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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission file number 0-49651
--------------------
SUNTRON CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 86-1038668
- --------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
2501 West Grandview Road, Phoenix, Arizona 85023
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(Address of Principal Executive Offices) (Zip Code)
(602) 789-6600
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $0.01 par value Nasdaq National Market
----------------------------- ----------------------
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 [ ] No [X]
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. [ ]
The aggregate market value of Common Stock held by nonaffiliates of the
registrant (2,438,393 shares) based on the closing price of the registrant's
Common Stock as reported on the Nasdaq National Market on March 28, 2002, was
$19,946,054.74. For purposes of this computation, all officers, directors, and
10% beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such officers,
directors, or 10% beneficial owners are, in fact, affiliates of the registrant.
As of March 28, 2002, there were outstanding 27,414,388 shares of the
registrant's Common Stock, $0.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
None.
SUNTRON CORPORATION
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
PART I
ITEM 1. BUSINESS............................................................. 1
ITEM 2. PROPERTIES........................................................... 5
ITEM 3. LEGAL PROCEEDINGS.................................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.......................................................... 6
ITEM 6. SELECTED FINANCIAL DATA.............................................. 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE......................................... 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 29
ITEM 11. EXECUTIVE COMPENSATION............................................... 31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 37
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K..................................... 38
SIGNATURES........................................................... 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................... F-1
----------------------------
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report on Form 10-K contains forward-looking statements regarding
future events or our future financial and operational performance.
Forward-looking statements include statements regarding markets for our
products; trends in net sales, gross profits, and estimated expense levels;
liquidity and anticipated cash needs and availability; and any statement that
contains the words "anticipate," "believe," "plan," "estimate," "expect,"
"seek," and other similar expressions. The forward-looking statements included
in this report reflect our current expectations and beliefs, and we do not
undertake publicly to update or revise these statements, even if experience or
future changes make it clear that any projected results expressed in this
report, annual or quarterly reports to shareholders, press releases, or company
statements will not be realized. In addition, the inclusion of any statement in
this report does not constitute an admission by us that the events or
circumstances described in such statement are material. Furthermore, we wish to
caution and advise readers that these statements are based on assumptions that
may not materialize and may involve risks and uncertainties, many of which are
beyond our control, that could cause actual events or performance to differ
materially from those contained or implied in these forward-looking statements.
These risks and uncertainties include, but are not limited to, risks related to
the realization of anticipated revenues, profitability, and synergies of the
recent business combination of EFTC Corporation and K*TEC Electronics Holding
Corporation, trends affecting our growth, and the business and economic risks
described in Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Factors That May Affect Future Results."
PART I
ITEM 1. BUSINESS
OVERVIEW
Suntron Corporation is a provider of vertically integrated electronics
manufacturing solutions supplying high-mix services that target the aerospace
and defense, semiconductor, industrial controls, instrumentation, medical,
networking, and telecommunications industries. Our manufacturing services
include printed circuit card assembly, cable and harness production, plastic
injection molding, sheet metal, engineering services, full systems integration,
testing, and after-market repair and warranty services. We offer original
equipment manufacturers, or OEMs, the ability to outsource all stages of the
product life cycle, including development and design, materials procurement and
supply chain management, prototyping, manufacturing and assembly, testing,
quality control, and after-market support. High-mix manufacturing involves
processing assemblies in small lots (generally less than 100 assemblies per
production run) in a flexible manufacturing environment. We believe that our
success in the marketplace is primarily attributable to our ability to provide
intelligent solutions tailored to match customer requirements, while meeting the
highest quality standards in the industry.
Suntron was formed as a holding company for the purpose of effecting
the business combination of EFTC Corporation and K*TEC Operating Company, L.L.C.
(formerly known as Thayer-Blum Funding II, L.L.C.) and its wholly owned
subsidiary, K*TEC Electronics Holding Corporation (referred to together as
K*TEC). The combination of EFTC and K*TEC was completed on February 28, 2002
and, in connection with the combination, EFTC and K*TEC each became a wholly
owned subsidiary of Suntron. As a result of the combination, the former holder
of membership interests in K*TEC received 15,119,356 shares of Suntron common
stock, representing approximately 55% of our outstanding shares, and the former
shareholders of EFTC received .25 shares of Suntron common stock for each share
of EFTC common stock, or an aggregate of 12,294,982 shares, representing the
approximately 45% balance of our outstanding shares.
EXCEPT AS EXPRESSLY NOTED, ALL REFERENCES IN THIS REPORT TO OUR
HISTORICAL FINANCIAL RESULTS PRIOR TO JANUARY 1, 2002 REFLECT THE HISTORICAL
CONSOLIDATED FINANCIAL RESULTS OF EFTC AND ITS SUBSIDIARIES AND DO NOT INCLUDE
THE HISTORICAL FINANCIAL RESULTS OF K*TEC. Beginning in the first quarter of
2002, the combination will be accounted for as a reorganization of entities
under common control, which is similar to the pooling-of-interests method of
accounting for business combinations. Accordingly, beginning in the first
quarter of 2002, our financial statements will consist of the combined results
of EFTC since its inception and K*TEC Operating Company, L.L.C. since October
10, 2000 (the date that common control was established).
RECENT DEVELOPMENTS
In March 2002, we acquired substantially all of the assets of
Midwestern Electronics, Inc., a privately held electronics manufacturing
services provider. Midwestern focuses on high-mix manufacturing services,
including printed circuit board assembly, subassemblies, box build, and
after-market repair services. We intend to continue to operate the acquired
business from Midwestern's leased facilities in Kansas and Iowa.
MANUFACTURING SERVICES
We provide a variety of manufacturing services including printed
circuit board assembly and testing, electronic interconnect assemblies,
subassemblies, sheet metal fabrication and powder paint, plastic injection
molding, and full systems integration (known as box build), as well as
after-market repair and warranty services. Our competitive strengths include our
ability to manufacture highly complex products in short cycle times with smaller
lot sizes. Our strategy targets capturing turnkey work by providing customers
with support throughout the entire manufacturing process, starting with
prototype design for manufacturability all the way through material procurement
and supply chain management, final assembly, and testing, to reduce our
customers' costs and improve their time to market. We provide the following
services:
DESIGN SERVICES. We provide our customers product development and
design and test engineering services. Our design for manufacturability and
design for testability reviews allow our engineering group to collaborate with
our customers early in the design process to reduce variation, cost, and
complexity in new designs. Following completion of the initial design, we also
offer design services to assist our customers in taking their product to
market. Our support teams work closely with our customers through all stages of
product planning and production. Our computer systems feature a computer-aided
design capability that allows our engineers to collaborate online with a
customer's engineers when developing and changing product designs.
PROTOTYPE MANUFACTURING SERVICES. We provide quick-turn prototype
manufacturing services that provide customers with 24 hour to 10-day turnaround
times. Our prototype manufacturing operations located in Manchester, New
Hampshire and Phoenix, Arizona provide full turnkey solutions to support our
customers with new product introduction activities. These services permit our
customers to be more competitive by reducing the amount of time required to
bring new products to market.
MATERIALS AND SUPPLY CHAIN MANAGEMENT SERVICES. We consult with our
customers and their suppliers early in the component selection process. This
early supplier involvement helps ensure an efficient supply stream that focuses
not only on cost but also on availability of components and the component life
cycle. When material obsolescence affects our customers' designs, we can provide
recommendations on alternative components through our component engineering
group. We have developed innovative material requirements planning relationships
with a select group of OEMs in the aerospace and defense, semiconductor capital
equipment, computer, medical instrumentation, networking, and telecommunications
industries. These relationships are supported by sophisticated in-house product
design and technical support capabilities. In addition, certain of our customers
have internet access to our intranet in order to monitor printed circuit board
production quality, board and box build assembly methods, and product throughput
in a real-time environment. Each customer's internet site is secured and
tailored for the customer's unique needs. We further complement our offerings by
providing full logistics support that allows the final assembly to be shipped
directly to the customer's end customer. This supply chain management ability
differentiates us as a resource in enhancing customers' cost-efficiency and
time-to-market.
MANUFACTURING AND ASSEMBLY SERVICES. We provide high-mix manufacturing
services for a variety of highly complex electronic products. Our manufacturing
methodology is central to supporting high-mix manufacturing. While typical
high-volume manufacturing companies use high-volume runs to recover costs
incurred in the initial set-up for the manufacturing process, our high-mix
manufacturing technique focuses on parallel processing and set-up reductions in
order to reduce initial set-up costs.
TESTING SERVICES. We offer in-circuit functional testing and
environmental "stress" testing that includes temperature and
motion/shock/electronic cycle testing. These tests verify that components have
been properly placed and electrical continuity exists at the proper places on
the circuit card. Functional testing is performed on the in-circuit testers or
separate test adapters and verifies that the board or system is in compliance
with customer specifications. Environmental tests determine how the product will
function at various temperatures and seeks to identify and remove any latent
defects that might appear later in the product life cycle.
QUALITY CONTROL SERVICES. Our quality control standards provide another
means of serving the needs of our customers, because OEMs often rely on
suppliers to assure quality control for subassemblies rather than providing such
quality control themselves. We believe that our adherence to strict quality
control standards and our investment in state-of-the-art production facilities
and equipment have attracted and retained important customers that have
established extremely rigid product quality standards.
AFTER-MARKET REPAIR SERVICES. We provide after-market warranty and
repair services for electronic products, including products that may not have
been originally manufactured by us, in support of customer product warranty,
repair, and upgrade programs.
2
CUSTOMERS
Suntron focuses on serving OEMs in industries that have high-mix
requirements. Sales to Honeywell represented approximately 83% of EFTC's sales
in 2001. Sales to Applied Materials and Emulex represented approximately 38% and
26%, respectively, of K*TEC's sales for the nine months ended September 30,
2001. The loss of Honeywell, Applied Materials, or Emulex as a customer would,
and the loss of any other significant customer could, have a material adverse
effect on our financial condition and results of operations.
SALES AND MARKETING
Our sales force develops close working relationships with customers
beginning early in the design phase and throughout all stages of production. We
focus our marketing efforts on developing long-term relationships with our
customers' key personnel.
We continue to focus our sales and marketing efforts on the following
markets: (1) aerospace and defense, (2) semiconductor capital equipment, (3)
industrial controls and instrumentation, (4) networking and telecommunications
equipment, and (5) medical equipment. This approach facilitates sales personnel
specialization within related product groupings and permits sales
representatives to develop a high degree of technical expertise.
Our sales strategy is to target (1) technology companies with minimal
manufacturing capabilities that require "one-stop shopping" service in rapidly
evolving sectors and (2) OEMs whose demand is characterized by small lot, high
frequency purchases with significant variability in demand. Our vertical
integration, coupled with our focus on unique configuration required to service
our customers' high-mix needs, differentiates us from other electronics
manufacturing services providers.
We supplement the efforts of our sales force in the marketing of our
services with direct mailings of brochures and other literature, the publication
of various white papers, as well as advertisements in trade journals.
BACKLOG
Although we obtain firm purchase orders from customers, most customers
do not place firm purchase orders for products until 30 - 90 days prior to the
delivery date for the finished goods. Backlog covered by firm purchase orders
does not demonstrate a meaningful projection of our future sales as orders may
be modified or canceled.
SUPPLIERS
We use numerous suppliers of electronic components and other materials
for our operations. From time to time, some components we use have been subject
to shortages, and suppliers have been forced to allocate available quantities
among their customers. See Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Factors that may affect future
results-We may experience component shortages, which would cause us to delay
shipments to customers, resulting in potential declines in net sales and
operating results."
3
We attempt 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.
COMPETITION
The electronics manufacturing services industry is extremely
competitive and includes hundreds of companies. The contract manufacturing
services we provide are available from many independent sources. Many of our
competitors are more established in the industry and have substantially greater
financial, manufacturing, or marketing resources than we do. Certain of our
competitors have broader geographic presence than we do, including manufacturing
facilities in foreign countries. We believe that the principal competitive
factors in our targeted market are quality, reliability, ability to meet
delivery schedules, technological sophistication, geographic location, and
price. We also face competition from current and potential customers, which are
continually evaluating the relative merits of internal manufacturing versus
contract manufacturing for various products.
INTELLECTUAL PROPERTY
We seek to protect our proprietary technology and other intangible
assets primarily through trade secret protection. In addition, we depend heavily
on training, recruiting, and retaining our employees, who are required to have
sufficient know-how to operate advanced equipment and to conduct sensitive and
complicated manufacturing processes.
GOVERNMENTAL REGULATION
Our operations are subject to certain federal, state, and local
regulatory requirements relating to environmental, waste management, and 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, we have
modified our circuit board cleaning processes to utilize only aqueous
(water-based) methods.
Some risk of liabilities related to these matters is inherent in our
business, as with many similar businesses. Our management team believes that our
business is operated in substantial compliance with applicable environmental,
waste management, and health and safety regulations, the violation of which
could have a material adverse effect on our business, financial condition, and
results of operations. 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 our business.
We periodically generate and temporarily handle limited amounts of
materials that are considered hazardous waste under applicable law. We engage
independent contractors for the off-site disposal of these materials. For
additional information, see Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - " Factors That May Affect Future
Results - Our failure to comply with the requirements of environmental laws
could result in fines and revocation of permits necessary to our manufacturing
processes."
EMPLOYEES
As of March 4, 2002, we had 2,108 full-time equivalent employees.
As of the same date, we also engaged the full-time services of 157 temporary
laborers through employment agencies in manufacturing operations. None of our
employees is subject to a collective bargaining agreement. Our management team
believes that our relationship with our employees is good.
4
ITEM 2. PROPERTIES
The following table describes our material locations.
YEAR ACQUIRED/ APPROXIMATE OWNED/
LOCATION OPENED SIZE (SQUARE FEET) LEASED PRIMARY USE
- -------- ------ ------------------ ------ -----------
Sugar Land, Texas 2000 472,000 Owned Manufacturing
Phoenix, Arizona 1999 145,000 Leased Manufacturing/
Headquarters
Fremont, California 2000 87,000 Leased Manufacturing
Lawrence, Massachusetts 2001 73,000 Leased Manufacturing
Olathe, Kansas 2002 49,000 Leased Manufacturing
Garner, Iowa 2002 40,000 Leased Manufacturing
Newberg, Oregon 1998 65,000 Leased Manufacturing
Austin, Texas 1996 45,000 Leased Warehouse
Ottawa, Kansas 1998 40,000 Owned Manufacturing
Tijuana, Mexico 1999 30,000 Leased Manufacturing
Moses Lake, Washington 1997 20,000 Leased Manufacturing
Manchester, New Hampshire 1998 19,000 Leased Manufacturing
In addition, we lease a facility in Denver, Colorado where EFTC's
former executive offices were located. We have subleased a significant portion
of the facility and are actively pursuing a sublease of the remainder of the
space. We lease additional manufacturing facilities in Milpitas, California and
Plano, Texas, which we have closed. We have subleased a significant portion of
our facility in Milpitas, California. We are actively pursuing subleases for the
remainder of the space in Milpitas, California, as well as the facility in
Plano, Texas.
We believe our facilities are in good condition and that our current
capacity is sufficient to handle our anticipated needs for the foreseeable
future.
5
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which we are a party or to which any
of our properties are subject, that we expect to have a material adverse effect
on our company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock has been listed on the Nasdaq National Market under
the symbol "SUNT" since March 1, 2002. As a result of the combination, the EFTC
common stock, formerly traded under the symbol "EFTC," ceased to be listed on
the Nasdaq National Market.
For the period from March 1, 2002 through March 28, 2002 the high and
low closing prices of our common stock was $9.35 and $6.23, respectively, as
reported on the Nasdaq National Market.
As of March 25, 2002, there were approximately 638 holders of record of
our common stock. The closing sale price of our common stock on the Nasdaq
National Market on March 28, 2002 was $8.18 per share.
Our senior credit facility prohibits the payment of dividends. Neither
Suntron nor EFTC declared or paid any dividends for the years ended December 31,
2000 and 2001, and we do not anticipate paying any cash dividends in the
foreseeable future. We presently intend to retain any future earnings to finance
future operations and expansion of our business, and to reduce indebtedness.
6
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for each of the
years in the five-year period ended December 31, 2001, reflect only the
historical results of EFTC and not the results of K*TEC, and are derived from
our consolidated financial statements that have been audited by KPMG LLP,
independent certified public accountants. The consolidated financial statements
as of December 31, 2000 and 2001, and for each of the years in the three-year
period ended December 31, 2001, and the independent auditors' report thereon,
are included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Net sales $ 122,079 $ 226,780 $ 221,864 $ 327,444 $ 348,025
Cost of goods sold 102,166 200,581 229,892 311,485 310,679
--------- --------- --------- --------- ---------
Gross profit (loss) 19,913 26,199 (8,028) 15,959 37,346
Operating costs and expenses:
Selling, general and administrative
expenses 12,711 22,838 25,389 23,926 17,343
Recapitalization and merger
transaction costs -- 1,048 -- 5,336 1,570
Severance, retention, closure and
relocation costs -- 200 300 4,579 --
Impairment of long-lived assets -- 3,342 2,822 1,662 --
Goodwill amortization 547 1,564 1,133 267 267
Litigation settlement -- -- 6,400 -- --
--------- --------- --------- --------- ---------
Operating income (loss) 6,655 (2,793) (44,072) (19,811) 18,166
Interest expense (2,411) (4,312) (6,516) (9,556) (3,431)
Gain (loss) on sale of assets 1,156 400 (20,880) 4,369 767
Other, net 139 (104) (55) (15) 99
--------- --------- --------- --------- ---------
Income (loss) before income taxes 5,539 (6,809) (71,523) (25,013) 15,601
Income tax benefit (expense) (2,118) 2,631 (2,180) -- (307)
--------- --------- --------- --------- ---------
Net income (loss) $ 3,421 $ (4,178) $ (73,703) $ (25,013) $ 15,294
========= ========= ========= ========= =========
Net income (loss) applicable to
common stockholders:
Basic $ 3,380 $ (4,495) $ (73,703) $ (27,485) $ 14,744
========= ========= ========= ========= =========
Diluted $ 3,380 $ (4,495) $ (73,703) $ (27,485) $ 17,511
========= ========= ========= ========= =========
Net income (loss) per share applicable
to common stockholders:
Basic $ .40 $ (.31) $ (4.74) $ (1.72) $ 0.41
========= ========= ========= ========= =========
Diluted $ .38 $ (.31) $ (4.74) $ (1.72) $ 0.36
========= ========= ========= ========= =========
Number of shares used for computation:
Basic 8,502 14,730 15,543 15,978 35,889
========= ========= ========= ========= =========
Diluted 8,955 14,730 15,543 15,978 48,656
========= ========= ========= ========= =========
7
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(IN THOUSANDS)
OTHER OPERATING DATA:
EBITDA(a)(c) $ 10,580 $ 3,747 $ (57,765) $ (7,042) $ 25,321
Adjusted EBITDA(b)(c) 9,424 7,937 (27,363) 166 27,453
CASH FLOW DATA:
Cash provided (used) by:
Operating activities $ (29,414) $ (18,181) $ (9,873) $ (67,526) $ 57,030
Investing activities (42,074) (21,924) 17,752 7,682 (6,164)
Financing activities 72,958 38,851 (7,786) 59,171 (36,801)
DECEMBER 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Total assets $ 148,825 $ 190,666 $ 131,129 $ 159,572 $ 115,446
Total debt 44,959 54,983 42,994 90,652 72
Stockholders' equity 75,221 94,979 21,278 14,205 89,481
Total invested capital (d) 120,180 149,962 64,272 104,857 89,553
LIQUIDITY DATA:
Working capital (e) $ 43,634 $ 59,037 $ 26,232 $ 72,037 $ 59,125
Firm capital resources (f) 9,482 16,863 2,532 11,013 40,593
- -------------------------------
(a) EBITDA represents net income (loss) before interest expense, income taxes,
depreciation, and amortization. EBITDA is presented because we believe it
is an indicator of our ability to incur and service debt and to fund
capital expenditures. It is also used by our lenders in determining
compliance with certain financial covenants.
(b) Adjusted EBITDA represents EBITDA excluding recapitalization and merger
transaction costs, severance, retention, closure, and relocation costs;
impairment of long-lived assets; litigation settlement costs; and gain
(loss) on sale of assets. Adjusted EBITDA is presented because it excludes
charges and gains that we believe are not indicative of our core operating
performance. We primarily use this data in conjunction with other industry
and market indicators when we evaluate our future prospects for purposes
of setting performance goals.
(c) The primary measure of operating performance is net income (loss). EBITDA
and Adjusted EBITDA should not be construed as alternatives to net income
(loss), determined in accordance with generally accepted accounting
principles, or GAAP, as an indicator of operating performance, as a
measure of liquidity or as an alternative to cash flows from operating
activities determined in accordance with GAAP. We believe the presentation
of these additional financial performance indicators is beneficial to
investors since they provide an additional perspective from which to
evaluate our company. In addition, the measure of EBITDA and Adjusted
EBITDA herein may not be comparable to other similarly titled measures of
other companies.
(d) Total invested capital represents total debt plus total stockholders'
equity.
(e) Working capital represents current assets less current liabilities.
(f) Firm capital resources represent the maximum amount permitted to be
borrowed under revolving credit facilities, plus cash and equivalents,
less the amount outstanding under revolving credit facilities, less
outstanding checks in excess of cash balances. For a discussion of our
debt and capital resources after the recent combination, see Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources".
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes, and the other financial information included
in this report. This discussion and analysis contains forward-looking statements
that involve risks and uncertainties. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in "Factors That May Affect Future
Results" below and elsewhere in this report.
ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION
Suntron Corporation is a provider of vertically integrated electronics
manufacturing solutions supplying high-mix services for aerospace and defense,
semiconductor, industrial controls, instrumentation, medical, networking, and
telecommunications industries. Our manufacturing services include printed
circuit card assembly, cable and harness production, plastic injection molding,
sheet metal, engineering services, and full systems integration, testing, and
after-market repair and warranty services. High-mix manufacturing involves
processing printed circuit board assemblies in small lots (generally less than
100 assemblies per production run) in a flexible manufacturing environment. Our
success in the marketplace is a direct result of our ability to provide
intelligent solutions tailored to match customer requirements, while meeting the
highest quality standards in the industry.
Suntron was formed as a holding company for the purpose of effecting
the business combination of EFTC Corporation and K*TEC Operating Company, L.L.C.
(formerly known as Thayer-Blum Funding II, L.L.C.) and its wholly owned
subsidiary, K*TEC Electronics Holding Corporation.
The combination of EFTC and K*TEC was completed on February 28, 2002
and, in connection with the combination, EFTC and K*TEC each became a wholly
owned subsidiary of Suntron. As a result of the combination, the former holder
of membership interests in K*TEC Operating Company, L.L.C. received 15,119,356
shares of Suntron common stock, and the former shareholders of EFTC received .25
shares of Suntron common stock for each share of EFTC common stock, resulting in
the issuance of an additional 12,294,982 shares of Suntron common stock.
Beginning in the first quarter of 2002, the combination will be
accounted for as a reorganization of entities under common control, which is
similar to the pooling-of-interests method of accounting for business
combinations. Accordingly, beginning in the first quarter of 2002, our
consolidated financial statements will consist of the combined results of EFTC
since its inception and K*TEC Operating Company, L.L.C. since October 10, 2000
(the date that common control was established). However, because the combination
was completed in the first quarter of 2002, the financial statements for the
years ended December 31, 2000 and 2001 included in this report have not been
restated to reflect the combination. EXCEPT AS EXPRESSLY NOTED, ALL REFERENCES
IN THIS REPORT TO OUR FINANCIAL RESULTS PRIOR TO JANUARY 1, 2002 REFLECT THE
HISTORICAL FINANCIAL RESULTS OF EFTC AND ITS SUBSIDIARIES AND DO NOT INCLUDE THE
HISTORICAL FINANCIAL RESULTS OF K*TEC AND ITS SUBSIDIARIES. ACCORDINGLY, WE
BELIEVE THAT OUR HISTORICAL FINANCIAL RESULTS INCLUDED IN THIS REPORT ARE NOT
INDICATIVE OF THE FINANCIAL RESULTS OF SUNTRON AS A COMBINED COMPANY. The
corresponding consolidated financial statements of K*TEC for the fiscal year
ended December 31, 2001, as well as pro forma combined consolidated financial
information, will be included in a current report on Form 8-K/A, which we expect
to file with the SEC in the near future.
Between the fourth quarter of 1998 and the fourth quarter of 2000, EFTC
implemented a series of actions to improve liquidity and operating results.
These actions, which are more fully described in Note 9 of our consolidated
financial statements, included the disposition and closure of EFTC business
units. Moreover, as more fully described in Note 4 of our consolidated financial
statements, EFTC engaged in a number of significant recapitalization
transactions beginning in March 2000. Because of the significant impact of these
transactions, we believe that the financial results are not necessarily
comparable on a period-to-period basis.
INFORMATION ABOUT OUR BUSINESS
As an electronic manufacturing services company, many of our customers
are original equipment manufacturers, or OEMs, that have designed their own
products. Our customers request proposals that include key terms such as
quality, delivery, and the price to purchase the materials and perform the
manufacturing services to
9
make one or more components or assemblies. Generally, the component or assembly
that we manufacture is delivered to the customer where it is then integrated
into their final product. We price new business with our customers by obtaining
quotes from our suppliers and then estimating the amount of labor and overhead
that will be required to make the products.
Before we begin a customer relationship, we typically enter into
arrangements that are intended to protect us in case a customer cancels an order
after we have purchased the raw materials to fill that order. If an order is
cancelled, the customer is generally required to purchase the materials or
reimburse us if we incur a loss from liquidating the raw materials. Despite
these arrangements, it is not unusual for us to incur losses on inventories.
The electronics manufacturing services industry is extremely dynamic
and our customers make frequent changes to their orders. The magnitude and
frequency of these changes make it difficult to predict revenues beyond the next
quarter, and even relatively short-term forecasts may prove inaccurate depending
on changes in economic, political, and military factors, as well as unexpected
customer requests to delay shipments near the end of our fiscal quarters. These
changes in customer orders also cause substantial difficulties in managing
inventories, which often leads to excess inventories and the need to recognize
losses on inventories. However, from time to time, we may also have difficulties
obtaining certain electronic components that are in short supply, which can
result in a decision to purchase some materials before formal notice of demand
is received from our customer. In addition, our inventories consist of over
100,000 different parts and many of these parts have limited alternative uses or
markets, except in the products that we manufacture for our customers. When we
liquidate excess materials through an inventory broker or auction, we often
realize less than 25% of the original cost of the materials, and in some cases
we determine that there is no market for the excess materials.
The most common reasons we incur losses are if we purchase more
materials than are necessary to meet a customer's requirements or if we fail to
move quickly to minimize losses once the customer communicates a cancellation.
Occasionally it is not clear what action caused an inventory loss and there is a
shared responsibility whereby our customers agree to negotiate a settlement with
us. Accordingly, on a quarterly basis management evaluates inventory on-hand,
forecasted demand, contractual protections, and net realizable values in order
to determine whether an adjustment to the carrying amount of inventory is
necessary. When the relationship with a customer terminates, we tend to be more
vulnerable to inventory losses because the customer may be reluctant to accept
responsibility for the remaining inventory if a product is at the end of its
life cycle. We can also incur inventory losses if a customer becomes insolvent
and the materials do not have alternative uses or markets into which we can sell
them.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires that we
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to bad debts, inventories, property, plant and equipment,
intangible assets, income taxes, warranty obligations, restructuring, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. We cannot assure you that actual results will not differ from
those estimates. We believe the following critical accounting policies affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements.
BASIS OF PRESENTATION. The recent combination of EFTC and K*TEC will be
accounted for as a reorganization of entities under common control. Under this
method of accounting, we will be required to combine the operating results of
K*TEC since October 10, 2000 when common control was established. However, since
this acquisition did not close in 2001, we are required to exclude K*TEC's
results from the 2000 and 2001 financial statements included in this Report,
even though all future presentations of 2000 and 2001 financial results will
require that we combine the results of K*TEC as if the merger had occurred on
October 10, 2000. Accordingly, our historical financial results included in this
Report are not indicative of the combined results that will be retroactively
reported beginning in the first quarter of 2002.
10
WRITE-DOWNS FOR OBSOLETE AND SLOW-MOVING INVENTORIES. Our judgments
about excess and obsolete inventories are especially difficult because (i)
hundreds of different components may be associated with a single product we
manufacture for a customer, (ii) we make numerous products for most of our
customers, (iii) even though we are engaged in the electronic manufacturing
services industry, most of our customers are engaged in diverse industries, and
(iv) all of our customers experience dynamic business environments affected by a
wide variety of economic, political, and regulatory factors. This complex
environment results in positive and negative events that can change daily and
which affect judgments about future demand for our manufacturing services and
the amounts we can realize when it is not possible to liquidate inventories
through production of finished products.
We frequently review customer demand to determine if we have excess raw
materials that will not be consumed in production. In determining demand we
consider firm purchase orders and forecasts of demand submitted by our
customers. If we determine that excess inventories exist and that the customer
is not contractually obligated for the excess inventories, we need to make
judgments about whether unforecasted demand for those materials is likely to
occur or the amount we would likely realize in the sale of this material through
a broker or auction. If we determine that future demand from the customer is
unlikely, we write down our inventories to the extent that the cost of the
inventory exceeds the estimated market value.
If actual market conditions are less favorable than those projected by
management, additional inventory write-downs may be required in future periods.
Likewise, if we underestimate contractual recoveries from customers or future
demand, hindsight may indicate that we over-reported our costs of goods sold in
earlier periods, which results in the recognition of additional gross profit at
the time the material is used in production and the related goods are sold.
Therefore, although we make every effort to ensure the accuracy of our forecasts
of future product demand, any significant unanticipated changes in demand or the
outcome of customer negotiations with respect to the enforcement of contractual
provisions, could have a significant impact on the value of our inventory and
our reported operating results.
ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE. We maintain allowances for
doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required.
IMPAIRMENT OF LONG-LIVED ASSETS. When we undergo changes in our
business, including the closure or relocation of facilities, we often have
equipment and other assets that are no longer needed in our business. When this
occurs, we estimate how much we believe we are likely to receive upon disposal
of the assets and we record an impairment charge if this amount is less than the
net carrying value. If actual market conditions for these assets are less
favorable than those projected by management, additional impairment charges may
be required.
Through 2001, we evaluated goodwill associated with our business
acquisitions for potential impairment indicators. Our judgment regarding the
existence of impairment indicators was based on operational performance of the
acquired businesses and existing market conditions. Effective January 1, 2002,
we will be required to implement a new accounting standard that requires an
evaluation of impairment of goodwill based on the current fair value of the
reporting unit to which it relates. Any resulting impairment loss from the
adoption of this new accounting standard, or the periodic testing required in
future periods, could have a material adverse impact on our results of
operations.
INCOME TAXES. In 1998 through 2000, we incurred net losses in excess of
$100 million. The year 2001 was the first year out of the last four in which we
have reported net income (and taxable income). These earlier losses generated a
sizeable federal tax net operating loss, or NOL, carryforward of approximately
$52.0 million as of December 31, 2001.
Generally accepted accounting principles require that we record a
valuation allowance against the deferred tax asset if it is "more likely than
not" that we will not be able to utilize it to offset future taxes. Due to our
history of unprofitable operations, we have not recognized a benefit for any of
this net deferred tax asset. We currently provide for income taxes only to the
extent that we expect to pay cash taxes (primarily state taxes and the federal
alternative minimum tax) for current income.
It is possible, however, that we could be profitable in the future at
levels that cause management to conclude that it is more likely than not that we
will realize all or a portion of the NOL carryforward. Upon reaching
11
such a conclusion, we would immediately record the estimated net realizable
value of the deferred tax asset at that time and would then provide for income
taxes at a rate equal to our combined federal and state effective rates, which
would approximate 37% under current tax rates, rather than the 2% rate currently
being used. Subsequent revisions to the estimated net realizable value of the
deferred tax asset could cause our provision for income taxes to vary
significantly from period to period, although our cash tax payments would remain
unaffected until the benefit of the NOL is utilized.
For a detailed discussion on the application of these and other
accounting policies, see Note 1 in our consolidated financial statements
included in this report.
OVERVIEW OF STATEMENT OF OPERATIONS
We recognize revenue when title is transferred to our customers, which
generally occurs upon shipment from our facilities. Our gross sales are reduced
by an allowance for returns to arrive at the net sales reported in our financial
statements. Currently, we do not have non-cancelable long-term contracts with
our customers.
Cost of goods sold includes materials, labor, and overhead expenses
incurred in the manufacture of our products. Cost of goods sold also includes
charges for obsolete and slow moving inventories and charges for impairment of
long-lived assets used in our manufacturing operations. Many factors affect our
gross margin, including capacity utilization, product mix, and production
volume. We generally do not have long-term contracts with our suppliers.
Our operating expenses are classified into six general categories: (1)
selling, general, and administrative; (2) recapitalization and merger
transaction costs; (3) severance, retention, closure, and relocation costs; (4)
impairment of long-lived assets; (5) goodwill amortization; and (6) litigation
settlement costs.
Selling, general, and administrative expenses primarily include the
salaries for executive, finance, accounting, and human resources personnel;
salaries and commissions paid to our internal sales force and marketing costs;
insurance expenses; depreciation expense related to assets not used in
manufacturing activities; and professional fees for auditing and legal
assistance and general corporate expenses.
Recapitalization and merger transaction costs relate primarily to costs
incurred in connection with the recapitalization in 2000, which is described in
Note 4 of our consolidated financial statements included in this report. These
costs included fees for legal, accounting, and management consulting services,
financial advisory fees, and costs related to the special meeting of
shareholders to approve the transaction. Recapitalization and merger transaction
costs also include costs incurred in connection with the business combination
between EFTC and K*TEC, which is described in Note 2 of our consolidated
financial statements included in this report. The costs included fees primarily
related to a fairness opinion and professional fees for the combination and
related Securities and Exchange Commission filings. The business combination
will be accounted for as a reorganization of entities under common control, and,
accordingly, these costs were charged to operations when the costs were
incurred.
Severance, retention, closure, and relocation costs include charges
incurred for severance and retention costs associated with the relocation of our
corporate headquarters from Denver to Phoenix and other changes in management in
2000, the estimated loss on the sublease of the Denver facility, moving and
relocation costs, and recruiting fees.
Impairment of long-lived assets includes charges for long-lived assets
not used in manufacturing activities and relate primarily to the dispositions,
closures, and relocation of facilities described in Note 9 of our consolidated
financial statements included in this report.
Goodwill amortization expenses include the amortization of goodwill
relating to the 1997 acquisition of Current Electronics, Inc.
Litigation settlement expenses relate to the settlement of a class
action lawsuit, which is more fully described in Note 11 to our consolidated
financial statements included in this report.
12
Interest expense relates to our senior credit facility and other
long-term debt obligations. Interest expense also includes the amortization of
debt issuance costs.
Gain (loss) on sale of assets resulted primarily from the sale of the
services division, assets related to a plant in Tucson, Arizona, and assets
related to a plant closure in Ft. Lauderdale, Florida. These transactions are
described in Note 9 to our consolidated financial statements included in this
report.
RESULTS OF OPERATIONS
Our results of operations are affected by several factors, primarily
the level and timing of customer orders (especially orders from Honeywell). 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 our
quarterly results of operations. See "-- Factors that May Affect Our Future
Results - Our results of operations will be affected by a variety of factors,
which could cause our results of operations to fail to meet expectations and our
stock price to decline."
The following table sets forth certain operating data as a percentage
of net sales for the years ended December 31, 1999, 2000, and 2001. As indicated
above, the balance of this Management's Discussion and Analysis of Financial
Condition and Results of Operations reflects only EFTC's historical results and
not the results of K*TEC.
1999 2000 2001
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 103.6% 95.1% 89.3%
------ ------ ------
Gross profit (loss) (3.6)% 4.9% 10.7%
Operating costs and expenses:
Selling, general, and administrative 11.5% 7.3% 5.0%
Recapitalization and merger transaction costs -- 1.6% 0.5%
Severance, retention, closure, and relocation costs 0.1% 1.4% --
Impairment of long-lived assets 1.3% 0.5% --
Goodwill amortization 0.5% 0.1% 0.1%
Litigation settlement 2.9% -- --
------ ------ ------
Operating income (loss) (19.9)% (6.0)% 5.1%
====== ====== ======
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET SALES. Net sales increased $20.6 million, or 6.3%, from $327.4
million in 2000 to $348.0 million in 2001. This reflects an approximately $51.7
million increase in sales to Honeywell (almost all of which is attributable to
manufacturing services from our Phoenix facility), partially offset by reduced
sales to a number of other customers. Approximately 59% of our net sales in 2001
related to manufacturing services for Honeywell at our Phoenix plant, compared
to approximately 51% in 2000. The overall concentration of business with
Honeywell increased from 73% of our net sales in 2000 to 83% of our net sales in
2001. We expect our net sales to increase and our overall concentration of
business with Honeywell to decrease as a result of the combination of EFTC and
K*TEC, which occurred in the first quarter of 2002.
GROSS PROFIT. Our gross profit increased $21.4 million from $15.9
million in 2000 to $37.3 million in 2001. Similarly, gross profit as a
percentage of net sales improved from 4.9% of net sales in 2000 to 10.7% of net
sales in 2001. The improvement in gross profit in 2001 is primarily attributable
to an overall improvement in capacity utilization and operational efficiency at
our facilities and a more favorable product mix with our customers. The
improvement in capacity utilization was driven by changes initiated in 1999 and
2000, including the closure of our Ft. Lauderdale facility and the sale of the
assets of our Tucson facility. The Ft. Lauderdale and Tucson facilities
generated a combined gross profit deficiency of $2.1 million in 2000. Gross
profit in 2000 was also negatively
13
impacted by approximately $0.8 million related to the transition of additional
manufacturing services under the Honeywell agreement in the first quarter of
2000.
In 2001, we assessed certain long-lived assets for impairment related
to the planned move to a new facility in the Northeast and the abandonment of
manufacturing-related software that is no longer expected to be used. Due to
changes in our customers and product mix, we also assessed the carrying value of
intellectual property and manufacturing equipment related to those customers in
2001. Accordingly, we recognized impairment expense of $1.3 million that is
included in cost of goods sold in 2001.
Inventory write-downs decreased from $5.6 million, or 1.7% of net
sales, in 2000 to $4.7 million, or 1.4% of net sales, in 2001. During 2000, we
recognized inventory write-downs of $4.5 million for excess inventories related
to Honeywell and several smaller customers, approximately $0.8 million related
to customer disengagements, and approximately $0.3 million related to the Ft.
Lauderdale and Tucson inventories. In 2001, we recognized charges of $2.7
million for excess inventories related to a variety of customers, $1.1 million
related to an existing customer that discontinued a product line, approximately
$0.6 million due to customer disengagements, and approximately $0.3 million
related to inventory for a customer experiencing financial difficulties and for
which we do not expect to realize the value through production or other means of
liquidation. Over the past year we have focused substantial efforts to improve
our inventory management processes and to work more closely with our customers
to minimize losses due to excess inventories. These efforts were primarily
responsible for the reduction in inventory write-downs in actual dollars and as
a percentage of net sales in 2001 compared to 2000.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses ("SG & A") decreased $6.6 million, or 27.5%, from $23.9
million in 2000 to $17.3 million in 2001. SG & A expenses in 2000 included $3.1
million for consulting services intended to accelerate operational improvement
at each of our facilities. SG & A in 2000 also included a charge of $1.9 million
for accelerated depreciation and amortization of assets that were not expected
to be utilized after the 2000 relocation of EFTC's corporate headquarters to
Phoenix. Finally, the results in 2000 included approximately $0.6 million for SG
& A at divisions that were sold or closed by the end of September 2000.
After excluding all of the charges discussed above, SG & A expense
decreased $1.0 million, or 5.5%, from $18.3 million in 2000 to $17.3 million in
2001. Despite an increase in sales in 2001, SG & A expenses have remained
stable, primarily due to the elimination of costs as a result of the closure of
the Denver headquarters in the fourth quarter of 2000. We expect our SG & A
expenses to increase as a result of the combination.
RECAPITALIZATION AND MERGER TRANSACTION COSTS. Recapitalization and
merger transaction costs decreased $3.7 million, or 69.8%, from $5.3 million in
2000 to $1.6 million in 2001. In connection with the March 2000
recapitalization, we incurred charges totaling $5.3 million, including $1.6
million for financial advisor fees paid to unrelated parties, a fee of $0.8
million paid to Thayer-Blum Funding, costs of $0.8 million related to a
shareholder meeting to approve the recapitalization, and costs for legal,
accounting, and management consultant services of $2.1 million. We capitalized
costs associated with the issuance of senior subordinated exchangeable notes and
a revolving credit agreement, and all other costs were charged to operations in
2000. In 2001, we incurred costs, primarily for a fairness opinion and
professional fees, of $1.6 million related to the combination with K*TEC that
was completed on February 28, 2002. This business combination will be accounted
for as a reorganization of entities under common control, and, accordingly,
these costs were charged to operations when the costs were incurred.
SEVERANCE, RETENTION, CLOSURE, AND RELOCATION COSTS. We recognized
charges totaling $4.6 million in 2000 for severance, recruiting, and other costs
associated with changes in management and the relocation of corporate
headquarters. Because the management team was in place and corporate
headquarters was relocated by the fourth quarter of 2000, we did not incur
charges for similar activities in 2001.
IMPAIRMENT OF LONG-LIVED ASSETS. In 2000, we recognized an impairment
charge of $1.7 million, including $1.3 million for software that we decided to
abandon. During 2001, we recognized impairment of manufacturing assets, but the
amounts were charged to cost of goods sold as discussed above under the caption
"Gross Profit."
INTEREST EXPENSE. Interest expense decreased $6.1 million, or 64.1%,
from $9.6 million in 2000 to $3.4 million in 2001, primarily due to a decrease
in average outstanding borrowings. Our outstanding debt decreased from $90.7
million at December 31, 2000 to approximately $0.1 million at December 31, 2001.
The decreased debt
14
level at December 31, 2001 was primarily due to the conversion of $61.3 million
of debt to common stock on May 31, 2001. The reduction in debt was also
attributable to improved working capital management in 2001, which resulted in
the repayment of nearly $28.5 million of debt under our revolving credit
agreement and a $3.0 million note payable owed to a director.
Lower interest rates in 2001 also contributed to the reduction in
interest expense. The interest rate on the $54 million of Exchangeable Notes
that were outstanding during the second and third quarters of 2000 accrued
interest at 15% compared to the reduced rate of 8.875% that went into effect
after the recapitalization was approved by our shareholders in August 2000.
Additionally, the prime rate decreased by nearly five percentage points in 2001,
and this also had a favorable impact because the interest rate on the revolving
line of credit is a variable rate based on the prime rate.
Our debt level has increased as a result of the combination. Following
the combination, we are now a party to the credit facility with Citicorp USA
that K*TEC entered into in January 2001. As of March 18, 2002, we had borrowed
$17.9 million under this credit facility. As of March 18, 2002, we also had
$12.2 million of debt payable to the former parent of K*TEC.
GAIN (LOSS) ON SALE OF ASSETS. During 1999, we recognized a loss of
$20.6 million in connection with the sale of substantially all of the assets of
our services division. The 1999 loss gave effect to the deferral of $2.5 million
of the proceeds for a post-closing earn-out contingency. During 2000, the
purchaser agreed to pay $1.9 million under the earn-out contingency provision of
the sales agreement. Accordingly, we recognized a gain of $4.4 million in 2000,
consisting of $2.5 million of the 1999 proceeds that we were entitled to retain
and the additional consideration of $1.9 million that the purchaser agreed to
pay. However, in the fourth quarter of 2000 we notified the purchaser that we
believed we were entitled to a higher payment than the $1.9 million that they
calculated.
In April 2001, we entered into a settlement agreement with respect to
the earn-out calculation. As a result of this agreement, we received a final
payment of $0.6 million that accounted for $0.6 million of the gain on sale of
assets in 2001. In 2001, we also recognized a gain of $0.2 million from the sale
of equipment.
INCOME TAXES. Due to significant net losses in 1999 and 2000, we have
recorded a valuation allowance for all of our net deferred tax assets. Based on
the level of earnings generated in 2001, we determined that an income tax
provision of $0.3 million should be recognized. This provision was due to a
valuation allowance for Federal alternative minimum taxes payable for 2001 and a
provision for state income taxes at locations where the state net operating loss
carryovers were not sufficient to offset taxable income for 2001. Utilization of
our net operating loss carryovers is subject to limitation as a result of the
change in ownership of EFTC that occurred during 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 2000
NET SALES. Net sales for the year ended December 31, 2000 were $327.4
million compared to $221.9 million for the year ended December 31, 1999, an
increase of 47.6%. We experienced major changes in our customers and facilities
since the beginning of 1999. At the start of 1999, we had 11 facilities. Six of
these facilities were either sold or closed by December 31, 2000. However, we
also added facilities in Phoenix and Mexico during 1999 to support the new
business with Honeywell. Approximately 51% of our sales for the year ended
December 31, 2000 were made under the Honeywell agreement at the Phoenix
location as opposed to 12.6% of our sales in 1999. However, this increased
revenue from Honeywell was offset by the loss of revenue from the Services
Division that was sold on September 1, 1999, and our Tucson assets that were
sold on February 17, 2000. The Services division and the Tucson assets generated
revenue of $55.5 million in the year ended December 31, 1999 compared to $4.4
million in the comparable period of 2000.
After eliminating sales (excluding sales related to customers that
agreed to transition the manufacture of their products to another facility
operated by us) related to facilities that were either closed or sold, adjusted
net sales for 2000 amounted to $323.0 million compared to $166.4 million for
1999, which is an increase of $156.6 million, or 94.1%. Approximately $138
million of this increase is attributable to an increase in sales generated at
our Phoenix location to Honeywell.
GROSS PROFIT (LOSS). We realized gross profit of 4.9% in 2000 compared
to a loss of 3.6% in 1999. This 1999 loss was primarily attributable to charges
related to decisions to sell assets and close certain facilities,
15
including the Rocky Mountain operations, the Services Division, the Southeast
Operations and the Tucson facility. The operations sold or closed accounted for
a loss of $6.2 million during 1999 compared to a loss of $2.1 million for 2000.
During 1999, product pricing at the Tucson facility resulted in negative margins
of $3.5 million.
During 1999, we recognized inventory write-downs of $7.3 million, or
3.2% of net sales. This compares to $5.6 million for the year ended December 31,
2000, or 1.7% of net sales. During 1999, we recognized a charge of $1.2 million
that was necessary due to customer disengagements, $0.9 million related to
inventories for which we could not realize our carrying cost when we sold the
Services Division, $3.4 million under a negotiated settlement related to a
dispute with Honeywell with respect to excess inventories at the Fort Lauderdale
plant, and $1.8 million for excess inventories related to a variety of
continuing customers. As a result of the significant charges that we incurred in
1999, during 2000 we renegotiated customer agreements, focused substantial
efforts to improve our inventory management processes, and began working more
closely with customers to minimize charges due to excess inventories. These
efforts were primarily responsible for the reduction in inventory write-downs as
a percentage of net sales in 2000 compared to 1999. However, despite these
efforts, we recognized inventory write-downs in 2000 of $0.8 million related to
customer disengagements, $0.3 million of additional write-downs related to the
Fort Lauderdale and Tucson inventories, and $4.5 million for excess inventories
related to Honeywell and a variety of smaller customers.
In addition to poor performance at the facilities that were sold or
closed, our other facilities also performed poorly due to capacity utilization
issues, difficulties in dealing with rapid growth issues at the new Phoenix
plant, and difficulties in managing a business that was undergoing dramatic and
complex changes at a time when financial resources were not adequate. The
improvement in gross profit during 2000 was due to higher capacity utilization
at most of our facilities. The improvement in capacity utilization has been
partially offset by generally higher compensation and benefits costs during 2000
compared to 1999. During the second half of 2000, profitability was favorably
impacted by heightened management focus on operational issues and the
renegotiation of unfavorable contracts with customers.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. SG & A expenses
decreased 5.8% to $23.9 million during 2000 compared to $25.4 million in 1999.
SG & A expenses for the year ended December 31, 2000 includes $3.1 million for
consulting services intended to accelerate operational improvement at each of
our facilities. SG & A expenses for 2000 include a charge of $1.9 million for
accelerated depreciation and amortization of assets that could not be used after
we relocated the corporate headquarters and $0.6 million for SG & A expenses at
divisions that were sold or closed by the end of 2000. For 1999, SG&A expenses
included charges to bad debt expense of $5.1 million, primarily due to a loss of
$4.1 million that was recognized due to settlements reached with Honeywell with
respect to business conducted at the Fort Lauderdale and Tucson facilities, and
$0.9 million for uncollectible receivables related to the Services Division,
which was sold in September 1999. For 1999, SG&A also includes $6.2 million of
other costs related to the divisions that were sold or closed, and approximately
$0.4 million for start-up costs at the Phoenix facility.
After excluding all of the charges discussed above, SG & A expense for
2000 amounted to $18.3 million compared to $13.7 million in 1999. The increase
in SG & A in 2000 is primarily attributable to an increase in compensation and
benefits costs of $2.7 million, and information technology expenses of $1.4
million.
SEVERANCE, RETENTION, CLOSURE, AND RELOCATION COSTS. We also recognized
charges of $4.6 million in 2000 for severance, recruiting, and other costs
associated with changes in management and the relocation of corporate
headquarters. This compares to $0.3 million in 1999 that was primarily
attributable to severance costs for administrative employees in connection with
the closure of the Southeast Division.
RECAPITALIZATION TRANSACTION COSTS. In connection with the
recapitalization described below, during 2000, we incurred charges totaling $5.3
million for financial advisor fees, a fee paid to Thayer-Blum Funding, and due
diligence costs for legal, accounting, and management consultants. We
capitalized costs directly associated with the March and July Exchangeable Notes
and a revolving credit agreement with Bank of America, and all other costs were
charged to operations.
IMPAIRMENT OF LONG-LIVED ASSETS. During 2000, we recognized an
impairment charge of $1.7 million. This charge consists of $1.3 million for
software that was abandoned and an additional $0.4 million for impaired
equipment related to headquarters and plant closures. For 1999, we recognized
impairment expense of $2.8 million
16
that was incurred in connection with the sale and closure of four divisions. For
1999, we 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 2000 amounted to $0.3
million compared to $1.1 million in 1999. The decrease in 2000 was attributable
to the sale of the Services Division on September 1, 1999, and the corresponding
write-off of $36.5 million of goodwill that was included in the calculation of
the 1999 loss on sale of the Services Division.
LITIGATION SETTLEMENT. In 1999, we recognized a provision of $6.4
million for the settlement of litigation that was initiated in 1998.
INTEREST EXPENSE. Interest expense increased 46.7% to $9.6 million in
2000 compared to $6.5 million in 1999. For the year ended December 31, 2000, our
weighted average borrowings were $73.8 million compared to $52.1 million during
1999. The increased debt level in 2000 is attributable to the issuance of $54
million of March Exchangeable Notes that accrued interest at 15% until August
22, 2000. Upon stockholder approval of the issuance of the Convertible Notes, on
August 23, 2000 the March Exchangeable Notes were exchanged for Convertible
Notes that bear interest at 8.875%. EFTC also incurred interest expense at a
rate of 15% on the $14 million of July Exchangeable Notes for 40 days. The July
Exchangeable Notes were exchanged for Convertible Preferred Stock on August 22,
2000. In addition to the higher rate on the Exchangeable Notes, during 2000
interest expense was adversely affected by increases in the prime rate, which
impacted the interest rate on the revolving credit facility.
GAIN (LOSS) ON SALE OF ASSETS. During 1999, we recognized a loss of
$20.6 million in connection with the sale of substantially all of the assets of
the Services Division due to the write-off of $36.5 million of goodwill from the
1997 acquisition of the Services Division. The 1999 loss gave effect to the
deferral of $2.5 million of the proceeds for a post closing earn-out
contingency. During 2000, we were paid $1.9 million under the Earn-Out
Contingency agreed to with the purchaser in connection with the sale of the
Services Division. Accordingly, we recognized a gain of $4.4 million in 2000,
consisting of $2.5 million of the 1999 proceeds that we were entitled to retain
and additional consideration of $1.9 million that was received in 2000.
INCOME TAX BENEFIT (EXPENSE). Due to significant net losses in 1999, we
recorded a valuation allowance for all of our net deferred tax assets. As a
result, we recorded deferred tax expense of $2.2 million in 1999 despite a
pre-tax loss of $71.5 million. Due to significant net losses in 1999 and 2000,
we recorded a valuation allowance for all of the net deferred tax assets again
in 2000.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operating
activities in 2001 was $57.0 million, compared with net cash used in operating
activities of $67.5 million in 2000. The difference between our net income in
2001 of $15.3 million and $57.0 million operating cash flow was primarily
attributable to a $23.9 million decrease in trade receivables, a reduction in
inventories of $24.9 million, $6.3 million of depreciation and amortization
expense, a $4.7 million provision for excess and obsolete inventories, a $2.2
million increase in interest on convertible debt, a provision for uncollectible
accounts receivable of $1.5 million, and an impairment charge of $1.3 million,
partially offset by a reduction of $21.7 million in accounts payable and the
payment of $1.5 million for severance, retention, closure, and relocation costs.
Days sales outstanding (based on net sales for the year ended December
31, 2001 and net trade receivables outstanding on that date) decreased to 18
days for the year ended December 31, 2001, compared to 47 days for the
comparable period of 2000. Days sales outstanding in 2001 were affected
favorably by a new financing program for a substantial portion of our
receivables.
Inventories decreased 36.0% to $52.6 million at December 31, 2001,
compared to $82.2 million at December 31, 2000. For the year ended December 31,
2001, inventory turns (i.e., annualized net sales divided by period end
inventory) amounted to 6.6 times per year. This compares to 4.0 times for the
year ended December 31, 2000. During 2000, one of our biggest challenges
involved financing the higher levels of inventories required to support
increased sales at our Phoenix facility. During the last nine months of 1999 and
much of 2000, these
17
difficulties worsened because of industry-wide shortages of components that
ultimately delayed shipment of finished goods to customers. By the fourth
quarter of 2000, the component shortages had diminished and we had generally
improved our inventory management practices, which contributed to improved
inventory turns in 2001 compared to 2000.
CASH FLOWS FROM INVESTING ACTIVITIES. Net cash used in investing
activities in 2001 was $6.2 million compared with net cash provided by investing
activities of $7.7 million in 2000. Investing cash flows in 2001 reflect $7.7
million in capital expenditures (including leasehold improvements of $1.6
million at the new Northeast facility, $1.2 million for information technology
assets, and $2.2 million for new manufacturing equipment), partially offset by
$1.5 million of proceeds from the sale of assets. The proceeds from asset sales
included $0.6 million received as a final settlement under the earn-out
provision from the September 1999 sale of the Services Division, and the release
of $0.5 million of proceeds from the February 2000 sale of Tucson assets that
were required to be released from escrow one year after closing.
In 2001, we entered into a 10-year operating lease that provides for
annual payments of approximately $0.6 million for a new manufacturing facility
in Lawrence, Massachusetts. This facility opened in October 2001 and replaces
the facility in Wilmington, Massachusetts that provided for annual lease
payments of approximately $0.7 million.
CASH FLOWS FROM FINANCING ACTIVITIES. Net cash used in financing
activities in 2001 was $36.8 million, compared with net cash provided by
financing activities of $59.2 million in 2000. Financing cash flows in 2001
reflect a net repayment of borrowings under the revolving line of credit of
$28.5 million, the repayment of a $3.0 million loan from a director, and a $5.5
million reduction in outstanding checks in excess of cash balances.
CONTRACTUAL OBLIGATIONS. The following table summarizes our contractual
obligations as of December 31, 2001, after giving effect to the February 2002
closing of the combination with K*TEC:
MATURITY DATE DURING YEARS ENDING DECEMBER 31:
----------------------------------------------
2003 & 2005 & AFTER
2002 2004 2006 2006 TOTAL
------- ------- ------- ------ -------
Long-term Debt-
Bank of America $ -- $ 72 $ -- $ -- $ 72
Citicorp -- -- 31,556 -- 31,556
Former Parent of K*TEC 12,202 -- -- -- 12,202
Non-cancelable operating leases:
Former EFTC facilities 6,236 9,122 5,577 3,670 24,605
Former K*TEC facilities 3,428 5,499 4,796 1,795 15,518
------- ------- ------- ------ -------
Total $21,866 $14,693 $41,929 $5,465 $83,953
======= ======= ======= ====== =======
We believe we will be able to fund contractual operating lease
obligations from operating cash flows during the periods that payments are
required. We are currently involved in arbitration proceedings with respect to a
dispute with the former parent of K*TEC. Depending on the resolution of these
proceedings, our obligation to pay this debt may be reduced or eliminated.
However, even if we are required to pay the entire amount in 2002, we believe
adequate resources are available under our revolving line of credit with
Citicorp.
If we have not repaid outstanding borrowing from cash flow that may be
generated over the next three years, upon maturity of the Citicorp credit
facility in 2005 we currently intend to enter into negotiations for a new credit
agreement that provides for an extension of the maturity date. However, there
can be no assurance that we will be successful in this regard.
CAPITAL RESOURCES. Our working capital at December 31, 2001 totaled
$59.1 million compared to $72.0 million at December 31, 2000. At December 31,
2001, the borrowing base under our $45.0 million revolving credit facility with
Bank of America would have supported borrowings up to $26.6 million and we only
had outstanding borrowings of approximately $0.1 million under that credit
facility. Accordingly, we had unused availability of $26.5 million under the
Bank of America credit facility as of December 31, 2001. At December 31, 2001,
we also had cash and equivalents of $14.1 million resulting in firm capital
resources of $40.6 million.
18
On February 28, 2002, the combination of EFTC and K*TEC was completed,
and EFTC and K*TEC became wholly owned subsidiaries of Suntron. The credit
facility with Bank of America, N.A. was repaid in March 2002. We are now a party
to the credit facility with Citicorp USA that K*TEC entered into in January
2001. This amended credit facility provides for a revolving line of credit of up
to $75.0 million, maturing in February 2005. Borrowings under the amended credit
facility currently bear interest at the prime rate plus 2.00% for "Base Rate"
borrowings and the LIBOR rate plus 3.25% for "LIBOR Rate" borrowings. Total
borrowings are subject to limitation based on a percentage of eligible accounts
receivable, inventories, real estate, and equipment. The credit agreement
requires compliance with certain financial and non-financial covenants. The
credit agreement also limits or prohibits us from paying dividends, incurring
additional debt, selling significant assets, or merging with other entities
without the consent of the lenders. Substantially all of our assets are pledged
as collateral for outstanding borrowings.
In addition to the increase in debt from the February 2002 combination
with K*TEC, our debt level also increased on March 11, 2002 in connection with
our acquisition of Midwestern Electronics, Inc., as discussed in Note 12 to our
financial statements included elsewhere in this report. As of March 18, 2002,
the borrowing base under our $75.0 million revolving credit facility with
Citicorp supported borrowings up to $67.5 million and we had outstanding
borrowings of approximately $17.9 million under the credit facility, resulting
in unused availability of $49.6 million. As of March 18, 2002, we also had $12.2
million of debt payable to the former parent of K*TEC. This debt will be reduced
to the extent of a favorable outcome of arbitration proceedings that are in
progress. We believe that adequate capital resources are in place to fund our
working capital and other cash requirements for the next 12 months. However,
depending on the amount of capital resources that are devoted to any future
acquisitions of businesses, and increased working capital requirements if sales
levels increase in 2002, we may need to seek additional funds through public or
private debt or equity offerings, bank borrowings or leasing arrangements.
The continued availability of our credit facility with Citicorp is a
critical assumption underlying our belief that adequate capital resources are
currently in place to fund our planned activities for the next 12 months. The
borrowing base calculation under this credit facility is based on a percentage
of eligible receivables and inventories, plus the appraised value of certain
real estate and equipment. Accordingly, our borrowing availability decreases as
our net receivables and inventories decline. However, the borrowing base
generally increases as our receivables and inventories increase. If our sales
begin to increase rapidly, this credit facility is critical to enable us to
finance the increased working capital requirements associated with growth. We
are also required to comply with certain financial and reporting covenants that
must be adhered to in order to ensure the continuous availability of funding
under this credit facility. If we are unable to comply with all of our
covenants, the credit facility could be withdrawn and this would have a material
adverse effect on the Company's liquidity, resulting in the need to seek other
sources of financing. There is no assurance that we would be successful in
securing additional financing, and even if we would be successful, the terms may
be less favorable than we currently have with Citicorp.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations and Statement No. 142, Goodwill and
Other Intangible Assets. Statement No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
Statement 141 also specifies criteria that intangible assets acquired in a
business combination must meet to be recognized and reported apart from
goodwill. Statement No. 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
The provisions of Statement No. 141 apply to all business combinations initiated
after June 30, 2001. The provisions also apply to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001 or later. We are required to adopt the provisions of Statement No.
142 beginning in the first quarter of 2002. The effect of these Statements on us
will be the elimination of the amortization of goodwill that is currently being
amortized over 30 years and the requirement to begin testing goodwill and other
intangible assets for impairment at least on an annual basis. Because of the
extensive effort needed to comply with the adoption of Statements 141 and 142,
it is not currently practicable to estimate the impact of adopting those
Statements on our consolidated financial statements. However, any resulting
impairment loss from the adoption of this new accounting standard could have a
material adverse impact on our results of operations.
19
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This standard requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. This standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Management does not believe the initial application of
Statement 143 will have a significant impact on our consolidated financial
statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting Results
of Operations -- Reporting the Effects of Disposal of a Segment of a Business,
for the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. Statement 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of Statement
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively.
Management does not believe the initial application of Statement 144 will have a
significant impact on our consolidated financial statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in our common stock involves a high degree of risk. You
should carefully consider the factors described below, in addition to those
discussed elsewhere in this report, in analyzing an investment in our common
stock. If any of the events described below occurs, our business, financial
condition and results of operations would likely suffer, the trading price of
our common stock could fall and you could lose all or part of the money you paid
for our common stock.
In addition, the following factors could cause our actual results to
differ materially from those projected in our forward-looking statements,
whether made in this 10-K, our annual or quarterly reports to shareholders,
future press releases, SEC filings or orally, whether in presentations,
responses to questions or otherwise. See "Statement Regarding Forward-Looking
Statements."
OUR INABILITY TO SUCCESSFULLY INTEGRATE OUR OPERATIONS MAY ADVERSELY AFFECT OUR
ABILITY TO REALIZE THE ANTICIPATED BENEFITS OF THE RECENT BUSINESS COMBINATION
OF EFTC AND K*TEC.
The success of the combination will depend on our ability to unite
EFTC's business strategies and technologies with those of K*TEC. The
difficulties of combining EFTC's operations with those of K*TEC include the
necessity of coordinating geographically separated organizations and integrating
personnel with diverse business backgrounds. Combining management from EFTC and
K*TEC will result in changes affecting all employees and operations. Differences
in management approach and corporate culture may strain employee relations. The
process of integrating operations could cause an interruption of, or loss of
momentum in, the activities of the combined businesses and the loss of key
personnel. We may encounter difficulties in the process of integrating the
businesses of EFTC and K*TEC, which could adversely affect our ability to
realize the anticipated benefits of the combination, including expected
synergies from cost-cutting initiatives and cross-selling of products and
services across customers and geographic regions. The diversion of management's
attention and any delays or difficulties encountered in connection with the
combination and the integration of the two operations could have an adverse
effect on our business, financial condition, results of operations or prospects.
THE COMBINATION MAY RESULT IN A LOSS OF CUSTOMERS AND EMPLOYEES, WHICH COULD
HARM OUR RESULTS OF OPERATIONS.
20
The combination could cause certain customers to either seek
alternative sources of product supply or service, or delay or change orders for
products due to uncertainty over the integration of the two companies or the
strategic position of the combined company. As a result, we may experience some
customer attrition. Any customer attrition could harm our results of operations.
Difficulties in integrating the operations of EFTC and K*TEC, including the
uncertainty related to organizational changes, could also negatively affect
employee morale and result in the loss of key employees. We may not be able to
retain key management, sales, marketing, and technical personnel. Any steps
taken by us to address customer and employee attrition may not be effective, and
this attrition could negatively affect our results of operations.
WE HAVE EXPERIENCED DECLINING NET SALES.
EFTC's net sales declined from $107.5 million in the first quarter of
2001 to $97.8 million in the second quarter of 2001, $84.1 million in the third
quarter of 2001, and $58.6 million in the fourth quarter of 2001. K*TEC's net
sales declined from $90.7 million in the first quarter of 2001 to $59.4 million
in the second quarter of 2001, and $50.2 million in the third quarter of 2001.
We are in the process of compiling K*TEC's fourth quarter results. We expect
K*TEC's net sales for the fourth quarter will decline up to 60% sequentially
from third quarter 2001 net sales.
WE ARE DEPENDENT ON THE AEROSPACE INDUSTRY, AND RECENT TERRORIST ATTACKS MAY
NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
Our principal customer is engaged in the aerospace market. See "--We
are dependent upon a small number of customers for a large portion of our net
sales, and a decline in sales to major customers would harm our results of
operations." Consequently, a significant percentage of our net sales will be
derived from the aerospace segment of the electronics industry, and a
significant decline in the aerospace market could have a negative impact on our
results of operations. The September 11, 2001 terrorist attacks on the World
Trade Center in New York and the Pentagon in Washington, D.C. using hijacked
commercial aircraft have been highly publicized. We believe that these events
have had an adverse impact on our recent results of operations. See "--EFTC and
K*TEC have each experienced declining net sales." The long-term impact is not
known at this time, but may include reduced demand for products of our aerospace
customers, which would have a negative impact on our results of operations.
WE ARE DEPENDENT UPON THE ELECTRONICS INDUSTRY AND EXCESS CAPACITY OR DECREASED
DEMAND FOR PRODUCTS PRODUCED BY THIS INDUSTRY COULD RESULT IN INCREASED PRICE
COMPETITION AS WELL AS A DECREASE IN OUR GROSS MARGINS AND UNIT VOLUME SALES.
Our business is heavily dependent on the electronics industry. A
significant percentage of our net sales are generated from the aerospace and
defense, semiconductor capital equipment, industrial controls and
instrumentation, medical equipment, networking and telecommunications equipment
segments of the electronics industry, which is characterized by intense
competition, relatively short product life-cycles and significant fluctuations
in product demand. Furthermore, these segments are subject to economic cycles
and have experienced in the past, and are likely to experience in the future,
recessionary periods. A recession or any other event leading to excess capacity
or a downturn in these segments of the electronics industry could result in
intensified price competition as well as a decrease in our gross margins and
unit volume sales.
WE ARE DEPENDENT UPON A SMALL NUMBER OF CUSTOMERS FOR A LARGE PORTION OF OUR NET
SALES, AND A DECLINE IN SALES TO MAJOR CUSTOMERS WOULD HARM OUR RESULTS OF
OPERATIONS.
A small number of customers will be responsible for a significant
portion of our net sales. Sales to Honeywell represented approximately 83% of
EFTC's sales in 2001. Sales to Applied Materials and Emulex represented
approximately 38% and 26%, respectively, of K*TEC's sales for the nine months
ended September 30, 2001. We expect a significant portion of our net sales will
continue to be generated by a small number of customers.
Our customer concentration could increase or decrease depending on
future customer requirements, which will depend in large part on market
conditions in the electronics industry segments in which our customers
participate. The loss of one or more major customers or a decline in sales to
our major customers could significantly harm our business and results of
operations and lead to declines in the price of our common stock.
If we are not able to expand our customer base, we will continue to
depend upon a small number of customers for a significant percentage of our net
sales. Despite existing contractual arrangements, there can be no
21
assurance that current customers, including Honeywell, Applied Materials,
Emulex, or future customers will not terminate their manufacturing arrangements
with us or significantly change, reduce or delay the amount of manufacturing
services ordered from us.
In addition, we generate significant accounts receivable in connection
with providing services to our customers. If one or more of our significant
customers were to become insolvent or were otherwise unable or unwilling to pay
for our services, our results of operations would be harmed.
OUR CUSTOMERS MAY CANCEL THEIR ORDERS, CHANGE PRODUCTION QUANTITIES, OR DELAY
PRODUCTION.
Electronics manufacturing service providers must provide increasingly
rapid product turnaround for their customers. We generally do not obtain firm,
long-term purchase commitments from our customers, and we expect to continue to
experience reduced lead-times in customer orders. Customers may cancel their
orders, change production quantities, or delay production for a number of
reasons. Cancellations, reductions, or delays by a significant customer or by a
group of customers would seriously harm our results of operations. We purchase
inventory based on customer forecasts and firm purchase orders, which we may be
forced to write off to the extent customer orders are changed or cancelled. In
addition, we may be forced to hold excess inventories and incur carrying costs
as a result of delays, cancellations, or reductions in orders or poor
forecasting by our key customers.
In addition, we make significant decisions, including determining the
levels of business that we seek and accept, production schedules, component
procurement commitments, personnel needs, and other resource requirements based
on estimates of customer requirements. The short-term nature of our customers'
commitments and the possibility of rapid changes in demand for their products
reduces our ability to estimate accurately future customer requirements. In
addition, because many of our costs and operating expenses are relatively fixed,
a reduction in customer demand could harm our gross margins and operating
income. Conversely, customers may on occasion require rapid increases in
production, which can stress our resources and reduce margins, and we may not
have sufficient capacity at any given time to meet our customers' demands.
OUR RESULTS OF OPERATIONS WILL BE AFFECTED BY A VARIETY OF FACTORS, WHICH COULD
CAUSE OUR RESULTS OF OPERATIONS TO FAIL TO MEET EXPECTATIONS AND OUR STOCK PRICE
TO DECLINE.
EFTC's and K*TEC's results of operations have varied, and our results
of operations may continue to fluctuate significantly from period to period,
including on a quarterly basis. Our results of operations will be affected by a
number of factors, including:
- timing of orders from and shipments to major customers;
- mix of products ordered by major customers;
- volume of orders as related to our capacity at individual
locations;
- pricing and other competitive pressures;
- component shortages, which could cause us to be unable to meet
customer delivery schedules;
- our ability to minimize inventory obsolescence and bad debt
expense risk;
- our ability to manage effectively inventory and fixed asset
levels;
- our ability to time expenditures in anticipation of future
sales; and
- timing and level of goodwill amortization or asset
impairments.
Our results of operations can also be significantly influenced by
development and introduction of new products by our customers. From time to
time, we may experience changes in the volume of sales to our principal
customers, and results of operations may be affected on a period-to-period basis
by these changes. See "--Our customers may cancel their orders, change
production quantities, or delay production." Our results of operations for the
first quarter of 2002 may also be adversely affected by the recognition of
transitional impairment losses upon the initial application of recently issued
accounting standards. Results of operations in any period should not be
considered indicative of the results to be expected for any future period. In
addition, fluctuations in results of operations may also result in fluctuations
in the price of our common stock.
OUR LEVEL OF INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH, AND THE
RESTRICTIONS IMPOSED BY THE TERMS OF OUR DEBT INSTRUMENTS MAY SEVERELY LIMIT OUR
ABILITY TO PLAN FOR OR RESPOND TO CHANGES IN OUR BUSINESS.
22
As of March 18, 2002, we had outstanding indebtedness of approximately
$30.1 million. In addition, subject to the restrictions under our various debt
agreements, we may incur significant additional indebtedness from time to time
to finance acquisitions or capital expenditures or for other purposes.
Our level of debt could have negative consequences. For example, it could:
- require us to dedicate a substantial portion of our cash flow
from operations to repayment of debt, limiting the
availability of cash for other purposes;
- increase our vulnerability to adverse general economic
conditions by making it more difficult to borrow additional
funds to maintain our operations if we suffer revenue
shortfalls;
- limit our ability to attract new customers if we do not have
sufficient liquidity to meet working capital needs;
- hinder our flexibility in planning for, or reacting to,
changes in our business and industry by preventing us from
borrowing money to upgrade our equipment or facilities; and
- limit or impair our ability to obtain additional financing in
the future for working capital, capital expenditures,
acquisitions, or general corporate purposes.
IF WE ARE UNABLE TO RESPOND TO RAPID TECHNOLOGICAL CHANGE AND PROCESS
DEVELOPMENT, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The market for our products and services is characterized by rapidly
changing technology and continual implementation of new production processes.
The future success of our business will depend in large part upon our ability to
maintain and enhance our technological capabilities, to develop and market
products that meet changing customer needs, and to successfully anticipate or
respond to technological changes on a cost-effective and timely basis. We expect
that the investment necessary to maintain our technological position will
increase as customers make demands for products and services requiring more
advanced technology on a quicker turnaround basis. We may not be able to borrow
additional funds in order to respond to technological changes as quickly as our
competitors.
In addition, the electronics manufacturing services industry could
encounter competition from new or revised manufacturing and production
technologies that render existing manufacturing and production technology less
competitive or obsolete. We may not be able to respond effectively to the
technological requirements of the changing market. If we need new technologies
and equipment to remain competitive, the development, acquisition and
implementation of those technologies and equipment may require us to make
significant capital investments.
23
WE ARE DEPENDENT ON LIMITED AND SOLE SOURCE SUPPLIERS FOR ELECTRONIC COMPONENTS
AND MAY EXPERIENCE COMPONENT SHORTAGES, WHICH WOULD CAUSE US TO DELAY SHIPMENTS
TO CUSTOMERS, RESULTING IN POTENTIAL DECLINES IN NET SALES AND RESULTS OF
OPERATIONS.
We are dependent on certain suppliers, including limited and sole
source suppliers, to provide critical electronic components and other materials
for our operations. At various times, there have been shortages of some of the
electronic components we use, and suppliers of some components have lacked
sufficient capacity to meet the demand for these components. For example, from
time to time, some components we use, including semiconductors, capacitors, and
resistors, have been subject to shortages, and suppliers have been forced to
allocate available quantities among their customers. Such shortages have
disrupted our operations in the past, which resulted in incomplete or late
shipments of products to our customers. Our inability to obtain any needed
components during future periods of allocations could cause delays in shipments
to our customers. The inability to make scheduled shipments could in turn cause
us to experience a shortfall in revenue. We could also experience negative
customer goodwill due to the delay in shipment. Component shortages may also
increase our cost of goods due to premium charges we may pay to purchase
components in short supply. Accordingly, even though component shortages have
not had a lasting negative impact on our business, component shortages could
harm our results of operations for a particular fiscal period due to the
resulting revenue shortfall or cost increases and could also damage customer
relationships over a longer-term period.
IF WE EXPERIENCE EXCESS CAPACITY DUE TO VARIABILITY IN CUSTOMER DEMAND, OUR
GROSS MARGINS MAY FALL.
We may schedule certain of our production facilities at less than full
capacity to retain our ability to respond to additional quick turnaround orders.
However, if these orders are not made, we may forego some production and could
experience excess capacity. When we experience excess capacity, our sales
revenue may be insufficient to fully cover our fixed overhead expenses and our
gross margins will fall. Conversely, we may not be able to capture all potential
revenue in a given period if our customers' demands for quick turnaround
services exceed our capacity during that period.
OUR INABILITY TO EXPAND OUR WEB-BASED SUPPLY CHAIN MANAGEMENT SYSTEM COULD
NEGATIVELY IMPACT OUR FUTURE COMPETITIVENESS.
Our future success depends in part on our ability to rapidly respond to
changing customer needs by scaling operations to meet customers' requirements,
shift capacity in response to product demand fluctuations, procure materials at
advantageous prices, manage inventory, and effectively distribute products to
our customers. In order to continue to meet these customer requirements, we have
developed a Web-based supply chain management system that enables us to
collaborate with our customers on product content and to process engineering
changes. We are currently implementing an enhanced version of our existing
system, which will include real-time communications between our customers across
all of our facilities. Our inability to expand this Web-based system or delays
or defects in such expansion could negatively impact our ability to manage our
supply chain in an efficient and timely manner to meet customer demands, which
could adversely affect our competitive position and negatively affect our
ability to be competitive in the electronics manufacturing services industry.
WE MAY EXPAND OUR BUSINESS INTO NEW PRODUCTS AND SERVICES AND MAY NOT BE ABLE TO
COMPETE EFFECTIVELY WITH OTHER COMPANIES WHO HAVE BEEN IN THESE BUSINESSES
LONGER THAN WE HAVE.
In the future, we may broaden our service offerings by providing new
products and services. If we do this, we will likely compete with companies that
have substantially greater financial and manufacturing resources than we have
and who have been providing these services longer than we have. We may not be
able to compete successfully on this basis with more established competitors.
OUR INDUSTRY IS EXTREMELY COMPETITIVE.
The electronics manufacturing services industry is extremely
competitive and includes hundreds of companies. The contract manufacturing
services we provide are available from many independent sources, and we compete
with numerous domestic and foreign electronic manufacturing services firms,
including Solectron Corporation; SMTC Corporation; Benchmark Electronics, Inc.;
Pemstar, Inc.; Plexus Corp.; Group Technologies Corporation; Sanmina
Corporation; Flextronics International Ltd.; ACT Manufacturing, Inc.;
Manufacturers Services, Ltd.; Celestica Inc; Jabil Circuit, Inc., and others.
Many of such competitors are more established in the
24
industry and have substantially greater financial, manufacturing or marketing
resources than us. We may be operating at a cost disadvantage as compared to our
competitors that have greater direct buying power from component suppliers,
distributors, and raw material suppliers and have lower cost structures. In
addition, certain of our competitors have broader geographic presence, including
manufacturing facilities in foreign countries. We believe that the principal
competitive factors in our targeted market are quality, reliability, ability to
meet delivery schedules, technological sophistication, geographic location, and
price. We also face competition from our current and potential customers, who
are continually evaluating the relative merits of internal manufacturing versus
contract manufacturing for various products.
In recent years, many participants in our industry have substantially
expanded their manufacturing capacity. If overall demand for electronics
manufacturing services decreases, this increased capacity could result in
substantial pricing pressures, which could seriously harm our operating results.
WE MAY BE SUBJECT TO RISKS ASSOCIATED WITH ACQUISITIONS, AND THESE RISKS COULD
HARM OUR RESULTS OF OPERATIONS AND CAUSE OUR STOCK PRICE TO DECLINE.
In 2002, we acquired substantially all of the assets of Midwestern
Electronics, Inc., and we anticipate that we may seek to identify and acquire
additional suitable businesses in the electronics manufacturing services
industry. Acquisitions of companies and businesses and expansion of operations
involve certain risks, including the following:
- the potential inability to successfully integrate acquired
operations and businesses or to realize anticipated synergies,
economies of scale, or other value;
- diversion of management's attention;
- difficulties in scaling up production and coordinating
management of operations at new sites;
- the possible need to restructure, modify, or terminate
customer relationships of the acquired business;
- loss of key employees of acquired operations; and
- the potential liabilities of the acquired businesses.
Accordingly, we may experience problems in integrating the operations
associated with any future acquisition. We therefore cannot assure you that any
future acquisition will result in a positive contribution to our results of
operations. In particular, the successful combination with any businesses we
acquire will require substantial effort from each company, including the
integration and coordination of sales and marketing efforts. The diversion of
the attention of management and any difficulties encountered in the transition
process, including the interruption of, or a loss of momentum in, the activities
of any business acquired, problems associated with integration of management
information and reporting systems, and delays in implementation of consolidation
plans, could harm our ability to realize the anticipated benefits of any future
acquisition. Any failure to realize the anticipated benefits of our acquisitions
could harm our business and results of operations and could cause the price of
our common stock to decline. In addition, future acquisitions may result in
dilutive issuances of equity securities, the incurrence of additional debt,
large one-time write-offs, and the creation of goodwill or other intangible
assets that could result in increased amortization or impairment expense. These
factors could harm our business and results of operations and cause the price of
our common stock to decline.
PRODUCTS WE MANUFACTURE MAY CONTAIN DESIGN OR MANUFACTURING DEFECTS, WHICH COULD
RESULT IN REDUCED DEMAND FOR OUR SERVICES AND INCREASED LIABILITY CLAIMS.
We manufacture products to our customers' specifications, which are
highly complex and may contain design or manufacturing errors or failures
despite our quality control and quality assurance efforts. Defects in the
products we manufacture, whether caused by a design, manufacturing or component
failure or error, may result in delayed shipments, customer dissatisfaction, or
a reduction or cancellation of purchase orders. If these defects occur either in
large quantities or too frequently, our business reputation may be impaired.
Because our products are used in products that are integral to our customers'
businesses, errors, defects or other performance problems could result in
financial or other damages to our customers, for which we may be legally
required to compensate them. Product liability litigation against us, even if it
were unsuccessful, would be time consuming and costly to defend.
OUR MANAGEMENT TEAM HAS NOT WORKED TOGETHER AS A COMBINED UNIT, WHICH MAY MAKE
IT MORE DIFFICULT TO CONDUCT AND GROW OUR BUSINESS.
25
Our management team has not worked together as a combined unit. In
addition, EFTC's senior management team has only been working together since
July 2000 after the completion of the initial stage of EFTC's recapitalization
by Thayer-Blum. If our management team cannot successfully work together, we may
not be able to execute our business strategy or compete effectively. Any failure
to manage the combined operations of EFTC and K*TEC could harm our business and
limit our ability to realize the anticipated benefits of the combination.
OUR MAJOR STOCKHOLDER CONTROLS US AND COULD PREVENT A CHANGE OF CONTROL OR OTHER
BUSINESS COMBINATION OR COULD EFFECT A "SHORT FORM" MERGER WITHOUT THE APPROVAL
OF OTHER STOCKHOLDERS.
Thayer-Blum owns approximately 90% of our common stock, and four of our
nine directors are representatives of Thayer-Blum. The interests of Thayer-Blum
may not always coincide with those of our other stockholders, particularly if
Thayer-Blum decides to sell its controlling interest. In addition, Thayer-Blum
will have sufficient voting power (without the approval of Suntron's other
stockholders) to elect the entire Board of Directors of Suntron and, in general,
to determine the outcome of various matters submitted to stockholders for
approval, including fundamental corporate transactions. Thayer-Blum could cause
us to take actions that we would not consider absent Thayer-Blum's influence, or
could delay, deter, or prevent a change of control or other business combination
that might otherwise be beneficial to our public stockholders.
In addition, Thayer-Blum could contribute its Suntron stock to a
subsidiary corporation that, as a 90% stockholder, then would have the ability
under Delaware law to merge with or into Suntron without the approval of the
other Suntron stockholders. In the event of such a "short-form" merger, Suntron
stockholders would have the right to assert appraisal/dissenters' rights to
receive cash in the amount of the fair market value of their shares in lieu of
the consideration they would have otherwise received from the transaction.
OUR INABILITY TO MANAGE OUR GROWTH SUCCESSFULLY MAY DIVERT OUR RESOURCES AND
HARM OUR RESULTS OF OPERATIONS.
Our future results of operations will be affected by our ability to
manage expected growth successfully. Our future results may also be impacted by
our ability to execute future acquisitions and integrate the operations of
acquired companies with our operations. Any further growth is likely to continue
to place a significant strain on our managerial, operational, financial, and
other resources. This growth will require us to implement additional management
information systems, to further develop our operating, administrative,
financial, and accounting systems and controls and to maintain close
coordination among our accounting, finance, sales and marketing, and customer
service and support departments. In addition, we may be required to retain
additional personnel to adequately support our growth. If we cannot effectively
manage our expanding operations, we may not be able to continue to grow, or we
may grow at a slower pace. Any failure to successfully manage growth and to
develop financial controls and accounting and operating systems or to add and
retain personnel that adequately support growth could harm our business and
financial results.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS, OR AT ALL.
We may need to raise additional funds for the following purposes:
- to fund our operations;
- to fund any growth we experience;
- to enhance or expand the range of services we offer;
- to increase our promotional and marketing activities; or
- to respond to competitive pressures or perceived
opportunities, such as
- investment, acquisition, and international expansion
activities.
If such funds are not available when required or on acceptable terms,
our business and financial results could suffer.
OUR MANUFACTURING PROCESSES DEPEND ON THE COLLECTIVE INDUSTRY EXPERIENCE OF OUR
EMPLOYEES. IF THESE EMPLOYEES WERE TO LEAVE AND TAKE THIS KNOWLEDGE WITH THEM,
OUR MANUFACTURING PROCESSES MAY SUFFER AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
26
We have no patent or trade secret protection for our manufacturing
processes, but instead rely on the collective experience of our employees to
ensure that we continuously evaluate and adopt new technologies in our industry.
Although we are not dependent on any one employee or a small number of
employees, if a significant number of employees involved in our manufacturing
processes were to leave our employment and we are not able to replace these
people with new employees with comparable experience, our manufacturing
processes may suffer as we may be unable to keep up with innovations in the
industry. As a result, we may not be able to continue to compete effectively.
WE DEPEND ON OUR KEY PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND RETAINING
SKILLED EMPLOYEES.
Our future success will depend to a significant degree upon the
continued contributions of our key management, marketing, technical, and
operational personnel, including James K. Bass, our President and Chief
Executive Officer. We do not have employment agreements with any of our key
employees, except Mr. Bass and R. Michael Gibbons, one of our vice presidents.
The loss of the services of one or more key employees could have a material
adverse effect on our results of operations. We also believe that our future
success will depend in large part upon our ability to attract and retain
additional highly skilled management, technical, marketing, product development,
operational personnel, and consultants. Competition for such personnel is
intense. There can be no assurance that we will be successful in attracting and
retaining such personnel. In addition, recent and potential future facility
shutdowns and workforce reductions may have a negative impact on employee
recruiting and retention.
OUR FAILURE TO COMPLY WITH THE REQUIREMENTS OF ENVIRONMENTAL LAWS COULD RESULT
IN FINES AND REVOCATION OF PERMITS NECESSARY TO OUR MANUFACTURING PROCESSES.
Our operations are regulated under a number of federal, state, and
foreign environmental and safety laws and regulations that govern, among other
things, the discharge of hazardous materials into the air and water, as well as
the handling, storage, and disposal of such materials. These laws and
regulations include the Clean Air Act; the Clean Water Act; the Resource
Conservation and Recovery Act; and the Comprehensive Environmental Response,
Compensation, and Liability Act; as well as analogous state and foreign laws.
Compliance with these environmental laws is a major consideration for us because
our manufacturing processes use and generate materials classified as hazardous,
such as ammoniacal etching solutions, copper, and nickel. In addition, because
we use hazardous materials and generate hazardous wastes in our manufacturing
processes, we may be subject to potential financial liability for costs
associated with the investigation and remediation of our own sites or sites at
which we have arranged for the disposal of hazardous wastes, if such sites
become contaminated. Even if we fully comply with applicable environmental laws
and are not directly at fault for the contamination, we may still be liable. The
wastes we generate include spent ammoniacal etching solutions, solder stripping
solutions, and hydrochloric acid solutions containing palladium; waste water
that contains heavy metals, acids, cleaners, and conditioners; and filter cake
from equipment used for on-site waste treatment. We have not incurred
significant costs related to compliance with environmental laws and regulations
in the prior three years, and we believe that our operations substantially
comply with all applicable environmental laws. However, any material violations
of environmental laws by us could subject us to revocation of our effluent
discharge and other environmental permits. Any such revocations could require us
to cease or limit production at one or more of our facilities, negatively
impacting our net sales and causing our common stock price to decline. Even if
we ultimately prevail, environmental lawsuits against us would be time consuming
and costly to defend.
Environmental laws could also become more stringent over time, imposing
greater compliance costs and increasing risks and penalties associated with
violation. We operate in environmentally sensitive locations and are subject to
potentially conflicting and changing regulatory agendas of political, business,
and environmental groups. Changes or restrictions on discharge limits; emissions
levels; or material storage, handling, or disposal might require a high level of
unplanned capital investment or relocation. It is possible that environmental
compliance costs and penalties from new or existing regulations may harm our
business, financial condition, and results of operations.
27
WE MAY BE EXPOSED TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS BY THIRD PARTIES
THAT COULD BE COSTLY TO DEFEND, COULD DIVERT MANAGEMENT'S ATTENTION AND
RESOURCES AND, IF SUCCESSFUL, COULD RESULT IN LIABILITY.
We could be subject to legal proceedings and claims for alleged
infringement of third party proprietary rights, such as patents, from time to
time in the ordinary course of business. In certain cases, we may find it
necessary or desirable to license or otherwise acquire rights to intellectual
property held by others. For example, in February 2000, EFTC settled a dispute
with the Lemelson Foundation by entering into a license agreement that required
EFTC to make payments totaling approximately $160,000 over 18 months. Other
similar disputes could arise in the future. These disputes could be costly to
defend and could also result in the diversion of management time and attention.
In addition, adverse determinations in any proceedings could require us to pay
monetary damages and could also result in loss of intellectual property rights.
In the event we were able to settle disputes through licensing or similar
arrangements, the costs of these licenses could be substantial. Accordingly,
future disputes regarding intellectual property rights could harm our business,
financial condition, and results of operations.
OUR STOCK PRICE MAY BE VOLATILE, AND OUR STOCK IS THINLY TRADED, WHICH COULD
CAUSE INVESTORS TO LOSE ALL OR PART OF THEIR INVESTMENTS IN OUR STOCK.
The stock market has recently experienced volatility that has often
been unrelated to the operating performance of any particular company or
companies. If market or industry-based fluctuations continue, our stock price
could decline regardless of our actual operating performance, and investors
could lose a substantial part of their investments. Moreover, if an active
public market for our stock is not sustained in the future, it may be difficult
to resell our stock. Our stock is thinly traded.
The market price of our common stock will likely fluctuate in response
to a number of factors, including the following:
- failure to meet the performance estimates of securities
analysts;
- changes in financial estimates of our net sales and results of
operations by securities analysts;
- the timing of announcements by us or our competitors of
significant contracts or acquisitions; and
- general stock market conditions.
Recently, when the market price of a company's stock has been volatile,
stockholders have often instituted securities class action litigation against
that company. If a class action lawsuit is filed against us, we could incur
substantial costs defending the lawsuit and management time and attention would
be diverted. An adverse judgment could cause our financial condition or results
of operations to suffer.
OPERATING IN FOREIGN COUNTRIES EXPOSES US TO INCREASED RISKS THAT COULD
ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We currently have foreign operations in Mexico. We may in the future
expand into other foreign countries. We have limited experience in managing
geographically dispersed operations and in operating in foreign countries.
Because of the scope of our international operations, we are subject to the
following risks, which could adversely impact our results of operations:
- economic or political instability;
- transportation delays and interruptions;
- increased employee turnover and labor unrest;
- incompatibility of systems and equipment used in foreign
operations;
- difficulties in staffing and managing foreign personnel and
diverse cultures; and
- less developed infrastructures.
In addition, changes in policies by the United States or foreign
governments could negatively affect our operating results due to increased
duties, increased regulatory requirements, higher taxation, currency conversion
limitations, restrictions on the transfer of funds, the imposition of or
increase in tariffs, and limitations on imports or exports. Also, we could be
negatively affected if our host countries revise their policies away from
encouraging foreign investment or foreign trade, including tax holidays.
28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Following the recent combination of EFTC and K*TEC, we replaced our $45
million revolving credit facility with Bank of America, N.A. with a $75.0
million revolving line of credit with Citicorp USA. The interest rate on this
loan is based either on the prime rate or LIBOR rates, plus applicable margins.
Therefore, as interest rates fluctuate, we may experience changes in interest
expense that could impact financial results. We have not entered into any
interest rate swap agreements, or similar instruments, to protect against the
risk of interest rate fluctuations. Assuming outstanding borrowings of $75.0
million, if interest rates were to increase or decrease by one percentage point,
the result would be an annual increase or decrease in interest expense of
approximately $750,000 under this loan.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto, and the supplementary data commencing at page F-1 of this Report,
which financial statements, report, notes, and data are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table, together with the accompanying text, present
certain information, as of March 1, 2002, with respect to each of our executive
officers and directors.
NAME AGE POSITION(S) HELD WITH THE COMPANY
- ------------------------------------------------- --------- ----------------------------------------------------
James K. Bass.................................... 45 Chief Executive Officer, President and Director
John W. Briant................................... 36 Vice President
Michael Eblin.................................... 39 Vice President
R. Michael Gibbons............................... 43 Vice President
Oscar A. Hager................................... 46 Vice President of Human Resources
Peter W. Harper.................................. 40 Chief Financial Officer and Secretary
John H. Kulp..................................... 44 Vice President of Sales and Marketing
Kevin Sauer...................................... 38 Vice President of Information Technology
Alan Braswell, Jr................................ 43 Director
Fred A. Breidenbach.............................. 54 Director
Jeffrey W. Goettman.............................. 42 Chairman of the Board and Director
Douglas P. McCormick............................. 32 Director
Jose Medeiros.................................... 33 Director
Richard L. Monfort............................... 47 Director
James C. Van Horne............................... 66 Director
John C. Walker................................... 40 Director
29
James K. Bass has served as our Chief Executive Officer and President
and as a director since May 2001 and as EFTC's Chief Executive Officer since
July 2000. From 1996 to June 2000, Mr. Bass was a senior vice president of Sony
Corporation, a company engaged in the development, design, manufacture and sale
of various kinds of electronic equipment, instruments and devices for consumer
and professional markets. Prior to that, Mr. Bass spent 15 years in various
manufacturing management positions at the aerospace group of General Electric
Company, a company engaged in the development, manufacturing and marketing of a
wide variety of products for the generation, transmission, distribution,
control, and utilization of electricity. Mr. Bass also serves as a director of
TTM Technologies, Inc., a provider of time-critical, one-stop manufacturing
services for highly complex printed circuit boards which is also an affiliate of
Thayer Capital Partners.
John W. Briant has served as one of our Vice Presidents since February
2002. Mr. Briant served as EFTC's Vice President of Material and Logistics
from October 1999 to February 2002. Mr. Briant served as the Director of Process
and Quality Management since joining the company from July 1998 to September
1999. Prior to joining EFTC, Mr. Briant held various management, procurement,
and engineering positions at AlliedSignal from 1993 to 1998 and was responsible
for the development of their corporate supply base for Electronic Manufacturing
Services and Printed Wiring Boards. Prior to that, he held engineering positions
with Honeywell's Business and Commuter Aviation Division, a manufacturer of
aerospace products and services.
Michael Eblin has served as one of our Vice Presidents since February
2002. Mr. Eblin served as the Senior Vice President of Operations of EFTC from
July 2000 to February 2002. From 1995 to June 2000, Mr. Eblin was Director of
Operations of Sony Corporation. Prior to that, Mr. Eblin held various management
positions in the Electronics Controls division of United Technologies and Hughes
Electronics, part of General Motors Corporation, an automobile manufacturer and
communications systems and financial services provider.
R. Michael Gibbons has served as one of our Vice Presidents since
February 2002. Mr. Gibbons served as the President and Chief Executive Officer
of K*TEC from May 2000 to February 2002. From January 1998 to May 2000, Mr.
Gibbons served as Executive Vice President and General Manager of K*TEC and from
February 1997 to January 1998 as Corporate Quality Director of K*TEC. From July
1984 to February 1997, Mr. Gibbons worked in various capacities in the
electronics manufacturing industry at Schlumberger Oilfield Services.
Oscar A. Hager has served as our Vice President of Human Resources
since February 2002. Mr. Hager served as EFTC's Vice President of Human
Resources from November 2000 to February 2002. From April 1999 to October 2000,
Mr. Hager was EFTC's Director of Human Resources for Southwest Commercial
Operations. Prior to joining EFTC, Mr. Hager spent fifteen years with
Honeywell's Commercial Aviation group, a manufacturer of commercial avionics
equipment, in various human resource management capacities. Prior to joining
Honeywell, Mr. Hager held various human resource positions in the aerospace
industry.
Peter W. Harper has served as our Chief Financial Officer and Secretary
since May 2001. Mr. Harper served as the Chief Financial Officer of EFTC since
July 2000. From 1996 to June 2000, Mr. Harper served as Vice President of
Finance at Iomega Corporation, a company that designs, manufactures and markets
personal and professional storage solutions for users of personal computers and
consumer electronics devices. Prior to that, Mr. Harper spent 12 years in
various management positions at General Electric Company.
John H. Kulp has served as our Vice President of Sales and Marketing
since February 2002. Mr. Kulp served as the Vice President of Sales and
Marketing of EFTC from December 2001 to February 2002. From October 1999 to
August 2001, Mr. Kulp served as Vice President of Sales at FlexTek Incorporated,
a supplier of electromechanical subassemblies. From 1979 to October 1999, Mr.
Kulp served in various capacities, most recently as regional sales manager, at
AMP Inc., a supplier of electrical and electronic connections and
interconnection systems.
Kevin Sauer has served as our Vice President of Information Technology
since February 2002. Mr. Sauer served as Vice President of Information
Technology of K*TEC from May 2001 to February 2002. From May 1997 to April 2001,
Mr. Sauer held various management and information technology-related positions
with K*TEC. From November 1993 to May 1997, Mr. Sauer served in various
capacities at Schlumberger, most recently as a Quality Assurance Manager.
30
Allen S. Braswell, Jr. has served as a director since October 2001. Mr.
Braswell has engaged in private investment activities as his principal
occupation since December 2000. From September 1999 until such time, Mr.
Braswell served as President of Jabil Global Services, a subsidiary of Jabil
Circuit, Inc. engaged in electronic product service and repair, that was
purchased by EFTC from affiliates of Mr. Braswell in September 1997 and sold to
Jabil Circuit in September 1999. Mr. Braswell also served as President of the
predecessors of Jabil Global Services since October 1996.
Fred A. Breidenbach has served as a director since October 2001. Mr.
Breidenbach has served as the principal of FA Breidenbach & Associates, LLC, a
management consulting firm providing services to the aerospace industry, since
November 1997. From April 1993 until July 1997, Mr. Breidenbach served as
President and Chief Operating Officer of Gulfstream Aerospace Corporation, a
private aircraft manufacturing company (now a subsidiary of General Dynamics).
Jeffrey W. Goettman has served as our Chairman of the Board and a
director since May 2001. Mr. Goettman has served as a Managing Partner of Thayer
Capital Partners, a private equity investment company, since April 2001. Mr.
Goettman joined Thayer Capital Partners in February 1998. From February 1994 to
February 1998, Mr. Goettman served as a Managing Director and founder of the
electronic manufacturing services group at Robertson Stephens & Co., Inc., an
investment banking firm. Mr. Goettman also serves as Chairman of the Board and a
director of TTM Technologies, Inc.
Douglas P. McCormick has served as a director since October 2001. Mr.
McCormick has served as a Managing Director of Thayer Capital Partners since
January 2001 and was a Vice President of that company since January 1999. From
June 1997 to January 1999, Mr. McCormick served as an associate at Morgan
Stanley & Co. Incorporated, an investment banking firm. From September 1995 to
June 1997, Mr. McCormick attended Harvard Business School. Mr. McCormick also
serves as a director of TTM Technologies, Inc.
Jose S. Medeiros has served as a director since October 2001. Mr.
Medeiros has been a Partner in Blum Capital Partners, L.P., a San
Francisco-based private equity and strategic block investment firm, since August
2000 and Vice President since August 1998. From June 1996 to August 1998, Mr.
Medeiros served as a Vice President in the Technology Mergers & Acquisitions
group of Robertson Stephens & Company. From January 1990 to June 1996, Mr.
Medeiros served as an Associate at McKinsey & Company.
Richard L. Monfort has served as a director since October 2001. Mr.
Monfort has been engaged in private investment activities as his principal
occupation since June 1995. From July 1989 to June 1995, Mr. Monfort served as
President and Chief Operating Officer of ConAgra Red Meat Companies, a division
of ConAgra Foods Inc. engaged in beef, pork and lamb production. Mr. Monfort
also serves as a director of Famous Dave's of America, Inc., an owner and
operator of restaurants.
James C. Van Horne has served as a director since October 2001. Mr. Van
Horne has served as the A.P. Giannini Professor of Finance at the Stanford
University Graduate School of Business since 1979, and has taught at such
institution since 1965. Mr. Van Horne also serves as a director of United
California Bank, Montgomery Street Income Securities, Inc. (an investment
company), and Bailard Biehl & Kaiser Fund Group (a family of five mutual funds).
John C. Walker has served as a director since May 2001. Mr. Walker has
been a Partner with BLUM Capital Partners since April 1997. From 1992 until
April 1997, Mr. Walker served as the Vice President of PEXCO Holdings, Inc., a
private investment holding company. Mr. Walker also serves as a director of
Smarte Carte, Inc., a company providing products and services to travelers to
efficiently store or move their belongings, and Playtex Products, Inc., a
manufacturer and distributor of a diversified portfolio of consumer and personal
products.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
paid by EFTC or K*TEC for the fiscal years ended December 31, 2001, 2000, and
1999 to our Chief Executive Officer and each of the four other
31
most highly compensated individuals who now serve as executive officers of
Suntron, as well as their titles with Suntron.
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------------- ------------- --------
OTHER ANNUAL SECURITIES LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION UNDERLYING PAYOUTS COMPEN-
POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)(2) ($) SATION($)
- ------------------- ---- -------- -------- ------------ ------------- -------- ---------
James K. Bass(3) 2001 $300,000 $300,000 -- 13,750 -- $ --
Chief Executive 2000 126,918 135,500 -- 225,000 -- 42,133(4)
Officer and President
John W. Briant 2001 160,000 80,000 -- 3,750 -- --
Vice President 2000 140,950 87,000 -- 30,000 -- 46,124(4)
1999 117,105 -- -- -- -- --
Michael Eblin(3) 2001 200,004 140,000 -- 8,750 -- --
Vice President 2000 74,712 80,125 -- 75,000 -- 38,245(4)
R. Michael Gibbons 2001 198,000 25,000 -- 197,310 -- --
Vice President 2000 220,000 100,000 -- -- -- --
1999 176,764 30,000 -- -- -- --
Peter W. Harper(3) 2001 200,004 100,000 -- 15,000 -- --
Chief Financial 2000 81,827 60,125 -- 37,500 -- 36,463(4)
Officer and Secretary
- -----------------
(1) Except as otherwise provided in this table, no amounts for perquisites and
other personal benefits received by any of the named executive officers
are shown because the aggregate dollar amounts were lower than the
reporting requirements established by the rules of the SEC.
(2) Represents options to purchase shares of Suntron common stock, after
giving effect to the assumption of EFTC and K*TEC options upon the
completion of the combination and the applicable exchange ratios.
(3) Messrs. Bass, Eblin, and Harper joined EFTC in July 2000.
(4) Represents payment to defray moving expenses related to relocation to
Phoenix, Arizona in connection with employment with EFTC.
STOCK OPTION GRANTS
The following table sets forth information concerning the grant of
stock options in 2001 by EFTC and K*TEC to Suntron's Chief Executive Officer and
the other executive officers named in the Summary Compensation Table above.
Neither EFTC nor K*TEC granted any stock appreciation rights in 2001.
32
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE AT
SECURITIES % OF TOTAL GRANT ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE DATE PRICE APPRECIATION FOR OPTION
OPTIONS GRANTED TO OR MARKET TERMS(3)
GRANTED EMPLOYEES IN BASE PRICE VALUE EXPIRATION -----------------------------
NAME (#)(1) FISCAL YEAR(2) ($/SH)(3) ($/SH)(3) DATE 5%($) 10%($)
- ------------------ ---------- -------------- ---------- --------- ---------- ------------- -------------
James K. Bass 13,750 8.4% 10.52 8.50 1/16/11 45,727 158,494
John W. Briant 3,750 2.3% 10.52 8.50 1/16/11 12,471 43,226
Michael Eblin 8,750 5.4% 10.52 8.50 1/16/11 29,099 100,860
R. Michael Gibbons 197,310 28.6% 15.20 15.20 1/26/11 1,886,125 4,779,812
Peter W. Harper 15,000 9.2% 10.52 8.50 1/16/11 49,884 172,902
- -----------------
(1) Represents options to purchase shares of Suntron common stock, after
giving effect to the assumption of EFTC and K*TEC options upon the
completion of the combination and the applicable exchange ratios.
Generally, 50% of the options granted were categorized as A options and
the remaining 50% as B options. Generally, the B options become
exercisable for 20% of the underlying shares on the first anniversary of
the date of grant and for the balance in equal annual installments over
the four-year period thereafter, so long as the executive remains
employed. The A options generally cliff-vest on the eighth anniversary of
the date of grant. However, upon the occurrence of specified events,
including a sale of shares by the majority stockholder or a merger, a
portion of the A options will vest based upon the annual rate of return of
the common stock.
(2) The percentages shown above for Messrs. Bass, Briant, Eblin, and Harper
are based on an aggregate of 163,500 shares of Suntron common stock that
are subject to options that were related to options granted by EFTC to
employees in the year ended December 31, 2001. The percentage shown above
for Mr. Gibbons is based on an aggregate of 684,995 shares of Suntron
common stock that are subject to options issued in replacement of options
granted by K*TEC to its employees in the year ended December 31, 2001.
(3) The exercise prices and market values shown above for Suntron options were
determined by dividing the corresponding exercise prices and market values
for EFTC options granted in 2001 by .25 and by dividing the exercise price
and market value for K*TEC options granted in 2001 by .6577 to adjust for
the exchange ratios in the combination.
(4) Potential realizable value assumes that the stock price increases from the
date of the grant until the end of the option term (10 years) at the
annual rate specified (5% and 10%). The 5% and 10% assumed annual rates of
appreciation are mandated by SEC rules and do not represent our estimate
or projection of the future price of our common stock. We do not believe
that this method accurately illustrates the potential value of a stock
option.
STOCK OPTION EXERCISES AND VALUES FOR FISCAL 2001
The following table sets forth information with respect to Suntron's
Chief Executive Officer and the executive officers named in the Summary
Compensation Table concerning options exercised in 2001 and unexercised options
held by them as of the end of such fiscal year:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 2001 DECEMBER 31, 2001($)(2)
ACQUIRED ON VALUE ---------------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE(1) UNEXERCISABLE(1) EXERCISABLE UNEXERCISABLE
- ------------------ ----------- -------- -------------- ---------------- ----------- -------------
James K. Bass -- -- 46,375 192,375 -- --
John W. Briant -- -- 18,375 30,375 -- --
Michael Eblin -- -- 8,375 75,375 -- --
R. Michael Gibbons -- -- 39,442 157,768 -- --
Peter W. Harper -- -- 5,250 47,250 -- --
33
- -----------------
(1) The number of Suntron options shown above gives effect to the exchange
ratios in the combination of .25 of a share of Suntron common stock for
each share of EFTC common stock and .6577 of a share of Suntron common
stock for each share of K*TEC common stock.
(2) The closing sales price per share for EFTC common stock as reported by the
Nasdaq National Market on December 31, 2001 was $2.00. The option value is
calculated by multiplying (a) the positive difference, if any, between
$8.00 (which is four times the $2.00 EFTC closing sales price to adjust
for the exchange ratio in combination) and the option exercise price by
(b) the number of shares of common stock underlying the option. K*TEC
common stock was not publicly traded.
EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
James K. Bass, our Chief Executive Officer and President, has entered
into an employment agreement that provides for him to be employed as Chief
Executive Officer for a term ending on December 31, 2003, which term
automatically extends for successive one-year periods until the agreement is
terminated. Mr. Bass' agreement provides for a minimum annual base salary of
$300,000 and incentive-based bonus compensation in an amount determined by the
compensation committee of our board of directors. We may terminate his
employment agreement with or without cause. In the case of a termination without
cause, however, we must continue to pay Mr. Bass' base salary and prorated bonus
compensation for a period of one year from the date of termination.
R. Michael Gibbons, one of our Vice Presidents, has entered into an
employment agreement that provides for an initial term that ended on March 9,
2002, but has been extended until the agreement is terminated by Mr. Gibbons or
Suntron. Mr. Gibbons' agreement provides for a minimum annual base salary of
$220,000. Suntron may terminate his employment agreement with or without cause.
In the case of a termination without cause, Suntron must continue to pay Mr.
Gibbons' base salary and prorated bonus compensation for a period of one year
from the date of termination. In the case of a termination with cause, however,
Suntron must continue to pay Mr. Gibbons' base salary for a period of six
months.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to our common
stock beneficially owned as of March 1, 2002 by (a) each person known by us to
own beneficially more than five percent of our outstanding common stock, (b)
each of our directors, (c) each of our executive officers, and (d) all of our
directors and executive officers as a group.
SHARES BENEFICIALLY OWNED
------------------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT (2)
- ----------------------------------------------- --------------- ---------------
Thayer-Blum Funding III, L.L.C.(3) 24,582,191 89.7%
James K. Bass(4) 46,375 *
Allen S. Braswell, Jr.(5) 223,075 *
Fred A. Breidenbach(6) 4,500 *
Jeffrey W. Goettman(7) 24,582,191 89.7%
Douglas P. McCormick(7) 24,582,191 89.7%
Jose S. Medeiros(7) 24,582,191 89.7%
Richard L. Monfort(8) 110,097 *
James C. Van Horne(9) 3,350 *
John C. Walker(7) 24,582,191 89.7%
John W. Briant(10) 18,375 *
James A. Doran(11) 22,967 *
Michael Eblin(12) 8,375 *
R. Michael Gibbons(13) 19,731 *
Oscar A. Hager(14) 8,750 *
Peter W. Harper(15) 5,250 *
John H. Kulp -- *
Kevin Sauer (16) 3,288 *
All directors and executive officers as a group
(17 persons)(7)(17) 25,056,323 90.9%
34
- -----------------
* Represents less than 1% of our outstanding common stock.
(1) Except as otherwise indicated, the address of each person listed on the
table is 2501 West Grandview Road, Phoenix, Arizona 85023.
(2) We have determined beneficial ownership in accordance with the rules of
the Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, we have included the shares of common stock subject to options and
convertible securities held by that person that are currently exercisable
or convertible or will become exercisable or convertible within 60 days
after March 1, 2002, but we have not included those shares for purposes of
computing percentage ownership of any other person. We have assumed unless
otherwise indicated that the persons and entities named in the table have
sole voting and investment power with respect to all shares beneficially
owned, subject to community property laws where applicable. Beneficial
ownership is based on 27,414,388 shares of our common stock outstanding as
of March 1, 2002.
(3) Thayer-Blum Funding III, L.L.C. is owned as follows: 59.4% by Thayer
Equity Investors IV, L.P., 0.4% by TC Manufacturing Holdings, L.L.C.
0.2% by TC KCo, L.L.C., 34.4% by Blum Strategic Partners, L.P., and 5.6%
by Blum (K*TEC) Co-Investment Partners, L.P.
TC Manufacturing Holdings, L.L.C. is controlled by limited liability
companies, the managing members of which are Frederick Malek, Carl
Rickersten and Paul Stern.
Thayer Equity Investors IV, L.P. is controlled by a limited liability
company, the managing members of which are Frederick Malek and Carl
Rickersten.
TC KCo, L.L.C. is controlled by a limited liability company, the managing
members of which are Frederik Malek and Carl Rickertsen.
Blum Strategic Partners, L.P. is controlled by a limited liability
company, a managing member of which is Richard C. Blum.
Blum (K*TEC) Co-Investment Partners, L.P. is controlled by a limited
liability company, a managing member of which is Richard C. Blum.
Messrs. Goettman and McCormick, both directors of ours, are managing
directors of the limited liability company that controls Thayer Equity
Investors IV, L.P. Messrs. Walker and Medeiros, both directors of ours,
are members of the general partner of Blum Strategic Partners, L.P.
The address of Thayer-Blum Funding III, L.L.C. is 1455 Pennsylvania
Avenue, N.W., Suite 350, Washington, D.C. 20004.
(4) Consists of 46,375 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(5) Includes 37,520 shares beneficially owned by the Allen S. Braswell, Jr.
Family Limited Partnership #1; 24,455 shares beneficially owned by the
Allen S. Braswell, Jr. EFTC Limited Partnership, of which Allen S.
Braswell is a general partner; 2,750 shares beneficially owned by the
Allen S. Braswell, Sr. Trust, of which Allen S. Braswell, Sr., Allen S.
Braswell, Jr.'s father, is the trustee; 8,750 shares beneficially owned by
Circuit Test International, L.P., of which Braswell Investment Corporation
("BIC") is a general partner; 136,522 shares beneficially owned by
Braswell GRIT Limited Partnership, of which BIC is a general partner; and
850 shares issuable pursuant to options that are exercisable within 60
days of March 1, 2002. Allen S. Braswell, Jr. is president of BIC.
(6) Includes 750 shares issuable pursuant to options currently exercisable or
exercisable within 60 days of March 1, 2002.
(7) Reflects 24,582,191 shares held by Thayer-Blum. See footnote 3. Messrs.
Goettman, McCormick, Medeiros, and Walker disclaim beneficial ownership of
these securities, except to the extent of any pecuniary interest therein.
(8) Includes 67,875 shares held by the Monfort Family Partnership; 23,168
shares held by a partnership in which Mr. Monfort is the principal
investor; 11,518 shares owned by three of Mr. Monfort's minor children;
and 7,538 shares issuable pursuant to options that are currently
exercisable within 60 days of March 1, 2002.
(9) Includes 850 shares issuable pursuant to options that are exercisable
within 60 days of March 1, 2002.
(10) Consists of 18,375 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
35
(11) Includes 22,875 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(12) Consists of 8,375 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(13) Consists of 19,731 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(14) Includes 8,625 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(15) Consists of 5,250 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(16) Consists of 3,288 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
(17) Includes 142,882 shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days of March 1, 2002.
36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SALE/LEASEBACK TRANSACTION
Richard L. Monfort, currently a member of our board of directors,
entered into a sale/leaseback transaction with EFTC in December 1998 whereby
EFTC sold manufacturing facilities located in Newberg, Oregon and Tucson,
Arizona to Mr. Monfort for $10.5 million. Mr. Monfort leased these manufacturing
facilities back to us for a term of five years with aggregate monthly payments
of $90,000.
ISSUANCE OF SUBORDINATED NOTES AND WARRANTS
Mr. Monfort purchased $15 million in aggregate principal amount of
subordinated notes issued by EFTC 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. EFTC used
the proceeds from these notes to acquire certain assets from Honeywell. In
connection with the issuance of these subordinated notes, EFTC issued warrants
to purchase 500,000 shares of its 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 EFTC of $4.0 million. EFTC prepaid $10.0 million of the
outstanding principal amount of these notes early in December 1997 from the
proceeds of a loan from its senior lender. In connection with such prepayment,
EFTC 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 EFTC. These notes had a
maturity date of March 30, 2000 and provided for interest at a rate of 10%. EFTC
used the proceeds of these notes for general operating purposes. EFTC repaid
$6.9 million in principal amount outstanding under both subordinated notes. In
addition, EFTC 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 March 2000, the
remaining $3.0 million due under the November note agreement was refinanced with
a maturity date of March 30, 2004 and bearing interest at 10%. In June 2001, the
$3.0 million under the November note was repaid in full.
THAYER-BLUM'S RECAPITALIZATION OF EFTC
On March 30, 2000, EFTC completed the first stage of a recapitalization
transaction with Thayer-Blum Funding, L.L.C., whereby EFTC issued to Thayer-Blum
$54 million in senior subordinated exchangeable notes. On July 14, 2000, EFTC
issued to Thayer-Blum an additional $14 million of senior subordinated
exchangeable notes. On August 22, 2000, in connection with the tender offer
described below, these notes were exchanged for a $57,284,850 senior
subordinated convertible note and 14,233 shares of EFTC's Series B convertible
preferred stock.
The recapitalization also involved a tender offer by Thayer-Blum that
was completed on August 22, 2000 for 5,625,000 shares of EFTC's outstanding
common stock at a price of $4.00 per share.
On May 31, 2001, the convertible note and the Series B convertible
preferred stock were converted by Thayer-Blum into an aggregate of 32,226,343
shares of EFTC common stock.
As a result of the recapitalization, the tender offer, the subsequent
conversion of the convertible note and Series B convertible preferred stock into
EFTC common stock, and the recent combination, Thayer-Blum and its affiliates
currently own approximately 90% of our outstanding common stock.
COMBINATION WITH K*TEC
On October 10, 2000, K*TEC Operating Company, L.L.C. (formerly known as
Thayer-Blum Funding II, L.L.C.) acquired all of the issued and outstanding
capital stock of K*TEC Electronics Holding Corporation. Pursuant to the recent
combination of EFTC and K*TEC, each of K*TEC Operating Company and EFTC merged
37
with a separate, wholly owned subsidiary of Suntron, with K*TEC Operating
Company and EFTC continuing as the surviving corporations and wholly owned
subsidiaries of Suntron.
THAYER-BLUM MANAGEMENT FEES
EFTC paid Thayer-Blum affiliates management fees of approximately
$188,000 and $250,000 in 2000 and 2001, respectively.
Thayer-Blum affiliates also currently receive management fees of $1.0
million per year pursuant to the existing management and consulting agreement
with K*TEC. During the period from September 14, 2000 (inception) through
December 31, 2000, K*TEC paid Thayer-Blum affiliates management fees of
$225,000. In connection with the October 10, 2000 acquisition of K*TEC, K*TEC
paid Thayer-Blum affiliates investment advisory fees of $2.3 million. In
connection with the Citicorp credit facility, K*TEC paid Thayer-Blum affiliates
advisory fees of $1.75 million in 2001.
In addition, we paid Thayer-Blum affiliates advisory fees of $750,000
in connection with the recent combination of EFTC and K*TEC.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
(1) Financial Statements and Schedule II are listed in the Index
to Financial Statements on page F-1 of this Report.
Other schedules are omitted because they are not applicable, not
required, or because required information is included in the consolidated
financial statements or notes thereto.
(B) REPORTS ON FORM 8-K
None.
(C) EXHIBITS
EXHIBIT
NUMBER EXHIBITS
- ------ --------
2.1 Amended and Restated Agreement and Plan of Merger, dated as of May 3,
2001, by and among EFTC Corporation, K*TEC Electronics Holding
Corporation, Thayer-Blum Funding II, L.L.C. and the registrant. (1)
3.1 Certificate of Incorporation of the registrant. (1)
3.2 Bylaws of the registrant. (1)
4.1 Specimen Stock Certificate. (1)
10.1 Suntron Corporation 2002 Stock Option Plan. (1)
10.2 Registration Rights Agreement between the registrant and Thayer-Blum.
(1)
10.3 Memorandum of Understanding dated as of December 6, 2000 by and between
Honeywell International, Inc. and EFTC Corporation. (1)
38
10.4 Form of Management and Consulting Agreement by and between Thayer-Blum
Funding, L.L.C. and the registrant. (1)
10.5 Module Supplier Agreement dated as of February 2, 2000 by and between
Applied Materials, Inc. and K*TEC Electronics Corporation. (1)
10.6 Comprehensive Supplier Agreement #305038 dated as of August 3, 1997 by
and between Applied Materials, Inc. and K*TEC Electronics Corporation.
(1)
10.7 Credit Agreement dated as of January 26, 2001 by and among K*TEC
Electronics Corporation and certain of its subsidiaries and Citicorp.
USA, Inc., and the lenders and issuers parties thereto. (1)
10.8 Amendment No. 1 and Waiver to K*TEC Electronics Holding Corporation
Credit Agreement, Guaranty and Pledge and Security Agreement dated as
of November 7, 2001 by and between K*TEC Electronics Holding
Corporation and Citicorp USA, Inc. as sole Lender and as Administrative
Agent. (1)
10.9 Amendment No. 2 to K*TEC Electronics Holding Corporation Credit
Agreement dated as of December 19, 2001 among K*TEC Electronics Holding
Corporation and Citicorp USA, Inc. as sole Lender and as Administrative
Agent.
10.10 Amendment No. 3 to K*TEC Electronics Holding Corporation Credit
Agreement dated as of March 8, 2002 among K*TEC Electronics Holding
Corporation, EFTC Operating Corp., and Citicorp USA, Inc., as
Administrative Agent and sole Lender.
10.11 Employment Agreement dated as of June 23, 2000 by and between James
Bass and EFTC Corporation. (1)
10.12 Employment Agreement dated as of March 9, 2000 by and between Raymond
M. Gibbons and K*TEC Electronics Corporation. (1)
10.13 Lease Agreement dated as of May 10, 1999 by and between Orsett/I-17
L.L.C. and EFTC Corporation. (1)
10.14 Industrial Lease dated December 18, 1998 by and between Buckhorn
Trading Co., LLC and EFTC Corporation. (1)
10.15 Commercial/Industrial Lease dated as of April 1, 2001 by and between
EFTC Corporation and H. J. Brooks, LLC. (1)
10.16 Lease Agreement dated September 5, 2000 by and between Fremont
Industrial Portfolio, Inc. and K*TEC Electronics Corporation. (1)
21 List of Subsidiaries of the registrant.
- ---------------------------------
(1) Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-72992) declared effective February 8, 2002.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUNTRON CORPORATION
Date: April 1, 2002 By: /s/ James K. Bass
-----------------------
James K. Bass
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ---- ----- ----
/s/James K. Bass President, Chief Executive Officer April 1, 2002
- ----------------------------- (Principal Executive Officer), and Director
James K. Bass
/s/Peter W. Harper Chief Financial Officer and Secretary, April 1, 2002
- ----------------------------- (Principal Financial Officer)
Peter W. Harper
/s/James A. Doran Chief Accounting Officer April 1, 2002
- ----------------------------- (Principal Accounting Officer)
James A. Doran
/s/Allen S. Braswell, Jr. Director April 1, 2002
- -----------------------------
Allen S. Braswell, Jr.
/s/Fred A. Breidenbach Director April 1, 2002
- -----------------------------
Fred A. Breidenbach
/s/Jeffrey W. Goettman Director April 1, 2002
- -----------------------------
Jeffrey W. Goettman
/s/Douglas P. McCormick Director April 1, 2002
- -----------------------------
Douglas P. McCormick
/s/Jose S. Medeiros Director April 1, 2002
----------------------------
Jose S. Medeiros
Director April 1, 2002
- -----------------------------
Richard L. Monfort
Director April 1, 2002
- -----------------------------
James C. Van Horne
/s/John C. Walker Director April 1, 2002
- -----------------------------
John C. Walker
40
SUNTRON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
PAGE(S)
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent auditors' report of KPMG LLP F-2
Consolidated balance sheets as of December 31, 2000 and 2001 F-3 to F-4
Consolidated statements of operations for the years ended
December 31, 1999, 2000 and 2001 F-5
Consolidated statements of shareholders' equity for the
years ended December 31, 1999, 2000 and 2001 F-6
Consolidated statements of cash flows for the years ended
December 31, 1999, 2000 and 2001 F-7 to F-8
Notes to consolidated financial statements F-9 to F-28
SUPPLEMENTARY SCHEDULE:
Independent auditors' report of KPMG LLP F-29
Schedule II- Valuation and Qualifying Accounts F-30
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Suntron Corporation:
We have audited the accompanying consolidated balance sheets of Suntron
Corporation (formerly doing business as EFTC Corporation) and subsidiaries as of
December 31, 2000 and 2001, 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, 2001. 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 auditing standards generally
accepted in the United States of America. 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 Suntron
Corporation and subsidiaries as of December 31, 2000 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
Phoenix, Arizona
February 28, 2002, except as to note 12
which is as of March 11, 2002
F-2
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 2001
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and equivalents $43 $14,108
Trade receivables, net of allowance for doubtful
accounts of $1,671 and $1,783, respectively 42,270 16,953
Receivable from sale of assets 500 --
Inventories 82,220 52,613
Prepaid expenses and other 1,380 1,143
--------- ---------
Total Current Assets 126,413 84,817
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Leasehold improvements 4,249 5,801
Buildings and improvements 2,127 2,124
Manufacturing machinery and equipment 15,432 16,243
Furniture, computer equipment and software 13,149 15,372
--------- ---------
Total 34,957 39,540
Less accumulated depreciation and amortization (14,581) (18,348)
--------- ---------
Net Property, Plant and Equipment 20,376 21,192
--------- ---------
INTANGIBLE AND OTHER ASSETS:
Goodwill, net of accumulated amortization of $1,025 and
$1,292, respectively 6,997 6,729
Intellectual property, net of accumulated amortization
of $2,403 and $2,819, respectively 2,585 1,843
Debt issuance costs, net of accumulated amortization of
$811 and $541, respectively 2,470 465
Deposits and other 731 400
--------- ---------
Total Intangible and Other Assets 12,783 9,437
--------- ---------
$159,572 $115,446
========= =========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-3
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 2001
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $39,944 $18,228
Outstanding checks in excess of cash balances 5,471 --
Accrued compensation and benefits 7,463 6,070
Other accrued liabilities 1,498 1,394
--------- ---------
Total Current Liabilities 54,376 25,692
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities:
Banks 28,559 72
Convertible Notes, including accrued interest 59,093 --
Related parties 3,000 --
Other 339 201
--------- ---------
Total Liabilities 145,367 25,965
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 11)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; issued and
outstanding 14,233 shares of Series B Convertible Preferred Stock at
December 31, 2000 14,683 --
Common stock, $.01 par value. Authorized 75,000,000
shares; issued and outstanding 15,933,489 and
49,160,932 shares, respectively 159 492
Additional paid-in capital 93,222 169,782
Settlement obligation to issue 910,000 shares of common
stock at December 31, 2000 2,303 --
Deferred stock compensation cost (280) (205)
Accumulated deficit (95,882) (80,588)
--------- ---------
Total Shareholders' Equity 14,205 89,481
--------- ---------
$159,572 $115,446
========= =========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-4
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
1999 2000 2001
------------ ------------ ------------
NET SALES $221,864 $327,444 $348,025
COST OF GOODS SOLD 229,892 311,485 310,679
------------ ------------ ------------
Gross profit (loss) (8,028) 15,959 37,346
OPERATING COSTS AND EXPENSES:
Selling, general and administrative expenses 25,389 23,926 17,343
Recapitalization and merger transaction costs -- 5,336 1,570
Severance, retention, closure and relocation costs 300 4,579 --
Impairment of long-lived assets 2,822 1,662 --
Goodwill amortization 1,133 267 267
Litigation settlement 6,400 -- --
------------ ------------ ------------
Total operating costs and expenses 36,044 35,770 19,180
------------ ------------ ------------
Operating income (loss) (44,072) (19,811) 18,166
OTHER INCOME (EXPENSE):
Interest expense (6,516) (9,556) (3,431)
Gain (loss) on sale of assets (20,880) 4,369 767
Other, net (55) (15) 99
------------ ------------ ------------
Income (loss) before income taxes (71,523) (25,013) 15,601
INCOME TAX EXPENSE (2,180) -- (307)
------------ ------------ ------------
Net income (loss) $(73,703) $(25,013) $15,294
============ ============ ============
NET INCOME (LOSS) APPLICABLE TO COMMON SHAREHOLDERS:
Net income (loss) $(73,703) $(25,013) $15,294
Accrued dividends related to preferred stock -- (450) (550)
Deemed dividend related to beneficial conversion feature of
preferred stock -- (2,022) --
------------ ------------ ------------
Basic earnings per share computation (73,703) (27,485) 14,744
Accrued dividends related to preferred stock -- -- 550
Interest on convertible debt -- -- 2,217
------------ ------------ ------------
Diluted earnings per share computation $(73,703) $(27,485) $17,511
============ ============ ============
NET INCOME (LOSS) PER SHARE APPLICABLE TO COMMON SHAREHOLDERS:
Basic (4.74) $(1.72) $0.41
============ ============ ============
Diluted $(4.74) $(1.72) $0.36
============ ============ ============
NUMBER OF SHARES USED FOR COMPUTATION:
Basic 15,543,000 15,978,000 35,889,000
============ ============ ============
Diluted 15,543,000 15,978,000 48,656,000
============ ============ ============
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-5
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(DOLLARS IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------ PAID-IN SETTLEMENT
SHARES AMOUNT SHARES AMOUNT CAPITAL OBLIGATION
------ ------ ------ ------ ------- ----------
Balances, December 31, 1998 -- $ -- 15,542,989 $155 $91,990 $--
Stock options exercised -- -- 500 -- 2 --
Net loss -- -- -- -- -- --
------- -------- ---------- ---- --------- -------
Balances, December 31, 1999 -- -- 15,543,489 155 91,992 --
Fair value of warrants issued for
services -- -- -- -- 536 --
Compensation cost related to stock
options granted to employees -- -- -- -- 367 --
Amortization of deferred stock
compensation cost -- -- -- -- -- --
Conversion of exchangeable notes for
preferred stock, net of issuance
costs 14,233 14,233 -- -- (206) --
Common stock issued in lawsuit settlement -- -- 390,000 4 983 --
Obligation to issue common stock in
lawsuit settlement -- -- -- -- -- 2,303
Preferred stock dividend requirement -- 450 -- -- (450) --
Net loss -- -- -- -- -- --
------- -------- ---------- ---- --------- -------
Balances, December 31, 2000 14,233 14,683 15,933,489 159 93,222 2,303
Stock options exercised -- -- 91,100 1 231 --
Amortization of deferred stock
compensation cost -- -- -- -- -- --
Preferred stock dividend requirement -- 550 -- -- (550) --
Conversion of preferred stock to common
stock (14,233) (15,233) 8,462,994 85 15,148 --
Conversion of Convertible Notes to
common stock, net of debt issuance
costs of $1,635 -- -- 23,763,349 238 59,437 --
Issuance of common stock in connection
with lawsuit settlement -- -- 910,000 9 2,294 (2,303)
Net income -- -- -- -- -- --
------- -------- ---------- ---- --------- -------
Balances, December 31, 2001 -- $ -- 49,160,932 $492 $169,782 $ --
======= ======== ========== ==== ========= =======
RETAINED
DEFERRED STOCK EARNINGS
COMPENSATION (DEFICIT) TOTAL
------------ --------- -----
Balances, December 31, 1998 $-- $2,834 $94,979
Stock options exercised -- -- 2
Net loss -- (73,703) (73,703)
----- -------- --------
Balances, December 31, 1999 -- (70,869) 21,278
Fair value of warrants issued for
services -- -- 536
Compensation cost related to stock
options granted to employees (367) -- --
Amortization of deferred stock
compensation cost 87 -- 87
Conversion of exchangeable notes for
preferred stock, net of issuance
costs -- -- 14,027
Common stock issued in lawsuit settlement -- -- 987
Obligation to issue common stock in
lawsuit settlement -- -- 2,303
Preferred stock dividend requirement -- -- --
Net loss -- (25,013) (25,013)
----- -------- --------
Balances, December 31, 2000 (280) (95,882) 14,205
Stock options exercised -- -- 232
Amortization of deferred stock
compensation cost 75 -- 75
Preferred stock dividend requirement -- -- --
Conversion of preferred stock to common
stock -- -- --
Conversion of Convertible Notes to
common stock, net of debt issuance
costs of $1,635 -- -- 59,675
Issuance of common stock in connection
with lawsuit settlement -- -- --
Net income -- 15,294 15,294
----- -------- --------
Balances, December 31, 2001 $(205) $(80,588) $89,481
===== ======== ========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-6
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31,
-----------------------
1999 2000 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (73,703) $ (25,013) $ 15,294
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 7,242 8,415 6,289
Amortization of debt issuance costs 1,147 901 445
Impairment of property, plant and equipment 2,822 1,662 1,329
Severance, retention, closure and relocation costs 319 1,323 (1,541)
Deferred income tax expense 4,534 -- --
Interest on exchangeable and convertible notes -- 5,326 2,217
Provision for excess and obsolete inventories 7,287 5,640 4,710
Provision for uncollectible accounts receivable 5,091 1,033 1,451
Loss (gain) on sale of assets 20,880 (4,369) (767)
Stock-based compensation and services expense -- 297 75
Changes in operating assets and liabilities, net of effects of sale
of business:
Decrease (increase) in:
Trade receivables (338) (17,209) 23,866
Inventories (8,899) (35,612) 24,897
Income taxes receivable (1,981) 2,106 --
Prepaid expenses and other (843) 300 568
Increase (decrease) in:
Accounts payable 19,047 (7,041) (21,716)
Accrued compensation and benefits 3,312 1,970 (212)
Other accrued liabilities 4,210 (7,255) 125
--------- --------- ---------
Net cash provided (used) by operating activities (9,873) (67,526) 57,030
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of cash transferred 32,171 14,392 1,505
Payment of commission on sale of division -- (500) --
Capital expenditures (14,419) (6,210) (7,669)
--------- --------- ---------
Net cash provided (used) by investing activities 17,752 7,682 (6,164)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 153,157 392,902 359,158
Principal payments on long-term debt (154,756) (336,427) (390,645)
Payments for debt issuance costs (589) (2,775) (75)
Increase (decrease) in outstanding checks in excess of cash balances -- 5,471 (5,471)
Proceeds from exercise of stock options and warrants 2 -- 232
Payments under inventory financing arrangement (5,600) -- --
--------- --------- ---------
Net cash provided (used) by financing activities (7,786) 59,171 (36,801)
--------- --------- ---------
Net increase (decrease) in cash and equivalents 93 (673) 14,065
CASH AND EQUIVALENTS:
Beginning of year 623 716 43
--------- --------- ---------
End of year $ 716 $ 43 $ 14,108
========= ========= =========
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-7
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,320 $ 3,571 $ 844
======= ======== =======
Cash received (paid) for income taxes $ 184 $ 2,106 $ (221)
====== ======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of 23,763,349 shares of common stock as a
result of conversion of Convertible Notes $ -- $ -- $ 61,310
======= ======== ========
Issuance of 8,462,994 shares of common stock as a
result of conversion of Convertible Preferred
Stock $ -- $ -- $ 15,233
======= ======== ========
Issuance of preferred stock for exchangeable
notes, net of debt issuance costs of $205 $ -- $ 14,027 $ --
======= ======== ======
Obligation to issue common stock in lawsuit
settlement $ -- $ 2,303 $ --
======= ======= ======
Issuance of shares of common stock in connection
with lawsuit settlement $ -- $ 987 $ 2,303
======= ====== =======
Proceeds from sale of assets placed in escrow
account $ -- $ 500 $ --
======= ====== ======
Stock options granted for deferred compensation $ -- $ 367 $ --
======= ====== ======
Issuance of warrants to purchase common stock for
debt issuance costs $ -- $ 326 $ --
======= ====== ======
Conversion of capital lease for property, plant
and equipment to an operating lease $ 10,240 $ -- $ --
======== ======= ======
The Accompanying Notes Are an Integral Part of These Consolidated Financial
Statements.
F-8
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 2001
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION, NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. Suntron Corporation (the "Company") is a Delaware
Corporation that was formed on May 2, 2001 under the name Express EMS
Corporation. On October 31, 2001, the Company changed its name from Express EMS
Corporation to Suntek Corporation. On January 25, 2002, the Company changed its
name from Suntek Corporation to Suntron Corporation.
As discussed in Note 2, at December 31, 2001, Suntron was a wholly owned
subsidiary of EFTC Corporation ("EFTC"). On February 28, 2002, the mergers
described in Note 2 were completed whereby Suntron became the parent company of
EFTC. EFTC subsequently was merged into a successor Delaware Corporation. The
accompanying consolidated financial statements present the accounts and capital
structure 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. Financial information
related to K*TEC Operating Company, L.L.C. is excluded from these financial
statements as that merger did not close until February 28, 2002.
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.
NATURE OF BUSINESS. Suntron Corporation (the "Company") is an independent
provider of electronic manufacturing services to original equipment
manufacturers. The Company focuses on high-mix solutions that target the
aerospace and defense, semiconductor capital equipment, industrial controls and
instrumentation, medical equipment, networking and telecommunications equipment
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 complete "box-build"
products. High mix manufacturing involves processing printed circuit board
assemblies in small-lots (generally less than 100 assemblies per production run)
in a flexible manufacturing environment. The Company operates in one business
segment and substantially all of its operations are conducted in the United
States.
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.
F-9
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INVENTORIES. Inventories are stated at the lower of cost (weighted average
cost, which approximates the first-in, first-out method) or market. The Company
evaluates inventory on hand, forecasted demand, contractual protections and net
realizable values in order to determine whether an adjustment to the carrying
amount of inventory is necessary. Groups of identifiable inventory are
segregated by customer or category of inventory and the adjustment to carrying
value for such groups are tracked separately. If the Company records a
write-down to reduce the cost of inventories to market, such write-down is not
subsequently reversed. Finished goods and work-in-process inventories include
material, labor and manufacturing overhead.
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 amount of bank
debt approximates fair value due to the variable interest rate. Due to the
complexity of the terms of the Senior Subordinated Convertible Notes described
in Note 4, it was not practicable to estimate the fair value of this financial
instrument.
REVENUE RECOGNITION. The Company recognizes revenue upon shipment of
products and the transfer of title to customers, or when services are provided.
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.
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.
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
For the years ended December 31, 1999, 2000 and 2001, the Company recognized
depreciation and amortization expense of $5,751, $6,444 and $5,605,
respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS. Debt issuance costs are being
amortized over the term of the related debt using the interest method.
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. Goodwill was amortized using the straight-line
method over 30 years. However, see "New Accounting Standards", whereby goodwill
will no longer be amortized effective January 1, 2002. For the years ended
December 31, 1999, 2000 and 2001, the Company recognized amortization expense
related to goodwill and intellectual property of $1,491, $1,971 and $684,
respectively.
F-10
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 measured by a comparison of the carrying amount of an asset to the
undiscounted future net cash flows, excluding interest expense, expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amount of the asset exceeds its fair value. The Company recognized provisions
for impairment of long-lived assets of $2,822, $1,662 and $1,329 for the years
ended December 31, 1999, 2000 and 2001, respectively. These charges primarily
relate to the restructuring and relocation activities discussed in Note 9. The
impairment charge incurred in 2001 is included in cost of good sold since the
assets were previously used in manufacturing operations.
At December 31, 2001, the net carrying value of goodwill of $6,729 relates
to the 1997 acquisition of Current Electronics, which now comprises the
Company's Northwest Division. Since this division is not held for sale, the
Company evaluates the goodwill for impairment by considering historical and
estimated earnings trends for this division. The Company has adopted a policy
that if the unamortized carrying amount of the goodwill exceeds projected
undiscounted cash flows generated by this division before interest, an
adjustment will be recorded to reduce the carrying amount to the net cash flows
discounted at 15%. See "New Accounting Standards" for changes that will be
effective on January 1, 2002, related to accounting for impairment of goodwill.
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.
EARNINGS PER SHARE. Basic Earnings per Share excludes dilution for
potential common shares and is computed by dividing net income or loss
applicable to common shareholders by the weighted average number of common
shares outstanding for the period. For the computation of Basic Earnings per
Share, accrued dividends on preferred stock are deducted to arrive at net income
or loss applicable to common stockholders. 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. For purposes
of the weighted average share calculations, beginning on August 31, 2000 (the
date the court approved the class action lawsuit settlement) the 1,300,000
shares required to be issued in the lawsuit settlement discussed in Note 11 have
been treated as issued and outstanding. For the years ended December 31, 1999
and 2000, Basic and Diluted Earnings per Share were the same since all potential
common shares were antidilutive.
As discussed in Note 7, the calculation of Earnings per Share for 2000
reflects adjustments for a beneficial conversion feature and accrued dividends
for convertible preferred stock that was issued in the third quarter of 2000.
F-11
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the year ended December 31, 2001, Diluted Earnings per Share gives
effect to shares issuable prior to the May 31, 2001 conversion of the Company's
Convertible Notes and Convertible Preferred Stock, using the if-converted
method. Under the if-converted method, it is assumed that conversion occurred at
the beginning of the period, and that the Company would not have been required
to incur interest and dividends on the Convertible Notes and Convertible
Preferred Stock, respectively.
Presented below is the calculation of the number of shares used in the
calculation of Diluted Earnings per Share for the year ended December 31, 2001:
Basic Weighted Average Shares Outstanding 35,889,000
Shares related to Convertible Debt before
conversion 9,413,000
Shares related to Preferred Stock before
conversion 3,352,000
Options and warrants 2,000
---------
Number of Shares Used in Computation 48,656,000
==========
Stock options and warrants for approximately 5,187,000 shares exercisable
at prices ranging from $2.38 per share to $14.31 per share were outstanding at
December 31, 2001 but were not included in the computation of Diluted Earnings
per Share because the exercise price of the options was greater than the average
market price of the Company's common stock during the year ended December 31,
2001.
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 earnings if
the Company had adopted the alternative method under Statement of Financial
Accounting Standards No. 123, which prescribes the use of an option pricing
model to determine the fair value of stock options.
For fixed awards of stock options with pro rata vesting, the Company
utilizes the attribution method described in FASB Interpretation No. 28.
NEW ACCOUNTING STANDARDS. In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement No. 141, Business Combinations and Statement No.
142, Goodwill and Other Intangible Assets. Statement No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 141 also specifies criteria that intangible
assets acquired in a business combination must meet to be recognized and
reported apart from goodwill. Statement No. 142 addresses how intangible assets
that are acquired individually or with a group of other assets (but not those
acquired in a business combination) should be accounted for in financial
statements upon their acquisition. This Statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements.
F-12
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The provisions of Statement No. 141 apply to all business combinations
initiated after June 30, 2001. The provisions also apply to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. The provisions of Statement No. 142 are
required to be adopted by the Company beginning in the first quarter of 2002.
The effect of these Statements on the Company will be the elimination of the
amortization of goodwill which is currently being amortized over 30 years and
the requirement to begin testing goodwill and other intangible assets for
impairment at least on an annual basis. Because of the extensive effort needed
to comply with the adoption of Statements 141 and 142, it is not currently
practicable to estimate the impact of adopting these Statements on the Company's
consolidated financial statements. If such losses are required to be recognized
upon the initial application of these Statements, they would be accounted for as
the cumulative effect of a change in accounting principle.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. This standard requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. This standard is
effective for fiscal years beginning after June 15, 2002, with earlier
application encouraged. Management does not believe the initial application of
Statement 143 will have a significant impact on the Company's consolidated
financial statements.
In October 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which replaces FASB Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The accounting model for long-lived assets to be
disposed of by sale applies to all long-lived assets, including discontinued
operations, and replaces the provisions of APB Opinion No. 30, Reporting Results
of Operations -- Reporting the Effects of Disposal of a Segment of a Business,
for the disposal of segments of a business. Statement 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. Statement 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The provisions of Statement
144 are effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, are to be applied prospectively.
Management does not believe the initial application of Statement 144 will have a
significant impact on the Company's consolidated financial statements.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1999
and 2000 financial statements to conform to the presentation in 2001. These
reclassifications had no effect on the previously reported net loss.
F-13
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2. BUSINESS COMBINATION
On May 3, 2001, EFTC; K*TEC Electronics Holding Corporation, formerly
known as K*TEC Electronics Corporation ("K*TEC"); K*TEC Operating Company,
L.L.C., formerly know as Thayer-Blum Funding II, L.L.C. ("TBF II"); and Suntron
Corporation, a wholly owned subsidiary of EFTC, formerly known as Suntek
Corporation and Express EMS Corporation, ("Suntron"), entered into an Amended
and Restated Merger Agreement (the "Merger Agreement"), providing for, among
other things, the merger of two wholly owned subsidiaries of Suntron with and
into EFTC and TBF II, respectively.
K*TEC was a privately held electronic manufacturing services company based in
Sugar Land, Texas. K*TEC was 100% owned by TBF II, an affiliate of Thayer-Blum
Funding L.L.C. ("TBF"), EFTC's principal shareholder. TBF owned approximately
77% of the outstanding common stock of EFTC. A special committee comprised of
EFTC's independent directors negotiated the terms of the Merger Agreement on
behalf of the minority shareholders of EFTC. On February 28, 2002, EFTC's
shareholders voted in favor of the business combination and the closing occurred
on that date.
In connection with the signing of the Merger Agreement, EFTC entered into
a stockholder agreement, as amended (the "Stockholder Agreement"), with TBF, TBF
II and Suntron that required TBF to convert the Senior Subordinated Convertible
Notes described in Note 4, and the Series B Preferred Stock discussed in Note 7,
into EFTC common stock on or before May 31, 2001. These conversions resulted in
the issuance of an aggregate of 32,226,343 additional shares of common stock to
TBF. Pursuant to the Stockholder Agreement, TBF agreed to vote all its shares of
EFTC's common stock in favor of the business combination.
Under the terms of the Amended and Restated Merger Agreement, Suntron
formed two new wholly owned subsidiaries, which merged with and into EFTC and
TBF II, respectively. EFTC subsequently was merged into a successor Delaware
corporation. Accordingly, on February 28, 2002 EFTC's successor and TBF II
became wholly owned subsidiaries of Suntron. Suntron's common stock is traded on
the Nasdaq National Market under the trading symbol "SUNT". Based upon the
Amended and Restated Merger Agreement's exchange ratios, the owner of TBF II
received approximately 55% of Suntron's outstanding capital stock, while EFTC's
former shareholders received approximately 45% of Suntron's outstanding capital
stock. TBF and its affiliates currently own approximately 90% of the outstanding
capital stock of Suntron.
During the year ended December 31, 2001, EFTC incurred transaction costs
of $1,570 related to the merger, primarily related to a fairness opinion and
professional fees. The TBF II merger will be accounted for as a reorganization
of entities under common control in 2002 and, accordingly, the transactions
costs were charged to operations in the period incurred.
F-14
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. INVENTORIES
Inventories are summarized as follows:
DECEMBER 31,
------------
2000 2001
------- -------
Purchased parts and completed sub-assemblies $65,905 $42,869
Work-in-process 14,284 6,255
Finished goods 2,031 3,489
------- -------
$82,220 $52,613
======= =======
For the years ended December 31, 1999, 2000 and 2001, the Company recognized
charges to reflect excess and obsolete inventories of $7,287, $5,640 and $4,710,
respectively.
4. DEBT FINANCING
Long-term debt consists of the following:
DECEMBER 31,
------------
2000 2001
---- ----
Note payable to bank group under revolving line of
credit, interest at the prime rate plus 0.5%
(10.0% and 5.25% at December 31, 2000 and 2001,
respectively), collateralized by substantially all
assets, due March 2003 $28,559 $72
Senior Subordinated Convertible Notes, interest at
8.875%, unsecured, due June 2006 59,093 --
Subordinated note payable to entity controlled by a
director, interest at 10.0%, unsecured, due March 2004 3,000 --
------- ---
Total $90,652 $72
======= ===
REVOLVING LINE OF CREDIT. 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. Total borrowings are
subject to limitation based on a percentage of eligible accounts receivable and
inventories, 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. The credit agreement also
limits or prohibits the Company from paying dividends, incurring additional
debt, selling significant assets, or merging with other entities without the
consent of the lender. At December 31, 2001, the borrowing base calculation
supported borrowings up to $26,557.
On February 28, 2002, the combination of EFTC and K*TEC was completed, and
EFTC and K*TEC became wholly owned subsidiaries of Suntron. The credit facility
with Bank of America, N.A. was repaid and the Company is now a party to the
credit facility with Citicorp USA that K*TEC entered into in January 2001. This
amended credit facility provides for a revolving line of credit of up to $75.0
million, maturing in February 2005. Borrowings under the amended credit facility
bear interest at the prime rate plus 2.00% for "Base Rate" borrowings and the
LIBOR rate plus 3.25% for "LIBOR Rate" borrowings. Total borrowings are subject
to limitation based on a percentage of eligible accounts receivable,
inventories, real estate, and equipment. The credit agreement requires
compliance with certain financial and non-financial covenants. The credit
agreement also limits or prohibits the Company from paying dividends, incurring
additional debt, selling significant assets, or merging with other entities
without the consent of the lenders. Substantially all of the Company's assets
are pledged as collateral for outstanding borrowings.
F-15
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RECAPITALIZATION. On March 30, 2000, the Company completed the first stage
of a recapitalization transaction with Thayer-Blum Funding, L.L.C. ("Thayer-Blum
Funding"), an entity formed by affiliates of Thayer Capital Partners ("Thayer")
and Blum Capital Partners ("Blum"). The first stage of the recapitalization
involved the issuance of a total of $54,000 in Senior Subordinated Exchangeable
Notes (the "March Exchangeable Notes"), which was closed on March 30, 2000. On
July 14, 2000, the Company issued an additional $14,000 of Senior Subordinated
Exchangeable Notes (the "July Exchangeable Notes") to Thayer-Blum Funding in the
second stage of the transaction. As described below, on August 23, 2000, the
March and July Exchangeable Notes were exchanged for the Senior Subordinated
Convertible Notes (the "Convertible Notes") and the Series B Convertible
Preferred Stock (the "Series B Preferred Stock"), respectively. The
recapitalization also involved a tender offer by Thayer-Blum Funding that was
completed on August 23, 2000 for 5,625,000 shares of the Company's outstanding
common stock at a price of $4.00 per share. Upon completion of the final stage
of the recapitalization, Thayer-Blum Funding obtained the right to designate a
majority of the members of the Company's board of directors and has the right to
approve any significant financings, acquisitions and dispositions.
The March and July Exchangeable Notes initially provided for an interest
rate of 15% and were accompanied by warrants to purchase 3,093,154 shares of the
Company's common stock at an exercise price of $.01 per share. However, since
shareholders approved the issuance of the Convertible Notes and the Series B
Preferred Stock and the tender offer was consummated, the warrants never became
exercisable and expired. Accordingly, no value was assigned to the warrants in
the accompanying consolidated financial statements.
Upon receipt of shareholder approval, the March Exchangeable Notes were
exchanged for the Convertible Notes. The Convertible Notes provide for interest
at 8.875%, payable in kind, and were convertible into the Company's common stock
at $2.58 per share, subject to adjustment. As described in Note 7, the July
Exchangeable Notes were exchanged for Series B Preferred Stock. As described in
Note 2, in May 2001 the outstanding principal and accrued interest related to
the Convertible Notes was converted into 23,763,349 shares of common stock, and
the Series B Convertible Preferred Stock was converted into 8,462,994 shares of
common stock, for total conversions into 32,226,343 shares of common stock.
5. INCOME TAXES
Income tax benefit (expense) for the years ended December 31, 1999, 2000
and 2001, is comprised of the following:
1999 2000 2001
---- ---- ----
Current:
Federal $ 2,370 $ -- $(257)
State (16) -- (50)
------- -------- -----
Total current 2,354 -- (307)
------- -------- -----
Deferred:
Federal (4,039) -- --
State (495) -- --
------- -------- -----
Total deferred (4,534) -- --
------- -------- -----
Income tax expense $(2,180) $ -- $(307)
======= ======== =====
F-16
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Actual income tax expense for the years ended December 31, 1999, 2000 and
2001 differs from the amounts computed using the federal statutory tax rate of
34%, as follows:
1999 2000 2001
---- ---- ----
Income tax benefit (expense) at the statutory rate $ 24,318 $ 8,505 $(5,304)
Benefit (expense) resulting from:
State income taxes 2,146 -- (515)
Amortization of non-deductible goodwill (135) (91) (100)
Decrease (increase) in valuation allowance (28,462) (8,250) 5,734
Other, net (47) (164) (122)
-------- ------- -------
Income tax expense $ (2,180) $ -- $ (307)
======== ======= =======
At December 31, 1999, 2000 and 2001, the tax effects of temporary
differences that give rise to significant deferred tax assets and liabilities
are presented below:
1999 2000 2001
---- ---- ----
DEFERRED TAX ASSETS:
Federal net operating loss carryforwards $ 11,775 $ 24,224 $ 20,787
State net operating loss carryforwards 900 5,823 6,995
Inventories 6,943 7,741 6,968
Intangible assets 696 3,612 3,300
Allowance for doubtful accounts receivable 1,890 719 829
Accrued compensation, benefits and severance 558 2,039 1,219
Impairment of property, plant and equipment 844 830 350
Provision for settlement of litigation 2,368 -- --
Deferred liability on sale of division 925 -- --
Other 3,186 3,244 2,298
-------- -------- --------
Total deferred tax assets 30,085 48,232 42,746
Less valuation allowance (28,462) (45,888) (40,154)
-------- -------- --------
Net deferred tax assets $ 1,623 $ 2,344 $ 2,592
======== ======== ========
DEFERRED TAX LIABILITIES:
Accelerated depreciation and other basis
differences for property, plant and equipment $ (1,001) $ (2,020) $ 2,249
Amortization of intangible assets (622) (324) 343
-------- -------- --------
Total deferred tax liabilities $ (1,623) $ (2,344) $ 2,592
======== ======== ========
At December 31, 2001, the Company has a net operating loss carryforward
for Federal income tax purposes of approximately $52,000. If not previously
utilized, this carryforward will expire in 2019 through 2021. At December 31,
2001, substantially all of this net operating loss carryforward is subject to
limitation of use, whereby approximately $3,600 becomes available each year
through 2015, as a result of the changes in ownership that occurred in 2000.
F-17
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
6. STOCK-BASED COMPENSATION
WARRANTS. At December 31, 2001, the Company has warrants outstanding for
614,066 shares of common stock at an exercise price of $2.56 per share. If not
previously exercised, these warrants expire in December 2003. At December 31,
2001, the Company also has warrants outstanding for 13,720 shares of common
stock at an exercise price of $2.92 per share. If not previously exercised,
these warrants expire in March 2002. The amounts shown for these warrants have
been adjusted based on the anti-dilution provisions of the warrant agreements.
All of the above warrants were granted to financial advisors in connection
with the recapitalization discussed in Note 4. As required by Statement of
Financial Accounting Standards No. 123, the Company estimated the fair value of
these warrants using the Black-Scholes model. The assumptions for valuation of
the warrants provided for volatility of 96%, a risk-free interest rate of 5.6%,
and an expected life of 2.7 years, which resulted in a valuation of $536, of
which $210 was charged to operations in 2000 and $326 was recorded as debt
issuance costs.
STOCK OPTIONS. The Company has three stock option plans. The Equity
Incentive Plan was adopted in 1997 and 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 provides that options may be granted for a maximum of 4,495,000 shares of
common stock under this plan. 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. Effective
December 31, 2000, the Company's Board of Directors agreed to accelerate vesting
of all outstanding options under this plan, subject to continued employment and
other terms of this plan. The acceleration of vesting resulted in a new
measurement date but a compensation charge was not required since the options
did not have any intrinsic value on the new measurement date. On December 31,
2000, the market price of the Company's common stock was $1.13 and the weighted
average exercise price of the stock options was $5.42 per share. At December 31,
2001, approximately 3,109,000 shares were available for grant under the Equity
Incentive Plan.
The Non-employee Directors Plan was adopted in 1993 and provides for
options to acquire shares of common stock to members of the Board of Directors
who are not also employees. Options for a maximum of 300,000 shares may be
granted under this plan, and the options generally vest over a 4-year period. At
December 31, 2001, approximately 272,000 shares are available for grant under
the Directors Plan.
In August 2000, the Company's shareholders approved the 2000 Stock Option
Plan, which provides that options for 5,000,000 shares of common stock may be
granted under this plan. This plan provides for the grant of incentive and
non-qualified options to employees, directors and consultants of the Company. At
December 31, 2001, 1,847,000 shares were available for grant under the 2000
Stock Option Plan.
At December 31, 2001, the Company also has nonqualified stock options
outstanding for 273,369 shares. Effective December 31, 2000, the Company's Board
of Directors agreed to accelerate vesting of these options, subject to continued
employment and other terms of the options. The acceleration of vesting resulted
in a new measurement date but a compensation charge was not required.
F-18
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following summarizes activity related to all stock options for
the years ended December 31, 1999, 2000 and 2001:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
OUTSTANDING, DECEMBER 31, 1998 2,563,627 $7.01
Granted 1,222,263 4.13
Exercised (500) 3.38
Canceled (650,331) 7.59
---------
OUTSTANDING, DECEMBER 31, 1999 3,135,059 5.77
Granted 2,797,015 2.62
Canceled (1,576,332) 5.76
-----------
OUTSTANDING, DECEMBER 31, 2000 4,355,742 3.78
Granted 714,000 2.70
Exercised (91,100) 2.59
Canceled (403,084) 4.34
---------
OUTSTANDING, DECEMBER 31, 2001 4,575,558 3.59
=========
The following table summarizes information about stock options outstanding
at December 31, 2001:
STOCK OPTIONS OUTSTANDING
-------------------------
EXERCISE PRICES REMAINING STOCK OPTIONS EXERCISABLE
--------------- CONTRACTUAL -------------------------
WEIGHTED LIFE NUMBER OF WEIGHTED AVERAGE NUMBER OF
RANGE AVERAGE (YEARS) SHARES EXERCISE PRICE SHARES
----- ------- ------- ------ -------------- ------
$1.84 to $ 2.75 $ 2.63 7.6 3,148,000 $ 2.62 672,100
$2.85 to $ 4.13 $ 3.42 6.4 492,204 $ 3.52 394,204
$4.31 to $ 5.75 $ 5.04 5.7 432,000 $ 5.04 430,375
$7.50 to $ 9.88 $ 8.08 4.0 467,354 $ 8.08 467,354
$11.50 to $14.31 $13.53 6.0 36,000 $13.53 35,750
--------- ---------
$1.84 to $14.31 $ 3.59 6.9 4,575,558 $ 4.79 1,999,783
========= =========
F-19
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company uses the intrinsic value method to account for stock-based
compensation. During 2000, the Company granted options with an intrinsic value
of $367 on the measurement date. This amount is reflected as deferred
compensation cost in the accompanying statement of shareholders' equity and
compensation expense is being charged to operations over the vesting period for
the related stock options. If compensation cost had been determined for all
options granted subsequent to 1994, using the fair value method using an option
pricing model, the Company's unaudited pro forma net income (loss) and earnings
per share would have been as follows:
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2001
---- ---- ----
Net income (loss):
As reported $(73,703) $(25,013) $ 15,294
Pro forma $(75,345) $(28,633) $ 14,346
Earnings per share -- basic:
As reported $ (4.74) $ (1.72) $ 0.41
Pro forma $ (4.85) $ (1.95) $ 0.38
Earnings per share -- diluted:
As reported $ (4.74) $ (1.72) $ 0.36
Pro forma $ (4.85) $ (1.95) $ 0.34
The weighted average fair value of options granted for the years ended
December 31, 1999, 2000 and 2001 was $2.45, $1.38 and $1.69, 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 2000 2001
---- ---- ----
Dividend yield -- -- --
Expected volatility 78.0% 98.5% 94.7%
Risk-free interest rate 5.4% 5.5% 4.8%
Expected lives (years) 3.5 5.3 5.3
F-20
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
7. SHAREHOLDERS' EQUITY
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 outstanding share of common stock. 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 15% or more of the Company's common stock by any
person or group (the "Acquirer"). In certain events after the Rights become
exercisable they would entitle each holder, other than the Acquirer, to purchase
for $35 a number of shares of common stock having a market value of twice the
Right's exercise price, or a number of the acquiring company'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.
In connection with the business combination discussed in Note 2 and the
recapitalization discussed in Note 4, the Company's Board of Directors agreed to
amend the Shareholder Rights Plan to exclude the these transactions from being
classified as triggering events and, accordingly, the Rights did not become
exercisable.
PREFERRED STOCK. In connection with the recapitalization discussed in Note
4, the Board of Directors authorized the issuance of a new series of preferred
stock, designated Series B Convertible Preferred Stock (the "Series B Preferred
Stock"). A total of 15,000 shares of Series B Preferred Stock are authorized for
issuance. The Series B Preferred Stock accrues dividends, compounded quarterly,
at 8.875% per annum on the liquidation preference, which is $1,000 per share
plus accrued and unpaid dividends. Each share of Series B Preferred Stock may be
converted into the Company's common stock at a conversion price of $1.80 per
share, subject to adjustment. The Series B Preferred Stock is entitled to vote
on all matters presented to holders of the Company's common stock on an "as
converted" basis.
Upon shareholder approval of the recapitalization on August 22, 2000, the
July Exchangeable Notes held by Thayer-Blum Funding in the original principal
amount of $14,000, plus accrued interest of $233 were exchanged for 14,233
shares of Series B Preferred Stock. Based on the $1.80 per share conversion
price, the shares of Series B Preferred Stock were convertible into 7,907,407
shares of common stock on August 23, 2000. As of December 31, 2000, accrued and
unpaid dividends on the Series B Preferred Stock amounted to $450. In connection
with the business combination discussed in Note 2, all outstanding shares of
Series B Preferred Stock plus accrued dividends were converted into 8,462,994
shares of common stock in May 2001.
The market price of the Company's common stock was in excess of the
conversion price for the July Exchangeable Notes on the commitment date. The
commitment date was July 14, 2000, the date when the investor agreed to the
terms, funded the investment, and completed its performance obligations.
Accordingly, in the calculation of net loss per share applicable to common
shareholders, the Company was required to include a deemed dividend of $2,022
related to the holders of the Series B Preferred Stock due to the existence of a
"beneficial conversion feature" on the commitment date.
F-21
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
8. RELATED PARTY TRANSACTIONS
MANAGEMENT AND CROSS-SERVICES AGREEMENT. On March 27, 2001, K*TEC and the
Company executed a management and cross-services agreement whereby K*TEC and the
Company agreed to provide certain services to each other while they continued to
negotiate the business combination discussed in Note 2. Specifically, the
Company agreed to provide certain management and other services to K*TEC,
including advice and assistance to K*TEC's board in the development and
execution of an operating and business plan and other services customarily
provided by chief executive and chief financial officers. In exchange, K*TEC
agreed to provide certain marketing, sales support and information technology
services to the Company and to pay a $20 monthly fee to the Company in
consideration of the management services provided by the Company to K*TEC.
COMMISSION AGREEMENT. An investment-banking firm, of which a former
director of the Company is the Managing Director, received a fee of $500 as a
representative of the Company for the sale of the Services division discussed in
Note 9.
FINANCING ARRANGEMENTS. As discussed in Note 4, the Company has entered
into debt agreements with entities that are affiliated with directors of the
Company.
LEASING ACTIVITIES. In December 1998, the Company entered into a
sale-leaseback transaction with a director 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 through December 2003, 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
accompanying balance sheets. As discussed in Note 9, the Company subleased the
Tucson facility to Honeywell in February 2000.
CONSULTING AND EMPLOYMENT AGREEMENTS. The Company has entered into
consulting agreements with individuals who are former officers and directors of
the Company. The consulting agreements provide for aggregate monthly payments of
approximately $40 through February 2002. The Company has also entered into an
employment agreement with an officer and director that provides for monthly
payments of $25 until expiration in December 2003. The employment agreement may
be terminated prior to expiration but the Company would generally be required to
pay severance benefits equal to one-year's salary. Additionally, the Company
entered into arrangements with an entity that is owned by a former director
whereby an aggregate of $238 and $191 was paid for services rendered in 1999 and
2000, respectively.
MANAGEMENT FEES. During 2000 and 2001, the Company incurred management
fees of $188 and $250, respectively, for services provided by affiliates of the
Company's majority shareholder.
PURCHASE OF EQUIPMENT. In December 2001, the Company purchased equipment
from K*TEC with an estimated fair market value of $778.
F-22
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. SALE OF ASSETS, FACILITY CLOSURES, RECAPITALIZATION AND RELOCATION ACTIVITIES
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 Company has also
relocated its corporate headquarters to improve efficiency and control costs,
and has completed a recapitalization transaction. The aggregate results of
operations (excluding interest expense and income taxes) related to these
activities for the years ended December 31, 1999, 2000 and 2001 are summarized
as follows:
1999 2000 2001
--------- -------- -------
Net sales $ 102,967 $ 11,935 $ --
Cost of goods sold (109,203) 14,040 (1,329)
--------- -------- -------
Gross profit (loss) (6,236) (2,105) (1,329)
Selling, general and administrative (11,372) (2,580) --
Recapitalization and merger transaction
costs -- (5,336) (1,570)
Severance, retention, closure and
relocation costs (300) (4,579) --
Impairment of long-lived assets (2,681) (1,662) --
Goodwill amortization (868) -- --
Gain (loss) on sale of assets (20,712) 4,357 574
Other, net 212 -- --
--------- -------- -------
$ (41,957) $(11,905) $(2,325)
========= ======== =======
Management estimates that approximately $50,000 of the 1999 revenue and
$10,000 of the 2000 revenue relates to customers that agreed to transition the
manufacture of their products to other facilities owned by the Company.
Presented below is a detailed description of the recapitalization transaction
costs and each location that was impacted by significant asset sales, facility
closures and relocation activities:
RECAPITALIZATION AND MERGER COSTS. In connection with the
recapitalization described in Note 4, the Company incurred costs of $5,336 that
were charged to operations for the year ended December 31, 2000. These costs
included due diligence costs for legal, accounting and management consulting
services of $2,130; financial advisory fees of $1,645; costs related to a
Special Meeting of Shareholders and other costs of $811; and a fee paid to
Thayer-Blum Funding of $750.
In connection with the business combination discussed in Note 2, the
Company incurred $1,570 during 2001. These costs include fees related to a
fairness opinion and professional fees related to the preparation of a proxy
statement for the merger. Since this merger will be accounted for as a
reorganization of entities under common control, these costs were charged to
operations in the period in which they were incurred.
HEADQUARTERS RELOCATION. In July 2000, the Company announced plans to
relocate its corporate headquarters from Denver to Phoenix. Accordingly,
management assessed the estimated useful lives of the assets located in Denver
and determined that it was not practical to use certain assets at the Phoenix
location. The Company also reevaluated the carrying value of intellectual
property related to a customer whose business was expected to terminate by the
end of 2000. The aggregate carrying value of the Denver
F-23
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
assets and the intellectual property as of March 31, 2000 was $2,133.
Accordingly, effective April 1, 2000, the estimated useful lives of these assets
were shortened from approximately five years to nine months to coincide with the
expected period that the assets would continue to be used in the business. This
change in estimate resulted in an increase in depreciation and amortization
(included in selling, general and administrative) expense of $1,931 ($.12 per
share) for the year ended December 31, 2000, and the net book value of these
assets was reduced to zero at the end of 2000.
In connection with the Denver headquarters relocation and other changes in
management in 2000, the Company incurred $4,579 for severance, retention,
closure and relocation costs, consisting of $2,299 for severance and retention
costs, $823 for the expected loss on subleasing the Denver facility, $608 for
moving and relocation costs, $538 for recruiting fees, and $311 for other
related costs.
At December 31, 2000, all of these costs had been paid except for $1,181
of severance costs and the $823 provision related to the Denver sublease loss.
Approximately $808 of the remaining severance costs relate to four individuals
who were terminated in 2000 and were paid severance benefits in monthly
installments through December 2001. With respect to the relocation of
headquarters and changes in management, the Company terminated approximately 45
executive and administrative employees and paid $1,118 in termination benefits
in 2000.
At December 31, 2000 the Company recognized a liability of $823 related to
the expected loss on the sublease of the former headquarters facility. This
liability was accrued under Emerging Issues Task Force Issue No. 88-10. During
the year ended December 31, 2001, cash payments of $360 were charged against
this liability, resulting in a balance of $463. The remaining liability for loss
on the sublease is expected to be paid through January 2005 when the Company's
lease expires. This liability is included in other accrued liabilities in the
accompanying consolidated balance sheets.
During 2000, the Company recognized impairment expense related to software
of $1,312, and computer equipment of $100 that the Company decided to abandon in
the relocation of corporate headquarters.
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, resulting in net
proceeds of $12,740. The $500 placed in escrow was paid to the Company in
February 2001.
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 lease commitment. Honeywell has the option to extend the term of the
sublease until December 2003 when the Company's primary lease term expires. The
Tucson facility is currently leased from a director of the Company as discussed
in 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.
Exit costs of approximately $7,300 related to the
F-24
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
closure were recognized in the third quarter of 1999 and approximately $3,931 of
related charges were recognized in the fourth quarter. These aggregate costs and
charges of approximately $11,231 included $700 for severance costs related to
approximately 200 employees whose employment period ended by April 2000, the
unpaid portion of which amounted to $682 at December 31, 1999. Approximately
$400 of severance costs were included in cost of goods sold and approximately
$300 was reflected in severance, retention, closure and relocation costs in
1999. The Company also recognized charges of $3,464 for excess and obsolete
inventories and $3,667 for other items that are included in cost of goods sold
in 1999, a charge of $1,000 for impairment of property and equipment that was
not redeployed to other divisions, and an increase in the allowance for doubtful
accounts of $2,400 that is included in selling, general and administrative
expenses in 1999.
The Company incurred additional charges in 2000 of $1,485 for cost of
goods sold, including $393 for retention and relocation costs. During 2000 the
Company also incurred additional selling, general and administrative expenses of
$649, and $250 for impairment of excess equipment that was held for sale. At
December 31, 2000, the carrying value of the equipment held for sale was $50,
and this equipment was sold in 2001. The closure was substantially complete in
April 2000.
SALE OF SERVICES DIVISION. On September 1, 1999, the Company sold
substantially all of the assets of its Services Division for approximately
$24,900, net of selling costs of $600 and the $2,500 Earn-out Contingency
discussed below. The sale was part of the Company's efforts to improve liquidity
and operating results. 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 original acquisition. In connection with the sale of this division, the
Company also transferred cash of $469 and sold trade receivables of $3,276,
inventories of $3,355, property, equipment and other assets of $4,365, and the
buyer assumed liabilities of $2,452.
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
ended August 31, 2000 related to the division sold were in excess of $4,455
("Target Earnings"), the Company was entitled to an additional payment equal to
three times the difference between the actual earnings and Target Earnings. If
actual earnings were less than Target Earnings, the Company would have been
required to refund an amount equal to three times the difference. The maximum
amount that either party could be required to pay under the EC was $2,500;
accordingly, the Company recorded a liability for $2,500 of the consideration
received in 1999 that was potentially refundable to the buyer, depending on the
outcome of the EC.
Prior to the sale, the Company also recognized $400 for impairment of
abandoned software related to this division, and additional provisions of $893
for inventory and $705 for receivables not transferred to the purchaser.
In October 2000, the purchaser notified the Company that actual earnings
exceeded Target Earnings by $619, resulting in a payment due the Company of
$1,857. Accordingly, the Company recognized a gain of $4,357 in 2000 under the
EC. In the fourth quarter of 2000, the Company notified the purchaser of the
Services Division that the Company disputed the calculation of the EC. In April
2001, the Company entered into a settlement agreement with respect to the EC and
received a final payment of $574, which is included in the gain on sale of
assets in 2001.
F-25
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 related to the closure of $2,391 were incurred during
1999 and the facility was sold in October 1999 for $3,802. Total severance and
salaries of employees performing exit activities of $463 was charged to
operations in 1998, of which $100 was paid in 1998 and $363 was paid in 1999. At
December 31, 1999, all of the restructuring costs had been paid and no accrual
was remaining related to these restructuring activities.
IMPAIRMENT OF LONG-LIVED ASSETS. During 2001, the Company recognized
impairment of materials management software that the Company no longer intends
to use for $305, equipment that will not be used upon relocation of the
Company's Northeast facility for $308, intellectual property of $326 due to a
customer notification that the Company will no longer manufacture the related
products, and $390 for other assets no longer used in the Company's business.
The aggregate charge of $1,329 is included in cost of good sold since the assets
were previously used in manufacturing operations.
SUMMARY OF RESTRUCTURING ACTIVITIES. Some of the charges related to the
closure of facilities discussed above are considered restructuring charges that
were accounted for under Emerging Issues Task Force Issue No. 94-3, which sets
forth rules about when liabilities for employee termination benefits and other
costs should be recognized when commitments are made to exit certain business
activities. Presented below is a summary of such costs that were accrued for the
closures discussed above:
ROCKY
MOUNTAIN SOUTHEAST DENVER
OPERATIONS OPERATIONS HEADQUARTERS TOTAL
---------- ---------- ------------ -----
Balance, December 31, 1998 $ 363 $ -- $ -- $ 363
Severance costs accrued -- 700 -- 700
Severance costs paid (363) (18) -- (381)
----- ----- ------- -------
Balance, December 31, 1999 -- 682 -- 682
Severance costs accrued -- -- 2,299 2,299
Severance costs paid -- (682) (1,118) (1,800)
----- ----- ------- -------
Balance, December 31, 2000 -- -- 1,181 1,181
Severance costs paid -- -- (1,181) (1,181)
----- ----- ------- -------
Balance, December 31, 2001 $ -- $ -- $ -- $ --
===== ===== ======= =======
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, 2000 and
2001, approximately 65%, 74% and 84%, respectively, of the Company's sales were
derived from companies engaged in the aerospace industry. The Company has a
policy to regularly monitor the credit worthiness of its customers and provide
for uncollectible amounts if credit problems arise. Customers may experience
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 which have impacted the Company's profitability in previous years. If
this situation recurs, the Company may experience reduced net sales and
profitability in the future.
F-26
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Sales to significant customers as a percentage of net sales for the years
ended December 31, 1999, 2000 and 2001, were as follows:
1999 2000 2001
---- ---- ----
AlliedSignal, Inc. 46.1% -- --
Honeywell International, Inc. 10.3% 72.7% 82.7%
---- ---- ----
56.4% 72.7% 82.7%
==== ==== ====
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, 1999.
At December 31, 2000 and 2001, approximately 69% and 73%, respectively, of
the Company's net trade receivables were due from Honeywell International, Inc.
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 2007. Lease
expense under all operating leases amounted to $9,471, $10,169 and $8,342 for
the years ended December 31, 1999, 2000 and 2001, respectively. At December 31,
2001, future minimum lease payments for operating leases, net of sublease
rentals, are as follows:
YEAR ENDING DECEMBER 31: TOTAL SUBLEASES NET
2002 $ 6,236 $ 250 $ 5,986
2003 5,269 250 5,019
2004 3,853 250 3,603
2005 2,808 22 2,786
2006 2,769 -- 2,769
After 2006 3,670 -- 3,670
------- ------- -------
$24,605 $ 772 $23,833
======= ======= =======
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, up to a maximum matching contribution of 3% of the employee's
compensation. Additional profit sharing contributions to the plan are at the
discretion of the Board of Directors. During the years ended December 31, 1999,
2000 and 2001, total contributions by the Company to the Plan were approximately
$588, $637 and $1,028, respectively.
LEGAL PROCEEDINGS. In September and October 1998, the Company and certain of
its 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 purported to present claims under federal and
state securities laws, seeking unspecified damages based on alleged misleading
disclosures during the class period.
F-27
SUNTRON CORPORATION AND SUBSIDIARIES
(FORMERLY DOING BUSINESS AS EFTC CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In April 2000, the Company agreed to settle this litigation for
approximately $6,400 and the settlement was recorded as of December 31, 1999.
Under the settlement agreement, the Company transferred $3,100 to the class
settlement fund in April 2000 and agreed to issue a total of 1,300,000 shares of
its common stock to members of the class and their counsel. The estimated fair
value of the 1,300,000 shares of common stock was $3,290. During the third
quarter of 2000, 390,000 of these shares were issued and the remaining 910,000
shares were issued in the fourth quarter of 2001. In addition to the $6,400 of
consideration from the Company, the Company's insurer contributed an additional
$2,900 to the settlement fund. A motion to approve the settlement was approved
by the state court on August 31, 2000. On September 29, 2000, the parties filed
a motion in federal court to dismiss all claims with prejudice.
12. SUBSEQUENT EVENT
On March 11, 2002, the Company purchased substantially all of the assets
of Midwestern Electronics, Inc., a privately held Electronics Manufacturing
Services (EMS) provider. Midwestern focuses on high mix manufacturing services
and provides EMS services and products including printed circuit board assembly,
subassemblies, box build and aftermarket repair services. During the first
quarter of 2002, this acquisition will be accounted for under the purchase
method prescribed in Statement of Financial Accounting Standards No. 141.
13. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Presented below is selected unaudited quarterly financial information:
YEAR ENDED DECEMBER 31, 2000 YEAR ENDED DECEMBER 31, 2001
---------------------------------------------- ---------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-------- -------- -------- --------- --------- -------- -------- --------
Net sales $ 63,526 $ 75,944 $ 86,281 $ 101,693 $ 107,486 $ 97,839 $ 84,084 $ 58,616
Cost of sales 62,197 76,220 80,514 92,554 97,576 86,666 74,922 51,515
-------- -------- -------- --------- --------- -------- -------- --------
Gross profit (loss) 1,329 (276) 5,767 9,139 9,910 11,173 9,162 7,101
-------- -------- -------- --------- --------- -------- -------- --------
SG&A 4,848 8,232 8,903 6,522 4,934 4,527 4,277 3,605
Recapitalization costs 4,874 5 424 33 -- 996 117 457
Impairment of long-lived assets -- 1,662 -- -- -- -- -- --
Goodwill amortization 67 67 67 66 67 67 67 66
-------- -------- -------- --------- --------- -------- -------- --------
Operating income (loss) (8,460) (10,242) (3,627) 2,518 4,909 5,583 4,701 2,973
Interest expense (1,608) (2,780) (2,877) (2,291) (1,906) (1,270) (135) (120)
Gain (loss) on sale of assets (2) (8) 4,361 18 4 734 43 (14)
Other, net (30) 2 14 (1) 3 3 16 77
-------- -------- -------- --------- --------- -------- -------- --------
Income (loss) before taxes (10,100) 13,028 (2,129) 244 3,010 5,050 4,625 2,916
Income tax benefit (expense) -- -- -- -- -- (305) (146) 144
-------- -------- -------- --------- --------- -------- -------- --------
Net income (loss) $(10,100) $(13,028) $ (2,129) $ 244 $ 3,010 $ 4,745 $ 4,479 $ 3,060
======== ======== ======== ========= ========= ======== ======== ========
Net income (loss) per share
applicable to common
shareholders-
Basic $ (.65) $ (.84) $ (.27) $ -- $ .16 $ .16 $ .09 $ .06
======== ======== ======== ========= ========= ======== ======== ========
Diluted $ (.65) $ (.84) $ (.27) $ -- $ .09 $ .12 $ .09 $ .06
======== ======== ======== ========= ========= ======== ======== ========
F-28
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Suntron Corporation:
Under date of February 28, 2002, except as to note 12 which is as of March
11, 2002, we reported on the consolidated balance sheets of Suntron Corporation
(formerly doing business as EFTC Corporation) and subsidiaries as of December
31, 2000 and 2001, 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, 2001, which are included in this Annual Report on Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule included in this Annual Report on 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.
/s/ KPMG LLP
Phoenix, Arizona
February 28, 2002
F-29
SUNTRON CORPORATION AND SUBSIDIARIES
(formerly doing business as EFTC Corporation)
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE -- ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DOLLARS IN THOUSANDS)
ADDITIONS
---------
BALANCE AT CHARGED CHARGED BALANCE AT
BEGINNING TO COSTS & TO OTHER END OF
YEAR ENDED DECEMBER 31, OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------------------- ------- -------- -------- ---------- ----
1999 $ 1,322 $ 5,091 $ -- $ 2,724(1) $ 3,689
2000 3,689 1,033 -- 3,051(1) 1,671
2001 1,671 1,451 -- 1,339(2) 1,783
- -----------
(1) Deductions relate to write-offs.
(2) Deductions consist of write-offs of $675 and recoveries of $664.
F-30
EXHIBIT
NUMBER EXHIBITS
- ------ --------
2.1 Amended and Restated Agreement and Plan of Merger, dated as of May 3,
2001, by and among EFTC Corporation, K*TEC Electronics Holding
Corporation, Thayer-Blum Funding II, L.L.C. and the registrant. (1)
3.1 Certificate of Incorporation of the registrant. (1)
3.2 Bylaws of the registrant. (1)
4.1 Specimen Stock Certificate. (1)
10.1 Suntron Corporation 2002 Stock Option Plan. (1)
10.2 Registration Rights Agreement between the registrant and Thayer-Blum.
(1)
10.3 Memorandum of Understanding dated as of December 6, 2000 by and between
Honeywell International, Inc. and EFTC Corporation. (1)
10.4 Form of Management and Consulting Agreement by and between Thayer-Blum
Funding, L.L.C. and the registrant. (1)
10.5 Module Supplier Agreement dated as of February 2, 2000 by and between
Applied Materials, Inc. and K*TEC Electronics Corporation. (1)
10.6 Comprehensive Supplier Agreement #305038 dated as of August 3, 1997 by
and between Applied Materials, Inc. and K*TEC Electronics Corporation.
(1)
10.7 Credit Agreement dated as of January 26, 2001 by and among K*TEC
Electronics Corporation and certain of its subsidiaries and Citicorp.
USA, Inc., and the lenders and issuers parties thereto. (1)
10.8 Amendment No. 1 and Waiver to K*TEC Electronics Holding Corporation
Credit Agreement, Guaranty and Pledge and Security Agreement dated as
of November 7, 2001 by and between K*TEC Electronics Holding
Corporation and Citicorp USA, Inc. as sole Lender and as Administrative
Agent. (1)
10.9 Amendment No. 2 to K*TEC Electronics Holding Corporation Credit
Agreement dated as of December 19, 2001 among K*TEC Electronics Holding
Corporation and Citicorp USA, Inc. as sole Lender and as Administrative
Agent.
10.10 Amendment No. 3 to K*TEC Electronics Holding Corporation Credit
Agreement dated as of March 8, 2002 among K*TEC Electronics Holding
Corporation, EFTC Operating Corp., and Citicorp USA, Inc., as
Administrative Agent and sole Lender.
10.11 Employment Agreement dated as of June 23, 2000 by and between James
Bass and EFTC Corporation. (1)
10.12 Employment Agreement dated as of March 9, 2000 by and between Raymond
M. Gibbons and K*TEC Electronics Corporation. (1)
10.13 Lease Agreement dated as of May 10, 1999 by and between Orsett/I-17
L.L.C. and EFTC Corporation. (1)
10.14 Industrial Lease dated December 18, 1998 by and between Buckhorn
Trading Co., LLC and EFTC Corporation. (1)
10.15 Commercial/Industrial Lease dated as of April 1, 2001 by and between
EFTC Corporation and H. J. Brooks, LLC. (1)
10.16 Lease Agreement dated September 5, 2000 by and between Fremont
Industrial Portfolio, Inc. and K*TEC Electronics Corporation. (1)
21 List of Subsidiaries of the registrant.
- ---------------------------------
(1) Incorporated by reference to the Registration Statement on Form S-4
(Registration No. 333-72992) declared effective February 8, 2002.