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 December 31, 1996
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 December 31, 1996
---------------------------- --------------------------
Common Stock, $.10 par value 18,859,496
Class B Stock, $.10 par value 2,137,443
Total Number of Pages in This Document is 18.
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets -
December 31, 1996 and September 30, 1996 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three Months
Ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows - For the
Three Months Ended December 31, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 13
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PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
In thousands except shares 1996 1996
- ------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS:
Current assets:
Cash and cash equivalents $17,705 $26,264
Accounts receivable, less allowance for doubtful
receivables of $1,740 in December and $1,768 in September 42,897 39,828
Inventories 43,609 44,588
Deferred income taxes 4,457 4,457
Other current assets 7,403 7,054
- ------------------------------------------------------------------------------------------------
Total current assets 116,071 122,191
================================================================================================
Property, plant and equipment, net 49,097 48,838
Capitalized software development costs, net 23,393 23,393
Other assets 10,440 10,632
- ------------------------------------------------------------------------------------------------
$199,001 $205,054
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $6,731 $6,533
Accounts payable, trade 14,088 14,917
Accrued payroll and payroll-related costs 9,041 6,592
Deferred income 5,808 7,305
Other current liabilities 18,651 19,211
- -----------------------------------------------------------------------------------------------
Total current liabilities 54,319 54,558
===============================================================================================
Long-term debt, less current portion 22,078 22,781
Deferred income taxes 5,167 4,962
Other liabilities 637 567
- ----------------------------------------------------------------------------------------------
Total liabilities 82,201 82,868
==============================================================================================
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, par value $1.00 per share, 3,000,000 shares
authorized; issued and outstanding: 800,000 shares of 9%
Cumulative Convertible Exchangeable preferred stock in
December and September; $20 milion liquidation preference 800 800
Class B stock, par value $.10 per share, 35,000,000 shares authorized;
issued and outstanding: 2,137,443 in December and September 214 214
Common stock, par value $.10 per share, 35,000,000 shares authorized;
issued and outstanding: 19,279,425 in December and 19,249,987 in
September 1,928 1,925
Capital in excess of par value 148,334 148,208
Deficit (29,447) (23,323)
Cumulative foreign currency translation adjustment (1,920) (2,510)
Common stock held in treasury, at cost:
419,929 shares in December and 422,429 shares in September (3,109) (3,128)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 116,800 122,186
- -----------------------------------------------------------------------------------------------
$199,001 $205,054
===============================================================================================
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
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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 1996 1995
- ------------------------------------------------------------------------
Revenues:
Net product sales $48,220 $48,217
Service revenue 9,485 9,956
Lease revenue 1,338 1,626
- ------------------------------------------------------------------------
59,043 59,799
- ------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 23,117 22,918
Amortization of capitalized
software development costs 3,000 2,600
Cost of services 6,789 6,964
Cost of lease revenue 138 216
Selling, general and administrative 21,449 21,445
Research and product development 9,673 7,690
- ------------------------------------------------------------------------
64,166 61,833
- ------------------------------------------------------------------------
Operating loss (5,123) (2,034)
- ------------------------------------------------------------------------
Other income (expense):
Interest (339) (437)
Other, net (112) (120)
- ------------------------------------------------------------------------
(451) (557)
- ------------------------------------------------------------------------
Loss before income taxes (5,574) (2,591)
Income tax provision 100 300
- ------------------------------------------------------------------------
Net loss ($5,674) ($2,891)
========================================================================
Loss per share ($0.29) ($0.14)
========================================================================
Weighted average number of common and
common equivalent shares outstanding 20,987 20,499
========================================================================
Deficit at beginning of period ($23,323) ($6,153)
Net loss (5,674) (2,891)
Payment of preferred stock dividends (450) --
- ------------------------------------------------------------------------
Deficit at end of period ($29,447) ($9,044)
========================================================================
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 1996 1995
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($5,674) ($2,891)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,510 6,098
(Increase) decrease in accounts receivable (2,951) 2,247
Decrease in inventories 1,009 1,573
Increase in accounts payable and accrued expenses 951 4,854
(Increase) in other net current assets (2,085) (2,018)
(Increase) decrease in other net long-term assets 328 (577)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (1,912) 9,286
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (2,667) (3,170)
Capitalized software development costs (3,000) (2,600)
- ------------------------------------------------------------------------------
Net cash used in investing activities (5,667) (5,770)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes and mortgages 1,193 28
Principal payments on notes and mortgages (1,852) (8,375)
Proceeds from issuing common stock 148 584
Payment of preferred stock dividends (450) --
- -------------------------------------------------------------------------------
Net cash used in financing activities (961) (7,763)
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (19) (39)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (8,559) (4,286)
Cash and cash equivalents at beginning of
period - (1) 26,264 18,443
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $17,705 $14,157
===============================================================================
(1)- The Corporation considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments
necessary to fairly present the financial position of General
DataComm Industries, Inc. and subsidiaries (the "Corporation" or
"Company") as of December 31, 1996, the results of operations for
the three months ended December 31, 1996 and 1995, and the cash
flows for the three months ended December 31, 1996 and 1995. 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
generally accepted accounting principles 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. 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 inventory,
capitalized software and certain other assets.
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, 1996.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
December 31, 1996 September 30, 1996
------------------ ------------------
Raw materials $16,843 $16,627
Work-in-process 6,022 6,726
Finished goods 20,744 21,235
------ --------
Total $43,609 $44,588
======= =======
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GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 3. LONG-TERM DEBT
Long-term debt consists of (in thousands):
December 31, 1996 September 30, 1996
----------------- ------------------
Notes payable $16,131 $16,421
Mortgages payable 12,223 12,359
Capital lease obligations 455 534
------- -------
28,809 29,314
Less: current portion 6,731 6,533
------- -------
$22,078 $22,781
======= =======
Revolving Credit Facility
-------------------------
The Corporation has an agreement with The Bank of New York
Commercial Corporation whereby the Corporation has been provided
a revolving credit facility in the amount of $25 million, subject
to a borrowing base formula. The facility, which matures in
November 1998, provides for a sub-limit of $5 million for letters
of credit. Certain assets of the Corporation, including most
accounts receivable and inventories, are pledged as collateral.
The amount of borrowing is predicated on satisfying a borrowing
base formula related to levels of certain accounts receivable and
inventories. The agreement also requires conformity with various
financial covenants.
No borrowings were outstanding as of December 31, 1996. There
were, however, $735,000 of letters of credit outstanding as of
December 31, 1996.
NOTE 4. FOREIGN CURRENCY TRANSLATION FOR MEXICAN OPERATIONS
As a result of Mexico's economy becoming highly inflationary,
the method of translating the financial statements of the
Corporation's Mexican subsidiary from pesos to U.S. dollars
will be changed to reflect designation of the U.S. dollar as
the functional currency, effective January 1, 1997.
Therefore, inventories (and related cost of sales) and property,
plant and equipment (and related depreciation expense) will
be translated at historical rates of exchange, and future
adjustments resulting from translation will be reflected in
results of operations. Previously, such amounts were stated at
current rates of exchange and translation adjustments were
reported as a separate component of stockholders' equity.
-7-
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL DISCUSSION
Total revenues for the first fiscal quarter ended December 31, 1996 were down
1.3% from the same quarter one year ago, primarily attributable to reduced
levels of domestic service and lease revenues. Product revenue was unchanged
from the prior year. International revenue growth partially offset reductions in
domestic business. International revenues approximated 50% of total revenue in
the December 31, 1996 quarter, as compared to 43% in the quarter ended December
31, 1995. Our ATM (Asynchronous Transfer Mode) product line shipments totaled
$12.8 million, an increase of 17.7% over the prior year and up $3.6 million, or
38.6%, sequentially from the quarter ended September 30, 1996. Revenues from our
transmission and internetworking product segments were down from the prior year,
both attributable to reduced levels of domestic business. ATM product revenue
comprised 26.6% of total product revenue for the three months ended December 31,
1996, as compared to 22.6% for the same period one year ago.
The net loss for the quarter ended December 31, 1996 amounted to $5.7 million,
as compared to $2.9 million for quarter ended December 31, 1995. The largest
single factor contributing to the increased net loss is a $2.0 million, or
25.8%, increase in research and product development spending. Reductions in
domestic service and lease business also contributed to the increased net loss
position.
The Company believes that its ATM and Access products have the potential to
deliver substantially higher revenues on a longer term basis, and therefore,
continues to make investments in ATM and Access research and product
development.
Cash flows from operations amounted to a negative $1.9 million for the quarter
ended December 31, 1996. After investing and financing activities, total cash
consumption amounted to $8.6 million for the quarter. However, the Company had
on-hand cash balances of $17.7 million at December 31, 1996. Furthermore, a $25
million revolving loan facility remained unused as of December 31, 1996.
-8-
RESULTS OF OPERATIONS
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three months ended
December 31,
-------------------
1996 1995
---- ----
Revenues:
Net product sales 81.6% 80.6%
Service revenue 16.1 16.7
Leasing revenue 2.3 2.7
----- -----
100.0 100.0
----- -----
Costs and expenses:
Cost of revenues 50.9 50.3
Amortization of capitalized software
development costs 5.1 4.3
Selling, general and administrative 36.3 35.9
Research and product development 16.4 12.9
---- ----
Operating (loss) (8.7) (3.4)
----- -----
Net (loss) (9.6)% (4.8)%
====== ======
Noteworthy items from the above summary include: Q1 fiscal 1997 service and
lease revenues represent a reduced portion of total revenue, and is attributable
to a decline in domestic product shipments to commercial users who tend to
require such support services and leases. Research and product development
expense has grown to 16.4% of total revenues versus 12.9% in the prior year, an
increase of 3.5 points or 27%. This reflects the Company's continued strategic
investment in ATM and other product lines; 51% of the Corporation's current
quarter research and development spending was applied to the ATM product line.
Three Months Ended December 31, 1996 vs. Three Months Ended December 31, 1995:
Total revenues decreased $0.8 million, or 1.3% from the corresponding quarter of
the previous year. Product revenue, including licensing revenues, were
unchanged; service and lease revenues were down $0.5 million and $0.3 million,
or 4.7% and 17.7%, respectively. From a product mix perspective, ATM revenue
growth of $1.9 million, or 17.7%, and $0.9 million of licensing fee revenue
growth from our V.34 analog product line technology offset product revenue
declines in our transmission and internetworking product segments. The ATM
revenue growth was achieved via international markets; the transmission and
internetworking business reductions occurred in the domestic marketplace and
were attributable to reductions in Narrowband and TMS product line shipments,
respectively. Geographically, a 17.2% increase in international product revenues
offset a 14.3% reduction in domestic business. As noted above, the service and
leasing revenue shortfalls resulted from a decline in domestic business.
-9-
Three Months Ended December 31, 1996 vs. Three Months Ended December 31, 1995
continued:
Gross margin as a percent of revenues (excluding the amortization of capitalized
software development costs) remained relatively constant at 49.1% and 49.7% for
the three months ended December 31, 1996 and 1995, respectively. Margin percent
losses in the transmission and internetworking product lines more than offset a
3.1 point margin gain in the ATM segment. Service margins were also down 1.7
points from the prior year, principally attributable to reduced revenue levels.
Separately, amortization of capitalized software development costs increased to
$3.0 million in the quarter ended December 31, 1996 as compared to $2.6 million
in the corresponding quarter one year ago.
Selling, general and administrative expenses were unchanged at $21.4 million for
the quarters ended December 31, 1996 and 1995. A $0.3 million increase in
selling and marketing costs, incurred primarily to promote ATM products, was
offset with cost savings achieved via more efficient general and administrative
activities.
Research and product development spending, before consideration of capitalized
software development costs, increased to $12.7 million in the first quarter of
fiscal 1997, up $2.4 million or 23.2% from the $10.3 million spending level one
year ago. This 23.2% spending increase, principally comprised of increased
headcount and related salary costs and increased utilization of outsourced
development costs, reflects the Company's continued commitment to aggressively
pursue product development and revenue growth opportunities in the ATM and other
product lines. The complexity of the ATM technology has and will continue to
demand significant research and product development investment. To expand its
pool of available engineering talent, the Corporation now operates research and
development facilities in four locations, including the United States
(Middlebury, Connecticut and Boston, Massachusetts), Canada, and the U.K.
Capitalized software costs were $3.0 million for the first fiscal quarter of
1997, versus $2.6 million for the corresponding period one year ago.
Tax provisions recorded by the Company, principally for foreign income and
domestic state taxes, amounted to $100,000 and $300,000 in the quarters ended
December 31, 1996 and 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's cash and cash equivalents amounted to $17.7 million at
December 31, 1996 as compared to $26.3 million at September 30, 1996. A $25
million revolving credit facility remained available and unused as of December
31, 1996. Bank debt was reduced by $0.5 million during the quarter to $28.8
million at December 31, 1996, from $29.3 million at September 30, 1996.
Operating
- ---------
During the three months ended December 31, 1996, the Corporation's operating
activities generated negative cash flow of $(1.9) million, as compared to a
positive cash flow of $9.3 million for the same period one year ago. The $11.2
million difference is principally comprised of a larger net loss ($2.8 million),
an increase in accounts receivable in the quarter ended December 31, 1996 versus
a decrease in the quarter ended December 31, 1995 ($5.2 million), and a reduced
level of growth in accounts payable and accrued expenses ($3.9 million).
-10-
Non-debt working capital, excluding cash and cash equivalents, increased $2.9
million to $50.8 million at December 31, 1996 as compared to $47.9 million at
September 30, 1996. The increase is principally comprised of a $3.1 million
increase in accounts receivable (due to a higher level of product shipments and
a reduced level of cash received for licensing fee revenue as compared to the
preceding quarter), and a $1.5 million reduction in deferred income (due to the
timing of maintenance contract renewals), both of which were partially offset
with a $2.4 million increase in accrued payroll and related costs (representing
the accrual of additional days due to the timing of payrolls).
Investing
- ---------
Net investments in property, plant and equipment for the quarter ended December
31, 1996 amounted to $2.7 million, as compared to $3.2 million for the
corresponding quarter one year ago. Separately, investments in capitalized
software amounted to $3.0 million and $2.6 million for the three months ended
December 31, 1996 and 1995, respectively. Total investments amounted to $5.7
million and $5.8 million in the three months ended December 31, 1996 and 1995,
respectively.
Financing
- ---------
Financing activities during the three-month period ended December 31, 1996
required the use of $1.0 million in cash, representing the net effect of
$659,000 in net debt payments, payment of $450,000 in preferred stock dividends,
and receipt of $148,000 in cash proceeds from the exercise of stock options.
The Corporation has an agreement with The Bank of New York Commercial
Corporation whereby the Corporation has been provided a revolving credit
facility in the amount of $25 million subject to a borrowing base formula. The
facility, which matures in November 1998, provides for a sub-limit of $5 million
for letters of credit. Certain assets of the Corporation, including most
accounts receivable and inventories, are pledged as collateral. The amount of
borrowing is predicated on satisfying a borrowing base formula related to levels
of certain accounts receivable and inventories. The agreement also requires
conformity with various financial covenants, the most restrictive of which
include minimum tangible net worth requirements, total liabilities to tangible
net worth ratio requirements, and net income (or restricted net loss)
performance requirements.
No borrowings were outstanding as of December 31, 1996. There were, however,
$735,000 of letters of credit outstanding as of December 31, 1996.
The Company believes, based on its future forecasts, that the combination of its
existing cash balances, future cash flows from operations, and available funds
under its revolving credit facility will be adequate to support the
Corporation's cash requirements for the near term. In addition, the Corporation
considers its ability to offer for sale its common stock, preferred stock,
and/or warrants as viable alternative sources of financing.
-11-
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Portions of the foregoing discussion include descriptions of the
Company's expectations regarding future trends affecting its business. The
forward-looking statements made in this document, as well as all other
forward-looking statements or information provided by the Company or its
employees, whether written or oral, are made in reliance upon the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements and future results are subject to, and should be
considered in light of risks, uncertainties, and other factors which may affect
future results including, but not limited to: competition, rapid changing
technology, regulatory requirements, and uncertainties of international trade.
-12-
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
10.16 Amendments to Retirement Savings and Deferred Profit
Sharing Plan. Two (2) separate amendments dated
March 31, 1996 and June 5, 1996.
11. Calculation of Earnings Per Share for the three-month
periods ended December 31, 1996 and 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for
which this report is filed.
-13-
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)
/s/ WILLIAM S. LAWRENCE
----------------------------------------------------
William S. Lawrence
Senior Vice President and Principal Financial Officer
Dated: February 14, 1997
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