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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, 1998
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
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GOLDEN SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT
TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. /X/
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT, BASED ON THE CLOSING PRICE AT JULY 30, 1999, WAS
APPROXIMATELY $265,000. THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK AT JULY 30, 1999 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, 1998
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PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders. . . 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . 18
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 19
Item 8. Financial Statements and Supplementary Data. . . . . . . 25
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . 26
PART III
Item 10. Directors and Executive Officers of the Registrant . . . 27
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 28
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 34
Item 13. Certain Relationships and Related Transactions . . . . . 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 37
Signatures . . . . . . . . . . . . . . . . . . . . . . . 38
Index to Consolidated Financial Statements . . . . . . . F-1
Financial Statements and Supplementary Data. . . . . . . F-1
Reports of Independent Public Accountants... . . . . . . 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, 1997 and ending March 31, 1998 is referred to herein as
"fiscal 1998" or "1998").
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. M. L.
Tandon, a resident and citizen of India, has been Chairman of the Board of Ultra
Tek since its incorporation on August 9, 1985 and is J. L. Tandon's brother.
The Company began doing business as "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 customer is Iomega Corporation
("Iomega").
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 1998, 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. The manufacturing in another facility in Madras, India, was
discontinued 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 Sri Lanka. During fiscal 1997, the Company relocated
its product design and development engineering,
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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 part of the Company's ongoing effort to cut
costs, because anticipated sales volume to support these activities did not
develop.
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 $838,000 and $1,046,000, respectively, as reported in
the Company's Annual Report on Form 10-K for fiscal 1997. 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 personal
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 continued in that
capacity until April 6, 1998, at which time he became an employee of the
Company. On September 8, 1998, the Board of Directors elected Mr. Marsh a
director and appointed him Chief Financial Officer of the Company.
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
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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 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
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
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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 the fiscal 1997 year end report with the Commission in June
1998, the Company proceeded to prepare quarterly reports on Form 10-Q for
each of the first three quarters of fiscal 1998, which were filed with the
Commission in September 1998. Because of the foregoing delays, a change in
auditors, and delays in completing the audit in India using Generally
Accepted Accounting Principles, the fiscal 1998 audit was not completed until
August 1999, which delayed the filing of this fiscal 1998 annual report on
Form 10-K with the Commission. Before the Company will be able to solicit
the approval of its shareholders for the Recapitalization Plan or any other
matters requiring shareholder approval, fiscal 1999 quarterly and annual
reports will have to be filed.
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. By its terms, the original bridge note has
converted into an 8% per annum demand promissory note. All of the proceeds
were used for the Company's working capital. As of March 31, 1998, the
Company had borrowed an additional $1,525,000 from the Tandon family. This
cash 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. At July 31, 1999, the outstanding balance, including
accrued interest, due to the Tandon family was $1,384,000, exclusive of the
note payable under the Recapitalization Plan. All additional loaned amounts
have been under the terms of a factoring agreement at a monthly interest rate
of 1% on the average outstanding daily balance. 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. In March 1999, the Company and Ultra Tek submitted to the banks a
proposed plan to reschedule a portion of the short-term borrowings as
projected at September 30, 1999, into long-term debt repayable over five
years in quarterly installments commencing October 2000 or later. The
proposed plan would also provide for the waiver by the banks of the penal
interest on the overdue amounts, which has accrued at a maximum interest
rate of 26 percent. In addition, the plan would make available new short-term
credit facilities of approximately $1,700,000 (70,000,000 in Indian rupees),
which would be secured by accounts receivable and inventories. Management is
currently discussing the rehabilitation program with the banks.
Consequently, the banks have not initiated any legal action against the
Company for non-payment of the amounts due. As of July 31, 1999, the debt to
the Indian lenders amounted to approximately $9,900,000.
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.
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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.
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 1998, 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, manufacturing at this facility was phased out in the second half of
fiscal 1995 and discontinued 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.
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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.
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 $332,000 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
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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 July 31, 1999, 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. Further, the slump in business of the Company's largest customer
in the first half of fiscal 1998, caused this customer to cut back its orders
by approximately 50% from projected levels for the fourth quarter of fiscal
1998. Through July 31, 1999, order levels have not significantly improved.
During February 1999, a major customer notified the Company that the
housing on one model of external power supplies manufactured by the Company
is subject to separation under some circumstances. The Company has worked
with the customer in their recall of 60,000 units at risk of separation.
Through July 31, 1999, the cost of the recall to the Company has been
approximately $50,000.
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.
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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.
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
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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. During fiscal 1999, sales have remained soft,
however, the Company believes that there is opportunity in the marketplace to
obtain orders from newly acquired customers, which offer higher margins. The
recent deterrent to product design and ramping up production has been a lack
of working capital. Because of market changes and the Company's lack of
capital resources, 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.
PRODUCT DESIGN AND DEVELOPMENT
In fiscal 1998, 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. In January 1998, the product design engineering department in
Scotland was reduced from 14 engineers to two engineers and relocated to Simi
Valley, California.
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
twelve weeks. However, the Company has acquired approval to act as a
self-certifying laboratory for Nemko which facilitates the approval process
by all these safety agencies thus reducing the typical approval time
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required by four to six weeks. The Company's self-certification laboratory,
located in Scotland during fiscal 1997 and for the first nine months of
fiscal 1998 and then moved to the Company's headquarters location in Simi
Valley, California, is subject to regular inspection and review by each
agency. Customers typically pay all new product safety certification costs
as incurred.
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.
Despite the Company's best efforts, quality problems do arise from time
to time. For example, during fiscal 1999 the Company discovered that the
plastic housing on approximately 150,000 external power supplies is subject
to separation at unacceptably high levels. In these situations, the Company
works closely with its customer to determine a course of action and to
implement it quickly in order to reduce the risk of a wide spread product
failure and to resolve the matter while most of the units in question are
still in the distribution channel.
MARKETING AND SALES
The Company markets and sells its products directly to OEMs of personal
computers, peripherals, and other electronic equipment primarily 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 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 65% and 15%, 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
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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. During fiscal 1996, 1997 and 1998, 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. However,
since fiscal 1998, the Company has retained a contract sales representative,
entered into three private label agreements and engaged manufacturing sales
representatives. Thus far, sales resulting from these arrangements have not
been significant.
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. 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
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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 July 31, 1999,
firm backlog was estimated at approximately $1,500,000.
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, through the end of fiscal 1998, had not
experienced any significant warranty claims. In the fourth quarter of fiscal
1999, a major customer discovered a housing separation issue on one model of
external power supply manufactured by the Company. Through July 31, 1999,
the Company has spent approximately $50,000 making modifications to all the
affected units. 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, 1998, the Company employed 10 people in its U.S.
operations, including two in engineering and operations, and eight in
administration and finance. Approximately 646 people were employed in India,
including 576 in manufacturing and planning, 32 in design engineering, and 38
in administration. There were no part-time employees.
As of July 31, 1999, full-time employees in the United States and India
were 13 and 462, respectively, and there were no part-time employees.
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 an additional
loan balance of $1,431,000, including accrued interest, from the Tandon
family, as of July 31, 1999. The only unrelated party financing available to
the Company has been a receivables factoring arrangement at unfavorable
rates. The Company has been
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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, 1998, the Company had a shareholders'
deficit of $17,317,000. 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. 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 July 31, 1999, the Company owed its Indian lenders approximately
$9,900,000. 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 lenders 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 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 lenders 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 July 31, 1999, the Tandon family beneficially owned 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
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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 7,000 square foot California facility
for $4,750 per month, including utilities, from SDJ Partners, a related
entity. This lease was renewed on January 1, 1997, amended July 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 $4,000, 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 expired 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 investigation by the Indian
customs authorities. Subsequently, inventories of $1,116,000 (47,447,000
Indian rupees) 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 $1,150,000 (48,885,000 Indian rupees) on the goods already
sold into the DTA, and (c) take penal action against the Company under the
law. 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 $605,000
(25,725,000 Indian rupees) 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, $605,000 (25,725,000 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
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impose duties of $605,000 (25,720,000 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 $2,500,000 (106,474,000 Indian rupees), using the Indian rupee
translation rate at July 31, 1999. 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. In
addition, penal action under Indian law, which the Company believes is very
unlikely, could result in possible monetary fines of up to approximately
$17,000,000 at July 31, 1999.
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, 1998.
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 "CRTS". 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. 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>
1998 Fourth quarter $0.031 $0.031
1998 Third quarter 0.047 0.031
1998 Second quarter 0.094 0.031
1998 First quarter 0.219 0.047
<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
</TABLE>
The approximate number of holders of record of the Company's Common Stock on
July 31, 1999 was 67. 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.
18
<PAGE>
ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31,
1994 1995 1996 1997 1998
----------- ------------ ------------ ----------- ------------
SUMMARY OF OPERATIONS: (in thousands except share data)
<S> <C> <C> <C> <C> <C>
Net sales $29,395 $24,539 $16,814 $ 2,568 $4,581
Net income (loss) 778 (13,308) (4,890) (12,627) (3,700)
Net income (loss) per share .26* (2.99) (1.10) (2.84) (.70)
*PRO FORMA FOR FISCAL YEAR 1993 AND 1994
<CAPTION>
As of March 31,
1994 1995 1996 1997 1998
----------- ------------ ------------ ----------- ------------
BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C> <C>
Working capital $ 17,760 $ 2,589 $(2,282) $(12,489) $(15,383)
Total assets 29,675 22,649 14,483 4,155 2,527
Long-term debt --- 856 934 --- ---
Minority interest 2,599 2,599 2,599 2,599 2,599
Total shareholders' equity (deficit) 16,769 3,355 (2,010) (14,168) (17,317)
</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 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 $4,200,000 in uncollected accounts receivable as a
result of the issuance of credits for the rejected units and $2,200,000 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 1998,
was unsuccessful in its efforts to resell the reworked rejected product. In
addition, the Company has not been successful, to date, in significantly
19
<PAGE>
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 had 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. At July 31,
1999, the outstanding balance, including accrued interest, due the Tandon family
was $1,431,000, exclusive of the $1,873,000 demand promissory note payable under
the Recapitalization Plan.
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 1998 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, 1998, the Company had outstanding amounts due to four
separate Indian lenders in the amount of $8,738,000, all of which are
currently in default. Of that amount, three banks have issued notices
to the Company demanding immediate repayment of $7,904,000. At July
31, 1999, the amounts due to the four separate Indian lenders was
approximately $9,900,000. 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.
- 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 approximately $2,500,000
(106,474,000 Indian rupees), using the Indian rupee translation rate
at July 31, 1999. In addition, penal action under Indian law, which
the Company believes is very unlikely, could result in possible
monetary fines of up to approximately $17,000,000. The Company is
contesting these allegations, but currently, the matters are
unresolved and the outcomes uncertain.
20
<PAGE>
- The Company has incurred significant losses from operations over the
past four years; has lost its two main historical customers, which has
significantly impacted its revenues; and at March 31, 1998, had a
shareholders' deficit of $17,317,000. During fiscal 1999, 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, 1998, 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 1998, 1997 and 1996. During fiscal 1998, 1997 and 1996,
export sales from the United States were 12%, 11% and 47% of total sales,
respectively, representing sales to foreign subsidiary companies of United
States companies located primarily in Europe and Asia. 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 1996 were $16,814,000, a 31% decrease from fiscal 1995
sales. The primary reason for the decline in sales was the adverse effect of the
product rejections by Compaq in the third quarter of fiscal 1995. 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% of net sales,
respectively, with Nexar, a new customer, accounting for an additional 21%.
Fiscal 1998 sales were $4,581,000, a 78% increase over fiscal 1997 sales.
This increase was due almost entirely to shipments to Iomega, a new customer in
fiscal 1998. Net sales to Iomega were 65% and to Nexar, a new customer obtained
in fiscal 1997, an additional 15% of net sales. There were no sales to Compaq
or IBM.
21
<PAGE>
GROSS PROFIT. 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 $6,400,000, 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.
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.
Gross profit for fiscal 1998 was $249,000 compared to a gross loss of
$4,537,000 in fiscal 1997. The improved gross margin in fiscal 1998 over fiscal
1997 is due primarily to the reduction in carrying value of inventories in
fiscal 1997 in the amount of $4,325,000, which charge was included in cost of
goods sold. The Company achieved only a slight gross profit on increased sales
because of low overall gross margins and unabsorbed production overhead due to
excess plant capacity and inefficient production runs due to small monthly
orders.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 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 did not change
significantly from the prior year due principally to cost containment actions
and employee attrition in the United States, India and Sri Lanka.
Selling, general and administrative expenses were $2,246,000 in fiscal 1998
compared to $3,348,000 in fiscal 1997, or a 33% decrease. This decrease
resulted from several factors, the most significant of which includes a
restructure of the Company's marketing strategy that resulted in the use of
sales representatives and the elimination of salaried employees, and other cost
containment actions in fiscal 1998, as well as the non-recurrance of expenses
relating to the Recapitalization Plan in fiscal 1997.
RESEARCH AND DEVELOPMENT. 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.
22
<PAGE>
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.
Research and development expenses were $976,000 in fiscal 1998 compared to
$865,000 in fiscal 1997. The increase in these expenses was due to the
Company's research and product development facility in Scotland being fully
staffed for the first nine months of fiscal 1998. During the prior year, the
facility began staffing during the second fiscal quarter and did not become
fully operational until the final quarter of fiscal 1997. 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 1996 was $1,253,000, an
increase of 77% over fiscal 1995 due to the high interest charged for extended
terms by the India banks on the bill discounting agreement and the 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 26% increase is primarily due to the higher interest rates
being charged by the India banks on short-term debt that is currently
delinquent.
Interest expense in fiscal 1998 was $1,998,000. The 26% increase over the
prior year was due to interest accrued on the demand promissory note payable
under the Recapitalization Plan, entered into in March 1997, interest on other
related party financing needed to continue the operations of the Company, and
accounts receivable factoring at monthly interest rates ranging from 2.25% to
1.75%, plus administration fees ranging from 1% to .75%.
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 $4,200,000 of lost accounts receivable directly related
to the sales of the rejected units and $2,200,000 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 $3,000,000.
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.
OTHER INCOME. Other income of $224,000 in fiscal 1997 increased
approximately 22% over the prior year, due to product development fees and scrap
sales in fiscal 1997 offset in part by a decline in interest income on lower
restricted cash deposits required to secure letters of credit and letters of
guarantee.
For fiscal 1998, substantially all of the Company's other income resulted
from the sale of property and equipment, which had been recorded at estimated
fair value in fiscal 1997, as determined by applying Statement of Financial
Accounting Standards No. 121.
23
<PAGE>
NET LOSS. For fiscal 1996, 1997 and 1998 the Company's net loss was
$4,890,000, $12,627,000, and $3,700,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
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.
During fiscal 1998, the Company used cash of $4,194,000 in operating
activities compared to $2,461,000 of cash used in fiscal 1997. Unlike fiscal
1997, there were no substantial non-cash valuation reserves recorded for
inventories and property, plant and equipment. In addition, cash was consumed
by an increase in accounts receivable resulting from an increase in sales
volume.
INVESTING ACTIVITIES
In fiscal 1997, cash generated by investing activities was $795,000,
compared to $92,000 in cash used by investing in fiscal 1996. This increase in
cash was due to the decrease in restricted cash as a consequence of the
continuing decline in manufacturing and shipping activity in India, which
resulted in lower restricted cash deposits required to secure letters of credit
and letters of guarantee. As of March 31, 1997 there was virtually no activity
in India requiring deposits on letters of credit and letters of guarantee.
Purchases of property, plant and equipment were also severely curtailed.
In fiscal 1998, cash provided by investing activities was $319,000 compared
to $795,000 provided in fiscal 1997. The primary source of this cash in fiscal
1998 was from the sale of property and equipment.
FINANCING ACTIVITIES
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 $2,000,000 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.
Cash provided by financing activities for fiscal 1998 was $3,168,000
compared to $2,003,000 in fiscal 1997. This increase was due principally to
loans received from Tandon Associates, Inc., a related party, to provide the
Company with working capital and to the transfer of bank debt as a result of the
sale of the Company's subsidiary in Sri Lanka. During November and December
1997, the Company factored a total of $713,000 of its accounts receivable to
provide working capital. Subsequently, the borrowings were repaid and there was
no outstanding balance at March 31, 1998.
In summary, the Company has suffered a considerable decline in cash flow
over the last three years for the aforementioned reasons. At March 31, 1998,
the Company had negative working capital of $15,383,000 and a retained deficit
of $34,070,000. While current actions are being taken to implement a viable
operating plan to increase sales, renegotiate the terms of 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.
24
<PAGE>
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 proposed plan to reschedule a portion of the
short-term borrowings projected at September 30, 1999 into long-term debt
repayable over five years in quarterly installments commencing October 2000
or later. The proposed plan would also provide for the waiver by the banks
of the penal interest on the overdue amounts, which has been accruing at a
maximum interest rate of 26 percent. In addition, the plan would make
available new short-term credit facilities of approximately $1,700,000
(70,000,000 Indian rupees), which would be secured by accounts receivable and
inventories. Management is currently discussing the rehabilitation program
with the banks. Consequently, 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 $10,030,000.
Subsequent to the fiscal year ended March 31, 1998, the Company
continues to experience negative cash flow as a result of continuing losses
and sporadic ramp-ups of production in India. In order to obtain the
necessary cash to operate, the Company has a factoring agreement with a
United States bank at a monthly financing fee of 1.75% and an administration
fee applied to the total of factored accounts of .75%. Under the terms of
the agreement, the bank may purchase up to $1,333,333 in accounts receivable
from the Company in return for cash equal to 80% of the face value of the
purchased accounts receivable. At July 31, 1999, the Company had factored
accounts receivable invoices totaling $129,000.
YEAR 2000 COMPLIANCE
The Company has in place a plan to address Year 2000 readiness of its
internal computer systems and key suppliers. It is not anticipated that the
Company's products will affect its customers' Year 2000 compliance. The Year
2000 readiness team consists entirely of internal personnel, as the Company's
lack of resources does not permit the use of external consultants. The
team's activities are directed to ensure that there will be no material
adverse effects on the Company's business operations and that transactions
with customers and suppliers will not be materially interrupted by the advent
of Year 2000. While all the costs to assure Year 2000 compliance have not
been fully quantified, the Company estimates that these costs will
approximate $50,000. It is expected that some of these costs will be
financed, to the extent that suppliers offer financing arrangements, and the
balance will come either from cash from operations or accounts receivable
financing.
Currently, the Company is engaged in discussions with its suppliers of
accounting and telecommunications software regarding hardware and software
upgrades to ensure Year 2000 compliance in the United States. In India, a
preliminary assessment indicates that a significant number of personal
computers will need to be upgraded to allow for software upgrades. It is
expected that these upgrades will be fully implemented by September 1999.
While the Company believes its planning efforts are adequate to address
known Year 2000 concerns, there can be no assurance that all internal
systems, as well as those of third parties upon which the Company relies,
will be Year 2000 compliant on a timely basis and will not have a material
affect on the Company's operations, especially those located in a third-world
country.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included in Part IV of this report.
25
<PAGE>
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On October 5, 1998, the Company received the written resignation of
Arthur Andersen LLP, as its auditors, effective immediately.
For each of the fiscal years ended March 31, 1996 and March 31, 1997,
the accountant's report on the financial statements was qualified as to the
uncertainty of the Company's ability to continue as a going concern. This
uncertainty was based on (1) the Company's default on payments due lenders in
the amount of $8,306,000, (2) Indian Customs and Department of Revenue
Intelligence allegations and investigations that could lead to additional
duty and penalties against the Company's Indian subsidiary in an amount then
believed to be approximately $8,400,000 (since revised to approximately
$2,500,000) and possible penal action, (3) continuing significant losses from
operations, which resulted in a shareholder deficit of $14,168,000 at March
31, 1997 and (4) a lack of a viable source of financing, other than from a
related party.
Because of the resignation of the Company's former auditors, the Company
engaged Farber & Hass LLP as its new independent accountants. This
engagement for the audit of the financial statements for the fiscal year
ended March 31, 1998, was effective October 8, 1998.
For the same reasons referred to above, the accountant's report on the
Company's financial statement for the fiscal year ended March 31, 1998 was
qualified as to the uncertainty of the Company's ability to continue as a
going concern.
The Audit Committee of the Board of Directors of the Company has been
advised of the former accountant's resignation and has approved the
engagement of the new independent accountant, Farber & Hass LLP, on October
8, 1998.
During the Company's two most recent audited fiscal years ended March
31, 1997, and through October 5, 1998, there were no disagreements with
Arthur Andersen LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused it to make reference to the subject matter of the
disagreements in connection with its report.
26
<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, Secretary and Director
M.L. Tandon 59 Chairman of the board of directors of Ultra
Tek, the Company's manufacturing subsidiary
Norman Barkeley 68 Director* (resigned December 1997)
Harvey A. Marsh 60 Chief Financial Officer and Director
R.D. Middlebrook, Ph.D. 69 Director*
Robert Sherburne 78 Director*
Prakash Thanky 47 President (resigned November 1997)
</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 and Chairman of Ultra
Tek, a subsidiary of the Company, since October 1985. From June 1988 to
March 1995, M. L. Tandon was 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.
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 a
director. Effective December 31, 1997, Mr. Barkeley resigned as director of
the Company.
Harvey A. Marsh became Vice President, Chief Financial Officer and
director in September 1998. From October 1996 to April 1998, Mr. Marsh acted
as a financial consultant to the Company and other Tandon affiliated
companies and joined the Company as an employee in April 1998. From January
1993 to June 1996, Mr. Marsh was Vice President, Finance and Chief Financial
Officer of FACT Retirement Services. Mr. Marsh is also a director of Bender
Growth Fund.
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
27
<PAGE>
1991, Mr. Sherburne was the Chairman of the Board of Everest & Jennings
International and remained a director until December 1996.
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.
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, 1998.
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 Fiscal Salary Bonus Compensation Awards SARs Payouts Compensation
Positions Year (1)($) ($) (2)($) ($) (#) ($) ($)
--------- ---- ------ --- ------ --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J.L. Tandon 1998 198,000 0 25,676 0 --- 0 ---
President, Chief 1997 198,000 0 22,282 0 --- 0 ---
Executive Officer and 1996 198,000 0 22,269 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
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) 1998 118,200 0 0 0 --- 0 ---
President 1997 117,000 0 0 0 --- 0 ---
</TABLE>
(1) Includes compensation deferred at the officer's election. J.L. Tandon
has deferred compensation of $52,000 in fiscal 1998.
(2) Represents supplemental income bonus, automobile allowance, club dues
and payments made toward medical and group life insurance on behalf of
executive officers.
28
<PAGE>
(3) Messrs. Barton and Thomas resigned from the Company in July 1996.
(4) Mr. Thanky resigned from the Company in November 1997. His salary
includes vacation and salary continuation pay through December 31, 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.
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 (the "1994
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 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
29
<PAGE>
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 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, 1998, nor were there any unexercised stock options at March
31, 1998, held by any executive officer.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board for fiscal 1998 was comprised of
Messrs. Barkeley (until his resignation on December 31, 1997), 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.
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
1998.
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 administers the Company's incentive plans. The
Compensation Committee is composed of two 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 that 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
30
<PAGE>
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, 1998, 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.
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. Tandon'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 1998, 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, 1998
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 option 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
31
<PAGE>
options become exercisable in cumulative installments over a period of five
years, but the individual forfeits any installment that has not vested during
the period of his employment.
In light of the Company's financial performance during fiscal 1997 and
1998, 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 Plan was 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
R. D. Middlebrook, Ph.D.
Robert Sherburne
32
<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.
[GRAPH]
33
<PAGE>
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG GOLDEN SYSTEMS, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER MANUFACTURER INDEX
[GRAPH]
* $100 INVESTED ON 3/31/94 IN STOCK OR INDEX -
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING MARCH 31.
<PAGE>
Golden Sys Inc(GLDN)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
----------------------------------------
3/94 3/95 3/96 3/97 3/98 3/99
<S> <C> <C> <C> <C> <C> <C>
GOLDEN SYSTEMS, INC. 100 15 7 4 1 2
NASDAQ STOCK MARKET (U.S.) 100 111 151 168 254 342
NASDAQ COMPUTER MANUFACTURER 100 119 184 201 356 706
</TABLE>
<PAGE>
Begin: 3/31/94
FYE: 3/31/97
Golden Sys Inc(GLDN) End: 3/31/99
<TABLE>
<CAPTION>
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- --------- --------- --------- ---- ------------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3/31/94 Begin 5.250 19.05 19.048 100.00
3/31/95 Year End 0.813 19.05 19.048 15.49
3/31/96 Year End 0.375 19.05 19.048 7.14
3/31/97 Year End 0.188 19.05 19.048 3.57
3/31/98 Year End 0.031 19.05 19.048 0.59
3/31/99 End 0.125 19.05 19.048 2.38
</TABLE>
* Specified ending dates or ex-dividend dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
*** 'Begin Shares' based on $100 investment.
<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 July 31, 1999 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
D.L. Tandon (5)..................................... 141,666 2.7
M.L. Tandon (6)..................................... 0 0.0
S.L. Tandon (6)..................................... 141,666 2.7
Harvey A. Marsh..................................... 0 0
R.D. Middlebrook, Ph.D. (7)......................... 30,000 *
Robert Sherburne (7)................................ 24,000 *
All executive officers and directors as a group
(four persons) (8).................................. 2,605,998 49.2
*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, a Panamanian corporation 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) 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.
(6) 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.
(7) Includes 24,000 shares issuable upon exercise of stock options exercisable
within sixty days of July 31, 1999.
(8) For purposes of this calculation, all shares beneficially owned by any
member of the Tandon family are included in the amount beneficially owned.
34
<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.
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. In fiscal 1998, the Company determined that the
potential need for the Singapore presence was remote. Consequently, the
Company 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 $38,000.
In order to support the continuing operations of the Company, Tandon
Associates has loaned the Company $1,525,000, net of repayments, during
fiscal 1998. The March 31, 1998 loan balance, including interest at 1% per
month on the average daily balance, was $1,607,000. The total due Tandon
Associates, including accrued interest, at July 31, 1999 was $1,431,000.
During fiscal 1998, the Company also sold to Tandon Associates certain
leasehold improvements at its headquarters office for $40,000, which was the
estimated fair market value, and charged Tandon Associates $19,000 for shared
common expenses based on estimate usage at cost.
During the fourth quarter of fiscal 1998, the Company sold its
manufacturing subsidiary located in Sri Lanka to Cortex, Limited, a Tandon
family affiliate, which transaction resulted in a gain to the Company of
approximately $590,000. In connection with the sale, Cortex, Limited, agreed
to assume all of the bank debt in Sri Lanka, the facility lease, and all the
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 charged at $250 per
month, which approximates estimated usage and cost. For fiscal 1998, total
facilities cost was $53,000. During fiscal 1998, SDJ Partners agreed to
amend the lease agreement, which allowed the Company to reduce the amount of
leased space because of the contraction of its business.
During fiscal 1998, the Company sold, for $52,000, power supply units
and certain raw materials to Tantec Magnetics, a Tandon family affiliate,
which assembles and markets personal computers. The Company also purchased
finished personal computers from Tantec Magnetics at a cost of $5,000. Both
sales and purchases are believed to have been at fair market values at the
time of each transaction. Tantec Magnetics also purchased assets from the
Company's subsidiary in Scotland, at the time this subsidiary was being shut
down, for a total price of $18,000, which the Company believes approximates
fair market value.
In fiscal 1998, Ultra Tek, the Company's manufacturing subsidiary in
India, sold power supply units, certain raw materials, and used equipment
with an aggregate value of $85,000 to Advance Technology Devices, a Tandon
affiliate, also located in India. Payment for these sales was advanced by
Advance Technology Devices to Ultra Tek in fiscal 1997. The Company believes
that the sales price of the equipment approximates fair market value.
Eastern Peripherals Ltd., a Tandon family-affiliated company that had
shared common facilities with and has purchased power supplies from Ultra
Tek, owed Ultra Tek $96,000 at March 31, 1998. During fiscal 1998, Eastern
Peripherals Ltd. made cash payments to Ultra Tek aggregating $58,000 against
the receivable balance of $171,000 owing at March 31, 1997. The power
supplies sold were sold at fair market prices.
35
<PAGE>
During fiscal 1998, Ultra Tek charged Tancom Electronics, a Tandon
family-affiliated company, $40,000 for shared electricity and $67,000 for
certain raw materials on hand. In addition, Ultra Tek purchased for $35,000
used equipment from Tancom Electronics. Electric utilities are billed at
estimated usage and cost and the equipment was purchased by Ultra Tek at
estimated fair market value.
In order to obtain needed working capital, Ultra Tek borrowed $120,000 from
M.L. Tandon, during fiscal 1998. M.L. Tandon is a director, Chairman of the
Board and Managing Director of Ultra Tek. He is also the brother of J.L.
Tandon, Chairman of the Board, director and Chief Executive Officer of the
Company.
36
<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:
<TABLE>
<C><S>
(a) 1. Financial Statements:
Reports of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1997 and 1998:
Assets
Liabilities and Shareholders' Deficit
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 1998
Consolidated Statements of Shareholders' Equity for
each of the three years in the period ended March 31, 1998
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Reports of Independent Public Accountants on Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts for the three
fiscal years ended March 31, 1998
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, 1998.
(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
</TABLE>
37
<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 September 15,
1999.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jawahar L. Tandon Chairman of the Board of September 15, 1999
- --------------------------- Directors and
Jawahar L. Tandon Chief Executive Officer
(Principal Executive Officer)
/s/ Harvey A. Marsh Vice President, Chief Financial September 15, 1999
- --------------------------- Officer (Principal Financial
Harvey A. Marsh Officer) and Director
/s/ R. D. Middlebrook Director September 15, 1999
- ---------------------------
R.D. Middlebrook
/s/ Robert Sherburne Director September 15, 1999
- ---------------------------
Robert Sherburne
</TABLE>
38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <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.
- ----------------------------------
39
<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.
40
<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 its subsidiaries
as of March 31, 1998 and for the year then ended, and have issued our qualified
report thereon, qualified with respect to the Company's ability to continue as a
going concern, dated February 12, 1999. Our audit was made for the purpose of
forming an opinion on the statements taken as a whole. The supplemental
schedule is presented for purposes of complying with the Securities and Exchange
Commission's Rules and Regulations and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit 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/ Farber & Hass LLP
---------------------
Farber & Hass LLP
Oxnard, California
Febraury 12, 1999
41
<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, 1997 and for each of the two 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
42
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF YEAR INCOME DEDUCTIONS END OF YEAR
<S> <C> <C> <C> <C>
Inventory reserves
1998 $6,869 60 1,258 $5,671
1997 $5,808 4,325 3,264 $6,869
1996 $5,719 204 115 $5,808
</TABLE>
43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Reports of Independent Public Accountants F-2 - F-4
Consolidated Balance Sheets as of March 31, 1997 and 1998:
Assets F-5
Liabilities and Shareholders' Deficit F-6
Consolidated Statements of Operations for each of
the three years in the period ended March 31, 1998 F-7
Consolidated Statements of Shareholders' Equity (Deficit) for
each of the three years in the period ended March 31, 1998 F-8
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 1998 F-9 and F-10
Notes to Consolidated Financial Statements F-11 - F-24
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Golden Systems, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Golden Systems,
Inc. and its subsidiaries (the "Company") as of March 31, 1998 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of the Company at March
31, 1998 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated 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 consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
At March 31, 1998, the Company had outstanding amounts due to four separate
Indian lenders in the amount of $8,738,000, all of which are currently in
default. Of that amount, three of the banks have issued notices to the Company
demanding immediate repayment of $7,904,000. 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 its operations
and forcing it into liquidation (see Note 4). 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.
In fiscal 1995 and 1997, Ultra Tek came under investigation by the Indian custom
authorities and the Indian Department of Revenue Intelligence regarding alleged
improprieties in their inventories and in the import and export of certain
components. The government's allegations and investigations could lead to
additional duty and penalties being assessed against Ultra Tek in the amount of
$2.5 million at January 31, 1999. In addition, penal action which could be
taken under Indian law could result in possible fines up to approximately $17.3
million at January 31, 1999. The Company is contesting these allegations, but
currently, the matters are unresolved and the outcomes uncertain (see Note 11).
The Company has incurred significant losses from operations over the past three
years and has lost its two largest customers, which has significantly impacted
its revenues. At March 31, 1998, the Company had a shareholders' deficit of
$17.3 million. During fiscal 1999, the Company has continued to incur
significant losses and management has not successfully executed 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/Farber & Hass LLP
--------------------
Farber & Hass LLP
Oxnard, California
February 12, 1999
F-2
<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 Notes 4 and 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. The above governmental allegations and investigations could lead to
additional duty and penalties being assessed against Ultra Tek in the amount of
$2.5 million and penal action being initiated against Ultra Tek estimated at
$17.3 million. Penalties relating to the Indian Department of Revenue
Intelligence investigation, if any, have not yet been finalized. The Company is
contesting these allegations, but currently, the matters are unresolved and the
outcomes uncertain (see Note 11).
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
F-3
<PAGE>
successfully executed on its efforts to achieve profitable operations and
positive cash flows. Management does not yet have a definitive plan to
achieve profitable operations and positive cash flows, and 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-4
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997 AND 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $1,363 $ 79
Restricted cash balances 29 12
Accounts receivable, net of allowance of
$52 and $352 at March 31, 1997 and
1998, respectively 233 871
Inventories 1,272 790
Prepaid expenses and other current assets 338 110
------ ------
Total current assets 3,235 1,862
------ ------
PROPERTY, PLANT AND EQUIPMENT, at estimated realizable value, net
of accumulated depreciation and amortization 920 665
------ ------
$4,155 $2,527
====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997 AND 1998
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings $7,835 $ 7,904
Note payable under Recapitalization Plan 1,873 2,023
Notes payable 914 834
Accounts payable 3,407 3,638
Accrued liabilities 1,603 1,012
Net amounts due to related parties 92 1,834
--------- -----------
Total current liabilities 15,724 17,245
--------- -----------
COMMITMENTS AND CONTINGENCIES (Note 11)
MINORITY INTEREST 2,599 2,599
SHAREHOLDERS' DEFICIT:
Common stock, no par value:
Authorized--6,000 shares
Issued and outstanding--5,300
shares in 1997 and 1998 16,405 16,405
Retained deficit (30,370) (34,070)
Cumulative translation adjustments (203) 348
---------- -----------
(14,168) (17,317)
---------- -----------
$ 4,155 $ 2,527
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ -----------
<S> <C> <C> <C>
NET SALES $ 16,814 $ 2,568 $ 4,581
COST OF GOODS SOLD
Material, labor, overhead and direct cost 16,565 2,780 4,272
Inventory provisions 204 4,325 60
---------- ---------- ----------
16,769 7,105 4,332
---------- ---------- ----------
Gross profit (loss) 45 (4,537) 249
---------- ----------- ----------
OPERATING EXPENSES:
Selling, general and administrative 3,435 3,348 2,246
Research and development 430 865 976
Property, plant and equipment impairment loss - 2,495 -
---------- ---------- ----------
3,865 6,708 3,222
---------- ---------- ----------
Loss from operations (3,820) (11,245) (2,973)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (1,253) (1,585) (1,998)
Litigation settlement - 429 -
Foreign currency transaction gains (losses) - (452) 235
Gain on sales of subsidiary companies - - 752
Other income 184 224 285
---------- ---------- ----------
(1,069) (1,384) (726)
----------- ----------- -----------
Loss before provision
for income taxes (4,889) (12,629) (3,699)
PROVISION (BENEFIT) FOR INCOME TAXES 1 (2) 1
----------- ----------- -----------
NET LOSS $(4,890) $(12,627) $(3,700)
=========== =========== ===========
BASIC LOSS PER COMMON SHARE $ (1.10) $(2.84) $(.70)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING SHARES 4,450 4,452 5,300
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1996 , 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
SHARES COMMON RETAINED TRANSLATION
OUTSTANDING STOCK DEFICIT ADJUSTMENTS TOTAL
----------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
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)
Translation adjustments --- --- --- 551 551
Net Loss --- --- (3,700) --- (3,700)
-------- ------- -------- --------- ----------
BALANCE, March 31, 1998 5,300 $16,405 $(34,070) $ 348 $(17,317)
======== ======== ========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,890) $(12,627) $(3,700)
Adjustments to reconcile net loss
to net cash used in
operating activities:
Depreciation 525 452 100
Property, plant & equipment impairment loss - 2,495 -
Provision for losses on accounts
receivable 43 278 148
Provision for losses on inventories 204 4,325 60
Gain on disposition of property
and equipment - - (232)
Gain on disposition of subsidiaries - - (752)
Changes in operating assets and liabilities, excluding
effects of dispositions:
Decrease (increase) in:
Accounts receivable 2,161 838 (786)
Inventories 2,270 1,046 306
Prepaid expenses and other current assets 619 459 205
Income taxes receivable - 46 -
Increase (decrease) in:
Accounts payable (1,432) (189) 628
Accrued liabilities (961) 416 (171)
---------- ---------- -----------
Net cash used in operating activities (1,461) (2,461) (4,194)
---------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (343) (62) (51)
Proceeds from the sale of property and
equipment - - 354
Restricted cash 251 857 16
---------- ---------- -----------
Net cash provided by (used in)
investing activities (92) 795 319
---------- ---------- -----------
</TABLE>
F-9
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of repayments 519 (342) 1,398
Borrowings (repayments) under notes payable 154 (20) (118)
Change in related party balances 87 365 1,738
Note payable under Recapitalization Plan - 1,873 150
Issuance of Common Stock under Recapitalization Plan - 127 -
---------- ---------- ----------
Net cash provided by financing activities 760 2,003 3,168
---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (20) 342 (577)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (813) 679 (1,284)
CASH AND CASH EQUIVALENTS, beginning of year 1,497 684 1,363
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of year $684 $1,363 $ 79
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION, BACKGROUND, AND PRINCIPLES OF CONSOLIDATION
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of Golden Systems,
Inc. (GSI) and Fairplay Group, Inc. (Fairplay), collectively hereafter
referred to as "the Company".
The accompanying financial statements at March 31, 1998 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, 1998, the Company had outstanding amounts due to four separate
Indian lenders in the amount of $8,738,000, all of which are currently in
default. Of that amount, three banks have issued notices to the Company
demanding immediate repayment of $7,904,000. 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 $2.5 million and penal
action being initiated against Ultra Tek. In addition, penal action under
Indian law, which the Company believes is very unlikely, could result in
possible monetary fines of up to a maximum of $17.3 million. 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
four years; has lost its two main customers, which has significantly
impacted its revenues; and at March 31, 1998, had a shareholders' deficit
of $17.3 million. During fiscal 1999, 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, 1998, 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, all of which were shut
down during fiscal 1998.
F-11
<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" during the
second quarter of fiscal 1997.
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.
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, 1997 and
1998, 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.
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, through fiscal 1998, 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, 1997 and 1998 and are
included in the accounts receivable allowance.
F-12
<PAGE>
Sales to countries other than the United States approximated 47, 20 and 18
percent of the Company's revenues in fiscal years 1996, 1997 and 1998,
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, 1998.
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 1996, sales to two 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 approximately 19 and 36 percent, respectively, of the Company's
net sales. As of March 31, 1997, these customers accounted for approximately
85 percent of the Company's accounts receivable balance. In fiscal 1998,
sales to these customers were not material because they were replaced with
two new customers which accounted for approximately 15% and 65%,
respectively, of the Company's net sales. At March 31, 1998, the accounts
receivable balance to these newly acquired customers was approximately 93
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 computer peripheral OEMs as well as other personal computer 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,
1997 1998
--------- ---------
<S> <C> <C>
Raw materials $ 1,237 $ 584
Work-in-progress 30 78
Finished goods 5 128
--------- ---------
$ 1,272 $ 790
--------- ---------
--------- ---------
</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,
1997, are presented net of a total reserve of $6,869,000 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, 1998 are presented net of a reserve of
$5,671,000, which records the inventories at their estimated net realizable
values.
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
F-13
<PAGE>
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,
1997 1998
--------- ---------
<S> <C> <C>
Machinery and equipment $ 3,622 $2,369
Motor vehicles 121 37
Furniture and fixtures 738 607
Computer software 121 55
Leasehold improvements 384 256
--------- ---------
4,986 3,324
Accumulated
depreciation and amortization (1,571) (1,392)
Reserve for impairment loss (2,495) (1,267)
--------- ---------
$ 920 $665
--------- ---------
--------- ---------
</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 and reserve for impairment loss 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Based on borrowing rates currently available to the Company for bank loans
with similar terms and maturities, the fair value of the Company's long-term
debt approximates the carrying value. Furthermore, the carrying value of all
other financial instruments potentially subject to valuation risk
(principally consisting of cash and cash equivalents; accounts receivable and
accounts payable) also aproximates fair value.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was $800 in 1996, 1997 and 1998. Cash paid for
interest was approximately $1,190,000, $308,000 and $302,000 in 1996, 1997
and 1998, respectively.
During fiscal year 1996, the Company received property and equipment with a
cost of approximately $31,000 from related parties. This non-cash
transaction is excluded from the statement of cash flows.
NET LOSS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," that established standards for the
computation, presentation and disclosure of earnings per share ("EPS"),
replacing the presentation of Primary EPS with a presentation of Basic EPS.
It also requires dual presentation of Basic EPS and Diluted EPS on the face
of the income statement for entities with complex capital structures. Basic
EPS is based on the weighted average number of common shares outstanding
during the period, which totaled 5,300,000, 4,452,000 and 4,450,000 for 1998,
1997 and 1996, respectively. The Company did not present Diluted EPS since
the result was anti-dilutive.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Account Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", establishes standards for reporting and displaying
comprehensive income and its components in financial statements. The Company
will adopt the provision of SFAS No. 130 in fiscal year 1999, but does not
expect its impact on the consolidated financial statements to be significant.
F-14
<PAGE>
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.
4. SHORT-TERM BORROWINGS
GSI FACTORING AGREEMENT
The Company has 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 in fiscal 1998 and 80% as of
September 14, 1998, 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. 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, 1997 and 1998, $6,838,000 and
$7,437,000 of principal and accrued interest (246,853,000 and 295,461,000 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,
1997 and 1998, the normal rate of interest was 13 percent per annum, with
interest on overdue amounts increasing to a maximum of 26 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, 1997 and 1998, $512,000 and $467,000 (18,495,000 and 18,548,000 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, 1997
and 1998, the normal rate of interest was 13 percent per annum, with interest on
overdue amounts increasing to a maximum of 25 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, 1997, the amount due
under letters of credit issued by banks on behalf of the Company and included in
short-term borrowings amounted to approximately $42,000 (1,530,000 in Indian
rupees). At March 31, 1997, the rate of interest on the unpaid amount was 21
percent. At March 31, 1998, there was no amount due under letters of credit.
F-15
<PAGE>
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. At March
31, 1998 there were no letters of guarantee utilized against these facilities.
The above agreements and facilities were due for renewal at various dates and
amounts prior to March 31, 1998, 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 proposed plan to reschedule a
portion of the short-term borrowings at September 30, 1999 into long-term
debt repayable over five years in quarterly installments commencing October
2000 or later. The proposed plan would also provide for the waiver by the
banks of the penal interest on the overdue amounts, which has been accrued at
a maximum interest rate of 26 percent. In addition, the plan would make
available new short-term credit facilities of approximately $1.7 million
(70,000,000 in Indian rupees), which would be secured by accounts receivable
and inventories. Management is currently discussing the rehabilitation
program with the banks. Consequently, 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 of Ultra Tek for
the amount of approximately $10,030,000.
5. NOTES PAYABLE
In fiscal 1995, the Company entered into borrowing agreements with an Indian
lending institution (which are denominated in U. S. dollars) to finance the
purchase of certain property and equipment. At March 31, 1997 and 1998,
$914,000 and $834,000, 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
20.4 to 23.2 percent per annum. At March 31, 1997 and 1998, the normal rate
was 8.3 and 8.7 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.
6. 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>
1997 1998
---- ----
<S> <C> <C>
Net Loss:
As Reported......................................... $(12,627) $(3,700)
Pro Forma........................................... (12,646) (3,700)
Loss Per Common Share:
As Reported......................................... $ (2.84) $ (.70)
Pro Forma........................................... (2.84) (.70)
</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.
F-16
<PAGE>
A summary of the status of the Company's outstanding stock options at March
31, 1996, 1997 and 1998 and changes during the years then ended is presented
in the table and narrative below (shares are in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ------------------ ------------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
<C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........................... 188 $5.52 246 $3.10 124 $ 4.58
Granted.................................................... 136 .85 --- --- --- ---
Exercised.................................................. --- --- --- --- --- ---
Forfeited.................................................. (78) 5.02 (122) 1.61 (43) 4.38
---- ---- ----- ------ ---- ------
Outstanding at end of year................................. 246 $.3.10 124 $ 4.58 81 $ 4.69
--- ------ --- ------ -- ------
Exercisable at end of year................................. 30 $ 6.15 51 $ 5.46 59 $ 5.82
--- ------ --- ------ -- ------
Weighted average fair value of options granted............. $ .55 N/A 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, 1995 149,000 $ .50 to 8.40
Issued - -
Exercised - -
Redeemed - -
------- -------------
Balance, March 31, 1996, 1997 and 1998 149,000 $ .50 to 8.40
------- --------------
------- --------------
</TABLE>
No warrants were issued, exercised or redeemed in fiscal years 1997 and 1998.
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.
7. 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.
F-17
<PAGE>
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.
8. 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 valuation allowance decreased
$5,467,000 in 1998.
The components of the net deferred income tax asset at March 31, 1997 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Allowance for bad debts $ 21 $ 141
Vacation accrual 7 7
Net operating loss carryforwards 7,290 4,510
Inventory reserve 3,013 90
Warranty reserve 69 59
Book over tax depreciation - 111
Other accrual - 15
------- -------
10,400 4,933
Less: Valuation allowance (10,400) (4,933)
-------- --------
$ - $ -
------ ------
------ ------
</TABLE>
The provision for income taxes for the years ended March 31, 1996, 1997 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current - Federal $ - $ - $ -
- State 1 1 1
- Foreign - (3) -
---- ----- -----
$ 1 $ (2) $ 1
---- ----- -----
---- ----- -----
</TABLE>
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended March 31, 1996, 1997 and
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Income tax benefit
at statutory federal rate $(1,623) $(4,653) $(1,258)
State and local income taxes,
net of federal income tax effect 1 1 1
Tax benefits not recognized 1,623 4,653 1,258
Other items, net - (3) -
-------- -------- --------
$ 1 $ (2) $ 1
-------- -------- --------
-------- -------- --------
</TABLE>
In 1996, the pre-tax loss relating to U.S. operations was $2,027,000 and the
pre-tax loss relating to foreign operations was $2,862,000. In 1997, the
pre-tax losses relating to U.S. and foreign operations were $1,551,100 and
$12,147,000, respectively. In 1998, the pre-tax losses relating to U.S. and
foreign operations were $1,561,000 and $2,138,000, respectively.
F-18
<PAGE>
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, 1997 and 1998, 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, 1998 for federal and state
tax purposes are approximately $13.2 million and $5.2 million, respectively,
and begin expiring in fiscal years 2009 and 1999, respectively.
9. NET DUE (TO) FROM RELATED PARTIES
Amounts due (to) from related parties are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, March 31,
1997 1998
---------- ---------
<S> <C> <C>
Tandon Associates, Inc. $ --- $(1,607)
M. L. Tandon --- (111)
Eastern Peripherals Limited 171 96
Modular Electronics Private Ltd. (73) (66)
Tancom Electronics (96) (94)
Advance Technology Devices (113) (36)
Other, net 19 (16)
-------- ------
$ (92) $(1,834)
-------- -------
-------- -------
</TABLE>
10. 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 $25 ($0.00003 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, 1997 and 1998
as minority interest.
11. COMMITMENTS AND CONTINGENCIES
a) LEASES
GSI leases its corporate headquarters from a related party under a three
year operating lease which expires in December 1999. Ultra Tek leases
certain factory premises from the Indian Government under operating leases
which expire at various dates through October 2000. Future minimum
payments under these and other various operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31:
---------------------
<S> <C>
1999 $ 99
2000 86
2001 27
2002 -
2003 -
----
$212
----
----
</TABLE>
F-19
<PAGE>
Gross rental expense for the years ended March 31, 1996, 1997 and 1998 was
approximately $204,000, $214,000 and $222,000, respectively.
b) 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.
c) 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 $1,116,000 (47,447,000 in
Indian rupees) 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 $1,150,000 (48,885,000 in Indian rupees) on the goods
already sold into the DTA, and (c) take penal action against the Company
under the law. 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
$605,000 (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 should not be initiated against the Company, and (c) why a
penalty equal to the duty held to be leviable, $605,000 (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 $605,000 (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 $2,500,000 (106,474,000 in Indian rupees), using the Indian
rupee translation rate at January 31, 1999. Although the Company is
contesting the allegations of the authorities, the outcomes of these
matters are uncertain at this time. Accordingly, no additional provisions
for any losses that may ultimately result have been made in these financial
statements. In addition, penal action under Indian law, which the Company
believes is very unlikely, could result in possible monetary fines of up to
$17,335,000 at January 31, 1999.
12. 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, 1997 and 1998 for sales, purchases,
transfers, sharing of expenses, advances and borrowings are disclosed in Notes
10 and 11 above.
F-20
<PAGE>
The amount of loans, sales, purchases, transfers and sharing of expenses during
the years ended March 31, 1996, 1997 and 1998 with each party are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
ADVANCE TECHNOLOGY DEVICES
BEGINNING BALANCE $ (36) $ (39) (113)
Product sales - 1 21
Sale (purchase) of raw materials - (4) 17
Credits for sharing common expenses 14 3 7
Sale of assets - - 47
Translation adjustments to/(from) the Company 3 3 6
Cash transfers (to)/from the Company (20) (77) (21)
---------------------------------------------
ENDING BALANCE (39) (113) (36)
---------------------------------------------
EASTERN PERIPHERALS LTD.
BEGINNING BALANCE 519 423 171
Purchase of raw materials - (1) -
Charges for sharing common expenses (233) (16) (6)
Sale/(purchase) of assets 9 (7) -
Translation adjustments to/(from) the Company - (3) (11)
Cash transfers (to)/from the Company 128 (225) (58)
---------------------------------------------
ENDING BALANCE 423 171 96
---------------------------------------------
GOLDEN COMPUTER LTD.
BEGINNING BALANCE 3 1 -
Product sales - (1) 1
Cash transfers (to)/from the Company (2) - (14)
---------------------------------------------
ENDING BALANCE 1 - (13)
---------------------------------------------
MAAZDA TRAVEL
BEGINNING BALANCE (13) (10) (1)
Charges for travel agent services (81) (36) (23)
Cash transfers (to)/from the Company 84 45 23
---------------------------------------------
ENDING BALANCE (10) (1) (1)
---------------------------------------------
MODULAR ELECTRONICS PVT. LTD.
BEGINNING BALANCE (35) (29) (73)
Purchase of raw materials - - 7
Charges for sharing common expenses (3) - -
Credits for sharing common expenses 2 - -
Cash transfers (to)/from the Company 7 (44) -
---------------------------------------------
ENDING BALANCE (29) (73) (66)
---------------------------------------------
M. L. TANDON
BEGINNING BALANCE - - -
Unsecured loan - - (120)
Translation adjustments to/(from) the Company - - 9
---------------------------------------------
ENDING BALANCE - - (111)
---------------------------------------------
RADICAL CONSULTANCY SERVICES
BEGINNING BALANCE (1) - -
Translation adjustments to/(from) the Company 1 - -
--------------------------------------------
ENDING BALANCE - - -
--------------------------------------------
RELIABLE CONSULTANCY SERVICES PVT. LTD.
BEGINNING BALANCE (11) - (2)
Charges for sharing common expenses - (6) -
Credits for sharing common expenses 11 4 -
Translation adjustments (to)/from the Company - - (1)
---------------------------------------------
ENDING BALANCE - (2) (3)
---------------------------------------------
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
SACHAM ELECTRONICS SERVICES PVT. LTD.
BEGINNING BALANCE 11 10 10
Translation adjustments to/(from) the Company (1) - (1)
---------------------------------------------
ENDING BALANCE 10 10 9
---------------------------------------------
SDJ PARTNERS
BEGINNING BALANCE (10) - -
Rent & utilities (114) (113) (53)
Cash transfers (to)/from the Company 124 113 53
---------------------------------------------
ENDING BALANCE - - -
---------------------------------------------
ST HOLDING PVT. LTD.
BEGINNING BALANCE - - (4)
Charges for sharing common expenses - (4) -
---------------------------------------------
ENDING BALANCE - (4) (4)
---------------------------------------------
TANCOM ELECTRONICS
BEGINNING BALANCE (3) (49) (96)
Sale of raw materials - 8 67
Sale/(purchase) of assets - 6 (35)
Credits for sharing common expenses 90 89 40
Translation adjustments to/(from) the Company (4) 2 9
Cash transfers (to)/from the Company (132) (152) (79)
---------------------------------------------
ENDING BALANCE (49) (96) (94)
---------------------------------------------
TANDON ASSOCIATES, INC. - NOTE RECEIVABLE
BEGINNING BALANCE - - -
Secured loans - - (1,989)
Accrued interest on loan - - (82)
Cash transfers (to)/from the Company - - 464
---------------------------------------------
ENDING BALANCE - - (1,607)
---------------------------------------------
TANDON ASSOCIATES, INC.
BEGINNING BALANCE - (8) 22
Credits for outside services and expenditures 106 317 -
Credits for sharing common expenses 7 59 19
Credits for research and development 48 27 -
Sale of assets - - 40
Cash transfers (to)/from the Company (169) (373) (81)
---------------------------------------------
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) (5)
Charges (credits) for sharing common expenses - (2) 1
---------------------------------------------
ENDING BALANCE (3) (5) (4)
---------------------------------------------
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
TANTEC MAGNETICS
BEGINNING BALANCE - - (1)
Product sales 118 26 47
Purchase of computers - (18) (5)
Sale of raw of materials - - 5
Charges for sharing common expenses - (1) -
Credits for sharing common expenses 1 - -
Credits for outside services 95 37 -
Sale of assets - - 18
Cash transfers (to)/from the Company (214) (45) (64)
---------------------------------------------
ENDING BALANCE - (1) -
---------------------------------------------
TANDON MOTORS PRIVATE LTD.
BEGINNING BALANCE 1 - -
Cash transfers (to)/from the Company (1) - -
---------------------------------------------
ENDING BALANCE - - -
---------------------------------------------
TOTAL NET DUE TO RELATED PARTIES $ 273 $ (92) $ (1,834)
---------------------------------------------
---------------------------------------------
TANDON FAMILY
BEGINNING BALANCE - $ - $(1,873)
Note under Recapitalization Plan - (1,873) -
Interest on note - - (150)
---------------------------------------------
Total note payable under Recapitalization Plan - $(1,873) $(2,023)
---------------------------------------------
---------------------------------------------
</TABLE>
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. During fiscal 1998, Tandon Associates loaned the Company
$1,525,000, net of repayments, to support continuing operations. The loan,
which is secured by a factoring agreement, is at a monthly interest rate of 1%
on the average daily outstanding balance.
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 estimated usage and 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.
In addition, during fiscal 1998, the Company sold its manufacturing subsidiary
located in Sri Lanka to Cortex, Limited, a Tandon family affiliate, which
transaction resulted in a gain to the Company of approximately $590,000. In
connection with the sale, Cortex, Limited, agreed to assume all of the bank debt
in Sri Lanka, the facility lease, and all the obligations to employees. The
Company also entered into an agreement with an affiliated part of Tandon
Associates to sell its Singapore operation. The Company recorded a gain of
approximately $38,000 on this transaction.
13. 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, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
UNITED
1998 STATES EUROPE ASIA TOTAL
- ---- ------ ------ ---- -----
<S> <C> <C> <C> <C>
Sales originating from ................................................... $4,305 - 276 $4,581
Loss from operations ..................................................... $1,587 - 1,386 $2,973
Identifiable assets ...................................................... $1,068 - 1,458 $2,527
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
UNITED
1997 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
</TABLE>
The Company exported approximately 13 percent, 11 percent, and 47 percent, of
its total sales in the years ended 1998, 1997 and 1996, 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>
1998 Sales to unaffiliated customers...................... $ 3,751 468 86 - $ 4,305
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
</TABLE>
14. 401K PLAN
The Company maintains a 401K plan for the benefit of its domestic employees.
The Plan covers substantially all of these employees, subject to certain
participation requirements. Participants may contribute from 1% to 15% of
their eligible earnings, subject to certain restrictions. The Plan provides
that the Company may make additional contributions to the Plan but it is not
required to contribute on behalf of the participants. The Company did not
incur expenses related to this Plan during fiscal years 1996, 1997 and 1998.
15. SUBSEQUENT EVENT (UNAUDITED)
On March 11, 1999, a major customer announced the recall of approximately
60,000 power supply units manufactured and sold by the Company in fiscal
1999. The cost to the Company of the customer's decision to initiate a
recall cannot be estimated at this time. However, as of July 31, 1999 the
cost of the recall to the Company has been approximately $50,000.
F-24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998 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-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 79
<SECURITIES> 0
<RECEIVABLES> 871
<ALLOWANCES> 0
<INVENTORY> 790
<CURRENT-ASSETS> 1,862
<PP&E> 665
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,527
<CURRENT-LIABILITIES> 17,245
<BONDS> 0
0
0
<COMMON> 16,450
<OTHER-SE> (33,722)
<TOTAL-LIABILITY-AND-EQUITY> 2,527
<SALES> 4,581
<TOTAL-REVENUES> 4,581
<CGS> 4,332
<TOTAL-COSTS> 4,332
<OTHER-EXPENSES> 3,222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,998
<INCOME-PRETAX> (3,699)
<INCOME-TAX> 1
<INCOME-CONTINUING> (3,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,700)
<EPS-BASIC> (.70)
<EPS-DILUTED> (.70)
</TABLE>
