<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 October 31, 1998 .
----------------------------------
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from to
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- -----------------------------------
Commission file number 0-17168 .
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FASTCOMM COMMUNICATIONS CORPORATION
-----------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1289115 .
- -------------------------------- -----------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation of Organization) Identification No.)
45472 Holiday Drive
Sterling, Virginia 20166
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(Address of principal executive offices, Zip code)
(703) 318-7750
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(Registrants telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
As of December 10, 1998, there were 12,506,826 shares of the Common Stock, par
value $.01 per share, of the registrant outstanding.
No exhibits are filed with this report, which consists of 12 consecutively
numbered pages.
<PAGE> 2
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
October 31, 1998 and November 1, 1997.........................................3
Consolidated Balance Sheets
October 31, 1998, and April 30, 1998..........................................4
Consolidated Statements of Cash Flows
Fiscal quarter and two fiscal quarters
ended October 31, 1998 and November 1, 1997...................................5
Notes to Consolidated Financial Statements....................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................7-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings............................................................11
SIGNATURES...............................................................................12
</TABLE>
2
<PAGE> 3
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
--------------------------------------- --------------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Revenue $ 1,205,474 $ 1,502,224 $ 2,335,349 $ 3,504,172
Expenses
Cost of sales 536,191 997,536 1,148,032 1,906,367
Selling, general and administrative 1,171,876 1,770,134 2,741,714 3,508,101
Research and development 652,667 562,205 1,355,123 1,177,721
Depreciation and amortization 114,444 131,427 229,631 258,969
Litigation settlement - - 7,970 -
------------------ ------------------ ----------------- -----------------
Loss from operations (1,269,704) (1,959,078) (3,147,121) (3,346,986)
Other income (expense)
Other income - 22,012 - 37,166
Interest income 5,087 50,609 15,276 107,704
Interest expense (30,187) (96,476) (58,053) (161,159)
Imputed interest on debenture discount - (330,000) - (330,000)
Loss before reorganizational items (1,294,804) (2,312,933) (3,189,898) (3,693,275)
Reorganizational items:
Professional fees 216,875 - 326,934 -
Interest earned on accumulated cash
resulting from Chapter 11 proceeding (7,731) - (12,885) -
------------------ ------------------ ----------------- -----------------
209,144 - 314,049 -
Net loss $ (1,503,948) $ (2,312,933) $ (3,503,947) $ (3,693,275)
================== ================== ================= =================
Loss per share
Basic ($0.12) ($0.23) ($0.29) ($0.37)
Diluted ($0.12) ($0.23) ($0.29) ($0.37)
Weighted average number of shares
Basic 12,314,715 10,055,956 12,294,000 10,048,177
Diluted 12,314,715 10,055,956 12,294,000 10,048,177
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE> 4
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
---------------------- -------------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 640,179 $ 1,213,052
Accounts receivable, net 1,098,986 3,126,100
Inventories, net 3,307,428 3,118,195
Prepaid and other 310,424 374,614
---------------------- -------------------
5,357,017 7,831,961
Property and equipment, net 638,375 775,457
Deferred financing costs 38,172 76,344
Notes receivable 26,400 26,400
Goodwill, net 438,634 482,144
Other assets 45,323 33,723
---------------------- -------------------
$ 6,543,921 $ 9,226,029
====================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 475,342 $ 2,427,712
Accrued payroll 193,904 308,109
Other current liabilities 642,855 843,178
Accrued litigation settlement - 1,195,560
---------------------- -------------------
1,312,101 4,774,559
Liabilities subject to compromise (a) 4,911,014 -
Convertible debentures - 1,205,299
---------------------- -------------------
1,312,101 5,979,858
---------------------- -------------------
Shareholders' equity
Common stock, $.01 par value, 125,765 120,488
(25,000,000 shares authorized; 12,506,826 and
12,048,753 issued and outstanding)
Additional paid in capital 21,209,503 20,636,197
Accumulated deficit (21,014,462) (17,510,514)
---------------------- -------------------
Total shareholders' equity 320,806 3,246,171
---------------------- -------------------
$ 6,543,921 $ 9,226,029
====================== ===================
(a) Liabilities subject to compromise:
Accounts payable $ 3,052,185 $ -
Accrued litigation settlement 1,203,530 -
Convertible debentures 655,299 -
---------------------- -------------------
$ 4,911,014 $ -
====================== ===================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
------------------------------------- ----------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
----------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C>
Operating activities
Net loss $ (1,503,948) $ (2,312,933) $(3,503,947) $(3,693,275)
Items not affecting cash
Depreciation and amortization 114,444 131,427 229,631 258,969
Provision for doubtful accounts 14 15,000 14 140,000
Provision for inventory obsolescence 53,840 175,000 53,840 250,000
Non cash interest expense on debentures 7,084 62,500 28,583 125,000
Amortization of deferred financing costs 19,086 - 38,172 -
Provision for litigation loss - - 7,970 -
Imputed discount on convertible debentures - 330,000 - 330,000
Changes in assets and liabilities
Accounts receivable 192,804 291,549 2,027,101 1,476,358
Inventories 84,279 (413,106) (243,073) (1,021,578)
Prepaid and other current assets 21,617 (476) 64,190 (43,266)
Other non current assets - (1,586) - (17,046)
Accounts payable and accrued liabilities (120,677) 144,989 509,531 575,107
Other current liabilities 275,755 38,310 264,155 56,173
----------------- ---------------- -------------- ---------------
Net cash used by operations (855,702) (1,539,326) (523,833) (1,563,558)
----------------- ---------------- -------------- ---------------
Investing activities
Additions of plant and equipment (34,762) (115,880) (49,040) (255,267)
----------------- ---------------- -------------- ---------------
Net cash used by investing activities (34,762) (115,880) (49,040) (255,267)
----------------- ---------------- -------------- ---------------
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 - 24,347
Repayment of notes payable - - - (29,000)
----------------- ---------------- -------------- ---------------
Net cash provided by financing activities - 6,250 - 1,895,347
----------------- ---------------- -------------- ---------------
Net increase in cash and equivalents (890,464) (1,648,956) (572,873) 76,522
Cash and cash equivalents, beginning of period 1,530,643 5,761,814 1,213,052 4,036,336
----------------- ---------------- -------------- ---------------
Cash and cash equivalents, end of period $ 640,179 $ 4,112,858 $ 640,179 $ 4,112,858
================= ================ ============== ===============
Supplemental cash flow disclosure:
Reorganizational items affecting cash
Professional fees paid $ 114,451 $ - $ 199,451 $ -
Interest received on accumulated cash
resulting from Chapter 11 proceeding (7,731) - (12,885) -
----------------- ---------------- -------------- ---------------
$ 106,720 $ - $ 186,566 $ -
================= ================ ============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE> 6
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, 1999.
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
October 31, 1998 and November 1, 1997 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 October 31, 1998 and November
1, 1997, 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>
October 31, April 30,
1998 1998
----------------------------
<S> <C> <C>
Production materials $ 1,890,535 $ 1,547,922
Work in process 329,855 336,680
Finished goods 1,087,038 1,233,593
------------ -------------
$ 3,307,428 $ 3,118,195
============ =============
</TABLE>
4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The quarter ended October 31, 1998 and the two fiscal quarters ended October 31,
1998 include sales of $466,000 and $560,000 respectively representing 36.5% and
23.3% of total revenues to one unrelated third party domestic corporation. As of
October 31, 1998, accounts receivable includes $243,000 due from this
corporation. As of the date of this report, accounts receivable includes $29,000
due from this corporation.
5. INCOME TAXES
The Company has estimated its annual effective tax rate at 0% due to uncertainty
over the level of earnings in fiscal 1999. 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PETITION FOR REORGANIZATION UNDER CHAPTER 11
On June 2, 1998, the Company filed a voluntary petition for reorganization under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor. (See Part II. Item 1. Legal
Proceedings) The Company has filed its Schedules and Statements of Financial
Affairs in accordance with the requirements of the Bankruptcy Code and is
current with its monthly operating reports. The Company continues to operate
under Bankruptcy Court protection from its pre petition creditors.
Chapter 11 provides that, unless the court appoints a trustee, the Company has
the exclusive right to file a plan of reorganization for the first 120 days
subsequent to the filing of the petition (or for such longer or shorter period
as the Bankruptcy Court may permit). The Company was granted an extension and,
on October 21, 1998, it submitted its plan of reorganization to the Bankruptcy
Court (the "Plan"). The Company is currently working on amendments which
includes certain amendments requested by the creditors committee. The Plan is
subject to the approval of the Bankruptcy Court. The approval of the Plan is
dependent on the Company's ability to demonstrate that it will be able to meet
its obligations, return to profitability, generate positive cash flow or raise
new capital. The Company can offer no assurance as to whether its Plan will be
approved, or that, if approved, the terms and conditions of the Plan will be
favorable to its creditors and shareholders.
The Company currently plans to file its amended Plan no later than December 21,
1998 and hopes to emerge from Chapter 11 protection during January 1999.
THE COMPANY CAN OFFER NO ASSURANCE AS TO WHETHER THIS PLAN WILL BE APPROVED, OR
THAT, IF APPROVED, THE TERMS AND CONDITIONS OF THE PLAN WILL BE FAVORABLE TO ITS
CREDITORS AND SHAREHOLDERS. If the Company is unable to attain approval of its
plan any creditor or party in interest may file a competing plan of
reorganization. If the court approves such plan, control of the Company might
transfer to the proponents of the competing plan. The Company is unaware of any
efforts to prepare a competing plan of reorganization, however it can offer no
assurances as to whether one might be prepared in the future.
FUTURE PROSPECTS
On a forward-looking basis and at such time as its plan of reorganization is
approved by the court, the Company anticipates improved sales of data based
frame relay products. Current and prospective customers have indicated that they
are holding orders pending the outcome of the Chapter 11 proceeding. It is
currently making changes to its Quick product line that will qualify this
product for larger and enhanced distribution channels. The Company anticipates
that sales related to its license agreement with KG Data will generate
significant revenues commencing with the later part of its fiscal year ended
April 30, 1999. The Company has changed its organizational structure and reduced
headcount. As a result, spending levels have declined sharply.
The Company anticipates that it will require additional funding to meet
operating requirements, future expansion and research and development expenses.
It is anticipated that such funding will be generated by way of additional
placements of equity, through research and development arrangements funded by
third parties and by asset based lending facilities. The Company is in contact
with asset based lenders. 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 anticipates significant legal expenses associated with its
reorganization and other legal affairs. On a fiscal year to date basis, these
costs totaled $327,000. The Company is unable to estimate future costs
associated with these actions. Assuming the plan is approved, the Company
anticipates a return to profitability, on a current operating basis, in the
later part of its fiscal year ended April 30, 1999.
There can be no assurance that the required increased sales and improved
operating efficiencies necessary to return to profitability will materialize or
if they do, the Company will be able to raise sufficient funding to finance its
working capital needs. Absent a return to profitability or the receipt of
additional capital, FastComm is unlikely to be able to operate and meet its
obligations throughout fiscal year 1999.
7
<PAGE> 8
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
--------------------------- -------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C>
$1,205,474 $1,502,224 $2,335,349 $3,504,172
</TABLE>
The Company believes that its filing a petition for reorganization under Chapter
11 has negatively impacted its ability to sell its products in the market place
in the near term. The Company's selling efforts have been further hindered by
delays in certain foreign markets, primarily Korea, and planned volume orders.
Total revenues increased $76,000 compared with that of the previous quarter and
decreased $297,000 (20%) when compared with the corresponding quarter of the
previous fiscal year. This decrease is primarily attributable to a decrease in
unit sales of voice frame relay access devices ($38,000 in the current fiscal
quarter as compared with $451,000 in the second fiscal quarter of the previous
fiscal year). This decline was offset by a $144,000 increase in the sale of
Quick products.
On a fiscal year to date basis, total revenues declined $1,169,000 compared with
that of the corresponding period of the previous fiscal year. This decrease is
primarily attributable to decreases in unit sales of data and voice frame relay
access devices ($1,341,000) offset by an increase in unit sales of data
compression products ($120,000).
The Company is 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 discussions.
The quarter ended October 31, 1998 and the two fiscal quarters ended October 31,
1998 include sales of $466,000 and $560,000 respectively representing 36.5% and
23.3% of total revenues to one unrelated third party domestic corporation.
A significant portion of the Company's sales are derived from products shipped
against firm purchase orders received in each fiscal quarter and from products
shipped against firm purchase orders released in that quarter. Unforeseen delays
in product deliveries or the closing of sales, introduction of new products by
the Company or its competitors, supply shortages, varying patterns of customer
capital expenditures or other conditions affecting the digital access product
industry or the economy during any fiscal quarter could cause quarterly revenue
and net earnings to vary greatly.
COST OF GOODS SOLD AND GROSS MARGIN
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
-------------------------- ------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Cost of sales $ 536,191 $ 997,536 $ 1,148,032 $ 1,906,367
Gross margin 56% 34% 51% 46%
</TABLE>
The increase in gross margin is primarily attributable to an increase in the
sales of the Quick product line as a percentage of total sales. Quick products
generate a relatively high gross margin, approximately 72%. Further, the Company
recorded a $175,000 increase in its reserve for inventory obsolescence during
the quarter ended November 1, 1997, which negatively impacted gross margin
during that quarter.
8
<PAGE> 9
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
------------------------- -----------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------ ----------- ------------ -------------
<S> <C> <C> <C>
$ 1,171,876 $ 1,770,134 $ 2,741,714 $ 3,508,101
</TABLE>
Selling, general and administrative expenses decreased $598,000 or (34%) when
compared with that of the corresponding quarter in the previous fiscal year.
This decrease is primarily attributable to reduced advertising and promotion
costs ($242,000); reduced legal and professional fees ($226,000); reduced salary
and related costs associated with a decline in headcount ($68,000) and reduced
costs associated with the closing of the Company's Australia sales office
($20,000).
On a fiscal year to date basis, selling, general and administrative expenses
decreased $766,000 or 22% when compared with that of the corresponding period of
the previous fiscal year. This decrease is primarily attributable to reduced
advertising and promotion costs ($378,000); reduced legal and professional fees
($226,000); reduced costs associated with the closing of the Company's Australia
sales office ($40,000) and a decline in bad debt expense ($133,000).
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Fiscal quarter ended Two fiscal quarters ended
-------------------------- ---------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
------------- ----------- ------------ ------------
<S> <C> <C> <C>
$ 652,667 $ 562,205 $ 1,355,123 $ 1,177,721
</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 associated with the KG Data/ChanlComm product line.
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
The Company's autodialer patent was fully depreciated during the previous fiscal
year, which accounts for the decline in depreciation and amortization.
REORGANIZATIONAL ITEMS
During the quarter ended October 31, 1998, the Company incurred $217,000 in
expenses associated with its reorganization under Chapter 11. On a fiscal year
to date basis, these costs totaled $327,000. Such expenses primarily consisted
of legal fees and the costs of financial consulting services.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the Company had $640,000 in cash. During the current fiscal
quarter, working capital decreased from $5.4 million at August l, 1998 to $4.1
million at October 31, 1998. At October 31, 1998, the Company had a current
ratio of 4.4 to one. These measures of liquidity have been positively benefited
by the reclassification of pre petition accounts payable ($3,052,000), accrued
litigation settlement ($1,203,000) and convertible debenture ($655,000) balances
to liabilities subject to compromise.
On June 2, 1998, the Company filed a voluntary petition for reorganization under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor. (See Part II. Item 1. Legal
Proceedings) The Company continues to operate under bankruptcy court protection
from its pre petition creditors. On October 21, 1998, the Company submitted its
plan of reorganization to the Bankruptcy Court and is currently working on
amendments which includes certain amendments requested by the creditors
committee.
9
<PAGE> 10
As a result of this petition for reorganization, pre petition accounts payable
($3,052,000), accrued litigation settlement ($1,203,000) and convertible
debenture ($655,000) balances were reclassified to liabilities subject to
compromise.
The Company anticipates that it will require additional funding to meet
operating requirements, future expansion and research and development expenses.
It is anticipated that such funding will be generated by way of additional
placements of equity, through research and development arrangements funded by
third parties and by asset based lending facilities. The Company is in contact
with asset based lenders. 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
SECOND FISCAL QUARTER OF 1999 COMPARED TO SECOND FISCAL QUARTER OF 1998
The Company used $856,000 in cash from operations during the quarter ended
October 31, 1998. This compares favorably to $1,539,000 in cash used by
operations during the corresponding quarter of the previous fiscal year. The
$683,000 improvement is primarily attributable to a $809,000 reduction in the
net loss for the quarter and reduced inventory purchases offset by funds used to
satisfy accounts payable and a reduction in non cash expenses associated with
depreciation and amortization, inventory and accounts receivable reserves and
imputed interest on convertible debentures.
The Company purchased $35,000 in fixed assets during the current fiscal quarter.
TWO FISCAL QUARTERS ENDED OCTOBER 31, 1998 COMPARED TO TWO FISCAL QUARTERS ENDED
NOVEMBER 1, 1997
Cash used by operations decreased from $1,564,000 in the two fiscal quarters
ended October 31, 1998 to $524,000 in the two fiscal quarters ended November 1,
1997. This $1,040,000 improvement is primarily attributable to a $189,000
reduction in the net loss for the period, increased funds generated from
accounts receivable and reduced inventory purchases offset by a reduction in non
cash expenses associated with depreciation and amortization, inventory and
accounts receivable reserves and imputed interest on convertible debentures.
The Company purchased $49,000 in fixed assets during the two fiscal quarters
ended October 31, 1998.
Cash provided by financing activities is primarily attributable to $2,000,000 in
proceeds received, in the corresponding quarter of the previous fiscal year, as
part of a $5 million convertible debenture offering.
ACCOUNTS RECEIVABLE
The Company's accounts receivable balance decreased $193,000 in the current
fiscal quarter and $2,027,114 on a fiscal year to date basis. This decline is
primarily to reduced sales in the current fiscal and improved collection
efforts.
INVENTORIES
The Company's gross inventory balance decreased $84,000 in the current fiscal
quarter. The Company increased its reserve for inventory obsolescence by $54,000
to $1,424,000. 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 $1,397,000 in the current quarter and $2,925,000
on a year to date basis. These decreases are attributable to the net losses
incurred.
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.
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.
10
<PAGE> 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The United States Securities and Exchange Commission ("SEC") has conducted an
inquiry pursuant to an order directing a private investigation relating to
certain prior public disclosures and periodic reports of the Company. On April
7, 1998, the Company was informed by the staff of the SEC that the staff intends
to recommend to the Commission that it be authorized to file a civil injunctive
action against the Company and certain of its past and current officers for
various violations of the federal securities laws. The Company continues to work
with the SEC in an effort to settle this proposed action. While no assurances
can be given that the matter will be settled, or if settled, the terms will be
favorable to the Company, the Company is reasonably confident that it will reach
settlement of this action in the 1999 fiscal year.
In 1997, Gary H. Davison a former officer and director of the Company commenced
two lawsuits against the Company in the Circuit Court of Fairfax, Virginia, one
for wrongful termination and the other for breach of contract. The breach of
contract action involved claims for options to purchase 100,000 shares of stock
and a $100,000 bonus. On February 17, 1998, a jury in Fairfax County awarded Mr.
Davison $1,125,000 in damages and $163,233 in interest accrued from May 26, 1996
in this case. Accordingly, the Company recorded a loss provision for this amount
in its third fiscal quarter ended January 31, 1998. Subsequently, this award was
reduced by $100,000.
The Company has filed a petition to appeal this decision with the Virginia
Supreme Court and believes it has sufficient meritorious defenses to overturn
this verdict. On August 27, 1998, Davison filed a brief in opposition to this
petition for appeal. The Virginia Supreme Court heard oral argument in support
of FastComm's appeal petition on December 10, 1998.
The filing of the bankruptcy petition transferred the jurisdiction for the
second case from the Circuit Court in Fairfax, Virginia to the Bankruptcy Court.
Davison filed a motion asking that the Bankruptcy Court reverse this change in
jurisdiction. This motion was opposed by both FastComm and the creditors
committee and was denied by the Bankruptcy Court on October 29, 1998. A trial
date of March 1, 1999 has been set for this case.
On June 2, 1998, the Company filed a voluntary petition for reorganization under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor, Gary H. Davison. The Company has
filed its Schedules and Statements of Financial Affairs in accordance with the
requirements of the Bankruptcy Court and is current with its monthly operating
reports. Chapter 11 provides that, unless a trustee is appointed, the Company
has the exclusive right to file a plan of reorganization for the first 120 days
subsequent to the filing of the petition (or for such longer or shorter period
as the Bankruptcy Court may permit). The Company was granted an extension and
filed its plan on October 21, 1998. It is currently working on amendments which
include certain amendments requested by the creditors committee. The disclosure
hearing originally scheduled for December 1, 1998 has been postponed pending the
submission of a revised plan of reorganization. It is anticipated that the
amended plan will be filed no later than December 21, 1998.
The Company continues to operate under bankruptcy court protection from its pre
petition creditors. It has commenced filing objections to certain creditor's
proofs of claim and will shortly file to recover preference payments.
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.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
FASTCOMM COMMUNICATIONS CORPORATION
(Registrant)
Date: December 15, 1998 By: /s/ Peter C. Madsen
Peter C. Madsen ---------------------
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
Date: December 15, 1998 By: /s/ Mark H. Rafferty
Mark H. Rafferty ---------------------
Vice President, Chief Financial Officer
Treasurer and Director
(Principal Financial and Accounting Officer)
12
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