SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996 Commission File number 1-8086
GENERAL DATACOMM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0853856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1579 Straits Turnpike, Middlebury, Connecticut, 06762-1299
(Address of principal executive offices)
(203) 574-1118
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Common Stock, $.10 par value New York Stock Exchange
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 ___
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. {X}
The aggregate market value of the voting stock of the Registrant held by
nonaffiliates as of December 10, 1996: $205,255,611.
Number of shares of Common Stock and Class B Stock outstanding as of December
10, 1996: $205,255,611.
18,852,558 Shares of Common Stock
2,137,443 Shares of Class B Stock
DOCUMENTS INCORPORATED BY REFERENCE:
Annual Report to Stockholders for the fiscal year ended September 30, 1996 for
Part II, Items 5, 6, 7 and 8.
Corporation's Proxy Statement (dated December 10, 1996) for 1997 Annual Meeting
of Stockholders for Part III, Items 10, 11, 12 and 13.
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of
Security Holders 13
PART II
Item 5. Market for the Registrant's Common
Equity and Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
PART III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial
Owners and Management 17
Item 13. Certain Relationships and Related
Transactions 17
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
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PART I
ITEM 1. BUSINESS
General DataComm Industries, Inc. (the "Corporation" or "GDC") was incorporated
in 1969 under the laws of the State of Delaware. Unless the context otherwise
requires, the terms "Corporation" and "GDC" as used here and in the following
pages mean General DataComm Industries, Inc. and its subsidiaries.
Overview
GDC is a leading worldwide provider of wide area networking and
telecommunications products. The Corporation designs, assembles, markets,
installs and maintains products and services that enable telecommunications
common carriers, corporations and governments to build, upgrade and better
manage their global telecommunications networks. Products include Asynchronous
Transfer Mode ("ATM") cell switches, multiplexers, internetworking equipment,
digital data sets, analog modems, network management systems and comprehensive
support services. The Corporation sells and leases its products through its own
worldwide sales and service organizations, as well as through distributors,
value-added resellers and system integrators.
GDC's customer base includes: Local Exchange Carriers including all seven
Regional Bell Operating Companies, Bell Canada and GTE; Competitive Access
Providers including MFS Datanet; Interexchange Carriers including AT&T, MCI and
Sprint; corporate end users such as American Airlines, Citicorp, EDS, Chrysler,
Amoco, Hitachi and Hong Kong & Shanghai Bank; government entities including the
British Ministry of Defence, the French Ministry of State, NASA, the U.S. State
Department and many state and local governments; and international communication
carriers such as Impsat (Argentina and Colombia), Telefonos de Mexico, France
Telecom and Deutsche Telekom, and suppliers of central office switching
equipment such as Lucent Technologies, LM Ericsson and DSC Communications.
The Corporation's executive offices are located at 1579 Straits Turnpike,
Middlebury, Connecticut, 06762-1299 and its telephone number is (203) 574-1118.
Strategy
The Corporation's broad product line provides integrated networking solutions
used to construct global data, voice and video communications networks. The
Corporation's core product line of multiplexers and internetworking equipment,
digital data sets and analog modems has historically combined advanced wide area
networking technology with analog and digital transmission capabilities. During
the last several years the Corporation has emphasized its digital product
offerings over its analog products as telephone companies upgrade their
transmission facilities and offer new digital services at substantially lower
rates.
In the early 1990s, the Corporation identified ATM technology as the preferred
solution for addressing problems caused by the increasing limitations of
conventional Local Area Network ("LAN") and Wide Area Network ("WAN")
technologies. ATM provides a dramatic increase in network capacity, carrying
both LAN and WAN traffic faster than conventional networking technologies. ATM
also enables the transmission of voice, video and high-speed data traffic on a
single communications line. After reviewing various strategic alternatives for
entering the ATM market, the Corporation entered into a distribution and
technology transfer agreement with Netcomm Limited ("Netcomm") in December 1992.
The Corporation subsequently acquired Netcomm in 1993.
By offering ATM solutions to its customers, the Corporation believes it has
enhanced its position as a leading supplier of wide area networking and
telecommunications products. The Corporation's strategy of providing integrated
solutions to its customers is based upon the following:
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Capitalizing on ATM Technology. The Corporation believes it has a leading
position in the ATM switch market. The following entities have deployed GDC's
ATM cell switches in their ATM networks: Bell Canada; MCI; MFS Datanet; France
Telecom and Deutsche Telekom. As of September 30, 1996, GDC, including Netcomm,
had shipped approximately 1,000 ATM switches and related products to a variety
of customers in approximately 30 countries. Additionally, the Corporation has
shipped non-revenue products for trial and evaluation. The Corporation also
believes that growing market awareness of its ATM switch technology has
increased customer exposure to GDC's other products.
Providing Cost-Effective Flexible Product Solutions. The Corporation's product
families are designed with architectures that scale to most network sizes and
cost requirements. Customers can select the products that are most appropriate
for their needs and migrate to higher capacity products over time.
Standardization of a network management protocol across product families allows
the end user to utilize a single network management system, which provides
value-added capabilities such as extensive alarm reporting, diagnostics and
advanced service restoral options for each circuit and unit of equipment in the
network.
Improving Performance of Customer Networks. The Corporation's products are
designed to improve network efficiency by increasing transmission speed,
compressing and consolidating voice and data communication and providing dynamic
bandwidth allocation.
Leveraging Global Customer Base, Distribution and Support. The Corporation has a
worldwide customer base of corporate and government users and telecommunications
carriers. The Corporation has global distribution capabilities and products
installed in more than 60 countries around the world. GDC's ability to provide
international customer service and support is crucial to customers that run
mission-critical applications over their networks.
ATM Market
Background. Improvements in microprocessor technology over the past several
years have significantly changed the way users design and build communications
networks. Corporations are migrating away from mainframe centric computer
networks and moving to client/server architectures in which increasing
processing power is located on the desktop. Personal computers ("PCs") and
workstations are connected together to form LANs, and large corporations today
may have up to several hundred LANs within their enterprise. LANs typically use
shared medium technologies like Ethernet, Token Ring and Fiber Distributed Data
Interface. These LAN technologies require that all users contend for the
available bandwidth and consequently, as the number of users increases,
throughput decreases. In addition, users find that shared medium LANs cannot
provide the bandwidth necessary to support today's powerful PCs running
communication-intensive applications. As a result, switched-connection
architecture is now being implemented in the LAN with several competing
technologies, including ATM, vying for the business.
WANs present an additional bottleneck constraining greater deployment of
enterprise-wide networks. The underlying WAN architecture of the telephone
companies is optimized for low speed, constant bit-rate voice communications. It
does not scale well to accommodate high-speed, burst-oriented data
communications typical of a LAN. To address this problem, telecommunications
carriers have deployed fiber optic transmission facilities in their networks
over the past decade and are beginning to, or have announced their intention to,
test and deploy ATM switches as the platform of choice for offering new,
value-added services to their customers. The need for more bandwidth in both the
LAN and WAN environments to support current data processing and networking
applications is a key factor driving demand for ATM products. Increasing numbers
of applications combining voice, video and data will demand even more bandwidth
than current applications.
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ATM Segments. Although currently in the "early adopter" phase of deployment,
ATM is expected to become a leading transmission technology for communications
networks. Within the broader ATM market, the Corporation has identified the five
distinct segments described below and has chosen to pursue the enterprise, edge
switch and edge concentration switch segments.
Workgroup Hub. ATM workgroup hubs are devices used to connect high-speed
workstations and servers to form a high performance, local computing
environment. The Corporation expects switched Ethernet and virtual LAN
architectures to be the dominant approaches to creating this
high-performance local computing environment and anticipates a gradual
migration to ATM desktop connectivity. GDC intends to address this market
segment through partnerships or potential acquisitions in order to provide
a timely entrance into this market.
Enterprise Switch. Enterprise switches are used to interconnect a broad range of
customer premise equipment, including LAN hubs, routers, multiplexers, PBXs
and video codecs, across a campus or a more geographically dispersed area
to create high-speed backbone networks linking major corporate locations.
Key market requirements include a fault tolerant architecture and the
ability to support a broad range of interfaces and adaptation capabilities
for new, as well as legacy, technologies.
Edge Switch. The telecommunications carrier edge switch is typically
located in the central office of a Local Exchange Carrier, an
Interexchange Carrier, a Competitive Access Provider or a Cable
Television Operator. Switches are used as platforms to provide
services to a number of end user locations. Common carriers also
utilize these switches in the basements of customer buildings to offer
new services to multiple customers. As with the enterprise switch
market, fault tolerance and the ability to support a broad range of
interfaces and adaptation capabilities are key requirements because
carriers need maximum flexibility. In addition, the unique packaging
and environmental requirements of telecommunications carriers must be
met.
Edge Concentration Switch. The Edge Concentration switch provides an
intermediate level of cell switching in a network without requiring the
carrier to make massive investments in large core switches. Whereas the
primary function of an edge switch is adaptation, the primary functions of
an Edge Concentration switch are fast, high capacity cell switching,
traffic management and very high capacity up-links to the core network.
This switch must be fault tolerant and must meet the unique packaging and
environmental requirements of telecommunications carriers.
Central Office Switch. At many large central offices, all traffic in the network
hierarchy has been converted into ATM cells and the required switches must
provide up to hundreds of gigabits of throughput. GDC does not intend to
address this market directly as the Corporation views the development costs
of these switches to be high and believes this market is currently served
by established central office switching providers. Rather, the Corporation
has developed strategic partnerships with participants in this market, such
as Lucent Technologies, Ericsson and DSC Communications Corporation, as a
vehicle for enhancing its position in the edge, enterprise and edge
concentration switch markets.
GDC's Target ATM Segments. The enterprise, edge switch and edge concentration
switch markets, which the Corporation is pursuing, address the points in a
network where LAN, voice, video and other data applications converge with WANs
and the greatest bandwidth bottlenecks exist. The Corporation also believes
that, at present, these three market segments are not adequately served by any
established vendors due to a lack of sufficient proven tested products by other
vendors.
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Products
In fiscal 1996, sales and leases of products represented approximately 83% of
revenues while service revenues represented about 17% of revenues. GDC's line of
products includes:
Multiplexers/Internetworking Products. GDC's multiplexer and internetworking
products family includes systems for both branch office and corporate backbone
locations which integrate voice, traditional data, video and LAN traffic over
narrowband (56/64 Kbps) or wideband (fractional T1 (1.5 Mbps)/E1 (2.0 Mbps) and
T1/E1) digital services operating up to 2 Mbps. By consolidating multiple forms
of traffic over a single transmission line, these products dramatically decrease
an end user's network costs. The Corporation's products integrate both time
division multiplexing and packet switching (LAN routing and frame relay
switching), thereby providing a flexible networking platform.
For corporate backbone locations, the Corporation offers the TMS 3000 which
supports a wide range of voice, facsimile, LAN, traditional data and video
applications. In April 1993, GDC introduced the Office Communications Manager
("OCM"), a cost-effective networking solution for the branch office location,
which offers the integration of voice, LAN routing, frame relay and traditional
data at speeds ranging from 9.6 Kbps to T1/E1. In June, 1996, GDC introduced the
Metroplex 6000, an intelligent access multiplexer designed for cost-effective
access to a variety of data and voice services that can feed into the corporate
backbone.
In September 1996, GDC introduced the North American version of Universal Access
System 7000 ("UAS 7000"), a service provisioning multiplexer that allows service
providers to deliver digital services over copper loop systems, and reduce cost
and service provisioning time. UAS 7000 has previously been sold in
international markets earlier in 1996.
In corporate backbone environments requiring broadband speeds and services, the
Corporation's APEX ATM switches can be used. The TMS 3000 and OCM can feed into
the APEX switch enabling the Corporation to offer an integrated networking
solution that scales from small remote or branch locations into regional
wideband backbones and ultimately into ATM-based broadband backbones.
Selling prices vary widely depending upon the size and complexity of the system
being ordered.
Digital Data Sets. Digital data sets are used to convert and interpret signals
from computers and communications equipment into a form that is acceptable for
transmission over telecommunications facilities. The Corporation offers a broad
set of narrowband digital data sets that run at various speeds up to 64 Kbps and
wideband digital data sets operating at fractional T1 (FT1) and T1 speeds. In
September 1996, GDC introduced the Desktop 554A, a full featured single port
T1/FT1 Channel Service Unit/Data Service Unit (CSU/DSU),for applications, such
as LAN bridging/routing to multiplexers, video teleconferencing, CAD/CAM and
medical imaging, that demand the speed and performance offered by today's
cost-effective FT1 services. GDC recently introduced broadband data sets running
at T3 (45 Mbps) rates. GDC supplies its digital data sets to major North
American telephone companies and various end users. GDC continues to enhance its
digital transmission product line by combining higher transmission speeds with
value-added capabilities including data compression, concentration, protocol
adaptation/conversion and network management. This enables the Corporation to
offer differentiated and, in some cases, unique transmission solutions.
The Corporation is leveraging its digital transmission expertise by pursuing
international markets. In China and in developing countries in Latin America and
the Pacific Rim, there is insufficient copper wire installed to support the
growing demand for communications services. The Corporation is responding to
these needs by offering new products utilizing transmission technologies like
2B1Q (Two Binary One Quarternary) and HDSL (High Speed Digital Subscriber Line).
These products offer much higher transmission speeds while using half of the
copper wire pairs normally needed to provision private line services.
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Analog Modems. Analog modems convert digital computer signals to a format that
can be transmitted over telephone lines. The market for private line modems has
been shrinking as telephone networks move from an analog to a digital format.
However, with the growth of telecommuting and Internet access, the market for
dial-up modems is continuing to grow. The Corporation offers a broad range of
private line and dial-up analog modems operating at all standard speeds up to
33.6 Kbps.
GDC began shipments of its new modem family, known as the V.F. 28.8 family, in
the first quarter of fiscal 1994. These modems, which comply with the global
transmission standard V.34, offer transmission speeds twice as fast as modems
conforming to any pre-V.34 standards with throughputs of up to 115 Kbps over
basic analog dial-up facilities or over two-wire analog private line circuits.
The V.F. 28.8 enables faster transmission speeds on a single pair of wires
whereas traditional analog provisioning requires two pairs. During fiscal 1995,
the Corporation added standards-based SNMP (Simple Network Management Protocol)
network management capability to its V.34 modems. These modems are sold through
direct and indirect sales channels throughout the world.
In fiscal 1995 and 1996, the Corporation entered into technology licensing
agreements whereby licensees, including certain semiconductor manufacturers who
produce V.34 modem-integrated circuit chips for the mass modem market, pay the
Corporation license fees for the use or sale of specific V.34 patented
technology. During fiscal 1996, the Corporation received technology licensing
fees for the use of its technology and revenues from the sale of computer
chips.
ATM Switches and Network Management Systems. The Corporation currently offers a
family of ATM switches and access products for both public and private networks
under the GDC APEX name. The APEX product line consists of the APEX-DV2, the
APEX-NPX, the APEX-MAC and the APEX-MAC1. In September 1996, the Company
introduced APEX-STROBOS which addresses the edge concentration switch market.
This product is expected to be deliverable in 1997.
GDC introduced the APEX-MMS (Multimedia Multipoint Server), the industry's first
"any band" Multipoint Control Unit in September 1996. Part of the ATM
broadband family, it can operate on any band (narrow, wide and broad), and
provide audio, video and data-intensive applications like videoconferencing,
telemedicine and distance education. Wide area transport is provided via the
shared APEX VIP(TM) family of integrated codecs within the APEX Switch.
Switch Specifications Targeted Segment
APEX-STROBOS Provides up to 25.6 Gbps of Edge concentration switch
capacity and support for up for common carriers,
to 32 ports of OC-12 links including telephone and
within a single shelf, cable television companies.
utilizing DC power supplies.
APEX-DV2 Provides up to 6.4 Gbps of Enterprise switch for corporate
capacity and support for up and government users.
to 64 ports within a single
shelf, utilizing AC power
supplies.
APEX-NPX Provides up to 6.4 Gbps of Edge switch for common carriers,
capacity and support for up including telephone and cable
to 64 ports within a single television companies.
shelf, utilizing DC power
supplies.
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APEX-MAC Provides up to 2.8 Gbps of Lower capacity enterprise switch
capacity and support for 14 to for corporate and government users
28 ports within a single shelf. and common carriers.
APEX-MAC1 Provides up to 1.6 Gbps of Access concentrator for corporate
capacity and support for 8 to and government users and common
16 ports within a single enclosure. carriers.
GDC's APEX-NMS 3000 Network Management System supports the Corporation's
APEX-ATM switches. The network management platform offers a powerful UNIX-based,
object-oriented system employing a graphical user interface for ATM network
management via the industry-standard Simple Network Management Protocol. The
APEX-NMS 3000 enables a network manager to configure APEX switches and monitor
the ATM switch network, the capacity and utilization of each ATM node and the
status of each other component of the network. In September 1996, GDC introduced
the APEX-ProSphere network management software for the complete line of APEX ATM
Switches. APEX-ProSphere enables network managers to build and administer ATM
networks using point-and-click Graphical User Interface applications.
Several major carriers have begun deploying GDC-APEX ATM switches as their
platform for provisioning new data communications services. A number of
corporate customers also have purchased APEX switches. The Corporation believes
its family of APEX switches have the following competitive features:
- Scalability, allowing a customer to construct a multi-tiered switch network
that scales in price and performance.
- Flexibility, providing the customer with comprehensive interfaces and
adaptation capabilities.
- Traffic management architecture, providing networks with traffic policing,
traffic prioritization and buffer management capabilities.
- Switched virtual circuits, dynamically establishing connections on an
end-to-end basis.
Selling prices vary directly with the size and complexity of the systems being
ordered.
Acquisition Strategy
As part of its business strategy, the Corporation actively reviews acquisition
opportunities, including those which may complement its product lines, provide
access to emerging technologies or enhance market penetration. In November 1993,
the Corporation acquired Netcomm for $5.5 million in cash and $1.8 million in
Common Stock. Future acquisitions could be for stock or cash or a combination
thereof and could be substantially larger than past acquisitions. The
Corporation at this time has no understandings or commitments to make any
acquisitions and there can be no assurances that any acquisitions will be made.
Marketing, Sales and Customers
The Corporation's products and networks are marketed throughout the world. GDC's
sales and marketing organization, which, at September 30, 1996 consisted of 457
employees, is organized on a worldwide basis to address three market segments:
(1) corporate and government end users and Competitive Access Providers; (2)
local and long distance telephone companies and Internet Service Provdiers; and
(3) indirect sales through original equipment manufacturers, value-added
resellers and distributors. In the United States, the Corporation sells, leases
and services its equipment primarily through its own sales and service groups,
which include separate sales and technical support organizations to address each
of the market segments. No single customer accounted for 10% or more of the
Corporation's revenues during any of the past three fiscal years.
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Internationally, GDC maintains full subsidiary operations in Canada (sales and
service), the United Kingdom (sales and service), Mexico (sales and service),
France (sales and service), Germany (sales and service), Australia (sales),
Singapore (sales and service) and Russia (sales), and sales and technical
support offices in Japan, Hong Kong, China, Argentina, Brazil, England, Scotland
and Sweden. In addition, GDC maintains a worldwide distributor network with
representatives in more than 60 countries. International operations represented
approximately 46% of the Corporation's revenues in fiscal 1996. GDC's foreign
operations are subject to all the various risks inherent in operating outside
the U.S.
Selected users of the Corporation's products include:
Telecommunications Commercial Financial Services
- ------------------ ---------- ------------------
Alascom American Airlines Boatmen's Bancshares
Ameritech Burlington Northern/Santa Fe Cecoban (Mexico)
AT&T Chrysler Citicorp
Bell Atlantic EDS Fiserv
Bell Canada Harris Hong Kong & Shanghai Bank
BellSouth Hitachi Key Services
British Telecom Lockheed Quotron Systems
Deutsche Telekom Loral Shawmut Bank
France Telecom Telerate Systems
Guangdong PTA (China) Government Wheat First Butcher
GTE ---------- & Singer
Impsat (Argentina, British Ministry of Defense
Columbia) French Ministry of Defense Suppliers
MCI Los Angeles, City and County ---------
MFS Datanet NASA DSC Communications
Netherlands PTT New York City Transit Authority LM Ericsson
NYNEX U.S. State Department Lucent Technologies
Pacific Bell Various state governments, including
SNET California, Florida, Iowa,Kentucky
Southwestern Bell Michigan, Ohio and Texas
Sprint
Telefonos de Mexico
US West
While the majority of the Corporation's products are sold on an outright basis,
the Corporation also leases its equipment through a wholly-owned consolidated
subsidiary under a versatile selection of leasing programs designed to meet the
specific needs and objectives of its customers. At September 30, 1996, the
Corporation's leasing subsidiary had agreements in place with financial
institutions whereby lease receivables can be transferred with full recourse.
Each request for financing is subject to the approval of the financing
institution.
The Corporation's order backlog, while one of several useful financial
statistics, is, however, a limited indicator of the Corporation's future
revenues. Because of normally short delivery requirements, the Corporation's
sales in each quarter primarily depend upon orders received and shipped in that
same quarter. In addition, since product shipments are historically heavier in
the last month of each quarter, quarterly revenues can be adversely or
beneficially impacted by several events, including: unforeseen delays in product
shipments; large sales that close at the end of the quarter; sales order changes
or cancellations; changes in product mix; new product announcements by the
Corporation or its competitors; and the capital spending trends of customers.
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Industry and geographic area information is included in Note 10 of "Notes
to Consolidated Financial Statements." See "Index to Financial Statements and
Schedules" on page F-1 in this report.
Customer Service and Support
GDC provides comprehensive technical support crucial for its telecommunications
carrier, corporate and government customers that run mission-critical
applications over their networks. Each of the Corporation's sales subsidiaries
directly provides its own support capabilities, augmented by third party service
providers when necessary. Authorized distributors provide their own support
services and participate in service certification programs administered by the
Corporation's global services division.
The Corporation's service and support programs include product repair, logistics
support, installation, maintenance, educational services, on-line network
management, and other professional services. Services are supported by field
service engineers, technical support staff and Technical Operations and
Assistance Centers ("TOAC") located in the U.S., Canada, Mexico, England and
Singapore. TOACs in the U.S. and United Kingdom are staffed 24 hours a day, 365
days a year. The Corporation offers various value added services, including
First ResponseTM, an outsourcing service by which TOAC Technicians monitor and
manage customer networks on a remote basis. Customers of GDC's service and
support programs include Bell South, New York City Transit Authority, the State
of Michigan and Volvo. At September 30, 1996, GDC had 311 people engaged in
services and support activities.
Research, Engineering and Product Development
In order to develop and implement new technology in the data, voice and video
communications industry and to broaden the applications for its products, the
Corporation has significant ongoing engineering programs for product improvement
and new product development. At September 30, 1996, 414 employees were engaged
in research and development activities. To expand its pool of available talent,
the Corporation conducts research and development activities in four locations.
In addition, the Corporation utilizes contractors and outside developers for
product development. Development for all transmission products, multiplexer and
internetworking products, enhancements to the APEX-ATM switch products and
continuation engineering activities occur in the Technology Research Center in
Middlebury, Connecticut. The Multimedia Research Center in Montreal, Quebec,
focuses on ATM-based video and multimedia applications and solutions. The Boston
Research Center in Marlboro, Massachusetts, focuses on LAN-to-ATM and IP
(Internet Protocol) switching applications using APEX-ATM products, and the
Advanced Research Centre in Basildon, England, focuses on next-generation ATM
hardware and software.
The combination of research, development and capitalized software spending
amounted to 19.4%, 18.3% and 15.7% of revenues in fiscal 1996, 1995 and 1994,
respectively. In order to support its commitment to new products and
technologies, the Corporation expects to continue a high level of spending on
research and product and software development.
Manufacturing
GDC's principal assembly plant is a Corporation-owned, 360,000 square foot
facility located in Naugatuck, Connecticut, of which approximately 60% is
currently being utilized for manufacturing (25% is used for other GDC
operations and 15% is vacant). The Corporation also outsources the manufacturing
and assembly of certain subassemblies, generally high volume circuit boards and
power and packaging items. Outsourced products represented approximately 29% of
the manufacturing assembly during the 1996 fiscal year.
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GDC's Connecticut facilities are ISO 9001 certified. ISO 9001 is a comprehensive
model for quality assurance in design/development, production, installation and
servicing. It was developed by a technical committee comprised of
representatives from over 90 countries under the direction of the Geneva-based
International Organization for Standardization. GDC's United Kingdom facilities
are BS 5750 certified. Awarded by the British Standards Institute, BS 5750 also
is a comprehensive quality assurance model. The Corporation's Montreal, Canada
sales and service facility received ISO 9002 certification in October 1995. ISO
9002 covers quality assurance in production, installation and servicing; it does
not cover design and development.
Competition
Each segment of the telecommunications and networking industries is intensely
competitive. Many of the Corporation's current and prospective competitors have
greater name recognition, a larger installed base of networking products, more
extensive engineering, manufacturing, marketing, distribution and support
capabilities and greater financial, technological and personnel resources.
Many of the participants in the networking industry, including, among others,
ADC Telecommunications, Bay Networks, Cascade Communications, Cisco, ECI
Telecom, FORE Systems and Newbridge Networks and certain participants in the
computer industry, including among others, DEC and IBM, have introduced, or
announced their intention to develop, ATM networking products. Other companies
are expected to follow. In addition, traditional suppliers of central office
switching equipment such as Alcatel, Lucent Technologies, DSC Communications
Corporation, Fujitsu, Hitachi, LM Ericsson, Northern Telecom and Siemens, are
expected to offer ATM-based switches for central offices. Companies may also
develop alternative network solutions to ATM. Even though certain of these ATM
competitors currently offer or plan to offer ATM products in markets in which
the Corporation does not plan to compete, it is possible that such competitors
will develop ATM technology that does compete with the Corporation's products.
This competition could result in the same intense price competition that is
present in the broader networking market.
Patents and Related Rights
The Corporation presently owns approximately 63 domestic patents and has
approximately 11 additional applications pending. In addition, all of these
patents and applications have been filed in Canada; most also have been filed in
other various foreign countries. Most of those filed outside the United States
have been allowed while the remainder are pending. The Corporation believes that
certain features relating to its equipment for which it has obtained patents or
for which patent applications have been filed are important to its business, but
does not believe that its success is dependent upon its ability to obtain and
defend such patents. Because of the extensive patent coverage in the data
communications industry and the rapid issuance of new patents, certain equipment
of the Corporation may involve infringement of existing patents not known to the
Corporation.
Employee Relations
At September 30, 1996, the Corporation employed 1,849 persons, of whom 414 were
research and development personnel, 503 were manufacturing personnel, 457 were
employed in various selling and marketing activities, 311 were in customer
support services and 164 were in general and administrative activities.
No Corporation employees are covered by collective bargaining agreements. The
Corporation has never experienced a work stoppage and considers its relations
with its employees to be good.
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Reliance on Key Components
The Corporation's products use certain components, such as microprocessors,
memory chips and pre-formed enclosures that are acquired or available from one
or a limited number of sources. The Corporation has generally been able to
procure adequate supplies of these components in a timely manner from existing
sources. While most components are standard items, certain application-specific
integrated circuit chips, used in many of the Corporation's products, are
customized to the Corporation's specifications. The suppliers of components do
not operate under contract. The Corporation's inability to obtain a sufficient
quantity of components as required, or to develop alternative sources at
acceptable prices and within a reasonable time, could result in delays or
reductions in product shipments which could materially affect the Corporation's
operating results in any given period.
ITEM 2. PROPERTIES
The principal facilities of the Corporation are as follows:
Middlebury, Connecticut -- executive offices of the Corporation and Data-
Comm Leasing Corporation located in a 120,000
square foot facility owned by the Corporation
Naugatuck, Connecticut -- principal assembly, test and systems integration
operations and global services division located in a
360,000 square foot facility owned by the
Corporation
Middlebury, Connecticut -- engineering organization located in a 275,000
square foot facility leased through 2003 by the
Corporation; approximately 72,000 square feet are
sub-leased to a third party through December 1999
Wokingham, England -- sales, service, systems integration and administrative
offices (including a parking garage) located in a
36,000 square foot facility owned by General DataComm
Limited
Toronto, Canada -- sales and administrative offices located in a 12,000
square foot facility leased through November 2004
by General DataComm Ltd.
Montreal, Canada -- a 20,000 square foot research, sales and service
facility leased through February 2000 by General
DataComm Ltd.
Paris, France -- sales and administrative offices located in an 11,000
square foot facility leased through April 1997 by
General DataComm France SARL
Mexico City, Mexico -- sales, service and administrative offices located in a
4,500 square foot facility leased through August 14,
1997 by General DataComm de Mexico S.A. de C.V.
12
<PAGE>
ITEM 2. PROPERTIES (cont'd)
Basildon, England -- engineering organization located in an 8,500 square
foot facility owned by General DataComm Advanced
Research Centre Limited
In addition, the Corporation leases sales, service and engineering offices
throughout the United States and in international locations.
Approximately sixty (60) percent of the 360,000 square-foot Naugatuck,
Connecticut, facility is being utilized by the Corporation's manufacturing
(assembly, test and systems integration) operations. The plant is currently
operating at 37% utilization by running partial first and second shifts. With
two full shifts, the aggregate productive capacity would be approximately
565,000 printed circuit boards per year. The Corporation has the capability of
adding a third shift should product demand require it.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference from the
section entitled "Common Stock Prices" on page 19 of the Corporation's 1996
Annual Report to Stockholders. (1)
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from the
section entitled "Five-Year Selected Financial Data" on page 1 of the
Corporation's 1996 Annual Report to Stockholders. (1)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information required by this item is incorporated by reference from the
section entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 15 through 19 of the Corporation's 1996 Annual
Report to Stockholders. (1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from pages 20
through 33 of the Corporation's 1996 Annual Report to Stockholders or is
included elsewhere in this annual report on Form 10-K.(1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
_____________
(1) Such information is also included in Exhibit 13 of this Form 10-K report
as filed with the Securities and Exchange Commission.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors is incorporated by reference from the
section entitled "ELECTION OF DIRECTORS" in the Corporation's Proxy Statement
for the 1997 Annual Meeting of Stockholders, which Proxy Statement will be filed
within 120 days after the end of the Corporation's fiscal year ended September
30, 1996.
Name Position Age
Charles P. Johnson Chairman of the Board of Directors 69
and Chief Executive Officer
Ross A. Belson President and Chief Operating Officer 60
Frederick R. Cronin Vice President, Corporate Technology
and a Director 65
Robert S. Smith Vice President, Business Development 63
William S. Lawrence Senior Vice President, Finance and
Chief Financial Officer 53
James R. Arcara Vice President, Corporate Operations 61
Dennis J. Nesler Vice President and Treasurer 53
William G. Henry Vice President and Corporate Controller 47
August J. Hof Vice President, Manufacturing Operations 46
V. Jay Damiano Senior Vice President, U.S. Sales 51
Robert H. Dorion, Jr. Vice President, Human Resources 42
Lloyd Atkinson Vice President, Marketing 52
Howard S. Modlin Secretary and a Director 64
- -----------------------
Mr. Charles P. Johnson, Chairman of the Board and Chief Executive Officer,
founded the Corporation in 1969.
Mr. Ross A. Belson, President and Chief Operating Officer, has served in his
present capacity since joining the Corporation in August of 1987.
Mr. Frederick R. Cronin, Vice President, Corporate Technology, has served in
executive capacities since the founding of the Corporation.
Mr. Robert S. Smith, Vice President, Business Development, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since February 1973.
15
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
Mr. William S. Lawrence, Senior Vice President, Finance and Chief Financial
Officer, served as Vice President, Finance and Chief Financial Officer since
joining the Company in April 1977, until February 1996 when he was appointed
Senior Vice President, Finance and Chief Financial Officer.
Mr. James R. Arcara, Vice President, Corporate Operations, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since September 1978.
Mr. Dennis J. Nesler, Vice President and Treasurer since May 1987 and Treasurer
since July 1981, joined the Corporation in 1979 as Vice President of the
Corporation's wholly owned leasing subsidiary, a capacity in which he still
serves.
Mr. William G. Henry, Vice President and Corporate Controller, joined the
Corporation as Corporate Controller in January 1984, was appointed an officer of
the Corporation in June 1989 and was appointed Vice President and Corporate
Controller in February 1996.
Mr. August J. Hof, Vice President, Manufacturing Operations since June 1989,
joined the Corporation in 1985 as Printed Circuit Board Plant Manager.
Mr. V. Jay Damiano, Senior Vice President, U.S. Sales, was elected an officer of
the Corporation in August 1993. He joined the Corporation in the sales
organization in 1984 and has held positions of increasing responsibility since
that time.
Mr. Robert H. Dorion, Jr., Vice President, Human Resources, joined the
Corporation in May 1995 and was elected an officer of the Corporation in June
1995. Before that time, Mr. Dorion held human resource management roles with
Wang Laboratories and Morton International.
Mr. Lloyd Atkinson, Vice President, Marketing, has been with the Corporation
since October 1995, and was elected to his current position effective June 1996.
Before joining the Corporation, Mr. Atkinson held positions with Digital
Equipment Corporation (18 years) and Timeplex.
Mr. Howard S. Modlin, Secretary, an attorney and member of the firm of Weisman,
Celler Spett & Modlin, P.C., has been Secretary and counsel to the Corporation
since its formation.
16
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Executive Compensation and Other Transactions with Management"
in the Corporations's Proxy Statement dated December 10, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information requried by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Directors and Officers" in the
Corporations's Proxy Statement dated December 10, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information requried by Item 13 is incorporated by reference from the
section entitled "Executive Compensation and Other Transactions with Management"
in the Corporations's Proxy Statement dated December 10, 1996.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial statements - see "Index to Financial Statements and Schedules"
on page F-1 of this report.
(2) Financial Statement Schedule - See "Index to Financial Statements and
Schedules" on page F-1 of this report.
(3) Exhibits - See Exhibit Index on page 19 of this report.
(b) Reports on Form 8-K.
On October 8, 1996, the Corporation filed a Report on Form 8-K reporting
the sale of 800,000 shares of new 9% Cumulative Convertible Exchangeable
Preferred Stock at $25.00 a share to a group of qualified institutional
buyers (780,000 shares) and its Chairman, Mr. Charles P. Johnson (20,000
shares).
18
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(cont'd)
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Corporation.1
3.2 Amended and Restated By-Laws of the Corporation.2
10.1 Transfer of Receivables Agreement between DataComm Leasing
Corporation and Sanwa Business Credit Corporation.3
10.2 1979 Employee Stock Purchase Plan.4
10.3 1983 Stock Option Plan.5
10.4 1984 Incentive Stock Option Plan.6
10.5 1985 Stock Option Plan.7
10.6 Amendment to the 1984 Incentive Stock Option Plan.8
10.7 Amendments to the 1984 Incentive Stock Option Plan.9
10.8 Retirement Savings and Deferred Profit Sharing Plan.10
10.9 1991 Stock Option Plan.11
10.10 Credit Agreement between General DataComm Industries, Inc. and
The Chase Manhattan Bank.12
10.11 Third Amended and Restated Revolving Credit and Security
Agreement between General DataComm Industries, Inc. et al.
and The Bank of New York Commercial Corporation et al.13
10.12 Amendment No. 1 to Third Amended and Restated Revolving Credit
and Security Agreement between General DataComm Industries, Inc.
et al. and The Bank of New York Commercial Corporation et al.14
10.13 Amendment No. 2 to Third Amended and Restated Revolving Credit
and Security Agreement between General DataComm Industries,
Inc. et al. and The Bank of New York Commercial Corporation
et al.15
10.14 Amendment No. 3 to Third Amended and Restated Revolving Credit
and Security Agreement between General DataComm Industries,
Inc. et al. and The Bank of New York Commercial Corporation et
al.
10.15 Amendment No. 4 to Third Amended and Restated Revolving Credit
and Security Agreement between General DataComm Industries,
Inc. et al.and The Bank of New York Commercial Corporation et al.
11. Calculation of (Loss) Per Share for the fiscal years ended
September 30, 1994 through 1996, inclusive.
12. Calculation of Current Ratio.
13. Annual Report to Stockholders for the year ended September 30,
1996. Portions of the Annual Report to Stockholders for the year
ended September 30, 1996 which have been incorporated by
reference are deemed to be "filed" (and are included as Exhibit
13 in our electronic filing with the Commission). All remaining
portions of the Annual Report to Stockholders will be furnished
for the information of the Commission and are not deemed
"filed."
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
- ------------------------
1 Incorporated by reference from Exhibit 3.1 to Form 10-Q for quarter ended
June 30, 1988. Amendments thereto are filed as Exhibit 3.1 to Form 10-Q for
quarter ended March 31, 1990.
2 Incorporated by reference from Exhibit 3.2 to Form 10-K for year ended
September 30, 1987.
3 Incorporated by reference from Exhibit 10.1 to Form 10-Q for quarter
ended June 30, 1989.
19
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(cont'd)
EXHIBIT INDEX (cont'd)
-------------
4 1979 Employee Stock Purchase Plan is incorporated by reference from
Part II of prospectus dated September 30, 1991, contained in Form S-8,
Registration Statement No. 33-43050.
5 Incorporated by reference from Exhibit 1(c) to Form S-8,
Registration Statement No. 2-92929. Amendments thereto are filed as Exhibit
10.3 to Form 10-Q for quarter ended December 31, 1987 and as Exhibit 10.3.1
to Form 10-Q for quarter ended June 30, 1991.
6 Incorporated by reference from Exhibit 1(a), Form S-8, Registration
Statement No.2-92929. Amendment thereto is filed as Exhibit 10.2 to Form
10-Q for quarter ended June 30, 1991.
7 Incorporated by reference from Exhibit 10a, Form S-8, Registration
Statement No. 33-21027. Amendments thereto are incorporated by reference
from Part II of prospectus dated August 21, 1990, contained in Form S-8,
Registration Statement No. 33-36351 and as Exhibit 10.3.2 to Form 10-Q for
quarter ended June 30, 1991.
8 Incorporated by reference from Exhibit 10.19 to Form 10-K for year
ended September 30, 1987.
9 Incorporated by reference from Exhibit 10.2 to Form 10-Q for quarter
ended December 31, 1987.
10 Incorporated by reference from Form S-8, Registration Statement No.
33-37266.
11 Incorporated by reference from Form S-8, Registration Statement No.
33-53150, from Form S-8, Registration Statement No. 33-62716, from Form
S-8, Registration Statement No. 33-53201 and from Form S-8, Registration
Statement No. 33-59573.
12 Incorporated by reference from Exhibit 10.21 to Form 10-K for the year
ended September 30, 1993.
13 Incorporated by reference from Exhibit 10.14 to Form 10-K for year
ended September 30, 1995.
14 Incorporated by reference from Exhibit 10.15 to Form 10-Q for quarter ended
June 30, 1996
15 Incorporated by reference from Exhibit 10.16 to Form 10-Q for quarter ended
June 30, 1996
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
GENERAL DATACOMM INDUSTRIES, INC.
By: /s/ William S. Lawrence
WILLIAM S. LAWRENCE
Senior Vice President, Finance
and Principal Financial Officer
Dated: December 20, 1996
21
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/ Charles P. Johnson Chairman of the Board December 20, 1996
CHARLES P. JOHNSON and Chief Executive Officer
/s/ William S. Lawrence Senior Vice President, December 20, 1996
WILLIAM S. LAWRENCE Finance and Principal
Financial Officer
/s/ William G. Henry Vice President and December 20, 1996
WILLIAM G. HENRY Corporate Controller
/s/ Howard S. Modlin Director and Secretary December 20, 1996
HOWARD S. MODLIN
/s/ Lee M. Paschall Director December 20, 1996
LEE M. PASCHALL
/s/ Frederick R. Cronin Director and December 20, 1996
FREDERICK R. CRONIN Vice President, Corporate
Technology
/s/ John L. Segall Director December 20, 1996
JOHN L. SEGALL
22
<PAGE>
General DataComm Industries, Inc.
and Subsidiaries
Index to Financial Statements and Schedules
Financial Statements Incorporated by Reference
- ----------------------------------------------
The consolidated financial statements of General DataComm Industries, Inc. and
subsisidaries and the Report of Independent Accountants related thereto are
incorporated herein by reference from pages 20 through 33 of the Corporation's
Annual Report to Stockholders for the year ended September 30, 1996. Such
information is also included in Exhibit 13 of this Form 10-K report (as filed
with the Securities and Exchange Commission). The Corporation's 1996 Annual
Report to Stockholders is not deemed to be "filed" as part of this Form 10-K
report except for those portions thereof specifically incorporated by reference.
Financial Statements and Schedule Included Page
- ------------------------------------------ ----
Report of Independent Accountants F-2
Consolidated Financial Statement Schedules:
II. Valuation and qualifying accounts for the years
ended September 30, 1996, 1995 and 1994. F-3
Financial Statements and Schedules Omitted
- ------------------------------------------
Financial statements and schedules other than those incorporated by reference
above or included herein are omitted because they are not required or because
the required information is presented elsewhere in the financial statements or
notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of General DataComm Industries, Inc.
Our report on the consolidated financial statements of General DataComm
Industries, Inc. and Subsidiaries has been incorporated by reference in this
Form 10-K from page 33 of the Annual Report to Shareholders of General DataComm
Industries, Inc. and Subsididaries for the year ended September 30, 1996
(Exhibit 13). In connection with our audits of such financial statements, we
have also audited the related financial statement schedule listed in the Index
on Page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND, L.L.P.
Stamford, Connecticut
October 21, 1996
F-2
<PAGE>
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended September 30, 1996, 1995 and 1994
(In Thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- ---------- ---------- ----------
(b)
1996
Allowance for doubtful
receivables (a) $1,704 $121 $57 $1,768
====== ==== === ======
1995
Allowance for doubtful
receivables (a) $1,618 $252 $166 $1,704
====== ==== ==== ======
1994
Allowance for doubtful
receivables (a) $1,575 $339 $296 $1,618
====== ==== ==== ======
- ---------------------------------
(a) Deducted from asset accounts.
(b) Uncollectible accounts written off, net of recoveries.
F-3
PAGE 1 OF 4
AMENDMENT NO. 3
TO
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 ("Amendment") is entered into as of September 27,
1996, among GENERAL DATACOMM INDUSTRIES, INC., a corporation organized under the
laws of the State of Delaware ("GDC"), GENERAL DATACOMM, INC., a corporation
organized under the laws of the State of Delaware, GDC REALTY, INC., a
corporation organized under the laws of the State of Texas, GDC NAUGATUCK, INC.,
a corporation organized under the laws of the State of Delaware, GENERAL
DATACOMM INTERNATIONAL CORP., a corporation organized under the laws of the
State of Delaware, GDC FEDERAL SYSTEMS, INC. (formerly known as GENERAL DATACOMM
SYSTEMS, INC.), a corporation organized under the laws of the State of Delaware
(each a "Borrower" and jointly and severally, the "Borrowers"), the undersigned
financial institutions (each a "Lender" and collectively, "Lenders") and THE
BANK OF NEW YORK COMMERCIAL CORPORATION ("BNYCC"), a New York corporation, as
agent for Lenders (BNYCC in such capacity, "Agent").
BACKGROUND
Borrowers, Lenders and Agent are parties to a Third Amended and
Restated Revolving Credit and Security Agreement dated as of November 30, 1995
(as amended, supplemented or otherwise modified from time to time, the "Loan
Agreement") pursuant to which Lenders provide Borrowers with certain financial
accommodations.
Borrowers have requested that Agent and Lenders consent to the issuance
of certain preferred stock of GDC and Agent and Lenders are willing to do so on
the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrowers by
Lenders or Agent, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1.2 of the Loan Agreement is amended by adding the following
definition in the appropriate alphabetical order:
"Preferred Stock" means the 9% $20,000,000 Cumulative
Convertible Exchangeable Preferred Stock of GDC to be issued
on or about September 30, 1996.
<PAGE>
PAGE 2 OF 4
(b) The following language is added to the end of Section 7.7 of the Loan
Agreement:
"provided, however, GDC may pay dividends on the Preferred
Stock in accordance with the terms thereof so long as (i) no
notice of termination with regard to this Agreement shall be
outstanding and (ii) no Default or Event of Default shall have
occurred and be continuing prior to or after giving effect to
such payment."
(c) Section 7.8 of the Loan Agreement is amended by deleting the period at
the end thereof and replacing it with the following language:
"; and (vii) Indebtedness evidenced by the Preferred Stock
provided that in the event the Preferred Stock is converted
into subordinated debt in accordance with the terms thereof
such debt is subordinated to the Obligations on terms and
conditions satisfactory to Agent, Lenders and their counsel."
3. Conditions of Effectiveness. This Amendment shall become effective upon
receipt by Agent of (i) four (4) copies of this Amendment executed by Borrowers
and consented and agreed to by Guarantors, (ii) the Certificate of the Powers,
Designation, Preferences, Rights and Limitations of the Preferred Stock and
(iii) such other certificates, instruments, documents, agreements and opinions
of counsel as may be required by Agent, Lenders or their counsel, each of which
shall be in form and substance satisfactory to Agent, Lenders and their counsel.
4. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of Borrowers and are enforceable against
Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, each Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or would
exist after giving effect to this Amendment.
(d) Borrowers have no defense, counterclaim or offset with respect to the
Loan Agreement.
-2-
<PAGE>
PAGE 3 OF 4
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of Agent or Lenders, nor
constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
GENERAL DATACOMM INDUSTRIES, INC.
GENERAL DATACOMM, INC.
GDC REALTY, INC.
GDC NAUGATUCK, INC.
GENERAL DATACOMM INTERNATIONAL CORP.
GDC FEDERAL SYSTEMS, INC.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: Vice President and Treasurer
-3-
<PAGE>
PAGE 4 OF 4
THE BANK OF NEW YORK COMMERCIAL
CORPORATION, as Agent and Lender
By:/s/ Michael Lustbader
Name: Michael Lustbader
Its: Vice President
CONSENTED AND AGREED TO:
DATACOMM RENTAL CORPORATION
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM LTD.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM FRANCE S.A.R.L.
By:/s/ Dennis J.Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM DE MEXICO S.A. DE C.V.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM PTY LIMITED
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM S.A.R.L.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
-4-
PAGE 1 OF 6
AMENDMENT NO. 4
TO
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 4 ("Amendment") is entered into as of October 22,
1996, among GENERAL DATACOMM INDUSTRIES, INC., a corporation organized under the
laws of the State of Delaware, GENERAL DATACOMM, INC., a corporation organized
under the laws of the State of Delaware, GDC REALTY, INC., a corporation
organized under the laws of the State of Texas, GDC NAUGATUCK, INC., a
corporation organized under the laws of the State of Delaware, GENERAL DATACOMM
INTERNATIONAL CORP., a corporation organized under the laws of the State of
Delaware, GDC FEDERAL SYSTEMS, INC. (formerly known as GENERAL DATACOMM SYSTEMS,
INC.), a corporation organized under the laws of the State of Delaware (each a
"Borrower" and jointly and severally, the "Borrowers"), the undersigned
financial institutions (each a "Lender" and collectively, "Lenders") and THE
BANK OF NEW YORK COMMERCIAL CORPORATION ("BNYCC"), a New York corporation, as
agent for Lenders (BNYCC in such capacity, "Agent").
BACKGROUND
Borrowers, Lenders and Agent are parties to a Third Amended and
Restated Revolving Credit and Security Agreement dated as of November 30, 1995
(as amended, supplemented or otherwise modified from time to time, the "Loan
Agreement") pursuant to which Lenders provide Borrowers with certain financial
accommodations.
Borrowers have requested that Lenders amend certain of the financial
covenants contained in the Loan Agreement and Agent and Lenders are willing to
do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrowers by
Lenders or Agent, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 3 below, the Loan Agreement is hereby amended as
follows:
(a) Section 6.5 of the Loan Agreement is amended in its entirety to provide
as follows:
<PAGE>
PAGE 2 OF 6
"6.5 Tangible Net Worth. Cause to be maintained at the end of each fiscal
quarter a Tangible Net Worth in an amount not less than the amount set opposite
such fiscal quarter end below:
FISCAL QUARTER ENDING MINIMUM TANGIBLE NET WORTH
- --------------------- --------------------------
September 30, 1996 $86,883,000
December 31, 1996 $80,476,000
March 31, 1997 $77,839,000
June 30, 1997 $77,566,000
September 30, 1997 and at the the sum of (i) (a) $77,566,000 if the
end of each fiscal quarter minimum Tangible Net Worth at the end
thereafter of the fiscal quarter ending June 30,
1997 is less than $80,566,000 or (b) an
amount equal to the actual Tangible Net
Worth at the end of the fiscal quarter
ending June 30, 1997 less $3,000,000 if
such actual Tangible Net Worth is equal
to or greater than $80,566,000 plus
(ii) the product of (x) 75% times (y)
Net Income (if positive) during the
fiscal quarter then ended (excluding
net additions to capitalized software)
plus (iii) the product of (x) 75% times
(y) the sum of additional equity
contributed to GDC (excluding stock
options and stock purchase plan
payments) and the amount of
subordinated debt proceeds received by
GDC and its Subsidiaries on a
consolidated basis during such fiscal
quarter."
(b) Section 6.6 of the Loan Agreement is amended in its entirety to provide
as follows:
"6.6 Total Liabilities to Tangible Net Worth. Cause to be maintained as of
the end of each fiscal quarter a ratio of Total Liabilities to Tangible Net
Worth of not greater than the ratio set opposite such fiscal quarter end below:
RATIO OF TOTAL
LIABILITIES
FISCAL QUARTER END TO TANGIBLE NET WORTH
------------------ ---------------------
September 30, 1996 1.2 to 1.0
December 31, 1996 1.1 to 1.0
March 31, 1997 1.1 to 1.0
June 30, 1997 1.1 to 1.0
September 30, 1997 1.1 to 1.0
-2-
<PAGE>
PAGE 3 OF 6
December 31, 1997 1.0 to 1.0
March 31, 1998 1.0 to 1.0
June 30, 1998 .95 to 1.0
September 30, 1998 .95 to 1.0"
(c) Section 6.7 of the Loan Agreement is amended in its entirety to provide
as follows:
"6.7 Fixed Charge Coverage Ratio. Cause to be maintained as of
the end of each fiscal quarter a Fixed Charge Coverage Ratio for the immediately
preceding fiscal quarter equal to or greater than the ratio set opposite such
fiscal quarter end below:
FIXED CHARGE
FISCAL QUARTER ENDING COVERAGE RATIO
--------------------- --------------
September 30, 1996 (0.58) to 1.00
December 31, 1996 (2.00) to 1.00
March 31, 1997 (0.75) to 1.00
June 30, 1997 .50 to 1.00
September 30, 1997 1.20 to 1.00
December 31, 1997 1.30 to 1.00
March 31, 1998 1.40 to 1.00
June 30, 1998 1.50 to 1.00
September 30, 1998 1.60 to 1.00"
(d) Section 6.8 of the Loan Agreement is amended in its entirety to provide
as follows:
"6.8 Net Income. Cause Net Income (loss) for each fiscal period set forth
below to be not less than (more than) the amount set opposite such fiscal period
below:
FISCAL PERIOD NET INCOME (LOSS)
------------- -----------------
April 1, 1996 - September 30, 1996 ($16,000,000)
July 1, 1996 - December 31, 1996 ($16,000,000)
October 1, 1996 - March 31, 1997 ($13,500,000)
January 1, 1997 - June 30, 1997 ($ 7,000,000)
October 1, 1996 - September 30, 1997 ($ 9,449,000)
April 1, 1997 - September 30, 1997 ($1 ,000,000)
July 1, 1997 - December 31, 1997 $ -0-
October 1, 1997 - March 31, 1998 $ 1,000,000
January 1, 1998 - June 30, 1998 $ 2,000,000
October 1, 1997 - September 30, 1998 $ 4,000,000
April 1, 1998 - September 30, 1998 $ 3,000,000"
(e) Section 6.9 of the Loan Agreement is amended in its entirety to provide
as follows:
-3-
<PAGE>
PAGE 4 OF 6
"6.9 Working Capital. Cause to be maintained as of the end of each fiscal
quarter, Working Capital in an amount not less than the amount set opposite such
fiscal quarter end below.
FISCAL QUARTER END WORKING CAPITAL
------------------ ---------------
September 30, 1996 $61,825,000
December 31, 1996 $49,925,000
March 31, 1997 $47,075,000
June 30, 1997 $47,075,000
September 30, 1997 $50,873,000
December 31, 1997 $53,000,000
March 31, 1998 $55,000,000
June 30, 1998 $57,000,000
September 30, 1998 $60,000,000"
3. Conditions of Effectiveness. This Amendment shall become effective
upon satisfaction of the following conditions precedent: Agent shall have
received (i) four (4) copies of this Amendment executed by Borrowers and
consented and agreed to by Guarantors, (ii) an amendment fee of $10,000, and
(iii) such other certificates, instruments, documents, agreements and opinions
of counsel as may be required by Agent, Lenders or their counsel, each of which
shall be in form and substance satisfactory to Agent, Lenders and their counsel.
4. Representations and Warranties. Each Borrower hereby represents and
warrants as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of Borrowers and are enforceable against
Borrowers in accordance with their respective terms.
(b) Upon the effectiveness of this Amendment, each Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade as
of the effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or would
exist after giving effect to this Amendment.
(d) Borrowers have no defense, counterclaim or offset with respect to the
Loan Agreement.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the
Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of
like import shall mean and be a reference to the Loan Agreement as amended
hereby.
-4-
<PAGE>
PAGE 5 OF 6
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not
operate as a waiver of any right, power or remedy of Agent or Lenders, nor
constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
GENERAL DATACOMM INDUSTRIES, INC.
GENERAL DATACOMM, INC.
GDC REALTY, INC.
GDC NAUGATUCK, INC.
GENERAL DATACOMM INTERNATIONAL CORP.
GDC FEDERAL SYSTEMS, INC.
By:________________________________
Dennis J. Nesler, the Vice-
President of each of the
foregoing corporations
THE BANK OF NEW YORK COMMERCIAL
CORPORATION, as Agent and Lender
By:/s/ Michael Lustbader
Name: Michael Lustbader
Its: Vice President
CONSENTED AND AGREED TO:
DATACOMM RENTAL CORPORATION
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
-5-
<PAGE>
PAGE 6 OF 6
GENERAL DATACOMM LTD.
By: /s/Dennis J.Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM FRANCE S.A.R.L.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM DE MEXICO S.A. DE C.V.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its:V.P. and Treasurer
GENERAL DATACOMM PTY LIMITED
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
GENERAL DATACOMM S.A.R.L.
By:/s/ Dennis J. Nesler
Name: Dennis J. Nesler
Its: V.P. and Treasurer
-6-
Exhibit 11
General DataComm Industries. Inc. and Subsidiaries
Calculation of (Loss) per Share
(In Thousands Except per Share Data)
<TABLE>
<S> <C> <C> <C>
Years Ended September 30, 1996 1995 1994
Primary (Loss ) Per Share:
Weighted average number of common shares outstanding 20,717 19,772 16,659
Assumed exercise of certain stock options and warrants -- -- --
------ ------ ------
20,717 19,772 16,659
====== ====== ======
(Loss) before cumulative effect of accounting changes ($17,170) ($27,630) ($1,895)
Cumulative effect of changes in accounting for post-
retirement and post-employment benefits -- -- (433)
------- --------- -------
Net (loss) ($17,170) ($27,630) ($2,328)
========= ========= ========
(Loss)per share:
(Loss) before cumulative effect of accounting changes ($0.83) ($1.40) ($0.11)
Cumulative effect of changes in accounting for post-
retirement and post-employment benefits -- -- (0.03)
---------- -------- -------
(Loss) per share: ($0.83) ($1.40) ($0.14)
========== ========= ========
Fully Diluted (Loss ) Per Share:
Weighted average number of common shares outstanding 20,717 19,772 16,659
Assumed exercise of certain stock options and warrants -- -- --
------ ------ ------
20,717 19,772 16,659
====== ======= ======
(Loss) before cumulative effect of accounting changes ($17,170) ($27,630) ($1,895)
Cumulative effect of changes in accounting for post-
retirement and post-employment benefits -- -- (433)
----------- ---------- ---------
Net (loss) ($17,170) ($27,630) ($2,328)
========= =========== =========
(Loss)per share:
(Loss) before cumulative effect of accounting changes ($0.83) ($1.40) ($0.11)
Cumulative effect of changes in accounting for post-
retirement and post-employment benefits -- -- (0.03)
---------- ----------- ----------
(Loss) per share: ($0.83) ($1.40) ($0.14)
========== =========== ==========
</TABLE>
Exhibit 12
General DataComm Industries, Inc. and Subsidiaries
Calculation of Current Ratio
(In thousands, except current ratio)
Years Ended September 30, 1996 1995 1994 1993 1992
- ------------------------- ---- ---- ---- ---- ----
Current Assets $122,191 $116,100 $104,032 $79,481 $82,123
Current Liabilities 54,558 52,813 47,619 41,236 38,656
Current Ratio 2.2:1 2.2:1 2.2:1 1.9:1 2.1:1
Exhibit 13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Common Stock Prices
General DataComm Industries, Inc.'s common stock is listed on the New York Stock
Exchange and trades under the symbol "GDC." The table below displays the high,
low and end-of-quarter closing sales prices as reported during each quarter of
the last two fiscal years.
1996 1995
---------------------- --------------------------
Quarter High Low Closing High Low Closing
- -----------------------------------------------------------------------
First 21 12-7/8 17-1/4 34-5/8 24-7/8 32-3/8
Second 16-5/8 10-1/8 10-5/8 35-7/8 13-3/4 14-3/4
Third 18 10-1/2 13-1/2 14-1/2 9-5/8 12-1/2
Fourth 13-3/4 10-1/8 11-1/4 14-3/4 11-5/8 14-3/4
No cash dividends have ever been paid on the Corporation's common stock or Class
B stock. The Corporation's principal loan agreement does not allow payment of
cash dividends, with the exception of dividends authorized for payment on the
Corporation's preferred stock. In the event this would change, it is still
management's intention to reinvest future earnings in the business to support
growth plans.
The Corporation had approximately 1,888 shareholders of record at September 30,
1996.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Selected Financial Data
In thousands except per share, ratio and employee data
Years ended September 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Operations
Revenues $235,129 $221,193 $210,990 $211,847 $197,858
Inventory write-down and
other items - (7,600) - - -
Operating income (loss) (14,726) (24,618) 661 8,997 5,549
- -------------------------------------------------------------------------------
Net income (loss) $(17,170)(1) $(27,630) $(2,328)(2) $6,116 $2,643
Earnings (loss) per share $(0.83)(1) $(1.40) $(0.14)(2) $0.36 $0.17
- -------------------------------------------------------------------------------
Financial Position
Working capital $67,633 $63,287 $56,413 $38,245 $43,467
Current ratio 2.2:1 2.2:1 2.2:1 1.9:1 2.1:1
Total assets 205,054 198,388 180,264 141,676 127,654
Long-term debt, less
current portion 22,781 23,435 42,118 28,402 23,711
Stockholders' equity(4) 122,186 117,085 84,487 67,028 60,290
- -------------------------------------------------------------------------------
General
Research and product
development:
Gross spending (before
software capitalization) $45,707 $40,439 $33,189 $29,829 $25,184
Net expense 34,121 28,244 20,076 19,279 15,910
Investments in property,
plant and equipment 14,537 16,398 11,534 22,378(3) 7,157
Cash flows provided (used)
by operating activities 16,780 (5,553) (3,521) 27,406 25,738
- -------------------------------------------------------------------------------
Average number of common and
common equivalent shares
outstanding 20,717 19,772 16,659 16,874 15,505
Average number of employees 1,814 1,849 1,823 1,805 1,764
- -------------------------------------------------------------------------------
(1) - Fiscal 1996 net (loss) includes a $1.0 million, or $0.05 per share, gain
on the sale of real estate.
(2) - Fiscal 1994 net (loss) includes: (i) after-tax charges totaling $(433),
or ($0.03) per share, resulting from the adoption of Financial
Accounting Standards Nos. 106 and 112 effective October 1, 1993, and
(ii) an income tax benefit of $1,700, or $0.10 per share, relating
to the resolution of a foreign tax issue.
(3) - Fiscal 1993 includes the purchase of the Corporation's principal
manufacturing facility and corporate headquarters for $14,473.
(4) - Cash dividends on Common Stock and Class B Stock are not permitted by
the Corporation's principal loan agreement.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
General Summary Discussion
Revenues for fiscal 1996 increased 6.3%, or $13.9 million, to $235.1 million as
compared to $221.2 million in fiscal 1995. The Corporation continued to invest
heavily in the strategic areas of its business, resulting in a net loss of
$(17.2) million, or $(0.83) per share for fiscal 1996. The current year results
represent a 38% improvement as compared to a net loss of $(27.6) million, or
$(1.40) per share in fiscal 1995.
Product evolution continued to affect financial results in fiscal 1996. Product
sales in the ATM (Asynchronous Transfer Mode) and UAS (Universal Access Systems)
areas showed growth, but large investments in research and development were
required to bring new products and features to market and to work on next
generation products. ATM product revenues grew 53% to $42.5 million. In fiscal
1995 ATM product revenues had more than doubled to almost $28 million. UAS
revenues increased almost three-fold to $9.5 million in fiscal 1996. Another
very positive development in fiscal 1996 was the Corporation's ability to
license its V.34 technology (for 33.6 Kbps speed modems) to manufacturers. This
licensing activity contributed $6.1 million of revenue in fiscal 1996.
The Corporation's private line analog product family, which provided $13.2
million of revenue in fiscal 1996, continued to decline, down more than 30% in
both fiscal 1996 and 1995 (or $6.2 million and $10.5 million in 1996 and 1995,
respectively). In addition, the domestic market for the Company's
internetworking products has matured and contributed to a revenue decline of
13%, or $8.2 million in fiscal 1996. Investments in these areas have been and
will continue to be scrutinized to assure maximum financial returns.
The Company's cash position was $26.3 million as of September 30, 1996 ($18.4
million at September 30, 1995). Contributing to this balance was the sale of
800,000 shares of 9% Convertible Preferred Stock pursuant to a private placement
offering in September 1996 for net proceeds of approximately $19.2 million.
These funds are targeted for use in the development and expansion of the
Corporation's ATM business and for working capital purposes. In the first
quarter of fiscal 1995, the Corporation had sold, through a public offering,
2,070,000 shares of its common stock and received net proceeds of $58.1 million.
<PAGE>
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues:
Years Ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenues:
Net product sales 80.4% 80.5% 80.6%
Service revenue 16.6 16.8 16.2
Lease revenue 3.0 2.7 3.2
- -------------------------------------------------------------------------------
100.0 100.0 100.0
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 49.9 49.8 47.7
Inventory write-down and other items -- 3.4 --
Amortization of capitalized software
development costs 4.9 5.2 4.6
Selling, general and administrative 36.9 39.9 37.9
Research and product development 14.5 12.8 9.5
- -------------------------------------------------------------------------------
Operating income (loss) (6.2) (11.1) 0.3
- -------------------------------------------------------------------------------
Net (loss) (7.3)% (12.5)% (1.1)%
- -------------------------------------------------------------------------------
Noteworthy observations from the above summary include: revenue mix, among
product, service and leasing types, has remained consistent over the three-year
period presented; fiscal 1996 selling, general and administrative expense
declined as a percent of revenue, reflecting the combined impact of revenue
growth and general and administrative expense cost reduction efforts; research
and product development costs (as a percent of revenue) increased by 5.0
percentage points over the three-year period, reflecting aggressive product
development in our ATM and Universal Access System product lines; net loss as a
percent of revenue was reduced considerably (5.2 percentage points) as compared
to fiscal 1995.
Revenues: Fiscal Year Ended September 30,
------------------------------------------
1996 1995 1994
Revenues $235,129 $221,193 $210,990
======== ======== ========
Increase over prior year 6.3% 4.8%
Fiscal 1996 revenue growth was principally achieved through product sales growth
and increased technology licensing fees as compared to fiscal 1995. ATM product
sales increased $14.8 million, or 53.3%; license fees from our V.34 analog
product line increased $5.2 million, or more than five-fold; and Universal
Access System product revenues increased $6.3 million, or 189%. These revenue
gains amounted to $26.3 million, and were partially offset with $15.4 million of
reduced revenues in our internetworking, private line analog and other product
lines. Service and lease revenues increased $3.0 million, or 7.0% as compared to
fiscal 1995. Geographically, the Corporation made considerable progress in
<PAGE>
expanding its base of international revenue, achieving growth of $20.1 million,
or 22.5%. This international growth, which more than offset a $6.2 million, or
4.7%, reduction in domestic business, was achieved through our international
distributor network (up $10.2 million), subsidiaries (up $8.9 million) and
technology license fees from foreign customers (up $1.0 million). Company
efforts to shift its approach to domestic selling of specific products from
direct sell activity to channels of distributors and value-added resellers have
not yet resulted in the revenue growth which had been anticipated.
For the 1995 fiscal year, net product sales increased $8.1 million, or 4.8%,
service revenue was up $2.9 million, or 8.3%, and leasing revenue was down
$796,000, or 11.7%. International product revenues grew $8.6 million and service
revenues grew $1.5 million, with increased business in Europe, as well as in
emerging Asian markets. Domestic product revenues were maintained at about the
same level as in fiscal 1994 and were impacted by the decline in private line
analog business which offset growth in the ATM business. Also, domestic product
revenues from telephone companies grew while direct end-user sales declined.
Domestic service revenues increased $1.4 million, due to new types of service
offerings.
Cost of Revenues and Gross Margin: Fiscal Year Ended September 30,
- --------------------------------- ---------------------------------------
1996 1995 1994
Gross margin(before adjustments) $117,729 $110,958 $110,393
As a percent of revenue 50.0% 50.1% 52.3%
Less adjustments:
Amortization of capitalized
software costs 11,600 11,500 9,735
As a percent of revenue 4.9% 5.2% 4.6%
Inventory write-down and other items - 7,600 -
As a percent of revenue - 3.4% -
Net gross margin $106,129 $91,858 $100,658
======== ======= ========
As a percent of revenue 45.1% 41.5% 47.7%
Fiscal 1996 gross margin (before adjustments) as a percent of revenue remained
consistent with fiscal 1995 margins. Margin gains achieved in our ATM and UAS
product lines and via technology licensing revenues were offset with reduced
private line analog product margins and a decline in domestic service margins. A
larger fiscal 1996 revenue base caused amortization of capitalized software to
decline modestly as a percent of revenue as compared to fiscal 1995. Fiscal 1995
results included a $7.6 million charge which reduced margins for that year,
primarily attributable to rapid technological improvements which served to
devalue earlier generations of the APEX ATM product line and performance issues
in vendor-supplied component parts.
High technology products, in particular, are subject to sales price pressures as
competition grows and sales cycles reach maturity. The Corporation continues to
partially offset the effect of price pressures by negotiating lower material
component prices, improving manufacturing costs and efficiencies and introducing
new generation products.
<PAGE>
Fiscal 1995 gross margin (excluding inventory write-down and other items and
amortization of capitalized software development costs) as a percent of revenues
declined 2.2 percentage points as compared to fiscal 1994. The reduction was
attributable to high startup costs associated with the APEX ATM product family
and reduced sales prices, particularly on certain analog products. Inventory
write-down and other items totaled $7.6 million in fiscal 1995 (discussed above)
and alone had the effect of further reducing gross margin by 3.4%. Amortization
of capitalized software development costs increased to $11.5 million in fiscal
1995 from $9.7 million in fiscal 1994.
Selling, General and Administrative Expenses:
- --------------------------------------------
Fiscal Year Ended September 30,
---------------------------------
1996 1995 1994
Selling, general and
administrative expense $86,734 $88,232 $79,921
======= ======= =======
As a percent of revenue 36.9% 39.9% 37.9%
Increase (decrease) over prior year (1.7)% 10.4%
Productivity gains were achieved in this area, with costs as a percent of
revenue declining by 3.0 percentage points as compared to fiscal 1995. Costs
were reduced $1.5 million, or 1.7%, while at the same time revenue growth was
achieved. The cost reduction represents the net effect of a $2.5 million, or
14.3%, reduction in general and administrative costs and a $1.0 million, or
1.3%, increase in selling and marketing costs. General and administrative costs
for fiscal 1995 included a $650,000 gain resulting from the early termination of
a lease obligation. Excluding the prior year $650,000 gain, current year general
and administrative expenses were reduced $3.1 million, or 17.4%. Both domestic
and foreign operations contributed to the general and administrative expense
cost reductions, with downsizing resulting in lower salary and related costs.
The increased selling and marketing costs were incurred to support ATM and UAS
product sales efforts and expand our international business. As noted earlier,
fiscal 1996 revenue growth was achieved in each of these markets, reflecting the
positive impact of investments made in these areas.
Selling, general and administrative expenses increased $8.3 million, or 10.4%,
in fiscal 1995, principally due to a growing APEX ATM marketing organization and
related product launch expenses (an increase of $1.8 million), expansion of
international selling organizations (an increase of $4.0 million) and the
remainder (an increase of $2.5 million) due to higher costs of medical
insurance, salary increases and employee hiring and relocation costs, among
others. As a percent of revenue, selling, general and administrative expenses
rose to 39.9% of revenues in fiscal 1995 from 37.9% in fiscal 1994.
<PAGE>
Research and Development Costs:
- ------------------------------
Fiscal Year Ended September 30,
---------------------------------------
1996 1995 1994
Gross expenditures $45,707 $40,439 $33,189
======= ======= =======
As a percent of revenue 19.4% 18.3% 15.7%
Increase over prior year 13.0% 21.8%
Capitalized software costs $11,586 $12,195 $13,113
======= ======= =======
As a percent of gross expenditures 25.3% 30.2% 39.5%
Net R&D expense $34,121 $28,244 $20,076
======= ======= =======
As a percent of revenue 14.5% 12.8% 9.5%
Increase over prior year 20.8% 40.7%
The Corporation continued to invest heavily in ATM product development during
fiscal 1996. Gross research and development spending increased by $5.3 million,
or 13.0%, as compared to fiscal 1995, and has risen to 19.4% of revenue despite
an increased revenue base. Research and development headcount as of September
30, 1996 increased 12% as compared to September 30, 1995. Increased salaries and
facility costs, along with outsourced development costs, comprise most of the
$5.3 million spending increase. The complexity of the ATM technology has and
will continue to demand significant research and development investment. As a
result, investments have been reduced in other product lines. ATM product
development costs comprised 47% of fiscal 1996 gross research and development
spending and 50% of gross spending in the final quarter of fiscal 1996. To
expand its pool of available talent, the Corporation now operates research and
development facilities in four locations including the United States
(Middlebury, Connecticut and Boston, Massachusetts), Canada and the U.K.
Capitalized software development costs in the amount of $11.6 million were
slightly lower in fiscal 1996. Such costs are affected by the timing, technical
complexity and nature of software development projects.
In fiscal 1995, gross research and product development spending increased $7.3
million over fiscal 1994 spending. This increase, 21.8% year-over-year, reflects
continued investment in ATM development (an increase of $12.7 million), which
was offset by reduced investments in other product lines. The amount of
capitalized software development costs was $12.2 million in fiscal 1995, down
from $13.1 million in fiscal 1994.
Interest and Other Income and Expenses: Net interest expense for fiscal 1996
reflects a reduction of $304,000, or 12.9% from the prior year, principally due
to lower levels of outstanding debt and higher cash investments. Fiscal 1996
other income includes a $1.0 million gain on the sale of real estate.
Net interest expense in fiscal 1995 decreased $1.4 million, or 37.7%, as
compared to fiscal 1994. This reduction reflected the impact of cash proceeds
received from an equity offering, resulting in increased interest income earned
on short-term investments and reduced borrowing levels.
<PAGE>
Income Taxes: The fiscal 1996 and 1995 tax provisions approximate $1.2 million
and principally represent provisions for foreign income taxes and domestic state
taxes. The Corporation has significant net operating loss carryforwards
(approximately $61 million at September 30, 1996) available to offset future
income subject to federal income taxes. These net operating losses begin to
expire in the year 2003.
The fiscal 1995 income tax provision of $1,150,000 compares to an income tax
benefit of $975,000 in fiscal 1994, which resulted from the resolution of a
foreign tax issue in the amount of $1,700,000 offset by provisions for foreign
income and domestic state taxes.
Financial Condition and Liquidity
The Corporation's cash and cash equivalents improved to $26.3 million at
September 30, 1996, as compared to $18.4 million at September 30, 1995. This
improvement reflects the net effect of $19.2 million of proceeds received from
the issuance of preferred stock in September 1996 (discussed in detail below),
cash used to reduce bank debt by $6.6 million and $4.7 million of additional
cash consumption for all other fiscal 1996 corporate activities. Bank debt was
$29.3 million at September 30, 1996, as compared to $36.0 million at September
30, 1995.
Operating
Net cash provided by operating activities amounted to $16.8 million in fiscal
1996, a $22.3 million improvement as compared to cash usage of $(5.5) million in
the prior fiscal year. A $9.5 million reduction in non-debt working capital,
discussed below, and a $10.5 million reduction in the Company's reported net
loss accounted for most of the improvement in operating cash flows.
Non-debt working capital, excluding cash and cash equivalents, decreased from
$57.4 million at September 30, 1995 to $47.9 million at September 30, 1996. The
decrease resulted primarily from a decrease in accounts receivable and increases
in trade accounts payable and other accrued expenses. Accounts receivable
decreased $3.2 million in fiscal 1996 to $39.8 million at September 30, 1996,
principally due to the level and timing of revenues in the fourth quarter of
fiscal 1996 and continued improvement with our collection efforts. Trade
accounts payable grew $3.9 million as compared to September 30, 1995, reflecting
more normal levels. The September 30, 1995 accounts payable balance was
unusually low due to efforts to curtail inventory growth.
Investing
Fiscal 1996 net investments in property, plant and equipment amounted to $14.4
million as compared to $16.3 million in fiscal 1995, with the reduction
reflecting the completion of our new surface mount technology production line
and other items in fiscal 1995. The high rates of capital spending in fiscal
1996 and 1995 continued to be driven by the introduction of new technology (ATM)
into the Company. The Corporation believes that new products will continue to
require additional investments in manufacturing and development equipment.
Separately, the Corporation recognized a $1.0 million gain on the sale of real
estate in fiscal 1996. Investments in capitalized software amounted to $11.6
million and $12.2 million for fiscal 1996 and 1995, respectively.
<PAGE>
Financing
Net cash provided by financing activities amounted to $16.2 million in fiscal
1996, representing $19.2 million from the issuance of 9% Cumulative Convertible
Exchangeable Preferred Stock (described below) and $3.6 million from the
issuance of common stock pursuant to employee stock programs, offset by $6.6
million used to reduce long-term debt. This compares to cash provided by
financing activities of $49.9 million in fiscal 1995, which included net
proceeds of $58.1 million from the sale of 2,070,000 shares of common stock
pursuant to an underwritten public offering.
In September 1996, the Corporation completed the sale of 800,000 shares of 9%
Cumulative Convertible Exchangeable Preferred Stock ("Preferred Stock") pursuant
to a private placement offering. The net proceeds of $19.2 million are targeted
to be used to fund the development and expansion of the Corporation's ATM
business and for working capital purposes. The Preferred Stock, sold for $25.00
per share, earns dividends at a rate of 9% per annum, which are cumulative from
the date of issuance and payable quarterly in arrears commencing December 31,
1996. The Preferred Stock can be converted on and after November 30, 1996 into
common stock at $13.65 a share, or the equivalent of 1.8315 shares of common
stock for each share of Preferred Stock. After two years the Corporation has the
option to exchange the Preferred Stock for 9% Convertible Subordinated
Debentures due 2006 at the rate of $25.00 principal amount of Debentures for
each share of Preferred Stock outstanding at the time of exchange. The Preferred
Stock cannot be redeemed by the Corporation prior to September 30, 1999.
The Corporation has a revolving credit facility which matures in November 1998
and provides for borrowings of up to $25.0 million, reduced by the value of
outstanding letters of credit issued by the lenders on behalf of the Corporation
of up to $5.0 million. Interest is charged at the higher of either (1) the prime
rate plus 3/4 of 1% or (2) the federal funds rate plus 1.25%. Alternatively,
the Corporation may elect to borrow at 2.75% over LIBOR for terms of 1, 2, 3 or
6 months. The agreement imposes various financial covenants, requires that most
accounts receivable and inventories be pledged as collateral and limits the
permitted amount of borrowing through an asset-based formula. There were no
borrowings outstanding as of September 30, 1996. There were, however, $750,000
of letters of credit outstanding at September 30, 1996.
The Corporation believes its existing cash balances, future cash flow from
operations, and funds available under its revolving credit facility will be
adequate to support the Corporation's cash requirements and growth objectives
for the foreseeable future. The Corporation also considers its ability to offer
for sale its common stock, preferred stock, and/or warrants as a viable
alternative source of financing.
Lease Financing Agreements
The Corporation's principal leasing subsidiary has agreements in place with
financial institutions whereby lease receivables can be transferred with full
recourse. Each request for financing is subject to the approval of the financing
institution.
Operating Lease Obligations
See Note 8 of the "Notes to Consolidated Financial Statements" for discussion of
the Corporation's operating lease obligations.
<PAGE>
Concentrations of Credit
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist principally of cash instruments and
accounts receivable. The Corporation places its cash investments with
high-quality financial institutions and, as of September 30, 1996, maintained
balances of approximately $24.6 million with one such institution.
Approximately $18.2 million, or 40.5%, of consolidated accounts receivable at
September 30, 1996 ($18.6 million, or 38.7%, at September 30, 1995) were
concentrated in telephone companies in North America and Europe. These
receivables are not collateralized due to the high credit ratings and the
extensive financial resources available to such telephone companies.
Impact of Inflation and Changing Prices
In management's opinion, the impact of inflation and changing prices for the
three most recent fiscal years is not significant to the financial statements as
reported.
Adoption of Statements of Financial Accounting Standards Nos. 121, 123 and 125
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued, which establishes
financial accounting and reporting standards for stock-based employee
compensation plans and for certain other issues of equity instruments. As
permitted by this standard, the Corporation expects to continue to measure costs
for its employee stock compensation plans by using the accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the issuance of this standard will have no impact on
the Corporation's financial position or results of operations when the
disclosure provisions are adopted, as required, in fiscal 1997.
The Corporation will adopt, as required, Statements of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in fiscal
1997. Neither pronouncement is expected to have a material impact on the
Corporations's financial position or results of operations.
Safe Harbor Statement Under The Private Securities Litigation Reform Act of 1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this annual report, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties and other factors which may affect future results including, but
not limited to: competition, rapid changing technology, regulatory requirements
and uncertainties of international trade.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
General DataComm Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
In thousands except shares
September 30, 1996 1995
- -------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $26,264 $18,443
Accounts receivable, less allowance for doubtful
receivables of $1,768 in 1996 and $1,704 in 1995 39,828 43,033
Inventories 44,588 44,958
Deferred income taxes 4,457 3,612
Other current assets 7,054 6,054
- -------------------------------------------------------------------------------
Total current assets 122,191 116,100
- -------------------------------------------------------------------------------
Property, plant and equipment, net 48,838 46,722
Capitalized software development costs, net 23,393 23,407
Other assets 10,632 12,159
- -------------------------------------------------------------------------------
$205,054 $198,388
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $6,533 $12,598
Accounts payable, trade 14,917 11,023
Accrued payroll and payroll-related costs 6,592 6,173
Deferred income 7,305 6,495
Other current liabilities 19,211 16,524
- -------------------------------------------------------------------------------
Total current liabilities 54,558 52,813
- -------------------------------------------------------------------------------
Long-term debt, less current portion 22,781 23,435
Deferred income taxes 4,962 4,469
Other liabilities 567 586
- -------------------------------------------------------------------------------
Total liabilities 82,868 81,303
- -------------------------------------------------------------------------------
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, 9% Cumulative Convertible
Exchangeable, par value $1.00 per share, 3,000,000
shares authorized; 800,000 shares issued and
outstanding in 1996; $20 million liquidation
preference 800 -
Class B stock, par value $.10 per share, 35,000,000
shares authorized; issued and outstanding:
2,137,443 in 1996 and 2,217,836 in 1995 214 222
Common stock, par value $.10 per share,
35,000,000 shares authorized; issued and
outstanding: 19,249,987 in 1996 and 18,904,373
in 1995 1,925 1,890
Capital in excess of par value 148,208 128,076
Deficit (23,323) (6,153)
Cumulative foreign currency
translation adjustment (2,510) (2,026)
Common stock held in treasury, at cost:
422,429 shares in 1996 and 673,674 shares in 1995 (3,128) (4,924)
- -------------------------------------------------------------------------------
Total stockholders' equity 122,186 117,085
- -------------------------------------------------------------------------------
$205,054 $198,388
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Operations and Earnings Reinvested (Deficit)
In thousands except per share data
Years ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Revenues:
Net product sales $189,019 $178,092 $169,958
Service revenue 39,022 37,110 34,245
Lease revenue 7,088 5,991 6,787
- -------------------------------------------------------------------------------
235,129 221,193 210,990
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 90,194 85,406 76,854
Inventory write-down and
other items - 7,600 -
Amortization of
capitalized software development costs 11,600 11,500 9,735
Cost of services 26,350 23,993 22,861
Cost of lease revenue 856 836 882
Selling, general and administrative 86,734 88,232 79,921
Research and product development 34,121 28,244 20,076
- -------------------------------------------------------------------------------
249,855 245,811 210,329
- -------------------------------------------------------------------------------
Operating income (loss) (14,726) (24,618) 661
- -------------------------------------------------------------------------------
Other income (expense):
Interest, net (2,051) (2,355) (3,780)
Other, net 807 493 249
- -------------------------------------------------------------------------------
(1,244) (1,862) (3,531)
- -------------------------------------------------------------------------------
(Loss) before income taxes
and cumulative effect of accounting changes (15,970) (26,480) (2,870)
Income tax provision (benefit) 1,200 1,150 (975)
- -------------------------------------------------------------------------------
(Loss) before cumulative effect of
accounting changes (17,170) (27,630) (1,895)
Cumulative effect of changes in accounting for
post-retirement and post-employment benefits - - (433)
- -------------------------------------------------------------------------------
Net (loss) (17,170) (27,630) (2,328)
Earnings reinvested (deficit) at beginning
of year (6,153) 21,477 23,805
- -------------------------------------------------------------------------------
Earnings reinvested (deficit) at end of year $(23,323) $(6,153) $21,477
- -------------------------------------------------------------------------------
(Loss) per share:
(Loss) before cumulative effect of
accounting changes $(0.83) $(1.40) $(0.11)
Cumulative effect of changes in accounting
for post-retirement and post-employment
benefits - - (0.03)
- -------------------------------------------------------------------------------
(Loss) per share $(0.83) $(1.40) $(0.14)
- -------------------------------------------------------------------------------
Average number of common and common equivalent
shares outstanding 20,717 19,772 16,659
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
------------------------------------------------
In thousands
Years ended September 30, 1996 1995 1994(1)
- -------------------------------------------------------------------------------
Cash flows from operating activities:
(Loss) before cumulative effect of
accounting changes $(17,170) $(27,630) $(1,895)
Adjustments to reconcile (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization 25,803 24,097 20,504
Gain on sale of real estate (1,000) - -
Inventory write-down and other items - 7,600 -
Deferred income taxes 58 (21) 132
(Increase) decrease in accounts receivable 2,721 5,750 (13,206)
(Increase) decrease in inventories 4 (8,659) (6,594)
Increase (decrease) in accounts payable and
accrued expenses 5,670 (2,062) 2,268
(Increase) decrease in other net current assets 179 (2,685) (1,787)
(Increase) decrease in other net long-term assets 515 (1,943) (2,943)
- -------------------------------------------------------------------------------
Net cash provided (used) by operating activities 16,780 (5,553) (3,521)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment,net (14,449) (16,283) (11,344)
Capitalized software development costs (11,586) (12,195) (13,113)
Proceeds from sale of real estate 1,000 - -
Purchase price of companies acquired - - (5,852)
- -------------------------------------------------------------------------------
Net cash (used for) investing activities (25,035) (28,478) (30,309)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings - 21,400 135,333
Revolver repayments - (37,600) (119,583)
Proceeds from notes and mortgages 6,600 11,511 13,432
Principal payments on notes and mortgages (13,204) (6,649) (12,208)
Proceeds from issuing common stock 3,604 61,252 17,676
Proceeds from issuing preferred stock 19,150 - -
Payment of escrow deposits - - (500)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 16,150 49,914 34,150
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (74) (379) 25
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 7,821 15,504 345
Cash and cash equivalents at beginning of year-(2) 18,443 2,939 2,594
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year-(2) $26,264 $18,443 $2,939
- -------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid (received) during the year for:
Interest $2,895 $3,158 $3,153
Income taxes, net $447 $675 $(55)
===============================================================================
(1) - Excluded from the fiscal 1994 Consolidated Statements of Cash Flows
is the issuance of common stock with a fair market value of $1,846 related to
the acquisition of a company.
(2) - The Corporation considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
Notes to Consolidated Financial Statements
1. Description Of Business and Summary of Significant Accounting Policies
Description of Business
The Corporation is a worldwide provider of wide area networking and
telecommunications products. The Corporation designs, assembles, markets,
installs and maintains products and services that enable telecommunications
common carriers, corporations and governments to build, upgrade and better
manage their global telecommunications networks. Products include Asynchronous
Transfer Mode (ATM) cell switches, multiplexers, network access systems and
internetworking equipment, digital data sets, analog modems, network management
systems and comprehensive support services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiary companies. Intercompany accounts, transactions
and profits have been appropriately eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market using a first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated or amortized
using the straight-line method over their estimated useful lives. The cost of
internally constructed assets includes manufacturing labor and related overhead
costs.
Capitalized Software Development Costs
Software development costs are capitalized for those products that have met the
requirements of technological feasibility. These costs are amortized on a
product-by-product basis using a straight-line method over the estimated
economic life of the product, not to exceed three years. Unamortized costs are
reviewed for recoverability and, if necessary, adjusted so as to not exceed
estimated net realizable value.
Revenue Recognition
Revenue from equipment sales is generally recognized at the date of shipment
unless the terms and conditions of the sale dictate recognition at a later date.
Technology licensing fee revenue is recognized in the period received or,
alternatively, may be accrued when reliably determinable. Service revenue is
recognized when the service is performed or, in the case of maintenance
contracts, on a straight-line basis over the term of the contract.
Revenue from sales-type leases is recognized at the date of shipment. Revenue
from operating leases is recognized ratably over the lease term, and the related
equipment is depreciated using the straight-line method over its estimated
useful life which approximates four years. The average length of initial lease
terms in fiscal 1996 was approximately 32 months. Leasing revenue includes
income from the transfer (with full recourse) of certain finance lease
receivables. Such income amounted to $553,000, $518,000 and $842,000 in fiscal
1996, 1995 and 1994, respectively.
<PAGE>
Promotion and Advertising Costs
All promotion and advertising costs are charged to results of operations during
the fiscal year in which they are incurred. Promotion and advertising costs
amounted to $6,528,000, $5,828,000 and $4,524,000 in fiscal 1996, 1995 and 1994.
Income Taxes
The Corporation accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires use of the liability method of accounting for deferred income taxes.
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and deferred taxes resulting from temporary differences
between the financial statement and tax basis of assets and liabilities. The
Corporation intends to permanently reinvest the undistributed earnings of its
foreign subsidiaries ($3,839,000). Accordingly, no taxes have been provided on
such earnings. In addition, no significant taxes would be required if such
earnings were remitted, due to net operating loss carryforwards available in the
U.S.
Earnings Per Share
Earnings per share are computed using the weighted average number of common
(including Class B stock) and common equivalent shares outstanding. Common
equivalent shares consist of dilutive stock options and warrants. Preferred
stock dividends will be payable for the first time beginning in fiscal 1997. The
amount of such dividends will be deducted from the net income (loss) used in
computing primary earnings (loss) per share.
Concentrations of Credit Risk
Financial instruments which potentially subject the Corporation to
concentrations of credit risk consist principally of cash instruments and
accounts receivable. The Corporation places its cash investments with
high-quality financial institutions and, as of September 30, 1996, maintained
balances of approximately $24,600,000 with one such institution.
Approximately $18,200,000, or 40.5%, of consolidated accounts receivable at
September 30, 1996 ($18,600,000, or 38.7%, at September 30, 1995) were
concentrated in telephone companies in North America and Europe. These
receivables are not collateralized due to the high credit ratings and the
extensive financial resources available to such telephone companies.
Foreign Currency
Assets and liabilities of the Corporation's foreign subsidiaries are translated
using fiscal year-end exchange rates, and revenue and expenses are translated
using average exchange rates prevailing during the year. The effects of
translating foreign subsidiaries' financial statements are recorded as a
separate component of stockholders' equity.
In addition, included in other income are net realized foreign currency exchange
losses of $(325,000), $(323,000) and $(188,000) for fiscal 1996, 1995 and 1994,
respectively.
Post-Retirement Benefits
The Corporation accounts for post-employment benefits under the provisions of
Statement of Financial Accounting Standards No. 106, "Employer's Accounting for
Post-Retirement Benefits Other Than Pensions," (Statement No. 106), which
requires the use of an accrual method of accounting for post-retirement
benefits. The annual expense for retiree health care is not material. Fiscal
year 1994 includes a one-time charge of $(117,000), or $(0.01) per share,
resulting from the adoption of Statement No. 106.
<PAGE>
Post-Employment Benefits
The Corporation accounts for post-employment benefits under the provisions of
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Post-Employment Benefits," (Statement No. 112), which requires the use of an
accrual method of accounting for post-employment benefits. The annual expense
for post-employment costs is not material. Fiscal year 1994 includes a one-time
charge of $(316,000), or $(0.02) per share, resulting from the adoption of
Statement No. 112.
Accounting for Stock-Based Compensation
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued, which establishes
financial accounting and reporting standards for stock-based employee
compensation plans and for certain other issues of equity instruments. As
permitted by this standard, the Corporation expects to continue to measure costs
for its employee stock compensation plans by using the accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, the issuance of this standard will have no impact on
the Corporation's financial position or results of operations when the
disclosure provisions are adopted, as required, in fiscal 1997.
Future Adoption of Statements of Financial Accounting Standards Nos. 121 and
125
The Corporation will adopt, as required, Statements of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of," and No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," in fiscal
1997. Neither pronouncement is expected to have a material impact on the
Corporation's financial position or results of operations.
Fair Values of Financial Instruments
Cash and cash equivalents - The carrying amount reported in the consolidated
balance sheet for cash and cash equivalents approximates its fair value due to
their short-term nature.
Long-term debt - The carrying amounts of the Corporation's long-term borrowings,
including current maturities, does not differ materially from the fair value
based on current rates available to the Corporation for debt of the same
remaining maturities.
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 periods
presented. Actual results could differ from those estimates. The markets for the
Company's products are characterized by intense competition, rapid technological
development and frequent new product introductions, all of which could impact
the future value of the Corporation's inventory, capitalized software and
certain other assets.
Reclassifications
Certain reclassifications were made to prior years' financial statements to
conform to the current year's presentation.
<PAGE>
2. Business Acquisition - Fiscal 1994
Effective November 24, 1993, the Corporation acquired Netcomm Limited
("Netcomm"), a leader in Asynchronous Transfer Mode (ATM) technology, located in
England. Under the terms of the acquisition, the Corporation issued 184,647
shares of common stock valued at $1.8 million and paid cash of $5.5 million in
return for all the outstanding common stock of Netcomm. The acquisition was
accounted for as a purchase and, accordingly, the results of operations of the
acquired business have been included in the Corporation's consolidated financial
statements commencing on November 24, 1993. Approximately $6.5 million of the
purchase price was allocated to goodwill, which is being amortized on a
straight-line basis over fifteen years and has a remaining balance of $5,709,000
at September 30, 1996 ($6,126,000 at September 30, 1995). Goodwill
recoverability is assessed on a periodic basis.
3. Technology Licensing, Purchase and Product Development Agreements
Technology Licensing Agreements
During fiscal 1996, the Corporation entered into technology licensing
agreements whereby licensees pay the Corporation license fees for the use or
sale of specific V.34 patented technology. During the year ended September 30,
1996, technology licensing fee revenues from such agreements amounted to
$6,131,000 as compared to $949,000 in fiscal 1995. In the fourth quarter of
fiscal 1996 licensing revenue amounting to $2,459,000 was received from one
customer, a significant portion of which represented a retroactive application
of license fees.
Attachmate Corporation
On June 4, 1996, the Corporation entered into a Purchase Agreement (the
"Agreement") with Attachmate Corporation, whereby the Corporation has agreed to
acquire Attachmate hardware and software product for resale. The initial term of
the Agreement approximates two years and continues through June 30, 1998, unless
previously terminated by either party. The Corporation has committed to pay a
minimum of $4,000,000 for software licensing fees during the initial term, in
equal quarterly increments. Such fees may be offset in their entirety against
the purchase of Attachmate products. The Corporation may terminate the agreement
at any time after one year and be obligated for a prorated portion of the
minimum fees.
Quebec R&D Project
In fiscal 1993, the Corporation's Canadian subsidiary entered into a three-year
agreement with the Quebec, Canada, government to establish a research and
development facility in Quebec for the development of an ATM multimedia server
product. Up to 50% of the costs of this facility were or will be reimbursed
through tax credits and grants from the Quebec government. The sum of such tax
credits and grants, which amounted to $1,895,000, $1,201,000 and $675,000 for
the years ended September 30, 1996, 1995 and 1994, respectively, were recorded
as a reduction to research and product development expense. The Company
anticipates entering into a new agreement in fiscal 1997.
<PAGE>
4. Inventories
Inventories consist of (in thousands):
September 30, 1996 1995
---- ----
Raw materials $16,627 $19,466
Work-in-process 6,726 5,801
Finished goods 21,235 19,691
------- -------
$44,588 $44,958
======= =======
Fiscal 1995 financial results include a $(7.6) million, or $(0.38) per share,
charge for an inventory write-down and other items primarily related to: (1)
rapid technological improvements which served to devalue earlier generations of
the APEX ATM product line; and (2) performance issues in vendor-supplied
component parts.
<PAGE>
5. Property, Plant and Equipment
Property, plant and equipment consists of (in thousands):
September 30, 1996 1995
---- ----
Land $ 1,764 $ 1,764
Buildings and improvements 29,050 27,894
Test equipment, fixtures and
field spares 52,537 50,632
Machinery and equipment 50,482 46,669
------- -------
133,833 126,959
Less: accumulated depreciation 84,995 80,237
------- -------
$48,838 $46,722
======= =======
Depreciation expense amounted to $12,160,000, $10,530,000 and $8,776,000 in
fiscal 1996, 1995 and 1994, respectively.
<PAGE>
6. Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30, 1996 1995
----- ----
Notes payable $16,421 $22,179
Mortgages payable 12,359 13,018
Capital lease obligations 534 836
------ ------
29,314 36,033
Less: current portion 6,533 12,598
------- -------
$22,781 $23,435
======= =======
- -------------------------------------------------------------------------------
Interest expense amounted to $2,757,000, $3,120,000 and $3,335,000 in fiscal
1996, 1995 and 1994, respectively.
The following is a schedule of the future minimum payments of long-term debt at
September 30, 1996 (in thousands):
Years ended September 30, 1997 1998 1999 2000 2001 2002 & Thereafter
- -------------------------------------------------------------------------------
$6,533 $6,428 $5,053 $1,645 $ 659 $8,996
- -------------------------------------------------------------------------------
Total future minimum
payments $29,314
- -------------------------------------------------------------------------------
Revolving Credit Facility
On November 30, 1995, the Corporation entered into an amended agreement with The
Bank of New York Commercial Corporation to provide a revolving credit facility
maturing in November 1998 in the amount of $25,000,000, with availability
subject to a borrowing base formula. The facility provides for a sub-limit of
$5,000,000 for letters of credit, of which $750,000 was outstanding at September
30, 1996. The amended agreement provides for interest on outstanding borrowings
to be charged at the higher of either (1) the prime rate plus 3/4 of 1%, or (2)
the federal funds rate plus 1.25% (on September 30, 1996, the prime rate was
8.25% and the federal funds rate was 6.09%). Alternately, the Corporation may
elect to borrow at 2.75% over LIBOR for terms of 1, 2, 3 or 6 months (on
September 30, 1996, these LIBOR rates ranged from 5.31% to 5.63%).
The agreement also requires conformity with various financial covenants, the
most restrictive of which include minimum tangible net worth, fixed charge
coverage ratio, and net income (or loss restriction) performance requirements.
Certain assets of the Corporation, including most accounts receivable and
inventories, are pledged as collateral. The amount of borrowing is predicated on
satisfying a borrowing base formula related to levels of certain accounts
receivable and inventories. This amended agreement replaced the prior revolving
credit agreement which also provided for borrowings of up to $25,000,000. The
Corporation had no borrowings outstanding against such revolving credit
agreements as of either September 30, 1996 or 1995.
Notes Payable
The Corporation has entered into three, four and five-year note and installment
purchase agreements collateralized by certain machinery, test equipment and
furniture and fixtures. The outstanding balance of $16,421,000 at September 30,
1996, which approximates the net book value of the underlying equipment, bears
interest depending upon the agreement, either at fixed rates ranging from 6.50%
to 11.22%, at prime rate, at prime rate plus 1% or at the 30-day commercial
paper rate plus 3.75%. Individual notes mature between fiscal 1997 and fiscal
2000.
<PAGE>
On June 1, 1994, the Corporation refinanced $8,000,000 of a note payable,
previously maturing January 2, 1995, with The Bank of New York as lender and
agent for other institutions by incorporating term loan provisions and
additional collateral into the previous revolving credit agreement. In
conjunction with the amended revolving credit facility mentioned above, this
note, in the amount of $6,625,000, was paid in its entirety on November 30,
1995. Therefore, such note payable was classified as a current liability at
September 30, 1995.
Mortgages Payable
In September 1993, the Corporation purchased its corporate headquarters and
manufacturing facilities with financing provided by the seller's banks. Interest
is payable at 90-day LIBOR (5.50% at 9/30/96) plus 2%, and quarterly principal
payments of $100,000 are required until these mortgages mature in the year 2003.
The principal balances of such mortgages were $10,625,000 and $11,025,000 at
September 30, 1996 and 1995, respectively. In addition, two mortgages with
remaining principal balances of $1,734,000 and $1,993,000 at September 30, 1996
and 1995, respectively, were outstanding on the Corporation's buildings in the
United Kingdom, principally at interest rates of six-month LIBOR (5.63% at
9/30/96) plus 1.3%.
Capital Lease Obligations
The Corporation has acquired the use of certain machinery and equipment by
entering into capital leases. The outstanding balance of $534,000 at September
30, 1996 bears interest, depending upon the agreement, at fixed rates ranging
from 6.66% to 10.75%.
<PAGE>
7. Income Taxes
(Loss) before income taxes and cumulative effect of accounting changes consists
of both domestic and foreign income (loss) as follows (in thousands):
Years ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------
United States $(16,421) $(22,452) $(1,703)
Foreign 451 (4,028) (1,167)
- -------------------------------------------------------------------------------
$(15,970) $(26,480) $(2,870)
- -------------------------------------------------------------------------------
The provision for (benefit from) income taxes consists of the following amounts
(in thousands):
Years ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Current:
State $ 325 $ 600 $ 500
Foreign 817 571 (1,607)
- -------------------------------------------------------------------------------
$1,142 $1,171 $(1,107)
- -------------------------------------------------------------------------------
Deferred:
Federal $ (22) $ (80) $ (100)
Foreign 80 59 232
- -------------------------------------------------------------------------------
$ 58 $ (21) $ 132
- -------------------------------------------------------------------------------
The following reconciles the U.S. statutory income tax rate to the Corporation's
effective rate:
Years ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Federal statutory rate (34.0)% (34.0)% (34.0)%
No benefit recognized for
domestic net operating loss 32.9 27.5 12.8
Effect of foreign income taxes 4.7 7.5 29.8
Reversal of excess reserves for
tax audits - - (67.4)
State and local income taxes 2.0 2.3 17.4
Non-deductible expenditures 1.9 1.0 7.4
- -------------------------------------------------------------------------------
7.5% 4.3% (34.0)%
- -------------------------------------------------------------------------------
For regular tax reporting purposes at September 30, 1996, tax credit and net
operating loss carryforwards amounted to $8,950,000 and $69,500,000,
respectively. Domestic federal loss carryforwards of $61,200,000 expire between
2003 and 2012, of which approximately $13,000,000 relate to items which will be
credited to stockholders' equity when applied; domestic state loss carryforwards
of $20,339,000 expire between 1997 and 2012. Foreign loss carryforwards of
$8,300,000 expire beginning in 1997. Tax credit carryforwards expire between
1997 and 2012.
For federal alternative minimum tax purposes at September 30, 1996, net
operating loss carryforwards amounted to $54,500,000.
<PAGE>
The tax effects of the significant temporary differences comprising the deferred
tax assets and liabilities at September 30, 1996 and 1995 are as follows (in
thousands):
1996 1995
---- ----
Deferred Tax Assets
- -------------------
Receivable reserve $ 1,849 $ 1,600
Inventory reserve 6,789 5,862
Deferred income 2,372 1,420
Other accruals 1,186 286
Loss carryforwards 25,030 22,093
Tax credits 8,950 6,100
Valuation allowance (29,484) (23,211)
-------- --------
Net deferred tax assets $16,692 $14,150
======= =======
Deferred Tax Liabilities
- ------------------------
Depreciation $ 3,553 $ 2,471
Deferred income 1,840 1,496
Capitalized software 9,357 7,958
Operating leases 638 925
Capital leases 1,613 1,632
Other 196 525
------- -------
Gross deferred tax liability $17,197 $15,007
======= =======
During fiscal 1996 and 1995, the valuation allowance increased by $6,273,000 and
$10,255,000, respectively.
<PAGE>
8. Operating Leases
The Corporation has certain non-cancelable operating leases on automobiles,
subsidiary locations, sales offices and service facilities, which expire within
one to six years. These leases generally contain renewal options and provisions
for payment by the lessee of executory costs (taxes, maintenance and insurance).
In addition, the Corporation has a non-cancelable operating lease with scheduled
rent increases for its engineering facility which expires in the year 2003. The
Corporation has prepaid $2,454,000 of this rent (approximately 20 months) as of
September 30, 1996 in conjunction with a lease renegotiation. Included in
selling, general and administrative expenses for fiscal 1995 is a gain of
$650,000 resulting from the early termination of a lease obligation for an
industrial facility which had been vacated in 1988 as part of a cost reduction
program.
The following is a schedule of the future minimum payments on such leases at
September 30, 1996 (in thousands):
1997 1998 1999 2000 2001 2002 and thereafter
- --------------------------------------------------------------------------------
$2,489 $2,418 $2,971 $2,332 $2,195 $ 3,277
- -------------------------------------------------------------------------------
Total future minimum lease payments $15,682
Less: future sublease income, non-cancelable through 2000 4,295
- -------------------------------------------------------------------------------
Net future lease payments $11,387
- -------------------------------------------------------------------------------
Net rental expense for the three most recent fiscal years was (in thousands):
Rental Sublease
Expense Income Net
- -------------------------------------------------------------------------------
1996 $6,063 $1,198 $4,865
1995 6,330 1,981 4,349
1994 5,733 1,538 4,195
- -------------------------------------------------------------------------------
<PAGE>
9. Stockholders' Equity
<TABLE>
Transactions in capital stock during fiscal 1994, 1995 and 1996 were as follows
(in thousands except share amounts):
<CAPTION>
Capital Foreign
Preferred Stock Common Stock in Excess Treasury Stock Currency
Shares Amount Shares Amount of Par Shares Amount Translation
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 - - 16,980,581 $1,698 $50,064 1,082,058 $(7,462) $(1,077)
Exercise of stock options 448,617 45 2,122 (11,559) (106) -
Employee stock purchase plan 54,541 5 806 (44,079) 306 -
Business acquisition - - 573 (184,647) 1,273 -
Private placement offering 1,250,000 125 14,462 - - -
Foreign currency translation adjustment - - - - - 176
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 - - 18,733,739 1,873 68,027 841,773 (5,989) (901)
Exercise of stock options 318,470 32 1,370 (61,151) 285 -
Employee stock purchase plan - - 612 (106,948) 780 -
Underwritten public offering 2,070,000 207 58,067 - - -
Foreign currency translation adjustment - - - - - (1,125)
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 - - 21,122,209 2,112 128,076 673,674 (4,924) (2,026)
Exercise of stock options - - 265,221 27 1,424 (92,992) 624 -
Employee stock purchase plan - - - 358 (158,253) 1,172 -
Private placement offering 800,000 $800 - - 18,350 - - -
Foreign currency translation adjustment - - - - - - - (484)
=======================================================================================================================
Balance, September 30, 1996 800,000 $800 21,387,430 $2,139 $148,208 422,429 $(3,128) $(2,510)
=======================================================================================================================
</TABLE>
The Common Stock referenced above includes both Class B stock and common stock.
Class B stock, under certain circumstances, has greater voting power in the
election of directors. However, common stock is entitled to cash dividends, if
and when paid, 11.11% higher per share than Class B stock. The Corporation has
never declared or paid cash dividends on its common stock and terms of the
Corporation's revolving credit facility prohibit the Company from paying cash
dividends, with the exception of dividends authorized for payment on the
Corporation's Preferred Stock (referenced below). Class B stock has limited
transferability and is convertible into common stock at any time on a
share-for-share basis. At September 30, 1996, 1995 and 1994, 2,137,443,
2,217,836 and 2,271,780 shares, respectively, of Class B stock were outstanding.
On September 30, 1996, the Corporation completed the sale of 800,000 shares of
9% Cumulative Convertible Exchangeable Preferred Stock (Preferred Stock)
pursuant to a private placement offering. The sales price was $25.00 per share,
resulting in net proceeds of approximately $19.2 million. The Preferred Stock
earns dividends at a rate of 9% per annum, cumulative from the date of issuance
and payable quarterly in arrears commencing December 31, 1996. The Preferred
Stock can be converted on or after November 30, 1996 into common stock at $13.65
per share, or the equivalent of 1.8315 shares of common stock for each share of
Preferred Stock. After two years, the Corporation has the option to exchange the
Preferred Stock for 9% Convertible Subordinated Debentures due 2006, at the rate
of $25.00 principal amount of Debentures for each share of Preferred Stock
outstanding at the time of exchange. The Preferred Stock cannot be redeemed by
the Corporation before September 30, 1999. The net proceeds will be used to fund
the development and expansion of the Corporation's ATM business and for working
capital purposes.
On December 22, 1994, the Corporation completed the sale of 2,070,000 shares of
common stock pursuant to an underwritten public offering. The sales price was
$29.875 per common share before offering costs and commissions, resulting in net
proceeds of approximately $58.1 million. On May 27, 1994, the Corporation
completed the sale of 1,250,000 shares of common stock through a private
placement offering. The sales price was $12.375 per common share before offering
costs and commissions, resulting in net proceeds of approximately $14.6 million.
Proceeds from both of these offerings were used to reduce debt and provide
additional working capital.
<PAGE>
10. Industry and Geographic Area Information
The Corporation operates solely in the multi-media communications industry.
Geographic area information for 1996, 1995 and 1994 is presented below (in
thousands):
Western
United Hemisphere Elimina- Consoli-
1996 States (except U.S.) Europe tions dated
- -------------------------------------------------------------------------------
Revenues $177,397(1) $26,654 $31,078 $ - $235,129
Transfers between geo-
graphic areas 30,578 - - (30,578) -
- -------------------------------------------------------------------------------
Total revenues $207,975 $26,654 $31,078 $(30,578) $235,129
- -------------------------------------------------------------------------------
Operating profit (loss) $ (6,687) $ (272) $ 745 $ - $ (6,214)
- -------------------------------------------------------------------------------
General corporate
expenses, net (7,705)
Interest expense, net (2,051)
- -------------------------------------------------------------------------------
Loss before income
taxes $(15,970)
- -------------------------------------------------------------------------------
Total assets $172,231 $13,028 $19,795 $ - $205,054
===============================================================================
Western
United Hemisphere Elimina- Consoli-
1995 States (except U.S.) Europe tions dated
- -------------------------------------------------------------------------------
Revenues $172,994(1) $21,035 $27,164 $ - $221,193
Transfers between geo-
graphic areas 38,491 - 886 (39,377) -
- -------------------------------------------------------------------------------
Total revenues $211,485 $21,035 $28,050 $(39,377) $221,193
- -------------------------------------------------------------------------------
Operating (loss) $(12,392) $(2,507) $(980) $ - $(15,879)
- -------------------------------------------------------------------------------
General corporate
expenses, net (8,246)
Interest expense, net (2,355)
- --------------------------------------------------------------------------------
Loss before income
taxes $(26,480)
- --------------------------------------------------------------------------------
Total assets $167,781 $8,944 $21,663 $ - $198,388
===============================================================================
Western
United Hemisphere Elimina- Consoli-
1994 States (except U.S.) Europe tions dated
- -------------------------------------------------------------------------------
Revenues $157,685(1) $27,860 $25,445 $ - $210,990
Transfers between geo-
graphic areas 36,726 - 2,515 (39,241) -
- -------------------------------------------------------------------------------
Total revenues $194,411 $27,860 $27,960 $(39,241) $210,990
- -------------------------------------------------------------------------------
Operating profit (loss) $ 7,848 $ (513) $ (30) $ - $ 7,305
- -------------------------------------------------------------------------------
General corporate
expenses, net (6,395)
Interest expense, net (3,780)
- -------------------------------------------------------------------------------
Loss before income taxes
and accounting changes $(2,870)
- --------------------------------------------------------------------------------
Total assets $149,983 $14,621 $15,660 $ - $180,264
================================================================================
(1) Includes export sales by domestic operations of $51,649, $41,075 and
$25,731 for fiscal 1996, 1995 and 1994, respectively.
<PAGE>
11. Employee Incentive Plans
Stock Option Plans
Officers and key employees may be granted incentive stock options at an exercise
price equal to or greater than the market price on the date of grant and
non-incentive stock options at an exercise price equal to or less than the
market price on the date of grant. Once granted, options become exercisable in
whole or in part after the first year and generally expire within ten years.
Under the terms of these stock option plans, the Corporation has reserved a
total of 3,630,767 shares of common stock at September 30, 1996, 925,000 shares
of which are subject to shareholder approval (3,084,137 shares reserved at
September 30, 1995).
The following summarizes activity in fiscal 1994, 1995 and 1996 under these
stock option plans:
Shares Option Price
- -------------------------------------------------------------------------------
Options outstanding, September 30, 1993
(873,394 exercisable) 2,445,017 $2.00 to $14.50
Options granted 660,097 8.63 to 19.94
Options exercised (473,992) 2.00 to 11.63
Options canceled or expired (84,925) 3.62 to 15.50
______________________________________________________________________________
Options outstanding, September 30, 1994
(871,075 exercisable) 2,546,197 $2.00 to $19.94
Options granted 254,100 9.94 to 30.13
Options exercised (387,695) 2.00 to 11.75
Options canceled or expired (283,868) 3.00 to 30.13
______________________________________________________________________________
Options outstanding, September 30, 1995
(809,511 exercisable) 2,128,734 $2.00 to $15.50
Options granted 1,232,900 9.88 to 16.19
Options exercised (363,420) 3.00 to 15.50
Options canceled or expired (369,673) 3.75 to 16.19
______________________________________________________________________________
Options outstanding, September 30, 1996
(852,816 exercisable) 2,628,541 $2.00 to $16.19
______________________________________________________________________________
Stock Purchase Plan
The Corporation has a stock purchase plan to encourage employees to participate
in the Corporation's future growth. At September 30, 1996, 288,490 shares were
reserved for purchase by employees through payroll deductions regularly
accumulated over six-month payment periods. At the end of each payment period,
common stock is purchased by employees at 85% of the market value of the stock
on the first or last day of the payment periods, whichever is lower. However,
the purchase of common stock under this plan is prohibited if 85% of the market
value of the common stock is less than the book value per share. Note 9,
"Stockholders' Equity," presents the historical activity under this plan.
No charges are made to income for stock purchases or incentive stock options
granted or exercised under the stock purchase and stock option plans. When
shares are purchased under the stock purchase plan or issued upon exercise of
incentive stock options, the excess of amounts paid over par value is credited
to capital in excess of par value. Refer to Note 1, "Description of Business and
Summary of Significant Accounting Policies," for further discussion of
accounting for stock options.
<PAGE>
Employee Retirement Savings and Deferred Profit Sharing Plan
Under the retirement savings provisions of the Corporation's retirement plan,
established under Section 401(k) of the Internal Revenue Code, employees are
generally eligible to contribute to the plan after six months of continuous
service (three months effective October 1, 1996), in amounts determined by the
plan. The Corporation contributes an additional 50% of the employee contribution
up to certain limits, not to exceed 1.5% of total eligible compensation (not to
exceed 2.0% of total eligible compensation effective January 1, 1997). Employees
become fully vested in the Corporation's contributions after five years of
continuous service (three years effective October 1, 1996), death, disability or
upon reaching age 65. The amounts charged to expense, representing the estimated
Company contribution to the 401(k) plan, for the years ended September 30, 1996,
1995 and 1994 were $919,600, $866,300 and $838,800, respectively.
The deferred profit sharing provisions of the plan include retirement and other
related benefits for substantially all of the Corporation's full-time employees.
Contributions under the plan are funded annually and are based, at a minimum,
upon a formula measuring profitability in relation to revenues. Additional
amounts may be contributed at the discretion of the Corporation. There were no
deferred profit sharing contributions for fiscal 1996, 1995 or 1994,
respectively.
<PAGE>
12. Leasing Subsidiary
The Corporation's consolidated financial statements include the accounts of its
wholly-owned leasing subsidiary, DataComm Leasing Corporation. The leasing
subsidiary purchases equipment for lease to others from General DataComm, Inc.,
its sole supplier.
The following represents the condensed financial information of DataComm Leasing
Corporation (in thousands).
Financial Condition
September 30, 1996 1995 (1)
- --------------------------------------------------------------------------------
Current assets $ 1,867 $1,900
Noncurrent assets 1,714 2,567
Due from General DataComm, Inc. 5,235 2,036
- -------------------------------------------------------------------------------
Total assets $ 8,816 $6,503
- -------------------------------------------------------------------------------
Current liabilities $ 1,663 $1,168
Noncurrent liabilities 34 173
Stockholder's equity 7,119 5,162
- -------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 8,816 $6,503
===============================================================================
Results of Operations
Years ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------
Net revenues $ 6,489 $5,807 $6,713
Income before income taxes $ 3,261 $2,371 $3,192
===============================================================================
(1) Fiscal 1995 numbers have been restated to reflect a $27,000,000 dividend
declared payable to General DataComm Industries, Inc.
Lease Financing Programs
DataComm Leasing Corporation maintains agreements with financial institutions
whereby certain finance lease receivables are transferred with full recourse.
The underlying equipment is retained as collateral by DataComm Leasing
Corporation. Proceeds received by the leasing subsidiary from the transfer of
such receivables amounted to $2,452,000, $2,613,000 and $3,618,000 for fiscal
1996, 1995 and 1994, respectively. The balance of all transferred receivables
which were due to be paid by the original lessees under the remaining lease
terms as of September 30, 1996 and 1995 amounted to $4,449,000 and $5,208,000,
respectively.
<PAGE>
13. Quarterly Financial Data (unaudited)
In thousands except per share data
Fiscal 1996 First Second Third Fourth
- -------------------------------------------------------------------------------
Revenues $59,799 $59,170 $56,569 $59,591
Gross profit 27,101 27,595 24,151 27,282
Operating (loss) (2,034) (1,877) (6,895) (3,920)
Net (loss) $(2,891) $(1,656) $(7,767) $(4,856)
(Loss) per share(1) $ (0.14) $ (0.08) $ (0.37) $ (0.23)
- -------------------------------------------------------------------------------
Fiscal 1995 First Second Third Fourth
- -------------------------------------------------------------------------------
Revenues $58,222 $56,531 $48,092 $58,348
Inventory write-down
and other items - - 6,500 1,100
Gross profit 27,189 25,435 13,821 25,413
Operating income (loss) 719 (4,214) (16,480) (4,643)
Net (loss) $ (805) $(5,033) $(16,598) $(5,194)
(Loss) per share (1) $ (0.04) $ (0.25) $ (0.82) $ (0.25)
===============================================================================
(1) Earnings (loss) per share amounts for each quarter are required to be
computed independently and, in both fiscal 1996 and fiscal 1995, did not equal
the full-year loss-per-share amounts.
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors of General DataComm Industries, Inc.
We have audited the accompanying consolidated balance sheets of General DataComm
Industries, Inc. and Subsidiaries as of September 30, 1996 and 1995 and the
related consolidated statements of operations and earnings reinvested (deficit)
and cash flows for the years ended September 30, 1996, 1995 and 1994. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based upon
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 General
DataComm Industries, Inc. and Subsidiaries as of September 30, 1996 and 1995,
and the consolidated results of their operations and their cash flows for the
years ended September 30, 1996, 1995 and 1994, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
October 1, 1993, the Corporation changed its methods of accounting for
post-retirement benefits other than pensions and post-employment benefits.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
October 21, 1996
Exhibit 21
General DataComm Industries, Inc.
Subsidiaries of the Registrant
Percentage
State or of Voting
Jurisdiction of Securities
Subsidiaries Incorporation Owned
- ------------ --------------- ----------
General DataComm, Inc. Delaware 100%
GDC Federal Systems, Inc. Delaware 100%
DataComm Leasing Corporation Delaware 100%
DataComm Rental Corporation (1) Delaware 100%
General DataComm Ltd. Canada 100%
General DataComm Limited United Kingdom 100%
General DataComm International
Corporation Delaware 100%
General DataCommunications,
Industries, B.V. (1) Netherlands 100%
GDC Realty, Inc. Texas 100%
GDC Naugatuck, Inc. Delaware (2)
General DataComm Pty. Limited Australia 100%
General DataComm SARL France 100%
General DataComm de Mexico
S.A. de C.V. Mexico 100%
General DataComm France SARL France 100%
General DataComm Pte Ltd. Singapore 100%
General DataComm de
Venezuela, C.A. (1) Venezuela 100%
General DataComm Advanced Research
Centre Limited United Kingdom 95% (3)
General DataComm Industries GmbH Germany 100%
General DataComm CIS Russia 100%
General DataComm China, Ltd. Delaware (4)
General DataComm do Brasil Ltda, S.C. Brazil 100%
_________________
(1) Currently inactive.
(2) Wholly owned by GDC Realty, Inc.
(3) 5% owned by General DataComm International Corporation.
(4) Wholly owned by General DataComm International Corporation.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
General DataComm Industries, Inc. and Subsidiaries on Form S-8 (File Nos.
2-83701, 2-92929, 33-21027, 33-36351, 33-37266, 33-43050, 33-53150, 33-62716,
33-53201 and 33-59573) and on Form S-3 (File No. 33-54417) of our report, which
includes an explanatory paragraph for certain accounting changes, dated October
21, 1996 on our audits of the consolidated financial statements and financial
statement schedule of General DataComm Industries, Inc. and Subsidiaries as of
September 30, 1996 and 1995 and for the years ended September 30, 1996, 1995 and
1994, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Stamford, Connecticut
December 20, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 26,264
<SECURITIES> 0
<RECEIVABLES> 39,828
<ALLOWANCES> 1,768
<INVENTORY> 44,588
<CURRENT-ASSETS> 11,511
<PP&E> 133,833
<DEPRECIATION> 84,995
<TOTAL-ASSETS> 205,054
<CURRENT-LIABILITIES> 54,558
<BONDS> 22,781
0
800
<COMMON> 2,139
<OTHER-SE> 119,247
<TOTAL-LIABILITY-AND-EQUITY> 205,054
<SALES> 189,019
<TOTAL-REVENUES> 235,129
<CGS> 101,794
<TOTAL-COSTS> 129,000
<OTHER-EXPENSES> 120,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,051
<INCOME-PRETAX> (15,970)
<INCOME-TAX> 1,200
<INCOME-CONTINUING> (17,170)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,170)
<EPS-PRIMARY> (0.83)
<EPS-DILUTED> (0.83)
</TABLE>
