<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
GOLDEN SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4021568
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2125-C MADERA ROAD
SIMI VALLEY, CA 93065
(Address of principal executive offices)
(805) 582-4400
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES NO X
--- ---
AS OF SEPTEMBER 30, 1999 THERE WERE 5,299,998 SHARES OF NO PAR VALUE COMMON
STOCK OUTSTANDING.
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INDEX LISTING
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Page
Number
PART I
FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS.
Consolidated Balance Sheets as of June 30, 1998 (unaudited) and March 31, 1998. 1
Consolidated Statements of Operations (unaudited) for the three months
ended June 30, 1998 and June 30, 1997. 2
Consolidated Statements of Cash Flows (unaudited) for the three months
ended June 30, 1998 and June 30, 1997. 3
Notes To Consolidated Financial Statements (unaudited). 4-6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 7-9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 9
<CAPTION>
PART II
OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 10
<CAPTION>
SIGNATURES
SIGNATURES 11
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i
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Part I - Financial Information
Item 1. Financial Statements.
GOLDEN SYSTEMS, INC.
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
--------------- -----------------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $94 $79
Accounts receivable, net of allowances 641 871
Inventories 582 790
Prepaid expenses and other current assets 116 122
--------------- -----------------
Total current assets 1,433 1,862
--------------- -----------------
PROPERTY, PLANT AND EQUIPMENT,
at cost, net of accumulated depreciation 607 665
--------------- -----------------
$2,040 $2,527
=============== =================
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $7,731 $7,904
Accounts payable 3,473 3,638
Note payable under Recapitalization Plan 2,060 2,023
Net due to related parties 1,883 1,834
Notes payable 781 834
Accrued liabilities 1,046 1,012
--------------- -----------------
Total current liabilities 16,974 17,245
--------------- -----------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST 2,599 2,599
SHAREHOLDERS' EQUITY
Common Stock 16,405 16,405
Accumulated deficit (34,612) (34,070)
Cumulative translation adjustments 674 348
--------------- -----------------
Total shareholders' deficit (17,533) (17,317)
--------------- -----------------
$2,040 $2,527
=============== =================
</TABLE>
1
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GOLDEN SYSTEMS, INC.
Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
June 30, 1998 June 30, 1997
--------------- ---------------
<S> <C> <C>
NET SALES $777 $314
COST OF GOODS SOLD 536 497
--------------- ---------------
Gross profit (loss) 241 (183)
--------------- ---------------
OPERATING EXPENSES:
Selling, general and administration 311 623
Research and development 78 348
--------------- ---------------
389 971
--------------- ---------------
Operating loss (148) (1,154)
--------------- ---------------
OTHER INCOME (EXPENSE):
Interest expense (463) (436)
Foreign currency transaction gains (losses) (7) 4
Gain on sale of subsidiary company 61 ---
Other income (expense) 13 (18)
--------------- ---------------
(396) (450)
--------------- ---------------
Loss before provision for
income taxes (544) (1,604)
PROVISION FOR INCOME TAXES --- 1
--------------- ---------------
NET LOSS $(544) $(1,605)
=============== ===============
BASIC LOSS PER SHARE $(0.10) $(0.30)
=============== ===============
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING SHARES 5,300 5,300
=============== ===============
</TABLE>
2
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GOLDEN SYSTEMS, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
June 30, 1998 June 30, 1997
--------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(544) $(1,605)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization expense 10 59
Provision for losses on accounts receivable 40 10
Provision for losses on inventories 15 15
Loss on disposition of property and equipment 25
Decrease (increase) in:
Accounts receivable 190 30
Inventories 78 (240)
Prepaid expenses and other current assets (17) 45
Increase (decrease) in:
Accounts payable 26 (40)
Accrued liabilities 88 147
--------------- --------------
Net cash used in operating activities (114) (1,554)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (51) (16)
Proceeds from the sale of property and equipment --- 195
Restricted cash --- (4)
--------------- --------------
Net cash provided by (used in) investing activities (51) 175
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of repayments 337 209
Note payable under Recapitalization Plan 37 ---
Borrowings under notes payable --- 14
Net change in related party balances 69 (26)
--------------- --------------
Net cash provided by financing activities 443 197
--------------- --------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (263) (25)
--------------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 15 (1,207)
CASH & CASH EQUIVALENTS, beginning of period 79 1,363
=============== ==============
CASH & CASH EQUIVALENTS, end of period $94 $156
=============== ==============
</TABLE>
3
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GOLDEN SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. GENERAL
In management's opinion, all adjustments, which are necessary
for a fair presentation of financial condition and results of operations, are
reflected in the accompanying interim consolidated financial statements. All
such adjustments are of a normal recurring nature. All amounts are unaudited,
except the March 31, 1998 balance sheet. This report should be read in
conjunction with the audited consolidated financial statements, notes, and
disclosures presented in the Company's 1998 Annual Report on Form 10-K.
Footnotes and other disclosures which would substantially duplicate the
disclosures in the Company's audited financial statements for fiscal year 1998
contained in the Company's 1998 Annual Report on Form 10-K, have been omitted.
The interim financial information herein is not necessarily representative of
operations for a full year.
NOTE 2. RISKS AND BASIS OF PRESENTATION
Results of operations for the quarter ended June 30, 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 June 30, 1998, the Company had outstanding amounts due to four
separate Indian lenders in the amount of $8,512,000, all of which
are currently in default. Of that amount, three banks have issued
notices to the Company demanding immediate repayment of
$7,731,000. At September 30, 1999, the amount due to the banks was
approximately $9.9 million. 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 $2.4 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 $16.9 million. The
Company is contesting these allegations, but currently, the
matters are unresolved and the outcomes uncertain.
- The Company has incurred significant losses from operations over
the past four fiscal years and quarter ended June 30, 1998; has
lost its two main historical customers,
4
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which has significantly impacted its revenues; and at June 30,
1998, had a shareholders' deficit of $17.5 million. During fiscal
1999 and the six months ended September 30, 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 June 30, 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.
NOTE 3. INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or
market. Cost includes cost of material, freight and manufacturing overhead.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
------------- --------------
<S> <C> <C>
Raw materials $478 $584
Work-in-progress 78 78
Finished goods 26 128
-------------- ---------------
$582 $790
============== ===============
</TABLE>
NOTE 4. 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 (nine months) $ 75
2000 86
2001 27
2002 -
2003 -
----
$ 188
====
</TABLE>
5
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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 $1,087,000
(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 $1,120,000
(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 fiscal 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 at June 30, 1998. 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 $590,000 (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,
$590,000 (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
$590,000 (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 $2,440,000, using the Indian rupee translation rate at
September 30, 1999. Although the Company is contesting the allegations
of the authorities, the outcome of these matters is uncertain at this
time. Accordingly, no additional provisions for any losses that may
ultimately result have been made in these financial statements. In
addition, penal action under Indian law, which the Company believes is
very unlikely, could result in possible monetary fines of up to
$16,886,000 at September 30, 1999.
6
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GOLDEN SYSTEMS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Any forward looking statements made in this Form 10-Q report involve
risks and uncertainties. The Company's future financial results could differ
materially from those anticipated due to the Company's dependence on conditions
in the electronics industry, level of consumer demand for products containing
the Company's power supply components, competitive pricing pressures, technology
and product development risks and uncertainties, product performance, increasing
consolidation of customers and suppliers in the electronics industry, and other
factors beyond the Company's control.
RESULTS OF OPERATIONS
OVERVIEW
As has been previously reported, the Company's operations and cash flow
were significantly impacted by the product rejection that took place during the
third quarter of fiscal 1995. Those returns cost the Company $4.2 million in
uncollected accounts receivable as a result of the issuance of credits for the
rejected units and $2.2 million relating to other direct costs, as well as
additional costs for transportation, unutilized capacity, business interruption,
reorganization, inventory carrying costs, and interest on short-term borrowings.
In fiscal 1996 the Company implemented a program to overcome its cash
difficulties by reducing inventory, organizational restructuring, price
increases, volume growth and more favorable payment terms from the Company's
existing customers. While a number of elements of that program were successfully
implemented, the Company has not been able to generate anticipated amounts of
cash from inventory reduction and, to date, has been unsuccessful in its efforts
to resell any significant number of units of the reworked rejected product. In
addition, the Company has not been successful, to date, in significantly
building its sales volumes to its existing customers or to new customers. While
the Company has implemented a plan to transition its business focus to power
supplies for products that are less price sensitive and therefore provide a
greater opportunity to develop positive profit margins, it has not been
successful in doing so. There can be no assurance that the Company will have
sufficient resources to carry out its plan in the future, or even if the
resources are available, that the Company will be able to successfully develop
the necessary customer relationships and obtain the product contracts to allow
it to continue to operate its business. 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 it's fundamental structure.
In summary, the Company suffered a considerable decline in cash flow
during the four fiscal years ended March 31, 1998 and during the quarter ended
June 30, 1998. At June 30, 1998, the Company had negative working capital of
$15,541,000 and an
7
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accumulated deficit of $34,612,000. Subsequent to June 30, 1998, the Company
continues to experience negative cash flow as a result of continuing losses and
working capital required to ramp-up production in India. While current action is
being taken to develop a viable operating plan to increase sales and renegotiate
the terms of certain short-term obligations with the Indian banks, there can be
no assurance that any of these actions will be successfully completed.
FIRST QUARTER OF FISCAL YEAR 1999
Sales for the three months ended June 30, 1998 were $777,000 compared
to $314,000 for the same quarter in the prior year. This increase in sales of
147% is due principally to the Company obtaining two new customers that it did
not have in the comparable quarter.
Gross profit on first quarter sales was $241,000 compared to a gross
loss of $183,000 for the first quarter in fiscal year 1998. This increase in
gross margin is due principally to the increase in sales offset in part by the
major decline in manufacturing capacity utilization which has resulted in
significant unabsorbed indirect manufacturing overhead and inefficient
production runs due to small monthly orders.
Selling, general and administrative expenses for the first quarter of
fiscal year 1999 were $311,000 compared to $623,000 or a decline of 50%. This
decrease is due to the Company's continuing actions to reduce costs, the most
significant of which was the decision to restructure the Company's marketing
strategy that resulted in the use of sales representatives and the elimination
of salaried employees.
Research and development expenses for the current quarter were $78,000
as compared to $348,000 for the first quarter of fiscal year 1998. This
significant decrease resulted from the Company's decision during the third
quarter of fiscal 1998 to shut down its product research and development
facility in Scotland and relocate the research and product engineering to the
United States at a much reduced level.
The gain on sale of subsidiary company of $61,000 represents the
recovery of an account receivable by Ultra Tek, the Company's manufacturing
subsidiary in India. At the time the Sri Lanka company was sold in the fourth
quarter of fiscal 1998, the receivable resulting from the sale of equipment was
thought to be uncollectible and consequently written off in computing the net
gain on sale of the Sri Lanka subsidiary. During the first quarter of fiscal
1999, the new owner of the Sri Lanka company returned the equipment to Ultra Tek
in full satisfaction of its obligation.
Net loss for the first quarter ended June 30, 1998 was $544,000
compared to a net loss of $1,605,000 for the same period in the prior year. The
significant reasons for the decreased loss are set forth in the foregoing
discussion.
8
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LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
During the three months ended June 30, 1998 the Company used $114,000
in cash in operating activities. The major use of this cash is due to the net
loss from operations offset in part by a decrease in accounts receivable and
inventories, and an increase in accounts payable and accrued liabilities.
INVESTING ACTIVITIES
Cash used in investing activities during the first quarter of fiscal
year 1999 was $51,000 resulting from the purchase of equipment.
FINANCING ACTIVITIES
Cash provided in the first quarter of fiscal year 1999 from financing
activities aggregated $443,000. The primary factor contributing to this amount
relates to a net increase in borrowings totaling $374,000 resulting from the
accrual of interest on outstanding debt. Additionally, there was a net increase
of $69,000 in the related party account payable balances.
For the quarter ended June 30, 1998, the Company provided $15,000 in
cash, increasing the $79,000 cash balance at the beginning of the period to
$94,000 at June 30, 1998. At September 30, 1999 the Company had a cash balance
of $112,000. Outside of related party financing, the Company has identified no
viable source of financing. While current actions are being taken to implement a
viable operating plan to increase sales, renegotiate the terms of certain
short-term obligations with three Indian banks and raise additional capital,
there can be no assurance that any of these actions will be successfully
completed.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Inapplicable.
9
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PART II - OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
At June 30, 1998, the Company had outstanding amounts due to
four separate Indian lenders in the amount of $8,512,000, all
of which are currently in default because of nonpayment of
principal. Of that amount, three banks have issued notices to
the Company demanding immediate repayment of $7,731,000. At
September 30, 1999, the amount due to the banks was
approximately $9.9 million. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit 27. Financial Data Sheet
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the
three month period ended June 30, 1998.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GOLDEN SYSTEMS, INC.
By: /s/ Jawahar L. Tandon
-------------------------------------------
Jawahar L. Tandon
CHIEF EXECUTIVE OFFICER
(DULY AUTHORIZED OFFICER OF THE REGISTRANT)
By: /s/ Harvey A. Mars
-------------------------------------------
Harvey A. Marsh
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER OF THE REGISTRANT)
Date: NOVEMBER 16, 1999
-------------------------------------------
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 94
<SECURITIES> 0
<RECEIVABLES> 641
<ALLOWANCES> 0
<INVENTORY> 582
<CURRENT-ASSETS> 1,433
<PP&E> 607
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,040
<CURRENT-LIABILITIES> 16,974
<BONDS> 0
0
0
<COMMON> 16,405
<OTHER-SE> (33,938)
<TOTAL-LIABILITY-AND-EQUITY> 2,040
<SALES> 777
<TOTAL-REVENUES> 777
<CGS> 536
<TOTAL-COSTS> 536
<OTHER-EXPENSES> 389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 463
<INCOME-PRETAX> (544)
<INCOME-TAX> 0
<INCOME-CONTINUING> (544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (544)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
