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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM _____ TO _____ .
COMMISSION FILE NUMBER 0-22698
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GOLDEN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 95-4021568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2125-C MADERA ROAD
SIMI VALLEY, CA 93065
(Address of principal executive offices)
(805) 582-4400
(Registrant's telephone number, including area code)
___________________________________________________
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 NO X
--- ---
AS OF MARCH 31, 2000, THERE WERE 5,299,998 SHARES OF NO PAR VALUE COMMON STOCK
OUTSTANDING.
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INDEX LISTING
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Page
Number
PART I ------
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of December 31, 1999 (unaudited) and
March 31, 1999. 1
Consolidated Statements of Operations (unaudited) for the three months
and nine months ended December 31, 1999 and December 31, 1998. 2
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended December 31, 1999 and December 31, 1998. 3
Notes To Consolidated Financial Statements (Unaudited). 4-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 7-9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 9
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 10
SIGNATURES
SIGNATURES 11
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDEN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Dec. 31, 1999 March 31, 1999
----------------- ----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $46 $117
Accounts receivable, net of allowances 690 548
Inventories 578 612
Prepaid expenses and other current assets 126 143
----------------- -----------------
Total current assets 1,440 1,420
----------------- -----------------
PROPERTY, PLANT AND EQUIPMENT,
at cost, net of accumulated depreciation 592 628
----------------- -----------------
$2,032 $2,048
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $9,246 $8,617
Accounts payable 833 885
Note payable under Recapitalization Plan 2,286 2,173
Net due to related parties 2,639 2,505
Notes payable 1,104 962
Accrued liabilities 1,298 1,044
----------------- -----------------
Total current liabilities 17,406 16,186
----------------- -----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 2,599 2,599
SHAREHOLDERS' EQUITY
Common Stock 16,405 16,405
Accumulated deficit (35,450) (33,957)
Cumulative translation adjustments 1,072 815
----------------- -----------------
Total shareholders' deficit (17,973) (16,737)
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$2,032 $2,048
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1
GOLDEN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1999 Dec. 31, 1998
-------------- -------------- --------------- -------------
NET SALES $1,479 $1,519 $3,686 $2,790
COST OF GOODS SOLD 1,014 873 2,446 1,845
-------------- -------------- --------------- -------------
Gross Profit 465 646 1,240 945
-------------- -------------- --------------- -------------
OPERATING EXPENSES:
Selling, general and administration 397 351 1,079 1,018
Research and development 83 84 272 253
-------------- -------------- --------------- -------------
480 435 1,351 1,271
-------------- -------------- --------------- -------------
Operating Profit (Loss) (15) 211 (111) (326)
-------------- -------------- --------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (475) (461) (1,383) (1,387)
Foreign currency transaction gains (losses) (11) 58 (5) 152
Gain on sale of subsidiary --- --- --- 61
Other income 5 1 7 16
-------------- -------------- --------------- -------------
(481) (402) (1,381) (1,158)
-------------- -------------- --------------- -------------
Loss before provision for
income taxes (496) (191) (1,492) (1,484)
PROVISION FOR INCOME TAXES --- --- 1 1
-------------- -------------- --------------- -------------
NET LOSS $(496) $(191) $(1,493) $(1,485)
============== ============== =============== =============
BASIC LOSS PER SHARE $(0.09) $(0.04) $(0.28) $(0.28)
============== ============== =============== =============
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING SHARES 5,300 5,300 5,300 5,300
============== ============== =============== =============
2
GOLDEN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
---------------------------------
Dec. 31, 1999 Dec. 31, 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,493) $(1,485)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense 55 38
Provision for losses on accounts receivable 111 96
Provision for losses on inventories --- 45
Decrease (increase) in:
Accounts receivable (254) 27
Inventories 34 141
Prepaid expenses and other current assets 4 (19)
Increase (decrease) in:
Accounts payable (34) (448)
Accrued liabilities 1,384 1,395
--------------- ---------------
Net cash used in operating activities (193) (210)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (34) (59)
--------------- ---------------
Net cash provided by (used in)
investing activities (34) (59)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in related party balances 163 530
--------------- ---------------
Net cash provided by financing activities 163 530
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (7) (318)
--------------- ---------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (71) (57)
CASH & CASH EQUIVALENTS, beginning of period 117 79
--------------- ---------------
CASH & CASH EQUIVALENTS, end of period $46 $22
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3
GOLDEN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1. GENERAL
In management's opinion, all adjustments, which are necessary
for a fair presentation of financial condition and results of operations, are
reflected in the accompanying interim consolidated financial statements. All
such adjustments are of a normal recurring nature. All amounts are unaudited,
except the March 31, 1999 balance sheet. This report should be read in
conjunction with the audited consolidated financial statements, notes, and
disclosures presented in the Company's 1999 Annual Report on Form 10-K.
Footnotes and other disclosures which would substantially duplicate the
disclosures in the Company's audited financial statements for fiscal year 1999
contained in the Company's 1999 Annual Report on Form 10-K, have been omitted.
The interim financial information herein is not necessarily representative of
operations for a full year.
NOTE 2. RISKS AND BASIS OF PRESENTATION
Results of operations for the quarter and nine months ended
December 31, 1999 have been determined assuming that the Company will continue
as a going concern. However, the Company is currently facing significant issues
which raise substantial doubt that the Company has the ability to continue as
a going concern. These issues are summarized as follows:
- At December 31, 1999, the Company had outstanding amounts due to
four separate Indian lenders in the amount of $10,350,000, all of
which are currently in default. Of that amount, three banks have
issued notices to the Company demanding immediate repayment of
$9,246,000. At March 31, 2000, the amount due to the banks was
approximately $9.5 million. The Company has insufficient funds
available to repay the banks. Because the Indian debt is secured
by the assets of Ultra Tek, alternatives available to the banks
include closing the operations of Ultra Tek and forcing Ultra Tek
into liquidation.
- In fiscal 1995, Ultra Tek's importing of computer components into
India came under investigation by the Indian customs authorities.
In September 1997, the Indian customs authorities issued a
separate "show cause" notice alleging that Ultra Tek has not
provided valid explanations for shortages of imported raw material
in its inventories. In fiscal 1997, Ultra Tek came under the
investigation of the Indian Department of Revenue Intelligence
concerning the import and export of certain components used in the
manufacture of power supplies and customer returned product.
Subsequently, a separate "show cause" notice was issued requesting
explanation of why duties should not be assessed. The above
governmental allegations and investigations could lead to
additional duty and penalties being assessed against Ultra Tek in
the amount of $2.5 million (106,474,000 Indian rupees), using the
Indian rupee translation rate at January 31, 2000,and penal action
being initiated against Ultra Tek. In addition, penal action under
Indian law, which the Company believes is very unlikely, could
result in possible monetary fines of up to a maximum of $16.9
million. The Company is contesting these allegations, but
currently, the matters are unresolved and the outcomes uncertain.
4
- The Company has incurred significant losses from operations over
the past five fiscal years and nine months ended December 31,
1999; has lost its two main historical customers, which has
significantly impacted its revenues; and at December 31, 1999, had
a shareholders' deficit of $18,081,000. During fiscal 2000, the
Company continued to incur significant losses, and management has
not successfully executed on its efforts to achieve profitable
operations and positive cash flows. Outside of related party
financing, the Company has identified no viable source of
financing.
Due to the significance of these factors in the Company's financial statements
at December 31, 1999, all assets have been stated at their estimated realizable
values. Costs of resolving the contingencies noted above or settling amounts due
to Indian banks or Company creditors have not been recorded as management is
currently unable to estimate these amounts. Accounts receivable and inventories
were valued at their subsequently realized amounts (inventories at cost), and
property, plant and equipment were valued based on estimates by management and
in accordance with the guidelines of Statement of Financial Accounting Standards
No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS 121"). The estimated realizable values and
settlement amounts may be different from the proceeds ultimately received or
payments made.
NOTE 3. INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Cost includes cost of material, freight and manufacturing overhead.
Inventories consist of the following (in thousands):
Dec. 31, 1999 March 31, 1999
------------- --------------
Raw materials $182 $359
Work-in-progress 328 156
Finished goods 68 97
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$578 $612
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NOTE 4. COMMITMENTS AND CONTINGENCIES
a) LEASES
GSI leased its corporate headquarters from a related party under a
three year operating lease which expired in December 1999. The Company
is currently renting space on a month-to-month basis. Ultra Tek leases
certain factory premises from the Indian Government under operating
leases which expire at various dates through October 2000. Future
minimum payments under these and other various operating leases are as
follows (in thousands):
Year ending March 31:
---------------------
2000 (three months) 22
2001 27
2002 -
2003 -
2004 -
-----
$ 49
=====
5
b) LITIGATION
The Company is subject to lawsuits in the normal course of business. In
the opinion of management and legal counsel to the Company, pending
litigation will not result in a material loss to the Company.
c) CONTINGENCIES
During fiscal year 1995, the Company's imports of computer components
for final assembly and sale into the domestic tariff area (DTA) of
India (outside the SEEPZ) came under investigation by the Indian
customs authorities. As a result, Company inventories of $1,088,000
(47,447,000 in Indian rupees) were seized by the authorities. On
May 30, 1995, the authorities issued a notice to the Company alleging
misdeclaration of purported imports of complete computer systems as
imports of computer system components. The notice calls upon the
Company to explain why the authorities should not (a) confiscate all
the goods so imported, (b) levy additional duty of $1,121,000
(48,885,000 in Indian rupees) on the goods already sold into the DTA,
and (c) take penal action against the Company under the law. The
Company paid an advance of $700,000 (20,000,000 in Indian rupees)
against customs duty that may ultimately be levied by the authorities
and recorded this amount in "cost of goods sold" in fiscal 1995. During
fiscal 1996, the authorities released the seized goods. However,
because of difficulties encountered in re-exporting the goods and
technological obsolescence, the entire amount of the seized goods has
been included in the inventory reserve amounts at December 31, 1999. No
other penalties or expenses related to this government action have been
incurred by the Company.
In September 1997, the Indian customs authorities issued a "show cause"
notice alleging that Ultra Tek has not provided valid explanations for
shortages of raw material in its inventories. The notice called upon
the Company to explain why the authorities should not (a) impose duty
of $590,000 (25,725,000 in Indian rupees) leviable on imported
components which were alleged not accounted for in the terms of bond
executed, (b) why penal action should not be initiated against the
Company, and (c) why a penalty equal to the duty held to be leviable,
$590,000 (25,725,000 in Indian rupees), in respect of unaccounted goods
should not be imposed.
In fiscal 1997, the Company came under investigation by the Indian
Department of Revenue Intelligence (DRI) in connection with the import
and export of certain components and goods used in the manufacture of
power supplies and customer returns. The investigation focused on the
alleged discrepancy noted between the physical stock records and books,
in respect of the work-in-process inventory at March 31, 1996 and 1997
and customer returned product at March 31, 1992 through March 31, 1997.
In May 1998, the DRI issued a "show cause" notice requesting that the
Company explain why the DRI should not impose duties of approximately
$590,000 (25,720,000 in Indian rupees). Penalties relating to the
investigation, if any, have not yet been determined.
The aggregate of threatened duties and penalties to the Company is
approximately $2,442,000, using the Indian rupee translation rate at
January 31, 2000. Although the Company is contesting the allegations of
the authorities, the outcome of these matters is uncertain at this
time. Accordingly, no additional provisions for any losses that may
ultimately result have been made in these financial statements. In
addition, penal action under Indian law, which the Company believes is
very unlikely, could result in possible monetary fines of up to
$16,897,000 at January 31, 2000.
6
GOLDEN SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
Any forward looking statements made in this Form 10-Q report involve
risks and uncertainties. The Company's future financial results could differ
materially from those anticipated due to the Company's dependence on conditions
in the electronics industry, level of consumer demand for products containing
the Company's power supply components, competitive pricing pressures, technology
and product development risks and uncertainties, product performance, increasing
consolidation of customers and suppliers in the electronics industry, and other
factors beyond the Company's control.
RESULTS OF OPERATIONS
OVERVIEW
As has been previously reported, the Company's operations and cash flow
were significantly impacted by the product rejection that took place during the
third quarter of fiscal 1995. Those returns cost the Company $4.2 million in
uncollected accounts receivable as a result of the issuance of credits for the
rejected units and $2.2 million relating to other direct costs, as well as
additional costs for transportation, unutilized capacity, business interruption,
reorganization, inventory carrying costs, and interest on short-term borrowings.
In fiscal 1996, the Company implemented a program to overcome its cash
difficulties by reducing inventory, organizational restructuring, price
increases, volume growth and more favorable payment terms from the Company's
existing customers. While a number of elements of that program were successfully
implemented, the Company has not been able to generate anticipated amounts of
cash from inventory reduction and, to date, has been unsuccessful in its efforts
to resell any significant number of units of the reworked rejected product. In
addition, the Company has not been successful, to date, in significantly
building its sales volumes to its existing customers or to new customers. While
the Company has implemented a plan to transition its business focus to power
supplies for products that are less price sensitive and therefore provide a
greater opportunity to develop positive profit margins, it has not been
successful in doing so. There can be no assurance that the Company will have
sufficient resources to carry out its plan in the future, or even if the
resources are available, that the Company will be able to successfully develop
the necessary customer relationships and obtain the product contracts to allow
it to continue to operate its business. In light of these facts, and the
operating results discussed below, the Company continues to look at
opportunities to obtain additional capital from sources outside the Company and
at transactions that would change it's fundamental structure.
In summary, the Company suffered a considerable decline in cash flow
during the five fiscal years ended March 31, 1999 and during the nine months
ended December 31, 1999. At December 31, 1999, the Company had negative working
capital of $15,966,000
7
and an accumulated deficit of $35,558,000. Subsequent to December 31, 1999, the
Company continues to experience negative cash flow as a result of continuing
losses and working capital required to ramp-up production in India. While
current action is being taken to develop a viable operating plan to increase
sales and renegotiate the terms of certain short-term obligations with the
Indian banks, there can be no assurance that any of these actions will be
successfully completed.
THIRD QUARTER OF FISCAL YEAR 2000
Gross profit on third quarter sales was $465,000 compared to a gross
profit of $646,000 for the third quarter of fiscal year 1999. This decrease in
gross margin is due principally to the occurrence of some very high margin
specialty sales in the prior year, which did not recur in the current period, a
reduction in margin rates on shipments to the Company's largest customer and
increased freight expense resulting from an increase in the number of smaller
shipments from the Company's manufacturing facility in Mumbai, India.
Foreign currency transaction losses were $11,000 for the three months
ended December 31, 1999, compared to gains of $58,000 for the same period in
1998. This change is due principally to the relative stability of the value of
the Indian rupee in relation to the U. S. dollar during the current period.
Net loss for the third quarter ended December 31, 1999 was $496,000
compared to a net loss of $191,000 for the same period in the prior year. The
significant reasons for the increased loss are set forth in the foregoing
discussion.
NINE MONTHS OF FISCAL YEAR 2000
For the nine months ended December 31, 1999, net sales were $3,686,000
compared to $2,790,000 for the same period in fiscal 1999. This 32% increase is
due principally to an increase in demand for adapters being shipped to the
Company's largest customer, during the first half of fiscal 2000.
Gross profit for the first nine months of fiscal 2000 was $1,240,000
compared to $945,000 for the same period in fiscal 1999. This 31% improvement is
due primarily to the increase in sales volume and improved sales margins.
Foreign currency transaction losses were $5,000 for the first nine
months of fiscal 2000 compared to a gain of $152,000 in the comparable period.
As in the third quarter, this change is due principally to the relative
stability of the Indian rupee in relation to the U.S. dollar, whereas in the
prior year, because of the weaker Indian rupee in relation to the U.S. dollar,
more rupees were being paid to satisfy U.S. dollar net receivables due to Ultra
Tek.
The gain on sale of subsidiary company of $61,000 during the nine
months ended December 31, 1998, represents the recovery of an account receivable
by Ultra Tek, the Company's manufacturing subsidiary in India. At the time the
Sri Lanka company was sold in the fourth quarter of fiscal 1998, the receivable
resulting from the sale of equipment was thought to be uncollectible and
consequently written off in computing the net gain on sale of the Sri Lanka
subsidiary. During the first quarter of fiscal 1999, the
8
new owner of the Sri Lanka company returned the equipment to Ultra Tek in full
satisfaction of its obligation.
Net loss for the nine months ended December 31, 1999 was $1,493,000
compared to a net loss of $1,485,000 for the same period in the prior year. The
significant reasons for the reduction in the net loss are set forth in the
foregoing discussion.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the nine months ended December 31, 1999, the Company used
$193,000 in cash in operating activities. The major use of this cash is due to
the net loss from operations and an increase in accounts receivable, offset in
part by depreciation, a reserve for losses on accounts receivable and an
increase in accrued liabilities, a significant element of which is the accrued
interest on outstanding loan balances.
INVESTING ACTIVITIES
Cash used in investing activities during the first nine months of
fiscal year 2000 was $34,000 due to the purchase of equipment.
FINANCING ACTIVITIES
Cash provided in the first nine months of fiscal year 2000 from
financing activities was $163,000, resulting from a net increase in related
party payable balances, which is due primarily to accrued interest on related
party loans to the Company.
For the nine months ended December 31, 1999, the Company consumed
$71,000 in cash, decreasing the $117,000 cash balance at the beginning of the
period to $46,000 at December 31, 1999. At March 31, 2000 the Company had a cash
balance of $249,000. Outside of related party financing, the Company has
identified no viable source of financing. While current actions are being taken
to implement a viable operating plan to increase sales, renegotiate the terms of
certain short-term obligations with three Indian banks and raise additional
capital, there can be no assurance that any of these actions will be
successfully completed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Inapplicable
9
PART II -- OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At December 31, 1999, the Company had outstanding amounts due
to four separate Indian lenders in the amount of $10,350,000,
all of which are currently in default because of non-payment
of principal. Of that amount, three banks have issued notices
to the Company demanding immediate repayment of $9,246,000. At
March 31, 2000, the amount due was approximately $9.5 million.
The Company has insufficient funds available to repay the
banks. Because the Indian debt is secured by the assets of
Ultra Tek, alternatives available to the banks include closing
the operations of Ultra Tek and forcing Ultra Tek into
liquidation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27. Financial Data Sheet
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the
three month period ended December 31, 1999.
10
SIGNATURES
Pursuant to the requirements 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.
GOLDEN SYSTEMS, INC.
By: /s/ Jawahar L. Tandon
---------------------------------
Jawahar L. Tandon
CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED OFFICER OF THE
REGISTRANT)
By: /s/ Harvey A. Marsh
---------------------------------
Harvey A. Marsh
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(DULY AUTHORIZED OFFICER OF THE
REGISTRANT)
Date: May 31, 2000
---------------------------------
11