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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1999
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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 _______________
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)
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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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As of September 1, 1999, there were 17,555,160 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 Statement of Operations
Fiscal quarters ended
July 31, 1999 and August 1, 1998..................................................3
Consolidated Balance Sheets
July 31, 1999 and April 30, 1999..................................................4
Consolidated Statements of Cash Flows
Fiscal quarters
ended July 31, 1999 and August 1, 1998............................................5
Notes to Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................7-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................................11
SIGNATURES.........................................................................................12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Fiscal quarter ended
----------------------------
July 31 August 1
1999 1998
----------- -----------
Revenue $ 1,747,457 $ 1,129,875
Expenses
Cost of sales 779,675 611,841
Selling, general and administrative 980,194 1,569,838
Research and development 581,577 702,456
Depreciation and amortization 155,100 115,187
Litigation settlement - 7,970
----------- -----------
Loss from operations (749,089) (1,877,417)
Other income (expense)
Other income 23,489 -
Interest income 1,958 10,189
Interest expense (52,896) (27,866)
----------- -----------
Loss before reorganizional items (776,538) (1,895,094)
Reorganizational items
Professional fees - 110,059
Interest earned on accumulated cash
resulting from Chapter 11 proceeding - (5,154)
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- 104,905
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Net loss $ (776,538) $(1,999,999)
=========== ===========
Loss per share:
Basic: ($0.05) ($0.16)
Diluted: ($0.05) ($0.16)
Weighted average number of shares
Basic 16,626,192 12,273,731
Diluted 16,626,192 12,273,731
See accompanying notes to unaudited consolidated financial statements
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
July 31 April 30,
1999 1999
------------ ------------
(unaudited)
Current assets
Cash and cash equivalents $ 991,472 $ 90,727
Restricted cash 152,367 152,367
Accounts receivable, net 819,521 647,492
Inventories, net 2,426,383 2,658,788
Prepaid and other 210,536 228,120
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4,600,279 3,777,494
Property and equipment, net 685,423 631,959
Deferred financing costs 12,671 12,671
Goodwill, net 1,062,251 1,109,838
Other assets 49,096 49,096
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$ 6,409,720 $ 5,581,058
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,262,525 $ 1,080,713
Accrued payroll 209,899 246,615
Other current liabilities 622,522 527,342
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2,094,946 1,854,670
Convertible debentures 2,690,357 2,690,357
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4,785,303 4,545,027
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Shareholders' equity
Common stock, $.01 par value, 175,551 161,429
(50,000,000 shares authorized; 17,555,160 and
16,142,974 issued and outstanding)
Additional paid in capital 25,285,469 23,934,667
Accumulated deficit (23,836,603) (23,060,065)
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Total shareholders' equity 1,624,417 1,036,031
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$ 6,409,720 $ 5,581,058
============ ============
See accompanying notes to unaudited consolidated financial statements
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Fiscal quarter ended
--------------------------
July 31 August 1
1999 1998
----------- -----------
Operating activities
Net loss $ (776,538) $(1,999,999)
Items not affecting cash
Depreciation and amortization 155,100 115,187
Provision for doubtful accounts (141) -
Non cash interest expense on debentures 50,288 21,499
Amortization of deferred financing costs - 19,086
Provision for litigation loss - 7,970
Changes in assets and liabilities
Accounts receivable (171,888) 1,834,297
Inventories 232,406 (327,352)
Prepaid and other current assets 17,584 42,573
Accounts payable and accrued liabilities 145,096 630,208
Other current liabilities 44,895 (11,600)
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Net cash used by operations (303,198) 331,869
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Investing activities
Additions of property, plant and equipment (160,981) (14,278)
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Net cash used by investing activities (160,981) (14,278)
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Financing activities
Proceeds from the issuance of common stock 1,000,000 -
Net proceeds from exercise of warrants and options 364,924 -
----------- -----------
Net cash provided by financing activities 1,364,924 -
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Net increase in cash and equivalents 900,745 317,591
Cash and cash equivalents, beginning of period 90,727 1,213,052
----------- -----------
Cash and cash equivalents, end of period $ 991,472 $ 1,530,643
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See accompanying notes to unaudited consolidated financial statements
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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, 2000.
The Company's fiscal year ends on April 30. For interim reporting purposes the
interim fiscal quarters are closed on the first weekend following the calendar
quarter end date, unless the quarter end date falls on a weekend, in which case
such weekend is used as the interim fiscal quarter end. The quarter ended July
31, 1999 consisted of 92 calendar days as compared to 93 calendar days for the
quarter ended August 1, 1998.
2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of shares of common stock outstanding and common share equivalents
outstanding for the period. For the quarters ended July 31, 1999 and August 1,
1998, 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:
July 31, April 30,
1999 1999
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Production materials $1,348,162 $1,466,235
Work in process 144,709 111,568
Finished goods 933,512 1,080,985
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$2,426,383 $2,658,788
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4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The quarter ended July 31, 1999 includes sales of $685,000 representing 39% of
total revenues to one unrelated third party domestic corporation. The Company
collected this receivable prior to the end of the quarter.
5. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to uncertainty
over the level of earnings in fiscal 2000. Also, the Company has net operating
loss carryforwards for income tax reporting purposes for which no income tax
benefit has been recorded due to uncertainty over generation of future taxable
income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PETITION FOR REORGANIZATION UNDER CHAPTER 11
On June 2, 1998, the Company filed a voluntary petition for reorganization under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor. All litigation related to this
matter has been settled. On March 30, 1999, the Company's Plan of Reorganization
was approved by the Bankruptcy Court and the Company emerged from Chapter 11.
The Plan of Reorganization became effective on April 12, 1999. The Plan provides
for cash and debenture payments equal to 100% of each allowed claim plus
interest. The positions of all common shareholders are preserved. The Company is
in compliance with all of the terms and conditions of its Plan of
Reorganization.
FUTURE PROSPECTS
On a forward-looking basis, the Company anticipates improved sales of its
products. The Company has introduced its GlobalStack and MetroLan product lines,
all of which have voice, data and video capabilities. Orders have been received
and shipments have commenced in the second fiscal quarter. The Company added new
features to its Quick product that qualify this product for a larger and
enhanced distribution channel. Initial shipments of the ChanlComm(R) product
commenced in the fourth quarter of fiscal 1999. To date, such shipments have
been minimal. The Company anticipates that sales of the ChanlComm(R) product
will begin generating more significant revenues commencing with the second
quarter of its fiscal year ended April 30, 2000. This product is being well
received in both the domestic and international marketplaces.
The Company has changed its organizational structure and reduced headcount. As a
result, spending levels have declined sharply. Further, the Company anticipates
a significant reduction in legal and professional fees from that of the previous
fiscal year.
The Company anticipates that it will require additional funding to meet
operating requirements, future expansion and research and development expenses.
It is anticipated that such funding will be generated by way of additional
placements of equity, through research and development arrangements funded by
third parties, by asset based lending facilities and through the exercise of in
the money stock options and warrants. The Company can give no assurance as to
whether it will be able to conclude such financing arrangements, or that, if
concluded, they will be on terms favorable to the Company.
There can be no assurance that the required increased sales and improved
operating efficiencies necessary to return to profitability will materialize, or
if they do, the Company will be able to raise sufficient funding to finance its
working capital needs. Absent a return to profitability or the receipt of
additional capital, FastComm is unlikely to be able to operate and meet its
obligations throughout fiscal year 2000.
There can be no assurance that the required increased sales and improved
operating efficiencies necessary to return to profitability will materialize.
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RESULTS OF OPERATIONS
REVENUE
Fiscal quarter ended
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July 31 August 1
1999 1998
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$1,747,457 $1,129,875
Total revenues increased $1,131,000 (184%) compared with that of the previous
quarter and increased $618,000 (55%) when compared with the corresponding
quarter of the previous fiscal year. The sequential quarter over quarter
increase is primarily attributable to an increase in unit sales of data frame
relay access products ($802,000), an increase in unit sales of data controller
products ($90,000) and an increase in unit sales of Quick products ($173,000).
The increase in the current quarter in comparison with that of the corresponding
quarter of the previous fiscal year is primarily attributable to an increase in
unit sales of data frame relay access devices ($608,000) and an increase in unit
sales of Quick products ($157,000) offset by decreased unit sales of data
compression products ($115,000).
The quarter ended July 31, 1999 includes sales of $685,000 representing 39% of
total revenues to one unrelated third party domestic corporation..
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
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July 31 August 1
1999 1998
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Cost of sales $779,675 $611,841
Gross margin 55% 46%
The improvement in gross margins is attributable to the increase in the sale of
data frame relay and Quick products that generate higher gross margins.
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal quarter ended
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July 31 August 1
1999 1998
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$980,194 $1,569,838
Selling, general and administrative expenses decreased $590,000 or (38%) when
compared with that of the corresponding quarter in the previous fiscal year.
This decrease is primarily attributable to reduced salary and benefit costs
associated with a decline in headcount ($216,000); reduced legal and
professional fees ($150,000); reduced travel costs ($86,000); and reduced
operating lease costs resulting from expired and renegotiated lease agreements
($207,000) offset by increased advertising costs ($47,000).
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RESEARCH AND DEVELOPMENT EXPENSES
Fiscal quarter ended
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July 31 August 1
1999 1998
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$581,577 $702,456
Research and development expenditures consist primarily of hardware and software
engineering, personnel expenses, subcontracting costs, equipment, prototypes and
facilities. The decline in such expenses is primarily attributable a $150,000
fee, paid in the first quarter of the previous fiscal year, associated with the
exclusive license agreement with KG Data Systems, Inc. Net of this one time
expenditure, research and development costs increased $29,000 when compared with
that of the corresponding quarter of the previous fiscal year.
The markets for the Company's products are characterized by continuing
technological change. Management believes that significant expenditures for
research and development will continue in the future.
DEPRECIATION AND AMORTIZATION
Fiscal quarter ended
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July 31 August 1
1999 1998
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$155,100 $115,187
The increase in depreciation and amortization is primarily attributable
depreciation associated with fixed asset purchases and to the amortization of
goodwill associated with the acquisition of KG Data Systems in March, 1999. This
goodwill is being amortized on a straight line basis over a seven year period at
a rate of $26,000 per quarter
REORGANIZATIONAL ITEMS
During the quarter ended August 1, 1998, the Company incurred $105,000 in
expenses associated with its reorganization under Chapter 11. Such expenses
primarily consisted of legal fees and the costs of financial consulting
services. In that the Company's reorganization was approved on March 30, 1999,
such expenses will not recur.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company had $991,000 in cash. During the current fiscal
quarter, working capital increased from $1.9 million at April 30, 1999 to $2.5
million at July 31, 1999. At July 31, 1999, the Company had a current ratio of
2.2 to one.
During the quarter ended July 31, 1999, the Company raised an additional
$1,000,000 through a private placement of securities to a group of accredited
investors. Each security ("Unit") consists of (1) one common share; (2) an A
warrant exercisable immediately and permitting the holder to purchase one share
of common stock in the Company at a price of $1.50 per share ("A Warrant") and
(3) a B warrant exercisable immediately and permitting the holder to purchase
one half of a share of common stock at a price of $2.25 per share ("B Warrant").
The warrants are exercisable for a period of three years, expiring on July 29,
2002. The A Warrants may be called for redemption, by the Company, at such time
as the bid price of the Company's common stock remains above $3.00 for 20
(twenty) consecutive trading days. The B Warrants may be called for redemption,
by the Company, at such time as the bid price of the Company's common stock
remains above $4.50 for 20 (twenty) consecutive trading days. These Units carry
with them certain registration rights.
When and if exercised, the unexercised warrants associated with this private
placement, the debentures and warrants issued in conjunction with the Company's
Bankruptcy reorganization and the outstanding convertible debentures would
generate a maximum of $7,377,000 in additional cash for the Company. The Company
can give no assurance as to whether any warrants will be exercised, nor to the
amount of cash that will be generated, if any of these securities are exercised.
The Company anticipates that it will require additional funding to meet
operating requirements, future expansion and research and development expenses.
It is anticipated that such funding will be generated by way of additional
placements of equity, through research and development arrangements funded by
third parties, by asset based lending facilities and through the exercise of in
the money stock options and warrants. The Company can give no assurance as to
whether it will be able to conclude other financing arrangements, or that, if
concluded, they will be on terms favorable to the Company
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FIRST FISCAL QUARTER OF 2000 COMPARED TO FIRST FISCAL QUARTER OF 1999
The Company used $303,000 in cash from operations during the quarter ended July
31, 1999. This compares unfavorably to $332,000 in cash generated by operations
during the corresponding quarter of the previous fiscal year. This $635,000
decline is primarily attributable to a $1,223,000 reduction in the net loss for
the quarter and reduced inventory purchases offset by increased payments to
vendors and increased accounts receivable balances..
The Company purchased $161,000 in fixed assets during the current fiscal
quarter. The majority of these purchases will be utilized for software
development.
Cash provided by financing activities is primarily attributable to $1,000,000 in
proceeds received from the placement of common shares
ACCOUNTS RECEIVABLE
The Company's accounts receivable balance increased $172,000 in the current
fiscal quarter. This increase is primarily attributable to increased sales in
the current fiscal quarter offset by improved collection efforts.
INVENTORIES
The Company's gross inventory balance decreased $232,000 in the current fiscal
quarter. The Company's reserve for inventory obsolescence totals $1,450,000. 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 $588,000 in the current quarter. This increase is
attributable to the net loss incurred offset by the $1 million private placement
and proceeds from the exercise of common stock warrants and options.
INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to uncertainty
over the level of earnings in fiscal year 2000. Also, the Company has net
operating loss carryforwards for income tax reporting purposes for which no
income tax benefit has been recorded due to uncertainty over generation of
future taxable income.
YEAR 2000
In accordance with the U.S. Securities and Exchange Commission's Staff Legal
Bulletin No. 5, the Company has assessed both the cost of addressing and the
costs or consequences of incomplete or untimely resolution of the Year 2000
issue. The Company has reviewed its internal systems and has upgraded and
replaced such systems with applications, in the normal course of business, that
are Year 2000 compliant. To date, the costs of such upgrades have been minimal.
The Company plans to conduct a survey of its critical vendors concerning their
year 2000 compliance within the next 120 days.
The Company currently utilizes off the shelf software and uses no internally
developed software in the operation of its business. The software embedded in
the Company's products is not date sensitive and as such is not subject to the
Year 2000 issue. Accordingly, the Company has determined that its estimated
costs related to the Year 2000 issue are not anticipated to be material to the
Company's business, operations or financial condition. The Company will, within
the next 120 days, develop a contingency plan to be utilized in the event that
its management information systems fail due to a year 2000 related issue. This
plan will focus on identifying comparable companies utilizing comparable systems
and software to serve as an alternative to the Company's existing infrastructure
CERTAIN PARTS OF THE FOREGOING DISCUSSION AND ANALYSIS MAY INCLUDE
FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. AS
A CONSEQUENCE, ACTUAL RESULTS MIGHT DIFFER MATERIALLY FROM RESULTS FORECAST OR
SUGGESTED IN ANY FORWARD-LOOKING STATEMENTS. SEE "MARKETS FOR REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The United States Securities and Exchange Commission ("SEC") is currently
conducting an inquiry pursuant to an order directing a private investigation.
This inquiry, which commenced in September 1994, has focused on certain
accounting, end of quarter, revenue recognition, and internal controls issues,
is confidential and the Company is cooperating fully with the SEC staff. While
no assurance can be given concerning the outcome of this investigation, the
Company believes that this matter will be settled in the near future.
On March 30, 1999, the Company's Plan of Reorganization was approved by the
Bankruptcy Court and the Company emerged from Bankruptcy protection. The Company
has been operating pursuant to this Plan since that date.
No other material legal proceeding to which the Company is party or to which the
Company is subject is pending and no such proceeding is known by the Company to
be contemplated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FASTCOMM COMMUNICATIONS CORPORATION
(Registrant)
/s/ Peter C. Madsen
Date: September 13, 1999 By:
Peter C. Madsen ---------------------------
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Mark H. Rafferty
Date: September 13, 1999 By:
Mark H. Rafferty ---------------------------
Vice President, Chief Financial Officer
Treasurer and Director
(Principal Financial and Accounting Officer)
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