SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 26, 2002 .
---------------------------------
OR
[ ] TRANSITION 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
(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
Dulles, Virginia 20166
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(Address of principal executive offices, Zip code)
(703) 318-7750
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(Registrants telephone number, including area code)
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 March 8, 2002, there were 33,530,534 shares of the Common Stock, par value
$.01 per share, of the registrant outstanding.
No exhibits are filed with this report, which consists of 19 consecutively
numbered pages.
FASTCOMM COMMUNICATIONS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Statements of Operations
Fiscal quarter and two fiscal quarters ended
January 26, 2002 and January 27, 2001............................3
Consolidated Balance Sheets
January 26, 2002 and April 30, 2001..............................4
Consolidated Statements of Cash Flows
Two fiscal quarters ended
January 26, 2002 and January 27, 2001............................5
Summary of Accounting Policies.................................6-7
Notes to Consolidated Financial Statements ..................8-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................12-17
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................18
SIGNATURES....................................................................19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
Fiscal quarter ended Three fiscal quarters ended
--------------------------------- -----------------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
---------------- ------------- ----------------- ---------------
Revenue $ 949,799 $ 1,842,651 $ 3,247,097 $ 9,691,259
Expenses
Cost of sales 306,691 889,203 1,352,211 3,752,549
Selling, general and administrative 856,878 1,813,793 2,971,688 5,306,583
Research and development 508,697 1,481,843 1,839,717 4,286,881
Depreciation and amortization 916,323 963,418 2,833,052 2,919,246
Impairment of long-lived assets 872,533 - 6,472,533 -
---------------- ------------- ----------------- ---------------
Loss from operations (2,511,323) (3,305,606) (12,222,104) (6,574,000)
Other income (expense)
Other income 11,516 28,700 31,214 130,686
Interest income - 11,690 - 23,728
Interest expense (1,310,324) (76,637) (1,663,201) (264,564)
---------------- ------------- ----------------- ---------------
Loss before extraordinary item (3,810,131) (3,341,853) (13,854,091) (6,684,150)
Extraordinary item 241,667 - 241,667 -
---------------- ------------- ----------------- ---------------
Net loss (4,051,798) (3,341,853) (14,095,758) (6,684,150)
Dividend on prepaid warrants (45,911) - (138,868) -
---------------- ------------- ----------------- ---------------
Net loss attributable to common shareholders $(4,097,709) $ (3,341,853) $(14,234,626) $ (6,684,150)
================ ============= ================= ===============
Basic and diluted loss per share before extraordinary item ($0.13) ($0.13) ($0.47) ($0.25)
Extraordinary loss per share (0.01) - (0.01) -
---------------- ------------- ----------------- ---------------
Basic and diluted loss per share ($0.14) ($0.13) ($0.48) ($0.25)
================ ============= ================= ===============
Weighted average number of shares 30,289,980 26,442,772 29,682,685 26,288,946
See accompanying notes to unaudited consolidated financial statements
3
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
January 26, April 30,
2002 2001
------------------- ---------------------
(unaudited)
Current assets
Cash and cash equivalents $ 204,443 $ 69,125
Accounts receivable, net 328,217 1,379,526
Inventories, net 1,894,474 2,759,284
Prepaid and other - 13,628
------------------- ---------------------
2,427,134 4,221,563
Property and equipment, net 558,606 1,147,594
Deferred investment advisory fee - 120,172
Goodwill, net - 8,714,070
Other assets 62,648 18,830
------------------- ---------------------
$ 3,048,388 $ 14,222,229
=================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Liability to be settled through issuance of common stock $ 1,375,000 $ 1,000,000
Accounts receivable financing loan 39,751 356,200
Current portion of capital lease obligations - 1,519
Checks issued against future deposits - 111,278
Accounts payable 1,901,647 3,074,381
Accrued compensation 420,405 978,011
Other current liabilities 1,429,312 1,556,283
------------------- ---------------------
5,166,115 7,077,672
Convertible debentures 3,277,169 732,643
------------------- ---------------------
8,443,284 7,810,315
------------------- ---------------------
Shareholders' equity
Common stock, $.01 par value, 335,305 290,666
(50,000,000 shares authorized; 33,530,534 and
29,066,624 issued and outstanding)
Additional paid in capital 51,056,917 48,812,608
Accumulated deficit (56,787,118) (42,691,360)
------------------- ---------------------
Total shareholders' equity (5,394,896) 6,411,914
------------------- ---------------------
$ 3,048,388 $ 14,222,229
=================== =====================
See accompanying notes to unaudited consolidated financial statements
4
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three fiscal quarters ended
----------------------------------
January 26, January 27,
2002 2001
-----------------------------------
Operating activities
Net loss $(14,095,758) $ (6,684,150)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 2,833,052 2,919,246
Impairment of long-lived assets 6,472,533 -
Write-offs of accounts receivable (1,075,540) -
Provision for bad debt 183,022 10,000
Provision for inventory obsolescense 200,000 200,000
Non cash interest expense on convertible debentures 1,245,958 43,178
Non cash stock compensation 12,500 -
Amortization of deferred investment advisory fee 120,172 270,386
Extraordinary loss 241,667 -
Changes in assets and liabilities
Accounts receivable 1,943,827 51,626
Inventories 664,810 (1,846,749)
Prepaid and other current assets 13,628 (179,450)
Other assets (43,818) 30,575
Accounts payable and accrued compensation (1,730,340) 586,252
Other current liabilities (166,232) 102,969
------------- ------------
Net cash used in operating activities (3,180,519) (4,496,117)
============= ============
Investing activities
Additions of property, plant and equipment (2,527) (212,006)
Increase in acquisition costs - 35,575
------------- ------------
Net cash used in investing activities (2,527) (176,431)
============= ============
Financing activities
Checks issued against future deposits (111,278)
Net proceeds from the issuance of common stock - 1,170,400
Net proceeds from the issuance of prepaid warrants - 3,079,450
Net proceeds from issuance of convertible debenture 3,000,000 -
Net proceeds from exercise of warrants and options 747,610 383,443
Repayments on capital lease obligations (1,519) (11,303)
Repayments of accounts receivable line of credit (316,449) (268,320)
Increase in restricted cash - (229,258)
------------- ------------
Net cash provided by financing activities 3,318,364 4,124,412
============= ============
Net increase (decrease) in cash and cash equivalents 135,318 (548,136)
Cash and cash equivalents, beginning of period 69,125 548,136
------------- ------------
Cash and cash equivalents, end of period $ 204,443 $ -
============= ============
See accompanying notes to unaudited consolidated financial statements
5
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain estimates used by
management are particularly susceptible to significant changes in the economic
environment. These include estimates of inventory obsolescence, valuation
allowances for trade receivables and deferred tax assets and evaluation of the
impairment of goodwill. Each of these estimates, as well as the related amounts
reported in the financial statements, are sensitive to near term changes in the
factors used to determine them. A significant change in any one of those factors
could result in the determination of amounts different than those reported in
the financial statements. Management believes that as of January 26, 2002, the
estimates used in the financial statements are adequate based on the information
currently available.
REVENUE RECOGNITION
Revenues from product sales are recognized at the time of product shipment. An
allowance is provided for estimated sales returns and uncollectible accounts.
Also, the Company establishes a reserve for estimated warranty claims at the
time of product shipment.
GOODWILL
The Company has recorded goodwill based on the difference between the cost and
the fair value of certain purchased assets and it is being amortized on a
straight-line basis over the estimated period of benefit, which ranges from 4 to
7 years. The Company periodically evaluates the goodwill for possible
impairment. This analysis consists of a comparison of future projected cash
flows to the carrying value of the goodwill. Any excess goodwill would be
written off due to impairment.
ASSET IMPAIRMENT
In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of ("SFAS 121"), the Company periodically evaluates the carrying
value of long-lived assets when events and circumstances warrant such a review.
The carrying value of a long-lived asset is considered impaired when the
anticipated undiscounted cash flow from such asset is separately identifiable
and is less than the carrying value. In that event, a loss is recognized based
on the amount by which the carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
RECENT ACCOUNTING PRONOUNCEMENT
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 142, "Accounting for Goodwill" ("SFAS 142"). SFAS
142 establishes accounting standards for existing goodwill related to purchase
business combinations. Under the Statement, the Company would discontinue the
periodic amortization of goodwill effective with the adoption of the Statement.
Also, the Company would have to test any remaining goodwill for possible
impairment within the first six months of adopting the Statement based on new
valuation criteria set forth in the Statement. In the third quarter of fiscal
year 2002, the Company wrote off all remaining goodwill due to impairment.
Accordingly, the Company believes the adoption of SAS 142 will not have a
material impact on its financial position or results of operations. The
Statement becomes effective for the Company on April 1, 2002.
In August 2001, the FASB approved Statement of Accounting Standards No. 144,
"Accounting
6
for the Impairment and Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of the Accounting Principles Board No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model, based on the framework established in
SFAS 121. SFAS 144 retains the requirements of SFAS 141 to recognize an
impairment loss only if the carrying amount of the long-lived asset is not
recoverable from its undiscounted cash flows and measure an impairment loss as
the difference between the carrying amount and fair value of the asset. SFAS 144
excludes goodwill from its scope, describes a probability weighted cash flow
estimation approach, and establishes a "primary asset" approach to determine the
cash flow estimation period for groups of assets and liabilities. SFAS 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years, with early application encouraged. The Company
believes that adoption of SFAS 144 will not have a material impact on its
financial position or results of operations.
7
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, 2002.
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 fiscal quarters
ended January 26, 2002 and January 27, 2001 each consisted of 91 calendar days.
2. EARNINGS (LOSS) PER SHARE
Net income (loss) per common share is calculated using the weighted average
number of shares of common stock outstanding and common share equivalents
outstanding for the period. For the quarters presented, the earnings per share
calculation does not include common share equivalents in that the inclusion of
such equivalents would be antidilutive.
3. IMPAIRMENT OF LONG-LIVED ASSETS
Net revenues generated by the Company's signaling product line declined from
$6.7 million for the nine months ended January 27, 2001 to $2.1 million for the
nine months ended January 26, 2002. Accordingly, the Company continued its
review for possible impairment of the related long-lived assets as required
under generally accepted accounting principles.
The Company evaluated the long-lived assets of its signaling product line, which
consisted of goodwill associated with the acquisition of Cronus Technologies and
Comstat Datacomm, for impairment in accordance with SFAS No, 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." The review was based on future undiscounted cash flows. Based on this
calculation, the Company recorded an impairment charge of $5,600,000 in the
quarter ended October 27, 2001 to reduce goodwill to its estimated net
realizable value at that time. The Company continued to see a decline in the
revenues generated by its signaling product line in the quarter ended January
26, 2002. Accordingly, the Company performed another review based on
undiscounted cash flows. Based on this calculation, the Company recorded an
additional impairment charge of $872,533 in the quarter ended January 26, 2002
to reduce goodwill to zero, which is its estimated net realizable value at that
time.
8
4. INVENTORIES
Inventories are valued at the lower of cost or market and consist of the
following:
January 26, April 30,
2002 2001
--------------------------------
Productions materials $1,497,441 $1,366,116
Work in process 235,369 487,209
Finished goods 161,664 905,959
---------- ----------
$1,894,474 $2,759,284
========== ==========
5. ACCOUNTS RECEIVABLE FINANCING AGREEMENT
On February 6, 2001, the Company entered into an accounts receivable financing
agreement with Alliance Financial Capital, Inc. Under the terms and conditions
of this agreement, the Company can borrow up to the lesser of $3,000,000 or up
to 85% of eligible accounts receivable, as defined in the agreement. The
accounts receivable financing agreement bears interest at the prime rate plus
1.0% plus an additional 1.5% per invoice funded. The term of this agreement is
for twelve months with a minimum average daily account balance of $750,000. This
agreement lapsed effective February 6, 2002. The Company did not renew this
agreement.
6. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The fiscal quarter ended January 26, 2002 includes sales of $249,000 to one
unrelated third party that represents 26% of total revenues. The fiscal quarter
ended January 27, 2001 includes sales to five unrelated third parties each of
which individually exceeded 10% of total revenues.
7. EMPLOYEE LOANS AND ADVANCES
During the current fiscal quarter, the Company forgave $103,000 in loans and
advances to certain employees, officers and directors.
8. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to uncertainty
over the level of earnings in fiscal 2002. Also, the Company has net operating
loss carry-forwards for income tax reporting purposes for which no income tax
benefit has been recorded due to uncertainty over generation of future taxable
income.
9. LONG TERM DEBT
In May 2001, the Company raised $3,000,000 through the sale of a 10% senior
secured convertible debenture to a private investment corporation. All or any
portion of this Debenture may be converted into shares of common stock of the
Company by dividing the aggregate principle amount converted together with all
accrued but unpaid interest to the date of conversion by $0.446. The entire
debenture plus accrued interest is due and payable in a single installment on
June 8, 2006, unless sooner accelerated or converted into shares of common
stock. In connection with this investment, the Company also issued warrants
entitling this investor to purchase 3,363,229 shares of common stock of the
Company for $0.5575 per share. The warrants expire on June 8, 2006 and may be
called for redemption, by the Company, at such time as the bid price of the
Company's shares of common stock remains above $1.12 for 30 (thirty) consecutive
trading days.
The Company valued the warrant component of this investment at $525,546 using
the Black-Scholes valuation model, and accordingly, recorded this amount as a
discount. This discount will be amortized into interest expense over the five
year life of the warrants. Amortization charges to interest expense of $26,277
have been recorded in the current fiscal quarter. On a fiscal year to date
basis, such charges total $70,072.
On December 11, 2001, in an effort to improve its cash position, the Company
temporarily reduced the exercise price of all of its outstanding warrants to
$0.22 per share. This re-pricing remained in effect through December 31, 2001.
On December 20, 2001, this investor exercised all of its warrants generating
$740,000 in additional cash for the Company. During the current fiscal quarter,
the Company recorded a $1,135,000 non-cash charge to interest expense associated
with this transaction.
10. STOCK OPTIONS
The Company has both qualified and non-qualified stock option plans (the
"Plans") under which options to purchase up to 4,750,000 shares of common stock
may be granted to officers, directors and other key employees of the Company.
9
The exercise price of each option may not be less than 100% of the fair market
value of the stock on the date of grant for incentive stock options or 85% of
such fair market value for non-qualified stock options, as determined by the
Board. Generally, options vest over a three year period and expire five years
from the date of grant and, in most cases, upon termination of employment. The
following table relates to options granted, exercised and cancelled during the
nine month period ended January 26, 2002:
Number of
Shares Price per share
-------- ---------------
Outstanding At April 30, 2001 3,783,765 $0.25 to $15.63
Granted during the period 1,495,500 $0.22 to $ 0.51
Cancelled during the period (623,634) $0.30 to $ 3.97
----------
Outstanding at January 26, 2002 4,655,631 $0.22 to $12.00
The Company has adopted the disclosure-only provisions of SFAS-No. 123
"Accounting for Stock Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. For SFAS No. 123 purposes, the weighted average fair value of each
option granted during the quarter has been estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 3.56%, expected volatility of 70%,
expected option life of 5 years and dividend payout rate of zero. Using these
assumptions, the weighted average fair value of the stock options granted is
$0.11 for the quarter ended January 26, 2002. There were no adjustments made in
calculating the fair value to account for vesting provisions or for
non-transferability or risk of forfeiture.
If the Company had elected to recognize compensation cost based on the fair
value at the grant dates for options issued under the plans described above,
consistent with the method prescribed by SFAS No. 123, net loss applicable to
common shareholders and loss per share would have been changed to the pro forma
amounts indicated below:
Nine months ended Nine months ended
January 26, 2002 January 27, 2001
---------------- ----------------
Net loss applicable to common shareholders:
As reported $ (14,234,626) $ (6,684,150)
Proforma $ (15,499,781) $ (7,949,404)
Basic and diluted loss per share:
As reported $ (0.47) $ (0.25)
Proforma $ (0.52) $ (0.30)
On December 11, 2001, as part of a program to retain its employees, the Company
adopted a program to re-price the options of its current employees. The Company
also re-priced the options issued to its board of directors and to its chairman
of the board. Under the program, the exercise price of current stock options was
changed to $0.22 per share. Although each employee could elect not to
participate in this program, the exercise price of approximately 2.5 million
options was changed to the lower price. Under applicable accounting rules, the
Company will have to account for future variations in the price of its common
stock above $0.22 per share as compensation expense until the re-priced options
are either exercised, cancelled or expire. This calculation will be made each
quarter based upon the performance of the Company's common stock in that
quarter. Accordingly, operating results and earnings per share will be subjected
to potentially significant fluctuations based upon changes in the market price
of the Company's common stock. For the quarter and nine months ended January 26,
2002, operating results and earnings per share were not impacted by this
re-pricing because the price of the common stock at the end of both periods was
below $0.22 per share.
10
11. RESTRUCTURING COSTS
In fiscal year 2001, the Company commenced a broad restructuring aimed at
achieving profitability and positive cash flow in its fiscal year 2002.
Accordingly, in fiscal year 2001, the Company established a $618,000 liability
for future cash expenditures associated with this restructuring. During the
current fiscal year, the Company charged $254,000 against this liability. The
Company will continue to reduce this liability until all amounts are settled or
paid.
12. COMMITMENTS AND CONTINGENCIES
A supplier of parts for the Company's integrated access device product line has
filed an action against the Company. The Plaintiff seeks $96,581 for goods sold
and delivered, $280,662 for goods allegedly manufactured but not yet delivered
and $380,015 for parts allegedly ordered by Plaintiff to fulfill anticipated
orders. The Company filed its answer to the complaint, is presently engaged in
discovery and intends to vigorously defend this case.
On January 29, 2001, two individuals holding subordinated senior notes totaling
$1,000,000 commenced an action in the Circuit Court, Cook County, Illinois
against the Company, Cronus, certain former principal shareholders of Cronus and
a liquidating trust established by Cronus and its trustees seeking repayment of
the notes, together with accrued interest. The Company settled the principal
claims on November 30, 2001. In accordance with the terms and conditions of the
settlement agreement, the Company will issue to each of these individuals
$625,000 in common stock and $62,500 in warrants to purchase shares of the
Company's common stock at a premium to current market price. The Company
recorded a $241,667 extraordinary loss associated with this transaction in the
current fiscal quarter.
The three remaining co-defendants in this lawsuit have filed cross-claims for
indemnification against the Company. The Company has denied liability for
indemnification in the circumstances of the lawsuit. The Company has filed
answers, which include counterclaims, to each claim for indemnity.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FUTURE PROSPECTS
RECENT FUNDING
In May 2001, the Company raised $3,000,000 through the sale of a 10% senior
secured convertible debenture to a private investment corporation. All or any
portion of this Debenture may be converted into shares of common stock of the
Company by dividing the aggregate principle amount converted together with all
accrued but unpaid interest to the date of conversion by $0.446. The entire
debenture plus accrued interest is due and payable in a single installment on
June 8, 2006, unless sooner accelerated or converted into shares of common
stock. In connection with this investment, the Company also issued warrants
entitling this investor to purchase 3,363,229 shares of common stock of the
Company for $0.5575 per share. The warrants expire on June 8, 2006 and may be
called for redemption, by the Company, at such time as the bid price of the
Company's shares of common stock remains above $1.12 for 30 (thirty) consecutive
trading days.
The Company valued the warrant component of this investment at $525,546 using
the Black-Scholes valuation model, and accordingly, recorded this amount as a
discount. This discount will be amortized into interest expense over the five
year life of the warrants. Amortization charges to interest expense of $26,277
have been recorded in the current fiscal quarter. On a fiscal year to date
basis, such charges total $70,072.
On December 11, 2001, in an effort to improve its cash position, the Company
temporarily reduced the exercise price of all of its outstanding warrants to
$0.22 per share. This re-pricing remained in effect through December 31, 2001.
On December 20, 2001, this investor exercised all of its warrants generating
$740,000 in additional cash for the Company. During the current fiscal quarter,
the Company recorded a $1,135,000 non-cash charge to interest expense associated
with this transaction.
When and if exercised, the unexercised warrants associated other prior offerings
and agreements would generate a maximum of $11,000,000 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.
SIGNALING OPPORTUNITIES
In May 2001, FastComm announced the SignalPath Release 7 software which
increases performance and system availability in its SignalPath Signaling
Gateway product line. Release 7 software has more capacity and supports higher
calling volumes which in turn means more revenues for carriers who use the
Signaling Gateway product in their networks. This release lays the foundation
for future products aimed at supporting large capacity switch vendors who are
looking to replace entirely the circuit-switch technology used by incumbent
telecom providers with packet networks. The potential market for such products
is quite large, and worldwide revenues are expected to expand from approximately
$700 million in 2001 to $7 billion in 2004 according to market research
estimates.
The competitive environment that exists in the telecommunications marketplace
today dictates that the telecommunications carriers and Internet Service
Providers must seek additional revenue sources. Voice over internet protocol
(VoIP) offers unparalleled scalability, flexibility and economy. For this
reason, telecommunications carriers are reselling carrier grade IP telephony
services purchased from business to business outsource providers. A problem
exists in that the VoIP vendors are often limited in terms of supporting
traditional signaling protocols. The Company's SignalPath 230 Signaling Gateway
resolves this issue by providing a new level of interoperability with global
networks that employ protocols not directly supported by the VoIP network.
Worldwide, VoIP networks carried less than 1% of the number of calls made during
calendar year 2000, however it has been estimated that 40% of large corporations
have some sort of VoIP testing underway. Based on this market data, the Company
believes that VoIP will continue to offer revenue opportunities in the future.
12
PABX OPPORTUNITIES
In June 2001, the Company introduced the R2 Adapter, a small low cost signaling
appliance designed to enable PABX vendors to penetrate international markets
where signaling conversion is required. Next generation IP based PABX's are
software driven and far more flexible and cheaper to administer than traditional
PABX's. According to an independent research report, the market for the IP based
PABX's is significant and is expected to grow from $200 million today to $4
billion over the next four years. Currently, some PABX vendors, due to signaling
incompatibilities, cannot sell IP based PABX's in parts of the world that employ
an R2 signaling variant. The R2 Adapter resolves this incompatibility issue and
opens large marketplaces that deploy R2, such as Latin America, the Middle East,
Africa and parts of Southeast Asia, to these vendors. The IP/PABX vendors will
generally sell one R2 Adapter for every IP based PABX sold. There is a very
limited number of suppliers with competing products in the marketplace and
accordingly, the Company anticipates future revenue from this product.
RESTRUCTURING
The Company commenced a broad restructuring aimed at achieving profitability and
positive cash flow in its fiscal year 2002 by reducing costs and focusing on
market opportunities which offer the greatest revenue potential.
The Company has reduced its headcount from 103 to 44 fulltime employees and
consolidated its two Virginia facilities into one. As a result of these and
other cost saving activities, operating expenses have declined by more than $1
million per quarter. One-time charges for these restructuring activities were
reflected in the Company's operating results for its fourth fiscal quarter for
the year ended April 30, 2001.
The Company will require additional funding to meet future working capital needs
and research and development expenses. It is anticipated that such funding will
be generated by way of additional placements of convertible debt or equity,
through investments made by strategic partners and through the exercise of in
the money common stock warrants and options. 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.
The Company has yet to achieve profitability or positive cash flow. There can be
no assurance that the required increased sales and improved operating
efficiencies necessary to return to profitability will materialize.
On December 11, 2001, as part of a program to retain its employees, the Company
adopted a program to re-price the options of its current employees. The Company
also re-priced the options issued to its board of directors and to its chairman
of the board. Under the program, the exercise price of current stock options was
changed to $0.22 per share. Although each employee could elect not to
participate in this program, the exercise price of approximately 2.5 million
options was changed to the lower price. Under applicable accounting rules, the
Company will have to account for future variations in the price of its common
stock above $0.22 per share as compensation expense until the re-priced options
are either exercised, cancelled or expire. This calculation will be made each
quarter based upon the performance of the Company's common stock in that
quarter. Accordingly, operating results and earnings per share will be subjected
to potentially significant fluctuations based upon changes in the market price
of the Company's common stock. For the quarter and nine months ended January 26,
2002, operating results and earnings per share were not impacted by this
re-pricing because the price of the common stock at the end of both periods was
below $0.22 per share.
RESULTS OF OPERATIONS
REVENUE
Fiscal quarter ended Three fiscal quarters ended
--------------------------- ---------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
-------- ---------- ---------- -----------
$949,799 $1,842,651 $3,247,097 $9,691,259
Total revenues decreased $893,000 or 48%, compared with that of the
corresponding quarter of the previous fiscal year and $6,444,000, or 66% on a
fiscal year to date basis. This decrease is primarily attributable to a decline
in unit sales of all of the Company's products associated with a global downturn
in the demand for telecommunications equipment.
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The fiscal quarter ended January 26, 2002 includes sales of $249,000 to one
unrelated third party that represented 26% total revenues. The fiscal quarter
ended January 27, 2001 includes sales to five unrelated third parties each of
which individually exceeded 10% of total revenues.
A significant portion of the Company's sales are derived from products shipped
against firm purchase orders received in each fiscal quarter and from products
shipped against firm purchase orders released in that quarter. Unforeseen delays
in product deliveries or the closing of sales, introduction of new products by
the Company or its competitors, supply shortages, varying patterns of customer
capital expenditures or other conditions affecting the digital access product
industry or the economy during any fiscal quarter could cause quarterly revenue
and net earnings to vary greatly.
COST OF GOODS SOLD AND GROSS MARGIN
Fiscal quarter ended Three fiscal quarters ended
--------------------------- ---------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Cost of sales $306,691 $889,203 $1,352,211 $3,752,549
Gross margin 68% 52% 58% 61%
Gross margin on product sales approximated 68% in the current fiscal quarter,
compared to 52% recorded in the corresponding quarter of the previous fiscal
year. Sales in the quarter were concentrated in the Company's signaling product
line which generate higher gross margins than that of the Company's other
product lines. On a fiscal year to date basis, gross margin on product sales
approximated 58% compared with 61% last year. The Company increased its reserve
for inventory obsolescence by $50,000 in the current fiscal quarter and by
$200,000 on fiscal year to date basis. These reserve increases negatively
impacted gross margins by 6% on both a quarterly and fiscal year to date basis.
The Company has a $800,000 reserve for inventory obsolescence, which management
believes is adequate.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal quarter ended Three fiscal quarters ended
--------------------------- ---------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
$856,878 $1,813,793 $2,971,688 $5,306,583
Selling, general and administrative expenses decreased $957,000, or 53%, when
compared with that of the corresponding quarter in the previous fiscal year and
$2,335,000, or 44% on a fiscal year to date basis. In response to the downturn
in demand for telecommunications equipment, the Company reduced headcount, cut
back on travel and other discretionary expenses, and consolidated operating
facilities. Accordingly, associated expenses declined significantly.
RESEARCH AND DEVELOPMENT EXPENSES
Fiscal quarter ended Three fiscal quarters ended
--------------------------- ---------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
$508,697 $1,481,843 $1,839,717 $4,286,881
Research and development expenditures consist primarily of hardware and software
engineering personnel expenses, subcontracting costs, equipment, prototypes and
facilities. These expenses decreased $973,000 or 66%, in the current quarter
when compared with the corresponding quarter of the previous fiscal year and
$2,447,000, or 57% on a fiscal year to date basis. This decrease in expenses is
primarily attributable to the reductions in headcount, facility costs and
discontinuance of the ChanlComm product line.
14
The markets for the Company's products are characterized by continuing
technological change. The Company intends to continue to make substantial
investments in product and technology development and believes that its future
success depends significantly upon its ability to continue to enhance existing
products and to develop or acquire new products that maintain the Company's
technological competitiveness.
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. The
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.
DEPRECIATION AND AMORTIZATION
Fiscal quarter ended Three fiscal quarters ended
--------------------------- ---------------------------
January 26, January 27, January 26, January 27,
2002 2001 2002 2001
----------- ----------- ----------- -----------
$919,323 $963,418 $2,833,052 $92,919,246
IMPAIRMENT OF LONG-LIVED ASSETS
Net revenues generated by the Company's signaling product line declined from
$6.7 million for the nine months ended January 27, 2001 to $2.1 million for the
nine months ended January 26, 2002. Accordingly, the Company continued its
review for possible impairment of the related long-lived assets as required
under generally accepted accounting principles.
The Company evaluated the long-lived assets of its signaling product line, which
consisted of goodwill associated with the acquisition of Cronus Technologies and
Comstat Datacomm, for impairment in accordance with SFAS No, 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
of." The review was based on future undiscounted cash flows. Based on this
calculation, the Company recorded an impairment charge of $5,600,000 in the
quarter ended October 27, 2001 to reduce goodwill to its estimated net
realizable value at that time. The Company continued to see a decline in the
revenues generated by it s signaling product line in the quarter ended
January26, 2002. Accordingly, the Company performed another review based on
undiscounted cash flows. Based on this calculation, the Company recorded an
additional impairment charge of $872,533 in the quarter ended January 26, 2002
to reduce goodwill to zero, which is its estimated net realizable value at that
time.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to suffer severe cash flow problems. At January 26, 2002,
the Company had a cash balance of $204,000. During the current fiscal quarter,
working capital deficit increased from $2.3 million at October 27, 2001 to $2.5
million at January 26, 2002. At January 26, 2002, the Company had a current
ratio of 0.49 to one.
As of the date of this report, the Company has $30,000 in cash and $350,000 in
accounts receivable.
MAY PRIVATE PLACEMENT
In May 2001, the Company raised $3,000,000 through the sale of a 10% senior
secured convertible debenture to a private investment corporation. All or any
portion of this Debenture may be converted into shares of common stock of the
Company by dividing the aggregate principle amount converted together with all
accrued but unpaid interest to the date of conversion by $0.446. The entire
debenture plus accrued interest is due and payable in a single installment on
June 8, 2006, unless sooner accelerated or converted into shares of common
stock. In connection with this investment, the Company also issued warrants
entitling this investor to purchase 3,363,229 shares of common stock of the
Company for $0.5575 per share. The warrants expire on June 8, 2006 and may be
called for redemption, by the Company, at such time as the bid price of the
Company's shares of common stock remains above $1.12 for 30 (thirty) consecutive
trading days.
The Company valued the warrant component of this investment at $525,546 using
the Black-Scholes valuation model, and accordingly, recorded this amount as a
discount. This discount will be amortized into interest
15
expense over the five year life of the warrants. Amortization charges to
interest expense of $26,277 have been recorded in the current fiscal quarter. On
a fiscal year to date basis, such charges total $70,072.
On December 11, 2001, in an effort to improve its cash position, the Company
temporarily reduced the exercise price of all of its outstanding warrants to
$0.22 per share. This re-pricing remained in effect through December 31, 2001.
On December 20, 2001, this investor exercised all of its warrants generating
$740,000 in additional cash for the Company. During the current fiscal quarter,
the Company recorded a $1,135,000 non-cash charge to interest expense associated
with this transaction.
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
On February 6, 2001, the Company entered into an accounts receivable financing
agreement with Alliance Financial Capital, Inc. Under the terms and conditions
of this agreement, the Company can borrow up to the lesser of $3,000,000 or 85%
of eligible accounts receivable, as defined in the agreement. The accounts
receivable financing agreement bears interest at prime rate plus 1.0% plus an
additional 1.5% per invoice funded. The term of this agreement is for twelve
months with a minimum average daily account balance of $750,000. This agreement
lapsed effective February 6, 2002. The Company did not renew this agreement.
In connection with the acquisition of Cronus, the Company assumed $1,000,000 in
debt to two individuals, which is subordinated in priority and payment to all
senior debt referenced above. This debt matured on December 10, 2000. The
Company settled the principal claims on November 30, 2001. In accordance with
the terms and conditions of the settlement agreement, the Company will issue to
each of these individuals $625,000 in common stock and $62,500 in warrants to
purchase shares of the Company's common stock at a premium to current market
price. The Company recorded a $241,667 extraordinary loss associated with this
transaction in the current fiscal quarter.
At present the Company has immediate cash needs to fund its operations, fund
future expansion and pay research and development expenses. Until the Company
can regain the sales volume which has been lost in the past six months, it must
rely on a number of strategies for doing so. These include, additional private
placements of debt or equity; loans or R&D investments by officers or strategic
partners; incentive discounting of accounts receivable to encourage prompt
payment, exercise of in the money warrants and options (which would, at present,
generate approximately $11,000,000 in additional cash) and sale or licensing of
technology. While management is optimistic that the business cycle for the
Company's products is turning, historically the time from order decision to
purchase and to payment is unpredictable. If the Company is unable to stabilize
its cash flow and operations during the next six months, it must seriously
consider other more drastic measures, such as sale of all or a part of the
Company's assets; a sale of the Company as a whole or a restructuring under
State or Federal law. No assurances can be given that the Company will be
successful in accomplishing any of these goals or that business will expand, as
such expansion is largely dependent upon factors beyond the Company's control.
NINE MONTHS OF FISCAL 2002 COMPARED TO NINE MONTHS OF FISCAL 2001
The Company used $3,181,000 in cash in operations during the nine months ended
January 26, 2002 compared to $4,496,000 in cash used in operations during the
corresponding period of the previous fiscal year. This $1,315,000 decrease is
primarily attributable to an increase in funds generated from accounts
receivable and reduced inventory purchases offset by an increase in the net loss
for the period, which included non-cash impairment and interest charges.
Cash provided by financing activities is primarily attributable to the sale of a
$3,000,000, 10% senior secured convertible debenture to Wesley Clover
Corporation and the exercise of common stock warrants attached to this
debenture.
RESTRUCTURING COSTS
In fiscal year 2001, the Company commenced a broad restructuring aimed at
achieving profitability and positive cash flow in its fiscal year 2002.
Accordingly, in fiscal year 2001, the Company established a $618,000 liability
for future cash expenditures associated with this restructuring. During the
current fiscal year, the Company charged $254,000 against this liability. The
Company will continue to reduce this liability until all amounts are settled, or
paid.
INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to uncertainty
over the level of earnings in fiscal year 2002. Also, the Company has net
operating loss carry-forwards for income tax reporting purposes for which no
income tax benefit has been recorded due to uncertainty over generation of
future taxable income.
16
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Accounting Standards No. 142, "Accounting for Goodwill" ("SFAS 142"). SFAS
142 establishes accounting standards for existing goodwill related to purchase
business combinations. Under the Statement, the Company would discontinue the
periodic amortization of goodwill effective with the adoption of the Statement.
Also, the Company would have to test any remaining goodwill for possible
impairment within the first six months of adopting the Statement based on new
valuation criteria set forth in the Statement. In the third quarter of fiscal
year 2002, the Company wrote off all remaining goodwill due to impairment.
Accordingly, the Company believes the adoption of SAS 142 will not have a
material impact on its financial position or results of operations. The
Statement becomes effective in fiscal 2003.
In August 2001, the FASB approved Statement of Accounting Standards No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets" ("SFAS 144").
SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of the Accounting Principles Board No. 30, "Reporting the Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
144 establishes a single accounting model, based on the framework established in
SFAS 121. SFAS 144 retains the requirements of SFAS 141 to recognize an
impairment loss only if the carrying amount of the long-lived asset is not
recoverable from its undiscounted cash flows and measure an impairment loss as
the difference between the carrying amount and fair value of the asset. SFAS 144
excludes goodwill from its scope, describes a probability weighted cash flow
estimation approach, and establishes a "primary asset" approach to determine the
cash flow estimation period for groups of assets and liabilities. SFAS 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years, with early application encouraged. The Company
believes that adoption of SFAS 144 will not have a material impact on its
financial position or results of operations.
OTHER FACTORS
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.
The Company continues to experience severe cash flow problems resulting from
reduced sales and slow collections. Further, the Company's independent auditors
have included a paragraph in their opinion which indicates that, based on recent
operating losses, along with existing working capital and accumulated deficits,
there is substantial doubt about the Company's ability to continue as a going
concern. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Company's latest Annual Report on Form 10-K
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 latest Annual Report on Form 10-K.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
A supplier of parts for the Company's integrated access device product line has
filed an action against the Company. The Plaintiff seeks $96,581 for goods sold
and delivered, $280,662 for goods allegedly manufactured but not yet delivered
and $380,015 for parts allegedly ordered by Plaintiff to fulfill anticipated
orders. The Company filed its answer to the complaint, is presently engaged in
discovery and intends to vigorously defend this case.
On January 29, 2001, two individuals holding subordinated senior notes totaling
$1,000,000 commenced an action in the Circuit Court, Cook County, Illinois
against the Company, Cronus, certain former principal shareholders of Cronus and
a liquidating trust established by Cronus and its trustees seeking repayment of
the notes, together with accrued interest. The Company settled the principal
claims on November 30, 2001. In accordance with the terms and conditions of the
settlement agreement, the Company will issue to each of these individuals
$625,000 in common stock and $62,500 in warrants to purchase shares of the
Company's common stock at a premium to current market price. The Company has
filed a registration statement with the U.S. Securities and Exchange Commission,
which registers these and other shares issued to a third former creditor of
Cronus, among others. The Company recorded a $241,667 extraordinary loss
associated with this transaction in the current fiscal quarter.
The three remaining co-defendants in this lawsuit have filed cross-claims for
indemnification against the Company. The Company has denied liability for
indemnification in the circumstances of the lawsuit. The Company has filed
answers, which include counterclaims, to each claim for indemnity.
From time to time the Company is the subject of claims by trade creditors. Two
such claims, which may be deemed material, have been filed against the Company
by two suppliers of parts. One has been settled and is awaiting implementation
of a pay-out schedule and the other, which was recently filed by a supplier of
parts to the Company's former ChanlComm division, is pending. The Company filed
its answer to the complaint and intends to vigorously defend this case.
No other material legal proceeding to which the Company is party or to which the
Company is subject is pending and no such proceeding is known by the Company to
be contemplated.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FASTCOMM COMMUNICATIONS CORPORATION
(Registrant)
/s/ Peter C. Madsen
Date: March 12, 2002 By: __________________________
Peter C. Madsen
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Mark H. Rafferty
Date: March 12, 2002 By: __________________________
Mark H. Rafferty
Vice President, Chief Financial Officer
Treasurer, Secretary and Director
(Principal Financial and Accounting Officer)
19