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 March 31, 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 March 31, 2000
------------------------------------- ----------------------------
Common Stock, $.10 par value 24,380,050
Class B Stock, $.10 par value 2,057,383
Total Number of Pages in this Document is 27.
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
----
Part I -- FINANCIAL INFORMATION
Consolidated Balance Sheets -
March 31, 2000 and September 30, 1999 .............................. 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three and
Six Months Ended March 31, 2000 and 1999 .......................... 4
Consolidated Statements of Cash Flows - For the
Six Months Ended March 31, 2000 and 1999 ........................... 5
Notes to Consolidated Financial Statements ......................... 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 15
Part II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders.......... 26
Item 6. Exhibits and Reports on Form 8-K ............................ 26
- 2 -
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
In thousands, except shares 2000 1999
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $3,390 $3,790
Accounts receivable, less allowance
for doubtful receivables of $1,646
in March and $1,375 in September 32,101 32,795
Inventories 27,417 22,329
Deferred income taxes 1,748 1,578
Other current assets 10,740 12,624
- -------------------------------------------------------------------------------
Total current assets 75,396 73,116
- -------------------------------------------------------------------------------
Property, plant and equipment, net 30,213 32,679
Capitalized software development costs, net 21,906 21,815
Other assets 14,521 12,764
- -------------------------------------------------------------------------------
$142,036 $140,374
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $6,793 $4,533
Accounts payable, trade 18,381 18,669
Accrued payroll and payroll-related costs 4,430 4,626
Deferred income 5,806 6,082
Other current liabilities 15,535 16,449
- -------------------------------------------------------------------------------
Total current liabilities 50,945 50,359
- -------------------------------------------------------------------------------
Long-term debt, less current portion 57,594 64,532
Deferred income taxes 2,370 2,337
Other liabilities 1,297 1,053
- -------------------------------------------------------------------------------
Total liabilities 112,206 118,281
- -------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock, par value $1.00 per share,
3,000,000 shares authorized; issued and
outstanding: 800,000 shares of 9% cumulative
convertible exchangeable preferred stock with a
$20 million liquidation preference 800 800
Class B stock, par value $.10 per share,
10,000,000 shares authorized; issued and
and outstanding: 2,057,383 in March and
2,092,383 in September 209 209
Common stock, par value $.10 per share,
50,000,000 shares authorized; issued and
outstanding: 24,573,476 in March and
20,309,143 in September 2,454 2,031
Capital in excess of par value 174,552 151,706
Accumulated deficit (143,141) (127,472)
Accumulated other comprehensive loss (3,612) (2,736)
Common stock held in treasury, at cost:
193,426 shares in March and 330,382
shares in September (1,432) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 29,830 22,093
- -------------------------------------------------------------------------------
$142,036 $140,374
- -------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED DEFICIT
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- --------------------
In thousands, except per share data 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------
Revenues:
Net product sales $29,060 $25,779 $64,422 $53,616
Service revenue 11,378 11,471 22,573 23,453
Other revenue 949 1,527 1,972 4,127
------- ------- ------- ------
41,387 38,777 88,967 81,196
Cost of revenue:
Cost of product sales 15,276 13,068 33,656 27,458
Cost of service revenue 8,710 7,791 16,896 16,012
Cost of other revenue 49 124 137 609
------ ------ ------ ------
24,035 20,983 50,689 44,079
Gross Margin 17,352 17,794 38,278 37,117
Amortization of capitalized
software development costs 2,993 3,010 5,993 6,172
Operating Expenses:
Selling, general and administrative 14,922 14,617 29,525 31,453
Research and product development 5,034 7,135 10,206 14,821
Restructuring of operations -- -- 500 2,000
------ ------ ------ ------
19,956 21,752 40,231 48,274
Operating loss (5,597) (6,968) (7,946) (17,329)
Other income (expense):
Debt conversion expense (879) -- (2,403) --
Gain on sale of assets -- -- -- 9,001
Interest, net (2,063) (1,536) (4,075) (3,198)
Other, net 111 165 355 399
------- ------- ------- ------
(2,831) (1,371) (6,123) 6,202
Loss before income taxes (8,428) (8,339) (14,069) (11,127)
Income tax provision 400 200 700 500
------- ------- -------- --------
Net loss ($8,828) ($8,539) ($14,769) ($11,627)
======== ======== ========= =========
Basic and diluted loss per share ($0.36) ($0.41) ($0.65) ($0.58)
======== ======== ========= =========
Weighted average number of common and
common equivalent shares outstanding 25,815 21,803 24,054 21,769
======== ======== ========= =========
Accumulated deficit at beginning of period ($133,863) ($106,604) ($127,472) ($103,066)
Net loss (8,828) (8,539) (14,769) (11,627)
Payment of preferred stock dividends (450) (450) (900) (900)
---------- --------- ---------- ----------
Accumulated deficit at end of period ($143,141) ($115,593) ($143,141) ($115,593)
========== ========== ========== ==========
________________________
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash
and Cash Equivalents
----------------------------
Six Months Ended
March 31,
----------------------------
In thousands 2000 1999
----------------------------
Cash flows from operating activities:
Net loss ($14,769) ($11,627)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 11,432 12,874
Non-cash charge for debt conversion 2,403 --
Gain on sale of assets -- (9,001)
Changes in:
Accounts receivable 288 5,993
Inventories (5,178) 386
Accounts payable and accrued expenses (974) 2,074
Other net current assets 1,231 (2,110)
Other net long-term assets (3,111) 391
------------------------------------------------------------------------------
Net cash used in operating activities (8,678) (1,020)
------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (2,438) (4,892)
Capitalized software development costs (6,084) (6,534)
Proceeds from sale of assets, net -- 12,013
- -------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (8,522) 587
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings (repayments), net (1,477) 9,353
Proceeds from notes and mortgages 20,700 279
Principal payments on notes and mortgages (2,162) (8,159)
Proceeds from issuing common stock 719 368
Payment of preferred stock dividends (900) (900)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 16,880 941
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (80) (57)
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (400) 451
Cash and cash equivalents at beginning of period - (1) 3,790 3,757
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $3,390 $4,208
===============================================================================
(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-
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to fairly present the consolidated financial position
of General DataComm Industries, Inc. and subsidiaries (the
"Corporation" or "Company") as of March 31, 2000, the
consolidated results of their operations for the three and six
months ended March 31, 2000 and 1999, and their cash flows for
the six months ended March 31, 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):
March 31, 2000 September 30, 1999
-------------- ------------------
Raw materials $ 6,113 $ 5,054
Work-in-process 3,205 1,732
Finished goods 18,099 15,543
-------- --------
$ 27,417 $ 22,329
======== ========
- 6 -
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):
March 31, 2000 September 30, 1999
-------------- ------------------
Land $ 1,767 $ 1,775
Buildings and improvements 29,863 30,280
Test equipment, fixtures
and field spares 54,732 54,460
Machinery and equipment 59,715 58,099
-------- -------
146,077 144,614
Less: accumulated depreciation 115,864 111,935
-------- -------
$ 30,213 $ 32,679
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The accumulated amortization of capitalized software development
costs amounted to $14,668,000 and $18,065,000 at March 31, 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):
March 31, 2000 September 30, 1999
-------------- ------------------
Revolving credit facility $ 13,634 $ 15,111
Notes payable 37,871 18,543
7 3/4% convertible senior
subordinated debentures 3,000 25,000
Mortgages payable 9,882 10,411
-------- --------
64,387 69,065
Less: current portion 6,793 4,533
-------- --------
$ 57,594 $ 64,532
======== ========
- 7 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Expansion of Credit Facility and Receipt of Proceeds
On May 14, 1999, the Company entered into a three-year $40.0
million loan and security agreement with Foothill Capital
Corporation (the "Loan Agreement"). The Loan Agreement was
comprised of $15.0 million in term loans and a $25.0 million
(maximum value) revolving line of credit. At any point in time,
up to a maximum of $3.0 million of the outstanding term loan
balance is convertible into the Company's common stock at a
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 previous Loan Agreement
was modified to be less restrictive to the Company, requiring
that stockholders' equity, as defined, must now equal or exceed
$10.0 million, as compared to $18.1 million previously.
The new $20.0 million term loan bears interest at the higher of
13.5% or the prime rate of interest plus 5.0% (on March 31,
2000, the applicable prime rate of interest was 9.0%), payable
monthly. Commencing in March 2001, quarterly principal payments
in the amount of $1.0 million become payable, and the new term
loan is due and payable in full upon termination or expiration
of the New Loan Agreement. At any point in time, up to a maximum
of $4.0 million of the outstanding new term loan balance is
convertible into the Company's common stock at a conversion
price of $9.00 per share.
Under the revolving line of credit portion of the New Loan
Agreement, funds are advanced subject to satisfying a borrowing
base formula related to levels of certain accounts receivable
and inventories and the satisfaction of other financial
covenants. Under this formula, at March 31, 2000, the Company
would have been able to borrow up to $31.5 million. Borrowings
outstanding on the line of credit amounted to $13.6 million and
$15.1 million at March 31, 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
- 8 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
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 9.0% at March 31, 2000.
Conversion of Debentures into Equity
In the six months ended March 31, 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, 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 in the six months ended March 31, 2000.
After giving effect to these conversions, outstanding Debentures
amounted to $3.0 million at March 31, 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 all (other) outstanding indebtedness
of the Corporation.
- 9 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6. RESTRUCTURING OF OPERATIONS
On September 30, 1999, the Company entered into an agreement
with the Matco Electronics Group, Inc. ("Matco") to outsource a
substantial portion of its manufacturing operations. This
strategic decision, executed to reduce manufacturing costs and
more effectively focus the Company on product development,
marketing and sales activity, resulted in the elimination of
approximately 100 manufacturing positions. The net loss for the
six months ended March 31, 2000 includes a charge of $0.5
million, or $0.02 per share, primarily for post-employment
benefits under the Company's severance plan. Most of the
benefits were paid in the quarter ended March 31, 2000.
In December 1998, the Company restructured its operations into
three distinct business units to increase product line focus and
move toward operating autonomy. Two new business units resulted
from the reorganization: Broadband Systems Division and Network
Access Division, both of which supplemented the existing VITAL
Network Services business unit, which was launched in October
1997. The reorganization resulted in a workforce reduction of
approximately 200 persons. The net loss for the six months ended
March 31, 1999 includes a charge of $2.0 million, or $0.09 per
share, primarily for post-employment benefits under the
Company's severance plan; such costs were paid in fiscal 1999.
NOTE 7. SALE OF TECHNOLOGY ALLIANCE GROUP DIVISION
On December 30, 1998, the Company sold the assets of its
Technology Alliance Group ("TAG") division, which was identified
as non-strategic to the reorganized business units referenced in
Note 6 above. TAG, which developed, patented and licensed
advanced modem and access technologies, was principally
comprised of scientists and engineers and held rights to certain
technologies patented by the division. The sale resulted in a
pre-tax gain of approximately $9.0 million, or $0.41 per share,
in the six-month period ended March 31, 1999 and generated cash
proceeds, net of expenses, of approximately $12.0 million.
Technology licensing revenues from the TAG division amounted to
$420,000 and $1,115,000 in the three- and six-month periods
ended March 31, 1999, respectively (licensing revenues are
reported as "Other Revenue" in the Company's Consolidated
Statements of Operations).
- 10 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. SEGMENT INFORMATION - INTERIM DISCLOSURES
The Company reorganized in December 1998, creating distinct and
independently managed Strategic Business Units ("SBUs") for
specified groups of products and services. Each SBU has been
identified as a reportable segment, as summarized below:
o Broadband Systems Division ("BSD")
o Network Access Division ("NAD")
o VITAL Network Services, L.L.C.
o DataComm Leasing Corporation
The accounting policies of the segments are the same as those
described in Note 1, "Description of Business and Summary of
Significant Accounting Policies," in the Company's consolidated
financial statements filed with Form 10-K for the year ended
September 30, 1999, except for capitalized software accounting.
Such costs are treated as a period expense when measuring
divisional performance.
The Company evaluates the performance of its segments and
resource allocation based upon operating income, before
capitalized software accounting, restructuring charges and
executive level general corporate costs (i.e., chief executive
officer, chief operating officer, chief financial officer,
corporate strategic planning, investor relations, etc.). There
are no intersegment revenues, and BSD and NAD recognize revenue
for the sale of their product lines only (i.e., BSD recognizes
no revenue for the sale of NAD product and vice versa).
For additional information, including a description of the type
of business conducted by each respective SBU, refer to Note 11
in the Company's consolidated financial statements filed with
Form 10-K for the year ended September 30, 1999.
The tables below present financial performance information by
reportable segment (in thousands):
- 11 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8. SEGMENT INFORMATION - INTERIM DISCLOSURES (continued)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
------------------ -------------------
Revenue:
Network Access Division $14,479 $14,617 $32,407 $28,173
Broadband Systems Division 14,607 11,216 32,057 26,332
VITAL Network Services, L.L.C. 11,378 11,471 22,573 23,453
DataComm Leasing Corporation 923 1,053 1,930 2,123
Other -- 420 -- 1,115
------- ------- ------- -------
Total $41,387 $38,777 $88,967 $81,196
======= ======= ======= =======
Operating Income (Loss):
Network Access Division $ 962 $ 609 $ 2,699 $(1,942)
Broadband Systems Division (6,510) (9,778) (10,469) (17,153)
VITAL Network Services, L.L.C. 259 1,734 855 3,426
DataComm Leasing Corporation 751 807 1,501 1,563
Other -- 420 -- 420
------- ------- ------- ------
Total $(4,538) $(6,208) $(5,414) $(13,686)
======== ======== ======== =========
Reconciliations of operating loss, as reported above, to consolidated loss
before income taxes are summarized below:
Operating loss, per above $(4,538) $(6,208) $(5,414) $(13,686)
Capitalized software activity, net 91 179 91 362
General corporate expenses (1,150) (939) (2,123) (2,005)
Restructuring of operations -- -- (500) (2,000)
Debt conversion expense (879) -- (2,403) --
Gain on sale of assets -- -- -- 9,001
Other expense (1,952) (1,371) (3,720) (2,799)
-------- ------- --------- ---------
Loss Before Income Taxes $(8,428) $(8,339) $(14,069) $(11,127)
======== ======== ========= =========
-12-
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 Six Months Ended
March 31, March 31,
2000 1999 2000 1999
----------------- ----------------
Numerator:
Net loss $ (8,828) $(8,539) $(14,769) $(11,627)
Preferred stock dividends (450) (450) (900) (900)
Numerator for basic and diluted
loss per share - loss applicable
to common stockholders $(9,278) $(8,989) $(15,669) $(12,527)
======== ======== ========= ========
Denominator:
Denominator for basic and diluted
loss per share - weighted
average shares outstanding 25,815 21,803 24,054 21,769
------- ------- ------- -------
Basic and diluted loss per share $ (0.36) $ (0.41) $ (0.65) $ (0.58)
======== ======== ========= ========
The net loss reported for the three months ended March 31, 2000
includes a non-cash debt conversion charge of $0.9 million (or
$0.03 per share). The net loss reported for the six months ended
March 31, 2000 includes restructuring charges 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 six months
ended March 31, 1999 includes restructuring charges of $2.0
million (or $0.09 per share) and a gain on sale of assets of
$9.0 million (or $0.41 per share).
Outstanding securities (not included in the above computations
because of their dilutive impact on reported loss per share)
which could potentially dilute earnings per share in the future
include convertible debentures, convertible preferred stock and
employee stock options and warrants. For additional disclosure
information, including conversion terms, refer to Notes 7, 10
and 12, respectively, in the Company's consolidated financial
statements filed with Form 10-K for the year ended September 30,
1999. Weighted average employee stock options outstanding during
the six months ended March 31, 2000 approximated 4,024,000
shares, of which 667,000 would not have been included in diluted
earnings per share calculations for the six months ended March
31, 2000 (if the Company reported net income for the referenced
period) because the effect would be antidilutive.
- 13 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. COMPREHENSIVE INCOME (LOSS)
The following table sets forth the computation of comprehensive
loss:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -------------------
2000 1999 2000 1999
------------------ -------------------
Net loss $(8,828) $(8,539) $(14,769) $(11,627)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments (385) (251) (876) (664)
-------- -------- --------- --------
Comprehensive loss $(9,213) $(8,790) $(15,645) $(12,291)
======== ======== ========= =========
- 14 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary Discussion
The Company continues to achieve operational performance improvement as compared
to the prior fiscal year. Total revenues for the three- and six-month periods
ended March 31, 2000 reflect growth of approximately 7% and 10%, respectively,
as compared to the corresponding periods of fiscal 1999. In addition, the
Company's reported net loss, excluding unique one-time items, was narrowed to
$(11.9) million for the six months ended March 31, 2000 as compared to $(18.6)
million for the corresponding period of fiscal 1999, an improvement of $6.7
million, or 36%.
Regarding current quarter performance, management believes that, based on the
order rate and backlog, product revenues in the Broadband Systems Division would
have been approximately $3.0 million higher except for issues associated with
the complete outsourcing of manufacturing operations along with worldwide
shortages of critical electronic components.
The Company has also continued to improve its financial position since the
fiscal year ended September 30, 1999. 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 $1.7 million annually.
Discussion of the current fiscal year's operating results as compared to the
corresponding periods of fiscal 1999 are included below. Unique one-time items,
including restructuring charges, debt conversion expense and gain from the sale
of assets, are discussed under the captions "Restructuring of Operations" and
"Interest Expense and Other Income and Expense."
- 15 -
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three Months Ended Six Months Ended
March 31, March 31,
------------------- --------------------
2000 1999 2000 1999
------------------- --------------------
Revenues:
Net product sales 70.2% 66.5% 72.4% 66.0%
Service revenue 27.5 29.6 25.4 28.9
Other revenue 2.3 3.9 2.2 5.1
----- ----- ----- -----
100.0 100.0 100.0 100.0
Cost of revenues 58.1 54.1 57.0 54.3
----- ----- ----- -----
Gross margin 41.9 45.9 43.0 45.7
Amortization of capitalized
software development costs 7.2 7.8 6.7 7.5
Selling, general and
administrative 36.1 37.7 33.2 38.7
Research and product
development 12.1 18.4 11.5 18.3
----- ----- ----- -----
Operating loss before
restructuring charges (13.5) (18.0) (8.4) (18.9)
Restructuring of operations -- -- 0.5 2.4
------ ------ ------ ------
Operating loss (13.5)% (18.0)% (8.9)% (21.3)%
------ ------ ------ ------
Net loss excluding
unique items* (19.2)% (22.0)% (13.3)% (22.9)%
------ ------ ------ ------
Net loss (21.3)% (22.0)% (16.6)% (14.3)%
====== ====== ====== ======
- --------------------
*Unique items are comprised of restructuring charges, debt conversion expense
and gain on sale of assets.
Summary comments are as follows: (1) quarter and year-to-date product revenues
increased approximately 13% and 20%, respectively, while service revenues are
down slightly from fiscal 1999; as a result, product revenue represents an
increased percentage of total revenue; (2) other revenue represents a lower
percentage of total revenue, reflecting a reduction in royalty revenue
attributable to a division being sold in December 1998 (refer to Note 7 for
details); (3) quarter and year-to-date cost of revenues, measured as a percent
of revenue, increased as compared to the prior year, reflecting, in order of
relative importance, the combined impact of a reduction in (higher margin)
royalty revenue, reduced service margins and a less significant reduction in
product margins; (4) year-to-date operating expenses (excluding restructuring
charges) are down more than 12 percentage points when measured as a percent of
revenue, reflecting the combined impact of revenue growth and expense reductions
realized from the Company's fiscal 1999
- 16 -
restructuring efforts; (5) the year-to-date operating loss, excluding the impact
of restructuring charges, improved by approximately 11 percentage points
measured as a percent of revenue; (6) the year-to-date net loss, excluding
unique items, reflects a similar improvement of approximately 10 percentage
points when measured as a percent of revenue.
Consolidated Results
Revenues: Current quarter revenues were up $2.6 million, or 6.7%, as compared to
the corresponding quarter of fiscal 1999. Product revenues were up $3.3 million,
or 12.7%, service revenues were down $0.1 million, or 0.8%, and other revenues
were down $0.6 million, or 37.9%. The Broadband Systems Division's ATM business
accounted for all of the product revenue growth; the reduction in other revenue
reflects a $0.4 million reduction in royalty revenue resulting from a division
being sold (refer to Note 7 for details) and a $0.2 million reduction in lease
revenue.
Year-to-date revenues for the six months ended March 31, 2000 were up $7.8
million, or 9.6%, as compared to the first half of fiscal 1999. Product revenues
were up $10.8 million, or 20.2%, service revenues were down $0.9 million, or
3.8%, and other revenues were down $2.2 million, or 52.2%. Both the Network
Access Division (revenues up $4.5 million, or 16.2%) and the Broadband Systems
Division (revenues up $6.3 million, or 24.4%) contributed to the product revenue
growth; the decline in service revenue reflects weakness in the domestic
marketplace - principally attributable to customers minimizing new systems
implementation activity as they transitioned into calendar year 2000; and the
reduction in other revenues reflects the combined impact of a $1.1 million
reduction in royalty revenue resulting from the sale of a division, a $0.3
million reduction in leasing revenue and $0.8 million of contractual research
and development revenue recorded in the prior year (no such revenue was recorded
in the current year).
Geographically, international revenues amounted to 48% and 50% of consolidated
revenues for the three- and six-month periods ended March 31, 2000,
respectively, as compared to 46% and 47% for corresponding periods of fiscal
1999.
Gross Margins: Gross margins, measured as a percent of revenue and excluding
capitalized software amortization, were down 4.0 percentage points and 2.7
percentage points for the three and six months ended March 31, 2000,
respectively, as compared to the corresponding periods one year ago. Both
product and service margins contributed to the overall margin declines. The
product margin declines, experienced in both the Network Access and Broadband
Systems divisions, reflect the combined impact of the customer mix (on average
sell prices) and premium costs arising from worldwide shortages of critical
electronic components.
Amortization of capitalized software amounted to $3.0 million in the quarters
ended March 31, 2000 and 1999; year-to-date amortization of capitalized software
amounted to $6.0 million and $6.2 million in the six-month periods ended March
31, 2000 and 1999, respectively.
- 17 -
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 of Operations," in this quarterly
report and Note 2, "Restructuring of Operations," in the Company's consolidated
financial statements filed with Form 10-K for the year ended September 30, 1999
for further discussion); and (2) the shutdown of a non-strategic remote
technology center in England in July 1999.
Operating expenses were down $1.8 million, or 8.3%, for the quarter ended March
31, 2000 as compared to same quarter one year ago, reflecting the net impact of
a $0.3 million, or 2.1%, increase in selling, general and administrative
expenses and a $2.1 million, or 29.4%, 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 six
months ended March 31, 2000 were down $6.5 million, or 14.1%, as compared to the
six months ended March 31, 1999. The reduction is comprised of a $1.9 million,
or 6.1%, reduction, in selling, general and administrative expenses and a $4.6
million, or 31.1%, reduction in research and development expense. The selling,
general and administrative reduction principally reflects headcount and other
related cost reductions resulting from the Company's December 1998 reengineering
of its sales and marketing strategy, including an increased focus on sales
activity through distributors and other channels, a reduced focus on direct-sell
activity and more productive marketing initiatives. 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 six months
ended March 31, 2000 amounted to $16.3 million, or 18.3% 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 of Operations," for detailed
discussion.
- 18 -
Interest Expense and Other Income and Expense: Interest expense amounted to $2.1
million and $1.5 million for the quarters ended March 31, 2000 and 1999,
respectively, and $4.1 million and $3.2 million for the six months ended March
31, 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
increases in the prime rate of interest.
Fiscal year 2000 other expense includes non-cash charges for debt conversion
expense; such charges amounted to $0.9 million (or $0.03 per share) and $2.4
million (or $0.10 per share) for the three- and six-month periods ended March
31, 2000, respectively. Details regarding the debt-to-equity conversions, which
increased stockholders' equity and reduced outstanding indebtedness by
approximately $22.0 million during the six months ended March 31, 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 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 $400,000 and $200,000 in the
quarters ended March 31, 2000 and 1999, respectively, and $700,000 and $500,000
in the six-month periods ended March 31, 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 financial
statements.
Operating Segments: Discussion and analysis of the financial performance of the
Company's reportable operating segments is presented below (such discussions do
not include the impact of charges for restructuring of operations, as the
Company does not segregate such charges by business unit). In the case of all
operating segments, reference is made to Note 8, "Segment Information - Interim
Disclosures," for further discussion and disclosure.
Network Access Division ("NAD")
NAD's current quarter operating income amounted to $1.0 million as compared to
$0.6 million in the same quarter one year ago. Revenue and gross margin
contribution were relatively unchanged from the prior year. The $0.4 million
improvement in operating income resulted from a $0.4 million reduction in
operating expenses.
NAD's year-to-date operating income amounted to $2.7 million as compared to an
operating loss of $(1.9) million in first six months of fiscal 1999. The $4.6
million turnaround and improvement reflects the net effect of revenue growth of
$4.2 million, or 15.0%, resulting gross margin growth of $1.6 million, and
operating expense reductions of $3.0 million, or 20.1%. NAD's revenue growth was
achieved in both the domestic and international marketplace. 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.
- 19 -
Broadband Systems Division ("BSD")
BSD's current quarter operating loss amounted to $(6.5) million as compared to
$(9.8) million in the same quarter one year ago, an improvement of $3.3 million,
or 33.4%. The $3.3 million improvement reflects the net effect of revenue growth
of $3.4 million, or 30.2%, resulting margin growth of $1.1 million, and
operating expense reductions of $2.2 million, or 14.1%. The $3.4 million of
revenue growth reflects ATM product revenue growth which occurred in the
international marketplace. BSD's 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 six months ended March 31, 2000 amounted to $(10.5)
million as compared to $(17.2) million for the corresponding period of fiscal
1999, an improvement of $6.7 million, or 39.0%. The $6.7 million improvement
reflects the net effect of revenue growth of $5.7 million, or 21.7%, resulting
margin growth of $2.5 million, and operating expense reductions of $4.2 million,
or 13.6%. BSD's ATM and Internetworking products contributed $4.0 million and
$2.7 million of revenue growth, respectively, and such growth was achieved in
both the domestic and international marketplace. The operating expense
reductions resulted from the actions referenced above.
ATM product revenues amounted to $11.6 million and $23.2 million for the three-
and six-month periods ended March 31, 2000, as compared to $8.0 million and
$19.2 million for the three- and six-month periods ended March 31, 1999,
reflecting year-to-date growth of approximately 21%.
Refer to the Summary Discussion on page 15 for the management comment on the
potential for higher revenue in the quarter ended March 31, 2000.
VITAL Network Services, L.L.C. ("VITAL")
VITAL's service revenue amounted to $11.4 million and $11.5 million in the
quarters ended March 31, 2000 and 1999, respectively. VITAL's current quarter
operating income amounted to $0.3 million as compared to $1.7 million in the
same quarter one year ago, a reduction of $1.4 million, or 85%. The $1.4 million
reduction is comprised of a margin loss of $0.9 million (principally due to
increased costs) and a $0.5 million, or 23.8%, increase in operating expenses.
As noted earlier, VITAL's increased spending reflects a strategic investment in
the division's systems and people infrastructure in an effort to position the
business unit for future growth.
VITAL's trends for the six months ended March 31, 2000 are consistent with those
in the quarter as noted above. Service revenue amounted to $22.6 million and
$23.5 million in the six-month periods ended March 31, 2000 and 1999,
respectively, a reduction of $0.9 million, or 3.8%. VITAL's year-to-date
operating income amounted to $0.9 million as compared to $3.4 million in the
corresponding period one year ago, a reduction of $2.5 million, or 75%. The $2.5
million reduction is comprised of a margin loss of $1.8 million and a $0.7
million, or 20.1%, increase in operating expenses.
- 20 -
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 $0.8 million in the quarters ended March 31, 2000 and
1999, and $1.5 million and $1.6 million in the six months ended March 31, 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 $111,000 and $42,000 for the quarters ended March 31,
2000 and 1999, respectively, and $363,000 and $270,000 for the six-month periods
ended March 31, 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.
Interest Risk
For discussion applicable to interest risk, reference is made to Form 10-K filed
with the Securities and Exchange Commission for the year ended September 30,
1999, Item 7, Management's Discussion and Analysis of Results of Operations and
Financial Condition, under the caption "Interest Risk."
- 21 -
Liquidity and Capital Resources
Future cash requirements are planned to be satisfied from a combination of cash
balances ($3.4 million at March 31, 2000) and borrowings available under the
Company's revolving line of credit, under which the Company's lenders have
authorized up to a maximum of $35.0 million. Borrowings outstanding on the
Company's revolving line of credit amounted to $13.6 million and $15.1 million
at March 31, 2000 and September 30, 1999, respectively. In addition, alternate
financing sources may also be available, if required. Such alternate financing
sources include, among other items, the sale of assets, technologies, existing
businesses and/or the Company's common stock, 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 (proceeds received on December 31,
1999) and a $10.0 million increase in the revolving line-of-credit portion of
the credit facility. The expansion results in a $70.0 million credit facility
comprised of $35.0 million in term loans and a $35.0 million (maximum value)
revolving line of credit (New Loan Agreement). Refer to Note 5, "Long-Term
Debt," for a detailed discussion of the New Loan Agreement and the terms
thereof.
Under the revolving line of credit portion of the Company's New Loan Agreement,
availability of funds is subject to satisfying a borrowing base formula related
to levels of certain accounts receivable and inventories and the satisfaction of
other financial covenants. Therefore, maximum funds available for borrowing
under the revolving line of credit portion of the New Loan Agreement will
fluctuate as sales and collections efforts affect accounts receivable balances.
Such maximum availability amounted to $31.5 million at March 31, 2000. Most
assets of the Company, including accounts receivable, inventories and property,
plant and equipment are pledged as collateral. Amounts outstanding on the
revolving line of credit are payable in full upon termination of the New Loan
Agreement. Separately, letters of credit reduce the availability of funds under
the revolving line of credit; letters of credit in the amount of $200,000 and
$267,000 were outstanding at March 31, 2000 and September 30, 1999,
respectively.
Financial covenants of the New Loan Agreement require that the Company's
reported stockholders' equity, excluding the impact of foreign currency
translation adjustments occurring subsequent to March 31, 1999, equal or exceed
$10.0 million. Such stockholders' equity, as defined, amounted to $30.2 million
at March 31, 2000. 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.
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 the six
months ended March 31, 2000, thereby reducing outstanding indebtedness and
increasing stockholders' equity. Outstanding Debentures, after such conversions,
amounted to only $3.0 million at March 31, 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.
- 22 -
Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the year ended September 30,
1999 for further disclosures applicable to all other outstanding indebtedness of
the Corporation.
Operating
Net cash used in operating activities amounted to $8.7 million and $1.0 million
in the six-month periods ended March 31, 2000 and 1999, respectively. Increases
in inventories ($5.2 million) and investments in leased assets ($2.2 million)
account for a substantial part of the cash consumption for the six months ended
March 31, 2000. The inventory growth resulted from precautionary measures taken
by the Company as it transitioned to fully outsource its manufacturing
operations during the quarter; the Company anticipates a reduction in inventory
over the following six months. The increased investments in leases reflects the
impact of customer operating leases entered into during the quarter ended March
31, 2000 with the Company's subsidiary, DataComm Leasing Corporation.
Non-debt working capital, excluding cash and cash equivalents, amounted to $27.9
million at March 31, 2000, as compared to $23.5 million at September 30, 1999,
with the increase in inventory levels, as discussed above, being the principal
reason for the increase.
Investing
Investments in property, plant and equipment amounted to $2.4 million during the
six months ended March 31, 2000 as compared to $4.9 million in the corresponding
period one year ago. Approximately $600,000 of the prior year's capital
investments were applicable to VITAL Network Services' purchase of Olicom assets
(for additional discussion, refer to Note 4, "VITAL Network Services, L.L.C.
Partnership With Olicom, Inc.," in the Company's consolidated financial
statements filed with Form 10-K for the year ended September 30, 1999).
Separately, investments in capitalized software amounted to $6.1 million and
$6.5 million in the six-month periods ended March 31, 2000 and 1999,
respectively. All investment activity is targeted to satisfy minimum operating
requirements and to embrace new undertakings with the greatest potential
returns.
In the prior year six months ended March 31, 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 $16.9 million in the six
months ended March 31, 2000, comprised of $17.1 million of net borrowings, $0.7
million in proceeds received from the issuance of common stock pursuant to
employee stock programs and the payment of $0.9 million in preferred stock
dividends. This activity compares to $0.9 million of cash
- 23 -
provided by financing activities in the six months ended March 31, 1999,
comprised of $1.4 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 $0.9 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 March 31, 2000 and September 30, 1999, and
discussion of new borrowing and debt reduction activities occurring during the
six months ended March 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.
Year 2000 Compliance
Reference is made to Form 10-K filed with the Securities and Exchange Commission
for the year ended September 30, 1999, Item 7, Management's Discussion and
Analysis of Results of Operations and Financial Condition, under the caption
"Year 2000 Compliance" for year 2000 compliance related discussion. The Company
has encountered no major year 2000 compliance problems through March 31, 2000.
Certain Risk Factors
Continuing Losses: The Company has sustained net losses for the past 22 quarters
ended March 31, 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 $30.2 million at March 31, 2000).
Although not anticipated, should the Company ever fail to comply with the
required covenants, or fail to comply with any other provisions of the New Loan
Agreement which would result in a default, and a waiver or amendment is not
obtained, the Company may be unable to borrow funds under such agreement. In
such case the Company would be required to seek other financing to fund its
operations, and there can be no assurance the Company will be able to obtain
such financing or, if obtained, on terms deemed favorable by the Company.
Furthermore, in the event the Company does default on its $70.0 million New Loan
Agreement obligation, such default may result in a requirement to accelerate the
due dates and payment of other outstanding indebtedness.
Reliance on Outsourced Manufacturing: On September 30, 1999, the Company
announced that it 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.
- 24 -
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.
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.
- 25 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security-Holders
On March 2, 2000, at the Annual Meeting of Stockholders of the Corporation,
stockholders elected Lee M. Paschall and John L. Segall as directors to the
Corporation for a term of three years:
- Number of votes cast for: 21,348,699
- Number of votes withheld: 543,332
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
None.
- 26 -
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: May 12, 2000
------------
- 27 -