
Current portion of long-term debt................... $4,167,000 $ 867,000
Other accrued liabilities........................... $2,321,000 $2,278,000
</TABLE>
Concurrent with issuing the $2,000,000 note payable on June 30, 1997, the
Company agreed to acquire all of the issued and outstanding shares of Jolt
Technology, Inc.("Jolt"), a privately-held electronic manufacturing services
company controlled by the Investor, for nine million shares of the Company's
common stock. The acquisition of Jolt is subject to executing a definitive
agreement, obtaining a fairness opinion on the transaction, and obtaining the
approval of the Company's stockholders. Upon consummation of the Jolt
acquisition, the maturity date of the $2,000,000 note payable will be extended
from February 1, 1999 to October 31, 1999. If consummated, the acquisition is
expected to be accounted for under the pooling of interests method of
accounting for business combinations.
F-10
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--BUSINESS ACQUISITION, LIQUIDATION AND DIVESTITURE
LIQUIDATION AND DIVESTITURE
During fiscal 1995, the Company closed the operations of its A.J.
Electronics, Inc. subsidiary ("A.J."). The Company recorded restructuring
charges of $1,533,000 for the costs associated with the shut down and disposal
of the assets of A.J., including asset write-downs of $552,000, additional bad
debt write-offs of $136,000, lease termination costs of $211,000, and all
other exit costs totaling $634,000. Substantially all of the operating assets
of A.J. were sold in January 1995 for total consideration, in the form of cash
and debt assumption, of approximately $1,041,000.
In December 1994, the Company sold essentially all the assets of its
Aeroscientific Oregon subsidiary ("Aero Oregon") for proceeds of approximately
$9,200,000 in cash and the assumption by the purchaser of approximately
$300,000 of capitalized lease obligations, which resulted in a gain of
$3,317,000. With the proceeds of this sale, the Company paid off $5,300,000 of
industrial revenue bonds and settled a $6,941,000 bank term loan for a cash
payment of $4,500,000, which resulted in an extraordinary gain on debt
extinguishment of $2,441,000.
ACQUISITION
On January 12, 1996, the Company acquired 100% of the outstanding stock of
SMTEK, a provider of integrated electronic manufacturing services. The
purchase price of $8,000,000 was paid in cash of $7,199,000 and 1,000,000
shares of unregistered common stock which was valued at $801,000. The Company
also incurred acquisition-related fees and other costs totaling $495,000. The
cash portion of the purchase price was financed through the issuance of 10%
Senior Notes in the aggregate amount of $5,300,000 and 10% Cumulative
Convertible Debentures in the aggregate amount of $3,500,000. The 10% Senior
Notes were repaid on June 30, 1997, as discussed in Note 3.
The 10% Convertible Debentures, which were sold to offshore investors, were
convertible into common stock at any time after 60 days at a conversion price
equal to 82% of the market price of the Company's common stock at the time of
conversion. In May and June 1996, the holders of all of the 10% Debentures
elected to convert such debentures into common stock. As a result of these
conversions, a total of 2,698,275 new shares of common stock were issued and
stockholders' equity increased by $3,188,000, net of the remaining unamortized
issue costs associated with these debentures.
In connection with the sale of the 10% Senior Notes and 10% Convertible
Debentures, the Company paid $352,000 as a fee to the placement agent for
these financings. The Company also issued to the placement agent as additional
compensation 572,683 shares of common stock valued at $716,000 and warrants,
Series E, to purchase 1,500,000 shares of common stock for $2.50 per share
which are exercisable for five years. As further described in Note 10, the
Series E warrants contain an antidilution provision which has lowered the
exercise price.
The acquisition of SMTEK was accounted for using the purchase method. In
accordance with Accounting Principles Board Opinion No. 16, the total
investment made in SMTEK of $8,495,000 was allocated to the assets and
liabilities acquired at their estimated fair values at the acquisition date,
which resulted in the recognition of goodwill of $6,342,000. Accumulated
amortization of goodwill was $1,903,000 and $634,000 as of June 30, 1997 and
1996, respectively.
F-11
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is unaudited pro forma information presented as if the acquisition
of SMTEK had occurred on July 1, 1995 and on July 1, 1994, respectively (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
-----------------
1996 1995 (A)
------- --------
<S> <C> <C>
Sales................................................. $40,918 $43,776
Loss before extraordinary item........................ $(1,792) $(4,793)
Net income (loss)..................................... $ 564 $(2,352)
Earnings (loss) per share............................. $ 0.03 $ (0.11)
</TABLE>
(A) These pro forma results include the operations of Aero Oregon and A.J.,
the assets of which were sold in fiscal 1995. Excluding the fiscal 1995
operating results of Aero Oregon and A.J., and the related gain on sale of
Aero Oregon's assets and the A.J. restructuring charges, the fiscal 1995
pro forma sales, loss before extraordinary item, net loss and loss per
share are $34,960,000, $(5,191,000), $(2,750,000) and $(0.13),
respectively.
NOTE 5--ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Trade receivables........................................ $8,810 $5,456
Other receivables........................................ 546 296
Less allowance for doubtful accounts..................... (158) (132)
------ ------
$9,198 $5,620
====== ======
</TABLE>
Included in other receivables at June 30, 1997 and 1996 are grants due from
the Industrial Development Board for Northern Ireland of $125,000 and
$251,000, respectively (Note 12).
NOTE 6--COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
The components of costs and estimated earnings in excess of billings on
uncompleted contracts are as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Costs incurred on uncompleted contracts................ $20,455 $11,181
Estimated earnings..................................... 2,714 1,544
------- -------
23,169 12,725
Less: Billings to date................................. (20,008) (9,699)
------- -------
$ 3,161 $ 3,026
======= =======
</TABLE>
Costs and estimated earnings in excess of billings on uncompleted contracts
consists of revenue recognized under electronics assembly contracts which
amounts were not billable at the balance sheet date, net of $149,000 and
$64,000 of billings in excess of costs and estimated earnings at June 30, 1997
and 1996, respectively. Essentially all of the unbilled receivables are
expected to be billed within 90 days of the balance sheet date.
F-12
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Raw materials............................................ $2,889 $2,853
Work in process.......................................... 654 1,263
Finished goods........................................... 160 146
Less reserves............................................ (492) (248)
------ ------
$3,211 $4,014
====== ======
</TABLE>
NOTE 8--FINANCING ARRANGEMENTS
BANK CREDIT AGREEMENTS
The Company has an accounts receivable-based working capital bank line of
credit for SMTEK which provides for borrowings of up to $2,500,000 at an
interest rate of prime (8.5% at June 30, 1997) plus 1.25%. At June 30, 1997,
borrowings outstanding under this credit facility amounted to $977,000.
SMTEK's line of credit expires on September 1, 1998. The Company also has a
credit facility agreement with Ulster Bank Markets for its Northern Ireland
operations. This agreement includes a working capital line of credit of
(Pounds)1,150,000 (approximately $1,900,000), and provides for interest on
borrowings at the Bank's base rate (6.50% at June 30, 1997) plus 1.50%. At
June 30, 1997, borrowings outstanding under this credit facility amounted to
$401,000. In September 1997, Ulster Bank Markets increased the Northern
Ireland line of credit to (Pounds)3,000,000 (approximately $4,900,000) and
extended the credit facility through August 31, 1998.
LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------
1997 1996
------ -------
<S> <C> <C>
10% Senior Notes, interest payable quarterly beginning on June
1, 1996, secured by 1,060,000shares of common stock and
1,060,000 warrants,due July 1, 1997 (Note 3).................. $5,300 $ 5,300
Mortgage notes secured by real property at the Northern Ireland
operations, with interest at variable rates (7 7/8% at June
30, 1997), payable in semiannual installments through 2009.... 1,300 1,265
Notes payable secured by equipment, interest at 7.95% to 10.9%,
payable in monthly installments through April 2001............ 1,129 1,523
Capitalized lease obligations (Note 12)........................ 1,197 167
8 1/2% Convertible Subordinated Debentures, due 2008, interest
payable semi-annually and convertible at holders' option at a
price of $10.63 per share at any time prior to maturity;
redeemable by the Company at 101.7% of the principal amount
during the 12 months ending July 31, 1997 and subsequently at
prices declining to 100% at August 1, 1998, and thereafter.... 1,580 1,580
7% Convertible Subordinated Debentures ("CSDs"), due 2001,
interest payable semi-annually and convertible at holders'
option at a conversion price of $2.00 per share at any time
prior to maturity............................................. 421 443
Obligations to former officers, employees and directors under
consulting and deferred fee agreements........................ 826 965
Other.......................................................... 234 295
------ -------
11,987 11,538
Less current maturities........................................ 4,167 603
------ -------
$7,820 $10,935
====== =======
</TABLE>
F-13
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At June 30, 1997, one of the notes payable secured by equipment was further
collateralized by an irrevocable standby letter of credit, which in turn is
secured by the Company's restricted cash deposit of $145,000. This amount is
included in deposits and other assets in the accompanying consolidated balance
sheet at June 30, 1997 and 1996.
The aggregate amounts of minimum maturities of long-term debt for the
indicated fiscal years (other than capitalized lease obligations, as described
in Note 12) are as follows: 1998--$3,867,000; 1999--$2,954,000; 2000--
$400,000; 2001--$659,000; 2002--$172,000; and thereafter--$2,738,000.
During fiscal 1996 and 1995, holders of $132,000 and $86,000, respectively,
in principal of 7% CSDs exchanged such CSDs for common stock of 66,000 and
43,000 shares, respectively. Accrued interest related to the converted
debentures was credited to income.
In March 1996, the Company entered into a settlement agreement with certain
of its former officers, key employees and directors (the "Participants") to
restructure its outstanding obligations under several consulting programs and
deferred fee arrangements which had provided for payments to the Participants
after their retirement from the Company or from its Board of Directors. Under
terms of the settlement, the Participants agreed to relinquish all future
payments due them under these consulting programs and deferred fee
arrangements in return for an aggregate of 595,872 common stock purchase
warrants, Series G. The exercise price is $2.50 per warrant. The Company will
subsidize the exercise of warrants by crediting the Participants with $2.50
for each warrant exercised. The warrants may be called for redemption by the
Company at any time after June 1, 1996, if DDL's common stock closes above
$4.00 per share, at a redemption price of $.05 per warrant. The Company is
obligated to pay the Participants $2.50 for each warrant which remains
unexercised on the June 1, 1998 warrant expiration date, payable in semiannual
installments over two to ten years. The Company has recorded a liability for
the present value of these future payments, which amounted to $802,000 and
$941,000 at June 30, 1997 and 1996, respectively. As the result of this
settlement agreement, the Company recorded an extraordinary gain in fiscal
1996 of $2,356,000, net of $197,000 of compensation expense related to the
"call" feature of the warrants. During fiscal 1997, 144,646 Series G warrants
were exercised.
NOTE 9--INCOME TAXES
Temporary differences between financial statement carrying amounts and the
tax bases of assets and liabilities that give rise to significant portions of
the deferred tax assets and liabilities relate to the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued employee benefits.............................. $ 346 $ 394
Loss reserves.......................................... 452 547
Net operating loss carryforwards....................... 14,102 13,240
Other.................................................. 74 272
-------- --------
Total deferred tax assets................................ 14,974 14,453
Deferred tax liabilities:
Depreciation........................................... (118) (53)
-------- --------
Net deferred tax assets before allowance............... 14,856 14,400
Less valuation allowance............................... (14,856) (14,400)
-------- --------
Net deferred tax assets after allowance.................. $ -- $ --
======== ========
</TABLE>
F-14
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In assessing the realizability of net deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
net deferred tax assets will be realized. The ultimate realization of net
deferred tax assets is dependent upon the generation of future taxable income
of approximately $37,000,000 prior to the expiration of the net operating loss
carryforwards. Based on the level of historical losses and projections for
future taxable income, management believes that it is more likely than not
that the deferred tax assets will not be recognized, and therefore, has
recorded a 100% valuation allowance to offset the assets. The valuation
allowance was $14,400,000 and $20,846,000 as of July 1, 1996 and 1995,
respectively. The net change in the total valuation allowance for the years
ended June 30, 1997 and 1996 was an increase of $456,000 and a decrease of
$6,446,000, respectively. The reduction of the valuation allowance for fiscal
1996 was based on a carryback of prior year net operating losses and an
extraordinary gain on extinguishment of debt. This change in estimate
regarding the realizability of certain net operating losses has been reflected
in the income tax benefit for fiscal 1996.
The provision (benefit) for income taxes differs from an amount computed
using the statutory federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------
1997 1996 1995
----- ------- -----
<S> <C> <C> <C>
Federal tax benefit computed at statutory rate....... $(569) $ (635) $(804)
State income tax, net of federal benefit............. -- -- 5
Differences in taxation of foreign earnings, net..... (263) 114 (155)
Amortization of debt issue costs..................... -- (108) --
Amortization of goodwill............................. 431 215 --
Utilization of net operating losses.................. -- (1,110) --
Deferred tax effect of temporary differences......... (102) 6,871 1,438
Net change in valuation allowance.................... 456 (6,446) (484)
Other................................................ 47 (11) --
----- ------- -----
Income tax expense (benefit)......................... $ -- $(1,110) $ --
===== ======= =====
</TABLE>
During fiscal 1996, the Company recognized an income tax benefit associated
with its application for federal tax refunds as permitted under section 172(f)
of the Internal Revenue Code. In the aggregate, the Company applied for
federal tax refunds of $2,175,000, net of costs associated with applying for
such refunds. Through June 30, 1996, the Company had received $1,871,000 of
net refunds plus interest on such refunds of $106,000, and has recognized as
an income tax benefit $1,110,000 net of certain expenses. Because the tax
returns underlying these refunds are subject to audit by the Internal Revenue
Service and a portion of the refunds could be disallowed, the Company has not
yet recognized a tax benefit for the remainder of the refunds received to
date, or for the refunds still expected to be received. No additional refunds
were received during fiscal 1997. Nonetheless, the Company feels that its
claim for refund and carry back of net operating losses can be substantiated
and is supported by law, and that the Company will ultimately collect and
retain a substantial portion of the refunds applied for.
As of June 30, 1997, the Company has U.S. federal and state net operating
loss ("NOL") carryforwards of $37,408,000 and $27,709,000, respectively,
expiring in 2004 through 2012. The NOL carryforward for federal alternative
minimum tax purposes is approximately $28,558,000.
The Company's ability to use its NOL carryforwards to offset future taxable
income is subject to annual limitations due to certain substantial stock
ownership changes. Utilization of NOLs incurred through July 1993 became
limited due to an ownership change. NOLs incurred subsequent to July 1993 are
not subject to limitation. The amount of the NOL carryforward arising prior to
July 1993 which is subject to limitation is approximately $21,877,000. The
annual limitation is approximately $1,222,000.
F-15
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income of the Company's Northern Ireland subsidiaries is sheltered by
operating loss carryforwards for United Kingdom income tax purposes (the "U.K.
NOL"). The income tax benefit from the U.K. NOL was $244,000 in fiscal 1997
and has been treated as a reduction in the provision for income taxes. There
was no income tax benefit from the U.K. NOL in fiscal 1996 and 1995. At June
30, 1997, the U.K. NOL amounted to approximately $11,300,000. Substantially
all of these net operating losses from prior years can be carried forward by
the Company's Northern Ireland subsidiaries for an indefinite period of time
to reduce future taxable income.
As discussed in Note 2, the Company effected a quasi-reorganization as of
June 27, 1997. In the future, income tax benefits, if any, realized upon the
utilization of U.S. or U.K. net operating losses generated prior to the
effective date of the quasi-reorganization will be credited to additional
paid-in capital.
Pretax income (loss) from foreign operations for fiscal 1997, 1996 and 1995
was $772,000, ($338,000) and $443,000, respectively. It is not practicable to
estimate the amount of tax that might be payable on the eventual remittance of
such earnings. On remittance, the United Kingdom imposes withholding taxes
that would then be available for use as a credit against the U.S. tax
liability, if any, subject to certain limitations.
NOTE 10--STOCKHOLDERS' EQUITY
SALES OF COMMON STOCK
In June 1997, the Company sold 2,000,000 shares of common stock to various
investors, generating proceeds of $1,385,000, which is net of issuance costs
of $115,000.
In March 1996, the Company sold 600,000 shares of common stock to an
offshore investor, generating proceeds of $1,112,000, which is net of issuance
costs of $58,000.
COMMON STOCK HELD IN ESCROW
In February 1996, 1,060,000 shares of common stock (the "Escrow Shares")
were placed into an escrow account to secure the 10% Senior Notes. In June
1997, in connection with the payoff of the 10% Senior Notes, 353,333 of the
Escrow Shares were released to the placement agent of the 10% Senior Notes as
a deferred fee and the remaining 706,667 Escrow Shares were returned to the
Company and canceled. The carrying value of the 353,333 shares of $442,000 was
expensed in June 1997 and is included in debt issue cost amortization expense
in the accompanying consolidated statement of operations.
STOCK OPTION PLANS
The Company has in effect several stock-based plans under which non-
qualified and incentive stock options and restricted stock awards have been
granted to directors, officers and other key employees. Subject to the
discretion of the Compensation Committee of the Board of Directors (the
"Committee"), employee stock options generally become exercisable in
installments of 33.3% per year, or over an alternative vesting period
determined by the Committee, and generally have a 10-year term when granted.
The exercise price of all incentive stock options must be equal to or
greater than the fair market value of the shares on the date of grant. The
exercise price of non-statutory stock options must be at least 85% of the fair
market value of the common stock on the date of grant.
In July 1996, following stockholder approval, the Company adopted a stock
option plan for non-employee directors. Under this plan, annually on July 1
each non-employee director will be granted a non-statutory stock option to
purchase 30,000 shares of common stock. In July 1996, options to purchase a
total of 120,000 shares at an exercise price of $1.63 were granted to the
Company's four non-employee directors.
F-16
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity under the employee and non-employee director stock option plans for
fiscal years 1997, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
---------- ----------------
<S> <C> <C>
Shares under option, June 30, 1994.............. 1,864,566 $0.87
Granted........................................ 120,000 1.23
Expired or canceled............................ (177,500) 1.71
Exercised...................................... (450,447) 0.64
---------- -----
Shares under option, June 30, 1995.............. 1,356,619 0.87
Granted........................................ 906,042 1.72
Expired or canceled............................ (33,928) 1.44
Exercised...................................... (595,442) 0.75
---------- -----
Shares under option, June 30, 1996.............. 1,633,291 1.37
Granted........................................ 1,852,758 1.23
Expired or canceled............................ (1,139,058) 1.66
Exercised...................................... (150,000) 0.50
---------- -----
Shares under option, June 30, 1997.............. 2,196,991 $1.16
========== =====
</TABLE>
In fiscal 1997, pursuant to resolutions of the Compensation Committee of the
Board of Directors, 762,329 options with exercise prices of $1.63 to $4.88
were canceled and were replaced by new options for the same number of shares
at an exercise price of $1.25.
The following table summarizes information about shares under option at June
30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.50-$0.69 274,462 4.4 years $0.50 274,462 $0.50
1.00- 1.25 1,670,529 9.3 1.20 184,999 1.25
1.63 252,000 9.0 1.63 163,997 1.63
--------- ----- -------
2,196,991 $1.16 623,458
========= ===== =======
</TABLE>
At June 30, 1997, under the employee and non-employee director stock option
plans there were 857,998 and 780,000 shares, respectively, available for
future grants.
F-17
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK BASED COMPENSATION
The Company applies the provisions of APB Opinion No. 25 and related
interpretations in accounting for its stock option plans and the Series H
warrants granted to non-employee directors (see "Warrants" below).
Accordingly, no compensation cost has been recognized for its stock option
plans and awards of warrants to non-employee directors. Had compensation cost
for stock-based awards been determined consistent with SFAS 123, the Company's
results of operations would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30
-----------------------
1997 1996
----------- ----------
<S> <C> <C>
Net income (loss):
As reported....................................... $(1,678,000) $1,598,000
Pro forma......................................... $(2,251,000) $1,339,000
Basic and diluted earnings (loss) per share:
As reported....................................... $ (0.07) $ 0.09
Pro forma......................................... $ (0.10) $ 0.07
</TABLE>
The weighted average fair value of options granted during the years ended
June 30, 1997 and 1996 was $0.76 and $1.06, respectively. The weighted average
fair value of Series H warrants granted to non-employee directors in fiscal
1996 was $0.84 per warrant.
The fair value of each option and warrant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1997 and 1996, respectively: dividend yield of 0.0% percent
for both years; expected volatility of 68% and 67%, respectively; risk-free
interest rates ranging from 6.1% to 6.8% for 1997 and 6.6% to 6.7% for 1996;
and expected lives of five years for both years.
PREFERRED STOCK PURCHASE RIGHTS
At June 30, 1997, 1,000 preferred stock purchase rights are outstanding.
Each right may be exercised to purchase one-hundredth of a share of Series A
Participating Junior Preferred Stock at a purchase price of $30, subject to
adjustment. The rights may be exercised only after commencement or public
announcement that a person (other than a person receiving prior approval from
the Company) has acquired or obtained the right to acquire 20% or more of the
Company's outstanding common stock. The rights, which do not have voting
rights, may be redeemed by the Company at a price of $.01 per right within ten
days after the announcement that a person has acquired 20% or more of the
outstanding common stock of the Company and the redemption period may be
extended under certain circumstances. In the event that the Company is
acquired in a merger or other business combination transaction, provision
shall be made so that each holder of a right shall have the right to receive
that number of shares of common stock of the surviving company which at the
time of the transaction would have a market value of two times the exercise
price of the right. 150,000 shares of Series A Junior Participating Preferred
Stock, $1 par value, are authorized.
WARRANTS
In fiscal 1993, the Company exchanged a portion of its outstanding
convertible debentures for stock and common stock purchase warrants, Series A.
The remaining 223,500 of these Series A warrants were exercised during fiscal
1996 at $1.42 per share.
In fiscal 1995, the Company issued 100,000 warrants, Series B, to purchase
common stock at $1.31 per share to offshore investors in connection with an
earlier offering of common stock. These warrants were exercised in April 1996.
F-18
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal 1996, the Company issued Series C, D, E, F, G and H common
stock purchase warrants. The provisions and activity of these warrants are as
follows:
1. Series C warrants covering an aggregate of 455,000 shares were issued to
four parties, including an investment banking firm, for consulting and
financial advisory services. These warrants are exercisable at $2.25 per
share until June 30, 1998, and at $3.50 thereafter until the warrant
expiration date on June 30, 2000. Fifty-thousand of the Series C
warrants were issued to an individual who was subsequently elected a
director of the Company. Substantially all of these warrants were
granted in June and July 1995 and had no intrinsic value on the date of
grant.
2. Series D warrants covering 50,000 shares were issued to the Company's
former general counsel as partial consideration for legal services
rendered under an agreement entered into in fiscal 1995. These warrants
are exercisable at $1.50 per share until June 30, 1998, and at $2.50
thereafter until the warrant expiration date on June 30, 2000. The
warrants had no intrinsic value on the date of grant.
3. Series E warrants covering an aggregate of 1,500,000 shares were issued
to an investment banking firm which served as placement agent for the
10% Senior Notes and the 10% Convertible Debentures. The Series E
warrants are exercisable until their expiration on February 28, 2001,
and provided for an original exercise price of $2.50 per share, subject
to adjustment in the event the Company issues new common stock at an
effective price less than the effective exercise price on the Series E
warrants. Primarily as a result of the conversion of the 10% Convertible
Debentures in May and June 1996 at an average price of approximately
$1.30 and the issuance of 2,000,000 shares of common stock at a price of
$0.75 in June 1997, the effective exercise price on the Series E
warrants was reduced to $2.19 as of June 30, 1997. The Series E warrants
were granted in September 1995 contingent upon the placement of debt.
The warrants had no intrinsic value on the measurement date.
4. In February 1996, the Series F warrants covering an aggregate of
1,060,000 shares were issued as partial collateral for the 10% Senior
Notes. These warrants were canceled effective June 30, 1997, concurrent
with the repayment of the 10% Senior Notes.
5. As further described in Note 8, the Series G warrants covering an
aggregate of 595,872 shares were issued in March 1996 to certain former
officers, key employees and directors of the Company. The Series G
warrants are exercisable until their expiration on June 1, 1998. At June
30, 1997, 451,226 Series G warrants were outstanding.
6. Series H warrants covering an aggregate 300,000 shares were issued to
the Company's non-employee directors who served on the Company's board
without other compensation during the period from May 31, 1995 to June
30, 1996. The Series H warrants are exercisable at $1.50 per share until
June 30, 1998, and at $2.50 thereafter until the warrant expiration date
on June 30, 2000. There was no intrinsic value related to the warrants
on the date of grant.
NOTE 11--OTHER FINANCIAL INFORMATION
INFORMATION RELATING TO CONSOLIDATED STATEMENTS OF CASH FLOWS
"Net cash provided by (used in) operating activities" includes cash payments
for interest (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30,
----------------
1997 1996 1995
------ ---- ----
<S> <C> <C> <C>
Interest paid.................................................. $1,077 $732 $883
</TABLE>
F-19
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Net (increase) decrease in operating working capital, net of effects of
business acquired" consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
(Increase) decrease in accounts receivable........... $(3,397) $ 270 $2,030
Increase in costs and estimated earnings in excess of
billings on uncompleted contracts................... (135) (726) --
(Increase) decrease in inventories................... 1,054 (1,881) 1,504
(Increase) decrease in prepaid expenses.............. 189 (86) 62
Increase in accounts payable......................... 1,222 278 111
Increase (decrease) in accrued payroll and employee
benefits............................................ 328 24 (406)
Increase (decrease) in other accrued liabilities..... (808) 613 708
------- ------- ------
Net (increase) decrease.............................. $(1,547) $(1,508) $4,009
======= ======= ======
Following is the supplemental schedule of non-cash investing and financing
activities (in thousands):
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Capital expenditures financed by lease obligations
and notes payable................................... $ 1,221 $ 689 $ 96
Conversion of debt to equity......................... 223 3,667 86
Common stock issued as partial consideration for
purchase of SMTEK, Inc.............................. -- 801 --
Common stock issued as debt placement fee............ -- 716 --
Common stock deposited to (returned from) escrow
account for 10% Senior Notes........................ (883) 1,325 --
Conversion of preferred stock to common stock........ -- -- 3
</TABLE>
OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
-------------
1997 1996
------ ------
<S> <C> <C>
Environmental liabilities................................. $ 684 $ 728
Accrued taxes payable..................................... 794 951
Other..................................................... 843 1,435
------ ------
$2,321 $3,114
====== ======
</TABLE>
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Following is the Company's schedule of valuation and qualifying accounts and
reserves for the last three years (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Fiscal 1995............. $533 $95 $(447) $181
Fiscal 1996............. 181 85 (134) 132
Fiscal 1997............. 132 74 (48) 158
INVENTORY RESERVES:
Fiscal 1995............. $384 $62 $(290) $156
Fiscal 1996............. 156 250 (158) 248
Fiscal 1997............. 248 443 (199) 492
</TABLE>
F-20
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--COMMITMENTS AND CONTINGENCIES
ACQUISITION AND MERGER COMMITMENTS
On May 29, 1997, the Company signed a letter of intent (the "Letter of
Intent") to merge with Century Electronics Manufacturing, Inc. ("CEMI").
Pursuant to the Letter of Intent, CEMI was to provide a loan up to $3.3
million to the Company by June 1, 1997 for retirement of the Company's 10%
Senior Notes in the aggregate principal amount of $5,300,000. However, such
financing was not made available by CEMI. As a result, on June 30, 1997 the
Company obtained alternate financing which enabled it to repay the 10% Senior
Notes.
On September 22, 1997, the Company filed a lawsuit against CEMI alleging
breach of contract and fraud and seeking $5,000,000 in actual damages plus
punitive damages. CEMI has not yet answered the Company's complaint or made an
appearance in the case. In the circumstances, management currently believes
that the likelihood of consummating a merger with CEMI is remote.
As described in Note 3, the Company has entered into an agreement to acquire
Jolt Technology, Inc., a privately held electronic manufacturing services
company, for nine million shares of common stock. The acquisition of Jolt
Technology, Inc. is subject to executing a definitive agreement, obtaining a
fairness opinion on the transaction, and obtaining the approval of the
Company's stockholders.
LEASE COMMITMENTS
Future minimum lease payments at June 30, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Fiscal 1998............................................... $ 393 $ 415
Fiscal 1999............................................... 372 420
Fiscal 2000............................................... 335 386
Fiscal 2001............................................... 278 22
Fiscal 2002............................................... 50 16
Thereafter................................................ -- 21
------ ------
Total................................................... 1,428 $1,280
======
Less: Interest............................................ (231)
------
Present value of minimum lease payments................... $1,197
======
</TABLE>
The capitalized cost of the related assets (primarily plant equipment),
which are pledged as security under the capital leases, was $1,726,000 and
$370,000 at June 30, 1997, and 1996, respectively. Accumulated amortization on
assets under capital leases amounted to $264,000 and $143,000 at June 30, 1997
and 1996, respectively.
Rental expense for operating leases amounted to $408,000, $229,000 and
$238,000 for fiscal 1997, 1996 and 1995, respectively. The Company's principal
operating leases are renewable at the fair rental value on the expiration
dates.
SMTEK conducts its operations from a 45,000 square foot facility, which is
leased from an unaffiliated party through May 31, 2000. The monthly rent was
approximately $30,000 during fiscal 1997 and is subject to a 4% increase each
year. SMTEK has the option to extend the lease term for three renewal periods
of three years each. The lease rate during the renewal periods is subject to
adjustment based on changes in the Consumer Price Index for the local area.
F-21
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GOVERNMENT GRANTS
Pursuant to government grant agreements with the Industrial Development
Board for Northern Ireland ("IDB"), the Company's subsidiary, DDL Electronics
Limited ("DDL-E"), has been reimbursed for a portion of qualifying capital
expenditures and for certain employment and interest costs. Approximately
$869,000 of the government grants received by DDL-E are subject to repayment
if the employment level at this subsidiary falls below 134 employees during
the two year period beginning on July 1, 1997. At the present time, DDL-E has
approximately 180 employees. Management does not expect the employment at DDL-
E to drop below the level that would give rise to a grant repayment
obligation.
In addition to the contingent grant repayment liability based on DDL-E's
employment level, the Company would be obligated to repay grants in the event
that DDL-E ceases business, permanently discontinues production, or fails to
pay to the IDB any amounts due under its mortgage note payable (Note 8). DDL-
E's contingent grant repayment obligations amount to approximately $1,377,000
at June 30, 1997. Management does not expect that the Company will be required
to repay any grants under these provisions.
FOREIGN CURRENCY EXPOSURE
The Company's investment in its Northern Ireland subsidiaries is represented
by operating assets and liabilities denominated in these subsidiaries'
functional currency of British pounds sterling. In addition, in the normal
course of business these operating units enter into transactions denominated
in European currencies other than British pounds sterling. As a result, the
Company is subject to transaction and translation exposure from fluctuations
in foreign currency exchange rates. The Company uses a variety of strategies,
including foreign currency forward contracts and internal hedging, to minimize
or eliminate foreign currency exchange rate risk associated with substantially
all of its foreign currency transactions. Gains and losses on these hedging
transactions are generally recorded in earnings in the same period as they are
realized, which is usually in the same period as the underlying or originating
transactions. The Company does not enter into speculative foreign currency
transactions. At June 30, 1997, the Company did not have any open foreign
currency forward contracts.
ENVIRONMENTAL MATTERS
In the early 1970s, one of the Company's former California-based PCB
operating units, Aeroscientific Corp. ("Aero Anaheim"), disposed of certain
quantities of waste at the Stringfellow hazardous waste disposal site in
Riverside County, California, which was subsequently designated as a Superfund
site by the U.S. Environmental Protections Agency ("EPA"). Aero Anaheim's
waste accounted for less than three one-hundreds of one percent of the total
waste deposited at this site. Aero Anaheim, which since 1991 has been an
inactive, insolvent subsidiary of the Company, established a reserve of
$120,000 as its share of the estimated environmental remediation costs based
on its relative contribution to the total wastes disposed at this site. The
EPA contends that site owners and operators and waste generators are jointly
and severally liable under federal law. Nonetheless, the Company believes that
the final allocation of liability will generally be made based on relative
contributions of waste. Furthermore, even if joint liability were to be
imposed, the Company believes that the risk is remote that Aero Anaheim's
ultimate liability in this matter would exceed its reserve, because the other
generators of wastes disposed at the Stringfellow site include numerous
companies with assets and equity significantly greater than Aero Anaheim. The
Company believes that Aero Anaheim 's reserve is adequate to cover future
costs associated with this matter.
The Company is aware of certain chemicals that exist in the ground at Aero
Anaheim's previously leased facility in Anaheim. The Company, which was a
guarantor of Aero Anaheim's facility lease, has notified the appropriate
governmental agencies and is proceeding with remediation and investigative
studies regarding soil and groundwater contamination. The installation of
water and soil extraction wells was completed in August
F-22
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1994. In May 1995, the Company retained an environmental engineering firm to
begin the vapor extraction of pollutant from the soil and to perform quarterly
groundwater monitoring. In April 1997, the Company ceased soil vapor
extraction procedures at this site because the pollutant recovery rate had
declined to and stabilized at a very low level at which vapor extraction is no
longer a cost effective recovery technique. The property owner is currently
conducting a soil gas study at the site which is expected to provide
information as to the remaining contamination in the soil. It is not yet known
whether further soil remediation work will be necessary. Investigative work to
determine the full extent of potential groundwater pollution has not yet been
completed. Consequently, a complete and accurate estimate of the full and
potential costs cannot be determined at this time. The Company believes,
however, that the resolution of these matters could require a significant cash
outlay. Initial estimates from environmental engineering firms indicate that
it could cost from $1,000,000 to $3,000,000 to fully clean up the site and
could take as long as ten years to complete. The Company and Aero Anaheim
entered into an agreement to share the costs of environmental remediation with
the owner of the Anaheim property. Under this agreement, the Company is
obligated to pay 80% of the site's total remediation costs up to $725,000
(i.e., up to the Company's $580,000 share) with any costs above $725,000 being
shared equally between the Company and the property owner. Through June 30,
1997, the Company has paid $538,000 as its share of the remediation costs
(including cash placed in an escrow account for payment of expenses). At June
30, 1997, the Company has a reserve of $564,000, which represents its
estimated share of future remediation costs at this site. Based on
consultation with the environmental engineering firms, management believes
that the Company has made adequate provision for the liability based on
probable loss. It is possible, however, that the future remediation costs at
this site could differ significantly from the estimates, and may exceed the
amount of the reserve.
F-23
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in two primary industry segments providing electronic
manufacturing services and printed circuit boards principally to the computer,
communications, instrumentation and medical equipment markets. A summary of
the Company's operations by segment follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Sales:
Electronic Manufacturing Services................. $38,614 $22,245 $13,842
Printed Circuit Boards............................ 10,305 10,891 15,734
------- ------- -------
$48,919 $33,136 $29,576
======= ======= =======
Operating income (loss):
Electronic Manufacturing Services................. $ 70 $ (267) $(1,892)
Printed Circuit Boards............................ 589 (20) (646)
General Corporate................................. (541) (880) (2,432)
------- ------- -------
$ 118 $(1,167) $(4,970)
======= ======= =======
Identifiable assets:
Electronic Manufacturing Services................. $22,248 $20,321 $ 6,162
Printed Circuit Boards............................ 5,881 5,266 5,543
General Corporate................................. 3,751 2,500 885
------- ------- -------
$31,880 $28,087 $12,590
======= ======= =======
Depreciation and amortization:
Electronic Manufacturing Services................. $ 2,195 $ 1,195 $ 568
Printed Circuit Boards............................ 498 548 924
General Corporate................................. 938 285 13
------- ------- -------
$ 3,631 $ 2,028 $ 1,505
======= ======= =======
Capital expenditures:*
Electronic Manufacturing Services................. $ 1,143 $ 1,013 $ 210
Printed Circuit Boards............................ 1,060 586 433
General Corporate................................. 7 -- --
------- ------- -------
$ 2,210 $ 1,599 $ 643
======= ======= =======
</TABLE>
- --------
* Capital expenditures include equipment additions financed with capital
leases and notes payable.
F-24
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales, operating income (loss), and identifiable assets by geographic area
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Sales:
United States...................................... $19,170 $ 8,668 $ 8,765
Northern Ireland................................... 29,749 24,468 20,811
------- ------- -------
Total............................................ $48,919 $33,136 $29,576
======= ======= =======
Operating income (loss):
United States...................................... $ (819) $ (748) $(2,226)
Northern Ireland................................... 937 (419) (2,744)
------- ------- -------
Total............................................ $ 118 $(1,167) $(4,970)
======= ======= =======
Identifiable assets:
United States...................................... $17,425 $16,133 $ 1,003
Northern Ireland................................... 14,455 11,954 11,587
------- ------- -------
Total............................................ $31,880 $28,087 $12,590
======= ======= =======
</TABLE>
The Company had sales to two customers, Allied Signal, Inc. and De La Rue
International Limited, which accounted for approximately 18.4% and 16.5% of
sales, respectively, in fiscal 1997. The Company has not entered into supply
agreements with such customers and sales to such customers have not been
pursuant to a formal purchasing agreement. No single customer accounted for
10% or more of consolidated sales in fiscal 1996 or 1995.
NOTE 14--LIQUIDITY
The Company's financial statements are presented on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities
in the normal course of business. The Company incurred operating income
(losses) of $118,000, $(1,167,000) and $(4,970,000) and cash inflows
(outflows) from operating activities of $230,000, $(555,000) and $(264,000)
for the years ended June 30, 1997, 1996 and 1995, respectively.
In response to the large operating losses incurred up through fiscal 1995,
the Company liquidated its U.S. EMS operation and divested its U.S. PCB
operation during fiscal 1995. The U.S. EMS operation had been severely damaged
in the January 1994 Los Angeles earthquake. In fiscal 1996, the Company
reestablished a domestic operating presence by acquiring SMTEK.
With the exception of fiscal 1997, during which the Company generated
operating income of $118,000, the Company has incurred operating losses for a
number of years. Operating losses could continue until such time as sales
increase to a level sufficient to cover costs and operating expenses. No
assurance can be given as to whether or when sales increases may be achieved.
Sales increases will depend in part upon strengthening the Company's sales and
marketing functions for its existing operations, and improving its price
competitiveness in the EMS industry by achieving economies of scale in the
procurement of electronic components.
Management believes that the Company's cash resources and borrowing capacity
on its working capital lines of credit are sufficient to fund operations for
at least the next year.
F-25
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Following is a summary of the quarterly results of operations (in thousands
except per share amounts):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------
SEP.
30 DEC. 31 MAR. 31 JUN. 30 TOTAL
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Sales............................ $9,895 $11,185 $13,580 $14,259 $48,919
====== ======= ======= ======= =======
Net income (loss)................ $ (725) $ (531) $ 134 $ (556) $(1,678)
====== ======= ======= ======= =======
Basic and diluted earnings (loss)
per share....................... $(0.03) $ (0.02) $ 0.01 $ (0.02) $ (0.07)
====== ======= ======= ======= =======
FISCAL 1996
Sales............................ $6,192 $ 6,029 $10,501 $10,414 $33,136
====== ======= ======= ======= =======
Income (loss) before
extraordinary item.............. $1,084 $ (348) $ (405) $(1,089) $ (758)
Extraordinary item--Gain on debt
extinguishment.................. -- -- 2,356 -- 2,356
------ ------- ------- ------- -------
Net income (loss)................ $1,084 $ (348) $ 1,951 $(1,089) $ 1,598
====== ======= ======= ======= =======
Basic and diluted earnings (loss)
per share:
Income (loss) before
extraordinary item............ $ 0.06 $ (0.02) $ (0.02) $ (0.05) $ (0.04)
Extraordinary item............. -- -- 0.12 -- 0.13
------ ------- ------- ------- -------
Total basic and diluted earnings
(loss) per share................ $ 0.06 $ (0.02) $ 0.10 $ (0.05) $ 0.09
====== ======= ======= ======= =======
</TABLE>
F-26
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, EXCEPT JUNE 30, 1997)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 2,019,000 $ 4,718,000
Accounts receivable, net......................... 8,751,000 9,198,000
Costs and estimated earnings in excess of
billings on uncompleted contracts............... 4,413,000 3,161,000
Inventories, net................................. 2,515,000 3,211,000
Prepaid expenses................................. 441,000 132,000
------------ ------------
Total current assets........................... 18,139,000 20,420,000
------------ ------------
Property, equipment and improvements, at cost:
Buildings and improvements....................... 6,080,000 6,037,000
Plant equipment.................................. 14,947,000 14,962,000
Office and other equipment....................... 2,136,000 1,952,000
------------ ------------
23,163,000 22,951,000
------------ ------------
Less: Accumulated depreciation and amortization.... (16,946,000) (16,161,000)
------------ ------------
Property, equipment and improvements, net.......... 6,217,000 6,790,000
------------ ------------
Other assets:
Goodwill, net.................................... 3,488,000 4,439,000
Deposits and other assets........................ 234,000 231,000
------------ ------------
3,722,000 4,670,000
------------ ------------
$ 28,078,000 $ 31,880,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank lines of credit payable..................... $ 3,272,000 $ 1,378,000
Current portion of long-term debt................ 2,993,000 4,167,000
Accounts payable................................. 6,837,000 9,084,000
Accrued payroll and employee benefits............ 1,120,000 1,145,000
Other accrued liabilities........................ 2,288,000 2,321,000
------------ ------------
Total current liabilities....................... 16,510,000 18,095,000
------------ ------------
Long-term debt:
7% Convertible Subordinated Debentures, less
current portion................................. 387,000 398,000
8 1/2% Convertible Subordinated Debentures....... 1,580,000 1,580,000
Notes payable, capitalized lease obligations and
other long-term debt, less current portion...... 3,284,000 5,842,000
------------ ------------
Total long-term debt............................ 5,251,000 7,820,000
------------ ------------
Stockholders' equity:
Common stock..................................... 246,000 246,000
Additional paid-in capital....................... 6,884,000 6,410,000
Accumulated deficit since June 27, 1997.......... (204,000) --
Foreign currency translation adjustment.......... (609,000) (691,000)
------------ ------------
Total stockholders' equity...................... 6,317,000 5,965,000
------------ ------------
$ 28,078,000 $ 31,880,000
============ ============
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-27
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Sales................................................. $12,855,000 $13,580,000
Cost of goods sold.................................... 10,829,000 11,600,000
----------- -----------
Gross profit.......................................... 2,026,000 1,980,000
----------- -----------
Operating expenses:
Administrative and selling........................... 1,444,000 1,290,000
Goodwill amortization................................ 317,000 317,000
----------- -----------
1,761,000 1,607,000
----------- -----------
Operating income...................................... 265,000 373,000
----------- -----------
Non-operating income (expense):
Interest income...................................... 22,000 16,000
Interest expense..................................... (251,000) (279,000)
Debt issue cost amortization......................... -- (124,000)
Other income (expense), net.......................... (45,000) 148,000
----------- -----------
(274,000) (239,000)
----------- -----------
Income (loss) before taxes............................ (9,000) 134,000
Provision for income taxes............................ (105,000) --
----------- -----------
Net income (loss)..................................... $ (114,000) $ 134,000
=========== ===========
Basic and diluted earnings (loss) per share........... $ -- $ .01
=========== ===========
Shares used in computing earnings per share:
Basic............................................... 24,610,000 23,074,000
=========== ===========
Diluted............................................. 24,610,000 23,595,000
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-28
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH
31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales................................................ $37,576,000 $34,660,000
Cost of goods sold................................... 31,615,000 30,161,000
----------- -----------
Gross profit......................................... 5,961,000 4,499,000
----------- -----------
Operating expenses:
Administrative and selling......................... 4,048,000 3,653,000
Goodwill amortization.............................. 951,000 951,000
----------- -----------
4,999,000 4,604,000
----------- -----------
Operating income (loss).............................. 962,000 (105,000)
----------- -----------
Non-operating income (expense):
Interest income.................................... 51,000 59,000
Interest expense................................... (724,000) (844,000)
Debt issue cost amortization....................... -- (372,000)
Other income (expense), net........................ (63,000) 140,000
----------- -----------
(736,000) (1,017,000)
----------- -----------
Income (loss) before taxes........................... 226,000 (1,122,000)
Provision for income taxes........................... (430,000) --
----------- -----------
Net loss............................................. $ (204,000) $(1,122,000)
=========== ===========
Basic and diluted earnings (loss) per share.......... $ (.01) $ (.05)
=========== ===========
Shares used in computing basic and diluted earnings
per share........................................... 24,598,000 23,047,000
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-29
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss............................................ $ (204,000) $(1,122,000)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation expense.............................. 1,214,000 1,030,000
Amortization of goodwill and debt issue costs..... 954,000 1,326,000
Gain on sale of assets............................ (22,000) (128,000)
Utilization of pre-quasi-reorganization tax
benefits......................................... 430,000 --
Net increase in operating working capital......... (2,837,000) (3,595,000)
Increase in deposits and other assets............. (6,000) 100,000
Benefit of non-capital grants..................... -- (181,000)
Other............................................. 89,000 65,000
----------- -----------
Net cash used by operating activities................. (382,000) (2,505,000)
----------- -----------
Cash flows from investing activities:
Capital expenditures................................ (431,000) (697,000)
Proceeds from sale of assets........................ 16,000 202,000
----------- -----------
Net cash used by investing activities................. (415,000) (495,000)
----------- -----------
Cash flows from financing activities:
Proceeds from bank lines of credit.................. 1,883,000 1,955,000
Proceeds from long-term debt........................ 2,000,000 --
Payments of long-term debt.......................... (5,995,000) (556,000)
Proceeds from foreign government grants............. 123,000 467,000
----------- -----------
Net cash provided by (used in) financing activities... (1,989,000) 1,866,000
----------- -----------
Effect of exchange rate changes on cash............... 87,000 44,000
Decrease in cash and cash equivalents................. (2,699,000) (1,090,000)
Cash and cash equivalents at beginning of period...... 4,718,000 2,519,000
----------- -----------
Cash and cash equivalents at end of period............ $ 2,019,000 $ 1,429,000
=========== ===========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-30
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1--DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DDL Electronics, Inc. provides electronic manufacturing services ("EMS") to
original equipment manufacturers ("OEMs") in the computer, telecommunications,
instrumentation, medical, industrial and aerospace industries. The Company
also manufactures multilayer printed circuit boards ("PCBs") for use primarily
in the computer, communications and instrumentation industries. The Company's
EMS operations are located in Southern California and Northern Ireland. The
Company's PCB facilities are located in Northern Ireland.
The accompanying consolidated financial statements, which have not been
audited by independent accountants (except for the balance sheet as of June
30, 1997), include the accounts of DDL Electronics, Inc. and its subsidiaries.
All significant intercompany transactions and accounts have been eliminated in
consolidation. In the opinion of the Company's management, the accompanying
consolidated financial statements reflect all adjustments (consisting of
normal recurring accruals) necessary to present fairly the Company's financial
position at March 31, 1998 and its results of operations and cash flows for
the nine months ended March 31, 1998 and 1997.
The Company uses a 52-53 week fiscal year ending on the Friday closest to
June 30, which for fiscal year 1997 fell on June 27, 1997. In the accompanying
consolidated financial statements, the 1997 fiscal year end is shown as June
30 and the interim period end for both years is shown as March 31 for clarity
of presentation. The actual interim periods ended on April 3, 1998 and March
28, 1997. The nine month period of fiscal 1998 consisted of 40 weeks compared
to 39 weeks for the same period of fiscal 1997.
Certain notes and other information are condensed or omitted from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
Therefore, these financial statements should be read in conjunction with the
Company's 1997 Annual Report to Stockholders as filed with the Securities and
Exchange Commission on October 10, 1997.
Certain reclassifications have been made to the interim fiscal 1997
financial statements to conform with the fiscal 1998 financial statement
presentation. Such reclassifications had no effect on the Company's results of
operations or stockholders' equity.
NOTE 2--EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share" ("SFAS 128"). SFAS 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding for the period. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to
SFAS 128 requirements.
F-31
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the numerator and denominator used in the computation of
diluted earnings per share follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1997
---------------
<S> <C>
NUMERATOR:
Net income................................................. $ 134,000
Add back net interest related to convertible subordinated
debentures................................................ 34,000
----------
Net income for diluted earnings computation................ $ 168,000
==========
DENOMINATOR:
Weighted average number of common shares outstanding....... 23,074,156
Assumed exercise of options and warrants net of shares as-
sumed reacquired under treasury stock method.............. 211,078
Assumed conversion of convertible subordinated debentures.. 310,206
----------
Total diluted shares....................................... 23,595,440
==========
</TABLE>
The company reported net losses for the three and nine months ended March
31, 1998 and for the nine months ended March 31, 1997; hence, diluted earnings
per share for these periods as presented in the statements of operations
included herein is computed on the same basis as basic earnings per share. For
the nine months ended March 31, 1998 and 1997, the following securities were
outstanding but were not included in the computation of diluted earnings per
as they would have an antidilutive effect on earnings per share: subordinated
debentures convertible into 310,206 shares of common stock; and options and
warrants to purchase 5,421,809 and 4,988,128 shares of common stock,
respectively, at prices ranging from $0.50 to $2.25.
NOTE 3--ACCOUNTS RECEIVABLE
The components of accounts receivable are as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Trade receivables................................... $8,925,000 $8,810,000
Other receivables................................... 21,000 546,000
Less allowance for doubtful accounts................ (195,000) (158,000)
---------- ----------
$8,751,000 $9,198,000
========== ==========
</TABLE>
NOTE 4--COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
The components of costs and estimated earnings in excess of billings on
uncompleted contracts are as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts........... $30,801,000 $20,455,000
Estimated earnings................................ 3,003,000 2,714,000
----------- -----------
33,804,000 23,169,000
Less: Billings to date............................ (29,391,000) (20,008,000)
----------- -----------
$ 4,413,000 $ 3,161,000
=========== ===========
</TABLE>
F-32
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs and estimated earnings in excess of billings on uncompleted contracts
consists of revenue recognized under electronics assembly contracts which
amounts were not billable at the balance sheet date. Essentially all of the
unbilled receivables are expected to be billed within 90 days of the balance
sheet date.
NOTE 5--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Raw materials........................................ $2,239,000 $2,889,000
Work in process...................................... 475,000 654,000
Finished goods....................................... 310,000 160,000
Less reserves........................................ (509,000) (492,000)
---------- ----------
$2,515,000 $3,211,000
========== ==========
</TABLE>
NOTE 6--OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
---------- ----------
<S> <C> <C>
Environmental liabilities............................. $ 651,000 $ 684,000
Accrued taxes payable................................. 790,000 794,000
Other................................................. 847,000 843,000
---------- ----------
$2,288,000 $2,321,000
========== ==========
</TABLE>
NOTE 7--FINANCING ARRANGEMENTS AND ACQUISITION COMMITMENT
The Company has an accounts receivable-based working capital bank line of
credit for SMTEK, its U.S. EMS operation, which provides for borrowings of up
to $2,500,000 at an interest rate of prime (8.50% at March 31, 1998) plus
1.25%. At March 31, 1998, borrowings outstanding under this credit facility
amounted to $1,763,000. The Company also has a credit facility agreement with
Ulster Bank Markets for its Northern Ireland operations. This agreement
includes a working capital line of credit of 3,000,000 pounds sterling
(approximately $5,000,000), and provides for interest on borrowings at the
bank's base rate (7.59% at March 31, 1998) plus 1.50%. At March 31, 1998,
borrowings outstanding under this credit facility amounted to $1,509,000.
On June 30, 1997 (which is subsequent to the year ended June 27, 1997), the
Company repaid its 10% Senior Notes due July 1, 1997 in the amount of
$5,300,000 plus accrued interest of $43,000. Of the funds used to repay the
10% Senior Notes, $2,000,000 was borrowed from a private investor (the
"Investor") on June 30, 1997 under an 8% note payable due February 1, 1999
which is secured by the common stock of SMTEK.
Following is pro forma information for certain consolidated balance sheet
line items presented as if the issuance of the $2,000,000 note payable and
repayment of the 10% Senior Notes had occurred on June 27, 1997:
<TABLE>
<CAPTION>
JUNE 27, 1997
---------------------
AS
REPORTED PRO FORMA
---------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents........................... $4,718,000 $1,375,000
Liabilities:
Current portion of long-term debt................... $4,167,000 $ 867,000
Other accrued liabilities........................... $2,321,000 $2,278,000
</TABLE>
F-33
<PAGE>
DDL ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concurrent with issuing the $2,000,000 note payable on June 30, 1997, the
Company agreed to acquire all of the issued and outstanding shares of Jolt
Technology, Inc. ("Jolt"), a privately-held electronic manufacturing services
company controlled by the Investor, for nine million shares of the Company's
common stock. The acquisition of Jolt is subject to obtaining the approval of
the Company's stockholders. Upon consummation of the Jolt acquisition, the
maturity date of the $2,000,000 note payable will be extended from February 1,
1999 to October 31, 1999.
NOTE 8--INFORMATION RELATING TO STATEMENT OF CASH FLOWS
"Net cash used by operating activities" includes cash payments for interest
as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Interest paid..................................... $ 610,000 $ 834,000
=========== ===========
"Net increase in operating working capital" is comprised of the following:
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
(Increase) decrease in accounts receivable........ $ 324,000 $(3,736,000)
Increase in costs and estimated earnings in excess
of billings on uncompleted contracts............. (1,251,000) (1,418,000)
Decrease in inventories........................... 689,000 779,000
(Increase) decrease in prepaid expenses........... (309,000) 109,000
Increase (decrease) in accounts payable........... (2,232,000) 1,225,000
Decrease in accrued payroll and employee benefits. (24,000) (30,000)
Decrease in other liabilities .................... (34,000) (524,000)
----------- -----------
Net increase in operating working capital......... $(2,837,000) $(3,595,000)
=========== ===========
Following is the supplemental schedule of non-cash investing and financing
activities:
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Capital expenditures financed by lease
obligations...................................... $ 237,000 $ 710,000
Conversion of debt to equity...................... $ 44,000 $ 153,000
</TABLE>
F-34
<PAGE>
[LETTERHEAD OF BRUNT & COMPANY, P.A.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Jolt Technology, Inc.
We have audited the accompanying balance sheets of Jolt Technology, Inc. (a
Florida corporation) as of December 31, 1997 and 1996 and the related
statements of income, changes in stockholders' equity (deficit) and cash flows
for the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to in the first paragraph
present fairly, in all material respects, the financial position of Jolt
Technology, Inc. as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ Brunt & Company, P.A.
Hollywood, Florida
BRUNT & COMPANY, P.A.
Certified Public Accountants
March 19, 1998
F-35
<PAGE>
JOLT TECHNOLOGY, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 679,272 $ 613,618
Trade accounts receivable, net of allowance for
doubtful accounts of $5,000 in 1997 and 1996....... 446,046 269,181
Other receivables................................... 2,813 11,787
Inventories......................................... 115,700 55,249
Deferred merger costs............................... 70,452 --
Prepaid expenses.................................... 8,354 --
----------- ----------
TOTAL CURRENT ASSETS.............................. 1,322,637 949,835
PROPERTY AND EQUIPMENT, net........................... 457,773 454,540
OTHER ASSETS
Rental deposit...................................... 7,773 6,573
----------- ----------
TOTAL OTHER ASSETS................................ 7,773 6,573
----------- ----------
$ 1,788,183 $1,410,948
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued interest--stockholder....................... $ 368,200 $ 250,856
Accrued merger costs................................ 70,452 --
Other accrued expenses.............................. 41,669 28,323
Lease obligation payable............................ -- 31,992
Trade accounts payable.............................. 8,709 10,853
----------- ----------
TOTAL CURRENT LIABILITIES......................... 489,030 322,024
STOCKHOLDER NOTE AND LOAN PAYABLE..................... 1,625,148 1,625,148
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $1.00 par value, 10,000 shares
authorized, issued and outstanding................. 10,000 10,000
Additional paid-in-capital.......................... 24,000 24,000
Accumulated deficit................................. (359,995) (570,224)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).............. (325,995) (536,224)
----------- ----------
$ 1,788,183 $1,410,948
=========== ==========
</TABLE>
Read accompanying notes and auditors' report.
F-36
<PAGE>
JOLT TECHNOLOGY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
NET SALES.............................................. $2,721,510 $2,354,386
COST OF GOODS SOLD..................................... 1,419,373 1,412,482
---------- ----------
GROSS PROFIT......................................... 1,302,137 941,904
---------- ----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 384,280 326,815
---------- ----------
INCOME FROM OPERATIONS............................... 917,857 615,089
INTEREST EXPENSE--STOCKHOLDER LOANS.................... (117,345) (114,900)
OTHER INCOME (EXPENSES)................................ 9,717 (9,032)
---------- ----------
TOTAL NON-OPERATING EXPENSES......................... (107,628) (123,932)
---------- ----------
NET INCOME........................................... $ 810,229 $ 491,157
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE................. $ 81.02 $ 53.54
========== ==========
SHARES USED IN COMPUTING BASIC AND DILUTED EARNINGS
PER SHARE........................................... 10,000 9,173
========== ==========
</TABLE>
Read accompanying notes and auditors' report.
F-37
<PAGE>
JOLT TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 810,229 $ 491,157
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 158,355 232,435
Allowance for bad debts............................... -- 5,000
Changes in assets and liabilities:
Trade accounts receivable............................ (176,865) 119,792
Inventories.......................................... (60,451) 2,286
Other receivables.................................... 8,974 7,647
Prepaid expenses..................................... (8,354) --
Customer deposits.................................... -- (44,600)
Trade accounts payable............................... (2,144) (18,996)
Accrued expenses (net of deferred merger costs)...... 130,690 106,224
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 860,434 900,945
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment.................... (161,588) (225,942)
Rental deposit......................................... (1,200) 1,185
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES................. (162,788) (224,757)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction in capitalized lease obligations............. (31,992) (171,467)
Sale of treasury stock................................. -- 2,000
Shareholder dividends.................................. (600,000) (325,000)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES................. (631,992) (494,467)
--------- ---------
NET INCREASE IN CASH.................................. 65,654 181,721
CASH AT BEGINNING OF YEAR................................ 613,618 431,897
--------- ---------
CASH AT END OF YEAR...................................... $ 679,272 $ 613,618
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 4,411 $ 18,627
========= =========
</TABLE>
Read accompanying notes and auditors' report.
F-38
<PAGE>
JOLT TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ADDITIONAL
COMMON TREASURY PAID-IN ACCUMULATED
TOTAL STOCK STOCK CAPITAL DEFICIT
--------- ------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995. $(704,381) $10,000 $(2,000) $24,000 $(736,381)
Sale of Treasury Stock...... 2,000 2,000 --
Net income.................. 491,157 491,157
Dividends paid.............. (325,000) (325,000)
--------- ------- ------- ------- ---------
BALANCES, December 31, 1996. (536,224) 10,000 -- 24,000 (570,224)
Net income.................. 810,229 810,229
Dividends paid.............. (600,000) (600,000)
--------- ------- ------- ------- ---------
BALANCES, December 31, 1997. $(325,995) $10,000 $ -- $24,000 $(359,995)
========= ======= ======= ======= =========
</TABLE>
Read accompanying notes and auditors' report.
F-39
<PAGE>
JOLT TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 1--BUSINESS ACTIVITY
The Company was incorporated in the State of Florida on June 21, 1989. It
is engaged in the manufacture and sale of custom made printed circuit
boards for use primarily in the computer, communications and
instrumentation industries. The Company is located in Florida with
customers throughout the United States but primarily in the South Florida
region.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents: Cash equivalents include short-term, highly-
liquid debt instruments purchased with original maturities of three months
or less.
Revenue Recognition: Revenue is recognized when products are shipped and
title has passed to the customer.
Inventories: Inventories are stated at the lower of cost (determined on the
first-in, first-out basis) or market. Labor and overhead costs are
capitalized at the time of production.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided using straight-line methods at rates based on the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Machinery and equipment..................... 5-10
Furniture and fixtures...................... 5-10
Vehicles.................................... 5
</TABLE>
Expenditures for major renewals and betterments that extend the useful
lives of the property and equipment are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. Building and
equipment repairs amounted to $21,863 and $25,030 for the years ended
December 31, 1997 and 1996 respectively.
Reclassification of Financial Statement Presentation: Certain
reclassifications have been made to the 1996 financial statements to
conform with the 1997 financial statement presentation.
Income Taxes: The Company, with the consent of its stockholders, has
elected under the Internal Revenue Code to be an S corporation. In lieu of
corporation income taxes, the stockholders of an S corporation are taxed on
their proportionate share of the Company's taxable income. Therefore, no
provision or liability for federal income taxes has been included in the
financial statements.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Earnings per Share: All earnings per share amounts have been presented to
conform to the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share". The shares used in computing basic and diluted
earnings per share represent the weighted average number of common shares
outstanding for the period.
F-40
<PAGE>
JOLT TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
NOTE 3--INVENTORIES
Inventories consisted of the following as of December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Raw materials........................................... $ 74,677 $44,464
Work in process......................................... 41,023 10,785
-------- -------
$115,700 $55,249
======== =======
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following on December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Leasehold Improvements............................... $ 63,880 $ 63,880
Machinery and Equipment.............................. 1,353,460 1,203,636
Motor Vehicles....................................... 36,499 24,735
Office Furniture and Equipment....................... 30,855 30,855
---------- ----------
Total.............................................. 1,484,694 1,323,106
Less: Accumulated depreciation..................... (1,026,921) (868,566)
---------- ----------
Net Property Plant and Equipment..................... $ 457,773 $ 454,540
========== ==========
</TABLE>
NOTE 5--CAPITALIZED LEASE OBLIGATION
The Company acquired equipment under the provisions of a long-term lease in
August of 1994. For financial reporting purposes, minimum lease payments
relating to the equipment have been capitalized. The lease payments were
$4,550 per month and expired August 1997. The original cost of the leased
equipment was $216,682. The present value of the lease payments as of December
31, 1996 was $31,992.
There are no future minimum lease payments as of December 31, 1997.
NOTE 6--STOCKHOLDER NOTE AND LOAN PAYABLE
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Stockholder note payable, unsecured, bearing interest
at the rate of 8.25%................................ $ 100,000 $ 100,000
Stockholder loan payable, unsecured, bearing interest
at the effective simple interest rate of 7.1 % and
7.75% as of December 31, 1997 and 1996
respectively........................................ 1,525,148 1,525,148
---------- ----------
Total Stockholder note and loan payable.............. $1,625,148 $1,625,148
========== ==========
</TABLE>
The stockholders have signed a definitive merger agreement with another
company and under the terms of the agreement, the above note and loan will be
converted to equity as explained further in Note 10 of these financial
statements.
As of December 31, 1997 there were no repayment terms set forth for the
above note and loan payable. The stockholder has agreed not to demand payment
prior to February 1999.
F-41
<PAGE>
JOLT TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Accrued interest of $368,200 at December 31, 1997, plus interest accruing on
the note and loan payable from January 1, 1998 until the date of the
consummation of the business combination referred to in Note 10, will be
converted to equity as discussed further in Note 10.
NOTE 7--COMMITMENTS-OPERATING LEASES
As of December 31, 1997, the Company operated its facilities on a one year
noncancellable lease which will expire on October 31, 1998. The lease is for
$80,373 per year ($6,698 per month) plus applicable sales tax. Rental Expense
for the years ended December 31, 1997 and 1996 was $81,171 and $72,706
respectively.
In September 1997 the Company entered into an operating lease agreement for
an automobile. The lease term expires February 2000. Total payments are
$32,640 ($1,090 per month) plus applicable sales tax.
NOTE 8--CONCENTRATION OF RISKS
CASH
The Company maintains its cash accounts in one commercial bank. Accounts in
the bank are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. At various times throughout the year the Company had cash
balances in this bank that exceeded the FDIC limit. The cash balances exceeded
the FDIC limit on December 31, 1997 and 1996.
ACCOUNTS RECEIVABLE
Credit sales are made to the Company's customers in the ordinary course of
business. Generally, these sales are unsecured. Four customers accounted for
approximately 67% of the trade accounts receivable balances as of December 31,
1997 and three customers accounted for 68% of the trade receivable balances as
of December 31, 1996.
SALES
The Company had three customers that accounted for approximately 30% of its
revenue in 1997 and one customer that accounted for approximately 20% of its
revenue in 1996.
NOTE 9--EMPLOYEE BENEFIT PLAN
On January 1, 1991 the Company established a Salary Allowance Reduction
Simplified Employee Pension Plan (SARSEP). Under the plan, employees may elect
to defer up to fifteen percent of their salary, subject to Internal Revenue
Service limits. The Company, at their discretion can make matching
contributions. In addition, the plan allows for the Company to make additional
discretionary contributions. The Company made no contributions to the plan in
1997 or 1996.
NOTE 10--BUSINESS COMBINATION
On December 31, 1997 the company's stockholders entered into a definitive
agreement to combine the company with DDL Electronics, Inc. ("DDL"), a
publicly owned company, in exchange for DDL stock. Prior to the combination
and pursuant to the agreement, the Stockholder note and loan will be converted
to common stock. The stockholder creditor will receive 10,660 shares of
company stock in return for contributing the loan, the note and the accrued
interest. The conversion of the loans and accrued interest will occur prior to
the combination with DDL. It is anticipated that the transaction will be
accounted for as a pooling of interests in which 9,000,000 shares of DDL will
be exchanged for 20,660 shares of Jolt Technology, Inc. subject to the
approval of DDL stockholders.
F-42
<PAGE>
JOLT TECHNOLOGY, INC.
BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................................ $ 928,881
Trade accounts receivable, net of allowance for doubtful accounts
of $5,000....................................................... 461,843
Inventories...................................................... 146,260
Deferred merger costs............................................ 70,452
Prepaid expenses................................................. 8,354
----------
TOTAL CURRENT ASSETS........................................... 1,615,790
PROPERTY AND EQUIPMENT, net........................................ 414,614
OTHER ASSETS.......................................................
Rental deposit................................................... 7,773
----------
TOTAL OTHER ASSETS............................................. 7,773
----------
$2,038,177
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued interest--stockholder.................................... $ 397,333
Accrued merger costs............................................. 70,452
Other accrued expenses........................................... 50,038
Trade accounts payable........................................... 19,239
----------
TOTAL CURRENT LIABILITIES...................................... 537,062
STOCKHOLDER NOTE AND LOAN PAYABLE.................................. 1,625,148
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $1.00 par value, 10,000 shares authorized, issued
and outstanding................................................. 10,000
Additional paid-in-capital....................................... 24,000
Accumulated deficit.............................................. (158,033)
----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)........................... (124,033)
----------
$2,038,177
==========
</TABLE>
Read accompanying notes and auditors' report.
F-43
<PAGE>
JOLT TECHNOLOGY, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
NET SALES................................................... $745,859 $517,837
COST OF GOODS SOLD.......................................... 346,558 294,938
-------- --------
GROSS PROFIT.............................................. 399,301 222,899
-------- --------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 71,564 61,815
-------- --------
INCOME FROM OPERATIONS.................................... 327,737 161,084
INTEREST EXPENSE--STOCKHOLDER LOANS......................... (29,133) (31,537)
OTHER INCOME (EXPENSES)..................................... 3,358 944
-------- --------
TOTAL NON-OPERATING EXPENSES.............................. (25,775) (30,593)
-------- --------
NET INCOME................................................ $301,962 $130,491
======== ========
BASIC AND DILUTED EARNINGS
PER SHARE................................................ $ 30.20 $ 13.05
======== ========
SHARES USED IN COMPUTING BASIC
AND DILUTED EARNINGS PER SHARE........................... 10,000 10,000
======== ========
</TABLE>
Read accompanying notes and auditors' report.
F-44
<PAGE>
JOLT TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................. $ 301,962 $130,491
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 44,370 30,667
Changes in assets and liabilities:
Trade accounts receivable........................... (12,984) (36,781)
Inventories......................................... (30,560) (24,672)
Trade accounts payable.............................. 10,530 (10,853)
Accrued expenses.................................... 37,502 32,921
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 350,820 121,773
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment..................... (1,211) (29,251)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Reduction in capitalized lease obligations.............. -- (11,667)
Shareholder dividends................................... (100,000) --
--------- --------
NET CASH USED IN FINANCING ACTIVITIES................. (100,000) (11,667)
--------- --------
NET INCREASE IN CASH.................................. 249,609 80,855
CASH AT BEGINNING OF YEAR................................. 679,272 613,618
--------- --------
CASH AT END OF YEAR....................................... $ 928,881 $694,473
========= ========
</TABLE>
Read accompanying notes and auditors' report.
F-45
<PAGE>
JOLT TECHNOLOGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
NOTE 1--BUSINESS ACTIVITY
The Company was incorporated in the State of Florida on June 21, 1989. It is
engaged in the manufacture and sale of custom made printed circuit boards for
use primarily in the computer, communications and instrumentation industries.
The Company is located in Florida with customers throughout the United States
but primarily in the South Florida region.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents: Cash equivalents include short-term, highly-
liquid debt instruments purchased with original maturities of three months or
less.
Revenue Recognition: Revenue is recognized when products are shipped and
title has passed to the customer.
Inventories: Inventories are stated at the lower of cost (determined on the
first-in, first-out basis) or market. Labor and overhead costs are capitalized
at the time of production.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided using straight-line methods at rates based on the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Machinery and equipment............................................. 5 - 10
Furniture and fixtures.............................................. 5 - 10
Vehicles............................................................ 5
</TABLE>
Income Taxes: The Company, with the consent of its stockholders, has elected
under the Internal Revenue Code to be an S corporation. In lieu of corporation
income taxes, the stockholders of an S corporation are taxed on their
proportionate share of the Company's taxable income. Therefore, no provision
or liability for federal income taxes has been included in the financial
statements.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Earnings per Share: All earnings per share amounts have been presented to
conform to the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". The shares used in computing basic and diluted earnings
per share represent the weighted average number of common shares outstanding
for the period.
F-46
<PAGE>
JOLT TECHNOLOGY, INC.
UNAUDITED BALANCE SHEET
AS OF DECEMBER 31, 1995
<TABLE>
<S> <C>
CURRENT ASSETS
Cash.............................................................. $ 431,897
Accounts receivable............................................... 393,973
Inventories....................................................... 57,535
Prepaid expenses.................................................. 19,434
----------
Total current assets............................................ 902,839
----------
PROPERTY & EQUIPMENT
Leasehold improvements............................................ 63,880
Machinery & equipment............................................. 877,630
Vehicles.......................................................... 24,735
Office furniture & equipment...................................... 130,919
----------
Total property & equipment...................................... 1,097,164
Less: Accumulated depreciation and amortization................... (636,131)
Net property and equipment...................................... 461,033
----------
OTHER ASSETS
Long-term deposits................................................ 7,758
----------
$1,371,630
==========
CURRENT LIABILITIES
Accounts payable.................................................. $ 29,849
Accrued expenses.................................................. 172,955
Customer deposit.................................................. 44,600
Current portion of long-term debt................................. 86,709
----------
Total current liabilities....................................... 334,113
----------
LONG-TERM DEBT
Capital leases and notes payable.................................. 116,750
Shareholder loans payable......................................... 1,625,148
----------
Total long-term debt............................................ 1,741,898
----------
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock...................................................... 10,000
Additional paid-in capital........................................ 24,000
Retained earnings (deficit)....................................... (736,381)
Treasury stock................................................... (2,000)
----------
Total shareholders' equity (deficit)............................ (704,381)
----------
$1,371,630
==========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
JOLT TECHNOLOGY, INC.
UNAUDITED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
Sales............................................................... $1,816,919
----------
Costs and expenses:
Cost of goods sold................................................ 1,081,554
Administrative and selling........................................ 358,036
----------
1,439,590
----------
Operating income.................................................... 377,329
----------
Non-operating income (expense):
Interest expense on shareholder notes............................. (129,740)
Interest expense--other........................................... (35,687)
Other income (expense), net....................................... 9,278
----------
(156,149)
----------
Income before income taxes.......................................... 221,180
Provision for income taxes.......................................... --
----------
Net income.......................................................... $ 221,180
==========
Basic and diluted earnings per share................................ $ 27.65
==========
Shares used in computing basic and diluted earnings per share....... 8,000
==========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE>
JOLT TECHNOLOGY, INC.
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income......................................................... $221,180
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 145,877
Changes in assets and liabilities:
Accounts receivable.............................................. (120,435)
Inventories...................................................... (24,861)
Prepaid expenses................................................. (19,117)
Customer deposits................................................ 44,600
Accounts payable................................................. 19,323
Accrued expenses................................................. 102,998
--------
Net cash provided by operating activities...................... 369,565
--------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment................................ (256,452)
--------
Net cash used in investing activities.......................... (256,452)
--------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from long-term debt................................... 94,165
Other.............................................................. (800)
--------
Net cash provided by financing activities...................... 93,365
--------
NET INCREASE IN CASH................................................. 206,478
CASH AT BEGINNING OF YEAR............................................ 225,419
--------
CASH AT END OF YEAR.................................................. $431,897
========
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE>
JOLT TECHNOLOGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
NOTE 1--BUSINESS ACTIVITY
Jolt Technology, Inc. was incorporated in the State of Florida on June 21,
1989. It is engaged in the manufacture and sale of custom made printed circuit
boards for use primarily in the computer, communications and instrumentation
industries. Jolt is located in Florida with customers throughout the United
States but primarily in the South Florida region.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and cash equivalents: Cash equivalents include short-term, highly-
liquid debt instruments purchased with original maturities of three months or
less.
Revenue Recognition: Revenue is recognized when products are shipped and
title has passed to the customer.
Inventories: Inventories are stated at the lower of cost (determined on the
first-in, first-out basis) or market. Labor and overhead costs are capitalized
at the time of production.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is provided using straight-line methods at rates based on the
following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Machinery and equipment........................................... 5 - 10
Furniture and fixtures............................................ 5 - 10
Vehicles.......................................................... 5
</TABLE>
Expenditures for major renewals and betterments that extend the useful lives
of the property and equipment are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred. Building and equipment repairs
for the year ended December 31, 1995 were $22,955.
Income Taxes: Jolt, with the consent of its shareholders, has elected under
the Internal Revenue Code to be an S Corporation. In lieu of corporation
income taxes, the shareholders of an S corporation are taxed on their
proportionate share of Jolt's taxable income. Therefore, no provision or
liability for federal income taxes has been included in the financial
statements.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Earnings Per Share: All earnings per share amounts have been presented to
conform to the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share". The shares used in computing basic and diluted earnings
per share represent the weighted average number of common shares outstanding
for the period.
F-50
<PAGE>
JOLT TECHNOLOGY, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1995
NOTE 3--CAPITALIZED LEASE OBLIGATIONS
The future minimum lease payments under the capital lease and the net
present value of the future minimum lease payments at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Total minimum lease payments.................................... $91,000
Less amount representing interest............................... 7,498
-------
Present value of net minimum lease payments..................... $83,502
=======
</TABLE>
NOTE 4--COMMITMENTS
As of December 31, 1995, Jolt operated its facilities on a one year
noncancellable lease which will expire on October 31, 1996. The lease is for
$67,654 per year ($5,638 per month) plus applicable sales tax. Rental Expense
for the year ended December 31, 1995 was $66,824.
NOTE 5--MAJOR CUSTOMER
Jolt had one customer that accounted for approximately 20% of its revenue in
1995.
NOTE 6--EMPLOYEE BENEFIT PLAN
On January 1, 1991 Jolt established a Salary Allowance Reduction Simplified
Employee Pension Plan (the "Plan"). Under the Plan, employees may elect to
defer up to fifteen percent of their salary, subject to Internal Revenue
Service limits. Jolt, at its discretion, can contribute amounts matching
employee contributions. In addition, the Plan allows for Jolt to make
additional discretionary contributions. Jolt made no contributions to the Plan
in 1995.
F-51
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial data present the
Unaudited Pro Forma Consolidated Balance Sheet of the Company at March 31,
1998, giving effect to the merger between the Company and Jolt as if it had
been consummated on that date. Also presented are the Unaudited Pro Forma
Consolidated Statements of Operations of the Company for the nine months ended
March 31, 1998 and 1997 and the fiscal years ended June 30, 1997, 1996 and
1995, after giving effect to the Merger as if it had been consummated as of
the beginning of the respective periods presented. The Company's fiscal year
ends on June 30. Jolt's fiscal year ends on December 31. Pro forma
consolidated statement of operations information for the years ended June 30,
1997, 1996 and 1995 combines the results of the Company for the years then
ended with the results of Jolt for the 12 months ended June 30, 1997 and the
years ended December 31, 1996 and 1995, respectively.
The pro forma data are based on the historical consolidated statements of
the Company and Jolt giving effect to the merger under the pooling of
interests method of accounting and the assumptions and adjustments outlined in
the accompanying Notes to Unaudited Pro Forma Consolidated Financial
Statements. The pro forma adjustments set forth in the following unaudited pro
forma consolidated financial data are estimates and may differ from the actual
adjustments when they become known.
The unaudited pro forma consolidated statement of operations for the fiscal
year ended June 30, 1995 includes certain non-recurring charges and gains
recorded by the Company. During that fiscal year, the Company closed the
operations of its A.J. Electronics, Inc. ("A.J.") subsidiary and recorded
restructuring charges of $1,533,000 for the costs associated with the shut
down and disposal of A.J.'s assets. Also in fiscal 1995, the Company sold
essentially all of the assets of its Aeroscientific Oregon subsidiary, which
resulted in a gain of $3,317,000.
The pro forma data give effect to the non-recurring items described above
and assume that each share of Jolt common stock, both outstanding and issuable
upon the conversion of shareholder debt, is converted into the right to
receive 435.6244 shares of the Company's Common Stock. The following unaudited
pro forma consolidated financial data do not give effect to anticipated
expenses related to the acquisition and do not reflect certain cost savings
that management of the Company believes may be realized following the
acquisition. These savings are expected to be realized primarily through
integration of operations.
The pro forma data are provided for comparative purposes only. They do not
purport to be indicative of the results that actually would have occurred if
the merger had been consummated on the dates indicated or that may be obtained
in the future. The unaudited pro forma consolidated financial data should be
read in conjunction with the Notes thereto, the audited Consolidated Financial
Statements of the Company and the Notes thereto and the audited Financial
Statements of Jolt and the Notes thereto, all included in this Proxy
Statement.
F-52
<PAGE>
DDL ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- -----------------------------
DDL JOLT ADJUSTMENTS REFS. TOTAL
------- ------ ----------- -------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.... $ 2,019 $ 929 $ 2,948
Accounts receivable, net..... 8,751 462 9,213
Costs and estimated earnings
in excess of billings on
uncompleted contracts, net
of progress billings........ 4,413 4,413
Inventories.................. 2,515 146 2,661
Prepaid expenses and other
current
assets...................... 441 78 519
------- ------ --------
Total current assets....... 18,139 1,615 19,754
Property and equipment, net.... 6,217 415 6,632
Goodwill....................... 3,488 3,488
Deposits and other assets...... 234 8 242
------- ------ -------- --------
$28,078 $2,038 $ -- $ 30,116
======= ====== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Bank line of credit payable.... $ 3,272 $ 3,272
Current portion of long-term
debt.......................... 2,993 2,993
Accounts payable............... 6,837 $ 19 6,856
Accrued interest on notes
payable to shareholder........ 397 $ (397) 1(b) --
Other current liabilities...... 3,408 121 106 1(c) 3,635
------- ------ -------- --------
Total current liabilities...... 16,510 537 (291) 16,756
------- ------ -------- --------
Notes payable to shareholder... 1,625 (1,625) 1(b) --
Other long-term debt........... 5,251 5,251
------- ------ -------- --------
Total long-term debt........... 5,251 1,625 (1,625) 5,251
------- ------ -------- --------
Stockholders' equity:
Common stock................... 246 10 80 1(d) 336
Additional paid-in capital..... 6,884 24 24,926 1(a,b,d) 31,834
Retained earnings (deficit).... (204) (158) (23,090) 1(a,c,d) (23,452)
Foreign currency translation... (609) (609)
------- ------ -------- --------
Total stockholders' equity
(deficit)..................... 6,317 (124) 1,916 8,109
------- ------ -------- --------
$28,078 $2,038 $ -- $ 30,116
======= ====== ======== ========
</TABLE>
F-53
<PAGE>
DDL ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- -----------------------------
DDL JOLT ADJUSTMENTS REFS. TOTAL
------- ------ ----------- ----- -------
<S> <C> <C> <C> <C> <C>
Sales.......................... $37,576 $2,258 $39,834
------- ------ -------
Costs and expenses:
Cost of goods sold........... 31,615 1,110 32,725
Administrative and selling... 4,048 304 4,352
Goodwill amortization........ 951 951
------- ------ -------
36,614 1,414 38,028
------- ------ -------
Operating income............... 962 844 1,806
------- ------ -------
Non-operating income (expense):
Interest expense on
shareholder notes........... (87) $ 87 2(b) --
Interest expense--other...... (724) (2) (726)
Other income (expense), net.. (12) 11 (1)
------- ------ ------ -------
(736) (78) 87 (727)
------- ------ ------ -------
Income before income tax....... 226 766 87 1,079
Provision for income taxes..... (430) -- 383 2(a,c) (47)
------- ------ ------ -------
Net income..................... $ (204) $ 766 $ 470 $ 1,032
======= ====== ====== =======
Per share information:
Basic and diluted earnings
per share................... $ (0.01) $76.60 $ 0.03
======= ====== =======
Shares used in computing
earnings per share
(thousands):
Basic: 24,598 10 8,990 3(a) 33,598
======= ====== ====== =======
Diluted: 25,017 10 8,990 34,017
======= ====== ====== =======
</TABLE>
F-54
<PAGE>
DDL ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- -------------------------
DDL JOLT ADJUSTMENTS REFS. TOTAL
------- ------ ----------- ----- -------
<S> <C> <C> <C> <C> <C>
Sales............................. $34,660 $1,478 $36,138
------- ------ -------
Costs and expenses:
Cost of goods sold.............. 30,161 968 31,129
Administrative and selling...... 3,653 256 3,909
Goodwill amortization........... 951 951
------- ------ -------
34,765 1,224 35,989
------- ------ -------
Operating income (loss)........... (105) 254 149
------- ------ -------
Non-operating income (expense):
Interest expense on shareholder
notes.......................... (80) (80)
Interest expense--other......... (844) (9) (853)
Debt issue cost amortization.... (372) (372)
Other income, net............... 199 5 204
------- ------ -------
(1,017) (84) (1,101)
------- ------ -------
Income (loss) before income taxes. (1,122) 170 (952)
Provision for income taxes........ -- -- --
------- ------ -------
Net income (loss)................. $(1,122) $ 170 $ (952)
======= ====== =======
Per share information:
Basic and diluted earnings
(loss) per share............... $ (0.05) $17.00 $ (0.03)
======= ====== =======
Shares used in computing earnings
(loss) per share (thousands):
Basic and diluted............... 23,047 10 8,990 3(a) 32,047
======= ====== ===== =======
</TABLE>
F-55
<PAGE>
DDL ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- -------------------------
DDL JOLT ADJUSTMENTS REFS. TOTAL
------- ------ ----------- ----- -------
<S> <C> <C> <C> <C> <C>
Sales............................. $48,919 $2,170 $51,089
------- ------ -------
Costs and expenses:
Cost of goods sold.............. 42,475 1,329 43,804
Administrative and selling...... 5,058 346 5,404
Goodwill amortization........... 1,268 1,268
------- ------ -------
48,801 1,675 50,476
------- ------ -------
Operating income.................. 118 495 613
------- ------ -------
Non-operating income (expense):
Interest expense on shareholder
notes.......................... (107) $ 107 2(b) 0
Interest expense--other......... (1,105) (10) (1,115)
Debt issue cost amortization.... (937) (937)
Other income (expense), net..... 246 8 254
------- ------ ------ -------
(1,796) (109) 107 (1,798)
------- ------ ------ -------
Income (loss) before income taxes. (1,678) 386 107 (1,185)
Provision for income taxes........ -- -- (27) 2(c) (27)
------- ------ ------ -------
Net income (loss)................. $(1,678) $ 386 $ 80 $(1,212)
======= ====== ====== =======
Per share information:
Basic and diluted earnings
(loss)
per share...................... $ (0.07) $38.60 $ (0.04)
======= ====== =======
Shares used in computing earnings
(loss) per share (thousands):
Basic and diluted............... 23,150 10 8,990 3(a) 32,150
======= ====== ====== =======
</TABLE>
F-56
<PAGE>
DDL ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- -------------------------
DDL JOLT ADJUSTMENTS REFS. TOTAL
------- ------ ----------- ----- -------
<S> <C> <C> <C> <C> <C>
Sales............................. $33,136 $2,354 $35,490
------- ------ -------
Costs and expenses:
Cost of goods sold.............. 29,494 1,412 30,906
Administrative and selling...... 4,175 327 4,502
Goodwill amortization............. 634 634
------- ------ -------
34,303 1,739 36,042
------- ------ -------
Operating income (loss)........... (1,167) 615 (552)
------- ------ -------
Non-operating income (expense):
Interest expense on shareholder
notes.......................... (115) (115)
Interest expense--other......... (911) (19) (930)
Debt issue cost amortization.... (281) (281)
Other income (expense), net..... 491 10 501
------- ------ -------
(701) (124) (825)
------- ------ -------
Income (loss) before income taxes. (1,868) 491 (1,377)
Income tax benefit (provision).... 1,110 -- 1,110
------- ------ -------
Income (loss) before extraordinary
item............................. $ (758) $ 491 $ (267)
======= ====== =======
Per share information:
Basic and diluted income (loss)
before extraordinary item...... $ (0.04) $53.54 $ (0.01)
======= ====== =======
Shares used in computing income
(loss) per share (thousands):
Basic and diluted............... 18,180 9 8,991 3(a) 27,180
======= ====== ===== =======
</TABLE>
F-57
<PAGE>
DDL ELECTRONICS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------- -------------------------
DDL JOLT ADJUSTMENTS REFS. TOTAL
------- ------ ----------- ----- -------
<S> <C> <C> <C> <C> <C>
Sales............................. $29,576 $1,817 $31,393
------- ------ -------
Costs and expenses:
Cost of goods sold.............. 26,516 1,082 27,598
Administrative and selling...... 6,497 357 6,854
Restructuring charges........... 1,533 1,533
------- ------ -------
34,546 1,439 35,985
------- ------ -------
Operating income (loss)........... (4,970) 378 (4,592)
------- ------ -------
Non-operating income (expense):
Interest expense on shareholder
notes.......................... (130) (130)
Interest expense--other......... (883) (35) (918)
Gain on sale of assets.......... 3,317 3,317
Other income (expense), net..... 170 8 178
------- ------ -------
2,604 (157) 2,447
------- ------ -------
Income (loss) before income taxes. (2,366) 221 (2,145)
Provision for income taxes........ -- -- --
------- ------ -------
Income (loss) before extraordinary
item............................. $(2,366) $ 221 $(2,145)
======= ====== =======
Per share information:
Basic and diluted income (loss)
before extraordinary item...... $ (0.15) $27.65 $ (0.09)
======= ====== =======
Shares used in computing income
(loss) per share (thousands):
Basic and diluted............... 15,150 8 8,992 3(a) 24,150
======= ====== ===== =======
</TABLE>
F-58
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated balance sheet has been prepared to
reflect the merger of all outstanding capital stock of Jolt in exchange for
9,000,000 shares of the Company's Common Stock, or 435.6244 shares of the
Company's Common Stock for each outstanding share, and each outstanding right
to acquire a share, of Jolt common stock. The transaction will be accounted
for under the pooling-of-interests method. As required pursuant to the pooling
method of accounting, the quasi-reorganization effected by the Company on June
27, 1997 will be reversed upon consummation of the merger. Additionally, the
unaudited pro forma combined consolidated balance sheet reflects the
conversion of Jolt's indebtedness to one of its shareholders to additional
paid-in capital.
1. The unaudited pro forma consolidated balance sheet reflects the financial
position of the Company and Jolt at March 31, 1998 and has been adjusted to
reflect the events described above as follows:
(a) To record the equity adjustments required to reverse the quasi-
reorganization. Such equity adjustments include the reinstatement of the
Company's accumulated deficit of $23,678,000 at June 27, 1997, which had
been offset against additional paid-in capital, and the reversal of the
income tax provision which was recorded pursuant to quasi-reorganization
accounting;
(b) To record the conversion to equity of notes payable to a Jolt
shareholder in the aggregate amount of $1,625,000 and accrued interest
thereon of $397,000;
(c) To accrue estimated dividends distributable to Jolt shareholders; and
(d) To record the equity adjustments required to reflect the acquisition
of Jolt on a pooling-of-interests basis.
2. Jolt's fiscal year-end is December 31. In reflecting the pooling of
interests combination on a pro forma basis, Jolt's statement of operations for
the 12 months ended June 30, 1997 was combined with the Company's statement of
operations for the same period, and Jolt's statements of operations for the
years ended December 31, 1996 and 1995 were combined with the Company's
statements of operations for the years ended June 30, 1996 and 1995,
respectively. Jolt's unaudited results of operations for the six months ended
December 31, 1996 included sales of $960,000 and net income of $40,000.
Assuming the merger had been consummated on June 30, 1997, an adjustment would
have been made to stockholders' equity to eliminate the effect of including
Jolt's results of operations for the six months ended December 31, 1996 in
both the years ended June 30, 1997 and June 30, 1996. The historical results
of operations for the fiscal year ended June 30, 1997 and the nine months
ended March 31, 1998 have been adjusted as follows in preparing the unaudited
pro forma combined consolidated statement of operations:
(a) To reverse the income tax provision, recorded pursuant to quasi-
reorganization accounting;
(b) To adjust interest expense to reflect the elimination of interest on
Jolt's notes payable to its shareholder that will be converted to equity
prior to the combination; and
(c) To adjust the provision for income taxes to reflect the combined
results of operations.
3. (a) The number of common shares used in computing earnings per share in the
unaudited pro forma combined consolidated statements of operations for the
years ended June 30, 1997, 1996 and 1995 and for the nine months ended March
31, 1998 and 1997 have been adjusted to record issuance of 9,000,000 shares of
the Company's Common Stock in exchange for all outstanding shares of Jolt
common stock. The amount shown in the adjustments column represents the net of
the 9,000,000 shares and the outstanding Jolt shares shown in the Historical
column.
F-59
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of May 28, 1998, is among DDL
Electronics, Inc., a Delaware corporation ("DDL"), Jolt Technology, Inc., a
Florida corporation ("Jolt"), Jolt Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of DDL (such corporation being
referred to as "Sub") and the shareholders of Jolt identified on the signature
page hereof (collectively, the "Jolt Shareholders").
WHEREAS, the parties hereto consider it advisable and in the best interests
of Jolt, Sub and DDL, and in the best interests of the Jolt Shareholders and
of the stockholders of DDL, that the businesses of Jolt and DDL be combined
through a merger (the "Merger") of Jolt with and into Sub on the terms and
conditions set forth in this Agreement (Sub, after the Merger, being the
"Surviving Subsidiary");
NOW, THEREFORE, the parties hereto do hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
As used in this Agreement, the terms identified in this Article shall have
the meanings indicated.
1.1 Affiliate: When used with respect to a Person, an "Affiliate" of that
Person is a Person that directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, that Person, within the meaning of Rule 144(a)(1) under the Securities
Act.
1.2 Affiliate Letter: That certain agreement restricting transfers of the
Merger Consideration by the Jolt Shareholders in the form attached hereto as
Exhibit 1.2.
1.3 Agreement: This Agreement and Plan of Merger, including all of its
Schedules, Exhibits, disclosure documents and other documents specifically
referred to in this Agreement as having been or to be delivered by a party to
this Agreement to another such party in connection with this Agreement or the
Merger, including all duly adopted amendments, modifications and supplements
to or of this Agreement and such Schedules, Exhibits and other documents.
1.4 Audited Financial Statements: The consolidated balance sheets, income
statements, statements of stockholders' equity and statements of cash flows
or, in each instance, equivalent statements as commonly provided to
stockholders, as at December 31, 1996 and for the fiscal year then ended, in
the case of Jolt, and as at June 30, 1995, June 28, 1996 and June 27, 1997,
and for the fiscal years then ended, in the case of DDL, in each instance as
reported on by Auditors.
1.5 Auditors: With respect to Jolt, Brunt & Company, P.A., and, with respect
to DDL, KPMG Peat Marwick LLP, in each case independent certified public
accountants currently retained for the purpose of auditing financial
statements of such party.
1.6 Closing: The consummation of the transactions contemplated by this
Agreement, particularly the Merger, as provided in Article VII hereof.
1.7 Closing Date: The date upon which the Closing occurs.
1.8 Code: Internal Revenue Code of 1986, as amended to the date as of which
any reference thereto is relevant under this Agreement.
1.9 Counsel to DDL: McGuire Woods Battle & Boothe, L.L.P; 3700 NationsBank
Plaza; 101 S. Tryon Street; Charlotte, North Carolina 28202-4000.
1.10 Counsel to Jolt: Berry Moorman P.C., 600 Woodbridge Place, Detroit,
Michigan 40726-4302.
1.11 DDL: DDL Electronics, Inc., a Delaware corporation. As used in this
Agreement, the term "DDL" also shall be considered to include Sub, except
insofar as the context may require otherwise.
1.12 DDL Balance Sheet: The most recent consolidated balance sheet included
in the Audited Financial Statements of DDL.
A-1
<PAGE>
1.13 DDL Common Stock: The Common Stock, par value $.01 per share, of DDL.
1.14 DDL Disclosure Document: The document delivered by DDL to Jolt
containing certain disclosures regarding DDL as described in Article III
hereof.
1.15 DDL Stockholder Rights Plan: The Rights Agreement dated as of June 10,
1989 between Data-Design Laboratories, Inc. (as predecessor in interest of
DDL) and Bank of America, Rights Agent, in the form filed with the SEC as
Exhibit No. 1 to DDL's Current Report on Form 8-K dated June 15, 1989.
1.16 DDL Proxy Statement: A proxy statement of DDL designed to comply with
Regulation 14A under the Exchange Act, prepared by DDL for use in soliciting
proxies to approve issuance of the Merger Consideration in the Merger as
contemplated by Section 5.1 of this Agreement.
1.17 DGCL: The Delaware General Corporation Law, as amended to the date as
of which any reference thereto is relevant under this Agreement.
1.18 Exchange Act: The Securities Exchange Act of 1934, as amended to the
date as of which any reference thereto is relevant under this Agreement.
1.19 Financial Advisor to DDL: Needham & Company, Inc.
1.20 FBCA: The Florida Business Corporation Act, as amended to the date as
of which any reference thereto is relevant under this Agreement.
1.21 GAAP: Generally accepted accounting principles, as in effect on the
date of any statement, report or determination that purports to be, or is
required to be, prepared or made in accordance with GAAP. All references
herein to financial statements prepared in accordance with GAAP shall mean in
accordance with GAAP consistently applied throughout the periods to which
reference is made.
1.22 Inventories: The stock of raw materials, work-in-process and finished
goods, including but not limited to finished goods purchased for resale, owned
and held by the subject Person for manufacturing, assembly, processing,
finishing, sale or resale to others from time to time in the ordinary course
of the business of such Person in the form in which such inventories then are
held or after manufacturing, assembling, finishing, processing, incorporating
with other goods or items, refining or the like.
1.23 Jolt: Jolt Technology, Inc., a Florida corporation.
1.24 Jolt Balance Sheet: The most recent balance sheet included in the
Audited Financial Statements of Jolt.
1.25 Jolt Common Stock: The Common Stock, par value $1.00 per share, of
Jolt.
1.26 Jolt Disclosure Document: The document delivered by Jolt to DDL
containing certain disclosures regarding Jolt as described in Article IV
hereof.
1.27 Liabilities: At any point in time (the "Determination Time"), the
obligations of a Person, whether known or unknown, contingent or absolute,
recorded on its books or not, arising or resulting in any way from facts,
events, agreements, obligations or occurrences that existed or transpired at a
prior point in time, or resulted from the passage of time to the Determination
Time, but not including obligations accruing or payable after the
Determination Time to the extent (but only to the extent) that such
obligations (1) arise under previously existing agreements for services,
benefits or other considerations and (2) accrue or become payable with respect
to services, benefits or other considerations received by the Person after the
Determination Time.
1.28 Lien: Any lien, mortgage, security interest, pledge, charge, claim,
equity, reservation or other encumbrance of any kind.
1.29 Material Adverse Change: With respect to a Person, a material adverse
change in the business, condition (financial or otherwise), operations or
prospects of such Person.
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1.30 Material Adverse Effect: With respect to a Person, a material adverse
effect on the business, condition (financial or otherwise), operations or
prospects of such Person.
1.31 Merger Consideration: Four hundred thirty-five point six two four four
(435.6244) shares of DDL Common Stock, to be paid in the Merger in exchange
for each of the 20,660 shares of Jolt Common Stock issued and outstanding at
the Closing Date.
1.32 NYSE: The New York Stock Exchange, Inc.
1.33 Payables: Liabilities of a party arising from the borrowing of money or
the incurring of obligations for merchandise, goods purchased or services
rendered.
1.34 Person: An individual, a corporation, a partnership, a limited
liability company, an association, a joint-stock company, a trust, an
unincorporated organization, a government or a political subdivision thereof.
1.35 Prospectus: The prospectus relating to the Registration Statement, in
the form used in connection with any "offer," "offer to sell," "offer for
sale" or "sale" of DDL Common Stock. There may be more than one version of
such prospectus.
1.36 Registration Statement: A registration statement of DDL on Form S-1 or
S-3 under the Securities Act, prepared by DDL to cover the public reoffering
and resale, following the Merger, of DDL Common Stock acquired by Jolt
Shareholders as Merger Consideration.
1.37 SEC: The Securities And Exchange Commission.
1.38 SEC Report: A document filed by DDL with the SEC pursuant to the
Securities Act or the Exchange Act or issued by DDL as a press release.
1.39 Securities Act: The Securities Act of 1933, as amended to the date as
of which any reference thereto is relevant under this Agreement.
1.40 Sub Common Stock: The Common Stock, no par value, of Sub.
ARTICLE II
THE MERGER
2.1 The Merger. At the Effective Time (as defined below), upon the terms and
subject to the conditions of this Agreement, the DGCL and the FBCA, Jolt shall
be merged with and into Sub. As soon as practicable after satisfaction or
waiver of the conditions set forth in Article VII, DDL, Sub and Jolt will
effect the Merger by causing to be filed: (a) a Certificate of Merger,
prepared as prescribed in Section 252(c) of the DGCL, with the Secretary of
State of the State of Delaware, and (b) Articles of Merger, prepared as
prescribed in Section 607.1105 of the FBCA, with the Department of State of
the State of Florida. The Merger shall become effective at the time of such
filings or, if later, at the latest time specified therein (the time the
Merger becomes effective being referred to in this Agreement as the "Effective
Time"). Promptly following the Effective Time, the parties will make all such
other filings and recordings, if any, as may be required by the DGCL and the
FBCA in furtherance of the Merger. Sub shall be the surviving corporation in
the Merger, and the separate corporate existence of Sub, with all its
purposes, objects, rights, privileges, powers and franchises, shall continue
unaffected and unimpaired by the Merger.
2.2 Certificate of Incorporation of Jolt. The Certificate of Incorporation
of Sub as in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Surviving Subsidiary unless and until
amended as provided by law and by such Certificate of Incorporation.
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2.3 Bylaws of Jolt. The Bylaws of Sub as in effect immediately prior to the
Effective Time shall be the Bylaws of the Surviving Subsidiary by virtue of
the Merger unless and until amended or repealed as provided by law, by the
Certificate of Incorporation of the Surviving Subsidiary and by such Bylaws.
2.4 Directors and Officers. At and after the Effective Time, the directors
of Jolt at the Effective Time shall be the directors, and the officers of Jolt
at such time shall be the officers, of the Surviving Subsidiary, in both cases
by virtue of the Merger and until their successors shall have been elected and
shall qualify or until otherwise provided by law or by the Certificate of
Incorporation or Bylaws of the Surviving Subsidiary; provided, however, that
Gregory L. Horton shall be elected to the Board of Directors of Jolt and
Richard K. Vitelle shall become Treasurer and Secretary of Jolt.
2.5 Conversion. At the Effective Time, by virtue of the Merger and without
any action on the part of the holder of any share of Jolt Common Stock or the
holder of any share of Sub Common Stock:
(a) All Jolt Common Stock held by Jolt as treasury stock shall be
cancelled, and no payment shall be made in respect thereof.
(b) Each issued and outstanding share of Sub Common Stock shall remain
issued and outstanding and shall be converted into one share of common
stock of the Surviving Subsidiary, which shall constitute the only issued
and outstanding shares of capital stock of the Surviving Subsidiary.
(c) Each issued and outstanding share of Jolt Common Stock (other than
any share to be cancelled pursuant to subsection (a) or as to which
dissenter's rights have been exercised) shall be converted into Merger
Consideration.
(d) From and after the Effective Time, the holders of certificates
theretofore representing Jolt Common Stock shall cease to have any rights
with respect thereto (other than dissenter's rights, if applicable); their
sole right shall be to receive Merger Consideration pursuant to subsection
(c).
2.6 Surrender and Payment. As soon as practicable after the Effective Time,
each holder of Jolt Common Stock converted pursuant to Section 2.5(c), upon
surrender, for cancellation, to an exchange agent to be designated by DDL (the
"Exchange Agent"), of one or more certificates previously representing Jolt
Common Stock, will be entitled to receive certificates representing Merger
Consideration, as provided in Section 2.5(c), in respect of the aggregate
number of shares of Jolt Common Stock previously represented by the
certificate or certificates surrendered and promptly cancelled after receipt
thereof by the Exchange Agent.
2.7 No Further Transfers. At the Effective Time the stock transfer books of
Jolt shall be closed, and no transfer of any shares of Jolt Common Stock
theretofore outstanding shall thereafter be made.
2.8 Tax Consequences. The parties hereto intend that the Merger shall
constitute a "reorganization" within the meaning of Section 368(a)(1)(A) of
the Code by reason of Section 368(a)(2)(D) of the Code and that this Agreement
shall constitute a "plan of reorganization" for the purposes of Section 368 of
the Code. No consideration that could constitute "other property" within the
meaning of Section 356 of the Code is being transferred by, or on behalf of,
DDL or Sub in exchange for Jolt's capital stock. Each party hereto agrees and
covenants to report the Merger in accordance with such intention that it may
be taxed as a reorganization for federal income tax purposes, including filing
such returns, reports, information statements and declarations with applicable
federal, state, local and other taxing authorities and maintaining such
records as are required by applicable law in a manner consistent with such
intention.
2.9 SEC Registration. The parties agree that the Merger Consideration will
not be offered, issued or sold by DDL to the Jolt Shareholders pursuant to a
registration statement filed with the SEC. DDL covenants and agrees with the
Jolt Shareholders that it will register the Merger Consideration with the SEC
for resale by the Jolt Shareholders as soon as possible following the Closing
and will file a registration statement with the SEC (covering the resale of
the Merger Consideration) not later than sixty days following the Closing.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF DDL AND SUB
DDL and Sub hereby jointly and severally represent and warrant as follows to
Jolt and the Jolt Shareholders:
3.1 Organization and Qualification. Each of DDL and Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite power and authority to carry on its
business as it is now being conducted. Each of DDL and Sub is duly qualified
as a foreign corporation to do business, and in good standing, in each
jurisdiction where the character of the properties owned or leased by it, or
the nature of its activities, is such that qualification as a foreign
corporation in that jurisdiction is required by law. DDL has delivered to Jolt
true and complete copies of the charter and bylaws of DDL and Sub.
3.2 Capitalization. The authorized capital stock of DDL consists of
50,000,000 shares of DDL Common Stock and 1,000,000 shares of preferred stock,
par value $1.00 per share. There is no other capital stock authorized for
issuance by DDL. At the date of this Agreement, there are validly issued and
outstanding 24,613,666 shares of DDL Common Stock and no shares of preferred
stock. All such outstanding shares of capital stock are fully paid and
nonassessable. No shares of DDL capital stock are reserved for issuance, nor
are there outstanding any options, warrants, convertible securities or other
rights, agreements or commitments to issue or acquire shares of DDL capital
stock, except as disclosed on Schedule 3.2.
3.3 Authority Relative to this Agreement. This Agreement has been duly and
validly executed and delivered by each DDL and Sub and constitutes a legal,
valid and binding agreement of each of DDL and Sub, enforceable against each
of DDL and Sub in accordance with its terms. Each of DDL and Sub has all
requisite power and authority (corporate and otherwise) to enter into this
Agreement, and Sub has all requisite power and authority to carry out the
Merger contemplated hereby. The Board of Directors of Sub has, subject to the
terms and conditions set forth herein: (a) determined that this Agreement and
the transactions contemplated hereby, including the Merger, are fair to, and
in the best interests of, the sole stockholder of Sub; (b) approved this
Agreement and the transactions contemplated hereby, including the Merger, in
all respects; and (c) resolved to recommend that DDL, as the sole stockholder
of Sub, approve this Agreement and the Merger. The Board of Directors of DDL,
at a meeting duly called and held, has, subject to the terms and conditions
set forth herein: (d) determined that this Agreement and the transactions
contemplated hereby, including the Merger, are fair to, and in the best
interests of, DDL and its stockholders; (e) approved this Agreement and the
transactions contemplated hereby, including the Merger and the issuance of the
Merger Consideration therein, in all respects; and (f) resolved to recommend
that the stockholders of DDL approve the issuance of the Merger Consideration
in the Merger, provided, however, that such recommendation may be withdrawn,
modified or amended to the extent that the Board of Directors of DDL, by
majority vote, determines it is required to do so in the exercise of its
fiduciary duties. The Financial Advisor to DDL has delivered to the Board of
Directors of DDL its opinion letter to the effect that the Merger is fair to
the stockholders of DDL from a financial point of view. DDL has been
authorized by the Financial Advisor to DDL to refer to, and include, such
opinion letter in the DDL Proxy Statement.
3.4 Absence of Breach; No Consents. The execution and delivery of this
Agreement by DDL and Sub do not, and the performance by DDL and Sub of their
obligations hereunder will not (a) result in a breach of any of the provisions
of the charter or bylaws of DDL; (b) violate any law, rule or regulation of
any State or the United States (except for compliance with regulatory or
licensing laws all of which, to the extent applicable to DDL and Sub (and to
the extent within the control of DDL and Sub), will be satisfied in all
material respects prior to the Closing), or of any applicable foreign
jurisdiction, or any order, writ, judgment, injunction, decree, determination
or award of any court or other authority having jurisdiction over DDL or any
of its material properties, or cause the suspension or revocation of any
authorization, consent, approval or license presently in effect that affects
or binds DDL or any of its material properties, except in any such case where
such violation will not have a Material Adverse Effect on DDL; (c) result in a
material breach of or default under any material indenture or loan or
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credit agreement or other material agreement or instrument to which DDL is a
party or by which it or any of its material properties may be affected or
bound; (d) require the authorization, consent, approval or license of any
Person of such a nature that the failure to obtain the same would have a
Material Adverse Effect on DDL; or (e) constitute grounds for the loss or
suspension of any material permit, license or other authorization used in the
business of DDL.
3.5 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with this
Agreement or the Merger or any related transaction based upon any agreement,
written or oral, made by or on behalf of DDL, except that Saul Reiss, Esq. is
entitled to payment of a brokerage fee as disclosed in Schedule 3.5.
3.6 Delivered Documents. DDL has heretofore delivered to Jolt each of the
following:
(a) Annual Report of DDL to its stockholders for its fiscal year ended
the date of the DDL Balance Sheet;
(b) Annual Report of DDL on Form 10-K/A as filed with the SEC for DDL's
fiscal year ended the date of the DDL Balance Sheet;
(c) proxy statement of DDL relating to its most recent annual meeting of
stockholders; and
(d) Quarterly Reports of DDL on Form 10-Q as filed with the SEC for each
of the first three fiscal quarters of DDL for its most recent fiscal year,
and all other reports of DDL filed with the SEC, to the extent that such
reports have been filed with the SEC after the filing of the report
referred to in clause (b) above and prior to the date hereof.
Each such document, at the time it was prepared, and all such documents taken
together, did not and do not contain an untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. All of the financial statements contained in the foregoing
documents were prepared from the books and records of DDL. The Audited
Financial Statements were prepared in accordance with GAAP and fairly and
accurately reflect the financial condition of DDL as at the dates and for the
periods indicated. The financial statements of DDL included in the reports
referred to in clause (d) above were prepared in a manner not inconsistent
with the basis of presentation used in the Audited Financial Statements and
fairly present the financial condition of DDL as at and for the periods
indicated, subject to normal year-end adjustments.
3.7 Proxy Statement, Registration Statement and Prospectus. When the DDL
Proxy Statement, as the same may be amended or supplemented, shall be mailed
to holders of the DDL Common Stock, and at all times subsequent to such
mailing through the time of approval of this Agreement and the Merger by the
stockholders of DDL, the DDL Proxy Statement, as then amended or supplemented,
will comply in all material respects with the applicable provisions of the
Exchange Act and the rules and regulations of the SEC thereunder. At all times
material to a stockholder of DDL or a Jolt Shareholder: (a) the DDL Proxy
Statement, as the same may be amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements made, in the light of circumstances
under which they were made, not misleading; (b) the Registration Statement, as
the same may be amended, will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and (c) the
Prospectus, as the same may be supplemented, will not contain an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; it being understood and agreed, with
respect to each of clauses (a), (b) and (c), that DDL makes no representation
or warranty concerning, and shall have no responsibility for, the accuracy or
completeness of any information furnished to DDL by Jolt for use in any
document filed with the SEC or otherwise disseminated to the public or to
stockholders of DDL.
3.8 Merger Consideration Validly Issued. At the Effective Time, the Merger
Consideration will have been duly authorized and, when issued in connection
with the Merger pursuant to the terms hereof, will have been
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validly issued and will be fully paid and nonassessable, and no stockholder of
DDL will have any preemptive rights of subscription or purchase in respect
thereof.
3.9 Absence of Material Differences From DDL Disclosure Document or SEC
Reports. Except as disclosed in the DDL Disclosure Document or in an SEC
Report:
(a) No Material Adverse Change. Since the date of the DDL Balance Sheet,
other than as contemplated or caused by this Agreement, there has not been
(i) any Material Adverse Change in DDL; or (ii) any damage, destruction or
loss, whether covered by insurance or not, having a Material Adverse Effect
on DDL;
(b) Taxes. DDL has properly filed or caused to be filed all federal,
state, local and foreign income and other tax returns, reports and
declarations that are required by applicable law to be filed by it, and has
paid or made full and adequate provision for the payment of, all federal,
state, local and foreign income and other taxes properly due for the
periods covered by such returns, reports, declarations, except such taxes,
if any, for which there are adequate reserves in the DDL Balance Sheet.
There are no liens on any of the assets of DDL that arose in connection
with any delinquency in paying any tax;
(c) Litigation. (i) No material investigation or review by any
governmental entity with respect to DDL is pending or, to the best
knowledge of DDL, threatened, nor has any governmental entity indicated to
DDL an intention to conduct the same; and (ii) there is no action, suit or
proceeding pending or, to the best knowledge of DDL, threatened against or
affecting DDL at law or in equity, or before any federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality;
(d) Employees. There are no employment, consulting, severance or
indemnification arrangements, agreements or understandings between DDL and
any current or former directors, officers or other employees (or Affiliates
thereof) of DDL. The DDL Disclosure Document or an SEC Report identifies
each individual whose income from DDL in the fiscal year ended on the date
of the DDL Balance Sheet exceeded, or whose income from DDL in the fiscal
year begun immediately thereafter is at a rate exceeding, $100,000 per
annum, and describes each contractual arrangement for the employment or
compensation of each such individual. DDL is not, and following the Closing
will not be, bound by any express or implied contract or agreement to
employ, directly or as a consultant or otherwise, any person for any
specific period of time or until any specific age;
(e) Assets. DDL has good, marketable and insurable title, or valid,
effective and continuing leasehold rights in the case of leased property,
to all real property and all personal property owned or leased by it or
used by it in the conduct of its business in such manner as to create the
appearance or reasonable expectation that the same is owned or leased by
it, free and clear of all Liens, except Liens for taxes not yet due and
minor imperfections of title and encumbrances, if any, which, singly and in
the aggregate, are not substantial in amount and do not materially detract
from the value of the property subject thereto or materially impair the use
thereof;
(f) Accounts Receivable. All accounts receivable of DDL, whether or not
reflected in the DDL Balance Sheet, represent transactions in the ordinary
course of business and are current and collectible net of any reserves
shown on the DDL Balance Sheet (which reserves are adequate and were
calculated consistent with past practice);
(g) Inventories. All Inventories of DDL, whether or not reflected in the
DDL Balance Sheet, are of a quality and quantity usable and salable in the
ordinary course of business, except for obsolete items and items of below-
standard quality, all of which, in the aggregate, are immaterial in amount.
Items included in such Inventories are carried on the books of DDL, and are
valued on the DDL Balance Sheet, at the lower of cost or market and, in any
event, at not greater than their realizable value, on an item-by-item
basis, after appropriate deduction for costs of completion, marketing
costs, transportation expense and allocation of overhead; and
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(h) Accounts Payable. The accounts payable reflected on the DDL Balance
Sheet do, and those reflected on the books of DDL at the time of the
Closing will, reflect all amounts owed by DDL in respect of trade accounts
due and other Payables, and the actual Liability of DDL in respect of such
obligations was not, and will not be, on either such date, in excess of the
amount reflected on the balance sheet or the books of DDL.
3.10 DDL Stockholder Rights Plan. DDL has taken all action necessary so that
neither the execution of this Agreement nor the consummation of the Merger
will cause any person to become an "Acquiring Person" (as such term is defined
in the DDL Stockholder Rights Plan).
3.11 Listing on Exchanges. The common stock of DDL is currently listed on
the new York Stock Exchange ("NYSE") and the Pacific Exchange ("PE"). DDL is
currently not in compliance with the listing requirements that must be met to
continue to have its common stock listed on the NYSE. However, DDL has been in
communication with the staff of the NYSE regarding DDL's current and
anticipated business and financial condition and believes that the NYSE will
continue to refrain from taking action to delist the securities of DDL from
the NYSE at least until after the Closing Date. DDL has provided Jolt and the
Jolt Shareholders with copies of all correspondence between DDL and the NYSE
regarding the continued listing of the Jolt common stock on the NYSE.
3.12 Federal Income Tax Representations. (a) DDL is not an "investment
company" as defined in Section 368(a)(2)(F) of the Code.
(b) DDL owns 100% of the outstanding shares of capital stock and
otherwise is in control of Sub within the meaning of Section 368(c) of the
Code.
(c) Sub has been formed solely for the purpose of consummating the
Merger. Sub has not conducted and will not conduct any business activities
or other operations of any kind other than the issuance of its stock to DDL
prior to the Merger. Sub will have no liabilities assumed by Jolt and will
not transfer to Jolt any assets subject to liabilities in the Merger. No
liabilities of any person other than Jolt will be assumed by Sub or DDL in
the Merger, and none of the shares of Jolt to be surrendered in the Merger
in exchange for DDL Common Stock will be subject to any liabilities.
(d) DDL has no plan, arrangement or intention to cause Sub on or after
the Effective Time to issue additional shares of its capital stock that
would cause DDL to lose control, or otherwise result in DDL losing control
(in both cases within the meaning of Section 368(c) of the Code), of Sub.
(e) Neither DDL nor Sub has any current plan, arrangement or intention to
liquidate Sub; to merge Sub with or into another corporation; to sell or
otherwise dispose of the stock of Sub; or to sell or otherwise dispose (or
cause to be sold or otherwise disposed) of any of Sub's assets, including
the assets of Jolt acquired in the Merger, except for dispositions made in
the ordinary course of business or transfers described in Section
368(a)(2)(C) of the Code.
(f) DDL has no plan, arrangement or intention to directly or indirectly
reacquire any of the DDL Common Stock issued in the Merger.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF JOLT AND THE JOLT SHAREHOLDERS
Jolt and the Jolt Shareholders jointly and severally represent and warrant
as follows to DDL and Sub:
4.1 Organization and Qualification. Jolt is a corporation duly organized,
validly existing and in good standing under the laws of Florida and has the
requisite power and authority to carry on its business as it is now being
conducted. Jolt is duly qualified as a foreign corporation to do business, and
in good standing, in each jurisdiction where the character of the properties
owned or leased by it, or the nature of its activities, is such that
qualification as a foreign corporation in that jurisdiction is required by
law. Jolt has delivered to DDL true and complete copies of the charter and
bylaws of Jolt. Jolt has no subsidiaries.
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4.2 Capitalization. The authorized capital stock of Jolt currently consists
of 10,000 shares of Jolt Common Stock, par value $1.00 per share and, on the
Closing Date, will consist of 20,660 shares of Jolt Common Stock, par value
$1.00 per share. There is no other capital stock authorized for issuance by
Jolt. At the date of this Agreement, there are validly issued and outstanding
10,000 shares of Jolt Common Stock and no shares of preferred stock. All such
outstanding shares of capital stock are fully paid and nonassessable. No
shares of Jolt capital stock are reserved for issuance, nor are there
outstanding any options, warrants, convertible securities or other rights,
agreements or commitments to issue or acquire shares of Jolt capital stock,
except as disclosed on Schedule 4.2.
4.3 Authority Relative to This Agreement. This Agreement has been duly and
validly executed and delivered by Jolt and the Jolt Shareholders and
constitutes a legal, valid and binding agreement of Jolt and the Jolt
Shareholders, enforceable against Jolt and the Jolt Shareholders in accordance
with its terms. Jolt has all requisite power and authority (corporate and
otherwise) to enter into this Agreement and to carry out the Merger
contemplated hereby. The Board of Directors of Jolt, at a meeting duly called
and held, has, subject to the terms and conditions set forth herein: (a)
determined that this Agreement and the transactions contemplated hereby,
including the Merger, are fair to, and in the best interests of, the Jolt
Shareholders; (b) approved this Agreement and the transactions contemplated
hereby, including the Merger, in all respects; and (c) resolved to recommend
that the Jolt Shareholders approve this Agreement and the Merger, provided,
however, that such recommendation may be withdrawn, modified or amended to the
extent that the Board of Directors of Jolt, by majority vote, determines it is
required to do so in the exercise of its fiduciary duties.
4.4 Absence of Breach; No Consents. The execution and delivery of this
Agreement by Jolt and the Jolt Shareholders do not, and the performance by
Jolt and the Jolt Shareholders of their obligations hereunder will not, except
as disclosed in Schedule 4.4: (a) result in a breach of any of the provisions
of the charter or bylaws of Jolt; (b) violate any law, rule or regulation of
any State or the United States (except for compliance with regulatory or
licensing laws all of which, to the extent applicable to Jolt (and to the
extent within the control of Jolt), will be satisfied in all material respects
prior to the Closing), or of any applicable foreign jurisdiction, or any
order, writ, judgment, injunction, decree, determination or award of any court
or other authority having jurisdiction over Jolt, or any of the Jolt
Shareholders, or any of its or their material properties, or cause the
suspension or revocation of any authorization, consent, approval or license
presently in effect that affects or binds Jolt or any of the Jolt
Shareholders, or any of its or their material properties, except in any such
case where such violation will not have a Material Adverse Effect on Jolt; (c)
result in a material breach of or default under any material indenture or loan
or credit agreement or other material agreement or instrument to which Jolt or
any of the Jolt Shareholders is a party or by which it or they or any of its
or their material properties may be affected or bound; (d) require the
authorization, consent, approval or license of any Person of such a nature
that the failure to obtain the same would have a Material Adverse Effect on
Jolt; or (e) constitute grounds for the loss or suspension of any material
permit, license or other authorization used in the business of Jolt.
4.5 Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's, or other fee or commission in connection with this
Agreement or the Merger or any related transaction based upon any agreement,
written or oral, made by or on behalf of Jolt or any of the Jolt Shareholders.
4.6 Delivered Documents. The representations and warranties of Jolt in this
Agreement, and the documents furnished or to be furnished by or on behalf of
Jolt or the Jolt Shareholders to DDL incident to this Agreement and the
transactions undertaken in respect hereof, taken together, do not and will not
contain an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made, in the light of the
circumstances under which they were made, not misleading. All of the financial
statements included in the foregoing documents were prepared from the books
and records of Jolt. The Audited Financial Statements were prepared in
accordance with GAAP and fairly and accurately reflect the financial condition
of Jolt as at the dates and for the periods indicated. The unaudited financial
statements of Jolt included in the foregoing documents were prepared in a
manner not inconsistent with the basis of presentation used in the Audited
Financial Statements and fairly present the financial condition of Jolt as at
and for the periods indicated, subject to normal year-end adjustments. From
the date hereof through the Closing Date, Jolt will continue to
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prepare financial statements monthly and will promptly deliver the same to
DDL, and Jolt agrees that from and after each such delivery the foregoing
representations will be applicable to the financial statements so prepared and
delivered.
4.7 Proxy Statement, Registration Statement and Prospectus. At all times
material to a Jolt Shareholder or stockholder of DDL: (a) the information
furnished to DDL by Jolt for use in the DDL Proxy Statement, as the same may
be amended or supplemented, will not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements made, in the light of circumstances under which they were made,
not misleading; (b) the information furnished to DDL by Jolt for use in the
Registration Statement, as the same may be amended, will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading; and
(c) the information furnished to DDL by Jolt for use in the Prospectus, as the
same may be supplemented, will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4.8 Ownership of Jolt Common Stock. Each Jolt Shareholder, severally and not
jointly, represents and warrants to DDL and Sub that such Person owns the
shares of Jolt Common Stock set forth opposite such Person's name on the
signature page of this Agreement.
4.9 Absence of Material Differences From Jolt Disclosure Document. Except as
disclosed in the Jolt Disclosure Document:
(a) No Material Adverse Change. Since the date of the Jolt Balance Sheet,
other than as contemplated or caused by this Agreement, there has not been
(i) any Material Adverse Change in Jolt; or (ii) any damage, destruction or
loss, whether covered by insurance or not, having a Material Adverse Effect
on Jolt;
(b) Taxes. Jolt has properly filed or caused to be filed all federal,
state, local and foreign income and other tax returns, reports and
declarations that are required by applicable law to be filed by it, and has
paid, or made full and adequate provision for the payment of, all federal,
state, local and foreign income and other taxes properly due for the
periods covered by such returns, reports and declarations, except such
taxes, if any, for which there are adequate reserves in the Jolt Balance
Sheet. There are no Liens on any of the assets of Jolt that arose in
connection with any delinquency in paying any tax;
(c) Litigation. (i) No material investigation or review by any
governmental entity with respect to Jolt is pending or, to the best
knowledge of Jolt or the Jolt Shareholders, threatened, nor has any
governmental entity indicated to Jolt an intention to conduct the same; and
(ii) there is no action, suit or proceeding pending or, to the best
knowledge of Jolt or the Jolt Shareholders, threatened against or affecting
Jolt at law or in equity, or before any federal, state, municipal or other
governmental department, commission, board, bureau, agency or
instrumentality;
(d) Employees. There are no employment, consulting, severance or
indemnification arrangements, agreements or understandings between Jolt and
any current or former directors, officers or other employees (or Affiliates
thereof) of Jolt. The Jolt Disclosure Document identifies each employee
whose income from Jolt in the fiscal year ended on the date of the Jolt
Balance Sheet exceeded, or whose income from Jolt in the fiscal year begun
immediately thereafter is at a rate exceeding, $100,000 per annum, and it
describes each contractual arrangement for the employment or compensation
of each such individual. Jolt is not, and following the Closing will not
be, bound by any express or implied contract or agreement to employ,
directly or as a consultant or otherwise, any person for any specific
period of time or until any specific age;
(e) Assets. Jolt has valid, effective and continuing leasehold rights in
the case of leased property and all personal property owned or leased by it
or used by it in the conduct of its business in such a manner as to create
the appearance or reasonable expectation that the same is owned or leased
by it, free and clear of all Liens, except Liens for taxes not yet due and
minor imperfections of title and encumbrances, if any, which, singly and in
the aggregate, are not substantial in amount and do not materially detract
from the value of the property subject thereto or materially impair the use
thereof;
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(f) Accounts Receivable. All accounts receivable of Jolt, whether or not
reflected in the Jolt Balance Sheet, represent transactions in the ordinary
course of business and are current and collectible net of any reserves
shown on the Jolt Balance Sheet (which reserves are adequate and were
calculated consistent with past practice);
(g) Inventories. All Inventories of Jolt, whether or not reflected in the
Jolt Balance Sheet, are of a quality and quantity usable and salable in the
ordinary course of business, except for obsolete items and items of below-
standard quality, all of which, in the aggregate, are immaterial in amount.
Items included in such Inventories are carried on the books of Jolt, and
are valued on the Jolt Balance Sheet, at the lower of cost or market and,
in any event, at not greater than their net realizable value, on an item-
by-item basis, after appropriate deduction for costs of completion,
marketing costs, transportation expense and allocation of overhead; and
(h) Accounts Payable. The accounts payable reflected on the Jolt Balance
Sheet do, and those reflected on the books of Jolt at the time of the
Closing will, reflect all amounts owed by Jolt in respect of trade accounts
due and other Payables, and the actual Liability of Jolt in respect of such
obligations was not, and will not be, on either such date, in excess of the
amount reflected on the balance sheet or the books of Jolt.
4.10 Certain Tax Matters.
(a) The assets of Jolt at the Effective Time will constitute at least 90
percent of the fair market value of the net assets and at least 70 percent of
the fair market value of the gross assets held by Jolt immediately before the
Merger. For this purpose, any amounts paid for expenses of Jolt related to the
Merger, any distributions and redemptions (except for regular normal
dividends) made in anticipation of the Merger and any amounts paid to
dissenting shareholders will be included as assets of Jolt held immediately
before the Merger.
(b) Except for any additional liabilities created pursuant to this Agreement
or otherwise incurred in respect of the Merger, the liabilities of Jolt
assumed by Sub were incurred by Jolt in the ordinary course of its business.
(c) Jolt is not an "investment company" as defined in Section 368(a)(2)(F)
of the Code.
4.11 Private Placement. Each Jolt Shareholder represents and warrants to DDL
and to Sub as follows: (a) such Jolt Shareholder will acquire any and all of
the Merger Consideration that such Jolt Shareholder acquires not with a view
to the resale or other transfer thereof in a distribution, and such Jolt
Shareholder has no participation in any such undertaking and no participation
in the underwriting thereof; (b) either such Jolt Shareholder is an
"accredited investor" within the meaning of Rule 501(a) under the Securities
Act or else (through such Jolt Shareholder's knowledge and experience in
financial and business matters) such Jolt Shareholder is capable of evaluating
the merits and risks of investing in DDL and has made an evaluation of such
risks; (c) such Jolt Shareholder has been provided by DDL with all information
requested of DDL in connection with such Jolt Shareholder's prospective
investment in DDL and has been given an opportunity to make such further
inquiries as such Jolt Shareholder considers necessary or desirable in that
connection; and (d) such Jolt Shareholder understands that an equity
investment in DDL involves a high degree of risk of loss of such investment,
that there are substantial restrictions on the transferability of any or all
of the Merger Consideration under the Merger Agreement as amended hereby,
that, for an indeterminate period following the Closing there will be no
public market for any Merger Consideration and that, accordingly, it may not
be possible readily to liquidate the Merger Consideration.
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ARTICLE V
COVENANTS OF DDL
5.1 Stockholder Approval. DDL, acting through its Board of Directors, and in
accordance with applicable law, covenants and agrees with Jolt that: (a) it
will duly call, give notice of, convene and hold a meeting of its stockholders
as soon as practicable for the purpose of considering and taking action upon
the issuance of the Merger Consideration in the Merger as required by
paragraph 312.03 of the NYSE Listed Company Manual; (b) subject to its
fiduciary duties under applicable law, as determined in good faith by majority
vote, it will include in the DDL Proxy Statement its recommendation that
stockholders of DDL vote in favor of the approval of the issuance of the
Merger Consideration in the Merger; and (c) it will use its best efforts (i)
to obtain and furnish the information required to be included by it in the DDL
Proxy Statement (and any preliminary version thereof) and to cause the DDL
Proxy Statement to be mailed to its stockholders at the earliest practicable
time and, (ii) subject to its fiduciary duties under applicable law, to obtain
the necessary approvals by its stockholders of this Agreement and the
transactions contemplated hereby, including the Merger.
5.2 Best Efforts. Subject to the terms and conditions herein provided and to
applicable fiduciary duties, each of DDL and Sub agrees to use its best
efforts to take or cause to be taken all such actions necessary, proper or
advisable under applicable laws and regulations to satisfy the conditions set
forth in Article VII and to consummate the transactions contemplated by this
Agreement, including, without limitation: (a) in the preparation and filing of
the DDL Proxy Statement, the Registration Statement and the Prospectus and any
amendments and supplements to any thereof; and (b) the execution of any
additional documents necessary to consummate the transactions contemplated
hereby.
5.3 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred by DDL in connection with this Agreement and the
transactions contemplated hereby shall be paid by DDL and Sub except as
otherwise provided herein.
5.4 Publicity. Prior to the first to occur of the termination of this
Agreement and the second business day following the Effective Time, any
written news releases by DDL pertaining to this Agreement or the Merger shall
be submitted to Jolt for review and approval prior to release and shall be
released only in a form approved by Jolt; provided, however, that (a) such
approval shall not be unreasonably delayed or withheld, and (b) such review
and approval shall not be required of a release or releases by DDL if in DDL's
judgment (exercised in consultation with Counsel to DDL) it would prevent the
dissemination of information in such time as may be necessary or appropriate
to comply with applicable law or NYSE rules (in which case, however, the text
of the announcement, if written, or a written summary thereof, if oral, shall
be provided promptly to Jolt).
5.5 Updating of Exhibits and Disclosures. DDL shall notify Jolt and the Jolt
Shareholders of any changes, additions or events that would cause any change
in or addition to the DDL Disclosure Document or in or to any Schedules or
Exhibits delivered by it under this Agreement promptly after the occurrence of
the same and again at the Closing by delivery of appropriate updates to such
Schedules and Exhibits. No notification made pursuant to this Section shall be
deemed to cure any breach of any representation or warranty made in or in
connection with this Agreement unless Jolt specifically agrees thereto in
writing.
5.6 Pooling; Reorganization. DDL will not knowingly take any actions that
would cause the transactions contemplated hereby, including the Merger, to
fail to qualify for "pooling-of-interests" accounting treatment consistent
with GAAP and the rules and regulations of the SEC or to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
5.7 Tax Covenants. (a) As of the Effective Time and thereafter, DDL will
cause Jolt to continue the historic business of Jolt or use a significant
portion of the historic business assets of Jolt in a manner that satisfies the
continuity of business enterprise requirement described in Section 1.368-1(d)
of the regulations under the Code.
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(b) DDL shall timely file, or cause Jolt to timely file, as the case may be,
with the Internal Revenue Service and any other applicable governmental or
taxing authority, complete and accurate statements and documents, and shall
maintain, or cause to be maintained, as the case may be, such reports,
records, information and documents, with respect to DDL, Sub and Jolt, as
required by Section 1.368-3(a) and 1.368-3(c) of the regulations under the
Code or other applicable law relative to the Merger and the qualification of
the Merger as a tax-free reorganization for federal income tax purposes.
ARTICLE VI
COVENANTS OF JOLT
6.1 Shareholder Approval. Jolt, acting through its Board of Directors, and
in accordance with applicable law, covenants and agrees with DDL that: (a) it
will duly call, give notice of, convene and hold a meeting of its shareholders
as soon as practicable for the purpose of considering and taking action upon
this Agreement and the Merger as required by the FBCA; and (b) it will use its
best efforts, subject to its fiduciary duties under applicable law, to obtain
the necessary approvals by its shareholders of this Agreement and the
transactions contemplated hereby.
6.2 Best Efforts. Subject to the terms and conditions herein provided and to
applicable fiduciary duties, Jolt and the Jolt Shareholders agree to use their
best efforts to take or cause to be taken all such actions necessary, proper
or advisable under applicable laws and regulations to satisfy the conditions
set forth in Article VII and to consummate the transactions contemplated by
this Agreement, including, without limitation: (a) cooperation in the
preparation and filing of the DDL Proxy Statement, the Registration Statement
and the Prospectus and any amendments and supplements to any of the foregoing;
and (b) the execution of any additional documents necessary to consummate the
transactions contemplated hereby.
6.3 Continuing Investigation; Confidentiality. Jolt covenants and agrees
with DDL that DDL may, prior to the Effective Time and through its own
employees and agents, make such investigation of the business and assets of
Jolt as DDL considers necessary or desirable, it being understood and agreed
that such investigation shall have no effect on any representations or
warranties hereunder. Jolt covenants and agrees to permit DDL and its
representatives to have, after the date hereof, full access at all reasonable
times to the premises and to the books and records of Jolt, and the officers
of Jolt will furnish to DDL and its representatives such financial and
operating data and other information with respect to the business and assets
of Jolt as DDL from time to time may reasonably request. In the event of
termination of this Agreement, DDL will deliver to Jolt all documents, work
papers and other material so obtained before or after the execution hereof and
will not itself use, directly or indirectly, any information so obtained or
otherwise obtained from Jolt hereunder, or in connection herewith, and will
use its best efforts to have all such information kept confidential and not
used in any way detrimental to Jolt.
6.4 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred by Jolt in connection with this Agreement and the
transactions contemplated hereby shall be paid by Jolt and the Jolt
Shareholders except as otherwise provided herein.
6.5 Publicity. Prior to the first to occur of the termination of this
Agreement and the second business day following the Effective Time, any
written news releases by Jolt or any of the Jolt Shareholders pertaining to
this Agreement or the Merger shall be submitted to DDL for review and approval
prior to release and shall be released only in a form approved by DDL;
provided, however, that such approval shall not be unreasonably delayed or
withheld.
6.6 Updating of Exhibits and Disclosure Documents. Jolt and the Jolt
Shareholders shall notify DDL of any changes, additions or events that would
cause any change in or addition to the Jolt Disclosure Document or in or to
any Schedules or Exhibits delivered by any of them under this Agreement
promptly after the occurrence of the same and again at the Closing by delivery
of appropriate updates to the Jolt Disclosure Document and to all such
Schedules and Exhibits. No notification made pursuant to this Section shall be
deemed to cure any breach of any representation or warranty made in this
Agreement unless DDL specifically agrees thereto in writing.
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6.7 Conduct of Business Pending the Closing. Jolt covenants and agrees with
DDL that, prior to the Closing, unless DDL shall otherwise consent in writing
and except as otherwise contemplated by this Agreement:
(a) it will not hold any meetings of its Board of Directors, or any
committee thereof, or of its shareholders without inviting a representative
selected by DDL to attend the same (although such representative may be
required to absent himself or herself during that portion of any such
meeting that pertains to issues arising under this Agreement);
(b) it will not (i) amend or restate its charter or bylaws or (ii) split,
combine or reclassify any of its securities, or declare, set aside or pay
any dividend or other distribution on any of its securities, or make or
agree or commit to make any exchange for or redemption of any of its
securities payable in cash, stock or property; provided, however, that Jolt
shall be permitted to declare, set aside or pay any dividend or other
distribution on any of its securities payable in cash, stock or property to
the extent that: (A) as of Closing, Jolt's interim financial statements
reflect total shareholder's equity of at least $1.5 million and (B) as of
Closing, Jolt will have at least $600,000 in cash on its balance sheet;
(c) it will not (i) issue or agree to issue any additional shares of, or
options, warrants or other rights of any kind to acquire any shares of, its
capital stock of any class, whether by purchase or conversion or exchange
of other securities, or (ii) enter into any contract, agreement, commitment
or arrangement with respect to any of the foregoing, in each case other
than to issue Jolt Common Stock to Thomas M. Wheeler as necessary to comply
with Section 7.2(a);
(d) its business will be conducted prudently, in the ordinary and usual
course, it shall use reasonable efforts to keep intact its business
organizations and goodwill, and it shall keep available the services of its
officers and employees and maintain good relationships with suppliers,
lenders, creditors, distributors, employees, customers and others having
business or financial relationships with it;
(e) it will not terminate any material contract, agreement, commitment or
understanding;
(f) it will not create, incur or assume any long-term or short-term
indebtedness for money borrowed or make any capital expenditures or
commitment for capital expenditures in excess of $1,000;
(g) it will not (1) adopt, enter into or amend any bonus, profit sharing,
compensation, stock option, warrant, pension, retirement, deferred
compensation, employment, severance, termination or other employee benefit
plan, agreement, trust fund or arrangement for the benefit or welfare of
any officer, director, employee or consultant or (2) agree to any increase
in the compensation (including any bonus) payable or to become payable to,
or any increase in the contractual term of employment of, any officer,
director, employee or consultant;
(h) it will not sell, lease, mortgage, encumber or otherwise dispose of
or grant any interest in any of its assets or properties;
(i) it will not enter into any material contract or agreement;
(j) it will not enter into any capital lease, operating lease or rental
agreement for a term exceeding one month; and
(k) it will not enter into any agreement, commitment or understanding,
whether in writing or otherwise, with respect to any of the matters
referred to in subsections (e) through (i) above.
6.8 Pooling; Reorganization. Jolt will not knowingly take any actions that
would cause the transactions contemplated hereby, including the Merger, to
fail to qualify for "pooling-of-interests" accounting treatment consistent
with GAAP and the rules and regulations of the SEC or to be treated as a
"reorganization" within the meaning of Section 368(a) of the Code.
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ARTICLE VII
CONDITIONS TO CONSUMMATION OF THE MERGER
7.1 Conditions to Obligations of DDL, Sub and Jolt. The obligations of DDL,
Sub and Jolt to effect the Merger shall be subject to satisfaction or waiver
of the following conditions at or prior to the Effective Time:
(a) Such parties shall have received a copy, certified by the Secretary
of Jolt, of resolutions duly adopted (and not subsequently modified or
rescinded) by a majority of the members of the Board of Directors of Jolt
by the terms of which resolutions such directors shall have approved this
Agreement and recommended the Merger to the Jolt Shareholders and directed
the submission of this Agreement and the Merger to a vote of such
Shareholders.
(b) Such parties shall have received a copy, certified by the Secretary
of Jolt, of resolutions duly adopted (and not subsequently modified or
rescinded) by a majority of the shares of Jolt Common Stock present in
person or represented by proxy at a meeting of the Jolt Shareholders, a
quorum being present throughout such meeting, by the terms of which
resolutions such Shareholders shall have approved this Agreement and
authorized the Merger.
(c) Such parties shall have received a copy, certified by the Secretary
of Sub, of resolutions duly adopted (and not subsequently modified or
rescinded) by a majority of the members of the Board of Directors of Sub by
the terms of which resolutions such directors shall have approved this
Agreement and recommended the Merger to DDL, as the sole stockholder of
Sub, and directed the submission of this Agreement and the Merger to a vote
of such stockholder.
(d) Such parties shall have received a copy, certified by the Secretary
of DDL, of resolutions duly adopted (and not subsequently modified or
rescinded) by DDL, as the sole stockholder of Sub, by the terms of which
resolutions such sole stockholder shall have approved this Agreement and
authorized the Merger.
(e) Such parties shall have received a copy, certified by the Secretary
of DDL, of resolutions duly adopted (and not subsequently modified or
rescinded) by a majority of the members of the Board of Directors of DDL by
the terms of which resolutions such directors shall have approved this
Agreement, recommended the Merger and the issuance of the Merger
Consideration to the stockholders of DDL and directed the submission of
this Agreement, the Merger and the issuance of the Merger Consideration to
a vote of such stockholders.
(f) This Agreement, the Merger and the issuance of the Merger
Consideration hereunder shall have been approved by all action necessary on
the part of the stockholders of DDL.
(g) There shall not be in effect any preliminary or permanent injunction
or other order by any federal or state authority prohibiting the
consummation of the Merger.
(h) There shall have been obtained all consents that, in the reasonable
judgment of each of DDL, Sub and Jolt, are necessary or desirable in
connection with the consummation of the transactions contemplated hereby
such that, were they not obtained, it would be inadvisable to proceed with
the Merger.
(i) The Merger Consideration shall have been listed on the New York Stock
Exchange, subject to official notice of issuance.
7.2 Conditions to Obligations of DDL and Sub. The obligations of DDL and Sub
to effect the Merger shall be subject to satisfaction or waiver of the
following additional conditions at or prior to the Effective Time:
(a) As of Closing, Jolt's interim financial statements will (i) reflect
total shareholders' equity of at least $1.5 million and (ii) not include
any liabilities owed to Jolt Shareholders. Jolt will have at least $600,000
cash on its balance sheet at the Closing.
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(b) Each Jolt Shareholder shall have executed and delivered to DDL an
Affiliate Letter in substantially the form attached hereto as Exhibit 1.2.
(c) The representations and warranties of Jolt and the Jolt Shareholders
set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and, except in such respects as
would have no Material Adverse Effect on Jolt, as of the Effective Time (as
if made at such time).
(d) Jolt and the Jolt Shareholders shall have performed in all material
respects the covenants and agreements required by this Agreement to be
performed by them at or prior to the Closing.
(e) DDL shall have received from Jolt an officers' certificate, executed
by the Chief Executive Officer and the Chief Financial Officer of Jolt (in
their capacities as such) and dated the Closing Date, confirming
satisfaction of the conditions stated in subparagraphs (c) and (d) of
Section 7.2.
(f) DDL shall have received: (i) an opinion letter of Counsel to Jolt (or
other counsel selected by Jolt and not reasonably rejected by DDL), dated
the Closing Date, conforming to the provisions of Sections 4.1, 4.2, 4.3,
4.4, 4.7 and 4.10(c) of this Agreement insofar as such provisions relate to
matters of law as distinguished from matters of fact; (ii) a "cold comfort"
letter from Jolt's Auditors, dated the Closing Date, in form and substance
reasonably satisfactory to DDL; (iii) an opinion letter of the Financial
Advisor to DDL to the effect that the Merger is fair to the stockholders of
DDL from a financial point of view; and (iv) such other documents as DDL
may reasonably request, in each case reasonably satisfactory in form and
substance to DDL.
(g) No Jolt Shareholder shall have exercised dissenter's rights.
(h) Mitchell Morhaim shall have executed and delivered to DDL an
employment and noncompete agreement in a form reasonably acceptable to DDL.
(i) Jolt shall have obtained a policy of key-man life insurance for
Mitchell Morhaim in a form acceptable to DDL.
(j) Jolt shall have delivered to DDL audited financial statements
prepared in accordance with GAAP for the year ending December 31, 1997.
7.3 Conditions to Obligation of Jolt. The obligation of Jolt to effect the
Merger shall be subject to satisfaction or waiver of the following additional
conditions at or prior to the Effective Time:
(a) The representations and warranties of DDL and Sub set forth in this
Agreement shall be true and correct in all material respects as of the date
of this Agreement and, except in such respects as would have no Material
Adverse Effect on DDL, as of the Effective Time (as if made at such time).
(b) DDL and Sub shall have performed in all material respects the
covenants and agreements required by this Agreement to be performed by them
at or prior to the Closing.
(c) Jolt shall have received from DDL an officer's certificate, executed
by the Chief Financial Officer of DDL (in his capacity as such) and dated
the Closing Date, confirming satisfaction of the conditions stated in
paragraphs (a) and (b) above.
(d) Jolt shall have received: (i) an opinion letter of Counsel to DDL (or
other counsel selected by DDL and not reasonably rejected by Jolt), dated
the Closing Date, conforming to the provisions of Sections 3.1, 3.2, 3.3,
3.4, 3.7, 3.8 and 3.12(a) of this Agreement insofar as such provisions
relate to matters of law as distinguished from matters of fact; and (ii)
such other documents as Jolt may reasonably request, in each case
reasonably satisfactory in form and substance to Jolt.
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ARTICLE VIII
TERMINATION; AMENDMENT; WAIVER
8.1 Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, notwithstanding approval
thereof by the stockholders of DDL and the Jolt Shareholders:
(a) by written consent of DDL and Jolt;
(b) by DDL or Jolt if (1) any court of competent jurisdiction in the
United States or other United States governmental body shall have issued an
order, decree or ruling or taken any other action restraining, enjoining or
otherwise prohibiting the Merger, and such order, decree, ruling or other
action shall have become final and nonappealable;
8.2 Effect of Termination. In the event of the termination and abandonment
of this Agreement pursuant to Section 8.1, this Agreement shall forthwith
become void and of no effect, without any liability on the part of any party
hereto or its Affiliates, directors, officers or stockholders, other than the
provisions of this Section and of Sections 3.5, 3.6, 3.7, 4.5, 4.6, 4.7, 5.3,
5.4, 6.3, 6.4 and 6.5 and Article IX. Nothing contained in this Section shall
relieve any party from liability for any breach of this Agreement.
8.3 Amendments; Action by the Jolt Shareholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of the parties
hereto. The Jolt Shareholders shall act, as elsewhere in this Agreement
provided, by a majority in interest of them.
8.4 Waivers. To the extent permitted by applicable law, DDL and Sub, on the
one hand, or Jolt and the Jolt Shareholders, on the other hand, may at any
time (a) extend the time for the performance of any of the obligations or
other acts of the other, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or
(c) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE IX
INDEMNIFICATION
9.1 Scope. The Jolt Shareholders jointly and severally agree to indemnify,
defend and hold DDL, Sub and their respective affiliates, officers, directors,
agents, employees, successors and assigns and DDL agrees to indemnify, defend
and hold the Jolt Shareholders and their respective affiliates, officers,
directors, agents, employees, successors and assigns (collectively, as the
case may be, the "Indemnified Parties" or the "Indemnifying Parties") harmless
from, against and in respect of all claims, demands, suits, proceedings,
liabilities, judgments, losses, obligations, costs, expenses and deficiencies,
including legal fees incurred in litigation or otherwise (collectively,
"Losses") assessed, sustained or incurred by any of them at any time before
the Closing, as well as after the Closing, to the extent that such Losses
exceed $50,000, with respect to or arising out of, directly or indirectly, (a)
the failure of any representation or warranty made by the Indemnifying Parties
in this Agreement, in the Jolt or DDL Disclosure Document or in any Schedule,
Exhibit, certificate or other document delivered pursuant hereto to be true
and correct in all respects; or (b) the failure of the Indemnifying Parties to
perform and comply in all respects with each of their covenants and other
agreements stated in this Agreement, in the Jolt or DDL Disclosure Document or
in any Schedule or Exhibit hereto or any certificate or other document
delivered pursuant hereto. The rights of the Indemnified Parties provided by
this Article are in addition to, not in lieu of, any and all other rights and
remedies that may be available to them, at common law, in equity or otherwise,
at any time.
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9.2 Procedures.
(a) A party seeking indemnification hereunder shall promptly (i) notify the
Indemnifying Parties of any claim by another Person (a "Third Party Claim")
asserted against the Indemnified Party that could give rise to a right of
indemnification under this Agreement and (ii) transmit to the Indemnifying
Parties a written notice (a "Claim Notice") describing in reasonable detail
the nature of the Third Party Claim, a copy of all papers served with respect
to such claim (if any), an estimate, if reasonably possible, of the Losses
attributable to the Third Party Claim and the basis of the Indemnified Party's
request for indemnification under this Agreement.
(b) Not more than thirty days after receipt of a Claim Notice (the "Election
Period"), the Indemnifying Parties shall notify the Indemnified Party whether
the Indemnifying Parties desire, at their sole cost and expense, to defend the
Indemnified Party against the Third Party Claim
(c) If the Indemnifying Parties notify the Indemnified Party within the
Election Period that the Indemnifying Parties elect to assume the defense of
the Third Party Claim, then the Indemnifying Parties shall have the right to
defend, at their sole cost and expense, the Third Party Claim by all
appropriate proceedings, which proceedings shall be prosecuted diligently by
the Indemnifying Parties to a final conclusion or, subject to the terms of
this subsection, compromised or settled by the Indemnifying Parties. The
Indemnifying Parties shall have control of such defense and proceedings,
including any compromise or settlement thereof; provided, however, that the
Indemnifying Parties shall be solely liable to the third-party claimant for
the full amount of such compromise or settlement, subject to the last sentence
of this subsection; and provided further that the Indemnifying Parties shall
not enter into any such compromise or settlement for other than monetary
damages paid by the Indemnifying Parties (specifically, no such settlement or
compromise shall be authorized if it involves equitable relief against the
Indemnified Party) unless the Indemnified Party consents thereto. The
Indemnified Party is hereby authorized, at its sole cost and expense (but only
if the Indemnified Party is actually entitled to indemnification hereunder or
if the Indemnifying Parties assume the defense with respect to the Third Party
Claim), to file, during the Election Period, any motion, answer or other
pleadings that the Indemnified Party may consider necessary or appropriate to
protect its interests. If requested by the Indemnifying Parties, the
Indemnified Party shall, at the sole cost and expense of the Indemnifying
Parties, cooperate with the Indemnifying Parties and their counsel in
contesting any Third Party Claim that the Indemnifying Party elects to
contest, including, without limitation, the making of any related counterclaim
against the person asserting the Third Party Claim or any cross-complaint
against any Person. Subject to the foregoing provisions of this subsection
concerning equitable relief, the Indemnified Party may at its option
participate in, but not control, any defense or settlement of any Third Party
Claim controlled by the Indemnifying Parties pursuant to this subsection and
shall bear its own costs and expenses with respect to such participation;
provided, however, that, notwithstanding the foregoing, the Indemnified Party
shall have the right to approve or reject any compromise or settlement
involving only the payment of money, but, if the Indemnified Party rejects any
compromise or settlement, then the Indemnifying Parties' obligation to
indemnify the Indemnified Party thereafter shall be limited to the amount that
would have been paid had the settlement been approved by the Indemnified
Party.
(d) If the Indemnifying Parties fail to notify the Indemnified Party within
the Election Period that the Indemnifying Parties elect to defend the
Indemnified Party pursuant to subsection (b), or if the Indemnifying Parties
elect to defend the Indemnified Party pursuant to subsection (b) but fail
diligently and promptly to prosecute or compromise or settle such Third Party
Claim, then the Indemnified Party shall have the right to defend, at its sole
cost and expense, the Third Party Claim by all appropriate proceedings, which
proceedings shall be promptly and vigorously prosecuted by the Indemnified
Party to a final conclusion or shall be settled or compromised. The
Indemnified Party shall have full control of such defense and proceedings;
provided, however, that the Indemnified Party shall not enter into, without
the Indemnifying Parties' consent, which shall not be unreasonably withheld,
any compromise or settlement of such Third Party Claim. The Indemnifying
Parties may at their option participate in, but not control, any defense or
settlement controlled by the Indemnified Party pursuant to this subsection and
shall bear their own costs and expenses with respect of such participation.
A-18
<PAGE>
(e) In the event that any Indemnified Party should have a claim for
indemnification hereunder that does not involve a Third Party Claim, the
Indemnified Party shall, promptly upon becoming aware of the same, transmit to
the Indemnifying Parties a written notice (an "Indemnity Notice") describing
in reasonable detail the nature of the claim, an estimate, if reasonably
possible, of the Losses attributable to such claim and the basis of the
Indemnified Party's request for indemnification under this Agreement. If the
Indemnifying Parties do not send the Indemnified Party notice within sixty
days after the Indemnity Notice is given that the Indemnifying Parties dispute
such claim, then the claim specified by the Indemnified Party in the Indemnity
Notice shall be deemed a liability of the Indemnifying Parties hereunder.
9.3 Survival of Representations and Warranties. The representations,
warranties, covenants, indemnities and other agreements of each of the parties
to this Agreement shall be unaffected by any investigation made at any time by
or on behalf of any Person. The representations and warranties of the parties
hereto (and the related rights of the Indemnified Parties to indemnification
under this Agreement) shall survive the Closing for a period of three years
(and any related Indemnity Notice must be delivered within that period),
except for representations and warranties concerning tax matters, which shall
survive the Closing for a period of six years (and any related Indemnity
Notice must be delivered within that period).
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed sufficiently given if delivered personally or sent
by facsimile transmission or by registered or certified mail (postage
prepaid), addressed as follows (or to such other address for a party as shall
be specified by like notice given at least five days prior thereto):
if to DDL, then to:
Mr. Gregory L. Horton
President and Chief Executive Officer
DDL Electronics, Inc.
2151 Anchor Court
Newbury Park, California 91320
Fax: (805) 376-9015
with a copy (which shall not, in itself, constitute notice) to:
Patrick Daugherty, Esquire
McGuire Woods Battle & Boothe, L.L.P.
3700 NationsBank Plaza
101 S. Tryon Street
Charlotte, North Carolina 28202-4000
Fax: (704) 373-8990
if to Jolt or the Jolt Shareholders, or any of them, then to:
Thomas M. Wheeler
Jolt Technology, Inc.
c/o TMW Enterprises, Inc.
801 W. Big Beaver, Suite 201
Troy, MI 48084
Fax: (248) 362-3033
A-19
<PAGE>
with a copy (which shall not, in itself, constitute notice) to:
Robert Hudson, Esquire
Berry Moorman P.C.
600 Woodbridge Place
Detroit, MI 40726-4302
Fax: (313) 567-1001
All such notices and communications shall be deemed to have been duly given at
the time delivered by hand, if delivered personally; when receipt confirmed,
if sent by facsimile; and the next business day after timely delivery to the
courier, if sent by an overnight air courier service guaranteeing next-day
delivery.
10.2 Interpretation. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.3 Miscellaneous. This Agreement (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, between and among the parties, or any of them, with respect to the
subject matter hereof, except as specifically provided otherwise or referred
to herein, so that no such external or separate agreements relating to the
subject matter of this Agreement shall have any effect or be binding, unless
the same is referred to specifically in this Agreement or is executed by the
parties after the date hereof; (b) is not intended to confer upon any other
person any rights or remedies hereunder; (c) shall not be assigned by
operation of law or otherwise, except for assignment of all of the rights and
obligations of Sub hereunder, which may be assigned without the consent of any
other party so long as the assignee is a wholly-owned subsidiary of DDL; and
(d) shall be governed by and construed in accordance with the laws of the
State of Delaware without regard to the principles of conflict of laws
thereof. This Agreement may be executed in any number of counterparts, each of
which shall constitute an original but all of which together shall constitute
one agreement.
A-20
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed and delivered as of the date first written above.
DDL ELECTRONICS, INC.
By: /s/ Gregory L. Horton
-------------------------------
Gregory L. Horton
President and Chief Executive Officer
JOLT TECHNOLOGY, INC.
By: /s/ Mitchell Morhaim
-------------------------------
Mitchell Morhaim
JOLT ACQUISITION CORPORATION
By: /s/ Gregory L. Horton
-------------------------------
Gregory L. Horton
President
<TABLE>
<S> <C>
The Jolt Shareholders: Jolt Common Stock:
By: /s/ Thomas M. Wheeler 14,660 shares
-------------------------------
Thomas M. Wheeler
By: /s/ Charlene A. Gondek 4,000 shares
-------------------------------
Charlene A. Gondek
By: /s/ Mitchell Morhaim 2,000 shares
-------------------------------
Mitchell Morhaim
</TABLE>
A-21
<PAGE>
EXHIBIT 1.2
AFFILIATE LETTER
[Closing Date]
DDL Electronics, Inc.
2151 Anchor Court
Newbury Park, CA 91320
Attention: Mr. Richard K. Vitelle
Ladies and Gentlemen:
This letter is being delivered to you as contemplated by Section 7.2(b) of
that certain Agreement and Plan of Merger dated as of May 28, 1998 among DDL
Electronics, Inc. ("DDL"), Jolt Technology, Inc. ("Jolt"), Jolt Acquisition
Corporation ("Sub") and the shareholders of Jolt (the "Jolt Shareholders"),
including the undersigned (the "Agreement"). Pursuant to Sections 2.1 and 2.5
of the Agreement, Jolt shall be merged with and into Sub (the "Merger").
Subject to the terms and conditions of the Merger, each of the Jolt
Shareholders will receive 435.6244 shares (the "DDL Shares") of common stock,
par value $.01 per share, of DDL for each share of issued and outstanding
capital stock of Jolt (the "Jolt Stock").
In order to induce you to consummate the transactions contemplated by the
Agreement, the undersigned agrees as follows: The undersigned will at no time
sell, contract to sell, offer, offer to sell, offer for sale, solicit an offer
to buy or otherwise dispose of or attempt to dispose of ("Transfer") any DDL
Shares, except pursuant to a registration statement declared effective by the
Securities and Exchange Commission or within the limits and in accordance with
the applicable provisions of Rule 145 under the Securities Act of 1933, as
amended.
The undersigned is aware that DDL intends to treat the Merger as a tax-free
reorganization under Section 368 of the Internal Revenue Code (the "Code") for
federal income tax purposes, and the undersigned agrees to treat the
transaction in the same manner. The undersigned acknowledges that Section
1.368-1(b) of the regulations under the Code requires "continuity of interest"
in order for the Merger to be treated as tax-free under Section 368 of the
Code and that this requirement will be satisfied if there is no plan or
intention on the part of the Jolt shareholders to Transfer the DDL Shares to
be received in the Merger that will reduce such shareholders' ownership to a
number of shares having, in the aggregate, a value at the time of the Merger
of less than 50% of the total fair market value of the Jolt Stock outstanding
immediately prior to the Merger. The undersigned has no prearrangement, plan
or intention to Transfer a number of DDL Shares that would cause the foregoing
requirement not to be satisfied.
The undersigned will not Transfer or otherwise reduce his risk relative to
the DDL Shares until such time after the consummation of the Merger as
financial results covering at least 30 days of the combined operations of DDL
and Jolt have been (within the meaning of SEC Accounting Series Release No.
130, as amended) filed by DDL with the SEC or published by DDL in an Annual
Report on Form 10-K, a Quarterly Report onForm 10-Q, a Current Report on Form
8-K, a quarterly earnings report, a press release or other public issuance
that includes combined sales and income of DDL and Jolt. DDL will make such
filing or publication as soon as practicable and will notify the undersigned
of the same promptly thereafter. The undersigned will not, during the 30-day
period prior to the consummation of the Merger, Transfer or otherwise reduce
the undersigned's risk relative to the DDL Shares.
Very truly yours,
-------------------------------------
Name:
A-22
<PAGE>
SCHEDULE 3.2
DDL ELECTRONICS, INC.
SUMMARY OF COMMON SHARES OUTSTANDING AND ISSUABLE
<TABLE>
<CAPTION>
SHARES
----------
<S> <C>
Shares outstanding.................................................. 24,613,666
Shares reserved for outstanding stock options:
<CAPTION>
SHARES
EXERCISE ISSUABLE AT
PRICE EXERCISE
---------- -----------
<S> <C> <C>
Employee stock options.............. 0.500 269,462
Employee stock options.............. 0.688 5,000
Employee stock options.............. 0.750 339,400
Employee stock options.............. 1.000 115,900
Director stock options.............. 1.063 180,000
Employee stock options.............. 1.125 461,300
Employee stock options.............. 1.250 1,069,329
Employee & director options......... 1.625 252,000
---------
2,692,391 2,692,391
=========
Shares reserved for warrants:
<CAPTION>
EXERCISE OUTSTANDING
PRICE WARRANTS
---------- -----------
<S> <C> <C>
Series C Warrants................... 2.25 455,000
Series D Warrants................... 1.50 50,000
Series E Warrants................... 2.19 1,500,000
Series G Warrants................... 1.78 424,418
Series H Warrants................... 1.50 300,000
---------
2,729,418 2,729,418
=========
Shares issuable upon conversion of debentures:
<CAPTION>
O/S CONVERSION SHARES
PRINCIPAL PRICE ISSUABLE
---------- ----------- --------
<S> <C> <C> <C> <C>
7% convertible debentures........... $ 323,000 2.00 161,500
8-1/2% convertible debentures....... $1,580,000 10.63 148,706
-------
310,206 310,206
======= ----------
Total outstanding shares on fully diluted basis..................... 30,345,681
Shares underlying stock options available for grant under stock-
holder approved option plans....................................... 1,130,098
----------
Total shares authorized for listing with NYSE, before giving effect
to Jolt merger..................................................... 31,475,779
==========
</TABLE>
A-23
<PAGE>
SCHEDULE 3.5
DDL ELECTRONICS, INC.
Brokerage Fee for Merger with Jolt Technology, Inc.
Pursuant to an agreement between DDL Electronics, Inc. (the "Company"), and
Saul Reiss, Esq., the Company will issue 200,000 shares of its Common Stock,
$.01 par value, to Mr. Reiss as a brokerage fee upon the consummation of the
merger with Jolt Technology, Inc.
A-24
<PAGE>
AGREEMENT AND PLAN OF MERGER
DISCLOSURE DOCUMENT
SECTION 3.9(c)(i):
1. During its fiscal year ended June 30, 1996, DDL Electronics, Inc. (the
"Company") recognized an income tax benefit associated with its application
for federal tax refunds as permitted under Section 172(f) of the Internal
Revenue Code. In the aggregate, the Company applied for federal tax refunds
of $2,175,000, net of costs associated with applying for such refunds.
Through June 30, 1996, the Company had received $1,871,000 of net refunds
plus interest on such refunds of $106,000, and has recognized as an income
tax benefit $1,110,000 net of certain expenses. The tax returns underlying
these refunds are currently being audited by the Internal Revenue Service
and a portion of the refunds could be disallowed. Accordingly, the Company
has not yet recognized a tax benefit for the remainder of the refunds
received to date, or for the refunds still expected to be received. No
additional refunds were received during the fiscal year ended June 30,
1997. Nonetheless, the Company feels that its claim for refund and carry
back of net operating losses can be substantiated and is supported by law,
and that the Company will ultimately collect and retain a substantial
portion of the refunds applied for.
SECTION 3.9(d):
1. The employment agreement of the managing director of the Company's DDL
Electronics Ltd. subsidiary is currently being renegotiated, and once
finalized such agreement is expected to contain a severance provision which
is reasonable and consistent with comparable executive management positions
in Northern Ireland.
2. Effective June 30, 1997, Bernee D.L. Strom resigned as a director of the
Company. In connection therewith, the Company and Ms. Strom entered into an
indemnification agreement which provides that the Company will pay any
amount which Ms. Strom is legally obligated to pay because of any claims
made against Ms. Strom as a result of any act or omission, neglect, or
breach of duty related to her service as a director of the Company.
A-25
<PAGE>
SCHEDULE 4.2
CAPITALIZATION OF JOLT
None, except Jolt will issue 10,660 shares of Class A Voting Common Stock to
Thomas M. Wheeler to increase the total outstanding shares of common stock
from 10,000 to 20,660 shares as of the Closing Date.
A-26
<PAGE>
SECTION 4.4
BREACHES AND REQUIRED CONSENTS
None.
A-27
<PAGE>
APPENDIX B
[LETTERHEAD OF NEEDHAM]
November 25, 1997
Board of Directors
DDL Electronics, Inc.
2151 Anchor Court
Newbury Park, CA 91320
Ladies and Gentlemen:
We understand that DDL Electronics, Inc. ("DDL"), Jolt Technology,
Inc. ("Jolt"), and Jolt Acquisition Corporation, a wholly-owned
subsidiary of DDL ("Merger Sub"), propose to enter into an Agreement
and Plan of Merger (the "Merger Agreement") whereby Merger Sub will
be merged with and into Jolt and Jolt will become a wholly-owned
subsidiary of DDL (the "Merger"). The terms of the Merger will be
set forth more fully in the Merger Agreement.
Pursuant to the proposed Merger Agreement, we understand that at
the Effective Time (as defined in the Merger Agreement), all of the
issued and outstanding shares of common stock, par value $1.00 per
share, of Jolt will be converted into the right to receive an
aggregate of 9,000,000 shares of common stock, par value $.01 per
share, of DDL (the "DDL Common Stock").
You have asked us to advise you as to the fairness, from a
financial point of view, of the consideration to be proposed to be
paid by DDL in the Merger. Needham & Company, Inc., as part of its
investment banking business, is regularly engaged in the valuation
of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and valuations. We have acted as
financial advisor to DDL in connection with the Merger and will
receive a fee for our services. In addition, DDL has agreed to
indemnify us for certain liabilities arising out of the rendering of
this opinion.
For purposes of this opinion we have, among other things: (a)
reviewed a draft of the Merger Agreement dated November 12, 1997;
(b) reviewed certain other documents relating to the Merger; (c)
reviewed certain publicly available information concerning DDL and
certain other relevant financial and operating data of DDL and Jolt
made available from the internal records of DDL and Jolt; (d)
reviewed the historical stock prices and trading volumes of DDL's
common stock; (e) held discussions with members of senior management
of DDL and Jolt concerning their current and future business
prospects; (f) reviewed certain financial forecasts and projections
prepared by the respective managements of DDL and Jolt; (g) compared
certain publicly available financial data of companies whose
securities are traded in the public markets to similar data for
Jolt; (h) reviewed the financial terms of certain other business
combinations that we deemed generally relevant; and (i) performed
and/or considered such other studies, analyses, inquiries and
investigations as we deemed appropriate.
In connection with our review and arriving at our opinion, we have
not assumed any responsibility to independently verify any of the
foregoing information, have relied on such information, and have
assumed that all such information is complete and accurate in all
material respects. In addition, we have assumed, with your consent,
that (i) the Merger will be accounted for under the pooling-of-
interests method of accounting, (ii) the
B-1
<PAGE>
Merger either will constitute a tax-free reorganization or will not result in
materially adverse tax consequences to DDL, (iii) any material liabilities
(contingent or otherwise, known or unknown) of DDL and Jolt are as set forth
in the consolidated financial statements of DDL and Jolt, respectively, and
(iv) the terms set forth in the executed Merger Agreement will not differ
materially from the proposed terms provided to us in the draft Merger
Agreement dated November 12, 1997. With respect to DDL's and Jolt's financial
forecasts provided to us by their respective managements, we have assumed for
purposes of our opinion that such forecasts have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of such
managements, at the time of preparation, of the future operating and financial
performance of DDL and Jolt. We have not assumed any responsibility for or
made or obtained any independent evaluation, appraisal or physical inspection
of the assets or liabilities of DDL or Jolt. Further, our opinion is based on
economic, monetary and market conditions existing as of the date hereof, and
in rendering this opinion, we have relied without independent verification on
the accuracy, completeness and fairness of all historical financial and other
information which was either publicly available or furnished to us by DDL and
Jolt. Our opinion as expressed herein is limited to the fairness, from a
financial point of view, of the consideration to be paid by DDL in the Merger
and does not address DDL's underlying business decision to engage in the
Merger. Our opinion does not constitute a recommendation to any stockholder of
DDL as to how such stockholder should vote on the proposed Merger.
We are not expressing any opinion as to what the value of DDL Common Stock
will be when issued to the stockholders of Jolt pursuant to the Merger or the
prices at which DDL Common Stock will actually trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of DDL for our own account or for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This letter and the opinion expressed herein are provided at the request and
for the information of the Board of Directors of DDL and may not be quoted or
referred to or used for any purpose without our prior written consent, except
that this letter may be disclosed in connection with any registration
statement or proxy statement used in connection with the Merger so long as
this letter is quoted in full in such registration statement or proxy
statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the consideration to be paid by DDL in the Merger is fair to DDL
from a financial point of view.
Very truly yours,
/s/ Needham & Company, Inc.
Needham & Company, Inc.
B-2
<PAGE>
PROXY DDL ELECTRONICS, INC.
2151 ANCHOR COURT
NEWBURY PARK, CALIFORNIA 91320
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY
FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 26, 1998 AT 10:00 A.M.
The undersigned hereby appoints Gregory L. Horton and Richard K. Vitelle, and
each of them, proxies for the undersigned, with full power of substitution, to
represent the undersigned and to vote all shares of Common Stock that the
undersigned may be entitled to vote at the 1997 Annual Meeting of Stockholders
to be held in Newbury Park, California, on June 26, 1998, at 10:00 a.m., local
time, or at any adjournment or postponement thereof, as indicated on the
reverse side. The undersigned further authorizes such proxies to vote in their
discretion upon such matters as may properly come before such Annual Meeting or
any adjournment or postponement thereof. Receipt of Notice of the 1997 Annual
Meeting of Stockholders and of the Proxy Statement is hereby acknowledged.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY
WILL BE VOTED FOR PROPOSALS 2 AND 3. WHERE NO VOTE IS SPECIFIED OR WHERE A VOTE
FOR PROPOSAL 3 IS MARKED, THE CUMULATIVE VOTES REPRESENTED BY A PROXY WILL BE
CAST, UNLESS CONTRARY INSTRUCTIONS ARE GIVEN, IN THE DISCRETION OF THE PROXIES
NAMED HEREIN IN ORDER TO ELECT AS MANY NOMINEES AS BELIEVED POSSIBLE UNDER THE
THEN PREVAILING CIRCUMSTANCES. UNLESS INDICATED TO THE CONTRARY, IF YOU STRIKE
OUT THE NAME OF A NOMINEE, ALL YOUR CUMULATIVE VOTES WILL BE DISTRIBUTED AMONG
THE REMAINING NOMINEES IN THE DISCRETION OF THE PROXIES.
1. A proposal to approve the issuance of Common Stock pursuant to the Merger
Agreement with Jolt Technology, Inc. as described in the Proxy Statement.
[_] FOR [_] AGAINST [_] ABSTAIN
2. A proposal to amend the Certificate of Incorporation of the Company to in-
crease the number of shares of authorized Common Stock from 50,000,000 to
75,000,000.
[_] FOR [_] AGAINST [_] ABSTAIN
CONTINUED AND TO BE SIGNED ON REVERSE
3. Election of Charlene A. Gondek as a Class I Director to continue in office
until 1999 and Gregory L. Horton as a Class II Director to continue in office
until 2000:
[_] FOR BOTH NOMINEES LISTED BELOW [_] WITHHOLD(1) [_] CUMULATIVE(2)
(EXCEPT AS MARKED TO THE AUTHORITY TO VOTE FOR ALL
CONTRARY BELOW) OF THE NOMINEES LISTED BELOW
INSTRUCTION: (1) To withhold authority to vote for any nominee, write "NO" next
to that nominee's name; (2) to cumulate votes for any one or more nominees,
check the box "CUMULATIVE" and indicate in the space next to the nominee's name
the number of votes to be cast, which must equal and not exceed the total num-
ber of shares you own multiplied by 2.
CHARLENE A. GONDEK_________ GREGORY L. HORTON_________
Dated:______________________, 1998
----------------------------------
Signature of Stockholder(s)
Important: Please sign exactly as
your name(s) appear hereon. Where
shares are held jointly, both
holders should sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give your full
title as such. If the holder is a
corporation, execute in full
corporate name by authorized
officer.
PLEASE SIGN AND DATE THIS PROXY
AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE.
