<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:
[ X ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Amendment Number 2 Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
EFTC CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(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:
1,858,975
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined): The last sale of the Common Stock of the
Registrant reported on July 18, 1997 was $10.75 per share. At
$10.75 per share, the aggregate value of the Common Stock to
be transferred in the transaction is $19,983,981.25, and the
aggregate value of the cash portion of the transaction is
$19,500,000, resulting in a maximum annual value for the
transaction of $39,483,981.25 for the purposes of Exchange Act
Rule 0-11. Pursuant to Exchange Act Rule 0-11(c)(1)(i), the
filing fee is $7,896.80.
4) Proposed maximum aggregate value of transaction:
$39,483,981.25
5) Total fee paid: $7,896.80
[ ] Fee paid previously with preliminary materials.
[ X ] 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: $7,896.80
2) Form Schedule or Registration Statement No.: Schedule 14A
3) Filing Party: EFTC Corporation
4) Date Filed: July 23, 1997
<PAGE> 2
EFTC CORPORATION
HORIZON TERRACE
9351 GRANT STREET, SIXTH FLOOR
DENVER, COLORADO 80229
(303) 451-8200
SEPTEMBER 19, 1997
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of EFTC Corporation (the "Company"), formerly named "Electronic Fab Technology
Corp.," to be held on September 30, 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 1,858,975
shares of the Company's Common Stock (the "Merger Proposal"), in connection
with the merger of Circuit Test, Inc., a Florida corporation ("CTI"), with and
into CTI Acquisition Corp., a Florida corporation and a wholly-owned subsidiary
of the Company (the "Merger"), in exchange for such Common Stock of the
Company; (ii) approval of an amendment to the Company's Equity Incentive Plan
to increase the number of shares of the Common Stock of the Company reserved
for issuance thereunder from 995,000 to 1,995,000 (the "Employee Plan
Amendment"); (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
of the Company reserved for issuance thereunder from 160,000 to 300,000 (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 Company's Board of Directors believes that the Merger and the
related acquisition of Circuit Test International, L.C., a Florida limited
liability company, and Airhub Service Group, L.C., a Kentucky limited liability
company, both affiliates of CTI (the "CTI LLCs" and, together with CTI, the
"CTI Companies"), in exchange for all of the limited liability company
interests in the CTI LLCs (the "Acquisition") will provide (i) a strategic and
geographic expansion of the Company's breadth of high-mix service offerings and
opportunities to develop new programs to help OEMs reduce inventory; (ii)
implementation of a hub-based strategy for contract manufacturing; (iii)
opportunities to approach the CTI Companies' existing customer base to pursue
additional high-mix electronic contract manufacturing opportunities; and (iv)
delivery of the CTI Companies' repair services to the Company's existing
customer base, which, together, are expected to provide the Company competitive
advantages in the high-mix electronic contract manufacturing industry. The
Board of Directors and management of the Company also believe that the CTI
Companies' management team will represent a strong complement to the Company's
management team.
The Board of Directors recommends that the shareholders vote FOR each
of the proposals. The Merger Proposal, the Employee Plan Amendment and the
Non-Employee Plan Amendment each 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.
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,
President and Chief Executive Officer
<PAGE> 3
EFTC CORPORATION
HORIZON TERRACE
9351 GRANT STREET, SIXTH FLOOR
DENVER, COLORADO 80229
(303) 451-8200
------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 30, 1997
------------------
TO ALL SHAREHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of EFTC
Corporation, a Colorado corporation formerly named "Electronic Fab Technology
Corp." (the "Company"), will be held on September 30, 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 1,858,975 shares of the Company's
Common Stock, par value $.01 per share (the "Common Stock"), in connection with
the merger of Circuit Test, Inc., a Florida corporation ("CTI"), with and into
CTI Acquisition Corp., a Florida corporation and a wholly-owned subsidiary of
the Company, in exchange for such Common Stock, and;
(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 995,000 to 1,995,000 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 160,000 to 300,000 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 of Directors has fixed the close of business on August 6,
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
Lloyd A. McConnell
Secretary
Denver, Colorado
September 19, 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 MORE
LIKELY BE REPRESENTED AT THE MEETING, WHICH WILL PREVENT COSTLY FOLLOW-UP AND
DELAYS.
<PAGE> 5
EFTC CORPORATION
------------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 30, 1997
------------------
This Proxy Statement is being furnished to the shareholders of EFTC
Corporation, a Colorado corporation formerly named "Electronic Fab Technology
Corp." ("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 September 30,
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 1,858,975 shares (the "EFTC
Equity") of the Company's Common Stock, par value $.01 per share (the "Common
Stock"), in accordance with Nasdaq Stock Market rules (the "Merger Proposal"),
in connection with the merger (the "Merger") of Circuit Test, Inc., a Florida
corporation ("CTI"), with and into CTI Acquisition Corp., a Florida corporation
and a wholly-owned subsidiary of the Company ("CAC"), in exchange for the EFTC
Equity, and;
(ii) To approve an amendment to the Company's Equity Incentive Plan
(the "Employee Plan") to increase the number of shares of the Company's Common
Stock reserved for issuance thereunder from 995,000 to 1,995,000 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 (the "Non-Employee Plan") to increase the number of
shares of the Company's Common Stock reserved for issuance thereunder from
160,000 to 300,000 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 August 6,1997, 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 245 holders of record of the Common Stock.
A copy of the Agreement and Plan of Reorganization, among the Company,
CAC and CTI, dated as of July 9, 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 CTI into CAC, and (ii) the issuance of the
EFTC Equity to CTI's current shareholders. See "THE MERGER PROPOSAL" and
"DESCRIPTION OF THE MERGER AGREEMENT."
In addition, in connection with the Merger, the Company has entered
into a Limited Liability Company Unit Purchase Agreement, dated as of July 9,
1997 (the "Purchase Agreement"), among the Company, CTLLC Acquisition Corp., a
Florida corporation and a wholly owned subsidiary of the Company ("Acquisition
Corp."), the CTI LLCs and the CTI LLC Members (each as defined below). The
Purchase Agreement provides for the payment of $19,500,000, subject to
adjustment, and certain contingent earnout payments (the "Earnout Payments")
payable to the existing members (the "CTI LLC Members") of two affiliates of
CTI, Circuit Test International, L.C., a Florida limited liability company
("CTI International") and Airhub Service Group, L.C., a Kentucky limited
liability company ("Airhub" and, together with CTI International, the "CTI
LLCs"), in exchange for all of the limited liability company interests in the
CTI LLCs (the "Acquisition").
<PAGE> 6
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 995,000 to 1,995,000. See "DESCRIPTION OF THE
EMPLOYEE PLAN AMENDMENT."
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 160,000 to 300,000. See "DESCRIPTION OF THE
NON-EMPLOYEE PLAN AMENDMENT".
This Proxy Statement is being mailed to shareholders on or about
September 19, 1997. The Board has fixed the close of business on August 6,
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 5,939,410 shares
were outstanding as of the close of business on the Record Date. Each share of
Common Stock is entitled to one vote.
The Merger Proposal, the Employee Plan Amendment and the Non-Employee
Plan Amendment each 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.
As of August 31, 1997, the executive officers and directors of the
Company were the record owners of an aggregate of 3,822,570 shares of
outstanding Common Stock (or 64.2% of the total number of shares outstanding as
of such date). 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 no other shareholders will be required at the Special Meeting to
constitute a quorum to approve the Merger Proposal and the Employee Plan
Amendment.
The Company's executive offices are located at Horizon Terrace, 9351
Grant Street, Denver, Colorado 80229 (telephone (303) 451-8200).
THE BOARD HAS DETERMINED THAT (1) THE ISSUANCE OF THE EFTC EQUITY, THE
MERGER OF CAC INTO CTI AND THE RELATED ACQUISITION OF THE CTI LLCS; (2) THE
EMPLOYEE PLAN AMENDMENT AND (3) THE NON-EMPLOYEE PLAN AMENDMENT 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--Revocation of Proxies."
------------------
The date of this Proxy Statement is September 19, 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
EFTC Director Voting Arrangements . . . . . . . . . . . . . . . . . 4
CTI Shareholder Voting Arrangements . . . . . . . . . . . . . . . . 4
Related Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 5
Additional Matters . . . . . . . . . . . . . . . . . . . . . . . . . 5
Employee Plan Amendment . . . . . . . . . . . . . . . . . . . . . . 5
Non-Employee Plan Amendment . . . . . . . . . . . . . . . . . . . . 6
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA . . . . . . . . . . . . . . 7
Selected Historical Financial Data . . . . . . . . . . . . . . . . 7
Unaudited Selected Pro Forma Financial Data . . . . . . . . . . . . 9
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Cautionary Statement . . . . . . . . . . . . . . . . . . . . . . . 10
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Date, Time and Place . . . . . . . . . . . . . . . . . . . . . . . 10
The Record Date . . . . . . . . . . . . . . . . . . . . . . . . . 10
Purpose of the Special Meeting . . . . . . . . . . . . . . . . . . 10
Quorum and Voting . . . . . . . . . . . . . . . . . . . . . . . . 11
Revocation of Proxies . . . . . . . . . . . . . . . . . . . . . . 11
Cost of Solicitation . . . . . . . . . . . . . . . . . . . . . . . 11
CTI Companies Information . . . . . . . . . . . . . . . . . . . . 11
THE COMPANIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
EFTC Corporation . . . . . . . . . . . . . . . . . . . . . . . . 12
Circuit Test, Inc. and Affiliates . . . . . . . . . . . . . . . . 20
THE MERGER PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Description of the Merger . . . . . . . . . . . . . . . . . . . . 24
Description of the Acquisition . . . . . . . . . . . . . . . . . . 25
Transactions to Occur Concurrently . . . . . . . . . . . . . . . . 25
History and Background . . . . . . . . . . . . . . . . . . . . . . 25
Reasons for the Transactions . . . . . . . . . . . . . . . . . . . 26
Financing for the Merger and Acquisition . . . . . . . . . . . . . 29
Common Stock Held by Directors and Executive Officers . . . . . . 29
Tax and Accounting Treatment . . . . . . . . . . . . . . . . . . . 29
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . 29
DESCRIPTION OF THE MERGER AGREEMENT . . . . . . . . . . . . . . . . . . . . 29
The Merger Agreement . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
iii
<PAGE> 8
<TABLE>
<S> <C>
Change of the Company's Board . . . . . . . . . . . . . . . . . . 31
EFTC Director Voting Arrangements . . . . . . . . . . . . . . . . 31
CTI Shareholder Voting Arrangements . . . . . . . . . . . . . . . 32
DESCRIPTION OF THE RELATED AGREEMENTS . . . . . . . . . . . . . . . . . . . 32
The Purchase Agreement . . . . . . . . . . . . . . . . . . . . . . 32
Earnout Payments . . . . . . . . . . . . . . . . . . . . . . . . 32
The Registration Rights Agreement . . . . . . . . . . . . . . . . 33
Employment Matters . . . . . . . . . . . . . . . . . . . . . . . 34
The Indemnification Agreement . . . . . . . . . . . . . . . . . . 35
CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS . . . . . . . . . . . . . 35
Interests of Certain Persons in the Merger and the Acquisition . . 35
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Capitalization of the Company . . . . . . . . . . . . . . . . . . 36
Challenges of Business Integration . . . . . . . . . . . . . . . . 36
FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . 37
APPRAISAL RIGHTS OF DISSENTING SHAREHOLDERS . . . . . . . . . . . . . . . . 37
MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Circuit Test, Inc. and Affiliates . . . . . . . . . . . . . . . . 43
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION . . . . . . . . . . . . 46
RECOMMENDATION OF THE BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . 52
DESCRIPTION OF THE EMPLOYEE PLAN AMENDMENT . . . . . . . . . . . . . . . . 53
Reasons for the Proposed Amendment . . . . . . . . . . . . . . . . 53
Description of the Employee Plan . . . . . . . . . . . . . . . . . 53
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . 55
DESCRIPTION OF THE NON-EMPLOYEE PLAN AMENDMENT . . . . . . . . . . . . . . 56
Reasons for the Proposed Amendment . . . . . . . . . . . . . . . . 56
Description of the Non-Employee Plan . . . . . . . . . . . . . . . 56
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECURITY OWNERSHIP' . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . 59
Options Granted . . . . . . . . . . . . . . . . . . . . . . . . . 60
Option Exercises and Year End Option Values . . . . . . . . . . . 60
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . 60
Directors' Compensation . . . . . . . . . . . . . . . . . . . . . 61
COMPANY COMMON STOCK INFORMATION . . . . . . . . . . . . . . . . . . . . . 61
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
iv
<PAGE> 9
<TABLE>
<S> <C>
SHAREHOLDER PROPOSALS . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
OTHER BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>
v
<PAGE> 10
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, as
defined in the Private Securities Litigation Reform Act of 1995, that involve
known and unknown risks, including, without limitation, statements containing
the words "believes," "anticipates," "estimates," "expects," "may" and words of
similar import or statements of management's opinion. See
"INTRODUCTION--Cautionary Statement" for a discussion of certain risks and
their potential impact on the forward looking statements contained herein.
THE COMPANIES
EFTC Corporation. 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.
At the Company's annual meeting held on May 28, 1997, the shareholders voted to
change the name of the Company from "Electronic Fab Technology Corp." to "EFTC
Corporation." The Company operates manufacturing facilities totaling 82,000
square feet in Greeley, Colorado, a campus including manufacturing facilities
comprising 47,000 square feet in Newberg, Oregon, and a 20,000 square feet
manufacturing facility in Moses Lake, Washington, and employs approximately 671
people. The principal executive offices of the Company are located at Horizon
Terrace, 9351 Grant Street, Denver, Colorado 80229.
The CTI Companies. CTI, founded in 1982 and based in Memphis,
Tennessee, is an electronic component repair organization specializing in the
computer and communications industries. One of CTI's principal strategies is
to compete through the effective use of "hub-based" repair services, which CTI
pioneered. CTI, together with its affiliates the CTI LLCs (collectively, the
"CTI Companies") are the only electronic repair service provider with
operations located inside the hub infrastructure of both the largest
transportation/logistics companies in the United States. Pursuant to the terms
of the Merger Agreement, all of the holders (the "CTI Shareholders") of the
outstanding Class A and Class B Common Stock (the "CTI Common Stock") will
exchange such shares for shares of the Company's Common Stock. In addition,
pursuant to the terms of the Purchase Agreement, the members of the CTI LLCs
will sell all of the interests in the CTI LLCs to the Company for cash.
THE SPECIAL MEETING
Date, Time and Place of Special Meeting. The Special Meeting will be
held on September 30, 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: (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 August 6, 1997 (the "Record Date"). As of the
Record Date 5,939,410 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 64.2% 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 and the Employee
Plan
<PAGE> 11
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 at the Special Meeting in person or by proxy no other shareholders
will be necessary to constitute a quorum. See "THE SPECIAL MEETING--Quorum and
Voting."
THE MERGER PROPOSAL
In connection with the execution and delivery of the Merger Agreement,
the Company has entered into: (i) the Merger Agreement, (ii) the Purchase
Agreement, (iii) a Voting Agreement, dated as of July 9, 1997 (the "Voting
Agreement"), among the Company and the CTI Shareholders, and (iv) a Letter
Agreement, dated as of July 9, 1997 (the "Letter Agreement") among CTI and EFTC
Directors who are also shareholders of the Company which together provide the
principal terms upon which the Merger and the Acquisition will be completed.
CTI and the CTI LLCs are independently owned entities owned and
controlled by various members, and entities in turn controlled by the family of
Allen S. Braswell, Sr. Over seventy percent of the shares of CTI are owned by
the Allen S. Braswell, Sr. Grantor Retained Income Trust. The following
entities each own fifty percent (50%) of both CTI LLCs: (i) Circuit Test
International Limited Partnership (Allen S. Braswell Sr. Living Trust, General
Partner, Allen S. Braswell, Sr. Trustee); and (ii) Allen S. Braswell, Jr.
Revocable Living Trust, Allen S. Braswell, Jr., Trustee.
Reasons for the Merger and the Acquisition. The Board and management
of the Company have identified significant benefits of the transactions,
including: (i) a strategic and geographic expansion of the Company's breadth
of high-mix service offerings, enabling the Company to offer "cradle-to-grave"
services such as concurrent engineering, subassembly manufacturing, next-day
delivery of assemblies, warranty repair service and post-warranty repair
services and to develop new programs to help OEMs reduce inventory; (ii)
implementation of a hub-based strategy for contract manufacturing; (iii)
opportunities to approach the CTI Companies' existing customer base to pursue
additional high-mix electronic contract manufacturing opportunities; and (iv)
delivery of the CTI Companies' repair services to the Company's existing
customer base, which, together, are expected to provide the Company competitive
advantages in the high-mix electronic contract manufacturing industry. The
Board and management of the Company also believe that the CTI Companies'
management team will represent a strong complement to the Company's management
team. See "THE MERGER PROPOSAL--Reasons for the Transactions."
Although there can be no assurance of 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 "THE MERGER PROPOSAL--Reasons for the
Transactions;" "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 CTI Companies and the Company contained
in this Proxy Statement. See "RECOMMENDATION OF THE BOARD OF DIRECTORS."
CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS
Interests of Certain Persons in the Merger and the Acquisition. Jack
Calderon, President, Chief Executive Officer and a director of the Company, Mr.
Robert K. McNamara and Mr. Richard L. Monfort, who are both directors of the
Company, and Mr. Allen S. Braswell, Sr., who will become a director of the
Company upon the completion of the Merger and the Acquisition, each have
certain financial interests in the completion of the Merger and the
Acquisition. See "CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS--Interests
of Certain Persons in the Merger and Acquisition."
Financing for the Acquisition. In connection with the Merger and the
Acquisition, the Company has signed a commitment letter for a loan (the "Bank
One Loan") with Bank One, Colorado, N.A. ("Bank One") and has agreed upon
2
<PAGE> 12
terms for the issuance of $15 million in subordinated notes (the "Subordinated
Notes," the Bank One Loan and the Subordinated Notes are together referred to
herein as the "Financing") to Richard L. Monfort, a director of the Company.
The Bank One Loan is comprised of a $30 million revolving credit facility and a
$15 million term loan. The Financing is subject to the negotiation of
definitive loan documents and there can be no assurance that the Financing will
be obtained. The Bank One Loan documents will contain covenants restricting
the Company's ability to incur additional debt, grant dividends and engage in
mergers and acquisitions without Bank One's consent, as well as financial
covenants. See "CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS--Interests of
Certain Persons in the Merger and Acquisition--Issuance of Subordinated
Notes;" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--The Company--Liquidity and Capital Resources."
Significant Ownership of Common Stock by Management. As of August 31,
1997, directors and officers of the Company owned approximately 64.2% of the
outstanding Common Stock. If the Merger is approved and the Merger and the
Acquisition are consummated, the EFTC Equity will be issued and Allen S.
Braswell, Sr. and Allen S. Braswell, Jr. will become directors of the Company.
Following such transactions, the directors and officers of the Company will own
approximately 71.2% of the outstanding Common Stock. 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
and the purchase of certain assets from AlliedSignal, the Company will have
approximately $39 million in long-term debt outstanding and stockholders'
equity of approximately $26 million. The Company's management believes this to
be a reasonable amount of indebtedness in light of the combined size and nature
of operations of the Company and the CTI Companies following the completion of
the Merger and the Acquisition. 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 Acquisition and the subsequent integration of the operations of the Company
and the CTI Companies will require substantial attention of management and
effort by employees throughout the Company and the CTI Companies. There is no
assurance that such efforts will successfully achieve the anticipated benefits
of the Merger, the Acquisition and related transactions. See "CERTAIN MATTERS
TO BE CONSIDERED BY SHAREHOLDERS--Challenges of Business Integration."
THE MERGER AGREEMENT
The Merger Agreement provides for the merger of CAC, a wholly-owned
subsidiary of the Company into CTI, with CTI being the surviving corporation.
As consideration for the Merger, the Company will issue the EFTC Equity to the
CTI Shareholders, representing approximately 23.85% of the Common Stock of the
Company after giving effect to the transactions. The CTI Shareholders
currently do not own any shares of the Company's Common Stock. The Merger will
become effective at the time the articles of merger are filed with the
Department of State of State of Florida or at such later time that the parties
agree, as 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 after the Special Meeting. At the Effective Time
and whether or not surrendered at the closing of the Merger and the Acquisition
(the "Closing"), each issued and outstanding share of CTI Common Stock will be
converted into the right to receive approximately 152.788 shares of Common
Stock of EFTC. The aggregate number of shares of the Company's Common Stock
constituting the EFTC Equity is 1,858,975 shares. 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 CTI 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 CTI Shareholders, the simultaneous closing of the
Acquisition, as well as other usual and customary conditions for similar
transactions. In addition, the obligations of the Company and CTI to
consummate the Merger are subject to the performance by the CTI
3
<PAGE> 13
Shareholders of, and their compliance with, the voting arrangement entered into
in connection with the Merger Agreement and the execution and delivery by the
Company and the CTI Shareholders of a Registration Rights Agreement among the
Company and the CTI Shareholders (the "Registration Rights Agreement") that
provides the CTI Shareholders certain rights to have their shares of the EFTC
Equity registered under the Securities Act of 1933 (the "Securities Act"), an
Indemnification Agreement among the CTI Shareholders, the CTI LLC Members and
the Company (the "Indemnification Agreement") and a letter concerning certain
tax matters. In addition, the obligation of CTI to consummate the Merger is
subject to the grant by the Company of certain employee stock options with
respect to the Company's Common Stock to certain members of CTI's management
and the execution and delivery of Employment Agreements (the "Employment
Agreements") between the Company and four members of the senior management of
the CTI Companies. See "DESCRIPTION OF THE MERGER AGREEMENT --The Merger
Agreement--Conditions to the Merger" and "--CTI Shareholder Voting
Arrangements," "DESCRIPTION OF THE RELATED AGREEMENTS--The Registration Rights
Agreement," "--the Indemnification Agreement" and "-- Employment Matters."
Covenants. Under the Merger Agreement, CTI 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. CTI 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 CTI, subject to the fiduciary duties of its Board
of Directors, 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, CTI 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: (i) by mutual consent of
the Company and CTI; (ii) by either the Company or CTI, if, without fault of
the terminating party, the Closing does not occur on or before November 30,
1997, or such later date as agreed by the parties; (iii) by either the Company
or CTI, 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 CTI, 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 such breach has been given in accordance with the Merger
Agreement. See "DESCRIPTION OF THE MERGER AGREEMENT--The Merger
Agreement--Termination."
CHANGE OF THE COMPANY'S BOARD
Pursuant to the Merger Agreement, as of the Effective Time the Board
will (i) increase the number of the Company's directors from 14 to 16 and (ii)
nominate and appoint Allen S. Braswell, Sr. as an additional Class II director
to hold office until the 1999 Annual Meeting of the Company's shareholders and
Allen S. Braswell, Jr. as an additional Class I director to hold office until
the 1998 Annual Meeting of the Company's shareholders. The Company has agreed
to take the actions necessary to nominate Messrs. Braswell for election to the
Company's Board of Directors at the next annual meeting of the shareholders of
the Company. See "DESCRIPTION OF THE MERGER AGREEMENT--Change of the Company's
Board."
EFTC DIRECTOR VOTING ARRANGEMENTS
The EFTC Directors who are also shareholders of the Company have
agreed with CTI that they will give their consent with respect to or vote their
shares of Company Common Stock to approve the Merger Agreement and the Merger.
The shares of Common Stock owned by the EFTC Directors represent approximately
64.2% of the outstanding shares of the Company's Common Stock. See
"DESCRIPTION OF THE MERGER AGREEMENT--EFTC Director Voting Arrangements."
CTI SHAREHOLDER VOTING ARRANGEMENTS
The CTI Shareholders have agreed with the Company that they will give
their consent with respect to or vote their shares of CTI Common Stock to
approve the Merger Agreement and the Merger. Because the shares of CTI Common
Stock owned by the CTI Shareholders represent 100% of the outstanding shares of
CTI Common Stock,
4
<PAGE> 14
approval of the Merger Agreement and the Merger by the shareholders of CTI is
assured. See "DESCRIPTION OF THE MERGER AGREEMENT--CTI Shareholder Voting
Arrangements."
RELATED AGREEMENTS
The Purchase Agreement. If the Acquisition is approved, the Company
and Acquisition Corp., simultaneously with the consummation of the Merger, will
purchase from the CTI LLC Members all of the ownership interests in the CTI
LLCs for $19,500,000 in cash (subject to adjustment as provided for in the
Purchase Agreement). See "DESCRIPTION OF THE RELATED AGREEMENTS--The Purchase
Agreement."
The Earnout Agreement. The Company will pay the CTI LLC Members
certain contingent earnout payments (the "Earnout Payments") over three years
in a maximum aggregate amount of $6,000,000, provided that the earnings of the
CTI Companies, before interest and taxes, exceed certain target amounts each
year, as provided for in an Earnout Agreement to be entered into at the Closing
among the Company and the CTI LLC Members (the "Earnout Agreement") pursuant to
the terms of the Purchase Agreement. See "DESCRIPTION OF THE RELATED
AGREEMENTS--Earnout Payments."
The Registration Rights Agreement. When delivered to the CTI
Shareholders, the EFTC Equity will not be registered under the Securities Act.
The Company will grant certain registration rights with respect to the
Company's Common Stock issued to the CTI 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 offer
employment for three years to certain members of CTI's management pursuant to
the Employment Agreements. In connection with the Merger, the Company will
grant certain options to purchase Common Stock to certain members of CTI's
management. See "DESCRIPTION OF THE RELATED AGREEMENTS--Employment Matters."
The Indemnification Agreement. Certain of the CTI Shareholders and the
CTI LLC Members will indemnify the Company with respect to breaches of
covenants and representations and warranties in the Merger Agreement and the
Purchase Agreement such indemnification obligations are subject, in certain
circumstances, to 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."
Accounting Treatment. The Merger and Acquisition will be accounted
for as a purchase of the CTI Companies by the Company. See "THE MERGER
PROPOSAL--Tax and Accounting Treatment" and "UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION."
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 July 9, 1997, which was the
last trading day prior to the announcement of the Merger and the Acquisition,
as proposed, was $10.25 as reported by the Nasdaq National Market.
5
<PAGE> 15
EMPLOYEE PLAN AMENDMENT
Increase in the Number of Shares Reserved. If approved, the Employee
Plan Amendment will increase the aggregate number of shares of the Common
Stock reserved for issuance under the Employee Plan from 995,000 to 1,995,000.
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. The Employee Plan Amendment will also effect a change of the
name of such Plan to reflect the Company's recent name change. 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 the Non-Employee Plan from 160,000 to 300,000.
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. The Non-Employee Plan Amendment
will also effect a change of the name of such Plan to reflect the Company's
recent name change.
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".
6
<PAGE> 16
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables present for the Company and the CTI Companies, on
a historical basis, selected financial data and unaudited pro forma financial
data reflecting the issuance of the EFTC Equity, payment of an aggregate of
$19.5 million in cash and the incurrence of approximately $21 million in
indebtedness 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 June 30, 1997, and the pro forma operating data
assumes the Merger and the Acquisition were consummated on January 1, 1996.
See "UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION."
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of the Company and
the CTI Companies has been derived from such companies' respective historical
financial statements and should be read in conjunction with such financial
statements and the notes thereto and each 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 June 30, 1997 and 1996 and for the six months
then ended has 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 CTI Companies as
of June 30, 1997 and 1996 and for the six months then ended has been derived
from unaudited financial statements, but in the CTI Companies' opinion reflects
all adjustments (consisting only of normal, recurring adjustments) necessary
for the fair presentation of the CTI Companies' financial condition and results
of operations as of and for the periods then ended. The results of operations
of the Company and the CTI Companies for the interim period ended June 30, 1997
are not necessarily indicative of the results to be expected for the entire
year. Historical information for certain periods is derived from financial
statements not included in or incorporated herein by reference.
EFTC CORPORATION
SELECTED HISTORICAL FINANCIAL DATA
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Years Ended December 31,
----------------- ------------------------------------------------
1997 1996 1996(1) 1995 1994 1993 1992
------- ------- ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . . . $36,782 $30,994 $56,880 $49,220 $52,542 $29,817 $17,294
Operating income (loss) . . . . . 1,420 (292) (2,021) 802 3,024 2,286 713
Income (loss) before income taxes . 921 (518) (2,465) 481 2,958 2,037 494
Net income (loss) . . . . . . . . . 582 (317) (1,592) 354 1,917 1,031 320
Earnings (loss) per common share . $ 0.10 $ (0.08) $ (0.40) $ 0.09 $ 0.53 $ 0.52 $ 0.13
Cash dividends per common share . . -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
----------------- ------------------------------------------------
BALANCE SHEET DATA: 1997(3) 1996 1996 1995 1994(2) 1993 1992
------- ------- ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets . . . . . . . . . . . $46,120 $28,008 $22,869 $24,984 $23,479 $11,172 $6,703
Long-term debt . . . . . . . . . . 9,140 2,975 2,890 3,060 3,230 2,539 2,736
Stockholders' equity . . . . . . . 19,998 15,198 13,922 15,509 14,989 3,547 2,090
</TABLE>
- ------------------
(1) As part of a corporate restructuring, the Company expensed $2.1
million for restructuring costs in the third quarter of 1996. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
(2) The Company received net proceeds of $9.3 million from its initial
public offering in March 1994.
(3) The Company acquired the CE Companies in February 1997 for total
consideration of approximately $10.3 million consisting of 1,980,000
shares of the Company's Common Stock and $4.9 million in cash.
7
<PAGE> 17
THE CTI COMPANIES
SELECTED HISTORICAL COMBINED FINANCIAL DATA
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS DATA:
Net sales . . . . . . . . . . . 19,896 9,755 $26,510 $16,184 $9,029 $9,938 $13,710
Operating income . . . . . . . 2,661 (576) 678 1,591 193 1,146 3,423
Net income . . . . . . . . . . 2,387 (768) 235 1,300 82 810 2,855
Earnings per common share . . . 196.31 (63.12) 19.28 129.98 8.19 81.00 285.50
Cash dividends per common share
60.65 -- 50.00 -- 107.30 -- --
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
----------------- -------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets . . . . . . . . . 13,301 8,405 $13,174 $9,245 $4,303 $3,639 $3,709
Long-term debt . . . . . . . . 148 199 595 240 15 16 33
Stockholders' equity . . . . . 3,571 963 1,922 2,057 758 1,749 2,822
</TABLE>
- -------------------
8
<PAGE> 18
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 the purchase from AlliedSignal, Inc. and its affiliates of
certain assets, and the CE Companies, as described elsewhere within, and should
be read in conjunction with such unaudited pro forma condensed financial
information and notes thereto included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996
----------------------- ------------------
(Dollars in Thousands, except per share data)
<S> <C> <C>
PRO FORMA OPERATING DATA:
Net sales 61,154 115,910
Operating income 2,908 287
Net income (loss) 1,363 (1,801)
Earnings (loss) per common share .17 (0.23)
Weighted average common and common equivalent shares
outstanding 7,980 7,781
</TABLE>
<TABLE>
<CAPTION>
As of
June 30, 1997
-------------
(Dollars in Thousands)
<S> <C>
PRO FORMA BALANCE SHEET DATA:
Total assets 99,045
Long-term debt 39,938
Stockholders' equity 26,994
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C> <C>
BOOK VALUE PER COMMON SHARE: (1)
Historical:
EFTC $3.26 $3.53
The CTI Companies $293.52 $157.96
Pro forma combined company $3.38 $3.48
</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.
9
<PAGE> 19
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--Revocation 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, that involve known and
unknown risks, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," "may" and words of similar
import or statements of management's opinion. 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
CTI 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 differences include, but are not
limited to, changes in economic or business conditions in general or affecting
the electronic products industry in particular, changes in the use of
outsourcing by OEMs, increased material prices and service competition within
the electronic component contract manufacturing and repair industries, changes
in the competitive environment in which the Company operates, the continued
growth of the industries targeted by the Company, 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
September 30,1997, 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
September 19, 1997. The Board of Directors has fixed the close of business on
August 6, 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 5,939,410
shares were outstanding as of the close of business on the Record Date, held by
approximately 245 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: (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 THE
MERGER PROPOSAL, THE EMPLOYEE PLAN AMENDMENT AND THE NON-EMPLOYEE PLAN
AMENDMENT AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL OF EACH OF THE
PROPOSALS.
10
<PAGE> 20
QUORUM AND VOTING
Only holders 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 and the 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 the Merger Proposal and the 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 or the Employee Plan Amendment.
As of August 31, 1997, the executive officers and Directors were the
owners of an aggregate of 3,822,570 shares of the Common Stock or 64.2% of the
total number of shares outstanding. Accordingly, the Company anticipates that
the attendance in person or by proxy of no other shareholders will be required
at the Special Meeting to constitute a quorum to approve the Merger Proposal
and the Employee Plan Amendment.
REVOCATION 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 without voting in person
will not 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.
CTI COMPANIES INFORMATION
All information contained in this Proxy Statement with respect to the
CTI Companies has been supplied by CTI and the CTI LLCs for inclusion herein
and has not been independently verified by the Company.
11
<PAGE> 21
THE COMPANIES
EFTC CORPORATION
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. At March 31, 1997, the Company had 671 employees and
four fully-automated surface mount technology lines.
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," by which the Company hopes to
become 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.
CE Companies Acquisition. On February 24, 1997, the Company acquired
two affiliated entities, Current Electronics, Inc., an Oregon corporation
("CEI"), and Current Electronics (Washington), Inc., a Washington corporation
("CEWI" and, together with CEI, the "CE Companies"), for a total consideration
of approximately $10.3 million consisting of 1,980,000 shares of Company common
stock and approximately $4.9 million in cash. The Company recorded goodwill of
approximately $8.0 million in connection with the acquisition, which will be
amortized over 30 years. The combined revenues for the two companies for the
fiscal year ended September 30, 1996 was approximately $32.5 million. In
connection with this transaction, the Company renegotiated its line of credit
to increase maximum borrowings to $15,000,000 and extended the maturity date to
June 1998. In addition, the Company obtained a 90-day
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<PAGE> 22
bridge loan in the amount of $4,900,000, the proceeds from which were used to
pay the cash consideration related to the acquisition, as discussed above.
Both the line of credit and the bridge-loan will be repaid from the proceeds of
the Bank One Loan.
AlliedSignal Acquisition. On July 15, 1997, the Company entered into
a Master Agreement (as amended through the date hereof, the "Master Agreement")
with AlliedSignal Avionics, Inc., a Kansas corporation ("Avionics"), and
AlliedSignal Inc., a Delaware corporation, operating through its Aerospace
Equipment Systems Unit ("AES," and together with Avionics, "AlliedSignal").
Pursuant to the Master Agreement, the Company agreed (i) to purchase certain
assets owned by AlliedSignal that are located at AlliedSignal production
facilities located in Tucson, Arizona, and Fort Lauderdale, Florida, (ii) to
enter into certain related transactions with respect to each location and (iii)
to enter into a Supplier Partnering Agreement with AlliedSignal to manufacture
electronic assemblies for it at those facilities (the "Supplier Partnering
Agreement"). The acquisition of assets by the Company from AES at the Tucson
facility and related matters are referred to herein as the "Arizona
Transaction," and the acquisition of assets by the Company from Avionics at the
Fort Lauderdale facility and related matters are referred to as the "Florida
Transaction." The Arizona Transaction and the Florida Transaction are referred
to collectively as the "Transactions." The aggregate amount to the paid by the
Company for the assets acquired approximates AlliedSignal's book value of those
assets. Prior to the Transactions, AlliedSignal used the assets sold to the
Company to provide electronic assembly services to certain of its own
operations. At the time the Master Agreement was executed, AlliedSignal was a
substantial customer of the Company and had no outside third-party customers.
On August 11, 1997, the Company (i) acquired from AlliedSignal
approximately $11.3 million in raw material and work-in-process inventory
previously used in the manufacture of certain electronic assemblies by
AlliedSignal at its Fort Lauderdale facility, (ii) employed certain persons who
were formerly employed by AlliedSignal at its Fort Lauderdale facility, (iii)
subleased from AlliedSignal the approximately 95,000 square foot portion of its
Fort Lauderdale manufacturing facility formerly used in the manufacture of such
electronic assemblies, and (iv) acquired from AlliedSignal the right to use on
a temporary basis certain equipment used in the manufacture of such electronic
assemblies. A total of approximately $5.2 million was paid to AlliedSignal on
August 11, 1997. An additional portion of the purchase price of approximately
$2.7 million is to be paid on or before August 29, 1997, and the balance is to
be paid on or before December 31, 1997. The Company and AlliedSignal had
entered into the Supplier Partnering Agreement as of July 15, 1997, but the
Company did not begin to perform thereunder until it closed the initial portion
of the Florida Transaction on August 11, 1997. Under the Master Agreement, the
Company is obligated to acquire on September 2, 1997 the equipment it obtained
the right to use on a temporary basis on August 11, 1997 and to license certain
intellectual property. The aggregate purchase price and license fee to be paid
that the time is approximately $2.8 million.
Certain matters relating to the Arizona Transaction occurred on August
4, 1997. Effective on that date, the Company (i) made a payment to
AlliedSignal of approximately $300,000 toward the licensing of certain
intellectual property and the purchase of certain equipment located at the AES
manufacturing facility in Tucson that is to be acquired by the Company at the
time it establishes it own manufacturing facility in Tucson as described below,
(ii) employed certain persons who were formerly employed by AlliedSignal at its
Tucson facility, and (iii) contracted with AlliedSignal to provide the
personnel and management services necessary to manufacture electronic
assemblies at its Tucson facility. The second stage of the Arizona Transaction
is to occur at the time the Company establishes a new Tucson manufacturing
facility, which is currently expected to occur during the first quarter of
1998. At that time, the Company will (i) pay to AlliedSignal the remaining
approximately $300,000 for purchase of the equipment and license of the
intellectual property, (ii) accept delivery from AlliedSignal of the equipment
used at the Tucson facility and move that equipment to the Company's new
manufacturing facility there, and (iii) acquire from AlliedSignal the remaining
raw material and work-in-process inventory used by it in the manufacture of
electronic assemblies at its Tucson facility.
The Company entered into a License Agreement (the "License Agreement")
with AlliedSignal Technologies Inc. ("ASTI") as part of the Transactions.
Effectiveness of the License Agreement has been suspended pending further
discussions with respect thereto between the Company and AlliedSignal. Pending
resolution of those matters, AlliedSignal has undertaken to cause its
subsidiary, ASTI, to grant a temporary license to the Company for matters
relating to the Fort Lauderdale facility. It is anticipated that the final
form of License Agreement to be entered into will provide for the payment to
ASTI of an amount equal to one percent of gross revenues received by the
Company from the sale to third parties of products manufactured at its Fort
Lauderdale or Tucson facilities through December 31, 2001.
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<PAGE> 23
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 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.
14
<PAGE> 24
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 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
15
<PAGE> 25
restructure those processes in order to improve operations and competitiveness.
The processes reviewed focused on core competencies of materials acquisition,
scheduling and project quoting.
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 from the International Organization of Standards
("ISO"), ISO 9002 certification in 1994. The ISO was originally organized in
England in the late 1940's and further developed in Europe over the next few
decades. The group now consists of hundreds member countries. The guidelines
(standards) acknowledged have become known as the "ISO Standards". Each
country appoints a group to be responsible for controlling the activities of
the registrar, or accreditation organization. In the United States that
responsibility rests with the American National Standards Institute ("ANSI")
and with the Registrar Accreditation Board ("RAB"). The Company has chosen for
its registrar Det Norske Veritas ("DNV") a Norwegian company recognized by
both ANSI and RAB, with United States offices in Houston, Texas. The ISO
series ISO 9002, dated 1994, signify that the Company's overall quality system,
has been reviewed and inspected by an internationally accredited body, DNV, and
that this registrar has found that the Company's system meets all of the
necessary requirements for certification, and is now recognized around the
world as an "ISO Certified Quality System". Such a certification provides that
the Company's system is capable of meeting its customers' requirements and
needs. The Company will undergo continued surveillance audits to ensure proper
operation and quality of the system.
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<PAGE> 26
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 OEM's growing product demand. The
Company's new high-mix-speed model, APM, improves throughput of certain
assembly processes over CFM and 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. In the APM model,
materials are moved through the production queue with high velocity and not in
a continuous or linear order as under CFM. Instead, materials are moved though
the assembly procedure in the most efficient manner, using a proprietary
algorithm, with all sequences controlled by an information system. While under
CFM, all assembly took place on the same line, thereby slowing down the process
with non-value-added operations, under APM, all non-value-added operations are
performed in the most efficient manner, off-line, thereby keeping the assembly
process moving. A hybrid of CFM and batch production techniques, APM sets
optimal process parameters and maximizes velocity in producing smaller lot
quantities. By designating teams to set up off-line feeders, standardizing
loading methods regardless of product complexity, and most importantly, 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
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<PAGE> 27
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.
The following table represents the Company's net sales by industry
segment in excess of 10%:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computer peripherals 12.3% 50.7% 57.5%
35.4% 27.5% 19.2%
Medical equipment 41.0% * *
High-end storage devices * * 17.9%
Telecommunications
</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.
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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.
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 March 31, 1997, the Company employed 671 persons, of whom 556
were engaged in manufacturing and operations, 62 in material handling and
procurement, 11 in marketing and sales and 42 in finance and administration,
and the Company engaged the full-time services of 54 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, comprising 10,000 square feet, are
located in Denver, Colorado and are leased by the Company for a period of 3
years. One of its manufacturing facilities, consisting of 52,000 square feet,
is located on approximately 10 acres owned by the Company in Greeley, Colorado.
The Company plans to expand this facility by 20,000 square feet and remodel the
existing facility at a cost of about $1,500,000. This construction is expected
to be completed by December 31, 1997. The Company has recently entered into a
letter of intent to sell its other manufacturing facility located in Greeley,
Colorado for approximately $2,500,000. The Company expects the sale to close
in August, 1997. The Colorado properties owned by the Company are subject to a
deed of trust securing indebtedness of $2,975,000 as of June 30, 1997. The
Company also currently operates a campus including
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manufacturing facilities comprising 47,000 square feet in Newberg, Oregon,
leased from Mr. Charles Hewitson, Mr. Gregory Hewitson and Mr. Matthew
Hewitson, each of whom is a director of the Company, and a 20,000 square feet
leased manufacturing facility in Moses Lake, Washington. The Company has
entered into a contract to purchase 12 acres of land and to build a 65,000
square foot building in Newberg, Oregon at a total cost of about $5,000,000.
The Company expects the construction to be completed by December 31, 1997 at
which time it will relocate from the leased Newberg facility. The Company
believes its facilities are in good condition.
In connection with the Tucson portion of the Asset Purchase, the
Company has entered into a contract for the purchase of 20.5 acres of land and
a 65,000 square foot building in Tucson and remodeling of the existing building
at a total cost of $2,500,000. This contract is contingent upon the closing of
the Asset Purchase. The Company expects the remodeling to be completed by the
end of 1997. In connection with the Florida portion of the Asset Purchase, the
Company will enter into a subleasing arrangement with AlliedSignal for a 95,000
square feet portion of a building leased by AlliedSignal.
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company submitted the following matters to a vote of security
holders during the first quarter of 1997:
The Company held a special meeting of shareholders on February 24,
1997. At such special meeting, the Company's shareholders voted to approve a
proposal for the issuance of 1,980,000 shares of the Company's Common Stock, in
connection with (A) the acquisition by merger of CEI in exchange for such
common stock and a cash payment of $3,370,000, and (B) the acquisition of the
outstanding capital stock of CEWI in exchange for $1,530,000 in cash. At such
special meeting, 2,270,851 shares of Common Stock were voted in favor, 5,450
opposed, 1,500 abstained and 1,666,959 shares were not voted.
At the February 24, 1997 special meeting, the Company's shareholders
also approved the proposal to amend the Employee 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. 2,152,911 shares of
Common Stock were voted in favor, 123,330 were opposed, 1,560 abstained and
1,666,959 shares were not voted. At such meeting, the Company's shareholders
also approved the proposal to amend the Company's Non-Employee Plan 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. 2,260,191 shares of Common
Stock were voted in favor, 16,050 were opposed, 1,560 abstained and 1,666,959
shares were not voted.
CIRCUIT TEST, INC. AND AFFILIATES
GENERAL
CTI, founded in 1982 and based in Memphis, Tennessee, is an electronic
component repair organization focused on the computer and communications
industries. One of CTI's principal strategies is to compete through the
effective use of "hub-based" repair services, which CTI pioneered. As used in
the transportation industry, the term "Hub" is used to denote the place where
the primary package sorting center is located. CTI is the only provider with
its operations inside the hub infrastructure of both of the largest
transportation/logistics companies in the United States (in terms of usage of
handling of time sensitive, express air service, as compared to those companies
that provide ground based, less time sensitive, freight transportation. As of
August 31, 1997, all of the issued and outstanding common stock of CTI was held
by six (6) shareholders of record.
Market Overview. The 1996 worldwide hardware maintenance segment of
the information technology services industry is currently estimated to be $91
billion and is forecasted to grow 4.0% annually through 2000. However, the
three sub-segments around which the CTI Companies' business is built --
personal computers ("PCs"), computer
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workstations and data communications equipment -- are the fastest growing areas
of the hardware maintenance industry. These segments are currently expected to
grow at 8.7%, 10.2% and 11.6% respectively. Combined, these three segments
comprise $20 billion (or 22%) of the 1996 worldwide hardware maintenance market
and are forecasted to grow at 2.5 times the pace of the overall hardware
maintenance marketplace. Furthermore, the CTI Companies' management expects
the trend toward outsourcing is expected to generate even faster growth for
independent repair service providers.
The current estimates for the projected growth in the repair market is
driven by the combination of a large base of equipment in use, the "installed
base," and strong growth expectations for new sales of PCs, computer
workstations and data communications equipment. These underlying trends are
further enhanced by a fundamental shift towards repair outsourcing in the OEM
model for hardware support.
On a broader scale, market research firms predict surges in sales of
the core products which the CTI Companies handle. According to Dataquest,
Inc., the aggregate U.S. sales of products worldwide for which the CTI
Companies provide repairs is estimated to be $85 billion in 1996 and is
forecast to grow 13% compounded annually though the year 2000. The CTI
Companies' management considers portable computers and network routers to be
among the fastest growing segments, supported by the emerging markets in
networking as well as portable hand held and pen-based devices. Complementing
this underlying expansion in the installed base, the hardware OEMs continue to
shift towards outsourcing their hardware support. This shift is consistent
with the trend toward outsourcing of electronic assembly and enables OEMs to
focus on their core competencies of product design and marketing. The key to
this shift is the ability of OEMs to find reliable outsourcing agents who can
handle the service quality component of the repair business in both a time-
effective and cost-effective manner.
STRATEGY
With an exclusive focus on computer and electronics OEMs, the CTI
Companies offer a variety of technical repair services to achieve two goals:
(i) optimize the service spares inventory for advance-exchange programs and
(ii) accelerate the same-unit return and repair process.
Due to its long tenure in the industry, its high-quality technical
capabilities, its logistically advantageous site locations, and its tight
relationships with the transportation industry leaders, the CTI Companies have
developed an optimized "service spares pipeline" applicable to a high-mix of
products which lower OEM costs and improve end-user service levels. The
location of the CTI Companies at the transportation provider's airport hubs
uniquely enables the CTI Companies to effectively provide an "end-of-runway"
repair service. The effect of this stategic location is faster turnaround of
replacement units, minimizing the inventory assets needed by the OEM to support
its install base.
The CTI Companies work with their customers on "advance exchange"
programs, whereby end-users receive overnight replacement for their broken
components, which are in turn repaired by the CTI Companies and replaced into
the OEM's "service spares inventory pipeline" for future redistribution. With
manufacturers under immense pressure to control their warranty and service
costs without letting customer service suffer, a portion of OEM profits are
essentially in escrow until the warranty period has expired. The CTI Companies
allow the OEMs to reliably outsource the entire "back-end" of their product's
life cycle while continuing to provide support to end-users once their warranty
expires. The CTI Companies thus assist OEM customers in increasing inventory
turns, reducing spares inventory, lowering overall costs, accelerating repair
cycles, and improving customer service. Customer service is improved through
both quicker turnaround time for in-warranty claims, as well as having the CTI
Companies support end-customers with out-of-warranty and end-of-life products.
The CTI Companies, recognizing the high growth projections of the
mobile computing segment, pioneered the "integrated return and repair of the
same unit to the same customer." Because the CTI Companies can offer an
"end-of-runway" repair solution, they can often gain an additional shift of
repair time, reducing the potential delay in the delivery process. The only
feasible location for such service is at an air transportation hub and this
advantage equates to an extra nine hours of repair time.
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REPAIR SERVICES
Core products covered under the CTI Companies' technical services
include repair of printed circuit boards, monitors, hubs, keyboards, routers,
laptop assemblies, printers, modems, scanners, fax machines, pen-based products
and personal digital assistants ("PDAs").
In order to execute quality service standards, the CTI Companies
provide a high degree of product and vendor specialization among its employees.
The Tampa facility is ISO-9002 certified with the other facilities planning
certification in early 1998. The CTI Companies provide regular employee
training to reinforce existing skills and further guarantee up-to-date
capabilities to handle recently released products. Additionally, the physical
operations are organized to take advantage of this specialization and ensure
complete quality inspection.
The CTI Companies augment the process by actively taking full
advantage of its advanced internal information systems to provide direct
communications into OEM customers' information systems. Incoming repair orders
and outgoing inventory replenishment as well as failure analyses are
transmitted daily across this electronic communications network. The
connecting systems are built around an internally developed bar-coding and
tracking system. Each component is tracked through every stage of work in
progress. Information captured includes the tests, procedures, times, dates,
failures and component replacements. Additionally, the financial systems are
tied into the order processing systems, which in turn are implemented
identically across the CTI Companies' multiple locations.
The process flow is thus organized to achieve the goal of fully
optimizing the OEM's "service spares" pipeline, removing any steps that do not
add value to the process. The CTI Companies assist OEMs in determining proper
stocking levels, eliminating unnecessary stocking locations, removing unneeded
transportation legs and delivering exchange components to field service
locations or directly to end-users.
The primary technical capabilities which the CTI Companies provide in
addition to the core component level repair are outlined below:
Systems Configuration Order. Many of the CTI Companies' customer
products have a consistent design foundation, but require additional custom
configuration. The CTI Companies provide the customization responsibility,
thereby enabling the OEM to reduce its inventory of 100% completed products and
substitute just the base platform. The CTI Companies will thus assist the OEMs
with "just-in-time" or "JIT" fulfillment of customer configuration
requirements, the associated testing or "burn-in" processes, and the
determination of target level component inventory.
Failure Tracking, Analysis and Engineering. The CTI Companies'
integrated information systems track the repair progress and history of each
component group. Not only is a failure analysis conducted on each vendor's
component group, but the CTI Companies also have the expertise in-house to
assist design teams with engineering improvements and potential redesigns.
This process is critical to improving the reliability of the OEM customer's
product, especially in the early phase of the product's life cycle.
Cosmetics. Because whole unit "advance exchange" for in-warranty
products has become the primary service strategy of OEMs, the returned product
must meet the highest quality standards and appear as new. The CTI Companies
are well known for providing cosmetic refurbishment (welding plastics, paint,
texturing, and logo silk screening) of monitors, keyboards, and printers.
End-of-Life Maintenance. The specific technical capabilities
developed on in-warranty parts enable the CTI Companies to easily migrate into
end-of-life (i.e. out-of warranty) product support. This enhances the value
proposition to the OEM whose customer now receives full life-cycle coverage
without obligation of the manufacturer.
The above-outlined technical services are performed on the following component
groups:
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<TABLE>
<CAPTION>
Percentage of
Component 1996 Revenue
--------- ------------
<S> <C>
Monitors (repair / testing / cosmetics) 58%
Laptops / Notebooks / PDAs 20%
Printers / Scanners / Fax Machines 10%
PC Boards / Keyboards / Power Supplies / 6%
Pen-Based Products
Routers / Modems / Other Telecom 6%
</TABLE>
CUSTOMERS AND MARKETING
All of CTI's customers fall into the broad category of computing and
communication products manufacturers, including 20 of the largest PC and
electronics OEMs, including Apple, Ascend, Bay Networks, Cisco, Compaq, Dell,
Digital, Gateway, Hewlett-Packard, IBM, Micron, Mitsubishi, Philips, Silicon
Graphics, Sony and Toshiba. The top three OEMs will account for approximately
50% of projected 1997 revenue. However, management estimates that with the
exception of one customer, CTI handles less than 5% of the repairs to any OEM's
products. The CTI Companies' management believes that leaves an important
opportunity to increase services to, and provide new repair services with
respect to additional product lines of, its existing customer base.
The CTI Companies have been able to achieve, sustain and improve its
operating margins partially due to the minimal need for traditional sales and
marketing expenses. CTI effectively leverages the market visibility provided
by its relationships with its transportation partners. Given its unique
location inside the logistics divisions of these transportation carriers, the
CTI Companies are incorporated as part of the official logistics sales and
marketing depot tour given by such transportation partners to their customers
and prospective customers. This tour brings high-ranking decision-makers from
large OEM organizations directly into the operations of the CTI Companies,
which are then positioned as an add-on benefit to the transportation carrier's
service offering. This system provides the CTI Companies with a fertile ground
for new customer sourcing opportunities.
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 CTI Companies have not historically tracked backlog.
COMPETITION
Historically, the component-level repair industry has been highly
competitive and fragmented, with a large number of small players servicing
specific geographic or product niches. Given that "component level repair" is
a subset of "Service," there is some overlap from large service organizations.
With the fairly recent innovation of combining "logistics" with "repair," there
has been a recent surge in repair organizations moving their facilities to
transportation service providers' hub cities.
SUPPLIERS
Sourcing and Qualification of suppliers is primarily the
responsibility of the OEM. The CTI Companies, as part of the repair process,
utilize the OEM's "Authorized Vendor List" or AVL, to acquire the piece parts
necessary to repair the product. CTI will work directly with the OEM's
Suppliers (many times overseas), or can also utilize U.S. distributors to
access these suppliers. Usually, the OEM's Suppliers are contractually
committed to provide "parts support" to the OEM for several years after the
product was last manufactured.
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PATENTS AND TRADEMARKS
The CTI Companies do not hold any patent or trademark rights.
Management does not believe that patent or trademark protection is material to
the CTI Companies' business.
GOVERNMENTAL REGULATION
The CTI Companies' 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.
Some risk of costs and liabilities related to these matters is
inherent in the CTI Companies' business, as with many similar businesses.
Management of the CTI Companies believes that their 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 CTI Companies. 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 CTI Companies.
The CTI Companies periodically generate and temporarily handle limited
amounts of materials that are considered hazardous waste under applicable law.
The CTI Companies contract for the off-site disposal of these materials.
EMPLOYEES
As of December 31, 1996, the CTI Companies employed 850 persons, of
whom 502 were engaged in repair services and operations, 76 in material
handling and procurement, 4 in marketing and sales and 25 in finance and
administration, and engaged the full-time services of 243 temporary laborers
through employment agencies in manufacturing and operations. None of the CTI
Companies' employees are subject to a collective bargaining agreement. The CTI
Companies' management believes that the CTI Companies' relationship with its
employees is good.
DESCRIPTION OF PROPERTY
The CTI Companies' repair services are carried out in three locations:
Memphis, Tennessee in 155,000 square feet of leased space, Louisville, Kentucky
in 130,000 square feet of leased space, and Tampa, Florida in 25,000 square
feet of leased space and a 30,000 square foot building owned by CTI. Tampa is
a traditional depot repair facility which services those customers not
requiring immediate repair and inventory replenishment.
LEGAL PROCEEDINGS
The CTI 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 CTI Shareholders
will exchange their shares of CTI Common Stock for the EFTC Equity in
connection with the merger of CAC into CTI, with CTI being the surviving
corporation. 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 CTI may terminate the Merger Agreement if Closing has not occurred
by November 30, 1997. At Closing, the Company will simultaneously acquire all
of the limited liability company interests of the CTI LLCs pursuant to the
Purchase Agreement; the Company and the CTI Shareholders will enter into the
Registration Rights Agreement; the Company and the CTI Shareholders will enter
into the Indemnification Agreement; the Company will enter into Employment
Agreements with Allen S. Braswell, Jr., Richard Strott, Andrew Hatch and
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Dennis Ayo; and Allen S. Braswell, Sr. and Allen S. Braswell, Jr., will be
appointed, effective at the Effective Time, as additional directors of the
Company.
DESCRIPTION OF THE ACQUISITION
The Purchase Agreement provides that, at Closing, the CTI LLC Members
will sell to the Company all of the limited liability company interests in the
CTI LLCs in exchange for $19,500,000 in cash (subject to certain adjustments as
provided in the Purchase Agreement). As the result of the Acquisition, the
Company will own 100% of the limited liability company interests of the CTI
LLCs. 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. CTI and the CTI LLCs are independently owned entities owned and
controlled by various members, and entities in turn controlled by the family of
Allen S. Braswell, Sr. Over seventy percent of the shares of CTI are owned by
the Allen S. Braswell, Sr. Grantor Retained Income Trust. The following
entities each own fifty percent (50%) of both of the CTI LLC's: (i) Circuit
Test International Limited Partnership (Allen S. Braswell Sr. Living Trust,
General Partner, Allen S. Braswell, Sr. Trustee); and (ii) Allen S. Braswell,
Jr. Revocable Living Trust, Allen S. Braswell, Jr., Trustee.
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.
Mr. Jack Calderon, President and CEO of EFTC and Mr. Allen Braswell,
Jr., President of CTI, Inc. have known each other since the early 1980's. Over
the years, they have maintained both a business and personal relationship. As
a result, Mr. Calderon has been familiar with the growth and operations of the
CTI Companies and has begun developing a hub-based strategy for EFTC similar in
concept to the hub-based strategy pioneered by the CTI Companies. In March
1997, Mr. Braswell, Jr. informed Mr. Calderon that CTI was considering a
possible corporate sale to a variety of electronic contract manufacturers. At
that time, Mr. Calderon informed Mr. Braswell, Jr. that, under acceptable
circumstances, EFTC would be interested in discussing the possibility of a
business combination with the CTI Companies.
In late April of 1997, Mr. Braswell, Jr. informed Mr. Calderon and Mr.
Stuart Fuhlendorf, Vice President and Chief Financial Officer of EFTC, that the
CTI Companies had decided to pursue opportunities for a sale of their business
and were undertaking to seek a suitable electronic contract manufacturer to
engage in such a transaction. Mr. Braswell, Jr. also disclosed that the CTI
Companies had retained Mr. Robert McNamara, a director of EFTC and a Managing
Director at Broadview Associates, LLC ("Broadview"), to help study business
combination possibilities and market the CTI Companies to prospective
purchasers. See "CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS--Interests
of Certain Persons in the Merger and the Acquisition."
On May 9, 1997, Mr. Calderon and Mr. Fuhlendorf traveled to Nashville,
Tennessee to meet with Kirk Lundblade, Senior Vice President of Corporate
Finance at J.C. Bradford & Co. ("J.C. Bradford"). At that meeting, the
possibility of a transaction with the CTI Companies was discussed. Among the
issues considered were: financing of the transaction, the possible strategic
fit of EFTC and the CTI Companies, the complimentary innovative service
concepts
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of EFTC and the CTI Companies and the likelihood of, and challenges involved in
completing, such a transaction. At the close of the meeting it was decided
that EFTC would approach the CTI Companies about the possible terms of a
business combination.
On the weekend of May 10, 1997, Mr. Calderon visited Mr. Braswell, Jr.
in Memphis, Tennessee. At meetings on Saturday, May 10, and Sunday, May 11,
Mr. Calderon and Mr. Braswell, Jr. discussed possible strategic benefits that
might result by combining the complimentary service offerings and operations of
the two companies and considered possible structures for a business
combination. On Sunday, the two parties agreed that they would move forward
and commence substantive negotiations based upon their initial outline of a
structure for a business combination.
On May 20, 1997, the management of the CTI Companies and EFTC met in
Memphis, Tennessee, together with representatives of J.C. Bradford, an
investment banking firm representing EFTC, and Broadview, an investment banking
firm representing the CTI Companies. Mr. Calderon, Mr. Fuhlendorf and
representatives of J.C. Bradford presented a possible structure for the
financing for a business combination transaction to Mr. Allen Braswell, Sr.,
Mr. Allen Braswell, Jr., Mr. Bruce Braswell and representatives of Broadview
Associates. During the day-long meeting, numerous aspects of a business
combination were discussed, including possible structure and taxation issues,
potential prices and the need for EFTC to secure financing, among other things.
At the end of that meeting, the parties agreed to continue detailed discussions
on the assumption that EFTC could secure reasonable terms for financing the
transaction by June 30, 1997 and receive approval by the EFTC Board.
On May 23, 1997, EFTC and CTI, Inc. signed an exclusivity letter
stating that the CTI Companies could meet with, but not accept, offers from
other contract manufacturers. Such letter outlined the general terms under
discussion and stated the parties intention to proceed with due diligence
investigations and negotiating definitive agreements, subject to EFTC's
securing acceptable terms for financing by June 30, 1997.
On May 28, 1997, the Company's Board of Directors met to discuss the
potential merger or acquisition of the CTI Companies. Mr. Fuhlendorf presented
a pro forma analysis of the Company and the CTI Companies, and Mr. Calderon led
a discussion of the proposed transaction. The Board discussed the structure of
the proposed transaction, the corporate cultures of EFTC and the CTI Companies,
combined corporate financial outlooks and whether Mr. Braswell, Sr. and Mr.
Braswell, Jr. would receive seats on EFTC's Board following the transaction.
Following such discussions, the Board recommended that the Company pursue the
transaction and management commenced the preparation of proposed documentation
for the Merger and the Acquisition. On June 2, 1997, the Company formally
retained J.C. Bradford to represent EFTC in seeking possible sources and terms
for the financing of the Merger and the Acquisition.
Between June 16, 1997 and June 27, 1997, senior management of the
Company and the CTI 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. During the same period, representatives of both Companies met
with numerous banks other financial institutions concerning the terms of
possible financing. Between June 30, 1997 and July 3, 1997 the Company received
three proposed letters of commitment from certain of such institutions.
By July 9, 1997, following such due diligence, document negotiation
and financing activities, EFTC's Board met to finalize and approve the Merger
and the Acquisition. The Merger Agreement and the Purchase Agreement were
signed by the parties on July 9, 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
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) a strategic and geographic expansion of the Company's breadth of
high-mix service offerings, enabling the Company to offer "cradle-to-
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grave" services such as concurrent engineering, subassembly manufacturing,
next-day delivery of assemblies, warranty repair service and post-warranty
repair services and to develop new programs to help OEMs reduce inventory; (ii)
implementation of a hub-based strategy for contract manufacturing; (iii)
opportunities to approach the CTI Companies' existing customer base to pursue
additional high-mix electronic contract manufacturing opportunities; and (iv)
delivery of the CTI Companies' repair services to the Company's existing
customer base, which, together, are expected to provide the Company competitive
advantages in the high-mix electronic contract manufacturing industry. The
Board and management of the Company also believe that the CTI Companies'
management team will represent a strong complement to the Company's existing
management team. In addition, the CTI Companies have an innovative and
customer-driven culture consistent with EFTC's emphasis on being an innovative
high-mix service provider.
The CTI Companies are hub-based, component-level repair organizations
focused on the computer and communications industries.
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:
EXPANSION OF HIGH-MIX SERVICE OFFERINGS.
EFTC is focused on providing high-mix contract manufacturing and other
services to OEMs. The CTI Companies' repair, logistics and custom
configuration businesses are, by definition, high-mix services that EFTC's
management believes are valuable and that EFTC does not now provide. The CTI
Companies manage multiple configurations of numerous products which require
next-day delivery box build services and repair and support services long after
products are out of production. EFTC's acquisition of the CTI Companies will
therefore allow EFTC to expand its breadth of high-mix service offerings into
this new, complimentary area.
EFTC's management believes that the trend in contract manufacturing is
for contract manufacturers to assume an increasing number and scope of
manufacturing-related services that OEMs traditionally performed in-house. The
addition of the CTI Companies' service offerings to EFTC's existing operations
through the Merger and the Acquisition will allow EFTC to offer
"cradle-to-grave" high-mix services, from concurrent engineering, to
subassembly manufacturing and final, next-day delivery box build and finally to
warranty and post-warranty repair services and to develop new programs to help
OEMs reduce inventory. EFTC's management believes that this scope of services
will uniquely position EFTC as the only provider of geographically disbursed
board manufacturing facilities supported by a next-day delivery custom
configuration hub-based repair center.
IMPLEMENTATION OF A HUB-BASED STRATEGY FOR CONTRACT MANUFACTURING.
The CTI Companies were the first electronics repair organization to
implement a repair strategy based on co-location with major air transportation
and logistics service providers and are now the only electronics repair
organization located inside the hub infrastructure and buildings of the
logistics divisions of premium transportation/logistics partners. The CTI
Companies' repair service offerings are fully integrated with the
transportation logistics of these partners, which provides the CTI Companies
unparalleled access to large OEM accounts. That innovative strategy has
allowed the CTI Companies to steadily expand its customer base and achieve
dramatic growth in revenues and margins. EFTC's management believes that the
CTI Companies have developed superior brand equity and have become embedded as
an integral part of the logistics service offerings of major national shipping
companies for computer and communications OEMs. The CTI Companies have spent
considerable time and effort to develop their "advance exchange" program, which
contribute significantly to the effectiveness of the hub-based business model.
In addition, the CTI Companies have shown these strategies to provide inventory
cost savings to OEMs.
ADDITIONAL HIGH-MIX CONTRACT MANUFACTURING OPPORTUNITIES FOR THE
COMPANY.
The CTI Companies' customers consist of approximately 20 major,
established manufacturers of computing and communications products operating in
the United States. The CTI Companies' customer relationships are typically
long-term, with most over five years old. The CTI Companies' customer base
spans OEM component suppliers, OEM component customers, and system, desktop,
and network vendors, as well as direct marketers and manufacturers who
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move their products through the distribution channel. While much of the
contract manufacturing services performed for those OEMs is high-volume
production, all of those OEMs have high-mix printed circuit board assembly
production and custom-configuration business that represent attractive contract
manufacturing opportunities for EFTC's existing operations. EFTC's management
intends to utilize the CTI Companies' strong customer relationships and
reputation with those OEMs to seek new high-mix contract manufacturing
opportunities to existing customers of the CTI Companies that are not currently
customers of EFTC.
EFTC also believes that significant opportunities exist to provide
electronics contract manufacturing services from a transportation hub-based
system. EFTC currently offers "box-build" services whereby EFTC takes the
printed circuit board assemblies which it has built and combines them with
other component parts to build the customer's finished product. This service
may also include final packaging of the product and direct shipment of
custom-configured products to the OEM's customer. The current trend in
technology products manufacturing is to reduce inventory and increase delivery
speed by constructing a basic product chassis and then building final products
to meet specific orders as they are received. Following completion of the
Merger and the Acquisition, EFTC currently plans to exploit the hub-based
logistics expertise of the CTI Companies to establish a contract manufacturing
facility in Memphis, Tennessee or Louisville, Kentucky to provide next-day
final assembly box-build operations of custom-configured products for EFTC's
existing customers as well as other electronics manufacturers. Management
intends that such hub location will allow EFTC to more rapidly and
cost-effectively bring together component parts and ship-out finished products.
DELIVERY OF THE CTI COMPANIES' REPAIR SERVICES TO THE COMPANY'S
CUSTOMER BASE.
The CTI Companies operations to date have focused on the provision of
repair services to OEMs in the computer and communications industries. The
management of EFTC and CTI believe that significant opportunities exist to
deliver the hub-based repair operating model to OEMs in other industries that
are currently served by EFTC, such as aviation, electronic medical and
additional telecommunications devices. Following the completion of the Merger
and the Acquisition, EFTC intends to pursue opportunities to provide repair
services to many of EFTC's existing contract manufacturing customers.
EXPERIENCED AND DEDICATED MANAGEMENT.
The CTI Companies' management developed and has many years of
experience running a hub-based component-level repair organization, and they
have demonstrated the ability to run a profitable high-growth business. The
Board believes that the management and staff at the CTI Companies are skilled
and experienced and will maintain a well-managed business environment. The
senior management of the CTI Companies is highly service focused and dedicated
to staying on and building the business. The culture and attitude of the CTI
Companies' management teams are similar to those of the Company's management,
and the Board believes that the Company's and the CTI Companies' management
teams will complement each other.
OTHER MATTERS CONSIDERED BY THE BOARD.
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 CTI Companies might contribute to
future business and prospects of the combined company, including earnings
contributions; (ii) the Company's and the CTI 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 CTI Companies' business,
operations, technology, facilities, financial information and competitive
position, and possible operating efficiencies and expansion opportunities for
the combined companies; (iv) the availability of capacity enabling revenue
growth; (v) pro forma financial information analyzing the combination of the
Company and the CTI 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 CTI 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 on the specific terms
of the Merger Agreement and the Purchase Agreement, (ix) the value of the
Company's stock to be issued in the Merger for goodwill purposes; and (x) the
Company's and the CTI Companies' historical and projected financials and
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results of operations, particularly with regard to determining the
consideration to be given for the CTI Companies. Neither the Company nor any
of its affiliates received any report, opinion or appraisal from any outside
party (including any investment bankers) which was or is materially related to
the Merger or the consideration or the fairness of the consideration to be paid
by the Company to the CTI Shareholders.
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 CTI Companies' growth; and (v) the risk that the CTI
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 may have
given different weights to different factors.
FINANCING FOR THE MERGER AND ACQUISITION
In connection with the Merger and Acquisition, the Company has
negotiated the Bank One Loan comprised of a $30 million revolving credit
facility and a $15 million term loan and the issuance of $15 million in
Subordinated Notes. In order to repay all or part of the Bank One Loan and the
Subordinated Notes, the Company is considering a public offering of Common
Stock in the near future, but there can be no assurances that any such offering
will be commenced, or if commenced, will be completed. See "CERTAIN MATTERS TO
BE CONSIDERED BY SHAREHOLDERS--Interests of Certain Persons in the Merger and
Acquisition--Issuance of Subordinated Notes;" and "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 3,822,570 shares of the Common Stock as of August 31, 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 has been structured by the parties so that it will qualify
as a tax-free 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.
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.
DESCRIPTION OF THE MERGER AGREEMENT
The following is a summary of the terms of the Merger based on the
Merger Agreement entered into on July 9, 1997, among the Company, CAC and CTI,
the Voting Agreement entered into as of July 9, 1997, among the Company and the
CTI Shareholders and the Letter Agreement entered into as of July 9, 1997 among
CTI and certain EFTC
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Directors. 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 CAC, a wholly-owned subsidiary of the Company, into CTI, with CTI being the
surviving corporation (the "Surviving Corporation") and CAC ceasing to have any
separate corporate existence. As a result of the Merger, the Company will
issue the EFTC Equity to the CTI Shareholders representing approximately 23.85%
of the Common Stock of the Company outstanding after giving effect to the
Merger and related transactions. The CTI 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 Florida 1989
Business Corporation Act with the Department of State of the State of Florida
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 after the Special Meeting. At
the Effective Time, the holders of CTI Common Stock will receive the Merger
Consideration described below.
Merger Consideration. At the Effective Time and whether or not
surrendered at the Closing, each issued and outstanding share of CTI Common
Stock will be converted into the right to receive approximately 152.788 shares
of Common Stock of EFTC. The aggregate number of shares of the Company's
Common Stock constituting the EFTC Equity is fixed pursuant to the Merger
Agreement at 1,858,975 shares.
Conditions to the Merger. None of the Company, CAC and CTI 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 CTI Shareholders;
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 that have not been obtained;
and the transactions contemplated under the Purchase Agreement are
simultaneously consummated.
The obligations of the Company and CAC to consummate the transactions
contemplated by the Merger Agreement are subject to, among other things: CTI's
performance of all its covenants, obligations and agreements under the Merger
Agreement; the truth and correctness of CTI's representations and warranties in
all material respects when made and as of the Effective Time; receipt of the
resignations of CTI's incumbent directors; the absence of any material adverse
events affecting CTI; the receipt of a legal opinion from Burch, Porter &
Johnson, PLLC, counsel to the CTI Companies; receipt of consents or approvals
of those persons whose consents or approvals are required in connection with
the Merger under any material contract of CTI; the performance by the CTI
Shareholders of and their compliance with the Voting Agreement; the execution
and delivery by certain CTI Shareholders, as the case may be, of the
Registration Rights Agreement, the Indemnification Agreement, and a letter
concerning certain tax matters; execution and delivery of the Employment
Agreements; the absence of any material variations between the audited
financial statements for the year ended December 31, 1996 delivered to the
Company in accordance with the terms of the Merger Agreement and the unaudited
financial statements previously delivered to the Company; all corporate
matters, except those not requiring Board approval shall have been approved or
ratified by the CTI Board of Directors; and the receipt of various customary
certificates, instruments, and other documents from CTI and others.
The obligation of CTI to consummate the transactions contemplated by
the Merger Agreement is subject to, among other things: the Company's and
CAC's performance of all their covenants, obligations and agreements under the
Merger Agreement; the truth and correctness of the Company's and CAC's
representations and warranties in all material respects when made and as of the
Effective Time; the receipt of a legal opinions from Holme Roberts & Owen LLP,
counsel to the Company; the execution and delivery by the Company of the
Registration Rights Agreement; the grant to certain members of CTI's management
of employee stock options in the Company's Common Stock; the execution and
delivery by the Company of the Employment Agreements with certain former
employees of CTI; and the receipt of various customary certificates,
instruments and other documents from the Company, CAC and others.
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Covenants. Until the Effective Time, CTI has agreed, among other
things, to carry on its business in the usual, regular and ordinary course and
to do certain other things so as not to impair its goodwill and ongoing
business; to maintain insurance coverages; maintain its plants, property and
equipment in good repair, working order and condition; to perform its
obligations under its contracts and commitments; to notify the Company about
certain material adverse effects; and to pay accounts in the ordinary course.
CTI also has agreed, among other things, not to amend its articles of
incorporation or bylaws; not to adopt, accelerate, amend or change any employee
or director stock option plan or options or rights thereunder; not to enter
into or amend agreements granting others exclusive marketing or other exclusive
rights concerning its products or technologies; not to 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 as permitted by
the Merger Agreement; not to commence lawsuits other than certain routine
collection suits; not to acquire or agree to merger with any entity; and not to
do anything that would make any representation or warranty untrue.
No Solicitation. The Merger Agreement also provides that, subject to
the fiduciary duties of CTI's board of directors, CTI 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, CTI 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 shareholders of the Company or the CTI Shareholders: (i)
by mutual consent of the Company and CTI; (ii) by either the Company or CTI,
if, without fault of the terminating party, the Closing does not occur on or
before November 30, 1997, or such later date as agreed by the parties; (iii) by
either the Company or CTI, 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 CTI, 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 such breach has been given in accordance
with the Merger Agreement.
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, CAC or CTI 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 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
the CTI Shareholders shall not alter or change (i) the amount or kind of
consideration to be received on conversion of CTI Common Stock; (ii) any term
of the articles of incorporation of CTI 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 the CTI
Shareholders.
CHANGE OF THE COMPANY'S BOARD
At the Effective Time the Board will (i) increase the number of the
Company's directors from 14 to 16 and (ii) nominate and appoint Allen S.
Braswell, Sr., as an additional Class II director to hold office until the 1999
Annual Meeting of the Company's shareholders and Allen S. Braswell, Jr., as an
additional Class I director to hold office until the 1998 Annual Meeting of the
Company's shareholders. Allen S. Braswell, Sr. and Allen S. Braswell, Jr. are
father and son. The Company has agreed to take the actions necessary to
nominate Messrs. Braswell for election to the Company's Board of Directors at
the next annual meeting of the shareholders of the Company.
EFTC DIRECTOR VOTING ARRANGEMENTS
The EFTC Directors who are also shareholders of the Company have
agreed with CTI that they will give their consent with respect to or vote their
shares of Company Common Stock to approve the Merger Agreement and the Merger.
The shares of Common Stock owned by the EFTC Directors represent approximately
64.2% of the outstanding shares of the Company's Common Stock.
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CTI SHAREHOLDER VOTING ARRANGEMENTS
The CTI Shareholders have agreed with the Company that they will give
their consent with respect to or vote their shares of CTI Common Stock to
approve the Merger Agreement and the Merger. Because the shares of CTI Common
Stock owned by the CTI Shareholders represent 100% of the outstanding shares of
CTI Common Stock, approval of the Merger Agreement and the Merger by the
shareholders of CTI is assured.
DESCRIPTION OF THE RELATED AGREEMENTS
The following is a summary of the terms of the Purchase Agreement
entered into on July 9, 1997, among the Company, Acquisition Corp., and the CTI
LLC Members; the Earnout Agreement entered into on July 9, 1997, among the
Company and the CTI LLC Members; the Registration Rights Agreement to be
entered into at the Closing of the Merger; an Indemnification Agreement to be
entered into at the Closing of the Merger; and certain Employment Agreements to
be offered by the Company to certain members of CTI's management.
THE PURCHASE AGREEMENT
Purchase Price. Simultaneously with the consummation of the Merger,
the Company and Acquisition Corp. will purchase and the CTI LLC Members will
sell to the Company and Acquisition Corp. all the ownership interests in the
CTI LLCs for $19,500,000 in cash, subject to adjustment as described below.
The purchase price will be (i) decreased by the amount, if any, that
interest-bearing indebtedness, net of cash and excluding certain obligations
permitted by the Purchase Agreement and the Merger Agreement (the "Debt") of
the CTI Companies exceeds $5,700,000 or (ii) increased by the amount, if any,
that the Debt of the CTI Companies is less than $5,700,000. The completion of
the Acquisition itself does not require the vote of the Company's Shareholders
and no vote is being sought with respect to the Acquisition. CTI and the CTI
LLCs are independently owned entities owned and controlled by various members,
and entities in turn controlled by the family of Allen S. Braswell, Sr. Over
seventy percent of the shares of CTI are owned by the Allen S. Braswell, Sr.
Grantor Retained Income Trust. The following entities each own fifty percent
(50%) of both of the CTI LLC's: (i) Circuit Test International Limited
Partnership (Allen S. Braswell Sr. Living Trust, General Partner, Allen S.
Braswell, Sr. Trustee); and (ii) Allen S. Braswell, Jr. Revocable Living Trust,
Allen S. Braswell, Jr., Trustee.
Covenants. Until the Effective Time, the CTI LLCs have agreed, among
other things, to carry on their business in the usual, regular and ordinary
course and do certain other things so as not to impair their goodwill and
ongoing business; to maintain insurance coverages; to maintain their plants,
property and equipment in good repair, working order and condition; to perform
their obligations under its contracts and commitments; to notify the Company
about certain material adverse effects; and to pay accounts in the ordinary
course. The CTI LLCs also have agreed not to amend formation documents; not to
enter into or amend agreements granting others exclusive marketing or other
exclusive rights concerning their products or technologies; not to 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 their employees; not to
commence lawsuits other than certain routine collection suits; not to acquire
or agree to merger with any entity; not to do anything that would make any
representation or warranty untrue; not to sell, lease or otherwise dispose of
any property or asset; and not to declare or pay any distribution to the CTI
LLC Members.
EARNOUT PAYMENTS
The Earnout Agreement provides for Earnout Payments to be made in cash
to the CTI LLC Members on a pro rata basis, payable after the end of the
Company's three fiscal years ending December 31, 1997, 1998 and 1999 in the
following amounts: (i) for 1997, $2,000,000, but only if the aggregate
earnings before interest and taxes, determined on a consolidated basis in
accordance with generally accepted accounting principles, ("EBIT") of the CTI
LLCs (and, if necessary to achieve the target amount of EBIT, of CTI) exceed
$4,500,000; (ii) for 1998, $4,000,000, minus any payments made for 1997, but
only if EBIT as so calculated exceeds $9,000,000; (iii) for 1999, $6,000,000,
minus payments made for 1997 and 1998, but only if EBIT as so calculated
exceeds $13,500,000. The Earnout Agreement further provides for payment to the
CTI LLC Members of $6,000,000 minus any Earnout Payments made or due and
payable, in the event of either (i) a change in control of the Company; (ii) a
public offering of the Company's Common
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Stock; or (iii) a private offering of the Company's Common Stock with aggregate
net proceeds to the Company of not less than $40,000,000. Any Earnout Payments
made by the Company will be recorded by the Company as additional goodwill.
In order to determine EBIT for the purposes of the Earnout Agreement,
the CTI Companies will be audited in accordance with generally accepted
accounting standards by a certified public accounting firm chosen by the
Company. EBIT will be determined independently of the Company and its
affiliates, other than the CTI Companies, without any allocation of income or
expense not directly incurred by the CTI Companies (based on historic
operations measured as of the Effective Time). EBIT will not include charges
and expenses, deferred compensation in the amount of $500,000 and bonuses
payable by the CTI Companies in connection with the Merger and the Acquisition
(the "Transaction Expenses") and payments made to Broadview Associates as
described in the Merger Agreement. In the event of a dispute over EBIT, any
CTI LLC Member may request that the records of the CTI Companies be examined by
an independent certified public accounting firm, other than that used by the
Company. The report of such accountants will be final, binding and conclusive
on the parties. The expense of such audit will be borne by the CTI LLC Member
who disputed the EBIT calculation, unless the audit finds an error results in
payment of an Earnout Payment that would otherwise not have been paid. In that
event, the Company will be responsible for reasonable fees incurred in such
audit. A dispute over Transaction Expenses will be resolved in final and
binding arbitration by a panel of three arbitrators.
THE REGISTRATION RIGHTS AGREEMENT
The shares of Company's Common Stock representing the EFTC Equity to
be delivered to the CTI Shareholders 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 the CTI Shareholders based in
part on certain representations and warranties given by them. Accordingly, the
CTI Shareholders 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 and the CTI
Shareholders. The Registration Rights Agreement also will provide for certain
registration rights with respect to the EFTC Equity.
Demand Registration. At any time within one year after the date of
the Registration Rights Agreement, the holders of a majority of the then
Registrable Securities (as defined in the Registration Rights Agreement) may
require the Company to register all or part of their Registrable Securities
(the "Initial Demand"). In addition, at any time eighteen months after the
effectiveness of the registration statement filed with respect to the Initial
Demand, the holders of a majority of then outstanding Registrable Securities
may request an additional registration of some or all of their Registrable
Securities not registered pursuant to the Initial Demand. In either case, the
aggregate amount of Registrable Securities that the holders request be included
in the registration must equal at least 40% of all Registrable Securities and
have a fair market value at the time of the request equal to $5,000,000. If
any Demand Registration (as defined in the Registration Rights Agreement)
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 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.
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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, securities that the Company has become, prior to the date of the
Registration Rights Agreement, otherwise obligated to include in such
registration; (iv) fourth, 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 (v) fifth, 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 Employment Agreements. At the Effective Time, the Company also
will offer employment agreements (the "Employment Agreements") to Allen S.
Braswell, Jr., Richard Strott, Andrew Hatch and Dennis Ayo, each of whom is a
member of CTI's senior management. The Employment Agreements provide for each
employee to work on a full time basis with the Company for a period of three
years. As compensation for their services the Company would pay each employee
the salary specified in the Employment 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.
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<PAGE> 44
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 two years after
his termination.
Other Employment Matters. Immediately following the Merger the Company
will grant certain members of CTI's management employee stock options to
purchase shares of the Company's Common Stock.
THE INDEMNIFICATION AGREEMENT
Survival of Representations and Warranties. Under the Merger
Agreement, the representations and warranties made by CTI relating to S
corporation status and employee benefit plans survive indefinitely. All other
representations and warranties of the Merger Agreement made by CTI survive for
two years after the Effective Time. The representations and warranties of the
Merger Agreement made by the Company and CAC survive for two years after the
Effective Time. Under the Purchase Agreement, the representations and
warranties of the CTI LLC Members survive for two years after the date of the
Closing, except for those relating to taxes which survive for the applicable
statute of limitations period. The representations and warranties of the
Purchase Agreement made by the Company and Acquisition Corp. do not survive 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 CTI Shareholder and CTI LLC Member has agreed to indemnify and
hold harmless the Company from and against such Shareholder's or Member's pro
rata share of all complaints, claims, losses, damages, liabilities and expenses
that the Company may suffer arising from (i) CTI's breach of a covenant in the
Merger Agreement or any representation or warranty of CTI in the Merger
Agreement being inaccurate; and (ii) the CTI LLCs or any CTI LLC Member
breaches a covenant or any representation or warranty in the Purchase Agreement
being inaccurate, except that the CTI Shareholders and CTI LLC Members 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 and (ii) to the extent
that Losses suffered by reason thereof exceeds a $2,500,000 aggregate ceiling
(after which the CTI Shareholders and CTI LLC Members will have no obligation
to indemnify the Company from any further Losses), unless such Losses are
caused by or arise out of any breach or inaccuracy of which any CTI Shareholder
or CTI LLC Member had actual knowledge at the time to related agreement or
representation was made or deemed made, in which case, there shall be no
limitation on the aggregate liability of the CTI Shareholders and CTI LLC
Members.
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 Allen S. Braswell, Sr. and Allen S. Braswell, Jr. 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."
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND THE ACQUISITION
SMI. Sales Management International, Inc. ("SMI") was formed in 1987
by Mr. Jack Calderon, President, Chief Executive Officer and a Director of
EFTC, Mr. Allen S. Braswell, Sr., the Chairman of CTI and Mr. Allen S.
Braswell, Jr., the President and CEO of CTI. SMI secured for CTI a large
contract from IBM Corporation to repair computer monitors for CTI as a sales
agent and receives a commission of 2% of revenues derived from such contract.
In November of 1990 CTI's Board of Directors passed a resolution stating that
in the event of a change of control of CTI, SMI would receive 2% of the
purchase price or $500,000, whichever is less. The total proceeds received by
SMI as the result of the consummation of the Merger will be $500,000, of which
Mr. Calderon will receive $166,667, representing his 33.3% interest. Since his
employment with EFTC, Mr. Calderon has not received any compensation from SMI.
Lease. CTI leases a repair facility in Florida from Allen S.
Braswell, Sr. who will become a director of the EFTC upon completion of the
Merger and the Acquisition. The building is approximately 25,000 square feet
and the monthly lease cost is $5,080, or $3.44 per square foot, and $300 per
month for taxes. The building is used for repair
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<PAGE> 45
operations and storage. EFTC's Management has agreed that CTI shall continue
to lease such facility upon substantially the same terms following the
consummation of the Merger and the Acquisition.
Director Representation of the CTI Companies. Mr. Robert K. McNamara,
a director of the Company, is a Managing Director of Broadview and in such
capacity is representing the CTI Companies in connection with the Merger and
the Acquisition. Broadview is an investment bank that has represented numerous
companies in connection with mergers and acquisitions in the technology sector.
Broadview will receive a fee of approximately $800,000 in connection with the
consummation of the Merger and the related Acquisitions.
Issuance of Subordinated Notes. Mr. Richard L. Monfort, a member of
EFTC's Board of Directors, is participating in the financing of the CTI
transaction by purchasing $15 million in aggregate principal amount of
Subordinated Notes to be issued by EFTC. The Subordinated Notes will have a
five year maturity and will bear interest at 200 basis points over the
applicable London Inter-Bank Offered Rate (LIBOR). The principal amount of the
Subordinated Notes will mature in five equal installments, commencing on the
first anniversary of their issuance at the consummation of the Merger and the
related Acquisitions. The principal amount of the outstanding Notes will be
accompanied by Warrants for 500,000 shares of the Company's Common Stock at an
exercise price of $8.00 per share.
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 76.1% of the total issued
and outstanding shares of the Common Stock. At August 6, 1997, the Record
Date, the Company had 5,939,410 shares of Common Stock outstanding and after
Closing there will be approximately 7,798,385 shares of Common Stock
outstanding.
On June 30, 1997, each share of Common Stock had a net book value of
$3.26 per share, calculated on a historical basis. After Closing, each share
of Common Stock will have a pro forma net book value of $3.38 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 $39 million in long-term debt outstanding and
stockholders' equity of approximately $26 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 Bank One Loan will contain significant restrictive covenants
eliminating the Company's ability to incur additional debt, grant dividends and
engage in mergers and acquisitions without Bank One's consent. See
"MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--The Company--Liquidity and Capital Resources."
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 CTI Companies will require successful integration of the administrative,
marketing, information, materials and manufacturing operations of the Company
and the CTI Companies. This will require substantial attention from the
Company's and the CTI 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.
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<PAGE> 46
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 CTI would be
required to recognize or gain or loss as a result of the merger. If the Merger
were to be a taxable transaction, the CTI Shareholders would recognize gain
from the deemed sale of their CTI stock and would be liable for the taxes
payable with respect to that gain.
With respect to the acquisition of the LLC interests of the CTI LLCs
for cash, no gain or loss will be recognized by the Company. The selling CTI
LLC Members 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.
The 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. Conversely, the productivity levels realized from
the implementation of Asynchronous Process Manufacturing (APM) in the latter
half of 1996 has led to a general trend toward higher gross profit percentages.
The growth in turnkey sales has also required the Company to increase its
investment in working capital, particularly as it relates to inventory
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and accounts receivable. The percentage of net sales attributable to sales of
materials increased from 58.4% in 1992 to 79.8% in 1996.
As a percentage of net sales, Selling, General and Administrative
Expenses from 1994 to 1996 have increased annually. Such increase is attributed
to charges incurred by the Company as a result of restructuring and as a result
of the acquisition of the CE Companies.
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.
The following table sets forth certain operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
Six Months Ended Year Ended December 31,
June 30, ---------------------------
-----------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Sales ............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Gross Profit .......................... 12.2 4.4 5.1 7.9 10.3
Selling, general and administrative
expenses .................... 8.1 5.4 7.4 6.3 4.6
Goodwill .............................. 0.2 -- -- -- --
Impairment of fixed assets ............ -- -- 1.3 -- --
------ ------ ------ ------ ------
Operating income (loss) ............... 3.9 (1.0) (3.6) 1.6 5.7
Interest expense ...................... (1.5) (0.8) (.9) (.8) (.3)
Other, net ............................ 0.1 0.1 0.2 0.2 0.2
------ ------ ------ ------ ------
Income (loss) before income taxes ..... 2.5 (1.7) (4.3) 1.0 5.6
Income tax expense (benefit) .......... 0.5 (0.7) (1.5) 0.3 2.0
------ ------ ------
Net Income (loss) ..................... 1.6 (1.0) (2.8) 0.7 3.6
====== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30,
1996
Net Sales. Net sales are net of discounts and are recognized upon
shipment to a customer. The Company's net sales increased by 18.9% to
$36,782,349 during the six months of fiscal 1997, from $30,944,370 during the
same period of fiscal 1996. The increase in net sales is due primarily to the
inclusion of the operations from Current Electronics, Inc.
which was acquired on February 24, 1997.
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 first six months of 1997 gross profit
increased by 229.6% to $4,496,567 compared to $1,364,338 for the first six
months of fiscal 1996. The gross profit margin for the first six months of
fiscal 1997 was 12.2% compared to 4.4% for the first six months of 1996. The
primary reason for the increase in gross profit percentage is related to the
operations of the CE Companies, which have a higher gross profit percentage.
Another reason for the increase in gross profit is the adoption of APM in the
later part of 1996 in the Rocky Mountain facility. APM standardizes processes
and sets them up in a parallel pattern on the manufacturing floor. Product can
flow to any process, i.e., any board to any line. This unique arrangement
combined with powerful proprietary information technologies allows for the
manufacture of high-mix product in a high speed mode. The key to making APM
work is to increase throughput by decreasing setup time, standardizing work
centers and processing smaller lot sizes. EFTC has done this by
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<PAGE> 48
designating teams to set up off-line feeders and standardizing loading methods
regardless of product complexity. APM has allowed EFTC to increase productivity
by producing product with less people which ultimately reduces costs and
increases gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by 98.1% to $2,986,655 for the six months of
fiscal 1997 compared with $1,656,540 a year earlier. As a percentage of net
sales, SGA increased to 8.1% in the first six months of 1997 from 5.4% in the
same period of fiscal 1996. The increase is primarily due to the inclusion of
the CE Companies' SGA expenses in 1997 from February 24 to June 30 in the
amount of approximately $1,132,000.
Operating Income. Operating income for the first six months of fiscal
1997 increased 586.1% to $1,402,311 from a loss of $292,202 for the first six
months of fiscal 1996. Operating income as a percentage of net sales increased
to 3.9% in the first six months of fiscal 1997 from (0.9%) in the same period
last year. The increase in operating income is attributable to increased
efficiencies associated with APM and the acquisition of the CE Companies as
explained above.
Interest Expense. Interest expense for the first six months of 1997
was $537,143 compared to $242,613 for the same period in fiscal 1996. The
increase in interest is primarily the result of the acquisition debt associated
with the merger and acquisition of the CE Companies and increased operating
debt used to finance both inventories and receivables for EFTC and the CE
Companies in the first six months of fiscal 1997.
Income Tax Expense. The effective income tax rate for the first six
months of fiscal 1997 was 36.8% compared to 38.9% from the same period a year
earlier. This percentage fluctuates substantially because relatively small
dollar amounts tend to move the rate significantly as estimates change. The
Company expects that the rate will normalize in future quarters and be
approximately 37%.
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 15.6% to
$56,880,067 from $49,220,070 in 1995. The increase in net sales is due
primarily to increased material sales associated with electro-mechanical
assembly (box-build) to one customer. The top ten customers in 1996 accounted
for 75.9% of total sales volume, as compared to 79.4% in 1995.
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). Gross profit in 1996 decreased 25.5% from 1995
to $2,900,000. Gross profit as a percentage of net sales for 1996 was 5.1%
compared to 7.9% in 1995. One reason for the decline in gross profit is related
to restructuring charges of $479,029 that were included in cost of goods sold
in the third quarter of 1996. Without the restructuring, gross profit would
have been $3,379,029 or 5.9% of net sales. These restructuring charges were
severance expenses related to a decrease in workforce, write down of inventory
related to changes in the Company's customer mix, and expenses related to the
reorganization of the manufacturing floor and manufacturing process.
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 1996
increased by 35.6% over 1995 to $4,195,784. The increase is due to
restructuring charges for severance expenses related to reduction in workforce
and other expenses related to organizational changes in the amount of $922,404
in the third quarter of 1996. Excluding the restructuring charges, the SGA
expense would have been $3,273,380 an increase of $179,980 or 5.8% over 1995.
This increase was due primarily to increased sales commissions and related
expenses associated with the sales growth from 1995 to 1996 levels as noted
above. As a percentage of net sales, SGA expense increased to 7.4% in 1996 from
6.3% in 1995. Without the restructuring changes, SGA expenses would have been
5.8% of net sales for the year ended 1996.
Impairment of Fixed Assets. During the third quarter of 1996, the
Company incurred a write down associated with impaired assets in the amount of
$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
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<PAGE> 49
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Long-lived assets and
certain identifiable intangibles to be disposed of should be reported at the
lower of carrying amount of fair value less cost to sell. The Company went
through a corporate restructuring in the third quarter of 1996 which included a
workforce reduction and an change in the way product is manufactured which
resulted in certain assets no longer being used in operations. Certain software
that will no longer be used, as well as excess equipment that is now held for
sale, were written down to fair value in accordance with Statement No. 121.
Operating Income. Operating income in 1996 decreased 352.3% to a loss
of $2,021,653 from income of $801,321. Operating income as a percent of sales
decreased to (3.6%) in 1996 from 1.6% in 1995. The decrease in operating income
was primarily attributable to the restructuring charges and impairment of fixed
assets noted above in the amount of $2,127,302. Excluding the restructuring
charges, the Company would have had operating income of $105,649 or .2% of net
sales for 1996. The decrease, excluding the restructuring charges, was related
to product mix changes and related overhead expenses to put new programs in
place as well as increased variable selling costs associated with higher sales
volumes in the first two quarters of 1996.
Interest Expense. Interest expense in 1996 increased 31.7% from 1995
to $525,854. Borrowing due to increases in inventory and accounts receivable
levels is the primary reason for the increase in interest expense.
Income Tax Expense. The Company's effective income tax rate for 1996
was 35.4% compared to 26.3% for 1995. Tax expense for 1995 was lower due to
certain research expenditures incurred in 1992, 1993, 1994 for which the
Company claimed federal tax credits. The Company is also located in a state
enterprise zone. The Company receives state tax credits for capital
expenditures and increases in the number of Company employees. As sales
increase, these state tax credits will have a relatively smaller effect on the
Company's effective income tax rate.
1995 Compared to 1994
Net Sales. Net sales 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.
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<PAGE> 50
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 in a state enterprise zone. The Company
receives state tax credits for capital expenditures and increases in the number
of Company employees. As sales and earnings increase, these state tax credits
will have a relatively smaller effect on the Company's effective income tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, working capital totaled $10,717,844. Working capital
at December 31, 1996 was $8,508,489 compared to $9,867,843 at December 31, 1995
and $6,744,318 at December 31, 1994. The increase in working capital from 1994
to 1995 is attributable primarily to a sale-leaseback transaction which closed
in December 1995. The Company sold equipment at a sales price of $3,678,014 and
retired short-term debt in the amount of $3,310,000 in December 1995. The
subsequent decrease in working capital in 1996 is attributable primarily to the
purchase of fixed assets and long-term debt retirement. The increase in working
capital in the first six months of 1997 is attributable to the inclusion of the
acquisition of the CE Companies that occurred on February 24, 1997.
Cash used in operations for the first six months of 1997 was
$1,275,419 compared to $3,611,555 in the same period last year. Cash provided
by operations in 1996 was $35,667 compared to cash used in operations of
$933,589 in 1995 and $697,176 in 1994. Increased profitability and an increase
in working capital components are the primary reasons for the decrease in the
cash used in operations in 1997 when compared to 1996. The increase in cash
used in operations in 1995 is attributable primarily to increases in accounts
receivable and inventories. Accounts receivable decreased 1.8% to $7,032,934 at
June 30, 1997 from $7,164,174 at June 30, 1996. Accounts receivable decreased
22.4% to $3,866,991 at December 31,1996 from $4,982,450 at December 31, 1995.
Accounts receivable increased 29.1% 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 first six months of fiscal 1997
and the first six months of fiscal 1996 is 10.5 and 8.7 turns, respectively.
The 1997 receivable turn is distorted because the sales for the first quarter
includes only one month and four days of the CE Companies' revenues. Based on
historical annual revenues of the CE Companies and the Company combined, the
receivable turns would be 11.9 times. Receivable turns for 1996, 1995 and 1994
were 14.7, 9.9 and 13.6, respectively. Inventories increased 65.1% to
$17,859,385 at June 30, 1997 from $10,816,201 at June 30, 1996. Inventories
decreased 7.2% to $9,146,505 on December 31, 1996 from $9,859,414 on December
31, 1995 and increased 31.8% 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 first six months of fiscal 1997 and 1996
shows a decrease to 3.6 from 5.5, respectively. The 1997 inventory turn is
distorted because the cost of sales for the first quarter includes only one
month and four days of the CE Companies' costs. Based on historical annual cost
of sales of the CE Companies and the Company combined, the inventory turns
would be 4.2 times. Inventory turns for 1996, 1995 and 1994 were 5.9, 4.6 and
6.3, respectively. Inventory turns have increased primarily because of new
projects that were
41
<PAGE> 51
being introduced towards the end of 1995. Inventory increases in the early
stages of new turnkey business which may create delays and decrease the turning
of inventory until the new assemblies are in full production.
The Company used cash to purchase capital equipment totaling
$1,292,053 in the first six months of 1997, compared with $1,061,879 in the
same period last year. The Company also used cash to purchase the CE Companies,
as explained earlier, in the amount of $7,398,728. Proceeds from long-term
borrowings of $6,700,000 were used to help fund the purchase of the CE
Companies. The Company used cash from investing activities of $2,028,865 in
1996, compared to providing cash of $1,265,525 in 1995 and using cash of
$9,035,395 in 1994. The Company used cash to purchase capital equipment
totaling $2,374,403 in 1996, compared with $2,473,819 in 1995. In 1995 the
Company received cash from the sale of equipment primarily from the
sale-leaseback transaction mentioned above of $3,739,344. 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 February 24, 1997, the Company renegotiated its revolving line of
credit, negotiated a 90-day bridge loan and incurred additional equipment debt
in conjunction with the merger and acquisition of the CE Companies. The
revolving line of credit was increased to $15,000,000 with a maturity date of
June 5, 1998. The amount outstanding was $5,800,000 at June 30, 1997. Interest
on borrowings under this credit facility accrues at the Bank One Prime rate
plus .25% (8.75% at March 31, 1997). 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 short term
bridge facility was for $4,900,000 and had a maturity date of May 24, 1997 and
will be repaid from the proceeds of the Bank One Loan. The interest accrues at
the Bank One Prime Rate plus .25% (8.75% at June 30, 1997). The proceeds from
this loan were used to pay the cash portion of the consideration to be paid in
the merger and acquisition of the CE Companies noted above. The Company also
issued a $1,800,000 five year note with a maturity date of April 5, 2002. The
interest rate is 8.95% per annum. The Company will pay this loan in 60 regular
monthly payments of $36,983 and one final payment of $41,983. These payments
include both principal and interest. The proceeds of this loan were used to pay
off equipment debt of the CE Companies pursuant to the merger agreement.
In connection with the Merger and Acquisition and the Asset Purchase,
the Company has negotiated a commitment letter for the Bank One Loan comprised
of a $30 million revolving line of credit, maturing on September 30, 2000 and a
$15 million term loan maturing on September 30, 2002. The proceeds of the Bank
One Loan may be used for (i) funding the Merger and Acquisition; (ii) funding
the Asset Purchase; (iii) funding the Real Property Purchase; (iv) repayment of
the existing Bank One line of credit and bridge facility; and (v) working
capital requirements. The Bank One Loan will bear interest at a rate based on
either the Bank One prime rate or the LIBOR plus applicable margins ranging
from 3.25% to 0.50% for the term facility and 2.75% to 0.00% for the revolving
facility. Borrowings on the revolving facility are subject to limitation based
on the value of the available collateral. The Bank One Loan is collateralized
by substantially all of the Company's assets, including real estate, whether
now owned or hereinafter acquired. The loan agreement for the Bank One Loan is
expected to contain restrictive covenants relating to capital expenditures,
limitation of investments, borrowings, payment of dividends, mergers and
acquisitions. In addition, the loan agreement is expected to contain financial
covenants relating to the following ratios: (i) maximum senior debt to EBIDTA;
(ii) maximum total debt to EBIDTA; (iii) minimum fixed charge coverage; (iv)
minimum EBIDTA to interest; (v) minimum tangible net worth requirement with
periodic step-up; (vi) maximum annual capital expenditures; and (vii) excess
cash flow recapture. The Bank One Loan is subject to the negotiation of
definitive loan documents, and there can be no assurance that the Company will
be able to obtain the Bank One Loan on terms satisfactory to the Company.
In addition to the Bank One Loan, the Company has agreed upon the
terms for the issuance of $15 million in Subordinated Notes, with a maturity
date of June 24, 2002 and bearing a fixed coupon of LIBOR plus 2.00%. The
Subordinated Notes are amortized yearly with payments of $50,000 and one final
payment of $14,800,000 and may be prepaid in whole or in part at any time, with
any prepayment subordinated to the Bank One Loan. The Subordinated Notes will
be accompanied by warrants for 500,000 shares of the Company's Common Stock at
an exercise price of $8.00. The holder of the Subordinated Notes will be
Richard L. Monfort, a director of the Company. See "CERTAIN
42
<PAGE> 52
MATTERS TO BE CONSIDERED BY SHAREHOLDERS--Interests of Certain Persons in the
Merger and Acquisition--Issuance of Subordinated Notes."
The Company has committed to construct a new manufacturing facility in
Oregon to replace the present location in Oregon at an approximate cost of
$5,000,000. The Company has agreed upon the terms for the financing of this new
facility and has started construction.
In order to repay all or part of the Bank One Loan and the
Subordinated Notes, the Company is considering a public offering of Common
Stock in the near future, but there can be no assurances that any such offering
will be commenced, or if commenced, will be completed.
New Accounting Standard. In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings Per Share" ("SFAS 128")
which revised the calculation and presentation provisions of Accounting
Principles Board Opinion 15 and related interpretations. SFAS 128 is effective
for the Company's fiscal year ending December 31, 1997 and retroactive
application is required. The Company believes the adoption of SFAS 128 will not
have a material effect on its determination of earnings per share.
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.
CIRCUIT TEST, INC. AND AFFILIATES
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30,
1996.
Net Sales. Net sales are net of discounts and are recognized upon
shipment of an order to a customer. Net sales in the six months of fiscal year
1997 increased 104.0% to $19,895,878 from $9,754,621 in the first six months of
fiscal year 1996. In 1997, the increase in revenues was primarily the result of
two factors. First, the revenues in Louisville increased due to orders from new
and existing customers related to expanded capacity. Second, there was
continued growth in the Memphis location as orders were received from new and
existing customers.
Gross Profit. Gross profit equals net sales less cost of revenues,
which consist of material, direct and indirect overhead, labor, fixed
operational costs and other variable costs. Gross profit in the first six
months of 1997 increased $4,348,283 from $2,258,953 in the first six months of
1996 to $6,607,236 in the first six months of 1997, a 192.5% increase. Gross
profit as a percentage of net sales for the first six months of 1997 was 33.2%,
compared to 23.2% in the first quarter of 1996. The increase in gross profit
was a result of increased sales and the resulting profitability on the
revenues. The increase in gross profit percentage was the result of operational
efficiencies due to the rapid increase in revenue.
Selling, General and Administrative Expenses. SGA expenses consist
primarily of non-direct labor salaries, sales costs, travel and other general
expenses. SGA expense for the first six months of 1997 increased by 39.6% over
the first six months of 1996 to $3,957,619. The increase is primarily the
result of increased costs related to the creation of infrastructure of the
newly created Louisville facility. As a percentage of net sales, SGA expense
was 19.9% in the first six months of 1997 compared to 29.1% in the first six
months of 1996.
The CTI Companies anticipate that they will experience increased SGA
costs in 1997 due to the transition from private to public entity. Also, the
CTI Companies will continue to create new and innovative services which possess
start-up costs and initial operating inefficiencies.
43
<PAGE> 53
Operating Income. As a result of the factors described above,
operating income in the first six months of 1997 increased 560.1% over the
first six months of 1996 to $2,649,617. Operating income as a percentage of net
sales increased from 5.9% in the first six months of 1996 to 13.3% in the first
six months of 1997.
Interest Expense. Interest expense in the first six months of 1997
increased 36.6 % from the first six months of 1996 to $262,152. Interest
expense was slightly higher due to higher borrowing related to working capital
needs as the CTI Companies' revenues increased.
Income Tax Expense. Each of the CTI Companies has elected to be taxed
as an S corporation or a limited liability company, as applicable. Earnings and
losses for federal tax purposes were included in the personal 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 the CTI Companies.
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 63.8 % to
$26,509,725 from $16,183,590 in 1995. In 1996, the increase in revenues was
primarily the result of two factors. First, the revenues in Louisville
increased $7,908,891 due to the move from a temporary to a permanent facility
which created capacity and infrastructure to accommodate new orders. Second,
there was continued growth in the Memphis location with the opening of a second
facility. The CTI Companies anticipate higher revenue levels as new and
existing business increases in Memphis and Louisville.
Gross Profit. Gross profit equals net sales less cost of revenues,
which consist of material, direct and indirect overhead, labor, fixed
operational costs and other variable costs. Gross profit in 1996 increased
$1,545,285 from $5,384,100 in 1995 to $6,929,385 in 1996, a 28.7% increase.
Gross profit as a percentage of net sales for 1996 was 26.1%, compared to 33.3%
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 operational inefficiencies due to the rapid
increase in revenue and resultant creation of needed capacity, particularly in
the Louisville facility. Gross margin is expected to increase as the CTI
Companies become more operationally efficient and absorbs newly created
overhead.
Selling, General and Administrative Expenses. SGA expense consist
primarily of non-direct labor salaries, sales costs, travel and other general
expenses. SGA expense for 1996 increased by 64.8% over 1995 to $6,251,364. The
increase is primarily the result of increased costs related to the creation of
infrastructure of the newly created Louisville facility. As a percentage of net
sales, SGA expense was 23.6% in 1996 compared to 23.4% in 1995.
The CTI Companies anticipate that they will experience increased SGA
costs in 1997 due to the transition from private to public entity. Also, the
CTI Companies will continue to create new and innovative services which possess
start-up costs and initial operating inefficiencies.
Operating Income. As a result of the factors described above,
operating income in 1996 decreased 57.4% over 1995 to $678,021. Operating
income as a percentage of net sales decreased from 9.8% in 1995 to 2.5% in
1996. Operating income is expected to increase as the CTI Companies become more
operationally efficient and revenues continue to grow and absorb overhead
created in 1996.
Interest Expense. Interest expense in 1996 increased 49.2% from 1995
to $434,345. The increase was attributable to the expansion of the Louisville
facility which resulted in higher borrowings. Also, the CTI Companies
experienced rapid growth, which created working capital needs as the CTI
Companies invested in certain balance sheet items such as inventory, accounts
receivable and fixed assets.
Income Tax Expense. Each of the CTI Companies has elected to be taxed
as an S corporation or limited liability company, as applicable. Earnings and
losses for federal tax purposes were included in the personal 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 the CTI Companies.
44
<PAGE> 54
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 79.2 % to
$16,183,590 from $9,028,587 in 1994. In 1995, the increase in revenues was
primarily the result of two factors. The net revenues at the Memphis location
increased $6,286,318 as the benefits of the hub-based service concept became
apparent to the CTI Companies' customers. Also, the CTI Companies increased
capacity to accommodate the ensuing increased orders.
Gross Profit. Gross profit equals net sales less cost of good sold,
which consist of material, direct and indirect overhead, labor, fixed
operational costs and other variable costs. Gross profit in 1995 increased
$2,666,143 from $2,717,957 in 1994 to $5,384,100 in 1995, a 98.1% increase.
Gross profit as a percentage of net sales for 1995 was 33.3%, compared to 30.1%
in 1994. The increase in gross profit was a result of increased sales and the
resulting profitability on the revenues in the Memphis facility. The increase
in gross profit percentage was the result of increased operating efficiencies.
Selling, General and Administrative Expenses. SGA expense consist
primarily of non-direct labor salaries, sales costs, travel and other general
expenses. SGA expense for 1995 increased by 50.2% over 1994 to $3,793,320. The
increase is primarily the result of increased costs related to the growth in
the Memphis facility as discussed above. As a percentage of net sales, SGA
expense was 23.4 % in 1995 compared to 28.0% in 1994 due to higher revenue
levels in 1995, and the subsequent absorption of overhead associated with the
higher volumes.
Operating Income. As a result of the factors described above,
operating income in 1995 increased 723.6% over 1994 to $1,590,780. Operating
income as a percentage of net sales increased from 2.1% in 1994 to 9.8% in
1995.
Interest Expense. Interest expense in 1995 increased 161.6% from 1994
to $291,061. The increase was attributable to the expansion of the Memphis
facility which resulted in higher borrowings. Also, the CTI Companies
experienced rapid growth, which created working capital needs as the CTI
Companies invested in certain balance sheet items such as inventory, accounts
receivable and fixed assets.
Income Tax Expense. Each of the CTI Companies has elected to be taxed
as an S corporation or a limited liability company, as applicable. Earnings and
losses for federal tax purposes were included in the personal 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 the CTI Companies.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, working capital was a deficit of $805,303
compared to $50,089 of working capital at December 31,1995, a decrease of
$855,392. The decrease in working capital from 1995 to 1996 is primarily
attributable to expansion of the Louisville facility and increased pressure to
fund revenue growth. The majority of the growth has been funded by short-term
operating debt rather than long-term financing which has reduced the CTI
Companies' working capital position.
Cash provided by operations in 1996 was $583,309 compared to cash used
in operations of $177,936 in 1995. The increase in cash provided by operations
in 1996 is primarily attributable the increase in accounts payable and accrued
expenses related to increased business volumes. The increases in current
liabilities were in excess of growth of current assets such as inventory and
accounts receivable. Accounts receivable increased 9.6 % to $4,110,743 at
December 31,1996 from $3,750,733 at December 31,1995. Receivable turns (i.e.
net sales divided by year-end accounts receivable) for 1996 and 1995 were 6.4
and 4.3, respectively. Receivable turns have increased as the CTI Companies
have better defined payment processes among the hubsite transportation
providers and the CTI Companies' customers. Inventories increased 71.9% to
$4,242,152 on December 31, 1996 from $2,467,679 at December 31, 1995. Inventory
turns (i.e. cost of revenues divided by year-end inventory) for 1996 and 1995
were 4.6 and 4.4, respectively. The CTI Companies have experienced a greater
percentage of its sales mix in value-added services which has resulted in a
higher percentage of costs of revenues in labor costs vs material costs. As a
result of this, inventory levels have grown as a
45
<PAGE> 55
slower rate than cost of revenues resulting in increased inventory turns. Also,
the CTI Companies have better defined its purchasing and inventory handling
processes with its customers.
The CTI Companies used cash in investing activities of $1,382,640 in
1996, compared to using cash of $621,754 in 1995. The use of cash in investing
activities in 1995 and 1996 was for capital expenditures related to operations.
The capital equipment was purchased with corporate cash flow and bank debt. The
bank loans are secured by machinery and equipment and are personally guaranteed
by certain of the CTI Companies' shareholders.
At December 31, 1996, the CTI Companies had available a revolving line
of credit of $4,000,000 with Barnett Bank with interest payable at the lenders
prime (8.25% at December 31,1996) and interest payable monthly with principal
due on demand. This note was renegotiated in February, 1997 increasing the line
to $6,000,000 with no other terms changing. There was $3,747,418 outstanding at
December 31, 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 CTI Companies experience a material negative change
in financial condition.
At December 31, 1996 the CTI Companies had a $1,000,000 non-revolving
line of credit. Advances bear interest at either the lender's prime rate or a
prevalent fixed rate at the time of the advance (8.25% at December 31, 1996);
master note payable on demand with individual advances payable in three years
consisting of monthly principal and interest payments; collateralized by
substantially all of the CTI Companies's machinery, equipment, fixtures and
furniture and guaranteed by certain of the CTI Companies' shareholders. This
note was renegotiated in February, 1997 increasing the line to $2,250,000 with
no other terms changing.
At December 31, 1996 the CTI Companies had a $525,000 commercial term
loan due June 1, 1998. The Note bears interest at the lender's prime rate
(8.25% at December 31, 1996); monthly principal and interest payments through
June 1, 1998; collateralized by substantially all of the CTI Companies'
machinery, equipment, fixtures and furniture and guaranteed by certain of the
CTI Companies' shareholders.
The CTI Companies have budgeted capital expenditures for 1997 of
approximately $750,000, intending to upgrade information systems, and machinery
and equipment required for the further expansions of the Memphis and Louisville
facilities. The expenditures are anticipated to occur at relatively even
intervals over the course of 1997.
The CTI Companies may require additional capital to finance
enhancements to, or expansions of their operating 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 CTI 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 EFTC Corporation ("EFTC"),
the historical combined financial statements of Current Electronics, Inc. (the
"CE Companies") and the historical combined financial statements of Circuit
Test, Inc. and the CTI LLCs (collectively, the "CTI Companies").
The unaudited pro forma condensed combined balance sheet presents the
combined financial position of EFTC, including the CE Companies, and the CTI
Companies as of June 30, 1997, assuming EFTC had completed the Merger and the
Acquisition as of that date using the purchase method of accounting, and also
assuming that EFTC had completed the Asset Purchase as of June 30, 1997. The
purchase accounting adjustments are included in the EFTC June 30, 1997
balances. Accordingly, the combined identifiable assets and liabilities of the
CTI Companies have been adjusted to their estimated fair values based upon a
preliminary purchase price of approximately $26 million. The unaudited
condensed combined pro forma statements of operations for the six months ended
June 30, 1997 and the year ended December 31, 1996 assume the CE Companies and
CTI Companies business combinations occurred on January 1, 1996 and include the
historical operations of EFTC and the CTI Companies for those periods and the
CE Companies (for the period from
46
<PAGE> 56
January 1, 1997 to February 24, 1997 and the year ended September 30, 1996),
adjusted for the pro forma effects of the business combinations.
The following unaudited condensed pro forma financial information has
been prepared based upon assumptions deemed appropriate by 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.
47
<PAGE> 57
EFTC Corporation
Unaudited Pro Forma Condensed Combined Balance Sheet
June 30, 1997
<TABLE>
<CAPTION>
CTI AlliedSignal
Pro Forma Pro Forma Pro Forma
EFTC CTI Companies Adjustments Adjustments Combined
------------ ------------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents .................. $ 897,579 367,350 (19,750,000)(1) 7,650,000 (7) 1,014,929
(23,000,000)(2) (7,650,000)(8)
(3,500,000)(6)
Accounts receivable .......... 7,032,934 5,050,110 -- -- 12,083,044
Inventories .................. 17,859,385 3,704,089 -- 10,500,000 (8) 32,063,474
Income taxes receivable ...... 469,774 -- -- -- 469,774
Other current assets ......... 1,110,661 391,814 -- -- 1,502,475
------------ ---------- ---------- ---------- ----------
Total current assets .... 27,370,333 9,513,363 (250,000) 10,500,000 47,133,696
Property, plant and
equipment, net .................. 10,659,362 3,674,313 -- 2,700,000 (8) 17,033,675
Goodwill ........................ 7,974,933 -- 23,174,537 (1) -- 34,649,470
3,500,000 (6) --
Other assets .................... 114,943 112,830 -- -- 227,773
------------ ---------- ---------- ---------- ----------
$ 46,119,571 13,300,506 26,424,537 13,200,000 99,044,614
============ ========== ========== ========== ==========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable ................ $ 5,800,000 4,728,752 -- -- 10,528,752
Shareholder loans ............ -- 943,000 -- -- 943,000
Current portion of long-
term debt .................... 468,655 -- -- -- 468,655
Accounts payable ............. 7,893,819 1,447,489 -- -- 9,341,308
Other current liabilities .... 2,490,015 2,461,728 -- 5,550,000 (8) 10,501,743
------------ ---------- ---------- ---------- ----------
Total current
liabilities ............. $ 16,652,489 $ 9,580,969 $ 5,550,000 $ 31,783,458
Long-term debt, net of
current portion ................... 9,140,117 148,229 23,000,000 (2) 7,650,000 (7) 39,938,346 (11)
Deferred income taxes ............. 328,482 -- -- -- 328,482
------------ ---------- ---------- ---------- ----------
26,121,088 9,729,198 23,000,000 13,200,000 72,050,286
------------ ---------- ---------- ---------- ----------
Shareholders' equity:
Common stock and
additional paid-in capital ... 15,720,724 156,280 6,274,000 (1) 21,994,724
(156,280)(1)
Retained earnings ............ 4,277,759 3,415,028 (2,693,183)(1) -- 4,999,604
------------ ---------- ---------- ---------- ----------
19,998,483 3,571,308 3,424,537 -- 26,994,328
------------ ---------- ---------- ---------- ----------
$ 46,119,571 13,300,506 26,424,537 13,200,000 99,044,614
============ ========== ========== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Financial Information.
48
<PAGE> 58
EFTC Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Pro forma
CE Companies Combined CTI Companies
CE Pro forma with CE CTI Pro Forma Pro Forma
EFTC Companies Adjustments Companies Companies Adjustments Combined
----------- ---------- ------------ ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $36,782,349 4,475,732 41,258,081 19,895,878 -- 61,153,959
Cost of goods sold ............... 32,285,782 4,025,431 (5,000)(9) 36,306,213 13,288,642 -- 49,594,855
----------- ---------- ---------- ---------- ---------- --------- ----------
Gross profit .................. 4,496,567 450,301 5,000 4,951,868 3,957,619 -- 11,559,104
Selling, general and
administrative expenses ....... 2,986,655 1,368,366 -- 4,355,021 3,957,619 -- 8,312,640
Goodwill amortization ............ 89,601 -- 27,083 (4) 116,684 -- 222,000 (4) 388,684
----------- ---------- ---------- ---------- ---------- --------- ----------
Operating income (loss) ....... 1,420,311 (918,065) (22,083) 480,163 (2,649,617) (222,000) 2,907,780
----------- ---------- ---------- ---------- ---------- --------- ----------
Other income (expense):
Interest expense .............. (537,143) (30,889) (52,063)(3) (620,095) (262,152) (474,000)(3) 1,356,247)(11)
Other income (expense), net ... 37,528 (17,273) -- 20,265 -- -- 20,265
----------- ---------- ---------- ---------- ---------- --------- ----------
(499,605) (48,162) (52,063) (599,830) (2,387,465) (474,000) (1,335,982)
----------- ---------- ---------- ---------- ---------- --------- ----------
Income (loss) before
income taxes ............... 920,706 (966,227) (74,146) (119,667) 2,387,465 (696,000) 1,571,798
Income tax expense (benefit) ..... 338,567 (362,354) (9,411)(10) (33,198) -- 242,000 (5) 208,802
----------- ---------- ---------- ---------- ---------- --------- ----------
Net income ................. $ 582,139 $ (603,873) $ (64,735) $ (86,469) 2,387,465 (938,000) $1,362,996
=========== ========== ========== ========== ========== ========= ==========
Income per common share .......... $ 0.10 0.17
=========== ==========
Weighted average common and
common equivalent shares
outstanding ................... 6,120,897 1,858,975 7,979,872
=========== ========= ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Financial Information.
49
<PAGE> 59
EFTC Corporation
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Pro forma
CE Companies Combined
CE Pro forma with CE CTI Pro Forma Pro Forma
EFTC Companies Adjustments Companies Companies Adjustments Combined
------------ ---------- ------------ ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 56,880,067 32,520,438 -- 89,400,505 26,509,725 -- 115,910,230
Cost of goods sold ............... 53,980,067 27,075,305 (30,000)(9) 81,025,372 19,580,340 -- 100,605,712
------------ ---------- ---------- ---------- ---------- ---------- -----------
Gross profit .................. 2,900,000 5,445,133 30,000 8,375,133 6,929,385 -- 15,304,518
Selling, general and
administrative expenses ....... 4,195,784 2,792,814 -- 6,988,598 6,251,364 -- 13,239,962
Goodwill amortization ............ -- -- 162,495 (4) 162,495 -- 889,000 (4) 1,051,495
Impairment of fixed assets ....... 725,869 -- -- 725,869 -- -- 725,869
------------ ---------- ---------- ---------- ---------- ---------- -----------
Operating income (loss) ....... (2,021,653) 2,652,319 (132,495) 660,666 678,021 (889,000) 287,192
------------ ---------- ---------- ---------- ---------- ---------- -----------
Other income (expense):
Interest expense .............. (525,854) (101,192) (312,375)(3) (939,421) (434,345) (1,897,500)(3) (3,271,266)(11)
Other income, net ............. 82,428 9,345 -- 91,773 (9,112) -- 82,661
------------ ---------- ---------- ---------- ---------- ---------- -----------
(443,426) (91,847) (312,375) (847,648) (443,457) (1,897,500) (3,188,605)
------------ ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) before income
taxes ....................... (2,465,079) 2,560,472 (444,870) (186,982) 234,564 (2,786,500) (2,901,413)
Income tax expense (benefit) ..... (872,114) 754,000 (56,465)(10) (174,579) -- (926,000)(5) (1,100,579)
------------ ---------- ---------- ---------- ---------- ---------- -----------
Net income (loss) ............. $ (1,592,965) $1,806,472 $ (388,405) $ (174,898) 234,564 (1,860,500) (1,800,834)
============ ========== ========== ========== ========== ========== ===========
Income (loss) per common share.... $ (0.40) (0.23)
============ ===========
Weighted average common and
common equivalent shares
outstanding.................... 3,942,139 1,858,975 7,781,114
============ ========== ===========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Financial Information.
50
<PAGE> 60
EFTC Corporation
Notes to Unaudited Pro Forma Condensed Financial Information
(A) BASIS OF PRESENTATION
On July 9, 1997, EFTC and CTI entered into the Merger Agreement that
provides for the merger of CTI with and into a newly formed subsidiary of EFTC.
Additionally, EFTC and the members of the CTI LLCs entered into the Purchase
Agreement that provides for the acquisition by EFTC of all of the limited
liability company interests of the CTI LLCs. The CTI Companies are affiliates
as a result of common ownership. Under the terms of the Merger Agreement and
the Purchase Agreement, EFTC will pay approximately $19.5 million in cash and
issue 1,858,975 shares of its common stock to the stockholders of the CTI
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. Additionally, EFTC acquired the CE Companies in
February 1997 and entered into an agreement with AlliedSignal to purchase
certain assets and inventory for an approximate amount of $13.2 million.
(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 $23.2 million based upon the
allocation of the estimated $26 million ($19.5 million in cash and
1,858,975 shares of Common Stock at $3.375 per share, based upon
an independent valuation and $250,000 in transaction costs) cost
of the Merger and the Acquisition and to eliminate the equity
accounts of the CTI Companies.
2. To record the borrowings for the Merger and the Acquisition of $23
million to be paid by the Company from a portion of the proceeds
of the Bank One Loan. See "MANAGEMENTS' DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources."
3. To record interest expense on the borrowings under the Bank One
loan at an assumed interest rate of 8.25% per annum.
4. To record amortization of goodwill resulting from the Merger and
the Acquisition over a 30 year period.
5. To record income tax expense for taxable income of CTI, an S
Corporation, and the CTI LLCs, net of the income tax effect of the
pro forma adjustments.
6. To record liability for bonuses to be paid to employees of the CTI
Companies prior to closing as additional goodwill.
7. To record additional borrowing to purchase inventory and assets
from AlliedSignal. See "THE COMPANIES-- EFTC
Corporation--General."
8. To record assets and inventory of $13.2 million purchased from
AlliedSignal. See "THE COMPANIES--EFTC Corporation--General."
9. Elimination of depreciation expense relating to certain leasehold
improvements that were abandoned after consummation of the
acquisition of the CE Companies.
10. To record income tax expense for the taxable income of Current
Electronics (Washington), Inc., one of the CE Companies, an S
corporation, net of the effect of the pro forma adjustments.
11. In September 1997, the Company issued $15 million in Subordinated
Notes to a director, which include warrants to purchase 500,000
shares of the Company's Common Stock. See "MANAGEMENTS'
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources." The warrants have
been recorded at fair value using the Black-Scholes option pricing
model as additional paid in capital and debt discount. The
discount will be amortized as additional interest expense over the
term of the
51
<PAGE> 61
Subordinated Notes. If the Subordinated Notes and warrants had
been issued on January 1, 1996, pro forma net income and income
per common share would have decreased by 402,025 and $0.05,
respectively, for the six months ended June 30, 1997 and pro forma
net loss and loss per common share would have increased by
$804,049 and $0.10, respectively, for the year ended December 31,
1996.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board believes that the Merger and the related transactions
provide an opportunity to fulfill the Company's objective of growth through
acquisition, fits well with the Company's strategic plan and will result in:
(i) a strategic expansion of the Company's breadth of high-mix service
offerings, enabling the Company to offer "cradle-to-grave" services such as
concurrent engineering, subassembly manufacturing, next-day delivery of
assemblies, warranty repair service and post-warranty repair services; (ii)
implementation of a hub-based strategy for contract manufacturing; (iii)
opportunities to approach the CTI Companies' existing customer base to pursue
additional high-mix electronic contract manufacturing opportunities; and (iv)
delivery of the CTI Companies' repair services to the Company's existing
customer base, which, together, are expected to provide the Company competitive
advantages in the high-mix electronic contract manufacturing industry. The
Board and management of the Company also believe that the CTI Companies'
management team will represent a strong complement to the Company's management
team. 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 Merger Agreement, the
Purchase Agreement and the transactions contemplated thereby, information with
respect to the financial condition, business, operations and prospects of the
Company and the CTI Companies, on both a 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.
The Board also considered the purchase price to be paid by the Company
and the allocation of such purchase price between stock and cash. In the
course of negotiations with respect to the Merger and the Acquisition, the
parties initially determined an aggregate purchase price payable to the CTI
Shareholders and the CTI LLC Members for CTI and the CTI LLCs. The portion of
the purchase price allocable to cash and stock, exclusive of any adjustments,
deferred compensation and contingent payments or other consideration, is $34
million. Because the Merger could be structured as a tax-free reorganization,
the parties to such negotiations also agreed that the consideration for the
Merger would be in the form of Common Stock, while the consideration for the
Acquisition would be in cash, and allocated the aggregate purchase price among
the Merger and the Acquisition. Of such $34 million, $19.5 million will be
paid in cash to the CTI LLC Members, with the remainder to be paid in the form
of Common Stock (based upon a negotiated price determined in the course of
negotiating the terms of the Merger) to the CTI Shareholders. Following
negotiations of the terms of the Merger and the Acquisition, management
presented the Merger and the Acquisition for consideration. Members of the
Company's management stated to the Board management's opinion that the Merger
upon the agreed terms would be favorably priced for the Company and would
provide the Company with beneficial income growth as well as help the Company
implement its strategic plan.
Mr. Jack Calderon, Mr. Richard L. Monfort and Mr. Robert K. McNamara
participated in the Board's deliberations on the Merger and the Acquisition,
but did not participate in the Board's vote to approve the Merger and the
Acquisition. See "CERTAIN MATTERS TO BE CONSIDERED BY SHAREHOLDERS--Interests
of Certain Persons in the Merger and the Acquisition."
52
<PAGE> 62
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 change the name of the
Employee Plan to "EFTC Corporation Equity Incentive Plan" and to increase the
number of shares of Common Stock reserved for issuance under the Employee Plan
from 995,000 to 1,995,000. Adoption of the amendment also requires the
approval of the Company's shareholders.
REASONS FOR THE PROPOSED AMENDMENT
Of the 995,000 shares of Common Stock currently subject to the
Employee Plan, as of August 31, 1997, 48,750 shares remained 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 believes that the 48,750 shares of Common Stock available
for further grants under the Employee Plan and the additional 1,000,000 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 8,200,000 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.
At the Company's 1997 annual meeting of shareholders, held on May 28,
1997, the Company's shareholders voted to approve changing the Company's name
from "Electronic Fab Technology Corp." to "EFTC Corporation." The Employee
Plan Amendment provides for a corresponding change of the name of the Employee
Plan to the "EFTC Corporation Equity Incentive Plan."
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 995,000 shares of Common Stock may be subject to awards under the
Employee Plan; however, the Employee Plan Amendment would raise that number to
1,995,000. 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, are 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 March 31, 1997, the Company
had 671 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, 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. 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.
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<PAGE> 63
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 of all of the Common Stock). 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 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, as well
as the requirements of Section 162(m) of the Code.
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.
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<PAGE> 64
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, as well as the requirements of Section 162(m) of the Code.
Under Section 162(m) of the Code, the Company may be limited as to
Federal income tax deductions to the extent that total annual compensation in
excess of $1,000,000 is paid to the chief executive officer of the Company or
any one of the other four highest paid executive officers who are employed by
the Company on the last day of the taxable year. However, certain
"performance-based compensation", the material terms of which are disclosed to
and approved by the Company's shareholders, is not subject to this limitation
on deductibility. The Company has structured the stock option portion of the
Employee Plan with the intention that compensation resulting therefrom would be
qualified performance- based compensation and would be deductible without
regard to the limitations otherwise imposed by Section 162(m) of the Code. The
Employee Plan allows the Committee discretion to award restricted stock and
other stock-based awards that are intended to be qualified performance-based
compensation. Bonuses and other compensation payable in stock under the
Employee Plan are not intended to qualify as performance-based compensation.
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.
55
<PAGE> 65
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 change the name of the Non-Employee Plan to "EFTC Corporation Stock
Option Plan for Non-Employee Directors" and to increase the number of shares
of Common Stock reserved for issuance under the Plan from 160,000 to 300,000.
REASONS FOR THE PROPOSED AMENDMENT
The Non-Employee Plan currently provides for the grant of up to
160,000 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 Non-Employee Plan provides that the Board, in its
sole discretion, may grant options to acquire shares of Common Stock to members
of the Board who are not also employees of the Company (a "non-employee
director"). The Board intends to grant options with respect to 6,000 shares of
Common Stock to each members of the Board expected to be elected as a result of
the Merger.
As discussed above with respect to the Employee Plan Amendment, the
Non-Employee Plan Amendment provides for changing the name of the Non-Employee
Plan to the "EFTC Corporation Stock Option Plan for Non-Employee Directors" to
correspond to the recent change of the Company's name. See "DESCRIPTION OF THE
EMPLOYEE PLAN AMENDMENT--Reasons for the Proposed Amendment."
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. Currently, a
maximum of 160,000 shares of Common Stock are available for the grant of
options under the Non-Employee Plan; the Non-Employee Plan Amendment would
increase that number to 300,000. The number of shares covered by the
Non-Employee Plan is subject to adjustment on account of stock splits, stock
dividends, recapitalizations and other dilutive changes in the Common Stock.
The Non-Employee Plan is administered by the Board, which has the
authority to grant options (a "Director's Option") to the members of the Board
who are not also employees of the Company. Thirteen directors will be eligible
to participate in the Non-Employee Plan upon the closing of the Merger and the
election of Allen S. Braswell, Sr. and Allen S. Braswell, Jr. to the Board.
Director's Options may 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 options are nontransferable
except by will or pursuant to the laws of descent and distribution. Director's
Options become vested 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.
A Director's Option must have an exercise price at least equal to the
fair market value of the Common Stock on the effective date of the 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 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.
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<PAGE> 66
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.
The Board may amend the Non-Employee Plan in any respect at any time
provided shareholder approval is obtained when necessary or desirable, but no
amendment can impair any option previously granted or deprive an option holder,
without his or her consent, of any Common Stock previously acquired. The
Non-Employee Plan will terminate when terminated by the Board.
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 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.
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.
57
<PAGE> 67
SECURITY OWNERSHIP
The following table sets forth certain information as of August 31,
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)
-----------------------------------
Number of Shares of Percent of Number of Shares of Percent of
Name of Beneficial Owner, Common Stock Common Common Stock Common
Director, or Executive Officer Beneficially Owned Stock Beneficially Owned Stock
------------------------------ ------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Gerald J. Reid (2) 500,000 8.4% 500,000 6.5%
Lucille A. Reid (2) 560,000 9.4% 560,000 7.3%
Jack Calderon (3) 122,500 (10) 2.1% 122,500 1.6%
Lloyd A. McConnell (3) 574,250 (11) 9.7% 574,250 7.5%
Stuart W. Fuhlendorf (3) 48,900 (12) * 48,900 *
James A. Doran (4) 8,182 (13) * 8,182 *
Richard L. Monfort (5) 140,982 (13)(14) 2.4% 140,982 1.8%
David W. Van Wert (6) 62,202 (13)(15) * 62,202 *
Darrayl Cannon (7) 3,436 (18) * 3,436 *
Robert K. McNamara (8) 3,436 (18) * 3,436 *
Masoud Shirazi (9) 30,782 (13) * 30,782 *
Charles Hewitson 660,000 11.1% 660,000 8.6%
Gregory Hewitson 660,000 11.1% 660,000 8.6%
Matthew Hewitson 660,000 11.1% 660,000 8.6%
August Bruehlman 40,000 (16) * 40,000 *
Allen S. Braswell, Sr. -- -- 1,374,328 17.9%
Allen S. Braswell, Jr. -- -- 369,289 4.8%
All directors and executive
officers as a group, including
persons named above
(15 persons) 4,074,670 (17) 68.5% 5,818,287 75.7%
========= =========
</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, Bruehlman and Fuhlendorf's address is
EFTC Corporation, 9351 Grant Street, Sixth Floor, Denver, Colorado
80229.
(4) Mr. Doran's address is Hein & Associates, LLP, 717 17th Street,
Denver, CO 80202-3330.
(5) Mr. Monfort's address is 3519 Holman Court, Greeley, CO 80632.
(6) Mr. Van Wert's address is 14227 West Dusty Trail Blvd., Sun City West,
AZ 85375.
(7) Mr. Cannon's address is 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 100,000 shares of Common Stock subject to currently
exercisable, non-qualified options granted in connection with the
commencement of Mr. Calderon's employment and 20,000 shares of Common
Stock subject to currently exercisable options granted pursuant to the
Company's Equity Incentive Plan.
(11) Includes 4,000 shares of Common Stock subject to currently exercisable
options granted pursuant to the Company's Equity Incentive Plan,
70,000 shares of Common Stock that are beneficially owned by Mr.
McConnell and are held in the August 1994 McConnell Charitable
Remainder Trust and 250 shares of Common Stock owned by Mr.
McConnell's wife.
(12) Includes 41,600 shares of Common Stock subject to currently
exercisable options granted under the Employee Plan and 7,200 shares
of Common Stock subject to options that are exercisable under the
Company's 1993 Stock Option Plan.
58
<PAGE> 68
(13) Includes 7,482 shares of Common Stock that are subject to currently
exercisable options under the Company's Stock Option Plan for
Non-Employee Directors. Options held by such director for an
additional 208 shares vest each month until March 1998 under such
plan.
(14) Includes 100,000 shares of Common Stock owned by a partnership in
which Mr. Monfort is the principal investor and 14,000 shares of
Common Stock owned by two of Mr. Monfort's minor children.
(15) Includes 17,720 shares of Common Stock owned jointly with Sally B. Van
Wert, Mr. Van Wert's wife.
(16) Includes 27,000 shares subject to currently exercisable options
granted under the Company's Equity Incentive Plan and 12,000 shares
subject to currently exercisable options granted under the Company's
1993 Stock Option Plan.
(17) Of such 4,074,670 shares, as of August 31, 1997, an aggregate of
3,822,570 shares were outstanding and held of record by directors and
officers of the Company and the remaining 252,100 represent shares of
Common Stock subject to options that are currently exercisable or,
within 60 days of August 31, 1997 will become exercisable.
(18) Includes 3,436 shares of Common Stock that are subject to currently
exercisable options under the Company's Stock Option Plan for
Non-Employee Directors. Options held by such director for an
additional 208 shares vest each month until May 2000 under such plan.
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> <C>
Gerald J. Reid 1996 $104,723 $175 -0- $161,874 (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.
59
<PAGE> 69
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% $4.125 (1)
</TABLE>
__________
(1) Vested exercisable options are exercisable up to 3 months following the
cessation of Mr. Calderon's employment with the Company other than
termination for cause.
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table sets forth information concerning options
exercised in 1996 and outstanding options held by the Company's executive
officers named in the Summary Compensation Table as of December 31, 1996, the
end of the Company's last fiscal year.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options
Acquired on Value December 31, 1996(#) at December 31, 1996($)
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 Mr. Calderon. Mr. Calderon's agreement provides for him
to be employed in his current position for a term of two years ending July
1998. The Company may terminate such employment agreement 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
agreement also provides 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
60
<PAGE> 70
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.
In connection with the consummation of the Merger and the Acquisition,
the Company will offer employment agreements to four members of the senior
management of the EFTC Companies. See "DESCRIPTION OF THE RELATED AGREEMENTS--
Employment Matters."
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 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 each of its
existing directors. 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 August 6, 1997, there were approximately 245
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>
1997 Sale Prices 1996 Sale Prices 1995 Sale Prices
---------------- ---------------- ----------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
First Quarter $6 3/4 $4 3/4 $5 1/8 $3 3/4 --- ---
Second Quarter 9 4 3/4 4 7/8 3 5/8 --- ---
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.
61
<PAGE> 71
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 shall
have the opportunity to make a statement, if they desire to do so, and will be
available to respond to appropriate questions.
SHAREHOLDER PROPOSALS
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 21, 1997 to be included in the proxy materials of the Company relating
to such Meeting.
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
Lloyd A. McConnell
Secretary
Denver, Colorado
September 19, 1997
62
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
ELECTRONIC FAB TECHNOLOGY CORP.
INDEPENDENT AUDITORS' REPORT.......................................................................... F-1
BALANCE SHEETS - June 30, 1997 (Unaudited) and December 31, 1996 and 1995............................. F-2
STATEMENTS OF OPERATIONS - Six Months Ended June 30, 1997 and 1996 (Unaudited) and
Years Ended December 31, 1996, 1995 and 1994..................................................... F-4
STATEMENTS OF SHAREHOLDERS' EQUITY - Six Months Ended June 30, 1997
(Unaudited) and Years Ended December 31, 1996, 1995 and 1994..................................... F-5
STATEMENTS OF CASH FLOWS - Six Months Ended June 30, 1997 and 1996 (Unaudited)
and Years Ended December 31, 1996, 1995 and 1994................................................. F-6
NOTES TO FINANCIAL STATEMENTS......................................................................... F-8
CIRCUIT TEST, INC. AND AFFILIATES
INDEPENDENT AUDITORS' REPORT.......................................................................... F-18
COMBINED BALANCE SHEETS - June 30, 1997 (Unaudited), December 31, 1996 and 1995....................... F-19
COMBINED STATEMENTS OF OPERATIONS - Six Months Ended June 30, 1997 and 1996
(Unaudited) and Years Ended December 31, 1996, 1995 and 1994..................................... F-21
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY - Six Months Ended June 30, 1997
(Unaudited) and Years Ended December 31, 1996, 1995 and 1994..................................... F-22
COMBINED STATEMENTS OF CASH FLOWS - Six Months Ended June 30, 1997 and
1996 (Unaudited) and Years Ended December 31, 1996, 1995 and 1994................................ F-23
NOTES TO COMBINED FINANCIAL STATEMENTS................................................................ F-25
</TABLE>
63
<PAGE> 73
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, 1996 and 1995, and the related statements of
operations, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and
its cash flows for each of the years in the three-year period ended December
31, 1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Denver, Colorado
January 20, 1997, except
as to note 12, which is as
of February 24, 1997
F-1
<PAGE> 74
ELECTRONIC FAB TECHNOLOGY CORP.
BALANCE SHEETS - JUNE 30, 1997 (UNAUDITED) and
DECEMBER 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS (NOTE 3) June 30,
1997
(Unaudited) 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................................ $ 897,579 123,882 481,086
Trade receivables (less allowance for doubtful accounts
of $105,000 in 1997 and $20,000 in 1996 and 1995) ..... 7,032,934 3,866,991 4,982,450
Inventories (note 2) ..................................... 17,859,385 9,146,505 9,859,414
Income taxes receivable .................................. 469,744 616,411 74,922
Deferred income taxes (note 5) ........................... 427,059 145,538
Prepaid expenses and other ............................... 1,110,661 69,196 382,928
------------ ------------ ------------
Total current assets ............................. 27,370,333 14,250,044 15,926,338
------------ ------------ ------------
Property, plant and equipment (note 3):
Land ..................................................... 662,098 662,098 662,098
Building ................................................. 488,467 4,889,467 4,874,571
Machinery and equipment .................................. 821,944 5,084,114 5,870,194
Furniture and fixtures ................................... 3,204,203 1,756,588 1,433,113
------------ ------------ ------------
16,974,712 12,392,267 12,839,976
Less accumulated depreciation ............................ (6,315,350) (3,872,443) (3,949,163)
Net property, plant and equipment ............... 10,659,362 8,519,824 8,890,813
------------ ------------ ------------
Goodwill .................................................... 7,974,933 -- --
Other assets, net ........................................... 114,943 99,773 167,148
------------ ------------ ------------
$ 46,119,571 22,869,641 24,984,299
============ ============ ============
(Continued)
</TABLE>
F-2
<PAGE> 75
ELECTRONIC FAB TECHNOLOGY CORP.
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY June 30,
1997
(Unaudited) 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
Current liabilities:
Line of credit with bank (note 3) ....................... $ 5,800,000 1,800,000 --
Accounts payable ........................................ 7,893,819 2,320,871 4,986,757
Accrued compensation payable ............................ -- 682,881 529,636
Notes payable to customers .............................. 653,014 -- --
Other accrued expenses .................................. 1,837,001 767,803 372,102
Current portion of long-term debt (note 3) .............. 468,655 170,000 170,000
----------- ----------- -----------
Total current liabilities ....................... 16,652,489 5,741,555 6,058,495
----------- ----------- -----------
Long-term debt, net of current portion (note 3) ............ 9,140,117 2,890,000 3,060,000
Deferred income taxes (note 5) ............................. 328,482 315,859 356,606
Shareholders' equity (note 7):
Preferred stock, $.01 par value. Authorized 5,000,000...
shares; none issued or outstanding ................... -- -- --
Common stock, $.01 par value. Authorized
45,000,000 shares; issued 5,937,410, 3,942,660 and
3,940,860 shares, respectively ....................... 59,374 39,427 39,409
Additional paid-in capital .............................. 15,661,350 10,187,180 10,181,204
Retained earnings ....................................... 4,277,759 3,695,620 5,288,585
----------- ----------- -----------
Total shareholders' equity ...................... 19,998,483 13,922,227 15,509,198
----------- ----------- -----------
Commitments and contingencies (notes 4 and 8)
$46,119,571 $22,869,641 $24,984,299
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 76
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF OPERATIONS-SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30, Year Ended December 31,
1997 1996 --------------------------------------------
(Unaudited) (Unaudited) 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 36,782,349 30,944,370 56,880,067 49,220,070 52,541,842
Cost of goods sold (note 10) .............. 32,285,782 29,580,032 53,980,067 45,325,349 47,123,066
------------ ------------ ------------ ------------ ------------
Gross profit ........................ 4,496,567 1,364,338 2,900,000 3,894,721 5,418,776
Selling, general and administrative
expenses (note 10) ..................... 2,986,655 1,656,540 4,195,784 3,093,400 2,395,164
Goodwill amortization ..................... 89,601 -- -- -- --
Impairment of fixed assets (note 10) ...... -- -- 725,869 -- --
------------ ------------ ------------ ------------ ------------
Operating income (loss) ............. 1,420,311 (292,202) (2,021,653) 801,321 3,023,612
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest expense ....................... (537,143) (242,613) (525,854) (399,389) (175,400)
Interest income ........................ -- -- 5,624 3,700 78,933
Gain on sale of assets ................. -- -- 50,012 49,533 --
Other, net ............................. 37,538 16,471 26,792 25,491 31,187
------------ ------------ ------------ ------------ ------------
(499,605) (226,142) (443,426) (320,665) (65,280)
------------ ------------ ------------ ------------ ------------
Income (loss) before income ......... 920,706 (518,344) (2,465,079) 480,656 2,958,332
taxes
Income tax expense (benefit) (note 5) ..... 338,567 (201,577) (872,114) 126,518 1,041,415
------------ ------------ ------------ ------------ ------------
Net income (loss) ................... $ 582,139 (316,767) (1,592,965) 354,138 1,916,917
============ ============ ============ ============ ============
Income (loss) per share ................... $ 0.10 (0.08) (.40) 0.09 0.53
============ ============ ============ ============ ============
Weighted average shares outstanding ....... 6,120,897 3,956,836 3,942,139 3,962,261 3,626,845
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 77
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF SHAREHOLDERS' EQUITY - SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Total
------------------------- Additional paid-in Retained shareholders'
Shares Amount capital earnings equity
---------- ------------ ------------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1994 2,368,500 $ 23,685 505,316 3,017,530 3,546,531
Initial public offering, net of
offering costs of $1,320,749 1,419,660 14,197 9,312,700 -- 9,326,897
Stock options exercised 102,950 1,029 198,019 -- 199,048
Net income -- -- -- 1,916,917 1,916,917
----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1994 3,891,110 38,911 10,016,035 4,934,447 14,989,393
Stock options exercised 49,750 498 165,169 -- 165,667
Net income -- -- -- 354,138 354,138
----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1995 3,940,860 $ 39,409 10,181,204 5,288,585 15,509,198
----------- ----------- ----------- ----------- -----------
Stock options exercised 1,800 18 5,976 -- 5,994
Net loss -- -- -- (1,592,965) (1,592,965)
----------- ----------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 3,942,660 $ 39,427 10,187,180 3,695,620 13,922,227
Issuance of stock 1,980,000 19,800 5,425,200 -- 5,445,000
Stock options exercised 14,750 147 48,970 -- 49,117
Net income -- $ -- -- 582,139 582,139
----------- ----------- ----------- ----------- -----------
BALANCE,
JUNE 30, 1997 5,937,410 $ 59,374 15,661,350 4,277,759 19,998,483
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 78
ELECTRONIC FAB TECHNOLOGY CORP.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
(Unaudited) (Unaudited)
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 582,139 (316,767)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 857,571 661,461
Deferred income tax expense (benefit) 67,061 (18,383)
Gain (loss) on sale and impairment of fixed assets, net 2,566 (9,479)
Deferred gain on sale leaseback -- --
Changes in operating assets and liabilities net of the effects of
acquisitions:
Trade receivables (1,176,636) (2,181,724)
Inventories (4,252,730) (956,787)
Income taxes receivable 146,637 (176,119)
Prepaid expenses and other current assets (509,822) 188,276
Other assets (10,726) (24,711)
Accounts payable and accrued expenses 3,018,521 (777,322)
----------- -----------
Net cash provided by (used in) operating activities (1,275,419) (3,611,555)
----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,292,053) (1,061,879)
Proceeds from sale of equipment 239,806 96,402
Purchase of CE Companies (5,598,728) --
----------- -----------
Net cash provided by (used in) investing activities (6,650,975) (965,477)
----------- -----------
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) (1,592,965) 354,138 1,916,917
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 1,281,628 1,716,841 973,262
Deferred income tax expense (benefit) (322,268) (15,745) 121,385
Gain (loss) on sale and impairment of fixed assets, net 1,101,475 (49,533) --
Deferred gain on sale leaseback 16,751 (106,088) --
Changes in operating assets and liabilities net of the effects of
acquisitions:
Trade receivables 1,115,459 (1,123,927) (1,378,102)
Inventories 712,909 (2,380,040) (2,839,405)
Income taxes receivable (541,489) (10,267) (64,655)
Prepaid expenses and other current assets 313,732 (333,461) (302)
Other assets 67,375 (96,971) 147,640
Accounts payable and accrued expenses (2,116,940) 1,111,464 426,084
----------- ----------- -----------
Net cash provided by (used in) operating activities 35,667 (933,589) (697,176)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,374,403) (2,473,819) (9,035,395)
Proceeds from sale of equipment 345,538 3,739,344 --
Purchase of CE Companies -- -- --
----------- ----------- -----------
Net cash provided by (used in) investing activities (2,028,865) 1,265,525 (9,035,395)
----------- ----------- -----------
(Continued)
</TABLE>
F-6
<PAGE> 79
ELECTRONIC FAB TECHNOLOGY CORP.
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Stock options exercised -- --
Issuance of common stock 49,117 5,994
Borrowings (payments) on note payable, net 3,902,202 4,200,000
Proceeds from long-term debt 6,700,000 --
Principal payments on long-term debt (1,951,228) (85,000)
----------- -----------
Net cash provided by (used in) financing activities 8,700,091 4,120,994
----------- -----------
Increase (decrease) in cash and cash equivalents 773,697 (456,038)
Cash and cash equivalents:
Beginning of year 123,882 481,086
----------- -----------
End of period $ 897,579 25,048
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 490,095 232,757
=========== ===========
Income taxes paid (refunded), net $ 127,500 6,000
=========== ===========
Common stock issued in exchange for stock of Current Electronics,
Inc $ 5,445,000 --
=========== ===========
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Stock options exercised 5,994 165,667 199,048
Issuance of common stock -- -- 9,326,897
Borrowings (payments) on note payable, net 1,800,000 -- (300,000)
Proceeds from long-term debt -- -- 3,400,000
Principal payments on long-term debt (170,000) (170,000) (2,783,770)
----------- ----------- -----------
Net cash provided by (used in) financing activities 1,635,994 (4,333) 9,842,175
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents (357,204) 327,603 109,604
Cash and cash equivalents:
Beginning of year 481,086 153,483 43,879
----------- ----------- -----------
End of period 123,882 481,086 153,483
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 517,502 387,045 238,884
=========== =========== ===========
Income taxes paid (refunded), net (8,010) 152,530 1,596,475
=========== =========== ===========
Common stock issued in exchange for stock of Current Electronics,
Inc -- -- --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE> 80
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 AND DECEMBER 31, 1996 AND 1995
(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
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments
with original maturities of six months or less.
INVENTORIES
Inventories are stated at the lower of 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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of (SFAS No. 121), effective January 1,
1996. This Statement requires the long-lived assets and
certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is generally
measured by a comparison of the carrying amount of an asset to
future net cash flows to be expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amounts of the assets exceed the fair values of
the assets. Adoption of this statement did not have a material
impact on the Company's financial position, results of
operations or liquidity. In connection with the Company's
restructuring in August 1996, the Company recorded a provision
for impairment of certain fixed assets of $725,869.
F-8
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS
Notes to Financial Statements(Continued)
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.
INCOME (LOSS) PER SHARE
Income per share is computed on the basis of weighted average
number of shares outstanding during the year and, if
significant, common equivalent shares. Common equivalent
shares consist of stock options, determined using the
treasury stock method, and are not significant in 1994 and
1995 and are antidilutive in 1996.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock compensation
plans as prescribed under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. Pro
forma disclosures of net income and earnings per share
required by Statement of Financial Accounting Standards No.
123 (SFAS 123), Accounting for Stock-based Compensation, are
included in note 6 to the financial statements.
(c) UNAUDITED INTERIM FINANCIAL STATEMENTS AND NOTES
The financial statements as of June 30, 1997 and for the six
months ended June 30, 1997 and 1996 are unaudited but, in the
opinion of management, include all adjustments, consisting
only of normal recurring adjustments, which are necessary for
a fair presentation of the financial condition, results of
operations and cash flows. Information in the notes to
financial statements that relate to the interim unaudited
financial statements is also unaudited. The operating results
for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 1997.
F-9
<PAGE> 82
NOTES TO FINANCIAL STATEMENTS
Notes to Financial Statements(Continued)
(2) INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
June -------------------------
1997 1996 1995
----------- ---------- -----------
(Unaudited)
<S> <C> <C>
Finished goods $ 475,308 249,223 --
Purchased parts and completed subassemblies 14,134,290 7,640,712 8,051,648
Work-in-process 3,249,787 1,256,570 1,807,766
----------- ---------- ----------
$17,859,385 9,146,505 9,859,414
=========== ========== ==========
</TABLE>
(3) DEBT
The Company has a revolving line of credit with a bank which provides
for borrowings up to the lesser of $15,000,000 or the borrowing base,
as defined in the line of credit agreement. At June 30, 1997, the
borrowing base was $15,893,029. The line of credit is secured by
substantially all of the Company's assets including inventories, trade
receivables, furniture, fixtures, machinery and equipment. Interest is
at the bank's prime rate plus .25% (8.15% at June 30, 1997).
Subsequent to December 31, 1996, the line of credit was renegotiated
as discussed in note 12.
The line of credit agreement contains restrictive covenants relating
to capital expenditures, borrowings, and payment of dividends and
provides that the agreement may be withdrawn or canceled at the bank's
option under certain conditions such as default or in the event the
Company experiences a material negative change in financial condition.
F-10
<PAGE> 83
NOTES TO FINANCIAL STATEMENTS
Notes to Financial Statements(Continued)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------
1997 1996 1995
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
Note payable to bank with interest at 5.95% is payable
in 60 regular monthly payments of $36,983 and one final
payment of $41,983. These payments include both principal
and interest. The proceeds of this loan were used to pay
off equipment debt of the CE Companies $ 1,733,772 -- --
Note payable expected to be refinanced as long-term debt
carries an interest rate at Bank One prime plus 0.25%
(8.75% at June 30, 1997). The proceeds were used to pay the
cash portion of the CE Companies acquisition (note 12) 4,900,000 -- --
Note payable to a bank with interest at 1% above Citibank's
prime rate adjusted annually (initial rate of 7.25% through
September 15, 1996, and a rate of 9.25% at December 31, 1996)
Interest is payable monthly with semi-annual principal payments
of $85,000, maturing September 15, 2001, collateralized by a first
deed of trust on buildings and land 2,975,000 3,060,000 3,230,000
Less current portion (468,665) (170,000) (170,000)
----------- ----------- -----------
Long-term debt, net of current portion $ 9,140,117 2,890,000 3,060,000
=========== =========== ===========
</TABLE>
Annual maturities of long-term debt are as follows at June 30, 1997:
<TABLE>
<S> <C>
1997 $ 406,725
1998 509,537
1999 541,431
2000 576,804
2001 7,105,620
----------
$9,140,117
==========
</TABLE>
This credit facility may be also withdrawn or canceled at the bank's
option under certain conditions such as default or in the event the
Company experiences a material negative change in its financial
condition.
(4) LEASES
The Company has noncancelable operating leases for equipment that
expire in various years through 2002. Lease expense on these operating
leases amounted to $591,100, $608,000, $1,215,623, $578,958, and
$736,153 for the six months ended June 30, 1997 and 1996 and years
ended December 31, 1996, 1995 and 1994, respectively.
F-11
<PAGE> 84
NOTES TO FINANCIAL STATEMENTS
Notes to Financial Statements(Continued)
At December 31, 1996, future minimum lease payments for operating
leases are as follows:
<TABLE>
<S> <C>
1997 $1,225,670
1998 1,203,447
1999 1,181,259
2000 881,586
2001 771,320
Thereafter 152,680
----------
Total future minimum lease payments $5,415,962
==========
</TABLE>
In December 1995, the Company entered into a sale-leaseback
transaction for equipment of approximately $3.6 million. The gain on this
transaction amounted to $106,088 which was deferred and is being amortized over
the remaining life of the lease, which is approximately 6 years.
(5) INCOME TAXES
The current and deferred components of income tax expense (benefit)
are as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
--------------------- ------------------------------------
1997 1996 1996 1995 1994
------- ------- -------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal .... 200,443 (127,800) (549,846) 142,263 880,392
State ...... 30,500 -- -- -- 39,638
------- ------- -------- ------- ---------
230,943 (127,800) (549,846) 142,263 920,030
------- ------- -------- ------- ---------
Deferred:
Federal .... 101,475 (43,395) (196,440) (13,635) 105,115
State ...... 6,149 (3,382) (125,828) (2,110) 16,270
------- ------- -------- ------- ---------
107,624 (73,777) (322,268) (15,745) 121,385
------- ------- -------- ------- ---------
338,567 (201,577) (872,114) 126,518 1,041,415
======= ======== ======== ======= =========
</TABLE>
F-12
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS
Notes to Financial Statements(Continued
Actual income tax expense (benefit) differs from the amounts computed
using the statutory tax rate of 34% as follows:
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Year Ended December 31,
-------------------------- --------------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Computed tax at the expected
statutory rate .................. 313,040 (176,236) (838,126) 163,423 1,005,833
Increase (reduction) in income
taxes resulting from:
Research and development
tax credits ................ _ _ -- (40,000) --
State tax, net of federal
benefit and state tax
credits .................... 32,224 (19,190) (83,046) (1,392) 36,900
Other, net ................... (6,697) (6,151) 49,058 4,487 (1,318)
---------- ---------- ---------- ---------- ----------
Income tax expense
(benefit) .................. 338,567 (201,577) (872,114) 126,518 1,041,415
========== ========== ========== ========== ==========
</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,
June 30, ----------------------
1997 1996 1995
----------- -------- ---------
(Unaudited)
<S> <C> <C> <C>
Deferred tax assets - current:
Accrued vacation ..................................... 72,750 76,064 83,375
Restructuring charges ................................ 102,906 186,434 --
Deferred gain on sale leaseback ...................... 30,199 36,008 39,571
State net operating loss carryforward, expires
2011 .............................................. 102,165 95,420 --
Other ................................................ 64,599 33,053 22,592
Basis-Stepup/assets acquired ......................... 175,004 -- --
-------- -------- --------
Total deferred tax assets -
current ......................................... 547,623 427,059 145,538
======== ======== ========
Deferred tax liability - noncurrent:
Accelerated depreciation of property, plant
and equipment .................................. (328,482) (315,859) (356,606)
======== ======== ========
</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.
F-13
<PAGE> 86
ELECTRONIC FAB TECHNOLOGY CORP.
Notes to Financial Statements(Continued)
(6) 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 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. Shares available
for grant under this plan total 80,000 shares.
The following summarizes activity of the plans for the three years and
six months ended June 30, 1997.
<TABLE>
<CAPTION>
Weighted
average exercise
Number of price
options per share
--------- ----------------
<S> <C> <C>
Balance, January 1, 1994 ................... 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, December 31, 1996 ................. 560,500 4.55
Granted - 1st and 2nd quarter 1997 ...... 637,500 5.74
Exercised - 1st and 2nd quarter 1997 .... (14,400) 3.33
Canceled - 1st and 2nd quarter 1997 ..... (29,100) 4.77
---------
Balance, June 30, 1997 ..................... 1,154,500 5.21
---------
At June 30, 1997:
Options exercisable ..................... 304,472
=========
Shares available for future grants ...... 201,500
=========
</TABLE>
F-14
<PAGE> 87
ELECTRONIC FAB TECHNOLOGY CORP.
Notes to Financial Statements(Continued)
The Company applies the provisions of APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock options
plans in 1997, 1996, 1995 and 1994.
The weighted average fair value of options granted during the years
ended December 31, 1996 and 1995 were $4.15 and $4.92, respectively.
In estimating the fair value of options, the Company used the
Black-Scholes option-pricing model with the following assumptions.
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------------------
<S> <C> <C>
Dividend yield 0.00% 0.00%
Expected volatility 60.00% 60.00%
Risk-free interest rates 6.00% 6.00%
Expected lives (years) 4.00 3.00
</TABLE>
Had compensation cost for the Company's three stock-based compensation
plans been determined using the fair values at the grant dates for
awards under those plans consistent with SFAS 123, the Company's pro
forma net income (loss) and income (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Net income (loss):
As reported (1,592,965) 354,138
Pro forma (1,731,259) 329,963
Income (loss) per share:
As reported (0.40) 0.09
Pro forma (0.44) 0.08
</TABLE>
The above pro forma disclosures are not necessarily representative of
the effect on the reported net income for future periods because
options vest over several years, and additional awards are made each
year. In addition, compensation cost for options granted prior to
January 1, 1995 has not been considered.
F-15
<PAGE> 88
ELECTRONIC FAB TECHNOLOGY CORP.
Notes to Financial Statements(Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life price exercisable price
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.33 to 3.635 192,000 8.43 3.45 37,800 3.45
$4.00 to 4.125 222,500 9.50 4.12 58,750 4.12
$5.00 to 5.50 56,000 8.87 5.18 9,160 5.18
$7.25 to 7.625 90,000 7.65 7.57 77,700 7.57
------- ---- ---- ------- ----
560,500 8.77 4.55 183,410 4.55
======= ==== ==== ======= ====
</TABLE>
(7) FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments at
December 31, 1996 and 1995 are deemed to approximate estimated fair
values. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction
between willing parties. The carrying amounts of cash and cash
equivalents, trade receivables, accounts payable and accrued
liabilities approximate fair value because of the short maturity of
these instruments. The carrying amounts of notes payable and long-term
debt approximate fair value because of the variable nature of the
interest rates of these instruments.
(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 six months ended June
30, 1997 and 1996 and the years ended 1996, 1995 and 1994,
contributions from the Company to the Plan were approximately $60,000,
$54,000, $108,000, $106,000 and $90,000, respectively.
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 years ended 1995 and 1994, contributions from the Company to the
plan were approximately $97,150 and $487,000, respectively. No
contributions were made in the six months ended June 30, 1997 and 1996
and the year ended December 31, 1996.
During 1996, the Company established an employee incentive plan based
upon employee productivity, transaction accuracy and profitability and
contributed approximately $210,000 to the plan.
(9) TRANSACTIONS WITH RELATED PARTIES
The Company purchased approximately 10 acres of land for aggregate
consideration of $500,000 from Tech Center Properties, a general
partnership, in March 1994. The Company constructed an additional
facility on the land. A director of the Company is related to a 50%
partner of Tech Center Properties.
F-16
<PAGE> 89
ELECTRONIC FAB TECHNOLOGY CORP.
Notes to Financial Statements(Continued)
(10) RESTRUCTURING
In the third quarter of fiscal year 1996, management initiated a plan
to restructure the Company's manufacturing operations and various
administrative functions, including a change in the manufacturing
process and a reorganization of the sales department. Restructuring
charges of $2,127,000 were expensed in the statement of operations for
the year ended December 31, 1996. The restructuring plan involved the
termination of 142 employees consisting of approximately 90 direct
manufacturing employees and 52 indirect overhead positions. The total
severance related costs approximated $615,000. The Company changed its
manufacturing strategy to focus on high-mix production and developed
its Asynchronous Process Manufacturing (APM) concept. Software
development costs unrelated to the Company's new manufacturing
strategy but related to previous manufacturing processes developed by
consultants were written off in the approximate amount of $442,000. As
part of the Company's 1996 restructuring, inventory allowances, in the
approximate amount of $344,000, were set up to reserve for future
losses to be incurred related to the separation of certain customers
who did not fit the Company's new manufacturing strategy. Because of
changes in the manufacturing process which eliminated the use of
various equipment, fixed assets were charged off in the amount of
$726,000 in accordance with SFAS No. 121.
(11) BUSINESS AND CREDIT CONCENTRATIONS
The Company operates in the electronic manufacturing services segment
of the electronics industry. The Company's customers are located in
the United States, primarily in the Colorado/Rocky Mountain region,
and sales and accounts receivable are concentrated with customers
principally in the computer peripherals and medical equipment
industries. The Company has a policy to regularly monitor the credit
worthiness of its customers and provides for uncollectible amounts if
credit problems arise. Customers may experience adverse financial
difficulties, including those that may result from industry
developments, which may increase bad debt exposure to the Company. In
addition, the electronics manufacturing services industry has
experienced component supply shortages in the past. Should future
component shortages occur, the Company may experience reduced net
sales and profitability.
Sales to significant customers as a percentage of total net sales were
as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------------- -----------------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Exabyte 22.1% 14.0% 20.8% - -
Ohmeda (BOC Group) 12.4% 13.0% 15.7% 15.3% 16.5%
Hewlett Packard Company 10.5% 24.5% 26.4% 37.8% 43.3%
XEL Communications 1.0% 0.9% 8.7% 16.5%
Kentrox 8.2%
Allied Signal 8.7%
</TABLE>
(12) BUSINESS COMBINATION
On February 24, 1997, the Company acquired two affiliated entities,
Current Electronics, Inc., an Oregon Corporation, and Current
Electronics (Washington), Inc., a Washington Corporation (the CE
Companies), for total consideration of approximately $10.3
million, consisting of 1,980,000 shares of Company common stock and
approximately $5.6 million in cash which included approximately
$700,000 of transaction costs. The
F-17
<PAGE> 90
ELECTRONIC FAB TECHNOLOGY CORP.
Notes to Financial Statements(Continued)
Company recorded goodwill of pproximately $8.0 million in connection
with the acquisition, which is being amortized over 30 years. The
combined revenues for the two companies for the fiscal year ended
September 30, 1996 was approximately $32.5 million.
The following unaudited pro forma information assumes that the
Acquisition of the CE Companies had occurred on January 1, 1996:
<TABLE>
<CAPTION>
Six Months Year ended
ended June 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Revenue $41,258,081 $89,400,505
Net loss (86,469) (174,898)
Loss per share (.01) (.03)
</TABLE>
The above pro forma information is not necessarily indicative of
future results.
In connection with the business combination, the Company renegotiated
its line of credit to increase maximum borrowings to $15,000,000 and
extended the maturity date to June 1998. In addition, the Company
obtained a 90-day bridge loan in the amount of $4,900,000, the
proceeds from which were used to pay the cash consideration related to
the acquisition, as discussed above.
(13) EVENTS SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
In July 1997, the Company entered into an agreement to purchase
Circuit Test, Inc., Circuit Test International, L.C. and Airhub
Service Group, L.C. (CTI Companies) for total consideration of $19.5
million and issuance of 1,858,975 shares of Company common stock. The
Company will record approximately $27 million in goodwill in
connection with the merger and acquisition and will amortize the
goodwill over 30 years.
The Company also entered into an agreement to purchase assets and
inventory from Allied Signal for approximately $13.2 million.
In connection with the acquisitions listed above, the Company
renegotiated its line of credit to increase the maximum borrowing to
$30 million and obtained a $15 million term loan. The Company has also
agreed upon terms for the issuance of $15 million in subordinated
notes.
F-18
<PAGE> 91
Independent Auditors' Report
The Board of Directors
Circuit Test, Inc. and Affiliates:
We have audited the accompanying combined balance sheets of Circuit Test, Inc.
and affiliates as of December 31, 1996 and 1995, and the related combined
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1996. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Circuit Test, Inc.
and affiliates as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1(a), the companies included in the combined financial
statements changed in 1996.
Our audits were made for the purpose of forming an opinion on the combined
financial statements taken as a whole. The combining information in the
accompanying schedules is presented for purposes of additional analysis of the
combined financial statements rather than to present the financial position,
results of operations and cash flows of the individual companies. The combining
information has been subjected to the auditing procedures applied in the audits
of the combined financial statements and, in our opinion, is fairly stated in
all material respects in relation to the combined financial statements taken as
a whole.
KPMG PEAT MARWICK LLP
Memphis, Tennessee
July 11, 1997
F-19
<PAGE> 92
CIRCUIT TEST, INC. AND AFFILIATES
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31,
June 30, -------------------------
1997 1996 1995
----------- ----------- -----------
ASSETS (NOTE 2) (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 367,350 1,490,336 758,087
Accounts receivable, net of allowance for doubtful accounts of
$544,830 in 1997, $544,830 in 1996 and $181,675 in 1995
(note 6) 5,050,110 4,110,743 3,750,733
Inventory 3,704,089 4,242,152 2,467,679
Prepaid expenses and other current assets 391,814 8,847 21,599
----------- ----------- -----------
TOTAL CURRENT ASSETS 9,513,363 9,852,078 6,998,098
----------- ----------- -----------
Property and equipment, at cost:
Land, buildings and improvements 605,409 605,409 685,134
Leasehold improvements 686,071 655,029 626,226
Machinery and equipment 3,459,098 2,845,745 1,731,370
Furniture and fixtures 425,946 382,440 280,011
Vehicles 137,074 137,074 157,817
----------- ----------- -----------
5,313,598 4,625,697 3,480,558
Less accumulated depreciation and amortization 1,639,285 1,400,285 1,293,583
----------- ----------- -----------
NET PROPERTY AND EQUIPMENT 3,674,313 3,225,412 2,186,975
Other assets, net 112,830 96,245 60,079
----------- ----------- -----------
TOTAL ASSETS $13,300,506 13,173,735 9,245,152
=========== =========== ===========
(continued)
</TABLE>
F-20
<PAGE> 93
CIRCUIT TEST, INC. AND AFFILIATES
Combined Balance Sheets, Continued
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------
1997 1996 1995
------------ ------------ -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of notes payable (note 2) $ 4,728,752 4,256,293 2,869,360
Accounts payable 1,447,489 3,935,078 1,755,099
Accrued expenses 2,599,119 1,069,762 949,866
Due to related parties (137,391) 260,377 397,813
Shareholder loans (note 3) 943,000 1,135,871 975,871
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 9,580,969 10,657,381 6,948,009
Long-term portion of notes payable (note 2) 148,229 594,509 239,882
------------ ------------ ------------
TOTAL LIABILITIES $ 9,729,198 11,251,890 7,187,891
------------ ------------ ------------
STOCKHOLDERS' EQUITY:
Circuit Test, Inc. common stock, $.01 par value; 50,000 shares
authorized; 5 shares issued and outstanding $ 1 1 1
Circuit Test, Inc. non-voting common stock, $.01 par value;
50,000 shares authorized; 12,162 and 9,995 shares issued and
outstanding at 1996 and 1995, respectively 121 121 99
Airhub Service Group, L.C. members' deficit:
Allen S. Braswell, Jr (70,800) (70,800) --
Circuit Test International Limited Partnership (70,800) (70,800) --
Circuit Test International L.C. members' equity:
Allen S. Braswell, Jr 4,330 4,330 4,330
Circuit Test International Limited Partnership 4,330 4,330 4,330
Additional paid-in capital 147,498 147,498 17,500
Retained earnings 3,556,628 1,907,165 2,031,001
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,571,308 1,921,845 2,057,261
Commitments, contingencies and related party transactions (notes 3, 4 and 5)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,300,506 13,173,735 9,245,152
============ ============ ============
</TABLE>
See accompanying notes to combined financial statements.
F-21
<PAGE> 94
CIRCUIT TEST, INC. AND AFFILIATES
Combined Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
------------------------- ---------------------------------------
1997 1996 1996 1995 1994
----------- --------- ----------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues (note 6) $19,895,878 9,754,621 26,509,725 16,183,590 9,028,587
Costs of revenues 13,288,642 7,495,668 19,580,340 10,799,490 6,310,630
----------- --------- ---------- ---------- ---------
GROSS PROFIT 6,607,236 2,258,953 6,929,385 5,384,100 2,717,957
Selling, general and administrative expenses 3,946,054 2,834,812 6,251,364 3,793,320 2,524,796
Interest expense, net 262,152 191,871 434,345 291,061 111,250
Other expense 11,565 -- 9,112 -- --
----------- --------- ---------- ---------- ---------
NET INCOME $ 2,387,465 (767,730) 234,564 1,299,719 81,911
=========== ========= ========== ========== =========
</TABLE>
See accompanying notes to combined financial statements
F-22
<PAGE> 95
CIRCUIT TEST, INC. AND AFFILIATES
Combined Statements of Stockholders' Equity
Six months ended June 30, 1997 (unaudited) and years ended December 31,
1996, 1995 and 1994
<TABLE>
<CAPTION>
Airhub Service Circuit Test
Circuit Test, Inc. Group, L.C. International, L.C.
-------------------------------- ------------------------------ -----------------------------
Non- Circuit Test Circuit Test
Voting voting Additional International International
common common paid-in Allen S. Limited Allen S. Limited
stock stock capital Braswell, Jr. Partnership Braswell, Jr. Partnership
---------- ------- ----------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 1 99 17,500 -- -- 4,300 4,300
Distributions to stockholders -- -- -- -- -- -- --
Net income (loss) -- -- -- -- -- -- --
------ ----- -------- ------- ------- ---------- -------
Balances at December 31, 1994 1 99 17,500 -- -- 4,300 4,300
Net income (loss) -- -- -- -- -- -- --
------ ----- -------- ------- ------- ---------- -------
Balances at December 31, 1995 1 99 17,500 -- -- 4,330 4,330
Sale of stock -- 22 129,998 -- -- -- --
Allocation of net deficit to
members at date of transfer -- -- -- (70,800) (70,800) -- --
Distributions to stockholders -- -- -- -- -- -- --
Net income (loss) -- -- -- -- -- -- --
------ ----- -------- ------- ------- ---------- ------
Balances at December 31, 1996 1 121 147,498 (70,800) (70,800) 4,330 4,330
Distributions to stockholders -- -- -- -- -- -- --
Net income (loss) -- -- -- -- -- -- --
------ ----- -------- ------- ------- ---------- ------
Balances at June 30, 1997 $ 1 122 147,498 (70,800) (70,800) 4,330 4,330
====== ===== ======== ======= ======= ========== ======
<CAPTION>
Related Earnings
------------------------------------------------------------------------
Airhub Circuit Test Total
Circuit Service International, stockholders'
Test, Inc. Group, L.C. L.C. Total equity
------------ ----------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 2,227,684 -- (505,291) 1,772,393 1,748,653
Distributions to stockholders (1,073,022) -- -- (1,073,022) (1,073,022)
Net income (loss) 372,735 -- (290,824) 81,911 81,911
---------- --------- ---------- ---------- ----------
Balances at December 31, 1994 1,527,397 -- (796,115) 731,282 757,542
Net income (loss) 355,566 (141,600) 1,085,753 1,299,719 1,299,719
---------- --------- ---------- ---------- ----------
Balances at December 31, 1995 1,882,963 (141,600) 289,638 2,031,001 2,057,261
Sale of stock -- -- -- -- 130,020
Allocation of net deficit to
members at date of transfer -- 141,600 -- 141,600 --
Distributions to stockholders -- -- (500,000) (500,000) (500,000)
Net income (loss) (189,383) (107,545) 531,492 234,564 234,564
---------- --------- ---------- ---------- ----------
Balances at December 31, 1996 1,693,580 (107,545) 321,130 1,907,165 1,921,845
Distributions to stockholders -- (31,000) (707,000) (738,000) (738,000)
Net income (loss) 935,079 665,943 786,443 2,387,465 2,387,465
---------- --------- ---------- ---------- ----------
Balances at June 30, 1997 2,628,658 385,798 400,572 3,415,028 3,571,308
========== ========= ========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE> 96
CIRCUIT TEST, INC. AND AFFILIATES
Combined Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
June 30, Years Ended December 31,
--------------------------- ------------------------------------------
1997 1996 1996 1995 1994
------------ ------------ ----------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,387,465 (767,730) 234,564 1,299,719 81,911
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 234,999 185,815 344,203 296,669 252,579
Increase in accounts receivable, net (939,367) (568,323) (360,010) (2,381,058) (430,908)
(Increase) decrease in inventory 538,063 361,836 (1,774,433) (1,073,683) (560,235)
Decrease (increase) in prepaid expenses
and other assets (399,552) (291,280) (23,414) (15,620) 102,603
(Decrease) increase in accounts payable (2,487,589) (412,555) 2,179,979 1,327,841 265,409
(Decrease) increase in accrued expenses 1,529,357 429,501 119,896 482,517 133,998
Change in due to (from) related parties (397,768) -- (137,436) (114,321) 242,458
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 465,608 (1,063,735) 583,309 (177,936) 87,815
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (683,902) (629,041) (1,382,640) (621,754) (368,538)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable and other (166,692) 702,851 1,901,560 1,434,578 1,257,802
obligations
Proceeds from sale of stock -- -- 130,020 -- --
Distributions to stockholders (738,000) (500,000) (500,000) -- (1,073,022)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (904,692) 202,851 1,531,580 1,434,578 184,780
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,122,986) (1,551,925) 732,249 634,888 (95,943)
Cash and cash equivalents at beginning of period 1,490,336 691,856 758,087 123,199 219,142
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 367,350 (860,068) 1,490,336 758,087 123,199
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow information -
Interest paid $ 262,152 191,871 418,000 291,000 164,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements
F-24
<PAGE> 97
CIRCUIT TEST, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994 AND SIX MONTHS
ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS AND PRINCIPLES OF COMBINATION
Circuit Test, Inc. and affiliates (the Company) are primarily engaged
in the business of repairing computer components and related
peripherals.
The combined financial statements include the financial statements of
Circuit Test, Inc., located in Tampa, Florida, and affiliates Circuit
Test International, L.C., located in Memphis, Tennessee and Airhub
Service Group, L.C., located in Louisville, Kentucky. The financial
statements are combined because of common ownership. All significant
intercompany accounts and transactions have been eliminated in
combination.
On February 28, 1996, Airhub Service Group, L.C., a Kentucky limited
liability company, was formed with two 50%/50% members. In a tax-free
transfer, the net liabilities of Circuit Test International, L.C.'s
Kentucky division were transferred to Airhub Service Group, L.C. on
March 1, 1996. Management has elected to include Airhub Service Group,
L.C. in its 1996 combined financial statements. The 1995 Airhub
Service Group, L.C. financial statements represent the Kentucky
division balances.
The members of a limited liability company have no personal liability
related to the company other than to the extent of their equity
balances. Both members have equal economic and voting interests.
Unless previously terminated, Airhub Services Group, L.C. will
continue in existence until February 28, 2026 and Circuit Test
International, L.C. will continue in existence until August 13, 2022.
During November 1995, the Company decided to close one of its two
Tampa facilities. This facility was closed in early 1996 upon the
expiration of the Company's facility lease. The Company's affiliate
near Boston, Massachusetts, Disk Maintenance, Inc., was closed in
August 1996 subsequent to the expiration of the facility lease.
During 1996, owners of the Company opened a facility in Brazil.
In connection with the closing of the Tampa facility, the Company
incurred costs of approximately $490,000 and $223,000 in 1996 and
1995, respectively.
In prior years, the financial statements of Disk Maintenance, Inc.
were included in the combined financial statements. Management has
elected to omit Disk Maintenance, Inc. from the 1996 combination due
to its closure. The accompanying 1995 and 1994 combined financial
statements have been restated to reflect the change in reporting
entity. Net income (loss) for 1996, 1995 and 1994 would have been
$(439,357), $1,124,608 and $468,993, respectively, had Disk
Maintenance, Inc. been included in the combination.
(b) REVENUE RECOGNITION
Revenues are recognized when products are shipped.
(c) ACCOUNTING ESTIMATES
Management is required to make estimates and assumptions during the
preparation of the combined financial statements in conformity with
generally accepted accounting principles. These estimates and
assumptions affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the
F-25
<PAGE> 98
CIRCUIT TEST, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
dates of the combined financial statements. They also affect the
reported amounts of net income. Actual results could differ from
these estimates and assumptions.
(d) CASH AND CASH EQUIVALENT
The Company considers all highly liquid investments with original
maturities of six months or less to be cash equivalents.
(e) INVENTORY
Inventory consists primarily of computer parts and components and is
valued at the lower of cost or market. Cost is determined using the
weighted average method. In October 1996, the Company entered into an
agreement with a third party which included the purchase of inventory
in the amount of $1,188,000, with payments to be made according to a
predetermined schedule during 1997. Such purchased inventory
remaining on hand was approximately $1,028,000 at December 31, 1996
(note 7).
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
Equipment held under capital leases and leasehold improvements are
amortized straight line over the shorter of the lease term or
estimated useful life of the assets.
(g) PRE-OPENING EXPENSES
Circuit Test International, L.C. began operations in January 1993 and
is amortizing pre-opening expenses, which are included in other
assets (net balance of approximately $8,510 at June 30, 1997, $17,600
at December 31, 1996 and $36,900 at December 31, 1995) using the
straight-line method over 60 months.
(h) INCOME TAXES
Circuit Test, Inc. has elected to be treated as an "S" Corporation
under provisions of the Internal Revenue Code. Circuit Test
International, L.C. and Airhub Service Group, L.C. have each elected
to be treated as a limited liability company. Under these elections,
the stockholders or partners are individually responsible for
reporting their share of taxable income or loss. Accordingly, no
provision for federal or state income taxes has been reflected in the
accompanying combined financial statements.
(i) GAIN-SHARING BONUSES
The Company has a gain-sharing bonus plan whereby employees are
rewarded for attaining quality and profit goals. Gain-sharing bonuses
paid for the six months ended June 30, 1997 and years ended December
31, 1996, 1995 and 1994 were $321,026, $309,174, $220,431 and
$81,932, respectively.
F-26
<PAGE> 99
CIRCUIT TEST, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
(j) RECLASSIFICATIONS
Certain 1995 and 1994 amounts have been reclassified to conform with
the 1996 presentation.
(2) NOTES PAYABLE
Notes payable at June 30, 1997 and December 31, 1996 and 1995 consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------
1997 1996 1995
-------- ---- ----
(Unaudited)
<S> <C> <C> <C>
$4,000,000 revolving bank line of credit;
borrowings bear interest at the lender's
prime rate (8.5 % at June 30, 1997),
interest payable monthly with principal due
on demand; collateralized by substantially
all assets of the Company and guaranteed by
certain of the Company's stockholders $3,693,900 3,747,418 2,545,129
$1,000,000 nonrevolving bank line of credit;
advances bear interest at either the lender's
prime rate or a prevalent fixed rate at the
time of the advance (8.5 % at June 30, 1997);
master note payable on demand with individual
advances payable in three years consisting of
monthly principal and interest payments;
collateralized by substantially all of the
Company's machinery, equipment, fixtures and
furniture and guaranteed by certain of the
Company's stockholders 1,024,857 861,790 138,241
$525,000 bank term loan; bears interest at the
lender's prime rate (8.5 % at June 30, 1997);
monthly principal and interest payments
through June 1, 1998; collateralized by
substantially all of the Company's machinery,
equipment, fixtures and furniture and guaranteed
by certain of the Company's stockholders 151,267 233,333 408,303
Other 6,957 8,261 17,569
---------- --------- ---------
Total notes payable 4,876,981 4,850,802 3,109,242
Less current maturities of notes payable 4,728,752 4,256,293 2,869,360
---------- --------- ---------
Long-term portion of notes payable $ 148,229 594,509 239,882
========== ========= =========
</TABLE>
F-27
<PAGE> 100
CIRCUIT TEST, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
The various loan agreements limit borrowings based on eligible
collateral and subject the Company to certain covenants regarding
financial maintenance and ratios. At December 31, 1996, the Company was
not in compliance with certain of the covenants. On July 9, 1997 the
lender waived the instances of non-compliance.
(3) SHAREHOLDER LOANS AND OBLIGATIONS
At June 30, 1997, the Company has loans payable to a stockholder of
$160,000, at 8.5% and $783,000 at 6.5%. At December 31, 1996, the Company
has loans payable to a stockholder of $352,871 at 8.5% and $783,000 at
6.5%. At December 31, 1995, balances on these loans were $192,871 and
$783,000.
Stockholders of the Company have personal revolving lines of credit
totaling $975,000, with $157,000, $779,500 and $107,600 outstanding at
June 30, 1997 and December 31, 1996 and 1995, respectively. The credit
lines are payable on demand and are guaranteed by the Company.
(4) LEASES
The Company is obligated for two capital leases that will expire in 1998.
The Company leases one of its Tampa facilities from a stockholder at a
rate of $5,080 per month under an operating lease. Rent expense for the
six months ended June 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994 was $30,480, $0, $25,520, $65,232 and $62,701,
respectively.
The Company has a noncancelable operating lease with a third party for
facility rental. The Company is charged $1.06 per square foot per month
for office space and warehouse space occupied by certain equipment. Rent
expense was $264,454 and $36,000 for the six months ended June 30, 1997
and 1996, respectively, and $206,776 and $28,800 for the years ended
December 31, 1996 and 1995, respectively.
The Company also has several noncancelable operating leases with third
parties, primarily for facility rental, that expire over the next three
years. Rent expense for these facilities for the six months ended June 30,
1997 and 1996 and the years ended December 31, 1996, 1995 and 1994 was
$176,969, $108,252, $384,181, $296,810 and $147,350, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of June 30,
1997 are as follows:
<TABLE>
<S> <C>
1997 511,219
1998 291,685
1999 283,865
2000 282,432
2001 41,216
-----------
1,510,417
</TABLE>
(5) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
The Company pays sales commissions to a company in which certain Company
stockholders have a majority ownership interest. Commissions paid for the
six months ended June 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994 were $12,600, $16,680, $27,240, $29,517 and $68,681,
respectively.
F-28
<PAGE> 101
CIRCUIT TEST, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
Certain corporate charges paid by Circuit Test, Inc. are allocated, based
on a percentage of net revenues, to affiliates included in the combined
financial statements and another related party which is not included in
the combination. The amounts charged to the related party for 1996, 1995
and 1994 were approximately $162,000, $247,000 and $287,000, respectively.
In the normal course of business, the Company is party to certain
litigation. Management of the Company is of the opinion that the ultimate
outcome of such matters will not have a material adverse impact on the
Company's combined financial statements.
(6) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's customers are primarily manufacturers of computers and
related peripherals and integrated transportation and logistics companies.
Certain customers of the Company comprise a significant portion of
accounts receivable and net revenues as of and for the years ended
December 31, 1996, 1995 and 1994. These customers are summarized as
follows:
<TABLE>
<CAPTION>
PERCENTAGE
CUSTOMERS OF TOTAL
--------- ----------
<S> <C> <C>
Accounts receivable:
December 31, 1996 4 65%
December 31, 1995 4 57%
December 31, 1994 4 72%
Net revenues:
Year ended December 31, 1996 4 81%
Year ended December 31, 1995 4 71%
Year ended December 31, 1994 4 79%
</TABLE>
The net revenues concentration numbers include one customer which
accounted for 46% of net revenues during 1996, 36% during 1995 and 39%
during 1994.
(7) SUBSEQUENT EVENT
In May 1997, a third party requested to terminate an agreement that the
Company had entered into to purchase certain assets and other rights. A
new agreement was reached that resulted in a reduction in purchase price
for the assets previously purchased. In June 1997, the Company reduced the
assets which are included in inventory and the corresponding payable to
the third party by approximately $1,000,000.
On July 9, 1997, the Company entered into an Agreement and Plan of Merger
(Agreement) with EFTC Corporation (EFTC). The Agreement provides that EFTC
will acquired the Company through the merger of the Company with and into
EFTC (Merger). In the Merger, subject to adjustment and certain
exceptions, stockholders of Circuit Test, Inc. will have the right to
receive 1,858,974 shares of EFTC common stock and the members of Airhub
Service Group, L.C. and Circuit Test International, L.C. will receive
approximately $19,500,000 and have certain liabilities assumed by EFTC.
Stockholders and members of the Company will also participate in an
earnout based on future earnings. The obligations of the Company and EFTC
to consummate the Merger are subject to various conditions, including the
condition that the holders of a majority of the outstanding shares of
common stock of EFTC vote to approve the Agreement. If the necessary
F-29
<PAGE> 102
CIRCUIT TEST, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
stockholder vote is obtained and all other conditions to the Merger are
satisfied, the Merger is expected to be completed on or before October 30,
1997.
F-30
<PAGE> 103
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Balance Sheet Information
December 31, 1996
<TABLE>
<CAPTION>
AIRHUB CIRCUIT TEST
CIRCUIT SERVICE INTERNATIONAL,
ASSETS TEST, INC. GROUP, L.C. L.C. COMBINED
------ ----------- ----------- -------------- --------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ (169,421) 634,756 1,025,001 1,490,336
Accounts receivable, net 1,074,345 1,268,588 1,767,810 4,110,743
Inventory 223,380 2,706,234 1,312,538 4,242,152
Prepaid expenses and other current assets 2,843 -- 6,004 8,847
Intercompany accounts 533,288 (400,846) (132,442) --
----------- ---------- ----------- -----------
TOTAL CURRENT ASSETS 1,664,435 4,208,732 3,978,911 9,852,078
----------- ---------- ----------- -----------
PROPERTY AND EQUIPMENT, AT COST:
Land, buildings and improvements 605,409 -- -- 605,409
Leasehold improvements -- -- 655,029 655,029
Machinery and equipment 1,030,977 680,431 1,134,337 2,845,745
Furniture and fixtures 121,255 111,680 149,505 382,440
Vehicles 137,074 -- -- 137,074
----------- ---------- ----------- -----------
1,894,715 792,111 1,938,871 4,625,697
Less accumulated depreciation and
amortization 1,026,834 65,590 307,861 1,400,285
----------- ---------- ----------- -----------
NET PROPERTY AND EQUIPMENT 867,881 726,521 1,631,010 3,225,412
Other assets, net 24,553 -- 71,692 96,245
----------- ---------- ----------- -----------
$ 2,556,869 4,935,253 5,681,613 13,173,735
=========== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable $ 121,498 1,943,867 2,190,928 4,256,293
Accounts payable 243,389 2,575,667 1,116,022 3,935,078
Accrued expenses 260,647 454,507 354,608 1,069,762
Due to (from) related parties (306,765) (12,455) 579,597 260,377
Shareholder loans 352,871 -- 783,000 1,135,871
----------- ---------- ----------- -----------
TOTAL CURRENT LIABILITIES 671,640 4,961,586 5,024,155 10,657,381
Long-term portion of notes payable 44,029 222,812 327,668 594,509
----------- ---------- ----------- -----------
TOTAL LIABILITIES 715,669 5,184,398 5,351,823 11,251,890
----------- ---------- ----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 122 -- -- 122
Members' equity -- (141,600) 8,600 (132,940)
Additional paid-in capital 147,498 -- -- 147,498
Retained earnings (deficit) 1,693,580 (107,545) 321,130 1,907,165
----------- ---------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,841,200 (249,145) 329,790 1,921,845
----------- ---------- ----------- -----------
$ 2,556,869 4,935,253 5,681,613 13,173,735
=========== ========== =========== ===========
</TABLE>
See accompanying independent auditors' report.
F-31
<PAGE> 104
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Balance Sheet Information
December 31, 1995
<TABLE>
<CAPTION>
AIRHUB CIRCUIT TEST
CIRCUIT SERVICE INTERNATIONAL,
ASSETS TEST, INC. GROUP, L.C. L.C. COMBINED
------ ----------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 210,987 38,372 508,728 758,087
Accounts receivable, net 1,332,405 449,172 1,969,156 3,750,733
Inventory 1,034,222 97,280 1,336,177 2,467,679
Prepaid expenses and other current assets 2,843 -- 18,756 21,599
Intercompany accounts 112,463 -- (112,463) --
----------- ---------- ---------- ---------
TOTAL CURRENT ASSETS 2,692,920 584,824 3,720,354 6,998,098
----------- ---------- ---------- ---------
PROPERTY AND EQUIPMENT, AT COST:
Land, buildings and improvements 685,134 -- -- 685,134
Leasehold improvements 208,505 29,378 388,343 626,226
Machinery and equipment 998,188 89,710 643,472 1,731,370
Furniture and fixtures 170,160 28,022 81,829 280,011
Vehicles 157,817 -- -- 157,817
---------- ---------- --------- ---------
2,219,804 147,110 1,113,644 3,480,558
Less accumulated depreciation and
amortization 1,140,678 4,268 148,637 1,293,583
----------- ---------- ---------- ---------
NET PROPERTY AND EQUIPMENT 1,079,126 142,842 965,007 2,186,975
Other assets, net 24,553 -- 35,526 60,079
----------- ---------- ---------- ---------
$ 3,796,599 727,666 4,720,887 9,245,152
=========== ========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of notes payable $ 925,306 448,241 1,495,813 2,869,360
Accounts payable 340,298 379,400 1,035,401 1,755,099
Accrued expenses 299,316 43,832 606,718 949,866
Due to (from) related parties (25,011) (2,207) 425,031 397,813
Shareholder loans 192,871 -- 783,000 975,871
----------- ---------- ---------- ---------
TOTAL CURRENT LIABILITIES 1,732,780 869,266 4,345,963 6,948,009
Long-term portion of notes payable 163,256 -- 6,626 239,882
----------- ---------- ---------- ---------
TOTAL LIABILITIES 1,896,036 869,266 4,422,589 7,187,891
----------- ---------- ---------- ---------
STOCKHOLDERS' EQUITY:
Common stock 100 -- -- 100
Members' equity -- -- 8,660 8,660
Additional paid-in capital 17,500 -- -- 17,500
Retained earnings (deficit) 1,882,963 (141,600) 289,638 2,031,001
----------- ---------- ---------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,900,563 (141,600) 298,298 2,057,261
----------- ---------- ---------- ---------
$ 3,796,599 727,666 4,720,887 9,245,152
=========== ========== ========== =========
</TABLE>
See accompanying independent auditors' report.
F-32
<PAGE> 105
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Operations Information
Year ended December 31, 1996
<TABLE>
<CAPTION>
AIRHUB CIRCUIT TEST
CIRCUIT SERVICE INTERNATIONAL, ELIMINATING
TEST, INC. GROUP, L.C. L.C. ENTRIES COMBINED
---------- ----------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $4,590,711 8,211,422 13,854,357 (146,765) 26,509,725
Costs of revenues 3,348,588 6,421,699 9,956,818 (146,765) 19,580,340
--------- --------- ---------- --------- ----------
GROSS PROFIT 1,242,123 1,789,723 3,897,539 -- 6,929,385
Selling, general and administrative
expenses 1,348,581 1,799,830 3,102,953 -- 6,251,364
Interest expense, net 100,587 70,664 263,094 -- 434,345
Other (income) expense (17,662) 26,774 -- -- 9,112
---------- ---------- ---------- --------- ----------
NET INCOME (LOSS) $ (189,383) (107,545) 531,492 -- 234,564
========== ========== ========== ========= ==========
</TABLE>
See accompanying independent auditors' report.
F-33
<PAGE> 106
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Operations Information
Year ended December 31, 1995
<TABLE>
<CAPTION>
AIRHUB CIRCUIT TEST
CIRCUIT SERVICE INTERNATIONAL, ELIMINATING
TEST, INC. GROUP, L.C. L.C. ENTRIES COMBINED
---------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues $7,668,419 302,531 8,356,249 (143,609) 16,183,590
Costs of revenues 5,593,172 238,617 5,111,310 (143,609) 10,799,490
--------- ---------- --------- ---------- ----------
GROSS PROFIT 2,075,247 63,914 3,244,939 -- 5,384,100
Selling, general and administrative
expenses 1,591,408 198,810 2,003,102 -- 3,793,320
Interest expense, net 128,273 6,704 156,084 -- 291,061
---------- ----------- ---------- ---------- ----------
NET INCOME (LOSS) $ 355,566 (141,600) $1,085,753 -- 1,299,719
========== =========== ========== ========== ==========
</TABLE>
See accompanying independent auditors' report.
F-34
<PAGE> 107
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Operations Information
Year ended December 31, 1994
<TABLE>
<CAPTION>
CIRCUIT TEST
CIRCUIT INTERNATIONAL, ELIMINATING
TEST, INC L.C. ENTRIES COMBINED
---------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Net revenues $7,032,786 2,069,931 (74,130) 9,028,587
Costs of revenues 4,891,004 1,493,756 (74,130) 6,310,630
---------- ----------- ------- ---------
GROSS PROFIT 2,141,782 576,175 -- 2,717,957
Selling, general and administrative expenses 1,721,680 803,116 -- 2,524,796
Interest expense, net 47,367 63,883 -- 111,250
---------- ----------- ------- ---------
NET INCOME (LOSS) $ 372,735 $ (290,824) -- 81,911
========== =========== ======= =========
</TABLE>
See accompanying independent auditors' report.
F-35
<PAGE> 108
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Cash Flows Information
Year ended December 31, 1996
<TABLE>
<CAPTION>
AIRHUB CIRCUIT TEST
CIRCUIT SERVICE INTERNATIONAL,
TEST, INC. GROUP, L.C. L.C. COMBINED
----------- ----------- -------------- --------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ (189,383) (107,545) 531,492 234,564
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 162,822 59,287 122,094 344,203
(Increase) decrease in accounts
receivables, net 258,060 (819,416) 201,346 (360,010)
(Increase) decrease in inventory 810,842 (2,608,954) 23,639 (1,774,473)
Increase in prepaids and other assets -- -- (23,414) (23,414)
Increase (decrease) in accounts payable (96,909) 2,196,267 80,621 2,179,979
Increase (decrease) in accrued expenses (38,669) 410,675 (252,110) 119,896
Change in due to (from) related parties (281,754) (10,248) 154,566 (137,436)
Change in intercompany account (1,017,309) 1,019,433 (2,124) --
---------- ---------- --------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (392,300) 139,499 836,110 583,309
---------- ---------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES -
capital expenditures, net 48,423 (642,966) (788,097) (1,382,640)
---------- ---------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable and other
obligations (166,551) 1,099,851 968,260 1,901,560
Proceeds from sale of stock 130,020 -- -- 130,020
Distributions to stockholders -- -- (500,000) (500,000)
---------- --------- -------- ----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (36,531) 1,099,851 468,260 1,531,580
---------- --------- ------------ ----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (380,408) 596,384 516,273 732,249
Cash and cash equivalents at beginning of year 210,987 38,372 508,728 758,087
---------- --------- ------------ ----------
Cash and cash equivalents at end of year (169,421) 634,756 1,025,001 1,490,336
========== ========= =========== ==========
Supplemental disclosure of cash information -
Interest paid $ 98,000 71,000 249,000 418,000
========== ========= =========== ==========
</TABLE>
See accompanying independent auditors' report.
F-36
<PAGE> 109
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Cash Flows Information
Year ended December 31, 1995
<TABLE>
<CAPTION>
AIRHUB CIRCUIT TEST
CIRCUIT SERVICE INTERNATIONAL,
TEST, INC. GROUP, L.C. L.C. COMBINED
---------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $355,566 (141,600) 1,085,753 1,299,719
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 203,597 8,368 84,704 296,669
Increase in accounts receivables, net (370,082) (449,172) (1,561,804) (2,381,058)
(Increase) decrease in inventory 242,180 (97,280) (1,218,583) (1,073,683)
(Increase) decrease in prepaids and
other assets (17,798) -- 2,178 (15,620)
Increase in accounts payable 36,453 379,400 911,988 1,327,841
Increase in accrued expenses 49,573 43,832 389,112 482,517
Change in due to (from) related parties (255,947) (2,207) 143,833 (114,321)
Change in intercompany account (11,439) -- 11,439 --
---------- ---------- ----------- ----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 232,103 (258,659) (151,380) (177,936)
---------- ---------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES -
capital expenditures, net 42,130 (151,210) (512,674) (621,754)
---------- ---------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
net proceeds from notes payable and other
obligations (219,440) 448,241 1,205,777 1,434,578
---------- ---------- ----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 54,793 38,372 541,723 634,888
Cash and cash equivalents at beginning of year 156,194 -- (32,995) 123,199
---------- ---------- ----------- ----------
Cash and cash equivalents at end of year $210,987 38,372 508,728 758,087
========== ========== =========== ==========
Supplemental disclosure of cash information -
Interest paid $128,000 7,000 156,000 291,000
======== ========= =========== ==========
</TABLE>
See accompanying independent auditors' report.
F-37
<PAGE> 110
CIRCUIT TEST, INC. AND AFFILIATES
Combining Schedule - Cash Flows Information
Year ended December 31, 1994
<TABLE>
<CAPTION>
CIRCUIT TEST
CIRCUIT INTERNATIONAL,
TEST, INC. L.C. COMBINED
----------- -------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 372,735 (290,824) 81,911
Adjustments to reconcile net income (loss)
to net cash flows provided by (used in)
operating activities:
Depreciation and amortization 195,200 57,739 252,579
Increase in accounts receivables, net (211,334) (219,574) (430,908)
Increase in inventory (511,571) 48,664 (560,235)
(Increase) decrease in prepaids and other assets 106,122 (3,519) 102,603
Increase in accounts payable 165,421 99,988 265,409
Increase (decrease) in accrued expenses (20,694) 154,692 133,998
Change in due to (from) related parties 239,655 2,803 242,458
Change in intercompany account (101,024) 101,024 --
----------- -------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 234,510 (146,695) 87,815
----------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES -
capital expenditures, net (37,560) (330,978) (368,538)
----------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable and other obligations 871,140 386,662 1,257,802
Distributions to stockholders (1,073,022) -- (1,073,022)
----------- -------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (201,882) 386,662 184,780
----------- -------- ----------
NET DECREASE IN CASH AND CASH EQUIVALENTS
(4,932) (91,011) (95,943)
Cash and cash equivalents at beginning of year 161,126 58,016 219,142
----------- -------- ----------
Cash and cash equivalents at end of year $ 156,194 (32,995) 123,199
=========== ======== ==========
Supplemental disclosure of cash information -
Interest paid $ 54,000 110,000 164,000
=========== ======== ==========
</TABLE>
See accompanying independent auditors' report.
F-38
<PAGE> 111
APPENDIX A CONFORMED COPY
================================================================================
AGREEMENT AND PLAN OF REORGANIZATION
among
EFTC CORPORATION
CTI ACQUISITION CORP.
and
CIRCUIT TEST, INC.
dated as of July 9, 1997
================================================================================
A-1
<PAGE> 112
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 The Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Certain Tax Positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
ARTICLE II SURVIVING CORPORATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Bylaws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.4 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III EFFECT OF MERGER ON CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3.2 Exchange of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.3 No Further Ownership Rights in Circuit Test Common Stock . . . . . . . . . . . . . . . . . . . . . . . 5
3.4 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CIRCUIT TEST . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2 Capitalization; Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.3 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.6 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.7 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.8 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.10 Restrictions on Business Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.11 Governmental Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.12 Contracts and Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.13 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.14 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.15 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.16 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
4.17 S Corporation and Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
A-2
<PAGE> 113
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
4.18 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
4.19 Employee Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.20 Interested Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.21 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
4.22 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.23 Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.24 Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.25 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.26 Product Warranty and Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.27 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.28 Brokers' and Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.29 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.30 Regulation D Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.31 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.32 Hart-Scott-Rodino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.33 Reliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.1 Organization, Standing and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
5.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.3 Due Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.4 SEC Documents; Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.5 Absence of Certain Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.6 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.7 Board Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.8 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.9 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.10 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
5.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.12 Employee Benefit Plans; ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.13 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.14 Major Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.15 Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.16 Brokers' and Finders' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.17 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.18 Hart-Scott-Rodino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.19 Reliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE VI CONDUCT PRIOR TO EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
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<TABLE>
<CAPTION>
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6.1 Conduct of Business of Circuit Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.2 No Solicitation; Acquisition Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.3 Conduct of Business of Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.4 Notice of Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VII ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.1 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.2 Meetings of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.3 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.4 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.5 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.6 Filings; Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.7 Employment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.8 Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.9 Director Nominees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.11 Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.12 Audited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.13 Additional Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.14 Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE VIII CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
8.1 Conditions to Obligations of Each Party to Effect the Merger . . . . . . . . . . . . . . . . . . . . 32
8.2 Additional Conditions to Obligations of Circuit Test to Effect the Merger . . . . . . . . . . . . . 33
8.3 Additional Conditions to the Obligations of Parent and Merger Sub to
Effect the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE IX RESTRICTIONS ON TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.1 Legends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
9.2 Notice of Proposed Dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE X TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
10.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
A-4
<PAGE> 115
<TABLE>
<CAPTION>
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ARTICLE XI GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.2 Indemnification by Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.3 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.4 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
11.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.6 Entire Agreement; Nonassignability; Parties in Interest . . . . . . . . . . . . . . . . . . . . . . 40
11.7 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.8 Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.9 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.10 Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
11.11 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
11.12 Attorneys Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
A-5
<PAGE> 116
EXHIBITS
<TABLE>
<S> <C>
Exhibit 1.3 (A) Articles of Merger
Exhibit 1.3 (B) Plan of Merger
Exhibit 7.7 Form of Employment Agreement
Exhibit 7.13 Form of Voting Letter Agreement
Exhibit 8.2(c) Opinion of Counsel to Parent
Exhibit 8.2(d) Registration Rights Agreement
Exhibit 8.3(c) Opinion of Counsel to Circuit Test
Exhibit 8.3(h) Indemnification Agreement
</TABLE>
SCHEDULES
<TABLE>
<S> <C>
Schedule 3.1 Circuit Test Common Stock and Pro Forma Conversions
to Parent Common Stock
Schedule 7.8 Options Issuable by Parent to Management of Circuit
Test
Target Disclosure Schedule
Parent Disclosure Schedule
</TABLE>
A-6
<PAGE> 117
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
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<S> <C>
1989 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Airhub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Annual Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Circuit Test . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Circuit Test Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Circuit Test Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Circuit Test Disclosure Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Circuit Test Employee Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Class A Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Class B Common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
COBRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
controlled group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CT Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Deferred Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Designees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Employment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Environmental Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ERISA Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Governmental Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Hazardous Substance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Holder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
HSR Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
include . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
includes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
including . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Indemnification Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Indemnification Threshold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Interim Circuit Test Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
A-7
<PAGE> 118
<TABLE>
<S> <C>
Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LLC Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
made available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Material Adverse Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Merger Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Merger Sub Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
NASD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
no action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Parent Balance Sheet Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Parent Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Parent SEC Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Parent Shareholders Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Parent Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
plan of reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Proprietary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Registration Rights Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Restricted Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECURITIES ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Shareholder Indemnity Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Surviving Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Tax Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Third Party Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ultimate parent entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
unrealized built in gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
without limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
A-8
<PAGE> 119
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as
of July 9, 1997, is among EFTC Corporation, a Colorado corporation ("Parent"),
CTI ACQUISITION CORP., a Florida corporation and a wholly-owned subsidiary of
Parent ("Merger Sub"), and CIRCUIT TEST, INC., a Florida corporation ("Circuit
Test").
RECITALS
A. The Boards of Directors of Parent and Circuit Test have
determined that a business combination between Parent and Circuit Test is in
the best interests of their respective companies and shareholders, and
accordingly have approved this Agreement and the merger provided for herein
whereupon Merger Sub shall merge with and into Circuit Test upon the terms, and
subject to the conditions, set forth herein. In addition, each of the
shareholders of Circuit Test (the "CT Shareholders") has approved this
Agreement and the merger provided for herein.
B. In addition to the transactions contemplated by this
Agreement, Parent intends to acquire certain other entities which are closely
affiliated with Circuit Test. As a result, simultaneous with the execution of
this Agreement, Parent is entering into that certain Limited Liability Company
Unit Purchase Agreement (the "Purchase Agreement") with Circuit Test
International, L.C., a Florida limited liability company ("LLC"), and Airhub
Services Group, L.C., a Kentucky limited liability company ("Airhub"). This
Agreement, the Purchase Agreement, and the exhibits and schedules contained
therein represent the entire transaction by which Parent is acquiring control
of the business conducted by Circuit Test, LLC and Airhub (the "Transaction").
C. 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"), and this Agreement
is intended to be a "plan of reorganization" within the meaning of the
regulations promulgated under Section 368 of the Code.
D. Parent, Merger Sub and Circuit Test desire to make certain
representations, warranties and agreements in connection with the merger.
A-9
<PAGE> 120
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
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.3), Merger Sub shall
be merged with and into Circuit Test in accordance herewith and the separate
corporate existence of Merger Sub shall thereupon cease (the "Merger").
Circuit Test 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 607.1106 of the Florida 1989 Business
Corporation Act (the "1989 Act").
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 Circuit Test 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 and a Plan of Merger meeting the
requirements of Section 607.1101 and 607.1105 of the 1989 Act to be properly
executed and duly filed in accordance with the 1989 Act on the Closing Date.
Forms of the Articles of Merger and Plan of Merger are set forth hereto as
Exhibits 1.3 (A) and (B). The Merger shall become effective at the time when
the Articles of Merger and Plan of Merger are so filed with the Department of
State of the State of Florida or at such later time that the parties hereto
agree and is designated in such Articles of Merger (the "Effective Time").
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)(E) 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 or regulations promulgated thereunder.
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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.
2.2 Bylaws. At the Effective Time, Surviving Corporation shall
take such actions as may be necessary to amend and restate the Bylaws of
Surviving Corporation to be the same as the Bylaws of Merger Sub, until duly
amended in accordance with applicable law.
2.3 Directors. The directors of the Surviving Corporation shall
be Jack Calderon, Stuart W. Fuhlendorf, and Allen S. Braswell, Jr.
2.4 Officers. The officers the of Surviving Corporation shall be
Allen S. Braswell, Jr., President, Stuart W. Fuhlendorf, Treasurer, and Jack
Calderon, Vice President and Secretary, or as the parties hereto may otherwise
agree prior to the Effective Time.
ARTICLE III
EFFECT OF MERGER ON CAPITAL STOCK
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, Circuit Test or
the holders of any of the following securities all of the following shall
occur:
(a) Conversion of Circuit Test Common Stock.
(i) Each issued and outstanding share of Circuit
Test Common Stock (as defined in Section 4.2) shall no longer be outstanding
but instead converted into the right to receive 152.788 shares of Common Stock,
$.01 par value, of Parent (the "Parent Common Stock").
(ii) Schedule 3.1 sets forth all shares of Circuit
Test Common Stock outstanding as of the date of this Agreement, along with a
calculation of the shares of Parent Common Stock issuable as of the Effective
Time.
(b) Fractional Shares. No fraction of a share of Parent
Common Stock will be issued in the Merger. In lieu of such issuance, all
shares of Parent Common Stock issued to the Circuit Test shareholders pursuant
to this Agreement shall be rounded to the closest whole share of Parent Common
Stock.
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(c) Capital Stock of Merger Sub. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder of any
capital stock of Parent, Merger Sub or Circuit Test, each issued and
outstanding share of Common Stock, $.01 par value, of Merger Sub ("Merger Sub
Common Stock") shall be converted into one (1) share of Circuit Test Common
Stock.
3.2 Exchange of Certificates.
(a) Exchange. As soon as practicable after 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 Circuit
Test Common Stock (the "Certificates"), Parent shall cause to be delivered to
the holder of record of such Certificates the Merger Consideration to be
received by such holder as specified in Section 3.1. Until such Certificates
are so surrendered, Parent shall not cause to be delivered to the holder of
record of such Certificates the shares referred to in the previous sentence.
Each outstanding Certificate that prior to the Effective Time represented
shares of Circuit Test 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 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 Circuit Test of the shares
of Circuit Test 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 representing the 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 and effectiveness of the Investor Questionnaire and the
Investor Letter, Indemnification Agreement and Registration Rights Agreement
(each as defined in Section 8.3) executed and delivered by such person.
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(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 Circuit Test Common Stock. All
shares of Parent Common Stock issued upon surrender for exchange of shares of
Circuit Test Common Stock in accordance with the terms hereof shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of Circuit Test Common Stock, and there shall be no further registration
of transfers on the records of Surviving Corporation of shares of Circuit Test
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.
3.4 Lost, Stolen or Destroyed Certificates. If any Certificate is
lost, stolen or destroyed, the Parent's 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.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF CIRCUIT TEST
Except as disclosed in a document of even date herewith and delivered
by Circuit Test to Parent prior to the execution and delivery of this Agreement
and referring to the section number and subsection of the representations and
warranties in this Agreement, subject to its subsequent revision from time to
time prior to the Effective Time (with the prior written consent of Parent),
(the "Circuit Test Disclosure Schedule"), Circuit Test represents and warrants
to Parent and Merger Sub as follows:
4.1 Organization, Standing and Power. Circuit Test is a
corporation duly organized and validly existing under the laws of the State of
Florida, 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 Circuit Test. Circuit Test has
delivered to Parent a true and correct copy of its Articles of Incorporation
and Bylaws, each as amended to date. Circuit Test is not in violation of any
of the provisions of its Articles of Incorporation or Bylaws or equivalent
organizational
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documents. The Circuit Test Disclosure Schedule lists a complete and correct
list of the officers and directors of Circuit Test.
4.2 Capitalization; Shareholders.
(a) The authorized capital stock of Circuit Test consists
of 50,000 shares of Circuit Test Class A Common Stock par value $.01 per share
(the "Class A Common"), of which there are issued and outstanding five (5)
shares of Class A Common and 50,000 shares of Circuit Test Class B Common Stock
par value $.01 per share (the "Class B Common"), of which there are issued and
outstanding 12,162 shares of Class B Common. The Class A Common and the Class
B Common are collectively referred to herein as the "Circuit Test Common
Stock." There are no other outstanding shares of capital stock or other
securities of Circuit Test 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 Circuit Test, or otherwise obligating Circuit Test to
issue, transfer, sell, purchase, redeem or otherwise acquire such stock or
securities. All outstanding shares of Circuit Test Common Stock are duly
authorized, validly issued, fully paid and non-assessable, 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 Circuit Test or any
agreement to which Circuit Test is a party or by which it is bound. There are
not any options, warrants, calls, conversion rights, commitments, agreements,
contracts, understandings, restrictions, arrangements or rights of any
character to which Circuit Test is a party or by which Circuit Test may be
bound obligating Circuit Test to issue, deliver, or sell, or cause to be
issued, delivered or sold, additional shares of the capital stock of Circuit
Test or obligating Circuit Test to enter into such an option, warrant, call,
conversion right, commitment, agreement, contract, understanding, restriction,
arrangement or right. There are no contracts, commitments or agreements
relating to voting, purchase or sale of Circuit Test's capital stock (i)
between or among Circuit Test and any of its shareholders and (ii) to the
Circuit Test's knowledge, between or among any of Circuit Test's shareholders,
except for the shareholders named in the Circuit Test Disclosure Schedule.
Circuit Test does not have any outstanding bonds, debentures, notes or other
indebtedness the holders of which have the right to vote (or convertible or
exercisable into securities having the right to vote) with holders of shares of
Circuit Test Common Stock on any matter.
(b) Schedule 3.1 sets forth a true and complete list of
the names of all the record holders of Circuit Test Common Stock, together with
the number of shares of Circuit Test Common Stock held by each such holder.
Except as set forth in Schedule 3.1, each holder so listed that is an
individual is a competent adult 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 dividends or distributions with
respect to such shares. Each holder so listed on Schedule 3.1 that is an
entity is the record and beneficial owner, or if a trust, its beneficiaries are
the beneficial owners 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
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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. Circuit Test 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) Circuit Test 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 Circuit Test, subject only to
the approval of the Merger by Circuit Test's shareholders as contemplated by
Section 7.2. This Agreement has been duly executed and delivered by Circuit
Test and constitutes the valid and binding obligation of Circuit Test
enforceable against Circuit Test in accordance with its terms. The execution
and delivery of this Agreement by Circuit Test 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 Circuit Test, (ii)
violate or conflict with any permit, order, license, decree, judgment, statute,
law, ordinance, rule or regulation applicable to Circuit Test or the properties
or assets of Circuit Test, 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
Circuit Test 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 Circuit Test 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 Circuit Test 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 Circuit Test in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby, except for the filing of the Plan of Merger and 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 Circuit Test or prevent the
consummation of transactions contemplated hereby.
(b) All holders of Circuit Test 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 Circuit Test Common Stock or other equity securities of Circuit Test is
required for Circuit Test to execute and deliver this Agreement and consummate
the transaction contemplated hereby. By virtue of such approval, no holder of
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Circuit Test Common Stock or other equity securities of Circuit Test has any
right to dissent and obtain payment for such holder's shares under applicable
law.
4.5 Financial Statements. Circuit Test has heretofore delivered
to Parent true and complete copies of (i) the unaudited balance sheet, and the
related statements of operations and stockholders' equity and of cash flows for
each of the years ended December 31, 1995 and 1994, and (ii) unaudited balance
sheet, and the related statements of operations and stockholders' equity and of
cash flows at December 31, 1996 (collectively, the "Annual Financial
Statements"). Circuit Test also has heretofore delivered to Parent true copies
of the unaudited balance sheet of Circuit Test at May 31, 1997 and the related
unaudited statements of income for the five (5) months then ended (the "Interim
Circuit Test Financial Statements"). The Annual Financial Statements and the
Interim Circuit Test 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 Interim Circuit Test
Financial Statements, that no notes are included) and fairly present the
consolidated financial condition and operating results of Circuit Test at the
dates and during the periods indicated therein, subject, in the case of the
Interim Circuit Test Financial Statements, to normal, recurring year-end audit
adjustments. Upon delivery of the audited financial statements to be delivered
to Parent pursuant to Section 7.12, such audited financial statements will be
deemed to be the Annual Financial Statements as to which representations and
warranties are made herein, and such representations and warranties will be
deemed to have been made by Circuit Test with respect to such financial
statements as of the date of such delivery.
4.6 Absence of Certain Changes. Except as specifically permitted
by this Agreement or as set forth in Schedule 4.6 of the Circuit Test
Disclosure Schedule, since December 31, 1996, Circuit Test has conducted its
business in the ordinary course consistent with past practice and there has not
occurred: (i) 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 Circuit Test; (ii) any action by or with respect
to Circuit Test that would have constituted a breach of any of the covenants
contained in Section 6.1(b); or (iii) any of the following matters:
(a) any material damage, destruction or loss (whether or
not covered by insurance) to the properties and assets of Circuit Test;
(b) any Lien on any asset other than those otherwise
permitted by this Agreement;
(c) any labor dispute, litigation or governmental
investigation affecting the business or financial condition of Circuit Test;
4.7 Liabilities. Except as set forth in the Annual Financial
Statements, the Interim Circuit Test Financial Statements, the Circuit Test
Disclosure Schedule and except for liabilities or obligations arising in the
ordinary course and consistent with past practice and those incurred
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in connection herewith, Circuit Test does not have any liability or obligation
of any nature, whether due or to become due, fixed or contingent.
4.8 Accounts Receivable. All of the accounts receivable shown on
the balance sheet included in the Interim Circuit Test Financial Statements as
of May 31, 1997 have been collected or are good and collectible in the
aggregate recorded amounts thereof (less the allowance for doubtful accounts
also appearing in such May 31, 1997 balance sheet and net of returns and
payment discounts allowable by Circuit Test's policies) and can reasonably be
anticipated to be paid in full in the ordinary course of business consistent
with past practice without outside collection efforts, subject to no
counterclaims or setoffs.
4.9 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 Circuit Test,
threatened against Circuit Test 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 Circuit Test. There is no judgment, decree or order against Circuit
Test, or, to the knowledge of Circuit Test, 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 Circuit Test.
4.10 Restrictions on Business Activities. There is no material
agreement, judgment, injunction, order or decree binding upon Circuit Test
which has or reasonably could be expected to have the effect of prohibiting or
materially impairing any current or proposed business practice of Circuit Test,
any acquisition of property by Circuit Test or the conduct of business by
Circuit Test as currently conducted or as proposed to be conducted by Circuit
Test.
4.11 Governmental Authorization. Circuit Test has obtained each
federal, state, county, local or foreign governmental consent, license, permit,
grant, or other authorization that is necessary for Circuit Test 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
"Circuit Test Authorizations"), Circuit Test has performed and fulfilled its
obligations under the Circuit Test Authorizations, and all the Circuit Test
Authorizations are in full force and effect, except where the failure to obtain
or have any of such Circuit Test Authorizations could not reasonably be
expected to have a Material Adverse Effect on Circuit Test.
4.12 Contracts and Commitments. Circuit Test 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
Circuit Test 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
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ordinary course of business consistent with past practice); (b)(i) employment
agreement or collective bargaining agreement or (ii) agreements that limit the
right of Circuit Test, 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 the Circuit Test Disclosure
Schedule have been delivered to Parent. Circuit Test 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, Circuit Test has not received any
notice of termination, cancellation or acceleration or any notice of breach,
violation or default thereof.
4.13 Title to Property. Circuit Test 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 Circuit Test that are
used in the operations of its business are in good operating condition and
repair. All plants, property and equipment owned by Circuit Test conform (to
Circuit Test's knowledge) with all applicable ordinances, regulations and
zoning and other laws and do not encroach on the property of others, the
failure to conform with which would have a Material Adverse Effect on Circuit
Test. There is no pending or, to Circuit Test's knowledge, threatened change
in any such ordinance, regulation or zoning or other law, and there is no
pending or, to Circuit Test's knowledge, threatened condemnation of any such
building, machinery or equipment. The properties and assets of Circuit Test
include all rights, properties, interests in properties and assets necessary to
permit Surviving Corporation to conduct its business as currently conducted.
The Circuit Test Disclosure Schedule identifies each parcel of real property
owned or leased by Circuit Test.
4.14 Intellectual Property.
(a) Circuit Test 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 in the business
of Circuit Test as currently 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 Circuit Test.
(b) The Circuit Test 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 Circuit Test 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
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application for such issuance and registration has been filed, (ii) all
material licenses, sublicenses and other agreements as to which Circuit Test 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 Circuit Test is a party and pursuant to which Circuit Test 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 Circuit Test.
(c) To the knowledge of Circuit Test, there is no
unauthorized use, disclosure, infringement or misappropriation of any
Intellectual Property rights of Circuit Test, any trade secret material to
Circuit Test, or any Third Party Intellectual Property Right, by any third
party, including any employee or former employee of Circuit Test. Circuit Test
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, or contained in license agreements relating to Intellectual Property
licensed to Circuit Test in the ordinary course of business.
(d) Circuit Test is not, and will not be as a result of
the execution and delivery of this Agreement or the performance of Circuit
Test'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 Circuit Test.
(e) All patents, registered trademarks, service marks and
copyrights held by Circuit Test are valid and subsisting. Circuit Test (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. To the knowledge of Circuit Test, the manufacture,
marketing, licensing or sale of the products and services of Circuit Test does
not infringe any patent, trademark, service mark, copyright, trade secret or
other proprietary right of any third party.
(f) Circuit Test 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
Circuit Test does not already own by operation of law.
(g) Circuit Test 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 Circuit Test by or to a third party has been
pursuant to the
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terms of a written agreement with such third party. All use, disclosure or
appropriation of Confidential Information not owned by Circuit Test has been
pursuant to the terms of a written agreement with the owner of such
Confidential Information, or is otherwise lawful.
4.15 Environmental Matters.
(a) Circuit Test has complied with, and is in compliance
with, all Environmental Laws (as defined in this Section 4.15(a)) applicable to
its current and prior business, properties and assets. Circuit Test has, and
Circuit Test 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 Circuit Test and all such permits, approvals, registrations,
licenses and other authorization are listed on the Circuit Test Disclosure
Schedule. There is no pending or, to Circuit Test'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 Circuit
Test is a party or, to Circuit Test's knowledge, threatened to be made a party.
For purposes of this Agreement, "Environmental Law" means any federal, state or
local law, statute, ordinance, rule, regulation, order or judgment or the
common law relating to protection of public health, safety or the environment
or occupational health and safety, or that regulates, or creates liability for,
releases or threatened releases of any Hazardous Substance. As used in this
Section 4.15, the terms "release" and "environment" have the meanings set forth
in the federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA"), and "Hazardous Substance" means any substance regulated
by, or the presence of which creates liability under, any Environmental Law
(including without limitation CERCLA) and includes without limitation
industrial, toxic or hazardous substances, pollutants and contaminants, oil or
petroleum products, solid or hazardous waste, chemicals and asbestos.
(b) There have been no releases or threatened releases of
any Hazardous Substance in violation of Environmental Law at any parcel of real
property or any facility currently or formerly owned, leased, operated or
controlled by Circuit Test. With respect to any such releases of or threatened
releases of Hazardous Substance, Circuit Test has given all required notices to
government authorities, copies of which have been provided to Parent. Circuit
Test is not aware of any releases of Hazardous Substance at parcels of real
property or facilities other than those presently or formerly owned, leased,
operated or controlled by Circuit Test that could reasonably be expected to
have an impact on the real property or facilities owned, leased, operated or
controlled by Circuit Test.
(c) The Circuit Test Disclosure Schedule lists all
environmental reports, investigations, audits or similar environmental
documents in the possession of Circuit Test with respect to the operations of,
or real property owned, leased, operated or controlled by Circuit Test (whether
conducted by or on behalf of Circuit Test or a third party and whether done at
the initiative of Circuit Test or directed by a Governmental Entity or other
third party). True and complete copies of each such document have been
provided to Parent.
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(d) Circuit Test is not subject to, and is not reasonably
expected to be subject to any material environmental liability, including
without limitation liability arising out of the utilization by Circuit Test of
any transporter or facility used for treatment, recycling, storage or
disposal.
4.16 Taxes. Circuit Test, and any consolidated, combined, unitary
or aggregate group for Tax (as defined in this Section 4.16) purposes of which
Circuit Test is or has been a member have timely filed all Tax Returns (as
defined in this Section 4.16) required to be filed by it taking into account
extensions of due dates, have paid all Taxes shown thereon to be due and have
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. Circuit Test 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. Circuit Test 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 the Circuit Test Disclosure
Schedule: (a) no material claim for Taxes has become a Lien against the
property of Circuit Test or is being asserted against Circuit Test other than
Liens for Taxes not yet due and payable, (b) no audit of any Tax Return of
Circuit Test is being conducted by a Tax authority, (c) no Tax authority is now
asserting, or to the knowledge of Circuit Test, threatening to assert against
Circuit Test 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 Circuit Test, (d) no extension of the statute of limitations
on the assessment of any Taxes has been granted by Circuit Test and is currently
in effect, (e) Circuit Test 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 Circuit Test from any period prior to the Effective Date
to any period after the Effective Date, (g) Circuit Test has never been included
in an affiliated group of corporations, within the meaning of Section 1504 of
the Code, (h) Circuit Test 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 Circuit Test, (j) Circuit Test has not disposed of any
property that has been accounted for under the installment method, (k) Circuit
Test is not a party to any interest rate swap, currency swap or similar
transaction, (l) Circuit Test is not a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code, (m) Circuit
Test 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)
Circuit Test 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, (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 and (p) Circuit Test is
not required to treat any asset as owned by another person for federal income
tax purposes or as tax exempt bond financed property or tax exempt use property
within
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the meaning of section 168 of the Code. Circuit Test will not be required to
include any material adjustment in Taxable income for any Tax period (or
portion thereof) ending after 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. The Circuit Test
Disclosure Schedule contains accurate and complete information with respect to:
(w) all material tax elections in effect with respect to Circuit Test, (x) the
current tax basis of the assets of Circuit Test, (y) the current and
accumulated earnings and profits of Circuit Test, and (z) the tax credit carry
overs of Circuit Test. 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. Circuit Test 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.
4.17 S Corporation and Other Matters. Circuit Test is, and at all
times since 1984 has been, an S Corporation within the meaning of Section 1361
of the code for federal income tax purposes. Each Circuit Test shareholder is
an individual U.S. citizen or resident or an estate or trust described in
Section 1361 (c)(2) of the Code. The amount of Circuit Test's "unrealized
built in gain" (as such term is defined in Section 1374(d) of the Code) prior
to the Closing is, and as of the Closing will be, zero. The Circuit Test
Disclosure Schedule contains a true list of those states where Circuit Test has
filed as an S Corporation for applicable state income tax purposes.
4.18 Employee Benefit Plans.
(a) The Circuit Test Disclosure Schedule lists, with
respect to Circuit Test, and any trade or business (whether or not
incorporated) which is treated as a single employer with Circuit Test (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
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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 "Circuit Test Employee Plans").
(b) Circuit Test has furnished to Parent a copy of each
of the Circuit Test 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 Circuit Test 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 Circuit Test Employee Plan intended to be qualified
under Sections 401(a) or 501(c)(9) of the Code is so qualified. Circuit Test
has furnished Parent with the most recent Internal Revenue Service
determination letter issued with respect to each such Circuit Test 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 Circuit Test Employee Plan subject to Code Section 401(a)), and all
communications with respect to any plan described in Section 4.18(a) with the
Internal Revenue Service, the Department of Labor or the Pension Benefit
Guaranty Corporation.
(c) (i) None of the Circuit Test Employee Plans promises
or provides retiree medical or other retiree welfare benefits to any person;
(ii) there have been no violations of applicable provisions of the Code or
ERISA with respect to any Circuit Test Employee Plan that could reasonably be
expected to have, in the aggregate, a Material Adverse Effect; (iii) each
Circuit Test Employee Plan is 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 Circuit Test, and Circuit
Test and each ERISA Affiliate have no knowledge of any default or violation by
any other party to any of the Circuit Test Employee Plans, which default or
violation could reasonably be expected to have a Material Adverse Effect on
Circuit Test; (iv) all material contributions required to be made by Circuit
Test or any ERISA Affiliate to any Circuit Test Employee Plan have been made on
or before its due dates and a reasonable amount has been accrued for
contributions to each Circuit Test Employee Plan for the current plan years;
and (v) neither Circuit Test no any ERISA Affiliate has ever maintained or
otherwise incurred any obligation under any plan subject to Title IV of ERISA.
No suit, administrative proceeding, action or other litigation has been
brought, or to the knowledge of Circuit Test, is threatened, against or with
respect to any such Circuit Test Employee Plan, including any audit or inquiry
by the Internal Revenue Service or United States Department of Labor.
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(d) 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 Circuit
Test, 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.
(e) There has been no amendment to, written
interpretation or announcement (whether or not written) by Circuit Test, or any
ERISA Affiliate relating to, or change in participation or coverage under, any
Circuit Test 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.
4.19 Employee Matters. The Circuit Test Disclosure Schedule lists
all employees of Circuit Test and the remuneration and benefits to which such
employees are entitled. The Circuit Test Disclosure Schedule also lists all
employment contracts and collective bargaining agreements, and all pension,
bonus, profit sharing, or other agreements or arrangements not otherwise
described in Section 4.18 providing for employee remuneration or benefits to
which Circuit Test is a party or by which it is bound; all of these contracts
and arrangements are in full force and effect, and neither Circuit Test nor any
other party is in default under them. There have been no claims of defaults
and, to Circuit Test'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 Circuit Test's knowledge, threatened
labor dispute, strike, or work stoppage that would have a Material Adverse
Effect on Circuit Test. Circuit Test is in compliance in all material 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 is not engaged
in any unfair labor practice. There are no pending claims against Circuit Test
under any workers compensation plan or policy or for long term disability.
Circuit Test does not have any obligations under The Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") with respect to any former
employees or qualifying beneficiaries thereunder.
4.20 Interested Party Transactions. Circuit Test is not indebted
to any shareholder, director, officer, employee or agent of Circuit Test
(except for amounts due as normal salaries and bonuses and in reimbursement of
ordinary expenses), and no such person is indebted to Circuit Test, 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.
4.21 Insurance. Circuit Test 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 Circuit Test. The Circuit Test Disclosure
Schedule sets forth a true and complete listing of all such policies, including
in each case applicable coverage limits, deductibles and policy
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expiration dates. There is no material claim pending under any of such
policies or bonds as to which Circuit Test has received a denial, or, to
Circuit Test's knowledge, as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums dueand
payable under all such policies and bonds have been paid and Circuit Test is
otherwise in compliance in all material respects with the terms of such
policies and bonds. Circuit Test 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.
4.22 Compliance With Laws. Circuit Test 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 Circuit Test.
4.23 Major Customers. The Circuit Test Disclosure Schedule
contains a list of the customers of Circuit Test for each of the two most
recent fiscal years, that 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. Circuit Test has no
knowledge nor has it received notice from any of the customers listed on the
Circuit Test Disclosure Schedule, that any of the customers listed in the
Circuit Test Disclosure Schedule will not continue to be customers of Circuit
Test after the Closing at substantially the same level of purchases.
4.24 Suppliers. As of the date hereof, no supplier of Circuit Test
has indicated to Circuit Test that it will stop, or decrease the rate of,
supplying materials, products or service to Circuit Test. Circuit Test has not
knowingly breached, so as to provide a benefit to Circuit Test that was not
intended by the parties, any agreement with, or engaged in any fraudulent
conduct with respect to, any customer or supplier of Circuit Test.
4.25 Inventory. All inventories of raw materials, work-in process
and finished goods (including all such in transit) of Circuit Test, together
with related packaging materials (collectively, "Inventory"), reflected in the
Interim Circuit Test Financial Statements consist of a quality and quantity
usable and saleable in the ordinary course of 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 the
Circuit Test Disclosure Schedule, all Inventory is located on premises owned or
leased by Circuit Test. 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 Circuit Test with no
recent history of credit problems with respect to Circuit Test; neither Circuit
Test nor any such customer is in material breach of the terms of any obligation
to the other, and, based on Circuit
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Test's knowledge or what Circuit Test 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.
4.26 Product Warranty and Product Liability. The Circuit Test
Disclosure Schedule contains a true and complete copy of Circuit Test's
standard warranty or warranties for its manufacturing services. There has been
no variation from such warranties, except as set forth in the Circuit Test
Disclosure Schedule. Except as stated therein, there are no warranties,
commitments or obligations with respect to Circuit Test's performance of
services. The Circuit Test 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
Circuit Test's knowledge, threatened, or which have been asserted or commenced
against Circuit Test 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 Circuit
Test's manufacturing services that would adversely affect performance of
products Circuit Test manufactures or create an unusual risk of injury to
persons or property. Circuit Test'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.
4.27 Minute Books. The minute books of Circuit Test 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
Circuit Test, and reflect all transactions referred to in such minutes
accurately in all material respects.
4.28 Brokers' and Finders' Fees. Except for commissions or fees
payable to Broadview Associates, LLC, Circuit Test 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.
4.29 Proxy Statement. The information supplied by Circuit Test 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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4.30 Regulation D Offering. To Circuit Test's knowledge, the
information provided to Parent by the holders of shares of Circuit Test 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.
4.31 Disclosure. None of the representations or warranties made by
Circuit Test herein or in the Circuit Test Disclosure Schedule, or in any
certificate furnished by Circuit Test 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. Circuit Test 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 Circuit Test.
4.32 Hart-Scott-Rodino. None of Circuit Test, its shareholders or
any of their respective affiliates is an "ultimate parent entity" within the
meaning of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the
rules and regulations promulgated thereunder (the "HSR Act"), that has
$100,000,000 of total assets or sales (as determined under the HSR Act), as of
the date of any such ultimate parent entity's last regularly prepared balance
sheet or as of the date hereof.
4.33 Reliance. The foregoing representations and warranties are
being made by Circuit Test with the knowledge and expectation that Parent and
Merger Sub are placing reliance thereon.
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 Circuit Test prior to the execution and delivery of this Agreement
and referring to the sections and subsections of the representations and
warranties in this Agreement (the "Parent Disclosure Schedule"), subject to its
subsequent revision from time to time to the Effective Time (with the prior
written consent of Circuit Test) Parent and Merger Sub represent and warrant to
Circuit Test 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 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
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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 March 31, 1997, 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 5,928,060 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
March 31, 1997 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 March 31, 1997, Parent has reserved (a)
1,155,000 shares of Parent Common Stock for issuance to employees, directors and
independent contractors pursuant to the Parent Stock Option Plans, (b) 243,800
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
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, the Articles of Incorporation or Bylaws of Merger Sub, or equivalent
charter documents of any of Parent's 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
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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 and Plan 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 or 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
Circuit Test with true and complete copies of its (a) Annual Report on Form
10-K for the fiscal year ended December 31, 1996, as filed with the SEC, (b)
Quarterly Reports on Form 10-Q for the quarter ended March 31, 1997, as filed
with the SEC, (c) proxy statements related to all meetings of its shareholders
(whether annual or special) since December 31, 1995, and (d) all other reports
and registration statements filed by Parent with the SEC since December 31,
1995, 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. The annual and interim financial statements
included in the Parent SEC Documents 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 fairly present the consolidated financial condition and
operating results of Parent and its consolidated subsidiaries at the dates and
during the periods indicated therein, subject, in the case of interim financial
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 March 31, 1997
(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 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
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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 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 Parent,
threatened against Parent, any of its subsidiaries, or any of their respective
assets and properties or any of Parent's 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 Parent. There is no judgment,
decree or order against Parent, or, to the knowledge of Parent, 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 Parent.
5.9 Title to Property. Parent and each of its subsidiaries 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
Parent that are used in the operations of its business are in good operating
condition and repair. All plants, property and equipment owned by Parent
conform (to Parent's knowledge) with all applicable ordinances, regulations and
zoning and other laws and do not encroach on the property of others, the
failure to conform with which would have a Material Adverse Effect on Parent.
5.10 Intellectual Property.
(a) Parent and its subsidiaries own, or are licensed or
otherwise possess legally enforceable rights to use, all Intellectual Property
used in the business of Parent and its subsidiaries as currently 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 Parent.
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(b) To the knowledge of Parent, there is no unauthorized
use, disclosure, infringement or misappropriation of any Intellectual Property
rights of Parent or its subsidiaries, any trade secret material to Parent, or
any Third Party Intellectual Property Right, by any third party, including any
employee or former employee of Parent or its subsidiaries. Neither Parent nor
any subsidiary of Parent has 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, or contained in license agreements relating to
Intellectual Property licensed to Parent or its subsidiaries in the ordinary
course of business.
(c) All patents, registered trademarks, service marks and
copyrights held by Parent and its subsidiaries are valid and subsisting.
Neither Parent nor any subsidiary of Parent (i) has 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 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. To the
knowledge of Parent, the manufacture, marketing, licensing or sale of the
products and services of Parent does not infringe any patent, trademark,
service mark, copyright, trade secret or other proprietary right of any third
party.
(d) Parent has taken all reasonable and appropriate steps
to protect and preserve the confidentiality of all Confidential Information.
All use, disclosure or appropriation of Confidential Information owned by
Parent or any of its subsidiaries 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 Parent or its
subsidiaries has been pursuant to the terms of a written agreement with the
owner of such Confidential Information, or is otherwise lawful.
5.11 Taxes. Except matters as would not have a Material Adverse
Effect on Parent: (i) Parent and its subsidiaries have (a) filed (or there
have been filed on their behalf) with appropriate governmental authorities all
Tax Returns required to be filed by them and such Tax Returns were true,
correct and complete, and (b) duly paid in full or made provision in accordance
with GAAP for the payment of all Taxes for all periods ending though the date
of this Agreement; and (ii) Parent and its subsidiaries have complied in all
material respects with all applicable laws, rules and regulations relating to
the payment and withholding of Taxes and had, within the time and manner
prescribed by law, withheld from employee wages and paid over to the proper
governmental authorities all amounts required to be so withheld and paid over
under applicable laws.
5.12 Employee Benefit Plans; ERISA. Except matters as would not
have a Material Adverse Effect on Parent: the material employee benefit plans,
arrangements, practices, contracts and agreements (including, without
limitation, employment agreement, change of control agreement and severance
agreements, incentive compensation, bonus, stock option, stock appreciation
rights and stock purchase plans, and including, but not limited to, plans
described in
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section 3(3) of ERISA, maintained by Parent, any of its subsidiaries or any
trade or business, whether or not incorporated, that together with Parent would
be deemed a "controlled group" within the meaning section 4001(a)(14) or ERISA,
or with respect to which Parent or any of its subsidiaries has or may have a
liability were in substantial compliance with applicable laws, including ERISA
and the Code.
5.13 Compliance With Laws. Parent and its subsidiaries have
complied with, are 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 their respective businesses, or the
ownership or operation of their respective businesses, except for such
violations or failures to comply as could not be reasonably expected to have a
Material Adverse Effect on Parent.
5.14 Major Customers. Parent has no knowledge or information of
any facts indicating, nor any other reason to believe, that any of the
principal customers of Parent and its subsidiaries will not continue to be
customers of Parent or such subsidiaries after the Closing at substantially the
same level of purchases.
5.15 Suppliers. As of the date hereof, no supplier of Parent has
indicated to Parent that it will stop, or decrease the rate of, supplying
materials, products or service to Parent. Parent has not knowingly breached,
so as to provide a benefit to Parent that was not intended by the parties, any
agreement with, or engaged in any fraudulent conduct with respect to, any
customer or supplier of Parent.
5.16 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.
5.17 Disclosure. None of the representations or warranties made by
Parent herein or in the Parent Disclosure Schedule, or in any certificate
furnished by Parent 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. Parent has delivered or made available true and complete
copies of each document that has been requested by Circuit Test or its counsel
in connection with their legal and accounting review of Parent.
5.18 Hart-Scott-Rodino. Neither Parent nor any of its subsidiaries
is an "ultimate parent entity" within the meaning of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, and the rules and regulations promulgated
thereunder (the "HSR Act"), that has $100,000,000 of total assets or sales (as
determined under the HSR Act), as of the date of any such ultimate parent
entity's last regularly prepared balance sheet or as of the date hereof.
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5.19 Reliance. The foregoing representations and warranties are
being made by Parent and Merger Sub with the knowledge and expectation that
Circuit Test is placing reliance thereon.
ARTICLE VI
CONDUCT PRIOR TO EFFECTIVE TIME
6.1 Conduct of Business of Circuit Test. Prior to the Effective
Time, except as expressly contemplated by this Agreement or as agreed in
writing by Parent:
(a) Affirmative Covenants. Circuit Test 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 Circuit Test; or
(vii) pay, consistent with past practice, all
accounts payable that arise in the ordinary course of its business.
(b) Negative Covenants. Circuit Test will not:
(i) cause or permit any amendments to its
Articles of Incorporation or Bylaws or equivalent charter documents;
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(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 as set forth in Section 6.1(b) of the
Circuit Test Disclosure Schedule;
(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 or Taxes, or consent to any extension
or waiver of the limitation period applicable to any claim or assessment in
respect or 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;
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(xii) delay in the payment of any trade or other
payables other than in the ordinary course of business consistent with past
practice;
(xiii) sell, lease or otherwise transfer or dispose
of any property or asset of Circuit Test, other than in the ordinary course of
business consistent with past practice;
(xiv) change its accounting methods, practices or
policies (including any change in depreciation or amortization policies or
rates) by Circuit Test or revalue any of its assets, except as described in the
notes to the Annual Financial Statements;
(xv) declare, set aside, or pay any dividend or
other distribution to Circuit Test's shareholders, or any direct or indirect
redemption, retirement, purchase or other acquisition by Circuit Test of any of
its capital stock or other securities or options, warrants or other rights to
acquire capital stock, except as set forth on Schedule 6.1(b);
(xvi) enter into commitment or transaction
(including any capital expenditure, capital financing or sale of assets) 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;
(xvii) cancel any debt or waive or release of any
right or claim by Circuit Test, other than in the ordinary course of business;
(xviii) make any payment, or discharge or satisfy any
claim, liability or obligation by Circuit Test, other than as reflected or
reserved against in the Annual Financial Statements or the Interim Circuit Test
Financial Statements or in the ordinary course of business consistent with past
practice;
(xix) issue or sell any capital stock or other
securities, exchangeable or convertible securities, options, warrants, puts,
calls or other rights to acquire capital stock or other securities of Circuit
Test;
(xx) incur any indebtedness for borrowed money, or
guarantee or otherwise assume any such indebtedness, except as set forth in
Schedule 6.1(b);
(xxi) make 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;
(xxii) increase in any salary, wage, benefit or
other remuneration payable or to become payable to any current or former
officer, director, employee, independent contractor or agent of Circuit Test or
pay or agree to pay any bonus or severance payment or arrangement made to, for
or with any officer, director, employee or agent of Circuit Test or provide for
any supplemental retirement plan or other program or special remuneration for
any officer, director,
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employee or agent of Circuit Test, except for normal salary or wage increases
relating to periodic performance reviews and annual bonuses consistent with
past practice of Circuit Test;
(xxiii) grant 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 Circuit Test with respect to
the granting of credit; or
(xiv) agree, whether in writing or otherwise, to do
any of the foregoing.
6.2 No Solicitation; Acquisition Proposals. Subject to the
fiduciary duties of Circuit Test's Board of Directors under applicable law, as
advised by counsel, Circuit Test 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,
Circuit Test or any business combination with Circuit Test 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. Circuit Test 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 Circuit Test and shall cease any
negotiations conducted in connection therewith or otherwise conducted with any
such parties.
6.3 Conduct of Business of Parent. Prior to the Effective Time,
except as expressly contemplated by this Agreement or as agreed in writing by
Circuit Test, Parent will, and will cause each of its subsidiaries to:
(a) 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;
(b) maintain insurance coverages and its books,
accounts and records in the usual manner consistent with past practice;
(c) comply in all material respects with all laws
and regulations of any Governmental Entity applicable to it;
(d) maintain and keep its plants, property and
equipment in good repair, working order and condition, ordinary wear and tear
excepted;
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(e) perform in all material respects its
obligations under all contracts and commitments to which it is a party or by
which it is bound;
(f) notify Circuit Test 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 Parent; or
(g) 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 Parent and such
contest does not have a Material Adverse Effect on Parent and adequate reserves
therefor are reflected on the Annual Financial Statements or the Interim
Financial Statements for Parent.
6.4 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, and subject to
the fiduciary duties of Parent's Board of Directors under applicable law, as
advised by counsel, the Board of Directors of Parent shall recommend a vote in
favor of the Merger.
(b) Circuit Test Shareholders Meeting. Circuit Test
shall take all action necessary in accordance with applicable law and its
Articles of Incorporation and Bylaws within ten (10) days after the date hereof
either (i) to obtain the written consent of the shareholders of Circuit Test 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, Circuit Test 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 Circuit Test's
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Board of Directors under applicable law, as advised by counsel, the Board of
Directors of Circuit Test shall recommend a consent or vote in favor of the
Merger.
7.3 Access to Information. Each party shall afford the other and
its accountants, counsel and other representatives (collectively,
"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 such party's properties, books, contracts, commitments and
records, and (b) all other information concerning the business, properties and
personnel of such party as the other party may reasonably request. Each party
agrees to provide to the other and its accountants, counsel and other
representatives copies of internal financial statements promptly upon request.
Subject to compliance with applicable law, from the date hereof until the
Effective Time, each of Parent and Circuit Test 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. Each party hereto and its Representatives
will treat as confidential and hold in confidence all information concerning
the businesses and affairs of the other 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.
7.5 Publicity. Circuit Test 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 Circuit Test 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 Circuit Test 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 employment agreements with each of Messrs. Allen S. Braswell, Jr., Richard
Strott, Andrew Hatch and
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Dennis Ayo (the "Employment Agreements"), which Employment Agreements shall be
substantially in the form attached hereto as Exhibit 7.7.
7.8 Stock Options. At the Effective Time, Parent will issue stock
options to certain employees of Circuit Test. Such stock options will be
issued and exercisable under Parent's Equity Incentive Plan. Schedule 7.8
hereto sets forth the names of the grantees, the number of options to be
granted and the manner in which such options will vest. The exercise price of
the options shall be the last closing sale price of the Parent Common Stock on
the date of grant.
7.9 Director Nominees. At or prior the Effective Time, Parent
shall take such action as may be necessary such that two persons designated by
Circuit Test will be elected to Parent's Board of Directors (the "Designees"),
effective at the Effective Time. Circuit Test has selected as the Designees
Messrs. Allen S. Braswell, Sr. and Allen S. Braswell, Jr. Unless waived by
the Designees, Parent also shall take such action as may be necessary to
nominate the Designees for election to the Board of Directors at Parent's
Annual Meeting of Shareholders held next following the Effective Time.
7.10 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,
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) Circuit Test 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.
7.11 Certain Tax Matters. Parent shall continue at least one
significant historical business line of Circuit Test, or shall use at least a
significant portion of Circuit Test's historical business assets in a business,
in each case within the meaning of Treasury Regulation Section 1.368-1(d).
7.12 Audited Financial Statements. On or before July 16, 1997,
Circuit Test shall deliver or cause to be delivered to Parent the consolidated
audited balance sheet, and the related
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statements of operations, stockholders' and members' equity and of cash flows
of Circuit Test, LLC and Airhub for the year ended December 31, 1996.
7.13 Additional Agreements. On or before July 16, 1997: (a)
Parent shall deliver or cause to be delivered to Circuit Test executed Voting
Letter Agreements (the form of which is attached as Exhibit 7.13 hereto) from
each of the directors of Parent who is also a shareholder of Parent; (b)
Circuit Test shall deliver or cause to be delivered to Parent a Voting
Agreement executed by all of the CT Shareholders (other than the Allen S.
Braswell, Sr. Grantor Retained Income Trust and Allen S. Braswell, Jr. who
shall execute such Voting Agreement as of the date hereof).
7.14 Deferred Compensation. The parties hereto agree that after
the Effective Time Circuit Test shall be authorized to pay up to an aggregate
of $500,000 to its employees as "Deferred Compensation", less the amount of any
Deferred Compensation paid by Airhub and CTLLC pursuant to Section 7.8 of the
Purchase Agreement.
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 Circuit Test 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, Circuit Test 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.
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(d) Simultaneous with the occurrence of the Closing
hereunder, the Closing shall have occurred under the Purchase Agreement.
8.2 Additional Conditions to Obligations of Circuit Test to Effect
the Merger. The obligations of Circuit Test 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 Circuit Test:
(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 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) Circuit Test 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) Circuit Test 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) Parent shall have executed and delivered to the
holders of Circuit Test 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(d) attached hereto.
(e) Parent shall have agreed to grant, as of the
Effective Time, to the members of Circuit Test's management identified on
Schedule 8.2(e), the employee stock options specified in such schedule.
(f) There shall not have occurred any Material Adverse
Effect on Parent.
(g) Parent shall have executed and delivered to the other
parties thereto, all Employment Agreements to be entered into at the Effective
Time, which Employment Agreements shall be substantially in the form attached
hereto as Exhibit 7.7.
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:
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(a) Circuit Test 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 Circuit Test 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 Circuit Test 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
Burch, Porter & Johnson, PLLC, legal counsel to Circuit Test, 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 Circuit Test otherwise.
(e) There shall not have occurred any Material Adverse
Effect on Circuit Test.
(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 Circuit Test.
(g) The Voting Agreement, dated the date hereof, (the
"Voting Agreement"), among the CT Shareholders and Parent shall be in full force
and effect as of the Effective Time and the parties to the Voting Agreement
other than Parent 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. The CT Shareholders 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; and (ii) the Registration Rights Agreement.
(h) The parties to the Voting Agreement, other than
Parent, and Bruce A. Braswell, Amy A. Braswell, and Anita B. Murman shall have
entered into an agreement regarding the indemnification of Parent and Merger
Sub with respect to the representations, warranties and covenants of this
Agreement (the "Indemnification Agreement"), which Indemnification Agreement
shall be substantially in the form of Exhibit 8.3(h) attached hereto;
(i) Each employee who is to be party thereto shall have
executed and delivered to Parent, all Employment Agreements to be entered into
at the Effective Time, which Employment Agreements shall be substantially in
the form attached hereto as Exhibit 7.7.
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(j) Parent shall have received from each of the holders
of Circuit Test Common Stock who are receiving Parent Common Stock in the
Merger a letter substantially in the form of Exhibit 8.3(j) 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)(E) of the Code.
(k) There shall be no material variation between the
audited financial statements for the year ended December 31, 1996 delivered to
Parent pursuant to Section 7.12 and the unaudited financial statements for such
period previously delivered to Parent.
(l) For matters from its inception until the Closing, all
corporate actions of Circuit Test, other than those that require no Board
approval, shall have been approved or otherwise ratified by the Circuit Test
Board of Directors as the valid and duly authorized actions of Circuit Test.
(m) Parent shall have received such clearance certificate
or shall have received or filed such other documents that may be required by
any state taxing authority in order to relieve Parent of any obligation to
withhold any portion of the consideration payable.
(n) Circuit Test shall deliver to Parent at Closing a
"Certificate of Nonforeign Status" under section 1445 of the Code in a form
reasonably satisfactory to Parent.
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
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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 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 Circuit Test and Parent, this Agreement may be
terminated:
(a) by mutual consent of Parent and Circuit Test;
(b) by either Parent or Circuit Test, if, without fault
of the terminating party, the Closing shall not have occurred on or before the
later of (i) 30 days after the date the Proxy Statement is mailed, but in no
event later than November 30, 1997, or (ii) 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;
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(d) by Circuit Test, 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 Circuit Test 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 Circuit Test 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 Circuit Test or Merger Sub shall not (a) alter or change the
amount or kind of consideration to be received on conversion of the Circuit
Test 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 Circuit Test Common
Stock or Parent.
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 Circuit Test in Article IV shall survive the
Merger and continue in full force and effect for two years after the Effective
Time, except for those contained in Section 4.16 and 4.17 shall survive the
Merger and continue in full force and effect after the Effective Time for the
applicable statute
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of limitations period. The Shareholders of Circuit Test have agreed to
indemnify Parent pursuant to the Indemnification Agreement, subject to the
limitations contained therein. The representations and warranties of Parent
and Merger Sub shall survive the Merger and continue in full force and effect
for two years after the Effective Time and Parent shall indemnify the
Shareholders of Circuit Test pursuant to Section 11.2, in each case subject to
the limitations contained therein.
11.2 Indemnification by Parent.
(a) Indemnity Obligation of Parent. Parent hereby agrees
to indemnify and hold harmless each of the CT Shareholders harmless from, and
to reimburse each of the CT Shareholders for, any Shareholder Indemnity Claims
arising under the terms and conditions of this Agreement. For purpose of this
Agreement, the term "Shareholder Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost or expense of any nature
whatsoever ("Losses") incurred by the CT Shareholders resulting from any breach
of representation or warranty of Parent or Merger Sub that is contained in this
Agreement.
(b) Limitation on Indemnification. Notwithstanding the
foregoing, any claim for indemnification or breach of representation and
warranty against Parent hereunder shall be payable by Parent only in the event,
and to the extent, that the accumulated amount of claims in respect of such
indemnifying party's obligations to indemnify hereunder shall exceed the amount
of $100,000 in the aggregate (the "Indemnification Threshold"). In addition,
the aggregate liability of Parent for amounts in excess of the Indemnification
Threshold shall not exceed an aggregate of $2.5 million unless such Losses are
caused by or arise out of any breach of which Parent had actual knowledge at
the time of the related representation was made or deemed made, in which case
an aggregate ceiling of $14.5 million shall apply.
11.3 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:
EFTC Corporation
7241 West 4th Street
Greeley, Colorado 80634
Attention: Stuart W. Fuhlendorf
Facsimile No.: (303) 892-4306
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with a copy to:
Holme Roberts & Owen LLP
1700 Lincoln, Suite 4100
Denver, Colorado 80203
Attention: Francis R. Wheeler
Facsimile No.: (303) 866-0200
(b) if to Circuit Test, to:
Circuit Test, Inc.
4601 Cromwell Avenue
Memphis, Tennessee 38118
Attention: Allen S. Braswell, Jr.
Facsimile No.: (901) 795-5305
with a copy to:
Burch, Porter & Johnson, PLLC
50 North Front Street
Suite 800
Memphis, Tennessee 38103
Attention: Warner B. Rodda
Facsimile No.: (901) 524-5026
11.4 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, index of defined terms 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 of a
particular fact or matter after due and diligent inquiry of officers, directors
and other employees of such party reasonably
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believed to have knowledge of such matters. Whenever the context may require,
any pronoun shall include the corresponding masculine, feminine and neuter
forms.
11.5 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.
11.6 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
Circuit Test 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.
11.7 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
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.
11.8 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.
11.9 Governing Law. The Merger shall be governed by the laws of
the state of Florida. All other aspects of this Agreement shall be governed by
and construed in accordance with the laws of the State of Colorado (without
regard to the principles of conflicts of law thereof).
11.10 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.
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11.11 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.
11.12 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.
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SIGNATURE PAGE--AGREEMENT AND PLAN OF REORGANIZATION
IN WITNESS WHEREOF, Circuit Test, 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.
EFTC CORPORATION,
a Colorado corporation
By: /s/ Stuart Fuhlendorf
-----------------------------------
CTI ACQUISITION CORP.,
a Florida corporation
By: /s/ Stuart Fuhlendorf
-----------------------------------
CIRCUIT TEST, INC.
a Florida corporation
By: /s/ Allen S. Braswell, Jr.
-----------------------------------
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EFTC CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 30, 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 EFTC CORPORATION, a Colorado corporation formerly
named "Electronic Fab Technology Corp." (the "Company") to be held on September
30, 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 August 6, 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.
This proxy revokes all proxies 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.
(Continued on reverse side. Please sign and mail in the enclosed envelope.)
<PAGE> 162
<TABLE>
<CAPTION>
Please mark an "X" in the appropriate box.
YOUR BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR
PROPOSALS 1, 2 AND 3
<S> <C> <C> <C>
1. ISSUANCE OF COMMON STOCK: To approve the issuance of 1,858,975 FOR AGAINST ABSTAIN
shares of the Company's Common Stock, par value $.01 per share (the ( ) ( ) ( )
"Common Stock"), in connection with the merger of Circuit Test, Inc., a
Florida corporation , with and into CTI Acquisition Corp., a Florida
corporation and a wholly-owned subsidiary of the Company, in exchange
for such Common Stock.
2. AMENDMENT TO EQUITY INCENTIVE PLAN: Approval of an amendment to the FOR AGAINST ABSTAIN
Company's Equity Incentive Plan to increase the number of shares of the ( ) ( ) ( )
Company's Common Stock reserved for issuance thereunder from 995,000 to
1,995,000 and to make certain other changes.
3. AMENDMENT TO STOCK OPTION PLAN: Approval of an amendment to the FOR AGAINST ABSTAIN
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 160,000 to 300,000, and to make certain other changes.
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.
TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS RECOMMENDATION,
MERELY SIGN BELOW; NO BOXES NEED TO BE CHECKED.
( )
I PLAN TO ATTEND THE SPECIAL MEETING
</TABLE>
Signature(s) Date
---------------------------------------- ---------------
Date
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NOTE: Please sign as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, trustee or guardian, please give full
title as such.
