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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1997
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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
(Title of Class)
OVER THE COUNTER
(Name of exchange on which registered)
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 AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES NO X
----------- -------
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 VOTING STOCK HELD BY NON-AFFILIATES OF
THE REGISTRANT, BASED ON THE CLOSING PRICE AT MARCH 31, 1998, WAS
APPROXIMATELY $212,000. THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK AT MARCH 31, 1998 WAS 5,299,998.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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GOLDEN SYSTEMS, INC.
INDEX TO ANNUAL REPORT ON
FORM 10-K
For the fiscal year ended
March 31, 1997
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PART I
Item 1. Business.................................................................... 3
Item 2. Properties.................................................................. 16
Item 3. Legal Proceedings........................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders......................... 17
PART II
Item 5. Market for Registrant's Equity Stock and Related Stockholder Matters........ 17
Item 6. Selected Financial Data..................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................... 18
Item 8. Financial Statements and Supplementary Data................................. 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...................................... 25
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 26
Item 11. Executive Compensation...................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 33
Item 13. Certain Relationships and Related Transactions.............................. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 36
Signatures.................................................................. 37
Index to Consolidated Financial Statements..................................F-1
Financial Statements and Supplementary Data.................................F-1
Independent Auditor's Report................................................F-2
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PART I
Unless otherwise indicated as used in this Form 10-K all references to a
fiscal year shall mean the fiscal year of Golden Systems, Inc. ("Golden
Systems" or the "Company") that ends in such year (for example, the fiscal
year commencing April 1, 1996 and ending March 31, 1997 is referred to herein
as "fiscal 1997" or "1997").
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Discussions containing such
forward-looking statements may be found in the material set forth under
"Business-General," "Business-Marketing and Sales," "Legal Proceedings" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as within this Form 10-K generally. Such statements are
subject to a number of risks and uncertainties. Actual results in the future
could differ materially from those described in the forward-looking
statements (as a result of the risk factors set forth below under "Risk
Factors"). The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made
to reflect any future events or circumstances.
ITEM 1 BUSINESS
BACKGROUND
Golden Systems was incorporated in October 1985 and commenced operating
in February 1991. Since then the Company has engaged in the marketing of
power supplies to personal computer and peripheral equipment original
equipment manufacturers ("OEMs") and to distributors of standard power supply
products. During the fiscal year ended March 31, 1992, the Company entered
into its first high volume OEM sales arrangement. The engineering, sales and
distribution operations of the Company were integrated with the engineering
and manufacturing operations of its newly acquired subsidiary, Ultra Tek
Devices, Ltd. ("Ultra Tek"), effective on July 1, 1993, in contemplation of
the Company's Initial Public Offering. Prior to the integration, Ultra Tek
manufactured power supplies for sale primarily to Tandon Corporation or
Tandon Associates for use in personal computers and peripheral equipment
manufactured by companies affiliated with the Tandon family. J. L. Tandon, a
United States resident and citizen, is the Chief Executive Officer and a
director of the Company. Ultra Tek has been managed by M. L. Tandon, a
resident and citizen of India, since its incorporation on August 9, 1985. M.
L. Tandon is Chairman of the Board of Ultra Tek and is J. L. Tandon's
brother. The Company began using the fictitious name "Cortech Systems" in
August 1996.
GENERAL
The Company is in the business of designing, manufacturing and marketing
switching power supplies. Historically, its customers have been OEMs of
personal computers and peripheral equipment. The Company's principal
customers in the past were Compaq Computer Corporation ("Compaq") and
International Business Machines Corporation ("IBM"). Sales to Compaq
declined significantly during fiscal 1996 and 1997. Although the Company
expanded its business activity with IBM during fiscal 1996, IBM ceased to be
a customer during fiscal 1997. Currently, the Company's primary customers
are Iomega Corporation ("Iomega"), Syquest Technology, Inc. ("Syquest") and
Nexar Technologies, Inc. ("Nexar").
The Company uses low-cost manufacturing and labor at its manufacturing
facilities to produce its products, which it designs specifically to meet the
quality requirements and other specifications of its OEM customers. During
fiscal 1997, the Company's manufacturing operations were located in a foreign
export processing zone in Bombay, India and in Sri Lanka near the capital city
of Colombo. Another manufacturing facility, in Madras, India, was closed in
fiscal 1996 as part of the Company's restructuring and cost reduction efforts.
During the third quarter of fiscal 1998, the Company ceased manufacturing in
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Sri Lanka. During fiscal 1997, the Company relocated its product design and
development engineering, along with its self-certifying product safety
laboratory, to Scotland. Both were moved back to the Company's headquarters
office in California during the fourth quarter of fiscal 1998, as the Company
continues to attempt to cut costs.
As was previously reported in the Company's annual and quarterly reports
filed with the Securities and Exchange Commission (the "Commission") and in
timely press releases issued in December 1994, the Company's cash flow was
significantly impacted by the product rejection by Compaq, its then-largest
customer, that took place in the last few months of fiscal 1995, which cost
the Company $4.2 million of lost accounts receivable directly related to the
sales of the rejected units and $2.2 million related to other direct costs
stemming from the rejection. This additionally placed the Company in an
unfavorable position with its raw material vendors due to limited cash, high
short-term debt, and a severe deferral of payments to its banking
institutions and vendors. Existing and potential new customers were very
aware of the significant product return and the unfavorable financial
position the Company was experiencing.
In recognition of the unfavorable circumstances created by this event
(high short-term debt, limited capital, vendor problems, and negative
perception by its existing and potential customer base), the Company was
required in fiscal 1996 to develop and implement a strategy to overcome its
severe cash difficulties. The strategy included utilization or sale of its
raw material inventory, cost reductions, organizational restructuring, price
increases, volume growth, and obtaining more favorable payment terms from its
existing customers. The Company recognized that these measures would be both
difficult to achieve in the very competitive personal computer component
market and would be short-term solutions under the best of circumstances and
results. Based on this, the Company recognized the necessity, on a longer
term basis, of pursuing new equity investment primarily through a merger or
acquisition.
The Company was successful in achieving certain portions of its cash
recovery strategy as is demonstrated in its fiscal 1996 year-end financial
statements. In particular, $2,161,000 in cash was provided by a decrease in
accounts receivable as a result of specific customers granting the Company
accelerated payment terms and an additional $2,270,000 in cash was provided
by a reduction in inventory primarily as a result of using existing raw
materials in new power supply products. These same activities resulted in
cash in the amounts of $423,000 and $1,283,000, respectively, as reported in
the Company's Quarterly Report on Form 10-Q, for the nine months ended
December 31, 1996. During fiscal 1996, selling, general and administrative
expenses were reduced by $1,129,000 resulting from the eventual shut-down of
the manufacturing facility located in Madras, India, staff and cost
reductions in the Simi Valley corporate offices, and cost reductions in the
England and Singapore sales offices. Continued efforts to reduce selling,
general and administrative expenses resulted in additional savings of
$531,000 for the nine months ended December 31, 1996. But, while achieving
some success, the Company did not generate the anticipated amounts of cash
recovery from inventory reduction, had only limited success in its efforts to
resell the reworked, rejected product, and failed to rebuild the volume of
its business.
Sales to Compaq decreased significantly in fiscal 1996 and fiscal 1997.
Although the Company was successful in increasing its volume with IBM through
the third quarter of fiscal 1996, it was not successful in building its sales
volumes to other existing customers or to new customers. The Company also
was notified by IBM in the latter half of fiscal 1996 that it was reducing
its number of vendors for power supplies to those larger and best financially
prepared to support its activities and that the Company no longer met its
vendor selection criteria. Sales to IBM ceased during fiscal 1997.
The Board of Directors concluded during the fourth quarter of fiscal
1996 that, if the Company were to remain operational, it must evaluate all
measures to obtain additional capital from sources outside the Company or, if
none were found, that the Company must engage in a transaction that would
change its fundamental structure. On February 13, 1996, the Board of
Directors established an Independent Directors Committee, made up of
non-management directors, to evaluate financing and restructuring options and
opportunities available to the Company.
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The Independent Directors Committee was unable to identify any outside
sources of capital. The Company pursued an equity investment by an outside
investment group; discussed strategic alliances with two different companies;
considered an acquisition proposal by an investment banker; and explored a
merger with another electronics manufacturer. However, the Company found
that the following factors made it unattractive to potential investors and
traditional lenders: (i) the size of its Indian bank debt relative to the
Company's consolidated assets; (ii) the fact that the Indian banks' liens on
Ultra Tek's assets are first in priority over all other debt, as well as over
shareholders' equity rights; (iii) the Company's operating losses since the
fiscal 1995 product rejection by Compaq; and (iv) the fact that the Company
had consumed the totality of its resources simply to survive during the four
quarters of fiscal 1996. In May 1996, J. L. Tandon, the Company's CEO,
informed the Independent Directors Committee that the Tandon family, which
owned approximately 38.2% of the outstanding shares of the Company's common
stock (the "Common Stock") and has personally guaranteed Ultra Tek's bank
debt in India (amounting to approximately $7.5 million at March 31, 1996),
was prepared to invest additional equity in the Company and to support the
Company in negotiations with the Indian banks. A number of discussions of
terms, amounts and timing took place, leading to an initial proposal from the
Tandon family dated July 31, 1996. During August 1996, the Independent
Directors Committee informed J. L. Tandon that, in addition to financial
terms, an acceptable proposal must include (i) a business plan showing that
the investment would be sufficient to restart the Company with new products,
and (ii) an organization chart showing that the Company had in place, or had
identified, the management and engineering talent necessary to implement the
plan. In addition, aspects of the proposal involving in-kind contributions
of product manufacturing and distribution rights presented valuation and tax
issues that both the committee and the Tandons needed more information to
resolve.
The tax and valuation issues stemmed from the aspect of the July 1996
proposal that involved the Tandon family's in-kind contribution to the
Company of a subsystem receptacle business operated by another Tandon-owned
entity. The primary value of this business was derived from a contract held
by another Tandon family-affiliated company to supply its product to a third
party PC computer manufacturer. However, since the product was still under
development, the valuation of this business was deemed to be too speculative.
In addition, the family's basis in the business was sufficiently low that
the Tandons would have recognized a large taxable gain upon contributing it
to the Company, necessitating that they receive an even greater number of
shares of Common Stock in exchange in order to offset the cost of tax
payments.
During September 1996, the Company prepared and delivered a business
plan and reviewed personnel issues. The Independent Directors Committee
pointed out the weakness in senior financial management as a result of the
resignation of Michael D. Thomas, the Company's president and chief financial
officer, effective July 1, 1996. Prakash Thanky had become the Company's
president, effective that same date, but no senior financial executive was
then employed by the Company. The committee directed management to initiate
a search for a chief financial officer and indicated its willingness to
accept an interim consultant in that position while the search was under way.
Harvey Marsh was hired as a part-time interim financial consultant in
October 1996 and, as of March 31, 1998, continued in that capacity.
In October 1996, the Tandon family proposed a recapitalization plan (the
"Recapitalization Plan") to the Independent Directors Committee that eliminated
the tax and valuation issues of their previous proposal (by deleting any in-kind
contributions) and added a financial commitment from management. This proposal
called for an investment in newly issued shares of the Company's Common Stock in
the amount of $2 million by the Tandons and $250,000 by certain members of
management, together with a commitment from the Tandon family to obtain a
standstill arrangement with Ultra Tek's Indian bank lenders whereby such banks
would agree not to demand payment of any interest or principal from the Company
or Ultra Tek, or declare a default despite the Company's failure to comply with
its debt covenants, for a period of not less than one year. The Company
expected that the standstill arrangement would give it enough time to
demonstrate its viability as an ongoing business so that it could negotiate a
reasonable payment schedule with the Indian banks, rather than having the banks
foreclose on Ultra Tek's assets. The Recapitalization Plan does not require
that a formal standstill agreement be reached with the Indian Banks. Instead,
it requires that the Tandon family loan to the Company any funds necessary to
meet
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any payment demands by the Indian Banks. The proposed per-share stock
purchase price was $0.15, which exceeded the public bid price of $0.07 and
the public asked price of $0.14 at the time of the proposal. The terms
presented by the Tandon family would result in Tandon interests in the
Company increasing from approximately 38.2% (as of March 1, 1997) to
approximately 77.3% of the Company's outstanding shares, while management
would acquire approximately 8.6%.
Because implementation of the Recapitalization Plan would cause an
increase in ownership by the Tandon family relative to other shareholders,
the Recapitalization Plan represents a conflict of interest as a related
party equity investment. The Independent Directors Committee, as a result of
the Company's lack of success in identifying and consummating a transaction
with an unrelated party, concluded that the Company must confront and resolve
the conflict of interest. The Committee recognized that the Company's
ability to continue its Indian manufacturing operations was dependent upon
the involvement of the Tandon family. The Tandon family provided expertise
in Indian operations and had personally guaranteed the debts to the Indian
banks. As a practical matter, no resolution of the Company's situation would
be achievable without the cooperation and participation of the Tandon family.
In fact, proposals received from third parties and rejected by the Company
(as described above) had provided for separate treatment of the Tandon family
and its interests relative to the Indian bank debt. Consequently, the
Independent Directors Committee determined that any potential conflict of
interest presented by the Recapitalization Plan could be minimized by the
function of the Committee itself in reviewing and negotiating the terms of
the Recapitalization Plan on the Company's behalf with the Tandon family.
Further, the Company appeared to have no practical alternative in order to
obtain the cash necessary for it to continue to exist. Shareholder approval
for the Recapitalization Plan would be necessary because of the substantial
number of shares issuable under its terms.
On February 21, 1997, the Independent Directors Committee determined to
recommend to the Board of Directors that the Recapitalization Plan and the
transactions contemplated thereby be approved. On February 27, 1997, the
Board of Directors approved the Recapitalization Plan. In arriving at its
conclusion, the Board of Directors determined that the Recapitalization Plan
was fair, from a financial point of view, to the Company's existing
shareholders and that the purchase price of $0.15 per share of Common Stock
was within the acceptable range of fairness. The Board of Directors
considered the value of the Company and the fairness of the consideration
being offered to the Company, including the standstill arrangement with the
Indian banks. The Company's debt to the Indian banks amounted to
approximately $8,120,308 (as of January 31, 1997) and, as now, was secured by
the assets of Ultra Tek and guaranteed by the Company. The Tandon family,
which has also personally guaranteed the debt, assumed additional risks by
allowing their personal assets to be used as security for the debt and thus
was able to secure a temporary suspension of interest payments. The Tandon
family was willing to make further personal commitments to the Indian banks
in order to achieve the bank standstill arrangement. In approving the
fairness of the Recapitalization Plan, the Board of Directors also took into
consideration the fairness opinion delivered by Wedbush Morgan Securities
("Wedbush"). In conclusion, given the unique value of the bank standstill
arrangement to be negotiated by the Tandon family and the supporting fairness
opinion of Wedbush, the Board of Directors recommended that the shareholders
of the Company approve the Recapitalization Plan.
The Company prepared a proxy statement describing the Recapitalization
Plan, which was to be presented to the Company's shareholders for a vote at the
1996 Annual Meeting of Shareholders. The document was filed with the Securities
and Exchange Commission (the "Commission"), as required by federal securities
law, on April 8, 1997. One month later, the Company received comments from the
Commission, which the Company needed to address before the proxy statement could
be delivered to the shareholders. As a result of the time taken by the
Commission to prepare its comments and the time necessary for the Company to
respond to them, the financial information included in the proxy statement
became too old to use under federal securities rules. Because the information
provided was from the third quarter of fiscal 1997, updating the financial
disclosure required the completion of the 1997 fiscal year end audit.
Unfortunately, the Company's worsening financial situation prevented it from
undertaking this audit for some time and then, upon undertaking the audit,
prevented the audit from being completed until June 1998. Having its fiscal
1997 audit in place and having filed this fiscal 1997 year end report with the
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Commission, the Company will now have to file quarterly reports on Form 10-Q
for each of the first three quarters of fiscal 1998 and an annual report on
Form 10-K with audited financials for fiscal 1998, together with any fiscal
1999 quarterly reports that may then be due, before it will be able to
solicit the approval of its shareholders for the Recapitalization Plan or any
other matters requiring shareholder approval.
In order to ease the Company's worsening cash situation while the
shareholder approval process was being pursued, the Tandon family agreed to
invest immediately the $2,000,000 contemplated by the Recapitalization Plan.
On or about March 31, 1997, the Tandon family contributed $2,000,000
consisting of cash and canceled promissory notes from the Company in exchange
for 850,000 shares of the Company's Common Stock that had been authorized for
issuance but never issued and a bridging promissory note from the Company in
the principal amount of $1,873,000 that would be canceled when the remaining
12,483,333 shares of Common Stock issuable under the terms of the
Recapitalization Plan had been authorized by the Company's shareholders and
issued to the Tandon family. All of the proceeds were used for the Company's
working capital and, as of March 31, 1998, the Company has borrowed an
additional $1,525,000 from the Tandon family. By its terms, the original
bridge note has converted into an 8% per annum demand promissory note. All
additional loaned amounts have been under the terms of demand promissory
notes. The Company continues to operate at a loss and in the third quarter
of fiscal 1998 began implementing additional cost reductions, including the
discontinuance of manufacturing operations at the Sri Lanka facility, in an
effort to overcome its negative cash flow. Prakash Thanky resigned as
President in November 1997, at which time J. L. Tandon assumed the title of
President. In the fourth quarter of fiscal 1998, the Company sold its
Singapore and Sri Lanka subsidiaries to related parties, closed its Scotland
office and initiated additional employee reductions. The reduction in the
Company's management personnel, including Mr. Thanky, has made any prospect
of the management investment portion of the Recapitalization Plan unrealistic.
In January 1998, the Company commenced discussions with its Indian banks
regarding a financial rehabilitation plan pursuant to guidelines established
by the Board for Financial and Industrial Reconstruction ("BFIR"), which is
an Indian authority that adjudicates all matters of financially distressed
companies. The Company believes that under this plan, existing debt may be
extended over a seven year period at reduced interest rates, subject to an
additional infusion of fresh funds of approximately $2 million. As of March
31, 1998, the debt to the Indian banks amounted to approximately $8 million.
During the second quarter of fiscal 1997, the Company began doing
business as "Cortech Systems." Pending shareholder approval of a change in
the Company's name, Cortech Systems is a fictitious business name.
UNITED STATES OPERATIONS
The Company's operations in the United States are focused on
administration and marketing, product design and development, and the
coordination of product engineering and manufacturing between the Company's
customers and its Indian manufacturing facilities. The Company markets its
products directly to OEMs through its established network of contacts in the
electronics industry. Product development and design engineers work closely
with OEMs, visiting their facilities and organizing lines of communication
(typically through the use of electronic mail). Concurrently, the design
engineers communicate with process and manufacturing engineers in India, also
via electronic mail, to coordinate the design and manufacture of products.
Finally, the Company has a self-certifying product safety laboratory, which
allows it to obtain safety certification for its products on an expedited
basis. In July 1996, the Company relocated its product design and
development engineering, together with its product safety laboratory, to
Scotland. However, as part of its third quarter fiscal 1998 cost reductions,
the Company closed the Scotland facility and, in January 1998, these
functions were relocated back to the United States.
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OFFSHORE OPERATIONS
The electronics industry is extremely competitive, with price being a
major competitive factor. The Company seeks a competitive advantage by
attempting to offer high-quality, low-cost products to existing and potential
customers by capitalizing on lower cost offshore manufacturing capabilities.
During fiscal 1997, the Company maintained manufacturing facilities in India
and Sri Lanka. During the third quarter of fiscal 1998, the Sri Lankan
facility ceased operations and the expenses of maintaining it were assumed by
a related party for its own manufacturing uses. India's large population and
high unemployment rate enable the Company to employ relatively well-educated
workers at low wages. The Company believes its workers are well educated
relative to workers performing similar manufacturing duties in other third
world countries. Most of the Company's workers are graduates of secondary
school (high school equivalent), which the Company believes enables more
extensive and effective worker training, permitting greater productivity.
The Company further benefits from these low wages by manufacturing many power
supply components in-house. The Company also employs executives who reside in
India, thereby minimizing travel expense as well as salary expense.
INDIA OPERATIONS
Ultra Tek currently manufactures all of its power supplies in a leased
facility located in the Santa Cruz Electronics Export Processing Zone
("SEEPZ") in Bombay, India. SEEPZ was established in Bombay in 1974 as part
of a series of incentive programs by the government of India to encourage
domestic manufacture of products for export. These programs began in the
early 1970s and, to date, the Indian government has created a number of free
trade zones. Recent amendments to these programs continue the trend of
expanding export incentives. Under Indian regulations relating to SEEPZ,
businesses in SEEPZ are required to export a substantial part of production.
The Company previously operated a manufacturing facility in another export
processing zone near Madras, India. In response to reductions in sales
volume, that facility was phased out in the second half of fiscal 1995 and
closed during fiscal 1996.
SEEPZ is 100 acres in area and is located in a northern suburb of
Bombay. It is less than five miles away from both Bombay's domestic and
international airports and less than twenty miles from its commercial docks.
Almost two hundred companies employing over ten thousand people currently
operate in SEEPZ. The Company believes that the Indian government will
continue to support these export processing zones.
Major benefits provided by the Indian government to businesses operating
within SEEPZ include:
INFRASTRUCTURE. In addition to developed land parcels for
self-constructed facilities, ready-built space is available in
government-constructed Standard Design Factories ("SDFs"). Ultra Tek
currently does all of its manufacturing in an SDF. SDFs are typically leased
for five-year periods, with the tenant responsible for the construction of
all internal improvements, including partitions, air conditioning and
internal wiring. The zones are exempt from scheduled electrical power cuts,
common in India, and also have on-site telecommunications switching
facilities and bank offices. The Indian government typically renews such
leases absent unusual circumstances.
INCENTIVES. The Indian government waives licensing and duties on
imported capital goods, raw materials, other production materials, office
equipment and supplies, and also waives the excise tax applicable on the
purchase of goods and materials in India. Sales tax on goods purchased in
India is eligible for reimbursement. The government has adopted policies
that do not require any domestic ownership to establish and operate a
facility within SEEPZ. These policies are intended to encourage the
investment of foreign capital. To operate within SEEPZ, all products
manufactured by a company therein must be exported, although with prior
governmental approval up to 25% of products manufactured may be sold within
India. Income derived from export sales is exempt from income tax. Income
derived from domestic sales, however, is subject to income tax.
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ADMINISTRATIVE SUPPORT. An on-site Development Commissioner is
empowered to grant a number of government approvals, widely required in
India, including a range of permits and licenses, and is available to
coordinate others. Export processing zones also are special customs areas
that allow customs clearance on-site, with bonded shipment to nearby harbor
and airport facilities.
In addition, restricted access to export processing zones means that the
risk of labor unrest from outside organizers is reduced. The businesses in
the zones also have the advantage of "public utility" status under Indian
law, which restricts the rights of their workers to strike.
SRI LANKA OPERATIONS
The Sri Lanka operation was established in March 1994 under very
favorable tax considerations, government participation in employee training,
and other favorable programs that benefited the Company. Sri Lanka is
attempting to pattern its development to be similar to Singapore's in the
early 1970s, which management believed would provide significant
opportunities for the Company's future growth and streamlining of its
business activities, both short- and long-term. However, because of the
continuing decline in the Company's production volume beginning in the fourth
quarter of fiscal 1995, the Sri Lanka operation was operating at a loss and
experiencing negative cash flow. As part of the Company's third quarter
fiscal 1998 cost reductions, the Company decided to cease its manufacturing
operations in Sri Lanka in order to reduce excess production capacity. In
March 1998, the Company agreed to assign its rights to the Sri Lanka
facility, and transfer its assets in Sri Lanka, to a related party in
exchange for the related party's agreement to assume all of the Company's
obligations in Sri Lanka, including the facility lease, obligations to
employees, and approximately $400,000 in bank debt.
STRATEGY
The Company's immediate strategy is continued cost control and cash
conservation as it seeks to rebuild its manufacturing operations. New credit
lines and other sources of working capital are also being explored. Since
the fourth quarter of fiscal 1995, the Company has pursued relationships with
a broad range of OEMs of electronic products. The Company has sought to
shift its product focus away from manufacturers of personal computers and to
focus instead on computer peripheral equipment and other electronics products
where the Company believes the margins of profit are higher. Manufacturers
of these products typically require lower volumes but are not subject to the
commodity price pressure that exists in the personal computer market. The
Company believes that, with improved production management, higher margins
can be obtained on shorter production runs because these circumstances lower
the portion of the customer's price that is represented by the components in
the product units. The Company's lower labor and engineering costs should
thus provide an opportunity to offer competitive prices while retaining
enough margin to allow the Company to generate positive cash flow. Achieving
positive cash flow from operations will make the Company more attractive to
existing and potential customers and should give the Company a better
opportunity to reach a settlement with its Indian banks that will allow the
Company to continue to operate. Further, the Board of Directors has
determined that the Company must evaluate all measures to obtain additional
capital from sources outside the Company or, if none are found, that the
Company must engage in a transaction that would change the Company's
fundamental structure.
It is crucial to the Company's prospects that it develop a level of
revenues from customers offering sufficient opportunities for positive profit
margins that will allow the Company to be cash flow positive on an operating
basis and to report operating income. As of March 31, 1998, this has not yet
occurred. In addition to the production management, inventory management,
customer satisfaction and new business development risks the Company faces in
achieving its objectives, the Company also faces national and world economy
risks, industry downturn risks and specific customer well-being risks. For
example, the recent economic crisis affecting some countries in Asia may be
helpful to some of the Company's competitors and harmful to some of its
customers. It also may disrupt the supply of raw materials from the affected
countries. Also, in May 1998, the United States government announced
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economic sanctions against India, as a result of underground nuclear testing,
that may negatively affect the Company's business or prospects. Further, the
recent slump in Iomega's business, while apparently temporary, caused Iomega,
the Company's largest customer in the first half of fiscal 1998, to cut back
its orders by approximately 50% from projected levels for the fourth quarter
of fiscal 1998.
POWER SUPPLIES
Manufacturers of certain types of electronic equipment do not design
their products for use with alternating current such as that provided by an
electrical outlet. Instead, these products require the use of a power supply
to convert the alternating current to a direct current of appropriate
voltage. Power supplies are either linear or switching. Linear power
supplies are relatively simple devices having low electromagnetic
interference and low output ripple, but tend to be large and heavy because
the necessary voltage conversion transformers must operate at below the
frequency (50 or 60 Hz) of the alternating input current. The scientific and
engineering communities use linear power supplies in technical
instrumentation where output regulation is extremely important and size and
efficiency are of less importance. Linear power supplies also tend to
produce a great amount of heat, making them undesirable for many industrial
and consumer applications. The Company sells an insignificant number of
linear power supplies.
Switching power supplies are more complex devices than linear power
supplies and produce greater power in relation to their physical size,
described as greater "power density". In a switching power supply,
alternating current is first converted to direct current by diodes, and is
then reconverted to much higher frequency alternating current before being
passed through the voltage conversion transformers, which are therefore much
smaller and permit greater power densities. A switching power supply
typically consists of a printed circuit board with the appropriate electronic
components, an on/off switch, and leads or cables to send power to the
electronic equipment. Switching power supplies are much more efficient and
therefore produce less heat than equally powerful linear power supplies,
making them preferable for a wide array of applications. The Company
manufactures three types of switching power supply products--closed frame,
open frame and A/C adapters.
CLOSED FRAME. Closed frame power supplies have a case enclosing the
power supply components and are used in product applications where end users
may need access to the interior of the product and in products requiring
greater power than can safely be provided by open frame power supplies.
Encasing the power supply minimizes the risk of injury to end users from the
high voltage components of the power supply. The Company manufactures closed
frame power supplies ranging from 25 watts to 350 watts, with the 200 watt
units accounting for a majority of sales. The Company offers these power
supplies in a variety of configurations and works closely with its customers
to modify or customize the power supplies to adapt them to particular
customer specifications. Sales of closed frame power supplies accounted for
approximately 82% of the Company's sales in fiscal 1997 and approximately 21%
in fiscal 1998.
OPEN FRAME. Open frame power supplies are not enclosed in a case. They
tend to be used in products that require lower wattage and that are unlikely
to be opened by end users. For example, open frame power supplies are used
in tape and disk drives, monitors, printers and other peripheral equipment.
Open frame power supplies tend to be more standardized in configuration than
closed frame power supplies. The Company produces open frame power supplies
ranging from 25 watts to 200 watts, with the 65 watt unit accounting for a
majority of sales. Open frame power supplies accounted for approximately 1%
of the Company's sales in fiscal 1997 and approximately 2% in fiscal 1998.
A/C ADAPTERS. A/C adapters are external power supplies that connect
electronic products to wall outlets. A/C adapters are used with a variety of
products, including notebook and portable computers. The A/C adapters
produced by the Company contain a battery recharging circuit. The Company
produces A/C adapters ranging from 15 watts to 70 watts, with the 15 watt
unit accounting for a majority of sales. Sales of A/C adapters accounted for
approximately 2% of the Company's sales in fiscal 1997 and approximately 75%
in fiscal 1998.
10
<PAGE>
PARTS AND LICENSE FEES. In addition to providing customers with
finished power supplies, the Company has also been selling parts on hand in
its efforts to reduce inventories. This activity, along with minor import
license fees, accounted for approximately 15% of the Company's sales in
fiscal 1997 and approximately 2% in fiscal 1998.
MANUFACTURING
The manufacture of power supplies is labor intensive and will probably
remain so in the near future. It necessarily involves relatively large,
heavy, or irregularly shaped items such as transformers, heat sinks and high
voltage capacitors. Additionally, the manufacture of transformers involves
winding wire in complex sequences, involving four or more winding and
insulating steps. For this reason, the Company has chosen to manufacture its
products in India. The Company believes that the work force there is
inexpensive and relatively well-educated. Moreover, because the Company's
management team has extensive experience in manufacturing computer components
in India, the Company believes that it is well positioned to benefit from
the advantages India provides. That being said, however, the largest
component of the production cost of a power supply is the materials that go
into each unit. The Company's financial condition has made advantageous
relationships with the Company's vendors unavailable, which has decreased the
Company's ability to produce low-priced products.
The Company uses its low-cost labor to manufacture magnetics, to
configure sheet metal, and to mold plastic components, which enables the
Company to respond quickly to design changes and reduces the risk of shipping
delays. Other purchased parts and raw materials are normally readily
available and are supplied to the Company under normal circumstances by
various vendors, each of which must be approved by the Company's OEM
customers. Many of the Company's purchased components are supplied by
manufacturers located in the United States, Japan and Taiwan.
Through fiscal 1996, the Company saw a continuation of price increases
and a tightening of supply for purchased parts (components) and other raw
material due to a steep growth in world-wide demand for personal computers
and other consumer electronics products, as well as the continued strength of
the Japanese yen relative to the U.S. dollar. The Company was more severely
impacted by this occurrence than its competitors due to its financial
condition and extended deferral of payments to its vendors. This unfavorable
situation, with its vendors in an already tight market, caused the Company to
pay premium costs and to receive poor delivery schedules. The overall effect
of these circumstances further reduced the Company's gross margins in an
already low margin OEM product and adversely affected the Company's ability
to meet its committed delivery schedules to its customers.
During fiscal 1996, the Company placed significant emphasis on improving
the control of its manufacturing functions. Because of the significant
decline in production in fiscal 1997, primary emphasis was placed on
controlling variable expenses and liquidating existing inventories. The
Company's strategy to redirect its business to supplying the needs of
lower-volume OEMs that offer higher margins means that, if those customers
can be secured, the Company would be manufacturing a larger number of product
runs, each representing a smaller number of units. As a consequence,
effective management of the manufacturing and inventory control processes is
critical if these lower-volume production runs are to generate acceptable
gross margins. During fiscal 1997 and 1998, the Company began to perform on
this strategy. The Company achieved general market acceptance of its product
design and production capabilities and began shipping A/C adapters and closed
frame power supplies during the second and third quarters of fiscal 1998 to
newly acquired customers. Unfortunately, the market for certain customer
products began to diminish and other customers began transitioning to new
product designs, which caused a significant slowdown in sales during the
final quarter of fiscal 1998. The Company believes the slowdown to be
temporary, but there is no assurance that sales volume will resume at earlier
levels or can be built up to levels that would provide the Company with
positive cash flow.
11
<PAGE>
PRODUCT DESIGN AND DEVELOPMENT
In fiscal 1997, the Company maintained engineering departments in
Scotland and Bombay. The Scotland engineering department was principally
responsible for the design development of the Company's products, while the
Bombay department was (and still is) principally responsible for production
and manufacturing engineering of the Company's products. The Company's
product design development team in Scotland worked closely with the OEMs to
design products that met each OEM's specifications for power, price, size,
and quality. Typically such a design development will start with one of the
Company's standard power supplies, which will then be modified to meet the
OEM's requirements. Prototypes of the OEM's product are often sent to the
Company so that the Company may test the effectiveness of its proposed power
supply design.
Concurrently with the power supply design, the Company's engineers in
Bombay develop the manufacturing processes the Company will need for
production. These engineers remain in close communication with the Company's
design development team and with the OEM's engineering team, typically
through the use of electronic mail. Throughout the design process, the
manufacturing applications team advises both the design development team and
the customer concerning the probable cost, speed of manufacture and ease of
quality control of various proposed designs and modifications, suggesting
alternatives where appropriate. Development of a prototype typically takes
approximately eight weeks from the start of the design process.
Once the OEM approves the product design, the Company subjects a
prototype to those testing procedures necessary to obtain product safety
certification by Underwriters Laboratories, Canadian Standards Association,
T.U.V. Rhineland, and Nemko. This process normally takes approximately eight
weeks. However, the Company has acquired approval to act as a
self-certifying laboratory for all these safety agencies, thus reducing the
typical time required by four to six weeks. The Company's self-certification
laboratory, located in Scotland during fiscal 1997, is subject to regular
inspection and review by each agency. Customers typically pay all new product
safety certification costs as incurred.
In January 1998, the product design engineering department in Scotland
was reduced from 14 engineers to two engineers and relocated to Simi Valley,
California. The self-certification laboratory has also been relocated to the
Company's headquarters location.
QUALITY CONTROL
Personal computers and computer peripheral devices are precision
products requiring each component to function as specified. The Company
endeavors to manufacture power supplies to exacting standards and with very
high reliability to minimize both return/replacement costs and inspection
time.
In pursuit of quality control, the Company tests each product
individually at a number of points in the manufacturing process. Completed
products are subjected to load tests and burn-ins prior to being packaged and
shipped. Because the Company currently inserts electronic components into
printed circuit boards manually, one of the more prevalent problems
discovered during testing is erroneous component placement. The Company has
improved its manufacturing efficiency by installing pin-in-hole equipment,
which automates the process of inserting small electronic components into
circuit boards. By fiscal 1996, the Company had installed a sufficient
number of pin-in-hole units to accommodate its entire production capacity.
This automated process has eliminated most misplacement defects. The
Company's manufacturing facilities are regularly inspected by its OEM
customers.
MARKETING AND SALES
The Company markets and sells its products directly to OEMs of personal
computers, peripherals, and other electronic equipment through its U.S.-based
sales force with an established network of contacts in the computer industry.
The Company attends several industry trade shows, including the annual
12
<PAGE>
COMDEX trade show, as a means of developing customer relationships. Once the
Company has established contact with an OEM, the Company targets several
departments of the OEM for its sales efforts, usually giving special emphasis
to the development engineering department, but with emphasis also on the
purchasing and quality control departments. The Company participates in
programs, such as the United States Environmental Protection Agency's "Energy
Star" program, in which its customers have expressed an interest in
conforming their products. There is no fee to participate in the "Energy
Star" program. Under the "Energy Star" program, products which meet certain
low power and high efficiency standards are permitted to bear an "Energy
Star" designation.
During fiscal 1997, sales to Compaq accounted for approximately 19% of
the Company's net sales and IBM accounted for approximately 36%. A new
relationship with Nexar accounted for 21% of fiscal 1997 net sales. Sales to
Compaq dropped dramatically by the end of fiscal 1997. The Company was
notified by IBM in the latter half of fiscal 1996 that it was reducing its
number of vendors for power supplies and that the Company no longer met its
requirements as to business size and financial stability. Consequently, the
Company and IBM agreed to a wind-down of business between the companies. The
Company therefore lost all major business with its two largest historical
customers during fiscal 1997. For fiscal 1998, the Company's largest
customers were Iomega and Nexar, representing 70% and 14%, respectively, of
net sales.
The Company's strategy for marketing and sales during fiscal 1997 and
1998 was, and in the future will be, directed at lower-volume OEM
manufacturers that require more engineering support and smaller product
volumes, but offer significantly higher prices and attractive gross margins.
At present, the Company has a limited number of customers that fit this
profile, however, there can be no assurance that it will be able to obtain a
sufficient number of them or orders for a sufficient number of units to
implement its strategy effectively. Further, because of the Company's
precarious financial condition, potential customers have expressed concern
regarding the Company's ability to provide on-going support for their product
programs.
Historically, the Company has marketed a portion of its products through
distributors. As of March 31, 1998, as during fiscal 1997 and 1996, the
Company was not capable of supporting any significant distribution sales.
This type of sales activity requires significant technical and in-house sales
support along with financial incentives the Company was not in a position to
provide.
COMPETITION
The electronics industry is extremely competitive, with price and
quality being critical competitive factors. In recent years, price
competition has become particularly intense. This competition has affected
vendors to OEMs, including those that manufacture power supplies. The
Company believes that the primary competitive factors in the power supply
industry are price, reliability, and the ability to timely modify and deliver
products to meet customer requirements. The Company believes that it has
improved its operations management so that it has the ability to compete
favorably with respect to these factors. The Company's lack of financial
resources, however, has been a major constraint on its ability to compete
effectively with its major competitors, many of whom are larger and better
financed than the Company. The Company's inability to satisfy the financial
strength and stability requirements IBM applied to its vendors was in large
part responsible for the loss of IBM as a customer. Further, the largest
portion of the Company's cost in producing a power supply is the cost of
materials. The Company's financial condition has made it very difficult for
the Company to obtain advantageous arrangements with its raw material
suppliers, which reduces the Company's ability to compete effectively.
The Company's principal competitors conduct many of their manufacturing
operations in countries with low-cost labor forces, but the Company believes
its labor costs are competitive. Given India's large population and high
unemployment rate, the Company does not anticipate rising labor costs.
Moreover, the Company believes it benefits from a relatively well-educated
labor force as well as a local process and manufacturing engineering group,
thereby minimizing the need for costly expatriate engineers.
13
<PAGE>
Although the Company has automated a portion of its manufacturing processes,
even with the installation of the pin-in-hole equipment, the manufacture of
power supplies will continue to be labor intensive, requiring the use of
skilled workers to install transformers and other components and to wind
transformer coils.
The Company's primary competitors in the OEM power supply market include
Astec America, Inc., Delta, API, and Lite-on, all of which are privately held
and based overseas. Additionally, management believes that many personal
computer OEMs that currently purchase power supplies from third party vendors
continue to have the capability to manufacture their own power supplies
in-house.
BACKLOG
Although the Company's OEM customers provide estimated annual power
supply requirements, the Company usually purchases supplies and manufactures
its products only against firm orders. Arrangements between the Company and
its OEM customers typically provide that the customer must furnish the
Company with a purchase order for the customer's power supply requirements
for a three-month period. The customer must purchase 100% of the power
supplies ordered for delivery within one month of the date of the purchase
order. The customer may increase or decrease the number of power supplies
estimated to be purchased in the second and third months from the date of the
purchase order by no more than 20% and 30%, respectively. The Company's
ability to enforce these provisions, however, is limited by the good faith
and the market power of the customer. The Company's non-OEM customer orders
also generally provide for delivery within a period of three months or less.
Therefore, the Company operates without a significant backlog, relying
primarily on monthly purchase orders. At March 31, 1998, firm backlog was
estimated at approximately $1.5 million.
PATENTS AND PROPRIETARY RIGHTS
Though the Company believes that patent rights are not significant in
the power supply industry and that generally the industry's customer base is
more responsive to suppliers that promptly meet its changing needs than to
those that offer proprietary technology, the Company did enter into a limited
agreement with TESLAco Inc. in the fourth quarter of fiscal 1996 to utilize
its patented "Cuk" technology for certain design applications. The Company
believed that there might be market segments, as part of its strategy to
address smaller volume OEMs, where this technology might offer an advantage.
During fiscal 1997 and 1998, the Company's product development engineers
attempted to utilize the "Cuk" technology, but without success. In the third
quarter of fiscal 1998, the agreement was terminated.
WARRANTIES
The Company generally provides its customers with a one- to three-year
warranty on its power supplies and has not experienced any significant
warranty claims, but no assurances can be given as to future warranty claim
levels. Due to the remoteness of the Company's manufacturing facilities and
the relatively low unit cost of its power supplies, the Company ordinarily
does not repair defective goods, but credits the customer for the replacement
product.
EMPLOYEES
At March 31, 1997, the Company employed 13 people in its U.S.
operations, including two in engineering and operations, eight in
administration and finance, and three in sales and marketing, and employed
approximately 584 people in India, including 506 in manufacturing and
planning, 34 in design engineering, and 44 in administration. In addition,
251 people were employed in Sri Lanka including 243 in manufacturing and 8
in general and administration. The Company also had an engineering operation
located in Scotland which employed 14 people, and one customer support
representative each in England and Singapore.
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As of March 31, 1998, full-time employees in the United States and India
were 10 and 646, respectively, and there were no part-time employees. Two
engineers were relocated from Scotland to the United States in January 1998
and the remaining 12 employees were terminated. The Company's Sri Lanka
facility was sold, and all employees transferred to the buyer in March 1998.
There were no employees in England or Singapore, as these operations were
either sold or liquidated during fiscal 1998.
None of the Company's employees are represented by a union, and
management believes the Company's relations with employees are good.
Moreover, under Indian Law, businesses operating in the duty free export
processing zones are considered public utilities, which restricts the rights
of their workers to strike.
RISK FACTORS
SIGNIFICANT LOSSES
The Company has incurred significant losses from operations over the
past three years. It has essentially lost its two primary historical
customers and has been unsuccessful in rebuilding its base of customer
relationships. In addition to the promissory note of $1,873,000 outstanding
under the terms of the Recapitalization Plan, the Company has borrowed
$1,525,000 from the Tandon family, since March 31, 1997. The only unrelated
party financing available to the Company has been a receivables factoring
arrangement at unfavorable rates. The Company has been unsuccessful in its
efforts over the last three fiscal years to reestablish its business at
levels approaching financial breakeven or approaching positive cash flow. At
March 31, 1997, the Company had a shareholders' deficit of $14.2 million.
Without a material change in the economics of the Company's business and the
viability of its financial position, the Company's prospects as a going
concern are limited.
INDIA AND INTERNATIONAL ISSUES
The Company manufactures all of its products in India and sells to OEMs
that operate in a number of foreign countries, including countries in Asia.
The Company procures a significant amount of raw materials and components
from vendors located in Asia. The economic uncertainties that have affected
Asia recently may seriously disrupt the Company's ability to deal with its
vendors and its customers on an advantageous basis. Further, nuclear testing
by India and Pakistan in May 1998 has increased international tensions in
Southern Asia and has caused the United States government to call for
economic sanctions against India. While the extent and impact of these
events are not known at this time, they could have a material adverse effect
on the Company's ability to procure raw materials and components, manufacture
its products, and export its products from India to customers in the United
States and Western Europe. In general, foreign manufacturing and sales are
subject to risks, including changes in governmental policy, economic
disruptions, transportation delays and interruptions, political turmoil,
protective labor laws, currency restrictions, and the imposition of tariffs
and import/export controls. Any disruption of the Company's activities, for
example because of international economic sanctions against India, economic
uncertainties affecting Japan, Korea and other Asian nations, or political
unrest in Indonesia, could adversely affect the Company. The Company's
products are not currently subject to any duties upon import to the United
States or other countries to which the Company ships. Any change in this
duty-free status, as a result, for example, of economic sanctions, could
adversely affect the Company.
DEBT IN INDIA
As of March 31, 1998, the Company owed its Indian banks approximately $8
million. While the Company is attempting to restructure its Indian debt, the
amount of debt and the cost of servicing that debt is beyond the Company's
capability to afford at its current level of operations. If the Company is
not able to generate sufficient levels of revenue and positive cash flow from
sales to existing and new customers to service its debt, it is within the
power of the Indian banks to seize virtually all of Ultra Tek's assets in
India. Further, the level of debt has been a major impediment to disposition
of the Company, the sale of Ultra
15
<PAGE>
Tek, a business combination, or other restructuring that could change the
fundamental prospects of the Company. Because the Company imports a good
portion of its raw materials and components into India and exports virtually
all of its sales from India, the availability of letter of credit and letter
of guaranty facilities and of a positive working relationship with its
lenders is more important to the Company than to businesses not so dependent
upon international transactions. While the Company's Indian banks have
continued to work with the Company, there can be no assurance that they will
continue to do so in the future.
AFFILIATE CONTROL
As of March 31, 1998, the Tandon family beneficially owns approximately
48% of the Company's Common Stock and has, to a substantial extent, the
ability to effectively control substantially all matters requiring approval
by the shareholders of the Company. Such matters could include the election
of members of the Board of Directors, proxy contests, mergers or the sale of
substantially all the assets of the Company, tender offers, open market
purchase programs or other transactions that could give shareholders of the
Company the opportunity to realize a premium over the then-prevailing market
price for their shares of the Company's Common Stock.
SHORT PRODUCT LIFE CYCLES
The personal computer industry in general, and the market for products
made by the Company's OEM customers in particular, is characterized by
rapidly changing technology, evolving industry standards, frequent new
product introductions and intense price competition, resulting in short
product life cycles and regular reductions of unit average selling prices
over the life of personal computer products. Products produced by the
Company's OEM customers typically have a life cycle of eight to twelve months
and dictate the Company's product life cycles. Changes in demand for
personal computers, computer peripherals and other electronic products, or
other negative factors affecting the electronics industry in general, or any
of the Company's OEM customers in particular (including, for example, the
recent downturn in the business of Iomega, the Company's largest customer
during the first half of fiscal 1998) have had in the past and in the future
could have a material adverse effect on the Company. The Company's financial
position makes it less able than most of its competitors to deal effectively
with these issues or to withstand the economic hardships they may entail.
ITEM 2 PROPERTIES
The Company currently leases its 8,250 square foot California facility
for $5,000 per month from SDJ Partners, a related entity. This lease was
renewed on January 1, 1997 and expires December 31, 1999. Ultra Tek leases
an aggregate of 83,325 square feet of manufacturing space in an SDF in SEEPZ
from the Indian government under five-year leases expiring at various dates
though October 28, 2000. The Indian government typically renews such leases
absent unusual circumstances. Monthly rent for Ultra Tek's SEEPZ facilities
aggregates approximately $5,000, but is subject to change at will by the
Indian government. In Sri Lanka, the Company leased 23,666 square feet under
a lease expiring in March 1999. The monthly rent was approximately $4,500.
That lease was assigned during the fourth quarter of fiscal 1998 to a related
party who took over the use and operation of the Company's entire operation
in Sri Lanka. The facility in Scotland was approximately 4,600 square feet
and leased for approximately $17,000 per quarter. This lease expires in
August 1999. The Company liquidated all of its assets in Scotland to satisfy
its liabilities there during the fourth quarter of fiscal 1998. The Company
believes it has no liabilities in connection with the termination of this
lease.
ITEM 3 LEGAL PROCEEDINGS
During fiscal 1995, the Company's importing of computer components for
final assembly and sale into the domestic tariff area ("DTA") of India (i.e.,
outside the export processing zone) came under
16
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investigation by the Indian customs authorities. Subsequently, inventories
of $1,300,000 were seized by the authorities. On May 30, 1995, the
authorities issued a notice to the Company alleging misdeclaration of
purported imports of complete computer systems as imports of computer system
components. The notice called upon the Company to explain why the
authorities should not (a) confiscate all the goods so imported, (b) levy
additional duty of $1,175,000 on the goods already sold into the DTA, and (c)
take penal action against the Company under the law, which could result in a
possible monetary penalty of $5,865,000. The Company has paid an advance of
$700,000, included in cost of goods sold in its fiscal 1995 financial
statements, against customs duty that may ultimately be levied by the
authorities. During fiscal 1996, the authorities released the inventories
seized earlier.
In September 1997, the Indian customs authorities issued a "show cause"
notice alleging that Ultra Tek had not provided valid explanations for
shortages of raw material in its inventories. The notice called upon the
Company to explain why the authorities should not (a) impose duty of $616,000
leviable on imported components which were alleged not accounted for in the
terms of bond executed, (b) why penal action should not be initiated against
the Company, and (c) why a penalty equal to the duty held to be leviable,
$616,000, in respect of unaccounted goods should not be imposed.
In fiscal 1997, the Company came under investigation by the Indian
Department of Revenue Intelligence (DRI) in connection with the import and
export of certain components and goods used in the manufacture of power
supplies and customer returns. The investigation focused on the alleged
discrepancy noted between the physical stock records and books, in respect of
the work-in-process inventory at March 31, 1996 and 1997, and customer
returned product at March 31, 1992 through March 31, 1997. In May 1998, the
DRI issued a "show cause" notice requesting that the Company explain why the
DRI should not impose duties of $615,000. Penalties relating to the
investigation, if any, have not yet been determined.
The Company has contested or intends to contest the allegations of the
authorities and the outcomes of all of these matters are uncertain.
Accordingly, no provisions for any losses that may ultimately result have
been made in the Company's financial statements.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year ended March 31, 1997.
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK PRICE DATA
The Company's Common Stock is traded in the over-the-counter market under the
symbol "GLDN". On March 31, 1998, the closing bid price for the Company's
Common Stock was $.04. The following sets forth the high and low bid prices
for the Common Stock over the two most recent fiscal years. Beginning in the
fourth quarter of 1996, these prices reflect inter-dealer prices, without
retail mark-up, mark-down or commission, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Fiscal Quarter High Low
-------------- ---- ---
<S> <C> <C>
1997 Fourth quarter $0.468 $0.030
1997 Third quarter 0.150 0.060
1997 Second quarter 0.430 0.070
1997 First quarter 0.563 0.313
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<PAGE>
<CAPTION>
Fiscal Quarter High Low
-------------- ---- ---
<S> <C> <C>
1996 Fourth quarter 1/2 1/2
1996 Third quarter 3/8 5/16
1996 Second quarter 11/16 11/16
1996 First quarter 9/16 1/4
</TABLE>
The approximate number of holders of record of the Company's Common Stock on
March 31, 1998 was 65. The Company has not paid dividends on its Common
Stock and has no present intention of doing so in the foreseeable future.
Instead, the Company intends to utilize its cash resources in the operation
of its business.
UNREGISTERED SALES OF THE COMPANY'S EQUITY SECURITIES DURING LAST FISCAL YEAR
On or about March 31, 1997, as a partial consideration for its
investment in the Company of $2,000,000, pending submission of the
Recapitalization Plan to the Company's shareholders, the Company issued to
the Tandon family 850,000 shares of Common Stock.
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31,
1993 1994 1995 1996 1997
------------------------------------------------
SUMMARY OF OPERATIONS: (in thousands except share data)
<S> <C> <C> <C> <C> <C>
Net sales $21,316 $29,395 $24,539 $16,814 $ 2,568
Net income (loss) 235 778 (13,308) (4,890) (12,627)
Net income (loss) per share .04* .26* (2.99) (1.10) (2.84)
*PRO FORMA FOR FISCAL YEAR 1993 AND 1994.
<CAPTION>
As of March 31,
1993 1994 1995 1996 1997
-------------------------------------------------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 211 $17,760 $ 2,589 $(2,282) $(12,489)
Total assets 10,299 29,675 22,649 14,483 4,155
Long-term debt --- --- 856 934 ---
Minority interest --- 2,599 2,599 2,599 2,599
Total shareholders'
equity (deficity) 1,253 16,769 3,355 (2,010) (14,168)
</TABLE>
In reviewing this data, please refer to the more detailed financial
information disclosed pursuant to Item 8 "Financial Statements and
Supplementary Data." Please also refer to the discussions in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 3 "Legal Proceedings."
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Since commencing operations in February 1991, the Company has engaged in
the marketing of power supplies to personal computer and peripheral equipment
OEMs and to distributors of standard power supply products. During the
fiscal year ended March 31, 1992, the Company entered into its first high
volume OEM sales arrangement. Prior to fiscal 1993, during which it was
acquired by the Company, Ultra Tek sold power supplies primarily to Tandon
Corporation or Tandon Associates for use in personal
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computers and peripheral equipment manufactured by companies affiliated with
the Tandon family. During fiscal 1993, the Company's net sales increased
significantly, due primarily to the commencement of shipments to Compaq. The
Company began shipments to IBM in the second quarter of the fiscal year ended
March 31, 1994. Net sales continued to increase in fiscal 1994 primarily due
to additional sales to Compaq, new sales to IBM, and continued development of
additional OEM customers.
The Company's cash flow was significantly impacted by Compaq's product
rejection that took place during the third quarter of fiscal 1995. Those
returns cost the Company $4.2 million in uncollected accounts receivable as a
result of the issuance of credits for 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.
In fiscal 1996, the Company implemented a program to overcome its cash
difficulties through inventory reduction, 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 were
successfully implemented, the Company has not been able to generate
anticipated amounts of cash from inventory reduction and, through the end of
fiscal 1997, was unsuccessful in its efforts to resell the reworked rejected
product. In addition, the Company has not been successful, to date, in
significantly building its sales volumes to its existing customers or to new
customers. 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, it has not been successful in doing so. There can be no assurance
that the Company will have sufficient resources to carry out its plan in the
future or, even if the resources are available, that the Company will be able
to successfully develop the necessary customer relationships and obtain
enough product contracts to allow it to continue to operate its business.
Currently the Company has received orders for power supplies which yield an
average gross margin of approximately 20%. Assuming the market continues to
be highly competitive and gross margins remain at current levels, it is
estimated that the Company will need to achieve approximately $10 million in
annual net sales to achieve a break-even from operations (before interest
expense and other income/expense). To break-even at the gross profit line
would require net sales of approximately $5 million.
In fiscal 1997, the Tandon family invested $2,000,000 as part of the
Recapitalization Plan. As of March 31, 1998, the Company has borrowed an
additional $1,525,000 from the Tandon family. This cash has allowed the
Company to continue operations, but aside from related party financing, the
Company currently has no viable source of financing to continue its current
revenue growth and achieve profitable operations and positive cash flow.
In light of these facts, and the operating results discussed below, the
Company continues to look at opportunities to obtain additional capital from
sources outside the Company and at transactions that would change its
fundamental structure.
RESULTS OF OPERATIONS
Results of operations for fiscal 1997 have been determined assuming that
the Company will continue as a going concern. However, the Company is
currently facing significant issues which raise substantial doubt that the
Company has the ability to continue as a going concern. These issues are
summarized as follows:
- At March 31, 1997, the Company had outstanding amounts due to four
separate Indian lenders in the amount of $8,306,000, all of which are
currently in default. Of that amount, three banks have issued notices
to the Company demanding immediate repayment of $7,392,000. At March
31, 1998, the amount due was approximately $8 million. The Company
has insufficient funds available to repay the banks. Because the
Indian debt is
19
<PAGE>
secured by the assets of Ultra Tek, alternatives available to the
banks include closing the operations of Ultra Tek and forcing Ultra
Tek into liquidation.
- In fiscal 1995, Ultra Tek's importing of computer components into
India came under investigation by the Indian customs authorities. In
September 1997, the Indian customs authorities issued a separate "show
cause" notice alleging that Ultra Tek has not provided valid
explanations for shortages of imported raw material in its
inventories. In fiscal 1997, Ultra Tek came under the investigation
of the Indian Department of Revenue Intelligence concerning the import
and export of certain components used in the manufacture of power
supplies and customer returned product. Subsequently, a separate
"show cause" notice was issued requesting explanation of why duties
should not be assessed. The above governmental allegations and
investigations could lead to additional duty and penalties being
assessed against Ultra Tek in the amount of $8.4 million and penal
action being initiated against Ultra Tek. The Company is contesting
these allegations, but currently, the matters are unresolved and the
outcomes uncertain.
- The Company has incurred significant losses from operations over the
past three years; has lost its two main historical customers, which
has significantly impacted its revenues; and at March 31, 1997, had a
shareholders' deficit of $14.2 million. During fiscal 1998, the
Company continued to incur significant losses, and management has not
successfully executed on its efforts to achieve profitable operations
and positive cash flows. Outside of related party financing, the
Company has identified no viable source of financing.
Due to the significance of these factors in the Company's financial
statements at March 31, 1997, all assets have been stated at their estimated
realizable values. Costs of resolving the contingencies noted above or
settling amounts due to Indian banks or Company creditors have not been
recorded as management is currently unable to estimate these amounts.
Accounts receivable and inventories were valued at their subsequently
realized amounts (inventories at cost), and property, plant and equipment
were valued based on estimates by management and in accordance with the
guidelines of Statement of Financial Accounting Standards No. 121 "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"). The estimated realizable values and settlement amounts may
be different from the proceeds ultimately received or payments made.
NET SALES. The Company records substantially all sales of finished
goods in the United States. Sales originating outside of the United States
were not material during fiscal 1997 and 1996. During fiscal 1995,
approximately 17% of the Company's sales occurred in Asia, resulting
primarily from the Company's attempt to assemble and market finished
computers in India. During fiscal 1997, 1996 and 1995, export sales from the
United States were 11%, 47% and 30% of total sales, respectively,
representing sales to foreign subsidiary companies of United States companies
located primarily in Europe, Asia and Mexico. All product shipments to fill
customer orders are made from the Company's manufacturing facility in India.
Until manufacturing was discontinued in the third quarter of fiscal 1998,
certain components were produced at the Company's facility in Sri Lanka and
sent to India for the final assembly of the finished power supply units.
Sales in fiscal 1995 were $24,539,000, a 17% decrease from fiscal 1994
sales. The decrease from fiscal 1994 is primarily due to product returns of
approximately $4.2 million and a halt in production of the same model power
supply due to quality and reliability concerns by Compaq. The halt in
production reduced the Company's expected sales by approximately $2.5
million. In January 1995, the Company restarted production and shipments of
this model to Compaq. None of the returned product was reshipped and as a
result the Company valued the returned units at zero, which had a cost of
$3.7 million, as part of a total reserve of $5.2 million for these returns.
Also included in this reserve were estimated freight and other settlement
costs with Compaq of $1.2 million and freight and warehousing costs incurred
by the Company of $300,000. In addition to these direct costs, the product
rejection and production halt substantially inhibited the Company's ability
to grow during fiscal 1995.
20
<PAGE>
Sales of power supplies declined also because of cancellation and
rescheduling of orders by a major customer as certain products approached the
end of their product life. Net sales to Compaq and IBM accounted for
approximately 54% and 19% of sales in fiscal 1995, respectively. Sales of
computers into the local Indian market were $3,000,000, or 12% of total
sales, in fiscal 1995 compared to zero in fiscal year 1994.
Sales in fiscal 1996 were $16,814,000, a 31% decrease from fiscal 1995
sales. The primary reason for the decline in sales is the adverse effects of
the third quarter of fiscal 1995 product rejections by Compaq. Sales to
Compaq in fiscal 1996 decreased approximately $10 million as compared to
fiscal 1995. Additionally, fiscal 1995 included $3,000,000 of local market
computer sales by the Company's manufacturing subsidiary in Bombay, India and
$1,275,000 of revenue in connection with program cancellation charges.
Computer sales in India ended in fiscal 1996 as a result of the actions of
Indian customs authorities, described above in Item 3 "Legal Proceedings."
While the Company believes that the Indian government's actions were without
legal authority, all of the seized inventory has been included in inventory
reserves and the Company has ceased to import computer components for
assembly and sale in India. Most importantly, the halt in production, lost
growth opportunity and restructuring as a result of the 1995 product returns
affected the Company's ability to obtain revenues during fiscal 1996.
Sales of power supplies for fiscal 1996 were $16,352,000, a decrease of
$4,113,000 or 20% from fiscal 1995 power supply sales. Sales to Compaq
accounted for approximately 21% of net sales in fiscal 1996 while sales to
IBM accounted for approximately 64% of net sales in fiscal 1996.
Sales in fiscal 1997 were $2,568,000, an 85% decrease from fiscal 1996
sales. The Company essentially lost its two major customers, Compaq and IBM,
during fiscal 1997. The primary reasons were the fiscal 1995 product
rejection by Compaq and the Company's ineligibility for new programs under
IBM's vendor selection criteria. Net sales to Compaq and IBM were 19% and
36%, respectively, with Nexar, a new customer, accounting for an additional
21%.
GROSS PROFIT. Gross loss for fiscal 1995 was $7,551,000 compared to a
gross profit of $4,441,000 in fiscal 1994. The primary reason for the
significant negative margin is the impact of the product rejection by Compaq
and the halt of production of the rejected power supply model. The total
direct impact of these returns on gross margin was approximately $6.4 million
in charges, consisting of a $4.2 million charge for the original selling
price, $1.7 million for transportation and other costs associated with the
returns, $0.4 million for unutilized manufacturing capacity, and $0.1 million
for restructuring. The Company's gross margin was also negatively affected
by the impact the product rejection and production halt had on the Company's
anticipated rate of growth during fiscal 1995. In addition, the Company
reserved $700,000 for a potential customs duty assessment in India and
recorded a $750,000 inventory reserve as a result of order cancellations from
Compaq.
Gross profit for fiscal 1996 was $45,000 compared to a gross loss of
$7,551,000 in fiscal 1995. Fiscal 1995 includes the negative impact of the
significant product returns, halt in production and related costs totaling
approximately $6.4 million, as well as a reserve of $700,000 for a potential
customs duty assessment in India and a $750,000 inventory reserve as a result
of order cancellations from Compaq. Fiscal 1996 gross margin was essentially
a break-even due primarily to the continuing adverse effects of the third
quarter fiscal 1995 product returns by Compaq. While the Company implemented
cost reduction measures to reduce manufacturing overhead, the significant
decrease in sales volume greatly impacted the Company's gross margin in
fiscal 1996. The Company also experienced shrinking gross margins during the
first quarter of fiscal 1996 as a result of raw material price increases and
a tightening of supply for purchased parts (components) and other raw
materials due to the increase in value of the Japanese yen and significant
demand increase created by a steep growth in sales of personal computers
worldwide. A portion of these cost factors was overcome by the customer
price increases implemented in the second quarter.
21
<PAGE>
Gross loss for fiscal 1997 was $4,537,000 compared to a gross profit of
$45,000 in fiscal 1996. As a consequence of not selling certain inventory,
including $1,300,000 of inventory of computers previously seized and
subsequently released by Indian customs authorities, and declining sales
volumes in fiscal 1997, the Company reduced the carrying value of inventories
by $4,325,000, which charge is included in cost of goods sold. Partially
offsetting the negative impact of this charge on gross profit was the sale of
38,000 power units for $628,000, which had been written off after the fiscal
1995 product rejection. The only cost associated with these sales was
$144,000 for rework.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For fiscal 1995, selling,
general and administrative expenses were $4,564,000, an increase of 67% over
the prior fiscal year. This increase in selling, general and administrative
costs was due primarily to increased general and administrative staffing in
the manufacturing facilities to support anticipated but unrealized
manufacturing volume increases and also increases in manufacturing capacity
at the Company's new plant sites in Madras, India and Colombo, Sri Lanka.
Increased selling, general and administrative costs at the Company's
headquarters in Simi Valley, California were also added to support activities
related to being a public company.
Selling, general and administrative expenses were $3,435,000 in fiscal
1996 compared to $4,564,000 for fiscal 1995. The decrease in selling,
general and administrative costs compared to the prior year was due primarily
to reduced general and administrative staffing in the Madras manufacturing
facility as a result of the cut-backs and eventual shut-down of that
facility, staff and cost reductions in the Simi Valley corporate offices, and
cost reductions in the England and Singapore sales offices. These cost
reductions were due to the restructuring required after the product rejection
by Compaq.
Selling, general and administrative expenses were $3,348,000 in fiscal
1997 compared to $3,435,000 in fiscal 1996. These expenses have not changed
significantly from the prior year due principally to cost containment actions
and employee attrition in the United States, India and Sri Lanka.
RESEARCH AND DEVELOPMENT. Research and development expenses in fiscal
1995 were $935,000, an increase of 42% over the prior fiscal year. This
increase in research and development costs was due primarily to increases in
staffing and related costs to support increased design activities for both
current and prospective customers, including activities on a new product for
the Company's then-largest customer, and the addition of a Vice President of
Engineering in the California office.
Research and development expenses were $430,000 in fiscal 1996 compared
to $935,000 in the prior year. Research and development costs decreased
compared to the prior year due to cost reductions implemented in the fourth
quarter of fiscal 1995. These reductions were due to reduced demand by
Compaq, one of the Company's largest customers, as a result of its fiscal
1995 product rejection.
Research and development expenses were $865,000 in fiscal 1997 compared
to $430,000 in fiscal 1996. This increase resulted from the establishment of
a research and product development facility in Scotland during the second
quarter of fiscal 1997. This action was part of the Company's strategy to
develop power supplies for OEMs of electronic equipment other than personal
computers, who offer higher gross margins. Because of a lack of funding,
this facility was discontinued in December 1997 and the research and
development engineering has been relocated to the United States at a much
reduced level.
PROPERTY, PLANT AND EQUIPMENT IMPAIRMENT LOSS. Because of the
continuing decline in sales volume and the difficulties encountered during
fiscal 1997 by the Company in implementing its marketing strategies, it was
determined that an impairment of the value of property, plant and equipment
may exist. Accordingly, a charge of $2,495,000 was taken to record the assets
at estimated current value.
INTEREST EXPENSE. Interest expense in fiscal 1995 was $707,000, an
increase of 44% over fiscal 1994 due to increased financing costs for working
capital growth as the Company continued to experience significant growth in
sales volumes. Interest expense in fiscal 1996 was $1,253,000. The increase
is due to the high interest charged for extended terms by the India banks on
the bill discounting agreement and the
22
<PAGE>
higher borrowing balance caused by the fiscal 1995 product rejection and the
related loss of the customer account receivable. Interest expense in fiscal
1997 was $1,585,000. The increase is primarily due to the higher interest
rates being charged by the India banks on short-term debt that is currently
delinquent.
INTEREST INCOME. For fiscal 1995, 1996 and 1997 interest income was
$475,000, $184,000, and $199,000, respectively. The decrease in fiscal 1996
and 1997 was due to lower cash balances as a result of the fiscal 1995
product rejections and the Company's continuing liquidity problems.
LITIGATION SETTLEMENT. During the third quarter of fiscal 1995, the
Company experienced a product rejection by Compaq, its then largest customer,
which cost the Company $4.2 million of lost accounts receivable directly
related to the sales of the rejected units and $2.2 million related to other
direct costs stemming from the rejections. The Company engaged the services
of an outside contractor to address the customer complaint and rework the
rejected product. After rework, the product was again rejected as a result,
in the Company's view, of poor workmanship in the rework process. In fiscal
1996, the Company filed a complaint against the rework contractor alleging,
among other things, that the contractor improperly performed rework services
and thereby breached the contract with the Company. The Company sought
damages in excess of $3 million. Also, in fiscal 1996, the contractor filed
a cross-complaint against the Company alleging breach of contract by the
Company for failure to pay for rework services rendered. The contractor
sought $108,000 and unspecified damages. In April 1996, the Company settled
the lawsuits with the contractor. Under the agreement terms, the Company
received a cash settlement of $592,000, of which $163,000 related to the
reimbursement of legal expenses incurred in fiscal 1996. Accordingly,
$163,000 was recorded as a reduction of legal expenses in fiscal 1996 and the
balance of the settlement was recorded in fiscal 1997.
NET LOSS. For fiscal 1995, 1996 and 1997 the Company's net loss was
$13,308,000, $4,890,000 and $12,627,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the fiscal year ended March 31, 1996, the Company had cash used
by operating activities of $1,461,000 compared to cash used in operations of
$10,391,000 for the fiscal year ended March 31, 1995. Funds were primarily
provided by a $2,161,000 decrease in accounts receivable as a result of
specific customers granting the Company accelerated payment terms and the
sales volume decline in fiscal 1996. The Company also was able to reduce its
inventory in fiscal 1996 by $2,270,000 primarily by using existing raw
materials and components in current projects. Additional cash was provided
by a $619,000 decrease in prepaid expenses. These sources of cash were
offset by cash usage of $1,432,000 to decrease accounts payable in India and
$961,000 for reduction of accrued liabilities primarily resulting from the
settlement of the fiscal 1995 product returns with Compaq, the Company's
largest customer at that time.
During fiscal 1997 the Company used cash of $2,461,000 in operating
activities compared to $1,461,000 of cash used in fiscal 1996. While the
fiscal 1997 balance sheet includes non-cash reserves to record assets at
estimated realizable values pursuant to the guidelines of SFAS 121, actual
cash of $1,046,000 was generated by sale of inventories and of $838,000
through collection of accounts receivable. Cash was also generated by
reducing prepaid expenses and other current assets by $459,000 and increasing
accrued liabilities by $416,000.
INVESTING ACTIVITIES
Cash used by investing was $92,000 for the fiscal year ended March 31,
1996, compared to cash used of $164,000 for fiscal 1995. The restricted cash
balance decreased by $251,000 reflecting lower manufacturing and shipping
activity in India, which resulted in lower deposits required to secure
letters of
23
<PAGE>
credit and letters of guarantee. Purchase of property, plant and equipment
was $343,000, primarily for capital expenditures in Bombay.
In fiscal 1997, cash generated by investing activities was $795,000.
This was due to the decrease in restricted cash due to the continuing
aforementioned decline in manufacturing and shipping activity in India. As
of March 31, 1997 there was virtually no activity in India requiring deposits
on letters of credit and letters of guarantee.
FINANCING ACTIVITIES
Cash provided by financing activities during fiscal 1996 was $760,000
compared to $3,554,000 in 1995. Short-term borrowings were under the terms of
credit agreements with certain Indian banks. Cash provided in the functional
currency under these credit agreements, which are secured by either accounts
receivable, inventories or both, was substantially higher in fiscal 1995 than
in fiscal 1996 because of the higher level of sales and inventories in fiscal
1995 and credit limits imposed by the banks which were reached in fiscal
1996. In addition, the Company borrowed $856,000 in fiscal 1995 to purchase
certain plant and equipment. During fiscal 1995, the Company also collected
the remaining balance of $1,115,000 due on a note receivable from a related
party; however, this source of financing was essentially offset by payments
made to other related parties on outstanding balances.
Cash provided by financing activities for fiscal year 1997 was
$2,003,000 compared to $760,000 in fiscal 1996. This increase is due
principally to the infusion of $2 million in cash during fiscal 1997 by the
Tandon family pursuant to the terms of the Recapitalization Plan. This Plan
resulted in the issuance of 850,000 Common Stock shares and a note payable in
the amount of $1,873,000, which is convertible into an additional 12,483,333
shares of Common Stock upon approval of the Recapitalization Plan by the
Company's shareholders.
In summary, the Company has suffered a considerable decline in cash flow
over the last three years because of the aforementioned reasons. At March
31, 1997, the Company had negative working capital of $12,489,000 and a
retained deficit of $30,370,000. While current actions are being taken to
implement a viable operating plan to increase sales, renegotiate the terms of
certain short-term obligations with certain Indian banks and raise 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 its Indian
banks for an extension of payment terms of existing debt as well as an
extension of credit to support planned production and sales. In July 1997,
the banks' legal counsel issued notices to Ultra Tek and the Company calling
upon them to pay the outstanding amounts due. In response to the demand from
the banks, the Company and Ultra Tek have submitted to the banks, as part of
a "rehabilitation program", a plan to convert the above short-term borrowings
into long-term loans. Management is currently discussing the rehabilitation
program with the banks. Currently, the banks have not initiated any legal
action against the Company for non-payment of the amounts due. Essentially
all of the Ultra Tek short-term borrowing agreements and facilities are
secured by the assets of Ultra Tek and are covered by corporate guarantees
from the Company, Fairplay Group, Inc. ("Fairplay"), an intermediate holding
company, and Tandon Associates, a related party. They are also covered by
the personal guarantee of the Chairman and Managing Director of Ultra Tek for
the amount of approximately $11,035,000.
Subsequent to the fiscal year ended March 31, 1997, the Company
continues to experience negative cash flow as a result of continuing losses
and a ramp-up of production in India. In order to obtain the necessary cash
to operate, the Company has factored certain accounts receivable with a
United States bank at monthly financing fees ranging from 2.25% to 1.75% and
an administration fee applied to the total of factored accounts ranging from
1% to .75%. Through December 31, 1997, the Company factored $713,000 of its
accounts receivable and had an outstanding balance due the bank of $428,000.
24
<PAGE>
Subsequently, the borrowings were repaid and there was no outstanding balance
at March 31, 1998. In addition, the Tandon family has loaned the Company an
aggregate of $1,525,000 as of March 31, 1998, which loans are payable on
demand with interest at 12% per annum.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included in Part IV of this report.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
25
<PAGE>
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning
each person who is an executive officer, director or significant employee of
the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
J.L. Tandon 48 Chairman, Chief Executive Officer
and President, Chief Financial
Officer, Secretary and Director
M.L. Tandon 59 Chairman of the board of directors
of Ultra Tek, the Company's
manufacturing subsidiary
Prakash Thanky 47 President (resigned November 1997)
Michael D. Thomas 59 President, Chief Operating Officer,
Chief Financial Officer, Secretary
and Director (resigned July 1996)
David B. Barton 55 Senior Vice President - Sales &
Marketing (resigned July 1996)
Norman Barkeley 68 Director* (resigned December 1997)
R.D. Middlebrook, Ph.D. 69 Director*
Robert Sherburne 78 Director*
</TABLE>
*Member of the Audit Committee, Compensation Committee, Subsidiary
Securities Committee and Independent Directors Committee
J. L. Tandon has been Chief Executive Officer and a director of the
Company since February 1991 and served as President from February 1991 to
April 1995, and again from November 1997 to present. On October 11, 1996,
J.L. Tandon was elected Chief Financial Officer of the Company. From
December 1978 to July 1993, J. L. Tandon was President of Tandon Associates,
an affiliate of the Company. From March 1992 to August 1993, J. L. Tandon
was President of Tantec, Inc., an affiliated company. From 1983 to present,
J. L. Tandon has been President and a director of Clady International
Corporation, Fairplay and Lunenburg S. A., all affiliated companies. J. L.
Tandon is M. L. Tandon's brother.
M. L. Tandon served as a director of the Company from August 1993
through April 1995. M. L. Tandon has been a director of Ultra Tek, a
subsidiary of the Company, since October 1985, and was elected Chairman of
the Board of Ultra Tek in August 1993. From June 1988, to the present, M. L.
Tandon has been Managing Director of Ultra Tek. M. L. Tandon was Managing
Director of Tandon Motors P. Ltd., an affiliated company, from June 1982 to
August 1989. M. L. Tandon is J. L. Tandon's brother.
Prakash Thanky became the President of the Company on July 1, 1996 after
having served as President of Magnum Power Solutions, Inc., an affiliated
company of Magnum Power PLC, from August 1994 to June 1996. In January 1993,
Mr. Thanky founded Logicom, a manufacturer's representative for technical
companies, and served as its President. Effective November 11, 1997, Mr.
Thanky resigned as an officer of the Company.
Michael D. Thomas joined the Company in April 1995 as President, Chief
Operating Officer, Chief Financial Officer and Secretary. In April 1995, he
was elected to serve as a director of the Company to replace M.L. Tandon.
Mr. Thomas served as an executive officer, President and Chief Executive
Officer of Shape, Inc. from 1990 to 1994 and as Chief Operating Officer from
1988 to 1990. Effective July 1, 1996, Mr. Thomas resigned as an officer and
director of the Company.
26
<PAGE>
David B. Barton joined the Company in September 1992 as Vice President
- -Sales and became Senior Vice President the fourth quarter of fiscal year
1994. In July 1996, Mr. Barton resigned from the Company.
Norman A. Barkeley joined the Company as director in April 1995. From
July 1988 through December 1996, Mr. Barkeley was Chairman, President and
Chief Executive Officer of Ducommun Incorporated and currently serves as
Chairman of its board of directors. Mr. Barkeley is also a director of
Kaynar Technologies, Inc. Effective December 31, 1997, Mr. Barkeley resigned
as director of the Company.
R. D. Middlebrook, Ph.D. joined the Company as a director in August
1993. From 1955 to present, Dr. Middlebrook has been a Professor of
Electrical Engineering at the California Institute of Technology.
Robert Sherburne joined the Company as a director in August 1993. From
January 1992 to present, Mr. Sherburne has been a merger and acquisition
consultant. From November 1990 to December 1991, Mr. Sherburne was the
Chairman of the Board of Everest & Jennings International and remained a
director until December 1996. From June 1987 to October 1990, Mr. Sherburne
was the Chairman of the Board of Guardian X-Ray Services.
All directors are elected annually and serve until the next annual
meeting of shareholders or until the election and qualification of their
successors. Executive officers of the Company are elected by and serve at the
discretion of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable.
ITEM 11 EXECUTIVE COMPENSATION
COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities to the Company paid or
accrued by the Company to the Chief Executive Officer and to each of the four
other most highly compensated officers of the Company for each of the fiscal
years in the three-year period ended March 31, 1997.
27
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------------------------------------
Awards Payouts
------------------------- ----------------------
Annual Compensation
---------------------------------
Securities
Restricted Underlying
Other Annual Stock Options/ LTIP All Other
Name and Principal Salary Bonus Compensation Awards SARs Payouts Compensation
Positions Year (1) ($) ($) (2) ($) ($) (#) ($) ($)
--------- ---- ------- ----- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J.L. Tandon 1997 198,000 0 20,282 0 --- 0 ---
President, Chief 1996 198,000 0 22,269 0 --- 0 ---
Executive Officer and 1995 198,000 0 12,580 0 --- 0 ---
Chief Financial
Officer
David B. Barton(3) 1997 51,230 0 0 0 --- 0 ---
Senior Vice President, 1996 124,383 0 0 0 --- 0 ---
Sales and Marketing 1995 116,650 0 0 0 --- 0 ---
Michael D. Thomas(3) 1997 151,661 0 60,000 0 --- 0 ---
President, Chief 1996 194,231 0 5,964 0 100,000 0 ---
Operating Officer &
Chief Financial Officer
Prakash Thanky(4) 1997 117,000 0 0 0 --- 0 ---
President
</TABLE>
(1) Includes compensation deferred at the officer's election. J.L. Tandon
has deferred compensation of $19,000 in fiscal 1997.
(2) Represents supplemental income bonus, automobile allowance, club dues
and payments made toward medical and group life insurance on behalf of
executive officers.
(3) Messrs. Barton and Thomas resigned from the Company in July 1996.
(4) Mr. Thanky resigned from the Company in November 1997.
EMPLOYMENT AGREEMENT
In April 1995, the Company hired Michael D. Thomas as President, Chief
Operating Officer, Chief Financial Officer, and Secretary at an annual salary
of $105,000 pursuant to a letter agreement. Additionally, the Company agreed
to grant Mr. Thomas an option to purchase 100,000 shares of Common Stock
which was to vest over five years and have a ten-year term. The Company also
agreed to grant Mr. Thomas an additional option to purchase 50,000 shares
which would vest and become exercisable if the Company's fiscal 1996
performance substantively conformed to a financial and cash management plan
prepared by Mr. Thomas and approved by the Board of Directors. However,
these performance targets were not met and consequently, Mr. Thomas' right to
purchase the additional 50,000 shares did not vest.
Mr. Thomas' agreement called for him to receive deferred compensation at
the end of each fiscal year he remained an executive of the Company in the
amount of $50,000. Mr. Thomas also was entitled to an annual bonus, not to
exceed $50,000, if the Company had met certain sales and profitability
targets. Those targets were not met for fiscal 1996 and no bonus was paid.
Mr. Thomas' letter agreement with the Company had no term and was terminable
by either party at any time. Mr. Thomas resigned in July 1996 and received
six months of severance pay and the pro rata portion of his deferred
compensation. His 100,000 share stock option expired without exercise.
28
<PAGE>
CHANGE IN CONTROL ARRANGEMENTS
Under the terms of his employment letter agreement, Mr. Thomas was
entitled to treat a termination of his employment in connection with a change
in control of the Company as a termination without cause. His agreement
terminated upon his resignation in July 1996.
Under the terms of the Company's 1994 Stock Option Plan, upon a change
in control or liquidation of the Company, the Compensation Committee, in its
discretion, may allow each person holding an option (who did not receive a
replacement stock option from the Company's successor entity) to exercise
that option without regard to its vesting provisions.
DIRECTOR COMPENSATION
Each outside director receives $1,500 for each board meeting attended
and $1,000 for each committee meeting attended; provided, however, that if
two committee meetings are held on the same day, outside directors in
attendance only receive $1,000. In August 1993, the Board of Directors
established an Audit Committee, a Compensation Committee and a Subsidiary
Securities Committee, each comprised of the outside directors.
In September 1993, the Board of Directors granted each outside director
an option to purchase 20,000 shares of Common Stock at the initial offering
price to the public of $7.00. The Company's policy is to issue its outside
directors options to purchase 20,000 shares upon election to the Board and
options to purchase 5,000 additional shares after each two years of
subsequent service. A proposal to adopt a formula grant amendment to the
Company's 1994 Stock Option Plan implementing this policy was approved by the
Company's shareholders at the 1995 Annual Meeting of Shareholders. All such
grants would be at fair market value.
In February 1996, an Independent Director's Committee consisting of the
outside directors was established to provide a disinterested review and
approval structure for any material transaction involving a business
combination, or an investment in or refinancing of the Company. As Chairman
of this Committee, Mr. Robert Sherburne received additional compensation of
$5,000 for his services in reviewing and executing documents relating to the
Recapitalization Plan discussed in Item 1 "Business."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None.
1994 STOCK OPTION PLAN
Key employees, including Directors who are key employees, who are chosen
by the Compensation Committee are eligible to participate in the 1994 Stock
Option Plan (the "1994 Plan"). Messrs. J. L. Tandon and M. L. Tandon have
agreed that they will not be eligible to receive grants of options under the
1994 Plan.
There were no stock options granted or exercised during the fiscal year
ended March 31, 1997, nor were there any unexercised stock options at March 31,
1997, held by any executive officer.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board for fiscal 1997 was comprised of
Messrs. Barkeley, Middlebrook and Sherburne. The Compensation Committee
establishes the general compensation policies of the Company, establishes the
compensation plans and specific compensation levels for executive officers,
and administers the 1994 Plan.
29
<PAGE>
As required by Commission rules designated to enhance the disclosure of
the Company's executive compensation policies and practices, the following is
the Compensation Committee's report submitted to the Board of Directors
addressing the compensation of the Company's executive officers for fiscal
1997.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors establishes the
general compensation policies of the Company, establishes the compensation
plans, establishes the specific compensation of Mr. J. L. Tandon, the
Company's Chief Executive officer, reviews the Chief Executive Officer's
recommendations as to the specific compensation levels for the other
executive officers, and, in conjunction with the Option Committee,
administers the Company's incentive plans. The Compensation Committee is
composed of three independent non-employee directors who have no interlocking
relationships as defined by the Securities and Exchange Commission.
COMPENSATION POLICY AND PROGRAMS. The Compensation Committee's
responsibility is to ensure that a strong and direct link exists among
shareholder values, Company performance, and executive compensation through
its oversight of the design and implementation of a sound compensation
program that will attract and retain highly qualified personnel.
Compensation programs are intended to complement the Company's short- and
long-term business objectives and to focus executive efforts on the
fulfillment of these objectives.
The Compensation Committee has conducted a full review of the Company's
executive compensation program and will repeat this review annually. It is
the Compensation Committee's practice to establish target levels of
compensation for senior officers consistent with that of companies comparable
in size and complexity to the Company, as well as companies which are direct
business competitors of the Company. Actual compensation of the Company's
executive officers is subject to increase or decrease by the Compensation
Committee from targeted levels according to the Company's overall performance
and the individual's efforts and contributions. A significant portion of
executive compensation is directly related to the Company's financial
performance and is therefore at risk. Total compensation for the Company's
senior management is composed of base salary, near-term incentive
compensation in the form of bonuses, and long-term incentive compensation in
the form of stock options. The Compensation Committee retains the discretion
to adjust the formula for certain items of compensation so long as total
compensation reflects overall corporate performance and individual
achievement.
BASE SALARY. In establishing base salary levels for senior officer
positions, the Compensation Committee and Mr. J. L. Tandon consider levels of
compensation at other similarly situated companies and at direct competitors,
levels of responsibility, and internal issues of consistency and fairness.
In determining the base salary of a particular executive, the Compensation
Committee and Mr. J. L. Tandon consider individual performance, including the
accomplishment of short- and long-term objectives, and various subjective
criteria including initiative, contribution to overall corporate performance,
and leadership ability.
In the fiscal year ended March 31, 1997, the annual base salary of Mr.
J. L. Tandon was unchanged at $198,000, a level determined to be appropriate
by the Compensation Committee based on comparable chief executive salaries of
a peer group of companies and of direct competitors referred to above, the
Company's overall performance in the prior fiscal year, and Mr. J. L.
Tandon's efforts and contributions to the Company.
BONUSES. The Company's executive officers are eligible for annual
bonuses based upon recommendations made by Mr. J. L. Tandon (as to the other
executive officers) and the Compensation Committee (as to Mr. J. L. Tandon)
as to individual performance and the Company's achievement of certain
operating results.
30
<PAGE>
Amounts of individual awards are based principally upon the results of
the Company's financial performance during the prior fiscal year. The amount
of awards for senior officers are within guidelines established by the
Compensation Committee and Mr. J. L. Tandon as a result of their review of
total compensation for senior management of peer companies and competitors.
The actual amount awarded, within these guidelines, will be determined
principally by the Compensation Committee's and Mr. J. L. Tendon's assessment
of the individual's contribution to the Company's overall financial
performance. Consideration is also given to factors such as the individual's
successful completion of a special project, any significant increase or
decrease in the level of the participant's executive responsibility and the
Compensation Committee's and Mr. J. L. Tandon's evaluation of the
individual's overall efforts and ability to discharge the responsibilities of
his position. In fiscal 1997, in light of the Company's financial results,
no bonuses were paid to any of the executive officers named in the Summary
Compensation Table.
Mr. J. L. Tandon received no bonus with respect to the March 31, 1997
fiscal year. In determining bonuses in future years, the Compensation
Committee will give particular consideration to the following factors: (1)
the Company's progress toward break-even financial results and sustainable
positive cash flow; (2) the narrowing of losses and the trend toward positive
earnings growth of the Company during the fiscal year; (3) the efforts and
contributions made by Mr. J. L. Tandon in discharging his responsibilities as
Chief Executive Officer; and (4) the efforts and contributions by the other
executives of the Company.
STOCK OPTIONS. During fiscal 1994, the Compensation Committee adopted
the Company's 1994 Stock Option Plan. The purpose of the 1994 Plan is to
provide incentives and reward the contributions of key employees and officers
for the achievement of long-term Company performance, as measured by earnings
per share and the market value of the Common Stock. The Compensation
Committee, working with the Option Committee (which, prior to being disbanded
in fiscal 1996, consisted of Mr. J. L. Tandon and Mr. M. L. Tandon), set
guidelines for the number and terms of stock options awards based on factors
similar to those considered with respect to the other components of the
Company's compensation program, including comparison with the practices of
peer group companies and direct competitors. In the event of unsatisfactory
corporate performance, the Compensation Committee may decide not to award
stock options or restricted stock in any given fiscal year although
exceptions to this policy may be made for individuals who have assumed
substantially greater responsibilities and other similar factors. The awards
under the 1994 Plan are designed to align the interests of executives with
those of the shareholders. Generally, stock options become exercisable in
cumulative installments over a period of five years, but the individual
forfeits any installment which has not vested during the period of his
employment.
In light of the Company's financial performance during fiscal 1996 and
1997, the Compensation Committee has tabled its review of any necessary
revisions to the Company's executive compensation policy or plans due to the
provisions of the Omnibus Budget Reconciliation Act of 1993. This
legislation amended Section 162 of the Internal Revenue Code by limiting to
$1,000,000 the deductibility of compensation paid to certain executives. The
Company's 1994 Stock Option Plan has been amended by the Board of Directors
to conform with new rules on Section 162 compliance and those amendments were
approved at the Company's 1995 Annual Meeting of Shareholders. It is the
current policy of the Compensation Committee to maximize, to the extent
reasonably possible, the Company's ability to obtain a corporate tax
deduction for compensation paid to executive officers of the Company to the
extent consistent with the best interests of the Company and its stockholders.
THE COMPENSATION COMMITTEE
Norman A. Barkeley
R. D. Middlebrook, Ph.D.
Robert Sherburne
31
<PAGE>
COMPANY PERFORMANCE
The following graph shows a comparison of cumulative total returns for
the Company, the NASDAQ Stock Market-U.S. Index and a peer group index
comprised of the NASDAQ Computer Index (as described below) for the period
during which the Company's Common Stock has been registered under Section 12
of the Exchange Act. The NASDAQ Computer Index includes approximately 170
companies, all of which are manufacturers of computer hardware or software.
The Company believes that the companies included in the NASDAQ Computer Index
are reasonably representative of companies in the Company's industry.
COMPARISON OF 52 MONTH CUMULATIVE TOTAL RETURN *
AMONG GOLDEN SYSTEMS, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER MANUFACTURER INDEX
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
------------------------------------------------------------------
11/09/93 3/94 3/95 3/96 3/97 3/98
<S> <C> <C> <C> <C> <C> <C>
GOLDEN SYSTEMS, INC. $100.00 68.85 10.66 4.92 2.46 0.41
NASDAQ STOCK MARKET (U.S.) $100.00 95.53 106.27 144.29 160.37 243.41
NASDAQ COMPUTER MANUFACTURER $100.00 105.25 125.68 193.57 211.91 375.77
</TABLE>
* $100 INVESTED ON 11/09/93 IN STOCK OR ON 10/31/93
IN INDEX - INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING MARCH 31.
32
<PAGE>
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of March 31, 1998 by
(i) each person who is known by the Company to be the beneficial owner of
more than 5% of any class of the Company's capital stock, (ii) each Director,
and certain executive officers of the Company, individually, and (iii) all
Directors and executive officers as a group:
<TABLE>
<CAPTION>
Amount Percent
Beneficially of
Name of Beneficial Owner (1) Owned Class
---------------------------- ------------ -------
<S> <C> <C>
J.L. Tandon (2)............................... 2,276,666 (3) 43.0 (3)
Clady International Corporation ("Clady") (4) 2,125,000 40.1
Hathaway & Associates, Ltd. (5)............... 283,400 5.4
D.L. Tandon (6)............................... 141,666 2.7
M.L. Tandon (7)............................... 0 0.0
S.L. Tandon (7)............................... 141,666 2.7
Norman A. Barkeley............................ 8,000 *
R.D. Middlebrook, Ph.D. (8)................... 24,000 *
Robert Sherburne (8).......................... 18,000 *
All executive officers and directors as a
group (three persons) (9)..................... 2,601,998 48.9
*Less than one percent
</TABLE>
(1) Except as otherwise indicated below, the persons named have sole voting
power and investment power with respect to all shares of capital stock
shown as beneficially owned by them, subject to community property laws
where applicable.
(2) The address for J. L. Tandon is 2125-C Madera Road, Simi Valley, California
93065.
(3) Includes 2,125,000 shares owned by Clady International Corporation, a
Panamanian corporation ("Clady") of which J. L. Tandon is the President.
(4) The address for Clady is c/o J. L. Tandon, 2125-C Madera Road, Simi Valley,
California 93065.
(5) The address for Hathaway & Associates, Ltd. is 119 Rowayton Avenue,
Rowayton, Connecticut 06853.
(6) D. L. Tandon is an officer and director of Clady. He expressly disclaims
beneficial ownership of any shares owned by Clady for the purposes of
Sections 13(d) and 13(g) of the Exchange Act.
(7) M. L. Tandon and S. L. Tandon expressly disclaim beneficial ownership of
any shares owned by Clady for the purposes of Section 13(d) and 13(g) under
the Exchange Act.
(8) Includes 13,000 shares issuable upon exercise of stock options exercisable
within sixty days of March 31, 1998.
(9) For purposes of this calculation, all shares beneficially owned by any
member of the Tandon family are included in the amount beneficially owned.
33
<PAGE>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Tandon family has been involved in the manufacture of a wide range of
personal computer components and of personal computers for many years. Since
its formation, the Company and its subsidiaries have been operated in
conjunction with other privately held operations of the Tandon family.
During fiscal 1997, Tandon Associates, Inc. has been billed for the direct
cost of Company employees who have worked on certain isolated projects. These
costs consist primarily of employee salaries, but also include allocations of
office space and utilities and the direct cost of minor raw materials.
Since fiscal 1995, the need for the Company's subsidiary operations in
Singapore greatly diminished because of the decline in sales. At the same time,
Tandon Associates experienced a growing need for the Singapore presence.
Consequently, Tandon Associates began using the personnel and facilities of the
Singapore subsidiary and paying the Company the cost on a 100% pass through
basis. During fiscal 1997, these costs, which include primarily salaries,
office expenses, the purchase of raw materials, and shipping expenses,
aggregated $317,000. The Company has determined that the potential need for the
Singapore presence is remote and in fiscal 1998 entered into an agreement with
an affiliated party of Tandon Associates to sell the Singapore operation. The
Company recorded a gain on the sale of approximately $16,000.
As disclosed elsewhere in this document, the Tandon family contributed
$2,000,000 to the Company during fiscal 1997, under the terms of the
Recapitalization Plan. The proceeds, which were used to provide working
capital, have been exhausted. In order to support the continuing operations of
the Company, Tandon Associates has loaned the Company an additional $1,525,000
through March 31, 1998.
During the fourth quarter of fiscal 1998, the Company sold its
manufacturing subsidiary located in Sri Lanka to Tandon Associates, which
transaction resulted in a gain to the Company of approximately $200,000. In
connection with the sale, Tandon Associates agreed to assume all of the bank
debt in Sri Lanka, facility lease and obligations to employees. The Company
believes that the consideration received for its interest in the Sri Lanka
subsidiary was fair.
The Company has entered into a lease agreement with SDJ Partners, a general
partnership, whose partners are certain members of the Tandon family. The lease
is for the Company's headquarters facility, which includes office and warehouse
space. The facility lease is at the cost of comparable space at the time the
lease was negotiated and utilities are at cost. For fiscal 1997, total
facilities cost was $113,000.
During fiscal 1997, the Company sold, for $26,000, power supply units to
Tantec Magnetics, a Tandon family affiliate, which assembles and markets
personal computers. The Company also purchased finished personal computers from
Tantec Magnetics for a cost of $18,000. Both sales and purchases are believed
to be at fair market values at the time of each transaction. Tantec Magnetics
also used the services of one of the Company's employees located in England,
which were billed at the actual cost of salary, payroll taxes, employee benefits
and related expenses. During fiscal 1997, these costs aggregated $37,000.
In fiscal 1997, Ultra Tek, the Company's manufacturing subsidiary in India,
received an advance payment on the sale of certain equipment valued at $77,000
from Advance Technology Devices, a Tandon affiliate, also located in India. The
Company believes that the sales price of the equipment approximates fair market
value.
Eastern Peripherals Ltd., a Tandon family-affiliated company, which had
shared common facilities with and has purchased power supplies from Ultra Tek,
owed Ultra Tek $171,000 at March 31, 1997. During fiscal 1997, Eastern
Peripherals Ltd. made cash payments to Ultra Tek aggregating $225,000 against
the receivable balance of $423,000 owing at March 31, 1996. The power supplies
sold were sold at fair market prices.
34
<PAGE>
During fiscal 1997, Tancom Electronics, a Tandon family affiliated company,
paid Ultra Tek $89,000 for shared electricity and advanced Ultra Tek $46,000 on
the purchase of used equipment. Electric utilities are billed at estimated
usage and cost and the equipment will be sold by Ultra Tek at estimated fair
market value. Tancom Electronics also advanced $14,000 against future electric
utility sharing.
35
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
(a) 1. Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1996 and 1997:
Assets
Liabilities and Shareholders' Deficit
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 1997
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended March 31, 1997
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Report of Independent Public Accountants on Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts
for the three fiscal years ended March 31, 1997
All other schedules are omitted because they are not applicable, not
required, or the required information is shown in the Financial
Statements or notes thereto.
3. Exhibits:
See Item 14(c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended March 31, 1997.
(c) Exhibits
The exhibits listed on the accompanying index immediately following the
signature page are filed as part of this report.
(d) Financial Statement Schedules
See Item 14(a) above
36
<PAGE>
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 June 25, 1998.
GOLDEN SYSTEMS, INC.
/s/ Jawahar L. Tandon
--------------------------------------
Jawahar L. Tandon
Chairman of the Board of
Directors and Chief Executive Officer
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 and in the capacities and on the dates so indicated.
Signature Title Date
--------- ----- ----
/s/ Jawahar L. Tandon Chairman of the Board of June 25, 1998
- ----------------------------- Directors,
Jawahar L. Tandon Chief Executive Officer and
Chief Financial Officer
(Principal Executive Officer and
Principal Financial Officer)
/s/ Tia Kline Controller (Principal Accounting June 25, 1998
- ----------------------------- Officer)
Tia Kline
/s/ R. D. Middlebrook Director June 25, 1998
- -----------------------------
R.D. Middlebrook
/s/ Robert Sherburne Director June 25, 1998
- -----------------------------
Robert Sherburne
37
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<S> <C> <C>
3.1(1) Restated Articles of Incorporation of the
Company..............................................
3.2(1) Bylaws of the Company, as amended to date............
10.1(1) Stock Exchange Agreement dated July 1, 1993 by and
between the Company and Lunenburg S.A. ..............
10.2(1) Stock Purchase and Sale Agreement dated July 1, 1993
by and between Lunenburg S.A. and Clady
International Corporation............................
10.3(1) Letter Agreement dated July 1, 1993 by and between
Clady International Corporation and the Company......
10.4(1) Form of Lease by and between the President of India
as landlord and Ultra Tek Devices Ltd. as tenant.....
10.5(1) Letter Agreement Sublease dated April 1, 1993
between Ultra Tek Devices Ltd. and Eastern
Peripherals Ltd. ....................................
10.6(1) Declaration dated September 7, 1993 by Advance Power
Devices Pvt. Ltd. ...................................
10.7(1) Letter of Credit in the principal amount of $320,000
dated August 20, 1993 issued by American Pacific State
Bank for the account of Golden Systems, Inc. ........
10.8(1) Memorandum of Agreement dated February 5, 1993 by
and between Ultra Tek Devices Ltd. as borrower and
the Bank of India as lender..........................
10.9(1) Hypothecation Agreement of Goods and Book Debts dated
October 19, 1992, by and between Ultra Tek Devices
Ltd. as borrower and Canara Bank as lender...........
10.10(1) Hypothecation Agreement of Goods and Book Debts
dated October 19, 1993, by and between Ultra Tek
Devices Ltd. as borrower and Canara Bank as lender...
10.11(1) Purchase Agreement dated May 25, 1993 by and between
Compaq Asia Pte. Limited and the Company.............
10.12(1) Employment Agreement dated as of July 23, 1993,
between the Company and Raymond V. Thomas............
10.13(2) Form of Warrant Agreement dated November 17, 1993
between Golden Systems, Inc. and the Representatives
of the Underwriters..................................
10.14(2) License Agreement, dated May 27, 1993, between
Compaq Computer Corporation and the Company..........
10.15(2) Loan and Security Agreement, dated October 7, 1993,
between Silicon Valley Bank and the Company..........
10.16(3) Agreement dated March 4, 1994, by and between the
Board of Investment of Sri Lanka and Golden Systems
Lanka (Private) Limited..............................
10.17(4) Stock Purchase Agreement, dated as of March 31,
1997, among the Company, J. L. Tandon, Clady and
certain members of management (with exhibits,
including Subscription Agreement and Bridge Note)....
21.1(1) List of Subsidiaries.................................
27 Financial Data Schedule..............................
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 dated September 9, 1993.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form S-1 dated October 20, 1993.
38
<PAGE>
(3) Incorporated by reference to the Company's Form 10K for the Fiscal Year
Ended March 31, 1994.
(4) Incorporated by reference to the Company's Preliminary Proxy Materials,
filed April 1, 1997.
39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Golden Systems, Inc. and subsidiaries as of
March 31, 1996 and 1997 and for each of the three years in the period ended
March 31, 1997, and have issued our qualified report thereon, qualified with
respect to the Company's ability to continue as a going concern, dated June 2,
1998. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. Supplemental Schedule II is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements,
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
--------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
June 2, 1998
40
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING OF CHARGED TO BALANCE AT
DESCRIPTION YEAR INCOME DEDUCTIONS END OF YEAR
- ----------- ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C>
Inventory
reserves
1997 $5,808 4,325 3,264 $6,869
1996 $5,719 204 115 $5,808
1995 $ --- 5,719 --- $5,719
</TABLE>
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-2 - F-3
Consolidated Balance Sheets as of March 31, 1996 and 1997:
Assets F-4
Liabilities and Shareholders' Deficit F-5
Consolidated Statements of Operations for each of
the three years in the period ended March 31, 1997 F-6
Consolidated Statements of Shareholders' Equity (Deficit) for
each of the three years in the period ended March 31, 1997 F-7
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1997 F-8 and F-9
Notes to Consolidated Financial Statements F-10 - F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Golden Systems, Inc.:
We have audited the accompanying consolidated balance sheets of GOLDEN
SYSTEMS, INC. (a California corporation) and subsidiaries as of March 31,
1996 and 1997, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in
the period ended March 31, 1997. 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
financial statement presentation. 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 Golden Systems, Inc. and
subsidiaries as of March 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is currently facing significant financial
and operational issues which raise substantial doubt that the Company has the
ability to continue as a going concern. These issues are summarized in the
paragraphs that follow. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
At March 31, 1997, the Company had outstanding amounts due to four separate
Indian lenders in the amount of $8,306,000, all of which are currently in
default. Of that amount, three of the banks have issued notices to the
Company demanding immediate repayment of $7,392,000. The Company has
insufficient funds available to repay the banks. Because the Indian debt is
secured by the assets of Ultra Tek, alternatives available to the banks
include closing the operations of Ultra Tek and forcing Ultra Tek into
liquidation (see Note 5). In the event of such action by the lenders,
liquidation of assets may result in amounts less than amounts shown in the
attached financial statements and related inability to pay liabilities.
In fiscal 1995, Ultra Tek's importing of computer components into India came
under investigation by the Indian customs authorities. In September 1997,
the Indian customs authorities issued a separate "show cause" notice alleging
that Ultra Tek has not provided valid explanations for shortages of imported
raw material in its inventories. In fiscal 1997, Ultra Tek came under the
investigation of the Indian Department of Revenue Intelligence concerning the
import and export of certain components used in the manufacture of power
supplies and returned customer product. Subsesquently, a separate "show
cause" notice was issued requesting explanation of why duties should not be
assessed. The above governmental allegations and investigations could lead to
additional duty and penalties being assessed against Ultra Tek in the amount
of $8.4 million and penal action being initiated against Ultra Tek.
Penalties relating to the Indian Department of Revenue Intelligence
investigation, if any, have not yet been determined. The Company is
contesting these allegations, but currently, the matters are unresolved and
the outcomes uncertain (see Note 12).
F-2
<PAGE>
The Company has incurred significant losses from operations over the past three
years; has lost its two main customers, which has significantly impacted its
revenues; and at March 31, 1997, had a shareholders' deficit of $14.2 million.
During fiscal 1998, the Company has continued to incur significant losses, and
management has not successfully executed on its efforts to achieve profitable
operations and positive cash flows. Outside of related party financing, the
Company has identified no viable source of financing.
/s/ ARTHUR ANDERSEN LLP
------------------------------
ARTHUR ANDERSEN LLP
Los Angeles, California
June 2, 1998
F-3
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996 AND 1997
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1996 1997
------- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 684 $1,363
Restricted cash balances 886 29
Accounts receivable, net of allowance of
$256 and $52 at March 31, 1996 and
1997, respectively 1,349 233
Net due from related parties 273 --
Inventories 6,643 1,272
Prepaid expenses and other current assets 797 338
Income taxes receivable 46 --
------- ------
Total current assets 10,678 3,235
------- ------
PROPERTY, PLANT AND EQUIPMENT, at cost, net
of accumulated depreciation and amortization 3,805 920
------- ------
$14,483 $4,155
------- ------
------- ------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996 AND 1997
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings $ 8,177 $ 7,835
Note payable under Recapitalization Plan -- 1,873
Notes payable -- 914
Accounts payable 3,596 3,407
Accrued liabilities 1,187 1,603
Net due to related parties -- 92
-------- --------
Total current liabilities 12,960 15,724
-------- --------
NOTES PAYABLE 934 --
-------- --------
Total liabilities 13,894 15,724
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 12)
MINORITY INTEREST 2,599 2,599
SHAREHOLDERS' DEFICIT:
Common stock, no par value:
Authorized--6,000 shares
Issued and outstanding--4,450
shares in 1996 and 5,300 shares in 1997 16,278 16,405
Retained deficit (17,743) (30,370)
Cumulative translation adjustments (545) (203)
-------- --------
Total shareholders' deficit (2,010) (14,168)
-------- --------
$ 14,483 $ 4,155
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES $ 24,539 $16,814 $ 2,568
COST OF GOODS SOLD
Material, labor, overhead and direct cost 26,371 16,565 2,780
Inventory provisions 5,719 204 4,325
-------- ------- --------
32,090 16,769 7,105
-------- ------- --------
Gross profit (loss) (7,551) 45 (4,537)
-------- ------- --------
OPERATING EXPENSES:
Selling, general and administrative 4,564 3,435 3,348
Research and development 935 430 865
Property, plant and equipment impairment loss - - 2,495
-------- ------- --------
5,499 3,865 6,708
-------- ------- --------
Loss from operations (13,050) (3,820) (11,245)
-------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense (707) (1,253) (1,585)
Interest income 475 184 199
Litigation settlement - - 429
Foreign currency transaction losses - - (452)
Other income - - 25
-------- ------- --------
(232) (1,069) (1,384)
-------- ------- --------
Loss before provision
for income taxes (13,282) (4,889) (12,629)
PROVISION (BENEFIT) FOR INCOME TAXES 26 1 (2)
-------- ------- --------
NET LOSS $(13,308) $(4,890) $(12,627)
-------- ------- --------
-------- ------- --------
NET LOSS PER COMMON SHARE $ (2.99) $ (1.10) $ (2.84)
-------- ------- --------
-------- ------- --------
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING SHARES 4,450 4,450 4,452
-------- ------- --------
-------- ------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1995 , 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Cumulative
Shares Common Retained Translation
Outstanding Stock Deficit Adjustments Total
----------- --------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1994 4,450 $ 16,278 $ 455 $ 36 $ 16,769
Translation adjustments --- --- --- (106) (106)
Net loss --- --- (13,308) --- (13,308)
------ -------- -------- -------- ---------
BALANCE, March 31, 1995 4,450 16,278 (12,853) (70) 3,355
Translation adjustments --- --- --- (475) (475)
Net loss --- --- (4,890) --- (4,890)
------ -------- -------- -------- ---------
BALANCE, March 31, 1996 4,450 16,278 (17,743) (545) (2,010)
Translation adjustments --- --- --- 342 342
Issuance of common stock
under recapitalization plan 850 127 --- --- 127
Net Loss --- --- (12,627) --- (12,627)
------ -------- -------- -------- ---------
BALANCE, March 31, 1997 5,300 $ 16,405 $(30,370) $ (203) $ (14,168)
------ -------- -------- -------- ---------
------ -------- -------- -------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (13,308) $(4,890) $(12,627)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation and amortization expense 439 525 452
Property, plant & equipment impairment loss - - 2,495
Provision for losses on accounts
receivable 13 43 278
Provision for losses on inventories 5,719 204 4,325
Loss on disposition of property
and equipment 8 - -
Decrease (increase) in:
Accounts receivable 2,598 2,161 838
Inventories (8,642) 2,270 1,046
Prepaid expenses and other current assets (779) 619 459
Income taxes receivable 39 - 46
Deferred tax asset 25 - -
Increase (decrease) in:
Accounts payable 1,946 (1,432) (189)
Accrued liabilities 1,551 (961) 416
-------- ------- -------
Net cash used in operating activities (10,391) (1,461) (2,461)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,066) (343) (62)
Proceeds from the sale of property and
equipment 7 - -
Restricted cash 395 251 857
Sales (purchases) of investments, net 2,500 - -
-------- ------- -------
Net cash provided by (used in)
investing activities (164) (92) 795
-------- ------- -------
</TABLE>
F-8
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of repayments 2,707 519 (342)
Borrowings (repayments) under notes payable 856 154 (20)
Change in related party balances (1,124) 87 365
Note receivable from related parties 1,115 - -
Note payable under Recapitalization Plan - - 1,873
Issuance of Common Stock under Recapitalization Plan - - 127
------ ----- ------
Net cash provided by financing activities 3,554 760 2,003
------ ----- ------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (2) (20) 342
------ ----- ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (7,003) (813) 679
CASH AND CASH EQUIVALENTS, beginning of year 8,500 1,497 684
------ ----- ------
CASH AND CASH EQUIVALENTS, end of year $1,497 $684 $1,363
------ ----- ------
------ ----- ------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION, BACKGROUND, AND PRINCIPLES OF CONSOLIDATION
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Golden Systems,
Inc. (GSI), Fairplay Group, Inc. (Fairplay), and three other subsidiaries
presented on a consolidated basis, collectively hereafter referred to as "the
Company".
The accompanying financial statements at March 31, 1997 have been prepared
assuming that the Company will continue as a going concern. However, the
Company is currently facing significant issues which raise substantial doubt
that the Company has the ability to continue as a going concern. These issues
are summarized as follows:
- - At March 31, 1997, the Company had outstanding amounts due to four separate
Indian lenders in the amount of $8,306,000, all of which are currently in
default. Of that amount, three banks have issued notices to the Company
demanding immediate repayment of $7,392,000. The Company has insufficient
funds available to repay the banks. Because the Indian debt is secured by
the assets of Ultra Tek, alternatives available to the banks include
closing the operations of Ultra Tek and forcing Ultra Tek into liquidation
(see Note 5).
- - In fiscal 1995, Ultra Tek's importing of computer components into India
came under investigation by the Indian customs authorities. In September
1997, the Indian customs authorities issued a separate "show cause" notice
alleging that Ultra Tek has not provided valid explanations for shortages
of imported raw material in its inventories. In fiscal 1997, Ultra Tek
came under the investigation of the Indian Department of Revenue
Intelligence concerning the import and export of certain components used in
the manufacture of power supplies and returned customer product.
Subsequently, a separate "show cause" notice was issued requesting
explanation of why duties should not be assessed. The above governmental
allegations and investigations could lead to additional duty and penalties
being assessed against Ultra Tek in the amount of $8.4 million and penal
action being initiated against Ultra Tek. Penalties relating to the Indian
Department of Revenue Intelligence investigation, if any, have not yet been
determnined. The Company is contesting these allegations, but currently,
the matters are unresolved and the outcomes uncertain (see Note 12).
- - The Company has incurred significant losses from operations over the past
three years; has lost its two main customers, which has significantly
impacted its revenues; and at March 31, 1997, had a shareholders' deficit
of $14.2 million. During fiscal 1998, the Company has continued to incur
significant losses, and management has not successfully executed on its
efforts to achieve profitable operations and positive cash flows. Outside
of related party financing, the Company has identified no viable source of
financing.
Due to the significance of these factors in the accompanying financial
statements at March 31, 1997, all assets have been stated at their estimated
realizable values. Costs of resolving the contingencies noted above or settling
amounts due to Indian banks or Company creditors have not been reflected in the
accompanying financial statements as management is currently unable to estimate
these amounts. Accounts receivable and inventories were valued at their
subsequently realized amounts (inventories at cost), and property, plant and
equipment were valued based on estimates by management and in accordance with
the guidelines of Statement of Financial Accounting Standards No. 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" (SFAS 121). The estimated realizable values and settlement amounts
may be different from the proceeds ultimately received or payments made.
BACKGROUND
Fairplay, a Panamanian corporation, is solely a holding company and conducts its
business through Ultra Tek Devices Limited (Ultra Tek), an Indian corporation
and wholly owned subsidiary of Fairplay. The Company has also established three
other foreign subsidiaries, two of which relate to foreign sales offices in
England and in Singapore. The third subsidiary relates to the Company's
manufacturing operations in Sri Lanka, which were shut down in the third quarter
of 1998.
F-10
<PAGE>
The Company is principally in the business of the manufacture and export of
switching mode power supplies and adapters, primarily for incorporation by
original equipment manufacturers (OEMs) of personal computers and computer
peripheral devices into their products. The Company's power supplies convert
alternating current electrical power from a primary source, such as a wall
outlet, into the direct current, stable voltages required to power the OEMs'
various products.
The manufacturing facilities of Ultra Tek are primarily located in Bombay,
India, in the Santa Cruz Electronics Export Processing Zone (SEEPZ). Under the
regulations of the SEEPZ, Ultra Tek is required to export a substantial part of
its production. Ultra Tek imports substantially all of its raw materials from
East Asia, Europe and the United States of America. Ultra Tek exports
substantially all of its production to GSI and its customers in the United
States of America, Asia and Europe.
GSI was incorporated in October 1985, but began its operations in February
1991. GSI, a California corporation, designs and markets the power supplies
manufactured by Ultra Tek. The power supplies are primarily drop shipped by
Ultra Tek directly to GSI's customers.
The Company began using the fictitious name "Cortech Systems" in August 1996.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company
presented on a consolidated basis. All significant intercompany balances and
transactions have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The financial statements of Ultra Tek and the Company's subsidiaries in Sri
Lanka and England have been prepared in their local currencies and have been
translated into U.S. dollars in accordance with the Statement of Financial
Accounting Standards No. 52. The functional currency is the local currency.
Assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate at the balance sheet date. Revenues, expenses and
cash flows are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates prevailing at the dates those
elements are recognized in the financial statements. Translation adjustments
resulting from the process of translating the local currency financial
statements into U.S. dollars are not included in determining net income or loss
but are accumulated and reported as a separate component of shareholders'
deficit in the accompanying balance sheets.
The financial statements of the Company's subsidiary in Singapore has been
prepared in U.S. dollars as the currency of the primary economic environment in
which the operations of this company is conducted is the U.S. dollar. Thus, the
functional currency of this company is the U.S. dollar. Transactions and
balances originally denominated in U.S. dollars are presented at their original
amounts. Transactions and balances in other currencies are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52,
and are included in determining net income or loss.
STOCK-BASED COMPENSATION PLAN
The Company accounts for its stock-based compensation plan (see Note 7) under
the provisions of APB Opinion No. 25. The Company has elected to follow the
disclosure provisions of Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation", beginning April 1, 1995
for employee awards. See Note 7 for disclosure of pro forma loss and loss per
common share amounts for the years ended March 31, 1996 and 1997 as required by
SFAS 123. The Company has adopted SFAS 123 for all non-employee awards
beginning April 1, 1996.
REVENUE RECOGNITION
Revenues on product sales are recognized at the time of shipment from India.
F-11
<PAGE>
The Company accounts for potential product returns by reserving for the
potential loss of sales and accounts receivable in the period in which the
original sale occurred based on historical results. Historically, product
returns have been relatively insignificant, except for in fiscal 1995 when the
Company's most significant customer returned approximately $4.2 million of
product to the Company. These significant returns only occurred in fiscal 1995
and the Company has incurred relatively insignificant product returns in every
other year of its operations since its inception. The Company's management
believes that the fiscal 1995 returns were of a non-recurring nature, and as
such, only reserves relating to recurring returns were recorded as of March 31,
1996 and 1997 and are included in the accounts receivable allowance.
Sales to countries other than the United States approximated 45, 47 and
20 percent of the Company's revenues in fiscal years 1995, 1996 and 1997,
respectively.
RESEARCH AND DEVELOPMENT
Costs associated with developing and testing new concepts and designs are
expensed as incurred. All research and development costs have been expensed
through March 31, 1997.
WARRANTIES
The Company generally provides its customers with a one to three-year warranty
on its power supplies. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped.
SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK
In fiscal 1995, sales to two customers accounted for approximately 54 and 19
percent, respectively, of the Company's net sales. As of March 31, 1995, these
customers accounted for approximately 82 percent of the Company's accounts
receivable balance. In fiscal 1996, sales to these customers accounted for
approximately 21 and 64 percent, respectively, of the Company's net sales. As
of March 31, 1996, these customers accounted for approximately 48 percent of the
Company's accounts receivable balance. In fiscal 1997, sales to these customers
accounted for 19 and 36 percent, respectively, with a new customer accounting
for an additional 21 percent. In 1997, the accounts receivable balance to these
customers was approximately 85 percent of the total accounts receivable balance.
The Company's strategy of selling to OEMs anticipates that the Company will be
relying on high sales volumes to a relatively small number of customers.
Although there can be no assurance that the major customers will continue to
utilize the Company's products at current levels, if at all, the Company expects
to continue to depend upon such customers for a significant percentage of its
net sales. The Company has no long-term contracts with major customers. A
decline in demand for personal computers, or other factors affecting the
computer industry in general, or major customers in particular, could have a
material adverse effect on the Company's results of operations (see Note 1).
Although the Company is pursuing, and will continue to pursue, the business of
other personal computer OEMs as well as computer peripheral OEMs, customer
concentration will continue to be a risk due to the limited number of OEMs
producing personal computers in sufficient volume to be attractive to the
Company.
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):
<TABLE>
<CAPTION>
March 31, March 31,
1996 1997
---------- ----------
<S> <C> <C>
Raw materials $ 5,575 $ 1,237
Work-in-progress 780 30
Finished goods 288 5
-------- --------
$ 6,643 $ 1,272
-------- --------
-------- --------
</TABLE>
The Company reviews its inventories on a periodic basis (generally quarterly)
for slow-moving, excess and obsolete items. A reserve is recorded against the
cost of items identified as such. The amounts shown above at March 31, 1996,
are presented net of a total reserve of $5,808,000 of which $3,885,000 was for
the 1995 product returns from the Company's major customer at that time. The
amounts shown at March 31, 1997 are presented net of a reserve of $6,869,000,
which records the inventories at their estimated net realizable values.
F-12
<PAGE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at acquisition cost, net of
accumulated depreciation and amortization, which is computed using
straight-line and accelerated methods over three to fifteen years. At March
31, 1997, the amounts presented below are shown net of accumulated
depreciation and amortization as the amounts are presented at their fair
value (as determined by applying SFAS 121).
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1996 1997
--------- ---------
<S> <C> <C>
Machinery and equipment $ 3,864 $3,622
Motor vehicles 121 121
Furniture and fixtures 595 738
Computer software 175 121
Leasehold improvements 283 384
--------- ---------
5,038 4,986
Accumulated
depreciation and amortization (1,233) (1,571)
Reserve for impairment loss (2,495)
--------- ---------
$ 3,805 $920
--------- ---------
--------- ---------
</TABLE>
Costs of normal maintenance and repairs are charged to expense as incurred.
Major replacements or betterments of property and equipment are capitalized.
When items are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in operations.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was $800 in 1995, 1996 and 1997. Cash paid for
interest was approximately $105,000, $1,190,000 and $308,000 in 1995, 1996
and 1997, respectively.
During fiscal years 1995 and 1996, the Company received property and
equipment with costs of approximately $22,000 and $31,000, respectively, from
related parties. These non-cash transactions are excluded from the
statements of cash flows.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
3. RECAPITALIZATION PLAN
In February 1997, the Company's Board of Directors approved a proposal (the
"Recapitalization Plan" or the "Plan") from the Company's President on behalf
of the Tandon family, the Company's principal shareholders, pursuant to which
the Tandon family would contribute $2,000,000 in cash in exchange for
13,333,333 shares of the Company's common stock. In February 1997, the
Company received a fairness opinion from an investment bank which stated the
Plan was fair to the Company's shareholders from a financial point of view.
In March 1997, the Company issued 850,000 of its common shares, which
represented all of the shares available to be issued by the Company under its
current capital structure, to the Tandon family. The Company's authorized
shares will be increased, if approved by the Company's shareholders, at which
time the remaining 12,483,333 shares will be issued to the Tandon family. In
connection with the Plan (due to not all of the shares being issued), the
Company entered into an agreement with the Tandon family under which
$1,873,000 of the $2,000,000 contributed would be set up as a note payable
with the remaining $127,000 recorded as an increase to equity. Borrowings
under the note payable agreement bear interest at 8 percent, are convertible
into 12,483,333 shares of common stock upon approval by the Company's
shareholders and are secured by essentially all assets of GSI.
F-13
<PAGE>
4. RESTRICTED CASH BALANCES
Cash balances include restricted deposits with a foreign bank amounting to
$886,000 and $29,000 at March 31, 1996 and 1997, respectively. At March 31,
1996, these deposits were given as security against letters of credit and
letters of guarantee issued by the bank on behalf of the Company (see Note 5
below). At March 31, 1997, the balance represents a time deposit with a bank.
5. SHORT-TERM BORROWINGS
GSI FACTORING AGREEMENT
The Company has entered into a factoring agreement with a United States bank.
Under the agreement, the Company may sell its accounts receivable to the
bank, at the bank's option, at the value of 60 percent of the face amount of
each receivable the bank desires to purchase. The total amount of "unpaid
advances" by the bank cannot exceed $1,333,333. The Company must pay a
monthly finance charge on the outstanding unpaid advances in addition to a
one-time administration fee on each purchased receivable. The unpaid
advances are secured by essentially all of the assets of the Company. The
term of the factoring agreement is on a year-to-year basis unless terminated
in writing by Buyer or Seller. Through March 31, 1997, the Company had not
sold any of its accounts receivable under the agreement. In November 1997,
the Company's monthly finance charge was adjusted from 2.25 to 1.75 percent
and the administration fee based on the total of factored accounts was
reduced from 1 to .75 percent. During November and December 1997, the
Company factored a total of $713,000 of its accounts receivable to provide
working capital. The outstanding balance as of December 31, 1997 was
$428,000. Subsequently, the borrowings were repaid and there was no
outstanding balance at March 31, 1998.
During fiscal 1995, the Company issued the bank a warrant to purchase 24,000
shares of its common stock at the price of $.50 per share. The warrants may
be exercised beginning in December 1994 and expire in December 1999.
ULTRA TEK FINANCING AGREEMENTS
The Company has entered into borrowing agreements with three banks in India,
which are denominated in Indian Rupees. The agreements provide for
borrowings based upon qualifying intercompany accounts receivable which
relate to export sales. At March 31, 1996 and 1997, $6,034,000 and
$6,838,000 of principal and accrued interest (207,854,000 and 246,853,000 in
Indian rupees), respectively, were outstanding under these agreements and no
amounts were available to borrow. Borrowings bear interest at varying rates
prescribed by the Reserve Bank of India for such borrowings. At March 31,
1996 and 1997, the normal rate of interest was 13 percent per annum, with
interest on overdue amounts increasing to a maximum of 23 percent. These
agreements are secured by accounts receivable, property, plant and equipment,
and inventories.
The Company has also entered into additional credit agreements with the same
three banks, which are denominated in Indian rupees. These agreements
provide for borrowings based upon qualifying inventories which relate to
export sales. At March 31, 1996 and 1997, $1,332,000 and $512,000 (45,899,000
and 18,495,000 in Indian rupees), respectively, were outstanding under these
agreements and no amounts were available to borrow. Borrowings bear interest
at varying rates prescribed by the Reserve Bank of India for such borrowings.
At March 31, 1996 and 1997, the normal rate of interest was 13 percent per
annum, with interest on overdue amounts increasing to a maximum of 23
percent. These credit agreements are secured by inventories and accounts
receivable.
In addition to the above credit arrangements, through June 1996, the Company
also had foreign letter of credit issuance facilities, denominated in Indian
rupees, from the same three banks in India. At March 31, 1996 and 1997,
amounts due under letters of credit issued by banks on behalf of the Company
and included in short-term borrowings amounted to approximately $324,000 and
$42,000 (11,152,000 and 1,530,000 in Indian rupees), respectively. At March
31, 1996 and 1997, the rate of interest on unpaid amounts was 23 and 21
percent, respectively.
Further, through June 1996, the Company had letter of guarantee issuance
facilities from the same three banks for guarantees required to be issued to
government agencies and others for various purposes. At March 31, 1997,
letters of guarantee utilized against these facilities was $2,000.
All of the letter of credit facilities and letter of guarantee facilities are
secured by property, plant and equipment, accounts receivable and
inventories. Primarily all of the above agreements and facilities were due
for renewal at various dates and amounts prior to March 31, 1997, and as
such, effective June 1996, the consortium of banks "froze" all credit
facilities available to the Company. In July 1997, the banks' legal counsel
issued notices to Ultra Tek and the Company calling upon them to pay the
outstanding amounts due. In response to the demand from the banks, the
Company and Ultra Tek have submitted to the banks, as part of a
"rehabilitation program", a plan to convert the above short-term borrowings
into long-
F-14
<PAGE>
term loans. Management is currently discussing the rehabilitation program
with the banks. Currently, the banks have not initiated any legal action
against the Company for non-payment of the amounts due. Essentially all of
the above agreements and facilities are covered by corporate guarantees from
GSI, Fairplay and Tandon Associates, a related party. They are also covered
by the personal guarantee of the Chairman and Managing Director of Ultra Tek
for the amount of approximately $11,035,000.
SRI LANKA FINANCING AGREEMENT
During fiscal 1995, the Company entered into borrowing agreements with a bank
in Sri Lanka. Under the agreements, the Company may incur up to $500,000 in
short-term borrowings and $350,000 in long-term borrowings (term loans), for
the purpose of acquiring property and equipment, and inventories. Borrowings
bear interest at the London Inter Bank Offer Rate (LIBOR) plus 3 percent (8.7
and 8.6 percent at March 31, 1996 and 1997, respectively) and are secured by
the related assets. At March 31, 1996 and 1997, $487,000 and $171,000,
respectively, was outstanding under the short-term agreements. During fiscal
1997, $350,000 under the short-term borrowing agreements was converted to a
term loan, payable in 36 equal monthly installments at the LIBOR plus 3
percent. At March 31, 1997, the balance outstanding under this term loan was
$272,000 at 8.6 percent interest. Subsequent to March 31, 1997, the balance
of $171,000 under the short-term borrowing agreements was converted to a term
loan, payable in 12 equal monthly installments, commencing October 1998 at
the LIBOR plus 3.5 percent. All borrowings under the short-term and term
borrowing agreements are denominated in United States dollars.
6. NOTES PAYABLE
In fiscal 1995, the Company entered into borrowing agreements with an Indian
lending institution (which are denominated in Indian rupees) to finance the
purchase of certain property and equipment. At March 31, 1996 and 1997,
$934,000 and $914,000 (32,180,000 and 33,010,000 in Indian rupees),
respectively, was owed under these agreements. The borrowings are repayable
in five equal installments beginning on April 1, 1997 and ending on April 1,
1998. Interest on outstanding amounts are payable annually at a rate equal to
the London Inter Bank Offer Rate (LIBOR) plus 2.75 percent. For overdue
amounts, the rates of interest ranged from 21 to 23 percent per annum. At
March 31, 1996 and 1997, the normal rate was 8.4 and 8.3 percent,
respectively. The borrowings are secured by the property and equipment. The
Company currently has defaulted on all payments due subsequent to April 1,
1997. Currently, there has been no legal action taken by the lender nor has
the lender called for repayment of outstanding amounts due. The amount
overdue at March 31, 1998 was $581,000.
7. EQUITY TRANSACTIONS
STOCK OPTION PLAN
During fiscal 1994, the Company adopted a stock option plan (the "1994 Plan")
that provides for the granting of options to purchase up to 455,000 shares of
common stock, consisting of both incentive stock options and non-qualified
options. Incentive stock options are issuable only to employees, while
non-qualified stock options may be issued to non-employee directors,
consultants and others, as well as to employees. All stock options must be
granted at prices equal to the fair market value of the common stock on the
grant date. All options granted expire ten years from the date of grant and
vest in 20 percent increments over five years.
The Company accounts for the 1994 Plan under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for this
plan been determined consistent with SFAS 123, the Company's net loss and
loss per common share amounts would have been increased to the following pro
forma amounts for the years ending March 31, 1996 and 1997 (net loss amounts
are in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Net Loss:
As Reported................................... $(4,890) $(12,627)
Pro Forma..................................... (4,924) (12,646)
Loss Per Common Share:
As Reported ............................... $ (1.10) $ (2.84)
Pro Forma..................................... (1.11) (2.84)
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
A summary of the status of the Company's outstanding stock options at March
31, 1995, 1996 and 1997 and changes during the years then ended is presented
in the table and narrative below (shares are in thousands):
F-15
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................ 110 $ 5.73 188 $ 5.52 246 $ 3.10
Granted......................................... 98 5.25 136 .85 -- --
Exercised....................................... -- -- -- -- -- --
Forfeited....................................... (20) 5.25 (78) 5.02 (122) 1.61
Outstanding at end of year...................... 188 $ 5.52 246 $ 3.10 124 $ 4.58
Exercizable at end of year...................... 12 $ 7.00 30 $ 6.15 51 $ 5.46
Weighted average fair value of options granted.. N/A $ .55 N/A
</TABLE>
The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following weighted-average assumptions used
for grants in 1997; a risk-free interest rate of seven percent; no expected
dividend yield; expected lives of 5 years; expected volatility of 50% to 60%.
COMMON STOCK PURCHASE WARRANTS
A summary of warrant activity is as follows:
<TABLE>
<CAPTION>
Number of
Shares Option Prices
--------- -------------
<S> <C> <C>
Balance, March 31, 1994 125,000 $ 8.40
Issued 24,000 .50
Exercised - -
Redeemed - -
------- -------------
Balance, March 31, 1995, 1996 and 1997 149,000 $ .50 to 8.40
------- -------------
------- -------------
</TABLE>
No warrants were issued, exercised or redeemed in fiscal years 1996 and 1997.
STOCK PURCHASE PLAN
The Company has established an Employee Stock Purchase Plan (the Purchase
Plan), which allows eligible employees to purchase shares of the Company at
the price of 85 percent of the fair market value of the shares on the first
or last day of an option period. The maximum number of shares which may be
issued under the Purchase Plan is 300,000. The Purchase Plan became
effective on September 1, 1994. No shares have been issued under this Plan.
8. LITIGATION SETTLEMENT
During the third quarter of fiscal year 1995, the Company experienced a
product rejection by its then-largest customer, which cost the Company $4.2
million of lost accounts receivables directly related to the sales of the
rejected units and $2.2 million related to other direct costs stemming from
the rejections. The Company engaged the services of an outside contractor to
address the customer complaint and rework the rejected product. After
rework, the product was again rejected by the customer as a result, in the
Company's view, of poor workmanship in the rework process.
In fiscal year 1996, the Company filed a complaint against the contractor
alleging, among other things, that the contractor improperly performed rework
services and thereby breached the contract with the Company. The Company
sought damages in excess of $3 million. Also, in fiscal year 1996, the
contractor filed a cross-complaint against the Company alleging breach of
contract by the Company for failure to pay for rework services rendered. The
contractor sought $108,000 and unspecified damages.
In April 1996, the Company settled the lawsuits with the contractor. Under
the agreement terms, the Company received a cash settlement of $592,000, of
which $163,000 related to the reimbursement of legal expenses incurred in
fiscal year 1996. Accordingly, $163,000 was recorded as a reduction of legal
expenses in fiscal year 1996 and the balance of the settlement has been
recorded in fiscal year 1997.
F-16
<PAGE>
9. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109).
Under SFAS 109, deferred income tax assets or liabilities are computed based
on the temporary difference between the financial statement and income tax
bases of assets and liabilities using the enacted marginal income tax rate in
effect for the year in which the differences are expected to reverse.
Deferred income tax expenses or credits are based on the changes in the
deferred income tax assets or liabilities from period to period.
The components of the net deferred income tax asset at March 31, 1996 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
Allowance for bad debts $ 102 $ 21
Vacation accrual 7 7
Net operating loss carryforwards 3,640 7,290
Inventory reserve 2,323 3,013
Warranty reserve 69 69
------- --------
6,141 10,400
Less: Valuation allowance (6,141) (10,400)
------- --------
$ - $ -
------- --------
------- --------
</TABLE>
The provision for income taxes for the years ended March 31, 1995, 1996 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current - Federal $ - $ - $ -
- State 1 1 1
- Foreign - - (3)
--- --- ---
1 1 (2)
--- --- ---
Deferred - Federal 17 - -
- State 8 - -
--- --- ---
25 - -
--- --- ---
$26 $ 1 $(2)
--- --- ---
--- --- ---
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended March 31, 1995, 1996
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Income tax provision (benefit)
at statutory federal rate $(4,448) $(1,623) $(4,653)
State and local income taxes,
net of federal income tax effect 1 1 1
Tax benefits not recognized 4,440 1,623 4,653
Other items, net 33 - (3)
------- ------- -------
$ 26 $ 1 $ (2)
------- ------- -------
------- ------- -------
</TABLE>
F-17
<PAGE>
In 1995, the pre-tax loss relating to U.S. operations was $10,412,000 and the
pre-tax loss relating to foreign operations was $2,870,000. In 1996, the
pre-tax losses relating to U.S. and foreign operations were $2,027,000 and
$2,862,000, respectively. In 1997, the pre-tax losses relating to U.S. and
foreign operations were $1,551,000 and $12,147,000, respectively.
Ultra Tek's manufacturing facilities are located in an export processing
zone. Under the Indian Income-tax Act of 1961, the entire profits of a
company situated in a free trade zone are exempt from income tax for a period
of five consecutive years within the first eight years of operations at the
option of the Company. Ultra Tek elected to claim the exemption for the five
years ended March 31, 1992. Consequently, Ultra Tek did not have any income
tax liability up to March 31, 1992. Under another provision of the Indian
Income-tax Act of 1961, Ultra Tek will continue to be exempt from income tax
to the extent of profits attributable to its export sales. For the years
ended March 31, 1996 and 1997, no provision for income taxes was recorded as
Ultra Tek incurred losses for tax purposes.
The Company does not provide for U. S. federal income taxes on the
undistributed earnings of its foreign operations. The Company's policy is to
leave the income permanently invested in the country of origin. Such amounts
will only be distributed to the United States to the extent any federal
income tax can be fully offset by foreign tax credits. Currently, this
policy is still in effect due to the limited foreign funds available for
repatriation to the U.S.
Net operating loss carryforwards as of March 31, 1997 for federal and state
tax purposes are approximately $10 million and $4 million, respectively, and
begin expiring in fiscal years 2009 and 1999, respectively.
10. NET DUE (TO) FROM RELATED PARTIES
Amounts due (to) from related parties are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1996 1997
--------- ---------
<S> <C> <C>
Eastern Peripherals Limited $ 423 $ 171
Modular Electronics Private Ltd. (29) (73)
Tancom Electronics (49) (96)
Advance Technology Devices (39) (113)
Other, net (33) 19
----- -----
$ 273 $ (92)
----- -----
----- -----
</TABLE>
11. MINORITY INTEREST
On September 7, 1993, the holders of notes payable due from Ultra Tek in the
amount of approximately $2.6 million contributed such amounts to Ultra Tek in
exchange for Ultra Tek redeemable preference shares. The preference shares
exchanged for the debt are non-voting shares, with an aggregate annual
dividend amount of $33 ($0.00004 per share) per year, are mandatorily
redeemable in 20 years and have a liquidation preference of approximately
$2.6 million. Due to an agreement with the preference shareholders, these
shares are redeemable at the option of the Company but do not have to be
redeemed for 20 years. Early redemption of the shares prior to maturity can
be accomplished only with the approval of a majority of the Company's outside
directors. The full redemption amount is shown in the accompanying balance
sheets as of March 31, 1996 and 1997 as minority interest.
F-18
<PAGE>
12. COMMITMENTS AND CONTINGENCIES
A) LEASES
GSI leases its corporate headquarters from a related party under a three
year operating lease which expires in January 2000. Ultra Tek leases
certain factory premises from the Indian Government under operating leases
which expire at various dates through October 2000. Another Company
subsidiary leases its factory premises near Colombo, Sri Lanka under an
operating lease which expires in March 1999. Future minimum payments under
these and other various operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending March 31:
---------------------
<S> <C>
1998 250
1999 207
2000 125
2001 34
2002 5
----
$621
----
----
</TABLE>
Gross rental expense for the years ended March 31, 1995, 1996 and 1997 was
approximately $253,000, $204,000 and $214,000, respectively.
B) CAPITAL EXPENDITURES
At March 31, 1996 and 1997, the Company had committed to spend
approximately $100,000 and $36,000, respectively, under agreements to
purchase property, plant and equipment.
C) PURCHASES
At March 31, 1996 and 1997, open letters of credit for import of raw
materials in the normal course of business amounted to approximately
$133,000 and $113,000, respectively.
D) LITIGATION
The Company is subject to lawsuits in the normal course of business. In
the opinion of management and legal counsel to the Company, pending
litigation will not result in a material loss to the Company.
E) CONTINGENCIES
During fiscal year 1995, the Company's imports of computer components for
final assembly and sale into the domestic tariff area (DTA) of India
(outside the SEEPZ) came under investigation by the Indian customs
authorities. As a result, Company inventories of $1,300,000 were seized by
the authorities. On May 30, 1995, the authorities issued a notice to the
Company alleging misdeclaration of purported imports of complete computer
systems as imports of computer system components. The notice calls upon
the Company to explain why the authorities should not (a) confiscate all
the goods so imported, (b) levy additional duty of $1,175,000 (49,000,000
in Indian rupees) on the goods already sold into the DTA, and (c) take
penal action against the Company under the law, which could result in a
possible monetary penalty of $5,865,000 (245,000,000 in Indian Rupees).
The Company paid an advance of $700,000 (20,000,000 in Indian rupees)
against customs duty that may ultimately be levied by the authorities and
recorded this amount in "cost of goods sold" in the accompanying statement
of operations for the year ended March 31, 1995. During fiscal 1996, the
authorities released the seized goods. However, because of difficulties
encountered in re-exporting the goods and technological obsolescence, the
entire amount of the seized goods has been included in the inventory
reserve amounts discussed in Note 2 at March 31, 1997 (Inventories). No
other penalties or expenses related to this government action have been
incurred by the Company.
In September 1997, the Indian customs authorities issued a "show cause"
notice alleging that Ultra Tek has not provided valid explanations for
shortages of raw material in its inventories. The notice called upon the
Company to explain why the authorities should not (a) impose duty of
$616,000 (25,725,000 in Indian rupees) leviable on imported components
which were alleged not accounted for in the terms of bond executed, (b) why
penal action
F-19
<PAGE>
should not be initiated against the Company, and (c) why a penalty equal
to the duty held to be leviable, $616,000 (25,725,000 in Indian rupees),
in respect of unaccounted goods should not be imposed.
In fiscal 1997, the Company came under investigation by the Indian
Department of Revenue Intelligence (DRI) in connection with the import
and export of certain components and goods used in the manufacture of
power supplies and customer returns. The investigation focused on the
alleged discrepancy noted between the physical stock records and books,
in respect of the work-in-process inventory at March 31, 1996 and 1997
and customer returned product at March 31, 1992 through March 31, 1997.
In May 1998, the DRI issued a "show cause" notice requesting that the
Company explain why the DRI should not impose duties of approximately
$615,000 (25,720,000 in Indian rupees). Penalties relating to the
investigation, if any, have not yet been determined.
The aggregate of threatened duties and penalties to the Company is
approximately $8,400,000, exclusive of any penalties arising from the
DRI investigation, using the Indian rupee translation rate at June 2,
1998. Although the Company is contesting the allegations of the
authorities, the outcome of these matters is uncertain at this time.
Accordingly, no additional provisions for any losses that may ultimately
result have been made in these financial statements.
13. RELATED PARTY TRANSACTIONS
The Company has substantial dealings with the following entities which are
owned by or affiliated with Company shareholders. The net balances due from
or to each such related party at March 31, 1996 and 1997 for sales,
purchases, transfers, sharing of expenses, advances and borrowings are
disclosed in Notes 10 and 11 above.
The amount of sales, purchases, transfers and sharing of expenses during the
years ended March 31, 1995, 1996 and 1997 with each party are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
ADVANCE TECHNOLOGY DEVICES
BEGINNING BALANCE $ 13 $ (36) $ (39)
Product sales - - 1
Purchase of raw materials - - (4)
Charges for sharing common expenses (163) - -
Credits for sharing common expenses - 14 3
Sale/(purchase) of assets (14) - -
Translation adjustments to/(from) the Company - 3 3
Cash transfers (to)/from the Company 128 (20) (77)
---------------------------
ENDING BALANCE (36) (39) (113)
---------------------------
EASTERN PERIPHERALS LTD.
BEGINNING BALANCE 420 519 423
Product Sales 2 - -
Purchase of raw materials (44) - (1)
Charges for sharing common expenses (709) (233) (16)
Credits for sharing common expenses - - -
Sale/(purchase) of assets (8) 9 (7)
Translation adjustments to/(from) the Company - - (3)
Cash transfers (to)/from the Company 858 128 (225)
---------------------------
ENDING BALANCE 519 423 171
---------------------------
GOLDEN COMPUTER LTD.
BEGINNING BALANCE - 3 1
Product sales 64 - (1)
Cash transfers (to)/from the Company (61) (2) -
---------------------------
ENDING BALANCE 3 1 -
---------------------------
MAAZDA TRAVEL
BEGINNING BALANCE - (13) (10)
Charges for travel agent services (126) (81) (36)
Cash transfers (to)/from the Company 113 84 45
---------------------------
ENDING BALANCE (13) (10) (1)
---------------------------
F-20
<PAGE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
MODULAR ELECTRONICS PVT. LTD.
BEGINNING BALANCE (992) (35) (29)
Purchase of raw materials (72) - -
Credits for rework 3 - -
Charges for sharing common expenses (27) (3) -
Credits for sharing common expenses 3 2 -
Cash transfers (to)/from the Company 1,050 7 (44)
---------------------------
ENDING BALANCE (35) (29) (73)
---------------------------
RADICAL CONSULTANCY SERVICES
BEGINNING BALANCE (1) (1) -
Credits for administrative services 1 - -
Cash transfers (to)/from the Company (1) 1 -
---------------------------
ENDING BALANCE (1) - -
---------------------------
RELIABLE CONSULTANCY SERVICES PVT. LTD.
BEGINNING BALANCE (2) (11) -
Charges for sharing common expenses (13) - (6)
Credits for sharing common expenses - 11 4
Cash transfers (to)/from the Company 4 - -
---------------------------
ENDING BALANCE (11) - (2)
---------------------------
SACHAM ELECTRONICS SERVICES PVT. LTD.
BEGINNING BALANCE (32) 11 10
Credits for processing fees 58 - -
Translation adjustments to/(from) the Company - (1) -
Cash transfers (to)/from the Company (15) - -
---------------------------
ENDING BALANCE 11 10 10
---------------------------
SDJ PARTNERS
BEGINNING BALANCE (8) (10) -
Rent & utilities (112) (114) (113)
Cash transfers (to)/from the Company 110 124 113
---------------------------
ENDING BALANCE (10) - -
---------------------------
ST HOLDING PVT. LTD.
BEGINNING BALANCE - - -
Charges for sharing common expenses - - (4)
---------------------------
ENDING BALANCE - - (4)
---------------------------
TANCOM ELECTRONICS
BEGINNING BALANCE - (3) (49)
Sale of raw materials - - 8
Sale/(purchase) of assets - - 6
Charges for sharing common expenses - - -
Credits for sharing common expenses 73 90 89
Translation adjustments to/(from) the Company - (4) 2
Cash transfers (to)/from the Company (76) (132) (152)
---------------------------
ENDING BALANCE (3) (49) (96)
---------------------------
TANDON (S) PVT. LTD.
BEGINNING BALANCE (139) - -
Cash transfers from the Company 139 - -
---------------------------
ENDING BALANCE - - -
---------------------------
TANDON ASSOCIATES, INC. - NOTE RECEIVABLE
BEGINNING BALANCE 1,115 - -
Cash transfers to the Company (1,115) - -
---------------------------
ENDING BALANCE - - -
---------------------------
F-21
<PAGE>
1995 1996 1997
<S> <C> <C> <C>
TANDON ASSOCIATES, INC.
BEGINNING BALANCE - - (8)
Purchase of raw materials (13) - -
Credits for outside services and expenditures 70 106 317
Credits for sharing common expenses - 7 59
Credits for research and development - 48 27
Sale/(purchase) of assets (30) - -
Cash transfers (to)/from the Company (27) (169) (373)
---------------------------
ENDING BALANCE - (8) 22
---------------------------
TANDON DATA SYSTEMS SERVICES LTD.
BEGINNING BALANCE - - (23)
Purchase of software - (23) -
Cash transfers (to)/from the Company - - 23
---------------------------
ENDING BALANCE - (23) -
---------------------------
TANDON MAGNETICS (I) PVT. LTD.
BEGINNING BALANCE - (3) (3)
Charges for sharing common expenses (3) - (2)
---------------------------
ENDING BALANCE (3) (3) (5)
---------------------------
TANTEC MAGNETICS
BEGINNING BALANCE 69 - -
Product sales - 118 26
Purchase of computers - - (18)
Charges for sharing common expenses - - (1)
Credits for sharing common expenses - 1 -
Credits for outside services - 95 37
Cash transfers (to)/from the Company (69) (214) (45)
---------------------------
ENDING BALANCE - - (1)
---------------------------
TANDON MOTORS PRIVATE LTD.
BEGINNING BALANCE - 1 -
Credits for sharing common expenses 1 - -
Cash transfers (to)/from the Company - (1) -
---------------------------
ENDING BALANCE 1 - -
---------------------------
TSL HOLDINGS, INC.
BEGINNING BALANCE - - -
Sale/(purchase) of assets (226) - -
Cash transfers (to)/from the Company 226 - -
---------------------------
ENDING BALANCE - - -
---------------------------
VEEMA HOLDINGS PVT. LTD.
BEGINNING BALANCE (1) - -
Charges for lease of chairman's residence (4) - -
Cash transfers (to)/from the Company 5 - -
---------------------------
ENDING BALANCE - - -
---------------------------
TOTAL $ 422 $ 273 $ (92)
---------------------------
---------------------------
</TABLE>
F-22
<PAGE>
In fiscal 1995, the Company received $1,115,000 from Tandon Associates, Inc.
as final payment on certain loans made by the Company to Tandon Associates.
These loans occurred as a result of Ultra Tek fully utilizing its Indian
lines of credit during fiscal years 1992 and 1993 and the Company had an
inadequate operating history to obtain credit in the United States. The
Tandon family supplemented the Company's working capital by advancing cash
and by utilizing the working capital resources of, and credit available to,
Tandon Associates, Modular Electronics and other family-owned entities. At
March 31, 1993, cash in the amount of $2,621,385 had been advanced to Ultra
Tek by M. L. Tandon and certain Indian persons and entities affiliated with
M. L. Tandon. In addition, Tandon Associates, which had trade credit
available from its vendors, purchased certain raw materials for resale to
Ultra Tek and Modular Electronics so that they could manufacture products for
sale to the Company. Sales of these raw materials resulted in accounts
payable from Ultra Tek and Modular Electronics to Tandon Associates.
Because of its outstanding receivable balances from Ultra Tek and Modular
Electronics, Tandon Associates suffered a cash shortage. As the Company
received collections on its rapidly growing sales, it made a series of loans
to Tandon Associates, which in turn allowed Tandon Associates to pay down
enough of its credit balances with third-party vendors so that it could
continue to make purchases of materials on credit for sale to Ultra Tek and
Modular Electronics.
A portion of the proceeds of the initial public offering in fiscal year 1993
were used to repay the accounts payable resulting from the series of
transactions described above. Ultra Tek, with those funds and additional
working capital resulting from the initial public offering, and Modular
Electronics, with the payment received from the Company, paid a portion of
their accounts payable to Tandon Associates. As a condition to these
payments, Tandon Associates committed, in turn, to repay its loan from the
Company.
In fiscal year 1996, Tandon Associates repaid the Company $169,000 for
expenses incurred by the Company's Singapore subsidiary and certain research
and development and administrative expenses incurred by the Company for the
benefit of Tandon Associates.
The Company believes that related party transactions are at amounts and terms
which approximate market. The headquarters facility lease is at the cost of
comparable office and warehouse space at the time the lease was negotiated
and utilities are at cost. Charges and credits for common expenses and
administrative services are at approximate cost and the transfer of assets is
at net book value which approximates market value. The purchase of travel
services is at competitive prices and the purchase of computer supplies is at
cost plus a five percent mark-up to cover administrative costs. The sale of
Company product is at estimated market price.
14. FOREIGN OPERATIONS
The Company operates principally in three geographic areas: the United
States, Europe, and Asia. The following is a summary of information by areas
as of and for the years ended March 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1997
- ----
United
States Europe Asia Total
------- ------ ----- -----
<S> <C> <C> <C> <C>
Sales originating from . . . . . . $ 2,329 $ - $ 239 $ 2,568
Loss from operations . . . . . . . 1,944 830 8,471 11,245
Identifiable assets. . . . . . . . 1,699 42 2,414 4,155
<CAPTION>
United
1996 States Europe Asia Total
- ---- ------- ------ ----- -----
<S> <C> <C> <C> <C>
Sales originating from . . . . . . $16,750 $ - $ 64 $16,814
Loss from operations . . . . . . . 1,402 50 2,368 3,820
Identifiable assets. . . . . . . . 490 19 13,974 14,483
United
1995 States Europe Asia Total
- ---- ------- ------ ----- -----
<S> <C> <C> <C> <C>
Sales originating from . . . . . . $ 20,465 $ - $4,074 $24,539
Loss from operations . . . . . . . 11,718 - 1,332 13,050
Identifiable assets. . . . . . . . 4,053 4 18,592 22,649
</TABLE>
F-23
<PAGE>
The Company exported approximately 11 percent, 47 percent, and 30 percent of
its total sales in the years ending 1997, 1996 and 1995, respectively. These
exports are primarily to foreign subsidiaries of U. S. companies.
DOMESTIC VERSUS EXPORT SALES
<TABLE>
<CAPTION>
Export
--------------------------------------
European All Other
Domestic Community Asia Areas Total
-------- --------- ------ ----- -----
<S> <C> <C> <C> <C> <C>
1997 Sales to unaffiliated customers............ $ 2,047 $ 192 $ 81 $ 9 $ 2,329
1996 Sales to unaffiliated customers............ $ 8,916 $ 4,152 $1,329 $ 2,353 $ 16,750
1995 Sales to unaffiliated customers............ $13,179 $ 2,766 $4,574 $ (54) $ 20,465
</TABLE>
F-24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,363
<SECURITIES> 0
<RECEIVABLES> 233
<ALLOWANCES> 0
<INVENTORY> 1,272
<CURRENT-ASSETS> 3,235
<PP&E> 920
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,155
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0
0
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</TABLE>
