SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
Commission file number: 0-23332
EFTC CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0854616
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9351 Grant Street, Sixth Floor
Denver, Colorado 80229
(Address of principal executive offices)
(303) 451-8200
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ]No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, par value $0.01 15,543,489 shares
----------------------------- -----------------
(Class of Common Stock) (Outstanding at August 8, 2000)
<PAGE>
EFTC CORPORATION
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION Number(s)
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets-
June 30, 2000 and December 31, 1999 3-4
Consolidated Statements of Operations-
Three and Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 2000 and 1999 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 13
Results of Operations 14-18
Liquidity and Capital Resources 18-21
Special Note Regarding Forward-looking Statements 21-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23-24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
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Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
ASSETS June 30, December 31,
2000 1999
----- -----
Current Assets:
<S> <C> <C>
Cash and equivalents $ 309 $ 716
Trade receivables, net of allowance for doubtful
accounts of $1,948 and $3,689, respectively 34,384 26,094
Income taxes receivable - 2,106
Inventories, net 85,878 60,167
Prepaid expenses and other 2,306 2,795
------------------- ------------------
Total Current Assets 122,877 91,878
------------------- ------------------
Property, Plant and Equipment, at cost:
Leasehold improvements 3,775 2,797
Buildings and improvements 2,071 1,172
Manufacturing machinery and equipment 14,307 16,496
Furniture, computer equipment and software 12,121 12,726
------------------- ------------------
Total 32,274 33,191
Less accumulated depreciation and amortization (11,492) (9,614)
------------------- ------------------
Net Property, Plant and Equipment 20,782 23,577
------------------- ------------------
Intangible and Other Assets:
Goodwill, net of accumulated amortization
of $891 and $758, respectively 7,130 7,264
Intellectual property, net of accumulated amortization
of $1,379 and $699, respectively 3,609 4,289
Debt issuance costs, net of accumulated amortization
of $151 and $97, respectively 2,963 460
Inventories, deposits and other 5,582 3,661
------------------- ------------------
Total Intangible and Other Assets 19,284 15,674
------------------- ------------------
$ 162,943 $ 131,129
=================== ==================
</TABLE>
3
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<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Dollars in Thousands, Except Per Share Amounts)
June 30, December 31,
2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ---- ----
Current Liabilities:
<S> <C> <C>
Current maturities of long-term debt - related party $ - $ 5,018
Accounts payable 55,712 46,985
Accrued compensation and benefits 5,465 4,993
Other accrued liabilities 5,769 8,650
------------------- ------------------
Total Current Liabilities 66,946 65,646
Long-term Liabilities:
Long-term debt, net of current maturities:
Related parties 3,000 4,792
Banks 30,813 33,184
Exchangeable Notes 54,000 -
Accrued interest- Exchangeable Notes 2,093 -
Other 7,405 6,229
------------------- ------------------
Total Liabilities 164,257 109,851
------------------- ------------------
Shareholders' Equity (Deficit):
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding 15,543,000 shares 155 155
Additional paid-in capital 92,528 91,992
Accumulated deficit (93,997) (70,869)
------------------- ------------------
Total Shareholders' Equity (Deficit) (1,314) 21,278
------------------- ------------------
$ 162,943 $ 131,129
=================== ==================
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Amounts)
Quarter Ended June 30, Six-months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 75,944 $ 54,692 $ 139,470 $ 109,016
Cost of Goods Sold 76,220 52,833 138,417 101,015
--------- --------- ---------- ----------
Gross profit (loss) (276) 1,859 1,053 8,001
Operating Costs and Expenses:
Selling, general and administrative 8,232 5,174 13,080 10,066
Impairment of long-lived assets 1,662 - 1,662 -
Goodwill amortization 67 391 134 782
Recapitalization transaction costs 5 - 4,879 -
--------- --------- ---------- ----------
Total operating costs and expenses 9,966 5,565 19,755 10,848
--------- --------- ---------- ----------
Operating loss (10,242) (3,706) (18,702) (2,847)
Other Income (Expense):
Interest expense (2,780) (1,334) (4,388) (2,598)
Loss on sale of property, plant and equipment (8) - (10) -
Other, net 2 52 (28) 90
--------- --------- ---------- ----------
Loss before income taxes (13,028) (4,988) (23,128) (5,355)
Income Tax Benefit - 1,996 - 2,034
--------- --------- ---------- ----------
Net loss $ (13,028) $ (2,992) $ (23,128) $ (3,321)
================ ================ ================ ===============
Net Loss Per Share- Basic and Diluted $ (0.84) $ (0.19) $ (1.49) $ (0.21)
================ ================ ================ ===============
Weighted Average Shares Outstanding 15,543,000 15,543,000 15,543,000 15,543,000
================ ================ ================ ===============
</TABLE>
5
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<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-months Ended June 30, 2000 and 1999
(Dollars in Thousands)
2000 1999
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (23,128) $ (3,321)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 4,057 3,370
Amortization of debt issuance costs 625 58
Deferred income tax benefit - (2,052)
Accrued interest on Exchangeable Notes 2,093 -
Provision for excess and obsolete inventories 2,930 68
Provision for doubtful accounts receivable 660 27
Impairment of long-lived assets 1,662 -
Loss on sale of property, plant and equipment 10 -
Fair value of common stock warrants issued for services 210 -
Changes in operating assets and liabilities, excluding
effects of sale of assets:
Decrease (increase) in:
Trade receivables (8,950) (1,299)
Inventories (43,360) 330
Income taxes receivable 2,106 -
Prepaid expenses and other 1,749 (3,337)
Increase (decrease) in:
Accounts payable 1,200 2,427
Accrued compensation and benefits 472 2,643
Other accrued liabilities (1,205) (392)
--------- --------
Net cash used by operating activities (58,869) (1,478)
--------- --------
Cash Flows from Investing Activities:
Proceeds from sale of assets 12,740 -
Payment of commissions related to sale of division (500) -
Capital expenditures (3,322) (8,185)
--------- --------
Net cash provided (used) by investing activities 8,918 (8,185)
--------- --------
Cash Flows from Financing Activities:
Proceeds from long-term debt 213,288 12,533
Principal payments on long-term debt (168,559) (1,750)
Payments for debt issuance costs (2,712) -
Net increase in checks outstanding 7,527 -
Payments under inventory financing arrangement - (1,600)
Proceeds from exercise of stock options - 1
--------- --------
Net cash provided by financing activities 49,544 9,184
--------- --------
Net decrease in cash and equivalents (407) (479)
Cash and Equivalents:
Beginning of period 716 623
--------- --------
End of period $ 309 $ 144
================= =================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Six-months Ended June 30, 2000 and 1999
(Dollars in Thousands)
2000 1999
---- ----
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C>
Cash paid for interest $ 1,906 $ 2,619
================= =================
Refund received for income taxes $ 2,106 $ -
================= =================
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Issuance of warrants to purchase common stock
for debt issuance costs $ 326 $ -
================= =================
Proceeds from sale of assets placed in escrow
account $ 500 $ -
================= =================
Conversion of capital lease for property, plant and
equipment to an operating lease $ - $ 10,240
================= =================
</TABLE>
7
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month and six-month periods ended
June 30, 2000 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2000. The unaudited consolidated financial
statements should be read in conjunction with the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
At June 30, 2000, the Company had outstanding checks in excess of cash balances
of $7,527, which is included in accounts payable in the accompanying balance
sheet.
2. Earnings Per Share
Basic Earnings Per Share excludes dilution for potential common shares and is
computed by dividing net income or loss by the weighted average number of common
shares outstanding for the period. Diluted Earnings Per Share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Basic and Diluted
Earnings Per Share are the same for the three and six-month periods ended June
30, 2000 and 1999, as all potential common share issuances were antidilutive.
3. Inventories
Inventories at June 30, 2000 and December 31, 1999 consist of the following:
2000 1999
---- ----
Purchased parts and completed
subassemblies, net $ 66,353 $ 43,971
Work-in-process 17,592 13,317
Finished goods 1,933 2,879
------------- -------------
$ 85,878 $ 60,167
============= =============
In connection with the long-term supply agreement with Honeywell, the Company
has purchased certain "life time buy" inventories that are expected to be used
over a period of several years Accordingly, at June 30, 2000 and December 31,
1999, the Company classified inventories of approximately $4,800 and $3,100,
respectively, as other assets.
8
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
4. Headquarters Relocation and Change in Estimates
In July 2000, the Company announced plans to relocate its corporate headquarters
from Denver to Phoenix. During the second quarter of 2000, management assessed
the estimated useful lives of the assets located in Denver and determined that
it will not be practical to use certain assets at the Phoenix location. In June
2000, the Company also reevaluated the carrying value of intellectual property
related to a customer whose business will be transitioned to a new location. The
aggregate carrying value of the Denver assets and the intellectual property as
of March 31, 2000 was $2,100. Accordingly, during the second quarter of 2000 the
estimated useful lives of these assets were shortened to coincide with the
expected period that the assets will continue to be used in the business. The
impact of this change in estimate resulted in an increase in depreciation and
amortization expense of $711 ($.05 per share) during the second quarter of 2000.
In connection with the Denver headquarters relocation and other changes in
management, the Company expects to incur up to $4,500 for severance, retention,
moving costs, recruiting fees for new management and employees, and related
costs. During the second quarter of 2000, the Company incurred $1,771 for these
costs, and management estimates that approximately $2,700 of additional costs
will be incurred during the remainder of 2000.
5. Restructuring and Sales of Assets
Since the fourth quarter of 1998, the Company has taken actions to increase
capacity utilization through the closure of two facilities and the sale of
substantially all of the assets at two other divisions. The aggregate operating
results for these divisions, derived from the Company's divisional accounting
records (excluding corporate costs, interest expense and income taxes), for the
three and six month periods ended June 30, 2000 and 1999 are summarized as
follows:
<TABLE>
<CAPTION>
Quarter ended June 30: Six-months ended June 30:
---------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 276 $27,380 $ 11,933 $62,847
Cost of goods sold 996 26,626 13,968 58,156
------------- -------------- ------------ -------------
Gross profit (loss) $(720) $ 754 $ (2,035) $ 4,691
============= ============== ============ =============
Selling, general & administrative $(223) $(1,763) $ (820) $(3,830)
============= ============== ============ =============
Goodwill amortization $ -- $ (324) $ -- $ (648)
============= ============== ============ =============
</TABLE>
Management estimates that approximately $8,000 of the net sales for the six
months ended June 30, 2000 shown above relate to customers who have agreed to
transition the manufacture of their products to other facilities operated by the
Company. Presented below is a description of each division that was impacted by
a sale or restructuring.
9
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
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 $13,240. The Company recognized a $1,200
impairment charge in the fourth quarter of 1999 related to property and
equipment at the Tucson facility.
Southeast Operations. On September 30, 1999, the Company initiated a plan to
consolidate and close its Southeast Operations in Fort Lauderdale, Florida. In
connection with the restructuring, the Company recognized a charge of
approximately $700 for severance costs related to approximately 200 employees
who were terminated by April 2000. During the first quarter of 2000, the Company
recognized charges totaling $950 for retention bonuses, relocation costs and
other closure activities. During the second quarter of 2000, the Company
recognized additional charges of $1,186 related to operations, impairment of
equipment and final closure activities. As of June 30, 2000, the closure of this
facility was complete and all severance and retention payments had been made.
Sale of Services Division. On September 1, 1999, the Company sold its Services
Division for approximately $28,000. In connection with this sale, the purchaser
and the Company agreed to an Earn-out Contingency (the "EC"). Under the EC, if
the earnings for the year ending August 31, 2000 related to this division are in
excess of $4,455 ("Target Earnings"), the Company will be entitled to an
additional payment equal to three times the difference between the actual
earnings and Target Earnings. If actual earnings are less than Target Earnings,
the Company will be required to refund an amount equal to three times the
difference. The maximum amount that either party would be required to pay under
the EC is $2,500; accordingly, the Company has deferred recognition of $2,500 of
the consideration subject to the EC. This amount is included in other accrued
liabilities in the accompanying balance sheets.
Rocky Mountain Operations. In the fourth quarter of 1998, management initiated a
plan to consolidate and close its Rocky Mountain Operations in Greeley,
Colorado. At June 30, 2000, all of the restructuring costs had been paid and no
accrual was remaining related to these restructuring activities.
6. Debt Financing
Refinancing of Debt. On March 30, 2000, the Company entered into a new credit
agreement with Bank of America, N.A. to refinance the Company's revolving line
of credit with the Company's previous lender. The new credit facility provides
for a $45,000 revolving line of credit with a maturity date of March 2003.
Initially, the interest rate is the prime rate plus .5%. Total borrowings are
subject to limitation based on a percentage of eligible accounts receivable and
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. At June 30, 2000, the
outstanding principal balance was $30,813.
On March 30, 2000, the Company also repaid outstanding notes payable in the
aggregate principal amount of $6,810 (net of discount) to a director of the
Company. The Company and the
10
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
director amended the terms of the remaining outstanding debt to provide for a
new unsecured note in the principal amount of $3,000 that bears interest at 10%
and is due March 2004.
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 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, the terms of the March and July
Exchangeable Notes will be modified depending on the outcome of a Special
Meeting of Shareholders to be held on August 22, 2000. The recapitalization also
involves a tender offer for up to 5,625,000 shares of the Company's currently
outstanding common stock at a price of $4.00 per share. Thayer-BLUM Funding
designated two persons who were elected to the Company's board of directors on
March 30, 2000.
The March and July Exchangeable Notes initially provide for an interest rate of
15% and are accompanied by warrants to purchase 3,093,154 shares of the
Company's common stock at an exercise price of $.01 per share. However, upon
shareholder approval of this transaction and consummation of the tender offer
with at least 500,000 shares being purchased, the warrants will not become
exercisable and will expire. Accordingly, no value was assigned to the warrants
since they are never expected to become exercisable.
The March Exchangeable Notes will be exchanged for Senior Subordinated
Convertible Notes ("Convertible Notes") upon receipt of shareholder approval and
consummation of the tender offer for at least 500,000 shares. The Convertible
Notes will provide for interest at 8.875%, payable in kind and may be converted
into the Company's common stock at $2.58 per share, subject to adjustment. The
July Exchangeable Notes will be exchanged for Convertible Preferred Stock
("Convertible Preferred Stock") upon receipt of shareholder approval and
consummation of the tender offer for at least 500,000 shares. The Convertible
Preferred Stock will accrue dividends, compounded quarterly, at 8.875% on the
liquidation preference thereof. The liquidation preference of the Convertible
Preferred Stock will initially be equal to the aggregate principal balance of
the July Exchangeable Notes plus accrued interest. The Convertible Preferred
Stock will be convertible into the Company's common stock at $1.80 per share,
subject to adjustment. Finally, if shareholders approve the transaction and the
tender offer is consummated for at least 500,000 shares, Thayer-BLUM Funding
will have the right to appoint a majority of the members of the Company's board
of directors and will have the right to approve any significant financings,
acquisitions and dispositions.
If shareholders do not approve the transaction or if less than 500,000 shares
are purchased in the tender offer, then the warrants will remain in place. If
shareholders do not approve the transaction, the interest rate on the March and
July Exchangeable Notes will increase to 20%. The maturity date of the March and
July Exchangeable Notes is June 2006. Interest would be compounded quarterly and
will accrue and be added to the principal amount of the Exchangeable Notes or be
payable in additional Exchangeable Notes, at the option of the Company.
11
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<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Summary of Debt. At June 30, 2000 and December 31, 1999, long-term debt consists of the following:
2000 1999
---- ----
<S> <C> <C>
Unsecured Senior Subordinated Exchangeable Notes, interest at 15%,
due June 2006 $ 54,000 $ --
Accrued interest on Exchangeable Notes 2,093 --
Note payable to director, interest at 10%, unsecured, due March
2004 3,000 5,000
Note payable to bank under revolving line of credit, interest
at the prime rate plus .5% (10.0% at June 30, 2000), collateralized
by substantially all assets, due March 2003 30,813 --
Note payable to bank group under revolving line of credit, interest
at the prime rate plus 2.25%, collateralized by substantially all
assets, paid in March 2000 -- 33,184
Note payable to director, interest at LIBOR plus 2%, annual
principal payments of $50, due December 2002, unsecured, net of
discount of $90, paid in March 2000 -- 4,810
-------------- ------------------
Total 89,906 42,994
Less current maturities -- (5,018)
-------------- ------------------
Long-term debt, less current maturities $ 89,906 $ 37,976
============== ==================
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the statements. See
"Special Note Regarding Forward-Looking Statements" below.
General
EFTC Corporation ("EFTC" or the "Company") is a leading independent
provider of high-mix electronic manufacturing services to original equipment
manufacturers (OEMs) in the avionics, medical, communications, industrial
instruments and controls, and computer-related products industries. The
Company's manufacturing services consist of assembling complex printed circuit
boards, cables, electro-mechanical devices, and finished products.
Although management does not believe that the Company's business is
affected by seasonal factors, the Company's sales and earnings typically vary
from quarter to quarter due to a variety of factors. Some of the factors that
impact quarterly results of operations include the level and timing of customer
orders and the mix of turnkey and consignment orders. The level and timing of
orders placed by a customer vary due to the customer's attempts to balance its
inventory, changes in the customer's manufacturing strategy, and variation in
demand for its products due to, among other things, product life cycles,
competitive conditions and general economic conditions. In the past, changes in
orders from customers have had a significant effect on the Company's quarterly
results of operations. Other factors affecting the Company's quarterly results
of operations may include, among other things, the Company's performance under
the long-term supply agreement with Honeywell, price competition, disposition of
divisions and closure of operating units, the ability to obtain inventory from
its suppliers on a timely basis, the Company's level of experience in
manufacturing a particular product, the degree of automation used in the
assembly process, the efficiencies achieved by the Company through managing
inventories and other assets, the timing of expenditures in anticipation of
increased sales, and fluctuations in the cost of components or labor. Therefore,
the Company's operating results for any particular quarter may not be indicative
of the results for any future quarter of the year.
The following discussion and analysis provides information that EFTC's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein, as well as with the consolidated financial
statements, notes thereto and the related management's discussion and analysis
of financial condition and results of operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
13
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
The following table sets forth certain operating data as a percentage
of net sales:
Quarter Ended June 30: Six-months ended June 30:
--------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 100.4% 96.6% 99.2% 92.7%
------------ ----------- ------------- --------------
Gross profit (loss) (0.4%) 3.4% 0.8% 7.3%
Selling, general and administrative 10.8% 9.5% 9.4% 9.2%
Impairment of long-lived assets 2.2% -- 1.2% --
Goodwill amortization 0.1% 0.7% 0.1% 0.7%
Recapitalization transaction costs -- -- 3.5% --
------------ ----------- ------------- --------------
Operating loss (13.5%) (6.8%) (13.4%) (2.6%)
============ =========== ============= ==============
</TABLE>
Quarter Ended June 30, 2000 Compared to 1999
Net Sales. Net sales for the quarter ended June 30, 2000 were $75.9
million compared to $54.7 million for the quarter ended June 30, 1999, which is
an increase of 38.9%. The Company has experienced major changes in its customers
and facilities since the beginning of 1999. At the start of 1999, the Company
had eleven facilities. Six of these facilities were either sold or closed by
June 30, 2000. However, the Company also added facilities in Phoenix and Mexico
during 1999 to support the new business with Honeywell in connection with the
long-term supply agreement entered into during March 1999. Approximately 50% of
the Company's sales for the second quarter of 2000 were pursuant to the
Honeywell agreement. However, this increased revenue under the Honeywell supply
agreement was offset by the loss of revenue from the Services division that was
sold on September 1, 1999, and the Company's Tucson assets that were sold on
February 17, 2000. The Services division and the Tucson assets generated revenue
of $15.7 million in the second quarter of 1999 compared to none in the second
quarter of 2000.
14
<PAGE>
After eliminating sales related to facilities that were either closed
or sold, adjusted net sales for the second quarter of 2000 amounted to $75.9
million compared to $39.0 million for the second quarter of 1999. Substantially
all of this increase of $36.9 million or 94.6% is attributable to sales
generated at the Company's Phoenix location under the long-term supply agreement
with Honeywell.
Gross Profit. The Company's gross profit in the second quarter of 2000
was $0.3 million less than breakeven compared to gross profit of $1.9 million or
3.4% in the second quarter of 1999. This decrease in gross profit relative to
results for the comparable period in 1999 is primarily attributable to the sale
of assets and closure of four divisions as discussed in Note 5 to the financial
statements. The four facilities subject to sale or closure accounted for $0.8
million of gross profit during the second quarter of 1999 compared to a loss of
$0.7 million in the second quarter of 2000. The aggregate impact on gross profit
was approximately $1.5 million between the two quarters. The decrease in gross
profit during the second quarter of 2000 was also a result of charges for excess
and obsolete inventories totaling $2.0 million Cost of goods sold was also
impacted by higher health insurance costs of approximately $0.5 million during
the second quarter of 2000 compared to 1999. During 2000, the Company has
experienced higher health insurance costs due to increased claims associated
with plant closures and general increases in health care costs.
During the second quarter of 2000, the Company was also impacted by
industry-wide parts shortages that contributed to unfavorable purchase price
variance (PPV), which is a component of cost of goods sold. For the second
quarter of 1999 the Company had favorable PPV of $0.7 million compared to the
second quarter of 2000 when the Company had unfavorable PPV of $1.6 million. The
aggregate impact between the two quarters amounted to $2.3 million.
During the second quarter of 1999, margins were negatively impacted by
charges of $0.4 million that were included in cost of goods sold due to
inventory allowances and operating charges related to the closure of the Greeley
facility. The Greeley facility was sold in the fourth quarter of 1999 and,
accordingly, there were no charges included in the second quarter of 2000 for
this facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") increased 59.1% to $8.2 million in the first
quarter of 2000 compared to $5.2 million in the quarter ended June 30, 1999. SG
& A expenses for the quarter ended June 30, 2000 included $1.5 million for
consulting services intended to accelerate operational improvement at each of
the Company's facilities. As discussed in Note 4 to the financial statements, SG
& A expenses for the second quarter of 2000 include a charge of $0.7 million
for accelerated depreciation and amortization of assets that will not be used
after the Company relocates its corporate headquarters. The Company also
recognized charges of $1.8 million for severance, recruiting and other costs
associated with changes in management during the second quarter of 2000.
Finally, as discussed in Note 5 to the financial statements, second quarter of
2000 results include $0.2 million for SG & A at divisions that were sold or
closed by the end of June 2000. For the second quarter of 1999, the Company
incurred SG & A expenses of $1.8 million related to divisions that were sold or
closed after June 30, 1999.
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After excluding all of the charges discussed above, SG & A expenses for
the second quarter of 2000 amounted to $4.0 million compared to $3.4 million in
the second quarter of 1999. The $0.6 million increase in SG & A in 2000 is
primarily attributable to higher health insurance costs and bad debt expense in
2000.
Impairment of Long-lived Assets. During the second quarter of 2000, the
Company 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 plant closures.
Goodwill Amortization. Goodwill amortization for the second quarter of
2000 amounted to $0.1 million compared to $0.4 million in the second quarter of
1999. The decrease in 2000 was attributable to the sale of the Services Group on
September 1, 1999, and the corresponding write-off of $36.5 million of goodwill
that was included in the calculation of the 1999 loss on sale of the Services
Group.
Interest Expense. Interest expense increased 108.4% to $2.8 million in
the second quarter of 2000 compared to $1.3 million in the same quarter of 1999.
At June 30, 2000, the Company's outstanding debt was $90 million compared to $55
million at June 30, 1999. The increase in debt resulted in higher interest cost
in 2000. The increased debt level in 2000 is attributable to the March 30, 2000
issuance of $54 million of Exchangeable Notes that currently accrue interest at
15%. In addition to the higher rate on the Exchangeable Notes, interest expense
was also negatively impacted in 2000 by increases in the prime rate, which
impacts the interest rate on the Company's revolving credit facility.
Income Tax Benefit Due to significant net losses in 1999 and the first
half of 2000, the Company has recorded a valuation allowance for all of its net
deferred tax assets The Company has a significant net operating loss
carryforward available for financial reporting and income tax purposes. However,
this carryforward may be subject to reduction or limitation as a result of
changes in ownership or certain consolidated return filing regulations.
Six-months Ended June 30, 2000 Compared to 1999
Net Sales. Net sales for the six-months ended June 30, 2000 were $139.5
million compared to $109.0 million for the six-months ended June 30, 1999, an
increase of 27.9%. The Company experienced major changes in its customers and
facilities since the beginning of 1999. At the start of 1999, the Company had
eleven facilities. Six of these facilities were either sold or closed by June
30, 2000. However, the Company also added facilities in Phoenix and Mexico
during 1999 to support the new business with Honeywell in connection with the
long-term supply agreement entered into during March 1999. Approximately 43% of
the Company's sales for the second quarter of 2000 were pursuant to the
Honeywell agreement. However, this increased revenue under the Honeywell supply
agreement was offset by the loss of revenue from the Services division that was
sold on September 1, 1999, and the Company's Tucson assets that were sold on
February 17, 2000. The Services division and the Tucson assets generated revenue
of $36.2 million in the first half of 1999 compared to $4.4 million in the first
half of 2000.
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After eliminating sales related to facilities that were either closed
or sold, adjusted net sales for the first six months of 2000 amounted to $135.1
million compared to $72.8 million for the first six months of 1999.
Substantially all of this increase of $62.3 million or 85.6% is attributable to
sales generated at the Company's Phoenix location under the long-term supply
agreement with Honeywell.
Gross Profit. The Company realized gross profit of 0.8% in the first
half of 2000 compared to gross profit of 7.3% in the first half of 1999. This
decrease in gross profit relative to results for the comparable period in 1999
is primarily attributable to the sale of assets and closure of four divisions as
discussed in Note 5 to the financial statements. The four facilities subject to
sale or closure accounted for $4.7 million of gross profit during the first half
of 1999 compared to a loss of $2.0 million for the first half of 2000. The
aggregate impact on gross profit was approximately $6.7 million between the two
periods. The decrease in gross profit during the first half of 2000 was also a
result of charges for excess and obsolete inventories totaling $2.9 million.
Furthermore, cost of goods sold was negatively impacted by higher health
insurance costs of approximately $0.7 million for the first half of 2000
compared to 1999.
During the first half of 2000, the Company was also impacted by
industry-wide parts shortages that contributed to unfavorable purchase price
variance (PPV), which is a component of cost of goods sold. For the first half
of 1999 the Company had favorable PPV of $1.1 million compared to the first half
of 2000 when the Company had unfavorable PPV of $1.0 million. The aggregate
impact between the two periods amounted to $2.1 million.
During the first half of 1999, margins were negatively impacted by
charges of $1.2 million that were included in cost of goods sold due to
inventory allowances and operating charges related to the closure of the Greeley
facility. The Greeley facility was sold in the fourth quarter of 1999 and,
accordingly, there were no charges included in the first half of 2000 for this
facility.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") increased 29.9% to $13.1 million during the
first half of 2000 compared to $10.1 million in the first half of 1999. SG & A
expenses for the six months ended June 30, 2000 included $1.5 million for
consulting services intended to accelerate operational improvement at each of
the Company's facilities. As discussed in Note 4 to the financial statements, SG
& A expenses for the first half of 2000 include a charge of $0.7 million for
accelerated depreciation and amortization of assets that will not be used after
the Company relocates its corporate headquarters. The Company also recognized
charges of $1.8 million for severance, recruiting and other costs associated
with changes in management during the first half of 2000. Finally, as discussed
in Note 5 to the financial statements, the results for the first half of 2000
include $0.8 million for SG & A expenses at divisions that were sold or closed
by the end of June 2000. For the first half of 1999, the Company incurred SG & A
expense of $3.8 million related to divisions that were sold or closed subsequent
to June 30, 1999.
After excluding all of the charges discussed above, SG & A expense for
the first half of 2000 amounted to $8.3 million compared to $6.3 million in the
first half of 1999. The $2.0 million increase in SG & A in 2000 is primarily
attributable to an increase in health insurance costs of $0.7 million,
compensation costs of $0.4 million, and bad debt expense of $0.2 million.
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Impairment of Long-lived Assets. During the first half of 2000, the
Company 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 plant closures.
Recapitalization Transaction Costs. In connection with the
recapitalization discussed in Note 5 to the financial statements, the Company
incurred charges totaling $4.9 million for financial advisor fees, a fee paid to
Thayer-BLUM Funding, and due diligence costs for legal, accounting and
management consultants. The Company capitalized costs associated with the Senior
Subordinated Exchangeable Notes and the new revolving credit agreement, and all
other costs were charged to operations during the first quarter of 2000.
Management expects that the Company will incur additional costs related to a
special shareholders' meeting and the tender offer of approximately $0.2 million
during the third quarter of 2000.
Goodwill Amortization. Goodwill amortization for the first half of 2000
amounted to $0.1 million compared to $0.8 million in the first half of 1999. The
decrease in 2000 was attributable to the sale of the Services Group on September
1, 1999, and the corresponding write-off of $36.5 million of goodwill that was
included in the calculation of the 1999 loss on sale of the Services Group.
Interest Expense. Interest expense increased 68.9% to $4.4 million in
the first half of 2000 compared to $2.6 million in the same period of 1999. At
June 30, 2000, the Company's outstanding debt was $90 million compared to $55
million at June 30, 1999, which is a primary contributor to the higher interest
cost in 2000. The increased debt level in 2000 is attributable to the March 30,
2000 issuance of $54 million of Exchangeable Notes that currently accrue
interest at 15%. In addition to the higher rate on the Exchangeable Notes,
interest expense was also negatively impacted in 2000 by increases in the prime
rate, which impacts the Company's revolving credit facility.
Income Tax Benefit Due to significant net losses in 1999 and the first
half of 2000, the Company recorded a valuation allowance for all of its net
deferred tax assets. Management does not expect that a tax provision will be
necessary if the Company generates earnings in 2000, since a significant net
operating loss carryforward is available for financial reporting and income tax
purposes. However, this carryforward may be subject to reduction or limitation
as a result of changes in ownership or certain consolidated return filing
regulations.
Liquidity and Capital Resources
Working Capital and Operating Cash Flows. At June 30, 2000, working
capital totaled $55.9 million compared to $26.2 million at December 31, 1999.
The increase in working capital during the first quarter of 2000 is primarily
attributable to the issuance of $54 million in principal amount of the March
Exchangeable Notes discussed in Note 6 to the financial statements.
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Net cash used by operating activities for the six-months ended June 30,
2000 was $58.9 million compared to net cash used by operating activities of $1.5
million for the six-months ended June 30, 1999. During the six-months ended June
30, 2000, the Company incurred a significant operating loss that used
approximately $10.9 million of cash. The Company also used cash of $43.4 million
to fund an increase in inventories and $9.0 million to fund an increase in
accounts receivable. During the period, the Company operating cash flows were
favorably affected by collection of an income tax refund of $2.1 million, a
reduction in prepaid expenses and other assets of $1.8 million, and an increase
in operating payables and other accrued liabilities of $0.5 million.
Receivable turns (e.g., annualized sales divided by period end accounts
receivable) increased to 8.8 for the quarter ended June 30, 2000 compared to 6.2
for the quarter ended June 30, 1999. Receivable turns for the six-months ended
June 30, 2000 increased to 8.1 compared to 6.2 for the six-months ended June 30,
1999. Receivable turns in 2000 have been positively impacted by thirty day
payment terms provided for in the Honeywell supply agreement.
Current inventories increased 42.7% to $85.9 million at June 30, 2000
from $60.2 million at December 31, 1999. Current inventory turns (i.e.,
annualized cost of sales divided by period end current inventory) for the three
months ended June 30, 2000 indicate that the Company is turning its inventories
3.5 times per year. This is the same as the second quarter of 1999, but
represents a decrease compared to the fourth quarter of 1999 and first quarter
of 2000 when inventories were turning 3.8 and 3.6 times per year, respectively.
Inventory turns in 2000 were negatively impacted by an increase in inventories
of $30 million in connection with preparation for increased business under the
Honeywell supply agreement. Inventory turns were positively impacted by the
non-operating sale of inventories for $12.0 million to Honeywell related to the
sale of the Tucson facility assets in the first quarter of 2000.
Cash Requirements for Investing Activities. The Company used cash for
capital expenditures totaling $3.3 million in the first half of 2000 (primarily
related to expansion activities at the Company's Phoenix facility) compared with
$8.2 million in the first half of 1999. Capital expenditures in 1999 were
primarily attributable to leasehold improvements and equipment at the new
facility in Phoenix in preparation for manufacturing services under the
Honeywell supply agreement. During the first quarter of 2000, the Company also
paid $500,000 for commissions related to the 1999 sale of the Services division.
In February 2000, the Company received net proceeds of $12.7 million related to
the sale of assets to Honeywell at the Company's former facility in Tucson.
While the Company has not entered into any material commitments for
capital expenditures, management expects to incur capital expenditures in the
range of $5 million to $10 million during the second half of 2000.
Financing Sources and Related Activities. In connection with the
purchase of the Services Group and the assets located in Tucson and Fort
Lauderdale, the Company entered into a credit facility on September 30, 1997
with a bank group led by Bank One, Colorado, N.A. This facility was refinanced
with proceeds from the recapitalization described below.
Sale/Leaseback Transaction. A director of the Company entered into a
sale/leaseback transaction with the Company in December 1998. The Company sold
two manufacturing facilities located in Newberg, Oregon and Tucson, Arizona to
the director for $10.5 million. The director leased these manufacturing
facilities back to the Company for a term of five years with monthly payments of
$90,000. At the end of the lease term, the Company had the option to repurchase
the facilities for approximately $9.4 million. In May 1999, the lease was
amended to eliminate the purchase option, which resulted in the
recharacterization of the lease from a capital lease to an operating lease. As
such, the buildings and the related are no longer reflected on the Company's
balance sheet.
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Honeywell Supply Agreement. In March 1999, the Company entered into a
long-term supply agreement with Honeywell International, Inc. While this
contract provides a favorable source of revenue to the Company, it also requires
significant amounts of working capital to finance inventories and receivables,
and the Company was required to incur significant costs for leasehold
improvements and equipment at a new facility in Phoenix, Arizona. In order to
respond to liquidity issues, the Company took a series of actions in 1999 that
were designed to provide ultimately the necessary capital to meet existing
obligations to suppliers and banks, and to have access to financing to meet the
additional working capital requirements under the new Honeywell agreement. The
first significant action after obtaining the Honeywell business was on September
1, 1999, when the Services Group was sold, resulting in net cash proceeds of
$28.0 million. On September 30, 1999, the Company initiated the consolidation of
its Ft. Lauderdale plant into three other EFTC facilities. In October 1999, the
Company sold its facility in Greeley, Colorado for proceeds of $3.8 million.
Issuance of Subordinated Notes and Warrants. A director of the Company
purchased $15 million in aggregate principal amount of subordinated notes issued
by the Company on September 9, 1997. The subordinated notes had a maturity date
of December 31, 2002 and provided for interest at a variable rate (adjusted
monthly) equal to 2.00% over the applicable LIBOR rate. The proceeds of these
notes were used to acquire certain assets from Honeywell (formerly AlliedSignal,
Inc.). In connection with the issuance of these subordinated notes, the Company
issued warrants to purchase 500,000 shares of the Company's common stock at an
exercise price of $8.00 per share to the director. The warrants were exercised
on October 9, 1997 resulting in net proceeds to the Company of $4.0 million. The
Company prepaid $10.0 million of the outstanding principal amount of these notes
early in December 1997 from the proceeds of a loan from the Company's senior
lender. In connection with such prepayment, the Company agreed to pay a fee of
approximately $325,000 to be paid in equal monthly installments until the
maturity of the notes.
In November 1999, the same director purchased $5 million in aggregate
principal amount of subordinated notes issued by the Company. These notes had a
maturity date of March 31, 2000 and provided for interest at a rate of 10%. The
proceeds of these notes were used for general operating purposes. In connection
with the recapitalization transaction described below, the Company repaid the
entire principal amount outstanding under the September 1997 subordinated note
and $2 million of the principal amount outstanding under the November 1999
subordinated note. In addition, the November note agreement was amended to
reflect that $3.0 million in aggregate principal amount of subordinated notes
remained outstanding, with a maturity date of March 30, 2004 and bearing
interest at 10%. In addition, the Company paid the remaining outstanding
prepayment fee of approximately $150,000 due in connection with the prepayment
of the September 1997 note and a fee of $100,000 due upon maturity of the
November 1999 note.
Recapitalization. Beginning in September 1999, the Company began
searching for debt and equity financing that would permit the Company to also
attract a new senior lender to replace the existing bank group. As a result of
these efforts, on March 30, 2000, the Company 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 involved the purchase of a
total of $54 million in Senior Subordinated Exchangeable Notes (the "March
Exchangeable Notes"), which was funded on March 30, 2000. On July 14, 2000, the
Company issued an additional $14 million of Senior Subordinated Exchangeable
Notes (the "July Exchangeable Notes") to Thayer-BLUM Funding in the second stage
of the transaction. As described below, the terms of the March and July
Exchangeable Notes will be modified depending on the outcome of a Special
Shareholder Meeting that will be held on August 22, 2000. The recapitalization
also involves a tender offer for up to 5,625,000 shares of the Company's
currently outstanding common stock at a price of $4.00 per share. Thayer-BLUM
Funding received the right to appoint two new members to the Company's board of
directors on March 30, 2000.
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The March and July Exchangeable Notes initially provide for an interest
rate of 15% and are accompanied by warrants to purchase 3,093,154 shares of the
Company's common stock at an exercise price of $.01 per share. However, upon
shareholder approval of this transaction and consummation of the tender offer
with at least 500,000 shares being purchased therein, the warrants will not
become exercisable and will expire. Accordingly, no value was assigned to the
warrants since they are never expected to become exercisable.
The March Exchangeable Notes will be exchanged for Senior Subordinated
Convertible Notes ("Convertible Notes") upon receipt of shareholder approval and
consummation of the tender offer for at least 500,000 shares. The Convertible
Notes will provide for interest at 8.875%, payable in kind and may be converted
into the Company's common stock at $2.58 per share, subject to adjustment. The
July Exchangeable Notes will be exchanged for Convertible Preferred Stock
("Convertible Preferred Stock") upon receipt of shareholder approval and
consummation of the tender offer for at least 500,000 shares. The Convertible
Preferred Stock will accrue dividends, compounded quarterly, at 8.875% on the
liquidation preference thereof. The liquidation preference of the Convertible
Preferred Stock will initially be equal to the aggregate principal balance of
the July Exchangeable Notes plus accrued interest. The Convertible Preferred
Stock will be convertible into the Company's common stock at $1.80 per share,
subject to adjustment. The Company's shareholders' equity as of June 30, 2000,
pro forma for the exchange of the July Exchangeable Notes for Convertible
Preferred Stock, would have been $12.7 million. Finally, if shareholders
approve the transaction and the tender offer is consummated for at least 500,000
shares, Thayer-BLUM Funding will have the right to appoint a majority of the
members of the Company's board of directors and will have the right to approve
any significant financings, acquisitions and dispositions.
If shareholders do not approve the transaction or if less than 500,000
shares are purchased in the tender offer, then the warrants will remain in
place. If shareholders do not approve the transaction, the interest rate on the
March and July Exchangeable Notes will increase to 20%. The maturity date of the
March and July Exchangeable Notes is June 2006. Interest would be compounded
quarterly and will accrue and be added to the principal amount of the
Exchangeable Notes or be payable in additional Exchangeable Notes, at the option
of the Company.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to refinance the Company's revolving line of credit with
the Company's previous lender. The new credit facility provides for a $45
million revolving line of credit with a maturity date of March 2003. Initially,
the interest rate is the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
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. At June 30, 2000, the
outstanding principal balance was $30.8 million.
Based on the financing activities completed in March and July 2000,
management believes the Company has adequate capital resources to fund working
capital and other cash requirements during the remainder of 2000. However,
depending on the timing and ability of the Company to improve operational
performance, the Company may need to seek additional funds through public or
private debt or equity offerings, bank borrowings, or leasing arrangements.
However, no assurance can be given that, if additional financing is needed, it
will be available on terms acceptable to the Company.
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the federal securities laws. In addition, EFTC
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or persons acting on its behalf sometimes make forward-looking statements in
other written and oral communications. Such forward-looking statements may
include, among other things, statements concerning the Company's plans,
objectives and future economic prospects, estimated costs expected to be
incurred related to the relocation of corporate headquarters, prospects for
achieving cost savings, increased capacity utilization, increased sales and
improved profitability, and other matters relating to the prospects for future
operations; the success of consulting services designed to improve operational
performance; and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of EFTC, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, the loss of Honeywell as a customer or
Honeywell's inability to pay, or inability or unwillingness to pay in a timely
manner, its outstanding receivables held by the Company, the Company's ability
to pay its suppliers in a timely manner, changes in economic or business
conditions in general or affecting the electronic products industry in
particular, changes in the use of outsourcing by original equipment
manufacturers, increased material prices and service competition within the
electronic component contract manufacturing industry, changes in the competitive
environment in which the Company operates, the continued growth of the
industries targeted by the Company or its competitors or changes in the
Company's management information needs, difficulties in managing the Company's
growth or in integrating new businesses, changes in customer needs and
expectations, the Company's success in retaining customers affected by the
closure of Company facilities, the Company's success in limiting costs
associated with such closures, the Company's ability to keep pace with
technological developments, increases in interest rates (including the impact on
the Exchangeable Notes if shareholders do not vote in favor of the
recapitalization), governmental actions and other factors identified as "Risk
Factors" or otherwise described in the Company's filings with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
On March 30, 2000, the Company entered into a $45 million revolving
line of credit with Bank of America, N.A. The interest rate on this loan is
based either on the prime rate or LIBOR rates, plus applicable margins.
Therefore, as interest rates fluctuate, the Company may experience changes in
interest expense that could impact financial results. The Company has not
entered into any interest rate swap agreements, or similar instruments, to
protect against the risk of interest rate fluctuations. Assuming outstanding
borrowings of $45 million, if interest rates were to increase or decrease by 1%,
the result would be an increase or decrease in annual interest expense of
approximately $450,000 under this loan.
Depending on the outcome of the shareholder action related to the
approval of the recapitalization, the $54 million of debt will bear interest at
8.875% (if shareholder approval is obtained) which would result in an annual
expense of $4.9 million, or at 20% (if shareholder approval is not obtained)
which would result in annual interest expense of $11.0 million.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Two legal proceedings, one in Colorado State court, the other in U.S.
District Court, were filed against the Company and certain of its officers,
directors and shareholders during September and October 1998. The proceedings
arose in connection with the decrease in the trading price of the Company's
common stock that occurred in August 1998 and make substantially the same
allegations. While both proceedings are in the pre-trial stage and the Company
therefore cannot make any assessment of their ultimate impact, the Company
believes the allegations made in the proceedings to be totally without merit.
Joshua Grayck, Philip and Angelique Signorelli, William McBride, Mark
Norris, Michael Keister, and Aiming Kiao v. EFTC Corporation, Jack Calderon,
Gerald J. Reid, Stuart W. Fuhlendorf, Brent L. Hofmeister, August P. Bruehlman,
L. Reid, and Lloyd McConnell (United States District Court for the District of
Colorado, Case No. 98-S-2178). Plaintiffs are shareholders of EFTC who
originally filed this lawsuit on October 8, 1998. Plaintiffs filed an amended
complaint on January 22, 1999. Plaintiffs allege that during the class period
April 6, 1998 to August 20, 1998, defendants made false and misleading
statements regarding EFTC's business performance, implementation of a new
computer system, manufacturing quality systems, operating margins, relationships
with its largest customers, and future prospects for earnings growth. Plaintiffs
allege that defendants disseminated or approved a prospectus in connection with
the Company's June 1998 secondary offering, as well as certain other press
releases and financial reports which contained misrepresentations and material
omissions and also concealed materially adverse financial information. The
amended complaint alleges violations of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder, as well as Section 11 of the
Securities Act of 1933. In addition, plaintiffs allege that by reason of their
positions as officers and/or directors of EFTC, Messrs. Calderon, Reid,
Fuhlendorf and Hofmeister had the power and authority to cause EFTC to engage in
the wrongful conduct alleged in the complaint. Plaintiffs allege, therefore,
that EFTC and these individual defendants violated Section 20(a) of the
Securities and Exchange Act of 1934 and Section 15 of the Securities Act of
1933. Plaintiffs seek the following relief: (a) certification of the complaint
as a class action on behalf of all persons who purchased or otherwise acquired
the common stock of EFTC between April 6, 1998 and August 20, 1998; (b) an award
of compensatory and/or rescisionary damages, interest, costs and attorneys' fees
to all members of the class; and (c) equitable relief available under federal
and state law.
Defendants deny the allegations of the amended complaint. Defendants
filed a motion to dismiss the case on March 8, 1999. That motion is pending.
Craig Anderson, Todd Sichelstiel, Phillip and Angelique Signorrelli,
Christy J. Baldwin and Patricia Conlon v. EFTC Corporation, Jack Calderon,
Gerald J. Reid, Stuart W. Fuhlendorf, Brent L. Hofmeister, August P. Bruehlman,
Lucille A. Reid, Lloyd A. McConnell and Salomon Smith Barney (District Court for
the County of Weld, Colorado, Case No. 99-CV-962). Plaintiffs are shareholders
of EFTC who filed this lawsuit originally in the District Court for the County
of Weld, Colorado. Plaintiffs allege that during the class period April 6, 1998
to August 20, 1998, defendants made false and misleading statements regarding
EFTC's business performance, implementation of a new computer system,
manufacturing quality systems, operating margins, relationships with its largest
customers, and future prospects for earnings growth. Plaintiffs allege that
defendants disseminated or approved a prospectus in connection with the
Company's June 1998 secondary offering, as well as certain other press releases
and financial reports which contained misrepresentations and material omissions
and also concealed materially adverse financial information. The complaint
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alleges violations of Sections 11-51-501(1)(a, b, and c) and 11-51-604(3) of the
Colorado Securities Act. In addition, plaintiff alleges that by reason of their
positions as officers and/or directors of EFTC, Messrs. Calderon, Reid,
Fuhlendorf, Hofmeister, Bruehlman, McConnell, and Ms. Reid are controlling
persons of the Company and, therefore, that these defendants violated Section
11-51-604(5) of the Colorado Securities Act. Plaintiffs also allege that
defendants conduct occurred in connection with the offer, sale or purchase of
the Company's securities in the secondary offering in violation of Section
11-51-604(4) of the Colorado Securities Act. Plaintiff seeks the following
relief: (a) certification of the complaint as a class action on behalf of all
persons who purchased or otherwise acquired the common stock of the Company
between April 6, 1998 and August 20, 1998; (b) an award of compensatory and/or
punitive damages, interest, costs and attorneys' fees to all members of the
class; and (c) equitable relief available under state law.
Defendants removed the case to federal court on January 11, 1999. The
federal court remanded the case to state court on February 14, 2000. Defendants
deny the allegations of the complaint.
The parties to these legal proceedings have reached an agreement to
settle both legal proceedings, subject to court approval. The proposed
settlement provided for the Company to contribute $3.1 million and its insurer
to contribute $2.9 million into a class settlement fund. In April 2000, the
Company transferred $3.1 million to the class settlement fund and the Company is
required to contribute 1.3 million shares of its common stock into a class
settlement fund upon receipt of court approval. In April 2000, notice of the
settlement was filed in both state and federal court requesting a stay of all
proceedings. A motion to approve the settlement was filed in early June 2000 and
is now pending.
Item 2. Changes in Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission Of Matters To A Vote Of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
The following exhibits are filed with this report:
Exhibit 4.1 Allonge to Exchangeable Note, dated July 14, 2000
(incorporated by reference to Exhibit 5.2 to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
with the Commission on July 19, 2000).
Exhibit 4.2 Senior Subordinated Exchangeable Note, dated July 14, 2000.
Exhibit 4.3 Form of Convertible Note (attached as Exhibit A to Exhibit
4.1).
Exhibit 4.4 Form of Articles of Amendment to the Articles of Incorporation
of the Company setting forth the terms of the Company's Series
B Convertible Preferred Stock.
Exhibit 4.5 Amendment to Rights Agreement, dated as of July 14, 2000, by
and between the Company and the Rights Agent.
Exhibit 10.1 First Amendment to Securities Purchase Agreement, dated as of
July 12, 2000, by and between the Company and Thayer-BLUM
(incorporated by reference to Appendix II to the Company's
Proxy Statement on Schedule 14A filed with the Commission on
July 19, 2000).
Exhibit 10.2 Employment Agreement, dated as of June 23, 2000, by and
between the Company and Mr. James K. Bass.
Exhibit 10.3 First Amendment to Warrant, dated July 12, 2000(incorporated
by reference to Exhibit 7.2 to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
with the Commission on July 19, 2000).
Exhibit 10.4 Registration Rights Agreement, dated as of March 30, 2000, by
and between the Company and Thayer-BLUM (incorporated by
reference to Exhibit 9.1 to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
with the Commission on July 19, 2000).
Exhibit 10.5 First Amendment to Registration Rights Agreement, dated
July 14, 2000 by and between the Company and Thayer-BLUM
(incorporated by reference to Exhibit 9.2 to the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 filed
with the Commission on July 19, 2000).
Exhibit 27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed the following Current Report on Form 8-K during
the quarter ended June 30, 2000:
Item Reported Date of Report Financial Statements
5. Other Events March 30, 2000 None Required
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EFTC CORPORATION
----------------
(Registrant)
Date: August 14, 2000 /s/ James K. Bass
---------------------------
James K. Bass
Chief Executive Officer
Date: August 14, 2000 /s/ Jack Calderon
---------------------------
Jack Calderon
Chairman
Date: August 14, 2000 /s/ Peter W. Harper
---------------------------
Peter W. Harper
Chief Financial Officer
Date: August 14, 2000 /s/ James A. Doran
---------------------------
James A. Doran
Chief Accounting Officer
26
