FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
For the Fiscal Year Ended March 31, 1996
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] 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: 0-15967
EFI ELECTRONICS CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 75-2072203
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2415 South 2300 West, Salt Lake City, Utah 84119
(Address of principal executive offices)
Registrant's telephone number, including area code: (801) 977-9009
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None n/a
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
[X] Check 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 past twelve 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.
[ ] Check if there is no disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B contained in this form, and no
disclosure will 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-KSB or any amendment to this
Form 10-KSB.
Issuer's revenues for its most recent fiscal year: $11,921,129
Aggregate market value of the voting stock (which consists solely
of shares of $.0001 par value common stock) held by non-affiliates
of the registrant as of June 10, 1996, computed by reference to the
closing sale price of the registrant's common stock as reported by
the NASDAQ Small Cap Market on such date: $ 4,165,641.
Number of shares of the registrant's common stock outstanding at
June 10, 1996: 3,173,822
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the Annual
Meeting of Shareholders scheduled for July 26, 1996 are incorporated
by reference in Part III of this report.
<page 1>
PART I
Item 1. Business
General Development of Business
EFI Corporation, a predecessor corporation to EFI Electronics
Corporation ("EFI" or the "Company"), was incorporated under the
laws of the State of Utah on April 4, 1979, under the name
"Electrical Filters Inc." and from 1979 to 1981 was principally
engaged in the sale of a power line filter which was an energy
savings device. In December 1982, the name of this company was
changed to EFI Corporation and it began manufacturing and selling
transient voltage surge suppression ("TVSS") devices.
In June 1987, EFI Corporation merged with and into Halyx Development
Company, Inc., a Delaware corporation, which was the surviving
corporation ("Surviving Corporation") in the merger. This
corporation was previously incorporated under the laws of the State
of Delaware on November 13, 1985, under the name "Halyx Development
Company, Inc." The name of the Surviving Corporation was changed to
EFI Electronics Corporation. Because the shares issued in the merger
to the shareholders of EFI Corporation represented approximately 90%
of the outstanding shares of the Surviving Corporation after the
merger and the officers and directors of EFI Corporation became the
officers and directors of the Surviving Corporation after the
merger, EFI Corporation was deemed, for financial reporting
purposes, to have acquired Halyx Development Company, Inc.
In February 1991, the Company began manufacturing uninterruptible
power supply ("UPS") systems for sale and distribution through the
same channels as its TVSS products. In February 1995, management
concluded that the UPS product line was not yielding the desired
return on investment. In June 1995, Valence, L.L.C. ("Valence"), an
unrelated party, purchased the exclusive rights to the Company's
UPS products along with related inventory and assets for $780
thousand and contracted with the Company to manufacture these UPS
products for a two year period.
In January 1995, EFI established a new business group named Network
Response Systems(TM) ("NRS") and acquired the necessary software to
provide a service that monitors power and several other conditions
that can exist on servers in a local area network ("LAN") system.
Narrative Description of Business
Company Overview--The Company is primarily engaged in the
manufacture and marketing of TVSS products. TVSS devices protect
electronic equipment from electrical disturbances such as lightning,
grid switching, switching of air conditioners, power tools,
elevators, welding units, and electrical accidents. These
disturbances can produce high speed, high energy transient voltage
spikes and surges which can cause hardware failure,
data/communication disruptions and transient induced software "bugs"
resulting in equipment damage and/or down time. EFI's first hardwire
product for industrial users was introduced in November 1981,
followed by introduction of similar plug-in products for computer
and telecommunication equipment which were introduced in early 1983
and 1984, respectively. Since the early 1980's, the Company has
continued to develop new products for both plug-in and hardwire
uses. Based on competitive research the Company believes it has the
broadest line of TVSS products in the market and is known for its
innovative solutions, high quality and engineering competence.
As discussed above, the Company developed a line of UPS products
which it no longer markets and sells. The Company continues to
manufacture these products for Valence pursuant to a manufacturing
agreement entered into in combination with the sale of the UPS
product line to Valence, but is no longer involved in development or
design of new UPS products.
<page 2>
Item 1. Business (continued)
In January 1995, the Company established a new business group named
NRS and acquired a software product from a third party developer to
monitor and report several variables relating to the power
conditions and node operations on LAN systems. As the PC and LAN
markets continue to grow in complexity, many third party service
organizations and in-house service departments need an effective
method to monitor the environment in which servers and other devices
operate. While many UPS manufacturers provide the ability to
monitor the power affecting their devices, these are limited in
scope by being both proprietary and providing only A/C power data.
NRS software is an "open system", on-line monitoring service that
provides information about not only power, but also environment,
network traffic, disk usage, etc.
Products--The Company is presently engaged in the design,
development, assembly, and marketing of TVSS devices for computer
systems and other microprocessor-based equipment. The increasing use
of microprocessor-based systems is opening new markets for surge
suppression products. These markets include office and home office
products (computers, fax machines, copiers, cash registers, etc.),
commercial and industrial products for medical facilities,
telecommunication installations, security systems, factories,
automated environments, and even modern homes.
All EFI TVSS products are designed and manufactured to meet
Underwriters Laboratories ("U.L.") and Canadian Standards
Association ("C.S.A.") standards for quality and safety. EFI's basic
suppression circuit was patented in 1986, with additional patents
granted in 1991 and 1992. All products are tested and listed by U.L.
for both domestic and Canadian use. EFI's products also provide
additional safety features such as thermal fusing, circuit breaker
protection, and complete diagnostics.
Currently, EFI offers a broad range of TVSS products under two
categories: (1) plug-in products and (2) hardwire products.
Plug-in Products are offered in four product lines, including
models to protect computers, copiers, fax machines, DSS
satellite systems, printers, disk drives, stereo equipment,
telecommunication equipment and data lines:
Powertracker(TM) Plugstrips offer six or eight outlets, an
on/off switch/circuit breaker and diagnostic lights. Three
different suppression networks are available to provide
the level of protection desired. Diagnostics indicate
reverse polarity, improper grounding and damage to the
suppression circuit. In addition, telephone and coaxial
line protection are also available.
Powertracker(TM) Wallmounts plug into a standard grounded
outlet and have two or six power outlets for connected
equipment. They have the same suppression circuitry,
diagnostic features and telephone/coaxial protection as
the plugstrips. Two special wallmount models have been
designed specifically for fax and copy machines.
Powertracker(TM) Modules are designed to protect
telecommunication systems and network data lines from
power surges. The modules plug into a wall outlet and have
connections for several types of networking
configurations.
Powertracker(TM) Power Control Center is packaged to
provide a personal computer monitor platform. It has five
A/C outlets for peripherals such as a printer, fax,
monitor, etc., as well as telephone line outlets. Separate
power switches are provided for each peripheral.
Additionally, these products include the diagnostic
features offered on the plugstrip and wallmount products.
<PAGE 3>
Item 1. Business (continued)
Hardwire Products provide a range of protection to an entire
facility at the service entrance, at distribution panels, to a
specific area or to electronic equipment at a dedicated branch
panel. In addition, original equipment manufacturers ("OEM")
may incorporate these products directly into specific
microprocessor based equipment. EFI actively markets two major
product lines:
Linemaster(R) products are designed with standard features
and are primarily sold through electrical distributors.
This product line includes both hardwire panels and
smaller, custom modules for use with or within specific
microprocessor-based customer products.
Titan(R) products are based on the same platform as certain
Linemaster(R) products, but have significantly greater
performance and optional features not offered on
Linemaster(R) products. Titan(R) products are sold on a bid
basis to contractors as specified by building and
architectural engineers.
Software/service products are provided by the Company's new
operation, NRS. These products are intended to monitor not only the
power of LAN and other distributed systems, but also other
characteristics relating to the environment and performance of
connected systems. These products grew out of the monitoring
features offered by the Company's UPS products. This technology can
ultimately be applied to other types of systems than LAN systems.
Competition
EFI experiences active competition in both of its TVSS product
categories. EFI believes it is one of the few companies to offer an
extensive line of both plug-in and hardwire products. A
description of the competitive factors in each category of EFI's
products is set forth below.
Plug-in Products--These products are sold into a variety of
distribution channels that include value added resellers ("VAR"),
office products dealers, government and mass retail outlets. These
markets are intensely price competitive and are characterized by the
import of low-priced products from foreign manufacturers for resale
by many large brand name companies. These companies are often
engaged in the sale of a wide range of products and accessories that
include TVSS. EFI believes its competitive advantages are
packaging, product performance and competitive costs through
continuing cost reduction activities.
Hardwire Products--These products are sold to a diverse set of
markets including process control equipment manufacturers,
government, medical equipment, modular office systems, and
telecommunication equipment, along with electrical contractors and
public utilities. Many of these products are sold through power VARs
and electrical wholesalers. Many customers require custom designed
products which are required as part of the installation of their
equipment. Public utilities are now selling protection devices to
both home and business power users. There are a number of companies
that manufacture hardwire TVSS products for these markets. However,
most manufacturers compete on the basis of product performance and
technical support rather than price. EFI believes its products in
this market compete favorably with respect to technical support and
performance and, that as the market matures, the Company will have
significant pricing advantages.
Software/service Products--Although the LAN market is well
developed, third party maintenance/service provided by VARs and
others is still evolving. There are very few competitors that
provide an open architecture approach to monitoring microprocessor-
based systems. The software that exists is mostly proprietary to
hardware suppliers and is not part of an overall service/maintenance
plan. The Company believes that its products provide a unique
opportunity to VARs, OEMs and large end users to develop an
opportunity for third party maintenance and service.
<PAGE 4>
Item 1. Business (continued)
Marketing
EFI delivers its products through a variety of marketing channels
including national and regional distributors that service retail
computer resellers, office products dealers, and industrial users or
building engineers/contractors. EFI also markets directly to private
label/OEM customers and the U.S. Government. EFI's marketing
strategy is to provide superior performance and features at a
competitive price with aggressive product and connected equipment
warranties. Following is a description of marketing programs for
each TVSS market:
EFI brand products are sold directly to large national and
regional suppliers of computers, office products and electrical
equipment. These suppliers distribute to VARs, computer and
office product dealers, electrical retailers and other market
retailers. These suppliers are serviced by authorized EFI
manufacturing representatives.
Government products are sold primarily on a bid basis through
direct sales contact and through manufacturer's
representatives.
Private Label/OEM product sales are made by direct sales to
other manufacturers and product merchandisers.
NRS products are sold directly to large VARs, third party
maintenance organizations and large end users.
Dependence on Customers
EFI received nearly 20% of its fiscal 1996 revenue from agencies of
the Federal Government, including slightly over 10% of its net sales
from the General Services Administration. In addition, sales to
EFI's next three largest customers amounted to an additional 17% of
net sales. This concentration reflects the Company's focus on
acquiring large distribution or private label customers. Loss of
any one or more of these customers could have a material adverse
effect on the Company's results of operations.
Patents and Trademarks
In December 1986, EFI was issued a patent which has a life of 17
years commencing December 16, 1986, related to the suppression
network utilized in its plug-in and hardwire product lines. In June
1991, EFI was issued a patent on its meter base surge suppression
product, which has a life of 17 years commencing June 11, 1991. In
June 1992, EFI was issued a patent on the CATV circuitry that EFI
has developed and uses in many of its products, which has a life of
17 years commencing June 23, 1992. In January 1996, the Company
purchased rights to a patent that is pending on a system to "hot
swap" a suppression module in hardwire products. In February 1996,
the Company applied for a patent on a unique TVSS technology
comprised of an array of varistor discs. EFI considers these patents
to be significant and material competitive advantages.
The Company has also registered its "EFI" logo, EFI(R) name as a
trademark, and Sine Wave Tracker(R), Omni-Phase(R), HomeGuard(R),
Mastershield(R), Powertracker(TM), Titan Linemaster(R), and Titan Surge
Defender(R) brand names as trademarks which appear on the Company's
products. Network Response Systems(TM) has been registered as a
service mark and Network Response Center(TM) as a trademark. The
trademarks are also deemed significant to EFI because of the
importance of name recognition in the markets in which EFI products
are sold.
<PAGE 5>
Item 1. Business (continued)
Research and Development
EFI is continually engaged in the research and development of new
products and refinements of existing TVSS products. While the
Company continues to manufacture UPS products for Valence, it is no
longer involved in development or design of new UPS products. The
Company employs five research and development professionals. Major
advances have been made to shorten the design cycle by establishing
product teams made up of representatives from sales, finance,
marketing, manufacturing, and engineering. These teams focus on the
product step by step and make changes throughout the cycle, rather
than making the changes at the end of the process. Research and
development expenses for fiscal years ended March 31, 1996 and 1995
were $574,576 and $784,116, respectively. The decrease in fiscal
year 1996 was due to discontinuance of the Company's UPS business.
Manufacturing Process
EFI's products are assembled at the Company's production facility in
Salt Lake City, Utah, primarily using standard electronic components
which are available from alternate sources. EFI focuses on
automating the assembly process as much as possible. The addition of
a radial inserter early in fiscal 1995 increased throughput
substantially, improved the line yield to in excess of 99.5%, and
gave the Company added flexibility in responding to varied
production needs. EFI's team approach to development is focused on
creating products that are easier and less expensive to produce. EFI
has not experienced serious delays or shortages in obtaining
necessary components, although some components are custom designed
and some components are purchased from foreign suppliers. All
components are available from alternative sources. EFI considers its
relationships with suppliers to be satisfactory.
EFI maintains substantial inventories of product components in order
to meet rapid delivery requirements of customers. Return of
merchandise from the customer is permitted and is subject to a 25%
restocking charge. EFI's normal credit terms closely match the
industry which typically extends Net 45 to Net 60 day terms. Backlog
at the beginning of any given month is generally about 25% of the
revenues for that month.
Employees
As of March 31, 1996, EFI employed approximately 95 full-time
people, including 12 sales and marketing personnel, 7 engineers, 58
production employees, and 18 executive and administrative personnel.
In addition, EFI employs contract temporary employees to support
peak activity in its manufacturing operations. EFI is not a party to
any collective bargaining agreements, has not experienced any work
stoppages, and has had no difficulties employing qualified people.
EFI considers its employee relations to be satisfactory.
Item 2. Properties
The Company's principal offices are located at 2415 South 2300 West,
Salt Lake City, Utah 84119, telephone number (801) 977-9009. This
facility is located in a light industrial park and consists of
28,000 square feet, of which approximately 14,000 square feet are
used for executive and administrative offices and the balance for
manufacturing, assembly and shipping. The Company has leased this
facility through June 1996. Monthly lease payments are $7,100 plus
taxes, insurance, and maintenance. Additionally, the Company leases
a warehouse facility at 2337 South 2300 West, Salt Lake City, Utah
84119. This facility is located in the same industrial park as the
Company's principal offices and consists of 16,800 square feet, of
which approximately 1,500 square feet are used for administrative
offices and the balance for the warehouse of materials and shipping.
Monthly lease payments are $3,696 plus taxes, insurance, and
maintenance. The warehouse is leased through August 1996. The
facilities have been renovated to specifications provided by the
Company. Management is negotiating extensions of each of these
leases for at least one more year and the Company believes its
facilities will be adequate and suitable for its operations during
the remaining term of its leases and extensions, if any.
<PAGE 6>
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
The Company's Common Stock is traded over-the-counter and is
included in the NASDAQ Small Cap Market under the symbol "EFIC." On
January 18, 1996, the Company changed its listing from the NASDAQ
National Market System to conform with lower net worth requirements
under the Small Cap Market. Market makers in EFI Common Stock are:
Wilson-Davis & Co., Inc. Wien Securities Corp.
Olsen Payne & Company Herzog, Heine, Geduld, Inc.
Sherwood Securities Corp. M.H. Meyerson & Co.
Nash Weiss/Div of Shatkin Inv. Troster Singer Corp.
Alpine Securities Cp.
The following table shows the range of closing sale quotations for
the Common Stock of the Company for the quarters indicated. Since
January 18, 1996 prices are as reported by the NASDAQ Small Cap
Market. Prior to that date prices are from the NASDAQ National
Market System. Such quotations reflect inter-dealer prices, without
retail markup, markdown or commission and may not necessarily
represent actual transactions.
QUARTER ENDED LOW HIGH
March 31, 1996 $1.25 $1.88
December 31, 1995 0.94 1.75
September 30, 1995 0.94 1.63
June 30, 1995 1.00 2.06
March 31, 1995 0.94 1.88
December 31, 1994 1.06 2.00
September 30, 1994 1.31 1.88
June 30, 1994 1.50 2.94
As of June 10, 1996, there were approximately 277 record holders of
the Company's Common Stock, which number does not include
shareholders whose stock is held through securities position
listings.
The Company has never paid dividends on its Common Stock. Under
the terms of the Company's line of credit agreement, the Company may
not pay cash dividends to shareholders. In the event this
restriction is removed, payment of dividends is within the
discretion of the Company's board of directors, subject to certain
legal limitations, and will depend upon earnings, capital
requirements and the operating and financial conditions of the
Company. At the present time, the Company's anticipated capital
requirements are such that it intends to follow a policy of
retaining any earnings in order to finance the development and
growth of its business.
<PAGE 7>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Net Sales for the year ended March 31, 1996, decreased by $1.0
million (8%) compared to the prior year. The major components of net
sales were:
Revenue by Product
(in thousands)
3/31/96 3/31/95
------- -------
TVSS revenue $11,289 $11,003
UPS revenue 369 1,869
Other revenue 263 27
------- -------
Total $11,921 $12,899
======= =======
Contribution margin percentage 54% 52%
Gross margin percentage 31% 28%
Note: Contribution margin reflects only direct, unburdened
material and labor costs
TVSS revenue increased by $286 thousand (3%) for the year ended
March 31, 1996 as compared to the year ended March 31, 1995. The
two components of TVSS revenue---plug-in and hardwire sales---are
discussed separately, below:
Plug-in revenue was virtually unchanged. Expected decreases in
the PC distribution channel related to the sale of the
Company's UPS products were offset by increases in government
sales and sales to the office products market. Efforts will
continue to expand both government and office products markets
as well as to expand plug-in sales in the private label/OEM
market.
Panel revenue increased by $306 thousand (11%) from fiscal 1995
to fiscal 1996. The Company has entered the new construction
and bid specification market, selling its new line of custom
panel products. In addition, the Company has increased its
penetration of the utility market with its HomeGuard(R) and
related products. The Company is expending significant effort
to continue growth in both markets.
UPS revenue for the current year decreased by $1.5 million as a
result of the sale of the Company's UPS product line in June 1995.
Ongoing UPS revenue ceased at this time. Subcontract income on UPS
products since the sale is included in other revenue.
Other revenue includes income primarily from subcontract manufacture
and assembly of UPS products sold to the buyer of the Company's UPS
product line. The contract to perform this service lasts until June
1997.
Gross Profit on sales for the year ended March 31, 1996, increased
by $120 thousand compared to the year ended March 31, 1995. As a
percentage of sales, gross profit improved from 28% to 31%. The
improvement in gross profit was related to two primary factors.
First, the contribution margin of the Company's products
increased by two percentage points as a result of increases in
higher margin panel revenue and the elimination of lower margin
UPS products. The contribution margin on plug-in products was
virtually unchanged.
<PAGE 8>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Second, indirect manufacturing costs and variances decreased by
$556 thousand (20%). Elimination of the UPS product line
reduced several categories of variable manufacturing costs such
as supplies, freight, scrap, rework, etc. Other savings in
indirect costs included reductions in depreciation expense
($104 thousand) as older assets became fully depreciated and
UPS related assets were sold, obsolete material reserve ($33
thousand) and a reduction of four indirect manufacturing
employees ($125 thousand).
Operating Expenses decreased by $1.3 million during the current
fiscal year compared to the year ended March 31, 1995. This
reduction was in spite of an increase in operating expenses of $465
thousand related to the start-up of NRS. Excluding these expenses,
operating expenses decreased by $1.8 million (27%). This decrease
was related to decreases in several categories.
Research and development expenses decreased by $209 thousand as
a result of personnel and expense reductions related to the
divestiture of the UPS product line.
Commissions on UPS products decreased by $155 thousand.
Sales and marketing headcount was reduced by 7 people ($344
thousand), as a result of elimination of the Company's outbound
telemarketing effort and other support personnel.
Bad debt expense was $221 thousand less than in the prior year.
The Company has changed its policies with regard to credit
extension in international markets, now requiring cash in
advance or letters of credit for payment of such shipments.
Telephone expenses were $60 thousand less due to the
elimination of outbound telemarketing and a new, lower rate
contract with an alternate long distance carrier.
Expenses related to the employment and relocation of certain
personnel in the year ended March 31, 1995 did not recur in the
current year ($60 thousand).
Advertising and promotional expenses targeted at the PC retail
market for both TVSS and UPS products decreased by $650
thousand as the Company discontinued promotion of UPS products.
Travel by sales personnel declined $87 thousand due to tighter
controls over customer related travel.
Other Expenses improved from $416 thousand for the year ended March
31, 1995 to $296 thousand for the year ended March 31, 1996. This
improvement was primarily the result of a non-recurring write-off of
subscription interest receivable of $112 thousand in the year ended
March 31, 1995 and a gain on the sale of the Company's UPS product
line in fiscal 1996. An increase in interest expense in the current
year of $32 thousand related to increased borrowings was offset by
an increase in the Company's equity in earnings from a joint
venture.
This category contained non-recurring expenses in each year. In
fiscal 1995, the Company settled a law suit involving patent
infringement claims for $75,000. In fiscal 1996, the Company
settled claims from prior years for certain, non-recurring payroll
tax liabilities due to the State of Utah and the Internal Revenue
Service ("IRS").
<PAGE 9>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
(Provision for)/Benefit from Income Taxes for the current fiscal
year was $(75,000). The Company is finalizing an audit of its fiscal
1994 tax year with the IRS which will likely result in adjustments
that affect the carry-back of tax credits. It is estimated that
these adjustments will result in the repayment of $75-115 thousand
of refunds previously received. The benefit from income taxes of
$445,111 in fiscal 1995 reflects the benefit from carrying back a
portion of the fiscal 1995 tax loss. No tax benefit has been
recognized for the Company's current year loss since the Company has
carried back all available tax losses in prior years and the Company
has recorded a full valuation allowance for its deferred tax assets
at March 31, 1996. (See Note 8 to the financial statements.)
Net Loss of $1.8 million in the current year is a $1million
improvement from the net loss of $2.8 million incurred in the year
ended March 31, 1995. This improvement resulted primarily from a
$2.3 million reduction in indirect manufacturing costs and operating
expenses offset by start-up expenses from NRS of $465 thousand and a
reduction in net sales resulting from the Company's strategic
decision to sell its UPS product line.
Liquidity and Capital Resources
Cash Flows From Operating Activities decreased from $31,254 for the
fiscal year ended March 31, 1995 to $(1,400,600) for the current
fiscal year. The most significant cause of this change was an
increase of accounts payable in fiscal 1995 of $1.2 million which
was not duplicated in the current fiscal year so that the Company
could continue to operate "on open account" with most of its
suppliers.
Receivables decreased by $332 thousand net of bad debt
allowance during the current fiscal year primarily as the
result of the receipt of refunds of Utah State and Federal
income taxes. Past due accounts as a percentage of trade
receivables decreased substantially during the current year as
a result of aggressive collection efforts and more restrictive
credit policies. The Company no longer extends terms to Latin
American accounts.
Inventories increased by $135 thousand net of the reserve for
obsolete inventory, excluding the effect of the sale of
inventory related to the UPS sale. This increase is due to a
buildup of raw materials and finished goods for product
shipments to new private label customers expected during the
first quarter of fiscal 1997.
Accounts payable decreased $407 thousand during the current
fiscal year as the Company has attempted to improve its
position with suppliers after significant increases in fiscal
1995. The Company has maintained adequate relationships with
its suppliers and remains on "open account" with all
significant vendors.
Reserve for customer warranty increased $99 thousand,
reflecting a combination of increasing unit volume shipments
during the past two years coupled with increased aging of
claims paid.
Accrued liabilities decreased by $208 thousand since March 31,
1995 as a result of payments to settle claims from the IRS and
State of Utah for payroll tax liabilities incurred primarily
in the quarters ended March 31, 1994 and June 30, 1994, offset
by an accrual of $75,000 for an estimated income tax liability
arising from an Internal Revenue Service audit of fiscal 1994.
Cash Flows from Investing Activities increased from March 31, 1995
to March 31, 1996 by $1.3 million. This was the result of proceeds
of $754 thousand in fiscal 1996 from the sale of the Company's UPS
product line and a reduction in fixed asset expenditures.
Property--Investments in new equipment of $329 thousand were
made in fiscal 1996. These were primarily for molds and
tooling related to new plug-in products announced by the
Company during the fourth fiscal quarter.
<PAGE 10>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
These products are designed to support the Company's strategy
of developing a low cost line of products for sale to private
label and OEM customers. This compares to investments in fiscal
1995 of $879 thousand for manufacturing equipment and software
related to the UPS product line.
Proceeds from the sale of UPS line in fiscal 1996 were $754
thousand, represented by inventory and the net book value of
fixed assets sold.
Cash Flows from Financing Activities decreased by $33 thousand from
fiscal 1995 to fiscal 1996. During the current fiscal year, the
Company refinanced its loan agreements to allow greater borrowing
availability on its assets. Although the Company's borrowing
capacity from these transactions increased by $700 thousand as of
March 31, 1996, the actual borrowing amount from these transactions
decreased by $213 thousand as of year end. This decrease was due to
the Company's use of bank overdrafts ($561 thousand) as a cash
management tool, in lieu of actual borrowings on the Company's
revolving line of credit. In addition, the Company executed a term
debt agreement for $500 thousand with a major shareholder and
director to help fund the Company's losses until it regains
profitability. As a part of the sale of the UPS product line, the
purchaser of this product line also bought $100 thousand of the
Company's common stock. Finally, other assets increased $71 thousand
during fiscal 1996 as a result of loan fees due to financial
institutions related to new financing agreements executed in the
fourth quarter of the current fiscal year.
Outlook
During fiscal 1996, the Company accomplished a number of significant
objectives necessary to turn around operations and become
profitable. These included:
Selling the UPS line of products to Valence for more than $750
thousand in cash.
Refinancing borrowings and lines of credit with higher limits
and lower monthly payment obligations to position the Company
for growth and to improve supplier relationships.
Developing new products to compete in the plug-in private
label/OEM markets and in hardwire bid/spec markets.
Cutting operating and indirect manufacturing expenses
(excluding NRS) by $2.3 million while increasing TVSS revenue
by 3% and gross margin by 3 percentage points.
Developing long term relationships with several new private
label/OEM customers with the potential for significant
increases in revenue.
Restructuring sales and marketing functions, by replacing
several people in key positions with individuals who have
proven experience who can contribute to improving performance
in these areas.
EFI appears to be emerging from a fragile financial condition.
Relationships with suppliers, lenders and other creditors are
presently satisfactory. The Company is "on open account" with all
of its important vendors and in compliance with its loan covenants,
as amended. Although the Report of Independent Accounts as of March
31, 1996, raises substantial doubt about the Company's ability to
continue as a going concern, management's confidence in further
improvement in this condition is the direct result of the above
outlined accomplishments, continued quarter to quarter improvement
in the Company's core TVSS business and the largest order and
committed business backlog in the Company's history, as it enters
its first quarter of fiscal 1997. Management has developed several
plans under a variety of assumptions and
<PAGE 11>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
scenarios for fiscal 1997. Under both the worst case and more
optimistic scenarios, management believes the Company can fund its
operations from financing arrangements in place and internally
generated cash flow.
Other Items
The Company's activities have not been, and in the near term are not
expected to be, materially affected by inflation or changing prices
in general.
The Company has evaluated the Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-
Lived Assets, and determined that, based on information available as
of March 31, 1996, the impact of the statement on the Company could
be material upon its adoption as of April 1, 1996, if the Company's
operating results do not improve significantly in fiscal 1997.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-Based Compensation. This
statement defines a fair value based method of accounting for stock
based compensation, including grants of stock, stock options, and
other equity instruments to employees, and encourages adoption of
the method. The statement also requires that an employer's
financial statements include certain disclosures about stock based
compensation arrangements, regardless of the method used to account
for them. The statement is effective for financial statements for
fiscal years that begin after December 15, 1995. The Company has
elected to continue to apply the current stock based compensation
methods pursuant to APB 25 and to furnish the additional disclosures
required by SFAS No. 123.
<PAGE 12>
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
Selected Financial Data
The following Selected Financial Data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and
Results of Operations, the financial statements, and accompanying
notes appearing in this report.
<TABLE>
<S> <C> <C> <C> <C> <C>
For the years ended March 31, 1996 1995 1994 1993
1992
Income Statement Data:
Net Sales $11,921,129 $12,899,293 $14,924,600 $14,819,664
$11,935,357
Cost of sales 8,173,468 9,271,371 9,930,209 8,574,369 6,243,231
- -------------------------------------------------------------------------------------------------------
Gross profit 3,747,661 3,627,922 4,994,391 6,245,295 5,692,126
Operating expenses 5,197,363 6,457,581 5,587,016 5,203,156
5,277,947
- -------------------------------------------------------------------------------------------------------
Operating (loss) income (1,449,702) (2,829,659) (592,625) 1,042,139
414,179
Other income (expense) (296,034) (416,029) (65,426) (52,807)
101,624
- -------------------------------------------------------------------------------------------------------
(Loss) income before
income taxes (1,745,736) (3,245,688) (658,051) 989,332
515,803
Benefit from/(provision for)
income taxes (75,000) 445,111 327,826 (325,013)
(119,495)
- --------------------------------------------------------------------------------------------------------
Net (loss) income $(1,820,736) $(2,800,577) $ (330,225) $ 664,319 $
396,308
=====================================================================
===================================
Net (loss) income per common and
common equivalent share $ (0.58) $ (1.04) $ (.12) $ 0.23 $ 0.14
=====================================================================
===================================
Dividends per common and
common equivalent share $ -0- $ -0- $ -0- $ -0- $ -0-
=====================================================================
===================================
Balance Sheet Data:
Working capital $ 1,962,966 $ 2,536,760 $ 4,930,967 $ 5,704,452 $
3,553,412
Total Assets 7,304,321 8,608,303 9,170,972 8,893,477
7,135,470
Long term debt 3,776,108 3,068,711 2,639,905 2,864,067
1,494,145
Total liabilities 6,818,187 6,416,978 4,514,952 3,718,337 2,796,671
Stockholders' equity 486,134 2,191,325 4,656,020 5,175,640
4,338,799
Current ratio 1.65 to 1 1.76 to 1 4.0 to 1 9.7 to 1 4.1 to 1
Total liabilities to net worth 14.0 to 1 2.9 to 1 .97 to 1 .72 to 1 .64 to 1
</TABLE>
Results of Operations:
The following table sets forth certain operational data as a
percentage of sales for the past two fiscal years: 1996 1995
Net sales 100.00% 100.00%
Cost of sales 68.56 71.88
Gross profit 31.44 28.12
Operating expenses 43.60 50.06
Operating loss (12.16) (21.94)
Other expense (2.48) (3.23)
Loss before income taxes (14.64) (25.17)
Benefit from/(provision for) income
taxes (0.63) 3.45
Net loss (15.27)% (21.72)%
<PAGE 13>
Item 7. Financial Data
Index to Financial Statements
<TABLE>
<S> <C> <S> <C>
Item Page Item Page
Report of Independent Accountants 14 Statement of Cash Flows 17-18
Statement of Operations 15 Statement of Stockholders' Equity 19
Balance Sheet 16 Notes to Financial Statements 20-27
</TABLE>
Report of Independent Accountants
To the Stockholders and Board of Directors of EFI Electronics
Corporation:
We have audited the accompanying balance sheet of EFI Electronics
Corporation as of March 31, 1996 and 1995, and the related
statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of EFI
Electronics Corporation as of March 31, 1996 and 1995, and the
results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 2 to the financial statements, the Company's recurring losses,
negative cash flows from operating activities for the year ended
March 31, 1996 and the possibility of future non-compliance with
certain debt covenants, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 2. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 14, the Company's financial statements for the
year ended March 31, 1995 have been restated.
Salt Lake City, Utah
June 18, 1996
<PAGE 14>
Item 7. Financial Data (continued)
Statement of Operations
<TABLE>
<S> <C> <C> <C>
For the years ended March 31, 1996 1995 Notes
- --------------------------------------------------------------------------------------
Net sales $ 11,921,129 $ 12,899,293 11
Cost of sales 8,173,468 9,271,371
- --------------------------------------------------------------------------------------
Gross profit 3,747,661 3,627,922
- --------------------------------------------------------------------------------------
Operating expenses:
Selling, general and
administrative expenses 4,482,861 5,312,950
Research and development 574,576 784,116
Bad debt loss 139,926 360,515 3
- -------------------------------------------------------------------------------------
Total operating expenses 5,197,363 6,457,581
- -------------------------------------------------------------------------------------
Operating loss (1,449,702) (2,829,659)
- -------------------------------------------------------------------------------------
Other income (expense):
Interest income (expense):
Related parties -0- (111,792) 9
Other 5,513 65,674
Equity in earnings of joint venture 67,824 27,473 17
Other income 58,669 -0-
Legal settlement (73,557) (75,000)
Interest expense (354,483) (322,384) 6
- -------------------------------------------------------------------------------------
Net other expense (296,034) (416,029)
- -------------------------------------------------------------------------------------
Loss before income taxes (1,745,736) (3,245,688)
(Provision for)/benefit from
income taxes (75,000) 445,111 1,8
- --------------------------------------------------------------------------------------
Net loss $(1,820,736) $(2,800,577)
=====================================================================
=================
Net loss per common
and common equivalent share $ (0.58) $ (1.04) 1
- --------------------------------------------------------------------------------------
Weighted average common
and common equivalent shares
outstanding 3,144,905 2,688,579 1
- ---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial
statements
<PAGE 15>
Item 7. Financial Data (continued)
Balance Sheet
<TABLE>
<S> <C> <C> <C>
As of March 31, 1996 1995 Notes
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 8,518 $ 96,259 1
Receivables 2,653,371 3,125,562 3,6
Inventories 2,307,704 2,597,400 1,4,6
Prepaid expenses 35,452 65,806
- ---------------------------------------------------------------------------------
Total current assets 5,005,045 5,885,027
Property - net 1,896,458 2,423,402 1,5,6
Investment in joint venture 117,705 49,881 17
Other assets 285,113 249,993
- ---------------------------------------------------------------------------------
Total assets $7,304,321 $8,608,303
=====================================================================
============
Liabilities
Current liabilities:
Current installments of
notes payable $ 194,300 $ 614,948 6
Accounts payable 1,503,860 1,841,741
Reserve for customer warranty 392,829 293,986 14
Bank overdraft 561,482 -0- 1
Accrued liabilities 389,608 597,592
- ---------------------------------------------------------------------------------
Total current liabilities 3,042,079 3,348,267
Notes payable, less current
installments 3,776,108 3,068,711 6
- ----------------------------------------------------------------------------------
Total liabilities 6,818,187 6,416,978
- ----------------------------------------------------------------------------------
Commitments 7,14
Stockholders' Equity
Common stock, $.0001 par value;
20,000,000 shares authorized;
3,535,978 shares issued and
3,173,822 outstanding in 1996
and 3,567,093 shares issued
and 3,056,023 outstanding in 1995 354 357 6,10,15
Common stock to be issued for settlement
of litigation -0- 75,000
Additional paid-in capital 816,546 1,120,021
Retained earnings 791,772 2,612,508 14
- ----------------------------------------------------------------------------------
1,608,672 3,807,886
Less:
Stock subscriptions and note
receivable from management and
employees (150,000) (156,549) 9
Treasury stock, at cost - 362,156
shares in 1996 and 511,070 shares
in 1995 (972,538) (1,460,012) 6
Total stockholders' equity 486,134 2,191,325
Total liabilities and
stockholders' equity $7,304,321 $8,608,303
</TABLE>
The accompanying notes are an integral part of the financial
statements.
<PAGE 16>
Item 7. Financial Data (continued)
Statement of Cash Flows
<TABLE>
<S> <C> <C>
For the years ended March 31, 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(1,820,736) $(2,800,577)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation 634,380 713,488
Amortization 40,483 23,113
Reserve for obsolete inventory (38,608) 128,000
Equity in earnings of joint venture (67,824) (27,473)
Bad debt loss 139,926 360,515
Interest receivable on stock subscriptions -0- 111,792
Compensation on stock issued -0- 26,394
Common stock issued for settlement of
litigation -0- 75,000
Deferred income taxes -0- (80,000)
Increase (decrease) in cash, excluding
sale of UPS
line in 1996, due to change in:
Receivables 332,265 (103,385)
Inventories (134,804) 186,653
Prepaid expenses 30,354 163,788
Accounts payable (406,895) 1,237,930
Reserve for customer warranty 98,843 (80,253)
Accrued liabilities (207,984) 96,269
- ---------------------------------------------------------------------------------
Net cash (used in)/provided by operating
activities (1,400,600) 31,254
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (329,381) (878,659)
Proceeds from sale of fixed assets
related to UPS sale 290,959 -0-
Proceeds from sale of inventory related
to UPS sale 463,108 -0-
Increase in other assets (4,603) (7,620)
- ---------------------------------------------------------------------------------
Net cash (used in)/provided by
investing activities 420,083 (886,279)
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings/(repayments) under line
of credit 777,318 (1,330,324)
Proceeds from borrowings under notes
payable 1,700,000 2,460,375
Principal payments under notes payable (2,190,569) (354,407)
Increase in other assets (71,000) -0-
Increase in bank overdraft 561,482 -0-
Proceeds from issuance of common stock 100,000 150,000
Proceeds from exercise of stock options 15,545 -0-
- ---------------------------------------------------------------------------------
Net cash provided by financing activities 892,776 925,644
- ---------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (87,741) 70,619
Cash and cash equivalents at beginning of year 96,259 25,640
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,518 $ 96,259
=====================================================================
============
</TABLE>
The accompanying notes are an integral part of the financial
statements.
-continued-
<PAGE 17>
Item 7. Financial Data (continued)
Statement of Cash Flows (continued)
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the year for
Income taxes $ (482,121) $ (228,013)
- --------------------------------------------------------------------------
Interest $ 342,604 $ 285,721
- --------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing
activities:
1996 The Company issued 46,875 shares of treasury common stock
valued at $75,000 as a settlement of litigation. The Company
retired 37,658 shares of treasury common stock .
The Company retired $1,062,368 of fully depreciated fixed
assets.
The Company's fixed assets and accounts payable, as stated,
include $69,014 of amounts for tooling which had not been
paid as of March 31, 1996.
1995 The Company issued a note payable in the amount of $117,250 to
a former officer in exchange for an agreement not to
compete.
The Company issued:
(a) 17,384 shares of common stock to an officer for
reimbursement of expenses in the amount of $26,394.
(b) 100,000 shares of common stock in exchange for software
rights in the amount of $125,000.
(c) 100,000 shares of common stock to an officer as part of an
employment agreement in exchange for a note
receivable in the amount of $150,000. (See Note 9.)
473,292 shares of treasury stock were returned to the Company
upon cancellation of subscriptions receivable in the
amount of $1,262,915. (See Note 9.)
The accompanying notes are an integral part of the financial
statements.
<PAGE 18>
Item 7. Financial Data (continued)
Statement of Stockholders' Equity
For the years ended March 31, 1996 and March 31, 1995:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Stock
Common Additional Subscriptions,
Common Stock Stock Paid-in Retained Note and Interest
Treasury Stock
Shares Amount to be Issued Capital Earnings Receivable Shares
Amount Total
Balance at April 1, 1994 3,199,709 $320 $ -0- $668,664 $5,566,500 $(1,419,464)
37,778 $(160,000) $4,656,020
Prior period adjustment (see Note 14) (153,415)
(153,415)
Acquire treasury stock upon
cancellation of stock subscrip-
tions and interest receivable 1,412,915 473,292
(1,300,012) 112,903
Issue new shares:
Common stock issued at
$1.50 per share for note
receivable from officer 100,000 10 149,990 (150,000)
Common stock issued at
$1.50 per share to officer for
reimbursement of expenses 17,384 2 26,392
26,394
Common stock issued at
$1.25 for software rights 100,000 10 124,990
125,000
Common stock to be issued
for settlement of litigation
(46,875 shares at $1.60) 75,000
75,000
Common stock issued for
cash at $1.00 150,000 15 149,985
150,000
Net loss (2,800,577)
(2,800,577)
- ------------------------------------------------------------------------------------------------------------------
- ---------------
Balance at March 31, 1995 3,567,093 $357 $75,000 $1,120,021 $2,612,508 $(156,549)
511,070 $(1,460,012) $2,191,325
- ------------------------------------------------------------------------------------------------------------------
- ---------------
Retire treasury stock (37,658) (3) (159,996) (37,658)
159,999
Exercise of stock options at
$1.06 per share; shares removed
from treasury at a cost of
$2.68 per share 6,543 (6,239) (8,122)
21,784 15,545
Acquire treasury stock upon
cancellation of stock subscrip-
tions and interest receivable 6,549 10,408
(6,549)
Issued treasury stock for settle-
ment of litigation (46,875
shares at $1.60); shares
removed from treasury at a cost
of $2.75 per share (75,000) (53,906) (46,875)
128,906
Issued treasury stock for cash
(66,667 shares at $1.50); shares
removed from treasury at a cost
of $2.75 per share (83,334) (66,667)
183,334 100,000
Net loss (1,820,736)
(1,820,736)
- ------------------------------------------------------------------------------------------------------------------
- -------------
Balance at March 31, 1996 3,535,978 $354 $ -0 $816,546 $791,772 $(150,000)
362,156 $(972,538) $486,134
- ------------------------------------------------------------------------------------------------------------------
- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE 19>
Item 7. Financial Data (continued)
Notes To Financial Statements
Note 1 The Company and Summary of Significant Accounting
Policies:
EFI Electronics Corporation ("EFI" or the "Company") is a Delaware
corporation that manufactures and sells transient voltage surge
suppression ("TVSS") products both domestically and internationally
and subcontracts the manufacturing of uninterruptible power supply
products to a single customer. Additionally, the Company markets and
sells a software based service named NRS to monitor LAN based
computer systems. The accounting policies of the Company conform to
generally accepted accounting principles. The following is a summary
of the most significant of such policies:
Inventories--Raw materials are stated at the lower of cost (using
standard costs which approximate a first-in, first-out basis) or
market. Work-in-process and finished goods are stated at the lower
of average cost or market.
Property--Property is stated at cost and depreciated on the straight-
line method over the 3- to 10-year lives of assets. Gains and losses
on disposal of property are accounted for and disclosed separately
on the statement of operations.
Income Taxes--The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 109
(Accounting for Income Taxes). Deferred income taxes are provided
for the difference between the financial statement and tax bases of
assets and liabilities (primarily depreciation) using applicable
future tax rates.
Cash and Cash Equivalents--The Company considers all interest-
bearing deposits with an original maturity date of three months or
less to be cash equivalents.
Bank Overdraft--Checks are drawn from payroll and operating accounts
prior to deposits of cash if funds are available under the Company's
revolving line of credit at the time of disbursement.
Revenue Recognition--Revenue is recognized generally when product is
shipped and/or services are performed.
Net Loss Per Common and Common Equivalent Share--Net loss per common
and common equivalent share is computed based on the number of
common and dilutive common stock equivalent shares outstanding and
is adjusted for the assumed conversion of shares issuable upon
exercise of options or warrants, after the assumed repurchase of
common shares with the related proceeds. The stock subscriptions
receivable are treated as warrants for purposes of this computation.
Concentration of Credit Risk--The Company's financial instruments
that are exposed to concentrations of credit risk consist primarily
of cash, cash equivalents and trade receivables. Cash and cash
equivalents, if any, are placed with federally insured financial
institutions. These balances are generally not significant since
they are transferred to reduce the Company's revolving line of
credit on a daily basis. The Company sells to a wide variety of
customers operating in several different markets and industries
including domestic companies engaged in electrical distribution,
computer distribution, office products dealers, the U.S. Government
and large private label accounts. With the exception of the U.S.
Government which represents 19.4% of Company sales for the fiscal
year 1996, there is no significant concentration of sales or
receivables to any of these customers. Shipments to the U.S.
Government are covered by four separate supply contracts, payment
for which is under various "quick pay" programs. In addition, sales
to EFI's next three largest customers amounted to an additional 17%
of net sales.
Foreign Operations--The Company owns 50% of EFI Electronics Europe
SL, a joint venture incorporated in Spain, engaged in the sale of
TVSS panel products to European and Japanese industrial companies.
The Company's equity in earnings and investment from this operation
have been translated into US Dollars at the rate of exchange as of
March 31, 1996, which approximates the average rate during the year.
Foreign exchange gains or losses have not been material.
Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of
assets, liabilities, revenues and expenses during the reporting
period. Estimates also affect the disclosure of contingent assets
and liabilities at the date of the financial statements. Actual
results could differ from these estimates.
<PAGE 20>
Item 7. Financial Data (continued)
Note 1 The Company and Summary of Significant Accounting Policies
- continued
Reclassifications--Certain balances in the March 31, 1995 financial
statements have been reclassified to conform with the current year
presentation. These changes had no effect on the previously
reported net loss, total assets, total liabilities or stockholders'
equity.
Note 2 Basis of Presentation
The Company has incurred a net loss in each of the last three fiscal
years and had negative cash flows from operating activities for the
year ended March 31, 1996. Additionally, the Company's revolving
line of credit contains certain covenants that, if not complied
with, may result in the acceleration of repayment. These factors
raise substantial doubt about the Company's ability to continue as a
going concern. The Company's financial statements for the year
ended March 31, 1996, have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments
that might result from the outcome of this uncertainty.
Management's plan with respect to fiscal 1997 is to accomplish a
number of goals intended to improve the Company's viability. These
goals, some of which are in place, include increasing revenues from
new private label/OEM customers, improving gross margin, controlling
operating expenses, refinancing its borrowing agreements (See Note
6) and improving its sales and marketing functions by hiring people
with proven experience. Though management is seeking to fund Company
operations from financing arrangements in place and internally
generated cash flow, failure to accomplish management's plans and to
generate positive operating cash flow could result in further
erosion of the Company's financial condition and failure to meet its
financial obligations.
Note 3 Receivables:
At March 31, 1996 and 1995, receivables consisted of the following:
1996 1995
- ------------------------------------------------------------
Trade and other receivables $ 2,612,467 $ 2,697,359
Receivable from joint venture 51,156 47,531
Warranty premium receivable 23,553 27,745
Income tax refund receivable 59,309 536,670
- -------------------------------------------------------------
2,746,485 3,309,305
Allowance for doubtful accounts (93,114) (183,743)
- -------------------------------------------------------------
Total $ 2,653,371 $ 3,125,562
=============================================================
In 1996, the allowance for doubtful accounts decreased due to
adoption of more restrictive credit policies with regard to foreign
customers and slow paying domestic customers.
Note 4 Inventories:
At March 31, 1996 and 1995, inventories consisted of the following:
1996 1995
- -------------------------------------------------------------
Raw materials $ 1,457,424 $ 1,909,155
Work-in-process 217,262 342,406
Finished goods 633,018 345,839
- -------------------------------------------------------------
Total $ 2,307,704 $ 2,597,400
=============================================================
<PAGE 21>
Item 7. Financial Data (continued)
Note 5 Property:
At March 31, 1996 and 1995, property consisted of the following:
1996 1995
- --------------------------------------------------------------------
Machinery and equipment $ 3,946,875 $ 4,819,046
Furniture and fixtures 151,342 245,788
Demonstration equipment -0- 25,931
Leasehold improvements 137,918 295,838
- --------------------------------------------------------------------
$ 4,236,135 $ 5,386,603
Less accumulated depreciation (2,339,677) (2,963,201)
- --------------------------------------------------------------------
Property--net $ 1,896,458 $ 2,423,402
- --------------------------------------------------------------------
Included in the above total as of March 31, 1996, are assets with a
cost of $353,573 which are fully depreciated and still in service.
During fiscal 1996, the Company retired assets that were fully
depreciated, with a cost of $1,062,368.
Note 6 Notes Payable and Revolving Line of Credit:
At March 31, 1996 and 1995, notes payable and revolving line of
credit, the carrying value of which approximates fair value,
consisted of the following:
1996 1995
- ---------------------------------------------------------------
Revolving line of credit $ 2,236,108 $ 1,458,790
Notes payable:
Collateralized promissory notes 1,200,000 2,137,019
Uncollateralized subordinated note 500,000 -0-
Uncollateralized note to former
officer (See Note 9) 34,300 87,850
- ---------------------------------------------------------------
3,970,408 3,683,659
Less current installments of
long-term debt (194,300) (614,948)
- ---------------------------------------------------------------
Total notes payable and revolving
line of credit, less current
installments $ 3,776,108 $ 3,068,711
- ---------------------------------------------------------------
The revolving line of credit in place at March 31, 1996, provides
for borrowings up to $3,000,000 collateralized by accounts
receivable and inventories. Interest is payable monthly at a rate of
prime (8.25% as of March 31, 1996) plus 2.5%. Principal payments
are made as cash is received from customers for accounts receivable.
Borrowing is based on formulas involving balances of accounts
receivable, inventories and certain ineligible amounts. The line of
credit agreement expires in March 2000. Proceeds from the new line
of credit were used to pay off the revolving line of credit in place
at March 31, 1995.
The revolving line of credit contains financial covenants, the most
restrictive of which require the Company to maintain not less than
$800,000 of tangible net worth plus subordinated debt and a debt to
net worth ratio not to exceed 7.5 to 1. At March 31, 1996, the
Company was in compliance with all covenants, as amended March 1,
1996, pertaining to this line of credit. Compliance with these
covenants in fiscal 1997 is uncertain and depends on improvement in
the Company's financial condition and results of operations.
The collateralized promissory note is collateralized by the
Company's fixed assets. Interest is payable monthly at a rate of
prime (8.25% as of March 31, 1996) plus 0.75% starting June 1, 1996
plus principal payments of the greater of $16,000 per month or 30%
of net income plus depreciation and amortization. The balance of
the note is due April 1, 1998.
The uncollateralized subordinated note is payable to a major
shareholder and director of the Company. Interest is at a rate of
11% per annum with payments monthly beginning June 30, 1996. The
note is subordinated to the revolving line of credit. According to
the terms of the revolving line of credit agreement, no principal
can be paid on this note until after March 31, 1997. On June 15,
1996 the Company agreed with this shareholder to exchange this note
in the amount of $500,000 plus accrued interest of $17,314 for
common stock of the Company based on a price set by and subject to
approval of the board of directors.
<PAGE 22>
Item 7. Financial Data (continued)
Note 6 Notes Payable and Revolving Line of Credit - continued
The uncollateralized note to former officer was issued in September
1994, in the amount of $117,250 to a former officer in exchange for
an agreement not to compete. The note does not provide for any
interest. It is payable in monthly installments of $4,900 until it
is fully paid.
Minimum principal payments on notes payable and revolving line of
credit are as follows:
Fiscal year ending March 31,
1997 $ 194,300
1998 692,000
1999 848,000
2000 2,236,108
2001 -0-
-------------------------
Total $ 3,970,408
-------------------------
Note 7 Lease Obligations:
During the year ended March 31, 1995, the Company extended its lease
agreements for its principal facility through June 1996, and its
warehouse facility through August 1996. These were the final options
to extend under the current agreements. The Company intends to
negotiate new agreements for both facilities. Minimum annual rentals
through the term of both leases are $46,660.
Total rent expense was $161,273 in fiscal 1996 and $138,544 in
fiscal 1995.
Note 8 Income Taxes:
The (provision for)/ benefit from income taxes for the years ended
March 31, 1996 and March 31, 1995, consisted of the following:
1996 1995
-------------------
Current $(75,000) $365,111
Deferred -0- 80,000
-------- --------
Total $(75,000) $445,111
======== ========
The reported (provision for)/benefit from income taxes is different
than the amount computed by applying the statutory federal income
tax rate of 34% to the loss before income taxes as follows:
1996 1995
-------------------
Benefit at statutory rates $594,000 $1,103,534
Increase in valuation allowance (677,000) (834,000)
State income taxes 58,000 111,466
Assessment for prior year's taxes (75,000) -0-
Non-deductible items and other
miscellaneous adjustments 25,000 64,111
-------- ---------
Total $ (75,000) $ 445,111
========= =========
In accordance with SFAS No. 109, the deferred tax assets and
liabilities as of March 31, 1996 and March 31, 1995, are comprised
of the estimated future tax (provision)/benefit due to different
financial reporting and income tax basis related to:
1996 1995
-----------------------
Deferred tax assets:
Net operating loss carry-forward $1,324,000 $ 755,000
Research and development credit
carry-forwards 130,000 56,000
Asset reserves and accrued liabilities 245,000 252,000
---------- ----------
Total deferred tax assets 1,699,000 1,063,000
Deferred tax liabilities:
Depreciation (188,000) (229,000)
Valuation allowance (1,511,000) (834,000)
---------- ----------
Net deferred tax liability $ -0- $ -0-
========== ==========
<PAGE 23>
Item 7. Financial Data (continued)
Note 8 Income Taxes - continued
The Company has concluded that since it is uncertain as to whether
the Company will be able to recognize the benefit of its operating
loss and research and development credit carry-forwards, a full
valuation allowance should be provided. At March 31, 1996, the
Company had net operating loss carry-forwards of approximately
$3,547,000 and research and development credit carry-forwards of
approximately $130,000. The net operating loss carry-forwards
expire in the years 2010 and 2011 and the research and development
credits expire from 2006 to 2010.
Note 9 Related Party Transactions:
During 1991, the Company sold a total of 580,000 shares of treasury
stock to the Company's management and key employees in exchange for
cash of $16,093 and stock subscriptions receivable totaling
$1,540,209. The shares were acquired from HCA Capital Corporation
for cash provided through a promissory note payable. The stock
subscriptions receivable were collateralized by the common stock
sold and accrued interest at the prime rate plus 0.5%. Under the
original agreement, interest was paid monthly and the notes were due
on December 31, 1993. In October 1992, the agreements were modified
to suspend monthly interest payments and to not require payments on
the notes unless the average closing sale price of the Company's
common stock exceeded 200% of the original purchase price plus
interest paid and/or accrued. The stock subscriptions and interest
receivable were recorded by the Company as a reduction of
stockholders' equity.
In January 1995, the Company completed a series of individual
agreements with the employees holding the stock subscriptions
receivable that effectively reversed the original agreements. The
shares of stock were returned to the Company and recorded as
treasury stock at the original subscription price. The unpaid
accrued interest was charged to expense. Because the original
agreements were, in essence, a stock option plan, no compensation
expense was recognized on the cancellation of the subscriptions
receivable.
In September 1994, the Company issued a note payable in the amount
of $117,250 to a former officer in exchange for an agreement not to
compete. The $117,250 is included in other assets and is being
amortized on a straight line basis over the three year term of the
agreement.
As of March 31, 1996 and March 31, 1995, the Company held a $150,000
note receivable from an officer of the Company, the proceeds from
which were used to purchase 100,000 shares of the Company's stock as
part of the officer's employment contract. The note receivable bears
interest at the prime rate (8.25% as of March 31, 1996) plus 1%, is
due in full by the earlier of 60 days after termination of
employment, or September 12, 2000, and is collateralized by the
shares of stock. The note receivable is reflected as a reduction of
stockholders' equity. Because of the nature of the agreement, the
transaction will be accounted for as a stock option and interest
will be recognized as an adjustment to the option price, when paid.
Note 10 Stockholders' Equity:
In July 1988, the Company adopted an incentive and non-qualified
stock option plan and terminated a prior incentive stock option
plan. Under the plan, as amended in May, 1991, incentive stock
options or non-qualified stock options, up to a maximum of 700,000
shares, may be granted to key employees and other persons to
purchase the Company's common stock. The stock options are
exercisable at various times as determined by the board of directors
but not less than six months from the date of grant and terminate
not more than ten years from the date of grant.
Incentive stock options can be granted to employees to purchase the
Company's common stock at its fair market value, as defined, at the
date of grant. No individual may be granted stock options exceeding
$100,000 in fair market value in any one year. Non-qualified stock
options can be granted to outside directors and other individuals as
well as employees to purchase the Company's common stock at its fair
market value, as defined, at the date of grant.
In January 1995, the Company modified the stock option plan. All of
the existing grants were canceled and new grants were issued in
place of the old. The price of the new grants was set at the fair
market value of $1.06 and the number of options issued to each
employee was based on the number of each employee's original options
adjusted by the options' original grant price compared to the new
option price.
<PAGE 24>
Item 7. Financial Data (continued)
Note 10 Stockholders' Equity - continued
Changes in stock options under the Company's incentive and non-
qualified stock option plan and prior stock options granted were as
follows:
Shares Price Range Per Share
1996:Granted 138,000 $1.00- 1.44
Exercised (14,665) 1.06
Canceled (60,901) 1.06
Expired (7,168) 1.06
Outstanding at March 31, 377,285 1.00-1.44
Exercisable 99,023 1.06
1995:Granted 322,019 $1.06
Canceled (96,900) 2.63 - 4.13
Expired (152,812) 2.63 - 4.13
Outstanding at March 31, 322,019 1.06
Exercisable 59,330 1.06
In January 1996, the Company issued warrants for 20,000 shares of
common stock to a major shareholder as an incentive to initiate a
$500,000 uncollateralized loan to the Company (see Note 6). The
exercise price is $1.375 per share and the warrants expire in
January 2001.
Note 11 Major Customers:
During the year ended March 31, 1996, revenue from the General
Services Administration of the United States Government accounted
for 10.2% of the Company's net sales. Total revenue from the United
States Government was 19.4% of net sales in fiscal 1996. No other
customer accounted for more than 10% of net sales in fiscal 1996 or
1995.
Note 12 Employee Benefit Plan:
The Company has a contributory 401(k) savings and profit sharing
plan covering all full-time employees. The employer contribution
amount is determined at the discretion of the board of directors.
During the year ended March 31, 1996, the Company matched employee
contributions to the 401(k) savings and profit sharing plan up to 1%
of employee base wages resulting in a total contribution of $13,813.
There were no contributions made by the Company to the plan for the
year ended March 31, 1995.
Note 13 Quarterly Financial Data (Unaudited):
Unaudited summarized financial data by quarter for 1996 and 1995 is
as follows:
<TABLE>
<S> <C> <C> <C> <C>
Net Income (Loss)
Per Common
and Common
Sales Gross Profit Net Income/(Loss) Equivalent Share
- ----------------------------------------------------------------------------------------
1996:
June 30 $ 3,150,854 $ 1,009,455 $ (289,237) $ (0.09)
September 30 2,931,358 991,032 (305,146) (0.10)
December 31 2,784,479 876,887 (366,392) (0.12)
March 31 3,054,438 870,287 (859,961) (0.27)
Total $11,921,129 $ 3,747,661 $ (1,820,736) $ (0.58)
1995:
June 30 $ 2,858,083 $ 1,230,392 $ 7,076 $ Nil
September 30 3,218,973 1,054,958 (500,218) (.19)
December 31 3,586,825 1,074,228 (279,716) (.10)
March 31 3,235,412 268,344 (2,027,719) (.75)
Total $12,899,293 $ 3,627,922 $(2,800,577) $ (1.04)
<PAGE 25>
Item 7. Financial Data (continued)
Note 14 Prior Period Adjustment
The Company's financial statements as of March 31, 1995, have been
restated to reflect a liability that existed for probable product
warranty claims related to the Company's connected equipment and
lifetime product warranties. The Company's plug-in products carry a
lifetime product replacement or repair warranty and a warranty for
repair or replacement of connected electronic equipment.
Catastrophic losses related to these warranties are covered by the
Company's product liability and errors and omissions insurance
coverages up to a limit of $6,000,000. However, the Company is
potentially liable for claims up to the deductible amount of $5,000.
The effect of the restatement is as follows:
For the year ended March 31, 1995 As previously reported As restated
Balance sheet:
Reserve for customer warranty $ 49,571 $ 293,986
Retained earnings 2,856,923 2,612,508
Statement of operations:
Benefit from income taxes 536,111 445,111
Net loss (2,709,577) (2,800,577)
Net loss per common and common
equivalent share $(1.01) $(1.04)
Additionally, the Statement of Shareholders' Equity reflects a
decrease in the Company's retained earnings of $153,415 as of
April 1, 1994.
Note 15 Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, Accounting for Stock-Based Compensation.
This statement defines a fair value method of accounting for
employee stock options or similar equity instruments and
encourages adoption of that method. The statement also requires
that an employer's financial statements include certain
disclosures about stock-based compensation arrangements regardless
of the method used to account for them. The statement is
effective for financial statements for fiscal years that begin
after December 15, 1995. The Company has elected to continue to
apply the current stock based compensation methods pursuant to APB
25 and to furnish the additional disclosures required by SFAS 123.
Note 16 Long-Lived Assets
In March 1995, the FASB issued SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The statement 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. The statement is effective for financial statements
for fiscal years beginning after December 15, 1995. The impact of
the statement on the Company could be material upon its adoption as
of April 1, 1996, if the Company's operating results do not improve
significantly in fiscal 1997.
Note 17 Investment in Joint Venture:
On July 29, 1993, EFI Electronics Europe SL ("EFI Europe") was
incorporated in Spain as a limited trading company. The Company
owns 50% of the outstanding common stock of EFI Europe. The balance
of the common stock is held by six individuals, one of whom acts as
the general manager of EFI Europe. The accounting policies of this
entity are similar to those of the Company.
<PAGE 26>
Item 7. Financial Data (continued)
Note 17 Investment in Joint Venture - continued
Financial results for EFI Europe for the fiscal years ended March
31, 1996 and March 31, 1995 were:
Results of Operations
($ thousands)
3/31/96 3/31/95
------- -------
Current Assets $325 $198
Total Assets 348 213
Shareholders' equity $236 $105
Net sales $423 $334
Net income $136 $55
Note 18 Sale of UPS
In June 1995, EFI sold its UPS product line and related inventory
and assets to Valence, L.L.C. for $884,000 payable $484,000 at the
time of agreement, $100,000 within 60 days after the agreement,
$100,000 in another 60 days, and the remaining $200,000 due by March
31, 1996, dependent on EFI meeting certain incentive criteria
relating to customer retention and cost reduction goals. Based on
mutual agreement the amount was subsequently modified to $780,000 as
a result of asset value adjustments and settlement of goals
achieved. A net gain of $26,000 is included in other income.
<PAGE 27>
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Items 9, 10, 11 and 12.
These items are incorporated by reference to the Company's Proxy
Statement related to the Annual Meeting of Shareholders to be held
on July 26, 1996, as filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities Exchange
Act of 1934.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
S-B Incorporated Filed
Number Exhibit by Reference Herewith
3.1 Certificate of Incorporation as Restated and Amended (1)
3.2 Amended and Restated Bylaws (2)
10.1 Non-Qualified Stock Option Plan and Incentive
Stock Option Plan As Amended (May 1991) (3)
10.2 Executive Bonus Plan Description (4)
10.3 Lease Agreement for Company Headquarters
in Salt Lake City, Utah (5)
10.4 Lease Agreement for Company Warehouse
in Salt Lake City, Utah (6)
24.1 Independent Accountant's Consent X
27 Financial Data Schedule X
(1) Incorporated by reference to Exhibit Nos. 1 and 2 to Annual
Report on Form 10-K (File No. 0-15967) for fiscal year ended April
1, 1988, and as Exhibit Nos. 4.3 and 4.4 to Registration Statement on Form
S-8 (Reg. No. 33-40279) filed on May 1, 1991.
(2) Incorporated by reference to Exhibit No. 1 to Annual Report on
Form 10-K for fiscal year ended March 31, 1989.
(3) Incorporated by reference to Exhibit No. 1 to Annual Report on
Form 10-K for fiscal year ended March 29, 1991.
(4) Incorporated by reference to page 7 of the Company's Proxy
Statement for fiscal year ended March 31, 1993 related to the Annual
Meeting of Shareholders scheduled for July 30, 1993 as filed with
the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934.
(5) Incorporated by reference to Exhibit No. 2 to Annual Report on
Form 10-K for fiscal year ended March 29, 1991.
(6) Incorporated by reference to Exhibit No. 10.4 to Annual Report
on Form 10-K for fiscal year ended March 31, 1992.
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter ending March 31, 1996.
<PAGE 29>
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 on June 26, 1996.
EFI ELECTRONICS CORPORATION
By:
Richard D. Clasen
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature Capacity in Which Signed Date
Richard D. Clasen Chief Executive Officer, President June 26, 1996
and Director (Principal Executive
Officer)
David G. Bevan Chief Financial Officer, Executive June 26, 1996
Vice President & Secretary
(Principal Financial Officer)
Gaylord K. Swim Director June 26, 1996
Bradford Romney Director June 26, 1996
Hans Imhof Director June 26, 1996
<PAGE 29>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 8518
<SECURITIES> 0
<RECEIVABLES> 2612467
<ALLOWANCES> 93114
<INVENTORY> 2307704
<CURRENT-ASSETS> 5005045
<PP&E> 4236135
<DEPRECIATION> 2339677
<TOTAL-ASSETS> 7304321
<CURRENT-LIABILITIES> 3042079
<BONDS> 3776108
0
0
<COMMON> 354
<OTHER-SE> 485780
<TOTAL-LIABILITY-AND-EQUITY> 7304321
<SALES> 11921129
<TOTAL-REVENUES> 11921129
<CGS> 8173468
<TOTAL-COSTS> 5197363
<OTHER-EXPENSES> 296034
<LOSS-PROVISION> 139926
<INTEREST-EXPENSE> 354483
<INCOME-PRETAX> (1745736)
<INCOME-TAX> 75000
<INCOME-CONTINUING> (1820736)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1820736)
<EPS-PRIMARY> (0.58)
<EPS-DILUTED> (0.58)
</TABLE>
