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, 1998
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.
X Yes 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, 1998
------------------ ---------------------------
Common Stock, $.10 par value 19,447,138
Class B Stock, $.10 par value 2,095,033
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, 1998 and September 30, 1997 3
Consolidated Statements of Operations and
Accumulated Deficit - For the Three and Nine Months
Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows - For the
Nine Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis
of Financial Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 20
- 2 -
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
In thousands except shares 1998 1997
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $10,901 $21,526
Accounts receivable, less allowance for doubtful
receivables of $1,459 in June and $1,703 in September 28,195 33,193
Inventories 34,632 41,749
Deferred income taxes 1,774 2,244
Other current assets 6,400 7,903
- -------------------------------------------------------------------------------
Total current assets 81,902 106,615
===============================================================================
Property, plant and equipment, net 41,918 46,427
Capitalized software development costs, net 23,961 23,500
Other assets 10,910 10,793
- -------------------------------------------------------------------------------
$158,691 $187,335
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $8,231 $7,569
Accounts payable, trade 12,793 15,245
Accrued payroll and payroll-related costs 7,203 6,990
Deferred income 5,409 6,527
Other current liabilities 16,889 18,358
- -------------------------------------------------------------------------------
Total current liabilities 50,525 54,689
===============================================================================
Long-term debt, less current portion 52,920 49,293
Deferred income taxes 2,964 2,789
Other liabilities 348 536
- -------------------------------------------------------------------------------
Total liabilities 106,757 107,307
===============================================================================
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: 2,095,033 in June
and 2,136,933 in September 209 214
Common stock, par value $.10 per share, 35,000,000 shares
authorized; issued and outstanding: 19,777,520 in June
and 19,582,661 in September 1,978 1,958
Capital in excess of par value 150,605 149,864
Accumulated deficit (96,429) (67,874)
Cumulative foreign currency translation adjustment (2,784) (2,489)
Common stock held in treasury, at cost:
330,382 shares in June and September (2,445) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 51,934 80,028
- -------------------------------------------------------------------------------
$158,691 $187,335
===============================================================================
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,
----------------- -----------------
1998 1997 1998 1997
----------------- -----------------
In thousands, except per share data
- ------------------------------------------------------------ -----------------
Revenues:
Net product sales $37,706 $35,262 $112,637 $123,500
Service revenue 9,221 10,046 28,406 28,967
Lease revenue 1,104 1,278 3,538 3,933
- ------------------------------------------------------------ -----------------
48,031 46,586 144,581 156,400
- ------------------------------------------------------------ -----------------
Costs and expenses:
Cost of product sales 17,761 17,693 54,399 59,702
Amortization of capitalized
software development costs 2,921 3,000 8,893 9,000
Cost of service revenue 6,709 6,519 20,119 20,131
Cost of lease revenue 144 152 391 481
Selling, general and administrative 17,788 21,518 56,208 64,654
Research and product development 7,396 10,582 24,503 30,897
Restructuring of operations - - 2,500 -
- ------------------------------------------------------------- ----------------
52,719 59,464 167,013 184,865
- ------------------------------------------------------------- ----------------
Operating loss (4,688) (12,878) (22,432) (28,465)
- ------------------------------------------------------------- ----------------
Other income (expense):
Interest (1,530) (637) (4,341) (1,475)
Other, net 32 (205) 168 (972)
- ------------------------------------------------------------- ----------------
(1,498) (842) (4,173) (2,447)
- ------------------------------------------------------------- ----------------
Loss before income taxes (6,186) (13,720) (26,605) (30,912)
Income tax provision 100 100 600 300
- ------------------------------------------------------------- ----------------
Net loss ($6,286) ($13,820) ($27,205)($31,212)
============================================================= ================
Loss per share ($0.31) ($0.67) ($1.33) ($1.55)
============================================================= ================
Weighted average number of common and
common equivalent shares outstanding 21,542 21,148 21,458 21,063
============================================================= ================
Accumulated deficit at beginning of
period ($89,693) ($41,615) ($67,874)($23,323)
Net loss (6,286) (13,820) (27,205) (31,212)
Payment of preferred stock dividends (450) (450) (1,350) (1,350)
- ------------------------------------------------------------- ----------------
Accumulated deficit at end of period ($96,429) ($55,885) ($96,429)($55,885)
============================================================= ================
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 1998 1997
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($27,205) ($31,212)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,963 20,413
Decrease in accounts receivable 4,488 8,881
(Increase) decrease in inventories 6,770 (1,061)
(Decrease) in accounts payable
and accrued expenses (2,694) (460)
(Increase) decrease in other net current assets 89 (259)
(Increase) in other net long-term assets (355) (1,729)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,056 (5,427)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (5,247) (8,661)
Capitalized software development costs (9,354) (9,107)
- -------------------------------------------------------------------------------
Net cash (used in) investing activities (14,601) (17,768)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Revolver repayments (4,799) -
Proceeds from notes and mortgages 15,094 5,584
Principal payments on notes and mortgages (6,517) (5,830)
Proceeds from issuing common stock 534 1,133
Payment of preferred stock dividends (1,350) (1,350)
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,962 (463)
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (42) (201)
- -------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (10,625) (23,859)
Cash and cash equivalents at beginning of period -(1) 21,526 26,264
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period -(1) $10,901 $2,405
===============================================================================
(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, 1998, the consolidated results of their operations for the
three and nine months ended June 30, 1998 and 1997, and their cash
flows for the nine months ended June 30, 1998 and 1997. 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, 1997.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
June 30, 1998 September 30, 1997
------------- ------------------
Raw materials $14,347 $16,075
Work-in-process 3,025 4,914
Finished goods 17,260 20,760
------- -------
$34,632 $41,749
======= =======
- 6 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of (in thousands):
June 30, 1998 September 30, 1997
------------- ------------------
Land $ 1,779 $ 1,770
Buildings and improvements 30,098 29,716
Test equipment, fixtures and
field spares 55,523 55,858
Machinery and equipment 58,654 56,165
-------- -------
146,054 143,509
Less: accumulated depreciation
and amortization 104,136 97,082
-------- --------
$ 41,918 $ 46,427
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Capitalized software development costs consist of (in thousands):
June 30, 1998 September 30, 1997
------------- ------------------
Original cost $39,220 $39,627
Less: accumulated amortization 15,259 16,127
------- -------
$23,961 $23,500
======= =======
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
June 30, 1998 September 30, 1997
------------- ------------------
Revolving credit facility $ -- $ 4,799
Notes payable 24,957 15,353
7-3/4% convertible senior
subordinated debentures 25,000 25,000
Mortgages payable 11,194 11,710
------ -------
61,151 56,862
Less: current portion 8,231 7,569
------- -------
$52,920 $49,293
======= =======
- 7 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Revolving Credit Facility
-------------------------
On October 22, 1997, the Company entered into a $40.0 million
loan and security agreement (the "Loan Agreement") with a new group of
financing institutions. The Loan Agreement provided $15.0 million in
proceeds (received on October 22, 1997) from a five-year term loan
(included in "notes payable" in the chart above). In addition, the
Loan Agreement provides for a $25.0 million (maximum value) revolving
line of credit for a three-year period ending in October 2000, subject
to extension. Availability of such funds is subject to 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, 1998, the total amount available
for borrowings and letters of credit was $25.0 million). Most assets
of the Company, including accounts receivable, inventories and
property, plant and equipment, are pledged as collateral.
No revolving line of credit borrowings was outstanding as of June
30, 1998, as compared to $4.8 million of such borrowings outstanding
(under a previous credit facility) as of September 30, 1997. There
were $975,000 of letters of credit outstanding as of June 30, 1998.
The Loan Agreement includes covenants which may limit access to
future borrowings and may accelerate payment requirements on
outstanding borrowings. The most restrictive covenant requires the
maintenance of a minimum balance of $80.0 million for the sum of
stockholders' equity (excluding both foreign currency translation
adjustments subsequent to September 30, 1997 and restructuring charges
up to $3.0 million) and outstanding 7 3/4% convertible senior
subordinated debentures, issued in September 1997. As such minimum
balance at June 30, 1998 is calculated to be $80.0 million, this
covenant will be violated if the Company realizes any losses in the
future. Therefore, it is anticipated that financial covenant
modifications in the form of an amendment to the Loan Agreement will
be required to satisfy financial covenant requirements in the future
and such modifications are being pursued. In addition to the loan
covenant modifications, the Company is assessing various alternate
financing arrangements so that it may continue strategic product
developments.
In the event of non-compliance with financial or other covenants,
the Company would have to obtain a waiver or amendment from the
lenders. However, there is no assurance that the lender would grant
such a waiver or amendment and in such case the Company would have to
pursue other sources of financing. In the past the Company has relied
on its ability to offer for sale its common stock, preferred stock,
convertible debentures and/or warrants as viable alternative sources
of financing. The availability and terms of
- 8 -
NOTE 5. LONG-TERM DEBT (continued)
such offerings in the future will depend on such items as the
Company's future financial performance and/or market demand for the
Company's technologies. As a result, these sources may not be
available, or may be available on less favorable terms, in the future.
The Company's inability to have access to the Loan Agreement funds
and/or alternative financing sources would have a material adverse
effect on the Company's financial condition.
7 3/4% Convertible Senior Subordinated Debentures
-------------------------------------------------
On September 26, 1997, the Company issued $25.0 million of
convertible senior subordinated debentures ("Debentures") which mature
on September 30, 2002 (if not converted or redeemed) and accrue
interest at a rate of 7 3/4% per annum. The Debentures, issued to
qualified institutional buyers and accredited institutional investors,
are convertible into shares of the Company's common stock originally
at a conversion price of $6.86 per share, or the equivalent of 145.8
shares of common stock for each $1,000 principal amount of Debentures.
Under the terms of the Debentures, on March 30, 1998, the conversion
price was reset to $6.279 per share, or the equivalent of 159.3 shares
of common stock for each $1,000 principal amount of Debenture. Under
certain conditions, such conversion price may again be reset to a
reduced price per share on September 30, 1999, but in no event may the
conversion price be reset at a price below 85% of the original
conversion price. As of June 30, 1998 and September 30, 1997, $25.0
million of Debentures were outstanding.
Reference is made to the Company's consolidated financial
statements and related notes thereto and exhibits filed with Form
10-K for the year ended September 30, 1997, for further
disclosures applicable to the above-referenced Loan Agreement and
Debentures.
NOTE 6. RESTRUCTURING OF OPERATIONS
The net loss for the nine months ended June 30, 1998 includes a
charge of $2.5 million, or $(0.12) per share, which is comprised of a
$1.0 million provision for post-employment benefits under the
Company's severance plan related to the elimination of approximately
200 full-time positions and $1.5 million for the write-off of
intangible assets and other costs associated with the elimination of
low-volume product lines.
NOTE 7. IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
128, "EARNINGS PER SHARE" (EPS)
In 1997, the Financial Accounting Standards Board issued
Statement of Financial
- 9 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
128, "EARNINGS PER SHARE" (EPS) (continued)
Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SFAS 128 replaced the previously reported primary and fully diluted
earnings per share with basic and diluted earnings per share,
respectively. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. SFAS 128
requires restatement of all prior period earnings per share
information to conform to the new reporting requirements. The
Company implemented SFAS 128, including new disclosure requirements,
in the quarter ended December 31, 1997.
Under current and prior accounting standards, common stock
equivalents are not factored into earnings per share calculations for
companies reporting net losses. As a result, implementation of SFAS
128 did not have an impact on the Company's reported loss per share
information for the three and nine month periods ended June 30, 1998
and 1997, and will not have an impact until the Company reports a
quarterly profit.
The following table sets forth the computation of basic and
diluted loss per share (in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------- -------------------
Numerator:
Net loss $(6,286) $(13,820) $(27,205) $(31,212)
Preferred stock dividends (450) (450) (1,350) (1,350)
Numerator for basic and diluted -------- --------- --------- ---------
loss per share - loss applicable
to common stockholders $(6,736) $(14,270) $(28,555) $(32,562)
======== ========= ========= ========
Denominator:
Denominator for basic and diluted
loss per share - weighted average
shares outstanding 21,542 21,148 21,458 21,063
====== ====== ====== ======
Basic and diluted loss per share $(0.31) $(0.67) $(1.33) $(1.55)
====== ======= ======= =======
- 10 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. IMPLEMENTATION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.
128, "EARNINGS PER SHARE" (EPS) (continued)
Outstanding securities which could potentially effect diluted EPS
in the future, when the Company reports a quarterly profit, include
convertible debentures, convertible preferred stock, warrants and
employee stock options. For additional disclosure information,
including conversion terms, refer to Notes 5, 8 and 10, respectively,
in the Company's consolidated financial statements filed with Form
10-K for the year ended September 30, 1997. The approximate weighted
average number of employee stock options outstanding at June 30, 1998
was 3,100,000 shares, 2,100,000 shares of which would not have
otherwise been included in diluted earnings per share calculations for
the nine months ended June 30, 1998, because the options' exercise
price was greater than the average market price of the common shares.
NOTE 8. NEW ACCOUNTING STATEMENT
In June 1998, Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued to be effective for fiscal quarters beginning
after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. The
Company historically has not entered into hedge contracts or any form
of derivative investment and, therefore, should not be impacted by
this new statement. However, the Company is in the process of
evaluating the effect of adoption on future results and the disclosure
under this standard.
- 11 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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,
1998 1997 1998 1997
---- ---- ---- ----
Revenues:
Net product sales 78.5% 75.7% 77.9% 79.0%
Service revenue 19.2 21.6 19.6 18.5
Leasing revenue 2.3 2.7 2.4 2.5
----- ----- ----- -----
100.0 100.0 100.0 100.0
Costs and expenses:
Costs of revenues 51.3 52.3 51.8 51.3
Amortization of capitalized
software development costs 6.1 6.4 6.2 5.8
Selling, general and
administrative 37.0 46.2 38.9 41.3
Research and product
development 15.4 22.7 16.9 19.8
Restructuring of operations -- -- 1.7 --
Operating loss (9.8) (27.6) (15.5) (18.2)
----- ------ ------ -----
Net (loss) (13.1)% (29.7)% (18.8)% (20.0)%
====== ======= ======= ======
Summary comments are as follows: (1) although revenues for the
third fiscal quarter showed a modest increase over the prior year's
quarter, there was a shift toward a higher percentage of revenues
generated from product sales and a lower percentage from service
revenues; (2) cost of revenues, measured as a percent of revenue,
improved in the quarter due to a greater proportion of sales being
composed of high-end ATM products which generate better margins; (3)
operating expenses were reduced to 52.4% of revenue in the quarter
ended June 30, 1998 as compared to 68.9% for the same period one year
ago, as a result of cost reductions begun in the first quarter; on a
year-to-date basis, operating expenses (excluding restructuring of
operations costs) declined from 61.1% to 55.8% of revenues despite a
reduction in revenues of $11.8 million due to the positive effect of
$14.8 million in expense reductions.
- 12 -
Revenues
- --------
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Revenues $48,031 $46,586 $144,581 $156,400
Percent Change 3.1% -- (7.6)% --
Quarter - Revenues in the quarter increased $1.4 million compared to the prior
year. Product revenues, which include technology license revenues, increased
$2.4 million offset by a $0.8 million reduction in service revenue and $0.2
million reduction in lease revenue.
A shift occurred in product line revenues whereby ATM product sales increased
$4.5 million, or 54%, while shipments of legacy analog and all other products
dropped $1.1 million and $1.0 million, respectively. Growing domestic market
interest in new voice and video applications, particularly with alternate
communications carriers, along with expansion of networks in Europe and a new
network in Mexico, account for the strength in ATM revenues.
In addition, technology license revenues dropped $0.9 million due to reductions
in volumes of computer chips being sold by manufacturers who license the
Company's technology; this business is expected to improve as the positive
impact is realized of separating and focusing these activities into a new
division, called the Technology Alliance Group, which was formed in the quarter.
Service revenues dropped $0.8 million, reflecting a transition from servicing
exclusively General DataComm products to also servicing other companies'
products. While positive developments are occurring in the new Vital Network
Services subsidiary toward securing new third-party business, this has yet to
translate into meaningful service revenues. This is expected to improve in the
near term as new third-party business begins converting to revenue.
Geographically, international revenues accounted for 48% of total consolidated
revenues in the quarter ended June 30, 1998 as compared to 51% for the
comparable period one year ago.
Year-to-Date - The $11.8 million, or 7.6%, revenue decline is attributable
primarily to reduced product revenue levels ($10.9 million), with both domestic
and international markets contributing to the decline ($4.4 million and $6.5
million, respectively). The product revenue reduction was experienced across the
Access and Internetworking product lines, which were down $6.6 million (11.9%)
and $10.4 million (29.0%), respectively. Licensing revenues were also down $0.2
million. ATM revenues are ahead of last year's level by $6.3 million, or 21.9%.
Access revenues reflect a continued reduction in sales of the Company's legacy
analog and low-speed products, with sales growth from new Access product
introductions not offsetting such declines. The internetworking (multiplexer)
business decline reflects weakness in Asian markets which accounts for
almost half, or $4.8 million, of the decline. In addition there is a general
market shift toward frame relay and ATM technologies and away from
multiplexing technology.
In total, international revenues approximated 49% and 50% of total revenues for
the nine months ended June 30, 1998 and 1997, respectively.
- 13 -
Cost of Revenues:
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Cost of revenues $24,614 $24,364 $74,909 $80,314
As a percent of revenue 51.3% 52.3% 51.8% 51.3%
Amortization of capitalized
software development costs $2,921 $3,000 $8,893 $9,000
As a percent of revenue 6.1% 6.4% 6.2% 5.8%
Quarter - Cost of revenues, measured as a percent of revenues, were lower (1.0
percentage point) for the quarter ended June 30, 1998 as compared to the
corresponding quarter in fiscal 1997. This improvement was related to higher
margins achieved on ATM products compared to other product lines which more than
offset the negative impact of lower technology license and service revenues. The
amount of amortization of capitalized software development costs was
approximately the same in each of the quarters ended June 30, 1998 and 1997.
Year-to-Date - Cost of revenues, measured as a percent of revenues, increased
0.5 percentage points as compared to the corresponding period last fiscal year.
The improvement in ATM product margins in the current quarter brought
year-to-date product margins in line with the prior year. Service margins were
down slightly (0.3 percentage points) from the prior year. Due to the lower
revenue base, amortization of capitalized software development costs, which were
relatively consistent in amounts year-to-year, now represent a larger percentage
of revenues.
High technology products in particular are subject to sales price pressures as
competition grows and sales cycles reach maturity. The Company continues to
partially offset the effect of such sales price pressures with the negotiation
of reduced material component prices, improvements in manufacturing costs and
efficiencies and the introduction of new generation products which generally
provide higher margins.
Selling, General and Administrative Expenses
- --------------------------------------------
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Selling, general, and
administrative expenses $17,788 $21,518 $56,208 $64,654
Percent change (17.3)% -- (13.1)% --
As a percent of revenue 37.0% 46.2% 38.9% 41.3%
Quarter - The Company's cost reduction plan implemented in the first fiscal
quarter contributed to a $3.7 million, or 17.3%, reduction in selling, general
and administrative costs for the quarter ended June 30, 1998, as compared to the
same period one year ago. The cost reductions were achieved in both domestic and
international operations, despite ongoing salary merit increases and other
inflationary increases. The
- 14 -
cost reductions are comprised of reduced compensation and travel costs, a more
effectively managed promotion and advertising program and lower sales commission
costs attributable to reduced product revenues. The lower expense levels, along
with a 3.1% increase in revenues, resulted in selling, general and
administrative expenses decreasing by 9.2% when measured as a percentage of
revenue for the quarter ended June 30, 1998 as compared to the prior year's
quarter.
Year-to-Date - Year-to-date selling, general and administrative expenses
decreased $8.4 million, or 13.1%, from the corresponding period of fiscal 1997.
The same cost reductions noted above also contributed favorably to the
year-to-date results. However, due to a 7.6% decline in revenues, selling,
general and administrative expenses, when measured as a percentage of revenue
for the nine months ended June 30, 1998, reflected a decline of only 2.4% as
compared to the prior year.
Research and Product Development Costs
- --------------------------------------
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
Gross expenditures $10,737 $13,582 $33,857 $40,004
Percent change (20.9)% -- (15.4)% --
As percent of revenue 22.4% 29.2% 23.4% 25.6%
------------------------------------------------------------------------
Capitalized software costs $3,341 $3,000 $9,354 $9,107
As a percent of gross
expenditures 31.1% 22.1% 27.6% 22.8%
-------------------------------------------------------------------------
Net research and product
development costs $7,396 $10,582 $24,503 $30,897
Percent change (30.1)% -- (20.7)% --
As a percent of revenue 15.4% 22.7% 16.9% 19.8%
-------------------------------------------------------------------------
Quarter - The Company continues to invest a high percentage of revenue in
research and product development, although lower than the prior year. As a
percentage of revenue, gross product research and development decreased by 6.8%
to 22.4% in the second quarter of fiscal 1998 from 29.2% in the same quarter one
year ago. Cost reduction efforts have resulted in a $2.8 million, or 20.9%,
reduction in gross research and development spending for the quarter ended June
30, 1998 as compared to the same period one year ago. This decrease was
primarily attributable to reduced usage of outside services and consultants and
lower compensation costs due to lower worldwide engineering headcount associated
in part with the elimination of low-volume products.
Capitalized software development costs were higher than the prior year's quarter
($3.3 million as compared to $3.0 million in the same period one year ago),
indicating that software development activities represent a greater proportion
of total research and product development spending.
- 15 -
Year-to-Date - Year-to-date product research and development spending displayed
similar trends. Gross spending for the nine months ended June 30, 1998 and 1997
amounted to $33.9 million and $40.0 million, respectively, a decrease of $6.1
million, or 15.4%.
Capitalized software development costs for the nine months ended June 30, 1998
amounted to $9.4 million as compared to $9.1 million for the corresponding
period of fiscal 1997.
The complexity of the ATM technology has in the past demanded, and will continue
to demand, significant research and product development investment. To retain an
effective pool of available engineering talent, the Company operates research
and development facilities in four locations: the United States (Middlebury,
Connecticut and Boston, Massachusetts), Canada and the United Kingdom.
Restructuring of Operations
- ---------------------------
The nine months ended June 30, 1998 includes a restructuring charge of $2.5
million for a cost reduction plan, implemented in the Company's first fiscal
quarter, involving a reduction in the number of employees, elimination of
low-volume products and other expense reductions.
Interest and Other Income and Expense
- -------------------------------------
Net interest expense amounted to $1.5 million and $0.6 million for the quarters
ended June 30, 1998 and 1997, respectively. Year-to-date net interest expense
amounted to $4.3 million and $1.5 million for fiscal 1998 and 1997,
respectively. The increases are attributable to interest expense and fees
(including amortization of offering costs) associated with $25.0 million of
convertible senior subordinated debentures issued in September 1997 and a new
$15.0 million term loan executed on October 22, 1997. Refer to "Foreign Currency
Risk" below for discussion of other income and expense.
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Company, principally for foreign income and
domestic state taxes, amounted to $100,000 in both quarters ended June 30, 1998
and 1997. Year-to-date tax provisions amounted to $600,000 and $300,000 for
fiscal 1998 and 1997, respectively. The Company has significant federal net
operating loss carryforwards available to offset future liabilities. However,
based on the Company's past financial performance and the uncertainty of
ultimate realization of such carryforwards, no net deferred tax asset (or
related deferred tax benefit) has been recorded in the Company's financial
statements.
Foreign Currency Risk
- ---------------------
The Company's foreign subsidiaries are exposed to foreign currency fluctuations
since they are invoicing customers in local currencies while liabilities for
product purchases from the parent company are transacted in U.S. dollars. The
impact of foreign currency fluctuations on these U.S. dollar-denominated
liabilities, to the extent such liabilities are not deemed to be permanent
investments, are recorded as a component of "Other Income and Expense" in the
Company's consolidated statements of operations. Such activity resulted in a
currency exchange gain of $168,000 and a currency exchange loss of $(198,000)
for the quarters ended June 30, 1998 and 1997, respectively. Year-to-date
currency
- 16 -
exchange losses amounted to $(142,000) and $(907,000) for fiscal 1998 and 1997,
respectively.
In addition, cumulative foreign currency adjustments resulting from translating
foreign subsidiary financial statements into U.S. dollars are reflected as a
separate component of stockholders' equity on the balance sheet.
No individual foreign subsidiary comprises 10 percent or more of consolidated
revenue or assets. The Company historically has not entered into hedge contracts
or any form of derivative or similar investment.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents amounted to $10.9 million at June 30,
1998, as compared to $21.5 million at September 30, 1997. The Company believes
its fiscal 1998 cash requirements will be satisfied from its cash and cash
equivalents balance, from a $25.0 million revolving loan facility (discussed
below), and from alternative sources of funds such as sales of technology,
technology funding arrangements and others that make sense from a strategic
standpoint.
On October 22, 1997, the Company entered into a $40.0 million loan and security
agreement (the "Loan Agreement") with a new group of financing institutions. The
Loan Agreement has provided the Company with $15.0 million in proceeds (received
on October 22, 1997) from a five-year term loan. In addition, the Loan Agreement
provides for a $25.0 million (maximum value) revolving line of credit for a
three-year period ending in October 2000, subject to extension. Availability of
such funds is subject to satisfying financial covenants and 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, 1998, the
total amount available for borrowings and letters of credit was $25.0 million).
Most assets of the Company, including accounts receivable, inventories and
property, plant and equipment, are pledged as collateral.
No revolving line of credit borrowings was outstanding as of June 30, 1998, as
compared to $4.8 million of such borrowings outstanding (under a previous credit
facility) as of September 30, 1997. There were $975,000 of letters of credit
outstanding as of June 30, 1998.
The Loan Agreement includes covenants which may limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
The most restrictive covenant requires the maintenance of a minimum balance of
$80.0 million for the sum of stockholders' equity (excluding both foreign
currency translation adjustments subsequent to September 30, 1997 and
restructuring charges up to $3.0 million) and outstanding 7 3/4% convertible
senior subordinated debentures, issued in September 1997. As such minimum
balance at June 30, 1998 is calculated to be $80.0 million, this covenant will
be violated if the Company realizes any losses in the future. Therefore, it is
anticipated that financial covenant modifications in the form of an amendment to
the Loan Agreement will be required to satisfy financial covenant requirements
in the future and such modifications are being pursued. In addition to the loan
covenant modifications, the Company is assessing various alternate financing
arrangements so that it may continue strategic product developments.
In the event of non-compliance with financial or other covenants, the Company
would have to obtain a waiver or amendment from the lenders. However, there is
no assurance that the lender would grant such a waiver or amendment and in such
case the Company would have to pursue other sources of financing.
- 17 -
In the past the Company has relied on its ability to offer for sale its common
stock, preferred stock, convertible debentures and/or warrants as viable
alternative sources of financing. The availability and terms of such offerings
in the future will depend on such items as the Company's future financial
performance and/or market demand for the Company's technologies. As a result,
these sources may not be available, or may be available on less favorable terms,
in the future. The Company's inability to have access to the Loan Agreement
funds and/or alternative financing sources would have a material adverse effect
on the Company's financial condition.
Reference is made to the Company's consolidated financial statements and related
notes thereto and exhibits filed with Form 10-K for the year ended September 30,
1997 for further disclosures applicable to the above-referenced Loan Agreement
and other long-term debt obligations, including $25.0 million of 7 3/4%
convertible senior subordinated debentures outstanding as of June 30, 1998 and
September 30, 1997.
Total outstanding debt amounted to $61.2 million at June 30, 1998, as compared
to $56.9 million at September 30, 1997. The net increase of $4.3 million is
comprised of the new $15.0 million term loan referenced above and $0.6 million
of capital equipment financing, partially offset with the repayment of $4.8
million of borrowings outstanding under a previous revolving credit facility and
$6.5 million in principal payments on other outstanding borrowings.
Operating
- ---------
Net cash provided by operating activities improved to $1.1 million for the nine
months ended June 30, 1998 as compared to net cash usage of $5.4 million for the
corresponding period one year ago.
Non-debt working capital, excluding cash and cash equivalents, decreased from
$38.0 million at September 30, 1997 to $28.7 million at June 30, 1998. The $9.3
million reduction is primarily comprised of, among other items, a $7.1 million
managed reduction in inventory, a $5.0 million reduction in accounts receivable
resulting from a reduced level of sales and continued improvement with
collection efforts, offset by a $2.5 million reduction in accounts payable
(related to the inventory reduction).
Investing
- ---------
Property, plant and equipment investments amounted to $5.2 million and $8.7
million in the nine-month periods ended June 30, 1998 and 1997, respectively.
The Company continues to closely monitor all capital spending in an effort to
preserve cash and limit such investment to instances which appear to offer the
greatest return on investment. Investments in capitalized software amounted to
$9.4 million and $9.1 million, respectively, for the nine months ended June 30,
1998 and 1997.
Financing
- ---------
Net cash provided by financing activities amounted to $3.0 million in the nine
months ended June 30, 1998, reflecting $4.3 million of net debt borrowings
($15.6 million in new borrowings less $11.3 million in debt repayments) and $0.5
million of proceeds received from the issuance of common stock pursuant to
employee stock programs and other items less $1.4 million in preferred stock
dividend payments and $0.4 million of costs incurred to execute the new
borrowings. This compares to net cash consumption of $0.5 million in the nine
months ended June 30, 1997, comprised of $1.1 million of proceeds received from
the issuance of common stock pursuant to employee stock programs, offset by $0.2
million of net debt reduction and $1.4 million in preferred stock dividend
payments.
- 18 -
Reference is made to Note 5 on page 7 for a condensed summary of outstanding
long-term debt as of June 30, 1998 and September 30, 1997. Separately, reference
is made to the consolidated financial statements, Notes 5 and 8, filed with Form
10-K for the year ended September 30, 1997 for further disclosures applicable to
outstanding long-term debt and the conversion terms applicable to $25.0 million
of 7 3/4% convertible senior subordinated debentures (Note 5) and $20.0 million
of convertible preferred stock outstanding (Note 8), both of which were
outstanding as of June 30, 1998 and September 30, 1997.
CERTAIN RISK FACTORS
- --------------------
Continuing Losses: The Company has sustained net losses for the past 15 quarters
ended June 30, 1998. There can be no assurance as to when the Company will
achieve net income.
Credit Availability: As noted above, the Company's Loan Agreement requires
compliance with specific financial covenants, including restricted net loss
performance, maintenance of a current ratio which equals or exceeds 1.5 and
capital spending restrictions. 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 new $40.0 million Loan Agreement obligation, such default may
result in payment of other outstanding indebtedness to be accelerated.
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.
- 19 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the
quarter for which this report is filed.
- 20 -
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, Finance and
Principal Financial Officer
Dated: August 14, 1998
- 21 -