FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal Year Ended March 31, 1998
[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)
1751 South 4800 West, Salt Lake City, Utah 84104
(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.
[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: $ 16,372,366
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, 1998, 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: $ 4,255,996
Number of shares of the registrant's common stock outstanding at
June 10, 1998: 5,554,644
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the Annual Meeting of
Shareholders scheduled for July 29, 1998 are incorporated by reference in Part
III of this report.
<PAGE>
PART I
Item 1. Business
General Development of Business
EFI Electronics Corporation ("EFI" or the "Company") was incorporated under the
laws of the State of Utah on April 4, 1979, and in December 1982 began
manufacturing and selling transient voltage surge suppression ("TVSS") devices
which represent the Company's principal products. In June 1987, EFI merged with
and into Halyx Development Company, Inc., a publicly traded Delaware
corporation, which was the surviving corporation in the merger.
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 did not have sufficient financial
resources to develop a significant market presence in this area. The Company
decided to devote its resources to 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 all costs associated with NRS.
In July 1993, the Company established a joint venture headquartered in
Barcelona, Spain with an independent group for the purpose of developing a
market for TVSS products through European distributors and machine tool
manufacturers. The name of this entity is EFI Electronics Europe, S.L. As of
January 1, 1998, the Company acquired 100% of the common stock of this entity
and contracted with the manager of the joint venture to remain as manager of the
Company's wholly owned subsidiary for a period of five years.
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. 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.
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 in several markets. 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.
<PAGE>
Item 1. Business (continued)
All EFI TVSS products are designed and manufactured to meet Underwriters
Laboratories ("UL") and Canadian Standards Association ("cUL") standards for
quality and safety. Several of the Company's products that are sold
internationally also meet requirements for European Conformity ("CE"). EFI's
basic suppression circuit was patented in 1986, with additional patents granted
in 1991 and 1992. 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 using EFI brand
identification and private label marks. These products include the broad
categories of plug-in and hardwired products. The Company offers three major
branded product lines. These three lines of product are:
Powertracker(R) products which include plugstrips, wall-mounted devices,
data line modules and power control centers. These products offer a
variety of configurations as to number of outlets, on/off switching and
diagnostics that indicate reverse polarity, improper grounding and
protection availability. Three different suppression levels are available
to provide the protection desired. Models with telephone and coaxial line
protection are also available. These products are offered in models to
protect computer systems and peripherals, copiers, fax machines, DSS
satellite systems, audio/visual equipment, telecommunication equipment and
data lines.
Linemaster(R) products are industrial wire-in devices that provide a full
range of protection from full facility protection at the service entrance
to distribution panel protection for a specific area, to electronic
equipment protection at a dedicated branch panel. 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.
In addition to branded products, the Company has adapted its products for use by
private label manufacturers. In some cases these products are specifically
designed for such customers and are differentiated from Company branded
products. Hubbell, Inc., a leading electrical and wiring device manufacturer and
Thomson Consumer Electronics, using the "RCA" brand name, are examples of such
customers for which the Company has designed unique products that are sold under
the brand names of these companies. In addition, the Company has relationships
with original equipment manufacturers ("OEM") which incorporate the Company's
TVSS products directly into equipment requiring electronic protection equipment.
Competition
EFI experiences active competition in each of its TVSS product categories.
However, EFI believes its extensive product lines of plug-in and hardwire
products is a competitive advantage. 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 imported 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 plug-in products' competitive
advantages are product design, product performance and competitive costs through
continuing cost reduction activities.
<PAGE>
Item 1. Business (continued)
Hardwire Products--These products are sold in a wide variety of markets and to
diverse customer groups including process control equipment manufacturers,
government, medical equipment, modular office systems, and telecommunication
equipment, electrical contractors and public utilities. Many of these products
are sold through power VARs and electrical wholesalers. Many customers require
custom designed products that are needed 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. As the market matures and pricing pressure
begins to occur, the Company believes it can leverage its low cost structure
gained from plug-in products to compete favorably with competitors that have
much higher product costs.
Marketing
EFI delivers its products through a variety of marketing channels including
national and regional distributors that service retail computer resellers and
office products dealers. 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
strategies programs for each major TVSS channel:
EFI brand products are sold directly to large national and regional
suppliers of computers and office products. These suppliers distribute to
VARs, computer and office product dealers, utilities and consumer
retailers. In addition, EFI's Titan products are sold to VARs that provide
solutions and support for power problems.
Government products are sold via the General Services Administration (GSA)
schedule and on a bid basis through direct sales. EFI also 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
Consistent with the Company's strategy to develop large OEM/Private Label
accounts, one OEM customer represented 16% of the Company's revenue in fiscal
1998. The five largest customers accounted for 44% of revenue. Management
expects the number of customers representing more than 10% of Company revenue to
increase. The loss or insolvency of any one or more of these customers could
have a material adverse effect on the Company's results of operations. In fiscal
1997 two customers each represented 13% of the Company's revenue, one being the
U.S. Government.
Patents and Trademarks
In December 1986, EFI was issued a patent 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. In June 1992, EFI was
issued a patent on the CATV circuitry that EFI has developed and uses in many of
its products. In January 1996, the Company purchased rights to a patent for a
system that allows replacement of suppression modules under power. In March
1998, EFI was issued a patent on a unique TVSS technology comprised of an array
of varistor discs that yields significantly greater performance at similar cost
but in a much smaller space than equivalent individual varistors. Each of these
patents has a life of 20 years from its filing date or 17 years from issuance.
EFI considers these patents to be significant and material competitive
advantages. The Company also has one or more pending patent applications that
will cover recently developed products if a patent issues. The Company has also
registered its EFI(R) name and trademark, as well as its Sine Wave Tracker(R),
Omni-Phase(R), HomeGuard(R), Mastershield(R), Powertracker(R), Titan
Linemaster(R), and
<PAGE>
Item 1. Business (continued)
Titan Surge Defender(R) 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. The Company employs six 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, 1998 and 1997 were $917,726 and $552,458,
respectively. There was no customer-sponsored research and development.
Manufacturing Process
EFI's products are assembled at the Company's production facility in Salt Lake
City, Utah, primarily using standard electronic components that are available
from alternate sources. EFI focuses on automating the assembly process as much
as possible. 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.
Most 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 EFI branded merchandise from
the customer is permitted and is subject to a 25% restocking charge. Such
returns require concurrent orders of equal or greater value than the product
returned. EFI's normal credit terms closely match the industry that 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, 1998, EFI employed 122 full-time people, including 21 sales and
marketing personnel, 6 engineers, 81 manufacturing employees, and 14 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 difficulty employing qualified people. EFI considers
its employee relations to be satisfactory.
Item 2. Properties
The Company's principal offices are located at 1751 South 4800 West, Salt Lake
City, Utah 84104, telephone number (801) 977-9009. This facility is located in a
light industrial park and consists of 56,000 square feet, of which approximately
11,000 square feet are used for executive and administrative offices and the
balance for manufacturing, and assembly. A lease terminating in October 2009
covers this facility. Monthly lease payments are $22,586 plus taxes, insurance,
and maintenance. The facilities have been renovated to specifications provided
by the Company. EFI Electronics Europe, SL leases approximately 3,000 square
feet of office and warehouse space in Barcelona, Spain, with monthly lease
payments of $981.
Item 3. Legal Proceedings
None.
<PAGE>
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." The following table shows the
range of closing sale quotations for the Common Stock of the Company for the
quarters indicated. 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, 1998 $ 1.88 $ 2.31
December 31, 1997 2.00 3.00
September 30, 1997 1.50 3.38
June 30, 1997 1.31 2.13
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
As of June 10, 1998, 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>
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, and the consolidated financial statements and accompanying notes
appearing in this report.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
For the years ended March 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Consolidated Income Statement Data:
Net Sales $ 16,372,366 $ 13,759,812 $ 11,921,129 $ 12,899,293 $ 14,924,600
Cost of sales 10,717,325 9,235,554 8,173,468 9,271,371 9,930,209
Gross profit 5,655,041 4,524,258 3,747,661 3,627,922 4,994,391
Operating expenses 4,944,065 4,685,190 5,197,363 6,457,581 5,587,016
Earnings/(loss) from operations 710,976 (160,932) (1,449,702) (2,829,659) (592,625)
Other expense, net (607,173) (302,491) (296,034) (416,029) (65,426)
Earnings/(loss) before income taxes 103,803 (463,423) (1,745,736) (3,245,688) (658,051)
Benefit from/(provision for) income taxes (29,400) (33,895) (75,000) 445,111 327,826
- -------------------------------------------------------------------------------------------------------------------------
Net earnings/(loss) $ 74,403 $ (497,318) $ (1,820,736) $ (2,800,577) $ (330,225)
=========================================================================================================================
Net earnings/(loss) per share
Basic $ 0.02 $ (0.13) $ (0.58) $ (1.04) $ (0.12)
Diluted $ 0.01 $ (0.13) $ (0.58) $ (1.04) $ (0.12)
========================================================================================================================
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital (deficit) $ 979,234 $ 102,809 $ (273,142) $ 2,536,760 $ 4,930,967
Total assets 10,794,866 7,694,768 7,304,321 8,608,303 9,170,972
Long term debt 1,248,580 1,048,000 1,540,000 3,068,711 2,639,905
Total liabilities 7,710,589 6,682,967 6,818,187 6,416,978 4,514,952
Stockholders' equity 3,084,277 1,011,801 486,134 2,191,325 4,656,020
Current ratio 1.15 to 1 1.02 to 1 0.95 to 1 1.76 to 1 4.0 to 1
Total liabilities to net worth 2.5 to 1 6.6 to 1 14.0 to 1 2.9 to 1 .97 to 1
</TABLE>
Consolidated Results of Operations:
The following table sets forth certain operational data as a percentage of sales
for the past two fiscal years: 1998 1997
- ---------------------------------------------------------------------
Net sales 100.00% 100.00%
Cost of sales 65.46 67.12
- ---------------------------------------------------------------------
Gross profit 34.54 32.88
Operating expenses 30.20 34.05
- ---------------------------------------------------------------------
Earnings/(loss) from operations 4.34 (1.17)
Other expense, net (3.71) (2.20)
- ---------------------------------------------------------------------
Earnings/(loss) before income taxes 0.63 (3.37)
Income taxes (0.18) (0.24)
- ---------------------------------------------------------------------
Net earnings/(loss) 0.45% (3.61)%
=====================================================================
<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, 1998, increased by $2.6 million (19%)
compared to the prior year. This increase in revenue is a result of the
Company's focus on expanding its international and utility markets. In addition,
the Company experienced strong growth in government business.
Revenue from international customers increased by $1.3 million in fiscal year
1998 as compared to the prior year. This increase was evenly spread across
Asian, Latin American and European customers. With the acquisition of 50% of the
ownership not previously held by the Company in EFI Electronics Europe, SL, a
Spanish entity, as of January 1, 1998, revenue from international customers is
expected to continue increasing substantially and become a significant portion
of the Company's business. As a result of the economic conditions in Asia,
management expects existing business in this area to be stable or slightly down
in the short term; however, new opportunities should cause this geographical
area to continue to grow.
Sales to utility-based distributors increased by $700 thousand from year to
year. Several utility companies launched non-power, revenue-generating programs
during 1998. TVSS protection for utility customers is one such program that
utilities are focusing on. Although such programs may have significant long-term
potential, management is uncertain as to the commitment and marketing expertise
that utility customers will have for such programs over time.
Government sales increased by $600 thousand as compared to the prior year. Most
of this increase occurred in new, multi-year contracts for the FAA and Social
Security Administration.
Distribution and OEM sales for the year increased only slightly over fiscal year
1997. As a result of a long-term supply agreement executed in August 1997, with
Hubbell, Incorporated, a diversified manufacturer of electrical products, the
Company ceased selling to its electrical distribution customers on January 1,
1998. The Company has given Hubbell the exclusive right to sell Company products
into electrical distribution because of its significant presence in this
channel. This has caused and will continue to cause a short-term decrease in
revenue from this channel as Hubbell establishes its presence in electrical
distribution with TVSS products.
Gross Profit on sales for the year ended March 31, 1998, increased by $1.1
million (25%) compared to the year ended March 31, 1997, relating to the
corresponding increase in sales. As a percentage of sales, gross profit improved
to 35% from 33% for the same periods. This margin percentage improvement was a
result of significant increases in international sales, which have much higher
than average margins. In addition, the mix of government sales shifted toward
hardwire products, which also have greater than average margins.
Operating Expenses increased by $259 thousand during the 1998 fiscal year
compared to the year ended March 31, 1997. Research and development costs
increased by $365 thousand for the current fiscal year. Effective February 15,
1998, Underwriters Laboratories implemented a new standard for TVSS products,
with which the Company must comply. As of the date of this report, the Company
has re-certified nearly 250 variations of 50 different products. The costs for
design, prototyping and fees at UL to complete this re-certification exceeded
$300 thousand. Simultaneously, the Company introduced an entire new hardwire
product line in conjunction with its agreement with Hubbell. This line of
products includes six new product categories.
Selling, general and administrative costs increased by $88 thousand
over the prior year. This increase was the result of several
factors. During the year, the Company
- relocated and consolidated its facilities ($111 thousand)
- relocated a key executive from Florida to Utah ($36 thousand)
- re-established a key employee incentive program based on
profitability ($ 168 thousand)
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
These increases were offset by decreases in several areas such as legal, audit,
investor public relations, postage and equipment repair.
In fiscal 1997, the Company wrote off its investment in a discontinued software
activity in the amount of $135 thousand. This unusual item did not recur in
fiscal 1998.
Bad debt provision decreased $59 thousand in the current year as compared to the
prior year. In fiscal 1997, a significant customer declared bankruptcy, which
caused the Company to increase its reserve requirement. During the current
fiscal year, the Company experienced only minor losses from customer
collections.
Other Income/Expense increased to $(607) thousand for the year ended March 31,
1998 compared to $(302) thousand for the year ended March 31, 1997. This
increase was the result of an increase in interest expense ($154 thousand) and a
reduction in equity in earnings of joint venture ($156 thousand) related to the
acquisition of EFI Electronics Europe, SL.
Net Earnings of $74 thousand in the current year is a $572 thousand improvement
from the net loss of $497 thousand incurred in the year ended March 31, 1997.
This improvement resulted from an increase in gross profit of $1.1 million
offset by a $259 thousand increase in operating expenses and an increase in
other expenses of $305 thousand. In the fourth quarter of the current fiscal
year, the Company experienced a loss of $91 thousand. This is not necessarily
indicative of a reversal of the earnings trend experienced in the first three
quarters of the current year. As discussed above, expenses required to comply
with a new UL standard significantly impacted the Company's performance during
the fourth quarter. The majority of these expenses occurred in the fourth
quarter and are not expected to recur.
Liquidity and Capital Resources
Cash used in operating activities - the Company used $614 thousand cash in
operating activities during fiscal 1998 compared to $1.5 million in fiscal 1997.
The most significant areas that affected the use of the Company's cash for
operations are described below:
Net earnings for fiscal year 1998 improved over fiscal 1997 by $572
thousand, thereby eliminating the use of cash to fund the significant loss
incurred in fiscal 1997.
Receivables increased by $991 thousand (32%) during the current fiscal
year primarily as a result of an increase in sales and the consolidation
of receivables from the purchase of EFI Electronics Europe, SL. 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 $685 thousand (26%) during fiscal 1998. This
increase is related to increasing sales and the consolidation of inventory
from the purchase of EFI Electronics Europe, SL.
Accounts payable increased $453 thousand during the current fiscal year
compared to a reduction of $931 thousand in accounts payable in fiscal
1997.
Cash used in investing activities was $1.0 million in the current fiscal year
compared to $385 thousand in the prior year. This was primarily the result of
investments in tooling for a new line of hardwire products and furnishings and
leasehold improvements related to the Company's move into new facilities.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cash provided by financing activities was $1.6 million in fiscal 1998 compared
to $1.8 million in fiscal 1997. During the current fiscal year, the Company
received $1.7 million in cash from Hubbell Incorporated in exchange for
1,054,044 shares of the Company's common stock. This infusion was coincident
with execution of a long-term supply agreement with Hubbell to sell Company
products into electrical distribution channels. This infusion allowed the
Company to improve its working capital by nearly $1 million and to purchase
tooling and other property. In addition, the Company also negotiated a note
payable for the purchase of an axial tab inserter essential in maintaining the
Company's market strategies.
Outlook
During fiscal 1998, the Company negotiated two long-term exclusive supply
agreements with customers who are channel leaders which may generate significant
revenue and income. The impact of these agreements is expected to positively
affect the results of Company operations beginning in fiscal year 1999, since
both of these companies have significant access to TVSS markets. In addition,
during fiscal 1998 the Company received a cash infusion of $1.7 million from
Hubbell that improved its working capital position and allowed completion of
tooling and other investments to support expansion of the Company's product
lines. Relationships with suppliers and lenders are presently satisfactory.
Management believes the Company can fund its operations during fiscal 1999 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.
The Company has addressed issues regarding Year 2000 (Y2K) compliance. The
Company's current software information systems are not Y2K compliant. However,
the Company has contracted with a global supplier of enterprise management
software to install an information system that will comply with Y2K
requirements. Compliance with Y2K requirements is estimated to cost the Company
$300,000 in fiscal year 1999 capital expenditures amortized over 3-7 years. In
addition, significant internal resources will be diverted to this project for a
period of 9-12 months. These costs are not expected to have a material effect on
the Company in any given period. Implementation of this system is expected to be
complete by December 1998. During fiscal year 1998, the Company also evaluated
its computer and telecommunications hardware for Y2K compliance and has upgraded
all of its systems to be compliant. In addition, the Company has taken steps to
ensure that its banking and lending relationships are with Y2K compliant
financial institutions. During fiscal 1999, the Company will work with its major
customers and suppliers to ensure that Y2K compliance issues will not interrupt
the normal activities supported by these relationships.
<PAGE>
Item 7. Financial Data
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Item Page Item Page
Report of Independent Accountants 11 Statements of Cash Flows 14 - 15
Statements of Operations 12 Statements of Stockholders' Equity 16
Balance Sheets 13 Notes to Financial Statements 17 - 24
</TABLE>
Report of Independent Accountants
To the Stockholders and Board of Directors of EFI Electronics Corporation:
We have audited the accompanying consolidated balance sheets of EFI Electronics
Corporation and Subsidiary as of March 31, 1998 and 1997, and the related
consolidated 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EFI Electronics
Corporation and Subsidiary as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
Salt Lake City, Utah
May 15, 1998
<PAGE>
Item 7. Financial Data (continued)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
For the years ended March 31, 1998 1997 Notes
- -------------------------------------------------------------------------------------------------------------
Net sales $ 16,372,366 $ 13,759,812 1,12
Cost of sales 10,717,325 9,235,554
- -------------------------------------------------------------------------------------------------------------
Gross profit 5,655,041 4,524,258
- -------------------------------------------------------------------------------------------------------------
Operating expenses:
Selling, general and administrative 4,006,339 3,918,240
Research and development 917,726 552,458 1
Unusual item -0- 135,375 8
Bad debts 20,000 79,117 2
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 4,944,065 4,685,190
- -------------------------------------------------------------------------------------------------------------
Earnings / (loss) from operations 710,976 (160,932)
Other income/(expense):
Equity in (loss) / earnings of joint venture (3,936) 151,818 14
Other, net 4,858 106
Interest expense (608,095) (454,415) 5,6
- -------------------------------------------------------------------------------------------------------------
(607,173) (302,491)
- -------------------------------------------------------------------------------------------------------------
Earnings/(loss) before income taxes 103,803 (463,423)
Provision for income taxes (29,400) (33,895) 1,9
- -------------------------------------------------------------------------------------------------------------
Net earnings/(loss) $ 74,403 $ (497,318) 11,15
=============================================================================================================
Earnings/(loss) per share:
Basic $ 0.02 $ (0.13) 1,11,16
Diluted 0.01 (0.13) 1,11,16
=============================================================================================================
Weighted average shares outstanding:
Basic 4,903,596 3,815,016 1,11
Diluted 5,104,420 3,815,016 1,11
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
Item 7. Financial Data (continued)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As of March 31, 1998 1997 Notes
- -------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 9,566 $ 10,123
Receivables 3,981,682 3,010,255 2,6
Inventories 3,359,178 2,674,607 3,6
Prepaid expenses 90,817 42,791
- -------------------------------------------------------------------------------------------------------------
Total current assets 7,441,243 5,737,776
- -------------------------------------------------------------------------------------------------------------
Property - net 2,539,290 1,658,901 4,6
Other assets:
Investment in EFI Electronics Europe -0- 209,219 14
Goodwill 752,203 -0- 1,14
Other assets 62,130 88,872
- -------------------------------------------------------------------------------------------------------------
Total other assets 814,333 298,091
- -------------------------------------------------------------------------------------------------------------
Total assets $ 10,794,866 $ 7,694,768
=============================================================================================================
Liabilities
Current liabilities:
Revolving line of credit $ 3,472,935 $ 3,198,381 6
Current maturities of capital lease obligations 159,242 -0- 5
Current maturities of notes payable 681,690 531,690 6
Accounts payable 1,595,440 1,142,637
Reserve for customer warranty 258,405 293,992 1
Accrued income taxes payable -0- 113,309 9
Accrued liabilities 294,297 354,958
- -------------------------------------------------------------------------------------------------------------
Total current liabilities 6,462,009 5,634,967
Long-term liabilities:
Capital lease obligations, less current maturities 353,498 -0- 5
Notes payable, less current maturities 895,082 1,048,000 6
- -------------------------------------------------------------------------------------------------------------
Total long-term liabilities 1,248,580 1,048,000
- -------------------------------------------------------------------------------------------------------------
Total liabilities 7,710,589 6,682,967
Commitments - - 5,7
Stockholders' Equity
Common stock, $.0001 par value; 20,000,000 shares
authorized; 5,504,644 and 4,216,174 shares issued
and outstanding in 1998 and 1997, respectively 551 422 1,11
Additional paid-in capital 2,930,739 926,925
Cumulative foreign currency translation adjustment (5,870) -0- 1
Retained earnings 368,857 294,454
- -------------------------------------------------------------------------------------------------------------
3,294,277 1,221,801
Less:
Stock subscriptions and note receivable
from management and employees (210,000) (210,000) 10
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,084,277 1,011,801
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 10,794,866 $ 7,694,768
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 7. Financial Data (continued)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C>
For the years ended March 31, 1998 1997
- ---------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings/(loss) $ 74,403 $ (497,318)
Adjustments to reconcile net earnings/(loss) to net cash
used in operating activities:
Depreciation 619,250 682,685
Amortization 46,178 60,907
Loss on property dispositions 102,695 -0-
Provision for obsolete inventory 75,000 58,305
Equity in loss/(earnings) of joint venture 3,936 (151,818)
Write-off NRS software asset -0- 135,375
Provision for bad debts 20,000 79,117
Increase/(decrease) in cash due to change in:
Receivables (991,427) (436,001)
Inventories (759,571) (425,208)
Prepaid expenses (48,026) (7,339)
Accounts payable 452,803 (931,223)
Accrued income taxes payable (113,309) 38,309
Reserve for customer warranty (35,587) (98,837)
Accrued liabilities (60,661) 40,350
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (614,316) (1,452,696)
- ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (1,080,793) (445,128)
Purchase of EFI Electronics Europe, S.L. (125,000) -0-
Proceeds from sale of property 61,896 -0-
Distribution from joint venture 147,880 60,304
Increase in other assets (19,436) (41)
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,015,453) (384,865)
- ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under line of credit 274,554 970,791
Proceeds from borrowings under notes payable 205,000 704,800
Principal payments under capital lease obligations (70,697) -0-
Principal payments under notes payable (482,918) (337,575)
Proceeds from issuance of common stock 1,695,356 498,500
Proceeds from exercise of stock options 13,787 2,650
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,635,082 1,839,166
- ---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (5,870) -0-
- ---------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (557) 1,605
Cash and cash equivalents at beginning of year 10,123 8,518
- ---------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 9,566 $ 10,123
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-continued-
<PAGE>
Item 7. Financial Data (continued)
Consolidated Statements of Cash Flows (continued)
Supplemental disclosures of cash flow information:
For the years ended March 31, 1998 1997
- ----------------------------------------------------------------------
Cash paid during the year for
Income taxes $ 113,309 $ 29,000
Interest 539,215 423,317
======================================================================
Supplemental schedule of non-cash investing and financing activities:
1998 The Company acquired all of the remaining outstanding shares of EFI
Electronics Europe, S.L. on January 1, 1998, in exchange for $125,000
cash, notes payable of $275,000 and 220,000 shares of the Company's common
stock valued at $1.34 per share. The Company recorded goodwill of $752,203
on the acquisition.
The Company retired $602,273 of fully depreciated fixed assets.
The Company has entered into capital lease obligations for the acquisition
of equipment in the amount of $583,437.
1997 The Company issued 93,276 shares of common stock and retired 362,156
shares of treasury stock to retire subordinated debt and accrued interest
in the amount of $521,835.
The Company retired $142,776 of fully depreciated fixed assets.
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 7. Financial Data (continued)
Consolidated Statements of Stockholders' Equity
For the years ended March 31, 1998 and March 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cumulative
Foreign Stock
Additional Currency Subscriptions,
Common Stock Paid-in Translation Retained and Note Treasury Stock
Shares Amount Capital Adjustment Earnings Receivable Shares Amount Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at April 1, 1996 3,535,978 $ 354 $ 816,546 $ -0- $ 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) -0- -0- -0- (362,156) 972,538 521,835
Common stock issued for cash
at $0.90 per share 383,334 38 344,962 -0- -0- (60,000) -0- -0- 285,000
Common stock issued for cash
at $1.05 per share 195,686 20 205,980 -0- -0- -0- -0- -0- 206,000
Common stock issued to retire
accounts payable debt at
$1.39 per share 5,400 1 7,499 -0- -0- -0- -0- -0- 7,500
Exercise of stock options
at $1.06 per share 2,500 -0- 2,650 -0- -0- -0- -0- -0- 2,650
Net loss -0- -0- -0- -0- (497,318) -0- -0- -0- (497,318)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 4,216,174 422 926,925 -0- 294,454 (210,000) -0- -0- 1,011,801
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued for cash
At $1.69 1,054,044 105 1,695,251 -0- -0- -0- -0- -0- 1,695,356
Exercise of stock options at
$1.06 per share 3,484 1 2,609 -0- -0- -0- -0- -0- 2,610
Exercise of stock options at
$1.25 per share 942 -0- 1,177 -0- -0- -0- -0- -0- 1,177
Exercise of stock options at
at $1.00 per share 10,000 1 9,999 -0- -0- -0- -0- -0- 10,000
Common stock issued for
purchase of joint venture
at $1.34 per share 220,000 22 294,778 -0- -0- -0- -0- -0- 294,800
Foreign currency translation
adjustment -0- -0- -0- (5,870) -0- -0- -0- -0- (5,870)
Net earnings -0- -0- -0- -0- 74,403 -0- -0- -0- 74,403
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 5,504,644 $ 551 $ 2,930,739 $ (5,870) $ 368,857 $ (210,000) -0- $ -0- $ 3,084,277
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Item 7. Financial Data (continued)
Notes To Consolidated 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. The accounting policies of the
Company conform to generally accepted accounting principles. The following is a
summary of the most significant of such policies:
Principals of consolidation--On January 1, 1998, the Company purchased all of
the remaining outstanding common stock of EFI Electronics Europe S.L., a company
incorporated in Spain in July 1993 as a 50% owned joint venture, engaged in the
sale of TVSS panel products to European distributors and machine tool
manufacturers. Prior to acquiring all of the outstanding common stock, the
Company's equity in earnings and investment from this operation were translated
into US Dollars at the rate of exchange as of March 31, 1997 and December 31,
1997, which approximated the average rate during the year. Foreign exchange
gains or losses have not been material. Beginning January 1, 1998, the financial
results of this operation have been consolidated into the financial results of
the Company.
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.
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 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.
Foreign currency translation--The asset and liability accounts of EFI
Electronics Europe, S.L., which were originally recorded in Spanish Pesetas, are
translated for financial consolidation and reporting purposes into U.S. Dollar
amounts at period-end rates of exchange. Revenue and expense accounts are
translated at the average daily rates during the period. Transaction gains and
losses, the amounts of which are not material, are included in other income and
expense. Foreign currency translation adjustments are accumulated as a separate
component of stockholders' equity.
Goodwill--The excess cost of subsidiary stock over book value is being amortized
by the straight-line method over a period of seven years. The Company reviews
goodwill annually to assess recoverability. Impairment would be recognized in
operating results if expected future operating undiscounted cash flows of the
acquired subsidiary are less than the carrying value of goodwill.
Estimates--The preparation of consolidated 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.
Item 7. Financial Data (continued)
<PAGE>
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.
Common stock-- The Company follows the practice of recording amounts received
upon the exercise of options by crediting common stock and additional paid-in
capital. No charges are reflected in the consolidated statements of operations
as a result of the grant or exercise of stock options. The Company realizes an
income tax benefit from the exercise of certain stock options. This benefit
results in a decrease in current income taxes payable and an increase in common
stock and additional paid-in capital.
Earnings per share-- basic earnings per common share are based on the weighted
average number of common shares outstanding during each period. Diluted earnings
per common share are based on shares outstanding (computed as under basic EPS)
and potentially dilutive common shares. Potential common shares included in the
dilutive earnings per share calculation include stock options and warrants
granted.
Reclassifications--Certain reclassifications have been made to the 1997
financial statements to conform with the 1998 presentation.
Product warranty and product returns--The Company offers replacement product
warranties ranging from 5 years to lifetime. It also allows return of EFI
branded product that is not obsolete for a restocking charge of up to 25%. It
does not allow return of custom, OEM or private label products. In addition, the
Company offers warranties on certain of its plug-in products to repair or
replace equipment that is plugged into Company products that is damaged by
electrical disturbances. The Company maintains warranty reserves for possible
future claims arising out of each of these contingencies that are based on
historical trends.
Note 2 Receivables:
At March 31, 1998 and 1997, receivables consist of the following:
1998 1997
- ------------------------------------------------------------------
Trade and other receivables $ 4,026,047 $ 3,124,292
Receivable from joint venture -0- 234,340
- ------------------------------------------------------------------
4,026,047 3,358,632
Less allowance for doubtful accounts (44,365) (348,377)
- ------------------------------------------------------------------
Total $ 3,981,682 $ 3,010,255
==================================================================
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. During fiscal 1998, the Company wrote this
account off to the allowance for doubtful accounts.
Note 3 Inventories:
At March 31, 1998 and 1997, inventories consist of the following:
1998 1997
- ------------------------------------------------------------------
Raw materials $ 1,842,504 $ 1,425,430
Work-in-process 552,250 498,178
Finished goods 1,039,424 809,304
- ------------------------------------------------------------------
3,434,178 2,732,912
Less allowance for obsolete inventory (75,000) (58,305)
- ------------------------------------------------------------------
Total $ 3,359,178 $ 2,674,607
==================================================================
<PAGE>
Item 7.Financial Data (continued)
Note 4 Property:
At March 31, 1998 and 1997, property consisted of the following:
1998 1997 Life (Years)
- -------------------------------------------------------------------------------
Machinery and equipment $ 4,843,313 $ 4,058,085 3 - 10
Furniture and fixtures 460,401 157,620 5 - 10
Leasehold improvements 85,968 131,572 5 - 10
Software 222,350 191,207 3 - 5
- ---------------------------------------------------------------
5,612,032 4,538,484
Less accumulated depreciation (3,072,742) (2,879,583)
- ---------------------------------------------------------------
Property--net $ 2,539,290 $ 1,658,901
===============================================================
Included in the above total as of March 31, 1998, are assets with a cost of
$1,502,788 which are fully depreciated and still in service. During fiscal 1998
and fiscal 1997, the Company retired assets that were fully depreciated, with a
cost of $602,273 and $142,776, respectively.
Note 5 Capital Lease Obligations:
Maturities of capital lease obligations at March 31, 1998, consist of the
following:
Fiscal year ended March 31,
---------------------------
1999 $ 211,350
2000 212,253
2001 157,756
2002 31,643
Thereafter -0-
--------------------------------------------------------
Total minimum lease payments 613,002
--------------------------------------------------------
Less: amounts representing interest (100,262)
Present value of net minimum lease payments 512,740
Less: current maturities (159,242)
--------------------------------------------------------
$ 353,498
========================================================
Included in property is $618,208 of equipment under capital leases at March 31,
1998, The related accumulated amortization is $34,930.
(None in 1997).
Note 6 Notes Payable and Revolving Line of Credit:
At March 31, 1998 and 1997, notes payable and revolving line of credit, the
carrying value of which approximates fair value, consisted of the following:
1998 1997
- ----------------------------------------------------------------------------
Revolving line of credit $ 3,472,935 $ 3,198,381
============================================================================
Notes payable:
Collateralized promissory note $ 848,695 $ 1,040,000
Uncollateralized subordinated note-director 300,000 500,000
Collateralized promissory note-machinery 174,247 -0-
Uncollateralized note - acquisition 253,830 -0-
Uncollateralized note to former officer -0- 39,690
- ----------------------------------------------------------------------------
1,576,772 1,579,690
Less current maturities of notes payable (681,690) (531,690)
- ----------------------------------------------------------------------------
Total notes payable less current maturities $ 895,082 $ 1,048,000
============================================================================
<PAGE>
Item 7. Financial Data (continued)
Note 6 Notes Payable and Revolving Line of Credit (continued)
The revolving line of credit in place at March 31, 1998, provides for borrowings
up to $3,700,000 collateralized by accounts receivable and inventories. Interest
is payable monthly at a rate of prime (8.50% as of March 31, 1998) plus 2.5%.
Principal payments are made as cash is received from customers for accounts
receivable. Borrowings are based on formulas involving balances of accounts
receivable, inventories and certain ineligible amounts. The line of credit
agreement expires in March 2000.
At March 31, 1998, the revolving line of credit contains certain financial
covenants, including, but not limited to, provisions that the Company maintain
certain levels of net worth, achieve certain results of operations, meet certain
financial ratios, and restrict the amount of capital expenditures. At times
throughout the year, including March 31, 1998, the Company has been in violation
of certain of these covenants. The Company has received appropriate waivers for
all covenants in violation 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, 1998) plus
0.75%. The total monthly payment (principal and interest) equals $23,500. The
balance of the note is due October 1, 2001.
The uncollateralized promissory note-director is payable to a major shareholder
and director of the Company. Interest is at a rate of 12% per annum. Interest is
paid monthly, with scheduled principal payments made once a quarter. All unpaid
principal and interest are due on March 31, 1999. The note is subordinated to
the revolving line of credit.
The collateralized promissory note-machinery is collateralized by manufacturing
equipment. Interest is payable monthly at a rate of prime (8.50% as of March 31,
1998) plus 2.5%. Principal payments of $3,417 are made monthly. The balance of
the note is due March 31, 2000.
The uncollateralized promissory note-acquisition is payable to the previous 50%
owner of EFI Electronics Europe, S.L. Interest is at a rate of prime (8.50% as
of March 31, 1998). Principal and interest payments of $12,500 are made monthly.
The balance of the note is due December 31, 1999.
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 was fully paid during fiscal year 1998.
Minimum principal payments on notes payable are as follows:
Fiscal year ending March 31,
1999 $ 681,690
2000 484,781
2001 251,762
2002 158,539
Thereafter -0-
--------------------------------
Total $ 1,576,772
================================
Note 7 Lease Obligations:
The Company leases its principal facilities in the U.S. and Spain through
October 2009 and December 2002, respectively. Monthly lease payments are $23,567
plus taxes, insurance and maintenance. Rental expense for 1998 and 1997 was
$268,155 and $184,656, 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 did 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 all costs associated with NRS, including the unamortized
software costs in the amount of $135,375.
<PAGE>
Item 7. Financial Data (continued)
Note 9 Income Taxes:
The (provision for)/ benefit from income taxes for the years ended March 31,
1998 and 1997, consisted of the following:
1998 1997
------------- ------------
Current
Federal $ -0- $ (33,895)
State (7,197) -0-
Foreign (22,203) -0-
------------ -----------
(29,400) (33,895)
Deferred -0- -0-
------------ -----------
Total $ (29,400) $ (33,895)
============ ===========
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
earnings/(loss) before income taxes as follows:
1998 1997
------------- ------------
(Expense)/benefit at statutory rates $ (35,300) $ 158,000
Increase in valuation allowance 13,000 (163,000)
State income taxes (200) 14,000
Assessment for prior year's taxes (7,200) (33,895)
Difference between U.S. statuatory rate and
foreign rate 11,100 -0-
Non-deductible items (10,800) (9,000)
------------ -----------
Total $ (29,400) $ (33,895)
============ ===========
In accordance with SFAS No. 109, the deferred tax assets and liabilities as of
March 31, 1998 and March 31, 1997, are comprised of the estimated future tax
(provision)/benefit due to different financial reporting and income tax basis
related to:
1998 1997
------------- ------------
Deferred tax assets:
Net operating loss carry-forward $ 1,339,000 $ 1,110,000
Research and development credit
carry-forwards 30,000 30,000
Asset reserves and accrued liabilities 197,000 333,000
Total deferred tax assets 1,556,000 1,473,000
Deferred tax liabilities:
Depreciation (41,000) (99,000)
Valuation allowance (1,525,000) (1,374,000)
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, 1998, the Company had net operating loss carry-forwards
of approximately $3,591,000 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 addition to the note payable discussed in Note 6, as of March 31, 1998, the
Company held two notes receivable from an officer of the Company. These notes
receivable bear interest at the Fed Funds rate (5.37% as of March 31, 1998 and
8.50% prime rate at March 31, 1997). 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. Interest
will be recognized in addition to the note amount when paid.
<PAGE>
Item 7. Financial Data (continued)
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.
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 (Note 6). The exercise price is $1.375 per share and the
warrants expire in January 2001.
Stock-Based Compensation
The Company has adopted only the disclosure provisions of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
Therefore, the Company continues to account for stock based compensation under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. 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 FAS 123, the Company's net
earnings/(loss) and earnings/(loss) per share would be adjusted to the pro forma
amounts indicated below:
Fiscal Year Ended March 31,
1998 1997
Net earnings/(loss) As reported $ 74,403 $ (497,318)
Pro Forma (38,875) (592,127)
Earnings/(loss) per share-basic As reported 0.02 (0.13)
Pro Forma 0.01 (0.16)
Earnings/(loss) per share-diluted As reported 0.01 (0.13)
Pro Forma 0.01 (0.16)
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, 1998
and 1997: expected volatility of 78.40% and 82.65%, respectively; risk-free
interest rate of 5.66% and 6.22%, respectively; and expected life of 5.36 and
4.45 years, respectively. The weighted-average fair value of options and
warrants granted was $1.54 and $0.97 in fiscal years ended March 31, 1998 and
1997, 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, 1998: Item 7.
Financial Data (continued)
<PAGE>
Note 11 Stockholders' Equity - (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Warrants and Exercise Weighted average
Stock Options price exercise price
------------- --------------- ----------------
Outstanding at April 1, 1996 397,285 $ 1.06 - 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
Granted 106,108 1.63 - 2.75 2.03
Exercised (15,134) 1.00 - 1.25 1.03
Expired (20,625) 1.00 - 2.125 1.76
-------------
Outstanding at March 31, 1998 645,829 1.06 - 2.75 1.43
=============
Exercisable at March 31, 1998 354,335 $ 1.00 - 2.75 $ 1.37
===============
</TABLE>
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 - 1.99 579,829 3.85 $ 1.33
2.00 - 2.75 66,000 5.38 2.35
-----------
645,829
===========
Options and Warrants Exercisable
Range of Number Weighted-Average
Exercise Prices Outstanding Exercise Price
- --------------- ----------- ----------------
$ 1.00 - 1.99 348,335 $ 1.35
2.00 - 2.75 6,000 2.13
-----------
354,335
===========
Note 12 Major Customers:
In accordance with the Company's strategy to develop large OEM/Private Label
accounts, one customer represented 16% of the Company's revenue in fiscal 1998.
The five largest customers accounted for 44% of revenue. Management expects the
number of customers representing more than 10% of Company revenue to increase.
The loss or insolvency of these customers could have a material adverse effect
on the Company's results of operations. In fiscal 1997, two customers
represented more than 10% of the Company's revenue. Each one was 13% of total
revenue, one being the U.S. Government.
Note 13 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 years ended March 31, 1998 and
1997, the Company matched employee contributions to the 401(k) savings and
profit sharing plan up to 1% of employee base wages resulting in total
contributions of $15,661 and $13,813, respectively.
<PAGE>
Item 7. Financial Data (continued)
Note 14 Investment in Subsidiary:
On January 1, 1998, the Company acquired all of the remaining outstanding common
stock of EFI Electronics Europe S.L., in a business combination accounted for as
a purchase. EFI Electronics Europe S.L. was incorporated in Spain in July 1993
as a 50% owned joint venture, engaged in the sale of TVSS panel products to
European distributors and machine tool manufacturers. Prior to acquiring all of
the outstanding common stock, the Company's equity in earnings and investment
from this operation were translated into US Dollars at the rate of exchange as
of March 31, 1997 and December 31, 1997, which approximated the average rate
during each period. Foreign exchange gains or losses have not been material.
Beginning January 1, 1998, the financial results of this operation have been
consolidated into the financial results of the Company. The total cost of the
acquisition consisted of $125,000 cash, notes payable of $275,000 and 220,000
shares of the Company's common stock. The Company recorded goodwill of $752,203,
which represents the excess of consideration paid over the net book value of the
acquired company.
Note 15 Quarterly Financial Data (Unaudited):
Summarized financial data by quarter for 1998 and 1997 are as follows:
Net earnings(Loss)
Net Per Common
Earnings and Common
Quarter ended Net Sales Gross Profit (Loss) Equivalent Share
- -------------------------------------------------------------------------------
1998:
June 30, 1997 $ 3,639,459 $ 1,354,602 $ 43,002 $ 0.01
September 30, 1997 4,190,824 1,378,027 90,304 0.02
December 31, 1997 4,248,981 1,549,688 32,688 0.01
March 31, 1998 4,293,102 1,372,724 (91,591) (0.02)
----------- ----------- --------- -------
Total $ 16,372,366 $ 5,655,041 $ 74,403 $ 0.02
=========== =========== ========= =======
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 $ 4,524,258 $ (497,318) $ (0.13)
=========== =========== ========= =======
Note 16 Earnings/(loss) per share
The following data show the amounts used in computing earnings/(loss) per common
share, including the weighted average number of shares and dilutive potential
common stock.
Fiscal Year Ended March 31,
1998 1997
Shares outstanding during the entire period 4,216,174 3,535,978
Weighted average shares issued during the period 687,422 279,038
--------- ---------
Weighted average number of shares used in basic EPS 4,903,596 3,815,016
Dilutive effect of stock options and warrants 200,824 -0-
--------- ---------
Weighted average number of shares and dilutive
potential stock used in diluted EPS 5,104,420 3,815,016
========= =========
For the year ended March 31, 1997, all of the options and warrants that were
outstanding, as described in Note 11, were not included in the computation of
diluted EPS because to do so would have been anti-dilutive. For the year ended
March 31, 1998, options and warrants to acquire 372,995 shares and 72,010 shares
of common stock, respectively, were not included in the computation of diluted
EPS because their exercise price was greater than the average market price of
the common stock during the year.
<PAGE>
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 29, 1998, 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)
23.1 Independent Accountant's Consent -
Grant Thornton 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.
(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:
On January 12, 1998, form 8-K was filed stating that the Company acquired all of
the outstanding shares of EFI Electronics Europe, S.L. on January 1, 1998. In
addition to $125,000 of cash, the Company issued notes payable of $275,000 and
220,000 shares of the Company's common stock.
On June 1, 1998 Form 8-K/A was filed by the Company as an Amendment to the 8-K
filed on January 12, 1998 to provide the financial statements and pro forma
statements not filed with the 8-K report.
<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 18, 1998.
EFI ELECTRONICS CORPORATION
By: /s/ Richard 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/ Richard D. Clasen
- ------------------------
Richard D. Clasen Chief Executive Officer, President
and Director (Principal Executive
Officer) June 18, 1998
/s/ David G. Bevan
- ------------------------
David G. Bevan Chief Financial Officer, Executive
Vice President & Secretary
(Principal Financial Officer) June 18, 1998
/s/ Gaylor K. Swim
- ------------------------
Gaylord K. Swim Chairman of the Board and Director June 18, 1998
/s/ James H. Biggart
- ------------------------
James H. Biggart Director June 18, 1998
/s/ Hans Imhof
- ------------------------
Hans Imhof Director June 18, 1998
/s/ Reino Kerttula
- ------------------------
Reino Kerttula Director June 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,566
<SECURITIES> 0
<RECEIVABLES> 4,026,047
<ALLOWANCES> 44,365
<INVENTORY> 3,359,178
<CURRENT-ASSETS> 7,441,243
<PP&E> 5,612,032
<DEPRECIATION> 3,072,742
<TOTAL-ASSETS> 10,794,866
<CURRENT-LIABILITIES> 6,462,009
<BONDS> 1,248,580
0
0
<COMMON> 551
<OTHER-SE> 3,293,726
<TOTAL-LIABILITY-AND-EQUITY> 10,794,866
<SALES> 16,372,366
<TOTAL-REVENUES> 16,372,366
<CGS> 10,717,325
<TOTAL-COSTS> 4,944,065
<OTHER-EXPENSES> 922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 608,095
<INCOME-PRETAX> 103,803
<INCOME-TAX> 29,400
<INCOME-CONTINUING> 74,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,403
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.01
</TABLE>
