<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by Registrant X
-----
Filed by a Party other than Registrant
-----
Check the Appropriate box:
[ ] Preliminary Proxy Statement
[ ] Preliminary Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
ELECTRONIC FAB TECHNOLOGY CORP.
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement. if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11
1) Title of each class of securities to which transaction
applies: Common Stock, par value $.01 per share
2) Aggregate number of securities to which transaction applies:
1,980,000
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined): $6.25 per share multiplied by 1,980,000
shares plus the cash portion of the consideration equal to
$4,900,000
4) Proposed maximum aggregate value of transaction: $17,275,000
5) Total fee paid: $3,455.00
[X] Fee paid previously with preliminary materials.*
* Fee paid by certified check together with the initial filing of
preliminary materials in paper format, as permitted by Rule
14a-6(e)(2).
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
<PAGE> 2
ELECTRONIC FAB TECHNOLOGY CORP.
7251 WEST 4TH STREET
GREELEY, COLORADO 80634
(970) 353-3100
FEBRUARY 11, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of Electronic Fab Technology Corp. (the "Company") to be held on February 24,
1997, at 10:00 a.m. local time at the offices of Holme Roberts & Owen LLP, 1700
Lincoln Street, Suite 4100, Denver, Colorado 80203-4541.
At the Special Meeting, shareholders will be asked to consider and
vote upon the following matters: (i) approval of the issuance of 1,980,000
shares of the Company's Common Stock (the "Merger Proposal"), in connection
with (a) the merger of Current Electronics, Inc., an Oregon corporation
("CEI"), with and into Current Merger Corp., an Oregon corporation and a
wholly-owned subsidiary of the Company (the "Merger"), in exchange for such
Common Stock of the Company and a cash payment of $3,370,000, subject to
adjustment, and (b) the payment of $1,530,000, subject to adjustment, to the
existing shareholders of Current Electronics (Washington), Inc., a Washington
corporation and an affiliate of CEI ("CEWI"), in exchange for all of the
outstanding capital stock of CEWI; (ii) approval of an amendment to the
Company's Equity Incentive Plan to increase the number of shares of the
Company's Common Stock reserved for issuance thereunder from 325,000 to 995,000
shares (the "Employee Plan Amendment") and to make certain other changes; (iii)
approval of an amendment to the Company's Stock Option Plan for Non-Employee
Directors to increase the number of shares of the Common Stock reserved for
issuance thereunder from 80,000 to 160,000 shares, to provide that stock
options may be granted thereunder to non-employee directors as determined by
the Company's Board of Directors (the "Board") and to make certain other
changes (the "Non-Employee Plan Amendment"); and (iv) transaction of such other
business as may properly come before the meeting or any adjournment or
postponement thereof.
The Board believes that the Merger, and the related acquisition of an
affiliate of CEI, will (i) give the Company geographic proximity to a
flourishing high-mix market, (ii) provide a strong complement to the Company's
current management team through the integration of the strong management team
of CEI into the Company, (iii) provide size, capacity, diversity of services
and other strategic benefits that could lead to greater market recognition of
the Company and (iv) thereby enhance the Company's revenues and growth
opportunities.
After careful consideration, the Board has approved, and recommends
that the shareholders vote FOR, each of the proposals. The Merger Proposal,
the Employee Plan Amendment and the Non-Employee Plan Amendment require the
approval of a majority of shares of Common Stock present, in person or by
proxy, at the Special Meeting, assuming a quorum is represented. In addition,
consummation of the Merger is subject to certain other conditions.
Details of the proposals and other important information are set forth
in the accompanying Proxy Statement and should be considered carefully by
shareholders.
I HOPE THAT YOU WILL ATTEND THE SPECIAL MEETING. WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING AND REGARDLESS OF THE NUMBER OF SHARES OF
COMMON STOCK YOU OWN, WE REQUEST THAT YOU COMPLETE, DATE AND SIGN THE ENCLOSED
PROXY CARD AND RETURN IT PROMPTLY IN THE ACCOMPANYING ENVELOPE, WHICH REQUIRES
NO POSTAGE IF MAILED IN THE UNITED STATES. YOU MAY, OF COURSE, ATTEND THE
SPECIAL MEETING AND VOTE IN PERSON, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR
PROXY CARD.
Sincerely,
/s/ JACK CALDERON
President and Chief Executive Officer
<PAGE> 3
ELECTRONIC FAB TECHNOLOGY CORP.
7251 WEST 4TH STREET
GREELEY, COLORADO 80634
(970) 353-3100
-------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 24, 1997
-------------------------
TO ALL SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of
Electronic Fab Technology Corp., a Colorado corporation (the "Company"), will
be held on February 24, 1997, at 10:00 a.m., local time, at the offices of
Holme Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver, Colorado
80203-4541 (the "Special Meeting"), for the following purposes:
(1) To approve the issuance of 1,980,000 shares of the Company's
Common Stock, par value $.01 per share (the "Common Stock"), in connection with
(a) the merger of Current Electronics, Inc., an Oregon corporation ("CEI"),
with and into Current Merger Corp., an Oregon corporation and a wholly-owned
subsidiary of the Company, in exchange for such Common Stock and a cash payment
of $3,370,000, subject to adjustment, and (b) the payment of $1,530,000,
subject to adjustment, to the existing shareholders of Current Electronics
(Washington), Inc., a Washington corporation and an affiliate of CEI ("CEWI"),
in exchange for all of the outstanding capital stock of CEWI;
(2) To approve an amendment to the Company's Equity Incentive Plan
to increase the number of shares of the Common Stock reserved for issuance
thereunder from 325,000 to 995,000 and to make certain other changes;
(3) To approve an amendment to the Company's Stock Option Plan for
Non-Employee Directors to increase the number of shares of the Common Stock
reserved for issuance thereunder from 80,000 to 160,000, to provide that
options may be granted thereunder to non-employee directors as determined by
the Board and to make certain other changes; and
(4) To transact such other business as may properly come before
the meeting or any adjournment or postponement thereof.
The Board has fixed the close of business on February 10, 1997, as the
record date for the determination of the shareholders entitled to notice of and
to vote at the Special Meeting or any adjournment or postponement thereof. A
list of shareholders entitled to notice of and to vote at the Special Meeting
will be open to the examination of any shareholder, for any purpose appropriate
to the meeting, during ordinary business hours, for a period of ten days prior
to the Special Meeting, at the principal executive offices of the Company.
BY ORDER OF THE BOARD OF
DIRECTORS
/s/ LLOYD A. MCCONNELL
Lloyd A. McConnell
Secretary
Greeley, Colorado
February 11, 1997
<PAGE> 4
IMPORTANT--YOUR PROXY IS ENCLOSED
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING
REGARDLESS OF THE SIZE OF YOUR HOLDINGS. WHETHER OR NOT YOU INTEND TO BE
PRESENT AT THE SPECIAL MEETING IN PERSON, WE URGE YOU TO MARK, SIGN, DATE AND
MAIL THE ENCLOSED PROXY AND RETURN IT IN THE ENVELOPE PROVIDED FOR THAT
PURPOSE, WHICH DOES NOT REQUIRE POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE BY PROXY OR YOU MAY WITHDRAW YOUR
PROXY AND VOTE IN PERSON. BY RETURNING YOUR PROXY PROMPTLY, A QUORUM WILL BE
ASSURED AT THE MEETING, WHICH WILL PREVENT COSTLY FOLLOW-UP AND DELAYS.
<PAGE> 5
ELECTRONIC FAB TECHNOLOGY CORP.
-----------------
PROXY STATEMENT
-----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 24, 1997
-----------------
This Proxy Statement is being furnished to the shareholders of
Electronic Fab Technology Corp., a Colorado corporation ("EFTC" or the
"Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company (the "Board") for use at the Special Meeting of
Shareholders of the Company to be held on February 24, 1997, at 10:00 a.m.,
local time, at the offices of Holme Roberts & Owen LLP, 1700 Lincoln Street,
Suite 4100, Denver, Colorado 80203-4541, and at any adjournment or postponement
thereof (the "Special Meeting"), which is being held for the purpose of voting
upon the following matters
(i) To approve the issuance of 1,980,000 shares (the "EFTC
Equity") of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), pursuant to the rules of the National Association of Securities
Dealers, Inc. (the "Merger Proposal"), in connection with (a) the merger (the
"Merger") of Current Electronics, Inc., an Oregon corporation ("CEI"), with and
into Current Merger Corp., an Oregon corporation and a wholly-owned subsidiary
of the Company ("CMC"), in exchange for the EFTC Equity and a cash payment of
$3,370,000, subject to adjustment (the "Cash Consideration"), and (b) the
payment of $1,530,000, subject to adjustment, to the existing shareholders of
Current Electronics (Washington), Inc., a Washington corporation and an
affiliate of CEI ("CEWI"), in exchange for all of the outstanding capital stock
of CEWI (the "Acquisition");
(ii) To approve an amendment to the Company's Equity Incentive Plan
to increase the number of shares of the Company's Common Stock reserved for
issuance thereunder from 325,000 to 995,000 and to make certain other changes
(the "Employee Plan Amendment");
(iii) To approve an amendment to the Company's Stock Option Plan for
Non-Employee Directors to increase the number of shares of the Company's Common
Stock reserved for issuance thereunder from 80,000 to 160,000, to provide that
options may be granted thereunder to non-employee directors as determined by
the Board and to make certain other changes (the "Non-Employee Plan
Amendment"); and
(iv) To transact such other business as may properly come before
the meeting or any adjournment or postponement thereof.
On February 10, 1997, the record date for the determination of the
holders of Common Stock entitled to vote at the Special Meeting (the "Record
Date"), there were approximately 255 holders of record of the Common Stock.
A copy of the Agreement and Plan of Merger, among the Company, CMC and
CEI, dated as of January 15, 1997 (the "Merger Agreement"), is attached to this
Proxy Statement as Appendix A.
The Merger Agreement provides for, among other things: (i) the merger
of CEI into CMC, and (ii) the Company's payment of the cash consideration and
issuance of the EFTC Equity to CEI's current shareholders. See "THE MERGER
PROPOSAL" and "DESCRIPTION OF THE MERGER AGREEMENT."
The Employee Plan Amendment provides for, among other things, an
increase in the number of shares of the Company's Common Stock reserved for
issuance thereunder from 325,000 to 995,000. See "DESCRIPTION OF THE EMPLOYEE
PLAN AMENDMENT."
<PAGE> 6
The Non-Employee Plan Amendment provides for, among other things, an
increase in the number of shares of the Company's Common Stock reserved for
issuance thereunder from 80,000 to 160,000, provides that options may be
granted thereunder to non-employee directors of the Company in such amounts,
and at such times, as may be determined by the Board in its discretion and
provides for certain other changes. See "DESCRIPTION OF THE NON-EMPLOYEE PLAN
AMENDMENT".
This Proxy Statement is being mailed to shareholders on or about
February 12, 1997. The Board has fixed the close of business on February 10,
1997 as the record date for the determination of shareholders entitled to
notice of, and to vote at, the Special Meeting (the "Record Date"). The only
outstanding stock of the Company is the Common Stock, of which 3,944,760 shares
were outstanding as of the close of business on the Record Date. Each share of
Common Stock is entitled to one vote.
The affirmative vote of a majority of the shares of Common Stock
present, in person or by proxy, at the Special Meeting, assuming a quorum is
present, is required to approve the Merger Proposal, the Employee Plan
Amendment and the Non-Employee Plan Amendment.
As of January 17, 1997, the executive officers and directors of the
Company were the record owners of an aggregate of 1,868,220 shares of the
Common Stock (or 47% of the total number of shares outstanding). The Company
has been informed that all such shares will be voted in favor of the proposals
at the Special Meeting. See "SECURITY OWNERSHIP." Accordingly, the Company
anticipates that the attendance in person or by proxy of not more than 117,989
shares (or 3% of the total number of shares outstanding) will be required at
the Special Meeting to constitute a quorum to approve the Merger Proposal, the
Employee Plan Amendment and the Non-Employee Plan Amendment.
The Company's executive offices are located at 7251 West 4th Street,
Greeley, Colorado 80634 (telephone (970) 353-3100).
BY UNANIMOUS VOTE THE BOARD HAS DETERMINED THAT THE ACQUISITIONS OF
CEI AND CEWI ARE IN THE BEST INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS.
THE BOARD HAS APPROVED THE MERGER AGREEMENT, THE ISSUANCE OF THE EFTC EQUITY,
THE EMPLOYEE PLAN AMENDMENT AND THE NON-EMPLOYEE PLAN AMENDMENT. THE BOARD
RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER PROPOSAL, THE
EMPLOYEE PLAN AMENDMENT AND THE NON-EMPLOYEE PLAN AMENDMENT.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE PROMPTLY. IF YOU ATTEND THE SPECIAL MEETING AND WISH TO VOTE YOUR
SHARES PERSONALLY, YOU MAY DO SO BY REVOKING YOUR PROXY AT ANY TIME PRIOR TO
THE VOTING THEREOF. See "THE SPECIAL MEETING--Revocability of Proxies."
----------------
The date of this Proxy Statement is February 11, 1997.
ii
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Merger Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Certain Matters to be Considered by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Change of the Company's Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CEI Shareholder Voting Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Employee Plan Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Non-Employee Plan Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Selected Historical Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Unaudited Selected Pro Forma Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Cautionary Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Date, Time and Place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
The Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Purpose of the Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cost of Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
CEI and CEWI Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Electronic Fab Technology Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Current Electronics, Inc. and Current Electronics (Washington), Inc. . . . . . . . . . . . . . . . . . . . . 18
THE MERGER PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Description of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Description of the Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Transactions to Occur Concurrently . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
History and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Reasons for the Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Financing for the Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Common Stock Held by Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DESCRIPTION OF THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Change of the Company's Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CEI Shareholder Voting Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
iii
<PAGE> 8
<TABLE>
<S> <C>
DESCRIPTION OF THE RELATED AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Employment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The Indemnification Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Capitalization of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Challenges of Business Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Current Electronics, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
RECOMMENDATION OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
DESCRIPTION OF THE EMPLOYEE PLAN AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Reasons for the Proposed Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Description of the Employee Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
DESCRIPTION OF THE NON-EMPLOYEE PLAN AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Reasons for the Proposed Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Description of the Non-Employee Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECURITY OWNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Options Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Option Exercises and Year End Option Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Directors' Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
COMPANY COMMON STOCK INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
</TABLE>
iv
<PAGE> 9
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. This summary is qualified in its entirety
by the more detailed information contained in the Proxy Statement and the
Appendices hereto. Capitalized terms used and not defined in the following
summary have the meanings set forth on the cover or as otherwise provided.
SHAREHOLDERS ARE URGED TO READ THIS PROXY STATEMENT AND THE APPENDICES HERETO
IN THEIR ENTIRETY. The following summary discussion and other information
contained in this Proxy Statement contains forward looking statements that
involve known and unknown risks. See "INTRODUCTION--Cautionary Statement" for
a discussion of certain risks and their potential impact on the forward looking
statements contained herein.
THE COMPANIES
Electronic Fab Technology Corp. The Company, formed in 1981, is an
independent provider of high-mix electronic manufacturing services to original
equipment manufacturers ("OEMs") in the medical, instrumentation and high-end
data storage industries, as well as certain segments of the communications
market. The Company operates two manufacturing facilities totaling 100,000
square feet in Greeley, Colorado and employs approximately 398 people. The
principal executive offices of the Company are located at 7251 West 4th Street,
Greeley, Colorado 80634.
Current Electronics, Inc. and Current Electronics (Washington), Inc.
CEI, formed in 1983, and CEWI, formed in 1994, are related, closely-held
companies. CEI and CEWI are affiliates. Charles Hewitson, Gregory Hewitson
and Matthew Hewitson (together, the "Principal CEI Shareholders") each own
9,416 shares of Common Stock, par value $.01 per share (the "CEI Stock"), of
CEI, equaling in the aggregate approximately 94.2% of the outstanding CEI
Stock. Mrs. Charles Hewitson, Mrs. Gregory Hewitson and Mrs. Matthew Hewitson
(together, the "CEWI Shareholders") each own 100 shares of the outstanding
Common Stock, par value $.01 per share (the "CEWI Stock"), of CEWI,
representing in the aggregate 100% of the outstanding CEWI Stock. In
connection with and subject to the approval and completion of the Merger, the
Company has entered into a Share Purchase Agreement with the shareholders of
CEWI, dated as of January 15, 1997 (the "Purchase Agreement"). CEI and CEWI
(together, the "CE Companies") are independent providers of manufacturing
services, cables and wire harnesses to OEMs primarily in the
aerospace/avionics, instrumentation, telecommunications and computer
peripherals industries. CEI operates a campus including manufacturing
facilities comprising 47,000 square feet in Newberg, Oregon and employs
approximately 290 people. CEWI operates a 20,000 square feet manufacturing
facility in Moses Lake, Washington, and employs approximately 50 people. The
principal executive offices of CEI are located at 125 South Elliott Road,
Newberg, Oregon 97132.
THE SPECIAL MEETING
Date, Time and Place of Special Meeting. The Special Meeting will be
held on February 24, 1997, at 10:00 a.m., local time, at the offices of Holme
Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver, Colorado
80203-4541.
Purpose. The Special Meeting will be held to consider and act upon
the following proposals: (i) to approve the issuance of the EFTC Equity in
connection with the Merger and the related Acquisition; (ii) to approve the
Employee Plan Amendment; (iii) to approve the Non-Employee Plan Amendment; and
(iv) to transact such other business as may properly come before the Special
Meeting. See "THE MERGER PROPOSAL;" "DESCRIPTION OF THE MERGER AGREEMENT;"
"DESCRIPTION OF THE EMPLOYEE PLAN AMENDMENT;" and "DESCRIPTION OF THE
NON-EMPLOYEE PLAN AMENDMENT."
Record Date; Shares Outstanding and Entitled to Vote. The record date
for determining the holders of the Common Stock of the Company entitled to vote
at the Special Meeting was February 10, 1997 (the "Record Date"). As of the
Record Date 3,944,760 shares of the Common Stock of the Company were issued and
outstanding and entitled to vote. As of such date, the executive officers and
directors of the Company held approximately 47% of the outstanding Common
Stock.
Vote Required for Approval. The affirmative vote of a majority of the
shares represented at the Special Meeting in person or by proxy, assuming a
quorum is present, is required to approve the Merger Proposal, the Employee
Plan
1
<PAGE> 10
Amendment and the Non-Employee Plan Amendment. Because the executive officers
and directors of the Company have indicated their intention to vote in favor of
the Merger Proposal, the Employee Plan Amendment and the Non-Employee Plan
Amendment, the Company expects that the presence in person or by proxy of not
more than 3% of the outstanding shares held by other shareholders will be
necessary to constitute a quorum and thereby ensure approval such proposals.
See "THE SPECIAL MEETING--Quorum and Voting."
THE MERGER PROPOSAL
Reasons for the Merger and the Acquisition. The Board and management
of the Company have identified significant benefits of the transactions,
including: (i) adding additional manufacturing facility locations (multi-
siting) with strategic proximity to significant high-mix electronics
manufacturing markets; (ii) creating the opportunity for better allocation and
use of manufacturing assets, for example, by allocating projects among
manufacturing facilities to avoid over or under use of any particular facility;
(iii) expanding the range of manufacturing services the Company can offer,
which is expected to expand marketing opportunities in the Pacific Northwest;
and (iv) increasing the Company's size and capacity, which is expected to lead
to greater market recognition of the Company. The Board and management of the
Company also believe that the CE Companies' management team will represent a
strong complement to the Company's management team and that the combined
companies will have greater marketing potential while reducing the Company's
and the CE Companies' corporate and regional selling, general and
administrative costs. See "THE MERGER PROPOSAL--Reasons for the Transactions."
Although there can be no assurance of the future performance, based on
the foregoing, and on certain economies of scale and operational efficiencies
that the management of the Company hopes to achieve, the Board believes that
the Merger and the Acquisition will provide enhanced long-term value for the
Company's shareholders. See "MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--The Company" and "RECOMMENDATION OF THE
BOARD OF DIRECTORS."
Recommendation of the Board of Directors. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE MERGER PROPOSAL. The
Board considered a number of factors in reaching its conclusion to recommend
approval by the shareholders of the Merger Proposal, including historical and
pro forma financial information of the CE Companies and the Company contained
in this Proxy Statement. See "RECOMMENDATION OF THE BOARD OF DIRECTORS."
CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS
Significant Ownership of Common Stock by Management. See "SECURITY
OWNERSHIP."
Dilution. The issuance of the EFTC Equity will cause a proportional
dilution in the voting rights of the existing shareholders of the Company. The
issuance of the EFTC Equity will result in a dilution in net book value per
share for the Company's existing shareholders. See "CERTAIN MATTERS TO BE
CONSIDERED BY SHAREHOLDERS--Dilution" and "UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION."
Capitalization of the Company. After the Merger and the Acquisition,
the Company will have approximately $8.3 million in long-term debt outstanding
and stockholders' equity of approximately $19.3 million. The Company's
management believes this to be a reasonable amount of indebtedness in light of
the size and nature of operations of the Company and the CE Companies. There
are, however, no limitations on the Company's or the CE Companies ability to
incur additional indebtedness in the future. See "CERTAIN MATTERS TO BE
CONSIDERED BY SHAREHOLDERS--Capitalization of the Company" and "UNAUDITED PRO
FORMA CONDENSED FINANCIAL INFORMATION."
Challenges of Business Integration. Consummation of the Merger and
the subsequent integration of the operations of the Company and the CE
Companies will require substantial attention of management and effort by
employees throughout the Company and the CE Companies. There is no assurance
that such efforts will successfully achieve the anticipated benefits of the
Merger and related transactions. See "CERTAIN MATTERS TO BE CONSIDERED BY
SHAREHOLDERS-- Challenges of Business Integration."
2
<PAGE> 11
THE MERGER AGREEMENT
The Merger Agreement provides for the merger of CEI into CMC, a wholly
owned subsidiary of the Company, with CMC being the surviving corporation. As
a result of the Merger, the Company will issue the EFTC Equity, representing
approximately 33.4% of the then outstanding Common Stock of the Company, to the
Principal CEI Shareholders. The Principal CEI Shareholders currently do not
own any shares of the Company's Common Stock. The Merger will become effective
at the time when the articles of merger are filed with the Secretary of State
of Oregon or at such later time that the parties agree and is designated in
such articles of merger (the "Effective Time"). It is anticipated that if the
Merger Agreement is approved at the Special Meeting and all other conditions
have been fulfilled or waived, the Effective Time will occur as soon as
practicable thereafter. At the Effective Time, the shares of CEI Common Stock
held by the Principal CEI Shareholders will be converted into the right to
receive the EFTC Equity and cash and the shares of CEI Common Stock held by the
other holders of CEI Common Stock will be converted into the right to receive
cash. The aggregate consideration to be received by all holders of CEI Common
Stock (the "Merger Consideration") is $3,370,000, subject to adjustment as
provided in the Merger Agreement, and the EFTC Equity. The number of shares of
the Company's Common Stock representing the EFTC Equity, 1,980,000 shares, is
fixed, subject to adjustments to reflect stock splits, stock dividends,
subdivisions, reclassifications, combinations, exchanges, reorganizations,
recapitalizations and similar transactions affecting the Company's Common Stock
or the CEI Common Stock. See "DESCRIPTION OF THE MERGER AGREEMENT -- The
Merger Agreement -- General; Effective Time" and "-- Merger Consideration."
Conditions to the Merger. The obligations of the Company and CEI to
consummate the Merger are subject to the satisfaction or waiver of several
conditions, including the approval of the Merger Proposal by the requisite vote
of the shareholders of the Company, the approval of the Merger Agreement and
the Merger by the shareholders of CEI, the simultaneous closing of the
Acquisition, as well as other usual and customary conditions for similar
transactions. In addition, the obligation of the Company to consummate the
Merger is subject to the performance by the Principal CEI Shareholders of, and
their compliance with, the voting arrangement entered into in connection with
the Merger Agreement and the execution and delivery by the Principal CEI
Shareholders and the CEWI Shareholders, as the case may be, of the Registration
Rights Agreement, the Indemnification Agreement, the Consulting Agreements and
a letter concerning certain tax matters. In addition, the obligation of CEI to
consummate the Merger is subject to the termination of certain guaranties given
by the Principal CEI Shareholders to Wells Fargo Bank or the release of the
Principal CEI Shareholders from all liability thereunder, the execution and
delivery by the Company of the Registration Rights Agreement and the grant of
employee stock options with respect to the Company's Common Stock to certain
members of CEI's management. See "DESCRIPTION OF THE MERGER AGREEMENT --The
Merger Agreement--Conditions to the Merger" and "--CEI Shareholder Voting
Arrangements."
Covenants. Under the Merger Agreement, CEI has agreed to carry on its
business in the usual, regular and ordinary course and do certain other things
so as not to impair the goodwill of its ongoing business. CEI also has agreed,
except as contemplated by the Merger Agreement or consented to by the Company,
not to amend its articles of incorporation or bylaws; adopt, accelerate, amend
or change any employee or director stock option plan; enter into or amend
certain material agreements; or take certain other actions. The Merger
Agreement also provides that CEI, subject to its board of directors' fiduciary
duties, will not directly or indirectly solicit, initiate or encourage
inquiries or submission of proposals or offers from any person relating to any
sale of, or business combination with, CEI or participate in any negotiation,
furnish information or otherwise cooperate in any attempt to do the foregoing.
See "DESCRIPTION OF THE MERGER AGREEMENT--The Merger Agreement--Covenants" and
"--No Solicitation."
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval by the Company's or CEI's shareholders: (i) by mutual consent of the
Company and CEI; (ii) by either the Company or CEI, if, without fault of the
terminating party, the Closing does not occur on or before April 30, 1997 or
such later date as agreed by the parties; (iii) by the Company or CEI, if the
notifying party is not obligated to close due to the failure of any of its
conditions to close; or (iv) by either the Company or CEI, if the other party
breaches its representations, warranties or obligations under the Merger
Agreement in a material respect and the breach continues for ten days after
notice of breach. See "DESCRIPTION OF THE MERGER AGREEMENT--The Merger
Agreement--Termination."
3
<PAGE> 12
CHANGE OF THE COMPANY'S BOARD
Pursuant to the Merger Agreement and as of the Effective Time, the
Board will (i) increase the number of the Company's directors from 11 to 14 and
(ii) nominate and appoint Mr. Gregory Hewitson as an additional Class I
director to hold office until the 1998 Annual Meeting of the Company's
shareholders, Mr. Matthew Hewitson as an additional Class II director to hold
office until the 1999 Annual Meeting of the Company's shareholders, and Mr.
Charles Hewitson as an additional Class III director to hold office until the
1997 Annual Meeting of the Company's shareholders. There will be no obligation
of the Company under the Merger Agreement to nominate any CEI or CEWI
representatives after such terms expire. See "DESCRIPTION OF THE MERGER
AGREEMENT--Change of the Company's Board."
CEI SHAREHOLDER VOTING ARRANGEMENTS
The Principal CEI Shareholders have agreed with the Company that they
will give their consent with respect to or vote their shares of CEI Common
Stock to approve the Merger Agreement and the Merger. Because the shares of
CEI Stock owned by the Principal CEI Shareholders represent 94.2% of the
outstanding shares of CEI Stock, approval of the Merger Agreement and the
Merger by the shareholders of CEI is assured. See "DESCRIPTION OF THE MERGER
AGREEMENT--CEI Shareholder Voting Arrangements."
RELATED AGREEMENTS
The Purchase Agreement. If the Acquisition is approved, the Company,
simultaneously with the consummation of the Merger, will purchase from the
shareholders of CEWI (the "CEWI Shareholders") all of the outstanding shares of
CEWI Stock for $1,530,000 in cash (subject to adjustments as provided in the
Purchase Agreement). See "DESCRIPTION OF THE RELATED AGREEMENTS--The Purchase
Agreement."
The Registration Rights Agreement. The Company's Common Stock to be
delivered to the Principal CEI Shareholders will not be registered under the
Securities Act. The Company will grant demand and piggyback registration
rights with respect to the Company's Common Stock issued to the Principal CEI
Shareholders pursuant to the Registration Rights Agreement. See "DESCRIPTION
OF THE RELATED AGREEMENTS--The Registration Rights Agreement."
Employment Matters. At the Effective Time, the Company will enter
into five-year consulting agreements with each of the Principal CEI
Shareholders and offer employment for one year to certain members of CEI's
management. In connection with the Merger, CEI will pay bonuses, which are not
to exceed $180,000, to certain members of its management and the Company will
grant certain members of CEI's management employee stock options in the
Company's Common Stock. CEI and the CEWI Shareholders have agreed to cause the
employment arrangements of persons related to the Principal CEI Shareholders or
the CEWI Shareholders to be terminated (other than the employment of Christie
Hewitson, which is to continue) as of the Effective Time and without liability
to CEI or CEWI. See "DESCRIPTION OF THE RELATED AGREEMENTS-- Employment
Matters."
The Indemnification Agreement. The Principal CEI Shareholders and the
CEWI Shareholders will indemnify the Company with respect to breaches of
covenants and representations and warranties in the Merger Agreement and the
Purchase Agreement within specified dollar limits. See "DESCRIPTION OF THE
RELATED AGREEMENTS--The Indemnification Agreement."
ADDITIONAL MATTERS
Regulatory Matters. The Company is not aware of any federal or state
approvals that must be obtained in order to consummate the Merger or the
Acquisition.
Dissenters' Rights. The shareholders of the Company will not have
dissenters' rights in connection with the transactions contemplated by the
Merger Agreement or the Purchase Agreement. See "APPRAISAL RIGHTS OF
DISSENTING SHAREHOLDERS."
4
<PAGE> 13
Accounting Treatment. The Merger will be accounted for as a purchase
of CEI by the Company. See "THE MERGER PROPOSAL--Tax and Accounting
Treatment."
Tax Consequences to the Shareholders of the Company. The consummation
of the transactions set forth in the Merger Agreement will not result in a
taxable event to the shareholders of the Company. See "FEDERAL INCOME TAX
CONSEQUENCES."
Last Sale Price of Company Common Stock Prior to Announcement. The
last sale price for the Company's Common Stock on December 17, 1996, which was
the last trading day prior to the announcement of the letter of intent
describing the Merger and the Acquisition, as proposed, was $3.375 as reported
by the Nasdaq National Market.
EMPLOYEE PLAN AMENDMENT
Increase in the Number of Shares Reserved. The Employee Plan
Amendment would increase the aggregate number of shares of the Common Stock
reserved for issuance under such Plan from 325,000 to 995,000. The Amendment
would also permit certain shares of Common Stock that are forfeited or used to
pay tax withholding on the option exercise price to again be used for the grant
of awards under such Plan. This Amendment is being proposed to facilitate the
achievement of the goals of the Employee Plan taking into account the Merger
and the Acquisition and the increased number of executives who may become
eligible for grants under the Employee Plan. See "DESCRIPTION OF THE EMPLOYEE
PLAN AMENDMENT."
Recommendation of the Board of Directors. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE EMPLOYEE PLAN
AMENDMENT. See "DESCRIPTION OF THE EMPLOYEE PLAN AMENDMENT."
NON-EMPLOYEE PLAN AMENDMENT
Increase in the Number of Shares Reserved. The Non-Employee Plan
Amendment would increase the aggregate number of shares of the Common Stock
reserved for issuance under such Plan from 80,000 to 160,000. The Amendment
would also permit shares of Common Stock that are used to pay the option
exercise price to again be used to make awards under such Plan. This Amendment
is being proposed to take into account the effects of the Merger and the
Acquisition and the increased number of non-employee directors who may become
eligible for grants under the Plan.
Grant of Options at the Discretion of the Board. The Amendment would
also change the Plan from a "formula" plan that automatically grants options to
directors at specified times to a plan that will provide discretion to the full
Board to grant options to non-employee directors of the Company at such times,
and in such amounts, as the Board determines. Recent changes to the rules and
regulations of the Securities and Exchange Commission no longer require
"formula" stock option plans for non-employee directors and the Company
believes that the greater flexibility inherent in discretionary grants will
enable the Company to better achieve the objectives of the Plan, namely the
closer alignment of the interests of non-employee directors of the Company with
the shareholders of the Company. See "DESCRIPTION OF THE NON-EMPLOYEE PLAN
AMENDMENT."
Recommendation of the Board of Directors. THE BOARD OF DIRECTORS
RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR APPROVAL OF THE NON-EMPLOYEE PLAN
AMENDMENT. See "DESCRIPTION OF THE NON-EMPLOYEE PLAN AMENDMENT".
5
<PAGE> 14
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present for the Company and the CE Companies, on
a historical basis, selected financial data and unaudited pro forma financial
data reflecting the issuance of the EFTC Equity and payment of an aggregate of
$4,900,000 in cash as contemplated by the Merger Agreement and the Purchase
Agreement. The pro forma balance sheet data assumes the Merger and the
Acquisition were consummated on September 30, 1996, and the pro forma operating
data assumes the Merger and the Acquisition were consummated on January 1,
1995. See "UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION."
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of the Company and
the CE Companies has been derived from the companies' respective historical
financial statements and should be read in conjunction with such financial
statements and the notes thereto and the companies' respective "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Proxy Statement. The selected historical financial
information of the Company as of September 30, 1996 and 1995 and for the nine
months then ended have been derived from unaudited financial statements, but in
the Company's opinion reflects all adjustments (consisting only of normal,
recurring adjustments) necessary for the fair presentation of the Company's
financial condition and results of operations as of and for the periods then
ended. The selected historical financial information of the CE Companies as of
September 30, 1994, 1993 and 1992 and for the years then ended have been
derived from unaudited financial statements, but in the CE Companies' opinion
reflects all adjustments (consisting only of normal, recurring adjustments)
necessary for the fair presentation of the CE Companies' financial condition
and results of operations as of and for the periods then ended. The results of
operations of the Company for the interim period ended September 30, 1996 are
not necessarily indicative of the results to be expected for the entire year.
Historical information for certain periods are derived from financial
statements not included in or incorporated herein by reference.
ELECTRONIC FAB TECHNOLOGY CORP.
SELECTED HISTORICAL FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- -----------------------------------------------------------
1996 (1) 1995 1995 1994 1993 1992 1991
---------- --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . $44,576 $36,140 $49,220 $52,542 $29,817 $17,294 $16,633
Operating income (loss) . . . . . . (2,229) 528 802 3,024 2,286 713 831
Income (loss) before income (2,596) 336 481 2,958 2,037 494 594
taxes . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . (1,676) 212 354 1,917 1,301 320 391
Earnings (loss) per common share. . . ($0.42) $0.05 $0.09 $0.53 $0.52 $0.13 $0.16
Cash dividends per common share . . . -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
---------------------- -----------------------------------------------------------
BALANCE SHEET DATA: 1996 (1) 1995 1995 1994 (2) 1993 1992 1991
---------- --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . 23,730 25,479 24,984 23,479 11,172 6,703 5,385
Long-term debt . . . . . . . . 2,890 3,060 3,060 3,230 2,539 2,736 1,801
Stockholders' equity . . . . . 13,839 15,367 15,509 14,989 3,547 2,090 1,920
</TABLE>
__________
(1) As part of a corporate restructuring, the Company expensed $2.1
million in the third quarter of 1996. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
(2) The Company received net proceeds of $9.3 million from its initial
public offering in March 1994.
6
<PAGE> 15
THE CE COMPANIES
SELECTED HISTORICAL COMBINED FINANCIAL DATA
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- -------- ---------- --------- ----------
(unaudited)
-------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . . . $32,520 $17,170 $11,067 $8,231 $6,475
Operating income . . . . . . . . . . . 2,652 1,721 658 1,001 224
Income before income taxes . . . . . . 2,560 1,627 605 951 203
Net income . . . . . . . . . . . . . . 1,806 1,146 401 559 129
Earnings per common share . . . . . . . 59.60 37.82 13.29 18.63 4.30
Cash dividends per common share (1) . . -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
--------- -------- --------- --------- ----------
(unaudited)
-------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . $8,923 $5,889 $3,595 $3,049 $1,708
Long-term debt, excluding current
portion . . . . . . . . . . . . . . . . 978 816 809 873 160
Stockholders' equity . . . . . . . . . 4,322 2,755 1,684 1,250 718
</TABLE>
__________
(1) CEI has paid no cash dividends. CEWI, an S corporation, paid cash
dividends of $240,000 and $75,000 for the years ended September 30,
1996 and 1995, respectively. Cash dividends per common share is not
presented as it is not considered meaningful.
7
<PAGE> 16
UNAUDITED SELECTED PRO FORMA FINANCIAL DATA
The unaudited selected pro forma financial information of the combined
company is derived from the unaudited pro forma condensed financial information
which gives effect to the consummation of the Merger and the Acquisition, and
should be read in conjunction with such unaudited pro forma condensed financial
information and notes thereto, which are included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1996 December 31, 1995
------------------ ------------------
(Dollars in Thousands, except per share data)
<S> <C> <C>
PRO FORMA OPERATING DATA:
Net Sales $68,926 $66,390
Operating income (loss) (395) 2,346
Net income (loss) (761) 890
Earnings (loss) per common share ($0.13) $0.15
Weighted average common and common equivalent shares
outstanding 5,948 5,942
</TABLE>
<TABLE>
<CAPTION>
As of
September 30, 1996
----------------------
(Dollars in Thousands)
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Total assets $38,676
Long-term liabilities 8,268
Stockholders' equity 19,284
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C> <C>
BOOK VALUE PER COMMON SHARE: (1)
Historical:
EFTC $3.51 $3.94
The CE Companies (3) $142.63 $90.93 (2)
Pro forma combined company $3.26 $3.54 (2)
</TABLE>
__________
(1) Historical book value per share is computed by dividing stockholders'
equity by the number of common shares outstanding at the end of each
period. Pro forma book value per common share is computed by dividing
pro forma stockholders' equity by the pro forma number of shares which
would have been outstanding had the Merger and Acquisition been
consummated as of each balance sheet date.
(2) The CE Companies' book value per common share has been derived from
the September 30, 1995 audited financial statements.
(3) Historical book value per common share for the CE Companies gives
retroactive effect to a 100 for one common stock split for CEI in
December 1996.
8
<PAGE> 17
INTRODUCTION
This Proxy Statement is provided to the shareholders of the Company in
connection with the Special Meeting and any adjournments or postponements
thereof. The Special Meeting will be held on the date and at the time and
location, and will be held to consider the matters set forth under the caption
"THE SPECIAL MEETING." The Board is soliciting proxies hereby for use at the
Special Meeting. A form of Proxy is being provided to the shareholders of the
Company with this Proxy Statement. For information with respect to the
execution and revocation of proxies, see "THE SPECIAL MEETING--Revocability of
Proxies."
CAUTIONARY STATEMENT
Certain statements in this Proxy Statement, including statements
contained in the Summary, and under the captions "THE COMPANIES," "CERTAIN
MATTERS TO BE CONSIDERED BY SHAREHOLDERS," "MANAGEMENTS' DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and elsewhere in
this Proxy Statement constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, market performance or achievements of the
Company and the CE Companies to differ materially from any future results,
performance or achievements expressed or implied by such forward looking
statements. Important factors that could cause such difference include, but
are not limited to, changes in economic or business conditions in general or
affecting the electronic products industry, changes in the use of outsourcing
by OEMs, increased material prices and service competition within the contract
manufacturing industry, changes in the competitive environment in which the
Company operates, the continued growth of the industries targeted by the
Company, 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.
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting of Shareholders is scheduled to be held on
February 24,1997, at 10:00 a.m., local time, at the offices of Holme Roberts &
Owen LLP, 1700 Lincoln Street, Suite 4100, Denver, Colorado 80203-4541.
THE RECORD DATE
This Proxy Statement is being mailed to shareholders on or about
February 12, 1997. The Board of Directors has fixed the close of business on
February 10, 1997 as the Record Date for determination of the shareholders of
the Company entitled to notice of, and to vote at, the Special Meeting. The
only outstanding voting stock of the Company is the Common Stock, of which
3,944,760 shares were outstanding as of the close of business on the Record
Date, held by approximately 255 holders of record. Each share of Common Stock
is entitled to one vote.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders will be asked to consider and
act upon the following proposals: (i) to approve the issuance of the EFTC
Equity in connection with the Merger; (ii) to approve the Employee Plan
Amendment; (iii) to approve the Non-Employee Plan Amendment; and (iv) to
transact such other business as may properly come before the Special Meeting.
THE BOARD HAS DETERMINED THAT EACH OF THE PROPOSALS IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS SHAREHOLDERS. THE BOARD HAS APPROVED EACH OF
THE PROPOSALS AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF EACH OF THE
PROPOSALS.
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<PAGE> 18
QUORUM AND VOTING
Only shareholders of record of shares of the Common Stock of the
Company issued and outstanding as of the close of business on the Record Date
will be entitled to notice of, and to vote at, the Special Meeting. The holder
of each share of Common Stock issued and outstanding as of the Record Date is
entitled to one vote per share upon each matter submitted to a vote of the
shareholders of the Company at the Special Meeting or any adjournment or
postponement thereof. The presence, in person or by proxy, of the holders of a
majority of the shares of Common Stock entitled to vote at the Special Meeting
is necessary to constitute a quorum to transact business at the Special
Meeting. If a quorum is not present at the Special Meeting, the shareholders
who are present, in person or by proxy, may, by majority vote, adjourn the
Special Meeting from time to time without notice or other announcement until a
quorum is present. The approval of the Merger Proposal, the Employee Plan
Amendment and the Non-Employee Plan Amendment will require approval of a
majority of the shares of Common Stock present, in person or by proxy, at the
Special Meeting, assuming a quorum is present.
All shares of Common Stock represented at the Special Meeting by
properly executed proxies received prior to or at the Special Meeting, and not
revoked, will be voted in accordance with the instructions indicated on such
proxies. If no instructions are indicated, such proxies will be voted FOR
approval and adoption of each of the Merger Proposal, the Employee Plan
Amendment and the Non-Employee Plan Amendment on the proxy card as described
herein. Votes submitted as abstentions will be counted for quorum purposes but
will not be counted as votes for or against each of the proposals. Broker
non-votes will not count for or against the Merger Proposal, the Employee Plan
Amendment or the Non- Employee Plan Amendment.
As of the January 17, 1997, the executive officers and Directors were
the owners of an aggregate of 1,868,220 shares of the Common Stock (or 47% of
the total number of shares outstanding. Accordingly, the Company anticipates
that the attendance in person or by proxy of not more than 117,989 shares (or
3% of the total number of shares outstanding) will be required at the Special
Meeting to constitute a quorum to approve the Merger Proposal, the Employee
Plan Amendment and the Non-Employee Plan Amendment.
REVOCABILITY OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted by: (i) delivering to the
Company's principal executive offices, attention: CORPORATE SECRETARY, at any
time before the vote at the Special Meeting, a written notice of revocation;
(ii) delivering to the Company's principal executive offices, attention:
CORPORATE SECRETARY, at any time before the vote at the Special Meeting, a duly
executed proxy bearing a later date; or (iii) attending the Special Meeting and
voting in person. Attendance at the Special Meeting will not in and of itself
constitute a revocation of a proxy.
COST OF SOLICITATION
The entire cost of this solicitation will be paid by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares of the Common Stock for their expenses
in forwarding solicitation material to such beneficial owners. In addition to
solicitation by mail, officers and regular employees of the Company may solicit
proxies from shareholders by telephone, facsimile or personal interview. Such
persons will receive no additional compensation for such services. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting material to the beneficial owners of shares held of record by them
and will be reimbursed for their reasonable expenses.
CEI AND CEWI INFORMATION
All information contained in this Proxy Statement with respect to CEI
and CEWI has been supplied by CEI and CEWI for inclusion herein and has not
been independently verified by the Company.
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<PAGE> 19
THE COMPANIES
ELECTRONIC FAB TECHNOLOGY CORP.
GENERAL
The Company, formed in 1981, is an independent provider of high-mix
electronic manufacturing services to OEMs in the medical, instrumentation and
high-end data storage industries as well as certain segments of the
communications industry.
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. 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.
Most of the Company's sales are generated from turnkey contracts,
whereby the Company provides the components and other materials used in the
assembly process, as well as value-added services. A lesser amount of the
Company's sales is made on a consignment basis, whereby the Company, using
components provided by the customer, provides only assembly and post-assembly
testing services. The Company focuses on a market niche of high-mix electronic
products, where speed and high levels of responsiveness and flexibility are
most valuable to customers.
In 1994, the Company completed a new 52,000 square foot manufacturing
facility in Greeley, Colorado and acquired two new surface mount technology
production lines. In 1995, the Company began a process to replace its existing
management information systems and, following a reevaluation of the project and
resultant changes in it, the Company expects the completion date to be in the
third quarter of 1997.
On August 5, 1996, the Board hired Mr. Jack Calderon as the new
President and Chief Executive Officer of the Company. After a short period of
cost restructuring and internal reorganization, Mr. Calderon implemented a
program named "the 100 Week Journey of Progress," the unifying vision of which
was to make the Company the undisputed national leader of high-mix electronic
contract manufacturing and which included five key corporate goals: (i) become
the recognized leader in high-mix electronic contract manufacturing; (ii)
become a multi-sited manufacturer; (iii) double revenues; (iv) provide a
broader range of service to a broader customer base; and (v) outperform
competitors in return- on-equity, cash flow and sales growth. Among the
strategies to meet such goals, the Company adopted an acquisition strategy
centered on finding companies that are favorably located geographically, will
strengthen the combined financial strength of the Company and are focused on
the same high-mix strategy as the Company.
As an additional part of its corporate restructuring in the third
quarter of 1996, the Company developed and implemented an innovative
manufacturing methodology, Asynchronous Process Manufacturing ("APM"). APM
involves the combination of high-speed manufacturing equipment, sophisticated
information systems and standardized process teams to produce small quantities
of products more flexibly and more quickly through the factory to market. The
Company implemented APM for all its customers as part of the Company's new
strategy to deliver manufacturing solutions for high- mix products in high
speed modes. The Company's new high-mix market focus concentrates on offering
solutions to OEMs in the medical, instrumentation and high-end data storage
industries, as well as certain segments of the communications industry. See
"Manufacturing Services" below.
At December 31, 1996, the Company had 398 employees and four
fully-automated surface mount technology lines.
Manufacturing Services in the Electronics Industry. The electronic
contract manufacturing ("ECM") services industry emerged in the United States
in the 1970's. By subcontracting their manufacturing operations, OEMs can
realize productivity gains because fewer in-house employees are needed to
produce products, and manufacturing capacity and capabilities increase without
capital investment. Capital that would otherwise be devoted to manufacturing
operations is available for other activities such as product development and
marketing. Four key developments have
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<PAGE> 20
spurred the growth in the electronics manufacturing services industry: (i)
surface mount technology ("SMT"), (ii) turnkey manufacturing, (iii) concurrent
engineering, and (iv) outsourcing in the electronics industry.
Surface Mount Technology. In the SMT manufacturing process,
electronic components are attached and soldered directly onto the surface of a
circuit board rather than inserted through holes. This process differs from
pin-through- hole technology, where electronic components, such as integrated
circuits, are attached to printed circuit boards by means of pins, also known
as leads, that are inserted into pre-drilled holes on a circuit board, and are
then soldered to complete the circuitry. SMT components are smaller, can be
spaced more closely together and, unlike pin-through-hole components, can be
placed on both sides of a circuit board. This allows for product
miniaturization, while enhancing the electronic properties of the circuit.
Because the SMT manufacturing process is fully automated, it results in lower
labor costs and higher quality output than pin-through-hole manufacturing.
Turnkey Manufacturing. Traditionally, OEMs provided most components
and other materials needed to complete a job on a consignment basis to ECMs.
Coincident with the trend toward SMT, OEMs began to shift the responsibility
for material procurement to ECMs. This concept came to be known as "turnkey
manufacturing." Turnkey manufacturing benefits OEMs in several ways. It
allows an OEM's purchasing agents to focus on procurement of fewer parts,
making it easier to coordinate the timing of future deliveries. In many cases,
turnkey manufacturing reduces material costs because ECMs can combine the
purchasing needs of customers when negotiating volume pricing agreements with
suppliers. Turnkey manufacturing also frees working capital of OEMs that would
otherwise be tied up in raw material inventory. Even if the number of contract
manufacturing jobs remained constant, the change from consignment to turnkey
manufacturing would increase the sales of ECMs because the contract price
includes the price of the components as well as the price of the manufacturing
services.
Concurrent Engineering. In an effort to gain greater efficiency in
material procurement and manufacturing, OEMs are giving contractors greater
input on such design issues as board layout, component selection, production
methods, and the preparation of assembly drawings and test schematics. With
such "concurrent engineering," also known as "design for manufacturability,"
OEMs can tap the contract manufacturer's expertise at the outset to minimize
manufacturing bottlenecks.
Outsourcing. To improve performance, many OEMs are concentrating
resources on their "core competencies," or those business activities that give
them a strategic advantage in the marketplace. Non-core activities are
eliminated or outsourced. Many OEMs have determined that manufacturing is not
one of their core competencies and are outsourcing their manufacturing to ECMs.
In addition, utilization of outside contract manufacturers by OEMs enables the
OEMs to focus their efforts on research, product design and development, and
marketing. Other significant benefits of using ECM services include: reduced
time to market, reduced capital investment, access to leading-edge
manufacturing technology, improved inventory management and improved purchasing
power. The Company believes that many OEMs now view contract manufacturers 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. OEMs are outsourcing
more design engineering, distribution and after-sale support, in addition to
material procurement, manufacturing and testing.
STRATEGY
The Company's objective is to be a leading provider of electronic
contract manufacturing services exclusively focusing on the needs of high-mix
OEM customers in its targeted markets. In pursuing this objective, the Company
has created a new strategic business plan, its "100-Week Vision," with five key
goals: (i) become the recognized leader in high-mix contract manufacturing;
(ii) become a multi-sited manufacturer; (iii) double revenues; (iv) provide a
broader range of service to a broader customer base; and (v) outperform
competitors in return-on-equity, cash flow and sales growth.
Creating and maintaining long-term relationships with customers by
providing high quality, cost-effective manufacturing services marked by a high
degree of responsiveness and flexibility. The central tenet of the Company's
operating philosophy is customer service, characterized by high quality,
flexibility and responsiveness to the needs of the customer. The Company
focuses on the level of service provided to customers by using (i) total
quality management
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<PAGE> 21
to assure that the Company realizes the full value of its human resources, (ii)
APM, (iii) computer-integrated manufacturing to allow the Company to track the
progress and costs of each project on a real-time basis and to respond quickly
and effectively to customer inquiries and changes and (iv) create new services
such as fixed price prototype and point-of-use inventory. For a more detailed
discussion of the Company's manufacturing operations, see "Manufacturing
Services" below.
Focusing on a market niche of complex, high-mix products. The Company
provides contract manufacturing services to established producers of electronic
products. The Company focuses primarily on high-mix OEMs in the medical,
instrumentation and high-end data storage industries, as well as certain
segments of the communication industry. High levels of quality, responsiveness
and flexibility tend to be of most value to OEMs in these industries.
Management believes that there are many OEMs in these industries with high-mix
product requirements that could benefit from using, or expanding their use of,
contract manufacturers, and therefore represent significant opportunities for
the Company's growth. Given its focus, the Company does not compete for the
manufacture of low cost, high-volume printed circuit boards for use in personal
computers, automotive or other consumer-related products.
Increasing profitability by emphasizing turnkey manufacturing and
concurrent engineering and expanding the breadth of services offered.
Management believes that expanding the scope of its relationships with its
customers leads to greater stability of its customer base and increased profit
opportunities. The Company has been successful in converting most of its
customers (over 90%) from consignment manufacturing to turnkey manufacturing
and emphasizes turnkey relationships in its negotiations with new customers.
Although turnkey manufacturing generally results in a lower gross profit
percentage compared to consignment sales, the Company is attempting to improve
margins by reengineering several critical business processes in order to
achieve improved efficiencies. See "--Critical business processes and
management information systems." In addition, the Company works to expand its
relationships with existing customers by emphasizing concurrent engineering and
other services. The Company frequently works with its customers to develop and
utilize advanced engineering to improve product quality, to reduce cost and to
gain early access to new product introductions. This positions the Company to
negotiate the price of new projects rather than being submitted to a
competitive bid process. These concurrent engineering activities include:
design for manufacturability; design for testability; and component
applications engineering.
Further diversifying its markets by pursuing opportunities in a
variety of industries and geographic areas. Management has sought to balance
the benefits of industry segment specialization with industry concentration
risks by focusing on four market segments: medical, instrumentation, high-end
data storage and communications. Management believes that, by addressing
multiple markets, the Company is less susceptible to downturns in any single
OEM industry, while limiting the total number of markets allows the Company to
offer more precisely tailored solutions to address the particular needs of each
different market. In addition, management believes that having manufacturing
facility sites in several locations allows the Company to better serve
customers and puts the Company in a better position to compete for new
customers. As part of the revision of the Company's strategy in the third
quarter of 1996, the Company adopted an acquisition strategy that focuses on
finding high-mix ECMs with favorable geographic locations and earnings.
Critical business processes and management information systems. In
the third quarter of 1996, the Company refocused its strategy to exclusively
serve high-mix OEMs. As part of this refocusing, the Company revised certain
of its business and manufacturing processes with the goal of creating a
sustainable competitive advantage.
At the center of the Company's new strategy was the introduction of
APM. APM standardizes processes so that any circuit board can be assembled by
a variety of different production lines. APM allows for short cycle time
manufacture of a wide variety of products. Management believes that the
Company's ability to manufacture high-end products at high speed creates
certain competitive advantages.
The Company's computer information technology enables APM to function
effectively. In August 1995, the Company began reviewing certain business and
manufacturing processes in a "reengineering" effort to modify and restructure
those processes in order to improve operations and competiveness. The
processes reviewed focused on core competencies of materials acquisition,
scheduling and project quoting.
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<PAGE> 22
The Company is reengineering its materials acquisition processes by
focusing on methods to optimize purchasing power by identifying materials that
are used across customer lines. Also, the Company is consolidating vendors in
order to achieve greater corporate purchasing power. The Company believes that
with these efforts the Company will obtain greater leverage in material pricing
and that the Company will become more competitive when bidding for turnkey
business. The Company also is developing methods to improve project quoting
and bidding processes. The Company believes that by improving turn-around time
on customer quotes and by better tracking actual costs against customer quotes,
the Company will better control costs and more accurately predict and manage
its operating margins. In addition, the Company is introducing scheduling
improvements to allow for more accurate schedule and production processes and
to create a more coordinated production effort than in the past. As part of
the introduction of APM during the third quarter of 1996, the Company
incorporated performance measurements and incentives into the APM process in
order to give management greater motivational ability.
Concurrent with the redesign of these business processes, the Company
has commenced development of a new management information system. The company
anticipates that it will purchase new software from third party vendors,
develop certain software internally and purchase new hardware in connection
with the development of this new management information system. The Company
has hired consultants to assist in the design and implementation of the
management information system. The reengineering and management information
system projects were scheduled for completion in the latter part of 1996.
Because of the Company's reorganization, initiated by Jack Calderon in the
third quarter of 1996, the project was reevaluated and some changes were made
in the overall project direction in order to implement APM. The management
information system project is now scheduled for completion in the third quarter
of 1997.
The Company can give no assurances that it will meet its targeted
completion date for implementation of the reengineered business processes and
the new management information system or that such processes and management
information system ultimately will be successful in enabling the Company to
create a sustainable competitive advantage and to improve efficiencies.
MANUFACTURING SERVICES
The Company's turnkey manufacturing services consist of assembling
complex printed circuit boards (using both surface mount and pin-through-hole
interconnection technologies), cables, electro-mechanical 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 also provides manufacturing
services on a consignment basis, whereby the Company, using components provided
by the customer, provides only assembly and post-assembly testing services.
The Company obtained ISO 9002 certification in 1994, an international quality
standard for manufacturing and distribution management systems.
In the third quarter of 1996, the Company introduced a new
manufacturing methodology, Asynchronous Process Manufacturing. 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. The Company
implemented APM for all its customers as part of restructuring strategy to
focus the Company exclusively on delivering manufacturing solutions for
high-mix products in high-speed modes. Implementation of APM required a
complete redesign of the Company's manufacturing operations, reorganizing
personnel into process teams and revising documentation. The physical moves
were completed in September, and by the end of October, APM was fully
implemented.
High-mix manufacturing involves a discontinuous series of products fed
through assembly in a start-stop manner, heretofore incompatible with
high-velocity techniques. APM is an alternative to both traditional continuous
(synchronous) flow processing ("CFM"), the predominant method used in
high-volume manufacturing, and batch processing often used in smaller scale
manufacturing. Until now, the combination of high-mix and high-speed has been
viewed as difficult, if not impossible, by many high-mix manufacturers. 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, cannot afford top quality high-speed
manufacturing assets or keep up with
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<PAGE> 23
OEM's growing product demand. The Company's new high-mix-speed model, APM, is
able to process products rapidly through the use of a combination of new
discontinuous flow methods for differing product quantities and the Company's
fast surface mount assembly systems, test equipment and wide-pipe,
high-velocity production lines. 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, by 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.
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 SMT 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 is 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.
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 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.
CUSTOMERS AND MARKETING
The Company seeks to serve a sufficiently large number of customers to
avoid dependence on any one customer or industry. Nevertheless, historically,
a substantial percentage of the Company's net sales have been to a small number
of customers, the loss of any of which would adversely affect the Company. To
that extent, the Company's success depends on the success of its customers,
which depends substantially on the growth of the high-end data storage devices,
medical equipment, communications and electronic instrumentation industries.
In 1996, two of the Company's customers, Exabyte and Ohmeda (BOC Group), each
accounted for more than 10% of the Company's net sales and together represented
36.5% of net sales. In 1996, the Company's ten largest customers accounted for
75.9% of net sales. In 1995, three of the Company's customers, Hewlett Packard
Company ("HP"), Ohmeda (BOC Group) and Colorado Memory Systems, Inc. (a
subsidiary of HP), each accounted for more than 10% of the Company's net sales
and together represented 53.1% of net sales. In 1995, the Company's ten
largest customers accounted for 79.4% of net sales. In 1994, four of the
Company's customers, Colorado Memory Systems, Inc., HP, XEL Communications, and
Ohmeda, each accounted for more than 10% of the Company's net sales and
together represented 76.3% of net sales. In 1994, the Company's ten largest
customers accounted for 90.2% of net sales. In 1993, two of the Company's
customers accounted for more than 10% of the Company's net sales and together
represented 69.6% of net sales. In 1993, the Company's ten largest customers
accounted for 86.5% of net sales.
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The following table represents the Company's net sales by industry
segment in excess of 10%:
<TABLE>
<CAPTION>
1996 1995 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computer peripherals 12.3% 50.7% 57.5% 61.2%
Medical equipment 35.4% 27.5% 19.2% 24.5%
High-end storage devices 41.0% * * *
Telecommunications * * 17.9% *
</TABLE>
__________
* Less than 10% of net sales.
BACKLOG
The Company's backlog was $28.5 million at December 31, 1996, compared
to $32.5 million at December 31, 1995. Backlog generally consists of purchase
orders believed to be firm that are expected to be filled within the next six
months. Since orders and commitments may be rescheduled or canceled and
customers' desired lead times may vary, backlog does not necessarily reflect
the timing or amount of future sales. The Company generally seeks to deliver
its products within four to eight weeks of obtaining purchase orders, which
tends to decrease backlog in relation to annual sales.
COMPETITION
The contract manufacturing services provided by the Company are
available from many independent sources. The Company also competes with
in-house manufacturing operations of current and potential customers. The
Company competes with numerous domestic and foreign ECMs, including SCI
Systems, Inc., Solectron Corporation, Benchmark Electronics, Inc., The DII
Group, Inc., and others. In addition the Company competes with large
electronics manufacturers, such as International Business Machines Corporation
(IBM), Westinghouse and Texas Instruments, that provide contract manufacturing
services to other OEMs. The Company also faces competition from its current
and potential customers, who are continually evaluating the relative merits of
internal manufacturing versus contract manufacturing for various products.
Certain of the Company's competitors have broader geographic breadth than the
Company. Many of such competitors are more established in the industry and
have substantially greater financial, manufacturing or marketing resources 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.
SUPPLIERS
The Company uses numerous suppliers of electronic components and other
materials for its operations. The Company works with customers and suppliers
to minimize the effect of any component shortages. Some components used by the
Company have been subject to industry-wide shortages, and suppliers have been
forced to allocate available quantities among their customers. The Company's
inability to obtain any needed components during periods of allocations could
cause delays in shipments to the Company's customers and could adversely affect
results of operations. The Company works at mitigating the risks of component
shortages by working with customers to delay delivery schedules or by working
with suppliers to provide the needed components using just-in-time inventory
programs. Although in the future the Company may experience periodic shortages
of certain components, the Company believes that an overall trend toward
greater component availability is developing in the industry.
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<PAGE> 25
PATENTS AND TRADEMARKS
The Company does not hold any patent or trademark rights. Management
does not believe that patent or trademark protection is material to the
Company's business.
GOVERNMENTAL REGULATION
The Company's operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters, and there can be no assurance that material costs
and liabilities will not be incurred in complying with those regulations or
that past or future operations will not result in exposure to injury or claims
of injury by employees or the public. To meet various legal requirements, the
Company has modified its circuit board cleaning processes to eliminate the use
of substantially all chlorofluorocarbons and now uses aqueous (water-based)
methods in its cleaning processes.
Some risk of costs and liabilities related to these matters is
inherent in the Company's business, as with many similar businesses.
Management believes that the Company's business is operated in substantial
compliance with applicable environmental, waste management, health and safety
regulations, the violation of which could have a material adverse effect on the
Company. 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.
The Company periodically generates and temporarily handles limited
amounts of materials that are considered hazardous waste under applicable law.
The Company contracts for the off-site disposal of these materials.
EMPLOYEES
As of December 31, 1996, the Company employed 398 persons, of whom 335
were engaged in manufacturing and operations, 32 in material handling and
procurement, 6 in marketing and sales and 25 in finance and administration, and
the Company engaged the full-time services of 16 temporary laborers through
employment agencies in manufacturing and operations. None of the Company's
employees is subject to a collective bargaining agreement. Management believes
that the Company's relationship with its employees is good.
DESCRIPTION OF PROPERTY
The Company's executive offices and manufacturing facilities are
located in two facilities totaling 100,000 square feet on approximately 19
acres owned by the Company in Greeley, Colorado. The Company believes the
facilities are in good condition. The properties are subject to a deed of
trust securing indebtedness of $3,060,000 as of December 31, 1996.
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of 1996.
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CURRENT ELECTRONICS, INC. AND CURRENT ELECTRONICS (WASHINGTON), INC.
GENERAL
CEI is a Newberg, Oregon based company that, together with its
affiliate CEWI, provides contract electronics manufacturing and assembly
services to technology companies in Oregon, Washington and California. The CE
Companies assemble and test printed circuit boards, cable and wire harness
assemblies and provide complete manufacturing solutions including design, parts
procurement, prototyping, productions and final test.
CEI was founded by Charles, Gregory and Matthew Hewitson in 1983 to
provide high quality contract assembly services to OEMs located in the Pacific
Northwest. The primary goal of CEI has been to build a profitable company
centered on quality and a positive employee environment. The CE Companies
utilize a team-based structure that has created a strong corporate culture and
has been highly effective in generating new business. The CE Companies have
achieved a reputation for assisting customers who require high quality,
technically complex services.
The CE Companies have grown by focusing on the needs of their
customers. In 1990, CEI acquired the cable and circuit assembly division of
Electro Scientific Industries ("ESI"). The acquisition allowed ESI to spin off
a non core business and yet maintain its high quality standards for complex
cable and circuit assembly. ESI remains one of CEI's largest customers. In
1991, CEI recognized the increasing trend by OEMs to require surface mount
technology ("SMT") in their assemblies. CEI began acquiring and installing
this technology and it presently accounts for more than 30% of the CE
Companies' business. In 1994, CEI purchased the printed circuit board assembly
manufacturing facility of the Commercial Avionics division of Allied Signal
Corporation, which became CEWI, in Moses Lake, Washington. Allied Signal
believed that CEI had the appropriate skills to manufacturer products to the
highly demanding technical requirements of the aerospace industry. CEWI now
represents 5% of the CE Companies' business. Over the past 18 months, the CE
Companies have enhanced their position as full service solution providers by
increasing capabilities in prototype and test services and design for
manufacturability.
The CE Companies operate in two locations, a campus facility in
Newberg, Oregon that includes 47,000 square feet of manufacturing facilities
and a 20,000 square foot manufacturing facility in Moses Lake, Washington.
These two locations are strategically placed to take advantage of the rapid
growth of the technology manufacturing base in the Pacific Northwest and the
highly skilled and well-educated workforce that has emerged over the past
decade. The CE Companies use technically advanced SMT and pin-through-hole
equipment in its assembly processes along with state of the art test equipment.
STRATEGY
The CE Companies' shared objective is to take advantage of the
significant opportunities for growth in contract manufacturing in the Pacific
Northwest. In pursuing this objective the CE Companies follow a strategy that
incorporates the following elements:
Creating and maintaining long-term relationships with customers by
providing high quality, cost effective services with a high degree of
responsiveness and flexibility. The central tenet of the CE Companies'
operating philosophy is customer service, characterized by high quality,
flexibility and responsiveness to the needs of the customer.
Focus on a market niche of complex, low- to mid-volume products. The
CE Companies provide contract manufacturing services to established producers
of high-end, low- to mid-volume industrial electronic products. The CE
Companies focus primarily on OEMs in the instrumentation, avionics,
telecommunications and specialized computer industries. Given its focus, the
company does not compete for the manufacture of low-cost, high-volume printed
circuit board assemblies that are used in consumer products, personal computers
and the like.
Increasing profitability by emphasizing turnkey manufacturing and
concurrent engineering. The management of the CE Companies believes that
expanding the scope of relationships with customers leads to greater stability
of the customer base and increased profit opportunities. The CE Companies have
been successful in converting many
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customers from consignment manufacturing to turnkey manufacturing and emphasize
turnkey relationships in negotiations with new customers. The CE Companies
currently generate about 85% of their revenues from turnkey production. The CE
Companies frequently work with customers to develop and utilize advanced
engineering to improve product quality, to reduce cost and to gain early access
to new product information. This positions the CE Companies to negotiate the
price of new projects rather than being submitted to the competitive bid
process.
MANUFACTURING SERVICES
The CE Companies' turnkey manufacturing services consist of assembling
complex printed circuit boards (using both SMT and pin-through-hole
interconnection technologies), cables, electromechanical devices and finished
products. The CE Companies also provide computer-aided testing of printed
circuit boards, subsystems and final assemblies.
The CE Companies have the ability to perform in-circuit and functional
testing as well as environmental stress screening. In-circuit tests verify
that the 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. Usually the CE Companies design or
procure test fixtures and then develop their own test software. Because the
density and complexity of electronic circuitry constantly is increasing, the CE
Companies seek to utilize developing test technology in their automated test
equipment and inspection systems to provide superior services to its customers.
In response to customer needs, the CE Companies have developed a Quick
Prototype Service ("QPS"), for circuit boards and assemblies. The QPS team is
able to assist OEMs in their initial stages of new product development by
utilizing sophisticated design equipment and providing experienced specialists
in circuit board and cable assembly to work with customers during the
pre-design stage. The CE Companies are often able to build a customer's
prototype in less than twenty-four hours, allowing customers to focus on more
value-added engineering projects. The ability to provide prototype
manufacturing either as a stand-alone service, or as a prelude to contract
manufacturing, has proven to be an extremely effective tool for establishing
long-term customer relationships.
The following charts illustrate the mix of the CE Companies' business
over the past three years:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
SMT 29% 20% 16%
PTH 64% 71% 74%
Other 7% 9% 10%
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Consigned 17% 45% 52%
Turnkey 83% 55% 48%
</TABLE>
CUSTOMERS AND MARKETING
The CE Companies seek to serve a large number of customers to avoid
dependence on any one customer or industry. Nevertheless, historically, a
substantial percentage of the CE Companies' net sales have been to a small
number of customers. The CE Companies market their contract assembly services
to a diverse group of electronic manufacturing companies located primarily in
the Pacific Northwest. The typical customer is a successful technology company
that is experiencing rapid growth due to new product introductions. The
management of the CE Companies believe that close proximity to these customers
is critical to establishing long term relationships. Keys to a successful
relationship include expedient communications, flexible delivery schedules and
better access to proper resources.
While the CE Companies believe close proximity to their customers
provides a competitive advantage, the CE Companies have also been successful in
providing service to customers located outside the Pacific Northwest. The CE
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Companies have taken steps to ensure that all customers are provided superior
service. These include frequent visits by key personnel, direct contact with
client manufacturing teams and utilization of Internet e-mail capabilities.
The CE Companies currently have twenty-five active accounts with the three
largest customers representing 31%, 20%, and 12% of total sales.
Instrumentation, telecommunications, aerospace and avionics, and specialized
computers are currently the four fastest growing markets for the CE Companies.
These segments currently account for 57%, 22%, 5% and 5%, respectively, of
total sales.
BACKLOG
Backlog consists generally of purchase orders believed to be firm that
are expected to be filled within the next six months. Since orders and
commitments may be received only immediately prior to commencement of
production and may be rescheduled or canceled and customers' desired lead times
may vary, backlog does not necessarily reflect the timing or amount of future
sales. Accordingly, the CE Companies have not historically tracked backlog.
COMPETITION
As discussed in relation to the Company, the contract manufacturing
service business in the electronics industry is highly competitive. See "THE
COMPANIES--Electronic Fab Technology Corp.--Competition." The market for such
services in the Pacific Northwest is highly fragmented and competitive. It is
estimated that thirteen companies perform approximately 75% of the total
business in the Pacific Northwest. Based on the available data, the CE
Companies believe that together they rank third or fourth in the region. The
CE Companies believe their competitive advantages include superior customer
service, commitment to quality and integrity, and strong technical
capabilities, including prototype development. The CE Companies believe that
they are particularly attractive to customers in the areas of flexible
scheduling and low- to medium-volume production with high product mix.
SUPPLIERS
The CE Companies are subject to supplier risks similar to those faced
by the Company. See "THE COMPANIES-- Electronic Fab Technology
Corp.--Suppliers."
PATENTS AND TRADEMARKS
The CE Companies believe they have all necessary rights to use their
names and trademarks. Management does not believe that patent or trademark
protections are material to the Company's business.
GOVERNMENTAL REGULATION
The CE Companies' operations are subject to federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters that are similar to those affecting the Company. See "THE
COMPANIES--Electronic Fab Technology Corp.--Governmental Regulation."
EMPLOYEES
As of December 31, 1996, the CE Companies employed 343 persons, of
whom 286 were engaged in manufacturing and operations, 27 in material handling
and procurement, 6 in marketing and sales and 21 in finance and administration,
and engaged the full-time services of 45 temporary laborers through employment
agencies in manufacturing and operations. None of the CE Companies' employees
are subject to a collective bargaining agreement. The CE Companies' management
believes that the CE Companies' relationship with its employees is good.
DESCRIPTION OF PROPERTY
The CE Companies currently have two manufacturing facilities--a campus
including manufacturing facilities comprising 47,000 square feet in Newberg,
Oregon and a 20,000 square foot manufacturing facility in Moses Lake,
Washington. The CE Companies lease the Newberg facility from a partnership
comprised of its majority shareholders.
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<PAGE> 29
CEI also leases 1,200 square feet of office space across the street from the
Newberg facility for its executive offices for $1,450 per month from an
unrelated third party. CEWI leases the Moses Lake facility from a partnership
comprised of its majority shareholders.
LEGAL PROCEEDINGS
The CE Companies are not involved in any material pending legal
proceedings.
THE MERGER PROPOSAL
DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at Closing, the CEI Shareholders
will exchange their shares of CEI Common Stock for the Cash Consideration,
which is subject to adjustment as provided in the Merger Agreement, and the
EFTC Equity, and CEI will be merged into CMC. The Closing is to occur three
business days after all of the conditions to Closing have been satisfied or
waived; however, either the Company or CEI may terminate the Merger Agreement
if Closing has not occurred by April 30, 1997. At Closing, the Company will
simultaneously acquire all of the outstanding CEWI Stock pursuant to the
Purchase Agreement; the Company and the CEI Shareholders will enter into the
Registration Rights Agreement; the Company, the CEI Shareholders and the CEWI
Shareholders will enter into the Indemnification Agreement; the Company will
enter into Consultant's Agreements with Messrs. Charles Hewitson, Gregory
Hewitson and Matthew Hewitson; the Company will offer to enter into Employment
Agreements with certain key employees of the CE Companies; and certain
guaranties given by the CEI Shareholders to Wells Fargo Bank will be terminated
or the CEI Shareholders will be released from all liability thereunder.
Messrs. Charles, Gregory and Matthew Hewitson will be elected, effective as of
the Closing, as additional directors of the Company.
DESCRIPTION OF THE ACQUISITION
The Purchase Agreement provides that, at Closing, the CEWI
Shareholders will sell to the Company, and the Company will purchase from them,
all of the outstanding CEWI Stock in exchange for $1,530,000 in cash (adjusted
as provided in the Purchase Agreement). As the result of the Acquisition, CEWI
will become a wholly owned subsidiary of the Company. The completion of the
Acquisition does not require the vote of the Company's shareholders and no vote
with respect to the Acquisition is being sought.
TRANSACTIONS TO OCCUR CONCURRENTLY
Under the terms of the Merger Agreement, the Closing of the Merger is
conditioned on the concurrent closing of the Acquisition and, under the terms
of the Purchase Agreement, the Closing of the Acquisition is conditioned upon
the concurrent Closing of the Merger.
HISTORY AND BACKGROUND
On August 5, 1996, the Board hired Mr. Jack Calderon as the new
President and Chief Executive Officer of the Company. After a short period of
cost restructuring and internal reorganization, Mr. Calderon implemented a
program named "the 100 Week Journey of Progress," the unifying vision of which
was to make the Company the undisputed national leader of high-mix electronic
contract manufacturing and which included five key corporate goals: (i) become
the recognized leader in high-mix electronic contract manufacturing; (ii)
become a multi-sited manufacturer; (iii) double revenues; (iv) provide a
broader range of service to a broader customer base; and (v) outperform
competitors in return- on-equity, cash flow and sales growth. Among the
strategies to meet such goals, the Company adopted an acquisition strategy
centered on finding companies that are favorably located geographically, will
strengthen the combined financial strength of the Company and are focused on
the same high-mix strategy as the Company.
In early September of 1996, the Company made it known to several
investment banking and other introducing firms, including Lincoln Partners
L.L.C. in Chicago, Illinois, that the Company was interested in expanding its
national
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<PAGE> 30
scope through a strategic acquisition. As a result, Mr. Robert Barr, Managing
Director of Lincoln Partners, introduced Mr. Calderon and Mr. Stuart
Fuhlendorf, Vice President and Chief Financial Officer of the Company, to a
potential opportunity in the northwest United States with the CE Companies.
Through its investment banking associations, Lincoln Partners was generally
familiar with the industry and the CE Companies' investment banking
representative Mr. Dave Kalez, Vice President of Pacific Crest Securities. Mr.
Barr was generally familiar with both the Company and the CE Companies, but had
no formal relationships with either party.
On September 17, 1996, the Company engaged Lincoln Partners as its
agent in introducing the CE Companies as an acquisition for the Company, and on
October 2, 1996, signed a confidentiality agreement with Pacific Crest
Securities, representing the CE Companies.
After reviewing an offering memorandum for the CE Companies that
Pacific Crest Securities had prepared, Messrs. Calderon and Fuhlendorf
determined that the CE Companies potentially fit the Company's acquisition
strategy and could contribute to the Company's overall corporate vision.
Messrs. Barr and Kalez then arranged an introductory meeting for the Company
with two of CEI's principal shareholders, Messrs. Gregory and Matthew Hewitson
(Mr. Charles Hewitson was unable to attend), along with the CE Companies'
leadership team, for October 10, 1996.
At the October 10, 1996 meeting, held at CEI's Newberg, Oregon
offices, Messrs. Calderon and Fuhlendorf discussed the Company's corporate
vision and strategies. Messrs. Gregory and Matthew Hewitson discussed the CE
Companies' reasons for examining a potential merger, and members of the CE
Companies' leadership team described the business, asked questions and
discussed their various roles with the CE Companies. The parties agreed that
the Company and the CE Companies had similar cultures and that it would make
sense to continue examining a potential transaction.
On October 23, 1996, Messrs. Gregory, Charles and Matthew Hewitson
visited the Company's facilities in Greeley, Colorado. During the visit they
had an opportunity to meet Mr. Gerald Reid, one of the Company's founders and
the Chairman of the Board of Directors. On October 24, 1996, the Hewitsons met
the Company's executive and expanded staff. During the Hewitsons' visit, the
Company's management team presented a detailed overview of the Company's
corporate vision and strategies. At the end of the day, a private meeting was
held between Messrs. Calderon and Fuhlendorf and the Hewitsons. Mr. Calderon
expressed the Company's interest in a possible transaction with the CE
Companies and indicated that he believed a combination would be beneficial to
both the Company and the CE Companies' shareholders because of the similarities
between the two businesses and the possible strategic benefits and synergies
created in a combination. A general discussion was held that helped set
guidelines for future deal structure possibilities. Included in the discussion
were general overviews of pooling versus purchase structures and general
comments about the future needs of both parties. Following these discussions,
the parties agreed that the strategies and benefits discussed warranted further
discussion and consideration.
On November 13, 1996, the Company's Board of Directors met to discuss
the potential merger or acquisition of the CE Companies. Mr. Fuhlendorf
presented a pro forma analysis of the Company and the CE Companies, and Mr.
Calderon led a discussion of the proposed transaction. Many issues were
discussed including the possibility of a pooling transaction and the likelihood
of the Hewitsons receiving seats on the Board. After discussions about
structure, corporate culture and combined corporate finances, the Board
recommended that the Company move forward with a letter of interest.
On November 14, 1996, Messrs. Calderon, Fuhlendorf, Gregory Hewitson,
Charles Hewitson, Matthew Hewitson, Barr, Kalez and Daren Shaw, Managing
Director of Pacific Crest Securities, met at Pacific Crest's Portland, Oregon
offices. At this meeting, Messrs. Calderon and Fuhlendorf presented the
Hewitsons with an initial draft of a letter of interest. The letter was
presented in detail and many items were discussed and clarified. The parties
decided that the Hewitsons would meet with their advisors and follow-up
discussions would occur prior to the end of the month.
On November 21, 1996, a conference call was held between Messrs.
Calderon, Fuhlendorf and Barr representing the Company and Messrs. Kalez and
Shaw representing the CE Companies. Messrs. Kalez and Shaw responded to the
Company's original letter of interest with comments and counter ideas and
requirements. Items discussed included the overall valuation of the CE
Companies, components of cash and stock in the proposed
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<PAGE> 31
transactions, treatment of management, including employment contracts, and
general views and needs of the Company and the CE Companies. The parties
discussed their respective strategic views and indicated a desire to come to
terms because of the positive attributes of the proposed transactions.
On November 25, 1996, the Company transmitted a revised letter of
interest to the Hewitsons and their advisors. The revised letter incorporated
some of the negotiated points from previous discussions. On November 26, 1996,
the parties held a conference call and Messrs. Calderon and Fuhlendorf
presented the revised letter of interest to the Hewitsons. The call also
included Messrs. Barr, Kalez and Shaw. Many points were discussed and
particular discussions were held regarding the value of CE Companies and the
stock and cash of the proposed transactions. The parties agreed that they
would come to terms and a letter of intent would be drafted by December 5,
1996, or negotiations would be severed.
On December 5, 1996, Messrs. Kalez and Shaw contacted Messrs.
Calderon, Fuhlendorf and Barr by telephone and indicated that the CE Companies
were considering other offers and that the CE Companies would make a decision
by December 10, 1996.
On December 10, 1996, Messrs. Calderon and Fuhlendorf contacted the
Hewitsons and discussed final matters that would be significant to their final
decision. After much discussion, the Hewitsons indicated that they would make
their decision and have Messrs. Kalez and Shaw relay the decision to the
various interested parties.
On December 11, 1996, Messrs. Kalez and Shaw contacted Messrs.
Calderon and Fuhlendorf to inform them that the Company had been selected to be
the acquiring company. It was agreed that the Company would draft a formal
letter of intent and Messrs. Calderon and Fuhlendorf would fly to Oregon to
conclude any final matters and participate in the signing of the letter of
intent. It was also agreed that the Hewitsons would review the Company's press
release announcing the status of the parties' discussions before it was
distributed.
On December 12, 1996, the Company's Board of Directors reviewed the
structure of the proposed transactions, including a merger with CEI and an
acquisition of CEWI, and voted to move forward with no significant changes.
During the Board meeting, Messrs. Calderon and Fuhlendorf informed the Board of
the discussions and events leading up to the proposed merger and acquisition.
During the meeting, Messrs. Calderon and Fuhlendorf reviewed the potential
advantages and disadvantages of a strategic combination with CE Companies. It
was agreed that the Company's management would inform the Board when the
Company had completed its due diligence review of the CE Companies and entered
into definitive merger and acquisition agreements and that the Board would
review the draft of the proxy statement for the transactions.
On December 17, 1996, Messrs. Calderon and Fuhlendorf met with the
Hewitsons to review any final matters or issues before the final letter of
intent would be signed. Participating in the final review were Mr. Robert
Stout of Hershner, Hunter, Andrews, Neill & Smith, LLP, the CE Companies' legal
counsel and Mr. Francis R. Wheeler, of Holme Roberts & Owen LLP, the Company's
legal counsel. All issues were resolved.
On December 18, 1996, Mr. Jack Calderon signed the letter of intent on
the Company's behalf and Messrs. Hewitsons and their wives signed as the
Principal CEI Shareholders and the CEWI Shareholders, respectively. On the
morning of December 18, 1996, Messrs. Calderon and Fuhlendorf distributed a
national press release and held a conference call to announce the signing of
the letter of intent to the general public.
Between December 18, 1996 and January 15, 1997, senior management of
the Company and the CE Companies conducted substantial due diligence
investigations and participated in various intracompany and intercompany
discussions regarding their due diligence findings and potential adjustments in
purchase price leading up to the signing of the Merger Agreement and the
Acquisition Agreement, effective as of January 15, 1997.
REASONS FOR THE TRANSACTIONS
The Company's vision is to be recognized as the undisputed national
leader in high-mix electronic contract manufacturing. Included in the vision
are some key corporate goals including expansion through strategic acquisitions
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<PAGE> 32
that will lead to multiple sites, larger revenues and potentially greater
corporate value. Since the hiring of Mr. Jack Calderon as the Company's
President and Chief Executive Officer, the Company has actively pursued
acquisitions in order to both realize its corporate vision and create
opportunities for increasing shareholder value. The Company believes that the
Merger and the related transactions are consistent with this strategy and will
result in: (i) giving the Company geographic proximity to a flourishing
high-mix market; (ii) the integration of strong, energetic management teams
from the CE Companies into the Company, which will complement the Company's
current management team; (iii) overall strategic benefits that could lead to
greater market recognition of the Company as a high-mix, high-speed provider of
manufacturing services; (iv) strengthened operational performance; and (v)
revenue growth and increased profitability.
The CE Companies are independent providers of contract manufacturing
services in the electronic manufacturing services industry. The primary goal
of the CE Companies has been to build profitable companies that are culturally
focused on manufacturing quality, excellent customer service and a positive
employee environment. CE Companies have grown at rates above industry averages
because of their focus on the needs of customers and because of their relative
small size and ability to finance growth with modest levels of bank debt and
cash flow from operations. The Company believes that because of the CE
Companies' strong management teams, strategic locations and strong financial
positions, they are well-positioned for continued future growth in the
Northwest.
In reaching its determination to approve the Merger Agreement, the
Purchase Agreement and all the transactions contemplated thereby, the Board has
identified the following potential benefits of the Merger and the Acquisition
that it believes will lead to the future success of the Company:
Geographic Proximity to a High-Mix Market. The Board believes that
the Merger and the Acquisition will enable the Company to offer a broad range
of contract manufacturing services to many existing and potential customers in
the Northwest. There are numerous cross-marketing opportunities between the
customers of the Company and the CE Companies. In addition, the Company and
the CE Companies serve several of the same customers, which should create
expanded future marketing opportunities.
Expanded Contract Manufacturing Services. The Company has developed
numerous services that are not currently offered by most contract
manufacturers, including Asynchronous Process Manufacturing, point-of-use
inventory systems and unique fixed-price prototype services. The CE Companies
have demonstrated an ability to grow and develop strong customer relationships.
The introduction of the Company's newly developed services to the CE Companies'
Northwest customers should lead to additional market opportunities for the
Company.
Strong, Experienced Management. The CE Companies' management has many
years of experience in the EMS industry, and they have demonstrated the ability
to run a profitable high-growth business. The Board believes that the
management and staff at the CE Companies are skilled and experienced and will
maintain a well-managed business environment. The culture and attitude of the
CE Companies' management teams are similar to those of the Company's
management, and the Board believes that the Company's and the CE Companies'
management teams will complement each other.
Utilization of Existing Manufacturing Capacity. Due to increased
productivity levels related to successful implementation of APM at its Greeley,
Colorado facility, the Company has created significant capacity that can be
utilized by new customers in Colorado and the CE Companies' existing customers.
The Board believes that certain synergies and efficiencies can be created by
the effective utilization of the Company's current capacity. It is expected
that, as APM is implemented at the CE Companies' facilities, efficiencies will
be gained and additional manufacturing capacity created resulting in marketing
opportunities in both the Northwest and Colorado.
In the course of its deliberations, the Board reviewed and considered
a number of other factors relevant to the Merger and the Acquisition,
including: (i) the relative value that the CE Companies might contribute to
future business and prospects of the combined company, including earnings
contributions; (ii) the Company's and the CE Companies' respective historical
financial performance, operations and products; (iii) opinions of the Company's
management, including reports relating to extensive due diligence that the
Company's management conducted regarding the CE Companies' business,
operations, technology, facilities, financials and competitive position, and
possible synergistic
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<PAGE> 33
and expansion opportunities for the combined companies; (iv) the availability
of capacity enabling revenue growth; (v) financial pro forma analyzing the
combination of the Company and the CE Companies and the accounting treatment of
significant matters, such as goodwill, certain assets and liabilities and
interest expense related to the Merger and the Acquisition; (vi) deal
structure, including comparison of a pooling versus purchase accounting
treatment, goodwill impacts and tax consequences; (vii) the compatibility of
corporate cultures of the Company and the CE Companies, including the
companies' common focus on the high-mix market, providing value for the
customers, creating new EMS services and employee environment; (viii) reports
from management and financial advisors on the specific terms of the Merger
Agreement and the Purchase Agreement and valuation of the Company's stock for
goodwill purposes; and (ix) the Company's and the CE Companies' historical and
projected financials and results of operations, particularly with regard to
determining the consideration to be given for the CE Companies.
The Board also considered a variety of potentially significant factors
relating to the Merger and the Acquisition, including: (i) the potential
dilutive impact of the issuance of EFTC Equity; (ii) the fees and transaction
charges that the Company expects to incur in connection with the Merger and the
Acquisition; (iii) the risks that the benefits sought in the Merger and the
Acquisition would not be fully realized; (iv) the substantial capital resources
required to support the CE Companies' growth, including the potential
construction of a new facility in Oregon; and (v) the risk that the CE
Companies' management team would not be able to successfully implement the APM
process and handle the technology and facility growth required in the future.
The Board believes that these risks are outweighed by the potential benefits of
the Merger and the Acquisition.
The foregoing discussion of the information and factors considered by
the Board is not intended to be exhaustive, but it does include the factors
that the Board considered material to its decision to approve the Merger and
the Acquisition. In view of the factors considered in connection with its
evaluation, the Board did not find it practicable to and did not quantify or
attempt to assign relative weights to the specific factors considered in
reaching its decision. In addition, individual members of the Board have given
different weights to different factors.
FINANCING FOR THE TRANSACTIONS
The Company is seeking possible financing for the Merger, but the
closing of the Merger and related transactions is not conditioned upon the
availability of such additional financing. The Company's existing financial
resources, including the availability of borrowings under the Company's
existing credit facility, are sufficient to allow the Company to consummate the
Merger, the Acquisition and the transactions related thereto. See
"MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--The Company--Liquidity and Capital Resources."
COMMON STOCK HELD BY DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company held in the
aggregate 1,868,220 shares of the Common Stock as of January 17, 1997. The
Company has been informed that all such shares will be voted in favor of each
of the Proposals at the Special Meeting. See "SECURITY OWNERSHIP."
TAX AND ACCOUNTING TREATMENT
The Merger will be structured as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Both the Merger and the Acquisition will be accounted for using the "purchase"
method of accounting.
VOTE REQUIRED
Under the rules applicable to Nasdaq National Market issuers, approval
of the Company's shareholders is required for any transaction or series of
transactions in which 20% or more of the voting stock of the Company is to be
issued. To be adopted, the Merger Proposal must be approved by the holders of
a majority of the shares of the Common Stock represented in person or by proxy
and entitled to vote at the Special Meeting, assuming a quorum is present.
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DESCRIPTION OF THE MERGER AGREEMENT
The following is a summary of the terms of the Merger based on the
Merger Agreement entered into on January 15, 1997, among the Company, CMC and
CEI, and the Voting Agreement entered into on January 15, 1997, among the
Company, the Principal CEI Shareholders and the CEWI Shareholders. The
following summary of the Merger Agreement is qualified in its entirety by the
full text of the Merger Agreement attached as Appendix A to this Proxy
Statement.
THE MERGER AGREEMENT
General; Effective Time. The Merger Agreement provides for the merger
of CEI with and into CMC with CMC being the surviving corporation (the
"Surviving Corporation") and CEI ceasing to have any separate corporate
existence. As a result of the Merger, the Company will issue the EFTC Equity
to the Principal CEI Shareholders representing approximately 33.4% of the
Common Stock of the Company outstanding after giving effect to the Merger and
related transactions. The Principal CEI Shareholders currently do not own any
shares of the Company's Common Stock. The Merger will become effective at the
time when the articles of merger are filed in accordance with the Oregon
Business Corporation Act with the Secretary of State of Oregon or at such later
time that the parties agree and is designated in such articles of merger. It
is anticipated that if the Merger Agreement is approved at the Special Meeting
and all other conditions have been fulfilled or waived, the Effective Time will
occur as soon as practicable thereafter. At the Effective Time, the holders of
CEI Common Stock will receive the Merger Consideration described below.
Merger Consideration. At the Effective Time and whether or not
surrendered at the Closing, all certificates representing shares of CEI Common
Stock will be converted into the right to receive the Merger Consideration to
which the holder thereof is entitled. The shares of CEI Common Stock held by
Messrs. Hewitson will be converted into the right to receive the EFTC Equity
and cash and the shares of CEI Common Stock held by the other holders of CEI
Common Stock will be converted into the right to receive cash. The aggregate
Merger Consideration to be received by all holders of CEI Common Stock is the
Cash Consideration, in the amount of $3,370,000, subject to adjustment as
described below, and the EFTC Equity. The number of shares of the Company's
Common Stock representing the EFTC Equity, 1,980,000 shares, is fixed, subject
to adjustments to reflect stock splits, reverse stock splits, stock dividends
(including any dividend or distribution of securities convertible into the
Company's Common Stock or the CEI Common Stock), subdivisions,
reclassifications, combinations, exchanges, reorganizations, recapitalizations
and similar transactions affecting the Company's Common Stock or the CEI Common
Stock.
The Cash Consideration, however, will be (i) reduced or increased, as
the case may be, by the amount by which the interest bearing indebtedness for
borrowed money of CEI ("Debt") as of the Effective Time is more or less than
$2.0 million (as increased by the amount of certain expenditures and additional
Debt authorized by the Company) and (ii) if the total combined stockholders'
equity of CEI and CEWI as of the Effective Time ("Combined Equity") is less
than $4.0 million, increased or reduced, as the case may be, by the amount by
which the total shareholders' equity of CEI as of the Effective Time ("Equity")
is more or less than $3,715,000. The Equity and Combined Equity amounts will
be determined without deduction for the amount of certain expenditures,
auditing fees, writeoffs of certain leasehold improvements or other adjustments
approved by the Company and are reduced by fees and expenses incurred by CEI
and CEWI for legal and accounting services and the services of Pacific Crest in
connection with the Merger. An estimated Cash Consideration will be paid at
Closing, subject to adjustment after Closing based on the Company's calculation
of the Cash Consideration, which calculation is binding on the CEI shareholders
unless they dispute the calculation. Either party may elect to submit an
unresolved dispute to Arthur Andersen LLP for binding determination.
Conditions to the Merger. None of the Company, CMC and CEI are
obligated to consummate the transactions contemplated by the Merger Agreement
unless, among other things, the Merger and the Merger Agreement are approved by
the requisite vote of the shareholders of the Company and the shareholders of
CEI; there is no legal, governmental or regulatory proceeding or action
restraining consummation of the transactions contemplated by the Merger
Agreement or that makes consummation of the Merger illegal; there are no
governmental approvals, waivers or consents necessary for the consummation of
or in connection with the Merger and the transactions contemplated thereby,
which have not been obtained; and the transactions contemplated under the
Purchase Agreement are simultaneously consummated.
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The obligations of the Company and CMC to consummate the transactions
contemplated by the Merger Agreement are subject to, among other things: CEI's
performance of all its covenants, obligations and agreements under the Merger
Agreement; the truth and correctness of CEI's representations and warranties in
all material respects (or in all respects to the extent qualified by its terms
by the concept of materiality) when made and as of the Effective Time; receipt
of the resignations of CEI's incumbent directors; the absence of any material
adverse events affecting CEI; the receipt of a closing certificate from CEI and
a legal opinion from Hershner, Hunter, Andrews, Neill & Smith, LLP; the
performance by Messrs. Hewitson of and their compliance with the Voting
Agreement; the execution and delivery by Messrs. Hewitson and the CEWI
Shareholders, as the case may be, of the Registration Rights Agreement, the
Indemnification Agreement, the Consulting Agreements and a letter concerning
certain tax matters; and the receipt of evidence that all CEI Shareholders have
consented to the specific allocation of the types of Merger Consideration among
them as contemplated by the Merger Agreement.
The obligation of CEI to consummate the transactions contemplated by
the Merger Agreement is subject to, among other things: the Company's and
CMC's performance of all their covenants, obligations and agreements under the
Merger Agreement; the truth and correctness of the Company's and CMC's
representations and warranties in all material respects (or in all respects to
the extent qualified by its terms by the concept of materiality) when made and
as of the Effective Time; the receipt of a closing certificate from the Company
and legal and tax opinions from Holme Roberts & Owen LLP; the termination of
certain guaranties given by the Principal CEI Shareholders to Wells Fargo Bank
or their release from all liability thereunder; the execution and delivery by
the Company of the Registration Rights Agreement; and the grant to certain
members of CEI's management of employee stock options in the Company's Common
Stock.
Covenants. Until the Effective Time, CEI has agreed to carry on its
business in the usual, regular and ordinary course and do certain other things
so as not to impair its goodwill and ongoing business; maintain insurance
coverages; comply in all material respects with applicable law; maintain its
plants, property and equipment in good repair, working order and condition;
perform its obligations under its contracts and commitments; notify the Company
about certain material adverse effects; and pay accounts in the ordinary
course. CEI also has agreed not to, without the Company's consent, do any of
the things that CEI has represented have not occurred concerning the conduct of
its business since September 30, 1996; amend its articles of incorporation or
bylaws; adopt, accelerate, amend or change any employee or director stock
option plan or options or rights thereunder; transfer its intellectual
property; enter into or amend agreements granting others exclusive marketing or
other exclusive rights concerning its products or technologies; enter into any
operating lease in excess of $50,000; hire new key employees or pay any special
bonus or special remuneration to any employee or director, or increase the
salaries or wage rates of its employees, except for the certain specified
bonuses and certain normal salary and wages increases consistent with past
practices where such increases or bonuses are not given to CEI's shareholders
or their relations or members of CEI's management; commence lawsuits other than
certain routine collection suits; acquire or agree to merger with any entity;
effect certain tax matters; revalue its assets; do anything that would make any
representation or warranty untrue; or agree to do any of the foregoing.
No Solicitation. The Merger Agreement also provides that, subject to
the fiduciary duties of CEI's board of directors under applicable law, as
advised by counsel, CEI will not directly or indirectly solicit, initiate or
encourage inquiries or submission of proposals or offers from any person
relating to any sale of, or business combination with, CEI or participate in
any negotiation, furnish information or otherwise cooperate in any attempt to
do the foregoing.
Termination; Amendment. The Merger Agreement may be terminated and
the Merger abandoned at any time prior to the Effective Time, whether before or
after approval by the Company's or CEI's shareholders: (i) by mutual consent
of the Company and CEI; (ii) by either the Company or CEI, if, without fault of
the terminating party, the Closing does not occur on or before April 30, 1997
or such later date as agreed by the parties; (iii) by the Company or CEI, if
the notifying party is not obligated to close due to the failure of any of its
conditions to close; or (iv) by either the Company or CEI, if the other party
breaches its representations, warranties or obligations under the Merger
Agreement in a material respect and the breach continues for ten days after
notice of breach.
In the event of termination of the Merger Agreement, the Merger
Agreement will become void and there will be no liability or obligation on the
part of the Company, CMC or CEI or their respective officers, directors,
shareholders or affiliates, except to the extent that termination results from
the breach by a party to the Merger Agreement of any of
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<PAGE> 36
its representations, warranties or covenants and except that certain specified
provisions of the Merger Agreement will survive the termination thereof.
The respective boards of directors of the parties may cause the Merger
Agreement to be amended, on the condition that any amendment made subsequently
to the approval of the Merger Agreement by the shareholders of the Company or
CEI shall not alter or change (i) the amount or kind of consideration to be
received on conversion of CEI Common Stock; (ii) any term of the articles of
incorporation of CMC to be effected by the Merger; or (iii) any of the terms
and conditions of the Merger Agreement if such alteration or change would
adversely affect the shareholders of the Company or CEI.
CHANGE OF THE COMPANY'S BOARD
At the Effective Time the Board will (i) increase the number of the
Company's directors from 11 to 14 and (ii) nominate and appoint Mr. Gregory
Hewitson as an additional Class I director to hold office until the 1998 Annual
Meeting of the Company's shareholders, Mr. Matthew Hewitson as an additional
Class II director to hold office until the 1999 Annual Meeting of the Company's
shareholders, and Mr. Charles Hewitson as an additional Class III director to
hold office until the 1997 Annual Meeting of the Company's shareholders. There
will be no obligation of the Company under the Merger Agreement to nominate any
CEI or CEWI representatives after such terms expire.
CEI SHAREHOLDER VOTING ARRANGEMENTS
Messrs. Hewitson have agreed with the Company that they will give
their consent with respect to or vote their shares of CEI Common Stock to
approve the Merger Agreement and the Merger. Because the shares of CEI Common
Stock owned by the Principal CEI Shareholders represent 94.2% of the
outstanding shares of CEI Common Stock, approval of the Merger Agreement and
the Merger by the shareholders of CEI is assured.
DESCRIPTION OF THE RELATED AGREEMENTS
The following is a summary of the terms of the Purchase Agreement
entered into on January 15, 1997, among the Company and the CEWI Shareholders,
the Registration Rights Agreement to be entered into at the Closing of the
Merger; an Indemnification Agreement and Consulting Agreements to be entered
into at the Closing of the Merger and Employment Agreements to be offered by
the Company to certain members of CEI's management.
THE PURCHASE AGREEMENT
Purchase Price. Simultaneously with the consummation of the Merger,
the Company will purchase, and the CEWI Shareholders will sell to the Company
the outstanding shares of CEWI Stock, for $1,530,000 in cash subject to
adjustments as follows. The completion of the Acquisition itself does not
require the vote of the Company's Shareholders and no vote with respect to the
Acquisition is being sought.
The purchase price will be (i) reduced or increased, as the case may
be, by the amount by which the interest bearing indebtedness for borrowed money
of CEWI ("Debt") as of the Closing Date is more or less than zero (as increased
by the amount of additional Debt authorized by the Company) and (ii) if the
total combined stockholders' equity of CEI and CEWI as of the Closing Date
("Combined Equity") is less than $4.0 million, increased or reduced, as the
case may be, by the amount by which the total shareholders' equity of CEWI as
of the Closing Date ("Equity") is more or less than $285,000. The Equity and
Combined Equity amounts will be determined without deduction for the amount of
any certain specified bonuses, certain auditing fees, writeoffs of certain
leasehold improvements or other adjustments approved by the Company and are
reduced by fees and expenses incurred by CEI and CEWI for legal and accounting
services and the services of Pacific Crest in connection with the Merger. An
estimated Adjusted Purchase Price will be paid at Closing, subject to
adjustment after Closing based on the Company's calculation of the Adjusted
Purchase Price, which calculation is binding on the CEWI Shareholders unless
they dispute the calculation. Either the Company or the CEWI Shareholders may
elect to submit an unresolved dispute to Arthur Andersen LLP for binding
determination.
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Covenants. Until Closing, the CEWI Shareholders have agreed to cause
CEWI to carry on its business in the usual, regular and ordinary course and do
certain other things so as not to impair its goodwill and ongoing business;
maintain insurance coverages; comply in all material respects with applicable
law; maintain its plants, property and equipment in good repair, working order
and condition; perform its obligations under its contracts and commitments;
notify the Company about certain material adverse effects; and pay accounts in
the ordinary course. The CEWI Shareholders also have agreed to cause CEWI not
to, without the Company's consent, do any of the things related to its
representations about the conduct of its business since September 30, 1996;
amend its articles of incorporation or bylaws; adopt, accelerate, amend or
change any employee or direct stock option plan; transfer its intellectual
property; enter into or amend agreements granting others exclusive marketing or
other exclusive rights concerning its products or technologies; enter into any
operating lease in excess of $10,000; hire new key employees or pay special
bonuses; commence lawsuits other than certain routine collection suits; acquire
or agree to merger with any entity; effect certain tax matters; revalue its
assets; do anything that would make any representation or warranty untrue; or
agree to do any of the foregoing.
The Purchase Agreement also provides that the CEWI Shareholders will
not, and will cause CEWI not to, directly or indirectly solicit, initiate or
encourage inquiries or submission of proposals or offers from any person
relating to any sale of, or business combination with, CEWI or participate in
any negotiation, furnish information or otherwise cooperate in any attempt to
do the foregoing.
THE REGISTRATION RIGHTS AGREEMENT
The shares of Company's Common Stock representing the EFTC Equity to
be delivered to Messrs. Hewitson in connection with the Merger will not be
registered under the Securities Act, nor qualified under applicable state
securities laws and are being offered and sold to Messrs. Hewitson based in
part on certain representations and warranties given by them. Accordingly,
Messrs. Hewitson will receive the EFTC Equity subject to restrictions on resale
set forth in the Merger Agreement and a Registration Rights Agreement that will
be entered into at the closing of the Merger among the Company, Messrs.
Hewitson and their spouses. The Registration Rights Agreement also will
provide for certain registration rights with respect to the EFTC Equity.
Capitalized terms used under this section of this Proxy Statement that have not
previously been defined shall have the meanings given to them in the
Registration Rights Agreement.
Demand Registration. At any time, but only once, within two years
after the date of the Registration Rights Agreement, the holders of more than
40% of the then Registrable Securities may require the Company to register all
or part of their Registrable Securities, on the condition that the aggregate
amount of Registrable Securities that the holders request be included in the
registration has a fair market value at the time of the request equal to
$3,000,000 ($1,000,000 if the Company can use Form S-3 or its equivalent to
effect such registration). If any Demand Registration involves an underwritten
offering, then as many securities of the Company as the Company elects may be
included in such registration on the same terms and conditions as the
Registrable Securities to be included in such registration, on the condition
that if the managing underwriters advise the Company that in their opinion the
number of shares proposed to be included in such offering should be limited,
the Company will give priority for inclusion in such registration: (i) first,
to the Registrable Securities that the holders request to be included in such
registration; (ii) second, to the securities, if any, requested to be included
in such registration pursuant to warrants or options issued to the
representatives of the underwriters with respect thereto; (iii) third, to the
securities that the Company elects to be included in such registration; (iv)
fourth, to other securities that the Company is obligated to include in such
registration; and (v) fifth, to other securities that the Company may desire to
include in such registration. The Company may also delay a Demand Registration
for up to 90 days if in the good faith reasonable judgment of the Company's
board of directors such registration would materially interfere with, or
require premature disclosure of, any financing, acquisition or reorganization
involving the Company or would otherwise have a material adverse effect on the
Company.
Piggyback Registration. If the Company at any time proposes to
register any of its securities under the Securities Act (other than as (i) a
Demand Registration; (ii) registration of securities in connection with a
merger, an acquisition, an exchange offer, another business combination or an
employee benefit plan maintained by the Company or its subsidiaries; or (iii) a
registration of securities on Form S-4 or S-8 or any successor or similar form)
and the
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registration statement to be used may be used for the registration of
Registrable Securities, the Company must give the Shareholders notice to the of
its intention to do so and offer to include the Registrable Securities in such
registration.
If any Piggyback Registration involves an underwritten offering
initiated by the Company and the managing underwriters advise the Company that
in their opinion the number of shares proposed to be included in such offering
should be limited, the Company will give priority for inclusion in such
registration: (i) first, to the securities that the Company proposes to be
included in such registration; (ii) second, to the securities, if any,
requested to be included in such registration pursuant to warrants or options
issued to the representatives of the underwriters with respect thereto; (iii)
third, to the Registrable Securities that the holders request to be included in
such registration and to other securities that the Company is obligated to
include in such registration; and (iv) fourth, to other securities that the
Company may desire or is obligated to include in such registration.
If any Piggyback Registration involves an underwritten offering
initiated on behalf of holders of the Company's securities and the managing
underwriters advise the Company that in their opinion the number of shares
proposed to be included in such offering should be limited, the Company will
give priority for inclusion in such registration: (i) first, to the securities
that such holders propose to be included in such registration; (ii) second, to
the securities, if any, requested to be included in such registration pursuant
to warrants or options issued to the representatives of the underwriters with
respect thereto; (iii) third, to the Registrable Securities that the holders
request to be included in such registration; and (iv) fourth, to other
securities that the Company may desire to include in such registration.
Registration Expenses. Except as otherwise provided in the
Registration Rights Agreement, the Company will pay all Registration Expenses
in connection with a Demand Registration and with any Piggyback Registration,
except that in the case of either a Demand Registration or a Piggyback
Registration that is an underwritten offering, all underwriting discounts,
commission spreads or fees of underwriters, selling brokers, dealer managers or
similar securities industry professionals relating to the Registrable
Securities being offered thereby will be paid by the holders thereof pro rata
based on the number of Registrable Securities that each such holder has
requested be registered.
Indemnification. The Company will indemnify, to the extent permitted
by law, the holders of Registrable Securities from and against any complaints,
claims, losses, damages, liabilities and expenses that a holder may suffer
arising out of any untrue or alleged untrue statement of material fact
contained in any Registration Statement, prospectus, preliminary prospectus, or
other related filing with the SEC or other federal or state agency, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by any holder expressly for use therein or
by any holder's failure to comply with any legal requirement applicable to such
holder not contractually assumed by the Company to deliver a copy of the
Registration Statement or prospectus or any amendment or supplement thereto
after the Company has furnished the holder with sufficient copies of the same.
Each holder of Registrable Securities will indemnify, to the extent
permitted by law, the Company from and against the holder's Pro Rata Share of
all complaints, claims, losses, damages, liabilities and expenses that the
Company may suffer arising out of any untrue or alleged untrue statement of
material fact contained in any Registration Statement, prospectus, preliminary
prospectus, or other related filing with the SEC or other federal or state
agency, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only to the extent that the same are caused by or contained in
any information furnished in writing to the Company by the holder expressly for
use therein or by any holder's failure to comply with any legal requirement
applicable to such holder not contractually assumed by the Company to deliver a
copy of the Registration Statement or prospectus or any amendment or supplement
thereto after the Company has furnished the holder with sufficient copies of
the same.
EMPLOYMENT MATTERS
The Consulting Agreements. At the Effective Time, the Company will
enter into five-year consulting agreements (the "Consulting Agreements") with
each of the Principal CEI Shareholders and offer employment for one-year to
certain members of CEI's management. Each of the Principal CEI Shareholders
will be paid approximately
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$160,000 per year and reimbursed his out-of-pocket expenses associated with the
performance of his duties. Each has agreed to devote sufficient working time,
attention and energies to the business of the Company, but not in excess of 80%
of the equivalent of being engaged on a full-time basis. The Consulting
Agreements would also prohibit the consultant from providing services to or
owning 5% or more of the outstanding stock of a competitor of the Company
during the term of his engagement and for two years after the termination of
his engagement.
The Employment Agreements. At the Effective Time, the Company also
will offer employment agreements (the "Employment Agreements") to certain
members of CEI's management. The Employment Agreements provide for each
employee to work on a full time basis with the Company for a period of one
year, which period may be extended. As compensation for their services the
Company would pay each employee the salary specified in the Merger Agreement.
In addition to the grants by the Company of employee stock options in
connection with the Merger, each employee would also be eligible to participate
in the Company's bonus and stock option plans and would receive additional
benefits that the Company customarily provides to its employees. Under the
Employment Agreements, the employee would assign to the Company all Inventions
conceived or developed by him during the term of his Employment Agreement and
for six months following his termination. The Employment Agreements would also
prohibit the employee from providing services to or owning 5% or more of the
outstanding stock of a competitor of the Company during the term of his
Employment Agreement and for one year after his termination.
Other Employment Matters. Prior to the Merger, CEI will be permitted
to pay bonuses, which are not to exceed $180,000, to certain members of its
management, and immediately following the Merger the Company will grant certain
members of CEI's management employee stock options in the Company's Common
Stock. CEI and the CEWI Shareholders have agreed to cause the employment
arrangements of persons related to Messrs. Hewitson or the CEWI Shareholders to
be terminated (other than the employment of Christie Hewitson, which is to
continue) as of the Effective Time and without liability to CEI or CEWI.
THE INDEMNIFICATION AGREEMENT
Survival of Representations and Warranties. Under the Merger
Agreement, the representations and warranties made by CEI relating to taxes
survive indefinitely. All other representations and warranties of the Merger
Agreement survive for one year after the Effective Time. Under the Purchase
Agreement, the representations and warranties of the CEWI Shareholders survive
for one year after the Closing Date, except for those relating to taxes and all
other representations and warranties of the CEWI Shareholders. The
representations and warranties of the Company and CMC do not survive the Merger
or the Acquisition.
Indemnification. Subject to the terms and conditions of the
Indemnification Agreement and the provisions limiting the survival of
representations and warranties in the Merger Agreement and the Purchase
Agreement, each Principal CEI Shareholder and each CEWI Shareholder has agreed
to indemnify and hold harmless the Company from and against such Shareholder's
pro rata share of all complaints, claims, losses, damages, liabilities and
expenses that the Company may suffer arising from CEI's breach of a covenant in
the Merger Agreement, the CEWI Shareholders' breach of a covenant in the
Purchase Agreement, any representation or warranty of CEI in the Merger
Agreement being inaccurate or any representation or warranty of the CEWI
Shareholders in the Purchase Agreement being inaccurate, except that the
Shareholders will not have such an obligation to indemnify (i) until the
Company has suffered Losses by reason thereof in excess of $100,000 in the
aggregate or (ii) to the extent the Losses exceed $750,000 in the aggregate,
after which the Shareholders will have no obligation to indemnify the Company
unless such Losses are caused by or arise out of any inaccuracy of which any
Shareholder was aware.
If any Shareholder breaches any of such Shareholder's covenants in the
Indemnification Agreement, any representation or warranty of the Shareholder in
the Indemnification Agreement is inaccurate, any CEWI Shareholder breaches
certain covenants in the Purchase Agreement or any representation or warranty
of a CEWI Shareholder in Article II of the Purchase Agreement is inaccurate,
then each Shareholder shall indemnify the Company from and against such
Shareholder's pro rata share for the entirety of any Losses the Company may
suffer arising out of such breach or inaccuracy.
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CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS
Immediately following the consummation of the Merger, the composition
of the Company's Board will change, as discussed elsewhere in the Proxy
Statement, with Messrs. Charles Hewitson, Gregory Hewitson and Matthew Hewitson
being appointed as Directors. There will not be any significant change in the
management of the Company. See "DESCRIPTION OF THE MERGER AGREEMENT--Change of
the Company's Board."
DILUTION
The issuance of the EFTC Equity will cause proportionate dilution in
the voting rights of the existing shareholders of the Company. Following
Closing, the issued and outstanding shares of the Common Stock held by the
current shareholders will be reduced to approximately 66.6% of the total issued
and outstanding shares of the Common Stock. At February 10, 1997, the Record
Date, the Company had 3,944,760 shares of Common Stock outstanding and after
Closing there will be approximately 5,924,760 shares of Common Stock
outstanding.
On September 30, 1996, each share of Common Stock had a net book value
of $3.51 per share, calculated on a historical basis. After Closing, each
share of Common Stock will have a pro forma net book value of $3.26 per share.
See "UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION."
CAPITALIZATION OF THE COMPANY
After the completion of the Merger and the Acquisition, the Company
will have approximately $8.3 million in long-term debt outstanding and
stockholders' equity of approximately $19.3 million. See "UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION." The management of the Company believes such
amounts of indebtedness to be reasonable in light of the size and operations of
the Company. The Company is not, however, subject to any limitation on the
amount or terms of indebtedness that it may incur in the future.
CHALLENGES OF BUSINESS INTEGRATION
The Company will seek to increase earnings by, among other things,
reducing operating costs as a percentage of revenues through improved operating
efficiencies and economics of scale. Although the Company expects to be able
to achieve such efficiencies and economies, the combination of the Company and
the CE Companies will require successful integration of the administrative,
marketing, information, materials and manufacturing operations of the Company
and the CE Companies. This will require substantial attention from the
Company's and the CE Companies' management teams and employees, but there can
be no assurance that such efforts will successfully achieve the anticipated
benefits of the Merger and related transactions. While the Company's Chief
Executive Officer is experienced in the integration of acquired operations, a
transaction of this size may divert management attention and any difficulties
encountered in this more complex transaction could have an adverse impact on
the revenues and operating results of the combined companies. Additionally,
attempts to achieve economies of scale through cost cutting may, at least in
the short term, have an adverse impact upon the combined companies' operations.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the federal income tax consequences to the
Company and its shareholders resulting from the Merger and the Acquisition is
for general information only. This summary is based upon laws, regulations,
rulings and judicial decisions now in effect, all of which are subject to
change. This discussion does not cover all aspects of federal taxation that
may be relevant and it does not address state, local, foreign or other tax
laws.
The Merger has been structured by the parties so that the merger will
qualify as a nontaxable reorganization under section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Although the parties believe
that the Merger will so qualify, no tax opinion will be received with respect
to the merger. As a nontaxable Merger, neither the Company nor CEI would be
required to recognize or gain or loss as a result of the merger. If the Merger
were to
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be a taxable transaction, CEI would recognize gain from the deemed sale of its
assets and would be liable for the taxes payable with respect to that gain.
Any such liability of CEI would become a liability of CMC in the merger.
With respect to the acquisition of the stock of CEWI for cash, no gain
or loss will be recognized by the Company. The selling shareholders of CEWI
will recognize taxable gain, however.
There will be no federal tax consequences to the holders of the Common
Stock of the Company in connection with the Merger and the Acquisition.
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS
Shareholders of the Company who do not vote in favor of the Merger
Proposal will not have the right to seek payment in cash of the fair market
value of their shares of Common Stock.
MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This information set forth below contains "forward looking statements"
within the meaning of the federal securities laws, including statements
regarding opportunities for growth from expanded use of contract manufacturing
by OEMs, the Company's new strategic business plan and development of its new
management information system, the trend toward turnkey manufacturing, the
Company's expectations regarding increases in the numbers of assemblies ordered
by customers, and other statements of expectations, beliefs, plans, and similar
expressions concerning matters that are not historical facts. These statements
are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in the statements. See
"INTRODUCTION--Cautionary Statement."
THE COMPANY
GENERAL
The Company has provided electronic manufacturing services to its
customers since 1981. Since 1981, there has been a general shift in the nature
and scope of the Company's services and the makeup of the relative components
of its sales. Within the electronic manufacturing services industry in general
and as experienced by the Company, there has been a significant shift from
consignment business to turnkey business. For consignment projects, the
Company charges only for value-added labor and manufacturing costs and uses
materials provided by the customer. Turnkey projects require the Company to
provide value-added labor, incur manufacturing costs and acquire components and
other materials used in the assembly process. In addition, turnkey projects
generally offer higher net sales and higher gross profits than consignment
projects as the sales and costs of components and other materials are included
in the results of the Company's operations. However, the gross profit
percentage earned on materials sales is generally lower than that earned on
assembly services, resulting in a trend over time toward a lower gross profit
percentage as turnkey sales increase. The growth in turnkey sales has also
required the Company to increase its investment in working capital,
particularly as it relates to inventory and accounts receivable. The
percentage of net sales attributable to sales of materials increased from 58.4%
in 1992 to 74.4% in 1995.
The Company's results of operations are affected by a number of
factors, including the level and timing of customer orders, the mix of turnkey
and consignment orders, the degree of automation used in the manufacturing
process, fluctuations in material costs, the overhead efficiencies achieved by
the Company in managing the costs of its operations, price competition, the
Company's level of experience in manufacturing a particular product, and the
timing of expenditures in anticipation of increased sales. Inflation has not
been a significant factor in the results of the Company's operations because
the Company's price quotations for turnkey jobs are generally good for only 90
days and the Company is entitled to pass on certain cost increases under some
of its turnkey contracts.
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<PAGE> 42
The following table sets forth certain operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
September 30, ------------------------------
----------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net Sales . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Gross Profit . . . . . . . . . . . . 4.3 8.0 7.9 10.3 13.9
Selling, general and administrative
expenses . . . . . . . . . 7.6 6.5 6.3 4.6 6.2
Impairment of fixed assets . . . . . 1.6 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss) . . . . . . . (4.9) 1.5 1.6 5.7 7.7
Interest expense . . . . . . . . . . (.9) (.8) (.8) (.3) (.8)
Other, net . . . . . . . . . . . . . -- 0.2 0.2 0.2 --
----- ----- ----- ----- -----
Income (loss) before income taxes . . (5.8) 0.9 1.0 5.6 6.9
Income tax expense (benefit) . . . . (2.1) 0.3 0.3 2.0 2.5
----- ----- ----- ----- -----
Net Income . . . . . . . . . . . . . (3.7) 0.6 0.7 3.6 4.4
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
Net sales. Net sales are net of discounts and are recognized upon
shipment to a customer. The Company's net sales increased by 16.6% to
$13,631,921 for the third quarter of fiscal 1996, from $11,691,875 during the
same period in fiscal 1995. The increase in net sales is due primarily to
increased material sales associated with electro-mechanical assembly
(box-build) to one customer.
The Company's net sales increased by 23.3% to $44,576,291 during the
nine months of fiscal 1996, from $36,140,147 during the same period of fiscal
1995. Again this increase is primarily the result of the sales related to the
box-build activity noted above.
Gross profit. Gross profit equals net sales less cost of goods sold
(such as salaries, leasing costs, and depreciation charges related to
production operations) and non-direct, variable manufacturing costs (such as
supplies and employee benefits). In the third quarter of fiscal 1996, gross
profit decreased 13.6% to $535,750 compared to $619,768 for the same period in
1995. The gross profit margin for the third quarter of fiscal 1996 was 3.9%
compared to 5.3% for the same period of fiscal 1995. The primary reason for
the decline in gross profit is related to restructuring charges of $479,029
that were included in cost of goods sold for the third quarter of 1996.
Without these restructuring charges, gross profit would have been $1,014,779 or
7.4% of net sales, an increase of 63.7% over the third quarter of 1995. 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 processes.
Gross profit decreased by 34.2% to $1,900,088 compared to $2,886,567
for the first nine months of fiscal 1996. The gross profit margin for the
first nine months of fiscal 1996 was 4.3% compared to 8.0% for the first nine
months of 1995. Excluding the restructuring charges as explained above gross
profit would have been $2,379,117 or 5.3% for the third quarter of 1996. The
additional decline not related to the restructuring charge taken in the third
quarter of fiscal 1996 was attributable to increased overhead associated with
the change in product mix from third quarter of 1995 to third quarter of 1996.
The decreased efficiencies prompted the Company to hire a new Chief Executive
Officer and decrease its workforce and cost structure in order to position the
Company for future success.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA expense") consist primarily of non-manufacturing
salaries, sales commissions, and other general expenses. SGA expense increased
by 106.9% to $1,746,550 in the third quarter of 1996, compared with $844,243 a
year earlier. The increase is due to
34
<PAGE> 43
restructuring charges as explained above related to SGA expense in the amount
of $922,404 in the third quarter of 1996. Excluding these costs, the SGA
expense would have been $824,146 a decrease of $20,007 from third quarter of
1995. As a percentage of net sales, SGA expenses increased from 7.2% of net
sales in the third quarter of fiscal 1995 to 12.8% of net sales in fiscal 1996.
Excluding the restructuring charges, SGA expenses would have been 6.0% of net
sales for the third quarter of 1996.
Selling, general and administrative expenses increased by 44.3% to
$3,403,090 for the nine months of fiscal 1996 compared with $2,358,576 a year
earlier. Excluding the restructuring charges incurred in third quarter of
1996, SGA expenses would have increased by $122,110 or 5.2% over the first nine
months of 1995. As a percentage of net sales, SGA increased to 7.6% in the
first nine months of 1996 from 6.5% in the same period of fiscal 1995. Without
the restructuring charges, SGA expenses would have been 5.6% of net sales for
the nine months ended September 30, 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
$725,869. 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 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 or 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 a change in the
way product is manufactured which resulted in several assets both tangible and
intangible to be eliminated from operations. Certain software that will no
longer be used as well as excess equipment that is now held for sale was
written down to fair value in order to comply with Statement No.121 as
mentioned above.
Operating income. Operating income for the third quarter of fiscal
1996 decreased 762.8% to a loss of $1,936,669 from a loss of $224,475 for the
third quarter of fiscal 1995. Operating income as a percentage of net sales
decreased to (14.2%) in the third quarter of fiscal 1996 from (1.9%) in the
same period last year. The decrease in operating income was attributable to
the restructuring charges and impairment of fixed assets write down as noted
above. The total of these items for the third quarter of 1996 was $2,127,302.
Excluding these items operating income would have been $190,633 or 1.4% of net
sales for the third quarter of 1996.
Operating income for the first nine months of fiscal 1996 decreased
522.1% to a loss of $2,228,871 from income of $527,991 in the first nine months
of fiscal 1995. Operating income as a percent of sales decreased to (5.0%) in
the first nine months of fiscal 1996 compared to 1.5% in the first nine months
of 1995. By excluding the restructuring charges noted above, the operating
loss would have been $101,569 or (0.2%) of net sales for the nine months ended
September 30, 1996.
Interest expense. Interest expense for the third quarter of 1996 was
$141,898 compared to $96,769 for the same period in fiscal 1995. The need to
fund the increase in inventory and accounts receivable levels with operating
debt was the primary reason for the increase in interest expense.
Interest expense for the first nine months of 1996 was $384,511
compared to $265,733 for the same period a year earlier. Borrowing due to
increases in inventory and accounts receivable levels is the primary reason for
the increase in interest expense.
Income tax expense. The estimate of the Company's effective income
tax rate for the third quarter of fiscal 1996 and 1995 was 34.6% and 32.3%,
respectively. This percentage fluctuates substantially because relatively
small dollar amounts tend to move the rate significantly as estimates change.
State tax credits generated from capital investment and job creation also
continue to affect state taxes because of the Company's location in a
state-designated "enterprise" zone.
The effective income tax rate for the first nine months of fiscal 1996
was 35.4% compared to 37.1% from the same period a year earlier. This
percentage fluctuates because relatively small dollar amounts tend to move the
rate
35
<PAGE> 44
significantly as estimates change and the Company is located in a state
enterprise zone which gives access to state tax credits for capital investment
and job creation.
1995 Compared to 1994
Net Sales. Net sales are net of discounts and are recognized upon
shipment of an order to a customer. Net sales in 1995 decreased 6.3% to
$49,220,070 from $52,541,842 in 1994. In 1995, three of the Company's largest
customers decreased orders by approximately $13.6 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. Although the loss of
revenues from these three customers was a significant factor in decreased sales
in 1995, the Company believes it will have lower customer concentrations in
1996. The top ten customers in 1995 accounted for 79.4% of total sales volume,
as compared to 90.2% 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 equals net sales less cost of goods sold,
which consists of material and direct and indirect overhead labor, fixed
manufacturing costs (primarily lease payments for, and depreciation of,
manufacturing equipment and facilities) and other manufacturing costs. Gross
profit in 1995 decreased 27.0% from 1994 to $3,894,721. 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 $743,579 to $1,716,841 in 1995
from $973,262 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA expense") consist primarily of non-manufacturing
salaries, sales commissions and other general expenses. SGA expense for 1995
increased by 25.2% over 1994 to $3,093,400. 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% under 1994 to $801,321. 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 56.1% 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 completed a sale-leaseback transaction in December of
1995. The Company used the proceeds of the sale leaseback transaction to
retire $3,310,000 of short term debt.
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
36
<PAGE> 45
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.
1994 Compared to 1993
Net Sales. Net sales are net of discounts and are recognized upon
shipment of an order to a customer. Net sales in 1994 increased 76.2% over
1993 to $52,541,842. The increase was primarily due to increased orders from
new and existing customers as a result of the Company's expanded capacity and
the general growth in the market for electronic manufacturing services.
Gross Profit. Gross profit equals net sales less cost of goods sold,
which consists of material and direct and indirect overhead labor, fixed
manufacturing costs (primarily lease payments for, and depreciation of,
manufacturing equipment and facilities) and other manufacturing costs. Gross
profit in 1994 increased 31.3% over 1993 to $5,418,776. Gross profit as a
percentage of net sales for 1994 was 10.3%, compared to 13.9% for 1993. The
decrease in gross profit as a percentage of net sales was attributable to two
factors. First, the increase in the percentage of net sales attributable to
sales of components in turnkey manufacturing tends to decrease gross profit as
a percentage of net sales. Second, the Company had increased expenses due to
expansion of its capacity, primarily depreciation of its new facility and
equipment, occupancy costs of its new facility and costs of hiring additional
manufacturing personnel. These new resources are not yet being used to full
capacity and have therefore decreased gross profit as a percentage of net
sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA expense") consist primarily of non-manufacturing
salaries, sales commissions and other general expenses. SGA expense for 1994
increased by 30.0% over 1993 to $2,395,164. The increase is primarily the
result of increased sales commissions and other selling costs and
administrative expenses of being a publicly-held company. As a percentage of
net sales, SGA expense decreased to 4.6% in 1994 from 6.2% in 1993.
Operating Income. As a result of the factors described above,
operating income in 1994 increased 32.3% over 1993 to $3,023,612. Operating
income as a percentage of net sales decreased from 7.7% in 1993 to 5.7% in
1994.
Interest Expense. Interest expense in 1994 decreased 25.9% from 1993
to $175,400. The decrease was attributable to the Company's repayment of
approximately $3 million of indebtedness in March 1994 from the proceeds of its
initial public offering. As discussed below under "Liquidity and Capital
Resources," the Company later borrowed $3.4 million to finance construction of
its new facility.
Income Tax Expense. The Company's effective income tax rate for 1994
was 35.2% compared to 36.2% for 1993. The Company's facilities are located in
a state enterprise zone, and its effective tax rate may vary based on state
credits received for capital expenditures and increases in the number of
employees. As sales and earnings increase, these credits will have a
relatively smaller effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, working capital totaled $8,182,490. Working
capital at December 31, 1995 was $9,867,843 compared to $6,744,318 at December
31, 1994. At December 31, 1993, prior to the Company's initial public
offering, working capital was $2,403,544. 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
$3,678,014 and retired short-term debt in the amount of $3,310,000 in December
1995. The subsequent decrease in working capital in the first nine months of
1996 is attributable primarily to the purchase of fixed assets and long-term
debt retirement.
Cash used in operations for the first nine months of 1996 was
$460,712. Cash used in operations was $933,589 in 1995 and $697,176 in 1994.
Cash provided from operations in 1993 was $814,237. Cash used to reduce
accounts payable was the key factor that resulted in the use of cash in 1996.
The increase in cash used in operations in 1995 is attributable primarily to
increases in accounts receivable and inventories. Accounts receivable
decreased 9.3% to
37
<PAGE> 46
$3,420,482 at September 30,1996 from $3,769,264 at September 30,1995. Accounts
receivable increased 29.1% to $4,982,450 at December 31, 1995 from $3,858,523
at December 31, 1994. A comparison of receivable turns (i.e. annualized sales
divided by current accounts receivable) for the third quarter of fiscal 1996
and the third quarter of fiscal 1995 is 15.9 and 12.4 turns, respectively.
Receivable turns for 1995 and 1994 were 9.9 and 13.6, respectively. Receivable
turns have decreased primarily because of decreases in orders from some
customers that were taking advantage of discounts and paying after 10 days.
These orders have been replaced with orders of other customers that are paying
primarily with terms of net 30 days. Inventories increased 24.9% to
$10,147,092 at September 30,1996 from $8,121,589 at September 30,1995.
Inventories increased 31.8% to $9,859,414 on December 31, 1995 from $7,479,374
on December 31, 1994. A comparison of inventory turns (i.e. annualized cost of
sales divided by current inventory) for the third quarter of fiscal 1996 and
1995 shows a decrease to 5.2 from 5.5, respectively. Inventory turns for 1995
and 1994 were 4.6 and 6.3, respectively. Inventory turns have decreased
primarily because of new projects that are being introduced. Inventory builds
in the early stages of new turnkey business because of new article approval
issues which sometimes create delays and slow down the turning of inventory
until the new assemblies are in full production.
The Company used cash of $2,125,812 in the first nine months of 1996.
The Company provided cash from investing activities of $1,265,525 in 1995,
compared to using cash of $9,035,395 in 1994 and $870,071 in 1993. The Company
used cash to purchase capital equipment totaling $2,135,969 in the first nine
months of 1996, compared with $2,231,860 in the same period last year. In 1995
the Company received cash from the sale of equipment primarily from the
sale-leaseback transaction mentioned above of $3,739,344 and purchased
additional equipment of $2,473,819 for net cash provided of $1,265,525. In
1994 capital equipment consisting primarily of manufacturing and computer
equipment in the amount of $5,346,016 was purchased. In addition, $3,689,379
was spent for the construction of a new manufacturing facility and an
additional parcel of land to allow for future expansion. The capital equipment
was purchased with proceeds from the Company's initial public offering.
On October 2, 1996, the Company renegotiated its revolving line of
credit in the amount of $10,000,000 with a maturity date of June 5, 1997. The
amount outstanding was $2,300,000 at September 30, 1996. Interest on
borrowings under this credit facility accrues at the Bank One Prime rate plus
.25% (8.5% at September 30, 1996). The credit facility is collateralized by
substantially all of the Company's assets, other than real estate. The loan
agreement from this facility contains restrictive covenants relating to capital
expenditures, borrowings and payment of dividends, and certain financial
statement ratios. The credit facility may be withdrawn/canceled at the bank's
option under certain conditions such as default or in the event the Company
experiences a material negative change in financial condition. The Company
also has a term loan that is secured by deeds of trust on both of the Company's
buildings and land. The term of the loan is seven years with a 20 year
amortization. Principal payments of $85,000 are semi-annual with monthly
payments of interest. The loan rate floats at the Citibank prime rate plus 1%
(9.25% at September 30, 1996) with a cap of 9.5%. The rate is adjusted
annually on September 15. The balance due on the loan was $3,060,000 at
September 30, 1996.
The Company has negotiated with Bank One an unsecured short term
bridge facility and an amendment to its revolving line of credit, each of which
is to be finalized prior to closing of the Merger and the Acquisition. The
amended line of credit would have substantially the same terms as the existing
line, except that the total amount available thereunder would be increased to
$15,000,000. The short term bridge facility would be in the amount of
$5,000,000, would be used to pay the cash portion of the consideration to be
paid in the Merger and the Acquisiton and would have a term of 120 days. The
Company is engaged in discussions for the issuance of convertible debt or
preferred stock, the proceeds of which would be used to repay the bridge
facility. Availability of the bridge facility is conditioned on the Company's
having received a third party commitment for purchase of the convertible debt
or preferred stock. If the Company is unable to borrow under the bridge
facility, the Company intends to borrow any amounts necessary to complete the
Merger and the Acquisition under its existing or amended revolving line of
credit.
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
operation. Although no assurance can be given that financing will be available
on terms acceptable to the Company, the Company may seek additional funds, from
time to time, through public or private debt or equity offerings, bank
borrowing, or leasing arrangements.
38
<PAGE> 47
CURRENT ELECTRONICS, INC.
RESULTS OF OPERATIONS
1996 Compared to 1995
Net Sales. Net sales are net of discounts and are recognized upon
shipment of an order to a customer. Net sales in 1996 increased 89.4% to
$32,520,438 from $17,169,805 in 1995. In 1996, the increase in revenues was
primarily the result of two factors. First, the CE Companies successfully won
turnkey manufacturing business from certain customers which resulted in higher
material sales. Second, two customers significantly increased orders during
the year. Credence Systems and ADC/Kentrox increased sales and contracted for
turnkey production which resulted in sales growth from $3.4 million in 1995 to
$16.4 million in 1996.
Gross Profit. Gross profit equals net sales less cost of goods sold,
which consists of material and direct and indirect overhead, labor, fixed
manufacturing costs and other variable manufacturing costs. Gross profit in
1996 increased $1,746,954 from $3,698,179 in 1995 to $5,445,133 in 1996, a
47.2% increase. Gross profit as a percentage of net sales for 1996 was 16.7% ,
compared to 21.5% in 1995. The increase in gross profit was a result of
increased sales and the resulting profitability on the revenues. The decrease
in gross profit percentage was the result of higher turnkey sales and the
resultant increase in lower margin material revenues. The gross margin can
fluctuate due to product mix and the difference in margin and profitability by
product and customer.
The CE Companies anticipate that they will experience increased
manufacturing costs in 1997 due to the transition to a new manufacturing
facility and forecasted increases in costs associated with revenue growth and
new manufacturing capacity. The CE Companies anticipate higher revenues for
the latter part of 1997, but believe that increased turnkey sales in 1997 will
create downward pressure on gross margins due to a higher percentage of lower
margin material sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA expense") consist primarily of non-manufacturing
salaries, sales costs, travel and other general expenses. SGA expense for 1996
increased by 41.3% over 1995 to $2,792,814. The increase is primarily the
result of increased costs in the sales and marketing area and new personnel in
the administrative area. Also, as a percentage of net sales, SGA expense
decreased to 8.6% in 1996 from 11.5% in 1995. The decrease in SGA expense as a
percentage of net sales was due to higher revenue levels in 1996.
Operating Income. As a result of the factors described above,
operating income in 1996 increased 54.1% over 1995 to $2,652,319. Operating
income as a percentage of net sales decreased from 10.0% in 1995 to 8.2% in
1996.
Interest Expense. Interest expense in 1996 decreased 21.7% from 1995
to $101,192. The decrease was attributable to lower borrowings during the
course of the year. The 1996 year-end balance sheet shows higher borrowings,
but this is attributable to end of year cash needs due to higher turnkey sales
and the financing of inventories. The company anticipates higher interest
expense in 1997 due to cash needs associated with business growth including the
financing of a new manufacturing facility and increased inventories due to
turnkey production.
Income Tax Expense. The CE Companies' effective income tax rate for
1996 was 29.4% compared to 29.5% for 1995. CEWI had elected to be taxed as an
S Corporation. Earnings and losses for federal tax purposes were included in
the personal income tax returns of the shareholders. Accordingly, there were
no provisions for income taxes or deferred taxes reflected in the accompanying
combined financial statements related to CEWI. CEI's effective tax rate of 33%
and 39% for fiscal 1996 and 1995, respectively, differed from the federal
statutory rate primarily due to state taxes and nondeductible officer life
insurance premiums. The 1996 effective rate was 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.
39
<PAGE> 48
1995 Compared to 1994
Net Sales. Net sales are net of discounts and are recognized upon
shipment of an order to a customer. Net sales in 1995 increased 55.1% over
1994 to $17,169,805. The increase was primarily due to increased orders from
new and existing customers and the acquisition of CEWI in Moses Lake,
Washington.
Gross Profit. Gross profit equals net sales less cost of goods sold,
which consists of material and direct and indirect overhead labor, fixed
manufacturing costs (primarily lease payments for, and depreciation of,
manufacturing equipment) and other manufacturing costs. Gross profit in 1995
increased 50.6% over 1994 to $3,698,179. Gross profit as a percentage of net
sales for 1995 was 21.5%, compared to 22.2% for 1994. Due to similar product
mix and customer profile, their was little change in gross profit percentage
from 1994 to 1995. During these time periods approximately half of the
Company's production was on a turnkey basis.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA expense") consist primarily of non-manufacturing
salaries, sales costs, travel and other general expenses. SGA expense for 1995
increased by 10.0% over 1994 to $1,976,702. The increase is primarily the
result of increased expenses due to the acquisition of CEWI in Moses Lake,
Washington. As a percentage of net sales, SGA expense decreased to 11.5% in
1995 from 16.2% in 1994.
Operating Income. As a result of the factors described above,
operating income in 1995 increased 161.5% over 1994 to $1,721,477. Operating
income as a percentage of net sales increased from 5.9% in 1994 to 10.0% in
1995.
Interest Expense. Interest expense in 1995 increased 104.9% from 1994
to $129,315. The increase was attributable to the Company's investment in
manufacturing equipment necessary for increased manufacturing demands from the
Company's customers.
Income Tax Expense. The CE Companies' effective income tax rate for
1995 was 29.5% compared to 33.7% for 1994. CEWI had elected to be taxed as an
S Corporation. Earnings and losses for federal tax purposes were included in
the personal income tax returns of the shareholders. Accordingly, there were
no provisions for income taxes or deferred taxes reflected in the accompanying
combined financial statements related to CEWI which was acquired in 1994.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, working capital totaled $2,943,866 compared to
$1,615,293 at September 30, 1995, an increase of $1,328,573 or 82.2%. The
increase in working capital from 1995 to 1996 is primarily attributable to
profitable operations and strong cash flow which resulted in increases to
current assets such as inventory, accounts receivable and cash while managing
slower growth in current liabilities.
Cash provided by operations in 1996 was $717,407 compared to
$1,093,824 in 1995. The decrease in cash provided by operations in 1996 is
primarily attributable to increases in accounts receivables and inventories.
Accounts receivable increased 28.1% to $1,929,142 at September 30, 1996 from
$1,506,049 at September 30, 1995. Receivable turns (i.e. net sales divided by
year-end accounts receivable) for 1996 and 1995 were 16.9 and 11.4,
respectively. Receivable turns have increased primarily because of increased
orders from some customers that are on shorter credit terms. Inventories
increased 105.6% to $3,826,074 on September 30, 1996 from $1,860,951 at
September 30, 1995. Inventory turns (i.e. annualized cost of sales divided by
year-end inventory) for 1996 and 1995 were 7.1 and 7.2, respectively.
Inventory turns have stayed relatively constant as volumes have risen.
The CE Companies used cash in investing activities of $811,843 in
1996, compared to using cash of $1,086,089 in 1995. The primary use of cash in
investing activities in both 1995 and 1996 was for purchase of manufacturing
equipment and funding of key man life insurance policies. In 1996, capital
equipment consisting primarily of manufacturing and computer equipment in the
amount of $768,867 was purchased. In 1995, $1,061,820 was spent on
manufacturing equipment. The capital equipment was purchased with corporate
cash flow and bank debt. The bank
40
<PAGE> 49
loans are secured by machinery and equipment and are personally guaranteed by
the shareholders of CEI. The terms of the loans vary in maturity dates from
1996 to 2001 and rates ranging from 7% to 9.5%.
At September 30, 1996, CEI had available a revolving line of
$1,200,000 with Wells Fargo Bank with interest payable at 1.0% 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 from the credit facilities contain restrictive covenants
relating to certain items such as borrowings, and payment of dividends. These
credit facilities may be withdrawn/canceled at the bank's option under certain
conditions such as default or in the event the Company experiences a material
negative change in financial condition.
The CE Companies have budgeted capital expenditures for 1997 of
approximately $2,400,000, intending to upgrade certain equipment used in their
manufacturing processes. Included in the capital equipment budget are items
such as surface mount production equipment, test equipment and other
manufacturing and information technology expenditures. The CE Companies also
plan to construct a new manufacturing facility to be financed with a long-term
debt instrument for approximately $4,500,000. The anticipated completion of
this facility will be at the end of 1997 to the beginning of 1998.
The CE Companies 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
operations. Although no assurance can be given that financing will be
available on acceptable terms, the CE Companies may seek additional funds, from
time to time, through public or private debt or equity offerings, bank
borrowing, or leasing arrangements.
UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information is
based upon the historical financial statements of Electronic Fab Technology
Corp. ("EFTC") and the historical combined financial statements of Current
Electronics, Inc. and Current Electronics (Washington), Inc. (collectively, the
"CE Companies").
The unaudited pro forma condensed balance sheet presents the combined
financial position of EFTC and the CE Companies as of September 30, 1996
assuming EFTC had completed a business combination with the CE Companies as of
that date using the purchase method of accounting. Accordingly, the combined
identifiable assets and liabilities of the CE Companies have been adjusted to
their estimated fair values based upon a preliminary purchase price of
approximately $10.3 million.
The unaudited condensed pro forma statements of operations for the
nine months and year ended September 30, 1996 and December 31, 1995,
respectively, assume the business combination occurred on January 1, 1995 and
include the historical operations of EFTC for those periods and the historical
operations of the CE Companies for the nine months and year ended June 30, 1996
and September 30, 1995, respectively, adjusted for the pro forma effects of the
business combination.
The following unaudited condensed pro forma financial information has
been prepared based upon assumptions deemed appropriate by EFTC 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.
41
<PAGE> 50
Electronic Fab Technology Corp.
Unaudited Pro Forma Condensed Balance Sheet
September 30, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
EFTC CE Companies Adjustments Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . $ 30,556 580,839 (4,900,000)(1) 611,395
4,900,000 (2)
Accounts receivable . . . . . . . 3,420,482 1,929,142 -- 5,349,624
Inventories . . . . . . . . . . . 10,147,092 3,826,074 -- 13,973,166
Income taxes receivable . . . . . 984,675 -- -- 984,675
Other current assets . . . . . . . 265,998 109,077 -- 375,075
------------ ------------ ------------ ------------
Total current assets . . . . 14,848,803 6,445,132 -- 21,293,935
Property, plant and equipment, net . 8,836,171 2,337,317 (476,351) 10,697,137
Goodwill . . . . . . . . . . . . . . -- -- 6,499,793 (1) 6,499,793
Other assets . . . . . . . . . . . . 45,323 140,201 -- (1) 185,524
------------ ------------ ------------ ------------
$ 23,730,297 8,922,650 6,023,442 38,676,389
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable . . . . . . . . . . $ 2,300,000 650,000 -- 2,950,000
Current portion of long-term debt 170,000 599,019 500,000 (2) 1,269,019
Accounts payable . . . . . . . . . 2,458,883 1,386,274 -- 3,845,157
Income taxes payable . . . . . . . -- 99,953 -- 99,953
Other current liabilities . . . . 1,737,430 766,020 -- 2,503,450
------------ ------------ ------------ ------------
Total current liabilities . . 6,666,313 3,501,266 500,000 10,667,579
Long-term debt, net of current portion 2,890,000 977,826 4,400,000 (2) 8,267,826
Deferred income taxes . . . . . . . . . 334,883 122,000 -- 456,883
------------ ------------ ------------ ------------
9,891,196 4,601,092 4,900,000 19,392,288
------------ ------------ ------------ ------------
Shareholders' equity:
Common stock and additional
paid-in capital . . . . . . . . . 10,226,607 33,000 5,445,000 (1) 15,671,607
(33,000)(1)
Retained earnings . . . . . . . . 3,612,494 4,288,558 (4,288,558)(1) 3,612,494
------------ ------------ ------------ ------------
13,839,101 4,321,558 1,123,442 19,284,101
------------ ------------ ------------ ------------
$23,730,297 8,922,650 6,023,442 38,676,389
============ ============ ============ ============
</TABLE>
See Notes to Unaudited Pro Forma Condensed Financial Information.
42
<PAGE> 51
Electronic Fab Technology Corp.
Unaudited Pro Forma Condensed Statement of Operations
Nine Months Ended September 30, 1996
<TABLE>
<CAPTION>
Pro Forma Pro Forma
EFTC CE Companies Adjustments Combined
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . $ 44,576,291 24,349,867 -- 68,926,158
Cost of goods sold . . . . . . . . . . 42,676,203 20,364,307 (30,000) (5) 63,010,510
------------ ---------- --------- ----------
Gross profit . . . . . . . . . . . 1,900,088 3,985,560 30,000 5,915,648
Selling, general and administrative 3,403,090 2,019,237 162,495 (4) 5,584,822
expenses . . . . . . . . . . . . . . .
Impairment of fixed assets . . . . . . 725,869 -- -- 725,869
------------ ---------- --------- ----------
Operating income (loss) . . . . . (2,228,871) 1,966,323 (132,495) (395,043)
------------ ---------- --------- ----------
Other income (expense):
Interest expense . . . . . . . . . (384,511) (93,727) (312,375) (3) (790,613)
Other income, net . . . . . . . . 17,089 37,308 -- 54,397
------------ ---------- --------- ----------
(367,422) (56,419) (312,375) (736,216)
------------ ---------- --------- ----------
Income (loss) before income
taxes . . . . . . . . . . . . . . (2,596,293) 1,909,904 (444,870) (1,131,259)
Income tax expense (benefit) . . . . . (920,203) 606,020 (56,465) (6) (370,648)
------------ ---------- --------- ----------
Net income (loss) . . . . . . $ (1,676,090) 1,303,884 (388,405) (760,611)
============ ========== ========= ==========
Loss per common share . . . . . . . . . $ (0.42) (.13) (1)
============ ==========
Weighted average common and common
equivalent shares outstanding . . . . . 3,968,417 1,980,000 (1) 5,948,417
============ ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Financial Information.
43
<PAGE> 52
Electronic Fab Technology Corp.
Unaudited Pro Forma Condensed Statement of Operations
Year Ended December 31, 1995
<TABLE>
<CAPTION>
Pro Forma Pro Forma
EFTC CE Companies Adjustments Combined
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . $ 49,220,070 17,169,805 -- 66,389,875
Cost of goods sold . . . . . . . . . . . 45,325,349 13,471,626 (40,000)(5) 58,756,975
------------- ----------- ---------- ----------
Gross profit . . . . . . . . . . 3,894,721 3,698,179 40,000 7,632,900
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . 3,093,400 1,976,702 216,660 (4) 5,286,762
------------- ----------- ---------- ----------
Operating income . . . . . . . 801,321 1,721,477 (176,660) 2,346,138
------------- ----------- ---------- ----------
Other income (expense):
Interest expense . . . . . . . (399,389) (129,315) (416,500)(3) (945,204)
Other income, net . . . . . . . 78,724 34,603 -- 113,327
------------- ----------- ---------- ----------
(320,665) (94,712) (416,500) (831,877)
------------- ----------- ---------- ----------
Income before income taxes . . 480,656 1,626,765 (593,160) 1,514,261
Income tax expense . . . . . . . . . . . 126,518 480,435 17,211 (6) 624,164
------------- ----------- ---------- ----------
Net income . . . . . . . . . . $ 354,138 1,146,330 (610,371) 890,097
============= =========== ========== ==========
Income per common share . . . . . . . . . $ .09 0.15(1)
============= ==========
Weighted average common and common
equivalent shares outstanding . . . . 3,962,261 1,980,000 (1) 5,942,261
============= ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Financial Information.
Electronic Fab Technology Corp.
Notes to Unaudited Pro Forma Condensed Financial Information
(A) BASIS OF PRESENTATION
On January 15, 1997, EFTC and CEI entered into the Merger Agreement
that provides for the merger of CEI with and into a newly formed subsidiary of
EFTC. Additionally, EFTC and the shareholders of CEWI entered into a the
Purchase Agreement that provides for the acquisition by EFTC of all of the
outstanding common stock of CEWI. The CE Companies are affiliates as a result
of common ownership. Under the terms of the Merger Agreement and the Purchase
Agreement, EFTC will pay approximately $4.9 million in cash and issue 1,980,000
shares of its common stock to the stockholders of the CE Companies. The Merger
and the Acquisition will both be 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 adjustments.
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<PAGE> 53
(B) PRO FORMA ADJUSTMENTS
The following pro forma adjustments have been made to the accompanying
pro forma condensed financial information:
1. To record goodwill in the amount of $6.5 million based upon the
allocation of the estimated $10.3 million ($4.9 million in cash
and 1,980,000 shares of Common Stock at $2.75 per share, based
upon an independent valuation) cost of the Merger and the
Acquisition and to eliminate the equity accounts of the CE
Companies. No allocation was made to leasehold improvements with
a historical book value of $476,351, which are expected to be
abandoned after consummation of the Merger and the Acquisition.
2. To record the borrowings for the Merger and the Acquisition of
$4.9 million.
3. To record interest expense on the borrowings for the Merger and
the Acquisition at an assumed interest rate of 8.5% per annum.
4. To record amortization of goodwill resulting from the Merger and
the Acquisition over a 30 year period.
5. Elimination of depreciation expense relating to certain leasehold
improvements that are expected to be abandoned after consummation
of the Merger and the Acquisition.
6. To record income tax expense for the taxable income of CEWI, an S
Corporation, net of the effect of the pro forma adjustments.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board believes that the Merger and the related transactions
provide an opportunity to fulfill its objective of growth through acquisition
and fits well with the Company's strategic plan and will result in: (i) giving
the Company geographic proximity to a flourishing high-mix market; (ii) the
integration of strong, energetic management teams from the CE Companies into
the Company, which will complement the Company's current management team;
(iii) overall strategic benefits that could lead to greater market recognition
of the Company as a high-mix, high-speed provider of manufacturing services;
(iv) strengthened operational performance; and (v) revenue growth and increased
profitability. THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE
FOR APPROVAL OF THE MERGER PROPOSAL.
In reaching its conclusion to recommend approval by the shareholders
of the Proposal, the Board considered management's discussion of a number of
factors, including the terms and conditions of the Management, the Purchase
Agreement and the transactions contemplated thereby, information with respect
to the financial condition, business, operations and prospects of the Company
and the CE Companies, on both an historical basis and a prospective basis,
including certain information reflecting the two companies on a pro forma
combined basis, potential synergies, improved operating efficiencies and
economies of scale that may result from the Merger and the Acquisition, and the
views and opinions of the Company's management and its financial advisors.
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<PAGE> 54
DESCRIPTION OF THE EMPLOYEE PLAN AMENDMENT
The Board of Directors of the Company has adopted an amendment to the
Company's Equity Incentive Plan (the "Employee Plan") to increase the number of
shares of Common Stock reserved for issuance under the Employee Plan from
325,000 to 995,000 to permit certain shares of Common Stock that are forfeited
or used to pay tax withholding or the option exercise price to again be used
for the grant of awards under the Plan and to increase the number of shares
subject to options that can be granted to any one employee from 100,000 to
300,000 shares. Adoption of the amendment also requires the approval of the
Company's shareholders.
REASONS FOR THE PROPOSED AMENDMENT
Of the 325,000 shares of Common Stock currently subject to the
Employee Plan, 92,300 shares remain available for use in future grants. The
Board believes that it is in the best interests of the Company to increase the
number of shares available for awards under the Employee Plan in order to take
into account the addition of key employees as a result of the Merger and the
Acquisition and to further facilitate the achievement of the goals of the
Employee Plan by providing additional shares for grants to induce new key
employees to join the Company, for grants to additional existing key employees
not previously participating in the Employee Plan or for additional grants to
existing key employees who currently participate in the Employee Plan. The
Board also believes that shares of Common Stock that become available under the
Employee Plan as a result of certain forfeitures or through use of shares of
Common Stock to pay tax withholding or the option exercise price should be
available for future grants under the Employee Plan.
The Board believes that the 92,300 shares of Common Stock available
for further grants under the Employee Plan and the additional 670,000 shares of
Common Stock that would be reserved upon adoption of the proposed amendment to
the Employee Plan are reasonable to achieve the goals of the Employee Plan in
light of the approximately 6,621,217 shares of Common Stock that would be
issued and outstanding on a fully diluted basis after adoption of the Employee
Plan Amendment and the Merger.
The benefits or amounts that will be received by executive officers
and employees under the Employee Plan are not determinable. The Company
granted options to purchase 145,200 of Common Stock under the Employee Plan in
1996.
DESCRIPTION OF THE EMPLOYEE PLAN
The Employee Plan provides for the grant of non-qualified stock
options, incentive stock options, stock appreciation rights, restricted stock,
stock units and other stock grants to key employees of the Company. Currently
a maximum of 325,000 shares of Common Stock may be subject to awards under the
Employee Plan; however, the Employee Plan Amendment raises that number to
995,000. The number of shares is subject to adjustment on account of stock
splits, stock dividends and other dilutive changes in the Common Stock. Shares
of Common Stock covered by unexercised non- qualified or incentive stock
options that expire, terminate or are canceled, together with shares of common
stock that are surrendered upon exercise of stock appreciation rights,
forfeited pursuant to a restricted stock grant or that are used to pay
withholding taxes or the option exercise price, will again be available for
option or grant under the Employee Plan.
Participation. The Employee Plan provides that awards may be made to
employees of the Company who are responsible for the Company's growth and
profitability. The Company currently considers all employees to be eligible
for grant of awards under the Employee Plan. As of December 31, 1996, the
Company had 398 employees. Directors who are not employees are not eligible.
Administration. The Employee Plan is administered by the Company's
Compensation Committee (the "Committee"). The Committee must be structured at
all times so that it satisfies the "non-employee director" requirement of Rule
16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act") and the
similar requirement of Section 162(m) of the Code. The Committee has the sole
discretion to determine the employees to whom awards may be granted under the
Employee Plan and the manner in which such awards will vest. Options, stock
appreciation rights,
46
<PAGE> 55
restricted stock and stock units are granted by the Committee to employees in
such numbers and at such times during the term of the Employee Plan as the
Committee shall determine, except that the maximum number of shares subject to
one or more options that can be granted during the term of the Employee Plan to
any employee is 300,000 shares of Common Stock, an increase from a maximum
number of 100,000 shares specified in the Employee Plan prior to giving effect
to the amendment. In granting options, stock appreciation rights, restricted
stock and stock units, the Committee will take into account such factors as it
may deem relevant in order to accomplish the Employee Plan's purposes,
including one or more of the following: the extent to which performance goals
have been met, the duties of the respective employees and their present and
potential contributions to the Company's success.
Exercise. The Committee determines the exercise price for each
option; however, options must have an exercise price that is at least equal to
the fair market value of the Common Stock on the date the option is granted (at
least equal to 110% of fair market value in the case of an incentive stock
option granted to an employee who owns Common Stock having more than 10% of the
voting power). An option holder may exercise an option by written notice and
payment of the exercise price in (i) cash or certified funds, (ii) by the
surrender of a number of shares of Common Stock already owned by the option
holder for at least six months with a fair market value equal to the exercise
price, or (iii) through a broker's transaction by directing the broker to sell
all or a portion of the Common Stock to pay the exercise price or make a loan
to the option holder to permit the option holder to pay the exercise price.
Option holders who are subject to the withholding of federal and state income
tax as a result of exercising an option may satisfy the income tax withholding
obligation through the withholding of a portion of the Common Stock to be
received upon exercise of the option. Options, stock appreciation rights,
stock units and restricted stock awards granted under the Employee Plan are not
transferable other than by will or by the laws of descent and distribution.
Change in Control. All awards granted under the Employee Plan shall
immediately vest upon any "change in control" of the Company. A "change in
control" occurs if (i) 30% or more of the Company's voting stock is acquired by
persons or entities without the approval of a majority of the Board unrelated
to the acquiror or (ii) individuals who were members of the Board at the
beginning of a 24-month period cease to make up at least two-thirds of the
Board at any time during that period, unless the election of the new members
was approved by a majority of the Board in office immediately prior to the
24-month period and of approved new members.
Amendment and Termination. The Board may amend the Employee Plan in
any respect at any time provided shareholder approval is obtained when
necessary or desirable, but no amendment can impair any option, stock
appreciation rights, awards or units previously granted or deprive an option
holder, without his or her consent, of any Common Stock previously acquired.
The Employee Plan will terminate on December 21, 2003 unless sooner terminated
by the Board.
Merger and Reorganization. Upon the occurrence of (i) the merger or
consolidation of the Company (other than a merger or consolidation in which the
Company is the continuing company and that does not result in any change in the
outstanding shares of Common Stock), (ii) the sale of all or substantially all
of the assets of the Company (other than a sale in which the Company continues
as a holding company of an entity that conducts the business formerly conducted
by the Company), or (iii) the dissolution or liquidation of the Company, all
outstanding options will terminate automatically when the event occurs if the
Company gives the option holders 30 days prior written notice of the event.
Notice is not required for a merger or consolidation or for a sale if the
Company, the successor, or the purchaser makes adequate provision for the
assumption of the outstanding options or the substitution of new options on
terms comparable to the outstanding options. When the notice is given, all
outstanding options fully vest and can be exercised prior to the event.
Federal Income Tax Consequences of Exercise of Options Under the
Employee Plan. When a non-qualified stock option is granted, there are no
income tax consequences for the option holder or the Company. When a
non-qualified stock option is exercised, in general, the option holder
recognizes compensation equal to the excess of the fair market value of the
Common Stock on the date of exercise over the exercise price. If, however, the
option holder exercises the non-qualified option within six months after it was
granted and if the sale of the Common Stock at a profit would subject the
option holder to liability under Section 16(b) of the Exchange Act ("Section
16(b)"), the option holder will recognize compensation income equal to the
excess of (i) the fair market value of the Common Stock on the earlier of the
date that is six months after the date of exercise or the date the option
holder can sell the Common Stock without
47
<PAGE> 56
Section 16(b) liability over (ii) the exercise price. The option holder can
make an election under section 83(b) of the Code to measure the compensation as
of the date the non-qualified option is exercised. The compensation recognized
by an employee is subject to income tax withholding. The Company is entitled
to a deduction equal to the compensation recognized by the option holder for
the Company's taxable year that ends with or within the taxable year in which
the option holder recognized the compensation, assuming the compensation
amounts satisfy the ordinary and necessary and reasonable compensation
requirements for deductibility.
When an incentive stock option is granted, there are no income tax
consequences for the option holder or the Company. When an incentive option is
exercised, the option holder does not recognize income and the Company does not
receive a deduction. The option holder, however, must treat the excess of the
fair market value of the Common Stock on the date of exercise over the exercise
price as an item of adjustment for purposes of the alternative minimum tax. If
the option holder makes a "disqualifying disposition" of the Common Stock
(described below) in the same taxable year the incentive stock option was
exercised, there are no alternative minimum tax consequences.
If the option holder disposes of the Common Stock after the option
holder has held the Common Stock for at least two years after the incentive
stock option was granted and one year after the incentive stock option was
exercised, the amount the option holder receives upon the disposition over the
exercise price is treated as long-term capital gain for the option holder. The
Company is not entitled to a deduction. If the option holder makes a
"disqualifying disposition" of the Common Stock by disposing of the Common
Stock before it has been held for a least two years after the date the
incentive option was granted and one year after the date the incentive option
was exercised, the option holder recognizes compensation income equal to the
excess of (i) the fair market value of the Common Stock on the date the
incentive option was exercised or, if less, the amount received on the
disposition over (ii) the exercise price. At present, the Company is not
required to withhold income or other taxes. The Company is entitled to a
deduction equal to the compensation recognized by the option holder for the
Company's taxable year that ends with or within the taxable year in which the
option holder recognized the compensation, assuming the compensation amounts
satisfy the ordinary and necessary and reasonable compensation requirements for
deductibility.
The Employee Plan provides that option holders are responsible for
making appropriate arrangements with the Company to provide for any additional
withholding amounts. Furthermore, the Company shall have no obligation to
deliver shares of Common Stock upon the exercise of any options, stock
appreciation rights, awards or units under the Employee Plan until all
applicable federal, state and local income and other tax withholding
requirements have been satisfied.
VOTE REQUIRED
To be adopted, the amendments to the Employee Plan must be approved by
the holders of a majority of the voting power of the outstanding shares of
Common Stock represented in person or by proxy and entitled to vote at the
Special Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE EMPLOYEE PLAN AMENDMENT.
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<PAGE> 57
DESCRIPTION OF THE NON-EMPLOYEE PLAN AMENDMENT
The Board of Directors of the Company has adopted an amendment to the
Company's Stock Option Plan for Non- Employee Directors (the "Non-Employee
Plan") to increase the number of shares of Common Stock reserved for issuance
under the Plan from 80,000 to 160,000 and to permit shares of Common Stock that
are used to pay the exercise price under an option or to again be used for
awards under the Plan. The Amendment also removes the formula option grant
provisions from the Non-Employee Plan and permits the full Board of Directors
to grant options to non-employee directors at such times, and in such amounts,
as they may determine in their discretion.
REASONS FOR THE PROPOSED AMENDMENT
The Non-Employee Plan currently provides for the grant of up to 80,000
options with respect to the Common Stock of the Company. The Board believes
that it is in the best interests of the Company to increase the number of
shares available for awards under the Non-Employee Plan in order to take
account of the additional directors that will join the Board as a result of the
Merger and Acquisition. The Board also believes that shares of Common Stock
that are used to pay the exercise price of an option should again be available
for awards under the Non-Employee Plan.
The Non-Employee Plan provides for a one-time grant of an option to
acquire 10,000 shares of Common Stock to each member of the Board who is not
also an employee of the Company (a "non-employee director"). At the time the
Non- Employee Plan was adopted, rules of the Securities and Exchange Commission
generally required that such plans contain an automatic formula grant
mechanism. The Securities and Exchange Commission has recently revised the
rules applicable to the grant of stock options to non-employee directors and
such rules no longer require the use of a fixed formula plan. The Board
believes that the flexibility to grant varying option awards to non-employee
directors will enhance the ability of the Company to attract qualified
individuals to serve on the Board and also believes that the use of a formula
option grant mechanism unduly restricts the flexibility of the Board to offer
incentives to directors of the Company.
The Board intends to grant options with respect to 6,000 shares of
Common Stock to the members of the Board expected to be elected as a result of
the Merger and to grant options with respect to 6,000 shares of Common Stock to
existing non-employee directors.
DESCRIPTION OF THE NON-EMPLOYEE PLAN
The Non-Employee Plan provides for the grant of options that are not
incentive options within the meaning of section 422 of the Code. The options
are nontransferable other than by will or by the laws of descent and
distribution. Options must be exercised no later than ten years after date of
grant.
A non-employee director may exercise an option by written notice and
payment of the exercise price in (i) cash or certified funds, (ii) by the
surrender of a number of shares of Common Stock already owned by the option
holder for at least 6 months with a fair market value equal to the exercise
price, or (iii) through a broker's transaction by directing the broker to sell
all or a portion of the Common Stock to pay the Company the exercise price or
make a loan to the option holder to permit the option holder to pay the
exercise price.
Vesting is accelerated upon a "change in control" of the Company. A
"change in control" occurs if (i) 30% or more of the Company's voting stock is
acquired by persons or entities without the approval of a majority of the Board
unrelated to the acquirer or (ii) individuals who were members of the Board at
the beginning of a 24-month period cease to make up at least two-thirds of the
Board at any time during that period, unless the election of the new members
was approved by a majority of the Board in office immediately prior to the
24-month period and of approved new members.
Federal Income Tax Consequences Under the Non-Employee Plan. When a
non-qualified stock option is granted, there are no income tax consequences for
the option holder or the Company. When a non-qualified stock option is
exercised, in general, the option holder recognizes self-employment income
equal to the excess of the fair market value of the Common Stock on the date of
exercise over the exercise price. However, if the option holder exercises the
non- qualified stock option within six months after the grant of the
non-qualified stock option and if the
49
<PAGE> 58
sale of the Common Stock at a profit would subject the option holder to
liability under Section 16(b), the option holder will recognize self-employment
income equal to the excess of (i) the fair market value of the Common Stock on
the earlier of the date that is six months after the date of exercise or the
date the option holder can sell the stock without Section 16(b) liability over
(ii) the exercise price. The option holder can make an election under Code
section 83(b) to measure the amount of income as of the date the non-qualified
stock option is exercised. The Company is entitled to a deduction equal to the
income recognized by the option holder for the Company's taxable year that ends
with or within the taxable year in which the option holder recognized the
income, assuming the amounts satisfy the ordinary and necessary and reasonable
compensation requirements for deductibility.
Pursuant to the provisions of the Non-Employee Plan as amended, the
Board will have the authority to grant options (a "Director's Option") to each
member of the Board who is not also an employee of the Company. Options will
be granted at such times, and pursuant to such terms (which must be consistent
with the provisions of the Non-Employee Plan) as the Board may determine in its
discretion. The Director's Options become exercisable with respect to 25% of
the shares covered thereby after the first anniversary of the effective date of
the grant and with respect to the remaining 75% in equal monthly increments
over the three year period thereafter.
The Board has adopted certain amendments to the Non-Employee Plan to
increase the number of shares available for issuance under the Non-Employee
Plan from 80,000 to 160,000 and to provide discretion to the Board with respect
to such grants. The number of shares covered by the Non-Employee Plan is
subject to adjustment on account of stock splits, stock dividends,
recapitalizations and other diluted changes in the Common Stock. Eleven
directors will be eligible to participate in the Non-Employee Plan upon closing
of the Merger and the election of Charles E. Hewitson, Gregory C. Hewitson and
Matthew J. Hewitson to the Board.
VOTE REQUIRED
To be adopted, the amendments to the Non-Employee Plan must be
approved by the holders of a majority of the voting power of the outstanding
shares of Common Stock represented in person or by proxy and entitled to vote
at the Special Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR
APPROVAL AND ADOPTION OF THE NON-EMPLOYEE PLAN AMENDMENT.
50
<PAGE> 59
SECURITY OWNERSHIP
The following table sets forth certain information as of January 17,
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 group:
<TABLE>
<CAPTION>
Pro Forma (1)
------------------------------------
Name of Beneficial Owner, Number of Shares of Percent of Number of Shares of Percent of
Director, or Executive Common Stock Common Common Stock Common
Officer Beneficially Owned Stock Beneficially Owned Stock
- ---------------------- ------------------ ------------- ------------------- -------------
<S> <C> <C> <C> <C>
Gerald J. Reid (2) 600,000 15.2% 600,000 10.1%
Lucille A. Reid (2) 600,000 15.2% 600,000 10.1%
Jack Calderon (3) 52,500 (10) 1.3% 52,500 *
Lloyd A. McConnell (3) 585,000 (11) 14.7% 585,000 9.9%
Stuart W. Fuhlendorf (3) 18,000 (12) * 18,000 *
James A. Doran (4) 6,840 (13) * 6,840 *
Richard L. Monfort (5) 13,640 (13) * 13,640 *
David W. Van Wert (6) 46,860 (13)(14) 1.0% 48,860 *
Darrayl Cannon (7) -- -- -- --
Robert K. McNamara (8) -- -- -- --
Masoud Shirazi (9) 29,440 (13) * 29,440 *
Charles Hewitson -- -- 660,000 11.1%
Gregory Hewitson -- -- 660,000 11.1%
Matthew Hewitson -- -- 660,000 11.1%
All directors and executive 1,952,280 (15) 49.2% 3,932,280 66.1%
officers as a group,
including persons named above
(11 persons)
</TABLE>
- ----------
* Less than one percent.
(1) After giving effect to the Merger, the Acquisition and the other
transactions to be completed in connection therewith.
(2) Mr. and Mrs. Reid's address is 2150 Reservoir Road, Greeley, Colorado
80631.
(3) Messrs. Calderon, McConnell and Fuhlendorf's address is Electronic Fab
Technology Corp., 7251 West 4th Street, Greeley, CO 80634.
(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 1515 Route 10, Parsippany, New Jersey 02054.
(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) Includes 50,000 shares of Common Stock subject to currently
exercisable, non-qualified options granted in connection with the
commencement of Mr. Calderon's employment.
(11) Includes 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.
(12) Includes 12,500 shares of Common Stock subject to currently
exercisable options granted under the Employee Plan and 3,600 shares
of Common Stock subject to options that are exercisable under the
Company's 1993 Stock Option Plan.
(13) Includes 6,140 shares of Common Stock that are subject to currently
exercisable options under the Company's Stock Option Plan for
Non-Employee Directors. As of March 17, 1997, options held by such
director for an additional 208 shares vest each month until March 1998
under such plan.
(14) Includes 37,720 shares of Common Stock owned jointly with Sally B. Van
Wert, Mr. Van Wert's wife.
(15) Of such 1,952,280 shares, as of January 17, 1997, 1,868,220 shares
were outstanding and held of record by directors and officers of the
Company.
51
<PAGE> 60
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding the
compensation paid in the last three fiscal years to each executive officer of
the Company who received total cash compensation of more than $100,000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Name and ------------------- Awards All Other
Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
- ------------------ ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Gerald J. Reid 1996 $104,723 $175 -0- $161,874.09(1)
Chairman of the Board 1995 $138,005 -0- -0- $2,711
1994 $131,793 -0- 20,000(2) $2,647
Jack Calderon 1996(3) $79,923 $-0- 200,000(4) $20,000 (5)
President and Chief
Executive Officer
</TABLE>
__________
(1) Includes the book value ($8,749.08) of an automobile previously owned by
the Company transferred to Mr. Reid upon the termination of his employment,
consulting fees ($35,416.70), fees in respect of Mr. Reid's service as
Chairman of the Board ($17,708.31) and a payment of $100,000 in connection
with the cessation of Mr. Reid's service as an employee of the Company.
See "--Employment Agreements."
(2) Options granted pursuant to the Employee Plan.
(3) Mr. Calderon has served as President and Chief Executive Officer of the
Company since August 1996.
(4) Non-qualified options granted in connection with the commencement of Mr.
Calderon's employment.
(5) Represents a lump-sum payment of $20,000 to defray moving expenses related
to Mr. Calderon's relocation to Greeley, Colorado in connection with the
commencement of his employment with the Company.
OPTIONS GRANTED
The following table sets forth information concerning options granted
in 1996 to the Company's executive officers named in the Summary Compensation
Table.
<TABLE>
<CAPTION>
Percent of Total
Options Granted to
Options Employees Exercise Price Expiration
Name Granted(#) During 1996 per Share Date
- ---- ---------- -------------------- ---------------- -----------
<S> <C> <C> <C> <C>
Gerald J. Reid -0- -- -- --
Jack Calderon 200,000 53.3% $4.125 (1)
</TABLE>
__________
(1) Vested exercisable options are exercisable up to 3 months following the
cessation of Mr. Calderon's employment with the Company other than
termination for cause.
52
<PAGE> 61
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table sets forth information concerning options
exercised in 1996 and outstanding options held by the Company's executive
officers named in the Summary Compensation Table as of December 31, 1996, the
end of the Company's last fiscal year.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on Value December 31, 1996(#) at December 31, 1996($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Gerald J. Reid -0- -0- -0-/-0- -0-/-0-
Jack Calderon -0- -0- 50,000/150,000 $25,000/$75,000
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
employees, including Messrs. Calderon, Fuhlendorf and Lawrence. Mr. Calderon's
agreement provides for him to be employed in his current position for a term of
two years ending July 1998. Mr. Fuhlendorf's and Mr. Lawrence's agreements
provide for them to be employed in their current capacities, each for a term of
three years ending in March 1997. The Company may terminate such employment
agreements with or without cause. In case of a termination without cause,
however, the Company must continue the terminated employee's salary and
benefits for a "Severance Period." The Severance Period is the greater of one
year (two years if a change in control of the Company has occurred) or the
remaining term of the employment agreement immediately prior to such
termination. The employment agreements also provide for the employee's salary
and benefits to continue for six months after termination of employment if the
employment agreement expires, the parties do not enter into a new employment
agreement and the employee does not remain an employee of the Company for at
least six months after such expiration. Mr. Calderon's Agreement also provides
that the Company shall grant to Mr. Calderon non- qualified stock options to
purchase 200,000 shares of Common Stock at an exercise price of $4.125. Of such
200,000 options, 50,000 vested upon the commencement of Mr. Calderon's
employment and the remaining options will vest and become exercisable (i) upon
the occurrence of a change in control, (ii) at the end of seven continuous
years of employment or (iii) in increments upon the Common Stock of the Company
achieving certain trading levels from $6.00 per share to $12.00 per share.
On August 23, 1996, the Company, in connection with the cessation of
Mr. Gerald J. Reid's services as an employee of the Company, entered into a
consulting agreement with Mr. Reid for a term of one year, renewable for three
additional one-year terms. The consulting agreement shall terminate (i) upon
the death of Mr. Reid, (ii) six months after such time as the closing sale
price of the Company's Common Stock is $8.00 per share or higher for a
specified period, (iii) thirty days after Mr. Reid or his wife sell 500,000 or
more shares of Common Stock and (iv) in the event of a change in control of the
Company. Pursuant to this agreement, he has received a payment of $100,000 and
an automobile previously owned by the Company. In addition, the Company will
pay Mr. Reid a retainer of $100,000 per year (subject to certain adjustments)
regardless of whether or not Mr. Reid performs any consulting services. The
portion of such retainer accrued in 1996 was $35,416.70. The consulting
agreement also provides that Mr. Reid will not compete with the Company,
directly or indirectly, by participating in the business of electronic contract
manufacturing during the term of the consulting agreement and for one year
thereafter.
DIRECTORS' COMPENSATION
Directors who are not also employees of the Company receive $1,000 for
each quarter in which the director attended a meeting in person and $1,000 per
additional Board or committee meeting attended in person, unless such committee
meeting is held in conjunction with a meeting of the full Board of Directors.
Directors who are also employees of the Company receive no additional
compensation for serving as directors. The Company reimburses all of its
directors for reasonable travel and out-of-pocket expenses in connection with
their attendance at meetings of the
53
<PAGE> 62
Board of Directors or committees of the Board. The Company has established a
Stock Option Plan for Non- Employee Directors. Under the Non-Employee Plan,
before its amendment, the Company has made initial grants of stock options to
purchase 10,000 shares of Common Stock to new directors. Pursuant to the
amended Non-Employee Plan, the Board may grant such options to non-employee
directors as it determines in its discretion. The Board has granted 6,000
additional options to existing directors and 6,000 options to the directors who
will join the Board as a result of the Merger, such grants to be effective upon
approval of the Non-Employee Plan Amendment at the Special Meeting and the
election of the directors who will join the Board as a result of the Merger.
Options granted under the Non-Employee Plan have an exercise price equal to the
fair market value of the Common Stock on the date of grant, are subject to
certain vesting periods and expire ten years following the date of grant.
COMPANY COMMON STOCK INFORMATION
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "EFTC". On January 15, 1997, there were approximately 200
shareholders of record of the Common Stock of the Company.
The following table sets forth the high and low sale prices for the
Company's Common Stock, as reported on the Nasdaq National Market, for the
quarters presented. Before March 3, 1994, the Company's Common Stock was not
publicly traded.
<TABLE>
<CAPTION>
1996 Sale Prices 1995 Sale Prices
---------------- ----------------
High Low High Low
---- --- ---- ----
<S> <C> <C> <C> <C>
First Quarter $5 1/8 $3 3/4 $7 5/8 $5
Second Quarter 4 7/8 3 5/8 8 1/4 5
Third Quarter 4 1/4 3 1/2 8 5 3/8
Fourth Quarter 4 7/8 2 3/4 5 7/8 3 1/2
</TABLE>
DIVIDENDS
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payments
of dividends, if any, on the Common Stock is within the discretion of the Board
of Directors and will depend on the Company's earnings, capital requirements,
financial condition and other relevant factors. The Company's loan agreements
prohibit payment of dividends without the lender's consent.
INDEPENDENT ACCOUNTANTS
A representative of KPMG Peat Marwick LLP, the Company's independent
public accountants, is expected to be present at the Special Meeting and will
be available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
The Company will hold its 1997 Annual Meeting on May 28, 1997. Any
proposal by a shareholder intended to be presented at the 1998 annual meeting
of shareholders must be received by the Company on or before December 19, 1997
to be included in the proxy materials of the Company relating to such Meeting.
54
<PAGE> 63
OTHER BUSINESS
The Company does not anticipate that any other matters will be brought
before the Meeting. However, if any additional matters shall properly come
before the Meeting, it is intended that the persons authorized under proxies
may, in the absence of instructions to the contrary, vote or act thereon in
accordance with their best judgment.
BY THE BOARD OF DIRECTORS
/s/ LLOYD A. MCCONNELL
Lloyd A. McConnell
Secretary
Greeley, Colorado
February 11, 1997
55
<PAGE> 64
INDEX TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ELECTRONIC FAB TECHNOLOGY CORP.
<S> <C>
INDEPENDENT AUDITORS' REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
BALANCE SHEETS - September 30, 1996 (unaudited), December 31, 1995 and 1994 . . . . . . . . . . . F-2
STATEMENTS OF OPERATIONS - Nine Months Ended September 30, 1996 and 1995 (Unaudited) and
Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . F-4
STATEMENTS OF SHAREHOLDERS' EQUITY - Nine Months Ended September 30, 1996
(Unaudited) and Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . F-5
STATEMENTS OF CASH FLOWS - Nine Months Ended September 30, 1996 and 1995 (Unaudited)
and Years Ended December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . F-7
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
CURRENT ELECTRONICS, INC. AND CURRENT ELECTRONICS (WASHINGTON), INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-17
COMBINED BALANCE SHEETS - September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . F-18
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS - Years Ended September 30, 1996,
1995 and 1994 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19
COMBINED STATEMENTS OF CASH FLOWS - Years Ended September 30, 1996, 1995 and
1994 (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-20
NOTES TO COMBINED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-21
</TABLE>
56
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Electronic Fab Technology Corp.:
We have audited the accompanying balance sheets of Electronic Fab Technology
Corp. as of December 31, 1995 and 1994, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Electronic Fab Technology
Corp. as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1995, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Denver, Colorado
January 22, 1996
F-1
<PAGE> 66
ELECTRONIC FAB TECHNOLOGY CORP.
BALANCE SHEETS - SEPTEMBER 30, 1996 (UNAUDITED) and
DECEMBER 31, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS (NOTE 3)
- ------ ----- --
September 30,
1996
(Unaudited) 1995 1994
-------------- ---------- ----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . $ 30,556 481,086 153,483
Trade receivables (less allowance for doubtful accounts
of $20,000) . . . . . . . . . . . . . . . . . . . . . 3,420,482 4,982,450 3,858,523
Inventories (note 2) . . . . . . . . . . . . . . . . . . 10,147,092 9,859,414 7,479,374
Income taxes receivable . . . . . . . . . . . . . . . . . 984,675 74,922 64,655
Deferred income taxes (note 6) . . . . . . . . . . . . . 133,918 145,538 85,847
Prepaid expenses and other current assets . . . . . . . . 132,080 382,928 49,467
-------------- ---------- ----------
Total current assets . . . . . . . . . . 14,848,803 15,926,338 11,691,349
-------------- ---------- ----------
Property, plant and equipment (note 4):
Land . . . . . . . . . . . . . . . . . . . . . . . . . . 662,098 662,098 662,098
Building . . . . . . . . . . . . . . . . . . . . . . . . 4,889,467 4,874,571 4,779,049
Machinery and equipment . . . . . . . . . . . . . . . . . 6,013,333 5,870,194 8,395,468
Furniture and fixtures . . . . . . . . . . . . . . . . . 1,664,564 1,433,113 1,043,098
-------------- ---------- ----------
13,229,462 12,839,976 14,879,713
Less accumulated depreciation . . . . . . . . . . . . . . 4,393,291 3,949,163 3,162,155
-------------- ---------- ----------
Property, plant and equipment, net . . . 8,836,171 8,890,813 11,717,558
-------------- ---------- ----------
Cash surrender value of life insurance . . . . . . . . . . . . - - 36,248
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 45,323 167,148 33,929
-------------- ---------- ----------
$ 23,730,297 24,984,299 23,479,084
============== ========== ==========
</TABLE>
(Continued)
F-2
<PAGE> 67
ELECTRONIC FAB TECHNOLOGY CORP.
BALANCE SHEETS, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- ----------- --- ------------- ------
September 30,
1996
(Unaudited) 1995 1994
----------- ---- ----
<S> <C> <C> <C>
Current liabilities:
Note payable (note 3) . . . . . . . . . . . . . . . . $ 2,300,000 - -
Accounts payable . . . . . . . . . . . . . . . . . . . 2,458,883 4,986,757 3,606,645
Accrued compensation . . . . . . . . . . . . . . . . . 700,568 529,636 813,788
Other accrued expenses . . . . . . . . . . . . . . . . 1,036,862 372,102 356,598
Current portion of long-term debt (note 4) . . . . . . 170,000 170,000 170,000
------------- ---------- ----------
Total current liabilities . . . . . . . . . . 6,666,313 6,058,495 4,947,031
------------- ---------- ----------
Long-term debt, net of current portion (note 4) . . . . . . 2,890,000 3,060,000 3,230,000
Deferred income taxes (note 6) . . . . . . . . . . . . . . 334,883 356,606 312,660
Shareholders' equity: . . . . . . . . . . . . . . . . . . .
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 3,942,660, 3,940,860
and 3,891,110 shares, respectively . . . . . . 39,427 39,409 38,911
Additional paid-in capital . . . . . . . . . . . . . . 10,187,180 10,181,204 10,016,035
Retained earnings . . . . . . . . . . . . . . . . . . 3,612,494 5,288,585 4,934,447
------------- ---------- ----------
Total shareholders' equity . . . . . . . . . . 13,839,101 15,509,198 14,989,393
------------- ---------- ----------
Commitments and contingencies (notes 5 and 10)
$ 23,730,297 24,984,299 23,479,084
============= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 68
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF OPERATIONS-NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30, Year Ended December 31,
1996 1995 ----------------------------------------
(Unaudited) (Unaudited) 1995 1994 1993
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . . . $44,576,291 $36,140,147 49,220,070 52,541,842 29,816,626
Cost of goods sold . . . . . . . . . . . 42,676,203 33,253,580 45,325,349 47,123,066 25,688,263
----------- ----------- ---------- ---------- ----------
Gross profit . . . . . . . . . . . 1,900,088 2,886,567 3,894,721 5,418,776 4,128,363
Selling, general and administrative
expenses . . . . . . . . . . . . . 3,403,090 2,358,576 3,093,400 2,395,164 1,842,442
Impairment of fixed assets 725,869 - - - -
----------- ----------- ---------- ---------- ----------
Operating income (loss) (2,228,871) 527,991 801,321 3,023,612 2,285,921
----------- ----------- ---------- ---------- ----------
Other income (expense):
Interest expense . . . . . . . . . . (384,511) (265,733) (399,389) (175,400) (236,917)
Interest income . . . . . . . . . . - - 3,700 78,933 -
Gain (loss) on sale of
assets . . . . . . . . . . . . . . (12,723) 51,500 49,533 - -
Other, net . . . . . . . . . . . . 29,812 22,638 25,491 31,187 (11,723)
----------- ----------- ---------- ---------- ----------
(367,422) (191,595) (320,665) (65,280) (248,640)
----------- ----------- ---------- ---------- ----------
Income (loss) before
income taxes . . . . . . . . . . . (2,596,293) 336,396 480,656 2,958,332 2,037,281
Income tax expense (benefit)
(note 6) . . . . . . . . . . . . . . (920,203) 124,759 126,518 1,041,415 736,612
----------- ----------- ---------- ---------- ----------
Net income (loss) . . . . . . . . . ($1,676,090) 211,637 354,138 1,916,917 1,300,669
=========== =========== ========== ========== ==========
Income (loss) per share . . . . . . . . . ($0.42) 0.05 0.09 0.53 0.52
===== ==== ==== ==== ====
Weighted average shares outstanding 3,968,417 3,968,417 3,962,261 3,626,845 2,483,000
=========== =========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 69
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY - NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common stock
----------- Additional paid-in
Shares Amount capital
------ ------ -------
<S> <C> <C> <C>
BALANCE, 2,364,000 $ 23,640 499,961
JANUARY 1, 1993
Treasury stock returned in
recision of prior
transaction (note 9) - - -
Stock options exercised 4,500 45 5,355
Net income - - -
--------- -------- ----------
BALANCE, 2,368,500 23,685 505,316
DECEMBER 31, 1993
Initial public offering, net
of costs of $1,320,749 1,419,660 14,197 9,312,700
Stock options exercised 102,950 1,029 198,019
Net income - - -
--------- -------- ----------
BALANCE, 3,891,110 38,911 10,016,035
DECEMBER 31, 1994
Stock options exercised 49,750 498 165,169
Net income - - -
--------- -------- ----------
BALANCE,
DECEMBER 31, 1995 3,940,860 $ 39,409 10,181,204
--------- -------- ----------
<CAPTION>
Treasury Stock Total
-------------- Retained shareholders'
Shares Amount earnings equity
------ ------ -------- ------
<S> <C> <C> <C> <C>
BALANCE, (90,000) $(150,000) 1,716,861 2,090,462
JANUARY 1, 1993
Treasury stock returned in
recision of prior
transaction (note 9) 90,000 150,000 - 150,000
Stock options exercised - - - 5,400
Net income - - 1,300,669 1,300,669
------- --------- --------- ---------
BALANCE, - - 3,017,530 3,546,531
DECEMBER 31, 1993
Initial public offering, net
of costs of $1,320,749 - - - 9,326,897
Stock options exercised - - - 199,048
Net income - - 1,916,917 1,916,917
------- --------- --------- ---------
BALANCE, - - 4,934,447 14,989,393
DECEMBER 31, 1994
Stock options exercised - - - 165,667
Net income - - 354,138 354,138
------- --------- --------- ---------
BALANCE,
DECEMBER 31, 1995 - $ - 5,288,585 15,509,198
------- --------- --------- ----------
</TABLE>
(Continued)
F-5
<PAGE> 70
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common stock
------------ Additional paid-in
Shares Amount capital
------ ------ -------
<S> <C> <C> <C>
Stock options exercised 1,800 $ 18 5,976
Net loss - - -
---------- -------- -----------
BALANCE,
SEPTEMBER 30, 1996 3,942,660 $ 39,427 10,187,180
========= ======== ==========
<CAPTION>
Treasury Stock Total
-------- ----- Retained shareholders'
Shares Amount earnings equity
------ ------ -------- ------
<S> <C> <C> <C> <C>
Stock options exercised - $ - 5,994
Net loss - - (1,676,090) (1,676,090)
-------- ------ ---------- ---------
BALANCE,
SEPTEMBER 30, 1996 - $ - 3,612,495 13,839,102
======== ====== ========== =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 71
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($1,676,090) 211,637
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 999,454 1,301,748
Deferred income tax expense (benefit) (10,103) 300,423
Gain (loss) on sale of assets 1,181,000 -
Deferred gain on sale leaseback - -
Changes in operating assets and liabilities:
Trade receivables 1,561,968 89,259
Inventories (287,678) (642,215)
Income taxes receivable (909,753) (328,193)
Prepaid expenses and other current assets 250,848 (230,549)
Cash surrender value of life insurance and other 121,824 (95,014)
assets
Accounts payable and accrued expenses (1,692,182) (130,657)
---------- ---------
Net cash provided by (used in) operating
activities (460,712) 476,439
---------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,135,969) (2,231,860)
Proceeds from sale of equipment 10,157 -
Principal payments on notes receivable - -
Net cash provided by (used in) investing
activities (2,125,812) (2,231,860)
---------- ----------
Cash flows from financing activities:
Stock options exercised 5,994 165,667
Issuance of common stock - -
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) 354,138 1,916,917 1,300,669
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,716,841 973,262 660,211
Deferred income tax expense (benefit) (15,745) 121,385 54,980
Gain (loss) on sale of assets (49,533) - -
Deferred gain on sale leaseback (106,088) - -
Changes in operating assets and liabilities:
Trade receivables (1,123,927) (1,378,102) (907,649)
Inventories (2,380,040) (2,839,405) (3,192,787)
Income taxes receivable (10,267) (64,655) 86,433
Prepaid expenses and other current assets (333,461) (302) (47,658)
Cash surrender value of life insurance and other
assets (96,971) 147,640 (156,763)
Accounts payable and accrued expenses 1,111,464 426,084 3,016,801
--------- ---------- ---------
Net cash provided by (used in) operating
activities (933,589) (697,176) 814,237
--------- ---------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,473,819) (9,035,395) (889,426)
Proceeds from sale of equipment 3,739,344 - -
Principal payments on notes receivable - - 19,405
--------- ---------- ---------
Net cash provided by (used in) investing
activities 1,265,525 (9,035,395) (870,021)
--------- ---------- ---------
Cash flows from financing activities:
Stock options exercised 165,667 199,048 5,400
Issuance of common stock - 9,326,897 -
</TABLE>
(Continued)
F-7
<PAGE> 72
ELECTRONIC FAB TECHNOLOGY CORP.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
September 30, September 30,
1996 1995
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
Borrowings (payments) on note payable, net 2,300,000 1,625,000
Proceeds from long-term debt - -
Principal payments on long-term debt (170,000) (170,000)
------------ ---------
Net cash provided by (used in) financing activities 2,135,994 1,620,667
------------ ---------
Increase (decrease) in cash and cash equivalents (450,530) (134,754)
Cash and cash equivalents:
Beginning of year 481,086 153,483
------------ ---------
End of year $ 30,556 18,729
============ =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 374,960 257,735
============ =========
Income taxes paid (refunded), net $ 12,728 152,530
============ =========
Noncash investing and financing activities:
Recision of subordinated debentures in exchange for
90,000 shares of Company common stock $ - -
============ =========
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Borrowings (payments) on note payable, net - (300,000) 120,000
Proceeds from long-term debt - 3,400,000 3,835,000
Principal payments on long-term debt (170,000) (2,783,770) (3,901,079)
-------- ---------- ----------
Net cash provided by (used in) financing activities (4,333) 9,842,175 59,321
-------- ---------- ----------
Increase (decrease) in cash and cash equivalents 327,603 109,604 3,537
Cash and cash equivalents:
Beginning of year 153,483 43,879 40,342
-------- ---------- ----------
End of year 481,086 153,483 43,879
======== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 387,045 238,884 238,349
======== ========== ==========
Income taxes paid (refunded), net 152,530 1,596,475 (16,591)
======== ========== ==========
Noncash investing and financing activities:
Recision of subordinated debentures in exchange for
90,000 shares of Company common stock - - (150,000)
======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 73
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 AND 1994
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF BUSINESS
Electronic Fab Technology Corp. (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
predominantly in the Colorado/Rocky Mountain region. 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.
(b) SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments
with original maturities of three months or less.
INVENTORIES
Inventories are stated at the lower of average cost or market,
using weighted average basis.
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 using
estimated useful lives of 31 to 39 years for buildings, and 5
to 10 years for furniture and fixtures and machinery and
equipment. The Company capitalizes as machinery and
equipment, the cost of purchased software and the external
costs associated with customizing that software. Related
training costs and internal costs are expensed as incurred.
Depreciation is computed using the straight-line method using
an estimated useful life of 5 years. When property, plant and
equipment is sold or otherwise disposed of, the related cost
and accumulated depreciation are removed from the respective
accounts and any gain or loss realized on disposition is
reflected in earnings.
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 at the time of shipment of an
order to a customer.
F-9
<PAGE> 74
ELECTRONIC FAB TECHNOLOGY CORP.
Notes to Financial Statements (Continued)
INCOME PER SHARE
Income per share is computed on the basis of weighted average
number of shares outstanding during the year and, if material,
common equivalent shares. Common equivalent shares consist of
stock options, determined using the treasury stock method.
However, all common and common equivalent shares issued at
prices below the then anticipated public offering price during
the 12-month period prior to the Company's initial public
offering on March 3, 1994, were included in the calculation
for 1993 as if they were outstanding for all of 1993 (using
the treasury stock method and the then anticipated initial
public offering price).
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(c) UNAUDITED INTERIM FINANCIAL STATEMENTS AND NOTES
The financial statements as of September 30, 1996 and for the
nine months ended September 30, 1996 and 1995 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 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, 1996
are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1996 December 31,
---- ------------
(Unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
Purchased parts and completed subassemblies $ 7,993,503 8,051,648 6,555,210
Work-in-process 2,153,589 1,807,766 924,164
------------ --------- ---------
$ 10,147,092 9,859,414 7,479,374
============ ========= =========
</TABLE>
(3) NOTES PAYABLE
The Company has a revolving line of credit with a bank which provides
for borrowings up to the lesser of $7,000,000 or the borrowing base,
as defined in the revolving line of credit agreement. At December 31,
1995, the borrowing base exceeded $7,000,000. The line of credit is
secured by assets including inventories, trade receivables, furniture,
fixtures, machinery and equipment. Interest is at the bank's prime
rate (9% at December 31, 1995) plus .25%. The balance outstanding as
of September 30, 1996 was $2,300,000. There
F-10
<PAGE> 75
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
were no borrowings outstanding on the line of credit at December 31,
1995 or 1994. The Company renewed the line of credit on October 2,
1996 in the amount of $10,000,000 with a maturity date of June 5, 1997
at the Bank One prime rate plus 0.25% (8.5% at September 30, 1996).
The Company also had a $3,000,000 term note available with the bank,
which is cross-collateralized with the revolving line of credit.
There were no borrowings outstanding on the term facility at September
30, 1996, December 31, 1995 or 1994. This note was cancelled upon the
renewal of the $10,000,000 line of credit on October 2, 1996 as noted
above.
The revolving line of credit and term note contain restrictive
covenants relating to capital expenditures, borrowing, and payment of
dividends. These credit facilities may be withdrawn/cancelled at the
bank's option under certain conditions such as default or in the event
the Company experiences a material negative change in financial
condition.
(4) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 -----------
----
(Unaudited) 1995 1994
---- ----
<S> <C> <C> <C>
Note payable to a bank with interest at 1% above
Citibank's prime rate adjusted annually, initial rate
of 7.25% through September 15, 1995, and a rate of
9.25% at September 30, 1996 and December 31, 1995.
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 $ 3,060,000 3,230,000 3,400,000
Less current maturities 170,000 170,000 170,000
----------- --------- --------
Long-term debt, net of current portion $ 2,890,000 3,060,000 3,230,000
=========== ========= =========
</TABLE>
Annual maturities of long-term debt are as follows at December 31,
1995:
<TABLE>
<S> <C>
1996 $ 170,000
1997 170,000
1998 170,000
1999 170,000
2000 170,000
Thereafter 2,380,000
-----------
$ 3,230,000
===========
</TABLE>
This note payable may be withdrawn/cancelled at the bank's option
under certain conditions such as default or in the event the Company
experiences a material negative change in financial condition.
F-11
<PAGE> 76
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(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 $934,200, $342,500, $578,958, $736,153,
and $417,382 for the nine months ended September 30, 1996 and 1995 and
years ended December 31, 1995, 1994 and 1993, respectively.
At December 31, 1995, future minimum lease payments for operating
leases are as follows:
<TABLE>
<S> <C>
1996 $ 1,164,540
1997 1,144,880
1998 1,083,723
1999 980,488
2000 686,069
Thereafter 820,129
-------
Total future minimum lease payments $ 5,879,829
=========
</TABLE>
(6) INCOME TAXES
The current and deferred components of income tax expense (benefit)
are as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------- ----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal . . . . . . . $ (779,180) (152,224) 142,263 880,392 629,715
State . . . . . . . . (130,920) (23,438) - 39,638 51,917
----------- -------- ------- ------- -------
(910,100) (175,662) 142,263 920,030 681,632
----------- -------- ------- ------- -------
Deferred:
Federal . . . . . . . (8,749) 273,823 (13,635) 105,115 47,609
State . . . . . . . . (1,354) 26,598 (2,110) 16,270 7,371
----------- -------- ------- ------- -------
(10,103) 300,421 (15,745) 121,385 54,980
----------- -------- ------- ------- -------
$ (920,203) 124,759 126,518 1,041,415 736,612
=========== ======= ======= ========= =======
</TABLE>
F-12
<PAGE> 77
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of income tax expense at the statutory rate
to income tax expense at the Company's effective rate is as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------- -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Computed tax at the expected
statutory rate of 34% . . . . . . $(882,740) 114,375 163,423 1,005,833 692,676
Increase (reduction) in income
taxes resulting from:
Research and development tax
credits - - (40,000) - -
State tax, net of federal
benefit and state tax
credits . . . . . . . . . . . (30,896) 4,003 (1,392) 36,900 39,131
Other, net . . . . . . . . . . (6,567) 6,351 4,487 (1,318) 4,805
--------- ------- ------- --------- -------
Income tax expense . . . . $(920,203) 124,729 126,518 1,041,415 736,612
========= ======= ======== ========= =======
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
September 30, ------------
1996 1995 1994
---- ---- ----
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Accrued vacation . . . . . . . . . . . . . . . . . . $ 75,317 83,375 69,740
Allowance for doubtful accounts . . . . . . . . . . . 7,460 7,460 7,460
Deferred gain on sale - leaseback . . . . . . . . . . 37,779 39,571 -
Differences between inventories for
financial statements and income tax
purposes. . . . . . . . . . . . . . . . . . . . . . 13,362 15,132 8,647
----------- ------- -------
Total gross deferred tax assets - current . . . 133,918 145,538 85,847
Non-current deferred tax liability - (334,883) (356,606) (312,660)
----------- ------- -------
accelerated depreciation . . . . . . . . . . . . .
Net deferred tax liability . . . . . . . . . . $ (200,965) (211,068) (226,813)
=========== ======= =======
</TABLE>
Management believes that it is more likely than not that the results
of future operations will generate sufficient taxable income to
realize the deferred tax assets.
(7) STOCK OPTIONS
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
F-13
<PAGE> 78
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 250,000. The Non-Employee Directors Plan provides for a
one-time grant of an option to acquire 5,000 shares of common stock to
each member of the Board of Directors who is not also an employee.
This plan was amended to increase the number of shares available under
this plan to 80,000 shares. The Company granted 200,000 executive
non-qualified stock options to the Company's CEO in August 1996.
The following summarizes activity of the plans for the three years and
nine months ended September 30, 1996:
<TABLE>
<CAPTION>
Number of Average price
options per share
------- ---------
<S> <C> <C>
Balance, December 31, 1992 . . . . . . . . . . 72,000 $ 1.20
Granted - 1993 . . . . . . . . . . . . . 180,000 3.33
Exercised - 1993 . . . . . . . . . . . (4,500) 1.20
-------
Balance, December 31, 1993 . . . . . . . . . . 247,500 2.75
Granted - 1994 . . . . . . . . . . . . . 169,000 7.74
Exercised - 1994 . . . . . . . . . . . (102,950) 1.93
-------
Balance, December 31, 1994 . . . . . . . . . . 313,550 5.11
Granted - 1995 . . . . . . . . . . . . . 69,500 5.30
Exercised - 1995 . . . . . . . . . . . . (49,750) 3.33
Canceled - 1995 . . . . . . . . . . . . (70,600) 6.37
-------
Balance, December 31, 1995 . . . . . . . . . . 262,700 5.87
Granted - 1996 . . . . . . . . . . . . 375,200 4.04
Exercised - 1996 . . . . . . . . . . . (1,800) 3.33
Canceled - 1996 . . . . . . . . . (75,600) 6.64
-------
Balance, September 30, 1996 . . . . . . . . . . 560,500 4.65
=======
At September 30, 1996:
Exerciseable . . . . . . . . . . . . . 147,080 5.17
=======
Available for future grants . . . . . . 92,300
=======
</TABLE>
(8) EMPLOYEE BENEFIT PLANS
During 1990, the Company established a 401(k) Savings Plan covering
substantially all employees. 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, 1996 and 1995 and the years ended 1995, 1994 and 1993,
contributions from the Company to the Plan were approximately $84,800,
$82,700, $106,000, $90,000 and $83,000, respectively.
F-14
<PAGE> 79
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company also maintains a Profit and Gain Sharing Plan by which a
percentage of net income before taxes is allocated to the plan.
During the nine months ended September 30, 1996 and 1995 and the years
ended 1995, 1994 and 1993, contributions from the Company to the plan
were approximately $-0-, $72,100, $97,150, $487,000 and $423,000,
respectively.
(9) TRANSACTIONS WITH RELATED PARTIES
In May 1992, the Company issued $450,000 in principal amount of 9%
subordinated debentures due in 1995. Gerald Reid, Lucille Reid and
Lloyd A. McConnell, who are directors, officers, and substantial
shareholders of the Company, each acquired $50,000 principal amount of
the debentures from the Company in exchange for 30,000 shares of
common stock. In addition, trustees of retirement plans for David W.
Van Wert and Masoud Shirazi, both of whom are directors of the
Company, each purchased $50,000 of the debentures for cash. Richard
L. Monfort, who was not a director of the Company at the time of the
transaction, but has since been elected as a director, purchased a
debenture of $100,000 in principal amount. The remaining $100,000 of
the debentures were issued for cash to persons who are not officers,
directors or shareholders of the Company. In June 1993, the Company,
Mr. Reid, Mrs. Reid and Mr. McConnell rescinded the transaction with
respect to the $150,000 of debentures issued after the parties
determined that the common stock had been incorrectly valued in the
original transaction. The Company believes that there was no
significant difference in the value of the common stock between the
initial issuance of the debentures and the rescission. The remainder
of the debentures were paid in full in March 1994.
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. Richard Monfort, a director of the Company, is
the brother of a 50% partner of Tech Center Properties.
(10) BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in the electronics industry, in the electronic
manufacturing services segment. The Company's customers are located
in the United States, primarily in the Colorado/Rocky Mountain region.
Its 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. It is possible that customers may experience
adverse financial difficulties, including those that may result from
industry developments, which difficulties may increase bad debt
exposure to the Company. Sales to significant customers as a
percentage of total net sales were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------- -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Ohmeda (BOC Group) 15.1% 15.8% 15.3% 16.5% 17.4%
Colorado Memory Systems, Inc.(1) 2.5% 12.7% 11.3% 21.3% 35.1%
Hewlett Packard Company,
various divisions (1) 27.3% 24.6% 26.5% 22.0% 12.7%
XEL Communications 0.8% 10.3% 8.7% 16.5% 4.4%
Exabyte 17.6% 0.1% 1.4% -- --
</TABLE>
F-15
<PAGE> 80
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(l)On October 22, 1993, Colorado Memory Systems, Inc. was acquired and
became a wholly owned subsidiary of Hewlett Packard Company.
The electronics manufacturing services industry has experienced
component supply shortages in the past. Should future component
supply shortages occur, the Company may experience reduced net sales
and profitability.
(11) EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
The Company underwent a corporate restructuring in the third quarter
of 1996 which included a workforce reduction, expenses related to the
reorganization of the manufacturing floor and manufacturing processes,
write down of inventory related to changes in the Company's customer
mix, and write down of assets to be disposed of. Total restructuring
charges amounted to $2,137,302.
F-16
<PAGE> 81
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 and the
supplementary combining information referred to below are the responsibility of
the Companies' management. Our responsibility is to express an opinion on
these combined financial statements and supplementary combining information
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.
Our audit was made for the purpose of forming an opinion on the combined
financial statements taken as a whole. The combining information is presented
for purposes of additional analysis of the combined financial statements rather
than to present the financial position and results of operations of the
individual companies. This information has been subjected to the auditing
procedures applied in our audit 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.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
November 25, 1996
F-17
<PAGE> 82
CURRENT ELECTRONICS, INC. AND
CURRENT ELECTRONICS WASHINGTON, INC.
COMBINED BALANCE SHEETS--SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
------
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 580,839 $ 252,323
Accounts receivable, net of allowance for doubtful accounts of $34,000 and
$6,774 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,929,142 1,506,049
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,826,074 1,860,951
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,077 24,809
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 6,445,132 3,644,132
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . 2,337,317 2,171,347
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,201 73,197
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,922,650 $ 5,888,676
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,386,274 $ 636,264
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766,020 643,863
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,953 247,764
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650,000 -
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . 599,019 500,948
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 3,501,266 2,028,839
----------- -----------
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,000 289,000
LONG-TERM DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 977,826 815,751
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,601,092 3,133,590
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 33,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,288,558 2,722,086
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 4,321,558 2,755,086
----------- -----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . $ 8,922,650 $ 5,888,676
============ ============
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-18
<PAGE> 83
CURRENT ELECTRONICS, INC. AND
CURRENT ELECTRONICS WASHINGTON, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995 1994 (Unaudited)
---- ---- --------------
<S> <C> <C> <C>
NET SALES $32,520,438 $17,169,805 $11,066,863
COST OF SALES 27,075,305 13,471,626 8,611,474
----------- ----------- -----------
Gross profit 5,445,133 3,698,179 2,455,389
----------- ----------- -----------
SELLING, GENERAL ADMINISTRATIVE EXPENSES 2,792,814 1,976,702 1,796,962
----------- ----------- ---------
Income from operations 2,652,319 1,721,477 658,427
OTHER INCOME (EXPENSE):
Other income, net 9,345 34,603 9,218
Interest expense, net (101,192) (129,315) (63,121)
----------- ----------- -----------
Total other income (expense) (91,847) (94,712) (53,903)
----------- ----------- -----------
Income before income taxes 2,560,472 1,626,765 604,524
----------- ----------- -----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 921,000 438,435 100,000
Deferred (167,000) 42,000 104,000
----------- ----------- -----------
754,000 480,435 204,000
----------- ----------- -----------
NET INCOME 1,806,472 1,146,330 400,524
RETAINED EARNINGS, beginning of year 2,722,086 1,650,756 1,250,232
DIVIDENDS (240,000) (75,000) -
----------- ----------- -----------
RETAINED EARNINGS, end of year $ 4,288,558 $ 2,722,086 $ 1,650,756
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-19
<PAGE> 84
CURRENT ELECTRONICS, INC. AND
CURRENT ELECTRONICS WASHINGTON, INC.
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994 (UNAUDITED)
<TABLE>
<CAPTION>
1996 1995 1994 (Unaudited)
---- ---- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . $1,806,472 $1,146,330 $ 400,524
Adjustments to reconcile net income to cash provided by
operating activities-
Depreciation and amortization . . . . . . . . . . . 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 . . . . . . . . . . . . . . (423,093) (673,973) (100,461)
Inventories . . . . . . . . . . . . . . . . . . (1,717,929) (902,338) (38,628)
Prepaid expenses . . . . . . . . . . . . . . . . (84,268) (13,042) 2,117
Accounts payable . . . . . . . . . . . . . . . . 750,010 458,679 11,889
Accrued liabilities . . . . . . . . . . . . . . 122,157 295,885 (56,053)
Income taxes payable . . . . . . . . . . . . . . (147,811) 264,339 (199,826)
---------- ---------- --------
Net cash provided by operating activities . . 717,407 1,093,824 479,538
---------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . (768,867) (1,061,820) (777,128)
Proceeds from disposal of property and equipment . . . . 24,028 - -
Key Man Insurance . . . . . . . . . . . . . . . . . . . (67,004) (24,269) (48,928)
---------- ---------- --------
Net cash used in investing activities . . . (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 . . . . . . . . . 1,285,344 551,539 691,496
Repayments of long-term debt . . . . . . . . . . . . . . (1,272,392) (389,811) (409,334)
Dividends paid . . . . . . . . . . . . . . . . . . . . . (240,000) (75,000) -
Issuance of common stock . . . . . . . . . . . . . . . . - - 3,000
---------- ---------- --------
Net cash provided by financing activities . 422,952 86,658 285,162
---------- ---------- --------
Net increase (decrease) in cash and cash 328,516 94,393 (61,356)
equivalents . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . 252,323 157,930 219,286
---------- ---------- --------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . $ 580,839 $ 252,323 $ 157,930
========== ========== =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . . . $ 143,109 $ 129,239 $ 63,121
Cash paid for taxes . . . . . . . . . . . . . . . . . . 1,073,489 158,000 381,809
Issuance of note in exchange for inventories
(noncash operating activity) . . . . . . . . . . . . . 247,194 - -
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-20
<PAGE> 85
CURRENT ELECTRONICS, INC. AND
CURRENT ELECTRONICS WASHINGTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 and 1994 (unaudited)
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:
1994 Financial Information
The financial statements and related footnote information as of and for the
year ended September 30, 1994 has not been audited.
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 (unaudited), respectively.
F-21
<PAGE> 86
CURRENT ELECTRONICS, INC.
CURRENT ELECTRONICS WASHINGTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 combined net
sales. For the year ended September 30, 1994, four customers accounted for 63%
(unaudited) 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.
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 years
ended September 30, 1996, 1995 and 1994 were $428,402, $259,720 and $182,520
(unaudited), respectively.
CEI provides selling, general and administrative services to CEWI. Services
totaling $150,000, $60,000 and $0 (unaudited) 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 (unaudited) under a note
as of September 30, 1994.
F-22
<PAGE> 87
CURRENT ELECTRONICS, INC.
CURRENT ELECTRONICS WASHINGTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. OPERATING LEASES:
Total rental expense under operating leases was $472,212, $362,241 and $232,516
(unaudited) during fiscal 1996, 1995 and 1994, respectively. Future minimum
lease payments under noncancelable operating leases as of September 30, 1996
are as follows:
<TABLE>
<CAPTION>
Year Ended September 30, CEI CEWI
------------------------ --- ----
<S> <C> <C>
1997 $266,788 $ 96,000
1998 73,408 16,000
1999 3,186 --
-------- --------
$343,372 $112,000
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
========= =========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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
========== ============
</TABLE>
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
F-23
<PAGE> 88
CURRENT ELECTRONICS, INC.
CURRENT ELECTRONICS WASHINGTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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.
9. LONG-TERM DEBT:
Long-term debt at September 30, 1996 and 1995 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C>
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
=========== ===========
</TABLE>
F-24
<PAGE> 89
CURRENT ELECTRONICS, INC.
CURRENT ELECTRONICS WASHINGTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future payments under long-term debt arrangements, by year, are as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
<S> <C>
1997 $ 599,019
1998 294,141
1999 315,208
2000 205,840
2001 72,282
Thereafter 90,355
----------
$1,576,845
==========
</TABLE>
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
(unaudited), 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% (unaudited) 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 (unaudited). CEWI paid
$240,000, $75,000 and $0 (unaudited) of dividends for the years ended September
30, 1996, 1995 and 1994, respectively.
F-25
<PAGE> 90
CURRENT ELECTRONICS, INC.
CURRENT ELECTRONICS WASHINGTON, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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-26
<PAGE> 91
CURRENT ELECTRONICS, INC. AND
CURRENT ELECTRONICS WASHINGTON, INC.
COMBINING BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
ASSETS
-------
CEI CEWI Eliminations Total
--- ---- ------------ -----
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 266,583 $ 314,256 $ -- $ 580,839
Accounts receivable, net 1,749,001 180,141 -- 1,929,142
Notes receivable -- 21,282 (21,282) --
Inventories 3,435,066 391,008 -- 3,826,074
Prepaid expenses 109,077 -- -- 109,077
----------- ---------- ---------- ----------
Total current assets 5,559,727 906,687 (21,282) 6,445,132
----------- ---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net 2,222,808 114,509 -- 2,337,317
OTHER ASSETS 131,243 8,958 -- 140,201
----------- ---------- ---------- ----------
Total assets $ 7,913,778 $1,030,154 $ (21,282) $ 8,922,650
=========== ========== ========= ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CEI CEWI Eliminations Total
--- ---- ------------ -----
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $1,238,140 148,134 -- $1,386,274
Accrued liabilities 697,976 68,044 -- 766,020
Income taxes payable 99,953 -- -- 99,953
Notes payable 650,000 -- -- 650,000
Current portion of long-term debt 373,107 247,194 (21,282) 599,019
---------- ---------- ------- ----------
Total current liabilities 3,059,176 463,372 (21,282) 3,501,266
---------- ---------- ------- ----------
DEFERRED INCOME TAXES 122,000 -- -- 122,000
LONG-TERM DEBT 977,826 -- -- 977,826
---------- ---------- ------- ----------
Total liabilities 4,159,002 463,372 (21,282) 4,601,092
---------- ---------- ------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock -- -- -- --
Common stock 30,000 3,000 -- 33,000
Retained earnings 3,724,776 563,782 -- 4,288,558
---------- ---------- ------- ----------
Total shareholders' equity 3,754,776 566,782 -- 4,321,558
---------- ---------- ------- ----------
Total liabilities and
shareholders' equity $7,913,778 $1,030,154 $ (21,282) $8,922,650
========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of this combining balance sheet.
F-27
<PAGE> 92
CURRENT ELECTRONICS, INC. AND
CURRENT ELECTRONICS WASHINGTON, INC.
COMBINING STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
CEI CEWI Eliminations Total
------------ ------------ ------------ -----------
<S> <C> <C> <C>
NET SALES $ 30,856,941 $ 1,692,130 $ (28,633) $32,520,438
COST OF SALES 26,015,461 1,088,477 (28,633) 27,075,305
------------ ------------ ------------ -----------
Gross profit 4,841,480 603,653 -- 5,445,133
------------ ------------ ------------ -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,607,239 335,575 (150,000) 2,792,814
------------ ------------ ------------ -----------
Income from operations 2,234,241 268,078 150,000 2,652,319
OTHER INCOME (expense):
Other income (expense), net 153,127 6,218 (150,000) 9,345
Interest income (expense), net (120,183) 18,991 -- (101,192)
------------ ------------ ------------ -----------
Total other income (expense) 32,944 25,209 (150,000) (91,847)
------------ ------------ ------------ -----------
Income before income taxes 2,267,185 293,287 -- 2,560,472
------------ ------------ ------------ -----------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current 921,000 -- -- 921,000
Deferred (167,000) -- -- (167,000)
------------ ------------ ------------ -----------
754,000 -- -- 754,000
------------ ------------ ------------ -----------
NET INCOME 1,513,185 293,287 -- 1,806,472
RETAINED EARNINGS, beginning of year 2,211,591 510,495 -- 2,722,086
DIVIDENDS -- (240,000) -- (240,000)
------------ ------------ ------------ -----------
RETAINED EARNINGS, end of year $ 3,724,776 $ 563,782 $ -- $ 4,288,558
============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of this combining schedule.
F-28
<PAGE> 93
APPENDIX A CONFORMED COPY
================================================================================
AGREEMENT AND PLAN OF MERGER
among
ELECTRONIC FAB TECHNOLOGY CORP.,
CURRENT MERGER CORP.
and
CURRENT ELECTRONICS, INC.
January 15, 1997
================================================================================
<PAGE> 94
TABLE OF CONTENTS
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RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.4 Certain Tax Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Taking of Necessary Action; Further Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III EFFECT OF MERGER ON CAPITAL STOCK OF MERGER SUB AND TARGET . . . . . . . . . . . . . . . . . . . . . 2
3.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 No Further Ownership Rights in Target Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.5 Stock Subject to Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TARGET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Capitalization; Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.7 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.9 Restrictions on Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.10 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.11 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.12 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.13 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.14 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.16 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.17 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.18 Interested Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.19 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.20 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.21 Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.22 Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
4.23 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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4.24 Product Warranty and Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.25 Minutes Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.26 Brokers' and Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.27 Section 60.835 of OBCA Not Applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.28 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.29 Regulation D Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.30 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB . . . . . . . . . . . . . . . . . . . . . . 17
5.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.3 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
5.4 SEC Documents; Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.5 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.6 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.7 Board Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.8 Brokers' and Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE VI CONDUCT PRIOR TO EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.1 Conduct of Business of Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 No Solicitation; Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
6.3 Notice of Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE VII ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.1 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.2 Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.3 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.4 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.5 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.6 Filings; Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.7 Employment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.8 Director Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.9 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
7.10 Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE VIII CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.1 Conditions to Obligations of Each Party to Effect the Merger . . . . . . . . . . . . . . . . . . . . 23
8.2 Additional Conditions to Obligations of Target to Effect the Merger . . . . . . . . . . . . . . . . 23
8.3 Additional Conditions to the Obligations of Parent and Merger Sub to Effect the Merger . . . . . . . 24
ARTICLE IX RESTRICTIONS ON TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.1 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
9.2 Notice of Proposed Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE X TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE XI GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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11.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.5 Entire Agreement; Nonassignability; Parties in Interest . . . . . . . . . . . . . . . . . . . . . . 28
11.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11.7 Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.8 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.9 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.10 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.11 Attorneys Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
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EXHIBITS
Exhibit 7.7A Consulting Agreement
Exhibit 7.7B Employment Agreement
Exhibit 8.2(c) Opinion of Counsel to Parent
Exhibit 8.2(e) Registration Rights Agreement
Exhibit 8.3(c) Opinion of Counsel to Target and Shareholders of CEWI
Exhibit 8.3(g) Indemnification Agreement
Exhibit 8.3(h) Tax Letter
SCHEDULES
Schedule 3.1(b)-1
Schedule 3.1(b)-2
Schedule 8.2(f)
Target Disclosure Schedule
Parent Disclosure Schedule
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INDEX OF DEFINED TERMS
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1994 Audit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Adjusted Debt Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Cash Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
CEWI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Combined Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Designees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ERISA Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Governmental Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Hewitson Consulting Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Indemnification Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Interim Target Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
include . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
includes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
including . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Materials of Environmental Concern . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
multiemployer plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
made available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Sub Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
no action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
NASD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
OBCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
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<PAGE> 99
<TABLE>
<S> <C>
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Parent Balance Sheet Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Parent Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Parent Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Parent Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Parent SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Parent Shareholders Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Parent Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Per Share Cash Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Proprietary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
prohibited transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
reportable event . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECURITIES ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Stock Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Stock Price Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Target . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Target Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Target Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Target Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Target Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Tax authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Tax Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Team Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Third Party Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
January 15, 1997, is among ELECTRONIC FAB TECHNOLOGY CORP., a Colorado
corporation ("Parent"), CURRENT MERGER CORP., an Oregon corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), and CURRENT ELECTRONICS,
INC., an Oregon corporation ("Target").
RECITALS
A. The Boards of Directors of Parent and Target have determined
that a business combination between Parent and Target is in the best interests
of their respective companies and shareholders, and accordingly have approved
this Agreement and the merger provided for herein whereupon Target shall merge
with and into Merger Sub upon the terms, and subject to the conditions, set
forth herein. In addition, each shareholder of Target has approved this
Agreement and the merger provided for herein.
B. The merger is intended to qualify, for federal income tax
purposes, as a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code").
C. Parent, Merger Sub and Target desire to make certain
representations, warranties and agreements in connection with the merger.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
MERGER
1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), Target shall be
merged with and into Merger Sub in accordance herewith and the separate
corporate existence of Target shall thereupon cease (the "Merger"). Merger Sub
shall be the surviving corporation in the Merger and, therefore, is sometimes
hereinafter referred to as "Surviving Corporation." The Merger shall have the
effects specified in Section 60.497 of the Oregon Business Corporation Act (the
"OBCA").
1.2 The Closing. Subject to the terms and conditions of this
Agreement, the closing of the Merger (the "Closing") shall take place (a) at
the offices of Holme Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100,
Denver, Colorado 80203, at 10:00 a.m., local time, within three business days
following the day on which the conditions set forth in Article VIII shall be
fulfilled or waived in accordance herewith or (b) at such other time, date or
place as Parent and Target agree. The date on which the Closing occurs is
hereinafter referred to as the "Closing Date."
1.3 Effective Time. If all the conditions to the Merger set forth
in Article VIII shall have been fulfilled or waived in accordance herewith and
this Agreement shall not have been terminated as provided in Article X, the
parties hereto shall cause Articles of Merger meeting the requirements of
Section 60.494 of the OBCA to be properly executed and duly filed in accordance
with the OBCA on the Closing Date. The Merger shall become effective at the
time when the Articles of Merger are so filed or at such later time that the
parties hereto agree and is designated in such Articles of Merger (the
"Effective Time").
<PAGE> 101
1.4 Certain Tax Positions. The parties hereto intend the Merger
to qualify, and will take the position for tax purposes that the Merger
qualifies, as a non-taxable reorganization under Sections 368(a)(1)(A) and
(a)(2)(D) of the Code. Neither party hereto nor any affiliate thereof will
take any action that would cause the Merger not to qualify as a reorganization
under those sections.
1.5 Taking of Necessary Action; Further Action. If, at any time
after the Effective Time, any further action is necessary or desirable to carry
out the purposes of this Agreement and to vest Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Target and Merger Sub, the officers and directors of Target
and Merger Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action consistent with this Agreement.
ARTICLE II
SURVIVING CORPORATION
2.1 Articles of Incorporation. The Articles of Incorporation of
Merger Sub in effect immediately prior to the Effective Time shall be the
Articles of Incorporation of Surviving Corporation until duly amended in
accordance with applicable law, except that Article I of the Articles of
Incorporation of Surviving Corporation shall be amended to read as follows:
"The name of the corporation is 'Current Electronics, Inc.'"
2.2 Bylaws. The Bylaws of Merger Sub in effect immediately prior
to the Effective Time shall be the Bylaws of Surviving Corporation until duly
amended in accordance with applicable law.
2.3 Directors. The directors of Merger Sub immediately prior to
the Effective Time shall be the directors of Surviving Corporation until their
respective successors are duly elected or appointed and qualified.
2.4 Officers. The officers of Merger Sub immediately prior to the
Effective Time shall be the officers of Surviving Corporation until their
respective successors are duly elected or appointed and qualified.
ARTICLE III
EFFECT OF MERGER ON CAPITAL STOCK
OF MERGER SUB AND TARGET
3.1 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of Merger Sub, Target or the
holders of any of the following securities all of the following shall occur:
(a) Cancellation of Target Common Stock Owned by Parent
or Target. All shares of Common Stock, $.01 par value, of Target ("Target
Common Stock") that are owned by Target, and all shares of Target Common Stock
owned by Parent, Merger Sub or any other subsidiary of Parent immediately prior
to the Effective Time shall be canceled.
(b) Conversion of Target Common Stock.
(i) Each issued and outstanding share of Target
Common Stock (other than Dissenting Shares (as defined in Section 3.1(f)) shall
be converted into the right to receive cash or cash and shares of Common Stock,
$.01 par value, of Parent ("Parent Common Stock") in accordance with this
Section 3.1(b). The consideration to be received by the holders of Target
Common Stock pursuant to the Merger is hereinafter referred to as the "Merger
Consideration." The aggregate Merger Consideration to be received by all
shares of Target Common Stock (assuming there are no Dissenting Shares) shall
be equal to $3,370,000, adjusted as provided in
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<PAGE> 102
Section 3.1(c)(as so adjusted, the "Cash Amount"), and the Stock Amount (as
defined in Section 3.1(b)(ii)). Subject to Section 3.1(c), (A) each
shareholder of Target Common Stock listed on Schedule 3.1(b)-1 shall be
entitled to receive with respect to the shares of Target Common Stock held by
it an amount of cash equal to the Per Share Cash Amount (as defined in Section
3.1(b)(ii)) times the number of shares of Target Common Stock so held, and (B)
each shareholder of Target Common Stock listed on Schedule 3.1(b)-2 shall be
entitled to receive with respect to the shares of Target Common Stock held by
the him the portion of the Cash Amount not to be received by the shareholders
of Target Common Stock pursuant to clause (A) and the Stock Amount, such cash
and shares of Parent Common Stock included in the Stock Amount to be allocated
among such shareholders pro rata in accordance with the number of shares of
Target Common Stock so held.
(ii) The "Per Share Cash Amount" shall be equal to
the sum of the Cash Amount and the Stock Price Amount (as defined in this
Section 3.1(b)(ii)) divided by 30,000 (adjusted to reflect fully the effect of
any stock split, reverse stock split, stock dividend (including any dividend or
distribution of securities convertible into target Common Stock), subdivision,
reclassification, combination, exchange, reorganization, recapitalization or
other similar transaction with respect to Target Common Stock occurring after
the date hereof and prior to the date of determination). The "Stock Price
Amount" shall be equal to the last closing sale price of Parent Common Stock on
the Nasdaq National Market on the trading day immediately preceding the Closing
Date times the Stock Amount. The "Stock Amount" shall be 1,980,000 shares of
Parent Common Stock (adjusted to reflect fully the effect of any stock split,
reverse stock split, stock dividend (including any dividend or distribution of
securities convertible into Parent Common Stock or Target Common Stock),
subdivision, reclassification, combination, exchange, reorganization,
recapitalization or other similar transaction with respect to Parent Common
Stock or Target Common Stock occurring after the date hereof and prior to date
of determination).
(c) Adjustments to Merger Consideration.
(i) The Cash Amount will be $3,370,000 (A)
increased by the amount by which the interest bearing indebtedness for borrowed
money of Target ("Debt") as of the Effective Time is less than the Adjusted
Debt Amount (as defined in this Section 3.1(c)(i)), (B) reduced by the amount
by which Debt as of the Effective Time exceeds the Adjusted Debt Amount and (C)
if the total combined stockholders' equity of Target and Current Electronics
(Washington), Inc., a Washington corporation ("CEWI"), as of the Effective Time
("Combined Equity") is less than $4.0 million, reduced or increased, as the
case may be, by the amount by which the total shareholders' equity of Target as
of the Effective Time ("Equity") is less or more than $3,715,000. For purposes
of the foregoing calculation, (x) "Adjusted Debt Amount" shall be $2.0 million,
increased by the amount of any bonuses (not to exceed $180,000) paid to
Target's leadership team pursuant to Section 6.1(b)(vi) hereof (the "Team
Bonuses") and by the amount of any additional Debt outstanding as of the
Effective Time that has been authorized by Parent under Section 3(c)(ii), (y)
Equity and Combined Equity shall be determined without deduction for (i) the
amount of any Team Bonuses, (ii) the fees and expenses of the accountants of
conducting the audit of the 1994 fiscal year of Target and CEWI requested by
Parent (the "1994 Audit Fees"), (iii) any writedown or writeoff of leasehold
improvements of Target's Newberg, Oregon facility or any reserves relating to
any move from such facility of Target's operations that is contemplated by
Parent, or (iv) such other reserves, writedowns or adjustments as may be
approved in writing by Parent, and (z) Equity and Combined Equity shall be
reduced (regardless of when paid or accrued) by (i) the amount of any legal and
accounting fees and expenses incurred by CEWI or Target, as the case may be,
with their present counsel and accountants that relate to the transactions
contemplated by this Agreement and the Purchase Agreement (as defined in
Section 8.1(d)) and any other similar expenses that relate to the
representation of the interests of the present shareholders of CEWI or Target
with respect to such transactions (other than the 1994 Audit Fees), and (ii)
the amount of any fees and expenses incurred to Pacific Crest Securities, Inc.
as contemplated by the letter agreement identified in Section 4.26 of this
Agreement. Any Debt owed by CEWI to Target, and any Debt owed by Target to
CEWI, shall be ignored in determining the Adjusted Debt Amount and the amount
of Debt outstanding. For the avoidance of doubt, the term Debt shall not
include the then outstanding balances of two accounts payable owed by CEWI to
Allied Signal in the approximate amounts of $676,000 and $180,000 as of
December 31, 1996. The amount of Debt outstanding, the Adjusted Debt Amount
and the amount of Equity as of the Effective Time shall be determined as
provided in Section 3(c)(iv).
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<PAGE> 103
(ii) Target may request that Parent consent to an
increase in the Adjusted Debt Amount to permit borrowings by Target to fund
actual or expected increased sales volumes and related working capital and
capital equipment requirements. Such request may be made by giving written
notice to Parent, accompanied by appropriate information supporting such
request. Parent shall respond to any such request promptly, and shall not
unreasonably withhold its consent where such borrowings would be necessary to
fund working capital and capital equipment requirements prudently required in
connection with increases in product sales by Target.
(iii) Target shall prepare and submit to Parent,
not later than five days prior to the Closing Date, a written estimate of the
Cash Amount as of the Closing Date. The estimate shall be based upon the books
and records of Target and shall be accompanied by (A) a statement setting forth
in reasonable detail the calculation of the estimate and (B) a certificate
signed by Target confirming that the estimate was calculated in accordance with
this Article I. Target shall also deliver to Parent such other information as
may be reasonably requested by Parent to verify the estimate of the Cash Amount
provided. The amount paid at the Closing based upon the Cash Amount under
Section 3.1(b) shall be equal to the estimate provided by Target, absent
reasonable objection by Parent, in which event the amount paid at the Closing
shall be equal to such reasonable amount as may be specified by Parent. Within
30 days after the Closing Date, Parent shall deliver to the Representative (as
defined in the Indemnification Agreement to be delivered pursuant to Section
8.3(g)) a statement calculating the Cash Amount as of the Closing Date in
accordance with this Section 3.1. Such calculation shall be made in accordance
with generally accepted accounting principles consistently applied, except as
otherwise specified herein. Parent's statement and report shall be final and
binding on the parties unless the Representative delivers a notice to Parent
disputing any matter including in such statement and stating the
Representative's position with respect to the disputed matter. If the
Representative delivers such notice and the parties are unable to resolve all
disputed matters within 30 additional days, Parent or the Representative may
elect to submit the disputed matter to Arthur Andersen & Co., independent
certified public accountants ("AA"), for determination. The determination of
all disputed matters pursuant to the preceding sentence shall be final and
binding on the parties and the fees and expenses of AA shall be borne by Parent
and the shareholders of Target receiving shares of Parent Common Stock in the
Merger (the "Shareholders") in proportion to the amount by which the
determination of all matters varies from the positions of Parent and the
Shareholders on all matters. Promptly following the determination of matters
by AA, Parent shall pay to the Shareholders or the Shareholders shall pay to
Parent, as appropriate, the amount, if any, determined to have been overpaid or
underpaid at the Closing.
(d) Fractional Shares. No fraction of a share of Parent
Common Stock will be issued, but in lieu thereof each holder of shares of
Target Common Stock who would otherwise be entitled to a fraction of a share of
Parent Common Stock (after aggregating all fractional shares of Parent Common
Stock to be received by such holder) shall receive from Parent an additional
share of Parent Common Stock.
(e) Capital Stock of Merger Sub. Each issued and
outstanding share of Common Stock, $.01 par value, of Merger Sub ("Merger Sub
Common Stock") shall be unaffected by the Merger and shall remain issued and
outstanding.
(f) Dissenting Shares. All issued and outstanding shares
of Target Common Stock of any holder who has properly exercised his dissenters'
rights with respect thereto in accordance with Sections 60.551 et sec. of the
OBCA and who, as of the Effective Time, has not effectively withdrawn or lost
such rights (the "Dissenting Shares") will not be converted into the right to
receive the Merger Consideration pursuant to Section 3.1(b) or any other amount
otherwise payable to such holder hereunder, and the holder thereof will have
such rights as are granted by the OBCA only. If, after the Effective Time, any
such holder effectively withdraws or loses such rights, the holder's Dissenting
Shares thereupon will be treated as if they had been converted, at the
Effective Time, into the right to receive the Merger Consideration and any
other amount otherwise payable to such holder hereunder, without interest
thereon. Target will give Parent prompt notice of any payment demand received
by Target for any shares of Target Common Stock, any withdrawal of such demands
and any other document or instrument received by Target in connection
therewith. Parent will have the right to participate in all negotiations
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<PAGE> 104
and proceedings with respect to any such demand and Target will not, except
with the prior written consent of Parent, make any payment with respect to, or
settle or offer to settle, any such demand.
3.2 Exchange of Certificates.
(a) Exchange; Payment. At the Closing and against
surrender to Parent by any holder of record of a certificate or certificates
that prior to the Effective Time represented shares of Target Common Stock (the
"Certificates"), Parent shall cause to be paid or delivered to the holder of
record of such Certificates, without interest thereon, the Merger Consideration
to be received by such holder as specified in Section 3.1. Notwithstanding
anything in the foregoing to the contrary, Certificates may be surrendered
after the Closing, but until so surrendered, Parent shall not cause to be paid
or delivered to the holder of record of such Certificates the shares or cash
amounts referred to in the previous sentence and each outstanding Certificate
that prior to the Effective Time represented shares of Target Common Stock will
be deemed from and after the Effective Time, for all corporate purposes, other
than the payment of dividends, to evidence the right to receive the Merger
Consideration, the right to receive an additional share of Parent Common Stock
in lieu of the issuance of any fractional shares in accordance with Section
3.1(d) and the right to receive unpaid dividends and distributions, if any,
that such holder has the right to receive in respect of such Parent Common
Stock, after giving effect to any required withholding tax, in each case
without interest thereon. The shares represented by the Certificates
surrendered to Parent shall forthwith be canceled. The risk of loss and title
to the Certificates shall pass only upon receipt by Parent of the Certificates.
(b) Distributions with respect to Unexchanged Shares. No
dividends or other distributions with respect to Parent Common Stock with a
record date after the Effective Time will be paid to the holder of any
Certificate until such Certificate is surrendered for exchange as provided
herein. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the holder of the certificates representing
whole shares of Parent Common Stock issued in exchange therefor, without
interest, at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time theretofore payable
(but for the provisions of this Section 3.2(b)) with respect to such shares of
Parent Common Stock and not paid, less the amount of any withholding taxes that
may be required thereon.
(c) Transfers. At or after the Effective Time, there
shall be no transfers on the stock transfer books of Target of the shares of
Target Common Stock that were outstanding immediately prior to the Effective
Time. If, at or after the Effective Time, Certificates are presented to the
Surviving Corporation, they shall be canceled and exchanged for certificates of
shares of Parent Common Stock deliverable in respect thereof pursuant to this
Agreement in accordance with the procedures set forth in this Article III.
Certificates surrendered for exchange by any person shall not be exchanged
until Parent has received confirmation of the continued accuracy of the
Investor Questionnaire and the Investor Letter, Indemnification Agreement and
Registration Rights Agreement (each as defined in Section 8.3) from such
person.
(d) No Liability. Notwithstanding anything to the
contrary in this Section 3.2, neither the Surviving Corporation nor any party
hereto shall be liable to any person for any amount properly paid to a public
official pursuant to any applicable abandoned property, escheat or similar law.
3.3 No Further Ownership Rights in Target Common Stock. All
shares of Parent Common Stock issued upon surrender for exchange of shares of
Target Common Stock in accordance with the terms hereof (including any
additional share of Parent Common Stock issued in lieu of fractional shares)
shall be deemed to have been issued in full satisfaction of all rights
pertaining to such shares of Target Common Stock, and there shall be no further
registration of transfers on the records of Surviving Corporation of shares of
Target Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Article III.
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<PAGE> 105
3.4 Lost, Stolen or Destroyed Certificates. If any Certificate is
lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such
lost, stolen or destroyed Certificate, upon the making of an affidavit of that
fact by the holder thereof, such shares of Parent Common Stock (and cash in
lieu of fractional shares) as may be required pursuant to Section 3.1, except
that Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent, Surviving Corporation or the Exchange
Agent with respect to the Certificates alleged to have been lost, stolen or
destroyed.
3.5 Stock Subject to Conditions. All shares of Parent Common
Stock that are received in the Merger in exchange for shares of Target Common
Stock, which, under agreements with Target, are unvested and which, by their
terms, do not terminate due to the Merger will also be unvested, and the
certificates evidencing such shares will be marked with appropriate legends.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TARGET
Except as disclosed in a document of even date herewith and delivered
by Target to Parent prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Target
Disclosure Schedule"), Target represents and warrants to Parent and Merger Sub
as follows:
4.1 Organization, Standing and Power. Target is a corporation
duly organized and validly existing under the laws of the State of Oregon, has
the full corporate power to own its properties and to carry on its business as
now being conducted and as proposed to be conducted and is duly qualified to do
business and is in good standing in each jurisdiction in which the failure to
be so qualified and in good standing would have a Material Adverse Effect (as
defined in Section 11.3) on Target. Target has delivered to Parent a true and
correct copy of its Articles of Incorporation and Bylaws, each as amended to
date. Target is not in violation of any of the provisions of its Articles of
Incorporation or Bylaws or equivalent organizational documents.
4.2 Capitalization; Shareholders.
(a) The authorized capital stock of Target consists of
2,000,000 shares of Target Common Stock and 1,000,000 shares of Preferred
Stock, $.01 par value, of which there are issued and outstanding 30,000 shares
of Target Common Stock and no shares of Preferred Stock. There are no other
outstanding shares of capital stock or other securities of Target and no
outstanding subscriptions, options, warrants, puts, calls, purchase or sale
rights, exchangeable or convertible securities or other commitments or
agreements of any nature relating to the capital stock or other securities of
Target, or otherwise obligating Target to issue, transfer, sell, purchase,
redeem or otherwise acquire such stock or securities. All outstanding shares
of Target Common Stock are duly authorized, validly issued, fully paid and
non-assessable and are free and clear of any mortgage, pledge, lien,
encumbrance, charge or other security interest (a "Lien"), except Liens created
by or imposed upon the holders thereof, and are not subject to preemptive
rights or rights of first refusal created by statute, the Articles of
Incorporation or Bylaws of Target or any agreement to which Target is a party
or by which it is bound. There are no contracts, commitments or agreements
relating to voting, purchase or sale of Target's capital stock (i) between or
among Target and any of its shareholders and (ii) to the Target's knowledge,
between or among any of Target's shareholders, except for the shareholders
named in Schedule 4.2 of the Target Disclosure Schedule.
(b) Schedule 4.2 of the Target Disclosure Schedule sets
forth a true and complete list of the names of all the record holders of Target
Common Stock, together with the number of shares of Target Common Stock held by
each such holder. Except as set forth in Schedule 4.2 of the Target Disclosure
Schedule, each holder so listed that is an individual is a competent adult or
nonprofit corporation and is the record and the beneficial owner of all shares
or other equity securities so listed in his or her name, with the sole right to
vote, dispose of, and receive
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dividends or distributions with respect to such shares. Except as set forth in
Schedule 4.2 of the Target Disclosure Schedule, each holder so listed that is
an entity is the record and the beneficial owner of all shares or other equity
securities so listed in its name, has the sole right to vote, dispose of, and
receive dividends or distributions with respect to such shares, has the full
power and authority, and has or will be fully empowered and authorized as of
the Effective Time, to consummate the matters contemplated to be consummated by
such holder herein.
4.3 Subsidiaries. Target does not directly or indirectly own any
equity or similar interest in, or any interest convertible or exchangeable or
exercisable for, any equity or similar interest in, any corporation,
partnership, joint venture or other business association or entity.
4.4 Due Authorization.
(a) Target has the full corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Target, subject only to the approval of the
Merger by Target's shareholders as contemplated by Section 7.2. This Agreement
has been duly executed and delivered by Target and constitutes the valid and
binding obligation of Target enforceable against Target in accordance with its
terms. The execution and delivery of this Agreement by Target do not, and the
consummation of the transactions contemplated hereby will not, (i) conflict
with or violate any provision of the Articles of Incorporation or Bylaws of
Target, (ii) violate or conflict with any permit, order, license, decree,
judgment, statute, law, ordinance, rule or regulation applicable to Target or
the properties or assets of Target, or (iii) result in any breach or violation
of, or constitute a default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of,
or result in the creation of any Lien on any of the properties or assets of
Target pursuant to or require the consent or approval of any party to any
mortgage, indenture, lease, contract or other agreement or instrument, bond,
note, concession or franchise applicable to Target or any of its properties or
assets, except, in the case of this clause (iii) only, where such conflict,
violation, default, termination, cancellation or acceleration would not have
and could not reasonably be expected to have a Material Adverse Effect on
Target or prevent the consummation of the transactions contemplated hereby. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality ("Governmental Entity") is required
by or with respect to Target in connection with the execution and delivery of
this Agreement or the consummation of the transactions contemplated hereby,
except for the filing of the Articles of Merger as provided in Section 1.3 and
such other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a Material Adverse Effect on
Target or prevent the consummation of transactions contemplated hereby.
(b) All holders of Target Common Stock have approved, by
written consent or otherwise, this Agreement and the Merger in accordance with
applicable law, and no other consent or approval of any holder of Target Common
Stock or other equity securities of Target is required for Target to execute
and deliver this Agreement and consummate the transaction contemplated hereby.
By virtue of such approval, no holder of Target Common Stock or other equity
securities of Target has any right to dissent and obtain payment for such
holder's shares under applicable law.
4.5 Financial Statements. Target has heretofore delivered to
Parent true and complete copies of audited balance sheet, and the related
statements of operations and stockholders' equity and of cash flows at
September 30, 1996 on a combined basis with CEWI, with separate disclosure of
the balance sheet and income and retained earnings of Target (the "Annual
Financial Statements"), with an opinion of Target's independent public
accountants. Target also has heretofore delivered to Parent true copies of the
unaudited balance sheet of Target at November 30, 1996 and the related
unaudited statements of income for the two months then ended (the "Interim
Target Financial Statements"). The Annual Financial Statements and the Interim
Target Financial Statements were prepared in accordance with generally accepted
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other (except as indicated in the notes
thereto and, in the case of the
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Interim Target Financial Statements, that no notes are included) and fairly
present the consolidated financial condition and operating results of Target
(combined with CEWI to the extent applicable) at the dates and during the
periods indicated therein, subject, in the case of the Interim Target Financial
Statements, to normal, recurring year-end audit adjustments.
4.6 Absence of Certain Changes. Except as specifically permitted
by this Agreement or as set forth in Schedule 4.6 of the Target Disclosure
Schedule, since September 30, 1996, Target has conducted its business in the
ordinary course consistent with past practice and there has not occurred:
(a) any change, event or condition (whether covered by
insurance) that has resulted in, or might reasonably be expected to result in,
a Material Adverse Effect on Target;
(b) any sale, lease or other transfer or disposition of
any property or asset of Target, except for the sale of inventory in the
ordinary course of business;
(c) any change in accounting methods, practices or
policies (including any change in depreciation or amortization policies or
rates) by Target or any revaluation by Target of any of its assets, except as
described in the notes to the Annual Financial Statements;
(d) any declaration, setting aside, or payment of any
dividend or other distribution to Target's shareholders, or any direct or
indirect redemption, retirement, purchase or other acquisition by Target of any
of its capital stock or other securities or options, warrants or other rights
to acquire capital stock;
(e) any entering into, amendment or termination of, or
default under, by Target of any contract to which Target is a party or by which
it is bound other than in the ordinary course of business and as provided to
Parent;
(f) any damage, destruction or loss (whether or not
covered by insurance) to the properties and assets of Target;
(g) any commitment or transaction (including any capital
expenditure, capital financing or sale of assets) by Target for any amount that
requires or could require payments in excess of $50,000 with respect to any
individual contract or a series of related contracts;
(h) any Lien on any asset allowed to exist by Target;
(i) any cancellation of any debt or waiver or release of
any right or claim by Target;
(j) any payment, discharge or satisfaction of any claim,
liability or obligation by Target, other than as reflected or reserved against
in the Annual Financial Statements or the Interim Target Financial Statements
or in the ordinary course of business consistent with past practice;
(k) to Target's knowledge, any labor dispute, litigation
or governmental investigation affecting the business or financial condition of
Target;
(l) any issuance or sale of capital stock or other
securities, exchangeable or convertible securities, options, warrants, puts,
calls or other rights to acquire capital stock or other securities of Target;
(m) any indebtedness for borrowed money incurred, assumed
or guaranteed by Target;
(n) any loan or advance (other than advances to employees
in the ordinary course of business for travel and entertainment in accordance
with past practice) to any person;
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(o) any increase in any salary, wage, benefit or other
remuneration payable or to become payable to any current or former officer,
director, employee or agent of Target or any bonus or severance payment or
arrangement made to, for or with any officer, director, employee or agent of
Target or any supplemental retirement plan or other program or special
remuneration for any officer, director, employee or agent of Target, except for
(i) the Team Bonuses and (ii) normal salary or wage increases relating to
periodic performance reviews and annual bonuses consistent with past practice
of Target where such increases or bonuses are not given to Target's
shareholders or their relations or members of the leadership team of Target or
CEWI;
(p) any grant of credit to any customer on terms or in
amounts more favorable than those which have been extended to such customer in
the past, any other change in the terms of any credit heretofore extended or
any other change in the policies or practices of Target with respect to the
granting of credit;
(q) any delay in the payment of any trade or other
payables other than in the ordinary course of business consistent with past
practice; or
(r) any agreement, whether in writing or otherwise, by
Target to do any of the foregoing.
4.7 Liabilities. Except as set forth in the Annual Financial
Statements, the Interim Target Financial Statements, Schedule 4.7 of the Target
Disclosure Schedule or any other Schedule of the Target Disclosure Schedule and
except for liabilities or obligations arising in the ordinary course and
consistent with past practice and those incurred in connection herewith, Target
does not have any liability or obligation of any nature, whether due or to
become due, fixed or contingent.
4.8 Litigation. There is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any agency,
court or tribunal, foreign or domestic, or, to the knowledge of Target,
threatened against Target or any of its assets and properties or any of its
officers or directors (in their capacities as such) that, individually or in
the aggregate, could reasonably be expected to have a Material Adverse Effect
on Target. There is no judgment, decree or order against Target, or, to the
knowledge of Target, any of its directors or officers (in their capacities as
such), that could prevent consummation of the transactions contemplated by this
Agreement, or that could reasonably be expected to have a Material Adverse
Effect on Target.
4.9 Restrictions on Business Activities. There is no material
agreement, judgment, injunction, order or decree binding upon Target which has
or reasonably could be expected to have the effect of prohibiting or materially
impairing any current or proposed business practice of Target, any acquisition
of property by Target or the conduct of business by Target as currently
conducted or as proposed to be conducted by Target.
4.10 Governmental Authorization. Target has obtained each federal,
state, county, local or foreign governmental consent, license, permit, grant,
or other authorization that are necessary for Target to own or lease, operate
and use its respective assets and properties and to carry on business as
currently conducted or as proposed to be conducted (collectively "Target
Authorizations"), Target has performed and fulfilled its obligations under the
Target Authorizations, and all the Target Authorizations are in full force and
effect, except where the failure to obtain or have any of such Target
Authorizations could not reasonably be expected to have a Material Adverse
Effect on Target.
4.11 Contracts and Commitments. Except as set forth in Schedule
4.11 of the Target Disclosure Schedule, Target is not a party to any oral or
written (a)(i) obligation for borrowed money, (ii) obligation evidenced by
bonds, debentures, notes or other similar instruments, (iii) obligation to pay
the deferred purchase price of property or services (other than trade accounts
arising in the ordinary course of business), (iv) obligation under capital
leases, (v) debt of others secured by a Lien on its property, (vi) guaranty of
liabilities or obligations of others, (vii) agreement under which Target is
obligated to make or expects to receive payments in excess of $50,000 or (viii)
agreement granting any person a Lien on any of its properties or assets (except
purchase money security interests created in the ordinary course of business
consistent with past practice); (b)(i) employment agreement or
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collective bargaining agreement or (ii) agreements that limits the right of
Target, or any of its employees to compete in any line of business; or (c)
agreement which, after giving effect to the transactions contemplated hereby,
purports to restrict or bind Parent or any of its subsidiaries, other than
Surviving Corporation, in any respect. True and complete copies of all
agreements described in Schedule 4.11 of the Target Disclosure Schedule or any
other section thereto have been delivered to Parent. Target has fulfilled, or
taken all actions necessary to enable it to fulfill when due, its obligations
under each of such agreements. All parties thereto have complied in all
material respects with the provisions thereof and no party is in breach or
violation of, or in default (with or without notice or lapse of time, or both)
under such agreements. With respect to such agreements, Target has not
received any notice of termination, cancellation or acceleration or any notice
of breach, violation or default thereof.
4.12 Title to Property. Except as set forth in Schedule 4.12 of
the Target Disclosure Schedule, Target has good and marketable title to all of
its respective properties and assets, or in the case of leased properties and
assets, valid leasehold interests in such properties, free and clear of any
Lien. The plants, property and equipment of Target that are used in the
operations of its business are in good operating condition and repair. All
plants, property and equipment have been well maintained and conform (to
Target's knowledge) with all applicable ordinances, regulations and zoning and
other laws and do not encroach on the property of others. There is no pending
or, to Target's knowledge, threatened change in any such ordinance, regulation
or zoning or other law, and there is no pending or, to Target's knowledge,
threatened condemnation of any such building, machinery or equipment. The
properties and assets of Target include all rights, properties, interests in
properties and assets necessary to permit Surviving Corporation to conduct its
business as currently conducted or as proposed to be conducted. Schedule 4.12
of the Target Disclosure Schedule identifies each parcel of real property owned
or leased by Target.
4.13 Intellectual Property.
(a) Target owns, or is licensed or otherwise possesses
legally enforceable rights to use, all patents, trademarks, trade names,
service marks, copyrights, and any applications therefor, maskworks, net lists,
schematics, technology, know-how, trade secrets, inventory, ideas, algorithms,
processes, computer software programs or applications (in both source code and
object code form), and tangible or intangible proprietary information or
material ("Intellectual Property") that are used or proposed to be used in the
business of Target as currently conducted or as proposed to be conducted,
except to the extent that the failure to have such rights has not and could not
reasonably be expected to have a Material Adverse Effect on Target.
(b) Schedule 4.13 of the Target Disclosure Schedule lists
(i) all patents and patent applications and all registered and unregistered
trademarks, trade names and service marks, registered and unregistered
copyrights, and maskworks, which Target considers to be material to its
business and included in the Intellectual Property, including the jurisdictions
in which each such Intellectual Property right has been issued or registered or
in which any application for such issuance and registration has been filed,
(ii) all material licenses, sublicenses and other agreements as to which Target
is a party and pursuant to which any person is authorized to use any
Intellectual Property, and (iii) all material licenses, sublicenses and other
agreements as to which Target is a party and pursuant to which Target is
authorized to use any third party patents, trademarks or copyrights, including
software ("Third Party Intellectual Property Rights"), in each case which are
incorporated in, are, or form a part of any product or service of Target.
(c) To the knowledge of Target, there is no unauthorized
use, disclosure, infringement or misappropriation of any Intellectual Property
rights of Target, any trade secret material to Target, or any Third Party
Intellectual Property Right, by any third party, including any employee or
former employee of Target. Target has not entered into any agreement to
indemnify any other person against any charge of infringement of any
Intellectual Property, other than indemnification provisions contained in
purchase orders arising in the ordinary course of business.
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(d) Target is not, and will not be as a result of the
execution and delivery of this Agreement or the performance of Target's
obligations under this Agreement be, in breach of any license, sublicense or
other agreement relating to the Intellectual Property or Third Party
Intellectual Property Rights, the breach of which could have a Material Adverse
Effect on Target.
(e) All patents, registered trademarks, service marks and
copyrights held by Target are valid and subsisting. Target (i) has not been
sued in any suit, action or proceeding which involves a claim of infringement
of any patents, trademarks, service marks, copyrights or violation of any trade
secret or other proprietary right of any third party or (ii) has not brought
any action, suit or proceeding for infringement of Intellectual Property or
breach of any license or agreement involving Intellectual Property against any
third party. The manufacture, marketing, licensing or sale of the products and
services of Target does not infringe any patent, trademark, service mark,
copyright, trade secret or other proprietary right of any third party.
(f) Target has secured valid written assignments from all
consultants and employees who contributed to the creation or development of
Intellectual Property of the rights to such contributions that Target does not
already own by operation of law.
(g) Target has taken all reasonable and appropriate steps
to protect and preserve the confidentiality of all Intellectual Property not
otherwise protected by patents, or patent applications or copyright
("Confidential Information"). All use, disclosure or appropriation of
Confidential Information owned by Target by or to a third party has been
pursuant to the terms of a written agreement with such third party. All use,
disclosure or appropriation of Confidential Information not owned by Target has
been pursuant to the terms of a written agreement with the owner of such
Confidential Information, or is otherwise lawful.
4.14 Environmental Matters.
(a) Target has complied with, and is in compliance with,
all Environmental Laws (as defined in this Section 4.14(a)) applicable to its
business, properties and assets. Target has, and Target has provided to Parent
true and complete copies of, all permits, approvals, registrations, licenses
and other authorizations required by any Governmental Entity pursuant to any
Environmental Law applicable to its business, properties and assets, the
absence of which would have a Material Adverse Effect on Target. There is no
pending or, to Target's knowledge, threatened civil or criminal litigation,
written notice of violation, formal administrative proceeding, or
investigation, inquiry or information request by any Governmental Entity,
relating to any Environmental Law to which Target is a party or, to Target's
knowledge, threatened to be made a party. For purposes of this Agreement,
"Environmental Law" means any federal, state or local law, statute, rule or
regulation or the common law relating to the environment or occupational health
and safety, including any statute, regulation or order pertaining to (i)
treatment, storage, disposal, generation and transportation of industrial,
toxic or hazardous substances or solid or hazardous waste; (ii) air, water and
noise pollution; (iii) groundwater and solid contamination; (iv) the release or
threatened release into the environment of industrial, toxic or hazardous
substances, or solid or hazardous waste, including without limitation
emissions, discharges, injections, spills, escapes or dumping of pollutants,
contaminants or chemicals; (v) the protection of wild life, marine sanctuaries
and wetlands, including without limitation all endangered and threatened
species; (vi) storage tanks, vessels and containers; (vii) underground and
other storage tanks or vessels, abandoned, disposed or discarded barrels,
containers and other closed receptacles; (viii) health and safety of employees
and other persons; and (ix) manufacture, processing, use, distribution,
treatment, storage, disposal, transportation or handling of pollutants,
contaminants, chemicals or industrial, toxic or hazardous substances or oil or
petroleum products or solid or hazardous waste. As used herein, the terms
"release" and "environment" have the meanings set forth in the federal
Comprehensive Environmental Compensation, Liability and Response Act of 1980
("CERCLA").
(b) There have been no releases of any Materials of
Environmental Concern (as defined in this Section 4.14(b)) into the environment
at any parcel of real property or any facility presently or formerly owned by
Target or by Target at any parcel of real property or any facility presently or
formerly leased, operated or
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controlled by Target. With respect to any such releases of Materials of
Environmental Concern, Target has given all required notices to government
authorities, copies of which have been provided to Parent. Target is not aware
of any releases of Materials of Environmental Concern at parcels of real
property or facilities other than those presently or formerly owned, leased,
operated or controlled by Target that could reasonably be expected to have an
impact on the real property or facilities owned, leased, operated or controlled
by Target. For purposes of this Agreement, "Materials of Environmental
Concern" means any chemicals, pollutants or contaminants, hazardous substances
(as such term is defined under CERCLA), solid wastes and hazardous wastes (as
such terms are defined under the Federal Resources Conservation and Recovery
Act), toxic materials, oil or petroleum and petroleum products.
(c) Set forth in Schedule 4.14 of the Target Disclosure
Schedule is a list of all environmental reports, investigations and audits in
the possession of Target with respect to the operations of, or real property
leased by Target (whether conducted by or on behalf of Target or a third party
and whether done at the initiative of Target or directed by a Governmental
Entity or other third party). True and complete copies of each such report, or
the results of each such investigation or audit, have been provided to Parent.
(d) Target is not aware of any material environmental
liability arising out of the utilization by Target of any solid and hazardous
waste transporter or treatment, storage and disposal facility.
4.15 Taxes. Target, and any consolidated, combined, unitary or
aggregate group for Tax (as defined in this Section 4.15) purposes of which
Target is or has been a member have timely filed all Tax Returns (as defined in
this Section 4.15) required to be filed by it taking into account extensions of
due dates, have paid all Taxes shown thereon to be due and has provided
adequate accruals in accordance with generally accepted accounting principles
in its financial statements for any Taxes that have not been paid, whether
shown as being due on any Tax returns. Target has withheld and paid over all
Taxes required to have been withheld and paid over (including any estimated
taxes), and has complied with all information reporting and backup withholding
requirements, including maintenance of required records with respect thereto,
in connection with amounts paid or owing to any employee, creditor, independent
contractor, or other third party. Target does not have any liability under
Treasury Regulation Section 1.1502-6 or any analogous state, local or foreign
law by reason of having been a member of any consolidated, combined or unitary
group. Target does not have any liability under Treasury Regulation Section
1.1502-6 or any analogous state, local or foreign law by reason of having been
a member of any consolidated, combined or unitary group. Except as disclosed
in Schedule 4.15 of the Target Disclosure Schedule, (a) no material claim for
Taxes has become a Lien against the property of Target or is being asserted
against Target other than Liens for Taxes not yet due and payable, (b) no audit
of any Tax Return of Target is being conducted by a Tax authority, (c) no Tax
authority is now asserting, or to the knowledge of Target, threatening to
assert against Target any deficiency or claim for additional Taxes, and there
are no requests for information from a Tax authority currently outstanding that
could affect the Taxes of Target, (d) no extension of the statute of
limitations on the assessment of any Taxes has been granted by Target and is
currently in effect, (e) Target has not entered into any compensatory
agreements with respect to the performance of services which payment thereunder
would result in a nondeductible expense pursuant to Sections 162(m) or 280G of
the Code, (f) no action has been taken that would have the effect of deferring
any liability for Taxes for Target from any period prior to the Effective Date
to any period after the Effective Date, (g) Target has never been included in
an affiliated group of corporations, within the meaning of Section 1504 of the
Code, (h) Target is not (nor has it ever been) a party to any Tax sharing
agreement, (i) no consent under Section 341(f) of the Code has been filed with
respect to Target, (j) Target has not disposed of any property that has been
accounted for under the installment method, (k) Target is not a party to any
interest rate swap, currency swap or similar transaction, (l) Target is not a
United States real property holding corporation within the meaning of Section
897(c)(2) of the Code, (m) Target is not subject to any joint venture,
partnership or other arrangement or contract that is treated as a partnership
for federal income tax purposes, (n) Target has not made any of the foregoing
elections and is not required to apply any of the foregoing rules under any
comparable state or local income tax provisions, and (o) the transactions
contemplated herein are not subject to the tax withholding provisions of
Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code, or of
any other provision of law. Target will not be required to include any
material adjustment in Taxable income for any Tax period (or portion thereof)
ending after
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the Effective Time attributable to adjustments made prior to the Merger
pursuant to Section 481 or 263A of the Code or any comparable provision of any
state or foreign Tax law. Schedule 4.15 of the Target Disclosure Schedule
contains accurate and complete information with respect to: (w) all material
tax elections in effect with respect to Target, (x) the current tax basis of
the assets of Target, (y) the current and accumulated earnings and profits of
Target, and (z) the tax credit carry overs of Target. As used herein, "Tax"
(and, with correlative meaning, "Taxes" and "Taxable") means (i) any net
income, alternative or add-on minimum tax, gross income, gross receipts, sales,
use, ad valorem, transfer, franchise, profits, license, withholding, payroll,
employment, excise, severance, stamp, business and occupations, occupation,
premium, property, environmental or windfall profit tax, custom, duty, or other
tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or any penalty, addition to tax or
additional amount imposed by any Governmental Entity (a "Tax authority")
responsible for the imposition of any such tax (domestic or foreign), (ii) any
liability for the payment of any amounts of the type described in clause (i) as
a result of being a member of an affiliated, consolidated, combined or unitary
group for any Taxable period and (iii) any liability for the payment of any
amounts of the type described in clause (i) or (ii) as a result of any express
or implied obligation to indemnify any other person. As used herein, "Tax
Return" shall mean any return, statement, report or form (including, without
limitation,) estimated Tax returns and reports, withholding Tax returns and
reports and information reports and returns required to be filed with respect
to Taxes. Target is in full compliance with all terms and conditions of any
Tax exemptions or other Tax-sharing agreement or order of a foreign government
and the consummation of the Merger shall not have any adverse effect on the
continued validity and effectiveness of such Tax exemptions or other
Tax-sharing agreement or order.
4.16 Employee Benefit Plans.
(a) Schedule 4.16 of the Target Disclosure Schedule
lists, with respect to Target, and any trade or business (whether or not
incorporated) which is treated as a single employer with Target (an "ERISA
Affiliate") within the meaning of Section 414(b), (c), (m) or (o) of the Code,
(i) all material employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")), (ii)
each loan to a non-officer employee in excess of $50,000, loans to officers and
directors and any stock option, stock purchase, phantom stock, stock
appreciation right, supplemental retirement, severance, sabbatical, medical,
dental, vision care, disability, employee relocation, cafeteria benefit (Code
Section 125) or dependent care (Code Section 129), life insurance or accident
insurance plans, programs or arrangements, (iii) all bonus, pension, profit
sharing, savings, deferred compensation or incentive plans, programs or
arrangements, (iv) other fringe or employee benefit plans, programs or
arrangements that apply to senior management and that do not generally apply to
all employees, and (v) any current or former employment or executive
compensation or severance agreements, written or otherwise, as to which
unsatisfied obligations of greater than $50,000 remain for the benefit of, or
relating to, any present or former employee, consultant or director
(collectively, the "Target Employee Plans").
(b) Target has furnished to Parent a copy of each of the
Target Employee Plans and related plan documents (including trust documents,
insurance policies or contracts, employee booklets, summary plan descriptions
and other authorizing documents, and, to the extent still in its possession,
any material employee communications relating thereto) and has, with respect to
each Target Employee Plan which is subject to ERISA reporting requirements,
provided copies of the Form 5500, including all schedules attached thereto and
actuarial reports, if any, filed for the last three Plan years. Any Target
Employee Plan intended to be qualified under Sections 401(a) or 501(c)(9) of
the Code has either obtained from the Internal Revenue Service a favorable
determination letter as to its qualified status under the Tax Reform Act of
1986 and subsequent legislation, or has applied to the Internal Revenue Service
for such a determination letter prior to the expiration of the requisite period
under applicable Treasury Regulations or Internal Revenue Service
pronouncements in which to apply for such determination letter and to make any
amendments necessary to obtain a favorable determination. Target has also
furnished Parent with the most recent Internal Revenue Service determination
letter issued with respect to each such Target Employee Plan (and nothing has
occurred since the issuance of each such letter which could reasonably be
expected to cause the loss of the tax-qualified status of any Target Employee
Plan subject to Code Section 401(a)), and all prohibited transaction exemptions
(or requests for such exemptions), private letter rulings, opinions,
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information letters or compliance statements issued with respect to any plan
described in Section 4.16(a) by the Internal Revenue Service, the Department of
Labor or the Pension Benefit Guaranty Corporation.
(c) (i) None of the Target Employee Plans promises or
provides retiree medical or other retiree welfare benefits to any person; (ii)
there has been no "prohibited transaction," as such term is defined in Section
406 of ERISA and Section 4975 of the Code, with respect to any Target Employee
Plan, which could reasonably be expected to have, in the aggregate, a Material
Adverse Effect; (iii) each Target Employee Plan has been administered in
accordance with its terms and in compliance with the requirements prescribed by
any and all statutes, rules and regulations (including ERISA and the Code),
except as would not have a Material Adverse Effect on Target, and Target and
each ERISA Affiliate have performed all obligations required to be performed by
them under, are not in any respect in default under or violation of, and have
no knowledge of any default or violation by any other party to, any of the
Target Employee Plans, which default or violation could reasonably be expected
to have a Material Adverse Effect on Target; (iv) neither Target nor any ERISA
Affiliate is subject to any liability or penalty under Sections 4976 through
4980 of the Code or Title I of ERISA with respect to any of the Target Employee
Plans which have a Material Adverse Effect on any such parties; (v) all
material contributions required to be made by Target or any ERISA Affiliate to
any Target Employee Plan have been made on or before its due dates and a
reasonable amount has been accrued for contributions to each Target Employee
Plan for the current plan years; (vi) with respect to each Target Employee
Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the 30-day notice requirement has been
waived under the regulations to Section 4043 of ERISA) nor any event described
in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) no Target
Employee Plan is covered by, and neither Target nor any ERISA Affiliate has
incurred or expects to incur any liability under Title IV of ERISA or Section
412 of the Code. With respect to each Target Employee Plan subject to ERISA as
either an employee pension plan within the meaning of Section 3(2) of ERISA or
an employee welfare benefit plan within the meaning of Section 3(1) of ERISA,
Target has prepared in good faith and timely filed all requisite governmental
reports (which were true and correct as of the date filed) and has properly and
timely filed and distributed or posted all notices and reports to employees
required to be filed, distributed or posted with respect to each such Target
Employee Plan except where the failure to timely file, distribute or post such
documents would not, in the aggregate, have a Material Adverse Effect on
Target. No suit, administrative proceeding, action or other litigation has
been brought, or to the knowledge of Target, is threatened, against or with
respect to any such Target Employee Plan, including any audit or inquiry by the
Internal Revenue Service or United States Department of Labor. Neither Target
nor any ERISA Affiliate is a party to, or has made any contribution to or
otherwise incurred any obligation under, any "multiemployer plan" as defined in
Section 3(37) of ERISA.
(d) With respect to each Target Employee Plan, Target has
complied with (i) the applicable health care continuation and notice provisions
of the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
proposed regulations thereunder and (ii) the applicable requirements of the
Family and Medical Leave Act of 1993 and the regulations thereunder, except to
the extent that such failure to comply would not, in the aggregate, have a
Material Adverse Effect on Target.
(e) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not (i) entitle any
current or former employee or other service provider or any director of Target,
or any ERISA Affiliate to severance benefits or any other payment (including
unemployment compensation, golden parachute, bonus or otherwise), (ii) increase
any benefits otherwise payable or (iii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee, service
provider or director.
(f) There has been no amendment to, written
interpretation or announcement (whether or not written) by Target, or any ERISA
Affiliate relating to, or change in participation or coverage under, any Target
Employee Plan which would materially increase the expense of maintaining such
Plan above the level of expense incurred with respect to that Plan for the most
recent fiscal year included in the Annual Financial Statements.
4.17 Employee Matters. Schedule 4.17 of the Target Disclosure
Schedule lists all employees of Target and the remuneration and benefits to
which such employees are entitled. Schedule 4.17 also lists all employment
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contracts and collective bargaining agreements, and all pension, bonus, profit
sharing, or other agreements or arrangements providing for employee
remuneration or benefits to which Target is a party or by which it is bound;
all of these contracts and arrangements are in full force and effect, and
neither Target nor any other party is in default under them. There have been
no claims of defaults and, to Target's knowledge there are no facts or
conditions which if continued, or on notice, will result in a default under
these contracts or arrangements. There is no pending or, to Target's
knowledge, threatened labor dispute, strike, or work stoppage that would have a
Material Adverse Effect on Target. Target is in compliance in all respects
with all current applicable laws and regulations respecting employment,
discrimination in employment, terms and conditions of employment, wages, hours
and occupational safety and health and employment practices, and are not
engaged in any unfair labor practice. There are no pending claims against
Target under any workers compensation plan or policy or for long term
disability. Target does not have any obligations under COBRA with respect to
any former employees or qualifying beneficiaries thereunder.
4.18 Interested Party Transactions. Except as disclosed in
Schedule 4.18 of the Target Disclosure Schedule, Target is not indebted to any
shareholder, director, officer, employee or agent of Target (except for amounts
due as normal salaries and bonuses and in reimbursement of ordinary expenses),
and no such person is indebted to Target, and there have been no other
transactions of the type required to be disclosed pursuant to Items 402 and 404
of Regulation S-K under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended.
4.19 Insurance. Target has policies of insurance and bonds of the
type and in amounts customarily carried by persons conducting businesses or
owning assets similar to those of Target. Schedule 4.19 of the Target
Disclosure Schedule sets forth a true and complete listing of all such
policies, including in each case applicable coverage limits, deductibles and
policy expiration dates. There is no material claim pending under any of such
policies or bond as to which Target has received a denial, or, to Target's
knowledge, which coverage has been questioned, denied or disputed by the
underwriters of such policies or bonds. All premiums due and payable under all
such policies and bonds have been paid and Target is otherwise in compliance in
all material respects with the terms of such policies and bonds. Target has no
knowledge of any threatened termination of, or material premium increase with
respect to, any of such policies. Each policy or bond is legal, valid,
binding, enforceable and in full force and effect and will continue to be
legal, valid, binding, enforceable and in full force and effect following the
consummation of the transactions contemplated hereby.
4.20 Compliance With Laws. Target has complied with, is not in
violation of, and has not received any notices of violation with respect to,
any federal, state, local or foreign statute, law or regulation with respect to
the conduct of its business, or the ownership or operation of its business,
except for such violations or failures to comply as could not be reasonably
expected to have a Material Adverse Effect on Target.
4.21 Major Customers. Schedule 4.21 of the Target Disclosure
Schedule contains a list of the customers of Target for each of the two most
recent fiscal years, which individually accounted for more than five percent of
the total dollar amount of net sales, showing the total dollar amount of net
sales to each such customer during each such year. Target has no knowledge or
information of any facts indicating, nor any other reason to believe, that any
of the customers listed in such Schedule 4.21 will not continue to be customers
of Target after the Closing at substantially the same level of purchases.
4.22 Suppliers. As of the date hereof, no supplier of Target has
indicated to Target that it will stop, or decrease the rate of, supplying
materials, products or service to Target. Target has not knowingly breached,
so as to provide a benefit to Target that was not intended by the parties, any
agreement with, or engaged in any fraudulent conduct with respect to, any
customer or supplier of Target.
4.23 Inventory. All inventories of raw materials, work-in process
and finished goods (including all such in transit) of Target, together with
related packaging materials (collectively, "Inventory"), reflected in the
Interim Target Financial Statements consist of a quality and quantity usable
and saleable in the ordinary course of
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business, have commercial values at least equal to the value shown on such
balance sheet or are subject to purchase obligations by customers or suppliers
at such value and is valued in accordance with generally accepted accounting
principles at the lower of cost (on a first in first out basis) or market. All
Inventory purchased since the date of such balance sheet consists of a quality
and quantity usable and saleable in the ordinary course of business. Except as
set forth in Schedule 4.23 of the Target Disclosure Schedule, all Inventory is
located on premises owned or leased by Target. All work-in process contained
in Inventory constitutes items in process of production pursuant to contracts
or open orders taken in the ordinary course of business, from regular customers
of Target with no recent history of credit problems with respect to Target;
neither Target nor any such customer is in material breach of the terms of any
obligation to the other, and, based on Target's knowledge or what Target
reasonably should know, valid grounds exist for any counterclaim or set-off of
amounts billable to such customers upon the completion of orders to which
work-in-process relates. All work-in process is of a quality ordinarily
produced in accordance with the requirements of the orders to which such
work-in-process is identified, and will require no rework with respect to work
performed prior to Closing.
4.24 Product Warranty and Product Liability. Schedule 4.24 of the
Target Disclosure Schedule contains a true and complete copy of Target's
standard warranty or warranties for its manufacturing services. There has been
no variation from such warranties, except as set forth in Schedule 4.24 of the
Target Disclosure Schedule. Except as stated therein, there are no warranties,
commitments or obligations with respect to Target's performance of services.
Schedule 4.24 of the Target Disclosure Schedule contains a description of all
product liability claims and similar claims, actions, litigation and other
proceedings relating to services rendered, which are presently pending or, to
Target's knowledge, threatened, or which have been asserted or commenced
against Target within the last five years, in which a party thereto either
requests injunctive relief (whether temporary or permanent) or alleges damages
(whether or not covered by insurance). There are no defects in Target's
manufacturing services that would adversely affect performance of products
Target manufactures or create an unusual risk of injury to persons or property.
Target's manufacturing services have been designed or performed so as to meet
and comply with all governmental standards and specifications currently in
effect, and have received all governmental approvals necessary to allow its
performance.
4.25 Minutes Books. The minute books of Target made available to
Parent contain true and complete summaries of all meetings of directors and
shareholders or actions by written consent since the time of incorporation of
Target, and reflect all transactions referred to in such minutes accurately in
all material respects.
4.26 Brokers' and Finders' Fees. Except for the letter agreement,
dated August 23, 1996 between Target and Pacific Crest Securities, Inc., Target
has not incurred, and will not incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or investment bankers' fees
or any similar charges in connection with this Agreement or any transaction
contemplated hereby.
4.27 Section 60.835 of OBCA Not Applicable. The Board of Directors
of Target has taken all actions, including the approval of the Merger, so that
the restrictions contained in Section 60.835 of the OBCA applicable to a
"business combination" (as defined in Section 60.825 of the OBCA) will not
apply to the execution, delivery or performance of this Agreement or the
consummation of the Merger or the other transactions contemplated by this
Agreement.
4.28 Proxy Statement. The information supplied by Target for
inclusion in the proxy statement to be sent to the shareholders of Parent in
connection with the meeting of Parent's shareholders (the "Parent Shareholders
Meeting") to consider the Merger (such proxy statement as amended or
supplemented is referred to herein as the "Proxy Statement") shall not, on the
date the Proxy Statement is first mailed, at the time of the Parent
Shareholders Meeting and at the Effective Time, contain any statement which, at
such time, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which they are made, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the Parent Shareholders Meeting which has become false or
misleading.
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4.29 Regulation D Offering. To Target's knowledge, the information
provided to Parent by the holders of shares of Target Common Stock, which
information is set forth in each such holder's Voting Agreement (as defined in
Section 8.3(g)) delivered to Parent, is true and correct in all material
respects.
4.30 Disclosure. None of the representations or warranties made by
Target herein or in the Target Disclosure Schedule, or in any certificate
furnished by Target pursuant to this Agreement, when all such documents are
read together in their entirety, contain or will contain at the Effective Time
any untrue statement of a material fact, or omit or will omit at the Effective
Time to state any material fact necessary in order to make the statements
contained herein or therein, in the light of the circumstances under which
made, not misleading. Target has delivered or made available true and complete
copies of each document that has been requested by Parent or its counsel in
connection with their legal and accounting review of Target.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Except as disclosed in a document of even date herewith and delivered
by Parent to Target prior to the execution and delivery of this Agreement and
referring to the representations and warranties in this Agreement (the "Parent
Disclosure Schedule"), Parent and Merger Sub represent and warrant to Target as
follows:
5.1 Organization, Standing and Power. Each of Parent and its
subsidiaries, including Merger Sub, is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
organization, has the corporate power to own its properties and to carry on its
business as now being conducted and as proposed to be conducted and is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified and in good standing would have a Material
Adverse Effect on Parent. Merger Sub has not engaged in any business (other
than certain organizational matters) since the date of its incorporation.
5.2 Capitalization. As of September 30, 1996, the authorized
capital stock of Parent consisted of 45,000,000 shares of Parent Common Stock
and 5,000,000 shares of Preferred Stock, $.01 par value, of which there were
issued and outstanding 3,942,660 shares of Parent Common Stock and no shares of
Preferred Stock. There are no other outstanding shares of capital stock or
other securities of Parent other than shares of Parent Common Stock issued
after September 30, 1996 upon the exercise of options issued under Parent's
1993 Incentive Stock Option Plan and its Stock Option Plan for Non-Employee
Directors (collectively, the "Parent Stock Option Plans") and other outstanding
stock options granted by Parent to its employees. The authorized capital stock
of Merger Sub consists of 1,000 shares of Merger Sub Common Stock, all of which
are issued and outstanding and are held by Parent. All outstanding shares of
Parent and Merger Sub have been duly authorized, validly issued, fully paid and
are non-assessable and free and clear of any Lien, except Liens created by or
imposed upon the holders thereof. As of September 30, 1996, Parent has
reserved (a) 405,000 shares of Parent Common Stock for issuance to employees,
directors and independent contractors pursuant to the Parent Stock Option
Plans, (b) 267,800 shares of Parent Common Stock for issuance pursuant to other
outstanding stock options granted to its employees. Other than this Agreement,
as disclosed in the immediately preceding sentence or as to additional shares
to be authorized under employee benefit plans of Parent, there are no other
options, warrants, puts, calls, rights, exchangeable or convertible securities
or other commitments or agreements of any nature to which Parent or Merger Sub
is a party or by which either of them is bound obligating Parent or Merger Sub
to issue, deliver, sell, repurchase or redeem, or cause to be issued,
delivered, sold, or repurchased, any shares of the capital stock of Parent or
Merger Sub or obligating Parent or Merger Sub to grant, extend or enter into
any such option, warrant, call, right, commitment or agreement. The shares of
Parent Common Stock to be issued pursuant to the Merger will, when issued, be
duly authorized, validly issued, fully paid, and non-assessable.
5.3 Due Authorization. Parent and Merger Sub have the full
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
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Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Parent
and Merger Sub, subject only to the approval of the Merger by Parent's
shareholders as contemplated by Section 7.2. This Agreement has been duly
executed and delivered by Parent and Merger Sub and constitutes the valid and
binding obligations of Parent and Merger Sub. The execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated
hereby will not, (a) conflict with or violate any provision of the Amended and
Restated Articles of Incorporation or Amended and Restated Bylaws of Parent, as
amended, or equivalent charter documents of any of its subsidiaries, as
amended, (b) violate or conflict with any permit, order, license, decree,
judgment, statute, law, ordinance, rule or regulation applicable to Parent or
any of its subsidiaries or the properties or assets of Parent or any of its
subsidiaries, or (c) result in any breach or violation of, or constitute a
default (with or without notice or lapse of time, or both) under, or give rise
to any right of termination, cancellation or acceleration of, or result in the
creation of any Lien on any of the properties or assets of Parent or any of its
subsidiaries pursuant to any mortgage, indenture, lease, contract or other
agreement or instrument, bond, note, concession or franchise applicable to
Parent or any of its subsidiaries or their properties or assets, except, in the
case of this clause (c) only, where such conflict, violation, default,
termination, cancellation or acceleration would not have and could not
reasonably be expected to have a Material Adverse Effect on Parent. No
consent, approval, order or authorization of, or registration, declaration or
filing with, any Governmental Entity is required by or with respect to Parent
or any of its subsidiaries in connection with the execution and delivery of
this Agreement by Parent and Merger Sub or the consummation by Parent and
Merger Sub of the transactions contemplated hereby, except for (i) the filing
of the Articles of Merger as provided in Section 1.3, (ii) the filing with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. ("NASD") of the Proxy Statement relating to the Parent
Shareholders Meeting, (iii) the filing of a Form 8-K with the SEC and NASD
within 15 days after the Closing Date, (iv) any filings as may be required
under applicable state securities laws and the securities laws of any foreign
country, and (v) such other consents, authorizations, filings, approvals and
registrations which, if not obtained or made, would not have a Material Adverse
Effect on Parent and would not prevent or materially alter or delay any of the
transactions contemplated by this Agreement.
5.4 SEC Documents; Financial Statements. Parent has furnished
Target with true and complete copies of its (a) Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, as filed with the SEC, (b) Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996, and
September 30, 1996, as filed with the SEC, (c) proxy statements related to all
meetings of its shareholders (whether annual or special) since December 31,
1994, and (d) all other reports and registration statements filed by Parent
with the SEC since December 31, 1994, except registration statements on Form
S-8 relating to employee benefit plans (collectively, the "Parent SEC
Documents"). As of their respective filing dates, the Parent SEC Documents
prepared in all material respects in accordance with the requirements of the
Exchange Act or the Securities Act, as applicable, and the rules and
regulations of the SEC thereunder applicable to such Parent SEC Documents. As
of their respective filing dates, none of the Parent SEC Documents contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading,
except to the extent corrected by a subsequently filed Parent SEC Document.
The financial statements of Parent, including the notes thereto, included in
the Parent SEC Documents (the "Parent Financial Statements"), complied as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto as of their
respective dates, and were prepared in accordance with generally accepted
accounting principles applied on a basis consistent throughout the periods
indicated and consistent with each other (except as may be indicated in the
notes thereto or, in the case of unaudited statements included in Quarterly
Reports on Form 10-Q, as permitted by Form 10-Q of the SEC), and fairly present
the consolidated financial condition and operating results of Parent and its
subsidiaries at the dates thereof and during the periods indicated therein
(subject, in the case of unaudited statements, to normal, recurring year-end
audit adjustments).
5.5 Absence of Certain Changes. Except as disclosed in the Parent
SEC Documents filed with the SEC prior to the date hereof, since September 30,
1996 (the "Parent Balance Sheet Date"), each of Parent and its subsidiaries has
conducted its business in the ordinary course consistent with past practice and
there has not
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occurred: (a) any change, event or condition (whether or not covered by
insurance) that has resulted in, or might reasonably be expected to result in,
a Material Adverse Effect on Parent or (b) any declaration, setting aside, or
payment of a dividend or other distribution with respect to the shares of
Parent, or any direct or indirect redemption, retirement, purchase or other
acquisition by Parent of any of its capital stock. Except as disclosed in such
Parent SEC Documents, Parent is not aware of any facts which are reasonably
likely to have a Material Adverse Effect on Parent.
5.6 Compliance with Laws. Each of Parent and its subsidiaries has
complied with, is not in violation of, and have not received any notices of
violation with respect to, any federal, state, local or foreign statute, law or
regulation with respect to the conduct of its business, or the ownership or
operation of its business, except for such violations or failures to comply as
could not be reasonably expected to have a Material Adverse Effect on Parent.
5.7 Board Approval. The Boards of Directors of Parent and Merger
Sub have (a) approved this Agreement and the Merger, (b) determined that the
Merger is in the best interests of their respective shareholders and is on
terms that are fair to such shareholders and (c) recommended that the
shareholders of Parent and Merger Sub approve this Agreement and the Merger.
5.8 Brokers' and Finders' Fees. Parent has not incurred, and will
not incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or investment bankers' fees or any similar charges in
connection with this Agreement or any transaction contemplated hereby.
ARTICLE VI
CONDUCT PRIOR TO EFFECTIVE TIME
6.1 Conduct of Business of Target. Prior to the Effective Time,
except as expressly contemplated by this Agreement or as agreed in writing by
Parent:
(a) Affirmative Covenants. Target will:
(i) carry on its business in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted
and use its best efforts to preserve intact its present business organizations,
keep available the services of its present officers and key employees and
preserve its relationships with customers, suppliers, distributors, licensors,
licensees, and others having business dealings with it, to the end that its
goodwill and ongoing businesses shall be unimpaired at the Effective Time;
(ii) maintain insurance coverages and its books,
accounts and records in the usual manner consistent with past practice;
(iii) comply in all material respects with all laws
and regulations of any Governmental Entity applicable to it;
(iv) maintain and keep its plants, property and
equipment in good repair, working order and condition, ordinary wear and tear
excepted;
(v) perform in all material respects its
obligations under all contracts and commitments to which it is a party or by
which it is bound;
(vi) notify Parent of any event or occurrence not
in the ordinary course of its business, and of any event which could have a
Material Adverse Effect on Target; or
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(vii) pay, consistent with past practice, all
accounts payable that arise in the ordinary course of its business except to
the extent that the amount owing is being duly contested by Target and such
contest does not have a Material Adverse Effect on Target and adequate reserves
therefor are reflected on the Annual Financial Statements or the Interim Target
Financial Statements.
(b) Negative Covenants. Target will not do any of the
things enumerated in Section 4.6. In addition, but without limiting the
generality of the foregoing, Target will not:
(i) cause or permit any amendments to its
Articles of Incorporation or Bylaws or equivalent charter documents;
(ii) accelerate, amend or change the period of
exercisability or vesting of options or other rights granted under its employee
stock plans or director stock plans or authorize cash payments in exchange for
any options or other rights granted under any of such plans;
(iii) transfer to any person or entity any rights
to its Intellectual Property;
(iv) enter into or amend any agreements pursuant
to which any other party is granted exclusive marketing or other exclusive
rights of any type or scope with respect to any of its products or technology;
(v) enter into any operating lease providing for
payments in excess of an aggregate of $50,000;
(vi) adopt or amend any employee benefit or stock
purchase or option plan, or hire any new director level or officer level
employee (other than in the ordinary course of business), pay any special bonus
or special remuneration to any employee or director, or increase the salaries
or wage rates of its employees, except for (A) the Team Bonuses and (B) normal
salary or wage increases relating to periodic performance reviews and annual
bonuses consistent with past practices of Target where such increases or
bonuses are not given to Target's shareholders or their relations or members of
the leadership team of Target or CEWI;
(vii) commence a lawsuit other than (A) for the
routine collection of bills, (B) in such cases where it in good faith
determines that failure to commence suit would result in the material
impairment of a valuable aspect of its business, provided that it consults with
Parent prior to the filing of such a suit, or (C) for a breach of this
Agreement;
(viii) acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial portion of the assets of, or
by any other manner, any business or any corporation, partnership, association
or other business organization or division thereof, or otherwise acquire or
agree to acquire any assets, other than in the ordinary course of business
consistent with past practice;
(ix) other than in the ordinary course of
business, make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, file any material Tax Return
or any amendment to a material Tax Return, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any extension
or waiver of the limitation period applicable to any claim or assessment in
respect of Taxes;
(x) revalue any of its assets, including without
limitation writing down the value of inventory or writing off notes or accounts
receivable other than in the ordinary course of business;
(xi) take, or agree in writing or otherwise to
take, any other action that would make any of its representations or warranties
contained in this Agreement untrue; or
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(xii) agree, whether in writing or otherwise, to do
any of the foregoing.
6.2 No Solicitation; Acquisition Proposals. Subject to the
fiduciary duties of Target's Board of Directors under applicable law, as
advised by counsel, Target shall not, directly or indirectly, through any
officer, director, employee, representative, agent, financial advisor or
otherwise, solicit, initiate or encourage inquiries or submission of proposals
or offers from any person relating to any sale of all or any portion of the
assets, business, properties of (other than immaterial or insubstantial assets
or inventory in the ordinary course of business), or any equity interest in,
Target or any business combination with Target whether by merger, purchase of
assets, tender offer or otherwise or participate in any negotiation regarding,
or furnishing to any other person any information with respect to, or otherwise
cooperate in any way with, or assist in, facilitate or encourage, any effort or
attempt by any other person to do or seek to do any of the foregoing, and
Target will notify Parent immediately if any inquiries or proposals are
received by, any information is requested from, or any negotiations or
discussions are sought to be initiated or continued with Target, in each case
in connection with any of the foregoing. Target shall use its best efforts to
cause all confidential materials previously furnished to any third parties in
connection with any of the foregoing to be promptly returned to Target and
shall cease any negotiations conducted in connection therewith or otherwise
conducted with any such parties.
6.3 Notice of Breach. Each party hereto shall promptly give
written notice to the others upon becoming aware of the occurrence or, to its
knowledge, impending or threatened occurrence, of any event that could cause or
constitute a breach of any of its representations, warranties or covenants
hereunder.
ARTICLE VII
ADDITIONAL COVENANTS
7.1 Proxy Statement. As promptly as practicable after the
execution of this Agreement, Parent shall prepare and file with the SEC
preliminary proxy materials relating to the approval of the Merger and the
transactions contemplated hereby by the shareholders of Parent.
7.2 Meetings of Shareholders.
(a) Parent Shareholders Meeting. As promptly as
practicable after the date hereof, Parent shall take all action necessary in
accordance with applicable law and its Articles of Incorporation and Bylaws to
convene the Parent Shareholders Meeting. Subject to Section 7.1, Parent shall
use its reasonable efforts to solicit from shareholders proxies in favor of the
Merger and shall take all other action necessary or advisable to secure the
vote or consent of shareholders required to effect the Merger. The Board of
Directors of Parent shall recommend a vote in favor of the Merger.
(b) Target Shareholders Meeting. Target shall take all
action necessary in accordance with applicable law and its Articles of
Incorporation and Bylaws within 30 days after the date hereof either (i) to
obtain the written consent of the shareholders of Target to this Agreement and
the transactions contemplated hereby or (ii) to convene a special meeting of
its shareholders and solicit from shareholders proxies in favor of the Merger.
In any event, Target shall take all action necessary or advisable to secure the
vote or consent of shareholders required to effect the Merger, and subject to
the fiduciary duties of Target's Board of Directors under applicable law, as
advised by counsel, the Board of Directors of Target shall recommend a consent
or vote in favor of the Merger.
7.3 Access to Information. Target shall afford Parent and its
accountants, counsel and other representatives full access during normal
business hours (and at such other times as the parties hereto agree) during the
period prior to the Effective Time to (a) all of Target's properties, books,
contracts, commitments and records, and (b) all other information concerning
the business, properties and personnel of Target as Parent may reasonably
request. Target agrees to provide to Parent and its accountants, counsel and
other representatives copies of internal
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financial statements promptly upon request. Parent shall cooperate with Target
with its due diligence review of Parent to the extent necessary to confirm the
accuracy of Parent's and Merger Sub's representations and warranties. Subject
to compliance with applicable law, from the date hereof until the Effective
Time, each of Parent and Target shall confer on a regular and frequent basis
with one or more representatives of the other party to report operational
matters of materiality and the general status of ongoing operations. No
information or knowledge obtained in any investigation pursuant to this
Section 7.3 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties hereto to
consummate the Merger.
7.4 Confidentiality. The parties hereto will treat as
confidential and hold in confidence all information concerning the businesses
and affairs of Target and the business and affairs of Parent and Merger Sub
that is not already generally available to the public and is not otherwise
known to the party to whom it was disclosed on a non- confidential basis
("Proprietary Information") and refrain from using any Proprietary Information
except in furtherance of this Agreement or as required by law. For avoidance
of doubt, the letter agreement between Parent and Pacific Crest Securities
Inc., dated October 2, 1996, relating to the disclosure of Target's
confidential information and Section 11 of letter agreement, dated December 18,
1996, among Target, CEWI and Parent shall cease to have any further force or
effect.
7.5 Publicity. Target shall not, and shall use its reasonable
efforts to cause its shareholders not to, issue, or cause or permit to be
issued, any press release or otherwise make any public statement regarding the
terms of this Agreement or the transactions contemplated hereby without
Parent's prior written consent. Parent and Merger Sub shall consult with
Target before issuing any press release or otherwise making any public
statement regarding the terms of this Agreement or the transactions
contemplated hereby, except as required by law or its other legal obligations.
7.6 Filings; Cooperation. Parent and Target shall make, and cause
their affiliates to make, all necessary filings with respect to the Merger and
the other transactions contemplated hereby including those required under the
Securities Act and the Exchange Act and the rules and regulations thereunder,
and under applicable Blue Sky or similar securities laws, and shall use all
reasonable efforts to obtain required approvals and clearances with respect
thereto to (a) comply as promptly as practicable with all governmental
requirements applicable to the transaction and (b) obtain promptly all
necessary permits, orders and other consents of Governmental Entities and
consents of third parties necessary for the consummation of the Merger.
7.7 Employment Matters. At the Effective Time, Parent will enter
into consulting agreements with each of Messrs. Charles E. Hewitson, Greg
Hewitson and Matthew J. Hewitson (the "Hewitson Consulting Agreements"), which
Hewitson Consulting Agreements shall be substantially in the form attached
hereto as Exhibit 7.7A, and Parent will offer to enter into an employment
agreement with each member of the Target leadership team identified and at the
same salary level as currently compensated as disclosed to Parent, which
employment agreement shall be substantially in the form attached hereto as
Exhibit 7.7B. Target shall cause the employment arrangements of each person
that is related to a Target shareholder to be terminated (other than the
employment of Chris Hewitson, which is to continue), such terminations to be
effective at the Effective Time and without liability to Target in any respect.
7.8 Director Nominees. At the Effective Time, Parent shall take
such action as is necessary in order to enable three individuals designated by
Target to be elected to Parent's Board of Directors (the "Designees"). Target
has selected as the Designees Messrs. Charles E. Hewitson, Greg Hewitson and
Matthew J. Hewitson.
7.9 Further Assurances.
(a) Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use all reasonable efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using all reasonable efforts to obtain all necessary waivers,
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consents and approvals, to effect all necessary registrations and filings
(including, but not limited to, filings with all applicable Governmental
Entities) and to lift any injunction or other legal bar to the Merger (and, in
such case, to proceed with the Merger as expeditiously as possible).
(b) In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and/or directors of Parent and the Surviving
Corporation shall take all such necessary action.
(c) Target and its shareholders shall confirm and
represent to Parent, by signed certificates, such factual matters as Parent may
reasonably request in order for Parent to confirm that the Merger will qualify
as a nontaxable reorganization under Sections 368(a)(1)(A) and 368(a)(2)(D) of
the Code.
7.10 Certain Tax Matters. Parent shall continue at least one
significant historical business line of Target, or shall use at least a
significant portion of Target's historical business assets in a business, in
each case within the meaning of Treasury Regulation Section 1.368-1(d).
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 Conditions to Obligations of Each Party to Effect the Merger.
The respective obligations of each party hereto to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, by agreement of the parties
hereto:
(a) This Agreement and the Merger shall have been
approved and adopted by the requisite vote of the holders of Parent Common
Stock and by the requisite vote of the holders of Target Common Stock.
(b) No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint or prohibition preventing
the consummation of the Merger, nor any proceeding brought by an administrative
agency or commission or other governmental authority or instrumentality,
domestic or foreign, seeking any of the foregoing, shall be pending; nor shall
there be any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
(c) Parent, Target and Merger Sub and their respective
subsidiaries, if any, shall have timely obtained from each Governmental Entity
all approvals, waivers and consents, if any, necessary for consummation of or
in connection with the Merger and the several transactions contemplated hereby,
including such approvals, waivers and consents as may be required under the
federal securities and state Blue Sky laws.
(d) Simultaneous with the occurrence of the Closing
hereunder, the Closing shall have occurred under the Share Purchase Agreement,
dated as of January 15, 1997, among Parent and the shareholders of CEWI (the
"Purchase Agreement").
8.2 Additional Conditions to Obligations of Target to Effect the
Merger. The obligations of Target to consummate and effect this Agreement and
the transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, by Target:
(a) Parent and Merger Sub shall have performed and
complied in all material respects with all covenants, obligations and
conditions of this Agreement required to be performed and complied with by them
on
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or prior to the Effective Time and the representations and warranties of Parent
and Merger Sub in this Agreement shall be true and correct in all material
respects (or in all respects in the case of any representation or warranty that
is qualified by its terms by a reference to Material Adverse Effect or
otherwise the concept of materiality) when made and on and as of the Effective
Time as though such representations and warranties were made on and as of such
date.
(b) Target shall have received a certificate executed on
behalf of Parent by its Chief Financial Officer certifying that the conditions
specified in Section 8.2(a) have been fulfilled.
(c) Target shall have received a legal opinion of Holme
Roberts & Owen LLP, counsel to Parent, substantially in the form attached
hereto as Exhibit 8.2(c).
(d) The guaranties given by Messrs. Charles E. Hewitson,
Greg Hewitson and Matthew J. Hewitson as contemplated by that certain Loan
Agreement between First Interstate Bank of Oregon, N.A. and Target, dated May
30, 1996 shall have been terminated or Messrs. Charles E. Hewitson, Greg
Hewitson and Matthew J. Hewitson shall have been released from all liability
thereunder as a result of repayment of the related credit facilities or
otherwise.
(e) Parent shall have executed and delivered to the
holders of Target Common Stock an agreement with respect to demand and
piggyback registration rights of such holders (the "Registration Rights
Agreement"), which Registration Rights Agreement shall be substantially in the
form of Exhibit 8.2(e) attached hereto.
(f) Parent shall have granted to the members of Target's
management identified on Schedule 8.2(f) the employee stock options specified
in such schedule.
8.3 Additional Conditions to the Obligations of Parent and Merger
Sub to Effect the Merger. The obligations of Parent and Merger Sub to
consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to the Effective Time of each
of the following conditions, any of which may be waived, in writing, by Parent:
(a) Target shall have performed and complied in all
material respects with all covenants, obligations and conditions of this
Agreement required to be performed and complied with by it on or prior to the
Effective Time and the representations and warranties of Target in this
Agreement shall be true and correct in all material respects (or in all
respects in the case of any representation or warranty that is qualified by its
terms by a reference to Material Adverse Effect or otherwise by the concept of
materiality) when made and on and as of the Effective Time as though such
representations and warranties were made on and as of such time.
(b) Parent shall have received a certificate, dated as of
the Effective Time, executed on behalf of Target by its President and its Chief
Financial Officer certifying that the conditions specified in Section 8.3(a)
have been fulfilled.
(c) Parent shall have received a legal opinion from
Hershner, Hunter, Andrews, Neill & Smith, LLP, legal counsel to Target,
substantially in form attached hereto as Exhibit 8.3(c).
(d) Parent shall have been furnished with evidence
satisfactory to it of the consent or approval of those persons whose consent or
approval shall be required in connection with the Merger under any material
contract of Target otherwise.
(e) There shall not have occurred any Material Adverse
Effect on Target.
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(f) Parent shall have received letters of resignation,
effective as of the Effective Time, executed and tendered by each of the then
incumbent directors of Target.
(g) The Voting Agreement, dated the date hereof (the
"Voting Agreement"), among Messrs. Charles E. Hewitson, Greg Hewitson and
Matthew J. Hewitson and Target shall be in full force and effect as of the
Effective Time and Messrs. Charles E. Hewitson, Greg Hewitson and Matthew J.
Hewitson shall have performed and complied in all material respects with all
covenants, obligations and conditions of the Voting Agreement required to be
performed or complied with by them. Messrs. Charles E. Hewitson, Greg Hewitson
and Matthew J. Hewitson shall have executed and delivered to Parent (i) a
certificate confirming the continued accuracy of the representations and
warranties given by them under the Voting Agreement; (ii) an agreement with
respect to indemnification of Parent and Merger Sub with respect to breaches of
terms and conditions of this Agreement (the "Indemnification Agreement"), which
Indemnification Agreement shall be substantially in the form of Exhibit 8.3(g)
attached hereto; (iii) the Registration Rights Agreement; and (iv) the Hewitson
Consulting Agreements.
(h) Parent shall have received from each of the holders
of Target Common Stock who are receiving Parent Common Stock in the Merger a
letter substantially in the form of Exhibit 8.3(h) attached hereto, and Parent
shall have confirmed, to its reasonable satisfaction, that the Merger will
qualify as a nontaxable reorganization under Sections 368(a)(1)(A) and
368(a)(2)(D) of the Code.
(i) All shareholders of Target expressly shall have
consented to the specific arrangement specified in Section 3.1(b) for the
conversion of their shares of Target Common Stock into Merger Consideration.
ARTICLE IX
RESTRICTIONS ON TRANSFER
9.1 Legends. Each certificate representing shares of Parent
Common Stock issued in connection with the Merger (the "Restricted Securities")
shall bear a legend to the following effect:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
THESE SECURITIES CANNOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH
RESTRICTIONS ON THE TRANSFERABILITY CONTAINED IN AN AGREEMENT RELATING
TO THE SECURITIES AND APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND
NO TRANSFER WILL BE RECOGNIZED UNLESS MADE IN COMPLIANCE WITH SUCH
LAWS."
Any holder of Restricted Securities (a "Holder") who disposes of Restricted
Securities in accordance with Section 9.2 shall be entitled to have Parent
cause new unlegended certificates to be issued promptly to the Holder in
exchange for outstanding legended certificates representing the disposed shares
if (a) the opinion to counsel referred to in Section 9.2 is to the further
effect that such legend is not required in order to establish compliance with
any provisions of the Securities Act; (b) the transfer is in connection with a
transaction intended to comply with Rule 144 and Rule 145 as promulgated by the
SEC under the Securities Act. as such Rules may be amended from time to time,
or any similar successor rule that may be promulgated by the SEC, or (c) an
appropriate registration statement with respect to such Restricted Securities
has been filed by Parent with the SEC and has been declared effective by the
SEC.
9.2 Notice of Proposed Dispositions. Each Holder of Restricted
Securities by acceptance thereof shall agree to comply in all respects with the
provisions of this Section 9.2. Prior to any proposed disposition of any
Restricted Securities (unless there is in effect a registration statement under
the Securities Act covering such
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proposed disposition and such disposition is made in accordance with such
registration statement) the holder thereof shall give written notice to Parent
of such Holder's intention to effect such disposition. Each such notice shall
describe the manner and circumstances of the proposed disposition and shall be
accompanied by either (a) a written opinion of legal counsel addressed to
Parent and reasonably satisfactory in form and substance to Parent, to the
effect that the proposed disposition of Restricted Securities may be effected
without registration of such Restricted Securities or (b) a "no action" letter
from the SEC to the effect that such disposition without registration of such
Restricted Securities will not result in recommendation by the staff of the SEC
that enforcement action be taken with respect thereto, whereupon the Holder of
such Restricted Securities shall be entitled to transfer such Restricted
Securities in accordance with the terms of the notice delivered by the Holder
to Parent. The provisions of this Section 9.2 shall not apply to Restricted
Securities that are then freely tradeable pursuant to Rule 144(k) under the
Securities Act, as amended from time to time, or any similar successor rule
that may be promulgated by the SEC.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. At any time prior to the Effective Time, whether
before or after approval of the matters presented in connection with the Merger
by the shareholders of Target and Parent, this Agreement may be terminated:
(a) by mutual consent of Parent and Target;
(b) by either Parent or Target, if, without fault of the
terminating party, the Closing shall not have occurred on or before April 30,
1997, or such later date as may be agreed upon in writing by the parties
hereto;
(c) by Parent, if any of the conditions specified in
Section 8.3 have not been satisfied or waived at such time as such condition is
no longer capable of satisfaction;
(d) by Target, if any of the conditions specified in
Section 8.2 have not been satisfied or waived at such time as such condition is
no longer capable of satisfaction;
(e) by either Parent or Target if the other shall have
breached its respective representations, warranties or other obligations under
Articles IV through VII in any material respect and such breach continues for a
period of 10 days after receipt of notice of the breach from the non-breaching
party hereto.
10.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and there shall be no liability or obligation on the part of Parent,
Merger Sub or Target or their respective officers, directors, shareholders or
affiliates, except to the extent that such termination results from the breach
by a party hereto of any of its representations, warranties or covenants set
forth in this Agreement; provided that, the provisions of this Section 10.2 and
Section 7.4 (Confidentiality) and Article XI (General Provisions) shall remain
in full force and effect and survive any termination of this Agreement.
10.3 Amendment. The respective Boards of Directors of the parties
hereto may cause this Agreement to be amended at any time by execution of an
instrument in writing signed on behalf of each of the parties hereto; provided
that an amendment made subsequent to adoption of the Agreement by the
shareholders of Target or Merger Sub shall not (a) alter or change the amount
or kind of consideration to be received on conversion of the Target Common
Stock, (b) alter or change any term of the Articles of Incorporation of
Surviving Corporation to be effected by the Merger, or (c) alter or change any
of the terms and conditions of this Agreement if such alteration or change
would adversely affect the holders of Target Common Stock or Parent.
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10.4 Extension; Waiver. At any time prior to the Effective Time
any party hereto may, to the extent legally allowed, (a) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (b) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto and
(c) waive compliance with any of the agreements or conditions for the benefit
of such party contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party.
ARTICLE XI
GENERAL PROVISIONS
11.1 Survival of Representations and Warranties. The
representations and warranties of Target in Sections 4.1 - 4.14 and 4.16 - 4.30
shall survive the Merger and continue in full force and effect for one year
after the Effective Time. All the other representations and warranties of
Target, including those in Section 4.15, shall survive the Merger and continue
in full force and effect forever after the Effective Time (subject to any
applicable statute of limitations). The representations and warranties of
Parent and Merger Sub shall not survive the Merger.
11.2 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally or by
commercial delivery service, or mailed by registered or certified mail, return
receipt requested, or sent via facsimile, with confirmation of receipt, to the
parties at the following address or at such other address for a party as shall
be specified by notice hereunder:
(a) if to Parent or Merger Sub, to:
Electronic Fab Technology Corp.
7241 West 4th Street
Greeley, Colorado 80634
Attention: Stuart W. Fuhlendorf
Facsimile No.: (303) 892-4306
with a copy to:
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, Colorado 80203
Attention: Francis R. Wheeler
Facsimile No.: (303) 866-0200
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(b) if to Target, to:
Current Electronics, Inc.
125 Elliott Road
Newberg, Oregon 97132
Attention: Charles E. Hewitson
Facsimile No.: (503) 537-9926
with a copy to:
Hershner, Hunter, Andrews, Neill & Smith LLP
180 East 11th Avenue
Eugene, Oregon 97440
Attention: Robert Stout, Esq.
Facsimile No.: (541) 344-2025
11.3 Interpretation. When a reference is made in this Agreement to
Exhibits, Articles or Sections, such reference shall be to an Exhibit, Article
or Section to this Agreement unless otherwise indicated. The words "include,"
"includes" and "including" when used herein shall be deemed in each case to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available
if requested by the party hereto to whom such information is to be made
available. The table of contents and Article and Section headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. In this Agreement, any
reference to any event, change, condition or effect being "material" with
respect to any entity or group of entities means any material event, change,
condition or effect related to the condition (financial or otherwise),
properties, assets (including intangible assets), liabilities, business,
operations or results of operations of such entity or group of entities. In
this Agreement, any reference to a "Material Adverse Effect" with respect to
any entity or group of entities means any event, change or effect that is
materially adverse to the condition (financial or otherwise), properties,
assets, liabilities, business, operations or results of operations of such
entity and its subsidiaries, taken as a whole. In this Agreement, any
reference to a party's "knowledge" means such party's actual knowledge after
due and diligent inquiry of officers, directors and other employees of such
party reasonably believed to have knowledge of such matters. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms.
11.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties hereto and delivered to the other parties hereto, it being
understood that all parties hereto need not sign the same counterpart.
11.5 Entire Agreement; Nonassignability; Parties in Interest. This
Agreement and the documents and instruments and other agreements specifically
referred to herein or delivered pursuant hereto, including the Exhibits, the
Target Disclosure Schedule and the Parent Disclosure Schedule (a) constitute
the entire agreement among the parties hereto with respect to the subject
matter hereof and supersede all prior agreements and understandings, both
written and oral, among the parties hereto with respect to the subject matter
hereof; (b) are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided.
11.6 Severability. In the event that any provision of this
Agreement, or the application thereof, becomes or is declared by a court of
competent jurisdiction to be illegal, void or unenforceable, the remainder of
this Agreement will continue in full force and effect and the application of
such provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties hereto
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further agree to replace such void or unenforceable provision of this Agreement
with a valid and enforceable provision that will achieve, to the extent
possible, the economic, business and other purposes of such void or
unenforceable provision.
11.7 Remedies Cumulative; No Waiver. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. No failure or delay
on the part of any party hereto in the exercise of any right hereunder shall
impair such right or be construed to be a waiver of, or acquiescence in, any
breach of any representation, warranty or agreement herein, nor shall any
single or partial exercise of any such right preclude other or further exercise
thereof or of any other right.
11.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oregon (without regard to
the principles of conflicts of law thereof).
11.9 Rules of Construction. The parties hereto agree that they
have been represented by counsel during the negotiation, preparation and
execution of this Agreement and, therefore, waive the application of any law,
regulation, holding or rule of construction providing that ambiguities in an
agreement or other document will be construed against the party drafting such
agreement or document.
11.10 Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby (including, without limitation, the fees and expenses of
its advisers, accountants and legal counsel) shall be paid by the party
incurring such expense.
11.11 Attorneys Fees. In the event of any proceeding to enforce
this Agreement, the prevailing party shall be entitled to receive from the
losing party all reasonable costs and expenses, including the reasonable fees
of attorneys, accountants and other experts, incurred by the prevailing party
in investigating and prosecuting (or defending) such action at trial or upon
any appeal.
IN WITNESS WHEREOF, Target, Parent and Merger Sub have caused this
Agreement to be executed and delivered by their respective officers thereunto
duly authorized, all as of the date first written above.
ELECTRONIC FAB TECHNOLOGY CORP.
By: /s/ Stuart Fuhlendorf
-------------------------------
CURRENT MERGER CORP.
By: /s/ Stuart Fuhlendorf
-------------------------------
CURRENT ELECTRONICS, INC.
By: /s/ Charles E. Hewitson VP
-------------------------------
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- --------------------------------------------------------------------------------
ELECTRONIC FAB TECHNOLOGY CORP.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON FEBRUARY 24, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Jack Calderon and Stuart W. Fuhlendorf, or
either of them, with full power of substitution, as a proxy or proxies to
represent the undersigned at the Special Meeting (the "Special Meeting") of
Shareholders of ELECTRONIC FAB TECHNOLOGY CORP. (the "Company") to be held on
February 24, 1997, and at any adjournments or postponements thereof, and to vote
thereat all the shares of Common Stock of the Company held of record by the
undersigned at the close of business on February 10, 1997, with all the power
that the undersigned would possess if personally present, as designated on the
reverse side.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF PROPOSALS 1, 2 AND
3. IF NOT OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
RECOMMENDATION OF THE BOARD OF DIRECTORS.
1. ISSUANCE OF COMMON STOCK: To approve the issuance of 1,980,000 shares of the
Company's Common Stock, par value $.01 per share (the "Common Stock"), in
connection with (a) the merger of Current Electronics, Inc., an Oregon
corporation ("CEI"), with and into Current Merger Corp., an Oregon
corporation and a wholly-owned subsidiary of the Company, in exchange for
such Common Stock and a cash payment of $3,370,000, subject to adjustment,
and (b) the payment of $1,530,000, subject to adjustment, to the existing
shareholders of Current Electronics (Washington), Inc., a Washington
corporation and an affiliate of CEI ("CEWI"), in exchange for all of the
outstanding capital stock of CEWI.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. AMENDMENT TO EQUITY INCENTIVE PLAN: Approval of an amendment to the Company's
Equity Incentive Plan to increase the number of shares of the Company's
Common Stock reserved for issuance thereunder from 325,000 to 995,000 and to
make certain other changes.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. AMENDMENT TO STOCK OPTION PLAN: Approval of an amendment to the Company's
Stock Option Plan for Non-Employee Directors to increase the number of shares
of the Company's Common Stock reserved for issuance thereunder from 80,000 to
160,000, to provide that options may be granted thereunder to non-employee
directors as determined by the Board of Directors of the Company and to make
certain other changes.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED ON REVERSE SIDE. PLEASE SIGN AND MAIL IN THE ENCLOSED ENVELOPE.)
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<PAGE> 130
- --------------------------------------------------------------------------------
In their discretion, the named proxies may vote on such other business as
may properly come before the Special Meeting or any adjournments or
postponements thereof.
This proxy revokes all prior proxies of the undersigned with respect to the
Special Meeting and may be revoked prior to exercise. Receipt of the Notice of
Special Meeting of Shareholders and the Proxy Statement relating to the Special
Meeting is hereby acknowledged.
TO VOTE IN ACCORDANCE WITH THE
RECOMMENDATION OF THE BOARD OF
DIRECTORS, MERELY SIGN BELOW; NO
BOXES NEED TO BE CHECKED.
I PLAN TO ATTEND THE SPECIAL
MEETING [ ]
Signature(s)
------------------------------------
------------------------------------
Date
------------------------------------
NOTE: Please sign as name appears
hereon. Joint owners should
each sign. When signing as
attorney, trustee or guardian,
please give full title as
such.
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<PAGE> 131
This Appendix is filed pursuant
to Instruction 3 of Item 10(b)(2)
of Schedule 14A. It is not a part
of the Proxy Statement.
================================================================================
ELECTRONIC FAB TECHNOLOGY CORP.
EQUITY INCENTIVE PLAN
as amended and restated January 20, 1997
================================================================================
<PAGE> 132
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
ARTICLE I - INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Establishment . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Gender and Number . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III - PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE IV - STOCK SUBJECT TO THE PLAN . . . . . . . . . . . . . . . . . . . 4
4.1 Number of Shares . . . . . . . . . . . . . . . . . . . . . . 4
4.2 Other Shares of Stock . . . . . . . . . . . . . . . . . . . 4
4.3 Adjustments for Stock Split, Stock Dividend, Etc. . . . . . 4
4.4 Other Distributions and Changes in the Stock . . . . . . . . 5
4.5 General Adjustment Rules . . . . . . . . . . . . . . . . . . 5
4.6 Determination by the Committee, Etc. . . . . . . . . . . . . 5
ARTICLE V - CORPORATE REORGANIZATION . . . . . . . . . . . . . . . . . . . . 6
5.1 Reorganization . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Required Notice . . . . . . . . . . . . . . . . . . . . . . 6
5.3 Acceleration of Exercisability . . . . . . . . . . . . . . . 6
5.4 Limitation on Payments . . . . . . . . . . . . . . . . . . . 7
ARTICLE VI - PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE VII - OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.1 Grant of Options . . . . . . . . . . . . . . . . . . . . . . 8
7.2 Stock Option Certificates . . . . . . . . . . . . . . . . . 8
7.3 Restrictions on Incentive Options . . . . . . . . . . . . . 11
7.4 Shareholder Privileges . . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII - RESTRICTED STOCK AWARDS . . . . . . . . . . . . . . . . . . . 12
8.1 Grant of Restricted Stock Awards . . . . . . . . . . . . . . 12
8.2 Restrictions . . . . . . . . . . . . . . . . . . . . . . . . 12
8.3 Privileges of a Shareholder, Transferability . . . . . . . . 12
8.4 Enforcement of Restrictions . . . . . . . . . . . . . . . . 13
ARTICLE IX - STOCK UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . 13
</TABLE>
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<TABLE>
<S> <C>
ARTICLE X - STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . 13
10.1 Persons Eligible . . . . . . . . . . . . . . . . . . . . . . 13
10.2 Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.3 Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10.4 Number of Shares or Amount of Cash . . . . . . . . . . . . . 14
10.5 Effect of Exercise . . . . . . . . . . . . . . . . . . . . . 14
10.6 Termination of Employment . . . . . . . . . . . . . . . . . 14
ARTICLE XI - OTHER COMMON STOCK GRANTS . . . . . . . . . . . . . . . . . . . 14
ARTICLE XII - CHANGE IN CONTROL . . . . . . . . . . . . . . . . . . . . . . . 15
12.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . 15
12.2 Definition . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE XIII - RIGHTS OF EMPLOYEES; PARTICIPANTS . . . . . . . . . . . . . . 15
13.1 Employment . . . . . . . . . . . . . . . . . . . . . . . . . 15
13.2 Nontransferability . . . . . . . . . . . . . . . . . . . . . 15
13.3 No Plan Funding . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE XIV - GENERAL RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . 16
14.1 Investment Representations . . . . . . . . . . . . . . . . . 16
14.2 Compliance with Securities Laws . . . . . . . . . . . . . . 16
14.3 Changes in Accounting Rules . . . . . . . . . . . . . . . . 16
ARTICLE XV - OTHER EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . 17
ARTICLE XVI - PLAN AMENDMENT, MODIFICATION AND TERMINATION . . . . . . . . . 17
ARTICLE XVII - WITHHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . 17
17.1 Withholding Requirement . . . . . . . . . . . . . . . . . . 17
17.2 Withholding With Stock . . . . . . . . . . . . . . . . . . . 18
ARTICLE XVIII - REQUIREMENTS OF LAW . . . . . . . . . . . . . . . . . . . . . 18
18.1 Requirements of Law . . . . . . . . . . . . . . . . . . . . 18
18.2 Federal Securities Law Requirements . . . . . . . . . . . . 18
18.3 Governing Law . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE XIX - DURATION OF THE PLAN . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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ELECTRONIC FAB TECHNOLOGY CORP.
EQUITY INCENTIVE PLAN
ARTICLE I
INTRODUCTION
1.1 Establishment. Effective December 22, 1993, Electronic Fab
Technology Corp., a Colorado corporation (hereinafter referred to, together
with its Affiliated Corporations (as defined in subsection 2.1(a)) as the
"Company" except where the context otherwise requires), established the
Electronic Fab Technology Corp. Equity Incentive Plan (the "Plan") for certain
key employees of the Company. Article XVI of the Plan provides that the Board
may amend the Plan from time to time. The Plan is hereby amended and restated,
effective January 20, 1997, subject to shareholder approval (the "Effective
Date"). The Plan permits the grant of stock options, restricted stock awards,
stock appreciation rights, stock units and other stock grants to certain key
employees of the Company.
1.2 Purposes. The purposes of the Plan are to provide the key
employees selected for participation in the Plan with added incentives to
continue in the service of the Company and to create in such employees a more
direct interest in the future success of the operations of the Company by
relating incentive compensation to the achievement of long-term corporate
economic objectives, so that the income of the key employees is more closely
aligned with the income of the Company's shareholders. The Plan is also
designed to attract key employees and to retain and motivate participating
employees by providing an opportunity for investment in the Company.
ARTICLE II
DEFINITIONS
2.1 Definitions. The following terms shall have the meanings set
forth below:
(a) "Affiliated Corporation" means any corporation or
other entity (including but not limited to a partnership) that is affiliated
with Electronic Fab Technology Corp. through stock ownership or otherwise and
is treated as a common employer under the provisions of Sections 414(b) and (c)
of the Code, together with any parent or subsidiary of the Company as defined
in Section 424 of the Code.
(b) "Award" means an Option, a Restricted Stock Award, a
Stock Appreciation Right, a Stock Unit, grants of Stock pursuant to Article XI
or other issuances of Stock hereunder.
(c) "Board" means the Board of Directors of the Company.
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(d) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(e) "Committee" means a committee consisting of members
of the Board who are empowered hereunder to take actions in the administration
of the Plan. The Committee shall be so constituted at all times as to permit
the Plan to comply with Section 162(m) of the Code and Rule 16b-3 or any
successor rule promulgated under the Securities Exchange Act of 1934 (the "1934
Act"). Members of the Committee shall be appointed from time to time by the
Board, shall serve at the pleasure of the Board and may resign at any time upon
written notice to the Board.
(f) "Disabled" or "Disability" shall have the meaning
given to such terms in Section 22(e)(3) of the Code.
(g) "Eligible Employees" means those key employees
(including, without limitation, officers and directors who are also employees)
of the Company or any division thereof, upon whose judgment, initiative and
efforts the Company is, or will become, largely dependent for the successful
conduct of its business.
(h) "Fair Market Value" of a share of Stock shall be the
last reported sale price of the Stock on the Nasdaq National Market on the day
the determination is to be made, or if no sale took place on such day, the
average of the closing bid and asked prices of the Stock on the Nasdaq National
Market on such day, or if the market is closed on such day, the last day prior
to the date of determination on which the market was open for the transaction
of business, as reported by Nasdaq. If, however, the Stock should be listed or
admitted for trading on a national securities exchange, the Fair Market Value
of a share of the Stock shall be the last sales price, or if no sales took
place, the average of the closing bid and asked prices on the day the
determination is to be made, or if the market is closed on such day, the last
day prior to the date of determination on which the market was open for the
transaction of business, as reported in the principal consolidated transaction
reporting system for the principal national securities exchange on which the
Stock is listed or admitted for trading. If the Stock is not listed or traded
on NASDAQ or on any national securities exchange, the Fair Market Value for
purposes of the grant of Options under the Plan shall be determined by the
Committee in good faith in its sole discretion.
(i) "Incentive Option" means an Option designated as such
and granted in accordance with Section 422 of the Code.
(j) "Non-Qualified Option" means any Option other than an
Incentive Option.
(k) "Option" means a right to purchase Stock at a stated
or formula price for a specified period of time. Options granted under the
Plan shall be either Incentive Options or Non-Qualified Options.
(l) "Option Certificate" shall have the meaning given to
such term in Section 7.2 hereof.
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(m) "Option Holder" means a Participant who has been
granted one or more Options under the Plan.
(n) "Option Price" means the price at which shares of
Stock subject to an Option may be purchased, determined in accordance with
subsection 7.2(b).
(o) "Participant" means an Eligible Employee designated
by the Committee from time to time during the term of the Plan to receive one
or more of the Awards provided under the Plan.
(p) "Restricted Stock Award" means an award of Stock
granted to a Participant pursuant to Article VIII that is subject to certain
restrictions imposed in accordance with the provisions of such Section.
(q) "Share" means a share of Stock.
(r) "Stock" means the common stock of the Company.
(s) "Stock Appreciation Right" means the right, granted
by the Committee pursuant to the Plan, to receive a payment equal to the
increase in the Fair Market Value of a Share of Stock subsequent to the grant
of such Award.
(t) "Stock Unit" means a measurement component equal to
the Fair Market Value of one share of Stock on the date for which a
determination is made pursuant to the provisions of this Plan.
2.2 Gender and Number. Except when otherwise indicated by the
context, the masculine gender shall also include the feminine gender, and the
definition of any term herein in the singular shall also include the plural.
ARTICLE III
PLAN ADMINISTRATION
The Plan shall be administered by the Committee. In accordance with
the provisions of the Plan, the Committee shall, in its sole discretion, select
the Participants from among the Eligible Employees, determine the Awards to be
made pursuant to the Plan, the number of Stock Units, Stock Appreciation Rights
or shares of Stock to be issued thereunder and the time at which such Awards
are to be made, fix the Option Price, period and manner in which an Option
becomes exercisable, establish the duration and nature of Restricted Stock
Award restrictions, establish the terms and conditions applicable to Stock
Units, and establish such other terms and requirements of the various
compensation incentives under the Plan as the Committee may deem necessary or
desirable and consistent with the terms of the Plan. The Committee shall
determine the form or forms of the agreements with Participants that shall
evidence the particular provisions, terms, conditions, rights
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and duties of the Company and the Participants with respect to Awards granted
pursuant to the Plan, which provisions need not be identical except as may be
provided herein. The Committee may from time to time adopt such rules and
regulations for carrying out the purposes of the Plan as it may deem proper and
in the best interests of the Company. The Committee may correct any defect,
supply any omission or reconcile any inconsistency in the Plan or in any
agreement entered into hereunder in the manner and to the extent it shall deem
expedient and it shall be the sole and final judge of such expediency. No
member of the Committee shall be liable for any action or determination made in
good faith. The determinations, interpretations and other actions of the
Committee pursuant to the provisions of the Plan shall be binding and
conclusive for all purposes and on all persons.
ARTICLE IV
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares. The number of shares of Stock that are
authorized for issuance under the Plan in accordance with the provisions of the
Plan and subject to such restrictions or other provisions as the Committee may
from time to time deem necessary shall not exceed 1,000,000. This
authorization may be increased from time to time by approval of the Board and
by the shareholders of the Company if, in the opinion of counsel for the
Company, shareholder approval is required. Shares of Stock that may be issued
upon exercise of Options, or Stock Appreciation Rights, that are issued as
Restricted Stock Awards, that are issued with respect to Stock Units, and that
are issued as incentive compensation or other stock grants under the Plan shall
be applied to reduce the maximum number of shares of Stock remaining available
for use under the Plan. The Company shall at all times during the term of the
Plan and while any Options or Stock Units are outstanding retain as authorized
and unissued Stock at least the number of shares from time to time required
under the provisions of the Plan, or otherwise assure itself of its ability to
perform its obligations hereunder.
4.2 Other Shares of Stock. Any shares of Stock that are subject
to an Option that expires, or that is forfeited or for any reason is terminated
unexercised, and any shares of Stock withheld for the payment of taxes or
received by the Company as payment of the exercise price of an Option shall
automatically become available for use under the Plan.
4.3 Adjustments for Stock Split, Stock Dividend, Etc. If the
Company shall at any time increase or decrease the number of its outstanding
shares of Stock or change in any way the rights and privileges of such shares
by means of the payment of a stock dividend or any other distribution upon such
shares payable in Stock, or through a stock split, subdivision, consolidation,
combination, reclassification or recapitalization involving the Stock, then in
relation to the Stock that is affected by one or more of the above events, the
numbers, rights and privileges of the following shall be increased, decreased
or changed in like manner as if they had been issued and outstanding, fully
paid and nonassessable at the time of such occurrence: (i) the shares of Stock
as to which Awards may be granted under the Plan and (ii) the shares of the
Stock then included in each outstanding Award granted hereunder.
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4.4 Other Distributions and Changes in the Stock. If
(a) the Company shall at any time distribute with respect
to the Stock assets or securities of persons other than the Company (excluding
cash or distributions referred to in Section 4.3), or
(b) the Company shall at any time grant to the holders of
its Stock rights to subscribe pro rata for additional shares thereof or for any
other securities of the Company, or
(c) there shall be any other change (except as described
in Section 4.3) in the number or kind of outstanding shares of Stock or of any
stock or other securities into which the Stock shall be changed or for which it
shall have been exchanged,
and if the Committee shall in its discretion determine that the event described
in subsection (a), (b), or (c) above equitably requires an adjustment in the
number or kind of shares subject to an Option or other Award, an adjustment in
the Option Price or the taking of any other action by the Committee, including
without limitation, the setting aside of any property for delivery to the
Participant upon the exercise of an Option or the full vesting of an Award,
then such adjustments shall be made, or other action shall be taken, by the
Committee and shall be effective for all purposes of the Plan and on each
outstanding Option or Award that involves the particular type of stock for
which a change was effected. Notwithstanding the foregoing provisions of this
Section 4.4, pursuant to Section 8.3 below, a Participant holding Stock
received as a Restricted Stock Award shall have the right to receive all
amounts, including cash and property of any kind, distributed with respect to
the Stock upon the Participant's becoming a holder of record of the Stock.
4.5 General Adjustment Rules. No adjustment or substitution
provided for in this Article IV shall require the Company to sell a fractional
share of Stock under any Option, or otherwise issue a fractional share of
Stock, and the total substitution or adjustment with respect to each Option and
other Award shall be limited by deleting any fractional share. In the case of
any such substitution or adjustment, the total Option Price for the shares of
Stock then subject to an Option shall remain unchanged but the Option Price per
share under each such Option shall be equitably adjusted by the Committee to
reflect the greater or lesser number of shares of Stock or other securities
into which the Stock subject to the Option may have been changed, and
appropriate adjustments shall be made to other Awards to reflect any such
substitution or adjustment.
4.6 Determination by the Committee, Etc. Adjustments under this
Article IV shall be made by the Committee, whose determinations with regard
thereto shall be final and binding upon all parties thereto.
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ARTICLE V
CORPORATE REORGANIZATION
5.1 Reorganization. Upon the occurrence of any of the following
events, if the notice required by Section 5.2 shall have first been given, the
Plan and all Options then outstanding hereunder shall automatically terminate
and be of no further force and effect whatsoever, and other Awards then
outstanding shall be treated as described in Sections 5.2 and 5.3, without the
necessity for any additional notice or other action by the Board or the
Company: (a) the merger or consolidation of the Company with or into another
corporation or other reorganization (other than a reorganization under the
United States Bankruptcy Code) of the Company (other than a consolidation,
merger, or reorganization in which the Company is the continuing corporation
and which does not result in any reclassification or change of outstanding
shares of Stock); or (b) the sale or conveyance of the property of the Company
as an entirety or substantially as an entirety (other than a sale or conveyance
in which the Company continues as holding company of an entity or entities that
conduct the business or business formerly conducted by the Company); or (c) the
dissolution or liquidation of the Company.
5.2 Required Notice. At least 30 days' prior written notice of
any event described in Section 5.1 shall be given by the Company to each Option
Holder and Participant unless (a) in the case of the events described in
clauses (a) or (b) of Section 5.1, the Company, or the successor or purchaser,
as the case may be, shall make adequate provision for the assumption of the
outstanding Options or the substitution of new options for the outstanding
Options on terms comparable to the outstanding Options except that the Option
Holder shall have the right thereafter to purchase the kind and amount of
securities or property or cash receivable upon such merger, consolidation,
other reorganization, sale or conveyance by a holder of the number of Shares
that would have been receivable upon exercise of the Option immediately prior
to such merger, consolidation, sale or conveyance (assuming such holder of
Stock failed to exercise any rights of election and received per share the kind
and amount received per share by a majority of the non-electing shares), or (b)
the Company, or the successor or purchaser, as the case may be, shall make
adequate provision for the adjustment of outstanding Awards (other than
Options) so that such Awards shall entitle the Participant to receive the kind
and amount of securities or property or cash receivable upon such merger,
consolidation, other reorganization, sale or conveyance by a holder of the
number of Shares that would have been receivable with respect to such Award
immediately prior to such merger, consolidation, other reorganization, sale or
conveyance (assuming such holder of Stock failed to exercise any rights of
election and received per share the kind and amount received per share by a
majority of the non-electing shares). The provisions of this Article V shall
similarly apply to successive mergers, consolidations, reorganizations, sales
or conveyances. Such notice shall be deemed to have been given when delivered
personally to a Participant or when mailed to a Participant by registered or
certified mail, postage prepaid, at such Participant's address last known to
the Company.
5.3 Acceleration of Exercisability. Participants notified in
accordance with Section 5.2 may exercise their Options at any time before the
occurrence of the event requiring the giving of notice (but subject to
occurrence of such event), regardless of whether all conditions of exercise
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relating to length of service, attainment of financial performance goals or
otherwise have been satisfied. Upon the giving of notice in accordance with
Section 5.2, all restrictions with respect to Restricted Stock and other Awards
shall lapse immediately, all Stock Units shall become payable immediately and
all Stock Appreciation Rights shall become exercisable. Any Options, Stock
Appreciation Rights or Stock Units that are not assumed or substituted under
clauses (a) or (b) of Section 5.2 that have not been exercised prior to the
event described in Section 5.1 shall automatically terminate upon the
occurrence of such event.
5.4 Limitation on Payments. If the provisions of this Article V
would result in the receipt by any Participant of a payment within the meaning
of Section 280G of the Code and the regulations promulgated thereunder and if
the receipt of such payment by any Participant would, in the opinion of
independent tax counsel of recognized standing selected by the Company, result
in the payment by such Participant of any excise tax provided for in Sections
280G and 4999 of the Code, then the amount of such payment shall be reduced to
the extent required, in the opinion of independent tax counsel, to prevent the
imposition of such excise tax; provided, however, that the Committee, in its
sole discretion, may authorize the payment of all or any portion of the amount
of such reduction to the Participant.
ARTICLE VI
PARTICIPATION
Participants in the Plan shall be those Eligible Employees who, in the
judgment of the Committee, are performing, or during the term of their
incentive arrangement will perform, vital services in the management, operation
and development of the Company or an Affiliated Corporation, and significantly
contribute, or are expected to significantly contribute, to the achievement of
long-term corporate economic objectives. Participants may be granted from time
to time one or more Awards; provided, however, that the grant of each such
Award shall be separately approved by the Committee, and receipt of one such
Award shall not result in automatic receipt of any other Award. Upon
determination by the Committee that an Award is to be granted to a Participant,
written notice shall be given to such person, specifying the terms, conditions,
rights and duties related thereto. Each Participant shall, if required by the
Committee, enter into an agreement with the Company, in such form as the
Committee shall determine and which is consistent with the provisions of the
Plan, specifying such terms, conditions, rights and duties. Awards shall be
deemed to be granted as of the date specified in the grant resolution of the
Committee, which date shall be the date of any related agreement with the
Participant. In the event of any inconsistency between the provisions of the
Plan and any such agreement entered into hereunder, the provisions of the Plan
shall govern.
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ARTICLE VII
OPTIONS
7.1 Grant of Options. Coincident with or following designation
for participation in the Plan, a Participant may be granted one or more
Options. The Committee in its sole discretion shall designate whether an
Option is an Incentive Option or a Non-Qualified Option. The Committee may
grant both an Incentive Option and a Non-Qualified Option to an Eligible
Employee at the same time or at different times. Incentive Options and Non-
Qualified Options, whether granted at the same time or at different times,
shall be deemed to have been awarded in separate grants and shall be clearly
identified, and in no event shall the exercise of one Option affect the right
to exercise any other Option or affect the number of shares for which any other
Option may be exercised, except as provided in subsection 7.2(j). An Option
shall be considered as having been granted on the date specified in the grant
resolution of the Committee.
7.2 Stock Option Certificates. Each Option granted under the Plan
shall be evidenced by a written stock option certificate (an "Option
Certificate"). An Option Certificate shall be issued by the Company in the
name of the Participant to whom the Option is granted (the "Option Holder") and
in such form as may be approved by the Committee. The Option Certificate shall
incorporate and conform to the conditions set forth in this Section 7.2 as well
as such other terms and conditions that are not inconsistent as the Committee
may consider appropriate in each case.
(a) Number of Shares. Each Option Certificate shall
state that it covers a specified number of shares of Stock, as determined by
the Committee. Notwithstanding any other provision of this Plan, the maximum
number of shares of Stock to be granted subject to Options to any one
Participant during the term of this Plan shall be 300,000 shares of Stock.
(b) Price. The price at which each share of Stock
covered by an Option may be purchased shall be determined in each case by the
Committee and set forth in the Option Certificate, but in no event shall the
price be less than 100 percent of the Fair Market Value of the Stock on the
date the Option (both Incentive and Non-Qualified) is granted.
(c) Duration of Options; Restrictions on Exercise. Each
Option Certificate shall state the period of time, determined by the Committee,
within which the Option may be exercised by the Option Holder (the "Option
Period"). The Option Period must end, in all cases, not more than ten years
from the date the Option is granted. The Option Certificate shall also set
forth any installment or other restrictions on Option exercise during such
period, if any, as may be determined by the Committee; however, no Option may
be exercised for at least six months after the date of grant. Each Option
shall become exercisable (vest) over such period of time, if any, or upon such
events, as determined by the Committee.
(d) Termination of Employment, Death, Disability, Etc.
The Committee may specify the period, if any, after which an Option may be
exercised following termination of the Option Holder's employment. The effect
of this subsection 7.2(d) shall be limited to determining the consequences of a
termination and nothing in this subsection 7.2(d) shall restrict or otherwise
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interfere with the Company's discretion with respect to the termination of any
individual's employment. If the Committee does not otherwise specify, the
following shall apply:
(i) If the employment of the Option Holder
terminates for any reason other than death or Disability within six
months after the date the Option is granted or if the employment of
the Option Holder is terminated within the Option Period for "cause",
as determined by the Company, the Option shall thereafter be void for
all purposes. As used in this subsection 7.2(d), "cause" shall mean a
gross violation, as determined by the Company, of the Company's
established policies and procedures.
(ii) If the Option Holder becomes Disabled, the
Option may be exercised by the Option Holder, or in the case of death
by the persons specified in subsection (iii) of this subsection
7.2(d), within one year following his or her Disability (provided that
such exercise must occur within the Option Period), but not
thereafter. In any such case, the Option may be exercised only as to
the shares as to which the Option had become exercisable on or before
the date of the Option Holder's termination of employment because of
Disability.
(iii) If the Option Holder dies during the Option
Period while still employed or within the one year period referred to
in (ii) above or the three-month period referred to in (iv) below, the
Option may be exercised by those entitled to do so under the Option
Holder's will or by the laws of descent and distribution within one
year following the Option Holder's death, (provided that such exercise
must occur within the Option Period), but not thereafter. In any such
case, the Option may be exercised only as to the shares as to which
the Option had become exercisable on or before the date of the Option
Holder's death.
(iv) If the employment of the Option Holder by the
Company is terminated (which for this purpose means that the Option
Holder is no longer employed by the Company or by an Affiliated
Corporation) within the Option Period for any reason other than cause,
Disability or the Option Holder's death, and such termination occurs
more than six months after the Option is granted, the Option may be
exercised by the Option Holder within three months following the date
of such termination (provided that such exercise must occur within the
Option Period), but not thereafter. In any such case, the Option may
be exercised only as to the shares as to which the Option had become
exercisable on or before the date of termination of employment.
(e) Transferability. Each Option shall not be
transferable by the Option Holder except by will or pursuant to the laws of
descent and distribution. Each Option is exercisable during the Option
Holder's lifetime only by him or her, or in the event of disability or
incapacity, by his or her guardian or legal representative.
(f) Consideration for Grant of Option. Each Option
Holder agrees to remain in the employment of the Company, at the pleasure of
the Company, for a continuous period of at least one year after the date the
Option is granted, at the salary rate in effect on the date of such agreement
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or at such changed rate as may be fixed, from time to time, by the Company.
Nothing in this paragraph shall limit or impair the Company's right to
terminate the employment of any employee.
(g) Exercise, Payments, Etc.
(i) Manner of Exercise. The method for
exercising each Option granted hereunder shall be by delivery to the
Company of written notice specifying the number of Shares with respect
to which such Option is exercised. The purchase of such Shares shall
take place at the principal offices of the Company within thirty days
following delivery of such notice, at which time the Option Price of
the Shares shall be paid in full by any of the methods set forth below
or a combination thereof. Except as set forth in the next sentence,
the Option shall be exercised when the Option Price for the number of
shares as to which the Option is exercised is paid to the Company in
full. If the Option Price is paid by means of a broker's loan
transaction described in subsection 7.2(g)(ii)(D), in whole or in
part, the closing of the purchase of the Stock under the Option shall
take place (and the Option shall be treated as exercised) on the date
on which, and only if, the sale of Stock upon which the broker's loan
was based has been closed and settled, unless the Option Holder makes
an irrevocable written election, at the time of exercise of the
Option, to have the exercise treated as fully effective for all
purposes upon receipt of the Option Price by the Company regardless of
whether or not the sale of the Stock by the broker is closed and
settled. A properly executed certificate or certificates representing
the Shares shall be delivered to or at the direction of the Option
Holder upon payment therefor. If Options on less than all shares
evidenced by an Option Certificate are exercised, the Company shall
deliver a new Option Certificate evidencing the Option on the
remaining shares upon delivery of the Option Certificate for the
Option being exercised.
(ii) The exercise price shall be paid by any of
the following methods or any combination of the following methods at
the election of the Option Holder, or by any other method approved by
the Committee upon the request of the Option Holder:
(A) in cash;
(B) by certified, cashier's check or
other check acceptable to the Company, payable to the order of the
Company;
(C) by delivery to the Company of
certificates representing the number of shares then owned by the
Option Holder, the Fair Market Value of which equals the purchase
price of the Stock purchased pursuant to the Option, properly endorsed
for transfer to the Company; provided however, that no Option may be
exercised by delivery to the Company of certificates representing
Stock, unless such Stock has been held by the Option Holder for more
than six months; for purposes of this Plan, the Fair Market Value of
any shares of Stock delivered in payment of the purchase price upon
exercise of the Option shall be the Fair Market Value as of the
exercise date; the exercise date shall be the day of delivery of the
certificates for the Stock used as payment of the Option Price; or
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(D) by delivery to the Company of a
properly executed notice of exercise together with irrevocable
instructions to a broker to deliver to the Company promptly
the amount of the proceeds of the sale of all or a portion of
the Stock or of a loan from the broker to the Option Holder
required to pay the Option Price.
(h) Date of Grant. An Option shall be considered as
having been granted on the date specified in the grant resolution of the
Committee.
(i) Withholding.
(i) Non-Qualified Options. Upon exercise of an
Option, the Option Holder shall make appropriate arrangements with the
Company to provide for the amount of additional withholding required
by Sections 3102 and 3402 of the Code and applicable state income tax
laws, including payment of such taxes through delivery of shares of
Stock or by withholding Stock to be issued under the Option, as
provided in Article XV.
(ii) Incentive Options. If an Option Holder makes
a disposition (as defined in Section 424(c) of the Code) of any Stock
acquired pursuant to the exercise of an Incentive Option prior to the
expiration of two years from the date on which the Incentive Option
was granted or prior to the expiration of one year from the date on
which the Option was exercised, the Option Holder shall send written
notice to the Company at its principal office in Greeley, Colorado
(Attention: Corporate Secretary) of the date of such disposition, the
number of shares disposed of, the amount of proceeds received from
such disposition and any other information relating to such
disposition as the Company may reasonably request. The Option Holder
shall, in the event of such a disposition, make appropriate
arrangements with the Company to provide for the amount of additional
withholding, if any, required by Sections 3102 and 3402 of the Code
and applicable state income tax laws.
(j) Issuance of Additional Option. If an Option Holder
pays all or any portion of the exercise price of an Option with Stock, or pays
all or any portion of the applicable withholding taxes with respect to the
exercise of an Option with Stock that has been held by the Option Holder for
more than a period, not shorter than six months, to be determined by the
Committee, the Committee may, in its sole discretion, grant to such Option
Holder a new Option covering the number of shares of Stock used to pay such
exercise price and/or withholding tax. The new Option shall have an Option
Price per share equal to the Fair Market Value of a share of Stock on the date
of the exercise of the Option and shall have the same terms and provisions as
the exercised Option, except as otherwise determined by the Committee in its
sole discretion.
7.3 Restrictions on Incentive Options.
(a) Initial Exercise. The aggregate Fair Market Value of
the Shares with respect to which Incentive Options are exercisable for the
first time by an Option Holder in any calendar year, under the Plan or
otherwise, shall not exceed $100,000. For this purpose, the Fair Market Value
of the Shares shall be determined as of the date of grant of the Option.
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(b) Ten Percent Shareholders. Incentive Options
granted to an Option Holder who is the holder of record of 10% or more of the
outstanding Stock of the Company shall have an Option Price equal to 110% of
the Fair Market Value of the Shares on the date of grant of the Option and the
Option Period for any such Option shall not exceed five years.
7.4 Shareholder Privileges. No Option Holder shall have any
rights as a shareholder with respect to any shares of Stock covered by an
Option until the Option Holder becomes the holder of record of such Stock, and
no adjustments shall be made for dividends or other distributions or other
rights as to which there is a record date preceding the date such Option Holder
becomes the holder of record of such Stock, except as provided in Article IV.
ARTICLE VIII
RESTRICTED STOCK AWARDS
8.1 Grant of Restricted Stock Awards. Coincident with or
following designation for participation in the Plan, the Committee may grant a
Participant one or more Restricted Stock Awards consisting of Shares of Stock.
The number of Shares granted as a Restricted Stock Award shall be determined by
the Committee.
8.2 Restrictions. A Participant's right to retain a Restricted
Stock Award granted to him under Section 8.1 shall be subject to such
restrictions, including but not limited to his continuous employment by the
Company or an Affiliated Corporation for a restriction period specified by the
Committee or the attainment of specified performance goals and objectives, as
may be established by the Committee with respect to such Award. The Committee
may in its sole discretion require different periods of employment or different
performance goals and objectives with respect to different Participants, to
different Restricted Stock Awards or to separate, designated portions of the
Stock shares constituting a Restricted Stock Award. In the event of the death
or Disability of a Participant, or the retirement of a Participant in
accordance with the Company's established retirement policy, all employment
period and other restrictions applicable to Restricted Stock Awards then held
by him shall lapse with respect to a pro rata part of each such Award based on
the ratio between the number of full months of employment completed at the time
of termination of employment from the grant of each Award to the total number
of months of employment required for such Award to be fully nonforfeitable, and
such portion of each such Award shall become fully nonforfeitable. The
remaining portion of each such Award shall be forfeited and shall be
immediately returned to the Company. In the event of a Participant's
termination of employment for any other reason, any Restricted Stock Awards as
to which the employment period or other restrictions have not been satisfied
(or waived or accelerated as provided herein) shall be forfeited, and all
shares of Stock related thereto shall be immediately returned to the Company.
8.3 Privileges of a Shareholder, Transferability. A Participant
shall have all voting, dividend, liquidation and other rights with respect to
Stock in accordance with its terms received by him as a Restricted Stock Award
under this Article VIII upon his becoming the holder of record of
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such Stock; provided, however, that the Participant's right to sell, encumber,
or otherwise transfer such Stock shall be subject to the limitations of Section
13.2.
8.4 Enforcement of Restrictions. The Committee shall cause a
legend to be placed on the Stock certificates issued pursuant to each
Restricted Stock Award referring to the restrictions provided by Sections 8.2
and 8.3 and, in addition, may in its sole discretion require one or more of the
following methods of enforcing the restrictions referred to in Sections 8.2 and
8.3:
(a) Requiring the Participant to keep the Stock
certificates, duly endorsed, in the custody of the Company while the
restrictions remain in effect; or
(b) Requiring that the Stock certificates, duly endorsed,
be held in the custody of a third party while the restrictions remain in
effect.
ARTICLE IX
STOCK UNITS
A Participant may be granted a number of Stock Units determined by the
Committee. The number of Stock Units, the goals and objectives to be satisfied
with respect to each grant of Stock Units, the time and manner of payment for
each Stock Unit, and the other terms and conditions applicable to a grant of
Stock Units shall be determined by the Committee.
ARTICLE X
STOCK APPRECIATION RIGHTS
10.1 Persons Eligible. The Committee, in its sole discretion, may
grant Stock Appreciation Rights to Eligible Employees.
10.2 Grant. The Committee shall determine at the time of the grant
of a Stock Appreciation Right the time period during which the Stock
Appreciation Right may be exercised, which period may not commence until six
months after the date of grant.
10.3 Exercise. A Stock Appreciation Right shall entitle a
Participant to receive a number of shares of Stock (without any payment to the
Company, except for applicable withholding taxes), cash, or Stock and cash, as
determined by the Committee in accordance with Section 10.4 below. If a Stock
Appreciation Right is issued in tandem with an Option, except as may otherwise
be provided by the Committee, the Stock Appreciation Right shall be exercisable
during the period that its related Option is exercisable. A Participant
desiring to exercise a Stock Appreciation Right shall give written notice of
such exercise to the Company, which notice shall state the proportion of Stock
and cash that the Participant desires to receive pursuant to the Stock
Appreciation Right exercised. Upon receipt of the notice from the Participant,
the Company shall deliver to the person entitled
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thereto (i) a certificate or certificates for Stock and/or (ii) a cash payment,
in accordance with Section 10.4 below. The date the Company receives written
notice of such exercise hereunder is referred to in this Article X as the
"exercise date". The delivery of Stock or cash received pursuant to such
exercise shall take place at the principal offices of the Company within 30
days following delivery of such notice.
10.4 Number of Shares or Amount of Cash. Subject to the discretion
of the Committee to substitute cash for Stock, or Stock for cash, the amount of
Stock which may be issued pursuant to the exercise of a Stock Appreciation
Right shall be determined by dividing: (a) the total number of shares of Stock
as to which the Stock Appreciation Right is exercised, multiplied by the amount
by which the Fair Market Value of the Stock on the exercise date exceeds the
Fair Market Value of a share of Stock on the date of grant of the Stock
Appreciation Right, by (b) the Fair Market Value of the Stock on the exercise
date; provided, however, that fractional shares shall not be issued and in lieu
thereof, a cash adjustment shall be paid. In lieu of issuing Stock upon the
exercise of a Stock Appreciation Right, the Committee in its sole discretion
may elect to pay the cash equivalent of the Fair Market Value of the Stock on
the exercise date for any or all of the shares of Stock that would otherwise be
issuable upon exercise of the Stock Appreciation Right.
10.5 Effect of Exercise. If a Stock Appreciation Right is issued
in tandem with an Option, the exercise of the Stock Appreciation Right or the
related Option will result in an equal reduction in the number of corresponding
Options or Stock Appreciation Rights which were granted in tandem with such
Stock Appreciation Rights and Options.
10.6 Termination of Employment. Upon the termination of employment
of a Participant, any Stock Appreciation Rights then held by such Participant
shall be exercisable within the time periods, and upon the same conditions with
respect to the reasons for termination of employment, as are specified in
Section 7.2(d) with respect to Options.
ARTICLE XI
OTHER COMMON STOCK GRANTS
From time to time during the duration of this Plan, the Board may, in
its sole discretion, adopt one or more incentive compensation arrangements for
Participants pursuant to which the Participants may acquire shares of Stock,
whether by purchase, outright grant, or otherwise. Any such arrangements shall
be subject to the general provisions of this Plan and all shares of Stock
issued pursuant to such arrangements shall be issued under this Plan.
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ARTICLE XII
CHANGE IN CONTROL
12.1 In General. Upon a change of control in the Company as
defined in Section 12.2, then (a) all options shall become immediately
exercisable in full during the remaining term thereof, and shall remain so,
whether or not the Participants to whom such Options have been granted remain
employees of the Company or an Affiliated Corporation; (b) all restrictions
with respect to outstanding Restricted Stock Awards shall immediately lapse;
(c) all Stock Units shall become immediately payable; and (d) all other Awards
shall immediately become exercisable or shall vest, as the case may be, without
any further action or passage of time.
12.2 Definition. For purposes of this Plan, a "change in control"
shall be deemed to have occurred if (a) a person (as such term is used in
Section 13(d) of the 1934 Act) becomes the beneficial owner (as defined in Rule
13d-3 under the 1934 Act) of shares of the Company or the Company's successor
having 30% or more of the total number of votes that may be cast for the
election of directors of the Company without the prior approval of at least a
majority of the members of the Company's Board of Directors unaffiliated with
such person (unless such person beneficially owns shares with at least 15% of
such votes on the Effective Date), or (b) individuals who constitute the
directors of the Company at the beginning of a 24-month period cease to
constitute at least two-thirds of all directors at any time during such period,
unless the election of any new or replacement directors was approved by a vote
of at least a majority of the members of the Company's Board of Directors in
office immediately prior to such period and of the new and replacement
directors so approved.
ARTICLE XIII
RIGHTS OF EMPLOYEES; PARTICIPANTS
13.1 Employment. Nothing contained in the Plan or in any Award
granted under the Plan shall confer upon any Participant any right with respect
to the continuation of his employment by the Company or any Affiliated
Corporation, or interfere in any way with the right of the Company or any
Affiliated Corporation, subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such employment or to
increase or decrease the compensation of the Participant from the rate in
existence at the time of the grant of an Award. Whether an authorized leave of
absence, or absence in military or government service, shall constitute a
termination of employment shall be determined by the Committee at the time.
13.2 Nontransferability. No right or interest of any Participant
in an Option, a Stock Appreciation Right, a Restricted Stock Award (prior to
the completion of the restriction period applicable thereto), a Stock Unit, or
other Award granted pursuant to the Plan, shall be assignable or transferable
during the lifetime of the Participant, either voluntarily or involuntarily, or
subjected to any lien, directly or indirectly, by operation of law, or
otherwise, including execution, levy, garnishment, attachment, pledge or
bankruptcy. In the event of a Participant's death, a Participant's
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rights and interests in Options, Stock Appreciation Rights, Restricted Stock
Awards, other Awards, and Stock Units shall, to the extent provided in Articles
VII, VIII, IX, X and XI, be transferable by will or the laws of descent and
distribution, and payment of any amounts due under the Plan shall be made to,
and exercise of any Options may be made by, the Participant's legal
representatives, heirs or legatees. If in the opinion of the Committee a
person entitled to payments or to exercise rights with respect to the Plan is
disabled from caring for his affairs because of mental condition, physical
condition or age, payment due such person may be made to, and such rights shall
be exercised by, such person's guardian, conservator or other legal personal
representative upon furnishing the Committee with evidence satisfactory to the
Committee of such status.
13.3 No Plan Funding. Obligations to Participants under the Plan
will not be funded, trusteed, insured or secured in any manner. The
Participants under the Plan shall have no security interest in any assets of
the Company or any Affiliated Corporation, and shall be only general creditors
of the Company.
ARTICLE XIV
GENERAL RESTRICTIONS
14.1 Investment Representations. The Company may require any
person to whom an Option, Stock Appreciation Right, Restricted Stock Award,
Stock Unit, or Stock is granted, as a condition of exercising such Option or
Stock Appreciation Right, or receiving such Restricted Stock Award, Stock Unit,
or Stock, to give written assurances in substance and form satisfactory to the
Company and its counsel to the effect that such person is acquiring the Stock
for his own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with Federal and
applicable state securities laws.
14.2 Compliance with Securities Laws. Each Option, Stock
Appreciation Right, Restricted Stock Award, Stock Unit, and Stock grant shall
be subject to the requirement that, if at any time counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit,
or Stock grant upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental or regulatory body, is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such Option, Stock Appreciation Right, Restricted Stock Award,
Stock Unit or Stock grant may not be accepted or exercised in whole or in part
unless such listing, registration, qualification, consent or approval shall
have been effected or obtained on conditions acceptable to the Committee.
Nothing herein shall be deemed to require the Company to apply for or to obtain
such listing, registration or qualification.
14.3 Changes in Accounting Rules. Notwithstanding any other
provision of the Plan to the contrary, if, during the term of the Plan, any
changes in the financial or tax accounting rules applicable to Options, Stock
Appreciation Rights, Restricted Stock Awards, Stock Units or other Awards shall
occur which, in the sole judgment of the Committee, may have a material adverse
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effect on the reported earnings, assets or liabilities of the Company, the
Committee shall have the right and power to modify as necessary, any then
outstanding and unexercised Options, Stock Appreciation Rights, outstanding
Restricted Stock Awards, outstanding Stock Units and other outstanding Awards
as to which the applicable employment or other restrictions have not been
satisfied.
ARTICLE XV
OTHER EMPLOYEE BENEFITS
The amount of any compensation deemed to be received by a Participant
as a result of the exercise of an Option or Stock Appreciation Right, the sale
of shares received upon such exercise, the vesting of any Restricted Stock
Award, distributions with respect to Stock Units, or the grant of Stock shall
not constitute "earnings" or "compensation" with respect to which any other
employee benefits of such employee are determined, including without limitation
benefits under any pension, profit sharing, life insurance or salary
continuation plan.
ARTICLE XVI
PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may at any time terminate, and from time to time may amend
or modify the Plan provided, however, that no amendment or modification may
become effective without approval of the amendment or modification by the
shareholders if shareholder approval is required to enable the Plan to satisfy
any applicable statutory or regulatory requirements, or if the Company, on the
advice of counsel, determines that shareholder approval is otherwise necessary
or desirable.
No amendment, modification or termination of the Plan shall in any
manner adversely affect any Options, Stock Appreciation Rights, Restricted
Stock Awards, Stock Units, Stock or other Award theretofore granted under the
Plan, without the consent of the Participant holding such Options, Stock
Appreciation Rights, Restricted Stock Awards, Stock Units, Stock or other
Awards.
ARTICLE XVII
WITHHOLDING
17.1 Withholding Requirement. The Company's obligations to deliver
shares of Stock upon the exercise of any Option, or Stock Appreciation Right,
the vesting of any Restricted Stock Award, payment with respect to Stock Units,
or the grant of Stock shall be subject to the Participant's satisfaction of all
applicable federal, state and local income and other tax withholding
requirements.
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17.2 Withholding With Stock. At the time the Committee grants an
Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit, other
Award, or Stock, it may, in its sole discretion, grant the Participant an
election to pay all such amounts of tax withholding, or any part thereof, by
electing to transfer to the Company, or to have the Company withhold from
shares otherwise issuable to the Participant, shares of Stock having a value
equal to the amount required to be withheld or such lesser amount as may be
elected by the Participant. All elections shall be subject to the approval or
disapproval of the Committee. The value of shares of Stock to be withheld
shall be based on the Fair Market Value of the Stock on the date that the
amount of tax to be withheld is to be determined (the "Tax Date"). Any such
elections by Participants to have shares of Stock withheld for this purpose
will be subject to the following restrictions:
(a) All elections must be made prior to the Tax Date.
(b) All elections shall be irrevocable.
(c) If the Participant is an officer or director of the
Company within the meaning of Section 16 of the 1934 Act ("Section 16"), the
Participant must satisfy the requirements of such Section 16 and any applicable
Rules thereunder with respect to the use of Stock to satisfy such tax
withholding obligation.
ARTICLE XVIII
REQUIREMENTS OF LAW
18.1 Requirements of Law. The issuance of Stock and the payment of
cash pursuant to the Plan shall be subject to all applicable laws, rules and
regulations.
18.2 Federal Securities Law Requirements. If a Participant is an
officer or director of the Company within the meaning of Section 16, Awards
granted hereunder shall be subject to all conditions required under Rule 16b-3,
or any successor rule promulgated under the 1934 Act, to qualify the Award for
any exception from the provisions of Section 16(b) of the 1934 Act available
under that Rule. Such conditions shall be set forth in the agreement with the
Participant which describes the Award or other document evidencing or
accompanying the Award.
18.3 Governing Law. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Colorado.
ARTICLE XIX
DURATION OF THE PLAN
Unless sooner terminated by the Board of Directors, the Plan shall
terminate on December 21, 2003 and no Option, Stock Appreciation Right,
Restricted Stock Award, Stock Unit,
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other Award or Stock shall be granted, or offer to purchase Stock made, after
such termination. Options, Stock Appreciation Rights, Restricted Stock Awards,
other Awards, and Stock Units outstanding at the time of the Plan termination
may continue to be exercised, or become free of restrictions, or paid, in
accordance with their terms.
Dated: January 20, 1997
ELECTRONIC FAB TECHNOLOGY CORP.
ATTEST:
By: By:
---------------------------- --------------------------------------
Assistant Secretary President and Chief Executive Officer
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This Appendix is filed pursuant
to Instruction 3 of Item 10(b)(2)
of Schedule 14A. It is not a part
of the Proxy Statement.
================================================================================
ELECTRONIC FAB TECHNOLOGY CORP.
STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
AS AMENDED AND RESTATED JANUARY 20, 1997
================================================================================
<PAGE> 154
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I - GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Nature of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II - OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE III - AUTHORIZED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 The Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Adjustments for Stock Split, Stock Dividend, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 Adjustments for Certain Distributions of Property . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Distributions of Capital Stock and Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.5 No Rights as Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.6 Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV - CORPORATE REORGANIZATION; CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2 Required Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Acceleration of Exercisability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.4 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE V - GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.1 Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.2 Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.3 Treatment of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.4 Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.5 Fair Market Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.6 Section Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.8 Rule 16b-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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ELECTRONIC FAB TECHNOLOGY CORP.
STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
The Board of Directors (the "Board") of Electronic Fab Technology
Corp., a Colorado Corporation (the "Company"), established the Electronic Fab
Technology Corp. Stock Option Plan for Non-Employee Directors (the "Plan"),
effective December 22, 1993. Section 5.2 of the Plan provides that the Board
may amend the Plan from time to time. The Plan is hereby amended and restated,
effective January 20, 1997, subject to shareholder approval (the "Effective
Date").
PURPOSES
The purposes of the Plan are to provide to certain directors of the
Company who are not also employees of the Company added incentive to continue
in the service of the Company and a more direct interest in the future success
of the operations of the Company by granting to such directors options
("Options") to purchase shares of the common stock (the "Stock") of the Company
upon the terms and conditions described below.
ARTICLE I
GENERAL
1.1 Definition. For purposes of the Plan and as used herein, a
"non-employee director" is an individual who (a) is a member of the Board and
(b) is not an employee of the Company. For purposes of the Plan, an employee
is an individual whose wages are subject to the withholding of federal income
tax under section 3401 of the Internal Revenue Code of 1986, as amended from
time to time (the "Code"). A non-employee director to whom an Option is
granted is referred to herein as a "Holder."
1.2 Nature of Options. The Options granted hereunder shall be
options that do not satisfy the requirements of section 422 of the Code.
ARTICLE II
OPTIONS
2.1 Participation. Each non-employee director on the Effective
Date and each non-employee director elected thereafter shall be eligible to
receive Options to purchase Stock in accordance with Section 2.2 on the terms
and conditions herein described.
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2.2 Grant.
(a) Grant. The Board, in its sole discretion, may grant
Options to individual non-employee directors. The Board shall have full
discretion as to the number and date of the grant of Options and may grant
Options covering different numbers of shares of Stock to different directors.
(b) Date of Grant. The date on which a non-employee
director receives an Option hereunder is referred to as the date of grant of
such Option.
(c) Option Certificates. Each Option granted under the
Plan shall be evidenced by a written stock option certificate (an "Option
Certificate") issued in the name of the non-employee director to whom the
Option is granted. The Option Certificate shall incorporate and conform to the
terms and conditions set forth herein.
2.3 Terms. Options issued pursuant to the Plan shall have the
following terms and conditions in addition to those set forth elsewhere herein:
(a) Number. Each non-employee director shall receive
under the Plan Options to purchase the number of shares of Stock determined by
the Board, subject to adjustment as provided in Article III. Such grants shall
be effective at the times specified in Section 2.2.
(b) Price. The price at which each share of Stock
covered by the Option may be purchased by each non-employee director shall be
the Fair Market Value (as defined in Section 5.5) of the Stock on the date of
grant, subject to adjustment as provided in Article III.
(c) Duration of Options. The period within which each
Option may be exercised shall expire ten years from the date the Option is
granted (the "Option Period"), unless terminated sooner pursuant to subsection
(d) below or fully exercised prior to the end of such period.
(d) Termination of Service, Death, Etc. The Option shall
terminate in the following circumstances if the Holder ceases to be a director
of the Company:
(i) If the Holder is removed as a director of the
Company during the Option Period for cause, the Option shall be void
thereafter for all purposes.
(ii) If the Holder ceases to be a director of the
Company on account of disability within the meaning of Section
22(e)(3) of the Code, the Option may be exercised by the Holder (or,
in case of death thereafter, by the persons specified in Section
2.3(d)(iii)) within one year following the date on which the Holder
ceased to be a director (if otherwise within the Option Period), but
not thereafter. In any such case, the Option may be exercised as to
all shares of Stock specified therein, notwithstanding Section 2.3(g).
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(iii) If the Holder dies during the Option Period
while still serving as a director or within the three-month period
referred to in Section 2.3(d)(iv) below, the Option may be exercised
by those entitled to do so under the Holder's will or by the laws of
descent and distribution within one year following the Holder's death
(if otherwise within the Option Period), but not thereafter. In any
such case, the Option may be exercised as to all shares of Stock
specified therein, notwithstanding Section 2.3(g).
(iv) If the Holder ceases to be a director within
the Option Period for any reason other than removal for cause,
disability or death, the Option may be exercised by the Holder within
three months following the date of such termination (if otherwise
within the Option Period), but not thereafter. In any such case, the
Option may be exercised only as to the shares as to which the Option
had become exercisable on or before the date the Holder ceased to be a
director.
(e) Transferability, Exercisability. Each Option granted
under the Plan shall not be transferable by a Holder other than by will or the
laws of descent and distribution and shall be exercisable during the Holder's
lifetime only by the Holder or, in the event of disability or incapacity, by
the Holder's guardian or legal representative. Notwithstanding any other
provision of the Plan, no Option may be exercised unless and until the Plan is
approved by the shareholders of the Company in accordance with Section 5.4.
(f) Exercise, Payments, Etc.
(i) The method for exercising each Option granted
shall be by delivery to the Company of written notice specifying the
number of shares with respect to which the Option is exercised. The
purchase of Stock pursuant to the Option shall take place at the
principal office of the Company within thirty days following delivery
of such notice, at which time the purchase price of the Stock shall be
paid in full by any of the methods set forth in Section 2.3(f)(ii) or
a combination thereof. If the purchase price is paid by means of a
broker's loan transaction as described in clause (C) of Section
2.3(f)(ii), in whole or in part, the closing of the purchase of the
Stock under the Option shall take place on the date on which, and only
if, the sale of Stock upon which the broker's loan was based has been
closed and settled, unless the Holder makes an irrevocable written
election, at the time of exercise of the Option, to have the exercise
treated as fully effective for all purposes upon receipt of the
purchase price by the Company regardless of whether or not the sale of
the Stock by the broker is closed and settled. A properly executed
certificate or certificates representing the Stock shall be delivered
to the Holder upon payment therefor. If Options on less than all
shares evidenced by an Option Certificate are exercised, the Company
shall deliver a new Option Certificate evidencing the Option on the
remaining shares on delivery of the outstanding Option Certificate for
the Option being exercised.
(ii) The exercise price shall be paid by any of
the following methods or any combination of such methods, at the
option of the Holder: (A) cash; (B) certified, cashier's or other
check acceptable to the Company, payable to the order of the Company;
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or (C) delivery to the Company of irrevocable instructions to a broker
to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the purchase price of the Stock; or (D) delivery to
the Company of certificates representing the number of shares of Stock
then owned by the Holder, the Fair Market Value of which (determined
as of the date the notice of exercise is delivered to the Company)
equals the price of the Stock to be purchased pursuant to the Option,
properly endorsed for transfer to the Company. No Option may be
exercised by delivery to the Company of certificates representing
Stock that has been held by the Option Holder for less than six months
or such other period as shall be sufficient for the Company to avoid,
if possible, the recognition of expense with respect to the Option for
accounting purposes.
(g) Service Required for Exercise. Except as set forth
in Sections 2.3(d), 4.3, 4.4 and 5.4, each Option shall become exercisable in
increments after each month of continuous service by the Holder as a
non-employee director of the Company commencing with the twelfth month of
continuous service from the date of grant. The number of shares as to all or
part of which the Option may be exercised after twelve months of continuous
service as a non-employee director after the date of grant shall be 1/4 (12/48)
of the total number of shares covered by the Option, with an additional 1/48
being exercisable after each additional month of continuous service as a
non-employee director through the 48th month of continuous service. Except as
set forth in Sections 2.3(d), 4.3 and 4.4, the Option shall not be exercisable
as to any shares as to which the continuous service requirement has not been
satisfied, regardless of the circumstances under which the Holder ceased to be
a director. The number of shares as to which the Option may be exercised shall
be cumulative, so that once the Option becomes exercisable as to any shares it
shall continue to be exercisable as to those shares until expiration or
termination of the Option as provided in the Plan.
ARTICLE III
AUTHORIZED STOCK
3.1 The Stock. The total number of shares of Stock as to which
Options may be granted pursuant to the Plan shall be 160,000 in the aggregate.
The number of shares of Stock authorized for grant hereunder shall be adjusted
in accordance with the provisions of Section 3.2. Shares of Stock underlying
expired or cancelled and unexercised Options shall again be available for grant
under the Plan. The Company shall at all times reserve a sufficient number of
shares of Stock, or otherwise assure itself of its ability to perform its
obligations hereunder.
3.2 Adjustments for Stock Split, Stock Dividend, Etc. If the
Company shall at any time increase or decrease the number of its outstanding
Shares by means of payment of a stock dividend or any other distribution upon
such Shares payable in Stock, or through a stock split, subdivision,
consolidation, combination, reclassification or recapitalization involving the
Stock, or change in any way the rights and privileges of such Shares, then the
numbers, rights and privileges of the following shall be increased, decreased
or changed in like manner as if the corresponding Shares had been issued and
outstanding, fully paid and nonassessable at the time
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of such occurrence: (a) the Shares as to which Options may be granted under
the Plan; and (b) the Shares then subject to each outstanding Option. Upon any
occurrence described in this Section 3.2, the total Option Price under each
then outstanding Option shall remain unchanged but shall be apportioned ratably
over the increased or decreased number of Shares subject to the Option.
3.3 Adjustments for Certain Distributions of Property. If the
Company shall at any time distribute with respect to its Stock assets or
securities of other persons (excluding cash dividends or distributions payable
out of capital surplus and dividends or other distributions referred to in
Sections 3.2 or 3.4), then the Option Price of outstanding Options shall be
adjusted to reflect the fair market value of the assets or securities
distributed, the Company shall provide for the delivery upon exercise of such
Options of cash in an amount equal to the fair market value of the assets or
securities distributed or a combination of such actions shall be taken, all as
determined by the Committee in its discretion. Fair market value of the assets
or securities distributed for this purpose shall be as determined by the
Committee.
3.4 Distributions of Capital Stock and Indebtedness. If the
Company shall at any time distribute with respect to its Stock shares of its
capital stock (other than Stock) or evidences of indebtedness, then a
proportionate part of such capital stock and evidences of indebtedness shall be
set aside for each outstanding Option and, upon the exercise of such Option,
delivered to the Option Holder.
3.5 No Rights as Shareholder. An Option Holder shall have none of
the rights of a shareholder with respect to the Shares subject to an Option
until such Shares are transferred to the Option Holder upon the exercise of
such Option. Except as provided in this Article III, no adjustment shall be
made for dividends, rights or other property distributed to shareholders
(whether ordinary or extraordinary) for which the record date is prior to the
date such Shares are so transferred.
3.6 Fractional Shares. No adjustment or substitution provided for
in this Article III shall require the Company to issue a fractional share. The
total substitution or adjustment with respect to each Option shall be limited
by deleting any fractional share.
ARTICLE IV
CORPORATE REORGANIZATION; CHANGE OF CONTROL
4.1 Reorganization. Upon the occurrence of any of the following
events, if the notice required by Section 4.2 shall have first been given, the
Plan and all Options then outstanding hereunder shall automatically terminate
and be of no further force and effect whatsoever, without the necessity for any
additional notice or other action by the Board or the Company: (a) the merger
or consolidation of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification or change of outstanding shares
of Stock); or (b) the sale or
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conveyance of the property of the Company as an entirety or substantially as an
entirety (other than a sale or conveyance in which the Company continues as a
holding company of an entity or entities that conduct the business or
businesses formerly conducted by the Company); or (c) the dissolution or
liquidation of the Company.
4.2 Required Notice. At least 30 days' prior written notice of
any event described in Section 4.1 shall be given by the Company to each
Holder, unless in the case of the events described in clauses (a) or (b) of
Section 4.1, the Company, or the successor or purchaser, as the case may be,
shall make adequate provision for the assumption of the outstanding Options or
the substitution of new options for the outstanding Options on terms comparable
to the outstanding Options except that the Holder of each Option then
outstanding shall have the right thereafter to purchase the kind and amount of
shares of stock or other securities or property or cash receivable upon such
merger, consolidation, sale or conveyance by a holder of the number of shares
of Stock that would have been receivable upon exercise of the Option
immediately prior to such merger, consolidation, sale or conveyance (assuming
such holder of Stock failed to exercise any rights of election and received per
share the kind and amount received per share by a majority of the non-electing
shares). The provisions of this Article IV shall similarly apply to successive
mergers, consolidations, sales or conveyances. Such notice shall be deemed to
have been given when delivered personally to a Holder or when mailed to a
Holder by registered or certified mail, postage prepaid, at such Holder's
address last known to the Company.
4.3 Acceleration of Exercisability. Subject to Section 5.4,
Holders notified in accordance with Section 4.2 may exercise their Options at
any time before the occurrence of the event requiring the giving of notice (but
subject to occurrence of such event), regardless of whether all conditions of
exercise relating to length of service as a director have been satisfied.
4.4 Change of Control. If a Change in Control (as defined below)
occurs, all Options shall become exercisable in full, regardless of whether all
conditions of exercise relating to continuous service have been satisfied. A
"Change in Control" is deemed to have occurred if (a) a person (as such term is
used in Section 13(d) of the Securities Exchange Act of 1934 (the "Exchange
Act")) becomes the beneficial owner (as defined in Rule 13d-3 under the
Exchange Act) of shares of the Company or the Company's successor having 30% or
more of the total number of votes that may be cast for the election of
directors of the Company without the prior approval of at least a majority of
the members of the Board unaffiliated with such person (unless such person
beneficially owns shares with at least 15% of such votes on the Effective
Date), or (b) individuals who constitute the directors of the Company at the
beginning of a 24-month period cease to constitute at least two-thirds of all
directors at any time during such period, unless the election of any new or
replacement directors was approved by a vote of at least a majority of the
members of the Board in office immediately prior to such period and of the new
and replacement directors so approved. Notwithstanding anything to the
contrary in this Section 4.4, no Option will become exercisable by virtue of
the occurrence of a Change in Control if the Holder of that Option or any group
of which that Holder is a member is the person whose acquisition constituted
the Change in Control.
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ARTICLE V
GENERAL PROVISIONS
5.1 Expiration. The Plan shall terminate whenever the Board
adopts a resolution to that effect. After termination, no additional Options
shall be granted under the Plan, but the Company shall continue to recognize
Options previously granted.
5.2 Amendments, Etc. The Board may from time to time amend,
modify, suspend or terminate the Plan. Nevertheless, no such amendment,
modification, suspension or termination shall impair any Option theretofore
granted under the Plan or deprive any Holder of any shares of Stock that he may
have acquired through or as a result of the Plan without the consent of the
Holder. The Company shall obtain the approval of shareholders to any amendment
or modification of the Plan to the extent required by Rule 16b-3 under the
Exchange Act ("Rule 16b-3") (or any successor applicable rule) or by the
listing requirements of the National Association of Securities Dealers, Inc. or
any stock exchange on which the Company's securities are quoted or listed for
trading.
5.3 Treatment of Proceeds. Proceeds from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Company.
5.4 Effectiveness. This Plan shall be effective on the Effective
Date, subject to approval by the shareholders of the Company in accordance with
applicable law within 12 months before or after the Effective Date. If the
shareholders of the Company do not approve the Plan as specified above, the
Plan as in effect prior to this amendment and restatement shall remain in
effect.
5.5 Fair Market Value. The "Fair Market Value" of a share of
Stock shall be the last reported sale price of the Stock on the NASDAQ National
Market System on the day the determination is to be made, or if no sale took
place on such day, the average of the closing bid and asked prices of the Stock
on the NASDAQ National Market System on such day, or if the market is closed on
such day, the last day prior to the date of determination on which the market
was open for the transaction of business, as reported by NASDAQ. If, however,
the Stock should be listed or admitted for trading on a national securities
exchange, the Fair Market Value of a share of the Stock shall be the last sales
price, or if no sales took place, the average of the closing bid and asked
prices on the day the determination is to be made, or if the market is closed
on such day, the last day prior to the date of determination on which the
market was open for the transaction of business, as reported in the principal
consolidated transaction reporting system for the principal national securities
exchange on which the Stock is listed or admitted for trading. If the Stock is
not listed or traded on NASDAQ or on any national securities exchange, the Fair
Market Value for purposes of the grant of Options under the Plan shall be
determined by the Committee in good faith in its sole discretion.
5.6 Section Headings. The Section headings are included herein
only for convenience, and they shall have no effect on the interpretation of
the Plan.
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5.7 Severability. If any article, section, subsection or specific
provision is found to be illegal or invalid for any reason, such illegality or
invalidity shall not affect the remaining provisions of the Plan, and the Plan
shall be construed and enforced as if such illegal and invalid provision had
never been set forth in the Plan.
5.8 Rule 16b-3. This Plan is intended to comply with the
requirements of Rule 16b-3 and any successor applicable rule so that grants
under the Plan will not affect the status of non-employee directors as
disinterested persons for purposes of Rule 16b-3 and that such grants will
otherwise satisfy the requirements of Rule 16b-3. To the extent the Plan does
not conform to such requirements, it shall be deemed amended to so conform
without any further action on the part of the Board of Directors or
shareholders.
Amended and restated as of January 20, 1997.
ELECTRONIC FAB TECHNOLOGY CORP.
By:
--------------------------------------
President and Chief Executive Officer
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