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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 27, 2001 .
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 0-17168 .
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FASTCOMM COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-1289115
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
45472 Holiday Drive
Dulles, Virginia 20166
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(Address of principal executive offices, Zip code)
(703) 318-7750
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(Registrants telephone number, including area code)
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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 .
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As of February 5, 2001, there were 26,504,665 shares of the
Common Stock, par value $.01 per share, of the registrant
outstanding.
No exhibits are filed with this report, which consists of 17
consecutively numbered pages.
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FASTCOMM COMMUNICATIONS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL Page No.
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INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations Fiscal quarter and three
fiscal quarters ended January 27, 2001 and January 29, 2000 ............................... 3
Consolidated Balance Sheets
January 27, 2001 and April 30, 2000.........................................................4
Consolidated Statements of Cash Flows Three fiscal quarters ended
January 27, 2001 and January 29, 2000.......................................................5
Summary of Accounting Policies............................................................6-7
Notes to Consolidated Financial Statements ..............................................8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...........................................11-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................16
SIGNATURES................................................................................................17
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Fiscal quarter ended Three fiscal quarters ended
------------------------------ ----------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
-------------- ------------ ------------- ------------
Revenue $ 1,842,651 $ 1,175,418 $ 9,691,259 $ 4,491,526
Expenses
Cost of sales 889,203 675,377 3,752,549 2,292,124
Selling, general and administrative 1,813,793 1,080,229 5,306,583 3,109,132
Research and development 1,481,843 657,943 4,286,881 1,942,143
Depreciation and amortization 963,418 161,554 2,919,246 489,334
-------------- ------------ ------------- ------------
Loss from operations (3,305,606) (1,399,685) (6,574,000) (3,341,207)
Other income (expense)
Other income 28,700 - 130,686 23,489
Interest income 11,690 12,802 23,728 14,760
Interest expense (76,637) (50,943) (264,564) (165,118)
-------------- ------------ ------------- ------------
Net loss $ (3,341,853) $(1,437,826) $(6,684,150) $ (3,468,076)
============== ============ ============= ============
Basic and diluted loss per share ($0.13) ($0.07) ($0.25) ($0.19)
Weighted average number of shares 26,442,772 19,672,845 26,288,946 17,989,645
See accompanying notes to unaudited consolidated financial statements
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
January 27, April 30,
2001 2000
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(unaudited)
Current assets
Cash and cash equivalents $ - $ 548,136
Restricted cash 550,981 321,723
Accounts receivable, net 2,888,101 2,949,727
Inventories, net 4,052,496 2,405,747
Prepaid and other 347,581 168,131
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7,839,159 6,393,464
Property and equipment, net 1,314,375 1,690,011
Deferred investment advisory fee 210,301 480,688
Goodwill, net 9,878,611 12,547,854
Other assets 56,640 87,215
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$ 19,299,086 $ 21,199,232
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of notes payable $ 1,000,000 $ 1,000,000
Revolving line of credit and term loan 999,999 1,268,319
Current portion of capital lease obligations 3,521 11,281
Checks issued against future deposits 212,125 -
Accounts payable 2,948,993 2,583,161
Accrued compensation 583,529 363,109
Deferred revenue - 322,801
Other current liabilities 1,036,770 1,109,202
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6,784,937 6,657,873
Convertible debentures 732,643 767,602
Capital lease obligations - 3,543
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7,517,580 7,429,018
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Shareholders' equity
Common stock, $.01 par value, 265,047 255,784
(50,000,000 shares authorized; 26,504,665 and
25,578,472 issued and outstanding)
Additional paid in capital 48,077,436 43,391,257
Accumulated deficit (36,560,977) (29,876,827)
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Total shareholders' equity 11,781,506 13,770,214
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$ 19,299,086 $ 21,199,232
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See accompanying notes to unaudited consolidated financial statements
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three fiscal quarters ended
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January 27, January 29,
2001 2000
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Operating activities
Net loss $ (6,684,150) $ (3,468,076)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,919,246 489,334
Provision for doubtful accounts 10,000 (14,369)
Provision for inventory obsolescense 200,000 191,084
Non cash interest expense on debentures 43,178 170,970
Amortization of deferred financing costs - 12,671
Amortization of deferred investment advisory fee 270,386 -
Changes in assets and liabilities
Accounts receivable 51,626 (473,900)
Inventories (1,846,749) 153,345
Prepaid and other current assets (179,450) 91,864
Other assets 30,575 -
Accounts payable and accrued compensation 586,252 412,956
Other current liabilities 102,969 (241,903)
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Net cash used in operating activities (4,496,117) (2,676,024)
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Investing activities
Additions of property, plant and equipment (212,006) (461,727)
Increase in acquisition costs 35,575 -
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Net cash used in investing activities (176,431) (461,727)
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Financing activities
Net proceeds from the issuance of common stock 1,170,400 1,000,000
Net proceeds from the issuance of prepaid warrants 3,079,450 -
Net proceeds from exercise of warrants and options 383,443 3,847,051
Repayments on capital lease obligations (11,303) -
Repayments on revolving line of credit and term loan (268,320) -
Increase in restricted cash (229,258) -
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Net cash provided by financing activities 4,124,412 4,847,051
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Net decrease in cash and cash equivalents (548,136) 1,709,300
Cash and cash equivalents, beginning of period 548,136 90,727
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Cash and cash equivalents, end of period $ - $ 1,800,027
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See accompanying notes to unaudited consolidated financial statements
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FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
USE OF ESTIMATES
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 and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. 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 and evaluation of the
impairment of goodwill. 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
January 27, 2001, the estimates used in the financial statements are adequate
based on the information currently available.
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.
Also, the Company establishes a reserve for estimated warranty claims at the
time of product shipment.
GOODWILL
The Company has recorded goodwill based on the difference between the cost and
the fair value of certain purchased assets and it is being amortized on a
straight-line basis over the estimated period of benefit, which ranges from 4
to 7 years. The Company periodically evaluates the goodwill for possible
impairment. The analysis consists of a comparison of future projected cash
flows to the carrying value of the goodwill. Any excess goodwill would be
written off due to impairment.
ASSET IMPAIRMENT
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be disposed of ("SFAS 121"), the Company periodically evaluates the
carrying value of long-lived assets when events and circumstances warrant such
a review. The carrying value of a long-lived asset is considered impaired when
the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than the carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income and subsequently
reclassified into income when the transaction affects earnings. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 is effective for all
fiscal quarters beginning after June 15, 2000 and requires application
prospectively. Presently, the Company does not use derivative instruments
either in hedging activities or as investments. Accordingly, the adoption of
SFAS 133 had no impact on the financial position or results of operations.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),"Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of
APB Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a)
the definition of employee for purposes of applying APB No. 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2,
2000 but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company believes that adoption of
FIN 44 will not have an affect on the Company's financial statements but may
impact the accounting for grants or awards in future periods.
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In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. The Staff Accounting bulletin is effective for the
fiscal year beginning May 1, 2001. The initial adoption of this guidance is
not anticipated to have a material impact on the Company's results of
operations or financial position, however, the guidance may impact the way in
which the Company will account for future transactions.
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FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of FastComm
Communications Corporation (the "Company") have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes included in the Company's latest Annual
Report on Form 10-K.
In the opinion of Management, the consolidated financial statements reflect
all adjustments considered necessary for a fair presentation and all such
adjustments are of a normal and recurring nature. The results of operations as
presented in this report are not necessarily indicative of the results to be
expected for the fiscal year ending April 30, 2001.
The Company's fiscal year ends on April 30. For interim reporting purposes the
interim fiscal quarters are closed on the first weekend following the calendar
quarter end date, unless the quarter end date falls on a weekend, in which
case such weekend is used as the interim fiscal quarter end. The Company
deviated from this policy in the current fiscal quarter to facilitate
comparability. The quarter ended January 27, 2001 and the quarter ended
January 29, 2000 each consisted of 91 calendar days.
2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of shares of common stock outstanding and common share equivalents
outstanding for the period. For the quarters presented, the earnings per share
calculation does not include common share equivalents in that the inclusion of
such equivalents would be antidilutive.
3. BUSINESS ACQUISITION
On March 31, 2000, the Company acquired substantially all of the assets and
assumed certain liabilities of Cronus Technology, Inc. ("Cronus") for
approximately $9,600,000, plus the assumption of liabilities of approximately
$6,700,000 subject to adjustment as set forth in the agreement. Approximately
$9,300,000 of the purchase price was funded through the issuance of shares of
the Company's common stock and approximately $300,000 was paid in cash. Cronus
manufactures and sells telecommunications equipment and provides consulting
services for satellite telecommunications planning. The acquisition was
accounted for as a purchase and, accordingly, the acquired assets and
liabilities were recorded at their estimated fair market values at the date of
acquisition. The Company recorded goodwill of approximately $12,000,000
related to this transaction. The goodwill is being amortized on a straight
line basis over four years. The purchase and debt assumption agreements
related to the Cronus acquisition obligate the Company to issue up to
1,225,000 additional common shares if the fair value of its common stock has
not reached $7.30 per share prior to the one-year anniversary date of these
agreements. The Company will determine the purchase price adjustment when, and
if, it issues any additional common shares. The following unaudited pro forma
information presents the results of operations of the Company as if the
acquisition had occurred on May 1, 1999.
Three months ended Nine months ended
January 29, 2000 January 29, 2000
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Revenue $ 3,018,418 $ 10,020,526
Net loss $ (2,104,075) $ (5,468,228)
Basic and diluted loss per common share $ (0.08) $ (0.21)
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4. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following:
January 27, April 30,
2001 2000
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Production materials $ 2,009,333 $ 1,267,371
Work in process 855,485 240,408
Finished goods 1,187,678 897,747
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$ 4,052,496 $ 2,405,747
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5. LONG TERM DEBT
In connection with the acquisition of Cronus, the Company assumed liabilities
under a revolving line of credit and term loan agreement with LaSalle National
Bank. Under the revolving line of credit the Company could borrow up to the
lesser of $3,000,000 or 80% of eligible accounts receivable and 35% of
eligible inventory, as defined in the agreement. The revolving line of credit
bears interest at the bank's prime rate of interest plus 1.0% and was
scheduled to mature on May 1, 2001. Under the agreement, Cronus could issue
letters of credit up to $250,000 in the aggregate. There are no outstanding
letters of credit as of January 27, 2001. The term loan was payable in equal
monthly principle payments of $9,875, bears interest at the bank's prime rate
of interest plus 1.0% and was schedule to mature on May 1, 2001. In April 2000,
the Company placed $250,000 in escrow to further collateralize the revolving
line of credit and term loan. In July 2000, the bank informed the Company that
the revolving line of credit and term loan would mature on September 30, 2000.
The bank subsequently agreed to extend the line through June 29, 2001.
Accordingly, this debt has been classified as a current liability.
On February 6, 2001, the Company entered into an accounts receivable financing
agreement with Alliance Financial Capital, Inc. that replaced the revolving
line of credit and term loan agreement with LaSalle National Bank. All debt
associated with the LaSalle agreement was satisfied. Under the accounts
receivable financing agreement, the Company can borrow up to the lesser of
$3,000,000 or up to 85% of eligible accounts receivable, as defined in the
agreement. The accounts receivable financing agreement bears interest at prime
rate plus 1.0% plus an additional 1.5% per invoice funded. The term of this
agreement is for twelve months with a minimum average daily account balance of
$750,000.
6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The fiscal quarter ended January 27, 2001 includes sales to five unrelated
third parties each of which individually exceeded 10% of total revenues. The
nine months ended January 27, 2001 include sales of $1,506,000, $1,142,000 and
$1,090,000, representing 16%, 12% and 11% of total revenues to three unrelated
third parties.
7. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to
uncertainty over the level of earnings in fiscal 2001. Also, the Company has
net operating loss carryforwards for income tax reporting purposes for which
no income tax benefit has been recorded due to uncertainty over generation of
future taxable income.
8. SHAREHOLDERS' EQUITY
During the quarter ended July 29, 2000, the Company issued $1,170,000 of
common stock in a private placement.
On September 8, 2000, the Company sold 3,500 units at $1,000 per unit to a
group of accredited investors. Each unit consists of a prepaid common stock
purchase warrant ("Prepaid Warrant") and an incentive warrant ("Incentive
Warrant") to acquire additional shares of common stock in the Company. The
Prepaid Warrant is convertible at the option of the holder into common stock
at a conversion price equal to the lesser of $2.00 or the average of the five
lowest closing bid prices for the ten trading day period prior to conversion.
The prepaid warrant earns interest at a rate of 4% payable in common stock.
The Incentive Warrants allow the holder to purchase one half of one share at a
$2.50 per share. The Incentive Warrants have a five year term and are
exercisable immediately. The Company recorded the proceeds from the issuance
of the Prepaid Warrants as paid in capital. The interest earned on these
warrants will be reflected as a dividend. The Company paid a placement fee of
$350,000 plus other associated costs of $71,000 and issued to the placement
agent warrants to purchase 438,000 shares of stock at an exercise price of
$2.50 per share. The fee paid and the fair value of the warrants issued will
be recorded as a reduction in paid in capital. The placement agent for this
transaction was The Zanett Securities Corporation.
The Company received $383,443 from the exercise of common stock options and
warrants during the nine months ended January 27, 2001.
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9. STOCK OPTIONS
The Company has both qualified and non-qualified 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.
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. Generally, 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 granted, exercised and cancelled during the
nine month period ended January 27, 2001:
Number of
Shares Price per share
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Outstanding at April 30, 2000 2,975,501 $ 0.25 to $ 15.63
Granted during the period 1,186,305 $ 0.91 to $ 3.50
Exercised during the period (68,828) $ 0.46 to $ 2.50
Cancelled during the period (295,880) $ 0.46 to $ 3.97
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Outstanding at January 27, 2001 3,797,098 $ 0.25 to $ 15.63
The Company has adopted the disclosure-only provisions of SFAS-No. 123
"Accounting for Stock Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. For SFAS No. 123 purposes, the weighted average fair value of
each option granted during the quarter has been estimated as of the date of
grant using the Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rate of 6.4%, expected volatility of
100.0%, expected option life of 5 years and dividend payout rate of zero.
Using these assumptions, the weighted average fair value of the stock options
granted is $.62 for the quarter ended January 27, 2001. There were no
adjustments made in calculating the fair value to account for vesting
provisions or for non-transferability or risk of forfeiture.
If the Company had elected to recognize compensation cost based on the fair
value at the grant dates for options issued under the plans described above,
consistent with the method prescribed by SFAS No. 123, net loss applicable to
common shareholders and loss per share would have been changed to the pro
forma amounts indicated below:
Nine months ended Nine months ended
Net loss applicable to common shareholders: January 27, 2001 January 29, 2000
As reported $ (6,684,150) $ (3,468,076)
Proforma $ (7,949,404) $ (4,701,886)
Basic and diluted loss per share:
As reported $ (0.25) $ (0.19)
Proforma $ (0.30) $ (0.26)
On March 9, 2001, the Company's Board of Directors approved a reduction in the
exercise price of all employee stock options to $0.51 per share. As a result
of this reduction, the Company will incur non cash charges against future
earnings based upon the market price of the Company's common stock. No such
charges were required in the current accounting period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS ACQUISITION
On March 31, 2000, the Company acquired substantially all of the assets and
assumed certain liabilities of Cronus Technology, Inc. ("Cronus") for
approximately $9,600,000, plus the assumption of liabilities of approximately
$6,700,000 subject to adjustment as set forth in the agreement. The
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the date of acquisition. The Company recorded goodwill of approximately
$12,000,000 related to this transaction. The goodwill is being amortized on a
straight line basis over four years.
The results of operations for the current fiscal quarter includes
post-acquisition revenue and expenses generated by Cronus. The results of
operations for the quarter and three fiscal quarters ended January 29, 2000 do
not include such revenue and expense items. To facilitate comparability, the
analysis of revenue and expense items includes information presented on a
proforma basis assuming the inclusion of Cronus revenues and expenses as if
the acquisition occurred on May 1, 1999.
FUTURE PROSPECTS
The Company continues to experience severe cash flow problems resulting from
reduced sales and slow collections. In order to address this issue, the Company
has taken or is planning to take the following actions, among others: (a)
refinanced its senior debt with a new senior lender; (b) commenced accelerated
collection efforts; (c) repriced existing options and warrants; (d) engaged an
investment firm to provide the Company with strategies for addressing cash-flow
and shareholder value issues; and (e) reduced overheads. In addition to the
foregoing, the Company is considering either selling or recapitalizing certain
portions of its business or licensing certain of its technologies.
The acquisition of Cronus allows FastComm to offer signaling gateways that
bridge the gap between incompatible communications networks. These gateways
enable seamless communication between in-band and out-of-band networks, or
between out-of-band to out of band SS7 variants. Cronus has existing
relationships and contracts with several large multi-national customers such
as Nortel, Lucent and Siemens. Discussions with other large customers are
ongoing. The Company believes that it is well positioned to capitalize on
increasing international cross border traffic and the growing voice over
packet market.
Commercial shipments of the ChanlComm(R) 7790 product commenced in the first
quarter of fiscal 2001. The Company anticipates that sales of the ChanlComm(R)
7790 product could begin generating additional revenues during the current
fiscal year. The Company signed a three year agreement with Sumisho
Electronics to supply the Japanese Data Center market with ChanlComm 7790
product.
The Company's ability to make future capital expenditures and fund the
development and launch of new products, are dependent on existing cash and
demands on cash to support inventory for the Company's products and the
Company's return to profitability. The timing and amount of the Company's
future capital requirements can not be accurately predicted, nor can there be
any assurance that debt or equity financing, if required, can be obtained on
acceptable terms. There can be no assurance that the company will have cash
available in the amounts and at the times needed.
There can be no assurance that the required increased sales and improved
operating efficiencies necessary to return to profitability will materialize,
or if they do, the Company will be able to raise sufficient funding to finance
its working capital needs.
On September 8, 2000, the Company sold 3,500 units at $1,000 per unit to a
group of accredited investors. Each unit consists of a prepaid common stock
purchase warrant ("Prepaid Warrant") and an incentive warrant ("Incentive
Warrant") to acquire additional shares of common stock in the Company. The
Prepaid Warrant is convertible at the option of the holder into common stock
at a conversion price equal to the lesser of $2.00 or the average of the five
lowest closing bid prices for the ten trading day period prior to conversion.
The prepaid warrant earns interest at a rate of 4% payable in common stock.
The Incentive Warrants allow the holder to purchase one half of one share at a
$2.50 per share. The Incentive Warrants have a five year term and are
exercisable immediately. The Company recorded the proceeds from the issuance
of the Prepaid Warrants as paid in capital. The interest earned on these
warrants will be reflected as a dividend. The Company paid a placement fee of
$350,000 plus other associated costs totaling $71,000 and issued the placement
agent warrants to purchase 438,000 shares of stock at price of $2.50 per
share. The fee paid and the fair value of the warrants
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issued were recorded as a reduction in paid in capital. The placement agent
for this transaction was The Zanett Securities Corporation
On February 27, 2001, the Company sold an additional 850 units at $1,000 per
unit to the same investment group. The Prepaid Warrant is convertible at the
option of the holder into common stock at a conversion price equal to the
lesser of $.85 or the average of the lowest five closing bid prices for the
ten trading day period prior to conversion. The prepaid warrant earns interest
at a rate of 6% payable in common stock. The Incentive Warrants allow the
holder to purchase one half of one share at a $1.0625 per share. The Incentive
Warrants have a five year term and are exercisable immediately. The Company
paid a placement fee of $85,000 plus other associated costs totaling $15,000
and issued the placement agent warrants to purchase 212,500 shares of stock at
price of $1.0625 per share. The fee paid and the fair value of the warrants
issued will be recorded as a reduction in paid in capital.
RESULTS OF OPERATIONS
REVENUE
Fiscal quarter ended Three fiscal quarters ended
-------------------------- ---------------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
------------ ----------- ------------- --------------
$1,842,651 $ 1,175,418 $ 9,691,259 $ 4,491,526
Total revenues increased $667,000, or 57%, compared with that of the
corresponding quarter of the previous fiscal year. On a proforma basis,
assuming the inclusion of Cronus sales, revenues totaled $3,022,000 for the
quarter ended January 29, 2000. The $1,215,000 proforma decline is primarily
attributable to decline in unit sales of Cronus products ($671,000) and a
decline in unit sales of integrated access products ($382,000).
On a fiscal year to date basis, total revenues increased $5,200,000, or 116%
compared with that of the corresponding period of the previous fiscal year. On
a proforma basis, revenues totaled $10,033,000 for the three fiscal quarters
ended January 29, 2000. This $341,000 decline is primarily attributable to an
increase in unit sales of Cronus products ($1,561,000); an increase in unit
sales of ChanlComm products ($123,000) offset by a decline in unit sales of
integrated access devices ($1,452,000) and service revenue ($609,000).
The fiscal quarter ended January 27, 2001 includes sales to five unrelated
third parties each of which individually exceeded 10% of total revenues. The
nine months ended January 27, 2001 include sales of $1,506,000, $1,142,000 and
$1,090,000, representing 16%, 12% and 11% of total revenues to three unrelated
third parties.
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, supply shortages, varying patterns
of customer capital expenditures or other conditions affecting the digital
access product industry or the economy during any fiscal quarter could cause
quarterly revenue and net earnings to vary greatly.
COST OF GOODS SOLD AND GROSS MARGIN
Fiscal quarter ended Three fiscal quarters ended
-------------------------- ---------------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
------------ ----------- ------------- --------------
Cost of sales $ 889,203 $ 675,377 $ 3,752,549 $ 2,292,124
Gross margin 52% 43% 61% 49%
Gross margin on product sales approximated 52% in the current fiscal quarter
and 61% on a fiscal year to date basis. This compares favorably with the 43%
and 49% recorded in the corresponding periods of the previous fiscal year. On
a proforma basis, gross margins approximated 60% and 61% in the fiscal quarter
and three fiscal quarters ended January 29, 2000.
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SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal quarter ended Three fiscal quarters ended
------------------------------ ------------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
------------- -------------- ------------- --------------
$ 1,813,793 $ 1,080,229 $ 5,306,583 $ 3,109,132
Selling, general and administrative expenses increased $734,000, or 68%, when
compared with that of the corresponding quarter in the previous fiscal year.
On a proforma basis, assuming the inclusion of Cronus, selling, general and
administrative expenses increased $79,000 or 5%.
Selling, general and administrative expenditures for the nine months ended
January 27, 2001 increased $2,197,000 or 71% when compared to the
corresponding quarter of the previous fiscal year. On a proforma basis, such
costs increased $232,000 or 5%. This increase is primarily attributable to the
amortization of deferred investment advisory fees.
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal quarter ended Three fiscal quarters ended
------------------------------ ------------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
------------- -------------- ------------- --------------
$ 1,481,843 $ 657,943 $ 4,286,881 $ 1,942,143
Research and development expenditures consist primarily of hardware and
software engineering personnel expenses, subcontracting costs, equipment,
prototypes and facilities. These expenses increased $824,000, or 125%, in the
current quarter when compared with the corresponding quarter of the previous
fiscal year. On a proforma basis, such costs increased $299,000 or 25%. This
increase is primarily attributable to increased labor and material costs
associated with the development of the Company's ChanlComm and signaling
conversion product lines.
On a fiscal year to date basis, research and development expenditures
increased $2,345,000 or 121%. On a proforma basis such costs increased
$770,000 or 22%. This increase is primarily attributable to increased labor
and material costs associated with the development of the Company's ChanlComm
and signaling conversion product lines.
The markets for the Company's products are characterized by continuing
technological change. The Company intends to continue to make substantial
investments in product and technology development and believes that its future
success depends in a large part upon its ability to continue to enhance
existing products and to develop or acquire new products that maintain the
Company's technological competitiveness.
DEPRECIATION AND AMORTIZATION
Fiscal quarter ended Three fiscal quarters ended
------------------------------ ------------------------------
January 27, January 29, January 27, January 29,
2001 2000 2001 2000
------------- -------------- ------------- --------------
$ 963,418 $ 161,554 $ 2,919,246 $ 489,334
The increase in depreciation and amortization is primarily associated with the
amortization of goodwill and depreciation of fixed assets associated with the
acquisition of Cronus Technology, Inc. in March 2000. This goodwill is being
amortized on a straight line basis over a four year period at a rate of
approximately $750,000 per quarter.
LIQUIDITY AND CAPITAL RESOURCES
At October 28, 2000, the Company had a negative cash balance of $212,000.
During the current fiscal quarter, working capital decreased from $3.3 million
at October 28, 2000 to $1.1 million at January 27, 2001. At January 27, 2001,
the Company had a current ratio of 1.2 to one.
JULY 2000 PRIVATE PLACEMENT
During the quarter ended July 29, 2000, the Company raised $1,170,000 through
a private placement offering of securities to a group of accredited investors.
Warrants to purchase common stock associated with this
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offering are exercisable for a period of one year after the closing date.
These funds will be used for working capital purposes.
SEPTEMBER 2000 FINANCING
On September 8, 2000, the Company sold 3,500 units at $1,000 per unit to a
group of accredited investors. Each unit consists of a prepaid common stock
purchase warrant ("Prepaid Warrant") and an incentive warrant ("Incentive
Warrant") to acquire additional shares of common stock in the Company. The
Prepaid Warrant is convertible at the option of the holder into common stock
at a conversion price equal to the lesser of $2.00 or the average of the
lowest five closing bid prices for the ten trading day period prior to
conversion. The prepaid warrant earns interest at a rate of 4% payable in
common stock. The Incentive Warrants allow the holder to purchase one half of
one share at a $2.50 per share. The Incentive Warrants have a five year term
and are exercisable immediately. The Company paid a placement fee of $350,000
plus other associated costs totaling $71,000 and issued the placement agent
warrants to purchase 438,000 shares of stock at price of $2.50 per share.
FEBRUARY 2001 FINANCING
On February 27, 2001, the Company sold an additional 850 units at $1,000 per
unit to the same investment group. The Prepaid Warrant is convertible at the
option of the holder into common stock at a conversion price equal to the
lesser of $.85 or the average of the lowest five closing bid prices for the
ten trading day period prior to conversion. The prepaid warrant earns interest
at a rate of 6% payable in common stock. The Incentive Warrants allow the
holder to purchase one half of one share at a $1.0625 per share. The Incentive
Warrants have a five year term and are exercisable immediately. The Company
paid a placement fee of $85,000 plus other associated costs totaling $15,000
and issued the placement agent warrants to purchase 212,500 shares of stock at
price of $1.0625 per share.
UNEXERCISED WARRANTS
At January 27, 2001, the Company has warrants outstanding which, if exercised,
could generate a maximum of $10,574,000 in additional cash. On March 9, 2001,
the Company's Board of Directors approved the repricing of all outstanding
common stock warrants to $0.51 per share. This reduction in exercise price
reduces the maximum cash which could be generated to $3,043,000. This
repricing will remain in effect until March 30, 2001, after which the original
exercise prices will apply. The Company can give no assurance as to whether
any warrants will be exercised, nor to the amount of cash that will be
generated, if any of these securities are exercised.
The Company anticipates that it may require additional funding to meet
operating requirements, future expansion and research and development
expenses. It is anticipated that such funding will be generated by way of
additional placements of equity, through research and development arrangements
funded by third parties, by asset based lending facilities and through the
exercise of in the money stock options and warrants. The Company can give no
assurance as to whether it will be able to conclude such financing
arrangements, or that, if concluded, they will be on terms favorable to the
Company.
REVOLVING LINE OF CREDIT
In connection with the acquisition of Cronus, the Company assumed liabilities
under a revolving line of credit and term loan agreement with LaSalle National
Bank. Under the revolving line of credit the Company could borrow up to the
lesser of $3,000,000 or 80% of eligible accounts receivable and 35% of
eligible inventory, as defined in the agreement. The revolving line of credit
bears interest at the bank's prime rate of interest plus 1.0% and was
scheduled to mature on May 1, 2001. Under the agreement, Cronus could issue
letters of credit up to $250,000 in the aggregate. There are no outstanding
letters of credit as of October 28, 2000. The term loan was payable in equal
monthly principle payments of $9,875, bears interest at the bank's prime rate
of interest plus 1.0% and was schedule to mature on May 1, 2001. In April
2000, the Company placed $250,000 in escrow to further collateralize the
revolving line of credit and term loan. In July 2000, the bank informed the
Company that the revolving line of credit and term loan would mature on
September 30, 2000. On September 12, 2000, the bank agreed to a further
extension until December 31, 2000. Accordingly, this debt has been classified
as a current liability.
On February 6, 2001, the Company entered into an accounts receivable financing
agreement with Alliance Financial Capital, Inc. that replaced the revolving
line of credit and term loan agreement with LaSalle National Bank. All debt
associated with the LaSalle agreement was satisfied. Under the accounts
receivable financing agreement, the Company can borrow up to the lesser of
$3,000,000 or 85% of eligible accounts receivable, as defined in the
agreement. The accounts receivable financing agreement bears interest at prime
rate plus 1.0% plus an additional 1.5% per invoice funded. The term of this
agreement is for twelve months with a minimum average daily account balance of
$750,000.
In connection with this acquisition, the Company assumed $1,000,000 in debt to
two individuals, which is subordinated in priority and payment to all senior
debt referenced above. This debt matured on December 10, 2000. The Company is
currently in default on the repayment of this debt and the individuals have
commenced a lawsuit against the Company. See Part 2, Item 1. Legal
Proceedings.
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NINE MONTHS OF FISCAL 2001 COMPARED TO NINE MONTHS OF FISCAL 2000
The Company used $4,496,000 in cash from operations during the nine months
ended January 27, 2001. This compares unfavorably to $2,676,000 in cash used
in operations during the corresponding period of the previous fiscal year.
This $1,820,000 increase is primarily attributable to an increase in the net
loss for the period, increases in inventory balances offset by pay-downs of
current liabilities and increased non-cash expenditures, primarily goodwill
amortization.
The Company purchased $212,000 in fixed assets during the period.
Cash provided by financing activities is primarily attributable to $3,079,000
in net proceeds received from the private placement of prepaid warrants and
$1,170,000 in net proceeds received from the issuance of common stock offset
by repayments on the revolving line of credit.
The Company continues to experience severe cash flow problems resulting from
reduced sales and slow collections. In order to address this issue, the
Company has taken on or is planning to take on the following actions, among
others: (a) refinanced its senior debt with a new senior lender; (b) commenced
accelerated collection efforts; (c) repriced existing options and warrants;
(d) engaged an investment firm to provide the Company with strategies for
addressing cash-flow and shareholder value issues; and (e) reduced overheads.
In addition to the foregoing, the Company is considering either selling or
recapitalizing certain portions of its business or licensing certain of its
technologies.
INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to
uncertainty over the level of earnings in fiscal year 2001. Also, the Company
has net operating loss carryforwards for income tax reporting purposes for
which no income tax benefit has been recorded due to uncertainty over
generation of future taxable income.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss is initially reported
as a component of other comprehensive income and subsequently reclassified into
income when the transaction affects earnings. For a derivative not designated
as a hedging instrument, the gain or loss is recognized in income in the period
of change. SFAS 133 is effective for all fiscal quarters beginning after June
15, 2000 and requires application prospectively. Presently, the Company does
not use derivative instruments either in hedging activities or as investments.
Accordingly, the adoption of SFAS 133 had no impact on the financial position or
results of operations.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"),"Accounting
for Certain Transactions Involving Stock Compensation, an Interpretation of
APB Opinion No. 25". FIN 44 clarifies the application of APB No. 25 for (a)
the definition of employee for purposes of applying APB No. 25, (b) the
criteria for determining whether a plan qualifies as a non compensatory plan,
(c) the accounting consequences of various modifications to the previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 2,
2000 but certain conclusions cover specific events that occur after either
December 15, 1998 or January 12, 2000. The Company believes that adoption of
FIN 44 will not have an affect on the Company's financial statements but may
impact the accounting for grants or awards in future periods.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 which summarizes certain of the SEC staff's views
in applying generally accepted accounting principles to revenue recognition in
financial statements. The Staff Accounting bulletin is effective for the
fiscal year beginning May 1, 2001. The initial adoption of this guidance is
not anticipated to have a material impact on the Company's results of
operations or financial position, however, the guidance may impact the way in
which the Company will account for future transactions.
CERTAIN PARTS OF THE FOREGOING DISCUSSION AND ANALYSIS MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
AS A CONSEQUENCE, ACTUAL RESULTS MIGHT DIFFER MATERIALLY FROM RESULTS FORECAST
OR SUGGESTED IN ANY FORWARD-LOOKING STATEMENTS. SEE "MARKETS FOR REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION" IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A supplier of parts for the Company's integrated access device product line has
asserted claims for $111,000 for goods sold and delivered and $270,000 for goods
manufactured but not yet delivered. The Company is actively working to settle
this matter and expects to do so shortly.
Two other suppliers asserted claims against the Company seeking $134,000 and
$112,000, respectively for circuit boards and other parts sold and delivered.
While the Company disputed these charges at the time, both claims have been
settled.
On January 29, 2001, two individuals holding subordinated senior notes
totaling $1,000,000 commenced an action in the Circuit Court, Cook County,
Illinois against the Company, Cronus, certain former principal shareholders of
Cronus and a liquidating trust established by Cronus and its trustees seeking
repayment of notes, together with accrued interest. The Company has filed a
motion to dismiss the complaint on jurisdictional grounds. On March 6, 2001,
the Circuit Court denied an application by the Plaintiffs seeking an
injunction against the Defendants and other relief.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FASTCOMM COMMUNICATIONS CORPORATION
(Registrant)
/s/ Peter C. Madsen
Date: March 13, 2001 By:
Peter C. Madsen ----------------------
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Mark H. Rafferty
Date: March 13, 2001 By:
Mark H. Rafferty ----------------------
Vice President, Chief Financial Officer
Treasurer, Secretary and Director
(Principal Financial and Accounting Officer)
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