SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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) 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 February 13, 2001
Common Stock, $.10 par value 28,708,217
Class B Stock, $.10 par value 2,057,103
Total Number of Pages in this Document is 29.
PORTIONS AMENDED
The Registrant hereby amends Part 1, Financial Information, contained in the
Registrant's Report on Form 10-Q for the quarterly period ended December 31,
2000. The Registrant originally classified $5.0 million of 5% Preferred Stock
outstanding as permanent equity at December 31, 2000 and September 30, 2000.
However, to convert all outstanding 5% Preferred Stock into common stock,
shareholder approval may be required to authorize the registration of
additional shares of common stock. Since such shareholder approval is a
contingency outside of the Registrant's control, the 5% Preferred Stock is now
presented outside of permanent equity.
The disclosure regarding 5% Preferred Stock included in Note 11 was modified. In
addition, various footnote disclosures and discussion areas in the "Management's
Discussion and Analysis of Financial Condition and Operations" section were
modified as necessary, including discussion regarding non-compliance with the
covenant requirements of certain outstanding indebtedness as of December 31,
2000.
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page
Part I -- FINANCIAL INFORMATION
Consolidated Balance Sheets -
December 31, 2000 and September 30, 2000 ..................... 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three Months
Ended December 31, 2000 and 1999 ........................... 4
Consolidated Statements of Cash Flows - For the
Three Months Ended December 31, 2000 and 1999 ............... 5
Notes to Consolidated Financial Statements .................. 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 17
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..................... 28
2
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
In thousands, except shares 2000 2000
--------------------------------------------------------------------------
ASSETS: (Restated)
Current assets:
Cash and cash equivalents $2,344 $3,572
Accounts receivable, less allowance
for doubtful receivables of $1,913
in December and $2,037 in September 23,508 25,631
Inventories 32,782 31,718
Deferred income taxes 1,525 1,521
Other current assets 8,438 8,311
------------------------------------------------------------------------------
Total current assets 68,597 70,753
------------------------------------------------------------------------------
Property, plant and equipment, net 28,324 29,658
Capitalized software development costs, net 17,532 22,160
Other assets 9,021 10,512
------------------------------------------------------------------------------
$123,474 $133,083
------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $54,365 $51,982
Accounts payable, trade 24,294 23,040
Accrued payroll and payroll-related costs 4,219 4,853
Deferred income 6,069 6,567
Other current liabilities 15,501 14,070
------------------------------------------------------------------------------
Total current liabilities 104,448 100,512
------------------------------------------------------------------------------
Long-term debt, less current portion 3,000 3,000
Deferred income taxes 2,272 2,266
Other liabilities 1,066 1,142
------------------------------------------------------------------------------
Total liabilities 110,786 106,920
------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
Redeemable 5% preferred stock; par value $1.00
per share, issued and outstanding: 200,000
shares in December and September; liquidation
value $5.0 million 5,104 5,000
9% preferred stock, common stock and
other stockholders' equity:
Preferred stock, par value $1.00 per share,
3,000,000 shares authorized (including 5%
preferred stock); issued and
outstanding: 787,900 shares of 9% cumulative
convertible exchangeable preferred stock;
total liquidation preference of $19.7 million 788 788
Class B stock, par value $.10 per share,
10,000,000 shares authorized; issued
and outstanding: 2,057,103 in
December and in September 206 206
Common stock, par value $.10 per share,
50,000,000 shares authorized; issued
and outstanding: 27,710,710 in December
and 27,709,710 in September 2,771 2,771
Capital in excess of par value 189,529 189,631
Accumulated deficit (179,645) (165,754)
Accumulated other comprehensive loss (4,626) (5,040)
Common stock held in treasury, at cost:
194,614 shares in December and in September (1,439) (1,439)
------------------------------------------------------------------------------
Total 9% preferred stock, common
stock and other stockholders' equity 7,584 21,163
------------------------------------------------------------------------------
$123,474 $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
December 31,
-------------------------------------------------------------------------------
In thousands, except per share data 2000 1999
-------------------------------------------------------------------------------
Revenues:
Net product sales $16,675 $35,362
Service revenue 12,162 11,195
Other revenue 601 1,023
------ ------
29,438 47,580
Cost of revenues:
Cost of product sales 10,813 18,380
Cost of service revenue 9,930 8,186
Cost of other revenue 44 88
------ ------
20,787 26,654
Gross margin 8,651 20,926
Amortization of capitalized
software development costs 2,466 3,000
Operating expenses:
Selling, general and administrative 12,627 14,603
Research and product development 4,815 5,172
Restructuring and other charges 4,900 500
------- ------
22,342 20,275
Operating loss (16,157) (2,349)
Other income (expense):
Interest, net (2,009) (2,012)
Legal settlement proceeds, net 5,000 --
Debt conversion expense -- (1,524)
Other, net (325) 244
-------- -------
2,666 (3,292)
Loss before income taxes (13,491) (5,641)
Income tax provision 400 300
-------- --------
Net loss ($13,891) ($5,941)
========= ========
Basic and diluted loss per share ($0.47) ($0.29)
Weighted average number of common and
common equivalent shares outstanding 29,573 22,271
========= =========
Accumulated deficit at beginning of period ($165,754) ($127,472)
Net loss (13,891) (5,941)
Payment of preferred stock dividends -- (450)
---------- ----------
Accumulated deficit at end of period ($179,645) ($133,863)
========== ==========
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
----------------------------
Three Months Ended
December 31,
---------------------------
In thousands 2000 1999
------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($13,891) ($5,941)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,478 5,768
Non-cash charge for write-off of capitalized
software development costs 4,300 --
Non-cash charge for debt conversion expense -- 1,524
Changes in:
Accounts receivable 2,124 2,422
Inventories (1,049) (4,383)
Accounts payable and accrued expenses 1,362 1,670
Other net current assets 12 520
Other net long-term assets 1,532 (592)
------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,132) 988
------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (366) (1,211)
Capitalized software development costs (2,138) (3,000)
-------------------------------------------------------------------------------
Net cash used in investing activities (2,504) (4,211)
-------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver borrowings (repayments), net 3,763 (15,111)
Proceeds from notes and mortgages -- 19,700
Principal payments on notes and mortgages (1,411) (1,244)
Proceeds from issuing common stock 2 9
Payment of preferred stock dividends -- (450)
-------------------------------------------------------------------------------
Net cash provided by financing activities 2,354 2,904
------------------------------------------------------------------------------
Effect of exchange rates on cash 54 (70)
------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,228) (389)
Cash and cash equivalents at beginning
of period - (1) 3,572 3,790
------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $2,344 $3,401
==============================================================================
(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)
1. BASIS OF PRESENTATION
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 the Company's
ability to 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 presented
financial statements 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
the consolidated financial position of General DataComm
Industries, Inc. and subsidiaries (the "Corporation" or
"Company") as of December 31, 2000, the consolidated results of
their operations for the three months ended December 31,
2000 and 1999, and their cash flows for the three months ended
December 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.
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
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
In recent years (and in the quarter ended December 31, 2000),
the Company has experienced recurring net losses and, as a
result, has consumed cash 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) and high investments in
product development, 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.
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. As
a result, 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.
(In addition, due to a lack of compliance with a financial
covenant at December 31, 2000, the Company may receive an
additional notice of default from its primary lenders). 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.
Although the primary lenders have served a notice of default,
such 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 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.
7
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As a result of the claimed default, all outstanding indebtedness
whose maturity could be accelerated has been classified as a
current liability at December 31, 2000 and September 30, 2000.
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 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. Furthermore, the Company could
violate covenant or default provisions of other debt agreements
during fiscal 2001, which could accelerate the maturity of
amounts due under such agreements.
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 achieving cash neutral
operational performance for the Company on or about June 30,
2001, and profitability and positive cash flow on a longer-term
basis, 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.
In addition to the restructuring and cost reduction actions
taken, in June 2000, the Company engaged CIBC World Markets 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. The Company continues to actively pursue
opportunities that are presented and is aggressively looking
to identify new opportunities. To more aggressively pursue
the sale of divisions, the Company has more recently
engaged additional consultants to assist with such efforts.
However, the Company does not have a committed plan or
8
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
definitive agreement for the sale of any of its operating
segments or related assets at this time.
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
achieve future profitable operations, generate sufficient cash
from operations and obtain additional funding sources. The
financial statements, as presented, do not include any
adjustments that may result from the outcome of these
uncertainties.
NOTE 3. INVENTORIES
Inventories consist of (in thousands):
December 31, 2000 September 30, 2000
----------------- ------------------
Raw materials $ 8,788 $ 7,852
Work-in-process 4,111 3,504
Finished goods 19,883 20,362
------- --------
$32,782 $ 31,718
======= ========
NOTE 4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
December 31, 2000 September 30, 2000
---------------- ------------------
Land $ 1,749 $ 1,746
Buildings and improvements 30,251 30,177
Test equipment, fixtures
and field spares 54,064 53,818
Machinery and equipment 58,217 57,995
------- -------
144,281 143,736
Less: accumulated depreciation 115,957 114,078
------- -------
$28,324 $29,658
======= =======
At December 31, 2000, land, buildings and improvements with a net
book value of approximately $5.6 million are vacant and being
held for sale.
NOTE 5. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
As a result of restructuring operations, certain development
projects were cancelled resulting in a $4.3 million non-cash
charge for the write-off of capitalized software development
costs in the quarter ended December 31, 2000.
9
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accumulated amortization of capitalized software development
costs amounted to $16,318,000 and $15,630,000 at December 31,
2000 and September 30, 2000, respectively.
NOTE 6. LONG-TERM DEBT
Long-term debt consists of (in thousands):
December 31, 2000 September 30, 2000
----------------- ------------------
Revolving credit facility $ 10,720 $ 6,957
Notes payable 34,161 35,452
7 3/4% convertible senior
subordinated debentures 3,000 3,000
Real estate mortgages 9,484 9,573
-------- ------
57,365 54,982
Less: current portion 54,365 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"). 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 a default notice received by the Company on
January 5, 2001. As a result of the claimed default, all
outstanding indebtedness whose maturity could be accelerated has
been classified as a current liability at December 31, 2000 and
September 30, 2000 (such long-term debt which has been
classified as current amounted to $45.0 million and $43.3
million at December 31, 2000 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, at December 31, 2000, the Company
would have been able to have up to $21.5 million in total
borrowings and letters of credit. Borrowings outstanding on the
revolving line of credit portion of the Loan Agreement amounted
to $10.7 million at December 31, 2000 (as compared to $7.0
million at September 30, 2000). In addition, outstanding letters
of credit amounted
10
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to $110,000 at December 31, 2000 and September 30, 2000.
A financial covenant of the Loan Agreement requires that
stockholders' equity, as defined, must equal or exceed $10.0
million. At December 31, 2000, such stockholders' equity
amounted to $9.1 million and, therefore, the Company may at any
time receive an additional notice of default from its primary
lenders for failure to satisfy this covenant.
Mortgage Covenant Requirement
As of December 31, 2000, the Company had $8.9 million in
mortgages outstanding with one lending group on its previous
Corporate headquarters property, which is currently vacant and
available for sale, and on its Naugatuck, Connecticut property,
where its VITAL Network Services main offices and its remaining
manufacturing operations are located. To maintain compliance
with the tangible net worth covenant requirement of these
mortgage agreements, the Company intends to increase
stockholders' equity by a minimum of $15.4 million or reduce the
mortgage balance by a minimum of $6.2 million on or before April
14, 2001 (the Company believes that the sale of the vacant
premises during the cure period could possibly satisfy the
compliance). If the Company continues to report net losses
in future quarters, additional actions to increase stockholders'
equity and/or reduce the outstanding mortgage balance will be
required to remain in compliance with the covenant requirement.
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. OTHER INCOME AND EXPENSES
Restructuring of Operations - As a result of restructuring of
operations, in the quarter ended December 31, 2000 certain
development projects were cancelled which resulted in a $4.3
million (non-cash) charge for the write-off of capitalized
software development costs. In addition, severance costs
attributable to a 100 person reduction-in-force amounted to $0.6
million in the quarter ended December 31, 2000. Total
restructuring charges amounted to $4.9 million, or $0.17 per
share, in the quarter ended December 31, 2000. Most of the
severance costs were paid as of December 31, 2000.
During the same quarter one year ago, 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, primarily for
post-employment benefits under the Company's severance plan.
11
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Legal Settlement Proceeds - The quarter ended December 31, 2000
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 $1.5 million, or $0.07 per share, 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 8. SEGMENT INFORMATION - INTERIM DISCLOSURES
The following represent the Company's reportable segments:
. Broadband Systems Division ("BSD")
. Network Access Division ("NAD")
. VITAL Network Services, L.L.C.
. DataComm Leasing Corporation
Results of the Company's Multimedia Division are reported as
part of the Broadband Systems Division since BSD remains the
primary sales channel for the Multimedia division. 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 SBU, 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
December 31,
--------------------
2000 1999
--------------------
Revenue:
Broadband Systems Division $ 8,985 $17,450
Network Access Division 7,714 17,928
VITAL Network Services, L.L.C. 12,162 11,195
DataComm Leasing Corporation 577 1,007
------- -------
Total $29,438 $47,580
======= =======
12
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating Income (Loss):
Broadband Systems Division $(7,893) $(3,959)
Network Access Division (2,234) 1,737
VITAL Network Services, L.L.C. (147) 596
DataComm Leasing Corporation 413 750
-------- --------
Total $(9,861) $ (876)
======== ========
Reconciliations of operating loss, as reported above, to
consolidated loss before income taxes are summarized below:
Operating loss, per above $(9,861) $(876)
Capitalized software activity, net (328) --
General corporate expenses (1,068) (973)
Restructuring of operations (4,900) (500)
Legal settlement proceeds, net 5,000 --
Debt conversion expense -- (1,524)
Other expense (2,334) (1,768)
--------- --------
Loss Before Income Taxes $(13,491) $(5,641)
========= ========
NOTE 9. 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
December 31,
------------------------
2000 1999
------------------------
Numerator:
Net loss $(13,891) $(5,941)
Preferred stock dividends -- (450)
--------- --------
Numerator for basic and diluted
loss per share - loss applicable
to common stockholders $(13,891) $(6,391)
========= =======
Denominator:
Denominator for basic and diluted
loss per share - weighted
average shares outstanding 29,573 22,271
-------- ---------
Basic and diluted loss per share $ (0.47) $ (0.29)
======== ========
13
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three months ended December 31, 2000 approximated 4,378,746
shares, of which 3,265,711 would not have been included in
diluted earnings per share calculations for the three months
ended December 31, 2000 (if the Company reported net income for
the referenced period) because the effect would be antidilutive.
NOTE 10. COMPREHENSIVE INCOME (LOSS)
The following table sets forth the computation of comprehensive
loss:
Three Months Ended
December 31,
------------------
2000 1999
Net loss $(13,891) $(5,941)
Other comprehensive loss,
net of tax:
Foreign currency translation
adjustments 420 (491)
--------- --------
Comprehensive loss $(13,471) $(6,432)
========= ========
NOTE 11. SUBSEQUENT EVENTS
Notice Of Default
On January 5, 2001, the Company's primary lenders served the
Company with a notice of default under the Company's Loan
Agreement 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. 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. Refer to Note 2, "Business Conditions and
Financial Plans" and Note 6, "Long-Term Debt," for further
discussion.
14
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Restructuring Of Operations
---------------------------
On January 17, 2001, the Company announced that it has embarked
on a comprehensive restructuring plan designed to restore its
operations to financial health. Subsequent to December 31, 2000,
the Company executed a restructuring plan which resulted in a
workforce reduction of approximately 200 persons (the Company
does not expect to pay severance costs as a result of such
workforce reduction). When combined with the 100 person
reduction-in-force completed in November 2000, total annual
payroll savings are expected to approximate $20 million. In
addition, the Company estimates that non-payroll cash savings
will approximate $12 million per year, for total cash savings of
approximately $32 million per year.
The restructuring, which included the elimination of several
layers of management and a number of administrative support
positions, is intended to match employment levels with customer
demand for products and services.
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.
Through February 13, 2001, 50,000 shares of the 5% Preferred
Stock were converted into 1,920,121 shares of common stock at
the conversion price of $0.651 per common share. The remaining
150,000 shares of 5% Preferred Stock outstanding could become
convertible into 5,760,368 shares of common stock, partially
subject to Company shareholder approval. Of such 5,760,368
shares, 2,766,582 shares (4,686,703 shares originally registered
less 1,920,121 shares used for conversion) are registered and
available for future conversion; however, Company shareholder
approval would be required for registration of the additional
2,993,786 shares.
On July 31, 2002, any outstanding 5% Preferred Stock plus
accumulated dividends (accrued and recorded as an increase to
the 5% Preferred Stock at December 31, 2000) must be redeemded
or converted. Options available to the Company regarding
redemption and/or conversion include: (a) conversion into
common stock, subject to the shareholder approval discussed
above; (b) redemption by the Company for cash; or (c) a
combination thereof.
15
Since the potential need for shareholder approval to issue and
list additional common shares at a future date is a contingency
outside of the Company's control, the 5% Preferred Stock is
presented outside of permanent equity.
16
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Business Conditions and Financial Plans
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. As a result, 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. (In addition, due to lack of compliance with a
financial covenant at December 31, 2000, the Company may receive an additional
notice of default from its primary lenders). 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.
Although the primary lenders have served a notice of default, such 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 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 the claimed default, all
outstanding indebtedness whose maturity could be accelerated has been classified
as a current liability at December 31, 2000 and September 30, 2000.
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. Reference is made to Note 2, "Business Conditions and Financial
Plans" and Note 6, "Long-Term Debt," for more detailed discussions, including
risks and Company plans.
Summary Highlights
Product revenues in the current quarter were disappointing, down $18.7 million
or 53%. 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) continued problems
with the Company's manufacturing outsourcing program; and (3) some distraction
associated with the layoffs that occurred in the quarter.
Although operating expenses, excluding one-time charges, were down $2.3 million,
or 11.8%, from the prior year, this only partially offset the effect of lower
product revenues and margins. Lower product margin percentages result from the
costs of managing product supply being absorbed over a reduced revenue base.
17
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 total cash savings of approximately $32 million per year.
The Company is targeting to achieve breakeven cash flow by June 30, 2001.
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. The Company has targeted the
broadband access market as strategically important to its future growth and
business success using the combined expertise of our Access and Broadband
engineering groups.
Separately, the Company has made progress in its efforts to sell assets and/or
divisions. Such actions, if and when executed, could improve the Company's
financial position, which in turn could improve our ability to attract and
retain customers and employees.
At December 31, 2000, the Company would have been able to borrow up to $21.5
million under the revolving line of credit portion of its Loan Agreement.
Borrowings outstanding on the revolving line of credit amounted to $10.7 million
at December 31, 2000 (as compared to $7.0 million at September 30, 2000),
leaving an additional $10.8 million available for borrowing at the close of
business on December 31, 2000. It should be noted, however, that the Company
does not currently have sufficient funds to sustain operations for an extended
period. In order to obtain such funds the Company will be required to sell
additional stock, take on additional debt or sell assets, such as one or more
divisions. Such actions will also be required to satisfy covenant requirements
under the Company's Loan Agreement and under a mortgage agreement. 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.
Results Of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
18
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended
December 31,
2000 1999
-----------------------
Revenues:
Net product sales 56.7% 74.3%
Service revenue 41.3 23.5
Other revenue 2.0 2.2
------- ------
100.0 100.0
Cost of revenues 70.6 56.0
------- ------
Gross margin 29.4 44.0
Amortization of capitalized
software development costs 8.4 6.3
Selling, general and administrative 42.9 30.7
Research and product development 16.4 10.9
------ ----
Operating loss before restructuring charges (38.3) (3.9)
Restructuring of operations 16.6 1.0
------ -----
Operating loss (54.9)% (4.9)%
------- -----
Net loss excluding unique items* (47.5)% (8.2)%
------- -----
Net loss (47.2)% (12.5)%
====== ======
--------------------
*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 significantly
reduced portion of total revenue, reflecting the combined impact of a 53%
reduction in product revenues and 8.6% service revenue growth; (2) gross margin
erosion primarily result from the costs of managing product supply being
absorbed manufacturing costs over a reduced revenue base; service margins were
also down; (3) operating expenses, which have 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; and (4) current year restructuring of
operations includes a $4.3 million charge (14.6% of revenue) for the write-off
of capitalized software development costs applicable to projects which were
cancelled as a result of a Company restructuring.
Operating Segments: Discussion and analysis of the financial performance of the
Company's reportable operating segments is presented below. Such discussions do
not include the impact of charges for restructuring of operations, as the
Company does not segregate such charges by business unit. In the case of all
operating segments, reference is made to Note 8, "Segment Information - Interim
Disclosures," for further discussion and disclosure.
19
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Summary financial results by business unit for three months ended December 31,
2000 and 1999, along with a reconciliation to the reported net loss, follows
($ in millions):
Three Months Ended
December 31,
2000 1999
------------------------------
Revenues
--------
Broadband Systems Division $ 9.0 $17.5
Network Access Division 7.7 17.9
VITAL Network Services 12.2 11.2
Other 0.5 1.0
------- ------
Total $29.4 $47.6
Operating Income (Loss)
-----------------------
Broadband Systems Division $(7.9) $(4.0)
Network Access Division (2.2) 1.7
VITAL Network Services (0.1) 0.6
Other 0.3 0.8
-------- ---------
Total (9.9) (0.9)
Reconciliation to net loss:
--------------------------
General corporate expenses (1.1) (1.0)
Interest expense, net (2.0) (2.0)
Restructuring costs (4.9) (0.5)
Legal settlement proceeds, net 5.0 --
Debt conversion expense -- (1.5)
Other, net (0.6) 0.3
--------- --------
Net loss before tax $ (13.5) $(5.6)
Income tax provision 0.4 0.3
--------- -------
Net loss $ (13.9) $(5.9)
======== ======
Results going forward will be significantly impacted by headcount and cost
reductions implemented as part of a restructuring program in January 2001. See
"Summary Highlights" for further discussion.
Broadband Systems Division (BSD)
--------------------------------
BSD's $8.5 million revenue reduction was attributable to a slowdown in orders in
the networking industry which has also been noted by other companies, and this
appeared to be true for BSD's customer base as well. Sales of older generation
products have been on a downward trend in recent years. Most of BSD's revenue
loss was experienced in Europe where BSD has its largest customer base. The
resulting gross margin loss more than offset operating cost savings achieved by
the division.
20
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
During the quarter ended December 31, 2000, BSD remained the primary channel for
the sale of product by the Multimedia Division ("MMD"); as a result, MMD's
results continue to be reported as part of the BSD.
Network Access Division (NAD)
-----------------------------
Revenues for the NAD were down $10.2 million, or 57%, from the same quarter one
year ago. The revenue loss was experienced in both domestic and international
markets. NAD revenues for the current quarter were negatively impacted by three
major influences: (1) a significant slowdown in capital expenditures by the
division's incumbent telephone company customer base; (2) the inability to
provide timely deliveries as a result of problems experienced with the
division's primary outsource vendor (the division is currently transitioning its
manufacturing requirements to other vendors); and (3) prior year revenues were
unusually strong as a result of sales to one specific customer. NAD's sales and
resulting margin losses more that offset operating cost savings achieved by the
division.
VITAL Network Services, L.L.C. (VITAL)
--------------------------------------
In the quarter ended December 31, 2000, VITAL reported revenues of $12.2
million, an increase of approximately $1.0 million, or 9%, over the same period
one year ago. Revenues a year ago were negatively effected by the "Y2K" slowdown
in revenues. VITAL's operating loss of $0.1 million in the current quarter
compares to an operating profit of $0.6 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., and increased operating costs due to
investments made in computer systems and other operations. 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 82% of all new business booked. This is
slightly higher than the immediately preceding quarter and continues to reflect
an increasing level of independence (from GDC) with regard to VITAL's revenue
stream.
DataComm Leasing Corporation (DLC)
----------------------------------
DLC's operating income, derived from both operating and finance lease
activities, amounted to $0.3 million and $0.8 in the quarters ended December 31,
2000 and 1999, respectively. The reduced level of operating income is
attributable to the expiration of older leases and the lack of new lease
financing required by the Company's customer base.
Restructuring of Operations: The Company recorded restructuring charges of $4.9
million and $0.5 million in the quarters ended December 31, 2000 and 1999,
respectively. Refer to Note 7, "Other Income and Expenses," for detailed
discussion.
21
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Interest Expense and Other Income and Expense: Interest expense amounted to $2.0
million in the quarters ended December 31, 2000 and 1999. Separately, the
quarter ended December 31, 2000 includes income of $5.0 million, or $0.17 per
share, for proceeds received, net of expenses, from a legal settlement. Prior
year results include a non-cash charge of $1.5 million, or $0.07 per share, 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.
Income Taxes: Tax provisions recorded by the Company, principally for foreign
income and domestic state taxes, amounted to $400,000 and $300,000 in the
quarters ended December 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.
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 $(347,000) and $252,000 for the quarters
ended December 31, 2000 and 1999, 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.
22
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
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. As a result, 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. (In addition, due to a lack of compliance with
financial covenants as of December 31, 2000, the Company may receive an
additional notice of default from its primary lenders.) 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.
Although the primary lenders have served a notice of default, such 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 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 the claimed default, all
outstanding indebtedness whose maturity could be accelerated has been classified
as a current liability at December 31, 2000 and September 30, 2000.
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. Reference is made to Note 2, "Business Conditions and Financial
Plans" and Note 6, "Long-Term Debt," for more detailed discussions, including
risks and Company plans.
Subject to the above-referenced risks, future cash requirements are planned to
be satisfied from a combination of cash balances ($2.3 million at December 31,
2000), additional borrowings available under the Company's revolving line of
credit and, possibly, other funds resulting from new borrowings and/or the sale
of assets and/or securities. Based upon the provisions of the Company's Loan
Agreement, $10.8 million of additional funds were available to borrow at
December 31, 2000.
23
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of cost reduction actions taken in November 2000 and January 2001,
the Company eliminated approximately 300 positions and curtailed discretionary
spending. The Company estimates such actions will result in annual cash savings
of $32 million. The Company has targeted to become cash neutral by June 30,
2001. However, based upon current projections, the Company may require (in
addition to continued access to revolving line of credit funds under its Loan
Agreement) additional funds in the second fiscal quarter ending March 31, 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 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).
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 currently has a $70 million Loan Agreement in place, comprised of
$35 million (original amount) in term loans and a $35 million (maximum value)
revolving line of credit. At December 31, 2000, the Company had $32.8 million in
term loans outstanding and $10.7 million in revolving line of credit borrowings
outstanding. Reference is made to Note 2, "Business Conditions and Financial
Plans" and Note 6, "Long-Term Debt," for further discussion of the Loan
Agreement (including existing and potential notices of default) and other
outstanding indebtedness of the Company, including actions required by the
Company to remain in compliance with the covenant requirements of a mortgage
agreement (such mortgage had an outstanding balance of $8.9 million at December
31, 2000). 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 provided by or (used in) operating activities amounted to $(1.1)
million and $1.0 million in the three-month periods ended December 31, 2000 and
1999, respectively. Both quarters reflect primarily the impact of reported net
losses offset by non-cash charges, including depreciation expense. In addition
to depreciation expense, the current quarter includes a $4.3 million non-cash
charge for the write-off of capitalized software development costs, and the
prior year's results include a $1.5 million non-cash charge for debt conversion
expense.
Non-debt working capital, excluding cash and cash equivalents, amounted to $16.2
million at December 31, 2000, as compared to $18.7 million at September 30,
2000. A reduction in
24
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
accounts receivable, resulting from lower product shipments, comprised most of
the reduction.
Investing
The Company has restricted investments to capital equipment and software
development critical to operations. Investments in property, plant and equipment
amounted to $0.4 million and $1.2 million in the quarters ended December 31,
2000 and 1999, respectively. Investments in capitalized software amounted to
$2.1 million and $3.0 million in the quarters ended December 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.
Financing
Net cash provided by financing activities amounted to $2.4 million and $2.9
million in the quarters ended December 31, 2000 and 1999, respectively. Current
year activity is solely comprised of $2.4 million of net borrowings. Fiscal 1999
activity is comprised of $3.3 million of net borrowings and the payment of
$450,000 in preferred stock dividends.
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 25 quarters
ended December 31, 2000. There can be no assurance as to when the Company will
achieve net income.
Credit Availability: As noted above, 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. (In addition, due to a lack of compliance with
financial covenants at December 31, 2000, the Company may receive an additional
notice of default from its primary lenders.) 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.
25
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Although the primary lenders have served a notice of default, such 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 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.
Amounts outstanding under the Loan Agreement amounted to $43.5 million at
December 31, 2000. In addition, the Company's Loan Agreement and certain
mortgage agreements require compliance with specific financial covenants. As
discussed above, actions resulting in an increase in reported stockholders'
equity and/or a reduction in the outstanding balance of a mortgage loan will be
required for the Company to remain in compliance with covenant requirements of
the mortgage loan agreement. Reference is made to Note 6, "Long-Term Debt," for
more detailed discussions.
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. Should the lenders take further action, 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. Reference is made to Note 2, "Business
Conditions and Financial Plans" and Note 6, "Long-Term Debt," for more detailed
discussions, including risks and Company plans.
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, 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.
26
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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 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.
27
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
None.
28
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: October 22, 2001
29