SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998 Commission File number 1-8086
GENERAL DATACOMM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0853856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1579 Straits Turnpike, Middlebury, Connecticut, 06762-1299
(Address of principal executive offices)
(203) 574-1118
(Registrant's telephone number, including area code)
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES { X } NO { }
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { X }
The aggregate market value of the voting stock of the Registrant held by
nonaffiliates as of November 24, 1998: $69,531,517.
Number of shares of Common Stock and Class B Stock outstanding as of November
24,1998:
19,642,190 Shares of Common Stock
2,093,083 Shares of Class B Stock
DOCUMENTS INCORPORATED BY REFERENCE:
Annual Report to Stockholders for the fiscal year ended September 30, 1998 for
Part II, Items 5, 6, 7 and 8. Corporation's Proxy Statement (dated December 14,
1998) for the 1999 Annual Meeting of Stockholders for Part III, Items 10, 11, 12
and 13. <PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
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PART I
ITEM 1. BUSINESS
General DataComm Industries, Inc. was incorporated in 1969 under the laws of the
State of Delaware. Unless the context otherwise requires, the terms "Company,"
"Corporation" and "GDC" as used here and in the following pages mean General
DataComm Industries, Inc. and its subsidiaries. In addition, in the following
business discussion, "ATM" refers to Asynchronous Transfer Mode cell switching
technology, "LAN" refers to Local Area Network and "WAN" refers to Wide Area
Network.
Overview
General DataComm Industries, Inc. is a provider of internetworking and
telecommunications equipment based in Middlebury, Connecticut. The Company is
focused on providing multiservice provisioning solutions using ATM switching and
multiservice access products. The Company designs, assembles, markets, installs
and maintains products and services that enable telecommunications common
carriers, governments and corporations to better and more cost effectively
manage their global telecommunications networks. The Company sells and leases
its products primarily to corporations, governments and common carriers
(telephone and cable companies) through its own worldwide sales and service
organizations as well as original equipment manufacturers (OEMs), integrators,
local distributors and value-added resellers. The Company's products are
assembled in its Naugatuck, Connecticut facility with some sub-assemblies
produced in Mexico and other off-shore locations. In fiscal 1998, sales of
products represented 76% of revenues, service represented 19% of revenues and
the remaining 5% of revenues are comprised of leasing and contract engineering
activities.
As of December 1998 GDC has reorganized into three major core businesses that
include its Broadband Systems Products Division, the Network Access Division,
and its service organization, VITAL Network Services LLC.
The Company's customer base includes: Local Exchange Carriers, including all
five Regional Bell Operating Companies, Bell Canada and GTE; Alternative Service
Providers including Cignal Global Communications; Interexchange Carriers
including AT&T, MCI and Sprint; corporate end users such as American Airlines,
Citicorp, EDS, Cemex (Mexico), and Chicago Board of Trade; government entities
including the British Ministry of Defense, the French Ministry of State, NASA,
the U.S. Air Force, the U.S. State Department, the U.S. Army and many state and
local governments; international communications carriers such as Impsat
(Argentina and Colombia), Telefonos de Mexico, France Telecom and Deutsche
Telekom, and suppliers of central office switching equipment such as Lucent
Technologies and LM Ericsson.
The Corporation's executive offices are located at 1579 Straits Turnpike,
Middlebury, Connecticut, 06762-1299, and its telephone number is (203) 574-1118.
Broadband Business Strategy
The Company has concentrated its efforts on providing integrated networking
solutions and uses its ATM access and multiplexing products to construct global
data, voice and video communications networks. The Company's access and
broadband networking products provide an advanced multiservice architecture for
wide area networking solutions.
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In the early 1990s, the Company identified ATM technology as the preferred
solution for addressing the need for higher network bandwidth to support new
data and multimedia applications such as Internet services, telemedicine,
videoconferencing and distance learning. ATM, as a broadband technology, enables
the transmission of voice, video and high-speed data traffic on a single
communications line. By offering ATM solutions to its customers, the Company
believes it has enhanced its position as a leading supplier of wide area
networking and telecommunications products. The Company's strategy of providing
integrated solutions to its customers rests upon:
Capitalizing on ATM Technology. The Company believes it has a leading
position in the edge switch ATM switch market. The following entities have
deployed GDC's ATM cell switches in their ATM networks: Austrian PTT, MCI,
France Telecom, Deutsche Telekom, the Mayo Clinic and Burlington Northern
Santa Fe. Through OEMs and reseller channels, GDC's APEX ATM switches have
been supplied to Netherlands PTT, Telefonica de Espana (Spain) and Telia
(Swedish telephone company). France Telecom, Deutsche Telekom and
Netherlands PPT have each built out their multiservice networks to between
150 and 250 APEX switches that provide for LAN interconnect, voice, frame
relay and Internet services.
Providing Cost-Effective Flexible Product Solutions. The Company's product
families are designed with architectures that scale to most network sizes,
performance and cost requirements. Customers can select the products which
are most appropriate to their current needs and migrate to higher capacity
products over time. Standardization of a network management protocol across
product families allows the end user to utilize a single network management
system, which provides value-added capabilities such as extensive alarm
reporting, diagnostics and advanced service restoral options for each
circuit and unit of equipment in the network.
Improving Performance Of Customer Networks. The Company's products are
designed to improve network efficiency by increasing transmission speed,
compressing and consolidating voice, video and data communication
and providing dynamic bandwidth allocation.
Leveraging Global Customer Base, Distribution and Support. The Company has a
worldwide customer base of corporate and government users and
telecommunications carriers. The Company has global distribution
capabilities, and its ability to provide international customer service and
support is critical to customers that run mission-critical applications over
their networks.
ATM Market
Background. Improvements in microprocessor technology over the past several
years have significantly changed the way users design and build communications
networks. The explosive growth of the Internet, increased LAN traffic, rollout
of wide area interactive video and multimedia, and integration of long distance
compressed voice traffic have had a significant impact on bandwidth requirements
and service planning for wide area networks. There is a compelling logic for
network planners and managers to consolidate services over a single network
rather than using multiple, service-specific networks. As a result enterprises
are now implementing ATM networks. New competitive service providers are using
ATM to offer business customers greater economy in the cost of services and
facilities. All of this new direction requires advanced access products for LAN
to WAN connectivity and efficient WAN switching solutions.
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WANs present an additional bottleneck constraining greater deployment of
enterprise-wide networks. The underlying WAN architecture of the telephone
companies is optimized for low speed, constant bit-rate voice communications. It
does not scale well to accommodate high-speed, burst-oriented data
communications typical of a LAN. To address this problem, telecommunications
carriers have deployed fiber optic transmission facilities in their networks
over the past decade and some such companies are now in the process of testing
and deploying ATM switches as the platform of choice for offering new,
value-added services to their customers. The Company believes that the need for
more bandwidth in both the LAN and WAN environments to support current data
processing and networking applications is a key factor driving demand for ATM
products. Increasing numbers of applications combining voice, video and data
will demand even more bandwidth than current applications. The Company believes,
for example, that the Internet is the single most compelling driver of ATM-based
backbone networks.
ATM Segments. In the past five years ATM has become a leading transmission
technology for communications networks. Within the broader ATM market, the
Company has identified three distinct segments: access concentrator, enterprise
switch and edge switch as further described below. Each of these segments
requires significant traffic adaptation functions that convert conventional
voice, video, and data formats to ATM cells.
Access Concentrators. Carrier ATM services are evolving globally. Remote
offices, branch offices and medium size business offices are expected to
begin subscribing to these new service offerings and will require cost
effective access. As in the frame relay services arena where low cost
access devices enabled cost efficient services, the Company believes this
will occur over the next several years as the demand for ATM services
increases. Key market requirements include low cost adaptation of legacy
voice and data, support for video and IP services, and manageability of the
trunk line by both carrier and end user.
Enterprise Switch. Enterprise switches are used to interconnect a broad
range of customer premise equipment, including LAN hubs, routers,
multiplexers, PBXs and video codecs, across a campus or a more
geographically dispersed area to create high-speed backbone networks
linking major corporate locations. Key market requirements include a fault
tolerant architecture and the ability to support a broad range of
interfaces and adaptation capabilities for new as well as legacy
technologies.
Edge Switch. The telecommunications carrier edge switch is typically
located in the central office of a Local Exchange Carrier, an Interexchange
Carrier, a Competitive Access Provider or a Cable TV Operator. Switches are
used as platforms to provide services to a number of end user locations.
Common carriers also utilize these switches in the basements of buildings
to offer new services to multiple customers. As with the enterprise switch
market, fault tolerance and the ability to support a broad range of
interfaces and adaptation capabilities are key requirements because
carriers need maximum flexibility. In addition, the unique packaging and
environmental requirements of telecommunications carriers must be met.
GDC's Target ATM Segments. The access concentrator, enterprise switch and edge
switch markets that GDC is pursuing address the points in a network where LAN,
voice, video and other data applications converge with WANs and the greatest
bandwidth bottlenecks exist. A significant increase in compressed voice and
video over ATM has stirred much interest in GDC's standards-based multiservice
solution. GDC also believes that, at present, these targeted market segments
align with the Company's core ATM competencies developed over the last six
years.
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Broadband Products
The Company's broadband line of products includes ATM Switches and Network
Management Systems. GDC currently offers a family of ATM switches and access
products for both public and private networks under the GDC APEX name. The APEX
product line consists of the APEX-DV2, the APEX-NPX, the APEX-IMX and the
APEX-MAC1.
GDC introduced the APEX-MMS (Multimedia Multipoint Server), the industry's first
"any band" Multipoint Control Unit (MCU), in September 1996. Part of the ATM
broadband family, it can operate on any band (narrow, wide, and broad) and
provide audio, video, and data intensive applications like videoconferencing,
telemedicine, and distance education. Wide area transport is provided via the
shared APEX VIP(TM) family of integrated codecs within the APEX switch,
providing Motion JPEG, H.320 and MPEG-2 compression options allowing optimized
video-provisioned services.
Switch Specifications Targeted Segment
APEX-DV2 Provides up to 6.4 Gbps of Enterprise switch for
capacity and support for up to corporate and
64 ports within a single shelf, government users
utilizing AC power supplies.
APEX-NPX Provides up to 6.4 Gbps of Edge switch for common
capacity and support for up to carriers, including
64 ports within a single shelf, telephone and cable
utilizing DC power supplies. television companies
APEX-IMX Provides up to 2.8 Gbps of Lower capacity
capacity and support for 14 enterprise switch for
to 28 ports within a single corporations and
shelf. common carriers
APEX-MAC1 Provides up to 1.6 Gbps of Access concentrator for
capacity and support for 8 to corporations, carriers,
16 ports within a single enclosure. and government users.
GDC's APEX-Prosphere network management suite of applications supports GDC's
APEX ATM switches. The network management platform offers a powerful,
object-oriented system employing a graphical user interface for ATM network
management via the industry-standard Simple Network Management Protocol. The
APEX-Prosphere enables a network manager to configure APEX switches, provision
APEX circuits, build the ATM switch network and monitor that network, including
the capacity and utilization of each ATM node and the status of all other
components of the network.
Many traditional carriers have deployed GDC APEX ATM switches as their platform
for provisioning new differentiated data communications services. During 1998,
some GDC APEX customers implemented networks to provide standards-based voice
over ATM which offers compression, silence suppression and idle detection over
variable bit-rate services. This allows very cost efficient provisioning of
both voice and data services. A number of corporate customers also have
purchased APEX switches.
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GDC believes its family of APEX switches have the following competitive
advantages:
Scalability, allowing a customer to construct a multitiered switch
network that scales in price and performance and offers multiple
services over one platform
Flexibility, providing the customer with comprehensive interfaces and
adaptation capabilities
Traffic management architecture, providing networks with traffic
policing, traffic shaping, traffic prioritization and buffer management
capabilities
Switched virtual circuits, dynamically establishing connections on
an end-to-end basis
Comprehensive compressed standards-based voice and video
Selling prices vary directly with the size and complexity of the systems being
ordered.
Multiplexers/Internetworking Products. GDC's multiplexer and internetworking
products family includes systems for both branch office and corporate backbone
locations which integrate voice, traditional data, video and LAN traffic over
narrowband (56/64 Kbps) or wideband (fractional T1/E1 and T1/E1) digital
services. By consolidating multiple forms of traffic over a single transmission
line, these products significantly decrease an end user's network costs. For
corporate backbone locations, GDC offers the TMS 3000 which supports a wide
range of voice, facsimile, LAN, traditional data and video applications. The
Office Communications Manager ("OCM"), a cost-effective networking solution for
the branch office location, operates with the TMS 3000 as part of a network and
offers the integration of voice, LAN routing, frame relay and traditional data
at speeds ranging from 9.6 Kbps to T1/E1.
GDC is pursuing an aggressive TDM to ATM migration strategy. This allows GDC to
address its existing TDM customer base with an appropriate forward-looking
technical evolution. In corporate backbone environments requiring broadband
speeds and services, GDC APEX ATM switches can be used. The TMS 3000 and OCM can
feed into the APEX switch enabling GDC to offer an integrated networking
solution which scales from small remote or branch locations into regional
wideband backbones and ultimately into ATM-based broadband backbones.
Access Product Strategy
The recently completed reorganization resulted in the creation of a new Networks
Access Products Division. The objective of this reorganization was to improve
sales, marketing, and engineering productivity relative to the Company's access
product line. The new business unit intends to leverage the use of sales
resources of distributors, value-added resellers, integrators and
telecommunication provider channels in an effort to capitalize on breadth of
sales coverage, both domestically and internationally. The reorganization is is
also intended to serve to intensify the selling of access products which have an
inherently short selling cycle.
GDC has adjusted to shifting priorities in the overall access market. These
priorities are governed by the accelerated growth of Internet, Frame Relay, and
cell-based services, all of which require increased attention to network
management and performance quality. GDC accordingly intends to focus on the
development and sale of products targeted towards market growth areas. GDC's
digital data sets, copper loopware equipment, and service monitoring probes
combine to form the major product elements serving to meet emerging market
requirements.
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Access Products
Digital Data Sets. Digital data sets are used to convert and interpret signals
from computers and communications equipment into a form that is acceptable for
transmission over telecommunications facilities. GDC offers a broad set of
narrowband digital data sets that operate at various speeds up to 64 Kbps and
wideband digital data sets operating at fractional T1 and T1 speeds. GDC
supplies its digital data sets to the major North American telephone companies
and various end users. GDC continues to enhance its digital transmission product
line by combining higher transmission speeds with value-added capabilities
including data compression, concentration, protocol adaptation/conversion and
network management. This enables GDC to offer differentiated and, in some cases,
unique transmission solutions. The SpectraComm 5000 family of network managed
CSU/DSU products is the latest generation of digital products which are targeted
at large managed digital networks.
Analog Modems. Analog modems convert digital computer signals to a format that
can be transmitted over telephone lines. The market for private line modems has
been shrinking as telephone networks move from an analog to a digital format.
However, with the growth of telecommuting and Internet access, the need for
analog modems continues to grow. GDC offers a broad range of private line and
dial-up modems operating at all speeds up to 56 Kbps.
Another major factor in the modem market has been the trend to build modem
functionality directly into personal computers and other equipment. The Company
addressed that market by licensing its technology to semiconductor chip
manufacturers and to equipment manufacturers who pay the Company license fees
for the use or sale of specific V.34 or V.90 patented technology. Early in
fiscal 1998 the Company formed the Technology Alliance Group ("TAG") as an
entity to target that market and to separate the business unit for potential
sale. The sale was completed in December 1998 (see Partnering/Divestiture
Strategy below).
Intelligent Voice Data Access Multiplexer. The Metroplex 6000 is an intelligent
access multiplexer designed for cost-effective access to a variety of data and
voice services available in wide area networks. It is applicable to the branch
office/small office market where it provides connectivity from the office to an
enterprise network or to public network services.
Copper Loopware xDSL System. The Universal Access System 7000 is a service
provisioning multiplexer which allows service providers to deliver digital
services over copper loop systems, reducing both cost and service provisioning
time. It is particularly applicable in international markets. In China and in
developing countries in Latin America and the Pacific Rim, there is insufficient
copper wire installed to support the growing demand for communications services.
GDC believes it is responding to these needs by offering the Universal Access
System 7000 that utilizes transmission technologies like 2B1Q (Two Binary One
Quaternary) and HDSL (High speed Digital Subscriber Line). These products offer
much higher transmission speeds while using half of the copper wire pairs
normally required to provision private line services.
VITAL Network Services
In February 1997, GDC restructured its service division to form an integrated
worldwide service organization to provide global traditional and professional
network services for telecommunications carriers, corporate and government
network customers. Traditional services include installation, on-site
maintenance, technical support, logistics and product repair. The professional
services portfolio includes
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network design and performance consulting, network audits, integration services,
remote network management and educational services. In September 1997, the
service division became a separate company of General DataComm Industries, Inc.
under the name VITAL Network Services, LLC.
Customer relationships and services are managed from four area offices in North
America, Mexico, United Kingdom and Singapore. Individual worldwide services are
provided by VITAL personnel and are augmented by third-party service partners
when necessary. High level VITAL technical support engineers using centralized
simulation labs provide our field engineers and customers remote assistance from
our VITAL Technical Assistance Center (V-TEC's) located in each area office,
with North America containing an additional global internetworking center. At
September 30, 1998, VITAL had 257 persons engaged in the delivery of direct
customer service support worldwide.
VITAL embarked on a strategic decision to convert the entire company from a
single manufacturer support organization to one capable of servicing multiple
manufacturer's equipment and technologies. Capable of working in integrated
networks, VITAL is a Cisco Authorized Support Provider and has established an
excellent working relationship with Bay/Nortel and many other manufacturers.
VITAL is the exclusive authorized service provider for ADC Kentrox, Eastern
Research, Olicom, AccessLan and Verilink. The target market has expanded from
end users to include integrators, value added resellers, distributors and
equipment manufacturers.
Recently, VITAL purchased all of Olicom's (router manufacturer) Canadian and
United States network service business, and their support center located in
Marlborough Massachusetts; VITAL also hired approximately 30 of their highly
skilled internetworking technical personnel.
Future growth is expected to be fueled by the addition of direct sales personnel
dedicated to the channel market and additional acquisitions of synergistic
service businesses.
Acquisition Strategy
As part of its business strategy, the Corporation has in the past reviewed
acquisition opportunities, including those which may complement its product
lines, provide access to emerging technologies or enhance market penetration.
GDC's VITAL Network Services subsidiary acquired Olicom's service business in
October 1998. The Corporation at this time has no understandings or commitments
to make any acquisitions, and there can be no assurances that any acquisitions
will be made.
Partnering/Divestiture Strategy
The Company is focusing on its primary business units (Broadband Systems
Division, Network Access Division and VITAL Network Services) and is pursuing
partnering arrangements and asset sales to reduce the current level of
investment in research and development activities and to provide additional
funds for operations.
On December 31, 1998 (effective as of December 22, 1998), the Company sold
substantially all the assets relating to its TAG division referenced above, to
PC-Tel, Inc. of San Jose, California and a PC-Tel, Inc. affiliate for $16.3
million. The assets sold included: patents, technology, test equipment,
development tools, furniture, and license agreements. At the time of the sale,
the assets had a net carrying value on the Company's books of approximately $3.0
million. The employees of the TAG division were also transferred to PC-Tel.
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Marketing, Sales and Customers
The Company's products and services are marketed throughout the world. GDC has
just completed a major reorganization of business operations that creates three
major operating divisions in the form of the Broadband Systems Division, the
Network Access Division and VITAL Network Services. Each of these groups now
have their own marketing, sales and engineering components and are separated as
distinct operating business units with separate general managers.
Internationally, GDC maintains full subsidiary operations in Canada, the United
Kingdom, Mexico, France, Germany, Russia, Singapore, and Brazil. Sales and
technical support offices are maintained in Sweden, Japan, Hong Kong, China and
Argentina. In total, the Company manages a worldwide distribution network with
representatives in more than 60 countries. International operations represented
approximately 50% of the Company's revenues in fiscal 1998 as compared to 52% in
fiscal 1997. GDC's foreign operations are subject to all the risks inherent in
international operations.
Selected users of the Corporation's products include:
<TABLE>
<CAPTION>
<S> <C> <C>
Telecommunications Commercial/End User Financial Services
Alascom American Airlines BITAL (Mexico)
Ameritech Burlington Northern/Santa Fe CIBC (Canada)
AT&T Cemex Chicago Board of Trade
Bell Atlantic EDS Citicorp
Bell Canada Harris Fiserv
BellSouth Henry Ford Hospital Halyk Savings Bank
Cable & Wireless (Panama) Lockheed Martin Shawmut Bank
CANTV Mayo Clinic Telerate Systems
Cignal Com.
Deutsche Telekom
Emtelco (Columbia) Government Suppliers
France Telecom
Guangdong PTA (China) British Ministry of Defense LM Ericsson
GTE Belgian Government Lucent Technologies
Impsat (Argentina, NASA Nortel CALA
Columbia, Equador) New York City Transit Authority Siemens A. G.
MCI Worldcomm Secretary of Labor (Mexico)
Netherlands PTT Social Security Administration (Mexico)
Saudi PTT U.S. Army and U.S Air Force
SBC Communications Various state and county governments,
Slovac Telecomm including California, Colorodo, Florida,
Sprint Iowa, Kentucky, Michigan, Ohio, and
Telecomm Corp of New Texas
Zealand
Telefonica de Espana
Telefonos de Mexico
Telesc (Brazil)
Unisource Carrier Services
US West
</TABLE>
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While the majority of the Corporation's products are sold on an outright basis,
the Corporation also leases its equipment through a wholly owned consolidated
subsidiary under a versatile selection of leasing programs designed to meet the
specific needs and objectives of its customers.
The Corporation's order backlog, while one of several useful financial
statistics, is, however, a limited indicator of the Corporation's future
revenues. Because of normally short delivery requirements, the Corporation's
sales in each quarter primarily depend upon orders received and shipped in that
same quarter. In addition, since product shipments are historically heavier in
the last month of each quarter, quarterly revenues can be adversely or
beneficially impacted by several events, including: unforeseen delays in product
shipments; large sales that close at the end of the quarter; sales order changes
or cancellations; changes in product mix; new product announcements by the
Corporation or its competitors; and the capital spending trends of customers.
Industry and geographic area information is included in Note 10 of "Notes to
Consolidated Financial Statements." See "Index to Financial Statements and
Schedules" on page F-1 in this report.
Research, Engineering and Product Development
In order to develop and implement new technology in the data, voice and video
communications industry and to broaden the applications for its products, the
Corporation has significant ongoing engineering programs for product improvement
and new product development. At September 30, 1998, 340 employees were engaged
in research and development activities. To expand its pool of available talent,
the Corporation conducts research and development activities in four locations.
In addition, the Corporation utilizes contractors and outside developers for
product development.
Development for all Network Access Division transmission products occurs in the
Technology Research Center in Middlebury, Connecticut. Development of Broadband
Systems Division products, including multiplexer and internetworking products
and enhancements to the APEX-ATM switch products, also occurs in the Technology
Research Center. The Multimedia Research Center in Montreal, Quebec, focuses on
ATM-based video and multimedia applications and solutions; The Boston Research
Center in Marlborough, Massachusetts, is currently focused on a standards-based
approach to Internet Protocol (IP)/ATM wide area networks using the
Multiprotocol Label Switching (MPLS) standard (with APEX ATM products); and the
Advanced Research Centre in Basildon, England, focuses on next-generation ATM
hardware and software.
The combination of research, development and capitalized software spending
amounted to 23.0%, 25.5% and 19.4% of revenues in fiscal 1998, 1997 and 1996,
respectively. In order to support its commitment to new products and
technologies, the Corporation expects to continue a high level of spending on
research and product and software development.
Manufacturing
GDC's principal assembly plant is a Corporation-owned, 360,000 square-foot
facility located in Naugatuck, Connecticut, of which approximately 45% is
currently being utilized for manufacturing (30% is used for other GDC operations
and 25% is vacant). The Corporation also outsources the manufacturing (assembly
and test) of certain products and subassemblies, generally high volume circuit
boards and power and packaging items. Outsourced products represented
approximately 40% of the manufacturing assembly during the 1998 fiscal year. In
December 1998, GDC announced that its "through-hole" product assembly
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operation will become fully outsourced. Management estimates that this activity
represented in excess of 50% of manufacturing's assembly activity during fiscal
1998.
GDC's Connecticut facilities are ISO 9001 certified. ISO 9001 is a comprehensive
model for quality assurance in design/development, production, installation and
servicing. It was developed by a technical committee comprised of
representatives from over 90 countries under the direction of the Geneva-based
International Organization for Standardization.
Reliance on Key Components and Subcontractors
The Corporation's products use certain components, such as microprocessors,
memory chips and pre-formed enclosures that are acquired or available from one
or a limited number of sources. The Corporation has generally been able to
procure adequate supplies of these components in a timely manner from existing
sources. While most components are standard items, certain application-specific
integrated circuit chips used in many of the Corporation's products are
customized to the Corporation's specifications. All suppliers of components do
not operate under contract. The Corporation's inability to obtain a sufficient
quantity of components when required, or to develop alternative sources at
acceptable prices and within a reasonable time, could result in delays or
reductions in product shipments which could materially affect the Corporation's
operating results in any given period. In addition, as referenced above, the
Company sometimes relies on subcontractors for product production. The inability
of such subcontractors to deliver products in a timely fashion or in accordance
with the Company's quality standards could materially affect the Corporation's
operating results.
Competition
Each of the segments of the telecommunications and networking industries is
intensely competitive. Many of the Company's current and prospective competitors
have greater name recognition, a larger installed base of networking products,
more extensive engineering, manufacturing, marketing, distribution and support
capabilities and greater financial, technological and personnel resources.
Broadband Competition: Many of the participants in the networking industry,
including, among others, Nortel Networks, Cisco Systems, ADC Kentrox, Ascend
Communications, Siemens, FORE Systems and Newbridge Networks, have targeted the
WAN ATM market segment. Other companies are expected to follow. In addition,
traditional suppliers of central office switching equipment such as Alcatel,
Lucent Technologies, Fujitsu and LM Ericsson have already or are expected to
offer ATM-based switches for central offices.
Access Competition: The Company's competition in the network access products
marketplace includes, among others, Pairgain, Adtran, Paradyne, RAD, 3Com, ADC
Kentrox and Newbridge Networks.
Each competitor offers a unique solution and all are formidable competitors.
The Company believes it can maintain or grow its market share for both ATM and
Access products. However, there can be no assurance that the Company will be
able to attain this objective.
Patents and Related Rights
The Corporation presently owns approximately 40 domestic patents and has
approximately 20 additional applications pending after deducting those sold to
PC-Tel as part of the TAG division sale described
12
<PAGE>
above. In addition, all of these patents and applications have been filed in
Canada; most also have been filed in other various foreign countries. Most of
those filed outside the United States have been allowed while the remainder are
pending. The Corporation believes that certain features relating to its
equipment for which it has obtained patents or for which patent applications
have been filed are important to its business, but does not believe that its
success is dependent upon its ability to obtain and defend such patents. Because
of the extensive patent coverage in the data communications industry and the
rapid issuance of new patents, certain equipment of the Corporation may involve
infringement of existing patents not known to the Corporation.
Employee Relations
At September 30, 1998, the Corporation employed 1,413 persons, of whom 340 were
research and development personnel, 359 were manufacturing personnel, 339 were
employed in various selling and marketing activities, 257 were in customer
support services and 118 were in general and administrative activities.
In December 1998 the Corporation announced a restructuring of its operations
into autonomous business units, and associated with this action there would be a
reduction in workforce of approximately 200 persons when the plan was fully
implemented. This reduction will occur across all functional areas.
No Company employees are covered by collective bargaining agreements. The
Company has never experienced a work stoppage and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The principal facilities of the Corporation are as follows:
Middlebury, Connecticut -- executive offices of the Corporation and Data-
Comm Leasing Corporation located in a 120,000
square foot facility owned by the Corporation
Naugatuck, Connecticut -- principal assembly, test and systems integration
oerations and global services division located in a
360,000 square foot facility owned by the
Corporation
Middlebury, Connecticut -- engineering organization located in a 275,000
square foot facility leased through 2003 by the
Corporation; approximately 72,000 square feet are
subleased to a third party through June 30, 2001
Wokingham, England -- sales, service, and administrative offices
(including a parking garage) located in a 36,000
square foot facility owned by General DataComm
Limited
Toronto, Canada -- sales and administrative offices located in a
12,000 square foot facility leased through
November 1999 by General DataComm Ltd.
13
<PAGE>
ITEM 2. PROPERTIES (Cont'd)
Montreal, Canada -- a 20,000 square foot research, sales and service
facility leased through February 2000 by General
DataComm Ltd.
Paris, France -- sales, service and administrative offices located
in a 5,500 square foot facility leased through April
2006 by General DataComm France SARL
Mexico City, Mexico -- sales, service and administrative offices located
in a 3,230 square foot facility leased through June
14, 2001 by General DataComm de Mexico S.A. de C.V.
Basildon, England -- engineering organization located in an 8,500 square
foot facility owned by General DataComm Advanced
Research Centre Limited
In addition, the Corporation leases sales, service and engineering offices
throughout the United States and in international locations.
Approximately 45% of the 360,000 square-foot Naugatuck, Connecticut, facility is
being utilized by the Corporation's manufacturing (assembly, test and systems
integration) operations. The plant is currently operating at 33% utilization by
running partial first and second shifts. With two full shifts, the aggregate
productive capacity would be approximately 406,000 printed circuit boards per
year. The Corporation has the capability of expanding its second shift operation
and adding a third shift should product demand require it.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference from the
section entitled "Common Stock Prices" on page 17 of the Corporation's 1998
Annual Report to Stockholders.(1)
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from the
section entitled "Five-Year Selected Financial Data" on page 8 of the
Corporation's 1998 Annual Report to Stockholders.(1)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information required by this item is incorporated by reference from the
section entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 9 through 17 of the Corporation's 1998 Annual
Report to Stockholders.(1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from pages 18
through 35 of the Corporation's 1998 Annual Report to Stockholders or is
included elsewhere in this annual report on Form 10-K.(1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
- ---------------------
(1) Such information is also included in Exhibit 13 of this Form 10-K report
as filed with the Securities and Exchange Commission.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors is incorporated by reference from the
section "ELECTION OF DIRECTORS" in the Corporation's Proxy Statement for the
1999 Annual Meeting of Stockholders, which Proxy Statement will be filed within
120 days after the end of the Corporation's fiscal year ended September 30,
1998.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Position Age
Charles P. Johnson Chairman of the Board of Directors 71
and Chief Executive Officer
Ross A. Belson President and Chief Operating Officer 62
Frederick R. Cronin Vice President, Corporate Technology and a Director 67
Robert S. Smith Vice President, Business Development 65
William S. Lawrence Senior Vice President, Finance and
Chief Financial Officer 55
James R. Arcara Vice President, Corporate Operations 63
Dennis J. Nesler Vice President and Treasurer 55
William G. Henry Vice President and Corporate Controller 49
P. John Woods Vice President, Global Services 50
Keith A. Mumford Vice President, and General Manager of the
Broadband Systems Division 34
Howard S. Modlin Secretary and a Director 67
- ----------------------------
</TABLE>
Mr. Charles P. Johnson, Chairman of the Board and Chief Executive Officer,
founded the Corporation in 1969.
Mr. Ross A. Belson, President and Chief Operating Officer, has served in his
present capacity since joining the Corporation in August of 1987.
Mr. Frederick R. Cronin, Vice President, Corporate Technology, has served in
executive capacities since the founding of the Corporation.
16
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
Mr. Robert S. Smith, Vice President, Business Development, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since February 1973.
Mr. William S. Lawrence, Senior Vice President, Finance and Chief Financial
Officer, served as Vice President, Finance and Chief Financial Officer since
joining the Company in April 1977, until February 1996 when he was elected
Senior Vice President, Finance and Chief Financial Officer.
Mr. James R. Arcara, Vice President, Corporate Operations, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since September 1978.
Mr. Dennis J. Nesler, Vice President and Treasurer since May 1987 and Treasurer
since July 1981, joined the Corporation in 1979 as Vice President of the
Corporation's wholly owned leasing subsidiary, a capacity in which he still
serves.
Mr. William G. Henry, Vice President and Corporate Controller, joined the
Corporation as Corporate Controller in January 1984, was appointed an officer of
the Corporation in June 1989 and was elected Vice President in February 1996.
Mr. P. John Woods, Vice President, Global Services, has been with the
Corporation since February 1993, and was appointed to his current position
effective October 1996. Before joining the Corporation, Mr. Woods held positions
with Digital Equipment Corporation and Philips.
Mr. Keith A. Mumford, Vice President and General Manager of the Corporation's
Broadband Systems Division, has been with the Corporation since 1993. He was
elected an officer in October 1998 and elected to his current position in
December 1998.
Mr. Howard S. Modlin, Secretary, an attorney and member of the firm of Weisman
Celler Spett & Modlin P.C., has been Secretary and counsel to the Corporation
since its formation.
17
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Executive Compensation and other Transactions with Management"
in the Corporation's Proxy Statement dated December 14, 1998.(1)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Directors and Officers" in the
Corporation's Proxy Statement dated December 14, 1998.(1)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Executive Compensation and other Transactions with Management"
in the Corporation's Proxy Statement dated December 14, 1998.(1)
- ------------------------------
(1) The Corporation's Proxy Statement will be filed with the Commission within
120 days after the end of the Corporation's fiscal year ended September 30,
1998.
18
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - see "Index to Financial Statements and
Schedules" on page F-1 of this report.
(2) Financial Statement Schedule - See "Index to Financial Statements
and Schedules" on page F-1 of this report.
(3) Exhibits - See Exhibit Index on page 20 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
19
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (cont'd)
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Certificate of Incorporation of the Corporation.(1)
3.2 Amended and Restated By-Laws of the Corporation.(2)
4.1 Certificate of the Powers, Designation, Preferences, Rights and
Limitations of 9% Cumulative Convertible Exchangeable Preferred
Stock (3)
4.2 Indenture dated May 1, 1997 covering presently unissued 9%
Convertible Subordinated Debentures due 2006.(4)
4.3 Supplemental indenture, dated September 26, 1997, which amends
the May 1, 1997 Indenture covering presently unissued 9%
Convertible Subordinated Debentures due 2006 (5)
4.4 Indenture dated September 26, 1997 covering issued 7-3/4%
Convertible Senior Subordinated Debentures due 2002 (6)
10.1 Transfer of Receivables Agreement between DataComm Leasing
Corporation and Sanwa Business Credit Corporation. (7)
10.2 1979 Employee Stock Purchase Plan.(8)
10.3 1983 Stock Option Plan.(9)
10.4 1984 Incentive Stock Option Plan, and related amendments.(10)
10.5 1985 Stock Option Plan. (11)
10.6 1991 Stock Option Plan. (12)
10.7 Retirement Savings and Deferred Profit Sharing Plan, and related
amendments. (13)
10.8 Credit Agreement between General DataComm Industries, Inc. and
The Chase Manhattan Bank. (14)
10.9 Loan and Security Agreement between General DataComm Industries,
Inc.et al.and Transamerica Business Credit Corporation,et al.(15)
10.10 First amendment to Loan and Security Agreement between General
DataComm Industries, Inc., et al., and Transamerica Business
Credit Corporation, et al. (16)
10.11 Second amendment to Loan and Security Agreement between General
DataComm Industries, Inc., et al., and Transamerica Business
Credit Corporation, et al.
10.12 Third amendment to Loan and Security Agreement between General
DataComm Industries, Inc., et al., and Transamerica Business
Credit Corporation, et al.
13. Annual Report to Stockholders for the year ended September 30,
1998. Portions of the Annual Report to Stockholders for the year
ended September 30, 1998 which have been incorporated by
reference are deemed to be "filed" (and are included as Exhibit
13 in our electronic filing with the Commission). All remaining
portions of the Annual Report to Stockholders will be furnished
for the information of the Commission and are not deemed "filed."
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
- -----------------------
1 Incorporated by reference from Exhibit 3.1 to Form 10-Q for quarter ended
June 30, 1988. Amendments thereto are filed as Exhibit 3.1 to Form 10-Q
for quarter ended March 31, 1990.
2 Incorporated by reference from Exhibit 3.2 to Form 10-K for year ended
September 30, 1987.
20
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (cont'd)
EXHIBIT INDEX (cont'd)
3 Incorporated by reference from Exhibit 4 to Form 8-K dated October 8,1996.
4 Incorporated by reference from Exhibit 4.1 to Form 10-Q for quarter ended
June 30, 1997.
5 Incorporated by reference from Exhibit 4.3 to Form 10-K for the year
ended September 30, 1997.
6 Incorporated by reference from Exhibit 4 to Form 8-K dated October 8, 1997
7 Incorporated by reference from Exhibit 10.1 to Form 10-Q for quarter ended
June 30, 1989
8 Incorporated by reference from Part II of prospectus dated September 30,
1991, contained in Form S-8, Registration Statement No. 33-43050.
9 Incorporated by reference from Exhibit 1(c) to Form S-8, Registration
Statement No. 2-92929. Amendments thereto are incorporated by reference
and filed as Exhibit 10.3 to Form 10-Q for quarter ended December 31, 1987
and as Exhibit 10.3.1 to Form 10-Q for quarter ended June 30, 1991.
10 Incorporated by reference from Exhibit 1(a), Form S-8, Registration
Statement No.2-92929. Amendments thereto are incorporated by reference and
filed as Exhibit 10.2 to Form 10-Q for quarter ended June 30, 1991,
Exhibit 10.19 to Form 10-K for year ended September 30, 1987 and Exhibit
10.2 to Form 10-Q for quarter ended December 31, 1987.
11 Incorporated by reference from Exhibit 10a, Form S-8, Registration
Statement No. 33-21027. Amendments thereto are incorporated by reference
from Part II of prospectus dated August 21, 1990, contained in Form S-8,
Registration Statement No. 33-36351 and as Exhibit 10.3.2 to Form 10-Q for
quarter ended June 30, 1991.
12 Incorporated by reference from Form S-8, Registration Statement No.
333-35299.
13 Incorporated by reference from Form S-8, Registration Statement No.
33-37266. Amendments thereto are incorporated by reference to Exhibit
10.16 to Form 10-Q for the quarter ended December 31, 1996.
14 Incorporated by reference from Exhibit 10.21 to Form 10-K for the year
ended September 30, 1993.
15 Incorporated by reference from Exhibit 10.9 to Form 10-K for the year
ended September 30, 1997.
16 Incorporated by reference from Exhibit 10.9 to Form 10-Q for quarter
ended March 31, 1998.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENERAL DATACOMM INDUSTRIES, INC.
By: /S/ WILLIAM S. LAWRENCE
William S. Lawrence
Senior Vice President, Finance and
Principal Financial Officer
Dated: January 12, 1999
22
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/S/ CHARLES P. JOHNSON Chairman of the Board January 12, 1999
- ---------------------- and Chief Executive Officer
CHARLES P. JOHNSON
/S/ WILLIAM S. LAWRENCE Senior Vice President, January 12, 1999
- ----------------------- Finance and Principal
WILLIAM S. LAWRENCE Financial Officer
/S/ WILLIAM G. HENRY Vice President and January 12, 1999
- ---------------------- Corporate Controller
WILLIAM G. HENRY
/S/ HOWARD S. MODLIN Director and Secretary January 12, 1999
- --------------------
HOWARD S. MODLIN
/S/ FREDERICK R. CRONIN Director and January 12, 1999
- ----------------------- Vice President, Corporate
FREDERICK R. CRONIN Technology
_______________________ Director January 12, 1999
LEE M. PASCHALL
__________________________ Director January 12, 1999
JOHN L. SEGALL
23
<PAGE>
General DataComm Industries, Inc.
and Subsidiaries
Index to Financial Statements and Schedules
Financial Statements Incorporated by Reference
The consolidated financial statements of General DataComm Industries, Inc. and
Subsidiaries and the Report of Independent Accountants related thereto are
incorporated herein by reference from pages 18 through 35 of the Corporation's
Annual Report to Stockholders for the year ended September 30, 1998. Such
information is also included in Exhibit 13 of this Form 10-K report (as filed
with the Securities and Exchange Commission). The Corporation's 1998 Annual
Report to Stockholders is not deemed to be "filed" as part of this Form 10-K
report except for those portions thereof specifically incorporated by reference.
Financial Statements and Schedule Included Page
Report of Independent Accountants F-2
Consolidated Financial Statement Schedule:
II. Valuation and qualifying accounts for the years
ended September 30, 1998, 1997 and 1996. F-3
Financial Statements and Schedules Omitted
Financial statements and schedules other than those incorporated by reference
above or included herein are omitted because they are not required or because
the required information is presented elsewhere in the financial statements or
notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of General DataComm Industries, Inc.
Our report on the consolidated financial statements of General DataComm
Industries, Inc. and its subsidiaries has been incorporated by reference in this
Form 10-K from page 39 of the fiscal 1998 Annual Report to Shareholders of
General DataComm Industries, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/S/ PricewaterhouseCoopers LLP
Stamford, Connecticut
October 29, 1998, except for Note 15
for which the date is December 31, 1998
F-2
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended September 30, 1998, 1997 and 1996
(In Thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- --------- ---------- ----------
(b)
1998
Allowance for doubtful
receivables (a) $1,703 $ 22 $283 $1,442
====== ==== ==== ======
1997
Allowance for doubtful
receivables (a) $1,768 $285 $350 $1,703
====== ==== ==== ======
1996
Allowance for doubtful
receivables (a) $1,704 $121 $ 57 $1,768
====== ==== ==== ======
- ------------------------------
(a) Deducted from asset accounts.
(b) Uncollectible accounts written off, net of recoveries.
F-3
Exhibit 10.11
SECOND AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS SECOND 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, L.L.C. (as successor by merger to 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") for the Lenders and
TRANSAMERICA BUSINESS CREDIT CORPORATION, as agent (in such capacity, the
"Agent") for the Lenders, is made as of October 13, 1998 among the Borrowers,
the undersigned Lenders and the Agent.
W I T N E S S E T H :
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 heretofore amended, 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 parties hereto desire to amend the Loan Agreement
in the manner 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 Loan Agreement is hereby amended as follows:
(a) Section 1.1 of the Loan Agreement is amended by adding the following
definition in the proper alphabetical order:
"'Settlement Date' has the meaning specified in Section 2.3(b)(ii)."
<PAGE>
(b) Section 2.3 of the Loan Agreement is amended and restated as follows:
"SECTION 2.3. Procedure for Borrowing; Settlement Procedures.
(a) Each borrowing shall be made on notice, given not
later than 4:00 P.M. (Chicago time) on the Business Day
immediately preceding the date of the proposed borrowing, by
GDC to the Agent. Each such notice of a borrowing (a "Notice
of Borrowing") shall be by telecopier, in substantially the
form of Exhibit M, specifying therein the requested (i) date
of such borrowing and (ii) aggregate amount of such borrowing.
The Agent may, on behalf of the Lenders, disburse funds to
GDC, for the benefit of the Borrowers, for Revolving Credit
Loans requested by GDC. Each Lender shall reimburse the Agent
at the time set forth in Section 2.3(c) for all funds
disbursed on its behalf by the Agent, or if the Agent so
requests, each Lender will remit to the Agent its pro rata
share of any Revolving Credit Loan before the Agent disburses
the same to GDC, for the benefit of the Borrowers. If the
Agent elects to require that each Lender make funds available
to the Agent prior to a disbursement by the Agent to GDC, the
Agent shall advise each Lender by telephone (but not
voicemail) or telecopier of the amount of such Lender's pro
rata share of the Revolving Credit Loan requested by GDC no
later than 10:00 A.M. (Chicago time), on the borrowing date
applicable thereto, and such Lender shall make available to
the Agent such Lender's pro rata share of such requested
Revolving Credit Loan, in same day funds, by wire transfer to
the Agent's account specified in Section 2.8(a) prior to 12:00
Noon (Chicago time), on the borrowing date applicable thereto.
(b) (i) In order to minimize the frequency of
transfers of funds between the Agent and each Lender,
notwithstanding anything to the contrary set forth herein,
Revolving Credit Loans and payments in respect thereof will be
settled among the Agent and the Lenders according to the
procedures described in this Section 2.3(b). These procedures
notwithstanding, each Lender's obligation to fund its pro rata
share of any Revolving Credit Loan made by the Agent to GDC
will commence on the date such Revolving Credit Loan is made
by the Agent. Such payments will be made by such Lender
without setoff, counterclaim or deduction of any kind.
(ii) On the first Business Day of each week, or more
frequently (including daily) if the Agent so elects (each such
-2-
<PAGE>
day being a "Settlement Date"), the Agent will advise each
Lender by telephone (but not voicemail) or telecopier of the
amount of such Lender's pro rata share of the outstanding
principal amount of Revolving Credit Loans as of the close of
business of the first Business Day immediately preceding such
Settlement Date. In the event that payments are necessary to
adjust such Lender's actual pro rata share of the outstanding
principal amount of Revolving Credit Loans as of any
Settlement Date to equal the amount of such Lender's required
pro rata share of the outstanding principal amount of
Revolving Credit Loans, the party from which such payment is
due will pay the other, in same day funds, by wire transfer to
the other's account not later than 12:00 Noon (Chicago time)
on the Business Day immediately following such Settlement
Date.
(c) Unless the Agent shall have been notified in
writing by any Lender prior to a borrowing date that such
Lender will not make the amount that would constitute its
Revolving Credit Commitment Percentage of the borrowing on
such date available to the Agent, the Agent may assume that
such Lender has made such amount available to the Agent on the
Business Day immediately following the next Settlement Date,
and the Agent may, in reliance upon such assumption, make
available to GDC a corresponding amount. If such amount is not
made available to the Agent by 12:00 Noon (Chicago time) on
such date, such Lender shall pay to the Agent, on demand, in
addition to such Lender's Revolving Credit Commitment
Percentage of such borrowing, an amount equal to the product
of (i) the daily average Federal Funds Effective Rate during
such period, times (ii) the amount of such Lender's Revolving
Credit Commitment Percentage of such borrowing, times (iii) a
fraction the numerator of which is the number of days that
elapse from and including such date to the date on which such
Lender's Revolving Credit Commitment Percentage of such
borrowing shall have become immediately available to the Agent
and the denominator of which is 360. A certificate of the
Agent submitted to any Lender with respect to any amounts
owing under this Section 2.3(c) shall be conclusive in the
absence of manifest error. If such Lender's Revolving Credit
Commitment Percentage of such borrowing is not made available
to the Agent by such Lender by 12:00 Noon (Chicago time) on
the third Business Day after such date, the Agent shall be
entitled to recover, on demand, from the Borrowers, such
amount with interest thereon at the rate per annum applicable
to Revolving Credit Loans hereunder. For purposes of this
Section 2.3(c), any amounts received by the Agent on any
-3-
<PAGE>
Business Day after 12:00 Noon (Chicago time) shall be deemed
to be received by the Agent on the immediately succeeding
Business Day."
(c) Section 2.10 of the Loan Agreement is amended and restated as follows:
"SECTION 2.10. Collection of Receivables. GDC, the
Agent and a Lockbox Bank shall enter into separate agreements,
each in form and substance satisfactory to the Agent (each, as
amended, supplemented or otherwise modified from time to time,
a "Lockbox Agreement"), each of which, among other things,
shall provide for the opening of an account (each, a "Lockbox
Account") for the deposit of each Borrower's Collections at a
Lockbox Bank. Each Borrower shall promptly direct all of its
account debtors to send their remittances to a lockbox
established pursuant to a Lockbox Agreement. All Collections
and other amounts received by any Borrower from any of its
account debtors shall promptly upon receipt be deposited into
a Lockbox Account. Upon the terms and subject to the
conditions set forth in the Lockbox Agreements, all amounts
held in each Lockbox Account shall be wired each Business Day
into an account maintained by the Agent at First National Bank
of Chicago. GDC shall enter into an agreement with the Agent
and a financial institution acceptable to GDC and the Agent (a
"Concentration Bank") in substantially the form of Exhibit R
(as amended, supplemented or otherwise modified from time to
time, the "Concentration Account Agreement"). All amounts
received by a Borrower from any source (except for Collections
and any other amounts received by any Borrower from any of its
account debtors) shall promptly upon receipt be deposited into
an account (the "Concentration Account") maintained by the
Agent at a Concentration Bank. Upon and subject to the terms
and subject to the conditions set forth in the Concentration
Account Agreement, all amounts held in the Concentration
Account shall be transferred each Business Day into an account
maintained by the Agent at First National Bank of Chicago. The
Agent will credit all such payments to the Borrower's account,
conditional upon final collection; credit will be given only
for cleared funds received prior to 12:00 Noon, Chicago time,
by the Agent at its account at First National Bank of Chicago
(Account #51-011-90), or such other bank as the Agent may
designate; provided, however, that for purposes of calculating
interest due to the Agent for the benefit of the Lenders,
credit will be given to collections one Business Day after
receipt of cleared funds. In all cases, the Loan Account will
-4-
<PAGE>
be credited only with the net amounts actually received in
payment of Receivables."
(d) Section 7.1(k)(iv) of the Loan Agreement is amended by deleting
"commencing at least two weeks prior to the date on which the first Revolving
Credit Loan is made" and substituting therefor "upon the request of the Agent".
2. Conditions to Effectiveness.
(a) This Amendment (other than Section 1(c))
shall become effective upon the Agent's receipt of (i) counterparts of this
Amendment, duly executed by the Borrowers and the Required Lenders and duly
consented to by the Guarantors and (ii) the amendment to the Pledge Agreement,
substantially in the form of Exhibit A, duly executed by the pledgors party
thereto and the Required Lenders and duly acknowledged by Grupo GDC de Mexico,
S.A. de C.V., together with the stock certificates pledged thereunder and
related stock powers executed in blank.
(b) Section 1(c) of this Amendment shall become
effective upon the satisfaction of the conditions precedent set forth in Section
2(a) and upon the Agent's receipt of amendments to the existing Lockbox
Agreements, duly executed by GDC and the Lockbox Bank party thereto, in each
case in form and substance satisfactory to the Agent.
3. Authorization by Lenders. Effective as of the date hereof,
each of the undersigned Lenders hereby authorizes the Agent (on behalf of such
Lender) to enter into one or more new Concentration Account Agreements, new
Lockbox Agreements and amendments to the existing Lockbox Agreements and
Concentration Account Agreements to carry out the purpose and intent of Section
1(c) and containing such other terms as the Agent determines to be necessary or
desirable.
4. Covenant Regarding Mexican Stock Pledge. On or before
October 31, 1998, General DataComm Industries, Inc. shall, and shall cause each
of its Subsidiaries to, take all such further actions and execute all such
further documents and instruments as the Agent may determine in its reasonable
discretion to be necessary or desirable to perfect and protect the Liens of the
Agent (and the priority status thereof) on the Collateral granted in accordance
with Section 2(a)(ii).
5. Representations and Warranties of the Borrowers.
Each of the Borrowers represents and warrants as follows:
(a) Since June 30, 1998, there has occurred no
development, event or change that has had or could reasonably be expected to
have a Material Adverse Effect, except as expressly set forth in the Business
-5-
<PAGE>
Plan most recently delivered pursuant to Section 7.1(k)(ii) of the Loan
Agreement.
(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).
(d) This Amendment constitutes the legal, valid
and binding obligation of such Borrower, enforceable against such Borrower in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency and other laws affecting creditors' rights generally and
by general principles of equity.
6. Expenses. The Borrowers shall, jointly and severally,
pay for all of the reasonable costs and expenses incurred by the Agent and the
Lenders in connection with the transactions contemplated by this Amendment,
including, without limitation, the reasonable fees and expenses of counsel to
the Agent and the Lenders.
7. 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.
-6-
<PAGE>
(e) This Amendment shall constitute a Loan Document.
8. 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.
-7-
<PAGE>
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 and Treasurer
GENERAL DATACOMM, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GDC FEDERAL SYSTEMS, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GDC NAUGATUCK, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
VITAL NETWORK SERVICES, L.L.C.
(as successor by merger to Vital
Network Services, Inc.)
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
-8-
<PAGE>
LENDERS
TRANSAMERICA BUSINESS CREDIT
CORPORATION
By: /S/ IAN SCHNIDER
Name: Ian Schnider
Title: Senior Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /S/ RENEE M. SINGER
Name: Renee M. Singer
Title: Vice President
BANKBOSTON, N.A.
By:
Name:
Title:
AGENT
TRANSAMERICA BUSINESS CREDIT
CORPORATION, as Agent
By: /S/ IAN SCHNIDER
Name: Ian Schnider
Title: Senior Vice President
-9-
<PAGE>
Each of the undersigned Guarantors hereby consents to this
Amendment and agrees that the execution, delivery and performance of this
Amendment do 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 and Treasurer
GENERAL DATACOMM LIMITED
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GENERAL DATACOMM INTERNATIONAL CORP.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GENERAL DATACOMM CHINA, LTD.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
DATACOMM RENTAL CORPORATION
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
-10-
<PAGE>
GDC REALTY, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
-11-
Exhibit 10.12
THIRD AMENDMENT TO
LOAN AND SECURITY AGREEMENT
THIS THIRD 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, L.L.C. (successor by merger to 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") for the Lenders and
TRANSAMERICA BUSINESS CREDIT CORPORATION, as agent (in such capacity, the
"Agent") for the Lenders, is made as of November 20, 1998 among the Borrowers,
the undersigned Lenders and the Agent.
W I T N E S S E T H :
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 heretofore amended, 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 amend
the Loan Agreement to, among other things, adjust certain financial covenants
and other terms and conditions, and the Lenders are agreeable to such requests
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. Amendments to Loan Agreement. Effective as of September 30,
1998 (in the case of Sections 1(i) and (j) of this Amendment only) and effective
as of November 25, 1998 (in all other cases), and subject to the satisfaction of
the conditions to effectiveness set forth in Section 2 hereof, the Loan
Agreement is hereby amended as follows:
(a) The definition of "Net Cash Proceeds" in
Section 1.1 of the Loan Agreement is amended by deleting "and the sale permitted
under Section 7.2(e)(iii)" from the parenthetical phrase on the sixth line
thereof.
(b) The definition of "Stockholders Equity" in
Section 1.1 of the Loan Agreement is amended by deleting clause (b) from the
last sentence thereof and substituting therefor "(b) up to an aggregate amount
of $4,500,000 of restructuring costs incurred by such Person in its 1998 and
1999 fiscal years in connection with cost reduction initiatives".
(c) Section 1.1 of the Loan Agreement is amended
by adding the following definitions in their proper alphabetical order:
"'Borrowing Base' means an aggregate amount of
Revolving Credit Loans equal to the sum of (a) 80% of
the Eligible Receivables and (b) 50% of the Eligible
Inventory; provided, that in no event shall the
aggregate amount of Revolving Credit Loans
outstanding at any time in respect of Eligible
Inventory exceed the lesser of (i) 50% of the
aggregate outstanding principal balance of all
Revolving Credit Loans and (ii) $7,500,000."
"'Designated Amount' means $5,000,000; provided that,
if the principal amount of the Term Loan has been
prepaid by at least $4,000,000 from Extraordinary
Proceeds on or before March 31, 1999, the Designated
Amount shall be reduced to $0 on the date of such
prepayment."
"'Extraordinary Proceeds' means cash proceeds
received by the Loan Parties from one or more
transactions outside the ordinary course of business,
whether by an equity offering, a sale of fixed or
intellectual property assets or otherwise.
Extraordinary proceeds shall not include proceeds of
the Loans or other Indebtedness, proceeds from the
sale of Inventory or Receivables or proceeds of
Collections. Nothing in this definition shall be
deemed to constitute the consent by, or the
authorization of, the Lenders to the sale of any
assets."
"'Revolving Availability' means the lesser of (a) the
Revolving Credit Limit and (b) the Borrowing Base."
"'Revolving Credit Limit' means $25,000,000."
"'Specified Amount' means (a) $0, if the outstanding
principal amount of the Term Loan has been prepaid by
at least $4,000,000 from Extraordinary Proceeds on or
before December 31, 1998 and (b) $2,000,000, if the
outstanding principal amount of the Term Loan has not
been prepaid by at least $4,000,000 from
Extraordinary Proceeds on or before December 31,
1998; provided that, if the principal amount of the
Term Loan has been prepaid by at least $4,000,000
from Extraordinary Proceeds between January 1, 1999
and March 31, 1999 and no Event of Default exists,
the Specified Amount shall be reduced to $0 on the
date of such prepayment."
(d) Section 2.1(a) of the Loan Agreement is amended
by deleting "$25,000,000" and substituting therefor "the Revolving Credit Limit,
less such reserves set forth in the last sentence of Section 2.1(b)."
(e) Section 2.1(b) of the Loan Agreement is amended
by deleting the last sentence and substituting therefor the following: "Without
limiting the generality of the foregoing, the Agent shall establish (w) a
standing reserve in the amount of $5,000,000 against the Borrowing Base, (x) a
standing reserve in an amount equal to the Designated Amount against the
Revolving Credit Limit, (y) an additional standing reserve against Eligible
Receivables, in an amount from time to time determined by it in good faith, with
respect to the liabilities owing by the Borrowing Base Parties to any Specified
Account Debtor and (z) commencing December 31, 1998, an additional standing
reserve in an amount equal to the Specified Amount against Revolving
Availability."
(f) Section 2.2(c) of the Loan Agreement is amended
by (i) deleting "11.51%" from the last sentence thereof and substituting
therefor "12.51%" and (ii) deleting the table set forth therein and substituting
therefor the following:
"Installment Percentage
1-4 4.5000%
5-8 5.7861%
9-19 6.5286%
20 29.3716%"
(g) Clause (iv) of Section 2.5(b) of the Loan
Agreement is deleted and replaced with the following:
"(iv) the outstanding principal amount of the Loans
shall be immediately prepaid by an amount equal to
(A) 40% of the first $10,000,000 of Extraordinary
Proceeds and 20% of all Extraordinary Proceeds
thereafter and (B) 100% of all Net Cash Proceeds that
do not constitute Extraordinary Proceeds; provided,
that, so long as no Event of Default exists, the
amount of Loans required to be prepaid pursuant to
this clause (iv) shall not exceed $6,000,000 in the
aggregate; and
(v) on or before March 31, 1999, the outstanding
principal amount of the Term Loan shall be prepaid by
at least $4,000,000 from Extraordinary Proceeds
(which prepayment may be accomplished pursuant to
Section 2.5(b)(iv)(A)).
Prepayments of the Loans pursuant to Section
2.5(b)(iv) shall be applied, first, to the Term Loan
and, second, to the outstanding principal amount of
the Revolving Credit Loans. Prepayments of the Term
Loans pursuant to Sections 2.5(b)(iv) and (v) shall
be applied to the installments under the Term Loan in
the inverse order of maturity."
(h) Section 4.1 of the Loan Agreement is amended
by deleting "one percent (1%)" and substituting therefor "two percent (2%)."
(i) Section 8.1 of the Loan Agreement is amended
by deleting "1.5:1" and substituting therefor "1.4:1."
(j) Section 8.2 of the Loan Agreement is amended
and restated as follows:
"SECTION 8.2. Stockholders Equity.
The Stockholders Equity of GDC and its Subsidiaries on the last day of any
fiscal quarter set forth below shall not be less than the amount set forth below
opposite such fiscal quarter:
Fiscal Quarter Ended Stockholders Equity
-------------------- -------------------
September 30, 1998 $67,900,000
December 31, 1998 62,900,000
March 31, 1999 59,500,000
June 30, 1999 57,100,000
September 30, 1999 57,000,000
December 31, 1999 58,000,000
March 31, 2000 59,000,000
June 30, 2000 60,000,000
September 30, 2000 61,000,000
December 31, 2000 62,000,000
March 31, 2001 63,000,000
June 30, 2001 64,000,000
September 30, 2001 65,000,000
December 31, 2001 66,000,000
March 31, 2002 67,000,000
June 30, 2002 68,000,000
September 30, 2002 69,000,000"
(k) Section 9.1 of the Loan Agreement is amended
by (i) deleting the period at the end of clause (l) and substituting therefor ";
or" and (ii) adding at the end of such Section the following new clause:
"(m) The Loan Parties shall not have received
Extraordinary Proceeds of at least $10,000,000 in
cash (net of costs and expenses) during the period
from November 20, 1998 to March 31, 1999."
(l) Schedule 6.1(r) to the Loan Agreement is
deleted and replaced with Annex I attached hereto.
2. Conditions to Effectiveness.
(a) This Amendment shall become effective upon
the Agent's receipt of (i) counterparts of this Amendment, duly executed by the
Borrowers and the undersigned Lenders and duly consented to by the Guarantors,
(ii) resolutions of the Board of Directors of each Borrower, certified by the
Secretary or Assistant Secretary of such Borrower, in form and substance
satisfactory to the Agent, (iii) a certificate of a Responsible Officer
attesting to the matters set forth in Sections 5(a), (b) and (c) of this
Amendment and (iv) an amendment fee of $360,000 in immediately available funds
for the ratable benefit of the Lenders, which fee shall be fully earned and
nonrefundable on the effective date of this Amendment.
3. Conditions Subsequent. On or before November 25, 1998, GDC
shall, and shall cause each of its Subsidiaries to, deliver to the Agent the
following, each of which shall be in form and substance satisfactory to the
Agent (and the failure by GDC to timely deliver or cause to be delivered any of
the following shall constitute an Event of Default):
(a) An amendment to (or an amendment and
restatement of) each Term Note to reflect the changes set forth in Section 1(e)
of this Amendment; and
(b) An amendment to (or an amendment and
restatement of) each Stock Subscription Warrant made by GDC in favor of each
Lender (each, a "Warrant") to provide that the Warrant Price (as defined
therein) is $3.9375 per share, subject to adjustment in accordance with Section
5 thereof.
4. Special Provisions Concerning Term Notes and Warrants.
(a) Pending the satisfaction of the condition
subsequent set forth in Section 3(a) of this Amendment, the parties hereto agree
that if there is any conflict between the terms of the Term Notes and the terms
of the Loan Agreement (as amended hereby), the terms of the Loan Agreement (as
amended hereby) shall control.
(b) Pending the satisfaction of the condition
subsequent set forth in Section 3(b) of this Amendment, the parties hereto agree
that the definition of "Warrant Price" set forth in each Warrant is amended by
deleting "$10.00" and substituting "$3.9375."
5. Representations and Warranties of the Borrowers.
Each of the Borrowers represents and warrants as follows:
(a) Since June 30, 1998, there has occurred no
development, event or change that has had or could reasonably be expected to
have a Material Adverse Effect, except as expressly set forth in the Business
Plan most recently delivered pursuant to Section 7.1(k)(ii) of the Loan
Agreement.
(b) After giving effect to this Amendment, no
Default or Event of Default has occurred and is continuing.
(c) The representations and warranties 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
(i) 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) and (ii) as set forth on
Annex I attached hereto.
(d) This Amendment and the other documents
delivered or to be delivered in connection herewith (together with this
Amendment and the Loan Agreement as amended hereby, the "Amendment Documents")
constitute the legal, valid and binding obligations of such Borrower,
enforceable against such Borrower in accordance with their respective terms,
except as enforceability may be limited by bankruptcy, insolvency and other laws
affecting creditors' rights generally and by general principles of equity.
(e) Each Borrower has the power, authority and
legal right to execute, deliver and perform the Amendment Documents to which it
is a party and the transactions contemplated thereby, and has taken all actions
necessary to authorize the execution, delivery and performance of the Amendment
Documents to which it is a party and the transactions contemplated thereby.
(f) No consent of any Person, and no consent,
permit, approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any Governmental Authority is required
in connection with the execution, delivery, performance, validity or
enforceability of this Amendment, the other Amendment Documents and the
transactions contemplated hereby and thereby.
(g) The execution, delivery and performance by
each Borrower of the Amendment Documents to which it is a party will not violate
any Requirement of Law or any contractual obligation of such Borrower.
6. Expenses. The Borrowers shall, jointly and
severally, pay for all of the reasonable costs and expenses incurred by the
Agent and the Lenders in connection with the transactions contemplated by this
Amendment, including, without limitation, the reasonable fees and expenses of
counsel to the Agent and the Lenders.
7. 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.
8. Acknowledgement of Debt. The Loan Parties hereby
acknowledge that as of November 17, 1998, they are indebted to the Lenders in
the principal amount of $16,488,655.30 under the Loan Documents plus accrued
interest, fees and expenses without defense, setoff or counterclaim.
9. Release. Each Loan Party hereby releases the Agent and the
Lenders and their respective affiliates, officers, directors, agents, employees,
counsel, successors and assigns (collectively, the "Releasee") from any and all
claims, demands, liabilities, obligations, costs and expenses any Loan Party may
now or hereafter have against the Releasee arising under or relating to this
Amendment, the Loan Agreement, the other Loan Documents or otherwise, from the
beginning of time to the date of this Amendment.
10. 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.
<PAGE>
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 and Treasurer
GENERAL DATACOMM, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GDC FEDERAL SYSTEMS, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GDC NAUGATUCK, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
VITAL NETWORK SERVICES, L.L.C.
(successor by merger to Vital Network
Services, Inc.)
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
<PAGE>
LENDERS
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /S/ IAN SCHNIDER
Name: Ian Schnider
Title: Senior Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
By:
Name:
Title:
BANKBOSTON, N.A.
By: /S/ HOPE L. HAYDEN KELLEY
Name: Hope L. Hayden Kelley
Title: Vice President
AGENT
TRANSAMERICA BUSINESS CREDIT CORPORATION,
as Agent
By: /S/ IAN SCHNIDER
Name: Ian Schnider
Title: Senior Vice President
<PAGE>
Each of the undersigned Guarantors hereby agrees and consents
to this Amendment and agrees that the execution, delivery and performance of
this Amendment do 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 and Treasurer
GENERAL DATACOMM LIMITED
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GENERAL DATACOMM INTERNATIONAL CORP.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GENERAL DATACOMM CHINA, LTD.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
DATACOMM RENTAL CORPORATION
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
GDC REALTY, INC.
By: /S/ DENNIS J. NESLER
Name: Dennis J. Nesler
Title: Vice President and Treasurer
Exhibit 13
Financial Highlights
<TABLE>
Five-Year Selected Financial Data
In thousands except per share, ratio and employee data
<CAPTION>
<S> <C> <C> <C> <C> <C>
Years ended September 30, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Operations
Revenues $194,255 $207,766 $235,129 $221,193 $210,990
Restructuring of operations and other charges (2,500)(1) -- -- (7,600)(4) --
Operating income (loss) (26,740) (38,419) (14,726) (24,618) 661
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss (33,392) (42,751) (17,170)(3) (27,630) (2,328)(5)
Basic and diluted loss per share ($1.64) ($2.11) ($0.83)(3) ($1.40) ($0.14)(5)
- -----------------------------------------------------------------------------------------------------------------------------------
Financial Position
Working capital $25,101 $51,926 $67,633 $63,287 $56,413
Current ratio 1.5:1 2.0:1 2.2:1 2.2:1 2.2:1
Total assets 149,538 187,335 205,054 198,388 180,264
Long-term debt, less current portion 52,679 49,293 22,781 23,435 42,118
Stockholders' equity (2) 45,958 80,028 122,186 117,085 84,487
- -----------------------------------------------------------------------------------------------------------------------------------
General
Research and product development:
Gross spending (before software
capitalization) $44,590 $52,983 $45,707 $40,439 $33,189
Net expense 31,937 40,876 34,121 28,244 20,076
Investments in property, plant and equipment 7,446 11,766 14,537 16,398 11,534
Cash flows provided by (used in) operating activities (951) (7,073) 16,780 (5,553) (3,521)
- -----------------------------------------------------------------------------------------------------------------------------------
Average number of common and
common equivalent shares outstanding 21,495 21,105 20,717 19,772 16,659
Average number of employees 1,572 1,809 1,814 1,849 1,823
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) - Represents a charge of $2.5 million, or $0.12 per share, for severance
costs associated with employee terminations and for asset writeoffs.
(2) - Cash dividends on Common Stock and Class B Stock are not permitted by the
Company's principal loan agreement.
(3) - Fiscal 1996 net loss includes a $1.0 million, or $0.05 per share, gain on
the sale of real estate.
(4) - Represents a charge of $7.6 million, or $0.46 per share, for inventory
write-down and other items.
(5) - Fiscal 1994 net loss includes: (i) after-tax charges totaling $433, or
$0.03 per share, resulting from the adoption of Financial Accounting Standards
Nos. 106 and 112, and (ii) an income tax benefit of $1,700, or $0.10 per share,
relating to the resolution of a foreign tax issue.
8
<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
General Summary Discussion
The Company's fiscal 1998 strategy was to focus on developing its ATM
(asynchronous transfer mode) product business and bring operating expenses more
in line with revenues. Significant progress was registered in both of these
areas (ATM revenues grew over 30% and operating expenses were reduced by
approximately $21.0 million); however, results overall remained unsatisfactory
due to revenue declines in older product areas, as discussed later.
The new strategy for fiscal 1999 is to restructure the Company into distinct
business units with increased operating autonomy and responsibility for business
unit operating results. This is an expansion of the successful launch of the
VITAL Network Services subsidiary and its multi-vendor service initiatives in
the telecommunications industry. The two new business units, Broadband Systems
(ATM and Internetworking products) and Network Access (Access products), will
each have a general manager and dedicated marketing, sales and product
development operations. As a result, the business units will be focused on
products, sales channels and technologies unique to each unit and will be
streamlined to deliver the best product performance and customer satisfaction.
The formal roll-out of this program was announced in December 1998 (see Note 15
to the "Notes to Consolidated Financial Statements" for further discussion of
this restructuring activity).
Also, the Company is focusing on divesting non-strategic assets and operations,
and on partnering with other companies on new product developments to reduce
working capital requirements (see Note 15 to the "Notes to Consolidated
Financial Statements" for discussion of a sale of a division of the Company
which occurred subsequent to September 30, 1998).
Maintaining adequate financial resources to support operations remains a top
priority of management. The Company's loan and security agreement requires a
significant improvement in operating results in fiscal 1999 in order to maintain
compliance with the agreement's financial covenants. The restructuring
initiative and division sale, both described above, were targeted at improving
the Company's financial condition and maintaining compliance with the
agreement's financial covenants, and management is committed to further actions,
if necessary, to maintain compliance with such financial covenants. Please
reference the "Financial Condition and Liquidity" section below for further
discussion.
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues:
Fiscal Year Ended September 30,
---------------------------------
1998 1997 1996
Revenues:
Net product sales 75.7% 76.5% 76.9%
Service revenue 19.5 18.6 16.6
Other 4.8 4.9 6.5
100.0 100.0 100.0
------------------------------------------------------------------------
Costs and expenses:
Cost of revenues 51.8 51.5 49.9
Amortization of capitalized software
development costs 6.1 5.8 4.9
Selling, general and administrative 38.1 41.5 36.9
Research and product development 16.5 19.7 14.5
Restructuring of operations 1.3 - -
------------------------------------------------------------------------
Operating loss (13.8) (18.5) (6.2)
------------------------------------------------------------------------
Net loss (17.2)% (20.6)% (7.3)%
-------------------------------------------------------------------------
The mix of revenue among the categories remained relatively consistent, with
service representing a larger share of total revenue due to the overall decline
in product revenues. Gross margin rates were also relatively consistent.
9
<PAGE>
However, a significant change is reflected in lower operating expense levels,
which, excluding restructuring charges, declined 6.6% as a percentage of revenue
due to the successful implementation of cost reduction initiatives.
Revenues:
($ in thousands)
--------------------------------
Fiscal Year Ended September 30, 1998 1997 1996
--------------------------------------------------------------------------
Revenues $194,255 $207,766 $235,129
Decrease from prior year (6.5)% (11.6)%
Fiscal 1998 revenues were $194.3 million, a decline of 6.5% from the prior year.
The reduction, principally comprised of a decline in product revenue, was
related to a number of factors, including weak economic conditions in Asia and
product line transitions. In the Broadband Systems business unit, ATM products
registered growth of over 30% (to over $50 million) and became the largest
product line component of this business unit. However, other broadband systems
(principally time-division multiplexing [TDM]) products registered a decline of
35.8%, with most of the reduction attributable to the turmoil in Asia's
financial markets; the Broadband Systems business unit registered an overall net
revenue decline of 6.2%. In the Network Access business unit, customer
transitions to higher speed digital products did not offset continued declines
in lower speed legacy products, resulting in a net revenue decline of 9.1%.
VITAL Network Services' revenues were affected by the lower volumes of the
Company's product sales on which services are performed. However, the business
unit was able to offset most of this decline with new service initiatives in the
multi-vendor area. Other revenues, comprised of leasing, technology license fee
and contract engineering revenues, declined $0.7 million, with reductions in
leasing and license fee revenue being partially offset with an increase in
contract engineering revenue.
Geographically, the revenue loss experienced in fiscal 1998 occurred primarily
in international markets, whereas the reduction in fiscal 1997 revenue
principally occurred domestically. Domestic and international revenues amounted
to 50.3% and 49.7% of fiscal 1998 revenues, respectively, as compared to 48.3%
and 51.7%, respectively, for fiscal 1997.
Fiscal 1997 revenues were also impacted by a decline in demand for the Company's
legacy analog and low-speed data set products (down $13.2 million); this
business declined significantly as market requirements moved to higher speeds.
ATM product shipments were down $3.8 million, or 9.1%, in fiscal 1997. However,
market demand for the Company's ATM products began escalating in the last two
quarters of fiscal 1997. Other product sales were down $4.9 million, or 9.2%.
Service revenues were slightly lower in fiscal 1997. Other revenues reflected a
decline of $5.2 million, or 33.7%, attributable to reductions in leasing revenue
($1.9 million, resulting from weakness in the domestic direct sales channel
market); technology licensing revenues ($1.2 million, principally due to
one-time fees recorded in fiscal 1996); and lower contract engineering service
revenues ($2.1 million).
Cost of Revenues:
($ in thousands)
---------------------------------
Fiscal Year Ended September 30, 1998 1997 1996
--------------------------------------------------------------------------
Cost of revenues $100,622 $107,113 $117,400
As a percent of revenue 51.8% 51.6% 49.9%
Amortization of capitalized software
costs 11,867 12,000 11,600
As a percent of revenue 6.1% 5.8% 4.9%
The dollar reduction in fiscal 1998 cost of revenues is largely due to the lower
product sales volumes. When measured as a percent of revenues, fiscal 1998 costs
increased 0.2 percentage points as compared to fiscal 1997. This modest increase
reflects higher subcontract costs in the international segment of the service
business (which added 0.4 percentage points to costs) offset by slightly lower
cost of product sales. Fiscal 1998 amortization of capitalized software costs
increased as a percent of revenue due to the lower revenue base.
Fiscal 1997 cost of revenues measured as a percentage of revenue, increased by
1.7 percentage points as compared to fiscal 1996. The increase in costs, which
equates to $3.4 million, is attributable to lower gross margins in products
($2.2 million), services ($0.6 million) and license fees ($0.6 million). Product
margin reductions are attributable to price reductions on legacy analog products
and certain low-speed product lines. Service margins reflect a shift of service
business from higher margin domestic business to lower margin (sub-contract)
international business, and
10
<PAGE>
license fee margins reflect lower revenues. Fiscal 1997 amortization of
capitalized software costs, up slightly in dollars, increased by 0.9% when
measured as a percent of revenue due to a reduced revenue base.
High technology products sold by the Company are generally subject to intense
sales price pressures as competition grows and sales cycles reach maturity. The
Company attempts to offset the effect of such sales price pressures with the
negotiation of reduced material component prices, improvements in manufacturing
costs and efficiencies and the introduction of new generation products which
generally provide higher margins.
Selling, General and Administrative Expenses:
($ in thousands)
------------------------------
Fiscal Year Ended September 30, 1998 1997 1996
-----------------------------------------------------------------------------
Selling, general and administrative expenses $74,069 $86,196 $86,734
Decrease from prior year (14.1)% (0.6)%
As a percent of revenue 38.1% 41.5% 36.9%
-----------------------------------------------------------------------------
The Company implemented cost reduction actions in fiscal 1998 as part of an
overall strategy to improve financial results. Fiscal 1998 general and
administrative expenses were reduced $2.3 million, or 15.3%, from fiscal 1997
levels. Fiscal 1998 selling and marketing costs declined $9.8 million, or 13.8%,
in the year. The lower spending levels were also reflected in the 3.4% reduction
in expenses measured as a percent of revenue, which occurred despite a lower
revenue base.
Fiscal 1997 general and administrative costs were held to an increase of only
$143,000, or 1.0% as compared to the prior year. Selling and marketing costs
were down $681,000 or 0.9%, for the same period. Salary and inflationary
increases were offset by efficiencies resulting from reorganization initiatives
in our international subsidiary and sales operations. However, selling, general
and administrative expenses increased as a percentage of revenue due to a
reduced revenue base in fiscal 1997.
<TABLE>
<CAPTION>
Research and Product Development Expense:
($ in thousands)
------------------------------------
<S> <C> <C> <C>
Fiscal Year Ended September 30, 1998 1997 1996
------------------------------------------------------------------------------------
Gross expenditures $44,590 $52,983 $45,707
Increase (decrease) from prior year (15.8)% 15.9%
As a percent of revenue 23.0% 25.5% 19.4%
Capitalized software costs 12,653 12,107 11,586
As a percent of gross expenditures 28.4% 22.9% 25.3%
Net research and product development expense $31,937 $40,876 $34,121
Increase (decrease) from prior year (21.9)% 19.8%
As a percent of revenue 16.4% 19.7% 14.5%
------------------------------------------------------------------------------------
</TABLE>
Cost reductions were also implemented in the product development areas by
reducing development activities targeted at sustaining legacy products and by
focusing development resources on projects considered to have the highest
likelihood of success. Spending in the ATM area continued at a significant rate,
representing 55% of total R&D gross spending, as compared to 54% in fiscal 1997.
The complexity of the ATM technology has historically demanded a significant
investment in research and development programs. While future ATM investment
levels, measured in both dollars and as a percent of revenue, are expected to
remain high in relation to other product lines, the Company will pursue
opportunities to reduce costs and the unusually high level of investment
required, possibly through partnering with other parties on joint developments
and/or divestiture of non-core product lines.
Fiscal 1998 capitalized software costs increased despite the reduction in gross
expenditures, as projects matured and reached technological feasibility. As a
result of the reduced gross spending level and higher capitalization amounts,
overall net research and development expense declined 21.9% from fiscal 1997 and
represented a lesser percent of revenue.
The Company conducts research and development activities at four locations, with
the largest pool of resource in Middlebury, Connecticut, and remote facilities
in Boston, Montreal and England.
11
<PAGE>
Interest and Other Income and Expense:
Interest expense increased $3.1 million in fiscal 1998 over fiscal 1997. The
increase is attributable to $25 million of 7 3/4% debentures issued on September
26, 1997 ($1.9 million of interest expense) and a $15 million term loan issued
on October 22, 1997 ($1.6 million of interest expense), partially offset with
reduced interest cost associated with reductions in other other debt. Fiscal
1997 net interest expense amounted to $2,823,000, up 37.6% from fiscal 1996. The
increase is attributable to interest costs associated with fiscal 1997 revolving
credit facility borrowings (no such borrowings occurred in fiscal 1996) and
other financing costs incurred.
Other income and expense is typically comprised primarily of foreign currency
gains and losses, which are discussed below under "Foreign Currency Risk."
However, fiscal 1996 also includes a $1.0 million gain on the sale of real
estate.
Income Taxes:
Income tax provisions for fiscal 1998, 1997 and 1996 amounted to $700,000,
$400,000 and $1,200,000 respectively. Such provisions principally represent
provisions for foreign income taxes and domestic state taxes. The reduced tax
provision for fiscal 1997 principally reflects the reversal of tax contingency
provisions in foreign tax-paying jurisdictions.
The Company has significant domestic net operating loss carryforwards
(approximately $144 million at September 30, 1998) available to offset future
income subject to federal income taxes. These net operating losses begin to
expire in the year 2004.
During fiscal 1998 and 1997, the deferred tax asset valuation allowance
increased by $17.6 million and $15.6 million, respectively, principally
attributable to the uncertainty as to whether newly generated operating loss
carryforwards will be utilized prior to expiration. Reference is made to Note 7
of the "Notes to Consolidated Financial Statements" for further discussion.
Market Risk
The Company is exposed to various market risks, including potential losses
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company historically has not entered
into derivatives, forward exchange contacts or other financial instruments for
trading, speculation or hedging purposes.
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 $400,000, $1,038,000 and $325,000 in fiscal 1998, 1997 and
1996, respectively. The larger exchange loss in fiscal 1997 is principally
attributable to the strength of the U.S. dollar relative to the French franc and
the German mark.
The introduction of the Euro as a common currency for members of the European
Monetary Union is scheduled to take place in the Company's fiscal year 1999. The
Company has not determined what impact, if any, the Euro will have on foreign
exchange exposure. However, 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.
As a result of high inflation in Mexico, the Company was required to change its
method of translating the financial statements of its Mexican subsidiary to
reflect the designation of the U.S. dollar as the functional currency, effective
January 1, 1997. Mexico will cease being considered a highly inflationary
economy for quarters beginning after December 31, 1998 and, effective January 1,
1999, the Company expects to designate the Mexican peso as the functional
currency for its Mexican operations (as compared to the U.S. dollar). The
Company does not expect this change to have a material impact on its financial
results in fiscal 1999.
12
<PAGE>
Interest Risk
The fair market value of long-term fixed interest-rate debt is subject to
interest-rate risk. Generally, the fair market value of fixed interest-rate debt
will increase as interest rates fall and decrease as interest rates rise. The
estimated fair value of the Company's total long-term debt (including current
portion) approximated $53.4 million at September 30, 1998, as compared to a
recorded value of $60.8 million. The Company estimates that a 1% increase from
prevailing interest rates at September 30, 1998 would reduce the fair value of
total long-term debt by approximately $1.4 million. See Note 1 to the "Notes to
Consolidated Financial Statements" under the sub-caption "Fair Values of
Financial Instruments" for further discussion.
Financial Condition and Liquidity
Future cash requirements are planned to be satisfied from a combination of cash
balances ($3.8 million at September 30, 1998), from borrowings under its
revolving credit line ($22.6 million of additional borrowings available at
September 30, 1998) and from alternate financing sources. These alternate
sources are targeted to include the sale of assets, technologies and/or
interests in existing businesses. For example, in December 1998 the Company
negotiated the sale of its Technology Alliance Group, a division responsible for
developing, patenting and licensing advanced modem and access technologies, for
approximately $16.3 million ($12.0 million of net proceeds after related selling
costs).
In addition, on December 18, 1998, the Company announced a restructuring of its
business into three primary operating units and the intent to sell or partner
certain other operations. The Company anticipates annual operating expense
reductions to exceed $15.0 million when the plan is fully implemented.
Refer to Note 15 to the "Notes to Consolidated Financial Statements" for further
discussion of the business restructuring and the sale of an operating division.
On October 22, 1997, the Company entered into a $40.0 million loan and security
agreement (the "Loan Agreement") with a new lending group. The Loan Agreement
provided the Company with $15.0 million in proceeds from a five-year term loan
and an additional $25.0 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 and satisfaction of other
financial covenants. Such formula and covenants were amended on November 25,
1998, and are discussed below.
The Loan Agreement's covenants may, if violated, limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
The two most restrictive covenants are as follows: (1) the requirement to raise
a minimum of $10.0 million of net proceeds from the sale of assets or execution
of an equity offering on or before March 31, 1999 (the Company satisfied this
requirement on December 30, 1998, as discussed in further detail below), and
that a portion of the net proceeds (40% of the first $10.0 million and 20% of
net proceeds in excess of $10.0 million, not to exceed $6.0 million) be applied
to the term loan portion of the Loan Agreement upon receipt; and (2) the
requirement to maintain specified minimum balances consisting of the sum of
stockholders' equity (excluding foreign currency translation adjustments
subsequent to September 30, 1997 and restructuring charges recorded in fiscal
1998 or thereafter, not to exceed $4.5 million), and outstanding 7-3/4%
convertible debentures ("minimum equity balance"). Minimum equity balance
requirements under the Loan Agreement amount to $67.9 million, $62.9 million,
$59.5 million, $57.1 million and $57.0 million on September 30, 1998, December
31, 1998, March 31, 1999, June 30, 1999 and September 30, 1999, respectively,
and increases by $1.0 million per quarter for subsequent quarters. As such
minimum equity balance at September 30, 1998 was $74.2 million, this covenant
effectively limits the sum of cumulative future losses and preferred stock
dividend payments, less 60 percent of the value of new capital stock issued, to
$17.2 million (excluding restructuring charges of up to $2.0 million). Other
covenants require that the Company maintain a current ratio equal to or greater
than 1.4 and that annual capital expenditures not exceed $15.0 million.
Since the Company realized losses of $6.2 million and $33.4 million for the
quarter and year ended September 30, 1998, respectively, a combination of cost
reductions and/or revenue growth is required in fiscal 1999 to maintain
compliance with the minimum equity balance covenant. In addition, the Company
must sell assets or execute an equity offering to achieve the $10.0 million in
net proceeds required under the Loan Agreement. (See Note 15 to the
13
<PAGE>
"Notes to Consolidated Financial Statements" for a discussion of the sale of a
Company division subsequent to September 30, 1998 which satisfied the $10.0
million covenant.) In the event of non-compliance with financial or other
covenants, the Company would have to obtain a waiver or amendment from the
lender, and there is no assurance that the lender would grant such a waiver or
amendment. The Company's inability to have access to the Loan Agreement and/or
alternative financing sources would have a material adverse effect on the
Company's financial condition. 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 funding under the Loan Agreement.
Refer to Note 6 of the "Notes to Consolidated Financial Statements" for
additional information on the Loan Agreement.
Operating
Net cash used in operating activities amounted to $1.0 million in fiscal 1998 as
compared to $7.1 million of net cash used in operating activities in fiscal
1997. The improvement of $6.1 million is primarily attributable to the smaller
net loss reported in fiscal 1998.
Non-debt working capital, excluding cash and cash equivalents, decreased from
$38.0 million at September 30, 1997 to $29.5 million at September 30, 1998. The
decrease of $8.5 million reflects, among other items, a $3.2 million reduction
in accounts receivable (resulting from a reduced level of sales activity and
continued improvement with collection efforts) and an $11.2 million managed
reduction in inventory, offset in part with reductions in accounts payable ($2.5
million) associated with the reduction in inventory levels, accrued payroll
costs ($1.0 million), accrued taxes ($1.8 million) and other items ($0.6
million).
Investing
The Company continued to invest in new technologies during fiscal 1998.
Property, plant and equipment investments totaled $6.9 million in fiscal 1998 as
compared to $11.6 million in fiscal 1997. Investments in capitalized software
amounted to $12.7 million and $12.1 million in fiscal 1998 and 1997,
respectively.
Financing
Net cash provided by financing activities amounted to $2.7 million in fiscal
1998, comprised of $3.5 million in net borrowings (including the $15.0 million
term loan referenced above), $1.0 million of proceeds received for stock sold
under the employee stock purchase plan, less $1.8 million used for payment of
preferred stock dividends. In fiscal 1997, net cash provided by financing
activities amounted to $26.2 million, reflecting $23.6 million of net proceeds
from the issuance of 7-3/4% convertible debentures (described below), $1.8
million of proceeds from the issuance of common stock pursuant to employee stock
programs and net debt borrowings of $2.6 million, partially offset with $1.8
million in preferred stock dividend payments.
Reference is made to the discussion above regarding the Company's $40.0 million
Loan Agreement, including related terms and financial covenant restrictions.
On September 26, 1997, the Company issued $25.0 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.
Such Debentures, issued to qualified institutional buyers and accredited
institutional investors, are convertible into shares of the Company's common
stock. Refer to Note 6 of the "Notes to Consolidated Financial Statements" for
additional disclosure.
In September 1996, the Company completed the sale of 800,000 shares of
cumulative convertible exchangeable preferred stock ("Preferred Stock") pursuant
to a private placement offering resulting in net proceeds of $19.2 million. The
Preferred Stock, sold for $25.00 per share, accrues dividends at a rate of 9%
($1.8 million) per annum, cumulative from the date of issuance and payable on a
quarterly basis in arrears. The Preferred Stock can be converted into common
stock at $13.65 per share, or the equivalent of 1.8315 shares of common stock
for each share of Preferred Stock. Reference is made to Note 9 of the "Notes to
Consolidated Financial Statements" for additional disclosure regarding
conversion terms and options.
14
<PAGE>
Lease Financing Agreements
The Company's leasing subsidiary has in the past entered into agreements with
financial institutions whereby lease receivables are transferred to such
institutions with full recourse. However, no such agreements were entered into
in fiscal 1998. Refer to Note 12 of the "Notes to Consolidated Financial
Statements" for further discussion.
Operating Lease Obligations
See Note 8 of the "Notes to Consolidated Financial Statements" for discussion of
the Company's operating lease obligations.
Concentrations of Credit
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash instruments and accounts receivable. The
Company places its cash investments with high-quality financial institutions
within the U.S., and as of September 30, 1998 and 1997, maintained balances of
approximately $0.5 million and $20.2 million, respectively, with one such
institution.
Approximately $16.2 million, or 45% of consolidated accounts receivable at
September 30, 1998 ($15.1 million, or 39%, at September 30, 1997), were
concentrated in telephone companies in North America and Europe. These
receivables are not collateralized due to the high credit ratings and the
extensive financial resources available to such telephone companies.
Impact of Inflation and Changing Prices
In management's opinion, the impact of inflation and changing prices for the
three most recent fiscal years is not significant to the financial statements as
reported.
Future Adoption of New Accounting Statements
Newly issued pronouncements to become effective in fiscal 1999 or fiscal 2000
are not currently expected to have a material impact on the Company's financial
position or results of operations. Refer to Note 1 of the "Notes to Consolidated
Financial Statements" for detailed information.
Year 2000 Compliance
Many currently installed computer systems are not capable of distinguishing 21st
century dates from 20th century dates. As a result, in less than two years
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Significant uncertainty exists concerning the scope and
magnitude of problems associated with the century change.
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures and has established a project team to
address Year 2000 risks. The project team has coordinated the identification of
and is coordinating the implementation of changes to computer hardware and
software applications that will attempt to ensure availability and integrity of
the Company's information systems and the reliability of its operational systems
and manufacturing processes. The Company is also assessing the potential overall
impact of the impending century change on its business, results of operations
and financial position.
The Company has reviewed its information and operational systems and
manufacturing processes in order to identify those products, services or systems
that are not Year 2000 compliant. As a result of this review, the Company has
determined that it will be required to modify or replace certain information and
operational systems so they will be Year 2000 compliant. These modifications and
replacements are being, and will continue to be, made in conjunction with the
Company's overall systems initiatives. The total cost of these Year 2000
compliance activities, estimated at less than $1.0 million, has not been, and is
not anticipated to be, material to the Company's financial position or its
results of operations. These costs are being expensed as they are incurred and
are being funded through operating cash flow. These amounts do not include any
costs associated with the implementation of contingency plans, which are in the
process of being developed. The costs associated with the replacement of
computerized systems, hardware or equipment, substantially all of which would be
capitalized, are not included in the above estimates. The Company expects to
complete its Year 2000 project during fiscal 1999.
15
<PAGE>
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues. The Company plans to develop formal contingency plans in the
event it appears unlikely that its Year 2000 project will not be completed in a
timely manner. These costs and the timing in which the Company plans to complete
its Year 2000 modification and testing processes are based on management's best
estimates. However, there can be no assurance that the Company will timely
identify and remediate all significant Year 2000 problems, that remedial efforts
will not involve significant time and expense, or that such problems will not
have a material adverse effect on the Company's business, results of operations
or financial position.
The Company also faces risk to the extent that suppliers of products, services
and systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not comply with Year 2000 requirements. The
Company has initiated formal communications with significant suppliers and
customers to determine the extent to which the Company is vulnerable to these
third parties' failure to remediate their own Year 2000 issues. In the event any
such third parties cannot provide the Company with products, services or systems
that meet the Year 2000 requirements on a timely basis, or in the event Year
2000 issues prevent such third parties from timely delivery of products or
services required by the Company, the Company's results of operations could be
materially adversely affected. To the extent Year 2000 issues cause significant
delays in, or cancellation of, decisions to purchase the Company's products or
services, the Company's business, results of operations and financial position
would be materially adversely affected.
The Company believes that it has substantially identified and resolved all
potential Year 2000 problems with any of the software products it develops and
markets to customers. However, management also believes that it is not possible
to determine with complete certainty that all Year 2000 problems affecting the
Company's software products have been identified or corrected due to complexity
of these products and the fact that these products interact with other
third-party vendor products and operate on computer systems which are not under
the Company's control.
The discussion of the Company's efforts and management's expectations relating
to Year 2000 compliance are forward-looking statements which are further
discussed below. The Company's ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith, could be adversely impacted by,
among other things, the availability and cost of programming and testing
resources, vendors' ability to modify proprietary software, and unanticipated
problems identified in ongoing compliance review.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this annual report, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties, and other factors which may affect future results including, but
not limited to, competition, rapid changing technology, regulatory requirements,
and uncertainties of international trade.
16
<PAGE>
Common Stock Prices
General DataComm Industries, Inc.'s common stock is listed on the New York Stock
Exchange and trades under the symbol "GDC." The table below displays the high,
low and end-of-quarter closing sales prices as reported during each quarter of
the last two fiscal years.
1998 1997
- -------------------------------------------------------------------------
High Low Closing High Low Closing
- -------------------------------------------------------------------------
First 7-1/16 3-5/16 4-11/16 11-7/8 9-1/2 10-1/2
Second 6-1/4 3-9/16 5-15/16 11-1/2 6-5/8 6-5/8
Third 5-3/4 3-7/8 5-1/16 9-1/8 6-1/8 7-1/8
Fourth 5 2-1/2 3 8-1/8 5-7/8 6
- ------------------------------------------------------------------------
No cash dividends have ever been paid on the Company's common stock or Class B
stock. The Company's principal loan agreement does not allow payment of cash
dividends, with the exception of dividends authorized for payment on the
Company's preferred stock. In the event this would change, it is still
management's intention to reinvest future earnings in the business to support
growth plans.
The Company had approximately 1,860 shareholders of record at September 30,
1998.
17
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
<S> <C> <C> <C>
In thousands except per share data
Years ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Revenues:
Net product sales $146,965 $158,928 $180,781
Service revenue 37,852 38,677 39,022
Other revenue 9,438 10,161 15,326
- -------------------------------------------------------------------------------------------------------------
194,255 207,766 235,129
- -------------------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 73,226 79,798 90,194
Amortization of capitalized software development costs 11,867 12,000 11,600
Cost of service revenue 26,856 26,706 26,350
Cost of other revenue 540 609 856
Selling, general and administrative 74,069 86,196 86,734
Research and product development 31,937 40,876 34,121
Restructuring of operations 2,500 -- --
- -------------------------------------------------------------------------------------------------------------
220,995 246,185 249,855
- -------------------------------------------------------------------------------------------------------------
Operating loss (26,740) (38,419) (14,726)
- -------------------------------------------------------------------------------------------------------------
Other income (expense):
Interest, net (5,900) (2,823) (2,051)
Other, net (52) (1,109) 807
- -------------------------------------------------------------------------------------------------------------
(5,952) (3,932) (1,244)
- -------------------------------------------------------------------------------------------------------------
Loss before income taxes (32,692) (42,351) (15,970)
Income tax provision 700 400 1,200
- -------------------------------------------------------------------------------------------------------------
Net loss ($33,392) ($42,751) ($17,170)
=============================================================================================================
Basic and diluted loss per share ($1.64) ($2.11) ($0.83)
=============================================================================================================
Average number of common and common equivalent
shares outstanding 21,495 21,105 20,717
=============================================================================================================
Accumulated deficit at beginning of year ($67,874) ($23,323) ($6,153)
Net loss (33,392) (42,751) (17,170)
Payment of preferred stock dividends (1,800) (1,800) --
- -------------------------------------------------------------------------------------------------------------
Accumulated deficit at end of year ($103,066) ($67,874) ($23,323)
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financia
statements.
18
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
In thousands except shares
September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $3,757 $21,526
Accounts receivable, less allowance for doubtful
receivables of $1,442 in 1998 and $1,703 in 1997 30,013 33,193
Inventories 30,574 41,749
Deferred income taxes 1,675 2,244
Other current assets 7,030 7,903
- -------------------------------------------------------------------------------------------------------
Total current assets 73,049 106,615
=======================================================================================================
Property, plant and equipment, net 40,553 46,427
Capitalized software development costs, net 24,286 23,500
Other assets 11,650 10,793
- -------------------------------------------------------------------------------------------------------
$149,538 $187,335
=======================================================================================================
Liabilities and Stockholders' Equity:
Current liabilities:
Current portion of long-term debt $8,133 $7,569
Accounts payable, trade 12,763 15,245
Accrued payroll and payroll-related costs 5,896 6,990
Deferred income 6,034 6,527
Other current liabilities 15,122 18,358
- -------------------------------------------------------------------------------------------------------
Total current liabilities 47,948 54,689
=======================================================================================================
Long-term debt, less current portion 52,679 49,293
Deferred income taxes 2,589 2,789
Other liabilities 364 536
- -------------------------------------------------------------------------------------------------------
Total liabilities 103,580 107,307
=======================================================================================================
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: 2,093,083 in 1998 and 2,136,933 in 1997 209 214
Common stock, par value $.10 per share, 35,000,000 shares authorized;
issued and outstanding: 19,968,280 in 1998 and 19,582,661 in 1997 1,997 1,958
Capital in excess of par value 151,052 149,864
Accumulated deficit (103,066) (67,874)
Cumulative foreign currency translation adjustment (2,589) (2,489)
Common stock held in treasury, at cost:
330,382 shares in 1998 and 1997 (2,445) (2,445)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 45,958 80,028
========================================================================================================
$149,538 $187,335
========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash Equivalents
<S> <C> <C> <C>
------------------------------------------------
In thousands
Years ended September 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($33,392) ($42,751) ($17,170)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 26,108 28,180 25,803
Gain on sale of real estate - - (1,000)
Deferred income taxes 23 261 58
Decrease in accounts receivable 2,529 5,915 2,721
Decrease in inventories 10,608 2,514 4
Increase (decrease) in accounts payable and accrued expenses (5,837) 38 5,670
(Increase) decrease in other net current assets (228) 1,203 179
(Increase) decrease in other net long-term assets (762) (2,433) 515
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (951) (7,073) 16,780
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (6,870) (11,580) (14,449)
Capitalized software development costs (12,653) (12,107) (11,586)
Proceeds from sale of real estate - - 1,000
- --------------------------------------------------------------------------------------------------------------------
Net cash (used in) investing activities (19,523) (23,687) (25,035)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings 23,274 60,361 -
Revolver repayments (26,486) (55,562) -
Proceeds from notes and mortgages 15,094 5,584 6,600
Principal payments on notes and mortgages (8,387) (7,725) (13,204)
Proceeds from issuing common stock 1,000 1,829 3,604
Proceeds from issuing convertible debentures - 23,562 -
Proceeds from issuing preferred stock - - 19,150
Payment of preferred stock dividends (1,800) (1,800) -
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,695 26,249 16,150
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash 10 (227) (74)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (17,769) (4,738) 7,821
Cash and cash equivalents at beginning of year (1) 21,526 26,264 18,443
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year (1) $3,757 $21,526 $26,264
- --------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $5,999 $2,864 $2,895
Income taxes, net $1,039 $541 $447
=====================================================================================================================
</TABLE>
(1) - The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
Notes to Consolidated Financial Statements
1. Description Of Business and Summary of Significant Accounting Policies
Description of Business
The Company is a worldwide provider of wide area networking and
telecommunications products. The Company designs, assembles, markets, installs
and maintains products and services that enable telecommunications common
carriers, corporations and governments to build, upgrade and better manage their
global telecommunications networks. Products include asynchronous transfer mode
(ATM) broadband switches, network access products, including advanced xDSL-based
network access systems, time-division multiplexing (TDM) equipment and network
management systems. The Company also provides comprehensive support services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiary companies. Intercompany accounts, transactions and
profits have been appropriately eliminated in consolidation.
Inventories
Inventories are stated at the lower of cost or market using a first-in,
first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated or amortized
using the straight-line method over their estimated useful lives. The cost of
internally constructed assets (test fixtures) includes the cost of materials,
internal labor and overhead costs.
Capitalized Software Development Costs
Software development costs are capitalized for those products that have met the
requirements of technological feasibility. Such costs are amortized
straight-line, on a product-by-product basis over the estimated economic life of
the product. Unamortized costs are reviewed for recoverability and, if
necessary, adjusted so as not to exceed estimated net realizable value. The
accumulated amortization of capitalized software development costs amounted to
$17,972,000 and $16,127,000 at September 30, 1998 and 1997, respectively.
Goodwill
Goodwill is amortized to expense over its estimated useful life, which
approximates 15 years, using the straight-line method. The valuation,
recoverability and amortization of goodwill is reviewed on a periodic basis. The
remaining unamortized portion of goodwill (included in the Consolidated Balance
Sheets under "Other Assets") amounted to $4,578,000 and $4,999,000 at September
30, 1998 and 1997, respectively. The accumulated amortization of goodwill
amounted to $2,469,000 and $2,048,000 at September 30, 1998 and 1997,
respectively.
Revenue Recognition
Revenue from equipment sales is generally recognized at the date of shipment
unless the terms and conditions of the sale dictate recognition at a later date.
Technology licensing fee revenue is recognized in the period received or,
alternatively, may be accrued when reliably determinable. Service revenue is
either recognized when the service is performed or, in the case of maintenance
contracts, on a straight-line basis over the term of the contract.
Revenue from sales-type leases is recognized at the date of shipment. Revenue
from operating leases is recognized ratably over the lease term, and the related
equipment is depreciated using the straight-line method over its estimated
useful life, which approximates four years. The average length of initial lease
terms in fiscal 1998 was approximately 31 months. Leasing revenue includes
income from the transfer (with full recourse) of certain finance lease
receivables. No such income was recognized in fiscal 1998 and such income
amounted to $195,000 and $553,000 in fiscal 1997 and 1996, respectively.
21
<PAGE>
Promotion and Advertising Costs
Promotion and advertising costs are charged to operating expense in the fiscal
year in which they are incurred. Promotion and advertising costs amounted to
$5,287,000, $7,007,000 and $6,528,000 in fiscal 1998, 1997 and 1996,
respectively.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred income
taxes.
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and deferred taxes resulting from temporary differences
between the financial statement and tax basis of assets and liabilities. The
Company intends to permanently reinvest the undistributed earnings of its
foreign subsidiaries ($5,474,000 at September 30, 1998). Accordingly, no U.S.
federal income taxes have been provided on such earnings. In addition, no
significant taxes would be required if such earnings were remitted due to net
operating loss carryforwards available in the United States.
Earnings (Loss) Per Share
Earnings (loss) per share is computed under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which
the Company adopted in fiscal 1998. 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.
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 years ended September 30,
1998, 1997 or 1996. Separately, the pronouncement is not expected to have a
material impact on the Company's reported earnings (loss) per share information
in the near term. Refer to Note 13 to the "Notes to Consolidated Financial
Statements" for further information.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash instruments and accounts receivable. The
Company places its cash investments with high-quality U.S. financial
institutions and maintained balances of approximately $531,000 and $20,200,000
with one such institution at September 30, 1998 and 1997, respectively.
Approximately $16,185,000, or 45%, of consolidated accounts receivable at
September 30, 1998 ($15,144,000, or 39%, at September 30, 1997) were
concentrated in telephone companies in North America and Europe. These
receivables are not collateralized due to the high credit ratings and the
extensive financial resources available to such telephone companies.
Foreign Currency
Assets and liabilities of the Company's foreign subsidiaries in countries other
than Mexico are translated using fiscal year-end exchange rates, and revenues
and expenses are translated using average exchange rates prevailing during the
year. The effects of translating such foreign subsidiaries' financial statements
are recorded as a separate component of stockholders' equity. As a result of
high inflation in Mexico, effective January 1, 1997 the Company was required to
change its method of translating the financial statements of its Mexican
subsidiary to reflect the designation of the U.S. dollar as the functional
currency. As a result, certain assets, liabilities and expenses are translated
using historical exchange rates and the effects of translating the Mexican
subsidiary's financial statements are recorded in the Company's statements of
operations. The impact of this change was not material to the Company's
financial results in fiscal 1998 or 1997.
22
<PAGE>
Mexico will cease being considered a highly inflationary economy for quarters
beginning after December 31, 1998. Effective January 1, 1999, the Company
expects to designate the Mexican peso as the functional currency for its Mexican
operations (as compared to the U.S. dollar). The Company does not expect this
change to have a material impact on its financial results in fiscal 1999.
Included in other income are net recognized foreign currency exchange losses of
$400,000, $1,038,000 and $325,000 for fiscal 1998, 1997 and 1996, respectively.
Post-Retirement and Post-Employment Benefits
The Company accounts for post-retirement benefits and post-employment benefits
under the provisions of Statement of Financial Accounting Standards No. 106,
"Employer's Accounting for Post-Retirement Benefits Other Than Pensions," and
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Post-Employment Benefits," respectively, each of which requires the use of an
accrual method of accounting for such benefits. The annual expense and other
disclosure information applicable to such benefits is not material.
Accounting for Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to continue
to measure costs for its employee stock compensation plans by using the
accounting methods prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which allows that no compensation
cost be recognized provided the exercise price of options granted is equal to
the fair market value of the Company's stock at date of grant. Reference is made
to Note 11 of the "Notes to Consolidated Financial Statements" for further
information.
Future Adoption of New Accounting Statements
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The Company will adopt SFAS No. 130 in fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which, among other things, changes the way public companies report
information about operating segments, also becomes effective for the Company in
fiscal 1999. The Company, which currently operates solely in the multimedia
communications industry, is currently evaluating the effects of this
pronouncement on its reporting of segment information.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which revises disclosure requirements about pensions and other
postretirement benefit plans (the Statement does not change the measurement or
recognition of applicable plans), will become effective for the Company in
fiscal 1999. The Company has not yet evaluated the effects of this pronouncement
on future related disclosures.
Statement Of Position 97-2, "Software Revenue Recognition," ("SOP 97-2") was
issued by the Accounting Standards Executive Committee on October 27, 1997 and
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. Mandatory compliance with the
accounting principles set forth in SOP 97-2 has been deferred until fiscal year
2000 (earlier application is encouraged and retroactive application is
prohibited); implementation of such accounting principles is not presently
expected to have a material impact on the Company's reported financial position
or results of operations.
Fair Values of Financial Instruments
Cash and cash equivalents - The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value due to
their short-term nature.
Long-term debt - The estimated fair value of the Company's $60.8 million and
$56.9 million total long-term debt (including current portion) at September 30,
1998 and 1997, respectively, was approximately $53.4 million and $56.9 million,
respectively. In the case of variable interest-rate debt, debt with shorter
maturities and recently secured fixed interest-rate debt, the Company estimates
the fair value to be the carrying value. For other long-term, fixed
interest-rate debt, the estimated fair value was obtained from an investment
banker.
23
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods
presented. Actual results could differ from those estimates. For example, 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.
Reclassifications
Certain reclassifications were made to prior years' consolidated financial
statements to conform to the current year's presentation.
2. Restructuring Of Operations
The fiscal year ended September 30, 1998 includes a restructuring of operations
charge of $2,500,000, or $0.12 per share (basic and diluted), which is comprised
of a $1.0 million provision for post-employment benefits 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. The restructuring actions, initiated on or about
January 2, 1998, were complete at September 30, 1998.
3. Technology Licensing Agreements
The Company has entered into numerous technology licensing agreements whereby
licensees pay the Company license fees for the use or sale of specific patents
and/or technology. Technology licensing revenues from such agreements amounted
to $3,166,000, $4,929,000 and $6,131,000 in fiscal 1998, 1997 and 1996,
respectively. Fiscal 1996 licensing revenue includes $2,459,000 of fees received
from one customer, a significant portion of which represented a retroactive
application of license fees. Licensing revenues are reported as "Other Revenue"
in the Company's Consolidated Statements of Operations. Refer to Note 15 to the
"Notes to Consolidated Financial Statements" for a discussion of the a sale of
the Technology Alliance Group division, which generates licensing fee revenues,
on December 31, 1998.
4. Inventories
Inventories consist of (in thousands):
September 30, 1998 1997
-----------------------------------------------------------------
Raw materials $10,945 $13,859
Work-in-process 3,611 4,932
Finished goods 16,018 22,958
-----------------------------------------------------------------
$30,574 $41,749
-----------------------------------------------------------------
5. Property, Plant and Equipment
Property, plant and equipment consists of (in thousands):
Estimated
September 30, 1998 1997 Useful Life
- -------------------------------------------------------------------------------
Land $ 1,784 $ 1,770 -
Buildings and improvements 30,134 29,716 10 to 30 years
Test equipment, fixtures and field spares 54,897 55,858 3 to 10 years
Machinery and equipment 59,957 56,165 3 to 10 years
- -------------------------------------------------------------------------------
146,772 143,509
Less: accumulated depreciation 106,219 97,082
- -------------------------------------------------------------------------------
$40,553 $46,427
- -------------------------------------------------------------------------------
24
<PAGE>
Depreciation expense amounted to $12,747,000, $14,014,000 and $12,160,000 in
fiscal 1998, 1997 and 1996, respectively.
6. Long-Term Debt
Long-term debt consists of (in thousands):
September 30, 1998 1997
------------- -------- --------
Revolving credit facility $ 1,587 $ 4,799
Notes payable 23,173 15,353
7-3/4% convertible subordinated
debentures 25,000 25,000
Mortgages payable 11,052 11,710
-------- --------
60,812 56,862
Less: current portion 8,133 7,569
-------- --------
$52,679 $49,293
======== ========
Interest expense amounted to $5,981,000, $3,300,000 and $2,757,000 in fiscal
1998, 1997 and 1996, respectively.
The following is a schedule of the future minimum payments of long-term debt at
September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
2004 and
Fiscal years ended September 30, 1999 2000 2001 2002 2003 Thereafter
- -----------------------------------------------------------------------------------------------------------
$8,133 $5,498 $5,916 $32,927 $8,338 $ -
- -----------------------------------------------------------------------------------------------------------
Total future minimum
payments $60,812
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Revolving Credit Facility
On October 22, 1997, the Company entered into a $40.0 million loan and security
agreement (the "Loan Agreement") with a new lending group. The Loan Agreement
provided the Company with $15.0 million in proceeds (received on October 22,
1997) from a five-year term loan and an additional $25.0 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,
and satisfaction of other financial covenants. Such formula and covenants were
amended on November 25, 1998, along with changes in interest rates and other
items, as discussed below.
Interest on borrowings under the revolving line will be charged at the higher
of: (1) the prime rate of interest plus 1% (2% effective November 25, 1998); or
(2) a published annualized rate for 90-day dealer commercial paper plus 1% (2%
effective November 25, 1998). On September 30, 1998, the prime rate was 8.25%
and the applicable 90-day dealer commercial paper rate was 5.12%. Most assets
of the Company, including accounts receivable, inventories and property, plant
and equipment, are pledged as collateral. Borrowings and letters of credit
outstanding under this revolving line of credit portion of the Loan Agreement
were $1,587,000 and $763,000, respectively, at September 30, 1998; borrowings
and letters of credit outstanding under a separate credit facility were
$4,799,000 and $935,000, respectively, at September 30, 1997.
The Loan Agreement's covenants may, if violated, limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
The two most restrictive covenants are as follows: (1) the requirement to raise
a minimum of $10.0 million of net proceeds from the sale of assets or execution
of an equity offering on or before March 31, 1999 (reference is made to
discussion below regarding satisfaction of this requirement on December 30,
1998), and that a portion of the net proceeds (40% of the first $10.0 million
and 20% of net proceeds in excess of $10.0 million, not to exceed $6.0 million)
be applied to the term loan portion of the Loan Agreement upon receipt; and (2)
the requirement to maintain specified minimum balances consisting of the sum of
stockholders' equity (excluding foreign currency translation adjustments
subsequent to September 30, 1997 and restructuring charges recorded in fiscal
1998 or thereafter, not to exceed $4.5 million), and outstanding 7-3/4%
convertible debentures ("minimum equity balance"). Minimum equity balance
requirements under the Loan Agreement
25
<PAGE>
amount to $67.9 million, $62.9 million, $59.5 million, $57.1 million and $57.0
million on September 30, 1998, December 31, 1998, March 31, 1999, June 30, 1999
and September 30, 1999, respectively, and increases by $1.0 million per quarter
for subsequent quarters. As such minimum equity balance at September 30, 1998
was $74.2 million, this covenant effectively limits the sum of cumulative future
losses and preferred stock dividend payments, less 60 percent of the value of
new capital stock issued, to $17.2 million (excluding restructuring charges of
up to $2.0 million). Other covenants require that the Company maintain a current
ratio equal to or greater than 1.4 and that annual capital expenditures not
exceed $15.0 million.
Since the Company realized losses of $6.2 million and $33.4 million for the
quarter and year ended September 30, 1998, respectively, a combination of cost
reductions and/or revenue growth is required in fiscal 1999 to maintain
compliance with the minimum equity balance covenant. In addition, the Company
must sell assets or execute an equity offering to achieve the $10.0 million in
net proceeds required under the Loan Agreement (see Note 15 "Subsequent Events"
to the "Notes to Consolidated Financial Statements" regarding the sale of a
Company division subsequent to September 30, 1998 which satisfies the $10.0
million covenant.) In the event of non-compliance with financial or other
covenants, the Company would have to obtain a waiver or amendment from the
lender and there is no assurance that the lender would grant such a waiver or
amendment. The Company's inability to have access to the Loan Agreement and/or
alternative financing sources would have a material adverse effect on the
Company's financial condition. 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 funding under the Loan Agreement.
Notes Payable
On October 22, 1997, the Company received proceeds of $15.0 million from the
term loan portion of the above-referenced Loan Agreement. The term loan, whose
outstanding balance amounted to $14,136,402 at September 30, 1998, bears
interest at a rate of 11.51% per annum (12.51% per annum effective November 25,
1998), and is payable in 20 predetermined quarterly installments, with final
payment due on September 15, 2002 (the prepayments referenced above, payable
from proceeds received from the sale of assets, not to exceed $6.0 million, will
be applied to future term loan payments). Separately, the Company has entered
into three-, four-, and five-year note and installment purchase agreements
collateralized by certain machinery, test equipment, furniture and fixtures. The
outstanding balance of $9,037,000 at September 30, 1998, which approximates the
net book value of the underlying equipment, bears interest at fixed rates
ranging from 6.5% to 11.59%, or a variable rate equal to prime plus 1%.
Individual notes mature between fiscal 1999 and fiscal 2001.
Convertible 7-3/4% Debentures
On September 26, 1997, the Company issued $25.0 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.
Such Debentures, issued to qualified institutional buyers and accredited
institutional investors, are convertible into shares of the Company's common
stock at a conversion price of $6.279 per share (as adjusted on March 30, 1998),
or the equivalent of 159.3 shares of common stock for each $1,000 principal
amount of Debentures. Under certain conditions, such conversion price may be
reset to a reduced price per share on September 30, 1999, but in no event may
the conversion price be reset below $5.831 per share. The Debentures are
subordinated in right of payment to most other indebtedness of the Company and
are equal to or senior to other subordinated indebtedness of the Company.
The Debentures may not be redeemed by the Company prior to September 30, 2000
and are redeemable in whole or in part, at the option of the Company, at 103.1%
of principal value during the period September 30, 2000 through September 29,
2001 if certain conditions are met, and without conditions at 101.55% of the
principal value on or after September 30, 2001 or 100% of principal value on or
after September 30, 2002 (maturity).
During the 30-day period commencing September 30, 2000, each holder of the
Debentures can require the Company to repurchase the Debentures at 100% of
principal value. The Company may satisfy such repurchase obligations through the
issuance of non-convertible senior subordinated notes which are subordinated to
the same extent, due on the same maturity date and have substantially the same
terms as the Debentures, except such newly issued notes shall not be convertible
and will bear a rate of interest required for such new securities to have a
market value equal to
26
<PAGE>
100% of their principal amount on the date of repurchase, but in no event shall
such interest rate exceed 14% per annum.
Mortgages Payable
Mortgages outstanding on the Company's corporate headquarters and manufacturing
facilities, which bear interest at 90-day LIBOR (5.25% at September 30, 1998)
plus 2%, amounted to $9,825,000 and $10,225,000 at September 30, 1998 and 1997,
respectively. Quarterly principal payments of $100,000 are required until these
mortgages mature in the year 2003. In addition, two mortgages with remaining
principal balances totaling $1,227,000 and $1,485,000 at September 30, 1998 and
1997, respectively, were outstanding on the Company's buildings in the United
Kingdom. These mortgages bear interest at six-month LIBOR (5.16% at September
30, 1998) plus 1.3% and mature in fiscal 2003.
7. Income Taxes
<TABLE>
Loss before income taxes consists of both domestic and foreign income (loss),
as follows (in thousands):
<CAPTION>
<S> <C> <C> <C>
Fiscal years ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
United States $(32,983) $(43,561) $(16,421)
Foreign 291 1,210 451
$(32,692) $(42,351) $(15,970)
- -------------------------------------------------------------------------------------------------
The provision for income taxes consists of the following amounts (in thousands):
Fiscal years ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Current:
State $200 $ 200 $ 325
Foreign 477 (61) 817
- -----------------------------------------------------------------------------------------------
$677 $ 139 $ 1,142
- -----------------------------------------------------------------------------------------------
Deferred:
Federal $ 28 $ 25 $ (22)
Foreign (5) 236 80
- -----------------------------------------------------------------------------------------------
$ 23 $ 261 $ 58
- -----------------------------------------------------------------------------------------------
Total $ 700 $ 400 $1,200
- -----------------------------------------------------------------------------------------------
The following reconciles the U.S. statutory income tax rate to the Company's effective rate:
Fiscal years ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
Federal statutory rate (34.0)% (34.0)% (34.0)%
No benefit recognized for domestic net
operating loss 33.8 34.5 32.9
Effect of foreign income taxes 1.2 (0.6) 4.7
State and local income taxes 0.6 0.5 2.0
Non-deductible expenditures 0.5 0.5 1.9
- ------------------------------------------------------------------------------------------------
2.1% 0.9% 7.5%
- ------------------------------------------------------------------------------------------------
</TABLE>
For regular income tax reporting purposes at September 30, 1998, foreign and
domestic tax credits and net operating loss carryforwards amounted to $10.3
million and $151.0 million, respectively. Domestic federal loss carryforwards of
$144.0 million expire between fiscal 2004 and 2014, of which approximately $12.6
million relate to items which will be credited to stockholders' equity when
applied; domestic state loss carryforwards of $66.0 million expire between
fiscal 1999 and 2014. Foreign loss carryforwards of $8.0 million expire
beginning in fiscal 1999. Tax credit carryforwards expire between fiscal 1999
and 2014.
27
<PAGE>
For federal alternative minimum tax purposes, net operating loss carryforwards
amounted to $137.0 million at September 30, 1998. These carryforwards may be
carried forward indefinitely to offset any excess of regular tax liability over
alternative minimum tax liability, subject to certain separate company
limitations.
The tax effects of the significant temporary differences comprising the deferred
tax assets and liabilities at September 30, 1998 and 1997 are as follows (in
thousands):
Deferred Tax Assets 1998 1997
- ------------------------------------------------------------------------------
Receivable reserve $ 1,760 $ 2,100
Inventory reserve 6,399 5,692
Deferred income 1,206 1,820
Other accruals 592 604
Loss carryforwards 58,540 43,360
Tax credits 10,290 7,440
- -------------------------------------------------------------------------------
78,787 61,016
Valuation allowance (62,657) (45,056)
- -------------------------------------------------------------------------------
Net deferred tax assets $16,130 $15,960
- -------------------------------------------------------------------------------
Deferred Tax Liabilities
- -------------------------------------------------------------------------------
Depreciation $ 2,684 $ 3,694
Deferred income 1,080 1,240
Capitalized software 9,714 9,400
Operating leases 2,724 574
Capital leases 288 1,386
Other 554 211
- ------------------------------------------------------------------------------
Gross deferred tax liability $17,044 $16,505
- ------------------------------------------------------------------------------
Statement of Financial Accounting Standard No. 109, "Accounting For Income
Taxes," requires a valuation allowance against deferred tax assets if, based on
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company believes that uncertainty exists
with respect to the future realization of deferred tax assets and, as a result,
carries a valuation allowance for such items. The valuation allowances,
disclosed in the deferred tax summary above, increased by $17,601,000 and
$15,572,000 in fiscal 1998 and fiscal 1997, respectively.
8. Operating Leases
The Company has certain non-cancelable operating leases on automobiles,
subsidiary locations, sales offices and service facilities which expire within
one to six years. These leases generally contain renewal options and provisions
for payment by the lessee of executory costs (taxes, maintenance and insurance).
In addition, the Company has a non-cancelable operating lease through fiscal
2003 for its Connecticut engineering facility.
The following is a schedule of the future fiscal year minimum payments on
such leases at September 30, 1998 (in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 2004 and thereafter
- --------------------------------------------------------------------------------------------------------------------------------
$3,920 $2,972 $2,544 $2,278 $1,967 $ -
- --------------------------------------------------------------------------------------------------------------------------------
Sub-total $13,681
Less: future sublease income, non-cancelable through 2001 3,459
- --------------------------------------------------------------------------------------------------------------------------------
Net future lease payments $10,222
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Net rental expense for the three most recent fiscal years was (in thousands):
Rental Sublease
Expense Income Net
- -------------------------------------------------------------------------
1998 $5,504 $1,234 $4,270
1997 6,086 1,313 4,773
1996 6,063 1,198 4,865
- -------------------------------------------------------------------------
9. Stockholders' Equity
Transactions in capital stock for the three fiscal years ended September 30,
1998 were as follows (in thousands except share amounts):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Preferred Stock Common Stock Capital Treasury Stock Foregin
------------------- ------------------- in Excess ------------------- Currency
Shares Amount Shares Amount of Par Shares Amount Translation
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 - - 21,122,209 $2,112 $128,076 673,674 ($4,924) ($2,026)
Exercise of stock options - - 265,221 27 1,424 (92,992) 624 -
Employee stock purchase plan - - - - 358 (158,253) 1,172 -
Private placement offering 800,000 $800 - - 18,350 - - -
Foreign currency translation
adjustment - - - - - - - (484)
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 800,000 800 21,387,430 2,139 148,208 422,429 (3,128) (2,510)
Exercise of stock options - - 95,242 9 447 (1,512) 13 -
Employee stock purchase plan - - 236,922 24 1,478 - - -
Foreign currency translation
adjustment - - - - - - - 21
Other - - - - (269) (90,535) 670 -
- --------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 800,000 800 21,719,594 2,172 149,864 330,382 (2,445) (2,489)
Exercise of stock options - - 2,938 - 12 - - -
Employee stock purchase plan - - 338,831 34 954 - - -
Foreign currency translation
adjustment - - - - - - - (100)
Issuance of stock warrants - - - - 222 - - -
=================================================================================================================================
Balance, September 30, 1998 800,000 $800 22,061,363 $2,206 $151,052 330,382 ($2,445) ($2,589)
=================================================================================================================================
</TABLE>
The Common Stock referenced above includes both Class B stock and common stock.
Class B stock, under certain circumstances, has greater voting power in the
election of directors. However, common stock is entitled to cash dividends, if
and when paid, 11.11% higher per share than Class B stock. The Company has never
declared or paid cash dividends on its common stock and terms of the Company's
revolving credit facility prohibit the Company from paying cash dividends, with
the exception of dividends authorized for payment on the Company's preferred
stock (referenced below). Class B stock has limited transferability and is
convertible into common stock at any time on a share-for-share basis. At
September 30, 1998, 1997 and 1996, Class B stock outstanding amounted to
2,093,083, 2,136,933, and 2,137,443 shares, respectively.
"Other" activity for fiscal 1997 includes the issuance of treasury shares in
satisfaction of payment for certain legal services rendered. The fair market
value (on date of issuance) of shares issued was charged to expense.
On September 30, 1996, the Company completed the sale of 800,000 shares of 9%
Cumulative Convertible Exchangeable Preferred Stock (Preferred Stock) pursuant
to a private placement offering. The sales price was $25.00 per share, resulting
in net proceeds of approximately $19.2 million. The preferred stock accrues
dividends at a rate of 9% per annum, cumulative from the date of issuance and
payable quarterly in arrears . The Preferred Stock can be converted into common
stock at $13.65 per share, or the equivalent of 1.8315 shares of common stock
for each share of Preferred Stock. Effective September 30, 1998, the Company has
the option to exchange the Preferred Stock for 9% Convertible Subordinated
Debentures due 2006, at the rate of $25.00 principal amount of Debentures for
each share of Preferred Stock outstanding at the time of exchange. The Preferred
Stock cannot be redeemed by the Company prior to September 30, 1999.
29
<PAGE>
10. Industry and Geographic Area Information
The Company operates solely in the multimedia communications industry.
Geographic area information for 1998, 1997 and 1996 is presented below (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Western
Hemisphere
1998 United States (except U.S.) Europe Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------
Revenues $150,863(1) $22,604 $20,788 $ - $194,255
Transfers between geo-
graphic areas 22,899 - - (22,899) -
- -----------------------------------------------------------------------------------------------------------------
Total revenues $173,762 $22,604 $20,788 $ (22,899) $194,255
- ----------------------------------------------------------------------------------------------------------------
Operating profit (loss) $(17,924) $ 27 $ 1,066 $ - $ (16,831)
- ----------------------------------------------------------------------------------------------------------------
General corporate expenses, net (9,961)
Interest expense, net (5,900)
- ----------------------------------------------------------------------------------------------------------------
Loss before income taxes $(32,692)
- ----------------------------------------------------------------------------------------------------------------
Total assets $127,881 $ 9,453 $12,204 $ - $ 149,538
- ----------------------------------------------------------------------------------------------------------------
Western
Hemisphere
1997 United States (except U.S.) Europe Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------
Revenues $156,826(1) $23,715 $27,225 $ - $207,766
Transfers between geo-
graphic areas 21,596 - - (21,596) -
- ----------------------------------------------------------------------------------------------------------------
Total revenues $178,422 $23,715 $27,225 $(21,596) $207,766
- ---------------------------------------------------------------------------------------------------------------
Operating profit (loss) $(32,633) $ (543) $ 3,178 $ - $(29,998)
- ---------------------------------------------------------------------------------------------------------------
General corporate expenses, net (9,530)
Interest expense, net (2,823)
- ----------------------------------------------------------------------------------------------------------------
Loss before income taxes $(42,351)
- ----------------------------------------------------------------------------------------------------------------
Total assets $158,432 $10,080 $18,823 $ - $ 187,335
- ---------------------------------------------------------------------------------------------------------------
Western
Hemisphere
1996 United States (except U.S.) Europe Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------
Revenues $177,397(1) $26,654 $31,078 $ - $235,129
Transfers between geo-
graphic areas 30,578 - - (30,578) -
- -----------------------------------------------------------------------------------------------------------------
Total revenues $207,975 $26,654 $31,078 $(30,578) $235,129
- ----------------------------------------------------------------------------------------------------------------
Operating profit(loss) $ (6,687) $ (272) $ 745 $ - $ (6,214)
- ----------------------------------------------------------------------------------------------------------------
General corporate expenses, net (7,705)
Interest expense, net (2,051)
- ----------------------------------------------------------------------------------------------------------------
Loss before income taxes $(15,970)
- ----------------------------------------------------------------------------------------------------------------
Total assets $172,231 $13,028 $19,795 $ - $205,054
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes export sales by domestic operations of $52,984, $56,769 and $51,649
for fiscal 1998, 1997 and 1996, respectively.
11. Employee Incentive Plans
Stock Option Plans
Officers and key employees may be granted incentive stock options at an exercise
price equal to or greater than the market price on the date of grant and
non-incentive stock options at an exercise price equal to or less than the
market price on the date of grant. While individual options can be issued under
various provisions, most options, once granted, generally vest in increments of
25% per year over a four-year period and expire within ten years. Under the
terms of these stock option plans, the Company has reserved a total of 4,439,014
shares of common stock at September 30, 1998 (3,522,629 at September 30, 1997).
30
<PAGE>
The following summarizes activity under these stock option plans for the three
fiscal years ended September 30, 1998:
<TABLE>
<CAPTION>
<S> <C> <C>
Weighted
Average
Exercise
Shares Price
- ----------------------------------------------------------------------------------------------
Options outstanding, September 30, 1995 (809,511 exercisable) 2,128,734 $ 7.75
Options granted 1,232,900 12.15
Options exercised (363,420) 5.99
Options canceled or expired (369,673) 11.54
- ------------------------------------------------------------------------------------------
Options outstanding, September 30, 1996 (852,816 exercisable) 2,628,541 $ 9.52
Options granted 1,717,200 7.70
Options exercised (97,742) 4.86
Options canceled or expired (1,373,991) 11.83
- -----------------------------------------------------------------------------------------------
Options outstanding, September 30, 1997 (1,058,426 exercisable) 2,874,008 $ 7.49
Options granted 1,597,395 4.06
Options exercised (2,900) 4.07
Options canceled or expired (844,859) 7.10
- ----------------------------------------------------------------------------------------------
Options outstanding, September 30, 1998 (1,253,911 exercisable) 3,623,644 $ 6.07
</TABLE>
The following summarizes additional information regarding options outstanding
and exercisable options as of September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices Of Shares Price Life (Years) Of Shares Price
- -----------------------------------------------------------------------------------------------------------
$ 2.00 - $ 3.50 355,420 $3.21 6.68 142,650 $2.89
$ 3.53 - $ 4.00 1,311,184 3.88 8.21 316,710 3.84
$ 4.13 - $ 5.75 391,069 4.86 5.43 204,928 4.80
$ 5.84 - $ 6.75 661,321 6.67 8.48 142,811 6.68
$ 7.19 - $ 8.25 377,450 7.83 7.53 148,666 7.55
$ 8.50 - $12.31 411,550 11.45 7.10 234,046 11.49
$13.88 - $15.50 115,650 15.39 5.94 64,100 15.40
--------- ----- ---- --------- -----
$ 2.00 - $15.50 3,623,644 $6.07 7.54 1,253,911 $6.68
========= ===== ==== ========= =====
</TABLE>
The weighted average option price of exercisable options was $6.68, $5.75 and
$5.14 at September 30, 1998, 1997 and 1996, respectively. All options granted
during the three fiscal years ended September 30, 1998 were granted at an option
price equal to fair market value at date of grant.
Employee Stock Purchase Plan
The Company has a stock purchase plan to encourage employees to participate in
the Company's future growth. At September 30, 1998, 308,407 shares were reserved
for purchase by employees through payroll deductions regularly accumulated over
six-month payment periods. At the end of each payment period, Common Stock is
purchased at 85 percent of the market value of the stock on the first or last
day of the payment periods, whichever is lower. However, the purchase of Common
Stock under this plan is prohibited if 85 percent of the market value of the
Common Stock is less than the book value per share. Note 9, "Stockholders'
Equity," presents the historical activity under this plan during the three
fiscal years ended September 30, 1998.
31
<PAGE>
Employee Retirement Savings and Deferred Profit Sharing Plan
Under the retirement savings provisions of the Company's retirement plan
established under Section 401(k) of the Internal Revenue Code, employees are
generally eligible to contribute to the plan after three months of continuous
service, in amounts determined by the plan. The Company contributes an
additional 50 percent of the employee contribution up to certain limits (not to
exceed 2 percent of total eligible compensation). Employees become fully vested
in the Company's contributions after three years of continuous service, death,
disability or upon reaching age 65. The amounts charged to expense for the
fiscal years ended September 30, 1998, 1997 and 1996 were $1,015,100, $1,133,200
and $919,600, respectively.
The deferred profit sharing provisions of the plan include retirement and other
related benefits for substantially all of the Company's full-time employees.
Contributions under the plan are funded annually and are based, at a minimum,
upon a formula measuring profitability in relation to revenues. Additional
amounts may be contributed at the discretion of the Company. There were no such
contributions for fiscal 1998, 1997 or 1996.
Stock-Based Compensation
Pro-forma results, representative of financial results which would have been
reported by the Company if it had adopted the fair value based method of
accounting for stock-based compensation under SFAS No. 123, are summarized
below:
Fiscal Years Ended September 30,
--------------------------------
1998 1997 1996
--------------------------------
Net loss, as reported $(33,392) $(42,751) $(17,170)
Estimated stock compensation costs ( 3,552) (3,569) (2,579)
Pro-forma net loss $(36,944) $(46,320) $(19,749)
========= ========= =========
Pro-forma net loss per share
(basic and diluted) $ (1.80) $ (2.28) $ (0.95)
========= ========= =========
The Black-Scholes method was used to compute the pro-forma amounts presented
above, utilizing the weighted average assumptions summarized below. The
weighted-average fair value of options granted was $2.25, $3.99 and $6.58 for
the fiscal years ended September 30, 1998, 1997 and 1996, respectively.
<TABLE>
Stock Option Plans Employee Stock Purchase Plan
------------------------- ---------------------------------
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------
Risk-free interest rate 5.63% 6.59% 6.03% 5.48% 5.62% 5.47%
Volatility (%) 74.06% 57.34% 57.14% 85.71% 50.28% 50.19%
Expected life (in years) 3.62 4.52 4.91 0.50 0.50 0.50
Dividend yield rate nil nil nil nil nil nil
</TABLE>
12. Leasing Subsidiary
The Company's consolidated financial statements include the accounts of its
wholly-owned leasing subsidiary, DataComm Leasing Corporation. The leasing
subsidiary purchases most equipment for lease to others from General DataComm,
Inc.
32
<PAGE>
The following represents condensed financial information of DataComm Leasing
Corporation (in thousands):
Financial Condition
September 30, 1998 1997
- -------------------------------------------------------------------------------
Current assets $3,733 $2,063
Noncurrent assets 4,466 1,293
Due from General DataComm, Inc. 2,824 6,368
- -------------------------------------------------------------------------------
Total assets $11,023 $9,724
- -------------------------------------------------------------------------------
Current liabilities $1,624 $1,431
Noncurrent liabilities 3 33
Stockholder's equity 9,396 8,260
- -------------------------------------------------------------------------------
Total liabilities and stockholder's equity $11,023 $9,724
==============================================================================
Results of Operations
Fiscal Years ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------
Net revenues $4,437 $4,813 $6,489
- ------------------------------------------------------------------------------
Income before income taxes $1,882 $1,902 $3,261
===============================================================================
Lease Financing Programs
DataComm Leasing Corporation has entered into agreements with financial
institutions whereby certain finance lease receivables were transferred with
full recourse. The underlying equipment was retained as collateral by DataComm
Leasing Corporation. Proceeds received by the leasing subsidiary from the
transfer of such receivables amounted to $1,344,000 and $2,452,000 for fiscal
1997 and 1996, respectively (no receivables were transferred in fiscal 1998).
The balance of all transferred receivables which were due to be paid by the
original lessees under the remaining lease terms as of September 30, 1998 and
1997 amounted to $1,020,000 and $2,865,000, respectively.
13. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted loss per
share (in thousands, except per share amounts):
Years Ended September 30,
-------------------------------
1998 1997 1996
---- ---- ----
Numerator:
Net loss $(33,392) $(42,751) $(17,170)
Preferred stock dividends (1,800) (1,800) -
--------- --------- --------
Numerator for basic and diluted loss
per share - loss applicable
to common stockholders $(35,192) $(44,551) $(17,170)
========= ======== ========
Denominator:
Denominator for basic and diluted
loss per share - weighted average
shares outstanding 21,495 21,105 20,717
====== ====== ======
Basic and diluted loss per share $(1.64) $(2.11) $(0.83)
======= ======= =======
The net loss for the fiscal year ended September 30, 1998 includes a
restructuring charge of $2.5 million, or $0.12 per share, for restructuring of
operations (refer to Note 2 "Restructuring of Operations" for further
discussion).
Outstanding securities, not included in the above computations because of their
antidilutive impact on reported loss per share, which could potentially dilute
earnings per share in the future include convertible debentures, convertible
preferred stock, employee stock options and warrants. For additional disclosure
information, including conversion terms, refer to Notes 6, 9 and 11. Weighted
average employee stock options outstanding during fiscal 1998
33
<PAGE>
approximated 3,223,000 shares, of which 2,085,000 would not have been included
in fiscal 1998 diluted earnings per share calculations because the effect would
be antidilutive.
14. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
In thousands, except per share data
<S> <C> <C> <C> <C>
Fiscal 1998 First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
Revenues $48,219 $48,331 $48,031 $49,674
Gross profit 19,483 20,800 20,496 20,987
Operating loss (1) (12,193) (5,551) (4,688) (4,308)
Net loss (1) $(13,860) $(7,059) $(6,286) $(6,187)
Basic and diluted loss per share (1) (2) $(0.67) $(0.35) $(0.31) $(0.31)
- -------------------------------------------------------------------------------------------------------------
Fiscal 1997 First Second Third Fourth
- -------------------------------------------------------------------------------------------------------------
Revenues $59,043 $50,771 $46,586 $51,366
Gross Profit 25,999 21,865 19,222 21,567
Operating loss (5,123) (10,464) (12,878) (9,954)
Net loss $(5,674) $(11,718) $(13,820) $(11,539)
Basic and diluted loss per share (2) $(0.29) $(0.58) $(0.67) $(0.56)
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The first quarter of fiscal 1998 includes a charge of $2.5 million, or $0.12
per share, for restructuring of operations.
(2) Loss per share amounts for each quarter are required to be computed
independently and in fiscal 1997 did not equal the full year loss per share
amounts.
15. Subsequent Events
VITAL Network Services, L.L.C. Expanded its Partnership With Olicom, Inc. - On
October 15, 1998, the Company's VITAL Network Services ("VITAL") business unit
entered into an agreement with Olicom, Inc. whereby VITAL assumed responsibility
for Olicom's service operations in Marlborough, Massachusetts, and Olicom
assigned or transferred its service contract business in North America to VITAL.
In addition to the assumption of obligations for a leased facility, VITAL will
pay up to $3.8 million to Olicom as a percentage (25% in the first year, 20%
thereafter) of revenues derived from Olicom's business over a three-year period.
As part of the agreement, VITAL acquired the capital assets used in Olicom's
service business. VITAL recorded the acquisition using the purchase accounting
method which resulted in goodwill of approximately $4.0 million.
Corporate Reorganization - On December 18, 1998, the Company restructured its
operations into three distinct business units to increase product line focus and
move toward operating autonomy. Two (new) business units resulted from the
reorganization: Broadband Systems (ATM and Internetworking products) and Network
Access (Access products). The new business units will supplement the existing
VITAL Network Services business unit, which was launched in October 1997 to
provide professional services on multi-vendor networking equipment on a
worldwide basis.
The reorganization, when completed, is expected to result in a workforce
reduction of more than 200 persons. This reduction will result in a
restructuring charge of approximately $2.5 million, primarily for severance
costs.
Sale of Technology Alliance Group Division ("TAG") - On December 31, 1998, the
Company reported the sale of its TAG division. The Company had been actively
pursuing the sale of its TAG division since it is not strategic to the
reorganized business units mentioned above. The division develops, patents and
licenses advanced modem and access technologies, is principally comprised of
scientists and engineers, and holds the rights to certain technologies patented
by the division. The sale resulted in a pre-tax gain of approximately $9.0
million and generated cash proceeds, net of expenses, of approximately $12.0
million.
Regarding the Company's primary Loan Agreement (refer to Note 6, "Long-Term
Debt"), the net proceeds generated from the sale of TAG will satisfy a Loan
Agreement covenant which required the Company to secure additional financial
resources. The Loan Agreement also provides that a portion of the proceeds
(approximately $4.4 million) be used to reduce outstanding indebtedness under
this agreement.
34
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors of General DataComm Industries, Inc.
In our opinion, the consolidated balance sheets and related consolidated
statements of operations and accumulated deficit and cash flows present fairly,
in all material respects, the consolidated financial position of General
DataComm Industries, Inc. and Subsidiaries at September 30, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based upon our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion expressed
above.
/S/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
October 29, 1998, except for Note 15
for which the date is December 31, 1998
35
Exhibit 21
General DataComm Industries, Inc.
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
<S> <C> <C>
Percentage
State or of Voting
Jurisdiction of Securities
Subsidiaries Incorporation Owned
General DataComm, Inc. Delaware 100%
GDC Federal Systems, Inc. Delaware 100%
DataComm Leasing Corporation Delaware 100%
DataComm Rental Corporation (1) Delaware 100%
General DataComm Ltd. Canada 100%
General DataComm Limited United Kingdom 100%
General DataComm International
Corporation Delaware 100%
General DataCommunications,
Industries, B.V. (1) Netherlands 100%
GDC Realty, Inc. Texas 100%
GDC Naugatuck, Inc. Delaware 100% (2)
General DataComm Pty. Limited Australia 100%
General DataComm de Mexico S.A. de C.V. Mexico 100% (3)
Grupo GDC de Mexico S.A. de C.V. Mexico 100%
GDC Servicios S.A. de C.V. Mexico 100%
VITAL Network Services, S.A. de C.V. Mexico 100%
General DataComm France SARL France 100%
General DataComm Pte Ltd. Singapore 100%
General DataComm de
Venezuela, C.A. (1) Venezuela 100%
General DataComm Advanced Research
Centre Limited United Kingdom 100% (4)
General DataComm Industries GmbH Germany 100%
General DataComm CIS Russia 100%
General DataComm China, Ltd. Delaware 100% (5)
General DataComm do Brasil Ltda, S.C. Brazil 100%
Vital Network Services LLC. Delaware 100% (6)
</TABLE>
- -----------------
(1) Currently inactive.
(2) Wholly owned by GDC Realty, Inc.
(3) One share, less than 1%, owned by General DataComm International Corporation
(4) 5% owned by General DataComm International Corporation.
(5) Wholly owned by General DataComm International Corporation.
(6) Limited liability company, owned by General DataComm, Inc.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
General DataComm Industries, Inc. and Subsidiaries on Form S-3 (File Nos.
333-20569 and 333-43835) and on Form S-8 (File Nos. 2-83701, 2-92929, 33-21027,
33-36351, 33-37266, 33-43050, 33-53150, 33-62716, 33-53201, 33-59573, 333-35299
and 333-57117) of our report dated October 29, 1998, except for Note 15 for
which the date is December 31, 1998, on audits of the consolidated financial
statements and financial statement schedule of General DataComm Industries, Inc.
and Subsidiaries as of September 30, 1998 and 1997 and for the three years ended
September 30, 1998, which reports are incorporated in this Annual Report on Form
10-K.
/S/ PricewaterhouseCoopers LLP
Stamford, Connecticut
January 11, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,757
<SECURITIES> 0
<RECEIVABLES> 30,013
<ALLOWANCES> 1,442
<INVENTORY> 30,574
<CURRENT-ASSETS> 8,705
<PP&E> 146,772
<DEPRECIATION> 106,219
<TOTAL-ASSETS> 149,538
<CURRENT-LIABILITIES> 47,948
<BONDS> 52,679
0
800
<COMMON> 2,206
<OTHER-SE> 42,952
<TOTAL-LIABILITY-AND-EQUITY> 149,538
<SALES> 146,965
<TOTAL-REVENUES> 194,255
<CGS> 85,093
<TOTAL-COSTS> 112,489
<OTHER-EXPENSES> 108,558
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,900
<INCOME-PRETAX> (32,692)
<INCOME-TAX> 700
<INCOME-CONTINUING> (33,392)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,392)
<EPS-PRIMARY> (1.64)
<EPS-DILUTED> (1.64)
</TABLE>
