SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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 December 31, 1997
Common Stock, $.10 par value 19,252,317
Class B Stock, $.10 par value 2,136,933
Total Number of Pages in this Document is 20.
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Consolidated Balance Sheets -
December 31, 1997 and September 30, 1997 3
Consolidated Statements of Operations
and Accumulated Deficit - For the Three Months
Ended December 31, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the
Three Months Ended December 31, 1997 and 1996 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
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<PAGE>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
In thousands except shares 1997 1997
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $22,248 $21,526
Accounts receivable, less allowance for
doubtful receivables of $1,599 in
December and $1,703 in September 32,052 33,193
Inventories 40,680 41,749
Deferred income taxes 1,925 2,244
Other current assets 7,028 7,903
- -------------------------------------------------------------------------------
Total current assets 103,933 106,615
===============================================================================
Property, plant and equipment, net 45,598 46,427
Capitalized software development costs, net 23,500 23,500
Other assets 9,565 10,793
- -------------------------------------------------------------------------------
$182,596 $187,335
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $8,534 $7,569
Accounts payable, trade 13,463 15,245
Accrued payroll and payroll-related costs 9,098 6,990
Deferred income 5,546 6,527
Other current liabilities 20,139 18,358
- -------------------------------------------------------------------------------
Total current liabilities 56,780 54,689
===============================================================================
Long-term debt, less current portion 57,033 49,293
Deferred income taxes 2,449 2,789
Other liabilities 579 536
- -------------------------------------------------------------------------------
Total liabilities 116,841 107,307
===============================================================================
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 December and
September 214 214
Common stock, par value $.10 per share,
35,000,000 shares authorized; issued and
outstanding: 19,582,699 in December and
19,582,661 in September 1,958 1,958
Capital in excess of par value 149,864 149,864
Accumulated deficit (82,184) (67,874)
Cumulative foreign currency translation
adjustment (2,452) (2,489)
Common stock held in treasury, at cost:
330,382 shares in December and September (2,445) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 65,755 80,028
- -------------------------------------------------------------------------------
$182,596 $187,335
===============================================================================
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
December 31,
In thousands, except per share data 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Net product sales $37,500 $48,220
Service revenue 9,481 9,485
Lease revenue 1,238 1,338
- -------------------------------------------------------------------------------
48,219 59,043
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 18,836 23,117
Amortization of capitalized software
development costs 3,000 3,000
Cost of service revenue 6,763 6,789
Cost of lease revenue 137 138
Selling, general and administrative 20,242 21,449
Research and product development 8,934 9,673
Restructuring of operations 2,500 --
- -------------------------------------------------------------------------------
60,412 64,166
- -------------------------------------------------------------------------------
Operating loss (12,193) (5,123)
- -------------------------------------------------------------------------------
Other income (expense):
Interest, net (1,396) (339)
Other, net (71) (112)
- -------------------------------------------------------------------------------
(1,467) (451)
- -------------------------------------------------------------------------------
Loss before income taxes (13,660) (5,574)
Income tax provision 200 100
- -------------------------------------------------------------------------------
Net loss ($13,860) ($5,674)
===============================================================================
Basic and diluted loss per share ($0.67) ($0.29)
===============================================================================
Accumulated deficit at beginning of period ($67,874) ($23,323)
Net loss (13,860) (5,674)
Payment of preferred stock dividends (450) (450)
- -------------------------------------------------------------------------------
Accumulated deficit at end of period ($82,184) ($29,447)
===============================================================================
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 CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
and Cash Equivalents
---------------------------
Three Months Ended
December 31,
----------------------------
In thousands 1997 1996
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($13,860) ($5,674)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,971 6,510
(Increase) decrease in accounts receivable 988 (2,951)
Decrease in inventories 944 1,009
Increase in accounts payable
and accrued expenses 1,487 951
(Increase) decrease in other net current assets 1,095 (2,085)
Decrease in other net long-term assets 1,499 328
- -------------------------------------------------------------------------------
Net cash used in operating activities (876) (1,912)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant, and equipment, net (2,455) (2,667)
Capitalized software development costs (3,000) (3,000)
- -------------------------------------------------------------------------------
Net cash used in investing activities (5,455) (5,667)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Payments on revolver borrowings (4,799) --
Proceeds from notes and mortgages 14,338 1,193
Principal payments on notes and mortgages (2,022) (1,852)
Proceeds from issuing common stock - 148
Payment of preferred stock dividends (450) (450)
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 7,067 (961)
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (14) (19)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 722 (8,559)
Cash and cash equivalents at beginning of period - (1) 21,526 26,264
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $22,248 $17,705
===============================================================================
(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 December 31, 1997,
the consolidated results of their operations for the three months ended
December 31, 1997 and 1996, and their cash flows for the three months ended
December 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, 1997.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
December 31, 1997 September 30, 1997
----------------- ------------------
Raw materials $16,674 $16,075
Work-in-process 2,350 4,914
Finished goods 21,656 20,760
------- ------
$40,680 $41,749
======= =======
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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):
December 31, 1997 September 30, 1997
----------------- -----------------
Land $ 1,775 $ 1,770
Buildings and improvements 29,885 29,716
Test equipment, fixtures and
field spares 56,246 55,858
Machinery and equipment 57,419 56,165
------- -------
145,325 143,509
Less: accumulated depreciation
and amortization 99,727 97,082
------- -------
$45,598 $46,427
======== =========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of (in thousands):
December 31, 1997 September 30, 1997
----------------- ------------------
Original cost $42,627 $39,627
Less: accumulated amortization 19,127 16,127
------- -------
$23,500 $23,500
======= =======
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
December 31, 1997 September 30, 1997
----------------- ------------------
Revolving credit facility $ -- $ 4,799
Notes payable 29,025 15,353
7-3/4% convertible senior
subordinated debentures 25,000 25,000
Mortgages payable 11,542 11,710
------ ------
65,567 56,862
Less: current portion 8,534 7,569
------ -------
$57,033 $49,293
======= =======
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Revolving Credit Facility
On October 22, 1997, the Company entered into a new $40 million loan
and security agreement (the "Loan Agreement") with Transamerica Business
Credit Corporation and The CIT Group/Business Credit, Inc. The new Loan
Agreement provided $15 million in proceeds (received on October 22, 1997)
from a five-year term loan. In addition, the Loan Agreement provides for a
$25 million (maximum value) revolving line of credit for a three-year
period ending in October 2000, subject to extension. Availability of such
funds is subject to satisfying a borrowing base formula related to levels
of certain accounts receivable and inventories, which may limit available
borrowings to less than $25 million (at December 31, 1997, the total amount
available for borrowings and letters of credit was $25 million). Most
assets of the Company, including accounts receivable, inventories and
property, plant and equipment, are pledged as collateral.
No revolving line of credit borrowings were outstanding as of December
31, 1997, as compared to $4.8 million of such borrowings outstanding (under
a previous credit facility) as of September 30, 1997. There were $920,000
of letters of credit outstanding as of December 31, 1997.
The new Loan Agreement includes covenants which may limit access to
future borrowings and may accelerate payment requirements on outstanding
borrowings. The most restrictive covenant requires the maintenance of a
minimum balance of $80 million for the sum of stockholders' equity
(excluding foreign currency translation adjustments which occur subsequent
to September 30, 1997) and outstanding 7-3/4% convertible senior
subordinated debentures. Other covenants require that the Company maintain
a current ratio equal to or greater than 1.5 and that annual capital
expenditures not exceed $15 million. A combination of cost reductions and
revenue growth are required in fiscal 1998 to maintain compliance with the
Loan Agreement's financial covenants. Management has implemented and is
committed to execute further cost reduction actions as necessary to improve
the Company's operating results and maintain availability of the new loan
and security agreement.
Refer to the Company's consolidated financial statements and related
notes thereto, filed with Form 10-K for the year ended September 30, 1997,
for further disclosures applicable to the above-referenced Loan Agreement
and other long-term debt obligations, including $25 million of 7-3/4%
convertible senior subordinated debentures outstanding as of December 31,
1997 and September 30, 1997.
- 8 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. RESTRUCTURING OF OPERATIONS
The net loss for the quarter ended December 31, 1997 includes a charge
of $2.5 million, or $0.12 per share, which is comprised of a $1 million
provision for post-employment benefits under the Company's severance plan
related to the elimination of approximately 200 full-time positions and
$1.5 million for the write-off of intangible assets and other costs
associated with the elimination of low-volume product lines.
NOTE 7. IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.128,
"EARNINGS PER SHARE" (EPS)
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128" or
the "Statement"). SFAS 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share,
respectively. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. SFAS 128 requires restatement of
all prior period earnings per share information to conform to the new
reporting requirements. The Company has implemented SFAS 128, including new
disclosure requirements, in the quarter ended December 31, 1997.
Under current and prior accounting standards, common stock equivalents
are not factored into earnings per share calculations for companies
reporting net losses. As a result, implementation of SFAS 128 did not have
an impact on the Company's reported loss per share information for the
three month periods ended December 31, 1997 and 1996, and will not have an
impact until the Company reports a quarterly profit.
The following table sets forth the computation of basic and diluted
loss per share (in thousands):
- 9 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.128,
"EARNINGS PER SHARE" (EPS) (continued)
The three months ended December 31,
-----------------------------------
1997 1996
Numerator:
Net loss $(13,860) $(5,674)
Preferred stock dividends (450) (450)
-------- --------
Numerator for basic and diluted
loss per share -- income available
to common stockholders $(14,310) $(6,124)
======== ========
Denominator:
Denominator for basic and diluted
loss per share -- weighted average
shares outstanding 21,389 20,987
======= =======
Basic and diluted loss per share $(0.67) $(0.29)
======= =======
Outstanding securities which could potentially affect diluted EPS in the future,
when the Company reports a quarterly profit, include convertible debentures,
convertible preferred stock and employee stock options and warrants. For
additional disclosure information, including conversion terms, refer to Notes 5,
8 and 10, respectively, in the Company's consolidated financial statements filed
with Form 10-K for the year ended September 30, 1997. Total employee stock
options outstanding at December 31, 1997 approximated 3,025,000 shares,
2,153,000 shares of which would not have otherwise been included in diluted
earnings per share calculations as of December 31, 1997 because the options'
exercise price was greater than the average market price of the common shares.
-10-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL SUMMARY DISCUSSION
Revenues for the quarters ended December 31, 1997 and 1996 amounted to $48.2
million and $59.0 million, respectively, a reduction of $10.8 million, or 18.3%.
Revenues were down $3.1 million, or 6.1%, as compared to the immediately
preceding quarter ended September 30, 1997. There was a net loss for the period
of $(13.9) million, or $(0.67) per share, compared to loss of $(5.7) million, or
$(0.29) per share, in the same period one year ago. The net loss for the quarter
ended December 31, 1997 includes a charge of $(2.5) million, or $(0.12) per
share, for costs associated with a cost reduction and restructuring program.
Excluding the restructuring charge, the current quarter net loss was $(11.4)
million, or $(0.55) per share, representing a slight improvement over the
immediately preceding quarter ended September 30, 1997.
Since the end of March 1997, the Company has been reducing expenses through
employee attrition and spending reductions. Operating expenses (excluding
restructuring of operations costs) for the quarter ended December 31, 1997 were
down $1.9 million, or 5.7% as compared to the same period one year ago and down
$2.3 million, or 6.8%, as compared to the immediately preceding quarter ended
September 30, 1997. Furthermore, the Company has recently taken additional
action to further reduce expenses, and on January 6, 1998 announced a formal
cost reduction plan. The plan includes the elimination of approximately 200
full-time positions, the elimination of certain low-volume products and other
expense reductions. The Company currently estimates that total fiscal 1998
operating expenses (excluding restructuring of operations costs) will be
approximately $18 million, or 14%, lower than total fiscal 1997 operating
expenses.
Cash balances and working capital amounted to $22.2 million and $47.2 million as
of December 31, 1997. On October 22, 1997, the Company entered into a new $40
million loan and security agreement (the "Loan Agreement"). The new Loan
Agreement has provided the Company with $15 million in proceeds (received on
October 22, 1997) from a five-year term loan. In addition, the Loan Agreement
provides for a $25 million (maximum value) revolving line of credit for a
three-year period ending in October 2000, subject to extension. Availability of
such funds is subject to satisfying a borrowing base formula related to levels
of certain accounts receivable and inventories, which may limit available
borrowings to less than $25 million (at December 31, 1997, the total amount
available for borrowings and letters of credit was $25 million). Most assets of
the Company, including accounts receivable, inventories and property, plant and
equipment, are pledged as collateral.
The new Loan Agreement does include covenants which may limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
Please reference the "Liquidity and Capital Resources" section following for
further discussion.
In addition to the new Loan Agreement, the Company continues to actively explore
alternate sources of funds, such as the sale of technology, technology funding
arrangements and other strategic options.
- 11 -
<PAGE>
The Company has made (and continues to make) large investments in research and
product development which have resulted in advanced products and technologies
that management believes are of significant value in today's marketplace and
have the potential to deliver substantially higher revenues, and ultimately,
shareholder value, on a longer term basis. The Company views its master supply
contracts in place with strategic partners such as Lucent Technologies and L.M.
Ericsson as confirmation of such value and revenue potential.
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three months ended December 31,
--------------------------------
1997 1996
---- ----
Revenues:
Net product sales 77.7% 81.6%
Service revenue 19.7 16.1
Leasing revenue 2.6 2.3
---- ----
100.0 100.0
Costs and expenses:
Costs of revenues 53.4 50.9
Amortization of capitalized
software development costs 6.2 5.1
Selling, general and administrative 42.0 36.3
Research and product development 18.5 16.4
Restructuring of operations 5.2 --
---- ----
Operating loss (25.3) (8.7)
---- ----
Net (loss) (28.7)% (9.6)%
======= ======
A reduced revenue base (down 18.3% from one year ago) creates large fluctuations
in year-to-year comparisons when measured as a percent of revenue. Noteworthy
observations include: (1) most of the revenue decline has occurred in product
revenues; as a result, product revenues represent a reduced percentage of total
revenue in the current quarter, while both service and lease revenue represent
an increased percent of total revenue; (2) cost of revenue, measured as a
percent of revenue, is up 2.5 percentage points, principally reflecting the
impact of under-absorption of manufacturing overhead costs due to reduced
product production levels; (3) operating expenses (excluding restructuring of
operations costs), although down 6.3% in dollar terms as compared to the
previous fiscal year, amounted to 60.5% of revenue in the quarter ended December
31, 1997 as compared to 52.7% for the same period one year ago, due to a reduced
revenue base; and (4) research and product development related expenses
(including capitalized software amortization) amounted to 24.7% and 21.5% of
revenue for the three-month periods ended December 31, 1997 and 1996,
respectively, reflecting the Company's continued commitment to significant
investment in its ATM and Access product development activities.
- 12 -
<PAGE>
Revenues
Three Months Ended
December 31,
--------------------
1997 1996
---- ----
Revenues $48,219 $59,043
Percent Change (18.3)%
The $10.8 million, or 18.3%, revenue decline is attributable to reduced product
revenue levels, with both domestic and international markets contributing to the
decline ($4.8 million and $6 million, respectively). The reduction was
experienced across all product lines, with Access, Internetworking, and ATM
product revenues down $4.2 million (20.5%), $4.4 million (32.1%) and $2.2
million (17.3%), respectively. Access revenues reflect a continued reduction in
sales of the Company's legacy analog and low-speed products, with sales growth
from new Access product introductions not yet fully offsetting such declines.
The Internetworking (multiplexer) business decline reflects a general market
movement toward frame relay and ATM technologies and away from multiplexing
technology. ATM product revenues, although down as compared to the same quarter
one year ago, have now shown modest growth for three consecutive quarters.
Geographically, international revenues accounted for 52% of total consolidated
revenues in the quarter ended December 31, 1997, relatively unchanged from the
53% level one year ago.
Cost of Revenues:
Three Months Ended
December 31,
---------------------
1997 1996
---- ----
Cost of revenues $25,736 $30,044
As a percent of revenue 53.4% 50.9%
Amortization of capitalized software cost $3,000 $3,000
As a percent of revenue 6.2% 5.1%
Cost of revenues, measured as a percent of revenues, increased 2.5 percentage
points for the quarter ended December 31, 1997 as compared to the corresponding
quarter last year, with product cost of sales comprising most of the increase.
The product cost increase reflects the absorption of fixed production costs over
a reduced revenue base (product sales down 22.2% as compared to the same quarter
one year ago), partially offset with improved margins realized on product sales.
The impact of service and lease margin variances were not material.
Separately, amortization of capitalized software development cost amounted to $3
million in each of the quarters ended December 31, 1997 and 1996.
- 13 -
<PAGE>
High technology products in particular are subject to sales price pressures as
competition grows and sales cycles reach maturity. The Company continues to
partially offset the effect of such sales price pressures with the negotiation
of reduced material component prices, improvements in manufacturing costs and
efficiencies and the introduction of new generation products which generally
provide higher margins.
Selling, General and Administrative Expenses
Three Months Ended
December 31,
-------------------
1997 1996
Selling, general, and
administrative expenses $20,242 $21,449
Percent change (5.6)% -
As a percent of revenue 42.0% 36.3%
The Company's cost management efforts resulted in a $1.2 million, or 5.6%,
reduction in selling, general and administrative costs for the quarter ended
December 31, 1997 as compared to the same period one year ago. The cost
reductions were achieved in both domestic and international operations, despite
ongoing salary merit increases and other inflationary increases. The cost
reductions are comprised of reduced compensation and travel costs, a more
effectively managed promotion and advertising program and reduced sales
commission costs attributable to reduced product revenues. However, selling,
general and administrative expenses increased when measured as a percentage of
revenue for the quarter ended December 31, 1997, due to a reduced revenue base.
Research and Product Development Costs
Three Months Ended
December 31,
--------------------
1997 1996
---- ----
Gross expenditures $11,934 $12,673
Percent change (5.8)% --
As percent of revenue 24.7% 21.5%
Capitalized software costs $3,000 $3,000
As a percent of gross expenditures 25.1% 23.7%
Net R&D expense $8,934 $9,673
Percent change (7.6)% --
As a percent of revenue 18.5% 16.4%
- 14 -
<PAGE>
The Company continued to invest heavily in product research and development
during the first quarter of fiscal 1998, with gross spending approximating an
annual rate of $48 million, or 24.7% of revenue. Gross research and development
spending for the quarter ended December 31, 1997 decreased by $0.7 million, or
5.8%, as compared to the corresponding quarter of fiscal 1997, principally due
to reduced use of outside services and consultants. Spending related to the
Company's ATM product line, including development of the Company's
next-generation Strobos(TM) product line, amounted to 54% of total research and
product development spending for the quarter ended December 31, 1997, as
compared to 51% for the same quarter one year ago. As noted above, first quarter
fiscal 1998 gross research and product development spending amounted to 24.7% of
consolidated revenue, up from 21.5% in the corresponding quarter of fiscal 1997,
reflecting the impact of a substantially reduced revenue base in the quarter
ended December 31, 1997. The complexity of the ATM technology has in the past
demanded, and will continue to demand, significant research and product
development investment.
Capitalized software development costs remained unchanged at $3 million for the
quarters ended December 31, 1997 and 1996.
Interest and Other Income and Expense
- -------------------------------------
Net interest expense amounted to $1.4 million and $0.3 million for the quarters
ended December 31, 1997 and 1996, respectively. The $1.1 million increase is
attributable to interest expense (including amortization of offering costs)
associated with $25 million of convertible senior subordinated debentures issued
in September 1997 and interest expense incurred on a new $15 million term loan
executed on October 22, 1997. Refer to "Foreign Currency Risk" below for some
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 $200,000 and $100,000 in the quarters ended
December 31, 1997 and 1996, respectively. As noted in the Corporation's Form
10-K filed for the year ended September 30, 1997, 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 net deferred tax asset (or related
deferred tax benefit) has been recorded in the Corporation's financial
statements.
Foreign Currency Risk
- ---------------------
The Company's foreign subsidiaries are exposed to foreign currency fluctuation
since they are invoicing customers in local currencies while liabilities for
product purchases from the parent company are transacted in U.S. dollars. The
impact of foreign currency fluctuations on these U.S. dollar denominated
liabilities are recorded as a component of "Other Income and Expense" in the
Company's consolidated statements of operations and resulted in currency
exchange losses of $250,000 and $40,000 for the quarters ended December 31, 1997
and 1996, respectively. The current quarter exchange loss is principally
attributable to the impact of the strength of the U.S dollar relative to the
Canadian dollar.
No individual foreign subsidiary comprises 10 percent or more of consolidated
revenue or assets; most subsidiary operations represent less than 5 percent of
consolidated revenue or assets. The Company historically has not entered into
hedge contracts or any form of derivative or similar investment.
- 15 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents amounted to $22.2 million at December
31, 1997, as compared to $21.5 million at September 30, 1997. The Company
believes its fiscal 1998 cash requirements will be satisfied from its cash and
cash equivalents balance of $22.2 million as of December 31, 1997 and from a $25
million (maximum value) revolving loan facility discussed below.
On October 22, 1997, the Company entered into a new $40 million loan and
security agreement (the "Loan Agreement") with Transamerica Business Credit
Corporation and The CIT Group/Business Credit, Inc. The new Loan Agreement has
provided the Company with $15 million in proceeds (received on October 22, 1997)
from a five-year term loan. In addition, the Loan Agreement provides for a $25
million (maximum value) revolving line of credit for a three-year period ending
in October 2000, subject to extension. Availability of such funds is subject to
satisfying a borrowing base formula related to levels of certain accounts
receivable and inventories, which may limit available borrowings to less than
$25 million (at December 31, 1997, the total amount available for borrowings and
letters of credit was $25 million). Most assets of the Company, including
accounts receivable, inventories and property, plant and equipment, are pledged
as collateral.
No revolving line of credit borrowings were outstanding as of December 31, 1997,
as compared to $4.8 million of such borrowings outstanding (under a previous
credit facility) as of September 30, 1997. There were $920,000 of letters of
credit outstanding as of December 31, 1997.
The new Loan Agreement includes covenants which may limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
The most restrictive covenant requires the maintenance of a minimum balance of
$80 million for the sum of stockholders' equity (excluding foreign currency
translation adjustments subsequent to September 30, 1997) and outstanding 7-3/4%
convertible senior subordinated debentures, issued in September 1997. (The
Company is currently in the process of negotiating an amendment to the Loan
Agreement ("Amendment") whereby restructuring costs incurred by the Company in
fiscal 1998, not to exceed $3 million, would not reduce Stockholders' Equity for
the purpose of calculating covenant compliance.) As such balance at December 31,
1997 was $90.7 million, this covenant effectively limits the sum of cumulative
future losses (subsequent to December 31, 1997) and preferred stock dividend
payments, less 60 percent of the value of new capital stock issued, to $10.7
million (or $13.2 million if the referenced Amendment is executed). In the event
of non-compliance with financial or other covenants, the Company would have to
obtain a waiver or amendment from the lender. However, there is no assurance
that the lender would grant such a waiver or amendment and in such case the
Company would have to pursue other sources of financing. In the past the Company
has relied on its ability to offer for sale its common stock, preferred stock,
convertible debentures and/or warrants as viable alternative sources of
financing. The availability and terms of such offerings in the future will
depend on such items as the Company's future financial performance and its
ability to demonstrate favorable trends in reported financial results. As a
result, these sources may not be available, or may be available on less
favorable terms, in the future. The Company's inability to have access to the
new loan and security agreement and/or alternative financing sources would have
a material adverse effect on the Company's financial condition.
Since the Company realized losses of $42.8 million and $13.9 million for the
year ended September 30, 1997 and the quarter ended December 31, 1997,
respectively, a combination of cost reductions and revenue growth are required
in fiscal 1998 to maintain compliance with the loan's financial covenants.
Management has
- 16 -
<PAGE>
implemented and is committed to execute further cost reduction actions as
necessary to improve the Company's operating results and maintain availability
of the new loan and security agreement. Other covenants require that the Company
maintain a current ratio equal to or greater than 1.5 and that annual capital
expenditures not exceed $15 million.
Reference is made to the Company's consolidated financial statements, Note 5,
filed with Form 10-K for the year ended September 30, 1997 for further
disclosures applicable to the above-referenced Loan Agreement and other
long-term debt obligations, including $25 million of 7-3/4% convertible senior
subordinated debentures outstanding as of December 31, 1997 and September 30,
1997.
Total outstanding debt amounted to $65.6 million at December 31, 1997, as
compared to $56.9 million at September 30, 1997. The net increase of $8.7
million is comprised of the new $15 million term loan referenced above,
partially offset with the repayment of $4.8 million of borrowings outstanding
under a previous revolving credit facility and principal reductions on other
outstanding borrowings.
Operating
- ---------
Net cash used in operating activities amounted to $(0.9) million for the three
months ended December 31, 1997 as compared to $(1.9) million for the
corresponding quarter one year ago.
Non-debt working capital, excluding cash and cash equivalents, decreased from
$38 million at September 30, 1997 to $33.4 million at December 31, 1997. The
$4.6 million reduction is comprised of, among other items, $1.1 million
reductions in both accounts receivable (reduced revenue level) and inventories
(improved inventory management) and a $2.1 million increase in accrued payroll
costs (timing).
Investing
- ---------
Property, plant and equipment investments amounted to $2.5 million and $2.7
million in the quarters ended December 31, 1997 and 1996, respectively. The
Company continues to closely monitor all requests for capital spending in an
effort to preserve cash and limit such investment to instances which appear to
offer the greatest return on investment. Investments in capitalized software
amounted to $3 million in each of the quarters ended December 31, 1997 and 1996.
Financing
- ---------
Net cash provided by financing activities amounted to $7.1 million in the three
months ended December 31, 1997, reflecting $7.5 million of net debt borrowings
($15 million in new borrowings less $6.8 million in debt repayments and $0.7
million of costs incurred to execute the new borrowings), less $450,000 in
preferred stock dividend payments. This compares to net cash consumption of $1
million in the three months ended December 31, 1996, comprised of $0.1 million
of proceeds received from the issuance of common stock pursuant to employee
stock programs, offset by $0.7 million of net debt reduction and $450,000 in
preferred stock dividend payments.
Reference is made to Note 5 on page 7 for a condensed summary of outstanding
long-term debt as of December 31, 1997 and September 30, 1997. Separately,
reference is made to the consolidated financial statements, Notes 5 and 8, filed
with Form 10-K for the year ended September 30, 1997 for further disclosures
applicable to outstanding long-term debt and the conversion terms applicable to
$25 million of 7-3/4% convertible senior subordinated debentures (Note 5) and
$20 million of convertible preferred stock outstanding (Note 8), both of which
were outstanding as of December 31, 1997 and September 30, 1997.
- 17 -
<PAGE>
CERTAIN RISK FACTORS
- --------------------
Continuing Losses: The Company has sustained net losses for the past 13 quarters
ended December 31, 1997. There can be no assurance as to when the Company will
achieve net income.
Credit Availability: As noted above, the Company's new Loan Agreement requires
compliance with specific financial covenants, including restricted net loss
performance, maintenance of a current ratio which equals or exceeds 1.5 and
capital spending restrictions. If the Company fails to comply with the required
covenants and a waiver or amendment is not obtained, the Company may be unable
to borrow funds under such agreement. In such case the Company will be required
to seek other financing to fund its operations, and there can be no assurance
the Company will be able to obtain such financing or if obtained, on terms
deemed favorable by the Company. Furthermore, in the event the Company does
default on its new $40 million Loan Agreement obligation, such default may
result in payment of other outstanding indebtedness to be accelerated.
Volatility of Stock Price: The trading price of the Common Stock has fluctuated
widely in response to quarter-to-quarter operating results, industry conditions,
awards of orders to the Company or its competitors, new product or product
development announcements by the Company or its competitors, and changes in
earnings estimates by analysts. Any shortfall in revenue or earnings from
expected levels could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock in any given period.
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.
- 18 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
for which this report is filed.
- 19 -
<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, Finance and
Principal Financial Officer
Dated: February 13, 1998
- 20 -
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
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