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 March 31, 1998
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, 1998
----------------------------- -----------------------------
Common Stock, $.10 par value 19,098,557
Class B Stock, $.10 par value 2,111,690
Total Number of Pages in this Document is 26.
1
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets -
March 31, 1998 and September 30, 1997 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three and Six Months
Ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - For the
Six Months Ended March 31, 1998 and 1997 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 4. Submission of Matters to a Vote of
Security-Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
In thousands except shares 1998 1997
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $15,419 $21,526
Accounts receivable, less
allowance for doubtful
receivables of $1,562 in March and
$1,703 in September 31,091 33,193
Inventories 37,138 41,749
Deferred income taxes 1,979 2,244
Other current assets 6,993 7,903
- -------------------------------------------------------------------------------
Total current assets 92,620 106,615
===============================================================================
Property, plant and equipment, net 43,632 46,427
Capitalized software development costs, net 23,541 23,500
Other assets 9,185 10,793
- -------------------------------------------------------------------------------
$168,978 $187,335
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $8,184 $7,569
Accounts payable, trade 13,302 15,245
Accrued payroll and payroll-related costs 5,874 6,990
Deferred income 6,379 6,527
Other current liabilities 18,352 18,358
- -------------------------------------------------------------------------------
Total current liabilities 52,091 54,689
===============================================================================
Long-term debt, less current portion 54,982 49,293
Deferred income taxes 2,740 2,789
Other liabilities 242 536
- -------------------------------------------------------------------------------
Total liabilities 110,055 107,307
===============================================================================
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: 2,111,133 in March and
2,136,933 in September 211 214
Common stock, par value $.10 per share,
35,000,000 shares authorized; issued
and outstanding: 19,759,320 in March
and 19,582,661 in September 1,976 1,958
Capital in excess of par value 150,597 149,864
Accumulated deficit (89,693) (67,874)
Cumulative foreign currency translation
adjustment (2,523) (2,489)
Common stock held in treasury, at cost:
330,382 shares in March and September (2,445) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 58,923 80,028
- -------------------------------------------------------------------------------
$168,978 $187,335
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
3
<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 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Revenues:
Net product sales $37,430 $40,018 $74,931 $88,238
Service revenue 9,704 9,436 19,185 18,921
Lease revenue 1,197 1,317 2,434 2,655
- -------------------------------------------------------------------------------
48,331 50,771 96,550 109,814
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 17,802 18,892 36,638 42,009
Amortization of capitalized
software development costs 2,972 3,000 5,972 6,000
Cost of service revenue 6,647 6,823 13,410 13,612
Cost of lease revenue 110 191 247 329
Selling, general and administrative 18,178 21,687 38,420 43,136
Research and product development 8,173 10,642 17,107 20,315
Restructuring of operations - - 2,500 -
- -------------------------------------------------------------------------------
53,882 61,235 114,294 125,401
- -------------------------------------------------------------------------------
Operating loss (5,551) (10,464) (17,744) (15,587)
- -------------------------------------------------------------------------------
Other income (expense):
Interest (1,415) (499) (2,811) (838)
Other, net 207 (655) 136 (767)
- ------------------------------------------------------------------------------
(1,208) (1,154) (2,675) (1,605)
- -------------------------------------------------------------------------------
Loss before income taxes (6,759) (11,618) (20,419) (17,192)
Income tax provision 300 100 500 200
- -------------------------------------------------------------------------------
Net loss ($7,059) ($11,718) ($20,919)($17,392)
===============================================================================
Loss per share ($0.35) ($0.58) ($1.02) ($0.87)
===============================================================================
Weighted average number of common
and common equivalent shares
outstanding 21,389 21,056 21,389 21,021
===============================================================================
Accumulated deficit at beginning
of period ($82,184) ($29,477) ($67,874)($23,323)
Net loss (7,059) (11,718) (20,919) (17,392)
Payment of preferred stock dividends (450) (450) (900) (900)
- -------------------------------------------------------------------------------
Accumulated deficit at end
of period ($89,693) ($41,645) ($89,693) ($41,615)
===============================================================================
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 1998 1997
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($20,919) ($17,392)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 13,661 13,292
Decrease in accounts receivable 1,726 5,022
(Increase) decrease in inventories 4,422 (984)
Increase (decrease) in accounts payable
and accrued expenses (2,743) 1,400
(Increase) decrease in other net current assets 925 (150)
(Increase) decrease in other net long-term assets 874 (1,733)
- -------------------------------------------------------------------------------
Net cash (used in) operating activities (2,054) (545)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (3,694) (6,228)
Capitalized software development costs (6,013) (6,107)
- -------------------------------------------------------------------------------
Net cash (used in) investing activities (9,707) (12,335)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver repayments (4,799) -
Proceeds from notes and mortgages 15,094 2,586
Principal payments on notes and mortgages (4,475) (3,560)
Proceeds from issuing common stock/warrants 748 1,061
Payment of preferred stock dividends (900) (900)
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 5,668 (813)
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (14) (180)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (6,107) (13,873)
Cash and cash equivalents at beginning of period - (1) 21,526 26,264
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $15,419 $12,391
===============================================================================
(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.
5
<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, 1998, the
consolidated results of their operations for the three and six months ended
March 31, 1998 and 1997, and their cash flows for the six months ended March 31,
1998 and 1997. 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):
March 31, 1998 September 30, 1997
-------------- ------------------
Raw materials $14,387 $16,075
Work-in-process 2,785 4,914
Finished goods 19,966 20,760
------- -------
$37,138 $41,749
======= =======
6
<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, 1998 September 30, 1997
-------------- ------------------
Land $ 1,780 $ 1,770
Buildings and improvements 30,100 29,716
Test equipment,fixtures and
field spares 55,614 55,858
Machinery and equipment 57,857 56,165
------- --------
145,351 143,509
Less: accumulated depreciation and
amortization 101,719 97,082
-------- --------
$43,632 $46,427
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of (in thousands):
March 31, 1998 September 30, 1997
-------------- ------------------
Original cost $39,655 $39,627
Less: accumulated amortization 16,114 16,127
-------- ------
$23,541 $23,500
======== =======
NOTE 5. LONG-TERM DEBT
March 31, 1998 September 30, 1997
------------- -----------------
Revolving credit facility $ - $ 4,799
Notes payable 26,792 15,353
7-3/4% convertible senior
subordinated debentures 25,000 25,000
Mortgages payable 11,374 11,710
------- ------
63,166 56,862
Less: current portion 8,184 7,569
------- --------
$54,982 $49,293
======= =======
7
<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 a new group of financing
institutions. The new Loan Agreement provided $15 million in proceeds (received
on October 22, 1997) from a five-year term loan (included in "notes payable" in
the chart above). 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 March 31, 1998, 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 March 31,
1998, as compared to $4.8 million of such borrowings outstanding (under a
previous credit facility) as of September 30, 1997. There were $720,000 of
letters of credit outstanding as of March 31, 1998.
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 both foreign currency
translation adjustments which occur subsequent to September 30, 1997 and
restructuring charges up to $3.0 million) 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 Agreement.
7-3/4% Convertible Senior Subordinated Debentures
- -------------------------------------------------
On September 26, 1997, the Company issued $25 million of convertible senior
subordinated debentures ("Debentures") which mature on September 30, 2002 (if
not converted or redeemed) and accrue interest at a rate of 7-3/4% per annum.
The Debentures, issued to qualified institutional buyers and accredited
institutional investors, are convertible into shares of the Company's common
stock originally at a conversion price of $6.86 per share,
8
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
or the equivalent of 145.8 shares of common stock for each $1,000 principal
amount of Debentures. Under the terms of the Debentures, on March 30, 1998, the
conversion price was reset to $6.279 per share, or the equivalent of 159.3
shares of common stock for each $1,000 principal amount of Debenture. Under
certain conditions, such conversion price may again be reset to a reduced price
per share on September 30, 1999, but in no event may the conversion price be
reset at a price below 85% of the original conversion price. As of March 31,
1998 and September 30, 1997, $25 million of Debentures were outstanding.
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 Debentures.
NOTE 6. RESTRUCTURING OF OPERATIONS
The net loss for the six months ended March 31, 1998 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 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 and six month
periods ended March 31, 1998 and 1997, and will not have an impact until the
Company reports a quarterly profit.
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 following table sets forth the computation of basic and diluted loss per
share (in thousands):
Three Months Ended Six Months Ended
-------------------- -------------------
March 31, March 31,
1998 1997 1998 1997
--------------------- -------------------
Numerator:
---------
Net loss $(7,059) $(11,718) $(20,919) $(17,392)
Preferred stock dividends (450) (450) (900) (900)
-------- --------- --------- ---------
Numerator for basic and diluted
loss per share - loss applicable
to common stockholders $(7,509) $(12,168) $(21,819) $(18,292)
======== ========= ========= =========
Denominator:
-----------
Denominator for basic and diluted
loss per share - weighted average
shares outstanding 21,389 21,056 21,389 21,021
======= ====== ====== ======
Basic and diluted loss per share $(0.35) $(0.58) $(1.02) $(0.87)
======= ======= ======= =======
Outstanding securities which could potentially effect 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 March 31, 1998 approximated 3,215,000
shares, 2,060,000 shares of which would not have otherwise been included in
diluted earnings per share calculations as of March 31, 1998 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
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,
------------------ ----------------
1998 1997 1998 1997
------------------ ----------------
Revenues:
Net product sales 77.4% 78.8% 77.6% 80.4%
Service revenue 20.1 18.6 19.9 17.2
Leasing revenue 2.5 2.6 2.5 2.4
---- ---- ---- ----
100.0 100.0 100.0 100.0
Costs and expenses:
Costs of revenues 50.8 51.0 52.1 50.9
Amortization of capitalized
software development costs 6.2 5.9 6.2 5.5
Selling, general and administrative 37.6 42.7 39.8 39.3
Research and product development 16.9 21.0 17.7 18.5
Restructuring of operations - - 2.6 -
---- ---- ---- ----
Operating loss (11.5) (20.6) (18.4) (14.2)
---- ------ ------ ------
Net (loss) (14.6)% (23.1)% (21.7)% (15.8)%
======= ======= ======= =======
Noteworthy observations include: (1) most of the quarterly and year-to-date
revenue decline has occurred in product revenues; as a result, product revenues
represent a reduced percentage of total revenue, while service revenue
represents an increased percentage of total revenue; (2) cost of revenues,
measured as a percent of revenue, improved slightly by 0.2 percentage points
from the same quarter one year ago; however, on a year-to-date basis cost of
revenues increased 1.2 percentage points, principally reflecting the impact of
reduced production and sales volumes in the first fiscal quarter; (3) operating
expenses were reduced to 54.5% of revenue in the quarter ended March 31, 1998 as
compared to 63.7% for the same period one year ago, as a result of cost
reductions implemented in the first quarter; on a year-to-date basis, operating
expenses (excluding restructuring of operations costs) declined from 57.8% to
57.5% of revenues due to the positive effect of $7.9 million in cost reductions
offset by the impact of a $13.2 million reduction in the revenue base.
11
<PAGE>
Revenues
- --------
Three months ended Six months ended
March 31, March 31,
------------------- ------------------
1998 1997 1998 1997
------------------- ------------------
Revenues $48,331 $50,771 $96,550 $109,814
Percent Change (4.8)% - (12.1)% -
Quarter - Revenues in the quarter declined $2.4 million compared to the prior
year. Revenues from Asian markets were down $3.3 million while all other
revenues netted an increase of $0.9 million. Asian business was adversely
effected by the financial turmoil in the market which delayed certain revenue
opportunities and may eliminate others.
A shift occurred in product line revenues whereby new ATM product sales
increased $4 million while shipments of traditional internetworking products
dropped $5.9 million. Expansion of networks in Europe, through the strategic
partnership with Lucent Technologies, as well as growing interest in voice and
video applications in domestic markets, account for the strength in ATM
revenues. The decline in internetworking products is attributed to slow sales
into Asian markets as discussed above and, in addition, to weakness in Latin
American business.
Geographically, international revenues accounted for 49% of total consolidated
revenues in the quarter ended March 31, 1998 as compared to 46% for the
comparable period one year ago.
Year-to-Date - The $13.3 million, or 12.1%, revenue decline is attributable to
reduced product revenue levels, with both domestic and international markets
contributing to the decline ($7.1 million and $6.2 million, respectively). The
product revenue reduction was experienced across the Access and Internetworking
product lines down $4.8 million (11.6%) and $10.3 million (38.4%), respectively.
ATM revenues are now ahead of last year's level by $1.8 million,or 8.7%. 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 weakness in Asian markets and a general market
movement toward frame relay and ATM technologies and away from multiplexing
technology. ATM product revenues have now shown modest growth for four
consecutive quarters.
Cost of Revenues:
Three months ended Six months ended
March 31, March 31,
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Cost of revenues $24,559 $25,906 $50,295 $55,950
As a percent of revenue 50.8% 51.0% 52.1% 50.9%
Amortization of capitalized
software development costs $2,972 $3,000 $5,972 $6,000
As a percent of revenue 6.2% 5.9% 6.2% 5.5%
12
<PAGE>
Quarter - The results for the quarters are very consistent. Cost of revenues,
measured as a percent of revenues, were only slightly lower (0.2 percentage
points) for the quarter ended March 31, 1998 as compared to the corresponding
quarter in fiscal 1997. Amortization of capitalized software development costs
amounted to $3 million in each of the quarters ended March 31, 1998 and 1997.
Year-to-Date - Cost of revenues, measured as a percent of revenues, increased
1.2 percentage points as compared to the corresponding period last fiscal year,
with cost of product sales accounting for the increase. The product cost
increase reflects the negative impact that lower production volumes has on
manufacturing costs (product sales down 15.1% as compared to the same period one
year ago). Amortization of capitalized software development costs were
approximately equal amounts ($6 million).
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 Six months ended
March 31, March 31,
------------------- -----------------
1998 1997 1998 1997
------------------- -----------------
Selling, general, and
administrative expenses $18,178 $21,687 $38,420 $43,136
Percent change (16.2)% - (10.9)% -
As a percent of revenue 37.6% 42.7% 39.8% 39.3%
Quarter - The Company's cost reduction plan implemented in the first fiscal
quarter contributed to a $3.5 million, or 16.2%, reduction in selling, general
and administrative costs for the quarter ended March 31, 1998 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. As a result of these efforts, selling, general and
administrative expenses decreased by 5.1% when measured as a percentage of
revenue for the quarter ended March 31, 1998, even though there was also a $4.8
reduction in revenues.
Year-to-Date - Year-to-date selling, general and administrative expenses
decreased $4.7 million, or 10.9%, from the corresponding period of fiscal 1997.
The same cost reductions noted above also contributed favorably to the
year-to-date results. However, due to a 12.1% decline in revenues, selling,
general and administrative expenses, when measured as a percentage of revenue
for the six months ended March 31, 1998, still reflected an increase of 0.5%.
13
<PAGE>
Research and Product Development Costs
Three months ended Six months ended
March 31, March 31,
------------------ -----------------
1998 1997 1998 1997
------------------ -----------------
Gross expenditures $11,186 $13,749 $23,120 $26,422
Percent change (18.6)% - (12.5)% -
As percent of revenue 23.1% 27.1% 23.9% 24.1%
________________________________________________________________________
Capitalized software costs $3,013 $3,107 $6,013 $6,107
As a percent of gross
expenditures 26.9% 22.6% 26.0% 23.1%
________________________________________________________________________
Net R&D expense $8,173 $10,642 $17,107 $20,315
Percent change (23.2)% - (15.8)% -
As a percent of revenue 16.9% 21.0% 17.7% 18.5%
_________________________________________________________________________
Quarter - The Company continues to invest heavily in research and product
development, yet recently implemented cost management efforts resulted in a $2.6
million, or 18.6%, reduction in gross research and development spending for the
quarter ended March 31, 1998 as compared to the same period one year ago. This
decrease was primarily attributable to reduced usage of outside services and
consultants and lower compensation costs due to lower worldwide engineering
headcount. As a percentage of revenue, gross product research and development
decreased by 4.0% in the second quarter of fiscal 1998 from the same quarter one
year ago.
Capitalized software development costs were about the same in each quarter ($3.0
million as compared to $3.1 million in the same period one year ago), indicating
that software development activities represent a greater proportion of total
research and product development spending.
Year-to-Date - Year-to-date product research and development spending displayed
similar trends. Gross spending for the six months ended March 31, 1998 and 1997
amounted to $23.1 million and $26.4 million, respectively, a decrease of $3.3
million, or 12.5%.
Capitalized software development costs for the six months ended March 31, 1998
amounted to $6.0 million as compared to $6.1 million for the corresponding
period of fiscal 1997.
The complexity of the ATM technology has in the past demanded, and will continue
to demand, significant research and product development investment. To retain an
effective pool of available engineering talent, the Company operates research
and development facilities in four locations, including the United States
(Middlebury, Connecticut and Boston, Massachusetts), Canada and the United
Kingdom.
14
<PAGE>
Interest and Other Income and Expense
- -------------------------------------
Net interest expense amounted to $1.4 million and $0.5 million for the
quarters ended March 31, 1998 and 1997, respectively. Year-to-date net interest
expense amounted to $2.8 million and $0.8 million for fiscal 1998 and 1997,
respectively. The increases are attributable to interest expense and fees
(including amortization of offering costs) associated with $25 million of
convertible senior subordinated debentures issued in September 1997 and a new
$15 million term loan executed on October 22, 1997. Refer to "Foreign Currency
Risk" below for discussion of other income and expense.
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Company, principally for foreign income and
domestic state taxes, amounted to $300,000 and $100,000 in the quarters ended
March 31, 1998 and 1997, respectively. Year-to-date tax provisions amounted to
$500,000 and $200,000 for fiscal 1998 and 1997, respectively. As noted in the
Company's Form 10-K filed for the year ended September 30, 1997, the Company has
significant federal net operating loss carryforwards available. However, based
on the Company'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 Company's financial statements.
Foreign Currency Risk
- ---------------------
The Company's foreign subsidiaries are exposed to foreign currency
fluctuations 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
a currency exchange gain of $38,000 and a currency exchange loss of $(669,000)
for the quarters ended March 31, 1998 and 1997, respectively. Year-to-date
currency exchange losses amounted to $(212,000) and $(709,000) for fiscal 1998
and 1997, respectively.
No individual foreign subsidiary comprises 10 percent or more of, and most
such foreign 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents amounted to $15.4 million at March
31, 1998, 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 $15.4 million as of March 31, 1998 and from a $25
million 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 a new group of financing
institutions. 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
15
<PAGE>
borrowing base formula related to levels of certain accounts receivable and
inventories, which may limit available borrowings to less than $25 million (at
March 31, 1998, 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 March 31,
1998, as compared to $4.8 million of such borrowings outstanding (under a
previous credit facility) as of September 30, 1997. There were $720,000 of
letters of credit outstanding as of March 31, 1998.
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 both foreign currency
translation adjustments subsequent to September 30, 1997 and restructuring
charges up to $3 million) and outstanding 7-3/4% convertible senior subordinated
debentures, issued in September 1997. As such minimum balance at March 31, 1998
is calculated to be $86.8 million, this covenant effectively limits the sum of
cumulative future losses (subsequent to March 31, 1998) and preferred stock
dividend payments to $6.8 million. 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.
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 Agreement funds 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 $20.9 million for
the year ended September 30, 1997 and the six months ended March 31, 1998,
respectively, a combination of cost reductions and revenue growth is required
for the balance of 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 Agreement.
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 March 31, 1998 and September 30, 1997.
Total outstanding debt amounted to $63.2 million at March 31, 1998, as
compared to $56.9 million at September 30, 1997. The net increase of $6.3
million is comprised of the new $15 million term loan referenced above and $0.6
million of capital equipment financing, partially offset with the repayment of
$4.8 million of borrowings outstanding under a previous revolving credit
facility and $4.5 million in principal reductions on other outstanding
borrowings.
16
<PAGE>
Operating
Net cash used in operating activities amounted to $(1.4) million for the
six months ended March 31, 1998 as compared to $(0.5) million for the
corresponding period one year ago.
Non-debt working capital, excluding cash and cash equivalents, decreased
from $38 million at September 30, 1997 to $33.3 million at March 31, 1998. The
$4.7 million reduction is primarily comprised of, among other items, a $4.6
million managed reduction in inventory, a $2.1 million reduction in accounts
receivable resulting from a reduced level of sales activity and continued
improvement with collection efforts, offset by a $1.9 million reduction in
accounts payable (related to the inventory reduction) and a $1.1 million
reduction in accrued payroll costs due to the timing of payments.
Investing
Property, plant and equipment investments amounted to $3.7 million and $6.2
million in the six-month periods ended March 31, 1998 and 1997, respectively.
The Company continues to closely monitor all 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
$6.0 million and $6.1 million, respectively, for the six months ended March 31,
1998 and 1997.
Financing
Net cash provided by financing activities amounted to $5.0 million in the
six months ended March 31, 1998, reflecting $5.1 million of net debt borrowings
($15.0 million in new borrowings less $9.3 million in debt repayments and $0.6
million of costs incurred to execute the new borrowings) and $0.7 million of
proceeds received from the issuance of common stock pursuant to employee stock
programs and from the issuance of warrants, less $900,000 in preferred stock
dividend payments. This compares to net cash consumption of $0.8 million in the
six months ended March 31, 1997, comprised of $1.1 million of proceeds received
from the issuance of common stock pursuant to employee stock programs, offset by
$1.0 million of net debt reduction and $900,000 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 March 31, 1998 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 March 31, 1998 and September 30, 1997.
CERTAIN RISK FACTORS
- --------------------
Continuing Losses: The Company has sustained net losses for the past 14
quarters ended March 31, 1998. 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
17
<PAGE>
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 4. Submission of Matters to a Vote of Security-Holders
On February 5, 1998, at the Annual Meeting of Stockholders of
the Corporation, the stockholders:
- Elected directors to the Corporation for a term of three years:
Number of Votes Cast
-------------------------------
For Withheld
-------------------------------
Mr. Charles P. Johnson 17,745,964 1,252,609
Mr. Howard S. Modlin 17,780,485 1,218,088
- Adopted an amendment to the 1979 Employee Stock Purchase Plan,
reserving an additional 600,000 shares of the Corporation's
Common Stock for issuance thereunder:
Number of votes cast for: 15,739,275
Number of votes cast against: 3,077,084
Number of votes abstained: 182,214
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
10.9 First Amendment to Loan and Security Agreement between
General DataComm Industries, Inc. et al., and
Transamerica Business Credit Corporation, et al.
(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
----------------------------------
Senior Vice President, Finance and
Principal Financial Officer
Dated: May 15, 1998
20
FIRST AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT (this "Amendment"), to LOAN AND SECURITY AGREEMENT, dated
as of October 22, 1997, among GENERAL DATACOMM INDUSTRIES, INC. GENERAL
DATACOMM, INC., GDC FEDERAL SYSTEMS, INC., GDC NAUGATUCK, INC., VITAL NETWORK
SERVICES, INC. (collectively, the "Borrowers"), the financial institutions from
time to time parties thereto as lenders (the "Lenders"), THE CIT GROUP/ BUSINESS
CREDIT, INC., as co-agent (in such capacity, the "Co-Agent") and TRANSAMERICA
BUSINESS CREDIT CORPORATION, as agent (in such capacity, the "Agent") for the
Lenders, is made as of February 13, 1998 among the Borrowers and the Lenders.
WITNESSETH:
WHEREAS, the Borrowers, the Lenders, the Co-Agent and the Agent are parties to
the Loan and Security Agreement, dated as of October 22, 1997 (as the same may
be amended, supplemented or otherwise modified from time to time, the "Loan
Agreement"; capitalized terms used herein shall have the meanings assigned to
such terms in the Loan Agreement unless otherwise defined herein); and
WHEREAS, the Borrowers have requested that the Lenders agree to amend the Loan
Agreement in the manner set forth herein, and the Lenders are agreeable to such
amendment, but only on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the parties hereto hereby agree as follows:
1. Amendment to Loan Agreement. Effective as of the date hereof, and subject to
the satisfaction of the conditions to effectiveness set forth in Section 2
hereof, the definition of "Stockholders Equity" in Section 1.1 of the Loan
Agreement is amended by adding the following sentence at the end thereof:
"The following items shall be excluded from the calculation of Stockholders
Equity of a Person: (a) foreign currency exchange adjustments made in the
stockholders equity section of the balance sheet of such Person occurring after
the Closing Date and (b) up to $3,000,000 of the restructuring costs incurred by
such Person in its 1998 fiscal year in connection with the cost reduction
initiatives described in the letter dated January 15, 1998 from Dennis J. Nesler
to Ian Schnider and Cyril A. Prince." 2. Condition to Effectiveness. This
Amendment shall become effective upon the Agent's receipt of counterparts of
this Amendment, duly executed by the Borrowers and the Required Lenders and duly
consented to by the Guarantors.
3. Representations and Warranties of the Borrowers. Each of the Borrowers
represents and warrants as follows: (a) Since September 30, 1997, there has
occurred no development, event or change that has had or could reasonably be
expected to have a Material Adverse Effect, except as disclosed in the 1998
Fiscal Year Transamerica Plan dated January 14, 1998.
(b) No Default or Event of Default has occurred and is continuing.
(c) The representations and warranties of such Borrower contained in Section 6.1
of the Loan Agreement are true and correct in all material respects on the date
hereof as though made on and as of the date hereof, except to the extent that
such representations and warranties expressly relate solely to an earlier date
(in which case such representations and warranties were true and correct on and
as of such earlier date).
4. Expenses. The Borrowers shall, jointly and severally, pay for all of the
reasonable costs and expenses incurred by the Agent and the Collateral Agent in
connection with the transactions contemplated by this Amendment, including,
without limitation, the reasonable fees and expenses of counsel to the Agent.
5. Miscellaneous.
(a) Except as expressly amended herein, all of the terms and provisions of the
Loan Agreement and the other Loan Documents are ratified and confirmed in all
respects and shall remain in full force and effect.
(b) Upon the effectiveness of this Amendment, all references in the Loan
Documents to the Loan Agreement shall mean the Loan Agreement as amended by this
Amendment and all references in the Loan Agreement to "this Agreement,"
"hereof," "herein," or similar terms shall mean and refer to the Loan Agreement
as amended by this Amendment.
(c) The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided herein, operate as an amendment to or waiver of any
right, power or remedy of the Agent or the Lenders under any of the Loan
Documents, or constitute an amendment or waiver of any provision of any of the
Loan Documents.
(d) This Amendment may be executed by the parties hereto individually or in
combination, in one or more counterparts, each of which shall be an original and
all of which shall constitute one and the same agreement. This Amendment may be
executed and delivered by telecopier with the same force and effect as if the
same were a fully executed and delivered original manual counterpart.
(e) This Amendment shall constitute a Loan Document.
6. GOVERNING LAW. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AMENDMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO
THE CONFLICTS OF LAW PRINCIPLES THEREOF.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered by their respective duly authorized officers as of the
date first above written.
BORROWERS
GENERAL DATACOMM INDUSTRIES, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GENERAL DATACOMM, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GDC FEDERAL SYSTEMS, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GDC NAUGATUCK, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
VITAL NETWORK SERVICES, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
LENDERS
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /S/ GERALD A. MICHAUD
Name: Gerald A. Michaud
Title: Senior Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /S/ CYRIL A. PRINCE
Name: Cyril A. Prince
Title: Vice President
Each of the undersigned Guarantors hereby consents to this Amendment and agrees
that the execution, delivery and performance of this Amendment does not in any
way affect the obligations of such Guarantor under any Loan Document to which it
is a party, all of which obligations are ratified and confirmed, remain absolute
and unconditional and are not subject to any defense, setoff or counterclaim.
GENERAL DATACOMM LTD.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GENERAL DATACOMM LIMITED
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GENERAL DATACOMM INTERNATIONAL CORP
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GENERAL DATACOMM CHINA, LTD.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
DATACOMM RENTAL CORPORATION
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
GDC REALTY, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President & Treasurer
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