UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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.
<PAGE>
PART I
ITEM 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
<PAGE>
methods, technologies, quality criteria, and logistic needs, resulting in an
increasing need for EMS providers to specialize their services.
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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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.
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:
<PAGE>
(1) aerospace and avionics; (2) medical devices; (3) communications; (4)
industrial controls and instrumentation; and (5) computer-related products.
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%
00.0% 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, three 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 89.7% 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.
<PAGE>
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 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.
<PAGE>
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. 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
<PAGE>
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
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.
<PAGE>
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
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 cash and
other consideration that included the issuance of 1,858,975 shares of the
Company's Common Stock. 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
<PAGE>
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 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.
<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
<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:
Year ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Net sales................................... 100.0% 100.0% 100.0%
Gross profit................................ 14.6 5.1 7.9
Selling, general and administrative
expenses................................. 8.4 7.4 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
======= ======== =======
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.
<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.
<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 30, December 31, March 31, June 30, September 30, December 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
<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 $9.1 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.
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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.
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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 14th day of May, 1998.
EFTC CORPORATION,
a Colorado corporation
By: /s/ Stuart W. Fuhlendorf
Stuart W. Fuhlendorf
Chief Financial Officer
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