- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 SEPTEMBER 30, 1996 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 - -------------------------------------------------------------------------------- GOLDEN SYSTEMS, INC. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- 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 NOVEMBER 30, 1996, THERE WERE 4,449,998 SHARES OF NO PAR VALUE COMMON STOCK OUTSTANDING. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INDEX LISTING - -------------------------------------------------------------------------------- Page Number ------ PART I FINANCIAL INFORMATION FINANCIAL STATEMENTS. Consolidated Balance Sheets as of September 30, 1996 (unaudited) and March 31, 1996. 1 Consolidated Statements of Operations (unaudited) for the three months and six months ended September 30, 1996 and September 30, 1995. 2 Consolidated Statements of Cash Flows (unaudited) for the six months ended September 30, 1996 and September 30, 1995. 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4-5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 6-9 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 10 SIGNATURES 11 i GOLDEN SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands) Sept. 30, 1996 March 31, 1996 -------------- -------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $353 $684 Restricted cash balances 37 886 Accounts receivable, net of allowances 794 1,349 Net due from related parties 211 273 Inventories 5,661 6,643 Prepaid expenses and other current assets 445 797 Income taxes receivable --- 46 ---------- ---------- Total current assets 7,501 10,678 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, at cost, net of accumulated depreciation 3,438 3,805 ---------- ---------- $10,939 $14,483 ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' DEFICIT CURRENT LIABILITIES: Short-term borrowings $6,863 $8,177 Accounts payable 3,603 3,596 Accrued liabilities 1,261 1,187 ---------- ---------- Total current liabilities 11,727 12,960 ---------- ---------- NOTES PAYABLE 1,235 934 COMMITMENTS AND CONTINGENCIES (Note 4) MINORITY INTEREST 2,599 2,599 SHAREHOLDERS' DEFICIT Common Stock 16,278 16,278 Retained earnings (deficit) (20,380) (17,743) Cumulative translation adjustments (520) (545) ---------- ---------- Total shareholders' deficit (4,622) (2,010) ---------- ---------- $10,939 $14,483 ---------- ---------- ---------- ---------- 1 GOLDEN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended -------------------------------- -------------------------------- Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995 -------------- -------------- -------------- -------------- NET SALES $444 $5,225 $1,074 $8,760 COST OF GOODS SOLD 589 5,250 1,823 9,426 -------------- -------------- -------------- -------------- Gross Loss (145) (25) (749) (666) -------------- -------------- -------------- -------------- OPERATING EXPENSES: Selling, general and administration 708 931 1,435 1,963 Engineering 206 112 251 275 -------------- -------------- -------------- -------------- 914 1,043 1,686 2,238 -------------- -------------- -------------- -------------- Operating Loss (1,059) (1,068) (2,435) (2,904) -------------- -------------- -------------- -------------- OTHER INCOME (EXPENSE): Interest expense (464) (298) (771) (552) Other income 94 67 568 112 -------------- -------------- -------------- -------------- (370) (231) (203) (440) -------------- -------------- -------------- -------------- Loss before provision for income taxes (1,429) (1,299) (2,638) (3,344) PROVISION FOR INCOME TAXES --- 1 --- 1 -------------- -------------- -------------- -------------- NET LOSS $(1,429) $(1,300) $(2,638) $(3,345) -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- NET LOSS PER SHARE $(.32) $(.29) $(.59) $(.75) -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES 4,450 4,450 4,450 4,450 -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- 2 GOLDEN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Six Months Ended ------------------------------- Sept. 30, 1996 Sept. 30, 1995 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(2,638) $(3,345) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization expense 133 194 Provision for losses on accounts receivable 204 19 Provision for losses on inventories 30 30 Decrease (increase) in: Accounts receivable 351 996 Inventories 952 844 Prepaid expenses and other current assets 398 492 Increase (decrease) in: Accounts payable 7 696 Accrued liabilities 74 687 -------------- -------------- Net cash provided by (used in) operating activities (489) 613 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Dispositions of property, plant & equipment, net 235 167 Restricted cash 849 (176) -------------- -------------- Net cash provided by (used in) investing activities 1,084 (9) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term borrowings, net of (repayments) (1,314) (714) Borrowings under notes payable 301 59 Net change in related party balances 62 99 -------------- -------------- Net cash used in financing activities (951) (556) -------------- -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 25 (254) -------------- -------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (331) (206) CASH & CASH EQUIVALENTS, beginning of period 684 1,497 -------------- -------------- CASH & CASH EQUIVALENTS, end of period $353 $1,291 -------------- -------------- -------------- -------------- 3 GOLDEN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 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 attached interim consolidated financial statements. All amounts are unaudited, except the March 31, 1996 balance sheet. This report should be read in conjunction with the audited consolidated financial statements, notes, and disclosures presented in the Company's 1996 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 1996 contained in the Company's 1996 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 FUTURE OPERATIONS The Company has incurred significant losses from operations in fiscal years 1995 and 1996 and during the six months ended September 30, 1996, has negative working capital of $4,226,000 and a retained deficit of $20,380,000, all of which raise substantial doubt about the Company's ability to continue as a going concern. Also, a significant portion of the Company's short-term borrowings with Indian banks were due for renewal prior to March 31, 1996, and the Company has suffered a substantial decline in net sales in fiscal years 1995 and 1996 and the six months ended September 30, 1996. Since March 31, 1996, the Company has been negotiating with certain Indian banks for an extension of payment terms of existing debt as well as an extension of credit to support planned production and sales. The Company's indebtedness to these banks at September 30, 1996 was approximately $7,600,000. Currently, the consortium of banks has expressed interest in assisting the Company with its request. In addition, certain members of the Tandon family (the Company's largest shareholders) have proposed a plan of recapitalization of the Company, which is subject to certain conditions among which are (1) approval by a Special Committee of outside directors of the Board of Directors, (2) negotiation of a definitive agreement, and (3) approval by the shareholders. The proposed plan of recapitalization would require those participating members of the Tandon family to invest $2 million in cash and certain members of management to invest $250,000 in cash. The proposed per-share stock purchase price is $0.15 which exceeded both the public bid and ask prices at the time of the proposal. The recapitalization plan also includes actions by the Tandon family, who have personally guaranteed the Indian bank debt, to obtain a standstill from these banks at no material cost to the Company. This proposed plan is currently being evaluated by the Special Committee. There can be no assurance, though, that the Company will be able to successfully increase sales or reduce operating costs, raise sufficient capital to meet its current operating needs, or renew its obligations to the Indian banks. 4 NOTE 3. LITIGATION SETTLEMENT In April 1996, the Company settled a lawsuit with an outside contractor. Under the agreement, the Company received a cash settlement (the agreement prohibits the disclosure of the amount) of which $163,000 related to the reimbursement of legal expenses incurred in fiscal year 1996, and accordingly, this amount was recorded as a reduction of legal expenses in fiscal year 1996. The balance of the settlement has been recorded together with other items as other income for the six months ended September 30, 1996. NOTE 4. COMMITMENTS AND CONTINGENCIES For a description of commitments and contingencies, refer to Note 11 to the Combined/Consolidated Financial Statements contained in the 1996 Annual Report on Form 10-K. 5 GOLDEN SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS OVERVIEW As has been previously reported, the Company's operations and cash flow was significantly impacted by the product rejection that took place during the third quarter of fiscal 1995. Those returns cost the Company $4.2 million of lost accounts receivable directly related to the sales of 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. 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 have been successfully implemented, the Company has not been able to generate anticipated amounts of cash from inventory reduction and, to date, has had only limited success 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 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, there can be no assurance that the Company will have the resources to carry out its plan and, 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 continue to operate its business. In light of these facts, and the operating results discussed below, the Company is presently looking at the opportunities to obtain additional capital from sources outside the Company or to engage in a transaction that would change the Company's fundamental structure. Absent success in generating cash from inventory or a dramatic change in the Company's operating outlook, the consummation of such a financing transaction will be necessary for the Company to continue its operations beyond the next several months. In summary, the Company suffered a considerable decline in cash flow during fiscal year 1996 and on into fiscal year 1997. At September 30, 1996, the Company had negative working capital of $4,226,000 and a retained deficit of $20,380,000. While current action is being taken to develop a viable operating plan to increase sales, renegotiate the terms of certain short-term obligations with certain Indian banks and raise additional capital, there can be no assurance that any of these actions will be successfully completed. 6 Since March 31, 1996, the Company has been negotiating with certain Indian banks for an extension of payment terms of existing debt as well as an extension of credit to support planned production and sales. The consortium of banks has expressed interest in assisting the Company with its request. In addition, certain members of the Tandon family have proposed a plan of recapitalization of the Company, which is subject to certain conditions, among which are (1) approval by a Special Committee of outside directors of the Board of Directors, (2) negotiation of a definitive agreement, and (3) approval by the shareholders. The proposed plan of recapitalization would require those participating members of the Tandon family to invest $2 million in cash and certain members of management to invest $250,000 in cash. The proposed per-share stock purchase price is $0.15 which exceeded both the public bid and ask prices at the time of the proposal. The recapitalization plan also includes actions by the Tandon family, who have personally guaranteed the Indian bank debt, to obtain a standstill from these banks at no material cost to the Company. This proposed plan is currently being evaluated by the Special Committee. SECOND QUARTER Sales for the three months ended September 30, 1996 were $444,000 compared to $5,225,000 for the same quarter in the prior year. This decrease in sales of 92% is a reflection of the continuing adverse effects of the product returns in the third quarter of fiscal year 1995 by the Company's then major customer. Since the product returns occurred, the Company was successful in increasing its sales volume with its newly established primary customer, IBM, through December 1995, however, it has not been successful in building its sales volume with other existing customers or in establishing new customers. Additionally, the Company has been notified by IBM that it is reducing its number of vendors for power supplies to those who are the larger and best financially prepared to support their needs and the Company no longer meets their new vendor criteria. The Company's future marketing and sales strategy will be the re-evaluation of the second tier OEM power supply business which is primarily made up of customers requiring strong engineering support and lower volumes but with significantly higher selling prices and gross margins. The success of this strategy will be contingent upon the Company's ability to obtain new capital resources. The gross loss on second quarter sales was $145,000 compared to a gross loss of $25,000 for the second quarter in fiscal year 1996. This increase in gross loss is due to the major decline in manufacturing capacity utilization which has resulted in significant unabsorbed direct manufacturing overhead, offset in part by the sale of certain reworked inventory which had previously been written off. Selling, general and administrative expenses for the second quarter of fiscal year 1997 were $708,000 compared to $931,000 or a decline of 24%, as a result of the decline in sales and resulting reduction in unit production. The decline in sales and production resulted in the restructuring of the Company to reduce costs which included the closure of the manufacturing facility in Madras, India during the first quarter of fiscal year 1996 and significant employee reductions in Sri Lanka and India since that time. 7 Engineering expenses for the current quarter were $206,000 as compared to $112,000 for the second quarter of fiscal year 1996 or an 84% increase. This increase results from the establishment of an engineering and product development facility in Scotland during early July 1996. This action is part of the Company's strategy to develop power supplies for original equipment manufacturers of electronic equipment, other than personal computers, who offer higher gross margins. Interest expense for the second quarter of fiscal year 1997 was $464,000 as compared to $298,000 for the same quarter in the prior fiscal year. This increase of nearly 56% is due primarily to an increase in interest rates on short-term borrowings. During the current second quarter the Company disposed of certain equipment which resulted in a gain of $50,000. This gain is reported as Other income. Net loss for the second quarter ended September 30, 1996 was $1,429,000 compared to a net loss of $1,300,000 for the same period in the prior year. The reasons for this loss are set forth in the foregoing discussion. SIX MONTHS Sales for the six months ended September 30, 1996 were $1,074,000 compared to $8,760,000 for the first six months of the prior fiscal year. This decline of approximately 88% is due to the aforementioned reasons set forth for the quarter ended September 30, 1996. Gross loss for the current six month period of $749,000 was much higher as a percent of sales than the $666,000 gross loss in the prior year due principally to the previously mentioned decline in manufacturing capacity utilization which has resulted in significant unabsorbed direct manufacturing overhead. This gross loss on a year-to-date basis is also much higher as a percent of sales (70%) than the 33% loss experienced for the second quarter because of the effect of the sales of the reworked inventory in the second quarter, which had been previously written off. Selling, general and administrative expenses of $1,435,000 and engineering expense of $251,000 for the six months ended September 30, 1996 were 27% and 9%, respectively, less than the comparable period in the prior year, due to continuing efforts to reduce costs. However, engineering expenses are beginning to rise, as evidenced in the most current quarter, as the Company builds its engineering support to meet the product demands of customers manufacturing electronic equipment other than personal computers. Interest expense of $771,000 for the current six month period compares to $552,000 for the same period in the prior fiscal year. This increase is due principally to the higher interest rates the Company is incurring on short-term debt that is currently delinquent. Other income of $568,000 for the six months ended September 30, 1996 is substantially higher than the $112,000 for the six months ended September 30, 1995 8 because of the inclusion in the current period of the contract settlement which was recorded in the first fiscal quarter. Net loss for the first six months ended September 30, 1996 was $2,638,000 versus a net loss of $3,345,000 for the same period in the prior year. The reasons for this loss are set forth in the foregoing discussion. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the six months ended September 30, 1996 the Company consumed $489,000 for operating activities. The major reason for this negative cash from operating activities is the net loss from operations offset in part by the liquidation of inventories and accounts receivable as the Company winds down its business with manufacturers of personal computers. INVESTING ACTIVITIES Cash provided by investing activities during the first six months of fiscal year 1997 was $1,084,000 due to a decrease in restricted cash which was securing certain bank obligations and the disposition of certain equipment. FINANCING ACTIVITIES Cash used in the first six months of fiscal year 1997 for financing activities aggregated $951,000. The primary factor contributing to this amount relates to net repayments of short-term borrowings totaling $1,314,000. This was partially offset by $301,000 in additional long-term borrowings. The Company believes that current liquidity and capital resources are not sufficient to continue operations beyond the next several months. However, the Company is discussing the restructuring of its debt with certain Indian banks and a plan of recapitalization, as previously disclosed. 9 PART II -- OTHER INFORMATION - -------------------------------------------------------------------------------- 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 September 30, 1996. 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 AND CHIEF FINANCIAL OFFICER (for registrant as authorized officer and as principal Financial and Accounting Officer) Date: DECEMBER 4, 1996 ---------------------------- 11