ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
FastComm Communications Corporation (the "Company" or "FastComm") designs, develops and manufactures signaling gateway products that bridge the gaps that exist between incompatible communications networks, integrated access devices that serve as advanced voice/data/video/data convergence routers for enterprise and carrier users, IBM data center products, and protocol converters specifically designed for Unisys environments. FastComm also provides advanced internet protocol and data solutions over Frame Relay and xDSL such as voice/data integrated access devices (IAD's) and routers.
The Company's goal is to provide customers with leading edge technology and a cost-effective means of incorporating these technologies into existing or new networks. FastComm is positioning itself at the forefront of the evolving converged networks with a customer base that includes domestic and international corporations, carriers, internet service providers, competitive local exchange carriers, and State and Federal government agencies.
The Company targets business customers and designs its products for volume sales through third party resellers such as network product and service dealers, systems integrators, telephone carriers and original equipment manufacturers. These resellers form a primary distribution channel for the Company and also provide installation and maintenance support services.
The Company was incorporated as MicroTel, Inc. under the laws of the Commonwealth of Virginia in May 1983. The Company changed its name to Data Safe Incorporated in February 1984; to Electronic Vaults, Inc., in August 1984; and to FastComm Communications Corporation, in October 1987.
During the fiscal year ended April 30, 1997, the Company acquired Comstat Datacomm Corporation, ("CDC or Comstat"), a Georgia corporation engaged in the data communications business.
In May 1998, FastComm obtained an exclusive license from KG Data Systems, Inc., ("KG Data") to manufacture, market and sell that firm's ChanlComm(R) product line, a replacement for channel attached front end processors in IBM based mainframe networks. Effective March 31, 1999, FastComm acquired all of the assets and assumed certain liabilities of KG Data. This business is now internally identified as the Mainframe Communications Division. (See Item 7)
On March 31, 2000, the Company completed its acquisition of substantially all of the assets and certain liabilities of Cronus Technology, Inc., ("Cronus") a privately held Illinois corporation that designs, manufactures and sells system compatibility solutions to the telecommunications industry. The Company believes that the Cronus acquisition provides it with a series of signaling gateway products that may be sold to multinational telecommunications corporations at gross margins significantly greater than the frame relay product line. Further, Cronus has 22 experienced software engineers which can allow the Company to significantly expand its research and development activities which could lead to more efficient product development. (See Item 7)
The Company's shares are quoted on the OTC Bulletin Board under the symbol FSCX.OB.
PETITION FOR REORGANIZATION UNDER CHAPTER 11 OF THE FEDERAL BANKRUPTCY LAWS
On June 2, 1998, the Company filed a voluntary petition for reorganization under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Virginia. On March 30, 1999, the Company's Plan of Reorganization (the "Plan") was approved by the Bankruptcy Court and the Company emerged from Chapter 11. The Plan became effective on April 12, 1999. The Plan provided for cash and debenture payments equal to 100% of each allowed claim plus interest. The positions of all common shareholders were preserved. Confirmation of the Company's Plan resulted in an extraordinary gain of $833,149 in the fiscal year ended April 30, 1999. On November 18, 1999, a motion for final decree was granted and the case was closed.
Pursuant to the Plan, Class 1 creditors representing existing holders of convertible debentures, were required to convert their debt to equity on or before October 12, 1999. Claims of unsecured creditors, below $1,000, were repaid in cash on or before April 30, 1999. Claims of unsecured creditors greater than $1,000 were satisfied by cash payments totaling 25% of the allowed claim. The Company issued debentures to these unsecured creditors for the remaining 75% of their allowed claims. To generate the cash requirement of the Plan, the Company raised $1,000,000 through a private placement offering of securities to a group of Company employees, insiders and accredited investors.
The Company issued $2,490,357 in convertible debentures in satisfaction of the remaining 75% of each claim allowed in its Plan. The debentures earn interest at a rate of 7.5% per annum payable in the form of common stock of the Company at time of conversion. The debentures are convertible at the average of the closing price of the Company's common stock for the ten consecutive trading days ending on the trading day immediately preceding the date of conversion. The Company may execute a cash prepayment of the debenture at any time. The debentures mature on April 12, 2003. Any debentures not converted by this date will automatically convert into common stock of the Company. At April 30, 2000, $767,602 in convertible debentures were outstanding.
The Company is in compliance with all of the terms and conditions of its Plan.
FASTCOMM'S PRODUCTS
FastComm's suite of products include:
SIGNALING GATEWAY PRODUCT FAMILY
The FastComm line of signaling gateways bridges the gap between incompatible communications networks, enabling seamless communication between in-band to in-band, in-band and out-of-band networks and out-of-band to out-of-band SS7, ISDN, and xGCP networks. There are 4 products in the signaling gateway product line:
o SIGNALPATH(TM) 230 (SP-230) is a 52 T1/E1 signaling gateway allowing communication between in-band and out-of-band networks or between networks supporting different out-of-band protocols. As a signaling gateway supporting multiple national SS7 and in-band variants, the SP-230 could extend the softswitch architecture to foreign markets immediately.
o SP-201 is a 4 T1/E1 variant of the SP-230.
o TSC-100 is a 24 T1/E1 signaling gateway allowing communication between different variants of in-band signaling.
o MUX-100 is an analog to digital converter. Protocol conversion is an available option.
INTEGRATED ACCESS DEVICES (IAD'S) PRODUCT FAMILY
Integrated Access Devices aggregate multiple traffic types (i.e. voice/fax, IP, video, etc.) onto a single access port or circuit. The FastComm IADs consist of the following two products:
o METROLAN(TM) family of IADs is ideal for remote office/branch office environments. Supports up to 3 analog voice/fax ports, Ethernet, and up to 3 physical ports with extensive IP/legacy support.
o GLOBALSTACK(TM) is a modular IAD that complements the MetroLAN(TM) for medium to large and central site environments. Supports up to 60 compressed digital voice/fax channels or 6 voice interfaces, Ethernet and a variety of serial data interfaces (i.e. V.35, X.21, V.24, T1/FT1, E1/N*64kbps, and/or 56/64kbps CSU/DSUs).
DATA CENTER PRODUCTS FAMILY
The Data Center product family is geared toward providing data routing capability for IP and legacy communications.
o CHANLCOMM(R) provides the IBM mainframe user with the ability to perform high speed SNA/SCLC/Bisync and LAN communications without the need for a traditional front-end processor or costly software products such as NCP or SSP.
o QUICK II(TM) is an integrated router, protocol converter and terminal server all in one easy to manage compact chassis, for attaching Unisys Poll Select devices into IP networks.
o MONOFRAD(TM) is a data router supporting a Network and a single User port.
o RINGFRAD(TM) is a data router supporting a Token Ring, a Network port and up to 4 User ports.
o WEBROUTER(TM) is a compact, low cost Internet/Intranet router supporting Ethernet and a single Network port.
o ETHERFRAD(TM) is a family of integrated IP and legacy data routers supporting Ethernet, a Network port and up to 5 User ports.
SIGNALPATH 230
The SignalPath 230 (SP 230) is an advanced signaling protocol converter designed to solve signaling compatibility problems that exist between communications networks. Different types of communications protocols, both in-band and out-of-band, exist globally making communications between such networks impossible. The SP 230 breaks down the communications barriers presented by these different protocols and enables a seamless flow of information across any network. The SP 230 can interface with switches and gateways provided by Cisco, Lucent, Nortel, Siemens, Ericsson, Alcatel and others. As a signaling gateway supporting multiple national SS7 and in-band variants, the SP-230 could extend the softswitch architecture to foreign markets immediately.
METROLAN
The MetroLAN router combines analog voice from switches, PBXs, key systems, telephones, and the public telephone network with LAN/legacy data & multimedia and transports it over switched or dedicated digital networks. MetroLAN satisfies the needs of small office/branch offices that require optimum phone line performance. With FastComm's routing software, three analog voice ports, two data equipment serial interfaces and an Ethernet port, the MetroLAN is the perfect solution for voice/fax/data and video applications. The MetroLAN is compliant with FRF.11, supporting voice compression (with silence suppression) which allows up to 3 compressed voice channels to be transported in less than 30Kbps. Bandwidth is dynamically allocated between voice/video/data so that LAN traffic may continually adapt to fill the unused bandwidth.
GLOBALSTACK
The GlobalStack-EX voice/fax/data/video router combines digital and analog voice from switches, PBXs, key systems, and remote telephones with LAN/legacy data and transports it over switched or dedicated digital networks. With digital T1, E1, ISDN BRI and PRI interfaces, frame relay interfaces for data equipment, an Ethernet port, and FastComm's routing software, the GlobalStack-EX is the perfect solution for integrating voice/fax/data and multimedia throughout the enterprise network. The GlobalStack-EX satisfies large regional and central site office and POP locations where a confluence of communication mediums converge. The GlobalStack-EX is compliant with FRF.11, supporting voice compression (with silence suppression) and allows up to 30 voice channels to be transported in less than 300Kbps. Bandwidth is dynamically allocated between voice/video/data so that LAN traffic may continually adapt to fill the unused bandwidth.
CHANLCOMM(R) MAINFRAME COMMUNICATIONS PROCESSOR
During fiscal 1999, the Company began to market the ChanlComm(R) product family as a replacement for the front end processor ("FEP") in IBM mainframe computer networks. The ChanlComm(R) takes its name from being "channel attached" to a main computer, bypassing the typical front end processor installed to handle communications lines. This product is now shipping with serial (SDLC) interfaces for wide area network lines
(point to point and multidrop). The product development plan includes the addition of a direct frame relay interface, full IP routing, along with other capabilities and protocols. The current 16 port capacity will be expanded to at least 256 ports this fiscal year. In certain applications, the ChanlComm(R) at the host computer will communicate with FastComm IADS or routers at remote sites, creating "pull through" business for the Company.
QUICK PRODUCT LINE
The Quick II targets Unisys A and C-series mainframe customers who have been using legacy CP2000 equipment. Unisys sells and supports the Quick II to customers who require cost-effective network solutions for communication between legacy mainframe, peripheral and LAN applications. FastComm supports over 100 protocol variations which legacy equipment users depend on for seamless operations.
NEW PRODUCT DEVELOPMENT
The Company invests heavily in research and development and expects such investment to continue.
Recorded expenses for research and development have been as follows:
The Company's ability to anticipate changes in technology, industry standards and communications service provider offerings, and its ability to develop and introduce new and enhanced products on a timely basis that are successful in the market will be a significant factor in the Company's competitive position and in its prospects for growth. Management believes that the future success of the Company depends on its ability to continue to enhance its products, improve product performance and functionality and to develop new products that address emerging markets. Management believes that significant expenditures for research and development will continue to be required.
To bring a product to market quickly, any design may be done entirely internally, externally, jointly with another firm, or from licensed technology. Larger companies, with greater engineering resources and more internal expertise, may be able to develop a larger portion of their products without outside technology. Elimination of licensing fees or royalties could provide them a cost advantage.
Research and development project schedules for high technology products are inherently difficult to predict, and there can be no assurance that the Company will achieve its expected initial shipment dates of products in development. The timely availability of new and enhanced products is critical to the success of the Company. Delays in availability of these new products, or lack of market acceptance of such products, could adversely affect the Company.
BACKLOG
Because of its quarterly design and build cycle, the Company builds and fills to the extent possible all of its customer orders within the fiscal quarter of receipt. Backlog of undeliverable orders is usually not significant. Management believes that the Company's backlog as of any given date is not necessarily indicative of actual revenues for any succeeding period.
Management knows of no material effect from non-compliance with environmental laws or regulations.
SEASONALITY AND INFLATION
The Company's operations have not proven to be seasonal, although quarterly revenue and net income may vary. Although the Company cannot accurately determine the amounts attributable thereto, the Company has been affected by inflation through increased costs of employee compensation and other operating expenses. The Company believes that inflation has not had a material effect on the Company's results of operation or financial condition.
MARKETING AND SALES
DOMESTIC
The Company targets its signaling gateway products and its IAD product line to business customers and designs its products for volume sales through third party resellers such as network product and service dealers, systems integrators, telephone carriers and original equipment manufacturers. The Company has existing relationships and contracts with several large customers such as Lucent, Nortel, Siemens and Pacific Access Technology. These resellers form a primary distribution channel for the Company and, in some instances, provide installation and maintenance support services.
To date, the Company has marketed the ChanlComm(R) product line directly to end users and will continue to do so until reseller relationships are developed. The Company is in discussion with several potential resellers of the ChanlComm product. Since discussions are in the preliminary stages, no assurance can be made as to the outcome of these discussions. Unisys and Anicom sell the Quick II directly to their customer base.
During fiscal year 2000, sales to Amadeus, Pacific Access Technology, and Anicom accounted for 18%, 15% and 12% of total sales. During fiscal years 1999 and 1998, sales to Alcatel Data Networks accounted for 28% and 32% of total sales.
There were no Government contracts during the fiscal year that were subject to renegotiation of profits or termination.
INTERNATIONAL
In the international marketplace, independent distributors represent the Company in more than 35 countries. These firms are most often locally owned and managed, which gives them an important presence in their markets. Terms of international distribution agreements are similar to domestic agreements and grant to the distributor similar stock adjustment/rotation and stock update rights. In most cases, a distributor obtains non-exclusive rights to all FastComm products for a specific geographic area. In fiscal 2000, 1999 and 1998, the Company had export sales to foreign customers totaling $616,000, $1,800,000 and $3,292,000, respectively. In fiscal 1999 and 1998 the majority of the sales to Alcatel Data Networks were for export, primarily to Latin America and Asia.
During fiscal year 2000, the Company placed significant emphasis on international selling opportunities. The Company increased its international sales force and executed new reseller contracts with distributors in Argentina, Bolivia, Bosnia, China, Costa Rica, El Salvador, Guatemala, Honduras, Hong Kong, Korea, Mexico, Nicaragua, Peru, Suriname, Tobago and Trinidad. The Company is in discussions, of various stages, with significant international customers. Since contracts have not yet been executed, no assurance can be made as to the outcome of these discussions. In most instances, the Company requests confirmed letters of credit, issued in advance, as payment for international sales. The Company recently signed a three year agreement with Sumisho Electronics to supply the Japanese Data Center market with the ChanlComm 7790 product.
The Company's export sales may be subject to restrictions on foreign operations, including restrictions imposed by foreign governments on imports as well as U.S. Government originated restrictions, and are subject to risks associated with fluctuations in foreign exchange rates. Although substantially all foreign contracts are denominated, and revenues are paid, in United States dollars, to the extent the Company receives payments in foreign currencies, it may incur gains or losses because of exchange fluctuations between currencies. Moreover, fluctuations in currency exchange rates may cause the Company's established prices to be relatively more or less expensive in terms of local currencies.
CUSTOMER SUPPORT AND SERVICE
The Company maintains a technical support staff. Their work primarily supports resellers, but end users are periodically given technical information and assistance by telephone. For new products or features, including beta tests, Company personnel will visit end user sites to participate in installation and training.
NCR Corp. and Unisys have signed agreements with the Company whereby they assume responsibility for installation and/or maintenance, under certain circumstances, of FastComm products sold by them or by third parties. The Company may enter into similar agreements with others in the future.
PROMOTION
The Company places advertisements in trade publications that stress the unique product benefits. Most publications in which the Company advertises have international circulation, aiding the Company's selling efforts outside the U.S.
The Company participates regularly in industry trade shows in order to meet prospective customers, generate sales leads, communicate with the press, and to do market research. The Company exhibits under its own name and also takes opportunities to exhibit with its dealers and distributors who show FastComm products. To generate interest and to identify prospects among data center managers, the Company uses direct mail targeted at known users of mainframe computers.
COMPETITION
The communications industry is highly competitive. Rapid technological change, evolving standards and regulatory developments characterize the market for the Company's products. Many of the Company's competitors and potential competitors have greater financial, technological, manufacturing, marketing and personnel resources than the Company. The Company's success depends to a large extent on the insight, experience, and energy of its people, and therefore on its ability to attract and retain experienced professionals.
The primary competition for each of the Company's major products is as follows:
SIGNALING GATEWAY PRODUCT FAMILY: The Company believes that there is a distinct market for signaling gateways and that the SignalPath product family is well positioned to take advantage of this trend. Competitors include California-based TEKELEC, Inet Technologies, Hewlett-Packard, Sun Microsystems, and Telesoft Design Ltd. Although, Sun and Hewlett Packard have SS7 interfaces, they focus on their server market without much emphasis on the multitude of international signaling variants.
The complexity and lack of interworking standards represent high barriers to entry. Accordingly, very few companies concentrate on this market. Those companies that have demonstrated development of signaling products have typically become acquisition targets of larger telecommunications companies.
INTEGRATED ACCESS DEVICES (IAD'S) PRODUCT FAMILY: Competition is extensive in this marketplace. Major competitors include the Motorola Vanguard product line, Cisco Systems' 2520-2523 and 3800, and the ACT Networks' Netperformer product family. While the Company currently has less than a 2% share of the total IAD market, management believes that the Company's products including prioritization and, in particular, integrated voice capabilities, are extremely attractive at the current selling prices.
UNISYS MAINFRAME MARKET: The users of the Quick II product are those with older Unisys mainframe computers that were designed to communicate using the Poll/Select protocol on leased lines. Progress in computers and communications technologies will force these networks to a more modern transmission format, typically frame relay or Internet Protocol (IP). FastComm supports both migration strategies with the Quick II, which replaces the CP 2000. The Quick II is sold and supported by Unisys personnel as well as certain other FastComm resellers.
IBM MAINFRAME MARKET: The ChanlComm(R) is one of the very few communications devices that attach directly to the mainframe computer via the block or byte channel (bus and tag connectors). No other IAD vendor offers a channel-attached device. Among router vendors, only Cisco has announced a channel attachment option to their larger router line. This channel attachment technology is licensed by Cisco from IBM. The Company believes that the cost to buy or design a channel interface to the mainframe will pose a significant barrier to new entrants to the market for several years.
Current users of IBM front end processors ("FEP") were advised that IBM discontinued support for certain older models in December of 1998. A similar plan for the remaining larger version (the IBM 3645) has alarmed customers who do not wish to convert to router based networks. These enterprises are now FastComm's prime targets for the newest release of of the ChanlComm product line. The ChanlComm(R) products easily replace all FEP versions. ThirD party maintenance organizations continue to support the older FEP's, thus allowing them to remain in service for some additional time. The Company expects that these organizations will continue to offer this support as it offers them a very lucrative business opportunity. These maintenance organizations are also sales prospects, as they too can benefit from the ease of use and state of the art of this product.
Having a channel-attached product is expected to provide a competitive advantage to the Company as it seeks a share of the business to be generated between now and the year 2003 when an expected 15,000 IBM networks convert from leased lines to a frame relay transmission service. However, competitors like IBM and Cisco, which are larger and have greater resources, are expected to compete for the same customers.
LICENSES, PATENTS, AND TRADEMARKS
The communications industry traditionally relies more on trade secrets and rapid obsolescence than patents. None of the Company's current products is protected by patent.
On November 12, 1998, the Company entered into a 20-year licensing agreement with Telogy Networks, Inc. to deliver their Golden Gateway Voice Over Packet software and documentation service. The total committed cost was $281,000. Payments are spread over a 24-month period. Deliverables include DSP unit licenses and developer's kit and MCU unit licenses and developer's kit.
On November 24, 1998, the Company obtained a worldwide non exclusive royalty bearing license from Alcatel Data Networks, Inc. ("Alcatel") to use and further develop Alcatel owned technology and intellectual property. The terms and conditions of this agreement call for a one-time fee of $50,000 payable in four equal installments plus royalty payments based on unit sales. The initial term of this agreement is twenty years and is renewable subject to negotiation of terms and conditions agreeable to both parties 30 days prior to its expiration.
On May 5, 1999 the Company entered into a licensing and task order agreement with Taboret, an Arinc Inc. subsidiary. The license provides for development of a graphical user interface (GUI) and a suite of SNMP tools to manage communication equipment and create management reports. The total committed cost for the basic management system was $61,000. An additional committed cost for each FastComm unit type, special project labor, editor, maintenance, block distribution run time licenses and options totaled $15,000.
The Company licenses outside technology for its product development. The cost to license software from commercial vendors is less than the loaded cost of internal developments. Licensing also speeds product delivery. All of the software licenses currently owned by the Company are perpetual. The Company expects to license additional software, particularly in areas that are highly standardized and have multiple sources to minimize costs.
Software related to the ISDN, X.25, voice compression and SNA interfaces is licensed to the Company and has been integrated into its IAD/ router product line.
MANUFACTURING
Over the past several years, the Company has outsourced the manufacturing of its circuit board assemblies to third party manufacturers. The Company believes that the outsourcing of manufacturing preserves capital for other business purposes. The Company's in house manufacturing process is limited to that of planning, purchasing, material management, final assembly and testing. The Company utilizes several manufacturers for this process and believe that its relationships with these organizations is satisfactory. The Company will continue this outsourcing activity for the foreseeable future.
Most of the components used in the Company's manufacturing process are available from multiple sources. Single-source items are all from large vendors with stable histories of supplying material as needed. FastComm and its third party manufacturers have established strong relationships with key vendors to reduce the risk of significant shortages or delays relating to availability of materials. Shortages or delays in the supply of components, however, could adversely affect the Company's ability to meet scheduled product shipments in any particular fiscal quarter, which could materially affect the Company's near term operating results. Management believes the loss of any supplier would not be materially detrimental to the Company's business in the long term.
EMPLOYEES
At July 5, 2000, the Company had 103 full-time employees. None of the Company's employees is covered by a collective bargaining agreement. The Company believes that its employee relations are satisfactory.
FUTURE PROSPECTS
On a forward-looking basis, the Company finalized the development of its GlobalStack and MetroLan product lines, all of which have voice, data and video capabilities. The Company has added new features to its Quick product line that qualify this product for a larger and enhanced distribution channel. The Company believes that the GlobalStack and MetroLan products have a strong international application. Accordingly, the Company has enhanced its international selling presence in Brazil, Australia, the Pacific Rim, Colombia, Venezuela and Central America.
During its fiscal year ended April 30, 2000, the Company executed non exclusive distribution agreements with resellers in Argentina, Bolivia, Bosnia, China, Costa Rica, El Salvador, Guatemala, Honduras, Hong Kong, Korea, Mexico, Nicaragua, Peru, Suriname, Tobago and Trinidad.
The acquisition of Cronus allows FastComm to offer signaling gateways that bridge the gap between incompatible communications networks. These gateways enable seamless communication between in-band and out-of-band networks, or between out-of-band to out of band SS7 variants. Cronus has existing relationships and contracts with several large multi national customers such as Nortel, Lucent and Siemens. Discussions with other large customers are ongoing. The Company believes that it is well positioned to capitalize on increasing international cross border traffic and the growing voice over packet market. The Company believes that through additional marketing and development efforts, Cronus product line sales could increase significantly in fiscal 2001.
The technologies acquired as part of this acquisition are complementary and enable the Company to migrate into new marketplaces such as the softswitch. Softswitch is an alternative to circuit based switching technology. Management believes that softswitch will force equipment makers to require more signaling gateway products. The Company believes that it will have the opportunity to complement softswitch solutions offered by companies currently in this marketplace as well as perhaps move into the softswitch market itself, at some future date.
Initial shipments of the ChanlComm(R) 7790 product, for field trial purposes, commenced in the fourth quarter oF fiscal 2000. The Company anticipates that sales of the ChanlComm(R) 7790 product could begin generating significanT revenues commencing mid year of its fiscal year ended April 30, 2001. The Company recently signed a three year agreement with Sumisho Electronics to supply the Japanese Data Center market with ChanlComm 7790 product. The Company believes that this agreement represents a major milestone for this product line. In late July 2000, subsequent to year end, the 7790 product was released to production and commercial customer shipments commenced.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's executive, administrative and marketing operations are located in a leased 17,000 square foot facility in Dulles, Virginia. Aggregate base rent and common charges for this facility approximated $284,000 for the fiscal year ended April 30, 2000. This lease expires April 30, 2003. The Company's research and development, technical support and manufacturing operations are located in a leased 17,250 square foot facility located in Chantilly Virginia. Aggregate base rent and common charges for this facility approximate $178,000 on an annual basis. This lease, which was assumed as part of the Company's acquisition of Cronus, expires on September 30, 2002.
As part of the KG Data acquisition, the Company assumed a three year lease for a 3,700 square foot facility in Norwalk, Connecticut. Expenditures under this lease agreement approximated $49,000 for the fiscal year ended April 30, 2000. This lease will expire June 30, 2001.
The Company also leases a small sales office in Colorado.
Management believes that its leased facilities adequately serve the Company's present needs.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In fiscal 1995, the Securities and Exchange Commission (the "SEC") began an inquiry relating to certain prior public disclosures and periodic reports of the Company. In September 1999, the Company, its Chief Executive Officer and its Chief Financial Officer agreed to a settlement with the SEC. Without admitting or denying the allegations in the complaints filed by the SEC, the Company consented to the entry of a final Judgment which enjoins it from violations of Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. Without admitting or denying the allegations, the Company's Chief Executive Officer and its Chief Financial Officer each agreed to consent to the entry of an Order to cease and desist committing or causing any violations or any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 promulgated thereunder. The Company's Chief Financial Officer also agreed to cease and desist from committing or causing any violations or any future violations of Rule 13a-1 promulgated under the Exchange Act.
On June 2, 1998, the Company filed a voluntary petition for reorganization under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Virginia. On March 30, 1999 a Plan of Reorganization was approved by the Bankruptcy Court and the Company emerged from Bankruptcy protection. The Plan of Reorganization became effective on April 12, 1999. The Plan provided for cash and debenture payments equal to 100% of each allowed claim plus interest. The positions of all common shareholders were preserved. The Chapter 11 Bankruptcy filing had a negative impact on the Company's sales, its
relationships with vendors and ability to hire and retain qualified employees, among other areas. On November 18, 1999 a motion for final decree was granted and the case was closed.
No other material legal proceeding to which the Company is party or to which the Company is subject is pending and no such proceeding is known by the Company to be contemplated.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Prior to June 9, 1998, FastComm shares were traded publicly on the NASDAQ National Market under the symbol FSCX. On June 9, 1998, the Company's shares were delisted from the National Market System. Effective June 16, 1998, the Company's shares have been quoted on the OTC Bulletin Board under the same symbol.
The following table sets forth the range of high and low bid prices or sales prices, as applicable, of the Common Stock for each fiscal quarter during the two most recent fiscal years, as furnished by NASDAQ. The bid prices represent prices between dealers, do not include retail markups, markdowns or commissions and do not necessarily represent actual transactions.
As of July 5, 2000, there were 298 registered holders of record of the Common Stock and the closing sales price on such date for the Common Stock as reported by NASDAQ was $2.25 per share.
DIVIDEND POLICY
The Company has not paid dividends on its Common Stock. The Company anticipates that it will retain all earnings to finance the operation and growth of its business and does not anticipate paying cash dividends on the Common Stock in the foreseeable future.
ADDITIONAL FACTORS THAT MAY APPROVE OUR BUSINESS AND FUTURE RESULTS
THE COMPANY CAUTIONS THAT CERTAIN STATEMENTS IN THIS REPORT AND IN THE COMPANY'S OTHER PERIODIC REPORTS FILED PURSUANT TO THE UNITED STATES SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE , MAY BE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT, THE "SAFE HARBOR" FOR FORWARD LOOKING STATEMENTS ENACTED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE FORWARD LOOKING STATEMENTS THAT MAY BE CONTAINED IN THE COMPANY'S REPORTS UNDER THE EXCHANGE ACT AND IN OTHER ORAL OR WRITTEN STATEMENTS MADE BY THE COMPANY OR BY ITS AUTHORIZED REPRESENTATIVES INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. AS A CONSEQUENCE, ACTUAL RESULTS MIGHT DIFFER MATERIALLY FROM RESULTS FORECAST OR SUGGESTED IN THESE FORWARD LOOKING STATEMENTS. SOME OF THESE RISKS AND UNCERTAINTIES ARE IDENTIFIED IN THE DISCUSSION TO FOLLOW. ADDITIONAL INFORMATION REGARDING THESE FACTORS AND OTHER IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY MAY BE REFERRED TO AS PART OF PARTICULAR FORWARD LOOKING STATEMENTS. THE FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY OR ON ITS BEHALF ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE IMPORTANT FACTORS DISCUSSED BELOW AND TO THOSE THAT MAY BE DISCUSSED AS PART OF PARTICULAR FORWARD-LOOKING STATEMENTS.
The Company cautions that the following important risk factors, among others, could cause actual results for the fiscal year ended April 30, 2001 and for subsequent financial reporting periods to differ materially from those forecast or suggested in any forward-looking statement made by the Company or on its behalf, in this report and otherwise. A number of these important factors have been discussed in this Annual Report on Form 10-K for the fiscal year ended April 30, 2000 and its quarterly reports on Form 10-Q previously filed with the United States Securities and Exchange Commission.
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE FUTURE LOSSES
We have incurred net losses of $6,817,000 $5,550,000 and $9,089,000 for the years ended April 30, 2000, 1999 and 1998, respectively. These losses are primarily attributable to sales levels insufficient to meet the costs associated with the development and marketing of new products in an emerging technology and to litigation costs and costs associated with the Chapter 11 Bankruptcy described below. Sales levels have been negatively impacted by delays in product development, delays on the part of the carriers to offer frame relay services and once offered, incorrect carrier pricing for frame relay services. The Company actively participates in industry forums that promote frame relay and ATM services. Further, the Company upgraded and expanded it sales, marketing and engineering organizations, while decreasing its general and administrative overhead. The Company is focused on acquisitions and partnership arrangements intended to expand its technology base and increase sales. There can be no assurance that the Company will generate sufficient revenues to meet expenses or to operate profitably in the future.
WE RECENTLY EMERGED FROM BANKRUPTCY
On June 2, 1998, the Company filed a voluntary petition for reorganization under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Virginia. This filing was a direct result of enforcement activities by a judgment creditor. All litigation related to this matter has now been settled. On March 30, 1999, the Company's Plan of Reorganization was approved by the Bankruptcy Court and the Company emerged from Chapter 11. The Plan of Reorganization became effective on April 12, 1999. The Plan provides for cash and debenture payments equal to 100% of each allowed claim plus interest. The positions of all common shareholders were preserved. The Chapter 11 Bankruptcy filing had a negative impact on the Company's sales, its relationships with vendors and its ability to hire and retain qualified employees, among other areas.
WE ARE ENGAGED IN A HIGHLY COMPETITIVE BUSINESS.
The market for networking systems is extremely competitive. In most of the markets in which we compete our competitors are more established, benefit from greater market recognition and have greater financial, technological, production and marketing resources than we do. Competition could become even more intense if new companies enter the market or if our existing competitors expand their product lines. We compete on the basis of product features and capabilities, performance and price. An increase in competition could have an adverse effect on our operating results, both in terms of lost market share and revenues and required investments in research and development and sales and marketing in order to remain competitive. There can be no assurance that we will be able to make technological advances or that we will have sufficient resources to fund the necessary research and development, marketing and sales efforts that will enable us to profitably compete in our markets. On June 2, 1998, the Company filed a voluntary petition for reorganization under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Virginia. This filing was a direct result of enforcement activities by a judgment creditor. All litigation related to this matter has been settled. On March 30, 1999, the Company's Plan of Reorganization was approved by the Bankruptcy Court and the Company emerged from Chapter 11 on April 12, 1999. The Plan provides for cash and debenture payments equal to 100% of each allowed claim
plus interest. The positions of all common shareholders were preserved. This filing had a negative impact on sales during the 1999 fiscal year and, at this time, the Company is unable to predict the effect this filing and the subsequent reorganization will have on its ability to compete in its marketplace.
WE RELY ON A LIMITED NUMBER OF KEY EMPLOYEES.
Our success depends to a significant degree upon the continued contributions of our management, marketing, engineering and technical personnel, many of whom would be difficult to replace. In addition, as we continue to develop the ChanlComm product line, we will need to attract and retain additional qualified personnel. There is intense competition for qualified personnel in our industry, and there can be no assurance that we will be able to attract and retain the qualified personnel necessary for the development of our business. Loss of the services of any of our key employees would be detrimental to our development. We do not have "key man" life insurance on any of our officers or directors. On June 2, 1998, the Company filed a voluntary petition for reorganization under Chapter 11 of the Federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Virginia. As a direct result of this filing, the Company has suffered the loss of certain key employees. To date, the Company has been able to refill some of these positions. At this time, the Company is unable to predict the long-term effect this filing will have on its ability to attract and retain key employees.
WE MUST BE ABLE TO ADAPT TO CHANGES IN PROTOCOL AND OTHER TECHNOLOGY.
New Data Protocols may be developed that could displace the protocols currently supported in Company products, requiring additional software development to sustain the viability of those products. An announcement of such new protocols could have a negative effect on sales of older designs, as users hesitate to install equipment based on existing designs until they have evaluated the new ones. There can be no assurance that the Company would have the necessary resources, particularly the knowledgeable employees, to implement new protocols in a timely manner. Such failure to develop adequate products in response to new technology could adversely affect the Company's profitability. Asynchronous Transfer Mode (ATM) is a new technology for transmitting digital information, including voice and data, over a public or private network. Telephone companies and other operators of public network are deploying ATM in their backbone segments. If the ATM technology becomes much less expensive, ATM services could become economically more attractive than frame relay services that currently are involved in the bulk of the Company's business. If ATM were to become more popular than frame replay, the Company would need to develop new products, retrain its employees, and educate its sales and distribution channel partners. There can be no assurance that the Company will have the resources necessary to develop appropriate products in a timely manner.
WE MUST INTRODUCE NEW PRODUCTS TO COMPETE
The Company's future revenue is dependent on its ability to successfully develop, manufacture and market products. In this regard, future growth is dependent on the Company's ability to timely and successfully develop and introduce new products, establish new distribution channels, develop affiliations with leading market participants which facilitate product development and distribution, and market existing and new products with service providers, resellers, channel partners, and others. The introduction of new or enhanced products requires the Company to manage the transition from older products in order to minimize disruption in customer ordering patterns, avoid excessive levels of older product inventories and ensure that adequate supplies of new products can be delivered to meet customer demand. In addition, as the technical complexity of new products increases, it may become increasingly difficult to introduce new products quickly and according to schedule. There can be no assurance that the Company will successfully manage the transition to new products or that the Company's research and development efforts will result in commercially successful new technology and products in the future.
WE MAY NEED TO SEEK ADDITIONAL CAPITAL TO FULFILL OUR BUSINESS PLAN
The Company's ability to make future capital expenditures and fund the development and launch of new products, are dependent on existing cash and demands on cash to support inventory for the Company's products and the Company's return to profitability. The timing and amount of the Company's future capital requirements can not be accurately predicted, nor can there be any assurance that debt or equity financing, if required, can be obtained on acceptable terms. There can be no assurance that the company will have cash available in the amounts and at the times needed.
SOME COMPONENTS OF OUR PRODUCTS ARE AVAILABLE TO US ONLY FROM A LIMITED NUMBER OF SUPPLIERS
Certain components used in our products are currently available from only one source and other of the components are available from only a limited number of suppliers. Although we have generally been able to obtain adequate supplies of components to date, our inability to develop alternative sources if and as required in the future, or to obtain sufficient sole source or limited source components as required, could result in delays or reductions in
product shipments. Certain products that are or may in the future be marketed with or incorporated into our products are supplied by or under development by third parties. These third parties may be the sole suppliers of such products. While the Company believes there are a number of suitable manufacturers, there can be no assurance that current or alternative sources will be able to supply all of our demands on a timely basis. Also, an unanticipated interruption in supply could have a short-term effect on our business. It will not be economically practical for the Company to develop its own manufacturing capacity in the foreseeable future.
WE ARE DEPENDENT ON PATENTS AND PROPERTY RIGHTS TO PROTECT OUR POSITION IN THE INDUSTRY
The Company's success depends in part upon its technological expertise and proprietary product designs. The Company relies upon its trade secret protection efforts and, to a lesser extent, upon patents and copyrights to protect its proprietary technologies. There can be no assurance that these steps will be adequate to deter misappropriation or infringement of its proprietary technologies or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Further, given the rapid evolution of technology and uncertainties in intellectual property law, there can be no assurance that the Company's current or future products will not be determined to infringe proprietary rights of others. Should the Company be sued for patent infringement, there can be no assurance that the Company will prevail, or, if required by such litigation, that it will be able to obtain the requisite licenses or rights to use such technology on commercially reasonable terms. In addition, any litigation, regardless of the outcome, could result in substantial costs to the Company.
WE COULD BE AFFECTED BY GOVERNMENTAL RESTRAINTS OR CHANGES IN GOVERNMENTAL POLICY
The Company's products are subject to regulation by the Federal Communications Commission (the "FCC"), and each of the Company's products must typically be tested before it can be introduced into the market. Any inability of the Company's products to conform to FCC regulations or any failure of the Company's products to meet FCC testing requirements could delay the introduction of the Company's products into the market, impact the Company's relationships with its OEMs and otherwise adversely affect the Company. Foreign authorities often establish telecommunications standards different from those in the United States, making it difficult and more time-consuming to obtain the required regulatory approvals. Any significant delay in obtaining such regulatory approvals could have an adverse effect on the Company's operating results. Furthermore, changes in such laws, regulations, policies or requirements could affect the demand for the Company's products or result in the need to modify products, which may involve substantial costs or delays in sales and could have an adverse effect on the Company's future operating results.
OUR OUTSTANDING SHARES MAY BE DILUTED
A substantial number of shares of Common Stock are or will be issuable by the Company upon the exercise of warrants and options which the Company has issued, which could result in dilution to a Shareholder's percentage ownership interest in the Company and could adversely affect the market price of the Common Stock.
On July 5, 2000, there were issued and outstanding a total of 26,388,699 shares of Common Stock. If all convertible debentures, warrants and stock options which the Company has issued were deemed converted and exercised, as the case may be, as of that date, there would be issuable approximately 5,880,144 shares of Common Stock. Upon such conversion and exercise, there would be outstanding 32,268,843 shares of Common Stock. The sale or availability for sale of a significant number of shares of Common Stock in the public market could adversely affect the market price of the Common Stock. The availability to the Company of additional equity financing, and the terms of any such financing, may also be adversely affected by the foregoing.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS AND GROWTH RATE
A significant portion of the Company's sales are derived from products shipped against firm purchase orders received in each fiscal quarter and from products shipped against firm purchase orders released in that quarter. Unforeseen delays in product deliveries or the closing of sales, introduction of new products by the Company or its competitors, fluctuations in customer capital expenditures or other conditions affecting the networking industry or the economy during any fiscal quarter could cause quarterly revenue and net earnings to vary greatly. Further, the Company schedules some production of its products and budgets expenses based on forecasts of sales, which are difficult to predict. The Company's manufacturing procedures are designed to assure rapid response to customer demand, but may, in certain circumstances, create risk of excess or inadequate inventory if orders do not match forecast. Moreover, shortages or delays in the supply of manufacturing components at shipments at acceptable prices could adversely affect the Company's ability to meet scheduled product shipments in any particular quarter, which could materially affect the Company's operating results. Because a substantial portion of customer orders are filled within the fiscal quarter of receipt, and because of the ability of customers to revise or cancel orders and
change delivery schedules without significant penalty, quarter to quarter revenues and, to a greater degree, net earnings, may be subject to greater variability and less predictability.
TECHNOLOGICAL CHANGES
The markets for the Company's products are characterized by continuous technological change, evolving industry standards and frequent product introductions. Such changes in the market may adversely affect the Company's ability to sell its products. The Company's ability to anticipate changes in technology, industry standards and to develop and introduce new and enhanced products on a timely basis that are successful in the market, will be significant factors in the Company's competitive position and its prospects for growth. Moreover, if technologies or standards supported by the Company's products or carrier service offerings based on the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be adversely affected. As a result, Management believes that significant expenditures for research and development will be required in the future. Research and development project schedules for high technology products are inherently difficult to predict and there can be no assurance that the Company will achieve its expected initial shipment dates for products in development. Because timely availability of new and enhanced products is critical to the success of the Company, delays in availability of these products, or lack of market acceptance of such products, could adversely affect the Company.
MARKET PRICE VOLATILITY OF COMMON SHARES
The Company's common shares have been subject to substantial market price volatility, some of which has occurred when there have been variations between the Company's actual or anticipated financial results and the expectations of that of the financial community and in the aftermath of public announcements by the Company and its competitors. Further, the stock market has experienced extreme price and volume fluctuations from time to time which have affected the market price of many technology companies in particular and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic conditions, may adversely affect the market price of the Company's common shares. The Company's shares are currently quoted on the NASDAQ OTC Bulletin Board.
OTHER FACTORS
The Company further cautions that the factors referred to above and those referred to as part of particular forward looking statements may not be exhaustive, and that new risk factors emerge from time to time in its rapidly changing business. Further, the Company's independent auditors have included a paragraph in their opinion which indicates that, based on recent operating losses, along with existing working capital and accumulated deficits, there is substantial doubt about the Company's ability to continue as a going concern. The Company does not undertake to update any forward looking statements it may make or has made on its behalf to reflect changes it its expectations or assumptions or the risks and uncertainties referred to.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected financial data for the five fiscal years in the period ended April 30, 2000. The statement of operations data for the fiscal years ended April 30, 2000, 1999 and 1998 and the balance sheet data at April 30, 2000 and 1999 are derived from and are qualified by reference to the financial statements of the Company audited by BDO Seidman, LLP, the Company's independent certified public accountants, whose opinion contains an explanatory paragraph related to substantial doubt about the Company's ability to continue as a going concern and is included elsewhere, herein. The statement of operations data for the fiscal years ended April 30, 1997 and 1996 and the balance sheet data at April 30, 1998, 1997 and 1996 are derived from financial statements of the Company also audited by BDO Seidman, LLP, but not included in this Annual Report. The financial data should be read in conjunction with the financial statements and related notes and other financial information and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THIS ANNUAL REPORT. IN ADDITION, THE COMPANY DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SPECIFICALLY, THE COMPANY WISHES TO ALERT READERS THAT THE FACTORS SET FORTH IN ITEM 5, "MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ADDITIONAL FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS", AS WELL AS OTHER FACTORS, IN THE PAST HAVE AFFECTED AND IN THE FUTURE COULD AFFECT THE COMPANY'S ACTUAL RESULTS, AND COULD CAUSE THE COMPANY'S RESULTS FOR FUTURE QUARTERS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD LOOKING STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY.
PETITION FOR REORGANIZATION UNDER CHAPTER 11
On June 2, 1998, the Company filed a voluntary petition for reorganization under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Eastern District of Virginia. On March 30, 1999, the Company's Plan of Reorganization (the "Plan") was approved by the Bankruptcy Court and the Company emerged from Chapter 11. The Plan provided for cash and debenture payments equal to 100% of each allowed claim plus interest. The positions of all common shareholders were preserved. Confirmation of the Company's Plan resulted in an extraordinary gain of $833,149 in the fiscal year ended April 30, 1999. On November 18, 1999, a motion for final decree was granted and the case was closed.
PLAN OF REORGANIZATION
Pursuant to the Plan, Class 1 creditors representing existing holders of convertible debentures, were required to convert their debt to equity on or before October 12, 1999. Claims of unsecured creditors, below $1,000, were repaid in cash on or before April 30, 1999. Claims of unsecured creditors greater than $1,000 were satisfied by cash payments totaling 25% of the allowed claim. The Company issued debentures to these unsecured creditors for the remaining 75% of their allowed claims. To generate the cash requirement of the Plan, the Company raised $1,000,000 through a private placement offering of securities to a group of Company employees, insiders and accredited investors.
The Company issued $2,490,357 in convertible debentures in satisfaction of the remaining 75% of each claim allowed in its Plan. The debentures earn interest at a rate of 7.5% per annum payable in the form of common stock in the Company at time of conversion. The debentures are convertible at the average of the closing price of the Company's common stock for the ten consecutive trading days ending on the trading day immediately preceding the date of conversion. The Company may execute a cash prepayment of the debenture at any time. The debentures mature on April 12, 2003. Any debentures not converted by this date will automatically convert into common shares of the Company. At April 30, 2000, $767,602 in convertible debentures were outstanding.
The Company is in compliance with all of the terms and conditions of its Plan.
FUTURE PROSPECTS
On March 31, 2000, the Company acquired substantially all of the assets and assumed certain liabilities of Cronus Technology, Inc. for approximately $9,600,000, plus the assumption of liabilities of approximately $6,700,000 subject to adjustment as set forth in the agreement. Approximately $9,300,000 of the purchase price was funded through the issuance of shares of the Company's common stock and approximately $300,000 was paid in cash. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market values at the date of acquisition. The Company recorded goodwill of approximately $12,000,000 related to this transaction. The goodwill is being amortized on a straight line basis over four years.
The acquisition of Cronus allows FastComm to offer signaling gateways that bridge the gap between incompatible communications networks. These gateways enable seamless interoperability between in-band and out-of-band networks, or between different types of out-of-band networks. Cronus has existing contracts and relationships with several large multi national customers such as Nortel, Lucent and Siemens. The Company believes that it is well positioned to capitalize on increasing international cross border traffic and the growing voice over packet market. The Company believes that through additional marketing and development efforts, Cronus product line sales will increase considerably from that of the $9 million recorded during the twelve months ended March 31, 2000.
The technologies acquired as part of this acquisition are complementary and enable the Company to migrate into new marketplaces such as the softswitch. Softswitch is an alternative to circuit based switching technology. Management believes that softswitch will force equipment makers to require more signaling gateway products. The Company believes that it will have the opportunity to complement softswitch solutions offered by companies currently in this marketplace as well as move into the softswitch market itself.
In fiscal year 2000, the Company finalized the development of its GlobalStack and MetroLan product lines, all of which have voice, data and video capabilities. The Company has added new features to the Quick product that qualify this product for a larger and enhanced distribution channel. The Company believes that the GlobalStack and MetroLan products have a strong international application. Accordingly, the Company has enhanced its international selling presence in Brazil, Australia, the Pacific Rim, Colombia, Venezuela and Central America. During its fiscal year ended April 30, 2000, the Company executed non exclusive distribution agreements with resellers in Argentina, Bolivia, Bosnia, China, Costa Rica, El Salvador, Guatemala, Honduras, Hong Kong, Korea, Mexico, Nicaragua, Peru, Suriname, Tobago and Trinidad.
Initial shipment of the ChanlComm(R) 7790 product for field trial purposes commenced in the fourth quarter oF fiscal 2000. The ChanlComm product group was developed by KG Data Systems, Inc. which the Company acquired on March 31, 1999. The Company anticipates that sales of the ChanlComm(R) 7790 product will begin generatinG significant revenues commencing mid year of its fiscal year ended April 30, 2001. The Company recently signed a three year agreement with Sumisho Electronics to supply the Japanese Data Center market with ChanlComm 7790 product. The Company believes that this agreement represents a major milestone for this product line. In late July 2000, subsequent to year end, the 7790 product was released to production and commercial customer shipments commenced.
The Company anticipates that it will require additional funding to meet future working capital needs and research and development expenses. It is anticipated that such funding will be generated by way of additional placements of equity, through research and development arrangements funded by third parties, by investments by strategic partners and through the exercise of in the money common stock warrants and options. Subsequent to April 30, 2000, but prior to the issuance of this report, the Company raised an additional $1,170,000 through a private placement offering of securities to a group of accredited investors. The Company has outstanding warrants that, if exercised, could generate a maximum of $7,293,000 in additional cash for the Company. The Company can give no assurance as to whether any warrants will be exercised, nor to the amount of cash that will be generated, if any of these securities are exercised. (See Item 7. Liquidity and Capital Resources)
The Company can give no assurance as to whether it will be able to conclude such financing arrangements, or that, if concluded, they will be on terms favorable to the Company.
There can be no assurance that the required increased sales and improved operating efficiencies necessary to return to profitability will materialize.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As explained in the succeeding paragraphs, the Company has sustained recurring operating losses and cash flow deficits in fiscal years 2000, 1999 and 1998. In addition, the Company must obtain funds from outside sources in fiscal year 2001 to successfully implement its business plan. Presently, the Company has no firm commitments from outside sources to provide these funds. These factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties.
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage of revenues represented by certain items in the Company's consolidated statements of income.
FISCAL 2000 COMPARED TO FISCAL 1999
Total revenues increased from $4,653,000 to $6,415,000 or by 38% during fiscal 2000 as compared to fiscal 1999. The $1,762,000 increase was primarily attributable to $1,218,000 associated with the introduction of the GlobalStack and MetroLan product lines and $856,000 in sales of the Cronus product line. The Company acquired Cronus effective March 31, 2000 and accordingly included one month of Cronus sales in fiscal 2000. The Company did not make any significant price adjustments during the current fiscal year.
The Company believes its future growth will be achieved through the sale of its voice and date integrated access products, the ChanlComm(R) product line and its signaling gateway products. During the fiscal year ended ApriL 30, 2000, three customers accounted for 18%, 15% and 12% of total sales.
A significant portion of the Company's sales are derived from products shipped against firm purchase orders received in each fiscal quarter and from products shipped against firm purchase orders released in that quarter. Unforeseen delays in product deliveries or the closing of sales, introduction of new products by the Company or its competitors, fluctuations in customer capital expenditures or other conditions affecting the networking industry or the economy during any fiscal quarter could cause quarterly revenue and net earnings to vary greatly.
Gross margins, as a percentage of total revenues, decreased from 42% to 36% during fiscal 2000 as compared to fiscal 1999. During fiscal 2000, the Company wrote off, against its existing reserve, inventory made obsolete by new product developments, the acquisition of Cronus and a change in overall product focus. Accordingly, after the significant inventory writedown, the Company also increased its reserve for inventory obsolescence by $815,000. The increase in the reserve reduced gross margin by approximately 13%. The Company's gross margin was positively impacted by the introduction of the GlobalStack and MetroLan product lines which produce gross margins significantly greater than products offered by the Company in the previous fiscal year. As of April 30, 2000, the Company has recorded a $600,000 reserve for inventory obsolescence, which management believes is adequate.
Selling, general and administrative expenses increased from $4,747,000 in fiscal 1999 to $4,984,000 in fiscal 2000. This 5% increase is primarily attributable to expenses incurred by Cronus in April 2000 ($429,000) and increased marketing costs ($246,000) offset by reduced employee related costs ($192,000) and reduced equipment rental expense resulting from terminated and renegotiated leases ($210,000).
Research and development expenditures consist primarily of hardware and software engineering, personnel expenses, subcontracting costs and, to a lesser degree, equipment and facilities. Research and development expenses increased from $2,388,000 in fiscal 1999 to $2,966,000 in fiscal 2000. This 24% increase is primarily attributable to one months worth of expenses incurred by Cronus ($278,000) and increased labor and material costs associated with new product development and new product prototypes associated with the GlobalStack, MetroLan and ChanlComm product lines. The markets for the Company's products are characterized by continuous technological change. Management believes that significant expenditures for research and development will continue to be required.
Depreciation and amortization expenses increased from $475,000 in fiscal 1999 to $1,093,000 in fiscal 2000. This increase is primarily attributable to one months amortization of goodwill associated with the Cronus acquisition ($323,000); the full year effect of the amortization of goodwill associated with the acquisition of KG Data and to a lesser degree, depreciation associated with Cronus fixed assets and other recent capital expenditures.
FISCAL 1999 COMPARED TO FISCAL 1998
Total revenues decreased from $8,907,000 to $4,653,000 or by 48% during fiscal 1999 as compared to fiscal 1998. The $4,254,000 decrease was primarily attributable to decreased unit sales volumes of data and voice based frame relay products. The Company did not make any significant price adjustments during this time period. Data based frame relay product sales decreased from $3,820,000 to $1,398,000 or by 63% during fiscal 1999 as compared to fiscal 1998. Voice based frame relay product sales decreased from $2,493,000 to $542,000 or by 78% during fiscal 1999 as compared to fiscal 1998. Sales generated by the Company's Quick product decreased $525,000 to $1,748,000 when compared with that of the previous fiscal year. The decline in sales was offset by a $382,000 increase in the sale of data compression products. The reduced sales of frame relay products is primarily attributable to lower sales to the Company's major reseller.
During the fiscal year ended April 30, 1999, one customer accounted for 28% of total sales.
Gross margins, as a percentage of total revenues, increased from 39% to 42% during fiscal 1999 as compared to fiscal 1998. The increase in gross margin is primarily attributable to a $1.1 million increase in the Company's reserve for inventory obsolescence that was recorded in fiscal 1998 compared with the $80,000 increase recorded in fiscal 1999. Further, sales of the Company's Quick product line as a percentage of overall sales increased during the current fiscal year. Gross margins on the Quick product line are greater than that of the Company's other product lines. During the current fiscal year, the Company increased its reserve for inventory obsolescence by $80,000 to $1,450,000.
Selling, general and administrative expenses decreased from $7,622,000 in fiscal 1998 to $4,747,000 in fiscal 1999. This 38% decrease in expense is primarily attributable to reduced advertising and promotion costs ($480,000); reduced legal and professional fees ($1,032,000); reduced salary and related costs associated with a decline in headcount ($351,000); reduced travel costs ($147,000); reduced office and occupancy costs including those associated with the Company's Australia sales office ($224,000) and a decline in bad debt expense ($417,000).
Research and development expenditures consist primarily of hardware and software engineering, personnel expenses, subcontracting costs and, to a lesser degree, equipment and facilities. Research and development expenses increased from $2,255,000 in fiscal 1998 to $2,388,000 in the current fiscal year. This 6% increase is primarily attributable to increased labor and material costs associated with new product development and new product prototypes associated with the ChanlComm product line.
Depreciation and amortization expenses decreased from $611,000 in fiscal 1998 to $475,000 in fiscal 1999. The Company's autodialer patent was written off in the previous fiscal year.
During the fiscal year ended April 30,1999, the Company recorded $643,000 in net expenses associated with its reorganization. Such costs include legal and professional fees totaling $663,000 offset by $20,000 in imputed interest earned on accumulated cash from the Chapter 11 proceeding. Implementing the Company's Plan of Reorganization resulted in an extraordinary gain of $833,000.
FOURTH QUARTER ADJUSTMENTS
During the fourth quarter ending April 30, 1998, the Company recorded provisions for obsolete inventory of $570,000 and a valuation allowance related to a note receivable of $273,600 all of which had the effect of increasing the operating loss and net loss by $843,600 or $.08 per share.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 2000, the Company used approximately $4,568,000 in cash to fund its operating activities. This amount includes $6,236,000 required to fund the net loss, after adjusting for non-cash expenses (consisting principally of depreciation, amortization, inventory writeoffs and adjustments to inventory valuation accounts) and $805,000 required by increases in accounts receivable. Inventory declined by $2,216,000, which provided liquidity.
Accounts receivable increased during the current fiscal year due to increased sales and better collection efforts. The Company has a $275,000 allowance for doubtful accounts at April 30, 2000, which management believes is adequate.
Inventory levels decreased $2,216,000 during fiscal year 2000. The Company wrote off, against its existing reserve, inventory made obsolete by new product developments, the acquisition of Cronus and a change in overall product focus. The Company increased its reserve for inventory obsolescence by $815,000. The Company has a $600,000 reserve for inventory obsolescence, which management believes is adequate.
At April 30, 2000, the Company had $548,000 in unrestricted cash, a working capital deficit of $264,000 and a current ratio of 1 to 1. Certain of the Company's accounts receivable or inventories are collateralized under the revolving line of credit and term loan agreement with LaSalle National Bank. (See Item 7. Cash Requirements)
FISCAL 2000 COMPARED TO FISCAL 1999
Cash used in operating activities increased from $2,329,000 in fiscal 1999 to $4,568,000 in fiscal 2000. The $2,329,000 increase in cash used in operating activities is primarily attributable to the $1,518,000 increase in the net loss for the year and by changes in working capital items in fiscal 2000 compared to fiscal 1999. Such changes include a $3,311,000 increase in cash used to fund accounts receivable, a $1,617,000 reduction in cash invested in inventory and increases in other non cash expenses, primarily depreciation and amortization accounts, asset valuation accounts.
Cash used by investing activities totaled $345,000 in fiscal 2000 as compared $62,000 in fiscal 1999. The Company purchased $527,000 in fixed assets during the current fiscal. This was partially offset by $182,000 assumed as part of the Cronus acquisition.
Cash provided by financing activities totaled $5,370,000 during fiscal 2000. The Company issued $1,087,000 in common stock during the fiscal year. Of this amount, $152,000 remains in escrow as restricted cash. The Company received $4,392,000 from the exercise of common stock warrants and $313,000 from the exercise of stock options during the current fiscal year.
FISCAL 1999 COMPARED TO FISCAL 1998
Cash used in operating activities decreased from $4,395,000 in fiscal 1998 to $2,329,000 in fiscal 1999. The $2,066,000 decrease in cash used in operating activities is primarily attributable to the $3,540,000 decrease in the net loss for the year offset by changes in working capital items in fiscal 1999 compared to fiscal 1998. Such changes include a $2,708,000 reduction in cash used to fund accounts receivable, a $1,930,000 reduction in cash invested in inventory offset by a $1,471,000 increase in funds used to paydown current liability balances, a fiscal 1998 $1,196,000 non cash reserve for litigation settlement and decreases in other non cash expenses, primarily asset valuation accounts and non cash discount and interest on convertible debentures.
Cash used by investing activities totaled $62,000 in fiscal 1999 as compared $318,000 in fiscal 1998. The Company purchased $212,000 in fixed assets during the fiscal year and received a $150,000 payment against an outstanding note receivable.
Cash provided by financing activities totaled $1,269,000 during fiscal 1999. The Company raised $1,000,000 as part of its reorganization. Of this amount, $152,000 remains in escrow as restricted cash. The Company received $421,000 from the exercise of common stock warrants during the current fiscal year.
JULY 1999 PRIVATE PLACEMENT
During the quarter ended July 31, 1999, the Company raised an additional $1,087,000 through a private placement of securities to a group of accredited investors.
CONVERSION OF WARRANTS
On November 17, 1999 the Company initiated an accelerated warrant conversion program designed to raise capital to finance working capital and product expansion plans This program generated $3,049,000 in cash for the Company. On February 7, 2000 the Company called for redemption certain callable warrants. In connection with this redemption, the Company issued 333,000 common shares and generated $500,000 in additional cash. On April 13, 2000 the Company initiated a second accelerated warrant conversion program. Under this program, 82,330 warrants were converted into shares of common stock generating $95,000 in cash for the Company. During the fiscal year ended April 30, 2000, the Company issued an additional 705,754 shares of common stock related to other warrant conversions generating an additional $748,000 in cash for the Company.
CONVERSION OF DEBENTURES
On January 13, 2000, the Company amended the terms of the Convertible Debentures issued as part of its Plan of Reorganization. Under the terms and conditions of this amendment, the conversion date of these debentures was accelerated from April 12, 2000 to January 13, 2000. During the fiscal year ended April 30, 2000 $1,825,552 in debentures and accrued interest were converted into 513,249 shares of common stock. Also during the current fiscal year, the remaining $224,684 in debentures issued in a May 1997 private placement were converted into 274,911 shares of common stock.
CASH REQUIREMENTS
In fiscal 2001, the Company's cash commitments include minimum payments of $499,000 under its operating lease arrangements. Management believes that expenditures for research and development in fiscal 2001 will continue to be significant. The Company anticipates additional capital spending for software, computer and test equipment and furniture and fixtures in fiscal 2001. Where possible, such capital requirements are expected to be met through lease financing arrangements.
In connection with the acquisition of Cronus, the Company assumed liabilities under a revolving line of credit and term loan agreement with LaSalle National Bank. Under the revolving line of credit the Company could borrow up to the lesser of $3,000,000 or 80% of eligible accounts receivable and 35% of eligible inventory, as defined in the agreement. The revolving line of credit bears interest at the bank's prime rate of interest plus 1% and was scheduled to mature on May 1, 2001. Under the agreement, Cronus could issue letters of credit up to $250,000 in the aggregate. There are no outstanding letters of credit as of April 30, 2000. The term loan was payable in equal monthly principle payments of $9,875, bears interest at the bank's prime rate of interest plus 1% and was schedule to mature on May 1, 2001. In April 2000, the Company placed $250,000 in escrow to further collateralize the revolving line of credit and term loan. In July 2000, the bank informed the Company that the revolving line of credit and term loan would mature on September 30, 2000. Accordingly, this debt has been classified as a current liability. The Company expects to be able to refinance this debt with another bank prior to the maturity date.
In connection with the acquisition of Cronus, the Company assumed short term notes payable to individuals totaling $1,000,000. The notes are unsecured, bear interest at 8.0% and mature on December 10, 2000.
The Company anticipates that it may require additional funding to meet future expansion and research and development expenses. It is anticipated that such funding will be generated by way of additional placements of equity, through research and development arrangements funded by third parties, by investments by strategic partners and through the exercise of in the money common stock warrants and options. The Company can give no assurance as to whether it will be able to conclude such financing arrangements, or that, if concluded, they will be on terms favorable to the Company
JULY 2000 PRIVATE PLACEMENT
Subsequent to April 30, 2000, but prior to the issuance of this report, the Company raised an additional $1,170,000 through a private placement offering of securities to a group of accredited investors. Warrants to purchase common stock associated with this offering are exercisable for a period of one year after the closing date. These funds will be used for working capital purposes.
UNEXERCISED WARRANTS
The Company has warrants outstanding which, if exercised, could generate a maximum of $7,293,000 in additional cash. The Company can give no assurance as to whether any warrants will be exercised, nor to the amount of cash that will be generated, if any of these securities are exercised.
Management believes that inflation did not have a material effect on operations during the fiscal year ended April 30, 2000.
CREDIT TERMS
The Company extends credit to its customers. Accordingly the Company may have significant risk in collecting accounts receivable from its customers. The Company has credit policies and procedures that it uses to minimize exposure to credit losses. The Company's collection personnel regularly contact customers with receivable balances outstanding to expedite collection. If these collection efforts are unsuccessful, the Company may discontinue product shipments until the outstanding balance is paid.
In many instances, the Company requires that international sales be paid in advance by wire transfer or confirmed letter of credit. This practice ensures against bad debts while improving cash flow.
Certain Resellers may request a stock adjustment/rotation twice annually and a stock update at any time. "Stock adjustment/rotation" and "stock update" are agreements whereby FastComm permits a reseller, at FastComm's sole discretion, to return already purchased but unused and still current products to FastComm. Stock adjustments/rotations and stock updates, which require the approval of an officer of FastComm, are granted for specific purposes:
o Stock adjustment/rotation allows an exchange for other FastComm products of equal value. At the sole discretion of FastComm, stock adjustments may be limited to 10% or 20% of the value of product ordered and accepted and paid for by the reseller during the prior six-month period.
o Stock updates may be approved for either warranty revalidation and/or software revision level changes on products that are then returned to the dealer. At FastComm's sole discretion, returned products may be exchanged for the same types of equipment from inventory.
FastComm, at its sole discretion, may charge a reseller a "restocking charge" of up to 20% to execute a stock adjustment or stock update. Stock adjustment/rotation and stock update do not permit distributors to return purchased merchandise for a refund.
The Company's practices concerning stock adjustment/rotation and stock updates are believed to be consistent with those of the communications manufacturing industry, based on management's experiences and its analysis of similar companies.
Normally, payment in full is due within thirty days from date of shipment to the reseller. The Company offers extended payment terms in certain situations. The Company also offers prompt payment discounts. Although normal payment terms are net 30 days from date of shipment, as a practical matter, the Company normally receives payments on accounts receivable beyond thirty (30) days, even from its most credit-worthy customers. Management does not believe that its credit and collection history is substantially different from other companies in the data-communications industry, based on management's experiences with similar companies.
With the exception of the stock adjustment/rotation policies as discussed above and product warranty, the Company is not contractually obligated to accept returned merchandise.
The Company's reserve for doubtful accounts totals $275,000, which management believes is adequate.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 in fiscal 2001 will have no impact on its financial position or results of operations.
ITEM 7A.
ITEM 7A. MARKET RISK
In the normal course of business, operations of the Company may be exposed to fluctuations in currency values and interest rates. These fluctuations can vary the costs of financing, investing, and operating transactions. Because the Company has only fixed rate long term convertible debentures and no foreign currency transactions, there is no material impact on earnings of fluctuations in interest and currency exchange rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and financial statement schedules are filed as part of this Report:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders FASTCOMM COMMUNICATIONS CORPORATION
We have audited the accompanying balance sheets of FastComm Communications Corporation as of April 30, 2000 and 1999, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended April 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 FASTCOMM COMMUNICATIONS CORPORATION at April 30, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2000 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has sustained significant operating losses and cash flow deficits in 2000, 1999 and 1998. In addition, the Company must obtain funds from outside sources in 2001 to successfully implement its business plan. Presently, the Company has no firm commitments from outside sources to provide these funds. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties.
BDO Seidman, LLP
Washington, D.C. July 14, 2000
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
See accompanying summary of accounting policies and notes to financial statements.
FASTCOMM COMMUNICATIONS CORPORATION
BALANCE SHEETS
See accompanying summary of accounting policies and notes to financial statements.
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
See accompanying summary of accounting policies and notes to financial statements.
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF OPERATIONS
See accompanying summary of accounting policies and notes to financial statements.
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
See accompanying summary of accounting policies and notes to financial statements.
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
FASTCOMM COMMUNICATIONS CORPORATION
STATEMENTS OF CASH FLOWS
See accompanying summary of accounting policies and notes to financial statements.
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
ORGANIZATION FastComm Communications Corporation (the "Company") was incorporated in Virginia in May 1983. The Company designs, manufactures, and markets data communications equipment for high-speed data transmission over public and private telephone networks. Management believes that the Company operates in one business segment.
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 the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain estimates used by management are particularly susceptible to significant changes in the economic environment. These include estimates of inventory obsolescence, valuation allowances for trade receivables and deferred tax assets and evaluation of the impairment of goodwill. Each of these estimates, as well as the related amounts reported in the financial statements, are sensitive to near term changes in the factors used to determine them. A significant change in any one of those factors could result in the determination of amounts different than those reported in the financial statements. Management believes that as of April 30, 2000, the estimates used in the financial statements are adequate based on the information currently available.
RISKS AND The Company's future operating results may be UNCERTAINTIES affected by a number of factors. Sales to three customers were 45% of total revenue in 2000. Sales to one customer were 28% and 32% of total revenue in 1999 and 1998, respectively. The risk to the Company is that a loss of one or two customers could have a significant negative impact on revenues and operating results (see Note 12).
The Company sells primarily to domestic and foreign dealers and distributors. Generally sales are on credit and no collateral is required, although the Company reserves the right to have the products returned in the event of default. The Company provides an allowance for estimated sales returns and uncollectible accounts. The Company's concentration of sales to certain customers, discussed above, exposes the Company to a relatively greater risk of loss than would be the case with greater diversification.
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
The Company operates in a highly volatile industry that is characterized by fierce industry-wide competition resulting in aggressive pricing practices, continually changing customer demand patterns, growing competition from well-capitalized high technology and consumer electronics companies, and rapid technological development. The Company's operating results could be adversely affected should the Company be unable to anticipate customer demand accurately, to maintain short design cycles while meeting evolving industry performance standards, to manage its product transactions, inventory levels, and manufacturing processes efficiently, to distribute its product quickly in response to customer demand, to differentiate its products from those of its competitors, or to compete successfully in the markets for its new products.
REVENUE Revenues from product sales are recognized at the RECOGNITION time of product shipment. An allowance is provided for estimated sales returns and uncollectible accounts. Also, the Company establishes a reserve for estimated warranty claims at the time of product shipment.
INVENTORY Production materials are valued using standard costs, which approximate the first-in, first-out (FIFO) method. Work-in-process represents direct labor, materials and overhead incurred on products not delivered to date. Finished goods are valued at the lower of cost or market, cost being determined on the specific identification method.
PROPERTY, Property and equipment is recorded at cost and EQUIPMENT AND depreciated on a straight-line basis over the DEPRECIATION estimated useful life of the related assets (generally five years). Leasehold improvements are amortized over the lesser of the lease term or the useful life of the property.
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
RESEARCH AND All costs incurred to establish the technological DEVELOPMENT COSTS feasibility of products are considered research and development costs which are charged to expense as incurred.
GOODWILL The Company has recorded goodwill based on the difference between the cost and the fair value of certain purchased assets and it is being amortized on a straight-line basis over the estimated period of benefit, which ranges from 4 to 7 years. The Company periodically evaluates the goodwill for possible impairment. The analysis consists of a comparison of future projected cash flows to the carrying value of the goodwill. Any excess goodwill would be written off due to impairment.
ASSET In accordance with Statement of Financial Accounting IMPAIRMENT Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of ("SFAS 121"), the Company periodically evaluates the carrying value of long-lived assets when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.
INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred taxes are determined using the liability method which requires the recognition of deferred tax assets and liabilities based on differences between financial statement and income tax basis using presently enacted tax rates.
FASTCOMM COMMUNICATIONS CORPORATION
SUMMARY OF ACCOUNTING POLICIES
CASH AND The Company considers all highly liquid investments CASH EQUIVALENTS with an original maturity of three months or less to be cash equivalents. The Company invests its excess cash principally in overnight repurchase accounts and short-term government securities. The Company maintains amounts in excess of the federal deposit insurance limitation of $100,000 in its bank accounts.
COMPREHENSIVE On May 1, 1998, the Company adopted Statement of INCOME Financial Accounting Standards No. 130, "Reporting Comprehensive Income". Comprehensive income as defined includes all changes to equity except those resulting from investments by owners and distributions to owners. The Company has no items of comprehensive income to report.
EARNINGS PER SHARE Earnings per share is based on the weighted average number of shares of common stock and dilutive common stock equivalents outstanding. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity. Basic and diluted earnings per share are the same during 2000, 1999 and 1998 because the impact of dilutive securities is anti-dilutive.
RECENT In June 1998, the Financial Accounting Standards ACCOUNTING Board issued Statement of Financial Accounting PRONOUNCEMENTS Standards No. 133, "Accounting for Derivative Instruments" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair market value. Under certain circumstances, a portion of the derivative's gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into income when the transaction affects earnings. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. Presently, the Company does not use derivative instruments either in hedging activities or as investments. Accordingly, the Company believes that adoption of SFAS 133 in fiscal 2001 will have no impact on its financial position or results of operations.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. FUTURE The accompanying financial statements have been PROSPECTS prepared assuming that the Company will continue as a going concern. As explained below the Company has sustained recurring operating losses and cash flow deficits in 2000, 1999 and 1998. The Company developed a business plan to increase revenue and reduce operating losses. However, the Company must obtain funds from outside sources in fiscal 2001 to successfully implement its business plan. Presently, the Company has no firm commitments from outside sources to provide these funds. These factors raise substantial doubt about the Company's ability to continue in existence. Management's plans in regard to these matters are described in the succeeding paragraphs. The financial statements do not contain any adjustments that might result from the outcome of these uncertainties.
The Company plans to introduce new products to its customers in fiscal 2001, some of which will be the ChanlComm products formerly manufactured by KG Data Systems, Inc. (see Note 3). Also, the Company expects to generate significant revenue from shipments of products manufactured by Cronus Technology, Inc. which it acquired in March 2000 (see Note 3). In addition, the Company is increasing its marketing efforts in Latin America and Japan in hopes of generating revenue. In addition, the Company expects to control production costs by outsourcing substantially all manufacturing activity.
While the Company is optimistic that it can execute its revised business plan, there can be no assurance that the increased sales necessary to return to profitability will materialize or if they do, that the Company will be able to raise sufficient cash to fund the additional working capital requirements.
In July 2000, the Company raised $1,170,000 through a private placement offering of securities to a group of accredited investors.
2. PLAN OF On June 2, 1998, the Company filed a voluntary REORGANIZATION petition for reorganization under Chapter 11 of the United States Bankruptcy Code. This filing was a direct result of enforcement activities by a judgment creditor (See Note 13). The Company negotiated with its creditors a consensual Plan of Reorganization (the "Plan") and filed with the Court a Disclosure Statement and Plan of Reorganization dated October 21, 1998 as modified on December 23, 1998, January 8, 1999 and finally February 16, 1999. Creditors approved the Plan in March 1999 and the Court confirmed this Plan on March 30, 1999. The Plan became effective on April 12, 1999.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Pursuant to the Plan, Class 1 creditors, representing existing holders of convertible debentures, were required to convert their debt to equity within six months of the effective date of the Plan. Claims of unsecured creditors, below $1,000, were repaid in cash on or before April 30, 1999. Claims of unsecured creditors greater than $1,000 were satisfied by two cash payments totaling 25% of the allowed claim on or before April 30, 1999. The Company issued debentures to these unsecured creditors for the remaining 75% of their allowed claims. The claim of Gary Davison related to the judgement of $1,195,560 obtained against the Company was reduced to $900,000 and allowed as an unsecured nonpriority claim. The Company then dismissed its appeal of the state court verdict underlying the Davison claim and Davison withdrew a second claim of $2,350,000 related to a pending trial on another matter associated with his dismissal from the Company. Prior to confirmation of the Plan, the Company's President assumed the allowed claim, the effect of which is the amount due Davison will now be paid to him.
In funding its Plan, the Company raised $1,000,000 by selling common stock in a private offering. The debentures, totaling $2,490,357 issued to the unsecured creditors, including the President in connection with purchase of the Davison claim, mature in April 2003. The debentures will be convertible into common stock of the Company between the first and fourth anniversary of the effective date of the Plan. The debentures are convertible at the average of the closing price of the Company's common stock for the ten consecutive trading days ending on the trading day immediately prior to conversion. The debentures bear interest at 7.5%, payable in common stock of the Company. If not converted sooner, all debentures must be converted to common stock by April 2003. The Company has the right, at anytime, to redeem for cash at par value all of the outstanding debentures plus any accrued interest. Each debentureholder had the additional right to surrender the entire debenture to the Company on April 12, 2000 and receive cash equal to 15% of the holder's original allowed claim plus interest. As of April 30, 2000, all of these debentures had been converted into common stock.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Confirmation of the Plan on March 30, 1999 resulted in an extraordinary gain determined as follows:
3. BUSINESS On March 31, 2000, the Company acquired substantially ACQUISITIONS all of the assets and assumed certain liabilities of Cronus Technology, Inc. ("Cronus") for approximately $9,600,000, plus the assumption of liabilities of approximately $6,700,000 subject to adjustment as set forth in the agreement. Approximately $9,300,000 of the purchase price was funded through the issuance of shares of the Company's common stock and approximately $300,000 was paid in cash. Cronus manufactures and sells telecommunications equipment and provides consulting services for satelite telecommunications planning. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market values at the date of acquisition. The Company recorded goodwill of approximately $12,000,000 related to this transaction. The goodwill is being amortized on a straight line basis over four years. The purchase and debt assumption agreements related to the Cronus acquisition obligate the Company to issue up to 1,225,000 additional common shares if the fair value of its common stock has not reached $7.30 per share prior to the one-year anniversary date of these agreements. The Company will determine the purchase price adjustment when, and if, it issues any additional common shares. The following unaudited pro forma information presents the results of operations of the Company as if the acquisition had occurred on May 1, 1998.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
These pro forma results of operations have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred on the date indicated, or which may result in the future.
On March 31, 1999, the Company acquired all of the assets and assumed certain liabilities (as defined in the agreement) of KG Data Systems, Inc., ("KG Data"). KG Data has developed a product which transmits data between IBM mainframes and remote offices. The purchase price was $845,000, which was funded through the issuance of 719,149 shares of the Company's common stock. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded at their estimated fair market values at the date of acquisition. The Company recorded $723,325 of goodwill related to this transaction. This goodwill is being amortized on a straight line basis over four years. The operations of KG Data in 1999 were not material and accordingly, the Company has not presented pro forma results of operations.
4. INVENTORIES Inventories consist of the following components:
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. ACCOUNTS Accounts receivable consist of the following: RECEIVABLE
6. PROPERTY AND Property and equipment consists of the EQUIPMENT following:
Depreciation expense for the three years ended April 30, 2000, 1999 and 1998 was $495,944, $379,591 and $357,583, respectively.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
7. OTHER CURRENT Other current liabilities consist of the LIABILITIES following:
8. LONG-TERM Long-term debt consists of the following: DEBT
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(a) In connection with the acquisition of Cronus, the Company assumed liabilities under a revolving line of credit and term loan agreement with LaSalle National Bank. Under the revolving line of credit the Company could borrow up to the lesser of $3,000,000 or 80% of eligible accounts receivable and 35% of eligible inventory, as defined in the agreement. The revolving line of credit bears interest at the bank's prime rate of interest plus 1.0% and was scheduled to mature on May 1, 2001. Under the agreement, Cronus could issue letters of credit up to $250,000 in the aggregate. There are no outstanding letters of credit as of April 30, 2000. The term loan was payable in equal monthly principle payments of $9,875, bears interest at the bank's prime rate of interest plus 1.0% and was schedule to mature on May 1, 2001. In April 2000, the Company placed $250,000 in escrow to further collateralize the revolving line of credit and term loan. In July 2000, the bank informed the Company that the revolving line of credit and term loan would mature on September 30, 2000. Accordingly, this debt has been classified as a current liability. The Company expects to be able to refinance this debt with a local bank prior to the maturity date.
(b) In connection with the acquisition of Cronus, the Company assumed short term notes payable to individuals. The notes are unsecured, bear interest at 8.0% and mature on December 10, 2000.
(c) In connection with the acquisition of Cronus, the Company assumed liabilities for capital lease obligations related to various office equipment.
As of April 30, 2000, future net minimum lease payments under capital leases are as follows:
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The net book value of assets under capital leases was approximately $23,700 at April 30, 2000.
(d) In April 1999 the Company issued $2,490,357 in convertible debentures in satisfaction of the remaining 75% of each claim allowed in its plan of reorganization (see Note 2). The debentures earn interest at a rate of 7.5% payable in the form of common stock of the Company at time of conversion. The debentures are convertible at the average of the closing price of the Company's common stock for the ten consecutive trading days ending on the trading day immediately preceeding the date of conversion. No conversions were permitted prior to April 6, 2000. The Company may prepay the debentures at any time. Each debentureholder has the additional right, but not the obligation, to surrender the entire debenture to the Company on April 12, 2000 and receive a cash distribution equal to 15% of the holder's original allowed claim together with accumulated interest under the plan of reorganization. The debentures mature on April 12, 2003. Any debentures which have not been converted by this date will automatically be converted into common shares of the Company. During 2000, holders of the debentures converted $1,825,552 of debentures and accrued interest into 513,249 shares of common stock.
(e) In April 1997, the Company issued $3,000,000 in 5.0% convertible debentures due April 2001. In May 1997, the Company issued $2,000,000 in 5% convertible debentures due May 2001. For the first 180 days following the issuance, the debentures were convertible at the option of the holder into common stock at a conversion price equal to the average closing bid prices on NASDAQ for the ten trading days prior to conversion. If the conversion occurs more than 180 days after the issuance, the conversion price is the lesser of 125% of the average closing bid prices on NASDAQ for the ten trading days prior to the issuance date, or, 90% of the average closing bid prices on NASDAQ for the ten trading days prior to the conversion date. In addition, if the conversion occurs more than 180 days after the issuance, the holder will receive one warrant for every five shares of common stock received upon conversion of the debentures. If the conversion occurs more than 360 days from the issuance, the holder will receive one warrant for every 2 1/2 common shares received upon conversion of the debentures. Each warrant will have a strike price set at 125% of the market price of the Company's common stock at the time of conversion. During 2000 and 1999, holders of the debentures converted $224,684 and $1,073,310 of debentures and accrued interest into 274,911 and 1,652,717 shares of common stock, respectively.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The terms of the convertible debenture provide for conversion at a discount to the market commencing 181 days after issuance. The value of the discount, using a conversion price of 90% of the average closing bid prices on NASDAQ for the ten trading days prior to the conversion date, was approximately $550,000. Since the holders of the convertible debentures did not elect to exercise their option to convert the debentures into common stock of the Company within 180 days of issuance (i.e., at a conversion price of 100% of market), the Company was required to recognize on the 181st day from issuance the amount of the conversion discount. Recognition of the conversion discount reduced income available to common shareholders during fiscal 1998 by $550,000 in the form of a one-time non-cash charge to interest expense.
9. STOCKHOLDERS' In April 2000, the Company issued 728,063 shares of EQUITY common stock in settlement of $5,314,862 in liabilities assumed as part of the acquisition of Cronus (see Note 3).
In January 2000, the Company executed an agreement with an investment banking firm to provide investment banking and advisory services through August 31, 2001. As consideration for these services the Company issued 200,000 warrants to purchase the Company's common stock at an exercise price of $7.50 per share. The warrants are exercisable at any time from February 1, 2000 to January 31, 2003. The warrants have been valued at $570,817 using the Black-Scholes option pricing model. The Company has recorded the value of these warrants as deferred investment advisory fees and is amortizing the value over the term of the agreement.
In July 1999, the Company issued 1,110,040 shares of common stock for $1,086,723 through a private placement offering of securities to a group of accredited investors.
During fiscal 2000, the Company received $4,392,184 in proceeds on the exercise of warrants, which resulted in the Company issuing 3,682,009 shares of common stock. As of April 30, 2000, the Company has outstanding 2,662,106 warrants to purchase common stock of the Company at exercise prices ranging from $1.87 to $7.50. The warrants expire principally in 2003.
During fiscal 2000, the Company issued 788,160 shares of common stock on the conversion of debentures and accrued interest totaling $2,050,236.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
In April 1999, the Company issued 1,333,333 shares of common stock for $1,000,000 though a private placement offering of securities to a group of Company employees, insiders and accredited investors. These proceeds, except for the $71,723 ($152,367 in 1999) placed in escrow, funded the 25% cash payment to the unsecured creditors as per the plan of reorganization.
10. STOCK OPTIONS The Company has both a qualified and non-qualified stock option plan (the "Plans") under which options to purchase up to 2,260,000 shares of common stock may be granted to officers, directors and other key employees of the Company.
The exercise price of each option may not be less than 100% of the fair market value of the stock on the date of grant for incentive stock options or 85% of such fair market value for non-qualified stock options, as determined by the Board. Generally, options vest over a three year period and expire five years from the date of grant and, in most cases, upon termination of employment. The following table relates to options outstanding, granted, exercised, and canceled during 2000, 1999 and 1998, under the Plan:
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
A summary of stock options outstanding and exercisable as of April 30, 2000 is as follows:
The Company has adopted the disclosure-only provisions of SFAS-No. 123 "Accounting for Stock Based Compensation", but applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. For SFAS No. 123 purposes, the
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
weighted average fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 5.96%, 5.53% and 5.77% and expected volatility of 125.0%, 60.0% and 65% and expected option life of 4, 5 and 5 years for the years ended April 30, 2000, 1999 and 1998, respectively, and dividend payout rate of zero for each year Using these assumptions, the weighted average fair value of the stock options granted is $1.41, $0.38 and $1.76 for 2000, 1999 and 1998, respectively. There were no adjustments made in calculating the fair value to account for vesting provisions or for non-transferability or risk of forfeiture.
If the Company had elected to recognize compensation cost based on the fair value at the grant dates for options issued under the plans described above, consistent with the method prescribed by SFAS No. 123, net loss applicable to common shareholders and loss per share would have been changed to the pro forma amounts indicated below:
11. INCOME TAXES The Company has net operating loss carryforwards for income tax reporting purposes of approximately $28,997,000, which begin to expire in 2008. The amount of the net operating loss carryforward related to the compensation element of stock options is approximately $10,381,000, which when realized will be a credit to paid in capital. In addition, the Company has research and development credit carryforwards of approximately $869,000, which begin to expire in 2006.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
The difference between the Federal tax rate and the effective tax rate realized as a percent of pretax earnings for the years ended April 30, 2000, 1999, and 1998, is as follows:
No deferred taxes have been recognized in the accompanying consolidated financial statements as of April 30, 2000 and 1999. The components of deferred income taxes are as follows:
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Management has provided a valuation allowance for deferred tax assets as of April 30, 2000, because they are unable to predict when the benefit of these items will be recognized in future years.
12. SIGNIFICANT Certain customers accounted for 10% or more of the CUSTOMERS AND Company's total revenue during the years ended April FOREIGN EXPORTS 30, 2000, 1999 and 1998 as noted below:
Sales to customers A, B and D were $1,162,000, $930,000 and $775,000 in 2000, respectively. Sales to customer C were $1,307,000 and $2,870,000 in 1999 and 1998, respectively.
In 1999 and 1998, the Company had export sales to foreign customers totaling approximately $1,800,000, and $3,292,000, respectively. These amounts constitute 39% and 37% of total revenues, respectively. The export sales were made to customers in Venezuela, Peru and Brazil. There were no significant export sales in 2000.
13. COMMITMENTS LITIGATION AND CONTINGENCIES In 1997, Gary H. Davison a former officer and director of the Company commenced two lawsuits against the Company in the Circuit Court of Fairfax, Virginia, one for wrongful termination and the other for breach of contract. The breach of contract action involved claims for options to purchase 100,000 shares of stock and a $100,000 bonus. On February 17, 1998, a jury in Fairfax County awarded Mr. Davison $1,125,000 in damages and $163,233 in interest accrued from May 26, 1996 in this case. Accordingly, the Company recorded a loss provision for this amount in its third fiscal quarter ended January 31, 1998. Subsequently, this award was reduced by $100,000. The Company filed an appeal of this decision with the Virginia Supreme Court. The Company settled these lawsuits for $900,000 as part of its plan of reorganization (see Note 2).
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION INVESTIGATION
In fiscal 1995, the Securities and Exchange Commission (the "SEC") began an inquiry relating to certain prior public disclosures and periodic reports of the Company. In September 1999, the Company, its Chief Executive Officer and Chairman of the Board and its Chief Financial Officer agreed to a settlement with the SEC. Without admitting or denying the allegations, the Company consented to the entry of a final judgement which enjoins it from violations of specific sections of the Securities Exchange Act of 1934 and the involved officers consented to the entry of an order to cease and desist committing or causing any violations or future violations of specific sections of the Securities and Exchange Act of 1934.
EXCLUSIVE LICENSE AGREEMENTS
In May 1999, the Company entered into a licensing and task order agreement with Taboret, an Arinc Inc. subsidiary. The license provides for development of a graphical user interface (GUI) and a suite of SNMP tools to manage communication equipment and create management reports. The total committed cost for the basic management system is $61,000. An additional committed cost for each FastComm unit type, special project editor, maintenance, block distribution run time licenses and options totaled $15,000.
In November 1998, the Company entered into a 20-year licensing agreement with Telogy Networks, Inc. to deliver their Golden Gateway Voice Over Packet software and documentation service. The total committed cost is $281,000. Payments will be spread over a 24-month period.
In November 1998, the Company obtained a worldwide non-exclusive royalty bearing license from Alcatel Data Networks, Inc. ("Alcatel") to use and further develop Alcatel owned technology and intellectual property. The terms and conditions of this agreement call for a one-time fee of $50,000 payable in four equal installments plus royalty payments based on unit sales. The initial term of this agreement is twenty years and is renewable subject to negotiation of terms and conditions agreeable to both parties 30 days prior to its expiration.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
OPERATING LEASES
The Company leases office space and certain office equipment under operating lease arrangements that expire at various dates through 2003. The main office lease provides for scheduled rent increases in the future which are being amortized over the lease period. Rent expense for the years ended April 30, 2000, 1999, and 1998, was approximately $434,000, $609,000 and $662,000, respectively. Aggregate future minimum lease payments under the operating leases are as follows:
======================================================
COMPENSATION
The Company maintains an employment agreement with its President and Principal Executive Officer. This agreement provides for a base salary of $100,000 plus bonus and incentive compensation as may be deemed appropriate by the Board of Directors. The agreement was scheduled to expire on January 31, 2000, however, the agreement was automatically renewed through January 31, 2001 by the Board of Directors. In connection with the acquisition of KG Data, the Company entered into a three year employment agreement, expiring March 31, 2002, with the former President and sole stockholder of KG Data. This agreement provides for a base salary of $100,000 plus bonus and incentive compensation as deemed appropriate by the Board of Directors.
The Company maintains a defined contribution plan that covers substantially all of its employees. Employees may contribute a portion of their compensation as defined under the Internal Revenue Code and employer contributions are discretionary. There were no employer contributions in 2000, 1999 or 1998.
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
14. FINANCIAL Generally accepted accounting principles requires the INSTRUMENTS disclosure of the fair value of financial instruments; however, this information does not represent the aggregate net fair value of the Company. Some of the information used to determine fair value is subjective and judgmental in nature; therefore, fair value estimates, especially for less marketable securities, may vary. The amounts actually realized or paid upon settlement or maturity could be significantly different.
Unless quoted market price indicates otherwise, the fair value of accounts receivable generally approximates market because of the short maturity of these instruments. The Company has estimated the fair value of long-term debt based on quoted market prices for similar debentures.
The estimated fair values of the Company's financial instruments, none of which are held for trading purposes, are summarized as follows:
15. FOURTH QUARTER During the fourth quarter ended April 30, 1998, the ADJUSTMENTS Company recorded provisions for obsolete inventory of $570,000 and a valuation allowance related to an uncollectible note receivable of $273,600 all of which had the effect of increasing the operating loss and net loss by $843,600 or $0.08 per share. These additional provisions were necessary in the fourth quarter of fiscal 1998 due to changes in estimates caused by decreased sales and the decline in the fair value of the related collateral for the note receivable.
16. SUPPLEMENTAL Supplemental information on interest paid is as follows: CASH FLOW INFORMATION
FASTCOMM COMMUNICATIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
Supplemental disclosure of non-cash investing and financing activities:
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
FASTCOMM COMMUNICATIONS CORPORATION
The audits referred to in our report, which includes an explanatory paragraph related to substantial doubt about the Company's ability to continue as a going concern, to FastComm Communications Corporation, dated July 14, 2000 which is contained in Item 8 of this Form 10-K, included the audit of the financial statement schedule listed in the accompanying index for each of the three years in the period ended April 30, 2000. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based upon our audits.
In our opinion, such schedule presents fairly, in all material respects, the information set forth therein.
BDO Seidman, LLP
Washington, D.C. July 14, 2000
FASTCOMM COMMUNICATIONS CORPORATION
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
1/ Accounts written off - - 2/ Inventory scrapped or disposed of - -
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
NONE.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists the directors and executive officers of the Company, their ages, descriptions of their business experience and positions held with the Company:
(1) Member Stock Option Committee. (2) Member Audit Committee.
All directors hold office until the next annual meeting of the shareholders and the election and qualification of their successors. The officers are elected by and serve at the discretion of the Board of Directors. See "Employment and Control Arrangements" under Item 11, "Executive Compensation."
PETER C. MADSEN has been President, Chief Executive Officer and a director of the Company since September 1992. From November 1986 to January 1992, he was an officer of the Newbridge Networks Corporation, a Canadian telecommunications company, most recently as Vice President and General Manager, United States Region, and President of Newbridge Networks Inc., Newbridge Networks Corporation's United States subsidiary. Mr. Madsen served as a director of Newbridge Networks Corporation from September 1987 until June 1998.
MARK H. RAFFERTY has been Vice President, Chief Financial Officer and Treasurer of the Company since August 1993 and a director of the Company since March 1998. From August 1992 to August 1993, Mr. Rafferty was Vice President, Finance at Newbridge Networks Inc. From August 1987 through August 1992, Mr. Rafferty was Controller of Newbridge Networks Inc.
WILLIAM A. GRANT has served as Executive Vice President - Global Sales for the Company since November, 1997. From October 1996 through October 1997, Mr. Grant served as Vice President - Global Sales for Memotec Communications Corporation. From January 1994 through September 1996, Mr. Grant was Vice President - Business Development for FastComm. Prior to this time, Mr. Grant was President of Inteletouch Corporation, a telecommunications equipment company.
DR. KENNETH A. BLOOM has served as Vice President - Mainframe Networking since March 1999. For five years prior to this time, Dr. Bloom was President and sole stockholder of KG Data Systems, Inc., which was acquired by the Company in March 1999.
SAFA ALKATEB has been Vice President - Engineering for the Company since February 1999. From April 1994 to January 1999, Mr. Alkateb held a variety of engineering positions within the Company. From October 1992 to March 1994, Mr. Alkateb was Product Development Senior Software Engineer for Novak Engineering Company, an engineering consulting firm.
THOMAS W. COLLIGAN was Vice President - Business Development for the Company from July 1998 to September 1999. From August 1997 to February 1998, Mr. Colligan was employed by InterNex Information Systems, a nationwide internet service provider. From November 1992 to January 1997, Mr. Colligan was Director of Federal Sales, National Accounts and Eastern Region Operations for Ascend Communications, a telecommunications equipment manufacturer. Mr. Colligan resigned from his position with the Company effective September 17, 1999.
ROY WAINWRIGHT has been Executive Vice President of the Company since April 3, 2000. From March 1997 to March 2000, Mr. Wainwright was Vice President / General Manager of Cronus Communications Inc. From June 1995 to March 1997, Mr. Wainwright was Associate Vice President - Product Marketing at Computer Sciences Corporation.
DARLENE GREENHAW has been Vice President - Sales for the Company since April 3, 2000. From October 1999 to March 2000, Ms. Greenhaw was Vice President - Sales at Cronus Communications Inc. From September 1987 to September 1999, Ms. Greenhaw was Vice President - Sales at Newbridge Networks Inc.
EDWARD R. OLSON has served as a director since January 1989. From 1990 to April 1997, Mr. Olson was the President, Chief Executive Officer and Chairman of M-C Industries, Inc., a fluid hydraulics equipment manufacturer. Commencing July 1, 1995, Mr. Olson became a principal in KPMG Baymark Strategies LLC, an independent consulting firm in a strategic alliance with KPMG Peat Marwick, LLP. KPMG Baymark Strategies LLC has since become Dominion Management LLC. Mr. Olson was President and COO of Porta Systems Corporation from November 1995 to January 1997. Mr. Olson has been Chairman of S&L Metal Products Corporation, Queens, NY for the last five years.
THOMAS G. AMON has served as a director since December 1994. For the past five years, Mr. Amon has been an attorney in private practice in New York City. Since June 1, 1999, Mr. Amon has been a partner in the law firm on Sokolow, Dunaud, Mercadier & Carreras, LLP., New York, NY and Paris, France.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and with the National Association of Securities Dealers, Inc. Automated Quotations (NASDAQ) system. Officers, directors and greater than ten percent shareholders are required by regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Company believes that during its fiscal year ended April 30, 2000, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with, except for one report regarding a stock option exercise filed late by Mr. Amon.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid by the Company to the nine named executives (the "Named Executive Officers") for services furnished in all capacities to the Company during the fiscal year ended April 30, 2000, as well as such compensation paid by the Company to the Named Executive Officers during the Company's two previous fiscal years
1) Automobile benefit.
2) At April 30, 2000, Mr. Madsen held 1,723,677 restricted shares of Common Stock with a market value of $6,248,329 at that date.
3) At April 30, 2000, Mr. Rafferty held 43,420 restricted shares of Common Stock with a market value of $157,398 at that date.
4) At April 30, 2000, Mr. Alkateb held 2,000 restricted shares of Common Stock with a market value of $7,250 at that date.
5) At April 30, 2000, Mr. Colligan held 325,000 restricted shares of Common Stock with a market value of $1,178,125 at that date. Mr. Colligan resigned from his position with the Company effective September 17, 1999.
6) At April 30, 2000, Mr. Grant held 36,667 restricted shares of Common Stock with a market value of $132,918 at that date.
7) At April 30, 2000, Dr. Bloom held 719,149 restricted shares of Common Stock with a market value of $2,606,915 at that date.
FISCAL 2000 OPTION GRANTS
The following table sets forth information concerning grants of stock options to the Named Executive Officers and Directors made pursuant to the Company's 1999 Stock Option Plan during the fiscal year ended April 30, 2000:
Stock Option Grants in Fiscal Year 2000
INDIVIDUAL GRANTS
The exercise price of each option may not be less than 100% of the fair market value of the stock on the date of the grant for incentive options or 85% of such fair value for non-qualified stock options, as determined by the Board of Directors. The vesting period is determined by the Board of Directors. Options expire five years from the date of grant and, in most cases, upon termination of employment.
FISCAL 2000 AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information concerning each exercise of stock options during the fiscal year ended April 30, 2000 by each of the Named Executive Officers and Directors and the fiscal year-end value of unexercised options held by such persons:
BOARD REPORT ON EXECUTIVE COMPENSATION
The Company does not have a formal compensation committee. Compensation levels for executive officers are approved by the Board of Directors. The Board of Directors is presently comprised of the following individuals: Peter C. Madsen, Thomas G. Amon , Edward R. Olson and Mark H. Rafferty. Salaries are reviewed periodically and are based on individual performance, the extent of individual experience and responsibility and comparisons with salaries paid in the industry.
The Company recruits for its executive officer positions from within the communications industry. In most instances, the source company is significantly larger than the Company. It has been the policy of the Board of Directors of FastComm to hire executive officers at levels below that of their current salaries along with a stock option package intended to make up for the differentiation and to provide a performance incentive. The Company believes that stock options are an attractive benefit in that they enhance performance and loyalty at little cost. The Company believes the compensation packages offered to its current employees and prospective employees have been consistent with that of the communications industry.
The Board granted six executive officers options during fiscal 2000. Four of these grants were determined by the individuals performance, responsibility and seniority. The remaining grants were a condition of employment.
The Board adheres to a policy of granting options to executive officers based upon performance and responsibility. In addition, the Board also considers the relative importance of the job function being performed and the number of options currently held by the executive officer, and options granted for comparable positions in peer group companies.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the year, Peter C. Madsen, Edward R. Olson, Thomas G. Amon and Mark H. Rafferty as directors participated in deliberations of the Company's Board of Directors concerning executive officer compensation and stock option grants, including their own. None of such directors was party to any reportable interlock or participation during fiscal 2000.
EMPLOYMENT AND CONTROL ARRANGEMENTS
Pursuant to the Employment Agreement dated September 18, 1992, Mr. Madsen was elected President and Chief Executive Officer of the Company at an annual base salary of $100,000 per year. Under this agreement, Mr. Madsen has been granted full control of and authority over the operations of the Company, subject to the general oversight of the Board of Directors. This agreement, which currently expires on January 31, 2001, is renewable thereafter on a year to year basis.
In connection with the acquisition of KG Data, the Company entered into a three year Employment and Non Competition Agreement on March 31, 1999 with Dr. Kenneth A Bloom. The Agreement provided that Dr. Bloom be employed by the Company in a senior management capacity at an annual salary of $100,000 plus incentives based on sales of the ChanlComm(R) product line.
DIRECTOR COMPENSATION
Directors receive no cash compensation for their services as such, however, the Board of Directors has authorized payment of reasonable expenses incurred by non-employee directors in connection with attendance at meetings of the Board of Directors. Further, members of the Company's Board of Director are granted options to purchase common shares pursuant to the Company's 1999 Stock Option Plan. During fiscal year 2000, the Company granted options to purchase 30,000 shares of its common stock to both Edward R. Olson and Thomas G. Amon. After the end of fiscal year 2000, the Board granted Mr. Amon options to purchase an additional 50,000 shares of common stock for his professional assistance in the acquisition of Cronus. The Chairman of the Board receives no compensation for serving in such capacity.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative total shareholder return on the Company's Common Stock with that of the cumulative total return of the NASDAQ Stock Market - US Index ("NASDAQ STOCK MRKT - US") and the NASDAQ Telecommunications Index ("NASDAQ TELECOM") for the five year period ended on April 30, 2000. The information below is based on an investment of $100, on April 30, 1995, in the Company's Common Stock, the NASDAQ STOCK MRKT - US and the NASDAQ TELECOM. The Company's Management consistently cautions that the stock price performance shown in the graph below should not be considered indicative of potential future stock price performance.
The Company's shares are quoted on the OTC Bulletin Board under the symbol FSCX.OB.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG FASTCOMM COMMUNICATIONS CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX, THE NASDAQ TELECOMMUNICATIONS INDEX AND A PEER GROUP
[GRAPH]
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At July 5, 2000, there were 26,388,699 shares of Common Stock of the Company issued and outstanding. As of such date, options to purchase 3,351,666 shares of Common Stock were outstanding.
Each holder of shares of Common Stock, but not holders of unexercised options, is entitled to one vote per share on each matter, which may be presented at a meeting of shareholders. Cumulative voting is not allowed. The Company's shares are quoted on the OTC Bulletin Board under the symbol FSCX. OB.
The following table sets forth information regarding ownership of Common Stock of the Company at July 5, 2000, by each person who is known by management of the Company to own beneficially more than five percent of the Common Stock (setting forth the address of each such person), by each director, by the Named Executive Officers of the Company identified in "Item 11. Executive Compensation," and by all directors and Named Executive Officers of the Company as a group. Shares issuable on exercise of options exercisable within 60 days of July 5, 2000 are deemed to be outstanding for the purpose of computing the percentage ownership of persons beneficially owning such warrants or options, but have not been deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as otherwise indicated, the persons indicated below have sole voting and investment power with respect to the shares indicated as owned by them except as otherwise stated in the notes to the table.
1) Director
2) Gives effect to 456,666 options owned by Mr. Madsen exercisable within 60 days
3) Gives effect to 30,000 options owned by Mr. Olson exercisable within 60 days
4) 6,667 Shares are owned by the Thomas G. Amon Pension and Profit Sharing Plans. Gives effect to 83,333 options owned by Mr. Amon exercisable within 60 days
5) Gives effect to 331,666 options owned by Mr. Rafferty exercisable within 60 days
6) Gives effect to 148,332 options owned by Mr. Grant exercisable within 60 days
7) Gives effect to 228,445 options owned by Mr. Alkateb exercisable within 60 days
8) Includes 78,000 shares owned by Mr. Colligan's wife
9) Gives effect to 40,000 options owned by Dr. Bloom exercisable within 60 days
10) Percent of Class based upon 26,388,699 shares outstanding at July 5, 2000
The Company is unaware of any arrangement the operation of which could at a subsequent date result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company paid the law firm of Sokolow, Dunaud, Mercadier and Carreras LLP $153,045 in the fiscal year ended April 30, 2000. Thomas G. Amon, a Director of the Company since December 1994, is a partner in this law firm.
During fiscal year 2000, the Company loaned $50,000, under normal terms and conditions, to one of its senior officers.
The terms of the transactions described above were negotiated at arms length such that the terms were as favorable to the Company as could have been obtained from an unaffiliated third party.
The Company has entered into separate indemnification agreements with each of its directors and executive officers that may require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) Financial Statements and Schedules.
The financial statements and financial statement schedules filed as a part of this Report are listed beneath Item 8 of this Report.
(a)(3) Exhibits.
The exhibits filed as a part of this Report are listed on the Exhibit Index at page 33 of this Report.
(b) Reports on Form 8-K.
The Company filed one report on Form 8-K during the fiscal year ended April 30, 2000 announcing the acquisition of Cronus Technology, Inc.
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 July 31, 2000.
FASTCOMM COMMUNICATIONS CORPORATION
By: /s/ Peter C. Madsen ------------------------------- Peter C. Madsen President
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 in the capacities indicated on July 31, 2000.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Peter C. Madsen and Mark H. Rafferty, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with the exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney- in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof.
EXHIBIT INDEX
- ----------
* Filed with revised form 10KA filed August 12, 1994.
** These exhibits are incorporated by reference from the corresponding exhibits to the Company's Form S-18 Registration Statement, SEC File Number 333-19758.
*** These exhibits are incorporated by reference from the corresponding exhibits to the Company's Form S-3 Registration Statement, SEC File No. 333-43374.
**** These exhibits are incorporated by reference from the corresponding exhibits to the Company's Form S-3 Registration Statement, see File No. 333-26459
(a) Filed with Form 8K dated April 6, 1999
(b) Filed with Form 8K dated April 21, 1999
(c) Filed with Form 8K dated April 21, 1999
(d) Filed with Form 8K dated April 14, 2000