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, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8086
GENERAL DATACOMM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0853856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Middlebury, Connecticut 06762-1299
(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (203) 574-1118
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Title of Each Class at March 31, 1994
Common Stock, $.10 par value 13,924,636
Class B Stock, $.10 par value 2,371,038
Total Number of Pages
in This Document is 21.
<PAGE 2>
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Consolidated Balance Sheets -
March 31, 1994 and September 30, 1993 3
Consolidated Statements of Income and
Earnings Reinvested - For the Three and Six
Months ended March 31, 1994 and 1993 4
Consolidated Statements of Cash Flows -
For the Six Months Ended March 31, 1994 and 1993 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
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<PAGE 3>
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands)
March 31, September 30,
1994 1993
------ --------
ASSETS:
Current assets:
Cash and cash equivalents $2,406 $2,594
Accounts receivable, less allowance
for doubtful receivables of $1,527 in March
and $1,575 in September 33,336 35,654
Inventories 40,889 34,522
Other current assets 8,759 6,711
------ ------
Total current assets 85,390 79,481
------ ------
Property, plant and equipment:
Land 1,745 1,745
Buildings and improvements 24,841 24,307
Test equipment, fixtures and field spares 44,153 43,183
Machinery and equipment 36,708 35,390
------ ------
107,447 104,625
Less: accumulated depreciation and amortization 68,675 67,384
------ ------
38,772 37,241
Capitalized software development costs, net
of accumulated amortization of $10,275 in
March and $10,582 in September 21,533 19,333
Other assets 11,262 5,621
-------- --------
$156,957 $141,676
LIABILITIES AND STOCKHOLDERS' EQUITY: ======== ========
Current liabilities:
Current portion of long-term debt-1) $13,764 $3,489
Accounts payable, trade 9,591 10,563
Accrued payroll and payroll-related costs 5,484 6,962
Deferred income 7,311 5,672
Other current liabilities 13,572 14,550
------ ------
Total current liabilities 49,722 41,236
------ ------
Long-term debt, less current portion 36,909 28,402
Other liabilities 3,421 4,958
------ ------
Total liabilities 90,052 74,596
------ ------
Minority interest in consolidated subsidiary 39 52
Stockholders' equity: ------ ------
Capital stock, par value $.10 per share, issued:
17,196,610 shares in March and 16,980,581
shares in September 1,720 1,698
Capital in excess of par value 51,957 50,064
Earnings reinvested 21,002 23,805
Cumulative foreign currency translation adjustment (1,579) (1,077)
Common stock held in treasury, at cost:
900,936 shares in March and 1,082,058 shares
in September (6,234) (7,462)
------ ------
Total stockholders' equity 66,866 67,028
-------- --------
$156,957 $141,676
======== ========
<FN>
(1 - Refer to Note 4 "Long-Term Debt" for subsequent event.
The accompanying notes are an integral part of these consolidated financial state-
ments.
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[TEXT]
4
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND EARNINGS REINVESTED
(Unaudited)
(In Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
March 31, March 31,
------------ ------------
1994 1993 1994 1993
----- ----- ----- -----
Revenues
Net product sales $38,177 $43,799 $76,154 $88,186
Service revenue 8,282 8,453 16,536 16,665
Lease revenue 1,573 2,043 3,392 3,716
----- ----- ----- -----
48,032 54,295 96,082 108,567
Costs and expenses
Cost of product sales 17,242 20,574 34,569 41,578
Amortization of capitalized
software development costs 2,300 2,200 4,500 4,300
Cost of services 5,463 5,619 10,951 11,344
Cost of lease revenue 225 296 454 523
Selling, general and administrative 19,512 17,827 38,880 35,820
Research and product development 4,892 5,055 9,181 9,965
----- ----- ----- -----
49,634 51,571 98,535 103,530
----- ----- ----- -----
Operating income (loss) (1,602) 2,724 (2,453) 5,037
----- ----- ----- -----
Other income (expense)
Interest (893) (496) (1,788) (1,006)
Other, net 86 101 102 (37)
----- ----- ----- -----
(807) (395) (1,686) (1,043)
----- ----- ----- -----
Income (loss) before income taxes, minority
interest and cumulative effect of
accounting change (2,409) 2,329 (4,139) 3,994
Income tax provision (benefit) (1,590) 369 (1,445) 519
Minority interest in consolidated subsidiary (9) 42 (8) 6
----- ----- ----- -----
Income (loss) before cumulative effect
of accounting change (810) 1,918 (2,686) 3,469
Cumulative effect of change in accounting
for post-retirement benefits - - (117) -
----- ----- ----- -----
Net income (loss) (810) 1,918 (2,803) 3,469
Earnings reinvested at beginning of period 21,812 19,240 23,805 17,689
----- ----- ----- -----
Earnings reinvested at end of period $21,002 $21,158 $21,002 $21,158
===== ===== ===== =====
Earnings (loss) per share:
Income (loss) before cumulative effect
of accounting change ($0.05) $0.11 ($0.16) $0.21
Cumulative effect of change in accounting
for post-retirement benefits - - (0.01) -
----- ----- ----- -----
Earnings (loss) per share ($0.05) $0.11 ($0.17) $0.21
===== ===== ===== =====
Average number of common and common
equivalent shares outstanding 16,186 16,792 16,081 16,330
===== ===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements.
[TEXT] -4-
5
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Increase (Decrease) in Cash
and Cash Equivalents
----------------
Six Months Ended
March 31, March 31,
1994 1993
----- -----
Cash flows from operating activities:
Net income (loss) before cumulative effect
of accounting change ($2,686) $3,469
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 9,437 8,694
Deferred income amortization - (705)
(Increase) decrease in accounts receivable 2,534 (2,290)
(Increase) decrease in inventories (5,576) 3,899
(Decrease) in accounts payable
and accrued expenses (4,216) (2,480)
Decrease in other net current assets 1,634 2,255
(Increase) in other net long-term assets (2,009) (1,492)
------- -------
Net cash provided (used) by operating activities (882) 11,350
------- -------
Cash flows from investing activities:
Acquisition of property, plant & equipment (4,619) (3,719)
Capitalized software development costs (6,700) (4,850)
Purchase of companies acquired-1) (5,852) (24)
------- -------
Net cash (used for) investing activities (17,171) (8,593)
------- -------
Cash flows provided (used) by financing activities:
Revolver borrowings, net 17,850 (3,654)
Proceeds from notes payable 2,278 1,792
Principal payments on notes and mortgages (1,991) (1,503)
Proceeds from issuing common stock-1) 1,286 1,194
Payments of escrow deposits (1,484) (500)
------- -------
Net cash provided (used) by financing activities 17,939 (2,671)
------- -------
Effect of exchange rates on cash (74) (234)
------- -------
Net (decrease) in cash and cash equivalents (188) (148)
Cash and cash equivalents at beginning of period-2) 2,594 2,018
------- -------
Cash and cash equivalents at end of period-2) $2,406 $1,870
======= =======
<FN>
(1 - Excluded from the fiscal 1994 Consolidated Statement of Cash Flow is
the issuance of common stock in the amount of $1,846 related to the acquisition of a company.
(2 - 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.
[TEXT]
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6
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to fairly present
the financial position of General DataComm Industries, Inc. and subsidiaries
(the "Corporation") as of March 31, 1994, the results of operations for the
three and six months ended March 31, the cash flows for the six months
ended March 31, 1994 and 1993. Such adjustments are generally of a normal
recurring nature, but include adjustments to reduce certain expense
accruals and asset reserves to appropriate levels.
The 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 year ended September 30, 1993.
Certain reclassifications were made to the prior year's financial
statements to conform to the current year's presentation.
NOTE 2. BUSINESS ACQUISITION
Effective November 24, 1993, the Corporation acquired Netcomm Limited,
a leader in Asynchronous Transfer Mode (ATM) technology, located
in England. Under the terms of the acquisition, the Corporation issued
184,647 shares of common stock valued at $1.8 million and committed
to pay cash of $5.5 million in return for all the outstanding common stock
of Netcomm. The acquisition was accounted for as a purchase and,
accordingly, the results of operations of the acquired business have been
included in the Corporation's consolidated financial statements commencing
on November 24, 1993. Approximately $6.5 million of the purchase
price was allocated to goodwill, which is being amortized on a
straight-line basis over fifteen years.
NOTE 3. INVENTORIES
Inventories consist of (in thousands):
March 31, 1994 September 30, 1993
Raw materials $18,926 $13,024
Work-in-process 5,285 5,033
Finished goods 16,678 16,465
Total $40,889 $34,522
[TEXT]
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7
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
March 31, 1994 September 30, 1993
Revolving credit loan $ 18,300 $ 450
Notes payable 19,191 18,283
Mortgages payable 11,998 11,825
Capital lease obligations 1,184 1,333
50,673 31,891
Less: current portion 13,764 3,489
$ 36,909 $28,402
[TEXT]
Revolving Credit Loan
On November 30, 1993, the Corporation entered into a new agreement
with The Bank of New York, as lender and agent for other
institutions that become lenders, to provide a revolving credit
facility maturing on November 30, 1996 in the amount of
$25,000,000. The agreement provides for interest on outstanding
borrowings to be charged at 2.625% over selected LIBOR terms
ranging from one month to six months, or at the Corporation's
election, at .75% over the prime rate (on 1994, one-month LIBOR
was 3.56% and the prime rate was 6.25%).
For discussion of the increase in the revolving credit loan
balance in the current fiscal year, see Management's Discussion
and Analysis of Financial Condition and Results of Operations,
elsewhere in this document.
Notes Payable - Subsequent Event
On May 5, 1994, the Corporation received and, thereafter, accepted
a commitment from The Bank of New York as agent to refinance,
subject to the satisfaction of certain conditions, $8,000,000
of a current note payable, on a long-term basis. Quarterly
principal payments of $250,000, $375,000 and $500,000 are required
in the first, second and third (partial) years, respectively,
with the final payment due November 30, 1996. Interest is
payable either at 3.25% over selected LIBOR terms or at 1.25%
over the prime rate, at the Corporation's election.
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8
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 5. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Six months ended March 31,
1994 1993
(in thousands)
Cash paid (received) during the
period for:
Interest $1,276 $710
Income taxes, net $ (30) $232
[TEXT]
NOTE 6. INCOME TAXES
In the quarter ended March 31, 1994, the Corporation recorded a
net income tax benefit of $1,590,000, comprised of tax
provisions for state and foreign income taxes of $110,000,
offset by an income tax benefit of $1,700,000 resulting from
the settlement of a foreign tax issue.
NOTE 7. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 106
Effective October 1, 1993, the Corporation adopted the
provisions of Statement of Financial Accounting Standards No.
106, "Employer's Accounting for Post-Retirement Benefits Other
Than Pensions," requiring the use of an accrual method of
accounting for post-retirement health care benefits. The
cumulative effect of adoption was a charge of $117,000, or
$(.01) per share. The increase in annual expense for retiree
health care is immaterial.
NOTE 8. ADOPTION OF FINANCIAL ACCOUNTING STANDARDS NO. 109
Effective October 1, 1993, the Corporation adopted the
provisions of Statement of Financial Accounting Standards No.
109 (FAS 109), "Accounting for Income Taxes." FAS 109 is an
asset and liability approach that requires recognition of
deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the
Corporation's financial statements or tax returns. In
estimating future tax consequences, FAS 109 generally considers
all expected future events other than enactments of changes in
the tax law or rates. Previously, the Corporation used the
FAS 96 asset and liability approach that gave no recognition to
future events other than the recovery of assets and settlement
of liabilities at their carrying amounts. The cumulative
effect of adoption was not material.
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9
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
The Corporation recorded a net loss of ($2,803,000), or ($.17) per share,
in the six-month period ended March 31, 1994, as compared to net income of
$3,469,000, or $.21 per share, in the prior fiscal year. The financial
results for fiscal 1994 continue to be negatively impacted by a decline in
product revenue combined with higher investments in international selling
organizations and product development costs, particularly in Asynchronous
Transfer Mode (ATM) technology. Operating losses combined with a growth in
new product inventory levels contributed to negative operating cash flow in
the six-month period of fiscal 1994.
Despite these disappointing results, the Corporation believes it is
strategically positioned to benefit from a growing demand for communication
products. In particular, the acquisition of Netcomm Limited, a leader in
ATM technology, earlier this fiscal year has positioned the Corporation to
capitalize on increasing demand for this new sophisticated networking
technology.
RESULTS OF OPERATIONS
Total revenues for the quarter ended March 31, 1994 decreased by $6,263,000
to $48,032,000, an 11.5% decline from the same period one year ago,
primarily due to lower product shipments and a related decline in service
and leasing revenues. These declines in North American markets occurred
as the Corporation's products are in a period of transition. New products,
such as ATM and high-speed analog (V.fast), and state-of-the-art digital
products are gaining sales momentum but were not a the anticipated
reduction in traditional analog modem shipments. New products have
been shipped to customer sites for evaluation and may result in future
sales. Similarly, total revenues for the six months ended March 31, 1994
decreased by $12,485,000, or 11.5%, as compared to the corresponding period
of fiscal 1993.
Gross margins improved from 47.2% to 47.5% in the March quarter comparison
and from 46.8% to 47.5% in the six-month comparison. Improvements in both
periods were a result of continuing productivity improvements in
manufacturing and service operations.
Selling, general and administrative expenses for the three months ended
March 31, 1994 rose $1,685,000, or 9.5%, over the comparable prior year's
quarter primarily due to strategic investments made in international
selling organizations and domestic ATM marketing operations. The growth in
selling, general and administrative expenses, combined with the decline
in revenues, resulted in such expenses rising to 40.6% of fiscal 1994
revenue from 32.8% of fiscal 1993 revenue. On a six-month basis, selling,
general and adminstrative expenses for fiscal 1994 increased $3,060,000,
or 8.5%.
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10
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The higher spending levels reflected the impact of additions to headcount,
especially in international operations and domestic marketing operations,
and increased costs associated with the launch of new products. As a
percentage of six-month revenue, selling, general and administrative
expenses rose to 40.5% of fiscal 1994 revenue as compared to 33.0% of
revenue in fiscal 1993.
Gross engineering, research and product development expenditures for the
quarter ended March 31, 1994 rose to $8,092,000 from $7,555,000, an
increase of 7.1% from the same period one year ago. As a percentage of
total revenue, gross research and development spending rose to 16.8% of
fiscal 1994 revenue from 13.9% of fiscal 1993 revenue. The increase in
research and development spending, including the effect of additions to
engineering headcount, was related to the development of new products
for future release with emphasis on the new ATM product line. On a
six-month basis, gross engineering, research and product development
expenditures increased $1,066,000, or 7.2%, from the same period in fiscal
1993. As a percentage of total revenues, gross research and development
spending for the six months of fiscal 1994 was 16.5% as compared to 13.6%
in the same period one year ago. Net research and product development
expense decreased 3.2% in the three-month and 7.9% in the six-month periods
compared to the prior year. This represented 10.2% and 9.6% of sales
respectively, compared to 9.3% and 9.2%, respectively, three- and six-month
periods.
Interest expense in the quarter ended March 31, 1994 increased $397,000,
or 80%, from the comparable period one year ago. For the six-month period,
interest expense increased $782,000, from $1,006,000 in fiscal 1993 to
$1,788,000 in fiscal 1994. The higher interest levels reflected an
increase in the Corporation's level of borrowings which was attributable to
the costs associated with the acquisition of Netcomm Limited and to growth
in inventory levels.
In the quarter ended March 31, 1994, the Corporation recorded an income tax
benefit of $1,590,000 as compared to an income tax provision of $369,000 in
the same quarter one year ago. The benefit resulted from the resolution of
a foreign tax issue in the amount of $1,700,000. On a six-month basis, the
income tax benefit of $1,445,000 in fiscal 1994 compared to an income tax
provision of $519,000 in fiscal 1993.
The Corporation adopted Financial Accounting Standards No. 106, "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions," as of October
1, 1993. The cumulative effect of the accounting change in fiscal 1994 was
$117,000, or $.01 per share. The Corporation also adopted Financial
Accounting Standards No. 109, "Accounting for Income Taxes," as of October
1, 1993, the effect of which was not material.
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11
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash balances, excluding escrow security deposits, decreased $188,000 in
the six-month period ended March 31, 1994. During this same period, escrow
security deposits increased by $1,484,000 to a total of $2,984,000. Total
debt increased by $18,782,000 to $50,673,000. Of this increase, $5,000,000
is related directly to the acquisition of Netcomm Limited.
The Corporation believes that available financing under its revolving
credit loan combined with cash to be generated from operations will be
sufficient to meet its cash requirements. The Corporation is, however,
exploring alternative funding sources in the event that cash requirements
to sponsor new product developments and introductions out-pace operating
cash receipts. Subsequent to March 31, 1994, the Corporation received
and accepted a commitment from The Bank of New York to refinance $8,000,000
of a note payable, previously maturing January 2, 1995, on a long-term
basis.
OPERATIONS
During the six months ended March 31, 1994, the Corporation's operating
activities resulted in a net use of cash of $882,000. Contributing to this
operating cash outflow were a net loss of ($2,803,000), an increase in new
product inventories of $5,576,000, a decrease in accounts payable and
accrued expenses of $4,216,000 due to, among other items, the timing of
payrolls and incentive compensation payments, the cost of carrying a vacant
facility and payments made for purchase of inventory parts.
Offsetting these negative operating cash flows was the favorable impact of
accelerated collection of accounts receivable of $2,534,000 and certain
costs and expenses (depreciation and amortization) that did not require an
outlay of cash in the current fiscal year of $9,437,000.
INVESTING
Investments in capitalized software development rose 38.1% to $6,700,000
from $4,850,000 in the prior fiscal year. Spending on property, plant and
equipment for the fiscal 1994 period increased $900,000 to $4,619,000 from
$3,719,000 in the prior fiscal year's period, principally for equipment to
improve manufacturing and engineering processes.
On November 24, 1993, the Corporation acquired all of the outstanding stock
of Netcomm Limited for a cash commitment of $5.5 million and the issuance of
184,627 shares of common stock valued at $1.8 million. The cash payment
was financed through the Corporation's revolving credit agreement.
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12
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Working capital decreased from $38,245,000 at September 30, 1993, to
$35,668,000 at March 31, 1994, primarily due to $8,000,000 in long-term debt
moving from a long-term to a current liability category in March. The
Corporation has received a commitment letter from a bank to refinance this
debt on a long-term basis and is proceeding to conclude this financing.
Excluding the effect of this item, working capital otherwise would have
shown an increase of $5,423,000 primarily due to increased inventory and
accounts receivable levels. The Corporation's current ratio is 1.7:1 at
March 31, 1994, as compared to 1.9:1 at September 30, 1993.
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13
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On February 3, 1994, at the Annual Meeting of Stockholders of
the Corporation, the stockholders voted on the following
matters:
1. Elected one director, Lee M. Paschall, to a term expiring
in 1997.
Number of votes cast for: 13,557,224
Number of votes cast against: 304,484
2. Approved the proposal to adopt an amendment to the 1991
Stock Option Plan by which an additional 650,000 shares of
the Corporation's Common Stock, $.10 par value, were
reserved for issuance thereunder.
Number of votes cast for: 11,057,532
Number of votes cast against: 2,760,860
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
11. Calculation of Earnings Per Share for the three- and six-
month periods ended March 31, 1994 and 1993.
28.1 Amendment No. 1 to Amended and Restated Revolving Credit
and Security Agreement between General DataComm
Industries, Inc. et al., and The Bank of New York et al.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for
which this report is filed.
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14
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
__________________________________________
William S. Lawrence
Vice President and Principal Financial Officer
Dated: May 13, 1994
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