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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, 2000
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. | |
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price at September 30, 2000, was
approximately $175,000. The number of shares outstanding of the registrant's
Common Stock at September 30, 2000 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, 2000
Page
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PART I
Item 1. Business........................................................... 3
Item 2. Properties......................................................... 15
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 16
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................................ 16
Item 6. Selected Financial Data............................................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 17
Item 8. Financial Statements and Supplementary Data........................ 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................. 23
PART III
Item 10. Directors and Executive Officers of the Registrant................. 24
Item 11. Executive Compensation............................................. 25
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 30
Item 13. Certain Relationships and Related Transactions..................... 31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 32
Signatures......................................................... 34
Index to Consolidated Financial Statements........................ F-1
Financial Statements and Supplementary Data....................... F-1
Reports of Independent Public Accountants................ F-2 and F-23
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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, 1999 and ending March 31, 2000 is referred to herein as
"fiscal 2000" or "2000").
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. Ultra Tek has changed
its name to Cortech Systems (India) Ltd. and a new certificate of incorporation
was issued on June 6, 2000.
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. Since
fiscal 1997, the Company's primary customer has been Iomega Corporation
("Iomega"). However, since December 1999, the Company has not received any new
orders from 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 1999, the Company's manufacturing operations were located in a foreign
export processing zone in Mumbai (formerly Bombay), India. Manufacturing in two
other facilities located in Chennai (formerly Madras), India and Sri Lanka were
discontinued in fiscal 1996 and fiscal 1998 as part of the Company's
restructuring and cost reduction efforts. During fiscal 1997, the Company
relocated its product design and development engineering, along with its
self-certifying product safety laboratory, to
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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 Chennai, India, staff and
cost reductions in the Simi Valley corporate offices, and cost reductions in the
England and Singapore sales offices. 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.
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
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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.
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. 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, together with a commitment from the
Tandon family to obtain a standstill arrangement with Ultra Tek's Indian bank
lenders whereby such banks would agree not to demand payment of any interest or
principal from the Company or Ultra Tek, or declare a default despite the
Company's failure to comply with its debt covenants, for a period of not less
than one year. The Company expected that the standstill arrangement would give
it enough time to demonstrate its viability as an ongoing business so that it
could negotiate a reasonable payment schedule with the Indian banks, rather than
having the banks foreclose on Ultra Tek's assets. The Recapitalization Plan did
not require that a formal standstill agreement be reached with the Indian Banks.
Instead, it required 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.
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
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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. 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 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 the fiscal 1999 annual report on Form
10-K. The completion of the 2000 fiscal year audit was delayed because of the
on-going negotiations to restructure the Company's debts with the Indian banks.
Because of these discussions, the Indian statutory audit and a special fixed
asset audit was given priority over the audit using Generally Accepted
Accounting Principles. A further delay was encountered with the Indian auditing
firm as a result of the need to present their report and audited financial
statements of Ultra Tek in this fiscal 2000 annual report on Form 10-K with the
Commission. This audit was not completed until November 28, 2000. 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 2000 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. The balance owing under that note as of March 31, 2000, was $2,322,000,
including accrued interest. Further, as of that date, the Company had borrowed,
net of repayments, an additional $2,363,000 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 September 30, 2000, the outstanding balance, including accrued
interest, due to the Tandon family was approximately $2,700,000, in addition to
$2,435,000 owing on the note payable under the Recapitalization Plan. All
additional loaned amounts have either been under the terms of a factoring
agreement at a monthly interest rate of 1% on the average outstanding daily
balance, or been under the terms of unsecured loans, payable on demand at an
interest rate of 15% per annum, commencing April 1, 2000.
In the third quarter of fiscal 1998, the Company 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. Also, Prakash Thanky resigned and J. L. Tandon assumed the title of
President. In
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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. In addition, the Company commenced discussions
with its Indian banks regarding a financial rehabilitation plan pursuant to
guidelines established by the Board for Industrial and Financial Reconstruction
("BIFR"), which is an Indian authority that adjudicates all matters of
financially distressed companies.
The BIFR appointed an Operating Agency ("OA") to examine the Company's
viability and prepare a viability study report. Accordingly, the Company
prepared a draft rehabilitation proposal, which was submitted to the OA. The OA
reviewed the proposal and forwarded the same to the BIFR along with the minutes
of a joint meeting convened by the OA in March 1999. Based on the minutes of the
joint meeting, the BIFR prepared its Draft Rehabilitation Scheme and advised all
concerned, inviting suggestions/objections to the scheme, which envisaged
restructuring of existing debts. The BIFR held a hearing on August 16, 1999 and,
after hearing all interested parties, advised the Company and the banks to
discuss further and modify the Draft Scheme to take into account the various
points made at the hearing. The BIFR also instructed the OA to conduct joint
meetings with the banks and the Company and to forward a modified scheme.
Accordingly, the Company made revisions in the Draft Scheme to the extent that,
no further funding would be required from the banks and there would be no
dilution of the existing security available to the consortium banks. On October
5, 1999, the OA held a joint meeting of consortium member banks and the Company
to discuss the revised proposal and forwarded minutes of the joint meeting to
BIFR, indicating that no consensus had been arrived at on the proposal submitted
by the Company. During a hearing on May 19, 2000, before the BIFR, the bench
observed that no acceptable revival proposal was in sight and directed OA to
initiate necessary steps towards change of management. The bench also directed
that the Company, being the existing promoter, can also submit their proposal
based on a One Time Settlement (OTS) acceptable to the banks and a third party
lending institution. The Company is in the process of submitting the OTS
proposal. The Company is hopeful of a favorable response in this matter. As of
September 30, 2000, the debt to the Indian lenders amounted to approximately
$10,737,000.
During February 1999, a major customer notified the Company that the
plastic housing on approximately 150,000 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
and in the hands of consumers. Through September 30, 2000, the cost of the
recall to the Company has been approximately $50,000.
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.
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.
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
1999, the Company maintained its manufacturing facility in Mumbai, India.
India's large population and high unemployment rate enable the Company to employ
relatively well-educated workers at low
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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
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Ultra Tek currently manufactures all of its power supplies in a leased
facility located in the Santa Cruz Electronics Export Processing Zone ("SEEPZ")
in Mumbai, India. SEEPZ was established in Mumbai 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.
The Company believes that the Indian government will continue to support these
export processing zones.
SEEPZ is 100 acres in area and is located in a northern suburb of Mumbai.
It is less than five miles away from both Mumbai'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.
Under Indian regulations relating to SEEPZ, businesses in SEEPZ are required to
export a substantial part of production.
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.
STRATEGY
Since fiscal 1996, the Company's strategy has been continued cost control
and cash conservation as it seeks to rebuild its manufacturing operations. New
credit lines and other sources of working capital
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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 manufacturers of computer peripheral
equipment and other electronics products where the Company believes the margins
of profit are higher. Manufacturers of these products typically require lower
volumes but are not subject to the commodity price pressure that exists in the
personal computer market. The Company believes that, with improved production
management, higher margins can be obtained on shorter production runs because
these circumstances lower the portion of the customer's price that is
represented by the components in the product units. The Company's lower labor
and engineering costs should thus provide an opportunity to offer competitive
prices while retaining enough margin to allow the Company to generate positive
cash flow. Achieving positive cash flow from operations would 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.
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 September 30, 2000, 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 economic crisis that began affecting some countries in Asia in 1997
was helpful to some of the Company's competitors and harmful to some of its
customers. It also disrupted 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.
For fiscal 1999, sales to this customer were approximately 17% less than sales
for fiscal 1998, and since December 1999 through September 30, 2000, no new
orders have been received.
POWER SUPPLIES
Manufacturers of certain types of electronic equipment do not design their
products for use with alternating current such as that provided by an electrical
outlet. Instead, these products require the use of a power supply to convert the
alternating current to a direct current of appropriate voltage. Power supplies
are either linear or switching. Linear power supplies are relatively simple
devices having low electromagnetic interference and low output ripple, but tend
to be large and heavy because the necessary voltage conversion transformers must
operate at below the frequency (50 or 60 Hz) of the alternating input current.
The scientific and engineering communities use linear power supplies in
technical instrumentation where output regulation is extremely important and
size and efficiency are of less importance. Linear power supplies also tend to
produce a great amount of heat, making them undesirable for many industrial and
consumer applications. The Company sells an insignificant number of linear power
supplies.
Switching power supplies are more complex devices than linear power
supplies and produce greater power in relation to their physical size, described
as greater "power density". In a switching power supply, alternating current is
first converted to direct current by diodes, and is then reconverted to much
higher frequency alternating current before being passed through the voltage
conversion transformers, which are therefore much smaller and permit greater
power densities. A switching power supply typically consists of a printed
circuit board with the appropriate electronic components, an on/off switch, and
leads or cables to send power to the electronic equipment. Switching power
supplies are much more efficient and therefore produce less heat than equally
powerful linear power supplies, making them preferable for a wide array of
applications. The Company manufactures three types of switching power supply
products--closed frame, open frame and A/C adapters.
CLOSED FRAME. Closed frame power supplies have a case enclosing the power
supply components and are used in product applications where end users may need
access to the interior of the product and in products requiring greater power
than can safely be provided by open frame power supplies. Encasing the power
supply minimizes the risk of injury to end users from the high voltage
components of the power
9
<PAGE>
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 10% of the Company's sales in fiscal 1999 and
approximately 3% in fiscal 2000.
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 17% of the Company's sales in
fiscal 1999 and approximately 31% in fiscal 2000.
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 72% of
the Company's sales in fiscal 1999 and approximately 65% in fiscal 2000.
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 1% of the Company's sales in fiscal 1999 and 2000.
MANUFACTURING
The manufacture of power supplies is labor intensive and will probably
remain so in the near future. It necessarily involves relatively large, heavy,
or irregularly shaped items such as transformers, heat sinks and high voltage
capacitors. Additionally, the manufacture of transformers involves winding wire
in complex sequences, involving four or more winding and insulating steps. For
this reason, the Company has chosen to manufacture its products in India. The
Company believes that the work force there is inexpensive and relatively
well-educated. Moreover, because the Company's management team has extensive
experience in manufacturing computer components in India, the Company believes
that it is well positioned to benefit from the advantages India provides. That
being said, however, the largest component of the production cost of a power
supply is the materials that go into each unit. The Company's financial
condition has made advantageous relationships with the Company's vendors
unavailable, which has decreased the Company's ability to produce low-priced
products.
The Company uses its low-cost labor to manufacture magnetics, to configure
sheet metal, and to mold plastic components, which enables the Company to
respond quickly to design changes and reduces the risk of shipping delays. Other
purchased parts and raw materials are normally readily available and are
supplied to the Company under normal circumstances by various vendors, each of
which must be approved by the Company's OEM customers. Many of the Company's
purchased components are supplied by manufacturers located in the United States,
Japan and Taiwan.
Through fiscal 1996, the Company saw a continuation of price increases and
a tightening of supply for purchased parts (components) and other raw material
due to a steep growth in world-wide demand for personal computers and other
consumer electronics products, as well as the continued strength of the Japanese
yen relative to the U.S. dollar. The Company was more severely impacted by this
occurrence than its competitors due to its financial condition and extended
deferral of payments to its vendors. This unfavorable situation, with its
vendors in an already tight market, caused the Company to pay premium costs and
to receive poor delivery schedules. The overall effect of these circumstances
further reduced the Company's gross margins in an already low margin OEM product
and adversely affected the Company's ability to meet its committed delivery
schedules to its customers.
10
<PAGE>
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. Since fiscal 1997, 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. The Company's limited resources did not allow it to react
promptly to those changes, which caused a significant slowdown in sales during
the final quarter of fiscal 1998. During fiscal 1999 and 2000, sales remained
soft. However, the Company believes that there is opportunity in the marketplace
to obtain orders from newly acquired customers, that offer acceptable margins.
Because of an evolving market and the Company's lack of capital resources, there
is no assurance that sales volume can be built up to levels that would provide
the Company with positive cash flow.
PRODUCT DESIGN AND DEVELOPMENT
In fiscal 2000, the Company maintained engineering departments in Simi
Valley, California and Mumbai, India. The California engineering department is
principally responsible for the design development of the Company's products,
while the Mumbai department is principally responsible for production and
manufacturing engineering of the Company's products. The Company's product
design development team in California work closely with the OEMs to design
products that meet each OEM's specifications for power, price, size, and
quality. Typically such a design development will start with one of the
Company's standard power supplies, which will then be modified to meet the OEM's
requirements. Prototypes of the OEM's product are often sent to the Company so
that the Company may test the effectiveness of its proposed power supply design
Concurrently with the power supply design, the Company's engineers in
Mumbai 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
Underwriters Laboratories and Nemko, which facilitates the approval process by
all these safety agencies, thus reducing the typical approval time required by
four to six weeks. The Company's self-certification laboratory, located 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, computer peripheral devices and other electronic
equipment 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.
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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 widespread 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 computers,
peripherals, and other electronic equipment primarily through its U.S.-based
sales force and manufacturing representatives and distributors with an
established network of contacts in the electronics 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's strategy for marketing and sales during fiscal 2000 was, and
continues to be, directed at lower-volume OEM manufacturers that require more
engineering support and smaller product volumes, but offer significantly higher
prices and attractive gross margins. At present, the Company has a limited
number of customers that fit this profile and there can be no assurance that it
will be able to obtain a sufficient number of this type of customer 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 small portion of its products
through distributors. Since fiscal 1998, the Company has retained a contract
sales representative, entered into private label agreements, and engaged
manufacturing sales representatives and distributors. As of September 30, 2000,
sales resulting from these arrangements accounted for approximately 63% of the
Company's sales volume.
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 in fiscal 1997. 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.
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<PAGE>
The Company's primary competitors in the OEM power supply market include
Power-One, Artysen Technology, Skynet and Astec America, Inc. These competitors
also 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.
BACKLOG
Although the Company's OEM customers provide estimated annual power supply
requirements, the Company usually purchases supplies and manufactures its
products only against firm orders. Arrangements between the Company and its OEM
customers typically provide that the customer must furnish the Company with a
purchase order for the customer's power supply requirements for a three-month
period. The customer must purchase 100% of the power supplies ordered for
delivery within one month of the date of the purchase order. The customer may
increase or decrease the number of power supplies estimated to be purchased in
the second and third months from the date of the purchase order by no more than
20% and 30%, respectively. The Company's ability to enforce these provisions,
however, is limited by the good faith and the market power of the customer. The
Company's non-OEM customer orders also generally provide for delivery within a
period of three months or less. Therefore, the Company operates without a
significant backlog, relying primarily on monthly purchase orders. At September
30, 2000, firm backlog was estimated at approximately $2.3 million. Iomega, the
Company's primary customer since fiscal 1997, had no orders in backlog at
September 30, 2000, and has not provided the Company with any new orders since
December 1999.
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patent rights are not significant in the power
supply industry. Generally the industry's customer base is more responsive to
suppliers that promptly meet its changing needs than to those that offer
proprietary technology.
WARRANTIES
The Company generally provides its customers with a one-year warranty on
its power supplies and, through the end of fiscal 1999, had not experienced any
significant warranty claims, except for the following event. 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. As of
September 30, 2000, 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. The Company ordinarily repairs or replaces defective
goods.
EMPLOYEES
At March 31, 2000, the Company employed 14 people in its U.S. operations,
including three in engineering and operations, and 11 in administration and
finance. Approximately 105 people were employed in India, including 71 in
manufacturing and planning, 19 in design engineering, and 15 in administration.
There were no part-time employees. The Company also contracts for the services
of workers through independent agencies in India. At the end of fiscal 2000,
there were 318 agency workers who were engaged primarily in manufacturing and
planning.
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As of September 30, 2000, full-time employees in the United States and
India were 14 and 102, 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
four years. It lost its two largest historical customers in fiscal 1996 and
1997, and has been unsuccessful in rebuilding its base of customer
relationships. In addition to the promissory note of $2,435,000 (including
accrued interest) outstanding under the terms of the Recapitalization Plan, the
Company has additional loan balances of approximately $2,700,000, including
accrued interest, with the Tandon family, as of September 30, 2000. The only
unrelated party financing available to the Company has been a receivables
factoring arrangement at unfavorable rates. The Company has been unsuccessful in
its efforts over the last four fiscal years to reestablish its business at
levels approaching financial breakeven or approaching positive cash flow. At
March 31, 2000, the Company had a shareholders' deficit of $18,411,000. 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 over
the last several years have seriously disrupted the Company's ability to deal
with its vendors and its customers on an advantageous basis. These events have
had an 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, tensions
between India and Pakistan, or economic uncertainties affecting Japan, Korea and
other Asian nations, 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 September 30, 2000, the Company owed its Indian lenders approximately
$10,737,000. 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 guarantee 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.
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Affiliate Control
-----------------
As of September 30, 2000, the Tandon family beneficially owned
approximately 48% of the 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 Common Stock.
Short Product Life Cycles
-------------------------
The market for products made by the Company's OEM customers is
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions. Products produced by the Company's OEM
customers typically have a life cycle of twelve months to twenty-four months.
Changes in demand for electronic products, or other negative factors affecting
the electronics industry in general, or any of the Company's OEM customers in
particular, 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 rents on a month-to-month basis its 7,000 square foot
California facility for $4,750 per month, including utilities, from SDJ
Partners, a related entity. A previous lease was renewed on January 1, 1997,
amended July 1, 1997 and expired 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 a five-year lease, which expired on March 31, 2000.
The Indian government is currently formalizing the renewal lease. Monthly rent
for Ultra Tek's SEEPZ facilities aggregates approximately $3,300.
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 $1,032,000 (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 $1,063,000 (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 $559,000 (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, $559,000 (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
15
<PAGE>
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 $559,000 (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 $2,316,000 (106,474,000 Indian rupees), using the Indian rupee
translation rate at September 30, 2000. The Company is contesting 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 $16,023,000 at September 30,
2000.
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, 2000.
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 "CRTSE". On March 31, 2000, the closing bid price for the Company's
Common Stock was $.07. 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.
Fiscal Quarter High Low
-------------- ---- ---
2000 fourth quarter $0.200 $0.010
2000 Third quarter 0.010 0.010
2000 Second quarter 0.050 0.031
2000 First quarter 0.033 0.033
Fiscal Quarter High Low
-------------- ---- ---
1999 Fourth quarter $0.109 $0.047
1999 Third quarter N/A 0.016
1999 Second quarter 0.016 0.016
1999 First quarter 0.031 0.016
The approximate number of holders of record of the Company's Common Stock
on September 30, 2000 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.
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ITEM 6 SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended March 31,
1996 1997 1998 1999 2000
---------------------------------------------------------------------
SUMMARY OF OPERATIONS: (in thousands except share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 16,814 $ 2,568 $ 4,581 $ 3,935 $ 4,680
Net income (loss) (4,890) (12,627) (3,700) 113 (1,969)
Net income (loss) per share (1.10) (2.84) (.70) .02 (.37)
As of March 31,
1996 1997 1998 1999 2000
---------------------------------------------------------------------
BALANCE SHEET DATA: (in thousands)
Working capital $ (2,282) $ (12,489) $ (15,383) $ (14,766) $ (16,358)
Total assets 14,483 4,155 2,527 2,048 1,660
Long-term debt 934 -- -- -- --
Minority interest 2,599 2,599 2,599 2,599 2,599
Total shareholders' deficit (2,010) (14,168) (17,317) (16,737) (18,411)
</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 2000, was
unsuccessful in its efforts to resell the reworked rejected product. In
addition, the Company has not yet been successful in significantly building its
sales volumes to its existing customers or to new customers. While the Company
has implemented a
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<PAGE>
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. Based
on the Company's product mix, production capacity and fixed production costs for
the six months ended September 30, 2000, it is estimated that the Company will
need to achieve approximately $6 million in annual net sales to achieve a
break-even from operations (before interest expense and other income/expense).
In fiscal 1997, the Tandon family invested $2,000,000 as part of the
Recapitalization Plan. As of March 31, 2000, the Company had borrowed, net of
repayments, an additional $2,263,000 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 September 30, 2000, the outstanding balance, including accrued
interest, due the Tandon family was approximately $2,700,000, exclusive of the
$2,435,000 demand promissory note payable and accrued interest 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 2000 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:
o At March 31, 2000, the Company had outstanding amounts due to four
separate Indian lenders in the amount of $10,629,000, all of which are
currently in default. Of that amount, three banks have issued notices
to the Company demanding immediate repayment of $9,465,000. At
September 30, 2000, the amounts due to the four separate Indian
lenders was approximately $10,737,000, including accrued interest. The
Company has insufficient funds available to repay the lenders. Because
the Indian debt is secured by the assets of Ultra Tek, alternatives
available to the lenders include closing the operations of Ultra Tek
and forcing Ultra Tek into liquidation.
o 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 $2,316,000 (106,474,000
Indian rupees), using the Indian rupee translation rate at September
30, 2000. In addition, penal action under Indian law, which the
Company believes is very unlikely, could result in possible monetary
fines of up to approximately $16,023,000. The Company is contesting
these allegations, but currently, the matters remain unresolved and
the outcomes uncertain.
18
<PAGE>
o The Company has incurred significant losses from operations over the
past five years; has lost its two main historical customers, which has
significantly impacted its revenues; and at March 31, 2000, had a
shareholders' deficit of $18,411,000. During fiscal 2001, the Company
continues 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, 2000, 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, 1999 and 2000. During fiscal 1998, 1999 and 2000,
export sales from the United States were 12%, 35%, and 30% 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 there 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.
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 and Nexar were 65% and 15% of net sales,
respectively. There were no sales to Compaq or IBM.
Sales in fiscal 1999 were $3,935,000, a 14% decrease from fiscal 1998
sales. This decrease was due almost entirely to the Company's decision to no
longer do business with Nexar, and a decline in the volume of shipments to
Iomega. These declines in sales were partially offset by sales to one new
customer and increased sales to two existing customers, none of which were major
customers of the Company during fiscal 1999.
Fiscal 2000 sales were $4,680,000, an increase of 19% over fiscal 1999
sales. This increase was due principally to an increase of approximately 9% in
the volume of sales to Iomega, the Company's largest customer in fiscal 2000,
and sales to Allied Telesyn, a newly acquired customer in fiscal 2000, which
accounted for approximately 12% of the Company's total sales.
GROSS PROFIT. 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 resulting from small
monthly orders.
Fiscal 1999 gross profit was $1,301,000 compared to $249,000 in fiscal
1998. The improved gross margin in fiscal 1999 on a 14% decrease in sales is due
to significantly improved sales margins resulting in part from the use of slow
moving inventory, the carrying value of which was reduced in fiscal 1997, a
reduction in production start-up costs, and a decrease in unabsorbed indirect
manufacturing overhead due to cost reductions and the sale of the manufacturing
facility in Sri Lanka in the fourth quarter of fiscal 1998.
19
<PAGE>
Gross profit for fiscal 2000 was $1,695,000 compared to $1,301,000 for
fiscal 1999. This increase of approximately 30% was due primarily to a reduction
in established reserves for warranty claims and sales returns aggregating
approximately $260,000, which the Company believes brings these reserves in line
with the current level of business. Gross profit was also aided by the increase
in sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. 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-recurrence of expenses relating to the Recapitalization Plan in
fiscal 1997.
Selling, general and administrative expenses were $1,525,000 in fiscal 1999
compared to $2,246,000 for fiscal 1998. This 32% decrease in expenses was due to
the Company's continuing actions to reduce costs, the most significant of which
were the decision to restructure its marketing strategy resulting in the use of
sales representatives, the elimination of salaried employees, and the sale of
the Sri Lanka subsidiary.
For fiscal 2000, selling, general and administrative expenses were not
materially different from those in fiscal 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses were $976,000
in fiscal 1998 compared to $865,000 in fiscal 1997. The 13% 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 was relocated to the United States at a
much reduced level.
Research and development expenses for fiscal 1999 were $341,000 compared to
$976,000 in fiscal 1998, a 65% decrease. 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 Simi Valley, California at a significantly reduced
level.
For fiscal 2000, research and development expenses were not materially
different from those in fiscal 1999.
EXTINGUISHMENT OF ACCOUNTS PAYABLE. In fiscal 1999 and 2000, the Company
decided to credit income for certain accounts payable aggregating $2,174,000 and
$72,000, respectively, for which no demand has been made against the Company.
Creditors owed on those accounts became barred in fiscal 1999 and 2000 under the
Indian Limitation Act from making any future demand on the Company to make
payment on these obligations.
INTEREST EXPENSE. Interest expense in fiscal 1998 was $1,998,000 compared
to $1,585,000 in fiscal 1997. The 26% increase over the prior year was due to
interest accrued on the demand promissory note payable to the Tandon family
under the Recapitalization Plan, entered into in March 1997, interest on other
related party financing that was implemented in order to continue the operations
of the Company, and accounts receivable factoring with a United States bank at
monthly interest rates ranging from 2.25% to 1.75%, plus administration fees
ranging from 1% to .75%.
Interest expense in fiscal 1999 was $1,828,000 compared to $1,998,000 in
fiscal 1998. The 9% decrease was due principally to the change in the value of
the Indian rupee, which affected the translation of interest expense on the debt
in India.
For fiscal 2000, interest expense was not materially different from that in
fiscal 1999.
20
<PAGE>
OTHER INCOME. For fiscal 1998, substantially all of the Company's other
income of $285,000, an increase of 27% over 1997, resulted from the sale of
property and equipment, which had been recorded at estimated fair value in
fiscal 1997, as determined by applying SFAS 121.
Other income in fiscal 1999 was $164,000 or approximately 42% lower than
the prior year. This decrease was due to a significant reduction in the sale of
property and equipment.
NET INCOME (LOSS). For fiscal 1998, 1999 and 2000 the Company's net income
(loss) was $(3,700,000), $113,000 and $(1,969,000), respectively. For fiscal
1999, net loss was $2,061,000, before giving effect to the $2,174,000
extinguishment of accounts payable.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
--------------------
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.
During fiscal 1999, cash used in operating activities was $1,947,000
compared to $4,194,000 of cash used in fiscal 1998. This reduction in cash
consumed in fiscal 1999 was due primarily to a reduction in the net loss to
$2,061,000 (before giving effect to a $2,174,000 extinguishment of accounts
payable) for the current year versus a loss of $3,700,000 in fiscal 1998. During
fiscal 1999, the Company also generated cash from a decrease in accounts
receivable because of the decline in sales, whereas in fiscal 1998, there was an
increase in accounts receivable resulting from an increase in sales.
During fiscal 2000, cash used in operating activities was $1,587,000
compared to $1,947,000 of cash used in fiscal 1999. The reasons for this
reduction in cash consumed vary. However, the most significant are a reduction
in the decrease of accounts payable and reduced levels of accounts receivable,
inventories and prepaid expenses and other assets. These positive forces were
partially offset by an increase in the net loss for fiscal 2000 compared to a
net profit of $113,000, which, when adjusted for the extinguishments of accounts
payable, resulted in a loss of $2,061,000.
Investing Activities
--------------------
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.
In fiscal 1999, $78,000 in cash was used in investing activities, compared
to $319,000 in cash being provided during fiscal 1998. As previously stated, the
fiscal 1998 cash resulted from the sale of property, plant and equipment,
whereas such sales during fiscal 1999 were significantly reduced.
In fiscal 2000, cash used in investing activities was $32,000 compared to
$78,000 used in fiscal 1999. This decrease resulted from fewer purchases of
equipment during fiscal 2000.
Financing Activities
--------------------
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.
Cash provided by financing activities for fiscal 1999 was $2,300,000
compared to $3,168,000 in fiscal 1998. This decrease is due primarily to the
reduction in working capital loans being made to the Company by related party
entities.
21
<PAGE>
Cash provided by financing activities for fiscal 2000 was $1,764,000
compared to $2,300,000 in fiscal 1999. This decrease is due primarily to a
reduction in working capital loans being made to the Company by related parties.
In summary, the Company has suffered a considerable decline in cash flow
over the last three years for the aforementioned reasons. At March 31, 2000, the
Company had negative working capital of $16,358,000 and a shareholders' deficit
of $18,411,000. While current actions are being taken to implement a viable
operating plan to increase sales, renegotiate the terms of short-term
obligations with the Indian banks, and raise additional capital, there can be no
assurance that any of these actions will be successfully completed.
Since March 31, 1996, the Company has been negotiating with its Indian
banks for an extension of payment terms of existing debt as well as an extension
of credit to support planned production and sales. In July 1997, the banks'
legal counsel issued notices to Ultra Tek and the Company calling upon them to
pay the outstanding amounts due. The banks have not initiated any legal action
against the Company for non-payment of the amounts due, since Ultra Tek has been
declared a sick company by the Board of Industrial and Financial Reconstruction
("BIFR") of the Government of India.
The BIFR appointed an Operating Agency ("OA") to examine the Company's
viability and prepare a viability study report. Accordingly, the Company
prepared a draft rehabilitation proposal, which was submitted to the OA. The OA
reviewed the proposal and forwarded the same to the BIFR along with the minutes
of a joint meeting between the Indian banks and the Company convened by the OA
in March 1999. Based on the minutes of the joint meeting, the BIFR prepared its
Draft Rehabilitation Scheme and advised all concerned inviting
suggestions/objections to the scheme, which envisaged restructuring existing
debts. The BIFR held a hearing on August 16, 1999 and after hearing all
interested parties, advised the Company and the banks to discuss further and
modify the Draft Scheme to take into account the various points made at the
hearing. The BIFR also instructed the OA to conduct joint meetings with the
banks and the Company and to forward a modified scheme. Accordingly, the Company
made revisions in the Draft Scheme to the extent that, no further funding would
be required from the banks and there would be no dilution of the existing
security available to the consortium banks. On October 5, 1999, the OA held a
joint meeting of consortium member banks and the Company to discuss the revised
proposal and forwarded the minutes of the joint meeting to BIFR, indicating that
no consensus had been arrived at on the proposal submitted by the Company.
During a hearing on May 19, 2000, before the BIFR, the bench observed that no
acceptable revival proposal was in sight and directed the OA to initiate
necessary steps towards change of management. The bench also directed that the
Company, being the existing promoter can also submit their proposal based on a
One Time Settlement (OTS) acceptable to the banks and a third party lending
institution. The Company is in the process of submitting the OTS proposal. The
Company is hopeful of favorable response in this matter. 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, 2000, 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
September 30, 2000, the Company had factored accounts receivable invoices
totaling $93,907.
22
<PAGE>
YEAR 2000 COMPLIANCE
The Company had in place a plan to address Year 2000 readiness of its
internal computer systems and key suppliers. It was not anticipated that the
Company's products would affect its customers' Year 2000 compliance. The Year
2000 readiness team consisted entirely of internal personnel, as the Company's
lack of resources did not permit the use of external consultants. The team's
activities were directed to ensure that there would be no material adverse
effects on the Company's business operations and that transactions with
customers and suppliers would not be materially interrupted by the advent of
Year 2000.
The Company upgraded its accounting and telecommunications software to
ensure Year 2000 compliance in the United States. In India, personal computers
were upgraded to allow for software upgrades.
While the Company believes its planning efforts have been 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
continue to be Year 2000 compliant and will not have a material affect on the
Company's operations, especially those located in a third-world country. As of
September 30, 2000 the Company has not experienced any significant computer
failures due to the advent of Year 2000.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item is included in Part IV of this report.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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, as of March 31, 1997 (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 $2,442,000) 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 reports on the
Company's financial statements for the fiscal years ended March 31, 1998, 1999
and 2000 were qualified as to the uncertainty of the Company's ability to
continue as a going concern.
The Audit Committee of the Board of Directors was advised of the former
accountant's resignation and approved the engagement of the new independent
accountant, Farber & Hass LLP, on October 8, 1998.
23
<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:
Name Age Position
---- --- --------
J.L. Tandon 51 Chairman, Chief Executive Officer and Director
M.L. Tandon 61 Chairman of the board of directors of Ultra
Tek, the Company's manufacturing subsidiary
Naren Bansal 43 President and Chief Operating Officer
Harvey A. Marsh 62 Chief Financial Officer, Secretary and
Director
R.D. Middlebrook, Ph.D. 70 Director*
Robert Sherburne 80 Director*
*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 October 1999. On October 11, 1996, J.L. Tandon
was elected Chief Financial Officer of the Company and served in that position
until September 1998. 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.
Naren Bansal became President and Chief Operating Officer of the Company on
October 15, 1999. Mr. Bansal has been an employee of the Company since 1990 and
most recently held the position Vice President, Operations and Sales.
Harvey A. Marsh became Vice President, Chief Financial Officer, Secretary
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 California Institute of Technology.
Robert Sherburne joined the Company as a director in August 1993. From
January 1992 to present, Mr. Sherburne has been a merger and acquisition
consultant. From November 1990 to December 1991, Mr. Sherburne was the Chairman
of the Board of Everest & Jennings International and remained a director until
December 1996.
24
<PAGE>
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
Naren Bansal became President of the Company on October 21, 1999, and a
Form 3 was not filed on Mr. Bansal's behalf on a timely basis.
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, 2000.
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 2000 198,000 0 16,147 0 -- 0 --
President, Chief 1999 198,000 0 24,488 0 -- 0 --
Executive Officer and 1998 198,000 0 22,676 0 -- 0 --
Chief Financial
Officer
Naren Bansal(3) 2000 95,381 0 0 0 -- 0 --
President and Chief
Operating Officer
Harvey A. Marsh(4) 2000 36,017 0 0 0 -- 0 --
Chief Financial 1999 68,938 0 0 0 -- 0 --
Officer
Prakash Thanky(5) 1998 118,200 0 0 0 -- 0 --
President
</TABLE>
(1) Includes compensation deferred at the officer's election. J.L. Tandon has
deferred compensation of $96,500 for fiscal 1999 and $171,346 for fiscal
2000.
(2) Represents supplemental income bonus, automobile allowance, club dues and
payments made toward medical and group life insurance on behalf of
executive officers.
(3) Mr. Bansal was appointed President and Chief Operating Officer of the
Company on October 21, 1999.
(4) Mr. Marsh became an employee of the Company on April 6, 1998 and was
appointed Chief Financial Officer on September 8, 1998.
(5) Mr. Thanky resigned from the Company in November 1997. His salary includes
vacation and salary continuation pay through December 31, 1997.
25
<PAGE>
CHANGE IN CONTROL ARRANGEMENTS
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 through fiscal 1996 was 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. No options have been granted since fiscal 1996.
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, 2000. The only unexercised stock options at March 31, 2000, held
by any executive officer, were for 7,500 shares held by Mr. Bansal, President
and Chief Operating Officer .
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board for fiscal 2000 was comprised of
Messrs. 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 2000.
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.
26
<PAGE>
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 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, 2000, 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 2000, 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, 2000 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.
27
<PAGE>
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 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 1999 and
2000, 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
28
<PAGE>
COMPANY PERFORMANCE
The following graph shows a comparison of cumulative total returns for the
Company, the NASDAQ Stock Market-U.S. Index, and a peer group index comprised of
the NASDAQ Computer Index (as described below) for the period during which the
Company's Common Stock has been registered under Section 12 of the Exchange Act.
The NASDAQ Computer Index includes approximately 170 companies, all of which are
manufacturers of computer hardware or software. The Company believes that the
companies included in the NASDAQ Computer Index are reasonably representative of
companies in the Company's industry.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG GOLDEN SYSTEMS, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER MANUFACTURER INDEX
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
Cumulative Total Return
-------------------------------------------------------------
3/95 3/96 3/97 3/98 3/99 3/00
<S> <C> <C> <C> <C> <C> <C>
GOLDEN SYSTEMS, INC. 100.00 53.85 23.08 4.92 13.54 9.85
NASDAQ STOCK MARKET (U.S.) 100.00 135.80 150.95 228.88 309.19 574.04
NASDAQ COMPUTER MANUFACTURER 100.00 153.72 167.92 297.18 589.61 1392.13
</TABLE>
* $100 Invested on 3/31/95 in Stock or Index -
inlcuding reinvestment of dividends.
Fiscal Year ending March 31.
29
<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 September 30, 2000 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:
Amount Percent
Beneficially of
Name of Beneficial Owner (1) Owned Class
---------------------------- ----- -----
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
Naren Bansal (7) ................................. 7,500 *
Harvey A. Marsh .................................. 0 0
R.D. Middlebrook, Ph.D. (8) ...................... 31,000 *
Robert Sherburne (8) ............................. 25,000 *
All executive officers and directors as a group
(five persons) (9) ............................... 2,623,498 49.5
*Less than one percent
(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 7,500 shares issuable upon exercise of stock options excercisable.
(8) Includes 24,000 shares issuable upon exercise of stock options exercisable
within sixty days of September 30, 2000.
(9) For purposes of this calculation, all shares beneficially owned by any
member of the Tandon family are included in the amount beneficially owned.
30
<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.
In order to support the continuing operations of the Company, Tandon
Associates loaned the Company $1,525,000, net of repayments, during fiscal 1998.
The total due Tandon Associates, including accrued interest at 1% per month on
the average daily balance, at March 31, 2000 was $1,443,000. Payments on the
loan balance during fiscal 2000 were $163,000 and additional borrowings were
$105,000.
In fiscal 1997 the Company entered into a renewed lease agreement with SDJ
Partners, a general partnership, whose partners are certain members of the
Tandon family. The lease was for the Company's headquarters facility, which
includes office and warehouse space. The facility lease was 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. 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. On December 31, 1999, the lease expired and the Company is currently
renting space on a month-to-month basis. For fiscal 2000, total facilities cost
was $57,000.
Celetron, Inc., (Celetron) a company owned by the Tandon family, is
currently seeking investors through a private placement. Representatives of
Celetron advised the Company's Board of Directors, at a special meeting held on
September 15, 2000, that Celetron intends to extend an offer to acquire the
Company if this private placement is successfully concluded. There can be no
assurance that the private placement will be successfully concluded and,
therefore, there can be no assurance that an offer will be made, or if made,
when it will be made or the terms thereof, should it be made, as such terms will
necessarily be dependent on circumstances that exist at that time.
31
<PAGE>
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) 1. Financial Statements:
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of March 31, 1999 and 2000:
Assets
Liabilities and Shareholders' Deficit
Consolidated Statements of Operations for each of the three
years in the period ended March 31, 2000
Consolidated Statements of Shareholders' Equity for each
of the three years in the period ended March 31, 2000
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 2000
Notes to Consolidated Financial Statements
FINANCIAL STATEMENTS OF CORTECH SYSTEMS (INDIA) LIMITED (FORMERLY
ULTRA TEK DEVICES LIMITED)
Independent Auditors' Report
Statements of Financial Condition at March 31, 1999 and 2000
Statements of Operations for each of the years ended March 31, 1999
and 2000
Statements of Cash Flows for each of the years ended March 31, 1999
and 2000
Notes to Financial Statements
2. Financial Statement Schedules:
Report of Independent Public Accountants on Supplemental Schedule
Schedule II - Valuation and Qualifying Accounts for the three fiscal
years ended March 31, 2000
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
32
<PAGE>
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended March 31, 2000.
(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
33
<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 December 20, 2000.
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 Directors and December 20, 2000
--------------------------- Chief Executive Officer
Jawahar L. Tandon (Principal Executive Officer)
/s/ Harvey A. Marsh Vice President, Chief Financial Officer December 20, 2000
--------------------------- (Principal Financial Officer) and Director
Harvey A. Marsh
/s/ R. D. Middlebrook Director December 20, 2000
---------------------------
R.D. Middlebrook
/s/ Robert Sherburne Director December 20, 2000
---------------------------
Robert Sherburne
</TABLE>
34
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<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.
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.
-----------------------------
35
<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, 2000 and for each of the three years then ended, and have issued
our report thereon, qualified with respect to the Company's ability to continue
as a going concern, dated November 8, 2000. 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
November 8, 2000
36
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
DESCRIPTION BEGINNING OF YEAR INCOME DEDUCTIONS END OF YEAR
----------- ----------------- ------ ---------- -----------
Inventory reserves
2000 $ 4,943 15 153 $ 4,805
1999 $ 5,671 5 733 $ 4,943
1998 $ 6,869 60 1,258 $ 5,671
37
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000:
Assets F-3
Liabilities and Shareholders' Deficit F-4
Consolidated Statements of Operations for each of
the three years in the period ended March 31, 2000 F-5
Consolidated Statements of Shareholders' Equity (Deficit) for
each of the three years in the period ended March 31, 2000 F-6
Consolidated Statements of Cash Flows for each of the
three years in the period ended March 31, 2000 F-7 and F-8
Notes to Consolidated Financial Statements F-9 to F-22
INDEX TO FINANCIAL STATEMENTS OF CORTECH SYSTEMS (INDIA) LIMITED
Independent Auditors' Report F-23
Statements of Financial Condition at March 31, 1999 and 2000 F-24
Statements of Operations for each of the years ended
March 31, 1999 and 2000 F-25
Statements of Cash Flows for each of the years ended
March 31, 1999 and 2000 F-26
Notes to Financial Statements F-27 to F-34
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 sheets of Golden Systems,
Inc. and its subsidiaries (the "Company") as of March 31, 1999 and 2000 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years ended March 31, 1998, 1999 and 2000. 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 audits. We did not audit the 2000 financial
statements of Cortech Systems (India) Limited (formerly known as Ultra Tek
Devices Limited), a wholly-owned subsidiary, which statements reflect total
assets of $1,446,000 and total revenues of $45,000 (net of intercompany amounts)
for the year then ended. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Cortech Systems (India) Limited as of March 31, 2000, and
for the year then ended, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
accompanying consolidated financial statements present fairly, in all material
respects, the financial position of the Company at March 31, 1999 and 2000 and
the results of its operations and its cash flows for the years ended March 31,
1998, 1999 and 2000 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, 2000, the Company had outstanding amounts due to four separate
Indian lenders in the amount of $10,629,000, all of which are currently in
default. Of that amount, three of the banks have issued notices to the Company
demanding immediate repayment of $9,465,000. The Company has insufficient funds
available to repay the banks. Because the Indian debt is secured by the assets
of the Company's subsidiary, 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
$2,316,000 at September 30, 2000. In addition, penal action which could be taken
under Indian law could result in possible fines up to approximately $16,023,000
at September 30, 2000. 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 five
years and has lost its two largest customers, which has significantly impacted
its revenues. At March 31, 2000, the Company had a shareholders' deficit of
$18,411,000. During fiscal 2001, 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
November 8, 2000
F-2
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND 2000
(IN THOUSANDS)
ASSETS
1999 2000
------ ------
CURRENT ASSETS:
Cash and cash equivalents $ 117 $ 255
Restricted cash balances 12 12
Accounts receivable, net of allowance of
$129 and $114 at March 31, 1999 and
2000, respectively 548 387
Inventories 612 386
Prepaid expenses and other current assets 131 74
------ ------
Total current assets 1,420 1,114
------ ------
PROPERTY, PLANT AND EQUIPMENT, at estimated realizable value,
net of accumulated depreciation and amortization 628 546
------ ------
$2,048 $1,660
====== ======
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 AND 2000
(IN THOUSANDS)
LIABILITIES AND SHAREHOLDERS' DEFICIT
1999 2000
------ ------
CURRENT LIABILITIES:
Borrowings under demand, including accrued interest $8,617 $9,465
Note payable under Recapitalization Plan, including
accrued interest 2,173 2,322
Notes payable, including accrued interest 962 1,164
Accounts payable 885 736
Accrued liabilities 1,044 1,049
Net amounts due to related parties 2,505 2,736
------ ------
Total current liabilities 16,186 17,472
------ ------
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 1999 and 2000 16,405 16,405
Retained deficit (33,957) (35,926)
Cumulative translation adjustments 815 1,110
------ ------
(16,737) (18,411)
------ ------
$2,048 $1,660
====== ======
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
1998 1999 2000
-------- -------- --------
NET SALES $ 4,581 $ 3,935 $ 4,680
COST OF GOODS SOLD
Material, labor, overhead and direct cost 4,272 2,629 2,970
Inventory provisions 60 5 15
-------- -------- --------
4,332 2,634 2,985
-------- -------- --------
Gross profit 249 1,301 1,695
-------- -------- --------
OPERATING (INCOME) EXPENSES:
Selling, general and administrative 2,246 1,525 1,522
Research and development 976 341 360
Extinguishment of accounts payable -- (2,174) (72)
-------- -------- --------
3,222 (308) 1,810
-------- -------- --------
Income (loss) from operations (2,973) 1,609 (115)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense (1,998) (1,828) (1,853)
Foreign currency transaction gains (losses) 235 169 --
Gain on sales of subsidiary companies 752 -- --
Other income 285 164 --
-------- -------- --------
(726) (1,495) (1,853)
-------- -------- --------
Income (loss) before provision
for income taxes (3,699) 114 (1,968)
PROVISION (BENEFIT) FOR INCOME TAXES 1 1 1
-------- -------- --------
NET INCOME (LOSS) $ (3,700) $ 113 $ (1,969)
======== ======== ========
BASIC INCOME (LOSS) PER COMMON SHARE $ (.70) $ .02 $ (.37)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING SHARES 5,300 5,300 5,300
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
SHARES COMMON RETAINED TRANSLATION
OUTSTANDING STOCK DEFICIT ADJUSTMENTS TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
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)
Translation adjustments -- -- -- 467 467
Net Income -- -- 113 -- 113
-------- -------- -------- -------- --------
Comprehensive income 580
--------
BALANCE, March 31, 1999 5,300 16,405 (33,957) 815 (16,737)
Translation adjustments -- -- -- 295 295
Net Loss -- -- (1,969) -- (1,969)
-------- -------- -------- -------- --------
Comprehensive loss 1,674
--------
BALANCE, March 31, 2000 5,300 $ 16,405 $(35,926) $ 1,110 $(18,411)
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (3,700) $ 113 $ (1,969)
Adjustments to reconcile net income (loss)
to net cash used in
operating activities:
Depreciation 100 79 95
Provision for losses on accounts
receivable 148 123 153
Provision for losses on inventories 60 5 15
Loss (Gain) on disposition of property
and equipment (232) -- 3
Gain on disposition of subsidiaries (752) -- --
Extinguishment of accounts payable -- (2,174) (72)
Changes in operating assets and liabilities,
excluding effects of dispositions:
Decrease (increase) in:
Accounts receivable (786) 200 8
Inventories 306 74 199
Prepaid expenses and other current assets 205 (21) 41
Increase (decrease) in:
Accounts payable 628 (398) (71)
Accrued liabilities (171) 52 11
-------- -------- --------
Net cash used in operating activities (4,194) (1,947) (1,587)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (51) (78) (32)
Proceeds from the sale of property and
equipment 354 -- --
Restricted cash 16 -- --
-------- -------- --------
Net cash provided by (used in)
investing activities 319 (78) (32)
-------- -------- --------
F-7
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net of repayments 1,398 1,284 1102
Borrowings (repayments) under notes payable (118) 168 176
Change in related party balances 1,738 698 337
Note payable under Recapitalization Plan 150 150 149
-------- -------- --------
Net cash provided by financing
activities 3,168 2,300 1,764
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (577) (237) (7)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,284) 38 138
CASH AND CASH EQUIVALENTS, beginning of year 1,363 79 117
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 79 $ 117 $ 255
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
GOLDEN SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
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, 2000 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:
o At March 31, 2000, the Company had outstanding amounts due to four separate
Indian lenders in the amount of $10,629,000, all of which are currently in
default. Of that amount, three banks have issued notices to the Company
demanding immediate repayment of $9,465,000. The Company has insufficient
funds available to repay the lenders. Because the Indian debt is secured by
the assets of Ultra Tek, alternatives available to the lenders include
closing the operations of Ultra Tek and forcing Ultra Tek into liquidation
(see Note 4).
o 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 $2,316,000 using the Indian rupee
translation rate at September 30, 2000, 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 $16,023,000 using the Indian rupee translation rate
at September 30, 2000. The Company is contesting these allegations, but
currently, the - matters are unresolved and the outcomes uncertain (see
Note 11).
o 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, 2000, had a shareholders' deficit
of $18,411,000. During fiscal 2001, 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, 2000, 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.
F-9
<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 Mumbai,
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 former 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 6) 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 and April 1, 1996 for non-employee awards.
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 1999, 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 level of returns was of a
non-recurring nature, and as such, only reserves relating to an estimated
recurring level of returns were recorded as of March 31, 1999 and 2000 and are
included in the accounts receivable allowance.
F-10
<PAGE>
Sales to countries other than the United States approximated 18, 36 and 31
percent of the Company's revenues in fiscal years 1998, 1999 and 2000,
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, 2000.
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 1998, sales to two customers accounted for approximately 15 and 65
percent, respectively, of the Company's net sales. As of March 31, 1998, these
customers accounted for approximately 93 percent of the Company's accounts
receivable balance. In fiscal 1999, the customer obtained in 1998, which
accounted for the smaller percentage of sales, was replaced. Sales to the new
customer and the existing customer accounted for approximately 12 and 64
percent, respectively, of the Company's net sales. As of March 31, 1999, these
customers accounted for approximately 76 percent of the Company's accounts
receivable balance. In fiscal 2000, the customer obtained in 1999, which
accounted for the smaller percentage of sales, was replaced. Sales to the new
customer and the existing customer accounted for approximately 12 and 59
percent, respectively, of the Company's net sales. As of March 31, 2000, these
customers accounted for approximately 82 percent of the Company's 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. The
Company has no long-term contracts with major customers and since December 1999,
has received no new orders from its largest customer in fiscal 2000. A decline
in demand for computer peripheral equipment and other electronic products, or
other factors affecting the electronics industry in general, or major customers
in particular, could have a material adverse effect on the Company's results of
operations (see Note 1).
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 over
the last several years have seriously disrupted the Company's ability to deal
with its vendors and its customers on an advantageous basis. These events have
had an 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, tensions
between India and Pakistan, or economic uncertainties affecting Japan, Korea and
other Asian nations, 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.
INVENTORIES
Inventories are valued at the lower of cost (first in, first out) or market.
Cost includes cost of material, freight and manufacturing overhead. Inventories
consist of the following (in thousands):
March 31, March 31,
1999 2000
------ ------
Raw materials $ 359 $ 259
Work-in-progress 156 7
Finished goods 97 120
------ ------
$ 612 $ 386
====== ======
F-11
<PAGE>
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 at March 31, 1999 and 2000
are presented net of a reserve of $4,943,000 and $4,805,000, respectively, 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. The amounts presented below are
shown net of accumulated depreciation and amortization as the amounts are
presented at their fair value (as determined by applying SFAS 121).
Property, plant and equipment consists of the following (in thousands):
March 31, March 31,
1999 2000
------ ------
Machinery and equipment $2,253 $2,205
Motor vehicles 34 33
Furniture and fixtures 612 605
Computer software 54 54
Leasehold improvements 253 253
------ ------
3,207 3,150
Accumulated
depreciation and amortization (1,330) (1,383)
Reserve for impairment loss (1,249) (1,221)
------ ------
$ 628 $ 546
====== ======
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 equivalents, accounts receivable and accounts payable) also
aproximates fair value.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes was $800 in 1998, 1999 and 2000. Cash paid for
interest was approximately $302,000, $223,000 and $177,000 in 1998, 1999 and
2000, respectively.
BASIC INCOME (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 for 2000, 1999 and 1998, respectively. The
Company did not present Diluted EPS, since the result was anti-dilutive in 1998
and 2000 and immaterial in 1999.
F-12
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Account Standards
("SFAS") No. 130, "Reporting Comprehensive Income", in fiscal year 1999. The
impact of SFAS No. 130, which establishes standards for reporting and displaying
comprehensive income and its component (foreign currency translation) in the
consolidated financial statements, is disclosed in the accompanying consolidated
statement of shareholders' equity (deficit).
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 in fiscal 1997. 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 80 percent of the face amount of each receivable
the bank desires to purchase. The total amount of "unpaid advances" by the bank
cannot exceed $1,333,333. The Company must pay a monthly finance charge (1.75
percent) on the outstanding unpaid advances in addition to a one-time
administration fee (.75 percent) 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. During fiscal 1999, the Company factored a total of
$265,000 of its accounts receivable to provide working capital. Subsequently,
the borrowings were repaid and there was no outstanding balance at March 31,
1999. During fiscal 2000, the Company factored a total of $1,111,000 of its
accounts receivable to provide working capital. Subsequently, the borrowings
were repaid and there was no outstanding balance at March 31, 2000.
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, 1999 and 2000, $8,191,000 and $9,098,000 of principal and
accrued interest (349,102,000 and 398,620,000 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, 1999 and 2000, 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, 1999 and 2000, $425,595 and $365,783 (18,139,000 and 16,025,000 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, 1999
and 2000, the normal rate of interest was 13 percent per annum, with interest on
overdue amounts increasing to a maximum of 26 percent. These credit agreements
are secured by inventories and accounts receivable.
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'
F-13
<PAGE>
legal counsel issued notices to Ultra Tek and the Company calling upon them to
pay the outstanding amounts due. The banks have not initiated any legal action
against the Company for non-payment of the amounts due, since Ultra Tek has been
declared a sick company by the Board of Industrial and Financial Reconstruction
(BIFR) of the Government of India.
The BIFR appointed an Operating Agency ("OA") to examine the Company's viability
and prepare a viability study report. Accordingly, the Company prepared a draft
rehabilitation proposal, which was submitted to the OA. The OA reviewed the
proposal and forwarded the same to the BIFR along with the minutes of a joint
meeting between the banks and the Company convened by the OA in March 1999.
Based on the minutes of the joint meeting, the BIFR prepared its Draft
Rehabilitation Scheme and advised all concerned inviting suggestions/objections
to the scheme, which envisaged restructuring existing debts. The BIFR held a
hearing on August 16, 1999 and after hearing all interested parties, advised the
Company and the banks to discuss further and modify the Draft Scheme to take
into account the various points made at the hearing. The BIFR also instructed
the OA to conduct joint meetings with the banks and the Company and to forward a
modified scheme. Accordingly, the Company made revisions in the Draft Scheme to
the extent that no further funding would be required from the banks and there
would be no dilution of the existing security available to the consortium banks.
On October 5, 1999, the OA held a joint meeting of consortium member banks and
the Company to discuss the revised proposal and forwarded minutes of the joint
meeting to BIFR, indicating that no consensus had been arrived at on the
proposal submitted by the Company. During a hearing on May 19, 2000, before the
BIFR, the bench observed that no acceptable revival proposal was in sight and
directed OA to initiate necessary steps towards change of management. The bench
also directed that the Company, being the existing promoter, can also submit its
proposal based on a One Time Settlement (OTS) acceptable to the banks and a
third party lending institution. Accordingly, the Company has submitted its
proposal, which is being considered by the banks and lending institution.
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, 1999 and 2000, $962,000
and $1,164,000, 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 rate of interest was 20.4 percent per annum. 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 effect on the Company's net income
(loss) and income (loss) per common share amounts would have been immaterial.
F-14
<PAGE>
A summary of the status of the Company's outstanding stock options at March 31,
1998, 1999 and 2000 and changes during the years then ended is presented in the
table and narrative below (shares are in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
----------------- ----------------- ----------------
Wtd. Wtd. Wtd.
Avg. Avg. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ....... 124 $ 4.58 90 $ 4.75 81 $ 4.69
Granted ................................ -- -- -- -- -- --
Exercised .............................. -- -- -- -- -- --
Forfeited .............................. (34) 4.14 (9) 5.25 -- --
------ ------ ------ ------ ------ ------
Outstanding at end of year ............. 90 $ 4.75 81 $ 4.69 81 $ 4.69
------ ------ ------ ------ ------ ------
Exercisable at end of year ............. 59 $ 5.62 65 $ 5.82 72 $ 5.62
------ ------ ------ ------ ------ ------
Weighted average fair value of options
granted .............................. N/A N/A N/A
------ ------ ------
</TABLE>
COMMON STOCK PURCHASE WARRANTS
A summary of warrant activity is as follows:
Number of
Shares Option Prices
------- -------------
Balance, March 31, 1997 149,000 $ .50 to 8.40
Issued -- --
Exercised -- --
Redeemed -- --
------- -------------
Balance, March 31, 1998, 1999 and 2000 149,000 $ .50 to 8.40
======= =============
No warrants were issued, exercised or redeemed in fiscal years 1998, 1999 and
2000. All warrants are currently exercisable.
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. EXTINGUISHMENT OF ACCOUNTS PAYABLE
In 1994, the Company attempted to develop a product line, which failed to
materialize. Inventory related to this product line was previously reserved for,
however certain accounts payable amounts aggregating $1,775,000 payable since
1994 had been retained in the financial statements pending any possible demand
for payment. Since demand for payment has not been made and any future demand
will be barred under the Indian Limitation Act, the Company in fiscal 1999
credited operating income for the balance due. Similarly, there are other
accounts payable amounts aggregating $399,000 in fiscal 1999 and $72,000 in
fiscal 2000 that have not been paid for which no demand has been made against
the Company and which are currently barred under the Indian Limitation Act.
These amounts have also been credited to operating income.
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 increased
$1,184,000 in 2000.
F-15
<PAGE>
The components of the net deferred income tax asset at March 31, 2000 are as
follows (in thousands):
2000
-----
Allowance for bad debts 28
Vacation accrual 5
Net operating loss carryforwards 3,959
Inventory reserve 1,418
Warranty reserve 25
Book over tax depreciation 58
-----
5,493
Less: Valuation allowance (5,493)
-----
$ --
=====
The provision for income taxes for the years ended March 31, 1998, 1999 and 2000
are as follows (in thousands):
1998 1999 2000
---- ---- ----
Current - Federal $ -- $ -- $ --
- State 1 1 1
- Foreign -- -- --
---- ---- ----
$ 1 $ 1 $ 1
==== ==== ====
Differences between the provision for income taxes and income taxes at the
statutory federal income tax rate for the years ended March 31, 1998, 1999 and
2000 are as follows (in thousands):
1998 1999 2000
---- ---- ----
Income tax benefit
at statutory federal rate $(1,258) $ 39 $(669)
State and local income taxes,
net of federal income tax effect 1 6 1
Tax benefits not recognized 1,258 (44) 669
------- ---- -----
$ 1 $ 1 $ 1
======= ==== ====
In 1998, the pre-tax losses relating to U.S. and foreign operations were
$1,561,000 and $2,138,000, respectively. In 1999, the pre-tax loss relating to
U.S. operations was $816,000 and the pre-tax profit relating to foreign
operations was $930,000. In 2000, the pre-tax losses relating to U.S. and
foreign operations were $694,000 and $1,274,000, respectively.
Ultra Tek's manufacturing facilities are located in an export processing zone.
Under the Indian Income-tax Act of 1961, the entire profits of a company
situated in a free trade zone are exempt from income tax for a period of five
consecutive years within the first eight years of operations at the option of
the Company. Ultra Tek elected to claim the exemption for the five years ended
March 31, 1992. Consequently, Ultra Tek did not have any income tax liability up
to March 31, 1992. Under another provision of the Indian Income-tax Act of 1961,
Ultra Tek will continue to be exempt from income tax to the extent of profits
attributable to its export sales. For the years ended March 31, 1998, 1999 and
2000, 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, 2000 for federal tax purposes
are approximately $15.8 million and begin expiring in fiscal year 2010.
F-16
<PAGE>
9. 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, 1999 and 2000
as minority interest.
10. COMMITMENTS AND CONTINGENCIES
a) LEASES
GSI leased its corporate headquarters from a related party under a three
year operating lease, which expired in December 1999. Currently, the
headquarters facility is being rented on a monthly basis. Ultra Tek leases
certain factory premises from the Indian Government under operating leases,
which expire at various dates through 2015. Future minimum payments under
these and other various operating leases are as follows (in thousands):
Year ending March 31:
---------------------
2001 42
2002 42
2003 42
2004 42
2005 42
Thereafter 29
----
$239
====
Gross rental expense for the years ended March 31, 1998, 1999 and 2000 was
approximately $222,000, $98,000 and $97,000, 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 $1,032,000 (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 $1,063,000 (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 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 was included in the inventory reserve amounts. 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
$559,000 (25,725,000 in Indian rupees) leviable on imported components which
were alleged not accounted for in the terms of bond executed, (b) why penal
action
F-17
<PAGE>
should not be initiated against the Company, and (c) why a penalty equal to
the duty held to be leviable, $559,000 (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 $559,000 (25,720,000 in Indian
rupees). Penalties relating to the investigation, if any, have not yet been
determined.
The Company is disputing each of the allegations above and has been advised
by counsel that it has meritorious defenses in each instance.
The aggregate of threatened duties and penalties to the Company is
approximately $2,316,000 (106,474,000 in Indian rupees), using the Indian
rupee translation rate at September 30, 2000. 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
$16,023,000 at September 30, 2000.
F-18
<PAGE>
12. RELATED PARTY TRANSACTIONS
The Company has substantial dealings with the following entities which are owned
by or affiliated with Company shareholders. The amount of loans, sales,
purchases, transfers and sharing of expenses during the years ended March 31,
1998, 1999 and 2000 with each party are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000
ADVANCE TECHNOLOGY DEVICES
<S> <C> <C> <C>
BEGINNING BALANCE $ (113) (36) (33)
Product sales 21 -- --
Sale (purchase) of raw materials 17 2 1
Charges for sharing common expenses -- -- (43)
Credits for sharing common expenses 7 4 1
Sale of assets 47 -- --
Translation adjustments to/(from) the Company 6 2 1
Cash transfers (to)/from the Company (21) (5) 21
--------------------------
ENDING BALANCE (36) (33) (52)
--------------------------
EASTERN PERIPHERALS LTD.
BEGINNING BALANCE 171 96 --
Purchase of raw materials -- -- --
Charges for sharing common expenses (6) (6) (2)
Sale/(purchase) of assets -- -- --
Translation adjustments to/(from) the Company (11) (6) --
Reserve for doubtful collection -- (84) --
Cash transfers (to)/from the Company (58) -- 2
--------------------------
ENDING BALANCE 96 -- --
--------------------------
GOLDEN COMPUTER LTD.
BEGINNING BALANCE -- (13) --
Product sales 1 -- --
Translation adjustments to/(from) the Company -- 1 --
Cash transfers (to)/from the Company (14) 12 --
--------------------------
ENDING BALANCE (13) -- --
--------------------------
MAAZDA TRAVEL
BEGINNING BALANCE (1) (1) 2
Charges for travel agent services (23) (43) --
Cash transfers (to)/from the Company 23 46 --
--------------------------
ENDING BALANCE (1) 2 2
--------------------------
MODULAR ELECTRONICS PVT. LTD.
BEGINNING BALANCE (73) (66) (62)
Purchase of raw materials 7 --
Charges for sharing common expenses -- --
Credits for sharing common expenses -- --
Creditor transfer due to sale of company -- -- 60
Translation adjustments to/(from) the Company -- 4 2
--------------------------
ENDING BALANCE (66) (62) --
--------------------------
M. L. TANDON
BEGINNING BALANCE -- (104)
Unsecured loan (120) (111) --
Translation adjustments to/(from) the Company 9 7 3
--------------------------
ENDING BALANCE (111) (104) (101)
--------------------------
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1998 1999 2000
RELIABLE CONSULTANCY SERVICES PVT. LTD.
<S> <C> <C> <C>
BEGINNING BALANCE (2) (3) --
Charges for sharing common expenses -- (1) (1)
Credits for sharing common expenses -- -- --
Translation adjustments (to)/from the Company (1) -- --
Cash transfers (to) from the Company -- 4 --
--------------------------
ENDING BALANCE (3) -- (1)
--------------------------
SACHAM ELECTRONICS SERVICES PVT. LTD.
BEGINNING BALANCE 10 9 6
Translation adjustments to/(from) the Company (1) (1)
Reserve for doubtful collection -- -- (6)
Cash Transfers (to) from the Company -- (2)
--------------------------
ENDING BALANCE 9 6 --
--------------------------
SDJ PARTNERS
BEGINNING BALANCE -- -- (57)
Rent & utilities (53) (57) (57)
Cash transfers (to)/from the Company 53 -- --
--------------------------
ENDING BALANCE -- (57) (114)
--------------------------
ST HOLDING PVT. LTD.
BEGINNING BALANCE (4) (4) (4)
Charges for sharing common expenses -- -- 1
--------------------------
ENDING BALANCE (4) (4) (3)
--------------------------
TANCOM ELECTRONICS
BEGINNING BALANCE (96) (94) (102)
Sale of raw materials 67 6 9
Sale/(purchase) of assets (35) (2) --
Purchase of materials -- (23) --
Credits for sharing common expenses 40 1 1
Charges for sharing common expenses -- (3) (9)
Translation adjustments to/(from) the Company 9 7 3
Cash transfers (to)/from the Company (79) 6 (29)
--------------------------
ENDING BALANCE (94) (102) (127)
--------------------------
TANDON ASSOCIATES, INC. - NOTE RECEIVABLE
BEGINNING BALANCE -- (1,607) (1,334)
Secured loans (1,989) -- (105)
Accrued interest on loan (82) (159) (167)
Cash transfers (to)/from the Company 464 432 163
--------------------------
ENDING BALANCE (1,607) (1,334) (1,443)
--------------------------
TANDON ASSOCIATES, INC.
BEGINNING BALANCE 22 -- (22)
Credits for outside services and expenditures -- -- --
Credits for sharing common expenses 19 17 --
Charges for sharing common expenses -- (39) (57)
Credits for research and development -- -- --
Sale of assets 40 -- --
Cash transfers (to)/from the Company (81) -- --
--------------------------
ENDING BALANCE -- (22) (79)
--------------------------
</TABLE>
F-20
<PAGE>
<TABLE>
<CAPTION>
1998 1999 2000
TANDON MAGNETICS (I) PVT. LTD.
<S> <C> <C> <C>
BEGINNING BALANCE (5) (4) (4)
Charges (credits) for sharing common expenses 1 -- --
--------------------------
ENDING BALANCE (4) (4) (4)
--------------------------
TANTEC MAGNETICS
BEGINNING BALANCE (1) -- 5
Product sales 47 -- --
Purchase of computers (5) -- --
Sale of raw of materials 5 9 --
Charges for sharing common expenses -- (4) --
Credits for sharing common expenses -- -- --
Credits for outside services -- -- --
Sale of assets 18 -- --
Cash transfers (to)/from the Company (64) -- --
--------------------------
ENDING BALANCE -- 5 5
--------------------------
J.T. HOLDINGS PVT. LTD.
BEGINNING BALANCE -- -- (796)
Unsecured loan -- (806) (45)
Translation adjustments (to)/from the Company -- 10 22
--------------------------
ENDING BALANCE -- (796) (819)
--------------------------
TOTAL NET DUE TO RELATED PARTIES $(1,834) $(2,505) $(2,736)
==========================
TANDON FAMILY NOTE UNDER RECAPITALIZATION PLAN
BEGINNING BALANCE $(1,873) $(2,023) $(2,173)
Interest on note (150) (150) (149)
--------------------------
Total note payable under Recapitalization Plan $(2,023) $(2,173) $(2,322)
==========================
</TABLE>
During fiscal 1999, it was determined that the balance of $84,000 due from
Eastern Peripherals Ltd. was not collectible. Eastern Peripherals ceased
operations in 1995 and has liquidated all of its assets to pay down its
outstanding obligations.
During fiscal 1999, J. T. Holdings Pvt. Ltd. loaned $806,000 to the Company for
needed working capital. The loan is unsecured, payable on demand at an interest
rate of 15% per annum commencing April 1, 2000.
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 party of Tandon
Associates to sell its Singapore operation. The Company recorded a gain of
approximately $38,000 on this transaction.
12. 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, 1999 and 2000 (in thousands):
F-21
<PAGE>
1998
----
United
States Asia Total
------ ------ ------
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
1999
----
United
States Asia Total
------ ------ ------
Sales originating from $3,889 46 3,935
Loss (income) from operations $ 560 (2,169) (1,609)
Identifiable assets $ 804 1,244 2,048
2000
----
United
States Asia Total
------ ------ ------
Sales originating from $3,272 1,408 4,680
Loss (income) from operations $ 331 (216) 115
Identifiable assets $ 652 1,008 1,660
The Company exported approximately 12 percent, 35 percent, and 30 percent, of
its total sales in the years ended 1998, 1999 and 2000, respectively. These
exports are primarily to foreign subsidiaries of U. S. companies.
DOMESTIC VERSUS EXPORT SALES
----------------------------
<TABLE>
<CAPTION>
Export
-------------------------------
European All Other
India Domestic Community Asia Areas Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1998 Sales to unaffiliated customers ... $ 276 3,751 468 86 -- $ 4,581
1999 Sales to unaffiliated customers ... $ 46 2,506 1,117 266 -- $ 3,935
2000 Sales to unaffiliated customers ... $ 45 3,272 632 729 2 $ 4,680
</TABLE>
13. 401K PLAN
The Company maintains a 401(k) 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. Commencing January 1, 2000, the Plan
was amended, whereby the Company will match employee contributions equal to 20%
on the first 6% of the participants elective deferral. The Company's
contributions to the Plan vest ratably over a five year employment period for
each participant. Expenses related to this Plan during fiscal years 1998, 1999
and 2000 were not significant.
F-22
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
TO THE BOARD OF DIRECTORS,
CORTECH SYSTEMS (INDIA) LIMITED
We have audited the accompanying statements of financial condition of CORTECH
SYSTEMS (INDIA) LIMITED, formerly known as ULTRA TEK DEVICES LIMITED as at March
31, 2000 and 1999 and related statements of operations, shareholder's equity and
cash flows for each of the years then ended. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether 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's 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 ULTRA TEK DEVICES LIMITED as at
March 31, 2000 and 1999 and the result of its operations and its cash flows for
each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
As stated in Notes 12(a), 12(b) and 12(c), various notices have been issued by
India's customs department alleging, among other matters, misdeclaration of
imports, shortages of materials and excess returned goods and claiming
additional duties, penalties and confiscation of inventory aggregating
Rs.155,063,381. The company has contested these allegations and the outcome of
these matters is uncertain.
The financial statements referred to above have been prepared assuming that the
company will continue as a going concern. As discussed in Note 15 to the
financial statements, the Company has been declared as a sick company by the
Board for Industrial and Financial Reconstruction (`BIFR'). In addition two
creditors of the Company have filed separate petitions in the Bombay High Court
for winding up the company on the basis that the company is unable to pay its
dues. The BIFR held a hearing on May 19, 2000 and observed that no acceptable
revival proposal was in sight and directed the Operating Agency to initiate
necessary steps to change management. The bench also directed that the company
could submit its proposal for a one time settlement acceptable to banks and
institutions. Accordingly, the Company has submitted its proposal, which is
being considered by those banks and institutions. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in this regard are also described in Note 16. These financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ DELOITTE HASKINS & SELLS
DELOITTE HASKINS & SELLS,
CHARTERED ACCOUNTANTS
MUMBAI
DATED: 28 NOVEMBER 2000
F-23
<PAGE>
CORTECH SYSTEMS (INDIA) LIMITED
(FORMERLY ULTRA TEK DEVICES LIMITED)
STATEMENTS OF FINANCIAL CONDITION AT MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
March 31,
----------------------------------
Notes 2000 1999
----- ---------------- ----------------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C>
Cash and cash equivalents 2(f) Rs. 1,054,565 Rs. 206,931
Restricted cash balances 3 539,439 506,152
Receivable from GSI 8 590,973,023 483,509,600
Other accounts receivable, net of allowances of
Rs.793,994 (1999 - Rs.4,378,702) 617,221 557,367
Supplier and other advances, net of allowances of
Rs.3,524,221 (1999 - Rs.3,278,569) 293,583 491,977
Inventories, net of allowances of Rs.151,936,352
(1999 - Rs.151,936,352) 2(d) 16,022,945 21,799,561
Prepaid expenses and othe current assets, net of
allowances of Rs.271,010 (1999 - NIL) 12(a) 21,036,481 22,774,218
---------------- ----------------
TOTAL CURRENT ASSETS 630,537,257 529,845,806
PROPERTY, PLANT AND EQUIPMENT, net of
impairment allowance and accumulated depreciation 2(e) 23,793,422 25,741,402
---------------- ----------------
TOTAL ASSETS Rs. 654,330,679 Rs. 555,587,208
---------------- ----------------
LIABILITY AND SHAREHOLDERS' EQUITY
----------------------------------
CURRENT LIABILITIES
Secured short-term borrowings 4 Rs. 269,072,349 Rs. 236,390,193
Secured loan 5 51,006,346 41,001,914
Unsecured short-term borrowings 6 145,572,333 130,850,193
Payable to GSI 8 299,484,762 207,871,293
Advances from GSI 9 243,211,599 236,605,304
Other accounts payable 10 21,162,816 34,558,708
Due to other related parties, net 15 72,929,163 67,907,412
Accrued liabilities 9,192,825 11,417,984
---------------- ----------------
TOTAL CURRENT LIABILITIES 1,111,632,193 966,603,001
---------------- ----------------
LONG TERM LIABILITY
Authorised Preference Capital:
825,000 non-cumulative redeemable preference
shares of Rs.100 each.
Issued and outstanding:
820,000 non-cumulative redeemable preference shares 13 82,000,000 82,000,000
of Rs.100 each
COMMITMENTS AND CONTINGENCIES 11 & 12 -- --
---------------- ----------------
CAPITAL AND RESERVES
Authorised:
250,000 common shares of Rs. 10 each
Issued and outstanding:
100,000 common shares of Rs.10 each 1,000,000 1,000,000
Accumulated Deficit (540,301,514) (494,015,793)
---------------- ----------------
TOTAL CAPITAL AND RESERVES (539,301,514) (493,015,793)
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Rs. 654,330,679 Rs. 555,587,208
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
CORTECH SYSTEMS (INDIA) LIMITED
(FORMERLY ULTRA TEK DEVICES LIMITED)
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------------
NOTES 2000 1999
----- ---------------- ----------------
REVENUES
<S> <C> <C> <C>
Sales to GSI 2(b) Rs. 160,260,246 Rs. 135,088,330
Sales to others 2,081,122 2,053,753
---------------- ----------------
TOTAL REVENUES 162,341,368 137,142,083
---------------- ----------------
COST OF GOODS SOLD
Material, labour, overhead and direct cost (135,845,029) (135,825,579)
Allowance for inventory -- (130,607,657)
---------------- ----------------
TOTAL COST OF GOODS SOLD (135,845,029) (266,433,236)
---------------- ----------------
GROSS PROFIT (LOSS) 26,496,339 (129,291,153)
OPERATING EXPENSES, net
Selling, general and administrative (17,128,613) (21,251,467)
Engineering (3,155,798) (2,166,459)
Property, plant and equipment impairment loss -- (36,370,190)
Accounts payable written back 10 11,815,426 80,251,336
---------------- ----------------
Total operating expenses (8,468,985) 20,463,220
---------------- ----------------
OPERATING INCOME (LOSS) 18,027,354 (108,827,933)
OTHER INCOME AND (EXPENSE)
Interest expense 7 (64,737,921) (63,522,131)
Interest and other income 424,846 878,597
---------------- ----------------
Total other income (expense), net (64,313,075) (62,643,534)
---------------- ----------------
NET LOSS FOR THE YEAR Rs. (46,285,721) Rs. (171,471,467)
---------------- ----------------
ACCUMULATED DEFICIT, beginning of the year (494,015,793) (322,544,326)
---------------- ----------------
ACCUMULATED DEFICIT, end of the year (540,301,514) (494,015,793)
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
CORTECH SYSTEMS (INDIA) LIMITED
(FORMERLY ULTRA TEK DEVICES LIMITED)
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
----------------------------------
2000 1999
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss Rs. (46,285,721) Rs. (171,471,467)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale or write off of property, plant and equipment 146,996 16,574
Property, plant and equipment impairment loss -- 36,370,190
Allowance for inventories -- 130,607,657
Accounts payable written back, net (11,815,426) (80,251,336)
Interest accrued on loans 64,737,922 62,908,550
Capital advance written off -- 237,500
Revaluation of foreign currency loan -- 59,441
Depreciation 3,107,514 8,433,495
Decrease/(increase) in current assets:
Receivable from GSI (107,463,423) (135,626,540)
Other accounts receivable (59,854) (493,707)
Suppliers and other advances 198,394 581,790
Inventories 5,776,617 20,397,378
Prepaid expenses and other current assets 1,737,737 (946,397)
Restricted Cash balances (33,287) (48,470)
Increase/(decrease) in current liabilities :
Payable to GSI 91,613,468 78,310,479
Other accounts payable (2,160,022) 1,325,873
Net dues to related parties 3,076,752 3,818,569
Advances from GSI 6,606,295 16,043,862
Accrued liabilities (2,225,160) 31,418
---------------- ----------------
NET CASH PROVIDED BY/ (USED IN)OPERATING ACTIVITIES 6,958,802 (29,695,141)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,307,318) (3,263,127)
Proceeds from sale of property, plant and equipment -- 16,000
---------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES (1,307,318) (3,247,127)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of secured short term debt (6,748,850) (1,876,907)
Loan from related party 1,945,000 33,914,760
---------------- ----------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (4,803,850) 32,037,853
---------------- ----------------
NET INCREASE / (DECREASE) IN CASH AND CASH
EQUIVALENTS 847,634 (904,415)
CASH AND CASH EQUIVALENTS, beginning of year 206,931 1,111,346
---------------- ----------------
CASH AND CASH EQUIVALENTS, end of year 1,054,565 206,931
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
CORTECH SYSTEMS (INDIA) LIMITED
(FORMERLY ULTRA TEK DEVICES LIMITED)
NOTES TO THE FINANCIAL STATEMENTS
1. BACKGROUND
Cortech Systems (India) Ltd. ('the Company') was incorporated in India as Ultra
Tek Devices Ltd. with limited liability on August 9, 1985. The name of the
Company was changed from Ultra Tek Devices Ltd. to Cortech Systems (India) Ltd.
and a fresh certificate of incorporation incorporating such change was issued by
the Registrar of Companies on June 6, 2000. The Company is wholly owned by
Fairplay Group, Inc., a company incorporated in Panama. On July 1, 1993,
Fairplay Group, Inc. was acquired by Golden Systems, Inc., (`GSI') previously
known as Golden Power Systems, Inc., a company incorporated in the State of
California in the United States of America.
The Company is principally in the business of manufacture and export of switch
mode power supplies and adapters, to cater to the need of various international
customers in the field of information technology, telecommunications, networking
and distribution channels. The manufacturing facilities of the Company are
located at Mumbai in India, in Export Processing Zones ('EPZ'). Under the
regulations governing EPZs, the Company is required to export a substantial part
of its production. The Company imports substantially all of its raw materials
from East Asia, Europe and the United States of America. The Company exports
substantially all of its production to GSI and GSI's customers in the United
States of America, Asia and Europe. During the year, the Company commenced the
development and export of software at its Mumbai and Chennai software units.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America ("US GAAP"), from
the accounting books and records maintained by the Company at Mumbai and Chennai
in India. The Company's general purpose financial statements are prepared under
accounting principles generally accepted in India, which differ in certain
material respects from US GAAP.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, as discussed in Note 16, the
Company currently faces significant issues that raise substantial doubt about
the ability of the Company to continue as a going concern.
(b) REVENUE RECOGNITION
Revenues from sales of products are recognised at the time of shipment and
include incentives provided by the Government of India on export sales. Revenue
is recognised when no significant uncertainty as to measurability or
collectability exists. Substantially all of the Company's sales and purchase
transactions are with GSI.
(c) FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Indian rupee. Foreign currency
denominated transactions are converted to rupees at the exchange rate prevailing
on the transaction date. Foreign currency denominated assets and liabilities are
translated at the exchange rate prevailing on the balance sheet date. Gains and
losses arising on conversion of foreign currency denominated assets and
liabilities and on foreign currency transactions are included in the
determination of the net loss.
(d) INVENTORIES
Inventories are valued at the lower of cost and net realizable value. Cost is
determined on a weighted average basis and includes the cost of material,
freight and manufacturing overheads.
Allowances have been made for the probable diminution in the value of
inventories that are obsolete or slow moving.
Inventories consist of the following:
F-27
<PAGE>
At March 31, 2000 1999
---- ----
Raw material 148,295,395 151,952,141
Work-in-progress 14,056,005 20,044,701
Finished goods 4,390,956 73,751
Goods in Transit 1,216,941 1,665,321
-----------------------------
167,959,297 173,735,914
Less: Allowance for obsolescence 151,936,352 151,936,352
-----------------------------
Total inventories, net 16,022,945 21,799,562
=============================
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at acquisition cost, net of
depreciation and allowance for impairment. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements have been amortized over the terms of the lease agreements.
The Company has subjected long lived assets to a test of recoverability, based
on the undiscounted cash flows expected from use or disposition of such assets
and recognised an impairment loss. The loss is recognised based on the amount by
which the carrying values exceed the fair market values of the long-lived
assets. Fair market value is determined using anticipated cash flows discounted
at a rate commensurate with the risk involved.
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIFE (YEARS) 2000 1999
------------ ---- ----
<S> <C> <C> <C>
Machinery and equipment 10 to 15 61,351,560 61,475,320
Dies and patterns 3 1,959,896 1,959,896
Tooling 5 to 10 24,506,152 24,100,512
Motor vehicles 10 1,453,402 1,453,402
Furniture, fixtures and miscellaneous assets 5 to 15 18,402,744 18,205,935
Leasehold improvements 5 1,244,140 1,244,140
---------------------------
Property, plant and equipment, at cost 108,917,894 108,439,205
Less: Accumulated depreciation (48,937,323) (46,327,613)
Allowance for impairment (36,187,149) (36,370,190)
---------------------------
Property, plant and equipment, net 23,793,422 25,741,402
---------------------------
</TABLE>
Costs of normal maintenance and repairs are charged to expense as incurred.
Major replacements or betterments of property, plant and equipment are
capitalised.
(f) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
90 days or less to be cash equivalents. Restricted cash balances (see note 3)
are not included as cash or cash equivalents.
F-28
<PAGE>
(g) RETIREMENT BENEFITS
Contributions to defined contribution schemes such as Provident Fund, Family
Pension Fund etc. are expensed when incurred. The liability in respect of
gratuity is charged to revenue based on actuarial valuation at the year-end.
GRATUITY:
The company provides for gratuity, a defined benefit retirement plan (the
"Gratuity Plan") covering all employees. The Gratuity Plan provides a lump sum
payment to vested employees at retirement or termination of employment in an
amount based on the respective employee's salary and the years of employment
with the company. Employees generally vest after five years of continuous
service.
PROVIDENT FUND:
All employees of the company are entitled to receive benefits under the
provident fund, a defined contribution plan, in which both the employee and the
company contribute monthly at a statutory rate, currently 12% of employee's
salary. These contributions are made to a fund set up by the Government of
India. The company has no further obligations under the provident fund beyond
its monthly contributions.
The company does not have any significant post retirement obligations to its
employees or retirees other than those discussed above. Amounts contributed for
gratuity and provident fund were Rs.1,405,154 and Rs.1,265,043 for the years
ended March 31, 2000 and 1999, respectively.
(h) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
No cash was paid for income taxes and interest for the years ended March 31,
2000 and 1999 respectively.
(i) 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 amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the years presented. Actual
results could differ from those estimates.
3. RESTRICTED CASH BALANCES
Restricted cash balances comprise restricted deposits with banks amounting to
Rs.539,439 and Rs.506,155 at March 31, 2000 and 1999, respectively which have
been given as security against delivery orders issued by banks. During the years
ended March 31, 2000 and 1999, the rates of interest on these deposits ranged
from 8 to 11 per cent per annum.
4. SECURED SHORT-TERM BORROWINGS
Short-term borrowings include:
AT MARCH 31, 2000 1999
------------ ---- ----
Bills discounted 152,040,006 153,394,550
Packing credit 16,024,967 18,138,878
Interest accrued and due 101,007,371 64,856,765
------------ ------------
Total 269,072,344 263,390,193
------------ ------------
The Company has the above credit facilities with three banks. The loans are
secured by hypothecation of stock of raw materials, work-in-progress,
semi-finished and finished goods, consumables, stores and spares, bills
receivables and book debts. Further, the bill discounting arrangements and
packing credit arrangements are also covered by corporate guarantees from Fair
Play Group Inc., and GSI., the Company's immediate and ultimate holding
companies, Tandon Associates Inc., a related party and by the personal guarantee
of a director of the Company.
On March 31, 2000 and 1999 the above amounts of bills discounted and packing
credit were in default along with interest. The rates of interest on these
borrowings ranged from 20 to 25 percent. The Company's bankers have frozen
credit facilities available to the Company effective June 1996. These banks
issued legal notices to the
F-29
<PAGE>
Company on July 4,1997 calling upon the Company to pay the outstanding amount
due. On January 12, 1998 the Company was declared a sick company and was placed
under the supervision of the Board for Industrial and Financial Reconstruction
("BIFR") of the Government of India (See Note 16). Under Indian law relating to
rehabilitation of sick companies, the Company's banks are not permitted to
initiate any legal action against the Company for non payment of amounts due as
the enforcement of collateral by the banks requires the prior approval and
sanction of the BIFR.
5. SECURED LOAN
The Company had taken a US dollar denominated loan of US$914,308 from ICICI
repayable in 5 equal quarterly installments commencing from April 1, 1997,
secured by a first charge by way of hypothecation of movables (other than book
debts), including movable machinery, machinery spares, tools and accessories,
both present and future, subject to prior charges created and/or to be created
in respect of stocks and such other movables as may be agreed in favour of the
banks for working capital requirement in the ordinary course of business. The
loan is also secured by a first charge on any immovable properties that may be
acquired in the future. ICICI has agreed to cede second charge in favour of a
consortium of banks subject to the banks' holding first charge on current assets
agreeing to cede second charge on current assets in favour of ICICI. The Company
has defaulted in the payment of installments due subsequent to April 21, 1997.
Accordingly, the outstanding foreign currency denominated loan has been frozen
as a rupee loan. No legal action has been taken by ICICI against the Company nor
has ICICI recalled any amount. The amount of principal and interest overdue as
on March 31, 2000 was Rs.51,006,346.
Interest on installments overdue is charged at the maximum rate chargeable on
rupee denominated loans. This rate is 20.41 per cent.
The enforcement of the security requires the prior approval and sanction of the
BIFR
6. UNSECURED SHORT TERM BORROWINGS
Unsecured borrowings include the principal balances in respect of unpaid overdue
bills discounted with banks and interest. The rate of interest on these
borrowings ranged from 20 per cent to 26 per cent.
7. INTEREST ON BORROWINGS
Interest including penal interest on secured and unsecured short-term borrowings
has been estimated by the Company based on information available with the
Company. These balances are subject to confirmation by the banks (See note 16).
8. RECEIVABLE FROM AND PAYABLE TO GSI
The Company has applied to the Reserve Bank of India to set off the export
receivables (bills sent on collection) from GSI of Rs. 296,722,398 against the
import payables to GSI in line with the international practice. Pending the
necessary clearance from RBI, no adjustment is made in respect of the same in
accounts.
9. ADVANCES FROM GSI
Advances from GSI represent advance payments from the Company's parent of
Rs.243,211,599 received in earlier years. These advance payments were made on
the understanding that they would be treated as advances and that the parent
company would make payment for individual bills as and when exports are made
against bills of exchange. Subsequently, the parent company did not honour its
commitment under the bills of exchange as and when they fell due for payment. In
the normal course of business, the Company had discounted these bills of
exchange with its bankers in India. When the Company's parent did not honour its
commitment under these bills of exchange, the Company approached the Reserve
Bank of India to set off the advance of Rs.243,187,952 due to the Company's
parent against the export receivables of Rs.240,320,979 due from the Company's
parent at the rate of exchange prevailing as on March 31, 2000. Pending the
RBI's clearance, no set off has been recorded.
10. ACCOUNTS PAYABLE WRITTEN BACK.
Included in accounts payable at March 31, 1999 were amounts aggregating to
Rs.11,815,426 payable to third parties since 1996. These amounts payable had not
been demanded by the parties by March 1999 and have become time barred under the
Indian Limitation Act, 1963. Accordingly, the Company has written back accounts
payable of Rs.11,815,426 as the Company is not legally obligated to repay these
amounts and does not intend to do so.
F-30
<PAGE>
11. COMMITMENTS
(a) Leases
(i) The Company leases factory and office premises under operating leases from
Santacruz Electronics Export Processing Zone. (SEEPZ) under a lease which
expired on March 31, 2000. The Company continues to occupy the space and expects
the lease to be renewed for a period of 5 years. Pending completion of the lease
renewal agreement the Company has estimated the rentals to be Rs.1,701,465
annually.
Future minimum payments under this operating lease are estimated as follows:
Years ending March 31:
----------------------
2001 1,701,465
2002 1,701,465
2003 1,701,465
2004 1,701,465
2005 1,701,465
(ii) The Company also leases factory and office premises under operating leases
from Madras Export Processing Zone (MEPZ) at Chennai. During the year, the
Company cancelled the existing lease agreement with MEPZ prematurely and entered
into a new lease agreement for a smaller space as a part of its restructuring
activities. This agreement is for a term of 15 years with minimum lease rentals
of Rs.123,412 annually, upto March 31, 2002. Thereafter the lease rentals would
be revised every 3 years subject to a maximum of 25% increase over the previous
lease rentals.
Future minimum payments under this operating lease are as follows:
Year ending March 31:
---------------------
2001 123,412
2002 123,412
Gross rental expense for the years ended March 31, 2000 and 1999 amounted to Rs.
1,875,5786 and Rs.1,745,104 respectively.
(b) CAPITAL EXPENDITURE
At March 31, 2000 and 1999, the Company has committed to spend approximately
Rs.377,817 and Rs.881,346, respectively, under agreements to purchase property,
plant and equipment.
12. CONTINGENCIES
The Company faces the following material assertions by revenue authorities in
India:
(a) During the year 1994-95, the Company's import of computer components and
parts of computer systems for the final assembly into computer systems and
sale into the Domestic Tariff Area (`DTA') came under investigation by the
Indian Customs and Excise department ("Customs"). Following the
investigation, inventories of Rs.47,000,000 were seized by the authorities.
On May 30, 1995, Customs issued a notice to the Company alleging
misdeclaration of imports of computer systems as imports of computer system
components. The notice calls upon the Company to explain why Customs should
not
(I) confiscate all the goods so imported,
(II) levy additional duty of Rs.49,000,000 on the goods already sold into
the DTA, and
(III)levy a penalty not exceeding five times the duty on such goods or
Rs.1,000 whichever is greater.
F-31
<PAGE>
The Company has paid an advance of Rs.20,000,000 against customs duty that
may be levied by Customs against which the balance as on March 31, 2000 and
1999 amounting to Rs.19,202,878 has been included in the prepaid expenses
and other current assets in the balance sheet.
Subsequently, the authorities released the inventories seized earlier and
the Company is exercising the opportunity provided by the authorities for
it to re-export the goods or sell the goods to other units located within
Santacruz Electronics Export Processing Zone (`SEEPZ') or into the DTA.
(b) The Customs department carried out an investigation in March 1995 in
respect of stocks of imported material including work-in-progress. Alleging
shortages, it has issued a show cause and demand notice dated September 8,
1997, asking the Company to explain why -
I. Duty of Rs.25,724,946 leviable on the non-duty paid imported
components valued at Rs.28,217,319 which are not accounted for in
terms of the bond executed by them should not be recovered;
II. Penal action should not be initiated against them for contravention of
the conditions of the Customs Notification and thereby rendering
unutilized goods liable for confiscation and also for violation of the
provisions of Foreign Trade (Development & Regulation)Act, 1992 ;
III. A penalty equal to the duty held to be leviable in respect of
unaccounted goods should not be imposed on the Company.
(c) The Directorate of Revenue Intelligence (`DRI') carried out investigation
in February 1997 in respect of returned rejected goods (`RMA') and stocks
of imported material including work in progress.
Alleging shortages and excess, Customs has issued a show cause and demand
notice on May 15,1998 asking the Company to explain why:
(I) duty of Rs.8,834,865 on the missing / non accounted and non duty paid
RMA totally valued at Rs.8,863,956 should not be paid by the Company;
(II) duty of Rs.16,885,317 on the non-accounted and non-duty paid short
material components valued at Rs.33,927,608 which are not accountable
in terms of bond executed by them, should not be paid by the Company;
(III)RMA and raw material components valued at Rs.28,893,307 which were
found in excess during investigation should not be confiscated; and,
(IV) levy a penalty not exceeding five times the duty on such goods or
Rs.1,000 whichever is greater.
The Company is disputing each of the allegations above and has been advised by
eminent counsel that it has meritorious defenses in each instance.
In the opinion of the Company and on the basis of advice given by eminent
counsel, no material liability is expected in respect of the above matters, and
accordingly, the Company has not made a provision for the above matters.
13. NON-CUMULATIVE REDEEMABLE PREFERENCE SHARES
Non-cumulative redeemable preference shares were issued and allotted on
September 7, 1993 to Advance Power Devices Private Limited ('APD'), a related
party, in full and final settlement of its loan to the Company and are
redeemable at par, after a period not earlier than 10 years. The Company has
obtained an undertaking from APD that APD will exchange these shares at maturity
for like shares having broadly similar terms. These preference shares are
entitled to a preferential nominal aggregate annual dividend of Rs.1,000 per
annum and, in the event of repayment of capital, to a preferential repayment at
par in priority to the common shares with no further right to participate in any
surplus.
14. INCOME-TAX
Under the Indian Income-tax Act, 1961, the Company is exempt from income tax to
the extent of profits attributable to the export sales of the Company. In
respect of the years ended March 31, 2000 and 1999, the Company did not
F-32
<PAGE>
have any taxable profits and, therefore, no provision for income-tax in respect
of profits attributable to domestic sales, interest and other income which are
not exempt from income-tax is made in the financial statements.
No provision for deferred taxes has been made as the Company has loss carry
forwards of Rs. 358,517,261 and Rs. 321,775,856 as on March 31, 2000 and 1999
respectively. No deferred tax asset has been established for such significant
loss carry forwards as their recoverability is unlikely and hence a valuation
allowance has been recognised for the entire amount of loss carry forwards.
15. RELATED PARTY TRANSACTIONS
The Company has dealings with the following entities, which are majority owned
or otherwise controlled by Mr. Manohar Lal Tandon, Chairman, either solely or
together with his close relatives and other directors of the Company. The net
balances due to related parties other than GSI, at March 31, 2000 and 1999 for
sales, purchases, transfers or sharing of expenses and advances are
Rs.72,929,163 and Rs.67,907,412, respectively.
The aggregate of sales, purchases, transfers and sharing of expenses during the
years ended March 31, 2000 and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
March 31, 2000 March 31, 1999
Nature of transaction Expenses Revenues Expenses Revenues
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charges for sharing expenses 2,454,306 377,110
Credits for sharing expenses 56,436 296,724
Purchase of materials 991,046
Sale of materials 435,614 333,795
---------------------------------------------------------
TOTAL 2,454,306 492,050 1,368,156 630,519
---------------------------------------------------------
</TABLE>
16. GOING CONCERN ASSUMPTION
The Company has been declared as a Sick Industrial Company by the Board for
Industrial and Financial Reconstruction (BIFR) on January 12, 1998. The BIFR, in
exercise of its powers has appointed Industrial Credit and Investment
Corporation of India (ICICI) as the Operating Agency (OA) responsible for
examining the Company's viability and preparing a Viability Study Report for the
BIFR's consideration. The rehabilitation proposal submitted by the Company was
studied by the OA and forwarded to the BIFR in March 1999 along with the minutes
of the joint meeting with banks and institution convened by the OA. Based on the
minutes of the joint meeting forwarded by the OA to the BIFR, the BIFR prepared
a Draft Rehabilitation Scheme and invited all concerned parties to make
suggestions or raise objections to the draft scheme within one month.
The BIFR held a hearing on August 16, 1999 and, after hearing all interested
parties, the BIFR directed the Company and the banks to hold further discussions
and modify the scheme to take into account the various points made at the
hearing and instructed the OA to forward a modified rehabilitation scheme within
six weeks.
Accordingly, the Company changed the scheme so that no further funding would be
required from the banks and that there would be no dilution of the existing
security available to the consortium banks. This revised scheme was submitted to
the OA.
The OA held a joint meeting of consortium member banks and the Company on
October 5, 1999 to discuss the modified draft rehabilitation scheme and
forwarded minutes of this joint meeting to the BIFR indicating that no consensus
on the proposal submitted by the Company had been arrived at.
On May 19, 2000, the BIFR held another hearing, at which the bench observed that
no acceptable revival proposal was in sight and directed the OA to initiate
necessary steps towards a change of management. The bench also directed that the
Company could also submit their proposal for a One Time Settlement acceptable to
the banks and institution. The Company submitted its settlement proposal on Aug
16, 2000 and initiated discussions/negotiations on the said proposal. Based on
the discussions with the banks and ICICI, the settlement proposal as revised on
November 16, 2000 calls for a repayment of 85% of the principal amount
outstanding as on March 31, 1996, in respect of banks and 78% of the principal
amount outstanding as on March 31, 1997, in respect of ICICI both after
adjusting subsequent credits availed and repayments made till date and waiver of
interest, penal interest etc. after the respective aforementioned dates. The
settlement is proposed to be made over a period of 18 months after the sanction
of the proposal by BIFR.
F-33
<PAGE>
Two creditors of the Company have filed separate petitions in the Bombay High
Court for winding up the Company on the basis that the Company is unable to pay
their dues. The amounts claimed by these two creditors aggregate Rs.4,494,867.
These petitions came up for admission after the Company was declared a sick
industrial company and their hearing has been adjourned until further notice,
pending completion of the rehabilitation process being undertaken by the BIFR.
The above matters give rise to serious doubts about the Company's ability to
continue as a going concern in the foreseeable future. Management's plans are to
satisfy the settlement arrived at with the banks and institutions under the
directives of the BIFR and to recapitalise the Company and to seek from the
Company's parent sufficient cash with which to do so. The Company's parent also
is executing restructuring plans and capital raising efforts.
Under these circumstances, the accounts of the Company have been prepared on
going concern basis and the same is dependent upon the approval of the
Settlement scheme by the BIFR, availability of funds to meet the commitments and
further working capital needs, and future profitability of the Company.
FOR CORTECH SYSTEMS (INDIA) LTD.
(FORMERLY ULTRA TEK DEVICES LTD.)
MANAGING DIRECTOR DIRECTOR
MUMBAI, DATED:
28 NOVEMBER 2000
F-34
