SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KA/2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended April 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to ________________
Commission File Number: 0-17168
FASTCOMM COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
45472 Holiday Drive
Sterling, Virginia
(Address of principal executive offices)
54-1289115
(I.R.S. Employer
Identification Number)
20166
(Zip Code)
Registrant's Telephone Number, including area code: 703/318-7750
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on July 17, 1995, was $37,707,726
(7,182,424 shares times $5.25). As of July 17, 1995, there were 9,444,529 shares
of the Common Stock of the registrant outstanding.
FASTCOMM COMMUNICATIONS CORPORATION
INDEX
PART I. Page
Item 1. Business. 3
Item 2. Properties. 11
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to Vote of Security Holders. 12
PART II. Page
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters. 13
Item 6. Selected Financial Data. 14
Item 7. Management's Discussion and Analysis of Financial Condition and 15
Results of Operations.
Item 8. Financial Statements and Supplementary Data. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and 49
Financial Disclosure.
PART III. Page
Item 10. Directors and Executive Officers of the Registrant. 50
Item 11. Executive Compensation. 51
Item 12. Security Ownership of Certain Beneficial Owners and Management. 55
Item 13. Certain Relationships and Related Transactions. 56
PART IV. Page
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 57
PART I.
Item 1. Business.
General
Network Access Marketplace
FastComm Communications Corporation, a Virginia corporation ("FastComm" or the
"Company"), participates in the communications networking industry, which
divides logically into two major areas:
1. Backbone systems and components: consisting of large switches and
multiplexers, connected to each other by Wide Area Network (WAN)
transmission lines. Public networks put backbone components in Central
Offices. Private networks place them at headquarters, major regional
centers, and the larger branch locations.
2. Access devices: this equipment is physically smaller, typically located in
remote customer offices and attached to the backbone network through a
single or multiple telephone lines. An access device may be part of a local
area network (LAN) within a building or campus and/or facilitate connection
among and between LAN and WAN environments.
Networks may be analog, where the electrical signal varies continuously like the
volume of a speaker's voice, or digital, where the signal is either on or off (1
or 0).
FastComm's Market Position
FastComm Communications Corp. (FSCX, NASDAQ) designs, manufactures, markets, and
sells access devices that allow computer users to connect to public and private
networks based on analog and digital transmission. Its products include a range
of devices aimed at the fast packet services (cell relay or ATM networks, X.25
packet switched networks, and frame relay networks) as well as the analog public
telephone network. The Company's access devices allow many types of terminal
equipment and computers to access these services.
The Company's current business is primarily based on access devices for frame
relay services. Other access products offered include models designed for cell
relay or ATM services (a LAN bridge), analog phone lines (modems), and leased or
switched digital data services (CSU/DSUs for DDS). FastComm also offers a family
of moderate to very high speed data compressors to enhance access to digital
services.
The Company manufactures the bulk of its products at its headquarters locations.
But it also resells products manufactured by others under its label.
The Company does not make backbone network components or systems, but is focused
on the much simpler access devices. The market potential (in units) is greater
for access products because there are so many small offices and businesses that
are increasingly able to justify a digital network connection.
Development of the Business
The Company was organized under the name MicroTel, Inc. by Robert N. Dennis and
another individual under the laws of the Commonwealth of Virginia in May 1983 to
provide computer data protection and recovery services. The Company changed its
name to Data Safe Incorporated in February 1984; to Electronic Vaults, Inc. in
August 1984; and to FastComm Communications Corporation in October 1987. The
Company commenced the design, manufacture, and marketing of communications
equipment in September 1984.
The Company's original product, a data backup service, involved the transfer of
digital information from each customer's computer to the Company's storage
facility over public telephone lines via third party modems. However, early
modems did not send data very quickly, reducing the value of this service. To
preserve its data backup business, the Company developed a faster modem, the
UPTA96 which to the best of Management's knowledge, was the first 9600 bit per
second dial modem. The data backup service was discontinued, and modems
dominated company revenue until 1993.
In April 1988, the Company completed an initial public offering of Units
consisting of one Common Stock share, par value $.01, and a Warrant to purchase
one share of Common Stock at $1.50 per share, priced at $5.00 per Unit. The
warrants expired on April 11, 1993.
The Company in early 1991 identified synchronous data compression as a potential
market and Watch Hill Research, Inc., a start-up firm with compression
technology, as an acquisition candidate. In August 1991, FastComm entered into
an agreement with Watch Hill to pay for development and to acquire exclusive
rights to the technology of the "Time Machine" data compressor. The Company
advanced approximately $358,000 to complete the initial development of the Time
Machine and delivered a total of 333,417 shares of restricted stock under the
terms of the agreement.
Another digital technology of interest in 1991 was Frame Relay ("FR"). The
Company in July 1991 reached agreement with Sigma Research, a New Jersey
partnership, to hire certain of its employees and to acquire title to its
existing frame relay software code. Payment consisted of 22,500 shares of
restricted stock and $195,000. The acquired code has since been incorporated
into the Company's frame relay products.
In March 1994 the Company acquired the assets and certain liabilities of ZyBel
Microsystems, Inc., based in Connecticut, for up to 25,000 shares of restricted
stock in satisfaction of the $220,000 purchase price. The firm was engaged in
selling an interactive voice response product that it had created, Vista, and
the data controller, a small data switch or data PBX (see Data Controllers
below) which are now FastComm products.
Products
The Company turned to digital access products starting in 1990. This equipment
addresses the needs of transmission lines (channel service units or CSU/DSUs),
frame relay services (FRADs), and most recently ATM services (ATM access
device).
In the fiscal year ended April 30, 1995, revenue was derived principally from
digital products. This represented the completion of a shift away from modems,
which had been the principal product from since 1984. FastComm considers all
access products to be a single market segment.
Frame Relay
Frame Relay is a simple way to transfer (relay) blocks of data (frames) on a
"best effort" basis (without error correction) across a public or private
network. Frame Relay depends on the higher quality (low error rates) of optical
fiber transmission lines, now widely deployed. Frame Relay standards define the
format for the data blocks sent to the network. Frame Relay Access Devices
("FRADs") adapt non-Frame Relay terminals and computers to the standard frame
relay format.
In the Fall of 1991, the Company first displayed its frame relay technology. It
was among the first to demonstrate voice transmission over a public frame relay
network.
The appeal of FastComm FRADs is the ability to handle terminal protocols with
intelligence. For example, in certain protocols like IBM's polled SDLC/SNA, more
than half the data on a line may be overhead, not information. FastComm FRADs
may be programmed to eliminate this overhead and pass only real information.
FastComm FRADs save bandwidth and improve response times.
FRADs connect PCs, workstation, local area networks, terminal controllers, and
mainframe computers to a frame relay service. For LAN protocols the data format
is compatible with routers. A solution mixing FRADs at some sites with routers
at others is less expensive than a network deploying routers everywhere. Certain
Internet access providers offer FAstComm FRADs as part of their service package,
with frame relay service between the customer and the provider's site.
IBM mainframe computers recently became compatible with frame relay. FastComm
FRADs recently developed the software needed to support the protocol conversion
necessary to operate with IBM hosts connected directly to a frame relay network.
As with router networks, FRADs at remote sites with terminal cluster controllers
can reduce the overall cost of a network.
Intense interest in frame relay among local telephone companies and other
carriers has produced agreements with several of them to resell or jointly
market FastComm FRADs. Three of the seven regional Bell operating companies
(RBOCs) had signed such agreements with FastComm as of the end of fiscal year
1995.
Additional interest is derived from the recent inclusion of data compression
over Frame Relay and a direct Ethernet LAN port on the FRADs. Flexible
configuration allows a compressing FRAD to operate in the uncompressed mode with
a distant FRAD that does not support compression. The EtherFRAD(TM) is
compatible with standard routers for the two most important LAN protocols, IP
and IPX.
In seeking to maximize the return on its frame relay investment, the Company has
licensed the technology to another vendor and agreed to manufacture FRADs under
various private labels. Under the terms and conditions of this agreement, the
licensee paid to FastComm $525,000 on execution of the agreement and made
additional payments( $55,000) upon receipt of agreed upon deliverables . This
transaction occurred in the Company's 1994 fiscal year. No payments were
received in the Company's 1995 fiscal year. The Company will not receive
payments in the future related to this transaction.
The Company has very little direct sales to end users, and as such, it seeks
resale arrangements with other vendors who find that the FRADs complete their
product line or offer a lower entry level price point compared to other
technology alternatives.
Channel Service Unit
In 1990, the Company anticipated increasing competition in the modem market. An
additional trend noted that year was toward leased digital lines, and away from
analog lines for data transfer. Users are attracted to digital lines because of
their lower error rates and declining tariffs as compared to analog lines.
Modems work with analog lines. The corresponding equipment for a digital line is
a Channel Service Unit (CSU). To prepare for the future, a CSU product was
designed to complement the modems. The DDX56 was shipped initially in 1991 in a
56,000 bit/s leased line version. Dial capability was added the following year
to work with certain "Switched 56" digital dial services offered by most
telephone companies.
Stand-alone CSUs have become a commodity product. The Company adds value to the
CSU by packaging it with FRAD, data compressors, and other features.
Data Compressors
FastComm put the original Time Machine data compressor into production in May
1992. Two inputs at up to 6 million bits per second ("Mbit/s") each are
compressed into a single line at up to 1.5 or 2 Mbits/s. The Time Machine
consistently shows compression ratios of 2.5 or 3 to 1, and has demonstrated
over 4 to 1 (exact ratio of compression depends on the nature of the data).
The same compression technology has since been built into several other FastComm
devices. These include the DDXTM family of smaller data compressors which began
shipping in July 1993 and the Company's Frame Relay Access Devices (see Frame
Relay).
Time Machines can more than double the capacity of a transmission line. By
eliminating half of the existing lines, or adding capacity to defer the need for
new lines, Time Machines show financial payback periods as short as a few
months. Compression of data frames (blocks of information) reduces file transfer
time and can also improve response time.
ATM
Asynchronous Transfer Mode (ATM) is the latest network transmission technology
to dominate the market's attention. ATM can carry all types of digital
information (LAN, voice, video, etc.) in small blocks (cells) of fixed length.
Uniform block size lets ATM switches work at high speeds more efficiently than
when handling variable length frame relay blocks. ATM can operate at speeds of
billions of bits per second while frame relay to date operates at up to 1.5 or 2
million bits per second.
Until 1994, the defined access speeds for ATM networks had been 45, 51, 155
million bits per second and faster. Seeing that access lines at these speeds
were too expensive for most users, the Company acted on the belief that ATM
would be offered over DS-1 lines (1.5 Mbit/s or 2 Mbit/s outside North America).
T-1 access has since been defined by the ATM Forum, and several carriers,
including Sprint, have announced an intent to offer ATM service over T-1.
FastComm has developed an ATM Access product, the LAN SARgent(TM), in
conjunction with HyNET, Ltd. (see "New Product Development" below). Development
began in late fiscal year 1993. Test units were delivered in an initial trial in
May 1994. Compatibility trials continued into FY 1995 and have been completed
successfully with several vendors of ATM switches and concentrators.
The LAN SARgent(TM) is a small-site access device that connects both an Ethernet
Local Area Network port and a serial data port (normal data connection) to a
public ATM service or a private ATM network. In the United States, the
connection from the SARgent(TM) to the ATM network is a standard DS-1 digital
line. A SARgent(TM) supports multiple logical connections over one physical line
to the ATM network. Each logical connection across the ATM network, between any
two SARgents, behaves like a learning, filtering, remote bridge. That is, all
separated LANs appear to be one large LAN.
Data Controllers
This small data switch is packaged in a compact 7x7 inch enclosure. It accepts
commands at any of its eight connectors to set up a connection to any other
connector. This switching capability, with interfaces that support modems,
allows a remote terminal to call the data controller, pick any of the remaining
seven ports, and then communicate with the supervisory port on the equipment
attached to that port.
A typical application environment would be a remote branch office equipped with
a CSU, multiplexer, bridge or router, terminal controller, and voice PABX or key
system. Data Controllers reduce management costs by allowing up to seven devices
with supervisory ports to be managed with a single telephone line and modem.
Common practice is to provide a separate phone line and modem for each device
under management.
In addition to supporting dial-in access, the Data Controller will accept
information from any of the managed devices, then dial out to the central
management station through the modem and deliver that information; for example,
an alarm message.
Modems
The Company continues to manufacture its analog modems for specialized data
applications that use unusual features like multiple layers of password
protection, dial back security, and support for 11-bit WANG protocols. No effort
is made to participate in the highly competitive consumer market for inexpensive
low-end modems.
Other Products
Through purchase of patent rights, the Company gained exclusivity in the US for
a credit-card size autodialer that can be programmed to dial one or two
pre-selected numbers. The card is held up to a telephone mouthpiece. Pushing one
of the two buttons causes the card to sound the dialing tones of the associated
preprogrammed number. Applications range from credit cards or pre-paid calling
cards for long distance companies, where the two numbers are the access and
security code, to promotions for products, like pizza, that are bought on
impulse over the phone.
The Company has entered into contracts with other manufacturers to acquire
equipment to resell. The Company puts its name or that of a customer on these
products for its existing distribution channels of direct sales, distributors,
dealers, and manufacturer's representatives. These products include statistical
multiplexers and cable assemblies.
The Company actively seeks additional products to resell. Products selected for
resale and private labeling must complement existing FastComm products.
New Product Development
FastComm continues to apply its technology to create new products for its
distribution channels. Development work focuses on newer digital access products
that promise higher margins than modems. Announced products include:
(1) 16-port MaxFRAD with standard Ethernet interface, optional data compression
and CSU. This device will serve as the central site access device for small
to medium-sized networks.
(2) ISDN (Integrated Services Digital Network) basic rate interface ("BRI")
will offer an alternative access method to the integral 56 kbit/s CSU now
available in most forms of the FRADs and small data compressors. When this
becomes available, ISDN BRI tariffs will, in many areas, make this a very
economical way to access frame relay networks.
Hardware and software design for the SARgent(TM) and hardware design of the
MaxFRAD are under a joint development agreement with HyNET, Ltd., an Israeli
company. Work was financed in part by a grant from the Binational Industrial
Research and Development Foundation (BIRD Foundation), a joint effort of the
U.S. and Israeli governments. Under the terms of BIRD grants, money they advance
to fund product development is repaid via a small royalty on those products as
they are sold. Repayment is capped at 150% of the grant amount, however, there
is no minimum repayment.
One goal of all FastComm products and their designs is that they be priced
aggressively. Product development stresses low cost, reliable components and
manufacturability. A modular approach allows many different products to be
created from a few basic components. For example, the integral CSU for 56 kbit/s
access is the same in all FRADs, Time Machines, and simple CSUs. To keep costs
low, any design may be done entirely internally, externally, or from licensed
technology.
The second key objective is speed to market. The extremely high rate of change
in the communications market means that late products often earn less market
share.
Larger companies, with larger engineering resources and more internal expertise,
may be able to develop a larger portion of their products without outside
technology. Not having to pay licensing fees or royalties could provide them a
cost advantage.
To remain competitive, the Company devotes a significant portion of revenue to
R&D, and expects such expenses to continue at about the same level. Recorded
expenses for research and development have been:
FY 1993 $ 718,295 11% of revenue
FY 1994 $ 960,042 19% of revenue
FY 1995 $ 916,003 22% of revenue
Backlog
Because of its quarterly design and build cycle, the Company ships essentially
all of its orders each quarter. Backlog of undeliverable orders, therefore, is
usually not significant.
In March 1995, the Company announced it had been awarded a contract from System
One Corporation, to sell approximately 8,500 FRADs to be delivered over a period
of up to three years. Either party may terminate this agreement only on the
occurrence of a material, uncured breach. No minimum purchase obligation is set
forth in the contract. Initial shipments and installations under that contract
have begun, in accordance with the forecast and schedule.
The market served by FastComm is not seasonal.
Management knows of no material effect from compliance with environmental laws
and regulations.
Marketing and Sales
The Company's end-user customers have been businesses, public utilities,
government units and universities. During the last three fiscal years, the
largest single customer for each year was: 1995 C&L Communications 15% of
revenue, 1994 C&L Communications 14.3% of revenue, and 1993 C&L Communications
23.3%.
In fiscal 1995 Newbridge Networks Inc. accounted for 9.95% of revenue and in
fiscal 1994, a license fee from Dynatech represented 12% of revenues. Because
customers such as C&L and Newbridge are resellers rather than end users,
management believes that the loss of such a customer, while potentially
significant short-term, would not materially affect the Company's business over
the long term.
Indirect Distribution Channels
FastComm sells most its products via indirect channels, that is, to dealers,
Value Added Resellers (VARs), systems integrators, major telephone companies,
and distributors. These entities generally provide the installation and local
maintenance support required by end-user customers. Among the Company's
resellers with multi-national presence are Newbridge Networks Inc. and Unisys.
The Company's end-user customers have been businesses, public utilities,
government units, and universities.
The Company streamlined its sales channels during fiscal year 1993.
Relationships with small dealers and resellers, who had purchased equipment
directly from the Company, were redirected to C&L Communications, the Company's
national stocking distributor. C&L takes volume shipments each quarter for later
resale to fill small orders on demand. With this shift, C&L took on a large
number of small customers, its intended business, freeing the Company's sales
staff to seek larger opportunities and to support major resellers.
Terms of sale with C&L provide for shipment against purchase orders. Title to
products passes to C&L upon shipment, and payment is due in full within thirty
days of shipment. C&L may request a stock adjustment/rotation twice annually and
a stock update at any time.
The term "stock adjustment/rotation" is an agreement by FastComm that permits a
distributor or dealer, at FastComm's sole discretion, to return already
purchased but unused and still current products to FastComm for other FastComm
products of equal value. Stock adjustments require the approval of an officer of
FastComm. Stock adjustments are not allowed for used or obsolete products. At
the sole discretion of FastComm, stock adjustments may be limited to 10% or 20%
of the value of product ordered and accepted by the distributor during the prior
six-month period and subject to a 20% restocking charge. The term "20%
restocking charge" refers to a fee which FastComm, at its sole discretion, may
charge a distributor to execute a stock adjustment or stock update. C&L may also
request stock updates for either warranty revalidation and/or software revision
level changes. The term "stock update" is an agreement by FastComm that, at
FastComm's sole discretion, permits a distributor or dealer to return already
purchased but unused products to FastComm for either warranty revalidation
and/or revision level change. Stock updates must be approved by an officer of
FastComm and may be subject to a 20% restocking charge at the sole discretion of
FastComm. No free stock updates are allowed for products that are used. The
terms "stock adjustment/rotation" and "stock update" do not permit distributors
to exchange purchased merchandise for a refund.
Certain dealers continued to buy directly from FastComm. Sales terms vary.
Direct buyers and resellers issue purchase orders.
The Company's inventory rotation practices are believed to be consistent with
that of the communications manufacturing industry, based on management's
experiences with similar companies. Such practices allow for limited like-kind
stock rotation and pre-approved stock updates. Contractual arrangements allow
for restocking charges of up to 20% of the value of returned merchandise.
FastComm may enforce such charges at its sole discretion.
The Company offers extended payment terms in certain situations. The Company
also offers prompt payment discounts. Although normal payment terms are net 30
days from date of shipment, as a practical matter, the Company normally receives
payments on accounts receivable beyond thirty (30) days, even from its most
credit-worthy customers. Management does not believe that its credit and
collection history is substantially different from other companies in the
data-communications industry, based on management's experiences with similar
companies.
With the exception of the stock rotation policies as discussed above, the
Company is not contractually obligated to accept returned merchandise.
Export Sales
Independent distributors represent the Company in more than 30 countries. These
firms are most often locally owned and managed, which gives them an important
presence in their markets. Terms of international distribution agreements are
similar to domestic agreements and grant to the distributor similar stock
adjustment and stock update rights. Among the more significant distributors are
Telindus, which covers 13 European countries from its base in Belgium, and
Tadiran, a major distributor in Israel. Tadiran is also a partner in joint
product development.
Several distributors in South America signed agreements with FastComm during FY
1995. They cover Argentina, Peru, Colombia, Ecuador, Brazil, and Chile. Large
networks in several of these countries have installed FastComm FRADs. The
Company's distributor in Japan continues to sell Time Machine data compressors
regularly.
In most cases, a distributor obtains non-exclusive rights to all FastComm
products for a specific geographic area. The Company entered into one exclusive
distributorship for Time Machines, which has since been revoked.
There are exclusive distributorships in two countries.
The Company's export sales may be subject to restrictions on foreign operations,
including restrictions imposed by foreign governments on imports. Although
substantially all foreign contracts are denominated, and revenues are paid, in
United States dollars, to the extent the Company receives payments in foreign
currencies, it may incur gains or losses because of exchange fluctuations
between currencies. Moreover, fluctuations in currency exchange rates may cause
the Company's established prices to be relatively more or less expensive in
terms of local currencies. To date, essentially all international customers have
paid the Company in US Dollars. Export sales for the 1995 fiscal year
constituted 29% of total revenue.
Telephone Carrier Market
Interest in the Company's frame relay products from telephone carriers --local,
long distance, and international-- continues to rise. The Company pursues this
market vigorously with the intent of demonstrating product functionality and
full compatibility with every carrier's network. Because the products and
networks are based on the same standards, these network compatibility tests have
generally gone smoothly.
However, the large variety of applications found in end-user locations
(including obsolescent equipment and protocols) means there can be no assurance
that FastComm product will fill every need in the market. This may leave an
opening for the entry of competing products.
The Company's goal is to be certified for compatibility by major carriers and
hardware vendors. Opportunities to work with other vendors of customer hardware
continue to arise. The Company routinely seeks to set up contractual
relationships with carriers, makers of complementary hardware, and software
designers who can resell FastComm products, jointly market a total solution, or
provide technology to FastComm.
Customer Support and Service
The Company maintains a technical support staff at its Virginia Headquarters.
Their work primarily supports resellers, but end users are often given technical
information and assistance by telephone. For new products or features, including
beta tests, Company personnel will sometimes visit end user sites to participate
in installation and training.
Promotion
Advertising continues in various trade publications. The publications selected
often have international distribution, aiding the Company's distributors outside
the U.S.
The Company participates regularly in industry trade shows, to meet prospective
customers, generate sales leads, communicate with the press and do market
research. In the 1995 fiscal year the Company exhibited ten (10) times.
The Sales Department maintains an extensive data base of contacts to which the
Company periodically mails information about products.
Public relations has been an important factor in promoting the Company. All
staff with appropriate experience interact with the communications industry
press by answering inquiries, responding to questionnaires, or visiting them in
their offices or at trade shows.
Competition
The communications industry is highly competitive. The desire of most customers
for compatibility with national and international standards puts pressure on all
products to conform, thus reducing product functional distinctions. To remain
competitive, the Company works to take advantage of its ability to develop and
rapidly deliver those products for which there is a market need. Its success
depends to a large extent on the insight, experience, and energy of its people,
and therefore on its ability to attract and retain experienced professionals.
Rapid change increases the cost to develop a new product. This creates a barrier
to entry of new companies in some market segments, but it also increases the
Company's costs.
Some competitors have greater financial resources, larger staffs, and greater
name recognition than the Company. One or more of these could be a material
advantage over the Company. The primary competition for each of the Company's
major products is as follows:
Frame Relay Access Devices: FastComm enjoys an advantage in its ability to
handle legacy protocols as well as LAN traffic, an integral CSU, small size, a
low price, and automatic self-configuration features that simplify installation.
Motorola is a significant competition for FRAD product sales. The EtherFRAD(TM),
because of its compatibility with routers, competes effectively with the low end
products of most router vendors.
Data Compressors: Various companies are competitors to FastComm's large Time
Machine. The DDXTM model, with an integral CSU, competes with several
"compressing CSUs." The DDXTM-35, without a CSU, overlaps some lower end
products. Other electronics manufacturers produce a competitive product.
ATM Access Devices: The LAN SARgent(TM), an Ethernet bridge over T-1 ATM
service, is a new market segment where competition is not clearly defined yet.
Competition will emerge in the form of add-in modules to existing routers and
bridges and from entirely new lines of LAN products based on ATM transmission.
CSUs: With little functional variation allowed, the CSU is largely a commodity
in its stand-alone form. There are many vendors offering a basic unit like that
offered by the Company. Several of these vendors publish lower list prices or
may have access to distribution channels not available to the Company. As with
modems, the Company is selective where it chooses to compete for basic CSU
business and prefers to bundle this technology with frame relay or data
compression components for added value.
Licenses, Patents and Trademarks
The communications industry traditionally relies more on trade secrets and rapid
obsolescence than patents. None of the Company's current products is protected
by patent except the autodialer card.
The Company had licensed its existing proprietary frame relay technology to
another vendor in fiscal 1994, however, that license was terminated as a part of
the settlement of a lawsuit, as set forth below in Item 3 (Legal Proceedings).
Other license opportunities are routinely sought as a way to recover the costs
of investment (through one-time payments) and as continuing revenue (a royalty
stream).
Outside technology is in turn licensed by the Company for its product
development. The cost to license software from commercial vendors is less than
the loaded cost of internal developments. Licensing also speeds product
delivery. The Company expects to license additional software, particularly in
areas that are highly standardized and have multiple sources to minimize costs.
Microcom Networking Protocol Classes 5 and 7, which provide data compression in
modems, have been licensed permanently by the Company, on a non-exclusive basis,
for a one-time payment made in 1986.
In purchasing modem chip sets for inclusion in the Company's modem products, the
chip vendor grants a license to the software contained in the chips. The Company
has no use for the software outside of the chip sets.
Manufacturing
The Company manufactures its CSUs, FRADs, and data compressors at its Sterling,
Virginia headquarters. Operations include both through-hole and surface mount
parts placement, soldering, testing, final assembly, and quality assurance. The
Company employs a Quality Assurance Manager who reports to the President on all
quality matters. The Company purchases raw printed circuit boards and other
components from various sources. The Company plans to outsource manufacturing of
circuit boards when demand exceeds present capacity.
In the current fiscal year, the Company transferred at cost, analog modem raw
materials and subassemblies valued at $273,000 to an electronics manufacturer.
Under the terms and conditions of the agreement executed by both parties, the
manufacturer will build and resell the modems to FastComm on an as needed basis
or may sell the modems to its own customers through the end of calendar year
1995. At such time, the contract may be extended or FastComm may be required to
repurchase any remaining modem materials. No revenue was recognized in
connection with this transfer of inventory.
Supply Sources
Component parts are normally purchased on an as-needed basis to minimize
inventory and working capital needs. In FY 1994, the Company negotiated reduced
component prices from essentially all of its suppliers based on a best-efforts
commitment to purchase all expected quantities from the same sources.
Most specialized components are available from multiple sources. Single-source
items are all from large vendors with stable histories of supplying material as
needed. Management believes the loss of any supplier would not be materially
detrimental to the Company's business.
Employees
At July 17, 1995, the Company had 46 full-time employees. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
believes that its employee relations are good.
Item 2. Properties.
The Company's executive, manufacturing, engineering and marketing operations are
located in a leased 17,000 square foot facility in Sterling, Virginia. Aggregate
base rent and common charges for the facility approximated $171,000 for the
fiscal year ended April 30, 1995. The facility lease expires in 1998 and
contains various early termination or extension provisions as well as options to
lease additional space. Management believes that this facility adequately serves
the Company's present needs. Small sales office spaces are also leased in
Colorado, Connecticut, Georgia and Florida.
Item 3. Legal Proceedings.
On July 6, 1993, Sheffield Securities, Inc., a Delaware corporation, commenced
an action against the Company in the Circuit Court of the Seventeenth Judicial
Circuit in and for Broward County, Florida. The suit pertains to the plaintiff's
attempted exercise of an expired warrant for the purchase of Common Stock of the
Company initially issued to the underwriter of the Company's initial public
offering. For jurisdictional purposes, the plaintiff claims unspecified damages
in excess of $15,000. Discovery is complete and trial was set to commence in
June 1995. However, due to the retirement of the Judge assigned to the case, the
case was recently reassigned and a new trial date in January 1996 has been set.
Counsel to the Company is of the opinion that the Company has meritorious
defenses against plaintiff's claim.
The United States Securities and Exchange Commission ("SEC") is currently
conducting a confidential inquiry pursuant to an order directing a private
investigation relating to certain prior public disclosures and periodic reports
of the Company. The Company is cooperating fully with the SEC Staff. The Company
is confident that the inquiry will be resolved in the near future, although no
assurance can be given that such will be the case.
On January 26, 1995, Dynatech Communications, Inc. ("Dynatech") commenced a
lawsuit against the Company in the Circuit Court for Loudoun County, Virginia.
In the lawsuit, Dynatech claimed that the Company breached its Software License
Agreement with Dynatech and sought damages. FastComm filed counterclaims against
Dynatech seeking more than $192,000 in damages. A mutually satisfactory
settlement agreement, which included a termination of the license granted
pursuant to that Agreement, was reached in this action in July 1995. No monies
were paid or are payable by either party under the terms at the settlement
agreement.
No other material legal proceeding to which the Company is party or to which the
Company is subject is pending and no such proceeding is known by the Company to
be contemplated.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of the Company
during the year ended April 30, 1995.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of the Company is traded on the NASDAQ National Market System
under the symbol "FSCX." The following table sets forth the range of high and
low bid prices or sales prices, as applicable, of the Common Stock for each
fiscal quarter during the two most recent fiscal years, as furnished by NASDAQ.
The bid prices represent prices between dealers, do not include retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
High Low
Fiscal Year Ended April 30, 1995:
First Quarter.............................. $ 10 $ 3 3/4
Second Quarter............................. 5 3/8 2 3/4
Third Quarter.............................. 7 5/8 2 5/8
Fourth Quarter ............................ 7 1/2 5
High Low
Fiscal Year Ended April 30, 1994:
First Quarter.............................. $ 15 1/4 $ 7 3/8
Second Quarter............................. 18 1/4 10 1/4
Third Quarter.............................. 15 7/8 9
Fourth Quarter............................. 13 5/8 7 5/8
As of July 17, 1995, there were 273 holders of record of the Common Stock and
the closing sale price on such date for the Common Stock as reported by NASDAQ
was $5.25 per share.
The Company has not paid dividends on its Common Stock. The Company anticipates
that it will retain all earnings to finance the operation and growth of its
business and does not anticipate paying cash dividends on the Common Stock in
the foreseeable future.
Item 6. Selected Financial Data.
The following sets forth certain selected consolidated financial data for the
five fiscal years in the period ended April 30, 1995. The consolidated statement
of operations data for the fiscal years ended April 30, 1995, April 30, 1994 and
April 30, 1993 and the consolidated balance sheet data at April 30, 1995 and
April 30, 1994 are derived from and are qualified by reference to the audited
consolidated financial statements of the Company audited by BDO Seidman,
independent certified public accountants, included elsewhere in this Report. The
consolidated statement of operations data for the fiscal years ended April 30,
1992 and 1991 and the consolidated balance sheet data at April 30, 1993, 1992
and 1991 are derived from consolidated financial statements of the Company not
included in this Report. The financial data should be read in conjunction with
the consolidated financial statements and related notes and other financial
information and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Report.
Certain financial data with respect to fiscal 1993 has been restated from
amounts previously reported. These matters are described in Item 7. Management's
Discussion and Analysis of Financial Conditions and Results of Operations.
- -------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended April 30,
- -------------------------------------------------------------------------------------------------------------------
1993
1995 1994 (Restated) 1992 1991
---- ---- ---------- ---- ----
($000's except per share data)
Statement of Income Data:
Total Revenues $4,166 $5,136 $6,398 $4,908 $5,692
------ ------ ------ ------ ------
Operating Costs and Expenses
Cost of Goods Sold 2,907 2,128 3,163 2,842 3,395
Other Operating Expenses 5,357 5,063 2,810 4,148 1,407
------ ------ ------ ------ ------
Total Operating Costs and Expenses 8,264 7,191 5,973 6,990 4,802
------ ------ ------ ------ ------
Operating Income (loss) (4,098) (2,055) 425 (2,082) 890
Other income (expense), net 14 46 152 7 78
Income tax (expense) benefit -0- 10 (14) 177 (190)
------ ------ ------ ------ ------
Net income (loss) (4,084) ($1,999) $ 563 ($1,898) $ 778
======= ======== ====== ======== ======
Net income (loss) per share $(0.49) $(0.27) $ 0.08 ($ 0.42) $ 0.18
======= ======== ====== ======== ======
Weighted average number of shares 8,409 7,521 6,876 4,518 4,444
outstanding during each period
Dividends -0- -0- -0- -0- -0-
Balance Sheet Data:
Total assets $7,577 $7,248 $7,001 $2,724 $2,740
Total long term obligations $ 132 $ 152 $ 333 $ -0- $ 10
Shareholders' equity $6,149 $5,600 $5,300 $1,072 $2,026
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The following table sets forth, for the fiscal years indicated, the percentage
of revenues represented by certain items in the Company's consolidated
statements of income.
Fiscal Year Ended April 30,
1993
1995 1994 (Restated)
---- ---- ----------
Revenues 100% 100% 100%
---- ---- ----
Operating costs and expenses:
Cost of goods sold 70% 41% 49%
Selling, general and administrative 101% 77% 30%
Research and development 22% 19% 11%
Depreciation and amortization 5% 3% 3%
-- --- --
198% 140% 93%
---- ---- ---
Operating (loss) income (98%) (40%) 7%
Other income (expense), net - 1% 2%
Income tax (expense) benefit - - -
Net (loss) income (98%) (39%) 9%
===== ===== ==
Certain statements set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations , which are not historical facts,
are forward-looking statements under the Private Securities Litigation Reform
Act of 1995 that are subject to risks and uncertainties that could cause actual
results to differ materially from those set forth in the forward-looking
statements. Among the factors that could cause actual future results to differ
materially are competitive pressures and market acceptance of certain products
and services.
Fiscal 1995 Compared to Fiscal 1994
Total revenues decreased from $5,136,000 to $4,166,000 or by 19% during fiscal
1995 as compared to fiscal 1994. The $970,000 decrease was primarily
attributable to lower revenue attributable to license fees and research and
development contracts in fiscal 1995 as compared to fiscal 1994. The Company
earned $615,000 in license fees and $160,000 in research and development
contract revenues in fiscal 1994. Such revenue totaled $62,000 in fiscal 1995.
The Company believes that opportunities to enter into licensing and/or research
and development agreements which further the Company's market strategies tend to
be rather unique in nature and infrequent in occurrence, accordingly, management
is unable to determine whether revenue from such opportunities will occur in the
future.
Product sales decreased from $4,362,000 to $4,104,000 or by 6% during fiscal
1995 as compared to fiscal 1994. This decrease was primarily attributable to a
decline in analog modem and data compression product sales, partially offset by
an increase in the sale of frame relay access and data controller products.
Analog modem and data compression product sales, as a percentage of total
product sales, decreased from approximately 60% in fiscal 1994 to approximately
20% in fiscal 1995 while Frame Relay access product sales, as a percentage of
total product sales, increased from approximately 40% in fiscal 1994 to
approximately 70% in fiscal 1995. The Company believes its future growth will be
achieved through the sale of digital products and accordingly the decline in the
sale of analog modems is part of its sales transition plan. The market for the
Company's data compression products has shifted from domestic to international
where circuit costs are higher and the savings afforded by this product are
greater. This shift has caused the sales of compression products to decline
significantly. As a result of the foregoing, during fiscal 1995, the Company
increased its reserves for inventory obsolescence, as discussed below.
The Company continues to focus its selling efforts on larger customers that
offer strong resale support of FastComm product to end users and on those that
present significant future resale potential. This change in selling focus has
resulted in a decline in sales that has resulted in net losses. Management does
not expect such losses to continue but cannot estimate as to when the Company
will achieve profitability.
A significant portion of the Company's sales are derived from products shipped
against firm purchase orders received in each fiscal quarter and from products
shipped against firm purchase orders released in that quarter. Unforeseen delays
in product deliveries or the closing of sales, introduction of new products by
the Company or its competitors, fluctuations in customer capital expenditures or
other conditions affecting the networking industry or the economy during any
fiscal quarter could cause quarterly revenue and net earnings to vary greatly.
Revenue in the fourth quarter of fiscal 1995 fell to $738,000, a decrease of
$562,000 when compared to the third quarter of fiscal 1995. This decline in the
fourth quarter is attributable to lost sales opportunities, reduced order inflow
which management anticipates will reverse. Fourth quarter revenue was also
negatively impacted by lower sales of data compression and analog modem
products.
Gross margins, as a percentage of total revenues, decreased from 59% to 30%
during fiscal 1995 as compared to fiscal 1994 while gross margins, as a
percentage of total product sales, decreased from 51% to 29% during fiscal 1995
as compared to fiscal 1994. The twenty-two percentage point decrease in gross
margin from total product sales is primarily attributable to an increase in the
Company's reserve for inventory obsolescence (reducing margins by eight
percentage points net); a shift in product mix to frame relay products, which
have margins of 45-50%, from data compression products, which have margins of
55-60% (reducing margins by five percentage points net); decreases in the
average selling price of certain products (reducing margins by three percentage
points net); and increases in costs due to generally higher overhead costs and
increased per unit absorption reflecting lower sales (reducing margins by three
percentage points).
The Company increased its reserve for inventory obsolescence by $402,000 during
the current fiscal year including an increase of $295,000 during the fourth
quarter. The specific targets for this increase in the reserve were the data
compression and analog modem inventories. The market for the Company's data
compression products has shifted from the domestic market to the international
market where circuit costs are higher and the economies offered by compression
are greater. The Company continues to manufacture analog modems for specialized
applications, however, it has no plans to sell into the consumer market for low
end modems. While the Company believes it will be able to ship and/or liquidate
substantially all its current inventory levels profitably, the inventory levels
remain higher than anticipated and, accordingly, management concluded that
increasing its reserve for inventory obsolescence is prudent and necessary at
this time.
Selling, general and administrative expenses increased from $3,937,000 in fiscal
1994 to $4,225,000 in fiscal 1995. This 8% increase in expense is attributable
to the full year effect of the prior fiscal years investment in senior
management ($203,000), an increase in professional fees associated with the
current SEC investigation (approximately $100,000 - - See Item 3. Legal
Proceedings), the reaudit of the Company's fiscal 1993 financial statements
(approximately $25,000 - - see Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure), the Dynatech litigation
(approximately $50,000), which was settled in July 1995, offset by a decrease in
advertising costs ($61,000).
The Company recorded a $200,000 addition to its allowance for doubtful accounts
during the fiscal 1995 fourth quarter to adjust the April 30, 1995 ending
allowance to $204,000 reflecting higher than anticipated sales returns,
allowances and uncollectible accounts.
Research and development expenditures consist primarily of hardware and software
engineering, personnel expenses, subcontracting costs and, to a lesser degree,
equipment and facilities. Research and development expenses decreased from
$960,000 in fiscal 1994 to $916,000 in the current fiscal year. This 5% decrease
is primarily attributable reduced research and development manpower and a
reduction in outside consulting services. The markets for the Company's products
are characterized by continuous technological change. Management believes that
significant expenditures for research and development will continue to be
required.
Depreciation and amortization expenses increased from $166,000 in fiscal 1994 to
$217,000 in fiscal 1995. This 11% increase is primarily attributable to the
amortization of goodwill associated with the purchase of Zybel Microsystems in
fiscal 1994.
Fiscal 1994 Compared to Fiscal 1993
Total revenues decreased from $6,398,000 to $5,136,000, or by 20% during fiscal
1994 as compared to fiscal 1993. Of the $1,261,000 decrease, $2,026,000 was due
to lower product sales, partially offset by $615,000 in license fees ($0 in
1993) and $160,000 in research and development contracts and other revenue
($10,000 in 1993).
Product sales declined during fiscal 1994 as a result of the transition of
selling focus from analog to digital products. Analog product sales were also
depressed due to two industry wide price decreases by major competitors in the
analog modem marketplace. Sales to the Company's national distributor and it's
Japanese distributor of data compression products also declined.
During fiscal 1994, the Company executed an agreement licensing certain
manufacturing and software technology to another company and recorded $615,000
under the terms and conditions of this agreement. The Company also recorded
$123,000 in revenue earned through research and development services.
Gross margins, as a percentage of revenues, increased from 51% to 59% during
fiscal 1994 as compared to fiscal 1993. The increase is attributable to the
revenues derived during 1994 from license fees and research and development
contracts in the amount of $615,000 and $123,000 respectively. Gross margins on
product sales were 51% in 1994 as compared to 50% in 1993. The effect on gross
margin during fiscal 1994 of industry-wide price decreases was substantially
offset by a shift in product mix to sales of higher margin digital products and
by reduced costs of purchased materials used to manufacture products resulting
from obtaining competitive bids from suppliers.
Selling, general and administrative expenses increased from $1,938,000 to
$3,937,000, or by 103%, during fiscal 1994 as compared to fiscal 1993. The
$1,999,000 increase is primarily attributable to significant investments made in
senior management ($300,000), domestic sales offices ($250,000), international
selling efforts ($350,000), upgrading advertising program ($350,000), technical
support program ($257,000) and infrastructure upgrade ($100,000) required to
provide the foundation for growth.
Research and development expenses increased from $718,000 to $960,000, or by
34%, during fiscal 1994 as compared to fiscal 1993. The $242,000 increase is
primarily attributable to increased spending on new digital products, features
and product enhancements. Research and development expenditures consist
primarily of hardware and software engineering, personnel expenses,
subcontracting costs and, to a lesser degree, equipment and facilities. The
markets for the Company's products are characterized by continuous technological
change. Management believes that significant expenditures for research and
development will continue to be required.
Depreciation and amortization expense in the amount of $166,000 during fiscal
1994 was reasonably consistent with the depreciation and amortization expense
incurred during fiscal 1993 in the amount of $154,000.
Other income, net, decreased from $153,000 in fiscal 1993 to $46,000 in fiscal
1994. Other income in fiscal 1993 includes $85,000 derived from the settlement
of a lawsuit and $43,000 related to an agreement with Watch Hill in which the
Company reacquired certain shares of stock issued to Watch Hill in settlement of
the lawsuit.
Fourth Quarter - Fiscal 1995 Interim Adjustments
During the fourth quarter ended April 30, 1995, the Company increased its
allowance for doubtful accounts by $200,000 ($0.02 per share) to take account of
products returned and credited to customers in the fourth quarter as well as to
provide for future sales returns and allowances. The Company also increased its
reserve for inventory obsolescence in the fourth quarter by $295,000 ($0.04 per
share) primarily to take account of certain slow moving data compression and
analog modem inventory.
Fourth Quarter - Fiscal Year 1994 Interrim Adjustments and Restatement of Prior
Interim Financial Results
During the fourth quarter ended April 30, 1994, the Company reversed a sale in
the amount of $580,000 which was originally recorded in the third quarter ended
February 5, 1994. The reversal of the sale was made after certain technical
difficulties arose in the fourth quarter regarding the project for which the
Company's product was intended. These matters were not identified by management
at the time of sale. The effect on third quarter and fiscal 1994 operating
results of the reversal of the sale is to increase net loss by approximately
$296,000, and to increase the per share net loss by ($0.04) per share.
Also during the fiscal 1994 fourth quarter, the Company increased its allowance
for doubtful accounts to take account of products returned and credited to
customers in the fourth quarter as well as to provide for potential future
returns and allowances. The increase in the allowance includes $220,000 which
management now believes is attributable to matters which existed at the end of
the third quarter. The effect on third quarter and fiscal 1994 operating results
of increasing the allowance for doubtful accounts by $220,000 is to increase the
net loss by $220,000 and to increase the net loss per share by ($0.03.)
These matters are summarized in the table below:
Quarter Ended Feb. 5, 94
($000s except per share data)
Net income (loss) as originally reported ($ 30)
Fourth quarter adjustments:
(i) reversal of sale ( 296)
(ii) increase in allowance for doubtful accounts ( 220)
------
Net income (loss) ($546)
======
Per share of common stock: _____
Net income (loss) as originally reported: $ 0.00
Fourth quarter adjustments:
(i) reversal of sale (0.04)
(ii) increase in allowance for doubtful accounts (0.03)
Net income (loss) ($0.07)
Restatement of Fiscal 1993 Financial Statements
The Company has restated its 1993 financial statements to reflect corrections to
cost of goods sold and additional paid-in capital accounts, in connection with
the re-audit of the 1993 financial statements (refer to Item 9.).
With respect to the 1993 financial statements, the restatement reduced the
pre-tax income and the net income by $90,000 ($0.01 per share). The restatement
has no effect on total stockholders' equity as originally reported.
These matters are summarized in the table below:
Year Ended April 30,
($000s except per share
data)
1993
Net income as originally stated $653
Adjustments: (90)
- ----
Net income, as restated $563
====
Per share of common stock:
Net income per share, as originally stated: $0.09
Adjustments: (0.01)
- ------
Net income per share, as restated $0.08
=====
Liquidity and Capital Resources
During fiscal 1995, the Company used approximately $1.9 million in cash to fund
its operating activities. This amount includes $3.1 million required to fund the
net loss, after adjusting for non-cash expenses (consisting principally of
depreciation, amortization, compensation associated with stock options, and
provision for doubtful accounts and inventory obsolescence), offset principally
by $1.2 million generated by decreases in inventory and accounts receivable.
Accounts receivable decreased during fiscal 1995 due to significantly lower
revenue and improved cash collections from the Company's distributors and
resellers. Accordingly, management decreased the allowance for doubtful accounts
during fiscal 1994 to $204,000 from $275,000. Management believes that the
allowance for doubtful accounts at April 30, 1995 is adequate. The Company was
unable to reduce its inventory levels as much as anticipated during fiscal 1995,
primarily reflecting lower than anticipated sales of data compression and analog
modem products. In response, the Company has increased its reserve for inventory
obsolescence by $402,000 to $495,000 as of April 30, 1995. Although management
believes it will be able to ship and/or liquidate substantially all its current
inventory levels profitably, the inventory levels remain higher than anticipated
and, accordingly, management concluded that increasing its reserve for
obsolescence is prudent and necessary at this time. Management believes the
reserve for net realizable value is adequate.
In fiscal year 1995, the Company completed a private placement of unregistered
shares of common stock. A total of 405,460 shares were sold generating
$1,294,000 in cash. In addition, the Company also completed a Regulation S
placement of 700,000 shares of common stock. Net proceeds to the Company under
this Regulation S placement totaled $2,983,775.
During the current fiscal year, the Company concluded the acquisition of Zybel
Microsystems, Inc. and retired the related $220,000 debt through the issuance of
25,000 shares of common stock in the Company.
In the current fiscal year, the Company transferred at cost, analog modem raw
materials and subassemblies valued at $273,000 to an electronics manufacturer.
As of July 1995, the Company has collected, in cash, approximately $240,000 of
this $273,000. Under the terms and conditions of the agreement executed by both
parties, the manufacturer will build and resell the modems to FastComm on an as
needed basis or may sell the modems to its own customers through the end of
calendar year 1995. At such time, the contract may be extended or FastComm may
be required to repurchase any remaining modem materials. No revenue was
recognized in connection with this transfer of inventory.
The Company executed a promissory note in the amount of $80,000 payable to
NationsBank in fiscal year 1995. This note is secured by a US Treasury Bill.
In fiscal 1996, the Company's cash commitments include payments to be made
against the $226,000 in current maturities of long term debt, which will be paid
from the proceeds of the restricted short term investment collateralizing the
debt. The Company is also committed in fiscal 1996 to minimum payments of
$261,000 under its operating lease arrangements. The Company anticipates capital
spending for software and test equipment in fiscal 1996. Where possible, such
capital requirements are expected to be met through lease financing
arrangements.
The Company believes that current levels of cash and cash equivalents
($3,105,000 at April 30, 1995) plus expected cash generated from the ongoing
collection of its current and future accounts receivable and inventory levels in
the normal course of events will be sufficient to meet the Company's current
cash requirements during fiscal 1996. At April 30, 1995, the Company had over
$5.5 million of working capital and a current ratio of over 5 to 1. None of the
Company's accounts receivable or inventories are collateralized currently.
Management believes that inflation did not have a material effect on operations
during the fiscal year ended April 30, 1995.
Fiscal 1995 Compared to Fiscal 1994
Cash used in operating activities decreased from $2,842,000 in fiscal 1994 to
$1,929,000 in fiscal 1995. The $912,000 decrease in cash used in operating
activities is primarily attributable to the $1,268,000 improvement with respect
to changes in the receivable balances, and a $1,950,000 improvement with respect
to changes in the inventory balance, partially offset by an approximate
$2,092,000 increase in the net loss, net of non cash expenditures.
Cash used by investing activities amounted to $109,000 in fiscal 1995 as
compared to cash provided by investing activities of $230,000 in fiscal 1994.
The $339,000 decline is primarily attributable to the $211,000 proceeds received
in fiscal 1994 from the partial release of investment funds held as collateral
against borrowings by the Company. The Company also received $93,000 in cash in
connection with the acquisition of ZyBel Microsystems in fiscal 1994.
Cash provided by financing activities increased from $1,553,000 in fiscal 1994
to $4,168,000 in fiscal 1995. The $2,615,000 increase is primarily attributable
to the $4,201,000 in funds received in fiscal 1995 from a private placement and
Regulation S stock offering as compared to $-0- in fiscal 1994, partially offset
by lower net proceeds received from the exercise of stock options and warrants
of $211,000 in fiscal 1995 as compared to $1,736,000 in fiscal 1994.
Fiscal 1994 Compared to Fiscal 1993
Cash used in operating activities increased from $925,000 in fiscal 1993 to
$2,842,000 in fiscal 1994. The $1,917,000 increase in cash used in operating
activities is primarily attributable to the $1,999,000 net loss incurred in
fiscal 1994 as compared to $563,498 net income earned in fiscal 1993. The effect
on cash flows of the fiscal 1994 loss as compared to fiscal 1993 net income was
partially offset by approximately $555,000 in additional net non-cash expenses
in 1994 relating primarily to compensation expense associated with stock
options.
Cash used in operating activities to fund increases in working capital amounted
to $1,822,000 in fiscal 1994 as compared to $1,914,000 in fiscal 1993. The
decrease primarily reflects a significantly smaller increase in receivables in
fiscal 1994 as compared to fiscal 1993, reflecting lower sales volume, partially
offset by a larger increase in inventory levels, reflecting lower than
anticipated product shipments in the fourth quarter.
Cash provided by investing activities amounted to $230,000 in fiscal 1994 as
compared to cash used in investing activities of $620,036 in fiscal 1993. The
$850,395 improvement is primarily attributable to the $211,000 proceeds received
in fiscal 1994 from the partial release of investment funds held as collateral
against borrowings by the Company as compared to $586,000 in purchases of such
investment funds in fiscal 1993 for the purpose of collateralizing such
borrowings. The Company also received $93,196 in cash in connection with the
acquisition of ZyBel Microsystems in fiscal 1994.
Cash provided by financing activities decreased from $3,445,000 in fiscal 1993
to $1,553,000 in fiscal 1994. The $1,892,000 decrease is primarily attributable
to the $2,101,000 funds received in fiscal 1993 from a private placement as
compared to $-0- in fiscal 1994, partially offset by higher net proceeds
received from the exercise of stock options and warrants of $1,736,000 in fiscal
1994 as compared to $1,464,000 in fiscal 1993.
Impact of New Accounting Standards
The Company does not provide postretirement benefits; accordingly, the
accounting prescribed by Statement of Financial Accounting Standards No. 106 and
No. 112 will have no effect on the Company's financial statements.
In October 1994, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" (SFAS 119). SFAS 119
requires disclosures about amounts, nature and terms of derivative financial
instruments which do not result in off-balance sheet risk of accounting loss. It
requires that a distinction be made between financial instruments held or issued
for trading purposes and financial instruments held or issued for purposes other
than trading. Also, SFAS 119 requires certain detailed disclosures related to
three financial instruments used in hedging transactions. SFAS 119 encourages,
but does not require, quantitative information about market risks of derivative
financial instruments. SFAS is effective for fiscal years ending after December
15, 1994.
Presently, FastComm has not purchased or issued any derivative financial
instruments. Consequently, management does not expect SFAS 119 to have any
impact on disclosures in the 1995 consolidated financial statements.
Item 8. Financial Statements and Supplementary Data.
The following financial statements and financial statement schedules are filed
as part of this Report:
Page
Independent Auditor's Report ......................................... 22
Balance Sheets at April 30, 1995 and 1994 ............................ 23 - 24
Statements of Operations for the Years
Ended April 30, 1995, 1994 and 1993 .................................. 25
Statements of Stockholders' Equity for the Years
Ended April 30, 1995, 1994 and 1993 .................................. 26
Statements of Cash Flows for the Years
Ended April 30, 1995, 1994 and 1993 .................................. 27 - 28
Summary of Accounting Policies ....................................... 29 - 32
Notes to Financial Statements ........................................ 33 - 47
Financial Statement Schedule: Valuation and
Qualifying Accounts (Schedule II) .................................... 48
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
FastComm Communications Corporation
We have audited the accompanying balance sheets of FastComm Communications
Corporation (the Company) as of April 30, 1995 and 1994 and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ending April 30, 1995. We have also audited the
schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion. The financial statements of
FastComm Communications Corporation for the year ended April 30, 1993 were
previously reported on by other auditors before the restatement adjustments,
which are described in Note 16 to the accompanying financial statements.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FastComm Communications
Corporation at April 30, 1995 and 1994 and the results of its operations and its
cash flows for each of the three years in the period ending April 30, 1995 in
conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
/s/ BDO Seidman, LLP
Washington, D.C.
July 28, 1995
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
April 30, 1995 1994
----------- -----------
Assets
Current
Cash and cash equivalents $ 3,105,346 $ 975,749
Restricted investments (Note 5) 374,687 374,275
Accounts receivables, net (Note 3) 1,281,487 1,982,898
Receivables from related party (Note 14) 50,986 336,529
Inventories, net (Note 2) 1,969,150 2,986,379
Refundable income taxes (Note 11) -- 10,000
Prepaid expenses and other current assets 74,685 53,634
----------- -----------
Total current assets 6,856,341 6,719,464
Property and equipment, at cost, less accumulated
depreciation and amortization (Note 4) 281,325 303,527
Other
Software license rights and other
intangibles, net (Notes 7 and 9) 357,779 218,375
Other assets 81,844 6,213
Total other assets 439,623 224,588
----------- -----------
$ 7,577,289 $ 7,247,579
=========== ===========
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
April 30, 1995 1994
----------- -----------
Liabilities
Current liabilities
Current portion of long-term debt
(Notes 5 and 7) $ 226,171 $ 444,493
Accounts payable 762,742 898,752
Accrued payroll 206,683 117,703
Other current liabilities 101,059 34,153
Total current liabilities 1,296,655 1,495,101
Long-term debt, less current maturities (Note 5) 131,754 152,044
----------- -----------
Total liabilities 1,428,409 1,647,145
Commitments and Contingencies (Note 6)
Stockholders' equity (Notes 7 and 8)
Common stock, $.01 par - shares authorized,
25,000,000; issued, 9,444,529 and 8,010,688;
outstanding, 9,444,529 and 8,010,688 94,445 80,107
Additional paid-in capital 13,249,770 8,643,761
Accumulated deficit (7,195,335) (3,111,196)
6,148,880 5,612,672
Treasury stock (Notes 7 and 10) -- (12,238)
Total stockholders' equity 6,148,880 5,600,434
----------- -----------
$ 7,577,289 $ 7,247,579
=========== ===========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
STATEMENTS OF OPERATIONS
1995 1994 1993
----------- ----------- -----------
As Restated
Year ended April 30, (Note 16)
Revenues (Notes 1, 12 and 14)
Products sales $ 3,689,817 $ 3,526,480 $ 6,306,933
Products sales to related parties 414,580 835,044 80,500
License fees and other 61,665 774,831 10,086
----------- ----------- -----------
Total revenues 4,166,062 5,136,355 6,397,519
=========== =========== ===========
Operating costs and expenses
Cost of goods sold 2,906,577 2,127,974 3,162,736
Selling, general and administrative 4,224,641 3,936,748 1,937,583
Research and development 916,003 960,042 718,295
Depreciation and amortization 217,326 166,098 154,203
----------- ----------- -----------
Total operating costs and expenses 8,264,547 7,190,862 5,972,817
=========== =========== ===========
Operating (loss) income (4,098,485) (2,054,507) 424,702
Other income (expense)
Other income 9,750 19,150 137,866
Interest income 33,142 52,431 45,426
Interest expense (28,546) (25,994) (30,496)
----------- ----------- -----------
Total other income 14,346 45,587 152,796
=========== =========== ===========
Income (loss) before income taxes (4,084,139) (2,008,920) 577,498
Provision (benefit) for income taxes (Note 11)- (10,000) 14,000
Net income (loss) $(4,084,139) $(1,998,920) $ 563,498
Net income (loss) per common share $ (0.49) $ (0.27) $ 0.08
Weighted-average number of common shares
outstanding during each year 8,409,000 7,521,000 6,876,000
See accompanying summary of accounting policies and notes to consolidated
financial statements.
Years ended April 30, 1995, 1994 and 1993
Common Stock
-------------------------- Additional Common
Par Paid-in Stock
Shares Values Capital Warrants
--------- ------------ ------------ ------------
Balance, April, 30, 1992 4,866,756 $ 48,668 $ 3,326,754 $ 100,000
Shares issued through private placement
(net of costs) -
As restated (Note 16) 1,381,000 13,810 2,087,202 --
Shares issued for stock options 160,000 1,600 108,375 --
Shares issued for stock warrants 655,312 6,553 1,347,150 --
Termination of stock warrants -- -- 100,000 (100,000)
Settlement of litigation (Notes 7 and 10)- -- (84,315) --
Shares issued for Sigma
Research acquisition 22,500 225 44,775 --
Amortization of deferred compensation
and forfeitures -- -- (75,193) --
Treasury stock acquired (46,583) (466) -- --
Net income - As restated (Note 16) -- -- -- --
Balance, April 30, 1993 -
As restated (Note 16) 7,038,985 70,390 6,854,748 --
Shares issued for stock
warrants, net 261,488 2,615 1,029,489 --
Shares issued for stock options 716,715 7,167 696,706 --
Deferred compensation on stock options -- -- 75,000 --
Amortization of deferred compensation -- -- -- --
Settlement of litigation -- -- (12,182) --
Treasury stock retired
(Notes 7 and 10) (6,500) (65) -- --
Treasury stock purchased (Note 7) -- -- -- --
Net loss -- -- -- --
Balance, April 30, 1994 8,010,688 80,107 8,643,761 --
Shares issued through private placement
(net of costs) 1,105,458 11,054 4,190,408 --
Shares issued for stock options 316,400 3,164 207,959 --
Shares issued for acquisition of
Zybel Microsystems, Inc. 25,000 250 219,750 --
Treasury stock retired (13,017) (130) (12,108) --
Net loss -- -- -- --
--------- ------------ ------------ --------
Balance, April 30, 1995 9,444,529 $ 94,445 $ 13,249,770 $ --
========= ============ ============ ========
STATEMENTS OF STOCKHOLDERS EQUITY
Retained
Treasury Deferred Earnings
Stock Compensation (Deficit) Total
----- ------------ --------- -----
$ -- $ (728,000) $(1,675,774) $ 1,071,648
-- -- -- 2,101,012
-- -- -- 109,975
-- -- -- 1,353,703
-- -- -- --
-- -- -- (84,315)
-- -- -- 45,000
-- 325,000 -- 249,807
-- -- -- (466)
-- -- 563,498 563,498
-- (403,000) (1,112,276) 5,409,862
-- -- -- 1,032,104
-- -- -- 703,873
-- (75,000) -- --
-- 478,000 -- 478,000
-- -- -- (12,182)
-- -- -- (65)
(12,238) -- -- (12,238)
-- -- (1,998,920) (1,998,920)
(12,238) -- (3,111,196) 5,600,434
-- -- -- 4,201,462
-- -- -- 211,123
-- -- -- 220,000
12,238 -- -- --
-- -- (4,084,139) (4,084,139)
$ -- $- $(7,195,335) $ 6,148,880
See accompanying summary of accounting policies and notes to consolidated
financial statements.
STATEMENTS OF CASH FLOWS
1995 1994 1993
----------- ----------- -----------
As Restated
Year ended April 30, (Note 16)
Cash flows from operating activities
Net income (loss) $(4,084,139) $(1,998,920) $ 563,498
Adjustments to reconcile net income (loss)
to cash (used in) operating activities
Depreciation and amortization 217,326 166,098 154,203
Compensation expenses associated with
stock options granted -- 478,000 249,341
Provision for inventory obsolescence
reserve 401,889 60,000 --
Provision for doubtful accounts 354,000 287,876 106,313
Other -- (12,247) (84,315)
----------- ----------- -----------
(3,110,924) (1,019,193) 989,040
Changes in assets and liabilities,
net of effects of acquisitions
(Increase) decrease in assets
Accounts receivable 347,411 1,422 (1,751,272)
Receivables from related party 285,543 (336,529) --
Inventory 615,340 (1,335,525) (602,258)
Refundable income taxes 10,000 (10,000) 253,888
Prepaid expense and other
current assets (21,051) (4,227) (38,947)
Other assets (75,631) (1,949) 11,163
Increase (decrease) in liabilities
Accounts payable (136,010) (150,229) 287,698
Accrued payroll 88,980 14,374 (26,975)
Income taxes payable -- (14,000) 14,000
Other current liabilities 66,906 14,352 (61,466)
----------- ----------- -----------
Net cash (used in) operating
activities (1,929,436) (2,841,501) (925,129)
STATEMENTS OF CASH FLOWS
1995 1994 1993
----------- ----------- -----------
As Restated
Year ended April 30, (Note 16)
Cash flows from investing activities
Purchase of property and equipment (108,170) (74,207) (34,391)
Sale (purchase) of restricted
investments (412) 211,370 (585,645)
Net proceeds assumed in acquisition
(Note 16) -- 93,196 --
Net cash provided by (used in) investing
activities (108,582) 230,359 (620,036)
Cash flows from financing activities
Repayments under line-of-credit agreement -- -- (400,000)
Proceeds from note payable to bank 80,000 -- 587,000
Repayments of notes payable to bank (324,970) (182,759) (306,678)
Net proceeds from issuance of common stock
through private placement 4,201,462 -- 2,101,012
Proceeds from exercise of stock
options 211,123 703,873 109,975
Proceeds from exercise of stock
warrants -- 1,032,104 1,353,703
Net cash provided by financing
activities 4,167,615 1,553,218 3,445,012
Net increase (decrease) in cash and
cash equivalents 2,129,597 (1,057,924) 1,899,847
Cash and cash equivalents,
beginning of year 975,749 2,033,673 133,826
Cash and cash equivalents, end
of year $ 3,105,346 $ 975,749 $ 2,033,673
See accompanying summary of accounting policies and notes to consolidated
financial statements.
SUMMARY OF ACCOUNTING POLICIES
Organization
FastComm Communications Corporation (the "Company") was incorporated in Virginia
in May 1983. The Company designs, manufactures, and markets data communications
equipment for high-speed data transmission over public and private telephone
networks.
The Company's fiscal year ends on April 30. For interim financial reporting
purposes, effective with the quarter ended October 31, 1992, the interim fiscal
quarters are closed on the first weekend following the calendar quarter end
date, unless the calendar quarter end date falls on a weekend, in which case
such weekend is used as the interim fiscal quarter end. Prior to the quarter
ended October 31, 1992, the interim fiscal quarters were closed on the last day
of the calendar quarter end.
Certain reclassifications have been made to conform prior years' data to the
current presentation.
Significant Risks and Uncertainties
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities. Certain estimates used by
management are particularly susceptible to significant changes in the economic
environment. These include estimates of inventory obsolescence, valuation
allowances for trade receivables and deferred tax assets. Each of these
estimates, as well as the related amounts reported in the financial statements,
are sensitive to near term changes in the factors used to determine them. A
significant change in any one of those factors could result in the determination
of amounts different than those reported in the financial statements. Management
believes that as of April 30, 1995, the estimates used in the financial
statements are adequate based on the information currently available.
SUMMARY OF ACCOUNTING POLICIES
Revenue
Recognition
Revenues from product sales are recognized at the time of product shipment. An
allowance is provided for estimated sales returns and uncollectible accounts.
The Company licenses certain technologies it has developed to others. These
agreements typically provide for an initial license fee to be paid at inception
and royalties to be paid as licensed products are sold. The Company recognizes
the initial license fee at inception as the license term is unlimited and the
Company has no material continuing obligations with respect to the licensed
technology.
Inventory
Production materials are valued using standard costs which approximate the
first-in, first-out (FIFO) method. Work-in-process represents direct labor,
materials and overhead incurred on products not delivered to date. Finished
goods are valued at the lower of cost or market, cost being determined on the
specific identification method.
Property,
Equipment and
Depreciation
Property and equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful live of the related assets (generally five
years). Leasehold improvements are amortized over the lesser of the lease term
or the useful life of the property.
Research and
Development Costs
All costs incurred to establish the technological feasibility of products are
considered research and development costs which are charged to expense as
incurred.
Research and
Development
Contracts
The Company enters into contracts to perform research and development for third
parties. The Company accounts for these contracts in accordance with Statement
of Financial Accounting Standards No. 68, "Accounting for Re-search and
Development Arrangements" (FASB 68). Under FASB 68, research and development
contracts with fixed obligations to repay the contracting party irregardless of
the outcome are treated as loans. Contracts without fixed obligations to repay
are treated as obligations to perform contractual services and revenue is
recognized as expenses are incurred and in accordance with the contracts
provisions. As of April 30, 1995, no research and development contracts have
fixed obligations to repay, accordingly, revenue is recognized as expenses are
incurred.
SUMMARY OF ACCOUNTING POLICIES
Manufacturing
and Software
License Rights
The Company capitalizes the cost of acquiring software license rights and
amortizes them over the shorter of the expected product life or the license
period, not to exceed 5 years.
Intangible Assets
The Company has recorded goodwill based on as the difference between the cost
and the fair value of certain purchased assets and it is being amortized over 3
years. The Company periodically evaluates the goodwill for possible impairment.
The analysis consists of a comparison of future projected net income to the
carrying value of the goodwill. Any excess goodwill would be written off due to
impairment.
Earnings Per Share
Primary earnings (loss) per share of common stock have been calculated by
dividing earnings (loss) by the weighted average number of common shares
(including shares held in escrow). Fully diluted earnings (loss) per common
share has not been presented for 1995 or 1994 because the effect is
anti-dilutive. For 1993, fully diluted earnings per share was not presented
since it is not materially different from primary earnings per share.
Income Taxes
The Company files federal and State income tax returns. Certain income and
expense items are recognized in different periods for income tax purposes than
for financial reporting purposes.
Prior to May 1, 1993, the Company accounted for income taxes under the liability
method as prescribed by Statement of Financial Accounting Standards No. 96 (FASB
96). Under the liability method, deferred taxes are determined based on the
differences, termed "temporary differences", between the bases of assets and
liabilities for financial reporting purposes versus tax purposes at current tax
rates. The provision for income taxes in the statement of operations is equal to
the sum of taxes currently payable, including any alternative minimum tax, plus
an amount necessary to adjust deferred tax liabilities to an amount measured
based on period-end temporary differences, currently prevailing marginal tax
rates and the realization criteria of FASB 96.
Effective May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FASB 109) which supersedes
FASB 96. The significant changes made by FASB 109 include less stringent
criteria for recognizing net deferred tax assets for amounts deductible in
future years. The recognition of net deferred assets is reduced, if necessary,
by a valuation allowance if management determines that it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
There was no cumulative effect of adopting FASB 109 as of May 1, 1993.
SUMMARY OF ACCOUNTING POLICIES
Cash and
Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company invests its excess cash
principally in overnight repurchase accounts and short-term government
securities.
Concentration of
Credit and Market
Risk
The Company sells primarily to domestic and foreign dealers and distributors.
Generally sales are on credit and no collateral is required, although the
Company reserves the right to have the products returned in the event of
default. The Company provides an allowance for estimated sales returns and
uncollectible accounts.
NOTES TO FINANCIAL STATEMENTS
1. Revenues
The Company is engaged in the development, manufacture and sale of products in
the computer and telecommunication industries. Revenues are derived from the
sale of products, manufacturing and software licenses and research and
development contracts and are as follows:
For the Year ended April 30, 1995 1994 1993
---------- ---------- ----------
Product sales $4,104,397 $4,361,524 $6,387,433
License fees -- 615,000 --
Research and development
contracts and other 61,665 159,831 10,086
---------- ---------- ----------
$4,166,062 $5,136,355 $6,397,519
========== ========== ==========
2. Inventories
Inventories consist of the following components:
April 30, 1995 1994
----------- -----------
Production materials $ 1,151,875 $ 1,132,356
Work-in-process 148,875 1,126,293
Finished goods 668,400 727,730
----------- -----------
$ 1,969,150 $ 2,986,379
=========== ===========
3. Receivables
Receivables consist of the following:
April 30, 1995 1994
----------- -----------
Trade $ 1,352,633 $ 2,204,466
Employee and other 132,854 53,432
----------- -----------
1,485,487 2,257,898
Allowance for doubtful
accounts (204,000) (275,000)
----------- -----------
$ 1,281,487 $ 1,982,898
=========== ===========
NOTES TO FINANCIAL STATEMENTS
4. Property and
Equipment
Property and equipment consists of the following:
April 30, 1995 1994
----------- -----------
Computer equipment $ 355,352 $ 259,665
Furniture and fixtures 384,354 374,565
Leasehold improvements 22,028 19,334
Automobiles 22,917 22,917
----------- -----------
784,651 676,481
Less accumulated depreciation
and amortization (503,326) (372,954)
----------- -----------
$ 281,325 $ 303,527
=========== ===========
5. Long-term
Debt
Long-term debt consists of the following:
April 30, 1995 1994
----------- -----------
Loan payable to bank in monthly
installments of principal plus
interest at prime plus 1/2%
(7.75% at April 30, 1995), due
March, 1996; collateralized by a
U.S. Treasury Bill $ 194,750 $ 322,850
Noninterest bearing note issued in
connection with acquisition of
patent rights, due May 1996 160,883 --
Less unamortized discount of
$18,117 based on imputed interest
rate of 7.25% -- --
Note payable to former share-
holders of ZyBel Microsystems,
payable in stock (see Note 7) -- 220,000
Loan payable to former share-
holders of ZyBel Microsystems,
payable on demand -- 44,763
Other 2,292 8,924
----------- -----------
Total 357,925 596,537
=========== ===========
Less current maturities (226,171) (444,493)
----------- -----------
$ 131,754 $ 152,044
=========== ===========
NOTES T0 FINANCIAL STATEMENTS
In 1991, the Company entered into a term loan and line-of-credit agreement with
a bank. The line-of-credit agreement provided for borrowings of up to
$1,000,000, not to exceed 80 percent of accounts receivable aged 89 days or
less, plus 30 percent of raw materials and finished goods inventory, up to
$150,000. The line-of-credit agreement expired on August 31, 1992. The term loan
provided for a $250,000 loan to be used for the purchase of equipment, to be
repaid in monthly installments through August 1995. The term loan and
line-of-credit agreements were collateralized by all of the assets of the
Company and contained certain financial covenants. During 1992, the Company was
in violation of these covenants and was notified by the bank that no further
amounts could be drawn under the line-of-credit. These covenants were cured in
October 1992 with the refinancing of the loan as discussed below.
In October 1992, the Company refinanced the outstanding balance of its
line-of-credit and term loan with a new loan of $587,000 from the bank. In July
1994, the Company borrowed an additional $80,000 from the bank. Both loans are
collateralized by a U.S. Treasury bill. As principal payments are made, the
Company may request reductions in the collateral balance. The new loan contains
no financial covenants other than the maintenance of adequate collateral.
Currently, the collateral must exceed 105% of the outstanding principal balance
of the loan. At April 30, 1995, the balance of the Treasury Bill collateral was
$374,687 and the loan balance was $194,750.
Scheduled maturities of long-term debt are as follows:
1996 $226,171
1997 131,754
-------
$357,925
========
6. Commitments
and
Contingencies
Operating leases
The Company leases office space and certain office equipment under operating
lease arrangements that expires at various dates through 1998. The main office
lease provides for scheduled rent increases in the future which are being
amortized over the lease period. Rent expense for the years ended April 30,
1995, 1994, and 1993, was approximately $245,000, $214,688 and $138,500,
respectively. Aggregate future minimum lease payments under the operating leases
are $261,436 in fiscal 1996; $204,735 in fiscal 1997; and $178,654 in fiscal
1998.
NOTES TO FINANCIAL STATEMENTS
Repurchase Commitment
During fiscal 1995, the Company transferred at cost, analog modem raw materials
and subassemblies valued at $273,000 to an electronics manufacturer. Under the
terms of the agreement, the manufacturer will build and resell the modems to
FastComm on an as needed basis or may sell the modems to its own customers
through the end of calendar year 1995. At such time, the contract may be
extended or FastComm may be required to repurchase any remaining modem
materials. No revenue was recognized in connection with this transfer of
inventory.
Compensation
The Board of Directors has agreed to pay the Company's president a base annual
salary plus bonus, as determined by the Board, through fiscal year 1996. During
1993, the Company's president gave up his right to receive any salary.
Accordingly, the Company recorded no salary related to his employment in 1993.
The president's salary was restored in November, 1993, and the president has
waived his right to any unpaid salary or bonus from periods prior to November,
1993.
The Company also maintains employment agreements with several key employees. The
agreements provide for base compensation, commissions, and stock options that
expire at various dates through fiscal 1998 or upon termination of employment
(see note 9).
Research and Development Contracts
During fiscal 1994, the Company entered into a contract to perform research and
development activities for a third party. In 1995 and 1994, revenues recognized
and costs incurred in connection with the contract were $31,774 and $63,548, and
$108,091 and $216,182, respectively. Under the agreement, the Company is
required to pay royalties to the third party for sales of products developed
from funded research and development activities.
If no products are sold, the Company is not obligated to repay the funds. As of
April 30, 1995, no royalties have been paid as the products were still under
development.
7. Stockholders'
Equity
Stock Issuances
In March 1992, the Company issued 285,000 shares of its common stock to the
shareholders of Watch Hill Research Inc. ("Watch Hill") as part of a purchase
agreement (see note 10). The Company also issued 95,000 shares to be placed in
escrow pending final resolution of litigation associated with the acquisition of
certain assets of Watch Hill. The Company settled the litigation during fiscal
1993. 46,583 shares and 6,500 shares in escrow were returned to the Company as
treasury stock in 1993 and 1994, respectively. The treasury stock was
subsequently retired.
NOTES TO FINANCIAL STATEMENTS
In November 1992, the Company sold 1,381,000 shares of common stock in a private
placement and received gross proceeds of $2,209,600. Additionally, as discussed
below, warrants were exercised resulting in the issuance of 655,312 shares of
common stock.
On March 15, 1994 the Company purchased assets and assumed certain liabilities
of Zybel Microsystems, Inc. (Zybel). The total purchase price of $220,000 was
paid through the issuance of common stock based on the stock value at the date
of the agreement. The stock was not issued until fiscal 1995; therefore, the
1994 financial statement reflected a payable for this amount (See Note 5). Zybel
owned 1,100 shares of the Company's stock which were included in the purchased
assets. These shares were included in treasury stock at April 30, 1994 at their
allocated cost and were cancelled during fiscal 1995. Goodwill in the amount of
approximately $102,000 was recorded as a result of the purchase.
In March, 1995, the Company completed the sale of 405,460 unregistered shares of
common stock in a private placement and received net cash proceeds of
$1,294,000. Also, in March, 1995, the Company completed a Regulation S placement
of 700,000 shares of common stock and received net cash proceeds of $2,907,500.
Initial Public Offering
In April 1988, the Company consummated an initial public offering (IPO) of its
common stock. In connection with the IPO, the Company sold 400,000 units, each
unit consisting of four shares of common stock, par value $0.01, and a warrant
to purchase one additional share of common stock at $1.50 per share, for $5.00
per unit. These warrants were exercisable through April 11, 1993. In February
1992, the Company offered callable Class B warrants to holders of the Class A
warrants upon exercise of the Class A warrants. Class A warrants for 396,500
shares of common stock were exercised during 1993 and 3,500 Class A warrants
expired on April 11, 1993. Upon exercise of each Class A warrant, the Company
issued one Class B warrant to purchase on additional share of common stock at
$4.25 per share. The Company may redeem the Class B warrants upon 30 days notice
if the common stock fair market value exceeds established limits and upon Board
approval. During fiscal 1993, 396,500 Class B warrants were issued and 134,812
Class B warrants were exercised. In August 1993, the Company called the 261,688
Class B warrants outstanding. All warrants were exercised except for 200
warrants which were redeemed for cash at $.14 per warrant.
Additionally, the Company sold to the underwriter, for nominal consideration
warrants to purchase 40,000 units at $6.00 per unit which expired in April 1993.
The underwriter exercised 31,000 warrants during 1993 and 9,000 underwriter
warrants expired in April 1993.
8. Stock Options
In 1991 and 1992, the Board of Directors approved the 1991 Non-Qualified, 1992
Non-Qualified and 1992 Incentive Stock Option Plans (the Plans) under which
options to purchase up to 2,260,000 shares of common stock may be granted to
officers, directors and other key employees of the Company.
NOTES TO FINANCIAL STATEMENTS
The exercise price of each option may not be less than 100% of the fair market
value of the stock on the date of grant for incentive stock options or 85% of
such fair market value for non-qualified stock options, as determined by the
Board. Options vest over a three year period and expire five years from the date
of grant and, in most cases, upon termination of employment.
The following table relates to options outstanding, granted, exercised, and
canceled during 1995, 1994 and 1993, under the Plan:
Option
Number Price
Options of Shares Per Shares
- ------- --------- ----------
Outstanding at
April 30, 1993 1,399,000 $.01 to 7.75
April 30, 1994 1,196,185 $.01 to 11.88
April 30, 1995 1,123,968 $1.09 to 5.88
Granted
During 1993 959,000 $1.00 to 7.75
During 1994 519,500 $10.50 to 11.88
During 1995 956,367 $3.25 to 5.88
Exercised
During 1993 160,000 $.01 to 1.00
During 1994 716,715 $.01 to 6.38
During 1995 316,400 $.01 to 5.13
Cancelled
During 1993 60,000 $.01 to .01
During 1994 5,600 $5.13 to 11.38
During 1995 712,184 $3.25 to 11.88
At April 30, 1995, 174,001 stock options are exercisable under the plans.
9. Acquisition of
Sigma Research
On July 29, 1991, the Company acquired rights to certain products of Sigma
Research, a New Jersey partnership and developer of advanced frame relay
technology. In consideration for the sale of the rights to the SNA terminal
adapter product, the Sigma Research partners were issued 22,500 shares of the
Company's common stock, valued at $2.00 per share, and paid $195,000. The 22,500
shares of the Company's common stock were issued in fiscal 1993. In a related
transaction, the Company entered into a license agreement for the SNA terminal
adapter products owned by Protocom Devices. The license agreement required a
one-time payment by the Company of $25,000.
The purchase price of these assets is reflected at cost and is being amortized
over five years.
NOTES TO FINANCIAL STATEMENTS
In fiscal 1992, the Company also entered into employment agreements with five
individuals from Sigma. These agreements provide for payment of annual base
salaries and, in certain instances, payment of commissions and stock options.
Options to purchase up to 510,000 shares of common stock over a period of three
years were also granted to these individuals. The options are exercisable at
$0.01 per share as long as the option holder is employed by the Company during
the relevant option exercise period.
10. Acquisition of
Watch Hill
Effective August 14, 1991, the Company entered into an agreement with Watch
Hill, a developer of high speed data communications compression devices. The
agreement included an option for the Company to acquire all of the assets of
Watch Hill in exchange for 475,000 shares of the Company's common stock based on
commercial viability of a certain product. Additionally, the purchase option
could be extended by the Company with a decrease in the number of shares
required to be issued.
In November 1991, the Company filed suit against Watch Hill and its principals
for specific performance of the agreement. In March 1992 the state supreme court
upheld the agreement and the Company issued 285,000 shares to the shareholders
of Watch Hill. The shareholders of Watch Hill then filed suit for a additional
95,000 shares which the Company issued into escrow pending settlement. The
purchase price of Watch Hill and certain advances made to them were expensed as
research and development cost in fiscal 1992.
In January 1993, the Company, Watch Hill and its successor WHR Corp reached a
final settlement. The Company received 46,583 shares of common stock and 6,500
shares of stock previously held in escrow. Additionally FastComm is to receive a
5% royalty on a certain WHR Corp. product of which none has been received as of
April 30, 1995.
11. Income Taxes
The components of income tax (benefit) expense are summarized as follows:
For the Year ended April 30, 1995 1994 1993
---------- ---------- --------
Current
Federal $ -- $ (10,000) $185,700
State -- -- --
Utilization of NOL
Federal -- -- (167,100)
State -- -- --
-- (10,000) 18,600
Deferred
Federal -- -- (4,600)
State -- -- --
$ -- $(10,000) $14,000
NOTES TO FINANCIAL STATEMENTS
The Company has net operating loss carryforwards for regular tax purposes of
approximately $13,410,000. In addition, the Company has research and development
credit carryforwards of approximately $274,000, at April 30, 1995. The Company
was subject to alternative minimum tax in 1993 of approximately $9,000 and paid
approximately $10,000 toward estimated taxes for 1994. The Company recorded a
tax refund receivable at April 30, 1994 of $10,000 as a result of the refund of
the estimated payments.
The difference between the Federal Tax rate and the effective tax rate realized
as a percent of pretax earnings for the years ended April 30, 1995 1994, and
1993, is as follows:
1995 1994 1993
------------------------- ------------------------- -------------------------
Amount Rate Amount Rate Amount Rate
----------- -------- ----------- -------- ----------- --------
Tax provision
(benefit) at
statutory
rates
$(1,388,000) (34.0%) $ (683,033) (34.0)% $ 227,000 34.0%
Benefit of net
operating loss
carryforward -- -- -- -- (260,600) (39.0)
Tax benefit
not recorded 1,777,800 43.3 2,946,557 146.7 -- --
Compensation
element of
stock
options (389,800) (9.3) (2,242,761) (111.6) 58,295 8.7
Other -- -- (30,763) (1.6) (10,695) (1.6)
----------- -------- ----------- -------- ----------- --------
$ -- $ -- $ (10,000) (0.5)% $ 14,000 2.1%
----------- -------- ----------- -------- ----------- --------
The primary differences between income (loss) for financial reporting and income
tax purposes is the recognition of reserves for uncollectible accounts
receivable and obsolete inventory, the compensation element of stock options and
research and development expenses, which are not currently deductible for income
tax purposes.
No deferred taxes have been recognized in the accompanying consolidated
financial statements as of April 30, 1995 and 1994. The components of deferred
income taxes are as follows:
April 30, 1995 1994
----------- -----------
Deferred tax liabilities
Accelerated depreciation $ 22,000 $ 17,000
----------- -----------
Total deferred tax liabilities $ 22,000 $ 17,000
=========== ===========
NOTES TO FINANCIAL STATEMENTS
Deferred tax assets
Allowance for doubtful accounts 69,000 94,000
Inventory reserve 213,000 32,000
Tax credits 274,000 223,000
NOL carryforwards 4,631,000 3,032,000
Other 33,000 7,000
Total deferred tax assets 5,220,000 3,388,000
Net deferred tax assets 5,198,000 3,371,000
Less: Valuation allowance (5,198,000) (3,371,000)
----------- -----------
Total $ -- $ --
=========== ===========
Management has provided a valuation allowance for deferred tax assets as of
April 30, 1995 and the benefit of these items will be recognized in future years
to the extent that such items are available to reduce taxable income.
12. Significant
Customers and
Foreign Exports
During 1995, the Company made sales to two customers which accounted for
approximately 15% and 10% of revenues. During 1994, the Company made sales to
two customers which accounted for approximately 14% and 11% of revenues and
generated license fees from a third customer which accounted for approximately
12% of revenues. During 1993, the Company made sales to one customer which
accounted for approximately 23% of revenues. In 1995 and 1993, the Company had
export sales to foreign customers totalling approximately $1,200,000 and
$825,000, respectively. In 1994 sales to foreign customers were less than 10%.
At April 30, 1995 trade receivable from one customer represented 28% of total
trade receivables outstanding.
13. Success
Sharing Plan
Effective May 1, 1991, the Company established the FastComm Communications
Corporation Success Sharing Plan, a defined contribution plan that covers
substantially all of its employees. Employer contributions are determined using
an actuarially determined factor based on the employee's age and compensation
level. No employer contributions were made for the years ended April 30, 1995 or
1994 or 1993.
14. Related Party
Transactions
During 1995, 1994 and 1993, the Company had sales of approximately $415,000,
$588,000 and $80,500, respectively, to a customer whose Board of Directors
includes the president of the Company. At April 30, 1995 and 1994, accounts
receivable includes approximately $51,000 and $337,000, respectively from this
related party which was paid to the Company subsequent to year end. During 1994,
the Company sold approximately
NOTES TO FINANCIAL STATEMENTS
$247,000 of product to a customer, Texel Systems Corporation, that is controlled
by an individual who is the brother-in-law of the Company's President and
Principal Executive Office. This amount was paid to the Company in 1994.
15. Fourth Quarter
Adjustment
During the fourth quarter ended April 30, 1995, the Company recorded adjustments
to its reserve for inventory obsolescence ($295,000) and allowance for doubtful
accounts ($200,000) which, in the aggregate, had the effect of increasing both
the operating loss and the net loss by approximately $495,000 or by $0.06 per
share.
During the fourth quarter ended April 30, 1994, the Company recorded certain
year end adjustments which, in the aggregate, had the effect of increasing both
the operating loss and the net loss by approximately $726,000 or $0.10 per
share. The fourth quarter adjustments relate to the elimination of product
sales, net, ($296,000 or $0.04 per share), the increase in allowance for
doubtful accounts ($220,000 or $0.03 per share) and fiscal year end adjustments
to inventory and accounts payable to record book to physical adjustments and to
write-off obsolete inventory ($210,000 or $0.03 per share). The adjustments to
product sales and to the allowance for doubtful accounts, aggregating $516,000
or $0.07 per share, relate to previously issued quarterly financial statements.
16. Restatement of
Prior Years'
Financial
Statements
The Company has restated 1993 financial statements to reflect corrections to the
cost of goods sold and additional paid-in capital accounts, in connection with
the re-audit of the 1993 financial statements (refer to Item 9 to the 1995
Annual Report on Form 10-K).
With respect to the 1993 financial statements, the restatement reduced the
pre-tax income and the net income by $90,000 ($0.01 per share). The restatement
has no effect on total stockholders' equity.
These matters are summarized in the table below:
1993
Year ended April 30, ($000's except per share data)
Net income (loss) as originally stated: $ 653
Adjustments: (90)
Net income (loss) as restated: $ 563
Per share of common stock:
Net income (loss) as originally stated: $ 0.09
Adjustments: 0.01)
Net income (loss) per share, as restated: $ 0.08
NOTES TO FINANCIAL STATEMENTS
17. Supplemental
Cash Flow
Information
Supplemental information on interest and income taxes paid is as follows:
For the Year ended April 30, 1995 1994 1993
---------- ---------- ----------
Interest $ 24,019 $ 25,994 $ 34,053
Income taxes $ -- $ 19,000 $ --
Supplemental disclosure of non-cash investing and financing activities:
For the Year ended April 30, 1995 1994 1993
---------- ---------- ----------
Incurrence of debt in connection
with acquisition of patent rights,
net of repayments $ 160,883 $ -- $ --
Incurrence (settlement) of debt
in connection with acquisition
of assets of another company (220,000) 220,000 --
Acquisition of assets of ZyBel,
net of cash assumed of $93,196
Current assets -- 65,165 --
Property, equipment -- 7,015 --
Other intangibles -- 1,134 --
Assumption of liabilities
of ZyBel
Current liabilities -- 16,242 --
Debt -- 44,763 --
Recording of Goodwill from
the purchase of ZyBel 102,257 --
During fiscal 1994, in connection with the acquisition of ZyBel, the Company
acquired treasury stock in the amount of $12,238. During fiscal 1995, the
Company retired this treasury stock.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On March 19, 1993, the Company engaged Deloitte & Touche ("D&T") as its
independent certified public accountants for the fiscal year ended April 30,
1993. On May 18, 1994, D&T resigned.
By action taken effective May 18, 1994, the Board of Directors of the Company
accepted the resignation of D&T and authorized senior management to seek to
engage an accounting firm and independent certified public accountants for the
Company for the fiscal year ended April 30, 1994.
In March 1993, D&T was initially engaged to audit the financial statements of
the Company for the year ended April 30, 1993. During the audit for the fiscal
year ended April 30, 1993, and during the interim period from May 1, 1993 to May
18, 1994, there were no disagreements with D&T on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
D&T advised the Company in its management letter dated July 16, 1993 of certain
of its concerns, including weaknesses in internal accounting controls.
Additionally, D&T advised the Company of its concerns in the following matters,
which had not been resolved prior to D&T's resignation and which are considered
by D&T to be reportable events under applicable regulation:
a. Sales cut off at April 30, 1994. Although all product was packed prior to
midnight of April 30, 1994, an immaterial portion was placed with a common
carrier between midnight of April 30, 1994 and 1:30 a.m. of the following
morning (May 1, 1994).
b. Allowance for sales returns and bad debts relating to past due balances in
accounts receivable, potential returns and/or bad debts.
c. The policy and disclosure regarding the dates of fiscal quarter ends.
The Company has authorized D&T to respond fully to the successor accountant
concerning the subject matter of each of the above.
The report of D&T on the financial statements of the Company for the fiscal year
ended April 30, 1993 contained no adverse opinion or disclaimer of opinion, nor
was it qualified or modified as to audit scope or accounting principles;
however, such report of D&T noted that the financial statements of the Company
for the fiscal year ended April 30, 1992, were audited by other auditors whose
report, dated July 2, 1992, expressed an unqualified opinion on those statements
and included an explanatory paragraph which described a going concern
uncertainty.
Effective June 3, 1994, the firm of BDO Seidman was engaged by the Company to
serve as its independent public accountants to audit the financial statements of
the Company commencing with the fiscal year ended April 30, 1994.
Subsequent to this change in accountants, Deloitte & Touche ("D&T") refused to
permit the reuse or reissuance of its reports on the Company's financial
statements for the year ended April 30, 1993, stating that it did not believe
that the Company had furnished satisfactory evidence of its quarter ending
policy. Should it not receive such evidence, Deloitte & Touche had informed the
Company that any reissuance would include a scope limitation with respect to
that disclosure and a disclaimer of opinion on such disclosure. Inasmuch as the
Company advised Deloitte & Touche of its quarter ending policy on at least two
occasions management has advised Deloitte & Touche that no further evidence was
required and strenuously objected to Deloitte & Touche's ex post facto refusal
to reissue its opinion on financial statements which had not changed and were
unaffected by the policy. Moreover, D&T reissued its opinions on two occasions
subsequent to the 1993 fiscal year end, in October 1993 and in January 1994.
The Company's current accountants, B.D.O. Seidman, agreed to perform a three
year audit in connection with the audit of the Company's fiscal 1995 financial
statements.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The following lists the directors and executive officers of the Company, their
ages, descriptions of their business experience and positions held with the
Company as of July 17, 1995:
Name Age Position
Peter C. Madsen(1) 44 President, Chief Executive Officer
and Chairman of the Board
Gary H. Davison 40 Senior Vice President, Chief Operating
Officer and Director
Robert C. Abbott 51 Vice President - Engineering, Secretary
William A. Flanagan 53 Vice President - Technology
Charles L. Deslaurier 54 Vice President - Contracts and Administration
Mark H. Rafferty 40 Vice President - Finance, Treasurer
Edward R. Olson(1)(2) 55 Director
Thomas G. Amon(2) 47 Director
(1) Member Stock Option Committee.
(2) Member Audit Committee.
Robert N. Dennis, former Chairman of the Board died on May 28, 1995.
All directors hold office until the next annual meeting of the shareholders and
the election and qualification of their successors. The officers are elected by
and serve at the discretion of the Board of Directors. See "Employment and
Control Arrangements" beneath Item 11.
Peter C. Madsen has been President, Chief Executive Officer and a director of
the Company since September 1992. Mr. Madsen was President of Professional
Marketing Corporation, a telecommunications equipment distributor, from February
1992 to September 1992. From November 1986 to January 1992, he was an officer of
the Newbridge Networks Corporation, a Canadian telecommunications company, most
recently as Vice President and General Manager, United States Region, and
President of Newbridge Networks Inc., Newbridge Networks Corporation's United
States subsidiary. Mr. Madsen currently serves as a director of Newbridge
Networks Corporation.
Gary H. Davison was named Senior Vice President, Chief Operating Officer and a
director of the Company on June 6, 1994. From 1988 to 1994, Mr. Davison held a
variety of positions with Newbridge Networks Inc., most recently as Vice
President; U.S. Sales. From 1986 to 1988, Mr. Davison was General Manager,
Transmission Products at Hekemian Laboratories. From 1976 through 1986, Mr.
Davison held a variety of positions at AT&T Corp.
Robert C. Abbott has served as Vice President - Engineering and as Secretary of
the Company since 1984. From December 1980 until joining the Company, he served
as product manager, VF Products, for the Telesystems Division of Comsat
Corporation in Fairfax, Virginia.
William A. Flanagan has served as Vice President - Marketing and Technology and
most recently as Vice President Technology of the Company since September 1991.
Prior to that, from 1987 through September 1991, he was Vice President - Network
Marketing and Vice President - Technology for Newbridge Networks Inc. Mr.
Flanagan is the author of a variety of best selling books on digital
communications technology.
Charles L. Deslaurier has been Vice President - Contracts and Administration of
the Company since September 1992. Mr. Deslaurier was Vice President of
Professional Marketing Corporation, a telecommunications equipment distributor,
from February 1992 to September 1992. From December 1986 to January 1992, he was
Vice President of Contracts and Administration for Newbridge Networks Inc.
Mark H. Rafferty has been Vice President, Chief Financial Officer and Treasurer
of the Company since August 1993. From August 1992 to August 1993, Mr. Rafferty
was Vice President, Finance at Newbridge Networks Inc. From August 1987 through
August 1992, Mr. Rafferty was Controller of Newbridge Networks Inc.
Edward R. Olson has served as a director since January 1989. From 1990 to
present, Mr. Olson has served as the President, Chief Executive Officer and
Chairman of M-C Industries, Inc., a fluid hydraulics equipment manufacturer.
Commencing July 1, 1995, Mr. Olson become a principal in KPMG Baymark LLC, an
independent consulting firm in strategic alliance with KPMG Peat Manufacturing,
LLP. For the past five years, Mr. Olson has served as President of Ed Olson
Consulting Group, Ltd., a management consulting firm. From 1992 to 1993 Mr.
Olson was Senior Vice President, Operations of Audiovox Corp., a company
concentrating in the marketing and distribution of consumer electronic devices.
Mr. Olson is Chairman and President of York Industries, York, PA and S&L Metal
Products, Queens, NY.
Thomas G. Amon as served as a director since December 1994. Mr. Amon has been a
partner in the law firm of Amon & Sabatini for the past five years.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the National Association of Securities Dealers, Inc. Automated
Quotations (NASDAQ) system. Officers, directors and greater than ten percent
shareholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons. The Company believes that during its fiscal year
ended April 30, 1995, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
Item 11. Executive Compensation.
Board Report on Executive Compensation
The Company does not have a formal compensation committee. Compensation levels
for executive officers are set by the Board of Directors. The Board of Directors
is presently comprised of the following individuals: Peter C. Madsen, Thomas G.
Amon, Edward R. Olson and Gary H. Davison. Messrs. Davison and Amon joined the
Board only after the close of fiscal 1994. Robert N. Dennis resigned from the
Board effective October 31, 1994. Salaries are reviewed annually and are based
on individual performance, the extent of individual responsibility and
comparisons with salaries paid in the industry.
The Company recruits for its executive officer positions from within the
communications industry. In most instances, the source Company is significantly
larger than the Company. It is the policy of the Board of Directors of FastComm
to hire executive officers at levels below that of their current salaries along
with a stock option package intended to make up for the differentiation and to
provide a performance incentive. The Company feels that stock options are an
attractive benefit in that they enhance performance and loyalty at little cost.
The Board establishes compensation levels based on experience and
responsibility. No executive officer has received a salary increase.
The Board granted three executive officers options during fiscal 1995. One of
the option grants was based on performance and responsibility. The two remaining
grants were conditions of employment.
The Board adheres to a policy of granting options to executive officers based
upon performance and responsibility. In addition, the Board also considers the
relative importance of the job function being performed and the number of
options currently held by the executive officer.
/s/ Gary H. Davison, /s/ Thomas G. Amon,
/s/ Edward R. Olson, /s/ Peter C. Madsen
Compensation Committee Interlocks and Insider Participation
During the year, Peter C. Madsen and Edward R. Olson, as directors participated
in deliberations of the Company's Board of Directors concerning executive
officer compensation, including their own. Other than the foregoing, none of
such directors was party to any reportable interlock or participation during
fiscal 1995. During the fiscal year ended April 30, 1995, the Company sold
approximately $415,000 of product under normal terms and conditions to Newbridge
Networks Inc. ("Networks") a United States subsidiary of Newbridge Networks
Corporation, a Canadian Telecommunications Company ("Newbridge"). Peter C.
Madsen, President, Chief Executive Officer and a director of the Company is also
a director of Newbridge.
Summary Compensation Table
The following table sets forth information regarding compensation paid by the
Company to the six named executives (the "Named Executive Officers") for
services furnished in all capacities to the Company during the fiscal year ended
April 30, 1995, as well as such compensation paid by the Company to the Named
Executive Officers during the Company's two previous fiscal years:
Annual Compensation Long-Term Compensation Awards
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
Other Annual Shares of
Salary Bonus Compensation Common Stock Underlying
Name and Principal Position Year ($) ($) ($) (1) Options ( #)
- --------------------------- ---- ---- ---- ------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
Peter C. Madsen,(2) 1995 113,344 -0- 6,219 -0-
President , CEO and Chairman 1994 71,478 -0- 6,219 -0-
of the Board of Directors 1993 -0- -0- 6,000 425,000
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
Gary H. Davison(3) 1995 113,797 25,000 -0- 100,000
Senior Vice President, COO, 1994 -0- -0- -0- -0-
Director 1993 -0- -0- -0- -0-
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
Mark H. Rafferty(4) 1995 110,825 -0- 5,824 50,000
Chief Financial Officer 1994 76,505 -0- 4,853 75,000
1993 -0- -0- -0- -0-
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
Charles L. Deslaurier(5) 1995 102,429 -0- 6,331 20,000
Vice President - 1994 125,414 -0- 6,331 20,000
Contracts and Administration 1993 27,417 -0- 6,000 150,000
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
Robert C. Abbott(6) 1995 100,750 -0- -0- -0-
Vice President of 1994 96,255 -0- -0- 50,000
Engineering, 1993 78,573 -0- -0- -0-
Secretary
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
William A. Flanagan,(7) 1995 113,943 -0- 6,632 -0-
Vice President - 1994 110,923 15,000 6,500 -0-
Marketing and Technology 1993 106,073 -0- 6,500 -0-
- --------------------------------- ------ ---------- -------- --------------- -------------------------------
- --------------
(1) Automobile benefit.
(2) At April 30, 1995, Mr. Madsen held 692,866 restricted shares of Common
Stock with a market value of $3,637,547 at that date; Mr. Madsen waived the
payment of his entire salary in the 1993 fiscal year and $28,522 of his
salary in the 1994 fiscal year.
(3) At April 30, 1995, Mr. Davison held 46,250 restricted shares of Common
Stock with a market value of $242,813 at that date.
(4) At April 30, 1995, Mr. Rafferty held 8,921 restricted shares of Common
Stock with a market value of $46,835 at that date.
(5) At April 30, 1995, Mr. Deslaurier held 143,250 restricted shares of Common
Stock with a market value of $752,063 at that date.
(6) At April 30, 1995, Mr. Abbott held 222,408 restricted shares of Common
Stock with a market value of $1,167,642 at that date.
(7) At April 30, 1995, Mr. Flanagan held 217,421 restricted shares of Common
Stock with a market value of $1,141,460 at that date.
Fiscal 1995 Option Grants
The following table sets forth information concerning grants of stock options to
the Named Executive Officers made pursuant to the Company's 1992 Stock Option
Plan during the fiscal year ended April 30, 1995:
Stock Option Grants in Fiscal Year 1995
Individual Grants
Securities Percent of Potential Realizable
Underlying Total Options Exercise Value at Assumed
Options Granted to or Annual Rates of Stock
Granted Employees in Base Price Expiration Price Appreciation
Name (#) Fiscal ($/sh) Date For Option Term
Year 5% ($) 10% ($)
----- ------ -------
Peter C. Madsen -0- - - - - -
Gary H. Davison 100,000 26.04% $4.38 7/29/99 121,000 267,000
Mark H. Rafferty 125,000 32.55% $4.38 9/9/99 151,250 333,750
Charles L. 40,000 10.42% $5.88 9/9/99 65,000 143,800
Deslaurier
Robert C. Abbott 50,000 13.02% $4.38 9/9/99 60,500 137,500-
William A. Flanagan -0- - - - - -
- --------------
On September 9, 1994 all Optionholders were offered the opportunity to have
outstanding options repriced to $4.38 per option conditional upon waiver of
previously vested options and acceptance of a new vesting period. With the
exception of outstanding options to purchase 80,900 shares, all Optionholders
accepted this offer to reprice their options as of that date.
Mssrs. Rafferty, Deslaurier, and Abbott accepted the offer to reprice 75,000 ,
20,000 and 50,000 options respectively as of that date.
Fiscal 1995 Aggregated Option Exercises and Year-End Option Values
The following table sets forth information concerning each exercise of stock
options during the fiscal year ended April 30, 1995 by each of the Named
Executive Officers and the fiscal year-end value of unexercised options held by
such persons:
Shares Value of
Underlying Unexercised
Unexercised in-the-money
Options at Options at
Shares Fiscal Year- Fiscal Year-
Acquired Value End (#) End ($)
on Realized Exercisable/ Exercisable/
Name Exercise ($) Unexercisable Unexercisable
---- -------- ------ ------------- -------------
(#)
Peter C. Madsen 125,000 $441,406 -0- / -0- -0- / -0-
Gary H. Davison - - -0- / 100,000 -0- / $137,500
Mark H. Rafferty - - -0- / 125,000 -0- / $171,875
Robert C. Abbott - - -0- / 50,000 -0- / $68,750
Charles L. 65,000 221,406 45,000 / 40,000 $209,531 /
Deslaurier $25,000
William A. Flanagan - - -0- / -0- -0- / -0-
Employment and Control Arrangements
Effective September 18, 1992 (the "Effective Date"), the Company, Mr. Robert N.
Dennis and Mr. Edward R. Olson, as the "Current Directors" therein, and Mr.
Peter C. Madsen entered into an employment agreement (the "Employment
Agreement") regarding the terms of Mr. Madsen's employment by the Company and
the scope of the relationships among the parties to the Employment Agreement.
In particular, pursuant to or in connection with the Employment Agreement, as
the case may be, subject to confirmation by the Board of Directors which
occurred as of the Effective Date, (i) Mr. Dennis resigned as President and from
all executive offices held by him in the Company, (ii) Mr. Madsen was elected
President and Chief Executive Officer of the Company for an initial term
expiring on January 31, 1995 at an initial base salary of $100,000 per year,
(iii) Mr. Madsen was granted an option to purchase a maximum of 425,000 shares
of Common Stock of the Company at an exercise price of $1.09375 per share upon
certain terms and conditions, (iv) Mr. Deslaurier was elected a Vice President
of the Company, (v) Mr. Deslaurier was granted an option to purchase a maximum
of 150,000 shares of Common Stock of the Company at an exercise price of
$1.09375 per share upon certain terms and conditions, (vi) Mr. Rick Sampley was
granted an option to purchase a maximum of 25,000 shares of Common Stock of the
Company at an exercise price of $1.09375 per share upon certain terms and
conditions, (vii) the Company and Mr. Dennis entered into an Amended and
Restated Employment Agreement providing for, among other things, the employment
of Mr. Dennis as Senior Advisor to the President at an initial salary of
$200,000 per year for an initial term of three years, subject to earlier
termination by Mr. Dennis at any time or by the Company, with or without cause,
on or after September 15, 1993, and (viii) Mr. Madsen and Mr. Peter Sommerer
were elected directors of the Company to fill two vacancies then existing on the
Board of Directors. Mr. Dennis was paid $99,458 pursuant to this arrangement in
the 1994 fiscal year during which year he resigned as Senior Advisor to the
President.
Under the Employment Agreement, Mr. Madsen has been granted full control of and
authority over the operations of the Company, subject to the general oversight
of the Board, and the Current Directors have agreed not to take any action
inconsistent with their respective obligations thereunder. The Employment
Agreement and the related actions resulted in an effective change in control of
the Company away from Mr. Dennis to Mr. Madsen.
Director Compensation
Directors receive no salary for their services as such; however, the Board of
Directors has authorized payment of reasonable expenses incurred by non-employee
directors in connection with attendance at meetings of the Board of Directors.
The Chairman of the Board receives no compensation for serving in such capacity.
In fiscal 1994, Mr. Dennis received $99,458 in compensation as Senior Advisor to
the President. As Senior Advisor, Mr. Dennis' duties included consultation with
and advise to the President and other Senior Management on technical and
business matters related to past, present and future operations, products and
strategies and the undertaking of special projects related to the above at the
request of the President.
Shareholder Return Performance Graph
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock with that of the
cumulative total return of the NASDAQ Stock Market - US Index ("NASDAQ STOCK
MRKT - US") and the NASDAQ Telecommunications Index ("NASDAQ TELECOM") for the
five year period ended on April 30, 1995. The information below is based on an
investment of $100, on April 30, 1989, in the Company's Common Stock, the NASDAQ
STOCK MRKT - US and the NASDAQ TELECOM. The Company's Management consistently
cautions that the stock price performance shown in the graph below should not be
considered indicative of potential future stock price performance.
[GRAPHIC OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management.
At July 17, 1995, there were 9,444,529 shares of Common Stock of the Company
issued and outstanding. As of such date, options to purchase 1,123,968 shares of
Common Stock were outstanding.
Each holder of shares of Common Stock, but not holders of unexercised options,
is entitled to one vote per share on each matter which may be presented at a
meeting of shareholders. Cumulative voting is not allowed. The Company's Common
Stock is traded on the NASDAQ National Market System under the symbol "FSCX."
The following table sets forth information regarding ownership of Common Stock
of the Company at July 17, 1995, by each person who is known by management of
the Company to own beneficially more than five percent of the Common Stock
(setting forth the address of each such person), by each director and nominee
for election as a director, by the Named Executive Officers of the Company
identified beneath "Item 11. Executive Compensation," and by all directors and
executive officers of the Company as a group. Shares issuable on exercise of
warrants or options exercisable within 60 days are deemed to be outstanding for
the purpose of computing the percentage ownership of persons beneficially owning
such warrants or options, but have not been deemed to be outstanding for the
purpose of computing the percentage ownership of any other person. Insofar as is
known to the Company, the persons indicated below have sole voting and
investment power with respect to the shares indicated as owned by them except as
otherwise stated in the notes to the table.
Amount and Nature
Name of Beneficial of Beneficial Percent of Class
- ------------------- -------------- ----------------
Owner Ownership
- ------------------ ---------
Robert N. Dennis Estate 774,341 8.20%
Peter C. Madsen(1) 692,866 7.34%
Gary H. Davison(1) 79,583 (2) .84%
Robert C. Abbott 239,075 (3) 2.53%
Charles L. Deslaurier 194,917 (4) 2.06%
William A. Flanagan 217,421 2.30%
Edward R. Olson(1) 6,667 (6) .07%
Thomas G. Amon(1) 6,650 (7) .07%
Mark H. Rafferty 50,588 (5) .54%
All Directors and Executive 2,262,107(8) 23.95%
Officers as a group (eight persons)
(1) Director.
(2) Gives effect to 33,333 options owned by Davison exercisable within 60 days.
(3) Gives effect to 16,667 options owned by Abbott exercisable within 60 days.
(4) Gives effect to 51,667 options owned by Deslaurier exercisable within 60
days.
(5) Gives effect to 41,667 options owned by Rafferty exercisable within 60
days.
(6) Gives effect to 6,667 options owned by Olson exercisable within 60 days.
(7) Shares are held in the Amon & Sabatini Pension and Profit Sharing Plans, of
which Mr. Amon is Co-Trustee.
(8) Based upon 9,444,531 shares outstanding at July 17, 1995
- -------------
The Company is unaware of any arrangement the operation of which could at a
subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions.
During the fiscal year ended April 30, 1995, the Company sold approximately
$415,000 of product under normal terms and conditions to Newbridge Networks Inc.
("Networks") a United States subsidiary of Newbridge Networks Corporation, a
Canadian Telecommunications Company ("Newbridge"). FastComm sells to Newbridge
Networks Corporation under net 30 day terms with prompt payment discounts. Such
terms are consistent with that of similar customers. Title passes on shipment of
product. Under the terms of the contract, Newbridge may return purchased and
paid for (during the previous six month period) but unused products to FastComm
for either warranty revalidation and/or revision level change (hardware or
firmware). Peter C. Madsen, President, Chief Executive Officer and a director of
the Company is also a director of Newbridge.
The Company paid the law firm of Amon & Sabatini $159,000 in the fiscal year
ended April 30, 1995. Thomas G. Amon, a Director of the Company, since December
1994, is a partner of Amon and Sabatini.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) and (a)(2) Financial Statements and Schedules.
The consolidated financial statements and financial statement schedules filed as
a part of this Report are listed beneath Item 8 at page 24 of this Report.
(a)(3) Exhibits.
The exhibits filed as a part of this Report are listed on the Exhibit Index at
page 65 of this Report.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter ended April
30, 1995.
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 10, 1996.
FASTCOMM COMMUNICATIONS CORPORATION
By: /s/ Peter C. Madsen
-----------------------
Peter C. Madsen
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark H. Rafferty
------------------------
Mark H. Rafferty
Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer)
EXHIBIT INDEX
Sequential
Exhibit Page
No. Description Number
3.1* Amendment to Restated Articles of Incorporation
3.2** By-laws, as amended
10.0** Employment Agreement between the Company and Robert C. Abbott
10.1** October 15, 1987 License Agreement between
the Company and Data Race, Inc.
10.2*** February 27, 1991 Lease Agreement between the Company and
Dulles/Route 28 Limited Partnership with respect to the premises
at 45472 Holiday Drive, Sterling, VA 22110
10.3*** Employment Agreement between the Company and William Flanagan
10.4*** Technology Transfer Agreement with Sigma Technology
10.5*** Agreement in Principle with Watch Hill Research
10.6*** Technology License Agreement with Protocom Devices
10.7*** Loan Agreement with Sovran Bank
10.8*** Employment Agreement among the Company, Robert N. Dennis and
Edward R. Olson, as the "Current Directors," and Peter C. Madsen.
10.9*** Option Agreement by the Company in favor of Charles L. Deslaurier.
10.10*** Option Agreement by the Company in favor of Rick Sampley.
10.11*** Amended and Restated Employment Agreement
between the Company and Robert N. Dennis.
10.12* Exclusive Master Distribution Agreement for FastComm Products
between FastComm Communications Corporation and Daitel Technologies
10.13* Distribution Agreement for products between FastComm Communications
Corporation and C&L Communications, Inc.
10.14* Distributor Agreement for FastComm products between FastComm
Communications Corporation and Tadiran, Ltd.
10.15* Distribution Agreement between the Company and Sumitronics, Inc.
10.16* Consulting Agreement between Gary H. Davison and Newbridge
Networks Inc.
10.17* Agreement between the Company and ZyBel Microsystems, Inc.
11.0* Statement re: Computation of per share earnings.
11.1 Schedule of Valuation and Qualifying Accounts*
- -----------
* Filed with revised form 10KA previously filed.
** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-18 Registration Statement, SEC File Number
33-19758.
*** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-3 Registration Statement, SEC File No.
33-43374.