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, 2001
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) 758-1811
--------------
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, 2001
---------------------- -----------------------------
Common Stock, $.10 par value 30,355,291
Class B Stock, $.10 par value 2,057,103
Total Number of Pages in this Document is 31.
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
Part I -- FINANCIAL INFORMATION
Consolidated Balance Sheets - As Of
March 31, 2001 and September 30, 2000 .................... 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three and Six
Months Ended March 31, 2001 and 2000 .................... 4
Consolidated Statements of Cash Flows - For the
Six Months Ended March 31, 2001 and 2000 ................. 5
Notes to Consolidated Financial Statements................ 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............. 18
Part II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders..... 30
Item 6. Exhibits and Reports on Form 8-K ....................... 30
2
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
In thousands, except shares 2001 2000
- -----------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $770 $3,572
Accounts receivable, less allowance for
doubtful receivables of $1,948 in March
and $2,037 in September 23,454 25,631
Inventories 29,810 31,718
Deferred income taxes 1,521 1,521
Other current assets 8,539 8,311
- ------------------------------------------------------------------------------
Total current assets 64,094 70,753
- ------------------------------------------------------------------------------
Property, plant and equipment, net 21,915 29,658
Capitalized software development costs, net 16,819 22,160
Other assets 7,839 10,512
- ------------------------------------------------------------------------------
$110,667 $133,083
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $58,535 $51,982
Accounts payable, trade 24,374 23,040
Accrued payroll and payroll-related costs 3,723 4,853
Deferred income 5,498 6,567
Other current liabilities 15,000 14,070
- -------------------------------------------------------------------------------
Total current liabilities 107,130 100,512
- -------------------------------------------------------------------------------
Long-term debt, less current portion 3,000 3,000
Deferred income taxes 2,244 2,266
Other liabilities 1,166 1,142
- ------------------------------------------------------------------------------
Total liabilities 113,540 106,920
- ------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Redeemable 5% preferred stock, par value
$1.00 per share, issued and outstanding:
130,000 shares in March and 200,000
shares in September; $3.3 million
liquidation preference 3,250 5,000
Non-redeemable preferred stock, common
stock and other stockholders' equity:
Preferred stock, par value $1.00 per share
3,000,000 shares authorized; issued and
outstanding: 787,900 shares in March and
800,000 shares in September of 9%
cumulative convertible exchangeable
preferred stock; $19.7 million
liquidation preference 788 788
Class B stock, par value $.10 per share,
10,000,000 shares authorized; issued
and outstanding: 2,057,103 in March and
September 206 206
Common stock, par value $.10 per share,
50,000,000 shares authorized; issued
and outstanding: 30,549,905 in March
and 27,709,710 in September 3,055 2,771
Capital in excess of par value 191,173 189,631
Accumulated deficit (194,489) (165,754)
Accumulated other comprehensive loss (5,417) (5,040)
Common stock held in treasury, at cost:
194,614 shares in March and September (1,439) (1,439)
- -------------------------------------------------------------------------------
Total non-redeemable preferred stock,
common stock and other stockholders' equity (6,123) 21,163
- -------------------------------------------------------------------------------
$110,667 $133,083
- -------------------------------------------------------------------------------
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 2001 2000 2001 2000
- -------------------------------------------------------------------------------
Revenues:
Net product sales $19,235 $29,060 $35,910 $64,422
Service revenue 10,658 11,378 22,820 22,573
Other revenue 592 949 1,193 1,972
------ ------ ------ ------
30,485 41,387 59,923 88,967
Cost of revenues:
Cost of product sales 12,557 15,276 23,370 33,656
Cost of service revenue 8,851 8,710 18,781 16,896
Cost of other revenue 39 49 83 137
------ ------ ------ ------
21,447 24,035 42,234 50,689
Gross margin 9,038 17,352 17,689 38,278
Amortization of capitalized
software development costs 2,153 2,993 4,619 5,993
Operating expenses:
Selling, general and
administrative 10,833 14,922 23,460 29,525
Research and product development 2,256 5,034 7,071 10,206
Restructuring and other charges 1,700 -- 6,600 500
------ ------ ------ ------
14,789 19,956 37,131 40,231
Operting loss (7,904) (5,597) (24,061) (7,946)
Other income (expense):
Interest, net (2,180) (2,063) (4,189) (4,075)
Write-down of real estate
assets held for sale (4,500) -- (4,500) --
Debt conversion expense -- (879) -- (2,403)
Legal settlement proceeds, net -- -- 5,000 --
Other, net 140 111 (185) 355
----- ------- ----- -------
(6,540) (2,831) (3,874) (6,123)
Loss before income taxes (14,444) (8,428) (27,935) (14,069)
Income tax provision 400 400 800 700
----- ------- -------- --------
Net loss ($14,844) ($8,828) ($28,735) ($14,769)
========= ======== ========= =========
Basic and diluted loss per share ($0.48) ($0.36) ($0.95) ($0.65)
========= ======== ========= =========
Weighted average number of common
and common equivalent
shares outstanding 30,986 25,815 30,272 24,054
========= ======== ========= ========
Accumulated deficit at beginning
of period ($179,645) ($133,863) ($165,754) ($127,472)
Net loss (14,844) (8,828) (28,735) (14,769)
Payment of preferred stock
dividends - (450) - (900)
---------- ----------- --------- ---------
Accumulated deficit at end
of period ($194,489) ($143,141) ($194,489) ($143,141)
========== ========== ========== ==========
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 2001 2000
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($28,735) ($14,769)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,613 11,432
Non-cash charge for capitalized
software write-down 5,100 --
Non-cash charge for write-down of real estate
assets held for sale 4,500 --
Non-cash charge for debt conversion -- 2,403
Changes in:
Accounts receivable 1,947 288
Inventories 1,833 (5,178)
Accounts payable and accrued expenses 365 (974)
Other net current assets (384) 1,231
Other net long-term assets 2,166 (3,111)
- -------------------------------------------------------------------------------
Net cash used in operating activities (4,595) (8,678)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (436) (2,438)
Capitalized software development costs (4,378) (6,084)
- -------------------------------------------------------------------------------
Net cash used in investing activities (4,814) (8,522)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings, net 9,563 (1,477)
Proceeds from notes and mortgages -- 20,700
Principal payments on notes and mortgages (2,995) (2,162)
Proceeds from issuing common stock 82 719
Payment of preferred stock dividends -- (900)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 6,650 16,880
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (43) (80)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,802) (400)
Cash and cash equivalents at beginning of period - (1) 3,572 3,790
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $770 $3,390
===============================================================================
(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
The Company's independent auditors have not yet completed their
review of the financial statements included in this Report.
In the event amendment of this Report is required upon
completion of such review, the Company will do so immediately.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 2, "Business Conditions and Financial Plans,"
the Company has suffered recurring losses and cash deficits from
operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding these
matters, which are also discussed in Note 2, are dependent upon
several factors including, among others, the Company's ability
to sell one or more operating units, increase revenue levels,
restructure operations to generate positive cash flows, retain
access to funds under its existing primary loan and security
agreement ("Loan Agreement") and to obtain additional financing.
The financial statements as presented do not include any
adjustments which might result from the outcome of these
uncertainties.
In the opinion of management and subject to the discussion
above, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to fairly present
on a going-concern basis the consolidated financial position of
General DataComm Industries, Inc. and subsidiaries (the
"Corporation" or "Company") as of March 31, 2001, the
consolidated results of their operations for the three and six
months ended March 31, 2001 and 2000, and their cash flows for
the six months ended March 31, 2001 and 2000. 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.
In the first quarter of fiscal 2001, the Company adopted
Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. The
Company has not historically entered into derivative instruments
and/or hedging contracts. As a result, adoption of SFAS 133 did
not have an impact on the Company's reported financial position
or results of operations.
Securities and Exchange Commission Staff Accounting Bulletin No.
101 ("SAB 101"), "Revenue Recognition in Financial Statements,"
provides the SEC staff's
6
views in applying generally accepted accounting principles to
selected revenue recognition issues. The Company is in the
process of evaluating SAB 101; however, implementation of SAB
101 is not presently expected to have a material impact on the
Company's reported financial position or results of operations.
The Company is required to adopt SAB 101 in the fourth quarter
of fiscal 2001.
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, 2000.
NOTE 2. BUSINESS CONDITIONS AND FINANCIAL PLANS
Potential Default Conditions and Availability Of Funds:
Primary Loan Agreement: Due to certain activities which were in
process and could have impacted disclosures in the Company's
financial statements for the year ended September 30, 2000, the
independent audit of such financial statements was not completed
until January 9, 2001. On January 5, 2001, the Company's primary
lenders served the Company with a notice of default on the basis
that the Company did not provide such lenders with Company
financial statements and an unqualified opinion within 90 days
of its fiscal year end, as required in the Company's Loan
Agreement. However, the Company has since provided its lenders
with such financial statements for the year ended September 30,
2000 along with an unqualified opinion from its independent
auditors. The Company's independent auditors also set forth an
explanatory paragraph in their report following their
unqualified opinion expressing uncertainty about the Company's
ability to continue as a going concern.
A financial covenant of the Loan Agreement requires that
stockholders' equity, as defined, must equal or exceed $10.0
million. At March 31, 2001, such stockholders' equity amounted
to $3.8 million and, therefore, the Company may at any time
receive a notice of default from its primary lenders for failure
to satisfy this covenant. In addition, as of May 17, 2001, an
"over-advance" condition exists whereby borrowings outstanding
under the Company's revolving line of credit portion of the Loan
Agreement exceeded the maximum amounts available per terms of
the Loan Agreement.
Despite these potential default issues, the Company's primary
lenders have not terminated the revolving line of credit portion
of the Loan Agreement, pursuant to which advances are still
continuing. However, the lenders have reserved their right to
declare such advances due and payable and/or limit the amount of
such future advances, are closely monitoring such advances and
have increased the interest rates on such advances (and the
outstanding term loans). When an event of default exists, there
can be no assurance that the lenders will continue to make such
advances or that they will not accelerate the maturity of
amounts due under the
7
Loan Agreement. Acceleration of such
amounts may in turn result in the acceleration of maturity of
debt owed to other creditors. As a result of the claimed
default, all outstanding indebtedness whose maturity could be
accelerated has been classified as a current liability at March
31, 2001 and September 30, 2000.
Mortgage Covenant And Waiver of Default: To allow for time
to potentially resolve a default of a financial covenant
relating to maintaining minimum levels of tangible net worth, as
defined, per terms of certain mortgage agreements, the agent
for the mortgage holders has recommended to such holders to
waive default through June 5, 2001. The Company is awaiting
this response and completion of the paperwork for such waiver.
Such mortgages relate to the Company's former executive office
property, which is currently vacant and available for
sale, and to its Naugatuck, Connecticut property, where
its VITAL Network Services main offices and its remaining
manufacturing operations are located (refer to Note 6,
"Long-Term Debt," for more detailed discussion).
As of March 31, 2001, the Company owed $8.8 million under
such mortgages.
The Company has presented a plan to the mortgage holders to
resolve the default. Such mortgage holders approval of this plan
is subject to receiving the consent of the Company's primary
lenders. The Company has requested such approval from its
primary lenders. The plan, if accepted, would result in the
transfer of ownership of the two properties in question to the
mortgage holders and relieve the Company of its mortgage
obligations, in addition to other provisions. Such transfer
would benefit the Company by improving cash flows, reducing debt
and disposing of excess real estate.
In the event such a plan is not accepted by the mortgage holders
and/or the consent of the primary lenders is not obtained, the
mortgage holders may accelerate the mortgage loans, and this
action would result in an automatic default under the Company's
primary Loan Agreement.
Since the Company does not currently have any alternative
sources of funds, these matters raise substantial doubt about
the Company's ability to continue as a going concern. The
Company's continued existence is dependent upon several factors,
including the Company's ability to sell one or more operating
units, increase revenue levels, restructure operations to
generate positive cash flows, retain access to funds under its
existing Loan Agreement and to obtain additional financing.
Potential financing sources include the sale of assets,
technologies, existing businesses, the Company's common and
preferred stock and the issuance of additional debt securities.
Although the Company has historically been able to satisfy its
cash requirements, there can be no assurance that such efforts
to obtain sufficient financing for operations will be successful
in the future.
Historical Financial Performance
--------------------------------
In recent years (and in the three- and six-month periods ended
March 31, 2001), the Company has experienced recurring net
losses and, as a result, has consumed cash
8
in operating and
investing activities. In addition, as a result of reduced
product shipment levels (resulting from a general economic and
industry slowdown, technology changes and other factors,
including the Company's weakened financial condition), the
Company may continue to suffer significant net losses and a
negative cash flow from operations. Preferred stock dividends
have not been paid or declared since June 30, 2000.
Corrective Actions Taken and Future Risks
-----------------------------------------
In response to current conditions and as a part of its ongoing
corporate strategy, the Company has pursued (and is continuing
to pursue) several initiatives intended to increase liquidity
and better position the Company to compete under current market
conditions. Refer to the Company's consolidated financial
statements and related notes thereto filed with Form 10-K for
the fiscal year ended September 30, 2000 for discussion of
various actions taken by the Company since January 1998. Such
actions resulted in a workforce reduction of 731 persons, or
42%, during the three- year period ended September 30, 2000.
Furthermore, since September 30, 2000, the Company has announced
a workforce reduction in November 2000 and a strategic
reorganization in January 2001 which, on a combined basis,
resulted in a workforce reduction of approximately 300 persons,
or 30% of the Company's workforce as of September 30, 2000. Such
strategic actions were targeted at improving profitability and
cash flow performance on a long-term basis (after certain
divisions are sold), subject to the Company's ability to achieve
revenue growth. These workforce reductions and other cost saving
actions initiated by the Company are expected to result in cash
savings of approximately $32 million per year (unaudited). In
addition, the Company implemented a four-day workweek for U.S.
employees effective April 23, 2001 in an effort to further
reduce compensation costs and preserve cash resources while the
Company pursues the sale of divisions.
In addition to the restructuring and cost reduction actions
taken, in June 2000, the Company engaged CIBC World Markets
("CIBC") to provide strategic direction, which may ultimately
involve the sale of one or more business units or the entire
Company. To date this initiative has not been successful in
identifying viable opportunities and the specific engagement of
CIBC is no longer active. However, the Company continues to
actively pursue all opportunities that have been identified and
is aggressively looking to identify new opportunities through
both internal resources and through the engagement of outside
consultants to assist with such efforts.
While the Company is aggressively pursuing opportunities and
corrective actions, as discussed above, there can be no
assurance that the Company will be successful in its efforts to
sell assets or divisions, achieve future profitable operations,
generate sufficient cash from operations and/or obtain
additional funding sources. The financial statements, as
presented, do not include any adjustments that may result
9
from the outcome of these uncertainties.
NOTE 3. INVENTORIES
Inventories consist of (in thousands):
March 31, 2001 September 30, 2000
-------------- ------------------
Raw materials $ 7,481 $ 7,852
Work-in-process 3,953 3,504
Finished goods 18,376 20,362
--------- ---------
$ 29,810 $ 31,718
======== =========
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
March 31, 2001 September 30, 2000
-------------- ------------------
Land $ 1,737 $ 1,746
Buildings and improvements 29,867 30,177
Test equipment, fixtures and field spares 53,754 53,818
Machinery and equipment 57,263 57,995
-------- --------
142,621 143,736
Less: accumulated depreciation 120,706 114,078
-------- -------
$ 21,915 $ 29,658
======== ========
At March 31, 2001 and September 30, 2000, land, buildings and improvements with
a net book value of approximately $8.8 million and $5.6 million, respecitvely,
were being held for sale (see Note 8, "Restructuring and Other Income and
Expense", for discussion of the writedown of real estate assets held for sale
taken in the quarter ended March 31, 2001).
NOTE 5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
As a result of restructuring operations, certain development
projects were cancelled, resulting in non-cash charges of $0.8
million and $4.3 million for the write-off of capitalized
software development costs in the quarters ended March 31, 2001
and December 31, 2000, respectively, or $5.1 million for the six
months ended March 31, 2001.
The accumulated amortization of capitalized software development
costs amounted to $16,846,000 and $15,630,000 at March 31, 2001
and September 30, 2000, respectively.
10
NOTE 6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
March 31, 2001 September 30, 2000
-------------- ------------------
Revolving credit facility $ 16,520 $ 6,957
Notes payable 32,761 35,452
7 3/4% convertible senior subordinated
debentures 3,000 3,000
Real estate mortgages 9,254 9,573
-------- --------
61,535 54,982
Less: current portion 58,535 51,982
-------- ---------
$ 3,000 $ 3,000
======== ========
The Company has a $70 million credit facility with the Foothill
Capital Corporation which is comprised of $35.0 million in term
loans (original loan values) and a $35.0 million (maximum value)
revolving line of credit ("Loan Agreement"). However, as
discussed below, the Company is in an "over-advance" position on
its revolving credit. Most assets of the Company, including
accounts receivable, inventories and property, plant and
equipment, are pledged as collateral under the Loan Agreement.
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, 2000 for further
disclosures applicable to the Loan Agreement. Separately, refer
to Note 2, "Business Conditions and Financial Plans," for
discussion regarding claimed (and potential) defaults under
terms of the Loan Agreement terms and other important
discussion.
As a result of the claimed and potential defaults, all
outstanding indebtedness whose maturity could be accelerated has
been classified as a current liability at March 31, 2001 and
September 30, 2000 (the long-term portion of such debt which has
been classified as current amounted to $49.6 million and $43.3
million at March 31, 2001 and September 30, 2000, respectively).
In addition, interest rates under the Loan Agreement were
increased by two percentage points effective January 5, 2001.
Under the revolving line of credit portion of the 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 and prior to any additional
reserves being imposed by the lenders as a result of any claimed
default conditions, at March 31, 2001, the Company would have
been able to have up to $19.7 million in total borrowings and
letters of credit. Actual borrowings outstanding on the
revolving line of credit portion of the Loan Agreement amounted
to $16.5 million at March 31, 2001 (as
11
compared to $7.0 million at September 30, 2000).
In addition, outstanding letters of credit amounted to
$50,000 and $110,000 at March 31, 2001 and September 30, 2000,
respectively. However, as of May 17, 2001, an "over-advance"
condition exists whereby borrowings outstanding under the
revolving credit line portion of the Loan Agreement exceeded
the accounts payable per terms of the Loan Agreement.
A financial covenant of the Loan Agreement requires that
stockholders' equity, as defined, must equal or exceed $10.0
million. At March 31, 2001, such stockholders' equity amounted
to $3.8 million and, therefore, the Company may at any time
receive a notice of default from its primary lenders for failure
to satisfy this covenant.
However, as discussed in Note 2, "Business Conditions and
Financial Plans," despite the referenced default issues and the
Company's over-borrowed status, the Company's primary lenders
have not terminated the revolving line of credit portion of the
Loan Agreement, pursuant to which advances are still continuing.
However, the lenders have reserved their right to declare such
advances due and payable and/or limit the amount of such future
advances, are closely monitoring such advances and have
increased the interest rates on such advances (and the
outstanding term loans). Refer to Note 2 for further discussion.
Mortgage Covenant Requirement
As of March 31, 2001, the Company had $8.8 million in mortgages
outstanding with one lending group. Such mortgages relate to the
Company's former executive office property, which is currently
vacant and available for sale, and to its Naugatuck, Connecticut
property, where its VITAL Network Services main offices and its
remaining manufacturing operations are located.
The Company has requested a waiver through June 5, 2001 to allow
time to potentially resolve a default relating to maintaining
minimum levels of tangible net worth, as defined, per terms of
the mortgage agreements. The agent for the mortgage holders has
recommended to such holders to issue the waiver, and the Company
is awaiting their response.
The Company has presented a plan to the mortgage holders to
resolve the default. Such mortgage holders approval of this plan
is subject to receiving the consent of the Company's primary
lenders. The Company has requested such approval from its
primary lenders. The plan, if accepted, would result in the
transfer of ownership of the two properties in question to the
mortgage holders and relieve the Company of its mortgage
obligations, in addition to other provisions. Such transfer
would benefit the Company by improving cash flows, reducing debt
and disposing of excess real estate. From an accounting
perspective, the Company would recognize a non-cash charge of
approximately $3 million to $4 million on the transfer.
In the event such a plan is not accepted by the mortgage holders
and/or the consent of the primary lenders is not obtained, the
mortgage holders may accelerate the
12
mortgage loans, and this action would result in an automatic
default under the Company's primary Loan Agreement. In the
interim, the Company is continuing to pursue the sale
of its previous Corporate Headquarters facility located in
Middlebury, Connecticut.
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, 2000 for further
disclosures applicable to the outstanding indebtedness of the
Corporation.
NOTE 7. 5% PREFERRED STOCK ACTIVITY
In July 2000, the Company sold 200,000 shares of 5% Cumulative
Convertible Preferred Stock ("5% Preferred Stock") for
$5,000,000. The 5% Preferred Stock was originally convertible
into one million shares of Common Stock at $5.00 per share, or
five shares of common stock for each share of 5% Preferred
Stock. Pursuant to the governing provisions of the 5% Preferred
Stock, commencing with the three-month period ended January 31,
2001, the conversion price is reset every three months, based
upon the average closing price of the Company's common stock for
the last 10 trading days of each three-month period.
On January 31, 2001 the conversion price was reset to $0.651 per
common share, or approximately 38.4 shares of common stock for
each share of 5% Preferred Stock. Furthermore, on April 30,
2001, the conversion price was again reset to $0.378 per common
share, or approximately 66.14 shares of common stock for each
share of 5% Preferred Stock.
During the six months ended March 31, 2001, 70,000 shares of the
5% Preferred Stock were converted into 2,688,172 shares of
common stock at a conversion price of $0.651 per common share.
As of March 31, 2001, 130,000 shares of the 5% Preferred Stock
remained outstanding and could become convertible into 4,992,320
shares of common stock. However, effective with the price reset
on April 30, 2001, the same 130,000 shares of 5% Preferred Stock
could become convertible into 8,597,884 of common stock, subject
to the restrictions discussed below.
As of April 30, 2001, only 4,686,703 shares of common stock have
been registered, of which 2,688,172 have already been issued
upon conversion of 5% Preferred Stock and 1,998,531 of which are
issuable (upon conversion) to holders of the 5% Preferred Stock.
On July 31, 2002, any outstanding 5% Preferred Stock must either
be redeemed by the Company or the remaining 6,599,353 shares of
common stock must be registered and issued by the Company.
Due to the reduced conversion price, the total number of common
shares issuable upon conversion of the 5% Preferred Stock now
exceeds 20% of the total common shares outstanding. As a result,
if the Company opts not to redeem the 5% Preferred Stock on July
31, 2002, registration of the additional 6,599,353 shares of
common stock will require shareholder approval. Since such
shareholder approval is not solely within the control of the
Company, such 5% Preferred Stock has been classified as redeem-
able preferred stock at March 31, 2001 and September 30, 200.
NOTE 8. RESTRUCTURING AND OTHER INCOME AND EXPENSES
Restructuring of Operations - In January 2001 the Company
continued its ongoing
13
restructuring efforts, resulting in a
workforce reduction of 200 persons in the quarter ended March
31, 2001. Related restructuring costs amounted to $1.7 million,
or $0.06 per share, comprised of: (1) $0.9 million, or $0.03 per
share, for costs incurred to satisfy employment contracts
(mostly international) and for extended health benefits offered
to terminated employees; and (2) a $0.8 million, or $0.06 per
share, charge for the write-off of capitalized software
development costs applicable to development projects which were
cancelled as a result of the restructuring activities.
The six months ended March 31, 2001 include a restructuring
charge of $6.6 million, or $0.22 per share, comprised of: (1) a
$0.9 million charge for the 200 person reduction-in-force
referenced above; (2) a $0.6 million charge for severance costs
applicable to a 100 person reduction-in-force executed in the
preceding quarter; and (3) a $5.1 million charge for the
write-off of capitalized software development costs applicable
to development projects which were cancelled as a result of the
restructuring activities. Approximately $0.5 million of
restructuring costs were unpaid as of March 31, 2001.
The above actions, which included the elimination of several
layers of management and a number of administrative support
positions, is intended to better match employment levels with
customer demand for products and services.
In the previous fiscal year, the Company made a strategic
decision to outsource a substantial portion of its manufacturing
operations. This strategic decision resulted in the elimination
of approximately 100 persons and a corresponding charge of $0.5
million, or $0.02 per share, for the six months ended March 31,
2000, primarily for post-employment benefits under the Company's
severance plan.
Writedown of Real Estate Assets Held for Sale - The Company
plans to vacate its Naugatuck, Connecticut facility, which it
owns, over the next year due to announced downsizing of
operations and planned sale of divisions. The Company previuosly
had vacated its former headquarters building in Middlebury,
Connecticut, and has actively listed that property for sale.
The Company estimates that the fair market value of such
properties is less than their carrying values and has
accordingly recorded a writedown of $4.5 million and a
corresponding charge to earnings in the quarter ended
March 31, 2001.
Legal Settlement Proceeds - The six months ended March 31, 2001
includes income of $5.0 million, or $0.17 per share, for
proceeds received (net of expenses) from a legal settlement.
Debt Conversion Expense - Prior year results include a non-cash
charge of $0.9 million, or $0.03 per share, for the quarter
ended March 31, 2000 and a non-cash charge of $2.4 million, or
$0.10 per share, for the six months ended March 31, 2000 for
debt conversion expense. Reference is made to Form 10-K filed
with the Securities and Exchange Commission for the year ended
September 30, 2000, Note 8, "Long-Term Debt," for a more
detailed discussion of the debt-to-equity conversions.
NOTE 9. SEGMENT INFORMATION - INTERIM DISCLOSURES
The following represent the Company's reportable segments:
- Broadband Systems products ("BSP")
14
- Network Access products ("NAP")
- VITAL Network Services, L.L.C. ("Vital")
- DataComm Leasing Corporation ("DLC")
Results of the Company's Multimedia Division are reported as
part of the Broadband Systems products. Separately, although the
Company's fiscal 2001 reorganization efforts resulted in the
combination of the previous Network Access and Broadband Systems
Divisions, the Company continues to separately monitor the
financial performance of each product line. The accounting
policies of the segments are the same as those described in Note
2, "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,
2000, except for capitalized software accounting. Such costs are
treated as a period expense when measuring divisional
performance.
For additional information, including a description of the type
of business conducted by each respective product line, refer to
Note 12 in the Company's consolidated financial statements filed
with Form 10-K for the year ended September 30, 2000.
The tables below present financial performance information by
reportable segment (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
--------------------- -------------------
Revenue:
-------
Broadband Systems $6,382 $14,607 $15,367 $32,057
Network Access 12,877 14,479 20,591 32,407
VITAL Network Services, L.L.C. 10,658 11,378 22,820 22,573
DataComm Leasing Corporation 568 923 1,145 1,930
-------- ------- ------- --------
Total $30,485 $41,387 $59,923 $88,967
======== ======= ======= =======
Operating Income (Loss):
-----------------------
Broadband Systems $(6,348) $(6,510) $(14,241) $(10,469)
Network Access 1,607 962 (627) 2,699
VITAL Network Services, L.L.C. (378) 259 (525) 855
DataComm Leasing Corporation (372) 751 41 1,501
-------- -------- --------- -------
Total $(5,491) $(4,538) $(15,352) $(5,414)
======== ======== ======== ========
15
Reconciliations of operating loss, as reported above, to consolidated loss
before income taxes are summarized below:
Operating loss, per above $(5,491) $(4,538) $ (15,352) $(5,414)
Capitalized software activity, net 87 91 (241) 91
General corporate expenses (800) (1,150) (1,868) (2,123)
Restructuring of operations (1,700) -- (6,600) (500)
Writedown of real estate assets
held for sale (4,500) -- (4,500) --
Debt conversion expense -- (879) -- (2,403)
Other expense (2,040) (1,952) 626 (3,720)
-------- ------- ------ -------
Loss Before Income Taxes $(14,444) $(8,428) $(27,935) $(14,069)
======== ======== ======== ========
NOTE 10. 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,
2001 2000 2001 2000
------------------ -------------------
Numerator:
- ---------
Net loss $(14,844) $(8,828) $(28,735) $(14,769)
Preferred stock dividends -- (450) -- (900)
-------- -------- --------- ---------
Numerator for basic and
diluted loss per share -
loss applicable to
common stockholders $(14,844) $(9,278) $(28,735) $(15,669)
========= ======== ========= =========
Denominator:
- -----------
Denominator for basic and
diluted loss per share -
weighted average shares
outstanding 30,986 25,815 30,272 24,054
-------- ------- ----------- ---------
Basic and diluted loss per
share $ (0.48) $ (0.36) $ (0.95) $ (0.65)
======== ========= ======== ==========
16
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 8, 11
and 13, respectively, in the Company's consolidated financial
statements filed with Form 10-K for the year ended September 30,
2000. Weighted average employee stock options outstanding during
the six months ended March 31, 2001 approximated 4,161,000
shares, of which 4,146,000 would not have been included in
diluted earnings per share calculations for the six months ended
March 31, 2001 (if the Company reported net income for the
referenced period) because the effect would be antidilutive.
NOTE 11. COMPREHENSIVE LOSS
The following table sets forth the computation of comprehensive
loss:
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------------ -------------------
Net loss $(14,844) $(8,828) $(28,735) $(14,769)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments (791) (385) (377) (876)
--------- --------- --------- -------
Comprehensive loss $(15,635) $(9,213) $(29,112) $(15,645)
========= ======== ========= =========
17
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Business Conditions and Financial Plans
The Company is facing challenges to continue in operation. Due to a
deterioration in its financial condition, potential defaults exist with its
primary lenders and with its mortgage lenders. To satisfy its primary lenders,
the company anticipates that it will be required to sell a number of its
operating units. In addition, substantial actions have been taken to reduce cash
consumption and the need for borrowing while the operating unit sales are being
pursued. To satisfy its mortgage lenders, plans are underway to transfer
ownership of the buildings involved to these lenders, subject to approval of the
primary lenders. The Company does not anticipate a long-term requirement for
these buildings due to the anticipated sale of operating units.
The primary lenders have not terminated the revolving line of credit portion of
the Loan Agreement, pursuant to which advances are still continuing. However,
the lenders have reserved their right to declare such advances due and payable
and/or limit the amount of such future advances, are closely monitoring such
advances and have increased the interest rates on such advances and the
outstanding term loans. There can be no assurance that the lenders will continue
to make such advances or that they will not accelerate the maturity of amounts
due under the Loan Agreement. Acceleration of such amounts may in turn result in
the acceleration of maturity of debt owed to other creditors. As a result of
these circumstances, all outstanding indebtedness whose maturity could be
accelerated has been classified as a current liability at both March 31, 2001
and September 30, 2000.
Since the Company does not currently have any alternative to the sources of
funds provided by its primary lenders, these matters raise substantial doubt
about the Company's ability to continue as a going concern. Reference is made to
Note 1, "Basis of Presentation," Note 2, "Business Conditions and Financial
Plans" and Note 6, "Long-Term Debt," for more detailed discussions, including
risks and Company plans.
Summary Highlights
Revenues in the current quarter were disappointing, down $10.9 million or 26.3%
from the same quarter last year. The Company believes that the current fiscal
quarter's revenues were affected by several factors, including: (1) a tightening
of capital spending for telecom equipment by service providers and enterprises;
(2) deterioration in the Company's financial condition; (3) diversion of
management and others to pursuing sales of operating units; and (4) distraction
associated with the reorganization and layoffs which occurred in the quarter.
Although operating expenses, excluding one-time charges, were down $6.9 million,
or 34.4%, from the prior year, this only partially offset the effect of lower
revenues and margins. Lower product margin percentages result from the costs of
managing product supply being absorbed over a reduced revenue base.
18
In anticipation of revenue shortfalls and downward market trends, the Company
acted in November 2000 to reduce the Company's workforce by approximately 100
positions for annualized saving of approximately $6 million. In addition, in
January 2001 the Company initiated a restructuring plan resulting in the
elimination of an additional 200 positions and incremental annualized saving of
$14 million. The combined reductions are expected to result in payroll-related
savings of $20 million per year. In addition, the restructuring plan is expected
to result in a reduced level of (non-payroll) operating expenses and capital
expenditures, for an estimated total cash savings of approximately $32 million
per year.
Anticipated savings are due in part to the elimination of redundant management
positions, the consolidation of marketing, sales and engineering resources, an
improved product development focus, and a reduction of overall expenses. The
merger of the Broadband Systems and Network Access divisions in particular has
resulted in increased organizational efficiency.
To conserve future cash consumption, further reduce expenses and allow time to
complete the sale of operating units, in April 2001, the Company initiated a
four-day work week for substantially all U.S. workers (with the exception of
only those providing critical services) for an estimated savings of $500,000 per
month while the shortened work week continues.
The Company believes that it has made important progress in its efforts to sell
assets and/or divisions. Such actions, if and when executed, will result in a
reduction of debt to improve the Company's financial position.
The Company is able to sustain operations only as long as the primary lenders
continue to advance funds under the Loan Agreement or until the sale of
operating units reduces indebtedness such that additional borrowings may become
available. There can be no assurance that efforts to obtain sufficient financing
for operations will be successful in the future.
Results Of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
19
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------------------- --------------------
Revenues:
Net product sales 63.1% 70.2% 59.9% 72.4%
Service revenue 35.0 27.5 38.1 25.4
Other revenue 1.9 2.3 2.0 2.2
------- ------ ------ ------
100.0 100.0 100.0 100.0
Cost of revenues 70.4 58.1 70.5 57.0
------- ------ ------ ------
Gross margin 29.6 41.9 29.5 43.0
Amortization of capitalized
software development costs 7.1 7.2 7.7 6.7
Selling, general and administrative 35.5 36.1 39.2 33.2
Research and product development 7.4 12.2 11.8 11.5
----- ---- ---- ----
Operating loss before restructuring charges (20.4) (13.5) (29.2) (8.4)
Restructuring of operations (5.5) -- (11.0) (0.5)
-------- --------- ----- -------
Operating loss (25.9)% (13.5)% (40.2)% (8.9)%
------- ------ ------ -----
Net loss excluding unique items* (28.4)% (19.2)% (37.8)% (13.3)%
------- ------ ------ ------
Net loss (48.7)% (21.3)% (48.0)% (16.6)%
====== ====== ====== ======
- --------------------
*Current year unique items are comprised of restructuring charges and income
from a legal settlement. Prior year unique items are comprised of restructuring
charges and debt conversion expense.
Summary comments are as follows: (1) product revenue represents a reduced
portion of total revenue, reflecting the impact of a 33.8% reduction in product
revenues in the quarter (44.3% reduction year-over-year); (2) gross margin
erosion is primarily the result of the costs of managing product supply being
absorbed over a reduced revenue base; service margins were also down; (3)
year-to-date operating expenses, which were reduced as compared to the prior
year when measured in dollars, are higher when measured as a percent of revenue
due the reduced revenue base; it should be noted, however, that current quarter
operating expenses (measured as a percent of revenue), are lower than the prior
year, despite the reduced revenue base; it should be noted, however, that
current quarter operating expenses (measured as a percent of revenue), which
include the impact of workforce reductions executed in November 2000 and January
2001, are lower than the prior year, despite the reduced revenue base; and (4)
restructuring of operations includes a $0.8 million charge in the current
quarter ($5.1 million or 11.0% of revenue for the current year) for the
write-off of capitalized software development costs applicable to projects which
were cancelled as a result of a Company restructuring.
20
Operating Segments: Discussion and analysis of the financial performance of the
Company's reportable operating segments is presented below. Such discussions do
not include the impact of charges for restructuring of operations, as the
Company does not segregate such charges by business unit. In the case of all
operating segments, reference is made to Note 9, "Segment Information - Interim
Disclosures," for further discussion and disclosure.
Summary financial results by product type and business unit for three and six
months ended March 31, 2001 and 2000, along with a reconciliation to the
reported net loss, follows ($ in millions):
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
------------------------------ ----------------------
Revenues
Broadband Systems $6.4 $14.6 $15.4 $32.1
Network Access 12.9 14.5 20.6 32.4
VITAL Network Services 10.7 11.4 22.8 22.6
Other 0.5 0.9 1.1 1.9
------- ------- -------- -------
Total $30.5 $41.4 $59.9 $89.0
Operating Income (Loss)
Broadband Systems $(6.3) $(6.5) $(14.2) $(10.5)
Network Access 1.6 1.0 (0.6) 2.7
VITAL Network Services (0.4) 0.3 (0.5) 0.9
Other (0.4) 0.7 -- 1.5
---------- --------- ------- ------
Total (5.5) (4.5) (15.3) (5.4)
Reconciliation to net loss:
General corporate expenses (0.8) (1.2) (1.9) (2.1)
Interest expense, net (2.2) (2.1) (4.2) (4.1)
Restructuring costs (1.7) -- (6.6) (0.5)
Write-down of real estate assets (4.5) -- (4.5) --
Legal settlement proceeds, net -- -- 5.0 --
Debt conversion expense -- (0.9) -- (2.4)
Other, net 0.3 0.3 (0.4) 0.4
------- -------- --------- ----
Net loss before tax $(14.4) $(8.4) $(27.9) $(14.1)
Income tax provision 0.4 0.4 0.8 0.7
---------- ------- ---- ---
Net loss $ (14.8) $(8.8) $(28.7) $(14.8)
======== ====== ======= =======
Results going forward will be further impacted by headcount and cost reductions
implemented as part of a restructuring program in January 2001. See "Summary
Highlights" for further discussion.
21
Broadband Systems Products ("BSP")
The networking industry generally has reported a slowdown in product orders and
this appeared to be true for the BSP customer base as well. BSP sales declined
56.3% in the quarter comparison and 52.1% year-over-year. About a third of this
decline is attributable to sales of older generation products which have been on
a downward trend in recent years. Geographically, about 80% of the BSP revenue
loss was experienced in Europe where BSP has its largest customer base. The
resulting gross margin loss more than offset operating cost savings achieved for
the March quarter and exceeded such savings for the six month comparison.
Broadband System products and results include both ATM (Asynchronous Transfer
Mode) and legacy TDM (Time Division Multiplexing) products in addition to video
products developed by the Company's Multimedia Division.
Network Access Products ("NAP")
Revenues for the NAP were down $1.6 million, or 11.1%, from the same quarter one
year ago and down $11.8 million, or 36.5%, for the six months of the current
fiscal year as compared to the prior fiscal year. The revenue loss was
experienced in both domestic and international markets. NAP revenues were
negatively impacted by: (1) a significant slowdown in capital expenditures by
the division's incumbent telephone company customer base; and (2) prior year
revenues were unusually strong as a result of sales to one specific customer for
the six month comparison. NAP sales and resulting margin losses have more that
offset operating cost savings achieved by the division. However, a sequential
rebound in revenue in the current quarter (from $7.7 million to $12.9 million),
when combined with cost reductions, resulted in operating income of $1.6
million, or 12.5% of revenue.
VITAL Network Services, L.L.C. (VITAL)
In the quarter ended March 31, 2000, VITAL reported revenues of $10.7 million, a
decrease of $0.7 million, or 6.3%, from the same period one year ago although
they remained slightly higher for the six months ended March 31, 2001 compared
to the same period one year ago. VITAL's operating loss of $0.4 million in the
current quarter compares to an operating profit of $0.3 million one year ago,
reflecting the combined impact of reduced gross margin rates associated with
higher subcontract costs and lower productivity in the U.S. For similar reasons,
the six month results also show a $1.4 million reduction in operating income. To
improve results going forward, VITAL also reduced its headcount and operating
costs as part of the Company's restructuring effort executed in January 2001.
VITAL continues its initiative to take advantage of the growing networking
market and manufacturers supplying this market. For the current quarter, VITAL's
non-GDC business increased, representing over 80% of all new business booked.
This continues to reflect an increasing level of independence (from GDC) with
regard to VITAL's revenue stream.
22
DataComm Leasing Corporation (DLC)
DLC's operating income (loss) is derived from both operating and financed lease
activities. The operating loss in the quarter ended March 31, 2001 is
attributable to the write-off of an $800,000 account deemed uncollectible.
Otherwise, the general reduced level of revenues and operating income is
attributable to the expiration of older leases and the lack of new lease
financing required by the Company's customer base from DLC.
Restructuring of Operations: The Company recorded restructuring charges of $1.7
million and $6.6 million in the quarter and six months ended March 31, 2001 and
2000, respectively. This compares to $500,000 recorded in the six months ended
March 31, 2000. Refer to Note 8, "Restructuring and Other Income and
Expenses," for detailed discussion.
Interest Expense and Other Income and Expense: Interest expense amounted to $2.2
million and $2.1 million in the quarters ended March 31, 2001 and 2000,
respectively. For the six months ended March 31, 2001 and 2000, interest expense
amounted to $4.2 million and $4.1 million, respectively. In January 2000, the
primary lenders increased interest rates charged by 2% as a result of a claimed
default.
The Company received proceeds of $5.5 million ($5.0 million net of expenses) as
a result of settling a lawsuit in the six months ended March 31, 2001.
Prior year results include non-cash charges of $0.9 million and $2.4 million for
the three- and six-month periods ended March 31, 2000, respectively, relating to
the conversion of convertible bonds into common stock (more fully described in
Note 8 "Long-Term Debt" in the Company's Form 10-K filed with the Securities and
Exchange Commission for the year ended September 30, 2000).
Write-down of Real Estate Assets - for discussion of this item, refer to Note 8,
"Restructuring and Other Income and Expenses."
Income Taxes: Tax provisions recorded by the Company, principally for foreign
income and domestic state taxes, amounted to $0.4 million in the quarters ended
March 31, 2001 and 2000 respectively, and $0.8 million and $0.7 million in the
six months ended March 31, 2001 and 2000, 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.
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 or (losses) of $122,000 and $111,000 for the quarters
ended March 31, 2001 and 2000, respectively and $(225,000) and $363,000 for the
six months ended March 31, 2001 and
23
2000 respectively.
No individual foreign subsidiary has traditionally comprised 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, has
not had, and in the future is not expected to have, a significant impact on 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,
2000, Item 7, Management's Discussion and Analysis of Results of Operations and
Financial Condition, under the caption "Interest Risk."
Liquidity and Capital Resources
The Company is facing challenges to continue in operation. Due to a
deterioration in its financial condition, potential defaults exist with its
primary lenders and with its mortgage lenders. To satisfy its primary lenders,
the company anticipates that it will be required to sell a number of its
operating units. In addition, substantial actions have been taken to reduce cash
consumption and the need for borrowing while the sale of certain operating units
are being pursued. To satisfy its mortgage lenders, plans are underway to
transfer ownership of the buildings involved to these lenders, subject to
approval of the primary lenders. The Company does not anticipate a long-term
requirement for these buildings due to the anticipated sale of operating units.
The Company's primary lenders have not terminated the revolving line of credit
portion of the Loan Agreement, pursuant to which advances are still continuing.
However, the lenders have reserved their right to declare such advances due and
payable and/or limit the amount of such future advances, are closely monitoring
such advances and have increased the interest rates on such advances and the
outstanding term loans. There can be no assurance that the lenders will continue
to make such advances or that they will not accelerate the maturity of amounts
due under the Loan Agreement. Acceleration of such amounts may in turn result in
the acceleration
24
of maturity of debt owed to other creditors. As a result of these circumstances,
all outstanding indebtedness whose maturity could be accelerated has been
classified as a current liability at both March 31, 2001 and September 30, 2000.
The Company is able to sustain operations only as long as its primary lenders
continue to advance funds under the Loan Agreement or until the sale of
operating units reduces indebtedness such that additional borrowings may become
available. There can be no assurance that efforts to obtain sufficient financing
for operations will be successful in the future. Since the Company does not
currently have any alternative to the sources of funds provided by its primary
lenders, these matters raise substantial doubt about the Company's ability to
continue as a going concern. Reference is made to Note 1, "Basis of
Presentation," Note 2, "Business Conditions and Financial Plans" and Note 6,
"Long-Term Debt," for more detailed discussions, including potential defaults,
related risks and Company plans.
Cash balances amounted to $0.8 million and $3.6 million at March 31, 2001 and
September 30, 2000, respectively. Based upon the provisions of the Company's
Loan Agreement, approximately $3.2 million of additional funds were available
for borrowing at March 31, 2001. However, as of May 17, 2001, an "over-advance"
condition exists whereby borrowings outstanding under the revolving line of
credit portion of the Loan Agreement exceeded the maximum amounts available per
terms of the Loan Agreement.
During the six months ended March 31, 2001, Company restructuring actions
resulted in the elimination of approximately 300 positions and curtailed
discretionary spending. The Company estimates such actions will result in annual
cash savings of $32 million. In addition, to further conserve cash consumption,
reduce expenses and allow time to complete the sale of operating units, in April
2001 the Company initiated a four-day work week for substantially all U.S.
workers (with the exception of only those providing critical services). This
action is expected to result in estimated savings of $500,000 per month while
the shortened work week continues.
Despite such actions taken, the Company will require (in addition to continued
access to revolving line of credit funds under its Loan Agreement, and
over-advances thereunder) additional funds in the quarter ending June 30, 2001
to sustain future operations. In order to obtain such funds, the Company will be
required to sell additional stock, secure additional debt financing or sell
assets, such as one or more divisions. The Company is actively pursuing
additional sources of financing. Although the Company has historically been able
to satisfy its cash requirements, there can be no assurance that such efforts to
obtain sufficient financing for operations will be successful in the future, or
successful on terms that would be considered beneficial to the Company and its
shareholders.
The Company has continued its efforts to sell or spin off assets, including one
or more divisions. Although to date this initiative has not been successful in
providing additional funds, the Company continues to actively pursue
opportunities that are presented and is currently engaged in such discussions.
Such actions, if and when executed, could improve the Company's financial
position, which in turn may improve the Company's ability to attract new working
capital funds (i.e., enter into new or renegotiate existing loan agreements
and/or effectuate security offerings).
25
The Company has a $70 million Loan Agreement in place as of March 31, 2001.
Reference is made to Note 1, "Basis of Presentation,", Note 2, "Business
Conditions and Financial Plans" and Note 6, "Long-Term Debt," for more detailed
discussion regarding such Loan Agreement and all other outstanding indebtedness
of the Company, including potential defaults, related risks and Company plans.
Furthermore, 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, 2000 for further disclosures applicable to outstanding
indebtedness of the Corporation.
Operating
Net cash used in operating activities amounted to $(4.6) million and $(8.7)
million in the six-month periods ended March 31, 2001 and 2000, respectively.
Current year consumption is principally comprised of the reported net loss,
partially offset by non-cash charges (including depreciation expense, the
write-down of capitalized software development costs and the write-down of real
estate held for sale), and reductions in accounts receivable and inventory
levels. The reduced levels of inventory and accounts receivable reflect the
Company's cash management efforts. Cash consumption for the six months ended
March 31, 2000 includes, among other items, an increase in inventory levels
($5.2 million) and an increase in investments in leased assets ($2.2 million).
The inventory growth resulted from precautionary measures taken by the Company
as it transitioned to outsource the manufacturing function last year; the
increased level of investments in leases reflects the impact of some large
operating leases entered into during the quarter ended March 31, 2000.
Non-debt working capital, excluding cash and cash equivalents, amounted to $14.7
million at March 31, 2001, as compared to $18.7 million at September 30, 2000
Investing
The Company has restricted investments to capital equipment and software
development considered critical to operations. Investments in property, plant
and equipment amounted to $0.4 million and $2.4 million in the six-month periods
ended March 31, 2001 and 2000, respectively. Investments in capitalized software
amounted to $4.4 million and $6.1 million in the six month periods ended March
31, 2001 and 2000, respectively. All investment activity is targeted to satisfy
minimum operating requirements and to embrace new undertakings with the greatest
potential returns.
Financing
Net cash provided by financing activities amounted to $6.7 million and $16.9
million in the six month periods ended March 31, 2001 and 2000, respectively.
Current year activity is principally comprised of $6.6 million of net
borrowings. Fiscal 2000 activity is 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.
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Future Adoption of New Accounting Statements
Reference is made to Note 1, "Basis Of Presentation," for discussion regarding
the Company's adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. Company plans regarding adoption of Securities and Exchange
Commission Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition
in Financial Statements," is also discussed therein.
Certain Risk Factors
Continuing Losses: The Company has sustained net losses for the past 26 quarters
ended March 31, 2001. There can be no assurance as to when the Company will
achieve net income.
Credit Availability: Due to a deterioration in the Company's financial condition
and other matters, potential defaults exist with its primary lenders and with
its mortgage lenders.
Regarding its primary lenders, the Company anticipates that it will be required
to sell a number of its operating units. The Company is able to sustain
operations only as long as the primary lenders continue to advance funds under
the Loan Agreement or until the sale of operating units reduces indebtedness
such that additional borrowings may become available. There can be no assurance
that efforts to obtain sufficient financing for operations will be successful in
the future. Since the Company does not currently have any alternative to the
sources of funds provided by its primary lenders, these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The primary lenders have not terminated the revolving line of credit portion of
the Loan Agreement, pursuant to which advances are still continuing. However,
the lenders have reserved their right to declare such advances due and payable
and/or limit the amount of such future advances, are closely monitoring such
advances and have increased the interest rates on such advances and the
outstanding term loans. There can be no assurance that the lenders will continue
to make such advances or that they will not accelerate the maturity of amounts
due under the Loan Agreement. Acceleration of such amounts may in turn result in
the acceleration of maturity of debt owed to other creditors.
The Company is able to sustain operations only as long as its primary lenders
continue to advance funds under the Loan Agreement or until the sale of
operating units reduces indebtedness such that additional borrowings may become
available. There can be no assurance that efforts to obtain sufficient financing
for operations will be successful in the future.
Regarding its mortgage lenders, plans are underway to transfer ownership of the
buildings involved to such mortgage lenders, subject to approval of the primary
Loan Agreement lenders.
Reference is made to Note 2, "Business Conditions and Financial Plans" and Note
6, "Long-
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Term Debt," for more detailed discussions of indebtedness outstanding,
including potential defaults, related risks and Company plans. In addition,
reference is made to the "Liquidity and Capital Resources" discussion above.
Reliance on Outsourced Manufacturing: During fiscal 1999 and 2000, the Company
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. The Company's weakening financial position, including
the above-referenced notice of default from the Company's primary lenders and a
mortgage lender, also poses a risk that such manufacturing outsource suppliers
could become unwilling to continue doing business with the Company.
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 and financial position, 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 or restrictions in credit
availability 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 report, as well as all other forward-looking statements
or information provided by the Company or its employees, whether written or
oral, are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements and future
results are subject to, and should be considered in light of risks,
uncertainties, and other factors which may affect future results including, but
not limited to, competition, rapid changing technology, regulatory requirements,
and uncertainties of international trade. Examples of risks and uncertainties
include, among other things: (i) the Company's ability to retain access to funds
available under all existing loan agreements and the continued satisfaction of
related covenant requirements, including, if necessary, the ability to achieve
amendments and/or waivers thereto to maintain compliance with the terms of all
such outstanding indebtedness; (ii) the possibility that the additional
indebtedness permitted to be incurred under the revolving credit facility
portion of the 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
28
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.
29
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4 -- Submission of Matters to a Vote of Security Holders
On March 1, 2001, at the Annual Meeting of Stockholders of the
Corporation, the stockholders:
1. Elected Charles P. Johnson as a director to the Corporation for a
term of three years:
Number of votes cast for: 18,579,208
Number of votes withheld: 6,131,015
2. Elected Howard S. Modlin as a director to the Corporation for a
term of three years:
Number of votes cast for: 18,667,425
Number of votes withheld: 6,042,798
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
A Form 8-K, dated April 16, 2001, was filed on April 23, 2001 to announce the
implementation of a four-day workweek for U.S. employees. Such action, which
reduced compensation for all such U.S. employees (including management) by 20
percent, was required in response to a general slowdown in the market for
networking products and limitations on available borrowings under the Company's
primary loan agreement. In addition, such actions represent an effort to
preserve jobs while the Company is pursuing the sale of divisions.
30
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 21, 2001
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