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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998 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
incorporation or organization) Identification No.)
1579 Straits Turnpike, Middlebury, Connecticut, 06762-1299
(Address of principal executive offices)
(203) 574-1118
(Registrant's telephone number, including area code)
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class Name of each exchange on which registered
Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. { X }
The aggregate market value of the voting stock of the Registrant held by
nonaffiliates as of November 24, 1998: $69,531,517.
Number of shares of Common Stock and Class B Stock outstanding as of November
24,1998:
19,642,190 Shares of Common Stock
2,093,083 Shares of Class B Stock
DOCUMENTS INCORPORATED BY REFERENCE:
Annual Report to Stockholders for the fiscal year ended September 30, 1998 for
Part II, Items 5, 6, 7 and 8. Corporation's Proxy Statement (dated December 14,
1998) for the 1999 Annual Meeting of Stockholders for Part III, Items 10, 11, 12
and 13.
GENERAL DATACOMM INDUSTRIES, INC.
TABLE OF CONTENTS
PART I Page
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 14
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters 15
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 15
PART III
Item 10. Directors and Executive Officers of the Registrant 16
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 19
2
PART I
ITEM 1. BUSINESS
General DataComm Industries, Inc. was incorporated in 1969 under the laws of the
State of Delaware. Unless the context otherwise requires, the terms "Company,"
"Corporation" and "GDC" as used here and in the following pages mean General
DataComm Industries, Inc. and its subsidiaries. In addition, in the following
business discussion, "ATM" refers to Asynchronous Transfer Mode cell switching
technology, "LAN" refers to Local Area Network and "WAN" refers to Wide Area
Network.
Overview
General DataComm Industries, Inc. is a provider of internetworking and
telecommunications equipment based in Middlebury, Connecticut. The Company is
focused on providing multiservice provisioning solutions using ATM switching and
multiservice access products. The Company designs, assembles, markets, installs
and maintains products and services that enable telecommunications common
carriers, governments and corporations to better and more cost effectively
manage their global telecommunications networks. The Company sells and leases
its products primarily to corporations, governments and common carriers
(telephone and cable companies) through its own worldwide sales and service
organizations as well as original equipment manufacturers (OEMs), integrators,
local distributors and value-added resellers. The Company's products are
assembled in its Naugatuck, Connecticut facility with some sub-assemblies
produced in Mexico and other off-shore locations. In fiscal 1998, sales of
products represented 76% of revenues, service represented 19% of revenues and
the remaining 5% of revenues are comprised of leasing and contract engineering
activities.
As of December 1998 GDC has reorganized into three major core businesses that
include its Broadband Systems Products Division, the Network Access Division,
and its service organization, VITAL Network Services LLC.
The Company's customer base includes: Local Exchange Carriers, including all
five Regional Bell Operating Companies, Bell Canada and GTE; Alternative Service
Providers including Cignal Global Communications; Interexchange Carriers
including AT&T, MCI and Sprint; corporate end users such as American Airlines,
Citicorp, EDS, Cemex (Mexico), and Chicago Board of Trade; government entities
including the British Ministry of Defense, the French Ministry of State, NASA,
the U.S. Air Force, the U.S. State Department, the U.S. Army and many state and
local governments; international communications carriers such as Impsat
(Argentina and Colombia), Telefonos de Mexico, France Telecom and Deutsche
Telekom, and suppliers of central office switching equipment such as Lucent
Technologies and LM Ericsson.
The Corporation's executive offices are located at 1579 Straits Turnpike,
Middlebury, Connecticut, 06762-1299, and its telephone number is (203) 574-1118.
Broadband Business Strategy
The Company has concentrated its efforts on providing integrated networking
solutions and uses its ATM access and multiplexing products to construct global
data, voice and video communications networks. The Company's access and
broadband networking products provide an advanced multiservice architecture for
wide area networking solutions.
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In the early 1990s, the Company identified ATM technology as the preferred
solution for addressing the need for higher network bandwidth to support new
data and multimedia applications such as Internet services, telemedicine,
videoconferencing and distance learning. ATM, as a broadband technology, enables
the transmission of voice, video and high-speed data traffic on a single
communications line. By offering ATM solutions to its customers, the Company
believes it has enhanced its position as a leading supplier of wide area
networking and telecommunications products. The Company's strategy of providing
integrated solutions to its customers rests upon:
Capitalizing on ATM Technology. The Company believes it has a leading
position in the edge switch ATM switch market. The following entities have
deployed GDC's ATM cell switches in their ATM networks: Austrian PTT, MCI,
France Telecom, Deutsche Telekom, the Mayo Clinic and Burlington Northern
Santa Fe. Through OEMs and reseller channels, GDC's APEX ATM switches have
been supplied to Netherlands PTT, Telefonica de Espana (Spain) and Telia
(Swedish telephone company). France Telecom, Deutsche Telekom and
Netherlands PPT have each built out their multiservice networks to between
150 and 250 APEX switches that provide for LAN interconnect, voice, frame
relay and Internet services.
Providing Cost-Effective Flexible Product Solutions. The Company's product
families are designed with architectures that scale to most network sizes,
performance and cost requirements. Customers can select the products which
are most appropriate to their current needs and migrate to higher capacity
products over time. Standardization of a network management protocol across
product families allows the end user to utilize a single network management
system, which provides value-added capabilities such as extensive alarm
reporting, diagnostics and advanced service restoral options for each
circuit and unit of equipment in the network.
Improving Performance Of Customer Networks. The Company's products are
designed to improve network efficiency by increasing transmission speed,
compressing and consolidating voice, video and data communication
and providing dynamic bandwidth allocation.
Leveraging Global Customer Base, Distribution and Support. The Company has a
worldwide customer base of corporate and government users and
telecommunications carriers. The Company has global distribution
capabilities, and its ability to provide international customer service and
support is critical to customers that run mission-critical applications over
their networks.
ATM Market
Background. Improvements in microprocessor technology over the past several
years have significantly changed the way users design and build communications
networks. The explosive growth of the Internet, increased LAN traffic, rollout
of wide area interactive video and multimedia, and integration of long distance
compressed voice traffic have had a significant impact on bandwidth requirements
and service planning for wide area networks. There is a compelling logic for
network planners and managers to consolidate services over a single network
rather than using multiple, service-specific networks. As a result enterprises
are now implementing ATM networks. New competitive service providers are using
ATM to offer business customers greater economy in the cost of services and
facilities. All of this new direction requires advanced access products for LAN
to WAN connectivity and efficient WAN switching solutions.
4
WANs present an additional bottleneck constraining greater deployment of
enterprise-wide networks. The underlying WAN architecture of the telephone
companies is optimized for low speed, constant bit-rate voice communications. It
does not scale well to accommodate high-speed, burst-oriented data
communications typical of a LAN. To address this problem, telecommunications
carriers have deployed fiber optic transmission facilities in their networks
over the past decade and some such companies are now in the process of testing
and deploying ATM switches as the platform of choice for offering new,
value-added services to their customers. The Company believes that the need for
more bandwidth in both the LAN and WAN environments to support current data
processing and networking applications is a key factor driving demand for ATM
products. Increasing numbers of applications combining voice, video and data
will demand even more bandwidth than current applications. The Company believes,
for example, that the Internet is the single most compelling driver of ATM-based
backbone networks.
ATM Segments. In the past five years ATM has become a leading transmission
technology for communications networks. Within the broader ATM market, the
Company has identified three distinct segments: access concentrator, enterprise
switch and edge switch as further described below. Each of these segments
requires significant traffic adaptation functions that convert conventional
voice, video, and data formats to ATM cells.
Access Concentrators. Carrier ATM services are evolving globally. Remote
offices, branch offices and medium size business offices are expected to
begin subscribing to these new service offerings and will require cost
effective access. As in the frame relay services arena where low cost
access devices enabled cost efficient services, the Company believes this
will occur over the next several years as the demand for ATM services
increases. Key market requirements include low cost adaptation of legacy
voice and data, support for video and IP services, and manageability of the
trunk line by both carrier and end user.
Enterprise Switch. Enterprise switches are used to interconnect a broad
range of customer premise equipment, including LAN hubs, routers,
multiplexers, PBXs and video codecs, across a campus or a more
geographically dispersed area to create high-speed backbone networks
linking major corporate locations. Key market requirements include a fault
tolerant architecture and the ability to support a broad range of
interfaces and adaptation capabilities for new as well as legacy
technologies.
Edge Switch. The telecommunications carrier edge switch is typically
located in the central office of a Local Exchange Carrier, an Interexchange
Carrier, a Competitive Access Provider or a Cable TV Operator. Switches are
used as platforms to provide services to a number of end user locations.
Common carriers also utilize these switches in the basements of buildings
to offer new services to multiple customers. As with the enterprise switch
market, fault tolerance and the ability to support a broad range of
interfaces and adaptation capabilities are key requirements because
carriers need maximum flexibility. In addition, the unique packaging and
environmental requirements of telecommunications carriers must be met.
GDC's Target ATM Segments. The access concentrator, enterprise switch and edge
switch markets that GDC is pursuing address the points in a network where LAN,
voice, video and other data applications converge with WANs and the greatest
bandwidth bottlenecks exist. A significant increase in compressed voice and
video over ATM has stirred much interest in GDC's standards-based multiservice
solution. GDC also believes that, at present, these targeted market segments
align with the Company's core ATM competencies developed over the last six
years.
5
Broadband Products
The Company's broadband line of products includes ATM Switches and Network
Management Systems. GDC currently offers a family of ATM switches and access
products for both public and private networks under the GDC APEX name. The APEX
product line consists of the APEX-DV2, the APEX-NPX, the APEX-IMX and the
APEX-MAC1.
GDC introduced the APEX-MMS (Multimedia Multipoint Server), the industry's first
"any band" Multipoint Control Unit (MCU), in September 1996. Part of the ATM
broadband family, it can operate on any band (narrow, wide, and broad) and
provide audio, video, and data intensive applications like videoconferencing,
telemedicine, and distance education. Wide area transport is provided via the
shared APEX VIP(TM) family of integrated codecs within the APEX switch,
providing Motion JPEG, H.320 and MPEG-2 compression options allowing optimized
video-provisioned services.
Switch Specifications Targeted Segment
APEX-DV2 Provides up to 6.4 Gbps of Enterprise switch for
capacity and support for up to corporate and
64 ports within a single shelf, government users
utilizing AC power supplies.
APEX-NPX Provides up to 6.4 Gbps of Edge switch for common
capacity and support for up to carriers, including
64 ports within a single shelf, telephone and cable
utilizing DC power supplies. television companies
APEX-IMX Provides up to 2.8 Gbps of Lower capacity
capacity and support for 14 enterprise switch for
to 28 ports within a single corporations and
shelf. common carriers
APEX-MAC1 Provides up to 1.6 Gbps of Access concentrator for
capacity and support for 8 to corporations, carriers,
16 ports within a single enclosure. and government users.
GDC's APEX-Prosphere network management suite of applications supports GDC's
APEX ATM switches. The network management platform offers a powerful,
object-oriented system employing a graphical user interface for ATM network
management via the industry-standard Simple Network Management Protocol. The
APEX-Prosphere enables a network manager to configure APEX switches, provision
APEX circuits, build the ATM switch network and monitor that network, including
the capacity and utilization of each ATM node and the status of all other
components of the network.
Many traditional carriers have deployed GDC APEX ATM switches as their platform
for provisioning new differentiated data communications services. During 1998,
some GDC APEX customers implemented networks to provide standards-based voice
over ATM which offers compression, silence suppression and idle detection over
variable bit-rate services. This allows very cost efficient provisioning of
both voice and data services. A number of corporate customers also have
purchased APEX switches.
6
GDC believes its family of APEX switches have the following competitive
advantages:
Scalability, allowing a customer to construct a multitiered switch
network that scales in price and performance and offers multiple
services over one platform
Flexibility, providing the customer with comprehensive interfaces and
adaptation capabilities
Traffic management architecture, providing networks with traffic
policing, traffic shaping, traffic prioritization and buffer management
capabilities
Switched virtual circuits, dynamically establishing connections on
an end-to-end basis
Comprehensive compressed standards-based voice and video
Selling prices vary directly with the size and complexity of the systems being
ordered.
Multiplexers/Internetworking Products. GDC's multiplexer and internetworking
products family includes systems for both branch office and corporate backbone
locations which integrate voice, traditional data, video and LAN traffic over
narrowband (56/64 Kbps) or wideband (fractional T1/E1 and T1/E1) digital
services. By consolidating multiple forms of traffic over a single transmission
line, these products significantly decrease an end user's network costs. For
corporate backbone locations, GDC offers the TMS 3000 which supports a wide
range of voice, facsimile, LAN, traditional data and video applications. The
Office Communications Manager ("OCM"), a cost-effective networking solution for
the branch office location, operates with the TMS 3000 as part of a network and
offers the integration of voice, LAN routing, frame relay and traditional data
at speeds ranging from 9.6 Kbps to T1/E1.
GDC is pursuing an aggressive TDM to ATM migration strategy. This allows GDC to
address its existing TDM customer base with an appropriate forward-looking
technical evolution. In corporate backbone environments requiring broadband
speeds and services, GDC APEX ATM switches can be used. The TMS 3000 and OCM can
feed into the APEX switch enabling GDC to offer an integrated networking
solution which scales from small remote or branch locations into regional
wideband backbones and ultimately into ATM-based broadband backbones.
Access Product Strategy
The recently completed reorganization resulted in the creation of a new Networks
Access Products Division. The objective of this reorganization was to improve
sales, marketing, and engineering productivity relative to the Company's access
product line. The new business unit intends to leverage the use of sales
resources of distributors, value-added resellers, integrators and
telecommunication provider channels in an effort to capitalize on breadth of
sales coverage, both domestically and internationally. The reorganization is is
also intended to serve to intensify the selling of access products which have an
inherently short selling cycle.
GDC has adjusted to shifting priorities in the overall access market. These
priorities are governed by the accelerated growth of Internet, Frame Relay, and
cell-based services, all of which require increased attention to network
management and performance quality. GDC accordingly intends to focus on the
development and sale of products targeted towards market growth areas. GDC's
digital data sets, copper loopware equipment, and service monitoring probes
combine to form the major product elements serving to meet emerging market
requirements.
7
Access Products
Digital Data Sets. Digital data sets are used to convert and interpret signals
from computers and communications equipment into a form that is acceptable for
transmission over telecommunications facilities. GDC offers a broad set of
narrowband digital data sets that operate at various speeds up to 64 Kbps and
wideband digital data sets operating at fractional T1 and T1 speeds. GDC
supplies its digital data sets to the major North American telephone companies
and various end users. GDC continues to enhance its digital transmission product
line by combining higher transmission speeds with value-added capabilities
including data compression, concentration, protocol adaptation/conversion and
network management. This enables GDC to offer differentiated and, in some cases,
unique transmission solutions. The SpectraComm 5000 family of network managed
CSU/DSU products is the latest generation of digital products which are targeted
at large managed digital networks.
Analog Modems. Analog modems convert digital computer signals to a format that
can be transmitted over telephone lines. The market for private line modems has
been shrinking as telephone networks move from an analog to a digital format.
However, with the growth of telecommuting and Internet access, the need for
analog modems continues to grow. GDC offers a broad range of private line and
dial-up modems operating at all speeds up to 56 Kbps.
Another major factor in the modem market has been the trend to build modem
functionality directly into personal computers and other equipment. The Company
addressed that market by licensing its technology to semiconductor chip
manufacturers and to equipment manufacturers who pay the Company license fees
for the use or sale of specific V.34 or V.90 patented technology. Early in
fiscal 1998 the Company formed the Technology Alliance Group ("TAG") as an
entity to target that market and to separate the business unit for potential
sale. The sale was completed in December 1998 (see Partnering/Divestiture
Strategy below).
Intelligent Voice Data Access Multiplexer. The Metroplex 6000 is an intelligent
access multiplexer designed for cost-effective access to a variety of data and
voice services available in wide area networks. It is applicable to the branch
office/small office market where it provides connectivity from the office to an
enterprise network or to public network services.
Copper Loopware xDSL System. The Universal Access System 7000 is a service
provisioning multiplexer which allows service providers to deliver digital
services over copper loop systems, reducing both cost and service provisioning
time. It is particularly applicable in international markets. In China and in
developing countries in Latin America and the Pacific Rim, there is insufficient
copper wire installed to support the growing demand for communications services.
GDC believes it is responding to these needs by offering the Universal Access
System 7000 that utilizes transmission technologies like 2B1Q (Two Binary One
Quaternary) and HDSL (High speed Digital Subscriber Line). These products offer
much higher transmission speeds while using half of the copper wire pairs
normally required to provision private line services.
VITAL Network Services
In February 1997, GDC restructured its service division to form an integrated
worldwide service organization to provide global traditional and professional
network services for telecommunications carriers, corporate and government
network customers. Traditional services include installation, on-site
maintenance, technical support, logistics and product repair. The professional
services portfolio includes
8
network design and performance consulting, network audits, integration services,
remote network management and educational services. In September 1997, the
service division became a separate company of General DataComm Industries, Inc.
under the name VITAL Network Services, LLC.
Customer relationships and services are managed from four area offices in North
America, Mexico, United Kingdom and Singapore. Individual worldwide services are
provided by VITAL personnel and are augmented by third-party service partners
when necessary. High level VITAL technical support engineers using centralized
simulation labs provide our field engineers and customers remote assistance from
our VITAL Technical Assistance Center (V-TEC's) located in each area office,
with North America containing an additional global internetworking center. At
September 30, 1998, VITAL had 257 persons engaged in the delivery of direct
customer service support worldwide.
VITAL embarked on a strategic decision to convert the entire company from a
single manufacturer support organization to one capable of servicing multiple
manufacturer's equipment and technologies. Capable of working in integrated
networks, VITAL is a Cisco Authorized Support Provider and has established an
excellent working relationship with Bay/Nortel and many other manufacturers.
VITAL is the exclusive authorized service provider for ADC Kentrox, Eastern
Research, Olicom, AccessLan and Verilink. The target market has expanded from
end users to include integrators, value added resellers, distributors and
equipment manufacturers.
Recently, VITAL purchased all of Olicom's (router manufacturer) Canadian and
United States network service business, and their support center located in
Marlborough Massachusetts; VITAL also hired approximately 30 of their highly
skilled internetworking technical personnel.
Future growth is expected to be fueled by the addition of direct sales personnel
dedicated to the channel market and additional acquisitions of synergistic
service businesses.
Acquisition Strategy
As part of its business strategy, the Corporation has in the past reviewed
acquisition opportunities, including those which may complement its product
lines, provide access to emerging technologies or enhance market penetration.
GDC's VITAL Network Services subsidiary acquired Olicom's service business in
October 1998. The Corporation at this time has no understandings or commitments
to make any acquisitions, and there can be no assurances that any acquisitions
will be made.
Partnering/Divestiture Strategy
The Company is focusing on its primary business units (Broadband Systems
Division, Network Access Division and VITAL Network Services) and is pursuing
partnering arrangements and asset sales to reduce the current level of
investment in research and development activities and to provide additional
funds for operations.
On December 31, 1998 (effective as of December 22, 1998), the Company sold
substantially all the assets relating to its TAG division referenced above, to
PC-Tel, Inc. of San Jose, California and a PC-Tel, Inc. affiliate for $16.3
million. The assets sold included: patents, technology, test equipment,
development tools, furniture, and license agreements. At the time of the sale,
the assets had a net carrying value on the Company's books of approximately $3.0
million. The employees of the TAG division were also transferred to PC-Tel.
9
Marketing, Sales and Customers
The Company's products and services are marketed throughout the world. GDC has
just completed a major reorganization of business operations that creates three
major operating divisions in the form of the Broadband Systems Division, the
Network Access Division and VITAL Network Services. Each of these groups now
have their own marketing, sales and engineering components and are separated as
distinct operating business units with separate general managers.
Internationally, GDC maintains full subsidiary operations in Canada, the United
Kingdom, Mexico, France, Germany, Russia, Singapore, and Brazil. Sales and
technical support offices are maintained in Sweden, Japan, Hong Kong, China and
Argentina. In total, the Company manages a worldwide distribution network with
representatives in more than 60 countries. International operations represented
approximately 50% of the Company's revenues in fiscal 1998 as compared to 52% in
fiscal 1997. GDC's foreign operations are subject to all the risks inherent in
international operations.
Selected users of the Corporation's products include:
Telecommunications Commercial/End User Financial Services
Alascom American Airlines BITAL (Mexico)
Ameritech Burlington Northern/Santa Fe CIBC (Canada)
AT&T Cemex Chicago Board of Trade
Bell Atlantic EDS Citicorp
Bell Canada Harris Fiserv
BellSouth Henry Ford Hospital Halyk Savings Bank
Cable & Wireless (Panama) Lockheed Martin Shawmut Bank
CANTV Mayo Clinic Telerate Systems
Cignal Com.
Deutsche Telekom
Emtelco (Columbia) Government Suppliers
France Telecom
Guangdong PTA (China) British Ministry of Defense LM Ericsson
GTE Belgian Government Lucent Technologies
Impsat (Argentina, NASA Nortel CALA
Columbia, Equador) New York City Transit Authority Siemens A. G.
MCI Worldcomm Secretary of Labor (Mexico)
Netherlands PTT Social Security Administration (Mexico)
Saudi PTT U.S. Army and U.S Air Force
SBC Communications Various state and county governments,
Slovac Telecomm including California, Colorodo, Florida,
Sprint Iowa, Kentucky, Michigan, Ohio, and
Telecomm Corp of New Texas
Zealand
Telefonica de Espana
Telefonos de Mexico
Telesc (Brazil)
Unisource Carrier Services
US West
10
While the majority of the Corporation's products are sold on an outright basis,
the Corporation also leases its equipment through a wholly owned consolidated
subsidiary under a versatile selection of leasing programs designed to meet the
specific needs and objectives of its customers.
The Corporation's order backlog, while one of several useful financial
statistics, is, however, a limited indicator of the Corporation's future
revenues. Because of normally short delivery requirements, the Corporation's
sales in each quarter primarily depend upon orders received and shipped in that
same quarter. In addition, since product shipments are historically heavier in
the last month of each quarter, quarterly revenues can be adversely or
beneficially impacted by several events, including: unforeseen delays in product
shipments; large sales that close at the end of the quarter; sales order changes
or cancellations; changes in product mix; new product announcements by the
Corporation or its competitors; and the capital spending trends of customers.
Industry and geographic area information is included in Note 10 of "Notes to
Consolidated Financial Statements." See "Index to Financial Statements and
Schedules" on page F-1 in this report.
Research, Engineering and Product Development
In order to develop and implement new technology in the data, voice and video
communications industry and to broaden the applications for its products, the
Corporation has significant ongoing engineering programs for product improvement
and new product development. At September 30, 1998, 340 employees were engaged
in research and development activities. To expand its pool of available talent,
the Corporation conducts research and development activities in four locations.
In addition, the Corporation utilizes contractors and outside developers for
product development.
Development for all Network Access Division transmission products occurs in the
Technology Research Center in Middlebury, Connecticut. Development of Broadband
Systems Division products, including multiplexer and internetworking products
and enhancements to the APEX-ATM switch products, also occurs in the Technology
Research Center. The Multimedia Research Center in Montreal, Quebec, focuses on
ATM-based video and multimedia applications and solutions; The Boston Research
Center in Marlborough, Massachusetts, is currently focused on a standards-based
approach to Internet Protocol (IP)/ATM wide area networks using the
Multiprotocol Label Switching (MPLS) standard (with APEX ATM products); and the
Advanced Research Centre in Basildon, England, focuses on next-generation ATM
hardware and software.
The combination of research, development and capitalized software spending
amounted to 23.0%, 25.5% and 19.4% of revenues in fiscal 1998, 1997 and 1996,
respectively. In order to support its commitment to new products and
technologies, the Corporation expects to continue a high level of spending on
research and product and software development.
Manufacturing
GDC's principal assembly plant is a Corporation-owned, 360,000 square-foot
facility located in Naugatuck, Connecticut, of which approximately 45% is
currently being utilized for manufacturing (30% is used for other GDC operations
and 25% is vacant). The Corporation also outsources the manufacturing (assembly
and test) of certain products and subassemblies, generally high volume circuit
boards and power and packaging items. Outsourced products represented
approximately 40% of the manufacturing assembly during the 1998 fiscal year. In
December 1998, GDC announced that its "through-hole" product assembly
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operation will become fully outsourced. Management estimates that this activity
represented in excess of 50% of manufacturing's assembly activity during fiscal
1998.
GDC's Connecticut facilities are ISO 9001 certified. ISO 9001 is a comprehensive
model for quality assurance in design/development, production, installation and
servicing. It was developed by a technical committee comprised of
representatives from over 90 countries under the direction of the Geneva-based
International Organization for Standardization.
Reliance on Key Components and Subcontractors
The Corporation's products use certain components, such as microprocessors,
memory chips and pre-formed enclosures that are acquired or available from one
or a limited number of sources. The Corporation has generally been able to
procure adequate supplies of these components in a timely manner from existing
sources. While most components are standard items, certain application-specific
integrated circuit chips used in many of the Corporation's products are
customized to the Corporation's specifications. All suppliers of components do
not operate under contract. The Corporation's inability to obtain a sufficient
quantity of components when required, or to develop alternative sources at
acceptable prices and within a reasonable time, could result in delays or
reductions in product shipments which could materially affect the Corporation's
operating results in any given period. In addition, as referenced above, the
Company sometimes relies on subcontractors for product production. The inability
of such subcontractors to deliver products in a timely fashion or in accordance
with the Company's quality standards could materially affect the Corporation's
operating results.
Competition
Each of the segments of the telecommunications and networking industries is
intensely competitive. Many of the Company's current and prospective competitors
have greater name recognition, a larger installed base of networking products,
more extensive engineering, manufacturing, marketing, distribution and support
capabilities and greater financial, technological and personnel resources.
Broadband Competition: Many of the participants in the networking industry,
including, among others, Nortel Networks, Cisco Systems, ADC Kentrox, Ascend
Communications, Siemens, FORE Systems and Newbridge Networks, have targeted the
WAN ATM market segment. Other companies are expected to follow. In addition,
traditional suppliers of central office switching equipment such as Alcatel,
Lucent Technologies, Fujitsu and LM Ericsson have already or are expected to
offer ATM-based switches for central offices.
Access Competition: The Company's competition in the network access products
marketplace includes, among others, Pairgain, Adtran, Paradyne, RAD, 3Com, ADC
Kentrox and Newbridge Networks.
Each competitor offers a unique solution and all are formidable competitors.
The Company believes it can maintain or grow its market share for both ATM and
Access products. However, there can be no assurance that the Company will be
able to attain this objective.
Patents and Related Rights
The Corporation presently owns approximately 40 domestic patents and has
approximately 20 additional applications pending after deducting those sold to
PC-Tel as part of the TAG division sale described
12
above. In addition, all of these patents and applications have been filed in
Canada; most also have been filed in other various foreign countries. Most of
those filed outside the United States have been allowed while the remainder are
pending. The Corporation believes that certain features relating to its
equipment for which it has obtained patents or for which patent applications
have been filed are important to its business, but does not believe that its
success is dependent upon its ability to obtain and defend such patents. Because
of the extensive patent coverage in the data communications industry and the
rapid issuance of new patents, certain equipment of the Corporation may involve
infringement of existing patents not known to the Corporation.
Employee Relations
At September 30, 1998, the Corporation employed 1,413 persons, of whom 340 were
research and development personnel, 359 were manufacturing personnel, 339 were
employed in various selling and marketing activities, 257 were in customer
support services and 118 were in general and administrative activities.
In December 1998 the Corporation announced a restructuring of its operations
into autonomous business units, and associated with this action there would be a
reduction in workforce of approximately 200 persons when the plan was fully
implemented. This reduction will occur across all functional areas.
No Company employees are covered by collective bargaining agreements. The
Company has never experienced a work stoppage and considers its relations with
its employees to be good.
ITEM 2. PROPERTIES
The principal facilities of the Corporation are as follows:
Middlebury, Connecticut -- executive offices of the Corporation and Data-
Comm Leasing Corporation located in a 120,000
square foot facility owned by the Corporation
Naugatuck, Connecticut -- principal assembly, test and systems integration
oerations and global services division located in a
360,000 square foot facility owned by the
Corporation
Middlebury, Connecticut -- engineering organization located in a 275,000
square foot facility leased through 2003 by the
Corporation; approximately 72,000 square feet are
subleased to a third party through June 30, 2001
Wokingham, England -- sales, service, and administrative offices
(including a parking garage) located in a 36,000
square foot facility owned by General DataComm
Limited
Toronto, Canada -- sales and administrative offices located in a
12,000 square foot facility leased through
November 1999 by General DataComm Ltd.
13
ITEM 2. PROPERTIES (Cont'd)
Montreal, Canada -- a 20,000 square foot research, sales and service
facility leased through February 2000 by General
DataComm Ltd.
Paris, France -- sales, service and administrative offices located
in a 5,500 square foot facility leased through April
2006 by General DataComm France SARL
Mexico City, Mexico -- sales, service and administrative offices located
in a 3,230 square foot facility leased through June
14, 2001 by General DataComm de Mexico S.A. de C.V.
Basildon, England -- engineering organization located in an 8,500 square
foot facility owned by General DataComm Advanced
Research Centre Limited
In addition, the Corporation leases sales, service and engineering offices
throughout the United States and in international locations.
Approximately 45% of the 360,000 square-foot Naugatuck, Connecticut, facility is
being utilized by the Corporation's manufacturing (assembly, test and systems
integration) operations. The plant is currently operating at 33% utilization by
running partial first and second shifts. With two full shifts, the aggregate
productive capacity would be approximately 406,000 printed circuit boards per
year. The Corporation has the capability of expanding its second shift operation
and adding a third shift should product demand require it.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference from the
section entitled "Common Stock Prices" on page 17 of the Corporation's 1998
Annual Report to Stockholders.(1)
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference from the
section entitled "Five-Year Selected Financial Data" on page 8 of the
Corporation's 1998 Annual Report to Stockholders.(1)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information required by this item is incorporated by reference from the
section entitled "Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 9 through 17 of the Corporation's 1998 Annual
Report to Stockholders.(1)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference from pages 18
through 35 of the Corporation's 1998 Annual Report to Stockholders or is
included elsewhere in this annual report on Form 10-K.(1)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
- ---------------------
(1) Such information is also included in Exhibit 13 of this Form 10-K report
as filed with the Securities and Exchange Commission.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors is incorporated by reference from the
section "ELECTION OF DIRECTORS" in the Corporation's Proxy Statement for the
1999 Annual Meeting of Stockholders, which Proxy Statement will be filed within
120 days after the end of the Corporation's fiscal year ended September 30,
1998.
Name Position Age
Charles P. Johnson Chairman of the Board of Directors 71
and Chief Executive Officer
Ross A. Belson President and Chief Operating Officer 62
Frederick R. Cronin Vice President, Corporate Technology and a Director 67
Robert S. Smith Vice President, Business Development 65
William S. Lawrence Senior Vice President, Finance and
Chief Financial Officer 55
James R. Arcara Vice President, Corporate Operations 63
Dennis J. Nesler Vice President and Treasurer 55
William G. Henry Vice President and Corporate Controller 49
P. John Woods Vice President, Global Services 50
Keith A. Mumford Vice President, and General Manager of the
Broadband Systems Division 34
Howard S. Modlin Secretary and a Director 67
- ----------------------------
Mr. Charles P. Johnson, Chairman of the Board and Chief Executive Officer,
founded the Corporation in 1969.
Mr. Ross A. Belson, President and Chief Operating Officer, has served in his
present capacity since joining the Corporation in August of 1987.
Mr. Frederick R. Cronin, Vice President, Corporate Technology, has served in
executive capacities since the founding of the Corporation.
16
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
Mr. Robert S. Smith, Vice President, Business Development, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since February 1973.
Mr. William S. Lawrence, Senior Vice President, Finance and Chief Financial
Officer, served as Vice President, Finance and Chief Financial Officer since
joining the Company in April 1977, until February 1996 when he was elected
Senior Vice President, Finance and Chief Financial Officer.
Mr. James R. Arcara, Vice President, Corporate Operations, has held positions of
major responsibility within the Corporation since its formation and has served
in executive capacities since September 1978.
Mr. Dennis J. Nesler, Vice President and Treasurer since May 1987 and Treasurer
since July 1981, joined the Corporation in 1979 as Vice President of the
Corporation's wholly owned leasing subsidiary, a capacity in which he still
serves.
Mr. William G. Henry, Vice President and Corporate Controller, joined the
Corporation as Corporate Controller in January 1984, was appointed an officer of
the Corporation in June 1989 and was elected Vice President in February 1996.
Mr. P. John Woods, Vice President, Global Services, has been with the
Corporation since February 1993, and was appointed to his current position
effective October 1996. Before joining the Corporation, Mr. Woods held positions
with Digital Equipment Corporation and Philips.
Mr. Keith A. Mumford, Vice President and General Manager of the Corporation's
Broadband Systems Division, has been with the Corporation since 1993. He was
elected an officer in October 1998 and elected to his current position in
December 1998.
Mr. Howard S. Modlin, Secretary, an attorney and member of the firm of Weisman
Celler Spett & Modlin P.C., has been Secretary and counsel to the Corporation
since its formation.
17
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
section entitled "Executive Compensation and other Transactions with Management"
in the Corporation's Proxy Statement dated December 14, 1998.(1)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
section entitled "Security Ownership of Directors and Officers" in the
Corporation's Proxy Statement dated December 14, 1998.(1)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
section entitled "Executive Compensation and other Transactions with Management"
in the Corporation's Proxy Statement dated December 14, 1998.(1)
- ------------------------------
(1) The Corporation's Proxy Statement will be filed with the Commission within
120 days after the end of the Corporation's fiscal year ended September 30,
1998.
18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - see "Index to Financial Statements and
Schedules" on page F-1 of this report.
(2) Financial Statement Schedule - See "Index to Financial Statements
and Schedules" on page F-1 of this report.
(3) Exhibits - See Exhibit Index on page 20 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
19
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (cont'd)
EXHIBIT INDEX
Exhibit No. Description
3.1 Restated Certificate of Incorporation of the Corporation.(1)
3.2 Amended and Restated By-Laws of the Corporation.(2)
4.1 Certificate of the Powers, Designation, Preferences, Rights and
Limitations of 9% Cumulative Convertible Exchangeable Preferred
Stock (3)
4.2 Indenture dated May 1, 1997 covering presently unissued 9%
Convertible Subordinated Debentures due 2006.(4)
4.3 Supplemental indenture, dated September 26, 1997, which amends
the May 1, 1997 Indenture covering presently unissued 9%
Convertible Subordinated Debentures due 2006 (5)
4.4 Indenture dated September 26, 1997 covering issued 7-3/4%
Convertible Senior Subordinated Debentures due 2002 (6)
10.1 Transfer of Receivables Agreement between DataComm Leasing
Corporation and Sanwa Business Credit Corporation. (7)
10.2 1979 Employee Stock Purchase Plan.(8)
10.3 1983 Stock Option Plan.(9)
10.4 1984 Incentive Stock Option Plan, and related amendments.(10)
10.5 1985 Stock Option Plan. (11)
10.6 1991 Stock Option Plan. (12)
10.7 Retirement Savings and Deferred Profit Sharing Plan, and related
amendments. (13)
10.8 Credit Agreement between General DataComm Industries, Inc. and
The Chase Manhattan Bank. (14)
10.9 Loan and Security Agreement between General DataComm Industries,
Inc.et al.and Transamerica Business Credit Corporation,et al.(15)
10.10 First amendment to Loan and Security Agreement between General
DataComm Industries, Inc., et al., and Transamerica Business
Credit Corporation, et al. (16)
10.11 Second amendment to Loan and Security Agreement between General
DataComm Industries, Inc., et al., and Transamerica Business
Credit Corporation, et al.
10.12 Third amendment to Loan and Security Agreement between General
DataComm Industries, Inc., et al., and Transamerica Business
Credit Corporation, et al.
13. Annual Report to Stockholders for the year ended September 30,
1998. Portions of the Annual Report to Stockholders for the year
ended September 30, 1998 which have been incorporated by
reference are deemed to be "filed" (and are included as Exhibit
13 in our electronic filing with the Commission). All remaining
portions of the Annual Report to Stockholders will be furnished
for the information of the Commission and are not deemed "filed."
21. Subsidiaries of the Registrant.
23. Consent of Independent Accountants.
- -----------------------
1 Incorporated by reference from Exhibit 3.1 to Form 10-Q for quarter ended
June 30, 1988. Amendments thereto are filed as Exhibit 3.1 to Form 10-Q
for quarter ended March 31, 1990.
2 Incorporated by reference from Exhibit 3.2 to Form 10-K for year ended
September 30, 1987.
20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K (cont'd)
EXHIBIT INDEX (cont'd)
3 Incorporated by reference from Exhibit 4 to Form 8-K dated October 8,1996.
4 Incorporated by reference from Exhibit 4.1 to Form 10-Q for quarter ended
June 30, 1997.
5 Incorporated by reference from Exhibit 4.3 to Form 10-K for the year
ended September 30, 1997.
6 Incorporated by reference from Exhibit 4 to Form 8-K dated October 8, 1997
7 Incorporated by reference from Exhibit 10.1 to Form 10-Q for quarter ended
June 30, 1989
8 Incorporated by reference from Part II of prospectus dated September 30,
1991, contained in Form S-8, Registration Statement No. 33-43050.
9 Incorporated by reference from Exhibit 1(c) to Form S-8, Registration
Statement No. 2-92929. Amendments thereto are incorporated by reference
and filed as Exhibit 10.3 to Form 10-Q for quarter ended December 31, 1987
and as Exhibit 10.3.1 to Form 10-Q for quarter ended June 30, 1991.
10 Incorporated by reference from Exhibit 1(a), Form S-8, Registration
Statement No.2-92929. Amendments thereto are incorporated by reference and
filed as Exhibit 10.2 to Form 10-Q for quarter ended June 30, 1991,
Exhibit 10.19 to Form 10-K for year ended September 30, 1987 and Exhibit
10.2 to Form 10-Q for quarter ended December 31, 1987.
11 Incorporated by reference from Exhibit 10a, Form S-8, Registration
Statement No. 33-21027. Amendments thereto are incorporated by reference
from Part II of prospectus dated August 21, 1990, contained in Form S-8,
Registration Statement No. 33-36351 and as Exhibit 10.3.2 to Form 10-Q for
quarter ended June 30, 1991.
12 Incorporated by reference from Form S-8, Registration Statement No.
333-35299.
13 Incorporated by reference from Form S-8, Registration Statement No.
33-37266. Amendments thereto are incorporated by reference to Exhibit
10.16 to Form 10-Q for the quarter ended December 31, 1996.
14 Incorporated by reference from Exhibit 10.21 to Form 10-K for the year
ended September 30, 1993.
15 Incorporated by reference from Exhibit 10.9 to Form 10-K for the year
ended September 30, 1997.
16 Incorporated by reference from Exhibit 10.9 to Form 10-Q for quarter
ended March 31, 1998.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /S/ WILLIAM S. LAWRENCE
William S. Lawrence
Senior Vice President, Finance and
Principal Financial Officer
Dated: January 12, 1999
22
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/S/ CHARLES P. JOHNSON Chairman of the Board January 12, 1999
- ---------------------- and Chief Executive Officer
CHARLES P. JOHNSON
/S/ WILLIAM S. LAWRENCE Senior Vice President, January 12, 1999
- ----------------------- Finance and Principal
WILLIAM S. LAWRENCE Financial Officer
/S/ WILLIAM G. HENRY Vice President and January 12, 1999
- ---------------------- Corporate Controller
WILLIAM G. HENRY
/S/ HOWARD S. MODLIN Director and Secretary January 12, 1999
- --------------------
HOWARD S. MODLIN
/S/ FREDERICK R. CRONIN Director and January 12, 1999
- ----------------------- Vice President, Corporate
FREDERICK R. CRONIN Technology
_______________________ Director January 12, 1999
LEE M. PASCHALL
__________________________ Director January 12, 1999
JOHN L. SEGALL
23
General DataComm Industries, Inc.
and Subsidiaries
Index to Financial Statements and Schedules
Financial Statements Incorporated by Reference
The consolidated financial statements of General DataComm Industries, Inc. and
Subsidiaries and the Report of Independent Accountants related thereto are
incorporated herein by reference from pages 18 through 35 of the Corporation's
Annual Report to Stockholders for the year ended September 30, 1998. Such
information is also included in Exhibit 13 of this Form 10-K report (as filed
with the Securities and Exchange Commission). The Corporation's 1998 Annual
Report to Stockholders is not deemed to be "filed" as part of this Form 10-K
report except for those portions thereof specifically incorporated by reference.
Financial Statements and Schedule Included Page
Report of Independent Accountants F-2
Consolidated Financial Statement Schedule:
II. Valuation and qualifying accounts for the years
ended September 30, 1998, 1997 and 1996. F-3
Financial Statements and Schedules Omitted
Financial statements and schedules other than those incorporated by reference
above or included herein are omitted because they are not required or because
the required information is presented elsewhere in the financial statements or
notes thereto.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of General DataComm Industries, Inc.
Our report on the consolidated financial statements of General DataComm
Industries, Inc. and its subsidiaries has been incorporated by reference in this
Form 10-K from page 39 of the fiscal 1998 Annual Report to Shareholders of
General DataComm Industries, Inc. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/S/ PricewaterhouseCoopers LLP
Stamford, Connecticut
October 29, 1998, except for Note 15
for which the date is December 31, 1998
F-2
General DataComm Industries, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the Years Ended September 30, 1998, 1997 and 1996
(In Thousands)
Additions
Balance at Charged to Balance
Beginning Costs and at End
of Period Expenses Deductions of Period
--------- --------- ---------- ----------
(b)
1998
Allowance for doubtful
receivables (a) $1,703 $ 22 $283 $1,442
====== ==== ==== ======
1997
Allowance for doubtful
receivables (a) $1,768 $285 $350 $1,703
====== ==== ==== ======
1996
Allowance for doubtful
receivables (a) $1,704 $121 $ 57 $1,768
====== ==== ==== ======
- ------------------------------
(a) Deducted from asset accounts.
(b) Uncollectible accounts written off, net of recoveries.
F-3