SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8086
GENERAL DATACOMM INDUSTRIES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0853856
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Middlebury, Connecticut 06762-1299
--------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (203) 574-1118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- --
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Title of Each Class at June 30, 2000
------------------------------ -----------------
Common Stock, $.10 par value 24,426,138
Class B Stock, $.10 par value 2,057,103
Total Number of Pages in this Document is 28.
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
Part I -- FINANCIAL INFORMATION
Consolidated Balance Sheets -
June 30, 2000 and September 30, 1999 . . . . . . . . . . 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three and
Nine Months Ended June 30, 2000 and 1999 . . . . . . . . . 4
Consolidated Statements of Cash Flows - For the
Nine Months Ended June 30, 2000 and 1999 . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 16
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 27
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
In thousands, except shares 2000 1999
-------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $2,477 $3,790
Accounts receivable, less allowance for doubtful
receivables of $1,995 in June and $1,375
in September 26,807 32,795
Inventories 33,755 22,329
Deferred income taxes 1,748 1,578
Other current assets 12,891 12,624
-------------------------------------------------------------------------------
Total current assets 77,678 73,116
-------------------------------------------------------------------------------
Property, plant and equipment, net 30,336 32,679
Capitalized software development costs, net 22,077 21,815
Other assets 10,446 12,764
-------------------------------------------------------------------------------
$140,537 $140,374
-------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $7,392 $4,533
Accounts payable, trade 25,371 18,669
Accrued payroll and payroll-related costs 3,909 4,626
Deferred income 7,384 6,082
Other current liabilities 15,618 16,449
-------------------------------------------------------------------------------
Total current liabilities 59,674 50,359
-------------------------------------------------------------------------------
Long-term debt, less current portion 60,218 64,532
Deferred income taxes 2,350 2,337
Other liabilities 1,236 1,053
-------------------------------------------------------------------------------
Total liabilities 123,478 118,281
-------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock, par value $1.00 per share, 3,000,000 shares authorized;issued
and outstanding: 787,900 in June and 800,000 in September, all 9% cumulative
convertible exchangeable preferred stock; liquidation preference of $19.7
million in June and
$20 million in September 788 800
Class B stock, par value $.10 per share,
10,000,000 shares authorized; issued
and outstanding: 2,057,103 in June
and 2,092,383 in September 206 209
Common stock, par value $.10 per share,
50,000,000 shares authorized; issued
and outstanding: 24,619,564 in June
and 20,309,143 in September 2,462 2,031
Capital in excess of par value 174,603 151,706
Accumulated deficit (154,978) (127,472)
Accumulated other comprehensive loss (4,590) (2,736)
Common stock held in treasury, at cost:
193,426 shares in June and 330,382
shares in September (1,432) (2,445)
-------------------------------------------------------------------------------
Total stockholders' equity 17,059 22,093
-------------------------------------------------------------------------------
$140,537 $140,374
-------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
Three Montsh Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
In thousands, except per share data 2000 1999 2000 1999
-------------------------------------------------------------------------------
Revenues:
Net product sales $27,358 $30,163 $91,780 $83,779
Service revenue 13,004 11,112 35,577 34,565
Other revenue 799 1,094 2,771 5,221
-------- -------- ------- -------
41,161 42,369 130,128 123,565
Cost of revenues:
Cost of product sales 14,870 15,504 48,526 42,962
Cost of service revenue 9,681 7,984 26,577 23,996
Cost of other revenue 50 87 187 696
-------- -------- -------- --------
24,601 23,575 75,290 67,654
Gross margin 16,560 18,794 54,838 55,911
Amortization of capitalized
software development costs 2,863 3,000 8,856 9,172
Operating expenses:
Selling, general and administrative 15,167 14,514 44,692 45,967
Research and product development 5,299 6,402 15,505 21,223
Restructuring and other charges 2,000 -- 2,500 2,000
-------- -------- -------- -------
22,466 20,916 62,697 69,190
Operating loss (8,769) (5,122) (16,715) (22,451)
Other income (expense):
Interest, net (2,292) (1,801) (6,367) (4,999)
Debt conversion expense -- -- (2,403) --
Gain on sale of assets -- -- -- 9,001
Other, net 167 49 522 448
--------- -------- --------- --------
(2,125) (1,752) (8,248) 4,450
Loss before income taxes (10,894) (6,874) (24,963) (18,001)
Income tax provision 500 200 1,200 700
--------- -------- --------- --------
Net loss ($11,394) ($7,074) ($26,163) ($18,701)
========= ======== ========= ========
Basic and diluted loss per share ($0.45) ($0.34) ($1.11) ($0.92)
========= ======== ========= ========
Weighted average number of common and
common equivalent shares outstanding 26,463 21,918 24,840 21,819
========= ======== ========= ========
Accumulated deficit at beginning of
period ($143,141) ($115,593) ($127,472) ($103,066)
Net loss (11,394) (7,074) (26,163) (18,701)
Payment of preferred stock dividends (443) (450) (1,343) (1,350)
---------- ---------- ---------- ----------
Accumulated deficit at end of period ($154,978) ($123,117) ($154,978) ($123,117)
========== ========== ========== ==========
---------------
The accompanying notes are an integral part of these consolidated financial
statements.
- 4 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
and Cash Equivalents
----------------------------
Nine Months Ended
June 30,
----------------------------
In thousands 2000 1999
-------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($26,163) ($18,701)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 16,827 19,574
Non-cash charge for debt conversion 2,403 --
Non-cash charge for lease receivable write-off 2,000 --
Gain on sale of assets -- (9,001)
Changes in:
Accounts receivable 5,209 3,190
Inventories (11,660) (694)
Accounts payable and accrued expenses 5,291 7,098
Other net current assets 2,649 (1,819)
Other net long-term assets (3,390) (2,176)
-------------------------------------------------------------------------------
Net cash used in operating activities (6,834) (2,529)
-------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (5,041) (6,282)
Capitalized software development costs (9,117) (9,534)
Proceeds from sale of assets, net -- 12,013
-------------------------------------------------------------------------------
Net cash used in investing activities (14,158) (3,803)
-------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings, net 2,822 11,435
Proceeds from notes and mortgages 20,700 14,679
Principal payments on notes and mortgages (3,197) (18,898)
Proceeds from issuing common stock 791 380
Payment of preferred stock dividends (1,343) (1,350)
-------------------------------------------------------------------------------
Net cash provided by financing activities 19,773 6,246
-------------------------------------------------------------------------------
Effect of exchange rates on cash (94) (91)
-------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,313) (177)
Cash and cash equivalents at beginning of period - (1) 3,790 3,757
-------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $2,477 $3,580
===============================================================================
(1) The Corporation considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary for a fair statement of the consolidated financial
position of General DataComm Industries, Inc. and subsidiaries
(the "Corporation" or "Company") as of June 30, 2000, the
consolidated results of their operations for the three and nine
months ended June 30, 2000 and 1999, and their cash flows for
the nine months ended June 30, 2000 and 1999. Such adjustments
are generally of a normal recurring nature and include
adjustments to certain accruals and asset reserves to
appropriate levels.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
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. In addition, the
markets for the Company's products are characterized by intense
competition, rapid technological development, and frequent new
product introductions, all of which could impact the future
value of the Company's inventories, capitalized software
development costs, and certain other assets.
The unaudited consolidated financial statements contained herein
should be read in conjunction with the consolidated financial
statements and related notes thereto filed with Form 10-K for
the fiscal year ended September 30, 1999.
Certain reclassifications were made to the prior year's
consolidated financial statements to conform to the current
year's presentation.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
June 30, 2000 September 30, 1999
------------- ------------------
Raw materials $ 9,088 $ 5,054
Work-in-process 5,289 1,732
Finished goods 19,378 15,543
--------- --------
$ 33,755 $ 22,329
======== ========
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
June 30, 2000 Sept. 30, 1999
------------- --------------
Land $ 1,753 $ 1,775
Buildings and improvements 30,091 30,280
Test equipment, fixtures
and field spares 56,177 54,460
Machinery and equipment 59,609 58,099
-------- --------
147,630 144,614
Less: accumulated depreciation 117,294 111,935
-------- --------
$ 30,336 $ 32,679
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The accumulated amortization of capitalized software development
costs amounted to $15,827,000 and $18,065,000 at June 30, 2000
and September 30, 1999, respectively. The reduction reflects the
write-off of fully amortized capitalized software in accordance
with the Company's accounting policy.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
June 30, 2000 September 30, 1999
------------- ------------------
Revolving credit facility $ 17,933 $ 15,111
Notes payable 36,948 18,543
7 3/4% convertible senior
subordinated debentures 3,000 25,000
Real estate mortgages 9,729 10,411
-------- --------
67,610 69,065
Less: current portion 7,392 4,533
-------- --------
$ 60,218 $ 64,532
======== ========
- 7 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Expansion of Credit Facility and Receipt of Proceeds
On May 14, 1999, the Company entered into a three-year $40.0
million loan and security agreement with Foothill Capital
Corporation (the "Loan Agreement"). The Loan Agreement was
comprised of $15.0 million in term loans and a $25.0 million
(maximum value) revolving line of credit. Monthly principal
payments on the term loans in the amount of $312,000 commenced
June 1, 2000. At any point in time, up to a maximum of $3.0
million of the outstanding term loan balance is convertible into
the Company's common stock at a conversion price of $5.00 per
share.
On December 30, 1999, the Company expanded its credit facility
to $70.0 million, as compared to the previous $40.0 million
agreement. The $30.0 million increase is comprised of a $20.0
million term loan (proceeds received on December 31, 1999) and a
$10.0 million increase in the revolving line of credit portion
of the credit facility. The expansion results in a $70.0 million
credit facility ("New Loan Agreement") comprised of $35.0
million in term loans and a $35.0 million (maximum value)
revolving line of credit.
In addition, a financial covenant of the New Loan Agreement
requires that stockholders' equity, as defined, must equal or
exceed $10.0 million. At June 30, 2000, such stockholders'
equity was $18.4 million. In addition, on July 31, 2000 the
Company sold $5.0 million of preferred stock which, after
expenses, would bring such stockholders' equity on a pro forma
basis to $23.3 million.
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 June 30, 2000,
the applicable prime rate of interest was 9.5%), 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. Up to a maximum of $4.0 million of
this new term loan balance is convertible into the Company's
common stock at a conversion price of $9.00 per share.
Under the revolving line of credit portion of the New Loan
Agreement, funds are advanced subject to satisfying a borrowing
base formula related to levels of certain accounts receivable
and inventories and the satisfaction of other financial
covenants.
- 8 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Under this formula, at June 30, 2000, the Company would have
been able to borrow up to $27.3 million. Borrowings outstanding
on the line of credit amounted to $17.9 million and $15.1
million at June 30, 2000 and September 30, 1999, respectively.
Most assets of the Company, including accounts receivable,
inventories and property, plant and equipment are pledged as
collateral under the New Loan Agreement. Interest on revolver
borrowings is payable monthly at the greater of prime plus
0.625%, or 7.0% per annum. The applicable prime rate was 9.5% at
June 30, 2000.
Conversion of Debentures into Equity
In the first six months of fiscal 2000, $22.0 million of the
$25.0 million in 7 3/4% Convertible 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 $22.0 million and $21.2 million, respectively. The
increase in stockholders' equity is comprised of approximately
$24.4 million of equity securities issued less non-cash charges
of $2.4 million for debt conversion expense (discussed below)
and $0.8 million of deferred debenture offering costs which were
charged to paid-in capital. Annual interest expense savings
resulting from the conversions will approximate $1.7 million.
In various separate, unsolicited and negotiated transactions,
the Company issued an aggregate of 4,110,600 shares of common
stock in exchange for the $22.0 million of Debentures referenced
above, as compared to 3,772,938 shares issuable under the
original debenture conversion terms. Issuance of the incremental
337,662 shares resulted in a non-cash charge of $2.4 million for
debt conversion expense during the nine-month period ended June
30, 2000.
After giving effect to these conversions, outstanding Debentures
amounted to $3.0 million at June 30, 2000.
Real Estate Mortgages
As of June 30, 2000, the Company had $9.1 million in mortgages
outstanding with one lending group on its previous Corporate
headquarters property, which is currently
- 9 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
vacant and available for sale, and its Naugatuck, Connecticut
property, where its VITAL Network Services main offices and its
manufacturing operations are located. To maintain compliance
with the covenant requirements of these mortgage agreements if
the building is not sold, the Company intends to raise
additional equity capital or take other initiatives on or before
October 2, 2000.
Reference is made to the Company's consolidated financial
statements and related notes thereto and exhibits filed with
Form 10-K for the year ended September 30, 1999 for further
disclosures applicable to the outstanding indebtedness of the
Corporation.
NOTE 6. RESTRUCTURING AND OTHER CHARGES AND LOSS CONTINGENCY
The three- and nine-month periods ended June 30, 2000 include a
charge of $2.0 million, or $0.08 per share, for uncollectible
lease receivables and related costs attributable to a customer
bankruptcy.
Litigation regarding the Company's legal right to take title and
possession of the equipment under lease is currently in process.
The Company intends to litigate the case vigorously and feels it
will ultimately be successful in recovering its equipment.
However, if the Company is not successful in its efforts to take
title and physical possession of such equipment, the Company
could realize an additional charge of up to an estimated $2.1
million.
The Company recorded a $500,000 charge for restructuring of
operations in the first fiscal quarter ended December 31, 1999
for severance costs associated with the decision to outsource
manufacturing operations. Refer to the Company's consolidated
financial statements and related notes thereto filed with Form
10-K for the fiscal year ended September 30, 1999 for discussion
of restructuring of operations charges recorded in fiscal 1999.
NOTE 7. SALE OF TECHNOLOGY ALLIANCE GROUP DIVISION
On December 30, 1998, the Company sold the assets of its
Technology Alliance Group ("TAG") division. The sale resulted in
a pre-tax gain of approximately $9.0
- 10 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. SALE OF TECHNOLOGY ALLIANCE GROUP DIVISION (continued)
million, or $0.41 per share, in the nine-month period ended June
30, 1999 and generated cash proceeds, net of expenses, of
approximately $12.0 million. Technology licensing revenues from
the sold division, included in "other revenue," amounted to
$1,115,000 in the nine-month period ended June 30, 1999 (no
licensing revenue was recognized in the quarter ended June 30,
1999).
NOTE 8. SEGMENT INFORMATION - INTERIM DISCLOSURES
The Company reorganized in December 1998, creating distinct and
independently managed Strategic Business Units ("SBUs") for
specified groups of products and services. Each SBU has been
identified as a reportable segment, as summarized below:
- Broadband Systems Division ("BSD")
- Network Access Division ("NAD")
- VITAL Network Services, L.L.C. ("VITAL")
- DataComm Leasing Corporation
The accounting policies of the segments are the same as those
described in Note 1, "Description of Business and Summary of
Significant Accounting Policies," in the Company's consolidated
financial statements filed with Form 10-K for the year ended
September 30, 1999, except for capitalized software accounting.
Such costs are treated as a period expense when measuring
divisional performance.
The Company evaluates the performance of its segments and
resource allocation based upon operating income, before
capitalized software accounting, restructuring charges and
executive level general corporate costs (i.e., chief executive
officer, chief operating officer, chief financial officer,
corporate strategic planning, investor relations, etc.). There
are no intersegment revenues, and BSD and NAD recognize revenue
for the sale of their product lines only (i.e., BSD recognizes
no revenue for the sale of NAD product and vice versa).
For additional information, including a description of the type
of business conducted by each respective SBU, refer to Note 11
in the Company's consolidated financial statements filed with
Form 10-K for the fiscal year ended September 30, 1999.
- 11 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. SEGMENT INFORMATION - INTERIM DISCLOSURES (continued)
The tables below present financial performance information by
reportable segment (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
----------------- -------------------
2000 1999 2000 1999
----------------- -------------------
Revenue:
Network Access Division $14,038 $15,952 $46,445 $44,125
Broadband Systems Division 13,346 14,269 45,403 40,601
VITAL Network Services, L.L.C. 13,004 11,112 35,577 34,565
DataComm Leasing Corporation 773 1,036 2,703 3,159
Other -- -- -- 1,115
------- ------- -------- --------
Total $41,161 $42,369 $130,128 $123,565
======= ======= ======== ========
Operating Income (Loss):
Network Access Division $ 338 $ 1,685 $ 3,037 $ (257)
Broadband Systems Division (9,452) (7,721) (19,921) (24,874)
VITAL Network Services, L.L.C. 915 1,092 1,770 4,518
DataComm Leasing Corporation 568 831 2,069 2,394
Other -- -- -- 420
-------- ------- --------- --------
Total $(7,631) $(4,113) $(13,045) $(17,799)
======== ======= ========= ========
The Broadband Systems Division results for the three- and nine-month
periods ended June 30, 2000 include a charge of $2.0 million for uncollectible
lease receivables and related costs attributable to a customer bankruptcy. Refer
to Note 6, "Restructuring and Other Charges and Loss Contingency," for further
discussion. Reconciliations of operating loss, as reported above, to
consolidated loss before income taxes are summarized below:
Operating loss, per above $(7,631) $(4,113) $ (13,045) $(17,799)
Capitalized software activity, net 171 -- 262 362
General corporate expenses (1,309) (1,009) (3,432) (3,014)
Restructuring of operations -- -- (500) (2,000)
Debt conversion expense -- -- (2,403) --
Gain on sale of assets -- -- -- 9,001
Other expense (2,125) (1,752) (5,845) (4,551)
------- ------- --------- --------
Loss Before Income Taxes $(10,894) $(6,874) $ (24,963) $(18,001)
========= ======== ========== =========
- 12 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and
diluted loss per share (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
June 30 June 30
------------------------------------------
2000 1999 2000 1999
------------------------------------------
Numerator:
Net loss $(11,394) $(7,074) $(26,163) $(18,701)
Preferred stock dividends (443) (450) (1,343) (1,350)
--------- -------- -------- ---------
Numerator for basic and
diluted loss per share -
loss applicable to common
stockholders $(11,837) $(7,524) $(27,506) $(20,051)
========= ======== ========= =========
Denominator:
Denominator for basic and
diluted loss per share -
weighted average
shares outstanding 26,463 21,918 24,840 21,819
-------- --------- -------- --------
Basic and diluted loss per
share $ (0.45) $ (0.34) $ (1.11) $ (0.92)
========= ========= ======== ========
The net loss reported for the three months ended June 30, 2000 includes a
charge of $2.0 million, or $0.08 per share, for uncollectible lease
receivables and related costs attributable to a customer bankruptcy. The
net loss reported for the nine months ended June 30, 2000 includes the $2.0
million (or $0.08 per share) charge referenced above, a restructuring
charge of $0.5 million (or $0.02 per share) and debt conversion charges of
$2.4 million (or $0.10 per share). The net loss reported for the nine
months ended June 30, 1999 includes restructuring charges of $2.0 million
(or $0.09 per share) and a gain on the sale of assets of $9.0 million (or
$0.41 per share).
Outstanding securities (not included in the above computations because of their
dilutive impact on reported loss per share) which could potentially
dilute earnings per share in the future include convertible debentures,
convertible preferred stock, employee stock options and warrants. For
additional disclosure information, including conversion terms, refer to
Notes 7, 10 and 12, respectively, in the Company's consolidated financial
statements filed with Form 10-K for the year ended September 30, 1999.
Separately, refer to Note 11 of this report for discussion of $5.0 million
of convertible preferred stock issued subsequent to June 30, 2000.
- 13 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. EARNINGS (LOSS) PER SHARE (continued)
Weighted average employee stock options outstanding during the
nine months ended June 30, 2000 approximated 4,035,000 shares,
of which 674,000 would not have been included in diluted
earnings per share calculations for the nine months ended June
30, 2000 (if the Company reported net income for the referenced
period) because the effect would be antidilutive.
NOTE 10. COMPREHENSIVE LOSS
The following table sets forth the computation of comprehensive
loss:
(in thousands)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
------------------ -----------------
Net loss $(11,394) $(7,074) $(26,163) $(18,701)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments (978) (93) (1,854) (757)
--------- -------- --------- ---------
Comprehensive loss $(12,372) $(7,167) $(28,017) $(19,458)
========= ======== ========= =========
NOTE 11. SUBSEQUENT EVENT
On July 31, 2000, the Company sold 200,000 shares of 5%
Cumulative Convertible Preferred Stock ("Preferred Stock") for
$5,000,000 to two accredited investors in a negotiated private
transaction exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended. The Preferred Stock is
convertible into one million shares of common stock at $5.00 per
share, or five shares of common stock for each share of
preferred stock.
The Company has the option to convert the Preferred Stock
into common stock if the market price of the Company's
common stock exceeds 125% of the conversion price, or $6.25 per
share, for a specified period, and has the right to redeem the
Preferred Stock at original issue price (par) in the event
certain transactions of $50,000,000 or more are effected by the
Company and a registration
- 14 -
<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11. SUBSEQUENT EVENT (continued)
statement is in effect covering the common stock. Separately,
the Preferred Stock will automatically be converted into common
stock on July 31, 2002, unless extended, if a registration
statement is not timely filed or kept effective. Dividends are
payable quarterly, at the option of the Corporation, in common
stock or cash.
The conversion price could potentially be adjusted downward at
six predetermined reset dates commencing on January 31, 2001,
and each three months thereafter, if the average closing price
of the Company's common stock during the ten trading days
preceding such predetermined dates falls below the conversion
price then in effect. An additional reset date is possible if
the Company's net worth falls below a certain formula as of
September 30, 2000. However, in no event can the conversion
price drop below a point where the Preferred Stock would be
convertible into more than 19.999% of the common stock shares
outstanding, excluding Class B stock and treasury shares.
The Company also issued warrants for the investors to purchase
an additional 200,000 shares of common stock at $5.75 per share.
Such warrants expire in five years. The Company has the right to
redeem such warrant shares two years after issuance for $.01 per
share if the common stock market price exceeds 200% of the
exercise price then in effect for 20 trading days out of 30
consecutive trading days and the holder does not exercise the
warrant by the date fixed for redemption. The Company has agreed
to register the underlying shares of the common stock.
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary Highlights
The Company's service business unit, VITAL Network Services, L.L.C., generated
record level quarterly revenues. Service revenues for the current quarter grew
17.0% as compared to the same quarter one year ago and 14.3% sequentially from
the preceding quarter. However, current quarter product revenues and financial
results were unfavorably impacted by a major customer becoming insolvent in the
quarter. The resulting effect on the quarter was a shortfall in product
shipments (down 9.3% from the same quarter one year ago and 5.9% sequentially
from the preceding quarter) and a one-time charge of $2.0 million for
uncollectible lease receivables and related costs.
Total revenues for the nine months ended June 30, 2000 reflect growth of $6.6
million, or 5.3%, from fiscal 1999. In addition, the Company's reported net
loss, excluding unique one-time items, was narrowed to $(21.3) million for the
nine months ended June 30, 2000 as compared to $(25.7) million for the
corresponding period of fiscal 1999, an improvement of $4.4 million, or 17%.
In December 1999 the Company improved its access to working capital resources by
expanding its credit facility to $70.0 million, as compared to $40.0 million at
September 30, 1999, an increase of $30.0 million, or 75%. In addition, $22.0
million of the $25.0 million in Convertible 7 3/4% Debentures ("Debentures")
outstanding at September 30, 1999 have been converted into and exchanged for
common stock, thereby reducing outstanding indebtedness and increasing
stockholders' equity. In addition to improving the Company's financial position,
the Debenture reductions will result in interest expense savings of
approximately $1.7 million annually. Furthermore, on July 31, 2000, the Company
sold $5.0 million of convertible preferred stock.
On June 26, 2000, the Company announced that it had retained CIBC World Markets
Corp. to advise the Company in evaluating its strategic and financial
alternatives. A major focus of the relationship will include assistance in
defining strategic and financial objectives and implementating strategic
initiatives to achieve these objectives.
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<PAGE>
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three Months Ended Nine Months Ended
June 30, June 30,
---------------- -----------------
2000 1999 2000 1999
---------------- -----------------
Revenues:
Net product sales 66.5% 71.2% 70.6% 67.8%
Service revenue 31.6 26.2 27.3 28.0
Other revenue 1.9 2.6 2.1 4.2
------ ------ ----- ------
100.0 100.0 100.0 100.0
Cost of revenues 59.8 55.6 57.9 54.8
------ ------ ----- ------
Gross margin 40.2 44.4 42.1 45.2
Amortization of capitalized
software development costs 7.0 7.1 6.8 7.4
Selling, general and administrative 36.8 34.3 34.3 37.2
Research and product development 12.9 15.1 11.9 17.2
------ ------ ----- ------
Operating loss before unique charges (16.4) (12.1) (10.9) (16.6)
Restructuring and other charges 4.9 -- 1.9 1.6
------- ------ ------ -------
Operating loss (21.3)% (12.1)% (12.8)% (18.2)%
------- ------ ------ ------
Net loss excluding unique items* (22.8)% (16.7)% (16.3)% (20.8)%
------- ------ ------ -------
Net loss (27.7)% (16.7)% (20.1)% (15.1)%
======= ====== ====== =======
--------------------
*Unique items are comprised of the write-down of lease receivables due to a
customer bankruptcy, restructuring charges, debt conversion expense and gain on
sale of assets.
Consolidated Results
Revenues: Current quarter revenues were down $1.2 million, or 2.9%, as compared
to the corresponding quarter of fiscal 1999. Product revenues were down $2.8
million, or 9.3%, service revenues were up $1.9 million, or 17%, and other
revenues were down $0.3 million, or 27%. For reasons cited above, the Company
had anticipated higher product sales from its Broadband Systems Division.
Year-to-date revenues for the nine months ended June 30, 2000 were up $6.6
million, or 5.3%, as compared to the first half of fiscal 1999. Product revenues
were up $8.0 million, or 9.6%; service revenues were up $1.0 million, or 2.9%;
and other revenues were down $2.5 million, or 46.9%.
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<PAGE>
All three operating business units (Broadband Systems Division, Network Access
Division and VITAL Network Services) registered revenue growth year-over-year.
The decline in "other revenues" relates principally to a division that was sold
in fiscal 1999 ($1.1 million), to contract development revenue in fiscal 1999
that did not repeat in fiscal 2000 ($0.8 million), and lower leasing revenues
($0.5 million).
Geographically, international product revenues amounted to 39% and 50% of
consolidated revenues for the three- and nine-month periods ended June 30, 2000,
respectively, as compared to 46% and 51% for corresponding periods of fiscal
1999.
Gross Margins: Gross margins, measured as a percent of revenue and excluding
capitalized software amortization, were down 4.2 percentage points and 3.1
percentage points for the three and nine months ended June 30, 2000,
respectively, as compared to the corresponding periods one year ago. Although
both product and service margins contributed to the overall margin declines, the
primary reason for the overall decline was due to revenue mix, with a decline in
higher margin product sales being offset with increases in lower margin service
business.
Amortization of capitalized software amounted to $2.9 million and $3.0 million
in the quarters ended June 30, 2000 and 1999, respectively; year-to-date
amortization of capitalized software amounted to $8.9 million and $9.2 million
in the nine-month periods ended June 30, 2000 and 1999, respectively.
Operating Expenses: The Company's fiscal 1999 restructuring efforts have
resulted in a reduction in the Company's operating expenses. Specific Company
restructuring actions impacting current year results include: (1) the December
1998 reorganization into three distinct business units with increased operating
autonomy (refer to Note 6, "Restructuring and Other Charges and Loss
Contingency," in this quarterly report and Note 2, "Restructuring of
Operations," in the Company's consolidated financial statements filed with Form
10-K for the fiscal year ended September 30, 1999 for further discussion); and
(2) the shutdown of a non-strategic remote technology center in England in July
1999.
Operating expenses were down $0.5 million, or 2.2%, for the quarter ended June
30, 2000 as compared to same quarter one year ago, reflecting the net impact of
a $0.6 million, or 4.5%, increase in selling, general and administrative
expenses and a $1.1 million, or 17.2%, reduction in research and development
expense. The increase in selling, general and administrative expense principally
reflects a strategic investment in the systems and people infrastructure of
VITAL Network Services to position the business unit for future growth. The
reduction in research and development expense reflects the shutdown of a
non-strategic remote technology center in England in July 1999 and cost
reductions resulting from more defined and focused development programs.
Year-to-date operating expenses (excluding restructuring charges) for the nine
months ended June 30, 2000 were down $7.0 million, or 10.4%, as compared to the
nine months ended June 30, 1999. The reduction is comprised of a $1.3 million,
or 2.8%, reduction, in selling, general and administrative expenses and a $5.7
million, or 26.9%, reduction in research and development expense. The selling,
general and administrative reduction principally reflects headcount and
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<PAGE>
other related cost reductions resulting from the Company's December 1998
reengineering of its sales and marketing strategy, including an increased focus
on sales activity through distributors and other channels, a reduced focus on
direct-sell activity and more productive marketing initiatives. Such cost
reductions were partially offset with an increased investment in VITAL's
infrastructure, as discussed above. The reduction in research and development
expense reflects the shutdown of a non-strategic remote technology center in
England in July 1999, the sale of a non-strategic division and reduced costs
associated with more defined and focused development programs.
The Company continues to channel a high percentage of its revenues into new
product development. Gross research and development spending for the nine months
ended June 30, 2000 amounted to $24.4 million, or 18.7% of revenue. Such
spending is, however, being closely monitored by the Network Access Division's
and Broadband Systems Division's management teams. The strategy of both business
units has been to significantly reduce or eliminate development activities
targeted at sustaining legacy products, to limit the investment of new funds
into projects considered to have only the highest likelihood of success and to
use outside development engineers to complement internal development activities,
all in an effort to focus development efforts and improve productivity.
Restructuring of Operations: The Company recorded restructuring charges of $0.5
million and $2.0 million in the six months ended March 31, 2000 and 1999,
respectively. Refer to Note 6, "Restructuring and Other Charges and Loss
Contingency," for further discussion.
Interest Expense and Other Income and Expense: Interest expense amounted to $2.3
million and $1.8 million for the quarters ended June 30, 2000 and 1999,
respectively, and $6.4 million and $5.0 million for the nine months ended June
30, 2000 and 1999, respectively. The increases are attributable to higher levels
of outstanding borrowings, a higher rate of interest (prime plus 5%) payable on
the Company's new $20.0 million term loan received in December 1999 and the
effect of increases in the prime rate of interest on the Company's other
floating rate debt.
Fiscal year 2000 other expense includes non-cash charges for debt conversion
expense; such charges amounted to $2.4 million (or $0.10 per share) for the
nine-month period ended June 30, 2000. Details regarding the debt-to-equity
conversions, which increased stockholders' equity and reduced outstanding
indebtedness by approximately $22.0 million during the nine months ended June
30, 2000, are discussed in Note 5, "Long-Term Debt."
Prior year "other income" includes a gain of $9.0 million, or $0.41 per share,
from the sale of assets of a division. Refer to Note 7, "Sale of Technology
Alliance Group Division," for further discussion.
Income Taxes: Tax provisions recorded by the Company, principally for foreign
income and domestic state taxes, amounted to $500,000 and $200,000 in the
quarters ended June 30, 2000 and 1999, respectively, and $1,200,000 and $700,000
in the nine-month periods ended June 30, 2000 and 1999, respectively. The
Company has significant federal net operating loss carryforwards available to
offset future federal income tax liabilities. However, based on the uncertainty
of the ultimate realization of such carryforwards, no net deferred tax asset (or
related deferred tax benefit) has been recorded in the Company's consolidated
financial statements.
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<PAGE>
Operating Segments: Discussion and analysis of the financial performance of the
Company's reportable operating segments is presented below (such discussions do
not include the impact of charges for restructuring of operations, as the
Company does not segregate such charges by business unit). In the case of all
operating segments, reference is made to Note 8, "Segment Information - Interim
Disclosures," for further discussion and disclosure.
Network Access Division ("NAD")
NAD's current quarter operating income amounted to $0.3 million as compared to
$1.7 million in the same quarter one year ago. Revenues were down $(1.9)
million, or 12%, which drove the operating income reduction. Revenues were
impacted by lower sales of legacy analog products, principally in Canada, offset
in part with higher sales of newer products in domestic markets.
NAD's year-to-date operating income amounted to $3.0 million as compared to an
operating loss of $(0.3) million in the first nine months of fiscal 1999. The
$3.3 million turnaround and improvement reflects the net effect of revenue
growth of $2.3 million, or 5.3%, resulting gross margin growth of $0.4 million,
and operating expense reductions of $2.9 million, or 13.7%. NAD's revenue growth
was achieved primarily in the domestic marketplace offset in part by lower
shipments of legacy products in Canada. NAD's operating expense reductions are
primarily the result of the Company's restructuring plan (executed in December
1998), which included a strategy to reduce selling costs by selling through
distributors and other indirect channels.
Broadband Systems Division ("BSD")
BSD's current quarter operating loss before unique items amounted to $(7.5)
million as compared to $(7.7) million in the same quarter one year ago, an
improvement of $0.2 million, with operating expense reductions of $1.3 million,
or 8.6%, offset in part by a reduction in revenues of $(0.9) million, or 6.5%.
Revenues were impacted negatively by the insolvency of a major customer.
Operating expense reductions reflect the combined impact of the Company's
restructuring plan executed in December 1998 and the shutdown of a non-strategic
remote technology center in England in July 1999.
BSD's operating loss for the nine months ended June 30, 2000 amounted to $(17.9)
million as compared to $(24.9) million for the corresponding period of fiscal
1999, an improvement of $5.0 million, or 19.9%. The improvement reflects the net
effect of revenue growth of $4.8 million, or 11.8%, resulting margin growth of
$1.5 million, and operating expense reductions of $5.5 million, or 12.0%.
Revenue growth was achieved in both the domestic and international marketplace.
The operating expense reductions resulted from the actions referenced above.
VITAL Network Services, L.L.C. ("VITAL")
VITAL's service revenue amounted to $13.0 million and $11.1 million in the
quarters ended June 30, 2000 and 1999, respectively. VITAL's current quarter
operating income amounted to $0.9 million as compared to $1.1 million in the
same quarter one year ago, a reduction of $0.2 million, or 16.2%. The results
include the impact of increased spending for strategic investments in the
division's systems and people infrastructure in an effort to position the
business unit for future growth.
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<PAGE>
VITAL's trends for the nine months ended June 30, 2000 are consistent with those
in the quarter as noted above. Service revenue amounted to $35.6 million and
$34.6 million in the nine-month periods ended June 30, 2000 and 1999,
respectively, an increase of $1.0 million, or 2.9%. VITAL's year-to-date
operating income amounted to $1.8 million as compared to $4.5 million in the
corresponding period one year ago, a reduction of $(2.7) million.
DataComm Leasing Corporation
DataComm Leasing Corporation ("DLC") offers BSD and NAD customers the
opportunity to lease rather than purchase products. 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.
DLC's operating income, derived from both operating and finance lease
activities, amounted to $0.6 million and $0.8 million in the quarters ended June
30, 2000 and 1999, respectively; and $2.1 million and $2.4 million in the nine
months ended June 30, 2000 and 1999, respectively.
Foreign Currency Risk
The Company's foreign subsidiaries are exposed to foreign currency fluctuations
since they are invoicing customers in local currencies while liabilities for
product purchases from the parent Company are transacted in U.S. dollars. The
impact of foreign currency fluctuations on these U.S. dollar-denominated
liabilities is recorded as a component of "Other Income and Expense" in the
Company's consolidated statements of operations. Such activity resulted in net
currency exchange gains of $280,000 and $42,000 for the quarters ended June 30,
2000 and 1999, respectively, and $644,000 and $311,000 for the nine-month
periods ended June 30, 2000 and 1999, respectively.
No individual foreign subsidiary comprises 10 percent or more of consolidated
revenue or assets, and most subsidiary operations represent less than 5 percent
of consolidated assets. Therefore, the Company historically has not entered into
hedge contracts or any form of derivative or similar investment. Separately, the
introduction of the Euro as a common currency for members of the European
Monetary Union, which occurred during fiscal 1999, is not expected to
significantly impact the Company's exposure to foreign currency transactions.
See "Market Risk" below for further discussion of foreign currency risk.
Market Risk
The Company is exposed to various market risks, including potential losses
arising from adverse changes in market rates and prices (such as foreign
currency exchange and interest rates), and dependence upon a limited number of
major distributors and resellers. The Company historically has not entered into
derivatives, forward exchange contacts or other financial instruments for
trading, speculation or hedging purposes.
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<PAGE>
Interest Risk
For discussion applicable to interest risk, reference is made to Form 10-K filed
with the Securities and Exchange Commission for the fiscal year ended September
30, 1999, Item 7, Management's Discussion and Analysis of Results of Operations
and Financial Condition, under the caption "Interest Risk."
Liquidity and Capital Resources
Future cash requirements are planned to be satisfied from a combination of cash
balances ($2.5 million at June 30, 2000), borrowings available under the
Company's $35 million maximum value revolving line of credit ($8.3 million
available at June 30, 2000 - see further discussion below), proceeds from the
sale of $5.0 million of preferred stock on July 31, 2000 and, if necessary,
alternate financing sources. Alternative financing sources include, among other
items, the sale of assets, technologies, existing businesses and/or the
Company's common and preferred stock, and the sale or discounting of customer
leases.
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 and a $10.0 million increase in the
revolving line-of-credit portion of the credit facility. The expansion results
in a $70.0 million credit facility comprised of $35.0 million in term loans and
a $35.0 million (maximum value) revolving line of credit (New Loan Agreement).
Refer to Note 5, "Long-Term Debt," for a detailed discussion of the New Loan
Agreement and the terms thereof.
To further improve the Company's financial position, $22.0 million of the $25.0
million in 7 3/4% Convertible Debentures ("Debentures") outstanding at September
30, 1999 were converted into and exchanged for common stock during fiscal 2000,
thereby reducing outstanding indebtedness and increasing stockholders' equity.
Outstanding Debentures, after such conversions, amounted to only $3.0 million at
June 30, 2000, as compared to $25.0 million at September 30, 1999. In addition
to improving the Company's financial position, the $22.0 million of Debenture
reductions will result in interest expense savings of $1.7 million annually.
Refer to Note 5, "Long-Term Debt," for further discussion.
In addition, on July 31, 2000, the Company generated cash proceeds and increased
stockholders' equity in the amount of approximately $5.0 million from the sale
of preferred stock. Refer to Note 11, "Subsequent Event," for further
discussion.
Under the revolving line of credit portion of the Company's New Loan Agreement,
availability of funds is subject to satisfying a borrowing base formula related
to levels of certain accounts receivable and inventories and the satisfaction of
other financial covenants. Therefore, maximum funds available for borrowing
under the revolving line of credit portion of the New Loan Agreement will
fluctuate as sales and collections efforts affect accounts receivable balances.
Such maximum availability amounted to $27.3 million at June 30, 2000. Borrowings
outstanding on the Company's revolving line of credit amounted to $17.9 million
and $15.1 million at June 30, 2000 and September 30, 1999, respectively.
Separately, letters of credit reduce the availability of funds under the
revolving line of credit; letters of credit in the amount
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<PAGE>
of $1,043,000 and $267,000 were outstanding at June 30, 2000 and September 30,
1999, respectively.
Most assets of the Company, including accounts receivable, inventories and
property, plant and equipment are pledged as collateral. Amounts outstanding on
the revolving line of credit are payable in full upon termination of the New
Loan Agreement.
Financial covenants of the New Loan Agreement require that the Company's
reported stockholders' equity, excluding the impact of foreign currency
translation adjustments occurring subsequent to March 31, 1999, equal or exceed
$10.0 million. Such stockholders' equity, as defined, amounted to $18.4 million
at June 30, 2000. (In addition, on July 31, 2000 the Company sold $5.0 million
of Preferred Stock which would bring such stockholders' equity to $23.4 million
at July 31, 2000 on a pro foma basis). Under terms of the New Loan Agreement,
revolving line of credit availability could be reduced by $1.5 million or $3.5
million if such stockholders' equity, as defined, falls below $18.1 million or
$15.0 million, respectively. Other covenants limit annual capital expenditures
to $12.0 million. Violation of such covenants may result in limiting access to
future borrowings and/or acceleration of payment requirements on outstanding
borrowings.
Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the fiscal year ended
September 30, 1999 for further disclosures applicable to all other outstanding
indebtedness of the Corporation.
Operating
Net cash used in operating activities amounted to $6.8 million and $2.5 million
in the nine-month periods ended June 30, 2000 and 1999, respectively, reflecting
the impact of reported net losses (net of non-cash items) and other balance
sheet fluctuations. Inventory growth accounted for cash consumption during the
nine months ended June 30, 2000. The inventory growth is attributable to the
cancellation of a $19 million order resulting from a customer bankruptcy, and to
precautionary measures taken by the Company as it transitioned to fully
outsource its manufacturing operations during the year. The Company anticipates
a reduction in inventory to more historic levels in the quarter ended September
30, 2000 and beyond.
Non-debt working capital, excluding cash and cash equivalents, amounted to $22.9
million at June 30, 2000, as compared to $23.5 million at September 30, 1999.
Investing
Investments in property, plant and equipment amounted to $5.0 million during the
nine months ended June 30, 2000 as compared to $6.3 million in the corresponding
period one year ago. Approximately $600,000 of the prior year's capital
investments were the result of an acquisition of a service business. Separately,
investments in capitalized software amounted to $9.1 million and $9.5 million in
the nine-month periods ended June 30, 2000 and 1999, respectively. All
investment activity is targeted to satisfy minimum operating requirements and to
embrace new undertakings with the greatest potential returns.
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<PAGE>
In the (prior year) nine months ended June 30, 1999, the Company generated $12.0
million in net proceeds from the sale of the Technology Alliance Group division,
which was identified as a non-strategic entity by the Company's strategic
business units. Refer to Note 7, "Sale of Technology Alliance Group Division,"
for further discussion.
Financing
Net cash provided by financing activities amounted to $19.8 million in the nine
months ended June 30, 2000, comprised of $20.3 million of net borrowings, $0.8
million in proceeds received from the issuance of common stock pursuant to
employee stock programs and the payment of $1.3 million in preferred stock
dividends. This activity compares to $6.2 million of cash povided by financing
activities in the nine months ended June 30, 1999, comprised of $7.2 million of
net borrowings, $0.4 million in proceeds received from the issuance of common
stock pursuant to employee stock programs and the payment of $1.4 million in
preferred stock dividends.
Reference is made to Note 5, "Long-Term Debt," for a condensed summary of
outstanding long-term debt as of June 30, 2000 and September 30, 1999, and
discussion of new borrowing and debt reduction activities occurring during the
nine months ended June 30, 2000.
In addition, reference is made to Note 11, "Subsequent Event," for detailed
discussion regarding $5.0 million of Preferred Stock issued by the Company on
July 31, 2000.
Future Adoption of New Accounting Statements
Reference is made to the consolidated financial statements filed with Form 10-K
for the year ended September 30, 1999, Note 1, for discussion regarding future
adoption of new accounting pronouncements. Additionally, the Company is
currently in the process of reviewing the Securities and Exchange Commission
Staff Accounting Bulletin Number 101 regarding revenue recognition issues.
However, the Company does not anticipate any significant changes in its current
revenue recognition policies.
Certain Risk Factors
Continuing Losses: The Company has sustained net losses for the past 23 quarters
ended June 30, 2000. There can be no assurance as to when the Company will
achieve net income.
Credit Availability: As noted above, the Company's New Loan Agreement requires
compliance with specific financial covenants, including the requirement that
reported stockholders' equity, as defined, equals or exceeds $10.0 million (such
stockholders' equity, as defined, amounted to $18.4 million at June 30, 2000,
and $23.4 million at July 31, 2000, on a proforma basis, after the sale of $5.0
million in Preferred Stock). Although not anticipated, should the Company ever
fail to comply with the required covenants, or fail to comply with any other
provisions of the New Loan Agreement which would result in a default, and a
waiver or amendment is not obtained, the Company may be unable to borrow funds
under such agreement. In such case the Company would be required to seek other
financing to fund its operations, and there can be no assurance
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<PAGE>
the Company will be able to obtain such financing or, if obtained, on terms
deemed favorable by the Company. Furthermore, in the event the Company does
default on its $70.0 million New Loan Agreement obligation, such default may
result in a requirement to accelerate the due dates and payment of other
outstanding indebtedness.
In addition, as discussed in Note 5, "Long-Term Debt," the Company intends to
increase stockholders' equity by October 2, 2000 to satisfy the covenant
requirements of certain mortgage agreements.
Reliance on Outsourced Manufacturing: On September 30, 1999, the Company
announced that it had outsourced substantially all of its manufacturing
operations. Therefore, the Company is largely dependent on third-party suppliers
to meet product delivery deadlines and quality requirements. Any shortfall in
the satisfaction of these requirements could negatively impact revenue and
profitability in that quarter, and possibly thereafter.
Volatility of Stock Price: The trading price of the Company's common stock has
fluctuated widely in response to, among other things, quarter-to-quarter
operating results, industry conditions, awards of orders to the Company or its
competitors, new product or product development announcements by the Company or
its competitors, changes in earnings estimates by analysts and, from time to
time, the volatile nature of equity markets. Any shortfall in revenue or
earnings from expected levels could have an immediate and significant adverse
effect on the trading price of the Company's common stock in any given period.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this document, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties, and other factors which may affect future results including, but
not limited to, competition, rapid changing technology, regulatory requirements
and uncertainties of international trade. Examples of risks and uncertainties
include, among other things: (i) the Company's ability to maintain compliance
with the covenant requirements of its New Loan Agreement and all other financing
arrangements, including, if necessary, the ability to achieve amendments and/or
waivers thereto to maintain compliance with the terms of all outstanding
indebtedness; (ii) the possibility that the additional indebtedness permitted to
be incurred under the revolving credit facility portion of the New Loan
Agreement may not be sufficient to maintain the Company's operations; (iii) the
Company's ability to satisfy its financial obligations and to obtain additional
financial resources, if required; (iv) the Company's ability to effectively
restructure its operations and achieve profitability; (v) the Company's ability
to retain existing and obtain new customers; (vi) the Company's ability to
maintain existing supply arrangements and terms; and (vii) the Company's ability
to retain key employees.
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<PAGE>
Readers are cautioned not to place undue reliance on such forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation and does not intend to update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
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<PAGE>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
A Form 8-K, dated May 17, 2000, was filed on May 26, 2000 to announce
the Company's termination of its agreement with Twister Communications
Network, Inc. as a result of Twister's insolvency. Refer to Note 6,
"Restructuring and Other Charges and Loss Contingency," for further
discussion.
In addition, a Form 8-K, dated July 31, 2000, was filed on August 9,
2000 to announce the Company's sale of 200,000 shares of Cumulative
Convertible Preferred Stock for $5.0 million and the terms thereof.
Refer to Note 11, "Subsequent Event," for further discussion.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL DATACOMM INDUSTRIES, INC.
--------------------------------
(Registrant)
By: /S/ WILLIAM G. HENRY
--------------------
William G. Henry
Vice President, Finance and
Principal Financial Officer
Dated: August 14, 2000
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