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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File Number: 0-17168
FASTCOMM COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
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VIRGINIA 54-1289115
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45472 HOLIDAY DRIVE
STERLING, VIRGINIA 20166
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(Address of principal executive offices) (Zip Code)
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Registrant's Telephone Number, including area code: 703/318-7750
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant, computed by reference to the last sale price
of such shares as of the close of trading on July 8, 1999, was $13,796,746
(13,526,222 shares times $1.02). As of July 8, 1999, there were 16,484,159
shares of the Common Stock of the registrant outstanding.
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FASTCOMM COMMUNICATIONS CORPORATION
INDEX
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PART I. PAGE
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Item 1. Business. 3
Item 2. Properties. 11
Item 3. Legal Proceedings. 11
Item 4. Submission of Matters to Vote of Security Holders. 11
PART II. PAGE
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 12
Item 6. Selected Financial Data. 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16
Item 8. Financial Statements and Supplementary Data. 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 25
PART III. PAGE
Item 10. Directors and Executive Officers of the Registrant. 26
Item 11. Executive Compensation. 27
Item 12. Security Ownership of Certain Beneficial Owners and Management. 32
Item 13. Certain Relationships and Related Transactions. 33
PART IV. PAGE
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 34
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PART I.
ITEM 1. BUSINESS
INTRODUCTION
FastComm Communications Corporation ( the "Company" or "FastComm"), designs,
develops, and manufactures network routing and switching equipment, controllers
and processors for Internet and frame relay networks, mainframe communications
controllers for IBM mainframe environments, multi-protocol access controllers
for Unisys users and an advanced voice/fax/video/data convergence routers for
enterprise and carrier users. The Company provides optimal migration paths for
legacy networks moving toward newer IP (Internet Protocol) routing
technologies. FastComm provides customers with modern networking technology as
a cost-efficient means of bridging old networks to new networks. FastComm
prides itself on its ability to customize private networks to attain the
specific needs of their customers. Its customer base includes state and federal
agencies, telephone companies and domestic and multi-national corporations.
The Company's strategy is to produce high quality value-added network routing
and switching equipment--that are the easiest to install, use, and
maintain--for several market segments: Legacy-to-LAN transition,
Internet/Intranet access, and Voice/Fax and Data integration. The Company
targets business customers primarily, and designs its products for volume sales
through third party resellers such as network product and service dealers,
systems integrators, telephone carriers, PTT's, and original equipment
manufacturers ("OEM's"). These resellers form a primary distribution channel
for the Company and also provide installation and maintenance services in the
United States and internationally.
The Company was incorporated as MicroTel, Inc. under the laws of the
Commonwealth of Virginia in May 1983. The Company changed its name to Data Safe
Incorporated in February 1984; to Electronic Vaults, Inc., in August 1984; and
to FastComm Communications Corporation, in October 1987.
During the fiscal year ended April 30, 1997, the Company acquired Comstat
Datacomm Corporation, ("CDC or Comstat"), a Georgia corporation engaged in the
data communications business. (See Item 7. Business Acquisitions).
In May 1998, FastComm obtained an exclusive license from KG Data Systems, Inc.,
("KG Data") to manufacture, market and sell that firm's ChanlComm(R) product
line, a replacement for channel attached front end processors in IBM based
mainframe networks. Effective March 31, 1999, FastComm acquired all of the
assets and assumed certain liabilities of KG Data. This business is now
internally identified as the Mainframe Communications Division. (See Item 7.
Future Prospects).
Prior to June 9, 1998, FastComm shares were traded publicly on the NASDAQ
National Market under the symbol FSCX. On June 9, 1998, the Company's shares
were delisted from the National Market System. Effective June 16, 1998, the
Company's shares have been quoted on the OTC Bulletin Board under the same
symbol.
PETITION FOR REORGANIZATION UNDER CHAPTER 11 OF THE FEDERAL BANKRUPTCY LAWS
On June 2, 1998, the Company filed a voluntary petition for reorganization
under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy
Court for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor. All litigation related to this
matter has been settled. On March 30, 1999, the Company's Plan of
Reorganization was approved by the Bankruptcy Court and the Company emerged
from Chapter 11. The Plan of Reorganization became effective on April 12, 1999.
(See Item 3. Legal Proceedings) The Plan provides for cash and debenture
payments equal to 100% of each allowed claim. The positions of all common
shareholders are preserved.
Pursuant to the Plan, Class 1 creditors representing existing holders of
convertible debentures, are required to convert their debt to equity on or
before October 12, 1999. Claims of unsecured creditors, below $1,000, were
repaid in cash on or before April 30, 1999. Claims of unsecured creditors
greater than $1,000 were satisfied by two cash payments totaling 25% of the
allowed claim. The Company issued debentures to these unsecured creditors for
the remaining 75% of their allowed claims. The claim of Gary Davison related to
the judgement of $1,195,560 obtained against the Company was reduced to
$900,000 and allowed as an unsecured nonpriority claim. The Company then
dismissed its appeal of the state court verdict underlying the Davison claim
and Davison withdrew a second claim of $2,350,000 related to a pending trial on
another matter associated with his dismissal from the Company. Prior to
confirmation of the Plan, the Company's President assumed the allowed claim,
the effect of which is the amount due Davison will now be paid to him.
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DESCRIPTION OF BUSINESS
NETWORKING INDUSTRY
The networking industry encompasses a broad range of communications services
and equipment. Communications in the form of voice, fax, data-- Internet
traffic, electronic mail, on-line transaction processing, imaging, video
teleconferencing, are transmitted across wide-area communication networks. As
demand for these information services grows, communication networks expand in
terms of the number of sites and users, the number of formats and types of
information, and the volume and speed of information to be communicated by each
user.
The network products industry categories that FastComm addresses divides itself
into three major areas:
1. BACKBONE COMPONENTS AND SYSTEMS, consisting of large switches and
multiplexers that manage wide area network (WAN) transmission lines that provide
connectivity for these devices. Public network service providers purchase
backbone components for their central offices, often identified as Point of
Presence (POP). Private networks install them at headquarters, major regional
centers, and the largest branch locations.
2. REMOTE ACCESS DEVICES, typically smaller equipment located in branch and
remote offices, attached to the backbone network through a single digital
telephone line. An access device may be part of a local area network (LAN)
within a building or directly connect to a telephone line for outside access.
3. MAINFRAME COMMUNICATION CONTROLLERS, are devices that interface to IBM
mainframe computers through very high-speed channels. These controllers have the
same channel connections as tape drives, disk drives and high speed printers and
typically are located in environmentally controlled rooms designed for large
mission-critical data processing operations. For more than 25 years, IBM has
been the custodian of its System Network Architecture (SNA) and corresponding
Network Control Program (NCP) products and services. These controllers are
designed to communicate at various speeds to remote locations only.
FASTCOMM'S PRODUCTS
The Company's products address all three areas of the network products industry.
Its frame relay access devices, WEBrouter (R), Quick and MetroLAN serve as
remote access devices. The GlobalStack provides a backbone system solution. The
ChanlComm (R) serves the mainframe communications controller marketplace.
MULTIPORT / MULTIPROTOCOL FRAME RELAY ACCESS DEVICES
The majority of the Company's revenue comes from the sale of frame relay access
devices (FRAD's) and multiprocol access routers FastComm FRADs provide cost
effective access to Frame Relay networks with support for a variety of LAN and
LEGACY protocols including TCP/IP, SLIP, PPP, IPX, HDLC (Bit Sync), SNA
RFC-1490, BISYNC, Burroughs Poll/Select, Telnet Client & Sever, X.25 Switching,
XXX PAD, Annex-G, Frame Relay Switching, AppleTalk, ALC, and Async. All FRADs
include an integral CSU/DSU or high speed serial network interface, support
remote configuration and management via Telnet and SNMP, and comply with
industry standard RFC1490 for internetworking with routers. The Fastconnect(TM)
feature allows a Fastcomm FRAD to automatically learn the network management
protocol, DLCIS and its IP address for management. This allows a network manager
to ship an unopened FRAD to a remote site, have a non-technical person plug it
in, and from the central site, access the FRAD via Telnet to complete the
configuration.
Frame relay is a simple way to transfer (relay) blocks of data (frames) on a
"best effort" basis (without error correction) across a public or private
network. Frame relay takes advantage of the high-quality (low error rate) of
digital and optical fiber transmission lines to simplify communications by not
correcting errors. Error correction is performed by computers and terminals
attached to the network, not the network itself. Frame relay standards define
the format for the data blocks sent to the network. The Company's frame relay
access devices and routers adapt terminals, computers, telephone equipment, and
facsimile machines to the industry standard frame relay format. FRAD market
studies from major consultants such as the Yankee Group and Vertical Systems
indicate that frame relay service revenues and unit counts are expected to grow
at a rate of 30% or more annually past the year 2000.
The Company's FRADs, which also function as routers, connect PCs, workstations,
local area networks ("LAN"), and host computers to a frame relay service. Data
formats on FastComm FRADs are compatible with standard routers for the most
important LAN protocols: IP, IPX, and AppleTalk(TM). A solution comprised of
mixing FRADs at some sites with routers at others is less expensive than
deploying routers everywhere. Certain Internet service providers (ISPs) offer
FastComm routers as part of their product package, with frame relay service
between the ISP site and those customers who require full time Internet access
or to maintain a site on the World Wide Web.
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In addition to standards compatibility, FastComm relies on additional
proprietary features to add value and distinguish its products. To the best of
the Company's knowledge, no competitor currently offers, in a single product
line, all the features listed below:
1. Automatic installation has been a key advantage, in the form of three
specific features that make FastComm products easier to install than those
of its competition.
- FastConnect(TM) allows a FastComm FRAD to learn how the frame relay
network switch is configured.
- FastConfig(TM) allows an EtherFRAD(TM), RingFRAD(TM) or WEB.router(R)
to learn its IP addressing.
- Save and restore configurations between the FRAD or WEB.router(R) and
a management station
2. MaximumPRIORITY(TM) and FastRATE(TM) features provide sophisticated,
multiprotocol prioritization and congestion control, a feature typically
found only in transmission switches. These features enable the Company's
FRAD and router products to combine multiple "mission critical"
applications over a single network connection while offering a superior
quality of service. When used in conjunction with a wide area network or
service that also offers prioritization of applications (virtual
circuits), the Company's products can be used to offer end-to-end
prioritization, a highly distinguishing feature.
3. A menu system on a dedicated port, for management and configuration,
guides a user to select and set options for the installation process or to
perform maintenance procedures. It also offers easy access to management
information and statistics. Many competitors, in contrast, typically offer
only a command line, which requires the user to learn and manually enter
exact commands in the proper format and order. This is a slow, error prone
and costly process.
A distinguishing feature of FastComm FRADs is their ability to handle terminal
protocols with intelligence. An example of this intelligence is seen when
dealing with polled protocols like IBM's SDLC (synchronous data link control)
where more than half the data on a line may be overhead, not information.
FastComm FRADs can eliminate this polling overhead and pass only user
information. The Company's equipment emulates multidrop lines, the most common
type found in over 50,000 IBM SNA (system network architecture) networks.
FastComm FRADs save bandwidth, improve response times and simplify network
topologies.
Recent versions of the front end processor for IBM mainframe computers and the
midrange AS/400 are compatible with direct connections to frame relay networks.
FastComm FRADs support the protocol conversion necessary for SDLC devices to
interoperate directly with a front end processor or AS/400. As with router
networks, FRADs at remote sites with terminal cluster controllers can reduce the
overall cost of a network.
Additional customer interest has been expressed in the direct Ethernet LAN port
on the EtherFRAD(TM) models, the Token Ring port in RingFRAD(TM) models. The
Company also offers a Basic Rate Interface (BRI) module to attach to the ISDN
(Integrated Services Digital Network), a digital telephone service. This module
becomes part of an EtherFRAD.
Voice over frame relay became popular during fiscal 1997. In response, the
Company introduced the VoiceFRAD(TM) a multiport/multiprotocol voice over frame
relay access device. FastComm VoiceFRADs(TM) provide cost effective data and
voice access over frame relay networks and support a variety of standard voice
interfaces. Voice is digitized and compressed using a CELP algorithm that
produces high voice quality at compression ratios of 8:1 and more. In response
to a request from its then largest customer, the Company had been reselling a
voice product manufactured by another vendor. Typically, arrangements such as
this produce minimal gross margins. In order to rectify this situation, the
Company is developing its own integrated voice/data product for sale in the
current fiscal year. These products, the GlobalStack and MetroLAN, are expected
to generate gross margins significantly greater than those generated by the
Company's previous voice based offerings.
WEB.ROUTER(R)_
The WEB.router(R) product, a low cost Internet access router, provides the
Company's solution for Internet access over frame relay. The Internet and its
World Wide Web are usually accessed over a dialed up connection or a leased line
carrying the Internet Protocol (IP) in a format called Point to Point Protocol
(PPP). With the large number of new Internet users, service providers are
finding frame relay an efficient way to offer connections to many customers over
a single data line at the ISP's site. WEB.router(R) devices were designed for
Intranet applications of World Wide Web technology (within companies) as well as
general Internet access.
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ISDN
The Company offers Basic Rate Interface (BRI) module to attach to the ISDN
(Integrated Services Digital Network, a digital phone service). This module
becomes part of an EtherFRAD, for example. The BRI is an all-digital method to
access a telephone company central office. A BRI can carry frame relay and voice
at the same time. Software enhancements allow a Company product to use the BRI
as its main connection, or as a way to dial up a replacement connection if for
any reason the original frame relay access line is lost. The BRI option is
offered in different versions for North America and Europe.
GLOBALSTACK
The GlobalStack-EX voice/fax/data/video router combines digital and analog voice
from switches, PBXs, key systems, and remote telephones with LAN/legacy data and
transports it over switched or dedicated digital networks. With digital T1, E1,
ISDN BRI and PRI interfaces, frame relay interfaces for data equipment, an
Ethernet port, and FastComm's routing software, the GlobalStack-EX is the
perfect solution for integrating voice/fax/data and multimedia throughout the
enterprise network. The GlobalStack-EX satisfies large regional and central site
office and POP locations where a confluence of communication mediums converge.
The GlobalStack-EX is compliant with FRF.11, supporting voice compression (with
silence suppression) and allows up to 30 voice channels to be transported in
less than 300Kbps. Bandwidth is dynamically allocated between voice/video/data
so that LAN traffic may continually adapt to fill the unused bandwidth.
METROLAN
The MetroLAN router combines analog voice from switches, PBXs, key systems,
telephones, and the PSTN with LAN/legacy data & multimedia and transports it
over switched or dedicated digital networks. MetroLAN satisfies the needs of
small office/branch office that require optimum phone line performance. With
FastComm's routing software, three analog voice ports, two data equipment serial
interfaces and an Ethernet port, the MetroLAN is the perfect solution for
voice/fax/data and video applications.
The MetroLAN is compliant with FRF.11, supporting voice compression (with
silence suppression) which allows up to 3 voice channels to be transported in
less than 30Kbps. Bandwidth is dynamically allocated between voice/video/data so
that LAN traffic may continually adapt to fill the unused bandwidth.
DATA CONTROLLER
Data Controllers are small data PABX's that allow up to seven devices to be
managed with a single telephone line and modem. A management station places one
call to the data controller, then communicates with up to seven attached
devices. A typical example would be a branch office equipped with a CSU,
multiplexer, bridge or router, terminal controller, and voice PABX or key
system. In addition to supporting dial-in access, the Data Controller will
accept information from any of the managed devices, then dial out to the central
management station, through the modem, and deliver that information -- for
example, an alarm message. This product is sold as the SuperView(TM) device.
QUICK PRODUCT LINE
The Quick II targets Unisys A and C-series mainframe customers who have been
using legacy CP2000 equipment. Unisys sells and supports the Quick II to
customers who require cost-effective network solutions for communication between
legacy mainframe, peripheral and LAN applications. FastComm supports over 100
protocol variations which legacy equipment users depend on for seamless
operations. The foundation of the Quick II is based on FastComm's streamline
FRADs and WEB.router, which adds to the ease of support and configuration
management. Sales of Quick II products totaled $1,748,000 during the fiscal year
ended April 30, 1999.
CHANLCOMM(R) MAINFRAME COMMUNICATIONS PROCESSOR
During fiscal 1999, the Company began to market the ChanlComm(R) product family
as a replacement for the front end processor ("FEP") in IBM mainframe computer
networks. The ChanlComm(R) takes its name from being "channel attached" to a
main computer, bypassing the typical front end processor installed to handle
communications lines. This product is now shipping with serial (SDLC) interfaces
for wide area network lines (point to point and multidrop). The product
development plan includes the addition of a direct frame relay interface, full
IP routing, along with other capabilities and protocols. The current 16 port
capacity will be expanded to at least 256 ports this fiscal year. In certain
applications, the ChanlComm(R) at the host computer will communicate with
FastComm FRADs or routers at remote sites, creating "pull through" business for
the Company.
NEW PRODUCT DEVELOPMENT
The Company invests heavily in research and development ("R&D") and expects such
investment to continue.
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Recorded expenses for research and development have been as follows:
FY 1999 $2,388,000 51% of revenue
FY 1998 $2,255,000 25% of revenue
FY 1997 $2,042,000 18% of revenue
The purchase of KG Data involves continuing product development on the
ChanlComm(R) communications processors. The work plan includes the addition of
several protocol variants, including a frame relay network interface, and
expansion of overall capacity.
Competitive pressure requires aggressive pricing. Product development stresses
low cost, reliable components and ease of assembly. A modular approach allows
many different products to be created from a few basic components. To keep
costs low or to bring a product to market quickly, any design may be done
entirely internally, externally, jointly with another firm, or from licensed
technology.
Larger companies, with larger engineering resources and more internal
expertise, may be able to develop a larger portion of their products without
outside technology. Not having to pay licensing fees or royalties could provide
them a cost advantage.
Research and development project schedules for high technology products are
inherently difficult to predict, and there can be no assurance that the Company
will achieve its expected initial shipment dates of products in development.
The timely availability of new and enhanced products is critical to the success
of the Company. Delays in availability of these new products, or lack of market
acceptance of such products, could adversely affect the Company.
The Company's ability to anticipate changes in technology, industry standards
and communications service provider offerings, and its ability to develop and
introduce new and enhanced products on a timely basis that are successful in
the market will be a significant factor in the Company's competitive position
and in its prospects for growth.
BACKLOG
Because of its quarterly design and build cycle, the Company builds and fills
to the extent possible all of its customer orders within the fiscal quarter of
receipt. Backlog of undeliverable orders is usually not significant. Management
believes that the Company's backlog as of any given date is not necessarily
indicative of actual revenues for any succeeding period.
Management knows of no material effect from compliance with environmental laws
or regulations.
SEASONALITY AND INFLATION
The Company's operations have not proven to be seasonal, although quarterly
revenue and net income may vary. Although the Company cannot accurately
determine the amounts attributable thereto, the Company has been affected by
inflation through increased costs of employee compensation and other operating
expenses. The Company believes that inflation has not had a material effect on
the Company's results of operation or financial condition.
MARKETING AND SALES
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. The Company believes that this
filing negatively impacted its ability to sell its product in the market place
during fiscal year 1999. The Company emerged from bankruptcy on March 30, 1999.
The Company cannot predict the effect, if any, this filing will have on future
sales.
DOMESTIC
FastComm sells its frame relay products primarily via indirect channels such as
value added resellers, systems integrators, major telephone companies, PTT's,
OEM's and distributors. These entities provide the installation and local
maintenance support required by end-user customers
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Unisys sells the Quick II directly to their customer base as a reseller of
FastComm. The Company sells the ChanlComm(R) products directly to end users and
will continue to do so until reseller relationships are developed. The Company
also provides direct technical support for all customers.
As of July 1999, the most active resellers of the Company's products include,
Anicom, C&L Communications, GTE Corporation, Unisys and Computer Services Inc.
These resellers, along with those less active and not mentioned, issue firm
purchase orders to the Company, take volume shipments against these orders and
resell the FastComm product to smaller dealers and end users. Title to product
transfers upon shipment by the Company.
During fiscal years 1999 and 1998, sales to Alcatel Data Networks accounted for
28% and 32% of total sales. During fiscal year 1997 sales to System One
Corporation and GTE Telephone Operations accounted for 29% and 16% of sales,
respectively. On March 29, 1999, the Company terminated its contract with
Alcatel, effective June 28, 1999.
There were no Government contracts during the fiscal year that were subject to
renegotiation of profits or termination.
INTERNATIONAL
In the international marketplace, independent distributors represent the
Company in more than 30 countries. These firms are most often locally owned and
managed, which gives them an important presence in their markets. Terms of
international distribution agreements are similar to domestic agreements and
grant to the distributor similar stock adjustment/rotation and stock update
rights. In most cases, a distributor obtains non-exclusive rights to all
FastComm products for a specific geographic area. In 1999, 1998 and 1997, the
Company had export sales to foreign customers totaling $1,800,000, $3,292,000
and $846,000, respectively. The majority of the sales to Alcatel Data Networks
are for export, primarily to Latin America and Asia. During fiscal year 2000,
the Company is placing significant emphasis on international selling
opportunities. The Company has increased its international sales force and
executed reseller contracts with four new distributors. The Company is in
preliminary discussions with significant end user customers in Mexico, Peru and
Brazil. In that such discussions are in the preliminary stages, no assurance
can be made as to the outcome of these discussions. In most instances, the
Company requests confirmed letters of credit, issued in advance, as payment for
international sales.
The Company's export sales may be subject to restrictions on foreign operations,
including restrictions imposed by foreign governments on imports as well as US
Government originated restrictions, and are subject to risks associated with
fluctuations in foreign exchange rates. Although substantially all foreign
contracts are denominated, and revenues are paid, in United States dollars, to
the extent the Company receives payments in foreign currencies, it may incur
gains or losses because of exchange fluctuations between currencies. Moreover,
fluctuations in currency exchange rates may cause the Company's established
prices to be relatively more or less expensive in terms of local currencies.
CUSTOMER SUPPORT AND SERVICE
The Company maintains a technical support staff. Their work primarily supports
resellers, but end users are periodically given technical information and
assistance by telephone. For new products or features, including beta tests,
Company personnel will visit end user sites to participate in installation and
training.
NCR Corp. and Unisys have signed agreements with the Company whereby they assume
responsibility for installation and/or maintenance of FastComm products sold by
them or by third parties. The Company may enter into similar agreements with
others in the future.
PROMOTION
Advertising in trade publications stress the unique benefits and the Company's
strong points. Most publications in which the Company advertises have
international circulation, aiding the Company's selling efforts outside the U.S.
The Company participates regularly in industry trade shows in order to meet
prospective customers, generate sales leads, communicate with the press, and to
do market research. The Company exhibits under its own name and also takes
opportunities to exhibit with its dealers and distributors who show FastComm
products.
To generate interest and to identify prospects among data center managers, the
Company uses direct mail targeted at known users of mainframe computers.
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The Company limited its advertising expenditures during fiscal year 1999. Such
expenditures will increase during fiscal year 2000.
COMPETITION
The communications industry is highly competitive. Rapid technological change,
evolving standards and regulatory developments characterize the market for the
Company's products. Many of the Company's competitors and potential competitors
have greater financial, technological, manufacturing, marketing and personnel
resources than the Company. The Company's success depends to a large extent on
the insight, experience, and energy of its people, and therefore on its ability
to attract and retain experienced professionals.
The primary competition for each of the Company's major products is as follows:
FRAME RELAY ACCESS DEVICES: This continues to be a developing market, where
functionality differences among vendors still persist. FastComm enjoys an
advantage in its ability to handle legacy protocols as well as LAN traffic, an
integral CSU, small size, a low price, and automatic self-configuration features
that simplify installation. Other vendors with distinguishing features focus on
specific applications or market niches, with feature sets or distribution
channels. The EtherFRAD(TM), because of its compatibility with routers, competes
with the low end products of most router vendors. They attempt to compete on
name recognition, size, or backbone router features rather than strictly as an
access product.
VOICE OVER FRAME RELAY: Most FRAD vendors now ship FRADs with voice capability,
and several have gained reputations for voice. The initial shipments of FastComm
VoiceFRAD(TM) product occurred during late FY 1997. The Company, previously
acquired VoiceFRADS from an Australian manufacturer and resold this product
under both its own name and that of customers. This was done at the request of
Alcatel. As part of its reorganization, the Company rejected this supply
contract and will meet the needs of this marketplace with its GlobalStack and
MetroLAN product lines.
UNISYS MAINFRAME MARKET: The users of the Quick II product are those with older
Unisys mainframe computers that were designed to communicate using the
Poll/Select protocol on leased lines. Progress in computers and communications
technologies will force these networks to a more modern transmission format,
typically frame relay or Internet Protocol (IP). FastComm supports both
migration strategies with the Quick II, which replaces the CP 2000. The Quick II
is sold and supported by Unisys personnel as well as certain other FastComm
resellers.
IBM MAINFRAME MARKET: The ChanlComm(R) is one of the very few communications
devices that attach directly to the mainframe computer via the block or byte
channel (bus and tag connectors). No other FRAD vendor offers a channel-attached
device. Among router vendors, only Cisco has announced a channel attachment
option to their larger router line. This feature is licensed by Cisco from IBM.
The Company believes that the cost to buy or design a channel interface to the
mainframe will pose a significant barrier to new entrants to the market entry
for several years.
Current users of IBM front end processors ("FEP") were advised that IBM will
discontinue support for certain older models at the end of 1998. A similar plan
for the remaining larger version (the IBM 3645) has alarmed customers who do not
wish to convert to router based networks. These enterprises are now FastComm's
prime targets for the newest release of of the ChanlComm product line. The
ChanlComm(R) products easily replace all FEP versions. Third party maintenance
organizations continue to support the older FEP's, thus allowing them to remain
in service for some additional time. The Company expects that these
organizations will continue to offer this support as it offers them a very
lucrative business opportunity. These maintenance organizations are also sales
prospects, as they too can benefit from the ease of use and state of the art of
this product.
Having a channel-attached product is expected to provide a competitive advantage
to the Company as it seeks a share of the business to be generated between now
and the year 2003 when an expected 15,000 IBM networks convert from leased lines
to a frame relay transmission service. However, competitors like IBM and Cisco,
which are larger and have greater resources, are expected to compete for the
same customers so there is no assurance that revenue targets will be achieved on
schedule.
LICENSES, PATENTS, AND TRADEMARKS
The communications industry traditionally relies more on trade secrets and rapid
obsolescence than patents. None of the Company's current products is protected
by patent.
On November 12, 1998, the Company entered into a 20-year licensing agreement
with Telogy Networks, Inc. to deliver their Golden Gateway Voice Over Packet
software and documentation service. The total committed cost was $281,000.
Deliverables include DSP unit licenses and developer's kit and MCU unit licenses
and developer's kit. The total committed cost for the software developer's kit
was $110,000; application software license, $5,000; DSP
9
<PAGE> 10
License unit, $63,000; MCU license unit, $17,000; software support services,
$75,000; and, training, $11,000. Payments were spread over a 24-month period.
On November 24, 1998, the Company obtained a worldwide non exclusive royalty
bearing license from Alcatel Date Networks, Inc. ("Alcatel") to use and further
develop Alcatel owned technology and intellectural property. The terms and
conditions of this agreement call for a one-time fee of $50,000 payable in four
equal installments plus royalty payments based on unit sales. The initial term
of this agreement is twenty years and is renewable subject to negotiation of
terms and conditions agreeable to both parties 30 days prior to its expiration.
On May 5, 1999 the Company entered into a licensing and task order agreement
with Taboret, an Arinc Inc. subsidiary. The license provides for development of
a graphical user interface (GUI) and a suite of SNMP tools to manage
communication equipment and create management reports. The total committed cost
for the basic management system was $61,000. An additional committed cost for
each FastComm unit type, special project labor, editor, maintenance, block
distribution run time licenses and options totaled $15,000.
The Company licenses outside technology for its product development. The cost to
license software from commercial vendors is less than the loaded cost of
internal developments. Licensing also speeds product delivery. All of the
software licenses currently owned by the Company are perpetual. The Company
expects to license additional software, particularly in areas that are highly
standardized and have multiple sources to minimize costs.
Software related to the ISDN, X.25, voice compression and SNA interfaces is
licensed to the Company and has been integrated into its FRAD/ router product
line.
MANUFACTURING
Over the past several years, the Company has outsourced the manufacturing of its
circuit board assemblies to third party manufacturers. The Company believes that
the outsourcing of manufacturing preserves capital for other business purposes.
The Company's in house manufacturing process is limited to that of planning,
purchasing, material management, final assembly and testing. The Company
utilizes several manufacturers for this process and believe that its
relationship with these organizations is satisfactory. The Company will continue
this outsourcing activity for the foreseeable future.
Most of the components used in the Company's manufacturing process are available
from multiple sources. Single-source items are all from large vendors with
stable histories of supplying material as needed. FastComm and its third party
manufactures have established strong relationships with key vendors to reduce
the risk of significant shortages or delays relating to availability of
materials. Shortages or delays in the supply of components, however, could
adversely affect the Company's ability to meet scheduled product shipments in
any particular fiscal quarter, which could materially affect the Company's near
term operating results. Management believes the loss of any supplier would not
be materially detrimental to the Company's business in the long term.
The Company has entered into contracts with other manufacturers to acquire
equipment to resell. The Company puts its name or that of a customer on these
products for its existing distribution channels. These products include
VoiceFRADs(TM). The Company, previously acquired VoiceFRADS from an Australian
manufacturer and resold this product under both its own name and that of
customers. This was done at the request of Alcatel, the Company's largest
customer at the time. Typically, arrangements such as this produce minimal gross
margins. In order to rectify this situation, the Company is developing its own
integrated voice/data product for sale in the current fiscal year. These
products, the GlobalStack and MetroLAN, are expected to generate gross margins
significantly greater than those generated by the Company's previous voice based
offerings.
Management knows of no material effect on its business from compliance with
environmental laws and regulations.
EMPLOYEES
At July 8, 1999, the Company had 55 full-time employees. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
believes that its employee relations are satisfactory.
FUTURE PROSPECTS
On a forward-looking basis, the Company is finalizing the development of its
GlobalStack, MetroLan and GlobalView product lines, all of which have voice,
data and video capabilities. It anticipates improved sales of data based frame
relay products and is in receipt of a $1 million dollar order for such products.
The Company has added new features to the Quick product that qualify this
product for a larger and enhanced distribution channel. Initial shipments of the
ChanlComm(R) product commenced in the fourth quarter of fiscal 1999. The Company
anticipates that sales of the ChanlComm(R) product will begin generating
significant revenues commencing with the second
10
<PAGE> 11
quarter of its fiscal year ending April 30, 2000. This product is being well
received in both the domestic and international marketplaces.
ITEM 2. PROPERTIES
The Company's executive, administrative, manufacturing, research and development
and marketing operations are located in a leased 17,000 square foot facility in
Dulles, Virginia. Aggregate base rent and common charges for this facility
approximated $264,000 for the fiscal year ended April 30, 1999. The Company
entered into a new five year lease agreement for this space effective May 1,
1998. Expenditures under this lease agreement approximate $22,000 per month plus
annual escalation.
Effective August 1, 1998, the Company entered into a two year lease agreement
for 2,100 square feet in Duluth Georgia that supports its Quick product
division. The base rent for this facility is $1,700 per month. As part of the KG
Data acquisition, the Company assumed a three year lease for a 3,700 square foot
facility in Norwalk, Connecticut. Expenditures under this lease agreement
approximate $4,100 per month plus annual escalation. This lease will expire June
30, 2001.
The Company also leases a small sales office in Colorado.
Management believes that its leased facilities adequately serve the Company's
present needs.
ITEM 3. 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. The
Company and the SEC staff are continuing settlement discussions. No assurance
can be given that this matter will be settled.
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. On March 30, 1999 a Plan of Reorganization
was approved by the Bankruptcy and the Company emerged from Bankruptcy
protection. The Company has been operating pursuant to this Plan since that
date.
No other material legal proceeding to which the Company is party or to which the
Company is subject is pending and no such proceeding is known by the Company to
be contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
<PAGE> 12
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to June 9, 1998, FastComm shares were traded publicly on the NASDAQ
National Market under the symbol FSCX. On June 9, 1998, the Company's shares
were delisted from the National Market System. Effective June 16, 1998, the
Company's shares have been quoted on the OTC Bulletin Board under the same
symbol.
The following table sets forth the range of high and low bid prices or sales
prices, as applicable, of the Common Stock for each fiscal quarter during the
two most recent fiscal years, as furnished by NASDAQ. The bid prices represent
prices between dealers, do not include retail markups, markdowns or commissions
and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended April 30, 1999:
First Quarter.................................... $2.28 $.38
Second Quarter................................... .63 .25
Third Quarter.................................... 1.50 .25
Fourth Quarter .................................. 1.59 .94
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended April 30, 1998:
First Quarter.................................... $7.88 $5.25
Second Quarter................................... 6.56 4.50
Third Quarter.................................... 5.19 2.09
Fourth Quarter .................................. 3.40 1.25
</TABLE>
As of July 8, 1999, there were 272 registered holders of record of the Common
Stock and the closing sale price on such date for the Common Stock as reported
by NASDAQ was $1.02 per share.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock. The Company anticipates
that it will retain all earnings to finance the operation and growth of its
business and does not anticipate paying cash dividends on the Common Stock in
the foreseeable future.
12
<PAGE> 13
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
THE COMPANY CAUTIONS THAT CERTAIN STATEMENTS IN THIS REPORT AND IN COMPANY'S
OTHER PERIODIC REPORTS FILED PURSUANT TO THE UNITED STATES SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), IN MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE , MAY
BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE
ACT, THE "SAFE HARBOR" FOR FORWARD LOOKING STATEMENTS ENACTED IN THE PRIVATE
SECURITIES LITIGATION REFORM ACT ON 1995. THE FORWARD LOOKING STATEMENTS THAT
MAY BE CONTAINED IN THE COMPANY'S REPORTS UNDER THE EXCHANGE ACT AND IN OTHER
ORAL OR WRITTEN STATEMENTS MADE BY THE COMPANY OR BY ITS AUTHORIZED
REPRESENTATIVES INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. AS A CONSEQUENCE,
ACTUAL RESULTS MIGHT DIFFER MATERIALLY FROM RESULTS FORECAST OR SUGGESTED IN
THESE FORWARD LOOKING STATEMENTS. SOME OF THESE RISKS AND UNCERTAINTIES ARE
IDENTIFIED IN THE DISCUSSION TO FOLLOW. ADDITIONAL INFORMATION REGARDING THESE
FACTORS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY MAY BE REFERRED TO AS PART OF PARTICULAR FORWARD LOOKING STATEMENTS.
THE FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY OR ON ITS BEHALF ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE IMPORTANT FACTORS DISCUSSED
BELOW AND TO THOSE THAT MAY BE DISCUSSED AS PART OF PARTICULAR FORWARD-LOOKING
STATEMENTS.
The Company cautions that the following important factors, among others, could
cause actual results for the fiscal year ended April 30, 1999 and for subsequent
financial reporting periods to differ materially from those forecast or
suggested in any forward-looking statement made by the Company or on its behalf,
in this report and otherwise. A number of these important factors have been
discussed in this Annual Report on Form 10-K for the fiscal year ended April 30,
1999 and its quarterly reports on Form 10-Q previously filed with the United
States Securities and Exchange Commission.
On June 2, 1998, the Company filed a voluntary petition for reorganization under
Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court
for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor. All litigation related to this
matter has been settled. On March 31, 1999, the Company's Plan of Reorganization
was approved by the Bankruptcy Court and the Company emerged from Chapter 11.
(See Item 3. Legal Proceedings) The Plan provides for cash and debenture
payments equal to 100% of each allowed claim plus interest. The positions of all
common shareholders are preserved.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND GROWTH RATE
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, fluctuations in customer capital expenditures or
other conditions affecting the networking industry or the economy during any
fiscal quarter could cause quarterly revenue and net earnings to vary greatly.
Further, the Company schedules some production of its products and budgets
expenses based on forecasts of sales, which are difficult to predict. The
Company's manufacturing procedures are designed to assure rapid response to
customer demand, but may, in certain circumstances, create risk of excess or
inadequate inventory of orders do not match forecast. Moreover, shortages or
delays in the supply of manufacturing components at shipments at acceptable
prices could adversely affect the Company's ability to meet scheduled product
shipments in any particular quarter, which could materially affect the Company's
operating results. Because a substantial portion of customer orders are filled
within the fiscal quarter of receipt, and because of the ability of customers to
revise or cancel orders and change delivery schedules without significant
penalty, quarter to quarter revenues and, to a greater degree, net earnings, may
be subject to greater variability and less predictability.
TECHNOLOGICAL CHANGES
The markets for the Company's products are characterized by continuous
technological change, evolving industry standards and frequent product
introductions. Such changes in the market may adversely affect the Company's
ability to sell its products. The Company's ability to anticipate changes in
technology, industry standards and to develop and introduce new and enhanced
products on a timely basis that are successful in the market, will be
significant factors in the Company's competitive position and its prospects for
growth. Moreover, if technologies or standards supported by the Company's
products or carrier service offerings based on the Company's products become
obsolete or fail to gain widespread commercial acceptance, the Company's
business may be adversely affected. As a result, Management believes that
significant expenditures for research and development will be required in the
future. Research and development project schedules for high technology products
are inherently difficult to predict , and there can be no assurance that the
Company will achieve its expected initial shipment dates for products in
development. Because timely availability of new and enhanced products is
critical to the success of the Company, delays in availability of these
products, or lack of market acceptance of such products, could adversely affect
the Company.
13
<PAGE> 14
COMPETITION
On June 2, 1998, the Company filed a voluntary petition for reorganization
under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy
Court for the Eastern District of Virginia. This filing was a direct result of
enforcement activities by a judgment creditor. All litigation related to this
matter has been settled. On March 31, 1999, the Company's Plan of
Reorganization was approved by the Bankruptcy Court and the Company emerged
from Chapter 11. (See Item 3. Legal Proceedings) The Plan provides for cash and
debenture payments equal to 100% of each allowed claim. The positions of all
common shareholders are preserved. At this time, the Company is unable to
predict the effect this filing and the subsequent reorganization will have on
its ability to compete in its marketplace.
The market for the Company's product is characterized by intense competition.
With the development of the worldwide communications market and the growing
demand for related equipment, numerous manufacturers such as the Company have
emerged to offer products for these markets in competition with traditional
communications equipment suppliers. Competition could further increase if new
companies enter the market or if existing competitors expand their product
lines or upgrade existing products to accommodate new technologies and
features. An increase in competition could require increased spending by the
Company on research and development and sales and marketing and may otherwise
adversely affect the Company's business. Many of the Company's competitors and
potential competitors have greater financial, technological, manufacturing,
marketing, and personnel resources than the Company.
DEPENDENCE ON KEY EMPLOYEES
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. As a direct result of this filing,
the Company has suffered the loss of certain key employees. To date, the
Company has been able to refill some of these positions. At this time, the
Company is unable to predict the long term effect this filing will have on its
ability to attract and retain key employees.
The Company's success depends upon the continued contributions of its
employees, many of whom would be difficult to replace. FastComm believes that
its future success will depend upon its ability to attract and retain skilled
and talented engineers, sales and marketing personnel and management. Failure
to attract and retain key employees could adversely affect the Company's
business and operating results.
MARKET PRICE VOLATILITY OF COMMON SHARES
The Company's common shares have been subject to substantial market price
volatility, some of which has occurred when there have been variations between
the Company's actual or anticipated financial results and the expectations of
that of the financial community and in the aftermath of public announcements by
the Company and its competitors. Further, the stock market has experienced
extreme price and volume fluctuations from time to time which have affected the
market price of many technology companies in particular and which have often
been unrelated to the operating performance of these companies. These broad
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the Company's common shares.
OTHER FACTORS
The Company further cautions that the factors referred to above and those
referred to as part of particular forward looking statements may not be
exhaustive, and that new risk factors emerge from time to time in its rapidly
changing business. Further, the Company's independent auditors have included a
paragraph in their opinion which indicates that, based on recent operating
losses, along with existing working capital and accumulated deficits, there is
substantial doubt about the Company's ability to continue as a going concern.
The Company does not undertake to update any forward looking statements it may
make or has made on its behalf to reflect changes it its expectations or
assumptions or the risks and uncertainties referred to.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected consolidated financial data for the
five fiscal years in the period ended April 30, 1999. The consolidated
statement of operations data for the fiscal years ended April 30, 1999, 1998
and 1997 and the consolidated balance sheet data at April 30, 1999 and 1998 are
derived from and are qualified by reference to the consolidated financial
statements of the Company audited by BDO Seidman, LLP, the Company's
independent certified public accountants, whose opinion contains an explanatory
paragraph related to substantial doubt about the Company's ability to continue
as a going concern and is included elsewhere, herein. The consolidated
statement of operations data for the fiscal years ended April 30, 1996 and 1995
and the consolidated balance sheet data at April 30, 1997, 1996 and 1995 are
derived from consolidated financial statements of the Company also audited by
BDO Seidman, LLP, but not included in this Annual Report. The financial data
should be read in conjunction with the consolidated financial statements and
related notes and other financial information and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Annual Report.
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: ($000's except per share date)
<S> <C> <C> <C> <C> <C>
Total revenues $4,653 $8,907 $11,163 $10,009 $4,166
Operating costs and expenses
Costs of goods sold 2,679 5,441 4,737 5,047 2,907
Other operating expenses 7,610 11,684 7,202 5,722 5,357
------------------------------------------------------------
Total operating costs and expenses 10,289 17,125 11,939 10,769 8,264
Operating loss (5,636) (8,218) (776) (760) (4,098)
Other income (expense), net (104) (871) 181 129 14
Reorganizational items, net (643) 0 0 0 0
Loss before extraordinary item (6,383) (9,089) (595) (631) (4,084)
Extraordinary gain 833 0 0 0 0
------------------------------------------------------------
Net loss ($5,550) ($9,089) ($595) ($631) ($4,084)
============================================================
Basic and diluted loss before extraordinary
item ($0.49) ($0.87) ($0.06) ($0.07) ($0.49)
Extraordinary item 0.06 0 0 0 0
Basic and diluted loss per share ($0.43) ($0.87) ($0.06) ($0.07) ($0.49)
Weighted average number of shares
outstanding during each period 12,917 10,391 9,961 9,522 8,409
BALANCE SHEET DATA:
Total assets $5,581 $9,226 $12,622 $9,034 $7,577
Total long term liabilities $2,690 $1,205 $3,000 $0 $132
Shareholders' equity $1,036 $3,246 $7,759 $6,880 $6,149
</TABLE>
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THIS ANNUAL REPORT. IN
ADDITION, THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SPECIFICALLY, THE
COMPANY WISHES TO ALERT READERS THAT THE FACTORS SET FORTH IN ITEM 5, "MARKET
FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS - CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION", AS WELL AS OTHER FACTORS, IN
THE PAST HAVE AFFECTED AND IN THE FUTURE COULD AFFECT THE COMPANY'S ACTUAL
RESULTS, AND COULD CAUSE THE COMPANY'S RESULTS FOR FUTURE QUARTERS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD LOOKING STATEMENTS MADE BY OR ON
BEHALF OF THE COMPANY.
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 and former executive officer of
the Company. All litigation related to this matter has been settled. On March
30, 1999, the Company's Plan of Reorganization (the "Plan") was approved by the
Bankruptcy Court and the Company emerged from Chapter 11. (See Item 3. Legal
Proceedings) The Plan provides for cash and debenture payments equal to 100% of
each allowed claim plus interest. The positions of all common shareholders are
preserved. Confirmation of the Company's Plan resulted in an extraordinary gain
of $833,149.
PLAN OF REORGANIZATION
Pursuant to the Plan, Class 1 creditors representing existing holders of
convertible debentures, are required to convert their debt to equity on or
before October 12, 1999. Claims of unsecured creditors, below $1,000, were
repaid in cash on or before April 30, 1999. Claims of unsecured creditors
greater than $1,000 were satisfied by two cash payments totaling 25% of the
allowed claim. The Company issued debentures to these unsecured creditors for
the remaining 75% of their allowed claims. The claim of Gary Davison related to
the judgement of $1,195,560 obtained against the Company was reduced to $900,000
and allowed as an unsecured nonpriority claim. The Company then dismissed its
appeal of the state court verdict underlying the Davison claim and Davison
withdrew a second claim of $2,350,000 related to a pending trial on another
matter associated with his dismissal from the Company. Prior to confirmation of
the Plan, the Company's President assumed the allowed claim, the effect of which
is the amount due Davison will now be paid to him.
To generate the cash requirement of the Plan, the Company raised $1,000,000
through a private placement offering of securities to a group of Company
employees, insiders and accredited investors. Each security ("Unit") consisted
of one share of common stock and two warrants to purchase common shares at
exercise prices of $1.00 and $1.50 per share. The warrants are exercisable for a
period of three years after March 31, 1999. The Company issued 1,333,333 Units
at a price of $.75 per Unit. As of the date of this report, $847,633 of the
proceeds of this offering has been used to satisfy allowed creditor claims. The
remaining funds are held in escrow to satisfy any potential future claims.
The Company issued $2,490,357 in convertible debentures in satisfaction of the
remaining 75% of each claim allowed in its Plan. The debentures earn interest at
a rate of 7.5% per annum payable in the form of common stock in the Company at
time of conversion. The debentures are convertible at the average of the closing
price of the Company's common stock for the ten consecutive trading days ending
on the trading day immediately preceding the date of conversion. No conversions
will be permitted prior to April 6, 2000. The Company may execute a cash
prepayment of the debenture at any time. Each debenture holder has the
additional right, but not the obligation, to surrender the entire debenture to
the Company on April 12, 2000 and receive a cash distribution equal to 15% of
the holder's original allowed claim, together with accumulated interest under
the Plan. The debentures mature on April 12, 2003. Any debentures not converted
by this date will automatically convert into common shares of the Company.
The Company is in compliance with all of the terms and conditions of its Plan.
16
<PAGE> 17
FUTURE PROSPECTS
During the current fiscal year, the Company closed its manufacturing operation
in Georgia and downsized its administrative overhead. Full-time headcount was
reduced from 63 employees at July 8, 1998 to 55 full-time employees at July 8,
1999. The Company reduced selling, general and administrative expenses and
manufacturing overhead by 38% and 18% respectively during the current fiscal
year.
During fiscal year 1999 the Company incurred $994,000 in legal and professional
fees, of which $663,000 related to its reorganization. During fiscal year 1998,
the Company incurred $1,363,000 in legal and professional fees of which
$1,037,000 related to the Davison litigation. The Company anticipates a
significant reduction in such costs in its fiscal year 2000.
Subsequent to April 30, 1999, but prior to the issuance of this report, the
Company raised an additional $1,000,000 through a private placement offering of
securities to a group of accredited investors. Each security ("Unit") consists
of (1) one common share; (2) an A warrant exercisable immediately and permitting
the holder to purchase one share of common stock in the Company at a price of
$1.50 per share ("A Warrant") and (3) a B warrant exercisable immediately and
permitting the holder to purchase one half of a share of common stock at a price
of $2.25 per share ("B Warrant"). The warrants shall be exercisable for a period
of three years after the closing date. The A Warrants may be called for
redemption, by the Company, at such time as the bid price of the Company's
common stock remains above $3.00 for 20 (twenty) consecutive trading days. The B
Warrants may be called for redemption, by the Company, at such time as the bid
price of the Company's common stock remains above $4.50 for 20 (twenty)
consecutive trading days. These units carry with them certain registration
rights.
When and if exercised, the unexercised warrants associated with this offering,
the reorganization offering and the outstanding convertible debentures will
generate a maximum of $7,377,000 in additional cash for the Company. The Company
can give no assurance as to whether any warrants will be exercised, nor to the
amount of cash that will be generated, if any of these securities are exercised.
(See Item 7. Liquidity and Capital Resources)
On a forward-looking basis, the Company is finalizing the development of its
GlobalStack, MetroLan and GlobalView product lines, all of which have voice,
data and video capabilities. It anticipates improved sales of data based frame
relay products and is in receipt of a $1 million dollar order for such products.
The Company has added new features to the Quick product that qualify this
product for a larger and enhanced distribution channel.
During the fiscal year ended April 30, 1999, the Company acquired all of the
assets and certain liabilities of KG Data Systems, Inc., ("KG Data"), a
Connecticut corporation engaged in designing and manufacturing the ChanlComm(R)
Mainframe Communications Processor. The aggregate purchase price amounted to
$845,000. The Company funded this acquisition through the issuance of 719,149
restricted shares of its common stock. In connection with this acquisition, the
Company entered into a three year employment agreement with Kenneth A. Bloom the
President and sole stockholder of KG Data. Mr. Bloom was also granted certain
registration rights for the shares issued to him. The acquisition was accounted
for as a purchase and, accordingly, the acquired assets and liabilities were
recorded at their estimated fair market values at the date of acquisition. The
purchase price plus costs directly attributable to the completion of the
acquisition have been allocated to the assets and liabilities acquired. The
Company recorded approximately $723,325 in goodwill related to this transaction.
This goodwill is being amortized over a seven year period.
Initial shipments of the ChanlComm(R) product commenced in the fourth quarter of
fiscal 1999. To date, such shipments have been minimal. The Company anticipates
that sales of the ChanlComm(R) product will begin generating more significant
revenues commencing with the second quarter of its fiscal year ended April 30,
2000. This product is being well received in both the domestic and international
marketplaces.
The Company anticipates that it may require additional funding to meet future
working capital needs and research and development expenses. It is anticipated
that such funding will be generated by way of additional placements of equity,
through research and development arrangements funded by third parties, by
investments by strategic partners and through the exercise of in the money
common stock warrants and options. The Company can give no assurance as to
whether it will be able to conclude such financing arrangements, or that, if
concluded, they will be on terms favorable to the Company.
There can be no assurance that the required increased sales and improved
operating efficiencies necessary to return to profitability will materialize.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
of revenues represented by certain items in the Company's consolidated
statements of income.
<TABLE>
<CAPTION>
Fiscal Year Ended April 30,
Statement of Operations Data: 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Total revenues 100% 100% 100%
Operating costs and expenses
Costs of goods sold 58% 61% 42%
Selling, general and administrative 102% 86% 44%
Research and development 51% 25% 18%
Reserve for litigation settlement - 13% -
Depreciation and amortization 10% 7% 3%
-------------------------------
221% 192% 107%
-------------------------------
Operating loss (121%) (92%) (7%)
Other income (expense), net (2%) (10%) (2%)
Reorganizational items (14%) - -
-------------------------------
Loss before extraordinary gain (137%) (102%) (5%)
Extraordinary gain 18% - -
-------------------------------
Net loss (119%) (102%) (5%)
===============================
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Total revenues decreased from $8,907,000 to $4,653,000 or by 48% during fiscal
1999 as compared to fiscal 1998. The $4,254,000 decrease was primarily
attributable to decreased unit sales volumes of data and voice based frame relay
products. The Company did not make any significant price adjustments during the
current fiscal year. Data based frame relay product sales decreased from
$3,820,000 to $1,398,000 or by 63% during fiscal 1999 as compared to fiscal
1998. Voice based frame relay product sales decreased from $2,493,000 to
$542,000 or by 78% during fiscal 1999 as compared to fiscal 1998. Sales
generated by the Company's Quick product decreased $525,000 to $1,748,000 when
compared with that of the previous fiscal year. The decline in sales was offset
by a $382,000 increase in the sale of data compression products. The reduced
sales of frame relay products is primarily attributable to lower sales to the
Company's major reseller. Further, the Company believes that its filing a
petition for reorganization under Chapter 11 negatively impacted its ability to
sell all of its products during the current fiscal year.
Frame Relay and Quick product sales, as a percentage of total product sales,
decreased from approximately 96% in fiscal 1998 to approximately 79% in fiscal
1999. The Company believes its future growth will be achieved through the sale
of frame relay, ChanlComm(R) and integrated voice/data router products that are
to be released during fiscal year 2000. During the fiscal year ended April 30,
1999, one customer accounted for 28% of total sales.
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, fluctuations in customer capital expenditures or
other conditions affecting the networking industry or the economy during any
fiscal quarter could cause quarterly revenue and net earnings to vary greatly.
Gross margins, as a percentage of total revenues, increased from 39% to 42%
during fiscal 1999 as compared to fiscal 1998. The increase in gross margin is
primarily attributable to a $1.1 million increase in the Company's
18
<PAGE> 19
reserve for inventory obsolescence that was recorded in fiscal 1998 compared
with the $80,000 increase recorded in fiscal 1999. Further, sales of the
Company's Quick product line as a percentage of overall sales increased during
the current fiscal year. Gross margins on the Quick product line are greater
than that of the Company's other product lines. During the current fiscal year,
the Company increased its reserve for inventory obsolescence by $80,000 to
$1,450,000. Management believes that its reserve for inventory obsolescence is
adequate.
Selling, general and administrative expenses decreased from $7,622,000 in fiscal
1998 to $4,747,000 in fiscal 1999. This 38% decrease in expense is primarily
attributable to reduced advertising and promotion costs ($480,000); reduced
legal and professional fees ($1,032,000); reduced salary and related costs
associated with a decline in headcount ($351,000); reduced travel costs
($147,000); reduced office and occupancy costs including those associated with
the Company's Australia sales office ($224,000) and a decline in bad debt
expense ($417,000).
Research and development expenditures consist primarily of hardware and software
engineering, personnel expenses, subcontracting costs and, to a lesser degree,
equipment and facilities. Research and development expenses increased from
$2,255,000 in fiscal 1998 to $2,388,000 in the current fiscal year. This 6%
increase 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 continuous technological change. Management believes that
significant expenditures for research and development will continue to be
required.
Depreciation and amortization expenses decreased from $611,000 in fiscal 1998 to
$475,000 in fiscal 1999. The Company's autodialer patent was written off in the
previous fiscal year.
During the fiscal year ended April 30,1999, the Company recorded $643,000 in net
expenses associated with its reorganization. Such costs include legal and
professional fees totaling $663,000 offset by $20,000 in imputed interest earned
on accumulated cash from the Chapter 11 proceeding. Implementing the Company's
Plan of Reorganization resulted in an extraordinary gain of $833,000.
FISCAL 1998 COMPARED TO FISCAL 1997
Total revenues decreased from $11,163,000 to $8,907,000 or by 20% during fiscal
1998 as compared to fiscal 1997. The $2,256,000 decrease was primarily
attributable to decreased unit sales volumes of data based frame relay products.
The Company did not make any significant price adjustments during the fiscal
year. Data based frame relay product sales decreased from $8,896,000 to
$3,820,000 or by 57% during fiscal 1998 as compared to fiscal 1997. This
decrease is attributable to the completion, in fiscal 1997, of the Company's two
largest projects to date, System One and GTE. This decline was offset with
$2,493,000 in sales of voice based frame relay access devices. The voice based
FRAD product was not sold in fiscal year 1997. The sale of Comstat product
increased $1,499,000 to $2,274,000 when compared with that of the previous
fiscal year. This increase is attributable to the fact that the Company acquired
Comstat during the prior fiscal year and accordingly included only one quarter
of Comstat sales in that period. On a proforma basis, Comstat sales totaled
$2,610,000 during fiscal year 1997.
Frame Relay product sales, as a percentage of total product sales, decreased
from approximately 80% in fiscal 1997 to approximately 72% in fiscal 1998. The
sale of its analog based products and data compression products declined
$1,085,000 when compared with that of the previous fiscal year. During the
fiscal year ended April 30, 1998, one customer accounted for 32% of total sales.
Gross margins, as a percentage of total revenues, decreased from 58% to 39%
during fiscal 1998 as compared to fiscal 1997. The decline in gross margin is
attributable in part to the sale of voice frame relay access products. The voice
products, which were not sold 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. This change in product mix negatively impacted gross margins by
approximately 8%. During the fiscal 1998, the Company disposed of $240,000 of
obsolete inventory while increasing its reserve for inventory obsolescence by
$1,110,000 to $1,370,000. This increase relates to the year over year decline in
the unit sales of analog modem and data compression products and to a lesser
degree, the decline in unit sales of certain frame relay products. These
transactions reduced the gross margin by approximately 11%.
Selling, general and administrative expenses increased from $4,822,000 in fiscal
1997 to $7,622,000 in fiscal 1998. This 58% increase in expense is attributable
to the annualized effect of an expanded sales force ($456,000), a full year of
costs associated with the operation of Comstat ($335,000), an enhanced marketing
and advertising program ($235,000), increased legal fees associated with the
Davison litigation ($1,037,000) and increased international travel ($182,000).
Selling, general and administrative expenses were negatively affected by a
$275,000 increase in bad debt expense.
Research and development expenditures consist primarily of hardware and software
engineering, personnel expenses, subcontracting costs and, to a lesser degree,
equipment and facilities. Research and development expenses increased from
$2,042,000 in fiscal 1997 to $2,255,000 in fiscal year 1998. This 10% increase
is
19
<PAGE> 20
primarily attributable to increased research and development manpower
($147,000), an increase in outside consulting services ($59,000) and costs
associated with the operation of Comstat ($104,000). The previous fiscal year
included a non recurring $75,000 charge related to the acquisition of Comstat
representing the value of in process research and development that had not
reached technological feasibility.
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. Subsequently, this award was reduced by $100,000. Accordingly, the
Company recorded a loss provision in the amount of $1,196,000 in fiscal year
1998.
Depreciation and amortization expenses increased from $339,000 in fiscal 1997 to
$611,000 in fiscal 1998. This increase is primarily attributable to the
amortization of goodwill associated with the acquisition of Comstat ($128,000)
and depreciation associated with fixed asset additions and the write off of the
Company's autodialer patent.
FOURTH QUARTER ADJUSTMENTS
During the fourth quarter ending April 30, 1998, the Company recorded provisions
for obsolete inventory of $570,000 and a valuation allowance related to a note
receivable of $273,600 all of which had the effect of increasing the operating
loss and net loss by $843,600 or $.08 per share.
During the fourth quarter ended April 30, 1997, the Company reduced its reserve
for inventory obsolescence by $100,000 which had the effect of reducing the
operating loss by $100,000 or $.01 per share.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 1999, the Company used approximately $2,329,000 in cash to
fund its operating activities. This amount includes $4,830,000 required to fund
the net loss, after adjusting for non-cash expenses (consisting principally of
depreciation, amortization and extraordinary gains associated with the Company's
reorganization). In addition, $467,000 was used to reduce current liabilities.
Cash was generated by a $2,455,000 decrease in accounts receivable and by a
$599,000 reduction in inventory.
Accounts receivable decreased during the current fiscal year due to lower sales
and improved collection efforts. The Company has a $300,000 allowance for
doubtful accounts at April 30, 1999. Management believes that its allowance for
doubtful accounts is adequate.
Inventory levels decreased $599,000 during fiscal year 1999. This decrease is
primarily attributable to decreased inventory of voice and frame relay products
and data compression products. All of FastComm's frame relay printed circuit
assemblies ("PCA's") are manufactured outside the Company's facilities by
contract manufacturers. The PCA'a are built to purchase order or forecast.
During the current fiscal year, the Company improved its forecasting methodology
that and reduced inventory levels. During the current fiscal year, the Company
increased its reserve for inventory obsolescence from $1,370,000 to $1,450,000.
Management believes its reserve for inventory obsolescence is adequate.
At April 30, 1999, the Company had $91,000 in unrestricted cash, $1.9 million of
working capital and a current ratio of over 2 to 1. None of the Company's
accounts receivable or inventories are collateralized currently.
FISCAL 1999 COMPARED TO FISCAL 1998
Cash used in operating activities decreased from $4,395,000 in fiscal 1998 to
$2,329,000 in fiscal 1999. The $2,066,000 decrease in cash used in operating
activities is primarily attributable to the $3,540,000 decrease in the net loss
for the year offset by changes in working capital items in fiscal 1999 compared
to fiscal 1998, including a $2,708,000 reduction in cash used to fund accounts
receivable, a $1,930,000 reduction in cash invested in inventory offset by a
$1,471,000 increase in funds used to paydown current liability balances, a
fiscal 1998 $1,196,000 non cash reserve for litigation settlement and decreases
in other non cash expenses, primarily asset valuation accounts and non cash
discount and interest on convertible debentures.
Cash used by investing activities amounted to $62,000 in fiscal 1999 as compared
$318,000 in fiscal 1998. The Company purchased $212,000 in fixed assets during
the current fiscal and received a $150,000 payment against an outstanding note
receivable.
Cash provided by financing activities totaled $1,269,000 during fiscal 1999. The
Company issued $1,000,000 in common stock as part of its reorganization. Of this
amount, $152,000 remains in escrow as restricted cash. The Company received
$421,000 from the exercise of common stock warrants during the current fiscal
year.
20
<PAGE> 21
FISCAL 1998 COMPARED TO FISCAL 1997
Cash used in operating activities increased from $2,259,000 in fiscal 1997 to
$4,395,000 in fiscal 1998. The $2,136,000 increase in cash used in operating
activities is primarily attributable to the $8,494,000 increase in the net loss
for the year offset by changes in working capital items in fiscal 1998 compared
to fiscal 1997, including a $2,227,000 reduction in cash used to fund current
liability balances in fiscal 1998, a $1,196,000 non cash reserve for litigation
settlement and increases in other non cash expenses, primarily increases in
asset valuation accounts and non cash discount and interest on convertible
debentures.
Cash used by investing activities amounted to $318,000 in fiscal 1998 as
compared $511,000 in fiscal 1997. The $193,000 decrease is primarily
attributable to reduced fixed asset purchases.
Cash provided by financing activities decreased from $2,998,000 in fiscal 1997
to $1,889,000 in fiscal 1998. The $1,109,000 decrease is primarily attributable
to a $1,000,000 decline, in fiscal year 1998, in proceeds from convertible
debentures.
OTHER CASH REQUIREMENTS
In fiscal 2000, the Company's cash commitments include minimum payments of
$476,000 under its operating lease arrangements. Management believes that
expenditures for research and development in fiscal 1999 will continue to be
significant. The Company anticipates capital spending for software, computer and
test equipment and furniture and fixtures in fiscal 1999. Where possible, such
capital requirements are expected to be met through lease financing
arrangements.
The Company anticipates that it may require additional funding 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, by investments by
strategic partners and through the exercise of in the money common stock
warrants and options. The Company can give no assurance as to whether it will be
able to conclude such financing arrangements, or that, if concluded, they will
be on terms favorable to the Company
Subsequent to April 30, 1999, but prior to the issuance of this report, the
Company raised an additional $1,000,000 through a private placement offering of
securities to a group of accredited investors. Each security ("Unit") consists
of (1) one common share; (2) an A warrant exercisable immediately and permitting
the holder to purchase one share of common stock in the Company at a price of
$1.50 per share ("A Warrant") and (3) a B warrant exercisable immediately and
permitting the holder to purchase one half of a share of common stock at a price
of $2.25 per share ("B Warrant"). The warrants shall be exercisable for a period
of three years after the closing date. The A Warrants may be called for
redemption, by the Company, at such time as the bid price of the Company's
common stock remains above $3.00 for 20 (twenty) consecutive trading days. The B
Warrants may be called for redemption, by the Company, at such time as the bid
price of the Company's common stock remains above $4.50 for 20 (twenty)
consecutive trading days. When and if exercised, the warrants will generate a
maximum of $2,625,000 in additional cash for the Company. However, since the
warrant holders cannot be forced to exercise until such time as the bid price of
the Company's common stock reaches the stated levels, the Company can give no
assurance as to whether any warrants will be exercised, nor can it give
assurance as to the amount of cash that will be actually generated.
Management believes that inflation did not have a material effect on operations
during the fiscal year ended April 30, 1999.
CONVERSION OF DEBENTURES
During the fiscal year ended April 30, 1999, debentures in the amount of
$1,005,299 plus $68,011 in accrued interest were converted into 1,652,717 shares
of common stock. During the fiscal year ended April 30, 1998, debentures in the
amount of $3,794,701 plus $151,672 in accrued interest were converted into
1,997,232 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 1,374,487 common shares at a strike price set at 125% of the market
price of the Company's common stock at the time of conversion. During the
current fiscal year, 65,022 warrants were converted into a like number of common
shares. This conversion generated $27,768 in cash proceeds to the Company.
Subsequent to April 30, 1999, but prior to the issuance of this report, an
additional 140,156 warrants were converted generating $75,897 in cash proceeds
to the Company. When and if exercised, the remaining 1,169,309 warrants will
generate a maximum of $2,111,741 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.
21
<PAGE> 22
CREDIT TERMS
The Company extends credit to its customers. Accordingly the Company may have
significant risk in collecting accounts receivable from its customers. The
Company has credit policies and procedures that it uses to minimize exposure to
credit losses. The Company's collection personnel regularly contact customers
with receivable balances outstanding to expedite collection. If these collection
efforts are unsuccessful, the Company may discontinue product shipments until
the outstanding balance is paid.
In most instances, the Company requires that international sales be paid in
advance by wire transfer or confirmed letter of credit. This practice ensures
against bad debts while improving cash flow.
Certain Resellers may request a stock adjustment/rotation twice annually and a
stock update at any time. "Stock adjustment/rotation" and "stock update" are
agreements whereby FastComm permits a reseller, at FastComm's sole discretion,
to return already purchased but unused and still current products to FastComm.
Stock adjustments/rotations and stock updates, which require the approval of an
officer of FastComm, are granted for specific purposes:
- - Stock adjustment/rotation allows an exchange for other FastComm products
of equal value. At the sole discretion of FastComm, stock adjustments may
be limited to 10% or 20% of the value of product ordered and accepted by
the reseller during the prior six-month period.
- - Stock updates may be approved for either warranty revalidation and/or
software revision level changes on products that are then returned to the
dealer. At FastComm's sole discretion, returned products may be exchanged
for the same types of equipment from inventory.
FastComm, at its sole discretion, may charge a reseller a "restocking charge" of
up to 20% to execute a stock adjustment or stock update. Stock
adjustment/rotation and stock update do not permit distributors to return
purchased merchandise for a refund.
The Company's practices concerning stock adjustment/rotation and stock updates
are believed to be consistent with those of the communications manufacturing
industry, based on management's experiences and its analysis of similar
companies.
Normally, payment in full is due within thirty days from date of shipment to the
reseller. The Company offers extended payment terms in certain situations. The
Company also offers prompt payment discounts. Although normal payment terms are
net 30 days from date of shipment, as a practical matter, the Company normally
receives payments on accounts receivable beyond thirty (30) days, even from its
most credit-worthy customers. Management does not believe that its credit and
collection history is substantially different from other companies in the
data-communications industry, based on management's experiences with similar
companies.
With the exception of the stock adjustment/rotation policies as discussed above
and product warranty, the Company is not contractually obligated to accept
returned merchandise.
The Company's reserve for bad debt totals $300,000. Management believes that its
reserve for bad debt is adequate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments"
(SFAS 133"). SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair market value.
Under certain circumstances, a portion of the derivative's gain or loss is
initially reported as component of other comprehensive income and subsequently
reclassified into income when the transaction affects earnings. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in income
in the period of change. Presently, the Company does not use derivative
instruments either in hedging activities or as investments. Accordingly, the
Company believes that adoption of SFAS 133 will have no impact on its financial
position or results of operations.
22
<PAGE> 23
YEAR 2000
In accordance with the U. S. Securities and Exchange Commission's Staff Legal
Bulletin No. 5, the Company has assessed both the cost of addressing and the
costs or consequences of incomplete or untimely resolution of the Year 2000
issue. The Company has reviewed its internal systems and has upgraded and
replaced such systems with applications, in the normal course of business, that
are Year 2000 compliant. To date, the costs of such upgrades have been minimal.
The Company plans to conduct a survey of its critical vendors concerning their
year 2000 compliance within the next 120 days.
The Company currently utilizes off the shelf software and uses no internally
developed software in the operation of its business. The software embedded in
the Company's products is not date sensitive and as such is not subject to the
Year 2000 issue. Accordingly, the Company has determined that its estimated
costs related to the Year 2000 issue are not anticipated to be material to the
Company's business, operations or financial condition. The Company will, within
the next 120 days, develop a contingency plan to be utilized in the event that
its management information systems fail due to a year 2000 related issue. This
plan will focus on identifying comparable companies utilizing comparable systems
and software to serve as an alternative to the Company's existing
infrastructure.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company may be exposed to
fluctuations in currency values and interest rates. These fluctuations can vary
the costs of financing, investing, and operating transactions. Because the
Company has only fixed rate long term convertible debentures and no foreign
currency transactions, there are no material impact on earnings of fluctuations
in interest and currency exchange rates.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and financial statement schedules are filed
as part of this Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-1
Balance Sheets at April 30, 1999 and 1998 F-2
Statements of Operations for the Years Ended April 30, 1999, 1998 and 1997 F-4
Statements of Stockholders' Equity for the Years Ended April 30, 1999, 1998 and 1997 F-6
Statements of Cash Flows for the Years Ended April 30, 1999, 1998 and 1997 F-7
Summary of Accounting Policies F-9
Notes to Financial Statements F-13
Financial Statement Schedule: Valuation and Qualifying Accounts (Schedule II) F-31
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
FASTCOMM COMMUNICATIONS CORPORATION
We have audited the accompanying balance sheets of FastComm Communications
Corporation as of April 30, 1999 and 1998, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended April 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FASTCOMM COMMUNICATIONS
CORPORATION at April 30, 1999 and 1998, and the results of its operations and
its cash flows for each of the three years in the period ended April 30, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has sustained significant
operating losses and cash flow deficits in fiscal 1999 and 1998, which, in part,
caused the Company to seek bankruptcy protection from which it was recently
released. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1. The financial statements do not contain any adjustments
that might result from the outcome of these uncertainties.
BDO Seidman, LLP
Washington, D.C.
July 12, 1999
1
<PAGE> 26
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
================================================================================
April 30, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 90,727 $ 1,213,052
Restricted cash (Note 1) 152,367 -
Accounts receivable, net (Notes 4 and 11) 617,492 3,123,340
Receivable from related party 30,000 2,760
Inventories, net (Notes 3 and 14) 2,658,788 3,118,195
Prepaid expenses and other current assets 228,120 374,614
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 3,777,494 7,831,961
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 5) 631,959 775,457
- --------------------------------------------------------------------------------
OTHER
Deferred financing costs 12,671 76,344
Goodwill (Note 2) 1,109,838 482,144
Notes receivable (Notes 2 and 14) - 26,400
Deposits 49,096 33,723
- --------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,171,605 618,611
- --------------------------------------------------------------------------------
$ 5,581,058 $ 9,226,029
================================================================================
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
2
<PAGE> 27
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
================================================================================
April 30, 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,080,713 $ 2,427,712
Accrued compensation 246,615 308,109
Reserve for litigation settlement (Note 7) - 1,195,560
Other current liabilities 527,342 843,178
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,854,670 4,774,559
- --------------------------------------------------------------------------------
CONVERTIBLE DEBENTURES (Notes 1 and 6) 2,690,357 1,205,299
- --------------------------------------------------------------------------------
TOTAL LIABILITIES 4,545,027 5,979,858
- --------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Notes 8 and 9)
Common stock, $.01 par - shares authorized,
50,000,000; issued and outstanding
16,142,974 and 12,048,753 161,429 120,488
Additional paid-in capital 23,934,667 20,636,197
Accumulated deficit (23,060,065) (17,510,514)
- --------------------------------------------------------------------------------
Total stockholders' equity 1,036,031 3,246,171
- --------------------------------------------------------------------------------
$ 5,581,058 $ 9,226,029
================================================================================
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
3
<PAGE> 28
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
================================================================================================
Year ended April 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (Note 11)
Product sales $ 4,091,843 $ 8,672,150 $10,961,750
Product sales to related parties - 13,335 43,028
Service revenue 561,462 221,185 158,551
- ------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,653,305 8,906,670 11,163,329
- ------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of goods sold 2,679,255 5,440,991 4,736,660
Selling, general and administrative 4,747,003 7,622,394 4,821,556
Research and development 2,387,904 2,255,097 2,042,331
Provision for litigation settlement (Note 7) - 1,195,560 -
Depreciation and amortization 475,223 611,078 338,522
- ------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 10,289,385 17,125,120 11,939,069
- ------------------------------------------------------------------------------------------------
OPERATING LOSS (5,636,080) (8,218,450) (775,740)
- ------------------------------------------------------------------------------------------------
OTHER INCOME (expense)
Other income (7,635) (82,692) 64,966
Interest income 8,950 174,120 160,461
Interest expense (104,894) (962,475) (44,721)
- ------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (103,579) (871,047) 180,706
- ------------------------------------------------------------------------------------------------
LOSS BEFORE REORGANIZATIONAL ITEMS AND
EXTRAORDINARY ITEM (5,739,659) (9,089,497) (595,034)
REORGANIZATIONAL ITEMS:
Professional fees 662,888 - -
Interest earned on accumulated cash resulting from
Chapter 11 proceeding (19,847) - -
- ------------------------------------------------------------------------------------------------
TOTAL REORGANIZATIONAL ITEMS 643,041 - -
- ------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM (6,382,700) (9,089,497) (595,034)
EXTRAORDINARY GAIN (Note 1) 833,149 - -
- ------------------------------------------------------------------------------------------------
NET LOSS $(5,549,551) $(9,089,497) $ (595,034)
================================================================================================
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
4
<PAGE> 29
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
================================================================================================
Year ended April 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted loss before extraordinary
item $ (0.49) $ (0.87) $ (0.06)
Extraordinary gain .06 - -
- ------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.43) $ (0.87) $ (0.06)
================================================================================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING EACH YEAR 12,917,125 10,390,552 9,961,107
================================================================================================
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
5
<PAGE> 30
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
======================================================================================================================
Year ended April 30, 1999, 1998 and 1997
- ----------------------------------------------------------------------------------------------------------------------
Common Stock
---------------------- Additional
Par Paid-in Accumulated
Shares Value Capital Deficit TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, April 30, 1996 9,786,619 $ 97,866 $14,608,463 $ (7,825,983) $ 6,880,346
Shares issued for stock options 104,803 1,048 472,358 - 473,406
Shares issued for acquisition
of Comstat Data Comm, Corp. 146,600 1,466 998,534 - 1,000,000
Net loss - - - (595,034) (595,034)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1997 10,038,022 100,380 16,079,355 (8,421,017) 7,758,718
Shares issued for stock options 3,499 35 18,042 - 18,077
Shares issued on conversion of debentures 1,997,232 19,973 3,926,400 - 3,946,373
Recognition of discount on debentures - - 550,000 - 550,000
Shares issued for compensation 10,000 100 62,400 - 62,500
Net loss - - - (9,089,497) (9,089,497)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1998 12,048,753 120,488 20,636,197 (17,510,514) 3,246,171
Shares issued on conversion of debentures 1,652,717 16,527 1,056,783 - 1,073,310
Shares issued for acquisition of
KG Data Systems, Inc. 719,149 7,191 837,809 - 845,000
Shares issued on exercise of warrants 389,022 3,890 417,211 - 421,101
Proceeds from sale of stock 1,333,333 13,333 986,667 - 1,000,000
Net loss - - - (5,549,551) (5,549,551)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 1999 16,142,974 $ 161,429 $ 23,934,667 $(23,060,065) $ 1,036,031
======================================================================================================================
ee accompanying summary of accounting policies and notes to financial statements.
</TABLE>
6
<PAGE> 31
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
================================================================================================
Year ended April 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,549,551) $(9,089,497) $ (595,034)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization 475,223 611,078 338,522
Extraordinary gain (833,149) - -
Compensation expense associated with
stock options granted 33,079 26,440 20,500
Provision for doubtful accounts 78,792 275,421 151,000
Provision for inventory obsolescence 80,000 1,110,000 -
Amortization of imputed discount - 286 3,415
Discount on convertible debentures - 550,000 -
Provision for doubtful note and interest
receivable - 316,225 -
Amortization of deferred financing costs 63,673 213,935 -
Accrued interest converted to stock 68,011 151,672 -
Compensation expense on shares issued - 62,500 -
Loss on disposal of equipment 2,516 - -
CHANGES IN ASSETS AND LIABILITIES,
NET OF EFFECTS OF ACQUISITIONS
(INCREASE) DECREASE IN ASSETS
Accounts receivable 2,454,587 (253,855) (765,576)
Receivables from related party (27,240) 1,135 21,430
Inventory 599,278 (1,330,698) (867,234)
Prepaid expense and other current assets 146,494 (87,736) (27,065)
Deposits (7,729) 135,036 (27,313)
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 880,849 1,150,171 (467,890)
Provision for litigation settlement (220,403) 1,195,560 -
Accrued compensation (97,672) 74,379 48,199
Income taxes payable - - (955)
Other current liabilities (315,836) 493,512 (90,655)
- ------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,329,078) (4,394,436) (2,258,656)
- ------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 32
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
================================================================================================
Year ended April 30, 1999 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (212,189) (317,639) (565,749)
Payment received on notes receivable 150,000 - -
Issuance of note receivable - - (300,000)
Net proceeds assumed in acquisition 208 - 355,084
- ------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (61,981) (317,639) (510,655)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds on issuance of common stock 1,000,000 - -
Net proceeds from exercise of warrants 421,101 - -
Increase in restricted cash (152,367) - -
Proceeds from issuance of convertible debentures - 2,000,000 3,000,000
Payment of deferred financing costs - (100,000) (190,279)
Net proceeds from exercise of stock options - 18,077 473,406
Repayments of notes payable - (29,286) (285,325)
- ------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,268,734 1,888,791 2,997,802
- ------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,122,325) (2,823,284) 228,481
CASH AND CASH EQUIVALENTS, beginning of year 1,213,052 4,036,336 3,807,855
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 90,727 $ 1,213,052 $ 4,036,336
================================================================================================
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
8
<PAGE> 33
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
ORGANIZATION FastComm Communications Corporation (the "Company") was
incorporated in Virginia in May 1983. The Company designs,
manufactures, and markets data communications equipment
for high-speed data transmission over public and private
telephone networks.
The Company's fiscal year ends on April 30. For interim
financial reporting purposes the interim fiscal
quarters are closed on the first weekend following the
calendar quarter end date, unless the calendar quarter
end date falls on a weekend, in which case such weekend
is used as the interim fiscal quarter end.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain
estimates used by management are particularly susceptible
to significant changes in the economic environment. These
include estimates of inventory obsolescence, valuation
allowances for trade receivables and deferred tax assets,
and evaluation of the recoverability of goodwill. Each of
these estimates, as well as the related amounts reported
in the financial statements, are sensitive to near term
changes in the factors used to determine them. A
significant change in any one of those factors could
result in the determination of amounts different than
those reported in the financial statements. Management
believes that as of April 30, 1999, the estimates used in
the financial statements are adequate based on the
information currently available.
RISKS AND The Company's future operating results may be affected by
UNCERTAINTIES a number of factors. During fiscal 1999 and 1998, 28% and
32% of revenues were from one customer, respectively.
During fiscal year 1997, 45% of revenues were derived from
two customers. The risk to the Company is that a loss of
one or two customers could have a significant negative
impact on revenues and operating results.
The Company sells primarily to domestic and foreign
dealers and distributors. Generally sales are on credit
and no collateral is required, although the Company
reserves the right to have the products returned in
9
<PAGE> 34
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
the event of default. The Company provides an allowance
for estimated sales returns and uncollectible accounts.
The Company's concentration of sales to certain customers,
discussed above, exposes the Company to a relatively
greater risk of loss than would be the case with greater
diversification.
The Company operates in a highly volatile industry that is
characterized by fierce industry-wide competition
resulting in aggressive pricing practices, continually
changing customer demand patterns, growing competition
from well-capitalized high technology and consumer
electronics companies, and rapid technological
development. The Company's operating results could be
adversely affected should the Company be unable to
anticipate customer demand accurately, to maintain short
design cycles while meeting evolving industry performance
standards, to manage its product transactions, inventory
levels, and manufacturing processes efficiently, to
distribute its product quickly in response to customer
demand, to differentiate its products from those of its
competitors, or to compete successfully in the markets
for its new products.
REVENUE Revenues from product sales are recognized at the time of
RECOGNITION product shipment. An allowance is provided for estimated
sales returns and uncollectible accounts. Also, the
Company establishes a reserve for estimated warranty
claims at the time of product shipment.
INVENTORY Production materials are valued using standard costs,
which approximate the first-in, first-out (FIFO) method.
Work-in-process represents direct labor, materials and
overhead incurred on products not delivered to date.
Finished goods are valued at the lower of cost or market,
cost being determined on the specific identification
method.
PROPERTY, Property and equipment is recorded at cost and depreciated
EQUIPMENT AND on a straight-line basis over the estimated useful life of
DEPRECIATION the related assets (generally five years). Leasehold
improvements are amortized over the lesser of the lease
term or the useful life of the property.
10
<PAGE> 35
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
RESEARCH AND All costs incurred to establish the technological
DEVELOPMENT COSTS feasibility of products are considered research and
development costs which are charged to expense as
incurred.
GOODWILL The Company has recorded goodwill based on the difference
between the cost and the fair value of certain purchased
assets and it is being amortized on a straight-line basis
over the estimated period of benefit, which is 7 years.
The Company periodically evaluates the goodwill for
possible impairment. The analysis consists of a comparison
of future projected cash flows to the carrying value of
the goodwill. Any excess goodwill would be written off due
to impairment.
ASSET In accordance with SFAS 121, the Company periodically
IMPAIRMENT evaluates the carrying value of long-lived assets when
events and circumstances warrant such a review. The
carrying value of a long-lived asset is considered
impaired when the anticipated undiscounted cash flow from
such asset is separately identifiable and is less than
the carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds
the fair market value of the long-lived asset. Fair
market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate
with the risk involved.
INCOME TAXES The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"). Under SFAS 109,
deferred taxes are determined using the liability method
which requires the recognition of deferred tax assets and
liabilities based on differences between financial
statement and income tax basis using presently enacted
tax rates.
CASH AND The Company considers all highly liquid investments with
CASH EQUIVALENTS an original maturity of three months or less to be cash
equivalents. The Company invests its excess cash
principally in overnight repurchase accounts and
short-term government securities. The Company maintains
amounts in excess of the federal deposit insurance
limitation of $100,000 in its bank accounts.
11
<PAGE> 36
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
================================================================================
COMPREHENSIVE On May 1, 1998, the Company adopted Statement of Financial
INCOME Accounting Standards No. 130, "Reporting Comprehensive
Income". Comprehensive income as defined includes all
changes to equity except that resulting from investments
by owners and distributions to owners. The Company has no
items of comprehensive income to report.
EARNINGS PER SHARE Earnings per share is based on the weighted average
number of shares of common stock and dilutive common
stock equivalents outstanding. Basic earnings per share
includes no dilution and is computed by dividing income
available to common shareholders by the weighted average
number of common shares outstanding for the period.
Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings
of an entity. Basic and diluted earnings per share are
the same during 1999, 1998 and 1997 because the impact of
dilutive securities is anti-dilutive.
RECENT In June 1998, the Financial Accounting Standards Board
ACCOUNTING issued Statement of Financial Accounting Standards No.
PRONOUNCEMENTS 133, "Accounting for Derivative Instruments" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities.
SFAS 133 requires that an entity recognize all derivatives
as either assets or liabilities and measure those
instruments at fair market value. Under certain
circumstances, a portion of the derivative's gain or loss
is initially reported as a component of other
comprehensive income and subsequently reclassified into
income when the transaction affects earnings. For a
derivative not designated as a hedging instrument, the
gain or loss is recognized in income in the period of
change. Presently, the Company does not use derivative
instruments either in hedging activities or as
investments. Accordingly, the Company believes that
adoption of SFAS 133 will have no impact on its financial
position or results of operations.
12
<PAGE> 37
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. RECENT EVENTS On June 2, 1998, the Company filed a voluntary petition
AND FUTURE for reorganization under Chapter 11 of the United States
PROSPECTS Bankruptcy Code. This filing was a direct result of
enforcement activities by a judgment creditor (See Note
7). The Company negotiated with its creditors a
consensual Plan of Reorganization (the "Plan") and filed
with the Court a Disclosure Statement and Plan of
Reorganization dated October 21, 1998 as modified on
December 23, 1998, January 8, 1999 and finally February
16, 1999. Creditors approved the Plan in March 1999 and
the Court confirmed this Plan on March 30, 1999. The Plan
became effective on April 12, 1999.
Pursuant to the Plan, Class 1 creditors, representing
existing holders of convertible debentures, are required
to convert their debt to equity within six months of the
effective date of the Plan. Claims of unsecured
creditors, below $1,000, were repaid in cash on or before
April 30, 1999. Claims of unsecured creditors greater
than $1,000 were satisfied by two cash payments totaling
25% of the allowed claim on or before April 30, 1999. The
Company issued debentures to these unsecured creditors
for the remaining 75% of their allowed claims. The claim
of Gary Davison related to the judgement of $1,195,560
obtained against the Company was reduced to $900,000 and
allowed as an unsecured nonpriority claim. The Company
then dismissed its appeal of the state court verdict
underlying the Davison claim and Davison withdrew a
second claim of $2,350,000 related to a pending trial on
another matter associated with his dismissal from the
Company. Prior to confirmation of the Plan, the Company's
President assumed the allowed claim, the effect of which
is the amount due Davison will now be paid to him.
In funding its Plan, the Company raised $1,000,000 by
selling common stock in a private offering. The
debentures, totaling $2,490,357 issued to the unsecured
creditors, including the President in connection with
purchase of the Davison claim, mature in April 2003. The
debentures will be convertible into common stock of the
Company between the first and fourth anniversary of the
effective date of the Plan. The debentures are
convertible at the average of the closing price of the
Company's common stock for the ten consecutive trading
days ending on the trading day immediately prior to
conversion. The debentures bear interest at 7.5%, payable
in common stock of the Company. If not converted sooner,
all debentures must be converted to common stock by April
2003. The Company has the right , at anytime, to redeem
for cash at par value all of the outstanding debentures
plus any accrued interest.
13
<PAGE> 38
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
Each debenture holder has the additional right to
surrender the entire debenture to the Company on April
12, 2000 and receive cash equal to 15% of the holder's
original allowed claim plus interest.
Confirmation of the Plan on March 30, 1999 resulted in an
extraordinary gain determined as follows:
<TABLE>
- ------------------------------------------------------------------------------
<S> <C>
Accounts payable - unsecured creditors $ 2,849,360
Reserve for litigation settlement 1,195,560
- ------------------------------------------------------------------------------
Net carrying value of liabilities exchanged 4,044,920
LESS CONSIDERATION EXCHANGED:
Convertible debentures issued 2,490,357
Cash option to unsecured creditors 845,014
Settlement of note receivable (123,600)
- ------------------------------------------------------------------------------
Total consideration exchanged 3,211,711
- ------------------------------------------------------------------------------
EXTRAORDINARY GAIN $ 833,149
==============================================================================
</TABLE>
BASIS OF PRESENTATION
The accompanying financial statements have been prepared
assuming that the Company will continue as a going
concern. As explained below the Company has sustained
recurring operating losses and cash flow deficits,
particularly in fiscal 1998 and 1999. The bankruptcy
filing discussed in the paragraphs above had an adverse
impact on revenues which contributed to the significant
net loss in fiscal 1999. These factors raise substantial
doubt about the Company's ability to continue in
existence. Management's plans in regard to these matters
are described in the succeeding paragraphs. The financial
statements do not contain any adjustments that might
result from the outcome of these uncertainties.
14
<PAGE> 39
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
FUTURE PROSPECTS
The Company plans to introduce several new products to
its customers in fiscal 2000, some of which will be the
ChanlCom products formerly manufactured by KG Data
Systems, Inc. (see Note 2). Also, the Company is
increasing its marketing efforts in Latin America, Korea
and China in hopes of generating additional revenue. In
addition, the Company expects to reduce administrative
expenses in fiscal 2000 due to the elimination of legal
fees related to the Davison litigation and the bankruptcy
filing.
While the Company is optimistic that it can execute its
revised business plan, there can be no assurance that the
increased sales necessary to return to profitability will
materialize or if they do, that the Company will be able
to raise sufficient cash to fund the additional working
capital requirements.
2. BUSINESS On March 31, 1999, the Company acquired all of the assets
ACQUISITIONS and assumed certain liabilities (as defined in the
agreement) of KG Data Systems, Inc., ("KG Data"). KG Data
has developed a product which transmits data between IBM
mainframes and remote offices. The purchase price was
$845,000, which was funded through the issuance of
719,149 shares of the Company's common stock. The
acquisition was accounted for as a purchase and,
accordingly, the acquired assets and liabilities were
recorded at their estimated fair market values at the
date of acquisition. The Company recorded $723,325 of
goodwill related to this transaction. This goodwill is
being amortized on a straight line basis over a seven
year period. The operations of KG Data
in 1999 and 1998 were not material and accordingly, the
Company has not presented pro forma results of operations.
15
<PAGE> 40
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
================================================================================
3. INVENTORIES Inventories consist of the following components:
April 30, 1999 1998
---------------------------------------------------------------
<S> <C> <C>
Production materials $ 2,916,235 $ 2,917,922
Work-in-process 111,568 336,680
Finished goods 1,080,985 1,233,593
---------------------------------------------------------------
4,108,788 4,488,195
Reserve for inventory obsolescence (1,450,000) (1,370,000)
---------------------------------------------------------------
$ 2,658,788 3,118,195
===============================================================
</TABLE>
<TABLE>
<CAPTION>
4. ACCOUNTS
RECEIVABLES Accounts receivable consist of the following:
April 30, 1999 1998
---------------------------------------------------------------
<S> <C> <C>
Trade $ 857,402 $ 3,343,500
Employee and other 60,090 79,840
---------------------------------------------------------------
917,492 3,423,340
Allowance for doubtful accounts (300,000) (300,000)
---------------------------------------------------------------
$ 617,492 $ 3,123,340
===============================================================
</TABLE>
16
<PAGE> 41
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
====================================================================================================
5. PROPERTY AND Property and equipment consists of the following:
EQUIPMENT
April 30, 1999 1998
----------------------------------------------------------------------------
<S> <C> <C>
Manufacturing equipment $251,285 $491,179
Furniture and fixtures 293,901 316,212
Leasehold improvements 26,188 24,649
Computers and electronics 650,154 616,780
Software 478,549 391,004
Demo equipment 91,584 92,320
----------------------------------------------------------------------------
1,791,661 1,932,144
Less accumulated depreciation
and amortization (1,159,702) (1,156,687)
----------------------------------------------------------------------------
$ 631,959 $775,457
============================================================================
</TABLE>
<TABLE>
<CAPTION>
Depreciation expense for the three years ended April
30, 1999, 1998 and 1997 was $379,591, $357,583 and
$227,346, respectively.
6. LONG-TERM Long-term debt consists of the following:
DEBT
April 30, 1999 1998
----------------------------------------------------------------------------
<S> <C> <C>
7.5% Convertible debentures, due
April 2003 $2,490,357 $ -
5.0% Convertible debentures, due
April and May 2001 200,000 1,205,299
----------------------------------------------------------------------------
$2,690,357 $ 1,205,299
============================================================================
</TABLE>
17
<PAGE> 42
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
In April 1999 the Company issued $2,490,357 in
convertible debentures in satisfaction of the remaining
75% of each claim allowed in its plan of reorganization
(see Note 1). The debentures earn interest at a rate of
7.5% payable in the form of common stock of the Company
at time of conversion. The debentures are convertible at
the average of the closing price of the Company's common
stock for the ten consecutive trading days ending on the
trading day immediately preceeding the date of
conversion. No conversions will be permitted prior to
April 6, 2000. The Company may execute a cash prepayment
of the debenture at any time. Each debenture holder has
the additional right, but not the obligation, to
surrender the entire debenture to the Company on April
12, 2000 and receive a cash distribution equal to 15% of
the holder's original allowed claim together with
accumulated interest under the plan of reorganization.
The debentures mature on April 12, 2003. Any debentures
which have not been converted by this date will
automatically be converted into common shares of the
Company.
In April 1997, the Company issued $3,000,000 in 5.0%
Convertible Debentures due April 2001. In May 1997, the
Company issued $2,000,000 in 5% convertible debentures
due May 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 prices on NASDAQ for the
ten trading days prior to conversion. If the conversion
occurs more than 180 days after the issuance, the
conversion price is the lesser of 125% of the average
closing bid prices on NASDAQ for the ten trading days
prior to the issuance date, 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 the 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 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. During 1999 and 1998, holders
of the debentures converted $1,005,299 and $3,946,373 of
debentures into 1,652,717 and 1,997,232 shares of common
stock, respectively.
18
<PAGE> 43
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
The terms of the Convertible Debenture 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, was approximately $550,000. Since the
holders of the Convertible Debentures did not elect to
exercise their option to convert the debentures into
common stock of the Company within 180 days of issuance
(i.e., at a conversion price of 100% of market), the
Company was required to recognize on the 181st day from
issuance the amount of the conversion discount.
Recognition of the conversion discount reduced income
available to common shareholders during fiscal 1998 by
$550,000 in the form of a one-time non-cash charge to
interest expense
7. COMMITMENTS LITIGATION
AND
CONTINGENCIES
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 filed an appeal of this decision with the
Virginia Supreme Court. The Company settled these
lawsuits for $900,000 as part of its plan of
reorganization (see Note 1).
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In fiscal 1995, the Securities and Exchange Commission
(the "SEC") began an inquiry relating to certain prior
public disclosures and periodic reports of the Company.
The Company and the SEC staff are continuing settlement
discussions.
19
<PAGE> 44
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
EXCLUSIVE LICENSE AGREEMENTS
In May 1998, the Company entered into an exclusive
license agreement with KG Data Systems, Inc. to
manufacture, market and sell products with
channel-attached technology known as ChanlComm. The terms
of this agreement called for an initial payment of
$150,000, with $70,000 payable upon executing the
agreement and the remaining $80,000 payable in four
weekly installments of $20,000 beginning May 18, 1998.
The agreement called for royalties of 5% of net sales
with minimum royalties or $8,000 per month. Additional
cash payments of $100,000 and $200,000 were due if net
revenues of ChanlComm products exceeded $1,500,000 and
$2,500,000, for the years ended April 30, 1999 and 2000,
respectively. An additional royalty of 3% was due for all
net revenues in excess of $2,500,000. The initial term of
the agreement was five years and was renewable by the
Company for two additional five year terms. The Company
was also required to reimburse KG Data Systems, Inc.
certain expenses on a monthly basis, as specified in the
agreement This agreement was terminated on March 31, 1999
in connection with the acquisition of all the assets and
certain liabilities (as defined in the agreement) of KG
Data Systems, Inc (see Note 2).
In November 1998, the Company entered into a 20-year
licensing agreement with Telogy Networks, Inc. to deliver
their Golden Gateway Voice Over Packet software and
documentation service. The total committed cost is
$281,000. Payments will be spread over a 24-month period.
In November 1998, the Company obtained a worldwide non
exclusive royalty bearing license from Alcatel Data
Networks, Inc. ("Alcatel") to use and further develop
Alcatel owned technology and intellectual property. The
terms and conditions of this agreement call for a
one-time fee of $50,000 payable in four equal
installments plus royalty payments based on unit sales.
The initial term of this agreement is twenty years and is
renewable subject to negotiation of terms and conditions
agreeable to both parties 30 days prior to its
expiration.
20
<PAGE> 45
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
In May 1999, the Company entered into a licensing and
task order agreement with Taboret, an Arinc Inc.
subsidiary. The license provides for development of a
graphical user interface (GUI) and a suite of SNMP tools
to manage communication equipment and create management
reports. The total committed cost for the basic
management system is $61,000. An additional committed
cost for each FastComm unit type, special project editor,
maintenance, block distribution run time licenses and
options totaled $15,000.
OPERATING LEASES
The Company leases office space and certain office
equipment under operating lease arrangements that expire
at various dates through 2003. The main office lease
provides for scheduled rent increases in the future which
are being amortized over the lease period. Rent expense
for the years ended April 30, 1999, 1998, and 1997, was
approximately $609,000, $662,000 and $515,000,
respectively. Aggregate future minimum lease payments
under the operating leases are as follows:
Year ended April 30,
----------------------------------------------------------
2000 $476,000
2001 $351,000
2002 $245,000
2003 $215,000
----------------------------------------------------------
COMPENSATION
The Company maintains an employment agreement with its
President and Principal Executive Officer. This agreement
provides for a base salary of $100,000 plus bonus and
incentive compensation as may be deemed appropriate by
the Board of Directors. The agreement was scheduled to
expire on January 31, 1999, however, the agreement was
automatically renewed through January 31, 2000 by the
Board of Directors. In connection with the acquisition of
KG Data, the Company entered into a three year employment
agreement, expiring March 31, 2002, with the former
President and sole stockholder of KG Data. This agreement
provides for a base salary of $100,000 plus bonus and
incentive compensation as deemed appropriate by the Board
of Directors.
21
<PAGE> 46
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. STOCKHOLDERS' STOCK ISSUANCES
EQUITY
On March 31, 1999, the Company acquired all of the assets
and assumed certain liabilities (as defined in the
agreement) of KG Data Systems, Inc. The purchase price
amounted to $845,000, which was funded through the
issuance of 719,149 shares of the Company's common stock.
In April 1999, the Company issued 1,333,333 shares of
common stock for $1,000,000 though a private placement
offering of securities to a group of Company employees,
insiders and accredited investors. These proceeds, except
for the $152,367 placed in escrow, funded the 25% cash
payment to the unsecured creditors as per the plan of
reorganization.
Subsequent to April 30, 1999, but prior to the issuance
of this report, the Company raised $1,000,000 through a
private placement offering of securities ("unit") to a
group of accredited investors. The units were sold at
$1.00 per unit. Each unit consists of one of share of
common stock, an A warrant exercisable immediately and
permitting the holder to purchase one share of common
stock at a price of $1.50 per share, and a B warrant
exercisable immediately and permitting the holder to
purchase one half of a share of common stock at a price
of $2.25 per share. The warrants are exercisable for
three years ending July 2002. The A and B warrants may be
redeemed by the Company if the Company's common stock
remains above $3.00 and $4.50 per share, respectively,
for twenty consecutive trading days.
On January 31, 1997, the Company acquired Comstat
Datacomm Corporation, ("CDC"), a Georgia corporation
engaged in the data communications business. The
aggregate purchase price amounted to $1,000,000 (subject
to post closing adjustments) consisting of $900,000
funded at closing and an additional $100,000 of
contingent consideration. The Company funded this
acquisition through the issuance of 146,600 shares of its
common stock. An additional 43,985 shares of common stock
with a fair value of approximately $300,000 were placed
in escrow and could have been issued upon CDC achieving
certain revenue targets for the fiscal year ended May 31,
1998. The revenue targets were not met and the escrow
shares have been canceled.
22
<PAGE> 47
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
9. STOCK OPTIONS In 1991 and 1992, the Board of Directors approved the
1991 Non-Qualified, 1992 Non-Qualified and 1992 Incentive
Stock Option Plans (the Plans) under which options to
purchase up to 2,260,000 shares of common stock may be
granted to officers, directors and other key employees of
the Company.
The exercise price of each option may not be less than
100% of the fair market value of the stock on the date of
grant for incentive stock options or 85% of such fair
market value for non-qualified stock options, as
determined by the Board. Options vest over a three year
period and expire five years from the date of grant and,
in most cases, upon termination of employment.
The following table relates to options outstanding,
granted, exercised, and canceled during 1999, 1998 and
1997, under the Plan:
Option
Number Price
Options of Shares Per Shares
----------------------------------------------------------
Outstanding at
April 30, 1997 1,165,535 $ 2.06 to 15.63
April 30, 1998 1,360,911 $ 2.06 to 15.63
April 30, 1999 1,765,992 $ 0.25 to 15.63
Granted
During 1997 514,000 $ 6.50 to 15.63
During 1998 1,046,564 $ 2.50 to 5.88
During 1999 866,138 $ 0.25 to 1.35
Exercised
During 1997 104,803 $ 3.25 to 5.13
During 1998 3,499 $ 5.00 to 5.88
During 1999 - -
Canceled
During 1997 140,871 $ 3.25 to 12.00
During 1998 847,689 $ 2.50 to 15.63
During 1999 461,057 $ 0.29 to 12.00
23
<PAGE> 48
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
At April 30, 1999, 514,857 stock options are exercisable
under the plans at exercise prices ranging from $2.06 to
$15.63 with a weighted-average exercise price of $6.88
and a weighted-average contractual maturity of
approximately one year, as follows: 228,582 options
exercisable at $2.50 to $5.88, weighted at $2.66, with a
weighted maturity of one-half year; 256,942 options
exercisable at $2.06 to $15.63, weighted at $5.25, with a
weighted maturity of one and one-half years; and 29,333
options exercisable at $6.50 to $12.00, weighted at
$8.39, with a weighted maturity of one year.
The Company has adopted the disclosure-only provisions of
SFAS-No. 123 "Accounting for Stock Based Compensation",
but applies Accounting Principles Board Opinion No. 25
and related interpretations in accounting for its stock
option plans. For SFAS No. 123 purposes, the weighted
average fair value of each option grant has been
estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.53% and 5.77%
and expected volatility of 60% and 65% for the years
ended April 30, 1999 and 1998, respectively, a dividend
payout rate of zero for each year and an expected option
life of 5 years. Using these assumptions, the weighted
average fair value of the stock options granted is $0.38
and $1.76, for 1999 and 1998, respectively. There were no
adjustments made in calculating the fair value to account
for vesting provisions or for non-transferability or risk
of forfeiture.
If the Company had elected to recognized compensation
cost based on the fair value at the grant dates for
options issued under the plans described above,
consistent with the method prescribed by SFAS No. 123,
net income (loss) applicable to common shareholders and
earnings (loss) per share would have been changed to the
pro forma amounts indicated below:
Year ended April 30,
(in thousands, except per
share data) 1999 1998 1997
----------------------------------------------------------
Net loss applicable to
common shareholders:
as reported $(5,550) $(9,089) $(595)
pro forma (6,611) (10,039) (931)
Loss per share: as reported $(0.43) $ (0.87) $(0.06)
pro forma (0.51) (0.97) (0.09)
==========================================================
24
<PAGE> 49
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
10. INCOME TAXES The Company has net operating loss carryforwards for
income tax reporting purposes of approximately
$26,006,000, which begin to expire in 2008. The amount of
the net operating loss carryforward related to the
compensation element of stock options is approximately
$10,156,000, which when realizable will be a credit to
paid in capital. In addition, the Company has research
and development credit carryforwards of approximately
$662,000, which begin to expire in 2006.
The difference between the Federal tax rate and the
effective tax rate realized as a percent of pretax
earnings for the years ended April 30, 1999, 1998, and
1997, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision
(benefit) at
Statutory rates $(1,887,000) (34.0) $(5,817,000) (34.0) $(202,000) (34.0)
Tax benefit not
recorded 1,887,000 34.0 5,817,000 34.0 382,000 64.0
Compensation
element of stock
options - - - - (235,000) (39.5)
Other - - - - (55,000) (9.5)
--------------------------------------------------------------------------------------------------------------
$ - - $ - - $ - -
==============================================================================================================
</TABLE>
The primary differences between income (loss) for
financial reporting and income tax purposes is the
recognition of reserves for uncollectible accounts
receivable and obsolete inventory, the compensation
element of stock options and research and development
expenses, which are not currently deductible for income
tax purposes.
25
<PAGE> 50
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
No deferred taxes have been recognized in the
accompanying consolidated financial statements as of
April 30, 1999 and 1998. The components of deferred
income taxes are as follows:
<TABLE>
<CAPTION>
April 30, 1999 1998
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Accelerated depreciation $ 114,000 $ 113,000
--------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities 114,000 113,000
--------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSETS
NOL carryforwards 10,403,000 7,577,000
Allowance for doubtful accounts 120,000 120,000
Inventory reserve 580,000 548,000
Tax credits 662,000 552,000
Reserve for litigation settlement - 478,000
Stock options as compensation 31,000 19,000
Other 48,000 24,000
--------------------------------------------------------------------------------------------------------------
Total deferred tax assets 11,844,000 9,318,000
--------------------------------------------------------------------------------------------------------------
Net deferred tax assets 11,730,000 9,205,000
Less: Valuation allowance $ (11,730,000) (9,205,000)
--------------------------------------------------------------------------------------------------------------
TOTAL $ - $ -
==============================================================================================================
</TABLE>
Management has provided a valuation allowance for
deferred tax assets as of April 30, 1999, because they
are unable to predict when the benefit of these items
will be recognized in future years.
11. SIGNIFICANT Certain customers accounted for 10% or more of the
CUSTOMERS AND Company's total revenue during the years ended April 30,
FOREIGN EXPORTS 1999, 1998 and 1997 as noted below:
<TABLE>
<CAPTION>
1999 1998 1997
CUSTOMER % OF SALES CUSTOMER % OF SALES CUSTOMER % OF SALES
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
C 28 C 32 A 29
B 16
=============================================================================================================
</TABLE>
26
<PAGE> 51
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
Sales to customers A and B were $3,271,000 and $1,831,000
in 1997, respectively. Sales to customer C were
$1,307,000 and $2,870,000 in 1999 and 1998, respectively.
In 1999, 1998 and 1997, the Company had export sales to
foreign customers totaling approximately $1,800,000,
$3,292,000, and $846,000, respectively. These amounts
constitute 39%, 37% and 8% of total revenues,
respectively. The export sales were made to customers in
Venezuela, Peru and Brazil.
12. BENEFIT PLAN The Company maintains a defined contribution plan that
covers substantially all of its employees. Employees may
contribute a portion of their compensation as defined
under the Internal Revenue Code and employer
contributions are discretionary. There were no employer
contributions in 1999, 1998 or 1997.
13. FINANCIAL Generally accepted accounting principles requires the
INSTRUMENTS disclosure of the fair value of financial instruments;
however, this information does not represent the
aggregate net fair value of the Company. Some of the
information used to determine fair value is subjective
and judgmental in nature; therefore, fair value
estimates, especially for less marketable securities, may
vary. The amounts actually realized or paid upon
settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair
value of accounts receivable generally approximates
market because of the short maturity of these
instruments. The Company has estimated the fair value of
long-term debt based on quoted market prices for similar
loans.
The estimated fair values of the Company's financial
instruments, none of which are held for trading purposes,
are summarized as follows:
April 30, 1999
--------------------------------------
Carrying Estimated
Amount Fair Value
--------------------------------------------------------
Long-term debt $2,490,357 $1,825,000
========================================================
27
<PAGE> 52
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
14. FOURTH QUARTER During the fourth quarter ended April 30, 1998, the
ADJUSTMENTS Company recorded provisions for obsolete inventory of
$570,000 and a valuation allowance related to an
uncollectible note receivable of $273,600 all of which
had the effect of increasing the operating loss and net
loss by $843,600 or $0.08 per share. These additional
provisions were necessary in the fourth quarter of fiscal
1998 due to changes in estimates caused by decreased
sales and the decline in the fair value of the related
collateral for the note receivable. During the fourth
quarter ended April 30, 1997, the Company reduced its
reserve for inventory obsolescence by $100,000 which had
the effect of reducing the operating loss and net loss by
$100,000 or $0.01 per share.
15. SUPPLEMENTAL Supplemental information on interest and income taxes paid
CASH FLOW is as follows:
INFORMATION
<TABLE>
<CAPTION>
For the Year ended April 30, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ - $ 542 $35,721
-----------------------------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of non-cash investing and
financing activities:
<TABLE>
<CAPTION>
For the Year ended April 30, 1999 1998 1997
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Issuance of stock for
convertible debentures $1,005,299 $3,794,701 $ -
-----------------------------------------------------------------------------------------------------------
Issuance of stock in connection
with acquisition of assets
of CDC:
Fair value of assets acquired - - 1,482,536
Fair market value of common
stock issued - - 1,000,000
-----------------------------------------------------------------------------------------------------------
Liabilities assumed - - 482,536
-----------------------------------------------------------------------------------------------------------
Issuance of stock in connection
with acquisition of assets
of KG Data
Fair value of assets acquired $845,000 - -
-----------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE> 53
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
FASTCOMM COMMUNICATIONS CORPORATION
The audits referred to in our report, which includes an explanatory paragraph
related to substantial doubt about the Company's ability to continue as a going
concern, to FastComm Communications Corporation, dated July 12, 1999 which is
contained in Item 8 of this Form 10-K, included the audit of the financial
statement schedule listed in the accompanying index for each of the three years
in the period ended April 30, 1999. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects, the
information set forth therein.
BDO Seidman, LLP
Washington, D.C.
July 12, 1999
29
<PAGE> 54
FASTCOMM COMMUNICATIONS CORPORATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
==============================================================================================================================
Balance Charged to Balance
at Beginning Costs and at End
of Period Expenses Deductions of Period
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended April 30, 1997
Reserves and allowances deducted from asset accounts:
Obsolescence reserve for
inventory $ 600,000 $ - $ (100,000) 2/ $ 500,000
Allowance for doubtful
accounts $ 100,000 $ 151,000 $ (141,000) 1/ $ 110,000
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended April 30, 1998
Reserves and allowances deducted from asset accounts:
Obsolescence reserve for
inventory $ 500,000 $ 1,110,000 $ (240,000) 2/ $1,370,000
Allowance for doubtful
accounts $ 110,000 $ 275,421 $ (85,421) 1/ $ 300,000
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended April 30, 1999
Reserves and allowances deducted from asset accounts:
Obsolescence reserve for
inventory $1,370,000 $ 80,000 $ - $1,450,000
Allowance for doubtful
accounts $ 300,000 $ 78,792 $ (78,792) 1/ $ 300,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1/ Accounts written off
2/ Inventory scrapped or disposed of
30
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
25
<PAGE> 56
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists the directors and executive officers of the Company, their
ages, descriptions of their business experience and positions held with the
Company as of April 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter C. Madsen(1) (2) 48 President, Chief Executive Officer and Chairman of the Board
Robert C. Abbott 55 Chief Technology Officer, Secretary
William A. Flanagan 56 Vice President - Technology
Mark H. Rafferty 44 Vice President - Finance, Treasurer and Director
Edward C. Bursk 40 Vice President - Marketing
William A. Grant 46 Vice President - Global Sales
Dr. Kenneth Bloom 50 Vice President - Mainframe Networking
Safa Alkateb 31 Vice President - Engineering
Thomas W. Colligan 51 Vice President - Corporate Development
Edward R. Olson(1) (2) 57 Director
Thomas G. Amon(1) (2) 52 Director
</TABLE>
(1) Member Stock Option Committee.
(2) Member Audit Committee.
All directors hold office until the next annual meeting of the shareholders and
the election and qualification of their successors. The officers are elected by
and serve at the discretion of the Board of Directors. See "Employment and
Control Arrangements" under Item 11.
Peter C. Madsen has been President, Chief Executive Officer and a director of
the Company since September 1992. From November 1986 to January 1992, he was an
officer of the Newbridge Networks Corporation, a Canadian telecommunications
company, most recently as Vice President and General Manager, United States
Region, and President of Newbridge Networks Inc., Newbridge Networks
Corporation's United States subsidiary. Mr. Madsen served as a director of
Newbridge Networks Corporation from September, 1987 until June, 1998.
Robert C. Abbott served as Vice President - Engineering and as Secretary of the
Company from 1984 through April 1998. Effective May, 1998, Mr. Abbott assumed
the role of Chief Technology Officer of the Company and was on medical leave
from the Company until his death on July 21, 1999.
William A. Flanagan has served as Vice President - Technology from September
1991 to October 9, 1998 when he resigned. Prior to that, from 1987 through
September 1991, he was Vice President - Network Marketing and Vice President
Technology for Newbridge Networks Inc. Mr. Flanagan is the author of a variety
of best selling books on digital communications technology.
Mark H. Rafferty has been Vice President, Chief Financial Officer and Treasurer
of the Company since August 1993 and a director of the Company since March 1998.
From August 1992 to August 1993, Mr. Rafferty was Vice President, Finance at
Newbridge Networks Inc. From August 1987 through August 1992, Mr. Rafferty was
Controller of Newbridge Networks Inc.
Edward C. Bursk was Vice President, Sales and Marketing of the Company from
November 1996 to July 1998 at which time he resigned. From September 1995 to
October 1996, Mr. Bursk was President of the U.S. Division of Ouest Standard
Telematique S.A., a French telecommunications manufacturer. From May 1994 to
September 1995, Mr. Bursk served as Assistant Vice President, Marketing for
FastComm. Mr. Bursk served as General Manager, Packet Switching for Dynatech
Communications from June 1993 to May 1994.
William A. Grant has served as Vice President - Global Sales for the Company
since November, 1997. From October 1996 through October 1997, Mr. Grant served
as Vice President - Global Sales for Memotec Communications Corporation. From
January 1994 through September 1996, Mr. Grant was Vice President - Business
Development for FastComm. Prior to this time, Mr. Grant was President of
Inteletouch Corporation, a telecommunications equipment company.
Kenneth A. Bloom has served as Vice President - Mainframe Networking since
March, 1999. For five years prior to this time, Dr. Bloom was President and sole
stockholder of KG Data Systems, Inc., which was acquired by the Company in
March, 1999.
26
<PAGE> 57
Safa Alkateb has been Vice President - Engineering for the Company since
February, 1999. From April, 1994 to January, 1999, Mr. Alkateb held a variety of
engineering positions within the Company. From October, 1992 to March 1994, Mr.
Alkateb was Product Development Senior Software Engineer for Novak Engineering
Company, an engineering consulting firm.
Thomas W. Colligan has been Vice President - Business Development for the
Company since July, 1998. From August 1997 to February 1998, Mr. Colligan was
employed by InterNex Information Systems, a nationwide internet service
provider. From November, 1992 to January 1997, Mr. Colligan was Director of
Federal Sales, National Accounts and Eastern Region Operations for Ascend
Communications, a telecommunications equipment manufacturer.
Edward R. Olson has served as a director since January 1989. From 1990 to April
1997, Mr. Olson was the President, Chief Executive Officer and Chairman of M-C
Industries, Inc., a fluid hydraulics equipment manufacturer. Commencing July 1,
1995, Mr. Olson became a principal in KPMG Baymark Strategies LLC, an
independent consulting firm in a strategic alliance with KPMG Peat Marwick, LLP.
KPMG Baymark Strategies LLC has since become Dominion Management LLC. Mr. Olson
was President and COO of Porta Systems Corporation from November 1995 to January
1997. Mr. Olson has been Chairman of S&L Metal Products Corporation, Queens, NY
for the last five years.
Thomas G. Amon has served as a director since December 1994. For the past five
years, Mr. Amon has been an attorney in private practice in New York City. Since
June 1, 1999, Mr. Amon has been a partner in the law firm on Sokolow, Dunaud,
Mercadier & Carreras, LLP., New York, NY and Paris, France.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the National Association of Securities Dealers, Inc. Automated
Quotations (NASDAQ) system. Officers, directors and greater than ten percent
shareholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5 were
required for those persons. The Company believes that during its fiscal year
ended April 30, 1999, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
BOARD REPORT ON EXECUTIVE COMPENSATION
The Company does not have a formal compensation committee. Compensation levels
for executive officers are approved by the Board of Directors. The Board of
Directors is presently comprised of the following individuals: Peter C.
Madsen, Thomas G. Amon , Edward R. Olson and Mark H. Rafferty. Salaries are
reviewed periodically and are based on individual performance, the extent of
individual responsibility and comparisons with salaries paid in the industry.
The Company recruits for its executive officer positions from within the
communications industry. In most instances, the source Company is significantly
larger than the Company. It has been the policy of the Board of Directors of
FastComm to hire executive officers at levels below that of their current
salaries along with a stock option package intended to make up for the
differentiation and to provide a performance incentive. The Company has felt
that stock options are an attractive benefit in that they enhance performance
and loyalty at little cost. The Company believes the compensation packages
offered to its current employees and prospective employees have been consistent
with that of the telecommunications industry.
The Board establishes compensation levels based on experience and
responsibility.
The Board granted seven executive officers options during fiscal 1999. Six of
these grants were determined by the individuals performance, responsibility,
seniority. The remaining grant was a condition of employment.
The Board adheres to a policy of granting options to executive officers based
upon performance and responsibility. In addition, the Board also considers the
relative importance of the job function being performed and the number of
options currently held by the executive officer.
27
<PAGE> 58
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year, Peter C. Madsen, Edward R. Olson, Thomas G. Amon and Mark H.
Rafferty as directors participated in deliberations of the Company's Board of
Directors concerning executive officer compensation and stock option grants,
including their own. None of such directors was party to any reportable
interlock or participation during fiscal 1999.
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid by the
Company to the nine named executives (the "Named Executive Officers") for
services furnished in all capacities to the Company during the fiscal year ended
April 30, 1999, as well as such compensation paid by the Company to the Named
Executive Officers during the Company's two previous fiscal years:
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
------------------------------------------------------ SHARES OF
OTHER ANNUAL COMMON STOCK
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) OPTIONS
- ------------------------------ ---- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Peter C. Madsen (2) 1999 96,154 0 7,320 20,000
President, CEO and Chairman 1998 98,077 0 7,320 0
of the Board of Directors 1997 101,757 0 6,613 0
Mark H. Rafferty (3) 1999 125,000 0 8,075 20,000
Vice President and 1998 116,732 0 8,075 0
Chief Financial Officer 1997 108,503 0 5,824 25,000
Robert C. Abbott (4) 1999 46,154 0 0 20,000
Vice President 1998 86,999 0 0 0
Corporate Secretary 1997 98,639 0 0 15,000
Safa Alkateb (5) 1999 89,192 0 0 47,000
Vice President -
Engineering
William A. Flanagan (6) 1999 58,731 0 0 20,000
Vice President - 1998 106,645 0 2,220 10,000
Technology 1997 109,417 0 2,511 0
Edward C. Bursk (7) 1999 25,239 0 1,000 0
Vice President- 1998 116,250 15,000 4,800 0
Marketing 1997 52,532 0 2,400 55,000
Thomas Colligan (8) 1999 61,058 0 10,000 125,000
Vice President-
Corporate Development
William A. Grant (9) 1999 167,983 0 6,000 35,000
Vice President- 1998 64,098 30,000 3,000 100,000
Global Sales
Kennth A. Bloom (10) 1999 8,333 0 0 120,000
Vice President-
Mainframe Networking
</TABLE>
28
<PAGE> 59
1) Automobile benefit.
2) At April 30, 1999, Mr. Madsen held 1,278,220 restricted shares of Common
Stock with a market value of $1,358,109 at that date. 3) At April 30,
1999, Mr. Rafferty held 43,420 restricted shares of Common Stock with a
market value of $46,134 at that date.
4) At April 30, 1999, Mr. Abbott held 192,408 restricted shares of Common
Stock with a market value of $204,434 at that date. Mr. Abbott died on
July 21, 1999.
5) At April 30, 1999, Mr. Alkateb held 2,000 restricted shares of Common
Stock with a market value of $2,125 at that date.
6) At April 30, 1999, Mr. Flanagan held 219,421 restricted shares of Common
Stock with a market value of $233,135 at that date. Mr. Flanagan
resigned from the Company on October 9, 1998.
7) At April 30, 1999, Mr. Bursk held 500 restricted shares of Common Stock
with a market value of $531 at that date. Mr. Bursk resigned from the
Company on July 12, 1998
8) At April 30, 1999, Mr. Colligan held 460,002 restricted shares of Common
Stock with a market value of $488,752 at that date. Includes 200,000
shares owned by Mr. Colligan's spouse.
9) At April 30, 1999, Mr. Grant held 36,667 restricted shares of Common
Stock with a market value of $38,959 at that date.
10) At April 30, 1999, Dr. Bloom held 719,149 restricted shares of Common
Stock with a market value of $764.096 at that date.
FISCAL 1999 OPTION GRANTS
The following table sets forth information concerning grants of stock options to
the Named Executive Officers and Directors made pursuant to the Company's 1992
Stock Option Plan during the fiscal year ended April 30, 1999:
Stock Option Grants in Fiscal Year 1999
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Securities Percent of Potential Realizable Value
Underlying Total Options Exercise at Assumed Annual Rates
Options Granted to or of Stock Price Appreciation
Granted Employees in Base Price Expiration For Option Term
Name (#) Fiscal Year ($/sh) Date 5% ($) 10% ($)
- ---- --- ----------- ------ ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Peter C. Madsen 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
Mark H. Rafferty 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
Robert C. Abbott 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
William A. Flanagan 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
Thomas G. Amon 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
Edward R. Olson 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
Edward C. Bursk 0 - - - - -
Thomas Colligan 125,000 14.4% $0.46 7/31/03 $15,875 $35,100
William A. Grant 15,000 1.73% $0.46 7/31/03 $1,905 $4,212
William A. Grant 20,000 2.31% $0.46 9/9/03 $2,540 $5,616
Safa Alkateb 10,000 1.15% $0.46 7/30/03 $1,270 $2,808
Safa Alkateb 25,000 2.89% $0.25 12/14/03 $1,725 $3,925
Safa Alkateb 12,000 1.39% $0.46 9/13/03 $1,524 $3,370
</TABLE>
The exercise price of each option may not be less than 100% of the fair market
value of the stock on the date of the grant for incentive options or 85% of such
fair value for non-qualified stock options, as determined by the Board of
Directors. Options vest over a three year period and expire five years from date
of grant and, in most cases, upon termination of employment.
29
<PAGE> 60
FISCAL 1999 AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of stock
options during the fiscal year ended April 30, 1999 by each of the Named
Executive Officers and Directors and the fiscal year-end value of unexercised
options held by such persons:
<TABLE>
<CAPTION>
Shares Value of
Underlying Unexercised
Unexercised in-the-money
Options at Options at
Fiscal Year- Fiscal Year-
Shares Value End (#) End ($)
Aquired on Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Peter C. Madsen - - - 20,000 $0 $12,050
Robert C. Abbott - - 60,000 25,000 $0 $12,050
William A. Flanagan - - 20,000 25,000 $0 $12,050
Thomas G. Amon - - 18,333 28,334 $0 $12,050
Edward R. Olson - - 31,666 28,334 $0 $12,050
Mark H. Rafferty - - 100,000 28,334 $0 $12,050
Edward C. Bursk - - - - $0 $0
Thomas Colligan - - - 125,000 $0 $75,313
Kenneth A. Bloom - - - - $0 $0
William A. Grant - - 33,333 101,667 $0 $12,050
Safa Alkateb - - 32,222 111,444 $0 $33,568
</TABLE>
EMPLOYMENT AND CONTROL ARRANGEMENTS
Pursuant to the Employment Agreement dated September 18, 1992, (i) Mr. Madsen
was elected President and Chief Executive Officer of the Company for an initial
term expiring on January 31, 1995 at an initial base salary of $100,000 per
year, (ii) Mr. Madsen was granted an option to purchase up to 425,000 shares of
Common Stock of the Company at an exercise price of $1.09375 per share upon
certain terms and conditions, and (iii) Mr. Madsen and Mr. Peter Sommerer were
elected directors of the Company to fill two vacancies then existing on the
Board of Directors. Mr. Sommerer has since resigned from the Board.
Under the Employment Agreement, Mr. Madsen has been granted full control of and
authority over the operations of the Company, subject to the general oversight
of the Board, and the Current Directors agreed not to take any action
inconsistent with their respective obligations thereunder. The Employment
Agreement and the related actions resulted in an effective change in control of
the Company away from Mr. Dennis to Mr. Madsen. The agreement, which currently
expires on January 31, 2000, is renewable thereafter on a year to year basis.
In connection with the acquisition of KG Data, the Company entered into a three
year Employment and Non Competition Agreement on March 31, 1999 with Kenneth A
Bloom. The Agreement provided that Dr. Bloom be employed by the Company in a
senior management capacity at an annual salary of $100,000 plus incentives based
on sales of the ChanlComm(R) product line.
30
<PAGE> 61
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services as such, however, the
Board of Directors has authorized payment of reasonable expenses incurred by
non-employee directors in connection with attendance at meetings of the Board of
Directors. Further, members of the Company's Board of Director are granted
options to purchase common shares pursuant to the Company's 1992 Stock Option
Plan. During fiscal year 1999, the Company granted options to purchase 20,000
shares of its common stock to both Edward R. Olson and Thomas G. Amon. The
Chairman of the Board receives no compensation for serving in such capacity.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock with that of the
cumulative total return of the NASDAQ Stock Market - US Index ("NASDAQ STOCK
MRKT - US") and the NASDAQ Telecommunications Index ("NASDAQ TELECOM") for the
five year period ended on April 30, 1999. The information below is based on an
investment of $100, on April 30, 1994, in the Company's Common Stock, the NASDAQ
STOCK MRKT - US and the NASDAQ TELECOM. The Company's Management consistently
cautions that the stock price performance shown in the graph below should not be
considered indicative of potential future stock price performance.
Prior to June 9, 1998, FastComm shares were traded publicly on the NASDAQ
National Market under the symbol FSCX. On June 9, 1998, the Company's shares
were delisted from the National Market System. Effective June 16, 1998, the
Company's shares have been quoted on the OTC Bulletin Board under the same
symbol.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG FASTCOMM COMMUNICATIONS CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
<TABLE>
<CAPTION>
Cumulative Total Return
-------------------------------------------------
4/94 4/95 4/96 4/97 4/98 4/99
(Dollars)
<S> <C> <C> <C> <C> <C> <C>
FASTCOMM COMMUNICATIONS CORPORATION $100 $ 59 $179 $ 51 $ 19 $ 11
NASDAQ STOCK MARKET (U.S.) $100 $116 $166 $175 $262 $356
NASDAQ TELECOMMUNICATIONS $100 $104 $143 $129 $246 $422
</TABLE>
* $100 INVESTED ON 4/30/94 IN STOCK OR INDEX-INCLUDING REINVESTMENT OF
DIVIDENDS. FISCAL YEAR ENDING APRIL 30.
31
<PAGE> 62
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 8, 1999, there were 16,484,159 shares of Common Stock of the Company
issued and outstanding. As of such date, options to purchase 1,765,992 shares
of Common Stock were outstanding.
Each holder of shares of Common Stock, but not holders of unexercised options,
is entitled to one vote per share on each matter, which may be presented at a
meeting of shareholders. Cumulative voting is not allowed. Prior to June 9,
1998, FastComm shares were traded publicly on the NASDAQ National Market under
the symbol FSCX. On June 9, 1998, the Company's shares were delisted from the
National Market System. Effective June 16, 1998, the Company's shares have been
quoted on the OTC Bulletin Board under the same symbol.
The following table sets forth information regarding ownership of Common Stock
of the Company at July 8, 1999, by each person who is known by management of the
Company to own beneficially more than five percent of the Common Stock (setting
forth the address of each such person), by each director, by the Named Executive
Officers of the Company identified in "Item 11. Executive Compensation," and by
all directors and Named Executive Officers of the Company as a group. Shares
issuable on exercise of warrants or options exercisable within 60 days are
deemed to be outstanding for the purpose of computing the percentage ownership
of persons beneficially owning such warrants or options, but have not been
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person. Except as otherwise indicated, the persons indicated below
have sole voting and investment power with respect to the shares indicated as
owned by them except as otherwise stated in the notes to the table.
<TABLE>
<CAPTION>
Amount and Nature
Name and address of Beneficial Owner of Beneficial Ownership Percent of Class
- ------------------------------------ ----------------------- ----------------
<S> <C> <C>
Peter C. Madsen (1) 1,278,220 7.75%
Sterling, Virginia
Robert C. Abbott 257,408 (2) 1.56%
Reston, Virginia
William A. Flanagan 241,088 (3) 1.46%
Sterling, Virginia
Edward R. Olson (1) 36,667 (4) 0.22%
Reston, Virginia
Thomas G. Amon (1) 33,317 (5) 0.20%
New York, New York
Edward C. Bursk 500 0.00%
Centreville, Virginia
Mark H. Rafferty (1) 143,420 (6) 0.86%
Centreville, Virginia
William A Grant 91,666 (7) 0.55%
Ashburn, Virginia
Thomas Colligan 501,668 (8) 3.04%
Reston, Virginia
Safa Alkateb 37,055 (9) 0.22%
Sterling, Virginia
Kenneth Bloom 719,149 4.36%
Norwalk, Connecticut
--------- -----
3,340,158 20.24%
</TABLE>
32
<PAGE> 63
1) Director
2) Gives effect to 65,000 options owned by Abbott's estate exercisable
within 60 days. Mr. Abbott died on July 21, 1999.
3) Gives effect to 21,667 options owned by Flanagan exercisable within 60
days.
4) Gives effect to 36,667 options owned by Olson exercisable within 60
days.
5) Shares are owned by the Thomas G. Amon Pension and Profit Sharing Plans.
Gives effect to 26,667 options owned by Amon exercisable within 60 days.
6) Gives effect to 100,000 options owned by Rafferty exercisable within 60
days.
7) Gives effect to 54,999 options owned by Grant exercisable within 60
days.
8) Gives effect to 41,666 options owned by Colligan exercisable within 60
days
9) Gives effect to 35,555 options owned by Alkateb exercisable
within 60 days
10) Based upon 16,484,159 shares outstanding at July 8, 1999.
The Company is unaware of any arrangement the operation of which could at a
subsequent date result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On March 31, 1999, the United States Bankruptcy Court for the Eastern District
of Virginia approved the transfer of the approved bankruptcy claim of Gary H.
Davison from Mr. Davison to Peter C. Madsen. Mr. Madsen is President, Chief
Executive Officer and Chairman of the Company. As a result of this
transaction, Mr. Madsen assumed the rights held by Mr. Davison against the
Company. As such, Mr. Madsen was paid $225,000 and was issued a convertible
debenture in the amount of $675,000. Mr. Madsen's claim against the Company
and the terms and conditions of the debenture held by Mr. Madsen are consistent
with that of the other approved creditors in the Company's reorganization.
The Company paid the law firm of Amon & Sabatini $50,000 in the fiscal year
ended April 30, 1999. Thomas G. Amon, a Director of the Company since December
1994, was a partner of Amon and Sabatini. In connection with the reorganization,
Mr. Amon's law firm was paid $5,000 and issued $15,000 in convertible
debentures.
On February 13, 1997, FastComm entered into an agreement whereby it leased a
facility in Georgia that is owned by Richard L Apel. Mr. Apel was a Vice
President of the Company. The Company paid $87,000 to Mr. Apel in the fiscal
year ended April 30, 1998. Also, in connection with the fiscal 1997 acquisition
of Comstat, Mr Apel was loaned $300,000. The loan bears interest at 2 1/2 %
above the prime lending rate. The Company rejected this facility lease in its
plan of reorganization. The loan has been satisfied.
During fiscal year 1999, the Company loaned $30,000, under normal terms and
conditions, to one of its senior officers.
The terms of the transactions described above were negotiated at arms length
such that the terms were as favorable to the Company as could have been obtained
from an unaffiliated third party.
The Company has entered into separate indemnification agreements with each of
its directors and executive officers that may require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers.
33
<PAGE> 64
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) Financial Statements and Schedules.
The consolidated financial statements and financial statement schedules filed as
a part of this Report are listed beneath Item 8 of this Report.
(a)(3) Exhibits.
The exhibits filed as a part of this Report are listed on the Exhibit Index at
page 33 of this Report.
(b) Reports on Form 8-K.
The Company filed three reports on Form 8-K during the fiscal year ended April
30, 1999. Such reports disclosed the following events: (i) the filing for a
voluntary petition for reorganization under Chapter 11; (ii) the confirmation of
the Company's plan of reorganization (iii) the acquisition of KG Data Systems
Inc.
34
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on July 29, 1999.
FASTCOMM COMMUNICATIONS CORPORATION
By: /s/ Peter C. Madsen
-------------------
Peter C. Madsen
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on July 29, 1999.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Peter C. Madsen and Mark H. Rafferty, his
attorney-in-fact, with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with the exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney- in-fact, or his substitute or substitutes may do or cause to be
done by virtue hereof.
<TABLE>
<S> <C>
/s/ Peter C. Madsen
-------------------------------------- President (Principal Executive Officer)
Peter C Madsen and Director
/s/ Mark H. Rafferty
-------------------------------------- Vice President - Finance, Treasurer and Director
Mark H. Rafferty (Principal Financial and Accounting Officer)
/s/ Thomas G. Amon
-------------------------------------- Director
Thomas G. Amon
/s/ Edward R. Olson
-------------------------------------- Director
Edward R. Olson
</TABLE>
35
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential
Exhibit Page
No. Description Number
- --- ----------- ------
<S> <C>
3.1* Amendment to Restated Articles of Incorporation
3.2** By-laws, as amended
4.1**** Form of Securities Purchase Agreement between the Company and
Capital Ventures, International, Nelson Partners, Olympus
Securities, Ltd. and CC Investments, LDC.
4.2**** Registration Rights Agreement between the Company and
Richard L. Apel.
4.3**** Registration Rights Agreement between the Company and Capital
Ventures, International, Nelson Partners, Olympus Securities,
Ltd. and CC Investments, LDC.
4.4**** Form of Convertible Debenture
4.5**** Form of Warrant
4.6**** Proposed Form of Certificate of Designations, Preference and
Rights
10.0** Employment Agreement between the Company and Robert C. Abbott
10.1** October 15, 1987 License Agreement between
the Company and Data Race, Inc.
10.2*** February 27, 1991 Lease Agreement between the Company and
Dulles/Route 28 Limited Partnership with respect to the
premises at 45472 Holiday Drive, Sterling, VA 22110
10.3*** Employment Agreement between the Company and William Flanagan
10.4*** Technology Transfer Agreement with Sigma Technology
10.5*** Agreement in Principle with Watch Hill Research
10.6*** Technology License Agreement with Protocom Devices
10.7*** Loan Agreement with Sovran Bank
10.8*** Employment Agreement among the Company, Robert N. Dennis and
Edward R. Olson, as the "Current Directors," and Peter C. Madsen.
10.9*** Option Agreement by the Company in favor of Charles L. Deslaurier.
10.10*** Option Agreement by the Company in favor of Rick Sampley.
10.11*** Amended and Restated Employment Agreement between the Company
and Robert N. Dennis.
10.12* Exclusive Master Distribution Agreement for FastComm Products
between FastComm Communications Corporation and Daitel Technologies
10.13* Distribution Agreement for products between FastComm
Communications Corporation and C&L Communications, Inc.
10.14* Distributor Agreement for FastComm products between FastComm
Communications Corporation and Tadiran, Ltd.
10.15* Distribution Agreement between the Company and Sumitronics, Inc.
10.16* Consulting Agreement between Gary H. Davison and Newbridge Networks Inc.
10.17* Agreement between the Company and ZyBel Microsystems, Inc.
10.18 (a) Plan of Reorganization Under Chapter 11
10.19 (b) Acquisition Agreement, KG Data Systems, Inc.
10.20 (c) Employment Agreement of Dr. Kenneth A. Bloom
11.0* Statement re: Computation of per share earnings.
</TABLE>
- -----------
* Filed with revised form 10KA filed August 12, 1994.
36
<PAGE> 67
** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-18 Registration Statement, SEC File
Number 333-19758.
*** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-3 Registration Statement, SEC File
No. 333-43374.
**** These exhibits are incorporated by reference from the corresponding
exhibits to the Company's Form S-3 Registration Statement, see File
No. 333-26459
(a) Filed with Form 8K dated April 6, 1999
(b) Filed with Form 8K dated April 21, 1999
(c) Filed with Form 8K dated April 21, 1999
37
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-1-1998
<PERIOD-END> APR-30-1999
<CASH> 243,094
<SECURITIES> 0
<RECEIVABLES> 917,492
<ALLOWANCES> 300,000
<INVENTORY> 2,658,788
<CURRENT-ASSETS> 3,777,494
<PP&E> 1,791,661
<DEPRECIATION> 1,159,702
<TOTAL-ASSETS> 5,581,058
<CURRENT-LIABILITIES> 1,854,670
<BONDS> 2,690,357
0
0
<COMMON> 161,429
<OTHER-SE> 874,602
<TOTAL-LIABILITY-AND-EQUITY> 5,581,058
<SALES> 4,653,305
<TOTAL-REVENUES> 4,653,305
<CGS> 2,679,255
<TOTAL-COSTS> 5,409,891
<OTHER-EXPENSES> 2,863,127
<LOSS-PROVISION> 300,000
<INTEREST-EXPENSE> 104,894
<INCOME-PRETAX> (6,382,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,382,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 833,149
<CHANGES> 0
<NET-INCOME> (5,549,551)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)
</TABLE>
