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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition period from ________ to ________
Commission File No. 0-20688
GLASGAL COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-2914253
(State of Incorporation) (I.R.S. Employer Identification No.)
- ------------------------ ------------------------------------
151 Veterans Drive, Northvale, NJ 07647
(Address of principal executive offices) (Zip Code)
- ---------------------------------------- ----------
Registrant's telephone number, including area code: (201) 768-8082
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, .001 par value
Common Stock Purchase Warrants
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates at July 31, 1996 was approximately $63,993,000. For purposes of
computing such market value, the Registrant has deemed as affiliates only
executive officers, directors and their affiliates.
The total number of shares of Common Stock of the Registrant
outstanding at July 31, 1996 was 16,341,162.
TABLE OF CONTENTS
PART I PAGE #
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 22
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure 48
PART III
Item 10. Directors and Executive Officers of the Registrant 49
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management 56
Item 13. Certain Relationships and Related Transactions 59
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 60
2
PART I
ITEM 1. BUSINESS
DEVELOPMENT OF THE BUSINESS
Glasgal Communications, Inc. a New Jersey corporation, was founded and
incorporated in 1975 (the "Predecessor") as a distributor of data communications
equipment and services. Beginning in 1991 the Predecessor began redirecting its
efforts to become an open systems integrator providing complete computer network
systems and integration services.
In May 1994, the Predecessor merged with and into Sellectek
Incorporated, a California corporation incorporated in 1983 ("Sellectek") (the
"Merger"). The surviving entity, Sellectek, changed its name to Glasgal
Communications, Inc. following the Merger and continued its existence under the
laws of the State of California. The Merger provided the Company (as hereinafter
defined) with an immediate infusion of approximately $750,000 ($190,000 net of
expenses) in cash contributed by Sellectek and created a publicly-traded vehicle
to finance the future growth of the Company's operation. Prior to the Merger,
Sellectek was a publicly-traded company without any on-going business
operations. The Company's sole business is the business of the Predecessor and
while Sellectek was the survivor of the Merger, for accounting purposes, the
Merger is treated as a reverse acquisition with the Predecessor as the acquirer.
In January 1996, Glasgal Communications, Inc. reincorporated in the state of
Delaware. As used herein the term "Company" refers collectively to Glasgal
Communications, Inc., a Delaware corporation, the Predecessor, and to its
subsidiaries, Signatel Ltd. ("Signatel"), its Canadian subsidiary and
Computer-Aided Software Integration, Inc. ("CASI").
On October 28, 1994, the Company consummated the acquisition of all the
voting capital stock of Signatel, a Canadian distributor of data communications
equipment and services, for 875,000 shares of its Common Stock. The acquisition
was accounted for as a pooling of interests.
On April 24, 1996, the Company acquired 80% of the common stock of
CASI. CASI develops and licenses a suite of system engineering software tools
collectively known as the Integrator's Workbench Product Series(TM). This
software automates the design, implementation, migration and support of
client/server computing environments. The acquisition has been accounted for as
a purchase; operations of CASI have been included in the accompanying
consolidated financial statements from the date of the acquisition.
3
On July 31, 1996, the Company acquired all of the common stock of HH
Communications, Inc., a Chicago area based systems integrator, for 1,500,000
shares of its common stock. The acquisition will be accounted for as a pooling
of interests.
DESCRIPTION OF BUSINESS
The Company is in the business of providing enterprise wide networking,
services and solutions including design, configuration, integration and
migration services to its customers in the USA and Canada. In most cases these
services are bundled with products selected by Company consultants to meet
specific technological needs of its customers. The Company also provides full
life cycle support including installation and maintenance services across the
USA and Canada. Internationally the Company exports primarily wide area
networking products to some fifty (50) resellers around the world.
In April 1996, the Company purchased 80% of CASI, a designer and
developer of middleware systems products. CASI's "Integrator's Workbench Product
Series"(TM) is currently comprised of two products - "The Configurator"(TM) and
the "Information Router"(TM). The Configurator(TM) is designed to automate the
design, configuration, integration and migration processes within network
environments, thereby reducing labor time for these tasks by as much as 80%. The
Information Router(TM) is a real time messaging system which "translates"
information from disparate platforms/protocols. The Information Router
eliminates the need for custom programming to perform intranet or internet
communication among applications, while ensuring integrity. Both products are
being marketed to Fortune 5,000 companies and government institutions by a small
specialist sales team. The Configurator(TM) is also being introduced into
Glasgal's own integration department allowing it to significantly reduce project
labor costs and thereby increase its competitiveness. In its initial marketing
phase, CASI has found significant interest for the product in its target markets
and has several "pilots" and evaluations planned for over the summer period.
In addition to its own unique products, Glasgal as a system integrator
offers solutions based on industry standard, proven hardware and software. The
Company is fully authorized to sell and support systems from leading
manufacturers including Microsoft, Novell, Cisco, 3Com, Sun Microsystems, RAD,
Micom, Optika and many others. The Company encompasses market leading operating
systems to support a truly "open" system implementation.
BUSINESS STRATEGY
The Company's objective is to become one of the leading "open" systems
integrators providing complete enterprise networking solutions in the USA and
Canada and eventually globally.
4
Systems integration is not only a high growth market, it is one that is
continuously evolving as new technologies come to market from a myriad of
technology companies. As margins on hardware come under increasing pressure
systems integrators are placing greater reliance on margins from services to
maintain and increase profitability. Since 1992, the Company has recognized the
importance of moving towards a significantly higher value added services sales
mix. For the fiscal year ended April 30, 1996 service revenue accounted for
$7,017,000 or 17% of net sales compared with $2,167,000 or 7% of sales for the
year ended December 31, 1992. However, this migration to services is being
adopted by several systems integrators thereby increasing competition in this
lucrative area. The concentration is therefore shifting towards increasing
efficiency and productivity, so as to reduce the variable costs associated with
delivering integration services to clients. Recognizing this trend, the Company,
through its new subsidiary CASI, designed and developed tools that substantially
lower labor variable cost elements by automating a significant proportion of the
integration process. Developed initially to help reduce the cost of delivering a
significant customer, the Company's management recognized that a tool of this
nature could be useful to any organization involved in high volume integration
services and has begun marketing the product through a small and specialized
CASI salesforce.
The Company's current operations will use the Configurator(TM) to
increase their own competitiveness and hence profitability. The CASI salesforce
will primarily attempt to sell the Configurator(TM) initially to systems
integrators ("SI's"), who will use the product for specific high volume projects
that they are engaged in. In this way SI's become a sales extension to CASI. The
Information Router(TM), accepted as the standard communications device by the
Integrating Technology Consortium (ITC), a group of leading hotel chains and
technology vendors, is currently being installed in several hotels.
Due to the paradyne shift that the Configurator and Information Router
imposes on organizations, the sales leadtimes are long and normally involves
evaluations and pilot projects before prospects are ready to commit to the
products. Management is currently actively involved in finding ways to shorten
the process without reducing the potential opportunities.
To provide more focus to its salesforce the Company is moving towards
concentrating its solution deliverables to the following areas:
o Client/Server Technology - This technology is a form of shared,
or distributed, computing in which tasks and computing power are
split between servers (a host computer) and clients (workstations
or personal computers). This division provides the network
design, topology, hardware, software, and cabling thereby
offering customers a "one-stop" shop.
o Connectivity - This division's focus is on delivering technology
to allow dissimilar devices to communicate with each other.
o Remote Access/Security - This division's focuses on providing
solutions for remote workstations or mobile users to dial into a
network and access the resources of that network.
5
o Data Communications - This division focuses on providing
solutions to customers with a need to transfer data between two
points.
o Middleware - This is a category of software that hides the
underlying network and its communication protocols from
applications, allowing seamless interoperability. The CASI
Configurator(TM), for example, allows simultaneous distribution
of application software to the workstations via networks
irrespective of the network communication protocol being used.
o Document Imaging - This technology allows organizations to
capture, store, manipulate and access documents on their
computers resulting in many efficiencies and benefits for an
organization including:
- Preserving the look of documents.
- Reducing the workload of data entry clerks.
- Providing the ability for documents to be viewed and
worked on by many people simultaneously.
- Reducing the risk of lost documentation.
Previously, the Company ran its operations through virtual business
units (VBU's) based on four vertical sales divisions, i.e., Domestic Branch
Operations, Export Sales Operations, Government, and Canada Branch Operations.
To provide added focus, meaningful support, and increased synergies throughout
the existing organization, as well as for potential new acquisitions, the
Company is organizing itself along technology solution lines as described above.
Separate VBU's have been established with appropriate technological expertise in
order to support increasingly complex deliverables in each of its solution
areas.
The Company's overall growth strategy remains dedicated towards strong
internal growth supplemented by strategic acquisitions.
INDUSTRY AND MARKET ASSESSMENT
The Company believes that the enterprise networking market will
experience further growth and that the once robust market for mainframe and
minicomputers will continue to decline. Certain desktop personal computers are
fully capable of performing such computationally intensive functions as database
management, three-dimensional modeling, and high-resolution graphics rendering.
They are also fully capable of performing as LAN file servers, allowing hundreds
of individual networked workstations to share data. Applications that once
required a dedicated mainframe or minicomputer platform, such as accounting and
statistical applications, are increasingly run on distributed client/server
platforms.
Several years ago, the Company recognized the opportunities that would
accrue from the shift taking place in the computer industry as a result of the
proliferation and growth in processing power of personal computers, and the
shift by manufacturers to an "open" systems architecture. This shift allowed
separate vendor computer platforms to communicate with one another for the first
time on a large scale. With "open" systems architecture came a growing demand
from users to replace rigid centralized processing systems with the more
flexible
6
processing of information on personal computer networks. This shift away from
centralized processing toward distributed systems, which is today a common
solution for many enterprises, became possible due to: (a) the advent of faster
and more powerful microprocessors, (b) price declines for networking hardware
and software, (c) user-friendly and application-specific software, (d)
increasing computer knowledge and skills in the work force, (e) the ability to
share and communicate enterprise data both locally and world-wide through what
have become known as local and wide area networks (LANs/WANs) and most recently
(f) Internet access through the PC.
Today's hot topic in commerce, finance, medicine, education and almost
every walk of life is the Internet. Once the preserve of the mainframe but now
in the public domain through the rapid growth of the PC, it is much vaunted as
the road to a new golden age of information. However, it is not just the
Internet but networks generally which the Company believes will continue to show
significant growth. The Internet in many ways shows how the future of networking
will develop. Today an office networks its internal computers with a LAN and in
many cases its multiple sites with a WAN. Increasingly the LAN is being
connected to the Internet.
Market acceptance of personal computers was widely realized in the
mid-1980's, bringing processing power, ease of use, and inexpensive applications
to the general public. The advent of LAN technologies introduced a viable
mechanism for the connection of multiple computer users, and allowed for the
sharing of peripherals such as laser printers and mass storage devices. More
importantly, LAN platforms provided a means of monitoring and controlling all of
these independent spheres of influence under a common management system and for
shared access to mission-critical information and data elements stored on the
system. This connectivity mechanism also offered a means of attaching multiple
LAN users through a common connection to a host system, reducing the costs and
simplifying procedures associated with access to even the largest repositories
of data be they within the company or outside its domain as in the case of the
Internet.
The many advantages of client/server networking (one or more servers
holding application and/or data, connected to a series of PC's), the ever
growing software applications coming to market for text, voice, graphics and
video as well as the advent of faster transmission rates, have encouraged
organizations to increase their use of networks as information proliferates both
geographically and by media type. As a result network topologies have increased
dramatically in complexity and size and will continue to do so well into the
future. Industry statistics from various sources, including Ledgeway/Dataquest,
Data Communications magazine and Frost & Sullivan Market Intelligence, indicate
that the annual rate of growth for connectivity products and services will climb
at a rate not less than 10% during the next several years.
The increased reliance organizations place on their networks today not
only generates demand for control devices like hubs, routers and switches - all
of which are provided by the Company - but also challenges service support
suppliers like the Company to reduce down times to a minimum.
7
The Company is uniquely positioned to support its customers and
prospects in all aspects of networking and connectivity solutions:
o Through its 50+ vendor relationships the Company can provide
networking products that meet even the most challenging customer
needs.
o Through its many service locations throughout the USA and Canada
the Company has the required infrastructure to offer 24 hour
support 365 days per year on all products.
o The Company has highly trained and experienced personnel
delivering design, configuration, integration and migration
support of network systems.
o Utilizing the software developed by its subsidiary, CASI, the
Company can carry out the above functions at a significantly
lower cost than its competition.
EXPORT SALES AND OPERATIONS. The Company sells in approximately 33
overseas locations through an international reseller network. Export sales
represented 8.9%, 8.7%, 11.7% and 8.5% of the Company's net sales as of the
fiscal year ended December 31, 1993, the four months ended April 30, 1994, and
the fiscal years ended April 30, 1995 and 1996, respectively. The market for
data networks abroad can range from one to five years behind the United States
in terms of state-of-the-art technology. Due to this time lag, as well as
differences in local competitive pressures, export margins on discrete data
communications devices are still relatively high compared to the Company's
domestic margins. This area is supported by four people.
The following table gives an analysis of the Company's export sales by
geographic area:
SALES
(in thousands)
Four Months
Year Ended December 31, Ended April 30, Year Ended April 30,
----------------------- --------------- --------------------
EXPORT SALES: 1992 1993 1994 1995 1996
------------- ---- ---- - ---- ---- ----
Canada $ 507 $ 256 $ 49 $ 103 $ 117
Europe 1,627 1,953 335 1,754 1,759
Middle East 66 29 17 73 137
Latin America 660 604 222 1,087 742
Far East 186 411 351 1,095 785
---- ---- --- ----- ---
$3,046 $3,253 $974 $4,112 $3,540
===== ===== === ===== ======
8
The Company ships products to its international agents only upon
receipt of an irrevocable letter of credit or full prepayment, with the
exception of Europe and Canada where the Company has granted these agents a
credit line.
CUSTOMERS
The Company's customers represent a variety of industries, and only two
market segments, the securities industry and government (at approximately 15%
and 18%, respectively), accounted for more than 10% of net sales in the fiscal
year ended April 30, 1996. Two customers, Waterhouse Securities, Inc. and Telos
Corporation, each accounted for more than 10% of net sales in the fiscal year
ended April 30, 1996, with such customers accounting for approximately 15% and
18% of net sales, respectively.
VENDORS
The Company has relationships with over 100 manufacturers and
distributors around the world. These manufacturers include Novell Inc., Intel
Corporation, Hewlett-Packard Co., Micom Corporation, RAD Data Communications,
Inc. (RAD), and Racal-Datacom, Inc. The distributors include, Microage, Inc.,
Intelligent Electronics, Inc. and Merisel, Inc. In addition, the Company is a
reseller of telephone line services from major companies, including LDDS
Worldcom Inc., MFS Telecom, Southern Pacific Telecom and IDB World
Communications Group Inc.
One vendor, RAD, accounted for 13% of total purchases during the year
ended April 30, 1996. Two vendors, Micom and RAD, accounted for 10% and 12%,
respectively, of total purchases during the year ended April 30, 1995. Micom and
RAD, accounted for 13% and 10%, respectively, of total purchases during fiscal
1993. During fiscal 1992, Micom also accounted for 10% of total purchases, while
RAD accounted for more than 5% but less than 10% of total purchases. Two other
vendors each accounted for more than 5% but less than 10% of total purchases in
1992 and 1993. These vendors were Mod Tap, Inc. and Microcom. The Company
believes that its relationship with these and all its vendors is satisfactory
and, while terms in agreements with vendors change from time to time in the
ordinary course of business, the Company believes that the loss of any one
vendor or changes in the terms of agreements would not have a materially adverse
effect on the Company's business. The Company has negotiated stock rotation and
price protection privileges with certain of its major vendors.
COMPETITION
The Company competes with computer manufacturers, software vendors and
telephone companies in all or some aspects of its business, some of which
companies have far greater resources than the Company. The Company believes,
however, that its wide-ranging skills as a full-service enterprise network
integrator, including skills at network implementation, network design,
equipment procurement, software integration, carrier
9
facilities liaison, installation maintenance, support services, premises wiring,
product procurement and data communications, enable it to be positioned to
compete effectively.
EMPLOYEES
The Company has 164 full-time employees. The Company employs 38
salespeople and 60 technical support people. The remaining employees consist of
48 administrative personnel, 4 project managers and 14 telemarketing and sales
support staff. The Company believes its relationship with its employees is
satisfactory.
10
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Northvale, New
Jersey. The headquarters building includes approximately 21,000 square feet of
warehouse and office space and was designed and built especially for the Company
in 1987. In addition, the building houses the Company's New York branch office.
The headquarters building is subject to a mortgage in the principal amount of
$1,000,000 outstanding as of April 30, 1996. In addition to its headquarters
building, the Company leases throughout the United States approximately 26,146
square feet of office space in 15 locations for its branch operations. The
Company also leases an aggregate of approximately 10,918 square feet of office
space in six locations in Canada.
ITEM 3. LEGAL PROCEEDING
The Company is not a party to any legal proceedings which individually
or in the aggregate, is believed to be material to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on Nasdaq under the
symbol "GLAS". The Company's Common Stock commenced listing on Nasdaq on May 3,
1994. Prior to such date, Sellectek's common stock traded on Nasdaq under the
symbol "SLTK". The following table sets forth the high and low bid prices on
Nasdaq for the periods indicated, as reported by the National Quotation Bureau,
Incorporated. The quotations are inter-dealer prices without adjustment for
retail mark-ups, mark-downs or commissions, and do not necessarily represent
actual transactions. These prices may not necessarily be indicative of any
reliable market value.
High Low
May 3, 1994 - July 31, 1994........................................ $5-3/4 $3-1/4
August 1, 1994 - October 31, 1994.................................. $4 $3
November 1, 1994-January 31, 1995 ................................. $3-5/8 $1-3/4
February 1, 1995-April 30, 1995.................................... $1-3/4 $1
May 1, 1995-July 31, 1995.......................................... $3-7/8 $1-1/4
August 1, 1995-October 31, 1995.................................... $4 $2-1/2
November 1, 1995-January 31, 1996.................................. $10-1/2 $3-3/4
February 1, 1996-April 30, 1996.................................... $12-3/4 $6-1/2
May 1, 1996-July 31, 1996.......................................... $11-5/8 $6-3/4
On July 31, 1996, the closing bid price for the Company's Common Stock
as reported on Nasdaq was $6-5/8. As of July 31, 1996, there were approximately
281 holders of record of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock since
its inception, other than distributions made by the Predecessor to shareholders
of the Predecessor in amounts sufficient to reimburse the Predecessor's
shareholders for federal (and some state) income tax liabilities arising from
the Predecessor's former status as an "S" corporation. The Company currently
intends to retain any earnings for use in the business and does not anticipate
paying any dividends to its shareholders in the foreseeable future. Each of the
Company's loan agreements with the Company's bank includes a restriction
prohibiting the payment of dividends.
12
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the selected financial data of the
Company for, and at the end of (i) each of the years in the three-year period
ended December 31, 1993, (ii) the four months ended April 30, 1993 and 1994 and
(iii) the years ended April 30, 1995 and 1996. The Company changed its fiscal
year-end from December 31 to April 30 on May 2, 1994. The Company acquired
Signatel on October 28, 1994 by issuing 875,000 shares of its common stock in
exchange for all of the voting capital stock of Signatel. The acquisition was
accounted for using the pooling of interests method of accounting; consequently
all periods presented reflect the combined operations of Glasgal Communications,
Inc. and Signatel after eliminating all intercompany transactions and balances.
On April 24, 1996 the Company acquired 80% of CASI for $500,000 in cash and
44,260 shares of common stock. The acquisition was accounted for as a purchase;
the results of CASI operations from the date of acquisition are not material.
The financial data presented below for, and at the end of, the four
month period ended April 30, 1993, has been derived from the unaudited
consolidated financial statements of the Company. In the opinion of management,
the financial data includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data at and for such
dates and periods.
The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and the notes
thereto appearing elsewhere herein.
FOUR MONTHS YEAR ENDED
YEAR ENDED DECEMBER 31, ENDED APRIL 30, APRIL 30,
----------------------------------- ------------------------ ----------------------------
1991 1992 1993 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
STATEMENT OF OPERATIONS (In thousands, except share and per share data)
DATA:
Net Sales $32,467 $32,627 $36,391 $11,833 $11,156 $35,161 $41,781
Operating Costs:
Cost of Sales 23,302 23,460 25,419 8,497 8,523 25,634 30,653
Selling, general and
administrative 8,241 8,715 10,422 3,397 4,640 11,725 11,327
Income (loss) from
operations 924 452 550 (61) (2,009) (1,198) (199)
Interest Expense 501 408 491 160 136 476 758
Provisions (benefit) for
income taxes 42 1 206(b) -- -- (32) --
Net income (loss) 381 43 (147) (221) (2,145) (1,643) (1,180)(c)
Net income (loss) per
share -- -- -- -- -- (0.15) (.09)(c)
Average number of shares
outstanding -- -- -- -- 10,681,237 12,853,747
Pro forma net income
(loss)(a) 373 29 (164) (221)
13
DECEMBER 31, APRIL 30,
------------------------------------ -------------------------------------------------
1991 1992 1993 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
BALANCE SHEET DATA:
Working Capital (deficiency) $(1,647) $(1,953) $(1,648) $(1,407) $(1,967) $(2,865) $2,470
Total Assets 10,908 12,159 14,811 11,874 11,844 12,594 16,251
Short-term debt 4,821 5,854 6,101 4,170 3,650 4,660 2,009
Long-term debt 489 90 1,072 1,180 1,086 918 1,088
Total Liabilities 9,928 11,230 14,052 11,357 11,228 12,905 9,098
Total shareholders'
equity (deficit) 980 929 759 517 616 (311) 7,153
(a) As adjusted to reflect the statutory income tax rate that would have been
recorded had the Company not elected S corporation status. Prior to January
1994, the Company had elected under the Internal Revenue Code of 1986, as
amended, to be an S corporation, whose shareholders were taxed on their
proportionate share of the Company's taxable income.
(b) Included in this amount is $195,000 of additional income taxes and interest
assessed in 1993 applicable to a transaction entered into by Signatel
during 1989.
(c) Net loss for the year includes a write off of $223,000 ($.02 per share) of
unamortized deferred financing fees as a result of the early extinguishment
of debt classified as an extraordinary item in the accompanying financial
statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and notes thereto appearing
elsewhere herein. All amounts in the following discussion have been rounded to
the nearest thousand dollar. On October 28, 1994, the Company acquired Signatel.
The acquisition has been accounted for as a pooling of interests. The financial
information for all periods appearing below represent the combination of such
information for the Company and Signatel as though they had been combined
throughout such periods. On April 24, 1996 the Company acquired CASI. The
acquisition has been accounted for as a purchase. Operations of CASI from the
date of acquisition were not material. See Note 2 to Consolidated Financial
Statements.
For the purpose of the following discussion and analysis "export sales"
represent sales by the Company's operations within the United States to entities
outside the United States and "foreign sales" represent sales by the Company's
subsidiary, Signatel. The Company's export sales represent sales of discrete
data communications equipment only. Unlike export sales, the Company's foreign
sales include sales of data communications equipment as well as sales of
complete computer network systems and integration services.
In conjunction with the Company's merger with Sellectek, the Company
changed its fiscal year end from December 31 to April 30.
In addition, certain matters discussed herein are forward looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those presented.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED APRIL 30, 1996 AND 1995
Net sales for the year ended April 30, 1996 were $41,781,000 compared
to $35,161,000 for the year ended April 30, 1995. The increase of 18.8% is
largely attributable to a 41% increase in service revenue to $7,017,000.
Gross profits for the year ended April 30, 1996 were $11,127,000
compared to $10,527,000 for the year ended April 30, 1995, an increase of 5.7%.
Gross profits as a percentage of net sales were 26.6% for the year ended April
30, 1996 compared to 29.9% for the year ended April 30, 1995. The Company's
gross profit percentage was negatively impacted by the Federal Enterprise
Systems division volume sales at low margins. The Federal Enterprise Systems
division accounted for 18% and 1% of sales in 1996 and 1995, respectively. In
addition, the Company anticipates seeing continued pressure on equipment sale
gross margins.
15
Selling, general and administrative expenses for the year ended April
30, 1996 were $11,327,000 compared to $11,726,000 for the year ended April 30,
1995. The decrease of 3.4% is attributable to decreases in both selling and
general and administrative expenses. Selling expenses decreased by 5% and
general and administrative expenses decreased by 4.3%. The decrease in selling
expenses is attributable to lower commission expense resulting from a higher
volume of non-commissionable sales. The decrease in general and administrative
expenses results from a streamlining and re-engineering of the Company's
processes which are continuing into fiscal 1997 with further cost reductions
anticipated.
Operating loss for the year ended April 30, 1996 was $199,000 compared
to $1,198,000 for the year ended April 30, 1995. This represents a reduction of
83% in operating losses, primarily the result of increased sales and reduced
overhead.
Interest expense for the year ended April 30, 1996 was $757,000
compared to $476,000 for the year ended April 30, 1995. Included in interest
expense is approximately $200,000 of amortization of deferred financing charges
relating to bridge loan financing the Company entered in during the year.
The Company's net loss for the fiscal year ended April 30, 1996 was
$1,180,000 compared to a net loss of $1,643,000 for the year ended April 30,
1995. Included in the net loss for the year ended April 30, 1996 is
approximately $223,000 representing the write off of the unamortized deferred
financing costs as an extraordinary item upon the early extinguishment of Bridge
Loan financing. See "Liquidity and Capital Resources" section for discussion of
Bridge Financing.
FISCAL YEARS ENDED APRIL 30, 1995 AND DECEMBER 31, 1993
Net sales for the year ended April 30, 1995 were $35,161,000 compared
to $36,391,000 for the year ended December 31, 1993. This decrease of
approximately 3.4% is attributable to a Company-initiated turnover of the
Company's sales force as well as to a significant decrease in sales to one of
the Company's significant customers which accounted for more than 10% of sales
for the fiscal year ended December 31, 1993. In order for the Company to meet
its objectives of shifting to systems sales, the Company replaced approximately
40% of its sales force with personnel better suited to provide complete computer
network systems and integration services. The Company anticipates that this
process will continue. Such Company-initiated turnover, although necessary to
achieve the Company's strategic goal, required an investment in the new sales
personnel the benefit of which has not been immediately evidenced. Net domestic
sales, export sales and foreign sales for the year ended April 30, 1995 were
$26,085,000, $4,112,000 and $4,964,000, respectively. Net domestic sales, export
sales and foreign sales for the year ended December 31, 1993 were $28,233,000,
$3,253,000 and $4,905,000, respectively.
Excluded from net sales is the unearned portion of the Company's
service contract revenue, which amounted to $ 1,075,000 as of April 30, 1995 and
$253,000 as of December 31, 1993.
16
Gross profits for the year ended April 30, 1995 were $10,527,000
compared to $10,972,000 in the year ended December 31, 1993. Gross profits as a
percentage of net sales were 29.9% for the year ended April 30, 1995 compared to
30.2% in the year ended December 31, 1993. Gross profits for the year ended
April 30, 1995 consisted of $7,974,000 representing 30.6% of domestic sales,
$848,000 representing 20.6% of export sales and $1,705,000 representing 34.3% of
foreign sales. Gross profits for the year ended December 31, 1993 consisted of
$8,643,000 representing 30.6% of domestic sales, $642,000 representing 19.7% of
export sales and $1,687,000 representing 34.4% of foreign sales.
Selling, general and administrative expenses for the year ended April
30, 1995 were $11,726,000 compared to $10,423,000 for the year ended December
31, 1993. The increase of 12.5% is the result of increases in both selling and
general and administrative expenses. Selling expenses for the year ended April
30, 1995 were $6,213,000 compared to $5,628,000 for the year ended December 31,
1993. The increase of 10.4% is attributable to two major factors: (i) the
Company produced a catalogue of the products it sells in 1994, for which costs
of approximately $300,000 are included in selling expense for the year ended
April 30, 1995 with no corresponding amount in the year ended December 31, 1993,
(ii) the Company increased its provision for uncollectible accounts by
approximately $300,000 compared to the year ended December 31, 1993. General and
administrative expenses for the year ended April 30, 1995 were $5,513,000 as
compared to $4,795,000 for the year ended December 31, 1993. Included in this
15% increase is approximately $185,000 of professional fees associated with the
acquisition of Signatel, which was accounted for as a pooling of interests.
Under such accounting, all acquisition costs including legal and accounting
costs are charged to expense. The Company incurred and estimates it will
continue to incur approximately $180,000 annually as a result of being a public
company. Included in these costs are legal fees for general corporate matters
and SEC matters, fees related to retaining a public relations firm and
maintaining insurance for the Company's directors and officers. Such fees were
not incurred in fiscal 1993. Salaries increased by approximately $100,000 as a
result of adding a chief financial officer and several in-house technical
support personnel. Relocation expenses were approximately $75,000, the result of
relocating sales and technical people around the country. In its continued
effort to improve its infrastructure, the Company invested over $500,000 in
equipment during the year, this has resulted in increased depreciation of
approximately $60,000.
Interest expense for the year ended April 30, 1995 was $476,000
compared to $491,000 for the year ended December 31, 1993. The decrease of 3%
reflects interest savings of approximately $110,000 as a result of the
conversion of a subordinated loan into equity, offset by the cost of financing
the current year loss with increased average borrowings under the Company's
revolving credit facility.
The Company's net loss for the fiscal year ended April 30, 1995 was
$1,643,000 compared to a net loss of $164,000 for the year ended December 31,
1993. The Company's net loss per share for the fiscal year ended April 30, 1995
was $0.15.
17
FOUR MONTHS ENDED APRIL 30, 1994 AND 1993
Net sales for the four months ended April 30, 1994 were $11,155,000
compared to $11,833,000 in the four months ended April 30, 1993. This decrease
of 5.7% is primarily attributable to depressed export sales, severe weather
conditions in the Northeastern United States, the Company-initiated sales force
turnover and a significant decrease in sales to one of the Company's significant
customers who accounted for more than 10% of sales for the fiscal year ended
December 31, 1993. Net domestic sales, export sales and foreign sales for the
four months ended April 30, 1994 were $8,292,000, $974,000 and $1,889,000,
respectively. Net domestic sales, export sales and foreign sales for the four
months ended April 30, 1993 were $8,519,000, $1,325,000 and $1,989,000,
respectively.
Excluded from net sales is the unearned portion of the Company's
service contract revenue, which amounted to $267,000 as of April 30, 1994 and
$227,000 as of April 30, 1993.
Gross profits for the four months ended April 30, 1994 were $2,632,000
compared to $3,336,000 in the four months ended April 30, 1993. Gross profits as
a percentage of net sales were 23.6% for the four months ended April 30, 1994
compared to 28.2% in the four months ended April 30, 1993. This decrease in
gross profit percentage is the result of an increase in the Company's inventory
reserve of approximately $500,000 to account for slow moving inventory. Gross
profits for the four months ended April 30, 1994 consisted of $1,756,000
representing 21.2% of domestic sales, $154,000 representing 15.8% of export
sales and $722,000 representing 38.2% of foreign sales. Gross profits for the
four months ended April 30, 1993 consisted of $2,380,000 representing 27.9% of
domestic sales, $291,000 representing 22.0% of export sales, $665,000
representing 33.4% of foreign sales.
Selling, general and administrative expenses for the four months ended
April 30, 1994 were $4,640,000 compared to $3,398,000 for the four months ended
April 30, 1993. Selling expenses for the four months ended April 30, 1994 were
$2,735,000 compared to $1,787,000 for the four months ended April 30, 1993. The
increase of 53% includes costs associated with the Company-initiated turnover of
its sales force as previously discussed as well as an increase of approximately
$600,000 to the Company's provision for doubtful accounts receivable to properly
reflect the disposition of those receivables. The Company has enhanced its
policies and procedures in this area to mitigate the need for such a significant
provision in the future including the increase in follow-up services to improve
customer satisfaction after each sale. General and administrative expenses were
$1,905,000 for the four months ended April 30, 1994 as compared to $1,611,000
for the four months ended April 30, 1993. The increase of 18.3% includes
approximately $100,000 of non-recurring severance pay as well as other costs
supporting the Company's effort to shift the focus of the organization to
systems sales. Interest expense for the four months ended April 30, 1994 was
$136,000 compared to $160,000 for the four months ended April 30, 1993. The
decrease of 15% reflects lower average debt, including the conversion of a
subordinated loan into equity of the Company and lower interest rates for the
period.
18
The Company's net loss for the four months ended April 30, 1994 was
$2,145,000 compared to a net loss of $221,000 for the four months ended April
30, 1993.
BACKLOG AND DEFERRED INCOME
The Company records revenue on the shipment of goods and the
performance of services. Many orders cannot be immediately shipped from
available inventory and, as a result, are added to the Company's backlog, which
was approximately $4,100,000 and $3,018,000 as of June 30, 1995 and 1996,
respectively. The Company expects that all of the backlog as of June 30, 1996
will be shipped by June 30, 1997. The Company sells service contracts on the
majority of the equipment it sells. Such contracts are one year in duration with
payments received annually in advance of commencement of the contract or
quarterly in advance. The Company recognizes the revenue from these contracts on
a straight line basis over the term of the contract, with the unearned portion
of the revenue reflected as deferred income. The excess of revenue from a
maintenance contract over related cost of selling that contract to a third party
vendor is recognized at the time of sale. As of April 30, 1996, the Company had
deferred income of $621,000 that it will recognize over the course of fiscal
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of $2,865,000 at April 30,
1995, as compared to working capital of $2,470,000 at April 30, 1996. The
increase in the working capital was principally attributable to the Company's
public offering in September 1995.
Prior to its 1996 fiscal year and since January 1994, the Company
funded its operations with cash flow from operations, borrowings and equity
investments. Over this period the Company raised approximately $3,700,000
through private placements consisting of (i) an equity investment in January
1994 by Direct Connect International Inc. ("DCI") pursuant to which DCI
converted approximately $2,000,000 of outstanding indebtedness of the Company
including accrued interest owed to DCI into 2,723,973 shares of Common Stock of
the Company, (ii) $750,000 of gross proceeds received by the Company from
Sellectek Incorporated upon consummation of the merger with Sellectek
Incorporated on May 2, 1994, (iii) $450,000 of gross proceeds received by the
Company in May 1994 from the sale of 180,000 shares of Common Stock to several
purchasers in a private offering, (iv) the satisfaction of $250,000 in accounts
payable of the Company in exchange for the issuance by the Company of 100,000
shares of Common Stock in June 1994, and (v) the application of a promissory
note in the aggregate principal amount of $250,000 by a debtholder to the
payment of the aggregate exercise price of warrants to purchase 125,000 shares
of Common Stock at an exercise price of $2.00 per share in September 1994.
On May 8, 1995, the Company consummated a bridge financing (the "First
Bridge Financing"), pursuant to which it issued an aggregate of (i) $1,200,000
principal amount of promissory notes (the "Bridge Notes") which bore interest at
the rate of 8% per annum, (ii) 600,000 warrants (the "First Bridge Warrants"),
each First Bridge Warrant entitling the holder
19
to purchase one share of Common Stock at an initial exercise price of $1.875
(subject to adjustment upon the occurrence of certain events) during the
three-year period commencing May 8, 1996, and (iii) 442,478 shares of Common
Stock at $1.13 per share. The net proceeds of $1,379,000 from the First Bridge
Financing were applied by the Company to reduce accounts payable and accrued
liabilities. Each First Bridge Warrant automatically converted into a Redeemable
Warrant (sometimes hereinafter referred to as the "New Warrant") having terms
identical to those of the Redeemable Warrants underlying the Units issued in the
Offering (as herein after defined).
On June 13, 1995, the Company consummated a bridge financing (the
"Second Bridge Financing" and, collectively with the First Bridge Financing, the
"Bridge Financings") pursuant to which it issued an aggregate of 350,000
warrants (the "Second Bridge Warrants" and collectively with the First Bridge
Warrants, the "Bridge Warrants"), each Second Bridge Warrant entitling the
holder to purchase one share of Common Stock at an initial exercise price of
$1.75 per share (subject to adjustment upon the occurrence of certain events)
during the three year period commencing June 13, 1996. The net proceeds of
$70,000 from the Second Bridge Financing were applied by the Company to reduce
accounts payable and accrued liabilities. Upon consummation of the Offering,
each Second Bridge Warrant was automatically converted into a New Warrant.
On September 28, 1995, the Company completed a public offering (the
"Offering") of 1,783,000 units (including an overallotment of 258,000 units in
October 1995 for net proceeds of approximately $6,485,000). Each unit consisted
of two shares of Common Stock and one redeemable warrant and was sold at $5 per
unit. Each redeemable warrant entitled the holder to purchase one share of
Common Stock at an initial exercise price of $3.75 per share. The net proceeds
were used as follows: (i) repay Bridge Notes referred to above plus accrued
interest through September 28, 1995, (ii) repay certain outstanding balances
under its revolving credit facility, and (iii) working capital purposes.
In March 1996, the Company completed a private placement offering of
312,500 shares of common stock. The net proceeds of the private placement
offering, $1,207,000, together with Company common stock, were used to acquire
80% of the issued and outstanding shares of common stock of CASI, and provide
CASI with working capital.
The Company has a credit facility with a bank that provides for a
maximum $3,750,000 revolving loan. The Company also has a mortgage with another
bank for $1,000,000. The maturity of the revolving loan and mortgage are August
31, 1996 and April 4, 2006, respectively. The revolving loan presently accrues
interest on borrowing at prime plus 1.75%, while the mortgage interest rate is
fixed at 8.05% for the first five years of its term. Allowable borrowings under
the revolving loan are based on a percentage of accounts receivable and
inventory. As of April 30, 1996, the Company had approximately $2,879,000
outstanding under the revolving loan. The credit facility is secured by a
perfected first priority security interest and lien upon all present and future
assets owned by the Company. The credit facility is also guaranteed by Mr.
Glasgal, Chairman of the Board and a principal shareholder of the Company.
20
On August 2, 1996, the Company received a commitment from a finance
company to provide the Company with a $4 million revolving line of credit. The
revolving line of credit will bear interest at prime plus 1.75%. Allowable
borrowings under the revolving line of credit will be based on a percentage of
receivables and inventory. Although the Company intends to enter into this
commitment, there can be no assurance that the Company will consummate a
transaction with this finance company.
The Company also has an agreement with Deustche Financial Services
(DFS) whereby DFS finances purchases of inventory up to $400,000. Interest on
the outstanding balance accrues at prime plus 2.0%. The Company also has a line
of credit of up to 500,000 Canadian dollars. The line of credit is due on demand
and accrues interest on the outstanding balance at a rate of prime plus 1.25%.
As a result of the public offering and the private placement offerings
during fiscal 1996, the Company has outstanding approximately 2,933,000 warrants
to purchase Company common stock. These warrants are currently exercisable by
the holder and allow the holder to convert each warrant into one share of
Company common stock for $3.75. These warrants expire on September 21, 1999 and
may be redeemed by the Company on or after September 21, 1996, provided certain
conditions are met, for $.05 per warrant. The Company views the warrants as a
potential source of liquidity and may utilize this liquidity to meet its
strategic goals.
As of April 30, 1996, the Company had net operating loss carryforwards
for income tax purposes of approximately $4,137,000 to offset future taxable
income, if any. Such net operating loss carryforwards expire through 2011.
The Company believes it has adequate liquidity and resources to sustain
current operations for the next twelve (12) months.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Financial Statements Schedules
CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Public Accountants. . . . . . . . . . . . . . . . . 23
Consolidated Balance Sheets as of April 30, 1995 and 1996. . . . . . . . . 25
Consolidated Statements of Operations for the year ended
December 31, 1993, the four months ended April 30,1994
and the years ended April 30, 1995 and 1996 . . . . . . . . . . . . . . 26
Consolidated Statements of Changes in Shareholders'
Equity (Deficit) for the year ended December 31, 1993,
the four months ended April 30, 1994
and the years ended April 30, 1995 and 1996 . . . . . . . . . . . . . . 27
Consolidated Statements of Cash Flows for the year ended
December 31, 1993, the four months ended April 30, 1994
and the years ended April 30, 1995 and 1996 . . . . . . . . . . . . . . 28
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 30
SCHEDULES
Schedule II - Valuation and Qualifying Accounts . . . . . . . 47
Schedules other than the one listed above have been omitted since they are
either not required, are not applicable, or the required information is shown in
the consolidated financial statements or related notes.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Glasgal Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Glasgal
Communications, Inc. (a Delaware corporation) and subsidiaries as of April 30,
1995 and 1996 and the related consolidated statements of operations, changes in
shareholders' equity (deficit) and cash flows for the year ended December 31,
1993, the four months ended April 30, 1994 and the years ended April 30, 1995
and 1996. These consolidated 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 did not audit the financial
statements of Signatel, Ltd., a company acquired during 1994 in a transaction
accounted for as a pooling of interests, as discussed in Note 2, for the year
ended November 30, 1993. Such statements are included in the 1993 consolidated
financial statements of Glasgal Communications, Inc. and reflect 13.5% of the
related consolidated revenues for that year. Those statements were audited by
other auditors whose reports have been furnished to us and our opinion, insofar
as it relates to amounts included for Signatel, Ltd., is based solely upon the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Glasgal
Communications, Inc. and subsidiaries as of April 30, 1995 and 1996 and the
results of their operations and their cash flows for the year ended December 31,
1993, the four months ended April 30, 1994 and the years ended April 30, 1995
and 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index of consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Roseland, New Jersey ARTHUR ANDERSEN LLP
August 2, 1996
23
To the Shareholders of
Signatel Ltd.
We have audited the balance sheet of Signatel Ltd. as of November 30, 1993 and
the statements of income and retained earnings and of changes in financial
position for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at November 30, 1993 and the
results of its operations and the changes in its financial position for the year
then ended in accordance with generally accepted accounting principles.
Deloitte & Touche
Charter Accountants
Toronto, Ontario
January 14, 1994
24
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30,
------------------------------------
1995 1996
----------------- -----------------
ASSETS
- -------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents (Notes 1 and 4) $ -- $ 579,087
Accounts receivable, less allowances of $403,914 and
$323,582, respectively for doubtful accounts (Note 4) 5,942,097 6,505,947
Inventory, less allowances of $293,964 and $343,018 for
obsolescence (Notes 1 and 4) 2,589,750 2,655,452
Prepaid expenses and other current
assets 590,041 739,665
--------------- ---------------
Total current assets 9,121,888 10,480,151
PROPERTY AND EQUIPMENT, net (Notes 1, 3, 4 and 5) 3,193,319 3,629,554
GOODWILL (Note 2) -- 1,866,967
OTHER ASSETS 278,456 274,810
--------------- ---------------
Total assets $ 12,593,663 $ 16,251,482
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------
CURRENT LIABILITIES:
Short-term borrowings (Note 4) $ 4,523,278 $ 1,915,467
Current portion of long-term obligations (Note 5) 137,074 93,332
Accounts payable 4,873,238 4,804,234
Accrued liabilities 1,356,375 574,454
Deferred income (Note 1) 1,075,124 620,734
Other current liabilities 21,942 1,643
--------------- ---------------
Total current liabilities 11,987,031 8,009,864
--------------- ---------------
LONG-TERM OBLIGATIONS (Note 5) 918,052 1,088,370
--------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value (4,000,000 shares
authorized, no shares issued and outstanding) -- --
Common stock, $.001 par value (authorized 34,000,000
shares; issued and outstanding 10,299,176 and
14,841,162 shares, respectively) (Notes 6 and 13) -- 14,841
Additional paid-in capital 2,999,141 11,693,354
Accumulated deficit (3,204,660) (4,434,817)
Cumulative translation adjustment (Note 1) (105,901) (120,130)
--------------- ---------------
Total shareholders' equity (deficit) (311,420) 7,153,248
--------------- ---------------
Total liabilities and shareholders' equity (deficit) $ 12,593,663 $ 16,251,482
=============== ===============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
25
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR FOR THE FOUR FOR THE YEARS ENDED
ENDED MONTHS ENDED APRIL 30,
DECEMBER 31, APRIL 30, -------------------------
1993 1994 1995 1996
---- ---- ---- ----
NET SALES (Note 1)
Equipment
$ 31,384,734 $ 9,359,921 $ 30,185,389 $ 34,763,949
Services
5,006,440 1,794,639 4,975,909 7,016,872
------------ ------------ ------------ ------------
36,391,174 11,154,560 35,161,298 41,780,821
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales
Equipment
22,646,846 7,332,807 21,205,812 26,608,877
Services
2,772,184 1,190,551 3,428,335 4,044,360
------------ ------------ ------------ ------------
25,419,030 8,523,358 24,634,147 30,653,237
Selling, general and administrative expenses 10,422,509 4,640,427 11,725,597 11,327,190
------------ ------------ ------------ ------------
Total costs and expenses 35,841,539 13,163,785 36,359,744 41,980,427
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 549,635 (2,009,225) (1,198,446) (199,606)
INTEREST EXPENSE (Notes 4 and 6) 490,596 136,053 476,096 757,485
------------ ------------ ------------ ------------
Income before provision
(benefit) for income taxes 59,039 (2,145,278) (1,674,542) (957,091)
INCOME TAX PROVISION (BENEFIT)(Notes 1 & 7) 206,372 -- (31,753) --
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (147,333) (2,145,278) (1,642,789) (957,091)
EXTRAORDINARY ITEM (NOTE 5) -- -- -- (223,066)
NET LOSS $ (147,333) $ (2,145,278) $ (1,642,789) $ (1,180,157)
============ ============ ============ ============
LOSS PER SHARE
Loss before extraordinary item $ (.15) $ (.07)
Extraordinary item -- (.02)
NET LOSS $ (.15) $ (.09)
============ ============
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES (Note 1) 10,681,237 12,853,747
============ ============
PRO FORMA NET INCOME (LOSS) DATA (Unaudited, Note 1)
Income before provision for
income taxes, as reported $ 59,039
Pro forma income tax 223,000
provision ------------
Pro forma net income (loss) $ (163,961)
============
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
Glasgal Communications, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 5)
Common Stock
---------------------------
Issued Retained Cumulative Total
------------------------ Additional Earnings Translation Shareholders'
Shares Dollars Paid-in-capital (Deficit) Adjustment Equity
------------ ----------- --------------- ------------- ------------- -------------
Balance at December 31, 1992 7,593,287 $ -- $ 10,120 $ 992,862 $ (74,158) $ 928,824
============ ========= ============= ============ ============= =============
Net loss -- -- -- (147,333) -- (147,333)
Effect of exchange rate changes -- -- -- -- (22,390) (22,390)
------------ --------- ------------- ------------ ------------- -------------
Balance at December 31, 1993 7,593,287 $ -- $ 10,120 $ 845,529 $ (96,548) $ 759,101
============ ========= ============= ============ ============= =============
Conversion of loan payableinto
Common stock 2,723,973 -- 2,016,835 -- -- 2,016,835
Net loss -- -- -- (2,145,278) -- (2,145,278)
Effect of exchange rate changes -- -- -- -- (14,357) (14,357)
Conversion from S corporation
status to C corporation -- -- 262,122 (262,122) -- --
------------ --------- ------------- ------------ ------------- -------------
Balance at April 30, 1994 10,317,260 $ -- $ 2,289,077 $ (1,561,871) $ (110,905) $ 616,301
============ ========= ============= ============ ============= =============
Sellectek merger ( Note 2) -- -- 190,000 -- -- 190,000
Private Placement Offerings of
Common stock 180,000 -- 427,383 -- -- 427,383
Conversion of accounts payable
into Common stock 100,000 -- 237,435 -- -- 237,435
Exercise of warrants 125,000 -- 237,435 -- -- 237,435
Net loss -- -- -- (1,642,789) -- (1,642,789)
Effect of exchange rate changes -- -- -- -- 5,004 5,004
Common stock issued for options
exercised 19,394 -- 93,811 -- -- 93,811
Stock exchanged for cancellation
of loan (Note 8) (442,478) -- (476,000) -- -- (476,000)
------------ --------- ------------- ------------ ------------- -------------
Balance at April 30, 1995 10,299,176 $ -- $ 2,999,141 $ (3,204,660) $ (105,901) $ (311,420)
============ ========= ============= ============ ====-========= =============
Private placement offering of
common stock and warrants
and bridge financing 442,478 -- 579,472 -- -- 579,472
Public offering of common stock
and warrants 3,566,000 -- 6,535,009 (50,000) -- 6,485,009
Acquisition and cancellation of
common stock (12,500) -- (26,635) -- -- (26,635)
Common stock issued for options
exercised 189,248 -- 123,563 -- -- 123,563
Change in par value of common
stock (Note 13) -- 14,484 (14,484) -- -- --
Private placement offering of
common stock (Note 2) 312,500 313 1,206,629 -- -- 1,206,942
Stock issued for business
acquisition (Note 2) 44,260 44 290,659 -- -- 290,703
Net loss -- -- -- (1,180,157) -- (1,180,157)
Effect of exchange rate changes -- -- -- -- (14,229) (14,229)
------------ --------- ------------- ------------ ------------- -------------
Balance at April 30,1996 14,841,162 $ 14,841 $ 11,693,354 $ (4,434,817) $ (120,130) $ 7,153,248
============ ========= ============= ============ ============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
27
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE FOUR FOR THE YEARS ENDED
ENDED MONTHS ENDED APRIL 30,
DECEMBER 31, APRIL 30, -------------------------
1993 1994 1995 1996
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (147,333) $(2,145,278) $(1,642,789) $(1,180,157)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities--
Depreciation and amortization 391,801 127,436 453,855 664,890
Provision for doubtful accounts and inventory
obsolescence 141,186 1,184,501 755,266 450,022
Extraordinary Item -- -- -- 223,066
Changes in operating assets and liabilities
net of effects from purchase of CASI
(Increase) decrease in accounts receivable (2,017,230) 2,399,316 (2,386,019) (848,872)
(Increase) decrease in inventory (471,541) (242,441) 250,679 (230,702)
Increase in prepaid expenses and other assets (762,588) (43,511) (181,383) (402,385)
Increase (decrease) in accounts payable,
accrued liabilities and other 1,592,695 (387,375) 1,085,070 (1,419,378)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (1,273,010) 892,648 (1,665,321) (2,743,516)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (616,771) (59,003) (516,959) (590,423)
Net cash used for CASI acquisition -- -- -- (704,701)
Advances to CASI -- -- -- (1,135,160)
Net cash used in investing activities (616,771) (59,003) (516,959) (2,430,284)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment of) short-term borrowings
819,192 (641,968) 952,467 (2,607,811)
Proceeds from notes payable 900,000 250,000 -- --
(Payments) Proceeds of indebtedness (581,852) (28,426) (110,150) 126,576
Net Proceeds from Common Stock issuance's -- -- 746,065 8,248,351
Net proceeds from Sellectek merger -- -- 190,000 --
----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities 1,137,340 (420,394) 1,778,382 5,767,116
----------- ----------- ----------- -----------
Net effect of foreign currency translation
on cash (22,390) (14,357) 5,004 (14,229)
----------- ----------- ----------- -----------
Net increase (decrease) in cash (774,831) 398,894 (398,894) 579,087
CASH AT BEGINNING OF PERIOD 774,831 -- 398,894 --
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ -- $ 398,894 $ -- $ 579,087
=========== =========== =========== ===========
28
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $402,831 $118,000 $470,293 $755,171
Income taxes paid $ 4,900 $ -- $ -- $ --
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
On January 1, 1994, the Direct Connect International Inc. notes payable of
$1,900,000 plus accrued interest of $117,000 was converted into equity.
On June 6, 1994, RAD Communications, Inc. converted $250,000 of Glasgal's
account payable into 100,000 shares of Glasgal's common stock.
On April 30, 1995, Mr. Glasgal contributed 442,478 shares of Common Stock in
consideration for the cancellation of $476,000 owed to the Company.
On April 24, 1996, the Company purchased 80% of the common stock of
Computer-Aided Software Integration, Inc. (CASI) for $500,000 in cash plus
44,260 shares of common stock of the Company valued at $290,000.
Goodwill $ 1,866,000
Cash Paid for Common Stock (including expenses) (705,000)
Common Stock Issued (290,000)
---------------
Liabilities Assumed $ 871,000
===============
During 1996, a capital lease obligation of $166,000 was incurred when the
Company entered into a lease for new equipment.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
29
GLASGAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The Company and its significant accounting policies:
Business--
Glasgal Communications, Inc. ("Glasgal"), and its Canadian
subsidiary, Signatel, Ltd. ("Signatel") distribute data
communications equipment and services, as well as design, install
and service local and wide area network systems that connect a
broad range of networking and communication products which allow
for the high speed transmission of data, voice, fax and video.
Glasgal's subsidiary, Computer-Aided Software Integration, Inc.
("CASI"), develops and licenses a suite of system engineering
software tools collectively known as the Integrators Workbench
Product Series(TM) (IWPS). This software automates the processes
of system design, configuration, implementation, migration and
support of client/server computing environments.
Basis of Presentation--
The consolidated financial statements include the accounts of Glasgal
Communications, Inc. and its subsidiaries (the "Company"). All
intercompany accounts and transactions have been eliminated.
On May 2, 1994, the Company merged with and into Sellectek,
Incorporated ("Sellectek") (See Note 2 - Mergers and
Acquisitions). For accounting purposes the merger has been treated
as a reverse merger using the recapitalization method of
accounting. In connection with the Company's merger with
Sellectek, the Company changed its fiscal year end to April 30.
On October 28, 1994, Glasgal acquired all of the voting stock of
Signatel, a Canadian based company (See Note 2 Mergers and
Acquisitions). The transaction was accounted for as a pooling of
interests and, accordingly, the accompanying consolidated
financial statements include the accounts of Signatel for all
periods presented.
On April 24, 1996, the Company acquired 80% of the common stock of
CASI (See Note 2 - Mergers and Acquisitions). The acquisition has
been accounted for as a purchase; operations of CASI from the date
of acquisition were not significant. The excess of
30
purchase price over fair market value of the net assets acquired
has been included in goodwill and will be amortized over 10 years.
Foreign Currency Translation--
The local currency of Signatel is its functional currency. Assets and
liabilities of Signatel are translated into US dollars at the
current exchange rate. Income statement accounts are translated at
the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange
rates from period to period are included as a separate component
of shareholders' equity.
Revenue Recognition--
The Company recognizes revenue from the sale of data communications
equipment upon shipment. Service revenue is recognized as the
services are provided. Maintenance contract revenue is recognized
on a straight-line basis over the contract period, usually one
year. The excess of revenues over related costs of maintenance
contracts sold to third party vendors is recognized at the time of
sale. Deferred income represents that portion of maintenance
contract revenue that has not been earned.
Cash and Cash Equivalents--
The Company considers as cash equivalents all highly liquid
investments with an original maturity of three months or less.
Inventory--
Inventory consists of merchandise purchased for resale, primarily
data communications and network equipment, and is stated at the
lower of cost (first-in, first-out basis) or market.
In those instances where the Company believes it will realize less
than the cost of the inventory items, an obsolescence reserve is
established for an amount equal to the difference between the cost
of the inventory and its estimated market value.
Property and Equipment--
Property and equipment is stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
computed using the straight-line and declining balance methods
over the estimated useful lives or lease terms of the related
assets, whichever is shorter.
31
Long-Lived Assets--
During 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires,
among other things, that an entity review its long-lived assets
and certain related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may
not be fully recoverable. As a result of its review, the Company
does not believe that any impairment currently exists related to
its long-lived assets.
Stock Based Compensation--
The Financial Accounting Standards Board issued a new standard,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
requires that an entity account for employee stock compensation
under a fair value based method. However, SFAS 123 also allows an
entity to continue to measure compensation cost for employee
stock-based compensation arrangements using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("Opinion 25").
Entities electing to remain with the accounting under Opinion 25
are required to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting
under SFAS 123 has been applied. The accounting and disclosure
requirements of this standard are effective for the Company's 1997
fiscal year. The Company expects to continue to account for
employee stock-based compensation under Opinion 25.
Income Taxes--
Prior to January 1, 1994, the Company filed its Federal income tax
return as an S Corporation. As a result, the Company's taxable
income was includable directly in the Federal income tax return of
the shareholders and no provision was made for Federal income
taxes. Provision was made for those states in which the Company
operates which do not recognize such an election or in which the
Company has not made such election. As a result of the acquisition
of Signatel, the income tax provision reflected in the
consolidated statements of operations includes a provision of
$206,372 in 1993 for income taxes on Signatel's income, which
included $194,707 of additional income taxes and interest assessed
in 1993 applicable to a transaction entered into by Signatel
during 1989. Effective January 1, 1994, the Company terminated its
S Corporation status and became subject to Federal income taxes.
In conjunction with this termination the Company began accounting
for income taxes in accordance with SFAS 109 "Accounting for
Income Taxes".
32
Earnings (Loss) per Share--
Commencing May 2, 1994, the effective date of the Company's merger
with Sellectek (see Note 2), earnings (loss) per share is computed
based upon the weighted average number of common shares and common
equivalent shares outstanding during each period, giving effect to
the exchange of Company shares for shares of Sellectek and the
issuance of Company shares for the shares of Signatel. Common
equivalent shares have not been included if antidilutive.
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications--
Certain prior year amounts have been reclassified to conform to the
current year financial statement presentation.
(2) Mergers and Acquisitions:
Sellectek--
On May 2, 1994 the Company merged with and into Sellectek. At the
time of the merger, Sellectek was a public company which had
$750,000 of cash and no liabilities or operations. For accounting
purposes, the merger has been treated as a recapitalization of the
Company with the Company as the acquirer (reverse acquisition).
The operations of the surviving entity are those of the Company
and, accordingly, Sellectek changed its name to Glasgal
Communications, Inc. Pursuant to the merger each outstanding share
of common stock of the Company was converted into 3,242.40 shares
of Sellectek common stock. The cost of the merger, approximately
$560,000, has been charged to additional paid-in capital. Pro
forma information is not presented since substantially all of the
assets, liabilities and operations were those of the Company.
Signatel--
On October 28, 1994, the Company acquired all of the issued and
outstanding voting common shares of Signatel, a Canadian
distributor of data communications equipment and services, in
exchange for 875,000 of its common shares. The acquisition was
33
accounted for using the pooling of interests method of accounting.
Presented below are the individual company and combined net sales,
operating income (loss), net income (loss) and identifiable assets
for the periods identified (stated in US dollars and net of
intercompany eliminations):
Glasgal Signatel Combined
------- -------- --------
For the year ended
December 31, 1993
---------------------------------------
Net Sales $ 31,486,000 $ 4,905,000 $ 36,391,000
Operating Income 548,000 2,000 550,000
Net Income (loss) 47,000 (194,000) (147,000)
Identifiable Assets 12,566,000 2,245,000 14,811,000
For the four months ended
April 30, 1994
---------------------------------------
Net Sales $ 9,266,000 $ 1,889,000 $ 11,155,000
Operating Loss (1,888,000) (121,000) (2,009,000)
Net Loss (2,014,000) (131,000) (2,145,000)
Identifiable Assets 10,243,000 1,601,000 11,844,000
For the year ended
April 30, 1995
---------------------------------------
Net Sales $ 30,197,000 $ 4,964,000 $ 35,161,000
Operating Loss (1,026,000) (172,000) (1,198,000)
Net Loss (1,468,000) (175,000) (1,643,000)
Identifiable Assets 10,787,000 1,807,000 12,594,000
The combined results are not necessarily indicative of what actually
would have occurred if the acquisition had been in effect for the
entire periods presented. In addition, the combined results are
not intended to be a projection of future results and do not
reflect any synergy's that might be achieved from combined
operations.
CASI--
On April 24, 1996, the Company acquired 80% of the outstanding common
stock of CASI, a company that develops and licenses software
products, in exchange for $500,000 in cash and 44,260 shares of
common stock of the Company valued at $6.57 per share based on the
average trading price of the Company's common stock for several
days before and after the date of the acquisition agreement. The
acquisition was accounted for as a purchase. The excess of
purchase price over fair value of net assets acquired, $1,867,000,
is included in goodwill and is being amortized over 10 years on a
straight line basis. Operations of CASI, which commenced in
February, 1995, were immaterial and CASI recorded losses of
$490,000 and $415,000 in the period from inception through
December 31, 1995 and the four months ended April 30, 1996,
respectively. If the acquisition of CASI had been consummated on
May 1,
34
1995, the pro forma loss before extraordinary item would have been
approximately $1,634,000.
In connection with this transaction, in March 1996 the Company
completed a private placement offering of 312,500 shares of common
stock. The net proceeds of the private placement offering,
$1,207,000, were used to acquire 80% of the issued and outstanding
shares of common stock of CASI, and to provide CASI with working
capital.
(3) Property and equipment:
The following is a summary of property and equipment, at cost.
APRIL 30,
--------------------------------
1995 1996
---- ----
Land $ 321,000 $ 321,000
Building 1,947,483 1,979,128
Computer Equipment 2,303,059 3,196,785
Furniture and fixtures 1,171,086 1,186,822
Computer equipment held under capital
leases 214,397 213,566
---------- ----------
5,957,025 6,897,301
Less--Accumulated depreciation and
amortization 2,763,706 3,267,747
---------- ----------
Net property and equipment $ 3,193,319 $ 3,629,554
=========== ===========
(4) Short-term borrowings:
The Company has a credit facility with a bank that provides a
maximum revolving loan of $3,750,000. Availability under the
revolving loan is calculated at the sum of (a) 75% of eligible
accounts receivable (as defined) and (b) 20% of the cost or
wholesale market value of eligible inventory, as defined. The
revolving loan accrues interest at the bank's floating base rate
plus 1.75% (10% at April 30, 1996) and expires on August 31, 1996.
On August 2, 1996, the Company received a commitment from a lender
to provide the Company with a $4,000,000 revolving line of credit.
The revolving line of credit will bear interest at the lender's
prime rate plus 1.75%. Availability under the revolving line of
credit is based upon a percentage of eligible receivables and a
percentage of eligible inventory, as defined. The revolving line
of credit has a term of 3 years. The Company intends to accept
this commitment.
Short-term borrowings at April 30, 1995 and 1996 included $860,060
and $676,085, respectively, representing checks drawn in excess of
available cash balances.
35
The Company has a "floor planning" arrangement with a lender to
finance the Company's purchases of inventory up to a total value
of $400,000. Under this arrangement, the Company is able to
purchase goods on credit from pre-authorized vendors who are paid
by the lender on pre-determined terms. The Company pays interest
at the lender's prime rate plus 2% (10.25% at April 30, 1996). As
collateral for this arrangement, the Company has a certificate of
deposit of $100,000 pledged to this lender. As of April 30, 1996
approximately $229,700 was outstanding under this arrangement and
is included in accounts payable in the accompanying consolidated
balance sheets.
The Company has a line of credit up to and payable in 500,000
Canadian dollars (US $362,500), due on demand with interest
calculated at the bank's prime rate plus 1.25% per annum (9.5% at
April 30, 1996). As of April 30, 1996, $87,602 was outstanding and
is included in short-term borrowings.
In connection with a merger agreement with Direct Connect
International, Inc. (DCI), the Company entered into a note payable
agreement with DCI during November 1992 for $1,000,000 due June
1993 with interest at 2% over the prime rate. During 1993, the
note payable was increased several times and the balance of the
note on December 31, 1993 was $1,900,000. On December 2, 1993, the
Company signed a mutual release agreement with DCI, which released
both companies from their commitments or obligations related to
the merger agreement.
In connection with the release agreement, the Company entered into a
common stock purchase agreement with DCI (DCI Agreement). Pursuant
to the DCI Agreement, in January 1994, DCI converted the
outstanding indebtedness of the Company owed to DCI into 2,723,973
shares of common stock of the Company (see Note 6).
All present and future assets of the Company are pledged as security
under the various debt agreements.
36
(5) Long-term obligations:
Long-term obligations are comprised of--
APRIL 30,
-------------------------------
1995 1996
---- ----
Mortgage payable $ 958,611 $ 1,000,000
Capital lease obligation 78,297 166,962
Other 18,218 14,740
----------- -----------
1,055,126 1,181,702
Less--Current portion of long-term
obligations 137,074 93,332
---------- ----------
$ 918,052 $ 1,088,370
=========== ===========
The Company has a 10 year mortgage agreement with a bank for
$1,000,000. During the first 5 years of the agreement the interest
rate is fixed at 8.05% per annum. Beginning in the year 2002, the
interest rate is subject to adjustment, as defined.
The scheduled repayment of long-term debt is as follows:
1997 $ 93,332
1998 69,633
1999 70,800
2000 16,412
2001 17,783
Thereafter 913,742
(6) Shareholders' equity:
Common Stock Issuances--
Pursuant to the DCI Agreement in January 1994, DCI converted the
outstanding indebtedness of the Company owed to DCI into 2,723,973
shares of common stock of the Company (see Note 4). In addition,
the DCI Agreement gives the Company the right to require DCI to
purchase up to 1,337,230 additional shares of Common Stock of the
Company (the "Additional Shares") for an aggregate of $8,750,000,
less current warrant solicitation fees (the "Additional DCI
Investment"). The Company may require the Additional DCI
Investment if, and then only to the extent, that DCI receives
proceeds from the exercise of existing warrants. If the Company
does not require the Additional DCI Investment, DCI may still
purchase, on the same terms, up to one-half of the Additional
Shares.
In May 1994, the Company sold 180,000 shares of common stock in a
private offering for gross proceeds of $450,000.
37
In June 1994, the Company issued 100,000 shares of its common stock
in satisfaction of a $250,000 account payable.
In September 1994, a warrant holder exercised the right to purchase
125,000 shares of common stock at an exercise price of $2.00 per
share. In satisfaction of the exercise price, the warrant holder
canceled the promissory note of $250,000 owed to the warrant
holder by the Company.
Bridge Financings--
On May 8, 1995, the Company consummated a bridge financing (the
"First Bridge Financing"), pursuant to which it issued an
aggregate of (i) $1,200,000 principal amount of promissory notes
(the "Bridge Notes") which bore interest at the rate of 8% per
annum and were payable upon the earlier of the consummation of the
Offering (as hereinafter defined), (ii) 600,000 warrants (the
"First Bridge Warrants"), each First Bridge Warrant entitling the
holder to purchase one share of Common Stock at an initial
exercise price of $1.875 (subject to adjustment upon the
occurrence of certain events) during the three-year period
commencing May 8, 1996, and (iii) 442,478 shares of Common Stock
at $1.13 per share. Financing fees of approximately $260,000 were
incurred in connection with the First Bridge Financing. Upon the
consummation of the Offering, each First Bridge Warrant was
converted into a redeemable warrant having terms identical to
those of the redeemable warrants underlying the units offered in
the Offering. The Company recorded an original issuance discount
of $120,000 associated with (i) and (ii) above.
On June 13, 1995, the Company consummated a bridge financing (the
"Second Bridge Financing") pursuant to which it issued an
aggregate of 350,000 warrants (the "Second Bridge Warrants"). Each
Second Bridge Warrant entitles the holder to purchase one share of
Common Stock at an initial exercise price of $1.74 per share
during the three year period commencing June 13, 1996. The net
proceeds from the Second Bridge Financing were approximately
$70,000. Upon consummation of the Offering, each First Bridge
Warrant was converted into a redeemable warrant having terms
identical to those of the redeemable warrants underlying the units
offered in the Offering.
Public Offering--
On September 28, 1995, the Company completed a public offering (the
"Offering") of 1,783,000 units at $5 per unit (including an
overallotment of 258,000 units in October 1995) for net proceeds
of approximately $6,485,000. Each unit consists of two shares of
Common Stock and one redeemable warrant. Each redeemable warrant
entitles the holder to purchase one share of Common Stock at an
initial exercise price of $3.75 per share. In addition, in
connection with the sale of 400,000 shares of common stock by
certain selling shareholders, the Company contributed 200,000
redeemable warrants
38
(valued at $50,000) that were included in the 200,000 units sold
by such shareholders. The Bridge Notes were repaid with the
proceeds of the Offering resulting in the write off of the
unamortized original issuance discount and the unamortized
deferred financing costs and the recognition of an extraordinary
loss of $223,006.
Stock Options--
The 1990 Stock Option Plan (the "1990 Plan") provides for grants of
1,500,000 common stock options to employees, directors, and
consultants to purchase common stock at a price at least equal to
100% of the fair market value of such shares on the grant date.
The exercise price of any options granted to a person owning more
than 10% of the combined voting power of all classes of stock of
the Company ("10% shareholder"), shall be at least equal to 110%
of the fair market value of the share on the grant date. The
options are granted for no more than a 10-year term (5 years for
10% shareholders) and the vesting periods range from 2 to 4 years.
In November 1993, the Company adopted its 1993 Consultant Stock
Option Plan (the "1993 Plan"), under which 30,000 shares of common
stock are reserved for issuance. The 1993 Plan provides for grants
of common stock options to selected persons who provide consulting
and advisory services to the Company to purchase common stock at a
price at least equal to 100% of the fair market value of such
shares on the grant date, as determined by the Board of Directors.
The exercise price of any options granted to a person owning more
than 10% of the combined voting power of all classes of stock of
the Company ("10% shareholder"), shall be at least equal to 110%
of the fair market value of such shares on the grant date. The
options are granted for no more than a 10-year term (5 years for
10% shareholders) and the vesting periods are determined by the
Board of Directors.
39
The following table represents a summary of stock option activity
under the 1990 Plan and the 1993 Plan:
1993 CONSULTANT STOCK
1990 STOCK OPTION PLAN OPTION PLAN
---------------------------------------------- -----------------------------
SHARES PRICE SHARES PRICE
------------- ---------------------------- ------------- ------------
Options outstanding at April 30, 1994 80,836 $ 5.00 - $ 15.63 21,000 $ 5.00
Granted 845,991 $ 1.25 - $ 3.4375 - -
Exercised (2,394) $ 3.68 (17,000) $ 5.00
Canceled (437,584) $ 3.425 - $ 3.4375 - -
------------- ---------------------------- ------------- ------------
Options outstanding at April 30, 1995 486,849 $ 1.25 - $ 15.63 4,000 $ 5.00
Granted 353,000 $ 2.775 - $ 10.55 5,000 $ 2.50
Exercised (91,248) $ 1.25 4,000 $ 5.00
Canceled (53,320) $ 1.25 - -
------------- ----------------------------- ------------- ------------
Options outstanding at April 30, 1996 695,281 $ 1.25 - $ 15.63 5,000 $ 2.50
============= ============================= ============= ============
Exercisable at April 30, 1996 283,345 $ 1.25 - $ 15.63 5,000 $ 2.50
============= ============ === ============ ============= ============
As of April 30, 1996, a total of 660,151 and 4,000 shares remain
reserved for future grants under the 1990 Plan and the 1993 Plan,
respectively.
On March 1, 1995, the Company adopted the 1995 Directors Stock Option
Plan (the "Directors Plan"), under which 500,000 shares of Common
Stock are reserved for issuance. All members of the Board of
Directors who are not employees of the Company ("Eligible
Directors") are eligible to receive grants of options. Each
Eligible Director is granted an option to purchase 24,000 shares
of Common Stock on the date the Eligible Director is elected to
the Board of Directors, and will be granted another option to
purchase 24,000 shares of Common Stock annually thereafter so long
as he remains an Eligible Director. Generally, each option vests
ratably over a three-year period provided such individual
continues to serve as a Director of the Company.
40
1995 DIRECTORS STOCK
OPTION PLAN
---------------------------------------------------
SHARES PRICE
------ -----
Options outstanding at April 30, 1994 -- $ --
Granted during 1995 48,000 $1.25
Exercised -- --
Canceled -- --
---------------- -------------------
Options Outstanding at April 30, 1995 48,000 $1.25
Granted during 1996 72,000 $2.552 - $2.775
Exercised -- --
Canceled -- --
================ ===================
Options outstanding at April 30, 1996 120,000 $1.25 - $2.775
================ ===================
Shares exercisable at April 30, 1996 48,000 $1.25
================ ===================
As of April 30, 1996, 380,000 shares were available for future
issuance under the Directors Plan.
During January 1992, the Company granted options to purchase
1,386,742 shares of its common stock, at an exercise price of
$.005 per share. The options may be exercised at any time prior to
January 1, 2002. 39,000 options have been exercised as of April
30, 1996. In April 1993, the Company granted options, which expire
in April 2003, to purchase 109,755 shares of common stock to a
consultant/advisor to the Company at an exercise price of $.005
per share. 55,000 options have been exercised as of April 30,
1996.
In March 1995, the Company granted options to purchase 165,000 shares
of Common Stock at an exercise price of $1.25 to certain executive
officers of the Company. These options are exercisable over a
three year period beginning August 24, 1995. The options expire in
March 2005. No options have been exercised as of April 30, 1996.
On April 25, 1995 the Company granted options to purchase 350,000
shares of Common Stock at an exercise price of $1.75, to certain
officers of Signatel. These options are exercisable, at any time
and from time to time, prior to April 21, 2005. As of April 30,
1996 no options have been exercised.
The table below sets forth the activity relating to stock options
referred to above which were originally granted by the Company not
pursuant to any option plan.
41
SHARES PRICE
-------------- ----------------
Options Outstanding at April 30, 1994 1,496,497 $.005
Granted 515,000 $1.25 - $1.75
Exercised -- --
Canceled -- --
-------------- ----------------
Options Outstanding at April 30, 1995 2,011,497 $.005 - $1.75
Granted -- --
Exercised (94,000) $.005
Canceled (95,455) $1.75
-------------- ----------------
Options Outstanding at April 30, 1996 1,822,042 $.005 - $1.75
============== ================
On July 17, 1995, Mr. Glasgal granted to five executive officers of
the Company, options to purchase an aggregate of 300,000 shares of
his common stock. The options granted by Mr. Glasgal vest 1/3 on
July 17, 1996 (at an exercise price of $2.775 per share, the fair
market value at the date of grant), 1/3 on July 17, 1997 (at an
exercise price of $3.50 per share) and 1/3 on July 17, 1998 (at an
exercise price of $4.50 per share).
(7) Income Taxes:
In January 1994, the Company adopted the provisions of SFAS 109
"Accounting for Income Taxes." The statement requires that
deferred income taxes reflect the tax consequences on future years
of differences between the tax bases of assets and liabilities and
their financial reporting amounts.
Deferred income taxes result primarily from temporary differences in
the recognition of expenses for tax and financial reporting
purposes. Deferred income taxes consisted of the following:
April 30,
-------------------------------------------
1995 1996
---------------------- --------------------
Net operating loss carryforwards $ 1,021,000 $ 1,406,000
Accelerated depreciation (326,000) (316,000)
Allowance for doubtful accounts 136,000 109,000
Inventory obsolescence 95,000 112,000
Other 19,000 19,000
------------------- -------------------
945,000 1,330,000
Valuation Allowance (945,000) (1,330,000)
------------------ ------------------
$ -- $ --
================== ==================
The Company has recorded a full valuation allowance against the net
deferred tax asset due to uncertainty relating to the realization
of this asset.
42
The Company does not provide for US income taxes on the undistributed
earnings of its foreign subsidiaries as the Company does not have
any current intention of repatriating such earnings.
At April 30, 1996, the Company has available $4,137,000 of net
operating loss carry forwards, which may be used to offset future
taxable income. These net operating loss carryforwards expire
through 2011.
(8) Related party transactions:
Beginning July, 1993, the Company and Ralph Glasgal, its Chairman and
President, orally agreed that future salary payments would be
suspended. In the year ended December 31, 1993, and the year ended
April 30, 1995, the Company loaned Mr. Glasgal $181,150, and
$294,850, respectively. On April 30, 1995, and in contemplation of
the closing of the First Bridge Financing (see Note 14), Mr.
Glasgal contributed to the Company 442,478 shares of Common Stock
in consideration for the cancellation of the $476,000 owed to the
Company. The 442,478 shares of Common Stock contributed to the
Company were canceled.
During 1993, the Company paid a management fee of approximately
$63,000 to a company controlled by a shareholder of the Company.
(9) Employee benefit plan:
The Company has a contributory 401(k) salary reduction plan which
covers each employee who is at least 21 years of age and has been
a full-time employee for six months. The Company matches the first
$600 contributed into the plan by each employee annually. The
Company's contributions to the plan were $37,800, $12,400, $27,400
and $17,100 for the year ended December 31, 1993, the four months
ended April 30, 1994 and the years ended April 30, 1995 and 1996,
respectively.
(10) Commitments and contingencies:
The Company leases sales offices in various states throughout the
United States and Canada. The terms of these leases generally do
not extend beyond one year. Rent expense incurred and charged to
operations was $224,000, $84,000, $252,000 and $372,000 for the
year ended December 31, 1993, the four months ended April 30, 1994
and the years ended April 30, 1995 and 1996, respectively.
43
The Company has operating lease commitments as follows:
1997 216,293
1998 184,496
1999 49,200
2000 33,600
2001 ---
The Company has entered into employment agreements with five key
employees. Three of the employment agreements expire on December
31, 1996, and provide for an aggregate annual salary of $635,000.
The remaining employment agreements provide for annual salary of
$265,500 increased annually by the percentage increase in the
consumer price index. One of these agreements expires on April 30,
2001, while the other is indefinite subject to termination clauses
within the agreement.
(11) Concentrations of credit risk:
The Company's financial instruments subject to credit risk are
primarily trade accounts receivable. Generally, the Company does
not require collateral or other security to support customer
receivables. At April 30, 1996, the Company's customers were
primarily within the continental United States, Canada, parts of
Europe, the Far East and Latin America, and, due to geographical
diversity, credit risk is limited. For the year ended April 30,
1996 two customers accounted for an aggregate of 33% of sales. For
the year ended December 31, 1993, one of these two customers
accounted for 10% of sales. In no other period presented did any
one customer account for more than 10% of sales.
(12) Export Sales
The following table gives an analysis of the Company's export sales.
FOR THE YEAR ENDED FOR THE FOUR MONTHS FOR THE YEAR FOR THE YEAR ENDED
DECEMBER 31, ENDED APRIL 30, ENDED APRIL 30, APRIL 30,
1993 1994 1995 1996
----------------------- ------------------------- ------------------- ---------------------
Canada $ 256,000 $ 49,000 $ 103,000 $ 117,000
Europe 1,953,000 335,000 1,754,000 1,759,000
Middle East 29,000 17,000 73,000 137,000
Latin America 604,000 222,000 1,087,000 742,000
Far East 411,000 351,000 1,095,000 785,000
--------------- --------------- --------------- ---------------
$3,253,000 $ 974,000 $4,112,000 $3,540,000
=============== =============== =============== ==============
For information relating to the Company's foreign operations see Note 2.
44
(13) Recapitalization
In January 1996, the Company was reincorporated in the State of
Delaware and each outstanding share of the old California
Corporation, no par value common stock, was converted into one
share of the new Delaware Corporation $.001 par value common
stock. This change resulted in the transfer of $14,484 from the
additional paid-in capital account to the common stock account. In
conjunction with the reincorporation, the Company increased the
authorized common stock from 21,000,000 shares to 34,000,000
shares.
(14) Subsequent Events
On July 31, 1996, the Company acquired all of the voting stock of HH
Communications, Inc. (HH), a Chicago area based systems
integrator, in exchange for 1,500,000 shares of its Common Stock.
The acquisition will be accounted for using the pooling of
interests method of accounting. For financial reporting purposes
HH utilizes December 31 as its year end. Presented below are the
individual company and combined net sales, net income and earnings
per share for the periods identified:
45
HH COMBINED
COMPANY (UNAUDITED) (UNAUDITED)
-------------------- ----------------- -----------------
For the year ended April 30, 1996(*)
- ---------------------------------------------
Net Sales $ 41,781,000 $ 4,398,000 $ 46,179,000
Net Income (Loss) (1,131,000) (9,000) (1,140,000)
Earnings (Loss) Per Share (.09) N/A (.08)
Weighted Average Shares 13,190,031 N/A 14,690,031
For the year ended April 30, 1995(*)
- ---------------------------------------------
Net Sales 35,161,000 897,000 37,288,000
Net Income (Loss) (1,643,000) 15,000 (1,628,000)
Earnings (Loss) Per Share (.15) N/A (.13)
Weighted Average Shares 10,681,237 N/A 12,181,237
For the year ended December 31, 1993
- ---------------------------------------------
Net Sales 36,391,000 897,000 37,288,000
Net Income (Loss) (147,000) 59,000 (88,000)
Earnings (Loss) Per Share N/A N/A N/A
Weighted Average Shares N/A N/A N/A
(*) HH financial information for the year ended December 31, 1995
(**) HH financial information for the year ended December 31, 1994
The combined results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire periods presented.
In addition, the combined results are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from combined
operations.
As of July 31, 1996, the Company adopted the 1996 Employee and
Consultant Stock Option Plan pursuant to which options to purchase
up to 2,000,000 shares of Common Stock may be granted by the
Company. Options to purchase 1,377,000 shares were granted on July
31, 1996 to employees of HH. All of such options vest in 15 years
(subject to earlier vesting upon HH reaching certain earnings
goals) and have an exercise price of $6.928 per share, the fair
market value at the date of the Grant.
46
GLASGAL COMMUNICATIONS, INC.
SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS
Balance, Charges to
beginning cost and Balance, end of
of period expenses Other (1) Deductions period
------------- -------------- ------------ --------------- -----------------
Year ended April 30, 1996
Allowance for doubtful accounts $ 403,914 $ 285,022 $ 5 $ (365,359) $ 323,582(2)
Allowance for inventory obsolescence 293,964 165,000 (846) (115,100) 343,018(3)
Year ended April 30, 1995
Allowance for doubtful accounts 746,355 497,606 (616) (839,431) 403,914(2)
Allowance for inventory obsolescence 55,729 257,660 420 (19,845) 293,964(3)
Four months ended April 30, 1994
Allowance for doubtful accounts 194,004 654,856 (64) (102,441) 746,355(2)
Allowance for inventory obsolescence 35,196 529,645 (828) (508,284) 55,729(3)
Year ended December 31, 1993
Allowance for doubtful accounts 293,682 96,524 - (196,202) 194,004(2)
Allowance for inventory obsolescence 117,973 44,662 (473) (126,966) 35,196(3)
(1) Includes changes in balances due to foreign exchange rates.
(2) Includes $3,650, $3,688 $3,617 and $0, respectively, relating to Signatel.
(3) Includes $15,079, $15,955, $27,011 and $20,478, respectively, relating to
Signatel.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 14, 1994 the Company notified its certifying accountants, KPMG
Peat Marwick (KPMG), that the client-auditor relationship between the Company
and KPMG would be terminated immediately. Additionally, the Company announced
its new certifying accountants, Arthur Andersen LLP, would serve as independent
accountants for the fiscal year 1995. The decision to change accountants was
approved by the Board of Directors.
The Company believes, and has been advised by KPMG Peat Marwick that it
concurs in such belief, that, during the fiscal year ended December 31, 1993 and
subsequent thereto, the Company and KPMG Peat Marwick did not have any
disagreement on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreement, if not
resolved to the satisfaction of KPMG Peat Marwick, would have caused it to make
reference in connection with its report on the Company's financial statements to
the subject matter of the disagreement.
No report of KPMG Peat Marwick on the Company's financial statements
for either of the past two fiscal years contained an adverse opinion, a
disclaimer or opinion or a qualification or was modified as to uncertainty,
audit scope or accounting principles. During such fiscal periods, there were no
"reportable events" within the meaning of Item 304 (a) (1) of Regulation S-K
promulgated under the Securities Act.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, their ages and
present positions with the Company are as follows:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Ralph Glasgal 63 Chairman of the Board and President
Isaac J. Gaon 47 Chief Executive Officer and Director
Ingemar Sjunnemark 50 Vice President - Export Sales
Robert F. Gadd 34 Vice President - Federal and Enterprise Systems
Scott Schultz 42 Vice President - Domestic Sales
James M. Caci 31 Chief Financial Officer, Secretary and Treasurer
Thomas D'Alleva 40 Vice President - Technical Operations
Robert H. Friedman 43 Director
Joseph M. Salvani 39 Director
Maurice Kulik 57 Director
Thomas J. Berry 71 Director
The directors are elected for one year terms which expire at the next
annual meeting of shareholders. Executive officers are elected annually by the
Board of Directors to hold office until the first meeting of the Board following
the next annual meeting of shareholders and until their successors have been
elected and qualified.
The following is a brief summary of the background of each director and
executive officer of the Company.
RALPH GLASGAL, Director, Chairman of the Board and President, with
degrees in Engineering Physics and Electrical Engineering, founded the
Predecessor in 1975 as a distributor of data communications equipment and
services. Prior to 1975 he held various engineering positions with RCA, Siemens
and Timeplex. Mr. Glasgal currently oversees the evaluation and selection of
connectivity products sold and installed by the Company. He is the author of
numerous articles and three books on data communications.
49
ISAAC J. GAON, Chief Executive Officer and Director, joined the
Predecessor in April 1992. He served as Chief Financial Officer from April 1992
until October 1994. Prior to joining the Predecessor, Mr. Gaon served as a
consultant to the Predecessor, developing the strategic plan and financial model
for the Predecessor's nationwide enterprise networking strategy. From September
1987 to December 1991, Mr. Gaon, a chartered accountant, served as President and
Chief Executive Officer of Toronto-based NRG, Inc., (a subsidiary of Gestetner
International) an office equipment supplier, and in several key senior
management roles within Gestetner Canada and Gestetner USA.
INGEMAR SJUNNEMARK, Vice President - Export Sales since October 1988.
Since joining the Predecessor in 1986 and until October 1988, Mr. Sjunnemark was
Director of Technical Marketing. Prior to joining the Predecessor, Mr.
Sjunnemark held various positions with ITT and General Data Communications
Industries. Mr. Sjunnemark holds degrees in Electrical Engineering and in
Marketing/Economics from the University of Stockholm.
ROBERT F. GADD, Vice President - Federal and Enterprise Systems since
September 1992, joined the Predecessor in April 1992. Mr. Gadd served as
Director of Technical Operations of the Company from April 1992 until August
1992. Prior to joining the Predecessor, Mr. Gadd was co-founder of Automation
Partners International, Inc. ("API"), a San Francisco-based systems integration
firm which has provided open architecture solutions to the legal industry since
1986. Prior to API, Mr. Gadd had his own automation consulting firm and
specialized in developing integrated solutions to meeting specific objectives in
a variety of business disciplines, including political campaigns, oil and gas,
real estate, and banking.
JAMES M. CACI, Chief Financial Officer, Secretary and Treasurer, joined
the Company in October 1994. Mr. Caci has been the Company's Chief Financial
Officer since October 1994 and the Company's Secretary and Treasurer since June
1995. From April 1994 to October 1994 Mr. Caci was a manager in the finance
department of Merck & Co., and from July 1986 to April 1994, Mr. Caci was
associated with the accounting firm of Arthur Andersen LLP, most recently
holding the position of Manager.
SCOTT SCHULTZ, Vice President - Sales & Marketing, joined the company
in September of 1995. Prior to joining the Company, Mr. Schultz held several
positions at Rad Network Devices (RND) since August 1991, most recently vice
president of sales. Prior to RND Mr. Schultz was director of sales training for
Timeplex, Inc.
THOMAS D'ALLEVA, Vice President - Technical Operations, joined the
company in October 1995. Prior to joining the Predecessor, Mr. D'Alleva was
Director of Product Management for RAM Mobile Data from May 1993 until October
1995. From January 1990 through May 1993, Mr. D'Alleva was Regional Manager of
Professional Services at Pyramid Technology. Mr. D'Alleva has held various
positions in Systems Engineering Management and Business Development. Mr.
D'Alleva holds a Bachelor of Arts degree from New York State University at
Oswego.
50
ROBERT H. FRIEDMAN, Director since August 1994, has been a partner with
Olshan Grundman Frome & Rosenzweig, a New York City law firm, since August 1992.
Prior to that time and since September 1983 he was associated with Cahill Gordon
& Reindel, also a New York City law firm. Mr. Friedman specializes in corporate
and securities law matters.
JOSEPH M. SALVANI, Director since August 1994, has been the President
of Salvani Investments, Inc., an investment and consulting firm that is a
consultant to Brookehill Equities, Inc. since 1991. Mr. Salvani was a registered
broker with Brookehill Equities, Inc. from March 1991 to July 1992. From July
1989 through 1991, he was a founder, general partner and Hedge Fund Manager of
EGS Associates, LP, a private investment limited partnership. He served as a
general partner of Steinhardt Partners from October 1986 until April 1989 and as
a general partner of Institutional Partners, LP from January 1987 to April 1989.
He began his career in 1981 as an analyst with Goldman, Sachs & Co. Mr. Salvani
is a graduate of Rutgers College with Bachelor of Science degrees in Accounting,
Economics and Finance. He also holds a Masters Degree in Business Administration
from Columbia University. Mr. Salvani is Chairman of the Board of Directors and
Chief Executive Officer of Direct Connect International Inc. ("DCI"), a Nasdaq
traded company and a director of Medicis Pharmaceutical, Inc., a pharmaceutical
company.
MAURICE KULIK, Director since October 1994, is also Chief Executive
Officer and President of Signatel which he founded in 1977. Prior to 1977 he
held various engineering, sales and marketing management positions with ATELCO,
ROR Associates, Beckman Instruments and SPERRY/UNIVAC. From 1985 to 1989 Mr.
Kulik also served as President, Chief Executive Officer and Director of Black
Box Canada Corporation, a joint venture corporation with Black Box Corporation
of Pittsburgh, PA. Mr. Kulik currently oversees Signatel's financial and
strategic planning as well as its marketing and sales management functions.
THOMAS J. BERRY, Director since July 1995, is currently retired. Mr.
Berry was an executive with the U.S. Postal Service from November 1986 to
December 1992, serving as executive assistant to the Postmaster General. Prior
to that time and until November 1986, Mr. Berry held various executive positions
at AT&T. Mr. Berry is a director of Computer Horizons Corp., a Nasdaq traded
company.
51
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for the years ended December
31, 1993, 1994, the fiscal years ended April 30, 1995 and 1996 with respect to
annual and long-term compensation for services in all capacities to the Company
of (i) the chief executive officer, and (ii) the other four most highly
compensated executive officers of the Company at April 30, 1996 who received
compensation of at least $100,000 during fiscal year ended April 30, 1996
(collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAYOUTS
STOCK LONG-TERM
OPTIONS INCENTIVE
NAME AND POSITION YEAR SALARY BONUS (SHARES) PAYMENTS
----------------- ---- ------ ----- -------- --------
Ralph Glasgal(1) 1996 $250,000 $74,800 -- --
Chairman of the Board and President 1994* 26,700 -- -- --
1994 105,901 -- -- --
1993 319,992 -- -- --
Isaac J. Gaon 1996 $204,800 -- 108,821 --
Chief Executive Officer 1994* 192,300 -- 90,000 --
1994 200,000 -- -- --
1993 180,685 --
Robert F. Gadd 1996 $136,433 $22,500 103,985 --
Vice President-Federal and Enterprise 1994* 113,900 -- 60,000 --
Systems 1994 112,308 -- -- --
1993 112,654 -- --
William Currie(2) 1996 $142,308 $16,625 -- --
Vice President - Domestic Sales 1994* 126,200 -- 100,000 --
1994 116,269 -- -- --
1993 -- -- --
Ingemar Sjunnemark 1996 $115,600 $15,000 24,666 --
Vice President - Export Sales 1994* 109,307 -- 15,000 --
1994 108,608 -- -- --
1993 105,391 -- --
52
(1) During 1992, the Company paid Ralph Glasgal $355,922 in full satisfaction
for loans he and his wife, Linda Glasgal, had made to the Company in the
past. Mr. Glasgal agreed to take this repayment as part of his 1992 salary
compensation. Beginning July, 1993, the Company and Ralph Glasgal, its
Chairman and President, orally agreed that future salary payments would be
suspended. During the period of salary suspension, Mr. Glasgal's duties
were significantly diminished as a result of the addition of Mr. Gaon as
Chief Executive Officer in April 1992. During this period, Mr. Glasgal
spent the majority of his time pursing interests outside of the Company.
Mr. Glasgal contributed to the Company 442,478 shares of Common Stock in
consideration for the cancellation by the Company of the $476,000 owed as
of April 30, 1995 by Mr. Glasgal to the Company. Mr. Glasgal is currently
receiving salary compensation of $250,000 per year. Mr. Glasgal may also
receive a bonus at the discretion of, and to be determined by, the Board of
Directors.
(2) Mr. Currie's employment with the Company was terminated on April 30, 1996.
* Represents the fiscal year ended April 30, 1995. The Company changed its
fiscal year end in May 1994 from December 31 to April 30.
STOCK OPTION TABLE
The following table sets forth certain information regarding stock
option grants made to each of the Named Officers during the fiscal year ended
April 30, 1996,
OPTIONS GRANTED IN FISCAL YEAR ENDED
APRIL 30, 1996
POTENTIAL REALIZABLE
VALUE AT ASSUMED RATES OF
INDIVIDUAL GRANTS ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
OPTION (1)
----------
SHARES OF % OF TOTAL EXERCISE EXPIRATION 5% 10%
COMMON STOCK OPTIONS GRANTED OR BASE DATE
UNDERLYING TO EMPLOYEES IN PRICE
NAME OPTIONS GRANTED FISCAL YEAR ($/SH)
Ralph Glasgal -- -- -- -- -- --
Isaac J. Gaon 108,821 31.45 2.775 July 17, 2005 $189,913 $481,276
Ingemar Sjunnemark 24,666 7.13 2.775 July 17, 2005 43,047 109,089
Robert F. Gadd 103,985 30.05 2.775 July 17, 2005 181,473 459,888
William Currie -- -- -- -- -- --
(1) The potential realizable portion of the foregoing table illustrates value
that might be realized upon exercise of options immediately prior to the
expiration of their term, assuming (for illustrative purposes only) the
specified compounded rates of appreciation on the Company's Common Stock
over the term of the option. These numbers do not take into account
provisions providing for termination of the option following termination of
employment, nontransferability or difference in vesting periods.
53
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information as to each of the named
officers concerning exercises of options during the fiscal year ended April 30,
1996 and unexercised stock options held as of April 30, 1996.
Value
Realized
Shares (Market Number of Unexercised Options Value of Unexercised
Acquired Price at Held at April 30, 1996 In-The-Money Options at
on Exercise Exercise April 30, 1996(1)
less
Exercise
Price)
------------- -------------- -------------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Ralph Glasgal -- $ -- -- -- $ -- $ --
Isaac J. Gaon -- -- 525,245 168,821 3,899,361 889,179
William S. Currie -- -- 100,000 -- 625,000 --
Robert F. Gadd -- -- 317,166 143,985 2,352,259 741,329
Ingemar Sjunnemark 35,000 105,000 267,166 34,666 1,997,060 179,047
(1) Assuming a price of $7.50 per share of Common Stock, which was the
closing bid price per share as of April 30, 1996.
The value of personal benefits for executive officers of the Company
during the fiscal year ended April 30, 1996 that might be attributable to
management as executive fringe benefits such as automobiles and club dues cannot
be specifically or precisely determined; however, it would not exceed 10% for
any individual named above or, with respect to the group, would not in the
aggregate exceed 10% of the compensation reported above.
The Company adopted the Glasgal Communications, Inc., Salary Reduction
Plan (the "401(k) Plan") effective January 1, 1983. The 401(k) Plan was assumed
by the Company following the Merger. The 401(k) Plan is a voluntary program
covering employees who are at least 21 years of age and who have worked full
time for the Company for six months. A participant in the 401(k) Plan may
contribute from 2% to 15% of his or her base salary or wages up to the maximum
amount per year allowable (currently $9,500) under the Internal Revenue Code of
1986, as amended, and the Company makes matching contributions of 100% of the
participant's contribution up to a maximum of $600 per year per participant. A
participant's and the Company's contributions and the related investment
earnings thereon are immediately vested and not subject to forfeiture.
Distribution of a participant's vested benefits in the 401(k) Plan is made upon
a termination of employment subject to the right of the participant, if his or
her account balance exceeds $3,500, to defer receipt until attaining age 65.
Certain in-service withdrawals, and loans up to 50% of a participant's account,
are permitted under the 401(k) Plan, including withdrawals to meet financial
emergencies. At July 31, 1996, 37 of the Company's employees were participating
in the 401(k) Plan.
54
DIRECTORS COMPENSATION
Each director who is not an employee of the Company receives an annual
grant of options to purchase 24,000 shares of Common Stock pursuant to the
Directors Plan at an exercise price equal to fair market value on the date of
grant and a fee of $1,000 per meeting attended.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Mr. Glasgal
pursuant to which he is employed full-time as the Company's President commencing
January 1, 1993 and until terminated in accordance with the agreement. The
agreement expires on December 31, 1996. The Company has entered into an
employment agreement with Mr. Gaon pursuant to which he is employed full-time as
the Company's Chief Executive Officer commencing January 1, 1993 and until
terminated in accordance with the agreement. The agreement expires on December
31, 1996. The Company has entered into an employment agreement with Mr. Gadd.
Mr. Gadd's employment agreement provides for Mr. Gadd to be employed full-time
as the Company's Vice President-Federal and Enterprise Systems. The employment
agreement expires on December 31, 1996. The agreements provide for aggregate
annual compensation of $635,000.
The Company has entered into an employment agreement with Mr. Kulik
pursuant to which he is employed full-time as the Chief Executive Officer and
President of Signatel Ltd., the Company's Canadian subsidiary commencing October
28, 1994 and until terminated in accordance with the agreement. Mr. Kulik
receives an annual base salary of $115,500; provided that the base salary shall,
at a minimum, be increased after each 12 months of employment by a percentage
equal to the percentage increase in the Consumer Price Index over such 12-month
period, with the increased amount to remain in effect for the next 12-month
period.
55
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, with respect to the
beneficial ownership of Common Stock outstanding as of July 24, 1996 by (i) each
person known by the Company to be the beneficial owner of five percent or more
of the Company's Common Stock, (ii) each of the Named Officers, (iii) each
director, and (iv) all executive officers and directors as a group.
NAME AND ADDRESS OF AMOUNT OF SHARES PERCENT OF CLASS
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) PRE-OFFERING
----------------------- --------------------- ------------------
Ralph Glasgal(3) 4,895,875 33.0%
Direct Connect(4) 1,175,000 7.9%
International Inc.
700 Godwin Avenue
Midland Park, NJ 07432
Isaac Gaon(5) 619,778 4.0%
Robert F. Gadd(6) 398,366 2.6%
William Currie (7) 100,000 *
Robert H. Friedman(8) 47,146 *
505 Park Avenue
New York, NY 10022
Joseph Salvani(9) 32,000 *
700 Godwin Avenue
Midland Park, NJ 07432
Maurice Kulik(10) 643,636 4.3%
Thomas Berry(11) 24,000 *
All directors and
officers as a group 7,131,967 43.2%
(9 persons)(12)
* Less than 1%
- -----------------
(1) Unless otherwise indicated, all addresses are c/o Glasgal Communications,
Inc., 151 Veterans Drive, Northvale, New Jersey 07647.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3
under the Exchange Act ("Rule 13d-3") and unless otherwise indicated,
represents shares for which the beneficial owner has sole voting and
investment power. The percentage of class is calculated in accordance with
Rule 13d-3 and includes options or other rights to subscribe which are
exercisable within sixty (60) days of July 24, 1996.
(3) Includes (i) 146,752 shares of Common Stock owned by Ralph Glasgal's wife
and (ii) 1,175,000 shares of Common Stock owned by Direct Connect
International Inc.
56
("DCI") which Ralph Glasgal has the right to vote pursuant to a voting
agreement with DCI.
(4) Based on information provided to the Company by DCI. Does not include any
shares of common stock to be purchased by DCI at the time of the Additional
DCI Investment.
(5) Represents options exercisable within sixty (60) days from July 24, 1996 to
purchase (i) 495,245 shares of Common Stock at an exercise price of $.005
per share, (ii) 60,000 shares of Common Stock at an exercise price of $1.25
per shares, and (iii) 64,533 shares of Common Stock at an exercise price of
$2.775 per share (includes options to purchase 28,259 shares of Common
Stock held by Ralph Glasgal.
(6) Represents options exercisable within sixty (60) days from July 24, 1996 to
purchase (i) 297,166 shares of Common Stock at an exercise price of $.005
per share, (ii) 40,000 shares of Common Stock at an exercise price of $1.25
per share, and (iii) 61,200 shares of Common Stock at an exercise price of
$2.775 per share (includes options to purchase 26,538 shares of Common
Stock held by Ralph Glasgal).
(7) Represents options exercisable within sixty (60) days from July 24, 1996 to
purchase 100,000 shares of Common Stock at an exercise price of $1.25 per
share. Mr. Currie's employment with the Company was terminated on April 30,
1996.
(8) Represents options exercisable within sixty (60) days from July 24, 1996 to
purchase (i) 15,146 shares of Common Stock at an exercise price of $.005
per share, (ii) 24,000 shares of Common Stock at an exercise price of $1.25
per share, and (iii) 8,000 shares of Common Stock at an exercise price of
$2.525 per share.
(9) Represents options exercisable within sixty (60) days of July 24, 1996 to
purchase (i) 24,000 shares of Common Stock at an exercise price of $1.25
per share and (ii) 8,000 shares of Common Stock at an exercise price of
$2.525 per share. Mr. Salvini is also the Chairman of the Board of DCI but
has no power to direct DCI's voting or disposition of its interest in the
Company. Thus the shares of the Company's Common Stock owned by DCI are not
deemed to be attributable to Mr. Salvani.
(10) Represents (i) 440,000 shares of Common Stock to be issued in exchange for
outstanding Class B shares of Signatel held by Maurice Kulik and (ii)
options exercisable within sixty (60) days of July 24, 1996 to purchase
203,636 shares at an exercise price of $1.75 per share. In addition,
Maurice Kulik holds proxies to vote 440,000 shares of Common Stock held by
another shareholder of the Company, Berthold Hoeniger, which shares will be
surrendered to the Company upon the exchange by Mr. Kulik of the Class B
shares of Signatel for shares of Common Stock of the Company described
above. Such proxies terminate on a share for share basis as Maurice Kulik
exchanges his Class B shares of Signatel for shares of Common Stock
57
of the Company. The holders of such Class B shares are entitled to the
equivalent of any dividend paid on shares of Common Stock of the Company.
(11) Represents options exercisable within sixty days of July 24, 1996 to
purchase 24,000 shares of Common Stock at an exercise price of $2.775 per
share.
(12) Includes (i) options exercisable within sixty (60) days of July 24, 1996 to
purchase an aggregate of 1,736,092 shares of Common Stock held by the
directors and executive officers of the Company (includes options to
purchase 79,066 shares of Common Stock held by Ralph Glasgal) and (ii)
1,175,000 shares of Common Stock owned by DCI which Ralph Glasgal has the
right to vote pursuant to a voting agreement with DCI.
58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Company's existing bank indebtedness under its
revolving credit facility, Ralph Glasgal, the Chairman of the Board and
President of the Company, has guaranteed the Company's obligations thereunder.
As of April 30, 1996, the Company had an aggregate outstanding indebtedness
under the revolving credit facility of $2,879,000.
The Company has entered into a common stock purchase agreement (the
"DCI Agreement") with DCI, a principal shareholder of the Company, governing
certain equity investments which DCI has made, and in the future intends to
make, in the Company's Common Stock. Pursuant to the DCI Agreement, in January
1994 DCI converted $1.9 million of outstanding indebtedness of the Company owed
to DCI into equity of the Company (the "DCI Conversion"). In addition, the DCI
Agreement gives the Company the right to require DCI to purchase an additional
number of shares of Common Stock equal to 13.5% of the outstanding shares on the
date of the agreement (the "Additional Share") for an aggregate of $8.75
million, less certain warrant solicitation fees (the "Additional DCI
Investment"). The Company may require this purchase if, and then only to the
extent, that DCI receives proceeds from the exercise of certain existing DCI
warrants. DCI has the right to retain the first $500,000 of warrant proceeds;
however, such amount must be used by DCI to purchase shares of Common Stock if
the aggregate amount of warrant proceeds applied to the purchase of Common
Stock, after the earlier of the expiration or exercise of all warrants or 24
months after the effectiveness of the registration statement covering the DCI
common stock underlying the warrants, is less than $8.4 million. If the Company
does not require the Additional DCI Investment, DCI may still purchase, on the
same terms, up to one-half of the Additional Shares.
On July 17, 1995, Mr. Glasgal granted to five executive officers and
other key employees of the Company, options to purchase an aggregate of 300,000
shares of Common Stock. The options granted by Mr. Glasgal vest 1/3 on July 17,
1996 (at an exercise price of $2.775 per share), 1/3 on July 17, 1997 (at an
exercise price of $3.50 per share) and 1/3 on July 17, 1998 (at an exercise
price of $4.50 per share). In connection with this grant the Company granted
options to purchase 281,000 shares of Common Stock under the 1990 Option Plan to
the same executive officers and on the same vesting schedule, at an exercise
price of $2.775 per share, which represented fair market value on the date of
grant.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(a)(1) The following financial statements are included in Part II, Item
8:
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Public Accountants
Financial Statements:
Consolidated Balance Sheets as of April 30, 1995 and 1996
Consolidated Statements of Operations for the year ended
December 31, 1993, the four months ended
April 30, 1994 and the years ended April 30, 1995
and 1996.
Consolidated Statements of Changes in Shareholders' Equity
(Deficit) for the year ended December 31, 1993, the four
months ended April 30, 1994 and the years ended April 30,
1995 and 1996.
Consolidated Statements of Cash Flows for the year ended
December 31, 1993, the four months ended April 30, 1994
and the years ended April 30, 1995 and 1996.
Notes to Consolidated Financial Statements
(2) The following financial statement schedules are included in
this Form 10-K report:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not required,
are inapplicable, or the information is otherwise shown in the
financial statements or notes thereto.
(b) Reports on Form 8-K filed during the last quarter of 1996:
None
(c) Exhibits:
Exhibit #
3.1 Amended Certificate of Incorporation of the
Company.
3.2 By-laws of the Company
60
*4.1 Specimen Certificate of the Company's Common Stock.
**4.2 The Company's 1990 Stock Option Plan, as amended to
date.
***4.3 Form of 1993 Consultant Stock Option Plan
***4.4 Form of 1995 Directors Stock Option Plan
***4.5 Form of Warrant Certificate
***4.6 Warrant Agreement between Continental Stock
Transfer and Trust Co. and the Company.
***4.7 Representative's Warrant Agreement, including Form
of Representative's Warrant.
4.8 1996 Employee and Consultant Stock Option Plan.
***10.1 Loan and Security Agreement by and between
the Company and United Jersey Bank dated
March 10, 1993, as amended.
***10.2 Mortgage and Security Agreement between the
Company and United Jersey Bank dated March
10, 1993, as amended.
***10.3 Transaction Agreement dated October 28, 1994 among
the Company, Signatel Ltd., Maurice Kulik and
Robert Engelberg.
***10.4 Common Stock Purchase Agreement dated
January 7, 1994 by and among Direct Connect
International Inc., the Company and Ralph
Glasgal.
- ---------------------
*Incorporated by reference from the Company's Registration Statement on Form S-3
(File No. 333-03414) filed with the Commission on April 8, 1996.
**Incorporated in reference to the Company's Registration statement on Form S-8
(File No. 333-08381) filed with the Commission on July 18, 1996.
***Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-93470) filed with the Commission on June 14, 1995.
61
***10.5 Subcontract Agreement by and between C3/TSI and the
Company dated February 3,1995.
***10.6 License Agreement dated as of March 17, 1995
between Computer-Aided Software Integration, Inc.
and the Company.
***10.7 Employment Agreement dated as of March 1, 1993 by
and between the Company and Ralph Glasgal.
***10.8 Employment Agreement dated as of March 1, 1993 by
and between the Company and Ingemar Sjunnemark.
***10.9 Employment Agreement dated as of March 1, 1993 by
and between the Company and Isaac Gaon.
***10.10 Employment Agreement dated as of March 1, 1993 by
and between the Company and Robert Gadd.
***10.11 Agreement and Plan of Merger dated January 10,
1994.
***10.12 Form of Financial Advisory and Consulting Agreement
between the Company and Joseph Stevens & Company,
L.P.
***10.13 Mutual Cancellation Agreement dated April 30, 1995
between the Company and Ralph Glasgal.
***10.14 Employment Agreement dated October 28, 1994 between
Signatel Ltd., the Company and Maurice Kulik.
***10.15 Form of Bridge Note.
***10.16 Form of Bridge Warrant
***10.17 Amendment No. 11 to Loan and Security Agreement.
***10.18 Amendment No. 12 to Loan and Security Agreement.
- ---------------------
***Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-93470) filed with the Commission on June 14, 1995.
62
*10.19 Stock Purchase Agreement by and among
Computer-Aided Software Integration, Inc., David
Tobey and the Company dated February 15, 1996.
10.20 Stockholders' Agreement by and among Computer-Aided
Software Integration, Inc., David Tobey and the
Company dated April 24, 1996.
***16.1 Letter from KPMG Peat Marwick relating to change of
accountants.
23.1 Independent Public Accountants Consent, Arthur
Andersen LLP
23.2 Independent Public Accountants Consent, Deloitte &
Touche
27 Financial Data Schedule
- -----------------------
*Incorporated by reference from the Company's Registration Statement on Form S-3
(File No. 333-03414) filed with the Commission on April 8, 1996.
***Incorporated by reference from the Company's Registration Statement on Form
S-1 (File No. 33-93470) filed with the Commission on June 14, 1995.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Ace of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GLASGAL COMMUNICATIONS, INC.
----------------------------
(Registrant)
Date: August 12, 1996 By:/s/ Isaac J. Gaon
--------------- -----------------
Name: Isaac J. Gaon
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Ralph Glasgal Chairman of the Board and President August 12, 1996
- -------------------------
Ralph Glasgal
/s/ Isaac J. Gaon Chief Executive Officer and Director August 12, 1996
- ------------------------- (principal executive officer)
Isaac J. Gaon
- ------------------------- Director August 12, 1996
Joseph M. Salvani
/s/ Robert H. Friedman Director August 12, 1996
- -------------------------
Robert H. Friedman
/s/ Maurice Kulik Director August 12, 1996
- -------------------------
Maurice Kulik
/s/Thomas Berry Director August 12, 1996
- -------------------------
Thomas Berry
/s/ James M. Caci Chief Financial Officer (principal August 12, 1996
- ------------------------- financial and accounting officer)
James M. Caci
64