SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
---------------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-8086
------
GENERAL DATACOMM INDUSTRIES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 06-0853856
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Middlebury, Connecticut 06762-1299
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's phone number, including area code: (203) 574-1118
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Title of Each Class at March 31, 1999
------------------- ----------------------------
Common Stock, $.10 par value 19,821,621
Class B Stock, $.10 par value 2,093,083
Total Number of Pages in this Document is 24.
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
---------------------
Consolidated Balance Sheets - March 31, 1999 and
September 30, 1998 3
Consolidated Statements of Operations and Accumulated
Deficit - For the Three and Six Months Ended
March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows - For the Six
Months Ended March 31, 1999 and 1998 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 4. Submission of Matters to a Vote of Security-Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
- 2 -
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30,
In thousands, except shares 1998 1998
- -------------------------------------------------------------------------------
ASSETS:
Current assets:
Cash and cash equivalents $4,208 $3,757
Restricted cash 1,000 -
Accounts receivable, less allowance for doubtful
doubtful receivables of $1,501 in March and
$1,442 in September 23,883 30,013
Inventories 30,240 30,574
Deferred income taxes 1,675 1,675
Other current assets 8,296 7,030
- -------------------------------------------------------------------------------
Total current assets 69,302 73,049
===============================================================================
Property, plant and equipment, net 38,815 40,553
Capitalized software development costs, net 21,815 24,286
Other assets 10,907 11,650
- -------------------------------------------------------------------------------
$140,839 $149,538
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $7,111 $8,133
Accounts payable, trade 13,108 12,763
Accrued payroll and payroll-related costs 4,861 5,896
Deferred income 4,799 6,034
Other current liabilities 19,056 15,122
- -------------------------------------------------------------------------------
Total current liabilities 48,935 47,948
===============================================================================
Long-term debt, less current portion 55,047 52,679
Deferred income taxes 2,561 2,589
Other liabilities 1,165 364
- -------------------------------------------------------------------------------
Total liabilities 107,708 103,580
===============================================================================
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: 2,093,083 in March
and September 209 209
Common stock, par value $.10 per share,
35,000,000 shares authorized; issued
and outstanding: 20,152,003 in March
and 19,968,280 in September 2,015 1,997
Capital in excess of par value 151,402 151,052
Accumulated deficit (115,593) (103,066)
Cumulative foreign currency translation
adjustment (3,253) (2,589)
Common stock held in treasury, at cost:
330,382 shares in March and September (2,449) (2,445)
------------------------------------------------------------------------------
Total stockholders' equity 33,131 45,958
------------------------------------------------------------------------------
$140,839 $149,538
==============================================================================
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 Six Months Ended
March 31, March 31,
- ------------------------------------------------------------ -----------------
In thousands, except per share data 1999 1998 1999 1998
- ------------------------------------------------------------ -----------------
Revenues:
Net product sales $25,779 $35,362 $53,616 $71,735
Service revenue 11,471 9,704 23,453 19,185
Other revenue 1,527 3,265 4,127 5,630
- ------------------------------------------------------------ -----------------
38,777 48,331 81,196 96,550
- ------------------------------------------------------------ -----------------
Costs and expenses:
Cost of product sales 13,068 17,802 27,458 36,638
Amortization of capitalized
software development costs 3,010 2,972 6,172 5,972
Cost of service revenue 7,791 6,647 16,012 13,410
Cost of other revenue 124 110 609 247
Selling, general and administrative 14,617 18,178 31,453 38,420
Research and product development 7,135 8,173 14,821 17,107
Restructuring of operations - - 2,000 2,500
- ----------------------------------------------------------- -----------------
45,745 53,882 98,525 114,294
- ----------------------------------------------------------- -----------------
Operating loss (6,968) (5,551) (17,329) (17,744)
- ----------------------------------------------------------- -----------------
Other income (expense):
Gain on sale of assets - - 9,001 -
Interest, net (1,536) (1,415) (3,198) (2,811)
Other, net 165 207 399 136
- ----------------------------------------------------------- -----------------
(1,371) (1,208) 6,202 (2,675)
- ----------------------------------------------------------- -----------------
Loss before income taxes (8,339) (6,759) (11,127) (20,419)
Income tax provision 200 300 500 500
- ----------------------------------------------------------- -----------------
Net loss ($8,539) ($7,059) ($11,627) ($20,919)
=========================================================== =================
Basic and diluted loss per share ($0.41) ($0.35) ($0.58) ($1.02)
=========================================================== =================
Weighted average number of common and
common equivalent shares outstanding 21,803 21,389 21,769 21,389
=========================================================== =================
Accumulated deficit at beginning of
period ($106,604) ($82,184) ($103,066) ($67,874)
Net loss (8,539) (7,059) (11,627) (20,919)
Payment of preferred stock dividends (450) (450) (900) (900)
- ----------------------------------------------------------- ------------------
Accumulated deficit at end of period ($115,593) ($89,693) ($115,593) ($89,693)
=========================================================== ==================
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
-----------------------------
Six Months Ended
March 31,
-----------------------------
In thousands 1999 1998
- -------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($11,627) ($20,919)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 12,874 13,661
Gain on sale of assets (9,001) --
Changes in:
Accounts receivable 5,993 1,726
Inventories 386 4,422
Accounts payable and accrued expenses 2,074 (2,743)
Other net current assets (2,110) 925
Other net long-term assets 391 874
- -------------------------------------------------------------------------------
Net cash used in operating activities (1,020) (2,054)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (4,892) (3,694)
Capitalized software development costs (6,534) (6,013)
- -------------------------------------------------------------------------------
Net cash used in investing activities (11,426) (9,707)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolver borrowings 85,043 --
Payments on revolver borrowings (75,690) (4,799)
Proceeds from sale of assets, net 12,013 --
Proceeds from notes and mortgages 279 15,094
Principal payments on notes and mortgages (8,159) (4,475)
Proceeds from issuing common stock 368 748
Payment of preferred stock dividends (900) (900)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 12,954 5,668
- -------------------------------------------------------------------------------
Effect of exchange rates on cash (57) (14)
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 451 (6,107)
Cash and cash equivalents at beginning of period - (1) 3,757 21,526
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $4,208 $15,419
===============================================================================
(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 March 31, 1999, the consolidated results of
their operations for the three and six months ended March 31, 1999 and 1998, and
their cash flows for the six months ended March 31, 1999 and 1998. 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. In addition, the
markets for the Company's products are characterized by intense competition,
rapid technological development, and frequent new product introductions, all of
which could impact the future value of the Company's 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, 1998.
Certain reclassifications were made to the prior years' consolidated financial
statements to conform to the current year's presentation.
NOTE 2. INVENTORIES
Inventories consist of (in thousands):
March 31, 1999 September 30, 1998
-------------- ------------------
Raw materials $ 9,669 $10,945
Work-in-process 4,020 3,611
Finished goods 16,551 16,018
------- -------
$30,240 $30,574
======= =======
- 6 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of (in thousands):
March 31, 1999 September 30, 1998
-------------- ------------------
Land $ 1,770 $ 1,784
Buildings and improvements 29,992 30,134
Test equipment, fixtures
and field spares 56,299 54,897
Machinery and equipment 60,521 59,957
------- -------
148,582 146,772
Less: accumulated
depreciation and
amortization 109,767 106,219
-------- --------
$ 38,815 $ 40,553
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The accumulated amortization of capitalized software development costs amounted
to $18,096,000 and $17,972,000 at March 31, 1999 and September 30, 1998,
respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
March 31, 1999 September 30, 1998
-------------- ------------------
Revolving credit facility $10,940 $ 1,587
Notes payable 15,512 23,173
7-3/4% convertible senior
subordinated debentures 25,000 25,000
Mortgages payable 10,706 11,052
------- -------
62,158 60,812
Less: current portion 7,111 8,133
------- -------
$55,047 $52,679
======= =======
- 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") which provided the Company with $15.0 million
in proceeds from a five-year term loan and an additional $25.0 million (maximum
value) revolving line of credit for a three-year period ending in October 2000,
subject to extension. Availability of the revolving line of credit funds is
subject to satisfying a borrowing base formula related to levels of certain
accounts receivable and inventories and the satisfaction of other financial
covenants.
Maximum funds available for borrowing under the revolving credit facility
amounted to $19,913,000 and $25,000,000 at March 31, 1999 and September 30,
1998, respectively.
Terms of the Loan Agreement required that the Company raise a minimum of $10.0
million in net proceeds on or before March 31, 1999 through the sale of assets
or execution of an equity offering. The Company satisfied this $10.0 million
covenant requirement on December 31, 1998 (see Note 8, "Sale of Technology
Alliance Group Division," for further discussion of the transaction involved).
In accordance with terms of the Loan Agreement, $4.3 million of the proceeds
received from the transaction were applied to reduce borrowings outstanding
(under the term loan portion of the Loan Agreement) in January 1999.
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,
1998 for further disclosures applicable to the Loan Agreement, including related
financial covenant requirements, and all other outstanding indebtedness of the
Corporation.
NOTE 6. VITAL NETWORK SERVICES, L.L.C. EXPANDED PARTNERSHIP WITH OLICOM, INC.
On October 15, 1998, the Company's VITAL Network Services ("VITAL") business
unit entered into an agreement with Olicom, Inc. whereby VITAL assumed
responsibility for Olicom's service operations in Marlborough, Massachusetts,
and Olicom assigned or transferred its service contract business in North
America to VITAL. In addition to the assumption of obligations for a leased
facility, VITAL will pay Olicom a percentage (25% in the first year, 20%
thereafter) of revenues derived from Olicom's business over a three-year period,
not to exceed $3.8 million. As part of the agreement, VITAL acquired the capital
assets used in Olicom's service business. VITAL recorded the acquisition using
the purchase method of accounting, and due to the conditional nature of the
payments owing to Olicom, no liability or corresponding assets (including
goodwill) were recorded for these payments at the date of acquisition.
Subsequent to the acquisition, VITAL is recording the assets and corresponding
liabilities as such amounts become unconditional.
- 8 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. RESTRUCTURING OF OPERATIONS
In December 1998, the Company restructured its operations into three distinct
business units to increase product line focus and move toward operating
autonomy. Two new business units resulted from the reorganization: Broadband
Systems Division and Network Access Division. The new business units will
supplement the existing VITAL Network Services business unit, which was launched
in October 1997 to provide professional services on multi-vendor networking
equipment on a worldwide basis.
The reorganization resulted in a work force reduction of approximately 200
persons. The net loss for the six months ended March 31, 1999 includes a charge
of $2.0 million, or $0.09 per share, primarily for post-employment benefits
under the Company's severance plan, of which $905,000 was unpaid at March 31,
1999; the Company expects to pay such unpaid amounts during fiscal 1999.
The net loss for the six months ended March 31, 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 8. SALE OF TECHNOLOGY ALLIANCE GROUP ("TAG") DIVISION
In December 1998, the Company reported the sale of its TAG division. The Company
had been actively pursuing the sale of its TAG division since it is not
strategic to the reorganized business units described in Note 7 above. The
division, which developed, patented and licensed advanced modem and access
technologies, was principally comprised of scientists and engineers and held the
rights to certain technologies patented by the division. The sale resulted in a
pre-tax gain of $9.0 million and generated cash proceeds, net of expenses, of
approximately $12.0 million in the six months ended March 31, 1999. Of such
$12.0 million, $1.0 million was being held in escrow and reported as restricted
cash at March 31, 1999. The Company expects to receive such funds on or about
June 30, 1999.
The Company's primary loan agreement provided that a portion of the proceeds
(approximately $4.3 million) be used to reduce outstanding indebtedness under
this agreement, and this occurred in January 1999.
- 9 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted loss per
share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Net loss $(8,539) $(7,059) $(11,627) $(20,919)
Preferred stock dividends 450 450 900 900
Numerator for basic and diluted -------- ------- --------- --------
loss per share - loss applicable
to common stockholders $(8,989) $(7,509) $(12,527) $(21,819)
======== ======== ========= ========
Denominator:
Denominator for basic and diluted
loss per share - weighted
average shares outstanding 21,803 21,389 21,769 21,389
------ ------ ------- ------
Basic and diluted loss per share $(0.41) $(0.35) $(0.58) $(1.02)
======= ======= ======= ======
The net loss reported for the six-month periods ended March 31, 1999 and 1998
includes restructuring charges of $2.0 million (or $0.09 per share) and $2.5
million (or $0.12 per share), respectively. Refer to Note 7, "Restructuring of
Operations," for further discussion.
Outstanding securities (not included in the above computations because of their
dilutive impact on reported loss per share) which could potentially dilute
earnings per share in the future include convertible debentures, convertible
preferred stock and employee stock options and warrants. For additional
disclosure information, including conversion terms, refer to Notes 6, 9 and 11,
respectively, in the Company's consolidated financial statements filed with Form
10-K for the year ended September 30, 1998. Weighted average employee stock
options outstanding during the six months ended March 31, 1999 approximated
3,578,112 shares, of which 3,430,667 would not have been included in diluted
earnings per share calculations for the six months ended March 31, 1999 (if the
Company reported net income for the referenced period) because the effect would
be antidilutive.
- 10 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10. COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS No. 130") establishes standards for the reporting and display of
"comprehensive income," and becomes effective for the Company in fiscal 1999.
Comprehensive income is defined as "all changes in equity during a period except
those resulting from investments by owners and distributions to owners." Under
various accounting pronouncements, certain changes in assets and liabilities are
not reported in a statement of operations for the period in which they are
recognized, but instead are included in balances within a separate component of
stockholders' equity in a statement of financial position. The sum of such
changes, along with other activity reported in the Company's statement of
operations, in effect represents comprehensive income as defined by SFAS No.
130.
The following table sets forth the computation of comprehensive income (loss):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
Net loss $(8,539) $(7,059) $(11,627) $(20,919)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (251) (71) (664) (34)
-------- -------- --------- ---------
Comprehensive loss $(8,790) $(7,130) $(12,291) $(20,953)
======== ======== ========= =========
- 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 Six months ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Net product sales 66.5% 73.2% 66.0% 74.3%
Service revenue 29.6 20.1 28.9 19.9
Other revenue 3.9 6.7 5.1 5.8
----- ----- ----- -----
100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenues 54.1 50.8 54.3 52.1
Amortization of capitalized
software development costs 7.8 6.2 7.5 6.2
Selling, general and
administrative 37.7 37.6 38.7 39.8
Research and product development 18.4 16.9 18.3 17.7
Restructuring of operations - - 2.5 2.6
----- ----- ------ ------
Operating loss (18.0) (11.5) (21.3) (18.4)
------ ----- ------ ------
Net loss (22.0)% (14.6)% (14.3)% (21.7)%
======= ======= ====== ======
Summary comments are as follows: (1) quarter and year-to-date product sales
declined, offset in part with growth in service revenue (see "Revenues" caption
below for further discussion); as a result, product revenue represents a reduced
percentage of total revenue, while service revenue represents an increased
percentage of total revenue; (2) other revenue also represents a lower
percentage of total revenue reflecting a reduction in royalty revenue
attributable to the Company's TAG division being sold in December 1998 (see Note
8 for details); (3) quarter and year-to-date cost of revenue, measured as a
percent of revenue, increased from the prior year reflecting the impact of
(lower margin) service revenue representing a higher percentage of total revenue
and a reduced level of high margin royalty revenue; (4) year-to-date operating
expenses (excluding restructuring charges) are down slightly when measured as a
percent of revenue, despite a lower revenue base in fiscal 1999; this reflects
the impact of the Company's cost reduction actions, which have reduced operating
expenses by $9.3 million, or 16.7%, as compared to the first six months of
fiscal 1998; (5) the year-to-date net loss was reduced reflecting the net impact
of reduced revenues, the positive results of implemented cost reductions and a
gain of $9.0 million from the sale of a division.
- 12 -
Revenues
- --------
Three months ended Six months ended
March 31, March 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Revenues $38,777 $48,331 $81,196 $96,550
Percent change (19.8)% - (15.9)% -
Revenues in the quarter ended March 31, 1999 decreased $9.6 million, or 19.8%,
compared to the prior year, reflecting a product revenue decline of $9.6
million, or 27.1%, offset in part with service revenue growth of $1.8 million,
or 18.2%; other revenue was down $1.8 million from the prior year, reflecting a
reduction in royalty revenue attributable to the TAG division which was sold in
December 1998 (refer to Note 8 for details). Both the Network Access Division
(down $2.3 million, or 14%) and the Broadband Systems Division (down $7.3
million, or 39%) contributed to the product revenue shortfall. The Network
Access business unit experienced a reduction in domestic Telco business and
weakness in other international markets, partially offset with growth in its
domestic distribution business and the Canadian marketplace. The Broadband
Systems business unit experienced a downturn in the international marketplace
(principally Latin America).
In December 1998, the Company announced a restructuring of operations into three
distinct and separately managed business units. The Network Access and Broadband
Systems business units spent considerable time defining their business
strategies, organizational structures and operating procedures during the
quarter ended March 31, 1999. The Company attributes a portion of the product
revenue decline in the quarter ended March 31, 1999 to a diversion of sales
efforts as each business unit defined and executed such plans.
The VITAL Network Services business unit's revenue growth reflects success in
its efforts to procure new third party service business, including VITAL's new
partnership with Olicom, Inc. (refer to Note 6 for details).
Geographically, international revenues accounted for 46% of total
consolidated revenues for the quarter ended March 31, 1999 as compared to 49%
for the comparable period one year ago.
The above trends and discussion also apply to year-to-date revenue performance.
Revenues for the six months ended March 31, 1999 decreased $15.3 million, or
15.9%, as compared to the prior year, reflecting a product revenue decline of
$18.1 million, or 25.3%, offset in part with service revenue growth of $4.3
million, or 22.2%; other revenue was down $1.5 million from the prior year. The
Network Access Division (down $5.3 million, or 16%) and the Broadband Systems
Division (down $12.9 million, or 33%) contributed to the product revenue
shortfall. A significant portion of the Broadband Systems business unit revenue
decline ($9.2 million) was attributable to the division's older internetworking
products (TMS or multiplexer). The division's ATM revenue decline amounted to
$3.7 million on a year-to-date basis.
Geographically, international revenues accounted for 47% and 52% of total
consolidated revenues for the six-month periods ended March 31, 1999 and
1998, respectively.
- 13 -
Cost of Revenues:
- ----------------
Three months ended Six months ended
March 31, March 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Cost of revenues $20,983 $24,559 $44,079 $50,295
As a percent of revenues 54.1% 50.8% 54.3% 52.1%
Amortization of capitalized
software development costs $3,010 $2,972 $6,172 $5,972
As a percent of revenues 7.8% 6.1% 7.6% 6.2%
Cost of revenues, measured as a percent of revenues, increased by 3.3 and 2.2
percentage points, respectively, for the three- and six-month periods ended
March 31, 1999 as compared to the corresponding periods one year ago. Product
cost (measured as a percent of revenue) was relatively unchanged. The increase
in total cost is principally attributable to revenue mix. Service revenue, which
generates lower margin than product revenue, represented a larger percentage of
the Company's total revenue in fiscal 1999 (approximately 30% and 29% of total
revenue for the three- and six-month periods ended March 31, 1999, respectively,
as compared to 20% for the same periods of fiscal 1998). In addition, a
reduction in high margin royalty revenue (attributable to the sale of TAG) also
contributed to the margin decline. These margin declines were partially offset
with improved margins from the service business as a result of the larger
revenue base.
Amortization of capitalized software development costs did not change materially
from the prior year. However, due to the lower revenues, such costs represented
a higher percentage of revenue in both the three and six months ended March 31,
1999 as compared to the corresponding periods of fiscal 1998.
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 Six months ended
March 31, March 31,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Selling, general, and
administrative expenses $14,617 $18,178 $31,453 $38,420
Percent change (19.6)% -- (18.1)% --
As a percent of revenues 37.7% 37.6% 38.7% 39.8%
- 14 -
The Company's cost reduction plans (refer to Note 7, "Restructuring of
Operations") have been effective in reducing selling, general and administrative
expenses. Selling, general and administrative expenses are down $3.6 million, or
19.6%, for the quarter ended March 31, 1999 and $7.0 million, or 18.1%, for the
six-month period ended March 31, 1999 as compared to the corresponding periods
of fiscal 1998. Cost reductions were achieved in both domestic and international
operations despite ongoing salary merit increases and other inflationary
increases. The cost reductions are comprised of reduced compensation, fringe
benefit and travel costs, a more effectively managed promotion and advertising
program, and a reduced level of capital spending and related depreciation
expense resulting from effective management of the Company's capital investment
program. Despite a significantly reduced revenue base, year-to-date selling,
general and administrative expenses were also down 1.1 percentage points when
measured as a percent of revenue.
Research and Product Development Costs
- --------------------------------------
Three months ended Six months ended
March 31, March 31,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
Gross expenditures $10,324 $11,186 $21,355 $23,120
Percent change (7.7)% -- (7.6)% --
As percent of revenues 26.6 % 23.1% 26.3 % 23.9%
----------------------------------------------------------------------------
Capitalized software costs $3,189 $3,013 $6,534 $6,013
As a percent of gross
expenditures 30.9% 26.9% 30.6% 26.0%
----------------------------------------------------------------------------
Net research and product
development costs $7,135 $8,173 $14,821 $17,107
Percent change (12.7)% -- (13.4)% --
As a percent of revenues 18.4 % 16.9% 18.3 % 17.7%
----------------------------------------------------------------------------
The Company continues to invest heavily in research and product development
during fiscal 1999, with gross spending for the first six months approximating
an annual rate of $43 million, or 26% of revenue. Such spending is, however,
being closely monitored under the Company's cost reduction program. The
Company's cost reduction program strategy has been to significantly reduce or
eliminate development activities targeted at sustaining legacy products and,
more importantly, to limit the investment of new funds into projects considered
to have only the highest likelihood of success. As a result, the Company has not
been replacing non-critical positions as employee attrition occurs. Furthermore,
other positions were eliminated as part of the December 1998 restructuring
process.
The end result of the Company's cost reduction program has been more focused
development effort and gradual headcount reduction. Gross spending for the
quarter ended March 31, 1999 was down $0.9 million, or 7.7%, as compared to
quarter ended March 31, 1998. Year-to-date gross spending follows a similar
pattern, down $1.8 million, or 7.6%, from the same period one year ago. The
spending reductions
- 15 -
are principally attributable to lower compensation costs (resulting from the
reduction in worldwide engineering headcount), and were achieved despite ongoing
salary merit increases and other inflationary increases.
Spending in the ATM area by the Broadband Systems business unit accounted for
73% and 54% of total product development spending for the quarters ended March
31, 1999 and 1998, respectively, and 69% and 54% of total product development
spending for the six month periods ended March 31, 1999 and 1998, respectively.
The complexity of the ATM technology has in the past demanded, and will continue
to demand, significant research and product development investment.
Capitalized software development costs, measured as a percentage of gross
spending, were higher than the previous year for both the three- and six-month
periods ended March 31, 1999, indicating that software development activities
represent a greater proportion of total research and product development
spending.
The Company conducts research and product development activities at four
locations, with the largest pool of resource located in Middlebury, Connecticut,
and remote facilities located in Boston, Montreal and England. The Company is
currently reviewing options for strategic partnering of certain research and
development activities.
Restructuring of Operations
- ---------------------------
Results for the six-month periods ended March 31, 1999 and 1998 include
restructuring charges of $2.0 million and $2.5 million, respectively. Refer to
Note 7, "Restructuring of Operations," for more detailed discussion. The
restructuring effort executed in December 1998 involved the creation of two new
and distinct business units, the Network Access Division and the Broadband
Systems Division. In an effort to improve product line focus and overall
operational productivity, each business unit is comprised of a dedicated general
manager and dedicated sales, marketing and product development functions. During
the quarter ended March 31, 1999, the new business units made significant
progress in defining their business strategies, organizational structures and
operating procedures. As a result, the Company anticipates productivity
improvements across all operational areas from each business unit going forward.
Interest and Other Income and Expense
- -------------------------------------
Net interest expense amounted to $1.5 million and $1.4 million for the quarters
ended March 31, 1999 and 1998, respectively. On a year-to-date basis, net
interest expense amounted to $3.2 million and $2.8 million for the six-month
periods ended March 31, 1999 and 1998, respectively. The increases are
principally attributable to a reduced level of cash available for investment and
a corresponding reduction in interest income.
The six months ended March 31, 1999 includes a $9.0 million gain from the sale
of the Company's Technology Alliance Group division. Refer to Note 8, "Sale of
Technology Alliance Group Division," for further discussion.
Separately, refer to "Foreign Currency Risk" below for discussion of foreign
currency exchange activity included in other income and expense.
- 16 -
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Company, principally for foreign income and
domestic state taxes, amounted to $200,000 and $300,000 in the quarters ended
March 31, 1999 and 1998, respectively, and $500,000 for each of the six-month
periods ended March 31, 1999 and 1998. 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 fluctuation
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 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 or (loss) of $42,000 and $38,000 for the quarters ended
March 31, 1999 and 1998, respectively, and $270,000 and $(212,000) for the
six-month periods ended March 31, 1999 and 1998, respectively.
The introduction of the Euro as a common currency for members of the European
Monetary Union is scheduled to take place in the Company's fiscal year 1999. The
Company has not determined what impact, if any, the Euro will have on foreign
exchange exposure. However, no individual foreign subsidiary comprises 10
percent or more of consolidated revenue or assets, and most subsidiary
operations represent less than 5 percent of consolidated revenue or assets. See
"Market Risk" below for further discussion of foreign currency risk.
As a result of lower 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 Mexican peso as the functional currency effective
January 1, 1999. Previously the U.S. dollar had been the designated functional
currency. This change did not have a material impact on current quarter
financial results, and the Company does not expect this change to have a
material impact on future financial results.
Market Risk
- -----------
The Company is exposed to various market risks, including potential losses
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company historically has not entered
into derivatives, forward exchange contacts or other financial instruments for
trading, speculation or hedging purposes.
Interest Risk
- -------------
For discussion applicable to interest risk, reference is made to Form 10-K filed
with the Securities and Exchange Commission for the year ended September 30,
1998, Item 7, Management's Discussion and Analysis of Results of Operations and
Financial Condition, under the caption "Interest Risk."
- 17 -
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents amounted to $4.2 million at March 31,
1999, as compared to $3.8 million at September 30, 1998. Future cash
requirements are planned to be satisfied from a combination of existing cash
balances, additional borrowings under its revolving credit facility ($8.6
million of additional borrowings available at March 31, 1999) and from alternate
financing sources. These alternate sources are targeted to include the sale of
assets, technologies and/or interests in existing businesses or operations which
make sense from a strategic standpoint (for example, in December 1998 the
Company completed the sale of its Technology Alliance Group division for
approximately $16.3 million ($12.0 million of net proceeds after related selling
costs). Refer to Note 8, "Sale of Technology Alliance Group Division," for
further discussion. Other alternative sources could also include the issuance of
new debt instruments, debt arrangements and/or equity securities.
In addition, on December 18, 1998, the Company announced a restructuring of its
business into three primary operating units and the intent to sell or partner
certain other operations. The Company anticipates annual operating expense
reductions to exceed $15.0 million when the plan is fully implemented. Refer to
Note 7, "Restructuring of Operations," for further discussion of the business
restructuring.
On October 22, 1997, the Company entered into a $40.0 million loan and security
agreement (the "Loan Agreement") which provided the Company with $15.0 million
in proceeds from a five-year term loan and an additional $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, and satisfaction of other financial covenants. Such formula and
covenants were amended on November 25, 1998, along with changes in interest
rates and other items, as discussed below.
Maximum funds available for borrowing under the revolving line of credit portion
of the Loan Agreement amounted to $19.9 million and $25.0 million at March 31,
1999 and September 30, 1998, respectively. Outstanding revolving line of credit
borrowings amounted to $11.0 million and $1.6 million at March 31, 1999 and
September 30, 1998, respectively. Separately, letters of credit in the amount of
$284,000 and $763,000 were outstanding at March 31, 1999 and September 30, 1998,
respectively. Most assets of the Company, including accounts receivable,
inventories and property, plant and equipment, are pledged as collateral.
The Loan Agreement's covenants may, if violated, limit access to future
borrowings and may accelerate payment requirements on outstanding borrowings.
The most restrictive covenant requires the Company to maintain specified minimum
balances consisting of the sum of stockholders' equity (excluding foreign
currency translation adjustments subsequent to September 30, 1997 and
restructuring charges recorded in fiscal 1998 or thereafter not to exceed $4.5
million) and outstanding 7 3/4% convertible debentures (hereinafter referred to
as "minimum equity balance"). Minimum equity balance requirements under the Loan
Agreement amount to $59.5 million, $57.1 million and $57.0 million on March 31,
1999, June 30, 1999 and September 30, 1999, respectively, and increases by $1.0
million per quarter beginning December 31, 1999. As such minimum equity balance
at March 31, 1999 approximated $64.2 million, this covenant effectively limits
the sum of cumulative future losses and preferred stock dividend payments
- 18 -
to $7.2 million for the balance of the fiscal year ending September 30, 1999.
Other covenants require that the Company maintain a current ratio equal to or
greater than 1.4 and that annual capital expenditures not exceed $15.0 million.
Separately, terms of the Loan Agreement required that the Company raise a
minimum of $10.0 million in net proceeds on or before March 31, 1999 from the
sale of assets or execution of an equity offering. The Company satisfied this
$10.0 million covenant requirement on December 31, 1998 (see Note 8, "Sale of
Technology Alliance Group Division," for further discussion of the transaction
involved). In accordance with terms of the Loan Agreement, $4.3 million of the
proceeds received from the transaction were applied to reduce borrowings
outstanding under the term loan portion of the Loan Agreement in January 1999.
Since the Company realized losses of $33.4 million for total fiscal 1998 and
$11.6 million for the six months ended March 31, 1999, a combination of cost
reductions and/or revenue growth will be required in the remainder of fiscal
1999 to maintain compliance with the minimum equity balance covenant. (Refer to
Note 7, "Restructuring of Operations," for discussion of cost reduction efforts
executed in December 1998). In the event of non-compliance with financial or
other covenants, the Company would have to obtain a waiver or amendment from the
lender, and there is no assurance that the lender would grant such a waiver or
amendment. The Company's inability to have access to the Loan Agreement and/or
alternative financing sources would have a material adverse effect on the
Company's financial condition. Management has implemented and is committed to
execute further cost reduction (or other) actions as necessary to improve the
Company's operating results and maintain availability of the Loan Agreement.
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, the Company's ability to authorize additional shares of its common
stock 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,
1998 for further disclosures applicable to the above-referenced Loan Agreement
and all other outstanding indebtedness of the Corporation.
Total outstanding debt amounted to $62.2 million at March 31, 1999, as compared
to $60.8 million at September 30, 1998. The net increase of $1.4 million is
comprised of $9.3 million of new (net) borrowings under the Company revolving
line of credit and other miscellaneous borrowings of $0.3 million, less $8.2
million of principal payments made to reduce other outstanding borrowings.
Operating
- ---------
Net cash used in operating activities amounted to $1.0 million and $2.0
million in the six months ended March 31, 1999 and 1998, respectively.
Non-debt working capital, excluding cash and cash equivalents, decreased
from $29.5 million at September 30, 1998 to $23.3 million at March 31, 1999,
for a reduction of $6.2 million. The single
- 19 -
largest factor in this change was a $6.1 million reduction in accounts
receivable, reflecting both favorable collection activity and the reduced level
of business this quarter as compared to the quarter ended September 30, 1998.
Investing
- ---------
Investment in property, plant and equipment amounted to $4.9 million and $3.7
million in the six-month periods ended March 31, 1999 and 1998, respectively.
Approximately $600,000 of the fiscal 1999 capital investment activity is
applicable to VITAL Network Services purchase of Olicom assets, for use in
servicing Olicom customers (see Note 6, "VITAL Network Services, L.L.C. Expanded
Partnership With Olicom, Inc." for further discussion). 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 $6.5 million and
$6.0 million for the six-month periods ended March 31, 1999 and 1998,
respectively,
Financing
- ---------
Net cash provided by financing activities in the six-month period ended March
31, 1999 amounted to $13.0 million, comprised of $12.0 million of proceeds
received from the sale of TAG, $1.5 million of net debt borrowings, $0.4 million
of proceeds received from the issuance of common stock pursuant to employee
stock programs and the payment of $0.9 million in preferred stock dividends.
This compares to $5.6 million of net cash proceeds generated in the six months
ended March 31, 1998, reflecting $5.8 million of net debt borrowings ($15.1
million in new borrowings less $9.3 million in debt repayments), $0.7 million of
proceeds received from the issuance of common stock pursuant to employee stock
programs and the payment of $0.9 million in preferred stock dividends.
Reference is made to Note 5 on page 7 for a condensed summary of outstanding
long-term debt as of March 31, 1999 and September 30, 1998. Separately,
reference is made to the consolidated financial statements, Notes 6 and 9, filed
with Form 10-K for the year ended September 30, 1998 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 6) and
$20.0 million of convertible preferred stock (Note 9), both of which were
outstanding as of March 31, 1999 and September 30, 1998.
Future Adoption Of New Accounting Statements
- --------------------------------------------
Reference is made to the consolidated financial statements filed with Form 10-K
for the year ended September 30, 1998, Note 1, for discussion regarding future
adoption of new accounting pronouncements.
Year 2000 Compliance
- --------------------
Reference is made to Form 10-K filed with the Securities and Exchange Commission
for the year ended September 30, 1998, Item 7, Management's Discussion and
Analysis of Results of Operations and Financial Condition, under the caption
"Year 2000 Compliance" for year 2000 compliance related discussion. The
referenced discussion remains current as of March 31, 1999.
- 20 -
CERTAIN RISK FACTORS
Continuing Losses: The Company has sustained net losses for the past 18 quarters
ended March 31, 1999. 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 1.4 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 would be required
to seek other financing to fund its operations, and there can be no assurance
the Company will be able to obtain such financing or, if obtained, on terms
deemed favorable by the Company. Furthermore, in the event the Company does
default on its $40.0 million Loan Agreement obligation, such default may result
in a requirement to accelerate the due dates and payment of other outstanding
indebtedness.
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.
Common Stock Availability: The Company has in the past relied on its ability to
issue common stock, convertible debt and convertible preferred stock as a source
of funds for general operating purposes. Additional shares of common stock need
to be authorized by a vote of a majority of shareholders at a shareholders'
meeting in June 1999 in order to assure availability of common stock for such
purposes. If not approved, the Company may 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.
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. Examples of risks and uncertainties
include, among other things: (i) the Company's ability to maintain compliance
with its Loan Agreement or other financing arrangements, including the ability
to achieve further amendments and/or waivers as required to maintain compliance
with terms of the Loan Agreement and all other outstanding indebtedness; (ii)
the possibility that the additional indebtedness
- 21 -
permitted to be incurred under the revolving credit facility portion of the Loan
Agreement may not be sufficient to maintain the Company's operations; (iii) the
Company's ability to satisfy its financial obligations and to obtain additional
indebtedness, if required; (iv) the Company's ability to effectively restructure
its operations and achieve profitability; (v) the Company's ability to retain
customers; (vi) the Company's ability to maintain existing supply arrangements
and terms; and (vii) the Company's ability to retain key employees.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the date hereof. The
Company undertakes no obligation and does not intend to update these
forward-looking statements to reflect events or circumstances that arise after
the date hereof.
- 22 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
On February 4, 1999, at the Annual Meeting of Stockholders of the
Corporation, the stockholders:
1. Elected Frederick R. Cronin as a director to the Corporation for a
term of three years:
Number of votes cast for: 8,860,413
Number of votes withheld: 2,037,788
2. Adopted an Amendment to the Corporation's 1979 Employee Stock
Purchase Plan reserving an additional 600,000 shares of the
Corporation's Common Stock for issuance thereunder:
Number of votes cast for: 14,171,847
Number of votes cast against: 5,129,807
Number of votes abstained: 366,779
3. Added a by-law which prohibits the repricing of stock options
already issued and outstanding to a lower strike price at any time
during the terms of such option without prior approval of
shareholders:
Number of votes cast for: 5,755,519
Number of votes cast against: 4,947,119
Number of votes abstained: 195,563
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Index of Exhibits
3.1 Amended By-Laws of the Corporation.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
- 23 -
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 G. HENRY
---------------------------------
William G. Henry
Vice President, Finance and
Principal Financial Officer
Dated: May 17, 1999
- 24 -