FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal Year Ended March 31, 1997
[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
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(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
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(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:
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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.
[X] 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: $ 13,759,812
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 9, 1997, 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: $ 3,575,550.
Number of shares of the registrant's common stock outstanding at June 9, 1997:
4,216,174
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the Annual Meeting of
Shareholders scheduled for July 29, 1997 are incorporated by reference in Part
III of this report.
<PAGE>
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. In December 1982, the Company 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. The name of
the Surviving Corporation was changed to EFI Electronics Corporation and the
officers and directors of EFI Corporation became the officers and directors of
the Surviving Corporation.
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. In spite of apparent user interest,
management determined that the Company does not have sufficient financial
resources to develop a significant market to provide for adequate return on
investment. The Company decided to devote greater emphasis on increasing the
TVSS part of its business. Therefore, during the year ended March 31, 1997, in
an effort to reduce operating expenses the Company wrote off the remaining
software costs associated with NRS in the amount of $135,375.
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 until June 1997 pursuant to a manufacturing agreement entered into
in connection with the sale of the UPS product line to Valence. At the
conclusion of this agreement there will be no material adverse impact on the
Company's results of operation. The Company is no longer involved in development
or design of new UPS products.
2
<PAGE>
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. In spite of apparent user interest, management determined that the
Company does not have sufficient financial resources to develop a significant
market. Since June 1996, management has been seeking strategic partners to
develop such a market or to purchase the Company's investment without success.
Because the Company was not successful in its efforts, the remaining costs
associated with NRS were written off in fiscal 1997.
Products--The Company is presently engaged in the design, development, assembly,
and marketing of TVSS devices to protect computer systems and other
micro-electronic equipment. The increasing use of micro-electronic systems
increases the need for surge suppression products. These markets include office
products (computers, fax machines, copiers, cash registers, etc.), commercial
and industrial products for medical facilities, telecommunication installations,
security systems, factories, automated environments, as well as residential
applications such as home theater, home office and appliances.
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. The Company has continued its
technology development, receiving notice of two new patents in May 1997. 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 computer systems and peripherals, copiers, fax machines, DSS
satellite systems, audio/visual equipment, telecommunication equipment and
data lines:
Powertracker(TM) Plugstrips offer either six or eight outlets, an
on/off switch/circuit breaker and diagnostic lights. Three different
suppression levels are available to provide the protection desired.
Diagnostics indicate reverse polarity, improper grounding and
protection availability. Models with telephone and coaxial line
protection are also available.
Powertracker(TM) Wallmounts plug into a standard grounded outlet and
provide either two or six power outlets for connected equipment.
Wallmounts use the same suppression circuitry, diagnostic features
and telephone/coaxial protection as plugstrips. Two specialized
wallmount models are available 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. These products include the same diagnostic features
offered on the plugstrip and wallmount products.
3
<PAGE>
Item 1. Business (continued)
Hardwire Products provide a full range of protection from full facility at
the service entrance to distribution panel protection for a specific area,
to electronic equipment protection at a dedicated branch panel. In
addition, original equipment manufacturers ("OEM") may incorporate TVSS
products directly into equipment requiring electronic protection
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 use the same technology as upper-end 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.
Competition
EFI experiences active competition in each of its TVSS product categories.
However, EFI believes its extensive product line of both plug-in and hardwire
products is an asset in the ever-changing competitive environment. A description
of the competitive factors in each category of EFI's products is set forth
below.
Plug-in Products--These products sell through a variety of distribution and
OEM/Private Label channels that include value added resellers ("VAR"), office
products dealers, government and 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
product design, 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 these markets compete favorably with respect to technical support and
performance and, that as the market matures, the Company will have significant
pricing advantages.
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 distributors, utility distributors and consumer retailers.
These suppliers are serviced by authorized EFI manufacturer's
representatives.
4
<PAGE>
Item 1. Business (continued)
Government products are sold via the General Services Administration
schedule and on a bid basis through direct sales. EFI uses manufacturer's
representatives for Government sales.
Private Label/OEM product sales are made by direct sales to other
manufacturers and product merchandisers.
Dependence on Customers
In accordance with the Company's strategy to develop large distribution or
OEM/Private Label accounts, in fiscal 1997 two customers each represented 13% of
the Company's revenue, one of which was the U.S. Government. Management expects
the number of customers representing more than 10% of Company revenue to
increase. The loss or insolvency of either of these customers could have a
material adverse effect on the Company's results of operations. In fiscal 1996,
only the U.S. Government represented more than 10% of the Company's revenue
(19%).
Patents and Trademarks
In December 1986, EFI was issued a patent commencing January 31, 1985, 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, commencing April 12, 1990. In June 1992, EFI was issued a patent on the
CATV circuitry that EFI has developed, commencing October 30, 1989. In January
1996, the Company purchased rights to a patent commencing August 11, 1995 for a
system to "hot swap" a suppression module in hardwire products. In May 1997, the
Company received notice that it will receive a patent on a unique TVSS
technology comprised of an array of varistor discs. Each of these patents has a
life of 20 years. 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. The trademarks are also
deemed significant to EFI because of the importance of name recognition in the
markets in which EFI
products are sold.
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, 1997 and 1996 were $552,458 and $574,576, respectively.
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 an automated 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.
5
<PAGE>
Item 1. Business (continued)
EFI maintains substantial inventories of product components in order to meet
rapid delivery requirements of customers. Return of EFI branded 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, 1997, EFI employed approximately 105 full-time people, including
18 sales and marketing personnel, 5 engineers, 60 production employees, and 22
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, and assembly. The Company leases this facility on a
month-to-month basis. Monthly lease payments are $9,372 plus taxes, insurance,
and maintenance. Additionally, the Company leases a 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 2,500 square feet are used for administrative
offices and the balance for assembly, warehouse of materials, and shipping.
Monthly lease payments are $5,208 plus taxes, insurance, and maintenance. This
facility is leased through August 1997. The facilities have been renovated to
specifications provided by the Company. Management expects to combine and
relocate these facilities during fiscal 1998.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
6
<PAGE>
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. 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, 1997 $ 1.31 $ 2.38
December 31, 1996 1.19 1.69
September 30, 1996 0.94 1.38
June 30, 1996 1.19 1.56
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
As of June 9, 1997, there were approximately 280 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.
7
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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>
<CAPTION>
For the years ended March 31, 1997 1996 1995 1994 1993
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Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net Sales $ 13,759,812 $ 11,921,129 $ 12,899,293 $ 14,924,600 $ 14,819,664
Cost of sales 9,235,554 8,173,468 9,271,371 9,930,209 8,574,369
- ----------------------------------------------------------------------------------------------------------------
Gross profit 4,524,258 3,747,661 3,627,922 4,994,391 6,245,295
Operating expenses 4,685,190 5,197,363 6,457,581 5,587,016 5,203,156
- ----------------------------------------------------------------------------------------------------------------
Income/(loss) from operations (160,932) (1,449,702) (2,829,659) (592,625) 1,042,139
Other expense, net (302,491) (296,034) (416,029) (65,426) (52,807)
- ----------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes (463,423) (1,745,736) (3,245,688) (658,051) 989,332
Benefit from/(provision for)
income taxes (33,895) (75,000) 445,111 327,826 (325,013)
- ----------------------------------------------------------------------------------------------------------------
Net (loss)/income $ (497,318) $ (1,820,736) $ (2,800,577) $ (330,225) $ 664,319
================================================================================================================
Net (loss)/income per common and
common equivalent share $ (0.13) $ (0.58) $ (1.04) $ (0.12) $ 0.23
================================================================================================================
Dividends per common and
common equivalent share $ -0- $ -0- $ -0- $ -0- $ -0-
================================================================================================================
Balance Sheet Data:
Working capital $ 102,809 $ (273,142) $ 1,077,970 $ 4,930,967 $ 5,704,452
Total assets 7,694,768 7,304,321 8,608,303 9,170,972 8,893,477
Long term debt 1,048,000 1,540,000 1,609,921 2,639,905 2,864,067
Total liabilities 6,682,967 6,818,187 6,416,978 4,514,952 3,718,337
Stockholders' equity 1,011,801 486,134 2,191,325 4,656,020 5,175,640
Current ratio 1.02 to 1 0.95 to 1 1.22 to 1 4.0 to 1 9.7 to 1
Total liabilities to net worth 6.6 to 1 14.0 to 1 2.9 to 1 .97 to 1 .72 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: 1997 1996
- ------------------------------------------------------------
Net sales 100.00% 100.00%
Cost of sales 67.12 68.56
- ------------------------------------------------------------
Gross profit 32.88 31.44
Operating expenses 34.05 43.60
- ------------------------------------------------------------
Loss from operations (1.17) (12.16)
Other expense, net (2.20) (2.48)
- ------------------------------------------------------------
Loss before income taxes (3.37) (14.64)
Income taxes (0.24) (0.63)
- ------------------------------------------------------------
Net loss (3.61)% (15.27)%
============================================================
8
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Results of Operations
Net Sales for the year ended March 31, 1997, increased by $1.8 million (15%)
compared to the prior year. The major components of net sales were:
Revenue by Product
(in thousands)
3/31/97 3/31/96
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TVSS revenue $13,663 $11,289
UPS revenue -0- 369
Other revenue 97 263
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Total $13,760 $11,921
======= =======
Contribution margin percentage 48% 54%
Gross margin percentage 33% 31%
Note: Contribution margin reflects only direct, unburdened material and labor
costs
TVSS revenue increased by $2.4 million (21%) for the year ended March 31, 1997
as compared to the year ended March 31, 1996. The two components of TVSS
revenue---plug-in and hardwire sales---are discussed separately, below:
Plug-in revenue increased by $1.8 million for the year ended March 31,
1997 as compared to the year ended March 31, 1996, as a result of the
Company's continued focus on increasing the Private Label/OEM business.
Panel revenue increased by $589 thousand from fiscal 1996 to fiscal 1997.
These increases are due to two major areas: 1) the Company has
successfully entered the new construction and bid specification market,
selling its new line of custom panel products; and 2) 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 $369 thousand as a result of the
sale of the Company's UPS product line in June 1995. Ongoing UPS revenue ceased
at that 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 terminates in June 1997.
Gross Profit on sales for the year ended March 31, 1997, increased by $777
thousand (21%) compared to the year ended March 31, 1996. As a percentage of
sales, gross profit improved from 31% to 33%. The improvement in gross profit
was related primarily to two factors.
First, an increase in overall sales of 15%. TVSS sales reflect the market
and direction on which the Company has focused its attention, which in
turn has resulted in increases in sales for this market by $2.4 million (a
21% increase) over the prior year.
Second, indirect manufacturing costs and variances decreased by $290
thousand (12%). Savings in indirect costs included reductions in rework,
manufacturing overhead, warranty claims, salaries and benefits, and
shipping costs.
9
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Operating Expenses decreased by $512 thousand during the 1997 fiscal year
compared to the year ended March 31, 1996. This decrease was related to
decreases in several categories.
Expense controls were put into place during the last three years which
resulted in continuing reductions for the year ended March 31, 1997 of
$130 thousand. Major reductions occurred in legal, business insurance,
postage and telephone expenses.
Network Response Systems (NRS) expenses were reduced from $504 thousand in
fiscal 1996 to $237 thousand in fiscal 1997, which includes a write off of
unamortized software costs in the amount of $135 thousand (See Unusual
item, Note 8 to the financial statements).
Bad debt expense decreased by $61 thousand as a result of several factors.
During the year ended March 31, 1996, the Company wrote-off two
significant accounts receivable from foreign customers. During the current
year, a large domestic account was written off in the net amount of $183
thousand. A previous bad debt was paid to the Company in the amount of
$125 thousand.
Loss from operations improved $1.3 million in the current fiscal year over the
prior year as a result of improved gross margin and lower operating expenses.
Without NRS expenses of $237 thousand in the current fiscal year, the Company
would have reported an operating profit of $75,876, the first such profit since
the year ended March 31, 1993.
Other Expenses, net of other income, increased to $302 thousand for the year
ended March 31, 1997 compared to $296 thousand for the year ended March 31,
1996. This increase was primarily the result of an increase in interest expense
in the current year related to increased borrowings, offset by an increase in
the Company's equity in earnings from a joint venture.
Net Loss of $497 thousand in the current year is a $1.3 million improvement from
the net loss of $1.8 million incurred in the year ended March 31, 1996. This
improvement resulted from an increase in gross profit of $777 thousand and a
$749 thousand reduction in operating expenses, offset by an increase in other
expenses of $243 thousand.
Liquidity and Capital Resources
Cash Flows From Operating Activities - the Company used $894 thousand cash in
operations during fiscal 1997 compared to $1.4 million in fiscal 1996. The most
significant cause of this change was a reduction in the Net Loss in fiscal 1997
by $1.3 million, compared to fiscal 1996.
Receivables increased by $436 thousand (13%) during the current fiscal
year as a result of a 15% increase in sales. 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.
Inventories increased by $425 thousand (16%) during fiscal 1997. This
increase is due to a 13% increase in cost of sales.
Accounts payable decreased $362 thousand during the current fiscal year as
the Company has attempted to improve its position with suppliers. The
Company has maintained adequate relationships with its suppliers and is on
open account terms with all significant vendors.
Reserve for customer warranty decreased $99 thousand, reflecting a
reduction in submitted claims coupled with run-off of Triple Crown
warranty claims resulting from termination of this program in January
1996.
Accrued liabilities increased by $40 thousand since March 31, 1996. This
increase is due to increases in payroll and fringe benefit accruals, which
are affected by timing of actual payments made.
10
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Cash Flows from Investing Activities decreased from March 31, 1996 to March 31,
1997 by $805 thousand. This was primarily the result of proceeds of $754
thousand in fiscal 1996 from the sale of the Company's UPS product line and an
increase in capital expenditures of $116 thousand over the $329 thousand
expended during 1996.
Property--Investments in new equipment of $445 thousand were made in
fiscal 1997. These were primarily related to molds and tooling for new
plug-in products announced by the Company during the previous fiscal year.
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.
Proceeds from the sale of UPS line in fiscal 1996 were $754 thousand,
representing non-recurring sales of UPS inventory and fixed assets.
Cash Flows from Financing Activities increased by $377 thousand from fiscal 1996
to fiscal 1997. During the prior fiscal year, the Company refinanced its loan
agreements to increase borrowing availability on its assets. The reduction of
notes payable and the implementation of a new line of credit agreement in March
1996 are the principal reasons for the increase in financing activities over the
prior year. The Company received $491 thousand in cash from the issuance of
common stock. The combination of these funds has allowed the Company to be on
open account terms with most of its suppliers while increasing the revenue from
its OEM/Private Label business. The Company also borrowed $500 thousand in
February 1997 from a related party to assist in the increase of OEM/Private
Label business and the reduction of accounts payable.
Outlook
The Company has improved its TVSS related results from a $2.8 million operating
loss in fiscal 1995 to operating income of $76 thousand for the 1997 fiscal
year. This has been the result of several actions:
1. Sale of the Company's UPS business in June 1995, which was unprofitable
and de-focused the Company from its core TVSS business.
2. Reduction of operating expenses by $2.0 million without significant
impact on core TVSS revenue.
3. Reduction of indirect manufacturing expenses by $726 thousand, while
improving Company operations.
4. Re-focus of Company resources on improvement and growth of TVSS business.
While management believes that Company operations have improved to the point
that its focus is now on sustaining growth, the financial condition of the
Company remains guarded. Relationships with suppliers and lenders are presently
satisfactory. Management has developed several plans under a variety of
assumptions and scenarios for fiscal 1998. Under both the worst case and more
optimistic scenarios, management believes the Company can fund its operations
during fiscal 1998 from financing arrangements in place and internally generated
cash flows.
This report contains certain forward looking statements with respect to the
Company that are subject to risks and uncertainties that include, but are not
limited to, those identified in this report, described from time to time in the
Company's other Securities and Exchange Commission filings or discussed in the
Company's press releases. Actual results may vary from expectations.
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.
11
<PAGE>
Item 7. Financial Data
Index to Financial Statements
<TABLE>
<CAPTION>
Item Page Item Page
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reports of Independent Accountants 12-13 Statements of Cash Flows 16-17
Statements of Operations 14 Statements of Stockholders' Equity 18
Balance Sheet 15 Notes to Financial Statements 19-26
</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, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Salt Lake City, Utah
May 16, 1997
12
<PAGE>
Item 7. Financial Data (continued)
Report of Independent Accountants
To the Stockholders and Board of Directors of EFI Electronics Corporation:
We have audited the accompanying statements of operations, stockholders' equity,
and cash flows of EFI Electronics Corporation for the year ended March 31, 1996.
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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of EFI
Electronics Corporation for the year ended March 31, 1996 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.
/s/ Coopers & Lybrand L.L.P.
Salt Lake City, Utah
June 18, 1996
<PAGE>
Item 7. Financial Data (continued)
Statements of Operations
<TABLE>
<CAPTION>
For the years ended March 31, 1997 1996 Notes
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 13,759,812 $ 11,921,129 1
Cost of sales 9,235,554 8,173,468
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 4,524,258 3,747,661
- -----------------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 3,918,240 4,482,861
Research and development 552,458 574,576
Unusual item 135,375 -0- 8
Bad debts 79,117 139,926 3
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,685,190 5,197,363
- -----------------------------------------------------------------------------------------------------------------------
Loss from operations (160,932) (1,449,702)
- -----------------------------------------------------------------------------------------------------------------------
Other income/(expense):
Equity in earnings of joint venture 151,818 67,824 13
Other income 106 64,182
Legal settlement -0- (73,557)
Interest expense (454,415) (354,483) 6
- -----------------------------------------------------------------------------------------------------------------------
Net other expense (302,491) (296,034)
- -----------------------------------------------------------------------------------------------------------------------
Loss before income taxes (463,423)
Provision for income taxes (33,895) (75,000) 1,9
- -----------------------------------------------------------------------------------------------------------------------
Net loss $ (497,318) $(1,820,736)
=======================================================================================================================
Net loss per common
and common equivalent share $ (0.13) $ (0.58) 1
=======================================================================================================================
Weighted average common
and common equivalent shares outstanding 3,815,016 3,144,905 1
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
14
<PAGE>
Item 7. Financial Data (continued)
Balance Sheet
<TABLE>
<CAPTION>
As of March 31, 1997 Notes
- -------------------------------------------------------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,123 1
Receivables 3,010,255 3,6
Inventories 2,674,607 1,4,6
Prepaid expenses 42,791
- -------------------------------------------------------------------------------------
Total current assets 5,737,776
Property - net 1,658,901 1,5,6
Investment in joint venture 209,219 13
Other assets 88,872
- -------------------------------------------------------------------------------------
Total assets $7,694,768
=====================================================================================
Liabilities
Current liabilities:
Revolving line of credit $3,198,381 6
Current maturities of notes payable 531,690 6
Accounts payable 1,142,637
Reserve for customer warranty 293,992
Accrued income taxes payable 113,309
Accrued liabilities 354,958
- -------------------------------------------------------------------------------------
Total current liabilities 5,634,967
Notes payable, less current maturities 1,048,000 6
- -------------------------------------------------------------------------------------
Total liabilities 6,682,967
- -------------------------------------------------------------------------------------
Commitments 7
Stockholders' Equity
Common stock, $.0001 par value; 20,000,000 shares
authorized; 4,216,174 shares issued and outstanding 422 6,11
Additional paid-in capital 926,925
Retained earnings 294,454
- -------------------------------------------------------------------------------------
1,221,801
Less:
Stock subscriptions and note receivable
from management and employees (210,000) 10
- -------------------------------------------------------------------------------------
Total stockholders' equity 1,011,801
- -------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,694,768
=====================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
15
<PAGE>
Item 7. Financial Data (continued)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the years ended March 31, 1997 1996
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (497,318) $(1,820,736)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 682,685 634,380
Amortization 60,907 40,483
Reserve for obsolete inventory 58,305 (38,608)
Equity in earnings of joint venture (151,818) (67,824)
Write-off NRS software asset 135,375 -0-
Bad debts 79,117 139,926
Increase/(decrease) in cash, excluding sale of UPS
line in 1996, due to change in:
Receivables (436,001) 332,265
Inventories (425,208) (134,804)
Prepaid expenses (7,339) 30,354
Accounts payable (362,241) (406,895)
Accrued income tax payable 38,309 75,000
Reserve for customer warranty (98,837) 98,843
Accrued liabilities 40,350 (282,984)
- ----------------------------------------------------------------------------------------------
Net cash used in operating activities (883,714) (1,400,600)
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (445,128) (329,381)
Distribution from joint venture 60,304 -0-
Proceeds from sale of fixed assets related to UPS sale -0- 290,959
Proceeds from sale of inventory related to UPS sale -0- 463,108
Increase in other assets (41) (4,603)
- ----------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities (384,865) 420,083
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under revolving line of credi 970,791 777,318
Proceeds from borrowings under notes payable 704,800 1,700,000
Principal payments under notes payable (337,575) (2,190,569)
Increase in other assets -0- (71,000)
Increase/(decrease) in overdraft (561,482) 561,482
Proceeds from issuance of common stock 491,000 100,000
Proceeds from exercise of stock options 2,650 15,545
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,270,184 892,776
- ----------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 1,605 (87,741)
Cash and cash equivalents at beginning of year 8,518 96,259
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,123 $ 8,518
=============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-continued-
16
<PAGE>
Item 7. Financial Data (continued)
Statements of Cash Flows (continued)
Supplemental disclosures of cash flow information:
For the years ended March 31, 1997 1996
- --------------------------------------------------------------------------------
Cash paid/(refunded) during the year for
Income taxes $ 29,000 $ (482,121)
- --------------------------------------------------------------------------------
Interest $ 423,317 $ 342,604
- --------------------------------------------------------------------------------
Supplemental schedule of non-cash investing and financing activities:
1997 The Company issued 93,276 shares of common stock and re-issued 362,156
shares of treasury stock to retire subordinated debt and accrued
interest in the amount of $521,835.
The Company issued 5,400 shares as payment of accounts payable of $7,500.
In connection with the issuance of 383,334 shares of common stock the
Company received a note receivable for $60,000.
1996 The Company issued 46,875 shares of treasury common stock valued at
$75,000 as a settlement of litigation.
The Company cancelled 37,658 shares of treasury common stock.
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.
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
Item 7. Financial Data (continued)
Statements of Stockholders' Equity
For the years ended March 31, 1997 and March 31, 1996:
<TABLE>
<CAPTION>
Stock
Common Stock Common Additional Subscriptions, Treasury Stock
------------ Stock Paid-in Retained and Note --------------
Shares Amount to be Issued Capital Earnings Receivable Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 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
subscriptions and interest
receivable 6,549 10,408 (6,549)
Issue treasury stock for
settlement 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
Issue 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
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued to retire
debt (455,432 shares at
$1.15 per share); shares
removed from treasury
stock at a cost of $2.69
per share 93,276 9 (450,712) (362,156) 972,538 521,835
Common stock issued for cash
at $0.90 per share 383,334 38 344,962 (60,000) 285,000
Common stock issued for cash
at $1.05 per share 195,686 20 205,980 206,000
Common stock issued as payment
of accounts payable at $1.39
per share 5,400 1 7,499 7,500
Exercise of stock options at
at $1.06 per share 2,500 2,650 2,650
Net loss (497,318) (497,318)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 4,216,174 $422 $ -0- $926,925 $294,454 $(210,000) -0- $ -0- $1,011,801
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
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. 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 utilizes the liability method of accounting for income
taxes. Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. An
allowance against deferred tax assets is recorded when it is more likely than
not that such tax benefits will not be realized. Research tax credits are
recognized as utilized.
Cash and Cash Equivalents--The Company considers all interest-bearing deposits
with an original maturity date of three months or less when purchased to be cash
equivalents.
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. Outstanding common stock warrants and
options were excluded from the weighted average number of shares of common stock
as they would decrease loss per share. 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. In
accordance with the Company's strategy to develop large distribution or
OEM/Private Label accounts, in fiscal 1997 two customers each represented 13% of
the Company's revenue, one of which was the U.S. Government. Management expects
the number of customers representing more than 10% of Company revenue to
increase. The loss or insolvency of either of these customers could have a
material adverse effect on the Company's results of operations. In fiscal 1996,
only the U.S. Government represented more than 10% of the Company's revenue
(19%).
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, 1997 and 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.
19
<PAGE>
Item 7. Financial Data (continued)
Note 1 The Company and Summary of Significant Accounting Policies - continued
Research and Development--The Company conducts research and development to
develop new products or product improvements not directly related to a specific
project. Research and development costs have been charged to expense as
incurred.
Reclassifications--Certain reclassifications have been made to the March 31,
1996 financial statements to conform with the March 31, 1997 presentation.
Recently Issued Accounting Standards---In February 1997, the FASB issued SFAS
No.128, "Earnings Per Share," which replaces the presentation of primary
earnings per share ("EPS") with a presentation of basic EPS, requires dual
presentation of basic and diluted EPS on the face of the statement of earnings
regardless of whether basic and diluted EPS are the same, and requires a
reconciliation of the numerator and denominator used in computing basic and
diluted EPS. Basic EPS excludes dilution and is computed by dividing earnings
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully diluted
EPS pursuant to APB Opinion 15. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. This Statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods, earlier application is not permitted and
requires restatement of all prior-period EPS data presented. Management believes
that implementation of this pronouncement should have no material effect on the
financial statements.
Note 2 Basis of Presentation:
The Company has incurred a net loss in each of the last four fiscal years and
has had negative cash flows from operating activities for the two years ended
March 31, 1997. Additionally, the Company's revolving line of credit contains
certain covenants that, if not complied with, may result in the acceleration of
repayment. As of March 31, 1996, these factors raised 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, were prepared assuming that the
Company would continue as a going concern and did not include any adjustments
that might result from the outcome of this uncertainty.
Management's plan with respect to fiscal 1997 was to accomplish a number of
goals intended to improve the Company's viability. These goals included
increasing revenues from new private label/OEM customers, improving gross
margin, controlling operating expenses, refinancing its borrowing agreements and
improving its sales and marketing functions by hiring people with proven
experience. Though management has sought to fund Company operations from
financing arrangements in place and internally generated cash flow, failure to
accomplish management's plans during fiscal 1997 and to generate positive
operating cash flow could have resulted in further erosion of the Company's
financial condition and failure to meet its financial obligations.
As of March 31, 1997, each of the above described goals previously set by
management have been accomplished. In addition, the Company has also received
more than $1 million in common stock and subordinated debt during fiscal 1997 to
improve its liquidity and financial position. The Company's lending
relationships are satisfactory. Management does not expect any acceleration of
repayment. The Company's net loss in fiscal 1997 has been substantially reduced
as compared to the prior two fiscal years and the Company accomplished a
positive operating profit from TVSS operations for the first time since fiscal
1993. Negative cash flow from operating activities in fiscal 1997 resulted from
reductions in past due accounts payable and increases in inventory and accounts
receivable associated with growth rather than erosion of liquidity. As a result
of these factors, management believes that the Company has the ability to
continue as a going concern for fiscal 1998.
Note 3 Receivables:
At March 31, 1997, receivables consisted of the following:
- -----------------------------------------------------
Trade and other receivables $ 3,124,292
Receivable from joint venture 234,340
- -----------------------------------------------------
3,358,632
Allowance for doubtful accounts (348,377)
- -----------------------------------------------------
Total $3,010,255
=====================================================
20
<PAGE>
Item 7. Financial Data (continued)
Note 3 Receivables - continued
In 1997, the allowance for doubtful accounts increased due to the insolvency of
one of the Company's large customers. As of March 31, 1997 the allowance
included $317,759 for this account. The Company has recovered inventory with a
value of approximately $135 thousand which it expects to sell. Any further
recovery is expected to be negligible.
Note 4 Inventories:
At March 31, 1997, inventories consisted of the following:
- ------------------------------------------------------
Raw materials $ 1,367,125
Work-in-process 498,178
Finished goods 809,304
- ------------------------------------------------------
Total $ 2,674,607
======================================================
Note 5 Property:
At March 31, 1997, property consisted of the following:
- ------------------------------------------------------
Machinery and equipment $ 4,058,085
Furniture and fixtures 157,620
Leasehold improvements 131,572
Software 191,207
- ------------------------------------------------------
4,538,484
Less accumulated depreciation (2,879,583)
- ------------------------------------------------------
Property--net $ 1,658,901
======================================================
Included in the above total as of March 31, 1997, are assets with a cost of
$1,244,508 which are fully depreciated and still in service. During fiscal 1997,
the Company retired assets that were fully depreciated, with a cost of $142,776.
Starting in the year ended March 31, 1997, the Company adopted SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. This has had no material impact on asset valuation.
Note 6 Notes Payable and Revolving Line of Credit:
At March 31, 1997, notes payable and revolving line of credit, the carrying
value of which approximates fair value, consisted of the following:
Revolving line of credit $ 3,198,381
========================================================
Notes payable:
Collateralized promissory note $ 1,040,000
Uncollateralized subordinated note 500,000
Uncollateralized note to former officer 39,690
- --------------------------------------------------------
1,579,690
Less current maturities (531,690)
- --------------------------------------------------------
Total notes payable, less current maturities $ 1,048,000
========================================================
The revolving line of credit in place at March 31, 1997, provides for borrowings
up to $3,200,000 collateralized by accounts receivable and inventories. Interest
is payable monthly at a rate of prime (8.50% as of March 31, 1997) 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 and inventories less certain ineligible amounts. The line of credit
agreement expires in March 2000.
21
<PAGE>
Item 7. Financial Data (continued)
Note 6 Notes Payable and Revolving Line of Credit - continued
The revolving line of credit contains financial covenants, the most restrictive
of which require the Company to maintain not less than $1,000,000 of net worth
plus subordinated debt and a debt to net worth ratio not to exceed 7.5 to 1. At
March 31, 1997, the Company was in compliance with or had received appropriate
waivers for all covenants pertaining to this line of credit.
The collateralized promissory note is collateralized by the Company's property.
Interest is payable monthly at a rate of prime (8.50% as of March 31, 1997) plus
0.75% 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 promissory note is payable to a major shareholder and
director of the Company. Interest is at a rate of 12% per annum. Monthly
interest payments begin March 31, 1997 through September 30, 1997 and monthly
principal installments of $50,000 plus interest are due beginning October 31,
1997 through May 31, 1998, with all unpaid principal and interest due on June
30, 1998. The note is subordinated to the revolving line of credit.
The uncollateralized note to former officer was issued in September 1994, in the
amount of $117,250 in exchange for an agreement not to compete. The note does
not provide for any interest. It is payable in monthly installments of $4,410
until it is fully paid.
Minimum principal payments on notes payable are as follows:
Fiscal year ending March 31,
1998 $ 531,690
1999 1,048,000
Thereafter -0-
-----------------------------------
Total $ 1,579,690
===================================
Note 7 Lease Obligations:
The Company currently leases its principal facility on a month-to-month basis.
Monthly lease payments are $9,372 plus taxes, insurance and maintenance. In
addition, the Company leases a warehouse facility under a lease that expires in
August 1997. Monthly lease payments for this facility are $5,208 plus taxes,
insurance and maintenance. Minimum rental payments through the term of this
lease is $26,040. The Company intends to combine and relocate their facilities
during fiscal 1998. Rental expense for 1997 and 1996 was $184,656 and $161,273,
respectively.
Note 8 Unusual Item
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. In spite of apparent user interest,
management determined that the Company does not have sufficient financial
resources to develop a significant market in this area. The Company decided to
devote greater emphasis on increasing the TVSS part of its business. Therefore,
during the year ended March 31, 1997, in an effort to reduce operating expenses
the Company wrote off the remaining software costs associated with NRS.
Note 9 Income Taxes:
The provision for income taxes for the years ended March 31, 1997 and 1996,
consisted of the following:
1997 1996
--------------------------
Current $(33,895) $(75,000)
Deferred -0- -0-
--------------------------
Total $(33,895) $(75,000)
========= =========
22
<PAGE>
Item 7. Financial Data (continued)
Note 9 Income Taxes - continued
The reported benefit from/(provision for) 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:
1997 1996
----------------------
Benefit at statutory rates $158,000 $594,000
Increase in valuation allowance (163,000) (677,000)
State income taxes 14,000 58,000
Assessment for prior year's taxes (33,895) (75,000)
Non-deductible items and other miscellaneous adjustments (9,000) 25,000
---------- ----------
Total $ (33,895) $ (75,000)
========== ==========
Deferred tax assets and liabilities as of March 31, 1997 and 1996, are comprised
of the estimated future tax (provision)/benefit due to different financial
reporting and income tax basis related to:
1997 1996
-----------------------
Deferred tax assets:
Net operating loss carry-forward $ 1,110,000 $ 1,324,000
Research and development credit carry-forwards 30,000 130,000
Asset reserves and accrued liabilities 333,000 245,000
Total deferred tax assets 1,473,000 1,699,000
Deferred tax liabilities:
Depreciation (99,000) (188,000)
Valuation allowance (1,374,000) (1,511,000)
----------- -----------
Net deferred tax liability $ -0- $ -0-
============= =============
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, 1997, the Company had net operating loss carry-forwards
of approximately $2,975,000 and research and development credit carry-forwards
of approximately $30,000. 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 10 Related Party Transactions:
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, 1997, the Company held two notes receivable from an officer of
the Company. These notes receivable bear interest at the prime rate (8.50% as of
March 31, 1997) plus 1%. The first note in the amount of $150,000 is secured by
100,000 shares of Company common stock and is due in full by the earlier of 60
days after termination of employment or September 12, 2000. The second note in
the amount of $60,000 is secured by 66,667 shares of Company stock and is due in
full by the earlier of 60 days after termination of employment or December 4,
2002. Because of the nature of these agreements, these notes receivable are
reflected as a reduction of stockholders' equity.
Note 11 Stockholders' Equity:
Stock Options and Warrants
In July 1988, the Company adopted an incentive and non-qualified stock option
plan and terminated a prior incentive stock option plan. Under the 1988 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.
23
<PAGE>
Item 7. Financial Data (continued)
Note 11 Stockholders' Equity - continued
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. Substantially, 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.
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.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation(SFAS 123). 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. If the Company had elected to
recognize compensation expense based upon the fair value at the grant date for
awards under these plans consistent with the methodology prescribed by SFAS 123,
the Company's net loss and loss per share would be adjusted to the pro forma
amounts indicated below:
Fiscal Year Ended March 31,
1997 1996
--------- ----------
Net loss As reported $ (497,318) $ (1,820,736)
Pro Forma (592,127) (1,840,694)
Loss per share As reported (0.13) (0.58)
Pro Forma (0.16) (0.59)
These pro forma amounts may not be representative of future disclosure because
they do not take into effect pro forma compensation expense related to grants
made before 1995. The fair value of these options was estimated at the date of
grant using the Modified Black-Scholes American option-pricing model with the
following weighted-average assumptions for the fiscal years ended March 31, 1997
and 1996: expected volatility of 82.65% and 82.42%, respectively; risk-free
interest rate of 6.22%; and expected life of 4.45 years. The weighted-average
fair value of options and warrants granted was $0.97 and $0.78 in fiscal years
ended March 31, 1997 and 1996, respectively.
Option pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Also, the Company's employee
stock options and warrants have characteristics significantly different from
those of traded options and warrants, and changes in the subjective input
assumptions can materially affect the fair value estimate. Management believes
the best input assumptions available were used to value the options and warrants
and the resulting values are reasonable. The following is a summary of the
activity relating to warrants and options through March 31, 1997:
24
<PAGE>
Item 7. Financial Data (continued)
Note 11 Stockholders' Equity - continued
Warrants and Exercise Weighted average
Stock Options price exercise price
------------- -------- ----------------
Outstanding at April 1, 1995 322,019 $1.06 - 2.75 $ 1.20
Granted 158,000 1.00 - 1.44 1.31
Exercised (14,665) 1.06 1.06
Canceled (60,901) 1.06 1.06
Expired (7,168) 1.06 1.06
-------------
Outstanding at March 31, 1996 397,285 1.00 - 2.75 1.28
Granted 298,322 1.125 - 2.125 1.33
Exercised (2,500) 1.06 1.06
Expired (117,627) 1.06 - 1.44 1.28
-------------
Outstanding at March 31, 1997 575,480 1.00 - 2.75 1.31
=============
Exercisable at March 31, 1997 181,868 $1.00 - 2.75 $1.25
=============
The following table summarizes information concerning currently outstanding and
exercisable stock options and warrants:
Options and Warrants Outstanding
--------------------------------
Weighted-Average
Remaining
Range of Number Contractual Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
-------------- ----------- ------- --------------
$1.00 - 1.99 549,480 4.45 $1.27
2.00 - 2.75 26,000 5.81 2.05
-----------
575,480
===========
Options and Warrants Exercisable
--------------------------------
Range of Number Weighted-Average
Exercise Prices Outstanding Exercise Price
--------------- ----------- --------------
$1.00 - 1.99 181,118 $1.24
2.00 - 2.75 750 2.75
------------
181,868
============
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, 1997, 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, 1996.
25
<PAGE>
Item 7. Financial Data (continued)
Note 13 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. During
fiscal 1997, the Company received $60,304 in cash distributions from this
investment. The accounting policies of this entity are similar to those of the
Company. Financial results for EFI Europe for the fiscal years ended March 31,
1997 and 1996 were:
Results of Operations
($ thousands)
3/31/97 3/31/96
------- -------
Current assets $ 638 $ 325
Total assets 747 348
Current liabilities 329 112
Shareholders' equity 418 236
Net sales 963 423
Net earnings $ 304 $ 136
Note 14 Quarterly Financial Data (Unaudited):
Unaudited summarized financial data by quarter for 1997 and 1996 is as follows:
Net Earnings/(Loss)
Per Common
Net/Earnings and Common
Quarter ended Net Sales Gross Profit (Loss) Equivalent Share
1997:
June 30, 1996 $ 3,109,044 $ 1,155,954 $ (186,633) $ (0.06)
September 30, 1996 3,559,318 1,186,981 (12,788) (0.00)
December 31, 1996 3,613,694 1,105,255 1,447 0.00
March 31, 1997 3,477,756 1,076,068 (299,344) (0.07)
Total $13,759,812 $ 4,524,285 $ (497,318) $ (0.13)
1996:
June 30, 1995 $ 3,150,854 $ 1,009,455 $ (289,237) $ (0.09)
September 30, 1995 2,931,358 991,032 (305,146) (0.10)
December 31, 1995 2,784,479 876,887 (366,392) (0.12)
March 31, 1996 3,054,438 870,287 (859,961) (0.27)
Total $11,921,129 $ 3,747,661 $(1,820,736) $ (0.58)
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
26
<PAGE>
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 29, 1997, 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)
11 Computation of Earnings Per Share X
23.1 Independent Accountant's Consent -
Grant Thornton LLP X
23.2 Independent Accountant's Consent -
Coopers & Lybrand, LLP 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, 1997.
27
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on June 19, 1997.
EFI ELECTRONICS CORPORATION
By:/s/R. D. Clasen
------------------------
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
- --------------------------------------------------------------------------------
/s/R.D. Clasen
- -------------------------
Richard D. Clasen Chief Executive Officer, June 19, 1997
President and Director
(Principal Executive Officer)
/s/David G. Bevan
- -------------------------
David G. Bevan Chief Financial Officer, Executive June 19, 1997
Vice President & Secretary
(Principal Financial Officer)
/s/Gaylord K. Swim
- -------------------------
Gaylord K. Swim Chairman of the Board and Director June 19, 1997
/s/Bradford Romney
- -------------------------
K. Bradford Romney, Jr. Director June 19, 1997
/s/Hans Imhof
- -------------------------
Hans Imhof Director June 19, 1997
/s/Reino O. Kerttula
- -------------------------
Reino Kerttula Director June 19, 1997
Weighted Average Common and Common Equivalent Shares Outstanding
Twelve months ended March 31, 1997
Shares Weighted Average
Outstanding Shares Outstanding
------------- -------------------
Common shares outstanding, March 31, 1996: 3,173,822 3,173,822
Additional shares outstanding due to:
Stock issued 1,042,352 641,194
Stock split 0 0
Stock acquired (Treasury) 0 0
Stock retired 0 0
------------- -------------------
Common shares outstanding March 31, 1997: 4,216,174 3,815,016
============= ===================
- --------------------------------------------------------------------------------
Weighted Average Common and Common Equivalent Shares Outstanding
Twelve months ended March 31, 1996
Shares Weighted Average
Outstanding Shares Outstanding
------------- -------------------
Common shares outstanding, March 31, 1995: 3,056,023 3,056,023
Additional shares outstanding due to:
Stock issued 155,457 125,508
Stock split 0 0
Stock acquired (Treasury) 0 0
Stock retired (37,658) (36,626)
------------- -------------------
Common shares outstanding March 31, 1996: 3,173,822 3,144,905
============= ===================
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