<PAGE> 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 November 1, 1997 .
----------------------------------
[ ] 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
-----------------------------------
(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 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 December 5, 1997, there were 10,094,065 shares of the Common Stock, par
value $.01 per share, of the registrant outstanding.
No exhibits are filed with this report, which consists of 13 consecutively
numbered pages.
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FASTCOMM COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations
Fiscal quarter and two fiscal quarters ended November 1, 1997
and November 2, 1996..................................................................3
Consolidated Balance Sheets
November 1, 1997 and April 30, 1997....................................................4
Consolidated Statements of Cash Flows
Fiscal quarter and two fiscal quarters ended November 1, 1997
and November 2, 1996..................................................................5
Notes to Consolidated Financial Statements...........................................6-7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations..........................................................................8-11
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................................12
SIGNATURES....................................................................................................13
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
------------------------------------- -----------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue $ 1,502,224 $ 1,647,239 $ 3,504,172 $ 5,438,405
Expenses
Cost of sales 997,536 601,731 1,906,367 2,401,815
Selling, general and administrative 1,770,134 1,253,637 3,508,101 2,354,925
Research and development 562,205 425,606 1,177,721 865,245
Depreciation and amortization 131,427 61,866 258,969 133,471
------------------- ---------------- ---------------- ----------------
Loss from operations (1,959,078) (695,601) (3,346,986) (317,051)
Other income (expense)
Other income 22,012 23,074 37,166 21,312
Interest income 50,609 38,900 107,704 75,790
Interest expense (96,476) (1,776) (161,159) (9,896)
Imputed discount on convertible debentures (330,000) (330,000)
Net loss $ (2,312,933) $ (635,403) $ (3,693,275) $ (229,845)
================== ================ ================ ================
Loss per share
Primary ($0.23) ($0.06) ($0.37) ($0.02)
Fully diluted ($0.23) ($0.06) ($0.37) ($0.02)
Weighted average number of shares
Primary 10,055,956 9,865,430 10,048,177 9,836,185
Fully diluted 10,055,956 9,865,430 10,048,177 9,836,185
</TABLE>
See accompanying notes to unaudited consolidated financial statements
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
November 1, April 30,
1997 1997
----------------- -----------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 4,112,858 $ 4,036,336
Accounts receivable, net 1,532,443 3,148,801
Inventories, net 3,669,075 2,897,497
Prepaid and other 372,768 329,503
----------------- -----------------
9,687,144 10,412,137
Property and equipment, net 903,878 815,401
Deferred financing costs 272,594 190,279
Software license, rights and other intangibles 143,838 166,474
Notes receivable 300,000 300,000
Goodwill, net 519,312 569,165
Other assets 185,805 168,759
----------------- -----------------
$ 12,012,571 $ 12,622,215
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long term debt $ 29,000
Accounts payable $ 1,884,610 1,277,541
Accrued payroll 183,603 207,290
Other current liabilities 530,839 349,666
----------------- -----------------
2,599,052 1,863,497
Convertible debentures 4,750,000 3,000,000
----------------- -----------------
7,349,052 4,863,497
----------------- -----------------
Shareholders' equity
Common stock, $.01 par value, 100,941 100,380
(25,000,000 shares authorized; 10,094,065 and
10,038,022 issued and outstanding)
Additional paid in capital 16,676,870 16,079,355
Accumulated deficit (12,114,292) (8,421,017)
----------------- -----------------
Total shareholders' equity 4,663,519 7,758,718
----------------- -----------------
$ 12,012,571 $ 12,622,215
================= =================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
---------------------------------- --------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (2,312,933) $ (635,403) $ (3,693,275) $ (229,845)
Items not affecting cash
Depreciation and amortization 131,427 61,866 258,969 133,471
Provision for doubtful accounts 15,000 50,688 140,000 50,688
Provision for inventory obsolescence 175,000 250,000
Non cash interest expense on debentures 62,500 125,000
Imputed discount on convertible debentures 330,000 330,000
Changes in assets and liabilities
Accounts receivable 291,549 365,360 1,476,358 369,791
Inventories (413,106) (1,416,684) (1,021,578) (1,697,534)
Prepaid and other current assets (476) 23,203 (43,266) (3,015)
Other non current assets (1,586) (2,338) (17,046) (2,708)
Accounts payable and accrued liabilities 144,989 636,040 575,107 392,810
Other current liabilities 38,310 (52,747) 56,173 (176,883)
----------------- --------------- --------------- ---------------
Net cash used by operations (1,539,326) (970,015) (1,563,558) (1,163,225)
----------------- --------------- --------------- ---------------
Investing activities
Additions of property, plant and equipment (115,880) (89,422) (255,267) (194,877)
Purchase of long term investments (69,531)
----------------- --------------- --------------- ---------------
Net cash used by investing activities (115,880) (89,422) (255,267) (264,408)
----------------- --------------- --------------- ---------------
Financing activities
Proceeds from the issuance of convertible debentures 2,000,000
Payment of deferred financing costs (100,000)
Net proceeds from exercise of options 6,250 243,342 24,347 443,619
Repayment of notes payable (29,000) (71,585)
----------------- --------------- --------------- ---------------
Net cash provided by financing activities 6,250 243,342 1,895,347 372,034
----------------- --------------- --------------- ---------------
Net increase in cash and equivalents (1,648,956) (816,095) 76,522 (1,055,599)
Cash and cash equivalents, beginning of period 5,761,814 3,568,351 4,036,336 3,807,855
----------------- --------------- --------------- ---------------
Cash and cash equivalents, end of period $ 4,112,858 $ 2,752,256 $ 4,112,858 $ 2,752,256
================= =============== =============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
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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, 1998.
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 quarters ended
November 1, 1997, and November 2, 1996, 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 ended November 1, 1997, and
November 2, 1996, 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:
<TABLE>
<CAPTION>
November 1, April 30,
1997 1997
---------------------------------
<S> <C> <C>
Production materials $ 2,029,191 $ 1,615,875
Work in process 237,989 160,991
Finished goods 1,401,895 1,120,631
-------------- --------------
$ 3,669,075 $ 2,897,497
============== ==============
</TABLE>
4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The quarter ended November 1, 1997, includes sales of $259,000 representing
17% of total revenues to one unrelated third party domestic corporations. As of
November 1, 1997, accounts receivable includes $ 169,000 due from this
corporation. The two fiscal quarters ended November 1, 1997, includes sales of
$812,000 and $318,000 representing 23% and 10% to two unrelated domestic
corporations. As of November 1, 1997, accounts receivable includes $169,000 and
$296,000, respectively, due from these corporations. As of the date of this
report, accounts receivable includes $ 48,000 and $192,000, respectively, due
from these corporations.
5. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to
uncertainty over the level of earnings in fiscal 1998. 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.
6
<PAGE> 7
6. CONVERTIBLE DEBENTURES
In April 1997, the Company issued $3,000,000 in 5.0% Convertible Debentures
due April 2001. For the first 180 days following the issuance, the debentures
were convertible at the option of the holder into common stock at a conversion
price equal to the average closing bid price on NASDAQ ten trading days prior to
conversion. If the conversion occurs more than 180 days after issuance, the
conversion price is the lesser of 125% of the average closing bid prices on
NASDAQ for the ten trading days prior to issuance, or, 90% of the average
closing bid prices on NASDAQ for the ten trading days prior to the conversion
date. In addition, if the conversion occurs more than 180 days after issuance,
the holder will receive one warrant for every five shares of common stock
received upon conversion of the debentures. If the conversion occurs more
than 360 days from the date of issuance, the holder will receive one warrant for
every 2 1/2 common shares received upon conversion of the debentures. Each
warrant will have a strike price set at 125% of the market price of the
Company's common stock at the time of conversion.
Subsequent to April 30, 1997, the Company issued an additional $2,000,000 in 5%
Convertible Debentures, in May 1997, due May 2001, under terms substantially
similar to that of the $3,000,000 issuance described above
The terms of the Convertible Debentures provide for conversion at a discount to
the market commencing 181 days after issuance. The value of the discount, using
a conversion price of 90% of the average closing bid prices on NASDAQ for the
ten trading days prior to the conversion date, is approximately $550,000. Based
on the foregoing, the Company is required to determine and recognize on the
181st day from issuance the amount of the conversion discount. This discount
will reduce income available to common share holders during fiscal 1998 by a
minimum of $550,000 in the form of two non-cash charges to interest expense.
During its fiscal quarter ended November 1, 1997, the Company recognized
$330,000 ($.03 per share) of such charges. The remaining $220,000 will be
recognized in the fiscal quarter ended January 31, 1998.
7. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CONVERTIBLE DEBENTURES
In April 1997, the Company issued $3,000,000 in 5.0% Convertible Debentures due
April 2001. For the first 180 days following the issuance, the debentures were
convertible at the option of the holder into common stock at a conversion price
equal to the average closing bid price on NASDAQ ten trading days prior to
conversion. If the conversion occurs more than 180 days after issuance, the
conversion price is the lesser of 125% of the average closing bid prices on
NASDAQ for the ten trading days prior to issuance, or, 90% of the average
closing bid prices on NASDAQ for the ten trading days prior to the conversion
date. In addition, if the conversion occurs more than 180 days after issuance,
the holder will receive one warrant for every five shares of common stock
received upon conversion of the debentures. If the conversion occurs more than
360 days from the date of issuance, the holder will receive one warrant for
every 2 1/2 common shares received upon conversion of the debentures. Each
warrant will have a strike price set at 125% of the market price of the
Company's common stock at the time of conversion.
Subsequent to April 30, 1997, the Company issued an additional $2,000,000 in 5%
Convertible Debentures, in May 1997, due May 2001, under terms substantially
similar to that of the $3,000,000 issuance described above
The terms of the Convertible Debentures provide for conversion at a discount to
the market commencing 181 days after issuance. The value of the discount, using
a conversion price of 90% of the average closing bid prices on NASDAQ for the
ten trading days prior to the conversion date, is approximately $550,000. Based
on the foregoing, the Company is required to determine and recognize on the
181st day from issuance the amount of the conversion discount. This discount
will reduce income available to common share holders during fiscal 1998 by a
minimum of $550,000 in the form of two non-cash charges to interest expense.
During its fiscal quarter ended November 1, 1997, the Company recognized
$330,000 ($.03 per share) of such charges. The remaining $220,000 will be
recognized in the fiscal quarter ended January 31, 1998.
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
----------------------------------- ----------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---------------- ------------- ------------- -------------
<S> <C> <C> <C>
$1,502,224 $1,647,239 $3,504,172 $5,438,405
</TABLE>
Total revenues decreased $500,000 (25%) compared with that of the previous
quarter. This decrease is primarily attributable to a decrease in unit sales of
frame relay access devices ($966,000 in the current fiscal quarter as compared
with $1,268,000 in the previous fiscal quarter). This decrease is further
attributable a decline in sales by the Company's Comstat Datacomm division that
was acquired in January 1997. Sales generated by this division totaled $402,000
in the Company's current fiscal quarter compared with $613,000 in the previous
fiscal quarter.
Total revenues decreased $145,000 (9%) when compared with the corresponding
quarter of the previous fiscal year. This decrease is primarily attributable to
a decrease in unit sales of frame relay access devices ($966,000 in the current
fiscal quarter as compared with $1,388,000 in the second quarter of the
previous fiscal year). This decrease is further attributable to a decline in
unit sales of data controllers ($71,000) and data compression products offset
by $402,000 in sales by the Company's Comstat Datacomm division that was
acquired in January 1997.
On a fiscal year to date basis, total revenues decreased $1,934,000 compared
with that of the corresponding period of the previous fiscal year. This
decrease is primarily attributable to a decrease in unit sales of frame relay
access devices ($2,427,000). This decline is further attributable to decreases
in sales of analog modems ($157,000), data compression products ($187,000) and
data controllers ($104,000). Revenue decreases were offset by $1,013,000 in
sales generated by the Company's Comstat Datacomm division that was acquired in
January 1997.
On a fiscal year to date basis, the decline in revenue reflects the completion
of the initial phases of the Company's two largest contracts to date. The
Company continues to focus on similar projects and is actively engaged in
discussions with several large resellers worldwide, each of which has multiple
end user opportunities. The Company can give no assurance as to the outcome of
such negotiations.
The quarter ended November 1, 1997, includes sales of $259,000 representing 17%
of total revenues to one unrelated third party domestic corporation. The two
fiscal quarters ended November 1, 1997, includes sales of $812,000 and $318,000
to
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<PAGE> 9
two unrelated domestic corporations representing 23% and 10% of year to date
revenues respectively.
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
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
------------------------------------- -------------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cost of sales $ 997,536 $ 601,731 $ 1,906,367 $ 2,401,815
Gross margin 34% 63% 46% 56%
</TABLE>
The decline in gross margin is primarily attributable to an increase in fixed
manufacturing costs as a percentage of gross sales and an increase in the sale
of voice frame relay access products as a percentage of gross sales. The voice
products, which were not available in the previous fiscal year, are produced by
another manufacturer and as such generate a significantly lower gross margin
when compared with that of data products. Gross margins were also negatively
impacted by lower sales of data frame relay access products that generate
relatively higher gross margins. The Company anticipates continued sales of
voice frame relay products. Further, the Company recorded a $175,000 increase
in its reserve for inventory obsolescence during the quarter ended November 1,
1997.
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
- ---------------------------------------- --------------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
- ----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$ 1,770,134 $ 1,253,637 $ 3,508,101 $ 2,354,925
</TABLE>
Selling, general and administrative expenses increased $516,000 or (41%) over
that of the corresponding quarter in the previous fiscal year. This is
primarily attributable to increased sales compensation costs associated with
increased sales headcount ($63,000), costs associated with the new European
headquarters ($30,000), increased advertising and promotion costs ($160,000);
increased office and communication costs associated with international selling
efforts and upgrades to the Company's communications infrastructure ($49,000),
costs assumed as part of the acquisition of Comstat Datacomm ($108,000) and
increased legal fees ($175,000).
On a fiscal year to date basis, selling, general and administrative expenses
increased $1,153,000 or (49%) over that of the corresponding quarter in the
previous fiscal year. This increase is primarily attributable to increased
sales compensation costs associated with increased sales headcount offset by a
decline in commission expenses associated with a decline in sales ($108,000
net); costs associated with the new European headquarters ($30,000), increased
advertising and promotion costs ($257,000); increased travel associated with
trade shows and international selling activities ($106,000); increased office
and communication costs associated with international selling efforts, costs
assumed as part of the acquisition of Comstat Datacomm and an upgrade of the
Company's communications infrastructure ($231,000); and increased legal fees
($256,000). During the first two quarters of the current fiscal year, the
Company recorded a $140,000 increase in its reserve for bad debts. The
Company's bad debt reserve totals $250,000.
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
- -------------------------------------- ---------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
- ------------------- ----------------- --------------- ---------------
<S> <C> <C> <C>
$ 562,205 $ 425,606 $ 1,177,721 $ 865,245
</TABLE>
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. Further, such expenses include costs
assumed as part of the January 1997 acquisition of Comstat Datacomm
Corporation.
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<PAGE> 10
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.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
- ----------------------------------- -----------------------------------
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
- --------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
$ 131,427 $ 61,866 $ 258,969 $ 133,471
</TABLE>
The increase in depreciation and amortization expenses is primarily
attributable to the amortization of goodwill associated with the acquisition of
Comstat Datacomm, depreciation of Comstat fixed assets and depreciation
associated with other fixed asset additions.
LIQUIDITY AND CAPITAL RESOURCES
At November 1, 1997, the Company had $4,113,000 in cash and cash equivalents.
Working capital decreased from $9.1 million at August 2, 1997 to $7.1 million
at November 1, 1997. At November 1, 1997, the Company had a current ratio of
3.7 to one.
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.
During the prior fiscal year, the Company closed a $5 million private
convertible debenture offering. The securities were purchased under Regulation
D by institutional investors. The Company intends to seek shareholder approval
of a new class of Series A Convertible Preferred Stock and, assuming such
shareholder approval, exercise its right to convert all the aforementioned
debentures into Series A Convertible Preferred Stock. Both the debenture and
the related preferred stock earn a 5% dividend payable in common stock or cash
at the option of the Company. The Company received $3 million from this
offering in April 1997. The remaining $2 million was received during the prior
fiscal quarter in May 1997.
The terms of the Convertible Debentures provide for conversion at a discount to
the market commencing 181 days after issuance. The value of the discount, using
a conversion price of 90% of the average closing bid prices on NASDAQ for the
ten trading days prior to the conversion date, is approximately $550,000. Based
on the foregoing, the Company is required to determine and recognize on the
181st day from issuance the amount of the conversion discount. This discount
will reduce income available to common share holders during fiscal 1998 by a
minimum of $550,000 in the form of two non-cash charges to interest expense.
During its fiscal quarter ended November 1, 1997, the Company recognized
$330,000 ($.03 per share) of such charges. The remaining $220,000 will be
recognized in the fiscal quarter ended January 31, 1998
SECOND FISCAL QUARTER OF 1998 COMPARED TO SECOND FISCAL QUARTER OF 1997
Cash used by operations increased from $970,000 in the quarter ended November
2, 1996, to $1,539,000 in the quarter ended November 1, 1997. The $569,000
increase is primarily attributable to the increase in net loss for the quarter
and the paydown of accounts payable balances offset by reduced inventory
purchases and higher non cash expenditures associated with depreciation and
amortization, inventory and accounts receivable reserves and $330,000 in imputed
interest on convertible debentures.
Cash used by investing activities totaled $116,000 in the current fiscal
quarter. This utilization of cash was primarily attributable to fixed asset
purchases required to develop and produce new products and improvements to the
Company's communications infrastructure.
TWO FISCAL QUARTERS ENDED NOVEMBER 1, 1997 COMPARED TO TWO FISCAL QUARTERS
ENDED NOVEMBER 2, 1996
Cash used by operations increased from $1,163,000 in the quarter ended
November 1, 1996, to $1,564,000 in the quarter ended November 1, 1997. The
$401,000 increase is primarily attributable to the $3.6 million year to date
loss offset by improved accounts receivable balances and reduced inventory
purchases. Cash used by operation was further reduced by higher non cash
expenditures associated with depreciation and amortization, inventory and
accounts receivable reserves and $330,000 in imputed interest on convertible
debentures.
Cash used by investing activities totaled $255,000. This utilization of cash
was primarily attributable to fixed asset purchases required to develop and
produce new products and improvements to the Company's communications
infrastructure.
Cash provided by financing activities is primarily attributable to $2,000,000
in proceeds received, in the Company's first
10
<PAGE> 11
fiscal quarter, as part of the $5 million convertible debenture offering
previously discussed.
INVENTORIES
The Company's inventory balances increased $413,000 in the current fiscal
quarter. This increase is primarily attributable to increased frame relay
product subassemblies required to support anticipated sales that did not
materialize. The Company also purchased a significant amount of voice over
frame relay product to take advantage of volume discounts offered by the
original equipment manufacturer of these products. The Company sees the demand
for voice product increasing, particularly in the international marketplace.
In the current fiscal quarter, the Company increased its reserve for inventory
obsolescence from $575,000 to $750,000. 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 decreased $1,733,000 in the current quarter and decreased
$3,095,000 on a fiscal year to date basis. The decreases are primarily
attributable to the net losses incurred in each of the first two quarters of
the current fiscal year.
INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to
uncertainty over the level of earnings in fiscal 1998. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) 130, "Reporting
Comprehensive Income", establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS 130 requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS 131, "Disclosure about Segments of a Business Enterprise," establishes
standards for the way that public enterprises report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS 131 defines
operating segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance.
Both of these new standards are effective for financial statements for periods
beginning after December 15, 1997, and require comparative information for
earlier years to be restated. Due to the recent issuance of these standards,
management has been unable to fully evaluate the impact, if any, they may have
on future financial statement disclosures.
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.
11
<PAGE> 12
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
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 with the SEC Staff.
The Company is a party to two lawsuits that initially included four claims
filed by a former officer and director, Gary H. Davison. Davison commenced
these actions on March 13, 1997, in the Circuit Court of Fairfax County,
Virginia. On May 19, 1997, one claim was non-suited and a second claim was
dismissed with prejudice. The remaining two claims, wrongful termination and
breach of contract are subject to continuing litigation.
The Company's position is that Mr. Davison's allegations with respect to
wrongful termination are without legal or factual basis. As to Mr. Davison's
claim for breach of contract, it is based in part upon an alleged agreement
between himself and the Company concerning the immediate vesting to him of
options to purchase 100,000 shares of FastComm common stock on the date he
began employment with FastComm. The Company has provided Davison's counsel with
documents signed by Davison and filed with the U.S. Securities and Exchange
Commission on which Davison did not report the existence of any such agreement,
as he would have been obligated to do under federal securities law. These
documents, therefore, appear to be entirely inconsistent with the allegations
in Davison's complaint. The Company believes that it has meritorious defenses
to these lawsuits and intends to defend these actions vigorously.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
FASTCOMM COMMUNICATIONS CORPORATION
(Registrant)
/s/ Peter C. Madsen
Date: December 16, 1997 By:
---------------------------
Peter C. Madsen
President, Chief Executive Officer
and Chairman of the Board of
Directors (Principal Executive Officer)
/s/ Mark H. Rafferty
Date: December 16, 1997 By:
---------------------------
Mark H. Rafferty
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
13
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