-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G4vNCnraNTtkiinZhcm0WPb2N2mCApbiuR1n+wR8AOBXDFKEPHB9ONKwOiGRghfU Xwy7b02EIy5bfZFtJ/i+Fw== 0000950134-98-004921.txt : 19980602 0000950134-98-004921.hdr.sgml : 19980602 ACCESSION NUMBER: 0000950134-98-004921 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19980601 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFTC CORP/ CENTRAL INDEX KEY: 0000916797 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 840854616 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-52137 FILM NUMBER: 98640484 BUSINESS ADDRESS: STREET 1: HORIZON TERRACE STREET 2: 9351 GRANT STREET SIXTH FL CITY: DENVER STATE: CO ZIP: 80229 BUSINESS PHONE: 3034518200 MAIL ADDRESS: STREET 1: HORIZON TERRACE STREET 2: 9351 GRANT STREET SIXTH FL CITY: DENVER STATE: CO ZIP: 80229 FORMER COMPANY: FORMER CONFORMED NAME: ELECTRONIC FAB TECHNOLOGY CORP DATE OF NAME CHANGE: 19940103 S-3/A 1 AMENDMENT NO. 2 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1998 FILE NO. 333-52137 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- EFTC CORPORATION (Exact name of registrant as specified in its charter) COLORADO (State or other jurisdiction of incorporation or 84-0854616 organization) (I.R.S. Employer Identification No.) STUART W. FUHLENDORF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 9351 GRANT STREET EFTC CORPORATION DENVER, COLORADO 80229 9351 GRANT STREET (303) 451-8200 DENVER, COLORADO 80229 (Address, including zip code, and telephone (303) 451-8200 number, including (Name, address, including zip code, and telephone area code, of registrant's principal executive including area offices) code, of agent for service) Copies to: FRANCIS R. WHEELER, ESQ. DAVID LOPEZ, ESQ. HOLME ROBERTS & OWEN LLP CLEARY, GOTTLIEB, STEEN & HAMILTON 1700 LINCOLN, STE. 4100 ONE LIBERTY PLAZA DENVER, COLORADO 80203 NEW YORK, NEW YORK 10006 (303) 861-7000 (212) 225-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE
================================================================================================================================ PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------------- Common Stock, $.01 par value per share..... 3,450,000 $14.8125 $51,103,125.00 (3) - -------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------
(1) Includes 381,750 shares subject to Underwriters' overallotment option. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. The registration fee has been calculated based upon the average of the high and low prices of the Company's Common Stock as reported on the Nasdaq National Market on May 29, 1998, which was $14.8125. (3) Previously paid. The registration fee as so calculated would be $15,075.42. A registration fee of $27,617.07 was paid upon the initial filing of this Registration Statement with the Securities and Exchange Commission on May 8, 1998. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JUNE 1, 1998 PROSPECTUS 3,000,000 SHARES EFTC CORPORATION LOGO EFTC CORPORATION COMMON STOCK ------------------ Of the 3,000,000 shares of Common Stock, $0.01 par value per share (the "Common Stock"), of EFTC Corporation (the "Company" or "EFTC") offered hereby, 1,600,000 shares are being offered by the Company and 1,400,000 shares are being offered by the Selling Shareholders (as defined herein). The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. The Common Stock is quoted on the Nasdaq National Market under the symbol "EFTC." The reported last sale price of the Common Stock as reported by the Nasdaq National Market on May 29, 1998 was $14.75 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================================== UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2) - ------------------------------------------------------------------------------------------------------------------ Per Share......................... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ Total(3).......................... $ $ $ $ ==================================================================================================================
(1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting offering expenses estimated at $ , all of which will be payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 450,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are being offered by the several Underwriters named herein subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1998 at the office of Smith Barney Inc., 333 West 34th Street, New York, New York, 10001 or through the facilities of The Depository Trust Company. ------------------ SALOMON SMITH BARNEY J.C. BRADFORD & CO. BANCAMERICA ROBERTSON STEPHENS NEEDHAM & COMPANY, INC. June , 1998 3 THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (THE "PSLRA"), THAT INVOLVE KNOWN AND UNKNOWN RISKS, INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES," "ANTICIPATES," "ESTIMATES," "EXPECTS," "MAY" AND WORDS OF SIMILAR IMPORT OR STATEMENTS OF MANAGEMENT'S OPINION. IN ADDITION, THIS PROSPECTUS CONTAINS, ON PAGES 3, 26 AND 27, FORECASTS OF FUTURE GROWTH IN MARKETS SERVED BY THE COMPANY. THESE FORECASTS WERE PREPARED BY ENTITIES THAT ARE NOT AFFILIATED WITH THE COMPANY OR THE UNDERWRITERS AND ARE BASED ON ASSUMPTIONS FORMULATED BY SUCH ENTITIES WITHOUT CONSULTATION WITH THE COMPANY OR THE UNDERWRITERS. SEE "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND FORECASTS" AND "RISK FACTORS" FOR A DISCUSSION OF CERTAIN RISKS AND THEIR POTENTIAL IMPACT ON THE FORWARD LOOKING STATEMENTS AND FORECASTS CONTAINED HEREIN. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MADE HEREBY MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN OF THE UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and Consolidated Financial Statements (including the notes thereto) appearing elsewhere in this Prospectus. The term "Company" refers to EFTC Corporation and its wholly-owned subsidiaries -- Current Electronics, Inc. ("CEI"), Circuit Test, Inc. ("CTI"), Airhub Service Group L.C. ("Airhub"), CTI International, L.C. ("CTI LLC"), CTLLC Acquisition Corp. ("CAC" ) and RM Electronics, Inc., doing business as Personal Electronics ("Personal Electronics"). CEI's affiliate, Current Electronics (Washington) Inc. ("CEWI"), was merged into CEI in September 1997. CEI and, with respect to any period prior to its merger into CEI, CEWI are hereinafter referred to as the "CE Companies." CTI, Airhub, CTI LLC and CAC are hereinafter referred to as the "CTI Companies." Unless otherwise indicated, the information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised. Investors should carefully consider the information set forth in "Risk Factors," beginning at page 8. THE COMPANY GENERAL The Company is a leading independent provider of "high-mix" electronic manufacturing services, including quick-turn manufacturing, prototype services, high-mix production, and aftermarket repair and warranty services, to original equipment manufacturers ("OEMs") and is initiating "build-to-order" services ("BTO"). The Company's manufacturing services focus on high-speed production of high-mix electronic products -- products that are characterized by small lot sizes with differences in configuration in each lot. The Company provides "hub-based" repair and warranty services that are marketed as part of the logistics service offerings of the two largest transportation companies that specialize in overnight delivery services in the United States. These hub-based services are provided principally through facilities located inside such transportation companies' national sorting, warehouse and logistics hub facilities (the "Overnight Delivery Hubs") in Memphis, Tennessee and Louisville, Kentucky. Since acquiring the CTI Companies, the Company has invested in creating a BTO manufacturing capability at the Memphis, Tennessee Overnight Delivery Hub. In May 1998, the Company signed its first BTO contract with Fujitsu PCCorporation ("Fujitsu") to provide BTO services for a line of notebook computers. The Company believes it is well positioned to capitalize on the industry shift away from mass production to mass customization because it specializes in small-lot processing associated with high-mix manufacturing and because of the logistics advantages associated with its hub-based BTO and repair and warranty services. The Company's ten largest customers on a revenue basis for the first quarter of 1998, taking into account the Acquisitions (as defined below), were: AlliedSignal, Inc. ("AlliedSignal"), Apple Corporation, Inc., Credence Systems Corporation, Electro Scientific Industries, Inc., Exabyte Corporation, Gateway 2000, Inc., Hewlett-Packard Company ("HP"), Honeywell Inc., Kentrox Industries, Inc. and Ohmeda Inc. INDUSTRY OVERVIEW Outsourcing of electronic manufacturing services continues to grow as OEMs increasingly focus on their core competencies of designing and marketing their products. According to Technology Forecasters, an independent market research firm, the worldwide market for electronic manufacturing services is expected to grow from $60 billion in 1996 to $178 billion in 2001, representing a compound annual growth rate of 24%. The Company believes that the growth of outsourcing combined with the increasing number of types of electronic products that have emerged over the last decade is fundamentally changing the nature of the electronic manufacturing industry. In particular, the Company believes that OEMs are offering, and in the future will increasingly offer, electronic products that are mass customized -- that is, products that are customized to the diverse specifications of end users and therefore OEMs will require more services from electronic manufacturing service providers. The Company believes that such additional services will include full product design, sophisticated quick-turn manufacturing and prototype services, high-mix manufacturing capability, "box-build" and BTO capabilities, inventory and logistics management, and integrated repair and warranty services. 3 5 STRATEGY The Company's objective is to emerge as a premier mass customizer of electronic products. The Company has assembled a full range of electronic manufacturing services that focus on small lot processing. The Company believes its customers are increasingly focused on strategic supply chain management, reduced time to market, BTO production, access to leading-edge manufacturing technology and reduced capital investment. The Company is differentiating itself by creating specific manufacturing techniques and service offerings solely focused on small-lot processing and creating integrated partnerships with logistics providers, component suppliers and customers to integrate its partners' core competencies through all levels of the Company's operations. The Company is also differentiating itself by integrating state-of-the-art information technology into its operations including an internal Oracle ERP (Enterprise Resource Planning) system and external service offerings through the Internet. These attributes allow the Company to provide customized solutions to customers' product needs. The Company's strategy is to provide a unique set of capabilities derived from its two key core competencies: "High-mix" manufacturing competence. The Company's high-mix manufacturing competence is based on the Company's capabilities in small-lot processing at high production speeds. This allows the Company to produce high-mix products with increased responsiveness and flexibility to changes in customers' needs. The nature of high-mix products makes them difficult to manufacture at high production speeds or with a high level of responsiveness. "Hub-based" repair and warranty services. The Company provides its customers with enhanced services through the integration of the Company's repair and warranty services with the facilities of the overnight delivery service providers located at the Overnight Delivery Hubs. This integration enables the Company to simplify inventory and logistics management for its customers and to provide high-speed fulfillment of repair and warranty service orders. The two overnight delivery service providers market the Company's repair and warranty services as part of their own logistics services offerings. The Company is planning to use the high-speed order fulfillment advantages of the hub-based facilities to provide a platform from which the Company can provide BTO services. ACQUISITIONS Through the Acquisitions (as defined below) completed in 1998 and 1997, the Company has expanded its operations from one facility in Colorado at the beginning of 1997 to nine facilities throughout the United States as of the date of this Prospectus. The Acquisitions, described below, have strategically expanded the Company's breadth of high-mix service offerings to include quick-turn manufacturing, prototype services, concurrent engineering, subassembly manufacturing, next-day delivery of assemblies and warranty and post-warranty repair services.
DATE OF ACQUISITION COMPANY/ASSETS ACQUIRED DESCRIPTION - ------------------- ----------------------- ----------- March 1998....................... Personal Electronics The Company acquired a quick-turn (the "PE Merger") manufacturing and prototype services company located in Manchester, New Hampshire. September 1997................... CTI Companies The Company acquired repair and (the "CTI Merger") warranty services companies with three sites, including two located at the Overnight Delivery Hubs.
4 6
DATE OF ACQUISITION COMPANY/ASSETS ACQUIRED DESCRIPTION - ------------------- ----------------------- ----------- August and September 1997........ AlliedSignal Assets The Company subleased a (the "AlliedSignal production facility, acquired Asset Purchase") related equipment and inventory and hired personnel located in Ft. Lauderdale, Florida. The Company acquired the inventory and equipment and has hired personnel located in Tucson, Arizona. February 1997.................... CE Companies The Company acquired manufactur- (the "CE Merger") ing companies with two sites located in Newberg, Oregon and Moses Lake, Washington.
For further descriptions of the PE Merger, the CTI Merger, the AlliedSignal Asset Purchase and the CE Merger (collectively, the "Acquisitions"), see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Company -- Acquisitions." The Company operates high-mix manufacturing facilities in five plants located in Arizona, Colorado, Florida, Oregon and Washington and has one replacement plant under construction. Personal Electronics is an EFTC Express location, specializing in quick-turn manufacturing and prototype services and is located in Manchester, New Hampshire. The Company's repair and warranty services are carried out in three locations: Memphis, Tennessee, Louisville, Kentucky and Tampa, Florida. For further descriptions of the Company's properties, see "Business and Properties -- Description of Property." The principal executive offices of the Company are located at 9351 Grant Street, Denver, Colorado 80229 and the telephone number is (303) 451-8200. SUMMARY CONSOLIDATED HISTORICAL FINANCIAL INFORMATION The following tables present for the Company summary consolidated historical financial data as of and for each of the three years ended December 31, 1997, as of and for the three months ended March 31, 1998 and 1997. All financial data has been restated for the PE Merger, as described elsewhere herein, as if the PE Merger had occurred on January 1, 1995. The summary consolidated historical financial data set forth below as of December 31, 1997 and 1996 and for the three years ended December 31, 1997 have been derived from the Company's financial statements audited by KPMG Peat Marwick LLP included elsewhere in this Prospectus. The summary historical financial data set forth below as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 have been derived from unaudited financial statements of the Company that have been prepared on the same basis as the audited financial statements and, in the opinion of the Company, reflect all adjustments necessary (consisting only of normal recurring adjustments) for the fair presentation of the Company's results of operations for the period. All of the financial data set forth below is qualified in its entirety by and should be read in conjunction with such financial statements and the notes thereto and the Company's "Management's Discussion and Analysis of Financial Condition and Results of 5 7 Operations" included elsewhere in this Prospectus. The results of operations of the Company for the interim period ended March 31, 1998 are not necessarily indicative of the results to be expected for the entire year.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------ ------------------------------ 1998 1997 1997 1996(1) 1995 ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales................................................... $54,200 $16,041 $122,079 $60,910 $51,580 Cost of goods sold.......................................... 44,297 13,941 102,166 56,277 46,437 ------- ------- -------- ------- ------- Gross profit.............................................. 9,903 2,100 19,913 4,633 5,143 Impairment of fixed assets.................................. -- -- -- 726 -- Goodwill amortization....................................... 391 23 547 -- -- Merger costs................................................ 1,048(2) -- -- -- -- Selling, general and administrative expenses................ 5,321 1,213 12,712 5,916 4,324 ------- ------- -------- ------- ------- Operating income (loss)................................... 3,143 864 6,654 (2,009) 819 Other income (expense): Interest expense.......................................... (908) (212) (2,411) (576) (432) Other, net................................................ 39 20 1,296(3) 100 92 ------- ------- -------- ------- ------- (869) (192) (1,115) (476) (340) Income (loss) before income taxes........................... 2,274 672 5,539 (2,485) 479 Income tax expense (benefit)................................ 935 73 2,118 (867) 130 ------- ------- -------- ------- ------- Net income (loss)......................................... $ 1,339 $ 599 $ 3,421 $(1,618) $ 349 ======= ======= ======== ======= ======= Pro forma information(4): Historical net income..................................... 1,339 599 3,421 (1,618) 349 Pro forma adjustment to income tax expense (benefit)...... 317 179 41 (10) (2) ------- ------- -------- ------- ------- Pro forma net income...................................... $ 1,022 $ 420 $ 3,380 $(1,608) $ 351 ======= ======= ======== ======= ======= Pro forma income (loss) per share: Basic..................................................... $ 0.07 $ 0.06 $ 0.40 $(0.28) $ 0.06 ======= ======= ======== ======= ======= Diluted................................................... $ 0.07 $ 0.06 $ 0.38 $(0.28) $ 0.06 ======= ======= ======== ======= ======= Pro forma weighted average shares outstanding:............ Basic..................................................... 13,645 6,658 8,502 5,742 5,762 ======= ======= ======== ======= ======= Diluted................................................... 14,400 6,658 8,954 5,742 5,762 ======= ======= ======== ======= =======
MARCH 31, 1998 DECEMBER 31, -------------------------- ------------------------------ AS ADJUSTED(5) ACTUAL 1997(6) 1996 1995 -------------- -------- -------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital......................................... $ 48,537 $ 43,537 $ 43,634 $ 9,284 $ 9,878 Goodwill................................................ 46,018 46,018 46,372 -- -- Total assets............................................ 171,633 171,633 148,825 24,037 25,724 Notes payable and current portion of long-term debt..... 3,350 8,350 3,150 1,970 196 Long-term debt, net of current portion.................. 29,027 45,836 41,809 3,947 3,081 Shareholders' equity.................................... 99,772 77,963 75,221 13,850 15,462
- --------------- (1) As part of a corporate restructuring, the Company expensed $2.1 million for restructuring costs in the third quarter of 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Merger costs related to the PE Merger which was accounted for as a pooling of interests. (3) Includes gain of approximately $1.2 million on the sale of a building used in the Company's manufacturing operations. (4) The net income of Personal Electronics, which was not subject to income taxes due to its S corporation status, has been tax effected and included as a pro forma adjustment to income tax expense. See Note 1 to the Consolidated Financial Statements of the Company. (5) Adjusted to reflect the issuance of shares in the offering made hereby, net of related expenses, the repayment of the $5 million Bank One Note (as defined herein) with the proceeds of additional borrowings under the amended Bank One Loan (as defined herein) subsequent to March 31, 1998 and the application of the proceeds as described in "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (6) Includes the effects of the CE Merger, the AlliedSignal Asset Purchase, the CTI Merger and a public offering of the Common Stock completed in 1997. 6 8 THE OFFERING Common Stock Offered by the Company... 1,600,000 Shares Common Stock Offered by the Selling Shareholders.......................... 1,400,000 Shares Common Stock to be Outstanding After the Offering(1)....................... 15,429,476 Shares Use of Proceeds....................... to pay down a portion of a revolving loan which, as of May 29, 1998, had outstanding borrowings of approximately $34.8 million. In the event the Company realizes net proceeds from the Offering in excess of $35 million, the Company intends to use such net proceeds first, to repay subordinated debt of approximately $5.0 million and second, to repay a portion of a term loan of the Company which, as of May 29, 1998, had an outstanding principal balance of approximately $19.3 million. See "Use of Proceeds." Nasdaq National Market Symbol......... "EFTC" - --------------- (1) Includes 13,649,676 shares outstanding as of March 31, 1998, as well as 9,800 shares issued pursuant to the exercise of options from March 31, 1998 to the date of this Prospectus and 170,000 shares expected to be issued upon the exercise of outstanding options by certain Selling Shareholders in connection with this Offering. Does not include 2,588,020 shares of Common Stock issuable upon exercise of other outstanding options and 80,000 shares of Common Stock issuable upon exercise of outstanding warrants. See "Description of Capital Stock and Other Securities." 7 9 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND FORECASTS Certain statements in this Prospectus, including statements contained in the Summary, and under the captions "Business and Properties," "Managements' Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of the PSLRA, that involve known and unknown risks, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects," "may" and words of similar import or statements of management's opinion. In addition, this Prospectus contains, on pages 3, 26 and 27, forecasts of future growth in markets served by the Company. These forecasts were prepared by entities that are not affiliated with the Company or the Underwriters and are based on assumptions formulated by such entities without consultation with the Company or the Underwriters. The aforementioned forward-looking statements, forecasts and assumptions involve known and unknown risks, uncertainties and other factors that may cause the actual results, market performance or achievements of the Company, growth of the electronic manufacturing services industry, or growth of the electronic hardware maintenance market to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements, forecasts and assumptions. Important factors that could cause such differences include, but are not limited to, changes in economic or business conditions in general or affecting the electronic products industry in particular, changes in the use of outsourcing by OEMs, increased material prices and service competition within the electronic component, contract manufacturing and repair industries, changes in the competitive environment in which the Company operates, the continued growth of the industries targeted by the Company or its competitors or changes in the Company's management information needs, difficulties in implementing the Company's new management information system, difficulties in managing the Company's growth or in integrating new businesses, changes in customer needs and expectations and the Company's ability to keep pace with technological developments and governmental actions. RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following information before making an investment in the Common Stock offered hereby. MANAGEMENT OF GROWTH; GEOGRAPHIC EXPANSION The Company has experienced rapid growth since February 1997 and intends to pursue continued growth through internal expansion and acquisitions. The Company's rapid growth has placed, and could continue to place, a significant strain on the Company's management information, operating and financial systems. In order to maintain and improve results of operations, the Company's management will be required to manage growth and expansion effectively. The Company's need to manage growth effectively will require it to continue to implement and improve its management information, operating and financial systems and internal controls. Moreover, the Company will be required to augment its management team, to develop the management skills of its operations managers and supervisors and to train, motivate and manage its employees. There can be no assurance that the Company's historical revenue growth will continue. The Company's failure to effectively manage growth could adversely affect the Company's results of operations. See "-- Acquisition Strategy." Beginning in 1997, the Company has acquired, and undertaken the construction of, facilities in several locations and the Company may acquire or build additional facilities from time to time in the future. The Company's results of operations could be adversely affected if its new facilities do not achieve growth sufficient to offset increased expenditures associated with growth of operations and geographic expansion. Should the Company increase its expenditures in anticipation of a future level of sales which does not materialize, its results of operations would be adversely affected. As the Company continues to expand, it may become more difficult to manage geographically-dispersed operations. There can be no assurance that the Company will successfully manage other plants it may acquire or build in the future. 8 10 ACQUISITION STRATEGY The Company has actively pursued in the past, and expects to actively pursue in the future, acquisitions to expand its operations, geographic markets, service offerings, customer base and revenue base. Acquisitions, including the PE Merger, CTI Merger, the AlliedSignal Asset Purchase, and the CE Merger, involve numerous risks, including difficulties in the integration of the operations, technologies and products and services of the acquired companies and assets, the diversion of management's attention and the Company's financial resources from other business activities, the potential to enter markets in which the Company has no or limited prior experience and where competitors in such markets have stronger market positions and the potential loss of key employees and customers of the acquired companies. In addition, during the integration of an acquired company, the financial performance of the Company will be subject to the risks commonly associated with an acquisition, including the financial impact of expenses necessary to realize benefits from the acquisition and the potential for disruption of operations. For instance, during the Company's integration of assets purchased pursuant to the AlliedSignal Asset Purchase, the Company experienced significant shortages of materials that have adversely affected operations at its Tucson facility. Such shortages resulted primarily from the Company's lack of familiarity with the procurement procedures applicable to the Tucson facility. Although the effects of such shortages have not had a significant adverse impact on the Company's operations as a whole, there can be no assurance that the Company will not experience other difficulties integrating operations that have been or may be acquired in the future, or that any such shortages or difficulties will not have a material adverse effect on the Company's business or results of operations in the future. Acquisitions by the Company have in some cases been financed with substantial borrowings. Although the Company intends to use the net proceeds of the offering made hereby to retire a portion of its outstanding indebtedness, the Company may incur significant amounts of indebtedness in connection with future acquisitions, other transactions or funding expansions of the Company's operations. Future acquisitions may also involve potentially dilutive issuances of equity securities. There can be no assurance that the Company will be able to identify suitable acquisition opportunities, to consummate acquisitions successfully or, with respect to recent or future acquisitions, integrate acquired personnel and operations into the Company successfully. DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS The Company has historically relied on a small number of customers to generate a significant percentage of its revenue. In the first quarter of 1998, AlliedSignal accounted for 38.6% of the Company's net revenues and was the only customer that accounted for more than 10% of the Company's net revenues. The Company's ten largest customers accounted for 69.9% of the Company's net revenues in the first quarter of 1998 and 70.8% of the Company's net revenues in 1997. The loss of AlliedSignal as a customer would, and the loss of any other significant customer could, have a material adverse effect on the Company's financial condition and results of operations. If the Company's efforts to expand its customer base are not successful, the Company will continue to depend upon a relatively small number of customers for a significant percentage of its net sales. There can be no assurance that current customers, including AlliedSignal, or future customers of the Company will not terminate their manufacturing arrangements with the Company or significantly change, reduce or delay the amount of manufacturing services ordered from the Company. Ohmeda, Inc. ("Ohmeda") which has been one of the Company's ten largest customers, is consolidating its outside manufacturing arrangements with another electronic contract manufacturer and will cease using the Company's services in 1998. See "-- Absence of Long-Term Manufacturing Contracts." In addition, the Company may from time to time hold significant accounts receivable from sales to certain customers. The insolvency or other inability of a significant customer to pay outstanding receivables could have a material adverse effect on the Company's results of operations and financial condition. RELATIONSHIPS WITH TRANSPORTATION PROVIDERS The Company's repair and warranty operations are built around their principal locations at the Overnight Delivery Hubs of the two largest transportation companies that specialize in overnight delivery services in the 9 11 United States and are integrated with the logistics operations of these overnight delivery service providers and participate in joint marketing programs to customers of these overnight delivery service providers. See "-- Competition." The Company believes that the location of its repair facilities at the Overnight Delivery Hubs is a significant competitive advantage for the Company's repair and warranty service offerings and a majority of the Company's repair and warranty service customers come from joint marketing efforts with such transportation providers. The Company does not, however, have any long-term contracts or other arrangements with these overnight delivery service providers, each of which could elect to cancel the Company's lease, to cease providing scheduling accommodations or to cease joint marketing efforts with the Company at any time. If the Company ceased to be allowed to share facilities and marketing arrangements with either or both of these overnight delivery service providers, there can be no assurance that alternate arrangements could be made by the Company to preserve such advantages and the Company could lose significant numbers of repair customers. In addition, work stoppages or other disruptions in the transportation network may occur from time to time which may affect these transportation providers. For example, on March 11, 1998, the union pilots employed by Federal Express Corporation ("FedEx") rejected a contract offer from management. According to press reports, the pilot's union is seeking to resume negotiations. A work action by FedEx pilots would disrupt the Company's operations. Such a work action or other similar events could have a material adverse effect on the Company's business and results of operations. INITIATION OF BUILD-TO-ORDER The Company is integrating its existing and newly-acquired businesses in order to offer BTO services, oriented around a hub-based distribution system, to its customers. The Company has incurred expenses in the establishment of the infrastructure to provide BTO services to its customers in advance of customer orders. This represents an expansion into a new line of business with which the Company has no operating experience and will require capital expenditures, certain operational changes and integration of the Company's Automated Execution System ("AES") software throughout all of the Company's facilities. There can be no assurance that the Company will successfully integrate its services or market BTO services to its customers and the failure to do so could change the Company's business and growth strategies and adversely affect the Company's long-term business prospects. See "Business and Properties -- Strategy" and "Business and Properties -- Services." IMPLEMENTATION OF NEW INFORMATION SYSTEM The Company is implementing a new management information system (the "MIS System"), based on commercially available Oracle software products, that is designed to track and control all aspects of its manufacturing services. Among other things, the implementation of the MIS System includes the conversion of the Company's AES software which is a customized software package designed to meet the needs of the Company's "Asynchronous Processing Manufacturing" ("APM") process, into software compatible with the MIS System. The Company has installed and is continuing to integrate the MIS System at the Company's Rocky Mountain and Tucson facilities. The Company intends to implement the MIS System at its other facilities as soon as practicable. Although the implementation of the MIS System to date has not presented any unmanageable difficulties, there can be no assurance that the MIS System can be properly installed at any of the Company's remaining facilities. Furthermore, there can be no assurance that, if installed, the MIS System will operate as designed or provide the Company's operations any additional efficiency. If the MIS System fails to operate as designed, the Company's operations could be disrupted by lost orders resulting in lost customers or by inventory shortfalls and overages and the Company could be compelled to write-off the development costs of such software. Such disruptions or events could adversely affect results of operations and the implementation of the Company's strategy. See "Business and Properties -- Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." INVENTORY RISK; LIMITED AVAILABILITY OF COMPONENTS AND MANUFACTURING EQUIPMENT In 1997, substantially all of the Company's net sales were derived from turnkey sales. In turnkey manufacturing, the Company provides materials as well as manufacturing services and often bears the risk of 10 12 fluctuations in materials costs, scrap and excess inventory, which could adversely affect the Company's gross profit margins. In addition, some materials used by the Company have been subject to industry-wide shortages and suppliers have been forced to allocate available quantities among their customers. Moreover, work stoppages or other disruptions in transportation services may occur from time to time which may affect availability of materials. The Company's inability to obtain any needed materials during periods of allocations, work stoppages or disruptions in transportation services or the Company's inability to forecast demand accurately could cause delays in shipments to the Company's customers, and could also adversely affect results of operations. Significant lead times also are involved in acquiring certain equipment used in the Company's manufacturing process. Although the Company has increased its manufacturing capacity in response to the expansion of its customer base, there can be no assurance that the Company will have sufficient capacity at any given time to be able to meet customers' demands if such demands exceed anticipated levels. ABSENCE OF LONG-TERM MANUFACTURING CONTRACTS As is typical in the electronic manufacturing services industry, the Company frequently does not obtain long-term purchase orders or commitments from its customers, but instead works with them to develop nonbinding forecasts of the future volume of orders. Based on such nonbinding forecasts, the Company makes commitments regarding the level of business that it will seek and accept, the timing of production schedules and the levels and utilization of personnel and other resources. A variety of conditions, both specific to each individual customer and generally affecting each customer's industry, may cause customers to cancel, reduce or delay orders that were either previously made or anticipated. Generally, customers may cancel, reduce or delay purchase orders and commitments without penalty, except, in some cases, for payment for services rendered, materials purchased and, in limited circumstances, charges associated with such cancellation, reduction or delay. Significant or numerous cancellations, reductions or delays in orders by customers would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION Contract Manufacturing. Competition in the electronic manufacturing services industry is intense. The Company competes against numerous domestic and foreign manufacturers, including Benchmark Electronics, Inc., DII Group, Inc., Plexus Corp., Reptron Electronics, Inc., Solectron Corporation, and others, many of which are substantially larger or have greater financial or operating resources than the Company. Many of the Company's competitors are more established in the industry and have substantially greater manufacturing, financial, engineering and marketing resources than the Company. The Company also faces competition from the manufacturing operations of its current and potential customers, which are continually evaluating the relative merits of internal manufacturing versus outsourcing. Certain of the Company's competitors have broader geographic breadth than the Company. In addition, several contract manufacturers have established manufacturing facilities in foreign countries. The Company believes that foreign manufacturing facilities are more important for contract manufacturers that focus on high-volume consumer electronic products, and do not afford a significant competitive advantage in the Company's targeted market for complex, mid-volume products for which greater flexibility in specifications and lead times is required. The Company believes that the principal competitive factors in its targeted market are quality, reliability, ability to meet delivery schedules, technological sophistication, geographic location and price. Repair and Warranty Services. The Company also has a number of competitors in the repair and warranty services industry, including Aurora Electronics, Inc., Data Exchange Corp., DecisionOne Holdings Corp., Logistics Management, Inc., Sequel, Inc., and others. In addition, the Company competes with certain OEMs that provide repair and warranty services for their own products. Some of the Company's competitors in the repair and warranty services industry are more established in the industry and have substantially greater financial, engineering and marketing resources than the Company. The Company believes that its location within the Overnight Delivery Hubs gives it a significant competitive advantage. However, a competitor can, and in some cases has, gained similar advantages by locating a repair facility in close proximity to the Overnight Delivery Hubs. The Company also faces competition from its current and potential customers, 11 13 which are continually evaluating the relative merits of providing repair and warranty services internally versus outsourcing. The Company believes that the principal competitive factors in its targeted repair and warranty services market are quality, reliability, ability to meet delivery schedules and price. PROTECTION OF KNOW-HOW AND TRADE SECRETS APM and the supporting AES software represent and, are expected to continue to represent, a critical part of the Company's high-mix manufacturing strategy. The use, by third parties, of the concepts or processes, developed by the Company, that comprise APM is not legally restricted. In addition, the Company has a non-exclusive license to use the AES software that, in conjunction with other commercially available software programs and databases, coordinates the APM process. The APM process is therefore subject to replication by a competitor willing to invest the resources to do so and the AES software is therefore available from third parties having rights thereto. To protect its know-how and processes related to APM, the Company primarily relies upon a combination of nondisclosure agreements and other contractual provisions, as well as the confidentiality and loyalty of its employees. However, there can be no assurance that these steps will be adequate to prevent a competitor from replicating the APM process or that a competitor will not independently develop know-how or processes similar or superior to the Company's APM process. The adoption by its competitors of a process that is similar to, or superior to, the Company's APM process would likely result in a material increase in competition faced by the Company for its targeted market of high-mix OEMs. ENVIRONMENTAL COMPLIANCE The Company's operations and properties are subject to certain federal, state and local regulatory requirements relating to environmental, waste management, health and safety matters. Some risk of costs and liabilities related to these matters is inherent in the Company's business, as with many other businesses. In the event of violation, these regulations provide for civil and criminal fines, injunctions and other sanctions and, in certain instances, allow third parties to sue to enforce compliance. In addition, new, modified or more stringent requirements or enforcement policies could be adopted that may adversely affect the Company. In certain cases, the Company could be liable for environmental clean-up and other costs resulting from actions of others occurring on or near the Company's properties or, even if not liable, the Company could find itself forced to defend against assertions of potential liability for the actions of others. There can be no assurance that material costs and liabilities will not be incurred in complying with those regulations or in defending against any such liability, or that past or future operations will not result in exposure to injury or claims of injury by employees or the public. VARIABILITY OF QUARTERLY RESULTS OF OPERATIONS The Company's quarterly results of operations are affected by several factors, primarily the level and timing of customer orders and the mix of turnkey and consignment orders. The level and timing of orders placed by a customer vary due to the customer's attempts to balance its inventory, changes in the customer's manufacturing strategy and variation in demand for its 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 the Company's quarterly results of operations. Other factors affecting the Company's quarterly results of operations may include, among other things, costs relating to the expansion of operations including development of the Company's BTO business, price competition, the Company's level of experience in manufacturing a particular product, the degree of automation used in the assembly process, the efficiencies achieved by the Company in managing inventories and other assets, the timing of expenditures in anticipation of increased sales and fluctuations in the cost of components or labor. Any of these factors could adversely affect the Company's quarterly results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 12 14 CONCENTRATION OF OWNERSHIP Upon completion of this offering and including shares issuable upon exercise of vested options, the officers and directors of the Company will continue to own (assuming the exercise of all currently vested options held by them) approximately 42.7% of the Company's Common Stock then outstanding. Consequently, the officers and directors will continue to be able to exercise substantial control over the election of the Company's directors, the outcome of corporate actions requiring shareholder approval, the business and affairs of the Company and future direction of the Company. The concentration of the ownership of the Common Stock among the Company's directors is likely to delay or prevent a change of control of the Company without the consent of such directors. See "Principal Shareholders" and "Selling Shareholders." SHARES ELIGIBLE FOR FUTURE SALES Sales of a substantial number of shares of Common Stock in the public market after this offering could adversely affect the market price of the Common Stock. Without consideration of the contractual rights and prohibitions described below, there is a substantial number of shares of Common Stock that are eligible for sale in public markets pursuant to Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or will become so eligible, in the near future. In addition, substantial numbers of shares of Common Stock are issuable upon exercise of outstanding options issued by the Company and the Company has registered, under the Securities Act, the resale of 2,965,441 shares of Common Stock issuable upon exercise of options granted to employees under the Company's 1989 Stock Option Plan, Equity Incentive Plan and Stock Option Plan for Non-Employee Directors (collectively, the "Stock Option Plans") and options granted to certain employees not under the Stock Option Plans. The Board of Directors of the Company has adopted an amendment to the Company's Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance by 2,500,000. This amendment will be voted on by the Company's shareholders at the annual meeting of shareholders to be held on June 4, 1998. If such amendment is approved by the shareholders, the Company intends to register the resale of these 2,500,000 shares of Common Stock on Form S-8. Moreover, certain of the Company's shareholders have certain contractual rights to cause the Company to register their shares for resale or to require the inclusion of their shares in registration statements otherwise filed by the Company. The Company, the Company's directors and executive officers and the Selling Shareholders have agreed with the Underwriters not to make certain sales or dispositions of shares of Common Stock or securities convertible or exercisable for Common Stock for a period of 120 days after the date of this Prospectus without the prior written consent of Smith Barney Inc. Smith Barney Inc. may, in its sole discretion at anytime without notice, consent to an early termination of such agreements. See "Shares Eligible for Future Sales." STOCK PRICE VOLATILITY The Company's Common Stock has experienced significant price volatility historically, and such volatility may continue to occur in the future. Factors such as announcements of large customer orders, order cancellations, new product introductions by the Company or competitors or general conditions in the electronics industry, as well as variations in the Company's actual or anticipated results of operations, may cause the market price of the Common Stock to fluctuate significantly. Furthermore, the stock market has experienced extreme price and volume fluctuations in recent years, often for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may materially adversely affect the price of the Common Stock. There can be no assurance that the market price of the Common Stock will not experience significant fluctuations in the future, including fluctuations that are unrelated to the Company's performance. ANTI-TAKEOVER PROVISIONS Several provisions of the Company's Articles of Incorporation and Bylaws could deter or delay unsolicited takeovers or delay or prevent changes in control or management of the Company, including transactions in which shareholders might otherwise receive a premium for their shares over then current market prices. In 13 15 addition, such provisions could limit the ability of shareholders to approve transactions that they may deem to be in their best interests. See "Description of Capital Stock and Other Securities." USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock being offered hereby, after deducting underwriting discounts and estimated offering expenses, are estimated to be approximately $21.8 million based upon the estimated public offering price of $14.75 per share. Such proceeds will be used by the Company to pay down a portion of the Company's revolving credit facility, which as of May 29, 1998, had outstanding borrowings of approximately $34.8 million. In the event the Company realizes net proceeds from the Offering in excess of $35 million, the Company intends to use such net proceeds first, to repay the Subordinated Notes (described below), which as of May 29, 1998, were outstanding in the principal amount of approximately $5.0 million and second, to repay a portion of a term loan of the Company which, as of May 29, 1998 had an outstanding principal balance of approximately $19.3 million. The term loan and the revolving loan (collectively, the "Bank One Loan") were incurred pursuant to a credit agreement, dated as of September 30, 1997, as amended, among the Company and Bank One, Colorado, N.A. ("Bank One"). The Bank One Loan was originally incurred in connection with the CTI Merger and the AlliedSignal Asset Purchase. The Company issued subordinated notes (the "Subordinated Notes") to a director of the Company in order to fund a portion of the AlliedSignal Asset Purchase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Company -- Liquidity and Capital Resources," for a description of the terms, including interest rates, of the Bank One Loan and the Subordinated Notes. PRICE RANGE OF COMMON STOCK The Common Stock is quoted on the Nasdaq National Market under the symbol "EFTC." The following table sets forth, for the periods indicated, the high and low closing sales prices of the Common Stock as reported on the Nasdaq National Market.
HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 1998: Second Quarter (through May 29, 1998)....................... $19 $12 9/16 First Quarter............................................... 17 12 13/16 YEAR ENDED DECEMBER 31, 1997: Fourth Quarter.............................................. 18 1/4 12 1/16 Third Quarter............................................... 14 5/16 8 5/8 Second Quarter.............................................. 8 1/2 4 5/8 First Quarter............................................... 6 3/4 4 3/4 YEAR ENDED DECEMBER 31, 1996: Fourth Quarter.............................................. 4 7/8 2 3/4 Third Quarter............................................... 4 1/4 3 1/2 Second Quarter.............................................. 4 7/8 3 5/8 First Quarter............................................... 5 1/8 3 3/4
On May 29, 1998, the last reported closing sale price for the Common Stock on the Nasdaq National Market was $14.75 per share. As of May 27, 1998, there were approximately 235 shareholders of record of the Common Stock. DIVIDEND POLICY The Company does not intend to pay cash dividends on the Common Stock in the foreseeable future. The Company instead intends to retain its earnings for use in the operation and expansion of its business. Any future cash dividends would depend on future earnings, capital requirements, the Company's financial condition and other factors deemed relevant by the Board of Directors. Under the terms of the Bank One Loan, the Company may not pay dividends without the consent of Bank One. See the description of the Bank One Loan in "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Company -- Liquidity and Capital Resources." 14 16 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of March 31, 1998, and as adjusted to reflect (i) the sale of 1,600,000 shares of Common Stock offered by the Company hereby, (ii) the application of the estimated net proceeds to the Company therefrom and (iii) the repayment of the $5 million Bank One Note (as defined herein) with the proceeds of additional borrowings under the amended Bank One Loan subsequent to March 31, 1998, as described under "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources."
MARCH 31, 1998 ---------------------------- ACTUAL AS ADJUSTED ------------ ------------ Debt: Note payable -- Bank.................................. $ 5,000,000 $ -- Current portion of long term debt..................... 3,350,000 3,350,000 ------------ ------------ Total current debt............................ 8,350,000 3,350,000 Long term debt, less current portion.................. 45,836,227 29,027,227 ------------ ------------ Total debt.................................... 54,186,227 32,377,227 Shareholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized, none issued and outstanding............ -0- -0- Common Stock, $0.01 par value, 45,000,000 shares authorized; 13,649,676 shares issued and outstanding and 15,249,676 shares as adjusted(1)... 136,497 152,497 Additional paid-in-capital.............................. 69,475,544 91,268,544 Retained earnings....................................... 8,350,774 8,350,774 ------------ ------------ Total shareholders' equity.................... 77,962,815 99,771,815 ------------ ------------ Total capitalization.......................... $132,149,042 $132,149,042 ============ ============
- --------------- (1) Does not include 170,000 shares of Common Stock issuable upon exercise of other outstanding options expected to be exercised by certain Selling Shareholders in connection with the Offering, 2,588,020 shares of Common Stock issuable upon exercise of other outstanding options, 9,800 shares issued pursuant to the exercise of options from March 31, 1998 to the date of this Prospectus and 80,000 shares issuable upon exercise of outstanding warrants. 15 17 SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA The following tables present for the Company selected consolidated historical financial data as of and for each of the five years ended December 31, 1997, as of and for the three months ended March 31, 1998 and 1997. All financial data has been restated for the PE Merger, as described elsewhere herein, as if the PE Merger had occurred on January 1, 1993. The selected consolidated historical financial data set forth below as of December 31, 1997 and 1996 and for the three years ended December 31, 1997 have been derived from the Company's financial statements audited by KPMG Peat Marwick LLP included elsewhere in this Prospectus. The selected historical financial data set forth below as of December 31, 1994 and 1993 and for each of the two years ended December 31, 1994 and as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 have been derived from unaudited financial statements of the Company that have been prepared on the same basis as the audited financial statements and, in the opinion of the Company, reflect all adjustments necessary (consisting only of normal recurring adjustments) for the fair presentation of the Company's results of operations for the period. All of the financial data set forth below is qualified in its entirety by and should be read in conjunction with such financial statements and the notes thereto and the Company's "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The results of operations of the Company for the interim period ended March 31, 1998 are not necessarily indicative of the results to be expected for the entire year.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------- ------------------------------------------------ 1998 1997 1997 1996(1) 1995 1994 1993 -------- -------- -------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales.......................... $54,200 $16,041 $122,079 $60,910 $51,580 $53,828 $30,870 Cost of goods sold................. 44,297 13,941 102,166 56,277 46,437 47,631 26,181 ------- ------- -------- ------- ------- ------- ------- Gross profit..................... 9,903 2,100 19,913 4,633 5,143 6,197 4,689 Impairment of fixed assets......... -- -- -- 726 -- -- -- Goodwill amortization.............. 391 23 547 -- -- -- -- Merger costs....................... 1,048(2) -- -- -- -- -- -- Selling, general and administrative expenses......................... 5,321 1,213 12,712 5,916 4,324 3,065 2,216 ------- ------- -------- ------- ------- ------- ------- Operating income (loss).......... 3,143 864 6,654 (2,009) 819 3,132 2,473 Other income (expense): Interest expense................. (908) (212) (2,411) (576) (432) (268) (250) Other, net....................... 39 20 1,296(3) 100 92 110 (12) ------- ------- -------- ------- ------- ------- ------- (869) (192) (1,115) (476) (340) (158) (262) Income (loss) before income taxes............................ 2,274 672 5,539 (2,485) 479 2,974 2,211 Income tax expense (benefit)....... 935 73 2,118 (867) 130 1,041 736 ------- ------- -------- ------- ------- ------- ------- Net income (loss)......... $ 1,339 $ 599 $ 3,421 $(1,618) $ 349 1,933 1,475 ======= ======= ======== ======= ======= ======= ======= Pro forma information(4): Historical net income............ 1,339 599 3,421 (1,618) 349 1,933 1,475 Pro forma adjustment to income tax expense (benefit).......... 317 179 41 (10) (2) 6 68 ------- ------- -------- ------- ------- ------- ------- Pro forma net income............. $ 1,022 $ 420 $ 3,380 $(1,608) $ 351 1,927 1,407 ======= ======= ======== ======= ======= ======= ======= Pro forma income (loss) per share: Basic............................ $ 0.07 $ 0.06 $ 0.40 $ (0.28) $ 0.06 $ 0.36 $ 0.33 ======= ======= ======== ======= ======= ======= ======= Diluted.......................... $ 0.07 $ 0.06 $ 0.38 $ (0.28) $ 0.06 $ 0.36 $ 0.33 ======= ======= ======== ======= ======= ======= ======= Pro forma weighted average shares outstanding: Basic............................ 13,645 6,658 8,502 5,742 5,762 5,427 4,283 ======= ======= ======== ======= ======= ======= ======= Diluted.......................... 14,400 6,658 8,954 5,742 5,762 5,427 4,283 ======= ======= ======== ======= ======= ======= =======
16 18
MARCH 31, 1998 DECEMBER 31, ------------------------ ------------------------------------------------ AS ADJUSTED(5) ACTUAL 1997(6) 1996 1995 1994(7) 1993 -------------- ------- -------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital............... $ 48,537 $43,537 $ 43,634 $ 9,284 $ 9,878 $ 7,015 $ 2,568 Goodwill...................... 46,018 46,018 46,372 -- -- -- -- Total assets.................. 171,633 171,633 148,825 24,037 25,724 23,883 11,532 Notes payable and current portion of long-term debt... 3,350 8,350 3,150 1,970 196 170 170 Long-term debt, net of current portion..................... 29,027 45,836 41,809 3,947 3,081 3,613 3,280 Shareholders' equity.......... 99,772 77,963 75,221 13,850 15,462 14,984 3,525
- --------------- (1) As part of a corporate restructuring, the Company expensed $2.1 million for restructuring costs in the third quarter of 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Merger costs related to the PE Merger which was accounted for as a pooling of interests. (3) Includes gain of approximately $1.2 million on the sale of a building used in the Company's manu- facturing operations. (4) The net income of Personal Electronics, which was not subject to income taxes due to its S corporation status, has been tax effected and included as a pro-forma adjustment to income tax expense. See Note 1 to the Consolidated Financial Statements of the Company. (5) Adjusted to reflect the issuance of shares in the offering made hereby, net of related expenses, the repayment of the $5 million Bank One Note (as defined herein) with the proceeds of additional borrowings under the amended Bank One Loan subsequent to March 31, 1998 and the application of the proceeds as described in "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." (6) Includes the effects of the CE Merger, the AlliedSignal Asset Purchase, the CTI Merger and a public offering of the Common Stock completed in 1997. (7) The Company received $9.3 million from its initial public offering in March 1994. 17 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth below contains "forward looking statements" within the meaning of the PSLRA. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements. See "Cautionary Statement Regarding Forward-Looking Statements." THE COMPANY GENERAL The Company is a leading independent provider of high-mix electronic manufacturing services to OEMs in the aerospace and avionics, medical, communications, industrial instruments and controls and computer-related products industries. The Company's manufacturing services consist of assembling complex printed circuit boards, cables, electro-mechanical devices and finished products. The CTI Companies provide repair and warranty services to OEMs in the communications and computer industries. The Company's quarterly results of operations are affected by several factors, primarily the level and timing of customer orders and the mix of turnkey and consignment orders. The level and timing of orders placed by a customer vary due to the customer's attempts to balance its inventory, changes in the customer's manufacturing strategy and variation in demand for its 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 the Company's quarterly results of operations. Other factors affecting the Company's quarterly results of operations may include, among other things, the Company's success in integrating the businesses of Personal Electronics and the assets and operations acquired in the AlliedSignal Asset Purchase, costs relating to the expansion of operations including establishment of the infrastructure to provide BTO services, price competition, the Company's level of experience in manufacturing a particular product, the degree of automation used in the assembly process, the efficiencies achieved by the Company in managing inventories and other assets, the timing of expenditures in anticipation of increased sales and fluctuations in the cost of components or labor. In the third quarter of 1996, the Company introduced Asynchronous Process Manufacturing ("APM"), a new manufacturing methodology, at its Rocky Mountain facility. APM is an innovative combination of high-speed manufacturing equipment, sophisticated information systems and standardized process teams designed to manufacture mixtures of small quantities of products more flexibly and faster. APM allows for the building of small lots in very short cycle times and increases throughput by decreasing setup time, standardizing work centers and processing smaller lot sizes. The Company has done this by designating teams to set up off-line feeders and standardizing loading methods regardless of product complexity. APM has allowed the Company to increase productivity by producing product with fewer people, which ultimately reduces costs and increases gross profit. The Company completed implementation of APM at its Rocky Mountain facility in October 1996 and has begun implementing APM at its existing Newberg, Oregon facility, but will not complete that implementation until after its new manufacturing facility under construction in Newberg, Oregon is completed. The Company also plans to implement APM at its other facilities, at appropriate times. ACQUISITIONS In March 1998, the Company completed the PE Merger and during 1997, the Company completed the CE Merger, the AlliedSignal Asset Purchase and the CTI Merger, all of which have affected the Company's results of operations and financial condition. All financial information has been restated for the effects of the PE Merger, which was accounted for as a pooling of interests. PE Merger. On March 31, 1998, the Company acquired RM Electronics, Inc., a New Hampshire corporation doing business as Personal Electronics, for 1,800,000 shares of its Common Stock issued to the former shareholders of Personal Electronics. The acquisition of Personal Electronics has been accounted for using the pooling of interests method of accounting. Personal Electronics' revenues in 1997, 1996 and 1995 18 20 were $8.8 million, $4.0 million and $2.4 million, respectively. Prior to its acquisition by the Company, Personal Electronics was an independent provider of rapid, low-volume, high-mix electronic manufacturing services to OEMs in the greater Boston area and New Hampshire. Personal Electronics focuses on providing high levels of personalized customer service to geographically proximate customers. CTI Merger. On September 30, 1997, the Company acquired the CTI Companies for approximately $29.7 million in cash and debt assumption, 1,858,975 shares of the Company's Common Stock and a $6 million contingent payment paid upon closing of a public offering in November of 1997. The Company recorded goodwill of approximately $38.9 million, which is being amortized over 30 years. In connection with this acquisition, the Company entered into the Bank One Loan and issued the Subordinated Notes. See "-- Liquidity and Capital Resources." In many respects, the CTI Companies and the Company are financially and operationally complementary businesses. This tends to give management at the CTI Companies more alternatives when making decisions that affect profit margins and overall operations. The CTI Companies have historically turned receivables at a slower rate and inventories at approximately the same rate as the Company. In 1996, the CTI Companies turned receivables at an approximate rate of 57 days or 6 times a year and turned inventories every 79 days or approximately 5 times a year. In 1996, the Company turned receivables at an approximate rate of 25 days or approximately 14 times a year and turned inventories every 62 days or approximately 6 times a year. Consequently, since the CTI Merger, the Company's receivables have turned over at a slower rate due to the inclusion of the CTI Companies. The Company is involved in the front end of many OEMs' new-product introductions and is subject to production fluctuations relating to the OEMs' product demands. Thus, the Company's production of a particular product is related to overall product life cycle and length of demand for such product. The CTI Companies' repair and warranty service is dependent on the size of the installed base and extent of use of such product. The CTI Companies have generated gross profit percentages ranging from 26% to 33% from 1994 to 1996. This is significantly higher than the Company's historic gross profit percentages, which have ranged from approximately 5% to 10% from 1994 to 1996. This is due to the high value-added content of the CTI Companies' operations. The impact of combining operations of the CTI Companies with the Company has been to increase the Company's overall gross, operational and net profit percentages due to the CTI Companies' overall higher profitability levels as a percentage of sales. This is based on historic results, and there is no guarantee that these trends will continue. AlliedSignal Asset Purchase. In February 1998, the Company completed two transactions with AlliedSignal, pursuant to which the Company acquired certain inventory and equipment located in Ft. Lauderdale, Florida, subleased the portion of AlliedSignal's facility where such inventory and equipment was located and employed certain persons formerly employed by AlliedSignal at that location. The Company also hired certain persons formerly employed by AlliedSignal in Tucson, Arizona and agreed with AlliedSignal to provide the personnel and management services necessary to operate a related facility on behalf of AlliedSignal on a temporary basis. The Company purchased from a third party and renovated a production facility in Tucson, Arizona. The Company moved AlliedSignal's inventory and equipment and related employees to its own facility and began production in early February 1998. The aggregate purchase price of the assets acquired by the Company from AlliedSignal approximated $19 million, of which approximately $16 million was paid by March 31, 1998. The Florida and Arizona facilities are currently used to produce electronic assemblies for AlliedSignal. The Company is also seeking to use the Florida and Arizona facilities to provide services for customers other than AlliedSignal. The Company agreed to pay AlliedSignal one percent of gross revenue for all electronic assemblies and parts made for a customer other than AlliedSignal at the Arizona or Florida facilities through December 31, 2001. CE Merger. On February 24, 1997, the Company acquired the CE Companies for approximately $10.9 million consisting of 1,980,000 shares of Common Stock and approximately $5.5 million in cash, which included approximately $0.6 million of transaction costs. The Company recorded goodwill of approximately $8.0 million, which is being amortized over 30 years. The combined revenues for the CE Companies for the 19 21 fiscal year ended September 30, 1996 was approximately $32.5 million. In connection with this transaction, the Company renegotiated its line of credit and obtained a 90-day bridge loan in the amount of $4.9 million (which was subsequently repaid), the proceeds from which were used to pay the cash consideration related to the CE Merger, as discussed above. See "--Liquidity and Capital Resources." RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales:
QUARTER ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------- ----------------------- 1998 1997 1997 1996 1995 ----- ----- ----- ----- ----- Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit........................................ 18.3 13.1 16.3 7.6 10.0 Merger costs........................................ 2.0 -- -- -- -- Selling, general and administrative expenses........ 9.8 7.6 10.4 9.7 8.4 Goodwill............................................ 0.7 0.1 0.4 -- -- Impairment of fixed assets.......................... -- -- -- 1.2 -- ----- ----- ----- ----- ----- Operating income (loss)............................. 5.8 5.4 5.5 (3.3) 1.6 Interest expense.................................... (1.7) (1.3) (2.0) (0.9) (0.9) Other, net.......................................... 0.1 0.1 1.0 0.1 0.2 ----- ----- ----- ----- ----- Income (loss) before income taxes................... 4.2 4.2 4.5 (4.1) 0.9 Income tax expense (benefit)........................ 1.7 0.5 1.7 (1.5) 0.2 Pro forma tax expense (benefit)..................... 0.6 1.1 -- -- -- ----- ----- ----- ----- ----- Pro forma net income (loss)......................... 1.9 2.6 2.8 (2.6) 0.7 ===== ===== ===== ===== =====
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Net Sales. The Company's net sales increased by 238.8% to $54.2 million for the first quarter of 1998 compared to $16.0 million in the first quarter of 1997. The increase in net sales is due primarily to the inclusion of the operations from the CE Companies, acquired on February 24, 1997, the inclusion of the operations of the Company's Ft. Lauderdale and Arizona facilities, acquired from AlliedSignal in August 1997, the inclusion of the CTI Companies, acquired on September 30, 1997, the growth in revenues of Personal Electronics and increased orders from existing customers. Gross Profit. Gross profit increased by 371.4% to $9.9 million for the quarter ended March 31, 1998 compared to $2.1 million for the same period last year. The gross profit margin increased to 18.3% for the quarter ended March 31, 1998 from 13.1% for the quarter ended March 31, 1997. The increase in gross profit margin is related to (i) the operations of the CE Companies, which have historically had a higher gross profit margin, (ii) the adoption of APM in the later part of 1996 in the Rocky Mountain facility which has resulted in greater operating efficiencies, and (iii) the operations of the CTI Companies, which have historically had a higher gross profit percentage. In addition, as revenues have increased, fixed overhead costs such as labor costs and depreciation have been absorbed in costs of goods sold resulting in higher margins. Selling, General and Administrative Expenses. Selling, general and administrative ("SGA") expenses increased by 341.7% to $5.3 million for the first quarter ended March 31, 1998, compared with $1.2 million for the same period in 1997. As a percentage of net sales, SGA expense increased to 9.8% for the quarter ended March 31, 1998 from 7.6% from the quarter ended March 31, 1997. The increase in SGA expenses is primarily due to the inclusion of the CE Companies', the CTI Companies' and the Company's Ft. Lauderdale and Arizona facilities' SGA expenses and increased investment in information technology and marketing. Operating Income. Operating income increased to $3.1 million for the quarter ended March 31, 1998 from $0.9 million for the quarter ended March 31, 1997. Operating income as a percentage of net sales increased to 5.8% for the quarter ended March 31, 1998 from 5.4% for the quarter ended March 31, 1997. Excluding the one-time merger costs of $1.0 million in the first quarter of 1998, operating income would have 20 22 been $4.2 million or 7.7% of net sales. The increase in operating income is attributable to the CE Merger, the CTI Merger, the increase in operating income of Personal Electronics, increased efficiencies associated with APM, and the acquisition and operation of the Ft. Lauderdale facility. Interest Expense. Interest expense was $0.9 million for the quarter ended March 31, 1998 compared to $0.2 million for the same period in 1997. The increase in interest is primarily the result of the incurrence of debt associated with the CE Merger, the AlliedSignal Asset Purchase in Arizona and Florida, the CTI Merger, and increased operating debt used to finance the growth of inventories and receivables. Income Tax Expense. The effective income tax rate for the quarter ended March 31, 1998 was 55.0% including pro forma income taxes compared to 37.5% for the same period in 1997, due to the impact of nondeductible goodwill and the nondeductible portion of the one-time merger costs of approximately $875,000 in the first quarter of 1998 which significantly increases the effective tax rate. 1997 Compared to 1996 Net Sales. The Company's net sales increased by 100.5% to $122.1 million during the year ended December 31, 1997, from $60.9 million for the year ended December 31, 1996. The increase in net sales is due primarily to the inclusion of the operations from the CE Companies, acquired on February 24, 1997, the inclusion of the operations of the Company's Ft. Lauderdale and Arizona facilities, acquired from AlliedSignal in August 1997, the inclusion of the CTI Companies, acquired on September 30, 1997, the growth in revenues of Personal Electronics and increased orders from existing customers. Gross Profit. Gross profit increased by 332.6% to $19.9 million during the year ended December 31, 1997, from $4.6 million during the year ended December 31,1996. The gross profit margin for the year ended December 31, 1997 was 16.3% compared to 7.6% for the year ended December 31, 1996. The increase in gross profit percentage is related to (i) the operations of the CE Companies, which have historically had a higher gross profit margin, (ii) the adoption of APM in the later part of 1996 in the Rocky Mountain facility which has resulted in greater operating efficiencies, and (iii) the operations of the CTI Companies, which also have historically had a higher gross profit percentage. In addition, as revenues have increased, fixed overhead costs such as labor costs and depreciation have been absorbed in cost of goods resulting in higher margins. Finally, the Company incurred a restructuring charge in cost of goods sold of $0.5 million in the third quarter of fiscal 1996, primarily related to severance costs and the write-off of inventory associated with the restructuring of the Company's customer base, which accentuated the difference in gross profit margins between 1997 and 1996. Selling, General and Administrative Expenses. SGA expenses increased by 115.3% to $12.7 million for the year ended December 31, 1997, compared with $5.9 million for the same period of 1996. As a percentage of net sales, SGA expense increased to 10.4% for the year ended December 31, 1997, from 9.7% in the same period of 1996. The Company incurred a restructuring charge of $0.9 million in the third quarter of 1996, primarily from severance pay for terminated employees at the Rocky Mountain facility. Without the restructuring charge, SGA expense for 1996 would have been 8.2% of sales. The increase in SGA expenses is primarily due to the inclusion of the CE Companies', the CTI Companies' and the Company's Fort Lauderdale and Arizona facilities' SGA expenses and increased investment in information technology and marketing. Operating Income. Operating income increased to $6.7 million for the year ended December 31, 1997, from a loss of $2.0 million for the same period in 1996. Operating income as a percentage of net sales increased to 5.5% in the year ending December 31, 1997 from negative 3.3% in the same period of 1996. The increase in operating income is attributable to the CE Merger, the CTI Merger, the increase in operating income of Personal Electronics, increased efficiencies associated with APM, and the acquisition and operation of the Fort Lauderdale and Tucson facilities. Without the $2.1 million write down in the third quarter of 1996, the 1996 operating profit margin would have been approximately breakeven. Interest Expense. Interest expense was $2.4 million for the year ended December 31, 1997 as compared to $0.6 million for the same period in 1996. The increase in interest is primarily the result of the incurrence of debt associated with the CE Merger, the AlliedSignal Asset Purchase in Arizona and Florida, the CTI 21 23 Merger, and increased operating debt used to finance both inventories and receivables for the Company in fiscal 1997. Income Tax Expense. The effective income tax rate for the year ended December 31, 1997 was 38.9% including pro forma income taxes compared to 35.2% for the same period a year earlier. The Company anticipates higher income tax rates due to the impact of nondeductible goodwill relating to the CTI Merger and CE Merger. 1996 Compared to 1995 Net Sales. Net sales in 1996 increased 18.0% to $60.9 million from $51.6 million in 1995. The increase in net sales is due primarily to increased material sales associated with the box-build project for one customer and the growth in revenues of Personal Electronics. Gross Profit. Gross profit in 1996 decreased 9.8% from 1995 to $4.6 million. Gross profit as a percentage of net sales for 1996 was 7.6% compared to 10.0% in 1995. One reason for the decline in gross profit is related to restructuring charges of $0.5 million that were included in cost of goods sold in the third quarter of 1996. Without the restructuring, gross profit would have been $5.1 million or 8.4% of net sales. These restructuring charges were severance costs related to a decrease in workforce, write down of inventory related to changes in the Company's customer mix, and expenses related to the reorganization of the manufacturing floor and manufacturing process in connection with the implementation of APM. Selling, General and Administrative Expenses. SGA expense for 1996 increased by 37.2% over 1995 to $5.9 million. The increase is due to restructuring charges for severance costs related to reduction in workforce and other expenses related to organizational changes in the amount of $0.9 million in the third quarter of 1996. Excluding the restructuring charges, the SGA expense would have been $5.0 million which is an increase of $0.7 million or 16.3% over 1995. This increase was due primarily to increased sales commissions and related expenses associated with the sales growth from 1995 to 1996 levels as noted above. As a percentage of net sales, SGA expense increased to 9.7% in 1996 from 8.4% in 1995. Without the restructuring charges, SGA expenses would have been 8.2% of net sales for 1996. Impairment of Fixed Assets. During the third quarter of 1996, the Company incurred a write down associated with impaired assets in the amount of $0.7 million. Statement of Financial Accounting Standards No. 12 "Accounting for the impairment of long-lived assets and for long-lived assets to be disposed of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets and certain identifiable intangibles to be disposed of should be reported at the lower of carrying amount of fair value less cost to sell. The Company went through a corporate restructuring in the third quarter of 1996, which included a workforce reduction and implementation of APM, resulting in certain assets no longer being used in operations. Certain software that will no longer be used, as well as excess equipment that was sold, were written down to fair value in accordance with Statement No. 121. Operating Income. Operating income in 1996 decreased 350.0% to a loss of $2.0 million from income of $0.8 million in 1995. Operating income as a percent of sales decreased to negative 3.3% in 1996 from 1.6% in 1995. The decrease in operating income was primarily attributable to the restructuring charges and impairment of fixed assets noted above in the amount of $2.1 million. Excluding the restructuring charges, the Company would have had operating income of $0.1 million or 0.2% of net sales for 1996. The decrease, excluding the restructuring charges, was related to product mix changes and related overhead expenses to put new programs in place as well as increased variable selling costs associated with higher sales volumes in the first two quarters of 1996. Interest expense. Interest expense in 1996 increased 50.0% from 1995 to $0.6 million. Borrowing necessitated by increases in inventory and accounts receivable levels is the primary reason for the increase in interest expense. Income Tax Expense. The Company's effective income tax rate for 1996 was 35.2%, including pro forma income taxes, compared to 26.7% for 1995. Tax expense for 1995 was lower due to certain research 22 24 expenditures incurred in 1992, 1993, 1994 and 1995 for which the Company claimed federal tax credits. The Company's Rocky Mountain facility is also located in a State of Colorado enterprise zone. The Company receives state tax credits for capital expenditures and increases in the number of Company employees but, as sales increase, these state tax credits will have a relatively smaller effect on the Company's effective income tax rate. Quarterly results. The following table presents unaudited quarterly operating data for the most recent five quarters of the period ended March 31, 1998. The information includes all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation thereof.
QUARTER ENDED -------------------------------------------------------------- MARCH 31, DEC. 31, SEP. 30, JUNE 30, MARCH 31, 1998 1997 1997 1997 1997 --------- -------- -------- -------- --------- Net sales(1)........................ $54,200 $50,938 $30,483 $24,617 $16,041 Cost of goods sold.................. 44,297 41,613 25,750 20,863 13,941 ------- ------- ------- ------- ------- Gross profit........................ 9,903 9,325 4,733 3,754 2,100 Merger costs........................ 1,048(2) -- -- -- -- Impairment of fixed assets.......... -- -- -- -- -- Goodwill amortization............... 391 390 67 67 23 Selling, general and administrative expenses.......................... 5,321 7,214(3) 2,288 1,995 1,213 ------- ------- ------- ------- ------- Operating income.................... 3,143 1,721 2,378 1,692 864 Interest expense and other, net..... (869) (1,220) 641(4) (346) (192) ------- ------- ------- ------- ------- Income before income taxes.......... 2,274 501 3,019 1,346 672 Income tax expense (benefit) including pro forma adjustment.... 1,252 269 1,122 516 252 ------- ------- ------- ------- ------- Pro forma net income(5)............. $ 1,022 $ 232 $ 1,897 $ 830 $ 420 ======= ======= ======= ======= ======= Pro forma income per share -- diluted.................. $ 0.07 $ 0.02 $ 0.22 $ 0.11 $ 0.06 ======= ======= ======= ======= ======= Weighted average shares outstanding -- diluted............ 14,400 12,438 8,476 7,921 6,658
- --------------- (1) The restatement of the Company's financial statements resulting from the treatment of the PE Merger as a pooling of interests resulted in increases to net sales of $3.2 million in the quarter ended March 31, 1998 and of $2.7 million in the fourth quarter, $2.3 million in the third quarter, $1.9 million in the second quarter and $2.0 million in the first quarter of 1997. (2) Merger costs related to the PE Merger which was accounted for as a pooling of interests. (3) Reflects bonuses paid to the shareholders of Personal Electronics of $2.6 million in the quarter ended December 31, 1997. (4) Includes gain of approximately $1.2 million on sale of building used in the Company's manufacturing operations. (5) The restatement of the Company's financial statements resulting from the treatment of the PE Merger as a pooling of interests resulted in increases to the pro forma net income (loss) of $0.5 million in the quarter ended March 31, 1998 and of ($1.1) million in the fourth quarter, $0.5 million in the third quarter, $0.4 million in the second quarter and $0.3 million in the first quarter of 1997. Although management does not believe that the Company's business is materially affected by seasonal factors, the Company's sales and earnings may vary from quarter to quarter, the Company's quarterly results of operations are affected by several factors, primarily the level and timing of customer orders and the mix of turnkey and consignment orders. Therefore, the Company's operating results for any particular quarter may 23 25 not be indicative of the results for any future quarter or year. See "Risk Factors -- Variability of Quarterly Results of Operations." LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, working capital totaled $43.5 million. Working capital at December 31, 1997 was $43.6 million compared to $9.3 million at December 31, 1996. The increase in working capital in 1997 is primarily attributable to a public offering that was completed in November 1997 with net proceeds to the Company of approximately $39.5 million, the proceeds of which were used to pay a portion of the acquisition price for the CTI Companies and to repay a portion of the Bank One Loan. In November 1997, the Company reborrowed approximately $20 million of the Bank One Loan that had been repaid in order to fund increases in inventory and accounts receivable related to increased business associated with the CE Merger, the CTI Merger and the AlliedSignal Asset Purchase and to repay $10 million of the Subordinated Notes. Cash used in operations for the quarter ended March 31, 1998, was $2.4 million compared to $0.2 million for the same period in 1997. Cash used in operations for the year ended December 31, 1997, was $29.4 million compared to cash used in operations of $0.5 million for the same period in 1996. The AlliedSignal Asset Purchase in Florida and Arizona and the CTI Merger resulted in a significant use of funds, particularly in the purchase of inventory and equipment in the third quarter of 1997. Accounts receivable increased 464.4% to $25.4 million at December 31, 1997 from $4.5 at December 31, 1996. A comparison of receivable turns (e.g., annualized sales divided by current accounts receivable) for 1997 compared to 1996 is 4.8 and 13.7, respectively. Inventories increased 401.1% to $46.1 million at December 31, 1997 from $9.2 million at December 31, 1996. A comparison of inventory turns (i.e., annualized cost of sales divided by current inventory) for the years ended 1997 and 1996 shows a decrease to 2.2 from 6.1, respectively. The Company believes that the 1997 receivable turns and inventory turns are not representative of actual operations because the cost of sales for the year includes only ten months from the CE Companies, three months of cost of sales from the CTI Companies, and only four and one-half months from the AlliedSignal Asset Purchase in Arizona and Florida, while the balance sheet includes the receivables and inventories from these operations. The Company used cash to purchase capital equipment totaling $9.5 million for the quarter ended March 31, 1998, $13.5 million for the year ended 1997 and $2.2 million for the year ended 1996. The Company also used cash to pay part of the purchase price of the CE Companies and CTI Companies, as explained earlier in the amount of $31.0 million. Proceeds from long-term borrowings of $35 million were used to help fund the purchase of the CE Companies and CTI Companies. In connection with the CTI Merger and the AlliedSignal Asset Purchase, the Company entered into a Credit Agreement, dated as of September 30, 1997, as amended (the "Bank One Loan"), provided by Bank One, Colorado, N.A. The Bank One Loan initially provided for a $25 million revolving line of credit, maturing on September 30, 2000 and a $20 million term Loan maturing on September 30, 2002. The Bank One Loan currently bears interest at a rate based on either the London Inter-Bank Offering Rate ("LIBOR") or Bank One prime rate plus applicable margins ranging from 2.50% to 0.00% for both the term and revolving facilities. Borrowings on the revolving facility are subject to limitation based on the value of the available collateral. The Bank One Loan is collateralized by substantially all of the Company's assets, including real estate and all of the outstanding capital stock and membership interests of the Company's subsidiaries, whether now owned or later acquired. The agreement for the Bank One Loan contains covenants restricting liens, capital expenditures, investments, borrowings, payment of dividends, mergers, and acquisitions and sale of assets. In addition, the loan agreement, as amended, contains financial covenants restricting maximum annual capital expenditures, recapturing excess cash flow and requiring maintenance of the following ratios: (i) maximum total debt to EBITDA (as defined in the agreement for the Bank One Loan); (ii) minimum fixed charge coverage; (iii) minimum EBITDA to interest; and (iv) minimum tangible net worth requirement with periodic step-up. In addition to the Bank One Loan, the Company issued a director of the Company $15 million in aggregate principal amount of Subordinated Notes, with a maturity date of December 31, 2002 and bearing interest at LIBOR plus 2.0%, in order to fund the acquisition of certain assets from AlliedSignal. The Company issued a warrant (the "Warrant") to purchase 500,000 shares of common stock at a price of $8.00 24 26 per share in connection with the Subordinated Notes. The Warrant was exercised in October 1997, resulting in net proceeds to the Company of $4 million. In December 1997, the Company repaid approximately $10 million of the Subordinated Notes from the proceeds of additional borrowings under the Bank One Loan. In November 1997, the Company completed a public offering of approximately 3,500,000 shares of common stock. The Company used the proceeds of such offering to make a $6 million payment to the previous owners of the CTI Companies and to repay approximately $32 million of the Bank One Loan. In November 1997, the Company reborrowed approximately $20 million of the Bank One Loan that had been repaid in order to fund increases in inventory and accounts receivable related to increased business associated with the CE Merger, the CTI Merger and the AlliedSignal Asset Purchase and to repay $10 million in aggregate principal amount of the Subordinated Notes. In March 1998, the Company issued Bank One a 15-day note in the principal amount of $5 million (the "Bank One Note") the proceeds of which were used to make payments to AlliedSignal in connection with the AlliedSignal Asset Purchase and for normal operating expenses. The Bank One Loan was then amended in April 1998 to increase the revolving line of credit to $40 million from $25 million. The Bank One Note was repaid in April 1998 after the amendment to the Bank One Loan was completed. As of March 31, 1998, the total outstanding principal amount under the Bank One Loan was $44.3 million, comprised of a term loan of $19.3 million and an outstanding balance on the revolving loan of $25 million. $15 million remained available for borrowing under the Bank One Loan. The Company intends to use the proceeds of the offering made hereby to retire a portion of its revolving credit facility with Bank One which as of May 29, 1998, had outstanding borrowings of approximately $34.8 million. In the event that the Company realizes net proceeds from the Offering in excess of $35 million, the Company intends to use such net proceeds first, to repay the outstanding Subordinated Notes which as of May 29, 1998 were outstanding in the principal amount of approximately $5 million and second, to repay a portion of its term loan with Bank One which, as of May 29, 1998 had an outstanding principal balance of approximately $19.3 million. See "Use of Proceeds." The Company may require additional capital to finance enhancements to, or expansions of, its manufacturing capacity in accordance with its business strategy. Management believes that the need for working capital will continue to grow at a rate generally consistent with the growth of the Company's operations. The Company may seek additional funds, from time to time, through public or private debt or equity offerings, bank borrowing or leasing arrangements; however, no assurance can be given that financing will be available on terms acceptable to the Company. The Company is implementing a new management information system (the "MIS System") throughout all of its facilities, including those it has recently acquired. The MIS System is designed to be "Year 2000 Compliant." Therefore, in the absence of unanticipated difficulties in implementing the MIS System, the Company does not anticipate that year 2000 problems will have a material adverse effect on the Company's operations. The Company is evaluating the impact of the year 2000 issue on vendors with a goal of completion during 1998. 25 27 BUSINESS AND PROPERTIES GENERAL The Company is a leading independent provider of "high-mix" electronic manufacturing services ("EMS"), including quick-turn manufacturing, prototype services, high-mix production, and aftermarket repair and warranty services, to OEMs and is initiating BTO services. The Company's manufacturing services focus on high-speed production of high-mix electronic products -- products that are characterized by small lot sizes with differences in configuration in each lot. The Company provides "hub-based" repair and warranty services that are marketed as part of the logistics service offerings of the two largest transportation companies that specialize in overnight delivery services in the United States. These hub-based services are provided principally through facilities located inside such transportation companies' national sorting, warehouse and logistics hub facilities (the "Overnight Delivery Hubs") in Memphis, Tennessee and Louisville, Kentucky. Since acquiring the CTI Companies, the Company has invested in creating a BTO manufacturing capability at the Memphis, Tennessee Overnight Delivery Hub. In May 1988, the Company signed its first BTO contract with Fujitsu to provide BTO services for a line of notebook computers. The Company believes it is well positioned to capitalize on the industry shift away from mass production to mass customization because it specializes in small-lot processing associated with high-mix manufacturing and because of the logistics advantages associated with its hub-based BTO and repair and warranty services. Through the Acquisitions completed in 1998 and 1997, the Company has expanded its operations from one facility in Colorado at the beginning of 1997 to nine facilities throughout the United States at March 31, 1998. The Acquisitions have strategically expanded the Company's breadth of high-mix service offerings to include quick-turn manufacturing, prototype services, concurrent engineering, subassembly manufacturing, next-day delivery of assemblies and warranty and post-warranty repair services. The Acquisitions provide the Company with new opportunities to develop programs to help its existing customers reduce inventory, and allow the Company to cross-market its other services to the CTI Companies' and Personal Electronics' existing customer bases. See "Prospectus Summary -- Acquisitions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Company -- Acquisitions." INDUSTRY OVERVIEW Electronic Manufacturing Services. The electronic manufacturing services industry emerged in the United States in the 1970s and began to grow rapidly in the 1980s. By subcontracting their manufacturing operations, OEMs realized productivity gains by reducing manufacturing capacity and the number of in-house employees needed to manufacture products. As a result, capital that such OEMs would have otherwise devoted to manufacturing operations became available for other activities, such as product development and marketing. Over time, many OEMs have determined that manufacturing is not one of their core competencies, leading them to outsource an increasing percentage, and in some cases all, of their manufacturing to EMS providers. The Company believes that many OEMs now view EMS providers as an integral part of their business and manufacturing strategy rather than as a back-up source to in-house manufacturing capacity during peak periods. The types of services now being outsourced have also grown. The Company believes that OEMs are outsourcing more design engineering, distribution and after-sale support, in addition to material procurement, manufacturing and testing. Technology Forecasters, an independent market research firm, has forecasted that the worldwide market for electronic contract manufacturing services is expected to grow from $60 billion in 1996 to $178 billion in 2001, representing a compound annual growth rate of 24%. Repair and Warranty Services. OEMs are also under pressure to control their warranty and service costs without allowing customer service to suffer. This pressure has increased as warranty periods have grown longer and product life-cycles have grown shorter. As with manufacturing services, many OEMs have determined that handling repair and warranty service and providing repair services after warranty expiration are not within their core competencies. Outsourcing allows the OEMs to focus their efforts on product research, design, development and marketing. OEMs can also obtain other benefits from the use of outside repair service providers, including reduced spares inventory, faster turns on inventory and improved customer service for products during the warranty period as well as after expiration of the warranty period. The Company's 26 28 hub-based service centers allow OEMs and their customers accelerated repair cycles by eliminating transportation legs to and from the shipper to the repair facilities. Dataquest, an independent market research firm, forecasts that worldwide electronic hardware maintenance market revenues will increase from $87 billion in 1995 to $106 billion in 2000. In addition, Dataquest estimates that the three segments that the Company's repair and warranty services are focused on -- personal computers, workstations and data communications equipment -- will grow from $17 billion in 1995 to $28 billion in 2000. Industry Trends. The Company believes that the growth of outsourcing combined with the increasing number of types of electronic products that have emerged over the last decade have significantly increased the variety of electronic manufacturing services required by OEMs. Management also believes that more OEMs from diverse industries are outsourcing manufacturing. The proliferation of electronic products in such diverse fields as aerospace and avionics, medical, communications, industrial controls and instrumentation and computers has placed increasing demands on EMS providers to adapt to new requirements specific to different product types. Similarly, the increasing diversity of the industries served by their OEM customers is placing increased demands on EMS providers to expand their value-added capabilities or more narrowly focus on a particular set of OEMs from particular industry groups. These demands include unique time to market models, manufacturing methods, technologies, quality criteria, and logistic needs, resulting in an increasing need for EMS providers to specialize their services. The Company believes that OEMs are offering, and in the future will increasingly offer, electronic products that are customized to their specifications on a "box-build" basis and electronic products that are customized to the specifications of end users on a BTO basis. In "box-build" services, the manufacturer assembles parts and components, some of which may be purchased from other manufacturers, into a finished product that meets the OEM's specifications. BTO services are box-build services in which the lot size may frequently consist of a single unit and is customized to the specifications of an end user. Typically, these products have some basic, mass-produced parts and special parts that are combined in numerous configurations to form highly customized products. The Company believes EMS providers seeking to participate in this BTO market niche will be required to build these products as orders are received from OEMs to permit such OEMs to reduce their inventory costs and to meet end-users' desires for fast order fulfillment. The Company is pursuing a specialization strategy within the EMS industry that focuses on providing a broad range of high-mix manufacturing and repair and warranty services with an emphasis on high-speed production and repair. The Company believes that OEMs that have historically been volume producers, but who are now shifting to BTO business models, will also be attracted to EFTC's integrated assembly, logistic, and repair capabilities at the Overnight Delivery Hubs. Management believes that the Company's exclusive focus on high-mix production techniques will serve the needs of traditional OEMs and is also well-suited for the BTO market. All of the Company's systems are oriented toward small-lot processing from cable assembly, to card assembly, to box-build, to repair and warranty services. It is the Company's strategy to enter the BTO market at the box-build level. The Company will outsource all mass-produced items to commodity suppliers and manufacture the complex high-mix items at one of the Company's regional facilities. Final BTO assembly will be done within the Overnight Delivery Hubs in Memphis and Louisville where the Company currently offers repair and warranty services. This strategy positions the Company to offer OEMs a simplified, more cost effective logistic solution to the delivery of their products. By locating its repair and warranty services within the Overnight Delivery Hubs, the Company believes it can reduce inventory pipelines, minimize transportation legs and gain more time to respond to customer needs. STRATEGY The Company's objective is to emerge as a premier mass customizer of electronic products. The Company has assembled a full range of electronic manufacturing services that focus on small lot processing. The Company believes its customers are increasingly focused on strategic supply chain management, reduced time to market, BTO production, access to leading-edge manufacturing technology and reduced capital investment. The Company is differentiating itself by creating specific manufacturing techniques and service offerings solely focused on small-lot processing and creating integrated partnerships with logistics providers, 27 29 component suppliers and customers to integrate its partners' core competencies through all levels of the Company's operations. The Company is also differentiating itself by integrating state-of-the-art information technology into its operations including an internal Oracle ERP (Enterprise Resource Planning) system and external service offerings through the Internet. These attributes allow the Company to provide customized solutions to customers' product needs. The Company's strategy is to create a broad geographic presence, to provide innovative manufacturing solutions, to provide a broad range of manufacturing services including, in the future, BTO services and to help OEMs simplify inventory and logistics management. Broad Geographic Presence. Electronic component manufacturing requires close coordination of design and manufacturing efforts. The Company's strategy to achieve that coordination is to provide front-end design for manufacturability, engineering services, design for test engineering services, prototypes, and complex high-mix production through regional facilities located close to OEM engineering centers. This proximity allows for faster product introduction and greater use of concurrent engineering. In pursuit of its manufacturing strategy, the Company has made acquisitions in Oregon, Washington, Arizona and Florida. To pursue its integrated repair and warranty strategy, the Company has acquired the CTI Companies, a repair and warranty services organization located within the Overnight Delivery Hubs in Memphis, Tennessee, Louisville, Kentucky and Tampa, Florida. The Company believes that this configuration of sites allows the Company to provide flexible, time-critical services to its customers. See "-- Description of Property." Innovative Manufacturing Solutions. The Company has designed APM to improve cycle times in the manufacture of high-mix products. APM allows for the building of small lots in very short cycle times by moving products asynchronously across standardized processes. The Company is continuing to refine APM with the goal of reducing average manufacturing cycle time. See "-- Services -- Asynchronous Process Manufacturing." The Company has also innovated additional services customized to meet the specialized needs of high-mix OEMs such as its Total Solution Prototype Services ("TSPS"), the industry's first fixed-price turnkey prototype service, its Component Obsolescence Program ("COP") and its "Point-of-Use Stocking Program" ("PUP"). Broad Range of Manufacturing Services. The Company's regional plants are actively involved in customer's new product introductions. As each newly built or acquired facility is integrated into the Company's operations, each is expected to have "design for manufacturability" ("DFM"), "design for test" ("DFT"), prototype, circuit card and cable assembly capabilities and to incorporate APM for the manufacture of high-mix products. See "-- Services -- Design and Testing Services." The CTI Companies' facilities based at the Overnight Delivery Hubs enable the Company to provide "design for serviceability" capabilities and to market the CTI Companies' repair and warranty services as complements to the Company's broad range of manufacturing services. Personal Electronics, an EFTC Express location, provides quick-turn manufacturing and prototype services. See "-- Services -- Repair and Warranty Services." The Company is seeking to add product design services to its existing design capabilities. Provide Build-To-Order Services. The Company believes it has the necessary skills and processes and is integrating its services in order to establish BTO capability for completed computers and instruments and systems at its facilities based in the Overnight Delivery Hubs. Locating this activity at the Overnight Delivery Hubs is intended to allow the Company's OEM customers to effect delivery of products to their customers with the fewest legs of transportation and the simplest logistic channel, thereby reducing the OEMs' inventory investments. The Company expects to manufacture complex high-mix circuit cards at its regional sites, out-source high-volume commodities to mass producers and conduct final assembly and test at its Overnight Delivery Hubs. See "-- Services -- Build-to-Order Services." Simplified Logistics and Inventory Management. The Company seeks to differentiate itself from its competitors by offering the customer service offerings that utilize logistic benefits resulting from the positioning of the Overnight Delivery Hubs. By taking advantage of the movement of goods through the Overnight Delivery Hubs and the timing of the arrival and departure of planes from the Overnight Delivery Hubs, the Company believes it is well-positioned within the industry to minimize: (1) the number of transportation legs incurred in the overall movement of goods; (2) the total inventory pipelines required for 28 30 final build of goods in a BTO model; and (3) the inventory pipeline required to support a rapid repair and warranty service. See "-- Services -- Repair and Warranty Services." SERVICES Manufacturing Services Overview. The Company provides a variety of "high-mix" electronic manufacturing services, including quick-turn manufacturing, prototype services, high-mix production, and aftermarket repair and warranty services, to OEMs and is initiating BTO services. The Company's turnkey manufacturing services consist of assembling complex printed circuit boards (using both surface mount and pin-through-hole interconnection technologies), cables, electromechanical devices and finished products. The Company also provides computer-aided testing of printed circuit boards, subsystems and final assemblies. In certain instances, the Company completes the assembly of its customers' products at the Company's facilities by integrating printed circuit boards and electro-mechanical devices into other components of the customer's products. The Company obtained, from the International Organization of Standards, ISO 9002 certification in 1994. The Company offers customer-select service offerings which utilize the Company's core competency of small-lot processing and logistic benefits due to the position of its repair and warranty service operations within the Overnight Delivery Hubs. The Company is starting to offer BTO services based at the Overnight Delivery Hubs. In addition, the Company is considering adding product design services to its existing design capabilities. The Company has also innovated additional services customized to meet the needs of OEMs that develop and sell high-mix products. These include APM, TSPS, PUP and COP. Asynchronous Process Manufacturing. In the third quarter of 1996, the Company introduced Asynchronous Process Manufacturing, a new manufacturing methodology, at its Rocky Mountain facility. APM is an innovative combination of high-speed manufacturing equipment, sophisticated information systems and standardized process teams designed to manufacture mixtures of small quantities of products faster and with more flexibility. APM allows for the building of small lots in very short cycle times. The Company is continuing to refine APM with the goal of reducing manufacturing cycle time for high-mix circuit cards. The Company plans to implement APM at all of its facilities and for all of its customers as part of a strategy to focus the Company exclusively on manufacturing high-mix products. APM implementation requires a complete redesign of the Company's manufacturing operations, reorganizing personnel into process teams and revising documentation. At the Company's Rocky Mountain facility, the physical moves were completed in September 1996 and by the end of October 1996 APM was fully implemented. The Company has begun implementing APM at its existing Newberg, Oregon facility, but will not complete that implementation until after its new manufacturing facility under construction in Newberg, Oregon is completed. The Company also plans to implement APM at its other facilities, at appropriate times. APM improves throughput of certain assembly processes over traditional continuous (synchronous) flow processing ("CFM"), which is the predominant method used in high-volume manufacturing. With APM, the Company is able to process products rapidly using a combination of new discontinuous flow methods for differing product quantities, fast surface mount assembly systems, test equipment and high-volume, high-speed production lines. In the APM model, materials are moved through the production queue at high-speed and not in a continuous or linear order as under CFM. Instead, materials are moved through the assembly procedure in the most efficient manner, using a computer algorithm developed for the Company's operations, with all sequences controlled by a computerized information system. High-mix manufacturing using APM involves a discontinuous series of products fed through assembly in a start-stop manner, previously incompatible with high-speed techniques. APM is an alternative to both CFM and batch processing often used in smaller scale manufacturing. The combination of small lots with numerous differences in configuration from one lot to the next and high-speed manufacturing has been viewed as difficult, if not impossible, by many high-mix manufacturers. The Company believes that CFM techniques used by high-volume, high-speed EMS providers cannot accommodate high-mix product assembly without sacrificing speed, while smaller EMS providers, capable of producing a wide variety of products, often find it difficult to afford high-quality, high-speed manufacturing assets or to keep up with OEMs' growing product 29 31 demand. Under CFM, all assembly occurs on the same line, thereby slowing down the process with non-value-added operations. Under APM, all non-value-added operations are performed in the most efficient manner, off-line, thereby keeping the assembly process moving. A hybrid of CFM and batch production techniques, APM sets optimal process parameters and maximizes velocity in producing smaller lot quantities. By designating teams to set up off-line feeders, standardizing loading methods regardless of product complexity, and most importantly, improving employee motivation, the Company's application of APM has decreased set-up and cycle times, standardized work centers, allowed processing of smaller lot sizes and increased the Company's productivity. [APM VS. CFM FLOW CHART] Prototype Manufacturing Services. Personal Electronics is an EFTC Express location, specializing in quick-turn manufacturing and prototype services with a high degree of personalized customer service. As customer orders grow, EFTC Express is intended to provide customers with an easy transition to the Company's larger regional manufacturing facilities. Design and Testing Services. The Company also assists in customers' product design by providing "concurrent engineering" or "design for manufacturability" services. The Company's applications engineering group interacts with the customer's engineers early in the design process to reduce variation and complexity in new designs and to increase the Company's ability to use automated production technologies. Application engineers are also responsible for assuring that a new design can be properly tested at a reasonable cost. Engineering input in component selection is also essential to assure that a minimum number of components are used, that components can be used in automated assembly and that components are readily available and cost efficient. The Company is seeking to add full product design services to its existing capabilities. 30 32 The Company has the capability to perform in-circuit and functional testing, as well as environmental stress screening. In-circuit tests verify that components have been properly inserted and that the electrical circuits are complete. Functional tests determine if a board or system assembly is performing to customer specifications. Environmental tests determine how a component will respond to varying environmental factors such as different temperatures and power surges. These tests are usually conducted on a sample of finished components although some customers may require testing of all products to be purchased by that customer. Usually, the Company designs or procures test fixtures and then develops its own test software. The change from pin-through-hole technology to surface mount technology is leading to further changes in test technology. The Company seeks to provide customers with highly sophisticated testing services that are at the forefront of current test technology. Because the density and complexity of electronic circuitry constantly are increasing, the Company seeks to utilize developing test technology in its automated test equipment and inspection systems in order to provide superior services to its customers. Repair and Warranty Services. The CTI Companies are a hub-based, component-level repair organization focused on the personal computer and communications industries. The CTI Companies pioneered the "end-of-runway" or "airport-hub-based" repair strategy and are the only providers with operations inside and integrated with the operations of the Overnight Delivery Hubs. The Company believes that through the CTI Companies' long tenure in the industry, high-quality technical capabilities, logistically advantageous site locations, and strong relationships with transportation industry leaders, the CTI Companies have developed an optimized "service spares pipeline," allowing lower OEM costs and improving end-user service levels. The Company's repair service offering complements the transportation logistics services marketing efforts of the two principal transportation providers at the Overnight Delivery Hubs, who work with the Company in providing access to large OEM accounts. The Company has exercised tight cost control by using a flexible, part-time labor pool and leveraging the sales and marketing efforts of these transportation and logistics service providers. Additionally, beyond the requisite piece-part inventory for repairs, the Company carries minimal OEM inventory and is thus less exposed to inventory obsolescence than many competitors. The Company's repair and warranty division has developed superior brand equity with high levels of service achievable through product and vendor repair specialization. The Company believes that, through its experience of perfecting an integrated service and logistics model, it has erected a barrier to entry for potential competitors who might also seek to locate repair and warranty service centers at the Overnight Delivery Hubs. Moreover, the Company believes the CTI Companies have succeeded in increasing certain customers' service though the assembly procedure in the most efficient manner, using a computer algorithm developed for the Company's operations, with all sequences controlled by a computerized information system. The Company's repair and warranty services handle various types of equipment, including monitors, PC boards, routers, laptops, printers, scanners, fax machines, pen-based products, personal digital assistants, and keyboards. The Company works with its customers on "advance exchange" programs, whereby end users receive overnight replacement of their broken components, which are in turn repaired by the Company and replaced into the OEMs' "service spares inventory pipeline" for future redistribution. The Company thus assists OEM customers in increasing inventory turns, reducing spares inventory, lowering overall costs, accelerating repair cycles, and improving customer service. Customer service is improved through both quicker turnaround time for in-warranty claims, as well as having the Company support end-customers with out-of-warranty claims and end-of-life products. Build-to-Order Services. The Company believes OEMs are shifting their focus to increase demand for customized products. In the past, electronic products were typically mass produced, sold through distributors to retailers who, in turn, sold to the mass market. Currently, the Company believes there will be an increased need for custom producers who build to a custom order received directly from an end user through telephone or Internet ordering systems. For example, several computer manufacturers have begun to market computers directly to, and to receive orders directly from, end-users. The products are then rapidly custom-built and delivered to the end-user. Custom products are by definition high-mix in that they are built in small lots and produced in a wide variety of configurations. Management believes that the Company's core competency of small-lot processing 31 33 using its APM model will permit the Company to begin providing BTO services. The Company is beginning BTO manufacturing, which includes these elements: - high-mix circuit cards and subassemblies will be manufactured at one of its regional sites, - commodity high-volume cards and subassemblies will be outsourced to volume commodity producers, - the Company's high-mix products and outsourced commodities will be delivered to its BTO facilities located within Overnight Delivery Hubs, - orders will be received at the Overnight Delivery Hubs, and - final product will be assembled at facilities currently used for repair/service utilizing the APM model and delivered to the end user. Management believes that this infrastructure, combined with its APM model, will provide OEMs a cost-advantageous model to serve their BTO needs. Since acquiring the CTI Companies, the Company has invested in creating a BTO manufacturing capability at the Memphis, Tennessee Overnight Delivery Hub. In May 1998, the Company signed its first BTO contract with Fujitsu to provide BTO services for a line of notebook computers. CUSTOMERS AND MARKETING The Company seeks to serve traditional high-mix OEMs and OEMs that produce high-volume products and need repair and warranty services, which by their nature are high-mix services, or plan to implement BTO strategies. The Company has recently reorganized its manufacturing marketing efforts to focus on the following markets: (1) aerospace and avionics; (2) medical; (3) communications; (4) industrial controls and instrumentation; and (5) computer-related products. Each segment has or will have a marketing manager located at the corporate center in Denver. The marketing manager's responsibility is to understand their market, to know which companies are the market share leaders, to know which are the emerging growth companies within the sector, and to know what new products and technologies are being introduced into that sector. From that data, the marketing manager develops a target account list and appropriate strategies and tactics for pursuing those accounts. Regional sales managers located at each of the Company's regional sites will assist the marketing managers. The regional sales managers are responsible for identifying and pursuing accounts within their region that fit the Company's targeted outlets. This interlocked or "webbed" sales and marketing organization positions the Company to pursue accounts on both a national and regional basis. In addition, a key part of the Company's repair and warranty services marketing strategy is to continue to utilize the sales force of the two transportation providers located in the Overnight Delivery Hubs to sell the Company's repair and warranty services as an integral part of the logistics service offerings of these two transportation service providers. The following table represents the Company's net sales by industry segment, taking into account the Acquisitions:
FIRST QUARTER 1998 1997 1996 1995 ------------- ----- ----- ----- Aerospace and Avionics...................... 42.5% 27.3% 0.0% 0.0% Medical..................................... 5.5% 13.1% 29.3% 31.0% Communications.............................. 5.0% 8.1% 1.5% 9.1% Industrial Controls and Instrumentation..... 17.3% 21.6% 12.6% 9.1% Computer-Related............................ 29.1% 28.8% 54.4% 49.0% Other....................................... 0.6% 1.1% 2.2% 1.8% 100.0% 100.0% 100.0% 100.0%
32 34 The Company's customer base for manufacturing services includes AlliedSignal, Credence Systems Corporation, Electro Scientific Industries, Inc., Exabyte Corporation, and Honeywell Inc. A small number of customers has historically represented a substantial percentage of the Company's net manufacturing sales. As a result, the success of the Company's manufacturing services operations depends to some degree on the success of its largest customers. The Company's customer base for repair and warranty services includes 29 of the largest PC and electronics OEMs, including Apple Corporation, Inc., Bay Networks, Inc., Cisco Systems Inc., Dell Computer Corporation, Gateway 2000, Inc., HP, International Business Machines Corporation and Sony Corp. of America, Inc. The relationships span OEM component suppliers, OEM component customers, and system, desktop and network vendors, as well as direct marketers and channel players. As with the Company's manufacturing services, a small number of customers historically has represented a substantial percentage of the Company's net repair and warranty services sales. As a result, the success of the Company's repair and warranty services operations depends to some degree on the success of its largest customers. See "Risk Factors -- Dependence on Limited Number of Customers." DESCRIPTION OF PROPERTIES As part of the Company's strategy to have a broad geographic presence and locate its facilities in regions with a substantial or growing number of OEMs' design and engineering facilities, the Company has made several acquisitions and made significant capital investments in its manufacturing facilities. The following table describes the Company's material properties.
YEAR LOCATION ACQUIRED/OPENED SIZE(1) OWNED/LEASED(2) SERVICES - -------- --------------- ------- --------------- -------- Denver, Colorado 1997 10,000 square feet Leased(3) Executive Offices Rocky Mountain 1991 84,000 square feet Owned(4) Manufacturing Greeley, Colorado Newberg, Oregon 1997 47,000 square feet Leased(5) Manufacturing (existing) Newberg, Oregon 1998 65,000 square feet Owned(6) Manufacturing (under construction) (expected) Moses Lake, Washington 1997 20,000 square feet Leased(7) Manufacturing Ft. Lauderdale, Florida 1997 95,000 square feet Subleased(8) Manufacturing Tucson, Arizona 1998 65,000 square feet Owned(9) Manufacturing Memphis, Tennessee 1997 155,000 square feet Leased(10) Offices, repair and warranty Louisville, Kentucky 1997 90,000 square feet Subleased and Repair and (169,000 square Leased(11) Warranty feet, as expanded) Tampa, Florida 1997 40,000 square feet Owned and Repair and (48,000 square Leased(12) warranty feet, as expanded) Manchester, New Hampshire 1998 11,000 square feet Leased(13) Manufacturing (expected expansion) (19,000 square feet, as expanded)
The Company believes its facilities are in good condition. - --------------- (1) Square footage numbers are approximate. (2) Pursuant to the terms of the Bank One Loan, substantially all of the Company's owned and leased property is subject to liens and other security interests in favor of Bank One, and any other lenders from time to time under the Bank One Loan. (3) This lease will expire on December 31, 1999. 33 35 (4) This facility is located on approximately 10 acres of land owned by the Company in Greeley, Colorado. The Company has recently remodeled and expanded this facility by adding approximately 32,000 square feet at an aggregate cost of approximately $1.8 million. This construction was completed in the first quarter of 1998. In 1997, the Company sold the other building that had been located on its campus in Greeley, Colorado for approximately $2.4 million. (5) This facility includes several buildings on a campus, all of which are leased from Mr. Charles Hewitson, Mr. Gregory Hewitson and Mr. Matthew Hewitson, each of whom is a director of the Company. These leases are on a month-to-month basis and will be terminated when the Company moves to its new facility. (6) The Company has purchased approximately 12 acres of land from an unaffiliated third party and is building a 65,000 square foot facility in Newberg, Oregon at an aggregate cost of approximately $6.5 million. The Company expects this new facility to be completed in June 1998. Upon completion of this new facility, the Company will relocate its Newberg operations from the leased facility. (7) The Company is renting this facility on a month-to-month basis and is negotiating a new lease with the new owner of the facility. (8) The Company subleased from AlliedSignal a 95,000 square foot portion of a building. (9) The Company purchased approximately 20 acres of land and a 65,000 square foot building in Tucson, Arizona, for $1.8 million. The Company remodeled and moved into the facility in February 1998. (10) The Company leases a 75,000 square foot facility and an 80,000 square foot facility, both used for office space, warehouse space and repair services, from unaffiliated third parties. The leases will expire on February 28, 2001 and June 30, 2001, respectively. (11) The Company subleases a 40,000 square foot facility from one of the transportation providers that operates one of the Overnight Delivery Hubs, and this lease is terminable upon 90 days notice by either party. The Company also leases a 50,000 square foot facility from an unaffiliated third party and this lease will expire on May 31, 2000. The Company has leased a new 129,000 square foot facility from an unaffiliated third party and expects to move in May 1998. This lease expires April 14, 2003. After this move, the Company plans to sublease the 50,000 square foot facility it currently occupies and will continue to occupy the 40,000 square foot facility that it currently leases from the transportation provider. (12) The Company owns a 30,000 square foot building, and the Company has leased a 10,000 square foot facility from an unaffiliated third party. The Company has leased and will consolidate its Tampa operations in a new 45,000 square foot facility during the second quarter of 1998. This new facility is leased from an unaffiliated third party and the lease will expire in July 2003. After this move, the Company plans to sell the building that it currently owns. (13) The Company leases a 11,000 square foot facility from an unrelated third party. This lease expires August 14, 2001. The Company anticipates leasing an additional 8,000 square feet at this facility in the third quarter of 1998. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Director Representation of Personal Electronics. Mr. Robert K. McNamara, a director of the Company, is a Managing Director of Broadview, an investment banking firm, and in such capacity represented Personal Electronics in connection with the PE Merger. Broadview is an investment bank that has represented numerous companies in connection with mergers and acquisitions in the technology sector. Broadview received a fee of approximately $640,000 in connection with the consummation of the PE Merger. The foregoing information supplements the information appearing under the caption "Certain Relationships and Related Transactions" in the Company's Proxy Statement for its Annual Meeting, dated April 21, 1998, which is incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 34 36 MANAGEMENT The following are the members of the Company's Board of Directors and the Company's executive officers:
NAME AGE TITLE(S) - ---- --- -------- Gerald J. Reid............ 57 Director and Chairman of the Board Jack Calderon............. 45 Director, President and Chief Executive Officer of the Company Stuart W. Fuhlendorf...... 35 Director and Chief Financial Officer of the Company Lloyd A. McConnell........ 45 Director Allen S. Braswell, Sr..... 60 Director Allen S. Braswell, Jr..... 39 Director Darrayl E. Cannon(2)...... 50 Director James A. Doran(2)......... 43 Director Charles E. Hewitson....... 48 Director Gregory C. Hewitson....... 50 Director Matthew J. Hewitson....... 46 Director Robert K. 44 Director McNamara(2)(3).......... Richard L. Monfort(1)..... 44 Director Lucille A. Reid........... 57 Director Masoud S. Shirazi(2)(3)... 47 Director David W. Van Wert(1)(2)... 59 Director August P. Bruehlman....... 42 Chief Administrative Officer
- --------------- (1) Member of Compensation Committee (2) Member of Audit Committee The number of members of the Company's Board of Directors is currently fixed at 16, but will be reduced to 10 following the Company's annual meeting to be held on June 4, 1998 (the "Meeting"). In connection with two acquisitions completed in 1997 and one acquisition completed in 1998, the Company agreed to nominate six individuals to the Board of Directors. As a result, the number of directors of the Company had grown to 16 as of December 31, 1997. The directors became concerned that the size of the Board of Directors had grown larger than appropriate for the Company's operations. Accordingly, at its February 27, 1998 meeting, the Board of Directors approved a plan (the "Board Reduction Plan") to reduce the number of directors to a more appropriate size. Pursuant to the Board Reduction Plan, two Class I directors have not been nominated for reelection, five Class II directors will resign prior to the Meeting and two Class III directors will resign prior to the Meeting and will stand for election as Class II directors. The Company's Amended and Restated Articles of Incorporation provide for a classified Board of Directors. For purposes of determining the directors' terms of office, directors are divided into three classes. Each director serves until the end of the three-year term of the class to which he or she is elected, or until his or her earlier resignation or removal. The Class I directors, whose terms expire at the Meeting, include Allen S. Braswell, Jr., James A. Doran, Gregory C. Hewitson, Richard L. Monfort and Lucille A. Reid. Pursuant to the Board Reduction Plan, Lucille A. Reid and Gregory C. Hewitson have not been nominated by the Company for reelection at the Meeting. The Class II directors, whose terms expire at the 1999 annual meeting of shareholders, include Allen S. Braswell, Sr., Jack Calderon, Darrayl E. Cannon, Matthew J. Hewitson, Lloyd A. McConnell and David W. Van Wert. Pursuant to the Board Reduction Plan, Allen S. Braswell, Sr., Darrayl E. Cannon, Lloyd A. McConnell, David W. Van Wert and Matthew J. Hewitson will resign from the Board of Directors effective prior to the Meeting. 35 37 The Class III directors, whose terms expire at the 2000 annual meeting of shareholders, include Stuart W. Fuhlendorf, Charles E. Hewitson, Robert K. McNamara, Gerald J. Reid and Masoud S. Shirazi. Pursuant to the Board Reduction Plan, Charles E. Hewitson and Robert K. McNamara will resign from their positions as Class III directors effective prior to the Meeting and have been nominated by the Company for election at the Meeting to serve as Class II directors with terms expiring at the 1999 annual meeting of shareholders. Acting pursuant to the Bylaws of the Company, the Board of Directors elected Allen S. Braswell, Jr. and Allen S. Braswell, Sr. as Class I and Class II directors, respectively, on September 30, 1997. In connection with the consummation of the Company's acquisition of the CTI Companies, which were controlled by the family of Allen S. Braswell, Sr., the Company agreed to use its best efforts to cause Allen S. Braswell, Sr. and Allen S. Braswell, Jr. to be elected to serve as directors until the Meeting and to take the actions necessary to nominate them for election to the Company's Board of Directors at the Meeting. The Company's Bylaws provide that the initial terms of Allen S. Braswell, Jr. and Allen S. Braswell, Sr. expire at the Meeting. In connection with the consummation of the Company's acquisition of Personal Electronics, which was 50% owned by Mr. Robert Monaco, the Company agreed to take the actions necessary to nominate Mr. Monaco for election to the Company's Board of Directors at the Meeting. The Company's Bylaws provide that, if the number of directors is not evenly divisible by three, the additional directors will be first assigned to Class III. Accordingly, Mr. Monaco has been nominated by the Company for election as a Class III director to serve until the 2000 annual meeting of shareholders. Gerald J. Reid and Lucille A. Reid are married. Charles, Gregory and Matthew Hewitson are brothers. Allen S. Braswell, Sr. and Allen S. Braswell, Jr. are father and son. Otherwise, there are no family relationships among any of the directors and executive officers of the Company. Following are brief descriptions of the business experience of the Company's directors and executive officers: Gerald J. Reid, 57, a founder of the Company, has been Chairman of the Board since October 1990. Mr. Reid also periodically served as the Company's Manufacturing Manager since that time and has served as President of the Company from August 1995 until August 1996. From August 1981 until October 1990, Mr. Reid was President and Chief Executive Officer of the Company. Before founding the Company in 1981, he held a number of manufacturing-related managerial positions over a 19-year career with HP, including Future Information Systems Task Force Manager, Production Control Manager, Production Section Manager and Technical Supervisor. At the time Mr. Reid left HP to found EFTC, he held the position of Division Materials Manager. Mr. Reid has been a director of the Company since its inception. Jack Calderon, 45, has been the Company's President and Chief Executive Officer since August 1996. From January 1996 to August 1996, Mr. Calderon was President of Sales Management International, a private consulting firm through which Mr. Calderon provided strategic consulting to executive officers of various high-technology companies. From 1992 to 1995, Mr. Calderon worked for Group Technologies, an electronic contract manufacturing company. Mr. Calderon held several management positions at Group Technologies, most recently as its Vice President and General Manager of International Operations, before leaving to form his own consulting firm. Mr. Calderon currently authors a column on electronic contract manufacturing for Circuitree Magazine and is on the Board of Directors of Interconnecting and Packaging Electronic Circuits, a trade association for electronic contract manufacturing companies. Mr. Calderon has been a director of the Company since August 1996. Stuart W. Fuhlendorf, 35, has been the Company's Chief Financial Officer since January 1993. Prior to joining EFTC, Mr. Fuhlendorf held a number of financial management positions in the aerospace and gaming industries. Mr. Fuhlendorf has been a director of the Company since October 1995. Lloyd A. McConnell, 45, was the Company's Director of Engineering until February 1998 and was the Company's Secretary and a Vice President from May 1994 to February 1998. Mr. McConnell served as the Company's Applications Engineering Coordinator from March 1993 to July 1995 and as Manager of the Engineering Department from July 1995 to October 1995. From March 1991 to March 1993, Mr. McConnell was the Company's Quality Assurance Manager. Mr. McConnell served from 1987 to 1991 as the Company's Engineering Manager and from 1982 to 1987 as Sales Manager. Prior to 1982, Mr. McConnell was employed 36 38 in a variety of manufacturing engineering positions with Eisenman Enterprises, Raincat Irrigation Systems and the U.S. Navy. Mr. McConnell has been a director of the Company since 1984. Allen S. Braswell, Sr., 60, was Chairman of the Board of Directors of CTI until the consummation of the CTI Merger in September 1997, and had served on the Board of Directors of CTI since founding the Company in 1981. Mr. Braswell served as Chief Executive Officer of CTI from 1981 until October 1996. Prior to founding CTI in 1981, Mr. Braswell was Director of Engineering at Honeywell's Tampa, Florida division for five years and, prior to that, had held a variety of management positions with Honeywell. Mr. Braswell began his employment with Honeywell in 1963 as an engineer on the Saturn Space program. Mr. Braswell received his B.S.E.E. from Georgia Institute of Technology in June 1962. Allen S. Braswell, Jr., 39, is currently Sr. Vice President of EFTC Corporation and President of the Company's EFTC Services group. Mr. Braswell had been President of CTI since October 1993 and Chief Executive Officer of CTI since October 1996 until the acquisition by the Company of the CTI Companies in September 1997. Prior to that time, Mr. Braswell had been Executive Vice President of CTI from August 1985 until October 1993 focusing primarily on CTI's Sales and Marketing activities. Mr. Braswell served on CTI's Board of Directors since its founding in 1981. Mr. Braswell has been director of the Company since September 1997. Darrayl E. Cannon, 50, has served as Vice President of Operations for Dialogic Corporation, a leading computer telephony company, since September 1995. Mr. Cannon has a total of 28 years experience in the computer industry. Mr. Cannon served from 1989 to 1995 in several positions at McDATA Corporation, a data communications company and subsidiary of EMC Corporation, including, Vice President Quality Assurance & Manufacturing, Vice President Development & Production and Business Unit Manager. From 1975 to 1989, Mr. Cannon held a variety of positions at NCR Corporation, including Director of NCR Power Systems, Director of Operations and Director of Manufacturing. Prior to 1975, Mr. Cannon was a design and manufacturing engineer for Magnavox Corporation. Mr. Cannon has been a director of the Company since May 1996. James A. Doran, 43, has been a senior audit manager with Hein & Associates, LLP, a public accounting firm, since July 1994. From 1993 to 1994 Mr. Doran was Senior Vice President and Chief Financial Officer and a director of Gerrity Oil & Gas Corporation, an independent oil and gas operator in Denver, Colorado, whose stock was listed on the New York Stock Exchange. Prior to joining Gerrity, Mr. Doran was a shareholder of Williams, Richey & Co., P.C., an accounting and consulting firm in Denver, Colorado, and before that was a Senior Manager with Coopers & Lybrand. Mr. Doran has been a director of the Company since 1993. Charles E. Hewitson, 48, currently serves as President of OnCourse, Inc., a private consulting firm through which Mr. Hewitson provides certain consulting services to EFTC, and is a director of EFTC. From 1984 to February 1997, Mr. Hewitson served as Vice President and director, and was a principal shareholder, of CEI, with responsibility for human resources, finance, accounting and manufacturing. In addition, Mr. Hewitson served as Vice President of CEWI, from 1994 to February 1997. CEI and its affiliate CEWI were acquired by EFTC in February 1997, at which time Mr. Hewitson was appointed to the Board of Directors. Gregory C. Hewitson, 49, currently serves as President of Corporate Solutions, Inc., a private consulting firm through which Mr. Hewitson provides certain consulting services to EFTC, and is a director of EFTC. From 1984 to February 1997, Mr. Hewitson served as President, and was a principal shareholder, of CEI, with responsibility for developing and leading a sales and marketing team, directing a leadership team which dealt with daily operational issues and developing strategic plans for the growth of CEI. CEI and its affiliate CEWI were acquired by EFTC in February 1997, at which time Mr. Hewitson was appointed to the Board. Matthew J. Hewitson, 46, currently serves as President of Matt Hewitson Consulting, Inc., a private consulting firm through which Mr. Hewitson provides certain consulting services to EFTC, and is a director of EFTC. From 1984 to February 1997, Mr. Hewitson served as Secretary and Treasurer, and was a principal shareholder, of CEI, with responsibility for engineering, facilities, manufacturing and equipment. CEI and its 37 39 affiliate CEWI were acquired by EFTC in February 1997, at which time Mr. Hewitson was appointed to the Board. Robert K. McNamara, 44, has served since August 1995 as a Managing Director for Broadview Associates, LLC, a merger and acquisition advisor serving the global information technology industry. Before joining Broadview, Mr. McNamara spent 10 years with Salomon Brothers Inc, an investment banking firm, most recently as vice president and head of its technology group. From September 1981 to June 1985 Mr. McNamara worked at Smith Barney, Harris Upham & Co., Inc., an investment banking firm, as vice president, focusing on the telecommunications equipment, computer peripherals and computer retailing market segments. McNamara has been a director of Nam Tai Electronics, Inc., a contract manufacturer that makes consumer electronics products with operations in Shenzhen, China since 1996. Mr. McNamara has been a director of the Company since February 1996. Richard L. Monfort, 44, served as President and Chief Operating Officer of ConAgra Red Meat Companies from July 1989 to June 1995. From June 1995 to March 1997, Mr. Monfort was engaged in private investing activities. From 1983 until 1989, he was President of Monfort, Inc., which was subsequently acquired by ConAgra, Inc. Mr. Monfort recently joined the board of the University of Colorado Hospital Authority. Mr. Monfort has been a director of Famous Dave's of America, Inc., an owner and operator of restaurants, since March 1997. Mr. Monfort has been a director of the Company since 1993. Lucille A. Reid, 57, a founder of the Company, served as the Company's Customer Support/Manufacturing Specifications Manager from October 1990 to August 1995 when she became Director of Manufacturing. Ms. Reid served as Director of Manufacturing until August 1996, when she retired from day-to-day operations of the Company. From 1982 to 1990 Mrs. Reid served as the Company's Manufacturing Manager. Before founding the Company in 1981, Mrs. Reid held various positions for 14 years at HP, her last position being Manufacturing Specifications Supervisor. Mrs. Reid's other positions at HP included Project Coordinator, Production Control Supervisor and Production Supervisor. Mrs. Reid has been a director of the Company since its inception. Masoud S. Shirazi, 47, has been the owner of Shirazi & Associates, P.C., a benefit and consulting firm in Greeley, Colorado, that specializes in benefit and estate planning since 1976. Mr. Shirazi serves as a director of Union Colony Bank. Mr. Shirazi has been a director of the Company since 1992. David W. Van Wert, 59, is President and Chief Executive Officer of Van Wert Associates Consulting, Inc., a management consulting firm he founded. From June 1993 to August 1995, Mr. Van Wert was President and Chief Operating Officer of Townsends, Inc., an agribusiness company based company in Millsboro, Delaware. In addition to founding and running his management consulting firm, Mr. Van Wert has held a variety of management and executive positions for 32 years in the meat and poultry processing industries. Mr. Van Wert has been a director of the Company since 1989. OTHER EXECUTIVE OFFICER August P. Bruehlman, 42, has been the Company's Chief Administrative Officer since August 1996 and Secretary of the Company since February 1998. Mr. Bruehlman joined the Company in 1988 and has held several management positions, most recently as Director of Human Resources. Mr. Bruehlman's current responsibilities at the Company include corporate facilities, human resources and information systems. Prior to 1988, subsequent to pursuing advanced degrees, he managed electronics and computer training in the private and public sectors. NOMINEE TO BOARD OF DIRECTORS Robert Monaco, 36, currently serves as Vice President, General Manager and Assistant Secretary of Personal Electronics. Mr. Monaco co-founded Personal Electronics in 1991 and served as its Vice President until the Company acquired Personal Electronics in March 1998. Prior to 1991, Mr. Monaco was employed by Cabletron Systems in various capacities, most recently as its Director of Operations. In connection with the consummation of the Company's acquisition of Personal Electronics, which was 50% owned by Mr. Monaco, 38 40 the Company agreed to take the actions necessary to nominate Mr. Monaco for election to the Company's Board of Directors at the Meeting. The Company's Bylaws provide that, if the number of directors is not evenly divisible by three, the additional directors will be first assigned to Class III. Accordingly, Mr. Monaco has been nominated for election as a Class III director to serve until the 2000 annual meeting of shareholders. PRINCIPAL SHAREHOLDERS The following table sets forth certain information as of April 30, 1998, as to the beneficial ownership of Common Stock by beneficial owners of more than five percent of the Company's Common Stock, each director, certain executive officers and by all directors and executive officers as group:
AFTER OFFERING(1) -------------------------------- NUMBER OF SHARES OF PERCENT OF NUMBER OF SHARES OF PERCENT OF NAME OF BENEFICIAL OWNER, COMMON STOCK COMMON COMMON STOCK COMMON DIRECTOR OR EXECUTIVE OFFICER BENEFICIALLY OWNED STOCK(2) BENEFICIALLY OWNED STOCK ----------------------------- ------------------- ---------- ------------------- ---------- Gerald J. Reid.................... 489,426(3) 3.4% 239,426 1.5% Lucille A. Reid................... 541,426(3) 3.7% 291,426 1.9% Jack Calderon..................... 300,441(4) 2.1% 220,441 1.4% Lloyd A. McConnell................ 583,291(5) 4.0% 428,291 2.7% Stuart W. Fuhlendorf.............. 118,728(6) * 83,728 * James A. Doran.................... 11,554(7) * 11,554 * Richard L. Monfort................ 659,354(7)(8) 4.6% 659,354 4.2% David W. Van Wert................. 58,574(7)(9) * 58,574 * Darrayl Cannon.................... 7,000(10) * 7,000 * Robert K. McNamara................ 17,000(10)(11) * 17,000 * Masoud S. Shirazi................. 34,154(7) * 34,154 * Charles E. Hewitson............... 555,406(3) 3.8% 530,406 3.4% Gregory C. Hewitson............... 555,406(3) 3.8% 530,406 3.4% Matthew J. Hewitson............... 555,406(3) 3.8% 530,406 3.4% August P. Bruehlman............... 88,441(12) * 68,441 * Allen S. Braswell, Sr............. 1,385,939(13) 9.6% 1,385,939 8.8% Allen S. Braswell, Jr............. 384,442(14) 2.7% 384,442 2.4% Raymond Marshall.................. 900,000(15) 6.2% 640,000 4.0% Robert Monaco..................... 900,000(15) 6.2% 640,000 4.0% All directors and executive officers as a group, including persons named above (19 persons)........................ 8,145,988(16) 57.2% 6,760,988 42.7%
- --------------- * Less than one percent. (1) After giving effect to the issuance of 1,500,000 shares of the Company's Common Stock in the offering made hereby and the sale of shares of Common Stock by the Selling Shareholders. For a description of the Selling Shareholders and the number of shares offered by each Selling Shareholder, see "Selling Shareholders." (2) Based solely upon reports of beneficial ownership required filed with the Securities and Exchange Commission pursuant to Rule 13d-1 under the Securities and Exchange Act of 1934, the Company does not believe that any other person beneficially owned, as of April 30, 1998, greater than five percent of the outstanding Common Stock of the Company. (3) Includes 1,875 shares of Common Stock that are subject to currently exercisable options under the Company's Stock Option Plan for Non-Employee Directors. Options held by such director for an additional 125 shares vest each month until March 2001 under such plan. (4) Includes 197,941 shares of Common Stock subject to currently exercisable, non-qualified options granted in connection with the commencement of Mr. Calderon's employment and 100,000 shares of 39 41 Common Stock subject to currently exercisable options granted pursuant to the Company's Equity Incentive Plan. (5) Includes 20,000 shares of Common Stock subject to currently exercisable options granted under the Company's Equity Incentive Plan, 70,000 shares of Common Stock that are beneficially owned by Mr. McConnell and are held in the August 1994 McConnell Charitable Remainder Trust and 250 shares of Common Stock owned by Mr. McConnell's wife. (6) Includes 109,200 shares of Common Stock subject to currently exercisable options granted under the Company's Equity Incentive Plan and 9,428 shares of Common Stock subject to options that are exercisable under the Company's 1993 Stock Option Plan. (7) Includes 10,854 shares of Common Stock that are subject to currently exercisable options under the Company's Stock Option Plan for Non-Employee Directors. Options held by such director for an additional 229 shares vest each month until May 1999 under such plan. Thereafter options for an additional 125 shares vest until March 2001 under such plan. (8) Includes 100,000 shares of Common Stock owned by a partnership in which Mr. Monfort is the principal investor and 27,000 shares of Common Stock owned by two of Mr. Monfort's minor children. (9) Includes 15,720 shares of Common Stock owned jointly with Sally B. Van Wert, Mr. Van Wert's wife. (10) Includes 7,000 shares of Common Stock that are subject to currently exercisable options under the Company's Stock Option Plan for Non-Employee Directors. Options held by such director for an additional 333 shares vest each month until May 2000 under such plan. Thereafter options for an additional 125 shares vest until March 2001 under such plan. (11) Includes 10,000 shares of Common Stock owned jointly with Irene Z. McNamara, Mr. McNamara's wife. (12) Includes 75,000 shares subject to currently exercisable options granted under the Company's Equity Incentive Plan and 12,941 shares subject to currently exercisable options granted under the Company's 1993 Stock Option Plan. (13) Includes 1,374,939 shares held in the Allen S. Braswell, Sr. Grantor Retained Income Trust and 11,000 shares held in the Allen S. Braswell, Sr. Family Limited Partnership, of which Allen S. Braswell, Sr. is the general partner. Allen S. Braswell, Sr.'s address is 1 Willow Road, Unit B, Waynesville, NC 28786. (14) Includes 374,442 shares held by the Allen S. Braswell, Jr. EFTC Family Limited Partnership, of which Allen S. Braswell Jr. and his spouse, Alma L. Braswell, are the general partners, and 10,000 shares subject to currently exercisable, non-qualified stock options granted in connection with the Company's acquisition of the CTI Companies and does not include 1,374,939 shares held in the Allen S. Braswell, Sr. Grantor Retained Income Trust, of which Allen S. Braswell, Jr. and his brother, Bruce Braswell, are co-trustees. Allen S. Braswell, Jr.'s address is Circuit Test, Inc., 4601 Cromwell Avenue, Memphis, TN 38118. (15) Mr. Marshall's and Mr. Monaco's address is Personal Electronics, Inc., 1 Perimeter Road, Manchester, NH 03130. (16) Of such 8,145,988 shares, as of April 13, 1998, 591,301 represent shares of Common Stock subject to options that are currently exercisable or, within 60 days of April 30, 1998, will become exercisable. 40 42 SELLING SHAREHOLDERS The following table sets forth certain information as of April 30, 1998 regarding the Selling Shareholders and the beneficial ownership of shares of Common Stock offered by the Selling Shareholders pursuant to this Prospectus.
PERCENT OF COMMON STOCK NUMBER OF SHARES OF NUMBER OF SHARES OF NUMBER OF SHARES BENEFICIALLY COMMON STOCK COMMON STOCK TO BE BENEFICIALLY OWNED OWNED AFTER NAME OF SELLING SHAREHOLDER BENEFICIALLY OWNED SOLD IN THE OFFERING AFTER THE OFFERING THE OFFERING --------------------------- ------------------- -------------------- ------------------ ------------ Robert Monaco(1)............... 900,000(4) 260,000 640,000 4.0% Raymond Marshall(2)............ 900,000(4) 260,000 640,000 4.0% Gerald J. Reid(1).............. 489,426(4) 250,000 239,426 1.5% Lucille A. Reid(1)............. 541,426(4) 250,000 291,426 1.9% Lloyd A. McConnell(1).......... 583,291(4) 155,000 428,291 2.7% Charles E. Hewitson(1)......... 555,406(4) 25,000 530,406 3.4% Gregory C. Hewitson(1)......... 555,406(4) 25,000 530,406 3.4% Matthew J. Hewitson(1)......... 555,406(4) 25,000 530,406 3.4% Jack Calderon(1)............... 300,441(4) 80,000 220,441 1.4% August P. Bruehlman(1)......... 88,441(4) 20,000 68,441 * Stuart W. Fuhlendorf(1)........ 118,728(4) 35,000 83,728 * Brent L. Hofmeister(3)......... 24,628(5) 15,000 9,628 *
- --------------- * Less than one percent. (1) For a description of positions held with the Company, see "Management." (2) Mr. Marshall is a founder and Co-Manager of Personal Electronics. (3) Mr. Hofmeister is the Company's Corporate Controller. (4) For a description of the beneficial ownership of these shares of Common Stock and percent of Common Stock beneficially owned prior to the offering, see "Principal Shareholders." (5) Includes 24,528 shares subject to currently exercisable options granted under the Company's Equity Incentive Plan. DESCRIPTION OF CAPITAL STOCK AND OTHER SECURITIES The Company's authorized capital stock consists of 45,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, each with a par value of $.01 per share. As of May 27, 1998, there were 13,659,476 shares of Common Stock outstanding, held of record by 235 persons, and no Preferred Stock was outstanding. Upon completion of this offering, there will be 15,429,476 shares of Common Stock (including 170,000 shares expected to be issued upon the exercise of outstanding options by certain Selling Shareholders in connection with this Offering and excluding shares subject to other outstanding options and warrants) and no shares of Preferred Stock outstanding. The following summary description of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the Company's Articles of Incorporation and Bylaws and to Colorado law. See "Available Information." COMMON STOCK Holders of Common Stock are entitled to one vote for each share of Common Stock held of record on all matters submitted to a vote of shareholders. Accordingly, holders of a majority of the shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Subject to preferences for any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as the Board of Directors may declare out of funds legally available for that purpose. In the event of 41 43 a liquidation, dissolution, or winding up of the Company, holders of Common Stock are entitled to share ratably all assets remaining after payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Holders of Common Stock have no preemptive rights. All of the outstanding shares of Common Stock are, and the Common Stock to be sold in this Offering will be, duly authorized, validly issued, fully paid and nonassessable. American Securities Transfer, Inc., is the transfer agent and registrar for the Common Stock. PREFERRED STOCK The Company is authorized to issue 5,000,000 shares of Preferred Stock. Subject to the limitations prescribed by law, the Board of Directors is authorized to divide the Preferred Stock into series and to fix and determine the relative rights and preferences of the shares of any series so established. The authority of the Board with respect to each series shall, to the extent allowed by the Colorado Corporate Code or any successor statute include, without limitation, the express authority to establish and fix the following: the number of shares and designation of any series of Preferred Stock and the dividend rights and terms, dividend rate, conversion rights and terms, voting rights, redemption rights and terms, liquidation preferences and sinking fund or reserve account terms of any series of Preferred Stock. Any such Preferred Stock could have economic and other rights senior to the Common Stock, so that the issuance of such Preferred Stock could adversely affect the market value of the Common Stock. The issuance of Preferred Stock may also have the effect of delaying, deferring or preventing a change in control of the Company without any action by the shareholders. The Company has no current plans to issue any such shares of Preferred Stock. CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS Certain provisions of the Company's Articles of Incorporation and Bylaws summarized below may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including attempts that might result in a premium over the market price for the shares held by shareholders. See "Risk Factors -- Anti-Takeover Provisions." The Company's Articles of Incorporation provide for a classified Board of Directors. For purposes of determining their terms, directors are divided as evenly as possible into three classes, with elections for each class every three years on a staggered basis. See "Management." In addition to the provisions described above, the Company's Articles of Incorporation and Bylaws provide (i) that vacancies on the Board of Directors may be filled only by the remaining directors (unless the Board approves the filling of such vacancies by the shareholders or there are no directors remaining, in which case the shareholders shall fill any such vacancies), (ii) that any action required or permitted to be taken by the shareholders of the Company may be taken only at a duly called annual or special meeting of the shareholders of the Company, and may not be taken by consent in writing or otherwise except upon the unanimous consent of all shareholders entitled to vote thereon, (iii) that special meetings of the Company's shareholders may be called only by the Company's Chairman of the Board, President or Board of Directors pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office, (iv) that the Company may not engage in certain business combinations with, in general, a person who is the beneficial owner of 10% or more of the Company's outstanding voting stock (with certain exceptions relating to persons who held Common Stock on December 9, 1993) without the authorization or approval, or the affirmative vote of holders of at least 80% of the outstanding shares and a majority of the shares not beneficially owned by the interested shareholder in each case voting together as a single class or the satisfaction of certain price, consideration and procedural requirements, (v) that the shareholders or the Company may adopt, amend, or repeal Bylaws only with the approval of holders of at least 80% of the shares, (vi) removal of any director requires the affirmative vote of the holders of at least 80% of the outstanding shares, (vii) for an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors or a committee of the Board of Directors, of candidates for election as directors as well as for other shareholder proposals to be considered at annual meetings of shareholders, and (viii) that, except as otherwise required by law, no 42 44 shareholder may nominate a person for election to the Board of Directors at a special meeting unless the special meeting is called for the election of directors and the shareholder satisfies the requirements for nominating directors. In general, notice of intent to nominate a director or raise business at such meetings must be received by the Company not less than 60 nor more than 90 days before the meeting, and must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the shareholder submitting the proposal. The affirmative vote of the holders of at least 80% of the outstanding shares is generally required to amend or repeal, or adopt any provision inconsistent with, the provisions described in this paragraph or to provide for cumulative voting. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering made hereby, there will be 15,429,476 shares of Common Stock outstanding (including 170,000 shares expected to be issued upon the exercise of outstanding options by certain Selling Shareholders in connection with this Offering and excluding shares subject to outstanding options and warrants). Of these shares, all of the 3,000,000 shares to be sold in this offering and an additional 6,089,789 previously issued shares will be freely tradable without restriction under the Securities Act, by persons who are not "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 6,339,687 shares are "restricted securities" as that term is defined under the Securities Act or are held by affiliates of the Company and may not be sold in the absence of registration under the Securities Act or an exemption therefrom, including the exemptions contained in Rule 144 and Rule 701 under the Securities Act, and may not be sold except in accordance with the lockup agreement described below. The Company, its directors and executive officers and the Selling Shareholders have agreed (the "Lockup Agreement") with the Underwriters not to make certain sales or dispositions of shares of Common Stock or securities convertible or exercisable for Common Stock for a period of 120 days after the date of this Prospectus without the prior written consent of Smith Barney Inc. subject to certain exceptions. See "Underwriting." Smith Barney Inc. may, in its sole discretion at any time without notice, consent to an early termination of the Lockup Agreement with respect to some or all of the shares subject thereto. Upon termination of the 120-day lockup period, approximately 5,059,687 shares of Common Stock will be eligible for sale, subject to the requirements of Rule 144. An additional 1,280,000 shares of Common Stock will become eligible for sale, subject to the requirements of Rule 144, after March 31, 1999. In addition, the directors, officers and Selling Shareholders who have agreed to 120-day lockup periods hold currently exercisable options to purchase 445,829 shares of Common Stock, which may be sold following the expiration of the lockup period under the registration statements on Form S-8 described below. In general, under Rule 144 as currently in effect, if at least one year has elapsed since the later of the date of acquisition of "restricted securities" from the Company or from an "affiliate" of the Company, the acquiror or subsequent holder thereof will be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of one percent of the shares of Common Stock then outstanding or the average weekly trading volume of the Common Stock during the four calendar weeks preceding the sale of such shares. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. If (i) at least two years have elapsed since the later of the date of acquisition of any "restricted securities" from the Company or from an "affiliate" of the Company and (ii) the acquiror or subsequent holder thereof is deemed not to have been an "affiliate" of the Company at any time during the preceding three months, such person will be entitled to sell such shares under Rule 144 immediately without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements described above. The Company also has reserved 2,295,000 shares of Common Stock for issuance under the Stock Option Plans. Options to purchase 1,827,579 of such shares have been issued and are outstanding under the Stock Option Plans and 921,513 of such options have vested. The resale of 2,295,000 shares of Common Stock issuable upon exercise of such options has been registered on Form S-8. The Board of Directors of the Company has adopted an amendment to the Company's Equity Incentive Plan to increase the number of shares of Common Stock reserved for issuance by 2,500,000. This amendment will be voted on by the 43 45 Company's shareholders at the Meeting. If such amendment is approved by the shareholders, the Company intends to register the resale of these 2,500,000 shares of Common Stock on Form S-8. In addition, 43,800 shares are reserved for issuance upon the exercise of the options issued and outstanding under the Company's 1993 Stock Option Plan, which is now closed. The resale of such shares has also been registered by the Company on Form S-8. Another 80,000 shares are reserved for issuance upon the release of outstanding warrants that the Company issued to certain underwriters in connection with the initial public offering of the Company's Common Stock. In connection with the CTI Merger and the PE Merger, the Company issued an aggregate of 732,500 of non-qualified stock options, not under the Plans. Pursuant to the Employment Agreement between the Company and Jack Calderon, the Company's Chief Executive Officer, the Company issued Mr. Calderon 200,000 non-qualified stock options not under the Plans (of which 197,941 remain outstanding and 80,000 are expected to be issued upon the exercise of outstanding options in connection with this Offering). The resale of such shares has also been registered by the Company on Form S-8. Under the terms and subject to the conditions of certain registration rights agreements, certain of the Company's shareholders, including certain Selling Shareholders, and certain of their transferees, are entitled to rights with respect to registration under the Securities Act of their shares of Common Stock not sold in the offering made hereby. If the Company proposes to register any of its securities under the Securities Act, either for its account or for the account of other security holders, the Company is required, subject to certain conditions, to use its best efforts to include in such registration the registrable securities held by those shareholders entitled to registration rights. In addition, subject to certain conditions, such shareholders may require the Company to file registration statements under the Securities Act with respect to the registrable securities of the Company held by them. The Company's directors, officers, Selling Shareholders and certain other shareholders holding registration rights have waived such rights with respect to the registration of the Common Stock being offered hereby. Furthermore, each of the Company's directors officers and Selling Shareholders who have entered into Lockup Agreements have also effectively waived the ability to exercise any such registration rights until the expiration of the applicable lockup period. No assurances can be given with respect to the effect, if any, of future public sales of restricted shares of Common Stock or the availability of restricted shares of Common Stock for sale in the public market. Sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. UNDERWRITING Subject to the terms and conditions set forth in the Underwriting Agreement, the Company and the Selling Shareholders have agreed to sell to each of the Underwriters named below (the "Underwriters"), and each of the Underwriters, for whom Smith Barney Inc., J.C. Bradford & Co., BancAmerica Robertson Stephens, and Needham & Company, Inc., are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES ------------ --------- Smith Barney Inc............................................ J.C. Bradford & Co.......................................... BancAmerica Robertson Stephens.............................. Needham & Company, Inc...................................... --------- Total............................................. 3,000,000 =========
44 46 In the Underwriting Agreement, the several Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the above-listed shares of Common Stock if any such shares are purchased. In the event of a default by any Underwriter, the Underwriting Agreement provides that, in certain circumstances, the purchase commitments of the nondefaulting Underwriters may be increased or the Underwriting Agreement may be terminated. The Company has been advised by the Representatives that the several Underwriters propose initially to offer the above-listed shares to the public at the price to public set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to other dealers. After the initial public offering, the public offering price and such concession may be changed. The Company has granted the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 450,000 additional shares of Common Stock at the same price per share as the initial 3,000,000 shares of Common Stock to be purchased by the several Underwriters. The Underwriters may exercise such option only to cover over-allotments, if any, incurred in connection with the sale of the shares of Common Stock made hereby. To the extent that the Underwriters exercise such option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the same proportion of the additional shares as the number of shares of Common Stock set forth opposite such Underwriter's name in the table above bears to the total number of shares of Common Stock initially offered by the Underwriters. The Company has agreed with the Underwriters not to offer, sell or contract to sell, or otherwise directly or indirectly dispose of (whether by actual disposition or effective economic disposition due to cash settlement or otherwise), or announce the offering of, any other shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock, for a period of 120 days following the date of this Prospectus. The Company may, however, issue Common Stock upon the exercise of options outstanding on the date of this Prospectus. The directors and executive officers of the Company and the Selling Shareholders of the Company have agreed with the Underwriters not to offer, sell, contract to sell, pledge or otherwise dispose of, or file a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act") with respect to, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 120 days following the date of this Prospectus without the prior written consent of Smith Barney Inc., other than (i) any shares of Common Stock offered hereby, (ii) any option or warrant or the conversion of a security outstanding on the date of, and described in, this Prospectus, (iii) up to 24,000 shares, in the aggregate, issued upon the exercise of options held as of the date hereof by directors who retire from the Board of Directors at the Company's annual meeting of shareholders, scheduled to take place on or about June 4, 1998 and (iv) shares of Common Stock disposed of as bona fide gifts approved by Smith Barney Inc. In connection with the offering made hereby, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M under the Exchange Act, pursuant to which such persons may bid for or purchase Common Stock for the purpose of stabilizing its market price. The Underwriters may also engage in passive market making transactions in the Common Stock in accordance with Rule 103 of Regulation M. The Underwriters also may create a short position for the account of the Underwriters by selling more Common Stock in connection with the offering made hereby than they are committed to purchase from the Company, and in such case may purchase Common Stock in the open market following completion of the offering made hereby to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position, up to 450,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, Smith Barney Inc., on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby it may reclaim from an Underwriter (or dealer 45 47 participating in the offering made hereby), for the account of other Underwriters, the selling concession with respect to Common Stock that is distributed in the offering made hereby but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the Common Stock at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. As permitted by Rule 103 under Regulation M, the Underwriters (and selling group members) that are market makers ("passive market makers") in the Common Stock may make bids for or purchases of Common Stock in the Nasdaq National Market until such time, if any, when a stabilizing bid for such securities has been made. Rule 103 generally provides that a passive market maker (i) may not make net daily purchases of the Common Stock in excess of the greater of (1) 200 shares and (2) 30% of its average daily trading volume in such securities for the two full consecutive calendar months immediately preceding the filing date of the registration statement of which this Prospectus forms a part, (ii) may not effect transactions or display bids for the Common Stock at a price that exceeds the highest independent bid for the Common Stock by persons who are not passive market makers, (iii) may not display bids of a size that exceed the lesser of (1) the minimum quotation size for the Common Stock and (2) the remaining purchase capacity under clause (i) above and (iv) must identify its bids as such. The Underwriting Agreement provides that the Company and the Selling Shareholders will indemnify the several Underwriters against certain liabilities and expenses, including liabilities under the Securities Act, or contribute to payments that the Underwriters may be required to make in respect thereof. LEGAL MATTERS The legality of the securities offered hereby will be passed on for the Company by Holme Roberts & Owen LLP, Denver, Colorado. Certain legal matters in connection with the sale of such securities will be passed on for the Underwriters by Cleary, Gottlieb, Steen & Hamilton, New York, New York. EXPERTS The consolidated financial statements of EFTC Corporation as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 have been included and incorporated by reference herein and in the registration statement in reliance on the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere and incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. The combined financial statements of Circuit Test, Inc. and affiliates as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 have been included herein and in the registration statement in reliance on 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. AVAILABLE INFORMATION The Company has filed with the Commission a registration statement on Form S-3 (the "Registration Statement," which term encompasses all amendments, exhibits, annexes and schedules thereto) under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement and the exhibits thereto, reference is hereby made to the exhibit for a more complete description of the matter involved, and each statement made herein shall be deemed qualified in its entirety by such reference. 46 48 The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files periodic reports, proxy and information statements and other information filed with the Commission. The Registration Statement filed by the Company with the Commission, as well as such reports, proxy and information statements and other information filed by the Company with the Commission, are available at the web site that the Commission maintains at http:/www.sec.gov and can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, New York, New York 10048, and the Chicago Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material, when filed, may also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock is quoted on the Nasdaq National Market and such reports, proxy and information statements and other information concerning the Company are available at the offices of the Nasdaq National Market located at 1735 K Street, N.W., Washington, D.C. 20006. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE Incorporated by reference in this Prospectus are (i) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (as amended by the Company's Amendment to Annual Report on Form 10-K/A for the fiscal year ended December 31, 1997), (ii) the Company's Current Reports on Form 8-K dated April 15, 1998 and May 15, 1998 filed previously with the Commission pursuant to Section 13 of the Exchange Act, (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and (iv) all filings by the Company with the Commission pursuant to the Exchange Act after the date of Amendment No. 2 to the Registration Statement and prior to the effectiveness of the Registration Statement. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner of Common Stock, to whom a copy of this Prospectus has been delivered, on the written or oral request of such person, a copy of any or all of the foregoing documents incorporated by reference in this Prospectus, other than exhibits to such documents unless such exhibits are specifically incorporated by reference into the information that this Prospectus incorporates. Written or oral requests for such copies should be directed to EFTC Corporation, 9351 Grant Street, Sixth Floor, Denver, Colorado 80229 (telephone: (303) 451-8200). 47 49 INDEX TO FINANCIAL STATEMENTS
EFTC CORPORATION AND SUBSIDIARIES Independent Auditors' Report.............................. F-2 Consolidated Balance Sheets -- December 31, 1997 and 1996 and March 31, 1998 (Unaudited)......................... F-3 Consolidated Statements of Operations -- Years Ended December 31, 1997, 1996 and 1995 and Three Months Ended March 31, 1998 and 1997 (Unaudited).................... F-4 Consolidated Statements of Shareholders' Equity -- Years Ended December 31, 1997, 1996 and 1995 and Three Months Ended March 31, 1998 and 1997 (Unaudited).............. F-5 Consolidated Statements of Cash Flows -- Years Ended December 31, 1997, 1996 and 1995 and Three Months Ended March 31, 1998 and 1997 (Unaudited).................... F-6 Notes to Consolidated Financial Statements................ F-7 CIRCUIT TEST, INC. AND AFFILIATES Independent Auditors' Report.............................. F-19 Combined Balance Sheets -- June 30, 1997 (Unaudited), December 31, 1996 and 1995............................. F-20 Combined Statements of Operations -- Six Months Ended June 30, 1997 and 1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994................................ F-21 Combined Statements of Stockholders' Equity -- Six Months Ended June 30, 1997 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994....................... F-22 Combined Statements of Cash Flows -- Six Months Ended June 30, 1997 and 1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994................................ F-23 Notes to Combined Financial Statements.................... F-24
F-1 50 INDEPENDENT AUDITORS' REPORT The Board of Directors EFTC Corporation: We have audited the accompanying consolidated balance sheets of EFTC Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 EFTC Corporation and subsidiaries as December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Denver, Colorado May 1, 1998 F-2 51 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 AND MARCH 31, 1998 (UNAUDITED) ASSETS (Note 4)
DECEMBER 31 MARCH 31 --------------------------- 1998 1997(1) 1996(1) ------------ ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents....................... $ 592,576 $ 1,877,010 $ 406,903 Trade receivables, less allowance for doubtful accounts of $466,000 in 1998, $474,000 in 1997 and $20,000 in 1996..................... 28,866,890 25,412,340 4,460,249 Inventories (note 3)............................ 59,154,326 46,066,650 9,195,202 Income taxes receivable......................... -- -- 616,411 Deferred income taxes (note 6).................. 491,152 494,290 427,059 Prepaid expenses and other...................... 1,403,298 759,668 102,425 ------------ ------------ ----------- Total current assets.................... 90,508,242 74,609,958 15,208,249 ------------ ------------ ----------- Property, plant and equipment: Land, building and improvements................. 9,561,863 7,062,881 5,551,565 Machinery and equipment......................... 19,673,740 14,354,997 5,657,104 Furniture and fixtures.......................... 6,490,255 4,105,731 1,756,588 Construction in progress........................ 7,326,080 4,791,288 -- ------------ ------------ ----------- 43,051,938 30,314,897 12,965,257 Less accumulated depreciation................... (10,205,943) (5,957,233) (4,235,894) ------------ ------------ ----------- Net property, plant and equipment....... 32,845,995 24,357,664 8,729,363 ------------ ------------ ----------- Goodwill, net of accumulated amortization of $937,737 and $546,747 (note 2).................. 46,017,691 46,372,060 -- Other assets, net................................. 2,260,634 3,484,897 99,773 ------------ ------------ ----------- $171,632,562 $148,824,579 $24,037,385 ============ ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................ $ 33,198,077 $ 23,579,663 $ 2,498,113 Accrued compensation............................ 3,279,971 2,365,034 682,881 Income taxes payable............................ 666,024 608,585 5,453 Other accrued liabilities....................... 1,477,291 1,272,544 767,803 Current portion of long-term debt and notes payable (note 4)............................. 8,350,000 3,150,000 1,970,000 ------------ ------------ ----------- Total current liabilities............... 46,971,363 30,975,826 5,924,250 ------------ ------------ ----------- Long-term debt, less current portion (note 4): Related party................................... 4,811,227 7,513,703 1,057,085 Others.......................................... 41,025,000 34,295,000 2,890,000 ------------ ------------ ----------- Total long-term debt, net of current portion............................... 45,836,227 41,808,703 3,947,085 Deferred income taxes (note 6).................... 862,157 818,686 315,859 ------------ ------------ ----------- Total liabilities....................... 93,669,747 73,603,215 10,187,194 ------------ ------------ ----------- Shareholders' equity (notes 4 and 7): Preferred stock, $.01 par value authorized 5,000,000 shares; none issued or outstanding.................................. -- -- -- Common stock, $.01 par value authorized 45,000,000 shares; issued and outstanding 13,649,676, 13,641,776 and 5,742,660 shares, respectively................................. 136,497 136,418 57,427 Additional paid-in capital...................... 69,475,544 68,040,433 10,169,180 Retained earnings............................... 8,350,774 7,044,513 3,623,584 ------------ ------------ ----------- Total shareholders' equity.............. 77,962,815 75,221,364 13,850,191 ------------ ------------ ----------- Commitments and contingencies (notes 2, 5 and 8) $171,632,562 $148,824,579 $24,037,385 ============ ============ ===========
- --------------- (1) Restated for pooling of interests -- See Note 1. See accompanying notes to consolidated financial statements. F-3 52 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ------------------------- ---------------------------------------- 1998 1997(1) 1997(1) 1996(1) 1995(1) ----------- ----------- ------------ ----------- ----------- (UNAUDITED) Net sales............................... $54,199,607 $16,041,342 $122,079,117 $60,910,316 $51,579,746 Cost of goods sold (note 11)............ 44,296,692 13,941,282 102,166,332 56,276,756 46,436,719 ----------- ----------- ------------ ----------- ----------- Gross profit.................. 9,902,915 2,100,060 19,912,785 4,633,560 5,143,027 Operating costs and expenses: Selling, general and administrative expenses (note 11)................. 5,320,978 1,213,281 12,711,431 5,917,034 4,324,390 Amortization of goodwill.............. 390,990 22,808 546,747 -- -- Impairment of fixed assets (note 11)................................ -- -- -- 725,869 -- Merger costs (note 2)................. 1,048,308 -- -- -- -- ----------- ----------- ------------ ----------- ----------- Operating income (loss)....... 3,142,639 863,971 6,654,607 (2,009,343) 818,637 ----------- ----------- ------------ ----------- ----------- Other income (expense): Interest expense...................... (908,407) (212,327) (2,410,860) (575,673) (432,269) Gain on sale of assets................ 4,188 4,188 1,156,618 50,012 49,533 Other, net............................ 35,041 16,641 138,959 50,436 43,461 ----------- ----------- ------------ ----------- ----------- (869,178) (191,498) (1,115,283) (475,225) (339,275) ----------- ----------- ------------ ----------- ----------- Income (loss) before income taxes... 2,273,461 672,473 5,539,324 (2,484,568) 479,362 Income tax expense (benefit) (note 6)... 934,630 73,119 2,118,395 (866,661) 130,284 ----------- ----------- ------------ ----------- ----------- Net income (loss)............. $ 1,338,831 $ 599,354 $ 3,420,929 $(1,617,907) $ 349,078 =========== =========== ============ =========== =========== Pro forma information (unaudited) (note 1): Historical net income (loss).......... $ 1,338,831 $ 599,354 $ 3,420,929 $(1,617,907) $ 349,078 Pro forma adjustment to income tax expense (benefit).................. 316,636 179,368 40,797 (9,727) (1,975) ----------- ----------- ------------ ----------- ----------- Pro forma net income (loss)... $ 1,022,195 $ 419,986 $ 3,380,132 $(1,608,180) $ 351,053 =========== =========== ============ =========== =========== Pro forma income (loss) per share: Basic.............................. $ 0.07 0.06 0.40 (0.28) 0.06 =========== =========== ============ =========== =========== Diluted............................ $ 0.07 0.06 0.38 (0.28) 0.06 =========== =========== ============ =========== =========== Weighted average shares outstanding: Basic.............................. 13,644,587 6,657,667 8,502,160 5,742,139 5,762,261 =========== =========== ============ =========== =========== Diluted............................ 14,399,804 6,657,667 8,954,525 5,742,139 5,762,261 =========== =========== ============ =========== ===========
- --------------- (1) Restated for pooling of interests -- See Note 1. See accompanying notes to consolidated financial statements. F-4 53 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
COMMON STOCK ADDITIONAL TOTAL --------------------- PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ---------- -------- ----------- ----------- ------------- BALANCES AT JANUARY 1, 1995(1)..... 5,691,110 $ 56,911 $ 9,998,035 $ 4,892,413 $14,947,359 Stock options exercised............ 49,750 498 165,169 -- 165,667 Net income......................... -- -- -- 349,078 349,078 ---------- -------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1995(1)... 5,740,860 57,409 10,163,204 5,241,491 15,462,104 Stock options exercised............ 1,800 18 5,976 -- 5,994 Net income......................... -- -- -- (1,617,907) (1,617,907) ---------- -------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1996(1)... 5,742,660 57,427 10,169,180 3,623,584 13,850,191 Issuance of common stock in business combination (note 2).... 3,838,975 38,389 14,143,793 -- 14,182,182 Issuance of common stock in secondary offering, net of costs (note 7)......................... 3,506,841 35,069 38,917,065 -- 38,952,134 Warrants issued in connection with subordinated debt (note 7)....... -- -- 489,786 -- 489,786 Stock options and warrants exercised, including tax benefit of $95,478 (note 4)......................... 553,300 5,533 4,320,609 -- 4,326,142 Net income......................... -- -- -- 3,420,929 3,420,929 ---------- -------- ----------- ----------- ----------- BALANCES AT DECEMBER 31, 1997(1)... 13,641,776 136,418 68,040,433 7,044,513 75,221,364 Conversion of notes payable to shareholders to equity (note 2)............................... -- -- 1,397,922 -- 1,397,922 Secondary offering costs........... -- -- (40,676) -- (40,676) Stock options and warrants exercised (note 4)............... 7,900 79 45,295 -- 45,374 Termination of S Corporation tax status of Personal Electronics... -- -- 32,570 (32,570) -- Net income......................... -- -- -- 1,338,831 1,338,831 ---------- -------- ----------- ----------- ----------- BALANCES AT MARCH 31, 1998 (UNAUDITED)...................... 13,649,676 $136,497 $69,475,544 $ 8,350,774 $77,962,815 ========== ======== =========== =========== ===========
- --------------- (1) Restated for pooling of interests -- See Note 1. See accompanying notes to consolidated financial statements. F-5 54 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------------- ---------------------------------------- 1998 1997(1) 1997(1) 1996(1) 1995(1) ------------ ----------- ------------ ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss)........................... $ 1,338,833 $ 599,354 $ 3,420,929 $(1,617,907) $ 349,074 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization............. 1,358,070 375,729 2,676,267 1,358,314 1,786,076 Deferred income tax expense (benefit)..... 46,079 164,534 755,650 (322,268) (15,745) Loss (gain) on sale and impairment of property, plant and equipment, net...... (4,188) (4,188) (1,149,638) 709,359 (155,621) Changes in operating assets and liabilities net of the effects of acquisitions: Trade receivables....................... (3,454,550) (1,032,324) (16,444,265) 858,283 (1,267,306) Inventories............................. (13,087,676) (1,038,472) (28,799,065) 694,730 (2,400,883) Income taxes receivable................. -- -- 616,411 (541,489) (10,267) Income taxes payable.................... 61,924 (19,415) 604,100 -- -- Prepaid expenses and other current assets... (643,629) (98,608) (235,478) 295,079 (347,137) Other assets............................ 1,224,263 28,795 (2,409,343) 67,375 (96,971) Accounts payable and accrued liabilities... 10,733,612 851,010 11,550,845 (2,009,079) 1,160,180 ------------ ----------- ------------ ----------- ----------- Net cash used by operating activities......................... (2,427,262) (173,585) (29,413,587) (507,603) (998,600) ------------ ----------- ------------ ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment... (9,450,693) (616,982) (13,496,255) (2,184,114) (2,492,693) Proceeds from sale of property, plant and equipment................................. -- 239,706 2,419,820 345,538 3,739,344 Payments for business combinations, net of cash acquired............................. (36,621) (7,279,601) (30,997,426) -- -- ------------ ----------- ------------ ----------- ----------- Net cash provided (used) by investing activities......................... (9,487,314) (7,656,877) (42,073,861) (1,838,576) 1,246,651 ------------ ----------- ------------ ----------- ----------- Cash flows from financing activities: Stock options and warrants exercised........ 45,374 17,982 4,326,142 5,994 165,667 Issuance of common stock for cash, net of costs..................................... (40,676) -- 38,952,134 -- -- Borrowings (payments) on lines of credit and short-term notes payable, net............. 5,000,000 1,810,377 15,595,000 1,800,000 -- Proceeds from long-term debt................ 7,605,000 6,700,000 83,345,391 459,566 249,913 Principal payments on long-term debt........ (1,979,556) (85,000) (68,283,612) (217,033) (207,126) Deferred debt issuance costs................ -- -- (977,500) -- -- ------------ ----------- ------------ ----------- ----------- Net cash provided (used) by financing activities......................... 10,630,142 8,443,359 72,957,555 2,048,527 208,454 ------------ ----------- ------------ ----------- ----------- Increase (decrease) in cash and cash equivalents........................ (1,284,434) 612,897 1,470,107 (297,652) 456,505 Cash and cash equivalents: Beginning of year........................... 1,877,010 406,903 406,903 704,555 248,050 ------------ ----------- ------------ ----------- ----------- End of year................................. $ 592,576 $ 1,019,800 $ 1,877,010 $ 406,903 $ 704,555 ============ =========== ============ =========== =========== Supplemental disclosures of cash flow information -- Cash paid during the period for: Interest.................................. $ 977,670 $ 124,963 $ 2,022,881 $ 567,321 $ 419,927 ============ =========== ============ =========== =========== Income taxes, net......................... $ 858,695 $ -- $ 118,608 $ -- $ 152,530 ============ =========== ============ =========== =========== Common stock issued in business combinations.............................. $ -- $ 5,445,000 $ 14,182,182 $ -- $ -- ============ =========== ============ =========== =========== Conversion of notes payable to shareholders to equity................................. $ 1,397,922 $ -- $ -- $ -- $ -- ============ =========== ============ =========== ===========
- --------------- (1) Restated for pooling of interests -- See Note 1. See accompanying notes to consolidated financial statements. F-6 55 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 MARCH 31, 1998 (1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Business EFTC Corporation (the Company), is an independent provider of electronic manufacturing services to original equipment manufacturers in the aerospace and avionics, computer related, medical, industrial controls, communications equipment and electronic instrumentation industries. The Company's manufacturing services consist of assembling complex printed circuit boards (using both surface mount and pin-through-hole technologies), cables, electro-mechanical devices and finished products. The Company also provides computer aided testing of printed circuit boards, subsystems and final assemblies, "hub based" repair and warranty services and quick turn prototype services. Basis of Presentation The accompanying consolidated financial statements include the accounts of EFTC Corporation and its wholly-owned subsidiaries since the date of formation or acquisition, as described in note 2. All intercompany balances and transactions have been eliminated in consolidation. On March 31, 1998, EFTC Corporation acquired, through a merger, RM Electronics, Inc., doing business as Personal Electronics (Personal), in a business combination accounted for as a pooling of interests. EFTC issued 1,800,000 shares of common stock in exchange for all of the outstanding common stock of Personal. Accordingly, the Company's consolidated financial statements have been restated for all periods presented to combine the financial position, results of operations and cash flows of Personal with those of the Company. The preparation of consolidated 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The consolidated financial statements, and related notes, as of March 31, 1998 and for the three months ended March 31, 1998 and 1997 are unaudited but, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial condition, results of operations and cash flows. The operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of three months or less. Inventories Inventories are stated at the lower of standard costs, which approximates weighted average cost, or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Maintenance and repairs are charged to operations as incurred. Depreciation is computed using straight-line and accelerated methods over estimated useful lives ranging from 31 to 39 years for buildings, and 5 to 10 years for furniture and fixtures and machinery and equipment. F-7 56 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Goodwill and Other Assets Goodwill is amortized using the straight-line method over 30 years. At December 31, 1997, other assets include acquired intellectual property consisting of circuit board assembly designs and specifications of $1.1 million which are being amortized over 10 years using the straight-line method, deferred financing costs of $926,000 which are being amortized over 5 years, and restricted cash of $653,000. Impairment of Long-Lived Assets The Company accounts for long-lived assets under the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is generally measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. In connection with the Company's restructuring in August 1996, the Company recorded a provision for impairment of certain fixed assets of $726,000. Income Taxes Deferred tax assets and liabilities are recognized for the 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 tax credit carryforwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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. Revenue Recognition The Company recognizes revenue upon shipment of products to customers. Income (Loss) Per Share Income (loss) per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 replaced the presentation of primary and fully diluted earnings (loss) per share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128, basic EPS excludes dilution for potential common shares and is computed by dividing income or loss available to common shareholders by the weighted average number common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock. In 1997, diluted weighted average shares outstanding includes 452,365 potential shares, consisting of stock options and warrants, determined using the treasury stock method. Basic and diluted EPS are the same in 1996 and 1995 as all potential common shares were antidilutive. In addition, all share and per share amounts have been restated for the effects of a business combination accounted for as a pooling of interests, as discussed in note 2. Pro Forma Net Income To properly reflect the Company's pro forma net income, the net income of Personal, which was not subject to income taxes due to their S corporation status, has been tax effected and included as a pro forma adjustment to income tax expense in the accompanying consolidated statements of operations. This F-8 57 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) adjustment was computed as if the merged company had been a taxable entity subject to federal and state income taxes for all periods presented at the marginal tax rates applicable in such periods. Stock-based Compensation The Company accounts for its employee stock compensation plans as prescribed under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Pro forma disclosures of net income and income per share, as required by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-based Compensation, are included in note 7 to the consolidated financial statements. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. (2) BUSINESS COMBINATIONS AND ASSET ACQUISITIONS As discussed in note 1, on March 31, 1998, the Company merged with Personal in a business combination accounted for as a pooling of interests. Revenue, net income (loss) and pro forma net income (loss) of EFTC and Personal and the combined companies for the years ended December 31 are as follows:
YEAR ENDED DECEMBER 31: EFTC CORPORATION PERSONAL COMBINED ----------------------- ---------------- ---------- ------------ 1997: Revenue................................ $113,243,983 $8,835,134 $122,079,117 Net income............................. 3,316,321 104,608 3,420,929 Pro forma net income................... 3,316,321 63,811 3,380,132 1996: Revenue................................ 56,880,067 4,030,249 60,910,316 Net loss............................... (1,592,965) (24,942) (1,617,907) Pro forma net loss..................... (1,592,965) (15,215) (1,608,180) 1995: Revenue................................ 49,220,070 2,359,676 51,579,746 Net income (loss)...................... 354,138 (5,060) 349,078 Pro forma net income (loss)............ 354,138 (3,085) 351,053
The Company incurred merger costs of $1,048,308, which were charged to operations in March 1998. Notes payable to shareholders of Personal in the amount of $1,397,922 were converted to equity upon consummation of the merger. On September 30, 1997, the Company acquired three affiliated companies, Circuit Test, Inc., Airhub Service Group L.C. and CTI International, L.C. (the CTI Companies), for approximately $35.7 million consisting of 1,858,975 shares of the Company's common stock and approximately $26.5 million in cash, which includes approximately $1.4 million of transaction costs and a $6 million payment made in November 1997 following a common stock offering (described in note 7). The Company recorded goodwill of approximately $38.9 million, in connection with the transaction. The acquisition was accounted for using the purchase method of accounting for business combinations and, accordingly, the accompanying consolidated financial statements include the results of operations of the acquired businesses since the date of acquisition. In February 1998, the Company completed two transactions with AlliedSignal Inc. (AlliedSignal) pursuant to which the Company acquired certain inventory and equipment located in Ft. Lauderdale, Florida, F-9 58 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subleased the facility where such inventory and equipment was located and employed certain persons formerly employed by AlliedSignal at that location. The Company also hired certain persons formerly employed by AlliedSignal in Arizona and agreed with AlliedSignal to provide the personnel and management services necessary to operate a related facility on behalf of AlliedSignal on a temporary basis. The Company acquired AlliedSignal's inventory and equipment located at the Arizona facility. The aggregate purchase price of all assets acquired by the Company from AlliedSignal was approximately $19.0 million. The Company has also agreed AlliedSignal one percent of gross revenue for all electronic assemblies and parts made for customers other than AlliedSignal at the Arizona or Florida facilities through December 31, 2001. On February 24, 1997, the Company acquired two affiliated entities, Current Electronics, Inc., an Oregon Corporation, and Current Electronics (Washington), Inc., a Washington Corporation (the CE Companies), for total consideration of approximately $10.9 million, consisting of 1,980,000 shares of Company common stock and approximately $5.5 million in cash, which included approximately $600,000 of transaction costs. The Company recorded goodwill of approximately $8.0 million in connection with the acquisition. The acquisition was accounted for using the purchase method of accounting for business combinations and, accordingly, the accompanying consolidated financial statements include the results of operations of the acquired businesses since the date of acquisition. The following unaudited pro forma information assumes that the acquisitions of the CTI Companies and the CE Companies had occurred on January 1, 1996, and is restated for the merger of Personal in 1998:
YEAR ENDED DECEMBER 31, ---------------------------- 1997 1996 ------------ ------------ Revenue................................................. $155,126,000 $119,940,000 Net income (loss)....................................... 1,115,000 (2,134,000) Net income (loss) per share -- diluted.................. .12 (.28)
The above pro forma information is not necessarily indicative of future results. (3) INVENTORIES Inventories are summarized as follows:
DECEMBER 31, MARCH 31, ------------------------- 1998 1997 1996 ----------- ----------- ---------- (UNAUDITED) Purchased parts and completed subassemblies.............................. $50,184,714 $38,723,546 $7,689,409 Work-in-progress............................. 8,164,861 6,950,855 1,256,570 Finished goods............................... 804,751 392,249 249,223 ----------- ----------- ---------- $59,154,326 $46,066,650 $9,195,202 =========== =========== ==========
F-10 59 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) DEBT Long-term debt to related parties consists of the following:
DECEMBER 31, MARCH 31, ----------------------- 1998 1997 1996 ----------- ---------- ---------- (UNAUDITED) Subordinated Notes to director(a).................... $4,861,227 $4,861,227 $ -- Notes payable to Personal shareholders(b)............ -- 2,702,476 1,057,085 ---------- ---------- ---------- Subtotal................................... 4,861,227 7,563,703 1,057,085 Less current maturities.............................. (50,000) (50,000) -- ---------- ---------- ---------- Total long-term debt-related party, net of current portion............................................ $4,811,227 $7,513,703 $1,057,085 ========== ========== ==========
- --------------- (a) During September 1997, the Company issued $15 million of subordinated notes (the Subordinated Notes) to a director and stockholder of the Company. The Subordinated Notes bear interest at LIBOR plus 2% (8.19% at December 31, 1997) and are payable in four annual installments of $50,000 and one final payment of $14.8 million in September 2002. Payments on the Subordinated Notes are subordinate to the Company's senior bank debt. The Subordinated Notes also included warrants to acquire 500,000 shares of the Company's common stock at $8.00 per share. The warrants were issued in October 1997 and were valued at approximately $500,000 using the Black-Scholes pricing model. Such amount was recorded as debt discount and is being amortized to interest expense over the term of the Subordinated Notes. The warrants were exercised on October 9, 1997 for total proceeds of approximately $4 million. The Company repaid $10 million of this debt in December 1997 upon the completion of the common stock offering described in note 7 and the scheduled repayment was reduced by the pro rata amount of unamortized discount. Accordingly, no gain or loss was recognized on the extinguishment of the debt. The outstanding balance, net of discount, as of December 31, 1997 and March 31, 1998 was $4,861,227, of which $50,000 is included in the current portion of long-term debt. (b) At December 31, 1997 and 1996, there were notes payable to Personal shareholders in the amount of $2,702,476 and $1,057,085, respectively. At March 31, 1998, notes payable to Personal shareholders in the amount of $1,397,922 were converted to equity. Long-term debt and notes payable to others consists of the following:
DECEMBER 31, MARCH 31, ------------------------- 1998 1997 1996 ----------- ----------- ---------- (UNAUDITED) Notes payable to banks(c).................... $44,325,000 $37,395,000 $ -- Note payable to a bank with interest at 1% above prime rate adjusted annually, repaid in 1997.................................... -- -- 3,060,000 Note payable to a bank with interest at 9.5%, due in April 1998(c)....................... 5,000,000 -- -- ----------- ----------- ---------- Subtotal........................... 49,325,000 37,395,000 3,060,000 Less current portion......................... (8,300,000) (3,100,000) (170,000) ----------- ----------- ---------- Long-term debt to others, net of current portion.................................... $41,025,000 $34,295,000 $2,890,000 =========== =========== ==========
- --------------- (c) In connection with the CTI Companies business combination and the AlliedSignal asset acquisition, the Company entered into a new loan agreement consisting of a $25 million revolving line of credit renewable on September 30, 2000, and a $20 million term loan maturing on September 30, 2002. The proceeds of the new loan agreement were used for (i) funding the CTI merger and (ii) repayment of the existing line F-11 60 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of credit and bridge facility and equipment loan. Borrowings under the agreement bear interest at a rate based on either LIBOR or the prime rate plus applicable margins ranging from 0.50% to 3.25% for the term facility (9.16% at December 31, 1997) and 0% to 2.75% for the revolving facility (approximately 9% at December 31, 1997). Borrowings on the revolving facility are subject to limitation based on the value of the available collateral. The loan agreement is collateralized by substantially all of the Company's assets and contains restrictive covenants relating to capital expenditures, limitation on investments, borrowings, payment of dividends and mergers and acquisitions, as well as the maintenance of certain financial ratios. The revolving facility requires a commitment fee of 0.5% per annum on any unused portion. As of December 31, 1997, the borrowing availability under the agreement was approximately $7.6 million. This credit facility may be withdrawn or canceled under certain conditions such as default or in the event the Company experiences a material adverse change in its financial condition. In March 1998, the Company issued Bank One a 15-day note in the principal amount of $5 million (the "Bank One Note") the proceeds of which were used to make payments to AlliedSignal in connection with the AlliedSignal Asset Purchase and for normal operating expenses. The existing loan agreement was then amended in April 1998, increasing the revolving line of credit to $40 million from $25 million. The Bank One Note was repaid in April 1998 after this amendment was completed. As of March 31, 1998, the total outstanding principal amount under the existing loan agreement was $44.3 million, comprised of a term loan of $19.3 million and an outstanding balance on the revolving loan of $25 million. Annual maturities of long-term debt, excluding the discount on the subordinated notes, are as follows at March 31, 1998: 1998............................................ $ 8,300,000 1999............................................ 4,085,000 2000............................................ 4,540,000 2001............................................ 4,900,000 2002............................................ 27,500,000 ----------- $49,325,000 ===========
(5) LEASES The Company has noncancelable operating leases for facilities and equipment that expire in various years through 2002. Lease expense on these operating leases amounted to $2,333,486, $1,215,623 and $578,958 for the years ended December 31, 1997, 1996 and 1995, respectively. At December 31, 1997, future minimum lease payments for operating leases are as follows: 1999............................................. $2,173,150 2000............................................. 1,583,840 2001............................................. 1,049,980 2002............................................. 365,416 ---------- Total future minimum lease payments.... $5,172,386 ==========
In December 1995, the Company entered into a sale-leaseback transaction for equipment of approximately $3.6 million. The gain on this transaction totaled $106,088, which was deferred and is being amortized over the remaining life of the lease, which is approximately 6 years. F-12 61 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (6) INCOME TAXES The current and deferred components of income tax expense (benefit) are as follows:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, -------------------- ----------------------------------- 1998 1997 1997 1996 1995 -------- -------- ---------- --------- -------- (UNAUDITED) Current: Federal.......................... $835,238 $(91,415) $1,210,858 $(549,846) $142,263 State............................ 53,313 -- 151,887 5,453 3,766 -------- -------- ---------- --------- -------- 888,551 (91,415) 1,362,745 (544,393) 146,029 -------- -------- ---------- --------- -------- Deferred: Federal.......................... 43,471 154,662 599,245 (196,440) (13,635) State............................ 2,608 9,872 156,405 (125,828) (2,110) -------- -------- ---------- --------- -------- 46,079 164,534 755,650 (322,268) (15,745) -------- -------- ---------- --------- -------- $934,630 $ 73,119 $2,118,395 $(866,661) $130,284 ======== ======== ========== ========= ========
Actual income tax expense (benefit) differs from the amounts computed using the statutory tax rate of 34% as follows:
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, ---------------------- ----------------------------------- 1998 1997 1997 1996 1995 --------- --------- ---------- --------- -------- (UNAUDITED) Computed tax at the expected statutory rate................. $ 772,977 $ 228,641 $1,883,370 $(844,753) $162,983 Increase (decrease) in income taxes resulting from: State income taxes, net of federal benefit and state tax credits................. 113,673 18,157 148,565 (80,693) 839 Amortization of nondeductible goodwill.................... 40,526 6,497 84,927 -- -- S Corporation (income) loss of Personal.................... (316,636) (179,368) (40,797) 9,727 1,975 Non-deductible merger costs.... 297,500 -- -- -- -- Research and development tax credits..................... -- -- -- -- (40,000) Other, net..................... 26,590 (808) 42,330 49,058 4,487 --------- --------- ---------- --------- -------- Income tax expense (benefit)................. $ 934,630 $ 73,119 $2,118,395 $(866,661) $130,284 ========= ========= ========== ========= ========
In 1997, the Company recognized $95,478 as an increase to additional paid-in capital for the income tax benefit resulting from the exercise of stock options by employees. F-13 62 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The tax effects of temporary differences at December 31, 1997 and 1996 that give rise to significant portions of the deferred tax assets and liabilities are presented below:
DECEMBER 31, ---------------------- 1997 1996 --------- --------- Deferred tax assets: Accrued vacation and/or bonuses........................... $ 283,078 $ 76,064 Restructuring charges..................................... -- 186,434 Deferred gain on sale leaseback........................... 27,583 36,088 Deferred loss on asset writedown.......................... 70,407 -- State net operating loss carryforwards.................... 15,200 95,420 Allowance for doubtful accounts........................... 124,807 7,600 Other..................................................... 86,405 25,453 --------- --------- Total deferred tax assets......................... $ 607,480 $ 427,059 ========= ========= Deferred tax liabilities: Amortization of deductible goodwill....................... $(115,640) $ -- Accelerated depreciation and other basis differences for property, plant and equipment.......................... (816,236) (315,859) --------- --------- Total deferred tax liabilities.................... $(931,876) $(315,859) ========= =========
The above balances are classified in the accompanying consolidated balance sheets as of December 31, 1997 and 1996 and March 31, 1998 as follows:
DECEMBER 31, -------------------- 1997 1996 -------- -------- Net deferred tax asset -- current........................... $494,290 $427,059 ======== ======== Net deferred tax liability -- noncurrent.................... $818,686 $315,859 ======== ========
Management believes that it is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. At March 31, 1998, the components of deferred tax assets and liabilities have not changed significantly from December 31, 1997. (7) SHAREHOLDERS' EQUITY In November 1997, the Company issued 3,506,841 shares of common stock in a public offering for proceeds of $39.5 million, net of issuance costs of approximately $3.1 million. The Company has three stock option or equity incentive plans: the 1989 Plan, the Equity Incentive Plan and the Non-employee Directors Plan. Options to purchase 180,000 shares of common stock at an exercise price of $3.33 have been granted under the 1989 Plan. These options generally vest over a five-year period and expire in April 2003. The Equity Incentive Plan provides for the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and stock units. Substantially all employees are eligible under this plan, which was amended to increase the maximum number of shares of common stock that can be granted under this plan to 1,995,000. The Non-employee Directors Plan provides for options to acquire shares of common stock to members of the Board of Directors who are not also employees. A total of 557,550 shares are available for grant under all plans at December 31, 1997. F-14 63 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has also issued 930,441 nonqualified options to officers and employees. Options generally vest 7 years after the grant date, but vesting may accelerate based on increases in the market price of the Company's common stock. The following summarizes activity of the various stock option plans (described in note 7) and other stock options granted to employees for the three years ended December 31, 1997 and three months ended March 31, 1998:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE OPTIONS PER SHARE --------- -------------- Balance at January 1, 1995.................................. 313,550 $ 5.11 Granted................................................... 69,500 5.30 Exercised................................................. (49,750) 3.33 Canceled.................................................. (70,600) 6.37 --------- Balance at December 31, 1995................................ 262,700 5.87 Granted................................................... 375,200 4.04 Exercised................................................. (1,800) 3.33 Canceled.................................................. (75,600) 6.64 --------- Balance at December 31, 1996................................ 560,500 4.55 Granted................................................... 2,004,000 11.63 Exercised................................................. (53,300) 4.34 Canceled.................................................. (95,980) 6.07 --------- Balance at December 31, 1997................................ 2,415,220 10.37 Granted................................................... 361,000 13.41 Exercised................................................. (7,900) 5.74 Canceled.................................................. (5,000) 16.25 --------- Balance at March 31, 1998 (unaudited)....................... 2,763,320 10.77 =========
The following table summarizes information regarding fixed stock options outstanding at December 31, 1997:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE ------------------------ ----------- ----------- -------- ----------- -------- $ 3.33 to $ 5.00............................ 399,520 8.3 $ 3.98 356,426 $3.97 $ 5.01 to $10.00............................ 774,200 8.9 6.45 487,464 6.02 $10.01 to $15.00............................ 777,500 9.8 14.03 -- -- $15.01 to $16.25............................ 464,000 9.8 16.25 -- -- --------- ------- 2,415,220 9.3 10.37 843,890 5.15 ========= =======
The Company applies the provisions of APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, because the Company grants options at fair value, no compensation cost has been recognized for its fixed stock option plans in 1998, 1997, 1996 and 1995. F-15 64 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) If compensation cost for the Company's three stock-based compensation plans had been determined using the fair values at the grant dates for awards under those plans consistent with SFAS 123, the Company's pro forma net income (loss) and income (loss) per share would have been as follows:
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ---------- ----------- -------- Net income (loss): As reported.................................. $3,420,929 $(1,617,907) $349,078 Pro forma.................................... 1,148,849 (1,756,201) 324,903 Income (loss) per share -- basic: As reported.................................. .40 (.28) .06 Pro forma.................................... .14 (.32) .05 Income (loss) per share -- diluted: As reported.................................. .38 (.28) .06 Pro forma.................................... .13 (.32) .05
The weighted average fair values of options granted for the years ended December 31, 1997, 1996 and 1995 were $5.90, $4.15 and $4.92, respectively. In estimating the fair value of options, the Company used the Black-Scholes option-pricing model with the following assumptions.
YEAR ENDED DECEMBER 31, ----------------------- 1997 1996 1995 ----- ----- ----- Dividend yield.............................................. 0% 0% 0% Expected volatility......................................... 70% 60% 60% Risk-free interest rates.................................... 6% 6% 6% Expected lives (years)...................................... 3 4 3
The above pro forma disclosures are not necessarily representative of the effect on the historical net income for future periods because options vest over several years, and additional awards are made each year. In addition, compensation cost for options granted prior to January 1, 1995 and which vest after that date has not been considered. The Company also has 80,000 warrants outstanding which were issued to two underwriters in connection with the Company's initial public offering in 1994. The warrants are exercisable at $9.00 per share and expire in 1999. None of the warrants have been exercised as of March 31, 1998. (8) FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments at December 31, 1997 and 1996 are deemed to approximate their estimated fair values. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The carrying amounts of notes payable and long-term debt approximate fair value because of the variable nature of the interest rates of these instruments. (9) EMPLOYEE BENEFIT PLAN The Company has a 401(k) Savings Plan covering substantially all employees, whereby the Company matches 50% of an employee's contributions to a maximum of 2% of the employee's compensation. Additional profit sharing contributions to the plan are at the discretion of the Board of Directors. During the years ended December 31, 1997, 1996 and 1995, contributions from the Company to the plan were approximately $138,000, $106,000 and $90,000, respectively. F-16 65 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (10) TRANSACTIONS WITH RELATED PARTIES Under an existing agreement, the CTI Companies were required to pay $500,000 upon change in control to an entity acting as a sales agent for the CTI Companies in which individuals who are stockholders, officers and directors of the Company have a majority ownership interest. In 1997, the Company leased three facilities from directors of the Company. Amounts paid to the directors totaled approximately $283,000. An investment banking firm, of which a director of the Company is the Managing Director, received a fee of approximately $900,000 as a representative of the CTI Companies in their acquisition by the Company. The same firm received a fee of approximately $640,000 in connection with the Personal merger. (11) RESTRUCTURING In the third quarter of 1996, management initiated a plan to restructure the Company's manufacturing operations and various administrative functions, including a change in the manufacturing process and a reorganization of the sales department. Restructuring charges of $2,127,000 were charged to operations for the year ended December 31, 1996. The restructuring plan involved the termination of 142 employees consisting of approximately 90 direct manufacturing employees and 52 indirect overhead positions. The total severance related costs approximated $615,000. The Company changed its manufacturing strategy to focus on high-mix production and developed its Asynchronous Process Manufacturing (APM) concept. Software development costs unrelated to the Company's new manufacturing strategy but related to previous manufacturing processes developed by consultants were written off in the approximate amount of $442,000. Inventory allowances, totaling approximately $344,000, were also recorded to provide for future losses to be incurred related to the separation of certain customers who did not meet the Company's new manufacturing strategy. In addition, due to changes in the manufacturing process which eliminated the use of various equipment, property, plant and equipment was written off in the amount of $726,000. The restructuring charge was allocated to cost of goods sold, selling, general and administrative expenses and impairment of fixed assets in the amounts of approximately $479,000, $922,000 and $726,000, respectively. The restructuring has been completed and no liabilities associated with the restructuring remained at December 31, 1997. (12) BUSINESS AND CREDIT CONCENTRATIONS The Company operates in the electronic manufacturing services segment of the electronics industry. The Company's customers are primarily located in the United States and sales and accounts receivable are concentrated with customers principally in the computer peripherals and medical equipment industries. The Company has a policy to regularly monitor the credit worthiness of its customers and provides for uncollectible amounts if credit problems arise. Customers may experience adverse financial difficulties, including those that may result from industry developments, which may increase bad debt exposure to the Company. In addition, the electronics manufacturing services industry has experienced component supply shortages in the past. Should future component shortages occur, the Company may experience reduced net sales and profitability. F-17 66 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sales to significant customers as a percentage of total net sales were as follows:
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, ----------------------- 1998 1997 1996 1995 ------------ ----- ----- ----- (UNAUDITED) AlliedSignal...................................... 38.6 25.3% --% --% Exabyte........................................... 4.5 12.3 20.3 -- Ohmeda (BOC Group)................................ 2.6 6.9 14.8 14.8 Hewlett Packard Company........................... 2.7 6.2 25.1 36.5 Kentrox........................................... 2.2 6.0 -- --
The businesses acquired in the CTI Companies business combination focus on repair and warranty operations which are located at the principal locations of the overnight delivery hubs of two overnight package transportation providers and are integrated with the logistics operations of these transportation providers and participate in joint marketing programs to customers of these transportation providers. If the Company ceased to be allowed to share facilities and marketing arrangements with either or both of these major transportation providers, there can be no assurance that alternate arrangements could be made by the Company to preserve such advantages and the Company could lose significant numbers of repair customers. In addition, work stoppages or other disruptions in the transportation network may occur from time to time which may affect these transportation providers. F-18 67 INDEPENDENT AUDITORS' REPORT The Board of Directors Circuit Test, Inc. and Affiliates: We have audited the accompanying combined balance sheets of Circuit Test, Inc. and affiliates as of December 31, 1996 and 1995, and the related combined statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 combined financial statements referred to above present fairly, in all material respects, the financial position of Circuit Test, Inc. and affiliates as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1(a), the companies included in the combined financial statements changed in 1996. Our audits were made for the purpose of forming an opinion on the combined financial statements taken as a whole. The combining information in the accompanying schedules is presented for purposes of additional analysis of the combined financial statements rather than to present the financial position, results of operations and cash flows of the individual companies. The combining information has been subjected to the auditing procedures applied in the audits of the combined financial statements and, in our opinion, is fairly stated in all material respects in relation to the combined financial statements taken as a whole. KPMG PEAT MARWICK LLP Memphis, Tennessee July 11, 1997 F-19 68 CIRCUIT TEST, INC. AND AFFILIATES COMBINED BALANCE SHEETS ASSETS (NOTE 2)
DECEMBER 31, JUNE 30, ------------------------- 1997 1996 1995 ------------ ----------- ---------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents................................. $ 367,350 $ 1,490,336 $ 758,087 Accounts receivable, net of allowance for doubtful accounts of $544,830 in 1997, $544,830 in 1996 and $181,675 in 1995 (note 6)............................... 5,050,110 4,110,743 3,750,733 Inventory................................................. 3,704,089 4,242,152 2,467,679 Prepaid expenses and other current assets................. 391,814 8,847 21,599 ----------- ----------- ---------- TOTAL CURRENT ASSETS................................ 9,513,363 9,852,078 6,998,098 ----------- ----------- ---------- Property and equipment, at cost: Land, buildings and improvements.......................... 605,409 605,409 685,134 Leasehold improvements.................................... 686,071 655,029 626,226 Machinery and equipment................................... 3,459,098 2,845,745 1,731,370 Furniture and fixtures.................................... 425,946 382,440 280,011 Vehicles.................................................. 137,074 137,074 157,817 ----------- ----------- ---------- 5,313,598 4,625,697 3,480,558 Less accumulated depreciation and amortization.......... 1,639,285 1,400,285 1,293,583 ----------- ----------- ---------- NET PROPERTY AND EQUIPMENT.......................... 3,674,313 3,225,412 2,186,975 Other assets, net........................................... 112,830 96,245 60,079 ----------- ----------- ---------- TOTAL ASSETS........................................ $13,300,506 $13,173,735 $9,245,152 =========== =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of notes payable (note 2).............. $ 4,728,752 $ 4,256,293 $2,869,360 Accounts payable.......................................... 1,447,489 3,935,078 1,755,099 Accrued expenses.......................................... 2,599,119 1,069,762 949,866 Due to related parties.................................... (137,391) 260,377 397,813 Shareholder loans (note 3)................................ 943,000 1,135,871 975,871 ----------- ----------- ---------- TOTAL CURRENT LIABILITIES........................... 9,580,969 10,657,381 6,948,009 Long-term portion of notes payable (note 2)................. 148,229 594,509 239,882 ----------- ----------- ---------- TOTAL LIABILITIES................................... $ 9,729,198 $11,251,890 $7,187,891 ----------- ----------- ---------- STOCKHOLDERS' EQUITY: Circuit Test, Inc. common stock, $.01 par value; 50,000 shares authorized; 5 shares issued and outstanding...... $ 1 $ 1 $ 1 Circuit Test, Inc. non-voting common stock, $.01 par value; 50,000 shares authorized; 12,162 and 9,995 shares issued and outstanding at 1996 and 1995, respectively... 121 121 99 Airhub Service Group, L.C. members' deficit: Allen S. Braswell, Jr................................... (70,800) (70,800) -- Circuit Test International Limited Partnership.......... (70,800) (70,800) -- Circuit Test International L.C. members' equity: Allen S. Braswell, Jr................................... 4,330 4,330 4,330 Circuit Test International Limited Partnership.......... 4,330 4,330 4,330 Additional paid-in capital................................ 147,498 147,498 17,500 Retained earnings......................................... 3,556,628 1,907,165 2,031,001 ----------- ----------- ---------- TOTAL STOCKHOLDERS' EQUITY.......................... 3,571,308 1,921,845 2,057,261 Commitments, contingencies and related party transactions (notes 3, 4 and 5) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $13,300,506 $13,173,735 $9,245,152 =========== =========== ==========
See accompanying notes to combined financial statements. F-20 69 CIRCUIT TEST, INC. AND AFFILIATES COMBINED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, -------------------------- -------------------------------------- 1997 1996 1996 1995 1994 ------------ ----------- ----------- ----------- ---------- (UNAUDITED) Net revenues (note 6)............. $19,895,878 $9,754,621 $26,509,725 $16,183,590 $9,028,587 Costs of revenues................. 13,288,642 7,495,668 19,580,340 10,799,490 6,310,630 ----------- ---------- ----------- ----------- ---------- GROSS PROFIT............ 6,607,236 2,258,953 6,929,385 5,384,100 2,717,957 Selling, general and administrative expenses......... 3,946,054 2,834,812 6,251,364 3,793,320 2,524,796 Interest expense, net............. 262,152 191,871 434,345 291,061 111,250 Other expense..................... 11,565 -- 9,112 -- -- ----------- ---------- ----------- ----------- ---------- NET INCOME.............. $ 2,387,465 $ (767,730) $ 234,564 $ 1,299,719 $ 81,911 =========== ========== =========== =========== ==========
See accompanying notes to combined financial statements F-21 70 CIRCUIT TEST, INC. AND AFFILIATES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CIRCUIT TEST CIRCUIT TEST, INC. AIRHUB SERVICE GROUP, L.C. INTERNATIONAL, L.C. ---------------------------- ----------------------------- ----------------------------- NON- CIRCUIT TEST CIRCUIT TEST VOTING VOTING ADDITIONAL INTERNATIONAL INTERNATIONAL COMMON COMMON PAID-IN ALLEN S. LIMITED ALLEN S. LIMITED STOCK STOCK CAPITAL BRASWELL, JR. PARTNERSHIP BRASWELL, JR. PARTNERSHIP ------ ------ ---------- ------------- ------------- ------------- ------------- Balances at December 31, 1993........ $ 1 $ 99 $ 17,500 $ -- $ -- $4,300 $4,300 Distributions to stockholders........ -- -- -- -- -- -- -- Net income (loss).................... -- -- -- -- -- -- -- --- ---- -------- -------- -------- ------ ------ Balances at December 31, 1994........ 1 99 17,500 -- -- 4,300 4,300 Net income (loss).................... -- -- -- -- -- -- -- --- ---- -------- -------- -------- ------ ------ Balances at December 31, 1995........ 1 99 17,500 -- -- 4,330 4,330 Sale of stock........................ -- 22 129,998 -- -- -- -- Allocation of net deficit to members at date of transfer................ -- -- -- (70,800) (70,800) -- -- Distributions to stockholders........ -- -- -- -- -- -- -- Net income (loss).................... -- -- -- -- -- -- -- --- ---- -------- -------- -------- ------ ------ Balances at December 31, 1996........ 1 121 147,498 (70,800) (70,800) 4,330 4,330 Distributions to stockholders........ -- -- -- -- -- -- -- Net income (loss).................... -- -- -- -- -- -- -- --- ---- -------- -------- -------- ------ ------ Balances at June 30, 1997............ $ 1 $122 $147,498 $(70,800) $(70,800) $4,330 $4,330 === ==== ======== ======== ======== ====== ====== RELATED EARNINGS ------------------------------------------------------------------------ AIRHUB CIRCUIT TEST TOTAL CIRCUIT SERVICE INTERNATIONAL, STOCKHOLDERS' TEST, INC. GROUP, L.C. L.C. TOTAL EQUITY ----------- ----------- -------------- ----------- ------------- Balances at December 31, 1993........ $ 2,227,684 $ -- $ (505,291) $ 1,772,393 $ 1,748,653 Distributions to stockholders........ (1,073,022) -- -- (1,073,022) (1,073,022) Net income (loss).................... 372,735 -- (290,824) 81,911 81,911 ----------- --------- ---------- ----------- ----------- Balances at December 31, 1994........ 1,527,397 -- (796,115) 731,282 757,542 Net income (loss).................... 355,566 (141,600) 1,085,753 1,299,719 1,299,719 ----------- --------- ---------- ----------- ----------- Balances at December 31, 1995........ 1,882,963 (141,600) 289,638 2,031,001 2,057,261 Sale of stock........................ -- -- -- -- 130,020 Allocation of net deficit to members at date of transfer................ -- 141,600 -- 141,600 -- Distributions to stockholders........ -- -- (500,000) (500,000) (500,000) Net income (loss).................... (189,383) (107,545) 531,492 234,564 234,564 ----------- --------- ---------- ----------- ----------- Balances at December 31, 1996........ 1,693,580 (107,545) 321,130 1,907,165 1,921,845 Distributions to stockholders........ -- (31,000) (707,000) (738,000) (738,000) Net income (loss).................... 935,079 665,943 786,443 2,387,465 2,387,465 ----------- --------- ---------- ----------- ----------- Balances at June 30, 1997............ $ 2,628,658 $ 385,798 $ 400,572 $ 3,415,028 $ 3,571,308 =========== ========= ========== =========== ===========
See accompanying notes to combined financial statements. F-22 71 CIRCUIT TEST, INC. AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31, ------------------------ ------------------------------------ 1997 1996 1996 1995 1994 ----------- ---------- ---------- ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................. $ 2,387,465 $ (767,730) $ 234,564 $1,299,719 $ 81,911 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization........................ 234,999 185,815 344,203 296,669 252,579 Increase in accounts receivable, net................. (939,367) (568,323) (360,010) (2,381,058) (430,908) (Increase) decrease in inventory..................... 538,063 361,836 (1,774,473) (1,073,683) (560,235) Decrease (increase) in prepaid expenses and other assets............................................. (399,552) (291,280) (23,414) (15,620) 102,603 (Decrease) increase in accounts payable.............. (2,487,589) (412,555) 2,179,979 1,327,841 265,409 (Decrease) increase in accrued expenses.............. 1,529,357 429,501 119,896 482,517 133,998 Change in due to (from) related parties.............. (397,768) -- (137,436) (114,321) 242,458 ----------- ---------- ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES..................................... 465,608 (1,063,735) 583,309 (177,936) 87,815 ----------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net.............................. (683,902) (629,041) (1,382,640) (621,754) (368,538) ----------- ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from notes payable and other obligations.......................................... (166,692) 702,851 1,901,560 1,434,578 1,257,802 Proceeds from sale of stock............................ -- -- 130,020 -- -- Distributions to stockholders.......................... (738,000) (500,000) (500,000) -- (1,073,022) ----------- ---------- ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES........ (904,692) 202,851 1,531,580 1,434,578 184,780 ----------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................... (1,122,986) (1,551,925) 732,249 634,888 (95,943) Cash and cash equivalents at beginning of period......... 1,490,336 691,856 758,087 123,199 219,142 ----------- ---------- ---------- ---------- ---------- Cash and cash equivalents at end of period............... $ 367,350 $ (860,068) $1,490,336 $ 758,087 $ 123,199 =========== ========== ========== ========== ========== Supplemental disclosure of cash flow information -- Interest paid.......................................... $ 262,152 $ 191,871 $ 418,000 $ 291,000 $ 164,000 =========== ========== ========== ========== ==========
See accompanying notes to combined financial statements F-23 72 CIRCUIT TEST, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business and Principles of Combination Circuit Test, Inc. and affiliates (the Company) are primarily engaged in the business of repairing computer components and related peripherals. The combined financial statements include the financial statements of Circuit Test, Inc., located in Tampa, Florida, and affiliates Circuit Test International, L.C., located in Memphis, Tennessee and Airhub Service Group, L.C., located in Louisville, Kentucky. The financial statements are combined because of common ownership. All significant intercompany accounts and transactions have been eliminated in combination. On February 28, 1996, Airhub Service Group, L.C., a Kentucky limited liability company, was formed with two 50%/50% members. In a tax-free transfer, the net liabilities of Circuit Test International, L.C.'s Kentucky division were transferred to Airhub Service Group, L.C. on March 1, 1996. Management has elected to include Airhub Service Group, L.C. in its 1996 combined financial statements. The 1995 Airhub Service Group, L.C. financial statements represent the Kentucky division balances. The members of a limited liability company have no personal liability related to the company other than to the extent of their equity balances. Both members have equal economic and voting interests. Unless previously terminated, Airhub Services Group, L.C. will continue in existence until February 28, 2026 and Circuit Test International, L.C. will continue in existence until August 13, 2022. During November 1995, the Company decided to close one of its two Tampa facilities. This facility was closed in early 1996 upon the expiration of the Company's facility lease. The Company's affiliate near Boston, Massachusetts, Disk Maintenance, Inc., was closed in August 1996 subsequent to the expiration of the facility lease. During 1996, owners of the Company opened a facility in Brazil. In connection with the closing of the Tampa facility, the Company incurred costs of approximately $490,000 and $223,000 in 1996 and 1995, respectively. In prior years, the financial statements of Disk Maintenance, Inc. were included in the combined financial statements. Management has elected to omit Disk Maintenance, Inc. from the 1996 combination due to its closure. The accompanying 1995 and 1994 combined financial statements have been restated to reflect the change in reporting entity. Net income (loss) for 1996, 1995 and 1994 would have been $(439,357), $1,124,608 and $468,993, respectively, had Disk Maintenance, Inc. been included in the combination. (b) Revenue Recognition Revenues are recognized when products are shipped. (c) Accounting Estimates Management is required to make estimates and assumptions during the preparation of the combined financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the combined financial statements. They also affect the reported amounts of net income. Actual results could differ from these estimates and assumptions. F-24 73 CIRCUIT TEST, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (d) Cash and Cash Equivalent The Company considers all highly liquid investments with original maturities of six months or less to be cash equivalents. (e) Inventory Inventory consists primarily of computer parts and components and is valued at the lower of cost or market. Cost is determined using the weighted average method. In October 1996, the Company entered into an agreement with a third party which included the purchase of inventory in the amount of $1,188,000, with payments to be made according to a predetermined schedule during 1997. Such purchased inventory remaining on hand was approximately $1,028,000 at December 31, 1996 (note 7). (f) Property and Equipment Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Equipment held under capital leases and leasehold improvements are amortized straight line over the shorter of the lease term or estimated useful life of the assets. (g) Pre-Opening Expenses Circuit Test International, L.C. began operations in January 1993 and is amortizing pre-opening expenses, which are included in other assets (net balance of approximately $8,510 at June 30, 1997, $17,600 at December 31, 1996 and $36,900 at December 31, 1995) using the straight-line method over 60 months. (h) Income Taxes Circuit Test, Inc. has elected to be treated as an "S" Corporation under provisions of the Internal Revenue Code. Circuit Test International, L.C. and Airhub Service Group, L.C. have each elected to be treated as a limited liability company. Under these elections, the stockholders or partners are individually responsible for reporting their share of taxable income or loss. Accordingly, no provision for federal or state income taxes has been reflected in the accompanying combined financial statements. (i) Gain-Sharing Bonuses The Company has a gain-sharing bonus plan whereby employees are rewarded for attaining quality and profit goals. Gain-sharing bonuses paid for the six months ended June 30, 1997 and years ended December 31, 1996, 1995 and 1994 were $321,026, $309,174, $220,431 and $81,932, respectively. (j) Reclassifications Certain 1995 and 1994 amounts have been reclassified to conform with the 1996 presentation. F-25 74 CIRCUIT TEST, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (2) NOTES PAYABLE Notes payable at June 30, 1997 and December 31, 1996 and 1995 consist of the following:
DECEMBER 31, JUNE 30, ------------------------ 1997 1996 1995 ----------- ---------- ---------- (UNAUDITED) $4,000,000 revolving bank line of credit; borrowings bear interest at the lender's prime rate (8.5% at June 30, 1997), interest payable monthly with principal due on demand; collateralized by substantially all assets of the Company and guaranteed by certain of the Company's stockholders....................... $3,693,900 $3,747,418 $2,545,129 $1,000,000 nonrevolving bank line of credit; advances bear interest at either the lender's prime rate or a prevalent fixed rate at the time of the advance (8.5% at June 30, 1997); master note payable on demand with individual advances payable in three years consisting of monthly principal and interest payments; collateralized by substantially all of the Company's machinery, equipment, fixtures and furniture and guaranteed by certain of the Company's stockholders....................... 1,024,857 861,790 138,241 $525,000 bank term loan; bears interest at the lender's prime rate (8.5% at June 30, 1997); monthly principal and interest payments through June 1, 1998; collateralized by substantially all of the Company's machinery, equipment, fixtures and furniture and guaranteed by certain of the Company's stockholders................................. 151,267 233,333 408,303 Other.......................................... 6,957 8,261 17,569 ---------- ---------- ---------- Total notes payable............................ 4,876,981 4,850,802 3,109,242 Less current maturities of notes payable....... 4,728,752 4,256,293 2,869,360 ---------- ---------- ---------- Long-term portion of notes payable............. $ 148,229 $ 594,509 $ 239,882 ========== ========== ==========
The various loan agreements limit borrowings based on eligible collateral and subject the Company to certain covenants regarding financial maintenance and ratios. At December 31, 1996, the Company was not in compliance with certain of the covenants. On July 9, 1997 the lender waived the instances of non-compliance. (3) SHAREHOLDER LOANS AND OBLIGATIONS At June 30, 1997, the Company has loans payable to a stockholder of $160,000, at 8.5% and $783,000 at 6.5%. At December 31, 1996, the Company has loans payable to a stockholder of $352,871 at 8.5% and $783,000 at 6.5%. At December 31, 1995, balances on these loans were $192,871 and $783,000. Stockholders of the Company have personal revolving lines of credit totaling $975,000, with $157,000, $779,500 and $107,600 outstanding at June 30, 1997 and December 31, 1996 and 1995, respectively. The credit lines are payable on demand and are guaranteed by the Company. F-26 75 CIRCUIT TEST, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (4) LEASES The Company is obligated for two capital leases that will expire in 1998. The Company leases one of its Tampa facilities from a stockholder at a rate of $5,080 per month under an operating lease. Rent expense for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 was $30,480, $0, $25,520, $65,232 and $62,701, respectively. The Company has a noncancelable operating lease with a third party for facility rental. The Company is charged $1.06 per square foot per month for office space and warehouse space occupied by certain equipment. Rent expense was $264,454 and $36,000 for the six months ended June 30, 1997 and 1996, respectively, and $206,776 and $28,800 for the years ended December 31, 1996 and 1995, respectively. The Company also has several noncancelable operating leases with third parties, primarily for facility rental, that expire over the next three years. Rent expense for these facilities for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 was $176,969, $108,252, $384,181, $296,810 and $147,350, respectively. Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of June 30, 1997 are as follows: 1997........................................................ $ 511,219 1998........................................................ 291,685 1999........................................................ 283,865 2000........................................................ 282,432 2001........................................................ 141,216 ---------- $1,510,417
(5) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS The Company pays sales commissions to a company in which certain Company stockholders have a majority ownership interest. Commissions paid for the six months ended June 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 were $12,600, $16,680, $27,240, $29,517 and $68,681, respectively. Certain corporate charges paid by Circuit Test, Inc. are allocated, based on a percentage of net revenues, to affiliates included in the combined financial statements and another related party which is not included in the combination. The amounts charged to the related party for 1996, 1995 and 1994 were approximately $162,000, $247,000 and $287,000, respectively. In the normal course of business, the Company is party to certain litigation. Management of the Company is of the opinion that the ultimate outcome of such matters will not have a material adverse impact on the Company's combined financial statements. F-27 76 CIRCUIT TEST, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) (6) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company's customers are primarily manufacturers of computers and related peripherals and integrated transportation and logistics companies. Certain customers of the Company comprise a significant portion of accounts receivable and net revenues as of and for the years ended December 31, 1996, 1995 and 1994. These customers are summarized as follows:
PERCENTAGE CUSTOMERS OF TOTAL --------- ---------- Accounts receivable: December 31, 1996......................................... 4 65% December 31, 1995......................................... 4 57% December 31, 1994......................................... 4 72% Net revenues: Year ended December 31, 1996.............................. 4 81% Year ended December 31, 1995.............................. 4 71% Year ended December 31, 1994.............................. 4 79%
The net revenues concentration numbers include one customer which accounted for 46% of net revenues during 1996, 36% during 1995 and 39% during 1994. (7) SUBSEQUENT EVENT In May 1997, a third party requested to terminate an agreement that the Company had entered into to purchase certain assets and other rights. A new agreement was reached that resulted in a reduction in purchase price for the assets previously purchased. In June 1997, the Company reduced the assets which are included in inventory and the corresponding payable to the third party by approximately $1,000,000. On July 9, 1997, the Company entered into an Agreement and Plan of Merger (Agreement) with EFTC Corporation (EFTC). The Agreement provides that EFTC will acquired the Company through the merger of the Company with and into EFTC (Merger). In the Merger, subject to adjustment and certain exceptions, stockholders of Circuit Test, Inc. will have the right to receive 1,858,974 shares of EFTC common stock and the members of Airhub Service Group, L.C. and Circuit Test International, L.C. will receive approximately $19,500,000 and have certain liabilities assumed by EFTC. Stockholders and members of the Company will also participate in an earnout based on future earnings. The obligations of the Company and EFTC to consummate the Merger are subject to various conditions, including the condition that the holders of a majority of the outstanding shares of common stock of EFTC vote to approve the Agreement. If the necessary stockholder vote is obtained and all other conditions to the Merger are satisfied, the Merger is expected to be completed on or before October 30, 1997. F-28 77 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- BALANCE SHEET INFORMATION DECEMBER 31, 1996 ASSETS
AIRHUB CIRCUIT SERVICE CIRCUIT TEST TEST, INC. GROUP, L.C. INTERNATIONAL, L.C. COMBINED ---------- ----------- ------------------- ----------- CURRENT ASSETS: Cash and cash equivalents................. $ (169,421) $ 634,756 $1,025,001 $ 1,490,336 Accounts receivable, net.................. 1,074,345 1,268,588 1,767,810 4,110,743 Inventory................................. 223,380 2,706,234 1,312,538 4,242,152 Prepaid expenses and other current assets................................. 2,843 -- 6,004 8,847 Intercompany accounts..................... 533,288 (400,846) (132,442) -- ---------- ---------- ---------- ----------- TOTAL CURRENT ASSETS.............. 1,664,435 4,208,732 3,978,911 9,852,078 ---------- ---------- ---------- ----------- PROPERTY AND EQUIPMENT, AT COST: Land, buildings and improvements.......... 605,409 -- -- 605,409 Leasehold improvements.................... -- -- 655,029 655,029 Machinery and equipment................... 1,030,977 680,431 1,134,337 2,845,745 Furniture and fixtures.................... 121,255 111,680 149,505 382,440 Vehicles.................................. 137,074 -- -- 137,074 ---------- ---------- ---------- ----------- 1,894,715 792,111 1,938,871 4,625,697 Less accumulated depreciation and amortization........................... 1,026,834 65,590 307,861 1,400,285 ---------- ---------- ---------- ----------- NET PROPERTY AND EQUIPMENT........ 867,881 726,521 1,631,010 3,225,412 Other assets, net........................... 24,553 -- 71,692 96,245 ---------- ---------- ---------- ----------- $2,556,869 $4,935,253 $5,681,613 $13,173,735 ========== ========== ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of notes payable....... $ 121,498 $1,943,867 $2,190,928 $ 4,256,293 Accounts payable.......................... 243,389 2,575,667 1,116,022 3,935,078 Accrued expenses.......................... 260,647 454,507 354,608 1,069,762 Due to (from) related parties............. (306,765) (12,455) 579,597 260,377 Shareholder loans......................... 352,871 -- 783,000 1,135,871 ---------- ---------- ---------- ----------- TOTAL CURRENT LIABILITIES......... 671,640 4,961,586 5,024,155 10,657,381 Long-term portion of notes payable.......... 44,029 222,812 327,668 594,509 ---------- ---------- ---------- ----------- TOTAL LIABILITIES................. 715,669 5,184,398 5,351,823 11,251,890 ---------- ---------- ---------- ----------- STOCKHOLDERS' EQUITY: Common stock.............................. 122 -- -- 122 Members' equity........................... -- (141,600) 8,600 (132,940) Additional paid-in capital................ 147,498 -- -- 147,498 Retained earnings (deficit)............... 1,693,580 (107,545) 321,130 1,907,165 ---------- ---------- ---------- ----------- TOTAL STOCKHOLDERS' EQUITY........ 1,841,200 (249,145) 329,790 1,921,845 ---------- ---------- ---------- ----------- $2,556,869 $4,935,253 $5,681,613 $13,173,735 ========== ========== ========== ===========
See accompanying independent auditors' report. F-29 78 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- BALANCE SHEET INFORMATION DECEMBER 31, 1995 ASSETS
AIRHUB CIRCUIT SERVICE CIRCUIT TEST TEST, INC. GROUP, L.C. INTERNATIONAL, L.C. COMBINED ---------- ----------- ------------------- ---------- CURRENT ASSETS: Cash and cash equivalents.................. $ 210,987 $ 38,372 $ 508,728 $ 758,087 Accounts receivable, net................... 1,332,405 449,172 1,969,156 3,750,733 Inventory.................................. 1,034,222 97,280 1,336,177 2,467,679 Prepaid expenses and other current assets.................................. 2,843 -- 18,756 21,599 Intercompany accounts...................... 112,463 -- (112,463) -- ---------- --------- ---------- ---------- TOTAL CURRENT ASSETS............... 2,692,920 584,824 3,720,354 6,998,098 ---------- --------- ---------- ---------- PROPERTY AND EQUIPMENT, AT COST: Land, buildings and improvements........... 685,134 -- -- 685,134 Leasehold improvements..................... 208,505 29,378 388,343 626,226 Machinery and equipment.................... 998,188 89,710 643,472 1,731,370 Furniture and fixtures..................... 170,160 28,022 81,829 280,011 Vehicles................................... 157,817 -- -- 157,817 ---------- --------- ---------- ---------- 2,219,804 147,110 1,113,644 3,480,558 Less accumulated depreciation and amortization............................ 1,140,678 4,268 148,637 1,293,583 ---------- --------- ---------- ---------- NET PROPERTY AND EQUIPMENT......... 1,079,126 142,842 965,007 2,186,975 Other assets, net.................. 24,553 -- 35,526 60,079 ---------- --------- ---------- ---------- $3,796,599 $ 727,666 $4,720,887 $9,245,152 ========== ========= ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of notes payable........ $ 925,306 $ 448,241 $1,495,813 $2,869,360 Accounts payable........................... 340,298 379,400 1,035,401 1,755,099 Accrued expenses........................... 299,316 43,832 606,718 949,866 Due to (from) related parties.............. (25,011) (2,207) 425,031 397,813 Shareholder loans.......................... 192,871 -- 783,000 975,871 ---------- --------- ---------- ---------- TOTAL CURRENT LIABILITIES.......... 1,732,780 869,266 4,345,963 6,948,009 Long-term portion of notes payable.......................... 163,256 -- 76,626 239,882 ---------- --------- ---------- ---------- TOTAL LIABILITIES.................. 1,896,036 869,266 4,422,589 7,187,891 ---------- --------- ---------- ---------- STOCKHOLDERS' EQUITY: Common stock............................... 100 -- -- 100 Members' equity............................ -- -- 8,660 8,660 Additional paid-in capital................. 17,500 -- -- 17,500 Retained earnings (deficit)................ 1,882,963 (141,600) 289,638 2,031,001 ---------- --------- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY......... 1,900,563 (141,600) 298,298 2,057,261 ---------- --------- ---------- ---------- $3,796,599 $ 727,666 $4,720,887 $9,245,152 ========== ========= ========== ==========
See accompanying independent auditors' report. F-30 79 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, 1996
AIRHUB CIRCUIT TEST CIRCUIT SERVICE INTERNATIONAL, ELIMINATING TEST, INC. GROUP, L.C. L.C. ENTRIES COMBINED ---------- ----------- -------------- ----------- ----------- Net revenues....................... $4,590,711 $8,211,422 $13,854,357 $(146,765) $26,509,725 Costs of revenues.................. 3,348,588 6,421,699 9,956,818 (146,765) 19,580,340 ---------- ---------- ----------- --------- ----------- GROSS PROFIT............. 1,242,123 1,789,723 3,897,539 -- 6,929,385 Selling, general and administrative expenses......................... 1,348,581 1,799,830 3,102,953 -- 6,251,364 Interest expense, net.............. 100,587 70,664 263,094 -- 434,345 Other (income) expense............. (17,662) 26,774 -- -- 9,112 ---------- ---------- ----------- --------- ----------- NET INCOME (LOSS)........ $ (189,383) $ (107,545) $ 531,492 $ -- $ 234,564 ========== ========== =========== ========= ===========
See accompanying independent auditors' report. F-31 80 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, 1995
AIRHUB CIRCUIT TEST CIRCUIT SERVICE INTERNATIONAL, ELIMINATING TEST, INC. GROUP, L.C. L.C. ENTRIES COMBINED ---------- ----------- -------------- ----------- ----------- Net revenues......................... $7,668,419 $ 302,531 $8,356,249 $(143,609) $16,183,590 Costs of revenues.................... 5,593,172 238,617 5,111,310 (143,609) 10,799,490 ---------- --------- ---------- --------- ----------- GROSS PROFIT............... 2,075,247 63,914 3,244,939 -- 5,384,100 Selling, general and administrative expenses........................... 1,591,408 198,810 2,003,102 -- 3,793,320 Interest expense, net................ 128,273 6,704 156,084 -- 291,061 ---------- --------- ---------- --------- ----------- NET INCOME (LOSS).......... $ 355,566 $(141,600) $1,085,753 $ -- $ 1,299,719 ========== ========= ========== ========= ===========
See accompanying independent auditors' report. F-32 81 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- OPERATIONS INFORMATION YEAR ENDED DECEMBER 31, 1994
CIRCUIT TEST CIRCUIT INTERNATIONAL, ELIMINATING TEST, INC. L.C. ENTRIESE COMBINED ---------- -------------- ----------- ---------- Net revenues................................ $7,032,786 $2,069,931 $(74,130) $9,028,587 Costs of revenues........................... 4,891,004 1,493,756 (74,130) 6,310,630 ---------- ---------- -------- ---------- GROSS PROFIT...................... 2,141,782 576,175 -- 2,717,957 Selling, general and administrative expenses.................................. 1,721,680 803,116 -- 2,524,796 Interest expense, net....................... 47,367 63,883 -- 111,250 ---------- ---------- -------- ---------- NET INCOME (LOSS)................. $ 372,735 $ (290,824) $ -- $ 81,911 ========== ========== ======== ==========
See accompanying independent auditors' report. F-33 82 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- CASH FLOWS INFORMATION YEAR ENDED DECEMBER 31, 1996
AIRHUB CIRCUIT TEST CIRCUIT SERVICE INTERNATIONAL TEST, INC. GROUP, L.C. L.C. COMBINED ----------- ----------- ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES:........ $ (189,383) $ (107,545) $ 531,492 $ 234,564 Net income (loss) Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: Depreciation and amortization............ 162,822 59,287 122,094 344,203 (Increase) decrease in accounts receivables, net...................... 258,060 (819,416) 201,346 (360,010) (Increase) decrease in inventory......... 810,842 (2,608,954) 23,639 (1,774,473) Increase in prepaids and other assets.... -- -- (23,414) (23,414) Increase (decrease) in accounts payable............................... (96,909) 2,196,267 80,621 2,179,979 Increase (decrease) in accrued expenses.............................. (38,669) 410,675 (252,110) 119,896 Change in due to (from) related parties............................... (281,754) (10,248) 154,566 (137,436) Change in intercompany account........... (1,017,309) 1,019,433 (2,124) -- ----------- ----------- ---------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............. (392,300) 139,499 836,110 583,309 ----------- ----------- ---------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES -- capital expenditures, net........................................ 48,423 (642,966) (788,097) (1,382,640) ----------- ----------- ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from notes payable and other obligations.............................. (166,551) 1,099,851 968,260 1,901,560 Proceeds from sale of stock................ 130,020 -- -- 130,020 Distributions to stockholders.............. -- -- (500,000) (500,000) ----------- ----------- ---------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.............. (36,531) 1,099,851 468,260 1,531,580 ----------- ----------- ---------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. (380,408) 596,384 516,273 732,249 ----------- ----------- ---------- ----------- Cash and cash equivalents at beginning of year....................................... 210,987 38,372 508,728 758,087 ----------- ----------- ---------- ----------- Cash and cash equivalents at end of year..... (169,421) 634,756 1,025,001 1,490,336 =========== =========== ========== =========== Supplemental disclosure of cash information-- Interest paid.............................. $ 98,000 $ 71,000 $ 249,000 $ 418,000 =========== =========== ========== ===========
See accompanying independent auditors' report. F-34 83 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- CASH FLOWS INFORMATION YEAR ENDED DECEMBER 31, 1995
AIRHUB CIRCUIT SERVICE CIRCUIT TEST TEST, INC. GROUP, L.C. INTERNATIONAL, L.C. COMBINED ---------- ----------- ------------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................... $ 355,566 $(141,600) $ 1,085,753 $ 1,299,719 Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: Depreciation and amortization.......... 203,597 8,368 84,704 296,669 Increase in accounts receivables, net.................................. (370,082) (449,172) (1,561,804) (2,381,058) (Increase) decrease in inventory....... 242,180 (97,280) (1,218,583) (1,073,683) (Increase) decrease in prepaids and other assets......................... (17,798) -- 2,178 (15,620) Increase in accounts payable........... 36,453 379,400 911,988 1,327,841 Increase in accrued expenses........... 49,573 43,832 389,112 482,517 Change in due to (from) related parties.............................. (255,947) (2,207) 143,833 (114,321) Change in intercompany account......... (11,439) -- 11,439 -- --------- --------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............ 232,103 (258,659) (151,380) (177,936) --------- --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES -- capital expenditures, net................. 42,130 (151,210) (512,674) (621,754) --------- --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: net proceeds from notes payable and other obligations............................ (219,440) 448,241 1,205,777 1,434,578 --------- --------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS..................... 54,793 38,372 541,723 634,888 Cash and cash equivalents at beginning of year...................................... 156,194 -- (32,995) 123,199 --------- --------- ----------- ----------- Cash and cash equivalents at end of year.... $ 210,987 $ 38,372 $ 508,728 $ 758,087 ========= ========= =========== =========== Supplemental disclosure of cash information -- Interest paid.............. $ 128,000 $ 7,000 $ 156,000 $ 291,000 ========= ========= =========== ===========
See accompanying independent auditors' report. F-35 84 CIRCUIT TEST, INC. AND AFFILIATES COMBINING SCHEDULE -- CASH FLOWS INFORMATION YEAR ENDED DECEMBER 31, 1994
CIRCUIT TEST CIRCUIT INTERNATIONAL, TEST, INC. L.C. COMBINED ----------- -------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................. $ 372,735 $(290,824) $ 81,911 Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities: Depreciation and amortization.................. 195,200 57,739 252,579 Increase in accounts receivables, net.......... (211,334) (219,574) (430,908) Increase in inventory.......................... (511,571) 48,664 (560,235) (Increase) decrease in prepaids and other assets....................................... 106,122 (3,519) 102,603 Increase in accounts payable................... 165,421 99,988 265,409 Increase (decrease) in accrued expenses........ (20,694) 154,692 133,998 Change in due to (from) related parties........ 239,655 2,803 242,458 Change in intercompany account................. (101,024) 101,024 -- ----------- --------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.............................. 234,510 (146,695) 87,815 ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES -- capital expenditures, net................................. (37,560) (330,978) (368,538) ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from notes payable and other obligations.................................... 871,140 386,662 1,257,802 Distributions to stockholders..................... (1,073,022) -- (1,073,022) ----------- --------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.............................. (201,882) 386,662 184,780 ----------- --------- ----------- NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (4,932) (91,011) (95,943) Cash and cash equivalents at beginning of year...... 161,126 58,016 219,142 ----------- --------- ----------- Cash and cash equivalents at end of year............ $ 156,194 $ (32,995) $ 123,199 =========== ========= =========== Supplemental disclosure of cash information -- Interest paid..................................... $ 54,000 $ 110,000 $ 164,000 =========== ========= ===========
See accompanying independent auditors' report. F-36 85 ====================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. --------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Cautionary Statement Regarding Forward- Looking Statements and Forecasts..... 8 Risk Factors........................... 8 Use of Proceeds........................ 14 Price Range of Common Stock............ 14 Dividend Policy........................ 14 Capitalization......................... 15 Selected Consolidated Historical Financial Data....................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 18 Business and Properties................ 26 Certain Relationships and Related Transactions......................... 34 Management............................. 35 Principal Shareholders................. 39 Selling Shareholders................... 41 Description of Capital Stock and Other Securities........................... 41 Shares Eligible for Future Sale........ 43 Underwriting........................... 44 Legal Matters.......................... 46 Experts................................ 46 Available Information.................. 46 Incorporation of Certain Documents by Reference............................ 47 Index to Financial Statements.......... F-1
====================================================== ====================================================== 3,000,000 SHARES EFTC CORPORATION COMMON STOCK EFTC CORPORATION LOGO ------------ PROSPECTUS JUNE , 1998 ------------ SALOMON SMITH BARNEY J.C. BRADFORD & CO. BANCAMERICA ROBERTSON STEPHENS NEEDHAM & COMPANY, INC. ====================================================== 86 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered (all amounts are estimated except the SEC Registration Fee and the NASD Filing Fee).
SEC Registration Fee........................................ $ 27,617 National Association of Securities Dealers, Inc. Fee........ 9,862 Nasdaq Listing Fee.......................................... 17,500 Blue Sky Qualification Fees and Expenses (including legal fees)..................................................... 3,500+ Printing Expenses........................................... 170,000+ Legal Fees and Expenses..................................... 80,000+ Auditors' Fees and Expenses................................. 60,000+ Transfer Agent and Registrar Fees........................... 3,500+ Miscellaneous Expenses...................................... 3,021+ -------- Total............................................. $375,000+ ========
- --------------- + Estimated. ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article Five of the Company's Articles of Incorporation and Article VI of the Company's Bylaws require the Company to indemnify, to the fullest extent authorized by applicable law, any person who is or is threatened to be made a party to any civil, criminal, administrative, arbitrative or investigative proceeding instituted or threatened by reason of the fact that he is or was a director or officer of the Company or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust, other enterprise or employee benefit plan. Article Four of the Company's Articles of Incorporation provides that, to the fullest extent permitted by the Colorado Corporation Code or any successor statute, directors of the Company shall not be liable to the Company or any of its shareholders for monetary damages caused by a breach of a fiduciary duty by such director. Sections 7-109-102 and 103 of the Colorado Business Corporation Act ("CBCA") authorize the indemnification of directors and officers against liability incurred by reason of being a director or officer and against expenses (including attorney's fees) judgments, fines and amounts paid in settlement and reasonably incurred in connection with any action seeking to establish such liability, in the case of third-party claims, if the officer or director acted in good faith and in a manner he reasonably believed to be in or not opposed to the best Interests of the corporation, and in the case of actions by or in the right of the corporation, if the officer or director acted in good faith and in a manner he reasonably believed to be in or not opposed to the best Interest of the corporation and if such officer or director shall not have been adjudged liable to the corporation, unless a court otherwise determines. Indemnification is also authorized with respect to any criminal action or proceeding where the officer or director also had no reasonable cause to believe his conduct was unlawful. The above discussion of the Company's Articles of Incorporation, Bylaws and the CBCA is only a summary and is qualified in its entirety by the full text of each of the foregoing. Reference is made to the Underwriting Agreement, the proposed form of which is filed as Exhibit 1.1, in which each Underwriter agrees, under certain circumstances, to indemnify the directors and officers of the Company and certain other persons against certain civil liabilities. II-1 87 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- +1.1 -- Form of Underwriting Agreement between the Company and the Underwriters +5.1 -- Form of Opinion of Holme Roberts & Owen LLP as to the legality of issuance of the Common Stock *23.1 -- Consent of KPMG Peat Marwick LLP *23.2 -- Consent of KPMG Peat Marwick LLP 23.3 -- Consent of Holme Roberts & Owen LLP (See Exhibit 5.1) +23.4 -- Consent of Robert Monaco +24.1 -- Powers of Attorney +24.2 -- Power of Attorney of Brent L. Hofmeister
- --------------- * Filed herewith + Previously filed (b) Financial Statement Schedules
SCHEDULE NUMBER DESCRIPTION OF SCHEDULES -------- ------------------------
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable and therefore have been omitted or the information required by the applicable schedule is included in the notes to the financial statements. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-2 88 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 89 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant that it has reasonable grounds to believe that it meets all of the requirements for filing Form S-3 and has duly caused this Amendment Number 2 to be signed on its behalf by the undersigned, thereunto duly authorized, in Denver, Colorado, on this 1st day of June 1998. EFTC CORPORATION By: /s/ JACK CALDERON ---------------------------------- Jack Calderon President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- * Chairman of the Board and June 1, 1998 - ----------------------------------------------------- Director Gerald J. Reid /s/ JACK CALDERON Director, President and Chief June 1, 1998 - ----------------------------------------------------- Executive Officer (Principal Jack Calderon Executive Officer) /s/ STUART W. FUHLENDORF Director and Chief Financial June 1, 1998 - ----------------------------------------------------- Officer (Principal Financial Stuart W. Fuhlendorf Officer) * Controller (Principal Accounting June 1, 1998 - ----------------------------------------------------- Officer) Brent L. Hofmeister * Director June 1, 1998 - ----------------------------------------------------- Allen S. Braswell, Sr. * Director June 1, 1998 - ----------------------------------------------------- Allen S. Braswell, Jr. * Director June 1, 1998 - ----------------------------------------------------- Darrayl F. Cannon * Director June 1, 1998 - ----------------------------------------------------- James A. Doran * Director June 1, 1998 - ----------------------------------------------------- Charles E. Hewitson * Director June 1, 1998 - ----------------------------------------------------- Gregory C. Hewitson
II-4 90
SIGNATURES TITLE DATE ---------- ----- ---- * Director June 1, 1998 - ----------------------------------------------------- Matthew J. Hewitson * Director June 1, 1998 - ----------------------------------------------------- Robert R. McNamara * Director June 1, 1998 - ----------------------------------------------------- Lloyd A. McConnell * Director June 1, 1998 - ----------------------------------------------------- Richard L. Monfort * Director June 1, 1998 - ----------------------------------------------------- Lucille A. Reid * Director June 1, 1998 - ----------------------------------------------------- Masoud S. Shirazi * Director June 1, 1998 - ----------------------------------------------------- David W. Van Wert By: /s/ STUART W. FUHLENDORF ------------------------------------------------ Stuart W. Fuhlendorf, as attorney-in-fact
II-5 91 EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- +1.1 -- Form of Underwriting Agreement between the Company and the Underwriters +5.1 -- Form of Opinion of Holme Roberts & Owen LLP as to the legality of issuance of the Company's Common Stock *23.1 -- Consent of KPMG Peat Marwick LLP *23.2 -- Consent of KPMG Peat Marwick LLP 23.3 -- Consent of Holme Roberts & Owen LLP (See Exhibit 5.1) +23.4 -- Consent of Robert Monaco +24.1 -- Powers of Attorney +24.2 -- Power of Attorney of Brent L. Hofmeister
- --------------- * Filed herewith + Previously filed EX-23.1 2 CONSENT OF KPMG 1 EXHIBIT 23.1 Independent Auditors' Consent The Board of Directors EFTC Corporation: We consent to the inclusion herein of our report dated May 1, 1998, relating to the consolidated balance sheets of EFTC Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997, and incorporation by reference herein of our report dated January 21, 1998, relating to the consolidated balance sheets of EFTC Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997 (which report is no longer applicable), which report appears in the December 31, 1997 annual report on Form 10-K of EFTC Corporation, and to the references to our firm under the headings "Summary Consolidated Historical Financial Information", "Selected Consolidated Historical Financial Data", and "Experts" in the Prospectus. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Denver, Colorado May 27, 1998 EX-23.2 3 CONSENT OF KPMG 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT ----------------------------- The Board of Directors EFTC Corporation: We consent to the inclusion of our report dated July 11, 1997, with respect to the combined balance sheets of Circuit Test, Inc. and affiliates as of December 31, 1996 and 1995, and the related combined statements of earnings, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the Form S-3, as amended, of EFTC Corporation. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Memphis, Tennessee May 27, 1998 -----END PRIVACY-ENHANCED MESSAGE-----