1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 1996.
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/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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Commission file number 0-17168 .
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FASTCOMM COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
Virginia 54-1289115 .
- ----------------------------------------- --------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
45472 Holiday Drive
Sterling, Virginia 20166
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(Address of principal executive offices, Zip code)
(703) 318-7750
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(Registrants telephone number, including area code)
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Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13
or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X . No .
--- ---
As of September 1, 1996, there were 9,836,581 shares of the
Common Stock, par value $.01 per share, of the registrant
outstanding.
No exhibits are filed with this report, which consists of 12
consecutively numbered pages.
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FASTCOMM COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NO.
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Item 1. Financial Statements
Consolidated Statements of Operations
Fiscal quarters ended August 3, 1996
and August 5, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets --
August 3, 1996, and April 30, 1996 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Fiscal quarters ended August 3, 1996
and August 5, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6-7
Item 2 Management's Discussion and Analysis of
Financial Conditions and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 11
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(Page 2 of 12)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Fiscal quarter ended
----------------------------------
August 3, August 5,
1996 1995
-------------- ------------
Revenue $3,791,166 $1,400,707
Expenses
Cost of sales 1,800,084 691,379
Selling, general and administrative 1,101,288 1,016,841
Research and development 439,639 276,837
Depreciation and amortization 71,605 68,113
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Income (loss) from operations 378,550 (652,463)
Other income (expense)
Other income (1,762) 409
Interest income 36,890 46,478
Interest expense (8,120) (9,980)
-------------- ------------
Net income (loss) $405,558 ($615,556)
============== ============
Earnings (loss) per share
Primary $0.04 ($0.07)
Fully diluted $0.04 ($0.07)
Weighted average number of shares
Primary 10,432,794 9,444,529
Fully diluted 10,432,794 9,444,529
See accompanying notes to unaudited consolidated financial statements
(Page 3 of 12)
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FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEET
ASSETS
August 3, April 30,
1996 1996
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(unaudited)
Current assets
Cash and cash equivalents $3,568,351 $3,807,855
Accounts receivable, net of provision for
returns and doubtful accounts of $100,000 2,366,718 2,371,149
Inventories, net 2,013,001 1,732,151
Prepaid and other 270,343 244,125
--------------- -------------
8,218,413 8,155,280
Property, plant and equipment 502,858 435,952
Software license, rights and other intangibles
net of accumulated amortization of $395,815
and $362,759 222,800 255,856
Other assets 256,675 186,774
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$9,200,746 $9,033,862
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long term debt $59,000 $130,585
Accounts payable 1,352,551 1,637,635
Accrued payroll 200,945 159,091
Other current liabilities 102,069 226,205
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1,714,565 2,153,516
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Shareholders' equity
Common stock, $.01 par value, 98,316 97,866
(25,000,000 shares authorized; 9,831,619 and
9,786,619 issued and outstanding)
Additional paid in capital 14,808,290 14,608,463
Accumulated deficit (7,420,425) (7,825,983)
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Total shareholders' equity 7,486,181 6,880,346
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$9,200,746 $9,033,862
=============== =============
See accompanying notes to unaudited consolidated financial statements
(Page 4 of 12)
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Fiscal quarter ended
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August 3, August 5,
1996 1995
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Operating activities
Net income (loss) $405,558 ($615,556)
Items not affecting cash
Depreciation and amortization 71,605 68,113
Provision for doubtful accounts 20,700
Provision for inventory obsolescence 30,000
Cash effect of changes in:
Accounts receivable 4,431 97,230
Inventories (280,850) 3,725
Prepaid and other current assets (26,218) (3,428)
Other non current assets (370) (1,712)
Accounts payable and accrued liabilities (243,230) (195,265)
Other current liabilities (124,136) (58,419)
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Net cash used by operations (193,210) (654,612)
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Investing activities
Additions of property, plant and equipment (105,455) (82,988)
Purchase of long term investments (69,531)
Reduction of investment collateral 374,687
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Net cash provided (used) by investing activities (174,986) 291,699
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Financing activities
Proceeds from exercise of options 200,277
Repayment of notes payable (71,585) (190,984)
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Net cash provided (used) by financing activities 128,692 (190,984)
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Net decrease in cash and equivalents (239,504) (553,897)
Cash and cash equivalents, beginning of period 3,807,855 3,105,346
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Cash and cash equivalents, end of period $3,568,351 $2,551,449
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See accompanying notes to unaudited consolidated financial statements
(Page 5 of 12)
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FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements of FastComm
Communications Corporation (the "Company") have been prepared without audit
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the consolidated financial
statements and related footnotes included in the Company's latest Annual Report
on Form 10-K.
In the opinion of Management, the consolidated financial statements reflect all
adjustments considered necessary for a fair presentation and all such
adjustments are of a normal and recurring nature. The results of operations
as presented in this report are not necessarily indicative of the results to be
expected for the fiscal year ending April 30, 1997.
The Company's fiscal year ends on April 30. For interim reporting purposes,
effective with the quarter ended October 31, 1992, the interim fiscal quarters
are closed on the first weekend following the calendar quarter end date, unless
the quarter end date falls on a weekend, in which case such weekend is used as
the interim fiscal quarter end. Prior to the quarter ended October 31, 1992,
the interim fiscal quarters were closed on the last day of the calendar quarter
end.
The quarter ended August 3, 1996, consisted of 95 calendar days as compared to
97 calendar days for the quarter ended August 5, 1995.
2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of shares of common stock outstanding and common share equivalents
outstanding for the period. For the quarter ended August 3, 1996, the
earnings per share calculation includes common share equivalents. For the
quarter ended August 5, 1995, the earnings per share calculation does not
include common share equivalents in that the inclusion of such equivalents
would be antidilutive.
3. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following:
August 3, April 30,
1996 1996
-----------------------------------
Production materials $ 1,442,975 $ 1,018,417
Work in process 192,965 176,818
Finished goods 377,061 536,916
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$ 2,013,001 $ 1,732,151
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(Page 6 of 12)
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4. RELATED PARTY TRANSACTIONS
During the quarter ended August 3, 1996, the Company sold approximately $33,000
of product under normal terms and conditions to Newbridge Networks Inc., a
subsidiary of Newbridge Networks Corporation, a Canadian telecommunications
company. FastComm sells to Newbridge under net 30 terms with prompt payment
discounts. Such terms are consistent with that of similar customers. Title
passes on shipment of product. Peter C. Madsen, President, Chief Executive
Officer and Chairman of the Board of Directors of FastComm Communications
Corporation is a Director of Newbridge Networks Corporation. The accounts
receivable due from Newbridge totaled $35,000 at August 3, 1996, and $25,000
at April 30, 1996.
5. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The quarter ended August 3, 1996, includes sales of $975,000 and $883,000,
representing 26% and 23%, respectively, of total revenues to two unrelated
third party domestic corporations. As of August 3, 1996, accounts receivable
includes $989,000 and $5,000, respectively, due from these corporations.
(Page 7 of 12)
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenue
Fiscal quarter ended
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August 3, August 5,
1996 1995
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Sales $3,791,166 $1,400,707
Total revenues increased $74,000 over that of the previous quarter and
increased $2,390,000 (171%) when compared with the corresponding quarter of the
previous fiscal year. This increase in was primarily attributable to an
increase in unit sales of frame relay access devices ($3,272,000 in the current
fiscal quarter as compared with $1,168,000 in the first quarter of the previous
fiscal year). Increased unit sales of analog modems ($121,000) and data
compression products ($165,000) also contributed to this improvement in sales.
The quarter ended August 3, 1996, includes sales of $975,000 and $883,000 to
two, unrelated, domestic corporations. The $883,000 sale was attributable to
the shipment of the final 880 units of a 3,400 unit order.
A significant portion of the Company's sales are derived from products shipped
against firm purchase orders received in each fiscal quarter and from products
shipped against firm purchase orders released in that quarter. Unforeseen
delays in product deliveries or the closing of sales, introduction of new
products by the Company or its competitors, supply shortages, varying patterns
of customer capital expenditures or other conditions affecting the digital
access product industry or the economy during any fiscal quarter could cause
quarterly revenue and net earnings to vary greatly.
COST OF GOODS SOLD AND GROSS MARGIN
Fiscal quarter ended
---------------------------------
August 3, August 5,
1996 1995
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Cost of sales $ 1,800,084 $ 691,379
Gross margin 53% 51%
Gross margin is calculated by subtracting cost of sales from sales. Gross
margins during the current fiscal quarter approximated 53%, as compared with
51% for the quarter ended August 5, 1995. The increase in gross margin is
attributable to higher manufacturing volumes in the current quarter. Further,
the current quarter included approximately $45,000 in revenue from software
development that had a minimal related cost.
(Page 8 of 12)
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SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal quarter ended
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August 3, August 5,
1996 1995
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$ 1,101,288 $ 1,016,841
Selling, general and administrative expenses increased $84,000 over that of the
corresponding quarter in the previous fiscal year. This is primarily
attributable to increased sales compensation costs associated with increased
sales ($137,000), increased advertising and promotion costs ($86,000) offset by
a decline in general and administrative salary and benefit costs ($115,000).
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal quarter ended
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August 3, August 5,
1996 1995
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$ 439,639 $ 276,837
Research and development expenditures consist primarily of hardware and
software engineering, personnel expenses, subcontracting costs, equipment,
prototypes and facilities. The increase in such expenses is primarily
attributable to increased labor and material costs associated with new product
development and new product prototypes.
The markets for the Company's products are characterized by continuing
technological change. Management believes that significant expenditures for
research and development will continue to be required in the future.
LIQUIDITY AND CAPITAL RESOURCES
At August 3, 1996, the Company had $3,568,000 in cash and cash equivalents.
Working capital increased $502,000 during the fiscal quarter ended August 3,
1996.
The Company believes it has adequate capital for the foreseeable future to
support its core business. However, the Company anticipates additional funding
requirements to meet future expansion and research and development expenses.
It is anticipated that such funding will be generated by way of additional
placements of equity, through research and development arrangements funded by
third parties and by investments by strategic partners. The Company can give
no assurance as to whether it will be able to conclude such financing
arrangements, or that, if concluded, they will be on terms favorable to the
Company.
FIRST FISCAL QUARTER OF 1997 COMPARED TO FIRST FISCAL QUARTER OF 1996
Cash used by operations decreased from $655,000 in the quarter ended August 5,
1995, to $193,000 in the quarter ended August 3, 1996. The $462,000 decrease
is primarily attributable to the $406,000 net income for the current quarter as
compared to a $616,000 net loss in the first quarter of fiscal 1996, offset by
increased inventory expenditures ($285,000) and by the paydown of accounts
payable and other current liability balances ($114,000).
Cash used by investing activities totaled $174,000 in the current fiscal
quarter. This
(Page 9 of 12)
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utilization of cash was primarily attributable to fixed asset purchases
required to develop and produce new products and to the purchase of long term
investments.
In the quarter ended August 5, 1995, the Company repaid the installment loan
payable to its bank and redeemed the US Treasury Bill that collateralized this
loan. This redemption totaled $375,000.
Cash provided by financing activities is primarily attributable to proceeds
from the exercise of employee common stock options ($200,000) offset by the
repayment of notes payable.
INVENTORIES
The Company's inventory balances increased $281,000 in the current fiscal
quarter. This increase is primarily attributable to increased frame relay
product subassemblies required to support future sales. This increase was
offset by decreases in analog modem inventory ($132,000) and data compression
product inventory ($50,000).
The Company currently has a recorded reserve for inventory obsolescence of
$600,000. The specific targets of this reserve are the data compression and
analog modem inventories. The market for the Company's data compression
products is in the international market where circuit costs are higher and the
economies offered by compression are greater. The Company continues to sell
analog modems for specialized applications, however, it has no plans to sell
into the consumer market for low end modems. The Company believes it will be
able to ship and/or liquidate its current inventory levels profitably and that
its reserve for inventory obsolescence and excess inventory is adequate.
SHAREHOLDERS' EQUITY
Shareholders' equity increased $606,000 in the current quarter. The increase
is attributable to the current quarter profit and to funds generated by the
exercise of employee stock options.
INCOME TAXES
The Company anticipates its effective tax rate will approximate 3% as the
Company is subject to alternative minimum taxes and expects to be subject to
such tax for the entire fiscal year.
CERTAIN PARTS OF THE FOREGOING DISCUSSION AND ANALYSIS MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
AS A CONSEQUENCE, ACTUAL RESULTS MIGHT DIFFER MATERIALLY FROM RESULTS FORECAST
OR SUGGESTED IN ANY FORWARD-LOOKING STATEMENTS. SEE "MARKETS FOR REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K.
(Page 10 of 12)
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The United States Securities and Exchange Commission ("SEC") is currently
conducting a confidential inquiry pursuant to a formal order directing a
private investigation relating to certain prior public disclosures and periodic
reports of the Company. 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 in the Circuit Court of Loudon County, Virginia seeking
indemnification for legal fees to be incurred in connection with his testimony
as it relates to the investigation by the SEC. 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 what was considered
reasonable and equitable. In his lawsuit, Davison seeks reimbursement in
excess of this amount and for reimbursement of the costs of his lawsuit. On
September 6, 1996, Davison was granted partial summary judgement on the issue
of liability in this action with the matter of reasonableness and amount of the
fees to be determined at a subject hearing. The Company is considering its
options which may include an appeal on the Court's decision.
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.
(Page 11 of 12)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FASTCOMM COMMUNICATIONS CORPORATION
(Registrant)
Date: September 13, 1996 By: /s/ Peter C. Madsen
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Peter C. Madsen
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
Date: September 13, 1996 By: /s/ Mark H. Rafferty
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Mark H. Rafferty
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
(Page 12 of 12)