<PAGE> 1
===============================================================================
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _________
Commission File No.: 0-14685
GENICOM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 51-0271821
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14800 CONFERENCE CENTER DRIVE
SUITE 400, WESTFIELDS
CHANTILLY, VIRGINIA 20151
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 802-9200
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No -
--- ---
As of October 29, 1999, there were 11,734,500 shares of Common Stock of
the Registrant outstanding.
===============================================================================
<PAGE> 2
FORM 10-Q INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets - October 3, 1999 and January 3, 1999 3
Consolidated Statements of Operations - Three and Nine Months Ended
October 3, 1999 and September 27, 1998 4
Consolidated Statements of Cash Flows - Three and Nine Months Ended
October 3, 1999 and September 27, 1998 5
Notes to Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11 - 16
Item 3. Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits E-1
</TABLE>
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<PAGE> 3
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
GENICOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
(In thousands, except share data) 1999 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,527 $ 4,894
Accounts receivable, less allowance for
doubtful accounts of $4,162 and $5,716 72,091 83,893
Other receivables 1,406 2,714
Inventories (note 2) 40,563 59,617
Prepaid expenses and other assets 2,137 12,664
--------- ---------
TOTAL CURRENT ASSETS 126,724 163,782
Property, plant and equipment, net 44,228 45,459
Goodwill 13,139 15,965
Intangibles and other assets 7,391 4,771
--------- ---------
$ 191,482 $ 229,977
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (note 5) $ 111,873 $ 7,936
Accounts payable and accrued expenses 68,255 67,096
Deferred income 12,269 13,344
--------- ---------
TOTAL CURRENT LIABILITIES 192,397 88,376
Long-term debt, less current portion 105,000
Other non-current liabilities 9,554 11,984
--------- ---------
TOTAL LIABILITIES 201,951 205,360
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value; 18,000,000 shares
authorized, 11,683,174 and 11,581,661 shares
issued and outstanding, respectively 117 116
Additional paid-in capital 30,512 29,216
Accumulated deficit (38,398) (2,039)
Accumulated other comprehensive loss (2,700) (2,676)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (10,469) 24,617
--------- ---------
$ 191,482 $ 229,977
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE> 4
GENICOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED, NINE MONTHS ENDED,
OCTOBER 3, SEPTEMBER 27, OCTOBER 3, SEPTEMBER 27,
(In thousands, except per share data) 1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES, NET:
Products $ 55,329 $ 73,400 $ 185,162 $ 228,415
Services 28,769 35,680 101,440 114,828
----------- ----------- ----------- -----------
84,098 109,080 286,602 343,243
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of revenues:
Products 45,052 52,361 139,186 163,012
Services 29,013 32,016 89,689 104,769
Service inventory adjustment
(note 2) 2,047 5,700
Selling, general and
administration 19,587 18,883 58,089 60,936
Engineering, research and
product development 4,181 3,767 12,563 12,191
Write-off of goodwill 15,000
----------- ----------- ----------- -----------
99,880 107,027 305,227 355,908
----------- ----------- ----------- -----------
OPERATING (LOSS) INCOME (15,782) 2,053 (18,625) (12,665)
Interest expense, net 2,966 2,887 8,581 8,217
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (18,748) (834) (27,206) (20,882)
Income tax expense (benefit) (note 4) 9,137 (225) 9,150 (5,639)
----------- ----------- ----------- -----------
NET LOSS $ (27,885) $ (609) $ (36,356) $ (15,243)
=========== =========== =========== ===========
Loss per common share (basic) $ (2.39) $ (0.05) $ (3.12) $ (1.32)
=========== =========== =========== ===========
Loss per common share (diluted) $ (2.39) $ (0.05) $ (3.12) $ (1.32)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding
(basic) 11,683 11,562 11,645 11,527
----------- ----------- ----------- -----------
Weighted average number of common
shares and dilutive shares
(diluted) 11,683 11,562 11,645 11,527
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE> 5
GENICOM CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED,
OCTOBER 3, SEPTEMBER 27,
(In thousands) 1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (36,356) $ (15,243)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation 9,813 10,787
Amortization 5,571 5,899
Write-off of goodwill 15,000
Service inventory adjustment (note 2) 5,700
Deferred tax reserve (note 4) 9,217
Changes in assets and liabilities:
Accounts receivable 13,860 3,017
Inventories 14,923 1,690
Accounts payable and accrued expenses (2,968) (8,414)
Deferred income (1,075) (2,191)
Other (1,316) (5,392)
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,369 5,153
-------------- --------------
Cash flows from investing activities:
Additions to property, plant and equipment (10,499) (16,460)
Other investing (236) (2,060)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (10,735) (18,520)
-------------- --------------
Cash flows from financing activities:
Borrowings on long-term debt 16,897 29,904
Payments on long-term debt (17,960) (12,005)
Bank overdraft (2,172)
Financing costs (102) (468)
-------------- --------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (1,165) 15,259
-------------- --------------
Effect of exchange rate changes on cash and cash
equivalents 164 9
-------------- --------------
Net increase in cash and cash equivalents 5,633 1,901
Cash and cash equivalents at beginning of period 4,894 4,622
-------------- --------------
Cash and cash equivalents at end of period $ 10,527 $ 6,523
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
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<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements of GENICOM Corporation and subsidiaries (the
"Company" or "GENICOM") contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the Company's
consolidated financial position as of October 3, 1999, and the results
of operations and cash flows for the periods indicated. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed unaudited consolidated financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's January 3, 1999 Annual Report on Form 10-K. The results of
operations for the nine months ended October 3, 1999, are not
necessarily indicative of the operating results to be expected for the
full year.
2. 1999 INVENTORY ADJUSTMENTS AND QUARTERLY RESTATEMENTS
During October 1999, the Company conducted a physical count of the
Enterprising Solutions Service company ("ESSC") parts and supplies
inventory. During its reconciliation of the physical count to its
perpetual inventory records, the Company discovered discrepancies that
occurred undetected in the first and second quarters of 1999 associated
with the internal transfer of parts among various locations within the
Company. These errors have the effect of increasing ESSC's cost of
revenue and the Company's operating loss for the first and second
quarters of 1999 by $2.7 million and $1 million, respectively. In
addition, they decreased inventory for the first and second quarter of
1999 by $2.7 million and $3.7 million, respectively. The Company's
unaudited consolidated financial statements for the first and second
quarters of 1999 have been restated for the following effect of these
discrepancies.
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
-----------------------------------------------------------
April 4, 1999 July 4, 1999 July 4, 1999
------------- ------------- ------------- ------------- ------------- -------------
As reported Restated As reported Restated As reported Restated
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Operating income (loss) $ (11) $ (2,687) $ 821 $ (156) $ 810 $ (2,843)
Net loss $ (2,808) $ (5,484) $ (2,010) $ (2,987) $ (4,818) $ (8,471)
Net loss per common share $ (0.24) $ (0.47) $ (0.17) $ (0.26) $ (0.41) $ (0.73)
Inventory $ 50,617 $ 47,941 $ 49,517 $ 45,864 $ 49,517 $ 45,864
Accumulated deficit $ (4,847) $ (7,523) $ (6,857) $(10,510) $ (6,857) $(10,510)
</TABLE>
All amounts included in this filing as of and for the nine months ended
October 3, 1999 reflect the effect of the correction of these errors and
the related restatements. Refer also to the Company's Forms 10-Q/A for
the quarters ended April 4, 1999 and July 4, 1999.
3. INVENTORIES
Inventories are stated at the lower of cost, determined on the first-in,
first-out method, or market. Inventories consist of, in thousands:
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<PAGE> 7
<TABLE>
<CAPTION>
OCTOBER 3, JANUARY 3,
1999 1999
------- -------
<S> <C> <C>
Raw materials $ 3,665 $ 4,086
Work in process 490 930
Finished goods 36,408 54,601
------- -------
$40,563 $59,617
------- -------
</TABLE>
4. INCOME TAXES
Due to the sustained losses incurred by the Company's U.S. operations
throughout 1999, and consistent with its assessment of the
recoverability of its deferred tax assets at the end of 1998, the
Company's management has determined that a full valuation allowance will
be recognized against the deferred tax assets relating to its U.S.
operations. Current information indicates that it is more likely than
not that the U.S. deferred tax assets will not be realized. Therefore,
an additional valuation allowance of $9.2 million has been recognized
during the third quarter of 1999.
5. DEBT
The Company was not in compliance with several covenants and payment
provisions of its credit facility at the end of the third quarter 1999
(see Part II, Item 3). Due to the previously described restatements (see
note 2) of the Company's first and second quarter 1999 unaudited
consolidated financial statements, the Company has not been in
compliance with its loan covenants and certain payment provisions from
the end of the first quarter of 1999. In addition, based upon these
restatements, the Company exceeded its borrowing base capacity from the
end of the first quarter 1999. Accordingly, all of the borrowings under
the credit facility have been classified as current liabilities.
The Company is currently in negotiations with the lenders concerning the
covenant and payment non-compliance and possible remedies. These
remedies could include waivers, forbearance, or restructuring of the
debt. The Company is currently experiencing liquidity problems and has
several vendors in a past due position. Continued losses and an absence
of lender support, will cause additional liquidity concerns and have a
material adverse effect on the Company's ability to continue as a going
concern.
The Company has $4.7 million recorded at October 3, 1999 as net deferred
financing costs related to the current credit facility, which is being
amortized over the remaining term of the loan through 2003. If the
current credit facility is refinanced or the borrowed amount is declared
by the lenders to be payable on demand, the remaining unamortized
deferred financing costs will be adjusted in the period of refinancing
or when the debt is declared payable.
6. EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of common
shares and dilutive common share equivalents (using the treasury stock
method) outstanding during the period.
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<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended October 3, 1999
----------------------------------------
Loss Shares Per Share
------------ ------------ -----------
<S> <C> <C> <C>
BASIC EPS
Loss available to shareholders $ (27,885) 11,683 $ (2.39)
Weighted shares from stock options (1)
------------ ------------ -----------
DILUTED EPS $ (27,885) 11,683 $ (2.39)
------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 27, 1998
----------------------------------------
Loss Shares Per Share
------------ ------------ -----------
<S> <C> <C> <C>
BASIC EPS
Loss available to shareholders $ (609) 11,562 $ (0.05)
Weighted shares from stock options (1)
------------ ------------ -----------
DILUTED EPS $ (609) 11,562 $ (0.05)
------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended October 3, 1999
----------------------------------------
Loss Shares Per Share
------------ ------------ -----------
<S> <C> <C> <C>
BASIC EPS
Loss available to shareholders $ (36,356) 11,645 $ (3.12)
Weighted shares from stock options (1)
------------ ------------ -----------
DILUTED EPS $ (36,356) 11,645 $ (3.12)
------------ ------------ -----------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 27, 1998
----------------------------------------
Loss Shares Per Share
------------ ------------ -----------
<S> <C> <C> <C>
BASIC EPS
Loss available to shareholders $ (15,243) 11,527 $ (1.32)
Weighted shares from stock options (1)
------------ ------------ -----------
DILUTED EPS $ (15,243) 11,527 $ (1.32)
------------ ------------ -----------
</TABLE>
(1) For the three months ended October 3, 1999 and September 27, 1998,
126,000 and 605,000 shares equivalent, respectively, have been omitted
due to their antidilutive nature. For the nine months ended October 3,
1999 and September 27, 1998, 290,000 and 1,030,000 equivalent shares,
respectively, have been omitted due to their antidilutive nature.
Page 8
<PAGE> 9
7. SEGMENT INFORMATION
The Company operates in the serial, line and page printer business where
it designs, manufactures and markets printers as well as the related
supplies and spare parts (Document Solutions company). The Company's
operation in services provides customers with a full range of network
information technology services with field services, depot repair, parts
and logistics and network products (Enterprising Service Solutions
company). Revenue between industry segments is not material.
<TABLE>
<CAPTION>
Nine Months Ended or As of
October 3, September 27.
(in thousands) 1999 1998
---------------- ----------------
<S> <C> <C>
REVENUE
Document Solutions $ 185,162 $ 228,415
Enterprising Service Solutions 101,440 114,828
---------------- ----------------
$ 286,602 $ 343,243
---------------- ----------------
OPERATING (LOSS) INCOME
Document Solutions $ (868) $ 7,168
Enterprising Service Solutions (17,757) (19,833)
---------------- ----------------
$ (18,625) $ (12,665)
---------------- ----------------
DEPRECIATION AND AMORTIZATION
Document Solutions $ 4,412 $ 4,832
Enterprising Service Solutions 8,646 10,578
Corporate and other 2,326 1,276
---------------- ----------------
$ 15,384 $ 16,686
---------------- ----------------
ASSETS
Document Solutions $ 94,104 $ 130,352
Enterprising Service Solutions 69,664 83,121
Corporate and other 27,714 27,835
---------------- ----------------
$ 191,482 $ 241,308
---------------- ----------------
CAPITAL EXPENDITURES
Document Solutions $ 2,349 $ 2,812
Enterprising Service Solutions 5,356 8,655
Corporate and other 2,794 4,993
---------------- ----------------
$ 10,499 $ 16,460
---------------- ----------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Environmental matters:
The Company and the former owner of its Waynesboro, Virginia facility,
General Electric Company ("G.E."), have generated and managed hazardous
wastes at the facility for many years as a result of their use of
certain materials in manufacturing processes. The Company and the United
States Environmental Protection Agency ("EPA") have agreed to a
corrective action consent order (the "Order"), which became effective on
September 14, 1990. The Order requires the Company to undertake an
investigation of solid waste management units at its Waynesboro,
Virginia facility and to conduct a study of any necessary corrective
measures that may be required. The investigative work under the Order
was completed in December 1997 and the Company submitted a final
investigative report to the EPA. During the second quarter of 1999, the
EPA requested additional investigative work which the Company
anticipates completing during the first quarter of 2000. Although not
required by the Order, the Company has installed and is operating an
interim groundwater stabilization system. Annual operational expenses
for
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<PAGE> 10
the system are currently approximately $57,000. The interim groundwater
stabilization program may be chosen as the final remedy for the site, or
additional corrective measures may eventually be required. It is not
possible to reliably estimate the costs that any such possible
additional corrective measures would entail. However, if additional
corrective measures are required, the Company expects that it will enter
into discussion with the EPA concerning their scope and a further order
for that purpose.
The Company has been notified by the EPA that it is one of 700
potentially responsible parties ("PRPs") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, for
necessary corrective action at a hazardous waste disposal site in Greer,
South Carolina. In prior years, the Company arranged for the
transportation of wastes to the site for treatment or disposal. During
1995, the PRPs entered into an administrative consent order with EPA
under which they would undertake a remedial investigation and
feasibility study. That study is currently underway. The Company has not
had and does not anticipate any material expenditures in connection with
this matter.
On November 8, 1999, the Company was served in a lawsuit brought in U.S.
District Court for the Southern District of Texas by Anglo Metal, Inc.
naming it and 143 other entities as co-defendants in an action under the
federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980. The suit seeks contribution of CERCLA response costs
incurred by the plaintiff based on allegations that the Company and the
other defendants released hazardous substances onto the plaintiff's
property in San Juan, Texas. At this time the Company cannot determine
if this matter will have a material impact on the financial condition of
the Company.
Other matters:
In the ordinary course of business, the Company is party to various
environmental, administrative and legal proceedings. In the opinion of
management, the Company's liability, if any, in all pending litigation
or other legal proceedings, other than those discussed above, will not
have a material effect upon the financial condition, results of
operations or liquidity of the Company.
9. COMPREHENSIVE INCOME
The Company's loss, if reported on a comprehensive basis, would be as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
October 3, September 27, October 3, September 27,
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Reported loss $ (27,885) $ (609) $ (36,356) $ (15,243)
Foreign currency translation 221 (41) (24) (146)
Tax benefit 11 39
-------------- ------------- -------------- --------------
Comprehensive loss $ (27,664) $ (639) $ (36,380) $ (15,350)
-------------- ------------- -------------- --------------
</TABLE>
10. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The Company
will be required to adopt this new accounting standard during the third
fiscal quarter of 2000. Management does not anticipate early adoption.
The Company believes that the effect of adoption of SFAS No. 133 will
not be material.
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<PAGE> 11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition:
Amounts for the nine months ended October 3, 1999, include the effect of the
restatements of the first and second quarters of 1999 discussed in Note 2 of the
Company's unaudited consolidated financial statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- -----------------------------------
3RD QTR. 3RD QTR. 3RD QTR. 3RD QTR.
(in millions) 1999 CHANGE 1998 1999 CHANGE 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues - Enterprising Service
Solutions $ 28.8 $ (6.9) $ 35.7 $ 101.4 $ (13.4) $ 114.8
Revenues - Document Solutions 55.3 (18.1) 73.4 185.2 (43.2) 228.4
-------- ------- -------- ------- -------- --------
Total Revenues $ 84.1 $ (25.0) $ 109.1 $ 286.6 $ (56.6) $ 343.2
-------- ------- -------- ------- -------- --------
Percentage change (22.9) % (16.5) %
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenue in the third quarter of 1999 decreased 22.9% from the third quarter of
1998 primarily due to lower printer and supply sales related to the
Digital/Compaq contract, lower off-site repair revenue due to a decision to
close the Fort Worth depot and exit the express parts business which were low
margin businesses, and lower levels of on-site service revenue. Documents
Solutions ("DSC") revenue was 24.6% lower than the third quarter of 1998
principally as a result of the Digital/Compaq sales mentioned above.
Enterprising Service Solutions ("ESSC") revenue decreased 19.3% from the prior
year quarter. The decrease in ESSC revenue was principally due to the lower
off-site and on-site revenue for the reasons mentioned partially offset by
higher Canadian service revenue.
Revenue for the nine months ended October 3, 1999 was 16.5% lower than the first
nine months of 1998. This was due primarily to the reasons mentioned above;
moreover, in 1998, ESSC had substantial revenues in the first quarter from a
contract with NASDAQ.
Digital branded printer and supply sales have softened over the past fifteen
months. Although broader product lines have been introduced, Compaq Computer
Corporation's acquisition of Digital has required a migration from Digital to
Compaq branding, realignment of channels and changes in the business
relationship. The Company has been authorized to sell selected products under
the Compaq brand. The Company is currently in discussions with Compaq concerning
changes in the terms of the contract governing their relationship. GENICOM is
unable to predict at this time the outcome of discussions and whether or to what
extent the relationship will continue.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ -----------------------------
3RD QTR. 3RD QTR. 3RD QTR. 3RD QTR.
(in millions) 1999 CHANGE 1998 1999 CHANGE 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross margin - Enterprising Service
Solutions $ (2.2) $ (5.9) $ 3.7 $ 6.1 $ (4.0) $ 10.1
Gross margin - Document Solutions 10.3 (10.7) 21.0 46.0 (19.4) 65.4
-------- -------- -------- -------- -------- --------
Total gross margin $ 8.1 $ (16.6) $ 24.7 $ 52.1 $ (23.4) $ 75.5
-------- -------- -------- -------- -------- --------
As a % of revenue 9.6 % 22.7 % 18.2 % 22.0 %
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Gross margin, as a percentage of revenue, decreased from 22.7% in the third
quarter of 1998 to 9.6% in the third quarter of 1999. As a percentage of
revenue, gross margin for DSC declined to 18.5% in the third quarter of 1999
from 28.7% in the third quarter of 1998. Primary contributors to DSC's gross
margin percentage decrease were a change in sales mix with a proportionate
reduction in higher margin supply sales, higher than normal sales of pass
though products at very low margins, asset reserves and the EURO and related
pricing constraints in Europe which put pressure on margins as a consequence.
For ESSC, gross margin decreased from 10.3% for the third quarter of 1998 to
(8.0) % for 1999. This decrease primarily resulted from inventory adjustments,
additional reserves for obsolescence, and higher material and labor
costs (refer to note 2).
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<PAGE> 12
For the first nine months of 1999, gross margin as a percentage of revenue,
decreased from 22.0% in 1998 to 18.2% in 1999. DSC's gross margin was lower by
3.8% due to the reasons mentioned above. ESSC's gross margin was lower by 2.8%,
principally due to higher material costs, higher labor costs, and the inventory
adjustment.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------- -----------------------------------------
3RD QTR. 3RD QTR. 3RD QTR. 3RD QTR.
(in millions) 1999 CHANGE 1998 1999 CHANGE 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating expenses:
Selling, general and
administrative $ 19.6 $ 0.7 $ 18.9 $ 58.1 $ (2.8) $ 60.9
Engineering, research and
product development 4.2 0.4 3.8 12.6 0.4 12.2
Write-off of goodwill (15.0) 15.0
--------- --------- ---------- ---------- ---------- ----------
Total $ 23.8 $ 1.1 $ 22.7 $ 70.7 $ (17.4) $ 88.1
As a % of revenue 28.3 % 20.8 % 24.7 % 25.7 %
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase of $1.1 million in operating expenses from the third quarter of
1998 was primarily a result of higher engineering and development costs for new
products, higher employee wage and benefit costs, higher consulting costs
related to the Company's current financial situation, and depreciation related
to the Company's new business systems. This increase was partially offset by
expense controls.
The decrease in operating expenses for the first nine months of 1999 as compared
to 1998 resulted from a one-time write-off of goodwill in 1998, lower marketing
expenses in ESSC (due to adjustments to the sales force in early 1998 after the
acquisition of Novadyne Computer Systems in late 1997) and cost controls
implemented in 1999. This decrease was partially offset by consulting expenses
related to the amending of the Company's credit agreement with Bank of America,
N.A., consulting costs concerning the Company's current financial situation,
increased employee wage and benefit costs, and higher depreciation expenses
related to the Company's new business systems.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------------ -----------------------------------
3RD QTR. 3RD QTR. 3RD QTR. 3RD QTR.
(in millions) 1999 CHANGE 1998 1999 CHANGE 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest expense, net $ 3.0 $ 0.1 $ 2.9 $ 8.6 $ 0.4 $ 8.2
Percentage change 3.4 % 4.9 %
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense increased $0.1 million in the third quarter of 1999 compared to
the same period a year ago due to costs associated with the Company's amendment
to its credit agreement. Debt levels did not differ significantly compared to
the third quarter of 1999. Interest expense for the first nine months of 1999
was $0.4 million higher than the same period in 1998 due to the amortization of
bank fees associated with the Company's credit facility.
Page 12
<PAGE> 13
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- ----------------------------------------
3RD 3RD 3RD
QTR. QTR. QTR. 3RD QTR.
(in millions) 1999 CHANGE 1998 1999 CHANGE 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax expense (benefit) $ 9.1 $ 9.3 $ (0.2) $ 9.2 $ 14.8 $ (5.6)
Effective tax rate 27.0% 27.0%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
During the third quarter of 1999, the Company has provided a full valuation
allowance against the domestic deferred tax assets created primarily as the
result of the Company's operating losses. Due to the continuing losses
experienced by the Company, realization of these assets is uncertain. During the
third quarter of 1998, the tax rate was affected by the anticipated partial
utilization of fully reserved foreign operating losses and the tax benefits
associated with the goodwill write-off. For the first nine months of 1999,
deferred tax assets were fully reserved compared to 1998 when a tax benefit was
recorded related to the write-off of goodwill.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Nine Months Ended
----------------------------------------------
(in millions) 3rd Qtr. 3rd Qtr.
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operations $ 17.4 $ 5.2
Cash used in investing activities (10.7) (18.5)
Cash (used in) provided by financing activities (1.2) 15.3
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(in millions) 3RD QUARTER 4TH QUARTER
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Working capital $ (65.7) $ 75.4
Inventories 40.6 59.6
Debt obligations 111.9 112.9
Debt to equity ratio n/a 4.6 to 1
- ----------------------------------------------------------------------------------------------------
</TABLE>
Cash provided by operations was $17.4 million for the first nine months of 1999
compared to $5.2 million in the same period of 1998. The increase in cash from
operations was principally due to the decreases in inventory (other than the
inventory adjustment) and accounts receivable partially offset by the Company's
operating loss. The Company's working capital decreased $141.1 million as of
October 3, 1999, as compared to January 3, 1999 due primarily to the following:
a reclassification of all debt to current debt due to the Company's
non-compliance of certain provisions under its credit agreement, a $12.7 million
decrease in inventory resulting from the Company's inventory reduction program
(other than the inventory adjustment), a $11.8 million decrease in trade and
other accounts receivable directly related to the Company's lower revenue, and a
$5.6 million increase in cash. Debt is
Page 13
<PAGE> 14
flat compared to December 1998. The balance of the revolving credit facility
exceeded the borrowing base formula as of October 3, 1999.
BANKING ARRANGEMENTS
The Company has credit facilities with Bank of America, N.A., as agent for a
group of lenders. When put in place in early 1996, the maximum availability
under the credit facilities was $75 million. The commitments under the
facilities were increased to $125 million in late 1997. As of the end of the
third quarter of fiscal 1999, the commitments had decreased to $113 million.
Loans under this agreement have been used to fund operations, capital
expenditures, and acquisitions. These facilities are secured by substantially
all of the Company's assets. They are comprised of two term loans aggregating
$55 million, with maturity dates in 2002 and 2004, and a revolving credit line
of $70 million (now reduced to $58 million) maturing in September, 2002.
Connected to the facilities is an interest rate swap which fixes the interest
rate on approximately $37.5 million of the facility at approximately 8.5%. The
interest rate on the balance of the facility is based on LIBOR plus a certain
percentage based on Company performance.
In 1998, the Company and the lender group amended the facilities several times.
These amendments were necessary because the Company was unable to meet certain
of the financial covenants in the agreement and required adjustments to the
agreement to allow the Company to increase availability under the existing
credit line for working capital purposes. The amendments included adjusting the
financial covenants until the end of 1998, limiting capital expenditures to a
maximum of $27 million for 1998, adjusting borrowing base percentages through
February 15, 1999 (allowing the Company increased borrowing ability) and
adjusting the interest rate upwards 1.5% on the incremental increased borrowing
against the higher base.
In February 1999, a further amendment to the credit agreement took effect. This
amendment retained the increased borrowing base percentages through April 5,
1999. The Company also pledged 65% of the shares in the Company's Canadian
subsidiary as additional collateral.
On April 2, 1999, an additional amendment ("Amendment 7") to the credit
agreement was put in place. It extended the increased borrowing base percentages
until June 2000 and changed the financial covenants relating to 1) minimum
earnings before charges for interest, state, federal and municipal income taxes,
depreciation, and amortization ("EBITDA"), 2) minimum net worth requirements,
and 3) 1999 capital expenditures, which were limited to approximately $19
million. The lenders also made available an additional $10 million for short
term liquidity purposes. This amount, to the extent borrowed, was due on
September 30, 1999 or the due date could be extended at the Company's option on
a quarterly basis for a fee of 0.5% of the liquidity facility outstanding. The
interest rate on the revolver and the additional $10 million is 3.5% above LIBOR
on Eurodollar loans. The Company drew $10 million on the liquidity facility in
April 1999.
As consideration for Amendment 7, the Company agreed to pay an amendment fee of
$1.2 million upon the earlier of the prepayment in full of the credit facilities
or the acceleration of the Company's obligations to repay the loans. This fee
has been accrued. The Company has also agreed to pay a continuation fee on the
last day of each fiscal quarter beginning with the fourth quarter of fiscal year
1999 until the obligations are paid. The continuation fee is 0.5% of all
obligations outstanding on the last day of each such fiscal quarter. As further
consideration, the Company pledged 65% of the shares in several foreign
subsidiaries as additional collateral. The lenders also received warrants to
purchase one million shares of GENICOM common stock at $1.94 per share. The
warrants are callable through March 31, 2000 under certain conditions and cannot
be exercised before then. Amendment 7 reduced the lenders' revolving credit
commitments to $62 million at the end of the first fiscal quarter of 1999, $61
million at the end of the second fiscal quarter of 1999, $58 million at the end
of the third fiscal quarter of 1999, and $52 million at the end of fiscal 1999.
The amount outstanding under the revolver and liquidity facility at October 3,
1999 was $61.2 million. The balance of the revolving credit facility exceeded
the borrowing base formula as of October 3, 1999.
The Company was not in compliance with several covenants and payment provisions
of its credit facility at the end of the third quarter of 1999 (see Part II,
Item 3). Due to restatements of the Company's first and second quarter
Page 14
<PAGE> 15
1999 unaudited consolidated financial statements (see note 2 to Company's
unaudited consolidated financial statements), the Company has not been in
compliance with its loan covenants and certain payment provisions from the end
of the first quarter.
The Company is currently in negotiations with the lenders concerning the
covenant and payment non-compliance and possible remedies. These remedies could
include waivers, forbearance, or restructuring of the debt. The Company is
currently experiencing liquidity problems and has several vendors in a past due
position. Continued losses and an absence of lender support, will cause
additional liquidity concerns and have a material adverse effect on the
Company's ability to continue as a going concern.
If the current credit facility is refinanced or the borrowed amount is declared
by the lenders to be payable on demand, the remaining unamortized deferred
financing costs of $4.7 million will be adjusted in the period of refinancing or
when the debt is declared payable.
YEAR 2000
GENICOM is taking an active approach to address computer issues associated with
the onset of the new Millennium - specifically, the impact of the possible
failure of computer systems and computer driven equipment due to the digit
rollover to the year 2000. The Year 2000 problem is pervasive and complex as
virtually every IT and non-IT system could be affected in some way by the
rollover of the two-digit year value from 99 to 00. The issue is whether
computer systems or embedded technology will properly recognize date sensitive
information when the year changes to 2000. IT and non-IT systems that do not
properly recognize such information could generate erroneous data or cause
failures.
If not properly addressed, the Year 2000 problem could result in failures in
Company computer systems or items with embedded systems, or the computer systems
or equipment of third parties with whom the Company deals worldwide. Any such
failures of the Company's and/or third parties' IT and non-IT systems could have
a material impact on the Company's ability to conduct business.
Since 1996, the Company has been identifying and seeking to minimize its
exposure to the Year 2000 problem. In 1996, the Company began expending
significant funds under contracts with EDS to replace the majority of its
internal computer system. During this process, the Company has required third
party vendors to make representations that the components of the new systems and
related software are Year 2000 compliant. The replacement equipment was
scheduled to be completely installed and tested by early December 1999. The
Company believed its worst case would be addressed with the new systems. Due to
performance issues with the new system, certain aspects of the project have been
delayed until after the end of 1999 and the contingency plan was implemented.
This plan is directed at insuring that its remaining major systems which have
not yet been replaced are Year 2000 compliant. Based up the representations of
the Company's vendor, this work is scheduled and expected to be completed and
the systems tested by the middle of December 1999. The programs which are not
modified for Year 2000 compliance are not expected to have a material impact on
the operations of the Company. As a result, the Company does not anticipate Year
2000 problems will materially affect its operations. The approximately $18-$20
million cost of the replacement system is being capitalized by the Company. The
Company has incurred approximately $17.9 million through October 3, 1999
associated with this replacement system.
Management has also considered whether the Year 2000 problem will affect the
products or services provided by the Company to its customers. Because the
Company's printer products do not contain date sensitive embedded software and
do not manipulate, calculate, convert, compare, sequence or present any date
data, these products should not present Year 2000 compliance issues. The Company
does, through its Enterprising Service Solutions company, resell and install
computer software that could be susceptible to Year 2000 problems. The Company's
practice is to disclaim responsibility for Year 2000 compliance relating to
third party software.
At this time, GENICOM is actively working to ensure that foreseeable Year 2000
computer problems related to Company computer systems and products are
effectively addressed. The Company does not expect that the
Page 15
<PAGE> 16
commitment of resources to study and correct internally any Year 2000 problems
to result in the delay of its projects or product development.
The Company has generally completed reviewing vendor and customer compliance as
well as items that may be affected by embedded systems such as manufacturing and
telephone equipment. The review included inquiries of vendors and customers
related to their Year 2000 compliance. As a result of this review, the Company
believes no material expenditures will be required at this time related to
customer and vendor compliance.
The Company cannot estimate or predict the potential adverse consequences, if
any, that could result from a third party failure to effectively address this
issue or failure of certain equipment and is unable to predict if those parties'
noncompliance or equipment failure will have a material adverse effect on
earnings.
EURO CONVERSION
On January 1, 1999, the exchange rates of eleven countries (Germany, France, the
Netherlands, Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal, and
Luxembourg) were fixed among one another and became the currencies of the EURO.
The individual currencies of the eleven countries will remain in circulation
until mid-2002. The EURO currency will be introduced on January 1, 2002. The
Company does not expect future balance sheets and statements of earnings and
cash flows to be materially impacted by the EURO conversion.
FORWARD LOOKING INFORMATION
GENICOM provides an array of services and products addressing different niches
of the information processing industry, competing against a wide range of
companies from large multinationals to small domestic entrepreneurs. Except for
the historical information contained herein, the matters discussed in this 10Q
include forward-looking statements that involve a number of risks and
uncertainties. Terms such as "believes", "expects", "plans", "intends",
"estimates", or "anticipates", and variations of such words and similar
expressions are intended to identify such forward looking statements. There are
certain important factors and risks, including the change in hardware and
software technology, economic conditions in the North American, Western European
and Asian markets, the anticipation of growth of certain market segments and the
positioning of the Company's products and services in those segments, certain
service customers whose business is declining, seasonality in the buying cycles
of certain of the Company's customers, the timing of product announcements, the
release of new or enhanced products and services, the introduction of
competitive products and services by existing or new competitors, access to and
development of product rights and technologies, the Company's cash needs,
currency rate fluctuations, GENICOM's ability to attract and retain highly
skilled technical, managerial and sales and marketing personnel, possible
litigation related to the Company's operations, including litigation arising
under various environmental laws, Year 2000 system issues, lending
relationships, and the other risks detailed from time to time in the Company's
SEC reports, including reports on Form 10K, that could cause results to differ
materially from those anticipated by the statements contained herein.
Page 16
<PAGE> 17
Item 3. Market Risk
The Company is exposed to the impact of interest rate and foreign currency risk.
In the normal course of business, the Company employs established policies and
procedures to manage its exposure to changes in interest rates and fluctuations
in the value of foreign currencies using a variety of financial instruments.
The Company's objective in managing its exposure to interest rate changes is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowings costs. To achieve its objectives, the Company
primarily uses an interest rate swap to manage net exposure to interest rate
changes related to its credit facility.
International revenues from the Company's foreign subsidiaries were
approximately 34% of total revenue. International sales are made mostly from the
Company's foreign subsidiaries in their respective countries and are typically
denominated in the local currency of each country. These subsidiaries also incur
most of their expenses in the local currency. Accordingly, all foreign
subsidiaries use the local currency as their functional currency.
The Company's international business is subject to risks typical of an
international business including, but not limited to, differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility. Accordingly,
the Company's future results could be materially adversely impacted by changes
in these or other factors.
The Company's exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which costs incurred in the United States are charged
to the Company's foreign subsidiaries. The Company is also exposed to foreign
exchange rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, those
results, when translated, may vary from expectations and adversely impact
overall expected profitability.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings:
Not applicable.
Item 2. Changes in Securities:
Not applicable
Item. 3 Defaults Upon Senior Securities:
The Company is in default under a number of provisions of its credit facility,
including:
1. The Company has failed to pay principal and interest due under the
credit facility since September 1, 1999 in the aggregate amount of $16.1
million, including $1.0 million of term loan principal, $4.1 million of
required revolving credit prepayment, $8.3 million of principal of a
short term loan made by the lenders in April 1999 which matured on
September 30, 1999 and has not been renewed to date due to the
defaults, and $2.7 million of interest.
2. As of October 30, 1999 the Company was not in compliance with the
minimum net worth covenant and the minimum earnings before interest,
taxes, depreciation and amortization covenant.
3. Losses by the Company's Italian subsidiary have had an adverse effect on
that subsidiary's net worth. Genicom Corporation issued a loan to the
Italian subsidiary in order to bring the subsidiary into compliance
with Italian law. This loan of $0.5 million constitute an investment by
the Company in an amount greater than that permitted by the credit
facility.
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<PAGE> 18
Item 4. Submission of Matters to a Vote of Security Holders:
Not applicable.
Item 5. Other Information:
Not applicable
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
----------- -------------------------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
Not applicable
Page 18
<PAGE> 19
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.
GENICOM Corporation
------------------------------
Registrant
Date: November 22, 1999
/s/James C. Gale
------------------------------
Signature
James C. Gale
Senior Vice President
Finance and Chief Financial
Officer
(Mr. Gale is the Chief
Financial Officer and has
been duly authorized to sign
on behalf of the Registrant)
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<PAGE> 20
GENICOM CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED OCTOBER 3, 1999
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ---------------- ---------------------------- --------------------------
<S> <C> <C>
27.1 Financial Data Schedule Filed only with EDGAR version
</TABLE>
E - 1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-2000
<PERIOD-START> JUL-04-1999
<PERIOD-END> OCT-03-1999
<CASH> 10,527
<SECURITIES> 0
<RECEIVABLES> 76,828
<ALLOWANCES> (4,162)
<INVENTORY> 40,013
<CURRENT-ASSETS> 127,001
<PP&E> 103,498
<DEPRECIATION> (59,270)
<TOTAL-ASSETS> 191,759
<CURRENT-LIABILITIES> 190,348
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> (5,830)
<TOTAL-LIABILITY-AND-EQUITY> 191,759
<SALES> 185,162
<TOTAL-REVENUES> 286,602
<CGS> 139,186
<TOTAL-COSTS> 228,875
<OTHER-EXPENSES> 70,652
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,581
<INCOME-PRETAX> (27,206)
<INCOME-TAX> 9,150
<INCOME-CONTINUING> (36,356)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,356)
<EPS-BASIC> 3.12
<EPS-DILUTED> 3.12
</TABLE>
