1
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 February 3, 1996 .
--------------------------------------
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from__________________ to _________________________
Commission file number 0-17168 .
-----------------------
FASTCOMM COMMUNICATIONS CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1289115 .
- ---------------------------------------- ----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
45472 Holiday Drive
Sterling, Virginia 20166
---------------------------------------------------------------
(Address of principal executive offices, Zip code)
(703) 318-7750
---------------------------------------------------------------
(Registrants 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
subjuct to such filing requirements for the past 90 days. Yes X . No .
----- ------
As of March 1, 1996, there were 9,573,696 shares of the Common Stock, par
value $.01 per share, of the registrant outstanding.
No exhibits are filed with this report, which consists of 13 consecutively
numbered pages.
2
FASTCOMM COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Consolidated Statements of Operations
Fiscal quarter and three fiscal quarters
ended February 3, 1996, and February 4, 1995 . . . . . . 3
Consolidated Balance Sheets -
February 3, 1996, and April 30, 1995 . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Fiscal quarter and three fiscal quarters
ended February 3, 1996 and February 4, 1995 . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . 6-7
Item 2 Management's Discussion and Analysis of
Financial Conditions and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . 8-11
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 12
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(Page 2 of 13)
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Fiscal quarter ended Three fiscal quarters ended
---------------------------- ------------------------------
February 3, February 4, February 3, February 4,
1996 1995 1996 1995
------------ ------------ ------------ -------------
Product sales $3,038,295 $1,288,359 $6,242,134 $3,361,354
License fees and other 12,600 12,000 50,014 66,355
------------ ------------ ------------ -------------
Total revenues 3,050,895 1,300,359 6,292,148 3,427,709
Expenses
Cost of sales 1,489,821 704,811 3,124,341 1,782,416
Selling, general and administrative 1,001,217 1,118,967 3,046,075 3,089,014
Research and development 350,136 224,201 989,346 687,440
Depreciation and amortization 58,555 54,483 199,274 160,879
------------ ------------ ------------ -------------
Income (loss) from operations 151,166 (802,103) (1,066,888) (2,292,040)
Other income (expense)
Other income 19,572 15 21,524 15
Interest income 39,933 9,205 97,831 20,718
Interest expense (4,527) (6,309) (19,863) (18,562)
------------ ------------ ------------ -------------
Net income (loss) $206,144 ($799,192) (967,396) ($2,289,869)
============ ============ ============ =============
Earnings (loss) per share
Primary $0.02 ($0.09) ($0.10) ($0.28)
Fully diluted $0.02 ($0.09) ($0.10) ($0.28)
Weighted average number of shares
Primary 9,780,384 8,428,240 9,478,959 8,224,283
Fully diluted 9,780,384 8,428,240 9,478,959 8,224,283
See accompanying notes to unaudited consolidated financial statements
(Page 3 of 13)
4
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEET
ASSETS
February 3, April 30,
1996 1995
------------- -------------
(unaudited)
Current assets
Cash and cash equivalents $1,257,655 $3,105,346
Restricted investments 374,687
Accounts receivable, net of provision for
returns and doubtful accounts of $202,000
and $225,000 2,783,154 1,332,473
Inventories, net 1,945,683 1,969,150
Prepaid and other 113,820 74,685
------------- -------------
6,100,312 6,856,341
Property, plant and equipment 375,743 281,325
Software license, rights and other intangibles
net of accumulated amortization of $238,500
and $198,750 288,911 357,779
Other assets 140,328 81,844
------------- -------------
$6,905,294 $7,577,289
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long term debt $156,001 $226,171
Accounts payable 1,311,932 762,742
Accrued payroll 160,606 206,683
Other current liabilities 45,615 101,059
------------- -------------
1,674,154 1,296,655
Long term debt, less current maturities 131,754
------------- -------------
1,674,154 1,428,409
------------- -------------
Shareholders' equity
Common stock, $.01 par value, 94,972 94,445
(25,000,000 shares authorized; 9,497,195 and
9,444,529 issued and outstanding)
Additional paid in capital 13,298,899 13,249,770
Accumulated deficit (8,162,731) (7,195,335)
------------- -------------
Total shareholders' equity 5,231,140 6,148,880
------------- -------------
$6,905,294 $7,577,289
============= =============
See accompanying notes to unaudited consolidated financial statements
(Page 4 of 13)
5
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Fiscal quarter ended Three fiscal quarters ended
------------------------------ --------------------------------
February 3, February 4, February 3, February 4,
1996 1995 1996 1995
-------------- ------------ --------------- -------------
Operating activities
Net income (loss) $206,144 ($799,192) ($967,396) ($2,289,869)
Items not affecting cash
Depreciation and amortization 58,555 54,483 199,274 160,879
Provision for doubtful accounts (27,600) (2,675)
Provision for inventory obsolescence 40,463 110,463
Settlement of litigation (21,570) (21,570)
Cash effect of changes in:
Accounts receivable (1,018,068) (128,914) (1,448,008) 649,051
Inventories (27,468) 405,888 (86,995) 447,992
Prepaid and other current assets (48,314) (18,927) (39,133) (87,597)
Other non current assets (6,772) 2,471 (58,484) (49,496)
Accounts payable and accrued liabilities 206,543 319,885 503,113 244,843
Other current liabilities (78,407) (55,444) (34,153)
------------ ----------- ------------- -----------
Net cash used by operations (716,494) (164,306) (1,866,855) (958,350)
------------ ----------- ------------- -----------
Investing activities
Additions of property, plant and equipment (37,724) (62,086) (198,692) (108,751)
Purchase of software license rights and
other intangible assets (26,131) (93,817)
Reduction of investment collateral (9,000) 374,687 4,088
------------ ----------- ------------- -----------
Net cash provided (used) by investing
activities (37,724) (71,086) 149,864 (198,480)
------------ ----------- ------------- -----------
Financing activities
Proceeds from exercise of options 8,537 450 71,224 208,912
Proceeds from private placement 611,500 611,500
Costs associated with private placement (26,759) (26,759)
Repayment of notes payable (57,683) (201,924) (199,599)
Preceeds from notes payable bank 80,000
------------ ----------- ------------- -----------
Net cash provided (used) by financing
activities 8,537 527,508 (130,700) 674,054
------------ ----------- ------------- -----------
Net decrease in cash and equivalents (745,681) 292,116 (1,847,691) (482,776)
Cash and cash equivalents, beginning of period 2,003,336 200,857 $3,105,346 975,749
------------ ----------- ------------- -----------
Cash and cash equivalents, end of period $1,257,655 $492,973 $1,257,655 $492,973
============ =========== ============= ===========
See accompanying notes to unaudited consolidated financial statements
(Page 5 of 13)
6
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, 1996.
The Company's fiscal year ends on April 30. For interim reporting purposes,
effective with the quarter ended October 31, 1992, the interim fiscal quarters
are closed on the first weekend following the calendar quarter end date, unless
the quarter end date falls on a weekend, in which case such weekend is used as
the interim fiscal quarter end. Prior to the quarter ended October 31, 1992,
the interim fiscal quarters were closed on the last day of the calendar quarter
end.
The quarters ended February 3, 1996, and February 4, 1995, included 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 quarter ended February 3, 1996, the
earnings per share calculation includes common share equivalents. For the
quarter ended February 4, 1995, and for the three fiscal quarters ended
February 3, 1996, and February 4, 1995, the earnings per share calculation does
not include common share equivalents in that the inclusion of such equivalents
would be antidilutive for all such periods.
3. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following:
February 3, April 30,
1995 1995
---------------------------------
Production materials $1,107,193 $1,151,875
Work in process 332,163 148,875
Finished goods 506,327 668,400
-------------- --------------
$1,945,683 $1,969,150
============== ==============
4. RELATED PARTY TRANSACTIONS
During the quarter ended February 3, 1996, the Company sold approximately
$37,000 of
(Page 6 of 13)
7
product under normal terms and conditions to Newbridge Networks Inc., a
subsidiary of Newbridge Networks Corporation, a Canadian telecommunications
company. Sales to Newbridge total approximately $114,000 for the three quarters
ended February 3, 1996. FastComm sells to Newbridge under net 30 terms with
prompt payment discounts. Such terms are consistent with that of similar
customers. Title passes on shipment of product. Peter C. Madsen, President,
Chief Executive Officer and Chairman of the Board of Directors of FastComm
Communications Corporation is a Director of Newbridge Networks Corporation.
The accounts receivable due from Newbridge totals $28,000 at February 3, 1996,
and $51,000 at April 30, 1995.
5. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The quarter ended February 3, 1996, includes sales of $936,000 and $874,000,
representing 31% and 29%, respectively, of total revenues to two unrelated
third party domestic corporations. The three fiscal quarters ended February 3,
1996 includes sales of $1,413,000 and 884,000, respectively, representing 22%
and 14% of total year to date revenues, to these same corporations. As of
February 3, 1996, accounts receivable includes $835,000 and $808,000,
respectively due from these corporations.
(Page 7 of 13)
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Fiscal quarter ended Three fiscal quarters ended
------------------------------- -------------------------------
February 3, February 4, February 3, February 4,
1996 1995 1996 1995
------------ ------------- ------------ -------------
Product sales $3,038,295 $1,288,359 $6,242,134 $3,361,354
License fees and other 12,600 12,000 50,014 66,355
------------ ------------- ------------ -------------
Total revenues $3,050,895 $1,300,359 $6,292,148 $3,427,709
Total revenues increased $1,210,000 (66%) over that of the previous quarter and
increased $1,751,000 (135%) when compared with the corresponding quarter of
fiscal 1995. The increase in product sales from that of the previous quarter
was primarily attributable to an increase in the sale of frame relay access
devices ($2,526,000 as compared with $1,505,000 in the previous quarter). The
increase in product sales over that of the corresponding quarter in the
previous fiscal year is also primarily attributable to increased sales of frame
relay access devices ($2,526,000 as compared with $1,167,000) offset by
decreased sales of data compression products, analog modems and channel service
units. The market for the Company's data compression is primarily
international where circuit costs are higher and the economies offered by
compression are greater. The Company continues to manufacture analog modems
for specialized applications, however, it has no plans to sell into the
consumer market for low end modems.
On a fiscal year to date basis, revenues increased $2,864,000 (84%) when
compared to the first three quarters of fiscal year 1995. This increase is
primarily attributable to increased sales of frame relay access devices
($5,199,000 as compared with $2,368,000).
The quarter ended February 3, 1996, includes sales of $936,000 and $874,000 to
two, unrelated, third party domestic corporations. The three quarters ended
February 3, 1995, includes sales of $1,413,000 and $884,000 to the same
corporations.
The Company continues to focus its selling efforts on larger customers that
offer strong resale support of FastComm products to end users and on those that
present significant resale potential.
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.
(Page 8 of 13)
9
COST OF GOODS SOLD AND GROSS MARGIN
Fiscal quarter ended Three fiscal quarters ended
------------------------------- -------------------------------
February 3, February 4, February 3, February 4,
1996 1995 1996 1995
------------ ------------- ------------ -------------
Cost of sales $1,489,821 $704,811 $3,124,341 $1,782,416
Gross margin 51% 45% 50% 47%
Gross margin is calculated by subtracting cost of sales from product sales.
Gross margins during the current fiscal quarter approximated 51%, as compared
with 45% for the quarter ended February 4, 1995. The increase in gross margin
is attributable to higher manufacturing volumes in the current quarter. During
the quarter ended February 3, 1996, the Company increased its reserve for
inventory obsolescence by $40,000. On a year to date basis, the Company has
increased its reserve or inventory obsolescence by $110,000 to $605,000. This
increase reduced gross margin by approximately 2%.
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal quarter ended Three fiscal quarters ended
------------------------------- -------------------------------
February 3, February 4, February 3, February 4,
1996 1995 1996 1995
------------ ------------- ------------ -------------
$1,001,217 $1,118,967 $3,046,075 $3,089,014
Selling, general and administrative expenses decreased $118,000 over that of
the corresponding quarter in the previous fiscal year. This is primarily
attributable to decreases in salary and benefit costs ($75,000), a decrease in
bad debt expense ($93,000), offset by an increase in professional fees
associated with the SEC investigation ($59,000).
Such costs decreased $43,000 on a fiscal year to date basis. This decrease is
primarily attributable to a decrease in bad debt expense ($65,000), a decline
in advertising costs ($34,000), decreased salary expenses ($100,000 offset by
increased professional fees associated with the SEC investigation ($155,000).
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal quarter ended Three fiscal quarters ended
------------------------------- -------------------------------
February 3, February 4, February 3, February 4,
1996 1995 1996 1995
------------ ------------- ------------ -------------
$350,136 $224,201 $989,346 $687,440
Research and development expenditures consist primarily of hardware and
software engineering personnel expenses, subcontracting costs, equipment,
prototypes and facilities. The increase in such expenses on both a current
quarter and fiscal year to date basis is primarily attributable to increased
labor and material costs associated with new product development and new
product prototypes.
The markets for the Company's products are characterized by continuing
technological change. Management believes that significant expenditures for
research and development will continue to be required in the future.
LIQUIDITY AND CAPITAL RESOURCES
At February 3, 1996, the Company had $1,258,000 in cash and cash equivalents.
Working capital increased $148,000 during the fiscal quarter ended February 3,
1996, and decreased
(Page 9 of 13)
10
$1,134,000 during the three fiscal quarters ended February 3, 1996.
The Company anticipates no funding will be required to meet its near term core
operating needs. However, the Company anticipates additional funding
requirements to meet 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 and by investments by strategic partners. 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.
THIRD FISCAL QUARTER OF 1996 COMPARED TO THIRD FISCAL QUARTER OF 1995
Cash used by operations increased from $164,000 in the quarter ended February
4, 1995, to $716,000 in the quarter ended February 3, 1996. The $552,000
increase in cash used in operating activities is primarily attributable to
increased accounts receivable balances associated with increased sales
($889,000), increased inventory expenditures ($433,000) the paydown of accounts
payable and accrued liability balances ($113,000) offset by increased net
income for the period ($1,005,000) and an increase in the provision for
inventory obsolescence ($40,000).
Cash used by investing activities totaled $38,000 in the current fiscal
quarter. This utilization of cash was primarily attributable to asset purchases
required to develop and produce new products.
THREE FISCAL QUARTERS ENDED FEBRUARY 3, 1996 COMPARED TO THREE FISCAL QUARTERS
ENDED FEBRUARY 4, 1995
Cash used by operations increased from $958,000 in the three fiscal quarters
ended February 4, 1995, to $1,862,000 in the three fiscal quarters ended
February 3, 1996. The $904,000 increase in cash used in operating activities
is primarily due to an increase in accounts receivable and inventory purchases
associated with increased sales. Further, the sharp decline in accounts
receivable, in fiscal 1995, did not recur in the current fiscal year. This was
offset by a $1,322,000 decrease in the net loss for the period, increases
accounts payable and accrued liability balances, and an increase in the
reserve for inventory obsolescence.
Cash provided by investing activities totaled $150,000 in the three fiscal
quarters ended February 3, 1996. The Company repaid the installment loan
payable to its bank and redeemed the US Treasury Bill that collateralized this
loan. This redemption, which totaled $375,000, was partially offset by $199,000
in fixed asset purchases.
Cash used by financing activities is primarily attributable to the repayment of
notes payable to the bank ($206,000) offset by proceeds from the exercise of
common stock options ($71,000).
REPAYMENT OF NOTES PAYABLE
During the first quarter of the current fiscal year, the Company repaid its
installment loan payable in the amount of $194,750 and redeemed the US Treasury
Bill that collateralized this loan. The proceeds from this Treasury Bill were
transferred to cash.
INVENTORIES
The Company's inventory balances increased slightly in the current fiscal
quarter. The Company increased its reserve for inventory obsolescence from
$565,000 to $605,000 during the current fiscal quarter. The specific targets
of this reserve are the data compression and analog modem inventories. The
market for the Company's data compression products is in the international
market where circuit costs are higher and the economies offered by compression
are greater. The Company continues to manufacture analog modems for
specialized applications, however, it has no plans to sell into the consumer
market for low
(Page 10 of 13)
11
end modems. The Company believes it will be able to ship and/or liquidate its
current inventory levels profitably and that its reserve for inventory
obsolescence and excess inventory is adequate.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $193,000 in the current quarter and decreased
$918,000 during the three fiscal quarters ended February 3, 1996. The
increase is attributable to the current quarter profit and the decrease is
attributable primarily to the year to date net loss.
(Page 11 of 13)
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 6, 1993, Sheffield Securities, Inc., a Delaware corporation that ceased
operations on November 9, 1990, commenced an action against the Company in the
Circuit Court of the Seventeenth Judicial Circuit in and for Broward County,
Florida. The suit pertained to the attempted exercise of an expired
Underwriter's Warrant Certificate. For jurisdictional purposes, the plaintiff
claimed unspecified damages in excess of $15,000.
On February 20, 1996, after commencement of trial, the Circuit Court of the
Seventeenth Judicial Circuit in and for Broward County, Florida issued a Final
Judgement of Dismissal in favor of the Company and against the Plaintiff,
Sheffield Securities, Inc. The parties have stipulated that no appeal will be
taken from the Final Judgement of Dismissal.
The United States Securities and Exchange Commission ("SEC") is currently
conducting a confidential inquiry pursuant to a formal order directing a
private investigation relating to certain prior public disclosures and periodic
reports of the Company. The Company is working with the SEC Staff. No
assurance can be given concerning the outcome of this investigation or that the
inquiry will be resolved in the near future.
(Page 12 of 13)
13
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, 1996 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, 1996 By:---------------------------
Mark H. Rafferty
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
(Page 13 of 13)