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, 1999
------------------------------------------------
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 February 11, 2000
- ---------------------------- ----------------------------
Common Stock, $.10 par value 24,031,040
Class B Stock, $.10 par value 2,092,383
Total Number of Pages in this Document is 25.
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I. Financial Information
Consolidated Balance Sheets -
December 31, 1999 and September 30, 1999 ......... 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three Months
Ended December 31, 1999 and 1998 ................ 4
Consolidated Statements of Cash Flows - For the
Three Months Ended December 31, 1999 and 1998...... 5
Notes to Consolidated Financial Statements......... 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K......... 24
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
In thousands, except shares 1999 1999
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $3,401 $3,790
Accounts receivable, less allowance
for doubtful receivables of $905
in December and $1,375 in September 30,126 32,795
Inventories 26,671 22,329
Deferred income taxes 1,578 1,578
Other current assets 11,961 12,624
- -------------------------------------------------------------------------------
Total current assets 73,737 73,116
- -------------------------------------------------------------------------------
Property, plant and equipment, net 31,458 32,679
Capitalized software development costs, net 21,815 21,815
Other assets 12,690 12,764
- -------------------------------------------------------------------------------
$139,700 $140,374
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 4,350 $ 4,533
Accounts payable, trade 20,463 18,669
Accrued payroll and payroll-related costs 4,275 4,626
Deferred income 5,216 6,082
Other current liabilities 17,339 16,449
- -------------------------------------------------------------------------------
Total current liabilities 51,643 50,359
- -------------------------------------------------------------------------------
Long-term debt, less current portion 53,855 64,532
Deferred income taxes 2,206 2,337
Other liabilities 1,324 1,053
- -------------------------------------------------------------------------------
Total liabilities 109,028 118,281
- -------------------------------------------------------------------------------
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,
10,000,000 shares authorized; issued
and outstanding: 2,092,383 in December
and September 209 209
Common stock, par value $.10 per share,
50,000,000 shares authorized; issued
and outstanding: 22,890,290 in December
and 20,309,143 in September 2,289 2,031
Capital in excess of par value 165,891 151,706
Accumulated deficit (133,863) (127,472)
Accumulated other comprehensive loss (3,227) (2,736)
Common stock held in treasury, at cost:
192,895 shares in December and 330,382
shares in September (1,427) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 30,672 22,093
- -------------------------------------------------------------------------------
$139,700 $140,374
- -------------------------------------------------------------------------------
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 1999 1998
----------------------------------------------------------------------
Revenues:
Net product sales $35,362 $27,837
Service revenue 11,195 11,982
Other revenue 1,023 2,600
------------ ------------
47,580 42,419
Cost of revenues:
Cost of product sales 18,380 14,390
Cost of service revenue 8,186 8,221
Cost of other revenue 88 485
------------ ------------
26,654 23,096
Gross margin 20,926 19,323
Amortization of capitalized
software development costs 3,000 3,162
Operating expenses:
Selling, general and administrative 14,603 16,836
Research and product development 5,172 7,686
Restructuring of operations 500 2,000
------------ ------------
20,275 26,522
Operating loss (2,349) (10,361)
Other income (expense):
Debt conversion expense (1,524) --
Gain on sale of assets -- 9,001
Interest, net (2,012) (1,662)
Other, net 244 234
------------ ------------
(3,292) 7,573
Loss before income taxes (5,641) (2,788)
Income tax provision 300 300
------------ ------------
Net loss ($5,941) ($3,088)
============ ============
Basic and diluted loss per share ($0.29) ($0.16)
============ ============
Weighted average number of common and
common equivalent shares outstanding 22,271 21,735
============ ============
Accumulated deficit at beginning of period ($127,472) ($103,066)
Net loss (5,941) (3,088)
Payment of preferred stock dividends (450) (450)
------------ ------------
Accumulated deficit at end of period ($133,863) ($106,604)
============ ============
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 1999 1998
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($5,941) ($3,088)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 5,768 6,493
Non-cash charge for debt conversion 1,524 --
Gain on sale of assets -- (9,001)
Changes in:
Accounts receivable 2,422 7,685
Inventories (4,383) (1,022)
Accounts payable and accrued expenses 1,670 5,015
Other net current assets 520 (3,607)
Other net long-term assets (592) (504)
- -------------------------------------------------------------------------------
Net cash provided by operating activities 988 1,971
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (1,211) (2,301)
Capitalized software development costs (3,000) (3,345)
Proceeds from sale of assets, net -- 12,013
- -------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (4,211) 6,367
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings (repayments), net (15,111) 5,855
Proceeds from notes and mortgages 19,700 --
Principal payments on notes and mortgages (1,244) (1,905)
Proceeds from issuing common stock 9 --
Payment of preferred stock dividends (450) (450)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 2,904 3,500
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (70) (15)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (389) 11,823
Cash and cash equivalents at beginning of period (1) 3,790 3,757
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period (1) $3,401 $15,580
===============================================================================
(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, 1999, the
consolidated results of their operations for the three months
ended December 31, 1999 and 1998, and their cash flows for the
three months ended December 31, 1999 and 1998. 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
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
effect 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. In addition, 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 unaudited 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, 1999.
Certain reclassifications were made to the prior year's
consolidated financial statements to conform to the current
year's presentation.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
December 31, 1999 September 30, 1999
----------------- ------------------
Raw materials $ 5,521 $ 5,054
Work-in-process 266 1,732
Finished goods 20,884 15,543
--------- ----------
$ 26,671 $ 22,329
========= ==========
- 6 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
December 31, 1999 September 30, 1999
----------------- ------------------
Land $ 1,770 $ 1,775
Buildings and improvements 29,856 30,280
Test equipment, fixtures and
field spares 54,253 54,460
Machinery and equipment 59,268 58,099
--------- ---------
145,147 144,614
Less: accumulated
depreciation 113,689 111,935
--------- ---------
$ 31,458 $ 32,679
========= =========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The accumulated amortization of capitalized software development
costs amounted to $14,874,000 and $18,065,000 at December 31,
1999 and September 30, 1999, respectively. The reduction
reflects the write-off of fully amortized capitalized software.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
December 31, 1999 September 30, 1999
----------------- ------------------
Revolving credit facility $ -- $ 15,111
Notes payable 37,648 18,543
7 3/4% convertible senior
subordinated debentures 10,520 25,000
Mortgages payable 10,037 10,411
------- -------
58,205 69,065
Less: current portion 4,350 4,533
------- -------
$ 53,855 $ 64,532
======== ========
- 7 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Expansion of Credit Facility and Receipt of Proceeds
On May 14, 1999, the Company entered into a three-year $40.0
million loan and security agreement with Foothill Capital
Corporation (the "Loan Agreement"). The Loan Agreement was
comprised of $15.0 million in term loans and a $25.0 million
(maximum value) revolving line of credit. At any point in time,
up to a maximum of $3.0 million of the outstanding term loan
balance is convertible into the Company's common stock at a
price of $5.00 per share.
On December 30, 1999, the Company expanded its credit facility
to $70.0 million, as compared to the previous $40.0 million
agreement. The $30.0 million increase is comprised of a $20.0
million term loan (proceeds received on December 31, 1999) and a
$10.0 million increase in the revolving line of credit portion
of the credit facility. The expansion results in a $70.0 million
credit facility (New Loan Agreement) comprised of $35.0 million
in term loans and a $35.0 million (maximum value) revolving line
of credit.
In addition, a financial covenant of the previous Loan Agreement
was modified to be less restrictive to the Company, requiring
that stockholders' equity, as defined, must now equal or exceed
$10.0 million, as compared to $18.1 previously.
The new $20.0 million term loan bears interest at the higher of
13.5% or the prime rate of interest plus 5.0% (on December 31,
1999, the applicable prime rate of interest was 8.5%), payable
monthly. Commencing in March 2001, quarterly principal payments
in the amount of $1.0 million become payable, and the new term
loan is due and payable in full upon termination or expiration
of the New Loan Agreement. At any point in time, up to a maximum
of $4.0 million of the outstanding new term loan balance is
convertible into the Company's common stock at a conversion
price of $9.00 per share.
Under the revolving line of credit portion of the New Loan
Agreement, funds are advanced subject to satisfying a borrowing
base formula related to levels of certain accounts receivable
and inventories and the satisfaction of other financial
covenants. Under this formula, at December 31, 1999, the Company
would have been able to borrow approximately $25.9 million. No
borrowings were outstanding on the line of credit as of December
31, 1999 (as compared to $15.1 million outstanding at September
30, 1999).
Most assets of the Company, including accounts receivable,
inventories and property, plant and equipment are pledged as
collateral under the New Loan Agreement. Interest on revolver
borrowings is payable monthly at the greater of prime plus
0.625% or 7.0% per annum. The applicable prime rate was 8.5% at
December 31, 1999.
- 8 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Conversion of Debentures into Equity
In December 1999 approximately $14.5 million of the $25.0
million in Convertible 7 3/4% Debentures ("Debentures")
outstanding at September 30, 1999 were converted into and
exchanged for common stock, thereby reducing outstanding
indebtedness and increasing stockholders' equity by
approximately $14.5 million and $14.0 million, respectively. The
increase in stockholders' equity is comprised of approximately
$16.0 million of equity securities issued less a non-cash charge
of $1.5 million for debt conversion expense (discussed below)
and $0.5 million of deferred debenture offering costs which were
charged to paid-in capital. Annual interest expense savings
resulting from the conversions will approximate $1.1 million.
In three separate, unsolicited and negotiated transactions, the
Company issued an aggregate of 2,716,280 shares of common stock
in exchange for the $14.5 million of Debentures, as compared to
2,483,279 shares issuable under the original debenture
conversion terms. Issuance of the incremental 233,001 shares
resulted in a non-cash charge of $1.5 million for debt
conversion expense in the quarter ended December 31, 1999.
Subsequent to December 31, 1999, an additional $7.0 million of
Debentures were converted into and exchanged for common stock,
thereby further reducing outstanding indebtedness and increasing
stockholders' equity. Refer to Note 11, "Subsequent Events," for
further discussion. After giving effect to these additional
conversions, outstanding Debentures approximated $3.5 million
as compared to $25.0 million at September 30, 1999.
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, 1999 for further
disclosures applicable to all (other) outstanding indebtedness
of the Corporation.
- 9 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. RESTRUCTURING OF OPERATIONS
On September 30, 1999, the Company entered into an agreement
with the Matco Electronics Group, Inc. ("Matco") to outsource a
substantial portion of its manufacturing operations. This
strategic decision, executed to reduce manufacturing costs and
more effectively focus the Company on product development,
marketing and sales activity, resulted in the elimination of
approximately 100 manufacturing positions. The net loss for the
quarter ended December 31, 1999 includes a charge of $0.5
million, or $0.02 per share, primarily for post-employment
benefits under the Company's severance plan. Most of the
benefits are expected to be paid in the quarter ending March 31,
2000.
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 Division and Network
Access Division, both of which supplement the existing VITAL
Network Services business unit, which was launched in October
1997. The reorganization resulted in a workforce reduction of
approximately 200 persons. The net loss for the three months
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, which were paid in fiscal 1999.
NOTE 7. SALE OF TECHNOLOGY ALLIANCE GROUP DIVISION
On December 30, 1998, the Company sold the assets of its
Technology Alliance Group ("TAG") division, which was identified
as non-strategic to the reorganized business units referenced in
Note 6 above. TAG, which developed, patented and licensed
advanced modem and access technologies, was principally
comprised of scientists and engineers and held rights to certain
technologies patented by the division. The sale resulted in a
pre-tax gain of approximately $9.0 million, or $0.41 per share,
in the three-month period ended December 31, 1998 and generated
cash proceeds, net of expenses, of approximately $12.0 million.
Technology licensing revenues from the TAG division amounted to
$695,000 in the three months ended December 31, 1998 (licensing
revenues are reported as "Other Revenue" in the Company's
Consolidated Statements of Operations).
- 10 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. SEGMENT INFORMATION - INTERIM DISCLOSURES
The Company reorganized in December 1998, creating distinct and
independently managed Strategic Business Units ("SBUs") for
specified groups of products and services. Each SBU has been
identified as a reportable segment, as summarized below:
o Broadband Systems Division
o Network Access Division
o VITAL Network Services, L.L.C.
o DataComm Leasing Corporation
The accounting policies of the segments are the same as those
described in Note 1, "Description of Business and Summary of
Significant Accounting Policies," in the Company's consolidated
financial statements filed with Form 10-K for the year ended
September 30, 1999, except for capitalized software accounting.
Such costs are treated as a period expense when measuring
divisional performance.
The Company evaluates the performance of its segments and
resource allocation based upon operating income, before
capitalized software accounting, restructuring charges and
executive level general corporate costs (i.e., chief executive
officer, chief operating officer, chief financial officer,
corporate strategic planning, investor relations, etc.). There
are no intersegment revenues, and BSD and NAD recognize revenue
for the sale of their product lines only (i.e., BSD recognizes
no revenue for the sale of NAD product and vice versa).
For additional information, including a description of the type
of business conducted by each respective SBU, refer to Note 11
in the Company's consolidated financial statements filed with
Form 10-K for the year ended September 30, 1999.
The tables below present financial performance information by
reportable segment (in thousands):
-11-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. SEGMENT INFORMATION - INTERIM DISCLOSURES (continued)
Three Months Ended
December 31,
--------------------
1999 1998
--------------------
Revenue:
-------
Network Access Division $ 17,928 $ 13,556
Broadband Systems Division 17,450 15,116
VITAL Network Services, L.L.C. 11,195 11,982
DataComm Leasing Corporation 1,007 1,070
Other -- 695
-------- --------
Total $ 47,580 $ 42,419
======== ========
Operating Income (Loss):
-----------------------
Network Access Division $ 1,737 $ (2,551)
Broadband Systems Division (3,959) (7,375)
VITAL Network Services, L.L.C. 596 1,692
DataComm Leasing Corporation 750 756
Other 0 0
-------- -------
Total $ (876) $ (7,478)
======== =========
Reconciliations of operating income (loss), as reported above,
to consolidated loss before income taxes are summarized below:
Operating loss, per above $ (876) $ (7,478)
Capitalized software
activity, net -- 183
General corporate expenses (973) (1,066)
Restructuring of operations (500) (2,000)
Debt conversion expense (1,524) --
Gain on sale of assets -- 9,001
Other income (expense) (1,768) (1,428)
-------- --------
Loss Before Income Taxes $ (5,641) $ (2,788)
========= =========
-12-
<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,
1999 1998
--------------------
Numerator:
---------
Net loss $ (5,941) $ (3,088)
Preferred stock dividends 450 450
--------- ---------
Numerator for basic and diluted
loss per share - loss applicable
to common stockholders $ (6,391) $ (3,538)
========= ==========
Denominator:
-----------
Denominator for basic and diluted
loss per share - weighted
average shares outstanding 22,271 21,735
--------- ---------
Basic and diluted loss per share $ (0.29) $ (0.16)
========= ==========
The net loss reported for three months ended December 31, 1999
includes restructuring charges of $0.5 million (or $0.02 per
share) and debt conversion charges of $1.5 million (or $0.07
per share). The net loss reported for the three months ended
December 31, 1998 includes restructuring charges of $2.0 million
(or $0.09 per share) and a gain on sale of assets of $9.0
million (or $0.41 per share).
Outstanding securities (not included in the above computations
because of their dilutive 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 7, 10
and 12, respectively, in the Company's consolidated financial
statements filed with Form 10-K for the year ended September 30,
1999. Weighted average employee stock options outstanding during
the three months ended December 31, 1999 approximated 3,995,000
shares, of which 1,191,000 would not have been included in
diluted earnings per share calculations for the three months
ended December 31, 1999 (if the Company reported net income for
the referenced period) because the effect would be antidilutive.
- 13 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. COMPREHENSIVE INCOME (LOSS)
The following table sets forth the computation of comprehensive
income (loss):
Three Months Ended
December 31,
-------------------------
1999 1998
---- ----
Net loss $ (5,941) $ (3,088)
Other comprehensive (loss),
net of tax:
Foreign currency translation
adjustments (491) (413)
------------ ----------
Comprehensive loss $ (6,432) $ (3,501)
============ ==========
NOTE 11. SUBSEQUENT EVENTS
Additional Conversions of Debentures into Equity, Subsequent to
December 31, 1999:
Subsequent to December 31, 1999, approximately $7.0 million of
the $10.5 million in Convertible 7 3/4% Debentures
("Debentures") outstanding at December 31, 1999 were converted
into and exchanged for common stock, thereby further reducing
outstanding indebtedness and increasing stockholders' equity by
approximately $7.0 million.
In five separate, unsolicited and negotiated transactions, the
Company issued an aggregate of 1,306,820 shares of common stock
in exchange for the $7.0 million of Debentures, as compared to
1,203,910 shares issuable under the original debenture
conversion terms. Issuance of the incremental 102,910 shares is
expected to result in a non-cash charge of approximately $0.9
million for debt conversion expense in the quarter ending March
31, 2000.
Including the above, cumulative debt-to-equity conversions
amount to $21.5 million, leaving $3.5 million of the
original $25.0 million in Debentures outstanding. Interest
expense will be reduced by approximately $1.7 million annually.
- 14 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary Discussion
The Company's operating performance and financial resources improved in the
first quarter of fiscal year 2000 as compared to the same quarter one year ago.
Both the current and prior years' quarters include unique items that are
unrelated to ongoing operations. These items include a non-cash charge of $(1.5)
million for debt conversion expense in the current quarter, a $9.0 million gain
on the sale of a division in the prior year's quarter and restructuring charges
of $(0.5) million and $(2.0) million in the quarters ended December 31, 1999 and
1998, respectively, all of which are discussed later.
Excluding these unique items, the operating loss in the current quarter is $1.8
million versus an operating loss of $8.4 million in the corresponding quarter of
fiscal 1999, an improvement of $6.6 million, or 79%; similar improvement was
achieved in the Company's reported net loss, which amounted to $3.9 million as
compared to $10.1 million in the same quarter one year ago, an improvement of
$6.2 million, or 61%.
In the current quarter, the Company improved its access to working capital
resources by expanding its credit facility to $70.0 million, as compared to
$40.0 million at September 30, 1999. In addition, in December 1999 the Company
improved its financial position when approximately $14.5 million of the $25.0
million in Convertible 7 3/4% Debentures ("Debentures") outstanding at September
30, 1999 were converted into and exchanged for common stock, thereby reducing
outstanding indebtedness and increasing stockholders' equity. Furthermore,
subsequent to December 31, 1999, the Company converted an additional $7.0
million of Debentures into equity. The Debenture reductions ($21.5 million) will
result in an interest expense reduction of $1.7 million annually.
Descriptions of the current quarter's results as compared to the corresponding
period of the previous fiscal year are included below.
- 15 -
<PAGE>
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,
1999 1998
---- ----
Revenues:
Net product sales 74.3% 65.6%
Service revenue 23.5 28.3
Other revenue 2.2 6.1
---- ----
100.0 100.0
Cost of revenues 56.0 54.4
------ ----
Gross margin 44.0 45.6
Amortization of capitalized
software development costs 6.3 7.5
Selling, general and administrative 30.7 39.7
Research and product development 10.9 18.1
----- -----
Operating loss before restructuring charges (3.9) (19.7)
Restructuring of operations 1.0 4.7
----- -----
Operating loss (4.9)% (24.4)%
------ -----
Net loss before unique items* (8.2)% (23.8)%
------ ------
Net loss (12.5)% (7.3)%
====== =======
- --------------------
*Unique items are comprised of restructuring charges, debt conversion expense
and gain on sale of assets.
Summary comments are as follows: (1) the revenue mix reflects the combined
impact of 27% product revenue growth and a service revenue decline of 6.6% as
compared to the prior year's quarter; (2) other revenue represents a lower
percentage of total revenue reflecting a reduction in royalty revenue
attributable to a division being sold in December 1998 (refer to Note 7 for
details); (3) current quarter cost of revenues, measured as a percent of
revenue, increased 1.6 percentage points, principally reflecting the combined
impact of a reduction in (higher margin) royalty revenue and reduced service
margins; (4) current quarter operating expenses (excluding restructuring
charges) are down more than 16 percentage points when measured as a percent of
revenue, reflecting the positive impact of current quarter revenue growth and
the Company's fiscal 1999 restructuring efforts; (5) the current year's
operating loss, excluding the impact of restructuring charges, improved by 15.8
percentage points measured as a percent of revenue; (6) current and prior year
net loss percentages, excluding the unique items discussed in the summary
discussion above, reflect a similar improvement of 15.6 points measured as a
percent of revenue.
- 16 -
<PAGE>
Consolidated Results
The Company's operating loss, excluding restructuring charges, was reduced to
$1.8 million in the current quarter as compared to $8.4 million in same quarter
one year ago, a reduction of $6.6 million, or 79%. The improved performance is
comprised of a $1.6 million increase in gross margin, a $0.2 million reduction
in capitalized software amortization and a $4.7 million, or 19.4%, reduction in
operating expenses.
Total revenue growth amounted to $5.2 million, or 12.2%, reflecting the combined
impact of product revenue growth of $7.5 million, or 27.0%, a service revenue
decline of $0.8 million, or 6.6%, and a reduction in other revenue of $1.5
million, or 60.7%. Both the Broadband Systems Division ("BSD") and the Network
Access Division ("NAD") contributed to the product revenue growth. The reduction
in other income is attributable to a $0.7 million reduction in royalty revenue
resulting from a division being sold in December 1998 (refer to Note 7 for
details) and $0.8 million of contractual research and development revenue
recorded in the prior year's first fiscal quarter (no such revenue was recorded
in the current quarter). Gross margins, measured as a percent of revenue and
excluding capitalized software amortization, were down 1.6 percentage points as
compared to the prior year, reflecting the combined impact of reductions in
service revenue and royalty revenue. Geographically, international revenues
accounted for 53% and 47% of total consolidated revenues for the three-month
periods ended December 31, 1999 and 1998, respectively.
The $4.7 million, or 19.4%, reduction in operating expenses is attributable to
the Company's fiscal 1999 restructuring efforts, including the December 1998
reorganization into three distinct business units with increased operating
autonomy (refer to Note 6, "Restructuring of Operations," in this quarterly
report and Note 2, "Restructuring of Operations," in the Company's consolidated
financial statements filed with Form 10-K for the year ended September 30, 1999
for further discussion). The reduction is comprised of a $2.2 million, or 13.3%,
reduction in selling, general and administrative expense and a $2.5 million, or
32.7% reduction in research and development expense. The selling, general and
administrative reduction principally reflects headcount and other related cost
reductions resulting from the Company's December 1998 reengineering of its sales
and marketing strategy, including an increased focus on sales activity through
distributors and other channels, a reduced focus on direct-sell activity and
more productive marketing initiatives. The reduction in research and development
expense reflects the shutdown of a non-strategic remote technology center in
England in July 1999, the sale of a non-strategic division and reduced costs
associated with more defined and focused development programs.
The Company continues to channel a high percentage of its revenues into new
product development. Gross spending for the quarter ended December 31, 1999
amounted to $8.2 million, or 17.2% of revenue. Such spending is, however, being
closely monitored by the Network Access Division's and Broadband Systems
Division's management teams. The strategy of both business units has been to
significantly reduce or eliminate development activities targeted at sustaining
legacy products, to limit the investment of new funds into projects
- 17 -
<PAGE>
considered to have only the highest likelihood of success and to use outside
development engineers to complement internal development activities, all in an
effort to focus development efforts and improve productivity.
Restructuring of Operations: The Company recorded restructuring charges of $0.5
million and $2.0 million in the quarters ended December 31, 1999 and 1998,
respectively. Refer to Note 6, "Restructuring of Operations," for detailed
discussion.
Interest and Other Income and Expense: Other income for the current quarter
ended December 31, 1999 includes a non-cash charge of $1.5 million, or $0.07 per
share, for debt conversion expense. Details regarding the debt-to-equity
conversions, which increased stockholders' equity and reduced outstanding
indebtedness by approximately $14.5 million in the first fiscal quarter, are
discussed in Note 5, "Long-Term Debt." Furthermore, refer to Note 11,
"Subsequent Events," for discussion of an additional $7.0 million of
debt-to-equity conversions occurring subsequent to December 31, 1999.
Prior year other income includes a gain of $9.0 million, or $0.41 per share,
from the sale of a division. Refer to Note 7, "Sale of Technology Alliance Group
Division," for further discussion. Separately, current quarter interest expense
amounted to $2.0 million as compared to $1.7 million in the same quarter one
year ago; the increase is attributable to a higher level of outstanding
borrowings during the quarter, prior to the debt-to-equity conversions which
occurred at the end of the quarter.
Income Taxes: Tax provisions recorded by the Company, principally for foreign
income and domestic state taxes, amounted to $300,000 in the quarters ended
December 31, 1999 and 1998. The Company has significant federal net operating
loss carryforwards available to offset future liabilities. However, based on 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.
Operating Segments: Discussion and analysis of the financial performance of the
Company's reportable operating segments is presented below (such discussions do
not include the impact of charges for restructuring of operations, as the
Company does not segregate such charges by business unit). In the case of all
operating segments, reference is made to Note 8, "Segment Information - Interim
Disclosures," for further discussion and disclosure.
Network Access Division
NAD's current quarter operating income amounted to $1.7 million as compared to
an operating loss of $(2.6) million in the same quarter one year ago. The $4.3
million improvement and turnaround reflects the net effect of revenue growth of
$4.4 million, or 32.3%, resulting gross margin growth of $1.6 million, and
operating expense reductions of $2.7 million, or 30.3%. The revenue growth is
primarily attributable to NAD's effort to penetrate the European market.
- 18 -
<PAGE>
Broadband Systems Division
The Broadband Systems Division's ("BSD's") current quarter operating loss
amounted to $(4.0) million as compared to $(7.4) million in the same quarter one
year ago, an improvement of $3.4 million, or 46.3%. The $3.4 million improvement
reflects the net effect of revenue growth of $2.3 million, or 15.4%, resulting
margin growth of $1.4 million, and operating expense reductions of $2.0 million,
or 13.0%.
BSD's ATM product revenue growth amounted to $2.9 million, or 27.8%, across both
domestic and international markets; TDM product revenue was up $0.2 million, or
6.0%; however, such product revenue growth was partially offset with a $0.8
million reduction in contractual research and development revenue.
VITAL Network Services, L.L.C. ("VITAL")
VITAL's revenue for the quarter ended December 31, 1999 amounted to $11.2
million, down $0.8 million, or 6.6% as compared to the corresponding quarter one
year ago. The Company attributes the revenue reduction to Year 2000 concerns and
hesitancy on the part of customers to install new systems as a result of such
concerns. Operating expenses for the current quarter were up $0.3 million, or
16.6%, as compared to the prior year, reflecting investments in information
systems and an expansion of the sales organization.
DataComm Leasing Corporation
DataComm Leasing Corporation ("DLC") offers BSD and NAD customers the
opportunity to lease rather than purchase products. DLC's operating income,
derived from both operating and finance lease activities, was $750,000 and
$756,000 in the quarters ended December 31, 1999 and 1998, respectively. Most of
DLC's leases are with BSD customers due to the more expensive nature of BSD
products and customers' desire to finance such equipment through leases.
Foreign Currency Risk
The Company's foreign subsidiaries are exposed to foreign currency fluctuations
since they are invoicing customers in local currencies while liabilities for
product purchases from the parent Company are transacted in U.S. dollars. The
impact of foreign currency fluctuations on these U.S. dollar-denominated
liabilities is recorded as a component of "Other Income and Expense" in the
Company's consolidated statements of operations and resulted in net currency
exchange gains of $252,000 and $227,000 in the quarters ended December 31, 1999
and 1998, respectively.
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. Therefore, the Company historically has not
entered into hedge contracts or any form of derivative or similar investment.
Separately, the introduction of the Euro as a common currency for members of the
European Monetary Union, which occurred during fiscal 1999, is not expected to
significantly impact the Company's exposure to foreign currency transactions.
See "Market Risk" below for further discussion of foreign currency risk.
- 19 -
<PAGE>
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), and dependence upon a limited number of
major distributors and resellers. The Company historically has not entered into
derivatives, forward exchange contacts or other financial instruments for
trading, speculation or hedging purposes.
Interest Risk
For discussion applicable to interest risk, reference is made to Form 10-K filed
with the Securities and Exchange Commission for the year ended September 30,
1999, Item 7, Management's Discussion and Analysis of Results of Operations and
Financial Condition, under the caption "Interest Risk."
Liquidity and Capital Resources
Future cash requirements are planned to be satisfied from a combination of cash
balances ($3.4 million at December 31, 1999) and borrowings under the Company's
revolving line of credit, which the Company's lenders have authorized up to a
maximum of $35.0 million; no borrowings were outstanding on the Company's
revolving line of credit as of December 31, 1999, as compared to $15.1 million
of such borrowings outstanding at September 30, 1999. In addition, alternate
financing sources may also be available, if required. Such alternate financing
sources include, among other items, the sale of assets, technologies, existing
businesses and/or the Company's common stock.
On December 30, 1999, the Company expanded its credit facility to $70.0 million,
as compared to $40.0 million at September 30, 1999. The $30.0 million increase
is comprised of a $20.0 million term loan (proceeds received on December 31,
1999) and a $10.0 million increase in the revolving line-of-credit portion of
the credit facility. The expansion results in a $70.0 million credit facility
comprised of $35.0 million in term loans and a $35.0 million (maximum value)
revolving line of credit (New Loan Agreement). Refer to Note 5, "Long-Term
Debt," for a detailed discussion of the New Loan Agreement and the terms
thereof.
Under the revolving line of credit portion of the Company's New Loan Agreement,
availability of funds is subject to satisfying a borrowing base formula related
to levels of certain accounts receivable and inventories and the satisfaction of
other financial covenants. Therefore, maximum funds available for borrowing
under the revolving line of credit portion of the New Loan Agreement will
fluctuate as sales and collections efforts affect accounts receivable balances.
Such maximum availability amounted to $25.9 million at December 31, 1999. Most
assets of the Company, including accounts receivable, inventories and property,
plant and equipment are pledged as collateral. Amounts outstanding on the
revolving line of credit are payable in full upon termination of the New Loan
Agreement. Separately, letters of credit reduce the availability of funds under
the revolving line of credit; letters of credit in the amount of $214,000 and
$267,000 were outstanding at December 31, 1999 and September 30, 1999,
respectively.
- 20 -
<PAGE>
Financial covenants of the New Loan Agreement require that the Company's
reported stockholders' equity, excluding the impact of foreign currency
translation adjustments occurring subsequent to March 31, 1999, equal or exceed
$10.0 million. Such stockholders' equity, as defined, amounted to $30.7 million
at December 31, 1999; in addition, such stockholders' equity, as defined,
increased, on a pro forma basis as of December 31, 1999, to approximately $37.7
million in February 2000, reflecting the impact of an additional $7.0 million of
convertible debentures being converted into common stock. Refer to Note 11,
"Subsequent Events," for additional discussion. Other covenants limit annual
capital expenditures to $12.0 million. Violation of covenants may result in
limiting access to future borrowings and/or acceleration of payment requirements
on outstanding borrowings.
To further improve the Company's financial position, in December 1999
approximately $14.5 million of the $25.0 million in Convertible 7 3/4%
Debentures ("Debentures") outstanding at September 30, 1999 were converted into
and exchanged for common stock, thereby reducing outstanding indebtedness and
increasing stockholders' equity. Furthermore, as noted above, an additional $7.0
million of Debentures were converted into equity subsequent to December 31,
1999. Outstanding Debentures, after such subsequent event conversions, amounted
to only $3.5 million at February 11, 2000, as compared to $25.0 million at
September 30, 1999. The cumulative Debenture reductions ($21.5 million) will
result in interest expense reductions of $1.7 million annually. Refer to Note 5,
"Long-term Debt" and Note 11, "Subsequent Events," for further discussion.
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,
1999 for further disclosures applicable to all other outstanding indebtedness of
the Corporation.
Operating
Net cash provided by operating activities amounted to $1.0 million and $2.0
million in the three-month periods ended December 31, 1999 and 1998,
respectively.
Non-debt working capital, excluding cash and cash equivalents, amounted to $23.0
million at December 31, 1999 as compared to $23.5 million at September 30, 1999.
Investing
The Company continues to invest in new technologies. Investments in property,
plant and equipment amounted to $1.2 million in the current quarter as compared
to $2.3 million in the same quarter one year ago. Approximately $600,000 of the
prior year's capital investments were applicable to VITAL Network Services'
purchase of Olicom assets (for additional discussion, refer to Note 4, "VITAL
Network Services, L.L.C. Partnership With Olicom, Inc.," in the Company's
consolidated financial statements filed with Form 10-K for the year ended
September 30, 1999). Separately, investments in capitalized software amounted to
$3.0 million and $3.3 million in the quarters ended December 31, 1999 and 1998,
respectively. All investment activity is targeted to satisfy minimum operating
requirements and to embrace new undertakings with the greatest potential
returns.
- 21 -
<PAGE>
During the three-month period ended December 31, 1998, the Company generated
$12.0 million in net proceeds from the sale of the Technology Alliance Group
division, which was identified as a non-strategic entity by the Company's
strategic business units. Refer to Note 7, "Sale of Technology Alliance Group
Division," for further discussion.
Financing
Net cash provided by current quarter financing activities amounted to $2.9
million, comprised of $3.3 million of net borrowings and the payment of $450,000
in preferred stock dividends. This activity compares to $3.5 million of cash
provided by financing activities in the quarter ended December 31, 1998,
comprised of $4.0 million of net borrowings and the payment of $450,000 in
preferred stock dividends.
Reference is made to Note 5, "Long-Term Debt" and Note 11, "Subsequent Events,"
for a condensed summary of outstanding long-term debt as of December 31, 1999
and September 30, 1999, and discussion of new borrowing and debt reduction
activities occurring in the quarter ended December 31, 1999, and subsequent
thereto.
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, 1999, Note 1, for discussion regarding future
adoption of new accounting pronouncements.
Year 2000 Compliance
Reference is made to Form 10-K filed with the Securities and Exchange Commission
for the year ended September 30, 1999, 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 21
quarters ended December 31, 1999. There can be no assurance as to when the
Company will achieve net income.
Credit Availability: As noted above, the Company's New Loan Agreement requires
compliance with specific financial covenants, including the requirement that
reported stockholders' equity, as defined, equals or exceeds $10.0 million (such
stockholders' equity, as defined, amounted to $30.7 million at December 31,
1999). Although not anticipated, should the Company ever fail to comply with the
required covenants, or fail to comply with any other provisions of the New Loan
Agreement which would result in a default, 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 $70.0 million
- 22 -
<PAGE>
New Loan Agreement obligation, such default may result in a requirement to
accelerate the due dates and payment of other outstanding indebtedness.
Reliance on Outsourced Manufacturing: On September 30, 1999, the Company
announced that it has outsourced substantially all of its manufacturing
operations. Therefore, the Company is largely dependent on third-party suppliers
to meet product delivery deadlines and quality requirements. Any shortfall in
the satisfaction of these requirements could negatively impact revenue and
profitability in that quarter, and possibly thereafter.
Volatility of Stock Price: The trading price of the Company's Common Stock has
fluctuated widely in response to, among other things, 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 the covenant requirements of its New Loan Agreement and all other financing
arrangements, including, if necessary, the ability to achieve amendments and/or
waivers thereto to maintain compliance with the terms of all outstanding
indebtedness; (ii) the possibility that the additional indebtedness permitted to
be incurred under the revolving credit facility portion of the New 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
financial resources, if required; (iv) the Company's ability to effectively
restructure its operations and achieve profitability; (v) the Company's ability
to retain existing and obtain new customers; (vi) the Company's ability to
maintain existing supply arrangements and terms; and (vii) the Company's ability
to retain key employees.
Readers are cautioned not to place undue reliance on such 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.
- 23 -
<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
None.
- 24 -
<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 14, 2000
- 25 -
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