UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO 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
(State or other jurisdiction of incorporation of organization)
84-0854616
(I.R.S. Employer Identification No.)
9351 Grant Street
Denver, Colorado
(Address of principal executive offices)
80634
(Zip code)
Registrant's telephone number, including area code: 303-451-8200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[ ]
As of March 25, 1998, the number of outstanding shares of Common Stock
was 11,849,696. As of such date, the aggregate market value of the shares of
Common Stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market, was approximately $84,128,309.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders is incorporated by reference in Part III of this Form 10-K.
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PART 1. Business
General
EFTC Corporation (together with its subsidiaries, the "Company" or
"EFTC"), is a leading independent provider of high-mix electronic manufacturing
services ("EMS") and repair and warranty services to original equipment
manufacturers ("OEM's"). The Company's manufacturing services focus on a market
niche of high-mix electronic products--products that are characterized by
high-speed production. The Company also provides hub-based repair and warranty
services that are marketed as part of the logistics service offerings of the two
largest companies that specialize in overnight delivery services in the United
States. These hub-based services are provided principally through such overnight
delivery companies' hub facilities located in Memphis, Tennessee and Louisville,
Kentucky (the "Overnight Delivery Hubs").
Through a series of acquisitions completed in 1997, the Company has
expanded its operations from one manufacturing facility in Colorado at the
beginning of 1997 to seven facilities throughout the United States at December
31, 1997. Additionally, these acquisitions have strategically expanded the
Company's breadth of high-mix service offerings to include concurrent
engineering, subassembly manufacturing, next-day delivery of assemblies and
warranty and post-warranty repair services.
Industry Overview
Electronics Manufacturing Services. The electronic manufacturing
services industry emerged in the United States in the 1970s and began to grow
rapidly in the 1980s. By subcontracting their manufacturing operations, OEMs
realized productivity gains by reducing manufacturing capacity and the number of
in-house employees needed to manufacture products. As a result, capital that
such OEMs would have otherwise devoted to manufacturing operations became
available for other activities, such as product development and marketing. Over
time, OEMs have determined that manufacturing is not one of their core
competencies, leading them to outsource an increasing percentage, and in some
cases all, of their manufacturing capacity to EMS providers. The Company
believes that many OEMs now view EMS providers as an integral part of their
business and manufacturing strategy rather than as a back-up source to in-house
manufacturing capacity during peak periods. The types of services now being
outsourced have also grown. The Company believes that OEMs are outsourcing more
design engineering, distribution and after-sale support, in addition to material
procurement, manufacturing and testing.
Repair and Warranty Services. The Company believes that OEMs are also
under pressure to control their warranty and service costs without allowing
customer service to suffer. This pressure has increased as warranty periods have
grown longer and product life-cycles have grown shorter. As with manufacturing
services, many OEMs have determined that handling repair and warranty service
and providing repair services after warranty expiration are not within their
core competencies. Outsourcing allows the OEMs to focus their efforts on product
research, design, development and marketing. OEMs can also obtain other benefits
from the use of outside repair service providers, including reduced spares
inventory, faster turns on inventory and improved customer service for products
during the warranty period as well as after expiration of the warranty period.
The Company's hub-based service centers allow OEMs and their customers
accelerated repair cycles by eliminating transportation legs to and from the
shipper to the repair facilities.
Industry Trends. The Company believes that the growth of outsourcing
combined with the increasing number of types of electronic products that have
emerged over the last decade have significantly increased the variety of
electronic manufacturing services required by OEMs. Management also believes
that more OEMs from diverse industries are outsourcing manufacturing. The
proliferation of electronic products in such diverse fields as digital avionics,
electronic medical diagnostics and treatment, communications, industrial
controls and instrumentation and computers has placed increasing demands on EMS
providers to adapt to new requirements specific to different product types.
Similarly, the increasing diversity of the industries served by their OEM
customers is placing increased demands on EMS providers to expand their
value-added capabilities or more narrowly focus on a particular set of
manufacturing methods, technologies, quality criteria, and logistic needs,
resulting in an increasing need for EMS providers to specialize their services.
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The Company believes that OEMs are offering, and in future will
increasingly offer, electronic products that are customized to specifications of
OEMs on a "box build" basis and to the specifications of end users on a
"build-to- order" ("BTO") basis. In "box build" services, the manufacturer
assembles parts and components, some of which may be purchased from other
manufacturers, into a finished product that meets the OEM's specifications. BTO
services are box-build services in which the lot size may frequently consist of
a single unit and is customized to the specifications of an end user. Typically,
these products have some basic, mass-produced parts and special parts that are
combined in numerous configurations to form highly customized products. The
Company believes EMS providers seeking to participate in this BTO market niche
will be required to build these products as orders are received from OEMs to
permit such OEMs to reduce their inventory costs and to meet end-users' desires
for fast order fulfillment. The Company is pursuing a specialization strategy
within the EMS industry that focuses on providing a broad range of high-mix
manufacturing and repair and warranty services with an emphasis on high-speed
production and repair. The Company believes that OEMs that have historically
been volume producers, but who are now shifting to BTO business models, will
also be attracted to EFTC's integrated assembly, logistic, and repair
capabilities at the Overnight Delivery Hubs.
Management believes that the Company's exclusive focus on high-mix
production techniques will serve the needs of traditional OEMs and is also
well-suited for the BTO market. All of the Company's systems are oriented toward
small-lot processing from cable assembly, to card assembly, to box-build level.
The Company will outsource all mass- produced items to commodity suppliers and
manufacture the complex high-mix items at one of the Company's regional
facilities. Final BTO assembly will be done within the Overnight Delivery Hubs
in Memphis and Louisville where the Company currently offers repair and warranty
services. This strategy positions the Company to offer OEMs a simplified, more
cost effective logistic solution to the delivery of their products. By locating
its repair and warranty services within the Overnight Delivery Hubs, the Company
believes it can reduce inventory pipelines, minimize transportation legs and
gain more time to respond to customer needs.
The Company's objective is to be a leading provider of electronic
manufacturing services exclusively focused on the needs of high-mix OEM
customers in its targeted markets. The Company believes its customers are
increasingly focused on improved inventory management, reduced time to market,
BTO production, access to leading-edge manufacturing technology and reduced
capital investment. The Company's strategy is to offer customers select service
offerings which utilize the Company's core competency of small-lot processing
and logistics benefits arising from the unique positioning of its repair and
warranty services and, in the future, BTO services at the Overnight Delivery
Hubs. The Company believes that this strategy is to create a broad geographic
presence, to provide innovative manufacturing solutions, to provide a broad
range of manufacturing services including, in the future, BTO services and to
help OEMs simplify inventory and logistics management.
Services
Manufacturing Services Overview. The Company's turnkey manufacturing
services consist of assembling complex printed circuit boards (using both
surface mount and pin-through-hole interconnection technologies), cables,
electromechanical devices and finished products. The Company also provides
computer-aided testing of printed circuit boards, subsystems and final
assemblies. In certain instances, the Company completes the assembly of its
customers' products at the Company's facilities by integrating printed circuit
boards and electro-mechanical devices into other components of the customer's
products. The Company obtained, from the International Organization of
Standards, ISO 9002 certification in 1994.
The Company offers customer-select service offerings that utilize the
Company's core competency of small-lot processing and logistic benefits due to
the position of its repair and warranty service operations within the Overnight
Delivery Hubs. The Company is developing plans to offer BTO services in the
future which would be based at the Overnight Delivery Hubs. In addition, the
Company has also innovated additional services customized to meet the needs of
OEMs that develop and sell high-mix products.
Broad Geographic Presence. Electronic component manufacturing requires
close coordination of design and manufacturing efforts. The Company's strategy
to achieve that coordination is to provide front-end design in
manufacturability, engineering services, design for test engineering services,
prototypes, and complex high-mix production through regional facilities located
close to OEM engineering centers. This proximity allows for faster product
introduction and greater use of concurrent engineering. In pursuit of its
manufacturing strategy, the Company has made
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acquisitions in Oregon, Washington, Arizona and Florida. To pursue its
integrated repair and warranty strategy, the Company acquired a repair and
warranty services organization located within the Overnight Delivery Hubs in
Memphis, Tennessee, Louisville, Kentucky and Tampa, Florida. The Company
believes that this configuration of sites allows the Company to provide
flexible, time-critical services to its customers. See "--Description of
Property."
Asynchronous Process Manufacturing. In the third quarter of 1996, the
Company introduced Asynchronous Process Manufacturing ("APM"), a new
manufacturing methodology, at its Rocky Mountain facility. APM is an innovative
combination of high-speed manufacturing equipment, sophisticated information
systems and standardized process teams designed to manufacture mixtures of small
quantities of products faster and with more flexibility. APM allows for the
building of small lots in very short cycle times. The Company is continuing to
define APM with the goal of reducing manufacturing cycle time for high-mix
circuit cards to two days. The Company plans to implement APM at all of its
facilities and for all of its customers as part of a strategy to focus the
Company exclusively on manufacturing high-mix products. APM implementation
requires a complete redesign of the Company's manufacturing operations,
reorganizing personnel into process teams and revising documentation. At the
Company's Rocky Mountain facility, the physical moves were completed in
September 1996 and by the end of October 1996 APM was fully implemented. The
Company has begun implementing APM at its existing Newberg, Oregon facility, but
will not complete that implementation until after its new manufacturing facility
under construction in Newberg, Oregon is completed. The Company also plans to
implement APM at its other facilities, at appropriate times.
APM improves throughput of certain assembly processes over traditional
continuous (synchronous) flow processing ("CFM"), which is the predominant
method used in high-volume manufacturing. With APM, the Company is able to
process products rapidly using a combination of new discontinuous flow methods
for differing product quantities, fast surface mount assembly systems, test
equipment and high-volume, high-speed production lines. In the APM model,
materials are moved through the production queue at high-speed and not in a
continuous or linear order as under CFM. Instead, materials are moved through
the assembly procedure in the most efficient manner, using a computer algorithm
developed for the Company's operations, with all sequences controlled by a
computerized information system.
High-mix manufacturing using APM involves a discontinuous series of
products fed through assembly in a start- stop manner, heretofore incompatible
with high-speed techniques. APM is an alternative to both CFM and batch
processing often used in smaller scale manufacturing. Until now, the combination
of small lots with numerous differences in configuration from each lot to the
next and high-speed manufacturing has been viewed as difficult, if not
impossible, by many high-mix manufacturers. The Company believes that CFM
techniques used by high-volume, high-speed ECMs cannot accommodate high-mix
product assembly without sacrificing speed, while smaller ECMs capable of
producing a wide variety of products, often find it difficult to afford
high-quality, high-speed manufacturing assets or to keep up with OEMs' growing
product demand. Under CFM, all assembly occurs on the same line, thereby slowing
down the process with non-value-added operations. Under APM, most
non-value-added operations are performed in the most efficient manner, off-line,
thereby keeping the assembly process moving. A hybrid of CFM and batch
production techniques, APM sets optimal process parameters and maximizes
velocity in producing smaller lot quantities. By designating teams to set up
off-line feeders, standardizing loading methods regardless of product
complexity, and most importantly, improving employee motivation, the Company's
application of APM has decreased set-up and cycle times, standardized work
centers, allowed processing of smaller lot sizes and increased the Company's
productivity.
APM and the Company's supporting software represent and, are expected
to continue to represent, a critical part of the Company's high-mix
manufacturing strategy. The use, by third parties, of the concepts or processes,
developed by the Company, that comprise APM is not legally restricted. The APM
process is therefore subject to replication by a competitor willing to invest
the resources to do so and the software similar to that used by the Company is
available from third parties having rights thereto. To protect its know-how and
processes related to APM, the Company primarily relies upon a combination of
nondisclosure agreements and other contractual provisions, as well as the
confidentiality and loyalty of its employees. However, there can be no assurance
that these steps will be adequate to prevent a competitor from replicating the
APM process or that a competitor will not independently develop know-how or
processes similar or superior to the Company's APM process. The adoption by its
competitors of a process that is similar to, or superior to, the Company's APM
process would likely result in a material increase in competition faced by the
Company for its targeted market of high-mix OEMs.
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Design and Testing Services. The Company also participates in product
design by providing its customers "concurrent engineering" or "design for
manufacturability" services. The Company's applications engineering group
interacts with the customer's engineers early in the design process to reduce
variation and complexity in new design and to increase the Company's ability to
use automated production technologies. Application engineers are also
responsible for assuring that a new design can be properly tested at a
reasonable cost. Engineering input in component selection is also essential to
assure that a minimum number of components are used, that components can be used
in automated assembly and that components are readily available and cost
efficient. The Company also offers customers a quick- turnaround, turnkey
prototype service.
The Company has the capability to perform in-circuit and functional
testing, as well as environmental stress screening. In-circuit tests verify that
components have been properly inserted and that the electrical circuits are
complete. Functional tests determine if a board or system assembly is performing
to customer specifications. Environmental tests determine how a component will
respond to varying environmental factors such as different temperatures and
power surges. These tests are usually conducted on a sample of finished
components although some customers may require testing of all products to be
purchased by that customer. Usually, the Company designs or procures test
fixtures and then develops its own test software. The change from
pin-through-hole technology to surface mount technology is leading to further
changes in test technology. The Company seeks to provide customers with highly
sophisticated testing services that are at the forefront of current test
technology. Because the density and complexity of electronic circuitry
constantly are increasing, the Company seeks to utilize developing test
technology in its automated test equipment and inspection systems in order to
provide superior services to customers.
Repair and Warranty Services. In September 1997, the Company acquired
the Circuit Test, Inc., Airhub Service Group, L.C. and CTI International, L.C.
(collectively, the "CTI Companies"), three affiliated companies, a hub-based,
component-level repair organization focused on the personal computer and
communications industries. The CTI Companies pioneered the "end-of-runway" or
"airport-hub-based" repair strategy and are the only providers with operations
inside and integrated with the operations of the Overnight Delivery Hubs. The
Company believes that through the CTI Companies' long tenure in the industry,
high-quality technical capabilities, logistically advantageous site locations,
and strong relationships with transportation industry leaders, the CTI Companies
have developed and optimized "service spares pipeline," allowing lower OEM costs
and improving end-user service levels.
The Company seeks to differentiate itself from its competitors by
offering the customer service offerings that utilize logistic benefits resulting
from the positioning of the CTI Companies' operations at the Overnight Delivery
Hubs. By taking advantage of the movement of goods through the Overnight
Delivery Hubs and the timing of the arrival and departure of planes from the
Overnight Delivery Hubs, the Company believes it will be well-positioned within
the industry to minimize: (i) the number of transportation legs incurred in the
overall movement of goods; (ii) the total inventory pipelines required for final
build of goods in a BTO model; and (iii) the inventory pipeline required to
support a rapid repair and warranty service.
The Company's repair service offering complements the transportation
logistics services marketing efforts of the two principal transportation
providers at the Overnight Delivery Hubs, who work with the Company in providing
access to large OEM accounts. The Company has exercised tight cost control on
costs by using a flexible, part-time labor pool and leveraging the sales and
marketing efforts of these transportation and logistics service providers.
Additionally, beyond the requisite piece-part inventory for repairs, the Company
carries minimal OEM inventory to reduce its exposure to inventory obsolescence.
The Company's repair and warranty services handle various types of
equipment, including computer monitors, PC boards, routers, laptops, printers,
scanners, fax machines, pen-based products, PDAs, and keyboards. The Company
works with its customers on "advance exchange" programs, whereby end users
receive overnight replacement of their broken components, which are in turn
repaired by the Company and replaced into the OEMs' "service spares inventory
pipeline" for future redistribution. The Company thus assists OEM customers in
increasing inventory turns, reducing spares inventory, lowering overall costs,
accelerating repair cycles, and improving customer service. Customer service is
improved through both quicker turnaround time for in-warranty claims, as well as
having the Company support end- customers with out-of-warranty claims and
end-of-life products.
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The Company believes that the location of its repair facilities at the
Overnight Delivery Hubs is a significant competitive advantage for the Company's
repair and warranty service offerings and a majority of the Company's repair and
warranty service customers come from joint marketing efforts with such
transportation providers. The Company does not, however, have any long-term
contracts or other arrangements with these overnight delivery service providers,
each of which could elect to cancel the Company's lease, to cease providing
scheduling accommodations or to cease joint marketing efforts with the Company
at any time. If the Company ceased to be allowed to share facilities and
marketing arrangements with either or both of these overnight delivery service
providers, there can be no assurance that alternate arrangements could be made
by the Company to preserve such advantages and the Company could lose
significant numbers of repair customers. In addition, work stoppages or other
disruptions in the transportation network may occur from time to time which may
affect these transportation providers. Such events could have a material adverse
effect on the Company's business and results of operations.
Build-to-Order Services. The Company believes OEMs are shifting their
focus to increase demand for customized products. In the past, electronic
products were typically mass produced, sold through distributors to retailers
who, in turn, sell to the mass market. Currently, the Company believes there
will be an increased need for custom producers who build to a custom order
received directly from an end user through telephone or internet ordering
systems. For example, several computer manufacturers have begun to market
computers directly to, and to receive orders directly from, end-users. The
products are then rapidly custom-built and delivered to the end-user.
Custom products are by definition high-mix in that they are built in
small lots and produced in a wide variety of configurations. Management believes
that the Company's core competency of small-lot processing using its APM model
will permit the Company to begin providing BTO services. The Company is
developing a plan to begin BTO manufacturing, which includes these elements:
- - High-mix circuit cards and subassemblies will be manufactured at one of its
regional sites,
- - Commodity high-volume cards and subassemblies will be outsourced to volume
commodity producers,
- - The Company's high-mix products and outsourced commodities will be delivered
to its BTO facilities located within Overnight Delivery Hubs,
- - Orders will be received at the Overnight Delivery Hubs, and
- - Final product will be assembled at facilities currently used for
repair/service utilizing the APM model and delivered to the end user.
Management believes that this infrastructure, combined with its APM model, will
provide OEMs a cost-advantageous model to serve their BTO needs. The Company can
give no assurance, however, that it will begin BTO service or that the Company
will successfully attract customers to utilize this new offering.
The Company's strategy includes the development of a business plan to
integrate its existing and newly-acquired businesses in order to offer BTO
services, oriented around a hub-based distribution system, to its customers.
This plan represents an expansion into a new line of business with which the
Company has limited operating experience and will require capital expenditures,
certain operational changes and integration of software. There can be no
assurance that the Company will successfully implement this plan or market these
services and the failure to do so could change the Company's business and growth
strategies and adversely affect the Company's long-term business prospects.
Customers and Marketing
The Company seeks to serve traditional high-mix OEMs and OEMs that
produce high-volume products and need high-mix repair warranty services, which
by their nature are high-mix services, or plan to implement high-mix BTO
strategies. The Company has recently reorganized its manufacturing marketing
efforts to focus on the following markets: (1) aerospace and avionics; (2)
medical devices; (3) communications; (4) industrial controls and
instrumentation; and (5) computer-related products.
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Each segment has or will have a marketing manager located at the
corporate center in Denver and regional sales managers located at each of the
Company's regional sites will assist the marketing managers. This interlocked or
"webbed" sales and marketing organization positions the Company to pursue
accounts on both a national and regional basis.
In addition, a key part of the Company's repair and warranty services
marketing strategy is to continue to utilize the sales force of the overnight
package delivery service providers located in the Overnight Delivery Hubs to
sell the Company's repair and warranty services as an integral part of the
logistics service offerings of these overnight package delivery service
providers.
The following table represents the Company's net sales for
manufacturing services by industry segment:
1997 1996 1995
---- ---- ----
Aerospace and Avionics 27.3% 0.0% 0.0%
Medical 13.1% 29.3% 31.0%
Communications 8.1% 1.5% 9.1%
Industrial Controls and Instrumentation 21.6% 12.6% 9.1%
Computer-Related 28.8% 54.4% 49.0%
Other 1.1% 2.2% 1.8%
100.0% 100.0% 100.0%
The Company's customer base for manufacturing services includes Exabyte
Corporation, Ohmeda, AlliedSignal, Inc. ("Allied Signal"), Hewlett-Packard
Company ("HP"), ADC Telecommunications, and Sony Corp of America, Inc. ("Sony").
The relationships are typically long-term with most over five years old. A small
number of customers has historically represented a substantial percentage of the
Company's net manufacturing sales. As a result, the success of the Company's
manufacturing services operations depends to some degree on the success of its
largest customers.
The Company's customer base for repair and warranty services includes
25 of the largest PC and electronics OEMs, including International Business
Machines Corporation, Dell Computer Corporation, Gateway 2000, Inc., HP, Bay
Networks, Inc., Ascend Communications Inc., Cisco Systems Inc. and Sony. The
relationships are typically long-term with most over five years old. The
relationships span OEM component suppliers, OEM component customers, and system,
desktop and network vendors, as well as direct marketers and channel players. As
with the Company's manufacturing services, a small number of customers
historically has represented a substantial percentage of the Company's net
repair and warranty services sales. As a result, the success of the Company's
repair and warranty services operations depends to some degree on the success of
its largest customers.
The Company historically has relied on a small number of customers to
generate a significant percentage of its revenue. During 1997, two of the
Company's customers each accounted for more than 10% of the Company's net
revenues and the Company's ten largest customers accounted for 76% of the
Company's net revenue. In 1996, two of the Company's customers each accounted
for more than 10% of the Company's net revenues and the Company's ten largest
manufacturing customers represented 78% of net revenue. The Company expects that
AlliedSignal, which is one of the Company's ten largest customers, will account
in 1998 for a significantly larger portion of the Company's net revenue than it
has historically. The loss of AlliedSignal as a customer would, and the loss of
any other significant customer could, have a material adverse effect on the
Company's financial condition and results of operations.
If the Company's efforts to expand its customer base are not
successful, the Company will continue to depend upon a relatively small number
of customers for a significant percentage of its net sales. There can be no
assurance that current customers, including AlliedSignal, or future customers of
the Company will not terminate their manufacturing arrangements with the Company
or significantly change, reduce or delay the amount of manufacturing services
ordered
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from the Company. Ohmeda, Inc. which has been one of the Company's ten largest
customers, has announced future plans to consolidate its outside manufacturing
arrangements with another electronic contract manufacturer. In addition, the
Company may from time to time hold significant accounts receivable from sales to
certain customers. The insolvency or other inability of a significant customer
to pay outstanding receivables could have a material adverse effect on the
Company's results of operations and financial condition.
As is typical in the electronic manufacturing services industry, the
Company frequently does not obtain long-term purchase orders or commitments from
its customers, but instead works with them to develop nonbinding forecasts of
the future volume of orders. Based on such nonbinding forecasts, the Company
makes commitments regarding the level of business that it will seek and accept,
the timing of production schedules and the levels and utilization of personnel
and other resources. A variety of conditions, both specific to each individual
customer and generally affecting each customer's industry, may cause customers
to cancel, reduce or delay orders that were either previously made or
anticipated. Generally, customers may cancel, reduce or delay purchase orders
and commitments without penalty, except, in some cases, for payment for services
rendered, materials purchased and, in limited circumstances, charges associated
with such cancellation, reduction or delay. Significant or numerous
cancellations, reductions or delays in orders by customers would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Backlog
The Company's backlog was approximately $135 million at December 31,
1997, compared to approximately $28.5 million at December 31, 1996. Backlog
generally consists of purchase orders believed to be firm that are expected to
be filled within the next six months. Since orders and commitments may be
rescheduled or canceled and customers' desired lead times may vary, backlog does
not necessarily reflect the timing or amount of future sales. The Company
generally seeks to deliver its products within four to eight weeks of obtaining
purchase orders, which tends to minimize backlog.
Competition
Competition in the electronic manufacturing services industry is
intense. The contract manufacturing services provided by the Company are
available from many independent sources. The Company also competes with in-house
manufacturing operations of current and potential customers. The Company
competes with numerous domestic and foreign ECMs, including SCI Systems, Inc.,
Solectron Corporation, Benchmark Electronics, Inc., The DII Group, Inc., Plexis,
Reptron, and others. The Company also faces competition from its current and
potential customers, who are continually evaluating the relative merits of
internal manufacturing versus contract manufacturing for various products.
Certain of the Company's competitors have broader geographic presence than the
Company. Many of such competitors are more established in the industry and have
substantially greater financial, manufacturing or marketing resources than the
Company. In addition, several contract manufacturers have established
manufacturing facilities in foreign countries. The Company believes that foreign
manufacturing facilities are more important for contract manufacturers that
focus on high-volume consumer electronic products, and do not afford a
significant competitive advantage in the Company's targeted market for complex,
mid-volume products for which greater flexibility in specifications and lead
times is required. The Company believes that the principal competitive factors
in its targeted market are quality, reliability, ability to meet delivery
schedules, technological sophistication, geographic location and price.
Suppliers
The Company uses numerous suppliers of electronic components and other
materials for its operations. The Company works with customers and suppliers to
minimize the effect of any component shortages. Some components used by the
Company have been subject to industry-wide shortages, and suppliers have been
forced to allocate available quantities among their customers. The Company's
inability to obtain any needed components during periods of allocations could
cause delays in shipments to the Company's customers and could adversely affect
results of operations.
The Company works at mitigating the risks of component shortages by
working with customers to delay delivery schedules or by working with suppliers
to provide the needed components using just-in-time inventory programs.
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Although in the future the Company may experience periodic shortages of certain
components, the Company believes that an overall trend toward greater component
availability is developing in the industry.
The Company also has a number of competitors in the repair and warranty
services industry, including Cerplex Group, Inc., Aurora Electronics, Inc.,
Logistics Management, Inc., Sequel, Inc., Data Exchange Corp., DecisionOne
Holdings Corp., and others. In addition, the Company competes with certain OEMs
that provide repair and warranty services for their own products. Some of the
Company's competitors in the repair and warranty services industry are more
established in the industry and have substantially greater financial,
engineering and marketing resources than the Company. The Company believes that
its location within the Overnight Delivery Hubs gives it a significant
competitive advantage. However, a competitor can, and in some cases has, gained
similar advantages by locating a repair facility in close proximity to the
Overnight Delivery Hubs. The Company also faces competition from its current and
potential customers, which are continually evaluating the relative merits of
providing repair and warranty services internally versus outsourcing. The
Company believes that the principal competitive factors in its targeted repair
and warranty services market are quality, reliability, ability to meet delivery
schedules and price.
Patents and trademarks
The Company does not hold any patent or trademark rights. Management
does not believe that patent or trademark protection is material to the
Company's business.
Governmental Regulation
The Company's operations are subject to certain federal, state and
local regulatory requirements relating to environmental, waste management,
health and safety matters, and there can be no assurance that material costs and
liabilities will not be incurred in complying with those regulations or that
past or future operations will not result in exposure to injury or claims of
injury by employees or the public. To meet various legal requirements, the
Company has modified its circuit board cleaning processes to eliminate the use
of substantially all chlorofluorocarbons and now uses aqueous (water-based)
methods in its cleaning processes.
Some risk of costs and liabilities related to these matters is inherent
in the Company's business, as with many similar businesses. Management believes
that the Company's business is operated in substantial compliance with
applicable environmental, waste management, health and safety regulations, the
violation of which could have a material adverse effect on the Company. In the
event of violation, these regulations provide for civil and criminal fines,
injunctions and other sanctions and, in certain instances, allow third parties
to sue to enforce compliance. In addition, new, modified or more stringent
requirements or enforcement policies could be adopted that may adversely affect
the Company.
The Company periodically generates and temporarily handles limited
amounts of materials that are considered hazardous waste under applicable law.
The Company contracts for the off-site disposal of these materials.
Employees
As of December 31, 1997, the Company employed 1,685 persons, of whom
1,216 were engaged in manufacturing, operations and repair and warranty
services, 188 in material handling and procurement, 18 in marketing and sales
and 91 in finance and administration, and the Company engaged the full-time
services of 172 temporary laborers through employment agencies in manufacturing
and operations. None of the Company's employees is subject to a collective
bargaining agreement. Management believes that the Company's relationship with
its employees is good.
Special Considerations
Management of Growth; Geographic Expansion. The Company has experienced
rapid growth since February 1997 and intends to pursue continued growth through
internal expansion and acquisitions. The Company's rapid growth has placed, and
could continue to place, a significant strain on the Company's management
information, operating and financial systems. In order to maintain and improve
results of operations, the Company's management will be required to manage
growth and expansion effectively. The Company's need to manage growth
effectively will require it to
9
<PAGE>
continue to implement and improve its management information, operating and
financial systems and internal controls, to develop the management skills of its
managers and supervisors and to train, motivate and manage its employees. The
Company's failure to effectively manage growth could adversely affect the
Company's results of operations.
In 1997, the Company has acquired, and undertaken the construction of,
facilities in several locations and the Company may acquire or build additional
facilities from time to time in the future. The Company's results of operations
could be adversely affected if its new facilities do not achieve growth
sufficient to offset increased expenditures associated with growth of operations
and geographic expansion. Should the Company increase its expenditures in
anticipation of a future level of sales which does not materialize, its results
of operations would be adversely affected. As the Company continues to expand,
it may become more difficult to manage geographically-dispersed operations.
There can be no assurance that the Company will successfully manage other plants
it may acquire or build in the future.
Acquisition Strategy. The Company has actively pursued in the past, and
expects to actively pursue in the future, acquisitions in furtherance of its
strategy of aggressively expanding its operations, geographic markets, service
offerings, customer base and revenue base. Acquisitions involve numerous risks,
including difficulties in the integration of the operations, technologies and
products and services of the acquired companies and assets, the diversion of
management's attention and the Company's financial resources from other business
activities, the potential to enter markets in which the Company has no or
limited prior experience and where competitors in such markets have stronger
market positions and the potential loss of key employees and customers of the
acquired companies. In addition, during the integration of an acquired company,
the financial performance of the Company will be subject to the risks commonly
associated with an acquisition, including the financial impact of expenses
necessary to realize benefits from the acquisition and the potential for
disruption of operations. There can be no assurance that the Company will be
able to identify suitable acquisition opportunities, to consummate acquisitions
successfully or, with respect to recent or future acquisitions, integrate
acquired personnel and operations into the Company successfully.
Implementation of New Information System. The Company is implementing a
new management information system (the "MIS System"), based on commercially
available software products, that is designed to track and control all aspects
of its manufacturing services. Among other things, the implementation of the MIS
System includes the conversion of the Company's Automated Execution System
("AES"), which is a customized software package designed to meet the needs of
the Company's APM process, into software compatible with the MIS System. The
Company completed the implementation of the MIS System at the Company's Rocky
Mountain facility in December 1997 and Arizona facility in February 1998. The
Company currently expects to implement the MIS System in its Ft. Lauderdale
facility in the second quarter of 1998 and it other facilities as soon as
practicable thereafter. If the MIS System fails to operate as designed, the
Company's operations could be disrupted by lost orders resulting in lost
customers or by inventory shortfalls and overages and the Company could be
compelled to write-off the development costs of such software. Such disruptions
or events could adversely affect results of operations and the implementation of
the Company's strategy.
Item 2. Description of Property
As part of the Company's strategy to have a broad geographic presence
and locate its facilities in regions with a substantial or growing number of
OEMs' design and engineering facilities, the Company has made several
acquisitions and made significant capital investments in its manufacturing
facilities. The following table describes the Company's material properties.
10
<PAGE>
<TABLE>
<CAPTION>
Year
Location Acquired/Opened Size Owned/leased(1) Services
- -------- --------------- ---- --------------- --------
<S> <C> <C> <C> <C>
Denver, Colorado 1997 10,000 square feet Leased (2) Executive Offices
Rocky Mountain 1991 52,000 square feet Owned (3) Manufacturing
Greeley, Colorado (84,000 square feet
(being expanded) as expanded)
Newberg, Oregon 1997 47,000 square feet Leased (4) Manufacturing
(existing)
Newberg, Oregon 1998 65,000 square feet Owned (5) Manufacturing
(under construction) (expected)
Moses Lake, Washington 1997 20,000 square feet Leased (6) Manufacturing
Ft. Lauderdale, Florida 1997 97,000 square feet Subleased (7) Manufacturing
Tucson, Arizona 1998 65,000 square feet Owned (8) Manufacturing
Memphis, Tennessee 1997 155,000 square feet Leased (9) Offices, repair
and warranty
Louisville, Kentucky 1997 130,000 square feet Subleased and Repair and
Leased (10) warranty
Tampa, Florida 1997 55,000 square feet Owned and Repair and
Leased (11) warranty
</TABLE>
The Company believes its facilities are in good condition.
- ---------------
(1) Pursuant to the terms of the Bank One Loan (as defined below), substantially
all of the Company's owned and leased property is subject to liens and other
security interests in favor of Bank One Colorado, N.A. ("Bank One"), and any
other lenders from time to time under the Bank One Loan.
(2) This lease will expire on December 31, 1999.
(3) This facility is located on approximately 10 acres of land owned by the
Company in Greeley, Colorado. The Company is in the process of remodeling and
expanding this facility by adding approximately 32,000 square feet at an
aggregate cost of approximately $1.8 million. This construction is expected to
be completed by April 1, 1998. The Company has recently sold the other building
that had been located on its campus in Greeley, Colorado for approximately $2.4
million.
(4) This facility includes several buildings on a campus, all of which are
leased from Mr. Charles Hewitson, Mr. Gregory Hewitson and Mr. Matthew Hewitson,
each of whom is a director of the Company. These leases are on a month-to-month
basis and will be terminated when the Company moves to its new facility.
(5) The Company has purchased approximately 12 acres of land from an
unaffiliated third party and is building a 65,000 square foot facility in
Newberg, Oregon at an aggregate cost of approximately $6.5 million. The Company
expects this new facility to be completed in May 1998. Upon completion of this
new facility, the Company will relocate its Newberg operations from the leased
facility.
(6) This facility was originally leased from Mr. Charles Hewitson, Mr. Gregory
Hewitson and Mr. Matthew Hewitson, each of whom is a director of the Company.
The lease expired on November 30, 1997, but the Company is continuing to rent
the facility on a month-to-month basis until the new facility is occupied.
11
<PAGE>
(7) The Company subleased from AlliedSignal a 95,000 square foot portion of a
building.
(8) The Company purchased approximately 20 acres of land and a 65,000 square
foot building in Tucson, Arizona, for $1.8 million. The Company remodeled and
moved into the facility in February 1998.
(9) The Company leases a 75,000 square foot facility and an 80,000 square foot
facility, both used for office space, warehouse space and repair services, from
unaffiliated third parties. The leases will expire on February 28, 2001 and June
30, 2001, respectively.
(10) The Company subleases an 80,000 square foot facility from one of the
transportation providers that operates one of the Overnight Delivery Hubs, and
this lease is terminable upon 90 days notice by either party. The Company also
leases a 50,000 square foot facility from an unaffiliated third party and this
lease will expire on May 31, 2000.
(11) The Company leases a 15,000 square foot facility from Allen S. Braswell,
Sr., who is a director of the Company. This lease is a month-to-month
arrangement. The Company expects this arrangement to end in March 1998. The
Company also owns a 30,000 square foot building, and the Company has leased a
10,000 square foot facility from an affiliated third party.
Item 3. Legal Proceedings
The Company has no material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "EFTC". On March 24, 1998, there were approximately 242
shareholders of record of the Company's Common Stock.
The following table sets forth the high and low sale prices for the
Company's Common Stock, as reported on the Nasdaq National Market, for the
quarters presented.
1997 Sales Prices 1996 Sale Prices
----------------- ----------------
High Low High Low
---- --- ---- ---
First Quarter $6 3/4 $4 3/4 $5 1/8 $3 3/4
Second Quarter 8 1/2 4 5/8 4 7/8 3 5/8
Third Quarter 14 5/16 8 3/4 4 1/4 3 1/2
Fourth Quarter 18 1/4 12 1/16 4 7/8 2 3/4
12
<PAGE>
Dividends
The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future. The future payments of
dividends, if any, on Common Stock is within the discretion of the Board of
Directors and will depend on the Company's earnings, capital requirements,
financial condition and other relevant factors. The Company's loan agreements
prohibit payment of dividends without the lender's consent.
Recent Sales of Unregistered Securities.
On February 24, 1997, the Company acquired Current Electronics, Inc.
and Current Electronics (Washington), Inc. (the "CE Companies"), which operated
two manufacturing facilities in Newberg, Oregon and Moses Lake, Washington, for
total consideration of approximately $10.9 million, consisting of 1,980,000
shares of Company common stock and approximately $5.5 million in cash, which
included approximately $600,000 of transaction costs. The Company determined
that the issuance of such shares was exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended (the "Securities Act"), as a
transaction by the issuer not involving a public offering because the
transaction involved the acquisition of a business from the owners thereof based
on private negotiations.
During September 1997, the Company issued to Richard L. Monfort, a
director of the Company $15 million in aggregate principal amount of
Subordinated Notes, with a maturity date of December 31, 2002 and bearing
interest at LIBOR plus 2.0%, in order to fund the acquisition of certain assets
from AlliedSignal. During October 1997, the Company issued a warrant (the
"Warrant") to purchase 500,000 shares of common stock at a price of $8.00 per
share as additional consideration for the loan represented by the Subordinated
Notes. The Warrant was exercised on October 9, 1997, resulting in net proceeds
to the Company of $4 million. The Company determined that the issuances of the
Subordinated Notes, the Warrant and the common stock issued upon exercise of the
Warrants were exempt from registration under Section 4(2) of the Securities Act
because it involved a director of the Company.
On September 30, 1997, the Company acquired the CTI Companies for
approximately $29.7 million consisting of 1,858,975 shares of the Company's
common Stock and approximately $20.5 million in cash, which includes
approximately $1 million of transaction costs. In addition, the Company made a
$6 million contingent payment that became payable upon closing of the Company's
public offering of common stock in November, 1997. The Company determined that
the issuance of such shares was exempt from registration under Section 4(2) of
the Securities Act as a transaction by the issuer not involving a public
offering because the transaction involved the acquisition of a business from the
owners thereof based on private negotiations.
Volatility
The Company's Common Stock has experienced significant price volatility
historically, and such volatility may continue to occur in the future. Factors
such as announcements of large customer orders, order cancellations, new product
introductions by the Company, events affecting the Company's competitors and
changes in general conditions in the electronics industry, as well as variations
in the Company's actual or anticipated results of operations, may cause the
market price of the Company's Common Stock to fluctuate significantly.
Furthermore, the stock market has experienced extreme price and volume
fluctuations in recent years, often for reasons unrelated to the operating
performance of the specific companies. These broad market fluctuations may
materially adversely affect the price of the Company's Common Stock. There can
be no assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.
Item 6. Selected Financial Data
The following selected financial data as of December 31, 1997 and 1996,
and for each of the years in the three-year period ended December 31, 1997, are
derived from the audited financial statements of the Company included as part of
this report on Form 10-K and should be read in conjunction with such financial
statements and the notes thereto. The data presented below as of December 31,
1995, 1994, and 1993, and for each of the years in the two-year period ended
December 31, 1994, are derived from financial statements of the Company not
included in this report.
13
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
(In thousands, except per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales................................. $ 113,244 $56,880 $49,220 $52,542 $29,817
Cost of goods sold........................ 96,672 53,980 45,325 47,123 25,689
-------- ------ ------ ------ ------
Gross profit.............................. 16,572 2,900 3,895 5,419 4,128
Impairment of fixed assets................ - 726 - - -
Goodwill amortization..................... 547 - - - -
Selling, general and administrative
expenses............................... 9,535 4,196 3,093 2,395 1,842
--------- ------- ------- ------- -------
Operating income (loss)................... 6,490 (2,022) 802 3,024 2,286
Interest expense.......................... (2,312) (526) (399) (175) (237)
Other, net................................ 1,247 83 7 8 109 (12)
--------- --------- ---------- ------- ----------
Income (loss) before income taxes......... 5,425 (2,465) 481 2,958 2,037
Income tax expense (benefit).............. 2,109 (872) 127 1,041 736
--------- --------- -------- ------- --------
Net income (loss)......................... 3,316 (1,593) 354 1,917 1,301
========= ======== ======== ======= =======
Income (loss) per share
Basic.................................. 0.49 (0.40) 0.09 0.53 0.52
Diluted................................ 0.46 (0.40) 0.09 0.53 0.52
Weighted average shares outstanding
Basic.................................. 6,702 3,942 3,962 3,627 2,483
Diluted................................ 7,155 3,942 3,962 3,627 2,483
December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Working capital........................... 41,247 8,508 9,868 6,744 2,404
Total assets.............................. 145,561 22,870 24,984 23,479 11,172
Notes payable and current portion of
long-term debt......................... 3,150 1,970 170 170 544
Long-term debt, net of current portion.... 39,106 2,890 3,060 3,230 2,540
Shareholders' equity...................... 75,189 13,922 15,509 14,989 3,547
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company is a leading independent provider of high-mix electronic
manufacturing services to OEMs in the aerospace and 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. Circuit Test, Inc., Airhub Service Group, L.C. and CTI International,
L.C. (collectively, the "CTI Companies") provide repair and warranty services to
OEMs in the communications and computer industries.
The Company's quarterly results of operations are affected by several
factors, primarily 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 success in integrating the businesses
of the CTI Companies and Current Electronics, Inc. and Current Electronics
(Washington), Inc. (the "CE Companies") and the assets and operations acquired
from AlliedSignal (the "AlliedSignal Asset Purchase"), costs relating to the
expansion of operations including development of the Company's plan to develop a
build-to-order business, price competition, 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 in managing
inventories and other assets, the timing of expenditures in anticipation of
increased sales and fluctuations in the cost of components or labor.
In the third quarter of 1996, the Company introduced Asynchronous
Process Manufacturing, a new manufacturing methodology, at its Rocky Mountain
facility. APM is an innovative combination of high-speed manufacturing
equipment, sophisticated information systems and standardized process teams
designed to manufacture mixtures of small quantities of products more flexibly
and faster. APM allows for the building of small lots in very short cycle times
and increases throughput by decreasing setup time, standardizing work centers
and processing smaller lot sizes. The Company has done this by designating teams
to set up off-line feeders and standardizing loading methods regardless of
product complexity. APM has allowed the Company to increase productivity by
producing product with fewer people, which ultimately reduces costs and
increases gross profit. The Company completed implementation of APM at its Rocky
Mountain facility in October and has begun implementing APM at its existing
Newberg, Oregon facility, but will not complete that implementation until after
its new manufacturing facility under construction in Newberg, Oregon is
completed. The Company also plans to implement APM at its other facilities, at
appropriate times.
14
<PAGE>
Recent Developments
During 1997, the Company completed the CE Merger, the AlliedSignal
Asset Purchase and the CTI Merger, all of which have affected the Company's
results of operations and financial condition in 1997.
CE Merger. On February 24, 1997, the Company acquired (the "CE Merger")
the CE Companies for approximately $10.9 million consisting of 1,980,000 shares
of Common Stock and approximately $5.5 million in cash, which included
approximately $0.6 million of transaction costs. The Company recorded goodwill
of approximately $8.0 million, which is being amortized over 30 years. The
combined revenues for the CE Companies for the fiscal year ended September 30,
1996 was approximately $32.5 million. In connection with this transaction, the
Company renegotiated its line of credit and obtained a 90-day bridge loan in the
amount of $4.9 million (which was subsequently repaid), the proceeds from which
were used to pay the cash consideration related to the CE Merger, as discussed
above. See "--Liquidity and Capital Resources."
AlliedSignal Asset Purchase. In August and September 1997, the Company
completed the initial elements of two transactions with AlliedSignal, Inc.,
pursuant to which the Company acquired certain inventory and equipment located
in Ft. Lauderdale, Florida, subleased the portion of AlliedSignal's facility
where such inventory and equipment was located and employed certain persons
formerly employed by AlliedSignal at that location. The Company also hired
certain persons formerly employed by AlliedSignal in Tucson, Arizona and agreed
with AlliedSignal to provide the personnel and management services necessary to
operate a related facility on behalf of AlliedSignal on a temporary basis. The
Company purchased from a third party and renovated a production facility in
Tucson, Arizona. The Company moved AlliedSignal's inventory and equipment and
related employees to its own facility and began production in early February
1998. The aggregate purchase price of the assets acquired by the Company from
AlliedSignal approximated $15 million, of which approximately $13 million was
paid by December 31, 1997. The Florida and Arizona facilities are currently used
to produce electronic assemblies for AlliedSignal. The Company is also seeking
to use the Florida and Arizona facilities to provide services for customers
other than AlliedSignal. The Company agreed to pay AlliedSignal one percent of
gross revenue for all electronic assemblies and parts made for a customer other
than AlliedSignal at the Arizona or Florida facilities through December 31,
2001.
CTI Merger. On September 30, 1997, the Company acquired (the "CTI
Merger") the CTI Companies for approximately $29.7 million in cash and debt
assumption, 1,858,975 shares of the Company's Common Stock and a $6 million
contingent payment paid upon closing of a public offering in November of 1997.
The Company recorded goodwill of approximately $38.9 million, which is being
amortized over 30 years. In connection with this acquisition, the Company
entered into the Bank One Loan (as defined below) and issued certain
subordinated notes in an aggregate principal amount of $15 million (the
"Subordinated Notes"). See "--Liquidity and Capital Resources."
In many respects, the CTI Companies and the Company are financially and
operationally complementary businesses. This tends to give management at the CTI
Companies more alternatives when making decisions that affect profit margins and
overall operations. The CTI Companies have historically turned receivables at a
slower rate and inventories at approximately the same rate as the Company. In
1996, the CTI Companies turned receivables at an approximate rate of 57 days or
6 times a year and turned inventories every 79 days or approximately 5 times a
year. In 1996, the Company turned receivables at an approximate rate of 25 days
or approximately 14 times a year and turned inventories every 62 days or
approximately 6 times a year. The Company, after the CTI Merger, expects its
receivables and inventory to turn over at a slower rate due to the inclusion of
the CTI Companies.
The Company is involved in the front end of many OEMs' new-product
introductions and is subject to production fluctuations relating to the OEMs'
product demands. Thus, the Company's production of a particular product is
related to overall product life cycle and length of demand for such product. The
CTI Companies' repair and warranty service is dependent on the size of the
installed base and extent of use of such product.
The CTI Companies have generated gross profit percentages ranging from
26% to 33% from 1994 to 1996. This is significantly higher than the Company's
historic gross profit percentages, which have ranged from approximately 5% to
10% from 1994 to 1996. This is due to the high value-added content of the CTI
Companies' operations. The impact of combining operations of the CTI Companies
with the Company has been to increase the Company's overall
15
<PAGE>
gross, operational and net profit percentages due to the CTI Companies' overall
higher profitability levels as a percentage of sales. This is based on historic
results, and there is no guarantee that these trends will continue.
Results of Operations
The following table sets forth certain operating data as a percentage
of net sales:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Net sales................................... 100.0% 100.0% 100.0%
Gross profit................................ 14.6 5.1 7.9
Selling, general and administrative
expenses................................. 8.4 4.1 6.3
Goodwill.................................... 0.5 - -
Impairment of fixed assets.................. - 1.3 -
------ ----- -----
Operating income (loss)..................... 5.7 (3.6) 1.6
Interest expense............................ (2) (0.9) (0.8)
Other, net.................................. 1.1 0.2 0.2
------- ------- -------
Income (loss) before income taxes........... 4.8 (4.3) 1.0
Income tax expense (benefit)................ 1.9 (1.5) 0.3
------- -------- -------
Net income (loss)........................... 2.9 (2.8) 0.7
======= ======== =======
</TABLE>
1997 Compared to 1996
Net Sales. The Company's net sales increased by 99.1% to $113.2 million
during the year ended December 31, 1997, from $56.9 million for the year ended
December 31, 1996. The increase in set sales is due primarily to the inclusion
of the operations from the CE Companies, acquired on February 24, 1997, the
inclusion of the operations of the Company's Ft. Lauderdale and Arizona
facilities, acquired from AlliedSignal in August 1997, the inclusion of the CTI
Companies, acquired on September 30, 1997, and increased orders from existing
customers.
Gross Profit. Gross profit increased by 471.5% to $16.6 million during
the year ended December 31, 1997, from $2.9 million during the year ended
December 31,1996. The gross profit margin for the year ended December 31, 1997
was 14.6% compared to 5.1% for the year ended December 31, 1996. The increase in
gross profit percentage is related to (i) the operations of the CE Companies,
which have historically had a higher gross profit margin, (ii) the adoption of
APM in the later part of 1996 in the Rocky Mountain facility which has resulted
in greater operating efficiencies, and (iii) the operations of the CTI
Companies, which have also have historically had a higher gross profit
percentage. In addition, as revenues have increased, fixed overhead costs such
as labor costs and depreciation have been absorbed in cost of goods resulting in
higher margins. Finally, the Company incurred a restructuring charge in cost of
goods sold of $0.5 million in the third quarter of fiscal 1996, primarily
related to severance costs and the write-off of inventory associated with the
restructuring of the Company's customer base, which accentuated the difference
in gross profit margins between 1997 and 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative ("SGA") expenses increased by 127.3% to $9.5 million for the year
ended December 31, 1997, compared with $4.2 million for the same period of 1996.
As a percentage of net sales, SGA expense increased to 8.4% for the year ended
December 31, 1997, from 7.4% in the same period of 1996. The Company incurred a
restructuring charge of $0.9 million in the third quarter of 1996, primarily
from severance pay for terminated employees at the Rocky Mountain facility.
Without the restructuring charge, SGA expense for 1996 would have been 5.8% of
sales. The increase in SGA expenses is primarily due to the inclusion of the CE
Companies, the CTI Companies, the Company's Fort Lauderdale and Arizona
facilities' SGA expenses and increased investment in information technology and
marketing.
16
<PAGE>
Impairment of Fixed Assets. During the third quarter of 1996, the Company
incurred a write down associated with impaired assets in the amount of $0.7
million. See "--1996 Compared to 1995--Impairment of Fixed Assets."
Operating Income. Operating income increased to $6.5 million for the
year ended December 31, 1997, from a loss of $2.0 million for the same period in
1996. Operating income as a percentage of net sales increased to 5.7% in the
year ending December 31, 1997 from negative 3.6% in the same period of 1996. The
increase in operating income is attributable to the CE Merger, the CTI Merger,
increased efficiencies associated with APM, and the acquisition and operation of
the Fort Lauderdale and Tucson facilities. Without the $2.1 million write down
in the third quarter of 1996, the 1996 operating profit margin would have been
approximately breakeven.
Interest Expense. Interest expense was $2.3 million for the year ended
December 31, 1997 as compared to $0.5 million for the same period in 1996. The
increase in interest is primarily the result of the incurrence of debt
associated with the CE Merger, the AlliedSignal Asset Purchase in Arizona and
Florida, the CTI Merger, and increased operating debt used to finance both
inventories and receivables for the Company in fiscal 1997.
Income Tax Expense. The effective income tax rate for the year ended
December 31, 1997 was 38.9% compared to 36.5% for the same period a year
earlier. This percentage can fluctuate because relatively small dollar amounts
tend to move the rate significantly as estimates change. The Company expects
that the rate will be higher in the upcoming quarters. This higher anticipated
effective tax rate is due to the impact of the nondeductible goodwill component
of the CTI Merger and CE Merger.
1996 Compared to 1995
Net Sales. Net sales in 1996 increased 15.6% to $56.9 million from
$49.2 million in 1995. The increase in net sales is due primarily to increased
material sales associated with the box-build project for one customer. The top
ten customers in 1996 accounted for 77.6% of total sales volume as compared to
80.4% in 1995.
Gross Profit. Gross profit in 1996 decreased 25.5% from 1995 to $2.9
million. Gross profit as a percentage of net sales for 1996 was 5.1% compared to
7.9% in 1995. One reason for the decline in gross profit is related to
restructuring charges of $0.5 million that were included in cost of goods sold
in the third quarter of 1996. Without the restructuring, gross profit would have
been $3.4 million or 5.9% of net sales. These restructuring charges were
severance costs related to a decrease in workforce, write down of inventory
related to changes in the Company's customer mix, and expenses related to the
reorganization of the manufacturing floor and manufacturing process in
connection with the implementation of APM.
Selling, General and Administrative Expenses. SGA expense for 1996
increased by 35.6% over 1995 to $4.2 million. The increase is due to
restructuring charges for severance costs related to reduction in workforce and
other expenses related to organizational changes in the amount of $0.9 million
in the third quarter of 1996. Excluding the restructuring charges, the SGA
expense would have been $3.3 million which is an increase of $179,980 or 5.8%
over 1995. This increase was due primarily to increased sales commissions and
related expenses associated with the sales growth from 1995 to 1996 levels as
noted above. As a percentage of net sales, SGA expense increased to 7.4% in 1996
from 6.3% in 1995. Without the restructuring changes, SGA expenses would have
been 5.8% of net sales for 1996.
Impairment of Fixed Assets. During the third quarter of 1996, the
Company incurred a write down associated with impaired assets in the amount of
$0.7 million. Statement of Financial Accounting Standards No.12 "Accounting for
the impairment of long-lived assets and for long-lived assets to be disposed
of," requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Long-lived assets and certain identifiable intangibles to be
disposed of should be reported at the lower of carrying amount of fair value
less cost to sell. The Company went through a corporate restructuring in the
third quarter of 1996, which included a workforce reduction and implementation
of APM, resulting in certain assets no longer being used in operations. Certain
software that will no longer be used, as well as excess equipment that was sold,
were written down to fair value in accordance with Statement No.121.
17
<PAGE>
Operating Income. Operating income in 1996 decreased 352.3% to a loss
of $2.0 million from income of $0.8 million in 1995. Operating income as a
percent of sales decreased to negative 3.6% in 1996 from 1.6% in 1995. The
decrease in operating income was primarily attributable to the restructuring
charges and impairment of fixed assets noted above in the amount of $2.1
million. Excluding the restructuring charges, the Company would have had
operating income of $0.1 million or 0.2% of net sales for 1996. The decrease,
excluding the restructuring charges, was related to product mix changes and
related overhead expenses to put new programs in place as well as increased
variable selling costs associated with higher sales volumes in the first two
quarters of 1996.
Interest expense. Interest expense in 1996 increased 31.7% from 1995 to
$0.5 million. Borrowing necessitated by increases in inventory and accounts
receivable levels is the primary reason for the increase in interest expense.
Income Tax Expense. The Company's effective income tax rate for 1996
was 35.4% compared to 26.3% for 1995. Tax expense for 1995 was lower due to
certain research expenditures incurred in 1992, 1993, 1994 and 1995 for which
the Company claimed federal tax credits. The Company's Rocky Mountain facility
is also located in a State of Colorado enterprise zone. The Company receives
state tax credits for capital expenditures and increases in the number of
Company employees but, as sales increase, these state tax credits will have a
relatively smaller effect on the Company's effective income tax rate.
Quarterly results. The following table presents unaudited quarterly
operating data for the most recent eight quarters for the two years ended
December 31, 1997. The information includes all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation thereof.
<TABLE>
<CAPTION>
Quarter Ended
March 31, June 30,September 3December 31, March 31, June 30,September 3December 31,
1996 1996 1996 1996 1997 1997 1997 1997
----------------------------------------------------------------------------------------
(In thousands, except per share data)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales.................. $15,003 $15,941 $13,632 $12,304 $14,037 $22,745 $28,191 $48,271
Cost of goods sold......... 14,403 15,177 13,096 11,304 12,529 19,756 24,454 39,932
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit............... 600 764 536 1,000 1,508 2,989 3,737 8,339
Impairment of fixed assets. - - 726 - - - - -
Goodwill Amortization...... - - - - 23 67 67 390
Selling, general and
administrative expenses.. 812 845 1,747 792 1,103 1,884 2,140 4,409
---------- --------- --------- ---------- --------- --------- --------- ---------
Operating income (loss).... (212) (81) (1,937) 208 382 1,038 1,530 3,540
Interest expense and other, net (102) (123) (141) (77) (169) (330) 651 (1,217)
------- ------------------------------------------- -------------------- ----------
Income (loss) before income
taxes.................... (314) (204) (2,078) 131 213 708 2,181 2,323
Income tax expense (benefit) (126) (75) (719) 48 73 265 794 976
-------------------------------- --------------------- ---------- ---------- ----------
Net income (loss).......... $ (188) $ (129) $ (1,359) $ 83 $ 140 $ 443 $ 1,387 $ 1,347
========== ========= ========= ======== ========= ========= ======== ========
Income (loss) per share -
diluted..................$ (0.05)$ (.03)$ (0.34) $ 0.02 $ 0.03 $ 0.07 $ 0.21$ 0.13
====================== ========== ========= ========== ========= ===================
Weighted average shares
Outstanding - diluted.... 3,958 3,955 3,968 3,942 4,858 6,121 6,676 10,638
</TABLE>
Although management does not believe that the Company's business is
materially 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
or year.
Liquidity and Capital Resources
At December 31, 1997, working capital totaled $41.2 million. Working
capital at December 31, 1996 was $8.5 million compared to $9.9 million at
December 31, 1995. The decrease in working capital in 1996 is attributable to
the purchase of fixed assets and long-term debt retirement. The increase in
working capital in 1997 is primarily attributable to a public offering that was
completed in November of 1997 with net proceeds to the Company of approximately
$39.5 million, the proceeds of which were used to pay a portion of the
acquisition price for the CTI Companies and, to repay
18
<PAGE>
a portion of the Bank One Loan. The portion of the Bank Loan that had ben repaid
was subsequently reborrowed to fund increases in inventory and accounts
receivable related to increased business associated with the CE and CTI Mergers
and the AlliedSignal Asset Purchase in 1997.
Cash used in operations for the year ended December 31, 1997, was $29.3
million compared to cash used in operations of $0.4 million for the same period
in 1996. The AlliedSignal Asset Purchase in Florida and Arizona and the CTI
Merger resulted in a significant use of funds, particularly in the purchase of
inventory and equipment in the third quarter of 1997. Accounts receivable
increased 531.9% to $24.4 million at December 31, 1997 from $3.9 at December 31,
1996. A comparison of receivable turns (e.g., annualized sales divided by
current accounts receivable) for 1997 compared to 1996 is 4.6 and 14.7,
respectively. Inventories increased 399.1% to $45.7 million at December 31, 1997
from $91.1 million at December 31, 1996. A comparison of inventory turns (i.e.,
annualized cost of sales divided by current inventory) for the year ended 1997
and 1996 shows a decrease to 2.2 from 5.9, respectively. The 1997 receivable
turns and inventory turns are distorted because the cost of sales for the year
includes only ten months from the CE Companies, three months of cost of sales
from the CTI Companies, and only four and one-half months from the AlliedSignal
Asset Purchase in Arizona and Florida, while the balance sheet includes the
receivables and inventories from these operations.
The Company used cash to purchase capital equipment totaling $13.2
million for the year ended 1997 compared with $2.0 million in the same period
last year. The Company also used cash to pay part of the purchase price of the
CE Companies and CTI Companies, as explained earlier in the amount of $31.0
million. Proceeds from long-term borrowings of $35 million were used to help
fund the purchase of the CE Companies and CTI Companies. The Company used cash
from investing activities of $1.6 million in 1996, compared to providing cash of
$1.3 million in 1995. The Company used cash to purchase capital equipment
totaling $2.0 million in 1996, compared with $2.5 million in 1995. In 1995, the
Company received cash from the sale of equipment primarily a sale-leaseback in
the amount of $3.7 million.
In connection with the CTI Merger and the AlliedSignal Asset Purchase,
the Company entered into a Credit Facility, dated as of September 30, 1997 (the
"Bank One Loan"), provided by Bank One, Colorado, N.A. The Bank One Loan
initially provided for a $25 million revolving line of credit, maturing on
September 30, 2000 and a $20 million term Loan maturing on September 30, 2002.
The proceeds of the Bank One Loan were used for (i) funding the CTI Merger and
(ii) repayment of the then-existing Bank One line of credit, bridge facility and
equipment Loan. The Bank One Loan bears interest at a rate based on either the
London Inter-Bank Offering Rate ("LIBOR") or Bank One prime rate plus applicable
margins ranging from 3.25% to 0.50% for the term facility and 2.75% to 0.00% for
the revolving facility. Borrowings on the revolving facility are subject to
limitation based on the value of the available collateral. The Bank One Loan is
collateralized by substantially all of the Company's assets, including real
estate and all of the outstanding capital stock and membership interests of the
Company's subsidiaries, whether now owned or later acquired. The agreement for
the Bank One Loan contains covenants restricting liens, capital expenditures,
investments, borrowings, payment of dividends, mergers, and acquisitions and
sale of assets. In addition, the loan agreement contains financial covenants
restricting maximum annual capital expenditures, recapturing excess cash flow
and requiring maintenance of the following ratios: (i) maximum senior debt to
EBITDA (as defined in the agreement for the Bank One Loan); (ii) maximum total
debt to EBITDA; (iii) minimum fixed charge coverage; (iv) minimum EBITDA to
interest; and (v) minimum tangible net worth requirement with periodic step-up.
In addition to the Bank One Loan, the Company issued to a director of
the Company $15 million in aggregate principal amount of Subordinated Notes,
with a maturity date of December 31, 2002 and bearing interest at LIBOR plus
2.0%, in order to fund the acquisition of certain assets from AlliedSignal. The
Company issued a warrant (the "Warrant") to purchase 500,000 shares of common
stock at a price of $8.00 per share in connection with the Subordinated Notes.
The Warrant was exercised in October 1997, resulting in net proceeds to the
Company of $4 million.
In November 1997, the Company completed a public offering of
approximately 3,500,000 shares of common stock. The Company used the proceeds of
such offering to make a $6.0 million payment to the previous owners of the CTI
Companies and to repay approximately $32 million of the Bank One Loan. As of
December 31, 1997, the outstanding principal amount of borrowings under the Bank
One Loan was $37.4 million and the borrowing availability under the Bank One
Loan was approximately $7.6 million. The Company believes it will need to
increase its availability under the Bank One Loan to fund the Company's current
operations, and it is currently discussing with Bank One an increase in the
combined facilities to $60 million.
19
<PAGE>
The Company is implementing a new management information system (the
"MIS System") throughout all of its facilities, including those it has recently
acquired. The MIS System is designed to be "Year 2000 Compliant." Therefore, in
the absence of unanticipated difficulties in implementing the MIS System, the
Company does not anticipate that year 2000 problems will have a material adverse
effect on the Company's operations. The Company is evaluating the impact of the
year 2000 issue on vendors with a goal of completion during 1998.
Cautionary Statement
The information set forth in this report includes "forward looking
statements" within the meaning of the federal securities laws. Forward-looking
statements consist of statements of expectations, beliefs, plans and similar
expressions concerning matters that are not historical facts. They involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, market performance or achievements of the Company, growth of the
electronic manufacturing services industry, or growth of the electronic hardware
maintenance market to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements or
forecasts. Important factors that could cause such differences include, but are
not limited to, changes in economic or business conditions in general or
affecting the electronic products industry in particular, changes in the use of
outsourcing by OEM's, increased material prices and service competition within
the electronic component contract manufacturing and repair industries, 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, changes in customer needs and
expectations and the Company's ability to keep pace with technological
developments and governmental actions.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements and notes thereto are included
elsewhere in this report on Form 10-K, commencing on page F-1.
Index to Consolidated Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Shareholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
20
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the directors and executive officers of the
Company is incorporated herein by reference to the section entitled PROPOSAL
1-ELECTION OF DIRECTORS in the Company's definitive Proxy Statement with respect
to the Company's Annual Meeting of Shareholders (the "Proxy Statement").
Item 11. Executive Compensation.
The section labeled "Compensation of Directors and Executive Officers"
appearing in the Company's Proxy Statement is incorporated herein by reference,
except for such information as need not be incorporated by reference under rules
promulgated by the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The Section labeled "Security Ownership of Directors and Executive
Officers and Certain Beneficial Owners" appearing in the Company's Proxy
Statement is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The second labeled "Certain Relationships and Related Transactions"
appearing in the Company's Proxy Statement is incorporated herein by reference.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements-The financial statements listed in the
index to Financial Statements, which appears on page 21, are
filed as part of this annual report.
2. Exhibits-The following exhibits are filed as part of this
annual report.
<TABLE>
<CAPTION>
Exhibit
Number Document Description
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company (1)
3.2 Articles of Amendment to the Articles of Incorporation of the Company (1)
3.3 Amended and Restated Bylaws of the Company (1)
4.1 Reference is made to Exhibits 3.1, 3.2 and 3.3, respectively
4.2 Specimen Common Stock Certificate of the Company (1)
10.1 Form of Registration Rights Agreement dated January 1994 between the Company and the parties
thereto (1)
10.2 Agreement and Plan of Merger among the Company, Current Merger Corp., and Current Electronics,
Inc., dated as of January 15, 1997 (2)
10.3 Share Purchase Agreement among the Company and the Shareholders of Current Electronics
(Washington), Inc. dated as of January 15, 1997 (2)
10.4 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 (2)
10.5 Indemnification Agreement dated as of February 24, 1997, among the Company, the shareholders of
Current Electronics, Inc., and the shareholders of Current Electronics (Washington), Inc. (2)
10.6 Agreement and Plan or Reorganization among the Company, Acquisition Corp., and Circuit Test, Inc.,
dated as of July 9, 1997 (4)
10.7 Limited Liability Company Unit Purchase Agreement among the
Company, CTLLC Acquisition Corp., Airhub Service Group, L.C., and
CTI International, L.C., dated as of July 9, 1997 (4)
10.8 Registration Rights Agreement dated as of September 30, 1997 among the Company and CTI
Shareholders (4)
21
<PAGE>
10.9 Indemnification Agreement dated as of September 30, 1997 among the Company, CTI Shareholders
and the LLC Members (4)
10.10 Earnout Agreement dated as of September 30, 1997 among the Company and the LLC Members (4)
10.11.1 Master Agreement Regarding Asset Purchase and Related Transactions among the Company,
AlliedSignal Avionics, Inc., a Kansas corporation ("Avionics"),
and AlliedSignal, Inc., operating through its Aerospace Equipment
Systems Unit ("AES"), dated as of July 15, 1997, as amended by the
First Amendment to Master Agreement dated as of July 31, 1997, and
as further amended by the Second Amendment to Master Agreement
dated as of August 11, 1997 (3)
10.11.2 Third Amendment to Master Agreement dated as of September 5, 1997 (6)
10.12 Supplier Partnering Agreement between the Company and AlliedSignal Technologies, Inc., dated as of
August 4, 1997 (3)
10.13.1 License Agreement between the Company and AlliedSignal technologies, Inc., dated as of July 15,
1997 (3)
10.13.2 Amended and Restated License Agreement between the Company and AlliedSignal Technologies, Inc.,
dated as of September 5, 1997 (6)
10.14 Premises License Agreement between the Company and AES dated as of August 4, 1997 (3)
10.15 Facilities Management and Transition Services Agreement dated as of July 31, 1997 between the
Company and AES as amended by a First Amendment to Facilities
Management and Transition Services Agreement dated as of August 4,
1997 (3)
10.16 Sublease Agreement dated as of August 11, 1997 between the Company and AlliedSignal, Inc. (3)
10.17 Transition Services Agreement dated as of August 11, 1997 between the Company and Avionics (3)
10.18.1 Agreement to Extend Avionics Personal Property Asset Transfer Date
dated August 15, 1997, by and between the Company, Avionics and
AES (3)
10.18.2 Agreement to Extend Avionics Personal Property Asset Transfer Date
dated August 29, 1997, by and between the Company, Avionics and
AES (6)
10.19 Accounts Payable Service Agreement dated as of August 11, 1997 between the Company and Avionics
(6)
10.20 Credit Agreement dated September 30, 1997 between the Company and Bank One, Colorado, N.A.
("Bank One") (4)
10.21 Pledge and Security Agreement dated as of September 30, 1997 by the
Company to Bank One (4) 10.22 Security Agreement and Assignment dated as of
September 30, 1997 between the Company and Bank One (4)
10.23 Deed of Trust and Security Agreement dated as of September 30,
1997, among the Company as Grantor, Bank One, as Agent and
Beneficiary, and Northwest Title Company as Trustee (4)
10.24 Deed of Trust and Security Agreement and Financing Statement dated
as of September 30, 1997 from the Company to The Public Trustee of
Weld County for Bank One, as Beneficiary (4)
10.25 Note Agreement between the Company and Richard L. Monfort dated as of September 5, 1997,
including the form of Floating Rate Subordinated Note attached as Exhibit A thereto (4)
10.26 Form of Warrants to Purchase an aggregate of 80,000 shares of
Common Stock of the Company, dated as of March 11, 1994, issued to
Dain Bosworth Incorporated and Stephens Inc., underwriters, in
connection with the Company's initial public offering (6)
10.27+ 1989 Stock Option Plan (1)
10.28+ 1993 Incentive Stock Option Plan (1)
10.29+ EFTC Corporation Equity Incentive Plan, amended and restated as of
July 9, 1997 (6) 10.30+ EFTC Corporation Stock Option Plan for Non-Employee
Directors, amended and restated as of July 9, 1997 (6)
10.31+ Employment Agreement with Jack Calderon dated as of August 1996 (5)
10.32+ Form of Consulting Agreement entered into by the Company with each of OnCourse Inc., Mat
Hewitson Consulting, Inc. and Corporate Solutions, Inc., dated as of February 24, 1997 (5)
10.33+ Form of the separate Employment Agreements, each dated as of September 30, 1997, entered into by
the Company, CTI and Allen S. Braswell, Jr., Richard Strott, Andrew Hatch and Dennis Ayo. (4)
10.34+ 1997 Management Bonus Plan (6)
*21.1 List of Subsidiaries
22
<PAGE>
*23.1 Consent of KPMG Peat Marwick LLP
*24.1 Power of Attorney
*27.1 Financial Data Schedule
* Filed herewith
+ Management Compensation Plan
(1) Incorporated by reference from the Company's Registration Statement on Form SB-2 (File No. 33-
73392-D) filed on December 23, 1993
(2) Incorporated by reference from the Company's Current Report on Form 8-K (File No. 0-23332) filed on
March 5, 1997
(3) Incorporated by reference from the Company's Current Report on Form 8-K (File No. 0-23332) filed on
August 26, 1997
(4) Incorporated by reference from the Company's Current Report on Form 8-K (File No. 0-23332) filed on
October 15, 1997
(5) Incorporated by reference from the Company's Annual Report on Form 10-K (File No. 0-23332) filed on
March 27, 1997
(6) Incorporated by reference from the Company's Registration Statement on Form S-2 (File No. 333-38444)
filed on October 21, 1997
</TABLE>
(b) Reports on Form 8-K
The Company filed a single Current Report on Form 8-K during the fourth
quarter of 1997, which report was dated September 30, 1997, and
reported the acquisition of the CTI Companies. That Current Report on
Form 8-K was subsequently amended to include the financial statements
on the CTI Companies required to be filed in accordance with Regulation
S-X.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Denver,
State of Colorado, on this 30th day of March, 1998.
EFTC CORPORATION,
a Colorado corporation
By: /s/ Stuart W. Fuhlendorf
Stuart W. Fuhlendorf
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this Report to be signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Position Held Date
With the Registrant
<S> <C> <C> <C>
* President and Director March 30, 1998
Jack Calderon (Principal Executive Officer)
* Chief Financial Officer and March 30, 1998
Stuart W. Fuhlendorf Director (Principal Financial
Officer)
* Controller (Principal March 30, 1998
Brent L. Hofmeister Accounting Officer)
Chairman of the March 30, 1998
Gerald J. Reid Board of Directors
* Director March 30, 1998
Allan S. Braswell, Jr.
* Director March 30, 1998
Allan S. Braswell, Sr.
* Director March 30, 1998
Darrayl Cannon
* Director March 30, 1998
James A. Doran
24
<PAGE>
Director March 30, 1998
Charles Hewitson
Director March 30, 1998
Gregory Hewitson
* Director March 30, 1998
Matthew Hewitson
Director March 30, 1998
Lloyd A. McConnell
* Director March 30, 1998
Robert McNamara
* Director March 30, 1998
Richard L. Monfort
Director March 30, 1998
Lucille A. Reid
* Director March 30, 1998
Masoud S. Shirazi
* Director March 30, 1998
David W. Van Wert
</TABLE>
* By: /s/ Stuart W. Fuhlendorf
Stuart W. Fuhlendorf
Attorney-in-fact
25
<PAGE>
Independent Auditors' Report
The Board of Directors
EFTC Corporation:
We have audited the accompanying consolidated balance sheets of EFTC Corporation
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EFTC Corporation and
subsidiaries as December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
January 21, 1998
F-1
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<S> <C> <C>
Assets (Note 4) 1997 1996
- --------------- ---- ----
Current assets:
Cash and cash equivalents $ 356,398 123,882
Trade receivables (less allowance for doubtful accounts of $474,000 24,434,781 3,866,991
in 1997 and $20,000 in 1996
Inventories (note 3) 45,653,743 9,146,505
Income taxes receivable - 616,411
Deferred income taxes (note 6) 494,290 427,059
Prepaid expenses and other 754,939 69,196
----------- --------
Total current assets 71,694,151 14,250,044
Property, plant and equipment:
Land, buildings and improvements 7,062,881 5,551,565
Machinery and equipment 13,601,998 5,084,114
Furniture and fixtures 4,070,853 1,756,588
Construction in progress 4,791,288 -
----------- ---------
29,527,020 12,392,267
Less accumulated depreciation (5,516,872) (3,872,443)
----------- ----------
Net property, plant and equipment 24,010,148 8,519,824
Goodwill, net of accumulated amortization of $546,747 (note 2) 46,372,060 -
Other assets, net 3,484,897 99,773
----------- ----------
Total assets $ 145,561,256 22,869,641
=========== ==========
Liabilities and Shareholders' Equity Current liabilities:
Accounts payable $ 23,057,717 2,320,871
Accrued compensation 2,365,034 682,881
Income taxes payable 604,100 -
Other accrued liabilities 1,270,700 767,803
Current portion of long-term debt (note 4) 3,150,000 170,000
Line of credit with bank (note 4) - 1,800,000
------------ ----------
Total current liabilities 30,447,551 5,741,555
Long-term debt, net of current portion (note 4):
Related party 4,811,227 -
Others 34,295,000 2,890,000
Total long-term debt, net of current portion 39,106,227 2,890,000
Deferred income taxes (note 6) 818,686 315,859
----------- ----------
Total liabilities 70,372,464 8,947,414
Shareholders' equity (notes 4 and 7):
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 118,418 39,427
and outstanding 11,841,796 and 3,942,660 shares, respectively
Additional paid-in capital 68,058,433 10,187,180
Retained earnings 7,011,941 3,695,620
----------- ----------
Total shareholders' equity 75,188,792 13,922,227
Commitments and contingencies (notes 2, 4, 5 and 9)
Total liabilities and shareholders' equity $ 145,561,256 22,869,641
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales $ 113,243,983 56,880,067 49,220,070
Cost of goods sold (note 11) 96,671,679 53,980,067 45,325,349
----------- ---------- ----------
Gross profit 16,572,304 2,900,000 3,894,721
Operating costs and expenses:
Selling, general and administrative 9,534,986 4,195,784 3,093,400
(note 11)
Amortization of goodwill 546,747 - -
Impairment of fixed assets (note 11) - 725,869 -
------------ ---------- ---------
Operating income (loss) 6,490,571 (2,021,653) 801,321
----------- ----------- ----------
Other income (expense):
Interest expense (2,312,356) (525,854) (399,389)
Gain on sale of assets 1,156,618 50,012 49,533
Other, net 89,938 32,416 29,191
----------- ---------- ----------
(1,065,800) (443,426) (320,665)
----------- ---------- ---------
Income (loss) before income
taxes 5,424,771 (2,465,079) 480,656
Income tax (expense) benefit (note 6) (2,108,450) 872,114 (126,518)
----------- ---------- ---------
Net income (loss) $ 3,316,321 (1,592,965) 354,138
=========== ========== ==========
Income (loss) per share:
Basic $ .49 (.40) .09
=== ==== ===
Diluted $ .46 (.40) .09
=== ==== ===
Weighted average shares outstanding:
Basic 6,702,160 3,942,139 3,962,261
=========== ========== ==========
Diluted 7,154,525 3,942,139 3,962,261
=========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional Total
Common stock paid-in Retained shareholders'
Shares Amount capital earnings equity
<S> <C> <C> <C>
Balances at January 1, 1995 3,891,110 $ 38,911 10,016,035 4,934,447 14,989,393
Stock options exercised 49,750 498 165,169 - 165,667
Net income - - - 354,138 354,138
----------- -------- ----------- --------- ----------
Balances at December 31, 1995 3,940,860 39,409 10,181,204 5,288,585 15,509,198
Stock options exercised 1,800 18 5,976 - 5,994
Net loss - - - (1,592,965) (1,592,965)
----------- -------- ----------- --------- ----------
Balances at December 31, 1996 3,942,660 39,427 10,187,180 3,695,620 13,922,227
Issuance of common stock in 3,838,975 38,389 14,143,793 - 14,182,182
business combinations (note 2)
Issuance of common stock in secondary 3,506,861 35,069 38,917,065 - 38,952,134
offering, net of costs (note 7)
Warrants issued in connection with subordinated - - 489,786 - 489,786
debt (note 7)
Stock options and warrants exercised,
including tax benefit of $95,478
(note 4) 553,300 5,533 4,320,609 - 4,326,142
Net income - - - 3,316,321 3,316,321
----------- -------- ----------- --------- ----------
Balances at December 31, 1997 11,841,796 $ 118,418 68,058,433 7,011,941 75,188,792
========== ======= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,316,321 (1,592,965) 354,138
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 2,523,604 1,281,628 1,716,841
Deferred income tax expense (benefit) 755,650 (322,268) (15,745)
Loss (gain) on sale and impairment of property, plant and (1,149,638) 692,608 (49,533)
equipment, net
Other, net - 16,751 (106,088)
Changes in operating assets and liabilities, net of the effects
of acquisitions:
Trade receivables (16,059,964) 1,115,459 (1,123,927)
Inventories (28,434,855) 712,909 (2,380,040)
Income taxes receivable 616,411 (541,489) (10,267)
Income taxes payable 604,100 - -
Prepaid expenses and other current assets (263,978) 313,732 (333,461)
Other assets (2,409,343) 67,375 (96,971)
Accounts payable and other accrued liabilities 11,205,263 (2,116,940) 1,111,464
---------- --------- ---------
Net cash used by operating activities (29,296,429) (373,200) (933,589)
---------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (13,205,613) (1,965,536) 2,473,819)
Proceeds from sale of property, plant and equipment 2,419,820 345,538 3,739,344
Payments for business combinations, net of cash acquired (30,997,426) - -
---------- ---------- ---------
Net cash provided (used) by investing activities (41,783,219) (1,619,998) 1,265,525
---------- --------- ---------
Cash flows from financing activities:
Stock options and warrants exercised 4,326,142 5,994 165,667
Issuance of common stock for cash, net of costs 38,952,134 - -
Borrowings (payments) on lines of credit and short-term notes 15,595,000 1,800,000 -
payable, net
Proceeds from long-term debt 81,700,000 - -
Principal payments on long-term debt (68,283,612) (170,000) (170,000)
Deferred debt issuance costs (977,500) - -
---------- ---------- ---------
Net cash provided (used) by financing activities 71,312,164 1,635,994 (4,333)
---------- --------- ---------
Increase (decrease) in cash and cash equivalents 232,516 (357,204) 327,603
Cash and cash equivalents:
Beginning of year 123,882 481,086 153,483
---------- --------- ---------
End of year $ 356,398 123,882 481,086
========== ========= =========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 1,999,744 517,502 387,045
========== ========= =========
Income taxes, net $ 118,608 - 152,530
========== ========== =========
Common stock issued in business combinations $ 14,182,182 - -
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(1) Nature of Business and Significant Accounting Policies
Business
EFTC Corporation (the Company), is an independent provider of electronic
manufacturing services to original equipment manufacturers in the
computer peripherals, medical equipment, industrial controls,
telecommunications equipment and electronic instrumentation industries.
The Company's manufacturing services consist of assembling complex
printed circuit boards (using both surface mount and pin-through-hole
technologies), cables, electro-mechanical devices and finished products.
The Company also provides computer aided testing of printed circuit
boards, subsystems and final assemblies and "hub based" repair and
warranty services.
Basis of Presentation
The accompanying consolidated financial statements include the accounts
of EFTC Corporation and its wholly-owned subsidiaries since the date of
formation or acquisition, as described in note 2. All intercompany
balances and transactions have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less.
Inventories
Inventories are stated at the lower of weighted average cost or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and repairs
are charged to operations as incurred. Depreciation is computed using
straight-line and accelerated methods over estimated useful lives ranging
from 31 to 39 years for buildings, and 5 to 10 years for furniture and
fixtures and machinery and equipment.
F-6
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1) Nature of Business and Significant Accounting Policies (continued)
Goodwill and Other Assets
Goodwill is amortized using the straight-line method over 30 years. At
December 31, 1997, other assets include acquired intellectual property
consisting of circuit board assembly designs and specifications of $1.1
million which are being amortized over 10 years using the straight-line
method, deferred financing costs of $926,000 which are being amortized
over 5 years, and restricted cash of $653,000.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets under the provisions of SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS No. 121). SFAS 121 requires
that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is generally measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amounts of the assets exceed the fair values of the assets. In
connection with the Company's restructuring in August 1996, the Company
recorded a provision for impairment of certain fixed assets of $726,000.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue upon shipment of products to customers.
Income (Loss) Per Share
Income (loss) per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share
(SFAS 128). SFAS 128 replaced the presentation of primary and fully
diluted earnings (loss) per share (EPS), with a presentation of basic EPS
and diluted EPS. Under SFAS 128, basic EPS excludes dilution for
potential common shares and is computed by dividing income or loss
available to
F-7
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
common shareholders by the weighted average number common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock and resulted in the
issuance of common stock. In 1997, diluted weighted average shares
outstanding includes 452,365 potential shares, consisting of stock
options and warrants, determined using the treasury stock method. Basic
and diluted EPS are the same in 1996 and 1995 as all potential common
shares were antidilutive.
Stock-based Compensation
The Company accounts for its employee stock compensation plans as
prescribed under Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Pro forma disclosures of net
income and income per share, as required by Statement of Financial
Accounting Standards No. 123 (SFAS 123), Accounting for Stock-based
Compensation, are included in note 7 to the consolidated financial
statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentation.
(2) Business Combinations and Asset Acquisitions
On September 30, 1997, the Company acquired three affiliated companies,
Circuit Test, Inc., Airhub Service Group L.C. and CTI International, L.C.
(the CTI Companies), for approximately $35.7 million consisting of
1,858,975 shares of the Company's common stock and approximately $26.5
million in cash, which includes approximately $1.4 million of transaction
costs and a $6 million payment upon completion of the common stock
offering in October 1997, as described in note 7. The Company recorded
goodwill of approximately $38.9 million, in connection with the
transaction. The acquisition was accounted for using the purchase method
of accounting for business combinations and, accordingly, the
accompanying consolidated financial statements include the results of
operations of the acquired businesses since the date of acquisition.
In August and September 1997, the Company completed the initial elements
of two transactions with AlliedSignal Inc. (AlliedSignal) pursuant to
which the Company acquired certain inventory and equipment located in Ft.
Lauderdale, Florida, subleased the facility where such inventory and
equipment was located and employed certain persons formerly employed by
AlliedSignal at that location. The Company also hired certain persons
formerly employed by AlliedSignal in Arizona and agreed with AlliedSignal
to provide the personnel and management services necessary to operate a
related facility on behalf of AlliedSignal on a temporary basis. Subject
to the satisfaction of the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, the Company will acquire
AlliedSignal's inventory and equipment located at the Arizona facility,
which acquisition is expected to be completed in 1998. The aggregate
purchase price of all assets to be acquired by the Company from
AlliedSignal is expected to approximate $15.0 million, of which
approximately $13.0 million
F-8
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
had been paid through December 31, 1997. The Company has also agreed to
pay AlliedSignal one percent of gross revenue for all electronic
assemblies and parts made for customers other than AlliedSignal at the
Arizona or Florida facilities through December 31, 2006.
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 $10.9 million, consisting of
1,980,000 shares of Company common stock and approximately $5.5 million
in cash, which included approximately $600,000 of transaction costs. The
Company recorded goodwill of approximately $8.0 million in connection
with the acquisition. The acquisition was accounted for using the
purchase method of accounting for business combinations and, accordingly,
the accompanying consolidated financial statements include the results of
operations of the acquired businesses since the date of acquisition.
The following unaudited pro forma information assumes that the
acquisitions of the CTI Companies and the CE Companies had occurred on
January 1, 1996:
Year ended December 31,
-----------------------
1997 1996
---- ----
Revenue $ 146,291,000 115,910,000
Net income (loss) 1,010,000 (2,109,000)
Net income (loss) per share - diluted .11 (.27)
The above pro forma information is not necessarily indicative of future
results.
(3) Inventories
Inventories are summarized as follows:
December 31,
-------------------
1997 1996
---- ----
Purchased parts and completed $ 38,510,233 7,640,712
subassemblies
Work-in-progress 6,751,261 1,256,570
Finished goods 392,249 249,223
---------- ---------
$ 45,653,743 9,146,505
========== =========
(4) Debt
During September 1997, the Company issued $15 million of subordinated
notes to a director and stockholder of the Company. The subordinated
notes bear interest at LIBOR plus 2% (8.19% at December 31, 1997) and are
payable in four annual installments of $50,000 and one final payment of
$14.8 million in September 2002. Payments on the notes are
F-9
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Debt (continued)
subordinate to the Company's senior bank debt. The subordinated notes
also included warrants to acquire 500,000 shares of the Company's common
stock at $8.00 per share. The warrants were issued in October 1997, were
valued at approximately $500,000 using the Black-Scholes pricing model.
Such amount was recorded as debt discount and is being amortized to
interest expense over the term of the notes. The warrants were exercised
on October 9, 1997 for total proceeds of approximately $4 million. The
Company repaid $10 million of this debt upon the completion of the common
stock offering described in note 7 in November 1997. The scheduled
repayment was reduced by the pro rata amount of unamortized discount.
Accordingly, no gain or loss was recognized on the extinguishment of
debt. The outstanding balance, net of discount, as of December 31, 1997
was $4,861,227, of which $50,000 is included in the current portion of
long-term debt.
Long-term debt to others consists of the following:
December 31,
-----------------
1997 1996
---- ----
Notes payable to banks (a) 37,395,000 -
Note payable to a bank with interest
at 1% above prime rate adjusted - 3,060,000
annually, repaid in 1997
Less current portion (3,100,000) (170,000)
---------- ----------
Long-term debt to others,
net of current portion $ 34,295,000 2,890,000
========== =========
(a) In connection with the CTI Companies business combination and the
AlliedSignal asset acquisition, the Company entered into a new loan
agreement consisting of a $25 million revolving line of credit
renewable on September 30, 2000, and a $20 million term loan maturing
on September 30, 2002. The proceeds of the new loan agreement were
used for (i) funding the CTI merger and (ii) repayment of the existing
line of credit and bridge facility and equipment loan. Borrowings
under the agreement bear interest at a rate based on either LIBOR or
the prime rate plus applicable margins ranging from 0.50% to 3.25% for
the term facility (9.16% at December 31, 1997) and 0% to 2.75% for the
revolving facility (approximately 9% at December 31, 1997). Borrowings
on the revolving facility are subject to limitation based on the value
of the available collateral. The loan agreement is collateralized by
substantially all of the Company's assets and contains restrictive
covenants relating to capital expenditures, limitation on investments,
borrowings, payment of dividends and mergers and acquisitions, as well
as the maintenance of certain financial ratios. The revolving facility
requires a commitment fee of 0.5% per annum on any unused portion. As
of December 31, 1997, the borrowing availability under the agreement
was approximately $7.6 million. This credit facility may be withdrawn
or canceled at the banks' option under certain conditions such as
default or in the event the Company experiences a material adverse
change in its financial condition.
F-10
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Annual maturities of long-term debt, excluding the discount on the
subordinated notes, are as follows at December 31, 1997:
1998 $ 3,150,000
1999 3,940,000
2000 4,460,000
2001 4,900,000
2002 25,945,000
----------
$ 42,395,000
(5) Leases
The Company has noncancelable operating leases for facilities and
equipment that expire in various years through 2002. Lease expense on
these operating leases amounted to $2,333,486, $1,215,623 and $578,958
for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, future minimum lease payments for operating leases
are as follows:
1999 $ 2,173,150
2000 1,583,840
2001 1,049,980
2002 365,416
---------
Total future minimum lease payments $ 5,172,386
=========
In December 1995, the Company entered into a sale-leaseback transaction
for equipment of approximately $3.6 million. The gain on this transaction
totaled $106,088, which was deferred and is being amortized over the
remaining life of the lease, which is approximately 6 years.
(6) Income Taxes
The current and deferred components of income tax expense (benefit) are
as follows:
Year ended December 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ 1,210,858 (549,846) 142,263
State 141,942 - -
--------- -------- -------
1,352,800 (549,846) 142,263
--------- ------- -------
Deferred:
Federal 599,245 (196,440) (13,635)
State 156,405 (125,828) (2,110)
--------- ------- -------
755,650 (322,268) (15,745)
--------- ------- -------
$ 2,108,450 (872,114) 126,518
========= ======= =======
F-11
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(6) Income Taxes (continued)
Actual income tax expense (benefit) differs from the amounts computed
using the statutory tax rate of 34% as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed tax at the expected $ 1,844,422 (838,126) 163,423
statutory rate
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal 136,771 (83,046) (1,392)
benefit and state tax credits
Amortization of nondeductible 84,927 - -
goodwill
Research and development tax - - (40,000)
credits
Other, net 42,330 49,058 4,487
--------- ------- -------
Income tax expense (benefit) $ 2,108,450 (872,114) 126,518
========= ======= =======
</TABLE>
In 1997, the Company recognized $95,478 as an increase to additional
paid-in capital for the income tax benefit resulting from the exercise of
stock options by employees.
The tax effects of temporary differences at December 31, 1997 and 1996
that give rise to significant portions of the deferred tax assets and
liabilities are presented below:
1997 1996
---- ----
Deferred tax assets:
Accrued vacation and/or bonuses $ 283,078 76,064
Restructuring charges - 186,434
Deferred gain on sale leaseback 27,583 36,088
Deferred loss on asset writedown 70,407 -
State net operating loss carryforwards 15,200 95,420
Allowance for doubtful accounts 124,807 7,600
Other 86,405 25,453
------- -------
Total deferred tax assets $ 607,480 427,059
======= =======
Deferred tax liabilities:
Amortization of deductible goodwill $(115,640) -
Accelerated depreciation and other
basis differences (816,236) (315,859)
for property, plant and equipment
Total deferred tax liabilities $(931,876) (315,859)
======= =======
F-12
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The above balances are classified in the accompanying consolidated
balance sheets as of December 31, 1997 and 1996 as follows:
1997 1996
---- ----
Net deferred tax asset - current $ 494,290 427,059
======= =======
Net deferred tax liability - noncurrent $ 818,686 315,859
======= =======
Management believes that it is more likely than not that future
operations will generate sufficient taxable income to realize the
deferred tax assets.
(7) Shareholders' Equity
In November 1997, the Company issued 3,506,861 shares of common stock in
a secondary offering for proceeds of $39.3 million, net of issuance costs
of approximately $3.1 million.
The Company has three stock option or equity incentive plans: the 1993
Plan, the Equity Incentive Plan and the Non-employee Directors Plan.
Options to purchase 180,000 shares of common stock at an exercise price
of $3.33 have been granted under the 1993 Plan. These options generally
vest over a five-year period and expire in April 2003. The Equity
Incentive Plan provides for the grant of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock and
stock units. Substantially all employees are eligible under this plan,
which was amended to increase the maximum number of shares of common
stock that can be granted under this Plan to 1,995,000. The Non-employee
Directors Plan provides for options to acquire shares of common stock to
members of the Board of Directors who are not also employees. A total of
557,550 shares are available for grant under all plans at December 31,
1997.
The Company has also issued 670,441 nonqualified options to officers and
employees. Options generally vest 7 years after the grant date, but
vesting may accelerate based on increases in the market price of the
Company's common stock.
F-13
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Shareholders' Equity (continued)
The following summarizes activity of the plans for the three years ended
December 31, 1997.
Weighted
average
Number of exercise price
options per share
------- ---------
Balance at January 1, 1995 313,550 $ 5.11
Granted 69,500 5.30
Exercised (49,750) 3.33
Canceled (70,600) 6.37
---------
Balance at December 31, 1995 262,700 5.87
Granted 375,200 4.04
Exercised (1,800) 3.33
Canceled (75,600) 6.64
---------
Balance at December 31, 1996 560,500 4.55
Granted 2,004,000 11.63
Exercised (53,300) 4.34
Canceled (95,980) 6.07
---------
Balance at December 31, 1997 2,415,220 10.37
=========
The following table summarizes information regarding fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
average Weighted Weighted
remaining average average
Range of exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 3.33 to $ 5.00 399,520 8.3 $ 3.98 356,426 $ 3.97
$ 5.01 to $ 10.00 774,200 8.9 6.45 487,464 6.02
$ 10.01 to $ 15.00 777,500 9.8 14.03 - -
$ 15.01 to $ 16.25 464,000 9.8 16.25 - -
--------- --------
2,415,220 9.3 10.37 843,890 5.15
========= =======
</TABLE>
The Company applies the provisions of APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, because the
Company grants options at fair value, no compensation cost has been
recognized for its fixed stock option plans in 1997, 1996 and 1995.
F-14
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Shareholders' Equity (continued)
If compensation cost for the Company's three stock-based compensation
plans had been determined using the fair values at the grant dates for
awards under those plans consistent with SFAS 123, the Company's pro
forma net income (loss) and income (loss) per share would have been as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss):
As reported $ 3,316,321 (1,592,965) 354,138
Pro forma 1,044,241 (1,731,259) 329,963
Income (loss) per share - basic:
As reported .49 (.40) .09
Pro forma .16 (.44) .08
Income (loss) per share - diluted:
As reported .46 (.40) .09
Pro forma .15 (.44) .08
</TABLE>
The weighted average fair values of options granted for the years ended
December 31, 1997, 1996 and 1995 were $5.90, $4.15 and $4.92,
respectively. In estimating the fair value of options, the Company used
the Black-Scholes option-pricing model with the following assumptions.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 70% 60% 60%
Risk-free interest rates 6% 6% 6%
Expected lives (years) 3 4 3
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effect on the historical net income for future periods because options
vest over several years, and additional awards are made each year. In
addition, compensation cost for options granted prior to January 1, 1995
and which vest after that date has not been considered.
The Company also has 80,000 warrants outstanding which were issued to the
underwriter in connection with the Company's initial public offering in
1994. The warrants are exercisable at $9.00 per share and expire in 1999.
None of the warrants have been exercised as of December 31, 1997.
F-15
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Fair Values of Financial Instruments
The carrying amounts of the Company's financial instruments at December
31, 1997 and 1996 are deemed to approximate their estimated fair values.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts of cash and cash equivalents, trade
receivables, accounts payable and accrued liabilities approximate fair
value because of the short maturity of these instruments. The carrying
amounts of notes payable and long-term debt approximate fair value
because of the variable nature of the interest rates of these
instruments.
(9) Employee Benefit Plan
The Company has a 401(k) Savings Plan covering substantially all
employees, whereby the Company matches 50% of an employee's contributions
to a maximum of 2% of the employee's compensation. Additional profit
sharing contributions to the plan are at the discretion of the Board of
Directors. During the years ended December 31, 1997, 1996 and 1995,
contributions from the Company to the Plan were approximately $138,000,
$106,000 and $90,000, respectively.
(10) Transactions with Related Parties
Under an existing agreement, the CTI Companies were required to pay
$500,000 upon change in control to an entity acting as a sales agent for
the CTI Companies in which individuals who are stockholders, officers and
directors of the Company have a majority ownership interest.
In 1997, the Company leased three facilities from directors of the
Company. Amounts paid to the directors totaled approximately $283,000.
An investment banking firm, of which a director of the Company is the
Managing Director, received a fee of approximately $900,000 as a
representative of the CTI Companies in their acquisition by the Company.
(11) Restructuring
In the third quarter of 1996, management initiated a plan to restructure
the Company's manufacturing operations and various administrative
functions, including a change in the manufacturing process and a
reorganization of the sales department. Restructuring charges of
$2,127,000 were charged to operations for the year ended December 31,
1996. The restructuring plan involved the termination of 142 employees
consisting of approximately 90 direct manufacturing employees and 52
indirect overhead positions. The total severance related costs
approximated $615,000. The Company changed its manufacturing strategy to
focus on high-mix production and developed its Asynchronous Process
Manufacturing (APM) concept. Software development costs unrelated to the
Company's new manufacturing strategy but related to previous
manufacturing processes developed by
F-16
<PAGE>
EFTC CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
consultants were written off in the approximate amount of $442,000.
Inventory allowances, totaling approximately $344,000, were also recorded
to provide for future losses to be incurred related to the separation of
certain customers who did not meet the Company's new manufacturing
strategy. In addition, due to changes in the manufacturing process which
eliminated the use of various equipment, property, plant and equipment
was written off in the amount of $726,000. The restructuring charge was
allocated to cost of goods sold, selling, general and administrative
expenses and impairment of fixed assets in the amounts of approximately
$479,000, $922,000 and $726,000, respectively. The restructuring has been
completed and no liabilities associated with the restructuring remain at
December 31, 1997.
(12) Business and Credit Concentrations
The Company operates in the electronic manufacturing services segment of
the electronics industry. The Company's customers are primarily located
in the United States and sales and accounts receivable are concentrated
with customers principally in the computer peripherals and medical
equipment industries. The Company has a policy to regularly monitor the
credit worthiness of its customers and provides for uncollectible amounts
if credit problems arise. Customers may experience adverse financial
difficulties, including those that may result from industry developments,
which may increase bad debt exposure to the Company. In addition, the
electronics manufacturing services industry has experienced component
supply shortages in the past. Should future component shortages occur,
the Company may experience reduced net sales and profitability.
Sales to significant customers as a percentage of total net sales were as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Allied Signal 27.1% - % - %
Exabyte 13.1 20.8 -
Ohmeda (BOC Group) 7.4 15.7 15.3
Hewlett Packard Company 6.6 26.4 37.8
Kentrox 6.4 - -
</TABLE>
The businesses acquired in the CTI Companies business combination focus
on repair and warranty operations which are located at the principal
locations of the overnight delivery hubs of two overnight package
transportation providers and are integrated with the logistics operations
of these transportation providers and participate in joint marketing
programs to customers of these transportation providers. If the Company
ceased to be allowed to share facilities and marketing arrangements with
either or both of these major transportation providers, there can be no
assurance that alternate arrangements could be made by the Company to
preserve such advantages and the Company could lose significant numbers
of repair customers. In addition, work stoppages or other disruptions in
the transportation network may occur from time to time which may affect
these transportation providers.
F-17
Exhibit 21.1
List of Subsidiaries
of
EFTC Corporation
Current Electronics, Inc., an Oregon corporation
Circuit Test, Inc., a Florida corporation
Airhub Service Group, L.C., a Kentucky limited liability company
Circuit Test International, L.C., a Florida limited liability company
CTI Acquisition Corp., a Florida corporation
The Board of Directors
EFTC Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-77938, 33-92418, 333-34255 and 333-47943) on Form S-8 of EFTC Corporation of
our report dated January 21, 1998 relating to the consolidated balance sheets of
EFTC Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997
which report appears in the December 31, 1997 annual report on Form 10-K of EFTC
Corporation.
KPMG Peat Marwick LLP
Denver, Colorado
March 25, 1998
POWER OF ATTORNEY
Each person whose signature appears below appoints Stuart W.
Fuhlendorf, his or her attorneys-in-fact, with full power of substitution, for
him or her in any and all capacities, to sign an annual report to be filed with
the Securities and Exchange Commission (the "Commission") on Form 10-K for the
year ended December 31, 1997, by EFTC Corporation (formerly named "Electronic
Fab Technology, Corp."), a Colorado corporation (the "Company"), and all
amendments thereto, and to file the same, with all exhibits thereto, with the
Commission; granting unto said attorneys-in-fact full power and authority to
perform any other act on behalf of the undersigned required to be done in the
premises, hereby ratifying and confirming all that said attorneys-in-fact
lawfully do or cause to be done by virtue hereof.
Date: March ____, 1998
Gerald J. Reid
Date: March 30, 1998 /s/ Jack Calderon
-----------------
Jack Calderon
Date: March ____, 1998
Lucille A. Reid
Date: March 30, 1998 /s/ Stuart W. Fuhlendorf
-------------------------
Stuart W. Fuhlendorf
Date: March 30, 1998 /s/ James A. Doran
-------------------
James A. Doran
Date: March 30, 1998 /s/ Robert McNamara
-------------------
Robert McNamara
Date: March 30, 1998 /s/ Brent Hofmeister
--------------------
Brent Hofmeister
Date: March 30, 1998 /s/ Masoud S. Shirazi
---------------------
Masoud S. Shirazi
Date: March 30, 1998 /s/ Darrayl Cannon
------------------
Darrayl Cannon
Date: March 30, 1998 /s/ Richard L. Monfort
----------------------
Richard L. Monfort
Date: March ____, 1998
Lloyd A. McConnell
Date: March 30, 1998 /s/ David Van Wert
------------------
David Van Wert
Date: March ____, 1998
Charles E. Hewitson
Date: March ____, 1998
Gregory C. Hewitson
Date: March 30, 1998 /s/ Matthew J. Hewitson
------------------------
Matthew J. Hewitson
Date: March 30, 1998 /s/ Allen S. Braswell, Sr.
Allen S. Braswell, Sr.
Date: March 30, 1998 /s/ Allen S. Braswell, Jr.
Allen S. Braswell, Jr.
II-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 356,398
<SECURITIES> 0
<RECEIVABLES> 24,908,781
<ALLOWANCES> 474,000
<INVENTORY> 45,653,743
<CURRENT-ASSETS> 71,694,151
<PP&E> 29,527,020
<DEPRECIATION> 5,516,872
<TOTAL-ASSETS> 145,561,256
<CURRENT-LIABILITIES> 30,447,551
<BONDS> 39,106,227
0
0
<COMMON> 118,418
<OTHER-SE> 75,070,374
<TOTAL-LIABILITY-AND-EQUITY> 145,561,256
<SALES> 113,243,983
<TOTAL-REVENUES> 113,243,983
<CGS> 96,671,679
<TOTAL-COSTS> 96,671,679
<OTHER-EXPENSES> 10,081,733
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,312,356
<INCOME-PRETAX> 5,424,771
<INCOME-TAX> 2,108,450
<INCOME-CONTINUING> 3,316,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,316,321
<EPS-PRIMARY> .49
<EPS-DILUTED> .46
</TABLE>
