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, 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 June 30, 1999
------------------- ----------------------------
Common Stock, $.10 par value 19,828,321
Class B Stock, $.10 par value 2,092,383
Total Number of Pages in this Document is 26.
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information
Consolidated Balance Sheets - June 30, 1999 and
September 30, 1998 3
Consolidated Statements of Operations and Accumulated
Deficit - For the Three and Nine Months Ended
June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows - For the Nine Months
Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II.Other Information
Item 4. Submission of Matters to a Vote of Security-Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
- 2 -
PART I. FINANCIAL INFORMATION
GENERAL DATACOMM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
In thousands, except shares 1999 1998
- -------------------------------------------------------------------------------
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents $ 3,580 $ 3,757
Restricted cash 1,000 -
Accounts receivable, less allowance
for doubtful receivables of $1,720 in
June and $1,442 in September 26,871 30,013
Inventories 30,309 30,574
Deferred income taxes 1,499 1,675
Other current assets 9,315 7,030
- -------------------------------------------------------------------------------
Total current assets 72,574 73,049
===============================================================================
Property, plant and equipment, net 37,205 40,553
Capitalized software development costs, net 21,815 24,286
Other assets 12,693 11,650
- -------------------------------------------------------------------------------
$144,287 $149,538
===============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long-term debt $ 4,370 $8,133
Accounts payable, trade 14,479 12,763
Accrued payroll and payroll-related costs 6,377 5,896
Deferred income 4,908 6,034
Other current liabilities 21,125 15,122
- -------------------------------------------------------------------------------
Total current liabilities 51,259 47,948
===============================================================================
Long-term debt, less current portion 64,131 52,679
Deferred income taxes 2,240 2,589
Other liabilities 1,131 364
- -------------------------------------------------------------------------------
Total liabilities 118,761 103,580
===============================================================================
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,
10,000,000 shares authorized; issued and
outstanding: 2,092,383 in June and 2,093,083
in September 209 209
Common stock, par value $.10 per share,
50,000,000 shares authorized; issued and
outstanding: 20,158,703 in June and
19,968,280 in September 2,016 1,997
Capital in excess of par value 151,413 151,052
Accumulated deficit (123,117) (103,066)
Cumulative foreign currency translation
adjustment (3,346) (2,589)
Common stock held in treasury, at cost:
330,382 shares in June and September (2,449) (2,445)
- -------------------------------------------------------------------------------
Total stockholders' equity 25,526 45,958
- -------------------------------------------------------------------------------
$144,287 $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 Nine Months Ended
June 30, June 30,
---------------- -----------------
In thousands, except per share data 1999 1998 1999 1998
- ------------------------------------------------------- ------------------
Revenues:
Net product sales $30,163 $37,154 $83,779 $108,889
Service revenue 11,112 9,221 34,565 28,406
Other revenue 1,094 1,656 5,221 7,286
- --------------------------------------------------------- ------------------
42,369 48,031 123,565 144,581
- --------------------------------------------------------- ------------------
Costs and expenses:
Cost of product sales 15,504 17,761 42,962 54,399
Amortization of capitalized
software development costs 3,000 2,921 9,172 8,893
Cost of service revenue 7,984 6,709 23,996 20,119
Cost of other revenue 87 144 696 391
Selling, general and administrative 14,514 17,788 45,967 56,208
Research and product development 6,402 7,396 21,223 24,503
Restructuring of operations - - 2,000 2,500
- --------------------------------------------------------- ------------------
47,491 52,719 146,016 167,013
- --------------------------------------------------------- ------------------
Operating loss (5,122) (4,688) (22,451) (22,432)
- --------------------------------------------------------- ------------------
Other income (expense):
Gain on sale of assets - - 9,001 -
Interest, net (1,801) (1,530) (4,999) (4,341)
Other, net 49 32 448 168
- --------------------------------------------------------- ------------------
(1,752) (1,498) 4,450 (4,173)
- --------------------------------------------------------- ------------------
Loss before income taxes (6,874) (6,186) (18,001) (26,605)
Income tax provision 200 100 700 600
- --------------------------------------------------------- ------------------
Net loss ($7,074) ($6,286) ($18,701) ($27,205)
========================================================= ==================
Basic and diluted loss per share ($0.34) ($0.31) ($0.92) ($1.33)
========================================================= ==================
Weighted average number of common and
common equivalent shares outstanding 21,918 21,542 21,819 21,458
========================================================= ==================
Accumulated deficit at beginning
of period ($115,593) ($89,693) ($103,066) ($67,874)
Net loss (7,074) (6,286) (18,701) (27,205)
Payment of preferred stock dividends (450) (450) (1,350) (1,350)
- --------------------------------------------------------- ------------------
Accumulated deficit at end of period ($123,117) ($96,429) ($123,117) ($96,429)
========================================================= ==================
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 1999 1998
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss ($18,701) ($27,205)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 19,574 19,963
Gain on sale of assets (9,001) -
Changes in:
Accounts receivable 2,936 4,488
Inventories 329 6,770
Accounts payable and accrued expenses 7,098 (2,694)
Other net current assets (2,588) 89
Other net long-term assets (2,176) (355)
- ------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (2,529) 1,056
- ------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (6,282) (5,247)
Capitalized software development costs (9,534) (9,354)
- ------------------------------------------------------------------------------
Net cash used in investing activities (15,816) (14,601)
- ------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from revolver borrowings 120,646 -
Payments on revolver borrowings (109,211) (4,799)
Proceeds from sale of assets, net 12,013 -
Proceeds from notes and mortgages 14,679 15,094
Principal payments on notes and mortgages (18,898) (6,517)
Proceeds from issuing common stock 380 534
Payment of preferred stock dividends (1,350) (1,350)
- ------------------------------------------------------------------------------
Net cash provided by financing activities 18,259 2,962
- ------------------------------------------------------------------------------
Effect of exchange rates on cash (91) (42)
- ------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (177) (10,625)
Cash and cash equivalents at beginning
of period - (1) 3,757 21,526
- ------------------------------------------------------------------------------
Cash and cash equivalents at end of period - (1) $3,580 $10,901
==============================================================================
(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, 1999, the consolidated
results of their operations for the three and nine months ended
June 30, 1999 and 1998, and their cash flows for the nine months
ended June 30, 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):
June 30, 1999 September 30, 1998
------------- ------------------
Raw materials $10,612 $10,945
Work-in-process 3,003 3,611
Finished goods 16,694 16,018
-------- -------
$30,309 $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):
June 30, 1999 September 30, 1998
------------- ------------------
Land $ 1,763 $ 1,784
Buildings and improvements 29,939 30,134
Test equipment, fixtures
and field spares 56,970 54,897
Machinery and equipment 60,849 59,957
-------- --------
149,521 146,772
Less: accumulated
depreciation and
amortization 112,316 106,219
$ 37,205 $ 40,553
======== ========
NOTE 4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS
The accumulated amortization of capitalized software development
costs amounted to $18,356,000 and $17,972,000 at June 30, 1999
and September 30, 1998, respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of (in thousands):
June 30, 1999 September 30, 1998
------------- -----------------
Revolving credit facility $13,022 $ 1,587
Notes payable 19,945 23,173
7-3/4% convertible senior
subordinated debentures 25,000 25,000
Mortgages payable 10,534 11,052
------- -------
68,501 60,812
Less: current portion 4,370 8,133
------- -------
$64,131 $52,679
======= =======
- 7 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Revolving Credit Facility
Through May 14, 1999, the Company had a $40.0 million loan and
security agreement (the "Loan Agreement") in place 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 was subject to satisfying a borrowing base formula
related to levels of certain accounts receivable and inventories
and the satisfaction of other financial covenants.
On May 14, 1999, the Company entered into a new three-year $40.0
million loan and security agreement (the "New Loan Agreement")
with Foothill Capital Corporation to provide additional funds for
operations and replace the Company's existing bank group. Under
provisions of the New Loan Agreement, the Company's cash
availability increased by $6.3 million (before related closing
costs incurred), as a result of the refinancing of the existing
term loan, which had an outstanding balance of approximately $8.7
million, with $15.0 million in new term loans. Furthermore,
financial covenants and formulas in the New Loan Agreement were
restructured to be less restrictive to the Company.
The New Loan Agreement is comprised of $15.0 million in term
loans and a $25.0 million (maximum value) revolving line of
credit. The term loans will bear interest at an annual rate of
12.5% during the first year, 13.0% in the second year and 14.0%
thereafter, payable monthly. Commencing in June 2000, monthly
principal payments in the amount of $312,000 become payable, and
the term loans are due and payable in full upon termination of
the New Loan Agreement. One term loan is convertible into the
Company's common stock at a conversion price of $5.00 per share,
or a maximum of 600,000 shares.
Under the revolving line of credit portion of the New Loan
Agreement, funds are advanced subject to satisfying a borrowing
base formula related to levels of certain accounts receivable and
inventories and the satisfaction of other financial covenants.
Under this formula, at June 30, 1999, the Company would have been
able to borrow up to the full $25.0 million. The actual amount
borrowed at June 30, 1999 was $13.0 million.
Most assets of the Company, including accounts receivable,
inventories and property, plant and equipment are pledged as
collateral under the New Loan Agreement. Interest on revolver
borrowings is payable monthly at the greater of prime plus 0.625%
or 7.0% per annum. The applicable prime rate was 7.75% at June
30, 1999.
- 8 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5. LONG-TERM DEBT (continued)
Financial covenants of the New Loan Agreement require that the
Company's reported stockholders' equity, excluding the impact of
any foreign currency translation adjustments occurring subsequent
to March 31, 1999, equal or exceed $18.1 million (such
stockholders' equity, as defined, amounted to $25.6 million at
June 30, 1999). Separately, annual capital expenditures are
limited to a maximum of $12.0 million under the New Loan
Agreement.
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 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 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.
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 nine months
ended June 30, 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 $667,000 was unpaid at June
30, 1999; the Company expects to pay such unpaid amounts during
fiscal 1999 or the early part of fiscal 2000.
- 9 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7. RESTRUCTURING OF OPERATIONS (continued)
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 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 was 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 nine months ended June 30, 1999. Of such
$12.0 million, $1.0 million was being held in escrow and reported
as restricted cash at June 30, 1999; the Company received the
$1.0 million of escrowed funds in July 1999.
The Company's previous Loan Agreement provided that a portion of
the proceeds (approximately $4.3 million) be used to reduce
outstanding indebtedness under the Loan Agreement, and this
occurred in January 1999.
- 10 -
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 Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------- -----------------
Numerator:
Net loss $(7,074) $(6,286) $(18,701) $(27,205)
Preferred stock dividends 450 450 1,350 1,350
Numerator for basic and
diluted loss per share -
loss applicable to common
stockholders $(7,524) $(6,736) $(20,051) $(28,555)
======== ======== ========= =========
Denominator:
Denominator for basic and
diluted loss per share -
weighted average shares
outstanding 21,918 21,542 21,819 21,458
------ ------- ------- -------
Basic and diluted loss per
share $(0.34) $(0.31) $(0.92) $(1.33)
======= ======= ======= =======
The net loss reported for the nine-month periods ended June 30,
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 nine months ended June 30, 1999 approximated 3,508,400
shares, of which 3,263,900 would not have been included in
diluted earnings per share calculations for the nine months
ended June 30, 1999 (if the Company reported net income for the
referenced period) because the effect would be antidilutive.
- 11 -
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
became 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 Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
------- -------- -------- ---------
Net loss $(7,074) $(6,286) $(18,701) $(27,205)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustments (93) (261) (757) (295)
-------- -------- --------- ---------
Comprehensive loss $(7,167) $(6,547) $(19,458) $(27,500)
======== ======== ========= =========
- 12 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General Summary Discussion
The quarter ended June 30, 1999 represents the second fiscal quarter completed
since the Company restructured its business operations into three distinct
business units in December 1998, and the new business units have started to show
improved results when compared to the preceding quarter ended March 31, 1999.
The Network Access business unit achieved product revenue growth of $1.5
million, or 10%, and the Broadband Systems business unit achieved product
revenue growth of $2.9 million, or 26%.
In addition, the business units were able to reduce expenses in accordance with
plans. When compared to the preceding quarter ended March 31, 1999, operating
expenses were reduced by $836,000, or approximately 4%. Furthermore, in July
1999, the Company decided to suspend product development activities in its U.K.
Advanced Research Centre. All documentation and intellectual property will be
transferred to the U.S. research and development operation. The Company's
operating expenses will be reduced by, approximately, an additional $1.0 million
per quarter, or $4.0 million annually, as a result of this action.
On May 14, 1999, the Company signed a new $40.0 million loan agreement with
Foothill Capital Corporation ("New Loan Agreement"). Under provisions of the New
Loan Agreement, the Company received an immediate cash infusion of $6.3 million.
Furthermore, financial covenants and formulas in the the New Loan Agreement were
restructured to be less restrictive to the Company (refer to Note 5, "Long-Term
Debt" for additional information).
Descriptions of current quarter and fiscal year-to-date results as compared to
the corresponding periods of the previous fiscal year are included below.
Results of Operations
The following table sets forth selected consolidated financial data stated as a
percentage of total revenues (unaudited):
- 13 -
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues:
Net product sales 71.2% 77.4% 67.8% 75.3%
Service revenue 26.2 19.2 28.0 19.7
Other revenue 2.6 3.4 4.2 5.0
---- ---- ---- ----
100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenues 55.6 51.2 54.8 51.8
Amortization of capitalized
software development costs 7.1 6.1 7.4 6.2
Selling, general and
administrative 34.3 37.1 37.2 38.9
Research and product
development 15.1 15.4 17.2 16.9
Restructuring of operations -- -- 1.6 1.7
------- ------- ------- ------
Operating loss (12.1) (9.8) (18.2) (15.5)
------- ------- ------- -------
Net loss (16.7)% (13.1)% (15.1)% (18.8)%
======= ======= ======= =======
Summary comments are as follows: (1) quarter and year-to-date product sales
declined, offset in part with growth in service revenue (refer to "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 (refer to
Note 8 for details); (3) quarter and year-to-date cost of revenues, measured as
a percent of revenue, increased from the prior year reflecting the combined
impact of (lower margin) service revenue representing a higher percentage of
total revenue, reduced amounts of (higher margin) royalty revenue attributable
to the sale of TAG, and some product margin erosion; (4) year-to-date operating
expenses (excluding restructuring charges) are down when measured as a percent
of revenue, despite lower revenue bases in fiscal 1999; this reflects the impact
of the Company's restructuring and cost reduction actions, which have reduced
operating expenses by $13.5 million, or 16.8%, as compared to the first nine
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 TAG.
Revenues
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenues $42,369 $48,031 $123,565 $144,581
Percent change (11.8)% -- (14.5)% --
- 14 -
Revenues in the quarter ended June 30, 1999 decreased $5.7 million, or 11.8%,
compared to the prior year, reflecting a product revenue decline of $7.0
million, or 18.8%, offset in part with service revenue growth of $1.9 million,
or 20.5%; other revenue was down $0.6 million from the prior year, reflecting a
reduction in royalty revenue attributable to the sale of the TAG division in
December 1998 (refer to Note 8 for details). The entire product revenue decline
occurred in the Broadband Systems Division, whose revenues were down $7.2
million, or 33%; the Division's older legacy internetworking product line
accounted for most ($5.2 million) of the reduction. Geographically, the
Broadband Systems Division revenue loss was experienced in Central America,
Latin America and Asia. The Network Access Division experienced modest revenue
growth of $0.2 million.
The VITAL Network Services business unit's revenue growth of $1.9 million, or
20.5%, reflects an increase in its third-party service business, including
VITAL's new partnership with Olicom, Inc. (refer to Note 6 for details),
partially offset with a decline in services related to the installed base of
GDC's legacy products.
Geographically, international revenues accounted for 44% of total consolidated
revenues for the quarter ended June 30, 1999 as compared to 48% for the
comparable period one year ago, principally reflecting the revenue loss
experienced in Central America, Latin America and Asia.
Year-to-date: Revenues for the nine months ended June 30, 1999 decreased by
$21.0 million, or 14.5%, as compared to the prior year, reflecting a product
revenue decline of $25.1 million, or 23.1%, offset in part with service revenue
growth of $6.2 million, or 21.7%; other revenue was down $2.1 million from the
prior year, primarily reflecting the sale of TAG referenced above. Both the
Broadband Systems Division (down $19.9 million, or 33%) and Network Access
Division (down $5.2 million, or 11%) contributed to the year-to-date product
revenue decline. A significant portion of the Broadband Systems Division's
revenue decline ($14.4 million) was attributable to the division's older legacy
internetworking product line. The division's ATM revenue decline amounted to
$5.5 million on a year-to-date basis. Geographically, most of the Broadband
Systems Division's revenue loss occurred in Central America, Latin America and
Asia. The Network Access Division's revenue loss was principally experienced in
the domestic (Telco) marketplace; internationally, strong revenue growth in
Canada offset reductions in Central America, Latin America and Europe.
The above discussion regarding VITAL's third-party revenue growth also applies
to the $6.2 million, or 21.7%, revenue growth which VITAL Network Services has
achieved on a year-to-date basis.
Geographically, international revenues accounted for 46% and 49% of total
consolidated revenues for the nine-month periods ended June 30, 1999 and 1998,
respectively, again reflecting reduced revenue levels in Central America, Latin
America and Asia.
- 15 -
Cost of Revenues:
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Cost of revenues $23,575 $24,614 $67,654 $74,909
As a percent of revenues 55.6% 51.2% 54.8% 51.8%
Amortization of capitalized
software development costs $3,000 $2,921 $9,172 $8,893
As a percent of revenues 7.1% 6.1% 7.4% 6.2%
Cost of revenues, measured as a percent of revenues, for the quarter ended June
30, 1999 increased by 4.4 points as compared to the same quarter one year ago.
The margin loss is attributable to revenue mix and some product margin erosion
in the domestic marketplace. Regarding revenue mix, high margin royalty revenues
are down as a result of the sale of TAG; separately, service revenue, which
generates lower margin than product sales, accounted for approximately 26% of
total revenue in the current quarter as compared to 19% of total revenue in the
same quarter one year ago. Service margins are up 0.9 points from the same
quarter one year ago, reflecting the division's increased revenue base.
Year-to-date: Cost of revenue, measured as a percent of revenue, for the first
nine months of fiscal 1999 increased by 3.0 percentage points as compared to the
corresponding period of fiscal 1998. Most of the year-to-date margin loss is
attributable to the revenue mix issues discussed above. Year-to-date service
margins are up 1.4 points from the prior year, again reflecting the division's
increased 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 nine-month periods ended
June 30, 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.
- 16 -
Selling, General and Administrative Expenses
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Selling, general, and
administrative expenses $14,514 $17,788 $45,967 $56,208
Percent change (18.4)% -- (18.2)% --
As a percent of revenues 34.3% 37.0% 37.2% 38.9%
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 $3.3 million, or
18.4%, for the quarter ended June 30, 1999 and $10.2 million, or 18.2%, for the
nine-month period ended June 30, 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 1.7 percentage points when
measured as a percent of revenue.
Research and Product Development Costs
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Gross expenditures $9,402 $10,737 $30,757 $33,857
Percent change (12.4)% -- (9.2)% --
As percent of revenues 22.2 % 22.4% 24.9% 23.4%
- -------------------------------------------------------------------------------
Capitalized software costs $3,000 $3,341 $ 9,534 $9,354
As a percent of gross expenditures 31.9% 31.1% 31.0% 27.6%
- -------------------------------------------------------------------------------
Net research and product
development costs $6,402 $7,396 $21,223 $24,503
Percent change (13.4)% -- (13.4)% --
As a percent of revenues 15.1 % 15.4% 17.2% 16.9%
- 17 -
The Company continues to prioritize the magnitude of investments in research and
product development in fiscal 1999, with gross spending for the first nine
months approximating an annual rate of $41.0 million, or 25% of revenue. Such
spending is, however, being closely monitored by the Network Access Division's
and Broadband Systems Division's management teams. The strategy of both business
units 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, positions were eliminated as part of the
December 1998 restructuring process. Furthermore, the Divisions' management has
been careful to replace only critical, high value-added positions as employee
attrition occurs; use of outside development engineers has also increased in an
effort to assure focused development efforts and improve productivity.
Gross spending for the quarter ended June 30, 1999 was down $1.3 million, or
12.4%, as compared to the quarter ended June 30, 1998. Year-to-date gross
spending follows a similar pattern, down $3.1 million, or 9.2%, from the same
nine-month period one year ago. The spending reductions are principally
attributable to lower compensation costs (resulting from a reduction in
worldwide engineering headcount), and were achieved despite ongoing salary merit
increases and other inflationary increases. Outside research and development
service costs were up slightly from the prior year.
Spending in the ATM area by the Broadband Systems business unit accounted for
71% and 54% of total product development spending for the quarters ended June
30, 1999 and 1998, respectively, and 67% and 54% of total product development
spending for the nine-month periods ended June 30, 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 nine-month
periods ended June 30, 1999, indicating that software development activities
represent a greater proportion of total research and product development
spending.
The Company has been conducting 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. As
noted in the preceding General Summary Discussion, the Company has recently
decided to suspend product development activities in the U.K. Advanced Research
Centre. All documentation and intellectual property will be transferred to the
U.S. research and development operation. Research and development expense will
be reduced by approximately $1.0 million per quarter, or $4.0 million annually,
as a result of this action.
Restructuring of Operations
- ---------------------------
Results for the nine-month periods ended June 30, 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
- 18 -
to improve product line focus and overall operational productivity, each
business unit is comprised of a dedicated general manager and dedicated sales,
marketing, product development and financial support functions. During the
previous quarter ended March 31, 1999, the new business units made significant
progress in defining their business strategies, organizational structures and
operating procedures, and further progress was achieved this quarter. The
Company anticipates productivity improvements across all operational areas from
each business unit going forward. Both business units posted sequential quarter
revenue growth in the quarter ended June 30, 1999.
Interest and Other Income and Expense
- -------------------------------------
Net interest expense amounted to $1.8 million and $1.5 million for the quarters
ended June 30, 1999 and 1998, respectively. On a year-to-date basis, net
interest expense amounted to $5.0 million and $4.3 million for the nine months
ended June 30, 1999 and 1998, respectively. The increases are attributable to
increased borrowing levels, reduced amounts of cash available for investment
(and a corresponding reduction in interest income) and the amortization of new
loan origination costs incurred to execute the new $40.0 million loan and
security agreement with Foothill Capital Corporation.
The nine months ended June 30, 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.
Income Tax Provisions
- ---------------------
Tax provisions recorded by the Company, principally for foreign income and
domestic state taxes, amounted to $200,000 and $100,000 in the quarters ended
June 30, 1999 and 1998, respectively, and $700,000 and $600,000 for the
nine-month periods ended June 30, 1999 and 1998, 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 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 net
currency exchange gain or (loss) of $42,000 and $168,000 for the quarters ended
June 30, 1999 and 1998, respectively, and $311,000 and $(142,000) for the
nine-month periods ended June 30, 1999 and 1998, respectively.
- 19 -
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 or
year-to-date 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."
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash and cash equivalents amounted to $3.6 million at June 30,
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 ($11.7
million of additional borrowings available at June 30, 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 and
received approximately $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 purpose of the restructuring was to reorganize
into autonomous business units with product focus to deliver higher revenues and
a lower, more efficient cost structure. Refer to Note 7, "Restructuring of
Operations," for further discussion of the business restructuring.
- 20 -
Through May 14, 1999, the Company had a loan and security agreement (the "Loan
Agreement") in place which provided the Company with a five-year term loan
(approximately $8.7 million owed on May 14, 1999), 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 was subject to satisfying a borrowing base formula related to
levels of certain accounts receivable and inventories and the satisfaction of
other financial covenants.
On May 14, 1999, the Company entered into a new three-year $40.0 million loan
and security agreement (the "New Loan Agreement") with Foothill Capital
Corporation to provide additional funds for operations and replace the Company's
existing bank group. Under provisions of the New Loan Agreement, the Company's
cash availability increased by $6.3 million (before related closing costs
incurred), as a result of the refinancing of the existing term loan, which had
an outstanding balance of $8.7 million, with $15.0 million in new term loans.
Furthermore, financial covenants and formulas in the New Loan Agreement were
restructured to be less restrictive to the Company.
Refer to Note 5, "Long-Term Debt," for additional discussion, including
effective interest rates and principal payment due dates.
Under the revolving line of credit portion of the New Loan Agreement,
availability is subject to satisfying a borrowing base formula related to levels
of certain accounts receivable and inventories and the satisfaction of other
financial covenants. Most assets of the Company, including accounts receivable,
inventories and property, plant and equipment are pledged as collateral. Maximum
funds available for borrowing under the New Loan Agreement revolving credit
facility amounted to $25.0 million at June 30, 1999; maximum funds available for
borrowing under the previous Loan Agreement revolving credit facility amounted
to $25.0 million at September 30, 1998. Outstanding revolving line of credit
borrowings amounted to $13.0 million and $1.6 million at June 30, 1999 and
September 30, 1998, respectively. Letters of credit also reduce the availability
of funds under the revolving line. Letters of credit in the amount of $253,000
and $763,000 were outstanding at June 30, 1999 and September 30, 1998,
respectively.
Financial covenants of the New Loan Agreement require that the Company's
reported stockholders' equity, excluding the impact of any foreign currency
translation adjustments occurring subsequent to March 31, 1999, equal or exceed
$18.1 million (such stockholders' equity, as defined, amounted to $25.6 million
at June 30, 1999). Financial covenants also limit annual capital equipment
expenditures to $12.0 million. The New Loan Agreement's covenants may, if
violated, limit access to future borrowings and may accelerate payment
requirements on outstanding borrowings under both the New Loan Agreement and
other outstanding loans.
Since the Company realized losses of $33.4 million for total fiscal 1998 and
$18.7 million for the nine months ended June 30, 1999, a combination of revenue
growth and cost reductions will be required in the remainder of fiscal 1999 and
in fiscal 2000 to maintain compliance with the minimum equity balance covenant
requirement. Alternatively, the Company could pursue an equity financing to
satisfy the equity covenant. 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
- 21 -
a waiver or amendment. 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 compliance with the New 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 and/or security
offerings. 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 New 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 all other outstanding indebtedness of
the Corporation.
Total outstanding debt amounted to $68.5 million at June 30, 1999, as
compared to $60.8 million at September 30, 1998. The net increase of $7.7
million is comprised of $11.4 million of new (net) borrowings under the
Company's revolving line of credit, $0.9 million of incremental (net) term loan
borrowings and other miscellaneous borrowings of $0.3 million, less $4.9 million
of principal payments made to reduce other outstanding borrowings.
Operating
Net cash used in operating activities amounted to $2.5 million in the nine
months ended June 30, 1999, as compared to positive cash flow from operating
activities of $1.1 million for the nine months ended June 30, 1998.
Non-debt working capital, excluding cash and cash equivalents, amounted to $22.1
million and $29.5 million at June 30, 1999 and September 30, 1998, respectively.
The $7.4 million reduction is principally comprised of an increase in trade
accounts payable and other accrued expenses related to the timing of purchases
and other obligations.
Investing
Investment in property, plant and equipment amounted to $6.3 million and $5.2
million in the nine-month periods ended June 30, 1999 and 1998, respectively.
Approximately $600,000 of fiscal 1999 capital investments are applicable to
VITAL Network Services' purchase of Olicom assets, for use in servicing Olicom
customers (refer to 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 $9.5 million and $9.4 million
for the nine-month periods ended June 30, 1999 and 1998, respectively.
- 22 -
Financing
Net cash provided by financing activities in the nine-month period ended June
30, 1999 amounted to $18.3 million, comprised of $12.0 million of proceeds
received from the sale of TAG, $7.2 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 $1.3 million in preferred stock dividends.
This compares to $3.0 million of net cash proceeds generated in the nine months
ended June 30, 1998, reflecting $3.8 million of net debt borrowings, $0.5
million of proceeds received from the issuance of common stock pursuant to
employee stock programs and the payment of $1.3 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 June 30, 1999 and September 30, 1998, including a new
three-year $40.0 million loan and security agreement entered into with Foothill
Capital Corporation on May 14, 1999, which provided the Company with an
immediate cash infusion of $6.3 million. 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 June
30, 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 June 30, 1999.
CERTAIN RISK FACTORS
- --------------------
Continuing Losses: The Company has sustained net losses for the past 19
quarters ended June 30, 1999. There can be no assurance as to when the Company
will achieve net income.
Credit Availability: As noted above, the Company's New Loan Agreement requires
compliance with specific financial covenants, including the requirement that
reported stockholders' equity, as defined, equal or exceed $18.1 million (such
stockholders' equity, as defined, amounted to $25.6 million at June 30, 1999).
If the Company fails to comply with the required covenants, fails to provide
subordinate mortgages on certain real estate for which consent has not been
provided to date by the first mortgage holder, or fails to comply with any other
provisions of the New Loan Agreement which would result in default, 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
- 23 -
obtained, on terms deemed favorable by the Company. Furthermore, in the event
the Company does default on its $40.0 million New 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 Company's 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. Examples of risks and uncertainties
include, among other things: (i) the Company's ability to maintain compliance
with the covenant requirements of its New Loan Agreement and all other financing
arrangements, including, if necessary, the ability to achieve amendments and/or
waivers thereto to maintain compliance with the terms of all outstanding
indebtedness; (ii) the possibility that the additional indebtedness permitted to
be incurred under the revolving credit facility portion of the New 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 such 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.
- 24 -
GENERAL DATACOMM INDUSTRIES, INC.
AND SUBSIDIARIES
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
On June 18, 1999, at the Special Meeting of Stockholders of
the Corporation, the stockholders voted to:
1. Increase the authorized shares of Common Stock by
15,000,000 shares from 35,000,000 shares to 50,000,000
shares and decrease the authorized shares of Class B stock
by 25,000,000 shares from 35,000,000 shares to 10,000,000
shares:
Number of votes cast for: 15,997,460
Number of votes against: 3,413,890
Number of votes abstained: 82,828
Item 6. Exhibits and Reports on Form 8-K
(a) Index of Exhibits
3.1 Form of Restated Certificate of Incorporation of
the Corporation
3.2 Amended By-Laws of the Corporation
(b) Reports on Form 8-K:
A Form 8-K dated May 14, 1999, was filed on May 27,
1999, to summarize the terms of the Company's New Loan
Agreement; the actual New Loan Agreement was attached
as an exhibit to the Form 8-K.
- 25 -
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: August 16, 1999
- 26 -