SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999 Commission File number 1-8086
GENERAL DATACOMM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0853856
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Park Road Extension, Middlebury, Connecticut, 06762-1299
(Address of principal executive offices)
(203) 574-1118
(Registrant's telephone number, including area code)
__________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES { X } NO { }
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { X }
The aggregate market value of the voting stock of the Registrant held by
nonaffiliates as of December 13, 1999: $120,690,015.
Number of shares of Common Stock and Class B Stock outstanding as of December
13, 1999:
19,981,115 Shares of Common Stock
2,092,383 Shares of Class B Stock
DOCUMENTS INCORPORATED BY REFERENCE:
Annual Report to Stockholders for the fiscal year ended September 30, 1999 for
Part II, Items 5, 6, 7 and 8. Corporation's Proxy Statement (dated January 4,
2000) for the 2000 Annual Meeting of Stockholders for Part III, Items 10, 11, 12
and 13.
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GENERAL DATACOMM INDUSTRIES, INC.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 18
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 18
PART III
Item 10. Directors and Executive Officers of the
Registrant 19
Item 11. Executive Compensation 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management 21
Item 13. Certain Relationships and Related Transactions 21
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 22
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PART I
ITEM 1. BUSINESS
General DataComm Industries, Inc. was incorporated in 1969 under the laws of the
State of Delaware. Unless the context otherwise requires, the terms "Company,"
"Corporation" and "GDC" as used here and in the following pages mean General
DataComm Industries, Inc. and its subsidiaries. In addition, in the following
business discussion "ATM" refers to Asynchronous Transfer Mode cell switching
technology, "LAN" refers to Local Area Network and "WAN" refers to Wide Area
Network.
Overview
General DataComm Industries, Inc., based in Middlebury, Connecticut, is a
worldwide provider of wide area networking and telecommunications products and
services. The Company is focused on providing multiservice provisioning
solutions using ATM switching and multiservice access products. The Company
designs, assembles, markets, installs and maintains products and services that
enable telecommunications common carriers, corporations, and governments to
build, improve and more cost effectively manage their global telecommunications
networks. In fiscal 1999, the Company completed a major reorganization of
business operations that created three independent operating divisions in the
form of the Broadband Systems Division, the Network Access Division and VITAL
Network Services, L.L.C. (VITAL was established as a business unit in 1997).
Each of these groups now have dedicated marketing, sales, engineering and
finance components and are separated as distinct operating business units with
separate general managers. Refer to "Company Strategy" below for further
discussion.
The Company's products and services are marketed throughout the world. The
Company sells and leases its products primarily to corporations, governments and
common carriers (telephone and cable companies) through its own worldwide sales
and service organizations as well as original equipment manufacturers (OEMs),
system integrators, local distributor networks and value-added resellers.
Internationally, GDC maintains subsidiary operations in Canada, the United
Kingdom, Mexico, France, Singapore and Brazil. Sales and technical support
offices are maintained in Sweden, Japan, Hong Kong, China and Argentina. In
total, the Company manages a worldwide distribution network with representatives
in more than 60 countries. International operations represented approximately
48% of the Company's revenues in fiscal 1999 as compared to 50% in fiscal 1998.
GDC's foreign operations are subject to all the risks inherent in international
operations.
The Company's customer base includes: Local Exchange Carriers, including all
five Regional Bell Operating Companies, Bell Canada and GTE; Alternative Service
Providers including Cignal Global Communications and Twister Communications;
Interexchange Carriers including MCI Worldcom; corporate end users; government
entities including New York City Transit Authority, Commonwealth of Kentucky and
the U.K. Ministry of Defense; international communications carriers such as
France Telecom and Telecom New Zealand; and suppliers of central office
switching equipment such as Lucent Technologies and LM Ericsson.
No individual customer accounts for 10 percent or more of the Company's
consolidated revenue.
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The Corporation's executive offices are located at Park Road Extension,
Middlebury, Connecticut, 06762-1299, and its telephone number is (203) 574-1118.
Company Strategy
Prior to December 1998, the Company operated with a horizontal structure with
such functional organizations as marketing, sales and engineering operating
across all product lines.
In December 1998, the Company restructured its operations into three distinct
business units with increased operating autonomy and business focus. The
Broadband Systems Division ("BSD") has responsibility for the development,
marketing and sale of broadband telecommunication products, including ATM
products; the Network Access Division ("NAD") has responsibility for the
development, marketing and sale of access telecommunication products, including
frame relay and DSL products; and VITAL Network Services, L.L.C. ("VITAL") will
continue to offer a broad range of network services, including an expansion into
professional network design and consulting services.
Each business unit is comprised of a general manager and dedicated marketing,
sales, product development and finance functions ("Strategic Business Unit [SBU]
management teams"). As a result, the business units are more focused on
products, sales channels and technologies unique to each unit and will be
streamlined to maximize time-to-market, product performance and customer
satisfaction. The new SBU management teams have responsibility for their
respective operating results.
To minimize the cost of certain support functions, including, among others,
marketing services, information technology, specific finance functions, human
resource management and facilities maintenance, such support operations are
centralized and provide their respective services to all business units.
Since the reorganization, each division, and the Company as a whole, achieved
improved financial performance on a quarter-to-quarter basis during fiscal 1999.
The Company views this performance improvement as confirmation that its new
business strategy (autonomous business units created along product lines) is a
more effective means of managing the business. Refer to Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," for
detailed discussion of the Company's (and each division's) performance trends
since their creation in December 1998.
Detailed discussion of each division's operations follows below. In addition,
financial performance by reportable operating segment and other geographical
information presented on a consolidated basis is included in Note 11 of the
Notes to Consolidated Financial Statements. See "Index to Financial Statements
and Schedules" on page F-1 in this report.
As part of the Company's new business strategy, it has sold, is holding for sale
and/or closed operations not considered strategic to the three business units
discussed above. Refer to the "Partnering/Divestiture Strategy" discussion below
for additional discussion.
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Broadband Systems Division
The Broadband Systems Division ("BSD" or "the Division") has concentrated its
efforts on providing integrated networks utilizing ATM multiplexing and
switching products to construct global networks offering converged data, voice
and video communications. BSD's broadband networking products provide an
advanced, multiservice architecture for wide area networking solutions to
operators, governments and enterprises worldwide.
In the early 1990s, the Company identified ATM technology as the preferred
solution for addressing the need for support of next-generation data and
multimedia applications requiring higher bandwidth and differentiated Qualities
of Service (QoS). Such applications include internet-related access and
services, high-speed intranets, remote interactive education, content
distribution and broadcast TV transmission. ATM, as a broadband technology,
enables the simultaneous transmission of voice, video and high-speed data
traffic on a single communications line. By offering ATM solutions to its
customers, the Company believes it has enhanced its position as a leading
supplier of wide area networking and telecommunications products.
BSD's strategy of providing integrated solutions to its customers rests upon:
Providing Cost-Effective Flexible Product Solutions. The Division's trademark
product families {GDC APEX(R), NEXERA(TM) and ProSphere(R)} are designed with
architectures that scale to meet the differing size, performance and cost
demands encountered in its potential customer base. Customers select products
which are most appropriate to their current needs and may easily migrate to
higher capacity products over time. Standardization of the network management
suite across all product families allows the end-user to utilize a single
network management system providing value-added capabilities such as
configuration, alarm reporting, route planning, provisioning and advanced
service restoral options.
Improving Performance of Customer Networks. The Division's system products are
designed to improve network efficiency by increasing data transmission speed,
compressing and consolidating voice and video signals and providing dynamic
bandwidth allocation as individual applications demand it. The ability to
migrate isolated company voice and data intranets to a single, converged
broadband network may provide significant cost savings within a relatively low
payback period.
Broadband Division Product Suite
ATM Products: To address the needs of its target customers, the Division offers
several product solutions designed to provide a flexible and cost-effective
on-ramp into the broadband environment. The GDC APEX(R) range of systems enables
companies to address network requirements for data, compressed video and
compressed voice in a multi-service environment with switching and multiplexing
speeds from 1.6Gbps to 6.4Gbps. The NexEra(TM) family of switches is a new
system designed to offer higher density data, IP, voice and private line
services at the edge of the operator's network offering switching at 2.5Gbps and
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5Gbps. The NexEra(TM) system incorporates functionality required to interconnect
the PSTN and ATM networks, such as an integral SS7/ISUP gateway. The
ProSphere(R) family of network management products was successfully migrated
during 1999 to a next-generation core platform with the introduction of
leading-edge, unique and innovative concepts such as an all-JAVA client/server
interface and a CORBA inter-process communications agent. Both of these features
are designed to promote standards-based open interfaces for third parties to
utilize, and to enable easier integration into a network operator's
provisioning, monitoring and alarm systems.
Multimedia Products: During fiscal 1999, the Division's multimedia products
consisted of the APEX-MMS (Multimedia Multipoint Server), the industry's first
"any band" multipoint control unit, and a family of integrated codecs (APEX VIP
series) within the APEX switch which provide wide area transport for Motion
JPEG, H.320 and MPEG-2 compression options, allowing for optimized
video-provisioned services.
In fiscal 1999 BSD introduced the MAC 500, a versatile, multi-service access
concentrator capable of delivering multiple MPEG-2 video signals to customer
locations along with data and Internet access. In addition, a new release of the
Multipoint Server, which is targeted to service providers, was introduced. The
Company believes these two new products, together with the APEX platform, offer
one of the most innovative and complete solutions available in the marketplace
today. The principal applications are in distance learning for schools and
universities as well as telemedicine for hospitals and health organizations.
With the establishment of a new Multimedia Division in fiscal 2000,
responsibility for these multimedia products will reside in the new
organization.
Multiplexers/Internetworking Products: GDC's multiplexer and internetworking
product family includes systems for both branch office and corporate backbone
locations which integrate voice, traditional data, video and LAN traffic over
narrowband (56/64 Kbps) or wideband (fractional T1/E1 and T1/E1) digital
services. By consolidating multiple forms of traffic over a single transmission
line, these products significantly decrease an end user's network costs. For
corporate backbone locations, GDC offers the TMS 3000, which supports a wide
range of voice, facsimile, LAN, traditional data and video applications. The
Office Communications Manager ("OCM"), a cost-effective networking solution for
the branch office location, operates with the TMS 3000 as part of a network and
offers the integration of voice, LAN routing, frame relay and traditional data
at speeds ranging from 9.6 Kbps to T1/E1.
Broadband Division Sales and Marketing
The Division's products are sold throughout the world using various channels to
market, including: a dedicated U.S. sales force; international subsidiary
operations in Canada, Mexico, the United Kingdom, France, Germany, Singapore and
Brazil; and indirect sales through an international distributor network,
original equipment manufacturers ("OEM's"), value-added resellers, system
integrators and alternate service providers.
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The Division focuses on providing systems solutions for public voice and data
network provisioning, remote interactive education (distance learning) and the
migration of TDM and frame relay facilities to higher capacity broadband
networks. In addressing these solutions, the Division focuses its selling and
marketing efforts on emerging competitive service providers, incumbent
telecommunications carriers, educational and medical establishments, federal and
state governments and utilities. The Division has a worldwide customer base of
operators, corporate and government entities. The Division has global
distribution capabilities, and its ability to provide international customer
service and support is critical to customers that run mission-critical
applications over their networks.
The Company believes it has a leading position in the multi-service voice, data
and video switch market. The following organizations have deployed GDC's
broadband products extensively in their wide-area networks: Telekom Austria,
France Telecom, KPN Netherlands PTT, Slovakia Telecom, Telefonica Spain, Telia
Sweden, Energis Carrier Services, NASA, U.S. Air Force, Mayo Clinic, Burlington
Northern Santa Fe Railroad, BC Tel (Telus), Cignal Global Communications, and
Twister Communications. Several of these entities have deployed over 200 GDC
switches into their networks, creating some of the largest public switched ATM
networks in existence. The Division's products were sold to some of the
referenced customers through Lucent Technologies and LM Ericsson.
The Division had three customers which individually accounted for more than 10
percent of revenue in fiscal 1999 and in total accounted for approximately 40
percent of the Division's fiscal 1999 revenue.
Value of the Broadband Division's Solutions
Numerous operators have deployed GDC broadband switches as their platform for
provisioning new, differentiated data communications services. During 1999 the
Division managed to significantly expand and enhance its presence in the
voice-over-packet service market. As a leading proponent and early provider of
standards based AAL2 voice over ATM packet solutions, the Company's BSD division
has established a presence in several of the largest voice-over-packet networks
in the world. Additionally, 1999 saw a number of U.S. government agencies begin
to deploy the Division's products for mission-critical applications in military,
security and space applications.
The Company believes its family of broadband switches have the following
competitive advantages:
- Scalability, allowing a customer to construct a multitiered switch
network that scales in price and performance and offers multiple
services over one platform;
- Flexibility, providing the customer with comprehensive interfaces and
adaptation capabilities;
- Traffic management architecture, providing networks with traffic
policing, traffic shaping, traffic prioritization and buffer management
capabilities second to none;
- Switched virtual circuits, dynamically establishing voice, data and
video connections on an end-to-end basis;
- Standards-based compressed voice and MPEG2 video.
Selling prices vary directly with the size and complexity of the systems being
ordered.
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The Division is pursuing an aggressive TDM to ATM migration strategy. This
allows BSD to address its existing TDM customer base with an appropriate
forward-looking technical evolution. In corporate backbone environments
requiring broadband speeds and services, GDC APEX(R) switches can be used. The
TMS 3000 and OCM can feed into the APEX switch enabling the Division to offer an
integrated networking solution which scales from small remote or branch
locations into regional wideband backbones and ultimately into ATM-based
broadband backbones.
BSD Research and Development
The Division has significant ongoing engineering programs for product
improvement and new product development. Gross expenditures for research and
development activities amounted to $29.9 million, $32.2 million and $38.0
million for fiscal 1999, 1998 and 1997, respectively.
BSD Competition
All segments of the telecommunications and networking industries are intensely
competitive. Many of the participants in the networking industry, including,
among others, Nortel Networks, Cisco Systems, Siemens, Marconi Communications
and Newbridge Networks, have targeted the WAN ATM market segment. Other
companies are expected to follow. In addition, traditional suppliers of central
office switching equipment such as Alcatel, Lucent Technologies, Fujitsu and LM
Ericsson are offering ATM-based switches for central offices. Refer to the
caption "Competition" below for further discussion.
BSD Manufacturing and Product Support
The Division's products are manufactured by the Company's manufacturing
operation and outsourcing partners. Product support services are available to
BSD customers through VITAL Network Services, L.L.C.
BSD Employees
At September 30, 1999 the Division had 315 dedicated employees. In addition, the
Division utilized Company support personnel as necessary (see "Company Employee
Relations" below).
Network Access Division
The objective of the Network Access Division ("NAD" or "the Division") is to
improve sales, marketing, and engineering productivity relative to the Company's
access product line. The new business unit intends to leverage the sales
resources of distributors, value-added resellers, integrators and
telecommunication provider channels in an effort to achieve greater sales
coverage both domestically and internationally. The reorganization has also
served to intensify the selling of access products, which have an inherently
short selling cycle.
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GDC has adjusted to shifting priorities in the overall access market. These
priorities are governed by the accelerated growth of the internet, frame relay
and cell-based services, all of which require increased attention to network
management and performance quality. NAD accordingly is focused on the
development and sale of products targeted towards market growth areas. More
specifically, NAD's digital data sets, DSLware equipment and service monitoring
probes constitute the Division's major product elements serving to meet emerging
market requirements.
Network Access Division Product Suite
Digital Data Sets: Digital data sets are used to convert and interpret signals
from computers and communications equipment into a form that is acceptable for
transmission over telecommunications facilities. GDC offers a broad set of
narrowband digital data sets which operate at various speeds up to 64 Kbps and
wideband digital data sets which operate at fractional T1 and full T1 speeds. In
fiscal 1999 a broadband data set operating at T-3 speeds was also introduced.
NAD supplies its digital data sets to the major North American telephone
companies and various end users. NAD continues to enhance its digital
transmission product line by combining higher transmission speeds with
value-added capabilities including data compression, concentration, protocol
adaptation/conversion and network management. This enables GDC to offer
differentiated and in some cases unique transmission solutions. The SpectraComm
5000 family of network managed CSU/DSU products is the latest generation of
digital products which are targeted at large managed digital networks and local
exchange carriers.
DSLware(TM): The Universal Access System 7000 is a service provisioning system
which allows service providers to deliver digital services over copper loop
systems, reducing both cost and service provisioning time. It is particularly
applicable in international markets. In China and in developing countries in
Latin America and the Pacific Rim, there is insufficient copper wire installed
to support the growing demand for communications services. NAD believes it is
responding to these needs by offering the Universal Access System 7000, which
utilizes transmission technologies like 2B1Q (Two Binary One Quaternary) and
HDSL (High-speed Digital Subscriber Line). These products offer much higher
transmission speeds while using half of the copper wire pairs normally required
to provision private line services.
Intelligent Voice Data Access Multiplexer: The Metroplex(R) 6000 is an
intelligent access multiplexer designed for cost-effective access to a variety
of data and voice services available in wide area networks. It is applicable to
the branch office/small office market where it provides connectivity from the
office to an enterprise network or to public network services.
Analog Modems: Analog modems convert digital computer signals to a format that
can be transmitted over telephone lines. The market for private line modems has
been shrinking as telephone networks move from an analog to a digital format.
However, with the growth of telecommuting and internet access, the need for
analog modems continues to grow. NAD offers a broad range of private line and
dial-up modems operating at all speeds up to 56 Kbps.
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Network Access Division Sales and Marketing
The Division's products are sold throughout the world using: a dedicated
domestic sales force; a Canadian subsidiary; and indirect sales through a
(domestic and international) distributor network, original equipment
manufacturers (OEM's), value-added resellers, system integrators and alternate
service providers.
The Division's customer base includes: Local Exchange Carriers, including all
five Regional Bell Operating Companies, Bell Canada and GTE; Interexchange
Carriers, including MCI Worldcomm and Sprint; Alternate Service Providers such
as Northpoint Communications and DSL Net; government entities, including state
and local governments; and international communications carriers such as
Telecomm New Zealand.
No individual customer accounted for 10 percent or more of the Division's fiscal
1999 revenue.
NAD Research and Development
NAD's gross expenditures for research and development activities amounted to
$8.6 million, $9.0 million and $11.0 million for fiscal 1999, 1998 and 1997,
respectively.
NAD Competition
All segments of the telecommunications and networking industries are intensely
competitive. Many of the participants in the networking industry, including,
among others, ADC Kentrox, Adtran, Paradyne, PairGain and Newbridge Networks,
have targeted the Access/Transmission market segment. Other companies are
expected to follow. Refer to the caption "Competition" for further discussion.
NAD Manufacturing and Product Support
The Division's products are manufactured by the Company's manufacturing
operation and outsourcing partners. Product support services are available to
NAD customers through VITAL Network Services, L.L.C.
NAD Employees
At September 30, 1999 the Division had 135 dedicated employees. In addition, the
Division utilized Company support personnel as necessary (see "Company Employee
Relations" below).
VITAL Network Services, L.L.C.
In February 1997, GDC restructured its service division to form an integrated
worldwide service organization providing comprehensive global professional and
traditional network services to customers who run critical applications over
their networks. In September 1997, the service division was
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incorporated as a wholly owned subsidiary of General DataComm, Inc. under the
name VITAL Network Services, L.L.C. ("VITAL"). A critical element of the newly
formed organization was the strategic decision to convert VITAL from a single
manufacturer support (i.e., GDC) organization to one capable of servicing
multiple manufacturers' equipment and technologies.
VITAL Services Offered
VITAL's traditional support services, which comprise the majority of its fiscal
1999 business, include installation, on-site maintenance, technical support,
logistics management and product repair. In addition, VITAL's professional
services portfolio includes network audits, performance consulting, design,
staging, rollout and integration services, project management, remote network
monitoring/management and educational services.
Worldwide services are provided by VITAL personnel and are augmented by
third-party service partners when necessary. Customer relationships and services
are managed from VITAL's global headquarters in the United States and four area
offices in North America, Mexico, United Kingdom and Singapore. High level VITAL
technical support engineers using centralized simulation labs provide VITAL
field engineers and customers remote assistance from the VITAL Technical
Assistance Centers ("V-TACs") located in each area office; the North America
V-TAC contains an additional global internetworking center.
VITAL Sales and Marketing
VITAL's customer base includes telecommunications carriers, corporate and
government network customers, distributors, value-added resellers, system
integrators, competitive local exchange carriers, internet service providers and
equipment manufacturers.
As noted above, VITAL has converted from a single manufacturer (i.e., GDC)
support organization to one capable of servicing multiple manufacturers'
equipment and technologies. Capable of working in integrated networks, VITAL has
received designations as a Cisco Professional Services Partner and Authorized
Support Provider, a Nortel Certified Support Expert and a 3Com Authorized
Service Provider. In addition, VITAL is the exclusive authorized (outside)
service provider for General DataComm Industries, Inc., ADC Kentrox, Eastern
Research, Ennovate Networks, Larscom, MCK, Olicom, AccessLan and Verilink. VITAL
has also established working relationships with other manufacturers. No
individual customer accounted for 10 percent or more of VITAL' fiscal 1999
revenue.
In October 1998, VITAL purchased all of Olicom Inc.'s (router manufacturer)
Canadian and United States network service business and their support center
located in Marlborough, Massachusetts. VITAL also hired approximately 30 of
their highly skilled internetworking technical personnel. Additionally, as of
November 1, 1999, VITAL assumed the responsibility for Olicom's technical and
warranty product support worldwide.
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In an effort to sustain revenue growth trends, VITAL plans to expand its direct
sales force with such personnel dedicated to selling VITAL services only. The
acquisition of synergistic service businesses would also offer growth
opportunity; no such acquistions are in progress at this time.
VITAL Competition
The network support service industry is intensely competitive, and there can be
no assurance that VITAL will successfully achieve its growth objectives.
VITAL Employees
At September 30, 1999, the Division had 299 dedicated employees. In addition,
the Division utilized Company support personnel as necessary (see "Company
Employee Relations" below).
DataComm Leasing Corporation ("DLC")
While the majority of the Corporation's products are sold on an outright basis,
the Corporation also leases its equipment through a wholly owned consolidated
subsidiary under a versatile selection of leasing programs designed to meet the
specific needs and objectives of its customers.
Manufacturing
The Company's manufacturing operation and its outsourcing partners service the
needs of the BSD and NAD business units.
Prior to fiscal 1999, the manufacturing operation had outsourced all power and
packaging assembly and test, and high-volume, through-hole printed circuit board
("PCB") assembly and test. In early fiscal 1999, the manufacturing operation
outsourced all residual through-hole PCB assembly and test. Furthermore, on
September 30, 1999, the Company entered into an agreement with the Matco
Electronics Group, Inc. ("Matco") to outsource the remainder of its principal
manufacturing operations (including surface mount printed circuit board assembly
and test). Transition of all surface mount PCB assembly and test to Matco's
manufacturing operations is targeted to be complete in January 2000.
At that point, GDC's manufacturing operation will be responsible for higher
level assembly and test on a build-to-order basis. Warehousing, distribution and
other miscellaneous services will also be provided by the manufacturing
operation.
After the transition to Matco is complete, the manufacturing operation will
occupy approximately 80,000 square feet, or 25%, of the 360,000 square foot
facility located in Naugatuck, Connecticut; 25% of the facility is being
utilized for other GDC operations and 50% will be vacant (as compared to 25%
vacancy during fiscal 1999).
GDC's Connecticut facilities continued to be ISO 9001 certified during fiscal
1999.
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Reliance on Key Components and Subcontractors: The Corporation's products use
certain components, such as microprocessors, memory chips and pre-formed
enclosures that are acquired or available from one or a limited number of
sources. The Corporation has generally been able to procure adequate supplies of
these components in a timely manner from existing sources. While most components
are standard items, certain application-specific integrated circuit chips used
in many of the Corporation's products are customized to the Corporation's
specifications. All suppliers of components do not operate under contract. The
Corporation's inability to obtain a sufficient quantity of components when
required or to develop alternative sources at acceptable prices and within a
reasonable time, could result in delays or reductions in product shipments which
could materially affect the Corporation's operating results in any given period.
In addition, as referenced above, the Company relies heavily on subcontractors
for production. The inability of such subcontractors to deliver products in a
timely fashion or in accordance with the Company's quality standards could
materially affect the Corporation's operating results.
Backlog
The Corporation's order backlog while one of several useful financial
statistics is, however, a limited indicator of the Corporation's future
revenues. Because of normally short delivery requirements, the Corporation's
sales in each quarter primarily depend upon orders received and shipped in that
same quarter. In addition, since product shipments are historically heavier in
the last month of each quarter, quarterly revenues can be adversely or
beneficially impacted by several events, including: unforeseen delays in product
shipments; large sales that close at the end of the quarter; sales order changes
or cancellations; changes in product mix; new product announcements by the
Corporation or its competitors; and the capital spending trends of customers.
Acquisition Strategy
As part of its business strategy, the Corporation has in the past reviewed
acquisition opportunities including those which may complement its product
lines, provide access to emerging technologies or enhance market penetration.
GDC's VITAL Network Services subsidiary acquired Olicom Inc.'s service business
in October 1998. The Corporation at this time has no understandings or
commitments to make any acquisitions, and there can be no assurances that any
acquisitions will be made.
Partnering/Divestiture Strategy
The Company's intent is to focus its resources on the three business units
(Broadband Systems Division, Network Access Division and VITAL Network
Services), to launch a new Multimedia Division and to sell or close
non-strategic assets to provide additional funds for operations and/or reduce
outstanding indebtedness of the Corporation.
On December 31, 1998 (effective as of December 22, 1998), the Company sold its
Technology Alliance Group division ("TAG"), which was identified as
non-strategic to the reorganized business units mentioned above. The division,
which developed, patented and licensed advanced modem and access technologies,
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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 and generated cash proceeds, net of expenses,
of approximately $12.0 million. Separately, in July 1999, the Company closed a
non-strategic remote technology center in England and consolidated any
development activities considered critical in its Connecticut research and
development facility.
At September 30, 1999, the Company is offering for sale its previous and now
vacant corporate headquarters facility in Middlebury, Connecticut, and three
buildings located in Wokingham and Basildon, England.
Regarding partnering strategy, the Company would consider partnering strategy
opportunities which it believes would result in enhanced financial performance
and/or shareholder value. The Corporation at this time has no understandings or
commitments to enter into any partnering agreement, and there can be no
assurances that any such partnering agreements will be made.
Competition
The telecommunications and networking industry is intensely competitive. Many of
the Company's current and prospective competitors have greater name recognition,
a larger installed base of networking products, more extensive engineering,
manufacturing, marketing, distribution and support capabilities and greater
financial, technological and personnel resources.
Specific competitors for the Company's individual business units were referenced
earlier in the discussion. Each competitor offers a unique solution and all are
formidable competitors. The Company believes it can maintain or grow its market
share for both broadband and access products through BSD and NAD, respectively,
as well as for services offered by VITAL. However, there can be no assurance
that the Company will be able to attain this objective.
Patents and Related Rights
The Corporation presently owns approximately 60 domestic patents and has
approximately 35 additional applications pending. In addition, all of these
patents and applications have been filed in Canada; most also have been filed in
other various foreign countries. Many of those filed outside the United States
have been allowed while the remainder are pending. The Corporation believes that
certain features relating to its equipment for which it has obtained patents or
for which patent applications have been filed are important to its business, but
does not believe that its success is dependent upon its ability to obtain and
defend such patents. Because of the extensive patent coverage in the data
communications industry and the rapid issuance of new patents, certain equipment
of the Corporation may involve infringement of existing patents not known to the
Corporation.
14
<PAGE>
Company Employee Relations
At September 30, 1999, the Corporation employed 1,118 persons, of whom 315 were
BSD positions, 135 were NAD positions, 299 were VITAL positions, 246 were
Manufacturing positions, 5 were DataComm Leasing Corporation positions, 12 were
general corporate management positions and 106 were shared support-service
positions. The shared support functions included information technology,
corporate finance, human resource management, marketing support groups,
facilities maintenance and other miscellaneous functions.
In January 2000 the Corporation reduced its workforce by more than 100 positions
as a result of the outsourcing of its manufacturing operations.
No Company employees are covered by collective bargaining agreements. The
Company has never experienced a work stoppage and considers its relations with
its employees to be good.
15
<PAGE>
ITEM 2. PROPERTIES
The principal facilities of the Corporation are as follows:
Middlebury, Connecticut - former executive offices of the Corporation
(vacant as of September 30, 1999); a 120,000
square-foot facility owned by the
Corporation; the facility is listed for sale
or lease at September 30, 1999
Naugatuck, Connecticut - manufacturing operations, as discussed above,
and worldwide headquarters for VITAL Network
Services, L.L.C.; a 360,000 square-foot
facility owned by the Corporation
Middlebury, Connecticut - executive offices of the Corporation and
DataComm Leasing Corporation; also houses the
management teams, marketing and engineering
operations of the Broadband Systems and
Network Access divisions; a 275,000
square-foot facility leased through 2003 by
the Corporation; approximately 72,000 square
feet are subleased to a third party through
June 30, 2001
Wokingham, England - sales, service, and administrative offices
(including a parking garage) located in a
36,000 square-foot facility owned by
General DataComm Limited
Toronto, Canada - sales and administrative offices located in a
12,000 square-foot facility leased through
November 1999 by General DataComm Ltd.;
effective November 1999, operations moved to
a 3,600 square-foot facility elsewhere in
Toronto, Canada
Montreal, Canada - a 20,000 square-foot research, sales and
service facility leased through February 2000
by General DataComm Ltd.
Paris, France - sales, service and administrative offices
located in an 5,500 square-foot facility
leased through April 2006 by General DataComm
France SARL
Mexico City, Mexico - sales, service and administrative offices
located in a 3,230 square-foot facility
leased through June 14, 2001 by General
DataComm de Mexico S.A. de C.V.
16
<PAGE>
ITEM 2. PROPERTIES (cont'd)
Basildon, England - two buildings totaling 8,500 square feet
owned by General DataComm Advanced Research
Centre Limited, whose operations were
closed in July 1999; facilities are listed
for sale or lease at September 30, 1999, one
of which was sold in late December 1999
In addition, the Corporation leases sales, service and engineering offices
throughout the United States and in international locations.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the
section entitled "Common Stock Prices" on page 17 of the Corporation's 1999
Annual Report to Stockholders.(1)
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from the
section entitled "Five-Year Selected Financial Data" on page 8 of the
Corporation's 1999 Annual Report to Stockholders.(1)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information required by this item is incorporated by reference from the
section entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 9 through 17 of the Corporation's 1999 Annual
Report to Stockholders.(1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from
pages 18 through 39 of the Corporation's 1999 Annual Report to Stockholders or
is included elsewhere in this annual report on Form 10-K.(1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
_____________________
1. Such information is also included in Exhibit 13 of this Form 10-K report as
filed with the Securities and Exchange Commission.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors is incorporated by reference from the
section "ELECTION OF DIRECTORS" in the Corporation's Proxy Statement for the
2000 Annual Meeting of Stockholders, which Proxy Statement will be filed within
120 days after the end of the Corporation's fiscal year ended September 30,
1999.
Name Position Age
- ---- -------- ---
Charles P. Johnson Chairman of the Board of Directors
and Chief Executive Officer 72
Ross A. Belson President and Chief Operating Officer 63
William G. Henry Vice President, Finance and
Chief Financial Officer 50
Frederick R. Cronin Vice President, Corporate Technology
and a Director 68
Robert S. Smith Vice President, Business Development 66
James R. Arcara Vice President, Corporate Operations 64
Dennis J. Nesler Vice President and Treasurer 56
P. John Woods President, VITAL Network Services, L.L.C. 51
Keith A. Mumford Vice President, and General Manager of the
Broadband Systems Division 35
Howard S. Modlin Secretary and a Director 68
____________________________
Mr. Charles P. Johnson, Chairman of the Board and Chief Executive Officer,
founded the Corporation in 1969.
Mr. Ross A. Belson, President and Chief Operating Officer, has served in his
present capacity since joining the Corporation in August of 1987.
19
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
Mr. William G. Henry, Vice President, Finance and Chief Financial Officer,
joined the Corporation as Corporate Controller in January 1984, was appointed an
officer of the Corporation in June 1989, was elected Vice President in February
1996 and was promoted to his current position in February 1999.
Mr. Frederick R. Cronin, Vice President, Corporate Technology, has served in
executive capacities since the founding of the Corporation.
Mr. Robert S. Smith, Vice President, Business Development, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since February 1973.
Mr. James R. Arcara, Vice President, Corporate Operations, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since September 1978.
Mr. Dennis J. Nesler, Vice President and Treasurer since May 1987 and Treasurer
since July 1981, joined the Corporation in 1979 as Vice President of the
Corporation's wholly owned leasing subsidiary, a capacity in which he still
serves.
Mr. P. John Woods, President, VITAL Network Services, L.L.C., has been with the
Corporation since February 1993, and was appointed to his current position
effective October 1996. Before joining the Corporation, Mr. Woods held positions
with Digital Equipment Corporation and Philips.
Mr. Keith A. Mumford, Vice President and General Manager of the Corporation's
Broadband Systems Division, has been with the Corporation since 1993. He was
elected an officer in October 1998 and elected to his current position in
December 1998.
Mr. Howard S. Modlin, Secretary, an attorney and president of the firm of
Weisman Celler Spett & Modlin P.C., has been Secretary and counsel to the
Corporation since its formation.
20
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Executive Compensation and other Transactions with Management"
to be contained in the Corporation's Proxy Statement for its March 2, 2000
Annual Meeting.(1)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Directors and Officers" to be contained
in the Corporation's Proxy Statement for its March 2, 2000 Annual Meeting.(1)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Executive Compensation and other Transactions with Management"
to be contained in the Corporation's Proxy Statement for its March 2, 2000
Annual Meeting.(1)
______________________________
1 The Corporation's Proxy Statement will be filed with the Commission within 120
days after the end of the Corporation's fiscal year ended September 30, 1999.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - see "Index to Financial Statements and
Schedules" on page F-1 of this report.
(2) Financial Statement Schedule - See "Index to Financial Statements and
Schedules" on page F-1 of this report.
(3) Exhibits - See Exhibit Index on page 23 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September 30,
1999.
22
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (cont'd)
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Corporation (1)
3.2 Amended By-Laws of the Corporation (2)
4.1 Certificate of the Powers, Designation, Preferences, Rights and
Limitations of 9% Cumulative Convertible Exchangeable Preferred
Stock (3)
4.2 Indenture dated May 1, 1997 covering presently unissued 9%
Convertible Subordinated Debentures due 2006 (4)
4.3 Supplemental indenture, dated September 26, 1997, which amends
the May 1, 1997 Indenture covering presently unissued 9%
Convertible Subordinated Debentures due 2006 (5)
4.4 Indenture dated September 26, 1997 covering issued 7-3/4%
Convertible Senior Subordinated Debentures due 2002 (6)
10.1 Transfer of Receivables Agreement between DataComm Leasing
Corporation and Sanwa Business Credit Corporation (7)
10.2 1979 Employee Stock Purchase Plan (8)
10.3 1983 Stock Option Plan (9)
10.4 1984 Incentive Stock Option Plan, and related amendments (10)
10.5 1985 Stock Option Plan (11)
10.6 1991 Stock Option Plan (12)
10.7 1998 Stock Option Plan (13)
10.8 Retirement Savings and Deferred Profit Sharing Plan, and related
amendments (14)
10.9 Credit Agreement between General DataComm Industries, Inc. and
The Chase Manhattan Bank (15)
10.10 Loan Agreement between General DataComm Industries, Inc., et al.,
and Foothill Capital Corporation (16)
10.11 First Amendment to, and Amendment Number Two to the Loan and
Security Agreement between General DataComm Industries, Inc.,
et al., and Foothill Capital Corporation
10.12 Outsource Manufacturing and Purchase Agreement between General
DataComm, Inc. and the Matco Electronics Group, Inc.
13. Annual Report to Stockholders for the year ended September 30,
1999. Portions of the Annual Report to Stockholders for the year
ended September 30, 1999 which have been incorporated by
reference are deemed to be "filed" (and are included as Exhibit
13 in our electronic filing with the Commission). All remaining
portions of the Annual Report to Stockholders will be furnished
for the information of the Commission and are not deemed "filed"
21. Subsidiaries of the Registrant
23. Consent of Independent Accountants
_______________________
1 Incorporated by reference from Exhibit 3.1 to Form 10-Q for quarter ended
June 30, 1999.
2 Incorporated by reference from Exhibit 3.2 to Form 10-Q quarter ended
June 30, 1999.
23
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (cont'd)
EXHIBIT INDEX (cont'd)
3 Incorporated by reference from Exhibit 4 to Form 8-K dated October 8,1996.
4 Incorporated by reference from Exhibit 4.1 to Form 10-Q for quarter ended
June 30, 1997.
5 Incorporated by reference from Exhibit 4.3 to Form 10-K for the year ended
September 30, 1997.
6 Incorporated by reference from Exhibit 4 to Form 8-K dated October 8, 1997
7 Incorporated by reference from Exhibit 10.1 to Form 10-Q for quarter ended
June 30, 1989
8 Incorporated by reference from Part II of prospectus dated August 31,
1999, contained in Form S-8, Registration Statement No. 333-86229.
9 Incorporated by reference from Exhibit 1(c) to Form S-8, Registration
Statement No. 2-92929. Amendments thereto are incorporated by reference
and filed as Exhibit 10.3 to Form 10-Q for quarter ended December 31, 1987
and as Exhibit 10.3.1 to Form 10-Q for quarter ended June 30, 1991.
10 Incorporated by reference from Exhibit 1(a), Form S-8, Registration
Statement No.2-92929. Amendments thereto are incorporated by reference and
filed as Exhibit 10.2 to Form 10-Q for quarter ended June 30, 1991,
Exhibit 10.19 to Form 10-K for year ended September 30, 1987 and Exhibit
10.2 to Form 10-Q for quarter ended December 31, 1987.
11 Incorporated by reference from Exhibit 10a, Form S-8, Registration
Statement No. 33-21027. Amendments thereto are incorporated by reference
from Part II of prospectus dated August 21, 1990, contained in Form S-8,
Registration Statement No. 33-36351 and as Exhibit 10.3.2 to Form 10-Q for
quarter ended June 30, 1991.
12 Incorporated by reference from Form S-8, Registration Statement No.
333-35299.
13 Incorporated by reference from Form S-8, Registration Statement No.
333-89571
14 Incorporated by reference from Form S-8, Registration Statement No.
33-37266. Amendments thereto are incorporated by reference to Exhibit
10.16 to Form 10-Q for the quarter ended December 31, 1996.
15 Incorporated by reference from Exhibit 10.21 to Form 10-K for the year
ended September 30, 1993.
16 Incorporated by reference from Exhibit 10.1 to Form 8-K dated May 14,1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GENERAL DATACOMM INDUSTRIES, INC.
By: /S/ WILLIAM G. HENRY
William G. Henry
Vice President, Finance and
Principal Financial Officer
Dated: January 13, 2000
25
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/S/ CHARLES P. JOHNSON Chairman of the Board January 13, 2000
CHARLES P. JOHNSON and Chief Executive Officer
/S/ WILLIAM G. HENRY Vice President, Finance January 13, 2000
WILLIAM G. HENRY Chief Financial Officer
/S/ HOWARD S. MODLIN Director and Secretary January 13, 2000
HOWARD S. MODLIN
/S/ FREDERICK R. CRONIN Director and January 13, 2000
FREDERICK R. CRONIN Vice President, Corporate
Technology
/S/ LEE M. PASCHALL Director January 13, 2000
LEE M. PASCHALL
/S/ JOHN L. SEGALL Director January 13, 2000
JOHN L. SEGALL
26
<PAGE>
General DataComm Industries, Inc.
and Subsidiaries
Index to Financial Statements and Schedules
Financial Statements Incorporated by Reference
The consolidated financial statements of General DataComm Industries, Inc. and
Subsidiaries and the Report of Independent Accountants related thereto are
incorporated herein by reference from pages 18 through 39 of the Corporation's
Annual Report to Stockholders for the year ended September 30, 1999. Such
information is also included in Exhibit 13 of this Form 10-K report (as filed
with the Securities and Exchange Commission). The Corporation's 1999 Annual
Report to Stockholders is not deemed to be "filed" as part of this Form 10-K
report except for those portions thereof specifically incorporated by reference.
Financial Statements and Schedule Included Page
- ------------------------------------------ ----
Report of Independent Accountants F-2
Consolidated Financial Statement Schedule:
II. Valuation and qualifying accounts for the years
ended September 30, 1999, 1998 and 1997. F-3
Financial Statements and Schedules Omitted
Financial statements and schedules other than those incorporated by reference
above or included herein are omitted because they are not required or because
the required information is presented elsewhere in the financial statements or
notes thereto.
F-1
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors of General DataComm Industries, Inc.
Our report on the consolidated financial statements of General DataComm
Industries, Inc. and its subsidiaries has been incorporated by reference in this
Form 10-K from page 39 of the fiscal 1999 Annual Report to Shareholders of
General DataComm Industries, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/S/ PricewaterhouseCoopers LLP
Stamford, Connecticut
October 29, 1999, except for Note 7 and Note 16
for which the date is December 31, 1999
F-2
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended September 30, 1999, 1998 and 1997
(In Thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- ---------- ---------- ---------
(b)
1999
Allowance for doubtful
receivables (a) $1,442 $183 $250 $1,375
====== ==== ==== ======
1998
Allowance for doubtful
receivables (a) $1,703 $22 $283 $1,442
====== ==== ==== ======
1997
Allowance for doubtful
receivables (a) $1,768 $285 $350 $1,703
====== ==== ==== ======
- -------------------------------------------------
(a) Deducted from asset accounts.
(b) Uncollectible accounts written off, net of recoveries.
F-3
FIRST AMENDMENT
TO LOAN AGREEMENT
FIRST AMENDMENT, dated as of September 30, 1999 (the
"Amendment"), to the Loan Agreement referred to below, by and among (i) GENERAL
DATACOMM INDUSTRIES, INC., a Delaware corporation, GENERAL DATACOMM, INC., a
Delaware corporation ("GDC"), DATACOMM LEASING CORPORATION, a Delaware
corporation, VITAL NETWORK SERVICES, L.L.C., a Delaware limited liability
company, GDC NAUGATUCK, INC., a Delaware corporation, GDC FEDERAL SYSTEMS, INC.,
a Delaware corporation (each, a "Borrower" and collectively, the "Borrowers"),
(ii) FOOTHILL CAPITAL CORPORATION, as a lender ("Foothill"), (iii) ABLECO
FINANCE LLC, as a lender ("Ableco"), (iv) MADELEINE L.L.C., as a lender
("Madeleine" and together with Foothill and Ableco, the "Lenders"), and (v)
FOOTHILL CAPITAL CORPORATION, as agent for the Lenders (the "Agent").
WHEREAS, the Borrowers, the Agent and the Lenders are parties
to the Loan and Security Agreement dated as of May 14, 1999 (the "Loan
Agreement"), pursuant to which the Lenders have agreed to make certain loans to
the Borrowers secured by the Collateral (as defined in the Loan Agreement);
WHEREAS, GDC has requested that the Agent (on behalf of the
Lenders) release its lien on certain equipment (the "Subject Equipment")
identified in the Outsource Manufacturing and Purchase Agreement dated as of
September 30, 1999 (the "Purchase Agreement"), between GDC and The Matco
Electronics Group, Inc. (the "Purchaser"), pursuant to which GDC will sell the
Subject Equipment to the Purchaser;
WHEREAS, the Agent is willing to release its lien on the
Subject Equipment, subject to (i) the execution and delivery of this Amendment
by the Borrowers, and (ii) the other terms and conditions set forth in this
Amendment; and
WHEREAS, each Borrower has determined that its execution,
delivery and performance of this Amendment directly benefit, and are within the
corporate purposes and in the best interests of, such Borrower;
NOW THEREFORE, in consideration of the premises and other good
and valuable consideration, the parties hereto hereby agree as follows:
1.1 Definitions in Amendment. Any capitalized term used herein
and not defined shall have the meaning assigned to it in the Loan Agreement.
1.2 First Amendment Effective Date. Section 1.1 of the Loan
Agreement is hereby amended by inserting, in appropriate alphabetical order, a
definition of the term "First Amendment Effective Date" to read in its entirety
as follows:
<PAGE>
"'First Amendment Effective Date' means the date on which all
of the conditions precedent to the effectiveness of the First Amendment
to Loan Agreement dated as of September 30, 1999, by and among the
Borrowers, the Lenders and the Agent, have been fulfilled or waived."
1.3 Disposal of Assets. Section of 7.4 of the Loan Agreement is
hereby amended to read in its entirety as follows:
"Sell, lease, assign, transfer, or otherwise dispose of any of
such Borrower's properties or assets other than, (i) sales of Inventory
to buyers in the ordinary course of such Borrower's business as
currently conducted, (ii) the sale of ARC, or (iii) the sale of the
Middlebury Real Property."
1.4. Conditions Subsequent. Section 3.3 of the Loan Agreement is
hereby amended by inserting a new paragraph (f) at the end of such Section to
read as follows:
"(f) within 60 days after the First Amendment Effective Date,
Agent shall have received appraisals of the Borrowers' asynchronous
transfer mode technology and of Vital's business, from appraisers
acceptable to the Agent, satisfactory in form and substance to Agent."
2. Conditions. The effectiveness of this Amendment is
subject to the fulfillment, in a manner satisfactory to the Agent, of each of
the following conditions precedent (the date such conditions are fulfilled or
waived by the Lender is hereinafter referred to as the "Amendment Effective
Date"):
(a) Representations and Warranties; No Event of Default. The
representations and warranties contained herein, in Section 5 of the Loan
Agreement and in each other Loan Document and certificate or other writing
delivered to the Agent or any Lender pursuant hereto on or prior to the
Amendment Effective Date shall be correct on and as of the Amendment Effective
Date as though made on and as of such date, except to the extent that such
representations and warranties (or any schedules related thereto) expressly
relate solely to an earlier date (in which case such representations and
warranties shall be true and correct on and as of such date); and no Default or
Event of Default shall have occurred and be continuing on the Amendment
Effective Date or would result from this Amendment becoming effective in
accordance with its terms.
(b) Delivery of Documents. The Lender shall have received on
or before the Amendment Effective Date the following, each in form and substance
satisfactory to the Agent and, unless indicated otherwise, dated the Amendment
Effective Date:
(i) the Agent shall have received a true and
correct copy of the Purchase Agreement, certified by an authorized officer of
the Administrative Borrower; and
(ii) such other agreements, instruments,
approvals, opinions and other documents as the Agent may reasonably request.
2
<PAGE>
(c) Proceedings. All proceedings in connection with the
transactions contemplated by this Amendment, and all documents incidental
thereto, shall be satisfactory to the Agent and its special counsel, and the
Agent and such special counsel shall have received all such information and such
counterpart originals or certified copies of documents, and such other
agreements, instruments, approvals, opinions and other documents, as the Agent
or such special counsel may reasonably request.
5. Representations and Warranties. Each Borrower hereby
represents and warrants to the Agent and the Lenders as follows:
(a) Representations and Warranties; No Event of Default. The
representations and warranties herein, in Section 5 of the Loan Agreement and in
each other Loan Document and certificate or other writing delivered to the Agent
or any Lender pursuant hereto on or prior to the Amendment Effective Date are
correct on and as of the Amendment Effective Date as though made on and as of
such date, except to the extent that such representations and warranties (or any
schedules related thereto) expressly relate solely to an earlier date (in which
case such representations and warranties are true and correct on and as of such
date); and no Default or Event of Default has occurred and is continuing on the
Effective Date or would result from this Amendment becoming effective in
accordance with its terms.
(b) Organization, Good Standing, Etc. Such Loan Party (i) is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its organization, (ii) has all requisite power and authority to
execute, deliver and perform this Amendment and the other Loan Documents to
which it is a party being executed in connection with this Amendment, and to
perform the Loan Agreement, as amended hereby, and (iii) is duly qualified to do
business and is in good standing in each jurisdiction in which the character of
the properties owned or leased by it or in which the transaction of its business
makes such qualification necessary except where the failure to be so qualified
reasonably could not be expected to have a Material Adverse Change.
(c) Authorization, Etc. The execution, delivery and
performance by such Loan Party of this Amendment and each other Loan Document to
which it is a party being executed in connection with this Amendment, and the
performance by such Loan Party of the Loan Agreement, as amended hereby, (i)
have been duly authorized by all necessary action, (ii) do not and will not
contravene such Loan Party's charter or by-laws, any applicable law or any
contractual restriction binding on or otherwise affecting it or any of its
properties, (iii) do not and will not result in or require the creation of any
Lien (other than pursuant to any Loan Document) upon or with respect to any of
its properties, and (iv) do not and will not result in any suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to its operations or any of its properties.
6. Consent. By executing this Amendment, each Lender hereby
consents to (i) the sale of the Subject Equipment by GDC to the Purchaser
pursuant to the Purchase Agreement and (ii) the release of the Agent's lien on
the Subject Equipment.
3
<PAGE>
7. Miscellaneous.
(a) Continued Effectiveness of the Loan Agreement. Except as
otherwise expressly provided herein, the Loan Agreement and the other Loan
Documents are, and shall continue to be, in full force and effect and are hereby
ratified and confirmed in all respects, except that on and after the Amendment
Effective Date (i) all references in the Loan Agreement to "this Agreement",
"hereto", "hereof", "hereunder" or words of like import referring to the Loan
Agreement shall mean the Loan Agreement as amended by this Amendment, and (ii)
all references in the other Loan Documents to which any Borrower is a party to
the "Loan Agreement", "thereto", "thereof", "thereunder" or words of like import
referring to the Loan Agreement shall mean the Loan Agreement as amended by this
Amendment. Except as expressly provided herein, the execution, delivery and
effectiveness of this Amendment shall not operate as an amendment of any right,
power or remedy of the Lender under the Loan Agreement or any other Loan
Document, nor constitute an amendment of any provision of the Loan Agreement or
any other Loan Document.
(b) Counterparts. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement.
(c) Headings. Section headings herein are included for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
(d) Governing Law. This Amendment shall be governed by,
and construed in accordance with, the law of the State of New York.
(e) Costs and Expenses. The Borrowers jointly and severally
agree to pay on demand all fees, costs and expenses of the Agent and each Lender
in connection with the preparation, execution and delivery of this Amendment and
the other related agreements, instruments and documents.
(f) Amendment as Loan Document. Each Borrower hereby
acknowledges and agrees that this Amendment constitutes a "Loan Document" under
the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan
Agreement if (i) any representation or warranty made by a Borrower under or in
connection with this Amendment shall have been untrue, false or misleading in
any material respect when made, or (ii) a Borrower shall fail to perform or
observe any term, covenant or agreement contained in this Amendment.
(g) Waiver of Jury Trial. EACH BORROWER, THE AGENT AND THE
LENDER EACH HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE)
ARISING OUT OF OR RELATING TO THIS AMENDMENT OR THE ACTIONS OF THE AGENT OR ANY
LENDER IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed and delivered as of the date first above written.
Borrowers:
GENERAL DATACOMM INDUSTRIES, INC.,
a Delaware corporation
By /S/ DENNIS J. NESLER
Title: V.P. & Treasurer
GENERAL DATACOMM, INC.,
a Delaware corporation
By /S/ DENNIS J. NESLER
Title: V.P. & Treasurer
DATACOMM LEASING CORPORATION,
a Delaware corporation
By /S/ DENNIS J. NESLER
Title: V.P. & Treasurer
VITAL NETWORK SERVICES, L.L.C.,
a Delaware limited liability company
By /S/ DENNIS J. NESLER
Title: V.P. & Treasurer
GDC FEDERAL SYSTEMS, INC.,
a Delaware corporation
By /S/ DENNIS J. NESLER
Title: V.P. & Treasurer
<PAGE>
GDC NAUGATUCK, INC.,
a Delaware Corporation
By /S/ DENNIS J. NESLER
Title: V.P. & TREASURER
Agent and Lender:
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /S/ PETER DROOFF
Title: Vice President
Lenders:
ABLECO FINANCE LLC,
a Delaware limited liability company
By /S/
Title:
MADELEINE L.L.C.,
a New York limited liability company
By /S/
Title: Vice President
<PAGE>
AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
This AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), dated as of December 30, 1999, is entered into by and among
GENERAL DATACOMM INDUSTRIES, INC., a Delaware corporation ("Parent"), GENERAL
DATACOMM, INC., a Delaware corporation ("General DataComm"), DATACOMM LEASING
CORPORATION, a Delaware corporation ("DataComm Leasing"), GDC FEDERAL SYSTEMS,
INC., a Delaware corporation ("GDC Federal"), VITAL NETWORK SERVICES, L.L.C., a
Delaware limited liability company ("Vital"), and GDC NAUGATUCK, INC., a
Delaware corporation ("GDC Naugatuck", and together with the Parent, General
DataComm, DataComm Leasing, GDC Federal and Vital, each a "Borrower" and
collectively the "Borrowers"), each of the financial institutions signatories
hereto (such financial institutions, together with their respective successors
and assigns, each a "Lender" and collectively, the "Lenders"), and FOOTHILL
CAPITAL CORPORATION, a California corporation, as agent for the Lenders (in such
capacity, the "Agent").
WHEREAS, the Borrowers have requested the Lender Group to
amend certain terms of that certain Loan and Security Agreement, dated as of May
14, 1999, by and among the Borrowers, the Lenders, and Agent (as amended,
restated, supplemented, or otherwise modified from time to time, the "Loan
Agreement"), and the Lender Group is willing to amend the Loan Agreement subject
to the terms and conditions of this Amendment. All capitalized terms used herein
and not defined herein shall have the meanings ascribed to them in the Loan
Agreement, as amended hereby.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants, agreements and conditions hereinafter set forth, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Amendments.
(a) Section 1.1 of the Agreement is hereby amended by adding the following
definitions in alphabetical order:
"Applicable Period" shall mean (a) with respect to
each of the first, second, or third fiscal quarter of the Parent's
fiscal year, 45 days after the end of such fiscal quarter, and (b) with
respect to the fourth fiscal quarter of the Parent's fiscal year, 90
days after the end of such fiscal quarter.
"Net Worth Reserve" shall mean, as of any date of
determination, an amount equal to: (a) $3,500,000, if the Net Worth of
Parent is less than $15,000,000; (b) $1,500,000, if the Net Worth of
Parent is greater than or equal to $15,000,000 and less
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than $18,131,000; and (c) $-0-, if the Net Worth of Parent is greater
than or equal to $18,131,000.
"Second Amendment" means that certain Amendment
Number Two to Loan and Security Agreement, dated as of December 30,
1999, by and among the Borrowers and the Lender Group.
"Second Amendment Closing Date" means the date that
the Second Amendment initially became effective by its terms.
"Term B Loan Conversion Price" means $5.00 per share
of Common Stock, subject to adjustment as provided in Section 15.
"Term B Loan Lender Registration Rights Agreement"
means that certain Registration Rights Agreement, dated as of the
Closing Date, by and between the Parent and the Term B Loan Lender,
with respect to the shares of Common Stock that Term B Loan Lender may
acquire and certain rights associated with such shares.
"Term C Loan" has the meaning set forth in Section
2.4(a)(iii).
"Term C Loan Commitment" means the amount set forth
opposite such Lender's name on Schedule C-1 as such Lender's "Term C
Loan Commitment", as the same may be adjusted from time to time
pursuant to the terms of this Agreement.
"Term C Loan Conversion Price" means $9.00 per share
of Common Stock, subject to adjustment as provided in Section 15;
provided, however, that, solely in the event that any "daily closing
price" (as such term is defined below) during the period between
December 29, 1999 and the Second Amendment Closing Date is $6.00 per
share or less, then the Term C Loan Conversion Price instead shall mean
a price per share of Common Stock equal to the lower of (a) $9.00 and
(b) the product of (i) 1.35 times (ii) the "Alternate Base Price" as of
the Second Amendment Closing Date, subject to adjustment as provided in
Section 15. For purposes of this definition, the "Alternate Base Price"
on any date of determination shall be the average of the daily closing
prices for the immediately preceding 10 consecutive Trading Days. For
purposes of this definition, the closing price for each day (i.e., a
"daily closing price") shall be the last reported sales price or, in
case no such reported sale takes place on such date, the average of the
reported closing bid and asked prices in either case on the New York
Stock Exchange or, if Common Stock is not listed or admitted to trading
on the New York Stock Exchange, on the principal national securities
exchange on which Common Stock is listed or admitted to trading or, if
not listed or admitted to trading on any national securities exchange,
the closing sales price of Common Stock as quoted by NASDAQ or, in case
no reported sales takes place, the average of the closing bid and asked
prices as quoted by NASDAQ or any comparable system or, if Common Stock
is not quoted on NASDAQ or any comparable system, the closing sales
price or, in case no reported sale takes place, the average of the
closing bid and asked prices, as furnished by any two members of the
National Association of Securities Dealers, Inc. selected from time to
time by the Parent for that purpose.
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"Term C Loan Lender" has the meaning set forth in
Section 15.1.
"Term C Loan Lender Registration Rights Agreement"
means the Registration Rights Agreement, in form and substance
substantially similar to the Term B Loan Lender Registration Rights
Agreement, by and between the Parent and the Term C Loan Lender, with
respect to the shares of Common Stock that Term C Loan Lender may
acquire and certain rights associated with such shares.
(b) Section 1.1 of the Agreement is hereby amended by amending and
restating the following definitions in their respective entirety as follows:
"Commitment" means, as to any Lender, the Revolving
Credit Commitment of such Lender, the Term A Loan Commitment of such
Lender, the Term B Loan Commitment of such Lender, and the Term C Loan
Commitment of such Lender, as applicable, and "Commitments" means,
collectively, the aggregate amount of the Commitments of the Lenders.
"Conversion Price" shall mean, as the context
requires, (a) the Term B Loan Conversion Price, or (b) the Term C Loan
Conversion Price. Without limiting the generality of the foregoing, the
term "Conversion Price" shall mean the Term B Loan Conversion Price if
such term is used in the context of Term B Loan (including the
conversion thereof) and shall mean the Term C Loan Conversion Price if
such term is used in the context of Term C Loan (including the
conversion thereof).
"Maximum Revolving Amount" shall mean $35,000,000.
"Pro Rata Share" shall mean, with respect to a
Lender, a fraction (expressed as a percentage), the numerator of which
is the amount of such Lender's Commitment and the denominator of which
is the aggregate amount of the Commitments, provided that, if the
Commitments have been reduced to zero, the numerator shall be the
aggregate unpaid principal amount of such Lender's Advances and Term
Loans and interest in Letter of Credit Obligations and the denominator
shall be the aggregate unpaid principal amount of all of the Advances,
the Term Loans and Letter of Credit Obligations. If and to the extent
that, pursuant to Section 16.1 hereof, an assignor Lender makes in
favor of an Assignee a non-ratable assignment of 100% of the
Commitments in respect of the Term A Loan and the Term Loan Obligations
with respect to the Term A Loan, or the Term B Loan and the Term Loan
Obligations with respect to the Term B Loan, or the Term C Loan and the
Term Loan Obligations with respect to the Term C Loan, then, anything
in the Loan Agreement or the other Loan Documents to the contrary
notwithstanding, for purposes of determining "ratability" among the
Lenders under the Loan Agreement and the other Loan Document: (a) when
used in the context of a Lender's obligation or Commitment to make the
Term A Loan or the Term B Loan or the Term C Loan, as the case may be,
or a Lender's right to receive payments in respect of the Term Loan
Obligations with respect to the Term A Loan or the Term B Loan or the
Term C Loan, as the case may be, the term "Pro Rata Share" shall mean
(i) 100% with respect to such Assignee and (ii) -0-% with respect to
such assignor Lender; (b) when used in the
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context of a Lender's obligation or Commitment to make Advances or
participate in Letters of Credit or a Lender's right to receive
payment in respect of the Other Obligations, the term "Pro Rata Share"
shall mean (i) 100% with respect to the assignor Lender and (ii) -0-%
with respect to the Assignee; (c)from and after the Closing Date, the
then outstanding principal amount of the Term Loans shall be deemed
to be the amount of the total Commitments in respect of the Term
Loans; and (d) in all other cases, the term "Pro Rata Share" shall
have the meaning set forth in the first sentence of this definition.
"Registration Rights Agreement" means, collectively,
the Term B Loan Lender Registration Rights Agreement and the Term C
Loan Lender Registration Rights Agreement.
"Term Loans" means, collectively, the Term A Loan,
the Term B Loan, and the Term C Loan.
(c) Clause (z) of the definition of "Borrowing Base" set forth in Section
2.1(a) of the Loan Agreement hereby is amended and restated in its entirety to
read as follows:
(z) the Net Worth Reserve and the aggregate amount
of reserves, if any, established by Agent under Section 2.1(b).
(d) The following hereby is added to the Loan Agreement as a new Section
2.4(a)(iii) in proper alphanumerical order:
(iii) Subject to the terms and conditions of this
Agreement, each Lender that has a Term C Loan Commitment severally
agrees to make a term loan on the Second Amendment Closing Date
(collectively, the "Term C Loan") to Borrowers in the original
aggregate principal amount equal to such Lender's Term C Loan
Commitment. The outstanding principal amount of the Term C Loan (after
giving effect to any conversions pursuant to Section 15 hereof) shall
be repaid in quarterly installments of principal equal to $1,000,000.
Each such installment shall be due and payable on the last day of each
March, June, September, and December, commencing on March 31, 2001 and
continuing on the last day of each succeeding March, June, September,
and December until and including the date on which the unpaid balance
of the Term C Loan is paid in full or has been converted pursuant to
Section 15 hereof. At the Term C Loan Lender's sole discretion and upon
the Term C Loan Lender's delivery of not less than 3 Business Days
prior written notice to Agent and Borrower, one or more scheduled
principal payments due in respect of the Term C Loan may be deferred
until the Maturity Date. The outstanding principal balance and all
accrued and unpaid interest under the Term C Loan shall be due and
payable upon the termination of this Agreement (or all Revolving Credit
Commitments), whether by its terms, by prepayment, by acceleration, or
otherwise. If and only if the Term A Loan has been repaid in full and
the Term B Loan has been repaid and/or converted in full, the unpaid
principal balance of the Term C Loan may be prepaid in whole or in part
without penalty or premium at any time during the term of this
Agreement upon 30 days prior written notice by Borrowers to Agent, all
such prepaid amounts shall be applied to the installments due on the
Term C Loan in the inverse order
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<PAGE>
of their maturity; provided, however, that (A) notwithstanding anything
herein to the contrary, the Term C Loan Lender shall have the right to
convert up to $4,000,000 of the outstanding principal amount of the
Term C Loan into shares of Common Stock, pursuant to Section 15 of this
Agreement, at any time during the 30 day period after the Borrowers'
delivery of written notice of the proposed prepayment of the Term
C Loan and (B) no such prepayment of the Term C Loan shall be made
unless, both before and after giving effect thereto, availability is
not less than $1,000,000. All amounts outstanding under the Term C
Loan shall constitute Obligations.
(e) Section 2.5(b)(i) of the Loan Agreement hereby is amended and restated
in its entirety to read as follows:
(b) Apportionment, Application of Payments, and
Reversal of Payments. (i) Except as otherwise provided with respect to
Defaulting Lenders, aggregate principal and interest payments shall be
apportioned ratably among the Lenders (according to the unpaid
principal balance of each Lender's Advances and Term Loans as to which
such payments relate), and payments of the fees (other than fees
designated for Agent's sole and separate account) shall, as applicable,
be apportioned ratably among the Lenders. All payments shall be
remitted to Agent and all such payments not relating to principal of or
interest on specific Advances or the Term Loans (other than payments
constituting payment of specific fees) and all proceeds of Collateral
received by Agent pursuant to this Agreement or any other Loan
Document, shall be applied:
first, to pay any fees or Lender Group Expenses then
due to Agent from Borrowers until paid in full;
second, to pay any fees or Lender Group Expenses then
due to Lenders from Borrowers;
third, to pay interest due in respect of all Foothill
Loans and Agent Advances until paid in full;
fourth, to pay interest due in respect of all Advances
(other than Foothill Loans and Agent Advances) until paid in full;
fifth, so long as no Event of Default has occurred
and is continuing or, if an Event of Default has occurred and is continuing and
Agent agrees in its sole discretion, to pay interest due in respect of the Term
Loans until paid in full (if an Event of Default has occurred and is continuing
and Agent has not so agreed, the priority of such amounts is deferred to item
"ninth");
sixth, to pay or prepay principal of Foothill Loans
and Agent Advances until paid in full;
seventh, ratably to pay principal of the Advances
(other than Foothill Loans and Agent Advances);
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eighth, to be held by Agent as cash collateral in
accordance with Section 2.2(e) hereof with respect to unreimbursed obligations
in respect of Letters of Credit until paid in full;
ninth, to pay interest due in respect of the Term
Loans until paid in full;
tenth, when due and payable, to pay the principal of
the Term A Loan and the Term B Loan until paid in full;
eleventh, when due and payable, to pay the principal
of the Term C Loan until paid in full; and
twelfth, ratably to pay any other Obligations due to
Agent or any Lender by Borrowers.
Agent shall promptly distribute to each Lender,
pursuant to the applicable wire transfer instructions received from each Lender
in writing, such funds as it may be entitled to receive, subject to a Settlement
delay as provided for in Section 2.1(h).
(f) Section 2.7(a) of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
(a) Interest Rate. Except as provided in clause (b)
below: (i) all Obligations (except for the Term Loan Obligations and
amounts undrawn under Letters of Credit) shall bear interest at a per
annum rate of 0.625 percentage point above the Reference Rate; (ii) all
Term Loan Obligations with respect to Term A Loan and Term B Loan shall
bear interest at a per annum rate of 12.50 percent; provided, however,
the interest rate on such Term Loans shall automatically increase to 13
percent per annum on the first anniversary of the Closing Date and
shall automatically increase to 14 percent per annum on the second
anniversary of the Closing Date; and (iii) all Term Loan Obligations
with respect to Term C Loan shall bear interest at a per annum rate of
5.00 percentage points above the Reference Rate.
(g) Section 2.7(c) of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default: (i) all Obligations (except for
the Term Loan Obligations and amounts undrawn under Letters of Credit)
shall bear interest at a per annum rate equal to 2.625 percentage
points above the Reference Rate; (ii) all Term Loan Obligations with
respect to Term A Loan or Term B Loan shall bear interest at a per
annum rate equal to 2.00 percentage points above the interest rate
applicable to such Term Loans at such time; (iii) the Letter of Credit
fee provided in Section 2.7(b) shall be increased to 3.50% per annum
times the amount of the undrawn Letters of Credit that were outstanding
during the immediately preceding month; and (iv) all Term Loan
Obligations with respect to Term C Loan shall bear interest at a per
annum rate equal to 2.00 percentage points above the interest rate
applicable to such Term Loans at such time.
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(h) Section 2.7(d) of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
(d) Minimum Interest. (i) In no event shall
the rate of interest chargeable under Section 2.7(a)(i)for any day be less than
7.00% per annum. To the extent that interest accrued hereunder at the rate set
forth in Section 2.7(a)(i) would be less than the foregoing minimum daily rate,
the interest rate chargeable under Section 2.7(a)(i) for such day automatically
shall be deemed increased to such minimum rate.
(ii) In no event shall the rate of interest
chargeable under Section 2.7(a)(iii) for any day be less than 13.50% per annum.
To the extent that interest accrued hereunder at the rate set forth in Section
2.7(a)(iii) would be less than the foregoing minimum daily rate, the interest
rate chargeable under Section 2.7(a)(iii) for such day automatically shall be
deemed increased to such minimum rate.
(i) Section 2.12(b) of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
(b) Second Amendment Closing Fees. On or before
the Second Amendment Closing Date, (i) a supplemental closing fee, for the
ratable benefit of the Lenders with a Revolving Credit Commitment, of $100,000,
and (ii) a supplemental closing fee, for the sole and separate account of the
Term C Loan Lender, of $200,000; (j) Section 2.12(c) of the Loan Agreement
hereby is amended and restated in its entirety to read as follows:
(c) Annual Facility Fee. (i) On each
anniversary of the Closing Date, an annual facility fee in an amount equal to
0.25% of the Maximum Revolving Amount; (ii) on each of the first and the second
anniversaries of the Closing Date, a facility fee in an amount equal to 0.50% of
the then outstanding principal amount of the Term A Loan and the Term B Loan;
and (iii) on each anniversary of the Second Amendment Closing Date, a facility
fee, for the sole and separate account of the Term C Loan Lender, in an amount
equal to 1.00% of the then outstanding principal amount of the Term C Loan; (k)
Section 3.3(f) of the Loan Agreement hereby is amended and restated in its
entirety to read as follows:
(f) within 45 days of the Second Amendment Closing
Date, Agent and the Lenders shall have received an updated business
valuation appraisal of Borrower's Broadband Systems Division and of
Vital (as previously required under the First Amendment, which
authorized the Matco outsourcing transaction described therein) from
appraisers acceptable to the Agent, which valuation appraisal shall be
in conformity with the form and methodology used by Arthur Andersen in
the valuation appraisals delivered to the Lender Group in May 1999 and
otherwise in form and substance satisfactory to Agent.
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(l) The following hereby is added to the Loan Agreement as a new Section
3.3(g) in proper alphanumerical order:
(g) Within 15 days following the Second Amendment
Closing Date, Agent shall have received duly executed originals of the
Term C Loan Registration Rights Agreement, in form and substance
satisfactory to the Term C Loan Lender, and the same shall be in full
force and effect.
(m) Section 7.11 of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
7.11 Distributions. Make any distribution or declare or pay
any dividends (in cash or other property, other than capital Stock) on,
or purchase, acquire, redeem, or retire any of such Borrower's capital
Stock, of any class, whether now or hereafter outstanding, except that
(i) a Subsidiary of any Borrower may pay dividends to such Borrower,
(ii) so long as both before and after giving effect thereto, no Default
or Event of Default has occurred and is continuing and Availability is
not less than $1,000,000, Parent may pay regularly scheduled quarterly
dividends on its 9% Cumulative Convertible Exchangeable Preferred
Stock, (iii) Parent may receive shares of its Common Stock in
consideration for the exercise of stock options granted to its
employees and directors (so long as no cash consideration is paid by
Parent or any of its Subsidiaries), (iv) Parent may cancel or retire
options in accordance with its stock option plans (so long as Parent
does not make any cash payments in connection therewith, and (v) Parent
may exchange its 9% Cumulative Convertible Exchangeable Preferred Stock
for a corresponding amount of its 9% Convertible Subordinated
Debentures or its Common Stock (but not for any other consideration).
(n) Section 7.17 of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
7.17 Use of Proceeds. (a) Use the proceeds of the
Advances and the Term A Loan and Term B Loan made hereunder for any
purpose other than (i) on the Closing Date, (y) to repay in full the
outstanding principal, accrued interest, and accrued fees and expenses
owing to Existing Lender, and (z) to pay transactional costs and
expenses incurred in connection with this Agreement, and (ii)
thereafter, consistent with the terms and conditions hereof, for its
lawful and permitted corporate purposes.
(b) Use the proceeds of the Term C Loan made
hereunder for any purpose other than (i) solely on the Second Amendment
Closing Date, (y) to pay transactional costs and expenses incurred in
connection with the Second Amendment, and (z) to repay outstanding
Advances, and (ii) thereafter, consistent with the terms and conditions
hereof, for its lawful and permitted corporate purposes.
(o) Section 7.20 of the Loan Agreement hereby is amended and restated in
its entirety to read as follows:
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7.20 Financial Covenant. Fail to maintain Net Worth
at the end of each fiscal quarter of the Parent of at least
$10,018,000, determined in accordance with GAAP as in effect on the
Closing Date. If GAAP changes subsequent to the Closing Date, the
Parent will deliver to the Agent, within the Applicable Period, a
statement reconciling the calculation of Net Worth using GAAP as it
existed on the Closing Date to the Net Worth calculation based upon
financial statements delivered to the Agent for such fiscal quarter.
(p) Section 15 of the Loan Agreement hereby is amended and restated in its
entirety to read as follows:
15. CONVERSION
15.1. Privilege. (a) Subject to the further
provisions of this Section 15.1, the holder of the Term B Loan
(individually and collectively, the "Term B Loan Lender") may make one
or more elections to convert up to an aggregate of $3,000,000 of the
principal amount of the Term B Loan, at any time or from time-to-time
outstanding, into Common Stock at a price equal to the then Term B Loan
Conversion Price. The number of shares of Common Stock issuable upon
conversion of the Term B Loan shall be determined by dividing the
amount of the Term B Loan elected to be converted by the Term B Loan
Lender by the then Term B Loan Conversion Price. The Term B Loan Lender
shall be entitled to the rights of a holder of Common Stock only to the
extent that the Term B Loan Lender has exercised its privilege to
convert Term B Loan into Common Stock.
(b) Subject to the further provisions
of this Section 15.1, the holder of the Term C Loan
(individually and collectively, the "Term C Loan Lender") may make one
or more elections to convert up to an aggregate of $4,000,000 of the
principal amount of the Term C Loan, at any time or from time-to-time
outstanding, into Common Stock at a price equal to the Term C Loan
Conversion Price. The number of shares of Common Stock upon conversion
of the Term C Loan shall be determined by dividing the amount of the
Term C Loan elected to be converted by the Term C Loan Lender by the
then Term C Loan Conversion Price. The Term C Loan Lender shall be
entitled to the rights of a holder of Common Stock only to the extent
that the Term C Loan Lender has exercised its privilege to convert Term
C Loan into Common Stock.
15.2. Procedure. To convert a portion of the Term B
Loan or the Term C Loan, as the case may be, the Term B Loan Lender or
the Term C Loan Lender, as the case may be, shall (a) furnish on the
Conversion Date a written notice of its election to convert such
portion of the Term B Loan or the Term C Loan, as the case may be, as
it may designate in such written notice (the "Conversion Amount") to
the Parent, and (b) surrender the note (if any) evidencing the Term B
Loan or the Term C Loan, as the case may be, to the Parent in exchange
for a new note in an amount equal to the difference between (i) the
then outstanding principal amount of the Term B Loan or the Term C
Loan, as the case may be, and (ii) the Conversion Amount plus the
aggregate amount of any prior Conversion Amounts relative to Term B
Loan or Term C Loan, as the case may
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be. The date on which the Term B Loan Lender or the Term C Loan
Lender, as the case may be, satisfies such requirements is the
"Conversion Date." Within ten days of the applicable Conversion Date,
the Parent shall deliver to the Term B Loan Lender or the Term C Loan
Lender, as the case may be, a certificate for the number of whole
shares of the Common Stock issuable upon the conversion. The
person in whose name the certificate is registered shall be deemed
to be a shareholder of record on the Conversion Date.
15.3. Fractional Shares. The Parent will not
issue fractional shares of Common Stock upon conversion of the Term B
Loan or the Term C Loan. The number of shares of Common Stock to be
issued shall be rounded down to the nearest whole number.
15.4. Taxes on Conversion. If the Term B Loan Lender
converts the Term B Loan, the Parent shall pay any documentary, stamp
or similar issue or transfer tax due on the issue of shares of Common
Stock upon such conversion. If the Term C Loan Lender converts the Term
C Loan, the Parent shall pay any documentary, stamp or similar issue or
transfer tax due on the issue of shares of Common Stock upon such
conversion.
15.5. Parent to Provide Stock. (a) At all times, the
Parent shall from and after the date hereof reserve, out of its
authorized but unissued Common Stock, a sufficient number of shares of
Common Stock to permit (i) the conversion of up to $3,000,000 of the
Term B Loan into shares of Common Stock, and (ii) the conversion of up
to $4,000,000 of the Term C Loan into shares of Common Stock.
(b) All shares of Common Stock delivered upon
conversion of the Term B Loan shall be newly issued shares or treasury
shares, shall be duly authorized, validly issued, fully paid and
nonassessable and shall be free from preemptive rights and free of any
lien or adverse claim. All shares of Common Stock delivered upon
conversion of the Term C Loan shall be newly issued shares or treasury
shares, shall be duly authorized, validly issued, fully paid and
nonassessable and shall be free from preemptive rights and free of any
lien or adverse claim.
(c) The Parent will endeavor promptly to comply with
all federal and state securities laws regulating the offer and delivery
of shares of Common Stock upon conversion, if any, of the Term B Loan
or the Term C Loan, as the case may be, and will comply with the terms
and provisions of the applicable Registration Rights Agreement.
15.6. Adjustment of Conversion Price. The
Conversion Price shall be adjusted from time to time by the Parent as
follows:
(a) In case the Parent shall (i) pay a dividend in
shares of Common Stock to all holders of Common Stock, (ii) make a
distribution in shares of Common Stock to all holders of Common Stock,
(iii) subdivide its outstanding Common Stock into a greater number of
shares, or (iv) combine its outstanding Common Stock into a smaller
number of shares, the applicable Conversion Price in effect immediately
prior thereto shall
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be adjusted so that the Term B Loan Lender or the Term C Loan Lender,
as the case may be, shall be entitled to receive that number of shares
of Common Stock which it would have owned had the Term B Loan or the
Term C Loan, as the case may be, been converted immediately prior
to the happening of such event. An adjustment made pursuant to this
subsection (a) shall become effective immediately after the
record date in the case of a dividend in shares or distribution
and shall become effective immediately after the effective date in the
case of subdivision or combination.
(b) In case the Parent shall issue rights or warrants
to all or substantially all holders of Common Stock entitling them (for
a period commencing no earlier than the record date described below and
expiring not more than 90 days after such record date) to subscribe for
or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price per share less than the current market price
per share of Common Stock (as determined in accordance with subsection
(e) of this Section 15.6) at the record date for the determination of
shareholders entitled to receive such rights or warrants, the
applicable Conversion Price in effect immediately prior thereto shall
be adjusted so that the same shall equal the price determined by
multiplying such Conversion Price in effect immediately prior to such
record date by a fraction of which the numerator shall be the number of
shares of Common Stock outstanding on such record date, plus the number
of shares which the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate applicable
Conversion Price of the convertible securities so offered) would
purchase at such current market price, and of which the denominator
shall be the number of shares of Common Stock outstanding on such
record date plus the number of additional shares of Common Stock
offered (or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively whenever any
such rights or warrants are issued, and shall become effective
immediately after such record date. If at the end of the period during
which such rights or warrants are exercisable not all rights or
warrants shall have been exercised, the applicable adjusted Conversion
Price shall be immediately readjusted to what it would have been based
upon the number of additional shares of Common Stock actually issued
(or the number of shares of Common Stock issuable upon conversion of
convertible securities actually issued).
(c) In case the Parent shall distribute to all or
substantially all holders of Common Stock any shares of capital stock
(other than Common Stock) of the Parent evidences of indebtedness or
other non-cash assets (including securities of any company other than
the Parent), or shall distribute to all or substantially all holders of
Common Stock rights or warrants to subscribe for or purchase any of its
securities (excluding those referred to in subsection (b) of this
Section 15.6) ("Rights"), then in each such case the applicable
Conversion Price shall be adjusted so that the same shall equal the
price determined by multiplying such Conversion Price in effect
immediately prior to the date of such distribution by a fraction of
which the numerator shall be the current market price per share (as
defined in subsection (e) of this Section 15.6) of Common Stock on the
record date mentioned below less the fair market value on such record
date (as determined by the Board of Directors of the Parent, whose
determination shall be conclusive evidence of such fair market value)
of the portion of the capital stock or assets or evidences of
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<PAGE>
indebtedness so distributed or of such rights or warrants applicable to
one share of Common Stock (determined on the basis of the number of
shares of Common Stock outstanding on the record date), and of which
the denominator shall be the current market price per share (as defined
in subsection (e) of this Section 15.6) of Common Stock on such record
date. Such adjustment shall become effective immediately after the
record date for the determination of shareholders entitled to receive
such distribution. Notwithstanding the foregoing, in the event that the
Parent shall distribute Rights (other than those referred to in
subsection (b) of this Section 15.6) pro rata to holders of Common
Stock, the Parent may, in lieu of making any adjustment pursuant to
this Section 15.6, make proper provision so that the Term B Loan Lender
or the Term C Loan Lender, as the case may be, upon conversion of the
Term B Loan or the Term C Loan, as the case may be, after the record
date for such distribution and prior to the expiration or redemption of
the Rights shall be entitled to receive upon such conversion, in
addition to the shares of Common Stock issuable upon such conversion
(the "Conversion Shares"), a number of Rights to be determined as
follows: (i) if such conversion occurs on or prior to the date for the
distribution to the holders of Rights of separate certificates
evidencing such Rights (the "Distribution Date"), the same number of
Rights to which the Term B Loan Lender or the Term C Loan Lender, as
the case may be, of a number of shares of Common Stock equal to the
number of Conversion Shares is entitled at the time of such conversion
in accordance with the terms and provisions of and applicable to the
Rights and (ii) if such conversion occurs after the Distribution Date,
the same number of Rights to which the Term B Loan Lender or the Term C
Loan Lender, as the case may be, of the number of shares of Common
Stock into which the outstanding principal amount of the Term B Loan or
the Term C Loan, as the case may be, together with all accrued and
unpaid interest thereon so converted was convertible immediately prior
to the Distribution Date would have been entitled on the Distribution
Date in accordance with the terms and provisions of and applicable to
the Rights.
(d) In case the Parent shall, by dividend or
otherwise, at any time distribute (a "Triggering Distribution") to all
or substantially all holders of Common Stock cash in an aggregate
amount that, together with the aggregate amount of any other cash
distributions to all or substantially all holders of Common Stock made
within the 12 months preceding the date of payment of the Triggering
Distribution and in respect of which no applicable Conversion Price
adjustment pursuant to this Section 15.6 has been made, exceeds 50% of
the product of the current market price per share of Common Stock (as
determined in accordance with subsection (e) of this Section 15.6) on
the Business Day (the "Determination Date") immediately preceding the
day on which such Triggering Distribution is declared by the Parent,
multiplied by the number of shares of Common Stock outstanding on such
date (excluding shares held in the treasury of the Parent), the
applicable Conversion Price shall be reduced so that the same shall
equal the price determined by multiplying such Conversion Price in
effect immediately prior to the Determination Date by a fraction of
which the numerator shall be the current market price per share of
Common Stock (as determined in accordance with subsection (e) of this
Section 15.6) on the Determination Date less the amount of cash so
distributed within such 12 months (including, without limitation, the
Triggering Distribution) applicable to
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<PAGE>
one share of Common Stock (determined on the basis of the number
of shares of Common Stock outstanding on the Determination Date)
and the denominator shall be such current market price per share of
Common Stock (as determined in accordance with subsection (e)
of this Section 15.6) on the Determination Date, such reduction
to become effective immediately prior to the opening of business on
the day following the date on which the Triggering Distribution is
paid.
(e) For the purpose of any computation under
subsections (b), (c) and (d) of this Section 15.6, the current market
price per share of Common Stock on any date shall be deemed to be the
average of the daily closing prices for the 30 consecutive Trading Days
commencing 35 Trading Days before (i) the Determination Date with
respect to distributions under subsection (d) of this Section 15.6 or
(ii) the record date with respect to distributions, issuances or other
events requiring such computation under subsection (b) or (c) of this
Section 15.6. The closing price for each day shall be the last reported
sales price or, in case no such reported sale takes place on such date,
the average of the reported closing bid and asked prices in either case
on the New York Stock Exchange or, if Common Stock is not listed or
admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any
national securities exchange, the closing sales price of Common Stock
as quoted by NASDAQ or, in case no reported sales takes place, the
average of the closing bid and asked prices as quoted by NASDAQ or any
comparable system or, if Common Stock is not quoted on NASDAQ or any
comparable system, the closing sales price or, in case no reported sale
takes place, the average of the closing bid and asked prices, as
furnished by any two members of the National Association of Securities
Dealers, Inc. selected from time to time by the Parent for that
purpose. If no such prices are available, the current market price per
share shall be the fair value of a share of Common Stock as determined
by the Board of Directors of the Parent.
15.7. Notice of Adjustment. Whenever the Term B Loan
Conversion Price is adjusted, the Parent shall promptly mail to the
Term B Loan Lender a notice of the adjustment briefly stating the facts
requiring the adjustment and the manner of computing it. Whenever the
Term C Loan Conversion Price is adjusted, the Parent shall promptly
mail to the Term C Loan Lender a notice of the adjustment briefly
stating the facts requiring the adjustment and the manner of computing
it.
15.8 Notice of Certain Transactions. In the
event that:
(1) the Parent proposes to take any action which
would require an adjustment in any Conversion Price;
(2) the Parent enters into any agreement for its
consolidation or merger with, or transfer of all or substantially all
of its assets to, another corporation and shareholders of the Parent
must approve the transaction; or
(3) there is a proposal for the dissolution or
liquidation of the Parent;
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<PAGE>
then, in each case, the Parent shall at least ten days before such
date, mail to the Term B Loan Lender or the Term C Loan Lender, as the
case may be, a notice stating the proposed effective date.
15.9. Effect of Reclassification, Consolidation,
Merger or Sale on Conversion Privilege. If any of the following events
shall occur with respect to the Parent, namely: (a) any
reclassification or change of shares of Common Stock (other than a
change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination, or
any other change for which an adjustment is specifically provided in
Section 15.6); (b) any consolidation or merger to which the Parent is a
party other than a merger in which the Parent is the continuing
corporation or other entity and which does not result in any
reclassification of, or change (other than a change in name, or in par
value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination) in, outstanding
shares of Common Stock; or (c) any sale or conveyance of all or
substantially all of the assets of the Parent, as an entirety, then the
Parent or such successor or purchasing corporation or other entity, as
the case may be, shall, as a condition precedent to such
reclassification, change, consolidation, merger, sale or conveyance,
execute and deliver to the Term B Loan Lender or the Term C Loan
Lender, as the case may be, an agreement providing that the Term B Loan
Lender or the Term C Loan Lender, as the case may be, shall have the
right to convert the Term B Loan or the Term C Loan, as the case may
be, into the kind and amount of shares of stock and other securities
and property (including cash) receivable upon such reclassification,
change, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock issuable upon conversion of the Term B
Loan or the Term C Loan, as the case may be, immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance.
Such agreement shall provide for adjustments of the Conversion Price
which shall be as nearly equivalent as may be practicable to the
adjustments of the Conversion Price provided for in this Section 15,
mutatis mutandis. If, in the case of any such consolidation, merger,
sale or conveyance, the stock or other securities and property
(including cash) receivable thereupon by a holder of Common Stock
include shares of stock, membership interests, or other securities and
property of a corporation or other entity other than the successor or
purchasing corporation or other entity, as the case may be, in such
consolidation, merger, sale or conveyance, then such agreement shall
also be executed by such other corporation or other entity and shall
contain such additional provisions to protect the interests of the Term
B Loan Lender or the Term C Loan Lender, as the case may be, that are
comparable to the provisions set forth in this Section 15, mutatis
mutandis. The provisions of this Section 15.9 shall similarly apply to
successive consolidations, mergers, sales or conveyances, mutatis
mutandis.
(q) Schedule C-1 hereby is amended and restated in its entirety to read as
set forth in Annex I attached hereto.
2. Conditions. This Amendment shall become effective only upon satisfaction in
full of the following conditions precedent (the first date upon which all such
conditions have been satisfied being herein called the "Second Amendment Closing
Date"):
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<PAGE>
(a) Agent shall have received on or before the
Second Amendment Closing Date the following, each in form and substance
satisfactory to Agent (and, where indicated, the applicable Lender) and, unless
indicated otherwise, dated as of the Second Amendment Closing Date:
(i) counterparts of this Amendment, duly
executed by the Borrowers and the Lenders Group;
(ii) the reaffirmation and consent of each
Guarantor attached hereto as Exhibit A, duly executed and
delivered by an authorized official of each entity thereof;
and
(iii) such other agreements, instruments,
approvals, opinions and other documents as Agent or any Lender
may reasonably request.
(b) (i) Agent shall have received, for the
benefit of the Lenders with a Revolving Credit Commitment, the fee described in
Section 2.12(b)(i) of the Loan Agreement; and (ii) the Term C Loan Lender shall
have received, for its sole and separate account, the fee described in Section
2.12(b)(ii) of the Loan Agreement.
(c) Borrowers shall have a minimum of $3,000,000
of unrestricted cash balances and Availability after the payment of all amounts
contemplated in Section 7.17(b) of the Loan Agreement and based upon a Borrowing
Base calculated using information as of a date no earlier than December 29,
1999, rolled forward to a date acceptable to the Agent, and after reserving for
amounts necessary to maintain Borrowers' current liabilities reasonably within
terms;
(d) the several counsel to the members of the
Lender Group shall have received payment, in immediately available funds, of all
accrued and unpaid attorneys fees and expenses constituting Lender Group
Expenses incurred in connection with this Amendment and the transactions
contemplated hereunder or reasonably ancillary hereto;
(e) The representations and warranties in
this Amendment, the Loan Agreement as amended by this Amendment, and the other
Loan Documents shall be true and correct in all respects on and as of the date
hereof, as though made on such date (except to the extent that such
representations and warranties relate solely to an earlier date);
(f) No Default or Event of Default shall have
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein;
(g) No injunction, writ, restraining order,
or other order of any nature prohibiting, directly or indirectly, the
consummation of the transactions contemplated herein shall have been issued and
remain in force by any governmental authority against Borrower or the Lender
Group; and
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<PAGE>
(h) All other documents and legal matters in
connection with the transactions contemplated by this Amendment shall have been
delivered or executed or recorded and shall be in form and substance
satisfactory to Agent and its counsel.
3. Representations and Warranties. Each Borrower hereby represents and warrants
to the Lender Group that (a) the execution, delivery, and performance of this
Amendment and of the Loan Agreement, as amended by this Amendment, are within
its corporate or other organizational powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which it is a party or by which any
of its properties may be bound or affected, and (b) this Amendment and the Loan
Agreement, as amended by this Amendment, constitute such Borrower's legal,
valid, and binding obligation, enforceable against such Borrower in accordance
with its terms.
4. Further Assurances. Borrower shall execute and deliver all agreements,
documents, and instruments, in form and substance satisfactory to Agent, and
take all actions as Agent may reasonably request from time to time fully to
consummate the transactions contemplated under this Amendment and the Loan
Agreement, as amended by this Amendment.
5. Miscellaneous.
(a) Upon the effectiveness of this Amendment,
each reference in the Loan Agreement to "this Agreement", "hereunder", "herein",
"hereof" or words of like import referring to the Agreement shall mean and refer
to the Loan Agreement as amended by this Amendment.
(b) Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Loan Agreement
shall mean and refer to the Agreement as amended by this Amendment.
(c) This Amendment shall be governed by and construed
in accordance with the laws of the State of New York.
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<PAGE>
(d) This Amendment may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Amendment.
Delivery of an executed counterpart of this Amendment by telefacsimile shall be
equally as effective as delivery of a manually executed counterpart of this
Amendment. Any party delivering an executed counterpart of this Amendment by
telefacsimile also shall deliver a manually executed counterpart of this
Amendment but the failure to deliver a manually executed counterpart shall not
affect the validity, enforceability, and binding effect of this Amendment.
(e) This Amendment is a Loan Document.
[Remainder of this page intentionally left blank]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the date first above written.
GENERAL DATACOMM INDUSTRIES, INC.,
a Delaware corporation
By /S/ WILLIAM G. HERNY
Title: Vice President
GENERAL DATACOMM, INC.,
a Delaware corporation
By /S/ WILLIAM G. HENRY
Title: Vice President
DATACOMM LEASING CORPORATION,
a Delaware corporation
By /S/ WILLIAM G. HENRY
Title: Vice President
VITAL NETWORK SERVICES, L.L.C.,
a Delaware limited liability company
By /S/ WILLIAM G. HENRY
Title: Vice President
GDC FEDERAL SYSTEMS, INC.,
a Delaware corporation
By /S/ WILLIAM G. HENRY
Title: Vice President
<PAGE>
GDC NAUGATUCK, INC.,
a Delaware Corporation
By /S/ WILLIAM G. HENRY
Title: Vice President
FOOTHILL CAPITAL CORPORATION,
a California corporation, as Agent
and a Lender
By /S/ PETER DROOFF
Title: Vice President
ABLECO FINANCE LLC, as a Lender
By /S/ KEVIN GENDA
Title: SVP & Chief Credit Officer
A2 FUNDING LP, as a Lender
By: A2 FUND MANAGEMENT LLC,
its General Partner
By /S/ ALEXANDER J. ORNSTEIN
Title: Vice President
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<PAGE>
ANNEX I
Schedule C-1
Commitments
Revolving Loan Commitment Dollar Amount Percentage
- ------------------------- ------------- ----------
Foothill $35,000,000 100%
Ableco $-0- -0-%
A2 Funding $-0- -0-%
Term A Loan Commitment Dollar Amount Percentage
- ---------------------- ------------- ----------
Foothill $-0- -0-%
Ableco $12,000,000 100%
A2 Funding $-0- -0-%
Term B Loan Commitment Dollar Amount Percentage
- ---------------------- ------------- ----------
Foothill $-0- -0-%
Ableco $-0- -0-%
A2 Funding $3,000,000 100%
Term C Loan Commitment Dollar Amount Percentage
- ---------------------- ------------- ----------
Foothill $-0- -0-%
Ableco $10,000,000 50%
A2 Funding $10,000,000 50%
<PAGE>
EXHIBIT A
Reaffirmation and Consent
-------------------------
All capitalized terms used herein but not otherwise defined
herein shall have the meanings ascribed to them in that certain Amendment Number
Two to Loan and Security Agreement, dated as of December 30, 1999 (the
"Amendment"). The undersigned hereby jointly and severally (a) represent and
warrant to the Lender Group that the execution, delivery, and performance of
this Reaffirmation and Consent are within each of their corporate or
organizational powers, have been duly authorized by all necessary corporate or
other organizational action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or governmental authority, or of the terms of its charter or
bylaws, or of any contract or undertaking to which either of them is a party or
by which any of their properties may be bound or affected; (b) consents to the
amendment of the Loan Agreement by the Amendment; (c) acknowledges and reaffirms
its obligations owing to the Lender Group under its respective guaranty and each
of the other Loan Documents to which it is party; and (d) agrees that each of
the guaranties and the other Loan Documents to which they are parties is and
shall remain in full force and effect. Although the undersigned have been
informed of the matters set forth herein and have acknowledged and agreed to
same, they understand that the Lender Group has no obligation to inform it of
such matters in the future or to seek its acknowledgement or agreement to future
amendments, and nothing herein shall create such a duty.
GDC REALTY, INC.
By /S/ WILLIAM G. HENRY
Title: Vice President
DATACOMM RENTAL CORPORATION
By /S/ WILLIAM G. HENRY
Title: Vice President
GENERAL DATACOMM INTERNATIONAL CORP.
By /S/ WILLIAM G. HENRY
Title: Vice President
GENERAL DATACOMM CHINA, LTD.
By /S/ WILLIAM G. HENRY
Title: Vice President
GENERAL DATACOMM LIMITED (ENGLAND)
By /S/ WILLIAM G. HENRY
Title: Vice President
VITAL NETWORK SERVICES, LTD.
By /S/ WILLIAM G. HENRY
Title: Vice President
GENERAL DATACOMM LTD. (CANADA)
By /S/ WILLIAM G. HENRY
Title: Vice President
OUTSOURCE MANUFACTURING AND PURCHASE AGREEMENT
AGREEMENT made this 30th day of September, 1999 by and between The Matco
Electronics Group, Inc., with principal offices at 320 North Jensen Road,
Vestal, NY 13850 on behalf of itself and its Affiliates (collectively "MEG"),
and General DataComm, Inc., with principal offices at Park Road Extension,
Middlebury, CT 06762 ("GDC").
RECITALS:
A. GDC designs, manufactures and markets voice and data communications products
for the carrier, corporate and government markets, and MEG is in the business of
contract electronics manufacturing, with specific emphasis on and expertise in
communications products, with core competency in the areas of printed circuit
board fabrication, cable manufacture, raw card manufacture, through-hole
production, surface mount technology, plastic injection molding, power supply
manufacture and system level configuration;
B. The parties desire to establish a business relationship whereby GDC shall
appoint MEG its primary manufacturing vendor, and divest and outsource certain
portions of its manufacturing operations to MEG, which will then through one or
more of its Affiliates (as defined below) and upon the prior written permission
of GDC, which permission shall not be unreasonably withheld, as to such
Affiliate and the specific manufacturing facility to be used, manufacture, as
required by GDC, certain GDC Products (as defined below) for exclusive sale to
GDC;
C. As part of such outsourcing of the GDC manufacturing operations, the parties
shall initially perform joint activities to assemble and test the GDC Products
at the GDC Naugatuck, CT facility and at MEG facilities. MEG shall complete the
transition of such operations to a MEG manufacturing facility or facilities
within one hundred twenty (120) days and shall Manufacture (as defined below)
the GDC Products. In addition, MEG shall purchase from GDC certain manufacturing
equipment, work in process and raw material inventory at the Closing (as defined
below);
NOW, THEREFORE in consideration of the mutual promises contained herein, and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties agree as follows:
1.0 DEFINITIONS AND SCHEDULES
1.1 "Affiliate" means those corporations, companies or other entities directly
or indirectly controlled, controlled by or under common control with or by a
party hereto. "Control" means ownership or control of more than fifty percent
(50%) of the
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<PAGE>
outstanding shares or securities (representing the right to vote for the
election of directors or other managing authority) of an entity. Such entities
shall be deemed to be Affiliates only so long as such ownership or control
exists. The MEG Electronics Group, Inc. shall be responsible for the acts and
omissions of its Affiliates hereunder.
1.2 "GDC Product(s)" means those products to be Manufactured by MEG
hereunder as set forth in Schedule 1.
1.3 "Technical Information" means (i) two (2) sets of applicable manufacturing
drawings and documents as shown below and provided by GDC for each GDC Product;
and (ii) such other related design and technical documents reasonably available
at GDC and necessary to enable MEG to Manufacture the GDC Products (Electronic
data/information will be provided if available):
1. Specification of GDC Product;
2. Assembly Drawings and Parts Drawings;
3. Purchase Specifications of Parts and Components;
4. Bill of Materials;
5. Assembly Instructions;
6. Manufacturing Instructions;
7. Test Instructions;
8. Test and Inspection Standards;
9. Test and Operational Software (including both object and
source code);
10. Part and Component Sourcing; and
11. Die and Tool Drawings.
1.4 "Intellectual Property Rights" means all current and future worldwide
patents, copyrights, mask work rights, trade secrets, and other intellectual
property rights and the documentation or other tangible expression thereof.
1.5 "Transition Period" means, with regard to each GDC Product, the period of
time that the GDC Product is manufactured at the GDC Naugatuck, CT facility or
is in process of transition to production at MEG facilities.
1.6 "Post-Transition Period" means, with regard to each GDC Product, the period
of time that the GDC Product is Manufactured by MEG at a MEG facility.
1.7 The following Schedules are attached hereto, an integral part of this
Agreement and incorporated by this reference:
Schedule 1 - GDC Product(s) Specifications
Schedule 2 - Purchase Prices
Schedule 3 - Delivery Performance Requirements
Schedule 4 - Quality Requirements
Schedule 5 - (Deleted)
Schedule 6 - Manufacturing Specifications
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<PAGE>
Schedule 7 - Manufacturing Equipment
Schedule 8 - Initial Six Month Forecast (By Quarter)
Schedule 9 - Raw Material Inventory
Schedule 10 - Work in Process Inventory
1.8 "Manufacture", "Manufactured" or "Manufacturing" means, with regard to the
performance of by MEG of its obligations hereunder, the performance of the
following operations in the order as set forth below:
1. SMT (Surface Mount Technology) Assembly;
2. PTH (Pin Through Hole) Assembly;
3. In-Circuit Testing;
4. Functional Testing;
5. Environmental Stress Screening;
1.9 The "Recitals" above are an integral part of this Agreement as if fully
set forth in the body hereto.
2.0 TERM
2.1 "Term" shall mean the period commencing on the Closing Date and ending three
(3) years thereafter. The Term may be renewed upon the written agreement of the
parties.
3.0 SCOPE
3.1 MEG shall be GDC's primary outsource manufacturing vendor for (i) the GDC
surface mount technology manufacturing ("SMT") and (ii) all other manufacturing
currently outsourced by GDC to third parties (the "Third Party Outsource"), both
subject to the following conditions:
3.1.1 MEG is not in breach of any of its material obligations
hereunder;
3.1.2 GDC shall at all times have the right to outsource to third
parties up to fifteen percent (15%) of the total dollar volume
of its manufacturing requirements in any manner and proportion
of GDC Products and Third Party Outsource products of its
choosing;
3.1.3 MEG must qualify for each product of Third Party Outsource
prior to the commencement of the Manufacture of such product.
"Qualify" means that (i) the Third Party Outsource product must
be within the specific MEG core competencies of either printed
circuit board fabrication, cable manufacturing, through-hole
production, SMT or plastic injection molding, (ii) MEG must
build a specific number of each such products (as reasonably
determined by GDC)for inspection by GDC with regard to quality
and conformance to specifications,
3
<PAGE>
(iii) GDC must approve such products as to quality and
conformance to technical specifications and delivery
requirements in writing, (iv) the MEG quoted Purchase Price for
such products must be no more than the then current price
charged GDC by the third party manufacturer, and (v) MEG must
comply with any unique, mandatory requirements for such products
(see subsection 3.1.4 below).
3.1.4 In the event a product of Third Party Outsource or a GDC
Product has or subsequently develops a unique or mandatory
requirement and MEG cannot meet such requirement, GDC shall
have the right to continue to outsource (or to award) the
manufacture of such product to third parties, and such
production shall not be included in the GDC total dollar volume
manufacturing requirements for purposes of calculating the 15%
threshold above. By way of example and not limitation, the
obligation to manufacture a product within a particular
country, or to provide a product within a particular high
tariff country at a specific low price are both unique,
mandatory requirements.
3.1.5 In the event GDC terminates this Agreement in part for breach
of MEG with regard to a specific GDC Product in accordance with
Section 22.3.2 below, then GDC shall have the right to award
the manufacture of such GDC product to any third party and such
production shall not be included in the GDC total dollar volume
manufacturing requirements for purposes of calculating the 15%
threshold above.
3.1.6 MEG shall purchase from each manufacturer of the Third Party
Outsource products that MEG has qualified for, all raw material
inventory and WIP of such manufacturer that can be used in the
Manufacture by MEG of the qualified product. Excess material,
outside of component lead time, will be reviewed by MEG and
procured as required to support GDC's forecast.
3.2 The initial price quoted by MEG for each Third Party Outsource product shall
be reviewed in accordance with the Purchase Price formula set forth below in
Section 12.1, at the point which is six (6) months after MEG is Manufacturing at
least eighty five percent (85%) of the GDC requirement for such product, not to
exceed twelve (12) months from the date GDC provided to MEG the Technical
Information for such product for qualification purposes. Except to the extent
caused by unusual or unexpected market price fluctuations, and then only upon
the mutual agreement of the parties, any revised price resulting from such
review shall not exceed the price paid by GDC to the former manufacturer for
such product. The "price paid by GDC" shall be the contract price between GDC
and the former manufacturer at the time of the commencement of Manufacture by
MEG.
3.3 To the extent in the possession of GDC, GDC shall provide to MEG, as soon as
practical after the Closing Date, all Technical Information and the current turn
key price, material and labor with regard to each Third Party Outsource product
reasonably required by MEG in order to qualify for such products; however, MEG
acknowledges that GDC
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requires that such requests do not pose a burden to its staff during the
Transition Period, nor provide any advance notice to its current Third Party
Outsource manufacturers of the relationship hereof, and both factors can affect
the time required by GDC to gather and deliver such Technical Information. MEG
also acknowledges that it is the requirement of GDC that the MEG qualification
of Third Party Outsource products does not cause either party to be distracted
from the initial goal of transitioning the SMT production to MEG during the
Transition Period. It is the intention of the parties that MEG commence
production of those qualified Third Party Outsource Products approximately six
(6) months after the Closing Date, and the parties will work together towards
such goal; however, the actual commencement date may be earlier or later as
agreed by the parties.
3A.0 CLOSING
3A.1 The closing (the "Closing") under this Agreement shall be held on September
30, 1999 (the "Closing Date"). The Closing shall take place at the headquarters
of GDC in Middlebury, CT or at such other place as the parties may agree. At the
Closing, (i) GDC shall deliver to MEG such documentation as is necessary to
transfer title, (including releases of all liens, encumbrances, and all required
consents), to the Manufacturing Equipment and that certain portion of the GDC
raw material inventory and Work In Process Inventory from GDC to MEG, and (ii)
MEG shall pay and deliver to GDC the purchase price for such equipment and
inventory in the amount and form as specified below.
3A.2 The obligation of GDC to close is conditional subject to the receipt by GDC
of the consent to this Agreement by its lenders.
4.0 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF MEG
MEG represents and warrants to GDC as follows:
4.1 MEG has the requisite expertise to perform the Manufacturing of the GDC
products and shall commit sufficient resources to meet its obligations
hereunder.
4.2 The MEG Electronics Group Inc. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and each
Affiliate performing Manufacturing hereunder shall be duly organized, validly
existing, and in good standing under the laws of the state of its incorporation
or organization, and MEG and each Affiliate shall be duly qualified and in good
standing to perform such Manufacturing in the jurisdiction where GDC Products
shall be Manufactured.
4.3 MEG shall at all times comply with all federal, state and local laws and
regulations applicable to and in connection with the performance of its
obligations hereunder.
4.4 All MEG facilities used to Manufacture GDC Products are and shall at all
times be ISO 9002 certified.
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4.5 The financial statements of the MEG Electronics Group Inc., including its
Affiliates, dated December 31, 1998 delivered to GDC on September 8, 1999 are
correct and complete and accurately present the financial condition and results
of operations of MEG and its Affiliates as of and for the year ending on
December 31, 1998, and were prepared in accordance with generally accepted
accounting principles. Since December 31, 1998 there has been no material
adverse change to the financial condition of MEG. MEG shall deliver to GDC
within ninety (90) days following the closing of each MEG fiscal year, financial
statements (audited, if available) for such fiscal year.
4.6 There are no actions or proceedings pending or threatened against MEG or its
Affiliates and MEG has no knowledge or belief of any pending, threatened or
imminent litigation, governmental investigations or claims, complaints, actions
or prosecutions involving MEG or any Affiliate which if adversely determined
would impair their ability to perform hereunder.
4.7 MEG is not a party to any collective bargaining agreement at any MEG
facility that will be used to Manufacture GDC Products. MEG's relationship with
its employees at all such facilities is excellent and there are and have been no
strikes, lockouts, other work stoppages, picketing or labor disputes during the
past five (5) years in which MEG or any of its Affiliates or manufacturing
facilities are or were involved, and no event has transpired or is contemplated
which has had or will have a material adverse effect on the relationship between
MEG and its employees.
4.8 There shall be no liens pending or threatened against the GDC Products
Manufactured hereunder by MEG and all shall be delivered to GDC free and clear
of all liens, claims and encumbrances.
4.9 The representations, warranties, and covenants of MEG above are in addition
to and not in lieu of any other representations, warranties, and covenants of
MEG set forth elsewhere in this Agreement.
5.0 PURCHASE AND SALE OF MANUFACTURING EQUIPMENT
5.1 GDC agrees to sell to and transfer to MEG, and MEG agrees to purchase from
GDC at the Closing, subject to the terms and conditions herein, the
manufacturing equipment set forth in Schedule 7 (the "Manufacturing Equipment").
5.2 As the purchase price for the Manufacturing Equipment, MEG shall pay to GDC
at the Closing the amount of Three Million One Hundred Thousand Dollars
($3,100,000.00) in cash payable by wire transfer in accordance with wire
transfer instructions provided MEG prior to the Closing.
5.3 Solely with regard to the Manufacturing Equipment, GDC warrants and
represents to MEG to the best of GDC's knowledge:
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5.3.1 The Manufacturing Equipment that is currently used by GDC in
the Manufacture of the GDC Products is in a commercially
reasonable state of repair and operating condition, ordinary
wear and tear and obsolescence excepted and;
5.3.2 GDC will transfer to MEG at the Closing good title to the
Manufacturing Equipment, free and clear of security interests,
mortgages, liens, attachments and encumbrances;
5.3.3 GDC will maintain the Manufacturing Equipment in a
commercially reasonable state of repair and operating
condition, ordinary wear and tear and obsolescence excepted,
until the Manufacturing Equipment is physically shipped to
MEG;
5.3.4 GDC will be responsible for dismantling and safe loading of
all manufacturing equipment purchased by MEG. MEG will pay for
transportation and set-up of the equipment at MEG's
manufacturing facilities.
5.4 GDC makes no other warranties or representations of any kind with regard to
the Manufacturing Equipment, either express or implied including, but not
limited to, the implied warranties of noninfringement, merchantability and
fitness for a particular purpose. Except to the extent caused by MEG, the risk
of loss of or damage to the Manufacturing Equipment shall be borne by GDC while
such equipment is at the GDC Naugatuck facility.
5A.0 PURCHASE AND SALE OF GDC RAW MATERIAL INVENTORY
5A.1 MEG shall purchase from GDC as needed, raw material from GDC's inventory
that meets MEG's production requirements hereunder. A listing of that portion of
GDC's raw material inventory to be consumed during the three (3) month period
after the Closing Date (determined as of the last Friday prior to the Closing
Date) is set forth in Schedule 9 and shall be purchased by MEG from GDC at the
Closing. The purchase and utilization of such GDC raw material by MEG for the
Manufacture of GDC Products shall at all times have priority over the purchase
and utilization by MEG of raw material supplied by third parties. MEG's purchase
from GDC during the Term of raw material in excess of or different from the raw
material set forth in Schedule 9, MEG shall purchase such material from GDC at a
price that is competitive with the best price MEG sources of supply for the same
material.
5A.2 "As needed" above means that MEG, in addition to purchasing from GDC at the
Closing, such raw material set forth in Schedule 9, shall purchase from GDC such
additional raw material as requirements are identified.
5A.3 As the purchase price for the raw material set forth in Schedule 9, MEG
shall pay to GDC at the Closing the amount of Four Million Six Hundred Fifty
Thousand Seven Hundred Eighty Four Dollars ($4,650,784.00) in cash payable by
wire transfer in accordance with wire transfer instructions provided MEG prior
the Closing.
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5A.4 To the extent provided to GDC by the suppliers of the raw material above,
and assignable by GDC, GDC shall pass through to MEG such raw material
warranties. GDC makes no other warranties or representations of any kind with
regard to the raw material, either express or implied including, but not limited
to, the implied warranties of noninfringement, merchantability and fitness for a
particular purpose.
5A.5 No later than January 31, 2000, the parties shall agree upon any
post-Closing operating adjustments to be made to the initial purchase of the raw
material set forth in Schedule 9 by MEG. Such adjustment shall be determined by
comparing the actual amount of the raw material inventory as of the Closing Date
to the amount of the raw material inventory as set forth in Schedule 9. The
adjustment will be made as a debit or credit adjustment between GDC and MEG.
5A.6 In the event that MEG has material requirements in other areas of its
business that can be satisfied (as reasonably determined by MEG) by the purchase
from GDC of excess raw material not purchased above, MEG shall purchase such raw
material from GDC at a price that is competitive with other MEG sources of
supply. MEG shall assist GDC with the disposal of any obsolete and excess raw
material not purchased by MEG.
6.0 PURCHASE AND SALE OF WORK IN PROCESS
6.1 GDC agrees to sell to and transfer to MEG, and MEG agrees to purchase from
GDC at the Closing, subject to the terms and conditions herein, the material
component of the Work in Process ("WIP"). Set forth in Schedule 10 is a listing
of WIP as of June 30, 1999.
6.2 As the purchase price for the WIP set forth in Schedule 10, MEG shall pay to
GDC at the Closing the amount of One Million One Hundred Thirty Six Thousand
Nine Hundred Eighteen Dollars ($1,136,918.00) in cash payable by wire transfer
in accordance with wire transfer instructions provided MEG prior the Closing.
6.3 To the extent provided to GDC by the suppliers of the raw material in the
WIP above, GDC shall pass through to MEG such raw material warranties. GDC makes
no other warranties or representations of any kind with regard to the raw
material in the WIP, either express or implied including, but not limited to,
the implied warranties of noninfringement, merchantability and fitness for a
particular purpose.
6.4 No later than January 31, 2000, the parties shall agree upon the
post-Closing operating adjustments to be made to the purchase of WIP by MEG.
Such adjustment shall be determined by comparing the actual amount of WIP as of
the Closing Date to the amount of WIP as set forth in Schedule 10. The
adjustment will be made as a debit or credit adjustment between GDC and MEG.
6A.0 START UP FEES
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6A.1 GDC shall pay to MEG at the Closing the amount of One Million One Hundred
Thousand Dollars ($1,100,000.00) as an outsourcing start up and administration
fee. The amount of this fee shall be offset by and deducted from the amounts due
GDC at Closing.
7.0 OPEN PURCHASE ORDERS
7.1 GDC shall retain responsibility for all purchase orders issued to suppliers
for the procurement of raw material, that are executory in part or full as of
the Closing Date (the "Open POs"). In the event, during the Transition Period,
there are production requirements that cannot be satisfied by the Open POs or by
inventory purchased by MEG as set forth in Schedules 9 and 10, then GDC shall
issue new purchase orders to MEG for such raw material requirements; however GDC
reserves the right to issue such purchase orders to other vendors if MEG cannot
meet the requirements of the purchase order. The price to GDC for such MEG
material shall be as set forth at Section 12.1 (i) below. MEG will work with GDC
personnel to manage the transition of future requirements to MEG at MEG
facilities.
8.0 TRANSITION PERIOD AND EMPLOYEES
8.1 During the Transition Period, GDC Products will be manufactured at the GDC
Naugatuck, CT facility and be in transition to MEG facilities. The GDC employees
utilized by GDC to manufacture the GDC Products prior to the Closing Date ("GDC
Employees") shall be retained by GDC and shall manufacture the GDC Products
under the direction of GDC. MEG and GDC shall work together in good faith during
the Transition Period to determine the scope and duration of the services to be
provided by the GDC Employees. As GDC Products move from the Transition period
to the Post-Transition Period, it shall be the responsibility of GDC at its sole
expense and discretion to either terminate the GDC Employees or transfer them to
other duties as it so determines.
8.2 There shall be no labor charge to MEG for the services of the GDC Employees
during the Transition Period, as the GDC Products manufactured during this
period shall be priced to GDC in accordance with the formula set forth below at
Section 12.2.
8.3 The following Sections of this Agreement do not apply to GDC Products within
the Transition Period: Section 15.1, Product Warranties and Remedies; Section
16.0, Inspection; Section 19.0, Rescheduling and Cancellation; and Section 21.0,
Changes To The GDC Products.
9.0 MANUFACTURING LICENSE
9.1 GDC hereby grants to MEG a nonexclusive, worldwide, nontransferable,
royalty-free license under all of GDC's Intellectual Property Rights, to use the
GDC Technical Information for the sole purpose of Manufacturing the GDC
Products, or mutually agreed-upon successor or additional products, for sale to
and purchase by GDC hereunder. MEG acknowledges and agrees that all Intellectual
Property Rights in the
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GDC Products Manufactured hereunder by MEG are and shall remain at all times the
exclusive property of GDC or its vendors and licensors and may be used by MEG
solely pursuant to this Agreement, and that MEG shall not become entitled to any
Intellectual Property Rights in any such products. MEG shall take all reasonable
measures to ensure that all Intellectual Property Rights of GDC in the products
remain with GDC.
9.2 All inventions and discoveries and other intellectual property rights
specifically with regard to the design and development of the GDC Products,
created and/or developed pursuant to or as a result of this Agreement by MEG,
shall be the sole and exclusive property of GDC. MEG hereby assigns and conveys,
and shall cause its employees and agents to assign and convey to GDC the entire
right, title and interest in and to the aforesaid, and shall deliver to GDC
signed instruments that may be required to vest in GDC the foregoing.
10.0 MANUFACTURING GOALS AND COST SAVINGS
10.1 MEG shall utilize its core competencies (printed circuit board fabrication,
cable manufacture, raw card manufacture, through-hole production, surface mount
technology, plastic injection molding, power supply manufacture and system level
configuration) as applicable in the performance of its obligations under this
Agreement, and acknowledges that the primary goals of GDC hereunder are to (i)
lower GDC's cost of acquiring GDC Products as set forth below at Section 10.3
and (ii) increase GDC's and GDC's customers' satisfaction with regard to the
quality and timeliness of the Manufacture of such products. MEG shall use its
best efforts at all times in the performance of this Agreement to achieve these
goals.
10.2 During the Post-Transition Period, fifty percent (50%) of all cost savings
created by MEG attributed to GDC Product-specific value added engineering design
changes shall be retained by MEG subject to the following: First, (i) the change
must be initially identified by MEG and subject to approval by GDC; and (ii) the
cost savings retained by MEG shall only be for the twelve (12) month period
following the date of MEG's initial shipment to GDC of such changed product.
Thereafter, these specific cost savings shall be retained by GDC. That portion
of the cost savings not retained by MEG shall be passed back to GDC in the form
of reduced Purchase Prices.
10.3 The parties acknowledge and agree that the primary goal of GDC in entering
into this Agreement is an overall reduction of its present costs to manufacture
the GDC Products. The initial cost reduction provided by MEG is evidenced by the
Purchase Prices set forth in Schedule 2. MEG's volume purchase capability with
regard to components and other raw material shall provide best market pricing
available; this best market pricing of components and raw material is the
primary element of the pricing formula described in Section 12.1 for future
pricing of GDC Products.
10.4 MEG agrees to allocate and reserve 3,000 cubic feet of secured,
environmentally controlled space for GDC finished goods inventory, at no charge
to GDC. MEG shall retain title to and risk of loss or damage to such finished
products until such time as they
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are shipped to GDC and GDC is invoiced for them. Upon shipment and invoice,
title shall transfer to GDC, and GDC shall have the risk of loss or damage to
such products.
11.0 PURCHASE VOLUME
11.1 So long as MEG is not in breach of any of its material obligations
hereunder, and subject to the terms and conditions of Section 3.0 above, GDC
shall purchase from MEG no less than eighty five percent (85%) of the total
dollar volume of its manufacturing requirements for the GDC Products during the
Term. This total dollar volume, based upon GDC's current forecast as of the
Closing Date, is anticipated to be approximately Thirty Million Dollars
($30,000,000) per year.
12.0 PURCHASE PRICE OF GDC PRODUCTS
12.1 "Purchase Price" means the net price that GDC Products Manufactured
hereunder are sold to and purchased by GDC and, for the Post-Transition Period,
are set forth in Schedule 2. The listing of GDC Products and associated Purchase
Prices set forth in Schedule 2 as of the Closing Date (the "Initial List") is
not a complete listing, and represents a level of savings to GDC with regard to
the GDC cost of manufacture of the same GDC Products. MEG shall provide a
complete Purchase Price listing for the balance of the GDC Products within
thirty (30) days following the date that GDC provides to MEG the bill of
materials for each such product (the "Complete List"). Such additional Purchase
Prices as set forth in the Complete List shall provide to GDC representative
savings as compared to the Initial List. Such listed Purchase Prices, all
subsequent revisions to Purchase Prices as allowed hereunder and Purchase Prices
for new GDC Products, are and shall be calculated by MEG for each GDC Product,
subject to the review and approval of GDC, in accordance with the following
model:
i. Material cost shall be calculated at MEG actual material cost
plus nine percent (9%);
ii. Labor cost for each GDC Product shall be calculated at the rate
of Twenty Five Dollars ($25.00) per hour; However, the number
of labor hours used to calculate the labor cost for each GDC
Product shall be the lower of (i) the number of hours as set
forth in GDC's current labor process routers as provided to
MEG, and (ii) the number of hours as determined by MEG as a
result of its own time and motion studies. GDC represents that
to the best of its knowledge, the data in labor process routers
provided to MEG are the result of time and motion studies and are
accurate in all material aspects, and to the extent the preceding
representation is not true with regard to any specific GDC
Product, then GDC shall not be in breach with regard to such
representation; however, the number of labor hours determined
by MEG as a result of its own studies shall then be used to
determine the Purchase Price for such GDC Product. In such
event, MEG shall represent to GDC that to the best of its
knowledge, the labor hours so determined are the result of time
and motion studies and are accurate in all material aspects.
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iii. MEG shall add a five percent (5%) mark-up to the costs above.
12.2 Purchase Prices for any GDC Product Manufactured at the GDC facility during
the Transition Period shall be priced to GDC in accordance with the following
model:
(i) If the GDC Product contains raw material purchased from GDC in
Schedules 9 and 10 and such material was used to Manufacture
the GDC Product at the GDC Naugatuck facility, the GDC Product
shall be priced to GDC at the price set forth in Schedule 9 or
10 as applicable.
(ii) If the GDC Product contains any raw material supplied by MEG
(other than material purchased from GDC in Schedules 9 an 10)
and such material was used to Manufacture the GDC Products at
the GDC Naugatuck facility, the GDC Product shall be priced to
GDC in accordance with Section 12.1 (i) only;
(iii) If the raw material was used to Manufacture the GDC Products
at a MEG facility, the GDC Product shall be priced to GDC in
accordance with Sections 12.1(i) through 12.1(iii).
12.3 GDC and MEG will work together in good faith to effectively manage, measure
and reconcile all inventory consumption and purchase of GDC Products occurring
during the Transition Period. No later than January 31, 2000 such reconciliation
shall be completed and settled. While the foregoing reconciliation is in process
during the month of January 2000, GDC will make a payment to MEG equal to Five
Million Two Hundred Six Thousand Five Hundred Dollars ($5,206,500.00) on January
3, 2000 to be applied by MEG towards the final reconciliation settlement. Any
raw material inventory which GDC purchased from MEG during the three month
period ended December 31, 1999, and which remains in GDC inventory on December
31, 1999, will be repurchased from GDC by MEG at the same price GDC originally
purchased such material from MEG.
12.4 MEG shall at all times maintain an "Open Book Policy" meaning that MEG
shall make available to GDC on a physical or electronic basis, all its business
records with regard to its performance of the Agreement as reasonably required
by GDC including, by way of example and not limitation, records with regard to
(i) calculation of all Purchase Prices, (ii) the cost of materials, labor and
administration and (iii) quality assurance and (iv) Manufacturing performance.
Such records shall be available during normal business hours upon reasonable
advance notice.
12.5 The parties shall meet and review the Purchase Prices six (6) months after
the Closing Date and twelve (12) months after the Closing Date. The Purchase
Prices shall be reviewed with regard to the Purchase Price calculations included
above. Adjustments shall be by mutual agreement, shall be prospective only, and
shall provide be effective no less than thirty (30) days following mutual
agreement. After the two adjustment periods above, Purchase Prices shall be
reviewed and fixed on and for consecutive twelve (12)
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month periods in accordance with this Section 12.5. Only in the event of any
industry-wide or sole source shortages of components affecting price or delivery
schedules, will GDC agree to negotiate with MEG any equitable, temporary
adjustments to the Purchase Prices contrary to the above.
13.0 GDC PURCHASE ORDERS/SCHEDULE.
13.1 The manufacture and shipment of GDC Products will be in accordance with GDC
Purchase Orders ("Purchase Order(s)"). Purchase Orders may be issued in hard
copy or electronically ("EDI") and will be issued at intervals as mutually
agreed. Issued Purchase Orders are firm (subject to the adjustment provisions at
Section 19 below) and will cover GDC requirements for GDC Products for the
subsequent ninety (90) days. Purchase Orders will state the quantity of and part
numbers for the GDC Products to be manufactured and shipped during the period
covered by the Purchase Order, as well as the GDC required delivery dates, and
Purchase Price. MEG will be measured for on time deliveries and therefore must
deliver GDC Product to GDC on the required delivery date, or within a window of
three (3) days early, zero (0) days late. MEG will confirm Purchase Orders
within 5 days of receipt. Delivery of the GDC Products in accordance with the
GDC required delivery dates as set forth in Schedule 3 or as otherwise agreed to
by MEG is a material obligation of MEG.
13.2 GDC shall provide to MEG, no less than once each month, a six (6) month
rolling forecast of GDC Product purchases. GDC forecasts of GDC Product
purchases beyond ninety (90) days (or some other mutually agreed period) are for
planning purposes only, are not firm, and will be issued at intervals as
mutually agreed. All forecasts provided by GDC shall be deemed to be GDC
Confidential Information regardless of whether marked as such, and shall be
treated by MEG in accordance with Section 27 below.
13.3 MEG will purchase only that material required for manufacturing Products
according to the quantity and delivery schedules set forth in Purchase Orders
issued by GDC during the term of this Agreement. MEG will purchase material for
the Products according to GDC Approved Vendor List ("AVL"), and subject to the
terms of Section 5A.0, Purchase and Sale of GDC Raw Material Inventory above.
The AVL is specific to the component manufacturer only and not the source of
supply. MEG reserves the right to procure components and material direct from
the manufacturer or through MEG's preferred distribution partners.
13.4 With GDC's prior written consent, which consent will not be unreasonably
withheld, MEG may purchase material in excess of Purchase Order requirements,
such as long lead-time components or components which can be purchased in volume
at a lower price. These instances (including the terms of disposal of any such
material) will be discussed and agreed to in writing by the parties prior to any
actual purchase.
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13.5 Material shortages. In the event of an industry shortage of certain
material to be used by MEG hereunder, which results in a temporary increase in
the cost of such material and/or an imposed allocation of supply, then MEG
agrees as follows:
i. GDC must approve the payment by MEG of any premium pricing with
regard to the material prior to its purchase by MEG, and MEG shall only
charge GDC for the material in accordance with the applicable pricing
formula set forth in Section 12 above, excluding any premium. The
amount of any premium paid by MEG shall be invoiced to GDC separately.
ii. In the event of any allocation of supply imposed upon MEG by its
supplier(s), then the amount to be utilized by MEG for the Manufacture
of the GDC Products hereunder shall be a pro rata percentage as
follows: For example, if the forecast for the Manufacture of GDC
Products (provided by GDC to MEG hereunder) is to consume seventy five
percent (75%) of the MEG overall requirements for the allocated
material for the same period, then MEG shall utilize seventy five
percent (75%) of it supply for the Manufacture of the GDC Products in
such period.
13.6 GDC warrants, as of the Closing Date, that to the best of its knowledge it
is not in material breach with regard to delivery of GDC Product to its
customers in any material aspect. GDC warrants that the Initial Forecast
provided in Schedule 8, to the best of its knowledge, reflects the demand for
GDC Products based upon the data available to GDC as of the Closing Date.
14.0 PAYMENT TERMS.
14.1 Payment terms are net thirty (30) days from invoice date in United States
dollars. The invoice date shall be no earlier than the ship date. Payments are
not subject to offset or setoff. Invoices not paid within thirty (30) days will
carry an interest charge of 1-1/2% per month. Acceptance of a partial payment
will not be a waiver of the right to be paid the remainder due.
15.0 PRODUCT WARRANTIES, TESTING, AND REMEDIES.
15.1 MEG warrants to GDC that each GDC Product manufactured hereunder shall be
(i) free from defects in material and workmanship and (ii) meet the GDC Quality
Requirements as set forth in Schedule 4 for twelve (12) months from the date GDC
ships the GDC Product to its customer, not to exceed fifteen (15) months from
the date of original shipment by MEG to GDC (the "Warranty Period"). In
addition, MEG warrants and represents that all GDC Product delivered to GDC by
MEG shall be Manufactured in accordance with the Manufacturing Specifications
set forth in Schedule 6 and, unless otherwise agreed to by GDC, shall meet the
Delivery Performance Requirements as set forth in Schedule 3 (the "Product
Warranty"). Repair made by MEG to GDC Products are warranted against defects in
material and workmanship for a period equal to the
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greater of ninety (90) days following the return of such product(s) to GDC or
the remaining term of the Warranty Period. GDC Product returns that are due to
either DOA (dead on arrival) or OOB (out of box failure) causes shall not be
deemed to be repairs and subject to the preceding sentence. Such product shall
be promptly replaced by MEG and a new Warranty Period shall then commence upon
shipment of the GDC Product to GDC.
15.2 The Product Warranty shall not apply to (i) GDC Product that is abused,
damaged, misused or altered other than by MEG, or (ii) Product damaged by
shipping or other external causes not directly contributed to by MEG.
15.3 GDC Products shall be deemed accepted by GDC if they are manufactured in
accordance with MEG's manufacturing workmanship standards, conform to the
applicable requirements of all Schedules hereto, and successfully complete any
mutually agreed upon GDC Product Acceptance Tests. These Product Acceptance
Tests will be provided by GDC at closing utilizing GDC's test equipment and
subject to GDC's test procedures, standards, and referenced by GDC's historical
test yields (ICT, Functional) and all other supporting data. GDC may perform
acceptance testing which measures a different array of performance criteria but
the parties agree that the mutually agreed upon GDC Product Acceptance Test will
be the measurement standard to determine if the GDC Product meets
specifications. GDC acceptance of GDC Products shall not relieve MEG of its
Product Warranty obligations hereunder.
All claims for breach of warranty must be received by MEG from GDC no later than
thirty (30) days after the expiration of the Warranty Period for the GDC
Product.
15.4 Except as may be expressly set forth in this Agreement, the Product
Warranty is the only warranty given by MEG with regard to the GDC Products. MEG
makes no other warranty either expressed or implied. All warranties of
merchantability or fitness for a particular purpose or use are expressly
disclaimed and excluded herefrom.
15.5 MEG shall, upon notification of a warranty claim and at its option, repair
the defective GDC Product at a MEG facility of its choice, replace the defective
GDC Product with another such GDC Product, or return the Purchase Price. In the
case of repair, all repairs will be made and MEG will return the repaired
product to GDC within ten (10) days of receipt. This 10 day return, under
warranty, will be treated as a "zero" dollar transaction, and will not involve a
debit or credit between the parties.
15.6 GDC will consign to MEG all required test fixtures to support the quality
production of GDC products, including but not limited to, In-Circuit Test
Fixtures (ICT) and Functional Test Fixtures all of which are believed to be in
good working order and capable of qualifying product to GDC's specifications.
The parties will enter into a written Consignment Agreement at a future date to
be determined and containing customary terms and conditions. Such agreement
shall provide at a minimum that (i) MEG will have the opportunity to review all
test fixtures during the first piece production at MEG's facility and will be
given the right to determine the "acceptance quality" of
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said equipment. If the test fixtures are deemed to be inadequate to perform the
required test per reasonable standards and as agreed by the parties, then GDC
will be responsible for correction of the fixtures; (ii) Risk of loss or damage
to and maintenance of the test fixtures will be the responsibility of MEG and
(iii) Engineering changes directed by GDC, may affect the functionality of GDC's
test fixtures and will therefore be the sole financial responsibility of GDC if
fixtures are to be reworked. MEG will submit pricing to GDC for fixture
modification as required.
15.7 Unless expressly agreed to by MEG in writing, MEG makes no warranty that
the products will (i) meet any specification not made, known to and agreed to by
MEG, or (ii) receive the approval of or be certified by Underwriters Laboratory,
any Federal, State, Local, or Foreign Government Agency (including without
limitation the Federal Communications Commission) or any other person or entity.
MEG assumes no responsibility for obtaining such approvals or certifications, or
meeting such specifications.
15.8 MEG Quality Complaints. - In the event GDC determines that GDC Product
furnished hereunder does not perform in a satisfactory manner or is
unsatisfactory in other respects, GDC shall issue a Quality Complaint in writing
to MEG specifying in detail the nature of the defect or problem (the "QC"). MEG
shall provide an acknowledgement in writing to GDC within three (3) days of
receipt. Within twenty (20) days thereafter, MEG shall provide a comprehensive
report to GDC specifying, as required, the change in the manufacturing process
required to address the GDC concern in the QC. The report will include, by way
of example and not limitation, the root cause of the QC, condition and plan for
immediate corrective action to remedy the QC, and a long term plan to ensure
that continued quality GDC Products are delivered by MEG.
15.9 GDC warrants to MEG that to the best of its knowledge any Technical
Information including but not limited to test fixtures, standards, historical
test yields (ICT, Functional Test) and all other data is accurate and may be
used by MEG to meet GDC's product requirements, unless GDC informs MEG
otherwise.
15.10 Any agreement to modify standards or procedures must be in writing and
agreed to by both parties.
15.11 MEG will repair and/or upgrade GDC Products which are outside the warranty
period on mutually agreed prices and terms and conditions to be negotiated by
the parties on a per product basis. MEG shall at all times use its best efforts
to maximize efficiencies in labor and cost with regard to such repair.
15.12 Any warranties contained in this agreement will inure to the benefit of
MEG and GDC and permitted assigns, and may not be the basis for any claim or
cause of action of parties other than MEG or GDC or such assigns.
16.0 INSPECTION
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16.1 Subject to Section 16.2 below, GDC may inspect incoming GDC Products at all
times and places and may base acceptance or rejection of any or all GDC Products
on generally accepted sampling techniques. MEG, without additional charge, shall
provide all reasonable facilities and assistance. GDC inspection shall not
relieve MEG from performing full and adequate test and inspection.
16.2 GDC shall inspect each shipment of GDC Products and give MEG written notice
of any defects or count or other discrepancies within fifteen (15) days of
receipt. If GDC does not inspect Products within fifteen (15) days, the Products
will be considered accepted by GDC; any Product defects reported after fifteen
(15) days will be covered by the warranty provisions of this Agreement. GDC will
follow MEG's RMA procedure for return of Products.
17.0 OWNERSHIP OF PRODUCT
17.1 GDC shall retain sole and exclusive ownership rights to the GDC Product(s)
Manufactured by MEG (and all Technical Information) and, except for the limited
rights provided MEG in Section 24, Bankruptcy of GDC, GDC shall have the
exclusive right to purchase and market the GDC Products.
18.0 PRIMARY CONTACT PERSONS
18.1 Each party shall assign one individual to act as primary contact person for
business issues, one individual to act as primary contact person for contract
issues, and one individual to act as primary contact person for technical
issues, however, it is MEG's intent to have a "Customer Executive" assigned as
the "prime" contact for all initial communications.
19.0 RESCHEDULING AND CANCELLATION.
19.1 Unless otherwise agreed by both parties on a case by case basis, GDC may
reschedule Purchase Order deliveries without charge per the following schedule:
RESCHEDULE %
DAYS' PRIOR NOTICE Purchase Order
0-30 days 25%
31-90 days 50%
over 90 days 100%
19.2 GDC may cancel Purchase Orders at any time subject to the terms of Section
22.0 or as otherwise agreed to by the parties in writing.
19.3 Any schedule acceleration requested by GDC will be subject to component
availability.
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20.0 NON-RECURRING ENGINEERING CHARGES.
20.1 With regard to any special design or engineering change requests made by
GDC, the parties will mutually agree on MEG provided non-recurring engineering,
set up and tooling charges ("NRE") required to Manufacture such special
products. NRE, set-up, and tooling charges may be amortized for payment by GDC
over the first twelve (12) months of prototype, pilot, and product delivery
under this agreement, however, this process is subject to review based on the
size and nature of the investment.
21.0 CHANGES TO THE GDC PRODUCTS
21.1 MEG will not make any changes to the GDC Products without GDC prior written
authorization. MEG will make GDC requested engineering changes ("EC's") to the
Products as required by the GDC EC. An EC request will include sufficient
information for evaluation of its feasibility and cost impact. MEG will respond
to EC requests in writing and provide cost and other relevant data within a time
period that is reasonable considering the magnitude of the EC, but in any event
not later than thirty (30) days after receipt of the EC. This process may change
GDC's Purchase Price of Product listed in Schedule 2.
21.2 GDC may from time to time change the specifications for the Products or the
work required of MEG hereunder and MEG agrees to implement the change per GDC's
reasonable requested schedule. If changes result in a change in MEG's costs or
in the time for performance, an adjustment will be made. Any adjustment must be
in writing and MEG shall not be required to implement such change until the
Parties have mutually agreed upon the adjustment to the Purchase Price if any.
In the event of a change necessitated by safety requirements or by law, MEG
agrees to use its best efforts to implement said change as soon as possible.
21.3 MEG agrees not to make any changes in its processes or manufacturing
standards which would affect form, fit, or function of the GDC Product, without
first obtaining written agreement from GDC, which permission will not be
unreasonably withheld. MEG will notify GDC at least ninety (90) days in advance
of any such changes.
22.0 TERMINATION/DEFAULT
22.1 Obligations of GDC
22.1.1 Upon termination of a Purchase Order by GDC, or upon expiration of this
Agreement without renewal or termination of this Agreement by MEG for default of
GDC, GDC shall reimburse MEG for:
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(i) All finished GDC Products (specifically for the Purchase Orders in the
case of a cancelled Purchase Order(s) ) and for all finished product,
in the case of the termination of the Agreement, scheduled for shipment
within ninety (90) days immediately following the date of MEG's receipt
of the cancellation or the effective date of the termination notice
(the "Notice Date"); and all additional finished goods as mutually
agreed to in writing;
(ii) all Work-In-Process as of the Notice Date and;
(iii) All components, subassemblies and other material purchased by MEG
to fill a Purchase Order or authorized by GDC to be purchased by MEG
which are on hand or on non cancelable orders as of the Notice Date.
Without limitation this includes raw material inventory made
obsolete or in excess due to GDC's changes to the specifications or
GDC Products, minimum buy quantities, and reel quantities. Items
(i)-(iii) above are referred to as the "Termination Inventory". In
calculating the quantity of finished GDC Products under (i) above, GDC
Products rescheduled for manufacture and shipment during the ninety
(90) days immediately prior to the Notice Date may be counted by MEG.
22.1.2 MEG will make every reasonable effort to use the Termination Inventory on
other current programs at the facility where the GDC Products are manufactured
and at other MEG facilities, will make every reasonable effort to cancel all
outstanding material orders with vendors, and will attempt to return raw
material inventory to vendors. GDC will be responsible only for costs, charges,
and fees actually incurred by MEG to cancel or return any portion of the
Termination Inventory to vendors and, upon mutual agreement, the cost to modify
portions of the Termination Inventory for other MEG programs.
22.1.3 Within thirty (30) days from termination or cancellation, MEG will
invoice, and GDC will purchase, the Termination Inventory remaining after vendor
cancellations and returns and after other program use, as follows: (i) for Raw
Material Inventory and authorized long lead time components, at MEG's purchase
price plus overhead as calculated in Section 12.1. MEG will provide GDC with
evidence of purchase price upon request; (ii) For WIP, at a reasonable pro rata
percentage of the finished GDC Product Purchase Price; and (iii) for Finished
GDC Product, at the Purchase Price in effect at termination or cancellation. GDC
will be responsible for any negative price differentials between the price MEG
paid for the raw material Inventory and authorized long lead time components and
the price at which MEG was able to return the items. MEG will credit or refund
to GDC at GDC's option any positive price differentials after application of
Section 12.1 pricing model.
22.1.4 In the event that this Agreement is terminated by MEG for default of GDC,
GDC shall pay to MEG, upon written notice given to GDC and within thirty days
following the effective date of termination, in addition to the above payments
for inventory and finished product, the depreciated value of the Manufacturing
Equipment as of the date of
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default. The Manufacturing Equipment will be depreciated on a straight line
basis by MEG over a thirty six (36) month period (decremented monthly) based
upon a purchase price of Two Million Dollars ($2,000,000.00). Upon payment to
MEG of such depreciated amount, MEG shall transfer title to and possession of
such Manufacturing Equipment to GDC free and clear of all liens, claims and
encumbrances. MEG shall have the option to retain the Manufacturing Equipment,
and in such event GDC shall have no liability to MEG for any payment whatsoever
with regard to the Manufacturing Equipment. The depreciation period starts on
the Closing Date.
22.2 Obligations of MEG
22.2.1 Upon the termination of this Agreement or any outstanding Purchase Order
by GDC for default of MEG, MEG shall reimburse GDC for:
(i) all costs, expenses, disbursements, direct damages and liabilities
(including reasonable legal fees) incurred and paid by GDC as a result of such
default and arising from (a) the transitioning by GDC of the Manufacture of the
GDC Products to a third party manufacturer or back to a GDC facility for
manufacture by GDC, and (b) penalties and damages paid by GDC to its customers
for failure to deliver GDC Products in accordance with the terms of the
contracts with such customers. In the event GDC must pay a third party
manufacturer to manufacture the GDC Products at prices that are in excess of the
Purchase Prices herein, then MEG shall pay to GDC the difference between the
third party prices and the Purchase Prices herein for each GDC Product
manufactured by such third party during the remainder of the Term herein.
22.3 Termination in General
22.3.1 This agreement may be terminated by expressed written consent by both
parties, having the expressed purpose of terminating this agreement.
22.3.2 Termination for Cause. This Agreement or any outstanding Purchase Order
may be terminated by either party in whole or in part via written notice to the
other party following the failure by either party to perform any of its material
performance obligations under this Agreement and to cure such failure within
thirty (30) days after receipt of written notice describing the failure in
sufficient detail, or if the failure cannot be completely cured within thirty
(30) days, failure to make substantial progress towards a cure within the thirty
(30) day period.
22.3.3 Default
In the event of material default by either party, and, written notification of
said default to the defaulting party, the defaulting party shall have, subject
to the substantial progress exception above, (30) days to cure said default.
(i) In the event of an uncured default, after written notification
for nonpayment of a sum certain due, following a thirty (30)
day cure period,
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then the non defaulting party may upon written notice, declare
this Agreement to be terminated.
(ii) For material breach, other than non payment and failure in
delivery (see below), then upon written notice default and
intent to terminate this Agreement, the defaulting party shall
have an additional fifteen (15) day period to cure such
default.
(iii) This additional notice and period to cure shall not affect the
non defaulting parties' right to damages, expenses, and costs
within the initial (30) day period after notice.
(iv) In the event that after notification, said default is not
cured within thirty (30) days or the forty five (45) days as
applicable, then in addition to any other rights the non
defaulting party may have hereunder, or at law or equity for
such default, defaulting party shall be liable for all
reasonable costs, expenses, direct damages, and reasonable
legal fees occasioned to the non defaulting party thereby.
(v) Notwithstanding anything to the contrary above, MEG shall
continue to accept orders from GDC for the GDC Products for a
period not to exceed one hundred twenty (120) days following
the termination or expiration of this Agreement, so long as
GDC is current on all payment obligations to MEG.
22.4 Failure in delivery by MEG occurs when the MEG delivery rate to GDC in a
thirty (30) day period falls below ninety percent (90%) of the scheduled
commitment for such thirty (30) day period. MEG shall have the next thirty (30)
days to cure such failure by achieving a delivery rate equal to or greater than
ninety percent (90%) of the scheduled commitment for such next thirty (30) day
period. No additional cure period shall be available to MEG.
22.4.1 In the event a failure in delivery above, (or any individual instance
of a failure by MEG to meet the delivery requirements of a particular
order), causes a GDC customer to cancel its order to GDC for the
delayed GDC Products, then GDC shall have the right to return the GDC
Products to MEG without penalty for a refund or credit at GDC's option.
22.4.2 In the event GDC is subject to liquidated damages for failure to timely
deliver GDC Products to its customer, and GDC gives MEG notice of such
liquidated damages and the required delivery dates and makes the
acceptance of same by MEG a condition of the order, and MEG accepts
such conditions and the order from GDC, then, MEG shall reimburse GDC
to the extent that GDC has paid liquidated damages to its customer as
a result of a late delivery of GDC Products caused by MEG late delivery
to GDC. The prior notice provisions of this Section 22.4.2 shall
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not apply to MEG obligations under Section 22.2.1(i)(b) above as it
relates to termination for default.
22.4.3 The only exception to the MEG obligations above is a force majeure
condition as set forth in Section 29.8 below; however, in such event,
MEG shall work in good faith with GDC to find a fair and equitable
resolution to the specific failure to deliver matter.
22.5 Additional Rights Upon Expiration/Termination. Upon the termination of this
Agreement for default of MEG, MEG shall, upon request of GDC, provide at no
charge reasonable training for GDC personnel and/or any third party personnel
with regard to the goal of continued performance of the services set forth
herein by such personnel. The dates, location, and duration of the training
shall be as reasonably required in order to achieve the goal above, but in any
event shall be completed no later than the effective date of termination or
expiration. In the event of the termination of this Agreement for the default of
GDC, or the expiration of this Agreement without renewal, GDC shall pay MEG at
the rate of $100.00 per trainer hour for such training plus reasonable travel
and living expenses.
22.6 Termination Fee. In the event that this Agreement is terminated by MEG
during the first twelve (12) month period following the Closing Date for the
default of GDC, then, in addition to any other rights or remedies available to
MEG for such default hereunder, GDC shall pay to MEG a termination fee in the
amount of Two Hundred Fifty Thousand Dollars ($250,000.00).
22.7 Return of Documents. Upon the expiration or termination of this Agreement
for any reason, and upon the request of GDC, MEG shall return to GDC, prior to
the effective date of such termination or expiration, all Technical Information
and Confidential Information in its possession without retaining any copies.
23.0 DISPUTE RESOLUTION BY THE PARTIES
23.1 Dispute Resolution. A designated representative of GDC and a designated
representative of MEG shall meet as often as requested by either party to review
the performance of MEG hereunder. In the event of any dispute that cannot be
resolved by such representatives, then upon the written notice of either party,
each party shall appoint a designated officer whose task will be to meet to
resolve such dispute within five (5) days after receipt of notice. The
designated officers shall meet as often as the parties reasonably deem necessary
during such period in order to gather and review all information with respect to
the disputed matter. Such officers will discuss the problem and negotiate in
good faith without the necessity of any formal proceeding. No formal proceedings
for the judicial resolution of such dispute shall be commenced by a party, nor
any action taken to terminate this Agreement for cause, until that party's
designated officer has concluded in good faith that a reasonable resolution
through continued negotiation of the matter at issue does not appear to be
imminent or likely. The
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procedures above shall apply to the resolution of performance issues and shall
not prevent a party from seeking injunctive relief at any time.
IN THE EVENT OF BANKRUPTCY OF GDC
24.1 In the event that GDC files a petition under Chapter 7 or Chapter 11 of the
US Bankruptcy Code where (a) this agreement is not assumed without modification;
(b) a liquidation plan is filed that involves the dissolution of that portion of
GDC's business related to the GDC Products; or (c) the bankruptcy trustee or GDC
rejects this Agreement, (each a "Bankruptcy Event") then MEG is hereby granted a
non-exclusive, royalty-free (except for any royalties payable to third parties
which shall be paid by MEG), limited term and restricted right and license to
use the Technical Information in its possession with regard to the GDC Products,
any licensed tool, jigs, gages, fixtures and equipment, the proprietary
specifications and all other GDC manufacturing documents related to the GDC
Products and all other manufacturing level documents related to the GDC
Products, together with all other documents and intellectual property above the
manufacturing level as may be reasonably necessary to modify or correct the
manufacturing process, including without limitation software and the source
codes therein which GDC owns or is otherwise authorized to license to third
parties, for the sole and limited purpose of Manufacturing the GDC Products and
selling such Manufactured units subject to the following conditions:
24.1.1 The license above shall only apply to the utilization by MEG of
such GDC Product raw material inventory, WIP and finished product on hand at MEG
facilities as of the date of the Bankruptcy Event. The license shall terminate
upon the first to occur of (i) consumption of all the raw material and WIP and
disposal of all the resulting finished product, or (ii) expiration of ninety
(90) days after the Bankruptcy Event.
24.1.2 GDC shall, to the extent it is able, assist MEG in the disposal
of the GDC Product Manufactured above; however, in the event MEG sells such
products to any entity other than GDC or independent of any coordinating efforts
GDC, then MEG shall remove and shall not sell such products with the GDC
trademarks, logos and markings, and shall not advertise nor identify such
products in any publication or posting as a GDC Product.
24.1.3 Solely with regard to this Section 24.1, and solely with regard
to the sale by MEG of GDC Products marked with GDC identification marks or
logos, MEG shall not sell any GDC Products (except to GDC) for less than ninety
percent (90%) of the GDC average invoice price for such GDC Products as
calculated for the prior six (6) month period.
24.1.4 GDC shall have no obligation or liability whatsoever for any GDC
Products sold by MEG to third parties hereunder, and MEG shall indemnify and
hold GDC harmless from and against any and all third party claims arising from
or related to the sale by MEG of such GDC Products.
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24.2 Upon the termination of the license under this Section 24, all Technical
Information and any other GDC Confidential Information provided to MEG
(including all copies) will be returned to GDC at MEG's sole cost and expense.
The obligations contained in this paragraph shall be binding upon GDC regardless
of the rejection of this agreement in the context of a pending bankruptcy
proceeding.
25.0 INFRINGEMENT/INDEMNIFICATION/INSURANCE
25.1 MEG shall, upon written demand, defend, indemnify and hold GDC harmless
against and reimburse GDC on demand for any claims, loss, damage, liability,
cost and expense (each a "Claim") including, without limitation, reasonable
attorney's fees, to the extent incurred by GDC by reason of:
(i) Any breach by MEG of its representations as set forth in
Section 4.0 above;
(ii) The negligence of MEG, its employees, agents, or the
employees and agents of its Affiliates in connection with the
Manufacture of the GDC Products; or
(iii) The use or disclosure of Confidential Information in violation
of the terms of this Agreement by MEG, its employees, agents
or the employees, agents of its Affiliates, or others acting
on its behalf.
25.2 Except for the GDC Products or portions of the GDC Products that are the
other party's design, each party is responsible for their portion of the design
of the GDC Products. Upon demand, that party will promptly defend, indemnify and
hold the other party, its officers, directors, employees, agents, successors and
assigns, harmless from and against every kind of cost, expense or loss
(including attorneys' fees and legal costs) directly relating to any claim or
threatened claim: (a) that any GDC Product or portion of a GDC Product violates
the intellectual property rights of a third party (foreign or domestic); (b)
that the Product has a design defect; or, (c) and except to the extent caused by
the other party, arising from or related to the distribution, sale or use of any
GDC Product or portion of a GDC Product. The immediately preceding sentence will
apply whether the claim is based upon contract, tort or any other legal theory.
25.3 GDC is solely responsible for any claim that the Manufacture of any GDC
Products by MEG in accordance with the terms of this Agreement infringes a third
party's U.S. patent, copyright, trade secret and/or other proprietary rights in
the United States. GDC will pay any costs, damages, and attorneys' fees for any
such infringement, provided that (i) MEG notifies GDC in writing, immediately
upon MEG's receipt of any such claim; (ii) GDC has sole control of the defense
of, and all related settlement negotiations for, any such claim; and (iii) MEG
cooperates fully, and furnishes all related evidence in its control relating to,
any such claim.
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25.4 GDC shall have no obligation or liability to MEG for any claim under this
Section 25 if such claim is caused by any alteration, Manufacture or
modification of any GDC Product(s) by MEG not authorized by GDC. In such events
MEG shall defend, hold harmless, and indemnify GDC.
25.5 Each party's obligation to defend and indemnify hereunder is conditioned
upon (i) receipt by the indemnifying party of timely written notice of the Claim
from the other party, (ii) the continuing full cooperation of the other party in
the defense of the Claim and the disclosure to the indemnifying party or its
attorneys of all evidence related to the Claim, and (iii) the indemnifying party
having the sole control of the defense and settlement of the Claim.
25.6 INSURANCE At all times during the Term, MEG shall maintain in force
comprehensive general liability insurance in the amounts of not less than Two
Million Dollars ($2,000,000) per occurrence and Twenty Million Dollars
($20,000,000) in the aggregate. MEG shall provide to GDC a Certificate of
Insurance in a form reasonably acceptable to GDC for each policy of insurance
required by this Section 25.6. Such Certificate of Insurance and all
subsequently issued Certificates of Insurance shall provide that the policy
shall not be canceled, changed or non renewed without at least thirty (30) days
prior written notice. Each Certificate of Insurance shall be delivered to GDC no
later than twenty (20) days after the Closing Date or date of renewal of the
policy as applicable. In addition, MEG shall at all times during the Term
maintain in force "all risk" property insurance for 100% replacement value, and
business interruption insurance in an amount equal to no less than 80% of MEG's
gross earnings, and shall provide to GDC Certificates of Insurance evidencing
such coverage.
26.0 TRADEMARKS AND PUBLIC ANNOUNCEMENTS
26.1 Except as expressly provided herein, this Agreement shall not include any
license or right for either party to use any trademark or trade name used or
claimed by the other (the "Trademarks"). All permitted uses of Trademarks by
each party in connection with the GDC Products or the packaging thereof shall be
in strict compliance with any conventions of the other concerning the same.
26.2 Neither GDC nor MEG shall, without first obtaining the written consent of
the other party hereto, in any manner, (i) advertise or publish or release for
publication any statement (including verbal information) mentioning the other
party or the fact that this Agreement has been entered into, (ii) release any
information concerning its relationship with the other party (including all
terms and conditions of this Agreement), or (iii) indicate any information about
the other party that is not already available as public information, except GDC
may do the foregoing in compliance with SEC regulations or as otherwise required
by law.
27.0 CONFIDENTIAL INFORMATION
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27.1 As used in this Agreement, "Confidential Information" means any business or
technical information disclosed, either orally or in writing, by one party to
the other under this Agreement provided, that if the information is disclosed in
writing, it must be clearly labeled as "Confidential", "Proprietary" or with a
similar legend, and if the information is disclosed orally, it must be (i)
identified as Confidential Information at the time of disclosure by the
disclosing party and (ii) summarized in a writing confirming it is Confidential
Information and sent to the receiving party within fifteen (15) days after
disclosure. Notwithstanding the above, all Technical Information shall be deemed
to be Confidential Information regardless of marking.
27.2 Confidential Information does not include information that the receiving
party can demonstrate (i) is now, or hereafter becomes, through no fault of the
receiving party, generally known or available to the public; (ii) was known by
the receiving party before receiving such information from the disclosing party;
(iii) is hereafter rightfully obtained by the receiving party from a third
party, without breach of any obligation to the disclosing party; or (iv) is
independently developed by the receiving party without use of or reference to
the Confidential Information by persons who had no access to the Confidential
Information.
27.3 Each party agrees to hold the other party's Confidential Information in
strict confidence and not to disclose such Confidential Information to any third
party except as specifically authorized by this Agreement or by the other party
in writing. Each party may disclose the other's Confidential Information to its
employees with a bona fide need to know such Confidential Information, but only
to the extent necessary to carry out the purposes of this Agreement.
27.4 All Confidential Information disclosed hereunder is and shall remain the
property of the disclosing party. No right or license is granted other than as
expressly set forth in this Agreement.
27.5 Upon the disclosing party's request or upon the termination or expiration
of this Agreement, the receiving party shall promptly return to the disclosing
party all copies of the Confidential Information, will destroy all notes,
abstracts, or other documents that contain Confidential Information, and will
provide to the disclosing party a written certification of an officer of the
receiving party that it has done so.
27.6 These Section 27.0 obligations shall survive the expiration or termination
of this Agreement for a period of five (5) years.
28.0 USE OF SUBCONTRACTORS
28.1 MEG agrees that it will not use any third party subcontractors to provide
services with regard to the manufacture of GDC Product without GDC's prior
written consent, which consent will not be unreasonably withheld.
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28.2 MEG agrees to provide GDC with no less than thirty (30) days' written
notice in the event of a change of location of the MEG manufacturing site. GDC
shall have the right of approval of such new site, which approval will not be
unreasonably withheld.
29.0 GENERAL.
29.1 This Agreement and its Schedules make up the entire agreement between the
parties regarding the Manufacture of the GDC Products. This Agreement supersedes
all prior oral and written agreements and understandings between the parties
relating to the Manufacture of the GDC Products, and may only be amended or
modified in writing signed by an authorized representative of each party. This
Agreement supersedes and replaces any terms and conditions of any Purchase
Order, Acknowledgment, Schedule, or other standard form of commercial document
of either party exchanged between the parties during the Term.
29.2 Unless otherwise agreed, GDC shall be (i) the exporter of record for any
GDC Products and/or GDC Product documentation exported from the United States,
and shall comply with all applicable U.S. export control statutes and
regulations, and (ii) the importer of record for all GDC Products exported from
the U.S. and later imported and returned to GDC or to MEG. MEG will cooperate
with GDC in obtaining any export or import licenses for the Products.
29.3 EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, IN NO EVENT SHALL EITHER
PARTY BE LIABLE TO THE OTHER PARTY OR A THIRD PARTY FOR ANY SPECIAL, INCIDENTAL,
PUNITIVE OR CONSEQUENTIAL DAMAGES, WHETHER BASED UPON CONTRACT, TORT, OR ANY
OTHER LEGAL THEORY (INCLUDING, WITHOUT LIMITATION, LOST PROFITS AND
OPPORTUNITY).
29.4 This Agreement is intended solely for the benefit of the executing parties
and their permitted successors and assigns. Except as otherwise agreed, no other
person or entity shall have any rights under or in connection with this
Agreement. The parties hereto are independent contractors, one with the other,
and nothing herein shall constitute either party the agent or legal
representative of the other for any purpose whatsoever except as specifically
set forth in this Agreement.
29.5 The parties agree that transmission of data by EDI (electronic data
interchange) will not occur until a separate agreement between the parties
governing such transmissions is executed. Upon execution, such EDI agreement
will become by addendum an attachment to this Agreement.
29.6 Any notice required or permitted to be given hereunder shall be in writing
and shall be deemed to have been given and received in all respects when
personally delivered, received by courier, or sent by certified mail, return
receipt requested, postage prepaid, addressed and delivered in all cases to the
following:
27
<PAGE>
If to GDC: Ross A. Belson
Chief Operating Officer
General DataComm, Inc.
Park Road Extension
Middlebury, CT 06762
With a copy to:
Bruce L. Galaro, Esq.
Corporate Counsel
(at the same address above)
If to MEG: Dana M. Pittman
Chief Operating Officer
Matco Electronics Group, Inc.
320 North Jensen Road
Vestal, NY 13850
With a copy to:
G. Peter Van Zandt, Esq.
507 Press Building
19 Chenango Street
Binghamton, NY 13901
29.7 Neither party may sell, transfer or assign any right, duty or obligation
granted or imposed upon it under this Agreement without the prior written
consent of the other party; however, GDC may assign this Agreement in whole or
in part without such consent to (i) any entity that acquires substantially all
its capital stock or assets, (ii) any entity that acquires substantially all the
assets of any business unit of GDC whose business is part of the subject matter
hereof, or (iii) to any Affiliate.
29.8 Neither party shall be liable for damages and costs to the other party
arising out of delays or failures to perform under this Agreement if such delays
or failures result from causes beyond the reasonable control of a party, and are
not caused by an act or omission of such party. Notice of any such delays or
failures and explanation of their causes must be given to the other party within
five (5) days of the occurrence. In the event occurrence will likely cause a
delay of more than ten (10) days with regard to MEG performance, GDC shall have
the right to terminate the affected installments under any Purchase Order. In
the event the occurrence will likely cause a delay of more than thirty (30) days
with regard to MEG performance, GDC shall have the right to have the affected
GDC Products manufactured by a third party for the duration of the occurrence,
and MEG shall reimburse GDC for any amounts paid to such third party in excess
of the Purchase Price herein for such GDC Product. In the event the occurrence
will likely cause a delay of more than sixty (60) days with regard to MEG
performance, GDC shall have the right to
28
<PAGE>
terminate the affected Purchase Order without further liability or penalty. This
force majeure provision may not be invoked for failure or inability to make a
payment under this Agreement.
29.9 Each party certifies that the individuals executing this Agreement on its
behalf have the legal authority to bind that party.
29.10 This Agreement shall be deemed to have been entered into and shall be
construed and enforced in accordance with the laws of the State of New York. In
the event of any legal action by either party arising from or related to this
Agreement, both parties consent to exclusive venue and jurisdiction of the state
courts of New York State or federal courts situated in the State of New York.
Both parties agree to comply with all local, state, and federal laws in
connection with their efforts pursuant to this agreement; and agree to indemnify
and hold harmless the other from and against all costs, damages, and reasonable
legal fees arising from failure to so comply.
29.11 For a period of three (3) years from the date hereof, MEG shall not,
directly or indirectly, either solicit for employment, offer employment, hire or
use the services of any employee of GDC so long as such employee is employed in
any GDC organization and for a period of one hundred eighty (180) days
thereafter, without first receiving the written consent of GDC.
29.12 Any waiver of a breach of this Agreement shall not be a waiver of any
other or subsequent breach.
29.13 Any indemnification obligations of a party hereto shall survive the
termination or expiration of this Agreement for a period of one (1) year. Any
other Section or the specific provisions of any other Section which by their
nature are clearly intended to survive the expiration or termination of this
Agreement, shall survive any expiration or termination of this Agreement.
IN WITNESS WHEREOF, each party represents that it has caused this Agreement to
be executed on its behalf on the date first above written by a representative
empowered to bind that party with respect to the undertakings and obligations
contained herein.
GENERAL DATACOMM, INC MATCO ELECTRONICS GROUP, INC.
BY: /S/WILLIAM G. HENRY BY /S/ DANA PITTMAN
TITLE: Vice President TITLE: Chief Operating Officer
29
General DataComm Industries, Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS
FIVE-YEAR SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE, RATIO AND EMPLOYEE DATA)
<TABLE>
<CAPTION>
Years ended September 30, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $171,017 $194,255 $207,766 $235,129 $221,193
Restructuring of operations and
other charges (2,000) (2,500) -- -- (7,600)
Operating loss (23,700) (26,740) (38,419) (14,726) (24,618)
- ---------------------------------------------------------------------------------------------
Net loss (22,606)(1) (33,392) (42,751) (17,170)(2) (27,630)
Basic and diluted loss per share $ (1.12)(1) $ (1.64) $ (2.11) $ (0.83)(2) $ (1.40)
=============================================================================================
Total assets 140,374 149,538 187,335 205,054 198,388
Long-term debt, less current
portion 64,532 52,679 49,293 22,781 23,435
=============================================================================================
</TABLE>
(1) Fiscal 1999 net loss includes a gain of $9.0 million, or $0.41 per share,
from the sale of a non-strategic division.
(2) Fiscal 1996 net loss includes a gain of $1.0 million, or $0.05 per share, on
the sale of real estate.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY DISCUSSION
Fiscal 1999 was a year of strategic change and significant accomplishment for
the Company.
In December 1998, the Company restructured its operations into three distinct
business units with increased operating autonomy and business focus. The
Broadband Systems Division ("BSD") has responsibility for the development,
marketing and sale of broadband telecommunication products, including
Asynchronous Transfer Mode ("ATM") products; the Network Access Division ("NAD")
has responsibility for the development, marketing and sale of access-type
telecommunication products, including frame relay and Digital Subscriber Line
("DSL") products; and VITAL Network Services, L.L.C. ("VITAL") will continue to
offer a broad range of network services, including an expansion into
professional network design and consulting services.
Each business unit is comprised of a general manager and dedicated marketing,
sales, product development and finance functions. As a result, the business
units are focused on products, sales channels and technologies unique to each
unit and will be streamlined to maximize time-to-market, product performance and
customer satisfaction.
Since the reorganization, each division, and the Company as a whole, achieved
improved financial performance on a quarter-to-quarter basis during fiscal 1999.
The Company views this performance improvement as confirmation that its new
business strategy (autonomous business units created along product lines) is a
more effective means of managing the business. Both NAD and VITAL realized
operating profits in fiscal 1999. BSD is not yet profitable, due in part to a
high level of investment in research and development; however, the division
reduced its level of operating loss from a high of $(9.8) million in the second
quarter of fiscal 1999 to $(4.5) million in the fourth quarter of fiscal 1999.
The trend of improved financial performance resulting from the implementation of
this new business strategy is not readily evident when comparing the Company's
year-to-year financial results. The following graphs summarize fiscal 1999
consolidated (quarterly) performance trends (in millions):
Fiscal 1999 Fiscal 1999 Fiscal 1999
Product Bookings Consolidated Revenue Operating loss
---------------- -------------------- --------------
(dollars in millions)
Q1 $24.0 Q1 $42.4 Q1 $(10.4)
Q2 $25.0 Q2 $38.8 Q2 $( 7.0)
Q3 $30.1 Q3 $42.3 Q3 $( 5.1)
Q4 $40.1 Q4 $47.5 Q4 $( 1.2)
As part of the overall business unit strategy, the Technology Alliance Group
division ("TAG") was identified as non-strategic to the reorganized business
units. TAG was sold in December 1998, resulting in net cash proceeds of $12.0
million and a pre-tax gain of $9.0 million. In addition, in July 1999, the
Company closed a remote technology center in England and consolidated
development activities in Connecticut. Finally, in a further effort to
concentrate resources on sales, marketing and engineering, the Company
outsourced essentially all of its manufacturing activities. This transaction
generated cash proceeds of $8.1 million through the sale of manufacturing
equipment and raw material inventories. Product cost savings are also
anticipated in fiscal 2000 and thereafter.
9
<PAGE>
The overall effect of reorganization activities was:
- To generate favorable (quarterly) financial performance trends, as
summarized in the charts above.
- To reduce headcount by approximately 300 persons, or 21%, during fiscal
1999.
- To reduce fiscal 1999 operating expenses by $18.7 million, or 17.7%, as
compared to fiscal 1998.
In addition, based upon the run-rate of operating expenses for the fourth
quarter of fiscal 1999, additional savings will be achieved in fiscal year 2000
(as compared to fiscal 1999).
As further endorsement of the new strategies and the underlying value of the new
business units, during fiscal 1999 the Company attracted a new lending group
with additional capital on more favorable terms. The initial commitment of $40
million replaced existing debt and provided approximately $11 million in
additional working funds.
Furthermore, in December 1999 (after fiscal year-end) the lending group agreed
to expand the Company's credit facility by $30.0 million, to $70.0 million.
Separately, in December 1999, $14.5 million of convertible debentures were
converted into common stock, thereby reducing the Company's outstanding debt
levels and increasing stockholders' equity. Refer to Note 16, "Subsequent
Events" of the Notes to Consolidated Financial Statements for discussion of both
events.
RESULTS OF OPERATIONS
CONSOLIDATED RESULTS
Fiscal 1999 vs. Fiscal 1998: The Company's fiscal 1999 net loss was reduced to
$(22.6) million as compared to $(33.4) million for fiscal 1998. The $10.8
million improvement is comprised of a $3.0 million improvement in operating
loss, a one-time $9.0 million gain from the sale of TAG, a $(1.1) million
increase in interest expense, and other items.
Fiscal 1999 revenues decreased by $23.2 million, or 12%, as compared to fiscal
1998 (service revenue growth of $8.8 million, or 23%, partially offset a
reduction in product revenues). Geographically, Central America, Latin America
and Asia account for approximately 70% of the reduction in product revenue.
Fiscal 1999 gross margins decreased by 2.7 percentage points, reflecting the
absorption of manufacturing costs over a reduced revenue base, and a reduction
in high-margin royalty revenue which had been generated by TAG prior to its sale
in December 1998. The reduction in gross margin contribution was, however, more
than offset by an $18.7 million, or 17.7%, reduction in operating expenses,
thereby reducing the Company's operating loss by $3.0 million.
The gain of $9.0 million, or $0.41 per share, from the sale of TAG is discussed
in detail in Note 3, "Sale of Assets" of the Notes to Consolidated Financial
Statements. The $1.1 million increase in interest expense reflects a higher
level of borrowing in fiscal 1999 as compared to fiscal 1998. Other income and
expense is primarily comprised of foreign currency gains and losses, which is
discussed below under "Foreign Currency Risk."
Fiscal 1999 and 1998 operating results include restructuring charges of $2.0
million ($0.09 per share) and $2.5 million ($0.12 per share), respectively.
Refer to Note 2, "Restructuring of Operations," of the Notes to Consolidated
Financial Statements for detailed discussion of the charges.
Fiscal 1998 vs. Fiscal 1997: The Company's fiscal 1998 net loss was reduced to
$(33.4) million as compared to $(42.8) million reported in fiscal 1997, an
improvement of $9.4 million ($11.9 million excluding $2.5 million of
restructuring charges). The reduction in net loss is comprised of an $11.7
million reduction in operating loss, a $(3.1) million increase in interest
expense, a $0.6 million reduction in foreign currency losses, and other items.
Revenues for fiscal 1998 were $13.5 million, or 6.5%, below fiscal 1997 levels.
The revenue decline (which was principally attributable to a reduction in
product revenue in the international marketplace) resulted in a gross margin
contribution decline of $7.0 million. However, operating expenses were reduced
by $21.2 million, or 16.6 percent, resulting in operating loss performance
improvement of $14.2 million during fiscal 1998. A $2.5 million charge for
restructuring of operations reduced the improvement from $14.2 million to $11.7
million. The reduction in
10
<PAGE>
operating expenses is principally attributable to restructuring actions executed
in January 1998, which resulted in cost reductions across all functional areas
of operation.
Fiscal 1998 interest expense increased by $3.1 million as compared to fiscal
1997. The increase is attributable to $25 million of 7 3/4% debentures issued in
September 1997 ($1.9 million of interest expense) and a $15 million term loan
issued on October 22, 1997 ($1.6 million of interest expense); these incremental
interest costs were partially offset with reduced interest cost associated with
reductions in other debt obligations.
Income Taxes: For information concerning the provisions for income taxes, which
generally represent provisions for foreign income taxes and domestic state
taxes, refer to Note 8, "Income Taxes," of the Notes to Consolidated Financial
Statements. The Company has significant domestic net operating loss
carryforwards (approximately $170 million at September 30, 1999) and tax credit
carryforwards (approximately $12.7 million at September 30, 1999) available to
reduce future U.S. federal income taxes. The net operating loss carryforwards
begin to expire in the year 2004.
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 11, "Segment and Geographical
Information," of the Notes to Consolidated Financial Statements for a three-year
comparative summary of financial performance and other information by operating
segment.
VITAL NETWORK SERVICES, L.L.C.
VITAL Revenue VITAL Operating Income
------------- ----------------------
(dollars in millions)
Fiscal 97 $38.7 Fiscal 97 $6.0
Fiscal 98 $37.9 Fiscal 98 $3.3
Fiscal 99 $46.7 Fiscal 99 $5.9
Fiscal 1999 vs. Fiscal 1998: VITAL's revenue increased by $8.8 million, or
23.3%, in fiscal 1999. Operating income amounted to $5.9 million, or 12.6%, of
revenue in fiscal 1999 as compared to $3.3 million, or 8.7% of revenue, in
fiscal 1998. Independent third-party customers accounted for all of VITAL's
revenue growth; revenue from services provided to GDC customers declined in
fiscal 1999. Gross margin rates were relatively consistent with fiscal 1998;
operating expenses were up $0.6 million or 7.2%, reflecting increased selling
cost. The revenue growth, consistent gross margin rates and operating expense
growth resulted in a $2.6 million, or 78%, increase in fiscal 1999 operating
income.
Fiscal 1998 vs. Fiscal 1997: VITAL's fiscal 1998 revenue, which amounted to
$37.9 million, was down $0.8 million, or 2% from fiscal 1997. Operating income
declined to $3.3 million, or 8.7% of revenue, in fiscal 1998 as compared to $6.0
million, or 15.6% of revenue, in fiscal 1997. Operating expenses were up $1.7
million, or 29.2%, reflecting investments being made by VITAL to develop the
operating infrastructure required to effectively pursue its new third-party
business opportunities. The combination of reduced revenue and increased
spending resulted in the reduction in fiscal 1998 operating income.
11
<PAGE>
BROADBAND SYSTEMS DIVISION
The Broadband Systems Division ("BSD") was created as an autonomous strategic
business unit in December 1998. BSD designs, markets and sells broadband
telecommunication products, including ATM switches and network management
systems which allow for the efficient transmission of voice, data and video. BSD
also sells time division multiplexing ("TDM") equipment and network management
systems. BSD's quarterly performance for fiscal 1999 is summarized below:
BSD Fiscal 1999 Revenue BSD Fiscal 1999 Operating Loss
----------------------- ------------------------------
(dollars in millions)
Q1 $15.1 Q1 $(7.4)
Q2 $11.2 Q2 $(9.8)
Q3 $14.3 Q3 $(7.7)
Q4 $18.5 Q4 $(4.5)
Year-to-year financial comparisons, discussed later, do not effectively reflect
the performance improvement achieved by BSD since its creation in December 1998.
BSD spent much of the second quarter of fiscal 1999 organizing its
infrastructure, selecting management personnel, reorganizing its sales force,
and developing formal product, customer and business strategies. Completion of
these tasks in the second quarter of fiscal 1999 positioned BSD to enter the
third quarter of fiscal 1999 focused on its business and the revenue growth
opportunity therein. Quarterly revenue grew sequentially by 27.2% and 29.7% in
the third and fourth quarters, respectively. Operating loss was reduced by
almost 40% to $(4.5) million in the fourth quarter of fiscal 1999 as compared to
the first quarter of fiscal 1999.
Fiscal 1999 vs. Fiscal 1998: BSD's operating loss amounted to $(29.4) million
and $(25.7) million in fiscal 1999 and 1998, respectively, an increase of $(3.7)
million. Revenue amounted to $59.1 million and $82.6 million in fiscal 1999 and
1998, respectively, a reduction of $(23.5) million, or 28.5%. The reduction was
comprised of a $(16.1) million reduction in legacy TDM product revenue and a
$(7.4) million reduction in ATM product revenue. Geographically, most (68%) of
the revenue decline occurred in Central America, Latin America and Asia,
primarily attributable to technology changes and difficult economic conditions
experienced in those regions. While BSD's legacy TDM product line experienced
significant revenue declines in both fiscal 1999 and 1998 (TDM revenue amounted
to $14.8 million, $31.0 million and $48.8 million in fiscal 1999, 1998 and 1997,
respectively), such revenue appears to have stabilized during fiscal 1999, which
would indicate that the historical rate of decline may not be experienced in the
future.
The December 1998 reorganization resulted in a $9.1 million, or 13.2%, reduction
in BSD operating expenses for fiscal 1999. This cost reduction offset all but
$3.7 million of the impact of the revenue loss referenced above.
Fiscal 1998 vs. Fiscal 1997: BSD's operating loss was reduced to $(25.7)
million in fiscal 1998 from $(34.8) million in fiscal 1997, an improvement of
$9.1 million, or 26.2%.
Revenue amounted to $82.6 million and $87.7 million in fiscal 1998 and 1997,
respectively, representing a decline $5.1 million, or 5.8%. The revenue decline
reflects the net effect of a $12.7 million, or 33%, increase in ATM revenue and
a $17.8 million, or 36%, decline in TDM product revenue. Geographically, the ATM
revenue growth was experienced in both Europe and the United States. The TDM
revenue decline was principally experienced in Asia and Latin America. The
resulting decline in BSD fiscal 1998 gross margin contribution amounted to $4.3
million. However, a $13.4 million reduction in operating expenses more than
offset the margin loss and, as a result, BSD's operating loss improved by $9.1
million in fiscal 1998. The reduction in operating expenses reflects the impact
of a company-wide restructuring executed in January 1998. Refer to Note 2,
"Restructuring of Operations," of the Notes to Consolidated Financial Statements
for a detailed discussion of the charges.
12
<PAGE>
NETWORK ACCESS DIVISION
The Network Access Division ("NAD") was created as an autonomous strategic
business unit in December 1998. NAD designs, markets and sells access-type
telecommunication products, including frame relay and DSL products.
NAD's quarterly performance for fiscal 1999 is summarized below:
NAD Fiscal 1999 Revenue NAD Fiscal 1999 Operating Income (Loss)
----------------------- ---------------------------------------
(dollars in milions)
Q1 $13.6 Q1 $(2.6)
Q2 $14.6 Q2 $ 0.6
Q3 $15.9 Q3 $ 1.7
Q4 $15.8 Q4 $ 2.0
Year-to-year financial comparisons (discussed later) do not effectively reflect
the performance improvement achieved by NAD since its inception. Along with BSD,
NAD was created late in the first quarter of fiscal 1999 and spent much of the
second quarter organizing its infrastructure, selecting management personnel,
reorganizing its sales force, and developing formal product, customer and
business strategies. Completion of the reorganization during the second quarter
of fiscal 1999 positioned NAD to enter the third quarter of fiscal 1999 focused
on its business and the revenue growth opportunity therein. Due to the short
sales cycle and immediate focus on sales through indirect channels, NAD was able
to realize revenue growth and operating income in the first quarter of its
existence (Q2 Fiscal 1999) and, through a combination of revenue growth and cost
management, improved its operating income in both ensuing quarters.
Fiscal 1999 vs. Fiscal 1998: NAD's fiscal 1999 operating income amounted to
$1.7 million as compared to an operating loss of $(1.4) million in fiscal 1998,
reflecting an improvement of $3.1 million. The improvement reflects the net
effect of reduced revenues (NAD revenue amounted to $59.9 million and $65.9
million in fiscal 1999 and 1998, respectively, down $6.0 million, or 9.1%) and a
$6.9 million, or 20.5%, reduction in operating expenses.
The fiscal 1999 revenue decline is principally attributable to lower sales of
legacy analog products to domestic telephone companies. Internationally, an
increase in business in the Canadian marketplace (growth of $5.3 million) was
offset with a decline in business in Central America, Latin America and Asia
(down $5.5 million). The reduction in NAD's operating expenses reflects the
impact of the Company's restructuring into independent business units in
December 1998. Refer to Note 2, "Restructuring of Operations," of the Notes to
Consolidated Financial Statements for detailed discussion of the charges.
Fiscal 1998 vs. Fiscal 1997: NAD recorded an operating loss of $(1.4) million
in fiscal 1998 as compared to $(9.3) million in fiscal 1997, an improvement of
$7.9 million. Revenue amounted to $65.9 million and $71.6 million in fiscal 1998
and 1997, respectively, a reduction of $5.7 million, or 8.0%. However,
manufacturing efficiencies and a $7.8 million, or 18.8%, reduction in operating
expenses resulted in the $7.9 million improvement in operating income.
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 $3.2 million, $3.1
million and $3.4 million in fiscal 1999, 1998 and 1997, 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.
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
13
<PAGE>
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.
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 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 or (losses) of $66,000, $(400,000) and $(1,038,000) in fiscal
1999, 1998 and 1997, respectively. The larger exchange loss in fiscal 1997 is
principally attributable to the strength of the U.S. dollar relative to the
French franc and the German mark.
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.
Reference is made to Note 1, sub-caption "Foreign Currency," of the Notes to
Consolidated Financial Statements for further discussion.
INTEREST RISK
The fair market value of long-term fixed interest-rate debt is subject to
interest-rate risk. Generally, the fair market value of fixed interest-rate debt
will increase as interest rates fall and decrease as interest rates rise. The
estimated fair value of the Company's total long-term debt (including current
portion) approximated $59.6 million at September 30, 1999, as compared to a
recorded value of $69.1 million. The Company estimates that a 1% increase from
prevailing interest rates at September 30, 1999 would reduce the fair value of
total long-term debt by approximately $1.0 million. See Note 1 to the Notes to
Consolidated Financial Statements under the sub-caption "Fair Values of
Financial Instruments" for further discussion.
FINANCIAL CONDITION AND LIQUIDITY
Future cash requirements are planned to be satisfied from a combination of cash
balances ($3.8 million at September 30, 1999), borrowings under the Company's
revolving credit line ($9.6 million of additional borrowings available at
September 30, 1999), and from a $30.0 million expansion of the Company's credit
facility which occurred subsequent to year-end (discussed below). 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.
The Company continues to aggressively monitor operating expenses and capital
spending. In December 1998, the Company executed a reorganization into three
independently managed strategic business units, resulting in improved business
focus, productivity gain and a workforce reduction. This action, combined with
others, resulted in an $18.7 million, or 17.7%, reduction in fiscal 1999
operating expenses as compared to fiscal 1998; furthermore, fiscal 1998
operating expenses were down $21.1 million, or 16.6%, as compared to fiscal
1997.
On December 30, 1999, subsequent to the Company's fiscal year end, the Company
expanded its credit facility (from $40.0 million to $70.0 million) to provide
for up to $30.0 million of additional funds for operations. The $30.0 million is
comprised of a $20.0 million term loan, the proceeds of which were received on
December 31, 1999, and a $10.0 million increase in the revolving line of credit.
See Note 16, "Subsequent Events," for further discussion.
Previously, on May 14, 1999, the Company entered into a new three-year $40.0
million loan and security agreement (the "Loan Agreement") with Foothill Capital
Corporation to provide additional funds for operations and replace the Company's
existing bank group. The Loan Agreement was comprised of $15.0 million in term
loans and a $25.0 million (maximum value) revolving line of credit. Under the
revolving line of credit portion of the Loan Agreement, availability is subject
to satisfying a borrowing base formula related to levels of certain accounts
receivable and inventories and the satisfaction of other financial covenants.
Maximum funds available for borrowing and letters of
14
<PAGE>
credit under the Loan Agreement revolving credit facility amounted to $25.0
million at September 30, 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 Loan Agreement.
Financial covenants of the Loan Agreement, as amended on December 30, 1999,
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 $21.6 million at September 30, 1999; in addition, such stockholders'
equity, as defined, increased on a pro forma basis to approximately $36.1
million in December 1999, reflecting the impact of $14.5 million of convertible
debentures being converted into common stock (refer to Note 16, "Subsequent
Events," of the Notes to Consolidated Financial Statements for additional
disclosures). Separately, annual capital expenditures of $12.0 million are
authorized under the Loan Agreement. The Loan Agreement's covenants may, if
violated, limit access to future borrowings and may accelerate payment
requirements on outstanding borrowings.
Refer to Note 7, "Long-Term Debt," and Note 16, "Subsequent Events," of the
Notes to Consolidated Financial Statements for further discussion of the Loan
Agreement and other outstanding indebtedness of the Company, including events
which occurred subsequent to September 30, 1999.
OPERATING
Net cash used in operating activities amounted to $1.6 million and $1.0 million
in fiscal 1999 and 1998, respectively.
Non-debt working capital, excluding cash and cash equivalents, decreased from
$29.5 million at September 30, 1998 to $23.5 million at September 30, 1999. The
$6.0 million reduction is principally comprised of an increase in trade accounts
payable, which primarily reflects the impact of an increase in inventory
purchasing activity in the latter part of the fourth quarter of fiscal 1999 to
satisfy anticipated customer demands. There is, however, no corresponding
increase in reported inventory as compared to the prior year due to the sale of
approximately $5.8 million of inventory on September 30, 1999 as part of a
manufacturing outsourcing transaction.
INVESTING
The Company continued to invest in new technologies during fiscal 1999.
Investments in property, plant and equipment amounted to $7.5 million in fiscal
1999 compared to $6.9 million in fiscal 1998. Fiscal 1999 investments in
capitalized software remained relatively consistent, amounting to $12.5 million
and $12.7 million in fiscal 1999 and 1998, respectively. All investment activity
was targeted to satisfy minimum operating requirements and to embrace new
undertakings with the greatest potential returns.
During fiscal 1999, the Company generated $15.1 million in net proceeds from the
sale of a non-strategic division ($12.0 million) and non-strategic manufacturing
assets ($3.1 million). Reference is made to Note 3 to the Notes to Consolidated
Financial Statements for further discussion.
FINANCING
Net cash provided by financing activities amounted to $6.6 million in fiscal
1999. Such funds were comprised of $7.7 million in net borrowings and $0.7
million of proceeds received for stock sold under the Company's employee stock
purchase plan, partially offset with of $1.8 million in preferred stock
dividends. This compares to $2.7 million of net cash provided by financing
activities in fiscal 1998, which was comprised of $3.5 million in net borrowings
and $1.0 million of proceeds received for stock sold under the Company's
employee stock purchase plan, partially offset with of $1.8 million in preferred
stock dividends.
Reference is made to the preceding discussion and Notes 7 and 16 to the Notes to
Consolidated Financial Statements for discussion regarding the Company's new
Loan Agreement, as amended, and other indebtedness of the Company, including the
terms and conditions thereof.
On September 26, 1997, the Company issued $25.0 million of convertible senior
subordinated debentures ("Debentures") which mature on September 30, 2002 (if
not converted or redeemed) and accrue interest at a rate of 7 3/4% per annum.
Such Debentures, issued to qualified institutional buyers and accredited
institutional investors, are convertible into shares of the Company's common
stock. In December 1999, $14.5 million of the Debentures were
15
<PAGE>
converted into common stock, leaving a balance of $10.5 million outstanding at
December 31, 1999. Refer to Notes 7 and 16 of the Notes to Consolidated
Financial Statements for additional discussion.
LEASE FINANCING AGREEMENTS
The Company's leasing subsidiary has in the past entered into agreements with
financial institutions whereby lease receivables are transferred to such
institutions with full recourse. However, no such agreements were entered into
during fiscal 1999 or 1998. Refer to Note 13 of the Notes to Consolidated
Financial Statements for further discussion.
OPERATING LEASE OBLIGATIONS
See Note 9 of the Notes to Consolidated Financial Statements for discussion of
the Company's operating lease obligations.
CONCENTRATIONS OF CREDIT
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash instruments and accounts receivable. The
Company places its cash investments with high-quality financial institutions
within the United States.
Approximately $15.5 million, or 41% of consolidated accounts receivable at
September 30, 1999 ($16.2 million, or 45%, at September 30, 1998), were
concentrated in telephone companies in North America and Europe. These
receivables are not collateralized due to the high credit ratings and the
extensive financial resources available to such telephone companies.
IMPACT OF INFLATION AND CHANGING PRICES
In management's opinion, the impact of inflation and changing prices for the
three most recent fiscal years is not significant to the financial statements as
reported.
FUTURE ADOPTION OF NEW ACCOUNTING STATEMENTS
Newly issued pronouncements to become effective in fiscal 2000 or later are not
currently expected to have a material impact on the Company's financial position
or results of operations. Refer to Note 1, "Future Adoption of Accounting
Statements," of the Notes to Consolidated Financial Statements for further
detailed information.
YEAR 2000 COMPLIANCE
Many installed computer systems were not capable of distinguishing 21st century
dates from 20th century dates. As a result, effective January 1, 2000 (or
sooner), computer systems and/or software used by many companies in a very wide
variety of applications will experience operating difficulties unless they are
modified or upgraded to adequately process information involving, related to or
dependent upon the century change. Significant uncertainty exists concerning the
scope and magnitude of problems associated with the century change.
The Company recognized the need to ensure its operations will not be adversely
impacted by Year 2000 software failures and established a project team to
address Year 2000 risks. The Company has reviewed its information and
operational systems and manufacturing processes in an effort to identify those
products, services or systems which were not Year 2000 compliant. As a result of
this review, the Company has modified or replaced certain information and
operational systems so they will be Year 2000 compliant. These modifications and
replacements were made in conjunction with the Company's overall systems
initiatives. The total cost of these Year 2000 compliance activities, estimated
at less than $1.0 million, has not been material to the Company's financial
position or its results of operations, and have been expensed as incurred. These
amounts do not include any costs associated with the implementation of
contingency plans which have been developed. Costs associated with the
replacement of computerized systems and hardware or equipment, substantially all
of which would be capitalized, are not included in the above estimates. The
Company believes it has successfully completed its Year 2000 project as of
December 1999.
Based on available information, the Company does not believe any material
exposure to significant business interruption exists as a result of Year 2000
compliance issues. As noted earlier, the Company has developed formal
contingency plans with regard to its Year 2000 project. However, there can be no
assurance that the Company has
16
<PAGE>
identified and remedied all significant Year 2000 problems, or that such
unanticipated problems, if any, will not have a material adverse effect on the
Company's business, results of operations or financial position.
The Company also faces risk to the extent that suppliers of products, services
and systems purchased by the Company and others with whom the Company transacts
business on a worldwide basis do not comply with Year 2000 requirements. The
Company has executed formal communications with significant suppliers and
customers to determine the extent to which the Company is vulnerable to these
third parties' failure to remedy their own Year 2000 issues. In the event any
such third parties cannot provide the Company with products, services or systems
that meet the Year 2000 requirements on a timely basis, or in the event Year
2000 issues prevent such third parties from timely delivery of products or
services required by the Company, the Company's results of operations could be
materially adversely affected. To the extent Year 2000 issues cause significant
delays in or cancellation of decisions to purchase the Company's products or
services, the Company's business, results of operations and financial position
would be materially adversely affected.
The Company believes that it has substantially identified and resolved all
potential Year 2000 problems with any of the software products it develops and
markets to customers. However, management also believes that it is not possible
to determine with complete certainty that all Year 2000 problems affecting the
Company's software products have been identified or corrected due to complexity
of these products and the fact that these products interact with other third-
party vendor products and operate on computer systems which are not under the
Company's control.
The discussion of the Company's efforts and management's expectations relating
to Year 2000 compliance are forward-looking statements, which are further
discussed below. The Company's ability to promptly solve unanticipated Year 2000
compliance problems, if any, and the level of incremental costs associated
therewith could be adversely impacted by, among other things, the complexity of
unanticipated problems encountered, the availability and cost of programming and
testing resources, and vendors' ability to modify proprietary software.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this annual report, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties, and other factors which may affect future results including, but
not limited to, competition, rapid changing technology, regulatory requirements,
and uncertainties of international trade.
COMMON STOCK PRICES
General DataComm Industries, Inc.'s common stock is listed on the New York Stock
Exchange and trades under the symbol "GDC." The table below displays the high,
low and end-of-quarter closing sales prices as reported during each quarter of
the last two fiscal years.
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------
QUARTER HIGH LOW Closing High Low Closing
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First 4 1/2 2 1/8 2 5/16 7 1/16 3 5/16 4 11/16
Second 3 7/16 2 3/16 2 1/2 6 1/4 3 9/16 5 15/16
Third 3 5/16 2 1/8 2 7/8 5 3/4 3 7/8 5 1/16
Fourth 2 15/16 2 3/16 2 13/16 5 2 1/2 3
- -------------------------------------------------------------------------------
</TABLE>
No cash dividends have ever been paid on the Company's common stock or Class B
stock. The Company's principal loan agreement does not allow payment of cash
dividends, with the exception of dividends authorized for payment on the
Company's preferred stock. In the event this would change, it is still
management's intention to reinvest future earnings in the business to support
growth plans.
The Company had approximately 1,798 shareholders of record at September 30,
1999.
17
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
(In thousands except per share data)
Years ended September 30, 1999 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Net product sales $ 118,052 $ 146,965 $ 158,928
Service revenue 46,676 37,852 38,677
Other revenue 6,289 9,438 10,161
- -------------------------------------------------------------------------------------------------
171,017 194,255 207,766
- -------------------------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 59,967 73,226 79,798
Amortization of capitalized software development costs 12,172 11,867 12,000
Cost of service revenue 32,538 26,856 26,706
Cost of other revenue 777 540 609
Selling, general and administrative 60,682 74,069 86,196
Research and product development 26,581 31,937 40,876
Restructuring of operations 2,000 2,500 --
- -------------------------------------------------------------------------------------------------
194,717 220,995 246,185
- -------------------------------------------------------------------------------------------------
OPERATING LOSS (23,700) (26,740) (38,419)
- -------------------------------------------------------------------------------------------------
Other income (expense):
Gain on sale of assets 9,001 -- --
Interest, net (6,998) (5,900) (2,823)
Other, net 241 (52) (1,109)
- -------------------------------------------------------------------------------------------------
2,244 (5,952) (3,932)
- -------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (21,456) (32,692) (42,351)
Income tax provision 1,150 700 400
- -------------------------------------------------------------------------------------------------
NET LOSS $ (22,606) $ (33,392) $ (42,751)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
BASIC AND DILUTED LOSS PER SHARE $ (1.12) $ (1.64) $ (2.11)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING 21,857 21,495 21,105
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT AT BEGINNING OF YEAR $ (103,066) $ (67,874) $ (23,323)
Net loss (22,606) (33,392) (42,751)
Payment of preferred stock dividends (1,800) (1,800) (1,800)
- -------------------------------------------------------------------------------------------------
ACCUMULATED DEFICIT AT END OF YEAR $ (127,472) $ (103,066) $ (67,874)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands except shares)
September 30, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 3,790 $ 3,757
Accounts receivable, less allowance for doubtful
receivables of $1,375 in 1999 and $1,442 in 1998 32,795 31,513
Inventories 22,329 26,045
Deferred income taxes 1,578 1,675
Other current assets 12,624 10,059
- -------------------------------------------------------------------------------
Total current assets 73,116 73,049
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Property, plant and equipment, net 32,679 40,553
Capitalized software development costs, net 21,815 24,286
Other assets 12,764 11,650
- -------------------------------------------------------------------------------
$ 140,374 $149,538
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 4,533 $ 8,133
Accounts payable, trade 18,669 12,763
Accrued payroll and payroll-related costs 4,626 5,896
Deferred income 6,082 6,034
Other current liabilities 16,449 15,122
- -------------------------------------------------------------------------------
Total current liabilities 50,359 47,948
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Long-term debt, less current portion 64,532 52,679
Deferred income taxes 2,337 2,589
Other liabilities 1,053 364
- -------------------------------------------------------------------------------
Total liabilities 118,281 103,580
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 10,000,000 shares
authorized; issued and outstanding: 2,092,383 in 1999
and 2,093,083 in 1998 209 209
Common stock, par value $.10 per share, 50,000,000 shares
authorized; issued and outstanding: 20,309,143 in 1999
and 19,968,280 in 1998 2,031 1,997
Capital in excess of par value 151,706 151,052
Accumulated deficit (127,472) (103,066)
Accumulated other comprehensive loss (2,736) (2,589)
Common stock held in treasury, at cost:
330,382 shares in 1999 and 1998 (2,445) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 22,093 45,958
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$ 140,374 $149,538
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Increase (Decrease) in Cash and Cash
Equivalents
(In thousands)
Years ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (22,606) $(33,392) $(42,751)
Adjustments to reconcile net loss to net cash (used
in) operating activities:
Depreciation and amortization 25,821 26,108 28,180
Gain on sale of TAG division (9,001) -- --
Deferred income taxes (136) 23 261
Changes in:
Accounts receivable (1,264) 2,936 5,565
Inventories 3,867 9,813 3,459
Accounts payable and accrued expenses 3,745 (5,837) 38
Other net current assets (720) 160 608
Other net long-term assets (1,343) (762) (2,433)
- -----------------------------------------------------------------------------------------------
NET CASH (USED IN) OPERATING ACTIVITIES (1,637) (951) (7,073)
===============================================================================================
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (7,486) (6,870) (11,580)
Capitalized software development costs (12,534) (12,653) (12,107)
Net proceeds from the sale of assets 15,113 -- --
- -----------------------------------------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (4,907) (19,523) (23,687)
===============================================================================================
Cash flows from financing activities:
Revolver borrowings (repayments), net 13,524 (3,212) 4,799
Proceeds from notes and mortgages 14,679 15,094 5,584
Principal payments on notes and mortgages (20,470) (8,387) (7,725)
Proceeds from issuing common stock 688 1,000 1,829
Proceeds from issuing convertible debentures -- -- 23,562
Payment of preferred stock dividends (1,800) (1,800) (1,800)
- -----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,621 2,695 26,249
===============================================================================================
EFFECT OF EXCHANGE RATES ON CASH (44) 10 (227)
- -----------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33 (17,769) (4,738)
Cash and cash equivalents at beginning of year(1) 3,757 21,526 26,264
- -----------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR(1) $ 3,790 $ 3,757 $ 21,526
- -----------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 6,244 $ 5,999 $ 2,864
Income taxes, net $ 788 $ 1,039 $ 541
===============================================================================================
</TABLE>
(1) The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company is a worldwide provider of wide area networking and
telecommunications products and services. The Company designs, assembles,
markets, installs and maintains products and services that enable
telecommunications common carriers, corporations and governments to build,
upgrade and better manage their global telecommunications networks. In fiscal
1999 the Company operated in three business segments: the Broadband Systems
Division ("BSD"), which designs and sells ATM (asynchronous transfer mode) and
time-division multiplexing equipment; the Network Access Division ("NAD"), which
designs and sells frame relay and DSL-based products; and VITAL Network
Services, L.L.C. ("VITAL"), which provides comprehensive support services for
the networking industry. Refer to Note 11, "Segment and Geographical
Information," for further discussion and a summary of financial performance by
operating segment.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiary companies. Intercompany accounts, transactions and
profits have been appropriately eliminated in consolidation.
INVENTORIES
Inventories are stated at the lower of cost or market using a first-in,
first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated or amortized
using the straight-line method over their estimated useful lives. The cost of
internally constructed assets (test fixtures) includes the cost of materials,
internal labor and overhead costs.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs are capitalized for those products that have met the
requirements of technological feasibility. Such costs are amortized using the
straight-line method, on a product-by-product basis, over the estimated economic
life of the product. Unamortized costs are reviewed for recoverability and, if
necessary, adjusted so as not to exceed estimated net realizable value. All
capitalized software costs are written off when they become fully amortized. The
accumulated amortization of capitalized software development costs amounted to
$18,065,000 and $17,972,000 at September 30, 1999 and 1998, respectively.
GOODWILL
Goodwill is amortized to expense on a straight-line basis over the estimated
useful life of the goodwill, generally between 10 and 15 years. The valuation,
recoverability and amortization of goodwill is reviewed on a ongoing basis. The
remaining unamortized portion of goodwill (included in the Consolidated Balance
Sheets under "Other assets") amounted to $4,985,000 and $4,578,000 at September
30, 1999 and 1998, respectively. The accumulated amortization of goodwill
amounted to $3,267,000 and $2,469,000 at September 30, 1999 and 1998,
respectively.
REVENUE RECOGNITION
Revenue from the sale of product is generally recognized at the date of shipment
unless the terms and conditions of the sale dictate recognition at a later date.
Technology licensing fee revenue (primarily applicable to the Company's
Technology Alliance Group which was sold in December 1998) is recognized in the
period received or, alternatively,
21
<PAGE>
may be accrued when reliably determinable. Service revenue is either recognized
when the service is performed or, in the case of maintenance contracts, on a
straight-line basis over the term of the contract.
Revenue from sales-type leases is recognized at the date of shipment. Revenue
from operating leases is recognized ratably over the lease term, and the related
equipment is depreciated using the straight-line method over its estimated
useful life, which approximates three years. The average length of initial lease
terms in fiscal 1999 was approximately 33 months. Leasing revenue may include
income from the transfer (with full recourse) of certain finance lease
receivables; however, no such income was recognized in fiscal 1999 or fiscal
1998, and such income amounted to $195,000 in fiscal 1997.
PROMOTION AND ADVERTISING COSTS
Promotion and advertising costs are charged to operating expense in the fiscal
year in which they are incurred. Promotion and advertising costs amounted to
$3,711,000, $5,287,000 and $7,007,000 in fiscal 1999, 1998 and 1997,
respectively.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred income
taxes.
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and deferred taxes resulting from temporary differences
between the financial statement and tax basis of assets and liabilities. The
Company intends to permanently reinvest the undistributed earnings of its
foreign subsidiaries ($8,331,000 at September 30, 1999). Accordingly, no U.S.
federal income taxes have been provided on such earnings. In addition, no
significant taxes would be required if such earnings were remitted due to net
operating loss carryforwards currently available in the United States.
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share is computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Refer
to Note 14 to the Notes to Consolidated Financial Statements for further
information.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash instruments and accounts receivable. The
Company places its cash investments with high-quality U.S. financial
institutions.
Approximately $15,500,000, or 41%, of consolidated accounts receivable at
September 30, 1999 ($16,185,000, or 45%, at September 30, 1998) were
concentrated in telephone companies in North America and Europe. These
receivables are not collateralized due to the high credit ratings and the
extensive financial resources available to such telephone companies.
FOREIGN CURRENCY
Assets and liabilities of most all of the Company's foreign subsidiaries are
generally translated using fiscal year-end exchange rates, and revenues and
expenses are translated using average exchange rates prevailing during the year.
The effects of translating such foreign subsidiaries' financial statements are
recorded as a separate component of stockholders' equity and have been reported
in other comprehensive income.
22
<PAGE>
Included in other income are net recognized foreign currency exchange gains and
(losses) of $66,000, $(400,000) and $(1,038,000) for fiscal 1999, 1998 and 1997,
respectively.
POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS
The Company accounts for post-retirement benefits and post-employment benefits
under the provisions of Statement of Financial Accounting Standards No. 106,
"Employer's Accounting for Post-Retirement Benefits Other Than Pensions," and
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Post-Employment Benefits," respectively, each of which requires the use of an
accrual method of accounting for such benefits. The annual expense and other
disclosure information applicable to such benefits is not material. Separately,
in fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Post-retirement
Benefits" (SFAS 132). SFAS 132 standardizes the disclosure of information about
pension and other post-retirement benefit plans.
ACCOUNTING FOR STOCK-BASED COMPENSATION
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company has elected to continue
to measure costs for its employee stock compensation plans by using the
accounting methods prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," which allows that no compensation
cost be recognized provided the exercise price of options granted is equal to
the fair market value of the Company's stock at date of grant. Reference is made
to Note 12 of the Notes to Consolidated Financial Statements for further
information.
OPERATING SEGMENTS
In fiscal 1999, the Company adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 supersedes SFAS 14, Financial Reporting for Segments of a
Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires enterprise-wide disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS 131 did not affect
results of operations or financial position but did affect the disclosure of
segment information.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) establishes standards for reporting comprehensive income and
its components in a company's financial statements. The Company adopted SFAS 130
in fiscal 1999.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods
presented. Actual results could differ from those estimates. For example, the
markets for the Company's products are characterized by intense competition,
rapid technological development and frequent new product introductions, all of
which could impact the future value of the Company's inventory, capitalized
software and certain other assets.
23
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS
Cash and cash equivalents -- The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value due to
their short-term nature.
Long-term debt -- The estimated fair value of the Company's $69.1 million and
$60.8 million total long-term debt (including current portion) at September 30,
1999 and 1998, respectively, was approximately $59.6 million and
$53.4 million, respectively. In the case of variable interest-rate debt, debt
with shorter maturities and recently secured fixed interest-rate debt, the
Company estimates the fair value to be the carrying value. For other long-term,
fixed interest-rate debt, the estimated fair value was obtained from an
investment banker.
FUTURE ADOPTION OF NEW ACCOUNTING STATEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities, becomes effective
for the Company in fiscal 2001. The Company has not yet evaluated the effects of
this pronouncement on future related disclosures.
Statement Of Position 97-2, "Software Revenue Recognition," ("SOP 97-2") was
issued by the Accounting Standards Executive Committee on October 27, 1997 and
provides guidance on applying generally accepted accounting principles in
recognizing revenue on software transactions. Mandatory compliance with the
accounting principles set forth in SOP 97-2 has been deferred until fiscal year
2000 (earlier application is encouraged and retroactive application is
prohibited); implementation of such accounting principles is not presently
expected to have a material impact on the Company's reported financial position
or results of operations.
RECLASSIFICATIONS
Certain reclassifications were made to prior years' consolidated financial
statements to conform to the current year's presentation.
2. 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 Division (ATM and internetworking products) and Network Access Division
(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.
In addition, the Company shut down a non-strategic remote technology center in
England during in July 1999. The fiscal 1999 reorganization efforts resulted in
a work force reduction of approximately 230 persons and a charge of $2.0
million, or $0.09 per share (basic and diluted), primarily for post-employment
benefits under the Company's severance plan. Most of the accrued costs were paid
as of September 30, 1999.
The fiscal year ended September 30, 1998 includes a restructuring of operations
charge of $2.5 million, or $0.12 per share (basic and diluted), which is
comprised of a $1.0 million provision for post-employment benefits related to
the elimination of approximately 200 full-time positions and $1.5 million for
the write-off of intangible assets and other costs associated with the
elimination of low-volume product lines. All such costs have been paid.
3. SALE OF ASSETS
On December 30, 1998, the Company sold its Technology Alliance Group division
("TAG"), which was identified as non-strategic to the reorganized business units
referenced in Note 2 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, and generated cash proceeds, net of expenses, of approximately $12.0
million. Technology
24
<PAGE>
licensing revenues from the TAG division amounted to $869,000, $3,166,000 and
$4,929,000 in fiscal 1999, 1998 and 1997, respectively. Licensing revenues are
reported as "Other Revenue" in the Company's Consolidated Statements 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. As part of the agreement, Matco purchased the
Company's applicable manufacturing assets for $3.1 million, which approximated
book value; in addition, Matco procured specific raw material inventories at net
book value. As a result, no gain or loss was recognized on the transaction.
Under terms of the Company's new three-year manufacturing outsourcing agreement
with Matco, the Company has a commitment to procure a majority (up to 85%) of
its outsourcing business with Matco.
4. VITAL NETWORK SERVICES, L.L.C. 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 is obligated to 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 assets (including
goodwill) were recorded for these payments at the date of acquisition. During
the year ended September 30, 1999, the Company recognized $1.7 million of
liability to Olicom toward its three-year obligation and recorded $1.2 million
of goodwill.
5. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 5,054 $10,945
Work-in-process 1,732 3,611
Finished goods 15,543 11,489
- -----------------------------------------------------------------------------
$22,329 $26,045
=============================================================================
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
<TABLE>
<CAPTION>
Estimated
SEPTEMBER 30, 1999 1998 Useful Life
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 1,775 $ 1,784 --
Buildings and improvements 30,280 30,134 10 to 30 years
Test equipment, fixtures and field spares 54,460 54,897 3 to 10 years
Machinery and equipment 58,099 59,957 3 to 10 years
- -------------------------------------------------------------------------------
144,614 146,772
Less: accumulated depreciation 111,935 106,219
- -------------------------------------------------------------------------------
$ 32,679 $ 40,553
===============================================================================
</TABLE>
25
<PAGE>
At September 30, 1999, land, buildings and improvements with a net book value of
approximately $6.0 million are vacant and being held for sale. Separately,
depreciation expense amounted to $11,994,000, $12,747,000 and $14,014,000 in
fiscal 1999, 1998 and 1997, respectively.
7. LONG-TERM DEBT
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit facility $15,111 $ 1,587
Notes payable 18,543 23,173
7 3/4% convertible subordinated debentures ("Debentures") 25,000 25,000
Mortgages payable 10,411 11,052
- -------------------------------------------------------------------------------
69,065 60,812
Less: current portion 4,533 8,133
- -------------------------------------------------------------------------------
$64,532 $52,679
===============================================================================
</TABLE>
Interest expense amounted to $7,118,000, $6,564,000 and $3,493,000 in fiscal
1999, 1998 and 1997, respectively.
The following is a schedule of the future minimum payments of long-term debt at
September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ending September 30, 2000 2001 2002 2003 Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Future minimum payments $4,533 $5,422 $50,772 $8,338 $69,065
- -------------------------------------------------------------------------------
===============================================================================
</TABLE>
In December 1999, $14.5 million of Debentures were converted into common stock
and, therefore, the future minimum payments shown for fiscal 2002 are now
reduced to $36,272. Refer to Note 16 and the discussion below for more
information.
REVOLVING CREDIT FACILITY
On December 30, 1999, subsequent to the Company's fiscal year end, the Company
expanded its credit facility (from $40.0 million to $70.0 million) to provide
for up to $30.0 million of additional funds for operations. The $30.0 million is
comprised of a $20.0 million term loan, the proceeds of which were received on
December 31, 1999, and a $10.0 million increase in the maximum value revolving
line of credit. See Note 16, "Subsequent Events," for detailed discussion.
Prior to May 14, 1999, the Company had a $40.0 million loan and security
agreement in place which was comprised of a $15.0 million five-year term loan
and a $25.0 million (maximum value) revolving line of credit for a three-year
period ending in October 2000, subject to extension. Availability of the
revolving line of credit funds was subject to satisfying a borrowing base
formula related to levels of certain accounts receivable and inventories and the
satisfaction of other financial covenants.
On May 14, 1999, the Company entered into a new three-year $40.0 million loan
and security agreement with Foothill Capital Corporation (the "Loan Agreement")
to provide additional funds for operations and replace the Company's existing
bank group. The Loan Agreement was comprised of $15.0 million in term loans and
a $25.0 million (maximum value) revolving line of credit. Under the revolving
line of credit portion of the Loan Agreement, availability is subject to
satisfying a borrowing base formula related to levels of certain accounts
receivable and
26
<PAGE>
inventories and the satisfaction of other financial covenants. Maximum funds
available for borrowing and letters of credit under the revolving line of credit
portion of the Loan Agreement amounted to $25.0 million at September 30, 1999.
Most assets of the Company, including accounts receivable, inventories and
property, plant and equipment are pledged as collateral. Amounts outstanding
under the revolving line of credit are payable in full upon termination of the
Loan Agreement. Interest on revolver borrowings is payable monthly at the
greater of prime plus 0.625% or 7.0% per annum (the prime rate was 8.25% at
September 30, 1999).
Financial covenants of the Loan Agreement, as amended on December 30, 1999,
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 $21.6 million at September 30, 1999; in addition, such stockholders'
equity, as defined, increased on a pro forma basis to approximately $36.1
million in December 1999, reflecting the impact of $14.5 million of convertible
debentures being converted into common stock (see Note 16, "Subsequent Events,"
for additional discussion). Separately, annual capital expenditures of $12.0
million are authorized under the Loan Agreement.
NOTES PAYABLE
As discussed in Note 16, "Subsequent Events," the December 1999 amendment to the
Loan Agreement provided for an additional term loan of $20.0 million.
Prior thereto and on May 14, 1999, the Company received proceeds of $15.0
million from the term loan portion of the Loan Agreement. The proceeds were used
to retire outstanding term loan debt in the amount of $8.7 million and generate
funds for operations. The $15.0 million is comprised of two independent term
loans in the amounts of $12.0 million and a $3.0 million (the "term loans"). The
term loans bear interest at an annual rate of 12.5% during the first year, 13.0%
in the second year and 14.0% thereafter, payable monthly. Commencing in June
2000, total monthly principal payments in the amount of $312,000 become payable,
and the term loans are due and payable in full upon termination or expiration of
the Loan Agreement. At any point in time, the outstanding balance of the
original $3.0 million term loan is convertible into the Company's common stock
at a conversion price of $5.00 per share.
Separately, the Company has entered into three-, four-, and five-year note and
installment purchase agreements collateralized by certain machinery, test
equipment, furniture and fixtures. The outstanding balance of $3,543,000 at
September 30, 1999, which approximates the net book value of the underlying
equipment, bears interest at fixed rates ranging from 8.4% to 11.6%. All such
notes will mature in fiscal 2000 and 2001.
CONVERTIBLE 7 3/4% DEBENTURES
On September 26, 1997, the Company issued $25.0 million of convertible senior
subordinated debentures ("Debentures") which mature on September 30, 2002 (if
not converted or redeemed) and accrue interest at a rate of 7 3/4% per annum. As
further discussed in Note 16, "Subsequent Events," in December 1999 $14.5
million of such Debentures were converted into common stock, thereby reducing
outstanding debt and increasing stockholders' equity.
The Debentures, originally issued to qualified institutional buyers and
accredited institutional investors, are convertible into shares of the Company's
common stock at a conversion price of $5.831 per share, or the equivalent of
171.5 shares of common stock for each $1,000 principal amount of Debentures. The
Debentures are subordinated in right of payment to most other indebtedness of
the Company and are equal to or senior to other subordinated indebtedness of the
Company.
The Debentures may not be redeemed by the Company prior to September 30, 2000
and are redeemable in whole or in part at the option of the Company at 103.1% of
principal value during the period September 30, 2000 through September 29, 2001
if the Company's common stock trades at a level exceeding 150% of the conversion
price for a period of 20 trading days, and without conditions at 101.55% of the
principal value on or after September 30, 2001 or 100% of principal value on or
after September 30, 2002 (maturity).
27
<PAGE>
During the 30-day period commencing September 30, 2000, each holder of the
Debentures can require the Company to repurchase the Debentures at 100% of
principal value. The Company may satisfy such repurchase obligations through the
issuance of non-convertible senior subordinated notes which are subordinated to
the same extent, due on the same maturity date and have substantially the same
terms as the Debentures, except such newly issued notes shall not be convertible
and will bear a rate of interest required for such new securities to have a
market value equal to 100% of their principal amount on the date of repurchase,
but in no event shall such interest rate exceed 14% per annum.
MORTGAGES PAYABLE
Mortgages outstanding on the Company's previous corporate headquarters facility
(currently for sale) and its VITAL headquarters and manufacturing facility,
which bear interest at 90-day LIBOR (5.94% at September 30, 1999) plus 2%,
amounted to $9,425,000 and $9,825,000 at September 30, 1999 and 1998,
respectively. Quarterly principal payments of $100,000 are required until these
mortgages mature in the year 2003. In addition, two mortgages with remaining
principal balances totaling $986,000 and $1,227,000 at September 30, 1999 and
1998, respectively, were outstanding on the Company's buildings in the United
Kingdom. These mortgages bear interest at six-month LIBOR (5.88% at September
30, 1999) plus 1.3% and mature in fiscal 2003.
8. INCOME TAXES
(Loss) before income taxes consists of both domestic and foreign income (loss),
as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
United States $(23,696) $(32,983) $(43,561)
Foreign 2,240 291 1,210
- -----------------------------------------------------------------------------
$(21,456) $(32,692) $(42,351)
=============================================================================
</TABLE>
The provision for income taxes consists of the following amounts (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
State $ 200 $200 $200
Foreign 1,086 477 (61)
- -------------------------------------------------------------------------------
1,286 677 139
- -------------------------------------------------------------------------------
Deferred:
Federal (136) 28 25
Foreign -- (5) 236
- -------------------------------------------------------------------------------
(136) 23 261
- -------------------------------------------------------------------------------
Total $1,150 $700 $400
===============================================================================
</TABLE>
28
<PAGE>
The following reconciles the U.S. statutory income tax rate to the Company's
effective rate:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate (34.0)% (34.0)% (34.0)%
No benefit recognized for domestic net operating loss 37.0 33.8 34.5
Effect of foreign income taxes 1.5 1.2 (0.6)
State and local income taxes 0.9 0.6 0.5
Non-deductible expenditures -- 0.5 0.5
- -------------------------------------------------------------------------------
5.4% 2.1% 0.9%
===============================================================================
</TABLE>
For regular income tax reporting purposes at September 30, 1999 foreign and
domestic tax credits and net operating loss carryforwards amounted to
approximately $12.7 million and $177.0 million, respectively. Domestic federal
loss carryforwards of $170.0 million expire between fiscal 2004 and 2015, of
which approximately $12.6 million relate to items which will be credited to
stockholders' equity when applied; domestic state loss carryforwards of
approximately $104.0 million expire between fiscal 2000 and 2015. Foreign loss
carryforwards of $7.0 million expire beginning in fiscal 2000. Tax credit
carryforwards expire between fiscal 2000 and 2015.
For federal alternative minimum tax purposes, net operating loss carryforwards
amounted to approximately $160.0 million at September 30, 1999. These
carryforwards may be carried forward indefinitely to offset any excess of
regular tax liability over alternative minimum tax liability, subject to certain
separate company limitations.
The tax effects of the significant temporary differences comprising the deferred
tax assets and liabilities at September 30, 1999 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets
Receivable reserve $ 1,847 $ 1,760
Inventory reserve 8,104 6,399
Deferred income 1,732 1,206
Other accruals 573 592
Loss carryforwards 68,840 58,540
Tax credits 12,708 10,290
- -------------------------------------------------------------------------------
93,804 78,787
Valuation allowance (78,039) (62,657)
- -------------------------------------------------------------------------------
Net deferred tax assets $ 15,765 $ 16,130
===============================================================================
Deferred Tax Liabilities
Depreciation $ 1,762 $ 2,684
Deferred income 1,640 1,080
Capitalized software 8,726 9,714
Operating leases 3,765 2,724
Capital leases 99 288
Other 532 554
- -------------------------------------------------------------------------------
Gross deferred tax liability $ 16,524 $ 17,044
===============================================================================
</TABLE>
Statement of Financial Accounting Standard No. 109, "Accounting For Income
Taxes," requires a valuation allowance against deferred tax assets if, based on
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company believes that uncertainty exists
with respect to the future realization of deferred tax assets and, as a result,
carries a valuation allowance for such items. The valuation allowances,
disclosed in the deferred tax summary above, increased by $15,382,000 and
$17,601,000 in fiscal 1999 and fiscal 1998, respectively.
29
<PAGE>
9. OPERATING LEASES
The Company has certain non-cancelable operating leases on automobiles,
subsidiary locations, sales offices and service facilities which expire within
one to six years. These leases generally contain renewal options and provisions
for payment by the lessee of executory costs (taxes, maintenance and insurance).
In addition, the Company has a non-cancelable operating lease through fiscal
2003 for its Connecticut corporate offices and technology center facility.
The following is a schedule of the future minimum payments on such leases at
September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ending September 30, 2000 2001 2002 2003 2004 thereafter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$2,979 $2,643 $2,273 $2,021 $330 $ 26
- -------------------------------------------------------------------------------
Total future minimum lease
payments $10,272
Less: future sublease income,
non-cancelable through 2001 2,076
- -------------------------------------------------------------------------------
Net future lease payments $ 8,196
===============================================================================
</TABLE>
Net rental expense for the three most recent fiscal years was (in thousands):
<TABLE>
<CAPTION>
Rental Sublease
Expense Income Net
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 $5,186 $1,409 $3,777
1998 5,504 1,234 4,270
1997 6,086 1,313 4,773
===============================================================================
</TABLE>
30
<PAGE>
10. STOCKHOLDERS' EQUITY
Transactions in capital stock for the three fiscal years ended September 30,
1999 were as follows (in thousands except share amounts):
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Capital Treasury Stock Other
Comprehensive ---------------- ------------------- in Excess ----------------- Comprehensive
Loss Shares Amount Shares Amount of Par Shares Amount Loss
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996 800,000 $800 21,387,430 $2,139 $148,208 422,429 $(3,128) $(2,510)
Comprehensive Loss:
Net loss $(42,751)
Foreign currency
translation
adjustments 21 -- -- -- -- -- -- -- 21
--------
Comprehensive loss $(42,730)
========
Exercise of stock
options -- -- 95,242 9 447 (1,512) 13 --
Employee stock purchase
plan -- -- 236,922 24 1,478 -- -- --
Other -- -- -- -- (269) (90,535) 670 --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30,
1997 800,000 800 21,719,594 2,172 149,864 330,382 (2,445) (2,489)
Comprehensive Loss:
Net loss $(33,392)
Foreign currency
translation
adjustments (100) -- -- -- -- -- -- (100)
--------
Comprehensive loss $(33,492)
========
Exercise of stock
options -- -- 2,938 -- 12 -- -- --
Employee stock purchase
plan -- -- 338,831 34 954 -- -- --
Issuance of stock
warrants -- -- -- -- 222 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30,
1998 800,000 800 22,061,363 2,206 151,052 330,382 (2,445) (2,589)
Comprehensive Loss:
Net loss $(22,606)
Foreign currency
translation
adjustments (147) -- -- -- -- -- -- -- (147)
--------
Comprehensive loss $(22,753)
========
Exercise of stock
options -- -- 6,000 1 11 -- -- --
Employee stock purchase
plan -- -- 334,163 33 643 -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Balance, September 30,
1999 800,000 $800 22,401,526 $2,240 $151,706 330,382 $(2,445) $(2,736)
===============================================================================================================================
</TABLE>
"Accumulated Other Comprehensive Loss" is comprised solely of foreign currency
translation adjustments; there is no income tax expense or benefit associated
with such adjustments.
The Common Stock referenced above includes both Class B stock and common stock.
Class B stock, under certain circumstances, has greater voting power in the
election of directors. However, common stock is entitled to cash dividends, if
and when paid, 11.11% higher per share than Class B stock. The Company has never
declared or paid cash dividends on its common stock and terms of the Company's
credit facility prohibit the Company from paying cash dividends, with the
exception of dividends authorized for payment on the Company's preferred stock
(referenced below). Class B stock has limited transferability and is convertible
into common stock at any time on a share-for-share basis. At September 30, 1999,
1998 and 1997, Class B stock outstanding amounted to 2,092,383, 2,093,083 and
2,136,933 shares, respectively.
31
<PAGE>
General DataComm Industries, Inc. and Subsidiaries
"Other" activity for fiscal 1997 includes the issuance of treasury shares in
satisfaction of payment for certain legal services rendered. The fair market
value of shares issued (on date of issuance) was charged to expense.
800,000 shares of the Company's 9% Cumulative Convertible Exchangeable Preferred
Stock ("Preferred Stock") were outstanding during the three-year period ended
September 30, 1999. The Preferred Stock accrues dividends at a rate of 9% per
annum, cumulative from the date of issuance and payable quarterly in arrears .
The Preferred Stock can be converted into common stock at $13.65 per share, or
the equivalent of 1.8315 shares of common stock for each share of Preferred
Stock. The Company has the option to exchange the Preferred Stock for 9%
Convertible Subordinated Debentures due 2006, at the rate of $25.00 principal
amount of such debentures for each share of Preferred Stock outstanding at the
time of exchange. Subject to approval of the Company's principal lenders, the
Preferred Stock can be redeemed by the Company on or after September 30, 2000 at
a price of $25.00 per share. Redemption is also possible during the period
September 30, 1999 through September 29, 2000 if the closing price of the
Company's common stock equals or exceeds $20.48 per share for 20 trading days
within a 30 consecutive trading day period ending within 5 trading days before
notice of redemption is mailed.
11. SEGMENT AND GEOGRAPHICAL INFORMATION
The Company reorganized in December 1998, creating distinct and independently
managed Strategic Business Units ("SBU") for specified groups of products and
services. Each SBU has been identified as a reportable segment, as summarized
below:
- Broadband Systems Division ("BSD") -- Designs, markets and sells
broadband telecommunication products, including ATM switches and network
management systems which allow for the efficient transmission of voice,
data and video. BSD also sells time-division multiplexing ("TDM")
equipment.
- Network Access Division ("NAD") -- Designs, markets and sells access-type
telecommunication products, including frame relay and DSL products.
- VITAL Network Services, L.L.C. ("VITAL") -- An integrated worldwide
service organization which provides global traditional and professional
network services for telecommunications carriers, corporate and
government customers. VITAL offers such support services for the products
of many companies (multi-vendor support services).
- DataComm Leasing Corporation -- Provides financing services, offering BSD
and NAD customers the opportunity to lease (rather than purchase)
products.
The prior year's segment information has been restated to conform to the
current-year presentation.
The accounting policies of the segments are the same as those described in Note
1, "Description of Business and Summary of Significant Accounting Policies,"
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).
32
<PAGE>
The tables below present financial performance information by reportable
segments (in thousands). Asset information by reportable segment is not
reported, as the Company does not produce such information internally.
<TABLE>
<CAPTION>
VITAL Network Broadband DataComm
Network Access Systems Leasing
Services Division Division Corporation Other Totals
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Fiscal 1999 $46,676 $59,936 $ 59,102 $4,188 $1,115 $171,017
Fiscal 1998 37,852 65,936 82,633 4,437 3,397 194,255
Fiscal 1997 38,677 71,637 87,709 4,813 4,930 207,766
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss):
Fiscal 1999 $ 5,896 $ 1,687 $(29,402) $3,200 $ 420 $(18,199)
Fiscal 1998 3,305 (1,393) (25,687) 3,149 (117) (20,743)
Fiscal 1997 6,016 (9,255) (34,816) 3,397 778 (33,880)
- ---------------------------------------------------------------------------------------------------------------
Depreciation and amortization expense
included in operating income (loss), as
reported above:
Fiscal 1999 $ 3,932 $ 2,294 $ 6,812 $ 578 $ 33 $ 13,649
Fiscal 1998 2,572 3,009 7,679 878 103 14,241
Fiscal 1997 3,433 3,625 8,041 976 105 16,180
===============================================================================================================
</TABLE>
Reconciliations of operating income (loss), as reported above, to consolidated
loss before income taxes are summarized below:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating loss, as reported above $(18,199) $(20,743) $(33,880)
Capitalized software activity, net 362 786 107
General corporate expenses (3,863) (4,283) (4,646)
Restructuring of operations (2,000) (2,500) --
Other income (expense) 2,244 (5,952) (3,932)
- -------------------------------------------------------------------------------
Loss before income taxes $(21,456) $(32,692) $(42,351)
===============================================================================
</TABLE>
Consolidated revenue and long-lived asset information by geographic area is as
follows:
<TABLE>
<CAPTION>
Revenue Long-Lived Assets
------------------------------ ---------------------------
YEARS ENDED SEPTEMBER 30, 1999 1998 1997 1999 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 88,939 $ 96,850 $ 99,576 $61,256 $68,805 $71,695
Foreign 82,078 97,405 108,190 6,002 7,684 9,025
- ---------------------------------------------------------------------------------------------------
$171,017 $194,255 $207,766 $67,258 $76,489 $80,720
===================================================================================================
</TABLE>
Foreign revenue is based on the country in which the revenue originated (i.e.,
where the legal subsidiary is domiciled or, in the case of sales through the
Company's international distributor network, where the customer placing the
order is domiciled). No individual foreign location accounted for more than 10
percent of consolidated revenue or long-lived assets. Separately, no individual
customer accounted for more than ten percent of the Company's consolidated
revenue.
33
<PAGE>
12. EMPLOYEE INCENTIVE PLANS
STOCK OPTION PLANS
Officers and key employees may be granted incentive stock options at an exercise
price equal to or greater than the market price on the date of grant and
non-incentive stock options at an exercise price equal to or less than the
market price on the date of grant. While individual options can be issued under
various provisions, most options, once granted, generally vest in increments of
25% per year over a four-year period and expire within ten years. Under the
terms of these stock option plans, the Company has reserved a total of 4,765,351
shares of common stock at September 30, 1999 (4,439,014 shares at September 30,
1998).
The following summarizes activity under these stock option plans for the three
fiscal years ended September 30, 1999:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
- -------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding, September 30, 1996
(852,816 exercisable) 2,628,541 $ 9.52
Options granted 1,717,200 7.70
Options exercised (97,742) 4.86
Options canceled or expired (1,373,991) 11.83
- -----------------------------------------------------------------------------
Options outstanding, September 30, 1997
(1,058,426 exercisable) 2,874,008 $ 7.49
Options granted 1,597,395 4.06
Options exercised (2,900) 4.07
Options canceled or expired (844,859) 7.10
- -----------------------------------------------------------------------------
Options outstanding, September 30, 1998
(1,253,911 exercisable) 3,623,644 $ 6.07
Options granted 1,217,355 2.67
Options exercised (6,000) 2.00
Options canceled or expired (1,198,127) 5.71
- -----------------------------------------------------------------------------
Options outstanding, September 30, 1999
(1,410,813 exercisable) 3,636,872 $ 5.07
=============================================================================
</TABLE>
The following summarizes additional information regarding options outstanding
and options exercisable as of September 30, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
----------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Exercise Contractual Number Exercise
Exercise Prices Of Shares Price Life (Years) Of Shares Price
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 2.00 - $ 2.75 967,501 2.54 9.54 9,250 2.00
$ 2.84 - $ 3.75 761,380 3.44 7.75 269,151 3.39
$ 3.78 - $ 4.00 647,823 3.93 6.18 375,249 3.88
$ 4.13 - $ 6.75 599,093 6.10 7.35 265,855 6.31
$ 7.19 - $12.31 548,675 9.86 6.33 380,158 10.08
$13.88 - $15.50 112,400 15.40 4.93 111,150 15.41
- ---------------------------------------------------------------------------
$ 2.00 - $15.50 3,636,872 $ 5.07 7.58 1,410,813 $ 6.81
===========================================================================
</TABLE>
34
<PAGE>
The weighted average option price of exercisable options was $6.81, $6.68 and
$5.75 at September 30, 1999, 1998 and 1997, respectively. All options granted
during the three fiscal years ended September 30, 1999 were granted at an option
price equal to fair market value at date of grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company has a stock purchase plan to encourage employees to participate in
the Company's future growth. At September 30, 1999, 578,536 shares were reserved
for purchase by employees through payroll deductions regularly accumulated over
six-month payment periods. At the end of each payment period, common stock is
purchased at 85 percent of the market value of the stock on the first or last
day of the payment periods, whichever is lower. However, the purchase of common
stock under this plan is prohibited if 85 percent of the market value of the
common stock is less than the book value per share. Note 10, "Stockholders'
Equity," presents the historical activity under this plan during the three
fiscal years ended September 30, 1999.
EMPLOYEE RETIREMENT SAVINGS AND DEFERRED PROFIT SHARING PLAN
Under the retirement savings provisions of the Company's retirement plan
established under Section 401(k) of the Internal Revenue Code, employees are
generally eligible to contribute to the plan after three months of continuous
service, in amounts determined by the plan. The Company contributes an
additional 50 percent of the employee contribution up to certain limits (not to
exceed 2 percent of total eligible compensation). Employees become fully vested
in the Company's contributions after three years of continuous service, death,
disability or upon reaching age 65. The amounts charged to expense for the
fiscal years ended September 30, 1999, 1998 and 1997 were $1,245,400, $1,015,100
and $1,133,200, respectively.
The deferred profit sharing provisions of the plan include retirement and other
related benefits for substantially all of the Company's full-time employees.
Contributions under the plan are funded annually and are based, at a minimum,
upon a formula measuring profitability in relation to revenues. Additional
amounts may be contributed at the discretion of the Company. There were no such
contributions for fiscal 1999, 1998 or 1997.
STOCK-BASED COMPENSATION
Pro forma results, representative of financial results which would have been
reported by the Company if it had adopted the fair value based method of
accounting for stock-based compensation under SFAS No. 123, are summarized
below:
<TABLE>
<CAPTION>
Fiscal Years Ended September 30,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss, as reported $(22,606) $(33,392) $(42,751)
Estimated stock compensation costs (2,622) (3,552) (3,569)
- -------------------------------------------------------------------------
Pro forma net loss $(25,228) $(36,944) $(46,320)
=========================================================================
Pro forma net loss per share
(basic and diluted) $ (1.24) $ (1.80) $ (2.28)
=========================================================================
</TABLE>
35
<PAGE>
The Black-Scholes method was used to compute the pro forma amounts presented
above, utilizing the weighted average assumptions summarized below. The
weighted-average fair value of options granted was $1.54, $2.25 and $3.99 for
the fiscal years ended September 30, 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
Stock Option Plans Employee Stock Purchase
------------------------ -----------------------
FISCAL YEARS ENDED SEPT 30, 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest rate 4.12% 5.63% 6.59% 5.12% 5.48% 5.62%
Volatility (%) 88.53% 74.06% 57.34% 71.87% 85.71% 50.28%
Expected life (in years) 3.12 3.62 4.52 0.50 0.50 0.50
Dividend yield rate nil nil nil nIL nil nil
</TABLE>
13. LEASING SUBSIDIARY
The Company's consolidated financial statements include the accounts of its
wholly-owned leasing subsidiary, DataComm Leasing Corporation. The leasing
subsidiary purchases most equipment for lease to others from General DataComm,
Inc.
The following represents condensed financial information of DataComm Leasing
Corporation (in thousands).
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Financial Condition
Current assets $ 5,821 $ 3,733
Noncurrent assets 5,897 4,466
Due from General DataComm, Inc. 633 2,824
- --------------------------------------------------------------------------------
Total assets $12,351 $11,023
- --------------------------------------------------------------------------------
Current liabilities $ 1,437 $ 1,624
Noncurrent liabilities 9 3
Stockholder's equity 10,905 9,396
- --------------------------------------------------------------------------------
Total liabilities and stockholder's equity $12,351 $11,023
================================================================================
</TABLE>
<TABLE>
<CAPTION>
Results of Operations
FISCAL YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues $4,188 $ 4,437 $ 4,813
- -------------------------------------------------------------------------------
Income before income taxes $2,514 $ 1,882 $ 1,902
===============================================================================
</TABLE>
LEASE FINANCING PROGRAMS
DataComm Leasing Corporation maintains agreements with financial institutions
whereby certain finance lease receivables are transferred with full recourse.
The underlying equipment is retained as collateral by DataComm Leasing
Corporation. Proceeds received by the leasing subsidiary from the transfer of
such receivables amounted to $1,344,000 for fiscal 1997 (no receivables were
transferred in fiscal 1998 or fiscal 1999). The balance of all transferred
receivables which were due to be paid by the original lessees under the
remaining lease terms amounted to $235,000 and $1,020,000 at September 30,
1999 and 1998, respectively.
36
<PAGE>
14. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted loss per
share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net loss $(22,606) $(33,392) $(42,751)
Preferred stock dividends (1,800) (1,800) (1,800)
- -------------------------------------------------------------------------------
Numerator for basic and diluted loss
per share -- loss applicable to common
stockholders $(24,406) $(35,192) $(44,551)
===============================================================================
Denominator:
Denominator for basic and diluted loss
per share -- weighted average shares
outstanding 21,857 21,495 21,105
===============================================================================
Basic and diluted loss per share $ (1.12) $ (1.64) $ (2.11)
===============================================================================
</TABLE>
The net loss for the fiscal year ended September 30, 1999 includes a
restructuring charge of $2.0 million, or $0.09 per share, for restructuring of
operations; fiscal 1998 results include a similar charge of $2.5 million, or
$0.12 per share. Refer to Note 2, "Restructuring of Operations," for further
discussion.
Outstanding securities, not included in the above computations because of their
antidilutive impact on reported loss per share, which could potentially dilute
diluted 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. Weighted average employee stock options outstanding
during fiscal 1999 approximated 3,498,700 shares, of which 3,197,100 would not
have been included in diluted earnings per share calculations for fiscal 1999
(if the Company reported net income) because the effect would be antidilutive.
<TABLE>
<CAPTION>
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
-----------------------------------------
Fiscal 1999 First Second Third Fourth
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 42,419 $38,777 $42,369 $47,452
Gross profit 16,161 14,784 15,794 18,824
Operating loss(1) (10,361) (6,968) (5,122) (1,249)
Net loss(1)(2) $ (3,088) $(8,539) $(7,074) $(3,905)
Basic and diluted loss
per share(1)(2)(3) $ (0.16) $ (0.41) $ (0.34) $ (0.20)
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 First Second Third Fourth
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 48,219 $48,331 $48,031 $49,674
Gross Profit 19,483 20,800 20,496 20,987
Operating loss(4) (12,193) (5,551) (4,688) (4,308)
Net loss(4) $(13,860) $(7,059) $(6,286) $(6,187)
Basic and diluted loss
per share(4) $ (0.67) $ (0.35) $ (0.31) $ (0.31)
==========================================================================
</TABLE>
(1) The first quarter of fiscal 1999 includes a charge of $2.0 million, or $0.09
per share, for restructuring of operations.
(2) The first quarter of fiscal 1999 includes a gain of $9.0 million, or $0.41
per share, from the sale of a non-strategic division.
(3) Loss per share amounts for each quarter are required to be computed
independently and, in fiscal 1999, did not equal the full year loss per
share amounts.
(4) The first quarter of fiscal 1998 includes a charge of $2.5 million, or $0.12
per share, for restructuring of operations.
37
<PAGE>
16. SUBSEQUENT EVENTS
EXPANSION OF CREDIT FACILITY AND RECEIPT OF PROCEEDS -- 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).
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. Refer to Note 7, "Long-Term Debt," for further discussion.
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.
Other than items specifically discussed above, terms of the New Loan Agreement,
including availability of the $35.0 million (maximum value) revolving line of
credit, are consistent with terms of the original $40.0 million Loan Agreement,
as discussed in Note 7, "Long-Term Debt."
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. The increase in stockholders' equity is
comprised of approximately $16.1 million of equity securities issued less $1.6
million of debt conversion expense discussed below. Annual interest expense
savings resulting from the conversions will approximate $1.1 million.
In unsolicited negotiated transactions, the Company issued 2,716,280 shares of
common stock in exchange for the $14.5 million of Debentures, as compared to
2,483,279 shares to be issued under the original debenture conversion terms.
Issuance of the incremental 233,001 shares will result in debt conversion
expense of approximately $1.6 million in the quarter ending December 31, 1999.
Refer to Note 7, "Long-Term Debt," under the caption "Convertible 7 3/4%
Debentures" for terms of the original Debentures issued, of which approximately
$10.5 million remain outstanding at December 31, 1999.
38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of General DataComm Industries, Inc.
In our opinion, the consolidated balance sheets and related consolidated
statements of operations and accumulated deficit and cash flows present fairly,
in all material respects, the consolidated financial position of General
DataComm Industries, Inc. and Subsidiaries at September 30, 1999 and 1998, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based upon
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion expressed above.
/s/ PriceWaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
October 29, 1999, except for Note 7 and Note 16
for which the date is December 31, 1999
38
<PAGE>
Exhibit 21
General DataComm Industries, Inc.
Subsidiaries of the Registrant
State or Percentage
Jurisdiction of of Voting
Subsidiaries Incorporation Securities Owned
- ------------ ---------------- ----------------
General DataComm, Inc. Delaware 100%
GDC Federal Systems, Inc. Delaware 100%
DataComm Leasing Corporation Delaware 100%
DataComm Rental Corporation (1) Delaware 100%
General DataComm Ltd. Canada 100%
General DataComm Limited United Kingdom 100%
General DataComm International
Corporation Delaware 100%
General DataCommunications,
Industries, B.V. (1) Netherlands 100%
GDC Realty, Inc. Texas 100%
GDC Naugatuck, Inc. Delaware 100% (2)
General DataComm Pty. Limited Australia 100%
General DataComm de Mexico
S.A. de C.V. Mexico 100% (3)
Grupo GDC de Mexico S.A. de
C.V. Mexico 100%
GDC Servicios S.A. de C.V. Mexico 100%
VITAL Network Services, S.A. de
C.V. Mexico 100%
General DataComm France SARL France 100%
General DataComm Pte Ltd. Singapore 100%
General DataComm de
Venezuela, C.A. (1) Venezuela 100%
General DataComm Advanced Research
Centre Limited United Kingdom 100% (4)
General DataComm Industries GmbH Germany 100%
General DataComm CIS Russia 100%
General DataComm China, Ltd. Delaware 100% (5)
General DataComm do Brasil Ltda,
S.C. Brazil 100%
VITAL Network Services, L.L.C. Delaware 100% (6)
Vital Network Services Limited United Kingdom 100% (7)
_________________
1. Currently inactive
2. Wholly owned by GDC Realty, Inc.
3. One share, less than 1%, owned by General DataComm International
Corporation
4. 5% owned by General DataComm International Corporation
5. Wholly owned by General DataComm International Corporation
6. Limited liability company owned by General DataComm, Inc.
7. Wholly owned by VITAL Network Services, L.L.C.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in these Registration
Statements on Form S-3 (File Nos. 333-20569 and 333-43835) and on Form S-8 (File
Nos. 2-83701, 2-92929, 33-21027, 33-36351, 33-37266, 33-43050, 33-53150,
33-62716, 33-53201, 33-59573, 333-35299, 333-57117, 333-86299 and 333-89571) of
our report dated October 29, 1999, except for Note 7 and Note 16 for which the
date is December 31, 1999, relating to the financial statements, which appears
in the 1999 Annual Report to Shareholders of General DataComm Industries, Inc.
and Subsidiaries, which is incorporated by reference in General DataComm
Industries, Inc.'s Annual Report on Form 10-K for the year ended September 30,
1999. We also consent to the incorporation by reference of our report dated
October 29, 1999, except for Note 7 and Note 16, for which the date is December
31, 1999, relating to the financial statement schedule, which appears in such
Annual Report on Form 10-K.
/S/ PRICEWATERHOUSECOOPERS LLP
Stamford, Connecticut
January 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,790
<SECURITIES> 0
<RECEIVABLES> 32,795
<ALLOWANCES> 1,375
<INVENTORY> 22,329
<CURRENT-ASSETS> 14,202
<PP&E> 144,614
<DEPRECIATION> 111,935
<TOTAL-ASSETS> 140,374
<CURRENT-LIABILITIES> 50,359
<BONDS> 64,532
0
800
<COMMON> 2,240
<OTHER-SE> 19,053
<TOTAL-LIABILITY-AND-EQUITY> 140,374
<SALES> 118,052
<TOTAL-REVENUES> 171,017
<CGS> 72,139
<TOTAL-COSTS> 105,454
<OTHER-EXPENSES> 80,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,998
<INCOME-PRETAX> (21,456)
<INCOME-TAX> 1,150
<INCOME-CONTINUING> (22,606)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,606)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>
