<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 January 31, 1998 .
---------------------------------
[ ] 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 .
-----------------------
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 March 6, 1998, there were 11,066,182 shares of the Common Stock, par
value $.01 per share, of the registrant outstanding.
No exhibits are filed with this report, which consists of 14 consecutively
numbered pages.
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FASTCOMM COMMUNICATIONS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
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<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations
Fiscal quarter and three fiscal quarters ended January 31, 1998
and February 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets
January 31, 1998 and April 30, 1997 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows
Fiscal quarter and three fiscal quarters ended January 31, 1998
and February 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6-7
Item 2. Management's Discussion and Analysis of
Financial Conditions and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 8-12
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Fiscal quarter ended Three fiscal quarters ended
-------------------------------- --------------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue $ 2,136,316 $ 2,358,065 $ 5,640,488 $ 7,796,470
Expenses
Cost of sales 1,254,763 1,059,744 3,161,130 3,461,559
Selling, general and administrative 1,808,783 1,093,000 5,316,884 3,447,925
Research and development 587,710 532,156 1,765,431 1,397,401
Depreciation and amortization 148,269 63,713 407,238 197,184
In process research and development 75,000 75,000
Litigation settlement 1,288,233 1,288,233
------------ ------------ ------------
Loss from operations (2,951,442) (465,548) (6,373,428) (782,599)
Other income (expense)
Other income 2,000 (1,912) 39,166 19,400
Interest income 47,048 23,347 154,752 99,137
Interest expense (34,780) (573) (195,939) (10,469)
Imputed discount on convertible debentures (220,000) (550,000)
------------ ------------ ------------ ------------
Net loss (3,157,174) (444,686) (6,925,449) (674,531)
Loss per share:
Basic: ($0.31) ($0.04) ($0.69) ($0.07)
Diluted: ($0.31) ($0.04) ($0.69) ($0.07)
Weighted average number of shares
Basic 10,165,454 10,022,824 10,048,177 9,902,004
Diluted 10,165,454 10,022,824 10,048,177 9,902,004
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
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FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
January 31, April 30,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,374,036 $ 4,036,336
Accounts receivable, net 1,835,519 3,148,801
Inventories, net 3,429,333 2,897,497
Prepaid and other 470,092 329,503
----------- -----------
8,108,980 10,412,137
Property and equipment, net 855,367 815,401
Deferred financing costs 248,404 190,279
Software license, rights and other intangibles 132,520 166,474
Notes receivable 300,000 300,000
Goodwill, net 503,899 569,165
Other assets 188,560 168,759
----------- -----------
$10,337,730 $12,622,215
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Current portion of long term debt $ 29,000
Accounts payable $ 1,750,951 1,277,541
Accrued payroll 118,821 207,290
Other current liabilities 684,276 349,666
Accured litigation settlement 1,288,233
----------- -----------
3,842,281 1,863,497
Convertible debentures 4,200,000 3,000,000
----------- -----------
8,042,281 4,863,497
----------- -----------
Shareholders' equity
Common stock, $.01 par value, 103,198 100,380
(25,000,000 shares authorized; 10,319,758 and
10,038,022 issued and outstanding)
Additional paid in capital 17,463,717 16,079,355
Accumulated deficit (15,271,466) (8,421,017)
----------- -----------
Total shareholders' equity 2,295,449 7,758,718
----------- -----------
$10,337,730 $12,622,215
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE> 5
<TABLE>
<CAPTION>
FASTCOMM COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Fiscal quarter ended Three fiscal quarters ended
------------------------------ ------------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating activities
Net loss $(3,157,174) $ (444,686) $(6,850,449) $ (674,531)
Items not affecting cash
Depreciation and amortization 148,269 63,713 407,238 197,184
Provision for doubtful accounts 42,363 (30,681) 182,363 20,007
Provision for inventory obsolescence 50,000 (15,000) 300,000 (15,000)
Non cash interest expense on debentures 72,793 197,793
Imputed discount on convertible debentures 220,000 550,000
Provision for litigation loss 1,288,233 1,288,233
Changes in assets and liabilities
Accounts receivable (345,440) (418,791) 1,130,918 (49,000)
Inventories 189,742 882,229 (831,836) (815,305)
Prepaid and other current assets (97,322) (50,201) (140,588) (53,216)
Other non current assets (2,755) 42,557 (19,801) 39,849
Accounts payable and accrued liabilities (198,441) (729,258) 376,666 (336,448)
Other current liabilities 99,746 113,078 155,919 (63,805)
----------- ----------- ----------- -----------
Net cash used by operations (1,689,986) (587,040) (3,253,544) (1,750,265)
----------- ----------- ----------- -----------
Investing activities
Additions of property, plant and equipment (48,836) (122,063) (304,103) (316,940)
Cash provided by acquisition 355,085 355,085
Purchase of long term investments (69,531)
----------- ----------- ----------- -----------
Net cash used by investing activities (48,836) 233,022 (304,103) (31,386)
----------- ----------- ----------- -----------
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 29,785 24,347 473,404
Repayment of notes payable (29,000) (71,585)
----------- ----------- ----------- -----------
Net cash provided by financing activities 29,785 1,895,347 401,819
----------- ----------- ----------- -----------
Net increase in cash and equivalents (1,738,822) (324,233) (1,662,300) (1,379,832)
Cash and cash equivalents, beginning of period 4,112,858 2,752,256 4,036,336 3,807,855
----------- ----------- ----------- -----------
Cash and cash equivalents, end of period $ 2,374,036 $ 2,428,023 $ 2,374,036 $ 2,428,023
=========== =========== =========== ===========
</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, 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
January 31, 1998, and February 1, 1997, consisted of 91 calendar days.
2. EARNINGS (LOSS) PER SHARE: BASIC AND DILUTED FASB 123
Basic and diluted earnings per share is calculated using the weighted average
number of shares of common stock outstanding and common stock equivalents
outstanding during the period. For the quarters ended January 31, 1998 and
February 1, 1997, the diluted earnings per share calculation does not include
common stock 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>
January 31, April 30,
1998 1997
---------------------------
<S> <C> <C>
Production materials $1,980,872 $1,615,875
Work in process 197,605 160,991
Finished goods 1,250,856 1,120,631
---------- ----------
$3,429,333 $2,897,497
========== ==========
</TABLE>
4. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK
The quarter ended January 31, 1998 includes sales of $799,000, $361,000 and
$269,000 representing 37%, 17% and 13% of total revenues to three unrelated
third party domestic corporations. As of January 31, 1998 accounts
receivable includes $250,000, $393,000 and $213,000 due respectively from these
corporations.
The three fiscal quarters ended January 31, 1998, include sales of $1,611,000
representing 28% of total revenue to an unrelated domestic corporation. As of
January 31, 1998, accounts receivable includes $250,000 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 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.
In May 1997, the Company issued an additional $2,000,000 in 5% Convertible
Debentures, 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
has been recognized in the current fiscal quarter.
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.
In May 1997, the Company issued an additional $2,000,000 in 5% Convertible
Debentures, 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
has been recognized in the current fiscal quarter.
CONVERSION OF CONVERTIBLE DEBENTURES
During the quarter ended January 31, 1998, debentures in the amount of $550,000
plus $19,000 in accrued interest were converted into 225,693 shares of common
stock. On a fiscal year to date basis, debentures in the amount of $800,000
plus $25,000 in accrued interest have been converted into 278,236 shares of
common stock. Subsequent to January 31, 1998 but prior to the issuance of this
report, an additional $1,900,000 in debentures plus $80,000 in accrued
interest have been converted into 900,510 shares of common stock.
In connection with the conversion of debentures and in accordance with the
terms of the debenture agreement, the Company has issued warrants to purchase
an additional 235,749 common shares at a strike price set at 125% of the market
price of the Company's common stock at the time of conversion. When and if
exercised, the warrants will generate a maximum of $779,000 in additional cash
for the Company. However, since the warrant holders cannot be forced to
exercise, the Company can give no assurance as to whether any of the warrants
will be exercised, nor can it give assurance as to the amount of cash that
will actually be generated.
RESULTS OF OPERATIONS
REVENUE
<TABLE>
<CAPTION>
Fiscal quarter ended Three fiscal quarters ended
------------------------------------------------- --------------------------------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
---------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C>
$2,136,316 $2,358,065 $5,640,488 $7,796,470
</TABLE>
Total revenues increased $634,000 (42%) compared with that of the previous
quarter. This increase is primarily attributable to an increase in unit sales
of frame relay access devices ($1,654,000 in the current fiscal quarter as
compared with $966,000 in the previous fiscal quarter). This increase is also
attributable to an increase in sales by the Company's Comstat Datacomm division
that was acquired in January 1997. Sales generated by this division totaled
$538,000 in the Company's current fiscal quarter compared with $402,000 in the
previous fiscal quarter.
Total revenues decreased $222,000 (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 ($1,654,000 in the
current fiscal quarter as compared with $1,982,000 in the third quarter of the
previous fiscal year). This decrease is further attributable to a decline in
unit sales of analog modems and data compression products ($385,000) offset by
$538,000 in sales by the Company's Comstat Datacomm division that was acquired
in January 1997.
8
<PAGE> 9
On a fiscal year to date basis, total revenues decreased $2,156,000 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 ($2,754,000). This decline is further attributable to decreases
in sales of analog modems ($308,000), data compression products ($421,000) and
data controllers ($170,000). Revenue decreases were offset by $1,552,000 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 January 31, 1998 includes sales of $799,000, $361,000 and
$269,000 representing 37%, 17% and 13% of total revenues to three unrelated
third party domestic corporations. The three fiscal quarters ended January 31,
1998, includes sales of $1,611,000 representing 28% of total revenue to an
unrelated 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 Three fiscal quarters ended
----------------------------- -----------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cost of sales $1,254,763 $1,059,744 $3,161,130 $3,461,559
Gross margin 41% 55% 44% 56%
</TABLE>
The decline in gross margin is primarily attributable to 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 higher gross margins. The Company anticipates continued sales of
voice frame relay products. Further, the Company disposed of $108,000 of
obsolete inventory and recorded a $50,000 increase in its reserve for inventory
obsolescence during the quarter ended January 31, 1998. These transactions
reduced gross margin by approximately 7%.
SELLING AND GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Fiscal quarter ended Three fiscal quarters ended
--------------------------- ---------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$1,808,783 $1,093,000 $5,316,884 $3,447,925
</TABLE>
Selling, general and administrative expenses increased $716,000 or (65%) over
that of the corresponding quarter in the previous fiscal year. This increase
is primarily attributable to increased compensation costs associated with
increased sales headcount ($88,000), costs associated with the new European
headquarters ($30,000), increased advertising and promotion costs ($91,000);
increased travel costs ($38,000); costs assumed as part of the acquisition of
Comstat Datacomm ($108,000) and increased legal fees ($336,000) associated with
litigation instituted by a former officer and director.
On a fiscal year to date basis, selling, general and administrative expenses
increased $1,869,000 or (54%) over that of the corresponding quarter in the
previous fiscal year. This increase is primarily attributable to increased
compensation costs associated with increased sales headcount offset by a
decline in commission expenses associated with a decline in sales ($196,000
net); costs associated with the new European headquarters ($60,000); increased
advertising and promotion costs ($348,000); increased travel associated with
trade shows and international selling activities ($144,000); 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 ($355,000); and increased legal fees
($592,000). During the first two quarters of the current fiscal year, the
Company recorded a $182,000 increase in its reserve for bad debts. The
Company's bad debt reserve totals $292,000.
9
<PAGE> 10
RESEARCH AND DEVELOPMENT EXPENSES
<TABLE>
<CAPTION>
Fiscal quarter ended Three fiscal quarters ended
------------------------------- -----------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
$ 587,710 $ 532,156 $ 1,765,431 $ 1,397,401
</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.
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 Three fiscal quarters ended
------------------------------ ---------------------------
January 31, February 1, January 31, February 1,
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
$ 148,269 $ 63,713 $ 407,238 $ 197,184
</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 purchases.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company had $2,374,000 in cash and cash equivalents.
Working capital decreased from $7.1 million at November 1, 1997 to $4.3 million
at January 31, 1998. At January 31, 1998, the Company had a current ratio of
2.1 to one.
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 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
has been recognized in the fiscal quarter ended January 31, 1998.
On February 17, 1998, the Circuit Court of Fairfax County, Virginia awarded a
former officer and director of the Company $1,288,233 in damages and interest
for breach of contract. Interest on this judgment continues to accrue at a rate
of 8% per annum. The Company does not currently have the resources to pay this
judgment in full and continue normal business operations. The Company is
currently considering all available options. These options include, but are not
limited to, a non cash settlement with the plaintiff, additional financing,
which could involve the sale of all or part of the Company, or reorganization
under Chapter 11 of the Federal Bankruptcy Act. While the Company has filed a
motion to appeal this decision it can give no assurance as to its success or
the outcome of this matter.
THIRD FISCAL QUARTER OF 1998 COMPARED TO SECOND FISCAL QUARTER OF 1997
Cash used by operations increased from $587,000 in the quarter ended February
1, 1997, to $1,690,000 in the quarter ended January 31, 1998. The $1,103,000
increase is primarily attributable to the increase in net loss for the quarter
and a net decrease in funds generated from inventory offset by higher non cash
expenditures associated with depreciation and amortization, inventory and
accounts receivable reserves, $220,000 in imputed interest on convertible
debentures and a provision for litigation loss ($1,288,000). Cash used by
operations was positively impacted by a reduction in funds used to pay down
accounts payable balances.
Cash used by investing activities totaled $48,000 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.
10
<PAGE> 11
THREE FISCAL QUARTERS ENDED JANUARY 31, 1998 COMPARED TO THREE FISCAL QUARTERS
ENDED FEBRUARY 1, 1997 Cash used by operations increased from $1,750,000 in the
three fiscal quarters ended February 1, 1997 to $3,254,000 in the three fiscal
quarters ended January 31, 1998. The $1,504,000 increase is primarily
attributable to the $6.8 million year to date loss offset by improved accounts
receivable balances and a reduction in cash used to fund accounts payable.
Cash used by operations was further reduced by higher non cash expenditures
associated with depreciation and amortization, inventory and accounts
receivable reserves, $550,000 in imputed interest on convertible debentures and
a provision for litigation loss ($1,288,000).
Cash used by investing activities totaled $304,000. 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 million
received, in the Company's first fiscal quarter, as part of the $5 million
convertible debenture offering previously discussed.
INVENTORIES
The Company's inventory balances decreased $190,000 in the current fiscal
quarter. The Company disposed of approximately $108,000 in obsolete inventory
during the quarter.
In the current fiscal quarter, the Company increased its reserve for inventory
obsolescence from $750,000 to $800,000. 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.
CONVERSION OF DEBENTURES
During the quarter ended January 31, 1998, debentures in the amount of $550,000
plus $19,000 in accrued interest were converted into 225,693 shares of common
stock. On a fiscal year to date basis, debentures in the amount of $800,000
plus $25,000 in accrued interest have been converted into 278,236 shares of
common stock. Subsequent to January 31, 1998 but prior to the issuance of this
report, an additional $1,900,000 in debentures plus $80,000 in accrued
interest have been converted into 900,510 shares of common stock.
In connection with the conversion of debentures and in accordance with the
terms of the debenture agreement, the Company has issued warrants to purchase
an additional 235,749 common shares at a strike price set at 125% of the market
price of the Company's common stock at the time of conversion. When and if
exercised, the warrants will generate a maximum of $779,000 in additional cash
for the Company. However, since the warrant holders cannot be forced to
exercise, the Company can give no assurance as to whether any of the warrants
will be exercised, nor can it give assurance as to the amount of cash that
will actually be generated.
SHAREHOLDERS' EQUITY
Shareholders' equity decreased $2,368,000 in the current fiscal quarter. This
decrease is primarily attributable to the $3,157,000 net loss incurred during
the period offset by $550,000 in conversions of subordinated debentures and
$220,000 in imputed interest on subordinated debentures. On a fiscal year to
date basis, shareholders' equity decreased $5,463,000. This decrease is
primarily attributable to the $6,850,000 net loss incurred during the period
offset by $800,000 in conversions of subordinated debentures and $550,000 in
imputed interest on subordinated debentures.
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.
11
<PAGE> 12
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.
12
<PAGE> 13
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. One of the remaining two claims for breach of
contract was tried before a jury in February and resulted in a verdict of
$1,288,233 in damages and interest. On March 6, the Company filed a motion to
set aside the verdict. The part of the motion relating to the options claim was
denied on March 13, 1998. The part of the motion relating to the bonus award is
sub judice. On March 17, 1998, the Company filed a notice of appeal of the
entire judgment.
The claim for wrongful termination is scheduled to go to trial in Fairfax
County, Virginia on June 22, 1998. The Company's position is that Mr. Davison's
allegations with respect to wrongful termination are without legal or factual
basis. The Company believes that it has meritorious defenses to this lawsuit
and intends to defend this action vigorously.
On March 5, 1998, the Company was served with a Third Party Motion for Judgment
in an action styled Michael L. Donnelly v. FastComm Communications Corp.,
Circuit Court of Fairfax County, Virginia, At law 16886. Donnelly, a former
officer of the Company who resigned in January, 1996, has sued the Company for
breach of contract (involving the alleged promise to grant Mr. Donnelly stock
options in 1993 when he joined the Company), insulting words/defamation and
abuse of process. He seeks compensatory on each count not to exceed $1,000,000
and punitive damages on the second and third counts not to exceed $350,000. The
Company believes it has meritorious defenses to this action and believes that
the claim is barred by applicable statute of limitations. The Company intends
to vigorously defend this action.
13
<PAGE> 14
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: March 23, 1998 By: /s/ Peter C. Madsen
---------------------------
Peter C. Madsen
President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
Date: March 23, 1998 By: /s/ Mark H. Rafferty
---------------------------
Mark H. Rafferty
Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
14
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<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> NOV-02-1997
<PERIOD-END> JAN-31-1998
<CASH> 2,374,036
<SECURITIES> 140,164
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