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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the Appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
EFTC CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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EFTC CORPORATION
9351 Grant Street, Sixth Floor
Denver, Colorado 80229
July 19, 2000
Dear Shareholder:
On behalf of the board of directors and management of EFTC Corporation, I
cordially invite you to attend a special meeting of shareholders to be held at
the Company's offices at 9351 Grant Street, Sixth Floor, Denver, Colorado, on
August 22, 2000, at 10:00 a.m. local time. At the special meeting you will be
asked to consider and vote on:
. The issuance to Thayer-BLUM Funding, L.L.C. of the following:
. the Company's 8.875% Senior Subordinated Convertible Notes due
June 2006
. the Company's Series B Convertible Preferred Stock
. An amendment to the Company's Amended and Restated Articles of
Incorporation increasing the number of authorized shares of common
stock from 45 million shares to 75 million shares; and
. A new stock option plan.
Approval of these matters is being sought in conjunction with a tender
offer being conducted by Thayer-BLUM Funding for up to 5,625,000 but not less
than 500,000 shares of Company common stock at a price of $4.00 per share.
Thayer-BLUM Funding was formed by affiliates of Thayer Capital Partners and BLUM
Capital Partners to hold securities of the Company.
Thayer Capital Partners is a private equity investment firm based in
Washington, DC. Thayer manages two private equity funds with more than $1.2
billion under management. The firm focuses on buyouts and growth equity
investments in four primary industries: information technology and services,
electronics and outsourced manufacturing, travel and leisure services, and
outsourced business services.
BLUM Capital Partners is a San Francisco-based private equity and strategic
block investment firm, which manages in excess of $3 billion in capital both
domestically and internationally. BLUM has invested in a wide variety of
businesses and has participated in going-private transactions, equity infusions
to either restructure a balance sheet or provide growth capital, share
repurchases, acquisition programs and business unit divestitures.
The board of directors recommends that you vote FOR each proposal. The
matters for which approval is sought, together with the tender offer and
financings of the Company by Thayer-BLUM Funding the first of which closed on
March 30, 2000 and the second of which closed on July 14, 2000, are parts of a
recapitalization of the Company. Detailed descriptions of the matters proposed
for shareholder approval, the other aspects of the recapitalization, the factors
considered by the board of directors in evaluating the matters proposed and
other important information, including fairness opinions of Needham & Company,
Inc., are set forth in the accompanying proxy statement. I urge you to consider
it carefully. Whether or not you plan to attend the special meeting, please
complete, sign, date and return the enclosed proxy as soon as possible in the
enclosed return envelope, which requires no postage if mailed in the United
States. This action will not limit your right to vote in person if you attend
the special meeting.
Very truly yours,
/s/ Jack Calderon
Jack Calderon
Chairman
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EFTC CORPORATION
9351 Grant Street, Sixth Floor
Denver, Colorado 80229
___________________________________________
Notice of Special Meeting of Shareholders
to be held on August 22, 2000
___________________________________________
TO THE SHAREHOLDERS OF EFTC CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of EFTC
Corporation, a Colorado corporation, will be held on August 22, 2000, at 10:00
a.m. at 9351 Grant Street, Sixth Floor, Denver, Colorado 80229. At the Special
Meeting, you will be asked to consider and vote upon the following proposals:
1. The Issuance of Convertible Notes and Convertible Preferred Stock. A
proposal to approve, in accordance with the rules of The Nasdaq Stock Market,
the issuance to Thayer-BLUM Funding, L.L.C. of the following:
. the Company's 8.875% Senior Subordinated Convertible Notes due
June 2006
. the Company's Series B Convertible Preferred Stock
2. Increase in the Number of Authorized Shares. A proposal to approve an
amendment to the Company's Amended and Restated Articles of Incorporation
increasing the number of authorized shares of common stock from 45.0 million
shares to 75.0 million shares.
3. The Adoption of the 2000 Equity Stock Option Plan. A proposal to
approve the adoption of the Company's 2000 Equity Stock Option Plan that
provides for the issuance of up to 5.0 million shares of common stock.
4. The transaction of such other business as may properly come before the
meeting or any adjournment or postponement thereof.
The board of directors has approved and recommends that you vote FOR
approval of:
. Proposal 1 - the issuance of convertible notes and convertible
preferred stock
. Proposal 2 - the increase in the number of authorized shares
. Proposal 3 - the adoption of the 2000 Equity Stock Option Plan
This proxy statement is being furnished to you in connection with the
solicitation of proxies by the board of directors of the Company for use at the
Special Meeting. This proxy statement is being mailed on or about July 19,
2000. The board of directors has fixed the close of business on July 17, 2000
as the record date for the determination of shareholders entitled to notice of
and to vote at this Special Meeting and at any adjournment or postponement
thereof. A list of shareholders entitled to notice of and to vote at the
Special Meeting will be open to the examination of any shareholder, for any
purpose appropriate to the Special Meeting, during ordinary business hours, for
a period of ten days prior to the Special Meeting, at the principal executive
offices of the Company.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ August P. Bruehlman
---------------------------------
August P. Bruehlman
Secretary
Denver, Colorado
July 19, 2000
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IMPORTANT-- YOUR PROXY IS ENCLOSED
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING
REGARDLESS OF THE SIZE OF YOUR HOLDINGS. YOU ARE CORDIALLY INVITED TO ATTEND
THE MEETING. WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING IN
PERSON, WE URGE YOU TO MARK, SIGN, DATE AND MAIL THE ENCLOSED PROXY AS PROMPTLY
AS POSSIBLE. A POSTAGE PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE BY PROXY OR MAY WITHDRAW YOUR PROXY AND
VOTE IN PERSON. BY RETURNING YOUR PROXY PROMPTLY, A QUORUM WILL MORE LIKELY BE
REPRESENTED AT THE MEETING WHICH WILL PREVENT COSTLY FOLLOW-UP AND DELAYS.
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TABLE OF CONTENTS
<TABLE>
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SUMMARY............................................................................................... 1
The Special Meeting.............................................................................. 1
Date, Time and Place of Special Meeting..................................................... 1
Purpose..................................................................................... 1
Record Date; Shares Outstanding and Entitled to Vote........................................ 1
Votes Required for Approval................................................................. 1
Voting Agreement............................................................................ 1
Summary of the Recapitalization Transaction...................................................... 1
Transaction with Thayer-BLUM Funding........................................................ 1
Proposal 1 - Issuance of the Convertible Notes and Convertible Preferred Stock................... 2
Reasons for the Proposal.................................................................... 2
Opinion of Needham & Company, Inc........................................................... 3
Certain Matters to be Considered by Shareholders............................................ 3
Proposal 2 - Increase in the Number of Authorized Shares......................................... 5
General Description......................................................................... 5
Reasons for Increase........................................................................ 5
Proposal 3 - Adoption of the 2000 Equity Stock Option Plan....................................... 6
General..................................................................................... 6
Reasons for Adoption........................................................................ 6
Recommendations of the Board of Directors........................................................ 6
FORWARD-LOOKING STATEMENTS............................................................................ 7
THE SPECIAL MEETING................................................................................... 8
Date, Time and Place............................................................................. 8
The Record Date.................................................................................. 8
Purpose of the Special Meeting................................................................... 8
Quorum and Voting................................................................................ 8
Approval of Proposal 1 - Issuance of the Convertible Notes and Convertible Preferred Stock.. 8
Approval of Proposal 2 - Increase in the Number of Authorized Shares........................ 9
Approval of Proposal 3 - Adoption of the 2000 Equity Stock Option Plan...................... 9
Voting Agreement............................................................................ 9
Revocation of Proxies............................................................................ 9
Cost of Solicitation............................................................................. 9
Information Regarding Thayer and BLUM............................................................ 9
Security Ownership of Certain Beneficial Owners and Management................................... 10
SUMMARY OF THE RECAPITALIZATION TRANSACTION........................................................... 12
Transaction with Thayer-BLUM Funding............................................................. 12
Transaction with Bank of America................................................................. 13
PROPOSAL 1 - ISSUANCE OF THE CONVERTIBLE NOTES AND
CONVERTIBLE PREFERRED STOCK...................................................................... 14
General.......................................................................................... 14
Background of the Recapitalization Transaction................................................... 14
Capital and Liquidity Needs................................................................. 14
Negotiations with Thayer and BLUM........................................................... 15
Appointment of Special Committee............................................................ 16
Murphy Noell Settlement..................................................................... 17
Amended Recapitalization Transaction............................................................. 17
Additional Investment and Revised Tender Offer.............................................. 17
Reasons for the Transaction...................................................................... 18
</TABLE>
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Opinions of Needham & Company, Inc............................................................... 20
Certain Matters to be Considered by Shareholders................................................. 23
Change in the Company's Board of Directors.................................................. 23
Control by Thayer-BLUM Funding.............................................................. 23
Dilution.................................................................................... 24
Continued Nasdaq National Market Listing.................................................... 24
Capitalization of the Company............................................................... 24
Voting Agreement............................................................................ 25
Repayment of Subordinated Indebtedness to a Director of the Company......................... 25
Stock Option Grants......................................................................... 25
Amendment to Articles of Incorporation...................................................... 26
Description of Securities Purchase Agreement..................................................... 26
General..................................................................................... 26
Representations and Warranties.............................................................. 26
Covenants................................................................................... 27
Termination................................................................................. 28
Conditions to the Tender Offer.............................................................. 28
Description of the Securities.................................................................... 30
Exchangeable Notes.......................................................................... 30
Convertible Notes........................................................................... 33
Convertible Preferred Stock................................................................. 35
Warrant..................................................................................... 36
Other Material Agreements........................................................................ 36
Voting Agreement............................................................................ 36
Registration Rights Agreement............................................................... 37
Regulatory Approvals............................................................................. 37
Vote Required and Board Recommendation........................................................... 37
PROPOSAL 2 - INCREASE IN THE NUMBER OF AUTHORIZED SHARES.............................................. 38
Background....................................................................................... 38
Description of the Proposal...................................................................... 38
Vote Required and Board Recommendation........................................................... 39
PROPOSAL 3 - ADOPTION OF THE 2000 EQUITY STOCK OPTION PLAN............................................ 40
Background....................................................................................... 40
New Plan Benefits................................................................................ 40
Description of 2000 Equity Stock Option Plan..................................................... 40
Administration.............................................................................. 41
Shares Subject to the Stock Option Plan..................................................... 41
Adjustments to the Shares Subject to the Stock Option Plan Upon Changes
in Capital Structure or Reorganization, Change in Control or Liquidation.............. 41
Participation............................................................................... 41
Grant of Options............................................................................ 42
Option Term................................................................................. 42
Vesting of Options.......................................................................... 42
Option Price................................................................................ 42
Independent Directors....................................................................... 42
Exercise of Options......................................................................... 42
Nontransferability of Options............................................................... 42
Amendment and Termination................................................................... 43
Federal Income Tax Consequences of Issuance and Exercise of Options......................... 43
Reasons for Adoption of 2000 Equity Stock Option Plan............................................ 44
Vote Required and Board Recommendation........................................................... 44
Certain Executive Compensation Information....................................................... 45
</TABLE>
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Summary Compensation Table....................................... 45
Options Granted.................................................. 46
Option Exercises and Year End Option Values...................... 46
Employment Agreements............................................ 47
Compensation of Directors............................................. 48
Compensation Committee Interlocks and Insider Participation...... 48
WHERE YOU CAN FIND MORE INFORMATION........................................ 50
SHAREHOLDER PROPOSALS...................................................... 50
INDEPENDENT PUBLIC ACCOUNTANTS............................................. 50
OTHER MATTERS.............................................................. 50
</TABLE>
Appendix I - Opinions of Needham & Company, Inc.
Appendix II - Securities Purchase Agreement and First Amendment to the
Securities Purchase Agreement
Appendix III - 2000 Equity Stock Option Plan
Appendix IV - Annual Report on Form 10-K for the Year Ended December 31, 1999
Appendix V - Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2000
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SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This summary is qualified in its entirety by the more
detailed information contained in the Proxy Statement and the Appendices hereto.
You are urged to read this Proxy Statement and the Appendices in their entirety,
as well as any other documents we have referred you to. See "Where You Can Find
More Information" on page 50.
The Special Meeting
Date, Time and Place of Special Meeting. The Special Meeting will be held
on August 22, 2000, at 10:00 a.m., local time, at the Company's executive
offices located at 9351 Grant Street, Sixth Floor, Denver, Colorado 80229.
Purpose. The Special Meeting will be held to consider and act upon the
following proposals:
. Proposal 1- Issuance of the following:
. the Company's 8.875% Senior Subordinated Convertible Notes due
June 2006
. the Company's Series B Convertible Preferred Stock;
. Proposal 2 - Increase in the number of authorized shares of the
Company's common stock from 45.0 million to 75.0 million;
. Proposal 3 - Adoption of the Company's 2000 Equity Stock Option Plan
that provides for the issuance of up to 5.0 million shares of common
stock; and
. Transaction of any other business which properly comes before the
meeting or any adjournment or postponement.
Record Date; Shares Outstanding and Entitled to Vote. The record date for
determining the holders of the common stock entitled to vote at the Special
Meeting is July 17, 2000. As of the record date 15,543,489 shares of the common
stock were issued and outstanding and entitled to vote. As of such date, the
executive officers and directors of the Company held the power to vote
approximately 23.2% of the Company's outstanding common stock.
Votes Required for Approval. Proposal 1 - issuance of the Company's
Convertible Notes and Convertible Preferred Stock - requires the affirmative
vote of a majority of the total votes cast on the proposal in person or by
proxy. Proposal 2 - increase in the number of authorized shares of the Company's
common stock - requires the affirmative vote of a majority of the shares of
common stock outstanding as of the record date. Proposal 3 - adoption of the
Company's 2000 Equity Stock Option Plan - requires the affirmative vote of a
majority of the total votes cast on the proposal in person or by proxy.
Voting Agreement. Directors, executive officers and other shareholders
having the power to vote an aggregate of approximately 26.5% of the Company's
outstanding common stock have entered into voting agreements pursuant to which
they have agreed to vote to approve each of the transactions contemplated by the
Securities Purchase Agreement.
Summary of the Recapitalization Transaction
Transaction with Thayer-BLUM Funding. On March 30, 2000, the Company
completed the first stage of a recapitalization transaction with Thayer-BLUM
Funding, L.L.C., an entity formed by affiliates of Thayer Capital Partners and
BLUM Capital Partners to hold securities of the Company. This first stage
involved:
. the purchase of a total of $54.0 million in Senior Subordinated
Exchangeable Notes with a maturity date of June 30, 2006 and an
initial interest rate of 15% accruing quarterly, or at the Company's
option, payable in additional Exchangeable Notes (the "March
Exchangeable Notes");
<PAGE>
. the issuance of Warrants to purchase 3,093,154 shares of the Company's
common stock at an exercise price of $.01 per share; and
. the election of two persons designated by Thayer-BLUM Funding to the
Company's board of directors.
On July 14, 2000, Thayer-BLUM Funding purchased $14.0 million in Senior
Subordinated Exchangeable Notes with a maturity date of June 30, 2006 and an
initial interest rate of 15% accruing quarterly, or at the Company's option,
payable in additional Exchangeable Notes (the "July Exchangeable Notes" and,
together with the March Exchangeable Notes, the "Exchangeable Notes"),
substantially in the form of the Company's currently outstanding March
Exchangeable Notes held by Thayer-BLUM Funding.
If Proposal 1 is approved at the Special Meeting and the tender offer is
consummated with respect to at least 500,000 shares of common stock:
. the March Exchangeable Notes will automatically be replaced with
Senior Subordinated Convertible Notes with a maturity date of June 30,
2006 and an interest rate of 8.875% compounding quarterly, or at the
Company's option, payable in additional Convertible Notes and which
are convertible at a rate of $2.58 per share;
. the July Exchangeable Notes will automatically be replaced with
Company's Convertible Preferred Stock accruing dividends at a rate of
8.875% on the liquidation preference thereof, compounded quarterly,
having a liquidation preference equal to the aggregate principal
amount of the July Exchangeable Notes, plus accrued interest, and
convertible into common stock of the Company at $1.80 per share of
common stock;
. Thayer-BLUM Funding will have the right to designate a majority of the
members of the Company's board of directors; and
. the Warrants will never become exercisable and will be canceled.
If Proposal 1 is not approved at the Special Meeting or if the tender offer
is not consummated with respect to at least 500,000 shares of common stock the
Warrants will become exercisable and will remain exercisable until June 30,
2010.
If Proposal 1 is not approved at the Special Meeting, the Exchangeable
Notes will remain in place and the interest rate will increase to 20%,
compounding quarterly, or at the Company's option, payable in additional
Exchangeable Notes.
Proposal 1 - Issuance of the Convertible Notes and Convertible Preferred Stock
Reasons for the Proposal. On March 30, 2000, the Company closed the initial
phase of the recapitalization transaction when Thayer-BLUM Funding invested
$54.0 million in the Company in exchange for $54.0 million in principal amount
of the Company's Senior Subordinated Exchangeable Notes and Warrants to purchase
3,093,154 shares of the Company's common stock at an exercise price of $.01 per
share. On July 14, 2000, Thayer-BLUM Funding purchased $14.0 million of the July
Exchangeable Notes, substantially in the form of the Company's currently
outstanding March Exchangeable Notes held by Thayer-BLUM Funding. In connection
with those investments, the Company agreed to use commercially reasonable
efforts to obtain shareholder approval under rules applicable to Nasdaq National
Market issuers for the issuance of its Senior Subordinated Convertible Notes and
Convertible Preferred Stock. Approval of Proposal 1 is being sought by the
Company in satisfaction of that obligation.
The Company also believes it to be in the best interests of the Company and
its shareholders to approve Proposal 1. Shareholder approval of Proposal 1 will
permit the last phase of the recapitalization transaction to be completed - the
exchange of its Exchangeable Notes for Convertible Notes and Convertible
Preferred Stock, the
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cancellation of the Warrants and the consummation of the tender offer. Failure
of shareholders to approve Proposal 1 would have a material adverse effect on
the Company and its shareholders because:
. the Warrants would remain outstanding and the shareholders would
experience substantial dilution when they are exercised because the
Company would issue a substantial number of additional shares without
receiving any material additional capital;
. the Exchangeable Notes would remain outstanding and their interest
rate would increase to 20% per annum; and
. Thayer-BLUM Funding would not be obligated to consummate the tender
offer, even if sufficient shares were tendered by the Company's
shareholders.
If Proposal 1 is not approved by shareholders, the Company believes that it
would find it necessary to refinance the Exchangeable Notes given the high
interest rate on such notes. In such a circumstance, the Company would
experience the additional costs, including prepayment penalties, associated with
such a refinancing, which could be substantial, and the Warrants would remain
outstanding.
A special committee of the board of directors, based in part on opinions of
Needham & Company, Inc., and the board of directors, also based in part on such
opinions, concluded that the recapitalization transaction with Thayer-BLUM
Funding as a whole was fair to and in the interests of the Company and its
shareholders and recommended that the Company's shareholders approve the
proposal.
Opinion of Needham & Company, Inc. In deciding to approve the
recapitalization transaction with Thayer-BLUM Funding, the special committee
received opinions from the Company's financial advisor, Needham & Company, Inc.,
as to the fairness from a financial point of view of the purchase of the
Exchangeable Notes and Warrants and the tender offer, when taken together. The
full text of opinions is attached as Appendix I to this proxy statement and
should be read carefully in its entirety. Needham's opinion is directed to the
special committee and does not constitute a recommendation to any shareholder
with respect to matters relating to the recapitalization transaction.
Certain Matters to be Considered by Shareholders. Shareholders should
carefully consider the matters listed below in addition to the other matters set
forth elsewhere in this Proxy Statement and its Appendices in connection with
Proposal 1:
. Change in the Company's Board of Directors. Immediately following the
consummation of the tender offer, and assuming Proposal 1 is approved, the size
of the board will be reduced from eleven to nine directors and a majority of the
Company's directors will be designated by Thayer-BLUM Funding.
. Control by Thayer-BLUM Funding. If Proposal 1 is approved and the
tender offer is consummated, assuming conversion of the Convertible Notes and
Convertible Preferred Stock on August 22, 2000 and the issuance of 1.3 million
shares of common stock into a class action settlement fund, Thayer-BLUM Funding
would own and be able to vote a minimum of 65.2% (if the minimum number of
shares is purchased in the tender offer) and a maximum of 76.1% (if the maximum
number of shares is purchased in the tender offer) of the outstanding common
stock of the Company based upon the number of shares outstanding on July 17,
2000. With such share ownership, Thayer-BLUM Funding would be able to assure
approval of any matters presented to a shareholder vote that it wishes to
approve, including electing the directors that it chooses.
If Proposal 1 is approved and the tender offer is consummated on August 22,
2000, assuming no conversion of either the Convertible Notes or the Convertible
Preferred Stock and the issuance of 1.3 million shares of common stock into a
class action settlement fund, Thayer-BLUM Funding would be able to vote a
minimum of 34.0% (if the minimum number of shares is purchased in the tender
offer) and a maximum of 54.7% (if the maximum number of shares is purchased in
the tender offer) of the outstanding common stock of the Company based upon the
number of shares outstanding on July 17, 2000.
3
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. Dilution. The issuance of common stock upon conversion of the
Convertible Notes and Convertible Preferred Stock will cause proportionate and
substantial dilution in the economic and voting rights of the existing
shareholders of the Company. The number of shares of common stock to be issued
upon conversion of the Convertible Notes will increase over time because accrued
interest on the Convertible Notes, unless paid in cash, would also be
convertible at $2.58 per share, subject to adjustment. Likewise, the number of
shares of common stock to be issued upon conversion of the Convertible Preferred
Stock will increase over time because accrued dividends on the Convertible
Preferred Stock, unless paid in cash, would also be convertible at $1.80 per
share of common stock, subject to adjustment.
. Continued Nasdaq National Market Listing. The Company's common stock
is currently listed for trading on the Nasdaq National Market and must satisfy
certain requirements to maintain its listing. The requirements that could be
most difficult for the Company to satisfy in the future are those of maintaining
net tangible assets of at least $4 million or of maintaining market value of
publicly held shares of $15 million. If the Company did not satisfy at least one
of these two requirements, its common stock might no longer be listed on the
Nasdaq National Market. Failure of the common stock to be listed on the Nasdaq
National Market would have a material adverse effect on the market for the
common stock and the ability of shareholders to sell their shares of common
stock. Moreover, listing on the Nasdaq Stock Market is one of the conditions of
the automatic conversion of the Convertible Notes and of the Convertible
Preferred Stock.
. Capitalization of the Company. If Proposal 1 is approved and the
tender offer is consummated on August 22, 2000, and assuming the conversion of
the Convertible Notes at a rate of $2.58 per share and the conversion of the
Convertible Preferred Stock at a rate of $1.80 per share of common stock on such
date and the issuance of 1.3 million shares of common stock into a class action
settlement fund, the Company would have:
. approximately $33.0 million in long-term debt outstanding under:
. the Company's senior revolving line of credit, based on the
Company's current expectations for borrowings on its line of
credit, and
. a note payable to one of the Company's directors (as
discussed below); and
. shareholders' equity of approximately $80.8 million based on
shareholders' equity at May 31, 2000.
If Proposal 1 is approved and the tender offer is consummated on August 22,
2000, and assuming no conversion of either the Convertible Notes or the
Convertible Preferred Stock and the issuance of 1.3 million shares of common
stock into a class action settlement fund, the Company would have:
. approximately $90.3 million in long-term debt outstanding under:
. the Company's senior revolving line of credit, based on
the Company's current expectations for borrowings on
its line of credit,
. the Convertible Notes, and
. a note payable to one of the Company's directors (as
discussed below); and
. shareholders' equity of approximately $23.5 million based on
shareholders' equity at May 31, 2000.
However, if Proposal 1 is not approved by the shareholders, Thayer-BLUM
Funding will be entitled to exercise the Warrants to purchase up to 3,093,154
shares of common stock for $.01 per share, the interest rate on the Exchangeable
Notes will increase from 15% to 20%. Assuming Proposal 1 is not approved, and
assuming exercise of the Warrants and the issuance of 1.3 million shares of
common stock into a class action settlement fund, the Company would have:
. approximately $104.8 million in long-term debt outstanding under:
. the Company's senior revolving line of credit, based on
the Company's current expectations for borrowings on
its line of credit,
. the Exchangeable Notes, and
4
<PAGE>
. a note payable to one of the Company's directors (as
discussed below); and
. shareholders' equity of approximately $9.3 million based on
shareholder's equity at May 31, 2000.
. Repayment of Subordinated Indebtedness to a Director of the Company.
In connection with the recapitalization transaction, an aggregate of $6.9
million in principal amount of subordinated indebtedness owed to entities
controlled by Richard L. Monfort, a director of the Company, was repaid. The
Company still owes Mr. Monfort $3.0 million in subordinated indebtedness, which
has a maturity date of March 30, 2004 and bears interest at 10%.
. Stock Option Grants. Thayer-BLUM Funding has discussed with certain of
the Company's management granting of a substantial number of additional stock
options. Such grants will not be made unless Proposal 1 is approved by
shareholders. As a consequence, management may have different interests in
approving Proposal 1 than the Company's shareholders in general.
. Amendment to Articles of Incorporation. The Company's board of
directors has approved an amendment deleting Article Eight of the Company's
Articles of Incorporation, thereby eliminating the special shareholder voting
requirements applicable to certain transactions between the Company and
shareholders that own 10% or more of the Company's voting stock. The board has
directed that this amendment be presented to shareholders for approval at the
next annual meeting of the Company's shareholders, which meeting is to be held
soon after the tender offer is consummated. As noted above, if Proposal 1 is
approved and the tender offer is consummated at the maximum number of shares,
Thayer-BLUM Funding would be able to assure approval of this amendment, even
without converting the Convertible Notes.
Proposal 2 - Increase in the Number of Authorized Shares
General Description. The Company's board of directors has determined that
increasing the number of authorized shares of common stock from 45.0 million
shares to 75.0 million shares is advisable and in the best interests of the
shareholders.
Reasons for Increase. Assuming the Exchangeable Notes are exchanged for the
Convertible Notes and Convertible Preferred Stock on August 22, 2000, a total of
approximately 30.2 million shares would be issuable upon conversion of the
Convertible Notes and Convertible Preferred Stock on that date. Taking into
account the number of shares of the Company's common stock that are currently
outstanding or otherwise reserved for issuance, the number of shares to be
issued by the Company as part of the settlement of two class action lawsuits and
the number of shares that would be reserved for issuance under the 2000 Equity
Stock Option Plan, the Company would not have sufficient shares available for
issuance to convert the Convertible Notes and Convertible Preferred Stock into
common stock. The proposed amendment would permit additional shares of common
stock to be reserved for issuance:
. upon conversion of the Convertible Notes as additional interest
accrues on the Convertible Notes;
. upon conversion of the Convertible Preferred Stock as additional
dividends accrue on the Convertible Preferred Stock; and
. for acquisitions or to give the Company greater flexibility in
pursuing funding to meet its capital needs in the future.
If Proposal 1 is approved at the Special Meeting and the tender offer is
consummated, but Proposal 2 is not approved at the Special Meeting, then,
assuming the maximum number of shares is purchased in the tender offer, Thayer-
BLUM Funding would have sufficient share ownership to assure approval of such an
amendment at a future meeting of the Company's shareholders, if it so wished.
5
<PAGE>
Proposal 3 - Adoption of the 2000 Equity Stock Option Plan
General Description. The board of directors of the Company has adopted the
2000 Equity Stock Option Plan which provides for the issuance of up to 5.0
million shares of common stock. The Company also has reserved for issuance up to
approximately 4.8 million additional shares under its existing stock option
plans. Adoption of the 2000 Equity Stock Option Plan also requires the approval
of the Company's shareholders.
Reasons for Adoption. The purposes of the 2000 Equity Stock Option Plan
are:
. to provide additional incentive for directors, employees, and
consultants to the Company to further the growth, development and
financial success of the Company through the ownership of common stock
and/or rights; and
. to enable the Company to obtain and retain the services of directors,
employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in
the Company and/or rights that will reflect the growth, development
and financial success of the Company.
If Proposal 1 is approved at the Special Meeting and the tender offer is
consummated, but Proposal 3 is not approved at the Special Meeting, then,
assuming the maximum number of shares is purchased in the tender offer, Thayer-
BLUM Funding would have sufficient share ownership to assure adoption of the
2000 Equity Stock Option Plan at a future meeting of the Company's shareholders,
if it so wished.
Recommendations of the Board of Directors
The board of directors has approved and recommends that you vote FOR
approval of:
. Proposal 1 - the issuance of Convertible Notes and Convertible
Preferred Stock;
. Proposal 2 - the increase in the number of authorized shares; and
. Proposal 3 - the adoption of the 2000 Equity Stock Option Plan.
6
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Proxy Statement constitute "forward-looking
statements" that involve known and unknown risks, including, without limitation,
statements containing the words "believes," "anticipates, "estimates,"
"expects," "may" and words of similar import or statements of management's
opinion. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, market
performance or achievements of the Company to differ materially from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Important factors that could cause such differences include,
but are not limited to, the following:
. the loss of Honeywell as a customer;
. Honeywell's inability to pay or unwillingness to pay in a timely
manner the outstanding receivables held by the Company;
. the Company's inability to pay its suppliers in a timely manner;
. changes in economic or business conditions in general or
affecting the electronic products industry in particular;
. changes in the use of outsourcing by original equipment
manufacturers;
. increased material prices and service competition within the
electronic component contract manufacturing industry;
. changes in the competitive environment in which the Company
operates;
. the continued growth of the industries targeted by the Company or
its competitors;
. changes in the Company's management information needs;
. difficulties in using the Company's new management information
system;
. difficulties in managing the Company's growth or in integrating
new businesses or facilities;
. changes in customer needs and expectations;
. the Company's success in retaining customers affected by the
closure of Company facilities;
. the Company's success in limiting costs associated with such
closures;
. the Company's ability to keep pace with technological
developments; and
. governmental actions and regulations.
7
<PAGE>
THE SPECIAL MEETING
Date, Time and Place
The Special Meeting of Shareholders is scheduled to be held on August 22,
2000, at 10:00 a.m., local time, at the Company's executive offices at 9351
Grant Street, Sixth Floor, Denver, Colorado 80229.
The Record Date
This Proxy Statement is being mailed to shareholders on or about July 19,
2000. The board of directors has fixed the close of business on July 17, 2000 as
the record date for determining the shareholders of the Company entitled to
notice of, and to vote at, the Special Meeting. The only outstanding voting
stock of the Company is the common stock, of which 15,543,489 shares were
outstanding as of the close of business on the record date, held by
approximately 270 holders of record. Each share of common stock is entitled to
one vote.
Purpose of the Special Meeting
At the Special Meeting, the shareholders will be asked to consider and act
upon the following:
. Proposal 1 - Issuance of the following:
. the Company's 8.875% Senior Subordinated Convertible Notes
due June 2006
. the Company's Series B Convertible Preferred Stock;
. Proposal 2 - Increase in the number of authorized shares of the
Company's common stock from 45.0 million to 75.0 million shares;
. Proposal 3 - Adoption of the Company's 2000 Equity Stock Option
Plan that provides for the issuance of up to 5.0 million shares
of common stock; and
. Transaction of any other business which properly comes before the
meeting or any adjournment or postponement.
The board of directors has determined that each of the proposals is in the
best interests of the Company and its shareholders and recommends that
shareholders vote FOR approval of each of the proposals.
Quorum and Voting
Only holders of record of shares of common stock issued and outstanding as
of the close of business on the record date will be entitled to notice of, and
to vote at, the Special Meeting. The holder of each share of common stock issued
and outstanding as of the record date is entitled to one vote per share upon
each matter submitted to a vote of the shareholders of the Company at the
Special Meeting or any adjournment or postponement thereof. The presence, in
person or by proxy, of the holders of a majority of the shares of common stock
entitled to vote at the Special Meeting is necessary to constitute a quorum to
transact business at the Special Meeting. If a quorum is not present at the
Special Meeting, the shareholders who are present, in person or by proxy, may,
by majority vote, adjourn the Special Meeting from time to time without notice
or other announcement until a quorum is present.
If no specific instructions are given with respect to the matters to be
acted upon at the Special Meeting, shares of common stock represented by a
properly executed proxy will be voted FOR each proposal.
Approval of Proposal 1 - Issuance of the Convertible Notes and Convertible
Preferred Stock. Nasdaq Stock Market Rule 4460(i), which is applicable to
issuers whose securities are listed on the Nasdaq National Market (the "Nasdaq
Rule"), requires shareholder approval of transactions other than a public
offering involving the sale or issuance of common stock (or securities
convertible into or exercisable for common stock) equal to 20% or more of the
common stock or voting power outstanding before the issuance at a price less
than the greater of book or market value. Under
8
<PAGE>
the Nasdaq Rule, approval of Proposal 1 requires the affirmative vote of a
majority of the total votes cast on the proposal in person or by proxy.
Approval of Proposal 2 - Increase in the Number of Authorized Shares.
Approval of Proposal 2 requires the affirmative vote of a majority of the shares
of common stock outstanding as of the record date.
Approval of Proposal 3 - Adoption of the 2000 Equity Stock Option Plan.
Approval of Proposal 3 requires affirmative vote of a majority of the total
votes cast on the proposal in person or by proxy.
A proxy submitted by a shareholder may indicate that all or a portion of
the shares represented by such proxy are not being voted by such shareholder
with respect to a particular matter. This could occur, for example, when a
broker is not permitted to vote shares held in street name on certain matters in
the absence of instructions from the beneficial owner of the shares. The shares
subject to any such proxy that are not being voted with respect to a particular
proposal may be considered present and entitled to vote for other purposes and
will count for purposes of determining the presence of a quorum. (Shares not
being voted as to a particular matter will be considered as abstentions.) Under
applicable Colorado law, abstentions and broker non-votes will have no effect on
the outcome of the matters to be voted on at the meeting, except that they have
the same effect as votes against Proposal 2.
Votes cast in person or by proxy at the Special Meeting will be tabulated
by the election inspectors appointed for the Special Meeting. The Company's
transfer agent, Computershare Trust Company, Inc., will act as inspector of
election for the Special Meeting.
Voting Agreement. Directors, executive officers and other shareholders
having the power to vote an aggregate of approximately 26.5% of the Company's
outstanding common stock have entered into voting agreements pursuant to which
they have agreed to vote to approve each of the transactions contemplated by the
Securities Purchase Agreement.
Revocation of Proxies
Proxies properly executed and returned in a timely manner will be voted at
the Special Meeting in accordance with the directions noted thereon. Any
shareholder giving a proxy has the power to revoke it any time before it is
voted, either by delivering to the Secretary of the Company a signed notice of
revocation or a later dated signed proxy or by attending the Special Meeting and
voting in person. Attendance at the Special Meeting will not in itself
constitute the revocation of a proxy. Any written notice of revocation or
subsequent proxy should be sent so as to be delivered to the Company, Attention:
Secretary, or hand delivered to the Secretary of the Company at the address of
the Company's executive offices, at or before the vote to be taken at the
Special Meeting.
Cost of Solicitation
The entire cost of this solicitation will be paid by the Company. In
addition, the Company may reimburse brokerage firms and other persons
representing beneficial owners of shares of common stock for their expenses in
forwarding solicitation material to such beneficial owners. In addition to
solicitation by mail, officers and regular employees of the Company may solicit
proxies from shareholders by telephone, facsimile or personal interview. Such
persons will receive no additional compensation for such services. Brokerage
houses, nominees, fiduciaries and other custodians will be requested to forward
soliciting material to the beneficial owners of shares held of record by them
and will be reimbursed for their reasonable expenses.
Information Regarding Thayer and BLUM
All information contained in this Proxy Statement relating solely to
Thayer, BLUM and their affiliate Thayer-BLUM Funding has been supplied by Thayer
and BLUM for inclusion herein and has not been independently verified by the
Company.
9
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of June 30, 2000 as
to the beneficial ownership of common stock by certain beneficial owners of more
than five percent of the common stock, each director, certain executive officers
and by all directors and executive officers as group:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership Common Stock(1)
------------------------ -------------------- ------------
<S> <C> <C>
Val M. Avery 14,000 (2) *
Allen S. Braswell, Jr.** 1,794,381 (3) 11.5%
August P. Bruehlman 72,133 (4) *
Jack Calderon 241,448 (5) 1.5%
James A. Doran 37,825 (6)(7) *
Jeffrey W. Goettman 3,093,154 (8) 16.6%
Charles E. Hewitson** 1,596,968 (9) 10.3%
Robert K. McNamara 36,166 (10) *
Robert Monaco 640,000 4.1%
Richard L. Monfort 754,875 (7)(11) 4.9%
Gerald J. Reid 512,352 (12) 3.3%
Masoud S. Shirazi 49,675 (7)(13) *
Chuck Tillett 30,000 (14) *
John C. Walker -- (15) *
Deltec Asset Management Corporation 1,379,740 (16) 8.9%
Dimensional Fund Advisors 1,112,700 (17) 7.2%
Thayer-BLUM Funding, L.L.C. 3,093,154 (18) 16.6%
All directors and executive officers as a
group, including persons named above
(14 persons) 8,872,977 (19) 46.4%
</TABLE>
_________________________
* Less than one percent.
** The address of each of these persons is 9351 Grant Street, Sixth Floor,
Denver, Colorado 80229.
(1) Based solely upon reports of beneficial ownership required to be filed with
the Securities and Exchange Commission pursuant to Rule 13d-1 under the
Securities and Exchange Act of 1934, the Company does not believe that any
other person beneficially owned, as of March 31, 2000, greater than five
percent of the outstanding common stock.
(2) Includes 14,000 shares of common stock subject to currently exercisable
options granted under the Company's Equity Incentive Plan.
(3) Includes 369,442 shares held by the Allen S. Braswell, Jr. EFTC Family
Limited Partnership, of which Allen S. Braswell Jr and his spouse, Alma L.
Braswell, are the general partners, 11,000 shares held by the Allen S.
Braswell, Sr. Trust, of which Allen S. Braswell, Sr., Allen S. Braswell,
Jr.'s father, is the trustee, 343,735 shares held by the Allen S. Braswell,
Jr. and Alma L. Braswell JTWROS, 4,000 shares held by the Allen S. and Alma
L. Braswell Family Limited Partnership, 35,000 shares held by Circuit Test
International, LP, of which Braswell Investment Corporation (Allen S.,
Braswell, Jr. is President) is a general partner and 1,031,204 shares held
by Braswell GRIT Limited Partnership of which Braswell Investment
Corporation (Allen S., Braswell, Jr. is President) is a general partner.
(4) Includes 71,633 shares subject to currently exercisable options granted
under the Company's Equity Incentive Plan.
(5) Includes 117,941 shares of common stock subject to currently exercisable,
non-qualified options granted in connection with the commencement of Mr.
Calderon's employment and 112,307 shares of common stock subject to
currently exercisable options granted pursuant to the Company's Equity
Incentive Plan.
(6) Includes 15,750 shares of common stock that are subject to currently
exercisable options under the Company's Equity Incentive Plan.
(7) Includes 21,375 shares of common stock that are subject to currently
exercisable options under the Company's Stock Option Plan for Non-Employee
Directors. Options for an additional 375 shares vest each month until March
2001 under such plan.
(8) Mr. Goettman's address is 1455 Pennsylvania Avenue, N.W., Suite 350,
Washington D.C. 20004. Includes 3,093,154 shares of common stock subject to
exercise of the warrant issued to Thayer-BLUM Funding. See Note 18 below.
10
<PAGE>
(9) Includes 11,375 shares of common stock that are subject to currently
exercisable options under the Company's Stock Option Plan for Non-
Employee Directors. Options held by such director for an additional 375
shares vest each month until March 2001 under such plan. Also includes
528,531 shares of common stock owned by Matthew Hewitson and 528,531
shares of common stock owned by Gregory Hewitson, brothers of Charles
Hewitson. Charles Hewitson disclaims beneficial ownership of the shares
of common stock owned by Matthew Hewitson and Gregory Hewitson.
(10) Mr. McNamara's address is Broadview International, LLC, One Bridge Plaza,
Fort Lee, NJ 07024. Includes 21,166 shares of common stock that are
subject to currently exercisable options under the Company's Stock Option
Plan for Non-Employee Directors. Options held by such director for an
additional 333 shares vest each month until May 2000 under such plan.
Thereafter options for an additional 250 shares vest until March 2001
under such plan. Also includes 15,000 shares of common stock owned
jointly with Irene Z. McNamara, Mr. McNamara's wife.
(11) Includes 271,500 shares held by the Monfort Family Partnership, 250,000
shares held by Rick Montera and Kay Montera JTWROS, 125,000 shares of
common stock owned by a partnership in which Mr. Monfort is the principal
investor and 87,000 shares of Common Stock owned by three of Mr.
Monfort's minor children.
(12) Includes 11,375 shares of common stock that are subject to currently
exercisable options under the Company's Stock Option Plan for Non-
Employee Directors. Options held by such director for an additional 375
shares vest each month until March 2001 under such plan. Also includes
289,551 shares of common stock that are held by Lucille Reid, Gerald, R.
Reid's wife.
(13) Mr. Shirazi's address is Shirazi & Associates, Inc., 1770 25th Avenue,
#302, Greeley, CO 80634. Includes 300 shares of common stock owned by
several of Mr. Shirazi's minor children.
(14) Includes 30,000 shares of common stock subject to currently exercisable
options granted under the Company's Equity Incentive Plan.
(15) Mr. Walker's address is 909 Montgomery Street, Suite 400, San Francisco,
CA. 94133. Mr. Walker is a partner in RCBA Strategic Partners, L.P. See
Note 18 below.
(16) The address of Deltec Asset Management Corporation is 645 Fifth Avenue,
New York, NY 10022. Deltec reported shared dispositive power and shared
voting power with regard to 1,379,740 shares of common stock.
(17) The address of Dimensional Fund Advisors is 1299 Ocean Avenue, 11th
Floor, Santa Monica, CA 90401.
(18) Thayer-BLUM Funding was formed to hold securities of the Company.
Includes 3,093,154 shares of common stock which may be purchased upon
exercise of the warrant issued to Thayer-BLUM Funding. This warrant is
not currently exercisable. A Schedule 13D relating to this issuance was
jointly filed by Thayer-BLUM Funding, L.L.C., a Delaware limited
liability company (the "Purchaser"), Thayer Equity Investors IV, L.P., a
Delaware limited partnership, TC Equity Partners IV, L.L.C., a Delaware
limited liability company, TC Manufacturing Holdings, L.L.C., a Delaware
limited liability company, TC Co-Investors IV, LLC, a Delaware limited
liability company, TC Management Partners IV, L.L.C., a Delaware limited
liability company (together each of Thayer Equity Investors IV, L.P., TC
Equity Partners IV, L.L.C., TC Manufacturing Holdings, L.L.C., TC Co-
Investors IV, LLC, and TC Management Partners IV, L.L.C., the "Thayer
Entities"), RCBA Strategic Partners, L.P., a Delaware limited
partnership, BLUM Capital Partners, L.P., a California limited
partnership, Richard C. Blum & Associates, Inc., a California
corporation, RCBA GP, L.L.C., a Delaware limited liability company
(together each of RCBA Strategic Partners, L.P., BLUM Capital Partners,
L.P., Richard C. Blum & Associates, Inc., and RCBA GP, L.L.C. the "BLUM
Entities") and Frederic V. Malek, Carl J. Rickertsen, Jeffrey W.
Goettman, Susan Gallagher and Richard C. Blum as individuals (the
"Individuals") (each of the Purchaser, the Thayer Entities, the BLUM
Entities, and the Individuals a "Reporting Person" and taken together the
"Reporting Persons"). The principal business offices of each of
Purchaser, the Thayer Entities, and Frederic V. Malek, Carl J.
Rickertsen, Jeffrey W. Goettman and Susan Gallagher is 1455 Pennsylvania
Avenue, N.W., Suite 350, Washington D.C. 20004. The business address of
each of the BLUM Entities and Richard C. Blum is 909 Montgomery Street,
Suite 400, San Francisco, CA. 94133. Thayer Equity Investors IV, L.P. and
TC Manufacturing Holdings, L.L.C. are members of Thayer-BLUM Funding,
L.L.C. TC Equity Partners IV, L.L.C. is the general partner of Thayer
Equity Investors IV, L.P. TC Co-Investors IV, LLC is the managing member
of TC Manufacturing Holdings, L.L.C. TC Management Partners IV, L.L.C. is
the managing member of TC Co-Investors IV, LLC. RCBA Strategic Partners,
L.P. is a member of Thayer-BLUM Funding, L.L.C. RCBA GP, L.L.C. is the
general partner of RCBA Strategic Partners, L.P. Each of Frederic V.
Malek, Carl J. Rickertsen, Jeffrey W. Goettman and Susan Gallagher are
members of TC Management Partners IV, L.L.C. and TC Equity Partners IV,
L.L.C. Each of the Reporting Persons reported shared dispositive power
and shared voting power as to the 3,093,154 shares of common stock
issuable upon exercise of the warrant.
(19) Of such 8,872,977 shares, as of June 30, 2000, 469,672 represent shares
of common stock subject to options that are currently exercisable or,
within 60 days of June 30, 2000, will become exercisable and 3,093,154
shares represent shares issuable upon exercise of the warrant issued to
Thayer-BLUM Funding. This warrant is not currently exercisable.
11
<PAGE>
SUMMARY OF THE RECAPITALIZATION TRANSACTION
Transaction with Thayer-BLUM Funding
On March 30, 2000, the Company completed the first stage of a
recapitalization transaction (the "Recapitalization Transaction") with Thayer-
BLUM Funding, L.L.C., an entity formed by affiliates of Thayer Capital Partners
and BLUM Capital Partners to hold securities of the Company. This first stage
involved the purchase of a total of $54.0 million in Senior Subordinated
Exchangeable Notes ("March Exchangeable Notes") with a maturity date of June 30,
2006 and an initial interest rate of 15% accruing quarterly, or at the Company's
option, payable in additional March Exchangeable Notes. The March Exchangeable
Notes were accompanied by warrants (the "Warrants") to purchase 3,093,154 shares
of the Company's common stock at an exercise price of $.01 per share. Thayer-
BLUM Funding has designated two persons who have been appointed to the Company's
board of directors and each committee thereof.
On July 14, 2000, Thayer-BLUM Funding purchased an additional $14.0 million
in Senior Subordinated Exchangeable Notes (the "July Exchangeable Notes" and,
together with the March Exchangeable Notes, the "Exchangeable Notes") with a
maturity date of June 30, 2006 and an initial interest rate of 15% accruing
quarterly, or at the Company's option, payable in additional July Exchangeable
Notes, substantially in the form of the Company's currently outstanding March
Exchangeable Notes held by Thayer-BLUM Funding.
If Proposal 1 is approved at the Special Meeting and the tender offer
described below is consummated with at least 500,000 shares of common stock, the
March Exchangeable Notes will automatically be replaced with Senior Subordinated
Convertible Notes ("Convertible Notes"), which have a maturity date of June 30,
2006 and bear interest at a rate 8.875% compounding quarterly, or at the
Company's option, payable in additional Convertible Notes. At the election of
the holder, the Convertible Notes, including accrued interest, may be converted,
at any time, into the Company's common stock at $2.58 per share, subject to
adjustment. Further, the July Exchangeable Notes will automatically be replaced
with Company's Series B Convertible Preferred Stock ("Convertible Preferred
Stock") having a liquidation preference equal to the aggregate principal amount
of the July Exchangeable Notes, plus accrued interest, and which will accrue
dividends at a rate of 8.875%, which, if unpaid, will be added to the
liquidation preference of the Convertible Preferred Stock. At the election of
the holder, the Convertible Preferred Stock may be converted, at any time, into
the Company's common stock at $1.80 per share of common stock, subject to
adjustment. Conversion of the Convertible Notes will occur automatically if:
. the Company at the time is maintaining the listing of its common stock
on the Nasdaq Stock Market;
. the Company is in full compliance with all covenants under its senior
debt; and
. the average of the high and low sales prices of the common stock is
above $7.50 per share for 45 consecutive trading days or, on or after
March 30, 2003, such average is above $4.25 for 45 consecutive trading
days.
Conversion of the Convertible Preferred Stock will occur automatically if:
. the Company at the time is maintaining the listing of its common stock
on the Nasdaq Stock Market;
. the Company is in full compliance with all covenants under its senior
debt and the Convertible Notes; and
. the average of the high and low sales prices of the common stock is
above $7.50 per share for 45 consecutive trading days.
A tender offer is currently being conducted by Thayer-BLUM Funding for up
to 5,625,000 shares of the Company's currently outstanding common stock at a
price of $4.00 per share. If Proposal 1 is approved and at least
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<PAGE>
500,000 shares are purchased in the tender offer, the Warrants will never become
exercisable and will be canceled. In addition, Thayer-BLUM Funding will have the
right to designate a majority of the members of the Company's board of directors
and will have the right to approve any significant financings, acquisitions and
dispositions.
If shareholders do not approve issuance of the Convertible Notes and
Convertible Preferred Stock by September 30, 2000 or if Thayer-BLUM Funding does
not purchase at least 500,000 shares in the tender offer, the Warrants will
become exercisable and the Exchangeable Notes will remain in place. If the
shareholders do not approve issuance of the Convertible Notes and the
Convertible Preferred Stock, the interest rate on the Exchangeable Notes will
increase to 20%. Interest would be compounded quarterly and continue to accrue
on the original notes or be payable in additional Exchangeable Notes, at the
option of the Company.
Transaction with Bank of America
Closing of the initial investment by Thayer-BLUM Funding was conditioned
upon the simultaneous closing of a new senior credit facility. On March 30,
2000, the Company entered into a new credit agreement with Bank of America, N.A.
to replace the Company's existing revolving line of credit with Bank One
Colorado, N.A. The new credit facility provides for a $45.0 million revolving
line of credit with a maturity date of March 30, 2003. Initially, the interest
rate will be prime rate plus 0.5%. Total borrowings are subject to limitation
based on a percentage of eligible accounts receivable and eligible inventory.
Substantially all of the Company's assets are pledged as collateral for
outstanding borrowings, and the credit agreement requires compliance with
certain financial and non-financial covenants.
13
<PAGE>
PROPOSAL 1 -
ISSUANCE OF THE CONVERTIBLE NOTES AND CONVERTIBLE PREFERRED STOCK
General
In accordance with the rules of the Nasdaq Stock Market, the Company is
seeking approval for the issuance to Thayer-BLUM Funding of its 8.875% Senior
Subordinated Convertible Notes due June 30, 2006 and its Convertible Preferred
Stock in connection with the Recapitalization Transaction summarized above. A
tender offer that is part of Recapitalization Transaction is being commenced by
Thayer-BLUM Funding concurrently with the mailing of this proxy statement.
Background of the Recapitalization Transaction
Capital and Liquidity Needs. The Company has had increasing needs for
capital since the fourth quarter of 1998 as a result of increased revenues and
continued operating losses. In March 1999, the Company entered into a long-term
supply agreement with Honeywell International, Inc. While this agreement
resulted in increased revenue to the Company, it also resulted in significantly
increased working capital requirements to finance inventory and receivables.
The Company had executed a commitment letter with Wells Fargo Business Credit,
Inc., to finance these capital requirements; however, Wells Fargo chose not to
proceed with such financing. The Company also incurred significant costs
related to leasehold improvements and equipment at its new facility in Phoenix,
Arizona, where it provides manufacturing services for Honeywell under the long-
term supply agreement.
During 1999, the Company had capital expenditures of $14.4 million,
primarily related to the Honeywell agreement and the build-out of the Phoenix
facility. The capital requirements under this new agreement provided
significant challenges to the Company in 1999, due to the Company's higher debt
levels at the end of 1998, combined with its deteriorating operating performance
since the third quarter of 1998.
The Company sold a significant amount of assets during 1999 to provide
additional liquidity. The Company's services division was sold in September
1999 for net cash proceeds of approximately $28.1 million, and the Company's
Greeley, Colorado plant was sold in October 1999 for net cash proceeds of
approximately $3.8 million. Proceeds from these asset dispositions were used to
repay indebtedness and for general working capital purposes.
The Company first engaged a broker to seek financing for the Company in
September 1999.
In early October 1999, the Company engaged in discussions with Bank One
Colorado, N.A. and the other lenders under its senior credit facility with a
view to obtaining waivers of certain financial covenants with which it would be
unable to comply. Bank One stated its desire to be fully repaid by year-end.
The loan agreement was amended at the end of October to change certain financial
covenants and to provide for a new maturity date of December 30, 1999.
During October and early November 1999, the Company had discussions with an
unrelated third party that had approached it about an acquisition of the
Company. The Company and the third party were unable to reach agreement and
discussions terminated.
During November 1999, the Company advised Honeywell, then its largest
customer, of the liquidity issues it faced. Also in November 1999, the Company
obtained a $5 million subordinated loan from a director of the Company and
engaged an additional broker to obtain subordinated financing of up to $25.0
million, as well as senior debt of at least $40.0 million.
On December 1, 1999, the Company engaged Murphy Noell Capital, L.L.C.
("Murphy Noell") to obtain subordinated debt or equity financing for the Company
that also would permit the Company to obtain a new senior lender to replace the
existing senior bank group. Murphy Noell contacted Thayer Equity Investors IV,
L.P. ("Thayer")
14
<PAGE>
regarding a possible investment in the Company on December 5, 1999. Thayer
expressed interest in a possible transaction that would involve a change of
control of the Company, not just subordinated financing.
Throughout December, Jack Calderon, the Company's Chairman and then Chief
Executive Officer, and Stuart Fuhlendorf, then the Company's Chief Financial
Officer, visited over a dozen financing prospects, including mezzanine lenders,
senior lenders and private equity groups. The Company also resumed discussions
with Honeywell regarding manufacturing conducted at the Company's Tucson
facility. Those discussions ultimately led to the sale of the Tucson facility
to Honeywell on February 17, 2000, for net cash proceeds of approximately $12.7
million. Proceeds of the sale were used by the Company to repay indebtedness
and to pay a portion of its past-due trade payables.
The Company was unable to obtain any additional subordinated financing or
to refinance its existing senior credit facility by its December maturity date,
and the senior bank group agreed to extend the maturity date to March 30, 2000.
As part of the extension, availability under the facility was reduced to $34.0
million on January 10, 2000, and reduced again by an additional $1.0 million per
month on each of February 1, 2000 and March 1, 2000. At December 31, 1999, the
Company had trade payables in excess of $18.0 million that were outside of
established terms and many suppliers were requiring payment of past-due balances
or payment in advance for purchases of additional inventories. The Company
experienced some interruptions in production as a result of this situation.
Throughout January 2000, the Company continued discussions with possible
sources of financing. During that period, the Company received eight proposals
for subordinated indebtedness or equity financing ranging in amount from $10
million to $35 million and nine proposals for a new senior credit facility
ranging in size from $40 million to $50 million. All of the proposals for
senior financing were contingent on obtaining subordinated financing.
Negotiations with Thayer and BLUM. On January 12, 2000, representatives of
Thayer met with Messrs. Calderon, and Fuhlendorf at the Company's Phoenix
manufacturing facility. On January 14, 2000, Thayer contacted BLUM Capital
Partners, L.P. ("BLUM") to inquire about BLUM's interest in participating with
Thayer in a potential transaction involving the Company.
On January 21, 2000, BLUM indicated to Thayer its interest in jointly
pursuing such a transaction. Also on January 21, 2000, Thayer presented its
initial proposal to the Company. The proposal called for an initial investment
of approximately $35 million in the Company in exchange for the issuance by the
Company of senior subordinated notes bearing interest at a rate of 12.5% per
annum payable in kind and warrants to purchase approximately 3.1 million shares
of the Company's common stock (representing approximately 19.9% of the Company's
outstanding shares) at $.01 per share. Thayer would conduct a tender offer for
approximately 9.6 million shares of the Company's outstanding common stock
(approximately 62.4%) at a price of $4.00 per share. Shareholder approval would
also be sought under the rules of the Nasdaq Stock Market. Upon receipt of
shareholder approval, the senior subordinated notes would become convertible
into the Company's common stock at $3.00 per share, the interest rate on the
notes would be reduced to 11% per annum, the number of shares issuable upon
exercise of the warrants would be reduced to 2.5 million, and Thayer would be
entitled to designate a majority of the Company's board of directors.
The Company's board of directors met at a regularly scheduled meeting on
January 21, 2000. Representatives of Murphy Noell were present, and together
with Messrs. Calderon and Fuhlendorf, described the five best proposals for
subordinated indebtedness or equity financing that had been received by the
Company, including the initial proposal from Thayer. The board focused its
discussion on the proposal received from Thayer and requested that certain
changes be made to it, including a reduction of the interest rate to 8.25% per
annum and the termination of all warrants upon receipt of shareholder approval,
in exchange for a reduction of the conversion price of the senior subordinated
notes of $2.50. After discussion, the board authorized management to execute an
exclusivity agreement and pursue discussions with Thayer, subject to board
approval of the final transaction. On January 24, 2000, Thayer presented a
revised proposal to the Company that responded to concerns expressed by the
Company's board of directors at the January 21st meeting.
In late January 2000, Thayer met with the Company to conduct initial due
diligence at the Company's offices, and the Company and Thayer signed an
exclusivity agreement with respect to the transaction that could be terminated
by either party after February 21, 2000 if definitive agreements had not been
entered into by that date. During the
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remainder of January and in February, Thayer and BLUM and their representatives
continued both legal and business due diligence. In addition, the Company and
Thayer continued discussions during February regarding the basis on which a
transaction might proceed.
On March 2, 2000, Thayer presented a revised proposal that increased the
initial investment to $45 million, increased the interest rate of the senior
subordinated notes to 15.0%, increased the interest rate on the convertible
notes to 8.625% and the conversion price to $2.55 per share and increased the
number of shares sought in the tender offer to 9.7 million.
Appointment of Special Committee. The Company's board of directors met on
March 5, 2000 to consider the revised proposal. At that time, the board
appointed a special committee to conduct further negotiations with Thayer and to
submit a recommendation to the full board of directors. The special committee
consisted of Robert K. McNamara, Chairman, Gerald J. Reid, Charles E. Hewitson,
Allen S. Braswell, Jr. and Masoud S. Shirazi, and was expressly authorized to
engage a financial advisor to deliver an opinion as to the fairness, from a
financial point of view, of the proposed transactions with Thayer to the Company
and its shareholders. The special committee met separately from the board of
directors on March 5 and March 15, 2000. On March 17, 2000, Needham & Company,
Inc. was formally engaged by the special committee to deliver a fairness opinion
on the transaction. At meetings of the special committee on March 15 and the
board of directors on March 21, 2000, Needham reported orally on its progress
toward being able to deliver a fairness opinion when requested to do so by the
special committee.
Between March 5 and March 21, 2000, Mr. McNamara and counsel conducted
negotiations with Thayer on the transaction, with emphasis on limiting or
eliminating provisions of the agreement that might have precluded the Company
from completing a competing transaction after an exclusivity agreement or
definitive agreements had been signed. By the conclusion of these negotiations,
the parties had reached an understanding that if the Company were to terminate
the agreement to accept a superior proposal, the Company would pay Thayer's
expenses and a $1.5 million termination fee, would repay the senior subordinated
note without premium, and would redeem the warrants for a payment beginning at
$5 million that would increase to $6 million based upon when the redemption
right was exercised. During this period, Mr. McNamara also contacted Bank One
to determine if there was any basis upon which the bank lending group would
extend the maturity date of the Company's senior credit facility to permit the
Company to pursue financing proposals other than that proposed by Thayer and
BLUM; he was advised there was not.
The Company and its counsel met with representatives of Thayer and BLUM and
their counsel on March 20 through 22, 2000 to negotiate definitive agreements
with respect to the transaction. On March 21, 2000, Thayer and BLUM advised the
Company that they had revised their proposal to reflect an increase of the
initial investment to $54 million, an increase of the initial interest rate on
the senior subordinated notes to 15%, a reduction of the initial conversion
price on the convertible notes and a reduction of the number of shares to be
purchased in the tender offer to 8.25 million. Thayer and BLUM conditioned
closing on resolving a dispute with Murphy Noell as to the amount payable to it
as a broker in connection with the transaction and settling or insuring over two
class action securities lawsuits that had been filed against the Company in
1998. On March 30, 2000, a preliminary settlement was reached on the two class
action lawsuits within the parameters established by Thayer and BLUM and in
early April 2000 the Company filed papers in appropriate courts giving notice of
its agreement to settle the cases, subject to court approval. A motion to
approve the settlement was filed in early June 2000 and is now pending. The
settlement provides for the payment by the Company of cash and the issuance of
1.3 million shares of common stock into the settlement fund.
On March 21, 2000, the special committee met with the balance of the board
of directors in attendance to discuss the status of negotiations for the
transaction. Mr. Calderon reported on the revised proposal made by Thayer and
BLUM. After extensive discussion, the special committee approved continued
negotiations for the transaction on the basis of the revised proposal.
During the following week, the Company, Thayer and BLUM continued
negotiations on the terms of the transaction and the form of definitive
agreements. The special committee met on March 29, 2000 to consider the
transaction as then proposed. The balance of the board of directors was also in
attendance at that meeting. Needham orally delivered its opinion that the
issuance of the Exchangeable Notes and Warrants and the tender offer, when taken
together, are fair to the Company and its shareholders (other than Thayer-BLUM
Funding and its affiliates), from a
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financial point of view. Needham's written opinion as to such matters is
attached as Appendix I. Counsel reviewed the principal terms of the transaction
with the special committee and the board of directors. After extensive
discussion, the special committee concluded that the Recapitalization
Transaction as a whole was fair to and in the best interests of the Company and
its shareholders and referred the matter to the full board of directors for
approval. A meeting of the board of directors was then convened, at which the
board of directors concluded that the Recapitalization Transaction as a whole
was fair to and in the best interests of the Company and its shareholders,
approved the Recapitalization Transaction and recommend that appropriate matters
be submitted to the Company's shareholders for approval.
Documentation for the transaction was finalized on March 30, 2000. An
agreement had not been reached with Murphy Noell. Immediately prior to closing,
the Company agreed with Thayer and BLUM that the initial conversion price of the
convertible notes would be reduced to reflect any adverse determination or
settlement with respect to Murphy Noell from that agreed. Implementation of
such adjustment to the conversion price was subject to approval of the board of
directors and the special committee. The initial transaction was closed and the
Company's senior loan with Bank One was repaid on its due date.
Closing of the initial transaction was conditional upon the simultaneous
closing of a new credit facility. The Company closed a credit facility
providing for a $45.0 million revolving line of credit with a maturity date of
March 2003 with Bank of America at the same time as the transaction with Thayer-
BLUM Funding.
Murphy Noell Settlement. The Company negotiated a settlement with Murphy
Noell effective on April 5, 2000. Payments to be made to Murphy Noell required
a reduction of the conversion price of the convertible notes from $2.60 to $2.58
under the terms of the agreement reached with Thayer and BLUM immediately prior
to closing. The board of directors met on April 9, 2000 to consider approving
the reduction. The board of directors referred the matter to the special
committee with authority to consider, and approve if appropriate, the reduction
in the conversion price of the Convertible Notes. The special committee
requested that Needham advise whether the reduced conversion price of the
Convertible Notes would have affected Needham's opinion that was delivered on
March 29, 2000. The special committee met on April 27, 2000, at which time
Needham orally confirmed that it did not believe that the establishment of the
conversion price at $2.58, had it been considered as part of its analyses in
connection with its earlier opinion, would have altered its conclusion set forth
in that opinion, as of the date of the opinion. Needham's supplemental letter
relating to the reduced conversion price is attached as Appendix I. The special
committee then authorized the reduction in the conversion rate in accordance
with the previous delegation to it by the board of directors. The form of the
Convertible Notes to be delivered was revised to reflect the reduction.
Amended Recapitalization Transaction
Additional Investment and Revised Tender Offer. Representatives of Thayer-
BLUM Funding approached Mr. Calderon on May 19, 2000, stating their concern
over, among other things, adverse changes represented by the Honeywell's desire
to see certain management changes at the Company and their belief that the
Company needed significant additional working capital. On May 23, 2000, Mr.
Calderon reported the substance of these discussions to most members of the
board of directors, who met by conference telephone. No representatives of
Thayer-BLUM Funding were present. The group discussed implications of Thayer-
BLUM Funding's views and possible responses by the Company.
The Company's board of directors met at a regularly scheduled meeting on
May 24, 2000. At that meeting Messrs. Goettman and Walker, members of the board
designated by Thayer-BLUM Funding, stated that they did not believe Thayer-BLUM
Funding would be obligated to consummate the tender offer because of material
adverse changes affecting the Company since March 30, 2000 represented by, among
other things, the concerns raised by Honeywell and the Company's need for
additional working capital. They also indicated that Thayer-BLUM Funding would
consider a revised transaction involving additional investment in the Company
and a tender offer of reduced size. Other members of the board of directors
expressed strong disagreement that any material adverse change had occurred that
would affect consummation of the tender offer. The board of directors
authorized the formation of a group to assess the magnitude of the Company's
need for additional working capital, if any, and how it should be addressed.
Throughout the day on May 25, 2000, representatives of the Company and
Thayer-BLUM Funding met at the Company's offices to analyze the Company's need
for additional working capital. They also discussed the amount and
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form of additional investment Thayer-BLUM Funding would be willing to make in
the Company in conjunction with a tender offer of reduced size. Members of the
board of directors met that evening and discussed the status of discussions with
Thayer-BLUM Funding, and Mr. Calderon had discussions with Messrs. Goettman and
Walker over the Memorial Day weekend to determine if Thayer-BLUM Funding would
improve its proposal and eliminate most conditions to consummation of the tender
offer.
On the evening of May 29, 2000, the board authorized the special committee
to consider and recommend to the full board whether the Company should agree to
an additional investment from Thayer-BLUM Funding and a reduction in the size of
the tender offer and to engage Needham as a financial advisor to address the
fairness of any revised transaction.
The Company's board of directors and special committee met again on May 30,
2000, without Messrs. Goettman and Walker, to discuss the status of discussions
between the Company and Thayer-BLUM Funding. Mr. Calderon explained that
Thayer-BLUM Funding had proposed to invest an additional $14 million in the
Company in notes that would be exchanged for Convertible Preferred Stock upon
consummation of a Successful Tender Offer with the maximum number of shares that
could be acquired in the tender offer being reduced to 5.625 million at the same
$4.00 per share purchase price. At that time, the parties had not reached
agreement on the scope of conditions to consummation of the tender offer.
Needham was formally engaged to render an opinion as to the fairness of the
revised transaction to the Company and its shareholders on May 31, 2000.
Between May 31, 2000 through June 5, 2000 counsel for the Company and
counsel for Thayer-BLUM Funding negotiated a term sheet for an additional
investment by Thayer-BLUM Funding and a tender offer of reduced size, including
a detailed list of conditions to the obligations of Thayer-BLUM Funding to
consummate the tender offer. Mr. Calderon continued negotiations with Messrs.
Goettman and Walker as to elements of the revised transaction during the same
period and reached an understanding about the scope of conditions to
consummation of the tender offer.
The special committee met on June 5, 2000 to consider revising the terms of
the transaction. Other members of the board of directors were also in
attendance at that meeting. Needham orally delivered its opinion that the
initial investment, the additional investment and the tender offer, when taken
together, are fair to the Company and its shareholders (other than Thayer-BLUM
Funding and its affiliates), from a financial point of view. Needham's written
opinion as to such matters is attached as Appendix I. Counsel reviewed the
principal differences that would result from the proposed transaction with the
special committee and the board of directors. After discussion, the special
committee concluded that revised transaction (the "Amended Recapitalization
Transaction") as a whole was fair to and in the best interests of the Company
and its shareholders and referred the matter to the full board of directors for
approval. A meeting of the board of directors was then convened, at which the
board of directors concluded that the Amended Recapitalization Transaction as a
whole was fair to and in the best interests of the Company and its shareholders,
approved the Amended Recapitalization Transaction and recommended that
appropriate matters be submitted to the Company's shareholders for approval.
The board of directors also authorized that appropriate documents evidencing the
revised transaction be prepared and executed by the Company.
The Amended Recapitalization Transaction was announced on June 6, 2000, and
definitive agreements reflecting the revised transaction were executed on July
12, 2000. The closing of the additional $14 million investment by Thayer-BLUM
Funding in the Company occurred on July 14, 2000.
Reasons for the Transaction
On March 30, 2000, the Company completed the initial stage of the
Recapitalization Transaction when Thayer-BLUM Funding invested $54.0 million in
the Company in exchange for $54.0 million of the Company's Senior Subordinated
Exchangeable Notes and the Warrants. On July 14, 2000, Thayer-BLUM Funding
purchased an additional $14.0 million in Senior Subordinated Exchangeable Notes
that are exchangeable for the Convertible Preferred Stock. In connection with
those investments, the Company agreed to use commercially reasonable efforts to
obtain shareholder approval to the issuance of the Convertible Notes and
Convertible Preferred Stock under rules applicable to Nasdaq National Market
issuers. Approval of Proposal 1 is being sought by the Company in satisfaction
of that obligation.
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The Company also believes it to be in the best interests of the Company and
its shareholders to approve Proposal 1. Shareholder approval of Proposal 1 will
permit the second phase of the Recapitalization Transaction to be completed -
the exchange of the Exchangeable Notes for the Convertible Notes and Convertible
Preferred Stock, the cancellation of the Warrants and the consummation of the
tender offer. Failure of shareholders to approve Proposal 1 would have a
material adverse effect on the Company and its shareholders because:
. the Warrants would remain outstanding and the shareholders would
experience substantial dilution when they are exercised because the
Company would issue a substantial number of additional shares without
receiving any material additional capital;
. the interest rate on the Exchangeable Notes would remain outstanding
and their interest rate would increase to 20% per annum; and
. Thayer-BLUM Funding would not be obligated to consummate the tender
offer, even if sufficient shares were tendered by the Company's
shareholders.
If Proposal 1 is not approved by shareholders, the Company believes that it
would find it necessary to refinance the Exchangeable Notes given the high
interest rate on such notes. In such a circumstance, the Company would
experience the additional costs, including prepayment penalties, associated with
such a refinancing, which could be substantial, and the Warrant would remain
outstanding.
As noted above under "Background of the Recapitalization Transaction," a
special committee of the board of directors, based in part on opinions of
Needham and the board of directors, also based in part on such opinion,
concluded that the Amended Recapitalization Transaction as a whole was fair to
and in the best interests of the Company and its shareholders and recommend that
the Company's shareholders approve the proposal.
In reaching these conclusions and recommendation as to the Recapitalization
Transaction, the board considered, among other things, the following factors,
none of which were qualified or assigned relative weight as compared to any
other factor:
. the Company's need for capital, including the March 30, 2000 maturity
date of its senior bank facility with Bank One;
. the substantial amount of capital that Thayer and BLUM were prepared
to commit to an investment in the Company and to purchasing shares in
the tender offer;
. the extensive effort that had been made by the Company and its
representatives to obtain funding for its operations and the lack of
alternatives that were superior to the proposed transaction;
. the structure of the transaction, which permitted the Company to
receive funding to satisfy its immediate capital needs, while
permitting existing shareholders the opportunity either to tender a
substantial portion of their shares to Thayer-BLUM Funding at a
significant premium to the trading price of the Company's common stock
during the period the tender offer price was negotiated, or to retain
ownership of those shares;
. the financial analysis and other information with respect to the
Company presented by Needham, including Needham's oral opinion, which
was subsequently confirmed in writing (and which opinion dated March
29, 2000 is attached to the proxy statement as part of Appendix I),
that the issuance of the Exchangeable Notes and Warrants and the
tender offer, when taken together, are fair to the Company and its
shareholders (other than Thayer-BLUM Funding and its affiliates), from
a financial point of view; and
. the understanding that Thayer and BLUM have of the Company's business,
their track record with other investments and their capital resources.
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In reaching these conclusions and recommendation as to the Amended
Recapitalization Transaction, the board considered, among other things the
following factors, none of which were qualified or assigned relative weight as
compared to any other factor:
. the Company's need for additional working capital and the additional
$14.0 million investment by Thayer-BLUM Funding in the Company, which
represents an additional $3.5 million being invested by Thayer-BLUM
Funding in the aggregate after taking into account the reduced amount
that Thayer-BLUM Funding would expend to purchase shares of Common
Stock in a tender offer of reduced size;
. the board's belief that Thayer-BLUM Funding would not consummate a
tender offer under the original terms because Thayer-BLUM Funding
believed there would be a failure to meet the tender offer conditions
and that if the Company were to engage in litigation with Thayer-BLUM
Funding, the Company's relationship with its senior lender, with its
suppliers and with Honeywell and it other customers would be seriously
jeopardized, thereby jeopardizing the Company's continued existence;
. the board's desire to give the Company's shareholders the ability to
participate in the transaction by being able to sell shares of Common
Stock to Thayer-BLUM Funding in the tender offer at a price
substantially in excess of recent trading prices for the Company,s
common stock; and
. the financial analysis and other information with respect to the
Company presented by Needham, including Needham's oral opinion, which
was subsequently confirmed in writing (and which opinion dated June 5,
2000 is attached to the proxy statement as part of Appendix I), that
the initial $54.0 million investment, the additional $14.0 million
investment and the tender offer, when taken together, are fair to the
Company and its shareholders (other than Thayer-BLUM Funding and its
affiliates), from a financial point of view.
The foregoing discussion of the information and factors considered by the
board is not intended to be exhaustive, but it does include the factors that the
board considered material to its decision to approve the Amended
Recapitalization Transaction. In view of the factors considered in connection
with its evaluation, the board did not find it practicable to and did not
quantify or attempt to assign relative weights to the specific factors
considered in reaching its decision. In addition, individual members of the
board may have given different weight to different factors.
Opinions of Needham & Company, Inc.
The Company retained Needham under an engagement letter to furnish
financial advisory and investment banking services with respect to the proposed
recapitalization and to render an opinion as to the fairness, from a financial
point of view, of the issuance of the March Exchangeable Notes and Warrants (the
"Initial Investment") and the tender offer to the holders of the Company's
common stock (other than Thayer-BLUM Funding and its affiliates). Under an
amendment to the engagement letter the Company retained Needham to render an
opinion as to the fairness, from a financial point of view, of the Initial
Investment, the issuance of the July Exchangeable Notes and the tender offer
(together, the "Amended Recapitalization Transaction") to the holders of the
Company's common stock (other than Thayer-BLUM Funding and its affiliates). The
terms of the Amended Recapitalization Transaction were determined through arm's
length negotiations between the Company and Thayer-BLUM Funding and not by
Needham.
At a meeting of the board of directors on March 29, 2000, Needham delivered
its oral opinion (subsequently confirmed in writing) that, as of that date and
based upon and subject to the assumptions and other matters described in its
written opinion, the Initial Investment and the tender offer, when taken
together, are fair to the Company and the holders of common stock (other than
Thayer-BLUM Funding and its affiliates) from a financial point of view. On June
5, 2000, Needham delivered its written opinion that, as of that date and based
upon and subject to the assumptions and other matters described in its written
opinion, the transactions contemplated by the Amended Recapitalization
Transaction, when taken together, are fair to the Company and the holders of
common stock (other than Thayer-BLUM Funding and its affiliates) from a
financial point of view. The Needham opinions are addressed to the special
committee of the board, are directed only to the financial terms of the
securities purchase agreement and related
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documents, and do not constitute a recommendation to any shareholder as to how
that shareholder should vote at the Special Meeting.
The complete text of the Needham opinions, which set forth the assumptions
made, matters considered, limitations on and scope of the review undertaken by
Needham, are attached to this document as Appendix I. The summary of the
Needham opinions set forth in this document are qualified in their entirety by
reference to the Needham opinions. You should read the Needham opinions
carefully and in their entirety for a description of the procedures followed,
the factors considered, and the assumptions made by Needham.
In arriving at its opinions, Needham, among other things:
. in connection with the March 29 opinion reviewed a draft of the
securities purchase agreement and related drafts of the forms of the
March Exchangeable Notes, Convertible Notes and Warrants furnished to
it on March 28, 2000 and in connection with the June 5 opinion
reviewed the final securities purchase agreement and related forms of
March Exchangeable Notes, Convertible Notes and Warrants and the
proposed terms of the amendment to the securities purchase agreement
and July Exchangeable Notes and Convertible Preferred Stock furnished
to it on June 5, 2000;
. reviewed certain publicly available information concerning the Company
and certain other relevant financial and operating data of the Company
furnished to Needham by the Company;
. reviewed the historical stock prices and trading volumes of the common
stock;
. held discussions with members of senior management of the Company
concerning their current and future business prospects of the Company;
. reviewed and discussed with members of the management of the Company
various financial forecasts and projections prepared by management
that assume the Amended Recapitalization Transaction (except the
Initial Investment) do not occur and, in the alternative, assume the
occurrence of the Amended Recapitalization Transaction, the exchange
of the Exchangeable Notes and cancellation of the Warrants;
. compared publicly available financial data of selected companies whose
securities are traded in the public markets and that Needham deemed
relevant to similar data for the Company;
. reviewed the financial terms of selected other transactions that
Needham deemed generally relevant;
. discussed with members of the Company's management the strategic
rationale and certain other benefits to the Company resulting from an
association with the Investor; and
. performed and/or considered such other studies, analyses, inquiries
and investigations as Needham deemed appropriate.
Needham assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by or discussed with it
for purposes of rendering its opinions and the assessment by the Company's
management of the strategic and other benefits expected to be derived from the
Amended Recapitalization Transaction. Needham assumed that the financial
forecasts relating to the Company were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the Company's
management, at the time of preparation, of the future operating and financial
performance of the Company. Needham did not assume any responsibility for or
make or obtain any independent evaluation, appraisal or physical inspection of
the assets or liabilities of the Company. The Needham opinions state that they
were based on economic, monetary and market conditions existing as of their
respective dates. Needham expressed no opinion as to the value of the
Exchangeable Notes, Convertible Notes, Convertible Preferred Stock or Warrants
or the prices at which the common stock will actually trade at any time. In
addition, Needham was not asked to consider, and the Needham opinions do not
address:
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. the Company's underlying business decision to engage in the Amended
Recapitalization Transaction;
. the relative merits of the Amended Recapitalization Transaction as
compared to any alternative business strategies that might exist for
the Company; or
. the effect of any other transaction in which the Company might engage.
No limitations were imposed by the Company on Needham with respect to the
investigations made or procedures followed by Needham in rendering its opinions.
Based on this information, Needham performed a variety of financial
analyses of the Amended Recapitalization Transaction. As part of its analyses,
Needham performed the following: (a) a selected companies analysis, in which
Needham compared selected operating and financial data for selected publicly
traded companies that Needham deemed relevant to similar data for the Company;
(b) a review of publicly available information concerning the financial terms of
selected transactions in the contract manufacturing industry; (c) a liquidation
analysis to analyze certain possible scenarios in the event the Amended
Recapitalization Transaction was not consummated and additional sources of
liquidity were not available to the Company; (d) an analysis of historical
trading prices and volumes for the Company's common stock and a comparison of
the Company's historical stock price performance relative to Nasdaq, the S&P 500
and selected publicly traded companies; and (e) an analysis of the premiums and
discounts implied by the proposed Amended Recapitalization Transaction and a
sensitivity analysis of selected financial data and ratios assuming completion
of the Amended Recapitalization Transaction at various levels of shares tendered
in the tender offer. Needham also considered certain issues with respect to the
Company's liquidity position.
No company, transaction or business used in any comparable analysis as a
comparison is identical to the Company or the Amended Recapitalization
Transaction. Accordingly, these analyses are not simply mathematical; rather,
they involve complex considerations and judgments concerning differences in the
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the comparable companies or
transactions to which they are being compared.
The summary set forth above does not purport to be a complete description
of the analyses performed by Needham in connection with the rendering of its
opinions. The preparation of a fairness opinion involves various determinations
as to the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily susceptible to
summary description. Accordingly, Needham believes that its analyses must be
considered as a whole and that considering any portions of its analyses and of
the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying its opinions.
In its analyses, Needham made numerous assumptions with respect to industry
performance, general business and economic and other matters, many of which are
beyond the control of the Company. Any estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future results
or values, which may be significantly more or less favorable. Additionally,
analyses relating to the values of business or assets do not purport to be
appraisals or necessarily reflect the prices at which businesses or assets may
actually be sold. Accordingly, these analyses and estimates are inherently
subject to substantial uncertainty. The Needham opinions and Needham's related
analyses were only one of many factors considered by the board of directors in
its evaluation of the Amended Recapitalization Transaction and should not be
viewed as determinative of the views of the board of directors or management
with respect to the Amended Recapitalization Transaction.
In connection with the reduction of the conversion price of the Convertible
Notes from $2.60 to $2.58, the special committee requested Needham to state
whether the revised conversion price would have affected Needham's opinion.
Needham was not requested to render, and did not render, a new opinion and,
accordingly, did not update its investigations made, procedures followed or
matters considered with respect to its opinion dated March 29, 2000. Needham
issued a letter to the special committee, dated April 27, 2000, that stated that
subject to those considerations, Needham believed that the establishment of the
$2.58 conversion price, had it been considered by Needham as part of
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its analyses, would not have altered its conclusion set forth in its March 29,
2000 opinion as of the date of that opinion. A copy of this letter is attached
to this document as part of Appendix I.
Under the terms of the Needham engagement letter, the Company has paid or
agreed to pay Needham fees for rendering the Needham opinions and for financial
advisory services that the Company and Needham believe are customary in
transactions of this nature. None of Needham's fees were contingent on
consummation of the Amended Recapitalization Transaction. The Company also
agreed to reimburse Needham for its reasonable out-of-pocket expenses and to
indemnify it against specified liabilities relating to or arising out of
services performed by Needham as financial advisor to the Company.
Needham is a nationally recognized investment banking firm. As part of its
investment banking services, Needham is frequently engaged in the evaluation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and other purposes. Needham was retained by the special committee to
act as the Company's financial advisor in connection with the Amended
Recapitalization Transaction based on Needham's experience as a financial
advisor in mergers and acquisitions and recapitalizations as well as Needham's
familiarity with technology companies. Needham has provided various investment
banking services to the Company in the past, for which it has received customary
compensation. In the normal course of its business, Needham may actively trade
the equity securities of the Company for its own account or for the account of
its customers and, therefore, may at any time hold a long or short position in
these securities.
Certain Matters to be Considered by Shareholders
Change in the Company's Board of Directors. Assuming Proposal 1 is
approved, immediately following consummation of the tender offer, the size of
the board will be reduced from eleven to nine directors, and a majority of the
Company's directors will be designated by Thayer-BLUM Funding. Thayer-BLUM
Funding has expressed its intention to designate the following persons for
election to the board of directors: Jeffrey W. Goettman, Douglas McCormick, Jose
Medeiros and John C. Walker. In addition, Thayer-BLUM Funding intends to
designate one additional person for election to the board of directors following
completion of the tender offer.
Control by Thayer-BLUM Funding. If Proposal 1 is approved and the tender
offer is consummated, assuming conversion of the Convertible Notes and
Convertible Preferred Stock on August 22, 2000 and the issuance of 1.3 million
shares of common stock into a class action settlement fund, Thayer-BLUM Funding
would own and be able to vote a minimum of 65.2% (if the minimum number of
shares are purchased in the tender offer) and a maximum of 76.1% (if the maximum
number of shares are purchased in the tender offer) of the outstanding common
stock of the Company based upon the number of shares outstanding on July 17,
2000. With such share ownership, Thayer-BLUM Funding will be able to assure
approval of any matters presented to a shareholder vote that it wishes to
approve, including electing the directors that it chooses.
If Proposal 1 is approved and the tender offer is consummated on August 22,
2000, assuming no conversion of either the Convertible Notes or the Convertible
Preferred Stock and the issuance of 1.3 million shares of common stock into a
class action settlement fund, Thayer-BLUM Funding would be able to vote a
minimum of 34.0% (if the minimum number of shares is purchased in the tender
offer) and a maximum of 54.7% (if the maximum number of shares is purchased in
the tender offer) of the outstanding common stock of the Company based upon the
number of shares outstanding on July 17, 2000.
Thayer-BLUM Funding is an entity established by affiliates of Thayer
Capital Partners and BLUM Capital Partners to hold securities of the Company and
is controlled solely by such affiliates. These entities in turn are controlled
by Thayer Capital Partners and BLUM Capital Partners.
Thayer Capital Partners is a private equity investment firm based in
Washington, DC. Thayer manages two private equity funds with more than $1.2
billion under management. The firm focuses on buyouts and growth equity
investments in four primary industries: information technology and services,
electronics and outsourced manufacturing, travel and leisure services, and
outsourced business services.
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BLUM Capital Partners is a San Francisco-based private equity and strategic
block investment firm, which manages in excess of $3 billion in capital both
domestically and internationally. BLUM has invested in a wide variety of
businesses and has been successful initiating value-enhancing strategies,
including going-private transactions, equity infusions to either restructure a
balance sheet or provide growth capital, share repurchases, acquisition
programs, and business unit divestitures.
Dilution. The issuance of common stock upon conversion of the Convertible
Notes and Convertible Preferred Stock will cause proportionate and substantial
dilution in the economic and voting rights of the existing shareholders of the
Company. Following consummation of the tender offer and assuming conversion of
the Convertible Notes and Convertible Preferred Stock on August 22, 2000 and the
issuance of 1.3 million shares of common stock into a class action settlement
fund, the issued and outstanding shares of the common stock held by the current
shareholders will be reduced to approximately 31.9% of the total issued and
outstanding shares of the common stock of the Company (if the minimum number of
shares is purchased in the tender) or approximately 21.0% of the total issued
and outstanding shares of the common stock of the Company (if the maximum number
of shares is purchased in the tender offer), in each case based upon the number
of shares outstanding on July 17, 2000.
Continued Nasdaq National Market Listing. The Company's common stock is
currently listed for trading on the Nasdaq National Market, which has several
different tests that set forth the requirements for continued listing. The
requirements, that are contained in two different tests, that could be most
difficult for the Company to satisfy are those of maintaining either:
. net tangible assets of at least $4 million; or
. market value of publicly held shares of $15 million.
For this purpose, "net tangible assets" means total assets (including the value
of patents, copyrights and trade marks but excluding the value of goodwill) less
total liabilities.
After giving effect to the issuance of the 1.3 million shares of common
stock into a class action settlement fund and assuming the exchange of the July
Exchangeable Notes for Convertible Preferred Stock, the Company's net tangible
assets would be approximately $16.2 million. However, future losses could
result in the Company's inability to satisfy the net tangible assets requirement
for continued listing. Assuming that Thayer-BLUM Funding purchases 5.625
million shares of common stock in the tender offer and giving effect to the
issuance of 1.3 million shares of common stock into a class action settlement
fund, the number of shares of publicly held common stock would be approximately
11.218 million shares based upon the number of shares outstanding on July 17,
2000. If the Company did not satisfy either the net tangible assets requirement
or the market value of publicly held shares requirement, its common stock might
no longer be listed on the Nasdaq National Market. Failure of the common stock
to be listed on the Nasdaq National Market would have a material adverse effect
on the market for the common stock and the ability of shareholders to sell
shares of common stock held by them. Moreover, listing on the Nasdaq Stock
Market is one of the conditions of the automatic conversion of the Convertible
Notes and the Convertible Preferred Stock. There are also other conditions to
the continued listing of the Company's common stock the failure of which to
satisfy could result in the common stock no longer being listed on the Nasdaq
Stock Market.
The Company and Thayer-BLUM Funding have each agreed, through September 30,
2010, to use commercially reasonable efforts to comply with the non-quantitative
designation criteria applicable to Nasdaq National Market issuers and to comply
with any applicable minimum per share bid price by effecting a reverse stock
split, if necessary. In addition, the Company has agreed to use commercially
reasonable efforts to list its common stock on the Nasdaq Small Cap Market if
the common stock is either de-listed, or is in the process of being de-listed,
from the Nasdaq National Market.
Capitalization of the Company. If Proposal 1 is approved and the tender
offer is consummated on August 22, 2000, and assuming the conversion of the
Convertible Notes and Convertible Preferred Stock on such date and the issuance
of 1.3 million shares of common stock into a class action settlement fund, the
Company would have:
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. approximately $33.0 million in long-term debt outstanding under:
. the Company's senior revolving line of credit, based on the
Company's current expectations for borrowings on its line of
credit, and
. a note payable to one of the Company's directors (as discussed
below); and
. shareholders' equity of approximately $80.8 million based on
shareholders' equity at May 31, 2000.
The management of the Company believes such amounts of indebtedness to be
reasonable in light of the size and operations of the Company.
If Proposal 1 is approved and the tender offer is consummated on August 22,
2000, and assuming no conversion of either the Convertible Notes or the
Convertible Preferred Stock and the issuance of 1.3 million shares of common
stock into a class action settlement fund, the Company would have:
. approximately $90.3 million in long-term debt outstanding under:
. the Company's senior revolving line of credit, based on the
Company's current expectations for borrowings on its line of
credit,
. the Convertible Notes, and
. a note payable to one of the Company's directors (as discussed
below); and
. shareholders' equity of approximately $23.5 million based on
shareholders' equity at May 31, 2000.
However, if Proposal 1 is not approved by shareholders or if the tender
offer is not consummated with respect to at least 500,000 shares of common
stock, Thayer-BLUM Funding will be entitled to exercise the Warrants to purchase
up to 3,093,154 shares of common stock for $.01 per share, the interest rate on
the Exchangeable Notes will be increased from 15% to 20%. Assuming Proposal 1
is not approved, and assuming exercise of the Warrants and the issuance of 1.3
million shares of common stock into a class action settlement fund, the Company
would have:
. approximately $104.8 million in long-term debt outstanding under:
. the Company's senior revolving line of credit, based on the
Company's current expectations for borrowings on its line of
credit,
. the Exchangeable Notes, and
. a note payable to one of the Company's directors (as discussed
below); and
. shareholders' equity of approximately $9.3 million based on
shareholders' equity at May 31, 2000.
The credit facility with Bank of America, the Exchangeable Notes and the
Convertible Notes contain significant restrictive covenants eliminating the
Company's ability to incur additional debt, pay dividends and engage in
transactions, including refinancing transactions, without Bank of America's and
Thayer-BLUM Funding,s consent.
Voting Agreement. Directors, executive officers and other shareholders
having the power to vote an aggregate of 26.5% of the Company's outstanding
common stock have entered into voting agreements pursuant to which they have
agreed to vote to approve each of the transactions contemplated by the
Securities Purchase Agreement.
Repayment of Subordinated Indebtedness to a Director of the Company. In
connection with the Recapitalization Transaction, an aggregate of $6.9 million
in principal amount of subordinated indebtedness owed to entities controlled by
Richard L. Monfort, a director of the Company was repaid. The Company still
owes the partnership $3.0 million in subordinated indebtedness, which has a
maturity date of March 30, 2004 and bears interest at 10%.
Stock Option Grants. Thayer-BLUM Funding has discussed with certain of the
Company's management granting of a substantial number of additional stock
options. Such grants will not be made unless Proposal 1 is approved by
shareholders. As a consequence, management may have different interests in
approving Proposal 1 than the Company's shareholders in general.
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Amendment to Articles of Incorporation. The Company's board of directors
has approved an amendment deleting Article Eight of the Company's Articles of
Incorporation, thereby eliminating the special shareholder voting requirements
applicable to certain transactions between the Company and shareholders that own
10% or more of the Company's voting stock. The board has directed that this
amendment be presented to shareholders for approval at the next annual meeting
of the Company's shareholders, which meeting is to be held soon after the tender
offer is consummated. As noted above, if Proposal 1 is approved and the tender
offer is consummated at the maximum number of shares, Thayer-BLUM Funding would
be able to assure approval of this amendment, even without converting the
Convertible Notes.
Description of Securities Purchase Agreement
The following summary of the Securities Purchase Agreement is qualified in
its entirety by the full text of the Securities Purchase Agreement which is
attached to this Proxy Statement as Appendix II.
General. The Securities Purchase Agreement, entered into on March 30, 2000
between Thayer-BLUM Funding and the Company, as amended on July 12, 2000, sets
forth the terms and conditions under which the Company sold and Thayer-BLUM
Funding bought $54.0 million in aggregate principal amount of the March
Exchangeable Notes, $14.0 million in aggregate principal amount of the July
Exchangeable Notes, plus warrants to purchase 3,093,154 shares of the Company's
common stock at an exercise price of $.01 per share representing approximately
19.9% of the Company's currently outstanding common stock.
Thayer-BLUM Funding agreed to undertake a tender offer for up to 5,625,000
but not less than 500,000 shares of common stock, at a price of $4.00 per share.
The tender offer must remain open until August 22, 2000, unless extended by
Thayer-BLUM Funding. If the tender offer is consummated and at least 500,000
shares of common stock are tendered, it will be considered a "Successful Tender
Offer." Upon shareholder approval of Proposal 1 and the completion of a
Successful Tender Offer, the March Exchangeable Notes will automatically be
exchanged for the Company's 8.875% Senior Subordinated Convertible Notes due
June 2006, in an aggregate principal amount equal to the aggregate principal
amount of the March Exchangeable Notes then outstanding, plus any accrued but
unpaid interest. The Convertible Notes will be convertible into common stock at
an exercise price of $2.58 per share, subject to certain adjustments, and upon
conversion, will be canceled. The July Exchangeable Notes will be automatically
be exchanged for Convertible Preferred Stock convertible into common stock at a
conversion price of $1.80 per share of common stock, subject to certain
adjustments. The aggregate liquidation preference of such Convertible Preferred
Stock will equal the aggregate principal amount of July Exchangeable Notes then
outstanding, plus accrued but unpaid interest.
If shareholders do not approve issuance of the Convertible Notes and
Convertible Preferred Stock by September 30, 2000 or if Thayer-BLUM Funding does
not purchase at least 500,000 shares in the tender offer, the Warrants will
become exercisable and the Exchangeable Notes will remain in place. If the
shareholders do not approve issuance of the Convertible Notes and the
Convertible Preferred Stock, the interest rate on the Exchangeable Notes will
increase to 20%. Interest would be compounded quarterly and continue to accrue
on the original notes or be payable in additional Exchangeable Notes, at the
option of the Company.
Upon consummation of their initial investment, Thayer-BLUM Funding
designated two directors who were elected to the Company's board of directors
and upon approval of Proposal 1 and consummation of a Successful Tender Offer,
Thayer-BLUM Funding will be entitled to designate a majority of the directors.
Representations and Warranties. The Securities Purchase Agreement contains
various customary representations and warranties of the Company and Thayer-BLUM
Funding, including representations and warranties with respect to the parties'
due organization, good standing, authority, requisite power and absence of any
conflicts with respect to the transactions contemplated by the Securities
Purchase Agreement. The Securities Purchase Agreement also contains
representations and warranties of the Company as to the following:
. the Company's capitalization;
. the Company's subsidiaries;
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. the absence of material litigation;
. SEC reports and financial statements;
. title and condition of assets;
. absence of contractual defaults;
. no material adverse change in the condition of the Company;
. absence of unfair labor practices;
. absence of strikes or other labor disputes;
. employee benefit plans;
. existing debt;
. absence of undisclosed liabilities;
. solvency;
. compliance with law;
. environmental matters;
. absence of any improper contribution, gift or bribe, including
compliance with the Foreign Corrupt Practices Act; and
. absence of certain changes in the Company's business since December
31, 1999 and May 31, 2000.
Covenants. In addition to the preparation and distribution of this proxy
statement, the Securities Purchase Agreement contains certain other agreements
between the Company and Thayer-BLUM Funding. The Company has agreed that it
will notify Thayer-BLUM Funding of any unsolicited requests, and will not
initiate any discussions, related to any merger, the sale of material assets of
the Company, sale of the Company's voting stock having greater than 15% of the
aggregate voting power of the Company's capital stock or any other transaction
involving the transfer of effective control of the Company or any of its
divisions.
The Company has also agreed that, during the period from March 30, 2000 to
the closing of the tender offer, other than as permitted or required by the
Securities Purchase Agreement, it will conduct its business and preserve its
business relationships in accordance with past practice, it will not amend its
Articles of Incorporation or Bylaws except to increase the number of authorized
shares as contemplated by Proposal 2 and to create the Convertible Preferred
Stock, it will not issue, pledge or sell shares of its capital stock except in
connection with the 2000 Equity Stock Option Plan or in the ordinary course of
business, it will not pay dividends, it will not adopt or amend any employee
benefit plans, it will not incur any indebtedness other than in the ordinary
course of business, it will not enter into certain material contracts or
encumber or dispose of any material assets, it may not obtain equity financing
in excess of $1 million without the prior written consent of Thayer-BLUM
Funding, and it will consult with Thayer-BLUM Funding regarding any significant
labor relations or employment issues. The Company has committed to entering
into agreements with consultants and advisors approved by Thayer-BLUM Funding to
facilitate and accelerate the Company's business plans with regard to its
manufacturing, hiring and purchasing initiatives. The Company is required to
have spent or be committed to spend at least $1.5 million, and shall reserve for
expense an additional $1.8 million, pursuant to these agreements. The Company
also has agreed to pay all transaction expenses incurred by Thayer-BLUM Funding
and its members in connection with the Recapitalization Transaction, which are
currently estimated to exceed $3 million.
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Thayer-BLUM Funding has agreed that it does not intend for the tender offer
to result in the delisting of the common stock. It has also agreed that it will
take no affirmative action to delist the Company's common stock from the Nasdaq
Stock Market. The Company and Thayer-BLUM Funding have each agreed, through
September 30, 2010, to use commercially reasonable efforts to comply with the
non-quantitative designation criteria applicable to Nasdaq National Market
issuers and to comply with any applicable minimum per share bid price by
effecting a reverse stock split, if necessary. In addition, the Company has
agreed to use commercially reasonable efforts to list its common stock on the
Nasdaq Small Cap Market if the common stock is either de-listed, or is in the
process of being de-listed, from the Nasdaq National Market.
Thayer-BLUM Funding has agreed that it will take no action prior to
December 31, 2001 to cause the Company to be the subject of a Rule 13e-3
transaction (a "going private" transaction as defined in Rule 13e-3 adopted
under the Exchange Act) with an affiliate of Thayer-BLUM Funding unless approved
by a majority of disinterested directors.
Termination. The Securities Purchase Agreement will terminate upon the
completion of a Successful Tender Offer, with certain covenants surviving such
termination, unless earlier terminated as follows:
. by mutual consent of Thayer-BLUM Funding and the Company;
. by court order;
. by either party if the tender offer is not consummated by September
30, 2000;
. by Thayer-BLUM Funding if the Company's board of directors has
withdrawn its recommendation or approval of the transactions
contemplated by the Securities Purchase Agreement;
. by Thayer-BLUM Funding if the shareholders fail to approve Proposal 1;
. by Thayer-BLUM Funding if any third party acquires more than 30% of
the outstanding common stock;
. by the Company if the Company receives an acquisition proposal for the
Company that the board of directors has determined in good faith is
superior to the proposal of Thayer-BLUM Funding; or
. by either party if the Federal Trade Commission or Department of
Justice has commenced or officially recommended commencement of an
action for an order prohibiting consummation of the tender offer.
If the termination results from the Company's board of directors either
withdrawing its approval or receiving a superior proposal, the Company must pay
a breakup fee of $1.5 million to Thayer-BLUM Funding and reimburse all of
Thayer-BLUM Funding's out of pocket costs and expenses up to an additional $1.5
million (net of any expenses paid previously by the Company). In the event of
any other termination of the Securities Purchase Agreement, no party shall have
any further liability or obligation other than liability for breach.
Conditions to the Tender Offer. Thayer-BLUM Funding shall not be required
to accept or pay for any shares tendered in the tender offer, and may terminate
or amend the tender offer as to any shares not then paid for, if (i) as of the
expiration date of the tender offer (A) any applicable waiting period under the
Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act")
has not expired or terminated or (B) 500,000 shares of common stock have not
been validly tendered or (ii) at any time after March 30, 2000 and before the
time of acceptance for payment for any shares tendered any of the following
events occurs and is continuing, unless Thayer-BLUM Funding has consented
otherwise:
. a governmental entity shall have threatened, or there shall be
pending, any action against Thayer-BLUM Funding, the Company or any of
the Company's subsidiaries, or any statute, rule, regulation,
judgment, order or injunction shall be applicable:
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. seeking to prohibit or impose any material limitations on, or
require the sale or disposal of, a material portion of the
Company's business or assets, or
. challenging the tender offer, including the ability of Thayer-
BLUM Funding to pay for or exercise full rights of ownership of
tendered shares;
. a general banking moratorium or other general material limitation on
banking in the United States;
. a general suspension of trading in the securities markets;
. a declaration of war or other international or national calamity
involving the United States;
. the Company's board of directors has withdrawn or modified adversely
its support of the tender offer, or approved or entered into any
proposal for acquisition of the Company's assets or capital stock;
. all required consents have not been obtained;
. the Securities Purchase Agreement is terminated;
. either the required members of the board of directors have not
tendered their resignations to be effective upon the closing of a
Successful Tender Offer or the size of the Board has not been
increased so that Thayer-BLUM Funding is not able to designate a
majority of the board of directors;
. Honeywell, Inc. Commercial Aviation Systems ("Honeywell") shall have
given a written notice to the Company of default and right to cure
under Section 16.1 of the Long Term Supply Agreement between Honeywell
and the Company, which notice has not been withdrawn by Honeywell; and
Honeywell shall have terminated the Long Term Supply Agreement;
. the making of any restricted payment prohibited by Section 7(e) of the
Exchangeable Notes;
. the incurrence of indebtedness in excess of that permitted by Section
7(i) of the Exchangeable Notes;
. the recapitalization (other than as expressly contemplated by the
Recapitalization Transaction), merger or consolidation of the Company;
. the authorization or issuance of securities other than (a) in
settlement of the securities litigation as currently agreed, (b)
pursuant to currently outstanding options or warrants, (c) stock
options granted to employees (other than executive officers) in the
ordinary course of business and (d) as otherwise expressly
contemplated by the Recapitalization Transaction;
. the amendment of the Company's articles of incorporation or bylaws
(other than as expressly contemplated by the Securities Purchase
Agreement);
. the acquisition or disposition of a material line of business or
facility, or the formation of a material joint venture;
. the making of any material change in the compensation arrangements or
employee benefit plans applicable to the Company's executive officers
or the making of any material change to the compensation arrangements
applicable to the Company's other employees except as made in the
ordinary course of business (other than as expressly contemplated by
the Securities Purchase Agreement);
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. the making of capital expenditures in fiscal year 2000 that exceed by
10% (a) $2,684,000 in the second fiscal quarter, (ii) $6,417,000 in
the third fiscal quarter or (iii) $3,432,000 in the fourth fiscal
quarter;
. the hiring or firing of any executive officer (other than as expressly
contemplated by the Securities Purchase Agreement);
. the making of any material amendment to either supply agreement
between the Company and Honeywell (other than as currently being
negotiated for lifetime buy inventory); or
. any agreement to do any of the foregoing.
These conditions are for the sole benefit of Thayer-BLUM Funding and may be
asserted by Thayer-BLUM Funding regardless of the circumstances giving rise to
such conditions.
Description of the Securities
The terms of the Exchangeable Notes, Convertible Notes, Convertible
Preferred Stock and Warrants are very complex. Any summary thereof will be
general in nature and must be qualified by reference to the forms of such
securities which have been filed as exhibits to the Company's filings with the
Securities and Exchange Commission. Shareholders desiring a more complete
understanding of the Exchangeable Notes, Convertible Notes, Convertible
Preferred Stock and Warrants and their operation are urged to refer to such
documents.
Exchangeable Notes. Under the 15% Senior Subordinated Exchangeable Notes
due June 30, 2006 issued on March 30, 2000 (the "March Exchangeable Notes"), the
Company promises to pay to Thayer-BLUM Funding, on June 30, 2006, the principal
amount of $54.0 million, plus interest on the unpaid principal balance at the
rate of 15.0% per annum, compounded quarterly. Interest accruing on the March
Exchangeable Notes is added to the principal amount of the notes on the date so
due, or, at the Company's option, it may issue additional March Exchangeable
Notes for the amount of unpaid accrued interest. Upon approval of Proposal 1
and consummation of a Successful Tender Offer, the March Exchangeable Notes
shall automatically be exchanged for and replaced by 8.875% Senior Subordinated
Convertible Notes due June 30, 2006, in an aggregate principal amount equal to
the amount outstanding under the March Exchangeable Notes, plus accrued but
unpaid interest.
Under the Senior Subordinated Exchangeable Notes due June 30, 2006 (the
"July Exchangeable Notes"), the Company promises to pay to Thayer-BLUM Funding,
on June 30, 2006, the principal amount of $14.0 million, plus interest on the
unpaid principal balance at the rate of 15.0% per annum, compounded quarterly.
Interest accruing on the July Exchangeable Notes is added to the principal
amount of the notes on the date so due, or, at the Company's option, it may
issue additional July Exchangeable Notes for the amount of unpaid accrued
interest. Upon approval of Proposal 1 and consummation of a Successful Tender
Offer, the July Exchangeable Notes shall automatically be exchanged for and
replaced by Convertible Preferred Stock convertible into the Company's common
stock at a price of $1.80 per share of common stock. The aggregate liquidation
preference of the Convertible Preferred Stock will be equal to the aggregate
amount then outstanding under the July Exchangeable Notes, plus accrued
interest.
If Proposal 1 is not approved by September 30, 2000, then (i) interest on
all unpaid amounts under the Exchangeable Notes from and after such date shall
be payable at the rate of 20% per annum, and (ii) the Company may redeem the
Exchangeable Notes, in whole or in part, by paying a redemption price equal to
108% of the principal amount redeemed, plus accrued and unpaid interest to the
redemption date. If the Company chooses to repurchase the Warrants, it may
redeem the Exchangeable Notes, in whole, at a redemption price equal to 100% of
the principal amount outstanding, plus accrued and unpaid interest to the
redemption date.
Upon a Change of Control or a Financing Redemption Event, the Company will
be obligated to redeem the Exchangeable Notes, at the option of the holders of a
majority in principal amount of the Exchangeable Notes, in whole or in part, at
a redemption price equal to 100% of the principal amount redeemed, plus accrued
and unpaid interest to the redemption date. A "Change of Control" under the
Exchangeable Notes will occur when (i) any person becomes
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a beneficial owner of 33% or more of the outstanding shares of the Company's
common stock or has the ability to cause 25% or more of the Company's board of
directors to be composed of its nominees, (ii) Jeffrey Goettman, John Walker and
any other directors elected or appointed to the Company's board of directors
pursuant to the terms of the Exchangeable Notes (as discussed below) cease for
any reason to be members of the board of directors and the holders of the
Exchangeable Notes do not have the ability to designate their replacements or
(iii) the Company's shareholders approve, or there is consummated without
shareholder approval, (A) a merger or consolidation of the Company in which the
shareholders of the Company prior to such transaction hold voting securities of
the surviving entity representing 50% or less of the total votes outstanding,
(B) a plan of complete liquidation of the Company or (C) an agreement for the
sale of disposition of all or any substantial portion of the Company's assets or
a major division or subsidiary of the Company. A "Financing Redemption Event"
under the Exchangeable Notes will occur when the Company sells equity securities
in one or a series of related transactions, which taken together, result in a
total, aggregate offering price of more than $50.0 million.
The indebtedness evidenced by the Exchangeable Notes is subordinated in
right of payment to the prior payment in full, in cash, of all Senior Debt (as
defined in the Exchangeable Notes). If a default, monetary or otherwise, occurs
with respect to the Senior Debt, no payments or distributions shall be made to
Thayer-BLUM Funding with respect to obligations under the Exchangeable Notes.
If an event of default occurs with respect to the Exchangeable Notes, the
Company must pay interest on all unpaid amounts under the Exchangeable Notes
(including interest) at a rate of interest equal to the then current rate of
interest plus 2%.
So long as the Exchangeable Notes are outstanding, the Company shall not,
and shall not permit any subsidiary or affiliate to, directly or indirectly,
declare or pay any dividend on any shares of its capital stock or purchase,
redeem or otherwise acquire or retire for value any equity interest of the
Company, or any subsidiary or other affiliate of the Company. Additionally, so
long as the Exchangeable Notes are outstanding, neither the Company nor its
subsidiaries may incur, issue, assume, guarantee or otherwise become liable with
respect to any indebtedness other than the indebtedness represented by the
Exchangeable Notes, the Senior Debt, the Promissory Note, dated March 30, 2000,
payable to the Monfort Family Limited Partnership in the principal amount of
$3.0 million (the "Monfort Note") and other indebtedness in an aggregate
principal amount not exceeding $5.0 million.
As long as the Exchangeable Notes are outstanding, the Company may not
engage in any "Significant Transaction" without the prior written approval of
the holders of a majority in principal amount of the Exchangeable Notes. A
Significant Transaction means (i) one or a series of related transactions in
which the Company obtains debt financing in an aggregate amount in excess of
$1.0 million, (ii) any material acquisition or material disposition, or (iii)
any adoption of, or amendment to, any incentive compensation plan.
The Company has agreed to provide all holders of the Exchangeable Notes any
annual reports and any information, documents or other reports that it is
required to file with the SEC. The Company will also provide holders, on a
quarterly basis, with a certificate of an officer of the Company stating that
the Company is in compliance with its obligations under the Exchangeable Notes.
In addition, the Company must furnish all holders with an officer,s certificate
within 90 days after the end of the Company's fiscal year ending in 2002 setting
forth the Company's consolidated net income, plus interest, taxes, losses (or
minus gains) on the sale or disposition of assets outside the ordinary course of
business, depreciation, amortization or other non-cash charges and certain
management fees, or EBITDA, for 2002. As discussed below, it is an event of
default if the Company's EBITDA for 2002 is less than $25.0 million.
The Company and its subsidiaries may not engage in transactions with an
affiliate of the Company, except on terms that are no less favorable to the
Company or the relevant subsidiary than those that could have been obtained in a
transaction with an unrelated person, other than transactions between the
Company and its wholly owned subsidiaries. The holders of at least a majority
in principal amount of the Exchangeable Notes have the right to approve any
transaction between the Company or its subsidiaries and an affiliate of the
Company having a potential value of more than $1.0 million, other than
transactions between the Company and its wholly owned subsidiaries.
The Company will not, and will not permit any subsidiary, to create any
lien upon the Company's assets or any subsidiary or any shares of capital stock
of any subsidiary. Without the consent of the holders of at least a majority in
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<PAGE>
principal amount of the Exchangeable Notes, (i) the Company may not dispose of
assets (i) for aggregate net proceeds in any fiscal year exceeding $2.0 million,
other than sales of inventory in the ordinary course of business, or (ii) for
less than fair market value, unless such fair market value is less than $2.0
million and the consideration received is promptly applied to the purchase of
comparable assets. At least 90% of the consideration received by the Company
for any sale of assets must be in the form of cash.
The Company's board of directors must at all times be composed of no more
than 12 directors unless approved by holders of a majority in principal amount
of the Exchangeable Notes. At all times during the term of the Exchangeable
Notes, holders of a majority in principal amount of the Exchangeable Notes will
have the right to designate an aggregate of two persons for election as members
of the Company's board of directors (or up to four upon occurrence of an event
of default).
An event of default under the Exchangeable Notes will occur if:
. the Company defaults in its payment obligations under the Exchangeable
Notes;
. the Company fails to comply in any material respect with its
agreements under the Exchangeable Notes;
. the Company fails to comply in any material respect with its
agreements under the Warrants;
. any of the representations and warranties of the Company made in
connection with the Exchangeable Notes or the Securities Purchase
Agreement were untrue when made in any respect materially adverse to
the Company and its subsidiaries taken as a whole;
. an event of default occurs under any agreement of the Company or any
subsidiary accelerating the payment of indebtedness of $500,000 or
more in the aggregate;
. final judgments for the payment of money in excess of $1.0 million are
entered against the Company or any of its subsidiaries and such
judgments remain undischarged for a period of 30 days;
. the Company or any subsidiary commences a voluntary bankruptcy,
consents to the entry of an order for relief against it in an
involuntary case, consents to the appointment of a bankruptcy
custodian for the Company or for all or substantially all of its
property, makes a general assignment for the benefit of its creditors
or generally is unable to pay its debts as they become due;
. a court enters an order under any bankruptcy law that (i) is for
relief against the Company or any of its subsidiaries in an
involuntary case, (ii) appoints a custodian of the Company or any of
its subsidiaries or for all or substantially all of the Company's
properties or (iii) orders the liquidation of the Company or any of
its subsidiaries, and the order or decree remains unstayed and in
effect for 60 days, or
. the Company does not deliver the officer,s certificate setting forth
the Company's EBITDA for 2002 within 90 days of the end of the
Company's fiscal year 2002 or such 2002 EBITDA is less than $25
million.
If an event of default (other than an event of default than involving
bankruptcy matters or the Company's 2002 EBITDA and the related officer's
certificate) occurs and is continuing, the holders of 20% in principal amount of
the Exchangeable Notes, by notice to the Company, may declare the unpaid
principal of and any accrued interest on the Exchangeable Notes to be
immediately due and payable. If the event of default involves a bankruptcy
matter as discussed above, all such amounts are immediately due and payable
without any declaration or other act on the part of any holder.
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<PAGE>
If the event of default involves 2002 EBITDA or the delivery of the related
officer's certificate as discussed above, the Company must pay in full the
principal of and accrued interest on the Exchangeable Notes to the holders by no
later than September 30, 2003. If the Company does not make such payment, the
Exchangeable Notes will thereafter be due and payable and in continuing default,
and from and after September 30, 2003 interest will accrue and be payable at 25%
per annum, compounded quarterly.
In addition, if an event of default occurs and is continuing, the Company
will, at the request of the holder of a majority in principal amount of the
Exchangeable Notes, create two vacancies on the Company's board of directors,
fill such vacancies with designees named by the holders, and take such actions
as are necessary to have such newly appointed directors elected to the board of
directors by the Company's shareholders.
Convertible Notes. Under the Senior Subordinated Convertible Notes due
June 30, 2006 (the "Convertible Notes"), the Company promises to pay to Thayer-
BLUM Funding, on June 30, 2006, the principal amount of $54.0 million, plus
interest on the unpaid principal balance at the rate of 8.875% per annum,
compounded quarterly. The Convertible Notes are being issued in exchange for
the March Exchangeable Notes. Interest on the Convertible Notes will accrue and
be added to the principal amount of the Convertible Notes on the date so due,
or, at the Company's option, it may issue an accrual note for the amount of
unpaid accrued interest.
The holders of the Convertible Notes may convert such notes into common
stock at any time with the number of shares issuable upon conversion being
determined by dividing the principal amount to be converted by the conversion
price in effect on the conversion date. Subject to certain adjustments, the
initial conversion price shall be $2.58 per share. The Convertible Notes are to
be automatically converted into shares of common stock if:
. the Company at the time is maintaining the listing of its common stock
on the Nasdaq Stock Market;
. the Company is in full compliance with all covenants under its senior
debt; and
. the average of the high and low sales prices of the common stock is
above $7.50 per share for 45 consecutive trading days or, on or after
March 30, 2003, such average is above $4.25 for 45 consecutive trading
days.
Upon a Change of Control, the Company will be obligated to redeem the
Convertible Notes, at the option of the holder of the Convertible Notes, in
whole or in part, at a redemption price equal to 100% of the principal amount
redeemed, plus accrued and unpaid interest to the redemption date and an amount
equal to the interest, if any, which would accrue on the Convertible Notes from
the date of redemption to the occurrence of a Change of Control up to and
including March 30, 2003. A "Change of Control" under the Convertible Notes
will occur when (i) any person becomes a beneficial owner of 33% or more of the
outstanding shares of the Company's common stock or has the ability to cause 25%
or more of the Company's board of directors to be composed of its nominees, (ii)
the directors elected or appointed to the Company's board of directors by the
holder of the Convertible Notes cease for any reason to constitute at least a
majority of the board of directors and the holders of the Convertible Notes do
not have the ability to designate their replacements or (iii) the Company's
shareholders approve, or there is consummated without shareholder approval, (A)
a merger or consolidation of the Company in which the shareholders of the
Company prior to such transaction hold voting securities of the surviving entity
representing 50% or less of the total votes outstanding, (B) a plan of complete
liquidation of the Company or (C) an agreement for the sale of disposition of
all or any substantial portion of the Company's assets or a major division or
subsidiary of the Company.
The indebtedness evidenced by the Convertible Notes shall be subordinated
in right of payment to the prior payment in full, in cash, of all Senior Debt.
If a default, monetary or otherwise, occurs with respect to the Senior Debt, no
payments or distributions shall be made to the holder with respect to
obligations under the Convertible Notes. If an event of default occurs with
respect to the Convertible Notes, the Company shall pay interest on all unpaid
amounts under the Convertible Notes (including interest) at the default rate of
10.875%.
So long as the Convertible Notes are outstanding, the Company shall not,
and shall not permit any subsidiary or affiliate to, directly or indirectly,
declare or pay any dividend on any shares of its capital stock or purchase,
redeem
33
<PAGE>
or otherwise acquire or retire for value any equity interest of the
Company, or any subsidiary or other affiliate of the Company. Additionally, so
long as the Convertible Notes are outstanding, neither the Company nor its
subsidiaries may incur, issue, assume, guarantee or otherwise become liable with
respect to any indebtedness other than the indebtedness represented by the
Convertible Notes, the Senior Debt, the Monfort Note and other indebtedness in
an aggregate principal amount not exceeding $5.0 million.
As long as the Convertible Notes are outstanding, the Company may not
engage in any Significant Transaction without the prior written approval of the
Holders of a majority in principal amount of the Notes.
The Company has agreed to provide all holders of the Convertible Notes with
any annual reports and any information, documents or other reports that it is
required to file with the SEC. The Company will also provide holders, on a
quarterly basis, with a certificate of an officer of the Company stating that
the Company is in compliance with its obligations under the Convertible Notes.
The Company and its subsidiaries may not engage in transactions with an
affiliate of the Company, except on terms that are no less favorable to the
Company or the relevant subsidiary than those that could have been obtained in a
transaction with an unrelated person, other than transactions between the
Company and its wholly owned subsidiaries. The holders of at least a majority
in principal amount of the Convertible Notes have the right to approve any
transaction between the Company or its subsidiaries and an affiliate of the
Company having a potential value of more than $1 million, other than
transactions between the Company and its wholly owned subsidiaries.
The Company will not, and will not permit any subsidiary, to create any
lien upon the Company's assets or any subsidiary or any shares of capital stock
of any subsidiary. Without the consent of the holders of at least a majority in
principal amount of the Convertible Notes, the Company may not dispose of assets
(i) for aggregate net proceeds in any fiscal year exceeding $2.0 million, other
than sales of inventory in the ordinary course of business, or (ii) for less
than fair market value, unless such fair market value is less than $2.0 million
and the consideration received is promptly applied to the purchase of comparable
assets. At least 90% of the consideration received by the Company for any sale
of assets must be in the form of cash.
The Company's board of directors must at all times be composed of no more
than 12 directors unless approved by holders of a majority in principal amount
of the Convertible Notes. The holder of the Convertible Notes will have the
right to nominate a number of persons for election as members of the board of
directors of the Company such that the number nominated by the holder will
compose a majority of the total number of directors.
An event of default under the Convertible Notes will occur if:
. the Company defaults in its payment obligations under the Convertible
Notes;
. the Company fails to comply in any material respect with its
agreements under the Convertible Notes;
. any of the representations and warranties of the Company made in
connection with the Convertible Notes or the Securities Purchase
Agreement were untrue when made in any respect materially adverse to
the Company and its subsidiaries taken as a whole;
. an event of default occurs under any agreement of the Company or any
subsidiary accelerating the payment of indebtedness of $500,000 or
more;
. final judgments for the payment of money in excess of $1.0 million are
entered against the Company or any of its subsidiaries and such
judgments remain undischarged for a period of 30 days;
. the Company or any subsidiary commences a voluntary bankruptcy,
consents to the entry of an order for relief against it in an
involuntary case, consents to the appointment of a bankruptcy
custodian for the Company or for all or substantially all of its
property, makes a general assignment for the benefit of its creditors
or generally is unable to pay its debts as they become due; or
34
<PAGE>
. a court enters an order under any bankruptcy law that (i) is for
relief against the Company or any of its subsidiaries in an
involuntary case, (ii) appoints a custodian of the Company or any of
its subsidiaries or for all or substantially all of the Company's
properties or (iii) orders the liquidation of the Company or any of
its subsidiaries, and the order or decree remains unstayed and in
effect for 60 days.
If an event of default (other than involving bankruptcy matters) occurs and
is continuing, the holders of at least a majority in principal amount of the
Convertible Notes, by notice to the Company, may declare the unpaid principal of
and any accrued interest on the Convertible Notes to be immediately due and
payable. If the event of default involves a bankruptcy matter as discussed
above, all such amounts are immediately due and payable without any declaration
or other act on the part of any holder.
Convertible Preferred Stock. The Convertible Preferred Stock is being
issued in exchange for the July Exchangeable Notes. The Convertible Preferred
Stock will accrue dividends at a rate of 8.875% per annum on the per share
liquidation preference of the Convertible Preferred Stock. Dividends on the
Convertible Preferred Stock will be cumulative and will accrue on a daily basis.
Accrued dividends will be payable quarterly in arrears on January 15, April 15,
July 15 and October 15 of each year (each a "Dividend Payment Date"). On each
Dividend Payment Date, all dividends, to the extent not declared and paid during
the preceding accrual period, will be added to the liquidation preference of
each share of Convertible Preferred Stock effective as of such Dividend Payment
Date and will remain a part thereof to and including the date on which such
dividend is paid.
In the event of any voluntary or involuntary liquidation, dissolution or
other winding up of the affairs of the Company, before any payment or
distribution is made to the holders of the Subordinate Stock (as defined below),
the holders of the shares of Convertible Preferred Stock will be entitled to be
paid the greater of (i) the per share liquidation preference or (ii) such per
share amount as would have been payable had each such share been converted into
common stock immediately prior to such liquidation, dissolution or other winding
up of the affairs of the Company.
The holders of shares of Convertible Preferred Stock may convert such
shares into common stock at any time with the number of shares issuable upon
conversion being determined by dividing the liquidation preference by the
conversion price in effect on the conversion date. The initial conversion price
is $1.80 per share. The conversion price is subject to adjustment if the
Company (i) pays a dividend or makes a distribution on its common stock or any
other Subordinate Stock in shares of its capital stock, (ii) subdivides its
outstanding shares of common stock into a greater number of shares, (iii)
combines its outstanding shares of common stock into a smaller number of shares
or (iv) issues by reclassification of its common stock any shares of its capital
stock. The shares of Convertible Preferred Stock are to be automatically
converted into shares of common stock if:
. the Company at the time is maintaining the listing of its common stock
on the Nasdaq Stock Market;
. the Company is in full compliance with all covenants under its senior
debt and the Convertible Notes; and
. the average of the high and low sales prices of the common stock is
above $7.50 per share for 45 consecutive trading days.
So long as any shares of Convertible Preferred Stock are outstanding, the
Company will not declare, pay or set apart for payment on any Subordinate Stock
any dividends or distributions whatsoever, whether in cash, property or
otherwise, other than dividends payable in kind or payable in shares of common
stock with respect to Subordinate Stock other than common stock. "Subordinate
Stock" with respect to the Convertible Preferred Stock means all authorized
shares of common stock of the Company and any other stock of the Company
authorized after the date on which the Convertible Preferred Stock is issued
which has the right (subject to prior rights of any class or series of preferred
stock) to participate in the distribution of the assets and earnings of the
Company without limit as to per share amount, and any class or series of the
Company's capital stock which is not entitled to receive (i) any dividends
unless all dividends required to have been paid or declared and set apart for
payment on the Convertible Preferred Stock have
35
<PAGE>
been so paid or declared and set apart for payment and (ii) any assets upon
liquidation, dissolution or winding up of the affairs of the Company until the
Convertible Preferred Stock has received the entire amount to which such stock
is entitled upon such liquidation, dissolution or winding up.
The Company has agreed to provide all holders of shares of Convertible
Preferred Stock with any annual reports and any information, documents or other
reports that it is required to file with the SEC. Each share of Convertible
Preferred Stock will have the right to vote on all matters presented to the
holders of common stock for vote, in the number of votes equal at any time to
the number of shares of common stock into which each share of Convertible
Preferred Stock would then be convertible, and the holders of the shares of
Convertible Preferred Stock will vote with the holders of the common stock as a
single class.
Warrant. The Warrant to Purchase Shares of common stock, par value $.01
per share, entered into on March 30, 2000 and amended on July 12, 2000, between
Thayer-BLUM Funding and the Company, sets forth the terms and conditions under
which the holder is entitled to purchase 3,093,154 shares of common stock (the
"Warrant"). The Warrant provides that the holder is entitled to purchase up to
3,093,154 shares of common stock at any time during the exercise period, at an
exercise price of $.01 per share, subject to adjustment.
To exercise the Warrant, in whole or in part, the holder must deliver to
the Company (i) a notice of exercise specifying the number of shares to be
purchased and stating the method by which the holder will pay the exercise
price, and (ii) the Warrant. The exercise period shall extend from (a) the
earlier of (i) September 30, 2000 and (ii) the date on which a "Failure to
Approve the Transactions" shall occur, until (b) the earlier of (i) the date on
which a Successful Tender Offer is consummated, or (ii) the close of business on
June 30, 2010. A Failure to Approve the Transactions shall mean that the
holders of the Company's common stock do not vote to approve Proposal 1 at the
Special Meeting. The exercise price is $.01 per share subject to adjustment for
certain events including:
. the Company's payment of dividends or distributions in shares of
common stock, convertible securities or stock purchase rights;
. the Company's subdivision of the outstanding shares of common stock
into a larger number of shares of common stock;
. the Company's combination of its outstanding shares of common stock
into a smaller number of shares of common stock;
. the Company's reorganization, reclassification or recapitalization of
its capital stock;
. the Company's consolidation or merger with or into another person; or
. the Company's effecting certain dilutive issuances of common stock.
During the period beginning on March 30, 2000 and ending at 5:00 p.m. New
York City time on June 24, 2000 (the "Redemption Exercise Period"), the Company
may, at its option, redeem not less than all of the Warrants for an amount equal
to the "Optional Redemption Price." The Optional Redemption Price means an
amount equal to $5 million during the first 30 days of the Redemption Exercise
Period, plus $250,000 on April 30, 2000, plus, for each successive seven day
period beyond such date, an additional $250,000 accruing on the first day of
such seven day period.
Other Material Agreements
Voting Agreement. Pursuant to a voting agreement (the "Voting Agreement")
between Thayer-BLUM Funding and certain shareholders of the Company having the
power to vote an aggregate of approximately 26.5 % of the outstanding common
stock, such shareholders have agreed to vote their shares of common stock in
favor of each of the transactions contemplated by the Securities Purchase
Agreement. The Voting Agreement will terminate upon the earliest to occur of:
36
<PAGE>
. receipt of shareholder approval for the issuance of the Convertible
Notes;
. the date on which the Company's shareholders shall vote on and fail to
approve such issuance; or
. December 31, 2000.
Registration Rights Agreement. The Company and Thayer-BLUM Funding have
entered into a registration rights agreement, dated as of March 30, 2000 and
amended as of July 14, 2000 (the "Registration Rights Agreement"). Pursuant to
the Registration Rights Agreement, Thayer-BLUM Funding will have the right to
require the Company to register the shares of common stock held by Thayer-BLUM
Funding (whether acquired through the exercise of the Warrant, conversion of the
Convertible Notes or Convertible Preferred Stock, or purchase in the Tender
Offer or otherwise (the "Registrable Securities")) under the Securities Act of
1933, as amended (the "Securities Act"). Thayer-BLUM Funding, or a permitted
transferee of Registrable Securities, must request that the registration include
at least 1,500,000 shares of common stock. If the Company proposes to register
its securities under the Securities Act, either for its own account or the
account of others, Thayer-BLUM Funding will be entitled to notice of such
registration and to include its shares in such registration; no minimum amount
must be included in such cases. The underwriters for any such registration will
have the right to limit the number of such shares included in such registration,
subject to certain conditions.
The Company may, for any reason, withdraw or delay such registration prior
to effectiveness of the related registration statement. Thayer-BLUM Funding may
transfer its rights under the Registration Rights Agreement to its members.
Thayer-BLUM Funding may also transfer Registrable Securities, and the related
rights under the Registration Rights Agreement, to any person in a transaction
exempt from the registration requirement of the Securities Act. Generally, the
Company is required to pay all costs and expenses in connection with its
obligations under the Registration Rights Agreement. The Registration Rights
Agreement will terminate on the earlier of (i) March 30, 2010 or (ii) such time
as all Registrable Securities have been sold pursuant to an effective
registration statement under the Securities Act.
Regulatory Approvals
The conversion of the Convertible Notes, the issuance of the Convertible
Preferred Stock and the consummation of the tender offer is subject to the
notification and waiting periods of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended. The parties have filed the required notifications.
The Company is not aware of any other federal or state approvals or filings
that must be made in order to issue the Convertible Notes or the Convertible
Preferred Stock and to consummate the tender offer.
Vote Required and Board Recommendation
Approval of Proposal 1 requires the affirmative vote of a majority of the
total votes cast on the proposal in person or by proxy.
As noted under "Background of the Recapitalization Transaction," a special
committee of the board of directors, based in part on opinions of Needham &
Company, Inc. and the board of directors, also based in part on such opinion,
concluded that the Recapitalization Transaction as a whole was fair to and in
the interests of the Company and its shareholders and recommend that the
Company's shareholders approve the proposal.
Management and the Board of Directors recommends a vote FOR this Proposal
to approve the issuance of Convertible Notes and Convertible Preferred Stock.
37
<PAGE>
PROPOSAL 2 -
INCREASE IN THE NUMBER OF AUTHORIZED SHARES
Background
The Company's board of directors has determined that amending the Company's
Amended and Restated Articles of Incorporation in the manner described below is
advisable and is in the best interest of shareholders and recommends that the
Company's shareholders approve and adopt the proposed amendment. The proposed
amendment would increase the number of authorized shares of the common stock
from 45.0 million shares to 75.0 million shares.
Assuming the Exchangeable Notes are exchanged for the Convertible Notes and
Convertible Preferred Stock on August 22, 2000, a total of 30.2 million shares
would be issuable upon conversion of the Convertible Notes and Convertible
Preferred Stock on that date. Taking into account the number of shares of the
Company's common stock that are currently outstanding or otherwise reserved for
issuance, the number of shares to be issued by the Company as part of the
settlement of two class action lawsuits, and the number of shares that would be
reserved for issuance under the 2000 Equity Stock Option Plan, the Company would
not have sufficient shares available for issuance upon conversion of the
Convertible Notes and Convertible Preferred Stock. The proposed amendment would
permit additional shares of common stock to be reserved for issuance upon
conversion of the Convertible Notes and Convertible Preferred Stock, as
additional interest accrues on the Convertible Notes and additional dividends
accrue on the Convertible Preferred Stock, and for the issuance of additional
shares for acquisitions or to give the Company greater flexibility in pursuing
funding to meet its capital needs in the future.
If Proposal 1 is approved at the Special Meeting and the tender offer is
consummated, but Proposal 2 is not approved at the Special Meeting, then,
assuming the maximum number of shares is purchased in the tender offer, Thayer-
BLUM Funding would have sufficient share ownership to assure approval of such an
amendment at a future meeting of the Company's shareholders, if it so wished.
Description of the Proposal
The proposed amendment to the Amended and Restated Articles of
Incorporation will increase the number of authorized shares of common stock from
45.0 million shares to 75.0 million. As of June 30, 2000, approximately 15.5
million shares of the Company's common stock were outstanding, and approximately
10.2 million shares of common stock were reserved for issuance pursuant to the
Company's existing stock option plans, the exercise of outstanding options and
warrants, including the Warrant, and upon settlement of two class action
lawsuits to which the Company was party.
If Proposal 2 is approved, the newly authorized shares of common stock
would have all of the rights and privileges as the shares of common stock now
authorized. The common stock has no preemptive rights. Once shares of common
stock are authorized, the Board of Directors can issue shares of common stock
without shareholder approval, except as may be required by law or regulations or
by the rules of the Nasdaq Stock Market or any stock exchange on which the
Company's securities may then be listed.
Although the board of directors would issue additional shares based on its
judgment as to the best interests of the Company and its shareholders, the
issuance of additional shares would have the effect of diluting the relative
voting power per share. It also could have the effect of diluting a
shareholder's interest in the Company on an economic basis to the extent shares
are issued at a price less than their fair value.
If Proposal 2 is approved, subparagraph (a) of Article Two of the Amended
and Restated Articles of Incorporation will be amended in its entirety to read
as follows:
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<PAGE>
(a) Total Capital. The total number of shares of capital stock that
-------------
the Corporation shall have the authority to issue is 80,000,000, of which
75,000,000 shares shall be common stock with a par value of $0.01 per share
("Common Stock") and 5,000,000 shares shall be preferred stock with a par
value of $0.01 per share ("Preferred Stock").
Vote Required and Board Recommendation
The affirmative vote of holders of a majority of the shares of common stock
outstanding as of the record date is required to approve the proposed amendment
to the Company's Amended and Restated Articles of Incorporation. If the
amendment is not approved by the shareholders, the Company's Amended and
Restated Articles of Incorporation, which authorizes the issuance of 45.0
million shares of common stock, will remain unchanged.
Management and the Board of Directors recommend a vote FOR this Proposal to
approve an amendment to the Company's Amended and Restated Articles of
Incorporation to increase the number of authorized shares of common stock.
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<PAGE>
PROPOSAL 3 -
ADOPTION OF THE 2000 EQUITY STOCK OPTION PLAN
Background
The Company currently has two stock option plans which have been adopted by
the Company's board of directors and approved by its shareholders:
. EFTC Corporation Equity Incentive Plan which provides for the issuance
of up to 4,495,000 shares of common stock
. EFTC Corporation Stock Option Plan for Non-Employee Directors which
provides for the issuance of up to 300,000 shares of common stock
The board of directors of the Company has adopted the 2000 Equity Stock
Option Plan which provides for the issuance of up to 5.0 million shares of
common stock. Adoption of this plan also requires the approval of the Company's
shareholders.
If Proposal 1 is approved at the Special Meeting and the tender offer is
consummated, but Proposal 3 is not approved at the Special Meeting, then,
assuming the maximum number of shares is purchased in the tender offer, Thayer-
BLUM Funding would have sufficient share ownership to assure adoption of the
2000 Equity Stock Option Plan at a future meeting of the Company's shareholders,
if it so wished.
New Plan Benefits
The following table presents, as of the date of this proxy statement,
information on options to purchase 2,680,000 shares of common stock, at an
exercise price of $2.63 per share, that have been or are expected to be granted
under the 2000 Equity Stock Option Plan (subject to approval of the plan by the
shareholders) to the most highly compensated executive officers of the Company,
all current executive officers as a group, all current directors who are not
executive officers as a group and all employees (including all current officers
who are not executive officers) as a group:
<TABLE>
<CAPTION>
Number of Shares
Name Position Underlying Options
---- -------- ------------------
<S> <C> <C>
Jack Calderon Chairman and former President
and Chief Executive Officer 450,000
August P. Bruehlman Chief Administrative Officer
and Secretary 55,000
Executive Group (5 persons).................................. 1,855,000
Non-Executive Director Group (1 person)...................... 300,000
Non-Executive Officer Employee Group (4 persons)............. 525,000
</TABLE>
Description of 2000 Equity Stock Option Plan
On June 22, 2000, the Board adopted the 2000 Equity Stock Option Plan of
EFTC Corporation (the "Stock Option Plan") for the benefit of the Company's
eligible employees, consultants and directors. The Stock Option Plan provides
for the grant of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code") and options that are
not incentive stock options ("non-qualified options").
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<PAGE>
The following summary of the Stock Option Plan is qualified by reference to
the complete text of the Stock Option Plan, which is incorporated by reference
and attached as Appendix III.
Administration. The general administration of the Stock Option Plan is the
responsibility of the Compensation Committee of the Board or another committee
or subcommittee of the Board appointed under the terms of the Stock Option Plan
(the "Committee"). The Committee must be structured so that it satisfies the
"non-employee" director requirement of Rule 16b-3 ("Rule 16b-3") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
"outside director" requirement of Code section 162(m). The Committee has the
discretion to select the employees and consultants to whom options are granted
under the Stock Option Plan and to determine the terms and conditions of each
grant, which need not be the same for each grantee. The full Board administers
the Stock Option Plan with respect to directors who are not also employees of
the Company ("Independent Directors"), selects the Independent Directors to whom
options are granted, and determines the terms and conditions of each grant,
which need not be the same for each grantee. The full Board may exercise the
rights and duties of the Committee in the administration of the Plan, except
with respect to matters that must be determined by the Committee under Rule 16b-
3 or Code section 162(m). The term "Administrator" refers to both the Committee
and the Board with reference to their responsibilities to administer the Stock
Option Plan with respect to employees and consultants and Independent Directors,
respectively.
Shares Subject to the Stock Option Plan. There are 5.0 million shares
reserved for the grant of options under the Stock Option Plan. If an option
expires or is canceled without having been fully exercised or is exercised for
cash in whole or in part, the number of shares subject to the option but as to
which the option was not exercised prior to its expiration, cancellation, or
exercise are available for grant under the Stock Option Plan. Shares of common
stock that are delivered by the option holder or withheld by the Company in
payment of the exercise price or tax withholding are available for grant under
the Plan. On July 14, 2000, the last sale price of the common stock on the
Nasdaq National Market was $2.06 per share.
Adjustments to the Shares Subject to the Stock Option Plan Upon Changes in
Capital Structure or Reorganization, Change in Control or Liquidation. If the
Administrator, in its sole discretion, determines that any dividend or other
distribution (whether in the form of cash, common stock, other securities, or
other property), recapitalization, reclassification, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange, or other
disposition of all or substantially all of the assets of the Company, or
exchange of common stock or other securities of the Company, or other similar
corporate transaction or event, affects the common stock such that an adjustment
is determined by the Administrator to be appropriate to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
with respect to an option, the Administrator will, in any manner it deems
equitable, adjust any or all of (1) the number and kind of shares of common
stock (or other securities or property) with respect to which options may be
granted, including the maximum number of shares that may be granted to an
individual in a calendar year, (2) the number and kind of shares subject to
outstanding options, and (3) the exercise price with respect to any option.
In the event of a transaction described in the preceding paragraph, or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, the financial statements of the Company or any
affiliate, or any changes in the laws, regulations, or accounting principles,
the Administrator, in its sole discretion, and on such terms as it deems
appropriate, may take any one or more of the following actions: (1) to provide
for the purchase of any option for an amount of cash equal to the amount that
the option holder could have received upon exercise of the option if the option
were fully vested or to provide for the replacement of the option with other
rights or property selected by the Administrator in its sole discretion, (2) to
provide that the option cannot vest or be exercised after the transaction or
event, (3) to provide that any option shall be fully vested, (4) to provide for
the assumption of the option by the successor or surviving corporation or the
substitution of a new option on terms comparable to the outstanding option, and
(5) to make adjustments in the number and type of shares of common stock (or
other property and securities) subject to outstanding options and/or in the
terms and conditions applicable to options granted in the future.
Participation. The Stock Option Plan provides that options may be granted
to those employees, consultants, and directors who are selected by the Committee
in its sole discretion. The Company currently considers all of its employees
and consultants and all of its Independent Directors to be eligible for the
grant of options under the Stock
41
<PAGE>
Option Plan. As of June 30, 2000, there were approximately 2,000 eligible
individuals. The Stock Option Plan is a discretionary plan and, accordingly, it
is not possible at present to determine the number of shares that may be subject
to options granted to any individual during the term of the Stock Option Plan.
Grant of Options. Options are granted to employees and consultants in such
numbers, at such times, and in such numbers as the Committee determines, except
that (1) the maximum number of shares that can be subject to options granted to
one individual during a calendar year is 1,000,000 shares and (2) incentive
stock options may be granted only to employees. The full Board determines the
time of grant and the terms and conditions of options granted to Independent
Directors, subject to the same exceptions described in the preceding sentence.
Option Term. The Committee determines the term of an option granted to an
employee or consultant, provided however, in the case of an incentive stock
option, the term shall be no longer than 10 years (five years in the case of an
incentive stock option granted to an employee who owns common stock having more
than 10% of the voting power). The Committee may extend the term of an
outstanding option in connection with an employee's or consultant's termination
of employment or consultancy, except as limited by the requirements applicable
to incentive stock options.
Vesting of Options. The Committee determines the vesting schedule for each
option; however, unless the Committee provides otherwise, an option granted to
an option holder who is subject to Section 16(b) of the Exchange Act ("Section
16(b)") may not be exercised during the period ending six months and one day
after the option is granted. The Committee may, in its sole discretion and
subject to the terms and conditions that it determines, accelerate the vesting
schedule for any outstanding option granted to an employee or consultant. An
option granted to an employee or consultant shall not continue to vest after
termination of employment or consultancy unless the Committee provides otherwise
either at the time the option is granted or after the option is granted. To the
extent that the aggregate fair market value (determined at the time the option
is granted) of common stock subject to an incentive stock option becomes
exercisable for the first time during a calendar year exceeds $100,000, the
option shall be treated as a non-qualified option.
Option Price. The Committee determines the exercise price for each option
granted to an employee or consultant; however, incentive stock options must have
an exercise price that is at least equal to the fair market value of the common
stock on the date the incentive stock option is granted (at least 110% of the
fair market value in the case of an incentive stock option granted to an
employee who owns common stock having more than 10% of the voting power).
Independent Directors. The terms and conditions of each option granted to
an Independent Director are determined by the Board, consistent with the terms
of the Stock Option Plan.
Exercise of Options. An option holder may exercise an option by giving
written notice and paying the exercise price in cash. The Administrator may, in
its discretion, (1) allow a delay in payment up to thirty days from the date the
notice of exercise is given, (2) allow payment, in whole or in part, through the
delivery of shares of common stock that have been owned by the option holder for
at least six months, (3) allow payment, in whole or in part, through the
surrender of common stock issuable upon exercise of the option having a fair
market value on the date the option is exercised equal to the aggregate exercise
price of the option or the portion of the option being exercised, (4) allow
payment, in whole or in part, through the delivery of property of any kind that
constitutes good and valuable consideration, (5) allow payment, in whole or in
part, through the delivery of a full recourse promissory note bearing interest
at a rate no less than the rate necessary to prevent imputation of interest
under the Code and with such security as the Administrator shall prescribe,
unless the payment by delivery of a promissory note is prohibited by law, (6)
allow payment, in whole or in part, through a broker's transaction by directing
a broker to sell all or a portion of the common stock to pay the exercise price,
or (7) allow payment through any combination of the methods in the foregoing (2)
through (6). Option holders who are subject to the withholding of tax may be
provided with an election to satisfy the minimum required withholding tax
obligation through the withholding of a portion of the common stock to be
received upon exercise of the option.
Nontransferability of Options. Except as may be permitted by the
Administrator, options are not transferable other than by will, the laws of
descent or distribution or pursuant to a domestic relations order entered in
connection
42
<PAGE>
with a divorce proceeding. The Committee may, in its sole discretion, permit an
option holder to transfer a non-qualified option to certain members of the
option holder's family, trusts for their benefit, foundations in which the
option holder or certain members of the option holder's family control the
management, or other entities in which the option holder or certain family
members own more than 50% of the voting interests or any other transferee
approved by the Administrator.
Amendment and Termination. The Board or the Committee may amend, suspend or
terminate the Stock Option Plan at any time in any respect, provided that
shareholder approval is obtained when it is necessary or desirable. No
amendment, suspension or termination of the Stock Option Plan may alter or
impair any rights or obligations under any outstanding option unless the terms
of the option expressly permit such alteration. No incentive stock option may be
granted under the Stock Option Plan more than ten years after the date the Stock
Option Plan was approved by the Board.
Federal Income Tax Consequences of Issuance and Exercise of Options. When a
non-qualified option is granted, there are no federal income tax consequences
for the option holder and the Company. When a non-qualified option is exercised,
in general, the option holder recognizes compensation equal to the excess of the
fair market value of the common stock on the date of exercise over the exercise
price. If, however, the sale of the common stock at a profit would subject the
option holder to liability under Section 16(b), the option holder will recognize
compensation income equal to the excess of (1) the fair market value of the
common stock on the date that is six months after the date of exercise or the
date the option holder can sell the common stock without Section 16(b) liability
over (2) the exercise price. The option holder can make an election under Code
section 83 to measure the compensation as of the date the non-qualified option
is exercised. The compensation recognized by an employee is subject to income
tax withholding. The Company is entitled to a deduction equal to the
compensation recognized by the option holder for the Company's taxable year that
ends with or within the option holder's taxable year in which the option holder
recognized the compensation, assuming that the amount of compensation satisfies
the ordinary and necessary and reasonable compensation requirements for
deductibility and that the deduction is not limited by Code section 162(m).
When an incentive stock option is granted, there are no income tax
consequences for the option holder or the Company. When an incentive stock
option is exercised, the option holder does not recognize income and the Company
does not receive a deduction. The option holder, however, must treat the excess
of the fair market value of the common stock on the date of exercise over the
exercise price as an item of adjustment for purposes of the alternative minimum
tax. If the option holder makes a "disqualifying disposition" of the common
stock (described below) in the same taxable year the incentive stock option was
exercised, there are no alternative minimum tax consequences.
If the option holder disposes of the common stock after the option holder
has held the common stock for at least two years after the incentive stock
option was granted and one year after the incentive stock option was exercised
(the "Incentive Stock Option Holding Period"), the amount the option holder
receives upon the disposition over the exercise price is treated as capital gain
for the option holder and the Company is not entitled to a deduction. If the
option holder makes a "disqualifying disposition" of the common stock by
disposing of the common stock before the end of the Incentive Stock Option
Holding Period, the option holder recognizes compensation income equal to the
excess of (1) the fair market value of the common stock on the date the
incentive stock option was exercised or, if less, the amount received on the
disposition over (2) the exercise price. At present, the Company is not required
to withhold federal income tax. The Company is entitled to a deduction equal to
the compensation recognized by the option holder for the Company's taxable year
that ends with or within the option holder's taxable year in which the option
holder recognized the compensation, assuming that the compensation amounts
satisfy the ordinary and necessary and reasonable compensation requirements for
deductibility and that the deduction is not limited by Code section 162(m).
Under Code section 162(m), the Company may be limited as to federal income
tax deductions to the extent that total annual compensation in excess of $1
million is paid to the Company's Chief Executive Officer or any one of the four
other highest paid executive officers who were employed by the Company on the
last day of the taxable year. However, certain "performance based compensation"
the material terms of which are disclosed to and approved by the Company's
shareholders, is not subject to the limitation on deductibility. The Company has
structured the Stock Option Plan with the intention that compensation resulting
from options under the Stock Option Plan would be deductible without regard to
the limitations otherwise imposed by Code section 162(m).
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<PAGE>
The foregoing is only a summary of the federal income taxation of
participants and the Company with respect to options granted under the Stock
Option Plan. It does not purport to be complete and does not address the tax
consequences arising in the context of a participant's death or the income tax
laws of any municipality, state or foreign country in which the participant's
income or gain may be taxable.
Reasons for Adoption of 2000 Equity Stock Option Plan
The purposes of the 2000 Equity Stock Option Plan are:
. to provide additional incentive for directors, employees, and
consultants to the Company to further the growth, development and
financial success of the Company through the ownership of common stock
and/or rights; and
. to enable the Company to obtain and retain the services of directors,
employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in
the Company and/or rights that will reflect the growth, development
and financial success of the Company.
Under the terms of the Securities Purchase Agreement, the board of
directors agreed to approve the adoption of the 2000 Equity Stock Option Plan
and to seek and recommend shareholder approval therefor at the Special Meeting.
Vote Required and Board Recommendation
Approval of Proposal 3 requires the affirmative vote of a majority of the
total votes cast on the proposal in person or by proxy.
The Board believes Proposal 3 is in the best interests of the Company and
its shareholders and is important in order to help assure the ability of the
Company to continue to recruit and retain highly qualified employees,
consultants, and directors.
Management and the Board of Directors recommends a vote FOR this Proposal
to approve the adoption of the Company's 2000 Equity Stock Option Plan.
44
<PAGE>
Certain Executive Compensation Information
Summary Compensation Table. The following table sets forth certain
information regarding the compensation paid in the last three fiscal years to
the most highly compensated executive officers of the Company.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Long-Term
Name and Annual Compensation Compensation
------------------- Awards All Other
Principal Position Year Salary($) Bonus($) Options(#) Compensation($)
------------------------ ---- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
Jack Calderon 1999 (1) $287,894 -- -- $ 2,241 (2)
Chairman, President 1998 * $240,885 $82,500 175,000 (3) $ 2,218 (2)
and Chief Executive 1997 $200,000 $40,000 200,000 $10,147 (2)
Officer (17)
Stuart W. Fuhlendorf 1999 (4) $180,019(5) -- 200,000 (6) --
Vice President and Chief 1998 * $178,385 $28,050 24,615 (7) --
Financial Officer 1997 $ 85,000 $33,500 110,000 --
August P. Bruehlman 1999 (8) $123,317 -- -- --
Chief Administrative 1998 * $120,692 $21,840 14,769 (9) --
Officer and Secretary 1997 $ 77,086 $ 7,800 75,000 --
Allen S. Braswell, Jr. 1999 $122,740(10) -- -- --
Senior Vice President and 1998 * $168,756 $14,438 60,818 (11) 16,849 (12)
President of EFTC Services 1997 (13) $ 47,115 -- 110,000 --
Chuck Tillett 1999 (14) $214,077 -- -- --
Chief Operations Officer 1998 (15) $ 83,970 -- 150,000 --
1997 -- -- -- --
Val Avery 1999 $130,000 -- 5,000 --
Chief Information Officer 1998 (16) $ 73,018 -- 85,000 --
1997 -- -- --
</TABLE>
____________________
* These officers named in this table voluntarily forfeited their salaries for
one pay period in 1998 to assist the Company's short-term liquidity
position. If they had collected their salaries for that pay period, Mr.
Calderon's salary for 1998 would have been $250,000; Mr. Fuhlendorf's
salary for 1998 would have been $185,000; Mr. Bruehlman's salary for 1998
would have been $125,000; and Mr. Braswell's salary for 1998 would have
been $175,000.
(1) Mr. Calderon voluntarily took a 15% reduction in salary during the period
beginning July 4, 1999 through October 10, 1999 to assist the Company's
short-term liquidity position. If Mr. Calderon had collected his full
salary for that period, his salary for 1999 would have been $300,000.
(2) Represents allocation of income associated with personal use of an
automobile provided by the Company.
(3) Mr. Calderon was granted 350,000 options in June 1998. These options were
canceled and Mr. Calderon was granted 175,000 new options in connection
with a repricing of options by the Company in December 1998.
(4) Mr. Fuhlendorf voluntarily took a 10% reduction in salary during the period
beginning July 4, 1999 through October 10, 1999 to assist the Company's
short-term liquidity position. If Mr. Fuhlendorf had collected his full
salary for that period, his salary for 1999 would have been $185,000.
(5) Mr. Fuhlendorf resigned from the Company effective March 27, 2000.
(6) Due to Mr. Fuhlendorf's resignation effective March 27, 2000, 165,000
options expired on March 27, 2000 and 35,000 expired on June 27, 2000.
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<PAGE>
(7) 50,000 options granted to Mr. Fuhlendorf in 1997 were canceled and 24,615
new options were granted to Mr. Fuhlendorf in connection with a repricing
of options by the Company in December 1998.
(8) Mr. Bruehlman voluntarily took a 5% reduction in salary during the period
beginning July 4, 1999 through October 10, 1999 to assist the Company's
short-term liquidity position. If Mr. Bruehlman had collected his full
salary for that period, his salary for 1999 would have been $125,000.
(9) 30,000 options granted to Mr. Bruehlman in 1997 were canceled and 14,769
new options were granted to Mr. Bruehlman in connection with a repricing of
options by the Company in December 1998.
(10) Mr. Braswell's employment agreement with the Company was terminated on
August 31, 1999.
(11) 110,000 options granted to Mr. Braswell in 1997 were canceled and 60,818
new options were granted to Mr. Braswell in connection with a repricing of
options by the Company in December 1998.
(12) Represents payment to defray moving expenses related to Mr. Braswell's
relocation to Denver, Colorado in connection with his employment with the
Company
(13) Mr. Braswell has been employed by the Company or a subsidiary of the
Company since September 1997.
(14) Mr. Tillett voluntarily took a 10% reduction in salary during the period
beginning July 4, 1999 through October 10, 1999 to assist the Company's
short-term liquidity position. If Mr. Tillett had collected his full
salary for that period, his salary for 1999 would have been $220,000.
(15) Mr. Tillett has been the Company's Chief Operations Officer since October
1998. Mr. Tillett resigned from the Company effective July 28, 2000.
(16) Mr. Avery has been the Company's Chief Information Officer since June 1998.
(17) Mr. Calderon resigned his positions as President and Chief Executive
Officer effective July 17, 2000.
Options Granted. The following table sets forth information concerning
options granted in 1999 to the Company's executive officers named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Option Grants in the Last Fiscal Year
-------------------------------------
Percent (%)
of Total Potential Realizable Value at
Number Options Assumed Annual Rate of Stock
of Granted to Exercise Price Appreciation for Option
-----------------------------
Options Employees Price per Expiration
Name Granted During 1999 Share Date 5% 10%
---- ------- ----------- ----- ---- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jack Calderon 0 -- -- -- -- --
Stuart W. Fuhlendorf 200,000 16.4 $5.00 5/17/09 (1) $110,057 $278,905
August P. Bruehlman 0 -- -- -- -- --
Allen S. Braswell, Jr. 0 -- -- -- -- --
Chuck Tillett 0 -- -- -- -- --
Val Avery 5,000 0.4 $4.00 1/25/09 $ 12,578 $ 31,875
</TABLE>
_______________
* Less than 0.1%.
(1) Due to Mr. Fuhlendorf's resignation effective March 27, 2000, 165,000
options expired on March 27, 2000 and 35,000 expired on June 27, 2000.
Option Exercises and Year End Option Values. The following table sets forth
information concerning options exercised in 1999 and outstanding options held by
the Company's executive officers named in the Summary Compensation Table as of
December 31, 1999, the end of the Company's last fiscal year.
46
<PAGE>
<TABLE>
<CAPTION>
Option Exercises in the Last Fiscal Year and Fiscal Year-End Option Values
--------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Shares Options at In-the-Money Options at
Acquired on Value December 31, 1999(#) December 31, 1999($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
----- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jack Calderon -- -- 230,248 / 211,924 --/--
Stuart W. Fuhlendorf -- -- 124,781 / -- --/--
August P. Bruehlman -- -- 71,633 / 11,077 --/--
Allen S. Braswell, Jr. -- -- -- / -- --/--
Chuck Tillett -- -- 30,000 / 120,000 --/--
Val Avery -- -- 14,000 / 76,000 --/--
</TABLE>
Employment Agreements. The Company has entered into employment agreements
with certain of its current employees and former employees, including Messrs.
Braswell, Calderon, James K. Bass, Fuhlendorf and Monaco.
Braswell Employment Agreement. Mr. Braswell's agreement provided for
him to be employed for a term of three years, expiring on September 30, 2000, at
a base salary of $175,000. Mr. Braswell's employment agreement with the Company
terminated on August 31, 1999 in connection with his accepting employment with
Jabil Global Services, a subsidiary of Jabil Circuit, Inc., after the sale of
the Company's EFTC Services Group to Jabil. Mr. Braswell served as President of
EFTC Services Group prior to its acquisition by Jabil.
Calderon Employment Agreement. Mr. Calderon's agreement provides for
him to be employed in his current position for a term of approximately three and
one-half years ending December 31, 2001 which then automatically extends for 90-
day periods until terminated. Mr. Calderon's agreement provides for a base
salary of $300,000 for the year ended December 31, 1999 and a base salary of
$350,000 for the remaining term of the employment agreement. The Company may
terminate such employment agreement with or without cause. In case of a
termination without cause, however, the Company must continue the terminated
employee's salary and benefits for a severance period of one year. Mr.
Calderon's agreement also provides for his salary and benefits to continue for
twelve months after termination of employment if the employment agreement
expires, and Mr. Calderon does not remain an employee of the Company. Mr.
Calderon's agreement also provided for the Company to grant to Mr. Calderon non-
qualified stock options to purchase 350,000 shares of common stock at an
exercise price of $16.00. Mr. Calderon elected to reprice such options in
December 1998. Such options vest in 10% increments upon the common stock of the
Company achieving certain trading levels above the exercise price. Mr. Calderon
has resigned as President and Chief Executive Officer of the Company, effective
July 17, 2000.
Bass Employment Agreement. Mr. James K. Bass was elected by the
Company's Board of Directors to the Board in connection with his being hired by
the Company as its Chief Executive Officer effective July 17, 2000. Mr. Bass's
agreement provides for him to be employed as Chief Executive Officer of the
Company for a term beginning on July 17, 2000 and ending on December 31, 2003,
which term automatically extends for successive one-year periods until the
agreement is terminated. Mr. Bass's agreement provides for a minimum annual base
salary of $300,000 and incentive-based bonus compensation in an amount
determined by the Compensation Committee. The Company may terminate such
employment agreement with or without cause. In case of a termination without
cause, however, the Company must continue Mr. Bass's base salary and prorated
bonus compensation for a period of one year from the date of termination. Mr.
Bass's agreement also provides for an initial award of stock options to purchase
900,000 shares of common stock at an exercise price of $2.63 per share under the
Company's 2000 Equity Stock Option Plan, subject to approval of the plan by the
Company's shareholders. Options to purchase 450,000 shares vest over five years
(20% of which vest immediately, the remaining 80% vest incrementally over five
years) and options to purchase the remaining 450,000 shares vest based upon
achieving certain benchmark internal rates of return in the Company.
47
<PAGE>
Fuhlendorf Employment Agreement. Mr. Fuhlendorf's employment agreement
had provided for him to be employed in his current capacity, for an initial term
of three years, which ended in March 1997, automatically extended for 90-day
periods until terminated. Mr. Fuhlendorf resigned from his position with the
Company, effective March 27, 2000.
Monaco Employment Agreement. The Company had an employment agreement
with Mr. Monaco which provided for him to be employed in his capacity as General
Manager of Personal Electronics at a base salary of $125,000 for an initial term
of two years. This contract expired on March 31, 2000 and the parties are
currently in the process of negotiating a new employment agreement. The Company
and Mr. Monaco have agreed in principle that the Company will employ Mr. Monaco
as a general manager of the Company's Northeast operations. Mr. Monaco will
receive an annual base salary of $200,000 per year, bonus compensation in an
amount based upon mutually determined performance criteria and bonus
compensation contingent upon Mr. Monaco's continued employment. The Company has
agreed to grant Mr. Monaco options to purchase 300,000 shares of common stock at
an exercise price of $2.63 per share under the Company's 2000 Equity Stock
Option Plan, subject to approval of the plan by the Company's shareholders.
Options to purchase 150,000 shares vest over five years and options to purchase
the remaining 150,000 shares vest based upon achieving certain benchmark
internal rates of return.
Compensation of Directors
Directors who are not also employees of the Company receive $1,000 for each
quarter in which the director attended a meeting in person and $250 per
additional Board or committee meeting attended in person, unless such committee
meeting is held in conjunction with a meeting of the full Board of Directors.
Directors who are also employees of the Company receive no additional
compensation for serving as directors. The Company reimburses all of its
directors for reasonable travel and out-of-pocket expenses in connection with
their attendance at meetings of the Board of Directors or committees of the
Board of Directors. The Company did not pay or accrue any director fees from
July 1, 1999 through March 31, 2000. The Company has established a Stock Option
Plan for Non-Employee Directors (the "Director Plan"). Under the Director Plan,
the Company makes grants of stock options to purchase shares of common stock to
new directors. Options granted under the Director Plan have an exercise price
equal to the fair market value of the common stock on the date of grant, are
subject to certain vesting periods and expire 10 years following the date of
grant.
Compensation Committee Interlocks and Insider Participation. Currently, the
Compensation Committee consists of Robert K. McNamara, Richard L. Monfort,
Masoud S. Shirazi, Gerald J. Reid, Charles E. Hewitson, Jeffrey Goettman and
John Walker. Several members of the Compensation Committee have engaged in
transactions with the Company.
Director Representation of Personal Electronics. Robert K. McNamara,
the Chairman of the Compensation Committee, is a Managing Director of Broadview
International LLC ("Broadview"), an investment banking firm, and in such
capacity represented Personal Electronics in connection with its acquisition by
the Company. Broadview is an investment bank that has represented numerous
companies in connection with mergers and acquisitions in the technology sector.
Broadview received a fee of $642,500 in connection with the consummation of the
acquisition of Personal Electronics. Broadview earned a fee of $500,000 in
connection with the sale of EFTC's Services Division in September 1999 and this
fee has been paid in full.
Sale/Leaseback Transaction. Richard L. Monfort, a member of the
Compensation Committee, entered into a sale/leaseback transaction with the
Company. The Company sold two manufacturing facilities located in Newburg,
Oregon and Tucson, Arizona to Mr. Monfort for $10.5 million. Mr. Monfort leased
these manufacturing facilities back to the Company for a term of five years with
monthly payments of $90,000. At the end of the lease term, the Company had the
option to repurchase the facilities for approximately $9.4 million. In May 1999,
the lease was amended to eliminate the purchase option, which resulted in the
recharacterization of the lease from a capital lease to an operating lease. As
such, the buildings and the related debt have been removed from the Company's
balance sheet.
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<PAGE>
Issuance of Subordinated Notes and Warrants. Mr. Richard L. Monfort, a
member of the Compensation Committee, purchased $15 million in aggregate
principal amount of subordinated notes issued by the Company on September 9,
1997. The subordinated notes had a maturity date of December 31, 2002 and
provided for interest at a variable rate (adjusted monthly) equal to 2.00% over
the applicable LIBOR rate. The proceeds of these notes were used to acquire
certain assets from Honeywell (formerly AlliedSignal, Inc.). In connection with
the issuance of these subordinated notes, the Company issued warrants to
purchase 500,000 shares of the Company's common stock at an exercise price of
$8.00 per share to Mr. Monfort. The warrants were exercised on October 9, 1997
resulting in net proceeds to the Company of $4.0 million. The Company prepaid
$10.0 million of the outstanding principal amount of these notes early in
December 1997 from the proceeds of a loan from the Company's senior lender. In
connection with such prepayment, the Company agreed to pay a fee of
approximately $325,000 to be paid in equal monthly increments until the maturity
of the notes.
In November 1999, Mr. Monfort purchased $5 million in aggregate principal
amount of subordinated notes issued by the Company. These notes had a maturity
date of March 30, 2000 and provided for interest at a rate of 10%. The proceeds
of these notes were used for general operating purposes. In connection with the
Recapitalization Transaction, the Company repaid the $10.0 million in principal
amount outstanding under both subordinated notes. In addition, the Company paid
the remaining outstanding prepayment fee of approximately $150,000 due in
connection with the prepayment of the September 1997 notes and a fee of $100,000
due upon maturity of the November 1999 note. In addition, the November note
agreement was amended to provide for issuance of $3.0 million in aggregate
principal amount of subordinated notes, with a maturity date of March 30, 2004
and bearing interest at 10%.
Transactions with Shirazi & Associates, P.C. During 1999, third
parties doing business with the Company paid Shirazi & Associates, P.C., an
employee benefit and consulting firm owned by Masoud Shirazi, one of the
Company's directors, approximately $230,000 in commissions.
Recapitalization Transaction. Messrs. Goettman and Walker, each of
whom are directors and members of the Compensation Committee, are partners in
Thayer Capital Partners and BLUM Capital Partners, respectively. Thayer-BLUM
Funding, L.L.C., an affiliate of both Thayer Capital Partners and BLUM Capital
Partners has entered into a Securities Purchase Agreement with the Company which
provides for the recapitalization of the Company described in this proxy
statement. Messrs. Goettman and Walker will have an interest in the approval of
the matters to which this proxy statement relates because of their position as
partners of Thayer Capital Partners and BLUM Capital Partners.
Hewitson Consulting Agreements. On February 24, 1997, the Company
entered into five-year consulting agreements with Messrs. Charles E. Hewitson,
Matthew J. Hewitson and Gregory C. Hewitson. Each of these consultants is being
paid approximately $160,000 per year and reimbursed his out-of-pocket expenses
associated with the performance of his duties. Each has agreed to devote
sufficient working time, attention and energies to the business of the Company,
but not in excess of 80% of the equivalent of being engaged on a full-time
basis. The Consulting Agreements prohibit the consultant from providing services
to, or owning 5% or more of the outstanding stock of, a competitor of the
Company during the term of his engagement and for two years after the
termination of his engagement.
49
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information that we file with the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-8330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the SEC at http://www.sec.gov.
SHAREHOLDER PROPOSALS
The Company presently expects that its 2000 annual meeting of shareholders
will be held on September 29, 2000. Any proposal by a shareholder intended to be
presented at the 2000 annual meeting of shareholders must be received by the
Company on or before August 1, 2000.
INDEPENDENT PUBLIC ACCOUNTANTS
A representative of KPMG LLP, the Company's independent public accountants,
is expected to be present at the Special Meeting and is expected to be available
to respond to appropriate questions.
OTHER MATTERS
The Company does not anticipate that any other matters will be brought
before the Special Meeting. However, if any additional matters shall properly
come before the Special Meeting, it is intended that the persons authorized
under proxies may, in the absence of instructions to the contrary, vote or act
thereon in accordance with their best judgment.
The board of directors encourages you to have your shares voted by signing
and returning the enclosed proxy. The fact that you will have returned your
proxy in advance will not affect your right to vote in person should you find it
possible to attend. However, by signing and returning the proxy, you have
assured your representation at the Special Meeting. Thank you for your
cooperation.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ August P. Bruehlman
-----------------------------------
August P. Bruehlman
Secretary
Denver, Colorado
July 19, 2000
50
<PAGE>
Appendix I
Opinions of Needham & Company, Inc.
<PAGE>
[Letterhead of Needham & Company, Inc.]
June 5, 2000
Special Committee of the Board of Directors
EFTC Corporation
9351 Grant Street
Denver, CO 80229
Members of the Special Committee:
The Company and Thayer-BLUM Funding, L.L.C. (the "Investor") have entered
into a Securities Purchase Agreement (the "Purchase Agreement") pursuant to
which the Company issued to the Investor $54 million principal amount of Senior
Subordinated Exchangeable Notes (the "Original Exchangeable Notes") and Warrants
to purchase the Company's Common Stock (the "Initial Investment"). Upon
stockholder approval of the Transactions and consummation of the Offer that
results in the acquisition of at least 500,000 shares of Common Stock, (i) the
Original Exchangeable Notes will automatically be exchanged for the Company's
8.875% Senior Subordinated Convertible Notes due June 2006 (the "Convertible
Notes") with an aggregate principal amount of $54,000,000 plus any accrued but
unpaid interest on the Original Exchangeable Notes, which Convertible Notes
could be converted into shares of Common Stock at an initial conversion price of
$2.58 per share, subject to adjustment as provided therein, and (ii) the
Warrants would be cancelled. We understand that the Company and the Investor
propose to enter into an amendment (the "Amendment") to the Purchase Agreement
providing, among other things, for the issuance by the Company to the Investor
(the "Additional Investment") of $14 million principal amount of Senior
Subordinated Exchangeable Notes (the "New Notes") and the modification of the
terms of a tender offer for the Company's Common Stock (the "Offer") to be
conducted by the Investor. The New Exchangeable Notes will be exchanged
automatically, in the same circumstances as those requiring the exchange of the
Original Exchangeable Notes, into shares of newly issued convertible preferred
stock of the Company (the "Convertible Preferred Stock") initially convertible
into the Company's Common Stock at $1.80 per share. The Company has requested
Needham & Company to render an opinion as to the fairness, from a financial
point of view, to the holders of the Company's Common Stock (other than the
Investor and its affiliates) of the Initial Investment, the Additional
Investment and the Offer, collectively "the Transactions",
<PAGE>
--------------------------------------------------------------------------------
Special Committee of the Board of Directors
EFTC Corporation
June 5, 2000
Page 2
--------------------------------------------------------------------------------
Needham & Company, Inc.
taken together. The terms and conditions of the Transactions will be set forth
more fully in the Purchase Agreement, as amended by the Amendment. The Original
Exchangeable Notes, the Convertible Notes and the Warrants are sometimes
collectively referred to herein as the "Original Securities" and the New
Exchangeable Notes and the Convertible Preferred Stock are sometimes
collectively referred to herein as the "New Securities."
You have asked us to advise you as to the fairness, from a financial point
of view, to the Company and the holders of the Common Stock (other than the
Investor and its affiliates) of the Transactions, when taken together. Needham &
Company, Inc., as part of its investment banking business, is regularly engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. We have been engaged by the
Company as financial advisor to render this opinion in connection with the
Transactions and will receive a fee for our services, none of which is
contingent on the consummation of the Transactions. In addition, the Company has
agreed to indemnify us for certain liabilities arising from our role as
financial advisor and out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed the
Purchase Agreement and the related forms of the Securities, dated March 30, 2000
as well as the proposed terms of the Amendment and New Securities as
contemplated by the Modification of Terms provided to us on June 5, 2000; (ii)
reviewed certain publicly available information concerning the Company and
certain other information concerning the Company furnished to us by the Company;
(iii) reviewed the historical stock prices and trading volumes of the Common
Stock; (iv) held discussions with members of the management of the Company
concerning the current and future business prospects of the Company; (v)
reviewed and discussed with members of the management of the Company certain
financial forecasts and projections prepared by such management that assume the
Transactions (other than the Initial Investment) do not occur and, in the
alternative, that assume the occurrence of the Transactions, the exchange of the
Original and New Exchangeable Notes and cancellation of the Warrants; (vi)
compared certain publicly available financial data of companies whose securities
are traded in the public markets and that we deemed relevant to similar data for
the Company; (vii) reviewed the financial terms of certain other transactions
that we deemed relevant; (viii) discussed with members of the management of the
Company the strategic rationale and certain other benefits to the Company
resulting from an association with the Investor; and (ix) performed and/or
considered such other studies, analyses, inquiries and investigations as we
deemed appropriate.
In connection with our review and in arriving at our opinion, we have
assumed and relied on (a) the accuracy and completeness of all of the financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with us for purposes of rendering this opinion and (b) the
assessment by the Company's management of the strategic and other benefits
expected to be derived from the Transactions, and have neither attempted to
verify independently nor assumed responsibility to verify any of such
information or assessment. In addition, we have
<PAGE>
--------------------------------------------------------------------------------
Special Committee of the Board of Directors
EFTC Corporation
June 5, 2000
Page 3
--------------------------------------------------------------------------------
Needham & Company, Inc.
assumed, with your consent, (i) that the terms set forth in the executed
Amendment and related New Securities will not differ materially from the
proposed terms provided to us in the draft Modification of Terms furnished to us
on June 5, 2000, and (ii) that the Purchase Agreement, as amended by the
Amendment, the Original Securities and the New Securities are enforceable in
accordance with their terms and that the parties to the Transactions, the
Original Securities and the New Securities, will carry out their obligations as
set forth therein. With respect to the Company's financial forecasts provided to
us by its management, we have assumed for purposes of our opinion that such
forecasts have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of such management at the time of preparation,
of the future operating and financial performance of the Company. We express no
opinion with respect to such forecasts or the assumptions on which they were
based. We have not assumed any responsibility for or made or obtained any
independent evaluation, appraisal or physical inspection of the assets or
liabilities of the Company. Further, our opinion is based on economic, monetary
and market conditions as they exist and can be evaluated as of the date hereof.
Our opinion as expressed herein is limited to the fairness, from a financial
point of view, to the Company and the holders of Common Stock (other than the
Investor and its affiliates) of the Transactions, when taken together, and does
not address the Company's underlying business decision to engage in the
Transactions. Our opinion does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote on the
proposed Transactions or as to whether such shareholder should tender shares of
Common Stock pursuant to the Offer. We are not expressing any opinion as to the
prices at which the Common Stock will actually trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of the Company for our own account or for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
This letter and the opinion expressed herein are provided at the request
and for the information of the Special Committee and the Board of Directors of
the Company and may not be quoted or referred to or used for any purpose without
our prior written consent, except that this letter may be disclosed in
connection with any proxy statement or solicitation/recommendation statement on
Schedule 14D-9 used in connection with the Transactions so long as this letter
is quoted in full in such proxy statement or solicitation/recommendation
statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Transactions, when taken together, are fair to the Company and
the holders of Common Stock (other than the Investor and its affiliates) from a
financial point of view.
Very truly yours,
/s/ Needham & Company, Inc.
NEEDHAM & COMPANY, INC.
<PAGE>
[Letterhead of Needham & Company, Inc.]
April 27, 2000
Special Committee of the Board of Directors
EFTC Corporation
9351 Grant Street
Denver, CO 80229
Members of the Special Committee:
Reference is hereby made to our letter to you dated March 29, 2000 (the
"Opinion"), regarding certain transactions between EFTC Corporation and Thayer-
BLUM Funding, L.L.C. Capitalized terms used herein that are defined in the
Opinion have the same meanings for purposes of this letter.
We have been advised that the Investors have requested, pursuant to an
agreement reached with the Company immediately prior to closing of the Initial
Investment, that the initial conversion price of the Convertible Notes be
reduced from $2.60 to $2.58, subject to approval of the Board of Directors and
the Special Committee.
We have not been requested to render, and are not hereby rendering, an
opinion as of the date hereof as to the fairness, from a financial point of
view, to the Company and the holders of the Common Stock (other than the
Investor and its affiliates) of the Initial Investment and the Transactions.
With your consent, we assume no responsibility to update the investigations
made, procedures followed or matters considered, or independently verify any
information relied upon, with respect to the Opinion. Accordingly, we have not
engaged in further analysis with respect to the reduced conversion price and our
statements in this letter should not be considered to be an opinion for any
purpose. Subject to the foregoing, we advise you that we do not believe that the
establishment of the conversion price at $2.58, had it been considered as part
of our analyses in connection with the Opinion, would have altered our
conclusion set forth in the Opinion as of the date of our Opinion.
This letter and the advice expressed herein are provided at the request and
for the information of the Special Committee and the Board of Directors of the
Company and may not be quoted or referred to or used for any purpose without our
prior written consent, except that this letter may be disclosed in connection
with any proxy statement or
New York Office: 445 Park Avenue, New York, NY 10022-4406 (212) 371-8300
Boston Office: One Post Office Square, Suite 3710, Boston, MA 02109
(617) 457-0900
<PAGE>
--------------------------------------------------------------------------------
Special Committee of the Board of Directors
EFTC Corporation
April 27, 2000
Page 2
--------------------------------------------------------------------------------
Needham & Company, Inc.
solicitation/recommendation statement on Schedule 14D-9 used in connection with
the Transactions so long as this letter, together with the Opinion, is quoted in
full in such proxy statement or solicitation/recommendation statement.
Very truly yours,
/s/ Needham & Company, Inc.
NEEDHAM & COMPANY, INC.
<PAGE>
[Letterhead of Needham & Company, Inc.]
March 29, 2000
Special Committee of the Board of Directors
EFTC Corporation
9351 Grant Street
Denver, CO 80229
Members of the Special Committee:
We understand that EFTC Corporation (the "Company") and Thayer-BLUM
Funding, L.L.C. (the "Investor") propose to enter into a Securities Purchase
Agreement (the "Purchase Agreement") pursuant to which, among other things, (i)
the Investor will purchase $54,000,000 in aggregate principal amount of the
Company's 15% Senior Subordinated Exchangeable Notes due June 2006 (the
"Exchangeable Notes") and warrants to purchase shares of the Company's common
stock, par value $.01 per share (the "Common Stock"), with an exercise price of
$.01 per share (the "Warrants") representing approximately 19.9% of the
outstanding Common Stock at the time of the issuance of the Warrants (such
purchase, the "Initial Investment") and (ii) following consummation of the
Initial Investment, the Investor will commence a tender offer (the "Offer") to
purchase up to 8,250,000 shares of Common Stock at a price of $4.00 per share
net to the seller in cash. The Initial Investment and the Offer are collectively
referred to herein as the "Transactions." Upon stockholder approval of the
Transactions and consummation of the Offer that results in the acquisition of at
least 500,000 shares of Common Stock, (i) the Exchangeable Notes would
automatically be exchanged for the Company's 8.875% Senior Subordinated
Convertible Notes due June 2006 (the "Convertible Notes") with an aggregate
principal amount of $54,000,000 plus any accrued but unpaid interest on the
Exchangeable Notes, which Convertible Notes could be converted into shares of
Common Stock at an initial conversion price of $2.60 per share, subject to
adjustment as provided therein, and (ii) the Warrants would be cancelled. The
terms and conditions of the Transactions will be set forth more fully in the
Purchase Agreement. The Exchangeable Notes, the Convertible Notes and the
Warrants are sometimes collectively referred to herein as the "Securities."
You have asked us to advise you as to the fairness, from a financial point
of view, to the Company and the holders of the Common Stock (other than the
Investor and its affiliates) of the
<PAGE>
--------------------------------------------------------------------------------
Special Committee of the Board of Directors
EFTC Corporation
March 29, 2000
Page 2
--------------------------------------------------------------------------------
Needham & Company, Inc.
Initial Investment and the Transactions, when taken together. Needham & Company,
Inc., as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, secondary distributions of securities,
private placements and other purposes. We have been engaged by the Company as
financial advisor to render this opinion in connection with the Transactions and
will receive a fee for our services, none of which is contingent on the
consummation of the Transactions. In addition, the Company has agreed to
indemnify us for certain liabilities arising from our role as financial advisor
and out of the rendering of this opinion.
For purposes of this opinion we have, among other things: (i) reviewed a
draft of the Purchase Agreement and the related drafts of the Securities,
furnished to us on March 28, 2000; (ii) reviewed certain publicly available
information concerning the Company and certain other information concerning the
Company furnished to us by the Company; (iii) reviewed the historical stock
prices and trading volumes of the Common Stock; (iv) held discussions with
members of the management of the Company concerning the current and future
business prospects of the Company; (v) reviewed and discussed with members of
the management of the Company certain financial forecasts and projections
prepared by such management that assume the Transactions (other than the Initial
Investment) do not occur and, in the alternative, that assume the occurrence of
the Transactions, the exchange of the Exchangeable Notes and cancellation of the
Warrants; (vi) compared certain publicly available financial data of companies
whose securities are traded in the public markets and that we deemed relevant to
similar data for the Company; (vii) reviewed the financial terms of certain
other transactions that we deemed relevant; (viii) discussed with members of the
management of the Company the strategic rationale and certain other benefits to
the Company resulting from an association with the Investor; and (ix) performed
and/or considered such other studies, analyses, inquiries and investigations as
we deemed appropriate.
In connection with our review and in arriving at our opinion, we have
assumed and relied on (a) the accuracy and completeness of all of the financial
and other information publicly available or furnished to or otherwise reviewed
by or discussed with us for purposes of rendering this opinion and (b) the
assessment by the Company's management of the strategic and other benefits
expected to be derived from the Transactions, and have neither attempted to
verify independently nor assumed responsibility to verify any of such
information or assessment. In addition, we have assumed, with your consent, (i)
that the terms set forth in the executed Purchase Agreement and related
Securities will not differ materially from the proposed terms provided to us in
the draft Purchase Agreement and related Securities furnished to us on March 28,
2000, and (ii) that the Purchase Agreement and Securities are enforceable in
accordance with their terms and that the parties to the Transactions and the
Securities will carry out their obligations as set forth therein. With respect
to the Company's financial forecasts provided to us by its management, we have
assumed for purposes of our opinion that such forecasts have been reasonably
prepared on bases reflecting the best currently available
<PAGE>
--------------------------------------------------------------------------------
Special Committee of the Board of Directors
EFTC Corporation
March 29, 2000
Page 3
--------------------------------------------------------------------------------
Needham & Company, Inc.
estimates and judgments of such management at the time of preparation, of the
future operating and financial performance of the Company. We express no opinion
with respect to such forecasts or the assumptions on which they were based. We
have not assumed any responsibility for or made or obtained any independent
evaluation, appraisal or physical inspection of the assets or liabilities of the
Company. Further, our opinion is based, on economic, monetary and market
conditions as they exist and can be evaluated as of the date hereof. Our opinion
as expressed herein is limited to the fairness, from a financial point of view,
to the Company and the holders of Common Stock (other than the Investor and its
affiliates) of the Initial Investment and the Transactions, when taken together,
and does not address the Company's underlying business decision to engage in the
Transactions. Our opinion does not constitute a recommendation to any
shareholder of the Company as to how such shareholder should vote on the
proposed Transactions or as to whether such shareholder should tender shares of
Common Stock pursuant to the Offer. We are not expressing any opinion as to the
prices at which the Common Stock will actually trade at any time.
In the ordinary course of our business, we may actively trade the equity
securities of the Company for our own account or for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
This letter and the opinion expressed herein are provided at the request
and for the information of the Special Committee and the Board of Directors of
the Company and may not be quoted or referred to or used for any purpose without
our prior written consent, except that this letter may be disclosed in
connection with any proxy statement or solicitation/recommendation statement on
Schedule 14D-9 used in connection with the Transactions so long as this letter
is quoted in full in such proxy statement or solicitation/recommendation
statement.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Initial Investment and the Transactions, when taken together,
are fair to the Company and the holders of Common Stock (other than the Investor
and its affiliates) from a financial point of view.
Very truly yours,
/s/ Needham & Company, Inc.
NEEDHAM & COMPANY, INC.
<PAGE>
Appendix II
Securities Purchase Agreement
and
First Amendment to the Securities Purchase Agreement
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (the "Agreement") is entered into
as of the 30th day of March, 2000 by and between Thayer-BLUM Funding, L.L.C., a
Delaware limited liability company (the "Purchaser"), and EFTC Corporation, a
Colorado corporation (the "Company").
RECITALS:
A. WHEREAS, upon the terms and subject to the conditions set forth in
this Agreement, the Company wishes to issue and sell, and the Purchaser wishes
to acquire, $54,000,000 in aggregate principal amount of the Company's 15%
Senior Subordinated Exchangeable Notes due June 2006, substantially in the form
attached as Exhibit A hereto (the "Exchangeable Notes"), and warrants to
purchase shares of the Company's common stock, par value $.01 per share, with an
exercise price of $.01 per share, substantially in the form attached as Exhibit
-------
B hereto (the "Warrants", and together with the Exchangeable Notes, the
-
"Securities"), representing approximately 19.9% of the Company's outstanding
Common Stock (such acquisition, the "Initial Investment").
B. WHEREAS, following the consummation of the Initial Investment, the
Purchaser intends to engage in a tender offer for up to 8,250,000 shares of the
Company's common stock (the "Tender Offer", and together with the Initial
Investment, the "Transactions").
C. WHEREAS, the parties intend that prior to completion of the Tender
Offer, the Company's shareholders approve of the Transactions, and the Company
has agreed to call a meeting of its shareholders (the "Shareholders Meeting")
and to recommend that the shareholders vote for a proposal to approve the
transactions as contemplated by this Agreement ("Shareholder Approval").
D. WHEREAS, the parties intend that upon gaining Shareholder Approval
and the completion of a Successful Tender Offer (as defined in Section 7.2(a)),
the Exchangeable Notes would automatically be exchanged for the Company's 8.875%
Senior Subordinated Convertible Notes due June 2006, substantially in the form
attached as Exhibit C hereto (the "Convertible Notes"), with an aggregate
---------
principal amount of $54,000,000 plus any accrued but unpaid interest on the
Exchangeable Notes, which could be converted into shares of the Company's common
stock at an exercise price of $2.60 per share, and any and all unexercised
Warrants would be cancelled.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and for good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereby agree as
follows:
ARTICLE 1.
DEFINITIONS
1.1. Definitions. As used in this Agreement, and unless the context requires a
-----------
different meaning, the following terms have the meanings indicated:
"Acquisition Proposal" has the meaning set forth in Section 7.4.
"Action" or "Actions" has the meaning set forth in Section 5.8.
"Affiliate" means, with respect to any specified Person, any Person
that, directly or indirectly, controls, is controlled by, or is under common
control with, such specified Person, whether by contract, through one or more
intermediaries, or otherwise.
<PAGE>
"Approval Date" has the meaning set forth in Section 7.2(a).
"Audited Financial Statements" has the meaning set forth in Section
5.9.
"Balance Sheet Date" means December 31, 1999.
"Board of Directors" means the board of directors of the Company,
including, as appropriate, the Special Committee formed to consider the
Transactions.
"Capital Lease" means any lease of any property which would in
accordance with GAAP be required to be classified and accounted for on the
balance sheet of the lessee as a capital lease.
"Closing" has the meaning set forth in Section 2.2.
"Closing Date" has the meaning set forth in Section 2.2.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute thereto.
"Commission" or "SEC" means the Securities and Exchange Commission or
any similar agency then having jurisdiction to enforce the Securities Act.
"Common Stock" means the common stock, par value $.01 per share, of
the Company, or any other capital stock of the Company into which such stock is
reclassified or reconstituted.
"Company" has the meaning set forth in the preamble hereto.
"Condition of the Company" means the assets, business, properties,
operations, financial condition or prospects of the Company and its Subsidiaries
taken as a whole.
"Confidentiality Agreement" has the meaning set forth in Section
7.6(a).
"Contractual Obligation" means as to any Person, any provision of any
security issued by such Person or any provision of any agreement, lease of real
or personal property, undertaking, contract, indenture, mortgage, deed of trust
or other instrument to which such Person is a party or by which it or any of its
property is bound.
"Convertible Notes" has the meaning set forth in Paragraph D of the
Recitals.
"Credit Agreement" means the Loan and Security Agreement dated as of
March 30, 2000 among the Financial Institutions named therein, Bank of America,
N.A. as Agent and the Company.
"DOJ" means the United States Department of Justice.
"Environmental Laws" means, collectively, all applicable foreign, U.S.
Federal, state or local laws, statutes, ordinances, rules, regulations, codes or
common law relating to health, safety, pollution or protection of the
environment (including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, the Resource Conservation
and Recovery Act, as amended, the Clean Air Act, as amended, and the California
Hazardous Waste Control Act, as amended).
"Equipment" means all of the tangible personal property owned or
leased by the Company or any of its Affiliates and used in or held for use in
the operations of the business of the Company or any of its Affiliates.
"ERISA" has the meaning set forth in Section 5.16.
2
<PAGE>
"Exchangeable Notes" has the meaning set forth in Paragraph A of the
Recitals.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder.
"Facilities" means the buildings, plants, offices and all other
improvements on any real property (including fixtures affixed thereto) which are
owned or leased by the Company or any of its Subsidiaries and used or held for
use in the operation of the business of the Company or any of its Subsidiaries.
"Financial Statements" has the meaning set forth in Section 5.9.
"FTC" means the United States Federal Trade Commission.
"GAAP" means United States generally accepted accounting principles,
in effect from time to time, consistently applied.
"Governmental Authority" means the government of any nation, state,
city, locality or other political subdivision of any thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government, and any corporation or other entity
exercising public functions owned or controlled, through stock or capital
ownership or otherwise, by any of the foregoing.
"Hazardous Materials" shall include hazardous substances, hazardous
waste or hazardous materials, or pollutants or contaminants, as such terms are
defined in any Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations promulgated thereunder.
"Indebtedness" means, as to any Person: (a) all obligations, whether
or not contingent, of such Person for borrowed money (including, without
limitation, reimbursement and all other obligations with respect to surety
bonds, letters of credit and bankers' acceptances, whether or not matured), (b)
all obligations of such Person evidenced by notes, bonds, debentures or similar
instruments, (c) all obligations of such Person representing the balance of
deferred purchase price of property or services, except trade accounts payable
and accrued commercial or trade liabilities arising in the ordinary course of
business, (d) all interest rate and currency swaps, caps, collars and similar
agreements or hedging devices under which payments are obligated to be made by
such Person, whether periodically or upon the happening of a contingency, (e)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (f)
all obligations of such Person under leases which have been or should be, in
accordance with GAAP, recorded as capital leases, (g) all obligations of such
Person under operating leases in excess of $15,000,000 (h) all indebtedness
secured by any Lien (other than Liens in favor of lessors under leases other
than leases included in clauses (f) and (g)) on any property or asset owned or
held by that Person regardless of whether the indebtedness secured thereby shall
have been assumed by that Person or is non-recourse to the credit of that
Person, and (i) all Indebtedness of any other Person referred to in clauses (a)
through (g) above, guaranteed, directly or indirectly, by that Person.
"Initial Investment" has the meaning set forth in Paragraph A of the
Recitals.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
assignment, encumbrance, lien (statutory or other) or other security interest of
any kind or nature whatsoever (excluding preferred stock or equity related
preferences) including, without limitation, those created by, arising under or
evidenced by any conditional sale or other title retention agreement, the
interest of a lessor under a capital lease obligation, or any financing lease
having substantially the same economic effect as any of the foregoing.
"Material Adverse Effect" means any material adverse change in the
Condition of the Company.
3
<PAGE>
"Minimum Condition" has the meaning set forth in Section 7.2(a).
"Notes" means the Exchangeable Notes and the Convertible Notes.
"Offer Documents" has the meaning set forth in Section 7.2(b).
"Outstanding Borrowings" means all Indebtedness of the Company and/or
its Subsidiaries for borrowed money (including without limitation, reimbursement
and all other obligations with respect to surety bonds, letters of credit and
bankers' acceptances, whether or not matured), excluding obligations with
respect to trade payables incurred in the ordinary course of business.
"Pension Plan" has the meaning set forth in Section 5.16.
"Permitted Liens" means (i) Liens for taxes, governmental charges or
levies which (a) are not yet due and payable, or (b) are being diligently
contested in good faith by appropriate proceedings; provided, that for any such
taxes being diligently contested in good faith, the Company has set aside
adequate reserves, (ii) Liens imposed by law, such as mechanic's, materialman's,
landlord's, warehouseman's and carrier's liens, securing obligations incurred in
the ordinary course of business which are not yet overdue or which are being
diligently contested in good faith by appropriate proceeding and, with respect
to such obligations which are being contested, for which the Company has set
aside adequate reserves, (iii) Liens securing Senior Debt, (iv) Liens which (x)
secure obligations of less than $15,000,000 in the aggregate, and (y) do not,
individually or in the aggregate, interfere with the use and enjoyment of the
property subject thereto and (v) Liens created in favor of General Electric
Capital Corporation pursuant to the Accounts Receivables Purchase Agreement
between General Electric Capital Corporation and EFTC Corporation, dated
December 5, 1997.
"Person" means any individual, firm, corporation, partnership, trust,
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, Governmental Authority or other entity of any kind,
and shall include any successor (by merger or otherwise) of such entity.
"Projected Budget" has the meaning set forth in Section 3.12.
"Proxy Statement" has the meaning set forth in Section 5.26(b).
"Purchase Price" has the meaning set forth in Section 2.1.
"Purchaser" has the meaning set forth in the preamble hereto.
"RCBA" means RCBA Strategic Partners, L.P.
"Requirements of Law" means, as to any Person, the provisions of the
Certificate of Incorporation and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule, regulation, right,
privilege, qualification, license or franchise, order, judgment, or
determination, in each case, of an arbitrator or a court or other Governmental
Authority, in each case, applicable to or binding upon such Person or any of its
property (or to which such Person or any of its property is subject) or
applicable to any or all of the transactions contemplated by or referred to in
the Transaction Documents.
"Rights" has the meaning set forth in Section 7.2(a).
"Rights Agreement" has the meaning set forth in Section 7.2(a).
"Schedule 14D-9" has the meaning set forth in Section 7.2(d).
"SEC Reports" has the meaning set forth in Section 5.25(a).
4
<PAGE>
"Securities" has the meaning set forth in Paragraph A of the Recitals.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder.
"Senior Debt" means (i) all indebtedness outstanding at any time under
the Credit Agreement, and all hedging obligations and bank products with respect
thereto, (ii) any replacement or refinancing of the Credit Agreement which
provides for borrowings by the Company up to $55,000,000 in aggregate principal
amount and (iii) all obligations with respect to any of the foregoing.
Notwithstanding anything to the contrary in the foregoing, Senior Debt shall not
include (x) any Indebtedness of the Company to any of its Subsidiaries or other
affiliates, or (y) any Indebtedness incurred for the purchase of goods or
materials or for services obtained in the ordinary course of business (other
than with the proceeds of revolving credit borrowings permitted hereby).
"Shareholder Approval" has the meaning set forth in Paragraph C of the
Recitals.
"Shareholders Meeting" has the meaning set forth in Paragraph C of the
Recitals.
"Stock Incentive Plan" means a stock incentive plan for the Company's
employees adopted by the Board of Directors with terms satisfactory to the
Purchaser.
"Subsidiary" or "Subsidiaries" means, with respect to any Person (the
"parent"), any corporation, association or other business entity of which
securities or other ownership interests representing more than 50% of the
ordinary voting power are, at the time as of which any determination is being
made, owned or controlled by the parent or one or more subsidiaries of the
parent or by the parent and one or more subsidiaries of the parent.
"Successful Tender Offer" has the meaning set forth in Section 7.2(a).
"Superior Proposal" means an Acquisition Proposal for which the
Company's Board of Directors has determined in its good faith judgment that its
fiduciary duties require it to consider and pursue but only after (i)
consultation with outside counsel and such other advisors as it may deem
appropriate, (ii) receiving the written opinion of its financial advisor and
such other information as it determines necessary, that such Acquisition
Proposal is financially superior to the Transactions and (iii) concluding based
on the advice of its financial advisor that the Person who has made the
Acquisition Proposal (x) has in place sufficient financing to be able to
successfully complete the transaction set forth in the Acquisition Proposal and
(y) would be capable of closing such transaction within a period ending on the
later of (i) June 30, 2000 and (ii) 60 days following the termination of this
Agreement pursuant to Section 8.1(g).
"Tax" or "Taxes" shall mean all federal, state, local foreign and
other taxes, assessments or other government charges, including, without
limitation, income, estimated income, business, occupation, franchise, property
sales, transfer, use, employment, commercial rent or withholding taxes,
including interest, penalties and additions in connection therewith for which
the Company may be liable.
"Tender Offer" has the meaning set forth in paragraph B of the
Recitals.
"Thayer" means, collectively, Thayer Equity Investors IV, L.P. and TC
Manufacturing Holdings, L.L.C.
"Tender Shares" has the meaning set forth in Section 7.2(a).
"Transactions" has the meaning set forth in paragraph B of the
Recitals.
"Transaction Documents" means collectively, this Agreement, the
Exchangeable Notes, the Convertible Notes and the Warrants.
5
<PAGE>
"Transaction Expenses" means out-of-pocket expenses incurred by the
Purchaser (including for purposes of this definition, by its members including,
without limitation, Thayer and RCBA), in connection with the legal and financial
due diligence review of the Condition of the Company conducted by the Purchaser,
the negotiation and preparation of the Transaction Documents, the consummation
of the transactions contemplated thereby and preparation for any of the
foregoing, including, without limitation, travel expenses, fees, charges and
disbursements of the Purchaser's legal counsel, accountants, consultants, other
advisors and any similar or related costs and expenses.
"Warrants" has the meaning set forth in Paragraph A of the Recitals.
1.2. Accounting Terms; Financial Statements. All accounting terms used herein
--------------------------------------
not expressly defined in this Agreement shall have the respective meanings given
to them in accordance with GAAP.
1.3. Knowledge Standard. When used herein, the phrase "to the knowledge of" any
------------------
Person, "to the best knowledge of" any Person or any similar phrase shall mean,
(i) with respect to any individual, the actual knowledge of such Person after
reasonable inquiry, and (ii) with respect to any other Person, the actual
knowledge of officers and directors, or Persons acting in similar capacities, of
such Person and the knowledge of such facts that such persons should have in the
exercise of their duties after reasonable inquiry. When used herein, the phrase
"to the knowledge of the Company," "to the best knowledge of the Company" or any
similar phrase shall mean "to the best knowledge of the Company and each
Affiliate" using the standards set forth in the previous sentence.
ARTICLE 2.
PURCHASE AND SALE OF THE SECURITIES
2.1. Purchase and Sale of the Securities. Upon the terms and subject to the
-----------------------------------
conditions herein contained, at the Closing (as defined herein) on the Closing
Date (as defined herein), the Company agrees that it will issue and sell to the
Purchaser, and the Purchaser agrees that it will acquire and purchase from the
Company, the Securities. The purchase price of the Securities shall be
$54,000,000 (the "Purchase Price").
2.2. Closing. The closing of the sale to and purchase by the Purchaser of the
-------
Securities referred to in Section 2.1 hereof (the "Closing") shall occur at the
offices of Latham & Watkins, 633 West Fifth Street, Suite 4000, Los Angeles, CA
90071-2007 at 10:00 a.m. Los Angeles time on March 30, 2000 or at such other
date, place or time of day as the Purchaser and the Company shall agree to in
writing (the "Closing Date"). At the Closing, (i) the Company shall deliver to
the Purchaser the Exchangeable Notes and certificates evidencing the Warrants
being purchased by the Purchaser, registered in such Purchaser's name, free and
clear of any Liens of any nature whatsoever, and (ii) the Purchaser shall
deliver to the Company the Purchase Price by wire transfer of immediately
available funds.
ARTICLE 3.
CONDITIONS TO THE OBLIGATION OF THE
PURCHASER TO PURCHASE THE SECURITIES
The obligation of the Purchaser to purchase the Securities, to pay the
Purchase Price therefor and to perform any obligations hereunder on the Closing
Date (unless otherwise specified) shall be subject to the satisfaction as
determined by, or waiver by, the Purchaser of the following conditions on or
before the Closing Date:
3.1. Representations and Warranties. The representations and warranties of the
------------------------------
Company contained in Article 5 hereof shall be true and correct in all material
respects at and as of the Closing Date except to the extent that such
representations and warranties relate solely to an earlier date, in which case
such representations and warranties shall have been true and correct in all
material respects as of such earlier date as if made at and as of such date.
6
<PAGE>
3.2. Compliance with Terms and Conditions of this Agreement. The Company shall
------------------------------------------------------
have duly and properly performed and complied with all of the agreements,
covenants, obligations and conditions set forth herein that are required to be
performed or complied with by the Company on or before the Closing Date.
3.3. Delivery of the Exchangeable Notes and Certificates Evidencing the
------------------------------------------------------------------
Warrants. The Company shall have delivered to the Purchaser the Exchangeable
--------
Notes and the certificates evidencing the Warrants as set forth in Section 2.2.
3.4. Closing Certificates. The Company shall have delivered to the Purchaser a
--------------------
certificate executed by an authorized officer of the Company certifying to such
matters as the Purchaser may reasonably request, including that the
representations and warranties of the Company contained in the Agreement are
true and correct in all material respects on and as of the Closing Date except
to the extent that such representations and warranties relate solely to an
earlier date, in which case such representations and warranties shall have been
true and correct in all material respects as of such earlier date, and that the
conditions set forth in this Article 3 to be satisfied by the Company have been
satisfied on and as of the Closing Date.
3.5. Secretary's Certificates. The Purchaser shall have received a certificate
------------------------
from the Company, dated as of the Closing Date and signed by the Secretary or an
Assistant Secretary of the Company, certifying that the attached copies of the
Articles of Incorporation, bylaws of the Company, and resolutions of the Board
of Directors of the Company approving the Transaction Documents and the
transactions contemplated thereby, are all true, complete and correct and remain
unamended and in full force and effect.
3.6. Documents. The Purchaser shall have received true, complete and correct
---------
copies of such documents and such other information as it may have reasonably
requested in connection with or relating to the sale of the Securities and the
transactions contemplated by the Transaction Documents, all in form and
substance reasonably satisfactory to the Purchaser prior to the Closing.
3.7. Purchase Permitted by Applicable Laws. The acquisition of and payment for
-------------------------------------
the Securities to be acquired by the Purchaser hereunder and the consummation of
the transactions contemplated by the Transaction Documents shall not (a) violate
any Requirements of Law, (b) result in a breach or default (i) under any of the
Contractual Obligations of the Company or (ii) under any order, writ, judgment,
injunction, decree, determination or award of any court, arbitrator, or
commission, board, bureau, agency or other governmental instrumentality, or (c)
result in, or require, the creation or imposition of any Lien, or the obligation
to make any payment with respect to any Lien, upon or with respect to any of the
property of the Company.
3.8. Opinion of Counsel. The Purchaser shall have received an opinion of
------------------
counsel to the Company, dated as of the Closing Date substantially in the form
of Exhibit D hereto.
---------
3.9. Consents and Approvals. Except as set forth on Schedule 3.9, all
----------------------
agreements, approvals, consents, exemptions, authorizations, or other actions
by, or notices to, or filings with, Governmental Authorities and other Persons
in respect of all Requirements of Law and with respect to those material
Contractual Obligations of the Company, necessary or required in connection with
the execution, delivery or performance of the Transaction Documents (including,
without limitation, the issuance of the Securities, and issuance of the Common
Stock upon conversion of the Convertible Notes or the exercise of the Warrants)
by the Company, shall have been obtained and be in full force and effect, and
the Purchaser shall have been furnished with appropriate evidence thereof, and
all waiting periods shall have lapsed without extension or the imposition of any
conditions or restrictions.
3.10. No Material Adverse Effect. Since the Balance Sheet Date, there shall have
--------------------------
been no Material Adverse Effect.
3.11. No Material Judgment or Order. There shall not be on the Closing Date any
-----------------------------
judgment or order of a court of competent jurisdiction or any ruling of any
Governmental Authority or any condition imposed under any Requirement of Law
which, in the reasonable judgment of the Purchaser, would (i) prohibit the
purchase of the Securities or the consummation of the other transactions
contemplated hereunder, (ii) subject the Purchaser to any
7
<PAGE>
penalty if the Securities were to be purchased hereunder, (iii) question the
validity or legality of the transactions contemplated hereby, or (iv) be
reasonably expected to materially and adversely affect the value of the capital
stock of the Company, the Securities or the Condition of the Company.
3.12. Financial Statements. Financial Statements and a projected budget for
--------------------
fiscal year 2000 (the "Projected Budget").
3.13. Bank Financing. The Company shall have entered into the Credit Agreement
--------------
upon terms which shall have been approved by the Purchaser and all other
Indebtedness which would rank senior in preference to the Notes shall have been
paid in full and any security interests related thereto shall have been
terminated.
3.14. Insurance Coverage. The Company shall provide liability insurance for its
------------------
directors and officers and shall cause such insurance to remain in full force
and effect on the Closing Date.
3.15. Board of Directors. As of the Closing Date, the Company's Board of
-------------------
Directors shall have been increased by two and two persons designated by the
Purchaser shall have been appointed as directors and such persons shall have
also been appointed to each committee of the Board of Directors; provided, that
both such persons need not be appointed to the audit committee if such
appointments would cause a breach of the continued listing requirements for the
Common Stock on the Nasdaq Stock Market. In addition, the Board of Directors
shall also have granted the right to two additional persons designated by the
Purchaser to attend and observe at meetings of the Board of Directors of the
Company.
3.16. Indemnification Agreement. The Company shall have executed and delivered
-------------------------
to the Purchaser an indemnification agreement, dated as of the Closing Date,
substantially in the form of Exhibit E hereto.
---------
ARTICLE 4.
CONDITIONS TO THE
OBLIGATIONS OF THE COMPANY TO CLOSE
The obligation of the Company to issue and sell the Securities and the
other obligations of the Company hereunder, shall be subject to the satisfaction
as determined by, or waiver by, the Company of the following conditions on or
before the Closing Date:
4.1. Representations and Warranties. The representations and warranties of the
------------------------------
Purchaser contained in Section 6 hereof shall be true and correct in all
material respects at and as of the Closing Date except to the extent that such
representations and warranties relate solely to an earlier date, in which case
such representation and warranties shall have been true and correct in all
material respects as of such earlier date as if made at and as of such date.
4.2. Compliance with Terms and Conditions of this Agreement. The Purchaser
------------------------------------------------------
shall have performed and complied with all of the agreements, covenants,
obligations and conditions set forth herein that are required to be performed or
complied with by the Purchaser on or before the Closing Date.
4.3. Payment of Purchase Price. The Purchaser shall tender to the Company the
-------------------------
Purchase Price.
4.4. Closing Certificates. The Purchaser shall have delivered to the Company a
--------------------
certificate executed by an authorized Person for the Purchaser certifying as to
such matters as the Company may reasonably request, including that the
representations and warranties of the Purchaser contained in this Agreement are
true and correct as of the Closing Date, and that the conditions set forth in
this Article 4 to be satisfied by the Purchaser have been satisfied on and as of
the Closing Date.
8
<PAGE>
4.5. Issuance Permitted by Applicable Laws. The issuance of the Securities by
-------------------------------------
the Company hereunder and the consummation of the transactions contemplated by
the Transaction Documents shall not (a) violate any Requirements of Law, or (b)
result in a breach or default (i) under any of the Contractual Obligations of
the Purchaser, or (ii) under any order, writ, judgment, injunction, decree,
determination or award of any court, arbitrator, or commission, board, bureau,
agency or other governmental instrumentality.
4.6. Manager's Certificate. The Company shall have received a certificate from
---------------------
the Purchaser, dated as of the Closing Date, and signed by an authorized Person
for the Purchaser, certifying that the attached copies of the Certificate of
Limited Liability Company, and any resolutions or similar documents for the
Purchaser approving the Transaction Documents and the transactions contemplated
thereby, are all true, complete and correct and remain unamended and in full
force and effect.
4.7. Documents. The Company shall have received true, complete and correct
---------
copies of such documents and such other information as it may have reasonably
requested in connection with or relating to the sale of the Securities and the
transactions contemplated by the Transaction Documents, all in form and
substance reasonably satisfactory to the Company prior to the Closing.
4.8. Opinion of Counsel. The Company shall have received an opinion of counsel
------------------
to the Purchaser, dated as of the Closing Date substantially in the form of
Exhibit F hereto.
---------
4.9. Consents and Approvals. Except as set forth on Schedule 4.9, all
----------------------
agreements, approvals consents, exemptions, authorizations, or other actions by,
or notices to, or filings with, Governmental Authorities and other Persons in
respect of all Requirements of Law and with respect to those material
Contractual Obligations of the Purchaser, necessary or required in connection
with the execution, delivery or performance of the Transaction Documents by the
Purchaser, shall have been obtained and be in full force and effect, and the
Company shall have been furnished with appropriate evidence thereof as requested
by the Company and all waiting periods shall have lapsed without extension or
imposition of any conditions or restrictions.
4.10. No Material Judgment or Order. There shall not be on the Closing Date any
-----------------------------
judgment or order of a court of competent jurisdiction or any ruling of any
Governmental Authority or any condition imposed under any Requirements of Law
which, in the reasonable judgment of the Company would (i) prohibit the sale of
the Securities or the consummation of the other transactions contemplated
hereunder, (ii) subject the Company to any penalty if the Securities were to be
sold hereunder, or (iii) question the validity or legality of the transactions
contemplated hereby.
ARTICLE 5.
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser as
follows:
5.1. Corporate Existence and Authority. The Company (a) is a corporation duly
---------------------------------
organized, validly existing and in good standing under the laws of the State of
Colorado; (b) has all requisite corporate power and authority to own and operate
its property, to lease the property it operates as lessee and to conduct the
business in which it is currently, or is currently proposed, to be engaged; (c)
is duly qualified as a foreign corporation, licensed and in good standing in
each jurisdiction in which such qualification is necessary under applicable law
as a result of the conduct of its business or the ownership of its properties;
and (d) has the corporate power and authority to execute, deliver and perform
its obligations under each Transaction Document to which it is or will be a
party.
5.2. Corporate Authorization; No Contravention. Except as set forth in Schedule
-----------------------------------------
5.2, the execution, delivery and performance by the Company of each of the
Transaction Documents and the consummation of the transactions contemplated
thereby, including without limitation, the issuance of the Securities (a) has
been duly authorized by all necessary corporate action, including, if required,
shareholder action, (b) does not and will not conflict with or
9
<PAGE>
contravene the terms of the Articles of Incorporation or the bylaws of the
Company, or any amendment thereof; and (c) does not and will not violate,
conflict with or result in any material breach or contravention of (i) any
Contractual Obligation of the Company or any of its Subsidiaries, or (ii) any
Requirements of Law applicable to the Company or any of its Subsidiaries.
5.3. Governmental Authorization; Third Party Consents. Except as set forth on
------------------------------------------------
Schedule 5.3, no approval, consent, compliance, exemption, authorization, or
other action by, or notice to, or filing with, any Governmental Authority or any
other Person in respect of any applicable Requirements of Law, and no lapse of a
waiting period under any applicable Requirements of Law, is necessary or
required to be obtained or made by the Company in connection with the execution,
delivery or performance (including, without limitation, the issuance of the
Securities, the issuance of the Common Stock upon the conversion of the
Convertible Notes or the exercise of the Warrants) by the Company or the
enforcement against the Company of the Transaction Documents, or the
transactions contemplated thereby.
5.4. Binding Effect. The Transaction Documents have been duly executed and
--------------
delivered by the Company and constitute the legal, valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as enforceability may be limited by applicable bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally and
by general principles of equity relating to enforceability.
5.5. Other Agreements. Except as set forth on Schedule 5.5, neither the Company
----------------
nor any Subsidiary has previously entered into any agreement which is currently
in effect or to which the Company or any Subsidiary is currently bound, granting
any registration or other material rights to any Person, the provision or
performance of which would render the provision or performance (including,
without limitation, the issuance of the Securities and the issuance of the
Common Stock upon the conversion of the Convertible Notes or the exercise of the
Warrants) of the material rights to be granted to the Purchaser by the Company
in the Transaction Documents impracticable.
5.6. Capitalization. As of the date hereof, the capital stock of the Company
--------------
consists solely of (i) 45,000,000 authorized shares of Common Stock (of which
15,543,489 are issued and outstanding); (ii) 45,000 authorized shares of Series
A Junior Participating Preferred Stock (of which none are issued and
outstanding); and (iii) 4,955,000 authorized shares of preferred stock (of which
none are issued and outstanding). Immediately following the Closing, the capital
stock of the Company will consist solely of (i) 45,000,000 authorized shares of
Common Stock (of which 15,543,489 will be issued and outstanding); (ii) 45,000
authorized shares of Series A Junior Participating Preferred Stock (of which
none will be issued and outstanding); and (iii) 4,955,000 authorized shares of
preferred stock (of which none will be issued and outstanding). Except for
issuances permitted under Section 7.5(e) and for the changes in authorized
capital contemplated by 7.5(b), immediately following the Closing and the
consummation of the Tender Offer, the capital stock of the Company will remain
unchanged. As of the date hereof, the Company has reserved (i) 4,495,000 shares
of Common Stock for issuance pursuant to the Company's Equity Incentive Plan,
(ii) 300,000 shares of Common Stock for issuance pursuant to the Company's Non-
Employee Director Plan and (iii) 402,388 shares of Common Stock for issuance
pursuant to non-qualified options issued by the Company. Immediately following
the Closing, the Company will have reserved (i) 4,495,000 shares of Common Stock
for issuance pursuant to the Company's Equity Incentive Plan, (ii) 300,000
shares of Common Stock for issuance pursuant to the Company's Non-Employee
Director Plan, (iii) 3,093,154 shares for issuance upon the exercise of the
Warrant and (iv) 402,388 shares of Common Stock for issuance pursuant to non-
qualified options issued by the Company. Immediately following the closing of
the Tender Offer, the Company expects to have reserved (i) 4,495,000 shares of
Common Stock for issuance pursuant to the Company's Equity Incentive Plan, (ii)
300,000 shares of Common Stock for issuance pursuant to the Company's Non-
Employee Director Plan, (iii) such shares of Common Stock as are issuable
pursuant to the Company's Stock Incentive Plan, (iv) such shares of Common Stock
as are issuable upon the exercise of the Convertible Note and (v) 402,388 shares
of Common Stock for issuance pursuant to non-qualified options issued by the
Company. All outstanding shares of capital stock of the Company are duly
authorized and validly issued, fully paid, nonassessable and free and clear of
any Liens, preferential rights, priorities, claims, options, charges or other
encumbrances or restrictions, except as set forth herein.
5.7. Subsidiaries. Each Subsidiary of the Company that is a corporation or a
------------
limited liability company is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or formation,
10
<PAGE>
with the corporate or requisite power and authority to own its properties and
conduct its business. Each Subsidiary is qualified and licensed to transact
business in each jurisdiction where such qualification is necessary under
applicable law as a result of the conduct of its business and ownership of its
properties, except insofar as the failure to be so qualified would not have a
Material Adverse Effect.
5.8. Litigation. Except as disclosed in the Company's SEC Reports, there is no
----------
complaint, action, order, writ, injunction, judgment or decree outstanding, or
claim, suit, litigation, proceeding, labor dispute, arbitral action or
investigation (each an "Action" and collectively, "Actions") pending or, to the
knowledge of the Company, threatened against, relating to or affecting (i) the
assets of the Company or the Subsidiaries, or (ii) the transactions required to
be performed under this Agreement or by the Transaction Documents which could
have a Material Adverse Effect. Neither the Company nor the Subsidiaries are in
default with respect to any judgment, order, writ, injunction or decree of any
court or governmental agency, and there are no unsatisfied judgments against the
Company or any Subsidiary which default could result in a Material Adverse
Effect. Except as set forth in the SEC Reports, there is not a reasonable
likelihood of an adverse determination of any pending Action that would,
individually or in the aggregate, have a Material Adverse Effect.
5.9. Financial Statements. The Company has furnished the Purchaser with a draft
--------------------
of the audited balance sheet of the Company as of December 31, 1999 and the
related consolidated statements of operations and cash flows for the fiscal year
then ended, accompanied by the report of an independent auditor (collectively,
the "Audited Financial Statements"), together with a copy of the unaudited
balance sheets of the Company as of January 31, 2000 and February 29, 2000 and
the related consolidated statements of operations and cash flows for the periods
then ended ("Unaudited Financial Statements", collectively, together with the
Audited Financial Statements, the "Financial Statements"). The Financial
Statements fairly present the financial condition and results of operations in
accordance with GAAP as of the dates and for the periods set forth in the
balance sheet included therein and the results of operations of the Company for
the periods covered, except that the Unaudited Financial Statements (i) do not
have all the footnotes required by generally accepted accounting principles and
(ii) are subject to normal, year-end adjustments. The Projected Budget
represents the best good faith financial estimates of the management of the
Company for such fiscal year.
5.10. Title and Condition of Assets.
-----------------------------
(a) Except as set forth on Schedule 5.10(a), the Company
has good, and with respect to real property, marketable, title to all of the
real and personal property reflected on the balance sheets included in the
Financial Statements or acquired by the Company and its Subsidiaries since the
Balance Sheet Date, free and clear of any Liens or defects of title, other than
Permitted Liens. The Company has a valid and enforceable leasehold interest in
all real property leased by it pursuant to the terms of the respective lease
agreements. The Company is in compliance in all material respects with the terms
of all such leases and, except as described on Schedule 5.10(a), such leases are
sufficient for the conduct of the Company's business as now being and presently
planned to be conducted.
(b) Except as set forth on Schedule 5.10(b), the Facilities
and Equipment are in good operating condition and repair (except for ordinary
wear and tear and any defect the cost of repairing which would not be material),
are sufficient for the operation of the Company's business and are in conformity
in all material respects with applicable laws, ordinances, orders, regulations
and other requirements (including applicable zoning, environmental, motor
vehicle safety standards, occupational safety and health laws and regulations)
relating thereto, except where such failure to conform would not have a Material
Adverse Effect. The Company enjoys peaceful and undisturbed possession of all
Facilities owned or leased by the Company, and, to the best knowledge of the
Company, such Facilities are not subject to any encroachments, building or use
restrictions, exceptions, reservations or limitations which in any material
respect interfere with or impair the present and continued use thereof in the
usual and normal conduct of the business of the Company. There are no pending
or, to the best knowledge of the Company, threatened, condemnation proceedings
relating to any of the Facilities. The Facilities and the Equipment are insured
and are, to the best of the Company's knowledge, structurally sound with no
material defects.
11
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(c) Assets are valued on the books of the Company at or below actual
cost less adequate and proper depreciation charges. All of the assets of the
Company, in the aggregate, have a value at least equal to the value thereof as
reflected in the balance sheet included in the Financial Statements. Except as
set forth on Schedule 5.10(c), the Company has not depreciated any of its assets
for tax purposes on an accelerated basis or in any manner inconsistent with the
Code or the rules, regulations, or guidelines of the Internal Revenue Service.
5.11. Contractual Obligations. Except as set forth on Schedule 5.11, the
-----------------------
Company is not in default or breach under or with respect to any Contractual
Obligation to which it is a party (and to the best knowledge of the Company, no
other party to any such Contractual Obligation is in default or breach
thereunder), except any such default which, individually or together with all
such defaults, would not have a Material Adverse Effect or impair the ability of
the Company to perform its obligations under the Transaction Documents. Neither
the Company nor any of its Subsidiaries has received notice that any party to
any such Contractual Obligation intends to cancel, amend or terminate any such
agreement.
5.12. No Material Adverse Effect. Since the Balance Sheet Date, there has not
--------------------------
been any Material Adverse Effect, nor to the best knowledge of the Company is
any such change threatened.
5.13. Investment Company/Government Regulations. Immediately following the
-----------------------------------------
Closing, after giving effect to the transactions contemplated by the Transaction
Documents, neither the Company nor any Person controlling, controlled by or
under common control with the Company will be an "investment company" within the
meaning of the Investment Company Act of 1940, as amended. The Company is not
subject to regulation under the Public Utility Holding Company Act of 1935, as
amended, the Federal Power Act, or any Federal or state statute or regulation
limiting its ability to incur Indebtedness.
5.14. Broker's, Finder's or Similar Fees. Other than as set forth on Schedule
----------------------------------
5.14, there are no brokerage commissions, finder's fees or similar fees or
commissions payable by the Company or any Subsidiary of the Company in
connection with the transactions contemplated hereby based on any agreement,
arrangement or understanding with the Company or any officer, director,
shareholder, or Subsidiary of the Company, or any action taken by any such
person.
5.15. Labor Relations and Employee Matters. The Company is not engaged in any
------------------------------------
unfair labor practice. There is (i) no unfair labor practice complaint pending
or, to the best knowledge of the Company, threatened against the Company before
the National Labor Relations Board, and no grievance or arbitration proceeding
arising out of or under collective bargaining agreements is so pending or, to
the best knowledge of the Company, threatened against the Company, (ii) no
strike, labor dispute, slowdown or stoppage pending or, to the best knowledge of
the Company, threatened against the Company, and (iii) no union representation
question existing with respect to the employees of the Company and, to the
knowledge of the Company, no union organizing activities are taking place.
5.16. Employee Benefit Plans. Each employee pension benefit plan, as such term
----------------------
is defined in Section 3(2) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), of the Company or any subsidiary of the Company (a
"Pension Plan") and each other employee benefit plan within the meaning of ERISA
(collectively with the Pension Plans, the "Plans") complies in all material
respects with all applicable requirements of ERISA and the Code, and other
applicable laws. None of the Plans is a multi-employer plan, as such term is
defined in Section 3(37) of ERISA. Each Pension Plan which is intended to be
qualified under Section 401(a) of the Code has been determined by the Internal
Revenue Service to be so qualified and, to the Company's knowledge, nothing has
occurred since the date of any such determination or application which would
adversely affect such qualification. Neither the Company nor any Subsidiary of
the Company, nor any Plan nor any of their respective directors, officers,
employees or agents has, with respect to any Plan, engaged in any "prohibited
transaction," as such term is defined in Section 4975 of the Code or Section 406
of ERISA, which could result in any taxes or penalties or other liabilities
under Section 4975 of the Code or under Section 502(i) of ERISA, except taxes,
penalties or liabilities which in the aggregate would not have a Material
Adverse Effect. No liability to the Pension Benefit Guaranty Corporation has
been incurred with respect to any Pension Plan that has not been satisfied in
full. No Pension Plan has incurred an "accumulated funding deficiency" within
the meaning of the Code. There has
12
<PAGE>
been no "reportable event" within the meaning of Section 4043 of ERISA with
respect to any Pension Plan. All amounts required by the provisions of any
Pension Plan to be contributed have been so contributed.
5.17. Outstanding Borrowings. Schedule 5.17 lists the amount of all Outstanding
----------------------
Borrowings as of the date set forth in such schedule and the name of each lender
thereof.
5.18. Undisclosed Liabilities. The Company has no liabilities or obligations
-----------------------
(absolute, accrued, contingent or otherwise) except (i) liabilities that are
reflected and reserved against on the balance sheets included in the Financial
Statements (including the notes thereto), (ii) liabilities incurred in the
ordinary course of business and consistent with the past practice of the Company
since the Balance Sheet Date, and which are reflected and reserved for in the
balance sheets included in the Financial Statements, (iii) liabilities arising
under Contractual Obligations described on Schedule 5.18 and (iv) liabilities
incurred in connection with the transactions contemplated by the Transaction
Documents.
5.19. Solvency. Neither the Company nor any Subsidiary has (i) made a general
--------
assignment for the benefit of its creditors, (ii) filed any voluntary petition
in bankruptcy or suffered the filing of any involuntary petition in bankruptcy
by its creditors, (iii) suffered the appointment of a receiver to take
possession of all or substantially all of its assets or properties, (iv)
suffered the attachment or other judicial seizure of all or substantially all of
its assets or (v) admitted in writing its inability to pay its debts as they
come due. After giving effect to the transactions contemplated by the
Transaction Documents, the Company will not (i) have liabilities which exceed
the stated value of its assets, or (ii) be left with unreasonably small capital
with which to engage in its respective business for the foreseeable future, or
(iii) have incurred debts beyond its ability to pay such debts as they mature.
5.20. Compliance with Law. The Company and the conduct of its business is in
-------------------
compliance with all applicable laws, statutes, ordinances and regulations,
whether federal, state, local or foreign, except where the failure to comply
would not have a Material Adverse Effect. Neither the Company nor any Subsidiary
has received any written notice to the effect that it is not in compliance with
any of such statutes, regulations, orders, ordinances or other laws where the
failure to comply would have a Material Adverse Effect. The Company, to the best
of its knowledge, has no reason to anticipate that any presently existing
circumstances are likely to result in any such violations which would, in any
one case or in the aggregate, have a Material Adverse Effect.
5.21. No Other Agreements to Sell the Assets or Capital Stock of the Company.
----------------------------------------------------------------------
Except as set forth on Schedule 5.21 hereto, neither the Company nor any
Subsidiary has any legal obligation, absolute or contingent, other than the
obligations under the Transaction Documents, to any person or firm to (i) sell
assets of the Company to any Person or firm in an aggregate amount of up to
$100,000 and/or other than in the ordinary course of business, (ii) sell any
capital stock of the Company (other than as reflected in Section 5.6) or effect
any merger, consolidation or other reorganization of the Company or (iii) enter
into any agreement with respect to any of the foregoing.
5.22. Changes. Except as set forth on Schedule 5.22, since December 31, 1999,
-------
there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business, that
have not caused, in the aggregate, a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered
by insurance, materially and adversely affecting the assets, properties,
financial condition, operating results, prospects or business of the Company (as
such business is presently conducted and as it is proposed to be conducted);
(c) any waiver by the Company of a valuable right or of a
material debt owed to it;
(d) any satisfaction or discharge of any lien, claim or
encumbrance or payment of any obligation by the Company, except in the ordinary
course of business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
13
<PAGE>
(e) any material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(f) any material change in any compensation arrangement or
agreement with any employee;
(g) any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets;
(h) any resignation or termination of employment of any key
officer of the Company; and to the knowledge of the Company, there is no
impending resignation or termination of employment of any such officer;
(i) receipt of notice that there has been a loss of, or material
order cancellation by, any major customer of the Company;
(j) receipt of notice that any supplier or third-party
outsourcing provider will no longer supply products or services to the Company;
(k) any mortgage, pledge, transfer of a security interest in, or
lien, created by the Company, with respect to any of its material properties or
assets, except liens for taxes not yet due or payable;
(l) any loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(m) any declaration, setting aside or payment or other
distribution in respect of any of the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition of any of such stock by the
Company;
(n) to the Company's knowledge, any other event or condition of
any character that would reasonably be expected to materially and adversely
affect the assets, properties, financial condition, operating results or
business of the Company (as such business is presently conducted and as it is
proposed to be conducted); or
(o) any agreement or commitment by the Company to do any of the
things described in this Section 5.22.
5.23. Certain Payments. The Company has complied with the requirements of the
----------------
Foreign Corrupt Practices Act and neither the Company nor any director, officer,
agent, or employee of the Company, or any other Person associated with or acting
for or on behalf of the Company has directly or indirectly (a) made any
contribution, gift, bribe, payoff, influence payment, kickback, or other payment
to any government official, regardless of form, whether in money, property, or
services (i) to obtain favorable treatment in securing business, (ii) to pay for
favorable treatment for business secured or, (iii) to obtain special concessions
or for special concessions already obtained, for or in respect of the Company or
any Subsidiary of the Company, (b) made any contribution, gift, bribe, payoff,
influence payment, kickback, or other payment to any person, private or public,
regardless of form, whether in money, property, or services in violation of any
law, or (c) established or maintained any fund or asset for use, directly or
indirectly, with any of the foregoing activities that has not been recorded in
the books and records of the Company.
5.24. Environmental Matters. The Company and its Subsidiaries are and at all
---------------------
times have been in compliance with all Environmental Laws, except where such
instances of noncompliance would not be expected by the Company to have a
Material Adverse Effect on the business, operations or financial condition of
the Company and its Subsidiaries, taken as a whole, and (ii) neither the Company
nor any of its Subsidiaries has any material liability
14
<PAGE>
under any Environmental Law. All real property previously leased by the Company
or any of its Subsidiaries was, at all times during which such premises were
occupied by the Company or any of its Subsidiaries, free from contamination from
Hazardous Materials regulated by Environmental Laws as a result of the conduct
of the Company or any of its Subsidiaries or, to the best of the Company's
knowledge, any other party. Except as set forth on Schedule 5.24, (i) no notices
of any violation or alleged violation of, or any liability under, any
Environmental Law relating to the operations or properties of the Company or any
of its Subsidiaries have been received by the Company or any of its Subsidiaries
and (ii) there are no writs, injunctions, decrees, orders or judgments
outstanding, or any actions, suits, claims, proceedings, administrative actions
or investigations pending or, to the knowledge of the Company, threatened,
alleging that the Company or any of its Subsidiaries is in violation of any
Environmental Law, or that the Company or any of its Subsidiaries is a party
responsible for remedial action pursuant to any Environmental Law. Except as set
forth on Schedule 5.24, the Company and each of its Subsidiaries has all
permits, licenses and authorizations required under the Environmental Laws for
the operation of their business as it is currently operated and, to the
Company's knowledge, based on the manner in which the business of the Company
and its Subsidiaries is currently conducted, no modification or change to the
operations of such business will be required upon renewal of any such permits,
licenses and authorizations.
5.25. SEC Reports.
-----------
(a) The Company has filed all required forms, reports and
documents with the SEC since December 31, 1995 (collectively, the "SEC
Reports"), except that the Company will file a Notification of Late Filing on
Form 126-25 notifying the SEC that its Form 10-K for its 1999 fiscal year could
not be filed within the prescribed time period. Each of the SEC Reports has
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act, each as in effect on the dates so filed.
None of such forms, reports or documents, including, without limitation, any
financial statements or schedules included or incorporated by reference therein,
contained, when filed, any untrue statement of a material fact or omitted to
state a material fact required to be stated or incorporated by reference therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has
heretofore made available or promptly will make available to the Purchaser, a
complete and correct copy of any amendment to the SEC Reports. None of the
Subsidiaries of the Company is required to file any reports, statements, forms
or other documents with the SEC.
(b) The SEC Reports contain audited consolidated balance
sheets of the Company and its Subsidiaries as of December 31 in each of the
years 1995 through 1998, and the related audited consolidated statements of
income, statements of cash flow and changes in Shareholders' equity of the
Company and its Subsidiaries for the fiscal years then ended, together with the
respective reports thereon of KPMG LLP. These audited financial statements of
the Company were included or incorporated by reference in the SEC Reports
(collectively, including the footnotes thereto, the "SEC Financial Statements"),
were prepared in accordance with GAAP (except as otherwise stated in the SEC
Financial Statements or in the related reports of the Company's independent
accountants) and present fairly the consolidated financial position of the
Company and its subsidiaries as at the dates thereof, and the results of
operations, changes in financial position and statements of Shareholders' equity
of the Company and its Subsidiaries for the periods indicated. No event has
occurred since the Balance Sheet Date that would require a restatement of the
SEC Financial Statements under GAAP other than by reason of a change in GAAP.
The SEC Financial Statements reflect, and on the Closing Date will reflect, the
interest of the Company in the assets, liabilities and operations of all
Subsidiaries of the Company.
(c) Neither the Company nor any of its Subsidiaries has any
material liability, obligation or commitment of any nature whatsoever (whether
known or unknown due or to become due, accrued, fixed, contingent, liquidated,
unliquidated or otherwise) other than liabilities, obligations or commitments
(i) which are accrued or reserved against in the consolidated balance sheet of
the Company and its consolidated subsidiaries as of December 31, 1999 included
in the Audited Financial Statements or reflected in the notes thereto, (ii)(x)
which arose in the ordinary course of business since such date and (y) which do
not or would not individually or in the aggregate have a Material Adverse
Effect, or (iii) which are of the type that would not be required to be
reflected on a consolidated balance sheet of the Company and its Subsidiaries or
in the notes thereto if such balance sheet were prepared in accordance with GAAP
as of the date thereof or as of the Closing Date, as the case may be.
15
<PAGE>
(d) Except as set forth on Schedule 5.25(d), since the date
of the Company's 1999 Proxy Statement to the date hereof, the Company has not
Except as set forth on Schedule 5.25(d), since the date of the Company's 1999
Proxy Statement to the date hereof, the Company has not entered into or
otherwise become obligated with respect to any transactions which would require
disclosure pursuant to Item 404 of Regulation S-K in accordance with Items 7(b)
or (c) of Schedule 14A under the Exchange Act were a Company proxy statement to
be distributed as of the date hereof.
5.26. Fairness Opinion. The Company has received an opinion of Needham &
----------------
Company, Inc., a copy of which was furnished to the Purchaser, that the terms of
the Transactions, including the proposed consideration to be received by the
Company's shareholders in the Tender Offer, is fair to such shareholders from a
financial point of view.
5.27. Disclosure.
----------
(a) This Agreement does not, and the documents and
certificates executed by the Company or otherwise furnished by the Company to
the Purchaser at the Closing will not, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
(b) There is no fact known to the Company, which the
Company has not disclosed to the Purchaser in writing, which has a Material
Adverse Effect, or insofar as the Company can reasonably foresee, will have a
Material Adverse Effect on the Condition of the Company, or the ability of the
Company to perform its obligations under the Transaction Documents, or any
document contemplated thereby.
ARTICLE 6.
REPRESENTATIONS AND
WARRANTIES OF THE PURCHASER
The Purchaser hereby represents and warrants to the Company as
follows:
6.1. Existence and Authority. The Purchaser (a) is a limited liability company
-----------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, (b) has all requisite power and authority to own its assets
and operate its business, and (c) has all requisite power and authority to
execute, deliver and perform its obligations under each of the Transaction
Documents to which it is or will be a party.
6.2. Authorization; No Contravention. The execution, delivery and performance
-------------------------------
by the Purchaser of the Transaction Documents to which it is a party and the
consummation of the transactions contemplated thereby, including, without
limitation, the acquisition of the Securities: (a) is within the Purchaser's
power and authority and has been duly authorized by all necessary action on the
part of such Purchaser; (b) does not conflict with or contravene the terms of
the Purchaser's certificate of formation and agreement of limited liability
company or any amendments thereof; and (c) will not violate, conflict with or
result in any material breach or contravention of (i) any Contractual Obligation
of the Purchaser, or (ii) any Requirements of Law or any order or decree
applicable to the Purchaser.
6.3. Binding Effect. This Agreement has been duly executed and delivered by the
--------------
Purchaser, and this Agreement constitutes the legal, valid and binding
obligation of the Purchaser, enforceable against it in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, or similar laws affecting the enforcement of creditors' rights
generally or by equitable principles relating to enforceability.
6.4. Purchasers Expertise. Without limiting the right of the Purchaser to rely
--------------------
on the representations and warranties of the Company contained herein, the
Purchaser is an informed and sophisticated purchaser, possesses such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of its investment under this Agreement and has
engaged expert legal, financial, tax, business and other advisors, experienced
in the evaluation and purchase of companies such as the Company.
16
<PAGE>
6.5. Investment Intent. The Purchaser is engaging in the Transactions solely
-----------------
for the purpose of investment and not with a view to, or for offer or sale in
connection with, any distribution thereof.
6.6. Broker's, Finder's or Similar Fees. There are no brokerage commissions,
----------------------------------
finder's fees or similar fees or commissions payable by the Company in
connection with the transactions contemplated hereby based on any agreement,
arrangement or understanding entered into by the Purchaser.
ARTICLE 7.
ADDITIONAL AGREEMENTS
7.1. Proxy Statement.
---------------
(a) As promptly as practicable after the date hereof, the
Company shall prepare and file the Proxy Statement in preliminary form with the
SEC under the Exchange Act, and shall use all reasonable efforts to have it
cleared with the SEC, and promptly thereafter shall mail it in definitive form
to its shareholders. The Purchaser and the Company shall cooperate with each
other in the preparation of the Proxy Statement. Each of the Purchaser and the
Company agrees promptly to correct any information provided by it for use in the
Proxy Statement if and to the extent that it shall have become false or
misleading in any material respect. The Company agrees to take all steps
necessary to cause the Proxy Statement as so corrected to be filed with the SEC
and to be mailed to the shareholders of the Company, in each case as and to the
extent required by law. The Proxy Statement shall contain the recommendation of
the Board of Directors of the Company described in Section 7.1(b). The
Purchaser, and its counsel, shall be given an opportunity to review and comment
on the Proxy Statement prior to it being filed with the SEC.
(b) The Company shall, in accordance with the Colorado Business
Corporation Act and its Amended and Restated Articles of Incorporation and
bylaws of the Company, duly call, give notice of, convene and hold the
Shareholders Meeting as soon as practicable after the date hereof for the
purpose of considering and taking action upon the approval of the Transactions
to the extent required by law or the requirements of the Nasdaq Stock Market.
Subject to the exercise of the fiduciary duty of the Board of Directors of the
Company after consultation with outside legal counsel, the Company will include
in the Proxy Statement the recommendation of the Board of Directors that
shareholders of the Company vote in favor of the approval of the Transactions at
the Shareholders Meeting and shall use its best efforts to solicit from
shareholders of the Company proxies in favor of such approval and adoption and
will take all other actions necessary, or in the reasonable judgment of the
Purchaser and the Company advisable, to secure the approval of the Transactions
by the Company's shareholders.
7.2. Tender Offer.
------------
(a) Provided that this Agreement shall not have been terminated
in accordance with Article 8, then, not later than the first business day after
execution of this Agreement, the Company shall issue a public announcement of
the execution of this Agreement. At the time of and following such public
announcement, both parties shall fully cooperate with each other as necessary to
allow the Purchaser to file such communications with the Commission under cover
of Schedule TO as are required to be filed pursuant to Rule 14d-2(b) under the
Exchange Act. Not later than the twentieth business day prior to the
Shareholders Meeting, the Purchaser shall, subject to the provisions of this
Agreement, commence the Tender Offer for up to 8,250,000 shares together with
the associated rights ("Rights") issued pursuant to the Rights Agreement dated
as of February 25, 1999 (the "Rights Agreement"), between the Company and
American Securities Transfer & Trust, Inc., as Rights Agent (collectively, the
"Tender Shares") at a price of $4.00 per Tender Share, net to the seller in
cash. The Purchaser shall keep the Tender Offer open until the earlier of the
date on which the Company Shareholders' Meeting is held and September 1, 2000
(the "Approval Date"). The Purchaser shall accept for payment and pay for all
Tender Shares that have been validly tendered and not withdrawn pursuant to the
Tender Offer promptly following the Shareholder Approval, subject to
satisfaction, or waiver by the Purchaser, of the conditions set forth in this
Agreement and in Annex I to this Agreement. The obligation of the Purchaser to
accept for payment, purchase and pay for Tender
17
<PAGE>
Shares tendered pursuant to the offer shall be subject to the conditions set
forth herein and in the Offer Documents, including the condition that a minimum
of 500,000 Tender Shares shall have been validly tendered and not withdrawn
prior to the expiration date of the Tender Offer (the "Minimum Condition").
Solely for purposes of determining whether the Minimum Condition has been
satisfied, any shares owned by the Purchaser shall be deemed to have been
validly tendered and not withdrawn pursuant to the Tender Offer. The Purchaser
expressly reserves the right to increase the price per share payable in the
Tender Offer or to make any other changes in the terms and conditions of the
Tender Offer; provided, however, that, unless previously approved by the Company
in writing, no change may be made which decreases the price per share payable in
the Offer, which changes the form of consideration to be paid in the Tender
Offer, which imposes conditions to the Tender Offer in addition to those set
forth herein, which broadens the scope of such conditions, which increases the
minimum number of Tender Shares which must be tendered as a condition to the
acceptance for payment and payment for Tender Shares in the Tender Offer, or
which otherwise amends the terms of the Tender Offer in a manner that is
materially adverse to holders of shares. Notwithstanding the foregoing, the
Purchaser may, without the consent of the Company, extend the Tender Offer if,
by the Approval Date, any of the conditions to the Purchaser's obligation to
purchase Tender Shares shall not be satisfied until such time as such conditions
are satisfied. However, if the Company shall have held the Shareholders Meeting
(with a quorum duly present) and a majority of the shareholders present and
voting did not vote to approve the Transactions by the Approval Date, the
Purchaser shall not extend the Tender Offer. It is agreed that the conditions to
the Tender Offer set forth herein and in the Annex I to this Agreement are for
the sole benefit of the Purchaser and may be asserted by the Purchaser
regardless of the circumstances giving rise to any such condition (including any
action or inaction by the Purchaser, unless any such action or inaction by the
Purchaser would constitute a breach by the Purchaser of any of its covenants or
agreements under this Agreement) or may be waived by the Purchaser, in whole or
in part at any time and from time to time, in its sole discretion. The failure
by the Purchaser at any time to exercise any of the foregoing rights shall not
be deemed a waiver of any such right and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time. Any
determination by the Purchaser with respect to any of the foregoing conditions
(including, without limitation, the satisfaction of such conditions) shall be
made in good faith and shall be final and binding on the parties. The Purchaser
may, but is not obligated to, purchase Tender Shares in the Tender Offer if the
Minimum Condition is not satisfied. However, only consummation of the Tender
Offer for a number of Tender Shares which satisfies the Minimum Condition (a
"Successful Tender Offer") shall result in the exchange of Exchangeable Notes
for Convertible Notes and the cancellation of any outstanding Warrants.
(b) The Purchaser shall file with the SEC a Tender Offer
Statement on Schedule TO with respect to the offer at such time as will permit
the Tender Offer to be commenced as contemplated by Section 7.2(a). The Tender
Offer Statement shall contain an offer to purchase and related letter of
transmittal and summary advertisement (such Schedule TO and the documents
therein pursuant to which the offer will be made, together with any supplements
or amendments thereto, the "Offer Documents"). The Offer Documents shall comply
as to form in all material respects with the requirements of the Exchange Act,
and the rules and regulations promulgated thereunder and, on the date filed with
the SEC and on the date first published, sent or given to the holders of shares
of Common Stock, shall not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading, except that no representation is made by the
Purchaser with respect to information supplied by the Company in writing
specifically for inclusion in the Offer Documents. Each of the Purchaser and the
Company agrees promptly to correct any information supplied by it specifically
for inclusion in the Offer Documents if and to the extent that such information
shall have become false or misleading in any material respect, and each of the
Purchaser and the Company further agrees to take all steps necessary to cause
the Offer Documents as so corrected to be filed with the SEC and to be
disseminated to shareholders of the Company, in each case as and to the extent
required by applicable Federal securities laws. The Purchaser agrees to provide
the Company and its counsel in writing with any comments the Purchaser or its
counsel may receive from the SEC or its Staff with respect to the Offer
Documents promptly after the receipt of such comments. The Company and its
counsel shall be given a reasonable opportunity to review and comment upon the
Offer Documents and all amendments and supplements thereto prior to their filing
with the SEC or dissemination to the shareholders of the Company.
18
<PAGE>
(c) The Company hereby approves of and consents to the Tender
Offer and represents and warrants that the Board of Directors of the Company, at
a meeting duly called and held, has unanimously adopted resolutions (i)
determining that this Agreement and the Transactions, are fair to, and in the
best interests of, the shareholders of the Company, (ii) approving and adopting
this Agreement and the Transactions, in all respects and that such approval
constitutes approval of the Initial Investment, the Tender Offer, this
Agreement, and the terms of the Exchangeable Notes, Warrants and Convertible
Notes and (iii) recommending that the shareholders of the Company accept the
Tender Offer, tender their shares of Common Stock thereunder to the Purchaser
and approve the Transactions at the Shareholders Meeting; provided, however,
that such recommendation may be withdrawn, modified or amended to the extent
that the Board of Directors, by a majority vote, determines in its good faith
judgment, based as to legal matters on the advice of legal counsel, that the
Board has received a Superior Proposal and is required to withdraw, modify or
amend its recommendation to properly discharge its fiduciary duties.
(d) The Company shall use its best efforts to file with the SEC
a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the
Tender Offer (such Schedule 14D-9, as amended from time to time, the "Schedule
14D-9") on the date the Offer Documents are filed with the SEC, and in any event
shall file with the SEC the Schedule 14D-9 not later than the date required
pursuant to the Exchange Act and the applicable rules and regulations
promulgated thereunder, containing the recommendation described in Section
7.2(c) and shall mail the Schedule 14D-9 to the shareholders of the Company. The
Schedule 14D-9 shall comply in all material respects with the requirements of
the Exchange Act and the rules and regulations promulgated thereunder on the
date filed with the SEC and on the date first published, sent or given to the
Company's shareholders, and shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation is
made by the Company with respect to information supplied in writing by the
Purchaser specifically for inclusion or incorporation by reference in the
Schedule 14D-9. Each of the Company and the Purchaser agrees promptly to correct
any information provided by it for use in the Schedule 14D-9 if and to the
extent that such information shall have become false or misleading in any
material respect, and the Company further agrees to take all steps necessary to
amend or supplement the Schedule 14D-9 and to cause the Schedule 14D-9 as so
amended or supplemented to be filed with the SEC and disseminated to the
Company's Shareholders, in each case as and to the extent required by applicable
Federal securities laws. The Purchaser and its counsel shall be given a
reasonable opportunity to review and comment upon the Schedule 14D-9 and all
amendments and supplements thereto prior to their filing with the SEC or
dissemination to shareholders of the Company.
(e) In connection with the Tender Offer, the Company will, and
will cause its transfer agent to, furnish promptly to the Purchaser mailing
labels containing the names and addresses of all record holders of shares of
Common Stock as of a recent date and of those persons becoming record holders
after such date, together with copies of all lists of shareholders and security
position listing and computer files and all other information in the Company's
possession and control regarding the beneficial ownership of its shares of
Common Stock. The Company shall promptly furnish the Purchaser with such
additional information (including, but not limited to, updated lists of
shareholders and their addresses, mailing labels and security position listings
and computer files) and such other assistance as the Purchaser or its agents may
reasonably request in communicating the Tender Offer to the record and
beneficial holders of shares. Subject to the requirements of law, and except for
such steps as are necessary or advisable to disseminate the Tender Offer and any
other documents necessary to consummate the Transactions and to solicit tenders
of shares and the approval of the Transaction, the Purchaser and each of its
Affiliates shall hold in confidence the information contained in any of such
labels, lists and additional information, shall use such information only in
connection with the Tender, and, if this Agreement shall be terminated, shall
deliver to the Company all copies of such information then in their possession
or under their control.
7.3. Proxy Statement; Offer Documents.
--------------------------------
(a) The Proxy Statement will comply in all material respects
with the applicable requirements of the Exchange Act and the rules and
regulations thereunder, and will not, at the time of the first
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<PAGE>
mailing and at the time of the Shareholders Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) The letter to shareholders, notice of meeting, proxy
statement and form of proxy that may be distributed by the Company to
Shareholders in connection with the Transactions (including any supplements),
and any schedules required to be filed with the SEC in connection therewith, are
collectively referred to as the "Proxy Statement".
(c) None of the information supplied by the Company in writing
for inclusion in the Offer Documents (as defined in Section 7.2(b)) or provided
by the Company in the Schedule 14D-9 will, at the respective times that the
Offer Documents and the Schedule 14D-9 or any amendments or supplements thereto
are filed with the SEC and are first published or sent or given to shareholders,
shall contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
7.4. Acquisition Proposals. The Company may, directly or indirectly, furnish
---------------------
information and access, in each case in response to unsolicited requests
therefor received after the date of this Agreement, with appropriate assurances
of confidentiality, to any corporation, partnership, person or other entity or
group, and, in response to unsolicited requests, may participate in discussions
and negotiate with any corporation, partnership, person or other entity or group
concerning a proposal for any merger, sale of any material assets of the
Company, sale of shares of voting capital stock of the Company having over 15
percent of the aggregate voting power of all the Company's capital stock or
other transaction involving the transfer of effective control of the Company or
any division thereof ("Acquisition Proposal"), if the Company's Board of
Directors, after consultation with its outside counsel and its financial
advisor, and such other advisors as it deems appropriate, determines in its good
faith judgment that its fiduciary duties require such action. In addition, in
the event of such determination by the Company's Board of Directors, the Company
may direct its officers and other appropriate personnel to cooperate with and be
reasonably available to consult with any such corporation, partnership, person
or other entity or group. Except as set forth above, neither the Company, or any
of its Subsidiaries, nor any of its or their respective officers, directors,
employees, representatives or agents, shall, directly or indirectly, encourage,
solicit, participate in or initiate discussions or negotiations with, or provide
any information to, any corporation, partnership, person or other entity or
group (other than the Purchaser, any affiliate or associate of the Purchaser or
any designees of the Purchaser) concerning any Acquisition Proposal, or take any
other action to facilitate the making of a proposal that constitutes or could
reasonably be expected to lead to an Acquisition Proposal. Without limiting the
foregoing, it is understood that any violation of the restrictions set forth in
the preceding sentence by any executive officer of the Company or any of its
subsidiaries shall be deemed to be a breach of this Section 7.4 by the Company.
The Company shall use its best efforts to ensure that the officers, directors
and employees of the Company and its Subsidiaries and any investment banker or
other advisor or representatives retained by the Company are aware of the
restrictions set forth in the preceding sentences, and the Company hereby
represents that the Board has adopted resolutions directing the officers,
directors and employees of the Company and its subsidiaries to comply with such
restrictions. The Company promptly shall advise the Purchaser orally, and in a
written notice, of any Acquisition Proposal and any inquiries or developments
with respect thereto, and shall, in such notice, provide a detailed description
of such Acquisition Proposal, indicating the identity of the offeror and the
material terms and conditions of any such Acquisition Proposal, including,
without limitation, price. The Company shall not enter into any agreement
pursuant to which the Company is to provide information to any person, entity or
group in connection with a proposed or possible Acquisition Proposal in which
agreement such person, entity or group is permitted to buy shares of the Common
Stock of the Company, or make any amendment, waiver, or release with respect
thereto, unless, at or prior to entering into such agreement or making such
amendment, waiver, or release with respect thereto, unless, at or prior to
entering into such agreement or making such amendment, waiver, or release, the
Company agrees to permit the Purchaser to buy shares of Common Stock to the same
extent and on substantially comparable terms as such person, entity or group.
Neither the Board nor any committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to the Purchaser the approval
or recommendation by the Board of the Tender Offer, or (ii) approve or
recommend, or propose to approve or recommend, any
20
<PAGE>
Acquisition Proposal; provided, that nothing in this Section 7.4 shall prevent
the Board of Directors from considering an Acquisition Proposal in anticipation
of terminating this Agreement pursuant to Section 8.1(g).
7.5. Interim Operations. During the period from the date of this Agreement to
------------------
the Approval Date, except (i) as contemplated by this Agreement, (ii) as
disclosed to the Purchaser in writing or in the SEC Reports or (iii) as
otherwise approved in writing by the Purchaser:
(a) Conduct of Business. The Company shall use its
-------------------
reasonable efforts to preserve intact in all material respects its business
organization, to preserve its present relationships with its customers,
prospective customers, suppliers, consultants, employees and any other persons
having business relations with it, to maintain all of its properties in
customary repair and condition, to maintain insurance policies in respect of its
business and properties, and to promote and market its services consistent with
past practice.
(b) Certificate and Bylaws. Except for increasing its
----------------------
authorized shares of Common Stock up to a maximum of 75,000,000, the Company
shall not, and shall not permit any of its subsidiaries to, make or propose any
change or amendment in their respective Articles of Incorporation or Bylaws.
(c) Capital Stock. Except as permitted in Sections 7.5(e)
-------------
and 7.5(g), the Company shall not, and shall not permit any of its Subsidiaries
to, issue, pledge or sell any shares of capital stock or any other securities of
any of them or issue any securities convertible into, exchangeable for or
representing a right to purchase or receive, or enter into any contract with
respect to the issuance of, any shares of capital stock or any other securities
of any of them (other than pursuant to this Agreement, the Rights Agreement or
the exercise of options or vesting of employee stock awards outstanding on the
date hereof), or enter into any contract with respect to the purchase or voting
of shares of their capital stock, or adjust, split, combine or reclassify any of
their securities, or make any other material changes in their capital
structures; provided, however, that nothing in this Section 7.5(c) shall limit
or restrict the Company's rights under Section 7.4 to furnish information and
access in response to unsolicited requests (and to enter into confidentiality
agreements in connection with any prospective Acquisition Proposal or
"standstill" agreements relating to the conditions under which a third party
shall be permitted to acquire shares (or the extent to which, or the manner in
which, such third party may acquire shares)), and to participate in discussions,
to negotiate and to consult with respect to any prospective Acquisition
Proposal.
(d) Dividends. The Company shall not, and shall not permit
---------
any of its Subsidiaries to, declare, set aside, pay or make any dividend or
other distribution or payment (whether in cash, stock or property) with respect
to, or purchase or redeem, any shares of the capital stock of any of them and
other than dividends, distributions and payments made solely to the Company or a
Subsidiary of the Company which Subsidiary is retained by the Company through
the Approval Date.
(e) Employee Plans; Compensation, Etc. Except as permitted
---------------------------------
in Section 7.12, the Company shall not, and shall not permit any of its
Subsidiaries to (except (i) for increases and cash bonuses in lieu of grants of
stock options and restricted stock awards in the ordinary course of business
that are consistent with past practice and that, in the aggregate, do not result
in a material increase in benefits or compensation expense of the Company
relative to the level in effect prior to such amendment, (ii) as required by
law, (iii) as required to maintain the qualified status of any employee plan
that is intended to constitute a qualified plan under the provisions of Section
401 of the Code or the tax exempt status under Section 501 of the Code of a
trust related to such a plan in the manner which is the least expensive
alternative to the Company and its subsidiaries, if there are alternative means
of maintaining such qualified or tax exempt status, or (iv) pursuant to the
terms of an existing contract disclosed in the SEC Reports to which the Company
is a party or by which it is bound or any amendment thereto that does not
materially increase the benefits provided thereunder) adopt, enter into or amend
any bonus, profit sharing, compensation, severance, termination, stock option,
pension, retirement, deferred compensation, employment or other employee benefit
plan, agreement, trust, plan, fund or other arrangement for the benefit or
welfare of any director, officer or employee, or increase in any manner the
compensation or fringe benefits of any director, officer or employee, or pay any
benefit not required by any existing plan or arrangement (including, without
limitation, the granting of stock options, stock appreciation rights,
performance units or restricted stock, or
21
<PAGE>
the removal of existing restrictions in any benefit plans or agreements or
awards made thereunder) or enter into any contract, agreement, commitment or
arrangement to do any of the foregoing.
(f) Debt and Capital Appropriations. Except in the ordinary
-------------------------------
course of its business, the Company shall not, and shall not permit any of its
Subsidiaries to, incur or assume any indebtedness (other than borrowings in the
ordinary course of business under its currently existing bank credit line or any
renewal thereof); make any loans, advances or capital contributions to, or
investments in, any other person (other than a wholly-owned Subsidiary of the
Company); issue or sell any debt securities or guarantee any indebtedness; or
enter into any contract, agreement, commitment or arrangement to do any of the
foregoing. The Company shall not, and shall not permit any of its Subsidiaries
to, enter into any contract or agreement which involves payments by the Company
or any of its subsidiaries of more than $100,000 and which extends beyond or
will affect the business of the Company for a term of four months or more beyond
the date of this Agreement. The Company shall not, and shall not permit any of
its subsidiaries to, approve or make appropriations for capital expenditures in
excess of $200,000 in the aggregate over those provided for in the operating and
capital plans of the Company in effect on the date of this Agreement.
(g) Assets; Mergers; Etc. Except as required under the
--------------------
Credit Agreement, the Company shall not, and shall not permit any of its
subsidiaries to, encumber, sell, lease or otherwise dispose of or acquire any
material assets, or encumber, sell, lease or otherwise dispose of assets having
a value in excess of $100,000 in the aggregate, or enter into any merger or
other agreement providing for the acquisition of any material assets of the
Company or any of its subsidiaries by any third party or acquire (by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership
or other business organization or division thereof or enter into any contract,
agreement, commitment or arrangements to do any of the foregoing.
(h) Labor Relations. The Company shall consult with the
---------------
Purchaser concerning any significant relations or employment issues which may
arise except to the extent prohibited by applicable law and regulation in the
reasonable judgment of the Company on advice of counsel.
7.6. Access to Information; Confidentiality.
--------------------------------------
(a) From the date hereof until the consummation of the
Tender Offer, the Company shall, and shall cause its subsidiaries, officers,
directors, employees and agents to, afford to the Purchaser and to the officers,
employees and agents of the Purchaser access at all reasonable times to their
officers, employees, agents, properties, books, records and contracts, and shall
furnish the Purchaser all financial, operating and other data and information as
the Purchaser may request as necessary to consummate the transactions
contemplated hereby including, without limitation, as necessary for consultants
and advisors hired by the Company at the request of the Purchaser; provided,
however, that the Company shall not be required to disclose or permit access to
certain information regarding the Company's business which the Company
reasonably determines after consultation with counsel would be inappropriate to
disclose or to permit access to the Purchaser due to competitive or regulatory
considerations. The Company shall, and shall cause it subsidiaries, officers,
directors, employees and agents to, afford the outside counsel of the Purchaser
with such information concerning the Company as may be necessary to file any
notification report filed under the HSR Act (and any additional information or
documentary material supplied in response to any request pursuant to the HSR Act
or any other filing), or to respond to any investigation by the DOJ, the FTC or
state attorneys general. Subject to the requirements of law or judicial process,
the Purchaser shall hold in confidence all such information, on the terms and
subject to the conditions contained in the letter agreement dated [November] __,
1999 (the "Confidentiality Agreement") the provisions of which shall survive the
termination of this Agreement, the Purchaser shall deliver to the Company all
documents, work papers and other material (including copies) obtained by the
Purchaser or on its behalf from the Company, as a result of this Agreement or in
connection herewith, whether so obtained before or after the execution hereof,
and shall destroy all documents, work papers and other materials (including
copies) containing all such information; provided, however, that in the event
that any litigation or investigation has been instituted or threatened, the
Company shall be entitled to retain all documents, work papers and other
materials (including copies) otherwise subject to destruction under this Section
for the pendency of such litigation or investigation.
22
<PAGE>
(b) The Purchaser shall, and shall cause its subsidiaries, officers,
directors, employees and agents to, afford the officers, employees and agents of
the Company with such information concerning the Purchaser as may be necessary
for the Company to ascertain the accuracy and completeness of the information
supplied by the Purchaser for inclusion in the Proxy Statement. The Purchaser
shall, and shall cause its subsidiaries, officers, directors, employees and
agents to, afford the outside counsel of the Company with such information
concerning Parent and the Purchaser as may be necessary to file any notification
report filed under the HSR Act (and any additional information or documentary
material supplied in response to any request pursuant to the HSR Act or any
other filing), or to respond to any investigation by the DOJ, the FTC or state
attorneys general. Subject to the requirements of law or judicial process, the
Company shall hold in confidence all such information, and, upon the
consummation of the Tender Offer or termination of this Agreement, the Company
shall deliver to the Purchaser all documents, work papers and other material
(including copies) obtained by the Company or on its behalf from the Purchaser,
as a result of this Agreement or in connection herewith, whether so obtained
before or after the execution hereof, and shall destroy all documents, work
papers and other materials (including copies) containing all such information;
provided, however, that, in the event that any litigation or investigation has
been instituted or threatened, the Purchaser shall be entitled to retain all
documents, work papers and other materials (including copies) otherwise subject
to destruction under this Section for the pendency of such litigation or
investigation.
7.7. Preferred Stock Purchase Rights. The Rights Agreement has been amended to
-------------------------------
provide that the execution and delivery of this Agreement and the consummation
of the Tender Offer contemplated hereby will not cause (a) the Purchaser to
become an "Acquiring Person" (as such term is defined in the Rights Agreement),
(b) the "Distribution Date" (as such term is defined in the Rights Agreement) to
occur, or (c) any adjustment under the provisions of Section 11 of the Rights
Agreement.
7.8. Continued Listing. The Purchaser agrees that it does not intend for the
-----------------
Tender Offer, or any other transactions contemplated herein, to result in the
Common Stock being delisted from the Nasdaq Stock Market. The Purchaser agrees
that it will take no affirmative action to delist the Common Stock from the
Nasdaq Stock Market.
7.9. Consultants and Advisors. The Company shall enter into agreements with
------------------------
Synergetics as soon as possible following the Closing Date, as well as such
other consultants and advisors as are approved by the Purchaser (including for
purposes of this Section 7.9 approvals by its members, including, without
limitation Thayer and RCBA) pursuant to which the Company shall have spent or be
committed to spend at least $1.5 million. Additionally the Company shall reserve
at least $1.8 million to be used for hiring consultants and advisors, approved
by the Purchaser, following the closing of the Tender Offer, to facilitate and
accelerate the Company's business plans with regard to its manufacturing, hiring
and purchasing initiatives.
7.10. Operational Review Meetings. During the period from the date of this
---------------------------
Agreement to the Approval Date, on the first Monday in each month, or at such
other time as the parties may agree, the Company shall make available officers
of the Company, including, but not limited to, the Chief Executive Officer, the
Chief Financial Officer and the Chief Accounting Officer, for meetings with
representatives of the Purchaser to provide an operational review of the
Company.
7.11. Approval of Financings. During the period from the date of this Agreement
----------------------
to the earlier of the Approval Date or the completion of the Tender Offer, the
Company shall not, without the prior written consent of the Purchaser, engage
in, one or series of related transactions, in which the Company obtains equity
financing in an aggregate amount in excess of $1,000,000.
7.12. Stock Incentive Plan. The Board of Directors shall approve the adoption
--------------------
of the Stock Incentive Plan and shall have agreed to seek and recommend
shareholder approval therefor at the Shareholders Meeting.
23
<PAGE>
ARTICLE 8.
TERMINATION
8.1. Termination Rights. This Agreement shall terminate upon the consummation
------------------
of a Successful Tender Offer unless earlier terminated pursuant to this Section
8.1. This Agreement may be terminated and the Tender Offer contemplated herein
may be abandoned at any time prior to a Successful Tender Offer:
(a) by the mutual written consent of the Purchaser and the Company;
(b) by either the Purchaser or the Company if either (or any
permitted assignee) is prohibited by an order or injunction (other than an order
or injunction on a temporary or preliminary basis) of a court of competent
jurisdiction from consummating the Transactions and all means of appeal and all
appeals from such order or injunction have been finally exhausted;
(c) by either the Purchaser or the Company if the Tender Offer shall
not have been consummated within 6 months after the date of this Agreement;
provided, that the right to terminate this Agreement under this Section 8.1(c)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or results in, the failure of the
Transactions to have been consummated within such period;
(d) by the Purchaser if the Board of Directors of the Company shall
have withdrawn or modified, or resolved to withdraw or modify, in any manner
which is adverse to the Purchaser, its recommendation or approval of the
Transactions, provided, however, that the Purchaser shall not have the right to
terminate this Agreement pursuant to this Section 8.1(d) if as a result of the
Company's receipt of an Acquisition Proposal from a third party the Company
withdraws, modifies, or amends its approval or recommendation of the
transactions contemplated hereby and if within three business days of taking and
disclosing to its shareholders the aforementioned position, the Company publicly
reconfirms its recommendations of the transactions contemplated hereby as set
forth in Sections 7.1(b) and 7.2(c) hereof;
(e) by the Purchaser if the shareholders of the Company fail to
approve the Transactions at the Shareholders Meeting referred to in Section
7.1(b); by the Purchaser if any third party shall have acquired beneficial
ownership of 30% or more of the outstanding shares of Common Stock;
(g) by the Company, if the Company receives an Acquisition Proposal
which the Company's Board of Directors determines is a Superior Proposal;
provided, however, that the Company may not terminate this Agreement pursuant to
this Section 8.1(g) earlier than three business days after furnishing notice to
Purchaser of such Acquisition Proposal in accordance with Section 7.4; or
(h) by either the Purchaser or the Company, if the FTC or the
Antitrust Division of DOJ shall have commenced or officially recommended
commencement of an action (judicial or administrative) for a preliminary or
permanent injunction or other order prohibiting consummation of the Tender
Offer, provided, however, that the terminating party has previously complied
with Section 7.6.
8.2. Effect of Termination. In the event of a termination, other than a
---------------------
termination pursuant to Section 8.1(d) or Section 8.1(g), no party hereto (or
any of its directors or officers) shall have any liability or further obligation
to any other party hereto or its shareholders or directors or officers in
respect thereof, other than as provided in Section 9.11 of this Agreement, or
under the Confidentiality Agreement, except that nothing herein will relieve any
party from liability for any breach of this Agreement. In the event the
Purchaser terminates this Agreement pursuant to Section 8.1(d) or the Company
terminates this Agreement pursuant to Section 8.1(g), the Company shall (i)
immediately pay a fee of $1.5 million to the Purchaser and (ii) reimburse all of
the Purchaser's (including its members, including, without limitation, Thayer
and RCBA) out-of-pocket costs and expenses relating to this
24
<PAGE>
Agreement and the transactions contemplated hereby, up to an additional $1.5
million net of any amounts previously paid pursuant to section 9.11.
ARTICLE 9.
MISCELLANEOUS
9.1. Notices. All notices, demands and other communications provided for or
-------
permitted hereunder shall be made in writing to the following addresses (or such
other addresses as shall be designated by a party in writing) and shall be by
courier service or personal delivery:
(a) if to Purchaser:
Thayer-BLUM Funding, L.L.C.
c/o Thayer Equity Investors IV, L.P.
1455 Pennsylvania Avenue, N.W., Suite 350
Washington, DC 20004
Attention: Jeffrey W. Goettman
Facsimile (not to be deemed notice): (202) 371-0391
and:
Thayer-BLUM Funding, L.L.C.
c/o RCBA Strategic Partners, L.P.
909 Montgomery Street, Suite 400
San Francisco, CA 94133
Attention: Murray A. Indick
Facsimile (not to be deemed notice): (415) 434-3130
with a second copy to:
Latham & Watkins
1001 Pennsylvania Avenue, N.W., Suite 1300
Washington, DC 20004-2505
Attention: Eric A. Stern, Esq.
Facsimile (not to be deemed notice): 202-637-2201
(b) if to the Company:
EFTC Corporation
9351 Grant Street
Sixth Floor
Denver, CO 80229
Attention: President
Facsimile (not to be deemed notice): (303) 280-8358
with a copy to:
Holme, Roberts & Owen, LLP
1700 Lincoln, Suite 4100
Denver, CO 80203
Attention: Francis R. Wheeler
Facsimile (not to be deemed notice): (303) 866-0200
25
<PAGE>
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; when delivered by
courier, if delivered by commercial overnight courier service.
9.2. Successors and Assigns. This Agreement shall inure to the benefit of and
----------------------
be binding upon the successors and permitted assigns of the parties hereto. This
Agreement may be assigned by the Purchaser, subject to applicable securities
laws, to Affiliates of either Thayer or RCBA. The Company may not assign any of
its rights under this Agreement without the written consent of the Purchaser.
Except as provided in Article 9, no Person other than the parties hereto and
their successors and permitted assigns is intended to be a beneficiary of any of
the Transaction Documents.
9.3. Amendment and Waiver.
--------------------
(a) No failure or delay on the part of the Company, or the
Purchasers in exercising any right, power or remedy hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy. The remedies provided for herein are
cumulative and are not exclusive of any remedies that may be available to the
Company or the Purchaser at law, in equity or otherwise.
(b) Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure by any party from the terms of any provision of
this Agreement, shall be effective (i) only if it is made or given in writing
and signed by the Company and the Purchaser or by the party or parties to be
bound hereby, and (ii) only in the specific instance and for the specific
purpose for which made or given. Except where notice is specifically required by
this Agreement, no notice to or demand on any party in any case shall entitle
any party hereto to any other or further notice or demand in similar or other
circumstances.
9.4. Counterparts. This Agreement may be executed in any number of counterparts
------------
and by the parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together shall
constitute one and the same Agreement.
9.5. Headings. The headings in this Agreement are for convenience of reference
--------
only and shall not limit or otherwise affect the meaning hereof.
9.6. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without regard to the
principles of conflicts of law of such state.
9.7. Jurisdiction. Each party to this Agreement hereby irrevocably agrees that
------------
any legal action or proceeding arising out of or relating to this Agreement or
any agreements or transactions contemplated hereby shall be brought in the
courts of the State of New York or of the United States of America for the
Southern District of New York and hereby expressly submits to the personal
jurisdiction and venue of such courts for the purposes thereof and expressly
waives any claim of improper venue and any claim that such courts are an
inconvenient forum. Each party hereby irrevocably consents to the service of
process of any of the aforementioned courts in any such suit, action or
proceeding by the mailing of copies thereof by registered or certified mail,
postage prepaid, to the address set forth in Section 9.1, such service to become
effective 10 days after such mailing.
9.8. Severability. If any one or more of the provisions contained herein, or
------------
the application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect for any reason, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired, unless the provision or
provisions held invalid, illegal or unenforceable shall substantially impair the
remaining provisions hereof.
9.9. Rules of Construction. Unless the context otherwise requires, "or" is not
---------------------
exclusive, and references to sections or subsections refer to sections or
subsections of this Agreement.
26
<PAGE>
9.10. Entire Agreement. This Agreement, together with the exhibits and
----------------
schedules hereto and the other Transaction Documents is intended by the parties
as a final expression of their agreement and is intended to be a complete and
exclusive statement of the agreement and understanding of the parties hereto in
respect of the subject matter contained herein and therein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
herein or therein. This Agreement, together with the exhibits and schedules
hereto, the other Transaction Documents, supersedes all prior agreements and
understandings between the parties with respect to such subject matter.
9.11. Transaction Expenses. The Company will pay all Transaction Expenses of
--------------------
the Purchaser.
9.12. Publicity. Except as may be required by applicable law or the rules of
---------
the Nasdaq Stock Market, none of the parties hereto shall issue a publicity
release or announcement or otherwise make any public disclosure concerning this
Agreement or the transactions contemplated hereby, without prior approval by the
other parties hereto. If any announcement is required by law or the rules of the
Nasdaq Stock Market to be made by any party hereto, prior to making such
announcement such party will deliver a draft of such announcement to the other
parties and shall give the other parties an opportunity to comment thereon.
9.13. Further Assurances. Upon the terms and subject to the conditions
------------------
contained herein, each of the parties hereto agrees, both before and after the
Closing, (i) to use all reasonable efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement, (ii) to execute any documents, instruments or conveyances of any kind
which may be reasonably necessary or advisable to carry out any of the
transactions contemplated hereunder, and (iii) to cooperate with each other in
connection with the foregoing, including using their respective commercially
reasonable efforts (A) to obtain all necessary waivers, consents and approvals
from other parties that may be required; (B) to obtain all necessary permits as
are required to be obtained under any federal, state, local or foreign law or
regulations, and (C) to fulfill all conditions to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Agreement or caused this Agreement to be executed and delivered by their
authorized representatives as of the date first above written.
THAYER-BLUM FUNDING, L.L.C.
By: /s/ Jeffrey Goettman
---------------------------------------------
Jeffrey Goettman
Manager
EFTC CORPORATION
By: /s/ Jack Calderon
---------------------------------------------
Jack Calderon
President and Chief Executive Officer
27
<PAGE>
FIRST AMENDMENT
TO THE SECURITIES PURCHASE AGREEMENT
DATED AS OF MARCH 30, 2000 BY AND BETWEEN THE
PURCHASER AND THE COMPANY
THIS FIRST AMENDMENT TO THE SECURITIES PURCHASE AGREEMENT DATED AS OF
MARCH 30, 2000 BY AND BETWEEN THE PURCHASER AND THE COMPANY (this "Amendment")
is effective as of July 12, 2000.
Preliminary Statement:
The Securities Purchase Agreement (the "Purchase Agreement") was
entered into by the parties thereto on March 30, 2000. The parties agree to
amend the Purchase Agreement and hereby modify certain terms as set out below.
Section 9.3(b) of the Purchase Agreement permits the parties to amend
the Purchase Agreement if given in writing and signed by the Purchaser and the
Company.
NOW, THEREFORE, in consideration of the above premises, and of other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Purchaser and the Company hereby agree that the Purchase
Agreement be amended as follows:
1. Defined Terms.
-------------
Terms used with initial capital letters herein which are not otherwise
defined in this Amendment shall have the meanings given to them in the Purchase
Agreement.
2. Amendments to Recitals.
----------------------
The Recitals to the Purchase Agreement shall be amended to read in their
entirety as follows:
RECITALS:
A. WHEREAS, upon the terms and subject to the conditions set
forth in this Agreement, the Company wishes to issue and sell, and the
Purchaser wishes to acquire, $54,000,000 in aggregate principal amount
of the Company's 15% Senior Subordinated Exchangeable Notes due June
2006 (the "March Notes"), substantially in the form attached as
Exhibit A hereto, $14,000,000 in aggregate principal amount of the
---------
Company's 15% Senior Subordinated Exchangeable Notes due June 2006
(the "July Notes"), substantially in the form attached as Exhibit B
---------
hereto, such notes exchangeable automatically for shares of the
Company's Series B convertible preferred stock (the "Convertible
Preferred Stock") (together the March Notes and the July Notes the
"Exchangeable Notes"), and warrants to purchase shares of the
Company's common stock, par value $.01 per share, with an exercise
price of $.01 per share, substantially in the form attached as Exhibit
-------
C hereto (the "Warrants", and together with the Exchangeable Notes,
-
the "Securities"), representing approximately 19.9% of the Company's
outstanding Common Stock (such acquisition, the "Initial Investment").
B. WHEREAS, following the consummation of the Initial
Investment, the Purchaser intends to engage in a tender offer for up
to 5,625,000 shares of the Company's common stock (the "Tender Offer",
and together with the Initial Investment, the "Transactions").
<PAGE>
C. WHEREAS, the parties intend that prior to completion of the
Tender Offer, the Company's shareholders approve of the Transactions,
and the Company has agreed to call a meeting of its shareholders (the
"Shareholders Meeting") and to recommend that the shareholders vote
for a proposal to approve the transactions as contemplated by this
Agreement ("Shareholder Approval").
D. WHEREAS, the parties intend that upon gaining Shareholder
Approval and the completion of a Successful Tender Offer (as defined
in Section 7.2(a)), the March Notes would automatically be exchanged
for the Company's Senior Subordinated Convertible Notes due June 2006,
substantially in the form attached as Exhibit D hereto (the
---------
"Convertible Notes"), with an aggregate principal amount of
$54,000,000 plus any accrued but unpaid interest on the March Notes,
which could be converted into shares of the Company's common stock at
a price of $2.58 per share, and any and all unexercised Warrants would
be cancelled. Additionally, upon gaining Shareholder Approval and the
completion of a Successful Tender Offer, the July Notes would
automatically be exchanged for Preferred Stock having an aggregate
liquidation preference equal to the aggregate principal amount of such
Notes then outstanding, plus accrued but unpaid interest.
3. Amendments to Purchase Agreement.
--------------------------------
(a) Article 1 is amended as follows:
Replace the definition of "Balance Sheet Date" with the following:
"Balance Sheet Date" means December 31, 1999, provided however, when
such term is used in a representation, warranty, covenant or condition
to be satisfied by the Company in connection with the Second Closing,
such term shall mean May 31, 2000.
Add the following definition immediately after the definition of
"Convertible Notes":
"Convertible Preferred Stock" means Series B Convertible Preferred
Stock of the Company convertible into Common Stock at the conversion
price of $1.80 per share. The registration rights and preferences of
the Preferred Stock shall be as set forth in the articles of amendment
to the Company's articles of incorporation substantially in the form
attached hereto as Exhibit G.
---------
(b) Insert the following after Section 2.2:
2.3 Purchase and Sale of the July Notes. Upon the terms and
-----------------------------------
subject to the conditions herein contained, at the Second Closing (as
defined herein) on the Second Closing Date (as defined herein), the
Company agrees that it will issue and sell to the Purchaser, and the
Purchaser agrees that it will acquire and purchase from the Company,
the July Notes. The purchase price of the July Notes shall be
$14,000,000 (the "July Notes Purchase Price").
2.4 Second Closing. The closing of the sale to and purchase by
--------------
the Purchaser of the July Notes referred to in Section 2.3 hereof (the
"Second Closing") shall occur at the offices of Latham & Watkins, 1001
Pennsylvania Avenue, N.W., Suite 1300, Washington, D.C. 20004 at 10:00
a.m. D.S.T. time on July 18, 2000 or at such other earlier date, place
or time of day as the Purchaser and the Company shall agree to in
writing (the "Second Closing Date"). At the Second Closing, (i) the
Company shall deliver to the Purchaser the July Notes being purchased
by the Purchaser, registered in such Purchaser's name, free and clear
of any Liens of any nature whatsoever, and (ii) the Purchaser shall
deliver to the Company the July Notes Purchase Price by wire transfer
of immediately available funds.
(c) Insert the following after Section 3.16:
2
<PAGE>
3.17 Conditions to the Obligation of the Purchaser to Purchase
---------------------------------------------------------
the July Notes. Articles 3.1, 3.2 and 3.4-3.10, inclusive together
--------------
with Article 3.14 hereof, hereby apply to the Second Closing.
(d) Insert the following after Section 4.10:
4.11 Conditions to the Obligation of the Company to Issue the
--------------------------------------------------------
July Notes. Article 4 hereof, hereby applies to the Second Closing.
----------
(e) Article 5 is amended as follows:
Insert the phrase "and the Second Closing" after the phrase
"Immediately following the Closing" in the second sentence of Section
5.6.
Insert the phrase "and the Convertible Preferred Stock" at the
end of clause (iv) of the sixth sentence of Section 5.6.
Delete the last sentence of Section 5.9.
Insert the phrase "for purposes of the Closing and since May 31,
2000 for purposes of the Second Closing" after the phrase "December
31, 1999" in the first sentence of Section 5.22.
Insert the following after Section 5.27:
5.28 Second Closing. The representations and warranties of the
--------------
Company contained in this Article 5 shall be deemed made at the Second
Closing; provided however, any representation and warranty that
relates solely to an earlier date shall be deemed to be made as of
such date in their entirety; and further provided that certain of such
representations and warranties shall be modified as set forth below
and by the Schedules attached hereto.
(f) Insert the following after Section 6.6:
6.7 Second Closing. The representations and warranties of the
--------------
Purchaser contained in this Article 6 shall be deemed made at the
Second Closing; provided however, any representation and warranty that
relates solely to an earlier date shall be deemed to be made as of
such date.
(g) Article 7 is amended as follows:
Delete the number "8,250,000" in the second sentence of Section
7.2(a) and replace it with the number "5,625,000."
Delete the date "September 1, 2000" in the third sentence of
Section 7.2(a) and replace it with the date "September 30, 2000."
Insert the phrase "and issuing the Convertible Preferred Stock,"
after the phrase "up to a maximum of 75,000,000" in the first sentence
of Section 7.5(b).
Delete the third sentence of Section 7.6(a) and replace it with
the following:
"Subject to the requirements of law or judicial process, the Purchaser
shall hold in confidence all such information, on the terms and
subject to the conditions contained in Annex II, the provisions of
which shall survive the termination of this Agreement, the Purchaser
shall deliver to the Company all documents, work papers and other
material
3
<PAGE>
(including copies) obtained by the Purchaser or on its behalf
from the Company, as a result of this Agreement or in connection
herewith, whether so obtained before or after the execution hereof,
and shall destroy all documents, work papers and other materials
(including copies) containing all such information; provided, however,
that in the event that any litigation or investigation has been
instituted or threatened, the Company shall be entitled to retain all
documents, work papers and other materials (including copies)
otherwise subject to destruction under this Section for the pendency
of such litigation or investigation."
Insert the following after the existing second sentence of
Section 7.8:
"While continued listing of the Company's Common Stock on the
Nasdaq National Market cannot be assured, following closing of the
Tender Offer (unless the Company has been the subject of a "Rule 13e-3
transaction" (as defined in Rule 13e-3 adopted under the Exchange
Act), or has been sold to a third party unaffiliated with Purchaser),
through September 30, 2010, (1) the Company will use commercially
reasonable efforts (a) to maintain the listing of the Company's Common
Stock on the Nasdaq National Market by complying with the non-
quantitative designation criteria applicable to Nasdaq National Market
issuers and to comply with any applicable minimum per share bid price
by effecting a reverse stock split if necessary, and (b) to list the
Company's Common Stock on the Nasdaq Small Cap Market if the Company's
Common Stock is de-listed or is in the process of being de-listed from
the Nasdaq National Market (although the Company will be required to
satisfy only the non-quantitative designation criteria applicable to
Nasdaq National Market issuers and any applicable minimum per share
bid price by effecting a reverse stock split if necessary), and (2)
Purchaser (and any successor) will use commercially reasonable efforts
to cause the Company to comply with the non-quantitative designation
criteria applicable to Nasdaq National Market issuers and to comply
with any applicable minimum per share bid price by effecting a reverse
stock split if necessary. Nothing herein shall prohibit Purchaser or
any of its Affiliates from proposing or effecting a Rule 13e-3
transaction if permitted under Article 7.13 hereof, or from causing
the Company to enter into a sale to a third party unaffiliated with
Purchaser. Compliance with this continued listing requirement after
March 31, 2004 may be waived by a majority of the Company's
disinterested directors. If the Company lists its Common Stock on the
New York Stock Exchange (NYSE), the foregoing obligations shall apply
to the continued listing of the Company's Common Stock on the NYSE
rather than the Nasdaq National Market."
Insert the following after Section 7.12:
7.13 Corporate Governance. Purchaser (or its successor) will
--------------------
take no action prior to December 31, 2001 to cause the Company to be
the subject of a Rule 13e-3 transaction with an Affiliate of Purchaser
(or such successor) unless approved by a majority of disinterested
directors.
(h) Delete the first sentence of Section 8.1 and add the following:
"This Agreement shall terminate upon the consummation of a
Successful Tender Offer unless earlier terminated pursuant to
this Section 8.1, provided however Sections 7.8 and 7.13 shall
survive until the dates set forth in each respective section."
4. Amendments to Annex I.
---------------------
Annex I to the Purchase Agreement shall be amended in its entirety as
set forth on Annex I attached to this Amendment.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment or caused this Amendment to be executed and delivered by their
authorized representatives as of the date first above written.
THAYER-BLUM FUNDING, L.L.C.
By: /s/ Jeffrey Goettman
--------------------------
Jeffrey Goettman
Manager
EFTC CORPORATION
By: /s/ Jack Calderon
-----------------------
Jack Calderon
Chairman
5
<PAGE>
Appendix III
2000 Equity Stock Option Plan
<PAGE>
2000 STOCK OPTION PLAN
OF
EFTC CORPORATION
EFTC Corporation, a Colorado corporation, has adopted 2000 Equity
Stock Option of EFTC Corporation (the "Plan"), effective ___________ ___, 2000,
for the benefit of its eligible employees, consultants and directors.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and Consultants (as each such term is defined below) to further the growth,
development and financial success of the Company by personally benefiting
through the ownership of Company stock and/or rights which recognize such
growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and Consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I.
DEFINITIONS
1.1 General. Wherever the following terms are used in the Plan they
shall have the meanings specified below, unless the context clearly indicates
otherwise.
Administrator. "Administrator" shall mean the entity that conducts
-------------
the general administration of the Plan as provided in Article VII. With
reference to the administration of the Plan with respect to Options granted to
Independent Directors, the term "Administrator" shall refer to the Board. With
reference to the administration of the Plan with respect to any other Option,
the term "Administrator" shall refer to the Committee unless the Board has
assumed the authority for administration of the Plan generally as provided in
Section 7.2.
1.2 Award Limit. "Award Limit" shall mean 1,000,000 shares of Common
-----------
Stock, as adjusted pursuant to Section 8.3 of the Plan.
1.3 Board. "Board" shall mean the Board of Directors of the Company.
-----
1.4 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
1.5 Committee. "Committee" shall mean the Compensation Committee of
---------
the Board, or another committee or subcommittee of the Board, appointed as
provided in Section 8.1.
1.6 Common Stock. "Common Stock" shall mean the common stock of the
------------
Company, par value $.01 per share, and any equity security of the Company issued
or authorized to be issued in the future, but excluding any preferred stock and
any warrants, options or other rights to purchase Common Stock. Debt securities
of the Company convertible into Common Stock shall be deemed equity securities
of the Company.
1.7 Company. "Company" shall mean EFTC Corporation, a Colorado
-------
corporation.
1.8 Consultant. "Consultant" shall mean any consultant or adviser if:
----------
(a) The consultant or adviser renders bona fide services to
the Company;
<PAGE>
(b) The services rendered by the consultant or adviser are not
in connection with the offer or sale of securities in a capital-
raising transaction and do not directly or indirectly promote or
maintain a market for the Company's securities; and
(c) The consultant or adviser is a natural person who has
contracted directly with the Company to render such services.
1.9 Director. "Director" shall mean a member of the Board.
--------
1.10 Employee. "Employee" shall mean any officer or other employee
--------
(as defined in accordance with Section 3401(c) of the Code) of the Company, or
of any corporation which is a Subsidiary.
1.11 Exchange Act. "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended.
1.12 Fair Market Value. "Fair Market Value" of a share of Common
-----------------
Stock as of a given date shall be (a) the average closing price of a share of
Common Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), based on the 10 trading days immediately prior to such
date, or if shares were not traded during such 10 trading day period, then
including such number of days following such date as necessary to include 10
consecutive days on which trades occur, or (b) if Common Stock is not traded on
an exchange but is quoted on Nasdaq or a successor quotation system, the average
of the means between the closing representative bid and asked prices for the
Common Stock on each of the ten trading days prior to such date as reported by
Nasdaq or such successor quotation system; or (c) if Common Stock is not
publicly traded on an exchange and not quoted on Nasdaq or a successor quotation
system, the Fair Market Value of a share of Common Stock as established by the
Administrator acting in good faith.
1.13 Incentive Stock Option. "Incentive Stock Option" shall mean an
----------------------
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.14 Independent Director. "Independent Director" shall mean a member
--------------------
of the Board who is not an Employee of the Company.
1.15 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
--------------------------
mean an Option which is not an Incentive Stock Option.
1.16 Option. "Option" shall mean a stock option granted under Article
------
IV of the Plan. An Option granted under the Plan shall, as determined by the
Committee, be either a Non-Qualified Stock Option or an Incentive Stock Option;
provided, however, that Options granted to Independent Directors and Consultants
-------- -------
shall be Non-Qualified Stock Options.
1.18 Option Agreement. "Option Agreement" shall mean a written
----------------
agreement executed by an authorized officer of the Company and the Optionee
which shall contain such terms and conditions with respect to an Option as the
Administrator shall determine, consistent with the Plan.
1.19 Optionee. "Optionee" shall mean an Employee, Consultant or
--------
Independent Director granted an Option under the Plan.
1.20 Plan. "Plan" shall mean The 2000 Stock Option Plan of EFTC
----
Corporation.
1.21 QDRO. "QDRO" shall mean a qualified domestic relations order as
----
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
2
<PAGE>
1.22 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such Rule may be amended from time to time.
1.23 Section 162(m) Participant. "Section 162(m) Participant" shall
--------------------------
mean any Employee designated by the Committee as a Employee whose compensation
for the fiscal year in which the Employee is so designated or a future fiscal
year may be subject to the limit on deductible compensation imposed by Section
162(m) of the Code.
1.24 Securities Act. "Securities Act" shall mean the Securities Act
--------------
of 1933, as amended.
1.25 Subsidiary. "Subsidiary" shall mean any corporation in an
----------
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain.
1.26 Termination of Consultancy. "Termination of Consultancy" shall
--------------------------
mean the time when the engagement of an Optionee as a Consultant to the Company
or a Subsidiary is terminated for any reason, with or without cause, including,
but not by way of limitation, by resignation, discharge, death or retirement;
but excluding terminations where there is a simultaneous commencement of
employment with the Company or any Subsidiary. The Committee, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Consultancy, including, but not by way of limitation, the
question of whether a Termination of Consultancy resulted from a discharge for
good cause, and all questions of whether a particular leave of absence
constitutes a Terminations of Consultancy. Notwithstanding any other provision
of the Plan, the Company or any Subsidiary has an absolute and unrestricted
right to terminate a Consultant's service at any time for any reason whatsoever,
with or without cause, except to the extent expressly provided otherwise in
writing.
1.27 Termination of Directorship. "Termination of Directorship" shall
---------------------------
mean the time when an Optionee who is an Independent Director ceases to be a
Director for any reason, including, but not by way of limitation, a termination
by resignation, failure to be elected, death or retirement. The Board, in its
sole and absolute discretion, shall determine the effect of all matters and
questions relating to Termination of Directorship with respect to Independent
Directors.
1.28 Termination of Employment. "Termination of Employment" shall
-------------------------
mean the time when the employee-employer relationship between an Optionee and
the Company or any Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (a) terminations where
there is a simultaneous reemployment or continuing employment of an Optionee by
the Company or any Subsidiary, (b) at the discretion of the Committee,
terminations which result in a temporary severance of the employee-employer
relationship, and (c) at the discretion of the Committee, terminations which are
followed by the simultaneous establishment of a consulting relationship by the
Company or a Subsidiary with the former employee. The Committee, in its absolute
discretion, shall determine the effect of all matters and questions relating to
Termination of Employment, including, but not by way of limitation, the question
of whether a Termination of Employment resulted from a discharge for cause, and
all questions of whether a particular leave of absence constitutes a Termination
of Employment; provided, however, that, with respect to Incentive Stock Options,
-------- -------
unless otherwise determined by the Committee in its discretion, a leave of
absence, change in status from an employee to an independent contractor or other
change in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of the Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
3
<PAGE>
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
----------------------
(a) The shares of stock subject to Options shall be Common
Stock, initially shares of the Company's Common Stock, par value $.01
per share. The aggregate number of such shares which may be issued
upon exercise of such Options under the Plan shall not exceed five
million (5,000,000). The shares of Common Stock issuable upon exercise
of such Options may be either previously authorized but unissued
shares or treasury shares.
(b) The maximum number of shares which may be subject to
Options, granted under the Plan to any individual in any calendar year
shall not exceed the Award Limit. To the extent required by Section
162(m) of the Code, shares subject to Options which are canceled
continue to be counted against the Award Limit and if, after grant of
an Option, the price of shares subject to such Option is reduced, the
transaction is treated as a cancellation of the Option and a grant of
a new Option and both the Option deemed to be canceled and the Option
deemed to be granted are counted against the Award Limit.
2.2 Add-back of Options. If any Option, expires or is canceled
-------------------
without having been fully exercised, or is exercised in whole or in part for
cash as permitted by the Plan, the number of shares subject to such Option but
as to which such Option was not exercised prior to its expiration, cancellation
or exercise may again be awarded hereunder, subject to the limitations of
Section 2.1. Furthermore, any shares subject to Options which are adjusted
pursuant to Section 8.3 and become exercisable with respect to shares of stock
of another corporation shall be considered cancelled and may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1. Shares
of Common Stock which are delivered by the Optionee or withheld by the Company
upon the exercise of any Option under the Plan, in payment of the exercise price
thereof or tax withholding thereon, may again be optioned, granted or awarded
hereunder, subject to the limitations of Section 2.1. Notwithstanding the
provisions of this Section 2.2, no shares of Common Stock may again be awarded
if such action would cause an Incentive Stock Option to fail to qualify as an
incentive stock option under Section 422 of the Code.
ARTICLE III.
GRANTING OF OPTIONS
3.1 Option Agreement. Each Option shall be evidenced by an Option
----------------
Agreement. Option Agreements evidencing Options intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code. Option Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to meet the applicable provisions of Section 422 of the Code.
3.2 Provisions Applicable to Section 162(m) Participants. The
----------------------------------------------------
Committee, in its discretion, may determine whether an Option is to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code.
3.3 Consideration. In consideration of the granting of an Option
-------------
under the Plan, the Optionee shall agree, in the Option Agreement, to remain in
the employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year (or
such shorter period as may be fixed in the Option Agreement or by action of the
Administrator following grant of the Option) after the Option is granted (or, in
the case of an Independent Director, until the next annual meeting of
stockholders of the Company).
3.4 At-Will Employment. Nothing in the Plan or in any Option
------------------
Agreement hereunder shall confer upon any Optionee any right to continue in the
employ of, or as a Consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company
4
<PAGE>
and any Subsidiary, which are hereby expressly reserved, to discharge any
Optionee at any time for any reason whatsoever, with or without cause, except to
the extent expressly provided otherwise in a written employment agreement
between the Optionee and the Company and any Subsidiary.
ARTICLE IV.
GRANTING OF OPTIONS
4.1 Eligibility. Any Employee or Consultant selected by the Committee
-----------
pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Section 4.5.
4.2 Disqualification for Stock Ownership. No person may be granted an
------------------------------------
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
Option shall be granted to any person who is not an Employee.
4.4 Granting of Options to Employees and Consultants.
------------------------------------------------
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of the Plan:
(i) Determine which Employees are key Employees and
select from among the key Employees or Consultants (including
Employees or Consultants who have previously received Options under
the Plan) such of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number
of shares to be subject to such Options granted to the selected key
Employees or Consultants;
(iii) Subject to Section 4.3, determine whether such
Options are to be Incentive Stock Options or Non-Qualified Stock
Options and whether such Options are to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such
Options, consistent with the Plan; provided, however, that the terms
-------- -------
and conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of a key Employee or Consultant to be
granted an Option, the Committee shall instruct the Secretary of the
Company to issue the Option and may impose such conditions on the
grant of the Option as it deems appropriate. Without limiting the
generality of the preceding sentence, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a
condition on the grant of an Option to an Employee or Consultant that
the Employee or Consultant surrender for cancellation some or all of
the unexercised Options which have been previously granted to him
under the Plan or otherwise. An Option, the grant of which is
conditioned upon such surrender, may have an Option price lower (or
higher) than the exercise price of such surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as
such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without
5
<PAGE>
regard to the number of shares, price, exercise period or any other
term or condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under the Plan may be
modified by the Committee, with the consent of the Optionee, to
disqualify such Option from treatment as an "incentive stock option"
under Section 422 of the Code.
4.5 Granting of Options to Independent Directors. The Board shall
--------------------------------------------
from time to time, in its discretion, and subject to applicable limitations of
the Plan select from among the Independent Directors (including Independent
Directors who have previously received Options under the Plan) such of them as
in its opinion should be granted Non-Qualified Stock Options, determine the
number of shares to be subject to such Non-Qualified Stock Options granted to
the selected Independent Directors and determine the terms and conditions of
such Non-Qualified Stock Options, consistent with the terms of the Plan.
4.6 Options in Lieu of Cash Compensation. Options may be granted
------------------------------------
under the Plan to Employees and Consultants in lieu of cash bonuses which would
otherwise be payable to such Employees and Consultants and to Independent
Directors in lieu of directors' fees which would otherwise be payable to such
Independent Directors, pursuant to such policies which may be adopted by the
Administrator from time to time.
ARTICLE V.
TERMS OF OPTIONS
5.1 Option Price. The price per share of the shares subject to each
------------
Option granted to Employees and Consultants shall be set by the Committee;
provided, however, that such price shall be no less than the par value of a
-------- -------
share of Common Stock, unless otherwise permitted by applicable state law, and
(a) in the case of Options intended to qualify as performance-based compensation
as described in Section 162(m)(4)(C) of the Code, such price shall not be less
than 100% of the Fair Market Value of a share of Common Stock on the date the
Option is granted; (b) in the case of Incentive Stock Options such price shall
not be less than 100% of the Fair Market Value of a share of Common Stock on the
date the Option is granted (or the date the Option is modified, extended or
renewed for purposes of Section 424(h) of the Code); (iii) in the case of
Incentive Stock Options granted to an individual then owning (within the meaning
of Section 424(d) of the Code) more than 10% of the total combined voting power
of all classes of stock of the Company or any Subsidiary or parent corporation
thereof (within the meaning of Section 422 of the Code), such price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Option is granted (or the date the Option is modified, extended or renewed
for purposes of Section 424(h) of the Code).
5.2 Option Term. The term of an Option granted to an Employee or
-----------
Consultant shall be set by the Committee in its discretion; provided, however,
-------- -------
that, in the case of Incentive Stock Options, the term shall not be more than
ten (10) years from the date the Incentive Stock Option is granted, or five (5)
years from such date if the Incentive Stock Option is granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee may extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
5.3 Option Vesting.
--------------
(a) Incentive Stock Options granted to an Employee or
Consultant pursuant to this Plan shall be either a Type A Option or a
Type B Option. Type A Options shall be Options which become vested and
exercisable over a five year period. Type B Options shall be Options
which become vested and exercisable on the seventh anniversary of the
date of grant. Subject to the foregoing, the period during which the
right to exercise, in whole or in part, an Option granted to an
Employee or a Consultant vests in the Optionee shall be set by the
Committee and the
6
<PAGE>
Committee may determine that an Option may not be exercised in whole
or in part for a specified period after it is granted; provided,
--------
however, that, unless the Committee otherwise provides in the terms of
-------
the Option Agreement or otherwise, no Option shall be exercisable by
any Optionee who is then subject to Section 16 of the Exchange Act
within the period ending six months and one day after the date the
Option is granted. At any time after grant of an Option, the Committee
may, in its sole and absolute discretion and subject to whatever terms
and conditions it selects, accelerate the period during which an
Option granted to an Employee or Consultant vests.
(b) No portion of an Option granted to an Employee or
Consultant which is unexercisable at Termination of Employment or
Termination of Consultancy, as applicable, shall thereafter become
exercisable, except as may be otherwise provided by the Committee
either in the Option Agreement or by action of the Committee following
the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of
stock with respect to which "incentive stock options" (within the
meaning of Section 422 of the Code, but without regard to Section
422(d) of the Code) are exercisable for the first time by an Optionee
during any calendar year (under the Plan and all other incentive stock
option plans of the Company and any parent or subsidiary corporation
(within the meaning of Section 422 of the Code) of the Company)
exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule
set forth in the preceding sentence shall be applied by taking Options
into account in the order in which they were granted. For purposes of
this Section 5.3(c), the Fair Market Value of stock shall be
determined as of the time the Option with respect to such stock is
granted.
5.4 Terms of Options Granted to Independent Directors. The Board
-------------------------------------------------
shall determine the terms and conditions of each Non-Qualified Stock Option
granted to an Independent Director, consistent with the terms of the Plan.
ARTICLE VI.
EXERCISE OF OPTIONS
6.1 Partial Exercise. An exercisable Option may be exercised in whole
----------------
or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Administrator may require that, by the terms of the
Option, a partial exercise be with respect to a minimum number of shares.
6.2 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules
established by the Administrator stating that the Option, or a portion
thereof, is exercised. The notice shall be signed by the Optionee or
other person then entitled to exercise the Option or such portion of
the Option;
(b) Such representations and documents as the Administrator,
in its absolute discretion, deems necessary or advisable to effect
compliance with all applicable provisions of the Securities Act and
any other federal or state securities laws or regulations. The
Administrator may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates
and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant
to Section 8.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise
the Option; and
(d) Full cash payment to the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is
exercised. However, the Administrator, may in its
7
<PAGE>
discretion (i) allow a delay in payment up to thirty (30) days from
the date the Option, or portion thereof, is exercised; (ii) allow
payment, in whole or in part, through the delivery of shares of Common
Stock which have been owned by the Optionee for at least six months,
duly endorsed for transfer to the Company with a Fair Market Value on
the date of delivery equal to the aggregate exercise price of the
Option or exercised portion thereof; (iii) allow payment, in whole or
in part, through the surrender of shares of Common Stock then issuable
upon exercise of the Option having a Fair Market Value on the date of
Option exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iv) allow payment, in whole or in part,
through the delivery of property of any kind which constitutes good
and valuable consideration; (v) allow payment, in whole or in part,
through the delivery of a full recourse promissory note bearing
interest (at no less than such rate as shall then preclude the
imputation of interest under the Code) and payable upon such terms as
may be prescribed by the Committee or the Board; (vi) allow payment,
in whole or in part, through the delivery of a notice that the
Optionee has placed a market sell order with a broker with respect to
shares of Common Stock then issuable upon exercise of the Option, and
that the broker has been directed to pay a sufficient portion of the
net proceeds of the sale to the Company in satisfaction of the Option
exercise price; or (vii) allow payment through any combination of the
consideration provided in the foregoing subparagraphs (ii), (iii),
(iv), (v) and (vi). In the case of a promissory note, the
Administrator may also prescribe the form of such note and the
security to be given for such note. The Option may not be exercised,
however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is
prohibited by law.
6.3 Conditions to Issuance of Stock Certificates. The Company shall
--------------------------------------------
not be required to issue or deliver any certificate or certificates for shares
of stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock
exchanges on which such class of stock is then listed;
(b) The completion of any registration or other qualification
of such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Administrator shall, in its
absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any
state or federal governmental agency which the Administrator shall, in
its absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of
Options granted to Independent Directors) may establish from time to
time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such
shares, including payment of any applicable withholding tax, which in
the discretion of the Committee or the Board may be in the form of
consideration used by the Optionee to pay for such shares under
Section 6.2(d).
6.4 Rights as Stockholders. Optionees shall not be, nor have any of
----------------------
the rights or privileges of, stockholders of the Company in respect of any
shares purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Company to such
Optionees.
6.5 Ownership and Transfer Restrictions. The Administrator, in its
-----------------------------------
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Option Agreement and may be referred to on the certificates evidencing such
shares. The Committee may require the Employee to give the Company prompt notice
of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock
8
<PAGE>
Option within (i) two years from the date of granting (including the date the
Option is modified, extended or renewed for purposes of Section 424(h) of the
Code) such Option to such Employee or (ii) one year after the transfer of such
shares to such Employee. The Committee may direct that the certificates
evidencing shares acquired by exercise of any such Option refer to such
requirement to give prompt notice of disposition.
6.6 Additional Limitations on Exercise of Options. Optionees may be
---------------------------------------------
required to comply with any timing or other restrictions with respect to the
settlement or exercise of an Option, including a window-period limitation, as
may be imposed in the discretion of the Administrator.
ARTICLE VII.
ADMINISTRATION
7.1 Compensation Committee. The Compensation Committee (or another
----------------------
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) shall have at least two Independent Directors appointed by and
holding office at the pleasure of the Board, each of whom is both a "non-
employee director" as defined by Rule 16b-3 and an "outside director" for
purposes of Section 162(m) of the Code. To the extent any Options are to be
granted to any Section 162(m) Participant, such grants shall be approved by a
subcommittee of the Compensation Committee composed solely of Independent
Directors. Appointment of Committee members shall be effective upon acceptance
of appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
7.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
agreements pursuant to which Options are granted or awarded, and to adopt such
rules for the administration, interpretation, and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. The terms of Options need
not be the same with respect to each Optionee. Any such interpretations and
rules with respect to Incentive Stock Options shall be consistent with the
provisions of Section 422 of the Code. In its absolute discretion, the Board may
at any time and from time to time exercise any and all rights and duties of the
Committee under the Plan except with respect to matters which under Rule 16b-3
or Section 162(m) of the Code, or any regulations or rules issued thereunder,
are required to be determined in the sole discretion of the Committee.
7.3 Majority Rule; Unanimous Written Consent. The Committee shall act
----------------------------------------
by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
7.4 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation ,if any, for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of the Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers, or other persons. The Committee, the Company and the
Company's officers and Directors shall be entitled to rely upon the advice,
opinions or valuations of any such persons. All actions taken and all
interpretations and determinations made by the Committee or the Board in good
faith shall be final and binding upon all Optionees, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to the Plan or Options, and all members of the Committee and the Board
shall be fully protected by the Company in respect of any such action,
determination or interpretation.
ARTICLE VIII.
MISCELLANEOUS PROVISIONS
8.1 Transferability of Options.
--------------------------
(a) Except as otherwise provided in Section 8.1(b):
9
<PAGE>
(i) No Option under the Plan may be sold, pledged,
assigned or transferred in any manner other than by will or the laws
of descent and distribution or, subject to the consent of the
Committee, pursuant to a DRO, unless and until such Option has been
exercised, or the shares underlying such Option have been issued, and
all restrictions applicable to such shares have lapsed;
(ii) No Option or interest or right therein shall be liable
for the debts, contracts or engagements of the Optionee or his
successors in interest or shall be subject to disposition by transfer,
alienation, anticipation, pledge, encumbrance, assignment or any other
means whether such disposition be voluntary or involuntary or by
operation of law by judgment, levy, attachment, garnishment or any
other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect,
except to the extent that such disposition is permitted by the
preceding sentence; and
(iii) During the lifetime of the Optionee, only he may
exercise an Option (or any portion thereof) granted to him under the
Plan, unless it has been disposed of pursuant to a DRO; after the
death of the Optionee, any exercisable portion of an Option may, prior
to the time when such portion becomes unexercisable under the Plan or
the applicable Option Agreement, be exercised by his personal
representative or by any person empowered to do so under the deceased
Optionee's will or under the then applicable laws of descent and
distribution.
(b) Notwithstanding Section 8.1(a), the Committee, in its sole
discretion, may determine to permit an Optionee to transfer a Non-
Qualified Stock Option to any one or more Permitted Transferees (as
defined below), subject to the following terms and conditions: (i) a
Non-Qualified Stock Option transferred to a Permitted Transferee shall
not be assignable or transferable by the Permitted Transferee other
than by will or the laws of descent and distribution; (ii) any Non-
Qualified Stock Option which is transferred to a Permitted Transferee
shall continue to be subject to all the terms and conditions of the
Non-Qualified Stock Option as applicable to the original Optionee
(other than the ability to further transfer the Non-Qualified Stock
Option); and (iii) the Optionee and the Permitted Transferee shall
execute any and all documents requested by the Administrator,
including, without limitation documents to (A) confirm the status of
the transferee as a Permitted Transferee, (B) satisfy any requirements
for an exemption for the transfer under applicable federal and state
securities laws and (C) evidence the transfer. For purposes of this
Section 8.1(b), "Permitted Transferee" shall mean, with respect to an
Optionee, any child, stepchild, grandchild, parent, stepparent,
grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-
law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships, any person sharing
the Optionee's household (other than a tenant or employee), a trust in
which these persons have more than fifty percent of the beneficial
interest, a foundation in which these persons (or the Optionee)
control the management of assets, and any other entity in which these
persons (or the Optionee) own more than fifty percent of the voting
interests, or any other transferee specifically approved by the
Administrator after taking into account any state or federal tax or
securities laws applicable to transferable Non-Qualified Stock
Options.
8.2 Amendment, Suspension or Termination of the Plan.Except as
------------------------------------------------
otherwise provided in this Section 8.2, the Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 8.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under the Plan. No amendment,
suspension or termination of the Plan shall, without the consent of the Optionee
alter or impair any rights or obligations under any Option theretofore granted
or awarded, unless the Option itself otherwise expressly so provides. No Options
may be granted or awarded during any period of suspension or after termination
of the Plan, and in no event may any Incentive Stock Option be granted under the
Plan after the first to occur of the following events:
10
<PAGE>
(a) The expiration of ten years from the date the Plan is
adopted by the Board; or
(b) The expiration of ten years from the date the Plan is
approved by the Company's stockholders under Section 8.4.
8.3 Changes in Common Stock or Assets of the Company, Acquisition or
----------------------------------------------------------------
Liquidation of the Company, Change in Control and Other Corporate Events.
------------------------------------------------------------------------
(a) Subject to Section 8.3(d), in the event that the
Administrator determines that any dividend or other distribution
(whether in the form of cash, Common Stock, other securities, or other
property), recapitalization, reclassification, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-
off, combination, repurchase, liquidation, dissolution, or sale,
transfer, exchange or other disposition of all or substantially all of
the assets of the Company (including, but not limited to, a Corporate
Transaction), or exchange of Common Stock or other securities of the
Company, issuance of warrants or other rights to purchase Common Stock
or other securities of the Company, or other similar corporate
transaction or event, in the Administrator's, affects the Common Stock
such that an adjustment is determined by the Administrator to be
appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the
Plan or with respect to an Option, then the Administrator shall, in
such manner as it may deem equitable, adjust any or all of:
(i) The number and kind of shares of Common Stock (or
other securities or property) with respect to which Options may be
granted or awarded (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares
which may be issued and adjustments of the Award Limit);
(ii) The number and kind of shares of Common Stock (or
other securities or property) subject to outstanding Options; and
(iii) The grant or exercise price with respect to any
Option.
(b) Subject to Sections 8.3(b)(vii) and 8.3(d), in the event of
any Corporate Transaction or other transaction or event described in
Section 8.3(a) or any unusual or nonrecurring transactions or events
affecting the Company, any affiliate of the Company, or the financial
statements of the Company or any affiliate, or of changes in
applicable laws, regulations, or accounting principles, the
Administrator, in its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, either by the terms of the
Option or by action taken prior to the occurrence of such transaction
or event and either automatically or upon the Optionee's request, is
hereby authorized to take any one or more of the following actions
whenever the Administrator determines that such action is appropriate
in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or
with respect to any Option, to facilitate such transactions or events
or to give effect to such changes in laws, regulations or principles:
(i) To provide for either the purchase of any such Option
for an amount of cash equal to the amount that could have been
attained upon the exercise of such Option or realization of the
Optionee's rights had such Option been currently exercisable or
payable or fully vested or the replacement of such Option with other
rights or property selected by the Administrator in its sole
discretion;
(ii) To provide that the Option cannot vest, be exercised
or become payable after such event;
11
<PAGE>
(iii) To provide that such Option shall be exercisable as to
all shares covered thereby, notwithstanding anything to the contrary
in (i) Section 5.3 or 5.4 or (ii) the provisions of the applicable
Option Agreement;
(iv) To provide that such Option be assumed by the
successor or survivor corporation, or a parent or subsidiary thereof,
or shall be substituted for by similar options, rights or awards
covering the stock of the successor or survivor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to the
number and kind of shares and prices; and
(v) To make adjustments in the number and type of shares
of Common Stock (or other securities or property) subject to
outstanding Options and/or in the terms and conditions of (including
the exercise price), and the criteria included in, outstanding Options
or Options which may be granted in the future.
(c) Subject to Section 8.3(d) and 8.8, the Administrator may, in
its discretion, include such further provisions and limitations in any
Option, agreement or certificate, as it may deem equitable and in the
best interests of the Company.
(d) With respect to Options which are granted to Section 162(m)
Participants and are intended to qualify as performance-based
compensation under Section 162(m)(4)(C), no adjustment or action
described in this Section 8.3 or in any other provision of the Plan
shall be authorized to the extent that such adjustment or action would
cause such Option to fail to so qualify under Section 162(m)(4)(C), or
any successor provisions thereto. No adjustment or action described in
this Section 8.3 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would cause
the Plan to violate Section 422(b)(1) of the Code. Furthermore, no
such adjustment or action shall be authorized to the extent such
adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3
unless the Administrator determines that the Option is not to comply
with such exemptive conditions. The number of shares of Common Stock
subject to any Option shall always be rounded to the next whole
number.
(e) Notwithstanding the foregoing, in the event that the Company
becomes a party to a transaction that is intended to qualify for
"pooling of interest" accounting treatment and, but for one or more of
the provisions of this Plan or any Option Agreement would so qualify,
then this Plan and any Option Agreement shall be interpreted so as to
preserve such accounting treatment, and to the extent that any
provision of the Plan or any Option Agreement would disqualify the
transaction from pooling of interests accounting treatment (including,
if applicable, an entire Option Agreement), then such provision shall
be null and void. All determinations to be made in connection with the
preceding sentence shall be made by the independent accounting firm
whose opinion with respect to "pooling of interests" treatment is
required as a condition to the Company's consummation of such
transaction.
8.4 Approval of Plan by Stockholders. The Plan will be submitted for
--------------------------------
the approval of the Company's stockholders within twelve months after the date
of the Board's initial adoption of the Plan. Options may be granted or awarded
prior to such stockholder approval, provided that such Options shall not be
exercisable nor shall such Options vest prior to the time when the Plan is
approved by the stockholders, and provided further that if such approval has not
been obtained at the end of said twelve-month period, all Options previously
granted or awarded under the Plan shall thereupon be canceled and become null
and void.
8.5 Tax Withholding. The Company shall be entitled to require payment
----------------
in cash or deduction from other compensation payable to each Optionee of any
sums required by federal, state or local tax law to be withheld with respect to
the issuance, vesting, exercise or payment of any Option. The Administrator may
in its discretion and in satisfaction of the foregoing requirement allow such
Optionee to elect to have the Company withhold shares of Common Stock otherwise
issuable under such Option (or allow the return of shares of Common Stock)
having a Fair Market Value equal to the sums required to be withheld.
Notwithstanding any other provision
12
<PAGE>
of the Plan, the number of shares of Common Stock which may be withheld with
respect to the issuance, vesting, exercise or payment of any Option in order to
satisfy the Optionee's federal and state income and payroll tax liabilities with
respect to the issuance, vesting, exercise or payment of the Option shall be
limited to the number of shares which have a Fair Market Value on the date of
withholding or repurchase equal to the aggregate amount of such liabilities
based on the minimum statutory withholding rates for federal and state tax
income and payroll tax purposes that are applicable to such supplemental taxable
income.
8.6 Loans. The Committee may, in its discretion, extend one or
-----
more loans to key Employees in connection with the exercise or receipt of an
Option. The terms and conditions of any such loan shall be set by the Committee.
8.7 Forfeiture Provisions. Pursuant to its general authority
---------------------
to determine the terms and conditions applicable to Options, the Administrator
shall have the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3) to provide, in the terms of an Option Agreement, or to
require an Optionee to agree by separate written instrument, that (i) any
proceeds, gains or other economic benefit actually or constructively received by
the Optionee upon any receipt or exercise of the Option, or upon the receipt or
resale of any Common Stock underlying the Option, must be paid to the Company,
and (ii) the Option shall terminate and any unexercised portion of the Option
(whether or not vested) shall be forfeited, if (a) a Termination of Employment,
Termination of Consultancy or Termination of Directorship occurs prior to a
specified date, or within a specified time period following receipt or exercise
of the Option, or (b) the Optionee at any time, or during a specified time
period, engages in any activity in competition with the Company, or which is
inimical, contrary or harmful to the interests of the Company, as further
defined by the Committee (or the Board, as applicable) or the Optionee incurs a
Termination of Employment, Termination of Consultancy or Termination of
Directorship for cause.
8.8 Limitations Applicable to Section 16 Persons and
-------------------------------------------------
Performance-Based Compensation. Notwithstanding any other provision of the
------------------------------
Plan, the Plan, and any Option granted or awarded to any individual who is then
subject to Section 16 of the Exchange Act, shall be subject to any additional
limitations set forth in any applicable exemptive rule under Section 16 of the
Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent
permitted by applicable law, the Plan and Options granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of the Plan or
any Option which is granted to a Section 162(m) Participant and is intended to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code shall be subject to any additional limitations set forth in Section
162(m) of the Code (including any amendment to Section 162(m) of the Code) or
any regulations or rulings issued thereunder that are requirements for
qualification as performance-based compensation as described in Section
162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent
necessary to conform to such requirements.
8.9 Effect of Plan Upon Options and Compensation Plans. The
--------------------------------------------------
adoption of the Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in the Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or Consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights or
awards otherwise than under the Plan in connection with any proper corporate
purpose including but not by way of limitation, the grant or assumption of
options in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation,
partnership, limited liability company, firm or association.
8.10 Compliance with Laws. The Plan, the granting and vesting of
--------------------
Options under the Plan and the issuance and delivery of shares of Common Stock
and the payment of money under the Plan or under Options granted or awarded
hereunder are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
law and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. Any securities
delivered under the Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide
13
<PAGE>
such assurances and representations to the Company as the Company may deem
necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan and Options
granted or awarded hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
8.11 Titles. Titles are provided herein for convenience only and are
------
not to serve as a basis for interpretation or construction of the Plan.
8.12 Governing Law. The Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the State of
[Colorado] without regard to conflicts of laws thereof.
* * * * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of EFTC Corporation on ____________, 2000.
I hereby certify that the foregoing Plan was duly approved by the
stockholders of the EFTC Corporation on __________ ___, 2000.
Executed on this ____ day of _______________, 2000.
________________________
Secretary
14
<PAGE>
Appendix IV
Annual Report on Form 10-K for the Year Ended December 31, 1999
<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
-------------------------------------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission File Number 0-23332
-------
EFTC CORPORATION
----------------
(Exact name of registrant as specified in its charter)
COLORADO
--------
(State or other jurisdiction of incorporation of organization)
84-0854616
----------
(I.R.S. Employer Identification No.)
9351 Grant Street
Denver, Colorado
----------------
(Address of principal executive offices)
80229
-----
(Zip code)
Registrant's telephone number, including area code: 303-451-8200
------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 30, 2000, the number of outstanding shares of common stock
was 15,543,489. As of such date, the aggregate market value of the shares of
common stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market, was approximately $21,156,806.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 2000 Annual Meeting of Shareholders
is incorporated by reference in Part III of this Form 10-K.
<PAGE>
PART I.
-------
Item 1. Business
General
EFTC Corporation (the "Company") is an independent provider of high mix
electronic manufacturing services to original equipment manufacturers in the
computer peripherals, medical equipment, industrial controls, telecommunications
equipment and electronic instrumentation industries. The Company's manufacturing
services consist of assembling complex printed circuit boards (using both
surface mount and pin-through-hole technologies), cables, electro-mechanical
devices and finished products. High mix manufacturing involves processing small-
lots of complex printed circuit boards at high production speeds.
Recapitalization
On March 30, 2000, the Company entered into an agreement with Thayer-Blum
Funding, LLC (the "Purchaser") for a recapitalization of the Company. The
agreement provides for the purchase of a total of $54 million in Senior
Subordinated Exchangeable Notes ("Exchangeable Notes") and a subsequent tender
offer for up to 8,250,000 shares of the Company's currently outstanding common
stock at a price of $4.00 per share. The Exchangeable Notes initially provide
for a maturity date of June 30, 2006 and a paid-in-kind interest rate of 15%,
and are accompanied by warrants (the "Warrants") to purchase 3,093,154 shares of
the Company's common stock at an exercise price of $.01 per share. The Purchaser
has designated two persons who have been appointed to the Company's board of
directors.
Upon shareholder approval of this transaction and assuming that at least
500,000 shares are tendered in the tender offer, the Warrants will never become
exercisable and will be cancelled. Additionally, the Exchangeable Notes will
automatically be replaced with Senior Subordinated Convertible Notes
("Convertible Notes") that provide for interest at 8.875%, payable in additional
Convertible Notes and a maturity date of June 30, 2006. At the election of the
holder, the Convertible Notes may be converted, at any time, into the Company's
common stock at $2.60 per share, subject to adjustment. Conversion of the notes
will occur automatically (i) if the Company's common stock trades above $7.50
per share for 45 consecutive trading days, or (ii) commencing on March 30, 2003,
if the Company's common stock trades above $4.25 for 45 consecutive trading
days. Finally, at the closing of the tender offer, the Purchaser will have the
right to designate a majority of the members of the Company's board of directors
and will have the right to approve any significant financings, acquisitions and
dispositions. The Purchaser has requested that the conversion price of the
Convertible Notes be reduced to $2.58 to reflect the change in the Company's
financial condition as a result of certain excess costs that were incurred by
the Company in connection with the transaction.
If shareholders do not approve the transaction by September 1, 2000 or if
less than 500,000 shares are tendered, the Warrants and Exchangeable Notes will
remain in place and the interest rate on the Exchangeable Notes will increase to
20%. Interest would be compounded quarterly and payable in additional
Exchangeable Notes or cash, at the option of the holders.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to replace the Company's existing revolving line of credit
with BankOne Colorado, N.A. The new credit facility provides for a $45 million
revolving line of credit with a maturity date of March 30, 2003. Initially, the
interest rate will be the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
inventory. Substantially all of the Company's assets are pledged as collateral
for outstanding borrowings, and the credit agreement requires compliance with
certain financial and non-financial covenants.
Acquisitions and Dispositions
Acquisitions
Northwest Operations Division. On February 24, 1997, the Company acquired
two affiliated entities, Current Electronics, Inc., an Oregon corporation, and
Current Electronics (Washington), Inc., a Washington
2
<PAGE>
corporation, for total consideration of approximately $10.9 million, consisting
of 1,980,000 shares of Company common stock and approximately $5.5 million in
cash, including approximately $600,000 of transaction costs. During 1998, the
Company completed construction of a new manufacturing facility in Newberg,
Oregon at a total cost of approximately $7.0 million. The Newberg facility along
with one in Moses Lake, Washington comprises the Company's Northwest Operations
Division.
AlliedSignal Asset Purchase. During the period from August 1997 through
February 1998, the Company completed two transactions with AlliedSignal, Inc.
now Honeywell International Inc. ("Honeywell") pursuant to which the Company
acquired inventories and equipment located in Fort Lauderdale, Florida and
Tucson, Arizona for an aggregate purchase price of approximately $19.0 million.
In connection with these activities, the parties entered into a long-term supply
agreement for the production of circuit card assemblies. Both these facilities
were closed in 2000.
EFTC Services Division. The Company acquired the Services Division in
September 1997 for approximately $35.7 million, consisting of 1,858,975 shares
of the Company's common stock and approximately $26.5 million in cash. The
Services Division had facilities in Memphis, Tennessee, Louisville, Kentucky and
Tampa, Florida and specialized in transportation hub-based warranty and repair
services for companies engaged in the computer and communications industries.
This division was sold in September 1999.
EFTC Express Division. In March 1998, the Company acquired RM Electronics,
Inc., doing business as Personal Electronics ("Personal"), in a business
combination accounted for as a pooling of interests. The Company issued
1,800,000 shares of common stock in exchange for all of the outstanding common
stock of Personal. Personal is based in Manchester, New Hampshire and
specializes in the quick turn, front-end prototype development, low volume, and
end-of-life high mix assembly services. Personal comprises the Company's EFTC
Express Division.
Northeast Operations Division. In September 1998, the Company acquired the
circuit card assembly operations of the Agfa Division of Bayer Corporation. The
Company purchased inventory and equipment for approximately $6.0 million and the
parties entered into a long-term supply agreement for the manufacture of circuit
card assemblies. This business is conducted in the Company's leased facility in
Wilmington, Massachusetts that comprises the Northeast Operations Division.
Midwest Operations Division. In September 1998, the Company purchased
manufacturing equipment for approximately $1.5 million from AlliedSignal. In
connection with this transaction, AlliedSignal agreed to amend the existing
long-term supply agreement it has with the Company to include the production of
circuit card assemblies at the Company's new facility in Ottawa, Kansas. The
Kansas facility comprises the Company's Midwest Operations Division.
Southeast Commercial Operations Division. In March 1999, the Company
entered into a ten year supply agreement with Honeywell that included the
acquisition of certain assets and inventory used in circuit card assembly
manufacturing. For the year ended December 31, 1999, sales under this agreement
amounted to approximately $28 million and the Company expects sales for 2000 to
be in excess of $100 million. The manufacturing activities under this agreement
are conducted in a newly leased facility near Phoenix, Arizona and a smaller
facility in Tijuana, Mexico. These facilities comprise the Company's Southwest
Commercial Operations Division.
Closure of Certain Facilities
Greeley, Colorado. In December 1998, the Company announced a plan to close
the Rocky Mountain Division located in Greeley, Colorado and to consolidate the
remaining business into other facilities, in an effort to improve capacity
utilization and profitability. In October 1999, the Company completed the sale
of the building in Greeley for net proceeds of approximately $3.8 million.
Sale of Services Division. On September 1, 1999, the Company sold its
Services Division for approximately $28.1 million. In connection with this sale,
the purchaser and the Company agreed to an Earn-out Contingency (the "EC").
Under the EC, if earnings for the year ending August 31, 2000 related to the
division sold are in excess of $4,455,000 ("Target Earnings"), the Company will
be entitled to an additional payment equal to
3
<PAGE>
three times the difference between the actual earnings and Target Earnings. If
actual earnings are less than Target Earnings, the Company will be required to
refund an amount equal to three times the difference. The maximum amount that
either party would be required to pay under the EC is $2.5 million.
Fort Lauderdale, Florida. In an effort to improve capacity utilization at
other facilities, in September 1999 the Company initiated a plan to close its
facility in Fort Lauderdale and consolidate the business from that plant into
three other EFTC facilities. Ft. Lauderdale was selected due to its higher cost
structure and in consideration of the added benefits of transferring this
business to facilities that are in closer proximity to the affected customers.
The Ft. Lauderdale restructuring activities are expected to be substantially
complete by the end of April 2000.
Tucson, Arizona. In December 1999, the Company commenced negotiations with
Honeywell International, Inc. for the sale of inventory and equipment at the
Company's facility in Tucson and the sublease of the facility to Honeywell. This
sale closed in February 2000 and provided net proceeds to the Company of $12.7
million.
Manufacturing Services
The Company completes the assembly of its customers' products at the
Company's facilities by integrating printed circuit boards and electro-
mechanical devices into other components of the customer's products. The
Company's facilities have obtained, or are in the process of obtaining, ISO 9002
certification from the International Organization of Standards.
The Company's manufacturing methodology, known as Asynchronous Process
Manufacturing ("APM") improves throughput of certain assembly processes over
traditional continuous (synchronous) flow processing ("CFM"), which is the
predominant method used in high-volume manufacturing. With APM, the Company is
able to process products rapidly using a combination of new discontinuous flow
methods for differing product quantities, fast surface mount assembly systems,
test equipment and high-volume, high-speed production lines. In the APM model,
materials are moved through the production queue at high-speed and not in a
continuous or linear order as under CFM. Instead, materials are moved through
the assembly procedure in the most efficient manner, using a computer algorithm
developed for the Company's operations, with all sequences controlled by a
computerized information system.
High mix manufacturing involves a discontinuous series of products fed
through assembly in a start-stop manner, heretofore incompatible with high-speed
techniques. APM is an alternative to both CFM and batch processing often used in
smaller scale manufacturing. The combination of small lots, with numerous
differences in configuration from each lot to the next, and high-speed
manufacturing has been viewed as difficult, if not impossible, by many high mix
manufacturers. The Company believes that CFM techniques used by high-volume,
high-speed Electronics Manufacturing Services ("EMS") providers cannot
accommodate high mix product assembly without sacrificing speed, while smaller
EMS providers, capable of producing a wide variety of products, often find it
difficult to afford high-quality, high-speed manufacturing assets or to keep up
with OEMs' growing product demand. Under CFM, all assembly occurs on the same
line, thereby slowing down the process with non-value-added operations and, more
importantly, significantly reducing flexibility. Under APM, all non-value-added
operations are performed in the most efficient manner, off-line, thereby keeping
the assembly process moving. A hybrid of CFM and batch production techniques,
APM sets optimal process parameters and maximizes velocity in producing smaller
lot quantities.
Prototype Manufacturing Services. Personal Electronics is an EFTC Express
location, specializing in quick-turn manufacturing and prototype services with a
high degree of personalized customer service. As customer orders grow, EFTC
Express is intended to provide customers with an easy transition to the
Company's larger regional manufacturing facilities.
Design and Testing Services. The Company also assists in customers' product
design by providing "concurrent engineering" or "design for manufacturability"
services. The Company's applications engineering group interacts with the
customer's engineers early in the design process to reduce variation and
complexity in new designs and to increase the Company's ability to use automated
production technologies. Application engineers are also responsible for assuring
that a new design can be properly tested at a reasonable cost. Engineering input
in component selection is also essential to assure that a minimum number of
components are used, that components
4
<PAGE>
can be used in automated assembly and that components are readily available and
cost efficient. The Company is seeking to add full product design services to
its existing capabilities.
The Company has the capability to perform in-circuit and functional
testing, as well as environmental stress screening. In-circuit tests verify that
components have been properly inserted and that the electrical circuits are
complete. Functional tests determine if a board or system assembly is performing
to customer specifications. Environmental tests determine how a component will
respond to varying environmental factors such as different temperatures and
power variations. These tests are usually conducted on a sample of finished
components although some customers may require testing of all products to be
purchased by that customer. Usually, the Company designs or procures test
fixtures and then develops its own test software. The change from pin-through-
hole technology to surface mount technology is leading to further changes in
test technology. The Company seeks to provide customers with highly
sophisticated testing services that are at the forefront of current test
technology.
Customers and Sales
The Company seeks to serve traditional high mix OEMs and OEMs that produce
high-volume products. The Company's sales force is located regionally, and the
Company's sales approach is designed to align the Company's sales efforts in
close proximity to its customers and the Company's regional manufacturing
facilities. The Company continues to focus on the following markets: (1)
avionics; (2) industrial controls and instrumentation; (3) computer-related
products; (4) communications; and (5) medical devices.
The following table represents the Company's net sales for manufacturing
services by industry segment for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Avionics 68% 46% 27%
Industrial controls and instrumentation 18% 18% 22%
Computer-related 8% 28% 29%
Communications 5% 5% 8%
Medical devices 1% 3% 13%
Other -- -- 1%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
Sales to significant customers as a percentage of total net sales for the
years ended December 31, 1999, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
AlliedSignal, Inc. 46% 42% 25%
Honeywell, Inc. 10% 3% --
---- ---- ----
Pro Forma Combined 56% 45% 25%
==== ==== ====
Exabyte -- 4% 12%
==== ==== ====
</TABLE>
In December 1999, AlliedSignal and Honeywell completed their merger and the
combined company was named Honeywell International, Inc. The pro forma
disclosure above presents the customer concentration as if the merger had
occurred on January 1, 1997. The Company historically has relied on a small
number of customers to generate a significant percentage of its revenue. During
1999, the Company's ten largest customers accounted for 88% of the Company's net
revenue. The loss of Honeywell as a customer would, and the loss of any
significant customer could, have a material adverse effect on the Company's
financial condition and results of operations.
In addition, the Company holds significant accounts receivable from sales
to certain customers. At December 31, 1999, approximately 57% of the Company's
net trade receivables were due from Honeywell and 12% of net trade receivables
were due from Bayer Corporation. The insolvency or other inability of a
significant
5
<PAGE>
customer to pay outstanding receivables could have a material adverse effect on
the Company's results of operations and financial condition.
If the Company's efforts to expand its customer base are not successful,
the Company will continue to depend upon a relatively small number of customers
for a significant percentage of its net sales. Despite existing contractual
arrangements, there can be no assurance that current customers, including
Honeywell, or future customers of the Company, will not terminate their
manufacturing arrangements with the Company or significantly change, reduce or
delay the amount of manufacturing services ordered from the Company.
As is typical in the electronic manufacturing services industry, the
Company frequently does not obtain long-term purchase orders or commitments from
its customers, but instead works with them to develop nonbinding forecasts of
the future volume of orders. Based on such nonbinding forecasts, the Company
makes commitments regarding the level of business that it will seek and accept,
the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each individual
customer and generally affecting each customer's industry, may cause customers
to cancel, reduce or delay orders that were either previously made or
anticipated. Generally, customers may cancel, reduce or delay purchase orders
and commitments without penalty, except, in some cases, for payment for services
rendered, materials purchased and, in limited circumstances, charges associated
with such cancellation, reduction or delay. Significant or numerous
cancellations, reductions or delays in orders by customers would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Backlog
The Company's backlog was approximately $219 million at December 31, 1999,
compared to approximately $108 million at December 31, 1998. Backlog generally
consists of purchase orders believed to be firm that are expected to be filled
within the next six months and are based on forecasts given to the Company by
its customers. Since forecasts are frequently revised, orders and commitments
may be rescheduled or canceled and customers' desired lead times might vary,
backlog does not necessarily reflect the timing or amount of future sales. The
Company generally seeks to deliver its products within four to eight weeks of
obtaining purchase orders, which tends to minimize backlog.
Competition
Competition in the electronic manufacturing services industry is intense.
The contract manufacturing services provided by the Company are available from
many independent sources. The Company also competes with in-house manufacturing
operations of current and potential customers. The Company competes with
numerous domestic and foreign EMS firms, including SCI Systems, Inc., Solectron
Corporation, Benchmark Electronics, Inc., The DII Group, Inc., Plexus Corp.,
Reptron Electronics, Inc., Group Technologies Corporation, and others. The
Company also faces competition from its current and potential customers, who are
continually evaluating the relative merits of internal manufacturing versus
contract manufacturing for various products. Certain of the Company's
competitors have broader geographic presence than the Company, including
manufacturing facilities in foreign countries. Many of such competitors are more
established in the industry and have substantially greater financial,
manufacturing or marketing resources than the Company. The Company believes that
the principal competitive factors in its targeted market are quality,
reliability, ability to meet delivery schedules, technological sophistication,
geographic location and price.
Suppliers
The Company uses numerous suppliers of electronic components and other
materials for its operations. The Company works with customers and suppliers to
minimize the effect of any component shortages. Some components used by the
Company have been subject to industry-wide shortages, and suppliers have been
forced to allocate available quantities among their customers. The Company's
inability to obtain any needed components during periods of allocations could
cause delays in shipments to the Company's customers and could adversely affect
results of operations. At times, the Company's cash flow problems have resulted
in late payments to its suppliers which, in turn, has caused such suppliers to
delay or stop shipments of inventory. This has disrupted the Company's
operations, which has resulted in incomplete or late shipments of products to
the Company's customers.
6
<PAGE>
The Company attempts to mitigate the risks of component shortages by working
with customers to delay delivery schedules or by working with suppliers to
provide the needed components using just-in-time inventory programs.
Patents and Trademarks
The Company currently has two registered trademarks, which consist of
"EFTC" and "APM" (including the related design) and two unregistered trademarks
which consist of "APM" and "Asynchronous Process Manufacturing." The Company's
management does not believe that patent or trademark protection is material to
the Company's business.
Governmental Regulation
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters, and there can be no assurance that material costs and
liabilities will not be incurred in complying with those regulations or that
past or future operations will not result in exposure to injury or claims of
injury by employees or the public. To meet various legal requirements, the
Company has modified its circuit board cleaning processes to utilize only
aqueous (water-based) methods in its cleaning processes.
Some risk of costs and liabilities related to these matters is inherent in
the Company's business, as with many similar businesses. Management believes
that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations, the
violation of which could have a material adverse effect on the Company. In the
event of violation, these regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. In addition, new, modified or more stringent
requirements or enforcement policies could be adopted that may adversely affect
the Company.
The Company periodically generates and temporarily handles limited amounts
of materials that are considered hazardous waste under applicable law. The
Company contracts for the off-site disposal of these materials.
Employees
As of December 31, 1999, the Company had 1,591 full-time equivalent
employees, of whom 1,186 were engaged in manufacturing operations services, 286
in material handling and procurement, 6 in marketing and sales and 113 in
finance and administration. The Company also engaged the full-time services of
481 temporary laborers through employment agencies in manufacturing and
operations. None of the Company's employees is subject to a collective
bargaining agreement. Management believes that the Company's relationship with
its employees is good.
Special Considerations
Dependence on Honeywell. During 1999, Honeywell accounted for more than 56%
of the Company's net revenues and at December 31, 1999, approximately 57% of the
Company's net trade receivables were due from Honeywell. For the year ending
December 31, 2000, pursuant to a long-term agreement with Honeywell, the Company
expects that Honeywell will account for an increased percentage of the Company's
business. The loss of Honeywell as a customer, a decline in the volume of
business with Honeywell, or Honeywell's insolvency or inability or unwillingness
to pay outstanding receivables in a timely manner, would have a material adverse
effect on the Company's results of operations and financial condition.
Integration of Systems; Management of New Facilities. The Company acquired
or opened ten new facilities during 1997 and 1998 and two in 1999. During 1999
the Company sold or closed four facilities and two more facilities are expected
to be closed by the end of the second quarter of 2000. The Company's expansion
into new facilities across the country placed a significant strain on the
Company's management information, operating and financial systems, as well as
the Company's management resources. In order to maintain and improve results of
operations, the Company's management will be required to integrate the new
facilities into the Company's existing systems and management structure. The
Company needs to continue to implement and improve its management
7
<PAGE>
information, operating and financial systems and internal controls, to attract
and retain qualified management personnel, to develop the management skills of
its managers and supervisors and to train, motivate and manage its employees.
The Company's failure to effectively integrate and manage its new facilities
could adversely affect the Company's results of operations.
Implementation of New Information System. The Company has implemented a new
management information system (the "MIS System") in all facilities except
EFTCExpress, based on commercially available Oracle software products, that is
designed to track and control all aspects of its manufacturing services, as well
as the Company's financial accounting applications. There can be no assurance
that the MIS System will continue to operate as designed or provide the
Company's operations any additional efficiency. If the MIS System fails to
operate as designed or the Company's business processes are not properly
integrated with the MIS System, the Company's operations could be disrupted in a
variety of ways including lost orders, orders that can not be filled in a timely
manner, inventory shortfalls and excess inventories, any or all of which could
result in lost customers and revenues. In addition, the Company could be
required to write-off costs associated with the MIS System if the system
acquisition and implementation costs are considered to be impaired. Such
disruptions or events could adversely affect results of operations and the
implementation of the Company's high mix manufacturing strategy.
Acquisition Strategy. The Company has actively pursued in the past, and
expects to actively pursue in the future, acquisitions in furtherance of its
strategy of expanding its operations, geographic markets, service offerings,
customer base and revenue base. Acquisitions involve numerous risks, including
difficulties in the integration of the operations, technologies, products and
services of the acquired companies and assets, the diversion of management's
attention and the Company's financial resources from other business activities,
the potential to enter markets in which the Company has no or limited prior
experience and where competitors in such markets have stronger market positions
and the potential loss of key employees and customers of the acquired companies.
In addition, during the integration of an acquired company, the financial
performance of the Company will be subject to the risks commonly associated with
an acquisition, including the financial impact of expenses necessary to realize
benefits from the acquisition and the potential for disruption of operations.
The Company may incur significant amounts of indebtedness in connection with
future acquisitions. Future acquisitions may also involve potentially dilutive
issuances of equity securities. There can be no assurance that the Company will
be able to identify suitable acquisition opportunities, to price such
acquisition opportunities properly, to consummate acquisitions successfully or
integrate acquired personnel and operations into the Company successfully.
8
<PAGE>
Item 2. Description of Property
The following table describes the Company's material properties during
1999.
<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
Newberg, Oregon 1998 65,000 square feet Leased (2) Manufacturing
Moses Lake, Washington 1997 20,000 square feet Leased (3) Manufacturing
Ft. Lauderdale, Florida* 1997 97,000 square feet Subleased (4) Manufacturing
Tucson, Arizona* 1998 65,000 square feet Leased (5) Manufacturing
Phoenix, Arizona 1999 145,000 square feet Leased (6) Manufacturing
Tijuana, Mexico 1999 30,000 square feet Leased (7) Manufacturing
Manchester, New Hampshire 1998 19,000 square feet Leased (8) Manufacturing
Wilmington, Massachusetts 1998 54,000 square feet Subleased (9) Manufacturing
Ottawa, Kansas 1998 40,000 square feet Owned (10) Manufacturing
</TABLE>
The Company believes its facilities are in good condition.
---------------
* This facility was closed by the Company in 2000.
(1) Pursuant to the terms of the Bank of America, N.A. Loan (as defined
below), substantially all of the Company's owned and leased property is
subject to liens and other security interests in favor of Bank of America
("Bank of America"), and any other lenders from time to time under the
Bank of America Loan.
(2) The Company purchased approximately 12 acres of land from an unaffiliated
third party and built a 65,000 square foot facility in Newberg, Oregon.
This facility was sold to a related party in December 1998 and was leased
back by the Company. The lease term is for 5 years.
(3) This facility is leased from an unaffiliated third party on a year-to-
year basis.
(4) The Company subleased a 97,000 square foot portion of a building from
Honeywell. In September 1999 the Company initiated a plan to consolidate
and close its operations in Fort Lauderdale, Florida. This sublease
agreement was terminated in April 2000.
(5) The Company purchased approximately 20 acres of land and a 65,000 square
foot building in Tucson, Arizona, for $1.8 million. The Company remodeled
and moved into the facility in February 1998. This facility was sold to a
related party in December 1998 and was leased back by the Company. The
lease term is for 5 years. The Company sold the assets and inventory
located at this facility to Honeywell in February 2000. Honeywell has
agreed to sublease the facility from the Company for 18 months at the same
cost as the Company pays to the landlord, with an option to extend the
term until December 2003 when the Company's primary lease term expires.
(6) The Company leases two facilities that comprise 145,000 square feet from
an unrelated third party. The lease expires in July 2007 with two
additional option terms of 5 years each.
(7) The Company utilizes this facility through a contractual arrangement with
an unrelated third party. This arrangement continues through July 2000,
and may be extended at the Company's option for subsequent one-year
periods.
(8) The Company leases a 19,000 square foot facility from an unrelated third
party. The lease expires in August 2001.
(9) The Company subleases a 54,000 square foot facility from Bayer-Agfa on a
year-to-year basis until March 31, 2003. The Company has provided notice
to its landlord that it will vacate this facility in September 2000. The
Company is in the process of locating a new facility in Massachusetts.
(10) The Company purchased a 40,000 square foot facility from Honeywell,
remodeled this facility and commenced manufacturing operations in the
facility in December 1998.
Item 3. Legal Proceedings
Two legal proceedings, one in Colorado State court, the other in U.S.
District Court, were filed against the Company and certain of its officers,
directors and shareholders during September and October 1998. The
9
<PAGE>
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. Defendants filed
a motion to dismiss the case on March 8, 1999. That motion is pending.
Craig Anderson, Todd Sichelstiel, Phillip and Angelique Signorrelli,
Christy J. Baldwin and Patricia Conlon v. EFTC Corporation, Jack Calderon,
Gerald J. Reid, Stuart W. Fuhlendorf, Brent L. Hofmeister, August P. Bruehlman,
Lucille A. Reid, Lloyd A. McConnell and Salomon Smith Barney ( District Court
for the County of Weld, Colorado, Case No. 99-CV-962). Plaintiffs are
shareholders of EFTC who filed this lawsuit originally in the District Court for
the County of Weld, Colorado. Plaintiffs allege that during the class period
April 6, 1998 to August 20, 1998, defendants made false and misleading
statements regarding EFTC's business performance, implementation of a new
computer system, manufacturing quality systems, operating margins, relationships
with its largest customers, and future prospects for earnings growth. Plaintiffs
allege that defendants disseminated or approved a prospectus in connection with
the Company's June 1998 secondary offering, as well as certain other press
releases and financial reports which contained misrepresentations and material
omissions and also concealed materially adverse financial information. The
complaint alleges violations of Sections 11-51-501(1)(a, b, and c) and 11-51-
604(3) of the Colorado Securities Act. In addition, plaintiff alleges that by
reason of their positions as officers and/or directors of EFTC, Messrs.
Calderon, Reid, Fuhlendorf, Hofmeister, Bruehlman, McConnell, and Ms. Reid are
controlling persons of EFTC and, therefore, that these defendants violated
Section 11-51-604(5) of the Colorado Securities Act. Plaintiffs also allege that
defendants conduct occurred in connection with the offer, sale or purchase of
EFTC securities in the secondary offering in violation of Section 11-51-604(4)
of the Colorado Securities Act. Plaintiff seeks the following relief: (a)
certification of the complaint as a class action on behalf of all persons who
purchased or otherwise acquired the common stock of EFTC between April 6, 1998
and August 20, 1998; (b) an award of compensatory and/or punitive damages,
interest, costs and attorneys' fees to all members of the class; and (c)
equitable relief available under state law.
Defendants removed the case to federal court on January 11, 1999. The
federal court remanded the case to state court on February 14, 2000. Defendants
deny the allegations of the complaint.
The parties to these legal proceedings have reached an agreement to settle
both legal proceedings. The settlement is subject to court approval. The
proposed settlement provides for the Company to contribute $3.1 million in cash
and 1.3 million shares of the Company's common stock and its insurer to
contribute $2.9 million into
10
<PAGE>
a class settlement fund. Notice of the settlement has been filed in both state
and federal court requesting a stay of all proceedings pending the submission of
settlement documents to the courts.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
11
<PAGE>
PART II
-------
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's common stock is quoted on the Nasdaq National Market under
the symbol "EFTC". On April 10, 2000, there were approximately 267 shareholders
of record of the Company's Common Stock.
The following table sets forth the high and low sale prices for the
Company's common stock, as reported on the Nasdaq National Market, for the
quarters presented.
<TABLE>
<CAPTION>
1999 Sales Prices 1998 Sale Prices
----------------- ----------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $5.750 $3.375 $17.000 $12.813
Second Quarter 6.750 4.000 18.313 11.500
Third Quarter 5.188 2.625 13.750 2.844
Fourth Quarter 3.594 1.500 5.063 2.625
</TABLE>
Dividends
The Company has never paid dividends on its common stock and does not
anticipate that it will do so in the foreseeable future. The future payments of
dividends, if any, on common stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, capital requirements,
financial condition and other relevant factors. However, the Company's loan
agreement with Bank of America as well as terms of the Exchangeable Note and the
Convertible Note prohibit payment of dividends without the lender's consent.
Recent Sales of Unregistered Securities.
On February 24, 1997, the Company acquired its Northwest Operations
Division, which operated two manufacturing facilities in Newberg, Oregon and
Moses Lake, Washington, for total consideration of approximately $10.9 million,
consisting of 1,980,000 shares of Company common stock and approximately $5.5
million in cash, which included approximately $600,000 of transaction costs. The
Company determined that the issuance of such shares was exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), as a transaction by the issuer not involving a public offering because
the transaction involved the acquisition of a business from the owners thereof
based on private negotiations.
During September 1997, the Company issued to Richard L. Monfort, a director
of the Company, $15 million in aggregate principal amount of subordinated notes
(the "Subordinated Notes"), with a maturity date of December 31, 2002 and
bearing interest at LIBOR plus 2.0%, in order to fund the acquisition of certain
assets from AlliedSignal. During October 1997, the Company issued a warrant (the
"Warrant") to purchase 500,000 shares of common stock at a price of $8.00 per
share as additional consideration for the loan represented by the Subordinated
Notes. The Warrant was exercised on October 9, 1997, resulting in net proceeds
to the Company of $4 million. The Company determined that the issuances of the
Subordinated Notes, the Warrant and the common stock issued upon exercise of the
Warrants were exempt from registration under Section 4(2) of the Securities Act
because it involved a director of the Company.
On September 30, 1997, the Company acquired the Services Group for
approximately $29.7 million consisting of 1,858,975 shares of the Company's
common stock and approximately $20.5 million in cash, which includes
approximately $1 million of transaction costs. In addition, the Company made a
$6 million contingent payment that became payable upon closing of the Company's
public offering of common stock in November, 1997. The Company determined that
the issuance of such shares was exempt from registration under Section 4(2) of
the Securities Act as a transaction by the issuer not involving a public
offering because the transaction involved the acquisition of a business from the
owners thereof based on private negotiations.
12
<PAGE>
On March 31, 1998, the Company acquired Personal Electronics which provided
quick-turn, small scale, high mix electronic manufacturing services to OEMs in
the greater Boston area and New Hampshire for total consideration of 1,800,000
shares of the Company's common stock. The Company determined that the issuance
of such shares was exempt from registration under Section 4(2) of the Securities
Act, as a transaction by the issuer not involving a public offering because the
transaction involved the acquisition of a business from the owners thereof based
on private negotiations.
In November 1999, the Company issued to Richard L. Monfort, a director of
the Company, $5 million in subordinated notes. These notes bore interest at 10%
and matured on March 30, 2000. The proceeds of these subordinated notes were
used for general operating purposes. On March 30, 2000, the Company repaid $2
million (plus accrued interest on the full $5 million) of the outstanding $5
million. The note agreement was amended to provide for issuance of $3 million in
aggregate principal amount of subordinated notes, with a maturity date of March
30, 2004 and bearing interest at 10%. The Company determined that the issuance
of the subordinated notes was exempt from registration under Section 4(2) of the
Securities Act because it involved a director of the Company.
On March 30, 2000, in connection with the recapitalization described above,
the Company issued $54 million of subordinated exchangeable notes due on June
30, 2006, with paid in kind interest at 15%. These notes are accompanied by
warrants to purchase 3,093,154 shares of the Company's common stock at an
exercise price of $0.01 per share. The Company determined that the issuance of
the subordinated notes and warrants was exempt from registration under Section
4(2) because the transaction involved a negotiated purchase of securities by an
accredited investor.
In April 2000, the Company issued warrants to purchase an aggregate of
525,000 shares of the Company's common stock at a price of $3.00 per share to
two investment banks as additional consideration for services rendered to the
Company. The Company determined that the issuances of such warrants were exempt
from registration under Section 4(2) of the Securities Act.
Volatility
The Company's common stock has experienced significant price volatility
historically, and such volatility may continue to occur in the future. Factors
such as announcements of large customer orders, order cancellations, new product
introductions by the Company, events affecting the Company's competitors and
changes in general conditions in the electronics industry, as well as variations
in the Company's actual or anticipated results of operations, may cause the
market price of the Company's common stock to fluctuate significantly.
Furthermore, the stock market has experienced extreme price and volume
fluctuations in recent years, often for reasons unrelated to the operating
performance of the specific companies. These broad market fluctuations may
materially adversely affect the price of the Company's common stock. There can
be no assurance that the market price of the Company's common stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
13
<PAGE>
Item 6. Selected Financial Data.
The following selected financial data as of December 31, 1999 and 1998, and
for each of the years in the three-year period ended December 31, 1999, are
derived from the audited financial statements of the Company included in Item 8
and should be read in conjunction with such financial statements and the notes
thereto. The data presented below as of December 31, 1997, 1996 and 1995, and
for the years ended December 31, 1996 and 1995, are derived from financial
statements of the Company that are not included in this report.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
Statement of Operations Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
-------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $221,864 $226,780 $122,079 $60,910 $51,580
Cost of goods sold 229,892 200,581 102,166 56,277 46,437
-------- -------- -------- ------- -------
Gross profit (loss) (8,028) 26,199 19,913 4,633 5,143
Selling, general and administrative 32,089 23,038 12,711 5,916 4,324
Impairment of long-lived assets 2,822 3,342 -- 726 --
Merger costs -- 1,048 -- -- --
Goodwill amortization 1,133 1,564 547 -- --
-------- -------- -------- ------- -------
Operating income (loss) (44,072) (2,793) 6,655 (2,009) 819
Interest expense (6,516) (4,312) (2,411) (576) (432)
Gain (loss) on sale of assets (20,880) 400 1,156 50 --
Other, net (55) (104) 139 50 92
-------- -------- -------- ------- -------
Income (loss) before income taxes (71,523) (6,809) 5,539 (2,485) 479
Income tax benefit (expense) (2,180) 2,631 (2,118) 867 (130)
-------- -------- -------- ------- -------
Net income (loss) $(73,703) $ (4,178) $ 3,421 $(1,618) $ 349
======== ======== ======== ======= =======
Pro Forma Information:
Historical net income (loss) $(73,703) $ (4,178) $ 3,421 $(1,618) $ 349
Pro forma tax adjustment -- (317) (41) 10 2
-------- -------- -------- ------- -------
Pro forma net income (loss) $(73,703) $ (4,495) $ 3,380 $(1,608) $ 351
======== ======== ======== ======= =======
Pro Forma Earnings Per Share:
Basic $ (4.74) $ (.31) $ .40 $ (.28) $ .06
======== ======== ======== ======= =======
Diluted $(4.74) $ (.31) $ .38 $ (.28) $ .06
======== ======== ======== ======= =======
Weighted Average Shares:
Basic 15,543 14,730 8,502 5,742 5,762
======== ======== ======== ======= =======
Diluted 15,543 14,730 8,955 5,742 5,762
======== ======== ======== ======= =======
Cash Flow Data:
Cash provided (used) by:
Operating activities $ (9,873) $(18,181) $(29,414) $ (508) $ (999)
Investing activities 17,752 (21,924) (42,074) (1,837) 1,247
Financing activities (7,786) 38,851 72,958 2,049 208
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital $ 26.232 $ 59,037 $ 43,634 $ 9,284 $ 9,878
Total assets 131.129 190,666 148,825 24,037 25,724
Total debt 42,994 54,983 44,959 5,917 3,277
Stockholders' equity 21,278 94,979 75,221 13,850 15,462
</TABLE>
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the statements. See
"--Special Note Regarding Forward-Looking Statements."
General
The Company is a leading independent provider of high mix electronic
manufacturing services to original equipment manufacturers (OEMs) in the
avionics, medical, communications, industrial instruments and controls, and
computer-related products industries. The Company's manufacturing services
consist of assembling complex printed circuit boards, cables, electro-mechanical
devices, and finished products.
During 1997 and 1998, the Company made several acquisitions of businesses
and assets in connection with an aggressive growth strategy. Between the fourth
quarter of 1998 and the fourth quarter of 1999, the Company began taking a
series of actions to improve liquidity and operating results. These actions
included the disposal or closure of several of the Company's business units. In
order to understand the Company's financial condition and results of operations
over the past three years, it is important to understand the acquisitions,
dispositions and closures that were occurring during this period. Accordingly, a
summary of these activities is presented below.
Northwest Operations Division. On February 24, 1997, the Company acquired
two affiliated entities, Current Electronics, Inc., an Oregon corporation, and
Current Electronics (Washington), Inc., a Washington corporation, for total
consideration of approximately $10.9 million, consisting of 1,980,000 shares of
Company common stock and approximately $5.5 million in cash, including
approximately $600,000 of transaction costs. During 1998, the Company completed
construction of a new manufacturing facility in Newberg, Oregon at a total cost
of approximately $7.0 million. The Newberg facility along with one in Moses
Lake, Washington comprises the Company's Northwest Operations Division.
AlliedSignal Asset Purchase. During the period from August 1997 through
February 1998, the Company completed two transactions with AlliedSignal, Inc.
now Honeywell International Inc. ("Honeywell") pursuant to which the Company
acquired inventories and equipment located in Fort Lauderdale, Florida and
Tucson, Arizona for an aggregate purchase price of approximately $19.0 million.
In connection with these activities, the parties entered into a long-term supply
agreement for the production of circuit card assemblies.
In an effort to improve capacity utilization at other facilities, in
September 1999 the Company initiated a plan to close its facility in Fort
Lauderdale and consolidate the business from that plant into three other EFTC
facilities. Ft. Lauderdale was selected due to its higher cost structure and in
consideration of the added benefits of transferring this business to facilities
that are in closer proximity to the affected customers. The Ft. Lauderdale
restructuring activities are expected to be substantially complete by the end of
April 2000.
In December 1999, the Company commenced negotiations with Honeywell
International, Inc. for the sale of inventory and equipment at the Company's
facility in Tucson and the sublease of the facility to Honeywell. This sale
closed in February 2000 and provided net proceeds to the Company of $12.7
million.
EFTC Services Division. The Company acquired the Services Division in
September 1997 for approximately $35.7 million, consisting of 1,858,975 shares
of the Company's common stock and approximately $26.5 million in cash. The
Services Division had facilities in Memphis, Tennessee, Louisville, Kentucky and
Tampa, Florida and specialized in transportation hub-based warranty and repair
services for companies engaged in the computer and communications industries.
On September 1, 1999, the Company sold the Services Division for
approximately $28.1 million. In connection with this sale, the purchaser and the
Company agreed to an Earn-out Contingency (the "EC"). Under the EC, if earnings
for the year ending August 31, 2000 related to the division sold are in excess
of $4,455,000 ("Target Earnings"), the Company will be entitled to an additional
payment equal to three times the difference between the actual earnings and
Target Earnings. If actual earnings are less than Target Earnings, the Company
will be required
15
<PAGE>
to refund an amount equal to three times the difference. The maximum amount that
either party would be required to pay under the EC is $2.5 million.
EFTC Express Division. In March 1998, the Company acquired RM Electronics,
Inc., doing business as Personal Electronics ("Personal"), in a business
combination accounted for as a pooling of interests. The Company issued
1,800,000 shares of common stock in exchange for all of the outstanding common
stock of Personal. Personal is based in Manchester, New Hampshire and
specializes in the quick turn, front-end prototype development, low volume, and
end-of-life high mix assembly services. Personal comprises the Company's EFTC
Express Division.
Northeast Operations Division. In September 1998, the Company acquired the
circuit card assembly operations of the Agfa Division of Bayer Corporation. The
Company purchased inventory and equipment for approximately $6.0 million and the
parties entered into a long-term supply agreement for the manufacture of circuit
card assemblies. This business is conducted in the Company's leased facility in
Wilmington, Massachusetts that comprises the Northeast Operations Division.
Midwest Operations Division. In September 1998, the Company purchased
manufacturing equipment for approximately $1.5 million from AlliedSignal. In
connection with this transaction, AlliedSignal agreed to amend the existing
long-term supply agreement it has with the Company to include the production of
circuit card assemblies at the Company's new facility in Ottawa, Kansas. The
Kansas facility comprises the Company's Midwest Operations Division.
Rocky Mountain Division. In December 1998, the Company announced a plan to
close the Rocky Mountain Division located in Greeley, Colorado and to
consolidate the remaining business into other facilities, in an effort to
improve capacity utilization and profitability. In October 1999, the Company
completed the sale of the building in Greeley for net proceeds of approximately
$3.8 million.
Southeast Commercial Operations Division. In March 1999, the Company
entered into an agreement with Honeywell to acquire certain assets and inventory
used in circuit card assembly. The Company and Honeywell have entered into a
ten-year supply agreement. For the year ended December 31, 1999, sales under
this agreement amounted to approximately $28 million. The manufacturing
activities under this agreement are conducted in a newly leased facility near
Phoenix, Arizona and a smaller facility in Tijuana, Mexico. These facilities
comprise the Company's Southwest Commercial Operations Division.
Results of Operations
The Company's quarterly results of operations are affected by several
factors, primarily the level and timing of customer orders and the mix of
turnkey and consignment orders. The level and timing of orders placed by a
customer vary due to the customer's attempts to balance its inventory, changes
in the customer's manufacturing strategy, and variation in demand for its
products due to, among other things, product life cycles, competitive conditions
and general economic conditions. In the past, changes in orders from customers
have had a significant effect on the Company's quarterly results of operations.
Other factors affecting the Company's quarterly results of operations may
include, among other things, the Company's performance under the long-term
supply agreement with Honeywell, price competition, disposition of divisions and
closure of operating units, the ability to obtain inventory from its suppliers
on a timely basis, the Company's level of experience in manufacturing a
particular product, the degree of automation used in the assembly process, the
efficiencies achieved by the Company through managing inventories and other
assets, the timing of expenditures in anticipation of increased sales, and
fluctuations in the cost of components or labor.
16
<PAGE>
The following table sets forth certain operating data as a percentage of
net sales:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of goods sold 104% 88% 84%
---- ---- ----
Gross profit (loss) (4%) 12% 16%
Selling, general and administrative 14% 10% 10%
Impairment of long-lived assets 1% 1% --
Merger costs -- 1% --
Goodwill amortization 1% 1% 1%
---- ---- ----
Operating income (loss) (20%) (1%) 5%
==== ==== ====
</TABLE>
1999 Compared to 1998
Net Sales. Net sales for 1999 were $222 million compared to $227 million in
1998, which is a decrease of 2.0%. Despite the minor decrease in revenue, the
Company experienced major changes in its customers and facilities during 1999.
At the start of 1999, the Company had eleven facilities. Six of these facilities
have been sold or will be closed by April 2000. However, the Company also added
facilities in Phoenix and Mexico during 1999 to support the new business with
Honeywell in connection with the long-term supply agreement entered into with
Honeywell in March 1999 which offset the loss of revenue from other divisions.
The Company's sales for 1999 include approximately $28 million of revenue under
this agreement. The Northeast Operations Division (acquired September 1, 1998)
and the Midwest Operations Division (acquired September 30, 1998) accounted for
$11 million of revenue in 1998 compared to $36 million in 1999. However, this
increase was offset by the loss of revenue from the Services Group that was sold
on September 1, 1999. The Services Group accounted for $41 million of revenue in
1998 compared to only $22 million in 1999. The closure of the Greeley, Colorado
facility in 1999 also contributed to lower revenue, despite the transfer of part
of this business to other facilities.
Gross Profit (Loss). The Company had gross profit of 12% in 1998 and a loss
of 4% in 1999. During 1998, the Company increased its workforce, and invested
substantial amounts in new facilities, equipment and information systems to
prepare for expected increases in sales in 1999. This higher cost structure
combined with a decrease in sales was the primary contributor to the significant
decrease in 1999 gross profit. The Company incurred restructuring charges for
the Greeley facility in the fourth quarter of 1998, including a $5.7 million
charge to cost of goods sold, primarily for a provision for inventory
allowances. During 1999, product pricing at the Tucson facility resulted in
negative margins of $3.5 million. Additionally, in 1999 the Company incurred (i)
charges included in cost of goods sold for $1.5 million due to inventory
allowances and operating charges related to the closure of the Greeley facility,
(ii) charges for excess and obsolete inventories and other charges to cost of
goods sold totaling $7.1 million related to the closure of the Fort Lauderdale
facility and (iii) approximately $0.9 million in charges related to excess and
obsolete inventories in connection with the Services Group. Additional charges
of $1.0 million are expected in the first two quarters of 2000 in connection
with the closure of the Fort Lauderdale facility as retention bonuses are paid
and other closure activities are completed.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased 39% to $32.1 million in 1999 compared
to $23.0 million in 1998. SG&A expenses were up significantly in 1999, primarily
due to a $6.4 million provision for the estimated settlement of shareholder
lawsuits. During 1999, the Company also recognized charges of $5.1 million for
uncollectable receivables compared to 1998 when the Company recognized bad debt
expense of $0.6 million. The 1999 charges included (i) settlements reached with
Honeywell related to pricing issues with respect to business conducted at the
Ft. Lauderdale and Tucson facilities, (ii) charges for uncollectable receivables
related to the Services Group, (iii) approximately $0.7 million for severance
costs related to the Ft. Lauderdale closure and (iv) $0.4 million for start-up
costs at the Phoenix facility. During 1998, SG&A includes approximately $0.2
million for severance and salaries of employees performing exit activities in
connection with the Greeley closure.
17
<PAGE>
Impairment of Property, Plant and Equipment. During 1999, the Company
recognized impairment expense of $2.8 million compared to $3.3 million in 1998
which is a decrease of 15.6%. The impairment in 1998 related solely to land,
building and equipment at the Greeley facility. For 1999, the Company recognized
$1.0 million of impairment related to equipment at the Ft. Lauderdale facility,
$1.2 million for the Tucson assets that were held for sale at year-end, $0.4
million for Services Group assets that were sold in September 1999, and $0.2
million for impaired assets at other locations.
Goodwill Amortization. Goodwill amortization for 1999 amounted to $1.1
million compared to $1.6 million in 1998. The decrease in 1999 was attributable
to the sale of the Services Group on September 1, 1999, and the corresponding
write-off of $36.5 million of goodwill that was included in the calculation of
the loss on sale of the Services Group.
Interest Expense. Interest expense increased 51.1% to $6.5 million in 1999
compared to $4.3 million in 1998. The increase in 1999 was partially
attributable to an increase in amortization of debt issuance costs of $.9
million in 1999. The increase in amortization in 1999 was attributable to
accelerated amortization of debt issuance costs and additional costs incurred in
connection with amendments to the credit agreement. Interest expense was also
higher in 1999 due to increases in the prime rate, as well as increases in the
rate charged by the Company's lenders due to increased credit risk.
Loss on Sale of Division. The Company recognized a loss of $20.6 million in
connection with the sale of the Services Group due to the write-off of $36.5
million of goodwill from the 1997 acquisition of the Services Group.
Additionally, the loss gives effect to the deferral of $2.5 million of the
proceeds for a post closing earn-out contingency.
Income Tax Benefit (Expense). Due to significant net losses in 1999, the
Company recorded a valuation allowance for all of its net deferred tax assets.
As a result, the Company recorded deferred tax expense of $2.2 million in 1999
despite a pre-tax loss of $70.2 million. During 1998, the Company recognized an
income tax benefit of $2.6 million based on a pre-tax loss of $6.8 million.
Management does not expect that a tax provision will be necessary if the Company
generates earnings in 2000, since a significant net operating loss carryforward
is available for income tax purposes. However, this carryforward may be subject
to reduction or limitation as a result of changes in ownership or certain
consolidated return filing regulations.
1998 Compared to 1997
Net Sales. The Company's net sales increased by 85.8% to $226.8 million
during the year ended December, 31, 1998 from $122.1 million for the year ended
December 31, 1997. The increase in net sales is due primarily to the inclusion
of: (i) a full year's revenues from the Northwest Operations Division (acquired
on February 24, 1997), (ii) a full year's revenues from the Company's Ft.
Lauderdale and Arizona facilities (acquired in August 1997), (iii) a full year's
revenues from the Services Group (acquired on September 30, 1997), (iv) internal
growth in revenues from Personal Electronics, (v) revenues from the Wilmington,
Massachusetts facility (acquired on September 1, 1998) and (vi) revenues from
the Ottawa, Kansas facility (acquired on September 30, 1998).
Gross Profit. Gross profit increased by 31.6% to $26.2 million during the
year ended December 31,1998 from $19.9 million during the year ended December
31,1997. The gross profit margin for the year ended December 31, 1998 was 11.6%
compared to 16.3% for the year ended December 31,1997. The gross margin
decreased in 1998 because the Company established additional infrastructure to
accommodate anticipated revenue growth for the year, but net sales were lower in
the third and fourth quarters of the year due to soft market conditions in the
electronics manufacturing services industry in general, schedule changes for
avionics-related products and a greater-than-anticipated decline in products
related to semiconductor manufacturing equipment.
The softening of revenue growth, as explained above, convinced management
and the Board of Directors to initiate a plan to consolidate and close down its
Rocky Mountain operations in Greeley, Colorado. Charges of $9.3 million were
included in operations in the fourth quarter of 1998. The restructuring and shut
down involved the termination of approximately 140 employees. Total severance
and salaries for employees performing exit activities amounted to $0.5 million.
Inventory allowances of $5.4 million were recorded to provide for future losses
to be
18
<PAGE>
incurred related to disengaged customers who will not be continuing as customers
of the Company. In addition, because of the shutdown of the facility an amount
of $3.3 million was recorded as asset impairment. Of the $9.3 million in
charges, $5.7 million was charged to cost of goods sold, $3.3 million was
recorded as an impairment of the facility, and $0.2 million was charged to
selling, general and administrative expenses. Excluding the $5.7 million in
charges, gross profit margin would have been 14.1% for the year ended December
31,1998.
Selling, General and Administrative Expenses. SG&A expenses increased by
81.2% to $23.0 million for the year ended December 31,1998, compared with $12.7
million for the same period in 1997. As a percentage of net sales, SG&A expense
decreased to 10.1% for the year ended December 31,1998, from 10.4% in the same
period of 1997. The increase in SG&A expenses is primarily due to the inclusion
of (i) a full year's expenses of the Northwest Operations Division (acquired on
February 24, 1997), (ii) a full year's expenses of the Company's Ft. Lauderdale
and Arizona facilities (acquired in August 1997), (iii) a full year's expenses
of the Services Group (acquired on September 30, 1997), (iv) expenses of the
Wilmington, Massachusetts facility (acquired on September 1,1998) and (v)
expenses of the Ottawa, Kansas facility (acquired on September 30, 1998).
Impairment of Property, Plant and Equipment. During the fourth quarter of
1998, the Company incurred a write down associated with the shutdown of the
Greeley, Colorado facility in the amount of $3.3 million.
Operating Income (Loss). Operating income decreased to a $2.8 million loss
for the year ended December 31, 1998 from operating income of $6.7 million for
the same period in 1997. Operating loss as a percentage of net sales decreased
to a loss of 1.2% for the year ended December 31,1998 compared to income of 5.5%
in the same period in 1997. The decrease in operating income is due primarily to
the shutdown of the Rocky Mountain facility in Greeley, Colorado that resulted
in charges of $9.3 million, as explained above. Without the Greeley charges,
operating income as a percentage of net sales for the year ended December
31,1998 would have been approximately 2.8%. Other factors relating to the
decline in operating profit were that the Company established additional
infrastructure to accommodate anticipated revenue growth for the year, but net
sales were lower in the third and fourth quarters of the year due to soft market
conditions in the electronics manufacturing services industry in general,
schedule changes for avionics related products and a greater than anticipated
decline in products related to semiconductor manufacturing equipment.
Interest Expense. Interest expense was $4.3 million for the year ended
December 31,1998 as compared to $2.4 million for the same period in 1997. The
increase in interest is primarily the result of additional debt associated with
the acquisition of the Midwest Operations Division, the Northeast Operations
Division and the Services Group and increased debt used to finance the growth of
inventories and receivables.
Income Tax Expense. The income tax benefit for the year ended December
31,1998 was 34.0% of loss before income taxes, including pro forma income taxes.
The effective tax rate for the year ended December 31, 1997 was 39.0%, including
pro forma income taxes. The decrease in the effective tax rate is primarily due
to the reduction of the 1998 income tax benefit for nondeductible goodwill
amortization.
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, 1999. The
information includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation
thereof.
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1999
-------------------------------------------- ---------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $54,200 $61,328 $52,805 $ 58,447 $54,325 $54,690 $ 50,434 $ 62,415
Cost of sales 44,297 50,931 46,202 59,151 48,184 52,833 60,902 67,973
-------------------------------------------- ---------------------------------------------
Gross profit (loss) 9,903 10,397 6,603 (704) 6,141 1,857 (10,468) (5,558)
SG&A 5,321 5,361 4,950 7,406 5,011 5,174 8,966 12,938
Impairment expense -- -- -- 3,342 -- -- 1,541 1,281
Goodwill amortization 391 391 391 391 391 391 283 68
Merger costs 1,048 -- -- -- -- -- -- --
-------------------------------------------- ---------------------------------------------
Operating income (loss) 3,143 4,645 1,262 (11,843) 739 (3,708) (21,258) (19,845)
Interest expense (909) (1,047) (1,092) (1,264) (1,264) (1,334) (1,947) (1,971)
Gain (loss) on sale of assets 4 7 4 122 120 5 (20,631) (374)
Other, net 36 102 10 12 37 47 (294) 155
-------------------------------------------- ---------------------------------------------
Income before taxes 2,274 3,707 184 (12,973) (368) (4,990) (44,130) (22,035)
Income tax benefit (expense) (935) (1,483) (68) 5,116 39 1,996 -- (4,215)
-------------------------------------------- ---------------------------------------------
Net income (loss) $ 1,339 $ 2,224 $ 116 $ (7,857) $ (329) $(2,994) $(44,130) $(26,250)
============================================ =============================================
Pro forma net income (loss) $ 1,022 $ 2,224 $ 116 $ (7,857) $ (329) $(2,994) $(44,130) $(26,250
============================================ =============================================
Pro forma earnings per share-
Diluted $ .07 $ .15 $ .01 $ (.51) $ (.02) $ (.19) $ (2.84) $ (1.69)
============================================ =============================================
Weighted average shares
outstanding- Diluted 14,400 14,825 15,740 15,542 15,543 15,543 15,543 15,543
============================================ =============================================
</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
Working Capital and Operating Cash Flows. At December 31, 1999, working
capital totaled $26.2 million which is a significant decrease from the balance
at December 31, 1998 of $59.0 million. The decrease in working capital in 1999
is primarily attributable to significant operating losses incurred during the
year combined with increased inventories in connection with the Honeywell
agreement at the Company's new facility in Phoenix, Arizona.
Cash used in operating activities for the year ended December 31, 1999 was
$9.9 million compared to cash used in operating activities of $18.2 million in
1998. During 1999, the Company incurred a significant operating loss that
utilized approximately $24.7 million of cash. The Company also utilized cash of
$12.1 million to fund an increase in inventories and other current assets. These
amounts were partially financed by an increase in operating payables of $26.9
million, including over $18 million of payables to suppliers that were outside
of established payment terms.
Cash Requirements for Investing Activities. The Company used cash for
capital expenditures totaling $14.4 million in 1999 (primarily related to the
build-out for the Company's new facility in Phoenix) compared with $22.9 million
in 1998. Capital expenditures in 1998 included payments in connection with the
acquisition of assets from AlliedSignal related to the Ft. Lauderdale, Tucson
and Kansas facilities, and the asset purchase agreement with Bayer-Agfa.
20
<PAGE>
Financing Sources and Related Activities. In September 1997, the Company
issued to a director of the Company $15 million in aggregate principal amount of
subordinated notes, with a maturity date of December 31, 2002 As of December 31,
1999, the outstanding principal amount of the subordinated notes was
approximately $4.8 million. These notes were repaid on March 30, 2000 in
connection with the recapitalization described below. In connection with the
purchase of the Services Group and the assets located in Tucson and Fort
Lauderdale, the Company entered into a credit facility on September 30, 1997
with a bank group led by BankOne, Colorado, N.A. This facility was refinanced
with proceeds from the recapitalization described below.
In December 1998, the Company entered into a sale-leaseback transaction
with a director and stockholder of the Company. Two manufacturing facilities
(one in Newberg, Oregon and one in Tucson, Arizona) were sold for $10.5 million
and leased back to the Company. The proceeds were used to pay down a portion of
the BankOne Loan. The lease was accounted for as a financing transaction; thus
the assets and related long-term debt were included on the Company's 1998
balance sheet. The transaction had an imputed interest rate of 8.68%. The lease
term is for 5 years with monthly payments of $90,000. At the end of the lease
term, the Company had the option to repurchase the facilities for approximately
$9.4 million. In May 1999, the lease was amended to eliminate the purchase
option, which resulted in the re-characterization of the lease from a capital
lease to an operating lease. Accordingly, the buildings and the related debt
have been removed from the balance sheet at December 31, 1999.
In June 1998, the Company issued 1,770,000 shares of its common stock in a
public offering for proceeds of $21.4 million which were used to repay a portion
of the bank group loan.
In March 1999, the Company entered into a long-term supply agreement with
Honeywell International, Inc. While this contract provides a favorable source of
revenue to the Company, it also requires significant amounts of working capital
to finance the inventories and receivables, and the Company was required to
incur significant costs for leasehold improvements and equipment at a new
facility in Phoenix, Arizona. During 1999, the Company had capital expenditures
of $14.4 million, primarily related to the Honeywell agreement and the build-out
for the new facility in Phoenix.
The capital requirements under this new agreement provided significant
challenges to the Company in 1999, due to the Company's higher debt levels
combined with significant operating losses since the fourth quarter of 1998.
In order to respond to the liquidity issues, the Company took a series of
actions in 1999 that were designed to ultimately provide the necessary capital
to meet existing obligations to suppliers and banks, and to have access to
financing to meet the additional working capital requirements under the new
Honeywell agreement. The first significant action after obtaining the Honeywell
business was on September 1, 1999, when the Services Group was sold, resulting
in net cash proceeds of $28.1 million. The proceeds from this sale were utilized
to repay approximately $14.0 million of term debt outstanding on the Company's
senior credit facility, with the remainder used to pay past due balances to
suppliers and debt under the revolving credit agreement. Depending on the
outcome of the earn-out contingency associated with the agreement, the Company
may be required to repay up to $2.5 million or the buyer may be required to pay
the Company up to $2.5 million.
On September 30, 1999, the Company initiated the consolidation of its Ft.
Lauderdale plant into three other EFTC facilities. In October 1999, the Company
sold its facility in Greeley, Colorado for proceeds of $3.8 million. The Company
was required to repay bank debt for $1.9 million and the remaining $1.9 million
was used to pay past due balances to suppliers.
In November 1999, the Company issued to a director of the Company $5
million in aggregate principal amount of subordinated notes, with a maturity
date of March 30, 2000 and an interest rate of 10%. The proceeds of these notes
were used for operating purposes. On March 30, 2000, in connection with the
recapitalization transaction described below, the Company repaid $2 million,
plus accrued interest. The note agreement for the original loan was amended to
provide for issuance of $3 million in aggregate principal amount of subordinated
notes, with a maturity date of March 30, 2004 and an interest rate of 10%.
At December 31, 1999, the Company had trade payables in excess of $18
million that were outside of established terms and many suppliers were requiring
payment of past due balances, or payment in advance, for
21
<PAGE>
purchases of additional inventories. The Company experienced some interruptions
in production as a result of delayed shipments from certain suppliers.
The Company sold assets and inventory located at the Company's Tucson
facility to Honeywell on February 17, 2000, which resulted in net proceeds of
$12.7 million. The agreement with Honeywell required the Company to utilize
$10.5 million of the proceeds to pay past due amounts to suppliers and the
remaining proceeds were utilized to repay bank debt.
Recapitalization. Beginning in September 1999, the Company began searching
for debt and equity financing that would permit the Company to also attract a
new senior lender to replace the existing bank group. By January 2000, the
Company had received several proposals for a variety of debt and equity
structures and the Board of Directors decided to proceed with a proposal
submitted by Thayer Equity Investors. After conclusion of an extensive due
diligence period, on March 30, 2000, the Company entered into an agreement with
Thayer-Blum Funding, LLC (the "Purchaser") for a recapitalization of the
Company. The agreement provides for the purchase of a total of $54 million in
Senior Subordinated Exchangeable Notes ("Exchangeable Notes") and a subsequent
tender offer for up to 8,250,000 shares of the Company's currently outstanding
common stock at a price of $4.00 per share. The Exchangeable Notes initially
provide for a maturity date of June 30, 2006 and a paid-in-kind interest rate of
15%, and are accompanied by warrants (the "Warrants") to purchase 3,093,154
shares of the Company's common stock at an exercise price of $.01 per share. The
Purchaser has designated two persons who have been appointed to the Company's
board of directors.
Upon shareholder approval of this transaction and assuming that at least
500,000 shares are tendered in the tender offer, the warrants will never become
exercisable and will be cancelled. Additionally, the Exchangeable Notes will
automatically be replaced with Senior Subordinated Convertible Notes
("Convertible Notes") that provide for interest at 8.875%, payable in additional
Convertible Notes and a maturity date of June 30, 2006. At the election of the
holder, the Convertible Notes may be converted, at any time, into the Company's
common stock at $2.60 per share, subject to adjustment. Conversion of the notes
will occur automatically (i) if the Company's common stock trades above $7.50
per share for 45 consecutive trading days, or (ii) commencing on March 30, 2003,
if the Company's common stock trades above $4.25 for 45 consecutive trading
days. Finally, at the closing of the tender offer, the Purchaser will have the
right to designate a majority of the members of the Company's board of directors
and will have the right to approve any significant financings, acquisitions and
dispositions. The Purchaser has requested that the conversion price of the
Convertible Notes be reduced to $2.58 to reflecdt the change in the Company's
financial condition as a result of certain excess costs that were incurred by
the Company in connection with the transaction.
If shareholders do not approve the transaction by September 1, 2000 or if
less than 500,000 shares are tendered, the Warrants and Exchangeable Notes will
remain in place and the interest rate on the Exchangeable Notes will increase to
20%. Interest would be compounded quarterly and payable in additional
Exchangeable Notes or cash, at the option of the holders.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to replace the Company's existing revolving line of credit
with BankOne Colorado, N.A. The new credit facility provides for a $45 million
revolving line of credit with a maturity date of March 30, 2003. Initially, the
interest rate will be the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
inventory. Substantially all of the Company's assets are pledged as collateral
for outstanding borrowings, and the credit agreement requires compliance with
certain financial and non-financial covenants.
Based on the March 30, 2000 financing activities, management believes the
Company has adequate capital resources to fund working capital and other cash
requirements during 2000.
The Year 2000 Issue
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year
22
<PAGE>
2000 date change, including the leap year date. The Company expensed
approximately $100,000 during 1999 in connection with testing and remediation of
its systems. The Company is not aware of any material problems resulting from
Year 2000 issues, either with its products, its internal systems or the products
and services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking statements"
within the meaning of the federal securities laws. In addition, EFTC or persons
acting on its behalf sometimes make forward-looking statements in other written
and oral communications. Such forward-looking statements may include, among
other things, statements concerning the Company's plans, objectives and future
economic prospects, prospects for achieving cost savings, increased capacity
utilization, improved profitability and other matters relating to the prospects
for future operations; and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of EFTC, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, the loss of Honeywell as a customer or
Honeywell's inability to pay, or inability or unwillingness to pay in a timely
manner, its outstanding receivables held by the Company, the Company's ability
to pay its suppliers in a timely manner, changes in economic or business
conditions in general or affecting the electronic products industry in
particular, changes in the use of outsourcing by original equipment
manufacturers, increased material prices and service competition within the
electronic component, contract manufacturing, changes in the competitive
environment in which the Company operates, the continued growth of the
industries targeted by the Company or its competitors or changes in the
Company's management information needs, difficulties in implementing the
Company's new management information system, difficulties in managing the
Company's growth or in integrating new businesses, changes in customer needs and
expectations, the Company's success in retaining customers affected by the
closure of Company facilities, the Company's success in limiting costs
associated with such closures, the Company's ability to keep pace with
technological developments, governmental actions and other factors identified as
"Risk Factors" or otherwise described in the Company's filings with the
Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
On March 30, 2000, the Company entered into a $45 million revolving line of
credit with Bank of America, N.A. The interest rate on this loan will be based
either on the prime rate or LIBOR rates, plus applicable margins. Therefore, as
interest rates fluctuate, the Company may experience changes in interest expense
that could impact financial results. The Company has not entered into any
interest rate swap agreements, or similar instruments, to protect against the
risk of interest rate fluctuations. Assuming outstanding borrowings of $45
million, if interest rates were to increase or decrease by 1%, the result would
be an annual increase or decrease in interest expense of approximately $450,000
under this loan.
If shareholder approval related to certain aspects of the recapitalization
is obtained, the $54 million in principal amount of debt under the Convertible
Notes will bear interest at 8.875% which would result in an annual interest
expense of $4,859,000, or if shareholder approval is not obtained, under the
Exchangeable Notes, the $54 million of principal amount of debt will bear
interest at 20% which would result in annual interest expense of $10,950,000.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The following financial statements and supplementary data are included in the
report:
Page
----
Financial Statements:
Independent Auditors' Report 25
Consolidated Balance Sheets 26-27
Consolidated Statements of Operations 28
Consolidated Statements of Shareholders' Equity 29
Consolidated Statements of Cash Flows 30-31
Notes to Consolidated Financial Statements 32-47
Supplementary Data:
Independent Auditors' Report 48
Schedule II- Valuation and Qualifying Accounts 49
24
<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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EFTC Corporation and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Denver, Colorado
April 4, 2000
25
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
ASSETS
------
1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and equivalents $ 716 $ 623
Trade receivables, net of allowance for doubtful
accounts of $3,689 and $1,322, respectively 26,094 34,123
Inventories, net 61,467 60,759
Income taxes receivable 2,106 125
Deferred income taxes - 5,259
Prepaid expenses and other 2,795 2,241
-------- --------
Total Current Assets 93,178 103,130
-------- --------
Property, Plant and Equipment, at cost:
Leasehold improvements 2,797 1,589
Buildings and improvements 1,172 17,143
Manufacturing machinery and equipment 16,496 17,435
Furniture, computer equipment and software 12,726 9,411
-------- --------
Total 33,191 45,578
Less accumulated depreciation and amortization (9,614) (6,959)
-------- --------
Net Property, Plant and Equipment 23,577 38,619
-------- --------
Intangible and Other Assets:
Goodwill, net of accumulated amortization
of $758 and $2,111, repectively 7,264 44,848
Intellectual property, net of accumulated amortization
of $699 and $233, repectively 4,289 2,861
Debt issuance costs, net of accumulated amortization
of $97 and $241, respectively 460 986
Deposits and other 3,661 222
-------- --------
Total Intangible and Other Assets 15,674 48,917
-------- --------
$132,429 $190,666
======== =========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
26
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
December 31, 1999 and 1998
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
---- ----
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt:
Related parties $ 5,018 $ 225
Banks - 3,890
Accounts payable 46,985 27,272
Accrued compensation and benefits 4,993 2,980
Deposit on inventory finance arrangement - 5,600
Other accrued liabilities 8,650 4,127
-------- --------
Total Current Liabilities 65,646 44,094
Long-term Liabilities:
Long-term debt, net of current maturities:
Related parties 4,792 15,098
Banks 33,184 35,770
Deferred income taxes - 725
Other 6,229 -
-------- --------
Total Liabilities 109,851 95,687
Commitments and Contingencies (Notes 8, 9 and 11)
Shareholders' Equity:
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding 15,543,000 shares 155 155
Additional paid-in capital 91,992 91,990
Retained earnings (deficit) (69,569) 2,834
-------- --------
Total Shareholders' Equity 22,578 94,979
-------- --------
$132,429 $190,666
======== ========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
27
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales $ 221,864 $ 226,780 $ 122,079
Cost of Goods Sold 228,592 200,581 102,166
----------- ----------- ----------
Gross profit (loss) (6,728) 26,199 19,913
Operating Costs and Expenses:
Selling, general and administrative expenses 32,089 23,038 12,711
Impairment of property, plant and equipment 2,822 3,342 -
Goodwill amortization 1,133 1,564 547
Merger costs - 1,048 -
----------- ----------- ----------
Total operating costs and expenses 36,044 28,992 13,258
----------- ----------- ----------
Operating income (loss) (44,772) (2,793) 6,655
Other Income (Expense):
Interest expense (6,516) (4,312) (2,411)
Loss on sale of division (20,565) - -
Gain (loss) on sale of property, plant and equipment (315) 400 1,156
Other, net (55) (104) 139
----------- ----------- ----------
Income (loss) before income taxes (70,223) (6,809) 5,539
Income Tax Benefit (Expense) (2,180) 2,631 (2,118)
----------- ----------- ----------
Net income (loss) $ (72,403) $ (4,178) $ 3,421
=========== =========== ==========
Pro Forma Information (Unaudited):
Historical Net Income (Loss) $ (72,403) $ (4,178) $ 3,421
Pro Forma Adjustment to Income Taxes - (317) (41)
----------- ----------- ----------
Pro Forma Net Income (Loss) $ (72,403) $ (4,495) $ 3,380
=========== =========== ==========
Pro Forma Income (Loss) Per Share:
Basic $ (4.66) $ (0.31) $ 0.40
=========== =========== ==========
Diluted $ (4.66) $ (0.31) $ 0.38
=========== =========== ==========
Weighted Average Shares Outstanding:
Basic 15,543,000 14,730,000 8,502,000
=========== =========== ==========
Diluted 15,543,000 14,730,000 8,955,000
=========== =========== ==========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
28
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
------- ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996 5,742,660 $ 57 $10,169 $ 3,624 $ 13,850
Issuance of common stock in
business combinations 3,838,975 38 14,144 - 14,182
Issuance of common stock in secondary
offering, net of costs of $3,100 3,506,841 35 38,917 - 38,952
Warrants issued in connection with
subordinated debt - - 490 - 490
Stock options and warrants exercised 553,300 6 4,225 - 4,231
Tax benefit from exercise of stock options - - 95 - 95
Net income - - - 3,421 3,421
----------- ----------- ----------- ----------- ----------
Balances at December 31, 1997 13,641,776 136 68,040 7,045 75,221
Conversion of notes payable to
shareholders' equity - - 1,398 - 1,398
Issuance of common stock in secondary
offering, net of costs of $3,500 1,770,000 18 21,314 - 21,332
Stock options and warrants exercised 131,213 1 512 - 513
Tax benefit from exercise of stock options - - 693 - 693
Termination of S Corporation tax status
of pooled company - - 33 (33) -
Net loss - - - (4,178) (4,178)
----------- ----------- ----------- ----------- ----------
Balances at December 31, 1998 15,542,989 155 91,990 2,834 94,979
Stock options exercised 500 - 2 - 2
Net loss - - - (73,403) (72,403)
----------- ----------- ----------- ----------- ----------
Balances at December 31, 1999 15,543,489 $ 155 $ 91,992 $ (69,569) $ 22,578
=========== =========== ========== =========== ==========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
29
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- -----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (73,703) $ (4,178) $ 3,421
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 7,242 6,244 2,630
Amortization of debt issuance costs 1,147 241 46
Impairment of property, plant and equipment 2,822 3,342 -
Deferred income tax expense (benefit) 4,534 (4,859) 755
Provision for excess and obsolete inventories 7,287 6,975 25
Provision for doubtful accounts receivable 5,091 600 454
Loss on sale of division 20,565 - -
Loss (gain) on sale of property, plant and equipment 315 (400) (1,150)
Changes in operating assets and liabilities, net
of effects of purchase and sale of businesses:
Decrease (increase) in:
Trade receivables (338) (9,311) (16,898)
Inventories (8,899) (21,667) (28,824)
Income taxes receivable (1,981) (125) 616
Prepaid expenses and other (843) (2,289) (2,644)
Increase (decrease) in:
Accounts payable 19,047 4,463 11,551
Accured compensation and benefits 3,631 616 -
Other accrued liabilities 4,210 2,167 604
--------- -------- --------
Net cash used by operating activities (9,873) (18,181) (29,414)
--------- -------- --------
Cash Flows from Investing Activities:
Proceeds from sale of division, net of cash transferred 28,135 - -
Proceeds from sale of property, plant and equipment 4,036 1,000 2,420
Payments for businesses, net of cash acquired - (40) (30,998)
Capital expenditures (14,419) (22,884) (13,496)
--------- -------- --------
Net cash provided (used) by investing activities 17,752 (21,924) (42,074)
--------- -------- --------
Cash Flows from Financing Activities:
Proceeds from exercise of stock options and warrants 2 513 4,326
Issuance of common stock for cash, net of costs - 21,332 38,952
Receipts (payments) under inventory financing arrangement (5,600) 5,600 -
Payments for debt issuance costs (589) - (978)
Proceeds from long-term debt 153,157 16,865 98,941
Principal payments on long-term debt (154,756) (5,459) (68,283)
--------- -------- --------
Net cash provided (used) by financing activities (7,786) 38,851 72,958
--------- -------- --------
Net increase (decrease) in cash and equivalents 93 (1,254) 1,470
Cash and Equivalents:
Beginning of year 623 1,877 407
--------- -------- --------
End of year $ 716 $ 623 $ 1,877
========= ======== ========
</TABLE>
30
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 5,320 $ 4,344 $ 2,023
========= ======== ========
Cash paid (received) for income taxes $ (184) $ 1,116 $ 119
========= ======== ========
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Conversion of capital lease for property, plant
and equipment to an operating lease $ 10,240 $ - $ -
========= ======== ========
Conversion of notes payable to shareholders' equity $ - $ 1,398 $ -
========= ======== ========
Common stock issued in business combinations $ - $ - $ 14,182
========= ======== ========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
31
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
1. Nature of Business and Significant Accounting Policies
Nature of Business
EFTC Corporation (the "Company") is an independent provider of electronic
manufacturing services to original equipment manufacturers in the computer
peripherals, medical equipment, industrial controls, telecommunications
equipment and electronic instrumentation industries. The Company's
manufacturing services consist of assembling complex printed circuit boards
(using both surface mount and pin-through-hole technologies), cables,
electro-mechanical devices and finished products.
The Company operates in one business segment and substantially all of its
operations are conducted in the United States.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
EFTC Corporation and its wholly-owned subsidiaries since the date of
formation or acquisition, as described in Note 2. All intercompany balances
and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenue and expenses during the reporting period. The actual results could
differ significantly from those estimates.
The Company's consolidated financial statements are based on several
significant estimates, including the allowance for doubtful accounts, the
provision for excess and obsolete inventories, and the selection of
estimated useful lives of intangible assets and property, plant and
equipment.
Cash and Equivalents
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of standard cost (which approximates
weighted average cost) or market.
Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts of cash and equivalents, trade receivables,
accounts payable and accrued liabilities approximate fair value because of
the short maturity of these instruments. The carrying amounts of notes
payable and long-term debt approximate fair value because of the variable
nature of the interest rates of these instruments.
32
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Material expenditures
that increase the life of an asset are capitalized and depreciated over
the estimated remaining useful life of the asset. The cost of normal
maintenance and repairs is charged to operating expenses as incurred. For
the year ended December 31, 1998, the Company incurred interest costs of
$4,762, of which approximately $450 was capitalized for assets under
construction. Upon disposal of an asset, the cost of the properties and
the related accumulated depreciation are removed from the accounts, and
any gains or losses are reflected in current operations. Leasehold
improvements are amortized over the lesser of the life of the lease or
the estimated life of the improvement. For the years ended December 31,
1999, 1998 and 1997, the Company recognized depreciation and amortization
expense of $5,751, $4,548 and $2,083, respectively. Depreciation is
computed using the straight-line method over the following estimated
useful lives:
Years
-----
Buildings and improvements 30 to 40
Manufacturing machinery and equipment 5 to 10
Furniture, computer equipment and software 3 to 7
Goodwill and Other Intangible Assets
Debt issuance costs are being amortized over the term of the related debt
using the interest method. Goodwill is amortized using the straight-line
method over 30 years. Intellectual property costs, consisting of circuit
board assembly designs and specifications, are being amortized over
periods ranging from 5 to 10 years using the straight-line method. For
the years ended December 31, 1999, 1998 and 1997, the Company recognized
amortization expense related to goodwill and intellectual property of
$1,491, $1,696 and $547, respectively.
Impairment of Long-Lived Assets
The Company assesses impairment whenever events or changes in
circumstances indicate that the carrying amount of a long-lived asset,
including goodwill and intellectual property costs, may not be
recoverable. Assets held for sale are stated at the lower of the carrying
value or fair value (net of costs to sell). Recoverability of assets to
be held and used is generally measured by a comparison of the carrying
amount of an asset to undiscounted future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the assets. In
connection with restructurings in 1999 and 1998, the Company recognized
provisions for impairment of long-lived assets of $2,822 and $3,342,
respectively.
At December 31, 1999, the net carrying value of goodwill of $7,264
relates to the 1997 acquisition of Current Electronics, which now
comprises the Company's Northwest Operations Division. Since this
division is not held for sale, the Company evaluates the goodwill for
impairment by considering historical and budgeted earnings trends for
this division. If the unamortized carrying amount of the goodwill exceeds
undiscounted cash flow projections for a period equal to one-half of the
remaining amortization period, then an adjustment will be recorded to
reduce the carrying amount to the net cash flows discounted at 15%.
33
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Income Taxes
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers or
when services are provided.
Earnings Per Share
Basic Earnings Per Share excludes dilution for potential common shares
and is computed by dividing net income or loss by the weighted average
number of common shares outstanding for the year. Diluted Earnings Per
Share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock. In 1997, diluted weighted average shares outstanding
include 452,365 potential common shares, consisting of stock options and
warrants, determined using the treasury stock method. Basic and diluted
Earnings Per Share are the same in 1999 and 1998 as all potential common
shares were antidilutive.
Prior to the merger with the Company, the net income of Personal
Electronics (see Note 2) was not subject to income taxes due to its tax
status under Subchapter S of the Internal Revenue Code. For periods prior
to the merger, Earnings Per Share has been presented on a pro forma basis
to reflect the Company's earnings as if Personal Electronics had been a
taxable entity subject to federal and state income taxes at the marginal
tax rates applicable in such periods.
Stock-based Compensation
The Company accounts for stock-based compensation issued to employees
using the intrinsic value method. Accordingly, compensation cost for
stock options granted to employees is measured as the excess, if any, of
the quoted market price of the Company's common stock at the measurement
date (generally, the date of grant) over the amount an employee must pay
to acquire the stock. Pro forma disclosures of net income (loss) and
earnings per share are presented in Note 6 to reflect the impact on
stock-based compensation if the Company had adopted the alternative
method prescribed by Statement of Financial Accounting Standards No. 123,
which requires the use of an option pricing model to determine the fair
value of stock options.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the presentation in 1999. These reclassifications had
no effect on the previously reported net income or loss.
34
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
2. Business Combinations and Asset Acquisitions
Personal Electronics. On March 31, 1998, the Company acquired through
merger, RM Electronics, Inc., doing business as Personal Electronics
(Personal), in a business combination accounted for as a pooling of
interests. The Company issued 1,800,000 shares of common stock in exchange
for all of the outstanding common stock of Personal. Accordingly, the
Company's consolidated financial statements were restated for all periods
presented to combine the financial position, results of operations and cash
flows of Personal with those of the Company.
In connection with the acquisition, the Company incurred merger costs of
$1,048, which were charged to operations in March 1998. Notes payable to
shareholders of Personal of $1,398 were converted to equity upon
consummation of the merger.
CTI Companies. On September 30, 1997, the Company acquired three affiliated
companies, Circuit Test, Inc., Airhub Service Group, L.C. and CTI
International, L.C. (the "CTI Companies"), for approximately $35,700
consisting of 1,858,975 shares of the Company's common stock and
approximately $26,500 in cash, including approximately $1,400 of
transaction costs and a $6,000 payment upon completion of the common stock
offering in October 1997. The Company recorded goodwill of approximately
$38,900, in connection with the transaction. The acquisition was accounted
for using the purchase method of accounting for business combinations and,
accordingly, the accompanying consolidated financial statements include the
results of operations of the acquired businesses since the date of
acquisition. The CTI Companies comprised the Services Division that was
sold on September 1, 1999 as described in Note 9.
Current Electronics, Inc. On February 24, 1997, the Company acquired two
affiliated entities, Current Electronics, Inc., an Oregon Corporation, and
Current Electronics (Washington), Inc., a Washington Corporation, for total
consideration of approximately $10,900, consisting of 1,980,000 shares of
Company common stock and approximately $5,500 in cash, including
approximately $600 of transaction costs. The Company recorded goodwill of
approximately $8,000 in connection with the acquisition. The acquisition
was accounted for using the purchase method of accounting for business
combinations and, accordingly, the accompanying consolidated financial
statements include the results of operations of the acquired businesses
since the date of acquisition.
Asset Acquisitions. In September 1998, the Company acquired the circuit
card assembly operations of the Agfa Division of Bayer Corporation. The
Company purchased inventory and equipment for approximately $6,000 and the
parties entered into a long-term supply agreement for the manufacture of
circuit card assemblies.
During the period from August 1997 through February 1998, the Company
completed two transactions with AlliedSignal, Inc. ("AlliedSignal")
pursuant to which the Company acquired inventories and equipment located in
Ft. Lauderdale, Florida and Tucson, Arizona, for an aggregate purchase
price of approximately $19,000. In connection with these transactions, the
Company entered into a long-term supply agreement with AlliedSignal for the
production of circuit card assemblies. In September 1998, the Company
purchased manufacturing equipment for approximately $1,500 from
AlliedSignal. In connection with this transaction, AlliedSignal agreed to
amend the long-term supply agreement to include the production of circuit
card assemblies at the Company's new facility in Ottawa, Kansas.
35
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
3. Inventories
Inventories are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Purchased parts and completed sub-assemblies, net of
reserve for excess and obsolete items of $10,175 and
$8,388, respectively $ 43,971 $ 44,216
Work-in-process 13,317 12,474
Finished goods 2,879 4,069
-------- --------
$ 60,167 $ 60,759
======== ========
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, the Company
recognized charges to reflect excess and obsolete inventories of $7,287,
$6,975 and $25, respectively. These charges include the effects of the
restructuring activities described in Note 9.
4. Debt Financing
At December 31, 1999 and 1998, long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
Note payable to Bank Group under revolving line of credit,
interest at the prime rate (8.5% at December 31, 1999) plus 2.25%,
collateralized by substantially all assets, due March 30, 2000
(refinanced on March 30, 2000, see below) $ 33,184 $ 23,760
Term note payable to Bank Group, due September 2002 -- 15,900
Sale-leaseback financing arrangement with director, interest
imputed at 8.68% (See Note 8) -- 10,495
Note payable to director, interest at LIBOR plus 2% (9.8% at
December 31, 1999), annual principal payments of $50, due
December 2002, unsecured, net of discount of $90 and $122,
respectively 4,810 4,828
Note payable to director, interest at 10% plus $100 due at
maturity, unsecured, due March 31, 2000 (see below and Note 8) 5,000 --
-------- --------
Total 42,994 54,983
Less current maturities (5,018) (4,115)
-------- --------
Long-term debt, less current maturities $ 37,976 $ 50,868
======== ========
</TABLE>
36
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
In September 1997, the Company entered into a credit agreement with a Bank
Group comprised of four financial institutions. The credit agreement
provided for a $40,000 revolving line of credit renewable on September 30,
2000, and a $20,000 term loan maturing on September 30, 2002. In order to
permit the sale of the Services Division discussed in Note 9, the Bank
Group required the Company to repay the term note on September 1, 1999.
During the fourth quarter of 1999, the credit agreement was amended to
reduce the commitment to $35,000 and the maturity date was changed to March
30, 2000. The commitment was further reduced to $30,500 in February 2000 in
connection with a modification to the credit agreement to permit the sale
of assets related to the Company's Tucson, Arizona manufacturing facility
discussed in Note 9. Borrowings under the revolving line of credit were
subject to limitation based on the value of the available collateral.
The loan agreement contains restrictive covenants relating to capital
expenditures, limitation on investments, borrowings, payment of dividends
and mergers and acquisitions, as well as the maintenance of certain
financial ratios. During 1999, the Company was not in compliance with
certain financial covenants and the Bank Group provided waivers or agreed
to amendments to the credit agreement.
Aggregate Maturities. As discussed below, the Company entered into a new
credit agreement on March 30, 2000, which permitted the refinancing of the
$33,184 balance due to the Bank Group on a long-term basis. Aggregate based
on outstanding debt at December 31, 1999, are as follows:
Year Ending December 31: Principal Discount Net
------------------------ --------- -------- --------
2000 $ 5,050 $ (32) $ 5,018
2001 50 (30) 20
2002 4,800 (28) 4,772
2003 33,184 -- 33,184
--------- -------- --------
Total $ 43,084 $ (90) $ 42,994
========= ======== ========
Recapitalization. On March 30, 2000, the Company entered into an agreement
with Thayer-Blum Funding, LLC (the "Purchaser") for a recapitalization of
the Company. The agreement provides for the purchase of a total of $54
million in Senior Subordinated Exchangeable Notes ("Exchangeable Notes")
and a subsequent tender offer for up to 8,250,000 shares of the Company's
currently outstanding common stock at a price of $4.00 per share. The
Exchangeable Notes initially provide for a maturity date of June 30, 2006
and a paid-in-kind interest rate of 15%, and are accompanied by warrants
(the "Warrants") to purchase 3,093,154 shares of the Company's common stock
at an exercise price of $.01 per share. The Purchaser has designated two
persons who have been appointed to the Company's board of directors.
Upon shareholder approval of this transaction and assuming that at least
500,000 shares are tendered in the tender offer, the Warrants will never
become exercisable and will be cancelled. Additionally, the Exchangeable
Notes will automatically be replaced with Senior Subordinated Convertible
Notes ("Convertible Notes") that provide for interest at 8.875%, payable in
additional Convertible Notes and a maturity date of June 30, 2006. At the
election of the holder, the Convertible Notes may be converted, at any
time, into the Company's common stock at $2.60 per share, subject to
adjustment. Conversion of the notes will occur automatically (i) if the
Company's common stock trades above $7.50 per share for 45 consecutive
trading days, or (ii) commencing on March 30, 2003, if the Company's common
stock trades above $4.25 for 45 consecutive trading days. Finally, at the
closing of the tender offer, the Purchaser will have the right to designate
a majority of the members of the Company's board of directors and will have
the right to approve any significant financings, acquisitions and
dispositions. The Purchaser has requested that the conversion
37
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
price of the Convertible Notes be reduced to $2.58 to reflect the change in
the Company's financial condition as a result of certain excess costs that
were incurred by the Company in connection with the transaction.
If shareholders do not approve the transaction by September 1, 2000 or if
less than 500,000 shares are tendered, the Warrants and Exchangeable Notes
will remain in place and the interest rate on the Exchangeable Notes will
increase to 20%. Interest would be compounded quarterly and payable in
additional Exchangeable Notes or cash, at the option of the holders.
Refinancing of Debt. On March 30, 2000, the Company entered into a new
credit agreement with Bank of America, N.A. to replace the Company's
existing revolving line of credit with BankOne Colorado, N.A. The new
credit facility provides for a $45 million revolving line of credit with a
maturity date of March 30, 2003. Initially, the interest rate will be the
prime rate plus .5%. Total borrowings are subject to limitation based on a
percentage of eligible accounts receivable and eligible inventory.
Substantially all of the Company's assets are pledged as collateral for
outstanding borrowings, and the credit agreement requires compliance with
certain financial and non-financial covenants.
On March 30, 2000, the Company also repaid outstanding notes payable in the
aggregate principal amount of $9,810 (net of discount) to a director of the
Company. The Company simultaneously borrowed $3,000 from this director
under a new unsecured note that provides for interest at 10% payable
quarterly and a due date of March 2004.
5. Income Taxes
Income tax benefit (expense) for the years ended December 31, 1999, 1998
and 1997, is comprised of the following:
1999 1998 1997
-------- -------- --------
Current:
Federal $ 2,370 $ (2,058) $ (1,211)
State (16) (170) (152)
-------- -------- --------
2,354 (2,228) (1,363)
-------- -------- --------
Deferred:
Federal (4,039) 4,328 (599)
State (495) 531 (156)
-------- -------- --------
(4,534) 4,859 (755)
-------- -------- --------
Income tax benefit (expense) $ (2,180) $ 2,631 $ (2,118)
======== ======== ========
38
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Actual income tax benefit (expense) differs from the amounts computed using
the federal statutory tax rate of 34%, as follows:
1999 1998 1997
-------- -------- --------
Income tax benefit (expense) at the
statutory rate $ 24,318 $ 2,315 $ (1,883)
Increase (decrease) resulting from:
State income taxes, net of federal
benefit 2,146 238 (149)
Amortization of non-deductible
goodwill (135) (164) (85)
S Corporation (loss) -- 317 41
Increase in valuation allowance (28,462) -- --
Other, net (47) (75) (42)
-------- -------- --------
Income tax benefit (expense) $ (2,180) $ 2,631 $ (2,118)
======== ======== ========
At December 31, 1999 and 1998, the tax effects of temporary differences
that give rise to significant portions of deferred tax assets and
liabilities are presented below:
1999 1998
-------- --------
Deferred tax assets:
Accrued compensation and benefits $ 558 $ 501
Impairment of property, plant and equipment 844 1,257
State net operating loss carryforwards 900 --
Provision for settlement of litigation 2,368 --
Deferred liability on sale of division 925 --
Federal net operating loss carryforwards 8,695 --
Intangible assets 696 --
Capital loss carryforward 3,080 --
Allowance for doubtful accounts 1,890 529
Inventories 6,943 4,042
Other 3,186 316
-------- --------
Total deferred tax assets 30,116 6,645
Less valuation allowance (28,462) --
-------- --------
Net deferred tax assets $ 1,623 $ 6,645
======== ========
Deferred tax liabilities:
Amortization of intangible assets $ (622) $ (565)
Accelerated depreciation and other basis
differences for property, plant and equipment (1,001) (1,546)
-------- --------
Total deferred tax liabilities $ (1,623) $ (2,111)
======== ========
39
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
The above balances are classified in the accompanying consolidated balance
sheets as of December 31, 1999 and 1998, as follows:
1999 1998
-------- --------
Net deferred tax asset - current $ -- $ 5,259
======== ========
Net deferred tax liability - noncurrent $ -- $ 725
======== ========
At December 31, 1999, the Company has a net operating loss carryforward for
Federal income tax purposes of approximately $23,000. If not previously
utilized, this carryforward will expire in 2019. A portion of this net
operating loss carryforward may be subject to reduction or limitation of
use as a result of changes in ownership or certain consolidated return
filing regulations. At December 31, 1999, the Company also has a long-term
capital loss carryforward of $8,300 that can be utilized to offset future
capital gains. This carryforward does not expire. During 1999, the Company
provided a valuation allowance for all net deferred tax assets, including
the net operating loss carryforward.
6. Stock-based Compensation
Warrants. At December 31, 1999, the Company has warrants outstanding for
10,000 shares of common stock at an exercise price of $4.00 per share. If
not previously exercised, these warrants expire in December 2001.
Stock Options. The Company has two stock option plans. The Equity Incentive
Plan provides for the grant of non-qualified stock options, incentive stock
options, stock appreciation rights, restricted stock and stock units.
Substantially all employees are eligible under this plan, which was amended
to increase the maximum number of shares of common stock that can be
granted under this Plan to 4,495,000. These options generally vest 7 years
after the grant date, but vesting may accelerate based on increases in the
market price of the Company's common stock or upon a change of control of
the Company. The Non-employee Directors Plan provides for options to
acquire shares of common stock to members of the Board of Directors who are
not also employees. These options generally vest over a 4-year period. At
December 31, 1999, an aggregate of approximately 1,360,000 shares are
available for grant under both plans.
The Company has also issued 451,850 nonqualified options to officers and
employees. These options generally vest 7 years after the grant date, but
vesting may accelerate based on increases in the market price of the
Company's common stock.
40
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
The following summarizes activity related to stock options for the three
years ended December 31, 1999:
Weighted
Number of average exercise
options price per share
----------- ----------------
Balance at December 31, 1996 560,500 $ 4.55
Granted 2,004,000 11.63
Exercised (53,300) 4.34
Canceled (95,980) 6.07
-----------
Balance at December 31, 1997 2,415,220 10.37
Granted 2,578,892 9.82
Exercised (275,016) 5.34
Canceled (2,155,469) 14.46
-----------
Balance at December 31, 1998 2,563,627 7.01
Granted 1,222,263 4.13
Exercised (500) 3.38
Canceled (650,331) 7.59
-----------
Balance at December 31, 1999 3,135,059 5.77
===========
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted Weighted
Range of Average Average
Exercise Number Year of Exercise Number Exercise
Prices Outstanding Expiration Price Exercisable Price
-------- ----------- ---------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$7.50 to $7.63 33,000 2004 $ 7.57 33,000 $ 7.57
$5.50 to $5.50 15,000 2005 5.50 15,000 5.50
$3.50 to $5.00 179,951 2006 4.05 178,909 4.05
$4.88 to $6.63 78,000 2007 11.84 30,500 5.74
$9.50 to $14.31 506,300 2007 5.75 491,800 10.53
$2.72 to $4.00 319,000 2008 3.27 58,900 3.33
$8.00 to $14.31 858,045 2008 8.67 263,803 8.72
$1.81 to $3.88 394,563 2009 3.02 4,000 3.85
$4.00 to $6.41 751,200 2009 4.85 114,250 4.88
----------- -----------
$1.81 to $14.31 3,135,059 5.77 1,190,162 6.11
=========== ===========
</TABLE>
41
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
The Company utilizes the intrinsic value method to account for stock-based
compensation. Accordingly, because the exercise price of stock options
granted by the Company is equal to the market price on the date of grant,
no compensation cost has been recognized in the accompanying financial
statements. If compensation cost had been determined using the fair value
method calculated using an option-pricing model, the Company's pro forma
net income (loss) and earnings (loss) per share would have been as follows:
Year ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Net income (loss):
As reported $ (73,703) $ (4,178) $ 3,421
Pro forma $ (75,345) $ (6,645) $ 1,149
Income (loss) per share - basic:
As reported $ (4.74) $ (.31) $ .40
Pro forma $ (4.85) $ (.45) $ .14
Income (loss) per share - diluted:
As reported $ (4.74) $ (.31) $ .38
Pro forma $ (4.85) $ (.45) $ .13
The weighted average fair value of options granted for the years ended
December 31, 1999, 1998 and 1997 was $2.45, $4.42 and $5.90, respectively.
In estimating the fair value of options, the Company used the Black-Scholes
option-pricing model with the following weighted average assumptions:
Year ended December 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Dividend yield -- -- --
Expected volatility 78.0% 100.0% 70.0%
Risk-free interest rate 5.4% 5.0% 6.0%
Expected lives (years) 3.5 3.0 3.0
7. Shareholder Rights Plan
In January 1999, the Board of Directors approved a Shareholder Rights Plan
and declared a dividend distribution of one right to purchase one one-
thousandth of a share of a new series of junior participating preferred
stock for each share of common stock of EFTC held. The distribution was
made on February 25, 1999, to shareholders of record on that date
The Rights trade with the Company's common stock as a unit unless the
Rights become exercisable upon the occurrence of certain triggering events
relating to the acquisition of beneficial ownership of 15% or more of the
Company's common stock by any person or group (the "Acquirer"), subject to
certain exceptions. In certain events after the Rights become exercisable,
they will entitle each holder other than the Acquirer, to purchase for
$35.00 per share, a number of shares of common stock having a market value
of twice the Right's exercise price, or a number of the Acquirer's common
shares having a market value at the time of twice the Right's exercise
price. A shareholder would have one such right for each share of stock held
at the time the Rights become exercisable. The Company may amend the Rights
or redeem the Rights at $0.001 per Right at any time prior to the Rights
becoming exercisable. The Rights will expire in February 2009, unless
sooner amended or redeemed by the Company.
In connection with the recapitalization discussed in Note 4, the Company
amended the agreement governing the Rights, effective March 30, 2000, to
exclude Thayer, BLUM and their affiliated entities, from the
42
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
definition of Acquirer. Thus, the acquisition of beneficial ownership of
15% or more of the Company's common stock in connection with the
recapitalization will not result in the Rights becoming exercisable.
8. Related Party Transactions
Under a previously existing agreement, the CTI Companies were required to
pay $500 upon change in control to an entity acting as a sales agent for
the CTI Companies in which individuals who are stockholders, officers and
directors of the Company have a majority ownership interest.
In 1997, the Company leased three facilities from directors of the Company.
Amounts paid to the directors totaled approximately $283.
An investment-banking firm, of which a director of the Company is the
Managing Director, received a fee of approximately $900 as a representative
of the CTI Companies in their acquisition by the Company. The same firm
earned a $500 fee as a representative of the Company for the sale of the
CTI Companies in September 1999. This fee has not been paid as of December
31, 1999, and is included in other accrued liabilities in the accompanying
balance sheet. This investment-banking firm also received a fee of $642 as
a representative of Personal Electronics in connection with the Company's
1998 acquisition described in Note 2.
During September 1997, the Company issued $15,000 of subordinated notes to
an entity that is owned by a director of the Company. The subordinated
notes also included warrants to acquire 500,000 shares of the Company's
common stock at $8.00 per share. The warrants were issued in October 1997,
and were valued at approximately $500 using an option-pricing model. The
warrants were exercised on October 9, 1997 for total proceeds of $4,000.
The Company repaid $10,000 of this debt upon the completion of a secondary
common stock offering completed in November 1997. The scheduled repayment
was reduced by the pro rata amount of unamortized discount. Accordingly, no
gain or loss was recognized on the extinguishment of debt. The outstanding
balance (net of discount) of $4,810 is included in long-term debt as of
December 31, 1999. In November 1999, the Company borrowed an additional
$5,000 from an entity that is controlled by this director.
In December 1998, the Company entered into a sale-leaseback transaction
with a director and stockholder of the Company. Manufacturing facilities in
Newberg, Oregon and Tucson, Arizona were sold for $10,500 and leased back
to the Company. Due to the Company's continuing financial interest in the
facilities, the transaction was accounted for as a financing transaction
secured by the facilities with an imputed interest rate of 8.68%. The lease
term is for 5 years with monthly payments of $90. No gain or loss from the
sale was recorded. At the end of the initial lease term the Company had the
option to buy the buildings back for $9,400. In May 1999, the lease was
amended to eliminate the purchase option, which resulted in the re-
characterization of the lease from a capital lease to an operating lease.
Accordingly, the buildings and the related debt have been removed from the
balance sheet at December 31, 1999.
The Company has entered into consulting and employment agreements with
individuals who are officers and directors of the Company. The consulting
agreements provide for aggregate monthly payments of approximately $38
through February 2002. The employment agreements provide for monthly
payments of $44 until expiration in 2000 and 2001. The employment
agreements may be terminated prior to expiration but the Company would
generally be required to pay severance benefits equal to one-year's salary
or up to two-year's salary if a change of control occurs. Additionally, the
Company has entered into arrangements with an entity that is owned by a
director whereby an aggregate of $238 was paid for services rendered in
1999.
9. Restructuring and Sale of Assets
Since the fourth quarter of 1998, the Company has taken actions to increase
capacity utilization through the closure of two facilities and the sale of
substantially all of the assets at two other divisions. The aggregate
43
<PAGE>
1999 operating results for these divisions, derived from the Company's
divisional accounting records (excluding corporate costs, interest expense
and income taxes), for these divisions are summarized as follows:
Net sales $ 103,000
Cost of goods sold 109,200
---------
Gross profit (loss) $ (6,200)
=========
Selling, general and administrative $ (11,400)
=========
Impairment of long-lived assets $ (2,700)
=========
Goodwill amortization $ (900)
=========
Loss on sale of assets $ (20,700)
=========
Management estimates that approximately $50,000 of the 1999 net sales shown
above relates to customers who have agreed to transition the impacted by a
sale or restructuring.
Sale of Tucson Assets. In December 1999, the Company commenced negotiations
with Honeywell International, Inc. for the sale of inventory and equipment
at the Company's facility located in Tucson, Arizona. On February 17, 2000,
these assets were sold to Honeywell for a purchase price of $13,240. The
Company was required to place $500 in an escrow account.
In connection with the agreement, Honeywell agreed to sublease the Tucson
facility for at least 18 months at $32 per month, which is equal to the
Company's rent expense. Honeywell has the option to extend the term of the
sublease until December 2003 when the Company's primary lease term expires.
If Honeywell terminates the sublease after 18 months, the Company will
attempt to enter into another sublease with a new tenant for the remaining
period under the primary lease. The Tucson facility is currently leased
from a director of the Company as discussed in the next to last paragraph
of Note 8.
The Company recognized a $1,200 impairment charge in 1999 related to
property and equipment at the Tucson facility.
Southeast Operations. On September 30, 1999, the Company initiated a plan
to consolidate and close its Southeast Operations in Fort Lauderdale,
Florida. In connection with the restructuring, the Company recognized a
charge of approximately $700 for severance costs related to approximately
200 employees who were terminated by April 2000. The unpaid portion of the
severance provision amounted to $682 at December 31, 1999 and is included
in accrued compensation and benefits in the accompanying balance sheet.
In connection with the closure, the Company recognized charges of $7,131
for excess and obsolete inventories and other items that are included in
cost of goods sold in 1999. The Company also recognized a charge of $1,000
for impairment of property and equipment that will not be redeployed at
other divisions. Additionally, the Company recognized an increase in the
allowance for doubtful accounts of $2,400 that is included in selling,
general and administrative expenses in 1999.
Management expects the Company will incur additional charges of $1,000 in
the first quarter of 2000 for retention bonuses, relocation costs and other
closure activities. These costs will be reflected in operations in the
period in which they occur. It is expected that the closure will be
substantially complete by April 2000.
Sale of Services Division. On September 1, 1999, the Company sold the
Services Division for approximately $28,000. The Company recognized a loss
of $20,565 primarily due to the write-off of $36,452 of unamortized
goodwill that was directly associated with the acquisition of this
division. The Company also recognized
44
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
$400 for impairment of property, plant and equipment, and additional
provisions totaling $1,600 related to inventory and receivables not
transferred to the purchaser.
In connection with this sale, the purchaser and the Company agreed to an
Earn-out Contingency (the "EC"). Under the EC, if the earnings for the year
ending August 31, 2000 related to the division sold is in excess of $4,455
("Target Earnings"), the Company will be entitled to an additional payment
equal to three times the difference between the actual earnings and Target
Earnings. If actual earnings are less than Target Earnings, the Company
will be required to refund an amount equal to three times the difference.
The maximum amount that either party would be required to pay under the EC
is $2,500; accordingly, the Company has deferred recognition of $2,500 of
the consideration subject to the EC.
Rocky Mountain Operations. In the fourth quarter of 1998, management
initiated a plan to consolidate and close its Rocky Mountain Operations in
Greeley, Colorado. Costs of $9,250 related to the closing were charged to
operations for the year ended December 31, 1998. Additional costs to
related to the closure of $2,391 were incurred through October 1999 when
the facility was sold for $3,802. The restructuring involved the
termination of approximately 140 employees of which 123 were manufacturing
related and 17 administrative or indirect support personnel. Total
severance and salaries of employees performing exit activities amounted to
$463 of which $263 was included in cost goods sold and $200 in selling,
general and administrative expenses in 1998. During 1998, the Company paid
$100 of these costs and the remaining costs were paid in 1999.
Inventory allowances of $5,445, which are included in cost of goods sold in
1998, were recorded to provide for future losses to be incurred related to
disengaged customers that did not continue as customers of the Company. In
addition, a provision of $3,342 was charged to operations in 1998 related
to asset impairment of land, building and equipment. At December 31, 1999,
all of the restructuring costs had been paid and no accrual was remaining
related to these restructuring activities.
10. Business and Credit Concentrations
The Company operates in the electronic manufacturing services segment of
the electronics industry. Substantially all of the Company's customers are
located in the United States. For the years ended December 31, 1999 and
1998, 68% and 46%, respectively, of the Company's sales were derived from
companies engaged in the avionics industry. The Company has a policy to
regularly monitor the credit worthiness of its customers and provides for
uncollectible amounts if credit problems arise. Customers may experience
adverse financial difficulties, including those that may result from
industry developments, which may increase bad debt exposure to the Company.
In addition, the electronics manufacturing services industry has
experienced component supply shortages in the past. Should future component
shortages occur, the Company might experience reduced net sales and
profitability.
45
<PAGE>
Sales to significant customers as a percentage of total net sales for the
years ended December 31, 1999, 1998 and 1997, were as follows:
1999 1998 1997
---- ---- ----
AlliedSignal, Inc. 46.1% 42.1% 25.3%
Honeywell, Inc. 10.3% 3.3% --
---- ---- ----
Pro Forma Combined 56.4% 45.4% 25.3%
==== ==== ====
Exabyte -- 4.4% 12.3%
==== ==== ====
In December 1999, AlliedSignal and Honeywell completed their merger and the
combined company was named Honeywell International, Inc. The pro forma
disclosure above presents the customer concentration as if the merger had
occurred on January 1, 1997.
At December 31, 1999, approximately 57% of the Company's net trade
receivables were due from Honeywell International, Inc., and 12% of net
trade receivables were due from Bayer Corporation. The Company does not
require collateral to support trade receivables.
11. Commitments and Contingencies
Operating Leases. The Company has noncancelable operating leases for
facilities and equipment that expire in various years through 2004. Lease
expense under all operating leases amounted to $9,471, $7,072 and $2,333
for the years ended December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, future minimum lease payments (excluding sublease
rentals due from Honeywell International, Inc. discussed in Note 9) for
operating leases are as follows:
Year Ending December 31:
------------------------
2000 $ 9,975
2001 7,727
2002 6,485
2003 5,881
2004 3,320
After 2005 5,845
---------
$ 39,233
=========
Customer Royalties. In connection with long-term customer supply
agreements, the Company has agreed to pay approximately 1% of gross revenue
for all electronic assemblies and parts made for other customers at certain
facilities. These arrangements expire beginning in 2001 and extending until
2009 at one of the Company's facilities. Total royalties under these
arrangements for the year ended December 31, 1999 amounted to $170.
Financial Advisory Agreement. In December 1999, the Company entered into an
agreement with an entity engaged to assist the Company with a debt or
equity financing. Depending on the nature of the financing transaction, the
company will be required to pay a fee between 1.0% and 5.0% of the gross
proceeds and issue warrants to purchase up to 525,000 shares of common
stock at an exercise price of $3.00 per share.
Employee Benefit Plan. The Company has a 401(k) Savings Plan covering
substantially all employees, whereby the Company matches 50% of an
employee's contributions to a maximum of 2% of the employee's compensation.
Additional profit sharing contributions to the plan are at the discretion
of the Board of
46
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
Directors. During the years ended December 31, 1999, 1998 and 1997,
contributions from the Company to the Plan were approximately $588, $391
and $138, respectively.
Legal Proceedings. In September and October 1998, the Company and certain
of its present and former directors and officers were named as defendants
in lawsuits brought by certain shareholders claiming to represent classes
of shareholders that purchased shares of the Company's common stock between
April and August 1998. These class action complaints purport to present
claims under federal and state securities laws and seek unspecified damages
based on alleged misleading disclosures during the class period. On April
4, 2000, subject to court approval, the plaintiffs and the Company agreed
to settle both lawsuits. The Company has recorded a provision for the
settlement of this loss contingency as of December 31, 1999. The settlement
will require the Company to pay approximately $3,100 by April 10, 2000.
Additionally, the Company will be required to contribute to the settlement
fund an aggregate of 1,300,000 shares of the Company's common stock with an
estimated fair value of $3,300.
12. Fourth Quarter Adjustments
During the fourth quarter of 1999, the Company recognized a charge of
$4,215 for a valuation allowance related to deferred tax assets, and a
charge of approximately $1,000 related to the accelerated amortization of
debt issuance costs due to a fourth quarter amendment to the bank credit
agreement. In addition, the Company incurred other charges of approximately
$6,400 related to the lawsuit settlement discussed in Note 11, and $5,600
for charges related to inventory, receivables and the resolution of other
issues (primarily related to the closure of the Ft. Lauderdale division and
the sale of the Tucson assets) with Honeywell International, Inc.
47
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
EFTC Corporation:
Under date of April 4, 2000, we reported on the consolidated balance sheets of
EFTC Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1999
which are included in the Company's annual report on Form 10-K for the year
ended December 31, 1999. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule included in the Form 10-K. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
April 4, 2000
48
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
---------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
Accounts Receivable- Allowance for Doubtful Accounts
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions (1)
-----------------------
Balance at Charged Charged Balance at
Beginning To Costs & To Other End Of
Year Ended December 31, Of Period Expenses Accounts Deductions (2) Period
---------- ---------- -------- -------------- ----------
<S> <C> <C> <C> <C> <C>
1997 $ 20 $ (240) $ 694 $ -- $ 474
1998 474 1,020 24 196 1,322
1999 1,322 5,091 -- 2,724 3,689
</TABLE>
Inventories- Reserve for Excess and Obsolete Inventories
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions (1)
-----------------------
Balance at Charged Charged Balance at
Beginning To Costs & To Other End Of
Year Ended December 31, Of Period Expenses Accounts Deductions (2)(3) Period
---------- ---------- -------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
1997 $ 20 $ 25 $ 2,196 $ 218 $ 2,023
1998 2,023 6,975 1,487 2,097 8,388
1999 8,388 7,287 -- 5,500 10,175
</TABLE>
------------------
(1) Amounts charged to other accounts were recorded in conjunction with
acquisitions.
(2) Deductions relate to write-offs unless otherwise indicated.
(3) Deductions of $2,087 in 1998 relate to adjustments to the purchase price
allocations of acquisitions.
49
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the directors and executive officers of the
Company is incorporated herein by reference to the section entitled PROPOSAL
1-ELECTION OF DIRECTORS in the Company's definitive Proxy Statement with respect
to the Company's Annual Meeting of Shareholders (the "Proxy Statement").
Item 11. Executive Compensation.
The section labeled "Compensation of Directors and Executive Officers"
appearing in the Company's Proxy Statement is incorporated herein by reference,
except for such information as need not be incorporated by reference under rules
promulgated by the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The Section labeled "Security Ownership of Directors and Executive
Officers and Certain Beneficial Owners" appearing in the Company's Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The second labeled "Certain Relationships and Related Transactions"
appearing in the Company's Proxy Statement is incorporated herein by reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements-The financial statements listed in Item 8 on
page 28, are filed as part of this annual report.
2. Financial Statement Schedules-Schedule II- Valuation and Qualifying
Accounts and the accompanying opinion of KPMG LLP which appear on
pages 53 and 52, respectively, are filed as part of this annual
report.
3. Exhibits-The following exhibits are filed as part of this annual
report.
Exhibit
-------
Number Document Description
------ --------------------
*3.1 Amended and Restated Articles of Incorporation of the Company
*3.2 Articles of Amendment to the Articles of Incorporation of the Company
3.3 Articles of Amendment to the Articles of Incorporation of the Company
(10)
3.4 Amended and Restated Bylaws of the Company (1)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3, respectively
4.2 Specimen Common Stock Certificate of the Company (1)
*4.3 Form of Exchangeable Note dated as of March 30, 2000 issued by the
Company to Thayer-Blum Funding, LLC
*4.4 Form of Convertible Note dated as of March 30, 2000 issued by the
Company to Thayer-Blum Funding, LLC
50
<PAGE>
4.5 Rights Agreement dated as of February 25, 1999 between the Company and
American Securities Transfer & Trust, Inc., as Rights Agent. (10)
*4.6 Amendment to Rights Agreement dated as of March 30, 2000 between the
Company and Rights Agent.
10.1 Form of Registration Rights Agreement dated January 1994 between the
Company and the parties thereto (1)
10.2 Registration Rights Agreement dated as of February 24, 1997, among the
Company, Charles E. Hewitson, Matthew J. Hewitson and Gregory Hewitson
and certain other parties (2)
10.3 Registration Rights Agreement dated as of March 31, 1998, among the
Company, Raymond Marshall and Robert Monaco (8)
10.4 Registration Rights Agreement dated as of September 30, 1997 among the
Company and CTI Shareholders (4)
10.5.1 Master Agreement Regarding Asset Purchase and Related Transactions
among the Company, AlliedSignal Avionics, Inc., a Kansas corporation
("Avionics"), and AlliedSignal, Inc., operating through its Aerospace
Equipment Systems Unit ("AES"), dated as of July 15, 1997, as amended
by the First Amendment to Master Agreement dated as of July 31, 1997,
and as further amended by the Second Amendment to Master Agreement
dated as of August 11, 1997 (3)
10.5.2 Third Amendment to Master Agreement dated as of September 5, 1997 (6)
10.6 Supplier Partnering Agreement between the Company and AlliedSignal,
Inc. dated as of September 29, 1998 (7)
10.7 Amended and Restated License Agreement between the Company and
AlliedSignal Technologies, Inc., dated as of September 5, 1997 (6)
*10.8 Asset Purchase Agreement dated February 17, 2000 between Honeywell
International Inc. and the Company
*10.9 Note Agreement between the Company and Richard L. Monfort dated as of
November 11, 1999
*10.10 First Amendment to Note Agreement between the Company and Richard L.
Monfort dated as of December 30, 1999, including the form of Note
attached as Exhibit A thereto.
10.11+ EFTC Corporation Equity Incentive Plan, amended and restated as of July
9, 1997 (6)
10.12+ EFTC Corporation Stock Option Plan for Non-Employee Directors, amended
and restated as of July 9, 1997 (6) 10.13+ Employment Agreement with
Jack Calderon dated as of June 5, 1998 (7) 10.14+ Form of Consulting
Agreement entered into by the Company in connection with the
acquisition of Current Electronics, Inc.(5)
*10.15+ 1999 Management Bonus Plan
10.16 Asset Purchase Agreement dated as of August 31, 1999 between Jabil
Circuit, Inc., the Company, CTLCC Acquisition Corp., Circuit Test,
Inc., Airhub Services Group, L.C., and Circuit Test International, L.C.
(9)
*10.17 Master Agreement regarding Asset Purchase and Related Transactions
dated as of March 19, 1999 between Honeywell Inc. and the Company
*10.18 Long Term Supply Agreement dated as of March 19, 1999 between
Honeywell Inc. and the Company
Note: Confidential treatment has been requested from the Securities
and Exchange Commission for portions of this exhibit
*10.19 Amendment to Long Term Supply Agreement dated as of May 21, 1999
*10.20 Second Amendment to Long Term Supply Agreement dated as of February
2000
*10.21 Securities Purchase Agreement between the Company and Thayer-Blum
Funding, LLC dated as of March 30, 2000
*10.22 Form of Warrant dated as of March 30, 2000 issued by the Company to
Thayer-Blum Funding, LLC
*10.23 Loan and Security Agreement dated March 30, 2000 with Bank of America,
N.A., as agent for several banks (the "Bank") and the Company
*10.24 Security Agreement - Stock Pledge dated March 30, 2000 with the Bank
and the Company
*21.1 List of Subsidiaries
*23.1 Consent of KPMG LLP
*27.1 Financial Data Schedule
-------------
* Filed herewith
51
<PAGE>
+ Management Compensation Plan
(1) Incorporated by reference from the Company's Registration Statement on Form
SB-2 (File No. 33-73392-D) filed on December 23, 1993
(2) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on March 5, 1997
(3) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on August 26, 1997
(4) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on October 15, 1997
(5) Incorporated by reference from the Company's Annual Report on Form 10-K
(File No. 0-23332) filed on March 27, 1997
(6) Incorporated by reference from the Company's Registration Statement on
Form S-2 (File No. 333-38444) filed on October 21, 1997
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
(File No. 0-23332) filed on November 16, 1998
(8) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on April 15, 1998
(9) Incorporated by reference from the Company's Current Report on Form 8-K
(File No. 0-23332) filed on September 16, 1999
(10) Incorporated by reference from the Company's Registration Statement on
Form 8-A (File No. 0-23332) filed on February 25, 1999
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K relating to the execution
by the Company and its senior lenders of an Amendment and Waiver to Credit
Agreement dated December 20, 1999.
52
<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 14th day of April, 2000.
EFTC CORPORATION, a Colorado corporation
By: /s/ Jack Calderon
-----------------
Jack Calderon
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this Report to be signed by the following persons in
the capacities and on the dates indicated.
Position Held
Signature With the Registrant Date
--------- ------------------- ----
/s/ Jack Calderon President and Director April 14, 2000
-------------------------- (Principal Executive Officer)
Jack Calderon
/s/ James A. Doran Treasurer and Director April 14, 2000
-------------------------- (Principal Financial and Accounting
James A. Doran Officer)
/s/ Allan S. Braswell, Jr. Director April 14, 2000
--------------------------
Allan S. Braswell, Jr.
/s/ Jeffrey W. Goettman Director April 14, 2000
--------------------------
Jeffrey W. Goettman
/s/ Charles Hewitson Director April 14, 2000
--------------------------
Charles Hewitson
/s/ Robert McNamara Director April 14, 2000
--------------------------
Robert McNamara
/s/ Robert Monaco Director April 14, 2000
--------------------------
Robert Monaco
/s/ Richard L. Monfort Director April 14, 2000
--------------------------
Richard L. Monfort
53
<PAGE>
/s/ Gerald J. Reid Director April 14, 2000
------------------------
Gerald J. Reid
/s/ Masoud S. Shirazi Director April 14, 2000
------------------------
Masoud S. Shirazi
/s/ John C. Walker Director April 14, 2000
------------------------
John C. Walker
54
<PAGE>
Appendix V
Quarterly Report on Form 10-Q for the Quarter Ended March 31, 2000
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
--------------
[_] TRANSITION REPORT PURSUANT 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 84-0854616
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9351 Grant Street, Sixth Floor
------------------------------
Denver, Colorado 80229
----------------------
(Address of principal executive offices)
(303) 451-8200
--------------
(Issuer's telephone number)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
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. [X] Yes [_]No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, par value $0.01 15,543,489 shares
----------------------------- -----------------
(Class of Common Stock) (Outstanding at April 30, 2000)
<PAGE>
EFTC CORPORATION
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION Number(s)
------------------------------ ---------
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets-
March 31, 2000 and December 31, 1999 3-4
Consolidated Statements of Operations-
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2000 and 1999 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 12
Results of Operations 13-14
Liquidity and Capital Resources 15-17
Special Note Regarding Forward-looking Statements 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
----------
2
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
------ 2000 1999
---- ----
<S> <C> <C>
Current Assets:
Cash and equivalents $ 3,819 $ 716
Trade receivables, net of allowance for doubtful
accounts of $2,438 and $3,689, respectively 25,742 26,094
Income taxes recievable 2,122 2,106
Inventories, net 69,958 60,167
Prepaid expenses and other 3,266 2,795
-------- --------
Total Current Assets 104,907 91,878
-------- --------
Property, Plant and Equipment, at cost:
Leasehold improvements 2,744 2,797
Buildings and improvements 2,064 1,172
Manufacturing machinery and equipment 13,733 16,496
Furniture, computer equipment and software 13,437 12,726
-------- --------
Total 31,978 33,191
Less accumulated depreciation and amortization (9,900) (9,614)
-------- --------
Net Property, Plant and Equipment 22,078 23,577
-------- --------
Intangible and Other Assets:
Goodwill, net of accumulated amortization
of $824 and $758, repectively 7,197 7,264
Intellectual property, net of accumulated amortization
of $867 and $699, repectively 4,121 4,289
Debt issuance costs, net of accumulated amortization
of $-0- and $97, respectively 2,892 460
Inventories, deposits and other 5,388 3,661
-------- --------
Total Intangible and Other Assets 19,598 15,674
-------- --------
$146,583 $131,129
======== ========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
3
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31,
------------------------------------ 2000 1999
---- ----
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt- related party $ - $ 5,018
Accounts payable 56,286 46,985
Accrued compensation and benefits 3,939 4,993
Other accrued liabilities 10,335 8,650
-------- --------
Total Current Liabilities 70,560 65,646
Long-term Liabilities:
Long-term debt, net of current maturities:
Related parties 3,000 4,792
Banks - 33,184
Exchangeable Notes 54,000 -
Other 7,309 6,229
-------- --------
Total Liabilities 134,869 109,851
Shareholders' Equity:
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding 15,543,000 shares 155 155
Additional paid-in capital 92,528 91,992
Accumulated deficit (80,969) (70,869)
-------- --------
Total Shareholders' Equity 11,714 21,278
-------- --------
$146,583 $131,129
======== ========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
4
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters Ended March 31, 2000 and 1999
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 63,526 $ 54,324
Cost of Goods Sold 62,197 47,064
----------- -----------
Gross profit 1,329 7,260
Operating Costs and Expenses:
Selling, general and administrative 4,848 6,007
Goodwill amortization 67 391
Recapitalization transaction costs 4,874 -
----------- -----------
Total operating costs and expenses 9,789 6,398
----------- -----------
Operating income (loss) (8,460) 862
Other Income (Expense):
Interest expense (1,608) (1,264)
Loss on sale of property, plant and equipment (2) -
Other, net (30) 38
----------- -----------
Loss before income taxes (10,100) (364)
Income Tax Benefit - 35
----------- -----------
Net loss $ (10,100) $ (329)
=========== ===========
Net Loss Per Share:
Basic $ (0.65) $ (0.02)
=========== ===========
Diluted $ (0.65) $ (0.02)
=========== ===========
Weighted Average Shares Outstanding:
Basic 15,543,000 15,543,000
=========== ===========
Diluted 15,543,000 15,543,000
=========== ===========
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
5
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarters Ended March 31, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (10,100) $ (329)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,700 1,595
Amortization of debt issuance costs 474 -
Deferred income tax benefit - (17)
Provision for excess and obsolete inventories 1,031 -
Provision for doubtful accounts receivable 321 -
Loss on sale of property, plant and equipment 2 -
Fair value of common stock warrants issued for services 210 -
Changes in operating assets and liabilities, excluding
effects of sale of assets:
Decrease (increase) in:
Trade receivables 31 (1,128)
Inventories (25,934) 828
Income taxes receivable (16) -
Prepaid expenses and other 1,040 571
Increase (decrease) in:
Accounts payable 4,491 (2,298)
Accured compensation and benefits (1,054) -
Other accrued liabilities 5,925 -
--------- -------
Net cash used by operating activities (21,879) (778)
--------- -------
Cash Flows from Investing Activities:
Proceeds from sale of assets 12,740 -
Payment of commissions related to sale of division (100) -
Capital expenditures (1,170) (2,250)
--------- -------
Net cash provided (used) by investing activities 11,470 (2,250)
--------- -------
Cash Flows from Financing Activities:
Payments for debt issuance costs (165) -
Proceeds from long-term debt 121,861 4,143
Principal payments on long-term debt (108,184) (875)
--------- -------
Net cash provided by financing activities 13,512 3,268
--------- -------
Net increase in cash and equivalents 3,103 240
Cash and Equivalents:
Beginning of period 716 623
--------- -------
End of period $ 3,819 $ 863
========= =======
</TABLE>
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
6
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Quarters Ended March 31, 2000 and 1999
(Dollars in Thousands)
2000 1999
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $1,416 $1,275
====== ======
Cash paid for income taxes $ - $ -
====== ======
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Issuance of warrants to purchase common stock
for debt issuance costs $ 326 $ -
====== ======
Proceeds from sale of assets placed in escrow
account $ 500 $ -
====== ======
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
7
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. The unaudited consolidated financial statements should
be read in conjunction with the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
2. Earnings Per Share
Basic Earnings Per Share excludes dilution for potential common shares and is
computed by dividing net income or loss by the weighted average number of common
shares outstanding for the period. Diluted Earnings Per Share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Basic and diluted
Earnings Per Share are the same for the quarters ended March 31, 2000 and 1999,
as all potential common shares were antidilutive.
3. Inventories
Inventories at March 31, 2000 and December 31, 1999 consist of the following:
2000 1999
---- ----
Purchased parts and completed subassemblies, net $54,651 $43,971
Work-in-process 12,371 13,317
Finished goods 2,936 2,879
------- -------
$69,958 $60,167
======= =======
At March 31, 2000 and December 31, 1999, the Company classified "life time buy"
inventories of approximately $4.9 million and $3.1 million, respectively, as
other assets.
8
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
4. Restructuring and Sale of Assets
Since the fourth quarter of 1998, the Company has taken actions to increase
capacity utilization through the closure of two facilities and the sale of
substantially all of the assets at two other divisions. The aggregate operating
results for these divisions, derived from the Company's divisional accounting
records (excluding corporate costs, interest expense and income taxes), for the
three months ended March 31, 2000 and 1999 are summarized as follows:
2000 1999
---- ----
Net sales $ 14,510 $ 35,467
Cost of goods sold 15,429 31,530
-------- --------
Gross profit (loss) $ (919) $ 3,937
======== ========
Selling, general and administrative $ (682) $ (2,023)
======== ========
Goodwill amortization $ -- $ (324)
======== ========
Management estimates that approximately $11,000 of the net sales in 2000
($14,000 in 1999) shown above relate to customers who have agreed to transition
the manufacture of their products to other facilities operated by the Company.
Presented below is a description of each division that was impacted by a sale or
restructuring.
Sale of Tucson Assets. In December 1999, the Company commenced negotiations with
Honeywell International, Inc. for the sale of inventory and equipment at the
Company's facility located in Tucson, Arizona. On February 17, 2000, these
assets were sold to Honeywell for a purchase price of $13,240. The Company
recognized a $1,200 impairment charge in the fourth quarter of 1999 related to
property and equipment at the Tucson facility.
Southeast Operations. On September 30, 1999, the Company initiated a plan to
consolidate and close its Southeast Operations in Fort Lauderdale, Florida. In
connection with the restructuring, the Company recognized a charge of
approximately $700 for severance costs related to approximately 200 employees
who were terminated by April 2000. The unpaid portion of the severance provision
amounted to $100 at March 31, 2000 and is included in accrued compensation and
benefits in the accompanying balance sheet. During the first quarter of 2000,
the Company recognized charges totaling $950 for retention bonuses, relocation
costs and other closure activities.
Management expects the Company will incur additional charges of $300 in the
second quarter of 2000 for closure activities. It is expected that the closure
will be substantially complete by the end of the second quarter.
9
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Sale of Services Division. On September 1, 1999, the Company sold the Services
Division for approximately $28,000. In connection with this sale, the purchaser
and the Company agreed to an Earn-out Contingency (the "EC"). Under the EC, if
the earnings for the year ending August 31, 2000 related to the division sold
are in excess of $4,455 ("Target Earnings"), the Company will be entitled to an
additional payment equal to three times the difference between the actual
earnings and Target Earnings. If actual earnings are less than Target Earnings,
the Company will be required to refund an amount equal to three times the
difference. The maximum amount that either party would be required to pay under
the EC is $2,500; accordingly, the Company has deferred recognition of $2,500 of
the consideration subject to the EC. This amount is included in other accrued
liabilities in the accompanying balance sheet.
Rocky Mountain Operations. In the fourth quarter of 1998, management initiated a
plan to consolidate and close its Rocky Mountain Operations in Greeley,
Colorado. At March 31, 2000, all of the restructuring costs had been paid and no
accrual was remaining related to these restructuring activities.
5. Debt Financing
At March 31, 2000 and December 31, 1999, long-term debt consists of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Unsecured Senior Subordinated Exchangeable Notes, interest
at 15%, due June 2006 $ 54,000 $ --
Note payable to director, interest at 10%, unsecured, due March
2004 3,000 5,000
Note payable to bank under revolving line of credit, interest at the
prime rate (9.0% at March 31, 2000) plus .5%, collateralized by
substantially all assets, due March 2003 -- --
Note payable to Bank Group under revolving line of credit, interest
at the prime rate plus 2.25%, collateralized by substantially all
assets, paid in March 2000 -- 33,184
Note payable to director, interest at LIBOR plus 2%, annual
principal payments of $50, due December 2002, unsecured, net of
discount of $90, paid in March 2000 -- 4,810
-------- --------
Total 57,000 42,994
Less current maturities -- (5,018)
-------- --------
Long-term debt, less current maturities $ 57,000 $ 37,976
======== ========
</TABLE>
10
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Recapitalization. On March 30, 2000, the Company entered into an agreement with
Thayer-BLUM Funding, L.L.C. ("Thayer-BLUM Funding"), an entity formed by
affiliates of Thayer Equity Investors IV, L.P. ("Thayer") and BLUM Capital
Partners, L.P. ("BLUM"), involving a recapitalization of the Company. The
recapitalization agreement provided for Thayer-BLUM Funding to invest a total of
$54,000 in Senior Subordinated Exchangeable Notes ("Exchangeable Notes") and to
subsequently undertake a tender offer for up to 8,250,000 shares of the
Company's currently outstanding common stock at a price of $4.00 per share.
Thayer-BLUM Funding received the right to appoint two new members to the
Company's board of directors.
The Exchangeable Notes initially provide for a paid in kind interest rate of 15%
and are accompanied by warrants to purchase 3,093,154 shares of the Company's
common stock at an exercise price of $.01 per share. However, upon shareholder
approval of this transaction and assuming that the tender offer is consummated
with at least 500,000 shares being purchased therein, the warrants will not
become exercisable and will expire. Accordingly, no value was assigned to the
warrants since they are never expected to become exercisable. Additionally, the
Exchangeable Notes will be replaced with Senior Subordinated Convertible Notes
("Convertible Notes") upon receipt of shareholder approval and consummation of
the tender offer for at least 500,000 shares. The Convertible Notes will provide
for interest at 8.875%, payable in kind. The Convertible Notes may be converted
into the Company's common stock at $2.58 per share, subject to adjustment.
Conversion of the notes will occur at the election of the holders or if EFTC's
common stock trades above $7.50 per share for 45 consecutive trading days.
Commencing on March 30, 2003, the Convertible Notes will automatically convert
if the Company's common stock trades above $4.25 per share for 45 consecutive
trading days. Finally, Thayer-BLUM Funding will have the right to appoint a
majority of the members of the Company's board of directors and will have the
right to approve any significant financings, acquisitions and dispositions.
If shareholders do not approve the transaction or if less than 500,000 shares
are purchased in the tender offer, then the warrants will remain in place and
the interest rate on the Exchangeable Notes will increase to 20%. The maturity
date of the Exchangeable Notes is June 2006. Interest would be compounded
quarterly and will accrue and be added to the principal amount of the
Exchangeable Notes or be payable in additional Exchangeable Notes, at the option
of the Company.
Refinancing of Debt. On March 30, 2000, the Company entered into a new credit
agreement with Bank of America, N.A. to refinance the Company's revolving line
of credit with the Company's previous lender. The new credit facility provides
for a $45,000 revolving line of credit with a maturity date of March 2003.
Initially, the interest rate is the prime rate plus .5%. Total borrowings are
subject to limitation based on a percentage of eligible accounts receivable and
eligible inventory, and substantially all of the Company's assets are pledged as
collateral for outstanding borrowings. The credit agreement requires compliance
with certain financial and non-financial covenants. No amounts were outstanding
under the revolving credit agreement as of March 31, 2000. On March 30, 2000,
the Company also repaid outstanding notes payable in the aggregate principal
amount of $6,810 (net of discount) to a director of the Company. The Company and
director amended the terms of the remaining outstanding debt to provide for a
new unsecured note in the principal amount of $3,000 that bears interest at 10%
and is due March 2004.
11
<PAGE>
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" below.
General
The Company is a leading independent provider of high-mix electronic
manufacturing services to original equipment manufacturers (OEMs) in the
avionics, medical, communications, industrial instruments and controls, and
computer-related products industries. The Company's manufacturing services
consist of assembling complex printed circuit boards, cables, electro-mechanical
devices, and finished products.
Although management does not believe that the Company's business is
affected by seasonal factors, the Company's sales and earnings typically vary
from quarter to quarter due to a variety of factors. Some of the factors that
impact quarterly results of operations include the level and timing of customer
orders and the mix of turnkey and consignment orders. The level and timing of
orders placed by a customer vary due to the customer's attempts to balance its
inventory, changes in the customer's manufacturing strategy, and variation in
demand for its products due to, among other things, product life cycles,
competitive conditions and general economic conditions. In the past, changes in
orders from customers have had a significant effect on the Company's quarterly
results of operations. Other factors affecting the Company's quarterly results
of operations may include, among other things, the Company's performance under
the long-term supply agreement with Honeywell, price competition, disposition of
divisions and closure of operating units, the ability to obtain inventory from
its suppliers on a timely basis, the Company's level of experience in
manufacturing a particular product, the degree of automation used in the
assembly process, the efficiencies achieved by the Company through managing
inventories and other assets, the timing of expenditures in anticipation of
increased sales, and fluctuations in the cost of components or labor. Therefore,
the Company's operating results for any particular quarter may not be indicative
of the results for any future quarter of the year.
The following discussion and analysis provides information that EFTC's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein, as well as with the consolidated financial
statements, notes thereto and the related management's discussion and analysis
of financial condition and results of operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
12
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of net
sales:
Quarter Ended March 31,
------------------------
2000 1999
---- ----
Net sales 100.0% 100.0%
Cost of goods sold 97.9% 86.7%
-------- --------
Gross profit 2.1% 13.3%
Selling, general and administrative 7.6% 11.0%
Recapitalization transaction costs 7.7% --
Goodwill amortization 0.1% 0.7%
-------- --------
Operating income (loss) (13.3%) 1.6%
======== ========
Net Sales. Net sales for 2000 were $63.5 million compared to $54.3
---------
million in 1999, which is a increase of 16.9%. The Company has experienced major
changes in its customers and facilities since the beginning of 1999. At the
start of 1999, the Company had eleven facilities. Six of these facilities have
been sold or will be closed by the second quarter of 2000. However, the Company
also added facilities in Phoenix and Mexico during 1999 to support the new
business with Honeywell in connection with the long-term supply agreement
entered into in March 1999 that offset the loss of revenue from other divisions.
The Company's sales for the first quarter of 2000 include approximately $22.4
million of revenue under the Honeywell agreement. However, this increased
revenue was offset by the loss of revenue from the Services division that was
sold on September 1, 1999, and the Tucson assets that were sold on February 17,
2000. The combined impact of the sale of the Services division and the Tucson
assets resulted in a decrease in revenue for the quarter ended March 31, 2000 of
$13 million compared to the same period in 1999.
Gross Profit (Loss). The Company had gross profit of 2.1% in 2000
-------------------
compared to gross profit of 13.3% in the first quarter of 1999. The decrease in
gross profit during the first quarter of 2000 is primarily attributable to the
sale of assets and closure of four divisions as discussed in Note 4 to the
financial statements. The four facilities subject to sale or closure accounted
for $3.9 million of gross profit during the first quarter of 1999 compared to a
loss of $0.9 million (primarily due to retention bonuses and other costs related
to the closure of the Company's Southeast operations) in the first quarter of
2000. The aggregate impact on gross profit was nearly $4.9 million between the
two quarters. The decrease in gross profit during the first quarter of 2000 was
also negatively impacted by $0.8 million related to the transition of additional
manufacturing services under the Honeywell agreement during February and March
of 2000.
During 1999, margins were negatively impacted by charges of $0.8
million that were included in cost of goods sold due to inventory allowances and
operating charges related to the closure of the Greeley facility. The Greeley
facility was sold in the fourth quarter of 1999 and, accordingly, there were no
charges included in first quarter of 2000 results for this facility.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative expenses ("SG & A") decreased 19.3% to $4.8 million in 2000
compared to $6.0 million in the quarter ended March 31, 1999. SG & A expenses
for the quarter ended March 31, 2000, included approximately $0.1 million for
retention bonuses and salaries of administrative employees performing exit
activities in connection with the closure of the Southeast operations. SG & A
expense for the quarter ended March 31, 1999 included
13
<PAGE>
increased costs of infrastructure added in the second half of 1998, including
sales and marketing resources, and added costs associated with operations,
quality and information technology. The primary costs associated with these
functions related to compensation costs.
Recapitalization Transaction Costs. In connection with the
----------------------------------
recapitalization discussed in Note 5 to the financial statements, the Company
incurred charges totaling $4.9 million for financial advisor fees, a fee paid to
Thayer-BLUM Funding, and due diligence costs for legal, accounting and
management consultants. The Company capitalized costs associated with the Senior
Subordinated Exchangeable Notes and the new revolving credit agreement, and all
other costs were charged to operations during the quarter ended March 31, 2000.
Management expects that the Company will incur additional costs related to a
special shareholders' meeting and the tender offer of approximately $300,000
during the second quarter of 2000.
Goodwill Amortization. Goodwill amortization for the first quarter of
---------------------
2000 amounted to $0.1 million compared to $0.4 million in the first quarter of
1999. The decrease in 2000 was attributable to the sale of the Services Group on
September 1, 1999, and the corresponding write-off of $36.5 million of goodwill
that was included in the calculation of the loss on sale of the Services Group.
Interest Expense. Interest expense increased 27.2% to $1.6 million in
----------------
the first quarter of 2000 compared to $1.3 million in the same quarter of 1999.
The increase in 2000 was primarily attributable to an increase in amortization
of debt issuance costs of approximately $350,000. This increase was attributable
to accelerated amortization of debt issuance costs and additional costs incurred
in connection with amendments to the credit agreement. Interest expense was also
negatively impacted in 2000 by increases in the prime rate, as well as increases
in the rate charged by the Company's lenders. However, the Company's overall
debt level was lower in 2000, which otherwise offset the increased interest
costs for the first quarter of 2000 compared to the first quarter of 1999.
Substantially higher interest costs are expected in the second quarter
of 2000 since the Company expects to have a debt balance that will be more than
double the average balance during the first quarter of 2000. Additionally, the
$54 million of Exchangeable Notes will provide for interest at 15% until receipt
of shareholder approval, at which time the interest rate would be reduced to
8.875%. However, if shareholder approval is not received, the interest rate will
increase to 20%.
Income Tax Benefit. Due to significant net losses in 1999 and the first
------------------
quarter of 2000, the Company recorded a valuation allowance for all of its net
deferred tax assets. Management does not expect that a tax provision will be
necessary if the Company generates earnings in 2000, since a significant net
operating loss carryforward is available for income tax purposes. However, this
carryforward may be subject to reduction or limitation as a result of changes in
ownership or certain consolidated return filing regulations.
14
<PAGE>
Liquidity and Capital Resources
Working Capital and Operating Cash Flows. At March 31, 2000, working
----------------------------------------
capital totaled $34.3 million compared to $26.2 million at December 31, 1999.
The increase in working capital during the first quarter of 2000 is primarily
attributable to the issuance of $54 million in principal amount of the
Exchangeable Notes discussed in Note 4 to the financial statements.
During the remainder of 2000, management expects that sales will
increase between 10% and 25% from first quarter levels as a result of additional
orders placed under the Honeywell supply agreement. The expected impact of this
increase in sales is an improvement in capacity utilization and a return to
profitability. However, if the Company does not effectively manage the
transition process related to this growth, the Company could experience
continued adverse financial performance. Additionally, management expects that
an increase in borrowings under the revolving credit agreement will be required
to fund the higher levels of working capital associated with the anticipated
increase in sales.
Net cash used by operating activities for the quarter ended March 31,
2000 was $21.9 million compared to net cash used in operating activities of $0.8
million in 1999. During 2000, the Company incurred a significant operating loss
that utilized approximately $6.4 million of cash. The Company also utilized cash
of $24.9 million to fund an increase in inventories and other current assets.
These amounts were partially financed by an increase in operating payables and
other accrued liabilities of $9.4 million.
Receivable turns (e.g., annualized sales divided by period end accounts
receivable) increased to 9.9 for the quarter ended March 31, 2000 compared to
6.2 for the quarter ended March 31, 1999.
Current inventories increased 16.3% to $70.0 million at March 31, 2000
from $60.2 million at December 31, 1999. Current inventory turns (i.e.,
annualized cost of sales divided by period end current inventory) for the three
months ended March 31, 2000 indicate that the Company is turning its inventories
3.6 times per year. This is a decrease compared to the fourth quarter of 1999
when inventories were turning 3.8 times per year. Inventory turns in the first
quarter of 2000 were negatively impacted by an increase in inventories of $25
million dollars in connection with preparation for increased business under the
Honeywell agreement. Inventory turns were positively impacted by the
non-operating sale of inventories for $12.0 million related to the Tucson
facility assets. Exclusive of these two events, current inventory turns for the
first quarter of 2000 would have been approximately 4.4 times.
Cash Requirements for Investing Activities. The Company used cash for
------------------------------------------
capital expenditures totaling $1.2 million in 2000 (primarily related to
additional fit-up costs at the Company's new facility in Phoenix) compared with
$2.3 million in the first quarter of 1999. During the first quarter of 2000, the
Company also received net proceeds of $12.7 million related to the sale of
assets to Honeywell at the Company's former facility in Tucson.
Financing Sources and Related Activities. In connection with the purchase of
----------------------------------------
the Services Group and the assets located in Tucson and Fort Lauderdale, the
Company entered into a credit facility on September 30, 1997 with a bank group
led by Bank One, Colorado, N.A. This facility was refinanced with proceeds from
the recapitalization described below.
A director of the Company entered into a sale/leaseback transaction with the
Company in December 1998. The Company sold two manufacturing facilities located
in Newberg, Oregon and Tucson, Arizona to the director for $10.5 million. The
director leased these manufacturing facilities back to the Company for a term of
five years with monthly payments of $90,000. At the end of the lease term, the
Company had the option to repurchase the facilities for approximately $9.4
million. In May 1999, the lease was amended to eliminate the purchase option,
which resulted in the recharacterization of the lease from a capital lease to an
operating lease. As such, the buildings and the related debt have been removed
from the Company's balance sheet.
15
<PAGE>
In March 1999, the Company entered into a long-term supply agreement with
Honeywell International, Inc. While this contract provides a favorable source of
revenue to the Company, it also requires significant amounts of working capital
to finance the inventories and receivables, and the Company was required to
incur significant costs for leasehold improvements and equipment at a new
facility in Phoenix, Arizona.
In order to respond to liquidity issues, the Company took a series of actions
in 1999 that were designed to ultimately provide the necessary capital to meet
existing obligations to suppliers and banks, and to have access to financing to
meet the additional working capital requirements under the new Honeywell
agreement. The first significant action after obtaining the Honeywell business
was on September 1, 1999, when the Services Group was sold, resulting in net
cash proceeds of $28.0 million. On September 30, 1999, the Company initiated the
consolidation of its Ft. Lauderdale plant into three other EFTC facilities. In
October 1999, the Company sold its facility in Greeley, Colorado for proceeds of
$3.8 million.
A director of the Company purchased $15 million in aggregate principal amount
of subordinated notes issued by the Company on September 9, 1997. The
subordinated notes had a maturity date of December 31, 2002 and provided for
interest at a variable rate (adjusted monthly) equal to 2.00% over the
applicable LIBOR rate. The proceeds of these notes were used to acquire certain
assets from Honeywell (formerly AlliedSignal, Inc.). In connection with the
issuance of these subordinated notes, the Company issued warrants to purchase
500,000 shares of the Company's common stock at an exercise price of $8.00 per
share to the director. The warrants were exercised on October 9, 1997 resulting
in net proceeds to the Company of $4.0 million. The Company prepaid $10.0
million of the outstanding principal amount of these notes early in December
1997 from the proceeds of a loan from the Company's senior lender. In connection
with such prepayment, the Company agreed to pay a fee of approximately $325,000
to be paid in equal monthly installments until the maturity of the notes.
In November 1999, the director purchased $5 million in aggregate
principal amount of subordinated notes issued by the Company. These notes had a
maturity date of March 31, 2000 and provided for interest at a rate of 10%. The
proceeds of these notes were used for general operating purposes. In connection
with the recapitalization transaction described below, the Company repaid the
principal amount outstanding under both subordinated notes. In addition, the
Company paid the remaining outstanding prepayment fee of approximately $150,000
due in connection with the prepayment of the September 1997 notes and a fee of
$100,000 due upon maturity of the November 1999 note. In addition, the November
note agreement was amended to provide for issuance of $3.0 million in aggregate
principal amount of subordinated notes, with a maturity date of March 30, 2004
and bearing interest at 10%.
Recapitalization. Beginning in September 1999, the Company began searching
----------------
for debt and equity financing that would permit the Company to also attract a
new senior lender to replace the existing bank group. As a result of these
efforts, on March 30, 2000, the Company entered into an agreement (the
"Recapitalization Agreement") with Thayer-BLUM Funding relating to a
recapitalization of the Company. The Recapitalization Agreement provided for an
initial investment of $54 million in Senior Subordinated Exchangeable Notes
("Exchangeable Notes") and Thayer-BLUM Funding will subsequently undertake a
tender offer for up to 8,250,000 shares of the Company's currently outstanding
common stock at a price of $4.00 per share. Thayer-BLUM Funding received the
right to appoint two new members to the Company's board of directors.
The Exchangeable Notes initially provide for a paid-in-kind interest
rate of 15% and are accompanied by warrants to purchase 3,093,154 shares of the
Company's common stock at an exercise price of $.01 per share. However, upon
shareholder approval of this transaction and assuming that the tender offer is
consummated with at least 500,000 shares being purchased therein, the warrants
will not become exercisable and will expire. Accordingly, no value was assigned
to the warrants since they are never expected to become exercisable.
Additionally, the Exchangeable Notes will be replaced with Senior
16
<PAGE>
Subordinated Convertible Notes ("Convertible Notes") upon receipt of shareholder
approval and consummation of the tender offer for at least 500,000 shares. The
Convertible Notes will provide for interest at 8.875%, payable in kind. The
Convertible Notes may be converted into the Company's common stock at $2.58 per
share, subject to adjustment. Conversion of the notes will occur at the election
of the holders or if EFTC's common stock trades above $7.50 per share for 45
consecutive trading days. Commencing on March 30, 2003, the Convertible Notes
will automatically convert if the Company's common stock trades above $4.25 per
share for 45 consecutive trading days. Finally, Thayer-BLUM Funding will have
the right to appoint a majority of the members of the Company's board of
directors and will have the right to approve any significant financings,
acquisitions and dispositions.
If shareholders do not approve the transaction or if less than 500,000
shares are purchased in the tender offer, then the warrants will remain in place
and the interest rate on the Exchangeable Notes will increase to 20%. The
maturity date of the Exchangeable Notes is June 2006. Interest would be
compounded quarterly and will accrue and be added to the principal amount of the
Exchangeable Notes or be payable in additional Exchangeable Notes, at the option
of the Company.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to refinance the Company's revolving line of credit with
the Company's previous lender. The new credit facility provides for a $45
million revolving line of credit with a maturity date of March 2003. Initially,
the interest rate is the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
inventory, and substantially all of the Company's assets are pledged as
collateral for outstanding borrowings. The credit agreement requires compliance
with certain financial and non-financial covenants. No amounts were outstanding
under the revolving credit agreement as of March 31, 2000.
Based on the financing activities completed in March 2000, management
believes the Company has adequate capital resources to fund working capital and
other cash requirements during the remainder of 2000.
17
<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, increased sales and improved profitability, and
other matters relating to the prospects for future operations; and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of EFTC, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, the loss of Honeywell as a customer or
Honeywell's inability to pay, or inability or unwillingness to pay in a timely
manner, its outstanding receivables held by the Company, the Company's ability
to pay its suppliers in a timely manner, changes in economic or business
conditions in general or affecting the electronic products industry in
particular, changes in the use of outsourcing by original equipment
manufacturers, increased material prices and service competition within the
electronic component contract manufacturing industry, changes in the competitive
environment in which the Company operates, the continued growth of the
industries targeted by the Company or its competitors or changes in the
Company's management information needs, difficulties in implementing the
Company's new management information system, difficulties in managing the
Company's growth or in integrating new businesses, changes in customer needs and
expectations, the Company's success in retaining customers affected by the
closure of Company facilities, the Company's success in limiting costs
associated with such closures, the Company's ability to keep pace with
technological developments, increases in interest rates (including the impact on
the Exchangeable Notes if shareholders do not vote in favor of the
recapitalization), governmental actions and other factors identified as "Risk
Factors" or otherwise described in the Company's filings with the Securities and
Exchange Commission.
Quantitative and Qualitative Disclosures about Market Risk
On March 30, 2000, the Company entered into a $45 million revolving
line of credit with Bank of America, N.A. The interest rate on this loan is
based either on the prime rate or LIBOR rates, plus applicable margins.
Therefore, as interest rates fluctuate, the Company may experience changes in
interest expense that could impact financial results. The Company has not
entered into any interest rate swap agreements, or similar instruments, to
protect against the risk of interest rate fluctuations. Assuming outstanding
borrowings of $45 million, if interest rates were to increase or decrease by 1%,
the result would be an annual increase or decrease in interest expense of
approximately $450,000 under this loan.
Depending on the outcome of the shareholder action related to the
approval of the recapitalization, the $54 million of debt will bear interest at
8.875% (if shareholder approval is obtained) which would result in an annual
expense of $4,859,000, or at 20% (if shareholder approval is not obtained) which
would result in annual interest expense of $10,950,000.
18
<PAGE>
PART II. OTHER INFORMATION
Legal Proceedings
There have been no material developments in either of the two legal
proceedings that were filed against the Company and certain of its offices,
directors, and shareholders during September and October 1998 since the
Company's Annual Report on Form 10-K filed on April 14, 2000.
Changes in Securities
Not Applicable.
Defaults Upon Senior Securities
Not Applicable.
Submission Of Matters To A Vote Of Security Holders
Not Applicable.
Other Information
Not Applicable.
Exhibits and Reports on Form 8-K
(a). Exhibits
The following exhibits are filed with this report:
Exhibit Number
--------------
27.1 Financial Data Schedule
(b). Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
March 31, 2000.
SIGNATURES
----------
Pursuant to the requirements 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.
EFTC CORPORATION
----------------
(Registrant)
Date: May 15, 2000 /s/ Jack Calderon
-------------------------------------
Jack Calderon
Chairman and Chief Executive Officer
Date: May 15, 2000 /s/ James A. Doran
------------------------------------
James A. Doran
Chief Accounting Officer
19
<PAGE>
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-2000
[PERIOD-END] MAR-31-2000
[CASH] 3,819,000
[SECURITIES] 0
[RECEIVABLES] 28,180,000
[ALLOWANCES] 2,438,000
[INVENTORY] 69,958,000
[CURRENT-ASSETS] 104,907,000
[PP&E] 31,978,000
[DEPRECIATION] 9,900,000
[TOTAL-ASSETS] 146,583,000
[CURRENT-LIABILITIES] 70,560,000
[BONDS] 57,000,000
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 155,000
[OTHER-SE] 11,559,000
[TOTAL-LIABILITY-AND-EQUITY] 146,583,000
[SALES] 63,526,000
[TOTAL-REVENUES] 63,526,000
[CGS] 62,197,000
[TOTAL-COSTS] 62,197,000
[OTHER-EXPENSES] 9,789,000
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 1,608,000
[INCOME-PRETAX] (10,100,000)
[INCOME-TAX] 0
[INCOME-CONTINUING] (10,100,000)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (10,100,000)
[EPS-BASIC] (.65)
[EPS-DILUTED] (.65)
</TABLE>
<PAGE>
PROXY This Proxy is Solicited on Behalf
of the Board of Directors
EFTC CORPORATION
9351 Grant Street, Sixth Floor, Denver, CO 80229
Proxy for Special Meeting of Shareholders to be held on August 22, 2000
The undersigned hereby appoints Jack Calderon or August P. Bruehlman, or
either of them, with full power of substitution, as a proxy or proxies to
represent the undersigned at the Special Meeting (the "Special Meeting") of
Shareholders of EFTC CORPORATION (the "Company") to be held on August 22,
2000, at 10:00 a.m. at 9351 Grant Street, Sixth Floor, Denver, Colorado 80229,
and at any adjournments or postponements thereof, and to vote thereat all the
shares of common stock, $.01 par value per share, held of record by the
undersigned at the close of business on July 17, 2000, with all the power that
the undersigned would possess if personally present, as designated on the
reverse side.
Shares will be voted as specified. THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR AND APPROVAL OF EACH OF THE PROPOSALS. IF NO SPECIFICATION IS MADE, THIS
PROXY WILL BE VOTED IN FAVOR OF EACH OF THE PROPOSALS IN ACCORDANCE WITH THE
BOARD OF DIRECTORS RECOMMENDATIONS.
<TABLE>
<S> <C> <C> <C>
1. Issuance of the Convertible Notes and Convertible
Preferred Stock Proposal. Approval of issuance to
Thayer-BLUM Funding, L.L.C. of the Company's 8.875%
Senior Subordinated Convertible Notes due June 2006
and the Company's Series B Convertible Preferred
Stock FOR AGAINST ABSTAIN
[_] [_] [_]
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
2. Increase in the Number of Authorized Shares FOR AGAINST ABSTAIN
Proposal. Approval of an amendment to the Company's [_] [_] [_]
Amended and Restated Articles of Incorporation to
increase the number of authorized shares of common
stock from 45 million shares to 75 million shares.
3. Adoption of the 2000 Equity Stock Option Plan FOR AGAINST ABSTAIN
Proposal. Approval of adoption of the Company's 2000 [_] [_] [_]
Equity Stock Option Plan that provides for the
issuance of up to 5.0 million shares of common stock.
</TABLE>
----------------------
Signature(s)
----------------------
Title
Date: _______________________________________, 2000
NOTE: Please sign
this proxy as your
name appears hereon,
including the title
"Executor,"
"Trustee," etc. if
such is indicated. If
joint account, each
joint owner should
each sign. If stock
is held by a
corporation, this
proxy should be
executed by a proper
officer thereof.
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE.
