U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1997
[ ] 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
ELECTRONIC FAB TECHNOLOGY CORP.
(Exact name of registrant as specified in its charter)
Colorado 84-0854616
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7251 West 4th Street
Greeley, Colorado 80634-9763
(Address of principal executive offices)
(970) 353-3100
(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.
YES X NO
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class of Common Stock Outstanding at May 6, 1997
Common Stock, par value $0.01 5,937,060 share
ELECTRONIC FAB TECHNOLOGY CORP.
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income --
Three months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated
Financial Statements -- March 31, 1997 6
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K and Form 8-K/A 12
SIGNATURES 14
<TABLE>
<CAPTION>
ELECTRONIC FAB TECHNOLOGY CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, December 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $353,437 $123,882
Accounts receivable, net of allowances
of $105,000 6,359,773 3,866,991
Inventories 14,645,127 9,146,505
Income taxes receivable 707,826 616,411
Prepaid expenses and other current assets 748,419 496,255
Total current assets 22,814,582 14,250,044
Property, plant and equipment, at cost 16,239,285 12,392,267
Less accumulated depreciation 5,868,245 3,872,443
Net property, plant and equipment 10,371,040 8,519,824
Other assets 74,849 99,773
Goodwill 8,013,050 -
$41,273,521 $22,869,641
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit with bank $3,651,576 $1,800,000
Current portion of long-term debt 454,460 170,000
Accounts payable 5,436,877 2,320,871
Notes payable to customers 709,612 -
Accrued expenses and other liabilities 1,956,227 1,450,684
Total current liabilities 12,208,752 5,741,555
Long-term debt, net of current portion 9,220,540 2,890,000
Deferred income taxes 319,586 315,859
Shareholders' equity
Preferred stock, $.01 par value. Authorized
5,000,000 shares; none issued or outstanding - -
Common stock, $.01 par value. Authorized
45,000,000 shares; issued 5,928,060 shares and
3,940,860 shares 59,281 39,427
Additional paid-in capital 15,630,308 10,187,180
Retained earnings 3,835,054 3,695,620
Total shareholders' equity 19,524,643 13,922,227
$41,273,521 $22,869,641
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
ELECTRONIC FAB TECHNOLOGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended
March 31,
1997 1996
<S> <C> <C>
Net sales $14,036,876 $15,002,959
Cost of goods sold 12,529,311 14,403,137
Gross profit 1,507,565 599,822
Selling, general, and administrative
expense 1,102,975 811,620
Goodwill amortization 22,808 -
Operating income (loss) 381,782 (211,798)
Other income (expense):
Interest expense (185,355) (95,526)
Other, net 16,127 (7,144)
(169,228) (102,670)
Income (loss) before income taxes 212,554 (314,468)
Income tax expense (benefit) 73,119 (126,861)
Net income (loss) $139,435 ($187,607)
Income (loss) per common and
common equivalent share $0.03 ($0.05)
Weighted average shares outstanding 4,857,667 3,958,335
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
ELECTRONIC FAB TECHNOLOGY CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31,
1997 1996
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $139,435 $(187,607)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation 337,565 324,465
Deferred income taxes 92,534 (23,936)
(Gain) loss on sale of fixed assets 4,188 14,441
Changes in operating assets and liabilities
net of the effects of acquisitions:
Accounts receivable (676,687) 140,696
Inventories (1,038,472) (1,727,133)
Prepaid expenses and other current assets (98,608) 159,671
Accounts payable and accrued expenses 604,614 (582,527)
Income taxes (19,415) (102,925)
Other assets 28,795 (2,656)
Net cash (used in) operating activities (626,051) (1,987,511)
Cash flows from investing activities
Proceeds from sale of equipment 239,706 95,600
Purchase of CE Companies (7,279,601) -
Purchase of property, plant and equipment (547,858) (708,100)
Net cash (used in) investing activities (7,587,753) (612,500)
Cash flows from financing activities
Proceeds from long-term borrowings 6,700,000 -
Common stock issued, net of issuance costs 17,982 -
Principal payments on long-term debt (85,000) (85,000)
Borrowings (payments) on notes payable, net 1,810,377 2,250,000
Net cash provided by financing activities 8,443,359 2,165,000
Increase (decrease) in cash and
cash equivalents 229,555 (435,011)
Cash and cash equivalents:
Beginning of period 123,882 481,086
End of period $353,437 $46,075
</TABLE>
See notes to condensed consolidated financial statements.
ELECTRONIC FAB TECHNOLOGY CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Basis of Presentation
The accompanying unaudited consolidated condensed 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 ending March 31, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. The
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and footnotes thereto included
in the Company's annual report and Form 10-K for the year ended December
31, 1996.
Note 2-- Acquisitions
On February 24,1997, the Company acquired two affiliated entities,
Current Electronics, Inc., an Oregon Corporation, and Current
Electronics (Washington), Inc., a Washington Corporation (the "CE
Companies"), for total consideration of approximately $10.3 million,
consisting of 1,980,000 shares of Company common stock and approximately
$4.9 million in cash. The Company recorded goodwill of approximately $8
million in connection with the acquisition, which will be amortized over
30 years. The combined revenues of the CE Companies for the fiscal year
ended September 30,1996 was approximately $32.5 million.
This acquisition was accounted for as a purchase with the results
of operations from the acquired business included in the Company's
results of operations from the acquisition date forward.
The proforma information shown below reflects revenues, net income
and earnings per share for the first quarter of 1997 and 1996 as if the
business combination had been completed at the beginning of each period.
1997 1996
Net sales $18,477,030 $23,133,068
Net income $ 349,084 $ 264,011
Earnings per share $ 0.07 $ 0.04
Note 3--Inventories
The components of inventory consist of the following:
March 31, December 31,
1997 1996
Purchased parts
and completed
subassemblies $11,629,731 $7,640,712
Work-in-process 2,719,598 1,256,570
Finished Goods 295,798 249,223
$14,645,127 $9,146,505
Note 4--Supplemental Disclosure of Cash Flow Information
March 31, March 31,
1997 1996
Cash paid during the period for:
Interest $124,963 $ 96,797
Income taxes $0 $0
Common stock issued in
exchange for stock of Current
Electronics, Inc. $5,445,000
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THREE MONTHS ENDED MARCH 31, 1997
This information set forth below contains "forward looking
statements" within the meaning of the federal securities laws and
other statements of expectations, beliefs, plans, and similar
expressions concerning matters that are not historical facts. These
statements are subject to risks and uncertainties that could cause
actual results to differ materially from those expressed in the
statements.
RESULTS OF OPERATIONS
Net sales. Net sales are net of discounts and are recognized
upon shipment to a customer. The Company's net sales decreased by
6.4% to $14,036,876 for the first quarter of fiscal 1997, from
$15,002,959 during the same period in fiscal 1996. The decrease in
net sales is due primarily to the loss of three customers in 1996
which were not totally backfilled with new sales or sales from
existing customer's new programs in the first quarter of 1997. The
effect of the loss of these three customers was lessened by the
acquisition of the CE Companies on February 24,1997, which
contributed sales from the day of the acquisition to the end of the
quarter.
Gross profit. Gross profit equals net sales less cost of goods
sold (such as salaries, leasing costs, and depreciation charges
related to production operations); and non-direct, variable
manufacturing costs (such as supplies and employee benefits). In the
first quarter of fiscal 1997 gross profit increased 151.3% to
$1,507,565 compared to $599,822 for the same period in 1996. The
gross profit margin for the first quarter of fiscal 1997 was 10.7%
compared to 4.1% for the same period of fiscal 1996. The primary
reason for the increase in gross profit is the adoption of the
Asynchronous Process Manufacturing (APM) in the later part of 1996.
APM standardizes processes and sets them up in a parallel pattern on
the manufacturing floor. Product can flow to any process, i.e., any
board to any line. This unique arrangement combined with
proprietary information technologies allows for the manufacture of
high-mix product in a high speed mode. The key to making APM work is
to increase throughput by decreasing setup time, standardizing work
centers and processing smaller lot sizes. EFTC has done this by
designating teams to set up off-line feeders and standardizing loading
methods regardless of product complexity. APM has allowed EFTC to
increase productivity by producing product with less people which
ultimately reduces costs and increases gross profit. The Company also
realized improvements in gross profit from the acquisition of the CE
Companies which contributed to the increase by including their
operations from the closing date of the merger and acquisition
(February 24, 1997) to the end of the quarter.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses (SGA expense) consist primarily of
non-manufacturing salaries, sales commissions, and other general
expenses. SGA expense increased by 35.9% to $1,102,975 in the first
quarter of 1997, compared with $811,620 a year earlier. As a
percentage of net sales SGA expenses increased from 5.4% of net sales
in the first quarter of fiscal 1996 to 7.9% of net sales in fiscal
1997. The primary reason for the increase in SGA expense is the
inclusion of the CE Companies SGA expenses from February 24, 1997 to
March 31, 1997.
Operating income. Operating income for the first quarter of
fiscal 1997 increased to $381,782 from a loss of $211,798 for the
first quarter of fiscal 1996. Operating income as a percentage of net
sales increased to 2.71% in the first quarter of fiscal 1997 from
(1.4%) in the same period last year. The increase in operating income
is attributable to increased efficiencies associated with APM and the
acquisition of the CE Companies as explained above.
Interest expense. Interest expense for the first quarter of
1997 was $185,355 compared to $95,526 for the same period in fiscal
1996. The increase in interest is primarily the result of the
acquisition debt associated with the merger and acquisition of the CE
Companies and increased operating debt used to finance both
inventories and receivables for EFTC and the CE Companies in the first
quarter of 1997.
Income tax expense. The estimate of the Company's effective
income tax rate for the first quarter of fiscal 1997 and 1996 was
34.4% and 40.3% respectively. This percentage fluctuates
substantially because relatively small dollar amounts tend to move the
rate significantly as estimates change. The Company expects that the
rate will normalize in future quarters and be around the 37% range.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of fiscal 1997 cash used in operations
was $626,051 compared to cash used in operations of $1,987,511 in the
same period last year.
As of March 31, 1997, working capital totaled $10,605,830
compared to $8,508,489 at December 31, 1996. The increase is
attributable to the inclusion of the acquisition of the CE Companies
that occurred on February 24, 1997.
Accounts receivable increased 64.5% to $6,359,773 at March 31,
1997 from $3,866,991 at March 31, 1996. A comparison of receivable
turns (i.e. annualized sales divided by current accounts receivable)
for the first quarter of fiscal 1997 and the first quarter of fiscal
1996 is 8.3 and 15.5 turns, respectively. The 1997 receivable turn is
distorted because the sales for the first quarter includes only one
month and four days of the CE Companies revenues. Based on historical
annual revenues of the CE Companies and EFTC combined, the receivable
turns would be 13.8 times.
Inventories increased 60.1% to $14,645,127 at March 31, 1997
from $9,146,505 at March 31,1996. A comparison of inventory turns
(i.e. annualized cost of sales divided by current inventory) for the
first quarter of fiscal 1997 and 1996 shows a decrease to 3.4 from
6.3, respectively. The 1997 inventory turn is distorted because the
cost of sales for the first quarter includes only one month and four
days of the CE Companies costs. Based on historical annual cost of
sales of the CE Companies and EFTC combined, the inventory turns would
be 5.5 times.
The Company used cash to purchase capital equipment totaling
$547,858 in the first quarter of 1997, compared with $708,100 in the
same period last year. The Company also used cash to purchase the CE
Companies, as explained earlier in the amount of $7,279,601. Proceeds
from long-term borrowings of $6,700,000 were used to help fund the
purchase of the CE Companies.
On February 24, 1997, the Company renegotiated its revolving
line of credit, negotiated a 90 day bridge loan and incurred
additional equipment debt in conjunction with the merger and
acquisition of the CE Companies. The revolving line of credit was
increased to $15,000,000 and has a maturity date of June 5, 1998.
Interest on this credit facility accrues at the Bank One Prime rate
plus .25% (8.5% on March 31, 1997). The credit facility is
collateralized by substantially all of the Company's assets, other
than real estate. The loan agreement from this facility contains
restrictive covenants relating to capital expenditures, borrowings and
payment of dividends, and certain financial statement ratios. The
credit facility may be withdrawn/canceled at the banks option under
certain conditions such as default or in the event the Company
experiences a material negative change in financial condition. The
short term bridge facility was for $4,900,000 and has a maturity date
of May 24, 1997. The interest rate accrues at the Bank One Prime rate
plus .25% (8.5% on March 31, 1997). The proceeds from this loan were
used to pay the cash portion of the consideration to be paid in the
merger and acquisition noted above. The Company has engaged in
discussions for issuance of convertible debt or preferred stock, the
proceeds of which would be used to repay the bridge facility. The
bridge facility was conditioned on the Company's receipt of a third
party commitment for the purchase of the convertible debt or preferred
stock which has been obtained. The Company also issued a $1,800,000
five year note with a maturity date of April 5,2002. The interest
rate will be 8.95% per annum. The Company will pay this loan in 60
regular monthly payments of $36,983 and one final payment of $41,983.
These payments include both principal and interest. The proceeds of
this loan were used to pay off equipment debt of the CE Companies as
per the merger agreement.
The Company has committed to construct a new manufacturing
facility in Oregon to replace the present location in Oregon at an
approximate cost of $5,000,000. The Company is currently negotiating
the financing on this new facility and expects to start construction
in late May or early June of 1997.
The Company may require additional capital to finance
enhancements to, or expansions of, its manufacturing capacity in
accordance with its business strategy. Management believes that the
need for working capital will continue to grow at a rate generally
consistent with the growth of the Company's operations. Although no
assurance can be given that financing will be available on terms
acceptable to the Company, the Company may seek additional funds, from
time to time, through public or private debt or equity offerings, bank
borrowing, or leasing arrangements.
QUARTERLY RESULTS
Although management does not believe that the Company's business
is affected by seasonal factors, the Company's sales and earnings may
vary from quarter to quarter, depending primarily upon the timing of
customer orders and product mix. Therefore, the Company's operating
results for any particular quarter may not be indicative of the
results for any future quarter of the year.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant held a Special Meeting of the Stockholders on
February 24, 1997. A proposal to approve the issuance of 1,980,000
shares of the Company's common stock, par value $.01 per share (The
"common stock"), in connection with (A) the merger of Current
Electronics, Inc., an Oregon corporation ("CEI"), with and into
Current Merger Corp., an Oregon corporation and a wholly-owned
subsidiary of the Company, in exchange for such common stock and a
cash payment of $3,370,000 subject to adjustment, and (B) the payment
of $1,530,000, subject to adjustment, to the existing shareholders of
Current Electronics (Washington), Inc., a Washington corporation and
an affiliate of CEI ("CEWI"), in exchange for all of the outstanding
capital stock of CEWI was voted on. Voting in favor were 2,270,851,
opposed were 5,450, abstaining were 1,500 and shares not voted were
1,666,959.
The shareholders approved the proposal to amend the Company's
Equity Incentive Plan to increase the number of shares of the
Company's common stock reserved for issuance thereunder from 325,000
to 995,000 and to make certain other changes. Voting in favor were
2,152,911, opposed were 123,330, abstaining were 1,560 and shares not
voted were 1,666,959.
The shareholders approved the proposal to amend the Company's
Stock Option Plan for Non-Employee Directors to increase the number of
shares of the Company's common stock reserved for issuance thereunder
from 80,000 to 160,000, to provide that options may be granted
thereunder to non-employee directors as determined by the Board of
Directors of the Company and to make certain other changes. Voting in
favor were 2,260,191, opposed were 16,050, abstaining were 1,560 and
shares not voted were 1,666,959.
Item 6 (A). EXHIBITS
EXHIBIT
NUMBER
27 Financial Data Schedule.
ITEM 6 (B). REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission during the quarter ended March 31, 1997. The
following items were reported in Form 8-K dated March 5, 1997:
Item 2. Acquisition or Disposition of Assets- The Company completed its
acquisition of Current Electronics, Inc., an Oregon corporation
and its affiliate, Current Electronics (Washington),Inc., a
Washington corporation pursuant to an Agreement and Plan of
Merger, dated January 15, 1997, as approved by the stockholders
of the Company at a special meeting held on February 24, 1997.
Item 7. Financial Statements and Exhibits- The following pro forma
financial information was included in said report:
(I) Unaudited Pro Forma Condensed Statement of Operations for
the Nine Months Ended September 30,1996;
(ii) Unaudited Pro Forma Condensed Statement of Operations for
the Year Ended December 31,1995;
(iii) Unaudited Pro Forma Condensed Balance Sheet as of
September 30, 1996.
Exhibit
Number
2.1 Agreement and Plan of Merger among Electronic Fab
Technology Corp., Current Merger Corp., and Current
Electronic, Inc., dated as of January 15, 1997.
2.2 Share Purchase Agreement, dated as of January 15, 1997,
among the Company and the shareholders of Current
Electronics (Washington), Inc.
10.1 Registration Rights Agreement, dated as of February
24, 1997, among the Company, Charles E. Hewitson,
Matthew J. Hewitson, and Gregory Hewitson and certain
other parties.
10.2 Indemnification Agreement, dated as of February 24, 1997,
among the shareholders of Current Electronics, Inc. party
thereto, the shareholders of Current Electronics
(Washington), Inc. party thereto and the Company.
ITEM 6 (B). REPORTS ON FORM 8-K/A
The Company filed a Current Report on Form 8-K/A with the Securities
and Exchange Commission on May 2, 1997. The following items were reported
in the Form 8-K/A dated May 2, 1997:
Item 7. Financial Statements and Exhibits-The following statements
of Current Electronics, Inc. and Current Electronics
(Washington), Inc. were included in said report:
(i) Current Electronics, Inc. and Current Electronics
Washington, Inc., Combined Balance Sheets as of
September 30, 1996 and 1995 and Combined Statement
of Income and Retained Earnings and Combined Statement
of Cash Flows for the three years ended September 30, 1994.
(ii) Unaudited Pro Forma Condensed Balance Sheet as of
December 31, 1996
(iii) Unaudited Pro Forma Condensed Statement of Operations for
the Year Ended December 31,1996.
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.
ELECTRONIC FAB TECHNOLOGY CORP.
(Registrant)
Date: May 14, 1997 _____/s/Jack Calerson_____
Jack Calderon
President and Chief Executive Officer
Date: May 14, 1997 __/s/Stuart W. Fuhlendorf__
Stuart W. Fuhlendorf
Treasurer and Chief Financial Officer
Date: May 14, 1997 ___/s/Brent L. Hofmeister___
Brent L. Hofmeister
Controller
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