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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, 2000
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 ______
Commission File Number: 0-17168
FASTCOMM COMMUNICATIONS CORPORATION
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(Exact name of registrant as specified in its charter)
VIRGINIA 54-1289115
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
45472 HOLIDAY DRIVE
DULLES, VIRGINIA 20166
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(Address of principal executive offices) (Zip Code)
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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APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes X No
--- ---
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 5, 2000, was $49,634,919
(22,059,964 shares times $2.25). As of July 5, 2000, there were 26,388,699
shares of the Common Stock of the registrant outstanding.
Documents incorporated by reference: NONE
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FASTCOMM COMMUNICATIONS CORPORATION
FORM 10 K
FOR THE YEAR ENDED APRIL 30, 2000
TABLE OF CONTENTS
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PART I. PAGE
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Item 1. Description of Business. 3
Item 2. Description of Properties. 10
Item 3. Legal Proceedings. 10
Item 4. Submission of Matters to Vote of Security Holders. 11
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PART II. PAGE
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 12
Item 6. Selected Financial Data. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 18
operations.
Item 7A Market Risk 25
Item 8. Financial Statements and Supplementary Data. 26
Item 9. Changes in and Disagreements with Accountants on Accounting 27
and Financial Disclosure
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PART III. PAGE
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Item 10. Directors and Executive Officers of the Registrant. 28
Item 11. Executive Compensation. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management. 35
Item 13. Certain Relationships and Related Transactions. 36
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PART IV. PAGE
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 37
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements" within the
meaning of an made under the safe harbor provisions of section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). From time to time, we may publish or
otherwise make available forward-looking statements of this nature.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, future events or performance, and underlying assumptions and
other statements, which are not historical facts. The words "may", "could",
"should", "will", "project", "intend", "continue", "believe", "anticipate",
"estimate", "expect", "plan", "intend" and similar expressions are intended to
identify forward looking statements. Examples of forward-looking statements
include statements regarding, among other matters, our plans, intentions,
beliefs and expectations about the following:
Our future prospect, including our revenues, income, margins, profitability,
cash flow, liquidity, financial condition and results of operations;
Our business plans and strategies;
The risks and uncertainties related to our business;
Our products and services, market position, market share, business, growth
strategies and strategic relationships;
Industry trends, competitive conditions and market conditions, segments and
trends;
The sufficiency of funds from operations and available borrowings to meet our
future working capital and capital expenditure needs;
These forward-looking statements are based on the current plans, intentions,
beliefs and expectations of management as well as assumptions made by and
information currently available to management. You are cautioned not to place
undue reliance on these forward-looking statements. Forward-looking statements
are subject to substantial risks and uncertainties. Any or all of these
forward-looking statements could turn out to be wrong. Forward-looking
statements will be affected by inaccurate assumptions we might make or by known
or unknown risks and uncertainties that could cause actual results to differ
materially from those expressed or implied by the forward-looking statements.
These risks and uncertainties include, but are not limited to, the factors
described under "Additional Factors That May Affect Our Business and Future
Results" in Item 5 below, as well as other risks and uncertainties discussed
elsewhere in this Report, in documents incorporated by reference in this Report
and in our other reports and filings with the Securities and Exchange Commission
("SEC"). We undertake no duty or obligation to update or revise any
forward-looking statements for any reason, whether as a result of new
information, future events or otherwise.
PART I.
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
FastComm Communications Corporation (the "Company" or "FastComm") designs,
develops and manufactures signaling gateway products that bridge the gaps that
exist between incompatible communications networks, integrated access devices
that serve as advanced voice/data/video/data convergence routers for enterprise
and carrier users, IBM data center products, and protocol converters
specifically designed for Unisys environments. FastComm also provides advanced
internet protocol and data solutions over Frame Relay and xDSL such as
voice/data integrated access devices (IAD's) and routers.
The Company's goal is to provide customers with leading edge technology and a
cost-effective means of incorporating these technologies into existing or new
networks. FastComm is positioning itself at the forefront of the evolving
converged networks with a customer base that includes domestic and international
corporations, carriers, internet service providers, competitive local exchange
carriers, and State and Federal government agencies.
The Company targets business customers and designs its products for volume sales
through third party resellers such as network product and service dealers,
systems integrators, telephone carriers and original equipment manufacturers.
These resellers form a primary distribution channel for the Company and also
provide installation and maintenance support services.
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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.
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)
On March 31, 2000, the Company completed its acquisition of substantially all of
the assets and certain liabilities of Cronus Technology, Inc., ("Cronus") a
privately held Illinois corporation that designs, manufactures and sells system
compatibility solutions to the telecommunications industry. The Company believes
that the Cronus acquisition provides it with a series of signaling gateway
products that may be sold to multinational telecommunications corporations at
gross margins significantly greater than the frame relay product line. Further,
Cronus has 22 experienced software engineers which can allow the Company to
significantly expand its research and development activities which could lead to
more efficient product development. (See Item 7)
The Company's shares are quoted on the OTC Bulletin Board under the symbol
FSCX.OB.
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. 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. The Plan became effective on April 12, 1999. The Plan
provided for cash and debenture payments equal to 100% of each allowed claim
plus interest. The positions of all common shareholders were preserved.
Confirmation of the Company's Plan resulted in an extraordinary gain of $833,149
in the fiscal year ended April 30, 1999. On November 18, 1999, a motion for
final decree was granted and the case was closed.
Pursuant to the Plan, Class 1 creditors representing existing holders of
convertible debentures, were 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 cash payments totaling 25% of the allowed
claim. The Company issued debentures to these unsecured creditors for the
remaining 75% of their allowed claims. 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.
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 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 preceding the date of conversion. The Company may
execute a cash prepayment of the debenture at any time. The debentures mature on
April 12, 2003. Any debentures not converted by this date will automatically
convert into common stock of the Company. At April 30, 2000, $767,602 in
convertible debentures were outstanding.
The Company is in compliance with all of the terms and conditions of its Plan.
FASTCOMM'S PRODUCTS
FastComm's suite of products include:
SIGNALING GATEWAY PRODUCT FAMILY
The FastComm line of signaling gateways bridges the gap between incompatible
communications networks, enabling seamless communication between in-band to
in-band, in-band and out-of-band networks and out-of-band to out-of-band SS7,
ISDN, and xGCP networks. There are 4 products in the signaling gateway product
line:
o SIGNALPATH(TM) 230 (SP-230) is a 52 T1/E1 signaling gateway allowing
communication between in-band and out-of-band networks or between networks
supporting different out-of-band protocols. As a signaling gateway supporting
multiple national SS7 and in-band variants, the SP-230 could extend the
softswitch architecture to foreign markets immediately.
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o SP-201 is a 4 T1/E1 variant of the SP-230.
o TSC-100 is a 24 T1/E1 signaling gateway allowing communication between
different variants of in-band signaling.
o MUX-100 is an analog to digital converter. Protocol conversion is an available
option.
INTEGRATED ACCESS DEVICES (IAD'S) PRODUCT FAMILY
Integrated Access Devices aggregate multiple traffic types (i.e. voice/fax, IP,
video, etc.) onto a single access port or circuit. The FastComm IADs consist of
the following two products:
o METROLAN(TM) family of IADs is ideal for remote office/branch office
environments. Supports up to 3 analog voice/fax ports, Ethernet, and up to 3
physical ports with extensive IP/legacy support.
o GLOBALSTACK(TM) is a modular IAD that complements the MetroLAN(TM) for medium
to large and central site environments. Supports up to 60 compressed digital
voice/fax channels or 6 voice interfaces, Ethernet and a variety of serial data
interfaces (i.e. V.35, X.21, V.24, T1/FT1, E1/N*64kbps, and/or 56/64kbps
CSU/DSUs).
DATA CENTER PRODUCTS FAMILY
The Data Center product family is geared toward providing data routing
capability for IP and legacy communications.
o CHANLCOMM(R) provides the IBM mainframe user with the ability to perform high
speed SNA/SCLC/Bisync and LAN communications without the need for a traditional
front-end processor or costly software products such as NCP or SSP.
o QUICK II(TM) is an integrated router, protocol converter and terminal server
all in one easy to manage compact chassis, for attaching Unisys Poll Select
devices into IP networks.
o MONOFRAD(TM) is a data router supporting a Network and a single User port.
o RINGFRAD(TM) is a data router supporting a Token Ring, a Network port and up
to 4 User ports.
o WEBROUTER(TM) is a compact, low cost Internet/Intranet router supporting
Ethernet and a single Network port.
o ETHERFRAD(TM) is a family of integrated IP and legacy data routers supporting
Ethernet, a Network port and up to 5 User ports.
SIGNALPATH 230
The SignalPath 230 (SP 230) is an advanced signaling protocol converter designed
to solve signaling compatibility problems that exist between communications
networks. Different types of communications protocols, both in-band and
out-of-band, exist globally making communications between such networks
impossible. The SP 230 breaks down the communications barriers presented by
these different protocols and enables a seamless flow of information across any
network. The SP 230 can interface with switches and gateways provided by Cisco,
Lucent, Nortel, Siemens, Ericsson, Alcatel and others. As a signaling gateway
supporting multiple national SS7 and in-band variants, the SP-230 could extend
the softswitch architecture to foreign markets immediately.
METROLAN
The MetroLAN router combines analog voice from switches, PBXs, key systems,
telephones, and the public telephone network with LAN/legacy data & multimedia
and transports it over switched or dedicated digital networks. MetroLAN
satisfies the needs of small office/branch offices 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 compressed 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.
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.
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
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(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 IADS or routers at remote
sites, creating "pull through" business for the Company.
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.
NEW PRODUCT DEVELOPMENT
The Company invests heavily in research and development and expects such
investment to continue.
Recorded expenses for research and development have been as follows:
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Fiscal year 2000 $2,966,000 46% of revenue
Fiscal year 1999 $2,388,000 51% of revenue
Fiscal year 1998 $2,255,000 25% of revenue
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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. Management believes that the future success of the
Company depends on its ability to continue to enhance its products, improve
product performance and functionality and to develop new products that address
emerging markets. Management believes that significant expenditures for research
and development will continue to be required.
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 greater engineering resources and more internal
expertise, may be able to develop a larger portion of their products without
outside technology. Elimination of 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.
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 non-compliance with environmental
laws or regulations.
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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
DOMESTIC
The Company targets its signaling gateway products and its IAD product line to
business customers and designs its products for volume sales through third party
resellers such as network product and service dealers, systems integrators,
telephone carriers and original equipment manufacturers. The Company has
existing relationships and contracts with several large customers such as
Lucent, Nortel, Siemens and Pacific Access Technology. These resellers form a
primary distribution channel for the Company and, in some instances, provide
installation and maintenance support services.
To date, the Company has marketed the ChanlComm(R) product line directly to end
users and will continue to do so until reseller relationships are developed. The
Company is in discussion with several potential resellers of the ChanlComm
product. Since discussions are in the preliminary stages, no assurance can be
made as to the outcome of these discussions. Unisys and Anicom sell the Quick II
directly to their customer base.
During fiscal year 2000, sales to Amadeus, Pacific Access Technology, and Anicom
accounted for 18%, 15% and 12% of total sales. During fiscal years 1999 and
1998, sales to Alcatel Data Networks accounted for 28% and 32% of total sales.
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 35 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 fiscal 2000, 1999 and 1998, the Company had export
sales to foreign customers totaling $616,000, $1,800,000 and $3,292,000,
respectively. In fiscal 1999 and 1998 the majority of the sales to Alcatel Data
Networks were for export, primarily to Latin America and Asia.
During fiscal year 2000, the Company placed significant emphasis on
international selling opportunities. The Company increased its international
sales force and executed new reseller contracts with distributors in Argentina,
Bolivia, Bosnia, China, Costa Rica, El Salvador, Guatemala, Honduras, Hong Kong,
Korea, Mexico, Nicaragua, Peru, Suriname, Tobago and Trinidad. The Company is in
discussions, of various stages, with significant international customers. Since
contracts have not yet been executed, 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
recently signed a three year agreement with Sumisho Electronics to supply the
Japanese Data Center market with the ChanlComm 7790 product.
The Company's export sales may be subject to restrictions on foreign operations,
including restrictions imposed by foreign governments on imports as well as U.S.
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.
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NCR Corp. and Unisys have signed agreements with the Company whereby they assume
responsibility for installation and/or maintenance, under certain circumstances,
of FastComm products sold by them or by third parties. The Company may enter
into similar agreements with others in the future.
PROMOTION
The Company places advertisements in trade publications that stress the unique
product benefits. 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.
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:
SIGNALING GATEWAY PRODUCT FAMILY: The Company believes that there is a distinct
market for signaling gateways and that the SignalPath product family is well
positioned to take advantage of this trend. Competitors include California-based
TEKELEC, Inet Technologies, Hewlett-Packard, Sun Microsystems, and Telesoft
Design Ltd. Although, Sun and Hewlett Packard have SS7 interfaces, they focus on
their server market without much emphasis on the multitude of international
signaling variants.
The complexity and lack of interworking standards represent high barriers to
entry. Accordingly, very few companies concentrate on this market. Those
companies that have demonstrated development of signaling products have
typically become acquisition targets of larger telecommunications companies.
INTEGRATED ACCESS DEVICES (IAD'S) PRODUCT FAMILY: Competition is extensive in
this marketplace. Major competitors include the Motorola Vanguard product line,
Cisco Systems' 2520-2523 and 3800, and the ACT Networks' Netperformer product
family. While the Company currently has less than a 2% share of the total IAD
market, management believes that the Company's products including prioritization
and, in particular, integrated voice capabilities, are extremely attractive at
the current selling prices.
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 IAD vendor offers a channel-attached
device. Among router vendors, only Cisco has announced a channel attachment
option to their larger router line. This channel attachment technology 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 for several years.
Current users of IBM front end processors ("FEP") were advised that IBM
discontinued support for certain older models in December 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.
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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.
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.
Payments are spread over a 24-month period. Deliverables include DSP unit
licenses and developer's kit and MCU unit licenses and developer's kit.
On November 24, 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.
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 IAD/ 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
relationships 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
manufacturers 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.
EMPLOYEES
At July 5, 2000, the Company had 103 full-time employees. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
that its employee relations are satisfactory.
FUTURE PROSPECTS
On a forward-looking basis, the Company finalized the development of its
GlobalStack and MetroLan product lines, all of which have voice, data and video
capabilities. The Company has added new features to its Quick product line that
qualify this product for a larger and enhanced distribution channel. The Company
believes that the GlobalStack and MetroLan products have a strong international
application. Accordingly, the Company has enhanced its international selling
presence in Brazil, Australia, the Pacific Rim, Colombia, Venezuela and Central
America.
9
<PAGE> 10
During its fiscal year ended April 30, 2000, the Company executed non exclusive
distribution agreements with resellers in Argentina, Bolivia, Bosnia, China,
Costa Rica, El Salvador, Guatemala, Honduras, Hong Kong, Korea, Mexico,
Nicaragua, Peru, Suriname, Tobago and Trinidad.
The acquisition of Cronus allows FastComm to offer signaling gateways that
bridge the gap between incompatible communications networks. These gateways
enable seamless communication between in-band and out-of-band networks, or
between out-of-band to out of band SS7 variants. Cronus has existing
relationships and contracts with several large multi national customers such as
Nortel, Lucent and Siemens. Discussions with other large customers are ongoing.
The Company believes that it is well positioned to capitalize on increasing
international cross border traffic and the growing voice over packet market. The
Company believes that through additional marketing and development efforts,
Cronus product line sales could increase significantly in fiscal 2001.
The technologies acquired as part of this acquisition are complementary and
enable the Company to migrate into new marketplaces such as the softswitch.
Softswitch is an alternative to circuit based switching technology. Management
believes that softswitch will force equipment makers to require more signaling
gateway products. The Company believes that it will have the opportunity to
complement softswitch solutions offered by companies currently in this
marketplace as well as perhaps move into the softswitch market itself, at some
future date.
Initial shipments of the ChanlComm(R) 7790 product, for field trial purposes,
commenced in the fourth quarter oF fiscal 2000. The Company anticipates that
sales of the ChanlComm(R) 7790 product could begin generating significanT
revenues commencing mid year of its fiscal year ended April 30, 2001. The
Company recently signed a three year agreement with Sumisho Electronics to
supply the Japanese Data Center market with ChanlComm 7790 product. The Company
believes that this agreement represents a major milestone for this product line.
In late July 2000, subsequent to year end, the 7790 product was released to
production and commercial customer shipments commenced.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive, administrative 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 $284,000 for the fiscal year
ended April 30, 2000. This lease expires April 30, 2003. The Company's research
and development, technical support and manufacturing operations are located in a
leased 17,250 square foot facility located in Chantilly Virginia. Aggregate base
rent and common charges for this facility approximate $178,000 on an annual
basis. This lease, which was assumed as part of the Company's acquisition of
Cronus, expires on September 30, 2002.
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 approximated $49,000 for the fiscal year ended April 30, 2000.
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
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. In September 1999, the Company, its Chief Executive Officer and its
Chief Financial Officer agreed to a settlement with the SEC. Without admitting
or denying the allegations in the complaints filed by the SEC, the Company
consented to the entry of a final Judgment which enjoins it from violations of
Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange
Act of 1934. Without admitting or denying the allegations, the Company's Chief
Executive Officer and its Chief Financial Officer each agreed to consent to the
entry of an Order to cease and desist committing or causing any violations or
any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act and Rules 12b-20 and 13a-13 promulgated thereunder. The Company's
Chief Financial Officer also agreed to cease and desist from committing or
causing any violations or any future violations of Rule 13a-1 promulgated under
the Exchange Act.
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 Court and the Company emerged from Bankruptcy
protection. The Plan of Reorganization became effective on April 12, 1999. The
Plan provided for cash and debenture payments equal to 100% of each allowed
claim plus interest. The positions of all common shareholders were preserved.
The Chapter 11 Bankruptcy filing had a negative impact on the Company's sales,
its
10
<PAGE> 11
relationships with vendors and ability to hire and retain qualified employees,
among other areas. On November 18, 1999 a motion for final decree was granted
and the case was closed.
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, 2000:
First Quarter ........................... $1.34 $ .80
Second Quarter .......................... 1.03 .69
Third Quarter ........................... 6.06 .77
Fourth Quarter .......................... 5.31 2.69
</TABLE>
<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
</TABLE>
As of July 5, 2000, there were 298 registered holders of record of the Common
Stock and the closing sales price on such date for the Common Stock as reported
by NASDAQ was $2.25 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.
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<PAGE> 13
ADDITIONAL FACTORS THAT MAY APPROVE OUR BUSINESS AND FUTURE RESULTS
THE COMPANY CAUTIONS THAT CERTAIN STATEMENTS IN THIS REPORT AND IN THE COMPANY'S
OTHER PERIODIC REPORTS FILED PURSUANT TO THE UNITED STATES SECURITIES AND
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 27A
OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, THE "SAFE HARBOR" FOR
FORWARD LOOKING STATEMENTS ENACTED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 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 risk factors, among others,
could cause actual results for the fiscal year ended April 30, 2001 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, 2000 and its quarterly reports on Form 10-Q previously filed with the
United States Securities and Exchange Commission.
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE FUTURE LOSSES
We have incurred net losses of $6,817,000 $5,550,000 and $9,089,000 for the
years ended April 30, 2000, 1999 and 1998, respectively. These losses are
primarily attributable to sales levels insufficient to meet the costs associated
with the development and marketing of new products in an emerging technology and
to litigation costs and costs associated with the Chapter 11 Bankruptcy
described below. Sales levels have been negatively impacted by delays in product
development, delays on the part of the carriers to offer frame relay services
and once offered, incorrect carrier pricing for frame relay services. The
Company actively participates in industry forums that promote frame relay and
ATM services. Further, the Company upgraded and expanded it sales, marketing and
engineering organizations, while decreasing its general and administrative
overhead. The Company is focused on acquisitions and partnership arrangements
intended to expand its technology base and increase sales. There can be no
assurance that the Company will generate sufficient revenues to meet expenses or
to operate profitably in the future.
WE RECENTLY EMERGED FROM BANKRUPTCY
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 now 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. The
Plan provides for cash and debenture payments equal to 100% of each allowed
claim plus interest. The positions of all common shareholders were preserved.
The Chapter 11 Bankruptcy filing had a negative impact on the Company's sales,
its relationships with vendors and its ability to hire and retain qualified
employees, among other areas.
WE ARE ENGAGED IN A HIGHLY COMPETITIVE BUSINESS.
The market for networking systems is extremely competitive. In most of the
markets in which we compete our competitors are more established, benefit from
greater market recognition and have greater financial, technological, production
and marketing resources than we do. Competition could become even more intense
if new companies enter the market or if our existing competitors expand their
product lines. We compete on the basis of product features and capabilities,
performance and price. An increase in competition could have an adverse effect
on our operating results, both in terms of lost market share and revenues and
required investments in research and development and sales and marketing in
order to remain competitive. There can be no assurance that we will be able to
make technological advances or that we will have sufficient resources to fund
the necessary research and development, marketing and sales efforts that will
enable us to profitably compete in our markets. 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 on April 12, 1999. The
Plan provides for cash and debenture payments equal to 100% of each allowed
claim
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<PAGE> 14
plus interest. The positions of all common shareholders were preserved. This
filing had a negative impact on sales during the 1999 fiscal year and, 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.
WE RELY ON A LIMITED NUMBER OF KEY EMPLOYEES.
Our success depends to a significant degree upon the continued contributions of
our management, marketing, engineering and technical personnel, many of whom
would be difficult to replace. In addition, as we continue to develop the
ChanlComm product line, we will need to attract and retain additional qualified
personnel. There is intense competition for qualified personnel in our industry,
and there can be no assurance that we will be able to attract and retain the
qualified personnel necessary for the development of our business. Loss of the
services of any of our key employees would be detrimental to our development. We
do not have "key man" life insurance on any of our officers or directors. 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.
WE MUST BE ABLE TO ADAPT TO CHANGES IN PROTOCOL AND OTHER TECHNOLOGY.
New Data Protocols may be developed that could displace the protocols currently
supported in Company products, requiring additional software development to
sustain the viability of those products. An announcement of such new protocols
could have a negative effect on sales of older designs, as users hesitate to
install equipment based on existing designs until they have evaluated the new
ones. There can be no assurance that the Company would have the necessary
resources, particularly the knowledgeable employees, to implement new protocols
in a timely manner. Such failure to develop adequate products in response to new
technology could adversely affect the Company's profitability. Asynchronous
Transfer Mode (ATM) is a new technology for transmitting digital information,
including voice and data, over a public or private network. Telephone companies
and other operators of public network are deploying ATM in their backbone
segments. If the ATM technology becomes much less expensive, ATM services could
become economically more attractive than frame relay services that currently are
involved in the bulk of the Company's business. If ATM were to become more
popular than frame replay, the Company would need to develop new products,
retrain its employees, and educate its sales and distribution channel partners.
There can be no assurance that the Company will have the resources necessary to
develop appropriate products in a timely manner.
WE MUST INTRODUCE NEW PRODUCTS TO COMPETE
The Company's future revenue is dependent on its ability to successfully
develop, manufacture and market products. In this regard, future growth is
dependent on the Company's ability to timely and successfully develop and
introduce new products, establish new distribution channels, develop
affiliations with leading market participants which facilitate product
development and distribution, and market existing and new products with service
providers, resellers, channel partners, and others. The introduction of new or
enhanced products requires the Company to manage the transition from older
products in order to minimize disruption in customer ordering patterns, avoid
excessive levels of older product inventories and ensure that adequate supplies
of new products can be delivered to meet customer demand. In addition, as the
technical complexity of new products increases, it may become increasingly
difficult to introduce new products quickly and according to schedule. There can
be no assurance that the Company will successfully manage the transition to new
products or that the Company's research and development efforts will result in
commercially successful new technology and products in the future.
WE MAY NEED TO SEEK ADDITIONAL CAPITAL TO FULFILL OUR BUSINESS PLAN
The Company's ability to make future capital expenditures and fund the
development and launch of new products, are dependent on existing cash and
demands on cash to support inventory for the Company's products and the
Company's return to profitability. The timing and amount of the Company's future
capital requirements can not be accurately predicted, nor can there be any
assurance that debt or equity financing, if required, can be obtained on
acceptable terms. There can be no assurance that the company will have cash
available in the amounts and at the times needed.
SOME COMPONENTS OF OUR PRODUCTS ARE AVAILABLE TO US ONLY FROM A LIMITED NUMBER
OF SUPPLIERS
Certain components used in our products are currently available from only one
source and other of the components are available from only a limited number of
suppliers. Although we have generally been able to obtain adequate supplies of
components to date, our inability to develop alternative sources if and as
required in the future, or to obtain sufficient sole source or limited source
components as required, could result in delays or reductions in
14
<PAGE> 15
product shipments. Certain products that are or may in the future be marketed
with or incorporated into our products are supplied by or under development by
third parties. These third parties may be the sole suppliers of such products.
While the Company believes there are a number of suitable manufacturers, there
can be no assurance that current or alternative sources will be able to supply
all of our demands on a timely basis. Also, an unanticipated interruption in
supply could have a short-term effect on our business. It will not be
economically practical for the Company to develop its own manufacturing capacity
in the foreseeable future.
WE ARE DEPENDENT ON PATENTS AND PROPERTY RIGHTS TO PROTECT OUR POSITION IN THE
INDUSTRY
The Company's success depends in part upon its technological expertise and
proprietary product designs. The Company relies upon its trade secret protection
efforts and, to a lesser extent, upon patents and copyrights to protect its
proprietary technologies. There can be no assurance that these steps will be
adequate to deter misappropriation or infringement of its proprietary
technologies or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. Further, given the rapid evolution of technology and uncertainties in
intellectual property law, there can be no assurance that the Company's current
or future products will not be determined to infringe proprietary rights of
others. Should the Company be sued for patent infringement, there can be no
assurance that the Company will prevail, or, if required by such litigation,
that it will be able to obtain the requisite licenses or rights to use such
technology on commercially reasonable terms. In addition, any litigation,
regardless of the outcome, could result in substantial costs to the Company.
WE COULD BE AFFECTED BY GOVERNMENTAL RESTRAINTS OR CHANGES IN GOVERNMENTAL
POLICY
The Company's products are subject to regulation by the Federal Communications
Commission (the "FCC"), and each of the Company's products must typically be
tested before it can be introduced into the market. Any inability of the
Company's products to conform to FCC regulations or any failure of the Company's
products to meet FCC testing requirements could delay the introduction of the
Company's products into the market, impact the Company's relationships with its
OEMs and otherwise adversely affect the Company. Foreign authorities often
establish telecommunications standards different from those in the United
States, making it difficult and more time-consuming to obtain the required
regulatory approvals. Any significant delay in obtaining such regulatory
approvals could have an adverse effect on the Company's operating results.
Furthermore, changes in such laws, regulations, policies or requirements could
affect the demand for the Company's products or result in the need to modify
products, which may involve substantial costs or delays in sales and could have
an adverse effect on the Company's future operating results.
OUR OUTSTANDING SHARES MAY BE DILUTED
A substantial number of shares of Common Stock are or will be issuable by the
Company upon the exercise of warrants and options which the Company has issued,
which could result in dilution to a Shareholder's percentage ownership interest
in the Company and could adversely affect the market price of the Common Stock.
On July 5, 2000, there were issued and outstanding a total of 26,388,699 shares
of Common Stock. If all convertible debentures, warrants and stock options which
the Company has issued were deemed converted and exercised, as the case may be,
as of that date, there would be issuable approximately 5,880,144 shares of
Common Stock. Upon such conversion and exercise, there would be outstanding
32,268,843 shares of Common Stock. The sale or availability for sale of a
significant number of shares of Common Stock in the public market could
adversely affect the market price of the Common Stock. The availability to the
Company of additional equity financing, and the terms of any such financing, may
also be adversely affected by the foregoing.
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 if 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
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<PAGE> 16
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.
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. The Company's shares are
currently quoted on the NASDAQ OTC Bulletin Board.
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.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected financial data for the five fiscal
years in the period ended April 30, 2000. The statement of operations data for
the fiscal years ended April 30, 2000, 1999 and 1998 and the balance sheet data
at April 30, 2000 and 1999 are derived from and are qualified by reference to
the 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 statement
of operations data for the fiscal years ended April 30, 1997 and 1996 and the
balance sheet data at April 30, 1998, 1997 and 1996 are derived from 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
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,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: ($000's except per share data)
<S> <C> <C> <C> <C> <C>
Total revenues $ 6,415 $ 4,653 $ 8,907 $ 11,163 $ 10,009
Operating costs and expenses
Costs of goods sold 4,074 2,679 5,441 4,737 5,047
Other operating expenses 9,043 7,610 11,684 7,202 5,722
-------- -------- -------- -------- --------
Total operating costs and expenses 13,117 10,289 17,125 11,939 10,769
Operating loss (6,702) (5,636) (8,218) (776) (760)
Other income (expense), net (115) (104) (871) 181 129
Reorganizational items, net -- (643) -- -- --
Loss before extraordinary item (6,817) (6,383) (9,089) (595) (631)
Extraordinary gain -- 833 -- -- --
-------- -------- -------- -------- --------
Net loss $ (6,817) $ (5,550) $ (9,089) $ (595) $ (631)
======== ======== ======== ======== ========
Basic and diluted loss before extraordinary
item $ (0.35) $ (0.49) $ (0.87) $ (0.06) $ (0.07)
Extraordinary item -- 0.06 -- -- --
Basic and diluted loss per share $ (0.35) $ (0.43) $ (0.87) $ (0.06) $ (0.07)
Weighted average number of shares
outstanding during each period $ 19,277 $ 12,917 $ 10,391 $ 9,961 $ 9,522
BALANCE SHEET DATA:
Total assets $ 21,199 $ 5,581 $ 9,226 $ 12,622 $ 9,034
Total long term liabilities $ 771 $ 2,690 $ 1,205 $ 3,000 $ --
Shareholders' equity $ 13,770 $ 1,036 $ 3,246 $ 7,759 $ 6,880
</TABLE>
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<PAGE> 18
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 - ADDITIONAL
FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS", 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. 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. The Plan provided for cash and debenture payments equal
to 100% of each allowed claim plus interest. The positions of all common
shareholders were preserved. Confirmation of the Company's Plan resulted in an
extraordinary gain of $833,149 in the fiscal year ended April 30, 1999. On
November 18, 1999, a motion for final decree was granted and the case was
closed.
PLAN OF REORGANIZATION
Pursuant to the Plan, Class 1 creditors representing existing holders of
convertible debentures, were 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 cash payments totaling 25% of the allowed
claim. The Company issued debentures to these unsecured creditors for the
remaining 75% of their allowed claims. 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.
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. The Company may
execute a cash prepayment of the debenture at any time. The debentures mature on
April 12, 2003. Any debentures not converted by this date will automatically
convert into common shares of the Company. At April 30, 2000, $767,602 in
convertible debentures were outstanding.
The Company is in compliance with all of the terms and conditions of its Plan.
FUTURE PROSPECTS
On March 31, 2000, the Company acquired substantially all of the assets and
assumed certain liabilities of Cronus Technology, Inc. for approximately
$9,600,000, plus the assumption of liabilities of approximately $6,700,000
subject to adjustment as set forth in the agreement. Approximately $9,300,000 of
the purchase price was funded through the issuance of shares of the Company's
common stock and approximately $300,000 was paid in cash. 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 goodwill of approximately $12,000,000 related
to this transaction. The goodwill is being amortized on a straight line basis
over four years.
The acquisition of Cronus allows FastComm to offer signaling gateways that
bridge the gap between incompatible communications networks. These gateways
enable seamless interoperability between in-band and out-of-band networks, or
between different types of out-of-band networks. Cronus has existing contracts
and relationships with several large multi national customers such as Nortel,
Lucent and Siemens. The Company believes that it is well positioned to
capitalize on increasing international cross border traffic and the growing
voice over packet market. The Company believes that through additional marketing
and development efforts, Cronus product line sales will increase considerably
from that of the $9 million recorded during the twelve months ended March 31,
2000.
18
<PAGE> 19
The technologies acquired as part of this acquisition are complementary and
enable the Company to migrate into new marketplaces such as the softswitch.
Softswitch is an alternative to circuit based switching technology. Management
believes that softswitch will force equipment makers to require more signaling
gateway products. The Company believes that it will have the opportunity to
complement softswitch solutions offered by companies currently in this
marketplace as well as move into the softswitch market itself.
In fiscal year 2000, the Company finalized the development of its GlobalStack
and MetroLan product lines, all of which have voice, data and video
capabilities. The Company has added new features to the Quick product that
qualify this product for a larger and enhanced distribution channel. The Company
believes that the GlobalStack and MetroLan products have a strong international
application. Accordingly, the Company has enhanced its international selling
presence in Brazil, Australia, the Pacific Rim, Colombia, Venezuela and Central
America. During its fiscal year ended April 30, 2000, the Company executed non
exclusive distribution agreements with resellers in Argentina, Bolivia, Bosnia,
China, Costa Rica, El Salvador, Guatemala, Honduras, Hong Kong, Korea, Mexico,
Nicaragua, Peru, Suriname, Tobago and Trinidad.
Initial shipment of the ChanlComm(R) 7790 product for field trial purposes
commenced in the fourth quarter oF fiscal 2000. The ChanlComm product group was
developed by KG Data Systems, Inc. which the Company acquired on March 31, 1999.
The Company anticipates that sales of the ChanlComm(R) 7790 product will begin
generatinG significant revenues commencing mid year of its fiscal year ended
April 30, 2001. The Company recently signed a three year agreement with Sumisho
Electronics to supply the Japanese Data Center market with ChanlComm 7790
product. The Company believes that this agreement represents a major milestone
for this product line. In late July 2000, subsequent to year end, the 7790
product was released to production and commercial customer shipments commenced.
The Company anticipates that it will require additional funding to meet future
working capital needs and research and development expenses. It is anticipated
that such funding will be generated by way of additional placements of 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. Subsequent to April 30, 2000, but prior to
the issuance of this report, the Company raised an additional $1,170,000 through
a private placement offering of securities to a group of accredited investors.
The Company has outstanding warrants that, if exercised, could generate a
maximum of $7,293,000 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)
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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As explained in the succeeding
paragraphs, the Company has sustained recurring operating losses and cash flow
deficits in fiscal years 2000, 1999 and 1998. In addition, the Company must
obtain funds from outside sources in fiscal year 2001 to successfully implement
its business plan. Presently, the Company has no firm commitments from outside
sources to provide these funds. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not contain any adjustments that might result from the outcome of these
uncertainties.
19
<PAGE> 20
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: 2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Total revenues 100% 100% 100%
Operating costs and expenses
Costs of goods sold 64% 58% 61%
Selling, general and administrative 78% 102% 86%
Research and development 46% 51% 25%
Reserve for litigation settlement -- -- 13%
Depreciation and amortization 16% 10% 7%
---- ---- ----
204% 221% 192%
---- ---- ----
Operating loss (104)% (121)% (92)%
Other income (expense), net (2)% (2)% (10)%
Reorganizational items -- (14)% --
---- ---- ----
Loss before extraordinary gain (106)% (137)% (102)%
Extraordinary gain -- 18.00% --
---- ---- ----
Net loss (106)% (119)% (102)%
==== ==== ====
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues increased from $4,653,000 to $6,415,000 or by 38% during fiscal
2000 as compared to fiscal 1999. The $1,762,000 increase was primarily
attributable to $1,218,000 associated with the introduction of the GlobalStack
and MetroLan product lines and $856,000 in sales of the Cronus product line. The
Company acquired Cronus effective March 31, 2000 and accordingly included one
month of Cronus sales in fiscal 2000. The Company did not make any significant
price adjustments during the current fiscal year.
The Company believes its future growth will be achieved through the sale of its
voice and date integrated access products, the ChanlComm(R) product line and its
signaling gateway products. During the fiscal year ended ApriL 30, 2000, three
customers accounted for 18%, 15% and 12% 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, decreased from 42% to 36%
during fiscal 2000 as compared to fiscal 1999. During fiscal 2000, the Company
wrote off, against its existing reserve, inventory made obsolete by new product
developments, the acquisition of Cronus and a change in overall product focus.
Accordingly, after the significant inventory writedown, the Company also
increased its reserve for inventory obsolescence by $815,000. The increase in
the reserve reduced gross margin by approximately 13%. The Company's gross
margin was positively impacted by the introduction of the GlobalStack and
MetroLan product lines which produce gross margins significantly greater than
products offered by the Company in the previous fiscal year. As of April 30,
2000, the Company has recorded a $600,000 reserve for inventory obsolescence,
which management believes is adequate.
20
<PAGE> 21
Selling, general and administrative expenses increased from $4,747,000 in fiscal
1999 to $4,984,000 in fiscal 2000. This 5% increase is primarily attributable to
expenses incurred by Cronus in April 2000 ($429,000) and increased marketing
costs ($246,000) offset by reduced employee related costs ($192,000) and reduced
equipment rental expense resulting from terminated and renegotiated leases
($210,000).
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
$2,388,000 in fiscal 1999 to $2,966,000 in fiscal 2000. This 24% increase is
primarily attributable to one months worth of expenses incurred by Cronus
($278,000) and increased labor and material costs associated with new product
development and new product prototypes associated with the GlobalStack, MetroLan
and ChanlComm product lines. 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 increased from $475,000 in fiscal 1999 to
$1,093,000 in fiscal 2000. This increase is primarily attributable to one months
amortization of goodwill associated with the Cronus acquisition ($323,000); the
full year effect of the amortization of goodwill associated with the acquisition
of KG Data and to a lesser degree, depreciation associated with Cronus fixed
assets and other recent capital expenditures.
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 this
time period. 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.
During the fiscal year ended April 30, 1999, one customer accounted for 28% of
total sales.
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 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.
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 ChanlComm product line.
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.
21
<PAGE> 22
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.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 2000, the Company used approximately $4,568,000 in cash to
fund its operating activities. This amount includes $6,236,000 required to fund
the net loss, after adjusting for non-cash expenses (consisting principally of
depreciation, amortization, inventory writeoffs and adjustments to inventory
valuation accounts) and $805,000 required by increases in accounts receivable.
Inventory declined by $2,216,000, which provided liquidity.
Accounts receivable increased during the current fiscal year due to increased
sales and better collection efforts. The Company has a $275,000 allowance for
doubtful accounts at April 30, 2000, which management believes is adequate.
Inventory levels decreased $2,216,000 during fiscal year 2000. The Company wrote
off, against its existing reserve, inventory made obsolete by new product
developments, the acquisition of Cronus and a change in overall product focus.
The Company increased its reserve for inventory obsolescence by $815,000. The
Company has a $600,000 reserve for inventory obsolescence, which management
believes is adequate.
At April 30, 2000, the Company had $548,000 in unrestricted cash, a working
capital deficit of $264,000 and a current ratio of 1 to 1. Certain of the
Company's accounts receivable or inventories are collateralized under the
revolving line of credit and term loan agreement with LaSalle National Bank.
(See Item 7. Cash Requirements)
FISCAL 2000 COMPARED TO FISCAL 1999
Cash used in operating activities increased from $2,329,000 in fiscal 1999 to
$4,568,000 in fiscal 2000. The $2,329,000 increase in cash used in operating
activities is primarily attributable to the $1,518,000 increase in the net loss
for the year and by changes in working capital items in fiscal 2000 compared to
fiscal 1999. Such changes include a $3,311,000 increase in cash used to fund
accounts receivable, a $1,617,000 reduction in cash invested in inventory and
increases in other non cash expenses, primarily depreciation and amortization
accounts, asset valuation accounts.
Cash used by investing activities totaled $345,000 in fiscal 2000 as compared
$62,000 in fiscal 1999. The Company purchased $527,000 in fixed assets during
the current fiscal. This was partially offset by $182,000 assumed as part of the
Cronus acquisition.
Cash provided by financing activities totaled $5,370,000 during fiscal 2000. The
Company issued $1,087,000 in common stock during the fiscal year. Of this
amount, $152,000 remains in escrow as restricted cash. The Company received
$4,392,000 from the exercise of common stock warrants and $313,000 from the
exercise of stock options during the current fiscal year.
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. Such changes include 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 totaled $62,000 in fiscal 1999 as compared
$318,000 in fiscal 1998. The Company purchased $212,000 in fixed assets during
the fiscal year 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 raised $1,000,000 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.
22
<PAGE> 23
JULY 1999 PRIVATE PLACEMENT
During the quarter ended July 31, 1999, the Company raised an additional
$1,087,000 through a private placement of securities to a group of accredited
investors.
CONVERSION OF WARRANTS
On November 17, 1999 the Company initiated an accelerated warrant conversion
program designed to raise capital to finance working capital and product
expansion plans This program generated $3,049,000 in cash for the Company. On
February 7, 2000 the Company called for redemption certain callable warrants. In
connection with this redemption, the Company issued 333,000 common shares and
generated $500,000 in additional cash. On April 13, 2000 the Company initiated a
second accelerated warrant conversion program. Under this program, 82,330
warrants were converted into shares of common stock generating $95,000 in cash
for the Company. During the fiscal year ended April 30, 2000, the Company issued
an additional 705,754 shares of common stock related to other warrant
conversions generating an additional $748,000 in cash for the Company.
CONVERSION OF DEBENTURES
On January 13, 2000, the Company amended the terms of the Convertible Debentures
issued as part of its Plan of Reorganization. Under the terms and conditions of
this amendment, the conversion date of these debentures was accelerated from
April 12, 2000 to January 13, 2000. During the fiscal year ended April 30, 2000
$1,825,552 in debentures and accrued interest were converted into 513,249 shares
of common stock. Also during the current fiscal year, the remaining $224,684 in
debentures issued in a May 1997 private placement were converted into 274,911
shares of common stock.
CASH REQUIREMENTS
In fiscal 2001, the Company's cash commitments include minimum payments of
$499,000 under its operating lease arrangements. Management believes that
expenditures for research and development in fiscal 2001 will continue to be
significant. The Company anticipates additional capital spending for software,
computer and test equipment and furniture and fixtures in fiscal 2001. Where
possible, such capital requirements are expected to be met through lease
financing arrangements.
In connection with the acquisition of Cronus, the Company assumed liabilities
under a revolving line of credit and term loan agreement with LaSalle National
Bank. Under the revolving line of credit the Company could borrow up to the
lesser of $3,000,000 or 80% of eligible accounts receivable and 35% of eligible
inventory, as defined in the agreement. The revolving line of credit bears
interest at the bank's prime rate of interest plus 1% and was scheduled to
mature on May 1, 2001. Under the agreement, Cronus could issue letters of credit
up to $250,000 in the aggregate. There are no outstanding letters of credit as
of April 30, 2000. The term loan was payable in equal monthly principle payments
of $9,875, bears interest at the bank's prime rate of interest plus 1% and was
schedule to mature on May 1, 2001. In April 2000, the Company placed $250,000 in
escrow to further collateralize the revolving line of credit and term loan. In
July 2000, the bank informed the Company that the revolving line of credit and
term loan would mature on September 30, 2000. Accordingly, this debt has been
classified as a current liability. The Company expects to be able to refinance
this debt with another bank prior to the maturity date.
In connection with the acquisition of Cronus, the Company assumed short term
notes payable to individuals totaling $1,000,000. The notes are unsecured, bear
interest at 8.0% and mature on December 10, 2000.
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
JULY 2000 PRIVATE PLACEMENT
Subsequent to April 30, 2000, but prior to the issuance of this report, the
Company raised an additional $1,170,000 through a private placement offering of
securities to a group of accredited investors. Warrants to purchase common stock
associated with this offering are exercisable for a period of one year after the
closing date. These funds will be used for working capital purposes.
UNEXERCISED WARRANTS
The Company has warrants outstanding which, if exercised, could generate a
maximum of $7,293,000 in additional cash. 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.
Management believes that inflation did not have a material effect on operations
during the fiscal year ended April 30, 2000.
23
<PAGE> 24
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 many 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:
o 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 and paid
for by the reseller during the prior six-month period.
o 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 doubtful accounts totals $275,000, which management
believes 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 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 in fiscal 2001 will have no impact on its financial position or results
of operations.
24
<PAGE> 25
ITEM 7A. 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 is no material impact on earnings of fluctuations
in interest and currency exchange rates.
25
<PAGE> 26
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, 2000 and 1999 F-2
Statements of Operations for the Years Ended April 30, 2000, 1999 and 1998 F-4
Statements of Stockholders' Equity for the Years Ended April 30, 2000, 1999 and 1998 F-6
Statements of Cash Flows for the Years Ended April 30, 2000, 1999 and 1998 F-7
Summary of Accounting Policies F-9
Notes to Financial Statements F-13
Report of Independent Certified Public Accountants on Financial Statement Schedule F-31
Valuation and Qualifying Accounts (Schedule II) F-32
</TABLE>
26
<PAGE> 27
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, 2000 and 1999, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended April 30, 2000. 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, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended April 30, 2000 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 2000, 1999 and 1998. In addition, the
Company must obtain funds from outside sources in 2001 to successfully implement
its business plan. Presently, the Company has no firm commitments from outside
sources to provide these funds. 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 14, 2000
1
<PAGE> 28
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents (including temporary investments
of $430,000 and $133,000) $ 548,136 $ 90,727
Restricted cash (Notes 5 and 8) 321,723 152,367
Accounts receivable, net (Notes 5 and 8) 2,865,727 617,492
Receivable from employees 84,000 30,000
Inventories, net (Notes 4 and 8) 2,405,747 2,658,788
Prepaid expenses and other current assets 168,131 228,120
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 6,393,464 3,777,494
--------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, at cost, less accumulated
depreciation and amortization (Note 6) 1,690,011 631,959
--------------------------------------------------------------------------------------------------------------------
OTHER
Goodwill (Note 3) 12,547,854 1,109,838
Deferred investment advisory fees (Note 9) 480,688 -
Deposits 87,215 49,096
Deferred financing costs - 12,671
--------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 13,115,757 1,171,605
--------------------------------------------------------------------------------------------------------------------
$21,199,232 $5,581,058
====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
2
<PAGE> 29
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable (Note 8) $ 1,000,000 $ -
Revolving line of credit and term loan (Note 8) 1,268,319 -
Current portion of capital lease obligations (Note 8) 11,281 -
Accounts payable 2,583,161 1,080,713
Accrued compensation 363,109 246,615
Deferred revenue 322,801 -
Other current liabilities (Note 7) 1,109,202 527,342
--------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 6,657,873 1,854,670
--------------------------------------------------------------------------------------------------------------------
Convertible debentures (Notes 8 and 9) 767,602 2,690,357
Capital lease obligations (Note 8) 3,543 -
--------------------------------------------------------------------------------------------------------------------
TOTAL LONG TERM DEBT 771,145 2,690,357
--------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 7,429,018 4,545,027
--------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS' EQUITY (Notes 3, 9 and 10)
Common stock, $.01 par - 50,000,000 shares authorized;
25,578,472 and 16,142,974 shares issued and outstanding 255,784 161,429
Additional paid-in capital 43,391,257 23,934,667
Accumulated deficit (29,876,827) (23,060,065)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,770,214 1,036,031
--------------------------------------------------------------------------------------------------------------------
$21,199,232 $5,581,058
====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
3
<PAGE> 30
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended April 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (Note 12)
Product sales $ 6,402,255 4,091,843 $8,672,150
Product sales to related parties - - 13,335
Service revenue 12,662 561,462 221,185
--------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 6,414,917 4,653,305 8,906,670
--------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Cost of goods sold 4,074,058 2,679,255 5,440,991
Selling, general and administrative 4,984,334 4,747,003 7,622,394
Research and development 2,966,012 2,387,904 2,255,097
Provision for litigation settlement (Note 13) - - 1,195,560
Depreciation and amortization 1,092,896 475,223 611,078
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 13,117,300 10,289,385 17,125,120
--------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (6,702,383) (5,636,080) (8,218,450)
--------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Other income (expense) 22,691 (7,635) (82,692)
Interest income 54,860 8,950 174,120
Interest expense (191,930) (104,894) (962,475)
--------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (114,379) (103,579) (871,047)
--------------------------------------------------------------------------------------------------------------------
LOSS BEFORE REORGANIZATIONAL ITEMS AND
EXTRAORDINARY ITEM (6,816,762) (5,739,659) (9,089,497)
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 (6,816,762) (6,382,700) (9,089,497)
EXTRAORDINARY GAIN (Note 2) - 833,149 -
--------------------------------------------------------------------------------------------------------------------
NET LOSS $ (6,816,762) $ (5,549,551) $ (9,089,497)
====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
4
<PAGE> 31
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended April 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic and diluted loss before extraordinary
item $ (0.35) $ (0.49) $ (0.87)
Extraordinary gain - .06 -
--------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per common share $ (0.35) $ (0.43) $ (0.87)
====================================================================================================================
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING DURING EACH YEAR 19,277,293 12,917,125 10,390,552
====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
5
<PAGE> 32
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year ended April 30, 2000, 1999 and 1998
---------------------------------------------------------------------------------------------------------------------
Common Stock
------------------------ Additional
Par Paid-in Accumulated
Shares Value Capital Deficit TOTAL
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Shares issued on conversion of debentures 788,160 7,882 2,042,354 - 2,050,236
Shares issued for acquisition of
Cronus Technology, Inc. 2,944,988 29,450 9,245,682 - 9,275,132
Shares issued on exercise of stock options 182,238 1,822 310,889 - 312,711
Shares issued on settlement of notes payable 728,063 7,281 1,855,861 - 1,863,142
Warrants issued to nonemployees - - 570,817 - 570,817
Shares issued on exercise of warrants 3,682,009 36,820 4,355,364 - 4,392,184
Proceeds from sale of stock 1,110,040 11,100 1,075,623 - 1,086,723
Net loss - - - (6,816,762) (6,816,762)
---------------------------------------------------------------------------------------------------------------------
BALANCE, April 30, 2000 25,578,472 $255,784 $43,391,257 $(29,876,827) $13,770,214
====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
6
<PAGE> 33
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended April 30, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (6,816,762) $(5,549,551) $(9,089,497)
ADJUSTMENTS TO RECONCILE NET LOSS
TO CASH USED IN OPERATING ACTIVITIES
Depreciation and amortization 1,092,896 475,223 611,078
Extraordinary gain - (833,149) -
Compensation expense associated with
stock options and warrants 223,639 33,079 26,440
Provision for doubtful accounts 1,764 78,792 275,421
Write off of accounts receivable (26,764) (78,792) (85,421)
Provision for inventory obsolescence 815,347 80,000 1,110,000
Write off of inventory (1,665,347) - (240,000)
Amortization of imputed discount - - 286
Discount on convertible debentures - - 550,000
Provision for doubtful note and interest
receivable - - 316,225
Amortization of deferred financing costs 12,671 63,673 213,935
Accrued interest converted to stock 127,480 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 (750,812) 2,533,379 (168,434)
Receivable from employees (54,000) (27,240) 1,135
Inventory 2,216,398 439,278 (1,090,698)
Prepaid expense and other current assets 131,936 146,494 (87,736)
Deposits (12,078) (7,729) 135,036
INCREASE (DECREASE) IN LIABILITIES
Accounts payable 102,879 880,849 1,150,171
Provision for litigation settlement - (220,403) 1,195,560
Accrued compensation (340,424) (97,672) 74,379
Deferred revenue (6,205) - -
Other current liabilities 379,813 (315,836) 493,512
------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (4,567,569) (2,329,078) (4,394,436)
------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 34
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended April 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (526,934) (212,189) (317,639)
Payment received on notes receivable - 150,000 -
Net cash from Cronus Technology acquisition 181,718 - -
Other - 208 -
-------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (345,216) (61,981) (317,639)
-------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 1,086,723 1,000,000 -
Proceeds from exercise of warrants 4,392,184 421,101 -
Proceeds from exercise of stock options 312,711 - 18,077
Increase in restricted cash (169,356) (152,367) -
Principal payments on debt (252,068) - (29,286)
Proceeds from issuance of convertible debentures - - 2,000,000
Payment of deferred financing costs - - (100,000)
-------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,370,194 1,268,734 1,888,791
-------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 457,409 (1,122,325) (2,823,284)
CASH AND CASH EQUIVALENTS, beginning of year 90,727 1,213,052 4,036,336
-------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 548,136 $ 90,727 $1,213,052
====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
8
<PAGE> 35
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. Management believes that the Company
operates in one business segment.
USE OF ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles
requires management to make estimates and assumptions
that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets
and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results
could differ from those estimates. Certain estimates
used by management are particularly susceptible to
significant changes in the economic environment.
These include estimates of inventory obsolescence,
valuation allowances for trade receivables and
deferred tax assets and evaluation of the impairment
of goodwill. Each of these estimates, as well as the
related amounts reported in the financial statements,
are sensitive to near term changes in the factors
used to determine them. A significant change in any
one of those factors could result in the
determination of amounts different than those
reported in the financial statements. Management
believes that as of April 30, 2000, 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
UNCERTAINTIES affected by a number of factors. Sales to three
customers were 45% of total revenue in 2000. Sales to
one customer were 28% and 32% of total revenue in
1999 and 1998, respectively. 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 (see Note 12).
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 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.
9
<PAGE> 36
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
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
RECOGNITION time of product shipment. An allowance is provided
for estimated sales returns and uncollectible
accounts. Also, the Company establishes a reserve for
estimated warranty claims at the time of product
shipment.
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
EQUIPMENT AND depreciated on a straight-line basis over the
DEPRECIATION estimated useful life of 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> 37
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 ranges from 4 to 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 Statement of Financial Accounting
IMPAIRMENT Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be
disposed of ("SFAS 121"), the Company periodically
evaluates the carrying value of long-lived assets
when events and circumstances warrant such a review.
The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted
cash flow from such asset is separately identifiable
and is less than the carrying value. In that event,
a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the
long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted
at a rate commensurate with the risk involved.
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.
11
<PAGE> 38
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
CASH AND The Company considers all highly liquid investments
CASH EQUIVALENTS with 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.
COMPREHENSIVE On May 1, 1998, the Company adopted Statement of
INCOME Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Comprehensive income as
defined includes all changes to equity except those
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
2000, 1999 and 1998 because the impact of dilutive
securities is anti-dilutive.
RECENT In June 1998, the Financial Accounting Standards
ACCOUNTING Board issued Statement of Financial Accounting
PRONOUNCEMENTS Standards No. 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 in fiscal
2001 will have no impact on its financial position or
results of operations.
12
<PAGE> 39
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FUTURE The accompanying financial statements have been
PROSPECTS 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 in 2000, 1999 and 1998. The Company
developed a business plan to increase revenue and
reduce operating losses. However, the Company must
obtain funds from outside sources in fiscal 2001 to
successfully implement its business plan. Presently,
the Company has no firm commitments from outside
sources to provide these funds. 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.
The Company plans to introduce new products to its
customers in fiscal 2001, some of which will be the
ChanlComm products formerly manufactured by KG Data
Systems, Inc. (see Note 3). Also, the Company expects
to generate significant revenue from shipments of
products manufactured by Cronus Technology, Inc.
which it acquired in March 2000 (see Note 3). In
addition, the Company is increasing its marketing
efforts in Latin America and Japan in hopes of
generating revenue. In addition, the Company expects
to control production costs by outsourcing
substantially all manufacturing activity.
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.
In July 2000, the Company raised $1,170,000 through a
private placement offering of securities to a group
of accredited investors.
2. PLAN OF On June 2, 1998, the Company filed a voluntary
REORGANIZATION petition for reorganization under Chapter 11 of the
United States Bankruptcy Code. This filing was a
direct result of enforcement activities by a judgment
creditor (See Note 13). 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.
13
<PAGE> 40
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Pursuant to the Plan, Class 1 creditors, representing
existing holders of convertible debentures, were
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. Each
debentureholder had 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. As of April 30,
2000, all of these debentures had been converted into
common stock.
14
<PAGE> 41
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Confirmation of the Plan on March 30, 1999 resulted in
an extraordinary gain determined as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
<S> <C> <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 3,211,771
--------------------------------------------------------------------------------
EXTRAORDINARY GAIN $ 833,149
================================================================================
</TABLE>
3. BUSINESS On March 31, 2000, the Company acquired substantially
ACQUISITIONS all of the assets and assumed certain liabilities of
Cronus Technology, Inc. ("Cronus") for approximately
$9,600,000, plus the assumption of liabilities of
approximately $6,700,000 subject to adjustment as set
forth in the agreement. Approximately $9,300,000 of
the purchase price was funded through the issuance of
shares of the Company's common stock and
approximately $300,000 was paid in cash. Cronus
manufactures and sells telecommunications equipment
and provides consulting services for satelite
telecommunications planning. 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 goodwill of
approximately $12,000,000 related to this
transaction. The goodwill is being amortized on a
straight line basis over four years. The purchase and
debt assumption agreements related to the Cronus
acquisition obligate the Company to issue up to
1,225,000 additional common shares if the fair value
of its common stock has not reached $7.30 per share
prior to the one-year anniversary date of these
agreements. The Company will determine the purchase
price adjustment when, and if, it issues any
additional common shares. The following unaudited pro
forma information presents the results of operations
of the Company as if the acquisition had occurred on
May 1, 1998.
15
<PAGE> 42
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Year ended April 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 13,173,574 $ 13,859,546
Loss before extraordinary item (13,291,101) (10,050,101)
Net loss (13,291.101) (9,216,952)
Diluted loss per common share (0.60) (0.58)
================================================================================
</TABLE>
These pro forma results of operations have been
prepared for comparative purposes only and do not
purport to be indicative of the results of operations
which actually would have resulted had the
acquisition occurred on the date indicated, or which
may result in the future.
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., ("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 four
years. The operations of KG Data in 1999 were not
material and accordingly, the Company has not
presented pro forma results of operations.
4. INVENTORIES Inventories consist of the following components:
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Production materials $1,867,371 $ 2,916,235
Work-in-process 240,408 111,568
Finished goods 897,968 1,080,985
--------------------------------------------------------------------------------
3,005,747 4,108,788
Reserve for inventory obsolescence (600,000) (1,450,000)
--------------------------------------------------------------------------------
$2,405,747 $ 2,658,788
================================================================================
</TABLE>
16
<PAGE> 43
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. ACCOUNTS Accounts receivable consist of the following:
RECEIVABLE
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Trade $2,929,657 $ 857,402
Other 211,070 60,090
--------------------------------------------------------------------------------
3,140,727 917,492
Allowance for doubtful accounts (275,000) (300,000)
--------------------------------------------------------------------------------
$2,865,727 $ 617,492
================================================================================
</TABLE>
6. PROPERTY AND Property and equipment consists of the
EQUIPMENT following:
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Manufacturing equipment $ 530,796 $ 251,285
Furniture and fixtures 1,725,855 293,901
Leasehold improvements 173,143 26,188
Computers and electronics 835,027 650,154
Software 1,040,001 478,549
Demo equipment 417,180 91,584
--------------------------------------------------------------------------------
4,722,002 1,791,661
Less accumulated depreciation
and amortization (3,031,991) (1,159,702)
--------------------------------------------------------------------------------
$ 1,690,011 $ 631,959
================================================================================
</TABLE>
Depreciation expense for the three years
ended April 30, 2000, 1999 and 1998 was
$495,944, $379,591 and $357,583,
respectively.
17
<PAGE> 44
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. OTHER CURRENT Other current liabilities consist of the
LIABILITIES following:
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Other accounts payable $ 362,923 $109,296
Customer credit balances 156,730 149,778
Accrued vacation 155,921 -
Allowance for warranty costs 120,000 120,000
Accrued professional fees 113,938 78,842
Accrued interest expense 74,964 30,746
Other 124,726 38,680
--------------------------------------------------------------------------------
$1,109,202 $527,342
================================================================================
</TABLE>
8. LONG-TERM Long-term debt consists of the following:
DEBT
<TABLE>
<CAPTION>
April 30, 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C>
$
Revolving line of credit (a) $1,139,944 -
Term loan (a) 128,375 -
Notes payable (b) 1,000,000 -
Capital lease obligations (c) 14,824 -
7.5% convertible debentures, due
April 2003 (d) 767,602 2,490,357
5.0% convertible debentures, due
April and May 2001 (e) - 200,000
Less current portion of revolving
line of credit and term loan 1,268,319 -
Less current portion of capital lease
obligations 11,281 -
Less current portion of notes
payable 1,000,000 -
------------------------------------------------------------------------------
$ 771,145 $2,690,357
================================================================================
</TABLE>
18
<PAGE> 45
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(a) In connection with the acquisition of Cronus, the
Company assumed liabilities under a revolving line of
credit and term loan agreement with LaSalle National
Bank. Under the revolving line of credit the Company
could borrow up to the lesser of $3,000,000 or 80% of
eligible accounts receivable and 35% of eligible
inventory, as defined in the agreement. The revolving
line of credit bears interest at the bank's prime
rate of interest plus 1.0% and was scheduled to
mature on May 1, 2001. Under the agreement, Cronus
could issue letters of credit up to $250,000 in the
aggregate. There are no outstanding letters of
credit as of April 30, 2000. The term loan was
payable in equal monthly principle payments of
$9,875, bears interest at the bank's prime rate of
interest plus 1.0% and was schedule to mature on May
1, 2001. In April 2000, the Company placed $250,000
in escrow to further collateralize the revolving line
of credit and term loan. In July 2000, the bank
informed the Company that the revolving line of
credit and term loan would mature on September 30, 2000.
Accordingly, this debt has been classified as a
current liability. The Company expects to be able to
refinance this debt with a local bank prior to the
maturity date.
(b) In connection with the acquisition of Cronus, the
Company assumed short term notes payable to
individuals. The notes are unsecured, bear interest
at 8.0% and mature on December 10, 2000.
(c) In connection with the acquisition of Cronus, the
Company assumed liabilities for capital lease
obligations related to various office equipment.
As of April 30, 2000, future net minimum lease
payments under capital leases are as follows:
<TABLE>
<CAPTION>
Year Amount
--------------------------------------------------------------------------------
<S> <C>
2001 $13,403
2002 2,028
--------------------------------------------------------------------------------
Total minimum lease payments 15,431
Less: amount representing interest 607
--------------------------------------------------------------------------------
Present value of net minimum lease payments 14,824
Less: current portion 11,281
--------------------------------------------------------------------------------
Long-term capital lease obligation $ 3,543
================================================================================
</TABLE>
19
<PAGE> 46
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The net book value of assets under capital leases was
approximately $23,700 at April 30, 2000.
(d) 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 2). 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 were permitted prior to April 6,
2000. The Company may prepay the debentures at any
time. Each debentureholder 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. During 2000, holders of
the debentures converted $1,825,552 of debentures and
accrued interest into 513,249 shares of common stock.
(e) 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 2000
and 1999, holders of the debentures converted
$224,684 and $1,073,310 of debentures and accrued
interest into 274,911 and 1,652,717 shares of common
stock, respectively.
20
<PAGE> 47
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.
9. STOCKHOLDERS' In April 2000, the Company issued 728,063 shares of
EQUITY common stock in settlement of $5,314,862 in
liabilities assumed as part of the acquisition of
Cronus (see Note 3).
In January 2000, the Company executed an agreement
with an investment banking firm to provide investment
banking and advisory services through August 31,
2001. As consideration for these services the
Company issued 200,000 warrants to purchase the
Company's common stock at an exercise price of $7.50
per share. The warrants are exercisable at any time
from February 1, 2000 to January 31, 2003. The
warrants have been valued at $570,817 using the
Black-Scholes option pricing model. The Company has
recorded the value of these warrants as deferred
investment advisory fees and is amortizing the value
over the term of the agreement.
In July 1999, the Company issued 1,110,040 shares of
common stock for $1,086,723 through a private
placement offering of securities to a group of
accredited investors.
During fiscal 2000, the Company received $4,392,184
in proceeds on the exercise of warrants, which
resulted in the Company issuing 3,682,009 shares of
common stock. As of April 30, 2000, the Company has
outstanding 2,662,106 warrants to purchase common
stock of the Company at exercise prices ranging from
$1.87 to $7.50. The warrants expire principally in
2003.
During fiscal 2000, the Company issued 788,160 shares
of common stock on the conversion of debentures and
accrued interest totaling $2,050,236.
21
<PAGE> 48
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 $71,723 ($152,367 in
1999) placed in escrow, funded the 25% cash payment
to the unsecured creditors as per the plan of
reorganization.
10. STOCK OPTIONS The Company has both a qualified and non-qualified
stock option plan (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. Generally,
options vest over a three year period and expire five
years from the date of grant and, in most cases, upon
termination of employment. The following table
relates to options outstanding, granted, exercised,
and canceled during 2000, 1999 and 1998, under the
Plan:
22
<PAGE> 49
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Option
Number Price
Options of Shares Per Shares
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at
April 30, 1998 1,360,911 $ 2.06 to 15.63
April 30, 1999 1,765,992 $ 0.25 to 15.63
April 30, 2000 2,975,501 $ 0.25 to 15.63
Granted
During 1998 1,046,564 $ 2.50 to 5.88
During 1999 866,138 $ 0.25 to 1.35
During 2000 1,957,954 $ 0.40 to 3.97
Exercised
During 1998 3,499 $ 5.00 to 5.88
During 1999 - -
During 2000 182,238 $ 0.29 to 5.88
Canceled
During 1998 847,689 $ 2.50 to 15.63
During 1999 461,057 $ 0.29 to 12.00
During 2000 566,207 $ 0.29 to 7.75
</TABLE>
A summary of stock options outstanding and exercisable
as of April 30, 2000 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
============================================================ ===========================
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Life (years) Exercise Number Exercise
Prices Outstanding Price Exercisable Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.25 to $ 2.50 2,199,507 3.9 $ 1.19 424,867 $ 1.81
$ 2.59 to $ 3.97 660,334 4.7 $ 3.45 52,732 $ 2.68
$ 5.00 to $ 6.82 80,660 1.7 $ 5.99 70,640 $ 6.00
$ 12.00 to $15.63 35,000 1.1 $14.07 35,000 $14.07
=========================================================================================
</TABLE>
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
23
<PAGE> 50
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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 5.96%, 5.53% and 5.77% and expected volatility of
125.0%, 60.0% and 65% and expected option life of 4, 5
and 5 years for the years ended April 30, 2000, 1999
and 1998, respectively, and dividend payout rate of
zero for each year Using these assumptions, the
weighted average fair value of the stock options
granted is $1.41, $0.38 and $1.76 for 2000, 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 recognize compensation
cost based on the fair value at the grant dates for
options issued under the plans described above,
consistent with the method prescribed by SFAS No. 123,
net loss applicable to common shareholders and loss per
share would have been changed to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year ended April 30,
(in thousands, except per share data) 2000 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss applicable to common
shareholders: as reported $(6,817) $(5,550) $(9,089)
pro forma (8,462) (6,222) (9,701)
Diluted loss per
share: as reported $ (0.35) $ (0.43) $ (0.87)
pro forma (0.44) (0.48) (0.93)
====================================================================================
</TABLE>
11. INCOME TAXES The Company has net operating loss carryforwards for
income tax reporting purposes of approximately
$28,997,000, which begin to expire in 2008. The
amount of the net operating loss carryforward related
to the compensation element of stock options is
approximately $10,381,000, which when realized will
be a credit to paid in capital. In addition, the
Company has research and development credit
carryforwards of approximately $869,000, which begin
to expire in 2006.
24
<PAGE> 51
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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, 2000, 1999,
and 1998, is as follows:
<TABLE>
<CAPTION>
2000 1999 1998
AMOUNT RATE Amount Rate Amount Rate
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision
(benefit) at
statutory rates $(2,318,000) (34.0) $(1,887,000) (34.0) $(5,817,000) (34.0)
Valuation
allowance 2,318,000 34.0 1,887,000 34.0 5,817,000 34.0
-------------------------------------------------------------------------------------------
$ - - $ - - $ - -
===========================================================================================
</TABLE>
No deferred taxes have been recognized in the
accompanying consolidated financial statements as of
April 30, 2000 and 1999. The components of deferred
income taxes are as follows:
<TABLE>
<CAPTION>
April 30, 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES
Accelerated depreciation $ 126,000 $ 114,000
----------------------------------------------------------------------------------
Total deferred tax liabilities 126,000 114,000
----------------------------------------------------------------------------------
DEFERRED TAX ASSETS
NOL carryforwards 11,591,000 10,403,000
Allowance for doubtful accounts 110,000 120,000
Inventory reserve 240,000 580,000
Tax credits 759,000 662,000
Amortization of goodwill 216,000 67,000
Stock options as compensation 76,000 31,000
Other 93,000 48,000
----------------------------------------------------------------------------------
Total deferred tax assets 13,085,000 11,911,000
----------------------------------------------------------------------------------
Net deferred tax assets 12,959,000 11,797,000
Less: Valuation allowance (12,959,000) (11,797,000)
----------------------------------------------------------------------------------
TOTAL $ - $ -
==================================================================================
</TABLE>
25
<PAGE> 52
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Management has provided a valuation allowance for
deferred tax assets as of April 30, 2000, because they
are unable to predict when the benefit of these items
will be recognized in future years.
12. SIGNIFICANT Certain customers accounted for 10% or more of the
CUSTOMERS AND Company's total revenue during the years ended April
FOREIGN EXPORTS 30, 2000, 1999 and 1998 as noted below:
<TABLE>
<CAPTION>
2000 1999 1998
CUSTOMER % OF SALES Customer % of Sales Customer % of Sales
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A 18
B 15 C 28 C 32
D 12
==============================================================================
</TABLE>
Sales to customers A, B and D were $1,162,000, $930,000
and $775,000 in 2000, respectively. Sales to customer
C were $1,307,000 and $2,870,000 in 1999 and 1998,
respectively.
In 1999 and 1998, the Company had export sales to
foreign customers totaling approximately $1,800,000,
and $3,292,000, respectively. These amounts constitute
39% and 37% of total revenues, respectively. The export
sales were made to customers in Venezuela, Peru and
Brazil. There were no significant export sales in
2000.
13. 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 2).
26
<PAGE> 53
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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. In September 1999, the Company, its
Chief Executive Officer and Chairman of the Board and
its Chief Financial Officer agreed to a settlement
with the SEC. Without admitting or denying the
allegations, the Company consented to the entry of a
final judgement which enjoins it from violations of
specific sections of the Securities Exchange Act of
1934 and the involved officers consented to the entry
of an order to cease and desist committing or causing
any violations or future violations of specific
sections of the Securities and Exchange Act of 1934.
EXCLUSIVE LICENSE AGREEMENTS
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.
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.
27
<PAGE> 54
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
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,
2000, 1999, and 1998, was approximately $434,000,
$609,000 and $662,000, respectively. Aggregate
future minimum lease payments under the operating
leases are as follows:
<TABLE>
<CAPTION>
Year ended April 30,
------------------------------------------------------
<S> <C>
2001 $557,707
2002 441,200
2003 280,023
2004 1,387
</TABLE>
======================================================
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, 2000, however,
the agreement was automatically renewed through
January 31, 2001 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.
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 2000, 1999 or
1998.
28
<PAGE> 55
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
14. 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 debentures.
The estimated fair values of the Company's financial
instruments, none of which are held for trading
purposes, are summarized as follows:
<TABLE>
<CAPTION>
April 30, 2000 1999
-------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible debentures $767,602 $615,000 $2,690,357 $1,825,000
===========================================================================================
</TABLE>
15. 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.
16. SUPPLEMENTAL Supplemental information on interest paid is as follows:
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
For the year ended April 30, 2000 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $1,728 $ - $ 542
================================================================================
</TABLE>
29
<PAGE> 56
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Supplemental disclosure of non-cash investing
and financing activities:
<TABLE>
<CAPTION>
For the year ended April 30, 2000 1999 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock issued for
Cronus acquisition $ 9,275,132 $ - $ -
Liabilities assumed in
Cronus acquisition $10,104,104 $ - $ -
=================================================================================
Issuance of common stock in
connection with acquisition
of assets of KG Data $ - $ 845,000 $ -
=================================================================================
Issuance of stock for
convertible debentures $ 2,050,236 $1,073,310 $3,946,373
=================================================================================
Notes payable settled through
issuance of common stock $ 1,863,142 $ - $ -
=================================================================================
Warrants issued to nonemployees $ 570,817 $ - $ -
=================================================================================
</TABLE>
30
<PAGE> 57
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 14, 2000 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, 2000. 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 14, 2000
31
<PAGE> 58
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, 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
====================================================================================================================
Year Ended April 30, 2000
Reserves and allowances deducted
from asset accounts:
Obsolescence reserve for $1,450,000 $ 815,347 $(1,665,347)2/ $ 600,000
inventory $ 300,000 $ 1,764 $ (26,764)1/ $ 275,000
Allowance for doubtful accounts
====================================================================================================================
</TABLE>
1/ Accounts written off
-
2/ Inventory scrapped or disposed of
-
32
<PAGE> 59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE.
27
<PAGE> 60
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:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter C. Madsen(1)(2) 49 President, Chief Executive Officer and Chairman of the Board
Mark H. Rafferty 45 Vice President - Finance, Treasurer, Secretary and Director
William A. Grant 47 Executive Vice President - Global Sales
Dr. Kenneth Bloom 51 Vice President - Mainframe Networking
Safa Alkateb 32 Vice President - Engineering
Thomas W. Colligan 52 Vice President - Corporate Development
Roy Wainwright 53 Executive Vice President
Darlene Greenhaw 49 Vice President - Sales
Edward R. Olson(1)(2) 59 Director
Thomas G. Amon(1)(2) 53 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, "Executive Compensation."
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.
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.
WILLIAM A. GRANT has served as Executive 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.
DR. 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.
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 was Vice President - Business Development for the Company
from July 1998 to September 1999. 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. Mr. Colligan
resigned from his position with the Company effective September 17, 1999.
ROY WAINWRIGHT has been Executive Vice President of the Company since April 3,
2000. From March 1997 to March 2000, Mr. Wainwright was Vice President / General
Manager of Cronus Communications Inc. From June 1995 to March 1997, Mr.
Wainwright was Associate Vice President - Product Marketing at Computer Sciences
Corporation.
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<PAGE> 61
DARLENE GREENHAW has been Vice President - Sales for the Company since April 3,
2000. From October 1999 to March 2000, Ms. Greenhaw was Vice President - Sales
at Cronus Communications Inc. From September 1987 to September 1999, Ms.
Greenhaw was Vice President - Sales at Newbridge Networks Inc.
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, 2000, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with, except for
one report regarding a stock option exercise filed late by Mr. Amon.
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<PAGE> 62
ITEM 11. EXECUTIVE COMPENSATION
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, 2000, 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
ANNUAL COMPENSATION AWARDS
------------------------------------------- ------------
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) 2000 100,000 -- 7,600 200,000
President, CEO and Chairman 1999 96,154 -- 7,320 20,000
of the Board of Directors 1998 98,077 -- 7,320 --
Mark H. Rafferty(3) 2000 130,000 -- 7,300 233,334
Vice President and 1999 125,000 -- 8,075 20,000
Chief Financial Officer 1998 116,732 -- 8,075 --
Safa Alkateb(4) 2000 105,000 -- -- 100,000
Vice President - 1999 89,192 -- -- 47,000
Engineering
Thomas Colligan(5) 2000 30,300 -- 5,000 --
Vice President- 1999 61,058 -- 10,000 125,000
Corporate Development
William A. Grant(6) 2000 175,000 -- 6,000 65,000
Vice President- 1999 167,983 -- 6,000 35,000
Global Sales 1998 64,098 30,000 3,000 100,000
Kennth A. Bloom(7) 2000 100,000 -- -- --
Vice President- 1999 8,333 -- -- 120,000
Mainframe Networking
Roy Wainwright 2000 8,100 -- -- 125,000
Executive Vice President
Darlene Greenhaw 2000 9,375 -- -- 80,000
Vice President - Sales
</TABLE>
1) Automobile benefit.
2) At April 30, 2000, Mr. Madsen held 1,723,677 restricted shares of Common
Stock with a market value of $6,248,329 at that date.
3) At April 30, 2000, Mr. Rafferty held 43,420 restricted shares of Common
Stock with a market value of $157,398 at that date.
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<PAGE> 63
4) At April 30, 2000, Mr. Alkateb held 2,000 restricted shares of Common Stock
with a market value of $7,250 at that date.
5) At April 30, 2000, Mr. Colligan held 325,000 restricted shares of Common
Stock with a market value of $1,178,125 at that date. Mr. Colligan resigned
from his position with the Company effective September 17, 1999.
6) At April 30, 2000, Mr. Grant held 36,667 restricted shares of Common Stock
with a market value of $132,918 at that date.
7) At April 30, 2000, Dr. Bloom held 719,149 restricted shares of Common Stock
with a market value of $2,606,915 at that date.
FISCAL 2000 OPTION GRANTS
The following table sets forth information concerning grants of stock options to
the Named Executive Officers and Directors made pursuant to the Company's 1999
Stock Option Plan during the fiscal year ended April 30, 2000:
Stock Option Grants in Fiscal Year 2000
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Securities Percent of Potential Realizable Value
Underlying Total Options Exercise at Assumed Annual Rates
Options Granted to or of Stock Price Appreciation
Granted Employees in Base Price Expiration For Option Term
Name (#) Fiscal Year ($/sh) Date 5%($) 10%($)
---- ---------- ------------- ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Peter C. Madsen 200,000 10.21% $ 1.03 8/2/04 $ 57,000 $129,600
Mark H. Rafferty 150,000 7.66% $ 1.03 8/2/04 $ 42,750 $ 97,200
Mark H. Rafferty 83,334 4.26% $ 0.69 9/9/04 $ 15,833 $ 35,834
Darlene Greenhaw 80,000 4.09% $ 3.50 4/11/05 $ 77,360 $176,000
Roy Wainwright 125,000 6.38% $ 3.50 4/11/05 $120,875 $275,000
Thomas G. Amon 30,000 1.53% $ 1.03 8/2/04 $ 8,550 $ 19,440
Edward R. Olson 30,000 1.53% $ 1.03 8/2/04 $ 8,550 $ 19,440
Thomas Colligan -- -- -- -- -- --
William A. Grant 40,000 2.04% $ 1.03 8/2/04 $ 11,400 $ 25,920
William A. Grant 25,000 1.28% $ 0.73 10/27/04 $ 5,000 $ 11,500
Safa Alkateb 40,000 2.04% $ 1.03 8/2/04 $ 11,400 $ 25,920
Safa Alkateb 60,000 3.06% $ 0.73 10/27/04 $ 12,000 $ 27,600
</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. The vesting period is determined by the Board of Directors. Options
expire five years from the date of grant and, in most cases, upon termination of
employment.
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<PAGE> 64
FISCAL 2000 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, 2000 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($)
Acquired on Realized Exercisable/ Exercisable/
Name Exercise(#) ($) Unexercisable Unexercisable
---- ----------- -------- ------------------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Peter C. Madsen -- -- 206,666 13,334 $540,098 $ 42,202
Thomas G. Amon 6,666 10,266 30,000 10,000 -- $ 12,050
Edward R. Olson -- -- 33,333 16,667 $ 24,851 $ 42,199
Mark H. Rafferty -- -- 181,666 96,668 $410,348 $286,787
Roy Wainwright -- -- -- 125,000 -- $ 15,625
Darlene Greenhaw -- -- -- 80,000 -- $ 10,000
Thomas Colligan 62,500 23,988 -- -- -- --
Kenneth A. Bloom -- -- 40,000 80,000 $ 93,000 $186,000
William A. Grant -- -- 143,332 56,668 $303,214 $109,853
Safa Alkateb -- -- 180,111 63,556 $401,069 $138,922
</TABLE>
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
experience and 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 believes
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 communications industry.
The Board granted six executive officers options during fiscal 2000. Four of
these grants were determined by the individuals performance, responsibility and
seniority. The remaining grants were a condition of employment.
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<PAGE> 65
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, and options granted for
comparable positions in peer group companies.
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 2000.
EMPLOYMENT AND CONTROL ARRANGEMENTS
Pursuant to the Employment Agreement dated September 18, 1992, Mr. Madsen was
elected President and Chief Executive Officer of the Company at an annual base
salary of $100,000 per year. Under this 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 of Directors. This agreement, which currently
expires on January 31, 2001, 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 Dr. 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.
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 1999 Stock Option
Plan. During fiscal year 2000, the Company granted options to purchase 30,000
shares of its common stock to both Edward R. Olson and Thomas G. Amon. After the
end of fiscal year 2000, the Board granted Mr. Amon options to purchase an
additional 50,000 shares of common stock for his professional assistance in the
acquisition of Cronus. The Chairman of the Board receives no compensation for
serving in such capacity.
33
<PAGE> 66
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, 2000. The information below is based on an
investment of $100, on April 30, 1995, 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.
The Company's shares are quoted on the OTC Bulletin Board under the symbol
FSCX.OB.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
AMONG FASTCOMM COMMUNICATIONS CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX,
THE NASDAQ TELECOMMUNICATIONS INDEX AND A PEER GROUP
[GRAPH]
34
<PAGE> 67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 5, 2000, there were 26,388,699 shares of Common Stock of the Company
issued and outstanding. As of such date, options to purchase 3,351,666 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. The Company's shares
are quoted on the OTC Bulletin Board under the symbol FSCX. OB.
The following table sets forth information regarding ownership of Common Stock
of the Company at July 5, 2000, 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 options exercisable within 60 days of July 5, 2000 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) 2,180,343(2) 8.12%
Sterling, Virginia
Edward R. Olson (1) 36,666(3) 0.14%
Reston, Virginia
Thomas G. Amon (1) 102,161(4) 0.39%
New York, New York
Mark H. Rafferty (1) 375,086(5) 1.40%
Centreville, Virginia
William A. Grant 184,999(6) 0.70%
Ashburn, Virginia
Roy Wainwright 48,254 0.18%
Fairfax, Virginia
Safa Alkateb 230,445(7) 0.87%
Sterling, Virginia
Darlene Greenhaw 8,632 0.03%
Fairfax, Virginia
Thomas Colligan 403,000(8) 1.53%
Irvington, Virginia
Kenneth A. Bloom 759,149(9) 2.87%
Norwalk, Connecticut
4,328,735 11.83%
</TABLE>
1) Director
2) Gives effect to 456,666 options owned by Mr. Madsen exercisable within 60
days
3) Gives effect to 30,000 options owned by Mr. Olson exercisable within 60
days
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<PAGE> 68
4) 6,667 Shares are owned by the Thomas G. Amon Pension and Profit Sharing
Plans. Gives effect to 83,333 options owned by Mr. Amon exercisable within
60 days
5) Gives effect to 331,666 options owned by Mr. Rafferty exercisable within 60
days
6) Gives effect to 148,332 options owned by Mr. Grant exercisable within 60
days
7) Gives effect to 228,445 options owned by Mr. Alkateb exercisable within 60
days
8) Includes 78,000 shares owned by Mr. Colligan's wife
9) Gives effect to 40,000 options owned by Dr. Bloom exercisable within 60
days
10) Percent of Class based upon 26,388,699 shares outstanding at July 5, 2000
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.
The Company paid the law firm of Sokolow, Dunaud, Mercadier and Carreras LLP
$153,045 in the fiscal year ended April 30, 2000. Thomas G. Amon, a Director of
the Company since December 1994, is a partner in this law firm.
During fiscal year 2000, the Company loaned $50,000, 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.
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<PAGE> 69
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) Financial Statements and Schedules.
The 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 one report on Form 8-K during the fiscal year ended April 30,
2000 announcing the acquisition of Cronus Technology, Inc.
37
<PAGE> 70
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 31, 2000.
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 31, 2000.
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)
--------------------------------- and Director
Peter C Madsen
/s/ Mark H. Rafferty Vice President - Finance, Secretary, 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>
38
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<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
4.7(d) Registration Rights Agreement made by FastComm Communications Corporation,
in favor of the holders of common stock of Cronus Technology, Inc., dated as of
March 31, 2000
4.8(d) Form of Registration Rights Agreement between FastComm Communications
Corporation, in favor of certain individuals and a subordinated debt holder, dated as
of March 31, 2000.
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
</TABLE>
39
<PAGE> 72
<TABLE>
<S> <C>
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
10.21(d) Agreement and Plan of Reorganization by and among FastComm Communications
Corporation, Cronus Technology, Inc., Cronus Communications, Inc., and certain
principal Stockholders, dated as of March 27, 2000.
10.22(d) Form of Warrant Agreement between FastComm Communications Corporation in
favor of certain individuals, dated as of March 31, 2000.
10.23(d) Investment Banking Agreement between FastComm Communications Corporation
and Kaufman Bros. LLP, dated January 24, 2000.
10.24(d) Financial Advisor Agreement between FastComm Communications Corporation and
Kaufman Bros. LLP, dated March 14, 2000.
10.25(d) Warrant Agreement between FastComm Communications Corporation and Kaufman
Bros. LLP, dated February 1, 2000.
11.0* Statement re: Computation of per share earnings.
</TABLE>
----------
* Filed with revised form 10KA filed August 12, 1994.
** 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
(d) Filed with Form 8K dated April 14, 2000
40
