SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8086
GENERAL DATACOMM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0853856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Middlebury, Connecticut 06762-1299
(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (203) 574-1118
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Title of Each Class at December 31, 1998
Common Stock, $.10 par value 19,642,190
Class B Stock, $.10 par value 2,093,083
Total Number of Pages in this Document is 23.
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Consolidated Balance Sheets -
December 31, 1998 and September 30, 1998 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three Months
Ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows - For the
Three Months Ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
In thousands except shares 1998 1998
- ------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $15,580 $3,757
Restricted cash 1,000 -
Accounts receivable, less allowance for
doubtful receivables of $1,426 in December
and $1,442 in September 22,473 30,013
Inventories 31,196 30,574
Deferred income taxes 1,675 1,675
Other current assets 7,068 7,030
- -------------------------------------------------------------------------------
Total current assets 78,992 73,049
===============================================================================
Property, plant and equipment, net 40,181 40,553
Capitalized software development costs, net 21,636 24,286
Other assets 11,028 11,650
- -------------------------------------------------------------------------------
$151,837 $149,538
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $11,936 $8,133
Accounts payable, trade 12,501 12,763
Accrued payroll and payroll-related costs 4,608 5,896
Deferred income 4,852 6,034
Other current liabilities 20,112 15,122
- -------------------------------------------------------------------------------
Total current liabilities 54,009 47,948
===============================================================================
Long-term debt, less current portion 52,781 52,679
Deferred income taxes 2,578 2,589
Other liabilities 466 364
- -------------------------------------------------------------------------------
Total liabilities 109,834 103,580
===============================================================================
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 December
and September 209 209
Common stock, par value $.10 per share,
35,000,000 shares authorized; issued
and outstanding: 19,972,572 in December
and 19,968,280 in September 1,997 1,997
Capital in excess of par value 151,052 151,052
Accumulated deficit (106,604) (103,066)
Cumulative foreign currency translation adjustment (3,002) (2,589)
Common stock held in treasury, at cost:
330,382 shares in December and September (2,449) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 42,003 45,958
- -------------------------------------------------------------------------------
$151,837 $149,538
===============================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
Three Months Ended
December 31,
---------------------------
In thousands, except per share data 1998 1997
- -------------------------------------------------------------------------------
Revenues:
Net product sales $27,837 $36,373
Service revenue 11,982 9,481
Other revenue 2,600 2,365
- -------------------------------------------------------------------------------
42,419 48,219
- -------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 14,390 18,836
Amortization of capitalized
software development costs 3,162 3,000
Cost of service revenue 8,221 6,763
Cost of other revenue 485 137
Selling, general and administrative 16,836 20,242
Research and product development 7,686 8,934
Restructuring of operations 2,000 2,500
- -------------------------------------------------------------------------------
52,780 60,412
- -------------------------------------------------------------------------------
Operating loss (10,361) (12,193)
- -------------------------------------------------------------------------------
Other income (expense):
Gain on sale of assets 9,001 --
Interest, net (1,662) (1,396)
Other, net 234 (71)
- -------------------------------------------------------------------------------
7,573 (1,467)
- -------------------------------------------------------------------------------
Loss before income taxes (2,788) (13,660)
Income tax provision 300 200
- -------------------------------------------------------------------------------
Net loss ($3,088) ($13,860)
===============================================================================
Basic and diluted loss per share ($0.16) ($0.67)
===============================================================================
Weighted average number of common and
common equivalent shares outstanding 21,735 21,389
===============================================================================
Accumulated deficit at beginning of period ($103,066) ($67,874)
Net loss (3,088) (13,860)
Payment of preferred stock dividends (450) (450)
- -------------------------------------------------------------------------------
Accumulated deficit at end of period ($106,604) ($82,184)
===============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
- 4 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
and Cash Equivalents
---------------------------
Three Months Ended
December 31,
---------------------------
In thousands 1998 1997
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($3,088) ($13,860)
Adjustments to reconcile net loss to net cash
(used in) operating activities:
Depreciation and amortization 6,493 6,971
Gain on sale (9,001) --
Decrease in accounts receivable 7,527 988
(Increase) decrease in inventories (625) 944
Increase in accounts payable
and accrued expenses 5,015 1,487
(Increase) decrease in other net current assets (3,846) 1,095
(Increase) decrease in other net long-term assets (504) 1,499
- -------------------------------------------------------------------------------
Net cash provided by (used in)operating activities 1,971 (876)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (2,301) (2,455)
Capitalized software development costs (3,345) (3,000)
- -------------------------------------------------------------------------------
Net cash (used in) investing activities (5,646) (5,455)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolver borrowings 45,796 --
Payments on revolver borrowings (39,941) (4,799)
Proceeds from sale of assets, net 12,013 --
Proceeds from notes and mortgages -- 14,338
Principal payments on notes and mortgages (1,905) (2,022)
Payment of preferred stock dividends (450) (450)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 15,513 7,067
- --------------------------------------------------------------------------------
Effect of exchange rates on cash (15) (14)
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,823 722
Cash and cash equivalents at beginning of period -(1) 3,757 21,526
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period -(1) $15,580 $22,248
===============================================================================
(1) - The Corporation considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to fairly present the consolidated
financial position of General DataComm Industries, Inc. and subsidiaries (the
"Corporation" or "Company") as of December 31, 1998, the consolidated results of
their operations for the three months ended December 31, 1998 and 1997, and
their cash flows for the three months ended December 31, 1998 and 1997. Such
adjustments are generally of a normal recurring nature and include adjustments
to certain accruals and asset reserves to appropriate levels.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods
presented. Actual results could differ from those estimates. The markets for the
Company's products are characterized by intense competition, rapid technological
development, and frequent new product introductions, all of which could impact
the future value of the Company's inventory, capitalized software, and certain
other assets.
The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and related notes thereto
filed with Form 10-K for the year ended September 30, 1998.
Certain reclassifications were made to the prior years' consolidated financial
statements to conform to the current year's presentation.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
December 31, 1998 September 30, 1998
----------------- ------------------
Raw materials $10,646 $10,945
Work-in-process 3,505 3,611
Finished goods 17,045 16,018
------- -------
$31,196 $30,574
======= =======
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of (in thousands):
December 31, 1998 September 30, 1998
----------------- ------------------
Land $1,778 $ 1,784
Buildings and improvements 30,003 30,134
Test equipment, fixtures and field spares 55,383 54,897
Machinery and equipment 60,404 59,957
------- -------
147,568 146,772
Less: accumulated depreciation and
amortization 107,387 106,219
-------- --------
$ 40,181 $ 40,553
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The accumulated amortization of capitalized software development costs amounted
to $19,590,000 and $17,972,000 at December 31, 1998 and September 30, 1998,
respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
December 31, 1998 September 30, 1998
----------------- ------------------
Revolving credit facility $ 7,442 $ 1,587
Notes payable 21,395 23,173
7-3/4% convertible senior subordinated
debentures 25,000 25,000
Mortgages payable 10,880 11,052
-------- --------
64,717 60,812
Less: current portion 11,936 8,133
-------- --------
$ 52,781 $ 52,679
======== ========
- 7 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Revolving Credit Facility
- -------------------------
On October 22, 1997, the Company entered into a $40.0 million loan and security
agreement (the "Loan Agreement") which 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.
Maximum funds available for borrowing under the revolving credit facility
amounted to $18,611,000 and $25,000,000 at December 31, 1998 and September 30,
1998, respectively.
Terms of the Loan Agreement required that the Company raise a minimum of $10.0
million in net proceeds on or before March 31, 1999 through the sale of assets
or execution of an equity offering. The Company satisfied this $10.0 million
covenant requirement on December 31, 1998 (see Note 8, "Sale of Technology
Alliance Group Division," for further discussion of the transaction involved).
In accordance with terms of the Loan Agreement, $4.3 million of the proceeds
received from the transaction were applied to reduce borrowings outstanding
(under the term loan portion of the Loan Agreement) in January 1999. Such $4.3
million was included in the caption "current portion of long-term debt" on the
Company's consolidated balance sheet as of December 31, 1998.
Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the year ended September 30,
1998 for further disclosures applicable to the above-referenced Loan Agreement,
including related financial covenant requirements, and all other outstanding
indebtedness of the Corporation.
NOTE 6. VITAL NETWORK SERVICES, L.L.C. EXPANDED 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 Olicom a percentage (25% in the first year, 20% thereafter) of revenues
derived from Olicom's business over a three-year period, not to exceed $3.8
million. As part of the agreement, VITAL acquired the capital assets used in
Olicom's service business. VITAL recorded the acquisition using the purchase
method of accounting and, due to the conditional nature of the payments owing to
Olicom, no liability or corresponding asset (goodwill) was recorded for these
payments at the date of acquisition. If such contingencies are resolved in the
future, the corresponding asset will be recorded by VITAL at that time.
- 8 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. RESTRUCTURING OF OPERATIONS
In December 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. The net loss for the quarter ended December
31, 1998 includes a charge of $2.0 million, or $0.09 per share, primarily for
post-employment benefits under the Company's severance plan.
The net loss for the quarter ended December 31, 1997 includes a charge of $2.5
million, or $0.12 per share, which is comprised of a $1.0 million provision for
post-employment benefits under the Company's severance plan related to the
elimination of approximately 200 full-time positions and $1.5 million for the
write-off of intangibles assets and other costs associated with the elimination
of low-volume product lines.
NOTE 8. 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 described in Note 7 above. The
division, which developed, patented and licensed advanced modem and access
technologies, was principally comprised of scientists and engineers and held the
rights to certain technologies patented by the division. The sale resulted in a
pre-tax gain of $9.0 million and generated cash proceeds, net of expenses, of
approximately $12.0 million in the quarter ended December 31, 1998.
The Company's primary loan agreement provides that a portion of the proceeds
(approximately $4.3 million) be used to reduce outstanding indebtedness under
this agreement, and this occurred in January 1999.
- 9 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted loss per
share (in thousands, except per share amounts):
Three Months Ended
December 31,
--------------------------
1998 1997
---- ----
Numerator:
Net loss $(3,088) $(13,860)
Preferred stock dividends (450) (450)
Numerator for basic and diluted -------- ---------
loss per share - loss applicable
to common stockholders $(3,538) $(14,310)
======== =========
Denominator:
Denominator for basic and diluted
loss per share - weighted average
shares outstanding 21,735 21,389
======= ======
Basic and diluted loss per share $(0.16) $(0.67)
======= =======
The net loss reported for the quarters ended December 31, 1998 and 1997 include
restructuring charges of $2.0 million (or $0.09 per share) and $2.5 million (or
$0.12 per share), respectively. Refer to Note 7, "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 and employee stock options and warrants. For additional
disclosure information, including conversion terms, refer to Notes 6, 9 and 11,
respectively, in the Company's consolidated financial statements filed with Form
10-K for the year ended September 30, 1998. Weighted average employee stock
options outstanding during the quarter ended December 31, 1998 approximated
3,626,200 shares, of which 3,426,930 would not have been included in diluted
earnings per share calculations for the quarter (if the Company reported net
income in the quarter) because the effect would be antidilutive.
- 10 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") establishes standards for the reporting and display of
"comprehensive income," and becomes effective for the Company in fiscal 1999.
Comprehensive income is defined as "all changes in equity during a period except
those resulting from investments by owners and distributions to owners." Under
various accounting pronouncements, certain changes in assets and liabilities are
not reported in a statement of operations for the period in which they are
recognized, but instead are included in balances within a separate component of
stockholders' equity in a statement of financial position. The sum of such
changes, along with other activity previously captured in a company's statement
of operations, in effect represents comprehensive income as defined by SFAS No.
130.
The following table sets forth the computation of comprehensive income (loss):
Three Months Ended
December 31,
-----------------------
1998 1997
---- ----
Net loss $(3,088) $(13,860)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (413) 37
-------- ---------
Comprehensive loss $(3,501) $(13,823)
======== =========
- 11 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three months ended
December 31,
------------------
1998 1997
Revenues:
Net product sales 65.6% 75.4%
Service revenue 28.3 19.7
Other revenue 6.1 4.9
----- -----
100.0 100.0
Costs and expenses:
Cost of revenues 54.4 53.4
Amortization of capitalized
software development costs 7.5 6.2
Selling, general and administrative 39.7 42.0
Research and product development 18.1 18.5
Restructuring of operations 4.7 5.2
----- -----
Operating loss (24.4) (25.3)
----- -----
Net loss (7.3)% (28.7)%
====== ======
Summary comments are as follows: (1) product sales declines, as discussed under
"Revenues" below, resulted in the lower product revenue percentage; separately,
service revenue increased 26.4%; (2) cost of revenues, measured as a percent of
revenue, was up 1.0 percentage point, due primarily to lower revenues overall;
(3) operating expenses (excluding restructuring charges), despite a reduced
revenue base, were reduced to 57.8% of revenue in the quarter ended December 31,
1998 as compared to 60.5% for the same period one year ago, reflecting the
benefits of a cost reduction plan; more specifically, operating expenses for the
quarter were down $4.5 million, or 14%; (4) the net loss was reduced, reflecting
the net impact of reduced revenues, the positive results of implemented cost
reductions and a gain of $9.0 million from the sale of a division.
- 12 -
<PAGE>
Revenues
- --------
Three months ended
December 31,
---------------------
1998 1997
---- ----
Revenues $42,419 $48,219
Percent Change (12.0)% --
Revenues in the quarter ended December 31, 1998 decreased $5.8 million, or
12.0%, compared to the prior year. Product revenues declined $8.5 million, or
23.5%, offset in part with service revenue growth of $2.5 million, or 26.4%.
Both the Network Access Division (down $3.0 million, or 18%) and the Broadband
Systems Division (down $5.5 million, or 28%) contributed to the product revenue
shortfall. The Network Access business unit experienced a reduction in domestic
Telco business and weakness in other international markets. The Broadband
Systems business unit experienced a downturn in the international marketplace
(principally Latin America). The entire Broadband reduction was attributable to
older internetworking (TMS or multiplexer) products; the Division's ATM business
($10.4 million) was relatively unchanged from the prior year.
The VITAL Network Services business unit experienced strong service revenue
growth from the prior year, reflecting success in its efforts to procure new
third party service business, including VITAL's new partnership with Olicom,
Inc. (refer to Note 6 for details).
Geographically, international revenues accounted for 47% of total consolidated
revenues in the quarter ended December 31, 1998 as compared to 52% for the
comparable period one year ago.
Cost of Revenues:
- ----------------
Three months ended
December 31,
------------------
1998 1997
---- ----
Cost of revenues $23,096 $25,736
As a percent of revenues 54.4% 53.4%
Amortization of capitalized
software development costs $ 3,162 $ 3,000
As a percent of revenues 7.5% 6.2%
Cost of revenues, measured as a percent of revenues, were slightly higher (1.0
percentage point) for the quarter ended December 31, 1998 as compared to the
corresponding quarter in fiscal 1998. This increase reflects higher engineering
contract costs associated with "other revenue," partially offset with strong
improvement in service margins (up 2.7 percentage points). The improved service
margins reflect the absorption of VITAL's costs over a larger revenue base. The
amount of amortization of capitalized software development costs was
approximately the same in each of the quarters ended December 31, 1998 and 1997.
- 13 -
<PAGE>
High technology products in particular are subject to sales price pressures as
competition grows and sales cycles reach maturity. The Company continues to
partially offset the effect of such sales price pressures with the negotiation
of reduced material component prices, improvements in manufacturing costs and
efficiency and the introduction of new generation products which generally
provide higher margins.
Selling, General and Administrative Expenses
- --------------------------------------------
Three months ended
December 31,
-------------------
1998 1997
---- ----
Selling, general, and
administrative expenses $16,836 $20,242
Percent change (16.8)% --
As a percent of revenues 39.7% 42.0%
The Company's cost reduction plan (refer to Note 7, "Restructuring of
Operations") contributed to a $3.4 million, or 16.8%, reduction in selling,
general and administrative costs for the quarter ended December 31, 1998 versus
the same period one year ago. Cost reductions were achieved in both domestic and
international operations, despite ongoing salary merit increases and other
inflationary increases. The cost reductions are comprised of reduced
compensation, fringe benefit and travel costs, a more effectively managed
promotion and advertising program and a reduced level of depreciation expense
resulting from effective management of the Company's capital investment program.
Despite a significantly reduced revenue base, selling, general and
administrative expenses were also down 2.3 percentage points when measured as a
percent of revenue.
Research and Product Development Costs
- --------------------------------------
Three months ended
December 31,
-------------------
1998 1997
---- ----
Gross expenditures $11,031 $11,934
Percent change (7.6)% -
As percent of revenues 26.0% 24.7%
------------------------------------------------------------------
Capitalized software costs $ 3,345 $ 3,000
As a percent of gross expenditures 30.3% 25.1%
-------------------------------------------------------------------
Net research and product
development costs $ 7,686 $8,934
Percent change (14.0)% -
As a percent of revenues 18.1% 18.5%
------------------------------------------------------------------
- 14 -
<PAGE>
The Company continued to invest heavily in research and product development
during the first quarter of fiscal 1999, with gross spending approximating an
annual rate of $44 million, or 26.0 percent of revenue. The Company's cost
reduction program, including decisions not to replace non-critical positions as
employee attrition occurs, resulted in a $0.9 million, or 7.6%, reduction in
gross research and development spending for the quarter ended December 31, 1998
as compared to the same period one year ago. The decrease is attributable to
lower compensation costs resulting from a reduction in worldwide engineering
headcount, reflecting a Company strategy of reducing development activities
targeted at sustaining legacy products and limiting the investment of new funds
into projects considered to have only the highest likelihood of success. Gross
research and product development spending amounted to 26.0% and 24.7% of revenue
in the quarters ended December 31, 1998 and 1997, respectively. The increase,
when measured as a percent of revenue, is attributable to a reduced revenue base
in the first quarter of fiscal 1999.
Spending in the ATM area by the Broadband Systems business unit accounted for
59% and 54% of total product development spending for the quarters ended
December 31, 1998 and 1997, respectively. The complexity of the ATM technology
has in the past demanded, and will continue to demand, significant research and
product development investment.
Capitalized software development costs were higher than the previous year ($3.3
million as compared to $3.0 million in the same period one year ago), indicating
that software development activities represent a greater proportion of total
research and product development spending.
The Company conducts research and product development activities at four
locations, with the largest pool of resource located in Middlebury, Connecticut,
and remote facilities located in Boston, Montreal and England.
Restructuring of Operations
- ---------------------------
Results for the three-month periods ended December 31, 1998 and 1997 include
restructuring charges of $2.0 million and $2.5 million, respectively. Refer to
Note 7, "Restructuring of Operations," for more detailed discussion. The
restructuring effort executed in the quarter ended December 31, 1998 involved
the creation of two new and distinct business units, the Network Access
Division and the Broadband Systems Division. In an effort to improve product
line focus and overall operational productivity, each business unit is comprised
of a dedicated general manager and dedicated marketing, sales and product
development functions.
Interest and Other Income and Expense
- -------------------------------------
Net interest expense amounted to $1.7 million and $1.4 million for the quarters
ended December 31, 1998 and 1997, respectively. The increase is principally
attributable to a reduced level of cash available for investment and a
corresponding reduction in interest income.
The quarter ended December 31, 1998 includes a $9.0 million gain from the sale
of the Company's Technology Alliance Group Division. Refer to Note 8, "Sale Of
Technology Alliance Group Division," for further discussion.
- 15 -
<PAGE>
Separately, refer to "Foreign Currency Risk" below for discussion of foreign
currency exchange activity included in other income and expense.
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Company, principally for foreign income and
domestic state taxes, amounted to $300,000 and $200,000 in the quarters ended
December 31, 1998 and 1997, respectively. The Company has significant federal
net operating loss carryforwards available to offset future liabilities.
However, based on the Company's past financial performance and the uncertainty
of ultimate realization of such carryforwards, no net deferred tax asset (or
related deferred tax benefit) has been recorded in the Company's financial
statements.
Foreign Currency Risk
- ---------------------
The Company's foreign subsidiaries are exposed to foreign currency 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 a currency
exchange gain or (loss) of $227,000 and $(250,000) for the quarters ended
December 31, 1998 and 1997, respectively.
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, and 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 future
financial results.
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.
- 16 -
<PAGE>
Interest Risk
- -------------
Reference is made to Form 10-K filed with the Securities and Exchange Commission
for the year ended September 30, 1998, Item 7, Management's Discussion and
Analysis of Results of Operations and Financial Condition, under the caption
"Interest Risk" for discussion applicable to interest risk.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents amounted to $15.6 million at December
31, 1998, as compared to $3.8 million at September 30, 1998. Future cash
requirements are planned to be satisfied from a combination of existing cash
balances ($15.6 million at December 31, 1998), from borrowings under its
revolving credit facility ($11.2 million of additional borrowings available at
December 31, 1998) and from alternate financing sources. These alternate sources
are targeted to include the sale of assets, technologies and/or interests in
existing businesses or operations which make sense from a strategic standpoint.
For example, in December 1998 the Company completed 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). Refer to Note 8, "Sale of
Technology Alliance Group Division," for further discussion.
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 7, "Restructuring Of Operations," for further discussion of the business
restructuring.
On October 22, 1997, the Company entered into a $40.0 million loan and security
agreement (the "Loan Agreement") which 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.
Maximum funds available for borrowing under the revolving line of credit portion
of the Loan Agreement amounted to $18.6 million and $25.0 million at December
31, 1998 and September 30, 1998, respectively. Outstanding revolving line of
credit borrowings amounted to $7,442,000 and $1,587,000 at December 31, 1998 and
September 30, 1998, respectively. Separately, letters of credit in the amount of
$784,000 and $763,000 were outstanding at December 31, 1998 and September 30,
1998, respectively. Most assets of the Company, including accounts receivable,
inventories and property, plant and equipment, are pledged as collateral.
The Loan Agreement's covenants may, if violated, limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
The most restrictive covenant requires the Company to maintain specified minimum
balances consisting of the sum of stockholders' equity (excluding foreign
- 17 -
<PAGE>
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 (hereinafter referred to
as "minimum equity balance"). Minimum equity balance requirements under the Loan
Agreement amount to $62.9 million, $59.5 million, $57.1 million and $57.0
million on 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 December 31, 1998 approximated $72.6
million, this covenant effectively limits the sum of cumulative future losses
and preferred stock dividend payments to $15.6 million for the balance of the
fiscal year ending September 30, 1999. 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. Separately, terms of the Loan Agreement
required that the Company raise a minimum of $10.0 million in net proceeds on or
before March 31, 1999 from the sale of assets or execution of an equity
offering. The Company satisfied this $10.0 million covenant requirement on
December 31, 1998 (see Note 8, "Sale of Technology Alliance Group Division," for
further discussion of the transaction involved). In accordance with terms of the
Loan Agreement, $4.3 million of the proceeds received from the transaction were
applied in January 1999 to reduce borrowings outstanding under the term loan
portion of the Loan Agreement.
Since the Company realized losses of $33.4 million for total fiscal 1998 and
$3.1 million for the quarter ended December 31, 1998, a combination of cost
reductions and/or revenue growth will be required in the remainder of fiscal
1999 to maintain compliance with the minimum equity balance covenant. (Refer to
Note 7, Restructuring of Operations, for discussion of cost reduction efforts
executed in December 1998). 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 the Loan Agreement.
In the past the Company has relied on its ability to offer for sale its common
stock, preferred stock, convertible debentures and/or warrants as viable
alternative sources of financing. The availability and terms of such offerings
in the future will depend on such items as the Company's future financial
performance and/or market demand for the Company's technologies. As a result,
these sources may not be available, or may be available on less favorable terms,
in the future. The Company's inability to have access to the Loan Agreement
funds and/or alternative financing sources would have a material adverse effect
on the Company's financial condition.
Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the year ended September 30,
1998 for further disclosures applicable to the above-referenced Loan Agreement
and all other outstanding indebtedness of the Corporation.
Total outstanding debt amounted to $64.7 million at December 31, 1998, as
compared to $60.8 million at September 30, 1998. The net increase of $3.9
million is comprised of $5.8 million of new borrowings under the Company
revolving line of credit, partially offset with $1.9 million of principal
payments made to reduce other outstanding borrowings.
- 18 -
<PAGE>
Operating
- ---------
Net cash provided by operating activities improved to a positive $2.0 million
for the quarter ended December 31, 1998 as compared to net cash usage of $0.9
million for the corresponding period one year ago.
Non-debt working capital, excluding cash and cash equivalents, decreased from
$29.5 million at September 30, 1998 to $21.3 million at December 31, 1998. The
$8.2 million reduction is principally comprised of, among other items, a $7.5
million reduction in accounts receivable resulting from a reduced level of
revenue and continued improvement with collection efforts and a $3.8 million
increase in short-term debt, partially offset with reductions in accrued payroll
($1.3 million) and deferred income ($1.2 million). The increase in short-term
debt is attributable to the $4.3 million of term loan which became due and
payable from proceeds received from the sale of TAG (such payment was made in
January 1999; refer to Note 8, "Sale Of Technology Alliance Group Division" and
Note 5, "Long-term Debt," for further discussion).
Investing
- ---------
Investment in property, plant and equipment amounted to $2.3 million and $2.5
million in the three-month periods ended December 31, 1998 and 1997,
respectively. The Company continues to closely monitor all capital spending in
an effort to preserve cash and limit such investment to instances which appear
to offer the greatest return on investment. Investments in capitalized software
amounted to $3.3 million and $3.0 million, respectively, for the three-month
periods ended December 31, 1998 and 1997.
Financing
- ---------
Net cash provided by financing activities in the quarter ended December 31, 1998
amounted to $15.5 million, including $12.0 million of proceeds received from the
sale of TAG, $4.0 million of net debt borrowings and the payment of $450,000 in
preferred stock dividends. This compares to $7.1 million of net cash proceeds
generated in the quarter ended December 31, 1997, reflecting $7.5 million of net
debt borrowings ($15 million in new borrowings less $6.8 million in debt
repayments and $0.7 million of costs incurred to execute the new borrowings),
less $450,000 in preferred stock dividend payments.
Reference is made to Note 5 on page 7 for a condensed summary of outstanding
long-term debt as of December 31, 1998 and September 30, 1998. Separately,
reference is made to the consolidated financial statements, Notes 6 and 9, filed
with Form 10-K for the year ended September 30, 1998 for further disclosures
applicable to outstanding long-term debt and the conversion terms applicable to
$25.0 million of 7-3/4% convertible senior subordinated debentures (Note 6) and
$20.0 million of convertible preferred stock (Note 9), both of which were
outstanding as of December 31, 1998 and September 30, 1998.
Future Adoption Of New Accounting Statements
- --------------------------------------------
Reference is made to the consolidated financial statements filed with Form 10-K
for the year ended September 30, 1998, Note 1, for discussion regarding future
adoption of new accounting pronouncements.
- 19 -
<PAGE>
Year 2000 Compliance
- --------------------
Reference is made to Form 10-K filed with the Securities and Exchange Commission
for the year ended September 30, 1998, Item 7, Management's Discussion and
Analysis of Results of Operations and Financial Condition, under the caption
"Year 2000 Compliance" for year 2000 compliance related discussion.
CERTAIN RISK FACTORS
- --------------------
Continuing Losses: The Company has sustained net losses for the past 17 quarters
ended December 31, 1998. There can be no assurance as to when the Company will
achieve net income.
Credit Availability: As noted above, the Company's Loan Agreement requires
compliance with specific financial covenants, including restricted net loss
performance, maintenance of a current ratio which equals or exceeds 1.4 and
capital spending restrictions. If the Company fails to comply with the required
covenants and a waiver or amendment is not obtained, the Company may be unable
to borrow funds under such agreement. In such case the Company would be required
to seek other financing to fund its operations, and there can be no assurance
the Company will be able to obtain such financing or, if obtained, on terms
deemed favorable by the Company. Furthermore, in the event the Company does
default on its $40.0 million Loan Agreement obligation, such default may result
in a requirement to accelerate the due dates and payment of other outstanding
indebtedness.
Volatility of Stock Price: The trading price of the Common Stock has fluctuated
widely in response to quarter-to-quarter operating results, industry conditions,
awards of orders to the Company or its competitors, new product or product
development announcements by the Company or its competitors, and changes in
earnings estimates by analysts. Any shortfall in revenue or earnings from
expected levels could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock in any given period.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this document, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties, and other factors which may affect future results including, but
not limited to, competition, rapid changing technology, regulatory requirements
and uncertainties of international trade. Examples of risks and uncertainties
include, among other things: (i) the Company's ability to maintain compliance
with its Loan Agreement or other financing arrangements, including the ability
to achieve further amendments and/or waivers as required to maintain compliance
with terms of the Loan Agreement and all other outstanding indebtedness; (ii)
the possibility that the additional indebtedness
- 20 -
<PAGE>
permitted to be incurred under the revolving credit facility portion of the Loan
Agreement may not be sufficient to maintain the Company's operations; (iii) the
Company's ability to satisfy its financial obligations and to obtain additional
indebtedness, if required; (iv) the Company's ability to effectively restructure
its operations and achieve profitability; (v) the Company's ability to retain
customers; (vi) the Company's ability to maintain existing supply arrangements
and terms; and (vii) and the Company's ability to retain key employees.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation and does not intend to update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
- 21 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter
for which this report is filed.
- 22 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL DATACOMM INDUSTRIES, INC.
(Registrant)
/S/ WILLIAM G. HENRY
----------------------
William G. Henry
Vice President, Finance and
Principal Financial Officer
Dated: February 12, 1999
- 23 -
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