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 June 30, 1997
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.)
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 June 30, 1997
Common Stock, $.10 par value 19,020,693
Class B Stock, $.10 par value 2,136,933
Total Number of Pages in this Document is 21.
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information
Consolidated Balance Sheets -
June 30, 1997 and September 30, 1996 3
Consolidated Statements of Operations
and Accumulated Deficit - For the Three and
Nine Months Ended June 30, 1997 and 1996 4
Consolidated Statements of Cash Flows - For the 5
Nine Months Ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
- 2 -
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
In thousands except shares 1997 1996
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $2,405 $26,264
Accounts receivable, less allowance
for doubtful receivables of $1,713
in June and $1,768 in September 30,245 39,828
Inventories 45,382 44,588
Deferred income taxes 2,871 4,457
Other current assets 8,369 7,054
- -------------------------------------------------------------------------------
Total current assets 89,272 122,191
- -------------------------------------------------------------------------------
Property, plant and equipment, net 48,052 48,838
Capitalized software development costs, net 23,500 23,393
Other assets 10,549 10,632
- -------------------------------------------------------------------------------
$171,373 $205,054
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $7,606 $6,533
Accounts payable, trade 14,981 14,917
Accrued payroll and payroll-related costs 7,717 6,592
Deferred income 6,771 7,305
Other current liabilities 17,693 19,211
- -------------------------------------------------------------------------------
Total current liabilities 54,768 54,558
- -------------------------------------------------------------------------------
Long-term debt, less current portion 21,448 22,781
Deferred income taxes 3,455 4,962
Other liabilities 423 567
- -------------------------------------------------------------------------------
Total liabilities 80,094 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 with
a $20 million liquidation preference 800 800
Class B stock, par value $.10 per share,
35,000,000 shares authorized;
issued and outstanding: 2,136,933 in
June and 2,137,443 in September 214 214
Common stock, par value $.10 per share,
35,000,000 shares authorized; issued and
outstanding: 19,440,622 in June and
19,249,987 in September 1,944 1,925
Capital in excess of par value 149,421 148,208
Accumulated deficit (55,885) (23,323)
Cumulative foreign currency translation
adjustment (2,106) (2,510)
Common stock held in treasury, at cost:
419,929 shares in June and 422,429 shares
in September (3,109) (3,128)
- -------------------------------------------------------------------------------
Total stockholders' equity 91,279 122,186
- -------------------------------------------------------------------------------
$171,373 $205,054
- -------------------------------------------------------------------------------
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 Nine Months Ended
June 30, June 30,
- -------------------------------------------------------------------------------
In thousands, except per share data 1997 1996 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Net product sales $35,262 $45,332 $123,500 $140,948
Service revenue 10,046 9,541 28,967 29,081
Lease revenue 1,278 1,696 3,933 5,509
- ------------------------------------------------------------------------------
46,586 56,569 156,400 175,538
- ------------------------------------------------------------------------------
Costs and expenses:
Cost of product sales 17,693 22,771 59,702 67,690
Amortization of capitalized
software development costs 3,000 3,000 9,000 8,600
Cost of services 6,519 6,473 20,131 19,731
Cost of lease revenue 152 174 481 670
Selling, general and administrative 21,518 22,308 64,654 65,395
Research and product development 10,582 8,738 30,897 24,258
- -------------------------------------------------------------------------------
59,464 63,464 184,865 186,344
- ------------------------------------------------------------------------------
Operating loss (12,878) (6,895) (28,465) (10,806)
- -------------------------------------------------------------------------------
Other income (expense):
Interest (637) (473) (1,475) (1,360)
Other, net (205) (99) (972) 752
- -------------------------------------------------------------------------------
(842) (572) (2,447) (608)
- -------------------------------------------------------------------------------
Loss before income taxes (13,720) (7,467) (30,912) (11,414)
Income tax provision 100 300 300 900
- -------------------------------------------------------------------------------
Net loss ($13,820) ($7,767) ($31,212) ($12,314)
===============================================================================
Loss per share ($0.67) ($0.37) ($1.55) ($0.60)
===============================================================================
Weighted average number of common and
common equivalent shares outstanding 21,148 20,797 21,063 20,656
===============================================================================
Accumulated deficit at beginning of
period ($41,615)($10,700) ($23,323) ($6,153)
Net loss (13,820) (7,767) (31,212) (12,314)
Payment of preferred stock dividends (450) - (1,350) -
- -------------------------------------------------------------------------------
Accumulated deficit at end of period ($55,885)($18,467) ($55,885) ($18,467)
===============================================================================
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
----------------------------
Nine Months Ended
June 30,
----------------------------
In thousands 1997 1996
- -----------------------------------------------------------------------------
Cash flows from operating activities:
Net(loss) ($31,212) ($12,314)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 20,413 18,978
Gain on sale of real estate - (1,000)
Decrease in accounts receivable 8,881 2,829
(Increase) in inventories (1,061) (2,247)
Increase (decrease) in accounts payable
and accrued expenses (460) 7,629
(Increase) in other net current assets (259) (1,175)
(Increase) in other net long-term assets (1,729) (301)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,427) 12,399
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant, and equipment (8,661) (10,666)
Capitalized software development costs (9,107) (8,586)
Proceeds from sale of real estate - 1,000
- -------------------------------------------------------------------------------
Net cash used in investing activities (17,768) (18,252)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from notes and mortgages 5,584 4,740
Principal payments on notes and mortgages (5,830) (11,445)
Proceeds from issuing common stock 1,133 2,556
Payment of preferred stock dividends (1,350) -
------------------------------------------------------------------------------
Net cash used in financing activities (463) (4,149)
------------------------------------------------------------------------------
Effect of exchange rates on cash (201) (84)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (23,859) (10,086)
Cash and cash equivalents at beginning of
period - (1) 26,264 18,443
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $2,405 $8,357
===============================================================================
(1) - The Corporation considers all highly liquid investments purchased with
a maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to fairly present the consolidated
financial position of General DataComm Industries, Inc. and subsidiaries (the
"Corporation" or "Company") as of June 30, 1997, the consolidated results of
their operations for the three and nine months ended June 30, 1997 and 1996, and
their cash flows for the nine months ended June 30, 1997 and 1996. 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):
June 30, 1997 September 30, 1996
------------- ------------------
Raw materials $15,783 $16,627
Work-in-process 5,163 6,726
Finished goods 24,436 21,235
------- -------
Total $45,382 $44,588
- 6 -
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
June 30, 1997 September 30, 1996
------------- ------------------
Land $ 1,778 $ 1,764
Buildings and improvement 29,740 29,050
Test equipment, fixtures and
field spares 54,788 52,537
Machinery and equipment 55,784 50,482
------- -------
142,090 133,833
Less: accumulated depreciation
and amortization 94,038 84,995
------- -------
$48,052 $48,838
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of (in thousands):
June 30, 1997 September 30, 1996
------------- ------------------
Original Cost $38,504 $33,998
Less: accumulated amortization 15,004 10,605
------- -------
$23,500 $23,393
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
June 30, 1997 September 30, 1996
------------- ------------------
Notes payable $16,908 $16,421
Mortgages payable 11,883 12,359
Capital lease obligations 263 534
------- -------
29,054 29,314
Less: current portion 7,606 6,533
------- -------
$21,448 $22,781
- 7 -
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
Long-Term Debt -- continued
Revolving Credit Facility
- -------------------------
The Company has an amended agreement with the BNY Financial Corporation (as
successor in interest to The Bank of New York Commercial Corporation) whereby
the Corporation has been provided a revolving credit facility in the maximum
amount of $25.0 million, subject to a borrowing base formula. The facility,
which matures in November 1998, provides for a sub-limit of $5.0 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, which may limit available
borrowings to less than $25.0 million. At June 30, 1997, the total amount
available for borrowings and letters of credit was $22.4 million.
The recently amended agreement requires conformity with various financial
covenants including, among others, restricted net loss performance. The
amendment also increases the borrowing rate by 1% and requires the Company to
raise at least $10.0 million from proceeds of an equity offering by September
30, 1997 and an additional $10.0 million before January 1, 1998 on terms
satisfactory to BNY Financial Corporation.
No borrowings were outstanding as of June 30, 1997. There were, however,
$780,000 of letters of credit outstanding as of June 30, 1997. The Company
commenced utilizing the credit facility subsequent to June 30, 1997. Borrowings
outstanding on the credit facility amounted to $7.3 million at August 7, 1997.
NOTE 6. FOREIGN CURRENCY TRANSLATION FOR MEXICAN OPERATIONS
As a result of high inflation in Mexico, the Company was required to change its
method of translating the financial statements of its Mexican subsidiary to
reflect the designation of the U.S. dollar as the functional currency.
Therefore, effective January 1, 1997, non-monetary assets such as inventories
and property, plant and equipment, along with expenses related thereto, are
being translated at historical rates of exchange, and adjustments resulting from
translation are 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. The impact of this
change was not material to the Company's reported financial results for the
three or nine months ended June 30, 1997.
- 8 -
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(Unaudited)
NOTE 7. OTHER INCOME (EXPENSE)
Other income (expense) for the quarter and nine months ended June 30, 1997
includes foreign currency exchange losses of $(198,000) and $(907,000),
respectively. The year-to-date exchange losses are principally attributable to
the strengthening U.S. dollar as compared to the French franc and German mark,
and its impact on liabilities of our French and German subsidiaries which are
payable in U.S. dollars. Such amounts compare to exchange losses of $(183,000)
and $(369,000) for the three and nine months ended June 30, 1996, respectively.
Separately, other income for the nine months ended June 30, 1996 includes a $1.0
million gain from a real estate transaction.
NOTE 8. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.128,"EARNINGS PER SHARE"
In February 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128" or the
"Statement"). The Company will adopt FAS 128 in the first quarter of fiscal 1998
(quarter to end on December 31, 1997).
The most significant computational change resulting from adoption of the
Statement involves replacing primary EPS with basic EPS, the principal
difference being that common stock equivalents will not be considered in basic
EPS calculations. Since under current accounting standards common stock
equivalents are not factored into EPS calculations for companies reporting net
losses, the Company does not expect the new pronouncement to have a material
impact on reported EPS in the near term.
- 9 -
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General Summary Discussion
- --------------------------
The Company reported losses for both the quarter and nine months ended June 30,
1997, reflecting the combined impact of reduced product revenue levels and
continued heavy investment in its Asynchronous Transfer Mode ("ATM") and
Advanced Network Access ("Access") product lines and technologies. Year-to-date
total revenues are down $19.1 million, or 10.9%, from one year ago.
Concurrently, research and development spending is up in accordance with plan by
$7.2 million, or 21.8%, on a year-to-date basis. The combined impact of lower
revenues and higher research and development spending account for most of the
increase in reported net losses for the three and nine months ended June 30,
1997, as compared to the corresponding periods one year ago.
Approximately 57% of the Company's research and development spending was
attributable to ATM technology and products in the quarter ended June 30, 1997
(54% on a year-to-date basis). ATM revenues in fiscal 1997 have not achieved
earlier anticipated levels. ATM revenues amounted to $8.3 million and $28.5
million for the three and nine months ended June 30, 1997, as compared to $9.4
million and $33.2 million in the corresponding periods of fiscal 1996,
representing declines of 11.9% and 14.2%, respectively. The revenue shortfall is
discussed under the "Revenues" caption which follows.
The Company's overall order input rate exceeded the shipment rate by $7.1
million during the quarter, resulting in an improved order backlog position
entering the final fiscal quarter.
Total revenues for the third fiscal quarter ended June 30, 1997 were $46.6
million, down $10.0 million, or 17.6%, from the same quarter one year ago.
Year-to-date revenues for the nine months ended June 30, 1997 and 1996 were
$156.4 million and $175.5 million, respectively, down $19.1 million, or 10.9%.
The net loss for the quarter ended June 30, 1997 amounted to $13.8 million, as
compared to a net loss of $7.8 million for the corresponding quarter one year
ago. The net loss for the nine months ended June 30, 1997 and 1996 amounted to
$31.2 million and $12.3 million, respectively.
Regarding cash flows, operating activities consumed $5.4 million in cash for the
nine months ended June 30, 1997. After investing and financing activities, cash
balances were reduced by $23.9 million for the same period to $2.4 million at
June 30, 1997, as compared to $26.3 million at September 30, 1996.
To help support future cash requirements, the Corporation has in place an
amended $25.0 million (maximum value) revolving credit facility, of which $22.4
million was available for borrowings and letters of credit at June 30, 1997. No
borrowings were outstanding on this credit facility at June 30, 1997. There
were, however, $780,000 of letters of credit outstanding at June 30, 1997.
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, which may limit available borrowings to less than
$25.0 million. The borrowing base under the formula tends to decline at interim
points of a quarter (i.e., the borrowing base dropped to a low point of
approximately $16.2 million in the quarter ended June 30, 1997).
- 10 -
General Summary Discussion - continued
- --------------------------------------
The recently amended agreement requires conformity with various financial
covenants including, among others, restricted net loss performance. The
amendment also increases the borrowing rate by 1% and requires the Company to
raise at least $10.0 million from proceeds of an equity offering by September
30, 1997, and an additional $10.0 million before January 1, 1998 on terms
satisfactory to BNY Financial Corporation.
While no borrowings were outstanding at June 30, 1997, the Company did commence
utilizing the credit facility subsequent to June 30, 1997. Borrowings
outstanding on the credit facility amounted to $7.3 million at August 7, 1997.
Company management recognizes a need to raise additional capital in the near
term to support cash requirements in fiscal 1998. As a result, it is actively
pursuing alternative sources of funding, such as the sale of equity securities,
debentures, and/or assets.
Management also recognizes the need to improve operational performance in
anticipation that revenue growth opportunities will take time to develop. A
managed cost reduction effort has been implemented with the objective of
reducing the Corporation's breakeven point. It is important to note, however,
that significant revenue growth will also be required to achieve profitability.
The cost reduction efforts include restrictions on hiring and reductions in
discretionary and capital spending. Reallocation of resources to prioritized
projects is also under review to maximize the productivity of the Corporation's
existing workforce.
The Company has continued to invest heavily in research and development
activities based on the belief that its ATM and Access products and their
related technologies have the potential to deliver substantially higher
revenues, and ultimately, shareholder value, on a longer term basis.
Results of Operations
- ---------------------
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
Three months ended Nine months ended
June 30, June 30,
1997 1996 1997 1996
------------------ ----------------
Revenues:
Net product sales 75.7% 80.1% 79.0% 80.3%
Service revenue 21.6 16.9 18.5 16.6
Leasing revenue 2.7 3.0 2.5 3.1
---- ---- ---- ----
100.0 100.0 100.0 100.0
Costs and expenses:
Costs of revenues 52.3 52.0 51.3 50.2
Amortization of capitalized
software development costs 6.4 5.3 5.8 4.9
Selling, general and administrative 46.2 39.5 41.3 37.3
Research and product development 22.7 15.4 19.8 13.8
---- ---- ---- ----
Operating loss (27.6) (12.2) (18.2) (6.2)
---- ---- ---- ----
Net (loss) (29.7)% (13.7)% (20.0)% (7.0)%
==== ==== ==== ====
- 11 -
Results of Operations - continued
- ---------------------------------
Percentages for the quarter ended June 30, 1997 are affected by the
lower-than-expected product revenue base. Noteworthy observations from the
year-to-date numbers include: service revenues have remained level despite
decreased product revenues and as a result comprise 18.5% of total revenue
(versus 16.6% in fiscal 1996); fiscal 1997 total operating expenses, including
research and development, amount to 61.1% of revenue, as compared to 51.1% for
the nine months ended June 30, 1996; research and product development related
expenses when combined with capitalized software amortization amounted to 25.6%
and 18.7% of revenue for the nine-month periods ended June 30, 1997 and 1996,
respectively, an increase of 6.8%. This increase reflects the Company's
continued significant investment in its ATM and Access product development.
Revenues
- --------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Total Revenues $46,586 $56,569 $156,400 $175,538
Percent Change (17.6)% (10.9)%
Quarter: The $10.0 million, or 17.6%, revenue decline is principally
attributable to product revenues with both domestic and international markets
contributing to the decline. From a product line perspective, Access,
Internetworking, and ATM revenues were down $5.8 million (26.1%), $3.4 million
(27.5%) and $1.1 million (11.9%), respectively. Access products are in
transition as older technologies are in decline while newer products are in
acceptance cycles. Internetworking products were affected by a $4.0 million
international order where the schedule for shipment slipped to the following
quarter. The Corporation attributes the lower-than-expected level of its ATM
business to longer sales cycle times required as a result of product complexity
and new technologies involved in ATM systems. Individual ATM orders are also
often larger in size than orders for other products, and the timing of such
orders and shipments can generate large quarter-to-quarter fluctuations.
Separately, the Company's service operations achieved revenue growth of
$505,000, or 5.3%, over the same quarter one year ago. International operations
accounted for all of the Service operation's revenue growth. Geographically,
international revenues accounted for 51% of total consolidated revenues, as
compared to 50% in the corresponding quarter of the previous fiscal year.
Year-to-Date: The year-to-date total revenue decline of $19.1 million, or 10.9%,
is attributable to a $17.4 million reduction in product revenue and a $1.6
million reduction in leasing revenues. Access, Internetworking, and ATM product
revenues were down $9.2 million (14.3%), $4.0 million (10.0%), and $4.7 million
(14.2%) respectively, partially offset with increased licensing revenues of the
Company's V.34 technology. Such licensing revenues amounted to $3.9 million
through the nine months ended June 30, 1997, an increase of $1.2 million, or
43.9% over the prior year. The explanations for the product revenue declines
discussed above for the quarter also apply to the year-to-date numbers. Service
revenue is relatively unchanged from the prior year, with a 10.3% increase in
international service business offsetting a 6.7% decline in domestic service
business. The leasing revenue decline
- 12 -
Revenues - continued
- --------------------
resulted from an unusually high level of revenue in the prior year, attributable
to lease renewals and sale of off-lease inventory. Geographically, international
revenues accounted for 49% of total consolidated revenues, up from 47% for the
same nine-month period one year ago.
Cost of Revenue and Gross Margin
- --------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Gross margin, before capitalized
software amortization $22,222 $27,151 $76,086 $87,447
Percent of revenue 47.7% 48.0% 48.7% 49.8%
Capitalized software amortization $3,000 $3,000 $9,000 $8,600
Percent of revenue 6.4% 5.3% 5.8% 4.9%
- -------------------------------------------------------------------------------
Gross margin, after capitalized
software amortization $19,222 $24,151 $67,086 $78,847
Percent of revenue 41.3% 42.7% 42.9% 44.9%
Quarter: Gross margin as a percent of revenues (excluding the amortization of
capitalized software development costs) was down 0.3 percentage points from the
same quarter one year ago, representing the net impact of: (1) the absorption of
fixed production costs over a reduced revenue base, partially offset with
improved margins realized on product sales; (2) service margins up 3.0
percentage points reflecting the impact of revenue growth and recently
implemented cost containment measures; and (3) leasing margin deterioration of
1.6 percentage points due to an unusually high revenue level achieved in the
prior fiscal year.
Year-to-Date: Year-to-date gross margins (excluding the amortization of
capitalized software development costs) were down 1.1 points from the prior
year, reflecting the combined impact of a minor reduction in margins realized on
product sold, the absorption of fixed production costs over a reduced revenue
base, and reduced service margins partially offset with an increased level of
high-margin V.34 licensing revenue. The reduced service margins (down 1.6
points) are attributable to the increase in international service business which
relies more heavily on the use of outside service contracts which produce lower
margins.
Separately, amortization of capitalized software development cost amounted to
$3.0 million in the quarters ended June 30, 1997 and 1996, and $9.0 million and
$8.6 million in the nine-month periods ended June 30, 1997 and 1996,
respectively.
- 13 -
Selling, General and Administrative Expenses
- --------------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Selling, General and
Administrative Expenses $21,518 $22,308 $64,654 $65,395
Percent Change (3.5)% - (1.1)% -
As Percent of Revenue 46.2% 39.4% 41.3% 37.3%
Due to cost containment efforts, selling, general, and administrative expenses
were down from the prior year in both the three and nine months ended June 30,
1997. The reduction for this quarter, representing the first quarter of our
recently implemented cost containment program, amounted to $790,000, or 3.5%,
from the same quarter one year ago. However, reduced revenue levels for both the
quarter and nine months ended June 30, 1997 resulted in an increased level of
selling, general, and administrative costs as compared to the prior fiscal year
when measured as a percent of revenue.
Research and Product Development Costs
- --------------------------------------
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Gross Expenditures $13,582 $11,738 $40,004 $32,844
Percent Change 15.7% - 21.8% -
As Percent of Revenue 29.2% 20.7% 25.6% 18.7%
---------------------------------------------------------------------
Costs capitalized $3,000 $ 3,000 $ 9,107 $ 8,586
As Percent Gross Spend 22.1% 25.6% 22.8% 26.1%
____________________________________________________________________
Net R&D Expense $10,582 $8,738 $30,897 $24,258
Percent Change 21.1% - 27.4% -
As Percent of Revenue 22.7% 15.4% 19.8% 13.8%
---------------------------------------------------------------------
Quarter: The Company continues to invest heavily in research and product
development. Gross research and product development spending, before deduction
for capitalized software development costs, increased to $13.6 million in the
third quarter of fiscal 1997, up $1.8 million or 15.7% from the $11.7 million
spending level in the corresponding quarter one year ago. This spending increase
is attributable to increased headcount (up 35 persons), related support costs,
and an increased utilization of outsourced product development services. Most of
the increase is associated with an ATM product development
- 14 -
Research and Product Development Costs - continued
- --------------------------------------------------
activity, including development of our Strobos ATM product line. The combination
of a spending increase and a reduced revenue base caused gross research and
development spending to increase to 29.2% of revenue, as compared to 20.7% in
the same quarter one year ago. Capitalized software development costs were $3.0
million in both of the quarters ended June 30, 1997 and 1996.
Year-to-Date: Year-to-date research and development spending follows similar
trends, with gross spending for the nine months ended June 30, 1997 up $7.2
million, or 21.8%, from the corresponding period of fiscal 1996. The causes of
the spending increase are consistent with those discussed above. Capitalized
software development costs for the nine months ended June 30, 1997 were $9.1
million as compared to $8.6 million for the corresponding period of fiscal 1996.
The complexity of the ATM technology has and will continue to demand significant
research and product development investment. To retain an effective pool of
available engineering talent, the Corporation operates research and development
facilities in four locations including the United States (Middlebury,
Connecticut and Boston, Massachusetts), Canada, and the United Kingdom.
Other Income and Expense
- ------------------------
Please reference Note 7 on page 9 for a detailed discussion of other income and
expense.
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Corporation, principally for foreign income and
domestic state taxes, amounted to $100,000 and $300,000 in the quarters ended
June 30, 1997 and 1996, respectively. Year-to-date tax provisions amounted to
$300,000 and $900,000 for fiscal 1997 and 1996, respectively. As noted in the
Corporation's Form 10-K filed for the year ended September 30, 1996, the
Corporation has significant federal net operating loss carryforwards available.
However, based on the Corporation's past financial performance and the
uncertainty of ultimate realization of such carryforwards, no deferred tax asset
(or related deferred tax benefit) has been recorded in the Corporation's
financial statements.
Foreign Currency Risk
- ---------------------
Foreign currency fluctuations did not have a material impact on trends reflected
in the Corporation's financial statements. No individual foreign subsidiary
operation represents a material percentage of consolidated revenue or net worth.
However, if international subsidiary operations (i.e., Canada, Germany, France,
and Mexico) experience strong revenue growth in the future, the likelihood of
foreign currency fluctuations impacting trends reflected in the Corporation's
financial statements could increase, especially if the U.S. dollar continues to
strengthen against the respective currencies. Separately, subsidiaries have some
U.S. dollar denominated liabilities. The impact of foreign currency fluctuations
on such amounts are recorded as a component of "Other Income and Expense" in the
Corporation's statements of operations. Please reference Notes 6 and 7 on pages
8 and 9, respectively, for further discussion.
- 15 -
LIQUIDITY AND CAPITAL RESOURCES
- ------------------------------
The Corporation's cash and cash equivalents amounted to $2.4 million at June 30,
1997 as compared to $26.3 million at September 30, 1996. To help support future
cash requirements, the Corporation has in place an amended $25.0 million
(maximum value) revolving credit facility, of which $22.4 million was available
for borrowings and letters of credit at June 30, 1997. No borrowings were
outstanding on this credit facility at June 30, 1997. There were, however,
$780,000 of letters of credit outstanding at June 30, 1997. 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,
which may limit available borrowings to less than $25.0 million. The borrowing
base under the formula tends to decline at interim points of a quarter (i.e.,
the borrowing base dropped to a low point of approximately $16.2 million in the
quarter ended June 30, 1997).
The recently amended agreement requires conformity with various financial
covenants including, among others, restricted net loss performance. The
amendment also increases the borrowing rate by 1% and requires the Company to
raise at least $10.0 million from proceeds of an equity offering by September
30, 1997 and an additional $10.0 million before January 1, 1998 on terms
satisfactory to BNY Financial Corporation.
While no borrowings were outstanding at June 30, 1997, the Company did commence
utilizing the credit facility subsequent to June 30, 1997. Borrowings
outstanding on the credit facility amounted to $7.3 million at August 7, 1997.
Company management recognizes a need to raise additional capital in the near
term to support cash requirements in fiscal 1998. As a result, it is actively
pursuing alternative sources of funding such as the sale of equity securities,
debentures, and/or assets. Also, please reference "Certain Risk Factors"
discussed on page 17.
Other bank debt was relatively unchanged from the prior year-end amounting to
$29.1 million and $29.3 million at June 30, 1997 and September 30, 1996,
respectively.
Operating
- ---------
During the nine months ended June 30, 1997, the Corporation's operating
activities generated negative cash flow of $5.4 million, as compared to a
positive cash flow of $12.4 million for the same period one year ago. The $17.8
million variance is principally comprised of a larger reported net loss ($18.9
million), fluctuations in the level of accounts payable and accrued expenses
($8.1 million), a decline in accounts receivable ($6.1 million source of funds)
attributable to reduced sales volume, and an improved days sales outstanding
position. The $8.1 million variance in accounts payable and accrued expenses is
primarily attributable to trade accounts payable, which were at an abnormally
low level as of September 30, 1995. (Inventories showed strong growth in the
first half of fiscal 1995 and were subsequently reduced by $8.8 million in the
six months ended September 30, 1995. The inventory reduction resulted in an
unusually low level of cash expenditure for inventory purchases in early fiscal
1996).
Non-debt working capital excluding cash and cash equivalents decreased $8.2
million to $39.7 million at June 30, 1997 as compared to $47.9 million at
September 30, 1996. The reduction is principally comprised of a $9.6 million
decrease in accounts receivable attributable to a reduced level of product
- 16 -
shipments in the quarter ended June 30, 1997, and improved collection activities
(days sales outstanding were reduced to 59 days at June 30, 1997 from 61 days at
September 30, 1996).
Investing
- ---------
Net investments in property, plant, and equipment for the nine months ended June
30, 1997 amounted to $8.7 million, as compared to $10.7 million for the
corresponding period of fiscal 1996. The Company continues to closely monitor
all requests for capital spending in an effort to preserve cash and limit such
investment to instances which appear to offer the greatest return on investment.
Separately, investments in capitalized software amounted to $9.1 million and
$8.6 million for the nine months ended June 30, 1997 and 1996, respectively.
Total investments amounted to $17.8 million and $19.3 million in the nine months
ended June 30, 1997 and 1996, respectively. Cash investments in fiscal 1996 were
partially offset with $1.0 million in proceeds from the sale of real estate.
Financing
- ---------
Financing activities during the nine-month period ended June 30, 1997 required
the use of $463,000 in cash representing the net effect of $246,000 in debt
reduction, payment of $1,350,000 in preferred stock dividends, and receipt of
$1.1 million in cash proceeds from the sale of stock through the Company's
Employee Stock Purchase Plan and exercise of stock options.
Please reference the discussion under "Liquidity and Capital Resources" above
and Note 5 on page 7 regarding on-hand cash balances, a $25.0 million revolving
credit facility available to the Company, the terms thereof and amendments
thereto, and forward-looking projections which display a need for the
Corporation to raise additional capital in the near term to effectively support
its cash requirements. The Corporation considers its ability to offer for sale
its common stock, preferred stock, warrants, and/or other assets as viable
alternative sources of financing, some form of which management expects to
execute within the next three months. Execution of such action(s), however,
cannot be assured.
CERTAIN RISK FACTORS
- --------------------
Continuing Losses: The Company has sustained net losses for the past eleven
quarters ending June 30, 1997. There can be no assurance as to when the Company
will achieve net income.
Credit Availability: As noted above, the Company's revolving credit facility
agreement includes provisions whereby covenant compliance including, among
others, restricted net loss performance and obligations to raise additional
capital, is required. If the Company fails to comply with the required covenants
and a waiver or amendment is not obtained, the Company may be unable to borrow
funds under such agreement. In such case the Company will be required to seek
other financing to fund its operations, and there can be no assurance the
Company will be able to obtain such financing or if obtained, on terms deemed
favorable by the Company. Furthermore, in the event the Company does default on
its BNY Financial Corporation obligation, such default may result in payment of
other outstanding indebtedness to be accelerated.
- 17 -
Risk Factors in Future Operating Results - continued
- -----------------------------------------------------
Volatility of Stock Price: The trading price of the Common Stock has fluctuated
widely in response to quarter-to-quarter operating results, industry conditions,
awards of orders to the Company or its competitors, new product or product
development announcements by the Company or its competitors, and changes in
earnings estimates by analysts. Any shortfall in revenue or earnings from
expected levels could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock in any given period.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Portions of the foregoing discussion include descriptions of the Company's
expectations regarding future trends affecting its business. The forward-looking
statements made in this document, as well as all other forward-looking
statements or information provided by the Company or its employees, whether
written or oral, are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements and
future results are subject to, and should be considered in light of risks,
uncertainties, and other factors which may affect future results including, but
not limited to: competition, rapid changing technology, regulatory requirements,
and uncertainties of international trade.
- 18 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
4.1 Indenture dated May 1, 1997 covering presently unissued 9%
Convertible Subordinated Debentures due 2006.
11. Calculation of Earnings Per Share for the three- and
nine-month periods ended June 30, 1997 and 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
- 19 -
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: August 14, 1997
- 20 -