10-Q 1 a10-q.txt 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____ . COMMISSION FILE NUMBER 0-22698 ------------------------------------------------------------------------------- GOLDEN SYSTEMS, INC. (Exact name of registrant as specified in its charter) ------------------------------------------------------------------------------- CALIFORNIA 95-4021568 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2125-C MADERA ROAD SIMI VALLEY, CA 93065 (Address of principal executive offices) (805) 582-4400 (Registrant's telephone number, including area code) ---------------------------------------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES NO X --- --- AS OF MARCH 31, 2000 THERE WERE 5,299,998 SHARES OF NO PAR VALUE COMMON STOCK OUTSTANDING. =============================================================================== INDEX LISTING -------------------------------------------------------------------------------

i PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GOLDEN SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS (in thousands)

1 GOLDEN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)

2 GOLDEN SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

3 GOLDEN SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------------------------------- NOTE 1. GENERAL In management's opinion, all adjustments, which are necessary for a fair presentation of financial condition and results of operations, are reflected in the accompanying interim consolidated financial statements. All such adjustments are of a normal recurring nature. All amounts are unaudited, except the March 31, 1999 balance sheet. This report should be read in conjunction with the audited consolidated financial statements, notes, and disclosures presented in the Company's 1999 Annual Report on Form 10-K. Footnotes and other disclosures which would substantially duplicate the disclosures in the Company's audited financial statements for fiscal year 1999 contained in the Company's 1999 Annual Report on Form 10-K, have been omitted. The interim financial information herein is not necessarily representative of operations for a full year. NOTE 2. RISKS AND BASIS OF PRESENTATION Results of operations for the quarter ended June 30, 1999 have been determined assuming that the Company will continue as a going concern. However, the Company is currently facing significant issues which raise substantial doubt that the Company has the ability to continue as a going concern. These issues are summarized as follows: - At June 30, 1999, the Company had outstanding amounts due to four separate Indian lenders in the amount of $9,734,000, all of which are currently in default. Of that amount, three banks have issued notices to the Company demanding immediate repayment of $8,741,000. At March 31, 2000, the amount due to the banks was approximately $9.5 million. The Company has insufficient funds available to repay the banks. Because the Indian debt is secured by the assets of Ultra Tek, alternatives available to the banks include closing the operations of Ultra Tek and forcing Ultra Tek into liquidation. - In fiscal 1995, Ultra Tek's importing of computer components into India came under investigation by the Indian customs authorities. In September 1997, the Indian customs authorities issued a separate "show cause" notice alleging that Ultra Tek has not provided valid explanations for shortages of imported raw material in its inventories. In fiscal 1997, Ultra Tek came under the investigation of the Indian Department of Revenue Intelligence concerning the import and export of certain components used in the manufacture of power supplies and customer returned product. Subsequently, a separate "show cause" notice was issued requesting explanation of why duties should not be assessed. The above governmental allegations and investigations could lead to additional duty and penalties being assessed against Ultra Tek in the amount of $2.5 million (106,474,000 Indian rupees), using the Indian rupee translation rate at January 31, 2000, and penal action being initiated against Ultra Tek. In addition, penal action under Indian law, which the Company believes is very unlikely, could result in possible monetary fines of up to a maximum of $16.9 million. The Company is contesting these allegations, but currently, the matters are unresolved and the outcomes uncertain. 4 - The Company has incurred significant losses from operations over the past five fiscal years and quarter ended June 30, 1999; has lost its two main historical customers, which has significantly impacted its revenues; and at June 30, 1999, had a shareholders' deficit of $17.1 million. During fiscal 2000, the Company continued to incur significant losses, and management has not successfully executed on its efforts to achieve profitable operations and positive cash flows. Outside of related party financing, the Company has identified no viable source of financing. Due to the significance of these factors in the Company's financial statements at June 30, 1999, all assets have been stated at their estimated realizable values. Costs of resolving the contingencies noted above or settling amounts due to Indian banks or Company creditors have not been recorded as management is currently unable to estimate these amounts. Accounts receivable and inventories were valued at their subsequently realized amounts (inventories at cost), and property, plant and equipment were valued based on estimates by management and in accordance with the guidelines of Statement of Financial Accounting Standards No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The estimated realizable values and settlement amounts may be different from the proceeds ultimately received or payments made. NOTE 3. INVENTORIES Inventories are valued at the lower of cost (first in, first out) or market. Cost includes cost of material, freight and manufacturing overhead. Inventories consist of the following (in thousands):

NOTE 4. COMMITMENTS AND CONTINGENCIES a) LEASES GSI leased its corporate headquarters from a related party under a three year operating lease until the lease expired in December 1999. Ultra Tek leases certain factory premises from the Indian Government under operating leases which expire at various dates through October 2000. Future minimum payments under these and other various operating leases are as follows (in thousands):

5 b) LITIGATION The Company is subject to lawsuits in the normal course of business. In the opinion of management and legal counsel to the Company, pending litigation will not result in a material loss to the Company. c) CONTINGENCIES During fiscal year 1995, the Company's imports of computer components for final assembly and sale into the domestic tariff area (DTA) of India (outside the SEEPZ) came under investigation by the Indian customs authorities. As a result, Company inventories of $1,088,000 (47,447,000 in Indian rupees) were seized by the authorities. On May 30, 1995, the authorities issued a notice to the Company alleging misdeclaration of purported imports of complete computer systems as imports of computer system components. The notice calls upon the Company to explain why the authorities should not (a) confiscate all the goods so imported, (b) levy additional duty of $1,121,000 (48,885,000 in Indian rupees) on the goods already sold into the DTA, and (c) take penal action against the Company under the law. The Company paid an advance of $700,000 (20,000,000 in Indian rupees) against customs duty that may ultimately be levied by the authorities and recorded this amount in "cost of goods sold" in fiscal 1995. During fiscal 1996, the authorities released the seized goods. However, because of difficulties encountered in re-exporting the goods and technological obsolescence, the entire amount of the seized goods has been included in the inventory reserve amounts at June 30, 1999. No other penalties or expenses related to this government action have been incurred by the Company. In September 1997, the Indian customs authorities issued a "show cause" notice alleging that Ultra Tek has not provided valid explanations for shortages of raw material in its inventories. The notice called upon the Company to explain why the authorities should not (a) impose duty of $590,000 (25,725,000 in Indian rupees) leviable on imported components which were alleged not accounted for in the terms of bond executed, (b) why penal action should not be initiated against the Company, and (c) why a penalty equal to the duty held to be leviable, $590,000 (25,725,000 in Indian rupees), in respect of unaccounted goods should not be imposed. In fiscal 1997, the Company came under investigation by the Indian Department of Revenue Intelligence (DRI) in connection with the import and export of certain components and goods used in the manufacture of power supplies and customer returns. The investigation focused on the alleged discrepancy noted between the physical stock records and books, in respect of the work-in-process inventory at March 31, 1996 and 1997 and customer returned product at March 31, 1992 through March 31, 1997. In May 1998, the DRI issued a "show cause" notice requesting that the Company explain why the DRI should not impose duties of approximately $590,000 (25,720,000 in Indian rupees). Penalties relating to the investigation, if any, have not yet been determined. The aggregate of threatened duties and penalties to the Company is approximately $2,442,000, using the Indian rupee translation rate at January 31, 2000. Although the Company is contesting the allegations of the authorities, the outcome of these matters is uncertain at this time. Accordingly, no additional provisions for any losses that may ultimately result have been made in these financial statements. In addition, penal action under Indian law, which the Company believes is very unlikely, could result in possible monetary fines of up to $16,897,000 at January 31, 2000. 6 GOLDEN SYSTEMS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- GENERAL Any forward looking statements made in this Form 10-Q report involve risks and uncertainties. The Company's future financial results could differ materially from those anticipated due to the Company's dependence on conditions in the electronics industry, level of consumer demand for products containing the Company's power supply components, competitive pricing pressures, technology and product development risks and uncertainties, product performance, increasing consolidation of customers and suppliers in the electronics industry, and other factors beyond the Company's control. RESULTS OF OPERATIONS OVERVIEW As has been previously reported, the Company's operations and cash flow were significantly impacted by the product rejection that took place during the third quarter of fiscal 1995. Those returns cost the Company $4.2 million in uncollected accounts receivable as a result of the issuance of credits for the rejected units and $2.2 million relating to other direct costs, as well as additional costs for transportation, unutilized capacity, business interruption, reorganization, inventory carrying costs, and interest on short-term borrowings. In fiscal 1996, the Company implemented a program to overcome its cash difficulties by reducing inventory, organizational restructuring, price increases, volume growth and more favorable payment terms from the Company's existing customers. While a number of elements of that program were successfully implemented, the Company has not been able to generate anticipated amounts of cash from inventory reduction and, to date, has been unsuccessful in its efforts to resell any significant number of units of the reworked rejected product. In addition, the Company has not been successful, to date, in significantly building its sales volumes to its existing customers or to new customers. While the Company has implemented a plan to transition its business focus to power supplies for products that are less price sensitive and therefore provide a greater opportunity to develop positive profit margins, it has not been successful in doing so. There can be no assurance that the Company will have sufficient resources to carry out its plan in the future, or even if the resources are available, that the Company will be able to successfully develop the necessary customer relationships and obtain the product contracts to allow it to continue to operate its business. In light of these facts, and the operating results discussed below, the Company continues to look at opportunities to obtain additional capital from sources outside the Company and at transactions that would change it's fundamental structure. In summary, the Company suffered a considerable decline in cash flow during the five fiscal years ended March 31, 1999 and during the quarter ended June 30, 1999. At June 30, 1999, the Company had negative working capital of $15,106,000 and an 7 accumulated deficit of $34,535,000. Subsequent to June 30, 1999, the Company continues to experience negative cash flow as a result of continuing losses and working capital required to ramp-up production in India. While current action is being taken to develop a viable operating plan to increase sales and renegotiate the terms of certain short-term obligations with the Indian banks, there can be no assurance that any of these actions will be successfully completed. FIRST QUARTER OF FISCAL YEAR 2000 Sales for the three months ended June 30, 1999 were $988,000 compared to $777,000 for the same quarter in the prior year. This increase in sales of 27% is due principally to increased shipments to the Company's largest customer. Gross profit on first quarter sales was $338,000 compared to a gross profit of $241,000 for the first quarter in fiscal year 1999. This increase in gross profit was due to the aforementioned increase in sales as well as a significant increase in gross margins on those sales. Selling, general and administrative expenses for the first quarter of fiscal year 2000 were $347,000 compared to $311,000 or an increase of 12%. This increase is due primarily to the addition of a sales representative and general cost increases. Research and development expenses for the current quarter were $101,000 as compared to $78,000 for the first quarter of fiscal year 1999. This increase is primarily due to an increase in product safety certification fees related to product development. Net loss for the first quarter ended June 30, 1999 was $578,000 compared to a net loss of $544,000 for the same period in the prior year. The significant reasons for the increased loss are set forth in the foregoing discussion. 8 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES During the three months ended June 30, 1999, the Company used $118,000 in cash in operating activities. The major use of this cash is due to the net loss from operations and increase in accounts receivable and decrease in accounts payable offset in part by an increase in accrued liabilities, a significant element of which is the accrued interest on outstanding loan balances. INVESTING ACTIVITIES Cash used in investing activities during the first quarter of fiscal year 2000 was $11,000 resulting from the purchase of equipment. FINANCING ACTIVITIES Cash provided in the first quarter of fiscal year 2000 from financing activities was $81,000, resulting from a net increase in the related party payable balances, which is due primarily to accrued interest on related party loans to the Company. For the quarter ended June 30, 1999, the Company used $57,000 in cash, decreasing the $117,000 cash balance at the beginning of the period to $60,000 at June 30, 1999. At March 31, 2000 the Company had a cash balance of $249,000. Outside of related party financing, the Company has identified no viable source of financing. While current actions are being taken to implement a viable operating plan to increase sales, renegotiate the terms of certain short-term obligations with three Indian banks and raise additional capital, there can be no assurance that any of these actions will be successfully completed. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Inapplicable. 9 PART II - OTHER INFORMATION ------------------------------------------------------------------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES. At June 30, 1999, the Company had outstanding amounts due to four separate Indian lenders in the amount of $9,734,000, all of which are currently in default because of nonpayment of principal. Of that amount, three banks have issued notices to the Company demanding immediate repayment of $8,741,000. At March 31, 2000, the amount due to the banks was approximately $9.5 million. The Company has insufficient funds available to repay the banks. Because the Indian debt is secured by the assets of Ultra Tek, alternatives available to the banks include closing the operations of Ultra Tek and forcing Ultra Tek into liquidation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS Exhibit 27. Financial Data Sheet (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the three month period ended June 30, 1999. 10 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GOLDEN SYSTEMS, INC. By: /s/ Jawahar L. Tandon ------------------------- Jawahar L. Tandon CHIEF EXECUTIVE OFFICER (DULY AUTHORIZED OFFICER OF THE REGISTRANT) By: /s/ Harvey A. Marsh ------------------------- Harvey A. Marsh VICE PRESIDENT, CHIEF FINANCIAL OFFICER (DULY AUTHORIZED OFFICER OF THE REGISTRANT) Date: May 31, 2000 -------------------------------- 11

GOLDEN SYSTEMS INC 10-Q