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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997
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.
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(Exact name of Registrant as specified in its charter)
DELAWARE 94-2914253
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(State of Incorporation) (I.R.S. Employer Identification No.)
20C COMMERCE WAY, TOTOWA, NJ 07512-1154
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 890-4800
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Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- ------------------------------------------
Common Stock, $.001 par value Boston Stock Exchange
Common Stock Purchase Warrants
Securities registered pursuant to Section 12(g) of the Act:
None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's voting stock held by
non-affiliates at July 31, 1997 was approximately $59,903,000. 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, 1997 was 23,708,689.
TABLE OF CONTENTS
PART I PAGE #
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Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 8. Financial Statements and Supplementary Data 26
Item 9. Change in and Disagreements with Accountants on Accounting
and Financial Disclosure 52
PART III
Item 10. Directors and Executive Officers of the Registrant 53
Item 11. Executive Compensation 57
Item 12. Security Ownership of Certain Beneficial Owners
and Management 61
Item 13. Certain Relationships and Related Transactions 64
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports
on Form 8-K 65
2
FORWARD LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULT COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY OF
MANAGERIAL PERSONNEL. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE
DATE HEREOF. GLASGAL COMMUNICATIONS, INC. UNDERTAKES NO OBLIGATION TO PUBLICLY
REVISE THESE FORWARD-LOOKING STATEMENTS, TO REFLECT EVENTS OR CIRCUMSTANCES THAT
ARISE AFTER THE DATE HEREOF.
PART I
ITEM 1. BUSINESS
The Company is in the business of providing software-enabled technical
configuration, integration and implementation services to Fortune 2,000
customers in the United States and Canada. What this translates into is a unique
capability to provide implementation services to large organizations to enable
them to rapidly deploy new networking technologies with minimal risk of failure
at very competitive prices.
The Company's market advantages include:
o A proprietary software tool, THE INTEGRATOR'S WORKBENCH PRODUCT
SERIES(TM)(IWPS), that significantly reduces the risk and time and,
therefore, labor costs of providing what are highly labor-intensive
services.
o A nationwide deployment team capable of delivering complex technologies
to any North American organization including any manner of computing
platform, cabling or electrical issues.
o A nationwide salesforce focused exclusively on the sale of
configuration, integration and deployment services to direct end users
and the indirect channel (OEMs, VARs, systems integrators and
telecommunications suppliers).
This unique combination of software-enabled configuration services
coupled with nationwide deployment provides Glasgal with a strong proprietary
position in the market.
The Company was incorporated in California in 1983 under the name
Sellectek Incorporated. The Company changed its name to Glasgal Communications
in May 1994 after merging with Glasgal Communications, Inc., a New Jersey
corporation (the "Predecessor"). The Company reincorporated in the state of
Delaware in January 1996. Unless the context otherwise requires, the "Company"
or "Glasgal" refers to Glasgal Communications, Inc., its predecessors and its
subsidiaries which include Signatel, Ltd. ("Signatel"), HH Communications, Inc.,
Computer-Aided Software Integration, Inc. ("CASI") and Datatec Industries, Inc.
The Company maintains its executive offices at 20C Commerce Way, Totowa, New
Jersey 07512. Its telephone number is (201) 890-4800.
3
BACKGROUND
Over the past five years the Company has repositioned itself from
selling network devices to providing customers with networking solutions with a
focus on Information Technology (IT) services. This shift was required to
buttress the continuing fall in gross margins from hardware sales. As the
Company moved increasingly into IT services its margins improved but so did the
need to increase the engineering staff. Despite standard gross margins from
services being some twenty-five to thirty percentage points higher than those
from hardware sales, there is still a direct linear relationship between
increased service revenues and their attendant labor costs. Unlike hardware
margins, however, service margins can be positively impacted through increased
efficiencies. As a result, the Company's thrust into services was coupled with a
move towards increased efficiencies. Through the development of THE INTEGRATOR'S
WORKBENCH PRODUCT SERIES (TM)(IWPS), the Company created the base engine to
dramatically increase efficiencies and drive up service margins well beyond
industry standards.
In June 1997, the Company decided to no longer resell hardware and
concentrate entirely on providing only integration, configuration and deployment
services. Today customers take title to their products and have them shipped to
one of the Company's five STAGING & CONFIGURATION CENTERS for implementation. In
this way, the Company's limited resources can be applied to business that
historically generates 35% to 40% margins rather than 10% or less. By being
non-aligned to any particular manufacturer or vendor the company can work
independently and in a non-threatening manner with all manufacturers, VARs,
systems integrators and software developers/vendors.
STRATEGY
The Company's objective is to be the premier provider for the
configuration, integration service and deployment of complex networking
solutions. To achieve this objective the Company is pursuing the following
strategies:
o Developing automated tools and methodologies to maintain a competitive
edge in the Company's chosen market niche.
o Creating, through the Datatec Relationship Cycle, close and long-term
relationships with its customers thereby providing a source for
repeatable business and as a result of high satisfaction ratios, a
source of business referrals.
o Focusing the Company's direct marketing efforts on seven vertical
markets comprising of Retail, Financial, Hospitality, Health Care,
Travel, Insurance and Entertainment. Each of these verticals was
selected for comprising of industries that are commonly multi-sited
with large internetworking environments.
o Leveraging the Company's indirect intra sales channel to create strong
strategic partnerships with OEMs, systems integrators, software
developers/distributors, VARs, and telecommunications carriers. Through
these relationships the Company leverages its clients sales force by
presenting joint solutions to its clients customers. Because the
Company is no longer aligned with manufacturers or reselling products,
its indirect partners are much more willing to introduce the Company's
sales professionals into their own opportunities. In return, the
indirect partners get the benefit of the Company's flexible process and
aggressive pricing that these companies can rarely compete with.
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o The Company intends to pursue strategic acquisitions to expand within
existing markets, address new markets, and acquire technical expertise
and technology to leverage its existing technology.
THE MARKET
Today the vast majority of PCs sold to businesses are attached to a
network. The proliferation of PC users and information residing on networks has
created an explosive demand for not only PCs and Servers but for networking
products like routers, hubs and switches. These products, which allow for the
orderly flow of information over networks, are constantly being improved to meet
the ever-increasing traffic and speed with which data travels along networks.
Before a workstation, server, router, hub or switch can work effectively on a
network, it needs to be properly configured and customized to be compatible with
each of the unique features and parameters of a clients network. In addition,
great care must be taken to ensure that each of these new devices works in
concert with existing or legacy equipment on that same network.
The Company knows of no independent research company that has focused
on the market size for configuration and deployment services. However, the
Yankee Group recently stated that the IT sector as a whole is growing by
approximately 17% per annum and will be worth $231 billion by the end of the
decade. Glasgal's management estimates that configuration, integration and
deployment services probably account for approximately 10% of the total IT
market.
The dynamics creating strong demand for Glasgal's new software assisted
service offerings include the following:
o Due to shorter product life cycles, hardware manufacturers and software
vendors alike must find ways to rapidly bring their products to market or
face losing market share.
o In order to maintain a competitive edge in the market, corporations are
constantly looking to become more efficient and technology has become a
major source of competitive advantage.
o Technologies are becoming increasingly complex, which makes them extremely
difficult and costly to implement, especially without tools and
methodologies. Given the downsizing of many MIS departments and their
preoccupation with their core operations, companies are increasingly
looking to outsource the deployment of new technologies.
GLASGAL'S SOLUTIONS
Glasgal is uniquely positioned to address the burgeoning demand for
configuring, integrating and deploying workstations, servers, routers, hubs and
switches onto networks through its software-enabled orientation. Through proper
utilization of its INTEGRATOR'S WORKBENCH tools developed by Glasgal's CASI
subsidiary and the Company's proprietary documented processes, many labor
intensive configuration, integration, and deployment services provided by the
Company are being automated and increasing the Company's effective yield and
profitability.
The benefits that accrue to the Company by software-enabling its
implementation processes are:
o REDUCTIONIN LABOR COSTS AND SIGNIFICANTLY HIGHER PRODUCTIVITY PER
PERSON. Typical time reductions achieved by using Glasgal's
software-enabled process range between 40% and 90%. For example, the
typical router that takes between forty-five minutes and one hour to
configure and document manually using a highly skilled engineer is
reduced to five minutes using the Company's software-enabled process.
o THE ABILITY TO LEVERAGE TECHNICAL SKILLS. Leveraging the Company's
software-enabled process, technical staffers with lower skill sets can
implement highly complex technical solutions. In addition, the market's
demand for experienced engineering resources continues to grow causing
many IT companies to face a "revolving door" syndrome in finding and
keeping their high priced, highly skilled engineers. Given the fact
that
5
Glasgal has software-enabled its methodologies, its knowledge base does
not go out of the door with engineers.
o A HIGHER DEGREE OF ACCURACY IN THE CONFIGURATION AND INTEGRATION
PROCESS LEADS TO VIRTUAL "PLUG AND PLAY" INSTALLATIONS. The automated
process eliminates the risk of input mistakes which account for almost
50% of all errors. As a result, highly complex and fully customized
devices convert into "plug and play" products for Glasgal's deployment
teams. In this way the Company not only saves significant time during
the configuration and integration process but also during the
installation process. Time spent on rework, normally at the Company's
expense, is also reduced to insignificant levels.
The benefits that accrue to our clients by software-enabling the
implementation process are:
o HIGHLY COMPETITIVE PRICING. Because of the automation and increased
productivity provided by the Company's software-enabled process for
what are highly labor-intensive tasks, Glasgal can afford to be
significantly more price competitive without compromising margins.
o FAST, ACCURATE, FIXED TIME/FIXED PRICE QUOTATIONS. Clients are
understandably resentful of cost overruns when deploying new
technologies. Cost overruns occur as a result of IT companies providing
clients with an hourly rate and the estimated hours it will take to
implement new systems. Inevitably, however, the tasks are rarely
completed on time. Using the software-enabled process, projecting task
times becomes significantly more accurate as these tasks become less
dependent on human intervention and increasingly automated. As a
result, Glasgal eliminates the risk of cost overruns for its clients.
o DIRECT RAPID DEPLOYMENT. The Company's services are particularly well
suited to organizations with multiple sites across the United States
and Canada who require a high level of technical assistance. The
Company's 450 plus field engineering staff are fully equipped to
address any computing, cabling or electrical tasks associated with a
technology deployment. As a result, it usually takes only one visit to
a site to complete the installation. In addition, because of the
methodologies employed at our configuration centers, products arrive at
our customer's site in a "plug and play" state.
o ERROR ELIMINATION AND RISK REDUCTION - Most configuration and
integration tasks are extremely precise and detailed in nature as well
as manually intensive. This environment is, therefore, prone to error.
Clearly, the software-enabled process results in a significant
reduction in errors and risks of failure.
GLASGAL'S SOFTWARE-ENABLED SERVICES
One of the Company's true competitive advantages is the
software-enabled process. Glasgal's software-enabled methodology and tools
result in significant advantages in securing highly distributed and complex
customer engagements and improves the Company's yield on delivered services
while reducing overall costs and defect rates. In conjunction with our existing
infrastructures and geographically dispersed national field force, Glasgal has
leveraged its proprietary software and methodologies into creating several
branded solutions to meet the configuration and implementation concerns of our
customers.
CLIENT-SERVER DEPLOYMENT SOLUTIONS (CSD). The rise in popularity of new
high performance platforms and 32-bit applications/technologies such as
Microsoft's Windows NT Server and Novell's Network Directory Services
architecture are driving organizations to consider and install a variety of
complex solutions to meet their computing needs and increase their overall
competitiveness. While most modern development efforts are meeting the demand
for improved functionality and product usability, much of the frustration end
users have in installing these solutions is the lack of a highly defined and
easy to use means of implementing these new solutions. Companies require access
to their new systems and applications in the shortest period of time to allow
their users to reach critical information sources. These frustrations are
equally mirrored by all of the Original Equipment Manufacturers (OEMs),
Independent Software Vendors (ISVs) and Value-Added Resellers (VARs) who develop
and package these new technologies into customer solutions. In order to meet
business demands and capital market expectations, both groups are incentivized
to deliver their wares and services as quickly and profitably as possible.
6
To meet these growing demands, Glasgal has introduced its Client Server
Deployment solutions, branded as APPWORKS (application and ISV deployment),
TECREFRESH (migration and technology upgrades) and NETWORKS (workstation and
server deployment) to provide the high levels of service to its corporate
customers as well as VARs, Systems Integrators and OEM accounts. These branded
service offerings combine superior design skills, process automation, "as built"
deliverables and enhanced implementation and support tools into a single
packaged solution that far exceeds that of the Company's competition. Finally,
Glasgal is able to deliver any of its software- enabled services across North
America on time and within tight budgetary constraints.
PRODUCT COMPONENTS
1. APPWORKS
The Company's APPWORKS service package for application or ISV deployments
provides for the distribution and installation of new software or software
upgrades. Deployments may be for software only, or may include system upgrades
or complete turn-key installation.
2. TECHREFRESH
System and network migration, and technology upgrade projects are supported by
the Company's TECHREFRESH service package. Once a target or "end-state" system
environment has been selected and tested, the Company will take complete
ownership for deployment from planning through turn-up and certification.
NETWORKS
NETWORKS is the Company's service package for the deployment of workstations and
servers. Service begins with understanding the target environment, and
developing a comprehensive plan for deployment. The Company then takes ownership
of the entire process from data collection and gap analysis, for environments
that are to be upgraded, through configuration, deployment, installation and
certification testing.
NETWORK DEVICE DEPLOYMENT SOLUTIONS (NDD). The proliferation of
networking technologies and the rise in popularity of such technologies as
groupware, remote access and the Internet are driving organizations to consider
and install a variety of complex solutions to meet their computing needs and
increase their overall competitiveness. While networking device manufacturers
continue to set the pace with ever-improved products and technology
enhancements, their frustrations in delivering and deploying these solutions to
an eager marketplace are much the same as their client-server counterparts.
Companies require access to their new systems and applications in the shortest
period of time to allow their users to reach critical information sources.
This sense of frustration is also shared by the Original Equipment
Manufacturers (OEMs) who create the devices and the Systems
Integrators/Value-Added Resellers (VARs) who develop and package these devices
into customer solutions. In order to meet business demands and capital market
expectations, both groups are incentivized to deliver their wares and services
as quickly and profitably as possible.
To meet these growing demands, Glasgal introduced two Network Device
Deployment solutions, branded as ROUTER CENTRAL, for the design and
implementation of routers and switches into business locations, and HOMEWORKS,
designed to deliver the remote access solutions that support the "work at home"
initiatives of major corporations. These branded service offering combines
superior design skills, process automation, "as built" deliverables and enhanced
implementation and support tools into a single packaged solution that far
exceeds that of our competition.
7
PRODUCT COMPONENTS
The Company's NDD set of service packages provides for the deployment of network
devices such as routers, hubs, switches, ISDN terminal adapters, remote access
devices, etc. These deployments may be at central sites, remote branches, small
or home offices (SOHO), or private residences. Each service package is built
from the following set of components:
o Deployment Process Definition
o Data Collection with IWPS
o GAP Analysis
o Asset Management
o Hardware Procurement, Receive and Stage
o Order, Confirm and Test Circuit
o Configuration using the IWPS technologies
o As Built Documentation (includes IWPS Object Base)
o On-site Installation of Hardware and Software
o Documentation as Installed
o Test
INDUSTRY-SPECIFIC DEPLOYMENT SOLUTIONS. To ensure customer satisfaction and
increase our added value, Glasgal often develops innovative solutions that
combine many of the methods and processes from our CSD and NDD solutions into
new service offerings that meet the unique objectives of our customers. These
solutions are developed in close cooperation with our strategic customers and
truly leverage the collective experience and personnel from both organizations.
Due to enhanced levels of customer intimacy and gained institutional knowledge,
Customer-Specific Deployment solutions provide long term benefits to both
Glasgal and its customers.
PRODUCT SPECIFICS
The Company's customers span numerous industry segments, including retail, fast
food, hospitality, financial services, healthcare, and transportation. We offer
service packages specific to certain environments within and across these
vertical industry segments.
OFFICELINK
The Company's OFFICELINK service provides for the deployment and installation of
technology, from simple upgrades to comprehensive new systems and networks,
within the remote or branch office, or SOHO environment. Typical deployments may
be for property management or office management systems tied back to a central
site. The Company can provide rapid and efficient deployment with minimal
disruption to the existing environment, with off-hours installations if
required.
RAPIDRESTAURANT
For the fast food, or traditional restaurant chain, the Company's
RAPIDRESTAURANT service package delivers turn-key deployment and installation of
point-of-sale, communications and associated technologies.
PRACTICECENTRAL
The Company's PRACTICECENTRAL service package for practice management systems
for physicians, dentists, attorneys, brokers and accountants provides for the
specific needs of the professional office environment.
8
SALES AND MARKETING
The Company has two sales forces comprising of approximately 50
national account managers. The direct sales division is dedicated to bringing
solutions to end users while the indirect division provides solutions to OEMs
and Software Vendors and other Systems Integrators. Both sales teams follow a
rigorous methodology called "The Datatec Relationship Cycle" (DRC) which has
been instrumental in creating long-term relationships with the Company's
customers and providing a recurring revenue stream for the Company. The DRC goes
through five stages of Initiation, Definition, Testing, Rollout, and Feedback.
This process has not only led to repeatable business (the vast majority of
Glasgal's revenues are from existing customers) but also to achieving a 97%
satisfaction rating with our customers.
There is significant interaction between the various departments in the
Company to bring optimal solutions to its customers. The Company's sales
functions work as a team with Glasgal's Professional Services division who, in
turn, work closely with the CASI development staff to provide the most cost
effective solutions to our customers. The chart below shows how the process
works within the organization of bringing optimal solutions to its customers.
[GRAPHIC OMITTED]
PROVIDING SOLUTIONS TO CUSTOMERS
The Company's marketing efforts are focused toward Glasgal's target
customers who are those organizations requiring more complex solutions from a
technical and/or geographic dispersion and/or time sensitive point of view. In
this segment the competition appears sparse and the Company's closing ratios are
comparatively high.
CUSTOMERS
The Company performs configuration and deployment services for a
variety of customers across a broad range of industries. Glasgal's customers in
fiscal 1997 included:
- American International Group, Inc. - Ross Stores, Inc.
- Bell Atlantic Network Integration - Bristol Myers-Squibb/Zimmer
- Beneficial Corporation - Starbucks Coffee Company
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- Blockbuster Entertainment Corporation - TDK Corp of America
- Coca-Cola (Canada) - Toys "R" Us, Inc.
- Federated Department Stores/FSG - Trans Canada Pipelines
- US Dept of Justice/INS - Walgreens
- Lowe's Companies, Inc.
- Merrill Lynch
The Company's customers represent a variety of industries, with one
industry, retail representing 57%. Two customers, Federated Department Stores,
Inc. and Lowes Companies, Inc., each accounted for more than 10% of net sales in
the fiscal year ended April 30, 1997, with such customers accounting for
approximately 12% and 10% of net sales, respectively.
COMPETITION
The Company believes that it has properly positioned itself to increase
its market share within the stated sections of its business focus as shown
below:
[GRAPHIC OMITTED]
While the Company has capabilities and competencies in the functions on
either side of its stated business focus, it has chosen to concentrate on
software-enabled configuration, integration and implementation services due to
both the absence of major competition and the Company's strategic advantages in
these areas of expertise.
10
However, the Company does compete with other organizations whose core
competencies are in areas outside its focus. These include systems integrators,
VARs, local and regional network service firms, telecommunications providers,
network equipment vendors and computer systems vendors, many of which have
significantly greater financial, technical and marketing resources and greater
name recognition and generate greater service revenues than Glasgal.
INTELLECTUAL PROPERTY
Glasgal's proven methodology for managing the software-enabled process
relies on several automated tools that collectively comprise The Integrator's
Workbench Product Series(TM) (IWPS). The IWPS tools, developed by Glasgal's
Computer-Aided Software Integration, Inc. subsidiary, provide a systemic
foundation for the collection and use of structured design information. This
unique series of software tools combines computer-aided software engineering
(CASE) techniques and workflow technologies to streamline the configuration,
integration and management of distributed networks and connectivity devices as
well as software applications, desktop computers and distributed servers. With
IWPS, the effort and associated costs of systems development, information
exchange, platform migration, and enterprise management are more easily managed
while improving the quality of these efforts.
The IWPS tools were first developed by CASI in 1995 to address the
continued challenges faced by designers, systems managers and integrators in
implementing complex, ever-evolving information systems solutions. These tools
allow IT teams to aggregate the collective wisdom of process and technology
experts into repeatable methodologies and "best practices", creating greater
ease of customization and implementation. Today, IWPS tools act as the process
management vehicle for managing all of Glasgal's customer interactions for each
of our software-enabled solutions.
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RECENT BUSINESS DEVELOPMENTS
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.
On July 31, 1996, the Company acquired 100% of the common stock of HH
Communications, Inc. The acquisition provided the Company with a midwest
presence it previously did not have. The acquisition has been accounted for as a
pooling of interest.
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On October 31, 1996, the Company acquired 98.5% of the common stock of
Datatec Industries, Inc. This acquisition enhanced the Company's ability to
stage, integrate and implement technology solutions for its Fortune 2,000
customer base. The acquisition has been accounted for as a pooling of interest.
In June 1997, Management of the Company with the consent of the Board,
agreed to discontinue its business as a distributor of data communications
equipment and services (see Note 4 to financial statements).
HUMAN RESOURCES
The Company has 560 full-time employees. Of these full-time employees,
235 are employed under contracts with the International Brotherhood of
Electrical Workers and the International Brotherhood of Electrical Workers Local
1430. The Company believes its relationship with its employees is satisfactory.
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ITEM 2. PROPERTIES
The Company's Corporate headquarters is located in Totowa, New Jersey.
The headquarters leased office space of 19,245 square feet, also houses the
Company's New York/New Jersey office. In addition to its headquarters building,
the Company leases throughout the United States approximately 89,269 square feet
of office space in 19 locations for its branch operations. The Company also
leases an aggregate of approximately 18,080 square feet of office space in five
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is currently traded on the Nasdaq Small Cap
Market ("Nasdaq") under the symbol "GLAS". The Company's Common Stock commenced
listing on Nasdaq on May 3, 1994. The following table sets forth the high and
low bid prices on Nasdaq for the periods indicated, 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
---- ---
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 3, 1996 - July 31, 1996............... $11-5/8 $6-3/4
August 1, 1996 - October 31, 1996......... $8-7/8 $4-3/4
November 1, 1996 - January 31, 1997...... $6-3/8 $4
February 1, 1997 - April 30, 1997......... $6 $25-4/64
May 3, 1997 - July 31, 1997............... $5 $2-3/4
On July 31, 1997, the closing bid price for the Company's common Stock
as reported on Nasdaq was $4-1/8. As of July 31, 1997, there were approximately
205 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 to shareholders 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. The Company's loan agreement with its bank includes a restriction
prohibiting the payment of dividends.
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal year ended April 30, 1997, the following securities
were sold by the Company without registration under the Securities Act. Except
as otherwise indicated, the securities were sold by the Company in reliance upon
the exemption provided by Section 4(2) of the Securities Act, among others, on
the basis that such transactions did not involve any public offering and the
purchasers were sophisticated with access to the kind of information
registration would provide.
15
In July 1996, the Company acquired 100% of the Common Stock of HH in
exchange for 1,500,000 shares of the Company's Common Stock. HH was in the
business of selling computer networking equipment and providing value-added
services in connection with such equipment.
In July 1996, the Company issued warrants to Joseph Stevens to purchase
an aggregate of 100,000 shares of Common Stock at a per share exercise price of
$6.25 in consideration for services rendered to the Company.
In September 1996, October 1996 and November 1996, the Company
consummated three separate financings with Southbrook International Investments,
Ltd. (the "Southbrook Placements") pursuant to which it issued 250,000 shares of
Series A Preferred Stock, 25,000 shares of Series B Preferred Stock and 75,00
shares of Series C Preferred Stock, respectively. The Preferred Stock was
subsequently converted into approximately 2,500,000 shares of Common Stock. The
net proceeds of the Southbrook Placements aggregating approximately $6,562,000
was used to fund the working capital needs of the Company and Datatec. The
Company has also issued to Southbrook International Investments, Ltd. a warrant
to purchase an aggregate of 175,000 shares of Common Stock at a per share price
of $5.25.
In September 1996, the Company issued warrants to Wharton Capital and
State Capital Market Group to purchase 10,000 shares of Common Stock, each at a
per share exercise price of $7.15.
In October 1996, the Company issued warrants to Wharton Capital and
State Capital Market Group to purchase 5,000 shares of Common Stock, each at a
per share exercise price of $5.78.
In October 1996, the Company acquired approximately 98.5% of the Common
Stock of Datatec in exchange for 4,000,000 shares of the Company's Common Stock.
Datatec is a network integrator which provides full integration and deployment
services to a wide range of customers concentrated in the retail market.
In December 1996, the Company issued an aggregate of 132,460 shares of
Common Stock to RAD Data Communications, Ltd. in exchange for the cancellation
of accounts payable of the Company in the amount of approximately $361,000.
16
In January 1997, the Company issued an aggregate 26,087 shares of
Common Stock to Amtech Associates, Inc. in exchange for the cancellation of
accounts payable of the Company in the amount of approximately $150,000.
In February 1997, the Company entered into two convertible loans each
for $1,000,000. The loans are convertible into Common Stock at 80% of the
average closing bid price per share of the Common Stock for the five trading
days immediately preceding the conversion date. The loans bear interest at 10%
which is due at the time of conversion. If not previously converted, the loans
mature in February 1999. In connection with this financing, the Company also
issued warrants to purchase an aggregate of 700,000 shares of Common Stock at a
per share exercise price of $5.25.
In March 1997, the Company issued an aggregate of 12,500 shares of
Common Stock to Tonar Industries, Inc. in exchange for the cancellation of
accounts payable of the Company in the amount of approximately $50,000.
17
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 two-year period
ended December 31,1993, (ii) the four months ended April 30, 1993 and 1994 and
(iii) the years ended April 30, 1995, 1996 and 1997 after giving effect in all
periods presented for the discontinuance of a segment of the Company's business
(See Note 4 to the financial statements). 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. On July 31, 1996 the Company acquired HH
Communications, Inc. On October 31, 1996 the Company acquired 98.5% of Datatec
Industries, Inc. All three acquisitions were accounted for using the pooling of
interests method of accounting; consequently all periods presented reflect the
combined accounts of all companies. On April 24, 1996 the Company acquired 80%
of CASI which was accounted for as a purchase and the results of CASI operations
from the date of acquisition are included below.
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.
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.
Year Ended Four Months Year Ended
December 31, Ended April 30, April 30,
(In thousands, except per share data)
Statement of Operations Data: 1992 1993 1993 1994 1995 1996 1997
-------- ----------- --------- ----------- ----------- ----------- ------------
Net Sales $42,905 $50,629 $13,795 $16,332 $55,876 $59,169 $59,481
Operating Income 2,935 13,244 2,299 1,191 3,204 (4,248) 1,538
Net income (loss) from Continuing
Operations 2,402 12,316 2,040 1,081 2,596 (5,149) 702
Discontinued Operations (1,460) (6,491) (1,700) (2,600) (4,989) (8,046) (5,662)
Extraordinary item (223)(a)
Net Income (loss) 941 5,825 340 (1,519) (2,393) (13,418) (4,960)
Loss Per Share:
Income (loss) from Continuing
Operations .14 (.28) .03
Discontinued Operations (.27) (.44) (.24)
Extraordinary Item -- (.01) --
----- ---- ------
Net Loss Per Share (.13) (.73) (.21)
=========== =========== ============
Average number of shares outstanding 17,981,000 18,354,000 23,557,000
18
DECEMBER 31, April 30,
-------------------------- ------------------------------------------------------------
1992 1993 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital (deficiency) $ 181 $ 5,447 $ 1,442 $444 $(585) $(7,664) $(2,957)
Total Assets 13,510 13,877 13,103 17,665 22,334 23,494 27,804
Long-term debt 1,242 1,057 2,170 2,509 3,642 2,338 5,001
Total shareholders'
equity (deficit) 1,511 6,893 1,761 4,768 1,967 (3,706) (2,000)
Write off of unamortized deferred financing fees as a result of the early
extinguishment of debt.
19
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. On October 28, 1994, July 31, 1996 and October 31, 1996, the
Company acquired Signatel, HH and Datatec, respectively. These acquisitions have
been accounted for as a pooling of interests and the financial information for
all periods represent the combined results of all companies. On April 24, 1996
the Company acquired CASI. The acquisition has been accounted for as a purchase
and the operations of CASI have been included from the date of acquisition. See
Note 2 to Consolidated Financial Statements. The financial information below
gives effect to the discontinuance of a segment of the Company's business (See
Note 4 to the Financial Statements).
In conjunction with the Company's merger with Sellectek in May 1994,
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, 1997 AND 1996
Net sales for the year ended April 30, 1997 were $59,481,000 compared
to $59,169,000 for the year ended April 30, 1996.
The current year was a year of significant change for the Company. The
Company acquired two businesses during the year as well as discontinued a major
segment of its business, the resale of computer and network equipment. In
addition, the Company has more fully integrated the utilization of the software
tools developed by CASI. The Company believes all of these changes to be
positive long-term strategic decisions. However, during the current year these
changes required a significant refocusing of the business as well as an
assimilation process that will take several more months to fully complete.
Gross profits for the year ended April 30, 1997 were $22,322,000
compared to $24,952,000 for the year ended April 30, 1996, representing 37% of
sales for the year ended April 30, 1997 compared to 42% of sales for the year
ended April 30, 1996. The decrease in gross margin is primarily attributable to
a lack of working capital. During the year the Company experienced delays in
receiving materials, was incurring additional costs in delivering materials on a
rush basis and was less efficient in delivering its services to customers as a
result of delays caused by a lack of working capital.
20
Selling, general and administrative expenses for the year ended April
30, 1997 were $20,784,000 compared to $29,200,000 for the year ended April 30,
1996. Included in the year ended April 30, 1996 is a restructuring charge of
$6,756,000. In April, 1995 the Company began an expansion plan which included
the addition of a marketing group, additional salespeople, a new headquarters
facility, a west coast configuration center and a new facility in the southeast
and furniture to equip these offices. In April 1996, the Company realized the
expansion plan, at the time, was overaggressive and began taking corrective
actions. The Company relocated its headquarters facility to smaller, less
expensive offices, and sold certain furniture and fixtures associated with the
old headquarters facility. These actions along with the Company's continuing
efforts to improve efficiency and reduce costs have resulted in additional
savings.
During June, 1997, the Company discontinued its business as a
distributor of hardware. As a result of this decision, the operations of that
business for all years presented in the accompanying financial statements have
been included as a loss from discontinued operations. In the year ended April
30, 1997 the loss was $4,709,000. In addition to the loss from discontinued
operations the Company's has provided a reserve of $953,000 for future losses
relating to the phase out of this segment of its business (See Note 4 to the
Financial Statements).
FISCAL YEARS ENDED APRIL 30, 1996 AND 1995
Net sales for the year ended April 30, 1996 were $59,169,000 compared
to $55,876,000 for the year ended April 30, 1995. The increase of 6% is largely
attributable to a 41% increase in configuration services.
Gross profits for the year ended April 30, 1996 were $24,952,000
compared to $23,260,000 for the year ended April 30, 1995, representing 42% for
both years.
Selling, general and administrative expenses for the year ended April
30, 1996 were $29,200,000 compared to $20,057,000 for the year ended April 30,
1995. As previously mentioned, the Company began an expansion program in late
1995 and felt the full effects of the additional costs during fiscal 1996.
During April 1996 the Company realized the expansion plan was overaggressive and
took action to restructure its business. Included in the year ended April 30,
1996 are $6,756,000 or restructuring changes. These restructuring changes
included projected cash outflows for personnel severance and facilities
consolidation as well as write downs of certain of the Company's long-lived
assets.
BACKLOG
The Company records revenue up on the performance of services. Many
orders are performed over several months and often exceed one year, and, as a
result, are added to the Company's backlog, which was approximately $38,000,000
and $36,000,000 as of July 31, 1996 and 1997, respectively. The Company expects
that all of the backlog as of July 31, 1997 will be shipped by July 31, 1998.
21
LIQUIDITY AND CAPITAL RESOURCES
EQUITY TRANSACTIONS
In September 1996, October, 1996, and November, 1996, the Company
issued 350,000 shares of preferred stock for net proceeds of approximately
$6,561,000. The preferred stock was subsequently converted into approximately
2,500,000 shares of common stock. The proceeds were used to reduce outstanding
debt and accounts payable of the Company's newly acquired subsidiary, Datatec.
In June 1997 and July 1997, the Company issued 859,000 shares of common
stock in private equity placements, raising approximately $3,120,000.
FINANCINGS
In March, 1997, the Company replaced existing credit facilities with a
$17,000,000 credit facility consisting of (i) a $15,000,000 three year revolving
credit facility and (ii) $2,000,000 three year term loan payable in 36 monthly
installments of principal and interest. The borrowings under the revolving line
of credit are based on a formula of 85% of eligible receivables and 50% of
eligible inventory. The revolving line of credit bears interest at prime plus
.75% and the term loan bears interest at prime plus 1.5%. As of April 30, 1997
approximately $11,675,000 was outstanding under the revolving credit facility
and $2,000,000 was outstanding under the term loan.
In February 1997, the Company issued convertible notes of $2,000,000,
which mature in February 1999. These notes bear interest at 10% per annum
payable at conversion or maturity. These notes, however, are convertible into
the Company's common stock following the expiration of six months following the
closing date, at the Company's option. Upon conversion, the aggregate amount of
the notes plus accrued interest converts into common stock at 80% of the then
quoted price of a share of the Company's common stock. In connection with these
notes, the Company issued warrants to purchase 700,000 shares of the Company's
common stock at $5.25 per share, the fair market value on the date of issuance.
It is anticipated that the notes will be converted into shares of the Company's
Common Stock prior to maturity.
As of April 30, 1997, the Company had a working capital deficiency of
$2,957,000 compared to a working capital deficiency of $7,664,000 at April 30,
1996. The improvement in working capital is attributable to the above mentioned
equity offering and loans.
22
As of April 30, 1997, the Company had net operating loss carryforwards
for income tax purposes of $10,200,000 to offset future taxable income. Such net
operating loss carryforwards begin to expire in 2011.
The Company believes it has adequate liquidity and resources to sustain
current operations for the next twelve (12) months.
INFLATION
In the opinion of management, inflation has not had a material adverse
effect on its results of operations.
23
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Consolidated Balance Sheets as of April 30, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Operations for the years ended April 30, 1995,
1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the
years ended April 30, 1995, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Statements of Cash Flows for the years ended
April 30, 1995, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SCHEDULES
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . 51
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.
24
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,
1996 and 1997 and the related consolidated statements of operations, changes in
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended April 30, 1997. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1996 and 1997 and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 1997, 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.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Roseland, New Jersey ARTHUR ANDERSEN LLP
August 9, 1997
25
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
April 30,
---------
1996 1997
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes 1 and 4) $2,219,000 $ 1,135,000
Accounts receivable, less allowances of $538,000 and
$520,000 in 1996 and 1997, respectively, for doubtful
accounts (Note 4) 7,470,000 11,289,000
Inventory (Notes 1 and 4) 3,238,000 2,134,000
Prepaid expenses and other current
assets (Note 1) 1,045,000 1,446,000
Net assets from discontinued operations (Note 4) 3,226,000 4,816,000
--------- ---------
Total current assets 17,198,000 20,820,000
PROPERTY AND EQUIPMENT, net
(Notes 1, 3 and 6) 3,299,000 3,634,000
GOODWILL (Note 2) 1,866,000 1,680,000
OTHER ASSETS (Note 1 ) 1,131,000 1,670,000
----------- ------------
Total assets $23,494,000 $27,804,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Short-term borrowings (Note 5) $8,337,000 $11,675,000
Current portion of long-term
obligations (Note 6) 2,555,000 850,000
Accounts payable 7,701,000 5,415,000
Accrued liabilities 6,251,000 5,331,000
Other current liabilities 18,000 506,000
---------- -----------
Total current liabilities 24,862,000 23,777,000
---------- =----------
DUE TO RELATED PARTIES (NOTE 9) -- 1,026,000
---------- ------------
LONG-TERM OBLIGATIONS (Note 6) 2,338,000 5,001,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.001 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 20,341,000 and
23,661,000 shares, respectively) (Notes 7 and 14) 20,000 24,000
Additional paid-in capital 11,662,000 10,341,000
Accumulated deficit (15,141,000) (12,080,000)
Cumulative translation adjustment (Note 1) (247,000) (285,000)
------------ ------------
Total shareholders' equity (deficit) (3,706,000) (2,000,000)
------------ ------------
Total liabilities and shareholders' equity
(deficit) $23,494,000 $27,804,000
=========== ===========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
26
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
April 30,
--------------------------------------------------------------
1995 1996 1997
---- ---- ----
Net Sales $ 55,876,000 $ 59,169,000 $ 59,481,000
Cost of sales 32,616,000 34,217,000 37,159,000
-------------- -------------- --------------
Gross Profit 23,260,000 24,952,000 22,322,000
Selling, general and administrative expenses (Note 13) 20,057,000 29,200,000 20,784,000
-------------- -------------- --------------
Operating income 3,203,000 (4,248,000) 1,538,000
Other Income -- -- 430,000
Interest Expense (Notes 5 and 6) (495,000) (938,000) (1,155,000)
-------------- -------------- --------------
Income (loss) before provision (benefit) for income taxes 2,708,000 (5,186,000) 813,000
Provision (benefit) for income taxes (Notes 1& 8) 112,000 (37,000) 111,000
-------------- -------------- --------------
Income (loss) from Continuing Operations 2,596,000 (5,149,000) 702,000
Discontinued Operations (Note 4):
Loss from operations (4,989,000) (5,762,000) (4,709,000)
Provision for future losses -- (2,284,000) (953,000)
-------------- -------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM (2,393,000) (13,195,000) (4,960,000)
Extraordinary Item - (223,000) -
-------------- -------------- --------------
NET LOSS $ (2,393,000) $ (13,418,000) $ (4,960,000)
=============== ============== ================
INCOME (LOSS) PER SHARE
Income (loss) from continuing operations $ .14 $ (.28) $ .03
Discontinued operations (.27) (.44) (.24)
Extraordinary item -- (.01) --
-------------- -------------- --------------
NET LOSS PER SHARE $ (.13) $ (.73) $ (.21)
================= =============== =================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES (Note 1) 17,981,000 18,354,000 23,557,000
---------------- -------------- --------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE
CONSOLIDATED STATEMENTS.
27
Glasgal Communications, Inc.
Consolidated Statements of Changes in Shareholders' Equity (Deficit) (Note 5)
Preferred Stock Common Stock
-------------------------------------------------------------------
Issued
-------------- --------------- ---------------------------------
Shares Dollars Shares Dollars
-------------- --------------- ----------------- --------------
Balance at April 30, 1994 - - $ - 15,817,000 $ -
-------------- --------------- ----------------- --------------
Distributions to S Corporation Shareholders
Sellectek merger ( Note 7)
Private Placement Offerings of
Common stock 180,000
Conversion of accounts payable
into Common stock 100,000
Exercise of warrants 125,000
Net loss
Effect of exchange rate changes
Common stock issued for options exercised 19,000
Stock exchanged for cancellation of loan (Note 9) (442,000)
-------------- --------------- ----------------- --------------
Balance at April 30, 1995 - $ - 15,799,000 $ -
============== =============== ================= ==============
Distributions to S Corporation Shareholders
Private placement offering of common stock and
warrants and bridge financing (Note 7) 443,000
Public offering of common stock
and warrants (Note 7) 3,566,000
Acquisition and cancellation of
common stock (13,000)
Common stock issued for options exercised 189,000
Change in par value of common stock (Note 14) 20,000
Private placement offering of common stock 313,000 -
Stock issued for business acquisition (Note 2) 44,000 -
Net loss
Effect of exchange rate changes -
-------------- --------------- ----------------- --------------
Balance at April 30,1996 - $ - 20,341,000 $ 20,000
-------------- --------------- ----------------- --------------
Distributions to S Corporation Shareholders
Issuance of preferred stock (Note 7) 350,000 -
Conversion of preferred stock into common stock (Note 7) (350,000) - 2,500,000 3,000
Exercise of warrants and options 649,000 1,000
Conversion of accounts payable into common stock 171,000 -
Conversion from S corporation status to C corporation
Net loss
Effect of exchange rates changes
-------------- --------------- ----------------- --------------
Balance at April 30, 1997 - $ - 23,661,000 $ 24,000
============== =============== ================= ==============
Additional Additional Retained
Paid-in-capital Paid-in-capital Earnings
Preferred Common (Deficit)
--------------- -------------------- -------------------
Balance at April 30, 1994 $ - $ 2,264,000 $ 3,177,000
--------------- -------------------- -------------------
Distributions to S Corporation Shareholders (1,790,000)
Sellectek merger ( Note 7) 190,000
Private Placement Offerings of
Common stock 428,000
Conversion of accounts payable
into Common stock 237,000
Exercise of warrants 237,000
Net loss (2,393,000)
Effect of exchange rate changes
Common stock issued for options exercised 94,000
Stock exchanged for cancellation of loan (Note 9) (476,000)
--------------- -------------------- -------------------
Balance at April 30, 1995 $ - $ 2,974,000 $ (1,006,000)
=============== ==================== ===================
Distributions to S Corporation Shareholders (667,000)
Private placement offering of common stock and
warrants and bridge financing (Note 7) 579,000
Public offering of common stock
and warrants (Note 7) 6,535,000 (50,000)
Acquisition and cancellation of
common stock (27,000)
Common stock issued for options exercised 123,000
Change in par value of common stock (Note 14) (20,000)
Private placement offering of common stock (Note 2) 1,207,000
Stock issued for business acquisition (Note 2) 291,000
Net loss (13,418,000)
Effect of exchange rate changes
--------------- -------------------- -------------------
Balance at April 30,1996 $ - $ 11,662,000 $ (15,141,000)
--------------- -------------------- -------------------
Distributions to S Corporation Shareholders (837,000)
Issuance of preferred stock (Note 7) 6,562,000
Conversion of preferred stock into common stock (Note 7) (6,562,000) 6,559,000
Exercise of warrants and options 429,000
Conversion of accounts payable into common stock - 549,000
Conversion from S corporation status to C corporation (8,858,000) 8,858,000
Net loss (4,960,000)
Effect of exchange rates changes
--------------- -------------------- -------------------
Balance at April 30, 1997 $ - $ 10,341,000 $ (12,080,000)
=============== ==================== ===================
Cumulative Total
Translation Shareholders'
Adjustment Equity
---------------- --------------------
Balance at April 30, 1994 $ (272,000) $ 5,169,000
---------------- --------------------
Distributions to S Corporation Shareholders (1,790,000)
Sellectek merger ( Note 7) 190,000
Private Placement Offerings of
Common stock 428,000
Conversion of accounts payable
into Common stock 237,000
Exercise of warrants 237,000
Net loss (2,393,000)
Effect of exchange rate changes 174,000 174,000
Common stock issued for options exercised 94,000
Stock exchanged for cancellation of loan (Note 9) (476,000)
---------------- --------------------
Balance at April 30, 1995 (98,000) $ 1,870,000
================ ====================
Distributions to S Corporation Shareholders (667,000)
Private placement offering of common stock and
warrants and bridge financing (Note 7) 579,000
Public offering of common stock
and warrants (Note 7) 6,485,000
Acquisition and cancellation of
common stock (27,000)
Common stock issued for options exercised 123,000
Change in par value of common stock (Note 14) -
Private placement offering of common stock (Note 2) 1,207,000
Stock issued for business acquisition (Note 2) 291,000
Net loss (13,418,000)
Effect of exchange rate changes (149,000) (149,000)
---------------- --------------------
Balance at April 30,1996 $ (247,000) $ (3,706,000)
---------------- --------------------
Distributions to S Corporation Shareholders (837,000)
Issuance of preferred stock (Note 7) 6,562,000
Conversion of preferred stock into common stock (Note 7) -
Exercise of warrants and options 430,000
Conversion of accounts payable into common stock 549,000
Conversion from S corporation status to C corporation -
Net loss (4,960,000)
Effect of exchange rates changes (38,000) (38,000)
---------------- --------------------
Balance at April 30, 1997 $ (285,000) $ (2,000,000)
================ ====================
The accompanying notes to consolidated
financial statements are an integral part
of these consolidated statements
28
GLASGAL COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
April 30,
--------------------------------------------------------------------
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,393,000) $ (13,418,000) $ (4,960,000)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities--
Depreciation and amortization 862,000 1,114,000 1,200,000
Extraordinary item -- 223,000 --
Changes in operating assets and liabilities net
of effects from purchase of CASI
(Increase) decrease in accounts
receivable, net (1,641,000) 1,860,000 (3,819,000)
(Increase) decrease in inventory (39,000) (378,000) 1,104,000
(Increase) decrease in prepaid expenses and
other assets (572,000) 2,044,000 (940,000)
Increase in net assets from discontinued
operations (725,000) (777,000) (1,590,000)
Increase (decrease) in accounts payable,
accrued liabilities and other 3,262,000 3,661,000 (2,169,000)
--------------- -------------- -------------
Net cash used in
Operating activities (1,246,000) (5,671,000) (11,174,000)
---------------- -------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net 2,884,000 (725,000) (1,349,000)
Net cash used for CASI acquisition -- (705,000) --
Advances to CASI -- (1,135,000) --
------------------ -------------- -------------
Net cash provided by (used in) investing 2,884,000 (2,565,000) (1,349,000)
------------------ -------------- -------------
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term borrowings -- 8,337,000 3,338,000
Net Proceeds (Payments) of indebtedness 4,457,000 (5,103,000) 958,000
Net Proceeds from Common Stock/Warrant
issuances 958,000 7,772,000 6,992,000
Net proceeds from related parties -- -- 1,026,000
Distributions to Stockholders (1,790,000) (667,000) (837,000)
----------------- ------------- -----------
Net cash provided by (used in) financing
activities 3,625,000 10,339,000 11,477,000
---------------- ------------- -----------
Net effect of foreign currency translation
on cash 173,000 (149,000) (38,000)
---------------- ------------- -----------
Net (decrease) increase in cash (332,000) 1,954,000 (1,084,000)
CASH AT BEGINNING OF PERIOD 597,000 265,000 2,219,000
---------------- ------------- -----------
CASH AT END OF PERIOD $ 265,000 $ 2,219,000 $ 1,135,000
============== ============= ==============
29
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 624,000 $ 1,020,000 $ 1,313,000
Income taxes paid $ 600,000 $ 14,000 $ 397,000
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
On June 6, 1994, a vendor converted $250,000 of Glasgal's accounts 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 1997, the Company converted $561,000 of accounts payable into 171,000
shares of common stock.
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS ARE AN INTEGRAL PART OF THESE
CONSOLIDATED STATEMENTS.
30
GLASGAL COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
Business--
Glasgal Communications, Inc. (the "Company" or "Glasgal"), and its
subsidiaries are in the business of providing software-enabled
technical configuration, integration and implementation services (See
Note 4).
Basis of Presentation -
The consolidated financial statements include the accounts of the
Company and its subsidiaries. These consolidated financial statements
include, for all periods presented, the accounts of all companies
acquired under the pooling of interests method of accounting (See Note
2). All intercompany accounts and transactions have been eliminated.
Theaccompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
reflected in the consolidated financial statements, the Company has
incurred net losses and operating cash flow deficits. During Fiscal
1997, the Company completed two acquisitions which have substantially
increased its revenues and the integration of these operations has
resulted in significant cash requirements (See Note 4). As a
consequence, the Company has had to rely primarily on private
placements of equity to fund its working capital requirements.
Subsequent to April 30, 1997, the Company raised approximately
$3,120,000 in private equity placements for 859,000 shares of its
common stock. Although there can be no assurance that additional funds
will be obtained, if needed, management believes that its fiscal 1998
operating plan is attainable and, together with the funds received from
the private placements subsequent to April 30, 1997, will provide
sufficient funds to enable the Company to meet its debt service and
working capital requirements.
Significant Accounting Policies-
Revenue Recognition--
Revenues from configuration, deployment and implementation services are
recognized as the services are provided.
31
Contract Costs-
Precontract costs incurred in connection with defining and clarifying
technical requirements and designing technical solutions are deferred
and amortized as the services are provided. As of April 30, 1997,
approximately $980,000 of such costs are included in other current
assets.
Cash and Cash Equivalents-
The Company considers as cash equivalents all highly liquid investments
with an original maturity of three months or less. The Company has
$210,000 of restricted cash as of April 30, 1997.
Inventory--
Inventory is stated at the lower of cost (first-in, first-out basis) or
market.
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.
Capitalized Software Costs --
The Company capitalized certain software costs which are amortized
utilizing the straight-line method over the economic lives of the
related products, not to exceed three years. Approximately $300,000 of
capitalized software costs are included in other assets in the
accompanying consolidated financial statements as of April 30, 1997.
Long-Lived Assets --
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets" ("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, reserves have been provided to record certain
assets at net realizable value (See Notes 4 and 13).
Stock Based Compensation --
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") requires that an entity account
for employee stock-based
32
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". The Company continues to account for
employee stock-based compensation using the intrinsic value based
method and is 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 had been applied (See Note 7).
Income Taxes--
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes"
("SFAS 109"). Certain transactions are recorded in the accounts in a
period different from that in which these transactions are reported for
income tax purposes. These transactions, as well as other temporary
differences between the basis in assets and liabilities for financial
reporting and income tax purposes, result in deferred income taxes.
Earnings (Loss) per Share --
Earnings (loss) per share is computed based upon the weighted average
number of common shares and common equivalent shares outstanding during
each period. Common equivalent shares have not been included, if
antidilutive.
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" which makes certain changes to the manner in which earnings per
share is reported. The Company is required to adopt this standard for
the year ending April 30, 1998. The adoption of this standard will
require restatement of prior years' earnings per share.
If the Company had adopted the new standard in 1997, basic earnings
(loss) per common share from continuing operations, discontinued
operations and net loss per common share would have been $.03, ($.27),
and $(.24), respectively, based on 21,151,000 basic weighted average
shares. Diluted earnings per share from continuing operations would
have been the same as basic earnings per share.
Foreign Currency Translation --
The local currency of the Company's foreign subsidiaries is its
functional currency. Assets and liabilities of the Company's foreign
subsidiaries 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 (deficit).
33
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:
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 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 is included in goodwill and is being amortized over 10 years
on a straight-line basis. Revenues of CASI, which commenced operations
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.
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.
HH Communications, Inc. --
On July 31, 1996, the Company acquired all of the issued and
outstanding shares of HH Communications, Inc. (HH), a value-added
reseller of computer hardware, in exchange for 1,500,000 shares of its
common stock. The transaction has been accounted for as a pooling of
interests.
34
Datatec Industries, Inc. --
On October 31, 1996, the Company acquired 98.5% of the issued and
outstanding shares of Datatec Industries, Inc. (Datatec), an
implementor of information communications networks, in exchange for
4,000,000 shares of its common stock. The transaction has been
accounted for as a pooling of interests.
Presented below are the individual entity and combined financial
information, after giving effect to classifying certain segments of the
Company's business as discontinued operations (See Note 4).
GLASGAL HH Datatec Combined
---------------- ------------------- ------------------------ --------------------
For the year ended April 30, 1995
Net Sales $ 3,252,000 $ - $ 52,624,000 $ 55,876,000
Income from Continuing Operations 673,000 - 1,923,000 2,590,000
Loss from Discontinued Operations (2,317,000) (92,000) (2,580,000) (4,989,000)
Net loss (1,644,000) (92,000) (657,000) (2,393,000)
For the year ended April 30, 1996
Net Sales $ 5,055,000 $ - $ 54,114,000 $ 59,169,000
Income (loss) from Continuing Operations 2,298,000 - (7,447,000) (5,149,000)
Loss from Discontinued Operations (3,255,000) (289,000) (4,502,000) (8,046,000)
Extraordinary loss (223,000) - - (223,000)
Net loss (1,180,000) (289,000) (11,949,000) (13,418,000)
For the year ended April 30, 1997
Net Sales $ 4,835,000 $ - $ 54,646,000 $ 59,481,000
Income (loss) from Continuing Operations (226,000) - 928,000 702,000
Loss from Discontinued Operations (5,267,000) (395,000) - (5,662,000)
Net income (loss) (5,493,000) (395,000) 928,000 (4,960,000)
The combined results are not necessarily indicative of what actually
would have occurred if the acquisitions 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 operations.
35
(3) PROPERTY AND EQUIPMENT:
The following is a summary of property and equipment.
April 30,
---------
1996 1997
---- ----
Equipment $1,078,000 $ 977,000
Computer Equipment 2,893,000 3,158,000
Furniture, fixtures and leasehold improvements 2,548,000 2,444,000
--------- ----------
6,519,000 6,579,000
Less--Accumulated depreciation and
amortization 3,220,000 2,945,000
--------- ---------
Property and equipment, net $3,299,000 $3,634,000
========== ==========
(4) DISCONTINUED OPERATIONS:
Prior to fiscal 1997, the Company had primarily been a distributor of
data communications equipment. Commencing with the Company's
acquisition of Signatel in October 1994, the Company revised its
business strategy to expand its implementation of information
communication network services. The acquisition of Datatec and CASI
(See Note 2) enabled the Company to transition from predominantly a
reseller of data communications network equipment to an open systems
integrator, providing software enabled configuration, deployment and
implementation services. The acquisition of HH (See Note 2), a value
added reseller of computer equipment, provided the Company the
opportunity to introduce these services to HH's premier customers.
Datatec's prior services were typically of short duration. As of April
30, 1997, the Company has entered into long term contracts of
significant value.
After several months of assimilating the Datatec acquisition and
repositioning its services, the Company, in June 1997, with the
concurrence of its Board of Directors, discontinued its data
communications equipment distribution business. The Company is
currently winding down this business which is expected to be completed
by the end of fiscal 1998. The Company is no longer a distributor of
data communications equipment and will only honor its existing
commitments.
The net losses of this business prior to April 30, 1997 are included in
the consolidated statements of operations as discontinued operations.
Revenues from such operations were $35,004,000, $43,033,000 and
$35,178,000 for the years ended April 30, 1995, 1996 and 1997,
respectively. Substantially all assets to be disposed of were those of
Glasgal. Included in net assets from discontinued operations is a 10
year mortgage agreement with a bank for $977,000, with an interest rate
of 8.05% per annum. Beginning in the year 2002, the interest rate is
subject to adjustment, as defined.
36
The provision for future losses of discontinued operations included in
the consolidated statements of operations includes the write-down of
assets to estimated net realizable value.
As of April 30, 1996, Datatec had discontinued its international
operations, which was a distributor of computer hardware, and its
Shoppertrak division, which developed and sold a proprietary system
that provided shopper traffic information. The loss from current year
operations was approximately $2,579,000 and $2,218,000 in 1995 and
1996, respectively, and the provision for future losses was
approximately $2,284,000 as of April 30, 1996, substantially all of
which was utilized in 1997. Revenues relating to these operations were
approximately $14,000,000 in 1995 and 1996.
(5) SHORT-TERM BORROWINGS:
In October 1996, the Company amended its credit facility with a bank
which was outstanding as of April 30, 1996. The Amended agreement that
provided for the borrowing of the lesser of $10,500,000 or a sum based
on a formula of qualified assets. As of April 30, 1996 the interest
rate was 9.0%. The outstanding borrowings under this facility were
repaid during 1997 with the proceeds obtained from the revolving loan
discussed below.
During 1997, the Company entered into a revolving loan agreement that
provides for maximum borrowings of $15,000,000. Availability under the
revolving loan is calculated at the sum of 85% of eligible accounts
receivable, as defined, and 50% of the cost or wholesale market value
of eligible inventory, as defined. The amount of available borrowings,
as defined, was $11,989,000 as of April 30, 1997. The revolving loan
accrues interest at the prime rate plus 0.75% (9.25% at April 30,
1997).
(6) LONG-TERM DEBT:
Long term debt consists of the following:
April 30,
--------------------------------------
1996 1997
----------------- -----------------
Term loan (a) $2,023,000 $ --
New Jersey EDA Note (b) 895,000 680,000
Term note (c) -- 2,000,000
Convertible notes (d) -- 2,000,000
Capital leases 1,975,000 1,171,000
----------------- -----------------
Total Debt 4,893,000 5,851,000
Less - Current maturities (2,555,000) (850,000)
----------------- ------------------
Long-term debt, net of current
maturities $2,338,000 $5,001,000
================= ===================
37
(a) The $2,800,000 term loan provided for equal monthly installments
of $78,000 commencing July 1995 through June 1998. As of April
28, 1996 the interest rate was 10.25%. The borrowings were
repaid during 1997.
(b) The Company entered into a $1,320,000 loan agreement with the
New Jersey Economic Development Authority ("NJEDA"). The note
provides for monthly payments of principal and interest through
June 1, 2002. Monthly principal payments range from $9,000 to
$14,000. Interest is based on a floating rate equal to the
variable rate borne by the NJEDA Economic Growth Bonds. As of
April 30, 1997 the interest rate was 4.5%. The note is secured
by the assets acquired with the loan proceeds.
(c) In March 1997, the Company entered into a $2,000,000 term note.
The term note bears interest at a variable rate equal to the
prime rate plus 1.5% (10.0% at April 30, 1997) and is payable
monthly. The outstanding principal is payable in 36 monthly
installments and matures in April 2000. The term note is
collateralized by certain assets, as defined.
(d) In February 1997, the Company issued convertible notes of
$2,000,000, which mature in February 1999. These notes bear
interest at 10% per annum payable at conversion or maturity.
These notes, however, are convertible into the Company's common
stock following the expiration of six months following the
closing date at the Company's option. Upon conversion, the
aggregate amount of the notes plus accrued interest converts
into common stock at 80% of the then quoted price of a share of
the Company's common stock. In connection with these notes, the
Company issued warrants to purchase 700,000 shares of the
Company's common stock at $5.25 per share, the fair market value
on the date of issuance. It is the intent of the Company to
convert the notes into common shares in August 1997.
The scheduled repayments of long-term debt are as follows:
1998 $ 850,000
1999 2,725,000
2000 1,757,000
2001 371,000
2002 148,000
38
(7) SHAREHOLDERS' EQUITY:
On May 2, 1994, the Company merged with and into Sellectek,
Incorporated (Sellectek), a public company which had cash and no
liabilities. For accounting purposes, the merger has been recorded as a
recapitalization of the Company with the Company as the acquirer
(reverse acquisition). Sellectek changed its name to Glasgal.
In connection with a January 1994 common stock purchase agreement with
Direct Connect International, Inc. (DCI), DCI converted approximately
$2,000,000 of indebtedness into 2,723,973 shares of common stock of the
Company. Under the agreement, the Company has the right to require DCI
to purchase up to 1,337,230 additional shares ("Additional Shares") of
Common Stock of the Company 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.
Public Offer