SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
Middlebury, Connecticut 06762-1299
(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (203) 574-1118
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Title of Each Class at March 31, 1997
- ------------------------------------ -----------------------
Common Stock, $.10 par value 19,004,818
Class B Stock, $.10 par value 2,136,933
Total Number of Pages in This Document is 23.
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets -
March 31, 1997 and September 30, 1996 3
Consolidated Statements of Operations
and Accumulated Deficit - For the Three and
Six Months Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the
Six Months Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 5
Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security-Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
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<PAGE>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, Sept 30,
In thousands except shares 1997 1996
- -------------------------------------------------------------------------------
ASSETS: (unaudited)
Current assets:
Cash and cash equivalents $12,391 $26,264
Accounts receivable, less allowance for doubtful
receivables of $1,772 in March and $1,768 in September 34,157 39,828
Inventories 45,372 44,588
Deferred income taxes 3,552 4,457
Other current assets 8,444 7,054
- -------------------------------------------------------------------------------
Total current assets 103,916 122,191
===============================================================================
Property, plant and equipment, net 49,010 48,838
Capitalized software development costs, net 23,500 23,393
Other assets 11,597 10,632
- -------------------------------------------------------------------------------
$188,023 $205,054
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $6,880 $6,533
Accounts payable, trade 17,189 14,917
Accrued payroll and payroll-related costs 5,845 6,592
Deferred income 7,912 7,305
Other current liabilities 18,881 19,211
- -------------------------------------------------------------------------------
Total current liabilities 56,707 54,558
==============================================================================
Long-term debt, less current portion 21,465 22,781
Deferred income taxes 4,143 4,962
Other liabilities 521 567
- -------------------------------------------------------------------------------
Total liabilities 82,836 82,868
===============================================================================
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, par value $1.00 per share, 3,000,000
shares authorized; issued and outstanding: 800,000 shares
of 9% cumulative convertible exchangeable preferred
stock with a $20 million liquidation preference 800 800
Class B stock, par value $.10 per share, 35,000,000
shares authorized; issued and outstanding: 2,136,933
in March and 2,137,443 in September 214 214
Common stock, par value $.10 per share, 35,000,000
shares authorized; issued and outstanding: 19,424,747
in March and 19,249,987 in September 1,942 1,925
Capital in excess of par value 149,351 148,208
Accumulated deficit (41,615) (23,323)
Cumulative foreign currency translation adjustment (2,396) (2,510)
Common stock held in treasury, at cost:
419,929 shares in March and 422,429 shares in September (3,109) (3,128)
- -------------------------------------------------------------------------------
Total stockholders' equity 105,187 122,186
- -------------------------------------------------------------------------------
$188,023 $205,054
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
In thousands, except per share data 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Net product sales $40,018 $47,399 $88,238 $95,616
Service revenue 9,436 9,584 18,921 19,540
Lease revenue 1,317 2,187 2,655 3,813
- -------------------------------------------------------------------------------
50,771 59,170 109,814 118,969
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 18,892 22,001 42,009 44,919
Amortization of capitalized
software development costs 3,000 3,000 6,000 5,600
Cost of services 6,823 6,294 13,612 13,258
Cost of lease revenue 191 280 329 496
Selling, general and administrative 21,687 21,642 43,136 43,087
Research and product development 10,642 7,830 20,315 15,520
- -------------------------------------------------------------------------------
61,235 61,047 125,401 122,880
- -------------------------------------------------------------------------------
Operating loss (10,464) (1,877) (15,587) (3,911)
- -------------------------------------------------------------------------------
Other income (expense):
Interest (499) (450) (838) (887)
Other, net (655) 971 (767) 851
- -------------------------------------------------------------------------------
(1,154) 521 (1,605) (36)
- -------------------------------------------------------------------------------
Loss before income taxes (11,618) (1,356) (17,192) (3,947)
Income tax provision 100 300 200 600
- -------------------------------------------------------------------------------
Net loss ($11,718) ($1,656) ($17,392) ($4,547)
===============================================================================
Loss per share ($0.58) ($0.08) ($0.87) ($0.22)
===============================================================================
Weighted average number of common and
common equivalent shares outstanding 21,056 20,676 21,021 20,586
===============================================================================
Accumulated deficit at beginning of
period ($29,447) ($9,044) ($23,323) ($6,153)
Net loss (11,718) (1,656) (17,392) (4,547)
Payment of preferred stock dividends (450) - (900) -
- -------------------------------------------------------------------------------
Accumulated deficit at end of period ($41,615) ($10,700) ($41,615) ($10,700)
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
and Cash Equivalents
---------------------------
Six Months Ended
March 31,
In thousands 1997 1996
------------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) ($17,392) ($4,547)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,292 12,644
Gain on sale of real estate -- (1,000)
Decrease in accounts receivable 5,022 1,833
(Increase) in inventories (984) (1,203)
Increase in accounts payable
and accrued expenses 1,400 6,653
(Increase) in other net current assets (150) (1,488)
(Increase) in other net long-term assets (1,733) (915)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (545) 11,977
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (6,228) (7,129)
Capitalized software development costs (6,107) (5,586)
Proceeds from sale of real estate - 1,000
- -------------------------------------------------------------------------------
Net cash used in investing activities (12,335) (11,715)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes and mortgages 2,586 582
Principal payments on notes and mortgages (3,560) (9,758)
Proceeds from issuing common stock 1,061 1,724
Payment of preferred stock dividends (900) -
- -------------------------------------------------------------------------------
Net cash used in financing activities (813) (7,452)
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (180) (91)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (13,873) (7,281)
Cash and cash equivalents at beginning of period - (1) 26,264 18,443
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $12,391 $11,162
===============================================================================
(1) - The Corporation considers all highly liquid investments purchased with
a maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to fairly present the consolidated financial position
of General DataComm Industries, Inc. and subsidiaries (the
"Corporation" or "Company") as of March 31, 1997, the
consolidated results of their operations for the three and six
months ended March 31, 1997 and 1996, and their cash flows for
the six months ended March 31, 1997 and 1996. Such adjustments
are generally of a normal recurring nature and include
adjustments to certain accruals and asset reserves to appropriate
levels.
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 Company's inventory,
capitalized software and certain other assets.
The consolidated financial statements contained herein should be
read in conjunction with the consolidated financial statements
and related notes thereto filed with Form 10-K for the year ended
September 30, 1996.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
March 31, 1997 September 30, 1996
-------------- ------------------
Raw materials $18,794 $16,627
Work-in-process 5,657 6,726
Finished goods 20,921 21,235
------- -------
Total $45,372 $44,588
======= =======
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
March 31, 1997 Sept 30, 1996
-------------- -------------
Land $ 1,772 $ 1,764
Buildings and improvements 29,497 29,050
Test equipment, fixtures and
field spares 54,232 52,537
Machinery and equipment 54,510 50,482
-------- -------
140,011 133,833
Less: accumulated depreciation
and amortization 91,001 84,995
-------- --------
$49,010 $ 48,838
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of (in thousands):
March 31, 1997 Sept 30, 1996
-------------- -------------
Original Cost $36,381 $33,998
Less: accumulated amortization 12,881 10,605
--------- ---------
$23,500 $23,393
========= ========
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
March 31, 1997 Sept 30, 1996
-------------- -------------
Notes payable $15,947 $16,421
Mortgages payable 12,042 12,359
Capital lease obligations 356 534
-------- -------
28,345 29,314
Less: current portion 6,880 6,533
-------- -------
$21,465 $22,781
======== =======
-7-
<PAGE>
Long-Term Debt -- Continued
Revolving Credit Facility
The Corporation has an agreement with The Bank of New York Commercial
Corporation whereby the Corporation has been provided a revolving credit
facility in the amount of $25 million, subject to a borrowing base formula. The
facility, which matures in November 1998, provides for a sub-limit of $5 million
for letters of credit. 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. The agreement also requires
conformity with various financial covenants.
No borrowings were outstanding as of March 31, 1997. There were, however,
$905,000 of letters of credit outstanding as of March 31, 1997.
NOTE 6. FOREIGN CURRENCY TRANSLATION FOR MEXICAN OPERATIONS
As a result of high inflation in Mexico, the Company was required to change its
method of translating the financial statements of its Mexican subsidiary to
reflect the designation of the U.S. dollar as the functional currency.
Therefore, effective January 1, 1997, non-monetary assets such as inventories
and property, plant and equipment, along with expenses related thereto, are
being translated at historical rates of exchange, and adjustments resulting from
translation are reflected in results of operations. Previously, such amounts
were stated at current rates of exchange and translation adjustments were
reported as a separate component of stockholders' equity. The impact of this
change was not material to the Company's reported financial results for the
quarter ended March 31, 1997.
NOTE 7. OTHER INCOME (EXPENSE)
Other income (expense) for the quarter and six-months ended March 31, 1997
includes foreign currency exchange losses of $(669,000) and $(709,000),
respectively. The exchange losses are principally attributable to the
strengthening U.S. dollar as compared to the French franc and German mark, and
its impact on liabilities of our French and German subsidiaries which are
payable in U.S. dollars. Such amounts compare to an exchange gain of $8,000 for
the quarter ended March 31, 1996 and an exchange loss of $(187,000) for the six
month period ended March 31, 1996. Separately, other income for the three and
six months ended March 31, 1996 includes a $1.0 million gain from a real estate
transaction.
-8-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General Summary Discussion
Total revenues for the second fiscal quarter ended March 31, 1997 were $50.8
million, down $8.4 million, or 14.2%, from the same quarter one year ago.
Year-to-date revenues for the six months ended March 31, 1997 and 1996 were
$109.8 million and $119.0 million, respectively, down $9.2 million, or 7.7
percent.
The net loss for the quarter ended March 31, 1997 amounted to $11.7 million, as
compared to a net loss of $1.7 million for quarter ended March 31, 1996. The net
loss for the six months ended March 31, 1997 amounted to $17.4 million, as
compared to a net loss of $4.5 million for the same six-month period one year
ago. The increased net losses (for the quarter and year-to-date periods) are
principally attributable to reduced revenue levels, increases in research and
development expense (up $2.8 million and $4.8 million in the quarter and six
months ended March 31, 1997, respectively, as compared to the same periods one
year ago) and increased exchange losses (up $522,000) experienced in fiscal
1997. In addition, prior year second quarter results include a $1.0 million gain
from the sale of real estate.
Regarding cash flow, operating activities consumed $545,000 in cash for the six
months ended March 31, 1997. After investing and financing activities, total
cash consumption for the same period amounted to $13.9 million. The Company had
on-hand cash balances of $12.4 million at March 31, 1997. Furthermore, the
Company has a $25 million revolving loan facility, of which $19.7 million was
available at March 31, 1997 per borrowing base calculations. No borrowings were
outstanding on this credit facility at March 31, 1997. Future availability of
funds under the revolving credit loan facility are dependent on the adequacy of
the available borrowing base (principally accounts receivable and inventories
required to secure such borrowings), and compliance with financial covenants,
including, among others, net income (or restricted net loss) performance.
The Company continues to invest heavily in research and development activities
based on the belief that its ATM and Advanced Network Access ("Access") products
have the potential to deliver substantially higher revenues, and ultimately,
shareholder value, on a longer term basis.
Management recognizes the need to improve operational performance in
anticipation that revenue growth opportunities will take time to develop. A
managed cost reduction effort has been implemented with the objective of
reducing the Corporation's breakeven point. It is important to note, however,
that significant revenue growth will also be required to achieve profitability.
The cost reduction efforts include restrictions on hiring and reductions in
discretionary and capital spending. Reallocation of resource to prioritized
projects is also under review to maximize the productivity of the Corporation's
existing workforce. Separately, management recognizes a need to raise capital in
the near-term to effectively support its cash requirements. As a result, it is
actively pursuing alternative funding sources, such as the sale of stock or
non-strategic assets.
-9-
<PAGE>
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three months ended Six months ended
March 31, March 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Net product sales 78.8% 80.1% 80.4% 80.4%
Service revenue 18.6 16.2 17.2 16.4
Leasing revenue 2.6 3.7 2.4 3.2
- -------------------------------------------------------------------------------
100.0 100.0 100.0 100.0
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 51.0 48.3 50.9 49.3
Amortization of capitalized software
development costs 5.9 5.1 5.5 4.7
Selling, general and administrative 42.7 36.6 39.3 36.3
Research and product development 21.0 13.2 18.5 13.0
- -------------------------------------------------------------------------------
Operating (loss) (20.6) (3.2) (14.2) (3.3)
- -------------------------------------------------------------------------------
Net (loss) (23.1)% (2.8)% (15.8)% (3.8)%
===============================================================================
Percentages for the quarter ended March 31, 1997 are affected by the low revenue
base. Noteworthy observations from the year-to-date numbers include: fiscal 1997
operating expenses, including research and development expenses, amount to 57.8%
of revenue, as compared to 49.3% for the six months ended March 31, 1996;
research and product development related expenses, including capitalized
software amortization, amount to 24.0% and 17.8% of revenue for the six month
periods ended March 31, 1997 and 1996, respectively, an increase of 6.2 points,
or 34.8%. This increase reflects the Company's continued strategic investment in
its ATM and Access product development.
Revenues
- --------
Quarter: Total revenues for the quarter ended March 31, 1997 were $50.8 million,
down $8.4 million, or 14.2%, from the same quarter last year. Product, service
and lease revenues were down $7.4 million, $0.1 million and $0.9 million,
respectively. Two primary factors accounted for the product sales decline: a
reduction in Asynchronous Transfer Mode ("ATM") product shipments resulted in a
revenue decline of $5.6 million as compared to the same quarter one year ago,
and shipments of other products to domestic Telephone Companies ("Telcos")
declined $2.3 million for the same period. Total ATM product line shipments
amounted to $7.4 million and $13.0 million for the quarters ended March 31, 1997
and 1996, respectively. The Corporation attributes the ATM product revenue
reduction to longer sales cycle times required as a result of product complexity
and new technologies involved in ATM systems. Individual ATM orders are also
often larger in size than orders for other products, and the timing of such
orders and shipments can generate large quarter-to-quarter fluctuations. In the
domestic Telco area, mergers have disrupted ordering patterns for our equipment.
In addition, increased competition among Telcos and other service providers is
driving the Telcos to reduce costs and capital spending. The
-10-
<PAGE>
Corporation expects this business to recover.
From a product line perspective, Access product revenues were down $2.4 million
(12.1%), Internetworking products achieved growth of $0.6 million (5.5%) and ATM
product sales were down $5.6 million (42.8%). Separately, the $870,000 reduction
in leasing revenue reflects the impact of a high level of leasing revenue in the
prior year second quarter, attributable to lease renewals and sale of off-lease
inventory. Geographically, domestic and international revenues accounted for 53%
and 47% of consolidated revenues, respectively, relatively unchanged from 52%
and 48%, respectively, for the same quarter one year ago.
Year-To-Date: Year-to-date total revenues amounted to $109.8 million as compared
to $119.0 million for the same six month period one year ago, down $9.2 million,
or 7.7%. Product, service and lease revenues were down $7.4 million, $0.6
million and $1.2 million, respectively. For the reasons described above,
year-to-date ATM product line shipments, which amounted to $20.3 million and
$23.9 million for the six months ended March 31, 1997 and 1996, respectively,
declined $3.6 million, or 15.2%, and domestic Telco business (of other products)
declined $3.8 million year-over-year. From a product line perspective, Access,
Internetworking and ATM product revenues were down $3.3 million (8.0%), $0.5
million (2.0%) and $3.6 million (15.2%), respectively. The Access product
revenue reduction occurred in the Telco sales channel. The ATM product revenue
decline principally occurred in the international marketplace. V.34 licensing
technology revenues amounted to $2.4 million, up $0.9 million, or 63%, from the
prior year. Regarding service revenues, a 7.3% rate of international service
revenue growth for the first six months of this year partially offset a 9.3%
domestic service revenue decline. This reflects growth in international product
support requirements and reduced domestic service support requirements resulting
from a declining domestic end-user business. Net consolidated service revenue is
down $0.6 million, or 3.2%. The leasing revenue discussion above is also
applicable to year-to-date results. Geographically, domestic and international
revenues accounted for 52% and 48% of consolidated revenues, respectively, as
compared to 54% and 46% for the same period one year ago.
Cost of Revenue and Gross Margin
- --------------------------------
Quarter: Gross margin as a percent of revenues (excluding the amortization of
capitalized software development costs) were 49.0% and 51.7% for the quarters
ended March 31, 1997 and 1996, respectively. Product margins were down 0.8
points overall; all three product lines contributed to the margin decline, which
resulted from the allocation of fixed manufacturing costs over a reduced revenue
base. Service margins declined 6.6 points as compared to the second quarter of
fiscal 1996, reflecting a reduction in domestic business and growth in the
international service business, which relies more heavily on use of outside
service contracts and therefore produce lower margins. Leasing margins as a
percent of revenue were also down compared to one year ago due to the higher
lease revenue recorded in the prior year, as discussed earlier.
Year-To-Date: Year-to-date gross margins as a percent of revenues (excluding the
amortization of capitalized software development costs) amounted to 49.1% and
51.0% for the six month periods ended March 31, 1997 and 1996, respectively, a
reduction of 1.9 points. This is the result of lower sales volume covering a
significant fixed cost component. Year-to-date service and leasing margin
trends, including the causes therefore, are consistent with the quarterly
discussion above.
Separately, amortization of capitalized software development cost amounted to
$3.0 million in the quarters ended March 31, 1997 and 1996, and $6.0 million and
$5.6 million in the six month periods ended March 31, 1997 and 1996,
respectively.
-11-
<PAGE>
Selling, General and Administrative Expenses
- --------------------------------------------
Due to cost containment efforts, selling, general and administrative expenses
were generally unchanged at $21.7 million and $43.1 million for the three and
six month periods ended March 31, 1997, respectively ($21.6 million and $43.1
million for the corresponding periods one year ago).
Research and Product Development Costs
- --------------------------------------
Quarter: The Company continues to invest heavily in research and product
development. Research and product development spending, before consideration of
capitalized software development costs, increased to $13.7 million in the second
quarter of fiscal 1997, up $2.9 million or 27.1% from the $10.8 million spending
level in the corresponding quarter one year ago. This spending increase is
attributable to increased headcount (up 41 persons), increased utilization of
outsourced product development services and other support costs associated with
an increased level of ATM product development activity, including development of
our Strobos ATM product line. The combination of a spending increase and a
reduced revenue base caused research and development spending to increase to
27.1% of revenue, as compared to 18.3% in the same quarter one year ago.
Capitalized software development costs were $3.1 million for the second fiscal
quarter of 1997, as compared to $3.0 million for the second fiscal quarter of
1996.
Year-To-Date: Year-to-date research and development spending follows similar
trends. Spending for the six months ended March 31, 1997 and 1996 amounted to
$26.4 million and $21.1 million, respectively, an increase of $5.3 million, or
25.2%. The causes of the spending increase are consistent with those discussed
above. Capitalized software development costs for the six months ended March 31,
1997 were $6.1 million as compared to $5.6 million for the corresponding period
of fiscal 1996.
The complexity of the ATM technology has and will continue to demand significant
research and product development investment. To retain an effective pool of
available engineering talent, the Corporation operates research and development
facilities in four locations, including the United States (Middlebury,
Connecticut and Boston, Massachusetts), Canada, and the United Kingdom.
Other Income and Expense
- ------------------------
Please refer to Note 7 on page 8 for a detailed discussion of other income
and expense.
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Corporation, principally for foreign income and
domestic state taxes, amounted to $100,000 and $300,000 in the quarters ended
March 31, 1997 and 1996, respectively. Year-to-date tax provisions amounted to
$200,000 and $600,000 for fiscal 1997 and 1996, respectively. As noted in the
Corporation's Form 10-K filed for the year ended September 30, 1996, the
Corporation has significant federal net operating loss carryforwards available.
However, based on the Corporation's past financial performance and the
uncertainty of ultimate realization of such carryforwards, no deferred tax asset
(or related deferred tax benefit) has been recorded in the Corporation's
financial statements.
-12-
<PAGE>
Foreign Currency Risk
- ---------------------
Foreign currency fluctuations did not have a material impact on trends reflected
in the Corporation's financial statements. No individual foreign subsidiary
operation represents a material percentage of consolidated revenue or net worth.
However, if international subsidiary operations (i.e. Canada, Germany, France
and Mexico) experience strong revenue growth in the future, the likelihood of
foreign currency fluctuations impacting trends reflected in the Corporation's
financial statements could increase, especially if the U.S. dollar continues to
strengthen against the respective currencies. Separately, subsidiaries have some
U.S. dollar denominated liabilities. The impact of foreign currency fluctuations
on such amounts are recorded as a component of "Other Income and Expense" in the
Corporation's statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Corporation's cash and cash equivalents amounted to $12.4 million at March
31, 1997 as compared to $26.3 million at September 30, 1996. The Corporation has
in place a $25 million revolving credit facility, of which $19.7 million was
available per borrowing base calculations at March 31, 1997. No borrowings were
outstanding on this credit facility at March 31, 1997. The future availability
of funds under this loan facility depends on (and may be restricted by) a
borrowing base formula which is calculated as a percentage of certain accounts
receivable and inventories, as well as compliance with certain financial
covenants, including restrictions on the magnitude of net loss levels. Bank debt
was reduced by $1.0 million during the six months ended March 31, 1997, to $28.3
million at March 31, 1997, as compared to $29.3 million at September 30, 1996.
The Company believes, based on its future forecasts, that the combination of its
existing cash balances and available funds under its revolving credit facility
will be adequate to support the Corporation's immediate cash requirements. In
addition, the Corporation considers its ability to offer for sale its common
stock, preferred stock, warrants and/or other assets as viable alternative
sources of financing, some form of which will be required to satisfy future cash
requirements.
Operating
- ---------
During the six months ended March 31, 1997, the Corporation's operating
activities generated negative cash flow of $545,000, as compared to a positive
cash flow of $12.0 million for the same period one year ago. The $12.5 million
difference is principally due to the larger net loss ($12.8 million).
Non-debt working capital, excluding cash and cash equivalents, decreased $6.2
million to $41.7 million at March 31, 1997 as compared to $47.9 million at
September 30, 1996. The reduction is principally comprised of a $5.7 million
decrease in accounts receivable, attributable to improved collection activities
(days sales outstanding were reduced to 61 days at March 31, 1997 from 66 days
at September 30, 1996) and a reduced level of product shipments in the quarter
ended March 31, 1997.
-13-
<PAGE>
Investing
- ---------
Net investments in property, plant and equipment for the six months ended March
31, 1997 amounted to $6.2 million, as compared to $7.1 million for the
corresponding six month period of fiscal 1996. Separately, investments in
capitalized software amounted to $6.1 million and $5.6 million for the six
months ended March 31, 1997 and 1996, respectively. Total investments amounted
to $12.3 million and $12.7 million in the six months ended March 31, 1997 and
1996, respectively. Cash consumption from prior year investments was partially
offset with $1.0 million in proceeds from the sale of real estate.
Financing
- ---------
Financing activities during the six-month period ended March 31, 1997 required
the use of $813,000 in cash, representing the net effect of $1.0 million in debt
reduction, payment of $900,000 in preferred stock dividends, and receipt of $1.1
million in cash proceeds from the sale of stock through the Company's Employee
Stock Purchase Plan and exercise of stock options.
The Corporation has an agreement with The Bank of New York Commercial
Corporation whereby the Corporation has been provided a revolving credit
facility in the amount of $25 million, subject to a borrowing base formula,
$19.7 million of which was available per borrowing base calculations at March
31, 1997. The facility, which matures in November 1998, provides for a sub-limit
of $5 million for letters of credit. 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. The agreement
also requires conformity with various financial covenants, the most restrictive
of which include net income (or restricted net loss) performance, minimum
tangible net worth requirements, and total liabilities to tangible net worth
ratio requirements.
No borrowings were outstanding under this agreement as of March 31, 1997. There
were, however, $905,000 of letters of credit outstanding as of March 31, 1997.
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 document, 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.
-14-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission Of Matters to a Vote of Security-Holders
On February 6, 1997, at the Annual Meeting of Stockholders of the
Corporation, the stockholders:
Elected directors to the Corporation for a term of three (3) years:
Number of votes cast:
For Withheld
----------- --------
Mr. Lee M. Paschall 17,501,923 1,769,895
Mr. John L. Segall 17,500,525 1,771,293
Adopted an amendment to the 1991 Stock Option Plan, reserving
an additional 925,000 shares of the Corporation's Common Stock
for issuance thereunder:
Number of votes cast for: 16,725,190
Number of votes cast against: 2,424,997
Number of votes abstained: 121,631
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
10.17 Amendment No. 5 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 Earnings Per Share for the three and six month
periods ended March 31, 1997 and 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for
which this report is filed.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL DATACOMM INDUSTRIES, INC.
(Registrant)
/s/ William S. Lawrence
-------------------------------
William S. Lawrence
Senior Vice President and
Principal Financial Officer
Dated: May 15, 1997
-16-
Exhibit 11
General DataComm Industries, Inc. and Subsidiaries
Calculation of Loss per Share
(In thousands except per share data)
Three months ended Six months ended
March 31, March 31,
1997 1996 1997 1996
===============================================================================
Primary loss per share:
Weighted average number of common
shares outstanding 21,056 20,676 21,021 20,586
Assumed exercise of certain stock
options - - - -
- -------------------------------------------------------------------------------
21,056 20,676 21,021 20,586
- -------------------------------------------------------------------------------
Net loss ($11,718) ($1,656) ($17,392) ($4,547)
Payment of preferred stock dividends (450) - (900) -
- -------------------------------------------------------------------------------
($12,168) ($1,656) ($18,292) ($4,547)
- -------------------------------------------------------------------------------
Primary loss per share ($0.58) ($0.08) ($0.87) ($0.22)
===============================================================================
Fully diluted loss per share:
The fully diluted loss per share calculation is identical to the calculation
presented above.
-17-
AMENDMENT NO. 5
TO
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 5 ("Amendment") is entered into as of April,
1997, 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>
"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
--------------------- --------------------------
March 31, 1997 $70,044,000
June 30, 1997 $60,503,000
September 30, 1997 $55,119,000
December 31, 1997 and at the the sum of (i) (a) $77,566,000
end of each fiscal quarter if the minimum Tangible Net Worth at
thereafter the end 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
------------------ ---------------------
March 31, 1997 1.20 to 1.0
June 30, 1997 1.45 to 1.0
September 30, 1997 1.70 to 1.0
December 31, 1997 1.00 to 1.0
March 31, 1998 1.00 to 1.0
June 30, 1998 0.95 to 1.0
- 2 -
<PAGE>
September 30, 1998 0.95 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
--------------------- --------------
March 31, 1997 (3.36) to 1.00
June 30, 1997 (2.31) to 1.00
September 30, 1997 (0.99) 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)
------------- -----------------
October 1, 1996 - March 31, 1997 ($18,700,000)
January 1, 1997 - June 30, 1997 ($21,700,000)
October 1, 1996 - September 30, 1997 ($33,651,000)
April 1, 1997 - September 30, 1997 ($16,700,000)
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:
"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
------------------ ---------------
March 31, 1997 $45,059,000
June 30, 1997 $35,736,000
September 30, 1997 $30,695,000
December 31, 1997 $53,000,000
- 3 -
<PAGE>
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.
(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.
- 4 -
<PAGE>
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
--------------------------
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/ RYAN PEAK
-------------------------------
Name: Ryan Peak
Its: Vice President
CONSENTED AND AGREED TO:
DATACOMM RENTAL CORPORATION
By: /s/ DENNIS J. NESLER
- -------------------------
Name: Dennis J. Nesler
Its: Vice President & Treasurer
GENERAL DATACOMM LTD.
By: /s/ DENNIS J. NESLER
- --------------------------
Name: Dennis J. Nesler
Its: Vice President & Treasurer
- 5 -
<PAGE>
GENERAL DATACOMM FRANCE S.A.R.L.
By: /s/ DENNIS J. NESLER
- --------------------------
Name: Dennis J. Nesler
Its: Vice President & Treasurer
GENERAL DATACOMM DE MEXICO S.A. DE C.V.
By: /s/ DENNIS J. NESLER
- --------------------------
Name: Dennis J. Nesler
Its: Vice President & Treasurer
GENERAL DATACOMM PTY LIMITED
By: /s/ DENNIS J. NESLER
- --------------------------
Name: Dennis J. Nesler
Its: Vice President & Treasurer
GENERAL DATACOMM S.A.R.L.
By: /s/ DENNIS J. NESLER
- --------------------------
Name: Dennis J. Nesler
Its: Vice President & Treasurer
- 6 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,391
<SECURITIES> 0
<RECEIVABLES> 34,157
<ALLOWANCES> 1,772
<INVENTORY> 45,372
<CURRENT-ASSETS> 11,996
<PP&E> 140,011
<DEPRECIATION> 91,001
<TOTAL-ASSETS> 188,023
<CURRENT-LIABILITIES> 56,707
<BONDS> 21,465
0
800
<COMMON> 2,156
<OTHER-SE> 102,231
<TOTAL-LIABILITY-AND-EQUITY> 188,023
<SALES> 88,238
<TOTAL-REVENUES> 109,814
<CGS> 48,009
<TOTAL-COSTS> 61,950
<OTHER-EXPENSES> 64,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (838)
<INCOME-PRETAX> (17,192)
<INCOME-TAX> 200
<INCOME-CONTINUING> (17,392)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,392)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
