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:
SEPTEMBER 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.)
2501 West Grandview Road
Phoenix, Arizona 85023
(Address of principal executive offices)
(602) 789-6600
(Issuer's telephone number)
9351 Grant Street, Sixth Floor
Denver, Colorado 80229
(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 15,933,489 shares
----------------------------- -----------------
(Class of Common Stock) (Outstanding at November 11, 2000)
<PAGE>
EFTC CORPORATION
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION Number(s)
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets-
September 30, 2000 and December 31, 1999 3-4
Consolidated Statements of Operations-
Three and Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 2000 and 1999 6-7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 14
Results of Operations 15-19
Liquidity and Capital Resources 20-23
Special Note Regarding Forward-looking Statements 23-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6 Exhibits and Reports on Form 8-K 25-26
SIGNATURES 27
2
<PAGE>
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 September 30, December 31,
------ 2000 1999
----- -----
Current Assets:
<S> <C> <C>
Cash and equivalents $ 56 $ 716
Trade receivables, net of allowance for doubtful
accounts of $1,500 and $3,689, respectively 29,430 26,094
Receivable from sale of division 1,533 -
Income taxes receivable - 2,106
Inventories, net 89,187 60,167
Prepaid expenses and other 2,370 2,795
--------- ---------
Total Current Assets 122,576 91,878
--------- ---------
Property, Plant and Equipment, at cost:
Leasehold improvements 3,902 2,797
Buildings and improvements 2,073 1,172
Manufacturing machinery and equipment 15,165 16,496
Furniture, computer equipment and software 12,731 12,726
--------- ---------
Total 33,871 33,191
Less accumulated depreciation and amortization (13,129) (9,614)
--------- ---------
Net Property, Plant and Equipment 20,742 23,577
--------- ---------
Intangible and Other Assets:
Goodwill, net of accumulated amortization
of $958 and $758, respectively 7,063 7,264
Intellectual property, net of accumulated amortization
of $1,891 and $699, respectively 3,097 4,289
Debt issuance costs, net of accumulated amortization
of $653 and $97, respectively 2,623 460
Inventories, deposits and other 755 3,661
--------- ---------
Total Intangible and Other Assets 13,538 15,674
--------- ---------
$ 156,856 $ 131,129
========= =========
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Dollars in Thousands, Except Per Share Amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
------------------------------------ 2000 1999
----- -----
Current Liabilities:
<S> <C> <C>
Current maturities of long-term debt - related party $ - $ 5,018
Accounts payable 50,723 46,985
Accrued compensation and benefits 4,631 4,993
Other accrued liabilities 831 8,650
--------- ---------
Total Current Liabilities 56,185 65,646
Long-term Liabilities:
Long-term debt, net of current maturities:
Related parties 3,000 4,792
Banks 25,653 33,184
Convertible Notes, including accrued interest 57,810 -
Other 281 6,229
--------- ---------
Total Liabilities 142,929 109,851
--------- ---------
Shareholders' Equity:
Preferred stock, $.01 par value. Authorized 5,000,000 shares; issued
and outstanding 14,233 shares in 2000 (liquidation preference of
$14,364 at September 30, 2000) - -
Common stock, $.01 par value. Authorized 75,000,000 shares;
issued and outstanding 15,933,000 and 15,543,000 shares, respectively 159 155
Additional paid-in capital 107,915 91,992
Settlement obligation to issue 910,000 shares of common stock 2,303 -
Deferred stock compensation cost (324) -
Accumulated deficit (96,126) (70,869)
--------- ---------
Total Shareholders' Equity 13,927 21,278
--------- ---------
$ 156,856 $ 131,129
========= =========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
4
<TABLE>
<CAPTION>
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars In Thousands, Except Per Share Amounts)
Quarter Ended September 30, Nine-months Ended September 30,
--------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 86,281 $ 50,434 $ 225,751 $ 159,450
Cost of Goods Sold 80,514 61,002 218,950 162,017
-------- -------- --------- ---------
Gross profit (loss) 5,767 (10,568) 6,801 (2,567)
Operating Costs and Expenses:
Selling, general and administrative 8,903 8,865 21,964 18,931
Impairment of long-lived assets - 1,541 1,662 1,541
Goodwill amortization 67 283 201 1,065
Recapitalization transaction costs 424 - 5,303 -
-------- -------- --------- ---------
Total operating costs and expenses 9,394 10,689 29,130 21,537
-------- -------- --------- ---------
Operating loss (3,627) (21,257) (22,329) (24,104)
Other Income (Expense):
Interest expense (2,877) (1,947) (7,265) (4,545)
Gain (loss) on sale of property, plant and equipment 4 (66) (6) (23)
Gain (loss) on sale of division 4,357 (20,565) 4,357 (20,565)
Other, net 14 (295) (14) (248)
-------- -------- --------- ---------
Loss before income taxes (2,129) (44,130) (25,257) (49,485)
Income Tax Benefit - - - 2,034
-------- -------- --------- ---------
Net loss $ (2,129) $ (44,130) $ (25,257) $ (47,451)
======== ========= ========= =========
Net Loss Applicable to Common Shareholders:
Net loss $ (2,129) $ (44,130) $ (25,257) $ (47,451)
Accrued dividends related to Preferred Stock (131) - (131) -
Deemed dividend related to Preferred Stock (2,022) - (2,022) -
-------- -------- --------- ---------
Net loss applicable to common stockholders $ (4,282) $ (44,130) $ (27,410) $ (47,451)
======== ========= ========= =========
Net Loss Per Share Applicable to Common
Shareholders-Basic and Diluted $ (0.27) $ (2.84) $ (1.75) $ (3.05)
======== ========= ========= =========
Weighted Average Common Shares Outstanding 15,590,000 15,543,000 15,686,000 15,543,000
========== ========== ========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-months Ended September 30, 2000 and 1999
(Dollars in Thousands)
2000 1999
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (25,257) $ (47,451)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 6,328 5,232
Amortization of debt discount and issuance costs 743 835
Deferred income tax benefit - (320)
Accrued interest on exchangeable and convertible notes 4,043 -
Provision for excess and obsolete inventories 4,821 6,657
Provision for doubtful accounts receivable 596 3,248
Impairment of long-lived assets 1,662 1,541
Loss (gain) on sale of division (4,357) 20,565
Loss on sale of property, plant and equipment 6 23
Stock-based compensation 263 -
Changes in operating assets and liabilities, excluding
effects of sale of assets:
Decrease (increase) in:
Trade receivables (3,932) 4,103
Inventories (43,760) (13,079)
Income taxes receivable 2,106 (1,695)
Prepaid expenses and other 1,786 (1,115)
Increase (decrease) in:
Accounts payable (5,443) 13,972
Accrued compensation and benefits (362) 3,666
Other accrued liabilities (6,478) 1,220
---------- ---------
Net cash used by operating activities (67,235) (2,598)
---------- ---------
Cash Flows from Investing Activities:
Proceeds from sale of assets, net of cash transferred 12,846 28,135
Payment of commissions related to sale of division (500) -
Capital expenditures (5,075) (11,863)
---------- ---------
Net cash provided by investing activities 7,271 16,272
---------- ---------
Cash Flows from Financing Activities:
Proceeds from long-term debt 296,706 45,528
Principal payments on long-term debt (243,138) (55,742)
Payments for debt issuance costs (2,770) (668)
Net increase in checks outstanding 8,506 451
Payments under inventory financing arrangement - (3,867)
Proceeds from exercise of stock options - 1
---------- ---------
Net cash provided (used) by financing activities 59,304 (14,297)
---------- ---------
Net decrease in cash and equivalents (660) (623)
Cash and Equivalents:
Beginning of period 716 623
---------- ---------
End of period $ 56 $ -
========== =========
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Nine-months Ended September 30, 2000 and 1999
(Dollars in Thousands)
2000 1999
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C>
Cash paid for interest $ 2,797 $ 3,962
======= =======
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 $ -
======= =======
Issuance of 390,000 shares of common stock in
connection with lawsuit settlement obligation $ 987 $ -
======= =======
Obligation to issue common stock in lawsuit settlement $ 2,303 $ -
======= =======
Issuance of preferred stock for exchangeable notes,
net of debt issuance costs of $206 $14,207 $ -
======= =======
Stock options granted for deferred compensation $ 377
=======
Conversion of capital lease for property, plant and
equipment to an operating lease $ - $10,240
======= =======
</TABLE>
The Accompanying Notes are an Integral Part of these
Consolidated Financial Statements
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 nine-month periods
ended September 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 September 30, 2000, the Company had outstanding checks in excess of cash
balances of $8,506, which are 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 attributable to common shareholders by
the weighted average number of common shares outstanding for the period. 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 have been
treated as issued and outstanding. As of September 30, 2000, the Company has not
issued 910,000 of these shares, pending identification of the members of the
"class" who will participate in the settlement.
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 nine-month periods ended September 30, 2000 and 1999, as all potential
common share issuances were antidilutive.
As discussed in Note 6, the Earnings per Share calculations for the three and
nine months ended September 30, 2000, reflect accrued and deemed dividends
related to convertible preferred stock that was issued during the third quarter
of 2000.
8
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
3. Inventories
Inventories at September 30, 2000 and December 31, 1999 consist of the
following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Purchased parts and completed subassemblies, net $ 68,906 $ 43,971
Work-in-process 17,403 13,317
Finished goods 2,878 2,879
-------- ---------
$ 89,187 $ 60,167
======== =========
</TABLE>
In connection with the long-term supply agreement with Honeywell, the Company
purchased certain "life time buy" inventories that were expected to be used over
a period of several years. Accordingly, at December 31, 1999, the Company
classified inventories of approximately $3,100 as other long-term assets. In
August 2000, Honeywell International, Inc. purchased life time buy inventories
at a price equal to the net carrying value of $6.2 million. As a result of this
transaction, no inventories were included in other long-term assets at September
30, 2000.
4. Headquarters Relocation and Change in Estimates
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 will not be
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 is expected to terminate by the end of 2000. 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) for the third quarter of 2000, and
$1,422 ($.09 per share) for the nine months ended September 30, 2000.
In connection with the Denver headquarters relocation and other changes in
management, the Company expects to incur up to $4,000 for severance, retention,
moving costs, recruiting fees for new management and employees, and related
costs. During the second and third quarters of 2000, the Company incurred $1,771
and $1,319, respectively, for these costs. Management estimates that
approximately $900 of additional costs will be incurred through the first
quarter of 2001.
9
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
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 nine month periods ended September 30, 2000 and 1999 are summarized as
follows:
<TABLE>
<CAPTION>
Nine-months ended September 30
Quarter ended September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ -- $ 20,378 $11,932 $ 83,225
Cost of goods sold 27 27,503 14,011 85,659
------------- -------------- ------------ -------------
Gross profit (loss) $ (27) $ (7,125) $ (2,079) $ (2,434)
============= ============== ============ =============
Selling, general & administrative $ (11) $ (4,988) $ (812) $ (8,818)
============= ============== ============ =============
Goodwill amortization $ -- $ (216) $ -- $ (864)
============= ============== ============ =============
============= ============== ============ =============
Impairment expense $ -- $ (1,400) $ (250) $ (1,400)
============= ============== ============ =============
</TABLE>
Management estimates that approximately $8,000 of the net sales for the nine
months ended September 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.
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 September 30, 2000, the closure of
this facility was complete and all severance and retention obligations had been
satisfied.
10
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
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 ended August 31, 2000 related to this division exceed
$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 deferred recognition of $2,500 of the
consideration subject to the EC until the outcome was determined. This amount
was included in other accrued liabilities in the accompanying balance sheet at
December 31, 1999.
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, during the quarter ended September 30, 2000, the Company
recognized an additional gain of $4,357 under the EC. At September 30, 2000, the
accompanying balance sheet includes a receivable from the purchaser of $1,533
(after deducting $324 due the purchaser for post closing adjustments).
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 September 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 September 30, 2000, the
outstanding principal balance was $25,653.
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 director amended the terms of the remaining
outstanding debt to provide for a new unsecured note in the principal amount of
$3,000 that bears interest at 10% and is due March 2004.
11
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
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 "Convertible 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 the 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 Convertible
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 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 may be converted into the Company's common stock
at $2.58 per share, subject to adjustment. The July Exchangeable Notes were
exchanged for the Convertible Preferred Stock that accrues dividends, compounded
quarterly, at 8.875% on the liquidation preference thereof. The liquidation
preference of the Convertible Preferred Stock was initially equal to $14,233
(the aggregate principal balance of the July Exchangeable Notes plus accrued
interest through August 22, 2000). The Convertible Preferred Stock is
convertible into the Company's common stock at $1.80 per share, subject to
adjustment.
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. Accordingly, for
purposes of the calculation of Earnings Per Share, the Company was required to
report a deemed dividend of $2,022 related to the holders of the Convertible
Preferred Stock due to the existence of a "beneficial conversion feature" on the
commitment date.
12
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Summary of Debt. At September 30, 2000 and December 31, 1999, long-term debt
consists of the following:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Senior Subordinated Convertible Notes, interest at 8.875%,
unsecured, due June 2006 $ 56,070 $ --
Accrued interest on Convertible Notes 1,740 --
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 September 30, 2000),
collateralized by substantially all assets, due March 2003 25,653 --
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 86,463 42,994
Less current maturities -- (5,018)
-------- ---------
Long-term debt, less current maturities $ 86,463 $ 37,976
======== =========
</TABLE>
13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth below contains "forward-looking statements."
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, 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.
14
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
Quarter Ended September Nine-months ended September
30: 30:
--------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 93.3% 121.0% 97.0% 101.6%
------------ ----------- ------------- --------------
Gross profit (loss) 6.7% (21.0)% 3.0% (1.6)%
Selling, general and administrative 10.3% 17.6% 9.7% 11.8%
Impairment of long-lived assets -- 3.0% 0.7% 1.0%
Goodwill amortization 0.1% 0.5% 0.1% 0.7%
Recapitalization transaction costs 0.5% -- 2.4% --
------------ ----------- ------------- --------------
Operating profit (loss) (4.2%) (42.1%) (9.9%) (15.1%)
============ =========== ============= ==============
</TABLE>
Quarter Ended September 30, 2000 Compared to 1999
Net Sales. Net sales for the quarter ended September 30, 2000 were
$86.3 million compared to $50.4 million for the quarter ended September 30,
1999, which is an increase of 71.1%. 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 September 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 in March 1999.
Approximately 55% of the Company's sales for the third quarter of 2000 were made
under 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 $10.9 million in the third quarter of 1999 compared to none
in the third quarter of 2000.
After eliminating sales (excluding sales related to customers who
agreed to transition the manufacture of their products to another facility
operated by the Company) related to facilities that were either closed or sold,
adjusted net sales for the third quarter of 2000 amounted to $86.3 million
compared to $39.6 million for the third quarter of 1999. This increase is
entirely 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 third quarter of 2000
was $5.8 million compared to a $10.6 million deficiency in the third quarter of
1999. The 1999 deficiency was primarily attributable to the sale of assets and
closure of certain facilities as discussed in Note 5 to the financial
statements. The operations sold or closed accounted for $7.2 million of the 1999
15
<PAGE>
deficiency. In addition to poor performance at the facilities that were closed
or sold, the Company's other facilities also performed poorly due to capacity
utilization issues, difficulties in dealing with start-up 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 the third quarter of 2000 was
favorably impacted by higher capacity utilization at most of the Company's
facilities. The improvement in capacity utilization has been partially offset by
generally higher compensation and benefits costs during the third quarter of
2000 compared to 1999. During the third quarter of 2000, profitability was
favorably impacted by heightened management focus on operational issues and the
renegotiation of unfavorable contracts with customers.
During the first half of 2000, the Company was adversely affected by
industry-wide parts shortages that contributed to unfavorable purchase price
variance (PPV), which is a component of cost of goods sold. However, during the
third quarter of 2000, the Company successfully negotiated with customers to
recover approximately $2.0 million of unfavorable PPV that was incurred in prior
quarters. Exclusive of PPV recoveries related to prior periods, PPV did not have
a significant impact on third quarter 2000 results. For the third quarter of
1999 the Company had favorable PPV of $0.7 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") amounted to $8.9 million in the third quarter
of both 2000 and 1999. SG & A expenses for the quarter ended September 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 third 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 $1.3 million for severance, recruiting
and other costs associated with changes in management during the third quarter
of 2000. For the third quarter of 1999, the Company incurred SG & A expenses of
$5.0 million related to divisions that were sold or closed after September 30,
1999.
After excluding all of the charges discussed above, SG & A expenses for
the third quarter of 2000 amounted to $5.4 million compared to $3.9 million in
the third quarter of 1999. The $1.3 million increase in SG & A in 2000 is
primarily attributable to higher compensation and health insurance costs.
Recapitalization Transaction Costs. In connection with the
recapitalization discussed in Note 6 to the financial statements, during the
third quarter of 2000 the Company incurred charges totaling $0.4 million for
costs related to the recapitalization, including costs related to the Special
Shareholders Meeting held on August 22, 2000, including printing costs,
professional fees, and regulatory fees.
Goodwill Amortization. Goodwill amortization for the third quarter of
2000 amounted to $0.1 million compared to $0.3 million in the third quarter of
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.
16
<PAGE>
Interest Expense. Interest expense increased 47.8% to $2.9 million in
the third quarter of 2000 compared to $1.9 million in the same quarter of 1999.
For the quarter ended September 30, 2000, the Company's weighted average
borrowings were $90.8 million compared to $49.6 million during the quarter ended
September 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 accrued interest at 15% until
August 22, 2000. Upon shareholder approval of the issuance of the Convertible
Notes, on August 23, 2000 the Exchangeable Notes were exchanged for Convertible
Notes that bear interest at 8.875%. The Company also incurred interest expense
at a rate of 15% on the July Exchangeable Notes that were outstanding for 40
days during the quarter. 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 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, a portion of this
carryforward may be subject to reduction or limitation as a result of changes in
ownership or certain consolidated return filing regulations.
Nine-months Ended September 30, 2000 Compared to 1999
Net Sales. Net sales for the nine-months ended September 30, 2000 were
$225.8 million compared to $159.5 million for the nine-months ended September
30, 1999, an increase of 41.6%. 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 September 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 in March 1999.
Approximately 48% of the Company's sales for the nine months ended September 30,
2000 were made under 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 $47.0 million in the nine-months ended September 30,
1999 compared to $4.4 million in the comparable period of 2000.
After eliminating sales (excluding sales related to customers who
agreed to transition the manufacture of their products to another facility
operated by the Company) related to facilities that were either closed or sold,
adjusted net sales for the first nine months of 2000 amounted to $221.4 million
compared to $108.3 million for the first nine months of 1999, which is an
increase of $113.1 million. Approximately $100.0 million of this increase is
attributable to an increase in sales generated at the Company's Phoenix location
under the long-term supply agreement with Honeywell.
17
<PAGE>
Gross Profit. The Company realized gross profit of 3.0% in the first
nine months of 2000 compared to a gross profit deficiency of 1.6% in the first
nine months of 1999. This 1999 deficiency was primarily attributable to charges
related to decisions to sell assets and close certain facilities as discussed in
Note 5 to the financial statements. The operations sold or closed accounted for
a gross profit deficiency of $2.4 million during the first nine months of 1999
compared to a gross profit deficiency of $2.1 million for the first nine months
of 2000.
In addition to poor performance at the facilities that were sold or
closed, the Company's 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 the first nine months of 2000
was favorably impacted by higher capacity utilization at most of the Company's
facilities. The improvement in capacity utilization has been partially offset by
generally higher compensation and benefits costs during the first nine months of
2000 compared to 1999. During the third quarter of 2000, profitability was
favorably impacted by heightened management focus on operational issues and the
renegotiation of unfavorable contractual issues with customers.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") increased 16.0% to $22.0 million during the
first nine months of 2000 compared to $18.9 million in the first nine months of
1999. SG & A expenses for the nine months ended September 30, 2000 included $3.0
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 nine months of 2000 include a charge
of $1.4 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 $3.1 million for severance, recruiting and
other costs associated with changes in management during the first nine months
of 2000. Finally, as discussed in Note 5 to the financial statements, the
results for the first nine months of 2000 include $0.8 million for SG & A
expenses at divisions that were sold or closed by the end of September 2000. For
the first nine months of 1999, the Company incurred SG & A expense of $8.8
million related to divisions that were sold or closed subsequent to September
30, 1999.
After excluding all of the charges discussed above, SG & A expense for
the first nine months of 2000 amounted to $13.7 million compared to $10.1
million in the first half of 1999. The increase in SG & A in 2000 is primarily
attributable to an increase in compensation and benefits costs of $1.7 million,
and information technology expenses of $1.0 million, royalty expense of $0.5
million, and insurance costs of $0.3 million.
Impairment of Long-lived Assets. During the first nine months 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 headquarters and plant closures. For
the comparable period in 1999, the Company recognized impairment expense of $1.5
million that was incurred in connection with the sale and closure of four
divisions.
18
<PAGE>
Recapitalization Transaction Costs. In connection with the
recapitalization discussed in Note 6 to the financial statements, during the
first nine months of 2000 the Company 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. The Company capitalized
costs directly associated with the March and July Exchangeable Notes and the new
revolving credit agreement, and all other costs were charged to operations.
Goodwill Amortization. Goodwill amortization for the first nine months
of 2000 amounted to $0.2 million compared to $1.1 million in the first nine
months of 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.
Interest Expense. Interest expense increased 59.8% to $7.3 million in
the first nine months of 2000 compared to $4.5 million in the same period of
1999. For the nine months ended September 30, 2000, the Company's weighted
average borrowings were $69.1 million compared to $56.2 million during the nine
months ended September 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 accrued
interest at 15% until August 22, 2000. Upon shareholder approval of the issuance
of the Convertible Notes, on August 23, 2000 the Exchangeable Notes were
exchanged for Convertible Notes that bear interest at 8.875%. The Company also
incurred interest expense at a rate of 15% on the July Exchangeable Notes for 40
days during the nine months ended September 30, 2000. The July Exchangeable
Notes were exchanged for Convertible Preferred Stock on August 22, 2000 and,
accordingly, the Company will not incur interest cost related to these notes
after that date. In addition to the higher rate on the Exchangeable Notes,
during 2000 interest expense was adversely affected 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 2000, the
Company recorded a valuation allowance for all of its net deferred tax assets.
The Company has a significant net operating loss carryforward that is available
for financial reporting and income tax purposes. However, a portion of this
carryforward may be subject to reduction or limitation as a result of changes in
ownership or certain consolidated return filing regulations.
19
<PAGE>
Liquidity and Capital Resources
Working Capital and Operating Cash Flows. At September 30, 2000,
working capital totaled $66.4 million compared to $26.2 million at December 31,
1999. The increase in working capital in 2000 is primarily attributable to the
proceeds from the issuance of $54 million in principal amount of the March
Exchangeable Notes and $14 million in principal amount of the July Exchangeable
Notes as discussed in Note 6 to the financial statements.
Net cash used by operating activities for the nine-months ended
September 30, 2000 was $66.9 million compared to net cash used by operating
activities of $2.6 million for the nine-months ended September 30, 1999. During
the nine-months ended September 30, 2000, the Company incurred a significant
operating loss that used approximately $11.2 million of cash. The Company also
used cash of $43.8 million to fund an increase in inventories and $3.9 million
to fund an increase in accounts receivable. During the nine-months ended
September 30, 2000, the Company also utilized cash of $12.3 million related to a
reduction in operating payables and other accrued liabilities. During this
period, the Company's operating cash flows were favorably affected by collection
of an income tax refund of $2.1 million and a reduction in prepaid expenses and
other assets of $1.8 million.
Receivable turns (e.g., annualized sales divided by period end accounts
receivable) increased to 11.7 for the quarter ended September 30, 2000 compared
to 8.6 for the quarter ended September 30, 1999. Receivable turns for the
nine-months ended September 30, 2000 increased to 10.2 compared to 9.0 for the
nine-months ended September 30, 1999. Receivable turns in 2000 have been
positively impacted by favorable payment terms with Honeywell.
Current inventories increased 48.2% to $89.2 million at September 30,
2000 from $60.2 million at December 31, 1999. Current inventory turns (i.e.,
annualized revenue divided by period end current inventory) for the three months
ended September 30, 2000 indicate that the Company is turning its inventories
3.9 times per year. This compares to 3.2 times for the third quarter of 1999,
and represents an improvement from 3.3 turns in the second quarter of 2000.
Cash Requirements for Investing Activities. The Company used cash for
capital expenditures totaling $5.1 million in the first nine months of 2000
(primarily related to expansion activities at the Company's Phoenix facility)
compared with $11.9 million in the first nine months 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 nine months of
2000, the Company also paid $0.5 million 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 $1.5 million to $2.0 million during the fourth quarter of 2000.
20
<PAGE>
Financing Sources and Related Activities. In connection with the
acquisition of the Services Division 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 debt are no longer reflected on the
Company's balance sheets.
Honeywell Supply Agreement. In March 1999, the Company entered into a
long-term supply agreement with Honeywell International, Inc. While this
contract provides a significant 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 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 the
director a fee of approximately $325,000 in equal monthly installments through
the original stated maturity date of the notes.
21
<PAGE>
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%. In
connection with the recapitalization transaction described below, the Company
repaid the entire principal amount outstanding under the September 1997 note and
$2 million of the principal amount outstanding under the November 1999
subordinated notes. In addition, the November note agreement was amended to
reflect the $3.0 million in aggregate principal amount outstanding of
subordinated notes, 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 notes 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 issuance 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, 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
"Convertible 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 Convertible
Preferred Stock and the tender offer was consummated, the warrants never became
exercisable and they expired.
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 may be converted into the Company's common stock
at $2.58 per share, subject to adjustment. The July Exchangeable Notes were
exchanged for the Convertible Preferred Stock that accrues dividends, compounded
quarterly, at 8.875% on the liquidation preference thereof. The liquidation
preference of the Convertible Preferred Stock was initially equal to $14,233,000
(the aggregate principal balance of the July Exchangeable Notes plus accrued
interest through August 22, 2000). The Convertible Preferred Stock is
convertible into the Company's common stock at $1.80 per share, subject to
adjustment.
22
<PAGE>
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
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 September 30, 2000, the
outstanding principal balance was $25.7 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, the
Company 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
profitability, the success of consulting services designed to improve
operational results, and other matters relating to the prospects for future
operations; and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends and similar expressions concerning
matters that are not historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, 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, a decrease in orders received from Honeywell, 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,
23
<PAGE>
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, governmental
actions and other factors identified as "Risk Factors" or otherwise described in
the Company's filings with the Securities and Exchange Commission. The forward
looking statements included in the report represent the Company's view, as of
the date of this report, and it should not be assumed that the statements made
herein remain accurate at any future date. The Company does not intend to update
these statements and undertakes no duty to update under any circumstances.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The following are the material developments since the Company's Annual
Report on Form 10-K filed on April 14, 2000, in the two legal proceedings that
were filed against the Company and certain of its officers, directors, and
shareholders during September and October 1998.
In April 2000, the Company transferred $3.1 million to the class
settlement fund and the Company will issue a total of 1.3 million shares of its
common to members of the class and their counsel once the procedures set forth
in the settlement are completed. A motion to approve the settlement was approved
by the state court on August 31, 2000. To date the Company has issued 390,000
shares of common stock to plaintiff's counsel, per the terms of the settlement
agreement. On September 29, 2000, the parties filed a motion in federal court to
dismiss all claims with prejudice.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
24
<PAGE>
Item 4. Submission Of Matters To A Vote Of Security Holders
On August 22, 2000, the Company held a Special Meeting of Shareholders
for the purpose of considering approval of: (i) the issuance to Thayer-BLUM
Funding, L.L.C. of Senior Subordinated Convertible Notes and Series B
Convertible Preferred Stock, (ii) an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the number of authorized shares
of common stock from 45 million shares to 75 million shares, and (iii) the
adoption of the 2000 Equity Stock Option Plan. Proxies for the meeting were
solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and
there was no solicitation in opposition to these solicitations.
In connection with the proposal for the issuance to Thayer-BLUM Funding, L.L.C.
of Senior Subordinated Convertible Notes and Series B Convertible Preferred
Stock, 8,344,439 shares were voted in favor of the proposal, 1,118,451 shares
were voted against and 35,107 shares were abstained from voting on the proposal.
This proposal was approved by the affirmative vote of the majority of the total
votes cast on the proposal.
In connection with the proposed amendment to the Company's Amended and Restated
Articles of Incorporation to increase the number of authorized shares of common
stock from 45 million shares to 75 million shares, 9,350,083 shares were voted
in favor of the proposal, 115,162 shares were voted against and 32,752 shares
were abstained from voting on the proposal. This proposal was approved by the
affirmative vote of a majority of the shares of common stock outstanding on the
record date.
In connection with the proposal for the adoption of the 2000 Equity Stock Option
Plan, 8,150,014 shares were voted in favor of the proposal, 1,311,186 shares
were voted against and 36,797 shares were abstained from voting on the proposal.
This proposal was approved by the affirmative vote of the majority of the total
votes cast on the proposal.
For the Special Meeting of Shareholders, the total outstanding shares that were
entitled to vote amounted to 15,543,489 shares. The number of outstanding shares
that were represented by proxy amounted to 9,497,997 shares, or 61.1%.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
The following exhibits are filed with this report:
*Exhibit 4.1 Articles of Amendment to the Articles of Incorporation of EFTC
Corporation increasing the authorized number of shares of common
stock to 75 million.
*Exhibit 4.2 Articles of Amendment to the Articles of Incorporation of EFTC
Corporation eliminating Article VIII.
*Exhibit 27.1 Financial Data Schedule.
------------------------------------
* Filed herewith.
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(b).Reports on Form 8-K
The Company filed the following Current Report on Form 8-K during
the quarter ended September 30, 2000:
Item Reported Date of Report Financial Statements
Changes in Control of Registrant August 23, 2000 None Required
26
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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: November 14, 2000 /s/ James K. Bass
-----------------
James K. Bass
Chief Executive Officer
Date: November 14, 2000 /s/ Peter W. Harper
-----------------------
Peter W. Harper
Chief Financial Officer
Date: November 14, 2000 /s/ James A. Doran
------------------------
James A. Doran
Chief Accounting Officer
27
