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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED APRIL 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____________ to ________________
Commission File Number: 0-17168
FASTCOMM COMMUNICATIONS CORPORATION
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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 or organization) Identification Number)
45472 Holiday Drive
Sterling, Virginia 20166
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(Address of principal executive offices) (Zip Code)
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Registrant's Telephone Number, including area code: 703/318-7750
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on July 15, 1996, was $104,023,776
(8,668,648 shares times $12.00). As of July 15, 1996, there were 9,820,081
shares of the Common Stock of the registrant outstanding.
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FASTCOMM COMMUNICATIONS CORPORATION
INDEX
PART I. PAGE
Item 1. Business. 3
Item 2. Properties. 11
Item 3. Legal Proceedings. 11
Item 4. Submission of Matters to Vote of Security Holders. 11
PART II. PAGE
Item 5. Market for Registrant's Common Equity and Related Stockholder 12
Matters.
Item 6. Selected Financial Data. 14
Item 7. Management's Discussion and Analysis of Financial Condition and 15
Results of Operations.
Item 8. Financial Statements and Supplementary Data. 21
Item 9. Changes in and Disagreements with Accountants on Accounting and 22
Financial Disclosure.
PART III. PAGE
Item 10. Directors and Executive Officers of the Registrant. 23
Item 11. Executive Compensation. 24
Item 12. Security Ownership of Certain Beneficial Owners and Management. 29
Item 13. Certain Relationships and Related Transactions. 30
PART IV. PAGE
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 31
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PART I.
ITEM 1. BUSINESS
GENERAL
FastComm Communications Corporation (the "Company" or "FastComm"), a Virginia
corporation, designs, manufactures, and sells access devices that allow
computer, terminal and telephone users to connect to public and private
transmission networks. Its products include a range of devices aimed at the
fast packet services as well as digital leased-lines, Switched 56 networks, and
Internet protocol ("IP") router networks.
The Company's strategy is to produce the most flexible, cost-effective access
devices that are also the easiest to install, use, and maintain. Such features
make FastComm products appealing to dealers, systems integrators, telephone
carriers, and other resellers who form the main distribution channel and
provide installation and maintenance services in the United States and
internationally.
FastComm shares are traded publicly on the NASDAQ National Market under the
symbol FSCX.
DEVELOPMENT OF THE BUSINESS
The Company was incorporated as MicroTel, Inc. under the laws of the
Commonwealth of Virginia in May 1983. The Company changed its name to Data
Safe Incorporated in February 1984; to Electronic Vaults, Inc., in August
1984; and to FastComm Communications Corporation, in October 1987. The
Company's original product, a data backup service, involved the transfer of
digital information from each customer's computer to the Company's storage
facility over telephone lines and third party modems. To foster this business,
the Company developed its own modem in May 1985. While the data backup service
was discontinued, a progression of modems dominated company revenue until
fiscal year 1993.
In 1990, the Company saw increasing competition in the analog modem
marketplace, and started to focus on the market for digital access products.
Starting with the Channel Service Unit (CSU), a modem for digital transmission
lines, FastComm pursued other digital based technologies.
In July 1991, the Company entered into an agreement with a New Jersey
partnership to acquire title to its existing frame relay software code. This
code became the basis for the Company's frame relay access device ("FRAD")
product line.
In August 1991, FastComm entered into an agreement with a Rhode Island firm, to
acquire exclusive rights to its data compression technology. The Company funded
the further development of this technology and delivered the "Time Machine"
data compression product.
In March 1994, the Company acquired the assets and certain liabilities of ZyBel
Microsystems, Inc., based in Connecticut. The firm was engaged in selling an
interactive voice response product that it had created, Vista, and the data
controller, a small data switch or data PBX (see Data Controllers below).
NETWORKING INDUSTRY
The networking industry encompasses a broad range of communications services
and equipment. Communications in the form of voice, data, Internet traffic,
electronic mail, facsimile, imaging, video teleconferencing, on-line
transaction processing and other forms of information are transmitted across
communications networks. As demand for these information services grows, the
demand on communications networks are increasing in terms of the number of
sites and users, the number of formats and types of information, and the volume
and speed of information to be communicated by each user.
The networking industry divides itself into logically into two major areas:
1. Backbone components and systems, consisting of large switches and
multiplexers, plus the wide area network (WAN) transmission lines that provide
connectivity for these devices. Public networks purchase backbone components
for their Central Offices. Private networks install them at headquarters,
major regional centers, and the largest branch locations.
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2. Access devices, typically smaller equipment located in customer branch
offices and attached to the backbone network through a single telephone line.
An access device may be part of a local area network (LAN) within a building or
campus.
FASTCOMM'S PRODUCTS
The Company's products are based on the second category, the access device
segment of the networking industry. The market potential for access products
(in units) is far greater than that of backbone and systems products because of
the number of small offices and business locations. As circuit costs decline,
these sites are increasingly able to justify a digital network connection.
FRAME RELAY
A large majority of the Company's revenue comes from the sale of frame relay
access devices (FRADs). Frame relay is a simple way to transfer (relay) blocks
of data (frames) on a "best effort" basis (without error correction) across a
public or private network. Frame relay depends on the high-quality (low error
rate) of optical fiber transmission lines. Frame relay standards define the
format for the data blocks sent to the network. The Company's frame relay
access devices (FRADs) adapt terminals, computers, telephone equipment, and
facsimile machines to the standard frame relay format. FRAD market studies
from major consultants indicate a growth rate of over 100% per year for the
past three years. Frame relay service revenues and unit counts are expected to
continue to grow at this rate.
The Company initially displayed its frame relay technology in the Fall of 1991,
when it was the first to publicly demonstrate voice transmission over a public
frame relay network.
The Company's FRADs connect PCs, workstations, local area networks ("LAN"), and
host computers to a frame relay service. Data formats on FastComm FRADs are
compatible with standard routers for the most important LAN protocols: IP,
IPX, and AppleTalka. A solution mixing FRADs at some sites with routers at
others is less expensive than deploying routers everywhere. Certain Internet
service providers (ISPs) offer FastComm FRADs as part of their product package,
with frame relay service between the ISP site and those customers who require
full time Internet access to maintain a site on the World Wide Web, to have
immediate access to news and mail or for other business reasons.
In addition to standards compatibility, FastComm relies on additional
proprietary features to add value and distinguish its products. To the best of
the Company's knowledge, no competitors currently offer such features. These
include:
1. Automatic installation has been a key advantage, in the form of two
specific features that make FastComm products easier to install than
those of its competition.
-- FastConnect(TM) allows a FastComm access device to learn how the frame
relay network switch is configured.
-- FastConfig(TM) allows an EtherFRAD(TM) or WEBrouter(TM) access device to
learn its IP addressing.
2. A menu system on the dedicated configuration port guides users through the
setup process for other protocols and all management functions. Menus make
installation and maintenance much easier than for equipment that requires
commands to be entered.
FastComm FRADs handle terminal protocols with intelligence, an appealing
feature. An example of this intelligence is seen when dealing with polled
protocols like IBM's SDLC (synchronous data link control) where more than half
the data on a line may be overhead, not information. FastComm FRADs can
eliminate this overhead and pass only real information. The equipment emulates
multidrop lines, the most common type found in over 50,000 SNA networks.
FastComm FRADs save bandwidth and improve response times and simplify network
topologies.
Recent versions of the front end processor for IBM mainframe computers can be
compatible with frame relay. FastComm is developing the software necessary to
support the protocol conversion necessary to interoperate directly with a front
end processor. Once developed this software will be available by downloading an
update into FLASH memory on a FRAD. As with router networks, FRADs at remote
sites with terminal cluster controllers can reduce the overall cost of a
network.
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Additional customer interest has been expressed in the direct Ethernet LAN port
on the EtherFrad(TM) models and in the data compression hardware option that
has been shipped with the QuadFrad and will be offered in other models.
Voice over frame relay became popular during fiscal 1996. The Company
announced the VoiceFRAD(TM) access device, which combines voice and data
interfaces on the same unit.
Frame relay products contributed about 85% of total revenue for the fiscal
year.
CHANNEL SERVICE UNIT
Modems work with analog lines. The corresponding equipment for a digital line
is a Channel Service Unit (CSU). The DDX56 shipped initially in 1991 is a
56,000 bit/s leased line version. Dial capability was added the following
year, to work with "Switched 56" digital dial services.
Stand-alone CSUs have become a commodity product. The Company adds value to
the CSU by packaging it with FRAD, data compressors, and remote management
features.
DATA COMPRESSION
FastComm put the original Time Machine data compressor into production in May
1992. It is still believed, based upon reports in industry periodicals, to be
the fastest commercially available data compressor. Two inputs at up to 6
million bits per second ("Mbit/s") are compressed into a single 2 Mbit/s line.
The Time Machine consistently shows compression ratios of 2.5 or 3 to 1, and
has demonstrated over 4 to 1 (exact ratio of compression depends on the nature
of the data). Compression technology has since been built into FastComm FRADs.
ATM ACCESS
The standardized access speeds for ATM networks had been 45, 55, 155 million
bits per second and faster. Since access lines at these speeds were too
expensive for most users, the Company, in 1993, acted on the belief that ATM
would be offered at 1.5 and 2 Mbit/s. These T-1 and E-1 access formats have
since been defined by the ATM Forum. Several carriers announced an intent to
offer ATM service over T-1, but only one telephone company has tariffed the
service, after the end of fiscal 1996.
FastComm has developed an ATM Access product in conjunction with HyNET, Ltd.
(see "New Product Development" below.) The LAN SARgent(TM) is a small-site
access device that connects both an Ethernet Local Area Network port and a
serial data port (normal data connection) to a public ATM service or a private
ATM network. The connection from the SARgent to the ATM network is a standard
T-1 or E-1 digital line.
Development began in late fiscal year 1993. Test units have been successfully
tested and certified with several vendors of ATM switches and concentrators.
DATA CONTROLLER
Data Controllers are small data PABX's that allow up to seven devices to be
managed with a single telephone line and modem. A management station places
one call to the data controller, then communicates with up to seven attached
devices. A typical example would be a branch office equipped with a CSU,
multiplexer, bridge or router, terminal controller, and voice PABX or key
system. In addition to supporting dial-in access, the Data Controller will
accept information from any of the managed devices, then dial out to the
central management station, through the modem, and deliver that information --
for example, an alarm message.
WEBROUTER(TM)
The WEBrouter, a low cost Internet access router, provides the Company's
solution for Internet access over frame relay. The Internet and its World
Wide Web are usually accessed over a dialed up connection or a leased line
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carrying the Internet Protocol (IP) in a format called Point to Point Protocol
(PPP). The second most popular way is using frame relay in place of PPP, or IP
over frame relay. With the large number of new Internet users, service
providers are finding frame relay an efficient way to offer connections to many
customers over a single data line at the ISP's site. WEBrouters(TM) were
designed for intranet applications of World Wide Web technology within
companies as well as general Internet access.
The WEBrouter is designed specifically for full-time Internet access. It is
well suited to connecting to the Internet those host computers which are sites
on the World Wide Web, electronic mail servers or file transfer points. It is
equally able to be part of a corporate intranet, which is a private network
based on the same World Wide Web technology.
MODEMS
The Company continues to sell its analog modems for specialized data
applications that use unusual features like multiple layers of password
protection and dial back security. No effort is made to participate in the
highly competitive consumer market for inexpensive low-end modems.
OTHER PRODUCTS
Through purchase of patent rights, the Company gained exclusivity in the US for
a credit-card size autodialer that can be programmed to dial one or two
pre-selected numbers. The card is held up to a telephone mouthpiece. Pushing
one of the two buttons causes the card to sound the dialing tones of the
associated number. Production began in FY 1995 to fulfill customer orders.
The Company has entered into contracts with other manufacturers to acquire
equipment to resell. The Company puts its name on these products for its
existing distribution channels. The Company actively seeks additional products
to resell in order to fill out the product line, reach a market quickly, or to
minimize development cost. Products selected for resale and private labeling
complement existing items and open new market opportunities for large
quantities of FastComm's own designs. Products may also be developed jointly
with another firm, usually for sale by both parties into different distribution
channels.
NEW PRODUCT DEVELOPMENT
To remain competitive, the Company invests heavily in research and development
("R&D") and expects such investment to continue. Recorded expenses for
research and development have been as follows:
FY 1996 $1,411,503 14% of revenue
FY 1995 $ 916,003 22% of revenue
FY 1994 $ 960,042 19% of revenue
The R&D plan includes new digital access products in addition to add-on
features for existing FRADs.
Announced products include:
(1) 16-port MaxFRAD(TM), with standard Ethernet interface, optional data
compression, and CSU. This device will serve as the central site access device
for small to medium sized networks.
(2) ISDN (Integrated Services Digital Network) basic rate interface ("BRI"),
will offer an alternative to the integral 56 kbit/s CSU for principal access
or dial backup protection. One telephone company tariffed ISDN BRI access to
its frame relay network toward the end of the fiscal year 1996.
Hardware design and testing for both projects were completed in FY 1996;
software work is progressing in the first quarter of fiscal year 1997. Also in
fiscal year 1996, the Company designed and delivered a FRAD with an integrated
token ring interface called the RingFrad(TM).
Hardware and software design for the SARgent and hardware design for the
MaxFRAD are under a joint development agreement with HyNET, Ltd., an Israeli
company. Work was financed in part by a grant from the
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Binational Industrial Research and Development Foundation (BIRD Foundation), a
joint effort of the U.S. and Israeli governments. Under the terms of BIRD
grants, money they advance to fund product development is repaid via a small
royalty on those products as they are sold. Repayment is capped at 150% of the
grant amount. There is no minimum repayment.
The initial release of the VoiceFRAD(TM) product will be customized for
FastComm by its manufacturer. Joint development of enhanced versions is being
planned.
One goal of all FastComm products designs is that they be priced aggressively.
Product development stresses low cost, reliable components and
manufacturability. A modular approach allows many different products to be
created from a few basic components. For example, the integral CSU for 56
kbit/s access is the same in all FRADs, low end Time Machines, and stand-alone
CSUs.
To keep costs low or to bring a product to market quickly, any design may be
done entirely internally, externally, jointly with another firm or from
licensed technology.
Larger companies, with larger engineering resources and more internal
expertise, may be able to develop a larger portion of their products without
outside technology. Not having to pay licensing fees or royalties could
provide them a cost advantage.
Research and development project schedules for high technology products are
inherently difficult to predict, and there can be no assurance that the Company
will achieve its expected initial shipment dates of products in development.
Because timely availability of new and enhanced products is critical to the
success of the Company, delays in availability of these new products, or lack
of market acceptance of such products, could adversely affect the Company.
The Company's ability to anticipate changes in technology, industry standards
and communications service provider offerings, and to develop and introduce new
and enhanced products on a timely basis that are successful in the market will
be a significant factor in the Company's competitive position and its prospects
for growth.
BACKLOG
In March, 1995, the Company announced it had been awarded a contract from
System One Corporation, for approximately 8,500 FRAD's to be delivered over a
period of up to three years. Either party may terminate the contract on the
occurrence of a material, uncured breach. No minimum purchase obligation is
set forth in the contract. Through fiscal 1996, approximately 5,000 units have
been shipped under normal terms and conditions. The remaining 3,500 units will
be shipped through December, 1997.
In January, 1996, the Company announced it had been awarded a contract from GTE
Telephone Operations.. Under the terms and conditions of this five year
agreement, 3,400 FRAD's are to be shipped over the first nine months. An
additional 300 units per year requirement is anticipated in years two through
five of the contract to meet expansion needs. Either party may terminate this
agreement without cause. Through fiscal 1996, approximately 2,520 units have
been shipped under normal terms and conditions. The final 880 units of the
initial 3,400 order will be shipped in the first quarter of fiscal 1997.
Alcatel Data Networks ("Alcatel") and FastComm announced a partnership for
voice and data frame relay access devices on July 1, 1996. While the Company
places no specific value on the agreement, it is expected to be significant.
Alcatel, in a separate public announcement, valued this three year agreement at
$70 million based on a good faith, non-binding estimate as to the likely volume
of FastComm products to be purchased and/or licensed during this initial term.
Actual revenue will depend on the number and size of successful bids made by
Alcatel to its customers. No minimum purchase obligation is set forth in the
contract. Either party may terminate the contract on the occurrence of a
material, uncured breach. At the end of the initial three year term or one
year extensions, the agreement shall be automatically extended for further
successive twelve (12) months each, unless FastComm or Alcatel gives the other
party written notice of its intent to cancel at least ninety days prior to the
then current term.
The market served by FastComm is not seasonal.
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MARKETING AND SALES
DOMESTIC
FastComm sells its products primarily via indirect channels such as value added
resellers, systems integrators, major telephone companies and distributors.
These entities provide the installation and local maintenance support required
by end-user customers. The Company has chosen not to seek direct sales to end
users that do not provide their own field support organization.
In 1993, the Company selected C&L Communications Corporation ("C&L") as its
national stocking distributor. C&L takes volume shipments for later resale.
Terms of sale with C&L provide for shipment against purchase orders. Title to
products passes to C&L upon shipment. Payment in full is due within thirty
days from date of shipment. C&L may request a stock adjustment/rotation twice
annually and a stock update at any time.
"Stock adjustment/rotation" and "stock update" are agreements by FastComm that
permit a distributor or dealer, at FastComm's sole discretion, to return
already purchased but unused and still current products to FastComm. Stock
adjustments and updates, which require the approval of an officer of FastComm,
are granted for specific purposes:
- -- Stock adjustment/rotation allows an exchange for other FastComm products of
equal value. At the sole discretion of FastComm, stock adjustments may be
limited to 10% or 20% of the value of product ordered and accepted by the
distributor during the prior six-month period.
- -- Stock updates may be approved for either warranty revalidation and/or
software revision level changes on products that are then returned to the
dealer. At FastComm's sole discretion, returned products may be exchanged for
the same types of equipment from inventory.
FastComm, at its sole discretion, may charge a distributor a "restocking
charge" of up to 20% to execute a stock adjustment or stock update. Stock
adjustment/rotation and stock update do not permit distributors to return
purchased merchandise for a refund. The Company's inventory practices are
believed to be consistent with those of the communications manufacturing
industry, based on management's experiences with similar companies.
The Company offers extended payment terms in certain situations. The Company
also offers prompt payment discounts that are being taken advantage of on an
increasing basis. Although normal payment terms are net 30 days from date of
shipment, as a practical matter, the Company normally receives payments on
accounts receivable beyond thirty (30) days, even from its most credit-worthy
customers. Management does not believe that its credit and collection history
is substantially different from other companies in the data-communications
industry, based on management's experiences with similar companies.
With the exception of the stock rotation policies as discussed above, the
Company is not contractually obligated to accept returned merchandise.
As of July 1996, other resellers of the Company's products with multi-national
presence include Newbridge Networks Inc., Unisys, GTE, Timeplex, General
DataComm, Optical Data Systems and Alcatel Data Networks. In the U.S.,
Diebold, Inc., Unisys, and multiple regional dealers had agreed to provide
sales, installation, and/or field maintenance support for FastComm products.
During fiscal year 1996 sales to System One Corporation and GTE Telephone
Operations accounted for 31% and 21% of sales, respectively. C&L
Communications Corporation accounted for sales of 15% in fiscal 1995 and 14% of
sales in fiscal 1994. In fiscal year 1996, sales to Newbridge Networks
Corporation accounted for 2% of revenue. FastComm Chairman and President,
Peter C. Madsen, is a director of Newbridge.
There were no Government contracts during the fiscal year that were subject to
renegotiation of profits or termination.
INTERNATIONAL
In the international marketplace, independent distributors represent the
Company in more than 30 countries. These firms are most often locally owned
and managed, which gives them an important presence in their markets. Terms of
international distribution agreements are similar to domestic agreements and
grant to the distributor similar stock adjustment and stock update rights. In
most cases, a distributor obtains non-exclusive rights to all FastComm products
for a specific geographic area.
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In 1996 and 1995, the Company had export sales to foreign customers totaling
$1,300,000 and $1,200,000, respectively. In 1994, sales to foreign customers
were less than 10% of total revenue. It is anticipated that the recently
announced partnership with Allocate Data Networks will enhance the Company's
international business in the future, although no assurance can be given that
such will be the case.
The Company's export sales may be subject to restrictions on foreign
operations, including restrictions imposed by foreign governments on imports as
well as US Government originated restrictions, and are subject to risks
associated with fluctuations in foreign exchange rates. Although substantially
all foreign contracts are denominated, and revenues are paid, in United States
dollars, to the extent the Company receives payments in foreign currencies, it
may incur gains or losses because of exchange fluctuations between currencies.
Moreover, fluctuations in currency exchange rates may cause the Company's
established prices to be relatively more or less expensive in terms of local
currencies.
CUSTOMER SUPPORT AND SERVICE
The Company maintains a technical support staff at its Virginia Headquarters.
Their work primarily supports resellers, but end users are periodically given
technical information and assistance by telephone. For new products or
features, including beta tests, Company personnel will visit end user sites to
participate in installation and training.
Diebold, Inc. and Unisys have signed agreements with the Company whereby they
may assume responsibility for installation and/or maintenance of FastComm
products sold by them or by third parties.
PROMOTION
Advertising in trade publications has expanded from pure product/feature
presentations to stress unique benefits and the Company's strong points. The
publications selected have international distribution, aiding the Company's
distributors outside the U.S.
The Company participates regularly in industry trade shows, to meet prospective
customers, generate sales leads, communicate with the press, and do market
research. In the 1996 fiscal year the Company exhibited eight times. The
Company exhibits under its own name and also takes opportunities to cooperate
with its dealers and distributors who show FastComm products.
COMPETITION
The communications industry is highly competitive. The market for the
Company's products is characterized by rapid technological change, evolving
standards and regulatory developments. Many of the Company's competitors and
potential competitors have greater financial, technological, manufacturing,
marketing and personnel resources than the Company. The Company's success
depends to a large extent on the insight, experience, and energy of its people,
and therefore on its ability to attract and retain experienced professionals.
The primary competition for each of the Company's major products is as follows:
FRAME RELAY ACCESS DEVICES: This continues to be a developing market, where
functionality differences among vendors still persist. FastComm enjoys an
advantage in its ability to handle legacy protocols as well as LAN traffic, an
integral CSU, small size, a low price, and automatic self-configuration
features that simplify installation. Other vendors with distinguishing
features focus on specific applications or market niches, with feature sets or
distribution channels. The EtherFRAD, because of its compatibility with
routers, competes with the low end products of most router vendors. They
attempt to compete on name recognition, size, or backbone router features
rather than strictly as an access product.
DATA COMPRESSORS: There is only one competitor to the large Time Machine,
Magnalink, a subsidiary of Telco Systems, Inc., which focuses its sales force
on this one product.
ATM ACCESS DEVICES: The LAN SARgent, an Ethernet bridge over T-1 ATM service,
is a new market segment, still very small, where competition is not clearly
defined yet. Competition has emerged in the form of add-in modules to existing
routers and bridges, and from new products based on ATM transmission.
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CSUS: With little functional variation allowed, the CSU is largely a
commodity, with many vendors of stand-alone models who compete largely on
price. The Company seldom chooses to compete in basic CSUs; it prefers to
bundle this technology with frame relay or data compression components with
added value.
VOICE: Many FRAD vendors have shipped FRADs with voice capability, and several
have gained reputations for having voice. Since being the first to demonstrate
voice over frame relay in 1991, FastComm has held a market position by
demonstrating prototypes and participating in voice activities on the Frame
Relay Forum technical committee. VoiceFRAD product will be shipped during FY
1997 that will combine the Company's data expertise with voice functions, and
thus set a new benchmark for voice/data integration in a market that has
competed largely on voice quality or voice compression ratios.
LICENSES, PATENTS, AND TRADEMARKS
The communications industry traditionally relies more on trade secrets and
rapid obsolescence than patents. None of the Company's current products is
protected by patent except the autodialer card. This patent expires on
November 21, 2006.
The Company had licensed its proprietary frame relay technology to another
vendor, which license was subsequently canceled. Other license opportunities
are sought by the Company as a way to recover the costs of investment (through
one-time payments) and as continuing revenue (a royalty stream). All of the
software licenses currently owned by the Company are perpetual.
Outside technology is in turn licensed by the Company for its product
development. The cost to license software from commercial vendors is less than
the loaded cost of internal developments. Licensing also speeds product
delivery. The Company expects to license additional software, particularly in
areas that are highly standardized and have multiple sources to minimize costs.
Microcom Networking Protocol Classes 5 and 7, which provide data compression in
modems, have been licensed permanently by the Company, on a non-exclusive
basis, for a one-time payment made in 1986.
Software related to the ISDN interface was licensed for integration into FRADs.
MANUFACTURING
Prior to the current fiscal year, the Company manufactured the bulk of its
products at its Sterling, Virginia headquarters. Manufacturing activities
include both through-hole and surface mount parts placement, soldering,
testing, final assembly, and quality assurance. The Company employs a Quality
Assurance Manager who reports to the President on all quality matters.
In the current fiscal year, as sales volume grew, the Company outsourced the
printed circuit board manufacturing operations while retaining the final
assembly and test functions. The Company will continue this outsourcing
activity and utilize its existing manufacturing facilities for short runs and
prototype development. FastComm also sells under its label several products
manufactured by others.
The Company purchases raw printed circuit boards and other components from
various sources. Component parts are normally purchased on an as-needed basis
to control inventory levels and working capital needs. In the 1994 fiscal
year, the Company negotiated reduced component prices from essentially all of
its suppliers based on a best-efforts commitment to purchase all expected
quantities from the same sources. These agreements remained in place or were
improved as volumes increased into FY 1996.
All but a few specialized components are available from multiple sources.
Single-source items are all from large vendors with stable histories of
supplying material as needed. Management believes the loss of any supplier
would not be materially detrimental to the Company's business.
During fiscal 1995, the Company transferred at cost, analog modem raw materials
and subassemblies valued at $273,000 to an unaffiliated electronics
manufacturer. Under the terms of this agreement, the manufacturer will build
and resell the modems to FastComm on an as needed basis or may sell the modems
to its own customers. No revenue was recognized in connection with this
transfer of inventory.
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Under the original terms of this agreement, the electronics manufacturer may at
its option, require the Company to repurchase any modem raw materials on hand
after calendar 1995. To date, the electronics manufacturer has not exercised
this option. The Company continues to purchase analog modems from this
manufacturer.
Management knows of no material effect on its business from compliance with
environmental laws and regulations.
EMPLOYEES
At July 15, 1996, the Company had 56 full-time employees. None of the
Company's employees is covered by a collective bargaining agreement, and the
Company believes that its employee relations are satisfactory.
ITEM 2. PROPERTIES
The Company's executive, manufacturing, engineering and marketing operations
are located in a leased 17,000 square foot facility in Sterling, Virginia.
Aggregate base rent and common charges for the facility approximated $171,000
for the fiscal year ended April 30, 1996. The facility lease expires in 1998
and contains various early termination or extension provisions as well as
options to lease additional space. Management believes that this facility
adequately serves the Company's present needs. Small sales offices are also
leased in Colorado and Georgia.
ITEM 3. LEGAL PROCEEDINGS
The United States Securities and Exchange Commission ("SEC") is currently
conducting an inquiry pursuant to an order directing a private investigation
relating to certain prior public disclosures and periodic reports of the
Company. This inquiry, which commenced in September, 1994, is confidential and
should not be construed as an indication by the SEC or its staff that any
violations of law have occurred. The Company is cooperating fully with the SEC
Staff. The Company is confident that the inquiry will be resolved in the near
future, although no assurance can be given that such will be the case.
On April 9, 1996, Gary H. Davison, a former officer and director of the Company
commenced an action on the Circuit Court of Loudoun County, Virginia seeking
indemnification for legal fees to be incurred in connection with his testimony
as it relates to the investigation by the SEC. The only parties to this
lawsuit are the Company and Mr. Davison. Prior to the commencement of
this lawsuit, the Company's Board of Directors had authorized indemnification
in the amount of $5,000, subject to its review and approval of Mr. Davison's
Counsel's fees. Such indemnification was based on that considered reasonable
and equitable by the Company's Board of Directors. In his lawsuit, Mr. Davison
seeks $13,352 in legal fees for "preparation" and one day's testimony before
the SEC, $11,707 for "prelitigation efforts" and $16,200 for the costs of his
lawsuit. The Company is vigorously defending this suit. To date, attempts at
settlement have not been successful. Since this case is in the preliminary
stages, it is too early to predict the outcome.
No other material legal proceeding to which the Company is party or to which
the Company is subject is pending and no such proceeding is known by the
Company to be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders of the Company
during the year ended April 30, 1996.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Stock of the Company is traded on the NASDAQ National Market System
under the symbol "FSCX." The following table sets forth the range of high and
low bid prices or sales prices, as applicable, of the Common Stock for each
fiscal quarter during the two most recent fiscal years, as furnished by NASDAQ.
The bid prices represent prices between dealers, do not include retail markups,
markdowns or commissions and do not necessarily represent actual transactions.
High Low
---- ---
Fiscal Year Ended April 30, 1996:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $ 5 7/8 $ 4 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 7 4 1/2
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 7 3/8 4 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . 17 1/2 6 15/16
High Low
---- ---
Fiscal Year Ended April 30, 1995:
First Quarter . . . . . . . . . . . . . . . . . . . . . . . $10 $3 3/4
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 5 3/8 2 3/4
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . 7 5/8 2 5/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . 7 1/2 5
As of July 15, 1996, there were 210 registered holders of record of the Common
Stock and the closing sale price on such date for the Common Stock as reported
by NASDAQ was $12.00 per share.
The Company has not paid dividends on its Common Stock. The Company
anticipates that it will retain all earnings to finance the operation and
growth of its business and does not anticipate paying cash dividends on the
Common Stock in the foreseeable future.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
THE COMPANY CAUTIONS THAT CERTAIN STATEMENTS IN THIS REPORT AND IN COMPANY'S
OTHER PERIODIC REPORTS FILED PURSUANT TO THE UNITED STATES SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), IN MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE , MAY
BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE
ACT, THE "SAFE HARBOR" FOR FORWARD LOOKING STATEMENTS ENACTED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT ON 1995. THE FORWARD LOOKING STATEMENTS THAT
MAY BE CONTAINED IN THE COMPANY'S REPORTS UNDER THE EXCHANGE ACT AND IN OTHER
ORAL OR WRITTEN STATEMENTS MADE BY THE COMPANY OR BY ITS AUTHORIZED
REPRESENTATIVES INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. AS A CONSEQUENCE,
ACTUAL RESULTS MIGHT DIFFER MATERIALLY FROM RESULTS FORECAST OR SUGGESTED IN
THESE FORWARD LOOKING STATEMENTS. SOME OF THESE RISKS AND UNCERTAINTIES ARE
IDENTIFIED IN THE DISCUSSION TO FOLLOW.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND GROWTH RATE
A significant portion of the Company's sales are derived from products shipped
against firm purchase orders received in each fiscal quarter and from products
shipped against firm purchase orders released in that quarter. Unforeseen
delays in product deliveries or the closing of sales, introduction of new
products by the Company or its competitors, fluctuations in customer capital
expenditures or other conditions affecting the networking industry or the
economy during any fiscal quarter could cause quarterly revenue and net
earnings to vary greatly.
TECHNOLOGICAL CHANGES
The markets for the Company's products are characterized by continuous
technological change, evolving industry standards and frequent product
introductions. Such changes in the market may adversely affect the Company's
ability to sell its products. The Company's ability to anticipate changes in
technology, industry standards and to develop and introduce new and enhanced
products on a timely basis that are successful in the market, will be
significant factors in the Company's competitive position and its prospects for
growth. Moreover, if technologies or standards supported by the Company's
products or carrier service offerings based on the Company's products become
obsolete or fail to gain widespread commercial acceptance, the Company's
business may be adversely affected. As a result, Management believes that
significant expenditures for research and development will be required in the
future.
COMPETITION
The market for the Company's product is characterized by intense competition.
With the development of the worldwide communications market and the growing
demand for related equipment, numerous manufacturers such as the Company have
emerged to offer products for these markets in competition with traditional
communications equipment suppliers. Competition could further increase if new
companies enter the market or if existing competitors expand their product
lines or upgrade existing products to accommodate new technologies and
features. An increase in competition could require increased spending by the
Company on research and development and sales and marketing and may otherwise
adversely affect the Company's business. Many of the Company's competitors and
potential competitors have greater financial, technological, manufacturing,
marketing, and personnel resources than the Company.
MARKET PRICE VOLATILITY OF COMMON SHARES
The Company's common shares have been subject to substantial market price
volatility. Further, the stock market has experienced extreme price and volume
fluctuations from time to time which have affected the market price of many
technology companies in particular and which have often been unrelated to the
operating performance of these companies. These broad market fluctuations, as
well as general economic conditions, may adversely affect the market price of
the Company's common shares.
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OTHER FACTORS
The Company further cautions that the factors referred to above and those
referred to as part of particular forward looking statements may not be
exhaustive, and that new risk factors emerge from time to time in its rapidly
changing business. The Company does not undertake to update any forward
looking statements it may make or has made on its behalf to reflect changes it
its expectations or assumptions or the risks and uncertainties referred to.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected consolidated financial data for the
five fiscal years in the period ended April 30, 1996. The consolidated
statement of operations data for the fiscal years ended April 30, 1996, April
30, 1995 and April 30, 1994 and the consolidated balance sheet data at April
30, 1996 and April 30, 1995 are derived from and are qualified by reference to
the audited consolidated financial statements of the Company audited by BDO
Seidman, LLP, independent certified public accountants, included elsewhere,
herein. The consolidated statement of operations data for the fiscal years
ended April 30, 1993 and 1992 and the consolidated balance sheet data at April
30, 1994, 1993 and 1992 are derived from consolidated financial statements of
the Company not included in this Report. The financial data should be read in
conjunction with the consolidated financial statements and related notes and
other financial information and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Report.
FISCAL YEAR ENDED APRIL 30,
------------------------------------------------------------
1993
----
1996 1995 1994 (Restated) 1992
---- ---- ---- ---------- ----
($000's except per share data)
STATEMENT OF INCOME DATA:
Total Revenues $10,009 $4,166 $5,136 $6,398 $4,908
------- ------ ------ ------ ------
Operating Costs and Expenses
Cost of Goods Sold 5,047 2,907 2,128 3,163 2,842
Other Operating Expenses 5,722 5,357 5,063 2,810 4,148
----- ----- ----- ------ ------
Total Operating Costs and Expenses 10,769 8,264 7,191 5,973 6,990
------ ----- ------ ------ -----
Operating Income (loss) (760) (4,098) (2,055) 425 (2,082)
Other income (expense), net 129 14 46 152 7
Income tax (expense) benefit -0- -0- 10 (14) 177
--- --- -- ----- ---
(631) (4,084) ($1,999) $ 563 ($1,898)
===== ======= ======== ====== ========
Net income (loss) per share $(0.07) $(0.49) $(0.27) $ 0.08 ($ 0.42)
======= =========== ========== ====== ========
Weighted average number of shares 9,522 8,409 7,521 6,876 4,518
outstanding during each period
Dividends -0- -0- -0- -0- -0-
BALANCE SHEET DATA:
Total assets $9,034 $7,577 $7,248 $7,001 $2,724
Total long term obligations $-0- $ 132 $ 152 $333 $-0-
Shareholders' equity $6,880 $6,149 $5,600 $5,300 $1,072
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in this annual report. In
addition, the Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert readers that the factors set forth in Item 5, "Market
for Registrants Common Stock and Related Stockholder Matters - Cautionary
Statement Regarding Forward Looking Information", as well as other factors, in
the past have affected and in the future could affect the Company's actual
results, and could cause the Company's results for future quarters to differ
materially from those expressed in any forward looking statements made by or on
behalf of the Company.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
of revenues represented by certain items in the Company's consolidated
statements of income.
Fiscal Year Ended April 30,
---------------------------
1996 1995 1994
---- ---- ----
Revenues 100% 100% 100%
---- ---- ----
Operating costs and expenses:
Cost of goods sold 50% 70% 41%
Selling, general and 40% 101% 77%
Research and development 14% 22% 19%
Depreciation and amortization 3% 5% 3%
-- --- --
107% 198% 140%
---- ---- ----
Operating (loss) income (7%) (98%) (40%)
Other income (expense), net 1% - 1%
Income tax (expense) benefit - - -
Net (loss) income (6%) (98%) (39%)
==== ===== =====
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues increased from $4,166,000 to $10,009,000 or by 140% during
fiscal 1996 as compared to fiscal 1995. The $5,843,000 increase was primarily
attributable to increased sales volumes of frame relay products. Frame
relay product sales increased from $2,923,000 to $8,522,000 or by 191% during
fiscal 1996 as compared to fiscal 1995. Frame Relay access product sales, as a
percentage of total product sales, increased from approximately 70% in fiscal
1995 to approximately 85% in fiscal 1996. During the fiscal year ended April
30, 1996, two customers accounted for 31.2% and 21.2% of total sales. Analog
modem and data compression product sales, as a percentage of total product
sales, decreased from approximately 20% in fiscal 1995 to approximately 5% in
fiscal 1996. The Company believes its future growth will be achieved through
the sale of frame relay and other digital products and accordingly the decline
in the sale of analog modems is part of its sales plan.
The Company continues to focus its selling efforts on larger customers that
offer strong resale support of FastComm product to end users and on those that
present significant future resale potential.
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16
A significant portion of the Company's sales are derived from products shipped
against firm purchase orders received in each fiscal quarter and from products
shipped against firm purchase orders released in that quarter. Unforeseen
delays in product deliveries or the closing of sales, introduction of new
products by the Company or its competitors, fluctuations in customer capital
expenditures or other conditions affecting the networking industry or the
economy during any fiscal quarter could cause quarterly revenue and net
earnings to vary greatly.
Gross margins, as a percentage of total revenues, increased from 30% to 50%
during fiscal 1996 as compared to fiscal 1995. The 50% gross margin achieved in
the current fiscal year is consistent with the Company's expectations based on
the level of business and the industry in which it operates. The twenty
percentage point improvement in gross margin is primarily attributable to a
fiscal 1995 increase in the Company's reserve for inventory obsolescence
(reducing margins by eight percentage points net); a shift in product mix to
frame relay products, which have margins of 45-50% and decreased per unit fixed
overhead absorption related to the significantly higher sales achieved in the
current fiscal year.
Selling, general and administrative expenses decreased from $4,225,000 in
fiscal 1995 to $4,037,000 in fiscal 1996. This 5% decrease in expense is
attributable to the reduction in senior management staff ($283,000), an
increase in professional fees associated with the current SEC investigation
(approximately $182,000 - - See Item 3. Legal Proceedings), decreased travel
cost (51,000), increased office and occupancy costs associated with expanded
facility and communications requirements ($132,000) and a $164,000 decrease in
bad debt expense associated with a $104,000 reduction the Company's allowance
for doubtful accounts.
The Company recorded a $104,000 reduction to its allowance for doubtful
accounts during the fiscal 1996 fourth quarter to adjust the April 30, 1996
ending allowance to $100,000. This adjustment reflects improved collections
and reduced product returns related to fiscal 1996 trade accounts receivable.
Management believes that its allowance for doubtful accounts is adequate.
Research and development expenditures consist primarily of hardware and
software engineering, personnel expenses, subcontracting costs and, to a lesser
degree, equipment and facilities. Research and development expenses increased
from $916,000 in fiscal 1995 to $1,411,000 in the current fiscal year. This
54% increase is primarily attributable increased research and development
manpower ($295,000), new product prototype development ($133,000) and increased
office and occupancy costs and communication requirements ($84,000). The
markets for the Company's products are characterized by continuous
technological change. Management believes that significant expenditures for
research and development will continue to be required.
Depreciation and amortization expenses increased from $217,000 in fiscal 1995
to $274,000 in fiscal 1996. This 25% increase is primarily attributable to the
amortization of a patent.
Under Statement of Accounting Standards No. 109 (FAS 109), deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. The Company has provided a full valuation allowance against its net
deferred tax assets due to uncertainties regarding their realization. During
its fiscal year 1997, the Company anticipates it will be required to make
alternative minimum tax payments on earnings.
FISCAL 1995 COMPARED TO FISCAL 1994
Total revenues decreased from $5,136,000 to $4,166,000 or by 19% during fiscal
1995 as compared to fiscal 1994. The $970,000 decrease was primarily
attributable to lower revenue attributable to license fees and research and
development contracts in fiscal 1995 as compared to fiscal 1994. The Company
earned $615,000 in license fees and $160,000 in research and development
contract revenues in fiscal 1994. Such revenue totaled $62,000 in fiscal 1995.
The Company believes that opportunities to enter into licensing and/or research
and development agreements which further the Company's market strategies tend
to be rather unique in nature and infrequent in occurrence, accordingly,
management is unable to determine whether revenue from such opportunities will
occur in the future.
Product sales decreased from $4,362,000 to $4,104,000 or by 6% during fiscal
1995 as compared to fiscal 1994. This decrease was primarily attributable to a
decline in analog modem and data compression product sales, partially offset by
an increase in the sale of frame relay access and data controller products.
Analog modem and data compression product sales, as a percentage of total
product sales, decreased from approximately 60% in fiscal 1994
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to approximately 20% in fiscal 1995 while Frame Relay access product sales, as
a percentage of total product sales, increased from approximately 40% in fiscal
1994 to approximately 70% in fiscal 1995.
Revenue in the fourth quarter of fiscal 1995 fell to $738,000, a decrease of
$562,000 when compared to the third quarter of fiscal 1995. This decline in
the fourth quarter is attributable to lost sales opportunities and reduced
order inflow. which management anticipates will reverse. Fourth quarter
revenue was also negatively impacted by lower sales of data compression and
analog modem products.
Gross margins, as a percentage of total revenues, decreased from 59% to 30%
during fiscal 1995 as compared to fiscal 1994 while gross margins, as a
percentage of total product sales, decreased from 51% to 29% during fiscal 1995
as compared to fiscal 1994. The twenty-two percentage point decrease in gross
margin from total product sales is primarily attributable to an increase in the
Company's reserve for inventory obsolescence (reducing margins by eight
percentage points net); a shift in product mix to frame relay products, which
have margins of 45-50%, from data compression products, which have margins of
55-60% (reducing margins by five percentage points net); decreases in the
average selling price of certain products (reducing margins by three percentage
points net); and increases in costs due to generally higher overhead costs and
increased per unit absorption reflecting lower sales (reducing margins by three
percentage points).
Selling, general and administrative expenses increased from $3,937,000 in
fiscal 1994 to $4,225,000 in fiscal 1995. This 8% increase in expense is
attributable to the full year effect of the prior fiscal years investment in
senior management ($203,000), an increase in professional fees associated with
the SEC investigation (approximately $100,000 - - See Item 3. Legal
Proceedings), the reaudit of the Company's fiscal 1993 financial statements
(approximately $25,000 - - see Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure), the Dynatech litigation
(approximately $50,000), which was settled in July 1995, offset by a decrease
in advertising costs ($61,000).
The Company recorded a $200,000 addition to its allowance for doubtful accounts
during the fiscal 1995 fourth quarter to adjust the April 30, 1995 ending
allowance to $204,000 reflecting higher than anticipated sales returns,
allowances and uncollectible accounts.
Research and development expenditures consist primarily of hardware and
software engineering, personnel expenses, subcontracting costs and, to a lesser
degree, equipment and facilities. Research and development expenses decreased
from $960,000 in fiscal 1994 to $916,000 in the current fiscal year. This 5%
decrease is primarily attributable reduced research and development manpower
and a reduction in outside consulting services.
Depreciation and amortization expenses increased from $166,000 in fiscal 1994
to $217,000 in fiscal 1995. This 11% increase is primarily attributable to the
amortization of goodwill associated with the purchase of ZyBel Microsystems,
Inc. in fiscal 1994.
FOURTH QUARTER - FISCAL 1995 INTERIM ADJUSTMENTS
During the fourth quarter ended April 30, 1995, the Company increased its
allowance for doubtful accounts by $200,000 ($0.02 per share) to take account
of products returned and credited to customers in the fourth quarter as well as
to provide for future sales returns and allowances. The Company also increased
its reserve for inventory obsolescence in the fourth quarter by $295,000 ($0.04
per share) primarily to take account of certain slow moving data compression
and analog modem inventory.
FOURTH QUARTER - FISCAL YEAR 1994 INTERIM ADJUSTMENTS AND RESTATEMENT OF PRIOR
INTERIM FINANCIAL RESULTS
During the fourth quarter ended April 30, 1994, the Company reversed a sale in
the amount of $580,000 which was originally recorded in the third quarter ended
February 5, 1994. The reversal of the sale was made after certain technical
difficulties arose in the fourth quarter regarding the project for which the
Company's product was intended. These matters were not identified by
management at the time of sale. The effect on third quarter and fiscal 1994
operating results of the reversal of the sale is to increase net loss by
approximately $296,000, and to increase the per share net loss by ($0.04) per
share.
Also during the fiscal 1994 fourth quarter, the Company increased its allowance
for doubtful accounts to take account of products returned and credited to
customers in the fourth quarter as well as to provide for potential future
returns and allowances. The increase in the allowance includes $220,000 which
management now believes is
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attributable to matters which existed at the end of the third quarter. The
effect on third quarter and fiscal 1994 operating results of increasing the
allowance for doubtful accounts by $220,000 is to increase the net loss by
$220,000 and to increase the net loss per share by ($0.03.)
These matters are summarized in the table below:
Quarter Ended Feb. 5, 1994
--------------------------
($000s except per share data)
Net income (loss) as originally reported ($ 30)
Fourth quarter adjustments:
(i) reversal of sale ( 296)
(ii) increase in allowance for doubtful accounts ( 220)
------
Net income (loss) ($546)
======
Per share of common stock: ______
Net income (loss) as originally reported: $ 0.00
Fourth quarter adjustments:
(i) reversal of sale (0.04)
(ii) increase in allowance for doubtful accounts (0.03)
Net income (loss) ($0.07)
=======
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company used approximately $447,000 in cash to fund its
operating activities. This amount includes $342,000 required to fund the net
loss, after adjusting for non-cash expenses (consisting principally of
depreciation, amortization and provision for doubtful accounts and inventory
obsolescence). This was offset principally by $935,000 used by increases in
accounts receivable, $132,000 generated by decreased inventory and $952,000
generated by increased accounts payable and other current liabilities. This
increase is primarily attributable to increased inventory purchases associated
with increased sales.
Accounts receivable increased during fiscal 1996 due to significantly higher
revenue associated with two major contracts which accounted for approximately
52% of total revenue and 66% of accounts receivable at April 30, 1996.
Subsequent to year end, but prior to the issuance of this report, accounts
receivable from these customers was collected. On an overall basis, cash
collections from the Company's distributors and resellers improved and the days
sales in accounts receivable declined. Further, product returns from customers
declined during fiscal year 1996 and management anticipates that this trend
will continue. Accordingly, management decreased the allowance for doubtful
accounts during fiscal 1996 to $100,000 from $204,000. Management believes
that the allowance for doubtful accounts at April 30, 1996 is adequate.
During fiscal year 1996, two customers accounted for 31% and 21% of total
sales. Such sales were made to an end user and to a large system integrator
with a designated end user customer. The order received from the end user was
for approximately 8,500 FRADs against which approximately 5,000 units have been
shipped. The remaining 3,500 units will be shipped through December, 1997.
The order received from the system integrator was for approximately 3,400
units. The final 880 units will be shipped in the first quarter of fiscal
1997.
The Company was unable to reduce its inventory levels as much as anticipated
during fiscal 1996. In response, the Company has increased, on a quarterly
basis during the current fiscal year, its reserve for inventory obsolescence by
$105,000 to $600,000 at April 30, 1996. Although management believes it will
be able to ship and/or liquidate substantially all its current inventory levels
profitably, the inventory levels remain higher than anticipated and,
accordingly, management concluded that increasing its reserve for obsolescence
is prudent and necessary at this time. Management believes the reserve for net
realizable value is adequate.
During fiscal 1996, the Company made deposits in the amount of $150,000 against
future purchases of product.
In fiscal year 1995, the Company completed a private placement of unregistered
shares of common stock. A total of 405,460 shares were sold generating
$1,294,000 in cash. In addition, the Company also completed a Regulation S
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19
placement of 700,000 shares of common stock. Net proceeds to the Company under
this Regulation S placement totaled $2,983,775.
During fiscal year 1995, the Company concluded the acquisition of ZyBel
Microsystems, Inc. and retired the related $220,000 debt through the issuance
of 25,000 shares of common stock in the Company.
The Company executed a promissory note in the amount of $80,000 payable to
NationsBank in fiscal year 1995. This note is secured by a US Treasury Bill.
This note was repaid in fiscal 1996 and the Treasury Bill was redeemed.
The Company believes that current levels of cash and cash equivalents
($3,808,000 at April 30, 1996) plus expected cash generated from the ongoing
collection of its current and future accounts receivable and inventory levels
in the normal course of events will be sufficient to meet the Company's current
cash requirements during fiscal 1997 and into the foreseeable future. At April
30, 1996, the Company had over $6.0 million of working capital and a current
ratio of over 3.8 to 1. None of the Company's accounts receivable or
inventories are collateralized currently.
Management believes that inflation did not have a material effect on operations
during the fiscal year ended April 30, 1996.
In fiscal 1997, the Company's cash commitments include minimum payments of
$293,000 under its operating lease arrangements and $131,000 to retire debt.
The Company anticipates capital spending for software, computer and test
equipment in fiscal 1997. Where possible, such capital requirements are
expected to be met through lease financing arrangements.
FISCAL 1996 COMPARED TO FISCAL 1995
Cash used in operating activities decreased from $1,929,000 in fiscal 1995 to
$447,000 in fiscal 1996. The $1,482,000 decrease in cash used in operating
activities is primarily attributable to the $2,770,000 decrease in the net
loss, net of non cash expenditures, a $933,000 improvement with respect to
changes in current liability balances offset by a $1,567,000 decline in
changes in cash used to fund accounts receivable balances and a $483,000
increase in changes in cash used to purchase inventory.
Cash provided by investing activities amounted to $29,000 in fiscal 1996 as
compared to cash used of $109,000 in fiscal 1995. The $138,000 decline is
primarily attributable to the $375,000 proceeds received from the sale of
restricted investments offset by a $192,000 increase in asset purchases and the
purchase of a $45,000 long term investment.
Cash provided by financing activities decreased from $4,168,000 in fiscal 1995
to $1,120,000 in fiscal 1996. The $3,048,000 decrease is primarily
attributable to the $4,201,000 in funds received in fiscal 1995 from a private
placement and Regulation S stock offering as compared to $-0- in fiscal 1996,
partially offset by greater net proceeds received from the exercise of stock
options of $1,362,000 in fiscal 1996 as compared to $211,000 in fiscal 1995.
FISCAL 1995 COMPARED TO FISCAL 1994
Cash used in operating activities decreased from $2,842,000 in fiscal 1994 to
$1,929,000 in fiscal 1995. The $912,000 decrease in cash used in operating
activities is primarily attributable to the $1,268,000 improvement with respect
to changes in the receivable balances, and a $1,950,000 improvement with
respect to changes in the inventory balance, partially offset by an approximate
$2,092,000 increase in the net loss, net of non cash expenditures.
Cash used by investing activities amounted to $109,000 in fiscal 1995 as
compared to cash provided by investing activities of $230,000 in fiscal 1994.
The $339,000 decline is primarily attributable to the $211,000 proceeds
received in fiscal 1994 from the partial release of investment funds held as
collateral against borrowings by the Company. The Company also received
$93,000 in cash in connection with the acquisition of ZyBel Microsystems, Inc.
in fiscal 1994.
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Cash provided by financing activities increased from $1,553,000 in fiscal 1994
to $4,168,000 in fiscal 1995. The $2,615,000 increase is primarily
attributable to the $4,201,000 in funds received in fiscal 1995 from a private
placement and Regulation S stock offering as compared to $-0- in fiscal 1994,
partially offset by lower net proceeds received from the exercise of stock
options and warrants of $211,000 in fiscal 1995 as compared to $1,736,000 in
fiscal 1994.
IMPACT OF NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets (SFAS 121)O. SFAS 121 requires that long lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. SFAS 121 is effective for the Company May 1, 1996. However, the
Company evaluated its long-lived and intangible assets for possible impairment
in the fourth quarter of fiscal 1996 using the criteria set forth in SFAS 121.
The Company concluded that there was no impairment. Consequently, the Company
believes that the adoption of SFAS 121 will not have a material impact on its
fiscal 1997 financial or operating results.
Effective May 1, 1996, the Company will adopt Statement of Accounting Standards
No. 123, "Accounting for Stock-Based Compensation ("SFAS 123"). The accounting
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The Company does not intend
to adopt the fair value method, therefore, there will be no impact on the
financial statements.
20
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and financial statement schedules are filed
as part of this Report:
Page
----
Report of Independent Certified Public Accountants F-1
Balance Sheets at April 30, 1996 and 1995 F-2
Statements of Operations for the Years Ended April 30, 1996, 1995 and 1994 F-4
Statements of Stockholders' Equity for the Years Ended April 30, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the Years Ended April 30, 1996, 1995 and 1994 F-6
Summary of Accounting Policies F-8
Notes to Financial Statements F-12
Financial Statement Schedule: Valuation and Qualifying Accounts (Schedule II) F-24
21
22
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
FASTCOMM COMMUNICATIONS CORPORATION
We have audited the accompanying balance sheets of FASTCOMM COMMUNICATIONS
CORPORATION (the Company) as of April 30, 1996 and 1995 and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended April 30, 1996. We have also audited the
schedule listed in the accompanying index. These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and schedule
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements and schedule. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements and schedule.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FASTCOMM COMMUNICATIONS
CORPORATION at April 30, 1996 and 1995 and the results of its operations and
its cash flows for each of the three years in the period ended April 30, 1996
in conformity with generally accepted accounting principles.
Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.
BDO Seidman, LLP
Washington, D.C.
June 21, 1996
F-1
23
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
April 30, 1996 1996 1995
- --------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash and cash equivalents $ 3,807,855 $ 3,105,346
Restricted investments (Note 5) - 374,687
Accounts receivables, net (Note 3 and 10) 2,345,824 1,281,487
Receivables from related party (Note 12) 25,325 50,986
Inventories, net (Note 2) 1,732,151 1,969,150
Prepaid expenses and other current assets 244,125 74,685
- --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,155,280 6,856,341
- --------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 4) 435,952 281,325
- --------------------------------------------------------------------------------------------------------
OTHER
Software license rights and other
intangibles, net (Notes 7) 255,856 357,779
Other assets 186,774 81,844
- --------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 442,630 439,623
- --------------------------------------------------------------------------------------------------------
$ 9,033,862 $ 7,577,289
========================================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
F-2
24
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
April 30, 1996 1995
- --------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
(Note 5) $ 130,585 $ 226,171
Accounts payable 1,637,635 762,742
Accrued payroll 159,091 206,683
Other current liabilities 226,205 101,059
- --------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,153,516 1,296,655
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 5) - 131,754
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,153,516 1,428,409
- --------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY (Notes 7 and 8)
Common stock, $.01 par - shares authorized,
25,000,000; issued and outstanding
9,786,619 and 9,444,529 97,866 94,445
Additional paid-in capital 14,608,463 13,249,770
Accumulated deficit (7,825,983) (7,195,335)
- --------------------------------------------------------------------------------------------
6,880,346 6,148,880
- --------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,880,346 6,148,880
- --------------------------------------------------------------------------------------------
$ 9,033,862 $ 7,577,289
============================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
F-3
25
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
Year ended April 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
REVENUES (NOTES 1, 10 AND 12)
Product sales $ 9,720,969 $3,689,817 $ 3,526,480
Product sales to related parties 195,427 414,580 835,044
License fees and other 92,901 61,665 774,831
- -----------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 10,009,297 4,166,062 5,136,355
- -----------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of goods sold 5,047,015 2,906,577 2,127,974
Selling, general and administrative 4,037,737 4,224,641 3,936,748
Research and development 1,411,503 916,003 960,042
Depreciation and amortization 273,507 217,326 166,098
- -----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 10,769,762 8,264,547 7,190,862
- -----------------------------------------------------------------------------------------------------------------
OPERATING LOSS (760,465) (4,098,485) (2,054,507)
- -----------------------------------------------------------------------------------------------------------------
OTHER INCOME (expense)
Other income 23,218 9,750 19,150
Interest income 127,574 33,142 52,431
Interest expense (20,975) (28,546) (25,994)
- -----------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME 129,817 14,346 45,587
- -----------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (630,648) (4,084,139) (2,008,920)
PROVISION (BENEFIT) FOR INCOME TAXES (Note 9) - - (10,000)
- -----------------------------------------------------------------------------------------------------------------
NET LOSS $ (630,648) $(4,084,139) $(1,998,920)
=================================================================================================================
Net loss per common share $ (0.07) $ (0.49) $ (0.27)
- -----------------------------------------------------------------------------------------------------------------
Weighted-average number of common shares
outstanding during each year 9,522,000 8,409,000 7,521,000
=================================================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
F-4
26
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended April 30, 1996, 1995 and 1994
Common Stock
------------------- Additional
Par Paid-in Treasury
Shares V alues Capital Stock
========================================================================================================================
BALANCE, April 30, 1993 7,038,985 $ 70,390 $ 6,854,748 $ -
Shares issued for stock warrants, net 261,488 2,615 1,029,489 -
Shares issued for stock options 716,715 7,167 696,706 -
Deferred compensation on stock options - - 75,000 -
Amortization of deferred compensation - - - -
Settlement of litigation - - (12,182) -
Treasury stock retired (Notes 7) (6,500) (65) - -
Treasury stock purchased (Note 7) - - - (12,238)
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1994 8,010,688 80,107 8,643,761 (12,238)
Shares issued through private placement
and Regulation S sales (net of costs) 1,105,458 11,054 4,190,408 -
Shares issued for stock options 316,400 3,164 207,959 -
Shares issued for acquisition of
ZyBel Microsystems, Inc. 25,000 250 219,750 -
Treasury stock retired (Note 16) (13,017) (130) (12,108) 12,238
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1995 9,444,529 94,445 13,249,770 -
Shares issued for stock options 342,090 3,421 1,358,693 -
Net loss - - - -
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1996 9,786,619 $ 97,866 $ 14,608,463 $ -
========================================================================================================================
Retained
Deferred Earnings
Compensation (Deficit) Total
===========================================================================================================
BALANCE, April 30, 1993 $ (403,000) $ (1,112,276) $ 5,409,862
Shares issued for stock warrants, net - - 1,032,104
Shares issued for stock options - - 703,873
Deferred compensation on stock options (75,000) - -
Amortization of deferred compensation 478,000 - 478,000
Settlement of litigation - - (12,182)
Treasury stock retired (Notes 7) - - (65)
Treasury stock purchased (Note 7) - - (12,238)
Net loss - (1,998,920) (1,998,920)
- -----------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1994 - (3,111,196) 5,600,434
Shares issued through private placement
and Regulation S sales (net of costs) - - 4,201,462
Shares issued for stock options - - 211,123
Shares issued for acquisition of
ZyBel Microsystems, Inc. - - 220,000
Treasury stock retired (Note 16) - - -
Net loss - (4,084,139) (4,084,139)
- -----------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1995 - (7,195,335) 6,148,880
Shares issued for stock options - - 1,362,114
Net loss - (630,648) (630,648)
- -----------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1996 $ - $ (7,825,983) $ 6,880,346
===========================================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
F-5
27
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
Year ended April 30, 1996 1995 1994
===============================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (630,648) $ (4,084,139) $ (1,998,920)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization 273,507 217,326 166,098
Compensation expenses associated with
stock options granted - - 478,000
Provision for inventory obsolescence
reserve 105,000 401,889 60,000
Provision for doubtful accounts (104,000) 354,000 287,876
Amortization of imputed discount 14,702 - -
Other - - (12,247)
CHANGES IN ASSETS AND LIABILITIES,
NET OF EFFECTS OF ACQUISITIONS
(INCREASE) DECREASE IN ASSETS
Accounts receivable (960,337) 347,411 1,422
Receivables from related party 25,661 285,543 (336,529)
Inventory 131,999 615,340 (1,335,525)
Refundable income taxes - 10,000 (10,000)
Prepaid expense and other current assets (169,440) (21,051) (4,227)
Other assets (85,736) (75,631) (1,946)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 874,893 (136,010) (150,229)
Accrued payroll (47,592) 88,980 14,374
Income taxes payable - - (14,000)
Other current liabilities 125,146 66,906 14,352
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (446,845) (1,929,436) (2,841,501)
- ---------------------------------------------------------------------------------------------------------------
F-6
28
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
Year ended April 30, 1996 1995 1994
===============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (300,077) (108,170) (74,207)
Sale (purchase) of restricted investments 374,687 (412) 211,370
Purchase of long-term investments (45,328) - -
Net proceeds assumed in acquisition (Note 16) - - 93,196
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 29,282 (108,582) 230,359
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable to bank - 80,000 -
Repayments of notes payable (242,042) (324,970) (182,759)
Net proceeds from issuance of common stock
through private placement - 4,201,462 -
Net proceeds from exercise of stock options 1,362,114 211,123 703,873
Proceeds from exercise of stock warrants - - 1,032,104
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,120,072 4,167,615 1,553,218
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 702,509 2,129,597 (1,057,924)
CASH AND CASH EQUIVALENTS, beginning of year 3,105,346 975,749 2,033,673
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 3,807,855 $ 3,105,346 $ 975,749
===============================================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
F-7
29
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION FastComm Communications Corporation (the "Company") was incorporated in Virginia
in May 1983. The Company designs, manufactures, and markets data communications
equipment for high-speed data transmission over public and private telephone
networks.
The Company's fiscal year ends on April 30. For interim financial reporting
purposes the interim fiscal quarters are closed on the first weekend following
the calendar quarter end date, unless the calendar quarter end date falls on a
weekend, in which case such weekend is used as the interim fiscal quarter end.
Certain reclassifications have been made to conform prior years' data to the
current presentation.
SIGNIFICANT RISKS The preparation of financial statements in conformity with generally accepted
AND UNCERTAINTIES 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. Each of these estimates, as well as the
related amounts reported in the financial statements, are sensitive to near term
changes in the factors used to determine them. A significant change in any one
of those factors could result in the determination of amounts different than
those reported in the financial statements. Management believes that as of April
30, 1996, the estimates used in the financial statements are adequate based on
the information currently available.
F-8
30
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
REVENUE Revenues from product sales are recognized at the time of product shipment. An
RECOGNITION allowance is provided for estimated sales returns and uncollectible accounts.
The Company licenses certain technologies it has developed to others. These
agreements typically provide for an initial license fee to be paid at inception
and royalties to be paid as licensed products are sold. The Company recognizes
the initial license fee at inception as the license term is unlimited and the
Company has no material continuing obligations with respect to the licensed
technology.
INVENTORY Production materials are valued using standard costs which approximate the
first-in, first-out (FIFO) method. Work-in-process represents direct labor,
materials and overhead incurred on products not delivered to date. Finished
goods are valued at the lower of cost or market, cost being determined on the
specific identification method.
PROPERTY, Property and equipment is recorded at cost and depreciated on a straight-line
EQUIPMENT AND basis over the estimated useful life of the related assets (generally five
DEPRECIATION years). Leasehold improvements are amortized over the lesser of the lease term
or the useful life of the property.
RESEARCH AND All costs incurred to establish the technological feasibility of products are
DEVELOPMENT COSTS considered research and development costs which are charged to expense as
incurred.
RESEARCH AND The Company enters into contracts to perform research and development for third
DEVELOPMENT parties. The Company accounts for these contracts in accordance with
CONTRACTS Statement of Financial Accounting Standards No. 68, "Accounting for Re
search and Development Arrangements" (FASB 68). Under FASB 68, research and
development contracts with fixed obligations to repay the
F-9
31
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
contracting party irregardless of the outcome are treated as loans. Contracts
without fixed obligations to repay are treated as obligations to perform
contractual services and revenue is recognized as expenses are incurred
and in accordance with the contracts provisions. As of April 30, 1996, no
research and development contracts have fixed obligations to repay, accordingly,
revenue is recognized as expenses are incurred.
MANUFACTURING The Company capitalizes the cost of acquiring software license rights and
AND SOFTWARE amortizes them over the shorter of the expected product life or the license
LICENSE RIGHTS period, not to exceed 5 years.
INTANGIBLE ASSETS 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 over 3
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.
EARNINGS PER SHARE Primary earnings (loss) per share of common stock have been calculated by
dividing earnings (loss) by the weighted average number of common shares
(including shares held in escrow). Fully diluted earnings (loss) per common
share has not been presented for 1996, 1995 or 1994 because the effect is
anti-dilutive.
INCOME TAXES The Company files Federal and State income tax returns. Certain income and
expense items are recognized in different periods for income tax purposes than
for financial reporting purposes.
CASH AND The Company considers all highly liquid investments with an original maturity of
CASH EQUIVALENTS three months or less to be cash equivalents. The Company
F-10
32
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
invests its excess cash principally in overnight repurchase accounts and
short-term government securities. The Company maintains amounts in excess
of the federal deposit insurance limitation of $100,000 in its bank accounts.
CONCENTRATION OF The Company sells primarily to domestic and foreign dealers and distributors.
CREDIT AND MARKET Generally sales are on credit and no collateral is required, although the Company
RISK reserves the right to have the products returned in the event of default. The
Company provides an allowance for estimated sales returns and uncollectible
accounts. As discussed in Note 10: Significant Customers and Foreign Exports,
approximately 52% of fiscal 1996 revenues were made to two customers. This
concentration exposes the Company to a relatively greater risk of loss than would
be the case with greater diversification.
F-11
33
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. REVENUES The Company is engaged in the development, manufacture and sale
of products in the computer and telecommunication industries.
Revenues are derived from the sale of products, manufacturing
and software licenses and research and development contracts and
are as follows:
For the Year ended April 30, 1996 1995 1994
=================================================================================
Product sales $ 9,916,396 $ 4,104,397 $ 4,361,524
License fees - - 615,000
Research and development
contracts and other 92,901 61,665 159,831
---------------------------------------------------------------------------------
$ 10,009,297 $ 4,166,062 $ 5,136,355
=================================================================================
2. INVENTORIES Inventories consist of the following components:
April 30, 1996 1995
=================================================================================
Production materials $ 1,618,417 $ 1,646,875
Work-in-process 176,818 148,875
Finished goods 536,916 668,400
---------------------------------------------------------------------------------
2,332,151 2,464,150
Provision for inventory
obsolescence (600,000) (495,000)
---------------------------------------------------------------------------------
$ 1,732,151 $ 1,969,150
=================================================================================
F-12
34
3. RECEIVABLES Receivables consist of the following:
April 30, 1996 1995
=================================================================================
Trade $ 2,382,892 $ 1,352,633
Employee and other 62,932 132,854
---------------------------------------------------------------------------------
2,445,824 1,485,487
Allowance for doubtful
accounts (100,000) (204,000)
---------------------------------------------------------------------------------
$ 2,345,824 $ 1,281,487
=================================================================================
4. PROPERTY AND Property and equipment consists
EQUIPMENT of the following:
April 30, 1996 1995
=================================================================================
Computer equipment $ 536,612 $ 355,352
Furniture and fixtures 468,416 384,354
Leasehold improvements 56,783 22,028
Automobiles 22,917 22,917
---------------------------------------------------------------------------------
1,084,728 784,651
Less accumulated depreciation
and amortization (648,776) (503,326)
---------------------------------------------------------------------------------
$ 435,952 $ 281,325
=================================================================================
Depreciation expense for the three years ended
April 30, 1996, 1995 and 1994 was $145,550,
$130,874 and $112,757, respectively.
F-13
35
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. LONG-TERM Long-term debt consists of the following:
DEBT
April 30, 1996 1995
=================================================================================
Noninterest bearing note issued
in connection with acquisition
of patent rights, due January 1, 1997
less unamortized discount of
$3,415 and $18,117, based on
imputed interest rate of 7.25% $ 130,585 $ 160,883
Loan payable to bank in monthly
installments of principal plus
interest at prime plus 1/2%
due March, 1996; collateralized
by a U.S. Treasury Bill - 194,750
Other - 2,292
---------------------------------------------------------------------------------
Total 130,585 357,925
Less current maturities (130,585) (226,171)
---------------------------------------------------------------------------------
$ - $ 131,754
=================================================================================
In October 1992, the Company borrowed $587,000
from a bank. In July 1994, the Company borrowed
an additional $80,000 from the bank. Both loans
were collateralized by a U.S. Treasury Bill. At
April 30, 1995, the balance of the Treasury Bill
collateral was $374,687 and the loan balance was
$194,750. The balance of the loans was paid off
during fiscal 1996.
F-14
36
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS OPERATING LEASES
AND
CONTINGENCIES The Company leases office space and certain office equipment under operating
lease arrangements that expires at various dates through 1998. The main office
lease provides for scheduled rent increases in the future which are being
amortized over the lease period. Rent expense for the years ended April 30,
1996, 1995, and 1994, was approximately $308,000, $245,000 and $214,688,
respectively. Aggregate future minimum lease payments under the operating leases
are $293,110 in fiscal 1997; and $228,454 in fiscal 1998.
REPURCHASE COMMITMENT
During fiscal 1995, the Company transferred at cost, analog modem raw materials
and subassemblies valued at $273,000 to an electronics manufacturer. Under the
terms of the agreement, the manufacturer will build and resell the modems to
FastComm on an as needed basis or may sell the modems to its own customers. No
revenue was recognized in connection with this transfer of inventory.
Under the original terms of this agreement, the electronics manufacturer may, at
its option, require the Company to repurchase any modem raw materials on hand
after calendar 1995. To date, the electronics manufacturer has not exercised
this option. The Company continues to purchase analog modems from this
manufacturer.
RESEARCH AND DEVELOPMENT CONTRACTS
During fiscal 1994, the Company entered into a contract to perform research and
development activities for a third party. In 1995 and 1994, revenues recognized
and costs incurred in connection with the contract were $31,774 and $63,548, and
$108,091 and $216,182, respectively. During 1996, no revenues or expenses were
recorded related to this contract. Under the agreement, the Company is required
to pay royalties to the third party for sales of products developed from funded
research and development activities.
F-15
37
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
If no products are sold, the Company is
not obligated to repay the funds. As of April 30, 1996, no royalties have been
paid as the products were still under development.
COMPENSATION
The Company maintains an employment agreement with its President and Principal
Executive Officer. This agreement provides for a base salary, bonus and
incentive compensation as may be deemed appropriate by the Board of Directors.
The agreement expires on January 31, 1997, and is renewable thereafter on a year
to year basis.
7. STOCKHOLDERS' STOCK ISSUANCES
EQUITY
In March 1992, the Company issued 285,000 shares of its common stock to the
shareholders of Watch Hill Research Inc. ("Watch Hill") as part of a purchase
agreement. The Company also issued 95,000 shares to be placed in escrow pending
final resolution of litigation associated with the acquisition of certain assets
of Watch Hill. The Company settled the litigation during fiscal 1993. 46,583
shares and 6,500 shares in escrow were returned to the Company as treasury stock
in 1993 and 1994, respectively. The treasury stock was subsequently retired.
In November 1992, the Company sold 1,381,000 shares of common stock in a private
placement and received gross proceeds of $2,209,600. Additionally, as discussed
below, warrants were exercised resulting in the issuance of 655,312 shares of
common stock.
On March 15, 1994 the Company purchased assets and assumed certain liabilities of
ZyBel Microsystems, Inc. (ZyBel). The total purchase price of $220,000 was paid
through the issuance of common stock based on the stock value at the date of the
agreement. The stock was not issued until fiscal 1995; therefore, the 1994
financial statement reflected a payable for this amount. ZyBel owned 1,100
shares of the Company's stock which were
F-16
38
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
included in the purchased assets. These shares were included in treasury
stock at April 30, 1994 at their allocated cost and were canceled during
fiscal 1995. Goodwill in the amount of approximately $102,000 was recorded
as a result of the purchase.
In March 1995, the Company completed the sale of 405,460 unregistered shares of
common stock in a private placement and received net cash proceeds of $1,294,000.
Also, in March 1995, the Company completed a Regulation S placement of 700,000
shares of common stock and received net cash proceeds of $2,907,500.
INITIAL PUBLIC OFFERING
In April 1988, the Company consummated an initial public offering (IPO) of its
common stock. In connection with the IPO, the Company sold 400,000 units, each
unit consisting of four shares of common stock, par value $0.01, and a warrant to
purchase one additional share of common stock at $1.50 per share, for $5.00 per
unit. These warrants were exercisable through April 11, 1993. In February 1992,
the Company offered callable Class B warrants to holders of the Class A warrants
upon exercise of the Class A warrants. Class A warrants for 396,500 shares of
common stock were exercised during 1993 and 3,500 Class A warrants expired on
April 11, 1993. Upon exercise of each Class A warrant, the Company issued one
Class B warrant to purchase on additional share of common stock at $4.25 per
share. The Company may redeem the Class B warrants upon 30 days notice if the
common stock fair market value exceeds established limits and upon Board
approval. During fiscal 1993, 396,500 Class B warrants were issued and 134,812
Class B warrants were exercised. In August 1993, the Company called the 261,688
Class B warrants outstanding. All warrants were exercised except for 200
warrants which were redeemed for cash at $.14 per warrant.
Additionally, the Company sold to the underwriter, for nominal consideration
warrants to purchase 40,000 units at $6.00 per unit which expired in April 1993.
The underwriter exercised 31,000 warrants during 1993 and 9,000 underwriter
warrants expired in April 1993.
F-17
39
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
8. STOCK OPTIONS In 1991 and 1992, the Board of Directors approved the 1991 Non-Qualified, 1992
Non-Qualified and 1992 Incentive Stock Option Plans (the Plans) under which
options to purchase up to 2,260,000 shares of common stock may be granted to
officers, directors and other key employees of the Company.
The exercise price of each option may not be less than 100% of the fair market
value of the stock on the date of grant for incentive stock options or 85% of
such fair market value for non-qualified stock options, as determined by the
Board. Options vest over a three year period and expire five years from the date
of grant and, in most cases, upon termination of employment.
The following table relates to options outstanding, granted, exercised, and
canceled during 1996, 1995 and 1994, under the Plan:
Option
Number Price
Options of Shares Per Shares
==============================================================
OUTSTANDING AT
April 30, 1994 1,196,185 $ .01 to 11.88
April 30, 1995 1,123,968 $ 1.09 to 5.88
April 30, 1996 897,209 $ 2.06 to 7.88
GRANTED
During 1994 519,500 $ 10.50 to 11.88
During 1995 956,367 $ 3.25 to 5.88
During 1996 381,500 $ 4.00 to 7.88
EXERCISED
During 1994 716,715 $ .01 to 6.38
During 1995 316,400 $ .01 to 5.13
During 1996 342,090 $ 1.09 to 7.63
CANCELED
During 1994 5,600 $ 5.13 to 11.38
During 1995 712,184 $ 3.25 to 11.88
During 1996 266,169 $ 3.25 to 6.80
At April 30, 1996, 274,759 stock options are
exercisable under the plans.
F-18
40
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
9. INCOME TAXES The Company has net operating loss carryforwards for regular tax purposes of
approximately $15,284,000 which begin to expire in 2007. The amount of the net
operating loss carryforward related to the compensation element of stock options
is approximately $9,560,000, which when utilized will be a credit to paid in
capital. In addition, the Company has research and development credit
carryforwards of approximately $408,000, which begin to expire in 2005. The
Company recorded a tax refund receivable at April 30, 1994 of $10,000 as a result
of the refund of prior estimated payments.
The difference between the Federal Tax rate and the effective tax rate realized
as a percent of pretax earnings for the years ended April 30, 1996 1995, and
1994, is as follows:
1996 1995 1994
AMOUNT RATE Amount Rate Amount Rate
===================================================================================
Tax provision
(benefit) at
statutory
rates $(214,000) (34.0%) $(1,388,000) (34.0%) $ (683,033) (34.0)%
Tax benefit
not recorded 593,000 94.0 1,777,800 43.3 2,946,557 146.7
Compensation
element of
stock
options (390,000) (61.8) (389,800) (9.3) (2,242,761) (111.6)
Other 11,000 1.7% - - (30,763) (1.6)
-----------------------------------------------------------------------------------
- - $ - - $ (10,000) (0.5)%
===================================================================================
The primary differences between income (loss) for
financial reporting and income tax purposes is the
recognition of reserves for uncollectible accounts
receivable and obsolete inventory, the compensation
element of stock options and research and
development expenses, which are not currently
deductible for income tax purposes.
No deferred taxes have been recognized in the
accompanying consolidated financial statements as
of April 30, 1996 and 1995. The components of
deferred income taxes are as follows:
F-19
41
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
April 30, 1996 1995
==============================================================================
DEFERRED TAX LIABILITIES
Accelerated depreciation $ 4,000 $ 22,000
------------------------------------------------------------------------------
Total deferred tax
liabilities $ 4,000 $ 22,000
------------------------------------------------------------------------------
DEFERRED TAX ASSETS
Allowance for
doubtful accounts 40,000 69,000
Inventory reserve 240,000 213,000
Tax credits 408,000 274,000
NOL carryforwards 6,131,000 5,503,000
Other 85,000 33,000
------------------------------------------------------------------------------
Total deferred tax assets 6,904,000 6,092,000
------------------------------------------------------------------------------
Net deferred tax assets 6,900,000 6,070,000
Less: Valuation allowance (6,900,000) (6,070,000)
------------------------------------------------------------------------------
TOTAL $ - $ -
==============================================================================
Management has provided a valuation allowance for
deferred tax assets as of April 30, 1996 and the
benefit of these items will be recognized in
future years to the extent that such items are
available to reduce taxable income.
10. SIGNIFICANT Certain customers accounted for 10% or more of the Company's total revenue during
CUSTOMERS AND the years ended April 30, 1996, 1995 and 1994 as noted below:
FOREIGN EXPORTS
1996 1995 1994
---------------------- ------------------------ -------------------------
Customer % of Sales Customer % of Sales Customer % of Sales
A 31 C 15 C 14
B 21 D 10 E 12
D 11
F-20
42
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
In 1996 and 1995, the Company had export sales to foreign customers totalling
approximately $1,310,000 and $1,200,000, respectively. In 1994 sales to foreign
customers were less than 10%. At April 30, 1996 trade receivable from one
customer represented 49% of total trade receivables outstanding. At April 30,
1995 trade receivable from one customer represented 28% of total trade
receivables outstanding.
11. SUCCESS Effective May 1, 1991, the Company established the FastComm Communications
SHARING PLAN Corporation Success Sharing Plan, a defined contribution plan that covers
substantially all of its employees. Employer contributions are determined using
an actuarially determined factor based on the employee's age and compensation
level. No employer contributions were made for the years ended April 30, 1996,
1995 or 1994.
12. RELATED PARTY During 1996, 1995 and 1994, the Company had sales of approximately $158,000,
TRANSACTIONS $415,000 and $588,000, respectively, to a customer whose Board of Directors
includes the president and principle executive officer of the Company. At April
30, 1996, 1995 and 1994, accounts receivable includes approximately $25,000,
$51,000 and $337,000, respectively from this related party which was paid to the
Company subsequent to year end. During fiscal 1994, the Company sold
approximately $247,000 of product to a customer, Texel Systems Corporation, that
is controlled by an individual who is the brother-in-law of the Company's
president and principal executive officer. This amount was paid to the Company
in fiscal 1994.
13. Fourth Quarter During the fourth quarter ended April 30, 1996, the Company reduced its allowance
Adjustments for doubtful accounts by $104,000, which had the effect of reducing the operating
loss and net loss by $104,000 or $0.01 per share.
During the fourth quarter ended April 30, 1995, the Company recorded adjustments
to its reserve for inventory obsolescence ($295,000) and allowance for doubtful
accounts ($200,000) which, in the aggregate, had the effect of increasing both
the operating loss and the net loss by approximately $495,000 or by $0.06 per
share.
F-21
43
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
During the fourth quarter ended April 30, 1994, the Company recorded certain year
end adjustments which, in the aggregate, had the effect of increasing both the
operating loss and the net loss by approximately $726,000 or $0.10 per share.
The fourth quarter adjustments relate to the elimination of product sales, net,
($296,000 or $0.04 per share), the increase in allowance for doubtful accounts
($220,000 or $0.03 per share) and fiscal year end adjustments to inventory and
accounts payable to record book to physical adjustments and to write-off obsolete
inventory ($210,000 or $0.03 per share). The adjustments to product sales and to
the allowance for doubtful accounts, aggregating $516,000 or $0.07 per share,
relate to previously issued quarterly financial statements.
14. FAIR VALUE The following methods and assumptions were used by the Company in estimating its
OF FINANCIAL fair value disclosures for financial instruments:
INSTRUMENTS
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash equivalents
approximates its fair value at April 30, 1996.
Long-Term Debt
The carrying amounts of the Company's notes payable and long-term debt are
estimated using discounted cash flow analyses, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. No
material differences exist between the Company's incremental borrowing rates and
the stated rates of interest. The carrying amounts approximate fair value April
30, 1996.
15. EFFECT OF NEW Effective May 1, 1996, the Company will adopt Statement of Financial Accounting
ACCOUNTING Standards No. 123, "Accounting for Stock-Based Compensation ("SFAS 123"). The
PRONOUNCE- accounting requirements of this statement are effective for transactions entered
MENTS into in fiscal years that begin after December 15, 1995. The Company does not
intend to adopt the fair value method, therefore, there will be no impact on the
financial statements.
F-22
44
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
16. SUPPLEMENTAL Supplemental information on interest and income taxes paid is as follows:
CASH FLOW
INFORMATION
For the Year ended April 30, 1996 1995 1994
================================================================================
Interest $ 20,975 $ 24,019 $ 25,994
Income taxes $ - $ - $ 19,000
================================================================================
Supplemental disclosure of non-cash
investing and financing activities:
For the Year ended April 30, 1996 1995 1994
================================================================================
Incurrence of debt in connection
with acquisition of patent rights,
net of repayments $ - $ 160,883 $ -
--------------------------------------------------------------------------------
Incurrence (settlement) of debt
in connection with acquisition
of assets of another company - (220,000) 220,000
--------------------------------------------------------------------------------
Acquisition of assets of ZyBel,
net of cash assumed of $93,196
Current assets - - 65,165
Property, equipment and other - - 7,015
--------------------------------------------------------------------------------
Assumption of liabilities
Current liabilities - - 16,242
Debt - - 44,763
--------------------------------------------------------------------------------
Recording of Goodwill from
the purchase of ZyBel $ - $ - $ 102,257
=================================================================================
During fiscal 1994, in connection with the
acquisition of ZyBel, the Company acquired
treasury stock in the amount of $12,238.
During fiscal 1995, the Company retired this
treasury stock.
F-23
45
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Balance Charged to Balance
at Beginning Costs and Other at End
Description of Period Expenses Changes Deductions of Period
================================================================================================================================
Year Ended April 30, 1994
Reserves and allowances deducted
from asset accounts:
Obsolescence reserve for
inventory $ 33,111 $ 60,000 $ - $ - $ 93,111
Allowance for doubtful
accounts $150,000 287,876 - (162,876)1/ $275,000
================================================================================================================================
Year Ended April 30, 1995
Reserves and allowances deducted
from asset accounts:
Obsolescence reserve for
inventory $ 93,111 $401,889 $ - $ - $495,000
Allowance for doubtful
accounts $275,000 204,000 - (275,000)1/ $204,000
================================================================================================================================
Year Ended April 30, 1996
Reserves and allowances deducted
from asset accounts:
Obsolescence reserve for
inventory $495,000 $ 105,000 $ - $ - $600,000
Allowance for doubtful
accounts $204,000 100,000 - (204,000)1/ $100,000
================================================================================================================================
1/ Accounts written off
F-24
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
22
47
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists the directors and executive officers of the Company, their
ages, descriptions of their business experience and positions held with the
Company as of July 15, 1996:
Name Age Position
---- --- --------
Peter C. Madsen(1) (2) 45 President, Chief Executive Officer and Chairman of the Board
Robert C. Abbott 52 Vice President - Engineering, Secretary
William A. Flanagan 54 Vice President - Marketing and Technology
Mark H. Rafferty 41 Vice President - Finance, Treasurer
Edward R. Olson(2) 56 Director
Thomas G. Amon(2) 49 Director
(1) Member Stock Option Committee.
(2) Member Audit Committee.
All directors hold office until the next annual meeting of the shareholders and
the election and qualification of their successors. The officers are elected
by and serve at the discretion of the Board of Directors. See "Employment and
Control Arrangements" beneath Item 11.
Peter C. Madsen has been President, Chief Executive Officer and a director of
the Company since September 1992. Mr. Madsen was President of Professional
Marketing Corporation, a telecommunications equipment distributor, from
February 1992 to September 1992. From November 1986 to January 1992, he was an
officer of the Newbridge Networks Corporation, a Canadian telecommunications
company, most recently as Vice President and General Manager, United States
Region, and President of Newbridge Networks Inc., Newbridge Networks
Corporation's United States subsidiary. Mr. Madsen currently serves as a
director of Newbridge Networks Corporation.
Robert C. Abbott has served as Vice President - Engineering and as Secretary of
the Company since 1984. From December 1980 until joining the Company, he
served as product manager, VF Products, for the Telesystems Division of Comsat
Corporation in Fairfax, Virginia.
William A. Flanagan has served as Vice President - Marketing and Technology
since September 1991. Prior to that, from 1987 through September 1991, he was
Vice President - Network Marketing and Vice President - Technology for
Newbridge Networks Inc. Mr. Flanagan is the author of a variety of best
selling books on digital communications technology.
Mark H. Rafferty has been Vice President, Chief Financial Officer and Treasurer
of the Company since August 1993. From August 1992 to August 1993, Mr.
Rafferty was Vice President, Finance at Newbridge Networks Inc. From August
1987 through August 1992, Mr. Rafferty was Controller of Newbridge Networks
Inc.
Edward R. Olson has served as a director since January 1989. From 1990 to
present, Mr. Olson has served as the President, Chief Executive Officer and
Chairman of M-C Industries, Inc., a fluid hydraulics equipment manufacturer.
Commencing July 1, 1995, Mr. Olson become a principal in KPMG Baymark LLC, an
independent consulting firm in strategic alliance with KPMG Peat Marwick, LLP.
For the past five years, Mr. Olson has served as President of Ed Olson
Consulting Group, Ltd., a management consulting firm. From 1992 to 1993 Mr.
Olson was Senior Vice President, Operations of Audiovox Corp., a company
concentrating in the marketing and distribution of consumer electronic devices.
Mr. Olson is Chairman and President of York Industries, York, PA, Chairman of
S&L Metal Products, Queens, NY and President of Porta Systems, Syossett, NY.
Thomas G. Amon has served as a director since December 1994. Mr. Amon has been
a partner in the law firm of Amon & Sabatini for the past five years.
23
48
Mr. Gary H. Davison's employment with the Company ended on October 20, 1995.
He was not nominated for re-election to the Board of Directors.
Mr. Charles L. Deslaurier resigned his position as an executive officer in the
Company on November 15, 1995 and was retained by the Company as a consultant on
such date.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the National Association of Securities Dealers, Inc. Automated
Quotations (NASDAQ) system. Officers, directors and greater than ten percent
shareholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons. The Company believes that during its fiscal year
ended April 30, 1996, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
BOARD REPORT ON EXECUTIVE COMPENSATION
The Company does not have a formal compensation committee. Compensation levels
for executive officers are set by the Board of Directors. The Board of
Directors is presently comprised of the following individuals: Peter C.
Madsen, Thomas G. Amon and Edward R. Olson. Salaries are reviewed annually and
are based on individual performance, the extent of individual responsibility
and comparisons with salaries paid in the industry.
The Company recruits for its executive officer positions from within the
communications industry. In most instances, the source Company is significantly
larger than the Company. It is the policy of the Board of Directors of
FastComm to hire executive officers at levels below that of their current
salaries along with a stock option package intended to make up for the
differentiation and to provide a performance incentive. The Company feels that
stock options are an attractive benefit in that they enhance performance and
loyalty at little cost. The Company believes the compensation packages offered
to its current employees and prospective employees are consistent with that of
the telecommunications industry.
The Board establishes compensation levels based on experience and
responsibility. No executive officer has received a salary increase.
The Board granted one executive officer options during fiscal year 1966. The
size of this grant was determined by this individuals performance,
responsibility, seniority and the number of options currently held by this
officer.
The Board adheres to a policy of granting options to executive officers based
upon performance and responsibility. In addition, the Board also considers the
relative importance of the job function being performed and the number of
options currently held by the executive officer.
/s/ Thomas G. Amon, /s/ Edward R. Olson, /s/ Peter C. Madsen
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year, Peter C. Madsen and Edward R. Olson, as directors participated
in deliberations of the Company's Board of Directors concerning executive
officer compensation and stock option grants, including their own. Other than
the foregoing, none of such directors was party to any reportable interlock or
participation during fiscal 1996. During the fiscal year ended April 30, 1996,
the Company sold approximately $158,000 of product under normal terms and
conditions to Newbridge Networks Inc. ("Networks") a United States subsidiary
of Newbridge Networks Corporation, a Canadian Telecommunications Company
("Newbridge"). Peter C. Madsen, President, Chief Executive Officer and a
director of the Company is also a director of Newbridge.
24
49
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid by the
Company to the four named executives (the "Named Executive Officers") for
services furnished in all capacities to the Company during the fiscal year
ended April 30, 1996, as well as such compensation paid by the Company to the
Named Executive Officers during the Company's two previous fiscal years:
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------------- ------------
SHARES OF
OTHER ANNUAL COMMON STOCK
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) OPTIONS
- --------------------------- ---- ---------- --------- ------- -------
Peter C. Madsen (2) 1996 104,196 0 6,219 0
President, CEO and Chairman 1995 113,344 0 6,219 0
of the Board of Directors 1994 71,478 0 6,219 0
Mark H. Rafferty (3) 1996 106,207 0 5,824 0
Vice President and 1995 110,825 0 5,824 125,000
Chief Financial Officer 1994 76,505 0 4,853 75,000
Robert C. Abbott (4) 1996 95,552 0 0 0
Vice President - Engineering 1995 100,750 0 0 50,000
Corporate Secretary 1994 96,255 0 0 50,000
William A. Flanagan (5) 1996 106,715 0 6,632 15,000
Vice President - 1995 113,943 0 6,632 0
Marketing and Technology 1994 110,923 15,000 6,500 0
The options listed with respect to fiscal year 1995 long-term compensation
awards include options granted upon repricing (and consequent cancellation) of
previously granted options. Options to purchase the following number of shares
granted to the following persons in fiscal year 1995 were issued as a result of
the repricing on September 9, 1994 of previously granted options: Mr.
Rafferty - 75,000 (all of which were originally granted in fiscal year 1994);
Mr. Abbott - 50,000 (all of which were originally granted in fiscal year 1994).
The repriced options were conditioned upon waiver of previously vested and
acceptance of a new vesting period.
(1) Automobile benefit.
(2) At April 30, 1996, Mr. Madsen held 692,866 restricted shares of Common
Stock with a market value of $12,125,155 at that date; Mr. Madsen waived
the payment of $28,522 of his salary in the 1994 fiscal year.
(3) At April 30, 1996, Mr. Rafferty held 27,088 restricted shares of Common
Stock with a market value of $474,040 at that date.
(4) At April 30, 1996, Mr. Abbott held 197,408 restricted shares of Common
Stock with a market value of $3,454,640 at that date.
(5) At April 30, 1996, Mr. Flanagan held 217,421 restricted shares of Common
Stock with a market value of $3,804,868 at that date.
25
50
FISCAL 1996 OPTION GRANTS
The following table sets forth information concerning grants of stock options
to the Named Executive Officers made pursuant to the Company's 1992 Stock
Option Plan during the fiscal year ended April 30, 1996:
Stock Option Grants in Fiscal Year 1996
INDIVIDUAL GRANTS
Securities Percent of Potential Realizable Value
Underlying Total Options Exercise at Assimed Annual Rates
Options Granted to or of Stock Price Appreciation
Granted Employees in Base Price Expiration For Option Term
Name (#) Fiscal Year ($/sh) Date 5%($) 10%($)
- ---- --- ----------- ------ ---- ----- ------
Peter C. Madsen 0 - - - - -
Mark H. Rafferty 0 - - - - -
Robert C. Abbott 0 - - - - -
William A. Flanagan 15,000 3.9% $5.63 3/8/01 $23,325 $51,675
The exercise price of each option may not be less than 100% of the fair market
value of the stock on the date of the grant for incentive options or 85% of
such fair value for non-qualified stock options, as determined by the Board of
Directors. Options vest over a three year period and expire five years from
date of grant and, in most cases, upon termination of employment.
FISCAL 1996 AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of stock
options during the fiscal year ended April 30, 1996 by each of the Named
Executive Officers and the fiscal year-end value of unexercised options held by
such persons:
Shares Value of
Underlying Unexercised
Unexercised in-the-money
Options at Options at
Fiscal Year- Fiscal Year-
Shares Value End (#) End ($)
Aquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
- ---- -------------- -------- ------------- -------------
Peter C. Madsen - - 0 0 $0 $0
Robert C. Abbott - - 16,667 33,333 $218,754 $437,496
William Flanagan - 0 15,000 $0 $0
Thomas G. Amon 3,333 $20,831 0 6,667 $0 $95,005
Edward R. Olson - 13,333 6,667 $129,997 $95,005
Mark H. Rafferty 41,666 $286,454 0 83,334 $0 $1,093,759
26
51
EMPLOYMENT AND CONTROL ARRANGEMENTS
Effective September 18, 1992 (the "Effective Date"), the Company, Mr. Robert N.
Dennis and Mr. Edward R. Olson, as the "Current Directors" therein, and Mr.
Peter C. Madsen entered into an employment agreement (the "Employment
Agreement") regarding the terms of Mr. Madsen's employment by the Company and
the scope of the relationships among the parties to the Employment Agreement.
In particular, pursuant to or in connection with the Employment Agreement, as
the case may be, subject to confirmation by the Board of Directors which
occurred as of the Effective Date, (i) Mr. Dennis resigned as President and
from all executive offices held by him in the Company, (ii) Mr. Madsen was
elected President and Chief Executive Officer of the Company for an initial
term expiring on January 31, 1995 at an initial base salary of $100,000 per
year, (iii) Mr. Madsen was granted an option to purchase up to 425,000 shares
of Common Stock of the Company at an exercise price of $1.09375 per share upon
certain terms and conditions, (iv) Mr. Deslaurier was elected a Vice President
of the Company, (v) Mr. Deslaurier was granted an option to purchase a maximum
of 150,000 shares of Common Stock of the Company at an exercise price of
$1.09375 per share upon certain terms and conditions, (vi) Mr. Rick Sampley was
granted an option to purchase a maximum of 25,000 shares of Common Stock of the
Company at an exercise price of $1.09375 per share upon certain terms and
conditions, (vii) the Company and Mr. Dennis entered into an Amended and
Restated Employment Agreement providing for, among other things, the employment
of Mr. Dennis as Senior Advisor to the President at an initial salary of
$200,000 per year for an initial term of three years, subject to earlier
termination by Mr. Dennis at any time or by the Company, with or without cause,
on or after September 15, 1993, and (viii) Mr. Madsen and Mr. Peter Sommerer
were elected directors of the Company to fill two vacancies then existing on
the Board of Directors. Mr. Dennis was paid $99,458 pursuant to this
arrangement in the 1994 fiscal year during which year he resigned as Senior
Advisor to the President.
Under the Employment Agreement, Mr. Madsen has been granted full control of and
authority over the operations of the Company, subject to the general oversight
of the Board, and the Current Directors have agreed not to take any action
inconsistent with their respective obligations thereunder. The Employment
Agreement and the related actions resulted in an effective change in control of
the Company away from Mr. Dennis to Mr. Madsen. The agreement, which expires
on January 31, 1997, is renewable thereafter on a year to year basis.
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services as such; however, the
Board of Directors has authorized payment of reasonable expenses incurred by
non-employee directors in connection with attendance at meetings of the Board
of Directors. Further, members of the Company's Board of Directors are granted
options to purchase common shares pursuant to the Company's 1992 Stock Option
Plan. During fiscal year 1996, the Company did not grant options to its
directors. The Chairman of the Board receives no compensation for serving in
such capacity. In fiscal 1994, Mr. Dennis received $99,458 in compensation as
Senior Advisor to the President. As Senior Advisor, Mr. Dennis' duties
included consultation with and advise to the President and other Senior
Management on technical and business matters related to past, present and
future operations, products and strategies and the undertaking of special
projects related to the above at the request of the President.
27
52
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock with that of the
cumulative total return of the NASDAQ Stock Market - US Index ("NASDAQ STOCK
MRKT - US") and the NASDAQ Telecommunications Index ("NASDAQ TELECOM") for the
five year period ended on April 30, 1996. The information below is based on
an investment of $100, on April 30, 1991, in the Company's Common Stock, the
NASDAQ STOCK MRKT - US and the NASDAQ TELECOM. The Company's Management
consistently cautions that the stock price performance shown in the graph below
should not be considered indicative of potential future stock price
performance.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG FASTCOMM COMMUNICATIONS CORP., THE NASDAQ STOCK
MARKET-US INDEX AND THE NASDAQ TELECOMMUNICATIONS INDEX
FASTCOMM NASDAQ
COMMUNICATIONS STOCK NASDAQ
CORP. MRKT (US) TELECOM.
4/91 $100 $100 $100
4/92 74 121 112
4/93 432 139 145
4/94 503 155 173
4/95 297 180 174
4/96 903 257 223
* $100 INVESTED ON 4/30/91 IN STOCK INDEX - INCLUDING REINVESTMENT OF
DIVIDENDS.
FISCAL YEAR ENDING APRIL 30.
28
53
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 15, 1996, there were 9,820,081 shares of Common Stock of the Company
issued and outstanding. As of such date, options to purchase 1,123,968 shares
of Common Stock were outstanding.
Each holder of shares of Common Stock, but not holders of unexercised options,
is entitled to one vote per share on each matter which may be presented at a
meeting of shareholders. Cumulative voting is not allowed. The Company's
Common Stock is traded on the NASDAQ National Market System under the symbol
"FSCX."
The following table sets forth information regarding ownership of Common Stock
of the Company at July 15, 1996, by each person who is known by management of
the Company to own beneficially more than five percent of the Common Stock
(setting forth the address of each such person), by each director, by the Named
Executive Officers of the Company identified beneath "Item 11. Executive
Compensation," and by all directors and executive officers of the Company as a
group. Shares issuable on exercise of warrants or options exercisable within
60 days are deemed to be outstanding for the purpose of computing the
percentage ownership of persons beneficially owning such warrants or options,
but have not been deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Except as otherwise indicated, the
persons indicated below have sole voting and investment power with respect to
the shares indicated as owned by them except as otherwise stated in the notes
to the table.
Amount and Nature
Name and address of Beneficial Owner of Beneficial Ownership Percent of Class
- ------------------------------------ ----------------------- ----------------
Peter C. Madsen (1)
Sterling, Virginia 702,866 7.16%
Robert C. Abbott
Reston, Virginia 230,741 (2) 2.35%
William A. Flanagan
Sterling, Virginia 217,421 2.21%
Edward R. Olson (1)
Reston, Virginia 13,333 (3) 0.14%
Thomas G. Amon (1)
New York, New York 6,650 (4) 0.07%
Mark H. Rafferty
Centreville, Virginia 68,755 (5) 0.70%
All directors and officers as a group
(six persons) 1,239,766 (6) 12.62%
(1) Director
(2) Gives effect to 33,333 options owned by Abbott exercisable within 60
days.
(3) Gives effect to 13,333 options owned by Olson exercisable within 60 days.
(4) Shares are owned by the Amon and Sabatini Pension and Profit Sharing
Plans as to which Mr. Amon has no voting or investment power.
(5) Gives effect to 41,667 options owned by Rafferty exercisable within 60
days.
(6) Based upon 9,820,081 shares outstanding at July 15, 1996
The Company is unaware of any arrangement the operation of which could at a
subsequent date result in a change in control of the Company.
29
54
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the fiscal year ended April 30, 1996, the Company sold approximately
$158,000 of product under normal terms and conditions to Newbridge Networks
Inc. ("Networks") a United States subsidiary of Newbridge Networks Corporation,
a Canadian Telecommunications Company ("Newbridge"). FastComm sells to
Newbridge Networks Corporation under net 30 day terms with prompt payment
discounts. Such terms are consistent with that of similar customers. Title
passes on shipment of product. Under the terms of the contract, Newbridge may
return purchased and paid for (during the previous six month period) but unused
products to FastComm for either warranty revalidation and/or revision level
change (hardware or firmware). Peter C. Madsen, President, Chief Executive
Officer and a director of the Company is also a director of Newbridge.
The Company paid the law firm of Amon & Sabatini $154,000 in the fiscal year
ended April 30, 1995. Thomas G. Amon, a Director of the Company, since
December 1994, is a partner of Amon and Sabatini.
The terms of the transactions described above were negotiated at arms length
such that the terms were as favorable to the Company as could have been
obtained from an unaffiliated third party.
The Company has entered into separate indemnification agreements with each of
its directors and executive officers that may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers.
30
55
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) Financial Statements and Schedules.
The consolidated financial statements and financial statement schedules filed
as a part of this Report are listed beneath Item 8 of this Report.
(a)(3) Exhibits.
The exhibits filed as a part of this Report are listed on the Exhibit Index at
page 33 of this Report.
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the quarter ended April
30, 1996.
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56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on July 29, 1996.
FASTCOMM COMMUNICATIONS CORPORATION
By: /s/ Peter C. Madsen
--------------------
Peter C. Madsen
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on July 29, 1996.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter C. Madsen and Mark H. Rafferty, his
attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with the exhibits thereto and other documents in connection therewith
with the Securities and Exchange Commission, hereby ratifying and confirming
all that said attorney-in-fact, or his substitute or substitutes may do or
cause to be done by virtue hereof.
/s/ Peter C. Madsen President (Principal Executive Officer)
---------------------------------- and Director
Peter C Madsen
/s/ Mark H. Rafferty Vice President - Finance and Treasurer
---------------------------------- (Principal Financial and Accounting Officer)
Mark H. Rafferty
/s/ Thomas G. Amon Director
----------------------------------
Thomas G. Amon
/s/ Edward R. Olson Director
----------------------------------
Edward R. Olson
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57
EXHIBIT INDEX
Sequential
Exhibit Page
No. Description Number
- --- ----------- ------
3.1* Amendment to Restated Articles of Incorporation
3.2** By-laws, as amended
10.0** Employment Agreement between the Company and
Robert C. Abbott
10.1** October 15, 1987 License Agreement between
the Company and Data Race, Inc.
10.2*** February 27, 1991 Lease Agreement between
the Company and Dulles/Route 28 Limited
Partnership with respect to the premises at 45472
Holiday Drive, Sterling, VA 22110
10.3*** Employment Agreement between the Company and
William Flanagan
10.4*** Technology Transfer Agreement with Sigma Technology
10.5*** Agreement in Principle with Watch Hill Research
10.6*** Technology License Agreement with Protocom Devices
10.7*** Loan Agreement with Sovran Bank
10.8*** Employment Agreement among the Company, Robert N.
Dennis and Edward R. Olson, as the "Current
Directors," and Peter C. Madsen.
10.9*** Option Agreement by the Company in favor of Charles
L. Deslaurier.
10.10*** Option Agreement by the Company in favor of Rick Sampley.
10.11*** Amended and Restated Employment Agreement between the
Company and Robert N. Dennis.
10.12* Exclusive Master Distribution Agreement for FastComm
Products between FastComm Communications Corporation
and Daitel Technologies
10.13* Distribution Agreement for products between FastComm
Communications Corporation and C&L Communications, Inc.
10.14* Distributor Agreement for FastComm products between
FastComm Communications Corporation and Tadiran, Ltd.
10.15* Distribution Agreement between the Company and
Sumitronics, Inc.
10.16* Consulting Agreement between Gary H. Davison and
Newbridge Networks Inc.
10.17* Agreement between the Company and ZyBel Microsystems,
Inc.
11.0* Statement re: Computation of per share earnings.
23.1 Consent of Independent Certified Public Accountants
- -----------
* Filed with revised form 10KA filed August 12, 1994.
** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-18 Registration Statement, SEC File Number
33-19758.
*** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-3 Registration Statement, SEC File No.
33-43374.
33