-----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, VyYO1B6CZ61w4J84+WsfENB4d3IpgBt2RKiTLcYO0CwokDxmgDBU1ogn6T5vM8P4 YasT3JuA1p8v8yfhtxBNqw== 0001035704-97-000359.txt : 19971114 0001035704-97-000359.hdr.sgml : 19971114 ACCESSION NUMBER: 0001035704-97-000359 CONFORMED SUBMISSION TYPE: S-2/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ELECTRONIC FAB TECHNOLOGY 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-2/A SEC ACT: SEC FILE NUMBER: 333-38433 FILM NUMBER: 97714551 BUSINESS ADDRESS: STREET 1: 7251 WEST 4TH ST CITY: GREELEY STATE: CO ZIP: 80634-9763 BUSINESS PHONE: 3033533100 S-2/A 1 AMENDMENT NO. 1 TO S-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997 FILE NO. 333-38433 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- EFTC CORPORATION (Exact name of registrant as specified in its charter) COLORADO 84-0854616 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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 number, (303) 451-8200 including area code, of registrant's principal (Address, including zip code, and telephone number, executive offices) including area code, of agent for service)
Copies to: FRANCIS R. WHEELER, ESQ. ALLAN G. SPERLING, 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 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 check the following box. [ ] If the Registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of the Form, 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 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. [ ] --------------------- 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 BY 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 NOVEMBER 12, 1997 PROSPECTUS 4,000,000 SHARES EFTC CORPORATION EFTC CORPORATION LOGO COMMON STOCK ($0.01 PAR VALUE) Of the 4,000,000 shares of Common Stock, $0.01 par value per share (the "Common Stock"), of EFTC Corporation (the "Company" or "EFTC") offered hereby, 3,500,000 shares are being offered by the Company and 500,000 shares are being offered by certain shareholders of the Company (the "Selling Shareholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Shareholders. See "Selling Shareholders." The Common Stock is quoted on the Nasdaq National Market under the symbol "EFTC." The last reported sale price of the Common Stock on October 20, 1997, as reported by the Nasdaq National Market, was $16.00 per share. See "Price Range of Common Stock." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. 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.
- ------------------------------------------------------------------------------------------------------------------ PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO PUBLIC DISCOUNT COMPANY(1) SELLING SHAREHOLDERS Per Share..................... $ $ $ $ Total(2)...................... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------
(1) Before deducting offering expenses estimated to be $ , all of which will be payable by the Company. (2) The Company and the Selling Shareholders have granted the Underwriters a 30-day option to purchase up to 600,000 additional shares of Common Stock at the Price to Public, less the Underwriting Discount, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount, Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel, or modify the offer without notice. It is expected that delivery of the shares will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through the facilities of The Depository Trust Company, on or about , 1997. SALOMON BROTHERS INC J.C. BRADFORD & CO. PACIFIC CREST SECURITIES INC. The date of this Prospectus is , 1997. 3 At the Company's annual meeting held on May 28, 1997, the shareholders voted to change the name of the Company from "Electronic Fab Technology Corp." to "EFTC Corporation." The principal executive offices of the Company are located at 9351 Grant Street, Sixth Floor, Denver, Colorado 80229. ------------------------ 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, 27 AND 28, 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" 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") and CTI International, L.C. ("CTI LLC") and CTLLC Acquisition Corp. ("Acquisition Corp." ). CEI's affiliate, Current Electronics (Washington) Inc. ("CEWI"), has recently been merged into CEI. 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 Acquisition Corp. 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 and repair and warranty services to original equipment manufacturers ("OEMs"). The Company's manufacturing services focus on a market niche of "high-mix" electronic products--products that are characterized by small lot sizes with differences in configuration from each lot size to the next--with an emphasis on high-speed production. Following its recent acquisition of the CTI Companies, the Company now also 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. The Company's ten largest customers on a pro forma revenue basis for the first nine months of 1997, taking into account the Company's recently completed acquisitions, would have been: Exabyte Corporation, AlliedSignal Inc., Apple Computer, Inc., Hewlett-Packard Company, Ohmeda Inc., ADC Telecommunications, International Business Machines Corporation, Gateway 2000, Inc., Sony Corp of America, Inc. and ESI Automation 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 $140 billion in 2000, 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 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 high-mix manufacturing capability, "box-build" and "build-to-order" ("BTO") capabilities, inventory and logistics management, and integrated repair and warranty services. STRATEGY The Company's objective is to be a leading provider of electronic manufacturing services exclusively focused on the needs of high-mix OEM customers in its targeted markets. The Company believes its customers are increasingly focused on improved inventory management, reduced time to market, BTO 3 5 production, access to leading-edge manufacturing technology and reduced capital investment. 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, and allows the Company to produce high-mix products with high levels of responsiveness and flexibility to changes in customers' needs. The nature of high-mix products historically 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 developing plans 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 1997, the Company has expanded its operations from one manufacturing facility in Colorado at the beginning of 1997 to seven facilities throughout the United States at September 30, 1997. The Acquisitions, described below, have strategically expanded the Company's breadth of high-mix service offerings to include concurrent engineering, subassembly manufacturing, next-day delivery of assemblies and warranty and post-warranty repair services.
DATE OF COMPANY / ASSETS ACQUISITION ACQUIRED DESCRIPTION - ----------- ---------------- ----------- September 1997......... CTI Companies The Company acquired three repair and warranty (the "CTI Merger") services sites, including two located at the Overnight Delivery Hubs. August and September 1997....... AlliedSignal Assets (the The Company subleased a production facility, "AlliedSignal Asset acquired related equipment and inventory and hired Purchase") personnel located in Ft. Lauderdale, Florida. The Company has agreed to acquire, subject to certain contingencies, the inventory and equipment, and has hired personnel located in Tucson, Arizona. February 1997.......... CE Companies The Company acquired two manufacturing facilities (the "CE Merger") located in Newberg, Oregon and Moses Lake, Washington.
For further descriptions of 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 -- Recent Developments." The Company operates manufacturing facilities in four plants located in Colorado, Oregon, Washington and Florida and has one new and one replacement plant under construction. For further descriptions of the Company's properties, see "Business and Properties -- Description of Property." The Company's repair and warranty services are carried out in three locations: Memphis, Tennessee, Louisville, Kentucky and Tampa, Florida. At September 30, 1997, the Company had 1,779 employees. 4 6 SUMMARY CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following tables present for the Company (i) summary consolidated historical financial data as of and for each of the three years ended December 31, 1996, as of and for the nine months ended September 30, 1997 and for the nine months ended September 30, 1996; (ii) unaudited pro forma financial data for the year ended December 31, 1996 and the nine months ended September 30, 1997 reflecting the consummation of the CTI Merger and the CE Merger, as described elsewhere herein; and (iii) unaudited pro forma adjusted financial data for the year ended December 31, 1996 and the nine months ended September 30, 1997 and unaudited adjusted financial data as of September 30, 1997 adjusted for the issuance of Common Stock being offered hereby and the related use of proceeds from such offering. The summary consolidated historical financial data set forth below as of September 30, 1997, and December 31, 1996 and 1995 and for the three years ended December 31, 1996 and the nine months ended September 30, 1997 have been derived from the Company's financial statements audited by KPMG Peat Marwick LLP included elsewhere in this Prospectus. The summary consolidated historical financial data as of December 31, 1994 is derived from financial statements not included or incorporated by reference herein. The summary historical financial data set forth below for the nine months ended September 30, 1996 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 September 30, 1997 are not necessarily indicative of the results to be expected for the entire year. 5 7
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------------------------- ---------------------------------------------------- PRO FORMA PRO PRO FORMA PRO AS ADJUSTED FORMA AS ADJUSTED FORMA 1997(3) 1997(2) 1997 1996 1996(3) 1996(2) 1996(1) 1995 1994 ----------- ------- ------- ------- ----------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales.............. $98,020 $98,020 $64,973 $44,576 $115,910 $115,910 $56,880 $49,220 $52,542 Cost of sales.......... 81,766 81,766 56,740 42,676 100,590 100,590 53,980 45,325 47,123 ------- ------- ------- ------- -------- -------- ------- ------- ------- Gross profit......... 16,254 16,254 8,233 1,900 15,320 15,320 2,900 3,895 5,419 Selling, general and administrative expense.............. 14,110 14,110 5,126 3,403 13,240 13,240 4,196 3,094 2,396 Amortization of goodwill............. 1,012 1,012 157 -- 1,349 1,349 -- -- -- Impairment of fixed assets............... -- -- -- 726 726 726 726 -- -- ------- ------- ------- ------- -------- -------- ------- ------- ------- Operating income (loss)............. 1,132 1,132 2,950 (2,229) 5 5 (2,022) 801 3,023 ------- ------- ------- ------- -------- -------- ------- ------- ------- Other income (expense): Interest expense..... -- (2,873) (1,054) (384) -- (3,275) (526) (399) (175) Other income, net.... 1,197(4) 1,197(4) 1,206(4) 17 83 83 83 79 110 ------- ------- ------- ------- -------- -------- ------- ------- ------- 1,197 (1,676) 152 (367) 83 (3,192) (443) (320) (65) ------- ------- ------- ------- -------- -------- ------- ------- ------- Income (loss) before income taxes....... 2,329 (544) 3,102 (2,596) 88 (3,187) (2,465) 481 2,958 Income tax expense (benefit)............ 885 (207) 1,133 (920) 32 (1,078) (872) 127 1,041 ------- ------- ------- ------- -------- -------- ------- ------- ------- Net income (loss).... $ 1,444 $ (337) $ 1,969 $(1,676) $ 56 $ (2,109) $(1,593) $ 354 $ 1,917 ======= ======= ======= ======= ======== ======== ======= ======= ======= Income (loss) per common share, fully diluted.............. $ .12 $ (.04) $ .32 $ (.42) $ .01 $ (.27) $ (.40) $ .09 $ .53 ======= ======= ======= ======= ======== ======== ======= ======= ======= Weighted average common and common equivalent shares outstanding... 11,578 8,078 6,219 3,968 11,281 7,781 3,942 3,962 3,627 ======= ======= ======= ======= ======== ======== ======= ======= =======
SEPTEMBER 30, 1997 ----------------------- DECEMBER 31, AS ------------------------- ADJUSTED(7) ACTUAL(6) 1996 1995 1994(5) ----------- --------- ------ ------ ------- ) (IN THOUSANDS BALANCE SHEET DATA: Working capital............................................. $ 25,200 $ 411 $8,508 $9,868 $6,744 Goodwill.................................................... 46,360 40,360 -- -- -- Total assets................................................ 123,646 117,646 22,870 24,984 23,479 Total debt.................................................. 11,424 57,514 4,860 3,230 3,400 Stockholder's equity........................................ 82,276 30,186 13,922 15,509 14,989
- --------------- (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) Pro forma for the acquisitions of the CE Companies and the CTI Companies as if these acquisitions had occurred on January 1, 1996 for pro forma statement of operations data purposes. See "Unaudited Pro Forma Condensed Combined Financial Statements." (3) Pro forma assuming the offering made hereby and the Acquisitions had occurred on January 1, 1996, and a portion of the proceeds were used to repay certain debt on that date, resulting in a decrease in interest expense of $2.9 million and $3.3 million for the nine months ended September 30, 1997 and the year ended December 31, 1996, respectively. (4) Includes gain on the sale of a building used in the Company's manufacturing operations of approximately $1.2 million. (5) The Company received net proceeds of $9.3 million from its initial public offering in March 1994. (6) The Company acquired the CE Companies in February 1997 for total consideration of approximately $10.9 million consisting of 1,980,000 shares of the Company's Common Stock and $5.5 million in cash, including approximately $0.6 million of transaction costs, and the CTI Companies on September 30, 1997 for $29.3 million consisting of 1,858,975 shares of the Company's Common Stock and $20.5 million in cash, including approximately $1.0 million of transaction costs. In addition, the Company acquired certain net assets of AlliedSignal in August and September 1997. See "Management's Discussion and Analysis -- Recent Developments." (7) Adjusted to reflect the issuance of shares in the offering made hereby, net of related expenses, and the application of the proceeds as described in "Use of Proceeds." 6 8 THE OFFERING Common Stock Offered by the Company............................. 3,500,000 Shares Common Stock Offered by the Selling Shareholders...................... 500,000 Shares Common Stock to be Outstanding After the Offering(1)..................... 11,854,135 Shares Use of Proceeds..................... (i) to make a $6 million contingent payment to the previous owners of certain of the CTI Companies; (ii) to retire a term loan of approximately $20 million; (iii) to pay down a revolving loan which, as of September 30, 1997, had outstanding borrowings of $22.5 million and (iv) to pay a portion of the $15 million outstanding principal amount of the Company's Subordinated Notes (as defined herein). See "Use of Proceeds." Nasdaq National Market Symbol....... "EFTC" - --------------- (1) Includes 7,812,135 shares outstanding as of September 30, 1997, 2,000 shares issued pursuant to the exercise of options from September 30, 1997 to the date of this Prospectus, 500,000 shares issued on October 9, 1997 upon the exercise of certain warrants and 40,000 shares issuable upon exercise of options that are expected to be exercised by certain Selling Shareholders in connection with the offering made hereby. Does not include 1,849,000 shares of Common Stock issuable upon exercise of additional 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, 27 and 28, 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 or forecasts. 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, 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, to develop the management skills of its 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" and "-- Uncertainties Relating to the Integration of CTI Companies." 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 in furtherance of its strategy of aggressively expanding its operations, geographic markets, service offerings, customer base and revenue base. Acquisitions, including the 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. Acquisitions by the Company have in the past been financed with substantial borrowings. Although the Company intends to use the net proceeds of the offering made hereby to retire a significant 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. The Company currently has no understandings or commitments with respect to any future acquisition transactions. UNCERTAINTIES RELATING TO THE INTEGRATION OF THE CTI COMPANIES In addition to the general risks described under "-- Acquisition Strategy," the acquisition of the CTI Companies presents other specific risks. The acquisition of the CTI Companies represents a significant expansion of the Company's operations into markets in which, prior to the CTI Merger, the Company's management team had limited prior experience. The Company's management team now includes management personnel and employees of the CTI Companies who have not previously worked with the Company. The Company's effort to successfully enter the electronics repair and warranty business will depend on the ability of this new, combined management team to work together effectively and on the Company's ability to retain key personnel of the CTI Companies. The Company's future success is also dependent upon its ability to effectively integrate the CTI Companies into the Company. There can be no assurance as to the timing or amount of any marketing opportunities or revenue increases that may be realized as the result of the acquisition of the CTI Companies. Further, there can be no assurance that the CTI Merger will enhance the Company's competitive position and business prospects. The diversion of management attention, the inability to satisfy the foregoing needs and any other difficulties encountered in the integration process could have an adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS; RELATIONSHIPS WITH TRANSPORTATION PROVIDERS The Company has historically relied on a small number of customers to generate a significant percentage of its revenue. On a pro forma basis taking into account the Acquisitions, in the first nine months of 1997, three of the Company's customers each accounted for more than 10% of the Company's net revenues and the Company's ten largest customers accounted for 80.5% of the Company's net revenue. In 1996, two of the Company's customers each accounted for more than 10% of the Company's net revenues and the Company's ten largest manufacturing customers represented 77.6% of net revenue. The Company expects that AlliedSignal Inc. ("AlliedSignal"), which is one of the Company's 9 11 ten largest customers, will account in 1998 for a significantly larger portion of the Company's net revenue than it has historically. 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, has announced future plans to consolidate its outside manufacturing arrangements with another electronic contract manufacturer. See "-- Absence of Long-Term Manufacturing Contacts." 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. 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 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. 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. Such events could have a material adverse effect on the Company's business and results of operations. 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. 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 Automated Execution System ("AES"), which is a customized software package designed to meet the needs of the Company's "Asynchronous Processing Manufacturing" 10 12 ("APM") process, into software compatible with the MIS System. The Company currently expects to complete the implementation of the MIS System by December 1997 at the Company's Rocky Mountain facility. Thereafter, the Company intends to implement the MIS System at its other facilities as soon as practicable. There can be no assurance, however, that the MIS System can be properly installed at the Rocky Mountain facility or any other facility of the Company. 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." 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. DEVELOPMENT OF PLAN FOR BUILD-TO-ORDER The Company's strategy includes the development of a business plan to integrate its existing and newly-acquired businesses in order to offer BTO services, oriented around a hub-based distribution system, to its customers. This plan 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 AES software throughout all of the Company's facilities. There can be no assurance that the Company will successfully implement this plan or market these services 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." 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, the Company's success in integrating the businesses of the CTI Companies and the CE Companies and the operations acquired in the AlliedSignal Asset Purchase, costs relating to the expansion of operations including development of the Company's plan to develop a BTO business, price competition, the 11 13 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 "-- Acquisition Strategy," "-- Uncertainties Relating to the Integration of the CTI Companies" and "Management's Discussion and Analysis of 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 SCI Systems, Inc., Solectron Corporation, Benchmark Electronics, Inc., DII Group, Inc., Plexus Corp., Reptron Electronics, Inc., 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 Cerplex Group, Inc., Aurora Electronics, Inc., Logistics Management, Inc., Sequel, Inc., Data Exchange Corp., DecisionOne Holdings Corp., 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, 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. TECHNOLOGICAL CHANGE The electronic manufacturing services industry is characterized by rapidly changing technology. The Company believes that its future success will depend on its ability to keep pace with technological changes in order to meet customer needs. The Company could be required to make substantial capital expenditures to acquire equipment embodying any new technology necessary to serve the needs of its customers. See "Business and Properties -- Industry Overview," "Business and Properties -- Strategy" and "Business and Properties -- Services." INVENTORY RISK; LIMITED AVAILABILITY OF COMPONENTS AND MANUFACTURING EQUIPMENT In the first nine months of 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 12 14 services and often bears the risk of 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. In addition, 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 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 meet its customers' demands if such demands exceed anticipated levels. 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. 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 48.1% 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 also 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 1,155,000 shares of Common Stock issuable upon exercise of options granted to employees under the Company's 1989 Stock Option Plan, 1993 Incentive Stock Option Plan, Equity Incentive Plan and Stock Option Plan for Non-Employee Directors (collectively, the "Stock Option Plans"). Shortly after completion of the offering made hereby, the Company intends to file a registration statement on Form S-8 to register under the Securities Act the resale of an additional 1,140,000 shares of Common Stock reserved for issuance under 13 15 the Stock Option Plans. 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 180 days (and in some cases 360 days) after the date of this Prospectus without the prior written consent of Salomon Brothers Inc. Salomon Brothers Inc may, in its sole discretion at anytime without notice, consent to an early termination of such agreements. See "Shares Eligible for Future Sales." VOLATILITY RISK FACTOR 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 Company's 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 Company's Common Stock. There can be no assurance that the market price of the Company's 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 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." 14 16 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 $52.1 million ($53.6 million if the Underwriters' over-allotment option is exercised in full) assuming a public offering price of $16.00 (the last reported sales price of the Common Stock on the Nasdaq National Market on October 20, 1997). Such proceeds will be used by the Company as follows: (i) to make a $6.0 million contingent payment to the previous owners of certain of the CTI Companies that becomes due upon completion of the offering made hereby; (ii) to retire a term loan of approximately $20 million; (iii) to pay down the Company's revolving credit facility, which as of September 30, 1997, had outstanding borrowings of approximately $22.5 million; and (iv) to pay a portion of the outstanding subordinated notes in the principal amount of $15 million (the "Subordinated Notes") held by Richard L. Monfort. 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, among the Company and Bank One, Colorado, N.A. ("Bank One") and the Subordinated Notes were issued and sold pursuant to a Note Agreement, dated as of September 5, 1997 between the Company and Richard L. Monfort. Both the Bank One Loan and the Subordinated Notes were incurred in connection with the CTI Merger and 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 ENDING DECEMBER 31, 1997: Fourth Quarter (through October 20, 1997)................... $16 $13 3/4 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 YEAR ENDED DECEMBER 31, 1995: Fourth Quarter.............................................. 5 7/8 3 1/2 Third Quarter............................................... 7 7/8 5 3/8 Second Quarter.............................................. 8 1/4 5 First Quarter............................................... 7 5/8 5 1/4
On October 20, 1997, the last reported closing sale price for the Common Stock on the Nasdaq National Market was $16.00. As of October 9, 1997, there were approximately 247 shareholders of record of the Common Stock. 15 17 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." CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of September 30, 1997, and as adjusted to reflect (i) the sale of 3,500,000 shares of Common Stock offered by the Company hereby and (ii) the application of the estimated net proceeds to the Company therefrom, as described under "Use of Proceeds." The following table should be read in conjunction with the Consolidated Financial Statements of the Company and the related notes and other financial information included elsewhere in this Prospectus.
AT SEPTEMBER 30, 1997 ---------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Debt: Revolving credit facility................................. $22,514 $ -- Current portion of long term debt......................... 2,275 -- ------- ------- Total current debt................................ 24,789 -- Long term debt, less current portion...................... 32,725 11,424 ------- ------- Total debt........................................ 57,514 11,424 ------- ------- Shareholders' equity: Preferred Stock, $0.01 par value, 5,000,000 shares authorized, none issued and outstanding................ -- -- Common Stock, $0.01 par value, 45,000,000 shares authorized; 7,812,135 shares issued and outstanding and 11,312,135 shares as adjusted(1)....................... 78 113 Additional paid-in-capital................................ 24,443 76,498 Retained earnings......................................... 5,665 5,665 ------- ------- Total shareholders' equity........................ 30,186 82,276 ------- ------- Total capitalization.............................. $87,700 $93,700 ======= =======
- --------------- (1) Does not include 1,849,000 shares of Common Stock issuable upon exercise of outstanding options, 2,000 shares issued pursuant to the exercise of options from September 30, 1997 to the date of this Prospectus, 80,000 shares issuable upon exercise of outstanding warrants, 40,000 shares issuable upon exercise of additional options that are expected to be exercised by certain Selling Shareholders in connection with the offering made hereby, or 500,000 shares issued on October 9, 1997 upon the exercise of certain warrants for total proceeds to the Company of $4 million. 16 18 SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA The following tables present for the Company (i) selected consolidated historical financial data as of and for each of the five years ended December 31, 1996, as of and for the nine months ended September 30, 1997 and for the nine months ended September 30, 1996; (ii) unaudited pro forma financial data for the year ended December 31, 1996 and the nine months ended September 30, 1997 reflecting the consummation of the CTI Merger and the CE Merger, as described elsewhere herein; and (iii) unaudited pro forma adjusted financial data for the year ended December 31, 1996 and the nine months ended September 30, 1997 and unaudited adjusted financial data as of September 30, 1997 adjusted for the issuance of Common Stock being offered hereby and the related use of proceeds from such offering. The selected consolidated historical financial data set forth below as of September 30, 1997 and December 31, 1996 and 1995 and for the three years ended December 31, 1996 and the nine months ended September 30, 1997 have been derived from the Company's financial statements audited by KPMG Peat Marwick LLP included elsewhere in this Prospectus. The selected consolidated historical financial data as of December 31, 1994, 1993 and 1992 and for the two years ended December 31, 1993 is derived from financial statements not included or incorporated by reference herein. The selected historical financial data set forth below for the nine months ended September 30, 1996 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 September 30, 1997 are not necessarily indicative of the results to be expected for the entire year. 17 19
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31 ----------------------------------------- ---------------------- PRO FORMA PRO PRO FORMA PRO AS ADJUSTED FORMA AS ADJUSTED FORMA 1997(3) 1997(2) 1997 1996 1996(3) 1996(2) ----------- ------- ------- ------- ----------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales................... $98,020 $98,020 $64,973 $44,576 $115,910 $115,910 Cost of sales............... 81,766 81,766 56,740 42,676 100,590 100,590 ------- ------- ------- ------- -------- -------- Gross profit.............. 16,254 16,254 8,233 1,900 15,320 15,320 Selling, general and administrative expense................... 14,110 14,110 5,126 3,403 13,240 13,240 Amortization of goodwill.... 1,012 1,012 157 -- 1,349 1,349 Impairment of fixed assets.................... -- -- -- 726 726 726 ------- ------- ------- ------- -------- -------- Operating income (loss)... 1,132 1,132 2,950 (2,229) 5 5 ------- ------- ------- ------- -------- -------- Other income (expense): Interest expense.......... -- (2,873) (1,054) (384) -- (3,275) Other income, net......... 1,197(4) 1,197(4) 1,206(4) 17 83 83 ------- ------- ------- ------- -------- -------- 1,197 (1,676) 152 (367) 83 (3,192) ------- ------- ------- ------- -------- -------- Income (loss) before income taxes............ 2,329 (544) 3,102 (2,596) 88 (3,187) Income tax expense (benefit)................. 885 (207) 1,133 (920) 32 (1,078) ------- ------- ------- ------- -------- -------- Net income (loss)......... $ 1,444 $ (337) $ 1,969 $(1,676) $ 56 $ (2,109) ======= ======= ======= ======= ======== ======== Income (loss) per common share, fully diluted...... $ .12 $ (.04) $ .32 $ (.42) $ .01 $ (.27) ======= ======= ======= ======= ======== ======== Weighted average common and common equivalent shares outstanding............... 11,578 8,078 6,219 3,968 11,281 7,781 ======= ======= ======= ======= ======== ======== YEAR ENDED DECEMBER 31, ----------------------------------------------- 1996(1) 1995 1994 1993 1992 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Net sales................... $56,880 $49,220 $52,542 $29,817 $17,294 Cost of sales............... 53,980 45,325 47,123 25,688 15,129 ------- ------- ------- ------- ------- Gross profit.............. 2,900 3,895 5,419 4,129 2,165 Selling, general and administrative expense................... 4,196 3,094 2,396 1,843 1,452 Amortization of goodwill.... -- -- -- -- -- Impairment of fixed assets.................... 726 -- -- -- -- ------- ------- ------- ------- ------- Operating income (loss)... (2,022) 801 3,023 2,286 713 ------- ------- ------- ------- ------- Other income (expense): Interest expense.......... (526) (399) (175) (237) (227) Other income, net......... 83 79 110 (12) 8 ------- ------- ------- ------- ------- (443) (320) (65) (249) (219) ------- ------- ------- ------- ------- Income (loss) before income taxes............ (2,465) 481 2,958 2,037 494 Income tax expense (benefit)................. (872) 127 1,041 736 174 ------- ------- ------- ------- ------- Net income (loss)......... $(1,593) $ 354 $ 1,917 $ 1,301 $ 320 ======= ======= ======= ======= ======= Income (loss) per common share, fully diluted...... $ (.40) $ .09 $ .53 $ .52 $ .13 ======= ======= ======= ======= ======= Weighted average common and common equivalent shares outstanding............... 3,942 3,962 3,627 2,483 2,417 ======= ======= ======= ======= =======
SEPTEMBER 30, 1997 ----------------------- DECEMBER 31, AS ------------------------------------------- ADJUSTED(7) ACTUAL(6) 1996 1995 1994(5) 1993 1992 ----------- --------- ------ ------ ------- ------ ------ ) (IN THOUSANDS BALANCE SHEET DATA: Working capital........................................... $ 25,200 $ 411 $8,508 $9,868 $6,744 $2,404 $1,423 Goodwill.................................................. 46,360 40,360 -- -- -- -- -- Total assets.............................................. 123,646 117,646 22,870 24,984 23,479 11,172 6,703 Total debt................................................ 11,424 57,514 4,860 3,230 3,400 3,084 3,180 Stockholder's equity...................................... 82,276 30,186 13,922 15,509 14,989 3,547 2,090
- --------------- (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) Pro forma for the acquisitions of the CE Companies and the CTI Companies as if these acquisitions had occurred on January 1, 1996 for pro forma statement of operations data purposes. See "Unaudited Pro Forma Condensed Combined Financial Statements." (3) Pro forma assuming the offering made hereby and the Acquisitions had occurred on January 1, 1996, and a portion of the proceeds were used to repay certain debt on that date, resulting in a decrease in interest expense of $2.9 million and $3.3 million for the nine months ended September 30, 1997 and the year ended December 31, 1996, respectively. (4) Includes gain on the sale of a building used in the Company's manufacturing operations of approximately $1.2 million. (5) The Company received net proceeds of $9.3 million from its initial public offering in March 1994. (6) The Company acquired the CE Companies in February 1997 for total consideration of approximately $10.9 million consisting of 1,980,000 shares of the Company's Common Stock and $5.5 million in cash, including approximately $0.6 million of transaction costs, and the CTI Companies on September 30, 1997 for $29.3 million consisting of 1,858,975 shares of the Company's Common Stock and $20.5 million in cash, including approximately $1.0 million of transaction costs. In addition, the Company acquired certain net assets of AlliedSignal in August and September 1997. See "Management's Discussion and Analysis -- Recent Developments." (7) Adjusted to reflect the issuance of shares in the offering made hereby, net of related expenses, and the application of the proceeds as described in "Use of Proceeds." 18 20 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 and Forecasts." 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 the CTI Companies and the CE Companies and the operations acquired in the AlliedSignal Asset Purchase, costs relating to the expansion of operations including development of the Company's plan to develop a 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. 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 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 implementing 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. RECENT DEVELOPMENTS During the first nine months of 1997, the Company has completed the CE Merger, the AlliedSignal Asset Purchase and the CTI Merger, all of which have effected the Company's results of operations and financial condition in 1997. CE Merger. On February 24, 1997, the Company acquired two companies, CEI and its affiliate CEWI, for approximately $10.9 million consisting of 1,980,000 shares of Common Stock and approximately 19 21 $5.5 million in cash, which included approximately $0.6 million of transaction costs. The Company recorded goodwill of approximately $8.0 million, which will be amortized over 30 years. The combined revenues for the CE Companies for the 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." AlliedSignal Asset Purchase. In August and September 1997, the Company completed the initial elements of 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. Subject to the satisfaction of the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the Company has agreed to acquire AlliedSignal's inventory and equipment located at AlliedSignal's Tucson, Arizona facility. The Company has agreed to purchase from a third party a production facility in Tucson, Arizona that is currently being renovated. Upon completion of such renovations (expected for the first quarter of 1998), the Company will move that inventory and equipment and related employees to its own facility and will begin its own production there. The aggregate purchase price of all the assets to be acquired by the Company from AlliedSignal is expected to approximate $15 million, of which $10.9 million had been paid through September 30, 1997. The Florida facility is currently used, and the Arizona facility will initially be 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 has 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. CTI Merger. On September 30, 1997, the Company acquired the CTI Companies for approximately $29.3 million in cash and debt assumption, 1,858,975 shares of the Company's Common Stock and a $6 million contingent payment payable upon closing of this offering. The Company recorded goodwill of approximately $32.4 million, which will be amortized over 30 years. In connection with this acquisition, the Company entered into the Bank One Loan and issued the Subordinated Notes in an aggregate principal amount of $15 million. 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. The Company, after the CTI Merger, expects its receivables and inventory to turn 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. The CTI Companies' repair and warranty service is dependent on the size of the products installed base. 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 which have ranged from 26% to 33% from 1994 to 1996. This is significantly higher than the Company's historic gross profit percentages 20 22 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 Company expects the overall impact of combining operations of the CTI Companies with the Company to be higher 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. RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net sales:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------- ------------------------- 1997 1996 1996 1995 1994 ------ ------ ----- ----- ----- Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit........................ 12.7 4.3 5.1 7.9 10.3 Selling, general and administrative expenses.......................... 7.9 7.7 7.4 6.3 4.6 Goodwill............................ 0.3 -- -- -- -- Impairment of fixed assets.......... -- 1.6 1.3 -- -- ----- ----- ----- ----- ----- Operating income (loss)............. 4.5 (5.0) (3.6) 1.6 5.7 Interest expense.................... (1.6) (0.9) (0.9) (0.8) (0.3) Other, net.......................... 1.9 0.1 0.2 0.2 0.2 ----- ----- ----- ----- ----- Income (loss) before income taxes... 4.8 (5.8) (4.3) 1.0 5.6 Income tax expense (benefit)........ 1.8 (2.0) (1.5) 0.3 2.0 ----- ----- ----- ----- ----- Net Income (loss)................... 3.0 (3.8) (2.8) 0.7 3.6 ===== ===== ===== ===== =====
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30, 1996 Net Sales. The Company's net sales increased by 45.8% to $65.0 million during the first nine months of 1997, from $44.6 million for the first nine months of 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 Fort Lauderdale facility, acquired from AlliedSignal on August 11, 1997, and increased orders from existing customers. Gross Profit. Gross profit increased by 333.3% to $8.2 million during the first nine months of 1997, from $1.9 million during the first nine months of 1996. The gross profit margin for the first nine months of 1997 was 12.7% compared to 4.3% for the first nine months of 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 percentage and (ii) the adoption of APM in the later part of 1996 in the Rocky Mountain facility which has resulted in greater operating efficiencies. 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 of $0.5 million in the third quarter of fiscal 1996, primarily related to severance pay and the write-off of inventory associated with the restructuring of the Company's customer base, which accentuated the difference in gross profit between the first nine months of 1996 and 1997. Selling, General and Administrative Expenses. Selling, general and administrative ("SGA") expenses increased by 50.6% to $5.1 million for the first nine months of 1997 compared with $3.4 million for the same period for the first nine months of 1996. As a percentage of net sales, SGA expense increased to 7.9% in the first nine months of 1997 from 7.7% 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 the first nine months of 1996 would have been 5.6% of sales. The increase in SGA expenses is primarily 21 23 due to the inclusion of the CE Companies' SGA expenses, SGA expenses related to the Company's Fort Lauderdale, Florida facility, and increased investment in information technology and marketing. Impairment of Fixed Assets. During the third quarter of 1996, the Company incurred a write down associated with impaired assets in the amount of $725,869. See "-- 1996 Compared to 1995 -- Impairment of Fixed Assets." Operating Income. Operating income increased to $3.0 million for the first nine months of 1997 from a loss of $2.2 million for the first nine months of 1996. Operating income as a percentage of net sales increased to 4.5% in the first nine months of 1997 from negative 5.0% in the same period of 1996. The increase in operating income is attributable to the CE Merger, increased efficiencies associated with APM, and the acquisition and operation of the Fort Lauderdale, Florida facility. Without the $2.1 million write down in the third quarter of 1996, the nine-month 1996 operating loss would have been $0.1 million, and the operating profit margin would have been approximately breakeven. Interest Expense. Interest expense was $1.1 million for the first nine months of 1997 as compared to $0.4 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 and the AlliedSignal Asset Purchase in Arizona and Florida, and increased operating debt used to finance both inventories and receivables for the Company in the first nine months of fiscal 1997. Income Tax Expense. The effective income tax rate for the first nine months of fiscal 1997 was 36.5% compared to 35.4% from the same period a year earlier. This percentage can fluctuate because relatively small dollar amounts tend to move the rate significantly as estimates change. The Company expects that the rate will be higher in the upcoming quarters. This higher anticipated effective tax rate is due to the impact of the nondeductible goodwill component of the CTI Merger and CE Merger. 1996 Compared to 1995 Net Sales. Net sales in 1996 increased 15.6% to $56.9 million from $49.2 million in 1995. The increase in net sales is due primarily to increased material sales associated with a box-build project for one customer. The top ten customers in 1996 accounted for 77.6% of total sales volume, as compared to 80.4% in 1995. Gross Profit. Gross profit in 1996 decreased 25.5% from 1995 to $2.9 million. Gross profit as a percentage of net sales for 1996 was 5.1% compared to 7.9% 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 $3.4 million or 5.9% of net sales. These restructuring charges were severance expenses 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 35.6% over 1995 to $4.2 million. The increase is due to restructuring charges for severance expenses 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 $3.3 million which is an increase of $179,980 or 5.8% 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 7.4% in 1996 from 6.3% in 1995. Without the restructuring changes, SGA expenses would have been 5.8% of net sales for the year ended 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. 121 "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 22 24 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 the implementation of APM which resulted 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 352.3% to a loss of $2.0 million from income of $801,321 in 1995. Operating income as a percent of sales decreased to negative 3.6% 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 31.7% from 1995 to $0.5 million. Borrowing due to 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 35.4% compared to 26.3% for 1995. Tax expense for 1995 was lower due to certain research 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. 1995 Compared to 1994 Net Sales. Net sales in 1995 decreased 6.3% to $49.2 million from $52.5 million in 1994. In 1995, revenues generated from sales to three of the Company's largest customers decreased by approximately $13.5 million when compared to 1994 levels. One customer moved into a larger facility and decided to decrease its outsourced manufacturing requirements. The decrease in orders from the other two customers was due to the Company's inability to be competitive on material pricing because of the Company's inability to take advantage of volume buying. In 1994, these three customers accounted for approximately $23.6 million of revenues compared to approximately $10 million in 1995. The top ten customers in 1995 accounted for 80.4% of total sales volume, as compared to 91.3% in 1994. The Company replaced a significant portion of the lost revenues attributable to the decrease in orders with new sources of revenue during 1995. Gross Profit. Gross profit in 1995 decreased 28.1% from 1994 to $3.9 million. Gross profit as a percentage of net sales for 1995 was 7.9%, compared to 10.3% in 1994. These decreases are attributable to several factors. First, the overall number of different assemblies ordered annually by customers increased by 200 assemblies from 703 assemblies at December 31, 1994 to 903 assemblies at December 31, 1995. At December 31, 1993, the Company had approximately 619 assemblies. The increase in the number of assemblies resulted in a decrease in efficiency manifested in increased costs related to the start-up of manufacturing of such new assemblies and other costs. Such start-up costs primarily consisted of increased labor costs due to difficulties in scheduling large numbers of assemblies, including costs for new personnel, training, overtime and increased rework costs. The Company also experienced increases in other manufacturing costs, including increased costs of production planning, documentation, engineering and scrap costs. Second, the Company made investments in equipment and facilities at the end of 1994 and the beginning of 1995. Due to such investments, depreciation expense increased by $0.7 million to $1.7 million in 1995 from $1.0 million in 1994. Third, during 1995, periodic material shortages created upward pressure on material prices and affected manufacturing schedules which had a negative impact on gross margins. 23 25 Selling, General and Administrative Expenses. SGA expense for 1995 increased by 29.2% over 1994 to $3.1 million. The increase is primarily the result of non-recurring costs related to corporate re-structuring in the third quarter, consulting fees related to corporate reengineering processes, increased selling expenses related to a new sales office in Texas and a new sales representative in California, and increased administrative expenses related to being a publicly-held company. As a percentage of net sales, SGA expense increased to 6.3% in 1995 from 4.6% in 1994. Operating Income. As a result of the factors described above, operating income in 1995 decreased 73.5% in 1994 to $0.8 million. Operating income as a percentage of net sales decreased from 5.7% in 1994 to 1.6% in 1995. Interest Expense. Interest expense in 1995 increased 127.7% from 1994 to $399,389. The increase was attributable the Company's use of bank debt to fund increases in inventory growth and accounts receivable which were related to the previously mentioned change in product mix. Also, the Company acquired approximately $2.5 million in property and equipment in 1995, which was financed with short term debt. As discussed below under "Liquidity and Capital Resources," the Company received cash from a sale-leaseback transaction in December 1995 of $3.7 million. In addition, the Company retired approximately $3.3 million of short-term debt, in December 1995. Income Tax Expense. The Company's effective income tax rate for 1995 was 26.3% compared to 35.2% for 1994. The decrease in the effective tax rate is primarily attributable to certain research expenditures incurred in 1992, 1993, 1994 and 1995 for which the Company will claim federal tax credits. Also, the Company's facilities are located in a state enterprise zone. The Company receives state tax credits for capital expenditures and increases in the number of Company employees. As sales and earnings increase, these state tax credits will have a relatively smaller effect on the Company's effective income tax rate. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, working capital totaled $411,296. Working capital at December 31, 1996 was $8.5 million compared to $9.9 million at December 31, 1995 and $6.7 million at December 31, 1994. The increase in working capital from 1994 to 1995 is attributable primarily to a sale-leaseback transaction which closed in December 1995. The Company sold equipment at a sales price of $3.7 million and retired short-term debt in the amount of $3.3 million in December 1995. The subsequent decrease in working capital in 1996 is attributable primarily to the purchase of fixed assets and long-term debt retirement. The decrease in working capital in the first nine months of 1997 is attributable to the increased borrowings under the Company's line of credit associated with the CTI Merger. Cash used in operations for the first nine months of 1997 was $12.3 million compared to $0.5 million in the same period last year. Cash provided by operations in 1996 was $35,667 compared to cash used in operations of $0.9 million in 1995 and $0.7 million in 1994. 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. The increase in cash used in operations in 1995 is attributable primarily to increases in accounts receivable and inventories. Accounts receivable increased 434.9% to $18.3 million at September 30, 1997 from $3.4 million at September 30, 1996. Accounts receivable decreased 22.4% to $3.9 million at December 31,1996 from $5.0 million at December 31, 1995, and increased 29.1% at December 31, 1995 from $3.9 million at December 31, 1994. A comparison of receivable turns (i.e., annualized sales divided by current accounts receivable) for the first nine months of 1997 and the first nine months of 1996 is 4.7 and 17.4 turns, respectively. The 1997 receivable turn is distorted because the sales for the first quarter of 1997 includes only one month and four days of the CE Companies' revenues. The balance sheet of the Company as of September 30, 1997, includes the consolidation of the CTI Companies and the AlliedSignal Asset Purchase, but there has been no corresponding revenue recognition from the CTI Merger and only one month and 20 days of the revenues from the operations in Fort Lauderdale, Florida and Tucson, Arizona. Receivable turns for 1996, 1995 and 1994 were 14.7, 9.9 and 13.6, respectively. Inventories increased 258.1% to $32.8 million at 24 26 September 30, 1997 from $10.1 million at September 30, 1996. Inventories decreased 7.2% to $9.1 million on December 31, 1996 from $9.9 million on December 31, 1995 and increased 31.8% on December 31, 1995 from $7.5 million on December 31, 1994. A comparison of inventory turns (i.e., annualized cost of sales divided by current inventory) for the first nine months of fiscal 1997 and 1996 shows a decrease to 2.3 from 5.6, respectively. The 1997 inventory turns are distorted because the cost of sales for the first quarter includes only one month and four days of the CE Companies' costs. Also the 1997 third quarter ending balance sheet includes the consolidation of the CTI Companies and the AlliedSignal Asset Purchase, but there has been no corresponding revenue recognition from the CTI Companies and only one month and 20 days of costs of running the Fort Lauderdale, Florida and Tuscon, Arizona operations. Inventory turns for 1996, 1995 and 1994 were 5.9, 4.6 and 6.3, respectively. Inventory increases in the early stages of new turnkey business may create delays and decrease the turning of inventory until the new assemblies are in full production. The Company used cash to purchase capital equipment totaling $6.4 million in the first nine months of 1997, compared with $2.1 million in the same period last year. The Company also used cash to purchase the CE Companies and CTI Companies, as explained earlier, in the amount of $24.6 million. Proceeds from long-term borrowings of $35.0 million were used to help fund the purchase of the CE Companies and CTI Companies. The Company used cash from investing activities of $2.0 million in 1996, compared to providing cash of $1.3 million in 1995 and using cash of $9.0 million in 1994. The Company used cash to purchase capital equipment totaling $2.4 million in 1996, compared with $2.5 million in 1995. In 1995, the Company received cash from the sale of equipment primarily from the sale-leaseback transaction mentioned above of $3.7 million. In 1994, capital equipment consisting primarily of manufacturing and computer equipment in the amount of $5.3 million was purchased. In addition, $3.7 million was spent for the construction of a new manufacturing facility and the purchase of an additional parcel of land to allow for future expansion. The capital equipment was purchased with proceeds from the Company's initial public offering in 1994. In connection with the CTI Merger and the AlliedSignal Asset Purchase, the Company entered into the Bank One Loan comprised of a $25 million revolving line of credit, maturing on September 30, 2000 and a $20 million term loan maturing on September 30, 2002. The proceeds of the Bank One Loan were used for (i) funding the CTI Merger and (ii) repayment of the then-existing Bank One line of credit, bridge facility and equipment loan. The Bank One Loan bears interest at a rate based on either the LIBOR or Bank One prime rate plus applicable margins ranging from 3.25% to 0.50% for the term facility and 2.75% to 0.00% for the revolving facility. 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 memberships 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 contains financial covenants restricting maximum annual capital expenditures, recapturing excess cash flow and requiring maintenance of the following ratios: (i) maximum senior debt to EBITDA (as defined in the agreement for the Bank One Loan); (ii) maximum total debt to EBITDA; (iii) minimum fixed charge coverage; (iv) minimum EBITDA to interest; and (v) minimum tangible net worth requirement with periodic step-up. As of September 30, 1997, the borrowing availability under the Bank One Loan was approximately $2.5 million. In addition to the Bank One Loan, the Company has issued the Subordinated Notes in the aggregate principal amount of $15 million, with a maturity date of December 31, 2002 and bearing a rate of the London Inter-Bank Offered Rate, adjusted monthly ("LIBOR"), plus 2.00% in order to fund the AlliedSignal Asset Purchase. The Subordinated Notes are payable in four annual installments of $50,000 and one final payment of $14.8 million at maturity, but may be prepaid in whole or in part at the option of the Company at any time. All payments and prepayments in respect of the Subordinated Notes are fully subordinated to all payments in respect of the Bank One Loan. The Subordinated Notes are accompanied by warrants for 500,000 shares of the Company's Common Stock at an exercise price of $8.00 (the 25 27 "Warrants"). The Warrants were exercised on October 9, 1997. The holder of the Subordinated Notes is Richard L. Monfort, a director of the Company. See "Certain Relationships and Related Transactions." The Company has begun construction of a new manufacturing facility in Oregon to replace its present facility located in Oregon at an approximate cost of $5.8 million. The Company will fund this from operational cash flow and, to the extent necessary, available lines of credit. The Company intends to use the proceeds from the offering made hereby to make a $6 million contingent payment to the previous owners of certain of the CTI Companies and to repay all or part of the Bank One Loan. 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. New Accounting Standard. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128") which revised the calculation and presentation provisions of Accounting Principles Board Opinion 15 and related interpretations. SFAS 128 is effective for the Company's fiscal year ending December 31, 1997 and retroactive application is required. The Company believes the adoption of SFAS 128 will not have a material effect on its determination of earnings per share. 26 28 BUSINESS AND PROPERTIES GENERAL The Company is a leading independent provider of high-mix electronic manufacturing services ("EMS") and repair and warranty services to OEMs. The Company's manufacturing services focus on a market niche of high-mix electronic products -- products that are characterized by small lot sizes with differences in configuration from each lot size to the next -- with an emphasis on high-speed production. Following its recent acquisition of the CTI Companies, the Company now also provides hub-based repair and warranty services that are marketed as part of the logistics service offerings of the two largest companies that specialize in overnight delivery services in the United States. These hub-based services are provided principally through facilities located inside the Overnight Delivery Hubs in Memphis, Tennessee and Louisville, Kentucky. Through a series of acquisitions completed in 1997, the Company has expanded its operations from one manufacturing facility in Colorado at the beginning of 1997 to seven facilities throughout the United States at September 30, 1997. Additionally, these Acquisitions have strategically expanded the Company's breadth of high-mix service offerings to include concurrent engineering, subassembly manufacturing, next-day delivery of assemblies and warranty and post-warranty repair services. The Acquisitions are expected to provide the Company with new opportunities to develop programs to help its existing customers reduce inventory, and allow the Company to cross-market its services to the CTI Companies' existing customer base. See "Prospectus Summary -- Acquisitions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- The Company -- Recent Developments." INDUSTRY OVERVIEW Electronics 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, 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 $140 billion in 2000, 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 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 $87.4 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 27 29 computers, workstations and data communications equipment -- will grow from $17.4 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 digital avionics, electronic medical diagnostics and treatment, 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 the key competitive trends in the industry may be summarized as follows: COMPETITIVE TRENDS
YESTERDAY TODAY AND TOMORROW --------- ------------------ Contract manufacturers as generalists Contract manufacturers as specialists Quality (key differentiator) Quality (prerequisite) Manufacturing (only competency) Integrated value added services (in addition to manufacturing) Just-in-time (parts procurement) Just-in-time (complete process) Manufacture printed circuit boards Manufacture complete products Build-to-forecast Build-to-order Typical warranty periods (90 days to Typical warranty periods (three to five one year) years)
The Company believes that OEMs are offering, and in the future will increasingly offer, electronic products that are customized to specifications of OEMs on a "box-build" basis and 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 28 30 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 be a leading provider of electronic manufacturing services exclusively focused on the needs of high-mix OEM customers in its targeted markets. The Company believes its customers are increasingly focused on improved inventory management, reduced time to market, BTO production, access to leading-edge manufacturing technology and reduced capital investment. The Company's strategy is to offer customers select service offerings which utilize the Company's core competency of small-lot processing and logistics benefits arising from the unique positioning of its repair and warranty services and, in the future, BTO services within the Overnight Delivery Hubs. The Company believes that this strategy will offer OEMs the most efficient model to deliver BTO products. 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 in 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 to two days. 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 now 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. See "--Services--Repair and Warranty Services." Provide Build-To-Order Services. The Company believes it has the necessary skills and processes and is developing the integration plan necessary 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 29 31 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 will be 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 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'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 developing plans to offer BTO services in the future which would be based at the Overnight Delivery Hubs. In addition, 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 to two days. 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 30 32 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. High-mix manufacturing using APM involves a discontinuous series of products fed through assembly in a start-stop manner, heretofore incompatible with high-speed techniques. APM is an alternative to both CFM and batch processing often used in smaller scale manufacturing. Until now, the combination of small lots with numerous differences in configuration from each 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 ECMs cannot accommodate high-mix product assembly without sacrificing speed, while smaller ECMs, 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 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 Design and Testing Services. The Company also participates in product design by providing its customers "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 31 33 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 also offers customers a quick-turnaround, turnkey prototype service. 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 Company has recently acquired the CTI Companies, 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 on costs 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 spare part inventory turnover rates significantly. The experiences of the CTI Companies with those customers provide evidence to demonstrate to potential OEM customers the cost savings associated with significant increases in service spare inventory turnover. 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, PDAs, 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. 32 34 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, sell 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 using its APM model will permit the Company to begin providing BTO services. The Company is developing a plan to begin 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. The Company can give no assurance, however, that it will begin BTO service or that the Company will successfully attract customers to utilize this new offering. CUSTOMERS AND MARKETING The Company seeks to serve traditional high-mix OEMs and OEMs that produce high-volume products and need high-mix repair and warranty services, which by their nature are high-mix services, or plan to implement high-mix BTO strategies. The Company has recently reorganized its manufacturing marketing efforts to focus on the following markets: (1) aerospace and avionics; (2) medical devices; (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 transporation providers. 33 35 The following table represents the Company's net sales for manufacturing services by industry segment:
NINE MONTHS 1997 1996 1995 ----------- ----- ----- Aerospace and Avionics............................ 17.0% 0.0% 0.0% Medical........................................... 17.9% 29.3% 31.0% Communications.................................... 10.7% 1.5% 9.1% Industrial Controls and Instrumentation........... 23.7% 12.6% 9.1% Computer-Related.................................. 29.5% 54.4% 49.0% Other............................................. 1.2% 2.2% 1.8% ----- ----- ----- 100.0% 100.0% 100.0%
The Company's customer base for manufacturing services includes Exabyte Corporation, Ohmeda, AlliedSignal, Hewlett-Packard Company ("HP"), ADC Telecommunications, and Sony Corp of America, Inc. ("Sony"). The relationships are typically long-term with most over five years old. 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. See "Risk Factors -- Dependence on a Limited Number of Customers; Relationships With Transportation Providers." The Company's customer base for repair and warranty services includes 25 of the largest PC and electronics OEMs, including International Business Machines Corporation, Dell Computer Corporation, Gateway 2000, Inc., HP, Bay Networks, Inc. Ascend Communications Inc., Cisco Systems Inc. and Sony. The relationships are typically long-term with most over five years old. 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 a Limited Number of Customers; Relationships With Transportation Providers." 34 36 DESCRIPTION OF PROPERTY 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.
YEAR LOCATION ACQUIRED SIZE OWNED/LEASED(1) SERVICES -------- -------- ---- --------------- -------- Denver, Colorado 1997 10,000 square feet Leased(2) Executive Offices Rocky Mountains 1991 52,000 square feet Owned(3) Manufacturing Greeley, Colorado (84,000 square feet, (being expanded) as expanded) Newberg, Oregon 1997 47,000 square feet Leased(4) Manufacturing (existing) Newberg, Oregon 1998 65,000 square feet Owned(5) Manufacturing (under construction) (expected) Moses Lake, Washington 1997 20,000 square feet Leased(6) Manufacturing Ft. Lauderdale, Florida 1997 95,000 square feet Subleased(7) Manufacturing Tucson, Arizona 1998 65,000 square feet Owned(8) Manufacturing (being remodeled) (expected) Memphis, Tennessee 1997 155,000 square feet Leased(9) Offices, repair and warranty Louisville, Kentucky 1997 130,000 square feet Subleased and Repair and Leased(10) warranty Tampa, Florida 1997 55,000 square feet Owned and Repair and Leased(11) warranty
The Company believes its facilities are in good condition. - --------------- (1) 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. (2) This lease will expire on December 31, 1999. (3) This facility is located on approximately 10 acres of land owned by the Company in Greeley, Colorado. The Company plans to remodel and to expand this facility by adding approximately 32,000 square feet at an aggregate cost of approximately $1.8 million. This construction is expected to be completed by January 30, 1998. The Company has recently sold the other building that had been located on its campus in Greeley, Colorado for approximately $2.4 million. (4) 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. See "Certain Relationships and Related Transactions -- Leases." These leases are on a month-to-month basis and will be terminated when the Company moves to its new facility. See footnote 5 below. (5) 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 $5.8 million. The Company expects this new facility to be completed by March 31, 1998. Upon completion of this new facility, the Company will relocate its Newberg operations from the leased facility. 35 37 (6) This facility is leased from Mr. Charles Hewitson, Mr. Gregory Hewitson and Mr. Matthew Hewitson, each of whom is a director of the Company. See "Certain Relationships and Related Transactions -- Leases." This lease expires on November 30, 1997, but the Company expects to continue such arrangement. (7) In connection with the Florida portion of the AlliedSignal Asset Purchase, the Company has entered into a subleasing arrangement with AlliedSignal for a 95,000 square foot portion of a building in turn leased by AlliedSignal. (8) In connection with the Tucson portion of the AlliedSignal Asset Purchase, the Company, through a qualified intermediary as part of a tax-free like-kind exchange, has agreed to purchase from an unaffiliated third party approximately 20 acres of land and a 65,000 square foot building in Tucson, Arizona for $1.8 million. The Company is remodeling the existing building at an expected cost of $1.0 million. The Company expects the remodeling to be completed in January 1998. Title to the land and building will pass to the Company once the remodeling is substantially completed. (9) 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. (10) The Company subleases an 80,000 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. (11) The Company leases a 15,000 square foot facility from Allen S. Braswell, Sr., who is a director of the Company. This lease is a month-to-month arrangement. See "Certain Relationships and Related Transactions -- Leases." The Company expects this arrangement to end in March 1998. The Company also owns a 30,000 square foot building, and the Company has leased a 10,000 square foot facility from an unaffiliated third party. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SMI. Sales Management International, Inc. ("SMI") was formed in 1987 by Mr. Jack Calderon, President, Chief Executive Officer and a director of the Company, Mr. Allen S. Braswell, Sr., the Chairman of CTI and Mr. Allen S. Braswell, Jr., the President and Chief Executive Officer of CTI. SMI, acting as sales agent for CTI, secured a large contract from IBM to repair computer monitors and received a commission of 2% of revenues derived from such contract. In November 1990, CTI's Board of Directors passed a resolution stating that in the event of a change of control of CTI, SMI would receive 2% of the purchase price or $0.5 million, whichever is less. The total proceeds received by SMI as the result of the consummation of the CTI Merger was $0.5 million, of which Mr. Calderon received $166,667, representing his 33.3% interest. Since his employment with the Company, Mr. Calderon has not received any other compensation from SMI. Leases. CTI leases a portion of its repair facilities in Tampa, Florida from Allen S. Braswell, Sr. a director of the Company. The Company leases approximately 15,000 square feet and the monthly lease cost is $3.44 per square foot and $300 per month for taxes. The building is used for repair operations and storage. The Company expects such arrangement to end in March 1998. The Company currently leases a manufacturing facility in Newberg, Oregon from Mr. Charles Hewitson, Mr. Gregory Hewitson and Mr. Matthew Hewitson, each of whom is a director of the Company. The Company expects, upon completion of its new facility which is currently under construction, to relocate its Newberg operations from the leased facility to the new facility and to terminate such lease. The Company also leases a manufacturing facility in Moses Lake, Washington from the Hewitsons and the Company expects to continue such arrangement. Contingent Payment. In connection with the CTI Merger, the Company agreed to pay Allen S. Braswell, Sr., Allen S. Braswell, Jr. (each a director of the Company) and other members of their families, 36 38 who were the indirect owners of the membership interests in Airhub and CTI LLC, on a pro rata basis, up to $6.0 million in three annual installments, subject to the achievement by the CTI Companies of certain goals relating to earnings before interest and taxes and subject to certain other conditions. Such agreement also provides for payment to the members of Airhub and CTI LLC of $6.0 million minus any earnout payments made or due and payable, in the event of either (i) a change in control of the Company; (ii) a public offering of the Company's Common Stock; or (iii) a private offering of the Company's Common Stock with aggregate net proceeds to the Company of not less than $40 million. Accordingly such $6.0 million contingent payment will become payable upon completion of the offering made hereby. See "Use of Proceeds." Director Representation of the CTI Companies. Mr. Robert K. McNamara, a director of the Company, is a Managing Director of Broadview, an investment banking firm, and in such capacity represented the CTI Companies in connection with the CTI 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 $900,000 in connection with the consummation of the CTI Merger. The previous owners of certain of the CTI Companies have agreed to pay Broadview an additional fee of $60,000 upon receipt of the $6.0 million contingent payment referred to above. See "-- Contingent Payment." Issuance of Subordinated Notes. Mr. Richard L. Monfort, a member of the Company's Board of Directors, purchased $15 million in aggregate principal amount of Subordinated Notes issued by the Company on September 9, 1997. The Subordinated Notes have a five-year maturity and bear interest at a variable rate (adjusted monthly) equal to 2.00% over the applicable LIBOR rate. The principal amount of the Subordinated Notes mature in four annual installments of $50,000 (commencing on the first anniversary of their issuance) and a final payment for the balance at maturity. In connection with the issuance of the Subordinated Notes, on October 6, 1997, the Company issued Warrants to purchase 500,000 shares of the Company's Common Stock at an exercise price of $8.00 per share to Mr. Monfort. The Warrants were exercised on October 9, 1997. 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 29, 1997, which is incorporated by reference into the Company's Annual Report on Form 10-K for the year ended December 31, 1996. UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION The following unaudited pro forma condensed financial information is based upon the historical financial statements of the Company, the historical combined financial statements of the CE Companies and the historical combined financial statements of the CTI Companies. The unaudited condensed combined pro forma statements of operations for the nine months ended September 30, 1997 and the year ended December 31, 1996 assume the CE Companies and CTI Companies business combinations occurred on January 1, 1996 and include the historical operations of the Company and the CTI Companies for those periods and the CE Companies for the period from January 1, 1997 to February 24, 1997 and the year ended September 30, 1996, adjusted for the pro forma effects of the business combinations. The following unaudited condensed pro forma financial information has been prepared based upon assumptions deemed appropriate by the Company and are not necessarily indicative of the consolidated financial position or results of operations if the business combination had been consummated on the assumed dates and are not necessarily indicative of the actual results of the future operations of the combined companies. 37 39 EFTC CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997
CE COMPANIES PRO FORMA CTI COMPANIES CE PRO FORMA COMBINED WITH CTI PRO FORMA PRO FORMA EFTC COMPANIES ADJUSTMENTS CE COMPANIES COMPANIES ADJUSTMENTS COMBINED ----------- ---------- ------------ ------------- ----------- ------------- ----------- Net sales.................. $64,973,220 $4,475,732 $ $69,448,952 $28,571,264 $ -- $98,020,216 Cost of goods sold......... 56,739,734 4,025,431 (7,604)(3) 60,757,561 21,008,847 -- 81,766,408 ----------- ---------- --------- ----------- ----------- ----------- ----------- Gross profit............. 8,233,486 450,301 7,604 8,691,391 7,562,417 -- 16,253,808 Selling, general and administrative expenses................. 5,126,226 1,368,366 -- 6,494,592 11,515,139 (3,900,000)(6) 14,109,731 Amortization of goodwill... 156,716 -- 44,645(1) 201,361 -- 810,651(1) 1,012,012 ----------- ---------- --------- ----------- ----------- ----------- ----------- Operating income (loss)................. 2,950,544 (918,065) (37,041) 1,995,438 (3,952,722) 3,089,349 1,132,065 ----------- ---------- --------- ----------- ----------- ----------- ----------- Other income (expense): Interest expense......... (1,054,448) (30,889) (77,901)(2) (1,163,238) (400,604) (1,309,640)(2) (2,873,482) Other income, net........ 1,205,756 (17,273) -- 1,188,483 8,825 -- 1,197,308 ----------- ---------- --------- ----------- ----------- ----------- ----------- 151,308 (48,162) (77,901) 25,245 (391,779) (1,309,640) (1,676,174) ----------- ---------- --------- ----------- ----------- ----------- ----------- Income (loss) before income taxes........... 3,101,852 (966,227) (114,942) 2,020,683 (4,344,501) 1,779,709 (544,109) Income tax expense (benefit)................ 1,132,824 (362,354) (38,189)(4) 732,281 -- (939,042)(5) (206,761) ----------- ---------- --------- ----------- ----------- ----------- ----------- Net income (loss)........... $ 1,969,028 $(603,873) $ (76,753) $ 1,288,402 $(4,344,501) $ 2,718,751 $ (337,348) =========== ========== ========= =========== =========== =========== =========== Income per common share, fully diluted............ $ 0.32 $ (0.04) =========== =========== Weighted average common and common equivalent shares outstanding.............. 6,218,528 1,858,975 8,077,503 =========== =========== ===========
See Notes to Unaudited Pro Forma Condensed Combined Financial Information. 38 40 EFTC CORPORATION UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996
PRO FORMA CE COMBINED COMPANIES WITH CE PRO FORMA CE CTI PRO FORMA EFTC COMPANIES ADJUSTMENTS COMPANIES COMPANIES ADJUSTMENTS ----------- ----------- ------------ ------------- ------------- ----------- Net sales.................... $56,880,067 $32,520,438 $ -- $89,400,505 $26,509,725 $ -- Cost of goods sold........... 53,980,067 27,075,305 (45,626)(3) 81,009,746 19,580,340 -- ----------- ----------- --------- ----------- ----------- ----------- Gross profit............... 2,900,000 5,445,133 45,626 8,390,759 6,929,385 -- Selling, general and administrative expenses.... 4,195,784 2,792,814 -- 6,988,598 6,251,364 -- Amortization of goodwill... -- -- 267,869(1) 267,869 -- 1,080,868(1) Impairment of fixed assets... 725,869 -- -- 725,869 -- -- ----------- ----------- --------- ----------- ----------- ----------- Operating income (loss)................... (2,021,653) 2,652,319 (222,243) 408,423 678,021 (1,080,868) ----------- ----------- --------- ----------- ----------- ----------- Other income (expense): Interest expense........... (525,854) (101,192) (467,407)(2) (1,094,453) (434,345) (1,746,187)(2) Other income, net.......... 82,428 9,345 -- 91,773 (9,112) -- ----------- ----------- --------- ----------- ----------- ----------- (443,426) (91,847) (467,407) (1,002,680) (443,457) (1,746,187) ----------- ----------- --------- ----------- ----------- ----------- Income (loss) before income taxes.................... (2,465,079) 2,560,472 (689,650) (594,257) 234,564 (2,827,055) Income tax expense (benefit).................. (872,114) 754,000 (68,284)(4) (186,398) -- (891,074) ----------- ----------- --------- ----------- ----------- ----------- Net income (loss).......... $(1,592,965) $ 1,806,472 $(621,366) $ (407,859) $ 234,564 $(1,935,981) =========== =========== ========= =========== =========== =========== Income (loss) per common share, fully diluted....... $ (0.40) =========== Weighted average common and common equivalent shares outstanding................ 3,942,139 1,980,000 1,858,975 =========== =========== =========== PRO FORMA COMBINED ------------ Net sales.................... $115,910,230 Cost of goods sold........... 100,590,086 ------------ Gross profit............... 15,320,144 Selling, general and administrative expenses.... 13,239,962 Amortization of goodwill... 1,348,737 Impairment of fixed assets... 725,869 ------------ Operating income (loss)................... 5,576 ------------ Other income (expense): Interest expense........... (3,274,985) Other income, net.......... 82,661 ------------ (3,192,324) ------------ Income (loss) before income taxes.................... (3,186,748) Income tax expense (benefit).................. (1,077,472) ------------ Net income (loss).......... $ (2,109,276) ============ Income (loss) per common share, fully diluted....... $ (0.27) ============ Weighted average common and common equivalent shares outstanding................ 7,781,114 ============
See Notes to Unaudited Pro Forma Condensed Combined Financial Information. 39 41 EFTC CORPORATION NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (A) BASIS OF PRESENTATION On February 24, 1997, the Company acquired two affiliated entities, Current Electronics, Inc., an Oregon Corporation, and Current Electronics (Washington), Inc., a Washington Corporation, 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, which is being amortized over 30 years. On September 30, 1997, the Company acquired three affiliated companies, Circuit Test, Inc., Airhub Service Group L.C. and CTI International, L.C. for approximately $29.3 million consisting of 1,858,975 shares of the Company's common stock and approximately $20.5 million in cash. In addition, the Company will make a $6 million contingent payment payable upon closing of a public offering of securities. The Company recorded goodwill of approximately $32.4 million, which will be amortized over 30 years. The acquisitions were accounted for using the purchase method of accounting for business combinations. Actual adjustments may differ from those presented herein upon finalization of the purchase accounting. (B) PRO FORMA ADJUSTMENTS The following pro forma adjustments have been made to the accompanying pro forma condensed financial information: 1. To record amortization of goodwill resulting from the acquisitions over a 30-year period. 2. To record interest expense on additional borrowings for the acquisitions at an assumed interest rate of 8.5% per annum. 3. Elimination of depreciation expense relating to certain leasehold improvements that were abandoned after consummation of the CE Companies acquisition. 4. To record income tax expense for the taxable income of CEWI, an S Corporation, net of the effect of the pro forma adjustments. 5. To record income tax expense for taxable income of CTI, an S Corporation, and CTI LLC and Airhub, net of the income tax effect of the pro forma adjustments. 6. To eliminate nonrecurring bonuses and commissions paid by the CTI Companies in connection with the CTI Merger in the amount of approximately $3.9 million. 40 42 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(1)............... 56 Director and Chairman of the Board Jack Calderon................... 44 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 and Director of Engineering Allen S. Braswell, Sr........... 60 Director Allen S. Braswell, Jr........... 39 Director Darrayl E. Cannon(2)............ 50 Director James A. Doran(3)............... 42 Director Charles E. Hewitson............. 48 Director Gregory C. Hewitson............. 50 Director Matthew J. Hewitson............. 46 Director Robert K. McNamara(2)(3)........ 43 Director Richard L. Monfort(1)(2)........ 43 Director Lucille A. Reid................. 57 Director Masoud S. Shirazi(2)(3)......... 46 Director David W. Van Wert(1)(2)(3)...... 59 Director August P. Bruehlman............. 42 Chief Administrative Officer
- --------------- (1) Member of committee to reduce number of directors (2) Member of Compensation Committee (3) Member of Audit Committee The number of members of the Company's Board of Directors is currently fixed at 16. 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. The Class I directors, whose terms expire at the 1998 annual meeting of shareholders, except as described below, include Lucille A. Reid, James A. Doran, Richard L. Monfort, Gregory C. Hewitson and Allen S. Braswell, Jr. The Class II directors, whose terms expire at the 1999 annual meeting of shareholders, except as described below, include Jack Calderon, Darrayl E. Cannon, Lloyd A. McConnell, David W. Van Wert, Matthew J. Hewitson and Allen S. Braswell, Sr. The Class III directors whose terms expire at the 2000 annual meeting of shareholders include Gerald J. Reid, Masoud S. Shirazi, Stuart W. Fuhlendorf, Robert K. McNamara and Charles E. Hewitson. On September 2, 1997, the Board of Directors determined that the proper number of directors for the Company is nine or fewer and voted to create a committee to study the current composition of the Board and to develop a plan to reduce the number of members on the Board of Directors to nine by February 1998. Acting pursuant to the Company's Articles of Incorporation and Bylaws, the Board elected Allen S. Braswell, Sr. and Allen S. Braswell, Jr. as Class II and Class I directors, respectively, on September 30, 1997. In connection with the consummation of the Company's acquisition of CTI Companies, which were owned by the Braswells, the Company agreed to take such action as may be necessary to cause the Braswells to be elected to serve as directors upon the effectiveness of the CTI Merger. The Company's Bylaws provide that each of the Braswells shall hold office until the 1998 annual meeting of shareholders and until his successor shall have been elected and qualified. 41 43 Following are brief descriptions of the business experience of the Company's directors and executive officers: Gerald J. Reid, 56, 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 when he retired as an executive of the Company. 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 the Company, he held the position of Division Materials Manager. Mr. Reid has been a director of the Company since its inception. Jack Calderon, 44, has been the Company's President and Chief Executive Officer since August 1996. From January 1996 to August 1996, Mr. Calderon was President of SMI, a private consulting firm through which Mr. Calderon provided strategic consulting to executive officers of various high-technology companies. From 1989 to 1996, 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. 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 manufacturing services companies. Mr. Calderon received a B.A. in economics from Case Western Reserve University and his Juris Doctorate from The American University. 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 the Company, Mr. Fuhlendorf held a number of financial management positions in the aerospace and gaming industries. Mr. Fuhlendorf holds an M.B.A. from the University of San Diego and a B.A. from the University of Northern Colorado. Mr. Fuhlendorf has been a director of the Company since October 1995. Lloyd A. McConnell, 45, is the Company's Director of Engineering and has been the Company's Secretary and a Vice President since May 1994. 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 as the Company's Engineering Manager from 1987 to 1991 and from 1982 to 1987 as Sales Manager. Prior to 1982, Mr. McConnell was employed 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. Mr. Braswell has been director of the Company since September 1997. Allen S. Braswell, Jr., 39, is currently Vice President and Secretary of CTI. Mr. Braswell had been President of CTI since October 1993 and Chief Executive Officer of CTI since October 1996 until the consummation of the CTI Merger 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 the Company's Sales and Marketing activities. Mr. Braswell has served on CTI's Board of Directors since its founding in 1981. From May 1982 until August 1985 Mr. Braswell practiced with the law firm of Tanney, Forde, Donahey, and Eno L.P. Mr. Braswell received his B.S. in business administration with a concentration in finance 42 44 from the University of Florida in March of 1980, and his Juris Doctorate from the University of Florida College of Law in May 1982. 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, 42, 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 the Company, and is a director of the Company. 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 the Company in February 1997, at which time Mr. Hewitson was appointed to the Board of Directors of the Company. 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 the Company and is a director of the Company. From 1984 to February 1997, Mr. Hewitson served as President of CEI and CEWI, 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 the Company in February 1997, at which time Mr. Hewitson was appointed to the Board of Directors of the Company. 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 the Company, and is a director of the Company. 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 affiliate CEWI were acquired by the Company in February 1997, at which time Mr. Hewitson was appointed to the Board of Directors of the Company. Robert K. McNamara, 43, has served since August 1995 as a Managing Director for Broadview, a merger and acquisition advisor serving the global information technology industry. Before joining Broadview, Mr. McNamara spent 10 years with Salomon Brothers Inc, 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. as vice president, focusing on the telecommunications equipment, computer peripherals and computer retailing market segments. From September 1976 to June 1979, Mr. McNamara served in the International Banking Group of Chemical Bank, Brussels, Belgium. Mr. McNamara has been a director of the Company since February 1996. Richard L. Monfort, 43, served as President and Chief Operating Officer of ConAgra Red Meat Companies from July 1989 to June 1995. From 1983 until 1989, he was President of Monfort, Inc., which was subsequently acquired by ConAgra, Inc. Mr. Monfort recently joined the board of directors of the 43 45 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. Mrs. 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, 46, is an entrepreneur and President of Shirazi and Associates, Inc., a benefit and consulting firm in Greeley, Colorado, specializing 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 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. Gerald J. Reid and Lucille A. Reid are married. Charles E. Hewitson, Gregory C. Hewitson and Matthew J. Hewitson are brothers. Allen S. Braswell, Sr. and Allen S. Braswell, Jr. are father and son. There are no other family relationships among the Company's Directors. OTHER EXECUTIVE OFFICER August P. Bruehlman, 42, has been the Company's Chief Administrative Officer since August 1996. 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. 44 46 PRINCIPAL SHAREHOLDERS The following table sets forth certain information as of October 9, 1997, 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 a group:
AFTER OFFERING(1) ------------------------------- NAME OF BENEFICIAL OWNER, PERCENT OF PERCENT OF NUMBER OF SHARES PERCENT OF DIRECTOR OR COMMON STOCK COMMON OF COMMON STOCK COMMON EXECUTIVE OFFICER BENEFICIALLY OWNED STOCK BENEFICIALLY OWNED STOCK ------------------------- ------------------ ---------- ------------------ ---------- Gerald J. Reid(2).............. 520,000 5.6% 420,000 3.3% Lucille A. Reid(2)............. 580,000 6.3% 480,000 3.8% Jack Calderon(3)............... 262,500(15) 2.9% 255,000 2.0% Lloyd A. McConnell(3).......... 582,250(16) 6.3% 502,250 4.0% Stuart W. Fuhlendorf(3)........ 90,000(17) * 85,000 * James A. Doran(4).............. 9,034(18) * 9,034 * Richard L. Monfort(5).......... 655,834(18)(19) 7.1% 655,834 5.2% David W. Van Wert(6)........... 63,054(18)(20) * 63,054 * Darrayl Cannon(7).............. 3,750(23) * 3,750 * Robert K. McNamara(8).......... 3,750(23) * 3,750 * Masoud S. Shirazi(9)........... 31,634(18) * 31,634 * Charles E. Hewitson(10)........ 660,000 7.2% 600,000 4.7% Gregory C. Hewitson(11)........ 660,000 7.2% 600,000 4.7% Matthew J. Hewitson(12)........ 660,000 7.2% 600,000 4.7% Allen S. Braswell, Sr.(13)..... 1,374,939(24) 14.9% 1,374,939 10.8% Allen S. Braswell, Jr.(14)..... 369,442(25) 4.0% 369,442 2.9% August P. Bruehlman(3)......... 64,500(21) * 57,000 * All directors and executive officers as a group, including persons named above (17 persons)................. 6,590,687(22) 71.7% 6,110,687 48.1%
- --------------- * Less than one percent. (1) After giving effect to the issuance of 3,500,000 shares of the Company's Common Stock in the offering made hereby and, as applicable, the sale of shares by the Selling Shareholders. (2) Mr. and Mrs. Reid's address is 2150 Reservoir Road, Greeley, CO 80631. (3) Messrs. Calderon, McConnell, Fuhlendorf and Bruehlman's address is EFTC Corporation, 9351 Grant Street, Sixth Floor, Denver, CO 80229. (4) Mr. Doran's address is Hein & Associates, LLP, 717 17th Street, Denver, CO 80202-3330. (5) Mr. Monfort's address is 3519 Holman Court, Greeley, CO 80632. (6) Mr. Van Wert's address is 14227 West Dusty Trail Blvd., Sun City West, AZ 85375. (7) Mr. Cannon's address is Dialogic Corp., 1515 Route 10, Parsippany, NJ 07054. (8) Mr. McNamara's address is Broadview Associates, One Bridge Plaza, Fort Lee, NJ 07024. (9) Mr. Shirazi's address is Shirazi & Associates, P.O. Box 5315, Greeley, CO 80632. (10) Mr. Charles Hewitson's address is 2513 NE 136th Street, Vancouver, WA 98683. (11) Mr. Gregory Hewitson's address is 15905 Oswego Shore Court, Lake Oswego, OR 97034. (12) Mr. Matthew Hewitson's address is 13801 SE 35th Street, Vancouver, WA 98683. (13) Mr. Allen Braswell, Sr.'s address is 1 Willow Road, Unit B, Waynesville, NC 28786 (14) Mr. Allen Braswell, Jr.'s address is Circuit Test, Inc., 4601 Cromwell Ave., Memphis, TN 38118. 45 47 (15) Includes 200,000 shares of Common Stock issuable upon exercise of currently exercisable, non-qualified options granted in connection with the commencement of Mr. Calderon's employment and 60,000 shares of Common Stock subject to currently exercisable options granted pursuant to the Company's Equity Incentive Plan. (16) Includes 12,000 shares of Common Stock issuable upon exercise of currently exercisable options granted pursuant to 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. (17) Includes 82,700 shares of Common Stock issuable upon exercise of currently exercisable options granted under the Employee Plan and 7,200 shares of Common Stock subject to options that are exercisable under the Company's 1993 Stock Option Plan. (18) Includes 8,334 shares of Common Stock issuable upon exercise of currently exercisable options under the Company's Stock Option Plan for Non-Employee Directors. (19) Includes 100,000 shares of Common Stock owned by a partnership in which Mr. Monfort is the principal investor, 1,000 shares of Common Stock owned by Christine Monfort, Mr. Monfort's wife, and 27,000 shares of Common Stock owned by three of Mr. Monfort's minor children. (20) Includes 17,720 shares of Common Stock owned jointly with Sally B. Van Wert, Mr. Van Wert's wife. (21) Includes 52,000 shares issuable upon exercise of currently exercisable options granted under the Company's Equity Incentive Plan and 12,000 shares subject to currently exercisable options granted under the Company's 1993 Stock Option Plan. (22) Of such 6,590,687 shares, as of October 9, 1997, an aggregate of 6,123,951 shares were outstanding and held of record by directors and officers of the Company and the remaining 446,736 represent shares of Common Stock issuable upon exercise of options or warrants that are currently exercisable or, within 60 days of October 9, 1997, will become exercisable. (23) Includes 3,750 shares of Common Stock issuable upon exercise of currently exercisable options under the Company's Stock Option Plan for Non-Employee Directors. (24) Includes 1,374,939 shares of Common Stock that are owned by the Allen S. Braswell, Sr. Grantor Retained Income Trust of which Mr. Braswell, Sr. is the beneficiary of the income generated by the trust and Mr. Braswell, Jr. is the beneficiary of a portion of the principal of the trust. (25) Includes 331,092 shares of Common Stock owned by the Allen S. Braswell, Jr./Alma L. Braswell JTWROS. Does not include 1,374,939 shares of Common Stock owned by the Allen S. Braswell, Sr. Grantor Retained Income Trust of which Mr. Braswell, Jr. is the beneficiary of a portion of the principal of the trust. 46 48 SELLING SHAREHOLDERS The following table sets forth certain information as of October 9, 1997 regarding the Selling Shareholders and the beneficial ownership of shares of Common Stock offered by the Selling Shareholders pursuant to this Prospectus.
NUMBER OF SHARES OF NUMBER OF SHARES OF COMMON STOCK COMMON STOCK NAME OF SELLING SHAREHOLDER BENEFICIALLY OWNED BEING OFFERED(1) --------------------------- ------------------- ------------------- Gerald J. Reid(2)..................................... 520,000(6) 100,000 Lucille A. Reid(2).................................... 580,000(6) 100,000 Lloyd A. McConnell(2)................................. 582,250(6) 80,000 Charles E. Hewitson(2)................................ 660,000(6) 60,000 Gregory C. Hewitson(2)................................ 660,000(6) 60,000 Matthew J. Hewitson(2)................................ 660,000(6) 60,000 Jack Calderon(2)...................................... 262,500(6) 7,500 August P. Bruehlman(2)................................ 64,500(6) 7,500 Robert Child(3)....................................... 35,000(7) 7,500 Brian Tracey(4)....................................... 44,200(8) 7,500 Stuart W. Fuhlendorf(2)............................... 90,000(6) 5,000 Brent L. Hofmeister(5)................................ 22,350(9) 5,000
- --------------- (1) If the Underwriters over-allotment option is exercised in full, each Selling Shareholder has agreed to sell an additional number of shares of Common Stock equal to the number of shares set forth in this column as being offered by such shareholder. (2) For a description of positions held with the Company, see "Management." (3) Mr. Child is the Company's Vice President of Materials. (4) Mr. Tracey is the Company's Vice President of Sales and Marketing. (5) Mr. Hofmeister is the Company's Corporate Controller. (6) For a description of the beneficial ownership of these shares of Common Stock, see "Principal Shareholders." For the number of shares of Common Stock beneficially owned and percent of Common Stock owned after giving effect to the issuance of 3,500,000 shares of the Company's Common Stock and the sale of shares by the Selling Shareholder, see "Principal Shareholders". (7) Includes 35,000 shares subject to currently exercisable options granted under the Company's Equity Incentive Plan. After giving effect to the issuance of 3,500,000 shares of the Company's Common Stock and the sale of 7,500 shares of Common Stock in this offering, Mr. Child will beneficially own 27,500 shares of Common Stock which is less than 1% of the outstanding Common Stock of the Company. (8) Includes 44,000 shares subject to currently exercisable options granted under the Company's Equity Incentive Plan. After giving effect to the issuance of 3,500,000 shares of the Company's Common Stock and the sale of 7,500 shares of Common Stock in this offering, Mr. Tracey will beneficially own 36,500 shares of Common Stock which is less than 1% of the outstanding Common Stock of the Company. (9) Includes 22,250 shares subject to currently exercisable options granted under the Company's Equity Incentive Plan. After giving effect to the issuance of 3,500,000 shares of the Company's Common Stock and the sale of 5,000 shares of Common Stock in this offering, Mr. Hofmeister will beneficially own 17,250 shares of Common Stock which is less than 1% of the outstanding Common Stock of the Company. 47 49 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 $0.01 per share. As of October 9, 1997, there were 8,313,135 shares of Common Stock outstanding, held of record by 247 persons, and no Preferred Stock was outstanding. Upon completion of this offering, and after the exercise of certain options before the closing of this offering, there will be 11,854,135 shares of Common Stock (exclusive of shares subject to 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 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." 48 50 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 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 11,854,135 shares of Common Stock outstanding (exclusive of shares subject to outstanding options and warrants). Of these shares, all of the 4,000,000 shares to be sold in this offering and an additional 1,870,310 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 5,983,825 shares are "restricted securities" as that term is defined under the Securities Act or are held by affiliates of the Company (the "Non-Trading Shares") 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 180 days (or, in the case of Gerald J. Reid, Lucille A. Reid, Lloyd A. McConnell, Charles E. Hewitson, Matthew J. Hewitson, Gregory C. Hewitson, Allen S. Braswell, Sr. and Allen S. Braswell, Jr., for a period of 360 days) after the date of this Prospectus without the prior written consent of Salomon Brothers Inc, subject to certain exceptions. See "Underwriting." Salomon Brothers 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. 49 51 Upon termination of the 180-day lockup period, approximately 229,620 of the Non-Trading Shares will be eligible for sale, and upon the termination of the 360-day lockup period, approximately 4,934,631 of the Non-Trading Shares will be eligible for sale, in each case subject to the requirements of Rule 144. In addition, the directors, officers and Selling Shareholders who have agreed to 180-day or 360-day lockup periods hold currently exercisable options to purchase 328,186 shares of Common Stock, 316,186 of which may be sold following the expiration of the 180-day lockup period, and 12,000 of which may be sold following the expiration of the 360-day 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 its Equity Incentive Plan and its Stock Option Plan for Non-Employee Directors (collectively, the "Plans"). Options to purchase 1,152,700 of such shares have been issued under the Plans and 879,776 of such options have vested. The resale of 1,155,000 shares of Common Stock issuable upon exercise of such options has been registered on Form S-8 and, shortly after the offering made hereby, the Company intends to file registration statements on Form S-8 to register the resale of the remaining 1,140,000 shares of Common Stock reserved for issuance under the Company's Stock Option Plans. 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. 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. 50 52 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 Salomon Brothers Inc, J.C. Bradford & Co. and Pacific Crest Securities Inc. are acting as representatives (the "Representatives"), has severally agreed to purchase from the Company and the Selling Shareholders the respective number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES PURCHASED FROM ----------------------------- THE SELLING UNDERWRITERS THE COMPANY SHAREHOLDERS ------------ ----------- ------------ Salomon Brothers Inc .............................. J.C. Bradford & Co. ............................... Pacific Crest Securities Inc. ..................... --------- ------- Total.................................... 3,500,000 500,000 ========= =======
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 and the Selling Shareholders have 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 and the Selling Shareholders have granted the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 100,000 and 500,000 additional shares of Common Stock, respectively, at the same price per share as the initial 4,000,000 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 180 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 180 days (or, in the case of 51 53 Gerald J. Reid, Lucille A. Reid, Lloyd A. McConnell, Charles E. Hewitson, Matthew J. Hewitson, Gregory C. Hewitson, Allen S. Braswell, Sr. and Allen S. Braswell, Jr., for a period of 360 days) following the date of this Prospectus without the prior written consent of Salomon Brothers 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 and (iii) shares of Common Stock disposed of as bona fide gifts approved by Salomon Brothers 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 the Selling Shareholders, 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 600,000 shares of Common Stock, by exercising the Underwriters' over-allotment option referred to above. In addition, Salomon Brothers 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 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. Each Underwriter will represent and agree in the Underwriting Agreement that (i) it has not offered or sold, and, prior to the expiration of the period ending six months after the date of this Prospectus, will not offer or sell any of the shares offered hereby to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom, within the meaning of the Public Offers of Securities Regulations 1995 (the "Regulations"), (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the shares offered hereby in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the shares offered hereby to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. 52 54 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 September 30, 1997 and December 31, 1996 and 1995 and for the nine months ended September 30, 1997 and each of the three years in the period ended December 31, 1996 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 three years in the 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. The combined financial statements of Current Electronics, Inc. and Current Electronics Washington, Inc. as of September 30, 1996 and 1995 and for each of the three years in the periods ended September 30, 1996, 1995 and 1994, included in this prospectus and elsewhere in this form S-2 Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company has filed with the Commission a registration statement on Form S-2 (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. 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 53 55 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, 1996, (ii) the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997 (as amended by Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 1997 and June 30, 1997) and (iii) the Company's Current Reports on Form 8-K dated March 5, 1997 (as amended by a Current Report on Form 8-K/A dated May 2, 1997), dated August 26, 1997 and dated October 15, 1997, filed previously with the Commission pursuant to Section 13 of the Exchange Act. 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). 54 56 INDEX TO FINANCIAL STATEMENTS EFTC CORPORATION AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT.............................. F-2 CONSOLIDATED BALANCE SHEETS -- September 30, 1997 and December 31, 1996 and 1995............................. F-3 CONSOLIDATED STATEMENTS OF OPERATIONS -- Nine Months Ended September 30, 1997 and 1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994....................... F-4 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY -- Nine Months Ended September 30, 1997 and Years Ended December 31, 1996, 1995 and 1994....................... F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS -- Nine Months Ended September 30, 1997 and 1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994....................... F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ F-7 CIRCUIT TEST, INC. AND AFFILIATES INDEPENDENT AUDITORS' REPORT.............................. F-18 COMBINED BALANCE SHEETS -- June 30, 1997 (Unaudited), December 31, 1996 and 1995............................. F-19 COMBINED STATEMENTS OF OPERATIONS -- Six Months Ended June 30, 1997 and 1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994................................ F-20 COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY -- Six Months Ended June 30, 1997 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994....................... F-21 COMBINED STATEMENTS OF CASH FLOWS -- Six Months Ended June 30, 1997 and 1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994................................ F-22 NOTES TO COMBINED FINANCIAL STATEMENTS.................... F-23 CURRENT ELECTRONICS, INC. AND CURRENT ELECTRONICS (WASHINGTON), INC. REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS................. F-36 COMBINED BALANCE SHEETS -- December 31, 1996 (unaudited) and September 30, 1996 and 1995........................ F-38 COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS -- Three Months Ended December 31, 1996 (unaudited) and Years Ended September 30, 1996, 1995 and 1994............................................... F-39 COMBINED STATEMENTS OF CASH FLOWS -- Three Months Ended December 31, 1996 (unaudited) and Years Ended September 30, 1996, 1995 and 1994................................ F-40 NOTES TO COMBINED FINANCIAL STATEMENTS.................... F-41
F-1 57 INDEPENDENT AUDITORS' REPORT The Board of Directors EFTC Corporation: We have audited the accompanying consolidated balance sheets of EFTC Corporation and subsidiaries as of September 30, 1997 and December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the nine months ended September 30, 1997 and for each of the years in the three-year period ended December 31, 1996. 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 of September 30, 1997 and December 31, 1996 and 1995, and the results of their operations and their cash flows for the nine months ended September 30, 1997 and for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Denver, Colorado October 17, 1997 F-2 58 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 ASSETS (Note 4)
DECEMBER 31, SEPTEMBER 30, -------------------------- 1997 1996 1995 ------------- ----------- ----------- Current assets: Cash and cash equivalents.......................... $ 2,226,217 $ 123,882 $ 481,086 Trade receivables (less allowance for doubtful accounts of $194,480 in 1997 and $20,000 in 1996 and 1995)........................................ 18,296,809 3,866,991 4,982,450 Inventories (note 3)............................... 32,754,622 9,146,505 9,859,414 Income taxes receivable............................ -- 616,411 74,922 Deferred income taxes (note 6)..................... 492,037 427,059 145,538 Prepaid expenses and other......................... 701,841 69,196 382,928 ------------ ----------- ----------- Total current assets........................ 54,471,526 14,250,044 15,926,338 ------------ ----------- ----------- Property, plant and equipment: Land............................................... 590,195 662,098 662,098 Buildings and improvements......................... 4,646,183 4,889,467 4,874,571 Machinery and equipment............................ 14,694,330 5,084,114 5,870,194 Furniture and fixtures............................. 2,638,107 1,756,588 1,433,113 Construction in progress........................... 1,735,280 -- -- ------------ ----------- ----------- 24,304,095 12,392,267 12,839,976 Less accumulated depreciation...................... (6,451,618) (3,872,443) (3,949,163) ------------ ----------- ----------- Net property, plant and equipment........... 17,852,477 8,519,824 8,890,813 Goodwill net of accumulated amortization of $156,807........................................... 40,359,749 -- -- Other assets, net.................................... 4,962,140 99,773 167,148 ------------ ----------- ----------- Total Assets................................ $117,645,892 $22,869,641 $24,984,299 ============ =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit with bank (note 4).................. $ 22,513,915 $ 1,800,000 $ -- Accounts payable................................... 21,125,734 2,320,871 4,986,757 Acquisition costs payable.......................... -- -- -- Income taxes payable............................... 491,930 -- -- Accrued compensation............................... 6,282,244 682,881 529,636 Other accrued liabilities.......................... 1,371,407 767,803 372,102 Current portion of long-term debt (note 4)......... 2,275,000 170,000 170,000 ------------ ----------- ----------- Total current liabilities................... 54,060,230 5,741,555 6,058,495 ------------ ----------- ----------- Long-term debt, net of current portion (note 4): Related party...................................... 14,950,000 -- -- Others............................................. 17,775,000 2,890,000 3,060,000 ------------ ----------- ----------- Total long-term debt, net of current portion................................... 32,725,000 2,890,000 3,060,000 Deferred income taxes (note 6)....................... 674,264 315,859 356,606 ------------ ----------- ----------- Total liabilities.................................... 87,459,494 8,947,414 9,475,101 ------------ ----------- ----------- Shareholders' equity (note 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 7,812,135, 3,942,660 and 3,940,860 shares, respectively..... 78,121 39,427 39,409 Additional paid-in capital......................... 24,443,629 10,187,180 10,181,204 Retained earnings.................................. 5,664,648 3,695,620 5,288,585 ------------ ----------- ----------- Total shareholders' equity.................. 30,186,398 13,922,227 15,509,198 ------------ ----------- ----------- Commitments and contingencies (notes 4 and 9)........ Total liabilities and stockholders' equity.................................... $117,645,892 $22,869,641 $24,984,299 ============ =========== ===========
See accompanying notes to consolidated financial statements. F-3 59 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------------------------- ----------------------------------------------------------- 1997 1996 1996 1995 1994 ---------------------- ------------------ ----------------- ------------------ ------------------ (UNAUDITED) Net sales............... $64,973,220 $44,576,291 $56,880,067 $49,220,070 $52,541,842 Cost of goods sold (note 11)................... 56,739,734 42,676,203 53,980,067 45,325,349 47,123,066 ----------- ----------- ----------- ----------- ----------- Gross profit.......... 8,233,486 1,900,088 2,900,000 3,894,721 5,418,776 Selling, general and administrative expenses (note 11).... 5,126,226 3,403,090 4,195,784 3,093,400 2,395,164 Amortization of goodwill.............. 156,716 -- -- -- -- Impairment of fixed assets (note 11)...... -- 725,869 725,869 -- -- ----------- ----------- ----------- ----------- ----------- Operating income (loss)............. 2,950,544 (2,228,871) (2,021,653) 801,321 3,023,612 ----------- ----------- ----------- ----------- ----------- Other income (expense): Interest expense...... (1,054,448) (384,511) (525,854) (399,389) (175,400) Interest income....... -- -- 5,624 3,700 78,933 Gain (loss) on sale of assets............. 1,152,430 (12,723) 50,012 49,533 -- Other, net............ 53,326 29,812 26,792 25,491 31,187 ----------- ----------- ----------- ----------- ----------- 151,308 (367,422) (443,426) (320,665) (65,280) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes....... 3,101,852 (2,596,293) (2,465,079) 480,656 2,958,332 Income tax expense (benefit) (note 6).............. 1,132,824 (920,203) (872,114) 126,518 1,041,415 ----------- ----------- ----------- ----------- ----------- Net income (loss)..... $ 1,969,028 $(1,676,090) $(1,592,965) $ 354,138 $ 1,916,917 =========== =========== =========== =========== =========== Income (loss) per common and common equivalent share: Primary............... $ .34 $ (.42) $ (.40) $ .09 $ .53 =========== =========== =========== =========== =========== Fully diluted......... $ .32 $ (.42) $ (.40) $ .09 $ .53 =========== =========== =========== =========== =========== Weighted average common and common equivalent shares outstanding: Primary............... 5,854,460 3,968,417 3,942,139 3,962,261 3,626,845 =========== =========== =========== =========== =========== Fully diluted......... 6,218,528 3,968,417 3,942,139 3,962,261 3,626,845 =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 60 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1997 AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COMMON STOCK TOTAL ------------------- ADDITIONAL PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY --------- ------- ------------------ ---------- ------------- BALANCES AT JANUARY 1, 1994..... 2,368,500 $23,685 505,316 3,017,530 3,546,531 Initial public offering, net of offering costs of $1,320,749.................... 1,419,660 14,197 9,312,700 -- 9,326,897 Stock options exercised......... 102,950 1,029 198,019 -- 199,048 Net income...................... -- -- -- 1,916,917 1,916,917 --------- ------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1994...... 3,891,110 38,911 10,016,035 4,934,447 14,989,393 Stock options exercised......... 49,750 498 165,169 -- 165,667 Net income...................... -- -- -- 354,138 354,138 --------- ------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1995...... 3,940,860 $39,409 10,181,204 5,288,585 15,509,198 Stock options exercised......... 1,800 18 5,976 -- 5,994 Net loss........................ -- -- -- (1,592,965) (1,592,965) --------- ------- ---------- ---------- ---------- BALANCE, DECEMBER 31, 1996...... 3,942,660 $39,427 10,187,180 3,695,620 13,922,227 Issuance of common stock in business combinations......... 3,838,975 38,389 14,143,793 -- 14,182,182 Stock options exercised......... 30,500 305 112,656 -- 112,961 Net income...................... -- -- -- 1,969,028 1,969,028 --------- ------- ---------- ---------- ---------- BALANCE, SEPTEMBER 30, 1997..... 7,812,135 $78,121 24,443,629 5,664,648 30,186,398 ========= ======= ========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 61 EFTC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31, -------------------------- --------------------------------------- 1997 1996 1996 1995 1994 ------------ ----------- ----------- ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net income (loss).............................. $ 1,969,028 $(1,676,090) $(1,592,965) $ 354,138 $ 1,916,917 Adjustments to reconcile net income (loss) to net cash provided, (used) by operating activities: Depreciation and amortization................ 1,417,407 999,454 1,281,628 1,716,841 973,262 Deferred income tax expense (benefit)........ 554,958 (10,103) (322,268) (15,745) 121,385 Loss (gain) on sale and impairment of property, plant and equipment, net......... (1,149,638) 1,181,000 1,101,475 (49,533) -- Other, net................................... -- -- 16,751 (106,088) -- Changes in operating assets and liabilities net of the effects of acquisitions: Trade receivables.......................... (9,774,725) 1,561,968 1,115,459 (1,123,927) (1,378,102) Inventories................................ (15,535,734) (287,678) 712,909 (2,380,040) (2,839,405) Income taxes receivable.................... 616,411 (909,753) (541,489) (10,267) (64,655) Income taxes payable....................... 491,930 -- -- -- -- Prepaid expenses and other current assets.................................. (358,147) 250,848 313,732 (333,461) (302) Other assets............................... (3,871,536) 121,824 67,375 (96,971) 147,640 Accounts payable and other accrued liabilities............................. 13,291,195 (1,692,182) (2,116,940) 1,111,464 426,084 ------------ ----------- ----------- ----------- ----------- Net cash provided (used) by operating activities............................ (12,348,851) (460,712) 35,667 (933,589) (697,176) ------------ ----------- ----------- ----------- ----------- Cash flows from investing activities: Purchase of property, plant and equipment...... (6,418,212) (2,135,969) (2,374,403) (2,473,819) (9,035,395) Proceeds from sale of property, plant and equipment.................................... 2,419,820 10,157 345,538 3,739,344 -- Payments for business combinations, net of cash acquired of $1.6 million..................... (24,595,172) -- -- -- -- ------------ ----------- ----------- ----------- ----------- Net cash provided (used) by investing activities............................ (28,593,564) (2,125,812) (2,028,865) 1,265,525 (9,035,395) ------------ ----------- ----------- ----------- ----------- Cash flows from financing activities: Stock options exercised........................ 112,960 5,994 5,994 165,667 199,048 Issuance of common stock for cash.............. -- -- -- -- 9,326,897 Borrowings (payments) on lines of credit and short-term notes payable, net................ 20,713,915 2,300,000 1,800,000 -- (300,000) Proceeds from long-term debt................... 41,700,000 -- -- -- 3,400,000 Principal payments on long-term debt........... (18,644,625) (170,000) (170,000) (170,000) (2,783,770) Payment of financing costs..................... (837,500) -- -- -- -- ------------ ----------- ----------- ----------- ----------- Net cash provided (used) by financing activities............................ 43,044,750 2,135,994 1,635,994 (4,333) 9,842,175 ------------ ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents........................... 2,102,335 (450,530) (357,204) 327,603 109,604 Cash and cash equivalents: Beginning of period............................ 123,882 481,086 481,086 153,483 43,879 ------------ ----------- ----------- ----------- ----------- End of period.................................. $ 2,226,217 $ 30,556 $ 123,882 $ 481,086 $ 153,483 ============ =========== =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest..................................... $ 1,054,448 $ 374,960 $ 517,502 $ 387,045 $ 238,884 ============ =========== =========== =========== =========== Income taxes paid (refunded), net............ $ (402,392) $ 12,728 $ (8,010) $ 152,530 $ 1,596,475 ============ =========== =========== =========== =========== Common stock issued in business combinations... $ 14,182,182 $ -- $ -- $ -- $ -- ============ =========== =========== =========== ===========
See accompanying notes to consolidated financial statements F-6 62 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 (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 computer peripherals, medical equipment, industrial controls, telecommunications 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 and "hub based" repair and warranty services. Basis of Presentation The accompanying consolidated financial statements include the accounts of EFTC Corporation and its wholly-owned subsidiaries since their date of formation or acquisition, as described in note 2. All intercompany balances and transactions have been eliminated in consolidation. 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. The financial statements for the nine months ended September 30, 1996 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 financial condition, results of operations and cash flows. Information recorded in the notes to financial statements that relate to the interim unaudited financial statements is also unaudited. The operating results for the nine months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. Cash and Cash Equivalents Cash and cash equivalents include highly liquid investments with original maturities of six months or less. Inventories Inventories are stated at the lower of weighted average cost or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense 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. Intangible Assets Intangible assets consist of goodwill and acquired intellectual property which are amortized using the straight-line method over the estimated useful lives of 30 and 10 years, respectively. Acquired intellectual property consists of circuit board assembly designs and specifications in the amount of $1.1 million, net of accumulated amortization of $7,000, and is included in other noncurrent assets. F-7 63 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 Impairment of Long-Lived Assets The Company adopted 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), effective January 1, 1996. 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 to be 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. Adoption of this statement effective January 1, 1996 did not have a material impact on the Company's consolidated financial position, results of operations or liquidity. In connection with the Company's restructuring in August 1996, the Company recorded a provision for impairment of certain fixed assets of $725,869. 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 enacted 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 to customers. Income (Loss) Per Share Income per share is computed based on the weighted average number of shares and common equivalent shares outstanding during the year. Common equivalent shares totaling 414,068 are included in the computation for the nine months ended September 30, 1997 and consist of stock options, determined using the treasury stock method. Common equivalent shares were not significant or antidilutive for all other periods included in the accompanying consolidated financial statements. 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 earnings per share required by Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-based Compensation," are included in note 7 to the financial statements. (2) BUSINESS COMBINATIONS AND ASSET ACQUISITIONS 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 $29.3 million consisting of 1,858,975 shares of the Company's common stock and approximately $20.5 million in cash which includes approximately $1 million of transaction costs. In addition, the Company will make a $6 million contingent payment payable upon closing of a public offering of securities. The Company recorded goodwill of approximately $32.4 million, which will be amortized over 30 years. The acquisition F-8 64 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 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 August and September 1997, the Company completed the initial elements of two transactions with AlliedSignal Inc. (AlliedSignal) pursuant to which the Company acquired certain inventory and equipment located in Ft. Lauderdale, Florida, 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. Subject to the satisfaction of the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the Company will acquire AlliedSignal's inventory and equipment located at the Arizona facility. The aggregate purchase price of all the assets to be acquired by the Company from AlliedSignal is expected to approximate $15.0 million, of which $10.9 million had been paid through September 30, 1997. The Company has also agreed to pay 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, 2006. 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, which is being amortized over 30 years. 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 (in thousands):
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ Revenue................................................. $ 98,020 $115,910 Net loss................................................ (337) (2,109) Loss per share, fully diluted........................... (.04) (.27)
The above pro forma information is not necessarily indicative of future results. F-9 65 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 (3) INVENTORIES Inventories are summarized as follows:
DECEMBER 31, SEPTEMBER 30, ------------------------ 1997 1996 1995 ------------- ---------- ---------- Finished goods............................ $ 408,648 $ 249,223 $ -- Purchased parts and completed subassemblies........................... 13,263,807 7,640,712 8,051,648 Work-in-process........................... 19,082,167 1,256,570 1,807,766 ----------- ---------- ---------- $32,754,622 $9,146,505 $9,859,414 =========== ========== ==========
(4) DEBT During September 1997, the Company issued $15 million of subordinated notes to a director and stockholder of the Company. The subordinated notes bear interest at LIBOR plus 2% (7.63% at September 30, 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 notes are subordinate to the Company's senior bank debt. The subordinated notes also include warrants to acquire 500,000 shares of the Company's common stock at $8.00 per share. The warrants were issued in October 1997, were valued at approximately $500,000 using the Black-Scholes pricing model, and such amount has been recorded as debt discount and is being amortized to interest expense over the term of the notes. The warrants were exercised on October 9, 1997 for total proceeds of $4 million. Long-term debt to others consists of the following:
DECEMBER 31, SEPTEMBER 30, ------------------------ 1997 1996 1995 ------------- ---------- ---------- Notes payable to banks(a)................. $20,000,000 $ -- $ -- Note payable to a bank with interest at 1% above Citibank's prime rate adjusted annually (initial rate of 7.25% through September 15, 1996, and a rate of 9.25% at December 31, 1996). Interest is payable monthly with semi-annual principal payments of $85,000, maturing September 15, 2001, collateralized by a first deed of trust on buildings and land, paid in 1997...................... -- 3,060,000 3,230,000 Less current portion...................... (2,225,000) (170,000) (170,000) ----------- ---------- ---------- Long-term debt to others, net of current portion................................. $17,775,000 $2,890,000 $3,060,000 =========== ========== ==========
- --------------- (a) In connection with the CTI Companies business combination and the AlliedSignal asset acquisition, the Company entered into a new loan agreement comprised of a $25 million revolving line of credit, renewable on an annual basis until 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 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 F-10 66 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 applicable margins ranging from 0.50% to 3.25% for the term facility (8.5% at September 30, 1997) and 0% to 2.75% for the revolving facility (8.5% at September 30, 1997). Borrowings on the revolving facility are subject to limitation based on the value of the available collateral and are included in current liabilities in the accompanying consolidated balance sheet. The loan agreement is collateralized by substantially all of the Company's assets. The loan agreement contains restrictive covenants relating to capital expenditures, limitation on investments, borrowings, payment of dividends, 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 September 30, 1997, the borrowing availability under the agreement was approximately $2.5 million. This credit facility may be also withdrawn or canceled at the bank's option under certain conditions such as default or in the event the Company experiences a material negative change in its financial condition. Annual maturities of long-term debt, including the subordinated notes, are as follows at September 30, 1997: 1998........................................................ $ 2,275,000 1999........................................................ 3,745,000 2000........................................................ 4,330,000 2001........................................................ 4,850,000 2002........................................................ 19,800,000 ----------- $35,000,000 ===========
(5) LEASES The Company has noncancelable operating leases for equipment that expire in various years through 2002. Lease expense on these operating leases amounted to $1,283,673, $993,400, $1,215,623, $578,958, and $736,153 for the nine months ended September 30, 1997 and 1996 and years ended December 31, 1996, 1995 and 1994, respectively. At September 30, 1997, future minimum lease payments for operating leases are as follows: 1998........................................................ $2,078,708 1999........................................................ 1,866,227 2000........................................................ 1,388,774 2001........................................................ 1,036,511 2002........................................................ 577,079 ---------- Total future minimum lease payments.................... $6,947,299 ==========
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-11 67 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 (6) INCOME TAXES The current and deferred components of income tax expense (benefit) are as follows:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ----------------------- --------------------------------- 1997 1996 1996 1995 1994 ---------- ----------- --------- -------- ---------- (UNAUDITED) Current: Federal............. $ 491,218 $(580,165) $(549,846) $142,263 $ 880,392 State............... 86,648 -- -- -- 39,638 ---------- --------- --------- -------- ---------- 577,866 (580,165) (549,846) 142,263 920,030 Deferred: Federal............. 511,064 (207,272) (196,440) (13,635) 105,115 State............... 43,894 (132,766) (125,828) (2,110) 16,270 ---------- --------- --------- -------- ---------- 554,958 (340,038) (322,268) (15,745) 121,385 ---------- --------- --------- -------- ---------- $1,132,824 $(920,203) $(872,114) $126,518 $1,041,415 ========== ========= ========= ======== ==========
Actual income tax expense (benefit) differs from the amounts computed using the statutory tax rate of 34% as follows:
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------ --------------------------------- 1997 1996 1996 1995 1994 ---------- ----------- --------- -------- ---------- (UNAUDITED) Computed tax at the expected statutory rate.................... $1,054,630 $(882,740) $(838,126) $163,423 $1,005,833 Increase (reduction) in income taxes resulting from: Research and development tax credits.......... -- -- -- (40,000) -- State tax, net of federal benefit and state tax credits.... 57,188 (87,625) (83,046) (1,392) 36,900 Amortization of nondeductible goodwill............. 48,293 -- -- -- -- Other, net.............. (27,287) 50,162 49,058 4,487 (1,318) ---------- --------- --------- -------- ---------- Income tax expense (benefit).......... $1,132,824 $(920,203) $(872,114) $126,518 $1,041,415 ========== ========= ========= ======== ==========
F-12 68 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:
SEPTEMBER 30, DECEMBER 31, ------------- --------------------- 1997 1996 1995 ------------- --------- --------- Deferred tax assets -- current: Accrued vacation.......................... $ 142,343 $ 76,064 $ 83,375 Restructuring charges..................... 95,000 186,434 -- Deferred gain on sale leaseback........... 31,991 36,088 39,571 State net operating loss carryforward, expires 2011........................... 94,553 95,420 -- Allowance for doubtful accounts........... 74,662 7,600 7,600 Other..................................... 53,488 25,453 14,992 --------- --------- --------- Total deferred tax assets -- current............... $ 492,037 $ 427,059 $ 145,538 ========= ========= ========= Deferred tax liability -- noncurrent: Accelerated depreciation of property, plant and equipment.................... $(237,404) $(315,859) $(356,606) Like-kind exchange of building for income tax purposes........................... (436,860) -- -- --------- --------- --------- Total deferred tax liability -- noncurrent...................... $(674,264) $(315,859) $(356,606) ========= ========= =========
Management believes that it is more likely than not that future operations will generate sufficient taxable income to realize the deferred tax assets. (7) STOCK OPTIONS AND WARRANTS The Company has three stock option or equity incentive plans: the 1993 Incentive Stock Options Plan (the "1993 Plan"), the Electronic Fab Technology Corp. Equity Incentive Plan (the "Equity Incentive Plan") and the Electronic Fab Technology Corp. Stock Option Plan for Non-employee Directors (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 1993 Plan. These options generally vest over a five-year period and expire April 22, 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 for the grant of awards. This plan 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 300,000 shares are available for grant under this plan. The Company has also issued 692,500 nonqualified options to officers and employees. Options generally vest over 7 years and vesting may accelerate based on increases in the market price of the Company's stock. F-13 69 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 The following summarizes activity of the plans for the three years and nine months ended September 30, 1997.
WEIGHTED AVERAGE EXERCISE NUMBER OF PRICE OPTIONS PER SHARE --------- ---------------- Balance, January 1, 1994................................. 247,500 $2.75 Granted................................................ 169,000 7.74 Exercised.............................................. (102,950) 1.93 --------- Balance, December 31, 1994............................... 313,550 5.11 Granted................................................ 69,500 5.30 Exercised.............................................. (49,750) 3.33 Canceled............................................... (70,600) 6.37 --------- Balance, December 31, 1995............................... 262,700 5.87 Granted................................................ 375,200 4.04 Exercised.............................................. (1,800) 3.33 Canceled............................................... (75,600) 6.64 --------- Balance, December 31, 1996............................... 560,500 4.55 Granted................................................ 1,435,000 9.94 Exercised.............................................. (30,150) 3.71 Canceled............................................... (76,350) 5.28 --------- Balance, September 30, 1997.............................. 1,889,000 8.63 ========= At September 30, 1997: Options exercisable.................................... 658,000 ========= Shares available for future grants..................... 1,142,300 =========
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 1997, 1996, 1995 and 1994. The weighted average fair value of options granted during the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995 were $4.97, $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.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, -------------- 1997 1996 1995 ------------- ----- ----- Dividend yield........................................ 0.00% 0.00% 0.00% Expected volatility................................... 70.00% 60.00% 60.00% Risk-free interest rates.............................. 6.40% 6.00% 6.00% Expected lives (years)................................ 3.00 4.00 3.00
F-14 70 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 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:
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ 1997 1996 1995 ------------- ------------ --------- Net income (loss): As reported.................................. $1,969,028 $(1,592,965) $354,138 Pro forma.................................... (162,478) (1,731,259) 329,963 Primary income (loss) per share: As reported.................................. $ 0.34 $ (0.40) $ 0.09 Pro forma.................................... (0.03) (0.44) 0.08 Fully diluted income (loss) per share: As reported.................................. $ 0.32 $ (0.40) $ 0.09 Pro forma.................................... (0.03) (0.44) 0.08
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 has not been considered. The following table summarizes information regarding fixed stock options outstanding at September 30, 1997:
WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE --------------- ----------- ----------- -------- ----------- -------- $3.33 to 5.00.................... 410,500 8.44 $3.98 408,136 $3.98 $5.25 to 9.50.................... 681,000 9.18 5.97 345,390 5.97 $9.50 to 11.00................... 165,000 9.81 9.60 63,000 9.60 $11.75 to 14.31.................. 632,500 10.00 14.22 63,250 14.22 --------- ------- 1,889,000 9.35 8.62 879,776 8.62 ========= =======
The Company also has 80,000 warrants outstanding which were issued to the underwriter 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 September 30, 1997. (8) FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments at September 30, 1997 and December 31, 1996 and 1995 are deemed to approximate 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. F-15 71 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 (9) EMPLOYEE BENEFIT PLANS 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 nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and 1994, contributions from the Company to the Plan were approximately $92,000, $85,000, $108,000, $106,000 and $90,000, respectively. The Company also had a Profit and Gain Sharing Plan by which a percentage of net income before taxes was allocated to the plan. During the years ended 1995 and 1994, contributions from the Company to the plan were approximately $97,150 and $487,000, respectively. No contributions were made during the nine months ended September 30, 1997 and 1996 and the year ended December 31, 1996 as the plan was discontinued. During 1996, the Company established an employee incentive plan based upon employee productivity, transaction accuracy and profitability and contributed approximately $210,000 to the plan in 1996 and $125,000 during the nine months ended September 30, 1997. (10) TRANSACTIONS WITH RELATED PARTIES Included in accrued compensation as of September 30, 1997, is $500,000 of commissions payable to an entity in which individuals who are stockholders, officers and directors of the Company have a majority ownership interest. The Company purchased approximately 10 acres of land for aggregate consideration of $500,000 from Tech Center Properties, a general partnership, in March 1994. The Company constructed an additional facility on the land. A director of the Company is related to a 50% partner of Tech Center Properties. (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. As part of the Company's 1996 restructuring, inventory allowances, totaling approximately $344,000, were 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 in accordance with SFAS No. 121. 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 remain at September 30, 1997. F-16 72 EFTC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995 (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. Sales to significant customers as a percentage of total net sales were as follows:
NINE MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------ ------------------ 1997 1996 1996 1995 1994 ---- ----------- ---- ---- ---- (UNAUDITED) Exabyte................................... 19.0% 17.6% 20.8% -- -- Ohmeda (BOC Group)........................ 10.4% 15.1% 15.7% 15.3% 16.5% Hewlett Packard Company................... 9.0% 27.3% 26.4% 37.8% 43.3% Kentrox................................... 8.61% -- -- -- -- Allied Signal............................. 16.6% -- -- -- --
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-17 73 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-18 74 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-19 75 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-20 76 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-21 77 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-22 78 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-23 79 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-24 80 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. F-25 81 CIRCUIT TEST, INC. AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 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. (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-26 82 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-27 83 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-28 84 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-29 85 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-30 86 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-31 87 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-32 88 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-33 89 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-34 90 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-35 91 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Current Electronics, Inc. and Current Electronics Washington, Inc.: We have audited the accompanying combined statements of income and retained earnings and cash flows of Current Electronics, Inc. (an Oregon Corporation) and Current Electronics Washington, Inc. (a Washington S Corporation) for the year ended September 30, 1994. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Current Electronics, Inc. and Current Electronics Washington, Inc. for the year ended September 30, 1994, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, April 4, 1997 F-36 92 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Current Electronics, Inc. and Current Electronics Washington, Inc.: We have audited the accompanying combined balance sheets of Current Electronics, Inc. (an Oregon Corporation) and Current Electronics Washington, Inc. (a Washington S Corporation) as of September 30, 1996 and 1995, and the related combined statements of income and retained earnings and cash flows for the years then ended. These combined financial statements are the responsibility of the companies 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 financial statements referred to above present fairly, in all material respects, the financial position of Current Electronics, Inc. and Current Electronics Washington, Inc. as of September 30, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, November 25, 1996 F-37 93 CURRENT ELECTRONICS, INC. AND CURRENT ELECTRONICS WASHINGTON, INC. COMBINED BALANCE SHEETS ASSETS
SEPTEMBER 30, DECEMBER 31, ------------------------ 1996 1996 1995 ------------ ---------- ---------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents........................ $ 645,262 $ 580,839 $ 252,323 Accounts receivable, net of allowance for doubtful accounts of $34,000 and $6,774 and $22,222....................................... 1,542,819 1,929,142 1,506,049 Inventories...................................... 4,098,178 3,826,074 1,860,951 Prepaid expenses................................. 167,436 109,077 24,809 ---------- ---------- ---------- Total current assets..................... 6,453,695 6,445,132 3,644,132 ---------- ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, net................. 2,430,218 2,337,317 2,171,347 OTHER ASSETS....................................... 11,783 140,201 73,197 ---------- ---------- ---------- Total assets............................. $8,895,696 $8,922,650 $5,888,676 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................. $1,268,678 $1,386,274 $ 636,264 Accrued liabilities.............................. 588,784 766,020 643,863 Income taxes payable............................. 191,331 99,953 247,764 Notes payable.................................... 1,326,384 650,000 -- Current portion of long-term debt................ 306,045 599,019 500,948 ---------- ---------- ---------- Total current liabilities................ 3,681,222 3,501,266 2,028,839 ---------- ---------- ---------- DEFERRED INCOME TAXES.............................. 122,000 122,000 289,000 LONG-TERM DEBT..................................... 881,371 977,826 815,751 ---------- ---------- ---------- Total liabilities........................ 4,684,593 4,601,092 3,133,590 ---------- ---------- ---------- SHAREHOLDERS' EQUITY: Preferred stock.................................. -- -- -- Common stock..................................... 33,000 33,000 33,000 Retained earnings................................ 4,178,103 4,288,558 2,722,086 ---------- ---------- ---------- Total shareholders' equity............... 4,211,103 4,321,558 2,755,086 ---------- ---------- ---------- Total liabilities and shareholders' equity................................. $8,895,696 $8,922,650 $5,888,676 ========== ========== ==========
The accompanying notes are an integral part of these combined balance sheets. F-38 94 CURRENT ELECTRONICS, INC. AND CURRENT ELECTRONICS WASHINGTON, INC. COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
THREE MONTHS ENDED DECEMBER 31, YEARS ENDED SEPTEMBER 30, ------------------------- --------------------------------------- 1996 1995 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) NET SALES................. $ 6,361,713 $ 6,114,044 $32,520,438 $17,169,805 $11,066,863 COST OF SALES............. 5,310,833 5,180,965 27,075,305 13,471,626 8,611,474 ----------- ----------- ----------- ----------- ----------- Gross profit............ 1,050,880 933,079 5,445,133 3,698,179 2,455,389 ----------- ----------- ----------- ----------- ----------- SELLING, GENERAL ADMINISTRATIVE EXPENSES................ 747,790 624,860 2,792,814 1,976,702 1,796,962 ----------- ----------- ----------- ----------- ----------- Income from operations........... 303,090 308,219 2,652,319 1,721,477 658,427 OTHER INCOME (EXPENSE): Other income, net....... 28,695 17,310 9,345 34,603 9,218 Interest expense, net... (50,240) (26,981) (101,192) (129,315) (63,121) ----------- ----------- ----------- ----------- ----------- Total other income (expense)..... (21,545) (9,671) (91,847) (94,712) (53,903) ----------- ----------- ----------- ----------- ----------- Income before income taxes......... 281,545 298,548 2,560,472 1,626,765 604,524 ----------- ----------- ----------- ----------- ----------- PROVISION (BENEFIT) FOR INCOME TAXES: Current................. 92,000 70,167 921,000 438,435 100,000 Deferred................ -- -- (167,000) 42,000 104,000 ----------- ----------- ----------- ----------- ----------- 92,000 70,167 754,000 480,435 204,000 ----------- ----------- ----------- ----------- ----------- NET INCOME................ 189,545 228,381 1,806,472 1,146,330 400,524 RETAINED EARNINGS, beginning of year....... 4,288,558 2,649,184 2,722,086 1,650,756 1,250,232 DIVIDENDS................. (300,000) (150,000) (240,000) (75,000) -- ----------- ----------- ----------- ----------- ----------- RETAINED EARNINGS, end of year.................... $ 4,178,103 $ 2,727,565 $ 4,288,558 $ 2,722,086 $ 1,650,756 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these combined statements. F-39 95 CURRENT ELECTRONICS, INC. AND CURRENT ELECTRONICS WASHINGTON, INC. COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, YEARS ENDED SEPTEMBER 30, ----------------------- ------------------------------------- 1996 1995 1996 1995 1994 --------- ----------- ----------- ----------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................... $ 189,545 $ 228,381 $ 1,806,472 $ 1,146,330 $ 400,524 Adjustments to reconcile net income to cash provided by operating activities -- Depreciation and amortization................. 165,720 183,809 576,378 475,944 350,874 Loss on sale of property....... -- -- 2,491 -- 4,533 Deferred income taxes.......... -- -- (167,000) 42,000 104,569 Changes in operating accounts: Accounts receivable.......... 386,323 13,835 (423,093) (673,973) (100,461) Inventories.................. (272,104) (2,955,557) (1,717,929) (902,338) (38,628) Prepaid expenses............. (69,007) (25,710) (84,268) (13,042) 2,117 Accounts payable............. (117,596) 1,020,877 750,010 458,679 11,889 Accrued liabilities.......... (177,236) (62,863) 122,157 295,885 (56,053) Income taxes payable......... 91,378 (162,962) (147,811) 264,339 (199,826) --------- ----------- ----------- ----------- --------- Net cash provided by operating activities.... 197,023 (1,760,190) 717,407 1,093,824 479,538 --------- ----------- ----------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment...................... (258,621) (178,326) (768,867) (1,061,820) (777,128) Proceeds from disposal of property and equipment......... -- -- 24,028 -- -- Key Man Insurance................ 139,066 (20,141) (67,004) (24,269) (48,928) --------- ----------- ----------- ----------- --------- Net cash used in investing activities.............. (119,555) (198,467) (811,843) (1,086,089) (826,056) --------- ----------- ----------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under lines of credit......................... -- -- 650,000 -- -- Proceeds from new long-term borrowings..................... 429,190 2,197,047 1,285,344 551,539 691,496 Repayments of long-term debt..... (142,235) (132,482) (1,272,392) (389,881) (409,334) Dividends paid................... (300,000) (150,000) (240,000) (75,000) -- Issuance of common stock......... -- -- -- -- 3,000 --------- ----------- ----------- ----------- --------- Net cash provided by financing activities.... (13,045) 1,914,565 422,952 86,658 285,162 --------- ----------- ----------- ----------- --------- Net increase (decrease) in cash and cash equivalents............. 64,423 (44,092) 328,516 94,393 (61,356) CASH AND CASH EQUIVALENTS, beginning of period.............. 580,839 252,323 252,323 157,930 219,286 --------- ----------- ----------- ----------- --------- CASH AND CASH EQUIVALENTS, end of period........................... $ 645,262 $ 208,231 $ 580,839 $ 252,323 $ 157,930 ========= =========== =========== =========== ========= SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest........... $ 50,240 $ 26,981 $ 143,109 $ 129,239 $ 63,121 Cash paid for taxes.............. -- 233,129 1,073,489 158,000 381,809 Issuance of note in exchange for inventories (noncash operating activity)...................... 429,190 2,585,974 247,194 -- --
The accompanying notes are an integral part of these combined statements. F-40 96 CURRENT ELECTRONICS, INC. CURRENT ELECTRONICS WASHINGTON, INC. NOTES TO COMBINED FINANCIAL STATEMENTS SEPTEMBER 30, 1996, 1995 AND 1994 1. DESCRIPTION OF BUSINESS: Current Electronics, Inc. (CEI) was incorporated on December 29, 1983 in the State of Oregon. CEI's primary business is contract manufacturing of electronic circuit boards and other components for its customers, who are located primarily in the Portland metropolitan area. Current Electronics Washington, Inc. (CEWI) was incorporated as an S Corporation in the State of Washington in 1994 and is also a contract manufacturer of electronic circuit boards. CEWI's primary customer is in Redmond, Washington. CEI and CEWI (the Companies) provide contract manufacturing on both a consigned basis (customer retains title to the raw materials) and turnkey basis (the Companies own the raw materials). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF COMBINATION The financial statements combine the accounts of the Companies, after elimination of intercompany items and transactions. These companies are being combined as they are under common ownership and management. The accounting policies referred to below represent the policies of both companies, unless otherwise specified. CASH EQUIVALENTS Cash equivalents consists of short-term, highly liquid investments with maturities at the date of purchase of 90 days or less. INVENTORIES Inventories are valued at standard cost which approximates lower of cost (first-in, first-out) or market, and include materials, labor and manufacturing overhead. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets: Machinery and production equipment--5 to 15 years and furniture, fixtures and computer equipment--5 to 7 years. Leasehold improvements are amortized over the estimated useful life of the asset. ADVERTISING Advertising costs are expensed as incurred. For the fiscal years ended September 30, 1996, 1995 and 1994, advertising costs were $48,266, $24,642 and $33,357, respectively. REVENUE RECOGNITION Revenues are recognized when the product is shipped to the customer. CONCENTRATIONS OF CREDIT RISK The Companies' revenues are principally generated from a small number of electronics companies based in Oregon and Washington. During 1996, four of the Companies' customers accounted for 74% of combined net sales. For the year ended September 30, 1995, three customers accounted for 52% of F-41 97 CURRENT ELECTRONICS, INC. CURRENT ELECTRONICS WASHINGTON, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) combined net sales. For the year ended September 30, 1994, four customers accounted for 63% of combined net sales. Historically, the Companies have not incurred significant losses related to its accounts receivable. However, the loss of any one customer could have a significant impact on the future results of the Companies' operations. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results may differ from those estimates and such differences could be material to the financial statements. RECENT PRONOUNCEMENT In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 121 requires an assessment of impairment of long-lived assets under certain conditions and recognition of loss in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. In such instances a loss would be recorded based on the fair market value of the applicable asset. SFAS 121 is effective for the Companies' fiscal year ending September 30, 1997. Adoption of SFAS 121 is not expected to have a material impact on the Company's financial position or results of operations. RECLASSIFICATIONS Certain balances for prior periods have been reclassified to be consistent with the September 30, 1996 presentation. INTERIM FINANCIAL INFORMATION The interim consolidated financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the management of the Company believes that the disclosures are adequate to make the information presented not misleading. Interim financial statements are by necessity somewhat tentative; judgments are used to estimate interim amounts for items that are normally determinable only on an annual basis. For example, the effective income tax rate is based on estimates of annual amounts of taxable income, tax credits and other factors. The interim period information included herein reflects all adjustments which are, in the opinion of the management of the Company, necessary for a fair statement of the results of the respective interim periods. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. 3. RELATED PARTY TRANSACTIONS: CEI and CEWI lease office and factory space from Hewitson, Hewitson and Hewitson (HHH), a partnership which is comprised of the majority shareholders of CEI. Lease rates between the Companies and these shareholders are based on estimated fair market values. Rents paid to the partnership for the F-42 98 CURRENT ELECTRONICS, INC. CURRENT ELECTRONICS WASHINGTON, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) years ended September 30, 1996, 1995 and 1994 were $428,402, $259,720 and $182,520, respectively. CEI provides selling, general and administrative services to CEWI. Services totaling $150,000, $60,000 and $0 were allocated to CEWI for the years ended September 30, 1996, 1995 and 1994, respectively. CEI owes HHH a combined total of $59,066 under a note (see Note 9) as of September 30, 1996. CEI owed the partnership $113,055 under two notes at September 30, 1995. CEI owed HHH a total of $39,190 under a note as of September 30, 1994. 4. OPERATING LEASES: Total rental expense under operating leases was $472,212, $362,241 and $232,516 during fiscal 1996, 1995 and 1994, respectively. Future minimum lease payments under noncancelable operating leases as of September 30, 1996 are as follows:
YEAR ENDED SEPTEMBER 30 CEI CEWI ----------------------- -------- -------- 1997.............................................. $266,778 $ 96,000 1998.............................................. 73,408 16,000 1999.............................................. 3,186 -- -------- -------- $343,372 $112,000 ======== ========
The Companies' lease payments principally represent commitments under the related party facility lease agreement described in Note 3. 5. INVENTORIES: Inventories consisted of the following at September 30:
1996 1995 ---------- ---------- Raw materials........................................... $2,892,338 $1,163,165 Work in process......................................... 827,437 484,555 Finished goods.......................................... 106,299 213,231 ---------- ---------- $3,826,074 $1,860,951 ========== ==========
6. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consisted of the following at September 30:
1996 1995 ---------- ---------- Machinery and equipment................................. $2,897,719 $2,771,774 Leasehold improvements.................................. 705,557 575,149 Computer equipment...................................... 626,032 279,188 Furniture and fixtures.................................. 138,184 121,414 ---------- ---------- 4,367,492 3,747,525 Less -- Accumulated depreciation and amortization....... 2,030,175 1,576,178 ---------- ---------- $2,337,317 $2,171,347 ========== ==========
F-43 99 CURRENT ELECTRONICS, INC. CURRENT ELECTRONICS WASHINGTON, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. OTHER ASSETS: Other assets include the cash surrender value of key man life insurance policies where the Company is the beneficiary. At September 30, 1996, the face amounts of these policies total $5,019,005. 8. NOTES PAYABLE: CEI has a revolving line of credit arrangement with Wells Fargo Bank which allows for borrowings up to $900,000 with interest payable at 1.25% above the existing prime rate at the date of draw down. The line expired September 30, 1996. Upon expiration, this line of credit arrangement was converted to term debt bearing interest at 7.75%, payable in monthly installments of $5,583 including interest through September 2001, secured by machinery and equipment and personally guaranteed by the shareholders of CEI. CEI has an additional revolving line of credit arrangement with Wells Fargo Bank which allows for borrowings up to $1,200,000 with interest payable at 1.00% above the existing prime rate at the date of draw down. The line expires March 31, 1997. The line of credit is personally guaranteed by the shareholders of CEI. There was $650,000 outstanding at September 30, 1996 under the line of credit. The loan agreements contain restrictive covenants for certain items, such as borrowings and dividends. As of September 30, 1996, CEI was in compliance with such covenants. F-44 100 CURRENT ELECTRONICS, INC. CURRENT ELECTRONICS WASHINGTON, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. LONG-TERM DEBT: Long-term debt at September 30, 1996 and 1995 is comprised of the following:
1996 1995 ---------- ---------- Note payable to Wells Fargo Bank, converted upon expiration of line of credit at September 30, 1996 (see Note 8)...... $ 335,000 $ -- Note payable to Hewitson, Hewitson, Hewitson and Hewitson, a related party, payable on demand, with interest at 10% per annum............................................. 59,066 106,171 Note payable to Wells Fargo Bank, maturing April 2001, payable in monthly installments of $2,157 including interest at 7.75% per annum; secured by machinery and equipment................................................. 99,590 -- Note payable to Wells Fargo Bank, maturing June 2000, payable in monthly installments of $14,841 including interest at 8.75% per annum; secured by machinery and equipment................................................. 567,597 675,451 Note payable to Wells Fargo Bank, maturing September 1999, payable in monthly installments of $7,430 including interest at 9.5% per annum; secured by machinery and equipment................................................. 231,960 290,680 Note payable to Wells Fargo Bank, maturing November 1997, payable in monthly installments of $2,289, including interest at 9.0% per annum; secured by machinery and equipment................................................. 30,288 51,998 Note payable to Wells Fargo Bank, maturing November 1997, payable in monthly installments of $350 including interest at 7.0% per annum......................................... 4,683 8,108 Unsecured noninterest-bearing note payable to customer, maturing May 1997, payable in monthly installments of $41,199................................................... 247,194 -- Note payable to Hewitson, Hewitson and Hewitson, repaid in 1996...................................................... -- 6,884 Note payable to Wells Fargo Bank, maturing October 1996, payable in monthly installments of $1,496 including interest at 7.75% per annum; secured by machinery and equipment................................................. 1,467 17,210 Note payable to Wells Fargo Bank, repaid in 1996....... -- 57,718 Note payable to Wells Fargo Bank, repaid in 1996....... -- 72,588 Note payable to customer, repaid in 1996............... -- 21,523 Note payable to Wells Fargo Bank, repaid in 1996....... -- 8,368 ---------- ---------- 1,576,845 1,316,699 Less -- Current portion................................ 599,019 500,948 ---------- ---------- Long-term debt......................................... $ 977,826 $ 815,751 ========== ==========
Future payments under long-term debt arrangements, by year, are as follows:
YEAR ENDED SEPTEMBER 30, ------------------------ 1997................................................... $ 599,019 1998................................................... 294,141 1999................................................... 315,208 2000................................................... 205,840 2001................................................... 72,282 Thereafter............................................. 90,355 ---------- $1,576,845 ==========
F-45 101 CURRENT ELECTRONICS, INC. CURRENT ELECTRONICS WASHINGTON, INC. NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 10. PROFIT SHARING PLAN: The Companies maintain a contributory employees' profit sharing plan which covers all eligible employees of the Company. The plan provides for annual contributions in an amount to be determined by the Companies' Board of Directors at its discretion. CEI's contribution for the years ended September 30, 1996, 1995 and 1994 was approximately $285,000, $125,000 and $92,000, respectively. 11. INCOME TAXES: CEI accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the liability method specified by SFAS 109, the deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates for the years in which the taxes are expected to be paid. At September 30, 1996 and 1995, total deferred tax liabilities were $122,000 and $289,000, respectively. In 1995, deferred tax liabilities primarily represent tax depreciation differences and utilization of cash method for tax purposes on consigned sales. In 1996, these deferred tax liabilities primarily represent book/tax depreciation differences. There were no significant deferred tax assets at September 30, 1996 and 1995. CEWI has elected to be taxed as an S corporation. Earnings and losses for federal tax purposes will be included in the personal income tax returns of the shareholders. Accordingly, there is no provision for income taxes or deferred taxes reflected in the accompanying combined financial statements related to CEWI. CEI's effective tax rate of 33%, 39% and 48% for fiscal 1996, 1995 and 1994, respectively, differs from the federal statutory rate primarily due to state taxes and nondeductible officer life insurance premiums. The 1996 effective rate is lower than the 1995 effective rate principally due to a one-time credit allowed by the State of Oregon and corrections of prior year estimates. 12. SHAREHOLDERS' EQUITY: Both CEI and CEWI have 2,000,000 shares common stock authorized and 1,000,000 shares preferred stock authorized, with a par value of $.01 per share. At September 30, 1996 and 1995, 300 shares of common stock were issued and outstanding for both Companies. Subsequent to September 30, 1996, the Board of Directors approved a 100-for-one stock split for CEI. CEWI paid $240,000, $75,000 and $0 of dividends for the years ended September 30, 1996, 1995 and 1994, respectively. CEI and CEWI maintain shareholder agreements which restrict the nature in which shares can be disposed. In accordance with these agreements, the Company and/or its shareholders have right of first refusal as to the purchase of any shares being disposed. The purchase price of such shares is based on the estimated fair market due at date of disposition, as determined by the Companies' Board of Directors or independent appraiser. F-46 102 NO DEALER, SALESPERSON OR 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 MADE BY THIS PROSPECTUS 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. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Cautionary Statement Regarding Forward-Looking Statements and Forecasts........................... 8 Risk Factors.......................... 8 Use of Proceeds....................... 15 Price Range of Common Stock........... 15 Dividend Policy....................... 16 Capitalization........................ 16 Selected Consolidated Historical and Pro Forma Financial Data............ 17 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 19 Business and Properties............... 27 Certain Relationships and Related Transactions........................ 36 Unaudited Pro Forma Condensed Financial Information............... 37 Management............................ 41 Principal Shareholders................ 45 Selling Shareholders.................. 47 Description of Capital Stock and Other Securities.......................... 48 Shares Eligible for Future Sale....... 49 Underwriting.......................... 51 Legal Matters......................... 53 Experts............................... 53 Available Information................. 53 Incorporation of Certain Documents by Reference........................... 54 Index to Financial Statements......... F-1
4,000,000 SHARES EFTC CORPORATION COMMON STOCK ($0.01 PAR VALUE) EFTC CORPORATION LOGO SALOMON BROTHERS INC J.C. BRADFORD & CO. PACIFIC CREST SECURITIES INC. PROSPECTUS DATED , 1997 103 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, the NASD Filing Fee and the Nasdaq Listing Fee). SEC Registration Fee........................................ $ 21,430 National Association of Securities Dealers, Inc. Fee........ 7,572 Nasdaq Listing Fee.......................................... 17,500 Blue Sky Qualification Fees and Expenses (including legal fees)..................................................... 1,500 Printing Expenses........................................... 175,000 Legal Fees and Expenses..................................... 125,000 Auditors' Fees and Expenses................................. 175,000 Transfer Agent and Registrar Fees........................... 3,500 Miscellaneous Expenses...................................... 23,498 -------- Total............................................. $550,000 ========
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-1 104 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 Company's Common Stock. MATERIAL CONTRACTS 10.1 -- Form of Registration Rights Agreement dated January 1994 between the Company and the parties thereto.(1) 10.2 -- Agreement and Plan of Merger among the Company, Current Merger Corp., and Current Electronics, Inc., dated as of January 15, 1997.(2) 10.3 -- Share Purchase Agreement among the Company and the Shareholders of Current Electronics (Washington), Inc. dated as of January 15, 1997.(2) 10.4 -- Registration Rights Agreement dated as of February 24, 1997, among the Company, Charles E. Hewitson, Matthew J. Hewitson and Gregory Hewitson and certain other parties.(2) 10.5 -- Indemnification Agreement dated as of February 24, 1997, among the Company, the shareholders of Current Electronics, Inc., and the shareholders of Current Electronics (Washington), Inc.(2) 10.6 -- Agreement and Plan of Reorganization among the Company, Acquisition Corp., and Circuit Test, Inc., dated as of July 9, 1997.(4) 10.7 -- Limited Liability Company Unit Purchase Agreement among the Company, CTLLC Acquisition Corp., Airhub Service Group, L.C., and CTI International, L.C., dated as of July 9, 1997.(4) 10.8 -- Registration Rights Agreement dated as of September 30, 1997 among the Company and CTI Shareholders.(4) 10.9 -- Indemnification Agreement dated as of September 30, 1997 among the Company, CTI Shareholders and the LLC Members.(4) 10.10 -- Earnout Agreement dated as of September 30, 1997 among the Company and the LLC Members.(4) 10.11.1 -- Master Agreement Regarding Asset Purchase and Related Transactions among the Company, AlliedSignal Avionics, Inc., a Kansas corporation ("Avionics"), and AlliedSignal, Inc., operating through its Aerospace Equipment Systems Unit ("AES"), dated as of July 15, 1997, as amended by the First Amendment to Master Agreement dated as of July 31, 1997, and as further amended by the Second Amendment to Master Agreement dated as of August 11, 1997.(3) 10.11.2 -- Third Amendment to Master Agreement dated as of September 5, 1997.(6) 10.12 -- Supplier Partnering Agreement between the Company and AlliedSignal, Inc., dated as of August 4, 1997.(3) 10.13.1 -- License Agreement between the Company and AlliedSignal Technologies, Inc., dated as of July 15, 1997.(3) 10.13.2 -- Amended and Restated License Agreement between the Company and AlliedSignal Technologies, Inc., dated as of September 5, 1997.(6) 10.14 -- Premises License Agreement between the Company and AES dated as of August 4, 1997.(3)
II-2 105
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 10.15 -- Facilities Management and Transition Services Agreement dated as of July 31, 1997 between the Company and AES as amended by a First Amendment to Facilities Management and Transition Services Agreement dated as of August 4, 1997.(3) 10.16 -- Sublease Agreement dated as of August 11, 1997 between the Company and AlliedSignal, Inc.(3) 10.17 -- Transition Services Agreement dated as of August 11, 1997 between the Company and Avionics.(3) 10.18.1 -- Agreement to Extend Avionics Personal Property Asset Transfer Date dated August 15, 1997, by and between the Company, Avionics and AES.(3) 10.18.2 -- Agreement to Extend Avionics Personal Property Asset Transfer Date dated August 29, 1997, by and between the Company, Avionics and AES.(6) 10.19 -- Accounts Payable Service Agreement dated as of August 11, 1997 between the Company and Avionics.(6) 10.20 -- Credit Agreement dated September 30, 1997 between the Company and Bank One, Colorado, N.A. ("Bank One").(4) *10.20.1 -- Amendment No. 1 to Credit Agreement dated as of November 6, 1997 between the Company and Bank One. 10.21 -- Pledge and Security Agreement dated as of September 30, 1997 by the Company to Bank One.(4) 10.22 -- Security Agreement and Assignment dated as of September 30, 1997 between the Company and Bank One.(4) 10.23 -- Deed of Trust and Security Agreement dated as of September 30, 1997, among the Company as Grantor, Bank One, as Agent and Beneficiary, and Northwest Title Company as Trustee.(4) 10.24 -- Deed of Trust and Security Agreement and Financing Statement dated as of September 30, 1997 from the Company to The Public Trustee of Weld County for Bank One, as Beneficiary.(4) 10.25 -- Note Agreement between the Company and Richard L. Monfort dated as of September 5, 1997, including the form of Floating Rate Subordinated Note attached as Exhibit A thereto.(4) 10.26 -- Warrant to Purchase 500,000 shares of Common Stock of the Company, dated as of October 6, 1997, issued by the Company to Richard L. Monfort.(4) 10.27 -- Form of Warrants to Purchase an aggregate of 80,000 shares of Common Stock of the Company, dated as of March 11, 1994, issued to Dain Bosworth Incorporated and Stephens Inc., underwriters, in connection with the Company's initial public offering.(6) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.28 -- 1989 Stock Option Plan.(1) 10.29 -- 1993 Incentive Stock Option Plan.(1) 10.30 -- EFTC Corporation Equity Incentive Plan, amended and restated as of July 9, 1997.(6) 10.31 -- EFTC Corporation Stock Option Plan for Non-Employee Directors, amended and restated as of July 9, 1997.(6) 10.32 -- Employment Agreement with Jack Calderon dated as of August 1996.(5)
II-3 106
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 10.33 -- Form of Consulting Agreement entered into by the Company with each of OnCourse Inc., Matt Hewitson Consulting, Inc. and Corporate Solutions, Inc., dated as of February 24, 1997.(5) 10.34 -- Form of the separate Employment Agreements, each dated as of September 30, 1997, entered into by the Company, CTI and Allen S. Braswell, Jr., Richard Strott, Andrew Hatch and Dennis Ayo.(4) 10.35 -- 1997 Management Bonus Plan.(6) CONSENTS *23.1 -- Consent of KPMG Peat Marwick LLP *23.2 -- Consent of KPMG Peat Marwick LLP *23.3 -- Consent of Arthur Andersen LLP 23.4 -- Consent of Holme Roberts & Owen LLP (See Exhibit 5.1) OTHER EXHIBITS 24.1 -- Powers of Attorney(6) 27.1 -- Financial Data Schedule(6)
- --------------- * Filed herewith. (1) Incorporated by reference from the Company's Registration Statement on Form SB-2 under the Securities Act of 1933, File No. 33-73392-D. (2) Incorporated by reference from EFTC Corporation Form 8-K filed on March 5, 1997. (3) Incorporated by reference from EFTC Corporation Form 8-K filed on August 26, 1997. (4) Incorporated by reference from EFTC Corporation Form 8-K filed on October 15, 1997. (5) Incorporated by reference from EFTC Corporation Form 10-K filed on March 27, 1997. (6) Previously filed. (b) Financial Statement Schedules All 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-4 107 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-5 108 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Denver, Colorado, on this 12 day of November 1997. EFTC CORPORATION By: * ---------------------------------- 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.
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board and Director November 12, 1997 - ----------------------------------------------------- Gerald J. Reid * Director, President and Chief November 12, 1997 - ----------------------------------------------------- Executive Officer (Principal Jack Calderon Executive Officer) /s/ STUART W. FUHLENDORF Director and Chief Financial November 12, 1997 - ----------------------------------------------------- Officer (Principal Financial Stuart W. Fuhlendorf Officer) /s/ BRENT L. HOFMEISTER Controller (Principal Accounting November 12, 1997 - ----------------------------------------------------- Officer) Brent L. Hofmeister * Director November 12, 1997 - ----------------------------------------------------- Allen S. Braswell, Sr. * Director November 12, 1997 - ----------------------------------------------------- Allen S. Braswell, Jr. * Director November 12, 1997 - ----------------------------------------------------- Darrayl E. Cannon * Director November 12, 1997 - ----------------------------------------------------- James A. Doran * Director November 12, 1997 - ----------------------------------------------------- Charles E. Hewitson * Director November 12, 1997 - ----------------------------------------------------- Gregory C. Hewitson * Director November 12, 1997 - ----------------------------------------------------- Matthew J. Hewitson
II-6 109
SIGNATURE TITLE DATE --------- ----- ---- * Director November 12, 1997 - ----------------------------------------------------- Lloyd A. McConnell * Director November 12, 1997 - ----------------------------------------------------- Robert K. McNamara * Director November 12, 1997 - ----------------------------------------------------- Richard L. Monfort * Director November 12, 1997 - ----------------------------------------------------- Lucille A. Reid * Director November 12, 1997 - ----------------------------------------------------- Masoud S. Shirazi * Director November 12, 1997 - ----------------------------------------------------- David W. Van Wert *By: /s/ STUART W. FUHLENDORF - ----------------------------------------------------- Stuart W. Fuhlendorf, as attorney-in-fact
II-7 110 INDEX TO 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 Company's Common Stock. MATERIAL CONTRACTS 10.1 -- Form of Registration Rights Agreement dated January 1994 between the Company and the parties thereto.(1) 10.2 -- Agreement and Plan of Merger among the Company, Current Merger Corp., and Current Electronics, Inc., dated as of January 15, 1997.(2) 10.3 -- Share Purchase Agreement among the Company and the Shareholders of Current Electronics (Washington), Inc. dated as of January 15, 1997.(2) 10.4 -- Registration Rights Agreement dated as of February 24, 1997, among the Company, Charles E. Hewitson, Matthew J. Hewitson and Gregory Hewitson and certain other parties.(2) 10.5 -- Indemnification Agreement dated as of February 24, 1997, among the Company, the shareholders of Current Electronics, Inc., and the shareholders of Current Electronics (Washington), Inc.(2) 10.6 -- Agreement and Plan of Reorganization among the Company, Acquisition Corp., and Circuit Test, Inc., dated as of July 9, 1997.(4) 10.7 -- Limited Liability Company Unit Purchase Agreement among the Company, CTLLC Acquisition Corp., Airhub Service Group, L.C., and CTI International, L.C., dated as of July 9, 1997.(4) 10.8 -- Registration Rights Agreement dated as of September 30, 1997 among the Company and CTI Shareholders.(4) 10.9 -- Indemnification Agreement dated as of September 30, 1997 among the Company, CTI Shareholders and the LLC Members.(4) 10.10 -- Earnout Agreement dated as of September 30, 1997 among the Company and the LLC Members.(4) 10.11.1 -- Master Agreement Regarding Asset Purchase and Related Transactions among the Company, AlliedSignal Avionics, Inc., a Kansas corporation ("Avionics"), and AlliedSignal, Inc., operating through its Aerospace Equipment Systems Unit ("AES"), dated as of July 15, 1997, as amended by the First Amendment to Master Agreement dated as of July 31, 1997, and as further amended by the Second Amendment to Master Agreement dated as of August 11, 1997.(3) 10.11.2 -- Third Amendment to Master Agreement dated as of September 5, 1997.(6) 10.12 -- Supplier Partnering Agreement between the Company and AlliedSignal, Inc., dated as of August 4, 1997.(3) 10.13.1 -- License Agreement between the Company and AlliedSignal Technologies, Inc., dated as of July 15, 1997.(3) 10.13.2 -- Amended and Restated License Agreement between the Company and AlliedSignal Technologies, Inc., dated as of September 5, 1997.(6) 10.14 -- Premises License Agreement between the Company and AES dated as of August 4, 1997.(3)
111 INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 10.15 -- Facilities Management and Transition Services Agreement dated as of July 31, 1997 between the Company and AES as amended by a First Amendment to Facilities Management and Transition Services Agreement dated as of August 4, 1997.(3) 10.16 -- Sublease Agreement dated as of August 11, 1997 between the Company and AlliedSignal, Inc.(3) 10.17 -- Transition Services Agreement dated as of August 11, 1997 between the Company and Avionics.(3) 10.18.1 -- Agreement to Extend Avionics Personal Property Asset Transfer Date dated August 15, 1997, by and between the Company, Avionics and AES.(3) 10.18.2 -- Agreement to Extend Avionics Personal Property Asset Transfer Date dated August 29, 1997, by and between the Company, Avionics and AES.(6) 10.19 -- Accounts Payable Service Agreement dated as of August 11, 1997 between the Company and Avionics.(6) 10.20 -- Credit Agreement dated September 30, 1997 between the Company and Bank One, Colorado, N.A. ("Bank One").(4) *10.20.1 -- Amendment No. 1 to Credit Agreement dated as of November 6, 1997 between the Company and Bank One. 10.21 -- Pledge and Security Agreement dated as of September 30, 1997 by the Company to Bank One.(4) 10.22 -- Security Agreement and Assignment dated as of September 30, 1997 between the Company and Bank One.(4) 10.23 -- Deed of Trust and Security Agreement dated as of September 30, 1997, among the Company as Grantor, Bank One, as Agent and Beneficiary, and Northwest Title Company as Trustee.(4) 10.24 -- Deed of Trust and Security Agreement and Financing Statement dated as of September 30, 1997 from the Company to The Public Trustee of Weld County for Bank One, as Beneficiary.(4) 10.25 -- Note Agreement between the Company and Richard L. Monfort dated as of September 5, 1997, including the form of Floating Rate Subordinated Note attached as Exhibit A thereto.(4) 10.26 -- Warrant to Purchase 500,000 shares of Common Stock of the Company, dated as of October 6, 1997, issued by the Company to Richard L. Monfort.(4) 10.27 -- Form of Warrants to Purchase an aggregate of 80,000 shares of Common Stock of the Company, dated as of March 11, 1994, issued to Dain Bosworth Incorporated and Stephens Inc., underwriters, in connection with the Company's initial public offering.(6) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS 10.28 -- 1989 Stock Option Plan.(1) 10.29 -- 1993 Incentive Stock Option Plan.(1) 10.30 -- EFTC Corporation Equity Incentive Plan, amended and restated as of July 9, 1997.(6) 10.31 -- EFTC Corporation Stock Option Plan for Non-Employee Directors, amended and restated as of July 9, 1997.(6)
112 INDEX TO EXHIBITS
EXHIBIT NUMBER DOCUMENT DESCRIPTION ------- -------------------- 10.32 -- Employment Agreement with Jack Calderon dated as of August 1996.(5) 10.33 -- Form of Consulting Agreement entered into by the Company with each of OnCourse Inc., Matt Hewitson Consulting, Inc. and Corporate Solutions, Inc., dated as of February 24, 1997.(5) 10.34 -- Form of the separate Employment Agreements, each dated as of September 30, 1997, entered into by the Company, CTI and Allen S. Braswell, Jr., Richard Strott, Andrew Hatch and Dennis Ayo.(4) 10.35 -- 1997 Management Bonus Plan.(6) CONSENTS *23.1 -- Consent of KPMG Peat Marwick LLP *23.2 -- Consent of KPMG Peat Marwick LLP *23.3 -- Consent of Arthur Andersen LLP 23.4 -- Consent of Holme Roberts & Owen LLP (See Exhibit 5.1) OTHER EXHIBITS 24.1 -- Powers of Attorney(6) 27.1 -- Financial Data Schedule(6)
- --------------- * Filed herewith. (1) Incorporated by reference from the Company's Registration Statement on Form SB-2 under the Securities Act of 1933, File No. 33-73392-D. (2) Incorporated by reference from EFTC Corporation Form 8-K filed on March 5, 1997. (3) Incorporated by reference from EFTC Corporation Form 8-K filed on August 26, 1997. (4) Incorporated by reference from EFTC Corporation Form 8-K filed on October 15, 1997. (5) Incorporated by reference from EFTC Corporation Form 10-K filed on March 27, 1997. (6) Previously filed. EX-1.1 2 FORM OF UA 1 EXHIBIT 1.1 EFTC Corporation 4,000,000 Shares(a) Common Stock ($0.01 par value) Underwriting Agreement New York, New York November _____, 1997 Salomon Brothers Inc J.C. Bradford & Co. Pacific Crest Securities Inc. As Representatives of the several Underwriters, c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: EFTC Corporation, a Colorado corporation (the "Company"), proposes to sell to the underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the "Representatives") are acting as representatives, 3,500,000 shares of Common Stock, $0.01 par value ("Common Stock"), of the Company, and the persons named in Schedule II hereto (the "Selling Shareholders") propose to sell to the Underwriters 500,000 shares of Common Stock (said shares to be issued and sold by the Company and shares to be sold by the Selling Shareholders collectively being hereinafter called the "Underwritten Securities"). The Company and the Selling Shareholders named in Schedule III hereto also propose to grant to the Underwriters an option to purchase up to 600,000 additional shares of Common Stock (the "Option Securities"; the Option Securities, together with the Underwritten Securities, being hereinafter called the "Securities"). To the extent there are no additional Underwriters listed on Schedule I other than you, the term Representatives as used herein shall mean you, as Underwriters, and the terms Representatives and Underwriters shall mean either the singular or plural as the context requires. Any reference herein to the Registration Statement, a Preliminary Prospectus or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein pursuant to Item 12 of Form S-2 which were filed under the Exchange Act. - ------------------------------- (a) Plus an option to purchase from EFTC Corporation and the persons named in Schedule III hereto up to 600,000 additional shares to cover over-allotments. 2 It is understood that a form of prospectus is to be used in connection with the offering and sale of the Securities to United States and Canadian Persons (as defined herein) which, for purposes of distribution to Canadian Persons, shall have a Canadian "wrap-around" (the "Canadian Offering Memorandum"). Insofar as they relate to offers or sales of Securities in Canada, all references herein to the Preliminary Prospectus and the Prospectus shall include the Canadian Offering Memorandum. I. Representations and Warranties. A. The Company and the Joint Selling Shareholders jointly and severally represent and warrant to, and agree with, each Underwriter as set forth below in this Section I. Certain terms used in this Section I are defined in Section XVII hereof. 1. The Company meets the requirements for use of Form S-2 under the Act and has filed with the Securities and Exchange Commission (the "Commission") a registration statement (file number 333-38433) on such Form, including a related preliminary prospectus, for the registration under the Act of the offering and sale of the Securities. The Company may have filed one or more amendments thereto, including a related preliminary prospectus, each of which has previously been furnished to you. The Company will next file with the Commission either (A) prior to the Effective Date of such registration statement, a further amendment to such registration statement (including the form of final prospectus) or (B) after the Effective Date of such registration statement, a final prospectus in accordance with Rules 430A and 424(b)(1) or (4). In the case of clause (B), the Company has included in such registration statement, as amended at the Effective Date, all information (other than Rule 430A Information) required by the Act and the rules thereunder to be included in such registration statement and the Prospectus. As filed, such amendment and form of final prospectus, or such final prospectus, shall contain all Rule 430A Information, together with all other such required information, and, except to the extent the Representatives shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company has advised you, prior to the Execution Time, will be included or made therein. 2. On the Effective Date, the Registration Statement did or will, and when the Prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date (as defined herein) and on any date on which shares sold in respect of the Underwriters' over-allotment option are purchased, if such date is not the Closing Date (a "settlement date"), the Prospectus (and any supplements thereto) will, comply in all material respects with the applicable requirements of the Act and the Exchange Act and the respective rules 2 3 thereunder; on the Effective Date and at the Execution Time, the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date, the Prospectus, if not filed pursuant to Rule 424(b), will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date and any settlement date, the Prospectus (together with any supplement thereto) will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company and the Joint Selling Shareholders make no representations or warranties as to the information contained in or omitted from the Registration Statement, or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished herein or in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for inclusion in the Registration Statement or the Prospectus (or any supplement thereto). 3. The subsidiaries listed on Schedule IV hereto are the only subsidiaries of the Company. 4. Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation or limited liability company, as the case may be, in good standing under the laws of the jurisdiction in which it is organized with full corporate power and authority to own its properties and conduct its business as described in the prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification. 5. All the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances. 6. The Company's authorized equity capitalization is as set forth in the Prospectus; the capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have been duly and validly authorized and issued and are fully paid and nonassessable; the Securities being sold hereunder have been duly and validly authorized, and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be fully paid and nonassessable; the Company has taken the actions required by the published rules of the Nasdaq Stock Market to qualify the Securities for inclusion in the Nasdaq 3 4 Stock Market; the certificates for the Securities are in valid and sufficient form; the holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other rights to subscribe for the Securities and, except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding. 7. There is no franchise, contract or other document of a character required to be described in the Registration Statement or Prospectus, or to be filed as an exhibit thereto, which is not described or filed as required; and the statements in each of (a) the Prospectus under the headings "Risk Factors -- Protection of Know-how and Trade Secrets; -- Environmental Compliance; -- Shares Eligible for Future Sale; and -- Anti-Takeover Provisions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments", (b) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, under the headings "Item 1. Business -- Patents and Trademarks", "Item 2. Description of Property" and "Item 3. Legal Proceedings" and (c) the Company's Proxy Statement dated April 29, 1997, under the heading "Certain Relationships and Related Transactions", fairly summarize the matters therein described. 8. This Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms. 9. The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended. 10. No consent, approval, authorization, filing with or order of any court or governmental agency or body is required in connection with the transactions contemplated herein, except such as have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters in the manner contemplated herein and in the Prospectus. 11. Neither the issue and sale of the Securities nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, 4 5 obligation, condition, covenant or instrument to which the Company or any of its subsidiaries is a party or bound or to which its or their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its subsidiaries or any of its or their properties. 12. No holders of securities of the Company have rights to the registration of such securities under the Registration Statement except for such rights of the persons and entities listed on Schedule V hereto (the "Registration Rights Shareholders") as have been effectively waived. 13. The consolidated financial statements and schedules of the Company and its consolidated subsidiaries included in the Prospectus and the Registration Statement present fairly in all material respects the financial condition, results of operations and cash flows of the Company as of the dates and for the periods indicated, comply as to form with the applicable accounting requirements of the Act, the Exchange Act and the respective rules and regulations thereunder and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the captions "Selected Consolidated Historical and Pro Forma Financial Data" and "Prospectus Summary -- Summary Consolidated Historical and Pro Forma Financial Information" in the Prospectus and the Registration Statement, fairly present, on the basis stated in the Prospectus and the Registration Statement the information included therein. The unaudited pro forma financial statements included in or incorporated by reference in the Prospectus and the Registration Statement comply as to form in all material respects with the requirements of the Act, the Exchange Act and the respective rules and regulations thereunder; the pro forma adjustments have been properly applied to the historical amounts in the compilation of such pro forma statements; the assumptions described in the notes to such pro forma statements provide a reasonable basis for presenting the significant direct effects of the transactions contemplated therein and such pro forma adjustments give appropriate effect to those adjustments, in each case, in accordance with Regulation S-X. 14. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to have a material adverse effect on the condition (financial or 5 6 otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 15. Each of the Company and each of its subsidiaries, owns or leases all such properties as are necessary to the conduct of its operations as presently conducted; neither the Company nor any subsidiary is in violation of any law, rule or regulation of any Federal, state or local governmental or regulatory authority applicable to it or is not in non-compliance with any term or condition of, or has failed to obtain and maintain in effect, any license, certificate, permit or other governmental authorization required for the ownership or lease of its property or the conduct of its business, which violation, non-compliance or failure would individually or in the aggregate have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto); and the Company has not received notice of any proceedings relating to the revocation or material modification of any such license, certificate, permit or other authorization. 16. Neither the Company nor any subsidiary is in violation or default of (i) any provision of its charter or bylaws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 17. KPMG Peat Marwick LLP and Arthur Andersen LLP, each of which has certified certain financial statements of the Company or its subsidiaries and delivered their report with respect to the audited consolidated financial statements and schedules included in the Prospectus, are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations thereunder. 6 7 18. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company, the sale by the Company or the resale by the Joint Selling Shareholders of the Securities. 19. The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 20. No labor disturbance by or dispute with the employees of the Company or any of its subsidiaries exists or is threatened or imminent that could reasonably be expected to have a material adverse change in the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 21. The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and its subsidiaries are engaged; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a currently anticipated cost that would not have a material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 7 8 22. No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus (exclusive of any amendment thereto). 23. Except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto), the Company and its subsidiaries (i) possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, except where the failure to possess such certificates, authorizations and permits would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business and (ii) have not received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a material adverse change in the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business. 24. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 25. The Company owns or has obtained licenses or other rights for the patents, patent applications, trade and service marks, trade secrets and other intellectual properties referenced or described in the Prospectus as being owned or used by or licensed to it, including without limitation the rights to the AES software (collectively, the "Intellectual Property"). Except as set forth in the Prospectus under the caption "Risk Factors -- Protection of Know-how and Trade Secrets", (a) there are no rights of third parties to any such Intellectual Property that would materially impair the rights of the Company therein; (b) to the Company's knowledge there is no material infringement by 8 9 third parties of any such Intellectual Property; (c) there is no pending or to the Company's knowledge threatened action, suit, proceeding or claim by others challenging the Company's rights in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (d) there is no pending or to the Company's knowledge threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; (e) there is no pending or to the Company's knowledge threatened action, suit, proceeding or claim by others that the Company infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim; (f) there is no U.S. patent or published U.S. patent application which contains claims that dominate or may dominate any Intellectual Property described in the Prospectus as being owned or used by or licensed to the Company or that interferes with the issued or pending claims of any such Intellectual Property; and (g) there is no prior art of which the Company is aware that may render any U.S. patent held by the Company invalid or any U.S. patent application held by the Company unpatentable which has not been disclosed to the U.S. Patent and Trademark Office. The Company and each of its subsidiaries owns the Intellectual Property or has rights to use the Intellectual Property that is necessary to conduct its business as described in the Prospectus. 26. Except as disclosed in the Registered Statement and the Prospectus, the Company (i) does not have any material lending or other relationship with any bank affiliate or lending affiliate of Salomon Brothers Inc, J.C. Bradford & Co. or Pacific Crest Securities Inc., and (ii) does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of any of the Underwriters. 27. The Indemnification Agreement, dated February 24, 1997, among Charles E. Hewitson, Matthew J. Hewitson, Greg Hewitson, Christie Hewitson, Marsha Hewitson and Linda Hewitson (collectively, the "Current Electronics Indemnitors") and the Company, has been duly authorized, executed and delivered by the Company, has been duly executed and delivered by the Current Electronics Indemnitors and constitutes a valid and binding obligation of the Company and the Current Electronics Indemnitors enforceable in accordance with its terms. 28. The Indemnification Agreement, dated September 30, 1997, among Allen S. Braswell, Sr. Grantor Retained Income Trust u/a/d 12/31/89, Allen S. Braswell, Jr., Alma L. Braswell, Allen S. Braswell, Jr. Revocable Living Trust and Circuit Test International Limited Partnership, a Florida limited partnership (collectively, the "Circuit Test Indemnitors"; and Allen S. Braswell 9 10 Jr. and Alma L. Braswell, together, are the "Circuit Test Individual Indemnitors") and the Company, has been duly authorized, executed and delivered by the Company and the Circuit Test Indemnitors (other than the Circuit Test Individual Indemnitors), has been duly executed and delivered by the Circuit Test Individual Indemnitors and constitutes a valid and binding obligation of the Company and the Circuit Test Indemnitors enforceable in accordance with its terms. Any certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by the Company, as to matters covered thereby, to each Underwriter. B. Each Selling Shareholder represents and warrants to, and agrees with, each Underwriter that: 1. Such Selling Shareholder is the lawful owner of the Securities to be sold by such Selling Shareholder hereunder and upon sale and delivery of, and payment for, such Securities, as provided herein, such Selling Shareholder will convey good and marketable title to such Securities, free and clear of all liens, encumbrances, equities and claims whatsoever. 2. Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities and has not effected any sales of shares of Common Stock which, if effected by the issuer, would be required to be disclosed in response to Item 701 of Regulation S-K. 3. Certificates in negotiable form for such Selling Shareholder's Securities (other than, in the case of an Exercising Selling Shareholder, the Exercise Securities) have been placed in custody (or, in the case of Exercise Securities, will be placed in custody on the first business day following the Execution Time), for delivery pursuant to the terms of this Agreement, under a Custody Agreement executed and delivered by such Selling Shareholders, in the form heretofore furnished to you (the "Custody Agreement") with American Securities Transfer & Trust, Inc., as Custodian (the "Custodian"); the Securities represented by the certificates so held in custody for each Selling Shareholder (and the Exercise Securities represented by the certificates that are required pursuant to this Agreement to be held in custody for an Exercising Selling Shareholder) are subject to the interests hereunder of the Underwriters, the Company and the other Selling Shareholders; the arrangements for custody and delivery of such certificates (including certificates representing Exercise Securities), made by such Selling Shareholder hereunder and under the 10 11 Custody Agreement, are not subject to termination or modification by any acts of such Selling Shareholder, or by operation of law, whether by the death or incapacity of such Selling Shareholder or the occurrence of any other event; and if any such death, incapacity or any other such event shall occur before the delivery of such Securities hereunder, certificates for the Securities will be delivered by the Custodian in accordance with the terms and conditions of this Agreement and the Custody Agreement as if such death, incapacity or other event had not occurred, regardless of whether or not the Custodian shall have received notice of such death, incapacity or other event. 4. No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by such Selling Shareholder of the transactions contemplated herein, except such as may have been obtained under the Act and such as may be required under the federal and provincial securities laws of Canada or the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters and such other approvals as have been obtained. 5. Neither the sale of the Securities being sold by such Selling Shareholder nor the consummation of any other of the transactions herein contemplated by such Selling Shareholder or the fulfillment of the terms hereof by such Selling Shareholder will conflict with, result in a breach or violation of, or constitute a default under any law or the terms of any indenture or other agreement or instrument to which such Selling Shareholder is a party or bound, or any judgment, order or decree applicable to such Selling Shareholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Shareholder. Any certificate signed by any Selling Shareholder or a representative of a Selling Shareholder and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Securities shall be deemed a representation and warranty by such Selling Shareholder, as to the matters covered thereby, to each Underwriter. C. Each Several Selling Shareholder represents and warrants to, and agrees with, each Underwriter that such Several Selling Shareholder has no reason to believe that the representations and warranties of the Company and the Joint Selling Shareholders contained in Section I.A. are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Prospectus or any supplement thereto which has adversely affected or may adversely affect the business of the Company or any of its subsidiaries; and the sale of Securities by such Several Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or any of its subsidiaries which is not set forth in the Prospectus or any supplement thereto. 11 12 D. Each Exercising Selling Shareholder represents and warrants to, and agrees with, each Underwriter that it has delivered to the Company (i) notice in the form attached hereto as Exhibit C of an irrevocable election to exercise options for the purchase of the number of Common Stock shown opposite its name on Schedule VII hereto and (ii) irrevocable instructions to deliver the Exercise Securities to the Custodian to be held by the Custodian pursuant to the Custody Agreement; each such election and each such set of instructions is irrevocable and is not subject to termination or modification by any acts of such Exercising Selling Shareholder, or by operation of law, whether by the death or incapacity of such Exercising Selling Shareholder or the occurrence of any other event; and if any such death, incapacity or any other such event shall occur before the delivery of such Exercise Securities pursuant to such instructions, certificates for the Exercise Securities will be delivered by the Company to the Custodian in accordance with the terms and conditions of such notice and such instructions as if such death, incapacity or other event had not occurred, regardless of whether or not the Company shall have received notice of such death, incapacity or other event. In respect of any statements in or omissions from the Registration Statement or the Prospectus or any supplements thereto made in reliance upon and in conformity with information furnished in writing to the Company by any Several Selling Shareholder specifically for use in connection with the preparation thereof, such Several Selling Shareholder hereby makes the same representations and warranties to each Underwriter as the Company makes to such Underwriter under paragraph A.3. of this Section. II. Purchase and Sale. A. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company and the Selling Shareholders agree, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Shareholders, at a purchase price of $_________ per share, the amount of the Underwritten Securities set forth opposite such Underwriter's name in Schedule I hereto. B. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company and the Selling Shareholders named in Schedule III hereto hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to 600,000 shares of the Option Securities at the same purchase price per share as the Underwriters shall pay for the Underwritten Securities. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Securities by the Underwriters. Said option may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of the Prospectus upon written or telegraphic notice by the Representatives to the Company and such Selling Shareholders setting forth the number of shares of the Option Securities as to which the several Underwriters are exercising the option and the settlement date. Delivery of certificates for the shares of Option Securities by the Company and such Selling Shareholders, and payment therefor to the Company and such Selling Shareholders, shall be made as 12 13 provided in Section III hereof. The maximum number of shares of the Option Securities to be sold by the Company and each of such Selling Shareholders is set forth in Schedule III hereto. In the event that the Underwriters exercise less than their full over-allotment option, the number of shares of the Option Securities to be sold by each party listed on Schedule III shall be, as nearly as practicable, in the same proportion to each other as are the number of shares of the Option Securities listed opposite their respective names on said Schedule III. The number of shares of the Option Securities to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Securities to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Securities, subject to such adjustments as you in your absolute discretion shall make to eliminate any fractional shares. III. Delivery and Payment. Delivery of and payment for the Underwritten Securities and the Option Securities (if the option provided for in Section II.B hereof shall have been exercised on or before the third Business Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on____________________, 1997, or at such time on such later date not more than three Business Days after the foregoing date as the Representatives shall designate, which date and time may be postponed by agreement among the Representatives, the Company and the Selling Shareholders or as provided in Section IX hereof (such date and time of delivery and payment for the Securities being herein called the "Closing Date"). Except as provided in the immediately following paragraph, delivery of the Securities shall be made to the Representatives for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representatives of the respective aggregate purchase prices of the Securities being sold by the Company and each of the Selling Shareholders to or upon the order of the Company and such Selling Shareholders by wire transfer payable in same-day funds to an account specified by the Company. Delivery of the Underwritten Securities and the Option Securities to be sold by the Company shall be made through the facilities of The Depository Trust Company unless the Representatives shall otherwise instruct. Delivery of the Exercise Securities shall be made to the Representatives for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representatives (i) to the Company of the aggregate exercise price of the options described in Schedule VII hereto and (ii) to each of the Exercising Selling Shareholders of the excess, if any, of the aggregate purchase price of the Exercise Securities being sold by such Exercising Selling Shareholder over the amount paid with respect to such Exercise Securities pursuant to clause (i) of this sentence, in each case, by wire transfer payable in same day funds to the account specified pursuant to the preceding paragraph. Delivery of the Underwritten Securities and the Option Securities to be sold by the Selling Shareholders shall be made at such location as the Representatives shall reasonably designate at least one Business Day in advance of the Closing Date and payment for the Securities shall be made at the office of _____________________________, New York, New York; certificates for such Securities shall be registered in such names and in such denominations as the 13 14 Representatives may request not less than two full Business Days in advance of the Closing Date. The Company agrees to have the certificates for such Securities available for inspection, checking and packaging by the Representatives in New York, New York, not later than 1:00 PM on the Business Day prior to the Closing Date. Each Selling Shareholder will pay all applicable state transfer taxes, if any, involved in the transfer to the several Underwriters of the Securities to be purchased by them from such Selling Shareholder and the respective Underwriters will pay any additional stock transfer taxes involved in further transfers. Except as provided in the immediately following paragraph, if the option provided for in Section II.B hereof is exercised after the third business day prior to the Closing Date, the Company and the Selling Shareholders named in Schedule III hereto will deliver the Option Securities (at the expense of the Company) to the Representatives on the date specified by the Representatives (which shall be within three Business Days after exercise of said option) for the respective accounts of the several Underwriters, against payment by the several Underwriters through the Representatives of the purchase price thereof to or upon the order of the Company and the Selling Shareholders identified in Schedule III by wire transfer payable in same-day funds to an account specified by the Company and the Selling Shareholders named in Schedule III hereto. If settlement for the Option Securities occurs after the Closing Date, the Company and such Selling Shareholders will deliver to the Representatives on the settlement date for the Option Securities, and the obligation of the Underwriters to purchase the Option Securities shall be conditioned upon receipt of, supplemental opinions, certificates and letters confirming as of such date the opinions, certificates and letters delivered on the Closing Date pursuant to Section VI hereof. In the event that any of the shares are delivered pursuant to the exercise of options, delivery of such shares shall be made to the Representatives for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representatives (i) to the Company of the aggregate exercise price of such options and (ii) to each of the Selling Shareholders of the excess, if any, of the aggregate purchase price of such shares being sold by such Selling Shareholder over the amount paid with respect to such shares pursuant to clause (i) of this sentence, in each case, by wire transfer payable in same day funds to the account specified pursuant to the preceding paragraph. IV. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Securities for sale to the public as set forth in the Prospectus. V. Agreements. A. The Company agrees with the several Underwriters that: 1. The Company will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereof, 14 15 to become effective. Prior to the termination of the offering of the Securities, the Company will not file any amendment of the Registration Statement or supplement to the Prospectus or any Rule 462(b) Registration Statement unless the Company has furnished you a copy for your review prior to filing and will not file any such proposed amendment or supplement to which you reasonably object. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will cause the Prospectus, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Company will promptly advise the Representatives (A) when the Registration Statement, if not effective at the Execution Time, shall have become effective, (B) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the Commission pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement shall have been filed with the Commission, (C) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (D) of any request by the Commission or its staff for any amendment of the Registration Statement, or any Rule 462(b) Registration Statement, or for any supplement to the Prospectus or of any additional information, (E) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (F) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof. 2. If, at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act or the Exchange Act or the respective rules thereunder, the Company promptly will (i) prepare and file with the Commission, subject to the second sentence of paragraph A of this Section V, an amendment or supplement which will correct such statement or omission or effect such compliance and (ii) supply any supplemented Prospectus to you in such quantities as you may reasonably request. 15 16 3. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement or statements of the Company and its subsidiaries which will satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act. 4. The Company will furnish to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement (including exhibits thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and, so long as delivery of a prospectus by an Underwriter or dealer may be required by the Act, as many copies of each Preliminary Prospectus and the Prospectus and any supplement thereto as the Representatives may reasonably request. The Company will pay the expenses of printing or other production of all documents relating to the offering. 5. The Company will in good faith seek to arrange, if necessary and with the cooperation of the Underwriters, for the qualification of the Securities for sale under the laws of such jurisdictions as the Representatives may designate, will maintain such qualifications in effect so long as required for the distribution of the Securities (provided that neither the Company nor its Subsidiaries will be required to qualify as a foreign corporation or consent to service of process in any such jurisdiction) and will pay any fee of the National Association of Securities Dealers, Inc. (the "NASD"), in connection with its review of the offering. 6. The Company will not, for a period of 180 days following the Execution Time, without the prior written consent of Salomon Brothers Inc, offer, sell or contract to sell, or otherwise dispose of (or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock; provided, however, that the Company may issue and sell Common Stock pursuant to any director or employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the Execution Time and the Company may issue Common Stock issuable upon the conversion of securities or the exercise of warrants outstanding at the Execution Time. B. Each Selling Shareholder agrees with the several Underwriters that it will, at the Execution Time, furnish to the Representatives through the Company the letter specified in paragraph I. of Section VI hereof. 16 17 VI. Conditions to the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Underwritten Securities and the Option Securities, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Shareholders contained herein as of the Execution Time, the Closing Date and any settlement date pursuant to Section III hereof, to the accuracy of the statements of the Company and the Selling Shareholders made in any certificates pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their respective obligations hereunder and to the following additional conditions: A. If the Registration Statement has not become effective prior to the Execution Time, unless the Representatives agree in writing to a later time, the Registration Statement will become effective not later than (i) 6:00 PM New York City time on the date of determination of the public offering price, if such determination occurred at or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the Business Day following the day on which the public offering price was determined, if such determination occurred after 3:00 PM New York City time on such date; if filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the Prospectus, and any such supplement, will be filed in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened. B. The Company shall have furnished to the Representatives the opinion of Holme Roberts & Owen LLP, counsel for the Company, dated the Closing Date, to the effect that: 1. each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized, with full corporate power and authority to own its properties and conduct its business as described in the Prospectus; 2. all the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any perfected security interest and, to the knowledge of such counsel, after due inquiry, any other security interests, claims, liens or encumbrances; 3. the Company's authorized equity capitalization is as set forth in the Prospectus; the capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock (including the Securities being sold hereunder by the Selling Shareholders) have been duly and validly authorized and issued and are fully 17 18 paid and nonassessable; the Securities being sold hereunder by the Company have been duly and validly authorized, and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be fully paid and nonassessable; the Company has taken the actions required by the published rules of the Nasdaq Stock Market to qualify the Securities for inclusion in the Nasdaq Stock Market; the certificates for the Securities are in valid and sufficient form; and the holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other rights to subscribe for the Securities; and, except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding; 4. to the knowledge of such counsel, there is no pending or threatened action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries of a character required to be disclosed in the Registration Statement that is not adequately described in the Prospectus, and there is no franchise, contract or other document of a character required to be described in the Registration Statement or Prospectus, or to be filed as an exhibit thereto, that is not described or filed as required; and the statements in each of (a) the Prospectus under the headings "Risk Factors -- Protection of Know-how and Trade Secrets; -- Environmental Compliance; -- Shares Eligible for Future Sale; and -- Anti-Takeover Provisions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Recent Developments", (b) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, under the headings "Item 1. Business --Patents and Trademarks", "Item 2. Description of Property" and "Item 3. Legal Proceedings" and (c) the Company's Proxy Statement dated April 29, 1997, under the heading "Certain Relationships and Related Transactions", to the extent that such statements purport to describe certain provisions of federal laws, laws of the State of Colorado, rules or regulations, the Company's charter and by-laws, and contracts to which the Company is a party, have been reviewed by such counsel and fairly summarize the matters therein described; 5. the Registration Statement has become effective under the Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued, no proceedings for that purpose have been instituted or threatened and the Registration Statement and the Prospectus (other than the financial statements and other financial information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable 18 19 requirements of the Act and the Exchange Act and the respective rules thereunder; 6. this Agreement has been duly authorized, executed and delivered by the Company; 7. the Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended; 8. no consent, approval, authorization, filing with or order of any court or governmental agency or body is required for the consummation by the Company of the transactions contemplated herein, except such as have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters in the manner contemplated in this Agreement and in the Prospectus; 9. neither the issue and sale of the Securities, nor the consummation by the Company of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its subsidiaries pursuant to, (i) the charter or by-laws of the Company or its subsidiaries or (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument known to such counsel after due inquiry to which the Company or its subsidiaries is a party or bound or to which its property is subject, or (iii) any statute, law, rule, regulation, judgment, order or decree known to such counsel after due inquiry to be applicable to the Company or its subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or its subsidiaries or any of its or their properties; and 10. to such Counsel's knowledge after due inquiry no holders of securities of the Company have rights to the registration of such securities under the Registration Statement except for such rights of the Registration Rights Shareholders as have been effectively waived. In addition, such counsel shall state that nothing has come to such counsel's attention that leads such counsel to believe that on the Effective Date or at the Execution Time the Registration Statement (other than the financial statements, including the notes thereto, and supporting schedules or other financial data contained therein, as to which such counsel need not comment) contains or contained any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not 19 20 misleading, or that the Prospectus (other than the financial statements, including the notes thereto, and supporting schedules or other financial data contained therein, as to which such counsel need not comment) contained or contains, as of its date or as of the Closing Date, any untrue statement of a material fact or omitted or omits, as of such dates, to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely (a) as to matters involving the application of laws of any jurisdiction other than the State of Colorado, the State of New York or the Federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters and (b) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. References to the Prospectus in this paragraph B include any supplements thereto at the Closing Date. C. The Selling Shareholders shall have furnished to the Representatives the opinion of Holme Roberts & Owen LLP, counsel for the Selling Shareholders, dated the Closing Date, to the effect that: 1. this Agreement, the Custody Agreement and the Power-of-Attorney have been duly executed and delivered by the Selling Shareholders, the Custody Agreement is valid and binding on the Selling Shareholders and each Selling Shareholder has full legal right and authority to sell, transfer and deliver in the manner provided in this Agreement and the Custody Agreement the Securities being sold by such Selling Shareholder hereunder; 2. the delivery by each Selling Shareholder to the several Underwriters of certificates for the Securities being sold hereunder by such Selling Shareholder against payment therefor as provided herein, will pass good and marketable title to such Securities to the several Underwriters, free and clear of all liens, encumbrances, equities and claims whatsoever; 3. no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by any Selling Shareholder of the transactions contemplated herein, except such as may have been obtained under the Act and such as may be required under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters and such other approvals (specified in such opinion) as have been obtained; and 4. neither the sale of the Securities being sold by any Selling Shareholder nor the consummation of any other of the transactions herein contemplated by any Selling Shareholder or the fulfillment of the terms hereof by any Selling Shareholder will conflict with, result in a breach or violation of, or constitute a default under (i) any law or the terms of any indenture or other agreement or instrument known to such counsel and to which any Selling 20 21 Shareholder is a party or bound, or any judgment, order or decree known to such counsel to be applicable to any Selling Shareholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over any Selling Shareholder or (ii) in the case of a Selling Shareholder that is a partnership or trust, the partnership agreement, trust agreement or other organizational documents of such Selling Shareholder. In rendering such opinion, such counsel may rely (a) as to matters involving the application of laws of any jurisdiction other than the State of Colorado, the State of New York or the Federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters, and (b) as to matters of fact, to the extent they deem proper, on certificates of the Selling Shareholders and public officials. D. The Representatives shall have received from Cleary, Gottlieb, Steen & Hamilton, counsel for the Underwriters, such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Securities, the Registration Statement, the Prospectus (together with any supplement thereto) and other related matters as the Representatives may reasonably require, and the Company and each Selling Shareholder shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. E. The Company shall have furnished to the Representatives a certificate of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus, any supplements to the Prospectus and this Agreement and that: 1. the representations and warranties of the Company in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; 2. no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the Company's knowledge, threatened; and 3. since the date of the most recent financial statements included in the Prospectus (exclusive of any supplement thereto), there has been no material adverse change in the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 21 22 F. Each Selling Shareholder shall have furnished to the Representatives a certificate, signed, in the case of a Selling Shareholder that is other than a natural person, by a representative of such Selling Shareholder satisfactory to the Representatives and, in any other case, by such Selling Shareholder, dated the Closing Date, to the effect that the signer of such certificate has carefully examined the Registration Statement, the Prospectus, any supplement to the Prospectus and this Agreement and that the representations and warranties of such Selling Shareholder in this Agreement are true and correct in all material respects on and as of the Closing Date to the same effect as if made on the Closing Date. G. At the Execution Time and at the Closing Date, KPMG Peat Marwick LLP shall have furnished to the Representatives letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Representatives, confirming that they are independent accountants within the meaning of the Act and the Exchange Act and the respective applicable published rules and regulations thereunder and stating in effect that: 1. in their opinion the audited financial statements and financial statement schedules and pro forma financial statements included or incorporated in the Registration Statement and the Prospectus and reported on by them comply in form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published rules and regulations; 2. on the basis of a reading of the latest unaudited financial statements made available by the Company and its subsidiaries; carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter; a reading of the minutes of the meetings of the Shareholders, directors and compensation and audit committees of the Company and the subsidiaries; and inquiries of certain officials of the Company who have responsibility for financial and accounting matters of the Company and its subsidiaries as to transactions and events subsequent to September 30, 1997, nothing came to their attention which caused them to believe that: a. with respect to the period subsequent to September 30, 1997, there were any changes, at a specified date not more than three days prior to the date of the letter, in the long-term debt of the Company and its subsidiaries or capital stock of the Company or decreases in the Shareholders' equity of the Company or decreases in working capital of the Company and its subsidiaries as compared with the amounts shown on the September 30, 1997, consolidated balance sheet included or incorporated in the Registration Statement and the Prospectus, or for the period from October 1, 1997 to such specified date there were any decreases, as compared with the corresponding 22 23 period in the preceding quarter in net revenues or income before income taxes or in total or per share amounts of net income of the Company and its subsidiaries; operating income; net interest income; net interest income after provision for loan losses, except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company as to the significance thereof unless said explanation is not deemed necessary by the Representatives; or b. the information included in the Registration Statement and Prospectus in response to Regulation S-K, Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information), Item 402 (Executive Compensation) and Item 503(d) (Ratio of Earnings to Fixed Charges) is not in conformity with the applicable disclosure requirements of Regulation S-K. 3. they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company and its subsidiaries) set forth in the Registration Statement and the Prospectus, including the information set forth under the captions "Summary Financial Data", "Capitalization", "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Prospectus, the information included or incorporated from Items 1, 2, 6, 7 and 11 of the Company's Annual Report on Form 10-K, incorporated in the Registration Statement and the Prospectus, the information included in the "Management's Discussion and Analysis of Results of Operations and Financial Condition" included or incorporated in the Company's Quarterly Reports on Form 10-Q incorporated in the Registration Statement and the Prospectus [and the financial statements included or incorporated in the Form 8-K and Form 8-K/A incorporated in the Registration Statement and the Prospectus], agrees with the accounting records of the Company and its subsidiaries, excluding any questions of legal interpretation. 4. on the basis of a reading of the unaudited pro forma financial statements included or incorporated in the Registration Statement and the Prospectus (the "pro forma financial statements"); carrying out certain specified procedures; inquiries of certain officials of the Company and its subsidiaries, who have responsibility for financial and accounting matters; and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing came to their attention which caused them to believe that the pro forma financial statements do not comply in form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements. 23 24 References to the Prospectus in this paragraph G includes any supplement thereto at the date of the letter. H. Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph G of this Section VI or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), earnings, business or properties of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto) the effect of which, in any case referred to in clause (i) or (ii) above, is, in the sole judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). I. At the Execution Time, the Company shall have furnished to the Representatives a letter substantially in the form of Exhibit A hereto from each officer and director of the Company, from each Selling Shareholder and from each other shareholder listed in Schedule VI hereto, in any case, addressed to the Representatives, in which each such person agrees 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 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 180 days or 360 days, in each case as specified in Schedule VI hereto, after the date of this Agreement, other than (i) any shares of Common Stock to be sold hereunder, (ii) any option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectus to which this Agreement relates and (iii) other than shares of Common Stock disposed of as bona fide gifts approved by Salomon Brothers Inc. J. The Securities shall be duly authorized for listing on the Nasdaq Stock Market upon issuance. K. Prior to the Closing Date, the Company shall have furnished to the Representatives such further information, certificates and documents as the Representatives may reasonably request. If any of the conditions specified in this Section VI shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Representatives and counsel for the 24 25 Underwriters, this Agreement and all obligations of the Underwriters hereunder may be canceled at, or at any time prior to, the Closing Date by the Representatives. Notice of such cancellation shall be given to the Company and each Selling Shareholder in writing or by telephone or facsimile confirmed in writing. The documents required to be delivered by this Section VI shall be delivered at the office of Cleary, Gottlieb, Steen & Hamilton, counsel for the Underwriters, One Liberty Plaza, New York, New York 10006, on the Closing Date. VII. Reimbursement of Underwriters' Expenses. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section VI hereof is not satisfied, because of any termination pursuant to Section X hereof or because of any refusal, inability or failure on the part of the Company or any Selling Shareholder to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally through Salomon Brothers Inc on demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. If the Company is required to make any payments to the Underwriters under this Section VII because of any Selling Shareholder's refusal, inability or failure to satisfy any condition to the obligations of the Underwriters set forth in Section VI, the Selling Shareholders pro rata in proportion to the percentage of Securities to be sold by each shall reimburse the Company on demand for all amounts so paid. VIII. Indemnification and Contribution. A. 1. The Company and the Joint Selling Shareholders jointly and severally agree to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person who controls any Underwriter within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Securities as originally filed or in any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company and the Joint Selling Shareholders will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any 25 26 such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Company or the Joint Selling Shareholders may otherwise have. 2. Each Several Selling Shareholder severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, each Underwriter, the directors, officers, employees and agents of each Underwriter and each person who controls the Company or any Underwriter within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company and the Joint Selling Shareholders to each Underwriter, but only with reference to written information furnished to the Company by or on behalf of such Several Selling Shareholder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Several Selling Shareholder may otherwise have. B. Each Underwriter severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, and each person who controls the Company within the meaning of either the Act or the Exchange Act and each Selling Shareholder, to the same extent as the foregoing indemnity to each Underwriter, but only with reference to written information relating to such Underwriter furnished to the Company by or on behalf of such Underwriter through the Representatives specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have. The Company and each Selling Shareholder acknowledge that the statements set forth in the last paragraph of the cover page regarding delivery of the Securities, the stabilization legend in block capital letters on page 2 and, under the heading "Underwriting" (i) the sentences related to concessions and reallowances and (ii) the paragraph related to stabilization in any Preliminary Prospectus and the Prospectus constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in any Preliminary Prospectus or the Prospectus. C. Promptly after receipt by an indemnified party under this Section VIII of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section VIII, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph A or B above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph A or B above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not 26 27 thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel, if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. D. In the event that the indemnity provided in paragraph A or B of this Section VIII is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and the Selling Shareholders, jointly and severally, and the Underwriters agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company, one or more of the Selling Shareholders and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and by the Underwriters on the other from the offering of the Securities; provided, however, that in no case shall any Underwriter (except as may be provided in any agreement among underwriters relating to the offering of the Securities) be responsible for any amount in excess of the underwriting discount or commission applicable to the Securities purchased by such Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company and the Selling Shareholders, jointly and severally, and the Underwriters shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholders on the one hand and of the Underwriters on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and the Selling Shareholders shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) received by 27 28 it, and benefits received by the Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information provided by the Company or the Selling Shareholders on the one hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph D, no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section VIII, each person who controls an Underwriter within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of an Underwriter shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph D. E. Notwithstanding any other provision of this agreement to the contrary: 1. the liability of each Selling Shareholder under such Selling Shareholder's representations and warranties contained in Section I hereof and under the indemnity and contribution agreements contained in this Section VIII shall be limited to an amount equal to the initial public offering price of the Securities sold by such Selling Shareholder to the Underwriters; 2. none of the Selling Shareholders shall have any liability with respect to the representations and warranties contained in Section I hereof, except to the extent that an Underwriter, or a director, officer or agent of an Underwriter or any person who controls any Underwriter within the meaning of either the Act or the Exchange Act is unable to satisfy a claim against the Company in respect of a breach or alleged breach of such representations and warranties; and 3. none of the Selling Shareholders shall have any liability under the indemnity and contribution agreements contained in this Section VIII, except to the extent that the indemnification and contribution obligations of the Company provided for in this Section VIII are unavailable or insufficient by reason of a Payment Default to hold an Underwriter, or a director, officer or agent of an Underwriter or any person who controls any Underwriter within the meaning of either the Act or the Exchange Act harmless in respect of any 28 29 losses, claims, damages or liabilities (or actions in respect thereof) referred to in such sections to which such Underwriter or such other person may be subject; provided, however, that nothing in this paragraph E shall prohibit the Underwriters from joining any Selling Shareholder as a party in any claim (including without limitation any counterclaim or cross-claim) against the Company for breach of the representations and warranties contained in Section I hereof or for payment under the indemnity and contribution agreements contained in this Section VIII. The Company and the Selling Shareholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. IX. Default by an Underwriter. If any one or more Underwriters shall fail to purchase and pay for any of the Securities agreed to be purchased by such Underwriter or Underwriters hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Underwriters shall be obligated severally to take up and pay for (in the respective proportions which the amount of Securities set forth opposite their names in Schedule I hereto bears to the aggregate amount of Securities set forth opposite the names of all the remaining Underwriters) the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that in the event that the aggregate amount of Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate amount of Securities set forth in Schedule I hereto, the remaining Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Securities, and if such nondefaulting Underwriters do not purchase all the Securities, this Agreement will terminate without liability to any nondefaulting Underwriter, the Selling Shareholders or the Company. In the event of a default by any Underwriter as set forth in this Section IX, the Closing Date shall be postponed for such period, not exceeding five Business Days, as the Representatives shall determine in order that the required changes in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Underwriter of its liability, if any, to the Company, the Selling Shareholders and any nondefaulting Underwriter for damages occasioned by its default hereunder. X. Termination. This Agreement shall be subject to termination in the absolute discretion of the Representatives, by notice given to the Company prior to delivery of and payment for the Securities, if at any time prior to such time (i) trading in the Company's Common Stock shall have been suspended by the Commission or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or the Nasdaq National Market shall have been suspended or limited or minimum prices shall have been established on such Exchange or National Market, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, 29 30 declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of the Representatives, impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Prospectus (exclusive of any supplement thereto). XI. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, of each Selling Shareholder and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, any Selling Shareholder or the Company or any of the officers, directors or controlling persons referred to in Section VIII hereof, and will survive delivery of and payment for the Securities. The provisions of Sections VII and VIII hereof shall survive the termination or cancellation of this Agreement. XII. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Representatives, will be mailed, delivered or telefaxed with confirmation to the Salomon Brothers Inc General Counsel (fax no.: (212) 783-1752) and confirmed to the General Counsel, care of Salomon Brothers Inc, at Seven World Trade Center, New York, New York 10048, Attention: General Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed with confirmation to EFTC Corporation (fax no.: (303) 451-8210) and confirmed to it at EFTC Corporation, 9351 Grant Street, Suite 600, Denver, Colorado 80229, Attention: Stuart W. Fuhlendorf, Chief Financial Officer, or if sent to the Selling Shareholders, will be mailed, delivered or telefaxed with confirmation to _____________________________ [facsimile number] and confirmed to them at the addresses set forth in Schedule II hereto. XIII. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section VIII hereof, and no other person will have any right or obligation hereunder. XIV. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York. XV. Counterparts. This Agreement may be signed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same agreement. 30 31 XVI. Headings. The section headings used herein are for convenience only and shall not affect the construction hereof. XVII. Definitions. The terms which follow, when used in this Agreement, shall have the meanings indicated. "Act" shall mean the Securities Act of 1933, as amended. "Business Day" shall mean any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorized or obligated by law to close in New York City. "Effective Date" shall mean each date and time that the Registration Statement, any post-effective amendment or amendments thereto and any Rule 462(b) Registration Statement became or become effective. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Execution Time" shall mean the date and time that this Agreement is executed and delivered by the parties hereto. "Exercise Securities" shall mean the numbers of shares listed on Schedule VII to be issued upon exercise of outstanding options listed in Schedule VII delivered by the Exercising Shareholders to the several Underwriters (i) on the Closing Date pursuant to this Agreement or (ii) on the settlement date for the option provided in Section II.B. of this Agreement, as the case may be. "Exercising Selling Shareholders" shall mean the Selling Shareholders appearing on Schedule VII hereto. "Joint Selling Shareholders" shall mean the Selling Shareholders other than Robert Child, Brian Tracey and August P. Bruehlman. "Payment Default" means the occurrence of each of the following events: (1) the Underwriters have given written notice (in accordance with Section XII hereof) to the Company of a claim under the indemnification or contribution provisions contained in Section VIII hereof; and (2) the Company shall have failed to satisfy such claim within 30 days of receipt of such notice. 31 32 "Preliminary Prospectus" shall mean any preliminary prospectus referred to in paragraph I.A. above and any preliminary prospectus included in the Registration Statement at the Effective Date that omits Rule 430A Information. "Prospectus" shall mean the prospectus relating to the Securities that is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing pursuant to Rule 424(b) is required, shall mean the form of final prospectus relating to the Securities included in the Registration Statement at the Effective Date. "Registration Statement" shall mean the registration statement referred to in paragraph I.A. above, including incorporated documents, exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereto or any Rule 462(b) Registration Statement becomes effective prior to the Closing Date (as hereinafter defined), shall also mean such registration statement as so amended or such Rule 462(b) Registration Statement, as the case may be. Such term shall include any Rule 430A Information deemed to be included therein at the Effective Date as provided by Rule 430A. "Rule 424," "Rule 430A" and "Rule 462" refer to such rules under the Act. "Rule 430A Information" shall mean information with respect to the Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A. "Rule 462(b) Registration Statement" shall mean a registration statement and any amendments thereto filed pursuant to Rule 462(b) relating to the offering covered by the initial registration statement. "Several Selling Shareholders" shall mean the Selling Shareholders other than the Joint Shareholders. "United States or Canadian Person" shall mean any person who is a national or resident of the United States or Canada, any corporation, partnership, or other entity created or organized in or under the laws of the United States or Canada or of any political subdivision thereof, or any estate or trust the income of which is subject to United States or Canadian Federal income taxation, regardless of its source (other than any non-United States or non-Canadian branch of any United States or Canadian Person), and shall include any United States or Canadian branch of a person other than a United States or Canadian Person. "U.S." or "United States" shall mean the United States of America (including the states thereof and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. 32 33 XVIII. Canada. Each of the Underwriters hereby covenants and agrees that it will not distribute the Securities in such a manner as to require the filing of a prospectus or similar document (excluding a private placement offering memorandum) with respect to the Securities under the laws of any Province or Territory in Canada. 33 34 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Company, the Selling Shareholders and the several Underwriters. Very truly yours, EFTC Corporation By: ------------------------------------- Name: Title: Gerald J. Reid Lucille A. Reid Lloyd A. McConnell Charles E. Hewitson Gregory Hewitson Matthew J. Hewitson Jack Calderon August P. Bruehlman Robert Child Brian Tracey Stuart W. Fuhlendorf Brent L. Hofmeister By: ------------------------------------- Name: Title: Attorney-in-Fact for each of the Selling Shareholders 34 35 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Salomon Brothers Inc J.C. Bradford & Co. Pacific Crest Securities By: Salomon Brothers Inc By: --------------------------- Name: Title: For themselves and the other several Underwriters named in Schedule I to the foregoing Agreement. 35 36 SCHEDULE I Underwriters
NUMBER OF SHARES TO BE UNDERWRITERS PURCHASED - -------------------------------------------------------------------------------------------------- Salomon Brothers Inc . . . . . . . . . . . . . . . . . . . . . . . J.C. Bradford & Co. . . . . . . . . . . . . . . . . . . . . . . . . Pacific Crest Securities Inc. . . . . . . . . . . . . . . . . . . . --------- Total . . . . . . . . . . . . . . . . . . . . . . 4,000,000 =========
37 SCHEDULE II Secondary Offering
NUMBER OF SHARES SELLING SHAREHOLDERS AND ADDRESSES TO BE SOLD - -------------------------------------------------------------------------------------------------- Gerald J. Reid . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Lucille A. Reid . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Lloyd A. McConnell . . . . . . . . . . . . . . . . . . . . . . . . 80,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Charles E. Hewitson . . . . . . . . . . . . . . . . . . . . . . . . 60,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Gregory Hewitson . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Matthew J. Hewitson . . . . . . . . . . . . . . . . . . . . . . . . 60,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Jack Calderon . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 August P. Bruehlman . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229
38 Robert Child . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Brian Tracey . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Stuart W. Fuhlendorf . . . . . . . . . . . . . . . . . . . . . . . 5,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Brent L. Hofmeister . . . . . . . . . . . . . . . . . . . . . . . . 5,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 ------- Total . . . . . . . . . . . . . . . . . . . . . . 500,000 =======
2 39 SCHEDULE III Over-Allotment Option
MAXIMUM NUMBER OF SHARES SUBJECT TO NAME AND ADDRESS OVER-ALLOTMENT OPTION - ----------------------------------------------------------------------------------------------------- EFTC Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 Gerald J. Reid . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Lucille A. Reid . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Lloyd A. McConnell . . . . . . . . . . . . . . . . . . . . . . . . 80,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Charles E. Hewitson . . . . . . . . . . . . . . . . . . . . . . . . 60,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Gregory Hewitson . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Matthew J. Hewitson . . . . . . . . . . . . . . . . . . . . . . . . 60,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Jack Calderon . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229
40 August P. Bruehlman . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Robert Child . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Brian Tracey . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Stuart W. Fuhlendorf . . . . . . . . . . . . . . . . . . . . . . . 5,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Brent L. Hofmaster . . . . . . . . . . . . . . . . . . . . . . . . 5,000 EFTC Corporation, 9351 Grant Street, Suite 600 Denver, Colorado 80229 Selling Shareholders Total . . . . . . . . . . . . . . . . . . 500,000 ------- Total . . . . . . . . . . . . . . . . . . . . . . 600,000 =======
2 41 SCHEDULE IV Subsidiaries Current Electronics, Inc. Circuit Test, Inc. Circuit Test International, L.C. Airhub Services Group, L.C. 42 SCHEDULE V Registration Rights Shareholders Gerald J. Reid Lucille A. Reid Lloyd A. McConnell Ken Shultz Gary E. Long Judith A. Long Harry Asmus Sara R. Asmus Helen R. Asmus David W. Van Wert Victor R. Nottingham Larry R. Vosmera Leonard R. Prothe Mason S. Shirozi Charles E. Hewitson Matthew J. Hewitson Greg Hewitzon Richard Monfort Allen S. Braswell Jr. Alma L. Braswell Bruce A. Braswell Amy A. Braswell Anita B. Murman Allen S. Braswell, Sr. Grantor Retained Income Trust u/a/d 12/31/89. Dain Bosworth Stephens Inc. 43 SCHEDULE VI Shareholders Providing Letter Set Forth in Exhibit A
Name Lock-up period - ---- -------------- Allen S. Braswell, Jr. 360 days Allen S. Braswell, Sr. 360 days August P. Bruehlman 180 days Jack Calderon 180 days Darrayl E. Cannon 180 days Robert Child 180 days James A. Doran 180 days Stuart W. Fuhlendorf 180 days Charles E. Hewitson 360 days Gregory C. Hewitson 360 days Matthew J. Hewitson 360 days Brent L. Hofmeister 180 days Lloyd A. McConnell 360 days Robert K. McNamara 180 days Richard L. Monfort 180 days Gerald J. Reid 360 days Lucille A. Reid 360 days Masoud S. Shirazi 180 days Brian Tracey 180 days David W. Van Wert 180 days
44 SCHEDULE VII Exercising Selling Shareholders
NAME OF EXERCISING SELLING DATE OF TYPE OF NUMBER OF EXERCISE SHAREHOLDER GRANT GRANT SHARES PRICE - -------------------------- ------- ------- --------- --------
[TO BE PROVIDED BY EFTC/HOLME ROBERTS & OWEN] 45 EXHIBIT A [Letterhead of officer, director or major shareholder of EFTC Corporation] EFTC Corporation Public Offering of Common Stock , 1997 Salomon Brothers Inc J.C. Bradford & Co. Pacific Crest Securities Inc. As Representatives of the several Underwriters, c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: This letter is being delivered to you in connection with the proposed Underwriting Agreement (the "Underwriting Agreement"), between EFTC Corporation, a Colorado corporation (the "Company"), the Selling Shareholders (as specified in the Underwriting Agreement) and each of you as representatives of a group of Underwriters named therein, relating to an underwritten public offering of Common Stock, $0.01 par value (the "Common Stock"), of the Company. In order to induce you and the other Underwriters to enter into the Underwriting Agreement, the undersigned will not, without the prior written consent of Salomon Brothers Inc, 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, as amended, 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 [180/360] days after the date of this Agreement, other than (i) any shares of Common Stock to be sold pursuant to the Underwriting Agreement, (ii) any option or warrant or the conversion of a security outstanding on the date hereof and referred to in the prospectus to which the Underwriting Agreement relates and (iii) shares of Common Stock disposed of as bona fide gifts approved by Salomon Brothers Inc. 46 If for any reason the Underwriting Agreement shall be terminated prior to the Closing Date (as defined in the Underwriting Agreement), the agreement set forth above shall likewise be terminated. Yours very truly, [Signature of officer, director or major shareholder] [Name and address of officer, director or major shareholder] 2 47 EXHIBIT B --------------------------------- (Name of Selling Stockholder) CUSTODY AGREEMENT AND POWER OF ATTORNEY for Sale of Common Stock of EFTC CORPORATION ____________________________________ (each as Attorney-in-Fact as provided hereunder) c/o ____________________________________ (as Custodian as provided hereunder) Ladies and Gentlemen: The undersigned (a "Selling Stockholder"; one of the several "Selling Shareholders" named in the Underwriting Agreement referred to below) proposes to sell certain shares of common stock, $.01 par value per share (the "Common Stock"), of EFTC Corporation, a Colorado corporation (the "Company"), to the Underwriters (the "Underwriters") for whom Salomon Brothers Inc, J.C. Bradford & Co. and Pacific Crest Securities Inc. will act as representatives (the "Representatives") for distribution under a Registration Statement on Form S-2 (the "Registration Statement") to the public at a price and on terms to be hereafter determined. It is understood that at this time there is no commitment on the part of the Underwriters to purchase any shares of Common Stock and no assurance that an offering of Common Stock will take place. The shares of Common Stock that the undersigned proposes to sell to the Underwriters pursuant to the Underwriting Agreement either as "Underwritten Securities" or "Option Securities" within the meaning of the Underwriting Agreement are referred to herein as the "Shares". 1. Appointment and Powers of Attorney-in-Fact. A. The undersigned hereby irrevocably constitutes and appoints _______________ and ______________ as the undersigned's agent and attorney-in-fact (each, the "Attorney-in-Fact"), each with full power and authority to act without the other and with full power of substitution to each, with respect to all matters arising in connection with the public offering and sale of the Shares, including, but not limited to, the power and authority on behalf of the undersigned to do or cause to be done any of the following things: 48 (i) execute and deliver on behalf of the undersigned an underwriting agreement (the "Underwriting Agreement"), substantially in the form of the draft dated November ____, 1997, delivered to the undersigned herewith, receipt of which is acknowledged, but with such insertions, changes, additions (including the price at which the Shares will be initially offered to the public by the Underwriters and the underwriting discount to be received by the Underwriters) or deletions as the Attorney-in-Fact, acting in his sole discretion, shall approve, which approval shall be conclusively evidenced by his execution of the Underwriting Agreement, including the exercise of all authority thereunder vested in the undersigned; (ii) sell, assign, transfer and deliver the Shares to the Underwriters pursuant to the Underwriting Agreement and deliver to the Underwriters certificates for the Shares so sold (the price for such shares to be the price specified in Section 2 of the Underwriting Agreement); (iii) endorse (in blank or otherwise) on behalf of the undersigned the certificate or certificates for the Shares to be sold by the undersigned pursuant to the Underwriting Agreement or to execute and deliver a stock power or powers with respect to such certificates; (iv) take any and all steps deemed necessary or desirable by the Attorney-in-Fact in connection with the registration of the Shares under the Securities Act of 1933, as amended (the "Securities Act" ), the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and under the securities or "blue sky" laws of various states and jurisdictions, including, without limitation, the giving or making of such undertakings, representations and agreements and the taking of such other steps as the Attorney-in-Fact may deem necessary or advisable; (v) instruct the Company and the Custodian, as hereinafter defined, on all matters pertaining to the sale of the Shares and delivery of certificates therefor; (vi) make any assurances, communications and reports (including in the form of a signed certificate pursuant to Section VI.F. of the Underwriting Agreement) for and on behalf of the undersigned to the Underwriters, which may be necessary or advisable for facilitating the sale of the Shares, or to appropriate state or governmental authorities, which may be necessary or advisable for effecting the registration of the Shares under the state securities or blue sky laws; (vii) provide, in accordance with the Underwriting Agreement, for the payment of certain expenses of the offering and sale of the Common Stock covered by the Registration Statement; (viii) to exercise any power conferred upon, and to take any action authorized to be taken by, the undersigned pursuant to the Underwriting Agreement, in the sole discretion of the Attorney-in-Fact; 2 49 (ix) certify on behalf of the undersigned to any transfer agent or registrar such instruction and such assurance of the genuineness of any document as may be reasonably required in connection with the consummation of the proposed sale of the Shares; and (x) otherwise take all actions and do all things necessary or proper, required, contemplated or deemed advisable or desirable by the Attorney-in-Fact in his discretion, including the execution and delivery of any documents, and generally act for and in the name of the undersigned with respect to the sale of the Shares to the Underwriters and the reoffering of the Shares by the Underwriters as fully as could the undersigned if then personally present and acting. B. Each Attorney-in-Fact may act alone in exercising the rights and powers conferred on the Attorney-in-Fact by this Custody Agreement and Power of Attorney (the "Agreement"). Each Attorney-in-Fact is hereby empowered to determine individually, in his sole and absolute discretion, the time or times when, the purposes for which, and the manner in which, any power herein conferred upon the Attorney-in-Fact shall be exercised. C. The Custodian (as defined below), the Underwriters, the Company and all other persons dealing with the Attorney-in-Fact as such may rely and act upon any writing believed in good faith to be signed by the Attorney-in-Fact. D. The Attorney-in-Fact shall not receive any compensation for his services rendered hereunder, except that he shall be entitled to cause the Custodian to pay, from the proceeds payable to the undersigned, the undersigned's proportionate share of any out-of-pocket expenses incurred under this Agreement. 2. Appointment of Custodian; Deposit of Shares. A. In connection with and to facilitate the sale of the Shares to the Underwriters, the undersigned hereby appoints ______________ as custodian (the "Custodian") and herewith deposits with the Custodian one or more certificates for Common Stock that in the aggregate represent not less than the excess, if any, of (a) the total number of Shares to be sold by the undersigned to the Underwriters, as Underwritten Securities and Option Securities, the number of such securities being set forth on Schedules II and III to the Underwriting Agreement over (b) the total number of Shares to be delivered by the Company to the Custodian pursuant to the Irrevocable Instructions (as defined below). Each such certificate so deposited on the date hereof is in negotiable and proper deliverable form, endorsed in blank with the signature of the undersigned or the Attorney-in-Fact thereon guaranteed by a commercial bank or trust company in the United States or by a member firm of the New York Stock Exchange, or is accompanied by a duly executed stock power or powers in blank, bearing the signature of the undersigned or the Attorney-in-Fact so guaranteed. The undersigned will deliver irrevocable instructions to the Company directing the Company to deposit any of the undersigned's Exercise Securities (as defined in the Underwriting Agreement) with the Custodian not later than the business day next following the date hereof (the "Irrevocable Instructions"). Each such certificate to be deposited by the Company pursuant to the Irrevocable Instructions will be, at the time of deposit with the 3 50 Custodian, in negotiable and proper deliverable form, endorsed in blank with the signature of the undersigned or the Attorney-in-Fact thereon guaranteed by a commercial bank or trust company in the United States or by a member firm of the New York Stock Exchange, or will be accompanied by a duly executed stock power or powers in blank, bearing the signature of the undersigned or the Attorney-in-Fact so guaranteed. Upon reasonable request of the Custodian, the undersigned agrees to furnish, or cause to be furnished, any other documentation reasonably necessary to assure the sale and transfer of deposited Shares to the Underwriters pursuant to the Underwriting Agreement. The Custodian is hereby authorized and directed, subject to the instructions of the Attorney-in-Fact, (a) to hold in custody the certificate or certificates deposited herewith (or deposited hereafter by the Company pursuant to the Irrevocable Instructions), (b) to deliver (or to authorize the Company's transfer agent to deliver) the certificate or certificates deposited hereunder (or deposited hereafter by the Company pursuant to the Irrevocable Instructions) (or replacement certificate(s) for the Shares) to or at the direction of the Attorney-in-Fact in accordance with the terms of the Underwriting Agreement and (c) to return (or cause the Company's transfer agent to return) to the undersigned new certificate(s) for the shares of Common Stock represented by any certificate deposited hereunder (or deposited hereafter by the Company pursuant to the Irrevocable Instructions) which are not sold pursuant to the Underwriting Agreement. The Custodian shall be entitled to customary compensation for the services to be rendered hereunder as set forth in Schedule II attached hereto. Such compensation shall be paid to the Custodian by the Company. B. Until the Shares have been delivered to the Underwriters against payment therefor in accordance with the Underwriting Agreement, the undersigned shall retain all rights of ownership with respect to the Shares deposited hereunder, including the right to vote and to receive all dividends and payment thereon, except the right to retain custody of or dispose of such Shares, which right is subject to this Agreement, a lock-up agreement among the undersigned and the Underwriters, the Irrevocable Instructions and the Underwriting Agreement. 3. Sale of Shares; Remitting Net Proceeds. A. The Attorney-in-Fact is hereby authorized and directed to deliver or cause the Custodian or the Company's transfer agent to deliver certificates for the Shares to the Representatives, as provided in the Underwriting Agreement, against delivery to the Attorney-in-Fact for the accounts of the undersigned of the purchase price of the Shares (or, in the case of the delivery of the Exercise Securities, the excess, if any, of the aggregate purchase price of the Exercise Securities being sold by the undersigned over the aggregate exercise price of the related options listed in Schedule VII to the Underwriting Agreement), at the time and in the funds specified in the Underwriting Agreement. The Attorney-in-Fact is authorized, on behalf of the undersigned, to accept and acknowledge receipt of the payment of the purchase price for the Shares (or, in the case of Exercise Securities, the excess, if any, of the aggregate purchase price of the Exercise Securities being sold by the undersigned over the aggregate exercise price of the related options listed in Schedule VII to the Underwriting Agreement) and shall promptly deposit such proceeds with the Custodian. After reserving an amount of such proceeds as provided below, the Custodian shall promptly remit to the undersigned the undersigned's proportionate share of the proceeds. 4 51 B. Before any proceeds of the sale of the Shares are remitted to the undersigned, the Attorney-in-Fact is authorized and empowered to direct the Custodian to reserve from the proceeds an amount determined by the Attorney-in-Fact to be sufficient to pay the expenses of the Selling Stockholder, including those items of expense of the offering and sale of the Common Stock to be borne by it as provided in the Underwriting Agreement. The Custodian is authorized to pay such amount to discharge in full such expenses from the amount reserved for that purpose pursuant to the written direction of the Attorney-in-Fact. After payment of expenses from this reserve, the Custodian will remit to the undersigned any balance. To the extent expenses exceed the amount reserved, the Selling Stockholder shall remain liable for such expenses. In no event will the Custodian be liable for any payments in excess of the proceeds from the sale of the Shares. 4. Representations, Warranties and Agreements. The undersigned represents and warrants to, and agrees with, the Company, the Attorney-in-Fact, the Custodian, and the Underwriters as follows: A. The undersigned has full legal right, capacity, power and authority to enter into and perform this Agreement and the Underwriting Agreement and to give the Irrevocable Instructions, and to sell, transfer, assign and deliver the Shares to be sold by it pursuant to the Underwriting Agreement, free and clear of all liens, encumbrances, equities and claims whatsoever. If the undersigned is acting as a fiduciary, officer, partner, or agent of a Selling Stockholder, the undersigned is enclosing with this Agreement certified copies of the appropriate instruments pursuant to which the undersigned is authorized to act hereunder. B. The undersigned has reviewed the representations and warranties to be made by the undersigned as a Selling Stockholder contained in the Underwriting Agreement, and hereby represents, warrants and covenants that each of such representations and warranties is true and correct as of the date hereof and, except as the undersigned shall have notified the Attorney-in-Fact and Salomon Brothers Inc pursuant to paragraph F of the attached instructions, will be true and correct at all times from the date hereof through and including the time of the closing of the sale of the Shares to the Underwriters (including any closing pursuant to the exercise by the Underwriters of the over-allotment option described in the Underwriting Agreement). The undersigned will promptly notify the Attorney-in-Fact of any development that would make any such representation or warranty untrue. C. The undersigned has no reason to believe that the representations and warranties of the Company contained in the Underwriting Agreement are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Prospectus or any supplement thereto which has adversely affected or may adversely affect the business of the Company or any of its subsidiaries; and the sale of the Shares by the Selling Stockholder pursuant to the Underwriting Agreement is not prompted by any information concerning the Company or any of its subsidiaries that is not set forth in the Prospectus or any supplement thereto. 5 52 D. The undersigned is not directly or indirectly an affiliate of or associated with any member of the National Association of Securities Dealers, Inc. E. Upon execution and delivery of the Underwriting Agreement by the undersigned, the undersigned agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, each Underwriter and each person who controls the Company or any Underwriter, and to contribute to amounts paid as a result of losses, claims, damages, liabilities and expenses, as provided in Section VIII. of the Underwriting Agreement. F. Upon execution and delivery of the Underwriting Agreement by the undersigned, (or the Attorney-in-Fact), the undersigned agrees that it will be bound by, and will perform each of the covenants and agreements made by the undersigned as a Selling Stockholder in the Underwriting Agreement. G. The undersigned agrees to deliver to the Attorney-in-Fact such documentation as the Attorney-in-Fact, the Company or the Underwriters or any of their respective counsel may reasonably request in order to effectuate any of the provisions hereof or of the Underwriting Agreement, all of the foregoing to be in form and substance satisfactory in all respects to the requesting party. The foregoing representations, warranties and agreements are made for the benefit of, and may be relied upon by, the Attorney-in-Fact, the Company, the Custodian, the Underwriters and their respective representatives, agents and counsel and are in addition to, and not in limitation of, the representations, warranties and agreements of the Selling Stockholder in the Underwriting Agreement. 5. Irrevocability of Instruments; Termination of this Agreement. A. This Agreement, the deposit of the Shares pursuant hereto and all authority hereby conferred, is granted, made and conferred subject to and in consideration of (i) the interests of the Attorney-in-Fact, the Underwriters and the Company in and for the purpose of completing the transactions contemplated hereunder and by the Irrevocable Instructions and the Underwriting Agreement and (ii) the completion of the registration of Common Stock pursuant to the Registration Statement and the other acts of the above-mentioned parties from the date hereof to and including the execution and delivery of the Underwriting Agreement in anticipation of the sale of Common Stock, including the Shares, to the Underwriters; and the Attorney-in-Fact is hereby further vested with an estate, right, title and interest in and to the Shares deposited herewith for the purpose of irrevocably empowering and securing to him authority sufficient to consummate said transactions. Accordingly, this Agreement shall be irrevocable prior to the Closing Date (as defined in the Underwriting Agreement), and shall remain in full force and effect until that date. The undersigned further agrees that this Agreement shall not be terminated by operation of law or upon the occurrence of any event whatsoever, including the death, disability or incompetence of any of the undersigned; or if this Agreement is executed on behalf of a trust, corporation, partnership or other entity, it shall not be terminated by liquidation, 6 53 dissolution, winding-up, or any other event affecting the legal life of such entity, or by the occurrence of any other event or events. If any event referred to in the preceding sentence shall occur, whether with or without notice thereof to the Attorney-in-Fact, the Company, the Custodian, the Underwriters or any other person, the Attorney-in-Fact and the Custodian shall nevertheless be authorized and empowered to deliver and deal with the Shares deposited under the Agreement by the undersigned in accordance with the terms and provisions of the Underwriting Agreement and this Agreement as if such event had not occurred. B. If the sale of the Shares contemplated by this Agreement (excluding any sale pursuant to the exercise by the Underwriters of the over-allotment option described in the Underwriting Agreement) is not completed by the Closing Date, this Agreement shall terminate (without affecting any lawful action of the Attorney-in-Fact or the Custodian prior to such termination or the agreement hereunder of the undersigned to indemnify the Attorney-in-Fact and the Custodian), and the Attorney-in-Fact shall cause the Custodian to return to the undersigned all certificates for the Shares deposited hereunder, but only after having received payment of any expenses to be paid or borne by the Selling Stockholder. The undersigned hereby covenants with the Attorney-in-Fact that if for any reason the sale of the Shares contemplated hereby shall not be consummated, the undersigned shall pay all expenses payable by such Selling Stockholder hereunder or under the Underwriting Agreement. 6. Liability and Indemnification of the Attorney-in-Fact and Custodian. The Attorney-in-Fact and the Custodian assume no responsibility or liability to the undersigned or to any other person, other than to deal with the Shares, the proceeds from the sale of the Shares and any other shares of Common Stock deposited with the Custodian pursuant to the terms of this Agreement in accordance with the provisions hereof. The duties and obligations of the Custodian shall be limited to and determined solely by the express provisions of this Agreement, and no implied duties or obligations shall be read into this Agreement against the Custodian. The undersigned hereby agrees to indemnify and hold harmless the Attorney-in-Fact and the Custodian, and their respective officers, agents, successors, assigns and personal representatives with respect to any act or omission of or by any of them in good faith in connection with any and all matters within the scope of this Agreement or the Underwriting Agreement; provided, however, that the Attorney-in-Fact and the Custodian may be liable to the undersigned for any such act or omission to the extent attributable to gross negligence or fraud. The Custodian may consult with counsel of its own choice and shall have full and complete authorization and protection for any action taken or suffered by it hereunder in good faith and in accordance with the opinion of such counsel. 7. Interpretation. A. The representations, warranties and agreements of the undersigned contained herein and in the Underwriting Agreement shall survive the sale and delivery of the Shares and the termination of this Agreement. B. The validity, enforceability, interpretation and construction of this Agreement shall be determined in accordance with the laws of the State of New York applicable to contracts 7 54 made and to be performed within the State of New York, and this Agreement shall inure to the benefit of, and be binding upon, the undersigned and the undersigned's heirs, executors, administrators, successors and assigns, as the case may be. C. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any such provision shall be prohibited by or invalid under applicable law, it shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. D. The use of the masculine gender in this Agreement includes the feminine and neuter, and the use of the singular includes the plural, wherever appropriate. E. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered, shall constitute an original and all together shall constitute one instrument. F. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against, the respective successors, heirs, personal representatives and assigns of the parties hereto. 8 55 IN WITNESS WHEREOF, the undersigned has executed this Custody Agreement and Power of Attorney this ___ day of ________, 1997. [Selling Stockholder] Guaranteed by:* - ---------------------------------------------------- --------------------------------------------------- Name: Name: (Please sign exactly as your Stockholder name appear on your stock certificate(s).) Name and address to which notices and funds shall be sent. - ---------------------------------------------------- (NAME) - ---------------------------------------------------- (STREET) - ---------------------------------------------------- (CITY) (STATE) (ZIP) * (NOTE: The signature of the Selling Stockholder must be guaranteed by a commercial bank or trust company in the United States or by a member of the New York Stock Exchange.) ACCEPTED by the Attorney-in-Fact ACCEPTED by the Custodian as of the date above set forth: as of the date above set forth: - ------------------------------ ---------------------------------- By: - ------------------------------ -------------------------------
SEE THE ATTACHED INSTRUCTIONS 56 INSTRUCTIONS (For completing the Custody Agreement and Power of Attorney) A. You have been sent five copies of the Custody Agreement and Power of Attorney (the "Agreement"). Please complete and return four copies of the Agreement and stock certificate(s) as set forth in paragraph D below. A fully executed copy of the Agreement will be returned to you; a fully executed copy of the Agreement and your stock certificate(s) will be retained by the Custodian; and a fully executed copy of the Agreement will be delivered to the Attorney-in-Fact and to counsel for the Underwriters. B. Complete Schedule I attached hereto. C. Unless such stock certificate(s) are endorsed or the stock power(s) attached thereto are executed by the Attorney-in-Fact as provided in the Agreement, each stock certificate or stock power deposited hereunder must be executed by you with your signature on the stock certificate(s) or the accompanying stock power(s) guaranteed by a commercial bank or trust company in the United States or by any member of the New York Stock Exchange. Please sign the stock certificate(s) or stock power(s) and the Agreement exactly as your name appears on your stock certificate(s). D. Endorsed stock certificate(s) or stock certificate(s) with stock powers attached along with all four executed copies of the completed Agreement should be promptly returned by you (or the Attorney-in-Fact as provided in the Agreement) by hand delivery or by certified mail appropriately insured to: American Securities Transfer & Trust, Inc. [address of custodian Attn: ] If sent through the mail, it is recommended that the certificate(s) not be endorsed, but an executed stock power be sent under separate cover from the certificate(s). E. If any certificate that you submit represents a greater number of Shares than the aggregate number of Shares that you agree to sell pursuant to the Underwriting Agreement, the Custodian will cause to be delivered to you in due course, but not earlier than ten days after the final closing for the purchase of Shares by the Underwriters pursuant to the exercise by the Underwriters of the over-allotment option described in the Underwriting Agreement, a certificate for the excess number of shares. F. For purposes of discharging your obligations under Section VI.F. of the Underwriting Agreement and Section 4B of the Custody Agreement and Power of Attorney please contact James McVeigh of Salomon Brothers Inc by phone at (212) 783-1451 or by facsimile at (212) 783-3453 if any information or representation included in the foregoing Agreement or the Underwriting Agreement should change, or if you become aware of any new information, at any time prior to termination of the period applicable to you referred to in Section VI.I. of the Underwriting Agreement. 57 --------------------------------- (Name of Selling Stockholder) SCHEDULE I Certificate(s) for Shares of Common Stock of EFTC CORPORATION deposited under the Custody Agreement and Power of Attorney and by the Company pursuant to the Irrevocable Instructions
Number of Shares of Number of Shares of Common Stock Common Stock Deposited Number of Shares of Deposited under the by the Company Common Stock Custody Agreement and Pursuant to the Number of Shares of Represented by Power of Irrevocable Common Stock from This Certificate Number Certificate Attorney Instructions Certificate To Be Sold - ------------------ ------------------- --------------------- ---------------------- ----------------------
* If fewer than all shares represented by a certificate are to be sold, indicate below, if desired for income tax purposes, the date of purchase or purchase price of the particular shares to be sold. 58 SCHEDULE II Fees of Custodian Custodial Fees .................................... Wire Transfer Fees ................................
2 59 EXHIBIT C Irrevocable Stock Option Exercise Notice EFTC Corporation 9351 Grant Street Denver, CO 80229 Salomon Brothers Inc Seven World Trade Center New York, NY 10048 With respect to the options described on Exhibit A hereto, the undersigned hereby irrevocably exercises the option to purchase an aggregate of ____ shares of EFTC Corporation ("EFTC") common stock, $0.01 par value and irrevocably instructs EFTC to deliver such shares to American Securities Transfer & Trust, Inc. ("AST"), acting as Custodian pursuant to the Custody Agreement and Power of Attorney dated November ___, 1997 (the "Custody Agreement"). Such shares shall be held by AST, as Custodian, pursuant to the Custody Agreement. I hereby irrevocably authorize Salomon Brothers Inc ("Salomon") to tender payment to EFTC of $________ which consists of the exercise price of these options and all applicable taxes due. I hereby acknowledge that Salomon has an interest in the exercise of these options and delivery of the shares issued thereunder to AST, acting as Custodian, and is relying on such exercise and delivery in executing the Underwriting Agreement dated November ___, 1997 between EFTC and the Underwriters (as defined therein). Date: November , 1997 -- ---------------------------------- Signature Please print: ---------------------------------- Name ---------------------------------- ---------------------------------- Address ---------------------------------- Social Security Number 60 Exhibit A
Date of Grant Type of Grant Number of Shares Exercise Price - ------------- ------------- ---------------- --------------
2 EX-5.1 3 OPINION OF HOLME ROBERTS 1 EXHIBIT 5.1 November 12, 1997 Board of Directors of EFTC Corporation 9351 Grant Street Denver, Colorado 80229 Ladies and Gentlemen: Reference is made to the registration statement on Form S-3 (the "Registration Statement") filed with the Securities and Exchange Commission (the "Commission") by EFTC Corporation, a Colorado corporation (the "Company"), for the purpose of registering 4,600,000 shares of Common Stock (the "Shares") under the Securities Act of 1933. As counsel for the Company, we have examined such documents and reviewed such questions of law as we have considered necessary or appropriate for the purpose of this opinion. Based on the foregoing, we are of the opinion that the Shares, when sold and delivered by the Company, as described in the Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We do not express an opinion on any matters other than those expressly set forth in this letter. Very truly yours, Holme Roberts & Owen LLP By: /S./ Francis R. Wheeler ----------------------------- Partner EX-10.20.1 4 AMENDMENT NO. 1 TO CREDIT AGREEMENT 1 EXHIBIT 10.20.1 AMENDMENT NO. 1 to CREDIT AGREEMENT THIS AMENDMENT NO. 1 (the "Amendment"), dated as of November 6, 1997 among EFTC Corporation (the "Borrower"), the banks listed on the signature pages hereof (each a "Bank") and Bank One, Colorado, N.A., as Agent (the "Agent"). W I T N E S S E T H: ------------------- WHEREAS, the Borrower, the Banks and the Agent are parties to the Credit Agreement dated as of September 30, 1997 (the "Credit Agreement") (capitalized terms used and not otherwise defined herein shall have the meanings ascribed thereto in the Credit Agreement); and WHEREAS, the Borrower has requested, and the Banks and the Agent have agreed to, the amendments to the Credit Agreement more fully set forth herein; and WHEREAS, such amendments shall be of benefit, either directly or indirectly, to the Borrower; NOW THEREFORE, in consideration of the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Amendments. Upon and after the Amendment Effective Date (as defined in Section 3 below): (a) Section 1.1 of the Credit Agreement shall be amended by restating the defined term "EBITDA" as follows: "EBITDA" means, with respect to the Borrower on a consolidated basis, in a twelve-month period, an amount equal to earnings (determined in accordance with GAAP) before deduction of interest expenses, taxes, depreciation expenses, and amortization, provided, however that for purposes of calculating the financial convenants in Section 5.2 during the twelve (12) month period following the Effective Date, EBITDA shall be calculated by also taking into account during the relevant period, without duplication, (v) the results of operations of Circuit Test and Current Electronics determined in accordance with the financial 2 statements of Circuit Test and Current Electronics as provided to the Agent, (w) the amount imputed to the Allied Signal Acquisition described on the Compliance Certificate to be furnished under Section 5.1(b)(iv), (x) acquisition charges arising out of the acquisition of Current Electronics and the CTI Acquisitions in the amount of $286,000 for the Fiscal Quarter ended March 31, 1997 and $5,108,373 for the Fiscal Quarter ended September 30, 1997, (y) non-cash charges arising out of the acquisition of Current Electronics and the CTI Acquisitions in the amount of $611,000 for the Fiscal Quarter ended March 31, 1997 and $2,137,225 for the Fiscal Quarter ended September 30, 1997, and (z) the results of operations of any other acquired Person as determined in accordance with the financial statements of any such Person for such period as provided to the Agent. Operations of such acquired Person shall be treated as if it had been a Subsidiary of the Borrower for the preceding four fiscal quarters. (b) Exhibit B-5, Form of Compliance Certificate is amended by restating Appendix II, Section A in accordance with the attached Schedule A. 2. Representations and Warranties. In order to induce the Banks to agree to amend the Credit Agreement, the Borrower makes the following representations and warranties, which shall survive the execution and delivery of this Amendment: (a) As of the date first referenced above, no Default will exist immediately after giving effect to the amendments contained herein; and (b) Each of the representations and warranties set forth in Article IV of the Credit Agreement are true and correct as though such representations and warranties were made at and as of the Amendment Effective Date, except to the extent that any such representations or warranties are made as of a specified date or with respect to a specified period of time, in which case such representations and warranties shall be made as of such specified date or with respect to such specified period. Each of the representations and warranties made under the Credit Agreement shall survive to the extent provided therein and not be waived by execution and delivery of this Amendment. 3. Effectiveness. The amendments to the Credit Agreement contained in Section 1 of this Amendment shall become effective as of the date first referenced above after the Agent shall have received this Amendment, executed and delivered by the Borrower, the Agent and the Required Banks (the "Amendment Effective Date"). 4. Payment of Expenses. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment and any other documents or instruments which may be delivered in connection herewith, including, without limitation, the reasonable fees and expenses of Davis, Graham & Stubbs LLP, counsel for the Agent. 5. Counterparts. This Amendment may be executed in counterparts and by different 3 parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which, when taken together, shall constitute one and the same instrument. 6. Ratification. The Credit Agreement, as amended by this Amendment, is and shall continue to be in full force and effect and is hereby in all respects confirmed, approved and ratified. 7. Governing Law. The rights and duties of the Borrower, the Banks and the Agent under this Amendment shall be governed by the law of the State of Colorado. 8. Reference to Credit Agreement. From and after the Amendment Effective Date, each reference in the Credit Agreement to "this Credit Agreement", "hereof", "hereunder" or words of like import, and all references to the Credit Agreement in any and all agreements, instruments, documents, notes, certificates and other writings of every kind and nature, shall be deemed to mean the Credit Agreement as modified and amended by this Amendment. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first written above. EFTC CORPORATION By: -------------------------------- Name: Stuart W. Fuhlendorf Title: Vice President BANK ONE, COLORADO, N.A., as Agent and Bank By: -------------------------------- Name: Cecilia Lanterman Title: Assistant Vice President NATIONAL BANK OF CANADA By: -------------------------------- Name: Raymond L. Yager Title: Vice President By: -------------------------------- Name: Andrew M. Conneen, Jr. Title: Vice President KEYBANK NATIONAL ASSOCIATION By: -------------------------------- Name: Mark K. Sunderland Title: Vice President MITSUI CAPITAL LEASING CORPORATION By: -------------------------------- Name: R. Wayne Hutton Title: Senior Vice President 4 SCHEDULE A APPENDIX II to the Compliance Certificate A. FINANCIAL CONVENANTS AND RATIO CALCULATIONS PURSUANT TO SECTION 5.2(a) OF THE CREDIT AGREEMENT: All calculations are made in accordance with the provisions of the Credit Agreement and based on the Financial Statements of Borrower on a consolidated basis for the period ending ___________. Capitalized terms have the meanings ascribed to them in the Credit Agreement. Attached hereto as Exhibit I is a calculation of EBITDA as defined in the Credit Agreement for purposes of calculating the following financial covenants. Earnings imputed to the Allied Signal Acquisition shall be 9-30-97 $4,239,514 12-31-97 $3,239,514 3-31-98 $2,239,514 6-30-98 $1,239,514 1. MAINTAIN SENIOR DEBT TO EBITDA RATIO IN ACCORDANCE WITH SECTION 5.2(a)(i) OF THE CREDIT AGREEMENT. (a) Senior Debt (excluding subordinated Debt) $ (b) EBITDA $ (c) Senior Debt to EBITDA (a)/(b) (d) In compliance, ___ Yes. ___ No. If no, comment on any mitigating factors and date for returning to compliance. 2. MAINTAIN TOTAL DEBT TO EBITDA RATIO IN ACCORDANCE WITH SECTION 5.2(a)(ii) OF THE CREDIT AGREEMENT. (a) Total Debt $____________ (b) EBITDA $____________ (c) Total Debt to EBITDA $____________ (d) In compliance, ___ Yes. ____ No. If, no, comment on any mitigating factors and date for returning to compliance. ----------------------------------------------------------------------- ----------------------------------------------------------------------- 3. MAINTAIN A MINIMUM TRAILING FOUR QUARTER EBITDA TO FIXED CHARGE COVERAGE RATIO IN 5 ACCORDANCE WITH SECTION 5.2(a)(iii) OF THE CREDIT AGREEMENT. (a) EBITDA $ (b) CMLTD $ (c) Interest Expense in past 12 months $ (d) Fixed Charge in past 12 months (b)+(c) $ ------------------- (e) Fixed Charge Coverage Ratio (a)/(d) $ (f) In compliance, __ Yes, __ No, If no, comment on any mitigating factors and date for returning to compliance. 4. MAINTAIN EBITDA TO INTEREST EXPENSE IN ACCORDANCE WITH SECTION 5.2(2)(iv) OF THE CREDIT AGREEMENT. (a) EBITDA $ (b) Interest Expense in past 12 months $ (c) EBITDA to Interest Expense Ratio (a)/(b) (d) In compliance, __ Yes, __ No, If no, comment on any mitigating factors and date for returning to compliance. -------------------------------------------------------------------- -------------------------------------------------------------------- 5. MAINTAIN MINIMUM NET WORTH EQUAL TO $26,613,000, PLUS 75% OF CUMULATIVE FYE NET INCOME FOR FYE 1997 AND THEREAFTER IN ACCORDANCE WITH SECTION 5.2(a)(v) OF THE CREDIT AGREEMENT. (a) Net Worth of $26,613,000 at 12-31-97 (b) Cumulative Net Income for FYE 1997 and thereafter $ (c) 75% of cumulative Net Income, (b) x 75%= $ (d) Minimum Required Net Worth, (a) + (c)= $ (e) Actual Net Worth (f) In compliance, __ Yes, __ No, If no, comment on any mitigating factors and date for returning to compliance. 6. IN ACCORDANCE WITH SECTION 5.2(a)(vi) OF THE CREDIT AGREEMENT, ANNUAL CAPITAL EXPENDITURES SHALL BE LESS THAN FYE 1998 $8,500,000
6 FYE 1999 $7,250,000 FYE 2000 $6,500,000 FYE 2001 $7,750,000
(a) Fiscal year end Capital Expenditures for FYE ____ $ (b) In compliance, __ Yes, __ No, If no, comment on any mitigating factors and date for returning to compliance. 7. THERE ARE NO CHANGES IN THE EMPLOYMENT STATUS WITH THE BORROWER OR ITS SUBSIDIARIES OF JACK CALDERON, ALLEN S. BRASWELL, JR. OR STUART FULENDORF OTHER THAN THE FOLLOWING: B: ATTACHMENTS: (Check below those items which are attached.) Form 10Q or Form 10K (as applicable) --- Annual Audited Statement (annually-within 90 days of FYE) --- Rolling 3 year operating plan (annually within 90 days FYE) --- Other, describe --- C: CERTIFICATION: The Borrower certifies to Bank One, Colorado, N.A., as Agent that: i. there is no Default or Event of Default; and, ii. all financial reports supporting and accompanying this Compliance Certificate (including, but not limited to schedules) are true and accurate as of of the Computation Date. Signed: Date: Authorized Signatory Title EX-23.1 5 CONSENT OF KPMG 1 Exhibit 23.1 The Board of Directors EFTC Corporation: We consent to inclusion of our report relating to the consolidated balance sheets of EFTC Corporation and subsidiaries as of September 30, 1997 and December 31, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for the nine months ended September 30, 1997 and for each of the years in the three year period ended December 31, 1996 and incorporation by reference of our report relating to the consolidated balance sheets of EFTC Corporation and subsidiaries as of December 31, 1996 and 1995 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, 1996 in the registration statement on Form S-2 of EFTC Corporation and to the references to our firm under the headings "Summary Consolidated Historical and Pro Forma Financial Information", "Selected Consolidated Historical and Pro Forma Financial Data" and "Experts" in the Prospectus. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Denver, Colorado November 7, 1997 EX-23.2 6 CONSENT OF KPMG 1 Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT The Board of Directors Circuit Test, Inc. and Affiliates: 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-2 of EFTC Corporation. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP Memphis, Tennessee November 7, 1997 EX-23.3 7 CONSENT OF ARTHUR ANDERSEN 1 Exhibit 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion, in this Amendment No. 1 to the Form S-2 Registration Statement, of our reports dated April 4, 1997 and November 25, 1996 on the combined financial statements of Current Electronics, Inc. and Current Electronics Washington, Inc. and to all references to our firm included in this Registration Statement. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Portland, Oregon November 7, 1997 -----END PRIVACY-ENHANCED MESSAGE-----