<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
----- -----
COMMISSION FILE NUMBER 0-22698
- --------------------------------------------------------------------------------
GOLDEN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
CALIFORNIA 95-4021568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2125-C MADERA ROAD
SIMI VALLEY, CA 93065
(Address of principal executive offices)
(805) 582-4400
(Registrant's telephone number, including area code)
----------------------------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO
------ ------
AS OF JANUARY 31, 1997, THERE WERE 4,449,998 SHARES OF NO PAR VALUE COMMON STOCK
OUTSTANDING.
<PAGE>
INDEX LISTING
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PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
- ------
FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of December 31, 1996 (unaudited) and
March 31, 1996. 1
Consolidated Statements of Operations (unaudited) for the three months
and nine months ended December 31, 1996 and December 31, 1995. 2
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended December 31, 1996 and December 31, 1995. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4-5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 6-9
PART II OTHER INFORMATION
- -------
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
- ----------
i
<PAGE>
GOLDEN SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
Dec. 31, 1996 March 31, 1996
--------------- ----------------
<S> <C> <C>
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $153 $684
Restricted cash balances 35 886
Accounts receivable, net of allowances 660 1,349
Net due from related parties 36 273
Inventories 5,315 6,643
Prepaid expenses and other current assets 468 797
Income taxes receivable --- 46
--------------- ----------------
Total current assets 6,667 10,678
--------------- ----------------
PROPERTY, PLANT AND EQUIPMENT,
at cost, net of accumulated depreciation 3,439 3,805
--------------- ----------------
$10,106 $14,483
--------------- ----------------
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Short-term borrowings $7,212 $8,177
Accounts payable 3,518 3,596
Accrued liabilities 1,053 1,187
--------------- ----------------
Total current liabilities 11,783 12,960
--------------- ----------------
NOTES PAYABLE 1,216 934
COMMITMENTS AND CONTINGENCIES
(Note 6)
MINORITY INTEREST 2,599 2,599
SHAREHOLDERS' DEFICIT
Common Stock 16,278 16,278
Retained earnings (deficit) (21,208) (17,743)
Cumulative translation adjustments (562) (545)
--------------- ----------------
Total shareholders' deficit (5,492) (2,010)
--------------- ----------------
$10,106 $14,483
--------------- ----------------
--------------- ----------------
</TABLE>
1
<PAGE>
GOLDEN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $1,188 $5,164 $2,262 $13,924
COST OF GOODS SOLD 561 4,796 2,383 14,222
------------- ------------- ------------- -------------
Gross Profit (Loss) 627 368 (121) (298)
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administration 886 889 2,321 2,852
Engineering 253 89 504 364
------------- ------------- ------------- -------------
1,139 978 2,825 3,216
------------- ------------- ------------- -------------
Operating Loss (512) (610) (2,946) (3,514)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (318) (316) (1,088) (868)
Other income 1 43 570 155
------------- ------------- ------------- -------------
(317) (273) (518) (713)
------------- ------------- ------------- -------------
Loss before provision for
income taxes (829) (883) (3,464) (4,227)
PROVISION FOR INCOME TAXES --- --- --- 1
------------- ------------- ------------- -------------
NET LOSS $(829) $(883) $(3,464) $(4,228)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET LOSS PER SHARE $(.19) $(.20) $(.78) $(.95)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING SHARES 4,450 4,450 4,450 4,450
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
2
<PAGE>
GOLDEN SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
Dec. 31, 1996 Dec. 31, 1995
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,464) $(4,228)
Adjustments to reconcile net loss to
net cash provided by (used in) operating activities:
Depreciation and amortization expense 340 302
Provision for losses on accounts receivable 266 31
Provision for losses on inventories 45 45
Decrease (increase) in:
Accounts receivable 423 2,008
Inventories 1,283 1,371
Prepaid expenses and other current assets 375 715
Increase (decrease) in:
Accounts payable (78) 680
Accrued liabilities (134) 306
--------------- ---------------
Net cash provided by (used in) operating activities (944) 1,230
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Dispositions of property, plant & equipment, net 25 247
Restricted cash 851 (167)
--------------- ---------------
Net cash provided by (used in) investing activities 876 80
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of (repayments) (965) (1,271)
Borrowings under notes payable 282 59
Net change in related party balances 237 14
--------------- ---------------
Net cash used in financing activities (446) (1,198)
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (17) (803)
--------------- ---------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (531) (691)
CASH & CASH EQUIVALENTS, beginning of period 684 1,497
--------------- ---------------
CASH & CASH EQUIVALENTS, end of period $153 $806
--------------- ---------------
--------------- ---------------
</TABLE>
3
<PAGE>
GOLDEN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1. GENERAL
- -------
In management's opinion, all adjustments, which are necessary for a
fair presentation of financial condition and results of operations, are
reflected in the accompanying interim consolidated financial statements. All
amounts are unaudited, except the March 31, 1996 balance sheet. This report
should be read in conjunction with the audited consolidated financial
statements, notes, and disclosures presented in the Company's 1996 Annual Report
on Form 10-K. Footnotes and other disclosures which would substantially
duplicate the disclosures in the Company's audited financial statements for
fiscal year 1996 contained in the Company's 1996 Annual Report on Form 10-K,
have been omitted. The interim financial information herein is not necessarily
representative of operations for a full year.
NOTE 2. RISKS AND FUTURE OPERATIONS
- -------
The Company has incurred significant losses from operations in fiscal
years 1995 and 1996 and during the nine months ended December 31, 1996, has
negative working capital of $5,116,000 and a retained deficit of $21,208,000.
While the Company is seeking to develop and implement its new business strategy,
substantial doubt remains about the Company's ability to continue as a going
concern. Also, a significant portion of the Company's short-term borrowings
with Indian banks were due for renewal prior to March 31, 1996, and the Company
has suffered a substantial decline in net sales in fiscal years 1995 and 1996
and the nine months ended December 31, 1996.
Since March 31, 1996, the Company has been negotiating with certain
Indian banks for an extension of payment terms of existing debt as well as an
extension of credit to support planned production and sales. The Company's
indebtedness to these banks at December 31, 1996 was approximately $7,600,000.
Currently, the consortium of banks has expressed interest in assisting the
Company with its request. In addition, certain members of the Tandon family
(the Company's largest shareholders) have proposed a plan of recapitalization of
the Company, which is subject to certain conditions among which are (1) approval
by a Special Committee of outside directors of the Board of Directors,
(2) negotiation of a definitive agreement, and (3) approval by the shareholders.
The proposed plan of recapitalization would require those participating members
of the Tandon family to invest $2 million in cash and certain members of
management to invest $250,000 in cash. The proposed per-share stock purchase
price is $0.15, which exceeded both the public bid and ask prices at the time of
the proposal. The recapitalization plan also includes actions by the Tandon
family, who have personally guaranteed the Indian bank debt, to obtain a
standstill from these banks at no material cost to the Company. This proposed
plan is currently being evaluated by a Special Committee of outside directors of
the Board of Directors.
There can be no assurance, though, that the Company will be able to
successfully increase sales or reduce operating costs, raise sufficient capital
to meet its current operating needs, or renew its obligations to the Indian
banks.
4
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NOTE 3. INVENTORIES
- -------
Inventories are valued at the lower of cost (first in, first out) or
market. Cost includes cost of material, freight and manufacturing overhead.
Inventories consist of the following (in thousands):
MARCH 31, 1996 DEC. 31, 1996
-------------- -------------
Raw materials $5,575 $4,662
Work-in-progress 780 390
Finished goods 288 263
-------------- -------------
$6,643 $5,315
-------------- -------------
-------------- -------------
NOTE 4. ORDER CANCELLATION SETTLEMENT
- -------
In November 1996, the Company entered into a release and settlement
agreement with a former customer relating to an order cancellation. Net
proceeds to the Company, after expenses incurred to negotiate the settlement,
approximated $670,000. Consistent with the accounting for such settlements,
$670,000 has been included in net sales for the three months ended December 31,
1996 and for the nine months then ended.
NOTE 5. LITIGATION SETTLEMENT
- -------
In April 1996, the Company settled a lawsuit with an outside
contractor. Under the agreement, the Company received a cash settlement (the
agreement prohibits the disclosure of the amount) of which $163,000 related to
the reimbursement of legal expenses incurred in fiscal year 1996, and
accordingly, this amount was recorded as a reduction of legal expenses in fiscal
year 1996. The balance of the settlement has been recorded together with other
items as other income for the nine months ended December 31, 1996.
NOTE 6. COMMITMENTS AND CONTINGENCIES
- -------
For a description of commitments and contingencies, refer to Note 11 to
the Combined/Consolidated Financial Statements contained in the 1996 Annual
Report on Form 10-K.
5
<PAGE>
GOLDEN SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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RESULTS OF OPERATIONS
OVERVIEW
--------
As has been previously reported, the Company's operations and cash flow
were significantly impacted by the product rejection that took place during the
third quarter of fiscal 1995. Those returns cost the Company $4.2 million of
lost accounts receivable directly related to the sales of the rejected units and
$2.2 million relating to other direct costs, as well as additional costs for
transportation, unutilized capacity, business interruption, reorganization,
inventory carrying costs, and interest on short-term borrowings.
The Company implemented a program to overcome its cash difficulties by
reducing inventory, organizational restructuring, price increases, volume growth
and more favorable payment terms from the Company's existing customers. While a
number of elements of that program have been successfully implemented, the
Company has not been able to generate anticipated amounts of cash from inventory
reduction and, to date, has had only limited success in its efforts to resell
any significant number of units of the reworked rejected product. In addition,
the Company has not been successful, to date, in building its sales volumes to
its existing customers or to new customers, however since the end of the third
quarter some small purchase orders have been received that could lead to more
significant future business provided the Company's products meet customer
acceptance. While the Company has implemented a plan to transition its business
focus to power supplies for products that are less price sensitive and therefore
provide a greater opportunity to develop positive profit margins, there can be
no assurance that the Company will have the resources to carry out its plan and,
even if the resources are available, that the Company will be able to
successfully develop the necessary customer relationships and obtain the product
contracts to continue to operate its business.
In light of these facts, and the operating results discussed below, the
Company is presently looking at the opportunities to obtain additional capital
from sources outside the Company or to engage in a transaction that would change
the Company's fundamental structure. Absent success in generating cash from
inventory or a dramatic change in the Company's operating outlook, the
consummation of such a financing transaction will be necessary for the Company
to continue its operations beyond the next several months.
In summary, the Company suffered a considerable decline in cash flow during
fiscal year 1996 and on into fiscal year 1997. At December 31, 1996, the
Company had negative working capital of $5,116,000 and a retained deficit of
$21,208,000. While current action is being taken to develop a viable operating
plan to increase sales, renegotiate the terms of certain short-term obligations
with certain Indian banks and raise
6
<PAGE>
additional capital, there can be no assurance that any of these actions will be
successfully completed.
Since March 31, 1996, the Company has been negotiating with certain Indian
banks for an extension of payment terms of existing debt as well as an extension
of credit to support planned production and sales. The consortium of banks has
expressed interest in assisting the Company with its request. In addition,
certain members of the Tandon family have proposed a plan of recapitalization of
the Company, which is subject to certain conditions, among which are
(1) approval by a Special Committee of outside directors of the Board of
Directors, (2) negotiation of a definitive agreement, and (3) approval by the
shareholders. The proposed plan of recapitalization would require those
participating members of the Tandon family to invest $2 million in cash and
certain members of management to invest $250,000 in cash. The proposed
per-share stock purchase price is $0.15 which exceeded both the public bid and
ask prices at the time of the proposal. The recapitalization plan also includes
actions by the Tandon family, who have personally guaranteed the Indian bank
debt, to obtain a standstill from these banks at no material cost to the
Company. This proposed plan is currently being evaluated by the Special
Committee.
THIRD QUARTER
-------------
Sales for the three months ended December 31, 1996 were $1,188,000 compared
to $5,164,000 for the same quarter in the prior year. This decrease in sales of
77% is due principally to the continuing adverse effects of the product returns
in the third quarter of fiscal year 1995 by the Company's then major customer.
Since the product returns occurred, the Company was successful in increasing its
sales volume with its newly established primary customer, IBM, through December
1995, however, it has not been successful in building its sales volume with
other existing customers or in establishing new customers. Additionally, the
Company has been notified by IBM that it is reducing its number of vendors for
power supplies to those who are the larger and best financially prepared to
support their needs and the Company no longer meets its new vendor criteria.
The Company's future marketing and sales strategy will be the re-evaluation of
the second tier OEM power supply business which is primarily made up of
customers requiring strong engineering support and lower volumes but with
significantly higher selling prices and gross margins. The success of this
strategy will be contingent upon the Company's ability to obtain new capital
resources. Included in the current quarter sales is approximately $670,000 of
net settlement proceeds relating to an order cancellation by a former customer.
The gross profit on third quarter sales was $627,000 compared to a gross
profit of $368,000 for the third quarter in fiscal year 1996. This increase in
gross profit is due to the sale of certain reworked inventory which had
previously been written off and the aforementioned settlement proceeds related
to an order cancellation, offset in part by the major decline in manufacturing
capacity utilization which has resulted in significant unabsorbed direct
manufacturing overhead.
Engineering expenses for the current quarter were $253,000 as compared to
$89,000 for the third quarter of fiscal year 1996 or an 184% increase. This
increase
7
<PAGE>
results from the establishment of an engineering and product development
facility in Scotland commencing early July 1996. This action is part of the
Company's strategy to develop power supplies for original equipment
manufacturers of electronic equipment, other than personal computers, who offer
higher gross margins.
Net loss for the third quarter ended December 31, 1996 was $829,000
compared to a net loss of $883,000 for the same period in the prior year. The
significant reasons for this loss are set forth in the foregoing discussion.
NINE MONTHS
-----------
Sales for the nine months ended December 31, 1996 were $2,262,000 compared
to $13,924,000 for the first nine months of the prior fiscal year. The decline
of approximately 84% is due to the aforementioned reasons set forth for the
quarter ended December 31, 1996.
Gross loss for the current nine month period of $121,000 was much higher as
a percent of sales than the $298,000 gross loss in the prior year due
principally to the previously mentioned decline in manufacturing capacity
utilization which has resulted in significant unabsorbed direct manufacturing
overhead. This overhead expense has been partially offset by the sale of
reworked inventory and the net settlement proceeds of approximately $670,000
related to an order cancellation by a former customer which was recorded in the
third quarter.
Selling, general and administrative expenses of $2,321,000 for the nine
months ended December 31, 1996 were 19% lower than the comparable period in the
prior year, due to continuing efforts to reduce costs. However, engineering
expenses of $504,000 were 38% higher than the prior year, as the Company
continues to build its engineering support to meet product demands of customers
manufacturing electronic equipment other than personal computers.
Interest expense of $1,088,000 for the current nine month period compares
to $868,000 for the same period in the prior fiscal year. This increase is due
principally to the higher interest rates the Company is incurring on short-term
debt that is currently delinquent.
Other income of $570,000 for the nine months ended December 31, 1996 is
substantially higher than the $155,000 for the nine months ended December 31,
1995 because of the inclusion in the current period of the contract settlement
which was recorded in the first fiscal quarter.
Net loss for the nine months ended December 31, 1996 was $3,464,000 versus
a net loss of $4,228,000 for the same period in the prior year. The significant
reasons for this loss are set forth in the foregoing discussion.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
--------------------
During the nine months ended December 31, 1996 the Company consumed
$944,000 for operating activities. The major reason for this negative cash from
operating activities is the net loss from operations offset in part by certain
non-cash charges and the liquidation of inventories and accounts receivable as
the Company winds down its business with manufacturers of personal computers.
INVESTING ACTIVITIES
--------------------
Cash provided by investing activities during the first nine months of
fiscal year 1997 was $876,000 due principally to a decrease in restricted cash
which was securing certain bank obligations.
FINANCING ACTIVITIES
--------------------
Cash used in the first nine months of fiscal year 1997 for financing
activities aggregated $446,000. The primary factor contributing to this amount
relates to net repayments of short-term borrowings totaling $965,000. This was
partially offset by $282,000 in additional long-term borrowings and collection
of related party balances.
Shortly after the close of the third quarter, the Company's current
liquidity and capital resources became insufficient to cover current operating
expenses. Consequently, the Tandon family is making temporary advances to the
Company to provide working capital needed to continue operations until the
previously disclosed recapitalization plan and debt restructuring with certain
Indian banks can be concluded or other financing can be obtained.
9
<PAGE>
PART II -- OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
--------
Exhibit 27. Financial Data Sheet
(b) REPORTS ON FORM 8-K
-------------------
No reports on Form 8-K were filed during the three month
period ended December 31, 1996.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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.
GOLDEN SYSTEMS, INC.
By: /S/ JAWAHAR L. TANDON
------------------------------
Jawahar L. Tandon
CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
(for registrant as authorized
officer and as principal Financial
and Accounting Officer)
Date: FEBRUARY 7, 1997
----------------------------
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENTS OF EARNINGS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 153
<SECURITIES> 0
<RECEIVABLES> 660
<ALLOWANCES> 0
<INVENTORY> 5,315
<CURRENT-ASSETS> 6,667
<PP&E> 3,439
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,106
<CURRENT-LIABILITIES> 11,783
<BONDS> 1,216
0
0
<COMMON> 16,278
<OTHER-SE> (21,770)
<TOTAL-LIABILITY-AND-EQUITY> 10,106
<SALES> 2,262
<TOTAL-REVENUES> 2,262
<CGS> 2,383
<TOTAL-COSTS> 2,383
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,088
<INCOME-PRETAX> (3,464)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,464)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,464)
<EPS-PRIMARY> (.78)
<EPS-DILUTED> (.78)
</TABLE>
