FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the Fiscal Year Ended March 31, 1999
[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)
Issuer'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: $ 13,890,564
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, 1999, 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: $ 4,703,467
Number of shares of the registrant's common stock outstanding at
June 10, 1999: 5,574,479
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the Annual Meeting of
Shareholders scheduled for July 29, 1999 are incorporated by reference in Part
III of this report.
Transitional Small Business Disclosure Format Yes[X] No [ ]
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, Incorporated, 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.
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 three years.
On July 1, 1998, the Company established a joint venture with a Singapore-based
corporation involved in distribution of programmable controllers and other
related industrial electrical devices. The purpose of this venture is to develop
the TVSS market in the Pacific Rim and India among industrial customers. The
name of this Singapore-based corporation is EFI Asia Pacific, LTD.
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.
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
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Item 1. Business (continued)
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 product lines 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 customers. In some cases these products are specifically designed
for such customers and are differentiated from Company branded products.
Hubbell, Incorporated ("Hubbell"), 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.
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 are a competitive advantage. A description of the principal 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 devices.EFI believes its plug-in products'
competitive advantages are product design, product performance and competitive
costs through continuing cost reduction activities.
Hardwire Products--These products are sold in a wide variety of markets and to
diverse customer groups including process control equipment, medical equipment,
modular office systems and telecommunication equipment
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Item 1. Business (continued)
manufacturers; government agencies, 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. However, 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 OEM/private label 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 EFI's principal
marketing strategies 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.
OEM/private label 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, two private label customers represented 15% and 12% of the Company's
net sales in fiscal 1999, respectively. The five largest customers accounted for
53% of net sales. Management expects the number of customers representing more
than 10% of Company net sales 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 1998, one customer represented 16% of the
Company's net sales. The five largest customers accounted for 44% of net sales
in fiscal 1998.
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 had 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
cover recently developed products.
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[GRAPHIC OMITTED] EFI Electronics
Item 1. Business (continued)
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(R), Linemaster(R), Surge Defender(R) and SurgeNet(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 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, 1999 and 1998 were $679,338 and $917,726,
respectively.
Manufacturing Process
EFI's products are assembled at the Company's production facility in Salt Lake
City, Utah, primarily using standard electronic components.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.Although some components are custom designed, EFI has not experienced
serious delays or shortages in obtaining necessary components. 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 at the Company's option 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 net sales for that
month.
Employees
As of March 31, 1999, EFI employed 76 full-time people, including 19 sales and
marketing personnel, 5 engineers, 41 manufacturing employees, and 11 executive
and administrative personnel. These include 5 employees of EFI Electronics
Europe, S.L. that are located in Spain. 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, S.L. leases approximately 3,000 square
feet of office and warehouse space in Barcelona, Spain, with monthly lease
payments of $981. The lease for this space terminates in December 2002.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.Market for the Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock ("the 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 high and low bid information for the Common
Stock 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, 1999 $ .78 $ 2.00
December 31, 1998 0.63 1.31
September 30, 1998 1.00 1.75
June 30, 1998 1.50 2.19
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
As of June 10, 1999, there were approximately 270 record holders of the 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 and agreement with Hubbell, the Company may
not pay cash dividends to shareholders. In the event these restrictions are
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.
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Item 6. Management's Discussion and Analysis or Plan of Operations
Selected Financial Data
The following Selected Financial Data should be read in conjunction with
Management's Discussion and Analysis or Plan of Operations, and the consolidated
financial statements and accompanying notes appearing in this report.
For the years ended March 31, 1999 1998
Consolidated Statement of Operations Data:
Net sales $13,890,564 $16,372,366
Cost of sales 9,357,776 11,037,479
Unusual item 299,990 -0-
Gross profit 4,232,798 5,334,887
Operating expenses 4,436,295 4,944,065
Earnings/(loss) from operations (203,497) 390,822
Other expense, net (528,996) (607,173)
Loss before income taxes (732,493) (216,351)
Income taxes (2,800) (29,400)
Net loss $ (735,293) $ (245,751)
Net loss per share
Basic $ (0.13) $ (0.05)
Diluted $ (0.13) $ (0.05)
Consolidated Balance Sheet Data:
Working capital (deficit) $ (250,122) $ 375,067
Total assets 8,080,827 10,276,694
Long term debt, less current
maturities 981,076 1,248,580
Total liabilities 6,199,593 7,710,591
Stockholders' equity 1,881,234 2,566,105
Current ratio 1.0 to 1 1.1 to 1
Total liabilities to net worth 3.3 to 1 3.0 to 1
Consolidated Results of Operations:
The following table sets forth certain operational data as a percentage
of net sales for the past two fiscal years: 1999 1998
Net sales 100.00% 100.00%
Cost of sales 67.37 67.41
Unusual item 2.16 -
Gross profit 30.47 32.59
Operating expenses 31.94 30.20
Earnings/(loss) from operations (1.47) 2.39
Other expense, net (3.80) (3.71)
Loss before income taxes (5.27) (1.32)
Income taxes (0.02) (0.18)
Net loss (5.29)% (1.50)%
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Item 6. Management's Discussion and Analysis or Plan of Operations (continued)
Results of Operations
Net Sales for the year ended March 31, 1999, decreased by $2.5 million (15%)
compared to the prior year. This decrease in net sales was comprised of a
decline in domestic sales of $3.1 million that was offset by an increase in
international business of $625 thousand.
Domestic Sales. Net sales from domestic customers were negatively affected by
two major factors that were the result of changes in domestic sales and
marketing strategy that are expected to have significant positive long-term
impact.
In August 1997, the Company contracted with Hubbell, Incorporated ("Hubbell") to
sell a full line of products through Hubbell into the electrical distribution
market. Management believes that Hubbell, which is a market leader in electrical
distribution, has a much greater long-term potential to obtain electrical
distribution market share than does the Company. Hubbell products were launched
in March 1998, at which time the Company discontinued its direct sales to
electrical distribution customers. As a result, total combined sales to Hubbell
and to electrical distribution and electrical resellers decreased in fiscal 1999
compared to the prior year by $1.1 million. Management believes that this
near-term decline will be offset by significant net sales increases in future
periods as Hubbell gains market share.
In fiscal 1998 and prior years, the Company manufactured and sold private label
products to Thomson Consumer Electronics ("TCE") under the RCA label and to a
large supplier that sold its products into the consumer office products channel.
These sales required significant management attention, custom parts inventories,
long customer payment cycles and very low margins. Management determined that
these sales were not profitable. A contract was executed in 1997 with TCE to
design TCE products, to assist in sourcing material and managing an offshore
manufacturer of these products, and to perform post sales and warranty support
services. In exchange, the Company receives fee income that is significantly
less than product sale revenue but which is more profitable. Sales to the
consumer office products supplier were discontinued. These changes accounted for
a decrease in net sales of approximately $1.8 million.
Sales to the US Government were flat in fiscal 1999 compared to the prior year.
Sales to utility customers were slightly less in fiscal 1999 compared to the
prior year. Management expects significant growth in the government business
during fiscal 2000.
International Sales. Net sales from international customers increased by
$625 thousand in fiscal1999 as compared to the prior year. This increase was the
result of three factors:
The full year impact of consolidated net sales from the Company's
acquisition of EFI Electronics Europe, S.L. on January 1, 1998 ($575
thousand).
An increase in sales to Latin American customers ($250 thousand).
A decrease in sales compared to the prior year from Asian customers due
to the significant decline in economic conditions in this region ($200
thousand). The Company has noted an improvement in the Asian market and
anticipates an increase in demand for its products during fiscal 2000.
Gross Profit on sales for the year ended March 31, 1999, decreased by $1.1
million compared to the year ended March 31, 1998. This decline was primarily
the result of two factors. As more fully explained in Note 15 to the financial
statements (Unusual Item), the Company changed its method of calculating
absorption of indirect costs into inventory, which reduced gross profit by $300
thousand. In addition, gross profit declined by approximately $800 as a result
of a decrease in sales.
Gross margin as a percentage of sales, excluding the Unusual Item, was virtually
unchanged. This, however, does not reflect several important factors related to
the changes in strategy discussed above. Gross margin dollars and percentage
were positively impacted by the change from TCE product to fee business even
though the revenue level has been reduced.
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Item 6. Management's Discussion and Analysis or Plan of Operations (continued)
Elimination of a consumer office products supplier as described above has
reduced gross margin dollars but had a positive impact on gross margin
percentage. Gross profit dollars and percentage were negatively affected by the
change to Hubbell for sales to electrical distributors as discussed above.
Margins to Hubbell are lower than were direct sales to electrical distributors.
However, as discussed below, the Company has been able to reduce its sales and
marketing expenses to offset a portion of this decrease. Gross margin percentage
was negatively impacted by certain fixed production costs such as depreciation
and occupancy expenses which did not decrease as net sales decreased.
Operating Expenses decreased by $508 thousand during the 1999 fiscal year
compared to the year ended March 31, 1998.
Research and development costs decreased by $238 thousand for the 1999 fiscal
year. In fiscal 1998, all TVSS manufacturers were required to comply with new
standards set by Underwriters' Laboratories (UL). The costs for design,
prototyping and fees at UL to complete this re-certification exceeded $300
thousand in fiscal 1998. Simultaneously, the Company introduced a new hardwire
product line in conjunction with its agreement with Hubbell. In fiscal 1999, the
UL costs did not recur and the cost of new product development was less than the
prior year.
Selling, general and administrative costs decreased by $393 thousand over the
prior year. This decrease was primarily the result of sales and marketing costs,
which decreased $378 thousand in fiscal 1999 compared to the prior year as a
result of sales through Hubbell rather than directly to electrical distributors,
as described above. These savings occurred in headcount, travel, promotional
costs and outside sales commissions.
Amortization of goodwill was $124 thousand in fiscal 1999 and did not exist in
fiscal 1998.
Other Expense decreased to $529 thousand for the year ended March 31, 1999
compared to $607 thousand for the year ended March 31, 1998. A significant
reduction in interest expense ($125 thousand) was partially offset by a loss
associated with the Company's interest in an Asian start-up joint venture ($25
thousand) and an amount accrued for severance payments resulting from year-end
headcount reductions ($22 thousand).
Net Loss of $735 thousand for the year ended March 31, 1999 was $490 thousand
more than the loss recorded for the year ended March 31, 1998. This increase in
the loss was due primarily to the Unusual Item mentioned above and to the
decrease in sales volume. These were partially offset by reductions in operating
expenses.
Liquidity and Capital Resources
Cash provided by operating activities was $1.7 million during the year as
compared to a $634 thousand use of cash in fiscal year 1998. This significant
improvement was the result of many items, the most significant of which were:
Receivables decreased by $1.7 million (43%) during the current fiscal year
compared to an increase in the prior year of $991 thousand. As described above,
the Company changed from product sales to TCE to fee income and discontinued
sales to a consumer office products company. These accounts required
significantly extended payment terms. In addition, fourth quarter sales
decreased by 40% from fiscal year 1998 to fiscal 1999. 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 decreased by $607 thousand during fiscal 1999. This decrease was
related to:
reductions resulting from implementation of a new Enterprise Resource
Planning system, which improved control over operations,
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Item 6.Management's Discussion and Analysis or Plan of Operations (continued)
a charge related to the Unusual Item discussed above and in Note 15,
changes in the relationship with certain customers that required custom
inventory, as described above, allowed liquidation of these items, an
increase in the provision for obsolete inventory related to disposition
of certain finished goods that were obsolete from the UL standard
changes described above and could not be sold, finished goods inventory
increased at March 31, 1999 by $295 thousand as a result of lower sales
during the last six weeks of the year as compared to the prior year end
and a change in strategy to carry more finished goods to improve lead
times and service to customers.
Accounts payable decreased $770 thousand during the current fiscal year compared
to an increase of $453 thousand in accounts payable in fiscal 1998. As a result
of cash flow improvements in other areas, the Company has significantly improved
its position with suppliers as of the end of fiscal 1999. Relationships with
suppliers and lenders are presently considered satisfactory.
Cash used in investing activities was $643 thousand in fiscal 1999 compared to
$996 thousand in the prior year. This reduction in cash usage was primarily the
result of reductions in capital expenditures. During fiscal 1998, the Company
invested in tooling and other costs associated with a completely new line of
hardwire products. Development projects in fiscal 1999 either involved less
tooling investment or such investment was paid directly by customers.
Cash used in financing activities was $808 thousand in fiscal 1999 compared to
$1.6 million of cash provided by financing activities in the prior year. Whereas
the Company required significant cash resources in fiscal 1998, including an
equity infusion of $1.7 million, to fund capital expenditures and working
capital requirements, the Company generated enough operating cash flow in fiscal
1999 to not only fund capital expenditures but to also reduce its total debt by
more than $800 thousand.
Outlook
During fiscal 1998, the Company negotiated two long-term exclusive supply
agreements with customers who are channel leaders. It is anticipated that these
agreements will generate significant net sales and income in the future as these
companies gain market presence. However, since both of these companies are in
the process of entering markets and gaining market share in markets in which the
Company was previously active, these agreements negatively affected sales and
the results of Company operations in fiscal year 1999, during the transition to
the new sales and marketing strategy described above.
The statements contained in this Annual Report on Form 10-KSB that are not
purely historical are "forword-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. All
forward-looking statements involve various risks and uncertainties.
Forward-looking statements contained in this Report include statements regarding
the Company's plans and opportunities, existing or anticipated products, market
opportunities, expectations, goals, revenues, financial performance, strategies,
intentions for the future and any other statements to the effect that the
Company or its management "believes", "expects", "anticipates", "plans", or
other similar expressions. Such forward-looking statements may be included under
Items 1, 2, 3 and 6 of this report. All forward-looking statements included in
this Report are made as of the date hereof, based on information available to
the Company as of such date, and the Company assumes no obligation to update any
forward-looking statements. It is important to note that such statements may not
prove to be accurate, and that the Company's actual results and future events
could differ materially from those anticipated in such statements. Many factors
could cause actual results to differ materially from the Company's expectations,
including, without limitation, the factors identified below.
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Item 6. Management's Discussion and Analysis or Plan of Operations (continued)
The Company's future results will be impacted by the Company's ability to
implement and finance a growth strategy, which, in turn, is dependent upon the
ability and willingness of key customers to penetrate markets that the Company
has ceded to them. The Company's growth strategy also includes expectations of
significant growth in international markets. These involve acquisition and
development of certain customers and markets that may or may not occur. In
addition, future results may also be affected by other factors including the
Company's response to existing or emerging competition, demand for Company
products, the Company's efforts to develop and maintain customer and employee
relationships, economic fluctuations and employee-related risks and expenses.
All written and oral forward-looking statements attributable to the Company or
person acting on its behalf are expressly qualified in their entirety by this
section and other factors included elsewhere in this report.
Liquidity and capital resources. Although Company liquidity is negative at March
31, 1999, management believes the Company can fund its operations during fiscal
2000 from financing arrangements in place and internally generated cash flows.
As disclosed in Note 6 to the financial statements, the Company has $991
thousand of current maturities of long term debt due in fiscal 2000. Of this
amount,$600,000 is due to a shareholder and board member of the Company.
Management expects to either refinance this obligation or extend its term beyond
one year.
Inflation. 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.
Year 2000. Management implemented a plan for compliance with Year 2000
requirements in fiscal 1998. This plan included the upgrade of all hardware
systems in fiscal 1998 at a capital cost of approximately $125 thousand;
implementation of a new enterprise management system in fiscal 1999, described
below; and evaluation of other hardware, suppliers, customers, financial
institutions, etc., with whatever corrective action is required, in fiscal 2000.
The Company contracted with a global supplier of enterprise management software
to install an information system that is Y2K compliant. This system was
installed in January 1999. The previous system was significantly out of date and
had many deficiencies as a management tool. Implementation of the new system has
been part of ongoing improvements to Company operations with Y2K compliance
being an important but incidental benefit. This system and resulting Y2K
compliance cost the Company approximately $300,000 in fiscal 1999 for capital
expenditures to be amortized over 3-7 years. In addition, significant internal
resources were diverted to this project.Internal resources used for this project
are comprised of existing human resources that caused no incremental financial
costs to the Company as a result of this project.
In addition, the Company has taken steps to ensure that its banking and lending
relationships are with Y2K compliant financial institutions. During fiscal 2000,
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. None of these items is expected to involved material investment
or expense in fiscal 2000.
Stock-based compensation. As disclosed in Note 11 to the Company's consolidated
financial statements, the Company has adopted only the disclosure provisions of
Financial Accounting Standards No.123, "Accounting for Stock-Based Compensation"
(FAS123). The disclosure impact of this information is immaterial to Company
operations.
European Union common currency (Euro). The Company owns a Spanish subsidiary
that is subject to the provisions of the European Union with regard to the
adoption of the Euro. In addition, the Company sells product into the European
Union (representing less than 10% of sales). The Company's new ERP system
described above is capable of meeting known requirements related to this change.
Management does not believe that this change will have any material impact on
the Company's competitive position in the market or its cost of doing business
within the European Union.
Item 7. Financial Data
Index to Consolidated Financial Statements
Item Page Item Page
Report of Independent Accountants 12 Statements of Cash Flows 15 - 16
Statements of Operations 13 Statements of Stockholders' Equity 17
Balance Sheets 14 Notes to Financial Statements 18 - 27
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, 1999 and 1998, 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, 1999 and 1998, 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 14, 1999
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Consolidated Statements of Operations
For the years ended March 31, 1999 1998 Notes
Net sales $ 13,890,564 $16,372,366 1,14
Cost of sales 9,357,776 11,037,479
Unusual item 299,990 -0- 15
Gross profit 4,232,798 5,334,887
Operating expenses:
Selling, general and administrative 3,633,157 4,026,339
Research and development 679,338 917,726 1
Amortization of goodwill 123,800 -0-
Total operating expenses 4,436,295 4,944,065
Earnings / (loss) from operations (203,497) 390,822
Other income/(expense):
Equity in loss from joint ventures (25,262) (3,936) 12
Other, net (20,727) 4,858
Interest expense (483,007) (608,095) 5,6
(528,996) (607,173)
Loss before income taxes (732,493) (216,351)
Income taxes (2,800) (29,400) 1,10
Net loss $ (735,293) $ (245,751) 11,15
Loss per share:
Basic $ (0.13) $ (0.05) 1,11,13
Diluted $ (0.13) $ (0.05) 1,11,13
Weighted average shares outstanding:
Basic 5,565,521 4,903,596 1,11
Diluted 5,565,521 4,903,596 1,11
The accompanying notes are an integral part of these financial statements
Item 7. Financial Data (continued)
Consolidated Balance Sheets
As of March 31, 1999 1998 Notes
Assets
Current assets:
Cash and cash equivalents $ 263,135 $ 9,566 1
Receivables, net 2,241,200 3,981,682 1,2,6
Inventories, net 2,119,336 2,726,606 1,3,6,15
Prepaid expenses 221,986 90,817
Total current assets 4,845,657 6,808,671
Property, net 2,448,376 2,539,290 1,4,5,6
Other assets:
Goodwill, net 742,803 866,603 1,12
Other assets 43,991 62,130
Total other assets 786,794 928,733
Total assets $ 8,080,827 $ 10,276,694
Liabilities
Current liabilities:
Revolving line of credit $ 2,583,210 $ 3,472,935 6
Current maturities of capital
lease obligations 177,763 159,242 5
Current maturities of notes payable 990,533 681,690 6
Accounts payable 825,291 1,595,440
Reserve for customer warranty
claims estimated to be due within
one year 215,000 230,000 1
Accrued liabilities 303,982 294,297
Total current liabilities 5,095,779 6,433,604
Long-term liabilities:
Capital lease obligations, less
current maturities 163,350 353,498 5
Notes payable, less current maturities 817,726 895,082 6
Reserve for customer warranty claims estimated
to be due beyond one year 122,738 28,405 1
Total long-term liabilities 1,103,814 1,276,985
Total liabilities 6,199,593 7,710,589
Commitments and contingencies - - 5,7
Stockholders' Equity
Common stock, $.0001 par value; 20,000,000 shares authorized; 5,574,479 and
5,504,644 shares issued and outstanding in 1999 and
1998, respectively 558 551 1,11
Additional paid-in capital 3,117,190 3,045,139
Accumulated other comprehensive loss (27,506) (5,870) 1
Accumulated deficit (999,008) (263,715)
2,091,234 2,776,105
Less: Notes receivable from officer (210,000) (210,000) 8
Total stockholders' equity 1,881,234 2,566,105
Total liabilities and
stockholders' equity $ 8,080,827 $ 10,276,694
The accompanying notes are an integral part of these financial statements.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Consolidated Statements of Cash Flows
For the years ended March 31, 1999 1998
Cash flows from operating activities:
Net loss $(735,293) $ (245,751)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Unusual item 299,990 -0-
Depreciation and amortization 874,197 665,428
Loss on property dispositions -0- 102,695
Provision for obsolete inventory 206,935 75,000
Provision for customer warranty expense 287,902 185,706
Provision for bad debts 45,337 20,000
Equity in loss from joint ventures 25,262 3,936
Increase/(decrease) in cash due to change in:
Receivables 1,695,145 (991,427)
Inventories 100,345 (439,417)
Prepaid expenses (81,169) (48,026)
Other assets 2,162 (19,436)
Accounts payable (770,149) 452,803
Warranty claims (208,569) (221,293)
Accrued income taxes payable -0- (113,309)
Accrued liabilities (15,577) (60,661)
Net cash provided by/(used in) operating activities 1,726,518 (633,752)
Cash flows from investing activities:
Capital expenditures (643,506) (1,080,793)
Purchase of EFI Electronics Europe, S.L. -0- (125,000)
Proceeds from sale of property -0- 61,896
Distribution from joint venture -0- 147,880
Net cash used in investing activities (643,506) (996,017)
Cash flows from financing activities:
Net borrowings/(payments) under line of credit (889,725) 274,554
Proceeds from borrowings under notes payable 600,000 205,000
Principal payments of capital lease obligations (171,627) (70,697)
Principal payments of notes payable (368,513) (482,918)
Proceeds from issuance of common stock -0- 1,695,356
Proceeds from exercise of stock options 22,058 13,787
Net cash provided by/(used in) financing activities (807,807) 1,635,082
Effect of exchange rate changes on cash (21,636) (5,870)
Net increase/(decrease)/in cash and cash equivalents 253,569 (557)
Cash and cash equivalents at beginning of year 9,566 10,123
Cash and cash equivalents at end of year $ 263,135 $ 9,566
The accompanying notes are an integral part of these financial statements.
-continued-
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Consolidated Statements of Cash Flows (continued)
Supplemental disclosures of cash flow information:
For the years ended March 31, 1999 1998
Cash paid during the year for
Income taxes $ -0- $113,309
Interest $502,237 $539,215
Supplemental schedule of non-cash investing and financing activities:
1999 The Company issued 50,000 shares of Common Stock to an officer under
terms related to his employment.
The Company retired $307,624 of fully depreciated property.
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 $1.86 per share. The Company recorded goodwill
of $866,603 on the acquisition.
The Company retired $602,273 of fully depreciated property.
The Company entered into capital lease obligations for the acquisition
of equipment in the amount of $583,437.
The accompanying notes are an integral part of these financial statements.
<PAGE>
[GRAPHIC OMITTED] EFI ELECTRONICS
Item 7. Financial Data (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Stockholders' Equity
For the years ended March 31, 1999 and March 31, 1998:
Accumulated
Additional Other Comp- Note
Common Stock Paid-in rehensive Accumulated Receivable
Shares Amount Capital Loss Deficit from Officer Total
Balance at April 1, 1997 4,216,174 $ 422 $926,925 $ -0-$ (17,964) $(210,000) $699,383
Comprehensive income:
Net loss (245,751) (245,751)
Foreign currency translation
adjustment (5,870) (5,870)
Total comprehensive loss (251,621)
Common stock issued for cash
at $1.69 1,054,044 105 1,695,251 -0- -0- -0- 1,695,356
Exercise of stock options at
$1.06 to $1.25 per share 14,426 2 13,785 -0- -0- -0- 13,787
Common stock issued for
purchase of joint venture
at $1.86 per share 220,000 22 409,178 -0- -0- -0- 409,200
Balance at March 31, 1998 5,504,644 551 3,045,139 (5,870) (263,715) (210,000)2,566,105
Comprehensive income:
Net loss (735,293) (735,293)
Foreign currency translation
adjustment (21,636) (21,636)
Total comprehensive loss (756,929)
Exercise of stock options at
$1.06 to $1.11 per share 19,835 2 22,056 -0- -0- -0- 22,058
Stock issued to officer 50,000 5 49,995 -0- -0- -0- 50,000
Balance at March 31, 1999 5,574,479 $558 $3,117,190$(27,506) $ (999,008) $(210,000)$1,881,234
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
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 U.S. Dollars at the rate of exchange as of December 31, 1997, which
approximated the average rate during the 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.
During fiscal 1999, the Company entered into a joint venture with a
Singapore-based corporation resulting in the establishment of EFI Asia Pacific,
LTD. The Company accounts for its 50% interest in the joint venture by
recognizing its equity in the earnings of the joint venture translated at an
exchange rate that approximates the average exchange rate for the period.
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,
net sales 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.
Reclassifications--Certain reclassifications have been made to the 1998
financial statements to conform with the 1999 presentation.
Revenue recognition--Revenue is recognized when product is shipped, fee income
is earned and/or services are performed.
Research and development--The Company conducts research and development to
develop new products. Research and development costs have been charged to
expense as incurred.
Stock-based compensation--The Company has adopted only the disclosure provisions
of Financial Accounting Standards No.23, "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.
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 the 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.
Loss per share--Basic loss per common share is based on the weighted average
number of common shares outstanding during each period. Diluted loss per common
share is based on shares outstanding (computed as under basic EPS) and
potentially dilutive common shares. Potential common shares included in the
dilutive loss per share calculation include stock options and warrants granted.
Cash and cash equivalents--The Company considers all highly liquid investments
with an original maturity date of three months or less when purchased to be cash
equivalents. 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.
Accounts receivable and 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. Consistent with the Companys
strategy to develop large OEM/private label accounts, two private label
customers represented 15% and 12% of the Company's net sales in fiscal 1999,
respectively.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 1 The Company and Summary of Significant Accounting Policies (continued)
The five largest customers accounted for 53% of net sales. Accounts receivable
for these customers represent 38% of total accounts receivable outstanding as of
March 31, 1999.
The allowance for doubtful accounts is based upon an evaluation of the aging of
accounts receivable, general economic conditions and known or suspected ability
of customers to pay their indebtedness.
Inventories--Raw materials are stated at the lower of cost (first-in, first-out
basis) or market. Work-in-process and finished goods are stated at the lower of
average cost or market. An allowance for obsolete inventory is based on an
evaluation of the economic usefulness of each item and the period over which
such use is expected.
Property--Property is stated at cost and depreciated or amortized 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.
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.
Product warranty and product returns--The Company offers replacement product
warranties ranging from 5 years to lifetime. EFI's customers have no contractual
right to return products not covered by product warranty. However, as an
accommodation to customers, product returns for credit are allowed under certain
circumstances at EFI's option. The Company 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 based on actual claims paid, cumulative claims experience
by product, average product life for claims and average claim by product.
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.
Foreign currency translation--The asset and liability accounts of EFI's foreign
subsidiary and joint venture, which were originally recorded in local
currencies, are translated for financial consolidation and reporting purposes
into U.S. Dollar amounts at period-end rates of exchange. Net sales 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 a component of comprehensive income (loss) and are accumulated as a separate
component of stockholders' equity.
Note 2 Receivables:
At March 31, 1999 and 1998, receivables consisted of the following:
1999 1998
Trade and other receivables $ 2,256,864 $ 4,026,047
Less allowance for doubtful accounts (15,664) (44,365)
Receivables, net $ 2,241,200 $ 3,981,682
The allowance for doubtful accounts is based upon an evaluation of the aging of
accounts receivables, general economic conditions and known or suspected ability
of customers to pay their indebtedness.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 3 Inventories:
At March 31, 1999 and 1998, inventories consisted of the following:
1999 1998
Raw materials $ 1,238,439 $ 1,937,961
Work-in-process 121,775 269,732
Finished goods 889,344 593,913
2,249,558 2,801,606
Less allowance for obsolete inventory (130,222) (75,000)
Inventory, net $ 2,119,336 $ 2,726,606
Raw materials are stated at the lower of cost (first-in, first-out basis) or
market. Work-in-process and finished goods are stated at the lower of average
cost or market. An allowance for obsolete inventory is based on an evaluation of
the economic usefulness of each item and the period over which such use is
expected.
Note 4 Property:
At March 31, 1999 and 1998, property consisted of the following: Life
1999 1998 (Years)
Machinery and equipment $5,082,418 $ 4,843,313 3 - 10
Furniture and fixtures 554,650 460,401 5 - 10
Leasehold improvements 72,407 85,968 5 - 10
Software 239,504 222,350 3 - 5
5,948,979 5,612,032
Less accumulated depreciation and
amortization (3,500,603) (3,072,742)
Property, net $ 2,448,376 $ 2,539,290
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.
Included in the above total as of March 31, 1999 are assets with a cost of
$1,567,542, which are fully depreciated and still in service. During fiscal 1999
and fiscal 1998, the Company retired assets that were fully depreciated, with a
cost of $307,624 and $602,273, respectively.
Note 5 Capital Lease Obligations:
Maturities of capital lease obligations at March 31, 1999, consist of the
following:
Fiscal year ended March 31,
2000 $212,253
2001 157,756
2002 31,643
Thereafter -0-
Total minimum lease payments 401,652
Less: amounts representing interest (60,539)
Present value of net minimum lease payments 341,113
Less: current maturities (177,763)
Total capital lease obligations,
less current maturities $163,350
Included in property is $618,208 of equipment under capital leases at March 31,
1999. The related accumulated amortization is $158,572.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 6 Notes Payable and Revolving Line of Credit:
At March 31, 1999 and 1998, notes payable and revolving line of credit, the
carrying value of which approximates fair value, consisted of the following:
1999 1998
Revolving line of credit $ 2,583,210 $ 3,472,935
Notes payable:
Collateralized promissory note $654,877 $ 848,695
Uncollateralized subordinated
notes-director 900,000 300,000
Collateralized promissory
note-machinery 133,243 174,247
Uncollateralized note-acquisition 120,139 253,830
1,808,259 1,576,772
Less current maturities of notes payable (990,533) (681,690)
Total notes payable, less current maturities $817,726 $ 895,082
The revolving line of credit in place at March 31, 1999, provides for borrowings
up to $3,700,000 collateralized by accounts receivable and inventories. Interest
is payable monthly at a rate of prime (7.75% as of March 31, 1999) plus 1.5%.
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. There are no other
minimum payments due regardless of cash received. The line of credit agreement
expires in March 2001.
At March 31, 1999, the revolving line of credit contained 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 and the
payment of dividends. At times throughout the year, including March 31, 1999,
the Company has been in violation of certain of these covenants. As of December
31, 1998, the Company had obtained appropriate waivers. As of March 31, 1999,
the Company has applied for 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 (7.75% as of March 31, 1999) 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 subordinated notes-director are payable to a major
shareholder and director of the Company. Interest is at a rate of 12%per annum.
Interest is paid monthly. A principal installment of $600,000 is due on
September 30, 1999. All unpaid remaining principal and interest are due on June
30, 2000. The notes are 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 (7.75% as of March 31,
1999) 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 (7.75% as
of March 31, 1999). Principal and interest payments of $12,500 are made monthly.
The balance of the note is due December 31, 1999.
Minimum principal payments on notes payable are as follows:
Fiscal year ending March 31,
2000 $990,533
2001 659,187
2002 158,539
Thereafter -0-
Total $1,808,259
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 7 Commitments and Contingencies:
Operating leases. 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
1999 and 1998 was $282,804 and $268,155, respectively.
Minimum payments of these lease commitments are as follows:
Fiscal year ending March 31,
2000 $282,804
2001 282,804
2002 279,861
2003 271,032
2004 271,032
Thereafter 1,242,230
Total $2,629,763
Employment agreements. The Company has entered into two long-term employment
agreements with an officer and another key employee. One agreement is
automatically renewable and includes minimum annual salary payments in the
amount of $150,000 and includes certain termination payments upon dismissal. The
other agreement is in force until March 31, 2001 and requires minimum annual
salary payments of $60,000.
Litigation. The Company is involved in litigation as a normal part of its
ongoing operations from time to time. At March 31, 1999, there was no litigation
which would have a material impact on the financial condition of the Company or
results of operations.
Note 8 Related Party Transactions:
In addition to the notes payable discussed in Note 6, as of March 31, 1999, the
Company held two notes receivable from an officer of the Company. These notes
receivable bear interest at the Fed Funds rate (4.98% as of March 31, 1999). The
first note in the amount of $150,000 is secured by 100,000 shares of 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 Common 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.
Note 9 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. Any contribution made by the Company vests
on a straight line basis over a period of five years. During the years ended
March 31, 1999 and 1998, the Company matched employee contributions to the
401(k) savings and profit sharing plan up to 3% in fiscal 1999 and 1% in fiscal
1998 of employee base wages resulting in total contributions of $63,378 and
$15,661, respectively.
Note 10 Income Taxes:
Income taxes for the years ended March 31, 1999 and 1998, consist of the
following:
1999 1998
Current
Federal $ -0- $ -0-
State -0- (7,197)
Foreign (2,800) (22,203)
(2,800) (29,400)
Deferred -0- -0-
Total $ (2,800) $ (29,400)
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 10 Income Taxes (continued):
The reported 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:
1999 1998
Benefit at statutory rates $ 249,000 $ 73,600
Increase in valuation allowance (242,300) (95,900)
State income taxes 22,700 (200)
Assessment for prior year's taxes -0- (7,200)
Difference between U.S. statutory rate
and foreign rate -0- 11,100
Non-deductible items (9,600) (10,800)
Goodwill amortization (22,600) -0-
Total $ (2,800) $ (29,400)
In accordance with SFAS No. 109, the deferred tax assets and liabilities as of
March 31, 1999 and March 31, 1998, are comprised of the estimated future tax
(provision)/benefit due to different financial reporting and income tax basis
related to:
1999 1998
Deferred tax assets:
Net operating loss carry-forward $1,757,000 $1,575,00
Research and development credit carry-forwards 30,000 30,000
Asset reserves and accrued liabilities 244,000 _197,000
Total deferred tax assets 2,031,000 1,802,000
Deferred tax liabilities:
Depreciation (14,000) (41,000)
Valuation allowance (2,017,000) (1,761,000)
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, research and
development credit carry-forwards and other deferred tax assets, a full
valuation allowance should be provided. At March 31, 1999, the Company had net
operating loss carry-forwards of approximately $4,712,000 and research and
development credit carry-forwards of approximately $30,000. The net operating
loss carry-forwards expire from 2010 and 2019 and the research and development
credits expire from 2006 to 2010.
Note 11 Stockholders' Equity:
Stock Options and Warrants
In July 1988, the Company adopted an incentive and non-qualified stock option
plan ("the 1988 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.
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 at
the date of the grant 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 July 1998, the Company adopted an additional incentive stock option plan
("the 1998 Plan") providing for issuance of up to 750,000 qualified or
non-qualified options, restricted stock grants and other incentive-based
instruments. Concurrently, the number of options available under the 1988 Plan
was reduced to 625,000 shares, which was the approximate number outstanding at
that time.
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
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 11 Stockholders' Equity (continued):
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 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 loss
and loss per share would be adjusted to the pro forma amounts indicated below:
Fiscal Year Ended March 31,
1999 1998
Net loss As reported $ (735,293) $ (245,751)
Pro Forma (895,225) (359,029)
Loss per share - basic As reported (0.13) (0.05)
Pro Forma (0.16) (0.07)
Loss per share - diluted As reported (0.13) (0.05)
Pro Forma (0.16) (0.07)
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, 1999
and 1998: expected volatility of 133.23% and 78.40%, respectively; risk-free
interest rate of 5.60% and 5.66%, respectively; and expected life of 7.70 and
5.36 years, respectively. The weighted-average fair value of options and
warrants granted was $1.73 and $1.54 in fiscal years ended March 31, 1999 and
1998, 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, 1999:
Warrants and Exercise Weighted average
Stock Options price exercise price
Outstanding at April 1, 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
Granted 391,118 0.81 - 2.13 1.96
Exercised (22,003) 1.06 - 1.25 1.17
Expired (19,948) 1.06 - 2.75 1.23
Outstanding at March 31, 1999 994,996 0.81 - 2.75 1.73
Exercisable at March 31, 1999 528,161 $1.06 - 2.75 $ 1.50
Item 7. Financial Data (continued)
Note 11 Stockholders' Equity (continued):
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
$0.81-1.00 20,000 8.05 $0.92
1.06 - 1.69 625,409 7.08 1.34
2.00 - 2.75 349,587 8.76 2.17
994,996
Options and Warrants Exercisable
Range of Number Weighted-Average
Exercise Prices Outstanding Exercise Price
$ 0.81-1.00 -0- $ -0-
1.06 - 1.69 438,515 1.37
2.00 - 2.75 89,646 2.15
528,161
Note 12 Investment in Subsidiary and Joint Venture:
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 U.S. Dollars at the rate of exchange as of December 31,1997, which
approximated the average rate during the period. 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
valued at $1.86 per share. The Company recorded goodwill of $866,603, which
represents the excess of consideration paid over the net book value of the
acquired company. Goodwill is being amortized by the straight-line
method over seven years.
The following summarizes pro forma (unaudited) information of the Company
assuming the acquisition had occurred on April 1, 1997:
March 31, 1998
($000s except
per share amounts)
Net sales $16,947
Net loss (383)
Loss per share-basic & diluted $(0.08)
Joint Venture. During fiscal 1999, the Company entered into a joint venture with
a Singapore-based corporation resulting in the establishment of EFI Asia
Pacific, LTD ("EFI Asia"), also a Singapore-based corporation. The Company
accounts for its 50% interest in the joint venture by recognizing its equity in
the earnings of the joint venture translated at an exchange rate that
approximates the average exchange rate for the period. EFI Asia experienced a
loss in its first year of operation. The Company recognized its portion of the
loss by reducing its investment in EFI Asia to zero and recording a liability
for the difference between this loss and the amount of the original investment
since the joint venture agreement may require up to $30,000 more in capital
contribution in future periods.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 13 Loss per Share (continued):
The following data show the amounts used in computing loss per common share,
including the weighted average number of shares and dilutive potential Common
Stock.
Fiscal Year Ended March 31,
1999 1998
Shares outstanding during
the entire period 5,504,644 4,216,174
Weighted average shares
issued during the period 60,877 687,422
Weighted average number of
shares used in basic EPS 5,565,521 4,903,596
Dilutive effect of stock
options and warrants -0- -0-
Weighted average number of shares
and dilutive potential stock used
in diluted EPS 5,565,521 4,903,596
For the years March 31, 1999 and 1998, 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.
Note 14 Business Segments:
The Company's operations involve a line of TVSS products comprised of several
different related categories. The Company's chief operating decision makers
utilize information about domestic and international geographic operations to
determine the allocation of resources and in assessing performance. Although
analysis of various markets, products or channels is performed on an as needed
basis, management considers the distinction between domestic and international
operations to be the only reportable operating segments.
The accounting policies used to develop segment information correspond to those
described in the summary of significant accounting policies. All inter-segment
transactions are eliminated from the following segment information. Net sales
for the international segment includes sales to customers primarily in Spain and
other European countries. Sales to individual European countries are not
significant nor is that information used by the chief operating decision maker
of the Company.
Segment information for domestic and international operations is as follows (in
$000s):
Net sales 1999 1998
Domestic $11,422 $14,528
International 2,469 1,844
Total $13,891 $16,372
Loss from operations
Domestic $1,649 $2,490
International 569 277
Total 2,218 2,767
Research and development 679 918
General and administrative 1,442 1,458
Unusual item 300 -0-
Total $ (203) $ 391
Identifiable assets
Domestic $7,872 $9,916
International 1,004 886
Eliminations (795) (525)
Total $8,081 $10,277
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
Item 7. Financial Data (continued)
Note 15 Unusual Item:
The Company's method of calculating the amount of indirect cost included in the
valuation of inventory has been based on a factor applied in total to all direct
material and labor dollars. The factor applied was developed from the ratio of
indirect costs to periodic purchases. This method was selected at a time when
direct material and labor costs comprised most of the cost of product sales and
because the Company's computer system did not allow more precise calculation at
the individual item level.
As the Company' business model has changed over the past several years to
include a higher percentage of hardwire products that have much greater indirect
support costs and a lower percentage of direct labor and material cost as
compared to total cost, the valuation method used has become inadequate for
inventory and cost of sales valuations. In addition, the Company has reduced its
inventory and significantly improved its manufacturing efficiency, both of which
have caused changes in inventory valuation that do not reflect changes in the
underlying economic value of this asset. These improvements have increased the
factor applied to direct material and labor dollars over the last several years,
causing a greater percentage of inventory value to be based on indirect costs.
In January 1999, the Company implemented a new Enterprise Resource Planning(ERP)
system that includes the ability to more precisely value the indirect cost
component of the Company's inventory. After careful evaluation, the Company has
implemented a multi-driver based costing system based upon separate valuation of
several components of indirect costs that are applied at different stages of the
inventory valuation process.
The impact of this change is a one-time reduction in inventory of $299,990 as of
March 31,1999 and an increase to the Company's cost of sales by the same amount.
Due to the detailed nature of the calculations supporting this adjustment, it is
not possible to estimate the impact of this change either quarterly or for the
year ended March 31, 1998.
Note 16 Quarterly Financial Data (unaudited):
Summarized financial data by quarter for 1999 and 1998 are as follows:
Net Earnings (Loss)
Net Earnings per share -diluted
Quarter ended Net Sales Gross Profit (Loss)
1999:
June 30, 1998 $3,582,053 $1,275,740 $ 27,110 $ 0.00
September 30, 1998 4,269,608 1,426,944 126,369 0.02
December 31, 1998 3,461,503 1,188,742 37,464 0.01
March 31, 1999 2,577,400 341,372 (926,236) (0.16)
Total $13,890,564 $4,232,798 $(735,293) ( 0.13)
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 1,052,570 (411,745) (0.09)
Total $ 16,372,366 $ 5,334,887 $(245,751) $(0.05)
Item 8.Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
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, 1999, to be
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 (1)
as restated and Amended
3.2 Amended and Restated Bylaws (2)
10.1 Non-Qualified Stock Option Plan and (3)
Incentive Stock Option Plan As
Amended (May 1991)
10.2 Lease Agreement, dated July 21, 1997 (4)
between Ninigret Park Development
L.C.,as landlord and the Company,
as tenant
10.3 Supply Agreement, dated August 26, (5)
1997, between the Company and Hubbell
Incorporated (Delaware), a
Delaware corporation
10.4 Employment Contract , dated (6)
September 12, 1994, between the
Company and Richard D. Clasen
21 List of subsidiaries X
23.1 Independent Accountant' 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, 1998,
and as Exhibit Nos. 4.3 and 4.4 to Registration Statement on Form S-8
filed on May 1, 1991.
(2) Incorporated by reference to Exhibit No. 1 to Annual Report on Form
10-K forfiscal 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 Exhibit No. 10.1 to Annual Report on
Form 10-KSB for fiscal year ended March 31, 1998.
(5) Incorporated by reference to Exhibit No. 10.3 to Annual Report on
Form 10-KSB for fiscal year ended March 31, 1998.
(6) Incorporated by reference to Exhibit No. 10.4 to Annual Report on
Form 10-KSB for fiscal year ended March 31, 1998.
(b) Reports on Form 8-K:
None.
<PAGE>
[GRAPHIC OMITTED] EFI Electronics
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, 1999.
EFI ELECTRONICS CORPORATION
By: Richard D. Clasen
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Capacity in Which Signed Date
Richard D. Clasen Chief Executive Officer, President June 18, 1999
and Director (Principal Executive Officer)
David G. Bevan Chief Financial Officer, Executive June 18, 1999
Vice President & Secretary
(Principal Financial Officer)
Gaylord K. Swim Chairman of the Board and Directors June 18, 1999
James H. Biggart Director June 18, 1999
Hans Imhof Director June 18, 1999
Reino Kerttula Director June 18, 1999
<PAGE>
<EXHIBIT 21>
EFI Electronics Corporation Subsidiaries
Company Name Venue of Incorporation
EFI Electronics Europe S.L. Barcelona, Spain
<EXHIBIT 23.1>
Independent Accountant's Consent - Grant Thornton L.L.P.
We have issued our report dated May 14, 1999, accompanying the consolidated
financiial statements of EFI Electronics Corporation and Subsidiary,
incorporated by reference or included in the Annual Report of EFI Electronics
Corporation, on Form 10-KSB for the year ended March 31, 1999. We hereby
consent to the incorporation by reference of said report in the Registration
Statement of EFI Electronics Corporation, on Form S-8 ( File No. 33-41154 filed
June 12, 1999).
/s/ Grant Thornton L.L.P.
Salt Lake City, Utah
June 16, 1999
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<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-1-1998
<PERIOD-END> MAR-31-1999
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<CASH> 263,135
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