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, 1998
[ ] 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 26, 1999, the number of outstanding shares of common stock
was 15,542,989. 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 $48,642,046.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders is incorporated by reference in Part III of this Form 10-K.
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PART 1. Business
General
EFTC Corporation (together with its subsidiaries, the "Company" or
"EFTC") is a leading independent provider of "high-mix" electronic manufacturing
services ("EMS") including quick-turn manufacturing, prototype services, high-
mix production, and aftermarket repair and warranty services to original
equipment manufacturers ("OEM's") and is in its initial year of providing build
to order ("BTO") services. The Company's manufacturing services focus on
high-speed production of high-mix electronic products--products that are
characterized by small lot sizes with differences in configuration in each lot.
Through its EFTC Services group, the Company provides "hub-based" repair and
warranty services that are integrated with the logistics service offerings of
the two largest transportation companies that specialize in overnight delivery
services in the United States. These hub-based services are provided principally
through facilities located inside or in close proximity to such transportation
companies' national sorting, warehouse and logistics hub facilities (the
"Overnight Delivery Hubs") in Memphis, Tennessee and Louisville, Kentucky. In
addition, the Company has invested in creating BTO manufacturing capabilities in
its Memphis, Tennessee facility. In May 1998, the Company signed its first BTO
contract with Fujitsu PCCorporation to provide BTO services for a line of
notebook computers.
Through acquisitions completed in 1998 and 1997, the Company has
expanded its operations from one facility in Colorado at the beginning of 1997
to twelve facilities throughout the United States at December 31, 1998. The
acquisitions have strategically expanded the Company's breadth of high-mix
service offerings to include quick-turn manufacturing, prototype services,
concurrent engineering, subassembly manufacturing, next-day delivery of
assemblies and warranty and post-warranty repair services. These acquisitions
have provided the Company with new opportunities to develop programs to help its
existing customers reduce inventory, and allow the Company to cross-market its
other services to the acquired companies' existing customer bases.
In November 1998, the Company announced its plans to close its Rocky
Mountain manufacturing facility located in Greeley, Colorado beginning in the
fourth quarter of 1998 and ending in early 1999 in order to reduce costs and
achieve greater capacity utilization. Certain key customers have been
transferred to other facilities and employees affected by this plant closure
have been offered employment opportunities at existing facilities whenever
possible. Approximately 140 employees were terminated. The Company is in the
process of transfering fixed assets, inventory and other resources to other
sites as needed. The Company charged $9.3 million to operations in the fourth
quarter of 1998 for severance, consolidation and moving expenses, asset
impairment for assets disposed of or held for sale, and inventory writedowns
associated with customers not transferred to other EFTC facilities.
In March 1999, the Company announced an agreement with Honeywell Inc.'s
Commercial Aviation Systems operations ("Honeywell") to acquire certain assets
and inventory located near Phoenix, Arizona which are used in circuit card
assembly. In addition, the Company has agreed to hire certain people that were
employed by Honeywell in that operation. The Company is leasing a facility
located in Phoenix, Arizona and will be transferring the assets it acquires and
employees it hires to this new facility. In addition, the Company and Honeywell
have signed a ten year agreement for the Company to supply circuit card assembly
services to Honeywell. This transaction is expected to close in phases
throughout 1999, with the first phase consisting of the purchase of assets for
approximately $2.5 million and the transfer of approximately 200 employees
expected to close in April 1999.
Acquisitions
In 1998, the Company entered into the AlliedSignal Kansas Asset
Purchase, the Bayer-Agfa Asset Purchase and the PE Merger, as described below.
AlliedSignal Kansas Asset Purchase. On September 30,1998, the Company
completed the first phase of acquiring a circuit card assembly operation (the
"AlliedSignal Kansas Asset Purchase") from AlliedSignal, Inc. ("Allied Signal").
This operation had been located in Lawrence, Kansas and was relocated by the
Company to a facility in nearby Ottawa, Kansas by December 31, 1998. As part of
the transaction, the Company hired certain employees that were formerly employed
by AlliedSignal. In connection with the transaction, the existing supply
agreement between the Company and AlliedSignal which was entered into in
connection with the AlliedSignal Florida/Arizona Asset
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Purchase (as defined below) was amended to include production of circuit card
assemblies by the Company at the Kansas facility. The Company agreed to pay
AlliedSignal one percent of gross revenue for all electronic assemblies and
parts made at the Kansas facility during the term of the supply agreement. The
Kansas facility is currently used to produce electronic assemblies for
AlliedSignal and other customers. The Company expects to complete the purchase
of AlliedSignal's inventory located in Kansas by May 1999.
Bayer-Agfa Asset Purchase. On September 1, 1998, the Company acquired
the circuit card assembly operations (the "Bayer-Agfa Asset Purchase") of the
Agfa Division of Bayer Corporation ("Bayer-Agfa") located in Wilmington,
Massachusetts. The Company purchased certain inventory and equipment for
approximately $6.0 million and hired certain employees associated with the
circuit card operation. In connection with the transaction, the Company entered
into two three-year supply agreements whereby the Company will produce and
supply circuit card assemblies used in Agfa's Electronic Prepress Systems and
Bayer's Medical Diagonistics Division. The Company agreed to pay Bayer-Agfa one
percent of gross revenue from sales to third parties of all printed circuit
boards manufactured, assembled or produced at the Massachusetts facility through
August 31, 2001 and in years thereafter when Bayer-Agfa's purchases under the
supply agreements exceed a certain threshold.
PE Merger. On March 31, 1998, the Company acquired (the "PE Merger") RM
Electronics, Inc., a New Hampshire corporation doing business as Personal
Electronics, Inc. ("Personal Electronics") for 1,800,000 shares of its common
stock issued to the former shareholders of Personal Electronics. Prior to its
acquisition by the Company, Personal Electronics was an independent provider of
quick-turn, low-volume, high-mix electronic manufacturing services to OEMs in
the Northeast region which focused on providing high levels of personalized
customer service to geographically proximate customers.
In 1997, the Company entered into the CTI Merger, the AlliedSignal
Florida/Arizona Asset Purchase and the CE Merger, as described below.
CTI Merger. On September 30, 1997, the Company acquired (the "CTI
Merger") three companies (the "CTI Companies") which perform repair and warranty
services at three sites, including two that were located at the Overnight
Delivery Hubs, for approximately $29.7 million in cash and debt assumption,
1,858,975 shares of the Company's common stock and a $6 million contingent
payment paid upon closing of a public offering of the Company's common stock
which was completed in November 1997. The CTI Companies are now known as the
"EFTC Services" group of the Company.
AlliedSignal Florida/Arizona Asset Purchase. In February 1998, the
Company completed the last stage of two transactions (the "AlliedSignal
Florida/Arizona Asset Purchase") with AlliedSignal which were begun in August
1997. Pursuant to these transactions, the Company acquired certain inventory and
equipment located in Ft. Lauderdale, Florida, subleased the portion of
AlliedSignal's facility where such inventory and equipment was located and
employed certain persons formerly employed by AlliedSignal at that location. The
Company also hired certain persons formerly employed by AlliedSignal in Tucson,
Arizona and agreed with AlliedSignal to provide the personnel and management
services necessary to operate a related facility on behalf of AlliedSignal on a
temporary basis. The Company purchased from a third party and renovated a
production facility in Tucson, Arizona. The Company moved AlliedSignal's
inventory and equipment and related employees to this facility and began
production there in early February 1998. The aggregate purchase price of the
assets acquired by the Company from AlliedSignal was approximately $19 million.
In addition, the Company entered into a supply agreement with AlliedSignal to
manufacture electronic assemblies for it at these facilities. The Company agreed
to pay AlliedSignal one percent of gross revenue for all electronic assemblies
and parts made for a customer other than AlliedSignal at the Arizona or Florida
facilities through December 31, 2001. The Florida and Arizona facilities are
currently used to produce electronic assemblies for AlliedSignal and other
customers.
CE Merger. On February 24, 1997, the Company acquired (the "CE Merger")
two manufacturing companies (the "CE Companies") with two sites located in
Oregon and Washington for approximately $10.9 million consisting of 1,980,000
shares of common stock and approximately $5.5 million in cash, which included
approximately $0.6 million of transaction costs.
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Services
The Company provides a variety of "high-mix" electronic manufacturing
services, including quick-turn manufacturing, prototype services, high-mix
production, and BTO services as well as aftermarket repair and warranty services
to OEMs. The Company offers customer-select service offerings which utilize the
Company's core competency of small-lot processing and logistic benefits due to
the position of its repair and warranty service operations within or close to
the Overnight Delivery Hubs.
Manufacturing Services
The Company's turnkey manufacturing services consist of assembling
complex printed circuit boards (using both surface mount and pin-through-hole
interconnection technologies), cables, electromechanical devices and finished
products. The Company also provides computer-aided testing of printed circuit
boards, subsystems and final assemblies. In certain instances, the Company
completes the assembly of its customers' products at the Company's facilities by
integrating printed circuit boards and electro-mechanical devices into other
components of the customer's products. Certain of the Company's facilities have
obtained, from the International Organization of Standards, ISO 9002
certification and the Company expects that all of its facilities will obtain
such certification by the end of 1999. The Company has innovated services and
programs such as Asynchronous Process Manufacturing ("APM"), its point-of -use
stocking program and its component obsolescence program which are customized to
meet the needs of OEMs that develop and sell high-mix products.
Asynchronous Process Manufacturing. APM is an innovative combination of
high-speed manufacturing equipment, sophisticated information systems and
standardized process teams designed to manufacture mixtures of small quantities
of products faster and with more flexibility. APM allows for the building of
small lots in very short cycle times. The Company is continuing to define APM
with the goal of reducing manufacturing cycle time for high-mix circuit cards.
The Company plans to implement APM at all of its facilities and for all of its
customers as part of a strategy to focus the Company exclusively on
manufacturing high-mix products. The Company has fully implemented APM at its
Newberg, Oregon facility. APM implementation requires a complete redesign of the
Company's manufacturing operations, reorganizing personnel into process teams
and revising documentation. Therefore, the Company, at its Newberg, Oregon
facility, is formulating detailed implementation procedures and documentation
which will be used to facilitate the implementation of APM at its other
facilities.
APM improves throughput of certain assembly processes over traditional
continuous (synchronous) flow processing ("CFM"), which is the predominant
method used in high-volume manufacturing. With APM, the Company is able to
process products rapidly using a combination of new discontinuous flow methods
for differing product quantities, fast surface mount assembly systems, test
equipment and high-volume, high-speed production lines. In the APM model,
materials are moved through the production queue at high-speed and not in a
continuous or linear order as under CFM. Instead, materials are moved through
the assembly procedure in the most efficient manner, using a computer algorithm
developed for the Company's operations, with all sequences controlled by a
computerized information system.
High-mix manufacturing using APM involves a discontinuous series of
products fed through assembly in a start-stop manner, 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 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 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. By designating teams to set up off-line feeders, standardizing
loading methods regardless of product complexity, and most importantly,
improving employee motivation,
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the Company's application of APM has decreased set-up and cycle times,
standardized work centers, allowed processing of smaller lot sizes and increased
the Company's productivity.
Build-to-Order Services. Management believes that the Company's
exclusive focus on high-mix production techniques will serve the needs of
traditional OEMs and is also well-suited for the BTO market. All of the
Company's systems are oriented toward small-lot processing from cable assembly,
to card assembly, to box-build, to repair and warranty services. The Company has
entered the BTO market at the box-build level. In "box build" services, the
manufacturer assembles parts and components, some of which may be purchased from
other manufacturers, into a finished product that meets the OEM's
specifications. BTO services are box-build services in which the lot size may
frequently consist of a single unit and is customized to the specifications of
an end user. Typically, these products have some basic, mass-produced parts and
special parts that are combined in numerous configurations to form highly
customized products. The Company's BTO services include these elements:
- commodity high-volume cards and subassemblies are outsourced to
volume commodity producers,
- the outsourced commodities are delivered to the Company's BTO
facility located in Memphis, Tennessee,
- orders are received at the Overnight Delivery Hubs, and
- final product is assembled at the Memphis, Tennessee facility and
delivered to the end user.
This offers OEMs a simplified, more cost effective logistic solution to the
delivery of their products. By locating its repair and warranty services close
to the Overnight Delivery Hubs, the Company believes it can reduce inventory
pipelines, minimize transportation legs and gain more time to respond to
customer needs. In May 1998, the Company signed its first BTO contract with
Fujitsu to provide BTO services for a line of notebook computers and, as of
January 1999, has shipped over 20,000 notebooks under this contract.
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. Because the density and complexity of electronic circuitry
constantly are increasing, the Company seeks to utilize developing test
technology in its automated test equipment and inspection systems in order to
provide superior services to customers.
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Repair and Warranty Services
The EFTC Services group is a hub-based, component-level repair
organization focused on the personal computer and communications industries.
EFTC Services pioneered the "end-of-runway" or "airport-hub-based" repair
strategy and are the only providers with operations integrated with the
operations of the two principal transportation providers at the Overnight
Delivery Hubs. The Company believes that through the EFTC Services group's long
tenure in the industry, high-quality technical capabilities, logistically
advantageous site locations, and strong relationships with transportation
industry leaders, the EFTC Services group has developed and optimized a "service
spares inventory pipeline," allowing lower OEM costs and improving end-user
service levels.
The EFTC Services group's repair service offering complements the
transportation logistics services marketing efforts of the two principal
transportation providers at the Overnight Delivery Hubs, who work with the
Company in providing access to large OEM accounts. The Company has exercised
tight cost control by using a flexible, part-time labor pool and leveraging the
sales and marketing efforts of these transportation and logistics service
providers. Additionally, beyond the requisite piece-part inventory for repairs,
the Company carries minimal OEM inventory and is thus less exposed to inventory
obsolescence than many competitors.
The EFTC Services group handles various types of equipment, including
computer monitors, PC boards, routers, laptops, printers, scanners, fax
machines, pen-based products, personal digital assistants, and keyboards. The
EFTC Services group works with its customers on "advance exchange" programs,
whereby end users receive overnight replacement of their broken components,
which are in turn repaired by the Company and replaced into the OEMs' "service
spares inventory pipeline" for future redistribution. The Company thus assists
OEM customers in increasing inventory turns, reducing spares inventory, lowering
overall costs, accelerating repair cycles, and improving customer service.
Customer service is improved through both quicker turnaround time for
in-warranty claims, as well as having the Company support end-customers with
out-of-warranty claims and end-of-life products.
The Company believes that the location of its repair facilities at or
near the Overnight Delivery Hubs is a significant competitive advantage for the
Company's repair and warranty service offerings and a majority of the Company's
repair and warranty service customers come from joint marketing efforts with
such transportation providers. However, a competitor can, and in some cases has,
gained similar advantages by locating a repair facility in close proximity to
the Overnight Delivery Hubs. The Company does not have any long-term contracts
or other arrangements with these overnight delivery service providers which
could cease providing scheduling accommodations or cease joint marketing efforts
with the Company at any time. If the Company ceased to be allowed to share
marketing arrangements with either or both of these overnight delivery service
providers, there can be no assurance that alternate arrangements could be made
by the Company to preserve such advantages and the Company could lose
significant numbers of repair customers. In addition, work stoppages or other
disruptions in the transportation network may occur from time to time which may
affect these transportation providers. Such events could have a material adverse
effect on the Company's business and results of operations.
Customers and Sales
The Company seeks to serve traditional high-mix OEMs and OEMs that
produce high-volume products and need high-mix repair warranty services, which
by their nature are high-mix services, or plan to implement high-mix BTO
strategies. The Company recently increased the size of its sales force which is
located regionally. This regional sales approach is designed to align the
Company's sales efforts in close proximity to its customers and the Company's
regional manufacturing, transport and hub-based repair facilities. The Company
continues to focus on the following markets: (1) aerospace and avionics; (2)
medical devices; (3) communications; (4) industrial controls and instrumentation
and (5) computer-related products.
In addition, a key part of the Company's repair and warranty services
marketing strategy is to continue to utilize the sales force of the overnight
package delivery service providers located in the Overnight Delivery Hubs to
sell the Company's repair and warranty services as an integral part of the
logistics service offerings of these overnight package delivery service
providers.
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The following table represents the Company's net sales for
manufacturing services by industry segment:
1998 1997 1996
---- ---- ----
Aerospace and Avionics 45.8% 27.3% 0.0%
Medical 3.3% 13.1% 29.3%
Communications 5.0% 8.1% 1.5%
Industrial Controls and Instrumentation 17.6% 21.6% 12.6%
Computer-Related 27.8% 28.8% 54.4%
Other 0.5% 1.1% 2.2%
---- ---- ----
100.0% 100.0% 100.0%
====== ====== ======
The Company's customer base for manufacturing services includes
AlliedSignal, Inc., Bayer, Inc., Honeywell Inc., Electro Scientific Industries,
Inc. and ADC Telecommunications. A small number of customers has historically
represented a substantial percentage of the Company's net manufacturing sales.
As a result, the success of the Company's manufacturing services operations
depends to some degree on the success of its largest customers.
The Company's customer base for repair and warranty services includes
20 of the largest PC and electronics OEMs, including Apple Corporation, Inc.,
International Business Machines Corporation, Compaq Computer Corporation, Dell
Computer Corporation, Hewlett-Packard Company, Bay Networks, Inc. and Cisco
Systems Inc. The relationships span OEM component suppliers, OEM component
customers, and system, desktop and network vendors, as well as direct marketers
and channel players. As with the Company's manufacturing services, a small
number of customers historically has represented a substantial percentage of the
Company's net repair and warranty services sales. As a result, the success of
the Company's repair and warranty services operations depends to some degree on
the success of its largest customers.
The Company historically has relied on a small number of customers to
generate a significant percentage of its revenue. During 1998, AlliedSignal
accounted for more than 42% of the Company's net revenues and the Company's ten
largest customers accounted for 70% of the Company's net revenue. The loss of
AlliedSignal 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.
If the Company's efforts to expand its customer base are not
successful, the Company will continue to depend upon a relatively small number
of customers for a significant percentage of its net sales. There can be no
assurance that current customers, including AlliedSignal, or future customers of
the Company will not terminate their manufacturing arrangements with the Company
or significantly change, reduce or delay the amount of manufacturing services
ordered from the Company. Ohmeda, Inc. which had been one of the Company's ten
largest customers, consolidated its outside manufacturing arrangements with
another electronic contract manufacturer and ceased using the Company's services
in 1998. In addition, the Company may from time to time hold significant
accounts receivable from sales to certain customers. The insolvency or other
inability of a significant customer to pay outstanding receivables could have a
material adverse effect on the Company's results of operations and financial
condition.
As is typical in the electronic manufacturing services industry, the
Company frequently does not obtain long-term purchase orders or commitments from
its customers, but instead works with them to develop nonbinding forecasts of
the future volume of orders. Based on such nonbinding forecasts, the Company
makes commitments regarding the level of business that it will seek and accept,
the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each individual
customer and generally affecting each customer's industry, may cause customers
to cancel, reduce or delay orders that were either previously made or
anticipated. Generally, customers may cancel, reduce or delay purchase orders
and commitments without penalty, except, in some cases, for payment for services
rendered, materials purchased and, in limited
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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 $108 million at December 31,
1998, compared to approximately $135 million at December 31, 1997. 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 may
vary, backlog does not necessarily reflect the timing or amount of future sales.
The Company generally seeks to deliver its products within four to eight weeks
of obtaining purchase orders, which tends to 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., 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.
The Company also has a number of competitors in the repair and warranty
services industry, including Cerplex Group, Inc., Logistics Management, Inc.,
Sequel, Inc., Data Exchange Corp., DecisionOne Holdings Corp., and others. In
addition, the Company competes with certain OEMs that provide repair and
warranty services for their own products. Some of the Company's competitors in
the repair and warranty services industry are more established in the industry
and have substantially greater financial, engineering and marketing resources
than the Company. The Company also faces competition from its current and
potential customers, which are continually evaluating the relative merits of
providing repair and warranty services internally versus outsourcing. The
Company believes that the principal competitive factors in its targeted repair
and warranty services market are quality, reliability, ability to meet delivery
schedules and price.
Suppliers
The Company uses numerous suppliers of electronic components and other
materials for its operations. The Company works with customers and suppliers to
minimize the effect of any component shortages. Some components used by the
Company have been subject to industry-wide shortages, and suppliers have been
forced to allocate available quantities among their customers. The Company's
inability to obtain any needed components during periods of allocations could
cause delays in shipments to the Company's customers and could adversely affect
results of operations.
The Company works at mitigating the risks of component shortages by
working with customers to delay delivery schedules or by working with suppliers
to provide the needed components using just-in-time inventory programs. Although
in the future the Company may experience periodic shortages of certain
components, the Company believes that an overall trend toward greater component
availability is developing in the industry.
Patents and Trademarks
The Company does not hold any patent or trademark rights. Management
does not believe that patent or trademark protection is material to the
Company's business.
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Governmental Regulation
The Company's operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters, and there can be no assurance that material costs and
liabilities will not be incurred in complying with those regulations or that
past or future operations will not result in exposure to injury or claims of
injury by employees or the public. To meet various legal requirements, the
Company has modified its circuit board cleaning processes to eliminate the use
of substantially all chlorofluorocarbons and now uses aqueous (water-based)
methods in its cleaning processes.
Some risk of costs and liabilities related to these matters is inherent
in the Company's business, as with many similar businesses. Management believes
that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations, the
violation of which could have a material adverse effect on the Company. In the
event of violation, these regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. In addition, new, modified or more stringent
requirements or enforcement policies could be adopted that may adversely affect
the Company.
The Company periodically generates and temporarily handles limited
amounts of materials that are considered hazardous waste under applicable law.
The Company contracts for the off-site disposal of these materials.
Employees
As of December 31, 1998, the Company employed 1,858 persons, of whom
1,530 were engaged in manufacturing operations and repair and warranty services,
192 in material handling and procurement, 24 in marketing and sales and 112 in
finance and administration, and the Company engaged the full-time services of
403 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
Management of Growth; Geographic Expansion. The Company has experienced
rapid growth since February 1997 and intends to pursue continued growth through
internal expansion and acquisitions. The Company's rapid growth has placed, and
could continue to place, a significant strain on the Company's management
information, operating and financial systems. In order to maintain and improve
results of operations, the Company's management will be required to manage
growth and expansion effectively. The Company's need to manage growth
effectively will require it to continue to implement and improve its management
information, operating and financial systems and internal controls, to develop
the management skills of its managers and supervisors and to train, motivate and
manage its employees. The Company's failure to effectively manage growth could
adversely affect the Company's results of operations.
Beginning in 1997, the Company has acquired, and undertaken the
construction of, facilities in several locations and the Company may acquire or
build additional facilities from time to time in the future. The Company's
results of operations could be adversely affected if its new facilities do not
achieve growth sufficient to offset increased expenditures associated with
growth of operations and geographic expansion. Should the Company increase its
expenditures in anticipation of a future level of sales which does not
materialize, its results of operations would be adversely affected. As the
Company continues to expand, it may become more difficult to manage
geographically-dispersed operations. There can be no assurance that the Company
will successfully manage other plants it may acquire or build in the future.
Acquisition Strategy. The Company has actively pursued in the past, and
expects to actively pursue in the future, acquisitions in furtherance of its
strategy of aggressively expanding its operations, geographic markets, service
offerings, customer base and revenue base. Acquisitions including the Bayer-Agfa
Asset Purchase, the AlliedSignal Kansas Asset Purchase, the PE Merger, the CTI
Merger, the AlliedSignal Florida/Arizona Asset Purchase and the CE Merger
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
9
<PAGE>
resources from other business activities, the potential to enter markets in
which the Company has no or limited prior experience and where competitors in
such markets have stronger market positions and the potential loss of key
employees and customers of the acquired companies. In addition, during the
integration of an acquired company, the financial performance of the Company
will be subject to the risks commonly associated with an acquisition, including
the financial impact of expenses necessary to realize benefits from the
acquisition and the potential for disruption of operations. For instance, during
the Company's integration of assets purchased pursuant to the AlliedSignal
Florida/Arizona Asset Purchase, the Company experienced significant shortages of
materials that adversely affected operations at its Tucson facility for a time.
Such shortages resulted primarily from the Company's lack of familiarity with
the procurement procedures applicable to the Tucson facility. Although the
effects of such shortages have not had a significant adverse impact on the
Company's operations as a whole, there can be no assurance that the Company will
not experience other difficulties integrating employees, operations, procedures
and systems that have been or may be acquired in the future, or that any such
shortages or difficulties will not have a material adverse effect on the
Company's business or results of operations in the future.
Acquisitions by the Company have in come cases been financed with
substantial borrowings and the Company may incur significant amounts of
indebtedness in connection with future acquisitions, other transactions or
funding expansions of the Company's operations. Future acquisitions may also
involve potentially dilutive issuances of equity securities.
There can be no assurance that the Company will be able to identify
suitable acquisition opportunities, to price such acquisition opportunities
properly, to consummate acquisitions successfully or, with respect to recent or
future acquisitions, integrate acquired personnel and operations into the
Company successfully.
Implementation of New Information System. The Company is implementing a
new management information system (the "MIS System"), based on commercially
available Oracle software products, that is designed to track and control all
aspects of its manufacturing services. The Company completed the implementation
of the MIS System at the Company's Rocky Mountain facility in December 1997, the
Arizona facility in February 1998, the Florida facility in August 1998, the
Massachusetts facility in December 1998 and the Northwest facilities in January
1999. The Company currently expects to implement the MIS System in its Kansas
facility in the second quarter of 1999. Although the implementation of the MIS
System to date has not presented any unmanageable difficulties, there can be no
assurance that the MIS System can be properly installed at any of the Company's
remaining facilities. Furthermore, there can be no assurance that, if installed,
the MIS System will operate as designed or provide the Company's operations any
additional efficiency. If the MIS System fails to operate as designed 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 overages all of which could result in lost customers and revenues. In
addition, the Company could be compelled to write-off costs associated with
the MIS System. Such disruptions or events could adversely affect results of
operations and the implementation of the Company's strategy.
Item 2. Description of Property
As part of the Company's strategy to have a broad geographic presence
and locate its facilities in regions with a substantial or growing number of
OEMs' design and engineering facilities, the Company has made several
acquisitions and made significant capital investments in its manufacturing
facilities. The following table describes the Company's material properties.
10
<PAGE>
<TABLE>
<CAPTION>
Year Approximate
Location Acquired/Opened Size Owned/leased(1) Services
<S> <C> <C> <C> <C>
Denver, Colorado 1997 18,000 square feet Leased Executive
Offices
Rocky Mountain 1994 84,000 square feet Owned (2) Manufacturing
Greeley, Colorado
Newberg, Oregon 1998 65,000 square feet Leased (3) Manufacturing
Moses Lake, Washington 1997 20,000 square feet Leased (4) Manufacturing
Ft. Lauderdale, Florida 1997 97,000 square feet Subleased (5) Manufacturing
Tucson, Arizona 1998 65,000 square feet Leased (6) Manufacturing
Memphis, Tennessee 1997 155,000 square feet Leased (7) Offices, repair
and warranty
Louisville, Kentucky 1997 159,000 square feet Leased (8) Repair and
warranty
Tampa, Florida 1997 60,000 square feet Leased (9) Repair and
warranty
Manchester, New Hampshire 1998 19,000 square feet Leased (10) Manufacturing
Wilmington, Massachusetts 1998 54,000 square feet Subleased (11) Manufacturing
Ottawa, Kansas 1998 40,000 square feet Owned (12) Manufacturing
</TABLE>
The Company believes its facilities are in good condition.
- ---------------
(1) Pursuant to the terms of the Bank One 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 One Colorado, N.A.
("Bank One"), and any other lenders from time to time under the Bank One
Loan.
(2) This facility is located on approximately 10 acres of land owned by the
Company in Greeley, Colorado. The building is being sold by the Company
since these manufacturing operations are being shut down during the first
quarter of 1999.
(3) 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 with an option to
purchase at the end of the lease term.
(4) This facility is leased from an unaffiliated third party pursuant to a
year-to-year basis.
(5) The Company subleased a 97,000 square foot portion of a building from
AlliedSignal.
11
<PAGE>
(6) 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 with an option to purchase at the end of the
lease term.
(7) The Company leases a 75,000 square foot facility and an 80,000 square foot
facility, both used for office space, warehouse space and repair services,
from unaffiliated third parties. The leases will expire on February 28,
2001 and June 30, 2001, respectively.
(8) The Company leases a 139,000 square foot facility and a 20,000 square foot
facility from unaffiliated third parties.
(9) The Company leases a 45,000 square foot building, and a 15,000 square foot
warehouse facility from an affiliated third party.
(10) The Company leases a 19,000 square foot facility from an unrelated third
party. The lease expires in August 2001.
(11) The Company subleases a 54,000 square foot facility on a year to year basis
until March 31, 2003.
(12) The Company purchased a 40,000 square foot facility from AlliedSignal,
remodeled 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 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 and intend to
vigorously defend against the lawsuit. Defendants filed a motion to dismiss the
case on March 8, 1999. That motion is pending.
12
<PAGE>
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 (United States
District Court for the District of Colorado, Case No. 99-S-63). Plaintiffs are
shareholders of EFTC who filed this lawsuit originally in the District Court for
the County of Weld, Colorado. Defendants removed the case to federal court on
January 11, 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 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.
After removal to federal court, on January 15, 1999, defendants moved
to dismiss the Complaint pursuant to the Securities Litigation Uniform Standards
Act of 1998, Pub. L. 105-353, in that the Complaint only asserts claims arising
under the Colorado Securities Act, which are now pre-empted by federal law.
Plaintiffs have filed a motion seeking to have the case remanded to state court.
In any event, defendants deny the allegations of the complaint and intend to
vigorously defend against the lawsuit.
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 1998.
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 March 25, 1999, there were approximately 238
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.
1998 Sales Prices 1997 Sale Prices
----------------- ----------------
High Low High Low
First Quarter $17.0000 $12.81250 $ 6.7500 $ 4.7500
Second Quarter 18.3125 11.50000 8.5000 4.6250
Third Quarter 13.7500 2.84375 14.3125 8.7500
Fourth Quarter 5.0625 2.62500 18.2500 12.0625
13
<PAGE>
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. The Company's loan agreements
prohibit payment of dividends without the lender's consent.
Recent Sales of Unregistered Securities.
On February 24, 1997, the Company acquired the CE Companies, 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.
On September 30, 1997, the Company acquired the CTI Companies 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.
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.
14
<PAGE>
Item 6. Selected Financial Data
The following selected financial data as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998, are
derived from the audited financial statements of the Company included as part of
this report on Form 10-K and should be read in conjunction with such financial
statements and the notes thereto. The data presented below as of December 31,
1996, 1995 and 1994, and for each of the years in the two-year period ended
December 31, 1995, are derived from financial statements of the Company not
included in this report. All financial data has been restated for the PE Merger.
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands, except per share data)
1998(7) 1997 1996(1) 1995 1994
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Net sales.......................................... $ 226,780 $ 122,079 $ 60,910 $ 51,580 $ 53,828
Cost of goods sold................................. 200,581 102,166 56,277 46,437 47,631
------- ------- ------ ------ ------
Gross profit................................. 26,199 19,913 4,633 5,143 6,197
Impairment of fixed assets......................... 3,343 - 726 - -
Goodwill amortization.............................. 1,564 547 - - -
Merger costs (2)................................... 1,048 - - - -
Selling, general and administrative expenses....... 23,038 12,712 5,916 4,324 3,065
------ ------ ----- ----- -----
Operating income (loss)..................... (2,794) 6,654 (2,009) 819 3,132
Interest expense................................... (4,311) (2,411) (576) (432) (268)
Other, net (3)..................................... 296 1,296 100 92 110
--- ----- --- -- ---
Income (loss) before income taxes.................. (6,809) 5,539 (2,485) 479 2,974
Income tax expense (benefit)....................... (2,631) 2,118 (867) 130 1,041
------- ----- ----- --- -----
Net income (loss)........................... $ (4,178) $3,421 $ (1,618) $349 $1,933
======== ====== ======== ==== ======
Pro forma information (4):
Historical net income....................... $ (4,178) $3,421 $ (1,618) $349 $1,933
Pro forma adjustment to income tax expense
(benefit)............................. 317 41 (10) (2) 6
--- -- ---- --- -
Pro forma net income (loss)................. $ (4,495) $3,380 $ (1,608) $351 $1,927
======== ====== ======== ==== ======
Pro forma income (loss) per share:
Basic....................................... $ (0.31) $0.40 $ (0.28) $0.06 $0.36
Diluted..................................... $ (0.31) $0.38 $ (0.28) $0.06 $0.36
Weighted average shares outstanding:
Basic.................................... 14,730 8,502 5,742 5,762 5,427
Diluted..................................... 14,730 8,954 5,742 5,762 5,427
December 31,
1998 (7) 1997 (5) 1996 1995 1994(6)
-------- -------- ---- ---- -------
(In thousands)
Balance Sheet Data:
Working capital.................................... $59,037 $43,634 $9,284 $9,878 $7,015
Goodwill........................................... 44,848 46,372 - - -
Total assets....................................... 190,666 148,825 24,037 25,724 23,883
Current portion of long-term debt.................. 4,115 3,150 1,970 196 170
Long-term debt, net of current portion............. 50,868 41,809 3,947 3,081 3,613
Shareholders' equity............................... 94,979 75,221 13,850 15,462 14,984
- ------------------
</TABLE>
(1) As part of a corporate restructuring, the Company expensed $2.1 million for
restructuring costs in the third quarter of 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(2) Merger costs related to the PE Merger which was accounted for as a pooling
of interests.
(3) Includes gain of approximately $1.2 million on the sale of a building used
in the Company's manufacturing operations in 1997.
15
<PAGE>
(4) The net income of Personal Electronics, which was not subject to income
taxes due to its S corporation status, has been tax effected and included
as a pro-forma adjustment to income tax expense. See Note 1 to the
Consolidated Financial Statements of the Company.
(5) Includes the effects of the CE Merger, the AlliedSignal Florida/Arizona
Asset Purchase, the CTI Merger and a public offering of the Company's
common stock completed in 1997.
(6) The Company received $9.3 million from its initial public offering in March
1994.
(7) As part of a corporate consolidation and restructuring in 1998, the Company
expensed $9.3 million in the fourth quarter of 1998. In addition, the
Company completed a public offering of its common stock in June 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 OEMs in the aerospace and avionics, medical,
communications, industrial instruments and controls and computer-related
products industries. The Company's manufacturing services consist of assembling
complex printed circuit boards, cables, electro-mechanical devices and finished
products. The EFTC Services group provides repair and warranty services to OEMs
in the communications and computer industries.
The Company's quarterly results of operations are affected by several
factors, primarily the level and timing of customer orders and the mix of
turnkey and consignment orders. The level and timing of orders placed by a
customer vary due to the customer's attempts to balance its inventory, changes
in the customer's manufacturing strategy and variation in demand for its
products due to, among other things, product life cycles, competitive conditions
and general economic conditions. In the past, changes in orders from customers
have had a significant effect on the Company's quarterly results of operations.
Other factors affecting the Company's quarterly results of operations may
include, among other things, the Company's success in integrating the businesses
acquired in the PE Merger and the assets and operations acquired from
AlliedSignal and Bayer-Agfa, price competition, the Company's level of
experience in manufacturing a particular product, the degree of automation used
in the assembly process, the efficiencies achieved by the Company through
managing inventories and other assets and APM, the timing of expenditures in
anticipation of increased sales and fluctuations in the cost of components or
labor.
Acquisitions
In 1998, the Company entered into the AlliedSignal Kansas Asset
Purchase, the Bayer-Agfa Asset Purchase and the PE Merger. In 1997, the Company
entered into the CE Merger, the AlliedSignal Florida/Arizona Asset Purchase and
the CTI Merger. All of these transactions have affected the Company's results of
operations and financial condition. All financial information has been restated
for the effects of the PE Merger, which was accounted for as a pooling of
interests.
AlliedSignal Kansas Asset Purchase. On September 30,1998, the Company
completed the initial phase of the AlliedSignal Kansas Asset Purchase This
operation had been located in Lawrence, Kansas and was relocated by the Company
to a facility in nearby Ottawa, Kansas. The Company purchased certain equipment
from AlliedSignal for approximately $1.5 million and purchased and renovated its
new facility for approximately $1.7 million. The Company expects to complete the
purchase of AlliedSignal's inventory by May 1999.
Bayer-Agfa Asset Purchase. On September 1, 1998, the Company completed the
Bayer-Agfa Asset Purchase. The Company purchased certain inventory and equipment
located in Wilmington, Massachusetts for approximately $6.0
16
<PAGE>
million.
PE Merger. On March 31, 1998, the Company completed the PE Merger for
total consideration of 1,800,000 shares of its common stock issued to the former
shareholders of Personal Electronics. The acquisition of Personal Electronics
has been accounted for using the pooling of interests method of accounting.
Personal Electronics' revenues in 1997, 1996 and 1995 were $8.8 million, $4.0
million and $2.4 million, respectively.
CTI Merger. On September 30, 1997, the Company completed the CTI Merger
for total consideration of approximately $29.7 million in cash and debt
assumption, 1,858,975 shares of the Company's common stock and a $6 million
contingent payment paid upon closing of a public offering in November 1997. The
Company recorded goodwill of approximately $38.9 million, which is being
amortized over 30 years. In connection with this acquisition, the Company
entered into the Bank One Loan (as defined below) and issued certain
subordinated notes in an aggregate principal amount of $15 million. See
"--Liquidity and Capital Resources."
AlliedSignal Florida/Arizona Asset Purchase. In February 1998, the
Company completed the AlliedSignal Florida/Arizona Asset Purchase. The aggregate
purchase price of the assets acquired by the Company from AlliedSignal was
approximately $19 million. In connection with this acquisition, the Company
entered into the Bank One Loan (as defined below) and issued certain
subordinated notes in an aggregate principal amount of $15 million. See
"--Liquidity and Capital Resources."
CE Merger. On February 24, 1997, the Company completed the CE Merger
for total consideration of approximately $10.9 million consisting of 1,980,000
shares of common stock and approximately $5.5 million in cash, which included
approximately $0.6 million of transaction costs. The Company recorded goodwill
of approximately $8.0 million, which is being amortized over 30 years. The
combined revenues for the CE Companies for the fiscal year ended September 30,
1996 was approximately $32.5 million. In connection with this transaction, the
Company renegotiated its line of credit and obtained a 90-day bridge loan in the
amount of $4.9 million (which was subsequently repaid), the proceeds from which
were used to pay the cash consideration related to the CE Merger. See
"--Liquidity and Capital Resources."
Results of Operations
The following table sets forth certain operating data as a percentage
of net sales:
Year ended December 31,
1998 1997 1996
---- ---- ----
Net sales....................................... 100.0% 100.0% 100.0%
Gross profit.................................... 11.6 16.3 7.6
Merger costs.................................... 0.5 - -
Selling, general and administrative expenses.... 10.1 10.4 9.7
Goodwill........................................ 0.7 0.4 -
Impairment of fixed assets...................... 1.5 - 1.2
--- - ---
Operating income (loss)......................... (1.2) 5.5 (3.3)
Interest expense................................ (1.9) (2.0) (0.9)
Other, net...................................... 0.1 1.0 0.1
--- --- ---
Income (loss) before income taxes............... (3.0) 4.5 (4.1)
Income tax expense (benefit).................... (1.2) 1.7 (1.5)
Pro forma tax expense (benefit)................. 0.1 - -
------
Pro forma net income (loss)..................... (1.9) 2.8 (2.6)
======= === =====
17
<PAGE>
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 CE Companies (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 CTI
Companies (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 an 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. Selling, general and
administrative ("SGA") 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, SGA expense decreased to 10.1% for the year ended
December 31,1998, from 10.4% in the same period of 1997. The increase in SGA
expenses is primarily due to the inclusion of (i) a full year's expenses of the
CE Companies (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 CTI Companies (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).
Impairment of Fixed Assets. 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 negative 1.2% for the year ended December 31,1998 compared to
positive 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 which 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 incurrence of debt associated
with the AlliedSignal Kansas Asset Purchase, the Bayer-Agfa Asset Purchase, the
CTI Merger and increased debt used to
18
<PAGE>
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.
1997 Compared to 1996
Net Sales. The Company's net sales increased by 100.5% to $122.1
million during the year ended December 31, 1997, from $60.9 million for the year
ended December 31, 1996. The increase in set sales is due primarily to the
inclusion of the operations from the CE Companies, acquired on February 24,
1997, the inclusion of the operations of the Company's Ft. Lauderdale and
Arizona facilities, acquired from AlliedSignal in August 1997, the inclusion of
the CTI Companies, acquired on September 30, 1997, the growth in revenues of
Personal Electronics and increased orders from existing customers.
Gross Profit. Gross profit increased by 332.6% to $19.9 million during
the year ended December 31, 1997, from $4.6 million during the year ended
December 31,1996. The gross profit margin for the year ended December 31, 1997
was 16.3% compared to 7.6% for the year ended December 31, 1996. The increase in
gross profit percentage is related to (i) the operations of the CE Companies,
which have historically had a higher gross profit margin, (ii) the adoption of
APM in the later part of 1996 in the Rocky Mountain facility which has resulted
in greater operating efficiencies, and (iii) the operations of the CTI
Companies, which have also have historically had a higher gross profit
percentage. In addition, as revenues have increased, fixed overhead costs such
as labor costs and depreciation have been absorbed in cost of goods resulting in
higher margins. Finally, the Company incurred a restructuring charge in cost of
goods sold of $0.5 million in the third quarter of fiscal 1996, primarily
related to severance costs and the write-off of inventory associated with the
restructuring of the Company's customer base, which accentuated the difference
in gross profit margins between 1997 and 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SGA") expenses increased by 115.3% to $12.7 million for the
year ended December 31, 1997, compared with $5.9 million for the same period of
1996. As a percentage of net sales, SGA expense increased to 10.4% for the year
ended December 31, 1997, from 9.7% in the same period of 1996. The Company
incurred a restructuring charge of $0.9 million in the third quarter of 1996,
primarily from severance pay for terminated employees at the Rocky Mountain
facility. Without the restructuring charge, SGA expense for 1996 would have been
8.2% of sales. The increase in SGA expenses is primarily due to the inclusion of
the CE Companies', the CTI Companies', the Company's Fort Lauderdale and Arizona
facilities' SGA expenses and increased investment in information technology and
marketing.
Operating Income. Operating income increased to $6.7 million for the
year ended December 31, 1997, from a loss of $2.0 million for the same period in
1996. Operating income as a percentage of net sales increased to 5.5% in the
year ending December 31, 1997 from negative 3.3% in the same period of 1996. The
increase in operating income is attributable to the CE Merger, the CTI Merger,
the increase in operating income of Personal Electronics, increased efficiencies
associated with APM, and the acquisition and operation of the Fort Lauderdale
and Tucson facilities. Without the $2.1 million charge for restructuring in the
third quarter of 1996, the 1996 operating profit margin would have been
approximately breakeven.
Interest Expense. Interest expense was $2.4 million for the year ended
December 31, 1997 as compared to $0.6 million for the same period in 1996. The
increase in interest is primarily the result of the incurrence of debt
associated with the CE Merger, the AlliedSignal Florida/Arizona Asset Purchase,
the CTI Merger, and increased operating debt used to finance both inventories
and receivables for the Company in fiscal 1997.
Income Tax Expense. The effective income tax rate for the year ended
December 31, 1997 was 39.0% including pro forma income taxes compared to 35.2%
for the same period a year earlier. The Company anticipates higher income tax
rates due to the impact of nondeductible goodwill relating to the CTI Merger and
CE Merger.
19
<PAGE>
Quarterly results. The following table presents unaudited quarterly
operating data for the most recent eight quarters for the two years ended
December 31, 1998. The information includes all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation thereof. All financial data has been restated for the PE Merger.
<TABLE>
<CAPTION>
Quarter Ended
(In thousands, except per share data)
March 31, June 30,September 3December 31, March 31, June 30,September 30December 31,
1997 1997 1997 1997 1998 1998 1998 1998
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales..................... $16,041 $24,617 $30,483 $50,938 $54,200 $61,328 $52,805 $58,447
Cost of goods sold............ 13,941 20,863 25,750 41,613 44,297 50,931 46,202 59,151
--------- --------- -------- --------- --------- --------- --------- --------
Gross profit.................. 2,100 3,754 4,733 9,325 9,903 10,397 6,603 (704)
Impairment of fixed assets.... - - - - - - - 3,343
Goodwill amortization ........ 23 67 67 390 391 391 391 391
Merger costs.................. - - - - 1048 - - -
Selling, general and
administrative expenses....... 1,213 1,995 2,288 7,214 5,321 5,361 4,950 7,406
-------------------- --------- ---------------------------------- ---------- ---------
Operating income (loss)....... 864 1,692 2,378 1,721 3,143 4,645 1,262 (11,844)
Interest expense and other,
net........................... (192) (346) 641 (1,220) (869) (938) (1,078) (1,130)
-------------------- --------- ---------- ---------------------- ---------- ----------
Income (loss) before income
taxes......................... 672 1,346 3,019 501 2,274 3,707 184 (12,974)
Income tax expense (benefit).. 73 266 795 984 935 1,483 68 (5,117)
-------------------- --------------------- -----------------------------------------------
Net income (loss)............. 599 1,080 2,224 (483) 1,339 2,224 116 (7,857)
==== ====== ===== ===== ====== ====== ==== =======
Pro forma net income (loss)... $ 420 $ 830 $ 1,897 $ 232 $ 1,022 $ 2,224 $ 116 $ (7,857)
========= ======== ======= ========== ========== ========== ========= ==========
Pro forma income (loss) per
share - diluted............... $ 0.06 $ 0.11 $ 0.22 $ 0.02$ 0.07 $ 0.15 $ 0.01 $ (0.51)
========= ======= ======== ============================== ========= =========
Weighted average shares
outstanding - diluted......... 6,658 7,921 8,476 12,438 14,400 14,825 15,740 15,542
</TABLE>
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.
Liquidity and Capital Resources
At December 31, 1998, working capital totaled $59.0 million. Working
capital at December 31, 1997 was $43.6 million. The increase in working capital
in 1998 is primarily attributable to a public offering that was completed in
June 1998 with net proceeds to the Company of approximately $21.4 million which
were used to repay a portion of the Bank One Loan (as defined below). The
portion of the Bank One Loan that had been repaid was subsequently reborrowed to
fund increases in inventory and accounts receivable related to increased
business associated with the Bayer-Agfa Asset Purchase and the AlliedSignal
Kansas Asset Purchase in 1998.
Cash used in operations for the year ended December 31, 1998 was $18.2
million compared to cash used in operations of $29.4 million for the same period
in 1997. The primary use of cash in 1998 was to support increased levels of
inventories and receivables associated with the Bayer-Agfa Asset Purchase and
the AlliedSignal Kansas Asset Purchase. The AlliedSignal Florida/Arizona Asset
Purchase and the CTI Merger resulted in a significant use of funds, particularly
in the purchase of inventory and equipment in the third quarter of 1997.
Accounts receivable increased 34.3% to $34.1 million at December 31, 1998 from
$25.4 at December 31, 1997. A comparison of receivable turns
20
<PAGE>
(e.g., annualized sales divided by current accounts receivable) for 1998
compared to 1997 is 6.6 and 4.8, respectively. Inventories increased 31.9% to
$60.8 million at December 31, 1998 from $46.1 million at December 31, 1997. A
comparison of inventory turns (i.e., annual cost of sales divided by current
inventory) for the year ended 1998 and 1997 shows an increase to 3.3 from 2.2,
respectively. The 1997 receivable turns and inventory turns are distorted
because the cost of sales for the year includes only ten months from the CE
Companies, three months from the CTI Companies, and only four and one-half
months from the AlliedSignal Florida/Arizona Asset Purchase, while the balance
sheet includes the receivables and inventories from these operations. The 1998
receivable turns and inventory turns are affected in the same way by the
Bayer-Agfa Asset Purchase and the AlliedSignal Kansas Asset Purchase that
occurred on September 1, 1998 and September 30, 1998, respectively.
The Company used cash to purchase capital equipment totaling $22.9
million (including $2.6 million for fixed assets purchased as part of the
Bayer-Agfa Asset Purchase and the AlliedSignal Kansas Asset Purchase) for the
year ended 1998 compared with $13.5 million (including $2.2 million for fixed
assets purchased as part of the AlliedSignal Florida/Arizona Asset Purchase) in
the same period last year. The Company also used cash to pay part of the
purchase price of the CE Companies and CTI Companies, as explained earlier, in
the amount of approximately $31.0 million in 1997. Proceeds from long-term
borrowings of approximately $35 million were used to help fund the purchase of
the CTI Companies and CE Companies.
In connection with the CTI Merger and the AlliedSignal Florida/Arizona
Asset Purchase, the Company entered into a Credit Facility, dated as of
September 30, 1997 (the "Bank One Loan"), provided by Bank One, Colorado, N.A.
The Bank One Loan currently provides for a $40 million revolving line of credit,
maturing on September 30, 2000 and a $15.9 million term loan maturing on
September 30, 2002. The Bank One Loan bears interest at a rate based on either
the London Inter-Bank Offering Rate ("LIBOR") or Bank One prime rate plus
applicable margins. Borrowings on the revolving facility are subject to
limitation based on the value of the available collateral. The Bank One Loan is
collateralized by substantially all of the Company's assets, including real
estate and all of the outstanding capital stock and membership interests of the
Company's subsidiaries, whether now owned or later acquired. As of December 31,
1998, the outstanding principal amount of borrowings under the Bank One Loan was
$39.7 million and the amount available for borrowing was approximately $16.2
million.
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 and bearing interest at LIBOR plus 2.0%, in order to
fund the AlliedSignal Florida/Arizona Asset Purchase. As of December 31, 1998,
the outstanding principal amount of the subordinated notes is approximately $5
million.
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 Bank One Loan. The lease is accounted for as a financing transaction, thus
the assets and related long-term debt continue to be shown on the Company's
balance sheet. The transaction has 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 has the option to repurchase the facilities for approximately
$9.4 million. If the option is not exercised, the Company can renew the lease
for an additional 5 years under similar terms, subject to adjustment for
interest rates in effect at the time of renewal.
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 One Loan.
During 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income", Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information", Statement
No. 132 "Employers Disclosures About Pensions and Other Postretirement Benefits"
and, during 1998, Statement No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise." During 1998, the American Institute of Certified Public
Accountants issued Statement of Position No. 98-5, "Reporting on the Costs of
Start-Up Activities." The adoption of these pronouncements did not and is not
expected to have a significant effect on the Company's financial position or
results of operations.
21
<PAGE>
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133), which is effective for
fiscal quarters of fiscal years beginning after June 15, 1999. Statement No. 133
establishes accounting and reporting standards for derivative instruments,
including some derivative instruments embedded in other contracts, and for
hedging securities. The Company will adopt the statement's disclosure
requirements in financial statements for the year ending December 31, 2000.
The Year 2000 (Y2K) Issue
The Y2K issue is a result of computer programs being written in the
past using only a two digit year to save memory space, in lieu of a full four
digit year. As a result, computer programs may recognize a date using a "00"
year code as the year 1900 instead of the year 2000. This could create system
failures or miscalculations causing disruptions in the operations of the Company
and its suppliers and customers.
The Company has undertaken a project to address the Y2K issue across
its operating units. The initial evaluation of all primary systems was completed
in 1998 with remediation scheduled for the first half of 1999. The Company
anticipates that its primary standard networks, operating systems, Oracle and
other packaged applications, and desktop systems are or will be compliant upon
the implementation of currently pending upgrades. Systems that have Y2K issues
are expected to be identified during the evaluation period. The Company intends
to either update or replace these systems as they are identified. Any embedded
program applications, such as machine controllers and building systems, are to
be evaluated and the manufacturers contacted for remediation. This process has
already begun at most sites, and is formalized as part of the Company's Y2K
project.
As part of the Company's Y2K project, the Company has begun contacting
all of its suppliers and customers at the site or division level to determine
the extent to which the Company is vulnerable to those third party failures to
remediate their Y2K issues. As part of the Company's overall Y2K project this
activity will be tracked across the Company to more efficiently track activity
with common customers and suppliers. The Company will continue to contact
significant suppliers and customers throughout 1999 to follow-up on their
progress. However, there can be no assurance that the systems of the other
companies on which the Company's business relies will be timely converted or
that failure to convert or a conversion that is incompatible with the Company's
own systems will not have a material adverse affect on the Company and its
operations.
Expenditures in 1998 for the Company's Y2K project did not have a
significant impact on the Company's operating results. Management believes that
expenditures in 1999 will not significantly impact the Company's operating
results, assuming no significant Y2K issues are discovered in evaluating
embedded technology.
The Company's failure to resolve Y2K issues before December 31,1999
could result in system failures or miscalculations causing disruptions in
operations, including a temporary inability to manufacture products, process
transactions, send invoices or engage in other normal business activities.
Additionally, the failure of third parties upon whom the Company's business
relies to timely remediate their Y2K issues could result in disruptions in the
Company's supply of parts and materials, late or misapplied invoices, temporary
disruptions in order processing and other general problems related to the
Company's daily business operations. While the Company can assess the Y2K
readiness of a more significant number of its suppliers and customers, the
overall risk associated with Y2K remain difficult to accurately describe and
quantify. Thus there can be no assurance that the Y2K issue will not have a
material adverse effect on the Company's operations.
The Company has not yet adopted a Y2K contingency plan. It is the
Company's goal to have the principal Y2K issues resolved by the end of the
second quarter of 1999. As part of the Company's Y2K project, the Company has a
Y2K compliance resource to coordinate compliance and remediation across all
divisions. Final Y2K verification is planned for the end of June 1999. However,
the Company intends to develop a contingency plan for addressing Y2K issues by
end of April 1999 in the event the Company's Y2K project should fall behind
schedule.
22
<PAGE>
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 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 improved
financial indicators in connection with the closure of the Company's Greeley
facility, the amount of restructuring charges to be incurred by the Company in
connection with such closure, the prospects for successfully integrating
acquired operations and the MIS System, 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,
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 and repair
industries, changes in the competitive environment in which the Company
operates, the continued growth of the industries targeted by the Company or its
competitors or changes in the Company's management information needs,
difficulties in implementing the Company's new management information system,
difficulties in managing the Company's growth or in integrating new businesses,
changes in customer needs and expectations, the Company's success in retaining
customers affected by the closure of the Company's Greeley facility, the
Company's success in limiting costs associated with such closure, 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
The Company's Bank One Loan is comprised of a $40 million
revolving line of credit and a $15.9 million term loan. As of December 31, 1998,
the Company had borrowed an aggregate principal amount of $39.7 million. The
interest rate on Bank One Loan is based either on the Bank One prime rate or the
LIBOR, plus applicable margins. Therefore, as interest rates fluctuate, the
Company may experience changes in interest expense that could impact financial
results. To protect against the risk of interest rate fluctuations, the Company
has entered into an interest rate swap agreement that covers its term loan and
has effectively fixed the interest rate on the entire outstanding principal
amount of the term loan at 6.25%, plus applicable margins pursuant to the loan
agreement, through its maturity date of September 2002. If interest rates were
to increase or decrease by 1%, the result would be an annual increase or
decrease in interest expense of approximately $240,000 for the revolving line of
credit.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements and notes thereto are included
elsewhere in this report on Form 10-K, commencing on page F-1.
Index to Consolidated Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
23
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to
beginning of costs and Charged to Balance at
Year Ended December 31, period expenses other accounts (1) Deletions (2) end of period
----------------------- ------ -------- -------------- --------- -------------
Accounts receivable -
allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
1996................................... $ 20,000 $ - $ - $ - $ 20,000
-
1997................................... 20,000 (239,749) 693,428 - 473,679
1998................................... 473,679 1,019,841 23,833 195,450 1,321,903
Inventory - reserve for obsolescence:
1996................................... 20,000 - - - 20,000
1997................................... 20,000 24,542 2,196,444 217,534 2,023,452
1998................................... 2,023,452 6,974,937 1,486,640 2,097,237 (3) 8,387,792
</TABLE>
- ------------------
(1) Amounts charged to other accounts were recorded in conjunction with
acquisitions.
(2) Deletions relate to write-offs unless otherwise indicated.
(3) Deletions of $2,086,640 relate to adjustments to the purchase price
allocations of acquisitions.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
EFTC Corporation:
Under date of January 26, 1999, except as to note 14, which is as of March 22,
1999, we reported on the consolidated balance sheets of EFTC Corporation and
subsidiaries as of December 31, 1998 and 1997, 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, 1998 which are included in the
Company's annual report on Form 10-K for the year ended December 31, 1998. 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
January 26, 1999
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
24
<PAGE>
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.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
(a) 1. Financial Statements-The financial statements listed in the
index to Financial Statements, which appears on page 23, 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 page 24 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 (1)
3.2 Articles of Amendment to the Articles of Incorporation of the
Company (1)
3.3 Amended and Restated Bylaws of the Company (1)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3, respectively
4.2 Specimen Common Stock Certificate of the Company (1) Form of
10.1 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 Agreement and Plan of Reorganization among the Company, CTI
Acquisition Corp., and Circuit Test, Inc., dated as of July 9,
1997 (4)
10.5 Limited Liability Company Unit Purchase Agreement among the
Company, CTLLC Acquisition Corp., Airhub Service Group, L.C., and
CTI International, L.C., dated as of July 9, 1997 (4)
10.6 Registration Rights Agreement dated as of September 30, 1997 among
the Company and CTI Shareholders (4)
25
<PAGE>
10.7 Indemnification Agreement dated as of September 30, 1997 among
the Company, CTI Shareholders and the LLC Members (4)
10.8 Earnout Agreement dated as of September 30, 1997 among the
Company and the LLC Members (4)
10.9.1 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)
10.9.2 Third Amendment to Master Agreement dated as of September 5, 1997
(6)
10.10 Supplier Partnering Agreement between the Company and
AlliedSignal, Inc. dated as of September 29, 1998 (7)
10.11 Amended and Restated License Agreement between the Company and
AlliedSignal Technologies, Inc., dated as of September 5, 1997
(6)
10.12 Sublease Agreement dated as of August 11, 1997 between the
Company and AlliedSignal, Inc. (3)
10.13 Credit Agreement dated September 30, 1997 between the Company and
Bank One, Colorado, N.A. ("Bank One") (4)
10.14 Pledge and Security Agreement dated as of September 30, 1997 by
the Company to Bank One (4)
10.15 Security Agreement and Assignment dated as of September 30, 1997
between the Company and Bank One (4)
10.16 Deed of Trust and Security Agreement dated as of September 30,
1997, among the Company as Grantor, Bank One, as Agent and
Beneficiary, and Northwest Title Company as Trustee (4)
10.17 Deed of Trust and Security Agreement and Financing Statement
dated as of September 30, 1997 from the Company to The Public
Trustee of Weld County for Bank One, as Beneficiary (4)
10.18 Note Agreement between the Company and Richard L. Monfort dated
as of September 5, 1997, including the form of Floating Rate
Subordinated Note attached as Exhibit A thereto (4)
10.19 Form of Warrants to Purchase an aggregate of 80,000 shares of
Common Stock of the Company, dated as of March 11, 1994, issued
to Dain Bosworth Incorporated and Stephens Inc., underwriters, in
connection with the Company's initial public offering (6)
10.20+ 1989 Stock Option Plan (1)
10.21+ 1993 Incentive Stock Option Plan (1)
10.22+ EFTC Corporation Equity Incentive Plan, amended and restated as
of July 9, 1997 (6)
10.23+ EFTC Corporation Stock Option Plan for Non-Employee Directors,
amended and restated as of July 9, 1997 (6)
10.24+ Employment Agreement with Jack Calderon dated as of June 5, 1998
(7)
10.25+ Form of Consulting Agreement entered into by the Company with
OnCourse Inc., dated as of February 24, 1997 (5)
10.26+ Form of Employment Agreement, dated as of September 30, 1997,
entered into by the Company, CTI and Allen S. Braswell, Jr. (4)
10.27+ Form of Employment Agreement, dated as of March 31, 1998, entered
into by the Company and Robert Monaco (8)
*10.28+ 1998 Management Bonus Plan
*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
26
<PAGE>
(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
(b) Reports on Form 8-K
The Company has not filed any Current Reports on Form 8-K during the
fourth quarter of 1998.
27
<PAGE>
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 30th day of March, 1999.
EFTC CORPORATION, a Colorado corporation
By: /s/ Stuart W. Fuhlendorf
Stuart W. Fuhlendorf
Chief Financial 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.
<TABLE>
<CAPTION>
Position Held
Signature With the Registrant Date
<S> <C> <C>
/s/Jack Calderon President and Director March 30, 1999
------------------
Jack Calderon (Principal Executive Officer)
/s/Stuart W. Fuhlendorf Chief Financial Officer and March 30, 1999
-----------------------
Stuart W. Fuhlendorf Director (Principal Financial
Officer)
/s/Brent L. Hofmeister Controller (Principal March 30, 1999
----------------------
Brent L. Hofmeister Accounting Officer)
/s/Allan S. Braswell, Jr. Director March 30, 1999
-------------------------
Allan S. Braswell, Jr.
/s/James A. Doran Director March 30, 1999
------------------
James A. Doran
/s/Charles Hewitson Director March 30, 1999
------------------
Charles Hewitson
/s/Robert McNamara Director March 30, 1999
------------------
Robert McNamara
28
<PAGE>
/s/Robert Monaco Director March 30, 1999
------------------
Robert Monaco
/s/Richard L. Monfort Director March 30, 1999
---------------------
Richard L. Monfort
/s/Gerald J. Reid Director March 30, 1999
------------------
Gerald J. Reid
/s/Masoud S. Shirazi Director March 30, 1999
--------------------
Masoud S. Shirazi
</TABLE>
29
<PAGE>
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
January 26, 1999, except as to
Note 14, which is as of
March 22, 1999
F-1
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets (Note 4) 1998 1997 (1)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 622,672 1,877,010
Trade receivables, less allowance for doubtful accounts of
$1,321,903 and $474,000, respectively 34,123,302 25,412,340
Inventories (note 3) 60,758,976 46,066,650
Income taxes receivable 124,785 --
Deferred income taxes (note 6) 5,259,000 494,290
Prepaid expenses and other 2,241,546 759,668
Total current assets 103,130,281 74,609,958
Property, plant and equipment (note 11):
Land, buildings and improvements 18,731,895 7,062,881
Machinery and equipment 17,435,505 14,354,997
Furniture, fixtures and computer equipment 9,410,557 4,105,731
Construction in progress -- 4,791,288
45,577,957 30,314,897
Less accumulated depreciation (6,958,900) (5,957,233)
Net property, plant and equipment 38,619,057 24,357,664
Goodwill, net of accumulated amortization of $2,110,707
and $546,747, respectively (note 2) 44,847,900 46,372,060
Other assets, net 4,069,103 3,484,897
Total assets $ 190,666,341 148,824,579
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 28,043,035 23,579,663
Accrued compensation 2,980,547 2,365,034
Income taxes payable -- 608,585
Other accrued liabilities 3,355,003 1,272,544
Current portion of long-term debt (note 4) 4,115,142 3,150,000
Deposit on inventory finance arrangement 5,600,000 --
Total current liabilities 44,093,727 30,975,826
Long-term debt, net of current portion (note 4):
Related party 15,098,347 7,513,703
Others 35,770,000 34,295,000
Total long-term debt, net of current portion 50,868,347 41,808,703
Deferred income taxes (note 6) 724,798 818,686
Total liabilities 95,686,872 73,603,215
Shareholders' equity (notes 4 and 7):
Preferred stock, $.01 par value, authorized 5,000,000 shares;
none issued or outstanding -- --
Common stock $.01 par value, authorized 45,000,000 shares; issued
and outstanding 15,542,989 and 13,641,776 shares, respectively 155,430 136,418
Additional paid-in capital 91,990,252 68,040,433
Retained earnings 2,833,787 7,044,513
Total shareholders' equity 94,979,469 75,221,364
Commitments and contingencies (notes 2, 4, 5, 9 and 13)
Total liabilities and shareholders' equity $ 190,666,341 148,824,579
(1) Restated for pooling of interests - See note 2.
See accompanying notes to consolidated financial statements.
</TABLE>
F-2
<PAGE>
EFTC CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998 1997 (1) 1996 (1)
Net sales $ 226,779,631 122,079,117 60,910,316
Cost of goods sold (note 11) 200,580,511 102,166,332 56,276,756
Gross profit 26,199,120 19,912,785 4,633,560
Operating costs and expenses:
Selling, general and
administrative(note 11) 23,037,952 12,711,431 5,917,034
Amortization of goodwill 1,563,961 546,747 --
Impairment of fixed assets
(note 11) 3,342,483 -- 725,869
Merger costs 1,048,308 -- --
Operating income (loss) (2,793,584) 6,654,607 (2,009,343)
Other income (expense):
Interest expense (4,311,505) (2,410,860) (575,673)
Gain on sale of assets 133,729 1,156,618 50,012
Other, net 162,300 138,959 50,436
(4,015,476) (1,115,283) (475,225)
Income (loss) before income
taxes (6,809,060) 5,539,324 (2,484,568)
Income tax expense (benefit)
(note 6) (2,630,905) 2,118,395 (866,661)
Net income (loss) $ (4,178,155) 3,420,929 (1,617,907)
Pro forma information
(unaudited) (note 1):
Historical net income (loss) $ (4,178,155) 3,420,929 (1,617,907)
Pro forma adjustment to income
tax expense (benefit) 316,636 40,797 (9,727)
Pro forma net income (loss) $ (4,494,791) 3,380,132 (1,608,180)
Pro forma income (loss) per
share:
Basic $ (0.31) 0.40 (0.28)
Diluted $ (0.31) 0.38 (0.28)
Weighted average common shares
outstanding:
Basic 14,729,651 8,502,160 5,742,139
Diluted 14,729,651 8,954,525 5,742,139
(1) Restated for pooling of interests - See note 2.
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Additional Total
Common stock paid-in Retained shareholders'
Shares Amount capital earnings equity
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1996 (1) 5,740,860 $ 57,409 10,163,204 5,241,491 15,462,104
Stock options exercised 1,800 18 5,976 -- 5,994
Net loss -- -- -- (1,617,907) (1,617,907)
Balances at December 31, 1996 (1) 5,742,660 57,427 10,169,180 3,623,584 13,850,191
Issuance of common stock in
business combinations (note 2) 3,838,975 38,389 14,143,793 -- 14,182,182
Issuance of common stock,
net of costs (note 7) 3,506,841 35,069 38,917,065 -- 38,952,134
Warrants issued in connection with
subordinated debt (note 7) -- -- 489,786 -- 489,786
Stock options and warrants exercised 553,300 5,533 4,225,131 -- 4,230,664
Tax benefit from exercise of stock options
(note 6) -- -- 95,478 -- 95,478
Net income -- -- -- 3,420,929 3,420,929
Balances at December 31, 1997 (1) 13,641,776 136,418 68,040,433 7,044,513 75,221,364
Conversion of notes payable to
shareholders' equity (note 2) -- -- 1,397,922 -- 1,397,922
Issuance of common stock, net of costs 1,770,000 17,700 21,313,960 -- 21,331,660
Stock options and warrants exercised 131,213 1,312 511,926 -- 513,238
Tax benefit from exercise of stock options
(note 6) -- -- 693,440 -- 693,440
Termination of S Corporation tax status
of pooled company (note 2) -- -- 32,571 (32,571) --
Net loss -- -- -- (4,178,155) (4,178,155)
Balances at December 31, 1998 15,542,989 $ 155,430 91,990,252 2,833,787 94,979,469
</TABLE>
(1) Restated for pooling of interests - See note 2.
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 (1) 1996 (1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(4,178,155) 3,420,929 (1,617,907)
Adjustments to reconcile net income (loss) to
net cash used by operating activities:
Depreciation and amortization 6,244,070 2,676,267 1,358,314
Deferred income tax expense (benefit) (4,858,598) 755,650 (322,268)
Loss (gain) on sale and impairment of
property, plant and equipment, net 2,942,754 (1,149,638) 709,359
Other, net 16,326 -- --
Changes in operating assets and
liabilities, exclusive of the effects of
acquisitions:
Trade receivables (8,710,962) (16,444,265) 858,283
Inventories (14,692,326) (28,799,065) 694,730
Income taxes receivable (124,785) 616,411 (541,489)
Income taxes payable 84,855 604,100 --
Prepaid expenses and other current assets (1,481,878) (235,478) 295,079
Other assets (584,206) (2,409,343) 67,375
Accounts payable and other accrued
liabilities 7,161,344 11,550,845 (2,009,079)
Net cash used by operating activities (18,181,561) (29,413,587) (507,603)
Cash flows from investing activities:
Purchase of property, plant and equipment (22,884,257) (13,496,255) (2,184,114)
Proceeds from sale of property, plant and
equipment 1,000,000 2,419,820 345,538
Payments for business combinations, net of (39,800) (30,997,426) --
cash acquired
Net cash used by investing activities (21,924,057) (42,073,861) (1,838,576)
Cash flows from financing activities:
Stock options and warrants exercised 513,238 4,326,142 5,994
Issuance of common stock for cash, net of costs 21,331,660 38,952,134 --
Deposit on inventory finance arrangement 5,600,000 -- --
Borrowings (payments) on lines of credit and
short-term notes payable, net 6,365,000 15,595,000 1,800,000
Proceeds from long-term debt 10,500,000 83,345,391 459,566
Principal payments on long-term debt (5,458,618) (68,283,612) (217,033)
Deferred debt issuance costs -- (977,500) --
Net cash provided by financing
activities 38,851,280 72,957,555 2,048,527
Increase (decrease) in cash and cash
equity (1,254,338) 1,470,107 (297,652)
Cash and cash equivalents:
Beginning of year 1,877,010 406,903 704,555
End of year $ 622,672 1,877,010 406,903
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 4,343,956 2,022,881 567,321
Income taxes, net $ 1,116,000 118,608 --
Common stock issued in business combinations $ -- 14,182,182 --
Conversion of notes payable to shareholders to $ 1,397,922 -- --
(1) Restated for pooling of interests - See note 2.
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFTC CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Continued)
(1) Nature of Business and Significant Accounting Policies
(a) Business
EFTC Corporation (the Company), is an independent provider of
electronic manufacturing services to original equipment
manufacturers in the computer peripherals, medical equipment,
industrial controls, telecommunications equipment and electronic
instrumentation industries. The Company's manufacturing services
consist of assembling complex printed circuit boards (using both
surface mount and pin-through-hole technologies), cables,
electro-mechanical devices and finished products. The Company also
provides computer aided testing of printed circuit boards,
subsystems and final assemblies and "hub based" repair and
warranty services.
The Company operates in one business seqment and substantially all
of its operations are domestic.
(b) 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. Actual results could differ from those
estimates.
(c) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
maturities at the date of purchase of three months or less.
(d) Inventories
Inventories are stated at the lower of standard cost, which
approximates weighted average cost, or market.
(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and
repairs are charged to operations as incurred. Depreciation is
computed using straight-line and accelerated methods over
estimated useful lives ranging from 31 to 39 years for buildings,
and 5 to 10 years for
F-6
<PAGE>
furniture and fixtures and machinery and equipment. For the year
ended December 31, 1998, the Company incurred interest costs of
$4,761,505, of which approximately $450,000 was capitalized for
assets under construction.
(f) Goodwill and Other Assets
Goodwill is amortized using the straight-line method over 30
years. Other assets include acquired intellectual property
consisting of circuit board assembly designs and specifications
which are being amortized over 10 years using the straight-line
method and deferred financing costs which are being amortized over
the term of the related debt.
(g) Impairment of Long-Lived Assets
The Company accounts for long-lived assets under the provisions of
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS
121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is generally measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the
assets. In connection with the Company's restructurings in
December 1998 and August 1996, the Company recorded provisions for
impairment of certain fixed assets of approximately $3,342,000 and
$726,000, respectively.
(h) Income Taxes
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
(i) Revenue Recognition
The Company recognizes revenue upon shipment of products to
customers or when services are provided.
F-7
<PAGE>
(j) Income (Loss) Per Share
Income (loss) per share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share (SFAS 128). Under SFAS 128, basic EPS excludes
dilution for potential common shares and is computed by dividing
income or loss by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
In 1997, diluted weighted average shares outstanding includes
452,365 potential shares, consisting of stock options and
warrants, determined using the treasury stock method. Basic and
diluted EPS are the same in 1998 and 1996 as all potential common
shares were antidilutive.
(k) Pro Forma Net Income
To properly reflect the Company's pro forma net income, the net
income of Personal Electronics (Personal) (see note 2), which was
not subject to income taxes prior to the merger with the Company
due to their S corporation status, has been tax effected and
included as a pro forma adjustment to income tax expense in the
accompanying consolidated statements of operations. This
adjustment was computed as if the merged company had been a
taxable entity subject to federal and state income taxes for all
periods presented at the marginal tax rates applicable in such
periods.
(l) Stock-based Compensation
The Company accounts for its stock-based compensation plans under
the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. Pro forma
disclosures of net income and income per share, as required by
Statement of Financial Accounting Standards No. 123 (SFAS 123),
Accounting for Stock based Compensation, are included in note 7 to
the consolidated financial statements.
(m) Reclassifications
Certain prior year amounts have been reclassified to conform with
the current year presentation.
(2) Business Combinations and Asset Acquisitions
On March 31, 1998, EFTC Corporation acquired, through a merger, RM
Electronics, Inc., doing business as Personal Electronics (Personal), in
a business combination accounted for as a pooling of interests. EFTC
issued 1,800,000 shares of common stock in exchange for all of the
outstanding common stock of Personal.
Accordingly, the Company's consolidated financial statements have
F-8
<PAGE>
been restated for all periods presented to combine the financial
position, results of operations and cash flows of Personal with those of
the Company.
Revenue, net income (loss) and pro forma net income (loss) of EFTC and of
Personal, prior to the merger with the Company, for the three months
ended March 31, 1998 and the years ended December 31, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
EFTC Corporation Personal Combined
----------------- ----------------- ------------------
Three months ended March 31, 1998:
<S> <C> <C> <C>
Revenue $ 50,998,224 3,201,343 54,199,607
Net income 526,944 811,887 1,338,831
Pro forma net income 526,944 495,251 1,022,195
Year ended December 31:
1997:
Revenue 113,243,983 8,835,134 122,079,117
Net income 3,316,321 104,608 3,420,929
Pro forma net income 3,316,321 63,811 3,380,132
1996:
Revenue 56,880,067 4,030,249 60,910,316
Net loss (1,592,965) (24,942) (1,617,907)
Pro forma net loss (1,592,965) (15,215) (1,608,180)
</TABLE>
In connection with the acquisition, the Company incurred merger costs of
$1,048,308, which were charged to operations in March 1998. Notes payable
to shareholders of Personal in the amounts of $1,397,922 were converted
to equity upon consummation of the merger.
On September 1, 1998, the Company acquired the circuit card assembly
operations of the Agfa Division of Bayer Corporation. Certain inventory
and equipment were purchased in the amount of approximately $6.0 million
and certain employees associated with the circuit card operation were
hired by the Company. In connection with the transaction, the Company
entered into long-term supply agreements whereby EFTC will produce and
supply circuit card assemblies to Agfa's Electronic Prepress Systems and
Medical Diagnostics Divisions.
On September 30, 1998, the Company completed the initial closing of an
agreement with AlliedSignal, Inc. (AlliedSignal) for the acquisition of
the circuit card assembly operation for the Business & General Aviation
Enterprise of AlliedSignal Electronic & Aviation Systems in Ottawa,
Kansas. The Company acquired approximately $1.5 million in manufacturing
equipment and facilities and hired certain employees formerly employed by
AlliedSignal. In connection with the
F-9
<PAGE>
transaction, the Company amended its long-term supply agreement with
AlliedSignal to include production of circuit card assemblies by the
Company at the Ottawa facility.
On September 30, 1997, the Company acquired three affiliated companies,
Circuit Test, Inc., Airhub Service Group, L.C. and CTI International,
L.C. (the CTI Companies), for approximately $35.7 million consisting of
1,858,975 shares of the Company's common stock and approximately $26.5
million in cash, which includes approximately $1.4 million of transaction
costs and a $6 million payment upon completion of the common stock
offering in October 1997, as described in note 7. The Company recorded
goodwill of approximately $38.9 million, in connection with the
transaction. The acquisition was accounted for using the purchase method
of accounting for business combinations and, accordingly, the
accompanying consolidated financial statements include the results of
operations of the acquired businesses since the date of acquisition.
In August and September 1997, the Company completed the initial elements
of two additional transactions with AlliedSignal pursuant to which the
Company acquired certain inventory and equipment located in Ft.
Lauderdale, Florida, subleased the facility where such inventory and
equipment was located and employed certain persons formerly employed by
AlliedSignal at that location. The Company also hired certain persons
formerly employed by AlliedSignal in Arizona and agreed with AlliedSignal
to provide the personnel and management services necessary to operate a
related facility on behalf of AlliedSignal on a temporary basis. The
Company also acquired AlliedSignal's inventory and equipment located at
the Arizona facility, which acquisition was completed in February 1998.
The aggregate purchase price of all assets acquired was approximately
$19.0 million. The Company has also agreed to pay AlliedSignal one
percent of gross revenue for all electronic assemblies and parts made for
customers other than AlliedSignal at the Arizona, Florida and Kansas
facilities through December 31, 2001.
On February 24, 1997, the Company acquired two affiliated entities,
Current Electronics, Inc., an Oregon Corporation, and Current Electronics
(Washington), Inc., a Washington Corporation (the CE Companies), for
total consideration of approximately $10.9 million, consisting of
1,980,000 shares of Company common stock and approximately $5.5 million
in cash, which included approximately $600,000 of transaction costs. The
Company recorded goodwill of approximately $8.0 million in connection
with the acquisition. The acquisition was accounted for using the
purchase method of accounting for business combinations and, accordingly,
the accompanying consolidated financial statements include the results of
operations of the acquired businesses since the date of acquisition.
F-10
<PAGE>
(3) Inventories
Inventories are summarized as follows:
December 31,
--------------------------------------------
1998 1997
------------------- -------------------
Purchased parts and completed
subassemblies $ 44,216,246 38,723,546
Work-in-progress 12,473,402 6,950,855
Finished goods 4,069,328 392,249
------------------- -------------------
$ 60,758,976 46,066,650
=================== ===================
(4) Debt
During September 1997, the Company issued $15 million of subordinated
notes to a director and stockholder of the Company. The subordinated
notes bear interest at LIBOR plus 2% (9.62% at December 31, 1998) and are
payable in four annual installments of $50,000 and one final payment of
$14.8 million in December 2002. Payments on the notes are subordinate to
the Company's senior bank debt. The subordinated notes also included
warrants to acquire 500,000 shares of the Company's common stock at $8.00
per share. The warrants were issued in October 1997, and were valued at
approximately $500,000 using the Black-Scholes pricing model. Such amount
was recorded as debt discount and is being amortized to interest expense
over the term of the notes. The warrants were exercised on October 9,
1997 for total proceeds of approximately $4 million. The Company repaid
$10 million of this debt upon the completion of the common stock offering
described in note 7 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, as of December 31, 1998 was $4,827,553, of
which $50,000 is included in the current portion of long-term debt.
The Company entered into a sale-leaseback transaction with a director and
stockholder of the Company in December of 1998. Two manufacturing
facilities in Newberg, Oregon and Tucson, Arizona were sold for
$10,500,000 and leased back to the Company. Due to the Company's
continuing financial interest in the facilities, the transaction has been
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 $90,000. No gain
or loss from the sale was recorded. At the end of the initial lease term
the Company has the option to buy the building back for $9,400,000. If
the option is not exercised the Company can renew the lease for an
additional five years under similar terms, subject to change for interest
rates at the time of renewal.
F-11
<PAGE>
Long-term debt to related parties is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
----------------- ------------------
<S> <C> <C>
Subordinated notes, net of unamortized discount of
$122,447 and $138,773, respectively $ 4,827,553 4,861,227
Note payable, secured by manufacturing facilities 10,495,936 --
Notes payable to Personal shareholders -- 2,702,476
----------------- ------------------
15,323,489 7,563,703
Less current portion (225,142) (50,000)
----------------- ------------------
Related party debt, less current portion $ 15,098,347 7,513,703
================= ==================
Long-term debt to others consists of the following:
December 31,
-----------------------------------
1998 1997
--------------- ----------------
Notes payable to banks (a) $ 39,660,000 37,395,000
Less current portion (3,890,000) (3,100,000)
--------------- ----------------
Long-term debt to others, net of current portion $ 35,770,000 34,295,000
=============== ================
</TABLE>
(a) In connection with the CTI Companies business combination and the
AlliedSignal asset acquisition, the Company entered into a new loan
agreement consisting of a $40 million revolving line of credit renewable on
September 30, 2000, and a $20 million term loan maturing on September 30,
2002, of which the current balance was $15.9 million at December 31, 1998.
The proceeds of the new loan agreement were used for (i) funding the
CTI merger and (ii) repayment of the existing line of credit and bridge
facility and equipment loan. Borrowings under the agreement bear interest
at a rate based on either LIBOR or the prime rate plus applicable margins
ranging from 0.50% to 3.25% for the term facility (8.25% at December 31,
1998) and 0% to 2.75% for the revolving facility (approximately 8.25% at
December 31, 1998). Borrowings on the revolving facility are subject to
limitation based on the value of the available collateral. The loan
agreement is collateralized by substantially all of the Company's assets
and contains restrictive covenants relating to capital expenditures,
limitation on investments, borrowings, payment of dividends and mergers and
acquisitions, as well as the maintenance of certain financial ratios. The
revolving facility requires a commitment fee of 0.5% per annum on any
unused portion. As of December 31, 1998, the borrowing availability under
the agreement was approximately $16.2 million. This credit facility may be
withdrawn or canceled at the banks' option under certain conditions such as
default or in the event the Company experiences a material adverse change
in its financial condition.
F-12
<PAGE>
As of December 31, 1998, the Company was not in compliance with
certain financial covenants related to the credit facility.
Subsequent to December 31, 1998, the loan agreement was amended
and waivers were obtained which resulted in compliance with these
financial covenants.
Annual maturities of long-term debt, excluding the discount on the
subordinated notes, are as follows at December 31, 1998:
1999 $ 4,115,142
2000 28,410,875
2001 5,108,021
2002 7,776,707
2003 9,695,191
---------------------
$ 55,105,936
=====================
(5) Leases
The Company has noncancelable operating leases for facilities and
equipment that expire in various years through 2002. Lease expense on
these operating leases amounted to $7,071,754, $2,333,486 and $1,215,623
for the years ended December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, future minimum lease payments for operating leases
are as follows:
1999 $ 8,750,822
2000 5,722,297
2001 4,005,817
2002 3,019,611
2003 1,351,397
Thereafter 511,724
---------------------
Total future minimum lease payments $ 23,361,668
=====================
F-13
<PAGE>
(6) Income Taxes
Income tax expense (benefit) for the years ended December 31 is comprised
of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ---------------- ------------------
<S> <C> <C> <C>
Current:
Federal $ 2,057,983 1,210,858 (549,846)
State 169,710 151,887 5,453
------------------ ---------------- ------------------
2,227,693 1,362,745 (544,393)
------------------ ---------------- ------------------
Deferred:
Federal (4,328,060) 599,245 (196,440)
State (530,538) 156,405 (125,828)
------------------ ---------------- ------------------
(4,858,598) 755,650 (322,268)
------------------ ---------------- ------------------
Total income tax
expense (benefit) $ (2,630,905) 2,118,395 (866,661)
================== ================ ==================
</TABLE>
Actual income tax expense (benefit) differs from the amounts computed
using the statutory tax rate of 34% as follows:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1998 1997 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Computed tax expense (benefit) at
the expected statutory rate $ (2,315,080) 1,883,370 (844,753)
Increase (decrease) in income
taxes resulting from:
State income taxes, net of
federal benefit and
state tax credits (238,147) 148,565 (80,693)
Amortization of
nondeductible goodwill 163,617 84,927 --
S Corporation income (loss) (316,636) (40,797) 9,727
Other, net 75,341 42,330 49,058
---------------- ----------------- -----------------
Income tax expense
(benefit) $ (2,630,905) 2,118,395 (866,661)
================ ================= =================
</TABLE>
F-14
<PAGE>
In 1998 and 1997, the Company recognized $693,440 and $95,478,
respectively, as increases to additional paid-in capital for the income
tax benefit resulting from the exercise of non-qualified stock options by
employees.
The tax effects of temporary differences at December 31 that give rise to
significant portions of the deferred tax assets and liabilities are
presented below:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Accrued compensation $ 500,950 283,078
Restructuring charges:
Inventories and severance 2,163,631 --
Property, plant and equipment 1,223,909 --
Deferred gain on sale leaseback transactions 129,134 27,583
Deferred loss on asset writedown 32,897 70,407
State net operating loss carryforwards -- 15,200
Allowance for doubtful accounts 528,761 124,807
Deferred revenue 154,242 --
Inventory costs capitalized for income tax
purposes 491,200 31,077
Provision for impairment of inventory 1,386,884 55,328
Other 33,332 --
------------------- -------------------
Total deferred tax assets $ 6,644,940 607,480
=================== ===================
Deferred tax liabilities:
Amortization of intangibles $ (564,720) (115,640)
Accelerated depreciation and other basis
differences for property, plant and
equipment (1,546,018) (816,236)
------------------- -------------------
Total deferred tax liabilities $ (2,110,738) (931,876)
=================== ===================
The above balances are classified in the accompanying consolidated
balance sheets as of December 31 as follows:
1998 1997
------------------- -------------------
Net deferred tax asset - current $ 5,259,000 494,290
=================== ===================
Net deferred tax liability - noncurrent $ 724,798 818,686
=================== ===================
</TABLE>
F-15
<PAGE>
Management believes that it is more likely than not that future
operations will generate sufficient taxable income to realize the
deferred tax assets.
(7) Shareholders' Equity
In June 1998, the Company issued 1,770,000 shares of common stock in a
secondary offering for proceeds of $21.3 million, net of issuance costs
of approximately $3.5 million.
In November 1997, the Company issued 3,506,861 shares of common stock in
a secondary offering for proceeds of $39.0 million, net of issuance costs
of approximately $3.1 million.
The Company has two stock option or equity incentive plans: the Equity
Incentive Plan and the Non-employee Directors Plan. 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. 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. A total of
2,509,911 shares are available for grant under all plans at December 31,
1998.
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.
On December 15, 1998, the Company repriced certain common stock options
which had been granted under the Equity Incentive Plan from March 3, 1994
to December 15, 1998 at exercise prices ranging from $9.75 to $18.32. The
repriced options were granted with an exercise price of $8.00, which was
greater than the quoted price and the number of options held by the
optionee were reduced in proportion to the reduction in the exercise
prices. Options to purchase approximately 1,851,000 shares of common
stock were cancelled as a result of the repricing.
F-16
<PAGE>
The following summarizes activity of the plans for the three years ended
December 31, 1998:
Weighted average
exercise price
Number of options per share
------------------- -------------------
Balance at January 1, 1996 262,700 $ 5.87
Granted 375,200 4.04
Exercised (1,800) 3.33
Canceled (75,600) 6.64
-------------------
Balance at December 31, 1996 560,500 4.55
Granted 2,004,000 11.63
Exercised (53,300) 4.34
Canceled (95,980) 6.07
-------------------
Balance at December 31, 1997 2,415,220 10.37
Granted 2,578,892 9.82
Exercised (275,016) 5.34
Canceled (2,155,469) 14.46
-------------------
Balance at December 31, 1998 2,563,627 7.03
===================
The following table summarizes information regarding fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
--------------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$1.83 to $3.66 369,510 9.5 $ 3.24 39,968 $ 3.52
$3.67 to $5.49 346,141 8.8 4.19 167,141 4.36
$5.50 to $7.33 499,300 8.1 5.79 474,237 5.78
$7.33 to $9.16 959,676 9.6 8.00 227,874 8.00
$9.17 to $10.99 156,000 8.9 9.91 67,000 9.78
$11.00 to $12.82 30,000 9.0 11.42 8,000 11.38
$12.83 to $14.65 172,500 9.0 13.93 24,720 13.65
$14.66 to $16.48 30,500 9.2 16.37 8,000 16.37
------------- -------------
2,563,627 9.1 7.03 1,016,940 6.57
============= =============
</TABLE>
F-17
<PAGE>
The Company applies the provisions of APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, because the
Company grants options at fair value, no compensation cost has been
recognized for its fixed stock option plans in 1998, 1997 and 1996.
If compensation cost for the Company's three stock-based compensation
plans had been determined using the fair values at the grant dates for
awards under those plans consistent with SFAS 123, and after
consideration of cancellations, the Company's pro forma net income (loss)
and income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss):
As reported $ (4,178,155) 3,420,929 (1,617,907)
Pro forma (6,645,172) 1,148,849 (1,756,201)
Income (loss) per share - basic:
As reported (.31) .40 (.28)
Pro forma (.45) .14 (.32)
Income (loss) per share - diluted:
As reported (.31) .38 (.28)
Pro forma (.45) .13 (.32)
</TABLE>
The weighted average fair values of options granted for the years ended
December 31, 1998, 1997 and 1996 were $4.42, $5.90 and $4.15,
respectively. In estimating the fair value of options, the Company used
the Black-Scholes option-pricing model with the following assumptions.
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 100% 70% 60%
Risk-free interest rates 5% 6% 6%
Expected lives (years) 3 3 4
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effect on historical net income for future periods because options vest
over several years, and additional awards are made each year. In
addition, compensation cost for options granted prior to January 1, 1995,
and which vest after that date, has not been considered.
The Company also had 20,000 warrants outstanding which were issued to the
underwriter in connection with the Company's initial public offering in
1994. The warrants are exercisable at $9.00 per share and expire in 1999.
F-18
<PAGE>
(8) 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 cash equivalents, trade
receivables, accounts payable and accrued liabilities approximate fair
value because of the short maturity of these instruments. The carrying
amounts of notes payable and long-term debt approximate fair value
because of the variable nature of the interest rates of these
instruments.
The Company has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on a portion of its floating rate
debt. A swap agreement is a contract to exchange variable interest
payments for fixed interest payments periodically over the life of the
agreement without the exchange of the underlying notional amounts. The
notional amounts of interest rate agreements are used to measure interest
to be paid or received and do not represent the amount of exposure to
credit loss. The differential paid or received on interest rate
agreements is recognized as an adjustment to interest expense.
The Company has entered into an interest swap agreement covering its
term loan which has an outstanding balance of $15.9 million at
December 31, 1998. The agreement has effectively fixed the interest
rate at 6.25%, plus applicable margins under the loan agreement, for
the entire principal amount through the loan's maturity date of
September 2002. This arrangement did not result in a significant
adjustment to interest expense in 1998. The Company estimates it would
incur a loss of approximately $400,000 if the swap was terminated on
December 31, 1998.
(9) Employee Benefit Plan
The Company has a 401(k) Savings Plan covering substantially all
employees, whereby the Company matches 50% of an employee's contributions
to a maximum of 2% of the employee's compensation. Additional profit
sharing contributions to the plan are at the discretion of the Board of
Directors. During the years ended December 31, 1998, 1997 and 1996,
contributions from the Company to the Plan were approximately $390,572,
$138,000 and $106,000, respectively.
(10) Other Transactions with Related Parties
Under a previously existing agreement, the CTI Companies were required to
pay $500,000 upon change in control to an entity acting as a sales agent
for the CTI Companies in which individuals who are stockholders, officers
and directors of the Company have a majority ownership interest.
In 1997, the Company leased three facilities from directors of the
Company. Amounts paid to the directors totaled approximately $283,000.
F-19
<PAGE>
An investment banking firm, of which a director of the Company is the
Managing Director, received a fee of approximately $900,000 as a
representative of the CTI Companies in their acquisition by the Company.
The same firm received a fee of approximately $642,500 as a
representative of Personal in their acquisition by the Company.
(11) Restructuring
In the fourth quarter of 1998, management initiated a plan to consolidate
and close its Rocky Mountain Operations in Greeley, Colorado. Charges of
$9,250,000 related to the closing were charged to operations for the year
ended December 31, 1998. Additional costs to close the facility will be
incurred in the first and second quarter of 1999 until the facility is
sold. The restructuring involved the termination of approximately 140
employees of which 123 were manufacturing related and 17 administrative
or indirect support personnel. Total severance and salaries of employees
performing exit activities amounted to $463,000 of which $263,000 was
included in cost goods sold and $200,000 in selling, general and
administrative expenses. Approximately $100,000 of these charges had been
paid in 1998. Inventory allowances of $5,445,000, which are included in
cost of goods sold, 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, a provision of $3,342,000 was
charged to operations related to asset impairment for land and building
and various equipment.
In the third quarter of 1996, management initiated a plan to restructure
the Company's manufacturing operations and various administrative
functions, including a change in the manufacturing process and a
reorganization of the sales department. Restructuring charges of
$2,127,000 were charged to operations for the year ended December 31,
1996. The restructuring plan involved the termination of 142 employees
consisting of approximately 90 direct manufacturing employees and 52
indirect overhead positions. The total severance related costs
approximated $615,000. The Company changed its manufacturing strategy to
focus on high-mix production and developed its Asynchronous Process
Manufacturing (APM) concept. Software development costs unrelated to the
Company's new manufacturing strategy but related to previous
manufacturing processes developed by consultants were written off in the
approximate amount of $442,000. Inventory allowances, totaling
approximately $344,000, were also recorded to provide for future losses
to be incurred related to the separation of certain customers who did not
meet the Company's new manufacturing strategy. In addition, due to
changes in the manufacturing process which eliminated the use of various
equipment, property, plant and equipment was written off in the amount of
$726,000. The restructuring charge was allocated to cost of goods sold,
selling, general and administrative expenses and impairment of fixed
assets in the amounts of approximately $479,000, $922,000 and $726,000,
respectively. The restructuring has been completed and no liabilities
associated with the restructuring remain at December 31, 1998.
F-20
<PAGE>
(12) Business and Credit Concentrations
The Company operates in the electronic manufacturing services segment of
the electronics industry. The Company's customers are primarily located
in the United States and sales and accounts receivable are concentrated
with customers principally in the computer peripherals and medical
equipment industries. The Company has a policy to regularly monitor the
credit worthiness of its customers and provides for uncollectible amounts
if credit problems arise. Customers may experience adverse financial
difficulties, including those that may result from industry developments,
which may increase bad debt exposure to the Company. In addition, the
electronics manufacturing services industry has experienced component
supply shortages in the past. Should future component shortages occur,
the Company may experience reduced net sales and profitability.
Sales to significant customers as a percentage of total net sales for
the years ended December 31 were as follows:
1998 1997 1996
-------------- ------------- -----------
Allied Signal 42.1% 25.3% --%
Exabyte 4.4 12.3 20.3
Ohmeda (BOC Group) -- 6.9 14.8
Hewlett Packard Company -- 6.2 25.1
The facilities which include the Company's repair and warranty services
are located at the principal locations of the overnight delivery hubs of
two overnight package transportation providers and are integrated with
the logistics operations of these transportation providers and
participate in joint marketing programs to customers of these
transportation providers. If the Company ceased to be allowed to share
facilities and marketing arrangements with either or both of these major
transportation providers, there can be no assurance that alternate
arrangements could be made by the Company to preserve such advantages and
the Company could lose significant numbers of repair customers. In
addition, work stoppages or other disruptions in the transportation
network may occur from time to time which may affect these transportation
providers.
(13) Litigation
The Company has been named in two legal proceedings, one in Colorado
State Court, the other in U.S. District Court, brought by certain
shareholders of the Company relating to a decrease in the trading price
of the Company's common stock in August of 1998. Both proceedings are in
the pre-trial stage and the Company therefore cannot make any assessment
of their ultimate impact. However, management of the Company believes
that the allegations included in the proceedings are without merit and
that the ultimate resolution of these matters will not have a material
adverse effect on the Company's financial condition, results of
operations or cash flows.
F-21
<PAGE>
(14) Subsequent Event
On March 22, 1999, the Company announced an agreement with Honeywell
Inc.'s Commercial Aviation Systems operations (Honeywell) to acquire
certain assets located near Phoenix, Arizona which are used in circuit
card assembly. The Company will lease a facility located in Phoenix,
Arizona and will transfer the assets acquired and employees to this new
facility. The Company anticipates incurring approximately $1.2 million in
costs associated with preparing the facility for operations. In addition,
the Company and Honeywell have signed a ten-year agreement for the
Company to supply circuit card assembly services to Honeywell. This
transaction is expected to close in phases throughout 1999, with the
first phase, consisting of the purchase of assets for approximately $2.5
million and the transfer of approximately 200 employees, expected to
close in April 1999.
F-22
<PAGE>
Exhibit 10.28
Management Bonus Plan
EFTC Corporation (the "Company") has established a Management Bonus
Plan. The Compensation Committee of the Board of Directors (the "Committee") of
the Company has established that, for 1998, in accordance with the Company's
executive compensation policies, a bonus plan based on achieving certain
performance levels will provide an incentive to executives to enhance the
financial performance of the Company. The 1998 Bonus Plan provided for the
President of Manufacturing, the President of Services, the Senior Vice President
of Sales, the Chief Executive Officer, the Chief Financial Officer, the Chief
Administrative Officer and the Chief Information Officer with the opportunity to
receive cash bonuses for achieving certain performance levels as determined by
the Committee.
Exhibit 21.1
List of Subsidiaries
of
EFTC Corporation
Current Electronics, Inc., an Oregon corporation
Circuit Test, Inc., a Florida corporation
Airhub Service Group, L.C., a Kentucky limited liability company
Circuit Test International, L.C., a Florida limited liability company
CTI Acquisition Corp., a Florida corporation
Personal Electronics, Inc., a New Hampshire corporation
Exhibit 23.1
The Board of Directors
EFTC Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-77938, 33-92418, 333-34255 and 333-47943) on Form S-8 of EFTC Corporation of
our report dated January 26, 1999, except as to note 14, which is as of March
22, 1999, relating to the consolidated balance sheets of EFTC Corporation and
subsidiaries as of December 31, 1998 and 1997, 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, 1998, and our report dated
January 26, 1999 on the related financial statement schedule, which reports
appear in the December 31, 1998 annual report on Form 10-K of EFTC Corporation.
KPMG LLP
Denver, Colorado
March 26, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 622,672
<SECURITIES> 0
<RECEIVABLES> 35,445,205
<ALLOWANCES> 1,321,903
<INVENTORY> 60,758,976
<CURRENT-ASSETS> 103,130,281
<PP&E> 45,577,957
<DEPRECIATION> 6,958,900
<TOTAL-ASSETS> 190,666,341
<CURRENT-LIABILITIES> 44,093,727
<BONDS> 50,868,347
0
0
<COMMON> 155,430
<OTHER-SE> 94,824,039
<TOTAL-LIABILITY-AND-EQUITY> 190,666,341
<SALES> 226,779,631
<TOTAL-REVENUES> 226,779,631
<CGS> 200,580,511
<TOTAL-COSTS> 200,580,511
<OTHER-EXPENSES> 28,992,704
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,311,505
<INCOME-PRETAX> (6,809,060)
<INCOME-TAX> (2,947,541)
<INCOME-CONTINUING> 4,494,791)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,494,791)
<EPS-PRIMARY> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
