UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File Number 0-23332
EFTC CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO
(State or other jurisdiction of incorporation of organization)
84-0854616
(I.R.S. Employer Identification No.)
9351 Grant Street
Denver, Colorado
(Address of principal executive offices)
80229
(Zip code)
Registrant's telephone number, including area
code: 303-451-8200
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock
------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [__]
As of March 30, 2000, the number of outstanding shares of common stock
was 15,543,489. As of such date, the aggregate market value of the shares of
common stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market, was approximately $21,156,806.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders is incorporated by reference in Part III of this Form 10-K.
PART I.
Item 1. Business
General
EFTC Corporation (the "Company") is an independent provider of high mix
electronic manufacturing services to original equipment manufacturers in the
computer peripherals, medical equipment, industrial controls, telecommunications
equipment and electronic instrumentation industries. The Company's manufacturing
services consist of assembling complex printed circuit boards (using both
surface mount and pin-through-hole technologies), cables, electro-mechanical
devices and finished products. High mix manufacturing involves processing
small-lots of complex printed circuit boards at high production speeds.
Recapitalization
On March 30, 2000, the Company entered into an agreement with
Thayer-Blum Funding, LLC (the "Purchaser") for a recapitalization of the
Company. The agreement provides for the purchase of a total of $54 million in
Senior Subordinated Exchangeable Notes ("Exchangeable Notes") and a subsequent
tender offer for up to 8,250,000 shares of the Company's currently outstanding
common stock at a price of $4.00 per share. The Exchangeable Notes initially
provide for a maturity date of June 30, 2006 and a paid-in-kind interest rate of
15%, and are accompanied by warrants (the "Warrants") to purchase 3,093,154
shares of the Company's common stock at an exercise price of $.01 per share. The
Purchaser has designated two persons who have been appointed to the Company's
board of directors.
Upon shareholder approval of this transaction and assuming that at
least 500,000 shares are tendered in the tender offer, the Warrants will never
become exercisable and will be cancelled. Additionally, the Exchangeable Notes
will automatically be replaced with Senior Subordinated Convertible Notes
("Convertible Notes") that provide for interest at 8.875%, payable in additional
Convertible Notes and a maturity date of June 30, 2006. At the election of the
holder, the Convertible Notes may be converted, at any time, into the Company's
common stock at $2.60 per share, subject to adjustment. Conversion of the notes
will occur automatically (i) if the Company's common stock trades above $7.50
per share for 45 consecutive trading days, or (ii) commencing on March 30, 2003,
if the Company's common stock trades above $4.25 for 45 consecutive trading
days. Finally, at the closing of the tender offer, the Purchaser will have the
right to designate a majority of the members of the Company's board of directors
and will have the right to approve any significant financings, acquisitions and
dispositions. The Purchaser has requested that the conversion price of the
Convertible Notes be reduced to $2.58 to reflect the change in the Company's
financial condition as a result of certain excess costs that were incurred by
the Company in connection with the transaction.
If shareholders do not approve the transaction by September 1, 2000 or
if less than 500,000 shares are tendered, the Warrants and Exchangeable Notes
will remain in place and the interest rate on the Exchangeable Notes will
increase to 20%. Interest would be compounded quarterly and payable in
additional Exchangeable Notes or cash, at the option of the holders.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to replace the Company's existing revolving line of credit
with BankOne Colorado, N.A. The new credit facility provides for a $45 million
revolving line of credit with a maturity date of March 30, 2003. Initially, the
interest rate will be the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
inventory. Substantially all of the Company's
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assets are pledged as collateral for outstanding borrowings, and the credit
agreement requires compliance with certain financial and non-financial
covenants.
3
Acquisitions and Dispositions
Acquisitions
Northwest Operations Division. On February 24, 1997, the Company
acquired two affiliated entities, Current Electronics, Inc., an Oregon
corporation, and Current Electronics (Washington), Inc., a Washington
corporation, for total consideration of approximately $10.9 million, consisting
of 1,980,000 shares of Company common stock and approximately $5.5 million in
cash, including approximately $600,000 of transaction costs. During 1998, the
Company completed construction of a new manufacturing facility in Newberg,
Oregon at a total cost of approximately $7.0 million. The Newberg facility along
with one in Moses Lake, Washington comprises the Company's Northwest Operations
Division.
AlliedSignal Asset Purchase. During the period from August 1997 through
February 1998, the Company completed two transactions with AlliedSignal, Inc.
now Honeywell International Inc. ("Honeywell") pursuant to which the Company
acquired inventories and equipment located in Fort Lauderdale, Florida and
Tucson, Arizona for an aggregate purchase price of approximately $19.0 million.
In connection with these activities, the parties entered into a long-term supply
agreement for the production of circuit card assemblies. Both these facilities
were closed in 2000.
EFTC Services Division. The Company acquired the Services Division in
September 1997 for approximately $35.7 million, consisting of 1,858,975 shares
of the Company's common stock and approximately $26.5 million in cash. The
Services Division had facilities in Memphis, Tennessee, Louisville, Kentucky and
Tampa, Florida and specialized in transportation hub-based warranty and repair
services for companies engaged in the computer and communications industries.
This division was sold in September 1999.
EFTC Express Division. In March 1998, the Company acquired RM
Electronics, Inc., doing business as Personal Electronics ("Personal"), in a
business combination accounted for as a pooling of interests. The Company issued
1,800,000 shares of common stock in exchange for all of the outstanding common
stock of Personal. Personal is based in Manchester, New Hampshire and
specializes in the quick turn, front-end prototype development, low volume, and
end-of-life high mix assembly services. Personal comprises the Company's EFTC
Express Division.
Northeast Operations Division. In September 1998, the Company acquired
the circuit card assembly operations of the Agfa Division of Bayer Corporation.
The Company purchased inventory and equipment for approximately $6.0 million and
the parties entered into a long-term supply agreement for the manufacture of
circuit card assemblies. This business is conducted in the Company's leased
facility in Wilmington, Massachusetts that comprises the Northeast Operations
Division.
Midwest Operations Division. In September 1998, the Company purchased
manufacturing equipment for approximately $1.5 million from AlliedSignal. In
connection with this transaction, AlliedSignal agreed to amend the existing
long-term supply agreement it has with the Company to include the production of
circuit card assemblies at the Company's new facility in Ottawa, Kansas. The
Kansas facility comprises the Company's Midwest Operations Division.
Southeast Commercial Operations Division. In March 1999, the Company
entered into a ten year supply agreement with Honeywell that included the
acquisition of certain assets and inventory used in circuit card assembly
manufacturing. For the year ended December 31, 1999, sales under this agreement
amounted to approximately $28 million and the Company expects sales for 2000 to
be in excess of $100 million. The manufacturing activities under this agreement
are conducted in a newly leased facility near
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Phoenix, Arizona and a smaller facility in Tijuana, Mexico. These facilities
comprise the Company's Southwest Commercial Operations Division.
Closure of Certain Facilities
Greeley, Colorado. In December 1998, the Company announced a plan to
close the Rocky Mountain Division located in Greeley, Colorado and to
consolidate the remaining business into other facilities, in an effort to
improve capacity utilization and profitability. In October 1999, the Company
completed the sale of the building in Greeley for net proceeds of approximately
$3.8 million.
Sale of Services Division. On September 1, 1999, the Company sold its
Services Division for approximately $28.1 million. In connection with this sale,
the purchaser and the Company agreed to an Earn-out Contingency (the "EC").
Under the EC, if earnings for the year ending August 31, 2000 related to the
division sold are in excess of $4,455,000 ("Target Earnings"), the Company will
be entitled to an additional payment equal to three times the difference between
the actual earnings and Target Earnings. If actual earnings are less than Target
Earnings, the Company will be required to refund an amount equal to three times
the difference. The maximum amount that either party would be required to pay
under the EC is $2.5 million.
Fort Lauderdale, Florida. In an effort to improve capacity utilization
at other facilities, in September 1999 the Company initiated a plan to close its
facility in Fort Lauderdale and consolidate the business from that plant into
three other EFTC facilities. Ft. Lauderdale was selected due to its higher cost
structure and in consideration of the added benefits of transferring this
business to facilities that are in closer proximity to the affected customers.
The Ft. Lauderdale restructuring activities are expected to be substantially
complete by the end of April 2000.
Tucson, Arizona. In December 1999, the Company commenced negotiations
with Honeywell International, Inc. for the sale of inventory and equipment at
the Company's facility in Tucson and the sublease of the facility to
Honeywell. This sale closed in February 2000 and provided net proceeds to the
Company of $12.7 million.
Manufacturing Services
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's facilities have obtained, or are in the process of obtaining, ISO 9002
certification from the International Organization of Standards.
The Company's manufacturing methodology, known as Asynchronous Process
Manufacturing ("APM") improves throughput of certain assembly processes over
traditional continuous (synchronous) flow processing ("CFM"), which is the
predominant method used in high-volume manufacturing. With APM, the Company is
able to process products rapidly using a combination of new discontinuous flow
methods for differing product quantities, fast surface mount assembly systems,
test equipment and high-volume, high-speed production lines. In the APM model,
materials are moved through the production queue at high-speed and not in a
continuous or linear order as under CFM. Instead, materials are moved through
the assembly procedure in the most efficient manner, using a computer algorithm
developed for the Company's operations, with all sequences controlled by a
computerized information system.
High mix manufacturing involves a discontinuous series of products fed
through assembly in a start-stop manner, heretofore incompatible with high-speed
techniques. APM is an alternative to both CFM and batch processing often used in
smaller scale manufacturing. The combination of small lots,
5
with numerous differences in configuration from each lot to the next, and
high-speed manufacturing has been viewed as difficult, if not impossible, by
many high mix manufacturers. The Company believes that CFM techniques used by
high-volume, high-speed Electronics Manufacturing Services ("EMS") providers
cannot accommodate high mix product assembly without sacrificing speed, while
smaller EMS providers, capable of producing a wide variety of products, often
find it difficult to afford high-quality, high-speed manufacturing assets or to
keep up with OEMs' growing product demand. Under CFM, all assembly occurs on the
same line, thereby slowing down the process with non-value-added operations and,
more importantly, significantly reducing flexibility. 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.
Prototype Manufacturing Services. Personal Electronics is an EFTC
Express location, specializing in quick-turn manufacturing and prototype
services with a high degree of personalized customer service. As customer orders
grow, EFTC Express is intended to provide customers with an easy transition to
the Company's larger regional manufacturing facilities.
Design and Testing Services. The Company also assists in customers'
product design by providing "concurrent engineering" or "design for
manufacturability" services. The Company's applications engineering group
interacts with the customer's engineers early in the design process to reduce
variation and complexity in new designs and to increase the Company's ability to
use automated production technologies. Application engineers are also
responsible for assuring that a new design can be properly tested at a
reasonable cost. Engineering input in component selection is also essential to
assure that a minimum number of components are used, that components can be used
in automated assembly and that components are readily available and cost
efficient. The Company is seeking to add full product design services to its
existing capabilities.
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 variations. These tests are usually conducted on a sample of finished
components although some customers may require testing of all products to be
purchased by that customer. Usually, the Company designs or procures test
fixtures and then develops its own test software. The change from
pin-through-hole technology to surface mount technology is leading to further
changes in test technology. The Company seeks to provide customers with highly
sophisticated testing services that are at the forefront of current test
technology.
Customers and Sales
The Company seeks to serve traditional high mix OEMs and OEMs that
produce high-volume products. The Company's sales force is located regionally,
and the Company's sales approach is designed to align the Company's sales
efforts in close proximity to its customers and the Company's regional
manufacturing facilities. The Company continues to focus on the following
markets: (1) avionics; (2) industrial controls and instrumentation; (3)
computer-related products; (4) communications; and (5) medical devices.
6
The following table represents the Company's net sales for manufacturing
services by industry segment for the years ended December 31, 1999, 1998 and
1997:
1999 1998 1997
---- ---- ----
Avionics 68% 46% 27%
Industrial controls and instrumentation 18% 18% 22%
Computer-related 8% 28% 29%
Communications 5% 5% 8%
Medical devices 1% 3% 13%
Other -- -- 1%
============ =========== ===========
Total 100% 100% 100%
============ =========== ===========
Sales to significant customers as a percentage of total net sales for
the years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997
---- ---- ----
AlliedSignal, Inc. 46% 42% 25%
Honeywell, Inc. 10% 3% --
- ------------------------ =========== ============ ===========
Pro Forma Combined 56% 45% 25%
- ------------------------ =========== ============ ===========
Exabyte -- 4% 12%
=========== ============ ===========
In December 1999, AlliedSignal and Honeywell completed their merger and
the combined company was named Honeywell International, Inc. The pro forma
disclosure above presents the customer concentration as if the merger had
occurred on January 1, 1997. The Company historically has relied on a small
number of customers to generate a significant percentage of its revenue. During
1999, the Company's ten largest customers accounted for 88% of the Company's net
revenue. The loss of Honeywell as a customer would, and the loss of any
significant customer could, have a material adverse effect on the Company's
financial condition and results of operations.
In addition, the Company holds significant accounts receivable from
sales to certain customers. At December 31, 1999, approximately 57% of the
Company's net trade receivables were due from Honeywell and 12% of net trade
receivables were due from Bayer Corporation. The insolvency or other inability
of a significant customer to pay outstanding receivables could have a material
adverse effect on the Company's results of operations and financial condition.
If the Company's efforts to expand its customer base are not
successful, the Company will continue to depend upon a relatively small number
of customers for a significant percentage of its net sales. Despite existing
contractual arrangements, there can be no assurance that current customers,
including Honeywell, or future customers of the Company, will not terminate
their manufacturing arrangements with the Company or significantly change,
reduce or delay the amount of manufacturing services ordered from the Company.
As is typical in the electronic manufacturing services industry, the
Company frequently does not obtain long-term purchase orders or commitments from
its customers, but instead works with them to develop nonbinding forecasts of
the future volume of orders. Based on such nonbinding forecasts, the Company
makes commitments regarding the level of business that it will seek and accept,
the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each individual
customer and generally affecting each customer's industry,
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may cause customers to cancel, reduce or delay orders that were either
previously made or anticipated. Generally, customers may cancel, reduce or delay
purchase orders and commitments without penalty, except, in some cases, for
payment for services rendered, materials purchased and, in limited
circumstances, charges associated with such cancellation, reduction or delay.
Significant or numerous cancellations, reductions or delays in orders by
customers would have a material adverse effect on the Company's business,
financial condition and results of operations.
Backlog
The Company's backlog was approximately $219 million at December 31,
1999, compared to approximately $108 million at December 31, 1998. Backlog
generally consists of purchase orders believed to be firm that are expected to
be filled within the next six months and are based on forecasts given to the
Company by its customers. Since forecasts are frequently revised, orders and
commitments may be rescheduled or canceled and customers' desired lead times
might 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 minimize backlog.
Competition
Competition in the electronic manufacturing services industry is
intense. 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 EMS firms, including SCI Systems,
Inc., Solectron Corporation, Benchmark Electronics, Inc., The DII Group, Inc.,
Plexus Corp., Reptron Electronics, Inc., Group Technologies Corporation, and
others. 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 presence than the Company,
including manufacturing facilities in foreign countries. Many of such
competitors are more established in the industry and have substantially greater
financial, manufacturing or marketing resources than the Company. The Company
believes that the principal competitive factors in its targeted market are
quality, reliability, ability to meet delivery schedules, technological
sophistication, geographic location and price.
Suppliers
The Company uses numerous suppliers of electronic components and other
materials for its operations. The Company works with customers and suppliers to
minimize the effect of any component shortages. Some components used by the
Company have been subject to industry-wide shortages, and suppliers have been
forced to allocate available quantities among their customers. The Company's
inability to obtain any needed components during periods of allocations could
cause delays in shipments to the Company's customers and could adversely affect
results of operations. At times, the Company's cash flow problems have resulted
in late payments to its suppliers which, in turn, has caused such suppliers to
delay or stop shipments of inventory. This has disrupted the Company's
operations, which has resulted in incomplete or late shipments of products to
the Company's customers. The Company attempts to mitigate 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.
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Patents and Trademarks
The Company currently has two registered trademarks, which consist of
"EFTC" and "APM" (including the related design) and two unregistered trademarks
which consist of "APM" and "Asynchronous Process Manufacturing." The Company's
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 utilize only
aqueous (water-based) methods in its cleaning processes.
Some risk of costs and liabilities related to these matters is inherent
in the Company's business, as with many similar businesses. Management believes
that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations, the
violation of which could have a material adverse effect on the Company. In the
event of violation, these regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. In addition, new, modified or more stringent
requirements or enforcement policies could be adopted that may adversely affect
the Company.
The Company periodically generates and temporarily handles limited
amounts of materials that are considered hazardous waste under applicable law.
The Company contracts for the off-site disposal of these materials.
Employees
As of December 31, 1999, the Company had 1,591 full-time equivalent
employees, of whom 1,186 were engaged in manufacturing operations services, 286
in material handling and procurement, 6 in marketing and sales and 113 in
finance and administration. The Company also engaged the full-time services of
481 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.
Special Considerations
Dependence on Honeywell. During 1999, Honeywell accounted for more than
56% of the Company's net revenues and at December 31, 1999, approximately 57% of
the Company's net trade receivables were due from Honeywell. For the year ending
December 31, 2000, pursuant to a long-term agreement with Honeywell, the Company
expects that Honeywell will account for an increased percentage of the Company's
business. The loss of Honeywell as a customer, a decline in the volume of
business with Honeywell, or Honeywell's insolvency or inability or unwillingness
to pay outstanding receivables in a timely manner, would have a material adverse
effect on the Company's results of operations and financial condition.
Integration of Systems; Management of New Facilities. The Company
acquired or opened ten new facilities during 1997 and 1998 and two in 1999.
During 1999 the Company sold or closed four facilities and two more facilities
are expected to be closed by the end of the second quarter of 2000. The
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Company's expansion into new facilities across the country placed a significant
strain on the Company's management information, operating and financial systems,
as well as the Company's management resources. In order to maintain and improve
results of operations, the Company's management will be required to integrate
the new facilities into the Company's existing systems and management structure.
The Company needs to continue to implement and improve its management
information, operating and financial systems and internal controls, to attract
and retain qualified management personnel, to develop the management skills of
its managers and supervisors and to train, motivate and manage its employees.
The Company's failure to effectively integrate and manage its new facilities
could adversely affect the Company's results of operations.
Implementation of New Information System. The Company has implemented a
new management information system (the "MIS System") in all facilities except
EFTCExpress, based on commercially available Oracle software products, that is
designed to track and control all aspects of its manufacturing services, as well
as the Company's financial accounting applications. There can be no assurance
that the MIS System will continue to operate as designed or provide the
Company's operations any additional efficiency. If the MIS System fails to
operate as designed or the Company's business processes are not properly
integrated with the MIS System, the Company's operations could be disrupted in a
variety of ways including lost orders, orders that can not be filled in a timely
manner, inventory shortfalls and excess inventories, any or all of which could
result in lost customers and revenues. In addition, the Company could be
required to write-off costs associated with the MIS System if the system
acquisition and implementation costs are considered to be impaired. Such
disruptions or events could adversely affect results of operations and the
implementation of the Company's high mix manufacturing strategy.
Acquisition Strategy. The Company has actively pursued in the past, and
expects to actively pursue in the future, acquisitions in furtherance of its
strategy of expanding its operations, geographic markets, service offerings,
customer base and revenue base. Acquisitions involve numerous risks, including
difficulties in the integration of the operations, technologies, products and
services of the acquired companies and assets, the diversion of management's
attention and the Company's financial resources from other business activities,
the potential to enter markets in which the Company has no or limited prior
experience and where competitors in such markets have stronger market positions
and the potential loss of key employees and customers of the acquired companies.
In addition, during the integration of an acquired company, the financial
performance of the Company will be subject to the risks commonly associated with
an acquisition, including the financial impact of expenses necessary to realize
benefits from the acquisition and the potential for disruption of operations.
The Company may incur significant amounts of indebtedness in connection with
future acquisitions. Future acquisitions may also involve potentially dilutive
issuances of equity securities. There can be no assurance that the Company will
be able to identify suitable acquisition opportunities, to price such
acquisition opportunities properly, to consummate acquisitions successfully or
integrate acquired personnel and operations into the Company successfully.
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Item 2. Description of Property
The following table describes the Company's material properties during
1999.
Year Approximate
Location Acquired/Opened Size Owned/leased(1) Services
- ---------------------------------------------------------------------------------------------------------------------
Denver, Colorado 1997 18,000 square feet Leased Executive Offices
Newberg, Oregon 1998 65,000 square feet Leased (2) Manufacturing
Moses Lake, Washington 1997 20,000 square feet Leased (3) Manufacturing
Ft. Lauderdale, Florida* 1997 97,000 square feet Subleased (4) Manufacturing
Tucson, Arizona* 1998 65,000 square feet Leased (5) Manufacturing
Phoenix, Arizona 1999 145,000 square feet Leased (6) Manufacturing
Tijuana, Mexico 1999 30,000 square feet Leased (7) Manufacturing
Manchester, New Hampshire 1998 19,000 square feet Leased (8) Manufacturing
Wilmington, Massachusetts 1998 54,000 square feet Subleased (9) Manufacturing
Ottawa, Kansas 1998 40,000 square feet Owned (10) Manufacturing
The Company believes its facilities are in good condition.
- ---------------
* This facility was closed by the Company in 2000.
(1) Pursuant to the terms of the Bank of America, N.A. Loan (as defined
below), substantially all of the Company's owned and leased property is
subject to liens and other security interests in favor of Bank of America
("Bank of America"), and any other lenders from time to time under the
Bank of America Loan.
(2) The Company purchased approximately 12 acres of land from an unaffiliated
third party and built a 65,000 square foot facility in Newberg, Oregon.
This facility was sold to a related party in December 1998 and was leased
back by the Company. The lease term is for 5 years.
(3) This facility is leased from an unaffiliated third party on a year-to
year basis.
(4) The Company subleased a 97,000 square foot portion of a building from
Honeywell. In September 1999 the Company initiated a plan to consolidate
and close its operations in Fort Lauderdale, Florida. This sublease
agreement was terminated in April 2000.
(5) The Company purchased approximately 20 acres of land and a 65,000 square
foot building in Tucson, Arizona, for $1.8 million. The Company remodeled
and moved into the facility in February 1998. This facility was sold to a
related party in December 1998 and was leased back by the Company. The
lease term is for 5 years. The Company sold the assets and inventory
located at this facility to Honeywell in February 2000. Honeywell has
agreed to sublease the facility from the Company for 18 months at the
same cost as the Company pays to the landlord, with an option to extend
the term until December 2003 when the Company's primary lease term
expires.
(6) The Company leases two facilities that comprise 145,000 square feet from
an unrelated third party. The lease expires in July 2007 with two
additional option terms of 5 years each.
(7) The Company utilizes this facility through a contractual arrangement with
an unrelated third party. This arrangement continues through July 2000,
and may be extended at the Company's option for subsequent one-year
periods.
(8) The Company leases a 19,000 square foot facility from an unrelated third
party. The lease expires in August 2001.
(9) The Company subleases a 54,000 square foot facility from Bayer-Agfa on a
year-to-year basis until March 31, 2003. The Company has provided notice
to its landlord that it will vacate this facility in September 2000. The
Company is in the process of locating a new facility in Massachusetts.
(10) The Company purchased a 40,000 square foot facility from Honeywell,
remodeled this facility and commenced manufacturing operations in the
facility in December 1998.
Item 3. Legal Proceedings
Two legal proceedings, one in Colorado State court, the other in U.S.
District Court, were filed against the Company and certain of its officers,
directors and shareholders during September and October 1998. The proceedings
arise in connection with the decrease in the trading price of the Company's
common stock that occurred in August 1998 and make substantially the same
allegations. While both proceedings are in the pre-trial stage and the Company
therefore cannot make any assessment of their ultimate impact, the Company
believes the allegations made in the proceedings to be totally without merit.
Joshua Grayck, Philip and Angelique Signorelli, William McBride, Mark
Norris, Michael Keister, and Aiming Kiao v. EFTC Corporation, Jack Calderon,
Gerald J. Reid, Stuart W. Fuhlendorf, Brent L. Hofmeister, August P. Bruehlman,
L. Reid, and Lloyd McConnell (United States District Court for the District of
Colorado, Case No. 98-S-2178). Plaintiffs are shareholders of EFTC who
originally
11
filed this lawsuit on October 8, 1998. Plaintiffs filed an amended complaint on
January 22, 1999. Plaintiffs allege that during the class period April 6, 1998
to August 20, 1998, defendants made false and misleading statements regarding
EFTC's business performance, implementation of a new computer system,
manufacturing quality systems, operating margins, relationships with its largest
customers, and future prospects for earnings growth. Plaintiffs allege that
defendants disseminated or approved a prospectus in connection with the
Company's June 1998 secondary offering, as well as certain other press releases
and financial reports which contained misrepresentations and material omissions
and also concealed materially adverse financial information. The amended
complaint alleges violations of Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, as well as Section 11 of the
Securities Act of 1933. In addition, plaintiffs allege that by reason of their
positions as officers and/or directors of EFTC, Messrs. Calderon, Reid,
Fuhlendorf and Hofmeister had the power and authority to cause EFTC to engage in
the wrongful conduct alleged in the complaint. Plaintiffs allege, therefore,
that EFTC and these individual defendants violated Section 20(a) of the
Securities and Exchange Act of 1934 and Section 15 of the Securities Act of
1933. Plaintiffs seek the following relief: (a) certification of the complaint
as a class action on behalf of all persons who purchased or otherwise acquired
the common stock of EFTC between April 6, 1998 and August 20, 1998; (b) an award
of compensatory and/or rescisionary damages, interest, costs and attorneys' fees
to all members of the class; and (c) equitable relief available under federal
and state law.
Defendants deny the allegations of the amended complaint. Defendants
filed a motion to dismiss the case on March 8, 1999. That motion is pending.
Craig Anderson, Todd Sichelstiel, Phillip and Angelique Signorrelli,
Christy J. Baldwin and Patricia Conlon v. EFTC Corporation, Jack Calderon,
Gerald J. Reid, Stuart W. Fuhlendorf, Brent L. Hofmeister, August P. Bruehlman,
Lucille A. Reid, Lloyd A. McConnell and Salomon Smith Barney ( District Court
for the County of Weld, Colorado, Case No. 99-CV-962). Plaintiffs are
shareholders of EFTC who filed this lawsuit originally in the District Court for
the County of Weld, Colorado. Plaintiffs allege that during the class period
April 6, 1998 to August 20, 1998, defendants made false and misleading
statements regarding EFTC's business performance, implementation of a new
computer system, manufacturing quality systems, operating margins, relationships
with its largest customers, and future prospects for earnings growth. Plaintiffs
allege that defendants disseminated or approved a prospectus in connection with
the Company's June 1998 secondary offering, as well as certain other press
releases and financial reports which contained misrepresentations and material
omissions and also concealed materially adverse financial information. The
complaint alleges violations of Sections 11-51-501(1)(a, b, and c) and
11-51-604(3) of the Colorado Securities Act. In addition, plaintiff alleges that
by reason of their positions as officers and/or directors of EFTC, Messrs.
Calderon, Reid, Fuhlendorf, Hofmeister, Bruehlman, McConnell, and Ms. Reid are
controlling persons of EFTC and, therefore, that these defendants violated
Section 11-51-604(5) of the Colorado Securities Act. Plaintiffs also allege that
defendants conduct occurred in connection with the offer, sale or purchase of
EFTC securities in the secondary offering in violation of Section 11-51-604(4)
of the Colorado Securities Act. Plaintiff seeks the following relief: (a)
certification of the complaint as a class action on behalf of all persons who
purchased or otherwise acquired the common stock of EFTC between April 6, 1998
and August 20, 1998; (b) an award of compensatory and/or punitive damages,
interest, costs and attorneys' fees to all members of the class; and (c)
equitable relief available under state law.
Defendants removed the case to federal court on January 11, 1999. The
federal court remanded the case to state court on February 14, 2000. Defendants
deny the allegations of the complaint.
The parties to these legal proceedings have reached an agreement to
settle both legal proceedings. The settlement is subject to court approval. The
proposed settlement provides for the Company to contribute $3.1 million in cash
and 1.3 million shares of the Company's common stock and its insurer to
12
contribute $2.9 million into a class settlement fund. Notice of the settlement
has been filed in both state and federal court requesting a stay of all
proceedings pending the submission of settlement documents to the courts.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is quoted on the Nasdaq National Market
under the symbol "EFTC". On April 10, 2000, there were approximately 267
shareholders of record of the Company's Common Stock.
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.
1999 Sales Prices 1998 Sale Prices
----------------------- --------------------
High Low High Low
---- --- ---- ---
First Quarter $ 5.750 $3.375 $17.000 $12.813
Second Quarter 6.750 4.000 18.313 11.500
Third Quarter 5.188 2.625 13.750 2.844
Fourth Quarter 3.594 1.500 5.063 2.625
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 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. However, the Company's loan
agreement with Bank of America as well as terms of the Exchangeable Note and the
Convertible Note prohibit payment of dividends without the lender's consent.
Recent Sales of Unregistered Securities.
On February 24, 1997, the Company acquired its Northwest Operations
Division, which operated two manufacturing facilities in Newberg, Oregon and
Moses Lake, Washington, for total consideration of approximately $10.9 million,
consisting of 1,980,000 shares of Company common stock and approximately $5.5
million in cash, which included approximately $600,000 of transaction costs. The
Company determined that the issuance of such shares was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), as a transaction by the issuer not involving a public offering because
the transaction involved the acquisition of a business from the owners thereof
based on private negotiations.
During September 1997, the Company issued to Richard L. Monfort, a
director of the Company, $15 million in aggregate principal amount of
subordinated notes (the "Subordinated Notes"), with a maturity date of December
31, 2002 and bearing interest at LIBOR plus 2.0%, in order to fund the
acquisition of certain assets from AlliedSignal. During October 1997, the
Company issued a warrant (the "Warrant") to purchase 500,000 shares of common
stock at a price of $8.00 per share as additional consideration for the loan
represented by the Subordinated Notes. The Warrant was exercised on October 9,
1997, resulting in net proceeds to the Company of $4 million. The Company
determined that the issuances of the Subordinated Notes, the Warrant and the
common stock issued upon exercise of the Warrants were exempt from registration
under Section 4(2) of the Securities Act because it involved a director of the
Company.
14
On September 30, 1997, the Company acquired the Services Group for
approximately $29.7 million consisting of 1,858,975 shares of the Company's
common stock and approximately $20.5 million in cash, which includes
approximately $1 million of transaction costs. In addition, the Company made a
$6 million contingent payment that became payable upon closing of the Company's
public offering of common stock in November, 1997. The Company determined that
the issuance of such shares was exempt from registration under Section 4(2) of
the Securities Act as a transaction by the issuer not involving a public
offering because the transaction involved the acquisition of a business from the
owners thereof based on private negotiations.
On March 31, 1998, the Company acquired Personal Electronics which
provided quick-turn, small scale, high mix electronic manufacturing services to
OEMs in the greater Boston area and New Hampshire for total consideration of
1,800,000 shares of the Company's common stock. The Company determined that the
issuance of such shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involving a public offering
because the transaction involved the acquisition of a business from the owners
thereof based on private negotiations.
In November 1999, the Company issued to Richard L. Monfort, a director
of the Company, $5 million in subordinated notes. These notes bore interest at
10% and matured on March 30, 2000. The proceeds of these subordinated notes were
used for general operating purposes. On March 30, 2000, the Company repaid $2
million (plus accrued interest on the full $5 million) of the outstanding $5
million. The note agreement was amended to provide for issuance of $3 million in
aggregate principal amount of subordinated notes, with a maturity date of March
30, 2004 and bearing interest at 10%. The Company determined that the issuance
of the subordinated notes was exempt from registration under Section 4(2) of the
Securities Act because it involved a director of the Company.
On March 30, 2000, in connection with the recapitalization described
above, the Company issued $54 million of subordinated exchangeable notes due on
June 30, 2006, with paid in kind interest at 15%. These notes are accompanied by
warrants to purchase 3,093,154 shares of the Company's common stock at an
exercise price of $0.01 per share. The Company determined that the issuance of
the subordinated notes and warrants was exempt from registration under Section
4(2) because the transaction involved a negotiated purchase of securities by an
accredited investor.
In April 2000, the Company issued warrants to purchase an aggregate of
525,000 shares of the Company's common stock at a price of $3.00 per share to
two investment banks as additional consideration for services rendered to the
Company. The Company determined that the issuances of such warrants were exempt
from registration under Section 4(2) of the Securities Act.
Volatility
The Company's common stock has experienced significant price volatility
historically, and such volatility may continue to occur in the future. Factors
such as announcements of large customer orders, order cancellations, new product
introductions by the Company, events affecting the Company's competitors and
changes in general conditions in the electronics industry, as well as variations
in the Company's actual or anticipated results of operations, may cause the
market price of the Company's common stock to fluctuate significantly.
Furthermore, the stock market has experienced extreme price and volume
fluctuations in recent years, often for reasons unrelated to the operating
performance of the specific companies. These broad market fluctuations may
materially adversely affect the price of the Company's common stock. There can
be no assurance that the market price of the Company's common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
15
Item 6. Selected Financial Data.
The following selected financial data as of December 31, 1999 and 1998,
and for each of the years in the three-year period ended December 31, 1999, are
derived from the audited financial statements of the Company included in Item 8
and should be read in conjunction with such financial statements and the notes
thereto. The data presented below as of December 31, 1997, 1996 and 1995, and
for the years ended December 31, 1996 and 1995, are derived from financial
statements of the Company that are not included in this report.
Year Ended December 31,
------------------------------------------------------------------
Statement of Operations Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $221,864 $ 226,780 $122,079 $ 60,910 $51,580
Cost of goods sold 229,892 200,581 102,166 56,277 46,437
-------- --------- -------- -------- -------
Gross profit (loss) (8,028) 26,199 19,913 4,633 5,143
Selling, general and administrative 32,089 23,038 12,711 5,916 4,324
Impairment of long-lived assets 2,822 3,342 -- 726 --
Merger costs -- 1,048 -- -- --
Goodwill amortization 1,133 1,564 547 -- --
-------- --------- -------- -------- -------
Operating income (loss) (44,072) (2,793) 6,655 (2,009) 819
Interest expense (6,516) (4,312) (2,411) (576) (432)
Gain (loss) on sale of assets (20,880) 400 1,156 50 --
Other, net (55) (104) 139 50 92
-------- --------- -------- -------- -------
Income (loss) before income taxes (71,523) (6,809) 5,539 (2,485) 479
Income tax benefit (expense) (2,180) 2,631 (2,118) 867 (130)
-------- --------- -------- -------- -------
Net income (loss) $(73,703) $ (4,178) $ 3,421 $ (1,618) $ 349
======== ========= ======== ======== =======
Pro Forma Information:
Historical net income (loss) $(73,703) $ (4,178) $ 3,421 $ (1,618) $ 349
Pro forma tax adjustment -- (317) (41) 10 2
-------- --------- -------- -------- -------
Pro forma net income (loss) $(73,703) $ (4,495) $ 3,380 $ (1,608) $ 351
======== ========= ======== ======== =======
Pro Forma Earnings Per Share:
Basic $ (4.74) $ (.31) $ .40 $ (.28) $ .06
======== ========= ======== ======== =======
Diluted $ (4.74) $ (.31) $ .38 $ (.28) $ .06
======== ========= ======== ======== =======
Weighted Average Shares:
Basic 15,543 14,730 8,502 5,742 5,762
======== ========= ======== ======== =======
Diluted 15,543 14,730 8,955 5,742 5,762
======== ========= ======== ======== =======
Cash Flow Data:
Cash provided (used) by:
Operating activities $ (9,873) $(18,181) $(29,414) $ (508) $ (999)
Investing activities 17,752 (21,924) (42,074) (1,837) 1,247
Financing activities (7,786) 38,851 72,958 2,049 208
December 31,
--------------------------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital $ 26.232 $ 59,037 $ 43,634 $ 9,284 $ 9,878
Total assets 131.129 190,666 148,825 24,037 25,724
Total debt 42,994 54,983 44,959 5,917 3,277
Stockholders' equity 21,278 94,979 75,221 13,850 15,462
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the statements. See
"--Special Note Regarding Forward-Looking Statements."
General
The Company is a leading independent provider of high mix electronic
manufacturing services to original equipment manufacturers (OEMs) in the
avionics, medical, communications, industrial instruments and controls, and
computer-related products industries. The Company's manufacturing services
consist of assembling complex printed circuit boards, cables, electro-mechanical
devices, and finished products.
During 1997 and 1998, the Company made several acquisitions of
businesses and assets in connection with an aggressive growth strategy. Between
the fourth quarter of 1998 and the fourth quarter of 1999, the Company began
taking a series of actions to improve liquidity and operating results. These
actions included the disposal or closure of several of the Company's business
units. In order to understand the Company's financial condition and results of
operations over the past three years, it is important to understand the
acquisitions, dispositions and closures that were occurring during this period.
Accordingly, a summary of these activities is presented below.
Northwest Operations Division. On February 24, 1997, the Company
acquired two affiliated entities, Current Electronics, Inc., an Oregon
corporation, and Current Electronics (Washington), Inc., a Washington
corporation, for total consideration of approximately $10.9 million, consisting
of 1,980,000 shares of Company common stock and approximately $5.5 million in
cash, including approximately $600,000 of transaction costs. During 1998, the
Company completed construction of a new manufacturing facility in Newberg,
Oregon at a total cost of approximately $7.0 million. The Newberg facility along
with one in Moses Lake, Washington comprises the Company's Northwest Operations
Division.
AlliedSignal Asset Purchase. During the period from August 1997 through
February 1998, the Company completed two transactions with AlliedSignal, Inc.
now Honeywell International Inc. ("Honeywell") pursuant to which the Company
acquired inventories and equipment located in Fort Lauderdale, Florida and
Tucson, Arizona for an aggregate purchase price of approximately $19.0 million.
In connection with these activities, the parties entered into a long-term supply
agreement for the production of circuit card assemblies.
In an effort to improve capacity utilization at other facilities, in
September 1999 the Company initiated a plan to close its facility in Fort
Lauderdale and consolidate the business from that plant into three other EFTC
facilities. Ft. Lauderdale was selected due to its higher cost structure and in
consideration of the added benefits of transferring this business to facilities
that are in closer proximity to the affected customers. The Ft. Lauderdale
restructuring activities are expected to be substantially complete by the end of
April 2000.
In December 1999, the Company commenced negotiations with Honeywell
International, Inc. for the sale of inventory and equipment at the Company's
facility in Tucson and the sublease of the facility to Honeywell. This sale
closed in February 2000 and provided net proceeds to the Company of $12.7
million.
17
EFTC Services Division. The Company acquired the Services Division in
September 1997 for approximately $35.7 million, consisting of 1,858,975 shares
of the Company's common stock and approximately $26.5 million in cash. The
Services Division had facilities in Memphis, Tennessee, Louisville, Kentucky and
Tampa, Florida and specialized in transportation hub-based warranty and repair
services for companies engaged in the computer and communications industries.
On September 1, 1999, the Company sold the Services Division for
approximately $28.1 million. In connection with this sale, the purchaser and the
Company agreed to an Earn-out Contingency (the "EC"). Under the EC, if earnings
for the year ending August 31, 2000 related to the division sold are in excess
of $4,455,000 ("Target Earnings"), the Company will be entitled to an additional
payment equal to three times the difference between the actual earnings and
Target Earnings. If actual earnings are less than Target Earnings, the Company
will be required to refund an amount equal to three times the difference. The
maximum amount that either party would be required to pay under the EC is $2.5
million.
EFTC Express Division. In March 1998, the Company acquired RM
Electronics, Inc., doing business as Personal Electronics ("Personal"), in a
business combination accounted for as a pooling of interests. The Company issued
1,800,000 shares of common stock in exchange for all of the outstanding common
stock of Personal. Personal is based in Manchester, New Hampshire and
specializes in the quick turn, front-end prototype development, low volume, and
end-of-life high mix assembly services. Personal comprises the Company's EFTC
Express Division.
Northeast Operations Division. In September 1998, the Company acquired
the circuit card assembly operations of the Agfa Division of Bayer Corporation.
The Company purchased inventory and equipment for approximately $6.0 million and
the parties entered into a long-term supply agreement for the manufacture of
circuit card assemblies. This business is conducted in the Company's leased
facility in Wilmington, Massachusetts that comprises the Northeast Operations
Division.
Midwest Operations Division. In September 1998, the Company purchased
manufacturing equipment for approximately $1.5 million from AlliedSignal. In
connection with this transaction, AlliedSignal agreed to amend the existing
long-term supply agreement it has with the Company to include the production of
circuit card assemblies at the Company's new facility in Ottawa, Kansas. The
Kansas facility comprises the Company's Midwest Operations Division.
Rocky Mountain Division. In December 1998, the Company announced a plan
to close the Rocky Mountain Division located in Greeley, Colorado and to
consolidate the remaining business into other facilities, in an effort to
improve capacity utilization and profitability. In October 1999, the Company
completed the sale of the building in Greeley for net proceeds of approximately
$3.8 million.
Southeast Commercial Operations Division. In March 1999, the Company
entered into an agreement with Honeywell to acquire certain assets and inventory
used in circuit card assembly. The Company and Honeywell have entered into a
ten-year supply agreement. For the year ended December 31, 1999, sales under
this agreement amounted to approximately $28 million. The manufacturing
activities under this agreement are conducted in a newly leased facility near
Phoenix, Arizona and a smaller facility in Tijuana, Mexico. These facilities
comprise the Company's Southwest Commercial Operations Division.
18
Results of Operations
The Company's quarterly results of operations are affected by several
factors, primarily the level and timing of customer orders and the mix of
turnkey and consignment orders. The level and timing of orders placed by a
customer vary due to the customer's attempts to balance its inventory, changes
in the customer's manufacturing strategy, and variation in demand for its
products due to, among other things, product life cycles, competitive conditions
and general economic conditions. In the past, changes in orders from customers
have had a significant effect on the Company's quarterly results of operations.
Other factors affecting the Company's quarterly results of operations may
include, among other things, the Company's performance under the long-term
supply agreement with Honeywell, price competition, disposition of divisions and
closure of operating units, the ability to obtain inventory from its suppliers
on a timely basis, the Company's level of experience in manufacturing a
particular product, the degree of automation used in the assembly process, the
efficiencies achieved by the Company through managing inventories and other
assets, the timing of expenditures in anticipation of increased sales, and
fluctuations in the cost of components or labor.
The following table sets forth certain operating data as a percentage of net
sales:
Year Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Net sales 100% 100% 100%
Cost of goods sold 104% 88% 84%
--- ---- ----
Gross profit (loss) (4%) 12% 16%
Selling, general and administrative 14% 10% 10%
Impairment of long-lived assets 1% 1% --
Merger costs -- 1% --
Goodwill amortization 1% 1% 1%
--- ---- ----
Operating income (loss) (20%) (1%) 5%
==== ==== ====
1999 Compared to 1998
Net Sales. Net sales for 1999 were $222 million compared to $227
million in 1998, which is a decrease of 2.0%. Despite the minor decrease in
revenue, the Company experienced major changes in its customers and facilities
during 1999. At the start of 1999, the Company had eleven facilities. Six of
these facilities have been sold or will be closed by April 2000. However, the
Company also added facilities in Phoenix and Mexico during 1999 to support the
new business with Honeywell in connection with the long-term supply agreement
entered into with Honeywell in March 1999 which offset the loss of revenue from
other divisions. The Company's sales for 1999 include approximately $28 million
of revenue under this agreement. The Northeast Operations Division (acquired
September 1, 1998) and the Midwest Operations Division (acquired September 30,
1998) accounted for $11 million of revenue in 1998 compared to $36 million in
1999. However, this increase was offset by the loss of revenue from the Services
Group that was sold on September 1, 1999. The Services Group accounted for $41
million of revenue in 1998 compared to only $22 million in 1999. The closure of
the Greeley, Colorado facility in 1999 also contributed to lower revenue,
despite the transfer of part of this business to other facilities.
Gross Profit (Loss). The Company had gross profit of 12% in 1998 and a
loss of 4% in 1999. During 1998, the Company increased its workforce, and
invested substantial amounts in new facilities,
19
equipment and information systems to prepare for expected increases in sales in
1999. This higher cost structure combined with a decrease in sales was the
primary contributor to the significant decrease in 1999 gross profit. The
Company incurred restructuring charges for the Greeley facility in the fourth
quarter of 1998, including a $5.7 million charge to cost of goods sold,
primarily for a provision for inventory allowances. During 1999, product pricing
at the Tucson facility resulted in negative margins of $3.5 million.
Additionally, in 1999 the Company incurred (i) charges included in cost of goods
sold for $1.5 million due to inventory allowances and operating charges related
to the closure of the Greeley facility, (ii) charges for excess and obsolete
inventories and other charges to cost of goods sold totaling $7.1 million
related to the closure of the Fort Lauderdale facility and (iii) approximately
$0.9 million in charges related to excess and obsolete inventories in connection
with the Services Group. Additional charges of $1.0 million are expected in the
first two quarters of 2000 in connection with the closure of the Fort Lauderdale
facility as retention bonuses are paid and other closure activities are
completed.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 39% to $32.1 million in 1999 compared
to $23.0 million in 1998. SG&A expenses were up significantly in 1999, primarily
due to a $6.4 million provision for the estimated settlement of shareholder
lawsuits. During 1999, the Company also recognized charges of $5.1 million for
uncollectable receivables compared to 1998 when the Company recognized bad debt
expense of $0.6 million. The 1999 charges included (i) settlements reached with
Honeywell related to pricing issues with respect to business conducted at the
Ft. Lauderdale and Tucson facilities, (ii) charges for uncollectable receivables
related to the Services Group, (iii) approximately $0.7 million for severance
costs related to the Ft. Lauderdale closure and (iv) $0.4 million for start-up
costs at the Phoenix facility. During 1998, SG&A includes approximately $0.2
million for severance and salaries of employees performing exit activities in
connection with the Greeley closure.
Impairment of Property, Plant and Equipment. During 1999, the Company
recognized impairment expense of $2.8 million compared to $3.3 million in 1998
which is a decrease of 15.6%. The impairment in 1998 related solely to land,
building and equipment at the Greeley facility. For 1999, the Company recognized
$1.0 million of impairment related to equipment at the Ft. Lauderdale facility,
$1.2 million for the Tucson assets that were held for sale at year-end, $0.4
million for Services Group assets that were sold in September 1999, and $0.2
million for impaired assets at other locations.
Goodwill Amortization. Goodwill amortization for 1999 amounted to $1.1
million compared to $1.6 million in 1998. The decrease in 1999 was attributable
to the sale of the Services Group on September 1, 1999, and the corresponding
write-off of $36.5 million of goodwill that was included in the calculation of
the loss on sale of the Services Group.
Interest Expense. Interest expense increased 51.1% to $6.5 million in
1999 compared to $4.3 million in 1998. The increase in 1999 was partially
attributable to an increase in amortization of debt issuance costs of $.9
million in 1999. The increase in amortization in 1999 was attributable to
accelerated amortization of debt issuance costs and additional costs incurred in
connection with amendments to the credit agreement. Interest expense was also
higher in 1999 due to increases in the prime rate, as well as increases in the
rate charged by the Company's lenders due to increased credit risk.
Loss on Sale of Division. The Company recognized a loss of $20.6
million in connection with the sale of the Services Group due to the write-off
of $36.5 million of goodwill from the 1997 acquisition of the Services Group.
Additionally, the loss gives effect to the deferral of $2.5 million of the
proceeds for a post closing earn-out contingency.
Income Tax Benefit (Expense). Due to significant net losses in 1999,
the Company recorded a valuation allowance for all of its net deferred tax
assets. As a result, the Company recorded deferred tax
20
expense of $2.2 million in 1999 despite a pre-tax loss of $70.2 million. During
1998, the Company recognized an income tax benefit of $2.6 million based on a
pre-tax loss of $6.8 million. Management does not expect that a tax provision
will be necessary if the Company generates earnings in 2000, since a significant
net operating loss carryforward is available for income tax purposes. However,
this carryforward may be subject to reduction or limitation as a result of
changes in ownership or certain consolidated return filing regulations.
1998 Compared to 1997
Net Sales. The Company's net sales increased by 85.8% to $226.8 million
during the year ended December, 31, 1998 from $122.1 million for the year ended
December 31, 1997. The increase in net sales is due primarily to the inclusion
of: (i) a full year's revenues from the Northwest Operations Division (acquired
on February 24, 1997), (ii) a full year's revenues from the Company's Ft.
Lauderdale and Arizona facilities (acquired in August 1997), (iii) a full year's
revenues from the Services Group (acquired on September 30, 1997), (iv) internal
growth in revenues from Personal Electronics, (v) revenues from the Wilmington,
Massachusetts facility (acquired on September 1, 1998) and (vi) revenues from
the Ottawa, Kansas facility (acquired on September 30, 1998).
Gross Profit. Gross profit increased by 31.6% to $26.2 million during
the year ended December 31,1998 from $19.9 million during the year ended
December 31,1997. The gross profit margin for the year ended December 31, 1998
was 11.6% compared to 16.3% for the year ended December 31,1997. The gross
margin decreased in 1998 because the Company established additional
infrastructure to accommodate anticipated revenue growth for the year, but net
sales were lower in the third and fourth quarters of the year due to soft market
conditions in the electronics manufacturing services industry in general,
schedule changes for avionics-related products and a greater-than-anticipated
decline in products related to semiconductor manufacturing equipment.
The softening of revenue growth, as explained above, convinced
management and the Board of Directors to initiate a plan to consolidate and
close down its Rocky Mountain operations in Greeley, Colorado. Charges of $9.3
million were included in operations in the fourth quarter of 1998. The
restructuring and shut down involved the termination of approximately 140
employees. Total severance and salaries for employees performing exit activities
amounted to $0.5 million. Inventory allowances of $5.4 million were recorded to
provide for future losses to be incurred related to disengaged customers who
will not be continuing as customers of the Company. In addition, because of the
shutdown of the facility an amount of $3.3 million was recorded as asset
impairment. Of the $9.3 million in charges, $5.7 million was charged to cost of
goods sold, $3.3 million was recorded as an impairment of the facility, and $0.2
million was charged to selling, general and administrative expenses. Excluding
the $5.7 million in charges, gross profit margin would have been 14.1% for the
year ended December 31,1998.
Selling, General and Administrative Expenses. SG&A expenses increased
by 81.2% to $23.0 million for the year ended December 31,1998, compared with
$12.7 million for the same period in 1997. As a percentage of net sales, SG&A
expense decreased to 10.1% for the year ended December 31,1998, from 10.4% in
the same period of 1997. The increase in SG&A expenses is primarily due to the
inclusion of (i) a full year's expenses of the Northwest Operations Division
(acquired on February 24, 1997), (ii) a full year's expenses of the Company's
Ft. Lauderdale and Arizona facilities (acquired in August 1997), (iii) a full
year's expenses of the Services Group (acquired on September 30, 1997), (iv)
expenses of the Wilmington, Massachusetts facility (acquired on September
1,1998) and (v) expenses of the Ottawa, Kansas facility (acquired on September
30, 1998).
21
Impairment of Property, Plant and Equipment. During the fourth quarter
of 1998, the Company incurred a write down associated with the shutdown of the
Greeley, Colorado facility in the amount of $3.3 million.
Operating Income (Loss). Operating income decreased to a $2.8 million
loss for the year ended December 31, 1998 from operating income of $6.7 million
for the same period in 1997. Operating loss as a percentage of net sales
decreased to a loss of 1.2% for the year ended December 31,1998 compared to
income of 5.5% in the same period in 1997. The decrease in operating income is
due primarily to the shutdown of the Rocky Mountain facility in Greeley,
Colorado that resulted in charges of $9.3 million, as explained above. Without
the Greeley charges, operating income as a percentage of net sales for the year
ended December 31,1998 would have been approximately 2.8%. Other factors
relating to the decline in operating profit were that the Company established
additional infrastructure to accommodate anticipated revenue growth for the
year, but net sales were lower in the third and fourth quarters of the year due
to soft market conditions in the electronics manufacturing services industry in
general, schedule changes for avionics related products and a greater than
anticipated decline in products related to semiconductor manufacturing
equipment.
Interest Expense. Interest expense was $4.3 million for the year ended
December 31,1998 as compared to $2.4 million for the same period in 1997. The
increase in interest is primarily the result of additional debt associated with
the acquisition of the Midwest Operations Division, the Northeast Operations
Division and the Services Group and increased debt used to finance the growth of
inventories and receivables.
Income Tax Expense. The income tax benefit for the year ended December
31,1998 was 34.0% of loss before income taxes, including pro forma income taxes.
The effective tax rate for the year ended December 31, 1997 was 39.0%, including
pro forma income taxes. The decrease in the effective tax rate is primarily due
to the reduction of the 1998 income tax benefit for nondeductible goodwill
amortization.
22
Quarterly Results.
The following table presents unaudited quarterly operating data for the
most recent eight quarters for the two years ended December 31, 1999. The
information includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation
thereof.
Year Ended December 31, 1998 Year Ended December 31, 1999
----------------------------------------- ------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
Net sales $ 54,200 $ 61,328 $ 52,805 $ 58,447 $ 54,325 $ 54,690 $ 50,434 $ 62,415
Cost of sales 44,297 50,931 46,202 59,151 48,184 52,833 60,902 67,973
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Gross profit (loss) 9,903 10,397 6,603 (704) 6,141 1,857 (10,468) (5,558)
SG&A 5,321 5,361 4,950 7,406 5,011 5,174 8,966 12,938
Impairment expense -- -- -- 3,342 -- -- 1,541 1,281
Goodwill amortization 391 391 391 391 391 391 283 68
Merger costs 1,048 -- -- -- -- -- -- --
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Operating income (loss) 3,143 4,645 1,262 (11,843) 739 (3,708) (21,258) (19,845)
Interest expense (909) (1,047) (1,092) (1,264) (1,264) (1,334) (1,947) (1,971)
Gain (loss) on sale of 4 7 4 122 120 5 (20,631) (374)
assets
Other, net 36 102 10 12 37 47 (294) 155
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Income before taxes 2,274 3,707 184 (12,973) (368) (4,990) (44,130) (22,035)
Income tax benefit (expense) (935) (1,483) (68) 5,116 39 1,996 -- (4,215)
---------- --------- --------- ---------- ---------- --------- ---------- ----------
Net income (loss) $ 1,339 $ 2,224 $ 116 $ (7,857) $ (329) $ (2,994) $(44,130) $(26,250)
========== ========= ========= ========== ========== ========= ========== ==========
Pro forma net income (loss) $ 1,022 $ 2,224 $ 116 $ (7,857) $ (329) $(2,994) $(44,130) $(26,250
========== ========= ========= ========== ========== ========= ========== ==========
Pro forma earnings per
share-
Diluted $ .07 $ .15 $ .01 $ (.51) $ (.02) $ (.19) $ (2.84) $ (1.69)
========== ========= ========= ========== ========== ========= ========== ==========
Weighted average shares
outstanding- Diluted 14,400 14,825 15,740 15,542 15,543 15,543 15,543 15,543
========== ========= ========= ========== ========== ========= ========== ==========
Although management does not believe that the Company's business is materially
affected by seasonal factors, the Company's sales and earnings may vary from
quarter to quarter, depending primarily upon the timing of customer orders and
product mix. Therefore, the Company's operating results for any particular
quarter may not be indicative of the results for any future quarter or year.
23
Liquidity and Capital Resources
Working Capital and Operating Cash Flows. At December 31, 1999, working
capital totaled $26.2 million which is a significant decrease from the balance
at December 31, 1998 of $59.0 million. The decrease in working capital in 1999
is primarily attributable to significant operating losses incurred during the
year combined with increased inventories in connection with the Honeywell
agreement at the Company's new facility in Phoenix, Arizona.
Cash used in operating activities for the year ended December 31, 1999
was $9.9 million compared to cash used in operating activities of $18.2 million
in 1998. During 1999, the Company incurred a significant operating loss that
utilized approximately $24.7 million of cash. The Company also utilized cash of
$12.1 million to fund an increase in inventories and other current assets. These
amounts were partially financed by an increase in operating payables of $26.9
million, including over $18 million of payables to suppliers that were outside
of established payment terms.
Cash Requirements for Investing Activities. The Company used cash for
capital expenditures totaling $14.4 million in 1999 (primarily related to the
build-out for the Company's new facility in Phoenix) compared with $22.9 million
in 1998. Capital expenditures in 1998 included payments in connection with the
acquisition of assets from AlliedSignal related to the Ft. Lauderdale, Tucson
and Kansas facilities, and the asset purchase agreement with Bayer-Agfa.
Financing Sources and Related Activities. In September 1997, the
Company issued to a director of the Company $15 million in aggregate principal
amount of subordinated notes, with a maturity date of December 31, 2002 As of
December 31, 1999, the outstanding principal amount of the subordinated notes
was approximately $4.8 million. These notes were repaid on March 30, 2000 in
connection with the recapitalization described below. In connection with the
purchase of the Services Group and the assets located in Tucson and Fort
Lauderdale, the Company entered into a credit facility on September 30, 1997
with a bank group led by BankOne, Colorado, N.A. This facility was refinanced
with proceeds from the recapitalization described below.
In December 1998, the Company entered into a sale-leaseback transaction
with a director and stockholder of the Company. Two manufacturing facilities
(one in Newberg, Oregon and one in Tucson, Arizona) were sold for $10.5 million
and leased back to the Company. The proceeds were used to pay down a portion of
the BankOne Loan. The lease was accounted for as a financing transaction; thus
the assets and related long-term debt were included on the Company's 1998
balance sheet. The transaction had an imputed interest rate of 8.68%. The lease
term is for 5 years with monthly payments of $90,000. At the end of the lease
term, the Company had the option to repurchase the facilities for approximately
$9.4 million. In May 1999, the lease was amended to eliminate the purchase
option, which resulted in the re-characterization of the lease from a capital
lease to an operating lease. Accordingly, the buildings and the related debt
have been removed from the balance sheet at December 31, 1999.
In June 1998, the Company issued 1,770,000 shares of its common stock
in a public offering for proceeds of $21.4 million which were used to repay a
portion of the bank group loan.
In March 1999, the Company entered into a long-term supply agreement
with Honeywell International, Inc. While this contract provides a favorable
source of revenue to the Company, it also requires significant amounts of
working capital to finance the inventories and receivables, and the Company was
required to incur significant costs for leasehold improvements and equipment at
a new facility in Phoenix, Arizona. During 1999, the Company had capital
expenditures of $14.4 million, primarily related to the Honeywell agreement and
the build-out for the new facility in Phoenix.
24
The capital requirements under this new agreement provided significant
challenges to the Company in 1999, due to the Company's higher debt levels
combined with significant operating losses since the fourth quarter of 1998.
In order to respond to the liquidity issues, the Company took a series
of actions in 1999 that were designed to ultimately provide the necessary
capital to meet existing obligations to suppliers and banks, and to have access
to financing to meet the additional working capital requirements under the new
Honeywell agreement. The first significant action after obtaining the Honeywell
business was on September 1, 1999, when the Services Group was sold, resulting
in net cash proceeds of $28.1 million. The proceeds from this sale were utilized
to repay approximately $14.0 million of term debt outstanding on the Company's
senior credit facility, with the remainder used to pay past due balances to
suppliers and debt under the revolving credit agreement. Depending on the
outcome of the earn-out contingency associated with the agreement, the Company
may be required to repay up to $2.5 million or the buyer may be required to pay
the Company up to $2.5 million.
On September 30, 1999, the Company initiated the consolidation of its
Ft. Lauderdale plant into three other EFTC facilities. In October 1999, the
Company sold its facility in Greeley, Colorado for proceeds of $3.8 million. The
Company was required to repay bank debt for $1.9 million and the remaining $1.9
million was used to pay past due balances to suppliers.
In November 1999, the Company issued to a director of the Company $5
million in aggregate principal amount of subordinated notes, with a maturity
date of March 30, 2000 and an interest rate of 10%. The proceeds of these notes
were used for operating purposes. On March 30, 2000, in connection with the
recapitalization transaction described below, the Company repaid $2 million,
plus accrued interest. The note agreement for the original loan was amended to
provide for issuance of $3 million in aggregate principal amount of subordinated
notes, with a maturity date of March 30, 2004 and an interest rate of 10%.
At December 31, 1999, the Company had trade payables in excess of $18
million that were outside of established terms and many suppliers were requiring
payment of past due balances, or payment in advance, for purchases of additional
inventories. The Company experienced some interruptions in production as a
result of delayed shipments from certain suppliers.
The Company sold assets and inventory located at the Company's Tucson
facility to Honeywell on February 17, 2000, which resulted in net proceeds of
$12.7 million. The agreement with Honeywell required the Company to utilize
$10.5 million of the proceeds to pay past due amounts to suppliers and the
remaining proceeds were utilized to repay bank debt.
Recapitalization. Beginning in September 1999, the Company began
searching for debt and equity financing that would permit the Company to also
attract a new senior lender to replace the existing bank group. By January 2000,
the Company had received several proposals for a variety of debt and equity
structures and the Board of Directors decided to proceed with a proposal
submitted by Thayer Equity Investors. After conclusion of an extensive due
diligence period, on March 30, 2000, the Company entered into an agreement with
Thayer-Blum Funding, LLC (the "Purchaser") for a recapitalization of the
Company. The agreement provides for the purchase of a total of $54 million in
Senior Subordinated Exchangeable Notes ("Exchangeable Notes") and a subsequent
tender offer for up to 8,250,000 shares of the Company's currently outstanding
common stock at a price of $4.00 per share. The Exchangeable Notes initially
provide for a maturity date of June 30, 2006 and a paid-in-kind interest rate of
15%, and are accompanied by warrants (the "Warrants") to purchase 3,093,154
shares of the Company's common stock at an exercise price of $.01 per share. The
Purchaser has designated two persons who have been appointed to the Company's
board of directors.
25
Upon shareholder approval of this transaction and assuming that at
least 500,000 shares are tendered in the tender offer, the warrants will never
become exercisable and will be cancelled. Additionally, the Exchangeable Notes
will automatically be replaced with Senior Subordinated Convertible Notes
("Convertible Notes") that provide for interest at 8.875%, payable in additional
Convertible Notes and a maturity date of June 30, 2006. At the election of the
holder, the Convertible Notes may be converted, at any time, into the Company's
common stock at $2.60 per share, subject to adjustment. Conversion of the notes
will occur automatically (i) if the Company's common stock trades above $7.50
per share for 45 consecutive trading days, or (ii) commencing on March 30, 2003,
if the Company's common stock trades above $4.25 for 45 consecutive trading
days. Finally, at the closing of the tender offer, the Purchaser will have the
right to designate a majority of the members of the Company's board of directors
and will have the right to approve any significant financings, acquisitions and
dispositions. The Purchaser has requested that the conversion price of the
Convertible Notes be reduced to $2.58 to reflecdt the change in the Company's
financial condition as a result of certain excess costs that were incurred by
the Company in connection with the transaction.
If shareholders do not approve the transaction by September 1, 2000 or
if less than 500,000 shares are tendered, the Warrants and Exchangeable Notes
will remain in place and the interest rate on the Exchangeable Notes will
increase to 20%. Interest would be compounded quarterly and payable in
additional Exchangeable Notes or cash, at the option of the holders.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to replace the Company's existing revolving line of credit
with BankOne Colorado, N.A. The new credit facility provides for a $45 million
revolving line of credit with a maturity date of March 30, 2003. Initially, the
interest rate will be the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
inventory. Substantially all of the Company's assets are pledged as collateral
for outstanding borrowings, and the credit agreement requires compliance with
certain financial and non-financial covenants.
Based on the March 30, 2000 financing activities, management believes
the Company has adequate capital resources to fund working capital and other
cash requirements during 2000.
The Year 2000 Issue
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change,
including the leap year date. The Company expensed approximately $100,000 during
1999 in connection with testing and remediation of its systems. The Company is
not aware of any material problems resulting from Year 2000 issues, either with
its products, its internal systems or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the federal securities laws. In addition, EFTC
or persons acting on its behalf sometimes make forward-looking statements in
other written and oral communications. Such forward-looking statements
26
may include, among other things, statements concerning the Company's plans,
objectives and future economic prospects, prospects for achieving cost savings,
increased capacity utilization, improved profitability and other matters
relating to the prospects for future operations; and other statements of
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of EFTC, or industry results, to be materially different 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, the loss of Honeywell as a customer or
Honeywell's inability to pay, or inability or unwillingness to pay in a timely
manner, its outstanding receivables held by the Company, the Company's ability
to pay its suppliers in a timely manner, changes in economic or business
conditions in general or affecting the electronic products industry in
particular, changes in the use of outsourcing by original equipment
manufacturers, increased material prices and service competition within the
electronic component, contract manufacturing, changes in the competitive
environment in which the Company operates, the continued growth of the
industries targeted by the Company or its competitors or changes in the
Company's management information needs, difficulties in implementing the
Company's new management information system, difficulties in managing the
Company's growth or in integrating new businesses, changes in customer needs and
expectations, the Company's success in retaining customers affected by the
closure of Company facilities, the Company's success in limiting costs
associated with such closures, the Company's ability to keep pace with
technological developments, governmental actions and other factors identified as
"Risk Factors" or otherwise described in the Company's filings with the
Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
On March 30, 2000, the Company entered into a $45 million revolving
line of credit with Bank of America, N.A. The interest rate on this loan will be
based either on the prime rate or LIBOR rates, plus applicable margins.
Therefore, as interest rates fluctuate, the Company may experience changes in
interest expense that could impact financial results. The Company has not
entered into any interest rate swap agreements, or similar instruments, to
protect against the risk of interest rate fluctuations. Assuming outstanding
borrowings of $45 million, if interest rates were to increase or decrease by 1%,
the result would be an annual increase or decrease in interest expense of
approximately $450,000 under this loan.
If shareholder approval related to certain aspects of the
recapitalization is obtained, the $54 million in principal amount of debt under
the Convertible Notes will bear interest at 8.875% which would result in an
annual interest expense of $4,859,000, or if shareholder approval is not
obtained, under the Exchangeable Notes, the $54 million of principal amount of
debt will bear interest at 20% which would result in annual interest expense of
$10,950,000.
27
Item 8. Financial Statements and Supplementary Data.
The following financial statements and supplementary data are included in the
report:
Page
Financial Statements:
Independent Auditors' Report 29
Consolidated Balance Sheets 30-33
Consolidated Statements of Operations 32
Consolidated Statements of Shareholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35-51
Supplementary Data:
Independent Auditors' Report 52
Schedule II- Valuation and Qualifying Accounts 53
28
Independent Auditors' Report
The Board of Directors
EFTC Corporation:
We have audited the accompanying consolidated balance sheets of EFTC Corporation
and subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EFTC Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
April 4, 2000
29
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in Thousands, Except Per Share Amounts)
ASSETS
1999 1998
---- ----
Current Assets:
Cash and equivalents $ 716 $ 623
Trade receivables, net of allowance for doubtful
accounts of $3,689 and $1,322, respectively 26,094 34,123
Inventories, net 60,167 60,759
Income taxes receivable 2,106 125
Deferred income taxes - 5,259
Prepaid expenses and other 2,795 2,241
--------- ---------
Total Current Assets 91,878 103,130
--------- ---------
Property, Plant and Equipment, at cost:
Leasehold improvements 2,797 1,589
Buildings and improvements 1,172 17,143
Manufacturing machinery and equipment 16,496 17,435
Furniture, computer equipment and software 12,726 9,411
--------- ---------
Total 33,191 45,578
Less accumulated depreciation and amortization (9,614) (6,959)
--------- ---------
Net Property, Plant and Equipment 23,577 38,619
--------- ---------
Intangible and Other Assets:
Goodwill, net of accumulated amortization
of $758 and $2,111, repectively 7,264 44,848
Intellectual property, net of accumulated amortization
of $699 and $233, repectively 4,289 2,861
Debt issuance costs, net of accumulated amortization
of $97 and $241, respectively 460 986
Deposits and other 3,661 222
--------- ---------
Total Intangible and Other Assets 15,674 48,917
--------- ---------
$ 131,129 $ 190,666
========= =========
30
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
December 31, 1999 and 1998
(Dollars in Thousands, Except Per Share Amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
----- ----
Current Liabilities:
Current maturities of long-term debt:
Related parties $ 5,018 $ 225
Banks - 3,890
Accounts payable 46,985 27,272
Accrued compensation and benefits 4,993 2,980
Deposit on inventory finance arrangement - 5,600
Other accrued liabilities 8,650 4,127
--------- ---------
Total Current Liabilities 65,646 44,094
Long-term Liabilities:
Long-term debt, net of current maturities:
Related parties 4,792 15,098
Banks 33,184 35,770
Deferred income taxes - 725
Other 6,229 -
--------- ---------
Total Liabilities 109,851 95,687
Commitments and Contingencies (Notes 8, 9 and 11)
Shareholders' Equity:
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding 15,543,000 shares 155 155
Additional paid-in capital 91,992 91,990
Retained earnings (deficit) (70,869) 2,834
--------- ---------
Total Shareholders' Equity 21,278 94,979
--------- ---------
$ 131,129 $ 190,666
========= =========
31
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(Dollars In Thousands, Except Per Share Amounts)
1999 1998 1997
---- ---- ----
Net Sales $ 221,864 $ 226,780 $ 122,079
Cost of Goods Sold 229,892 200,581 102,166
--------- --------- ---------
Gross profit (loss) (8,028) 26,199 19,913
Operating Costs and Expenses:
Selling, general and administrative expenses 32,089 23,038 12,711
Impairment of property, plant and equipment 2,822 3,342 -
Goodwill amortization 1,133 1,564 547
Merger costs - 1,048 -
--------- --------- ---------
Total operating costs and expenses 36,044 28,992 13,258
--------- --------- ---------
Operating income (loss) (44,072) (2,793) 6,655
Other Income (Expense):
Interest expense (6,516) (4,312) (2,411)
Loss on sale of division (20,565) - -
Gain (loss) on sale of property, plant and equipment (315) 400 1,156
Other, net (55) (104) 139
--------- --------- ---------
Income (loss) before income taxes (71,523) (6,809) 5,539
Income Tax Benefit (Expense) (2,180) 2,631 (2,118)
--------- --------- ---------
Net income (loss) $ (73,703) $ (4,178) $ 3,421
========== ========== =========
Pro Forma Information (Unaudited):
Historical Net Income (Loss) $ (73,703) $ (4,178) $ 3,421
Pro Forma Adjustment to Income Taxes - (317) (41)
--------- --------- ---------
Pro Forma Net Income (Loss) $ (73,703) $ (4,495) $ 3,380
========== ========== =========
Pro Forma Income (Loss) Per Share:
Basic $ (4.74) $ (0.31) $ 0.40
========== ========== =========
Diluted $ (4.74) $ (0.31) $ 0.38
========== ========== =========
Weighted Average Shares Outstanding:
Basic 15,543,000 14,730,000 8,502,000
========== ========== =========
Diluted 15,543,000 14,730,000 8,955,000
========== ========== =========
32
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
Balances at December 31, 1996 5,742,660 $ 57 $ 10,169 $ 3,624 $ 13,850
Issuance of common stock in
business combinations 3,838,975 38 14,144 - 14,182
Issuance of common stock in secondary
offering, net of costs of $3,100 3,506,841 35 38,917 - 38,952
Warrants issued in connection with
subordinated debt - - 490 - 490
Stock options and warrants exercised 553,300 6 4,225 - 4,231
Tax benefit from exercise of stock options - - 95 - 95
Net income - - - 3,421 3,421
---------- ---- ------- ------- -------
Balances at December 31, 1997 13,641,776 136 68,040 7,045 75,221
Conversion of notes payable to
shareholders' equity - - 1,398 - 1,398
Issuance of common stock in secondary
offering, net of costs of $3,500 1,770,000 18 21,314 - 21,332
Stock options and warrants exercised 131,213 1 512 - 513
Tax benefit from exercise of stock options - - 693 - 693
Termination of S Corporation tax status
of pooled company - - 33 (33) -
Net loss - - - (4,178) (4,178)
---------- ---- ------- ------- -------
Balances at December 31, 1998 15,542,989 155 91,990 2,834 94,979
Stock options exercised 500 - 2 - 2
Net loss - - - (73,703) (73,703)
---------- ---- ------- ------- -------
Balances at December 31, 1999 15,543,489 $ 155 $ 91,992 $(70,869) $ 21,278
========== ===== ======== ======== ========
33
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
1999 1998 1997
---- ---- ----
Cash Flows from Operating Activities:
Net income (loss) $ (73,703) $ (4,178) $ 3,421
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 7,242 6,244 2,630
Amortization of debt issuance costs 1,147 241 46
Impairment of property, plant and equipment 2,822 3,342 -
Deferred income tax expense (benefit) 4,534 (4,859) 755
Provision for excess and obsolete inventories 7,287 6,975 25
Provision for doubtful accounts receivable 5,091 600 454
Loss on sale of division 20,565 - -
Loss (gain) on sale of property, plant and equipment 315 (400) (1,150)
Changes in operating assets and liabilities, net
of effects of purchase and sale of businesses:
Decrease (increase) in:
Trade receivables (338) (9,311) (16,898)
Inventories (8,899) (21,667) (28,824)
Income taxes receivable (1,981) (125) 616
Prepaid expenses and other (843) (2,289) (2,644)
Increase (decrease) in:
Accounts payable 19,047 4,463 11,551
Accured compensation and benefits 3,631 616 -
Other accrued liabilities 4,210 2,167 604
------- ------ ------
Net cash used by operating activities (9,873) (18,181) (29,414)
------- ------ ------
Cash Flows from Investing Activities:
Proceeds from sale of division, net of cash transferred 28,135 - -
Proceeds from sale of property, plant and equipment 4,036 1,000 2,420
Payments for businesses, net of cash acquired - (40) (30,998)
Capital expenditures (14,419) (22,884) (13,496)
------- ------ ------
Net cash provided (used) by investing activities 17,752 (21,924) (42,074)
------- ------ ------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options and warrants 2 513 4,326
Issuance of common stock for cash, net of costs - 21,332 38,952
Receipts (payments) under inventory financing arrangement (5,600) 5,600 -
Payments for debt issuance costs (589) - (978)
Proceeds from long-term debt 153,157 16,865 98,941
Principal payments on long-term debt (154,756) (5,459) (68,283)
------- ------ ------
Net cash provided (used) by financing activities (7,786) 38,851 72,958
------- ------ ------
Net increase (decrease) in cash and equivalents 93 (1,254) 1,470
Cash and Equivalents:
Beginning of year 623 1,877 407
------- ------ ------
End of year $ 716 $ 623 $ 1,877
========= ======== =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,320 $ 4,344 $ 2,023
========= ======== =======
Cash paid (received) for income taxes $ (184) $ 1,116 $ 119
======== ======== =======
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Conversion of capital lease for property, plant
and equipment to an operating lease $ 10,240 $ - $ -
========= ======= =======
Conversion of notes payable to shareholders' equity $ - $ 1,398 $ -
========= ======= =======
Common stock issued in business combinations $ - $ - $14,182
========= ======= =======
34
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
1. Nature of Business and Significant Accounting Policies
Nature of Business
EFTC Corporation (the "Company") is an independent provider of electronic
manufacturing services to original equipment manufacturers in the
computer peripherals, medical equipment, industrial controls,
telecommunications equipment and electronic instrumentation industries.
The Company's manufacturing services consist of assembling complex
printed circuit boards (using both surface mount and pin-through-hole
technologies), cables, electro-mechanical devices and finished products.
The Company operates in one business segment and substantially all of its
operations are conducted in the United States.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of EFTC Corporation and its wholly-owned subsidiaries since the date of
formation or acquisition, as described in Note 2. All intercompany
balances and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. The actual results
could differ significantly from those estimates.
The Company's consolidated financial statements are based on several
significant estimates, including the allowance for doubtful accounts, the
provision for excess and obsolete inventories, and the selection of
estimated useful lives of intangible assets and property, plant and
equipment.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of standard cost (which approximates
weighted average cost) or market.
Financial Instruments
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 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.
35
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Material expenditures
that increase the life of an asset are capitalized and depreciated over
the estimated remaining useful life of the asset. The cost of normal
maintenance and repairs is charged to operating expenses as incurred. For
the year ended December 31, 1998, the Company incurred interest costs of
$4,762, of which approximately $450 was capitalized for assets under
construction. Upon disposal of an asset, the cost of the properties and
the related accumulated depreciation are removed from the accounts, and
any gains or losses are reflected in current operations. Leasehold
improvements are amortized over the lesser of the life of the lease or
the estimated life of the improvement. For the years ended December 31,
1999, 1998 and 1997, the Company recognized depreciation and amortization
expense of $5,751, $4,548 and $2,083, respectively. Depreciation is
computed using the straight-line method over the following estimated
useful lives:
Years
Buildings and improvements 30 to 40
Manufacturing machinery and equipment 5 to 10
Furniture, computer equipment and software 3 to 7
Goodwill and Other Intangible Assets
Debt issuance costs are being amortized over the term of the related debt
using the interest method. Goodwill is amortized using the straight-line
method over 30 years. Intellectual property costs, consisting of circuit
board assembly designs and specifications, are being amortized over
periods ranging from 5 to 10 years using the straight-line method. For
the years ended December 31, 1999, 1998 and 1997, the Company recognized
amortization expense related to goodwill and intellectual property of
$1,491, $1,696 and $547, respectively.
Impairment of Long-Lived Assets
The Company assesses impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset,
including goodwill and intellectual property costs, may not be
recoverable. Assets held for sale are stated at the lower of the carrying
value or fair value (net of costs to sell). Recoverability of assets to
be held and used is generally measured by a comparison of the carrying
amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the assets. In
connection with restructurings in 1999 and 1998, the Company recognized
provisions for impairment of long-lived assets of $2,822 and $3,342,
respectively.
At December 31, 1999, the net carrying value of goodwill of $7,264
relates to the 1997 acquisition of Current Electronics, which now
comprises the Company's Northwest Operations Division. Since this
division is not held for sale, the Company evaluates the goodwill for
impairment by considering historical and budgeted earnings trends for
this division. If the unamortized carrying amount of the goodwill exceeds
undiscounted cash flow projections for a period equal to one-half of the
remaining amortization period, then an adjustment will be recorded to
reduce the carrying amount to the net cash flows discounted at 15%.
36
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Income Taxes
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers or
when services are provided.
Earnings Per Share
Basic Earnings Per Share excludes dilution for potential common shares
and is computed by dividing net income or loss by the weighted average
number of common shares outstanding for the year. Diluted Earnings Per
Share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock. In 1997, diluted weighted average shares outstanding
include 452,365 potential common shares, consisting of stock options and
warrants, determined using the treasury stock method. Basic and diluted
Earnings Per Share are the same in 1999 and 1998 as all potential common
shares were antidilutive.
Prior to the merger with the Company, the net income of Personal
Electronics (see Note 2) was not subject to income taxes due to its tax
status under Subchapter S of the Internal Revenue Code. For periods prior
to the merger, Earnings Per Share has been presented on a pro forma basis
to reflect the Company's earnings as if Personal Electronics had been a
taxable entity subject to federal and state income taxes at the marginal
tax rates applicable in such periods.
Stock-based Compensation
The Company accounts for stock-based compensation issued to employees
using the intrinsic value method. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of
the quoted market price of the Company's common stock at the measurement
date (generally, the date of grant) over the amount an employee must pay
to acquire the stock. Pro forma disclosures of net income (loss) and
earnings per share are presented in Note 6 to reflect the impact on
stock-based compensation if the Company had adopted the alternative
method prescribed by Statement of Financial Accounting Standards No. 123,
which requires the use of an option pricing model to determine the fair
value of stock options.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the presentation in 1999. These
reclassifications had no effect on the previously reported net income or
loss.
37
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
2. Business Combinations and Asset Acquisitions
Personal Electronics. On March 31, 1998, the Company acquired through
merger, RM Electronics, Inc., doing business as Personal Electronics
(Personal), in a business combination accounted for as a pooling of
interests. The Company issued 1,800,000 shares of common stock in
exchange for all of the outstanding common stock of Personal.
Accordingly, the Company's consolidated financial statements were
restated for all periods presented to combine the financial position,
results of operations and cash flows of Personal with those of the
Company.
In connection with the acquisition, the Company incurred merger costs of
$1,048, which were charged to operations in March 1998. Notes payable to
shareholders of Personal of $1,398 were converted to equity upon
consummation of the merger.
CTI Companies. On September 30, 1997, the Company acquired three
affiliated companies, Circuit Test, Inc., Airhub Service Group, L.C. and
CTI International, L.C. (the "CTI Companies"), for approximately $35,700
consisting of 1,858,975 shares of the Company's common stock and
approximately $26,500 in cash, including approximately $1,400 of
transaction costs and a $6,000 payment upon completion of the common
stock offering in October 1997. The Company recorded goodwill of
approximately $38,900, in connection with the transaction. The
acquisition was accounted for using the purchase method of accounting for
business combinations and, accordingly, the accompanying consolidated
financial statements include the results of operations of the acquired
businesses since the date of acquisition. The CTI Companies comprised the
Services Division that was sold on September 1, 1999 as described in Note
9.
Current Electronics, Inc. On February 24, 1997, the Company acquired two
affiliated entities, Current Electronics, Inc., an Oregon Corporation,
and Current Electronics (Washington), Inc., a Washington Corporation, for
total consideration of approximately $10,900, consisting of 1,980,000
shares of Company common stock and approximately $5,500 in cash,
including approximately $600 of transaction costs. The Company recorded
goodwill of approximately $8,000 in connection with the acquisition. The
acquisition was accounted for using the purchase method of accounting for
business combinations and, accordingly, the accompanying consolidated
financial statements include the results of operations of the acquired
businesses since the date of acquisition.
Asset Acquisitions. In September 1998, the Company acquired the circuit
card assembly operations of the Agfa Division of Bayer Corporation. The
Company purchased inventory and equipment for approximately $6,000 and
the parties entered into a long-term supply agreement for the manufacture
of circuit card assemblies.
During the period from August 1997 through February 1998, the Company
completed two transactions with AlliedSignal, Inc. ("AlliedSignal")
pursuant to which the Company acquired inventories and equipment located
in Ft. Lauderdale, Florida and Tucson, Arizona, for an aggregate purchase
price of approximately $19,000. In connection with these transactions,
the Company entered into a long-term supply agreement with AlliedSignal
for the production of circuit card assemblies. In September 1998, the
Company purchased manufacturing equipment for approximately $1,500 from
AlliedSignal. In connection with this transaction, AlliedSignal agreed to
amend the long-term supply agreement to include the production of circuit
card assemblies at the Company's new facility in Ottawa, Kansas.
38
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
3. Inventories
Inventories are summarized as follows:
December 31,
---------------------------------
1999 1998
-------------- --------------
Purchased parts and completed sub-assemblies, net of
reserve for excess and obsolete items of $10,175 and
$8,388, respectively $43,971 $ 44,216
Work-in-process 13,317 12,474
Finished goods 2,879 4,069
-------------- --------------
$60,167 $ 60,759
============== ==============
For the years ended December 31, 1999, 1998 and 1997, the Company
recognized charges to reflect excess and obsolete inventories of $7,287,
$6,975 and $25, respectively. These charges include the effects of the
restructuring activities described in Note 9.
4. Debt Financing
At December 31, 1999 and 1998, long-term debt consists of the following:
December 31,
-----------------------------
1999 1998
-------------- -------------
Note payable to Bank Group under revolving line of credit, interest at
the prime rate (8.5% at December 31, 1999) plus 2.25%, collateralized by
substantially all assets, due March 30, 2000
(refinanced on March 30, 2000, see below) $ 33,184 $23,760
Term note payable to Bank Group, due September 2002 -- 15,900
Sale-leaseback financing arrangement with director, interest -- 10,495
Note payable to director, interest at LIBOR plus 2% (9.8% at December 31,
1999), annual principal payments of $50, due December 2002, unsecured,
net of discount of $90 and $122, respectively 4,810 4,828
Note payable to director, interest at 10% plus $100 due at maturity,
unsecured, due March 31, 2000 (see below and Note 8) 5,000 --
-------------- -------------
Total 42,994 54,983
Less current maturities (5,018) (4,115)
-------------- -------------
Long-term debt, less current maturities $ 37,976 $50,868
============== =============
39
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
In September 1997, the Company entered into a credit agreement with a
Bank Group comprised of four financial institutions. The credit agreement
provided for a $40,000 revolving line of credit renewable on September
30, 2000, and a $20,000 term loan maturing on September 30, 2002. In
order to permit the sale of the Services Division discussed in Note 9,
the Bank Group required the Company to repay the term note on September
1, 1999. During the fourth quarter of 1999, the credit agreement was
amended to reduce the commitment to $35,000 and the maturity date was
changed to March 30, 2000. The commitment was further reduced to $30,500
in February 2000 in connection with a modification to the credit
agreement to permit the sale of assets related to the Company's Tucson,
Arizona manufacturing facility discussed in Note 9. Borrowings under the
revolving line of credit were subject to limitation based on the value of
the available collateral.
The loan agreement contains restrictive covenants relating to capital
expenditures, limitation on investments, borrowings, payment of dividends
and mergers and acquisitions, as well as the maintenance of certain
financial ratios. During 1999, the Company was not in compliance with
certain financial covenants and the Bank Group provided waivers or agreed
to amendments to the credit agreement.
Aggregate Maturities. As discussed below, the Company entered into a new
credit agreement on March 30, 2000, which permitted the refinancing of
the $33,184 balance due to the Bank Group on a long-term basis. Aggregate
maturities of long-term debt, after giving effect to the refinancing and
based on outstanding debt at December 31, 1999, are as follows:
Year Ending December 31: Principal Discount Net
2000 $ 5,050 $ (32) $ 5,018
2001 50 (30) 20
2002 4,800 (28) 4,772
2003 33,184 -- 33,184
--------------- --------------- --------------
Total $ 43,084 $ (90) $ 42,994
=============== =============== ==============
Recapitalization. On March 30, 2000, the Company entered into an
agreement with Thayer-Blum Funding, LLC (the "Purchaser") for a
recapitalization of the Company. The agreement provides for the purchase
of a total of $54 million in Senior Subordinated Exchangeable Notes
("Exchangeable Notes") and a subsequent tender offer for up to 8,250,000
shares of the Company's currently outstanding common stock at a price of
$4.00 per share. The Exchangeable Notes initially provide for a maturity
date of June 30, 2006 and a paid-in-kind interest rate of 15%, and are
accompanied by warrants (the "Warrants") to purchase 3,093,154 shares of
the Company's common stock at an exercise price of $.01 per share. The
Purchaser has designated two persons who have been appointed to the
Company's board of directors.
Upon shareholder approval of this transaction and assuming that at least
500,000 shares are tendered in the tender offer, the Warrants will never
become exercisable and will be cancelled. Additionally, the Exchangeable
Notes will automatically be replaced with Senior Subordinated Convertible
Notes ("Convertible Notes") that provide for interest at 8.875%, payable
in additional Convertible Notes and a maturity date of June 30, 2006. At
the election of the holder, the
40
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Convertible Notes may be converted, at any time, into the Company's common stock
at $2.60 per share, subject to adjustment. Conversion of the notes will occur
automatically (i) if the Company's common stock trades above $7.50 per share for
45 consecutive trading days, or (ii) commencing on March 30, 2003, if the
Company's common stock trades above $4.25 for 45 consecutive trading days.
Finally, at the closing of the tender offer, the Purchaser will have the right
to designate a majority of the members of the Company's board of directors and
will have the right to approve any significant financings, acquisitions and
dispositions. The Purchaser has requested that the conversion price of the
Convertible Notes be reduced to $2.58 to reflect the change in the Company's
financial condition as a result of certain excess costs that were incurred by
the Company in connection with the transaction.
If shareholders do not approve the transaction by September 1, 2000 or if
less than 500,000 shares are tendered, the Warrants and Exchangeable
Notes will remain in place and the interest rate on the Exchangeable
Notes will increase to 20%. Interest would be compounded quarterly and
payable in additional Exchangeable Notes or cash, at the option of the
holders.
Refinancing of Debt. On March 30, 2000, the Company entered into a new
credit agreement with Bank of America, N.A. to replace the Company's
existing revolving line of credit with BankOne Colorado, N.A. The new
credit facility provides for a $45 million revolving line of credit with
a maturity date of March 30, 2003. Initially, the interest rate will be
the prime rate plus .5%. Total borrowings are subject to limitation based
on a percentage of eligible accounts receivable and eligible inventory.
Substantially all of the Company's assets are pledged as collateral for
outstanding borrowings, and the credit agreement requires compliance with
certain financial and non-financial covenants.
On March 30, 2000, the Company also repaid outstanding notes payable in
the aggregate principal amount of $9,810 (net of discount) to a director
of the Company. The Company simultaneously borrowed $3,000 from this
director under a new unsecured note that provides for interest at 10%
payable quarterly and a due date of March 2004.
5. Income Taxes
Income tax benefit (expense) for the years ended December 31, 1999, 1998
and 1997, is comprised of the following:
1999 1998 1997
--------------- --------------- ---------------
Current:
Federal $ 2,370 $ (2,058) $ (1,211)
State (16) (170) (152)
--------------- --------------- ---------------
2,354 (2,228) (1,363)
--------------- --------------- ---------------
Deferred:
Federal (4,039) 4,328 (599)
State (495) 531 (156)
--------------- --------------- ---------------
(4,534) 4,859 (755)
--------------- --------------- ---------------
Income tax benefit (expense) $ (2,180) $ 2,631 $ (2,118)
=============== =============== ===============
41
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Actual income tax benefit (expense) differs from the amounts computed
using the federal statutory tax rate of 34%, as follows:
1999 1998 1997
--------------- --------------- ---------------
Income tax benefit (expense) at the
statutory rate $ 24,318 $ 2,315 $ (1,883)
Increase (decrease) resulting from:
State income taxes, net of federal
benefit 2,146 238 (149)
Amortization of non-deductible
goodwill (135) (164) (85)
S Corporation (loss) -- 317 41
Increase in valuation allowance (28,462) -- --
Other, net (47) (75) (42)
--------------- --------------- ---------------
Income tax benefit (expense) $ (2,180) $ 2,631 $ (2,118)
=============== =============== ===============
At December 31, 1999 and 1998, the tax effects of temporary differences
that give rise to significant portions of deferred tax assets and
liabilities are presented below:
1999 1998
---------------- ----------------
Deferred tax assets:
Accrued compensation and benefits $ 558 $ 501
Impairment of property, plant and equipment 844 1,257
State net operating loss carryforwards 900 --
Provision for settlement of litigation 2,368 --
Deferred liability on sale of division 925 --
Federal net operating loss carryforwards 8,695 --
Intangible assets 696 --
Capital loss carryforward 3,080 --
Allowance for doubtful accounts 1,890 529
Inventories 6,943 4,042
Other 3,186 316
---------------- ----------------
Total deferred tax assets 30,085 6,645
Less valuation allowance (28,462) --
---------------- ----------------
Net deferred tax assets $ 1,623 $ 6,645
================ ================
Deferred tax liabilities:
Amortization of intangible assets $ (622) $ (565)
Accelerated depreciation and other basis
differences for property, plant and equipment (1,001) (1,546)
---------------- ----------------
Total deferred tax liabilities $ (1,623) $ (2,111)
================ ================
42
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
The above balances are classified in the accompanying consolidated
balance sheets as of December 31, 1999 and 1998, as follows:
1999 1998
-------------- ---------------
Net deferred tax asset - current $ -- $ 5,259
============== ===============
Net deferred tax liability - noncurrent $ -- $ 725
============== ===============
At December 31, 1999, the Company has a net operating loss carryforward
for Federal income tax purposes of approximately $23,000. If not
previously utilized, this carryforward will expire in 2019. A portion of
this net operating loss carryforward may be subject to reduction or
limitation of use as a result of changes in ownership or certain
consolidated return filing regulations. At December 31, 1999, the Company
also has a long-term capital loss carryforward of $8,300 that can be
utilized to offset future capital gains. This carryforward does not
expire. During 1999, the Company provided a valuation allowance for all
net deferred tax assets, including the net operating loss carryforward.
6. Stock-based Compensation
Warrants. At December 31, 1999, the Company has warrants outstanding for
10,000 shares of common stock at an exercise price of $4.00 per share. If
not previously exercised, these warrants expire in December 2001.
Stock Options. The Company has two stock option plans. The Equity
Incentive Plan provides for the grant of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock and
stock units. Substantially all employees are eligible under this plan,
which was amended to increase the maximum number of shares of common
stock that can be granted under this Plan to 4,495,000. These options
generally vest 7 years after the grant date, but vesting may accelerate
based on increases in the market price of the Company's common stock or
upon a change of control of the Company. The Non-employee Directors Plan
provides for options to acquire shares of common stock to members of the
Board of Directors who are not also employees. These options generally
vest over a 4-year period. At December 31, 1999, an aggregate of
approximately 1,360,000 shares are available for grant under both plans.
The Company has also issued 451,850 nonqualified options to officers and
employees. These options generally vest 7 years after the grant date, but
vesting may accelerate based on increases in the market price of the
Company's common stock.
43
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
The following summarizes activity related to stock options for the three
years ended December 31, 1999:
Weighted average
exercise price
Number of options per share
--------------------------- -----------------
Balance at December 31, 1996 560,500 $ 4.55
Granted 2,004,000 11.63
Exercised (53,300) 4.34
Canceled (95,980) 6.07
-------------------
Balance at December 31, 1997 2,415,220 10.37
Granted 2,578,892 9.82
Exercised (275,016) 5.34
Canceled (2,155,469) 14.46
-------------------
Balance at December 31, 1998 2,563,627 7.01
Granted 1,222,263 4.13
Exercised (500) 3.38
Canceled (650,331) 7.59
-------------------
Balance at December 31, 1999 3,135,059 5.77
===================
The following table summarizes information about stock options
outstanding at December 31, 1999:
Weighted Weighted
Range of Average Average
Exercise Number Year of Exercise Number Exercise
Prices Outstanding Expiration Price Exercisable Price
---------------------- -------------- ------------- ----------- ------------ ------------
$7.50 to $7.63 33,000 2004 $ 7.57 33,000 $7.57
$5.50 to $5.50 15,000 2005 5.50 15,000 5.50
$3.50 to $5.00 179,951 2006 4.05 178,909 4.05
$4.88 to $6.63 78,000 2007 11.84 30,500 5.74
$9.50 to $14.31 506,300 2007 5.75 491,800 10.53
$2.72 to $4.00 319,000 2008 3.27 58,900 3.33
$8.00 to $14.31 858,045 2008 8.67 263,803 8.72
$1.81 to $3.88 394,563 2009 3.02 4,000 3.85
$4.00 to $6.41 751,200 2009 4.85 114,250 4.88
-------------- ------------
$1.81 to $14.31 3,135,059 5.77 1,190,162 6.11
============== ============
44
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
The Company utilizes the intrinsic value method to account for
stock-based compensation. Accordingly, because the exercise price of
stock options granted by the Company is equal to the market price on the
date of grant, no compensation cost has been recognized in the
accompanying financial statements. If compensation cost had been
determined using the fair value method calculated using an option-pricing
model, the Company's pro forma net income (loss) and earnings (loss) per
share would have been as follows:
Year ended December 31,
----------------------------------------------------------
1999 1998 1997
--------------- ----------------- ----------------
Net income (loss):
As reported $ (73,703) $ (4,178) $ 3,421
Pro forma $ (75,345) $ (6,645) $ 1,149
Income (loss) per share - basic:
As reported $ (4.74) $ (.31) $ .40
Pro forma $ (4.85) $ (.45) $ .14
Income (loss) per share - diluted:
As reported $ (4.74) $ (.31) $ .38
Pro forma $ (4.85) $ (.45) $ .13
The weighted average fair value of options granted for the years ended
December 31, 1999, 1998 and 1997 was $2.45, $4.42 and $5.90,
respectively. In estimating the fair value of options, the Company used
the Black-Scholes option-pricing model with the following weighted
average assumptions:
Year ended December 31,
---------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
Dividend yield -- -- --
Expected volatility 78.0% 100.0% 70.0%
Risk-free interest rate 5.4% 5.0% 6.0%
Expected lives (years) 3.5 3.0 3.0
7. Shareholder Rights Plan
In January 1999, the Board of Directors approved a Shareholder Rights
Plan and declared a dividend distribution of one right to purchase one
one-thousandth of a share of a new series of junior participating
preferred stock for each share of common stock of EFTC held. The
distribution was made on February 25, 1999, to shareholders of record on
that date
The Rights trade with the Company's common stock as a unit unless the
Rights become exercisable upon the occurrence of certain triggering
events relating to the acquisition of beneficial ownership of 15% or more
of the Company's common stock by any person or group (the "Acquirer"),
subject to certain exceptions. In certain events after the Rights become
exercisable, they will entitle each holder other than the Acquirer, to
purchase for $35.00 per share, a number of shares of common stock having
a market value of twice the Right's exercise price, or a number of the
Acquirer's common shares having a market value at the time of twice the
Right's exercise price. A shareholder
45
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
would have one such right for each share of stock held at the time the
Rights become exercisable. The Company may amend the Rights or redeem
the Rights at $0.001 per Right at any time prior to the Rights
becoming exercisable. The Rights will expire in February 2009, unless
sooner amended or redeemed by the Company.
In connection with the recapitalization discussed in Note 4, the Company
amended the agreement governing the Rights, effective March 30, 2000, to
exclude Thayer, BLUM and their affiliated entities, from the definition
of Acquirer. Thus, the acquisition of beneficial ownership of 15% or more
of the Company's common stock in connection with the recapitalization
will not result in the Rights becoming exercisable.
8. Related Party Transactions
Under a previously existing agreement, the CTI Companies were required to
pay $500 upon change in control to an entity acting as a sales agent for
the CTI Companies in which individuals who are stockholders, officers and
directors of the Company have a majority ownership interest.
In 1997, the Company leased three facilities from directors of the
Company. Amounts paid to the directors totaled approximately $283.
An investment-banking firm, of which a director of the Company is the
Managing Director, received a fee of approximately $900 as a
representative of the CTI Companies in their acquisition by the Company.
The same firm earned a $500 fee as a representative of the Company for
the sale of the CTI Companies in September 1999. This fee has not been
paid as of December 31, 1999, and is included in other accrued
liabilities in the accompanying balance sheet. This investment-banking
firm also received a fee of $642 as a representative of Personal
Electronics in connection with the Company's 1998 acquisition described
in Note 2.
During September 1997, the Company issued $15,000 of subordinated notes
to an entity that is owned by a director of the Company. The subordinated
notes also included warrants to acquire 500,000 shares of the Company's
common stock at $8.00 per share. The warrants were issued in October
1997, and were valued at approximately $500 using an option-pricing
model. The warrants were exercised on October 9, 1997 for total proceeds
of $4,000. The Company repaid $10,000 of this debt upon the completion of
a secondary common stock offering completed in November 1997. The
scheduled repayment was reduced by the pro rata amount of unamortized
discount. Accordingly, no gain or loss was recognized on the
extinguishment of debt. The outstanding balance (net of discount) of
$4,810 is included in long-term debt as of December 31, 1999. In November
1999, the Company borrowed an additional $5,000 from an entity that is
controlled by this director.
In December 1998, the Company entered into a sale-leaseback transaction
with a director and stockholder of the Company. Manufacturing facilities
in Newberg, Oregon and Tucson, Arizona were sold for $10,500 and leased
back to the Company. Due to the Company's continuing financial interest
in the facilities, the transaction was accounted for as a financing
transaction secured by the facilities with an imputed interest rate of
8.68%. The lease term is for 5 years with monthly payments of $90. No
gain or loss from the sale was recorded. At the end of the initial lease
term the Company had the option to buy the buildings back for $9,400. In
May 1999, the lease was
46
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
amended to eliminate the purchase option, which resulted in the
re-characterization of the lease from a capital lease to an operating
lease. Accordingly, the buildings and the related debt have been removed
from the balance sheet at December 31, 1999.
The Company has entered into consulting and employment agreements with
individuals who are officers and directors of the Company. The consulting
agreements provide for aggregate monthly payments of approximately $38
through February 2002. The employment agreements provide for monthly
payments of $44 until expiration in 2000 and 2001. The employment
agreements may be terminated prior to expiration but the Company would
generally be required to pay severance benefits equal to one-year's
salary or up to two-year's salary if a change of control occurs.
Additionally, the Company has entered into arrangements with an entity
that is owned by a director whereby an aggregate of $238 was paid for
services rendered in 1999.
9. Restructuring and Sale of Assets
Since the fourth quarter of 1998, the Company has taken actions to
increase capacity utilization through the closure of two facilities and
the sale of substantially all of the assets at two other divisions. The
aggregate 1999 operating results for these divisions, derived from the
Company's divisional accounting records (excluding corporate costs,
interest expense and income taxes), for these divisions are summarized as
follows:
Net sales $103,000
Cost of goods sold 109,200
-------------
Gross profit (loss) $ (6,200)
=============
Selling, general and administrative $ (11,400)
=============
Impairment of long-lived assets $ (2,700)
=============
Goodwill amortization $ (900)
=============
Loss on sale of assets $ (20,700)
=============
Management estimates that approximately $50,000 of the 1999 net sales
shown above relates to customers who have agreed to transition the
manufacture of their products to other facilities owned by the Company.
Presented below is a detailed description of each division that was
impacted by a sale or restructuring.
Sale of Tucson Assets. In December 1999, the Company commenced
negotiations with Honeywell International, Inc. for the sale of
inventory and equipment at the Company's facility located in Tucson,
Arizona. On February 17, 2000, these assets were sold to Honeywell for
a purchase price of $13,240. The Company was required to place $500 in an
escrow account
In connection with the agreement, Honeywell agreed to sublease the Tucson
facility for at least 18 months at $32 per month, which is equal to the
Company's rent expense. Honeywell has the option to extend the term of
the sublease until December 2003 when the Company's primary lease term
expires. If Honeywell terminates the sublease after 18 months, the
Company will attempt to enter into another sublease with a new tenant for
the remaining period under the primary lease. The
47
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Tucson facility is currently leased from a director of the Company as
discussed in the next to last paragraph of Note 8.
The Company recognized a $1,200 impairment charge in 1999 related to
property and equipment at the Tucson facility.
Southeast Operations. On September 30, 1999, the Company initiated a plan
to consolidate and close its Southeast Operations in Fort Lauderdale,
Florida. In connection with the restructuring, the Company recognized a
charge of approximately $700 for severance costs related to approximately
200 employees who were terminated by April 2000. The unpaid portion of
the severance provision amounted to $682 at December 31, 1999 and is
included in accrued compensation and benefits in the accompanying balance
sheet.
In connection with the closure, the Company recognized charges of $7,131
for excess and obsolete inventories and other items that are included in
cost of goods sold in 1999. The Company also recognized a charge of
$1,000 for impairment of property and equipment that will not be
redeployed at other divisions. Additionally, the Company recognized an
increase in the allowance for doubtful accounts of $2,400 that is
included in selling, general and administrative expenses in 1999.
Management expects the Company will incur additional charges of $1,000 in
the first quarter of 2000 for retention bonuses, relocation costs and
other closure activities. These costs will be reflected in operations in
the period in which they occur. It is expected that the closure will be
substantially complete by April 2000.
Sale of Services Division. On September 1, 1999, the Company sold the
Services Division for approximately $28,000. The Company recognized a
loss of $20,565 primarily due to the write-off of $36,452 of unamortized
goodwill that was directly associated with the acquisition of this
division. The Company also recognized $400 for impairment of property,
plant and equipment, and additional provisions totaling $1,600 related to
inventory and receivables not transferred to the purchaser.
In connection with this sale, the purchaser and the Company agreed to an
Earn-out Contingency (the "EC"). Under the EC, if the earnings for the
year ending August 31, 2000 related to the division sold is in excess of
$4,455 ("Target Earnings"), the Company will be entitled to an additional
payment equal to three times the difference between the actual earnings
and Target Earnings. If actual earnings are less than Target Earnings,
the Company will be required to refund an amount equal to three times the
difference. The maximum amount that either party would be required to pay
under the EC is $2,500; accordingly, the Company has deferred recognition
of $2,500 of the consideration subject to the EC.
Rocky Mountain Operations. In the fourth quarter of 1998, management
initiated a plan to consolidate and close its Rocky Mountain Operations
in Greeley, Colorado. Costs of $9,250 related to the closing were charged
to operations for the year ended December 31, 1998. Additional costs to
related to the closure of $2,391 were incurred through October 1999 when
the facility was sold for $3,802. The restructuring involved the
termination of approximately 140 employees of which 123 were
manufacturing related and 17 administrative or indirect support
personnel. Total
48
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
severance and salaries of employees performing exit activities amounted
to $463 of which $263 was included in cost goods sold and $200 in
selling, general and administrative expenses in 1998. During 1998, the
Company paid $100 of these costs and the remaining costs were paid in
1999.
Inventory allowances of $5,445, which are included in cost of goods sold
in 1998, were recorded to provide for future losses to be incurred
related to disengaged customers that did not continue as customers of the
Company. In addition, a provision of $3,342 was charged to operations in
1998 related to asset impairment of land, building and equipment. At
December 31, 1999, all of the restructuring costs had been paid and no
accrual was remaining related to these restructuring activities.
10. Business and Credit Concentrations
The Company operates in the electronic manufacturing services segment of
the electronics industry. Substantially all of the Company's customers
are located in the United States. For the years ended December 31, 1999
and 1998, 68% and 46%, respectively, of the Company's sales were derived
from companies engaged in the avionics industry. 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 might experience reduced
net sales and profitability.
Sales to significant customers as a percentage of total net sales for the
years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997
---- ---- ----
AlliedSignal, Inc. 46.1% 42.1% 25.3%
Honeywell, Inc. 10.3% 3.3% --
----------------- ----------------- -----------------
Pro Forma Combined 56.4% 45.4% 25.3%
================= ================= =================
Exabyte -- 4.4% 12.3%
================= ================= =================
In December 1999, AlliedSignal and Honeywell completed their merger and
the combined company was named Honeywell International, Inc. The pro
forma disclosure above presents the customer concentration as if the
merger had occurred on January 1, 1997.
At December 31, 1999, approximately 57% of the Company's net trade
receivables were due from Honeywell International, Inc., and 12% of net
trade receivables were due from Bayer Corporation. The Company does not
require collateral to support trade receivables.
11. Commitments and Contingencies
Operating Leases. The Company has noncancelable operating leases for
facilities and equipment that expire in various years through 2004. Lease
expense under all operating leases amounted to $9,471, $7,072 and $2,333
for the years ended December 31, 1999, 1998 and 1997, respectively.
49
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
At December 31, 1999, future minimum lease payments (excluding sublease
rentals due from Honeywell International, Inc. discussed in Note 9) for
operating leases are as follows:
Year Ending December 31:
2000 $ 9,975
2001 7,727
2002 6,485
2003 5,881
2004 3,320
After 2005 5,845
-----------
$ 39,233
===========
Customer Royalties. In connection with long-term customer supply
agreements, the Company has agreed to pay approximately 1% of gross
revenue for all electronic assemblies and parts made for other customers
at certain facilities. These arrangements expire beginning in 2001 and
extending until 2009 at one of the Company's facilities. Total royalties
under these arrangements for the year ended December 31, 1999 amounted to
$170.
Financial Advisory Agreement. In December 1999, the Company entered into
an agreement with an entity engaged to assist the Company with a debt or
equity financing. Depending on the nature of the financing transaction,
the company will be required to pay a fee between 1.0% and 5.0% of the
gross proceeds and issue warrants to purchase up to 525,000 shares of
common stock at an exercise price of $3.00 per share.
Employee Benefit Plan. The Company has a 401(k) Savings Plan covering
substantially all employees, whereby the Company matches 50% of an
employee's contributions to a maximum of 2% of the employee's
compensation. Additional profit sharing contributions to the plan are at
the discretion of the Board of Directors. During the years ended December
31, 1999, 1998 and 1997, contributions from the Company to the Plan were
approximately $588, $391 and $138, respectively.
Legal Proceedings. In September and October 1998, the Company and certain
of its present and former directors and officers were named as defendants
in lawsuits brought by certain shareholders claiming to represent classes
of shareholders that purchased shares of the Company's common stock
between April and August 1998. These class action complaints purport to
present claims under federal and state securities laws and seek
unspecified damages based on alleged misleading disclosures during the
class period. On April 4, 2000, subject to court approval, the plaintiffs
and the Company agreed to settle both lawsuits. The Company has recorded
a provision for the settlement of this loss contingency as of December
31, 1999. The settlement will require the Company to pay approximately
$3,100 by April 10, 2000. Additionally, the Company will be required to
contribute to the settlement fund an aggregate of 1,300,000 shares of the
Company's common stock with an estimated fair value of $3,300.
50
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
12. Fourth Quarter Adjustments
During the fourth quarter of 1999, the Company recognized a charge of
$4,215 for a valuation allowance related to deferred tax assets, and a
charge of approximately $1,000 related to the accelerated amortization of
debt issuance costs due to a fourth quarter amendment to the bank credit
agreement. In addition, the Company incurred other charges of
approximately $6,400 related to the lawsuit settlement discussed in Note
11, and $5,600 for charges related to inventory, receivables and the
resolution of other issues (primarily related to the closure of the Ft.
Lauderdale division and the sale of the Tucson assets) with Honeywell
International, Inc.
51
Independent Auditors' Report
The Board of Directors
EFTC Corporation:
Under date of April 4, 2000, we reported on the consolidated balance sheets of
EFTC Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999
which are included in the Company's annual report on Form 10-K for the year
ended December 31, 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule included in the Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
April 4, 2000
52
EFTC CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Accounts Receivable- Allowance for Doubtful Accounts
(Dollars in Thousands)
Additions (1)
----------------------
Balance at Charged Charged Balance at
Beginning To Costs & To Other End Of
Year Ended December 31, Of Period Expenses Accounts Deductions (2) Period
--------- ---------- -------- -------------- ------
1997 $ 20 $ (240) $ 694 $ -- $ 474
1998 474 1,020 24 196 1,322
1999 1,322 5,091 -- 2,724 3,689
Inventories- Reserve for Excess and Obsolete Inventories
(Dollars in Thousands)
Additions (1)
---------------------------
Balance at Charged Charged Balance at
Beginning To Costs & To Other End Of
Year Ended December 31, Of Period Expenses Accounts Deductions(2)(3) Period
1997 $ 20 $ 25 $ 2,196 $ 218 $ 2,023
1998 2,023 6,975 1,487 2,097 8,388
1999 8,388 7,287 -- 5,500 10,175
------------------
(1) Amounts charged to other accounts were recorded in conjunction with
acquisitions.
(2) Deductions relate to write-offs unless otherwise indicated.
(3) Deductions of $2,087 in 1998 relate to adjustments to the purchase price
allocations of acquisitions.
53
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the directors and executive officers of the
Company is incorporated herein by reference to the section entitled PROPOSAL
1-ELECTION OF DIRECTORS in the Company's definitive Proxy Statement with respect
to the Company's Annual Meeting of Shareholders (the "Proxy Statement").
Item 11. Executive Compensation.
The section labeled "Compensation of Directors and Executive Officers"
appearing in the Company's Proxy Statement is incorporated herein by reference,
except for such information as need not be incorporated by reference under rules
promulgated by the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The Section labeled "Security Ownership of Directors and Executive
Officers and Certain Beneficial Owners" appearing in the Company's Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The second labeled "Certain Relationships and Related Transactions"
appearing in the Company's Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements-The financial statements listed in Item 8 on
page 28, are filed as part of this annual report.
2. Financial Statement Schedules-Schedule II- Valuation and
Qualifying Accounts and the accompanying opinion of KPMG LLP
which appear on pages 53 and 52, respectively, are filed as part
of this annual report.
3. Exhibits-The following exhibits are filed as part of this annual
report.
Exhibit
Number Document Description
*3.1 Amended and Restated Articles of Incorporation of the Company
*3.2 Articles of Amendment to the Articles of Incorporation of the Company
3.3 Articles of Amendment to the Articles of Incorporation of the Company
(10)
3.4 Amended and Restated Bylaws of the Company (1)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3, respectively
54
4.2 Specimen Common Stock Certificate of the Company (1)
*4.3 Form of Exchangeable Note dated as of March 30, 2000 issued by the
Company to Thayer-Blum Funding, LLC *4.4 Form of Convertible Note
dated as of March 30, 2000 issued by the Company to Thayer-Blum
Funding, LLC
4.5 Rights Agreement dated as of February 25, 1999 between the Company and
American Securities Transfer & Trust, Inc., as Rights Agent. (10)
*4.6 Amendment to Rights Agreement dated as of March 30, 2000 between the
Company and Rights Agent.
10.1 Form of Registration Rights Agreement dated January 1994 between the
Company and the parties thereto (1)
10.2 Registration Rights Agreement dated as of February 24, 1997, among the
Company, Charles E. Hewitson, Matthew J. Hewitson and Gregory Hewitson
and certain other parties (2)
10.3 Registration Rights Agreement dated as of March 31, 1998, among the
Company, Raymond Marshall and Robert Monaco (8)
10.4 Registration Rights Agreement dated as of September 30, 1997 among the
Company and CTI Shareholders (4)
10.5.1 Master Agreement Regarding Asset Purchase and Related Transactions
among the Company, AlliedSignal Avionics, Inc., a Kansas corporation
("Avionics"), and AlliedSignal, Inc., operating through its Aerospace
Equipment Systems Unit ("AES"), dated as of July 15, 1997, as amended
by the First Amendment to Master Agreement dated as of July 31, 1997,
and as further amended by the Second Amendment to Master Agreement
dated as of August 11, 1997 (3)
10.5.2 Third Amendment to Master Agreement dated as of September 5, 1997 (6)
10.6 Supplier Partnering Agreement between the Company and AlliedSignal,
Inc. dated as of September 29, 1998 (7)
10.7 Amended and Restated License Agreement between the Company and
AlliedSignal Technologies, Inc., dated as of September 5, 1997 (6)
*10.8 Asset Purchase Agreement dated February 17, 2000 between Honeywell
International Inc. and the Company
*10.9 Note Agreement between the Company and Richard L. Monfort dated as o
November 11, 1999
*10.10 First Amendment to Note Agreement between the Company and Richard L.
Monfort dated as of December 30, 1999, including the form of Note
attached as Exhibit A thereto.
10.11+ EFTC Corporation Equity Incentive Plan, amended and restated as of
July 9, 1997 (6)
10.12+ EFTC Corporation Stock Option Plan for Non-Employee Directors, amended
and restated as of July 9, 1997 (6) 10.13+ Employment Agreement with
Jack Calderon dated as of June 5, 1998 (7) 10.14+ Form of Consulting
Agreement entered into by the Company in connection with the
acquisition of Current Electronics, Inc.(5)
*10.15+ 1999 Management Bonus Plan
10.16 Asset Purchase Agreement dated as of August 31, 1999 between Jabil
Circuit, Inc., the Company, CTLCC Acquisition Corp., Circuit Test,
Inc., Airhub Services Group, L.C., and Circuit Test International,
L.C. (9)
*10.17 Master Agreement regarding Asset Purchase and Related Transactions
dated as of March 19, 1999 between Honeywell Inc. and the Company
*10.18 Long Term Supply Agreement dated as of March 19, 1999 between
Honeywell Inc. and the Company
Note: Confidential treatment has been requested from the Securities
and Exchange Commission for portions of this exhibit
*10.19 Amendment to Long Term Supply Agreement dated as of May 21, 1999
55
*10.20 Second Amendment to Long Term Supply Agreement dated as of February
2000
*10.21 Securities Purchase Agreement between the Company and Thayer-Blum
Funding, LLC dated as of March 30, 2000
*10.22 Form of Warrant dated as of March 30, 2000 issued by the Company to
Thayer-Blum Funding, LLC
*10.23 Loan and Security Agreement dated March 30, 2000 with Bank of America,
N.A., as agent for several banks (the "Bank") and the Company
*10.24 Security Agreement - Stock Pledge dated March 30, 2000 with the Bank
and the Company
*21.1 List of Subsidiaries
*23.1 Consent of KPMG LLP
*27.1 Financial Data Schedule
- -------------
* Filed herewith
+ Management Compensation Plan
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2 (File No. 33-73392-D) filed on December 23, 1993
(2) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on March 5, 1997
(3) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on August 26, 1997
(4) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on October 15, 1997
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-23332) filed on March 27, 1997
(6) Incorporated by reference from the Company's Registration Statement on
Form S-2 (File No. 333-38444) filed on October 21, 1997
(7) Incorporated by reference from the Company's Quarterly Report on Form
10-Q (File No. 0-23332) filed on November 16, 1998
(8) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on April 15, 1998
(9) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on September 16, 1999
(10) Incorporated by reference from the Company's Registration Statement on
Form 8-A (File No. 0-23332) filed on February 25, 1999
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K relating to the
execution by the Company and its senior lenders of an Amendment and
Waiver to Credit Agreement dated December 20, 1999.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on this 14th day of April, 2000.
EFTC CORPORATION, a Colorado corporation
By: /s/ Jack Calderon
Jack Calderon
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this Report to be signed by the following persons in
the capacities and on the dates indicated.
Position Held
Signature With the Registrant Date
/s/ Jack Calderon President and Director April 14, 2000
---------------------------
Jack Calderon (Principal Executive Officer)
/s/ James A. Doran Treasurer and Director April 14, 2000
--------------------------- (Principal Financial and Accounting Officer)
James A. Doran
/s/ Allan S. Braswell, Jr. Director April 14, 2000
----------------------------
Allan S. Braswell, Jr.
/s/ Jeffrey W. Goettman Director April 14, 2000
-------------------------
Jeffrey W. Goettman
/s/ Charles Hewitson Director April 14, 2000
---------------------------
Charles Hewitson
/s/ Robert McNamara Director April 14, 2000
---------------------------
Robert McNamara
/s/ Robert Monaco Director April 14, 2000
---------------------------
Robert Monaco
57
/s/Richard L. Monfort Director April 14, 2000
---------------------------
Richard L. Monfort
/s/ Gerald J. Reid Director April 14, 2000
---------------------------
Gerald J. Reid
/s/ Masoud S. Shirazi Director April 14, 2000
---------------------------
Masoud S. Shirazi
/s/ John C. Walker Director April 14, 2000
---------------------------
John C. Walker
58