SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000
--------------
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________
Commission file number: 0-23332
EFTC CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0854616
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9351 Grant Street, Sixth Floor
Denver, Colorado 80229
(Address of principal executive offices)
(303) 451-8200
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ]No
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Common Stock, par value $0.01 15,543,489 shares
- ----------------------------- -----------------
(Class of Common Stock) (Outstanding at April 30, 2000)
<PAGE>
EFTC CORPORATION
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION Number(s)
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets-
March 31, 2000 and December 31, 1999 3-4
Consolidated Statements of Operations-
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 2000 and 1999 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General 12
Results of Operations 13-14
Liquidity and Capital Resources 15-17
Special Note Regarding Forward-looking Statements 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 20
----------
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
ASSETS March 31, December 31,
------ 2000 1999
---- ----
Current Assets:
<S> <C> <C>
Cash and equivalents $ 3,819 $ 716
Trade receivables, net of allowance for doubtful
accounts of $2,438 and $3,689, respectively 25,742 26,094
Income taxes recievable 2,122 2,106
Inventories, net 69,958 60,167
Prepaid expenses and other 3,266 2,795
-------- --------
Total Current Assets 104,907 91,878
-------- --------
Property, Plant and Equipment, at cost:
Leasehold improvements 2,744 2,797
Buildings and improvements 2,064 1,172
Manufacturing machinery and equipment 13,733 16,496
Furniture, computer equipment and software 13,437 12,726
-------- --------
Total 31,978 33,191
Less accumulated depreciation and amortization (9,900) (9,614)
-------- --------
Net Property, Plant and Equipment 22,078 23,577
-------- --------
Intangible and Other Assets:
Goodwill, net of accumulated amortization
of $824 and $758, repectively 7,197 7,264
Intellectual property, net of accumulated amortization
of $867 and $699, repectively 4,121 4,289
Debt issuance costs, net of accumulated amortization
of $-0- and $97, respectively 2,892 460
Inventories, deposits and other 5,388 3,661
-------- --------
Total Intangible and Other Assets 19,598 15,674
-------- --------
$146,583 $131,129
======== ========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, Continued
(Dollars in Thousands, Except Per Share Amounts)
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31,
------------------------------------ 2000 1999
---- ----
Current Liabilities:
<S> <C> <C>
Current maturities of long-term debt- related party $ - $ 5,018
Accounts payable 56,286 46,985
Accrued compensation and benefits 3,939 4,993
Other accrued liabilities 10,335 8,650
-------- ---------
Total Current Liabilities 70,560 65,646
Long-term Liabilities:
Long-term debt, net of current maturities:
Related parties 3,000 4,792
Banks - 33,184
Exchangeable Notes 54,000 -
Other 7,309 6,229
-------- ---------
Total Liabilities 134,869 109,851
Shareholders' Equity:
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued - -
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding 15,543,000 shares 155 155
Additional paid-in capital 92,528 91,992
Accumulated deficit (80,969) (70,869)
-------- ---------
Total Shareholders' Equity 11,714 21,278
-------- ---------
$ 146,583 $ 131,129
========= =========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
4
<PAGE>
<TABLE>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Quarters Ended March 31, 2000 and 1999
(Dollars In Thousands, Except Per Share Amounts)
2000 1999
---- ----
<S> <C> <C>
Net Sales $ 63,526 $ 54,324
Cost of Goods Sold 62,197 47,064
----------- ----------
Gross profit 1,329 7,260
Operating Costs and Expenses:
Selling, general and administrative 4,848 6,007
Goodwill amortization 67 391
Recapitalization transaction costs 4,874 -
----------- ----------
Total operating costs and expenses 9,789 6,398
----------- ----------
Operating income (loss) (8,460) 862
Other Income (Expense):
Interest expense (1,608) (1,264)
Loss on sale of property, plant and equipment (2) -
Other, net (30) 38
----------- ----------
Loss before income taxes (10,100) (364)
Income Tax Benefit - 35
----------- ----------
Net loss $ (10,100) $ (329)
=========== ==========
Net Loss Per Share:
Basic $ (0.65) $ (0.02)
=========== ==========
Diluted $ (0.65) $ (0.02)
=========== ==========
Weighted Average Shares Outstanding:
Basic 15,543,000 15,543,000
=========== ==========
Diluted 15,543,000 15,543,000
=========== ==========
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarters Ended March 31, 2000 and 1999
(Dollars in Thousands)
2000 1999
---- ----
Cash Flows from Operating Activities:
<S> <C> <C>
Net loss $ (10,100) $ (329)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,700 1,595
Amortization of debt issuance costs 474 -
Deferred income tax benefit - (17)
Provision for excess and obsolete inventories 1,031 -
Provision for doubtful accounts receivable 321 -
Loss on sale of property, plant and equipment 2 -
Fair value of common stock warrants issued for services 210 -
Changes in operating assets and liabilities, excluding
effects of sale of assets:
Decrease (increase) in:
Trade receivables 31 (1,128)
Inventories (25,934) 828
Income taxes receivable (16) -
Prepaid expenses and other 1,040 571
Increase (decrease) in:
Accounts payable 4,491 (2,298)
Accured compensation and benefits (1,054) -
Other accrued liabilities 5,925 -
-------- -------
Net cash used by operating activities (21,879) (778)
-------- -------
Cash Flows from Investing Activities:
Proceeds from sale of assets 12,740 -
Payment of commissions related to sale of division (100) -
Capital expenditures (1,170) (2,250)
-------- -------
Net cash provided (used) by investing activities 11,470 (2,250)
-------- -------
Cash Flows from Financing Activities:
Payments for debt issuance costs (165) -
Proceeds from long-term debt 121,861 4,143
Principal payments on long-term debt (108,184) (875)
-------- -------
Net cash provided by financing activities 13,512 3,268
-------- -------
Net increase in cash and equivalents 3,103 240
Cash and Equivalents:
Beginning of period 716 623
-------- -------
End of period $ 3,819 $ 863
======== =======
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
6
<PAGE>
<TABLE>
<CAPTION>
EFTC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
Quarters Ended March 31, 2000 and 1999
(Dollars in Thousands)
2000 1999
---- ----
Supplemental Disclosure of Cash Flow Information:
<S> <C> <C>
Cash paid for interest $ 1,416 $ 1,275
======== =======
Cash paid for income taxes $ - $ -
======== =======
Supplemental Schedule of Non-cash Investing and
Issuance of warrants to purchase common stock
for debt issuance costs $ 326 $ -
======== =======
Proceeds from sale of assets placed in escrow
account $ 500 $ -
======== =======
</TABLE>
The Accompanying Notes Are an Integral Part of
These Consolidated Financial Statements.
7
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000. The unaudited consolidated financial statements should
be read in conjunction with the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
2. Earnings Per Share
Basic Earnings Per Share excludes dilution for potential common shares and is
computed by dividing net income or loss by the weighted average number of common
shares outstanding for the period. Diluted Earnings Per Share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. Basic and diluted
Earnings Per Share are the same for the quarters ended March 31, 2000 and 1999,
as all potential common shares were antidilutive.
3. Inventories
Inventories at March 31, 2000 and December 31, 1999 consist of the following:
2000 1999
---- ----
Purchased parts and completed subassemblies, net $ 54,651 $ 43,971
Work-in-process 12,371 13,317
Finished goods 2,936 2,879
------------ ----------
$ 69,958 $ 60,167
============ ==========
At March 31, 2000 and December 31, 1999, the Company classified "life time buy"
inventories of approximately $4.9 million and $3.1 million, respectively, as
other assets.
8
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
4. Restructuring and Sale of Assets
Since the fourth quarter of 1998, the Company has taken actions to increase
capacity utilization through the closure of two facilities and the sale of
substantially all of the assets at two other divisions. The aggregate operating
results for these divisions, derived from the Company's divisional accounting
records (excluding corporate costs, interest expense and income taxes), for the
three months ended March 31, 2000 and 1999 are summarized as follows:
2000 1999
---- ----
Net sales $ 14,510 $ 35,467
Cost of goods sold 15,429 31,530
------------ -------------
Gross profit (loss) $ (919) $ 3,937
============ =============
Selling, general and administrative $ (682) $ (2,023)
============ =============
Goodwill amortization $ -- $ (324)
============ =============
Management estimates that approximately $11,000 of the net sales in 2000
($14,000 in 1999) shown above relate to customers who have agreed to transition
the manufacture of their products to other facilities operated by the Company.
Presented below is a description of each division that was impacted by a sale or
restructuring.
Sale of Tucson Assets. In December 1999, the Company commenced negotiations with
Honeywell International, Inc. for the sale of inventory and equipment at the
Company's facility located in Tucson, Arizona. On February 17, 2000, these
assets were sold to Honeywell for a purchase price of $13,240. The Company
recognized a $1,200 impairment charge in the fourth quarter of 1999 related to
property and equipment at the Tucson facility.
Southeast Operations. On September 30, 1999, the Company initiated a plan to
consolidate and close its Southeast Operations in Fort Lauderdale, Florida. In
connection with the restructuring, the Company recognized a charge of
approximately $700 for severance costs related to approximately 200 employees
who were terminated by April 2000. The unpaid portion of the severance provision
amounted to $100 at March 31, 2000 and is included in accrued compensation and
benefits in the accompanying balance sheet. During the first quarter of 2000,
the Company recognized charges totaling $950 for retention bonuses, relocation
costs and other closure activities.
Management expects the Company will incur additional charges of $300 in the
second quarter of 2000 for closure activities. It is expected that the closure
will be substantially complete by the end of the second quarter.
9
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Sale of Services Division. On September 1, 1999, the Company sold the Services
Division for approximately $28,000. In connection with this sale, the purchaser
and the Company agreed to an Earn-out Contingency (the "EC"). Under the EC, if
the earnings for the year ending August 31, 2000 related to the division sold
are in excess of $4,455 ("Target Earnings"), the Company will be entitled to an
additional payment equal to three times the difference between the actual
earnings and Target Earnings. If actual earnings are less than Target Earnings,
the Company will be required to refund an amount equal to three times the
difference. The maximum amount that either party would be required to pay under
the EC is $2,500; accordingly, the Company has deferred recognition of $2,500 of
the consideration subject to the EC. This amount is included in other accrued
liabilities in the accompanying balance sheet.
Rocky Mountain Operations. In the fourth quarter of 1998, management initiated a
plan to consolidate and close its Rocky Mountain Operations in Greeley,
Colorado. At March 31, 2000, all of the restructuring costs had been paid and no
accrual was remaining related to these restructuring activities.
5. Debt Financing
<TABLE>
<CAPTION>
At March 31, 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 $ --
Note payable to director, interest at 10%, unsecured, due March
2004 3,000 5,000
Note payable to bank under revolving line of credit, interest at the
prime rate (9.0% at March 31, 2000) plus .5%, collateralized by
substantially all assets, due March 2003 -- --
Note payable to Bank Group under revolving line of credit, interest
at theprime rate plus 2.25%, collateralized by substantially all
assets, paid in March 2000 -- 33,184
Note payable to director, interest at LIBOR plus 2%,
annual principal payments of $50, due December 2002, unsecured,
net of discount of $90, paid in March 2000 -- 4,810
-------------- ------------------
Total 57,000 42,994
Less current maturities -- (5,018)
-------------- ------------------
Long-term debt, less current maturities $ 57,000 $ 37,976
============== ==================
</TABLE>
10
<PAGE>
EFTC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Recapitalization. On March 30, 2000, the Company entered into an agreement with
Thayer-BLUM Funding, L.L.C. ("Thayer-BLUM Funding"), an entity formed by
affiliates of Thayer Equity Investors IV, L.P. ("Thayer") and BLUM Capital
Partners, L.P. ("BLUM"), involving a recapitalization of the Company. The
recapitalization agreement provided for Thayer-BLUM Funding to invest a total of
$54,000 in Senior Subordinated Exchangeable Notes ("Exchangeable Notes") and to
subsequently undertake a tender offer for up to 8,250,000 shares of the
Company's currently outstanding common stock at a price of $4.00 per share.
Thayer-BLUM Funding received the right to appoint two new members to the
Company's board of directors.
The Exchangeable Notes initially provide for a paid in kind interest rate of 15%
and are accompanied by warrants to purchase 3,093,154 shares of the Company's
common stock at an exercise price of $.01 per share. However, upon shareholder
approval of this transaction and assuming that the tender offer is consummated
with at least 500,000 shares being purchased therein, the warrants will not
become exercisable and will expire. Accordingly, no value was assigned to the
warrants since they are never expected to become exercisable. Additionally, the
Exchangeable Notes will be replaced with Senior Subordinated Convertible Notes
("Convertible Notes") upon receipt of shareholder approval and consummation of
the tender offer for at least 500,000 shares. The Convertible Notes will provide
for interest at 8.875%, payable in kind. The Convertible Notes may be converted
into the Company's common stock at $2.58 per share, subject to adjustment.
Conversion of the notes will occur at the election of the holders or if EFTC's
common stock trades above $7.50 per share for 45 consecutive trading days.
Commencing on March 30, 2003, the Convertible Notes will automatically convert
if the Company's common stock trades above $4.25 per share for 45 consecutive
trading days. Finally, Thayer-BLUM Funding will have the right to appoint a
majority of the members of the Company's board of directors and will have the
right to approve any significant financings, acquisitions and dispositions.
If shareholders do not approve the transaction or if less than 500,000 shares
are purchased in the tender offer, then the warrants will remain in place and
the interest rate on the Exchangeable Notes will increase to 20%. The maturity
date of the Exchangeable Notes is June 2006. Interest would be compounded
quarterly and will accrue and be added to the principal amount of the
Exchangeable Notes or be payable in additional Exchangeable Notes, at the option
of the Company.
Refinancing of Debt. On March 30, 2000, the Company entered into a new credit
agreement with Bank of America, N.A. to refinance the Company's revolving line
of credit with the Company's previous lender. The new credit facility provides
for a $45,000 revolving line of credit with a maturity date of March 2003.
Initially, the interest rate is the prime rate plus .5%. Total borrowings are
subject to limitation based on a percentage of eligible accounts receivable and
eligible inventory, and substantially all of the Company's assets are pledged as
collateral for outstanding borrowings. The credit agreement requires compliance
with certain financial and non-financial covenants. No amounts were outstanding
under the revolving credit agreement as of March 31, 2000.
On March 30, 2000, the Company also repaid outstanding notes payable in the
aggregate principal amount of $6,810 (net of discount) to a director of the
Company. The Company and director amended the terms of the remaining outstanding
debt to provide for a new unsecured note in the principal amount of $3,000 that
bears interest at 10% and is due March 2004.
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The information set forth below contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed in the statements. See
"Special Note Regarding Forward-Looking Statements" below.
General
The Company is a leading independent provider of high-mix electronic
manufacturing services to original equipment manufacturers (OEMs) in the
avionics, medical, communications, industrial instruments and controls, and
computer-related products industries. The Company's manufacturing services
consist of assembling complex printed circuit boards, cables, electro-mechanical
devices, and finished products.
Although management does not believe that the Company's business is
affected by seasonal factors, the Company's sales and earnings typically vary
from quarter to quarter due to a variety of factors. Some of the factors that
impact quarterly results of operations include the level and timing of customer
orders and the mix of turnkey and consignment orders. The level and timing of
orders placed by a customer vary due to the customer's attempts to balance its
inventory, changes in the customer's manufacturing strategy, and variation in
demand for its products due to, among other things, product life cycles,
competitive conditions and general economic conditions. In the past, changes in
orders from customers have had a significant effect on the Company's quarterly
results of operations. Other factors affecting the Company's quarterly results
of operations may include, among other things, the Company's performance under
the long-term supply agreement with Honeywell, price competition, disposition of
divisions and closure of operating units, the ability to obtain inventory from
its suppliers on a timely basis, the Company's level of experience in
manufacturing a particular product, the degree of automation used in the
assembly process, the efficiencies achieved by the Company through managing
inventories and other assets, the timing of expenditures in anticipation of
increased sales, and fluctuations in the cost of components or labor. Therefore,
the Company's operating results for any particular quarter may not be indicative
of the results for any future quarter of the year.
The following discussion and analysis provides information that EFTC's
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial condition. This discussion should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere herein, as well as with the consolidated financial
statements, notes thereto and the related management's discussion and analysis
of financial condition and results of operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
12
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage
of net sales:
Quarter Ended March 31,
--------------------------------
2000 1999
---- ----
Net sales 100.0% 100.0%
Cost of goods sold 97.9% 86.7%
-------------- --------------
Gross profit 2.1% 13.3%
Selling, general and administrative 7.6% 11.0%
Recapitalization transaction costs 7.7% --
Goodwill amortization 0.1% 0.7%
-------------- --------------
Operating income (loss) (13.3%) 1.6%
============== ==============
Net Sales. Net sales for 2000 were $63.5 million compared to $54.3
million in 1999, which is a increase of 16.9%. The Company has experienced major
changes in its customers and facilities since the beginning of 1999. At the
start of 1999, the Company had eleven facilities. Six of these facilities have
been sold or will be closed by the second quarter of 2000. However, the Company
also added facilities in Phoenix and Mexico during 1999 to support the new
business with Honeywell in connection with the long-term supply agreement
entered into in March 1999 that offset the loss of revenue from other divisions.
The Company's sales for the first quarter of 2000 include approximately $22.4
million of revenue under the Honeywell agreement. However, this increased
revenue was offset by the loss of revenue from the Services division that was
sold on September 1, 1999, and the Tucson assets that were sold on February 17,
2000. The combined impact of the sale of the Services division and the Tucson
assets resulted in a decrease in revenue for the quarter ended March 31, 2000 of
$13 million compared to the same period in 1999.
Gross Profit (Loss). The Company had gross profit of 2.1% in 2000
compared to gross profit of 13.3% in the first quarter of 1999. The decrease in
gross profit during the first quarter of 2000 is primarily attributable to the
sale of assets and closure of four divisions as discussed in Note 4 to the
financial statements. The four facilities subject to sale or closure accounted
for $3.9 million of gross profit during the first quarter of 1999 compared to a
loss of $0.9 million (primarily due to retention bonuses and other costs related
to the closure of the Company's Southeast operations) in the first quarter of
2000. The aggregate impact on gross profit was nearly $4.9 million between the
two quarters. The decrease in gross profit during the first quarter of 2000 was
also negatively impacted by $0.8 million related to the transition of additional
manufacturing services under the Honeywell agreement during February and March
of 2000.
During 1999, margins were negatively impacted by charges of $0.8
million that were included in cost of goods sold due to inventory allowances and
operating charges related to the closure of the Greeley facility. The Greeley
facility was sold in the fourth quarter of 1999 and, accordingly, there were no
charges included in first quarter of 2000 results for this facility.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG & A") decreased 19.3% to $4.8 million in 2000
compared to $6.0 million in the quarter ended March 31, 1999. SG & A expenses
for the quarter ended March 31, 2000, included approximately $0.1 million for
retention bonuses and salaries of administrative employees performing exit
activities in connection with the closure of the Southeast operations. SG & A
expense for the quarter ended March 31, 1999 included increased costs of
infrastructure added in the second half of 1998, including sales and marketing
resources, and added costs associated with operations, quality and information
technology. The primary costs associated with these functions related to
compensation costs.
Recapitalization Transaction Costs. In connection with the
recapitalization discussed in Note 5 to the financial statements, the Company
incurred charges totaling $4.9 million for financial advisor fees, a fee paid to
Thayer-BLUM Funding, and due diligence costs for legal, accounting and
management consultants. The Company capitalized costs associated with the Senior
Subordinated Exchangeable Notes and the new revolving credit agreement, and all
other costs were charged to operations during the quarter ended March 31, 2000.
Management expects that the Company will incur additional costs related to a
special shareholders' meeting and the tender offer of approximately $300,000
during the second quarter of 2000.
Goodwill Amortization. Goodwill amortization for the first quarter of
2000 amounted to $0.1 million compared to $0.4 million in the first quarter of
1999. The decrease in 2000 was attributable to the sale of the Services Group on
September 1, 1999, and the corresponding write-off of $36.5 million of goodwill
that was included in the calculation of the loss on sale of the Services Group.
Interest Expense. Interest expense increased 27.2% to $1.6 million in
the first quarter of 2000 compared to $1.3 million in the same quarter of 1999.
The increase in 2000 was primarily attributable to an increase in amortization
of debt issuance costs of approximately $350,000. This increase was attributable
to accelerated amortization of debt issuance costs and additional costs incurred
in connection with amendments to the credit agreement. Interest expense was also
negatively impacted in 2000 by increases in the prime rate, as well as increases
in the rate charged by the Company's lenders. However, the Company's overall
debt level was lower in 2000, which otherwise offset the increased interest
costs for the first quarter of 2000 compared to the first quarter of 1999.
Substantially higher interest costs are expected in the second quarter
of 2000 since the Company expects to have a debt balance that will be more than
double the average balance during the first quarter of 2000. Additionally, the
$54 million of Exchangeable Notes will provide for interest at 15% until receipt
of shareholder approval, at which time the interest rate would be reduced to
8.875%. However, if shareholder approval is not received, the interest rate will
increase to 20%.
Income Tax Benefit Due to significant net losses in 1999 and the first
quarter of 2000, the Company recorded a valuation allowance for all of its net
deferred tax assets. Management does not expect that a tax provision will be
necessary if the Company generates earnings in 2000, since a significant net
operating loss carryforward is available for income tax purposes. However, this
carryforward may be subject to reduction or limitation as a result of changes in
ownership or certain consolidated return filing regulations.
14
<PAGE>
Liquidity and Capital Resources
Working Capital and Operating Cash Flows. At March 31, 2000, working
capital totaled $34.3 million compared to $26.2 million at December 31, 1999.
The increase in working capital during the first quarter of 2000 is primarily
attributable to the issuance of $54 million in principal amount of the
Exchangeable Notes discussed in Note 4 to the financial statements.
During the remainder of 2000, management expects that sales will
increase between 10% and 25% from first quarter levels as a result of additional
orders placed under the Honeywell supply agreement. The expected impact of this
increase in sales is an improvement in capacity utilization and a return to
profitability. However, if the Company does not effectively manage the
transition process related to this growth, the Company could experience
continued adverse financial performance. Additionally, management expects that
an increase in borrowings under the revolving credit agreement will be required
to fund the higher levels of working capital associated with the anticipated
increase in sales.
Net cash used by operating activities for the quarter ended March 31,
2000 was $21.9 million compared to net cash used in operating activities of $0.8
million in 1999. During 2000, the Company incurred a significant operating loss
that utilized approximately $6.4 million of cash. The Company also utilized cash
of $24.9 million to fund an increase in inventories and other current assets.
These amounts were partially financed by an increase in operating payables and
other accrued liabilities of $9.4 million.
Receivable turns (e.g., annualized sales divided by period end accounts
receivable) increased to 9.9 for the quarter ended March 31, 2000 compared to
6.2 for the quarter ended March 31, 1999.
Current inventories increased 16.3% to $70.0 million at March 31, 2000
from $60.2 million at December 31, 1999. Current inventory turns (i.e.,
annualized cost of sales divided by period end current inventory) for the three
months ended March 31, 2000 indicate that the Company is turning its inventories
3.6 times per year. This is a decrease compared to the fourth quarter of 1999
when inventories were turning 3.8 times per year. Inventory turns in the first
quarter of 2000 were negatively impacted by an increase in inventories of $25
million dollars in connection with preparation for increased business under the
Honeywell agreement. Inventory turns were positively impacted by the
non-operating sale of inventories for $12.0 million related to the Tucson
facility assets. Exclusive of these two events, current inventory turns for the
first quarter of 2000 would have been approximately 4.4 times.
Cash Requirements for Investing Activities. The Company used cash for
capital expenditures totaling $1.2 million in 2000 (primarily related to
additional fit-up costs at the Company's new facility in Phoenix) compared with
$2.3 million in the first quarter of 1999. During the first quarter of 2000, the
Company also received net proceeds of $12.7 million related to the sale of
assets to Honeywell at the Company's former facility in Tucson.
Financing Sources and Related Activities.. In connection with the
purchase of the Services Group and the assets located in Tucson and Fort
Lauderdale, the Company entered into a credit facility on September 30, 1997
with a bank group led by Bank One, Colorado, N.A. This facility was refinanced
with proceeds from the recapitalization described below.
15
<PAGE>
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 have been removed from the Company's
balance sheet.
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 the inventories and
receivables, and the Company was required to incur significant costs for
leasehold improvements and equipment at a new facility in Phoenix, Arizona. In
order to respond to liquidity issues, the Company took a series of actions in
1999 that were designed to ultimately provide the necessary capital to meet
existing obligations to suppliers and banks, and to have access to financing to
meet the additional working capital requirements under the new Honeywell
agreement. The first significant action after obtaining the Honeywell business
was on September 1, 1999, when the Services Group was sold, resulting in net
cash proceeds of $28.0 million. On September 30, 1999, the Company initiated the
consolidation of its Ft. Lauderdale plant into three other EFTC facilities. In
October 1999, the Company sold its facility in Greeley, Colorado for proceeds of
$3.8 million.
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 director purchased $5 million in aggregate
principal amount of subordinated notes issued by the Company. These notes had a
maturity date of March 31, 2000 and provided for interest at a rate of 10%. The
proceeds of these notes were used for general operating purposes. In connection
with the recapitalization transaction described below, the Company repaid the
principal amount outstanding under both subordinated notes. In addition, the
Company paid the remaining outstanding prepayment fee of approximately $150,000
due in connection with the prepayment of the September 1997 notes and a fee of
$100,000 due upon maturity of the November 1999 note. In addition, the November
note agreement was amended to provide for issuance of $3.0 million in aggregate
principal amount of subordinated notes, with a maturity date of March 30, 2004
and bearing interest at 10%.
16
<PAGE>
Recapitalization. Beginning in September 1999, the Company began
searching for debt and equity financing that would permit the Company to also
attract a new senior lender to replace the existing bank group. As a result of
these efforts, on March 30, 2000, the Company entered into an agreement (the
"Recapitalization Agreement") with Thayer-BLUM Funding relating to a
recapitalization of the Company. The Recapitalization Agreement provided for an
initial investment of $54 million in Senior Subordinated Exchangeable Notes
("Exchangeable Notes") and Thayer-BLUM Funding will subsequently undertake a
tender offer for up to 8,250,000 shares of the Company's currently outstanding
common stock at a price of $4.00 per share. Thayer-BLUM Funding received the
right to appoint two new members to the Company's board of directors.
The Exchangeable Notes initially provide for a paid-in-kind interest
rate of 15% and are accompanied by warrants to purchase 3,093,154 shares of the
Company's common stock at an exercise price of $.01 per share. However, upon
shareholder approval of this transaction and assuming that the tender offer is
consummated with at least 500,000 shares being purchased therein, the warrants
will not become exercisable and will expire. Accordingly, no value was assigned
to the warrants since they are never expected to become exercisable.
Additionally, the Exchangeable Notes will be replaced with Senior Subordinated
Convertible Notes ("Convertible Notes") upon receipt of shareholder approval and
consummation of the tender offer for at least 500,000 shares. The Convertible
Notes will provide for interest at 8.875%, payable in kind. The Convertible
Notes may be converted into the Company's common stock at $2.58 per share,
subject to adjustment. Conversion of the notes will occur at the election of the
holders or if EFTC's common stock trades above $7.50 per share for 45
consecutive trading days. Commencing on March 30, 2003, the Convertible Notes
will automatically convert if the Company's common stock trades above $4.25 per
share for 45 consecutive trading days. Finally, Thayer-BLUM Funding will have
the right to appoint a majority of the members of the Company's board of
directors and will have the right to approve any significant financings,
acquisitions and dispositions.
If shareholders do not approve the transaction or if less than 500,000
shares are purchased in the tender offer, then the warrants will remain in place
and the interest rate on the Exchangeable Notes will increase to 20%. The
maturity date of the Exchangeable Notes is June 2006. Interest would be
compounded quarterly and will accrue and be added to the principal amount of the
Exchangeable Notes or be payable in additional Exchangeable Notes, at the option
of the Company.
On March 30, 2000, the Company entered into a new credit agreement with
Bank of America, N.A. to refinance the Company's revolving line of credit with
the Company's previous lender. The new credit facility provides for a $45
million revolving line of credit with a maturity date of March 2003. Initially,
the interest rate is the prime rate plus .5%. Total borrowings are subject to
limitation based on a percentage of eligible accounts receivable and eligible
inventory, and substantially all of the Company's assets are pledged as
collateral for outstanding borrowings. The credit agreement requires compliance
with certain financial and non-financial covenants. No amounts were outstanding
under the revolving credit agreement as of March 31, 2000.
Based on the financing activities completed in March 2000, management
believes the Company has adequate capital resources to fund working capital and
other cash requirements during the remainder of 2000.
17
<PAGE>
Special Note Regarding Forward-Looking Statements
Certain statements in this Report constitute "forward-looking
statements" within the meaning of the federal securities laws. In addition, EFTC
or persons acting on its behalf sometimes make forward-looking statements in
other written and oral communications. Such forward-looking statements may
include, among other things, statements concerning the Company's plans,
objectives and future economic prospects, prospects for achieving cost savings,
increased capacity utilization, increased sales and improved profitability, and
other matters relating to the prospects for future operations; and other
statements of expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of EFTC, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Important factors that could cause such differences
include, but are not limited to, the loss of Honeywell as a customer or
Honeywell's inability to pay, or inability or unwillingness to pay in a timely
manner, its outstanding receivables held by the Company, the Company's ability
to pay its suppliers in a timely manner, changes in economic or business
conditions in general or affecting the electronic products industry in
particular, changes in the use of outsourcing by original equipment
manufacturers, increased material prices and service competition within the
electronic component contract manufacturing industry, changes in the competitive
environment in which the Company operates, the continued growth of the
industries targeted by the Company or its competitors or changes in the
Company's management information needs, difficulties in implementing the
Company's new management information system, difficulties in managing the
Company's growth or in integrating new businesses, changes in customer needs and
expectations, the Company's success in retaining customers affected by the
closure of Company facilities, the Company's success in limiting costs
associated with such closures, the Company's ability to keep pace with
technological developments, increases in interest rates (including the impact on
the Exchangeable Notes if shareholders do not vote in favor of the
recapitalization), governmental actions and other factors identified as "Risk
Factors" or otherwise described in the Company's filings with the Securities and
Exchange Commission.
Quantitative and Qualitative Disclosures about Market Risk
On March 30, 2000, the Company entered into a $45 million revolving
line of credit with Bank of America, N.A. The interest rate on this loan is
based either on the prime rate or LIBOR rates, plus applicable margins.
Therefore, as interest rates fluctuate, the Company may experience changes in
interest expense that could impact financial results. The Company has not
entered into any interest rate swap agreements, or similar instruments, to
protect against the risk of interest rate fluctuations. Assuming outstanding
borrowings of $45 million, if interest rates were to increase or decrease by 1%,
the result would be an annual increase or decrease in interest expense of
approximately $450,000 under this loan.
Depending on the outcome of the shareholder action related to the
approval of the recapitalization, the $54 million of debt will bear interest at
8.875% (if shareholder approval is obtained) which would result in an annual
expense of $4,859,000, or at 20% (if shareholder approval is not obtained) which
would result in annual interest expense of $10,950,000.
18
<PAGE>
PART II. OTHER INFORMATION
Legal Proceedings
There have been no material developments in either of the two legal
proceedings that were filed against the Company and certain of its offices,
directors, and shareholders during September and October 1998 since the
Company's Annual Report on Form 10-K filed on April 14, 2000.
Changes in Securities
Not Applicable.
Defaults Upon Senior Securities
Not Applicable.
Submission Of Matters To A Vote Of Security Holders
Not Applicable.
Other Information
Not Applicable.
Exhibits and Reports on Form 8-K
(a). Exhibits
The following exhibits are filed with this report:
Exhibit Number
27.1 Financial Data Schedule
(b). Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended March 31, 2000.
19
<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: May 15, 2000 /s/ Jack Calderon
-------------------------------------
Jack Calderon
Chairman and Chief Executive Officer
Date: May 15, 2000 /s/ James A. Doran
------------------------------------
James A. Doran
Chief Accounting Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,819,000
<SECURITIES> 0
<RECEIVABLES> 28,180,000
<ALLOWANCES> 2,438,000
<INVENTORY> 69,958,000
<CURRENT-ASSETS> 104,907,000
<PP&E> 31,978,000
<DEPRECIATION> 9,900,000
<TOTAL-ASSETS> 146,583,000
<CURRENT-LIABILITIES> 70,560,000
<BONDS> 57,000,000
0
0
<COMMON> 155,000
<OTHER-SE> 11,559,000
<TOTAL-LIABILITY-AND-EQUITY> 146,583,000
<SALES> 63,526,000
<TOTAL-REVENUES> 63,526,000
<CGS> 62,197,000
<TOTAL-COSTS> 62,197,000
<OTHER-EXPENSES> 9,789,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,608,000
<INCOME-PRETAX> (10,100,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,100,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,100,000)
<EPS-BASIC> (.65)
<EPS-DILUTED> (.65)
</TABLE>
