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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, 2003 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.)
6 Rubber Avenue, Naugatuck, Connecticut 06770
(Address of principal executive offices)
(203) 729-0271
(Registrant's telephone number, including area code)
----------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 [ ] NO [X]
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
non-affiliates as of December 15, 2003
$5,744,137
Number of shares of Common Stock and Class B Stock outstanding as of
December 15, 2003
3,303,872 Shares of Common Stock
664,978 Shares of Class B Stock
DOCUMENTS INCORPORATED BY REFERENCE: None
GENERAL DATACOMM INDUSTRIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
Page
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PART I
Item 1. Business.....................................................................3
Risk Factors................................................................10
Item 2. Properties..................................................................17
Item 3. Legal Proceedings...........................................................17
Item 4. Submission of Matters to a Vote of Security Holders.........................18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...18
Item 6. Selected Financial Data.....................................................19
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations...............................................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................33
Item 8. Financial Statements and Supplementary Data.................................34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure..................................................................65
Item 9A. Controls and Procedures.....................................................66
PART III
Item 10. Directors and Executive Officers of the Registrant..........................66
Item 11. Executive Compensation......................................................67
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.........................................................67
Item 13. Certain Relationships and Related Transactions..............................67
Item 14. Principal Accountant Fees and Services......................................67
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............68
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"
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.
Plan of Reorganization Approval and Effectiveness
On November 2, 2001 (the "Petition Date"), General DataComm Industries, Inc.,
General DataComm, Inc., DataComm Leasing Corporation, DataComm Rental
Corporation, GDC Federal Systems, Inc., GDC Naugatuck, Inc., GDC Holding
Company, LLC, General DataComm International Corp., General DataComm China,
Ltd., and GDC Realty, Inc. (collectively, the "Debtors") each filed voluntary
petitions for relief (collectively, the "Petitions) under Chapter 11 of Title 11
of the United States Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code")
in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The Debtors continued in possession of their properties and
the management of their businesses as debtors in possession pursuant to Section
1107 and 1108 of the Bankruptcy Code until September 15, 2003.
The Honorable Peter J. Walsh, Chief United States Bankruptcy Judge, presided
over these cases (the "Chapter 11 Cases") since their inception. On November 20,
2001, the Office of the United States Trustee for the District of Delaware (the
"Trustee") appointed an Official Committee of Unsecured Creditors to serve in
these cases (the "Committee"). No Chapter 11 trustee or examiner was appointed
in the Chapter 11 Cases.
On April 29, 2003 the Amended Joint Plan of Reorganization (the "Plan") was
filed. The Plan was proposed jointly by the Debtors and the Lenders, and
represented the result of extensive negotiations between such parties and the
Committee. The Plan set forth the proposed reorganization of the Debtors' assets
and distribution of recoveries to their creditors and equity security holders.
The Plan and its treatment of creditors was consistent with the plan term sheet
executed by the Debtors, the Committee and Lenders in October 2002, as modified
by agreement of such parties in February 2003.
A copy of the Plan appeared as Exhibit A to the Disclosure Statement (the
"Disclosure Statement") which was filed as an exhibit to Form 8-K dated August
11, 2003. The Plan specified the classes of the Debtors' creditors and equity
security holders and the treatment of the Claims and Equity Interests of such
creditors and equity security holders, respectively. Pursuant to Section 1126 of
the Bankruptcy Code, the Debtors solicited acceptances of the Plan from the
classes entitled to vote on the Plan. The Disclosure Statement was submitted
pursuant to Section 1125 of the Bankruptcy Code in order to provide information
of the kind necessary to enable a hypothetical reasonable investor to make an
informed judgment in the exercise of his, her, or its right to vote on the Plan.
On August 5, 2003, the Debtors' Plan was confirmed by the United States
Bankruptcy Court and the Plan thereafter became effective on September 15, 2003.
Reference is made to Note 1 and Note 6 to the Notes to Consolidated Financial
Statements presented in Item 8 of this Form 10-K, and to "Risk Factors"
presented below.
3
Overview
General DataComm Industries, Inc., based in Naugatuck, Connecticut, is a
provider of networking and telecommunications products and services. The Company
is focused on providing multiservice provisioning solutions using multiservice
access products. The Company designs, assembles, markets, installs and maintains
products that enable telecommunications common carriers, corporations, and
governments to build, improve and more cost effectively manage their global
telecommunications networks.
The Company's products and services are marketed primarily in the Americas and
through distributors elsewhere in the world. The Company sells its products and
services through its own sales organizations to common carriers (telephone and
cable companies), as well as corporations and governments, system integrators,
local distributors, and value-added resellers. International sales represented
approximately 31% of the total Company revenues in fiscal 2003 as compared to
26% in fiscal 2002.
The Company's user base includes: local exchange carriers, including Qwest, Bell
Canada, Verizon and SBC; interexchange carriers including MCI; corporate end
users; and government entities including the Commonwealth of Kentucky and the
U.K. Ministry of Defense.
The Company's executive offices are located at 6 Rubber Avenue, Naugatuck,
Connecticut, 06770, and its telephone number is (203) 729-0271.
Lower cost of raw materials, focused sales and marketing, and improved
engineering productivity have contributed to the Company's ability to emerge
from Chapter 11 Bankruptcy. The business leverages the sales resources of
distributors, value-added resellers, integrators and telecommunication provider
channels in an effort to achieve greater sales coverage both domestically and
internationally. The products produced by the Company for the most part have an
inherently short selling cycle. However, the Company estimates that it takes
approximately six to eighteen months to get products approved to be used in the
central offices of telephone companies.
GDC has adjusted to shifting priorities in the overall access market. These
priorities are governed by the accelerated growth of the Internet, frame relay
and packet-based (IP) services, all of which require increased attention to
network management and performance quality.
Principal Products and Services
GDC, accordingly, is focused on the development and sale of products targeted
towards market growth areas. Specifically, GDC's switching, routing and LAN
extension solutions, networking products including integrated access systems for
digital and analog transport and multiplexers for network consolidation,
constitute our major product elements serving to meet emerging market
requirements. The Company does this by designing products to target specific
applications to provide solutions that are intended to be superior in price and
performance to the competition.
These product solutions are offered across two distinct focused market segments.
The first product line consists of products that are NEBS Level 3 Certified for
deployment in mission critical applications in telephone company central offices
and government applications. This group of products is designated as the
SpectraComm family of products. GDC on October 8, 2003 introduced a second
family suite of products called InnovX for use in Enterprise applications. This
is a cost effective family of products offering security, high quality and
features typically found only in carrier products for use in Enterprise and
non-NEBS environments. A third product line known for its reliability is
Multiplexers. In addition, in the last year the Company has introduced a new
offering of professional services.
4
Product Suite
SpectraComm Family
General DataComm's SpectraComm family of NEBS Level 3 modems, CSU/DSUs and LAN
products support a wide range of applications. These include T3 broadband
applications including M13, T1/FT1 (Fractional T1) wide-band applications, 2.4
kbps - 64 kbps DDS (Digital Data Service) narrow-band applications, switched or
private line analog applications and Local Area Network applications (LAN
Extension and Ethernet switching). The flexible, expandable design of the
SpectraComm system accommodates network growth, spanning from a single card
enclosure to a robust 16-slot shelf system. This modularity maximizes the use of
network facilities and helps to reduce network management complexity. The
SpectraComm Manager provides SNMP Management for an entire shelf and is
compliant with the Industry Standard H.P. Open View.
GDC's SpectraComm devices provide unmatched packaging flexibility meaning that
any of the SpectraComm devices (from 202 to V34 to T1 to T3) will fit, and are
interchangeable between the various enclosures platforms. This
interchangeability allows flexible inventories, lower sparing and easier
deployment, resulting in overall lower costs.
The significance of NEBS Certification. A requirement for Central Office
equipment located in North American Public Switched Network centers, the
rigorous NEBS requirements are a universal measure of network product excellence
for carriers. NEBS includes criteria for operational continuity, protection of
property, and personnel safety. NEBS is the major test of quality and safety
that is required for organizations supplying or purchasing network equipment for
public network high density applications.
Specifically, the NEBS criteria are intended to:
. Ensure equipment compatibility with telephone industry standards
. Simplify equipment planning and installation
. Guard against service outages
. Prevent interference to close proximity telecommunications equipment
. Minimize the risk of fire spread
. Ensure equipment operation under stressful environmental conditions
. Protect personnel from injury - surge, shock and toxicity
Telcordia has grouped NEBS criteria into three functional groups or levels, with
Level 3 being the most stringent. Anything less than Level 3 certification can
restrict deployment in certain carrier environment applications. By meeting NEBS
Level 3 requirements, GDC products can be deployed in all interior carrier
environments. The NEBS Level 3 certification of GDC's SpectraComm products is a
key requirement for our Carrier and Service Provider customers. SpectraComm
CSU/DSUs, Modems, LAN Extension and Ethernet switching devices function in their
mission critical internal network infrastructures and central office
applications, providing secure, remote network management, SS7 Signal Transport,
Cell Site to CO access, and CPE provisioning.
5
InnovX Family
GDC has developed and introduced the InnovX family of products for use in
Enterprise applications. GDC's new InnovX family of products deliver high
quality, security and flexible features typically found only in carrier
products, for use in Enterprise and non-NEBS environments at competitive prices.
In most cases, InnovX uses common blades for installation in enclosures ranging
from a single-blade standalone to a high-density, 16 - blade rackmount
enclosure. This flexible approach simplifies network deployment and reduces
costs associated with network maintenance and sparing. GDC's InnovX family of
products support Enterprise access applications from low speed to T1, T3, and IP
and all are controlled by View Manager and View Soft network management
products.
The InnovX family includes:
.. InnovX FastRoute: This group of products extends IP connectivity for
Enterprise users and provides flexible options, exceptional remote
management, and network security at a fraction of the cost of traditional
methods. When deployed in enterprise networks, the InnovX FastRoute extends
internal IP networks and simplifies network management and administration.
The versatile and feature-rich InnovX FastRoute can be configured for LAN
extension or as a router eliminator. Management of remote devices is
optionally available as well as reporting of alarm conditions to a security
service. Out-of-band management (OBM) is available with an integral V.34
modem.
.. InnovX FastSwitch: Scalable & Secure Ethernet Switches are designed for
applications where high quality, high-reliability, security, and low-cost
are needed. InnovX FastSwitch is scalable and expands in 9- or 18- port
increments. The product reduces collisions and eases congestion problems on
existing shared-hub networks. InnovX FastSwitch devices can be monitored
and managed using standard protocols including HP OpenView, Telnet, SNMP
and HTTP. It also features GDC IronGate Security, which provides
port-by-port MAC address filtering. For additional security during periods
of heightened alert, SNMP and web access may be disabled.
.. InnovX LanLink: Industrial Ethernet Transfer
.. InnovX SurePath: Wide Area Network Transport Network (WAN) devices that
support T1/FT1, DDS, T3 and high-density secure V.34 dial applications.
The InnovX line of products is to be marketed solely through Value Added
Resellers, System Integrators and through the Government Services Administration
to government agencies.
Multiplexers
General DataComm supplies a line of multiplexing products. The TMS-3000 is a
network managed bandwidth management system for high speed wide area networks.
The TMS-3000 is primarily sold to system integrators, government agencies and
enterprise customers to build or expand fault tolerant resilient backbone
networks. GDC also provides an access product into the TMS-3000 network for
smaller branch or regional offices via the OCM feeder platform. The OCM platform
offers connectivity to a variety of digital carrier services and uses the same
bandwidth optimization techniques as the TMS-3000 to efficiently transport a
changing mix of applications, LAN to WAN integration, image and video along with
traditional voice and data traffic.
6
Professional Services
General DataComm has field-proven experience in the successful deployment and
maintenance and support of voice and data networking equipment. Flexible and
responsive to customer specific needs, General DataComm provides nation-wide
installation, maintenance and product repair services for the complete line of
network access products along with services such as project management,
training, coordination, staging and network testing.
GDC offers a range of guaranteed maintenance response plans: two- four- or
eight-hour and next day on-site service. Unlike most industry-offered training
programs, which deliver off-the-shelf, packaged courses, GDC creates a custom
training solution to fit a customer's specific needs in terms of course content
and duration. GDC's Factory Direct repair facility provides product and warranty
repair at our repair center in Naugatuck, Connecticut.
GDC previously provided similar services for multiple manufacturers including
GDC through the Vital Network Services Division (Vital). This division was sold
effective as of July 1, 2001. In fiscal 2002 and 2003, the professional services
provided by the Company were significantly more limited, in both scope and
magnitude than those previously under Vital in fiscal 2001. See Note 4,
"Division Sales and Discontinued Operations" in the Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.
Sales and Marketing
Effectively employing networking technology has become a key factor in
developing a successful business. Communications networks have emerged as
valuable assets that generate revenue and provide competitive advantage. General
DataComm over the past 30 years has helped many of the world's largest
enterprises harness the power of networking. Electronic channels of commerce
have been established, and reliable public and private communication links are
essential to any organization's survival. GDC's full range of products and
services can support this growing network challenge.
The Company's products are sold primarily in the Americas via a dedicated
domestic sales force and through a domestic and international distributor
network, original equipment manufacturers (OEM's), value-added resellers, system
integrators and alternate service providers.
GDC's customer base includes: local exchange carriers, including incumbents such
as Verizon, SBC, Qwest and Bell Canada; interexchange carriers, including MCI,
and government entities including state, local and foreign governments.
GDC had 3 customers which individually accounted for more than 10 percent of
revenue in fiscal 2003. In total, such customers accounted for approximately 49%
of fiscal 2003 revenue.
Research and Development
The Company focuses its development efforts on providing enhanced functionality
to its existing products, including total network solutions and performance and
the development of additional software-based features and functionality.
Extensive product development input is obtained from customers and our
monitoring of end-user needs and changes in the marketplace. Our current product
development focus has been on developing IP and Ethernet access solutions and
completing new products. We believe that our success will depend, in part, on
our ability to develop and introduce in a timely fashion new products and
enhancements to our existing products. GDC has in the past made, and intends to
continue making, significant investments in product and technological
development. We perform our research and product development activities at our
facility in Naugatuck, Connecticut. The Company's inability to develop new
products or enhancements to existing products on a timely basis, or the failure
of these new products or enhancements to achieve market acceptance, could have a
material adverse effect on our business.
7
GDC's expenditures for research and development activities amounted to $3.1
million, $3.6 million and $12.0 million for fiscal 2003, 2002, and 2001,
respectively.
Manufacturing
GDC's manufacturing operations consist of materials planning and procurement,
final assembly, product assurance testing, quality control, and packaging and
shipping. GDC currently uses several independent manufacturers to provide
certain printed circuit boards, chassis and subassemblies. The Company believes
that the efficiency of our manufacturing process to date is largely due to our
product architecture and our commitment to manufacturing process design.
GDC has spent significant engineering resources producing customized software to
assure consistent high product quality. Every product is tested after the
assembly process using internally developed automated product assurance testing
procedures.
The Company'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 Company 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 Company's products are customized
to the Company's specifications. None of the suppliers of components operate
under contract. Additionally, availability of some standard components may be
affected by market shortages and allocations. The Company'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
Company's operating results in any given period. In addition, as referenced
above, the Company relies heavily on outsourcing subcontractors for 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
Company's operating results and business.
GDC's Naugatuck facility continued to be ISO 9001 certified during fiscal 2003.
Backlog
The Company's order backlog, while one of several useful financial statistics
is, however, a limited indicator of the Company's future revenues. Because of
normally short delivery requirements, the Company'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 Company or its
competitors; and the capital spending trends of customers.
Competition
The telecommunications and networking industry is intensely competitive. Many of
the Company's current and prospective competitors including ADC, Cisco, Adtran,
Paradyne and Alcatel 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.
8
Each competitor offers its own solution and all are formidable competitors.
There can be no assurance that we will be able to maintain or grow our market
share of multi-service access products.
Patents and Related Rights
The Company presently owns approximately 41 domestic patents and has no
additional applications pending. All of these patents and applications have also
been filed in Canada; most also have been filed in various other foreign
countries. Many of those filed outside the United States have been allowed while
the remainder are pending. The Company 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 Company
may involve infringement of existing patents not known to the Company.
Employees
At September 30, 2003, the Company employed 111 persons, of whom 27 were
research and development positions, 31 were manufacturing positions, 32 were
sales and marketing positions and 21 were general corporate management positions
and shared support-service positions. The shared support functions included
information technology, corporate finance, human resource management, facilities
maintenance and other miscellaneous functions.
No Company employees are covered by collective bargaining agreements. The
Company has never experienced a work stoppage.
Many of our employees are highly skilled, and our continued success depends in
part upon our ability to attract and retain such employees. Due to the Company's
history of financial difficulties, the Company's employee benefit programs are
likely not to be equivalent to those offered by our competitors. While to date
management does not believe this to have resulted in significant difficulties in
hiring and retaining skilled personnel, this may not be the case in the future.
9
RISK FACTORS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FOR
THIS PURPOSE, STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE
FOREGOING, THE WORDS "BELIEVES", "ANTICIPATES", "PLANS", "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND ARE NOT
GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER THIS HEADING.
GDC Limited Operating History Since Emerging from Bankruptcy. The Company
recently emerged from Bankruptcy on September 15, 2003. The Company voluntarily
filed for protection under Chapter 11 of the US Bankruptcy Code on November 2,
2001, after incurring seven consecutive years of losses and selling three of its
four operating divisions in 2001. Accordingly, an investor in our common stock
must evaluate the risks, uncertainties, and difficulties frequently encountered
by a company emerging from Chapter 11 and that operates in rapidly evolving
markets such as the telecommunications equipment industry.
Due to the Company's limited operating history since emergence, the Company may
not successfully implement any of its strategies or successfully address these
risks and uncertainties. As described by the following factors, past financial
performance should not be considered to be a reliable indicator of future
performance, and investors should not use historical trends to anticipate
results or trends in future periods.
Limited Financial Resources and Risk of Default. The Company has virtually
no current ability to borrow additional funds. It must, therefore, substantially
fund operations from cash balances and cash generated from operating activities.
The Company has significant short term obligations including payment of
professional fees and monthly payments of principal and interest (currently such
principal and interest totals approximately $335,000 per month) under its new
loan agreement. Furthermore, the Company has significant outstanding obligations
and commitments approximating $54.6 million (see Item 7 of this Form 10-K, in
the section on "Liquidity" the reference to contractual cash obligations as of
September 30, 2003).
The Company's failure to make required payments under the new loan agreement
would constitute an event of default. In addition, the Company is required to
meet a financial covenant to avoid an event of default. (See Notes 1 and 6 to
Notes to Financial Statements included in Item 8 of this Form 10-K).
The ability of the Company to meet cash flow and loan covenant requirements is
directly affected by the factors described in the "Risk Factors" section.
There can be no assurance that the Company will be able to avoid a default on
the new loan agreement. If there is such a default, the senior secured lenders
may accelerate payment of the outstanding debt ($17.3 million at September 30,
2003) and foreclose on their security interests which likely would require the
Company to again file for bankruptcy protection. In addition, the Company's new
loan agreement provides the lenders with warrants to (i) purchase up to 51% of
the Company's common stock at $.01 per share in the event of default and (ii)
purchase 10% of the Company's common stock if the debt owing to them is not
fully paid by December 31, 2007. Both such warrants and any common stock issued
thereunder will be cancelled if the lender's outstanding debt is fully paid by
December 2007.
10
Dependence on Legacy and Recently Introduced Products and New Product
Development. The Company's future results of operations are dependent on market
acceptance of existing and future applications for the Company's current
products and new products in development. The majority of sales continue to be
provided by the Company's legacy products, primarily our DSU/CSU, V.34 lines
which represented approximately 85% of net sales in fiscal 2003, 87% of net
sales in fiscal 2002 and 49% of net sales in fiscal 2001. The Company
anticipates that net sales from legacy products will decline over the next
several years and net sales of new products will increase at the same time, with
significant quarterly fluctuations possible, and without assurance that sales of
new products will increase at the same time.
Market acceptance of both the Company's recently introduced InnovX product line
and future product lines is dependent on a number of factors, not all of which
are in the Company's control, including the continued growth in the use of
bandwidth intensive applications, continued deployment of new telecommunication
services, market acceptance of multiservice access devices, the availability and
price of competing products and technologies, and the success of the Company's
sales and marketing efforts. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. Failure to introduce new products
in a timely manner in order to replace sales of legacy products could cause
customers to purchase products from competitors and have a material adverse
effect on the Company's business, financial condition and results of operations.
New products under development may require additional development work,
enhancement and testing or further refinement before the Company can make them
commercially available. The Company has in the past experienced delays in the
introduction of new products, product applications and enhancements due to a
variety of internal factors, such as reallocation of priorities, financial
constraints, difficulty in hiring sufficient qualified personnel, and unforeseen
technical obstacles, as well as changes in customer requirements. Such delays
have deferred the receipt of revenue from the products involved. If the
Company's products have performance, reliability or quality shortcomings, then
the Company may experience reduced orders, higher manufacturing costs, delays in
collecting accounts receivable, and additional warranty and service expenses.
Customer Concentration. Our historical customers have consisted primarily
of RBOCs, long distance service providers, wireless service providers, and
Resellers who sell to these customers. The market for the services provided by
the majority of these service providers has been influenced largely by the
passage and interpretation of the Telecommunications Act of 1996 (the "1996
Act"). Service providers require substantial capital for the development,
construction, and expansion of their networks and the introduction of their
services. The ability of service providers to fund such expenditures often
depends on their ability to budget or obtain sufficient capital resources. Over
the past several years, resources made available by these customers for capital
acquisitions have declined, particularly due to recent negative market
conditions in the United States. If the Company's current or potential service
provider customers cannot successfully raise the necessary funds, or if they
experience any other adverse effects with respect to their operating results or
profitability, their capital spending programs may be adversely impacted which
could materially adversely affect the Company's business, financial condition
and results of operations.
A small number of customers have historically accounted for a majority of the
Company's sales. See "Item 1. Business - Sales and Marketing". Sales to the
Company's top five customers accounted for 61%, 62% and 46% of sales in fiscal
2003, 2002 and 2001, respectively. There can be no assurance that the Company's
current customers will continue to place orders with the Company, that orders by
existing customers will continue at the levels of previous periods, or that the
Company will be able to obtain orders from new customers. GDC expects the
economic climate and conditions in the telecommunication equipment industry to
remain unpredictable in fiscal 2004, and possibly beyond. The loss of one or
more of our service provider customers, such as occurred during the past three
years through industry consolidation or otherwise, could have a material adverse
effect on our sales and operating results. A bankruptcy filing by one or more of
the Company's major customers could materially adversely affect the Company's
business, financial condition and results of operations.
11
Dependence on Key Personnel. The Company's future success will depend to a
large extent on the continued contributions of its executive officers and key
management, sales, and technical personnel. Each of the Company's executive
officers, and key management, sales and technical personnel would be difficult
to replace. The Company does not have employment contracts with its key
employees. The Company implemented significant cost and staff reductions during
fiscal 2003, 2002 and 2001, which may make it more difficult to attract and
retain key personnel. The loss of the services of one or more of the Company's
executive officers or key personnel, or the inability to attract qualified
personnel, could delay product development cycles or otherwise could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Suppliers and Component Availability. The Company
generally relies upon several contract manufacturers to assemble finished and
semi-finished goods. The Company'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. Component parts that are
incorporated into board assemblies are sourced directly by the company from
suppliers. The Company 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 Company's products are customized to the Company's
specifications. None of the suppliers of components operate under contract.
Additionally, availability of some standard components may be affected by market
shortages and allocations. The Company's inability to obtain a sufficient
quantity of components when required, or to develop alternative sources due to
lack of availability or degradation of quality, at acceptable prices and within
a reasonable time, could result in delays or reductions in product shipments
which could materially affect the Company's operating results in any given
period. In addition, as referenced above the Company relies heavily on
outsourcing subcontractors for 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 Company's operating results and
business.
The Company uses internal forecasts to manage its general finished goods and
components requirements. Lead times for materials and components may vary
significantly, and depend on factors such as specific supplier performance,
contract terms, and general market demand for components. If orders vary from
forecasts, the Company may experience excess or inadequate inventory of certain
materials and components, and suppliers may demand longer lead times and higher
prices. From time to time, the Company has experienced shortages and allocations
of certain components, resulting in delays in fulfillment of customer orders.
Such shortages and allocations may occur in the future, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Fluctuations in Quarterly Operating Results. The Company's sales are
subject to quarterly and annual fluctuations due to a number of factors
resulting in more variability and less predictability in the Company's
quarter-to-quarter sales and operating results. As a small number of customers
have historically accounted for a majority of the Company's sales, order
volatility by any of these major customers has had and may have an impact on the
Company in the prior, current and future fiscal years.
12
Most of the Company's sales require short delivery times. The Company's ability
to affect and judge the timing of individual customer orders is limited. Large
fluctuations in sales from quarter-to-quarter could be due to a wide variety of
factors, such as delay, cancellation or acceleration of customer projects, and
other factors discussed below. The Company's sales for a given quarter may
depend to a significant degree upon planned product shipments to a single
customer, often related to specific equipment or service deployment projects.
The Company has experienced both acceleration and slowdown in orders related to
such projects, causing changes in the sales level of a given quarter relative to
both the preceding and subsequent quarters.
Delays or lost sales can be caused by other factors beyond the Company's
control, including late deliveries by the third party subcontractors the Company
is using to outsource its manufacturing operations and by vendors of components
used in a customer's products, slower than anticipated growth in demand for the
Company's products for specific projects or delays in implementation of projects
by customers and delays in obtaining regulatory approvals for new services and
products. Delays and lost sales have occurred in the past and may occur in the
future. The Company believes that sales in the past have been adversely impacted
by merger and restructuring activities by some of its top customers. These and
similar delays or lost sales could materially adversely affect the Company's
business, financial condition and results of operations. See "Customer
Concentration" and "Dependence on Key Suppliers and Component Availability".
The Company's backlog at the beginning of each quarter typically is not
sufficient to achieve expected sales for that quarter. To achieve its sales
objectives, the Company is dependent upon obtaining orders in a quarter for
shipment in that quarter. Furthermore, the Company's agreements with certain of
its customers typically provide that they may change delivery schedules and
cancel orders within specified timeframes, typically up to 30 days prior to the
scheduled shipment date, without significant penalty. Some of the Company's
customers have in the past built, and may in the future build, significant
inventory in order to facilitate more rapid deployment of anticipated major
projects or for other reasons. Decisions by such customers to reduce their
inventory levels could lead to reductions in purchases from the Company in
certain periods. These reductions, in turn, could cause fluctuations in the
Company's operating results and could have an adverse effect on the Company's
business, financial condition and results of operations in the periods in which
the inventory is reduced.
Operating results may also fluctuate due to a variety of factors, including
market acceptance of the Company's new InnovX line of products, delays in new
product introductions by the Company, market acceptance of new products and
feature enhancements introduced by the Company, changes in the mix of products
and or customers, the gain or loss of a significant customer, competitive price
pressures, changes in expenses related to operations, research and development
and marketing associated with existing and new products, and the general
condition of the economy.
All of the above factors are difficult for the Company to forecast, and these or
other factors can materially and adversely affect the Company's business,
financial condition and results of operations for one quarter or a series of
quarters. The Company's expense levels are based in part on its expectations
regarding future sales and are fixed in the short term to a certain extent.
Therefore, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in sales. Any significant decline in
demand relative to the Company's expectations or any material delay of customer
orders could have a material adverse effect on the Company's business, financial
condition, and results of operations. There can be no assurance that the Company
will be able to sustain profitability on a quarterly or annual basis. In
addition, the Company has had, and in some future quarter may have operating
results below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially and
adversely affected. See "Potential Volatility of Stock Price".
13
Competition. The market for telecommunications network access equipment
addressed by the Company's SpectraComm, InnovX and TMS/OCM product families can
be characterized as highly competitive, with intensive equipment price pressure.
This market is subject to rapid technological change, wide-ranging regulatory
requirements, the entrance of low cost manufacturers and the presence of
formidable competitors that have greater name recognition and financial
resources. Certain technology such as the V.34 and DSU/CSU portion of the
SpectraComm and InnovX lines are not considered new and the market has
experienced decline in recent years.
Industry consolidation could lead to competition with fewer, but stronger
competitors. In addition, advanced termination products are emerging, which
represent both new market opportunities, as well as a threat to the Company's
current products. Furthermore, basic line termination functions are increasingly
being integrated by competitors, such as Cisco, Lucent Technologies, Inc. and
Nortel Networks, into other equipment such as routers and switches. To the
extent that current or potential competitors can expand their current offerings
to include products that have functionality similar to the Company's products
and planned products, the Company's business, financial condition and results of
operations could be materially adversely affected. Many of the Company's current
and potential competitors have substantially greater technical, financial,
manufacturing and marketing resources than the Company. In addition, many of the
Company's competitors have long-established relationships with network service
providers. There can be no assurance that the Company will have the financial
resources, technical expertise, manufacturing, marketing, distribution and
support capabilities to compete successfully in the future.
Rapid Technological Change. The network access and telecommunications
equipment markets are characterized by rapidly changing technologies and
frequent new product introductions. The rapid development of new technologies
increases the risk that current or new competitors could develop products that
would reduce the competitiveness of the Company's products. The Company's
success will depend to a substantial degree upon its ability to respond to
changes in technology and customer requirements. This will require the timely
selection, development and marketing of new products and enhancements on a
cost-effective basis. The development of new, technologically advanced products
is a complex and uncertain process, requiring high levels of innovation. The
Company may need to supplement its internal expertise and resources with
specialized expertise or intellectual property from third parties to develop new
products.
Furthermore, the communications industry is characterized by the need to design
products that meet industry standards for safety, emissions and network
interconnection. With new and emerging technologies and service offerings from
network service providers, such standards are often changing or unavailable. As
a result, there is a potential for product development delays due to the need
for compliance with new or modified standards. The introduction of new and
enhanced products also requires that the Company manage transitions from older
products in order to minimize disruptions in customer orders, avoid excess
inventory of old products and ensure that adequate supplies of new products can
be delivered to meet customer orders. There can be no assurance that the Company
will be successful in developing, introducing or managing the transition to new
or enhanced products, or that any such products will be responsive to
technological changes or will gain market acceptance. The Company's business,
financial condition and results of operations would be materially adversely
affected if the Company were to be unsuccessful, or to incur significant delays
in developing and introducing such new products or enhancements. See "Dependence
on Legacy and Recently Introduced Products and New Product Development".
14
Compliance with Regulations and Evolving Industry Standards. The market for
the Company's products is characterized by the need to meet a significant number
of communications regulations and standards, some of which are evolving as new
technologies are deployed. In the United States, the Company's products must
comply with various regulations defined by the Federal Communications Commission
and standards established by Underwriters Laboratories and Bell Communications
Research and new products introduced in the SpectraComm line will need to be
NEBS Certified. As standards continue to evolve, the Company will be required to
modify its products or develop and support new versions of its products. The
failure of the Company's products to comply, or delays in compliance, with the
various existing and evolving industry standards, could delay introduction of
the Company's products, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
GDC May Require Additional Funding to Fund Operations. The Company emerged
from Chapter 11 bankruptcy on September 15, 2003. Under the plan of emergence,
the Company plans to pay all creditors 100% of their allowed claims based upon a
five year business plan. The ability to meet the objectives of this business
plan is directly affected by the factors described in this section "Risk
Factors". The Company cannot assure investors that it will be able to obtain new
customers or to generate the increased revenues required to meet our business
plan objectives. In addition, in order to execute the business plan, the Company
may need to seek additional funding through public or private equity offerings,
debt financings or commercial partners. The Company cannot assure investors that
it will obtain funding on acceptable terms, if at all. If the Company is unable
to generate sufficient revenues or access capital on acceptable terms, it may be
required to (a) obtain funds on unfavorable terms that may require the Company
to relinquish rights to certain of our technologies or that would significantly
dilute our stockholders and/or (b) significantly scale back current operations.
Either of these two possibilities would have a material adverse effect on the
Company's business, financial condition and results of operations.
Risks Associated With Entry into International Markets. The Company to date
has had minimal direct sales to customers outside of North America since 2001.
The Company has little recent experience in international markets with the
exception of a few direct customers and resellers/integrators. The Company
intends to expand sales of its products outside of North America and to enter
certain international markets, which will require significant management
attention and financial resources. Conducting business outside of North America
is subject to certain risks, including longer payment cycles, unexpected changes
in regulatory requirements and tariffs, difficulties in supporting foreign
customers, greater difficulty in accounts receivable collection and potentially
adverse tax consequences. To the extent any Company sales are denominated in
foreign currency, the Company's sales and results of operations may also be
directly affected by fluctuations in foreign currency exchange rates. In order
to sell its products internationally, the Company must meet standards
established by telecommunications authorities in various countries, as well as
recommendations of the Consultative Committee on International Telegraph and
Telephony. A delay in obtaining, or the failure to obtain, certification of its
products in countries outside the United States could delay or preclude the
Company's marketing and sales efforts in such countries, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risk of Third Party Claims of Infringement. The network access and
telecommunications equipment industries are characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to technologies that
are important to the Company. The Company has not conducted a formal patent
search relating to the technology used in its products, due in part to the high
cost and limited benefits of a formal search. In addition, since patent
applications in the United States are not publicly disclosed until the related
patent is issued and foreign patent applications generally are not publicly
disclosed for at least a portion of the time that they are pending, applications
may have been filed which, if issued as patents, could relate to the Company's
products. Software comprises a substantial portion of the technology in the
Company's products. The scope of protection accorded to patents covering
software-related inventions is evolving and is subject to a degree of
uncertainty which may increase the risk and cost to the Company if the Company
discovers third party patents related to its software products or if such
patents are asserted against the Company in the future.
15
The Company may receive communications from third parties asserting that the
Company's products infringe or may infringe the proprietary rights of third
parties. In its distribution agreements, the Company typically agrees to
indemnify its customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third parties. In the
event of litigation to determine the validity of any third-party claims, such
litigation, whether or not determined in favor of the Company, could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from productive tasks. In the event of an
adverse ruling in such litigation, the Company might be required to discontinue
the use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses from third parties. There can be no
assurance that licenses from third parties would be available on acceptable
terms, if at all. In the event of a successful claim against the Company and the
failure of the Company to develop or license a substitute technology, the
Company's business, financial condition, and results of operations could be
materially adversely affected.
Limited Protection of Intellectual Property. The Company relies upon a
combination of patent, trade secret, copyright, and trademark laws and
contractual restrictions to establish and protect proprietary rights in its
products and technologies. The Company has been issued certain U.S. and Canadian
patents with respect to certain products. There can be no assurance that third
parties have not or will not develop equivalent technologies or products without
infringing the Company's patents or that a court having jurisdiction over a
dispute involving such patents would hold the Company's patents valid,
enforceable and infringed. The Company also typically enters into
confidentiality and invention assignment agreements with its employees and
independent contractors, and non-disclosure agreements with its suppliers,
distributors and appropriate customers so as to limit access to and disclosure
of its proprietary information. There can be no assurance that these statutory
and contractual arrangements will deter misappropriation of the Company's
technologies or discourage independent third-party development of similar
technologies. In the event such arrangements are insufficient, the Company's
business, financial condition and results of operations could be materially
adversely affected. The laws of certain foreign countries in which the Company's
products are or may be developed, manufactured or sold may not protect the
Company's products or intellectual property rights to the same extent as do the
laws of the United States and thus, make the possibility of misappropriation of
the Company's technology and products more likely.
Potential Volatility of Stock Price. The trading price of the Company's
Common Stock may be subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, announcements of
technological innovations or new products by the Company or its competitors,
developments with respect to patents or proprietary rights, general conditions
in the telecommunication network access and equipment industries, changes in
earnings estimates by analysts, or other events or factors. In addition, the
stock market has experienced extreme price and volume fluctuations, which have
particularly affected the market prices of many technology companies and which
have often been unrelated to the operating performance of such companies.
Company-specific factors or broad market fluctuations may materially adversely
affect the market price of the Company's Common Stock. The Company has
experienced significant fluctuations in its stock price and share trading volume
in the past and may continue to do so.
16
The Company is Controlled by a Small Number of Stockholders and Certain
Creditors. In particular, Mr. Modlin, Chairman of the Board and Chief Executive
Officer, and President of Weisman Celler Spett & Modlin, P.C., legal counsel for
the Company, owns approximately 70% of the Company's outstanding shares of Class
B stock. Furthermore, Mr. Modlin is also executor of the estate of Mr. Charles
P. Johnson, the former Chairman of the Board and Chief Executive Officer, and
such estate owns approximately 27% of the outstanding shares of Class B stock.
Class B stock under certain circumstances has 10 votes per share in the election
of Directors. The Board of Directors is to consist of no less than three and no
more than thirteen directors, one of which may be designated by the Creditors
Committee (and thereafter the Trustee). The holders of the 9% Preferred Stock
are presently entitled to designate two directors until all arrears on the
dividends on such 9% Preferred Stock are paid in full. In addition, until the
Company's primary secured loan obligations are paid in full, the primary secured
lender, Ableco Finance LLC ("Ableco") is entitled to designate three directors
and, upon default in its loan, its affiliate shall have the right under the two
warrants it holds, to (i) acquire from 5% to 51% of the outstanding Commoon
Stock depending on the amount of the outstanding secured debt at such time and
(ii) acquire 10% of the outstanding Common Stock on a diluted basis. If Ableco's
loan is not repaid in full by September 15, 2006, the Trustee may designate two
more directors, and in the event of a payment default under the Debentures which
is not cured within 60 days after written notice, the Trustee shall be entitled
to select a majority of the Board of Directors. Accordingly, in the absence of a
default under Ableco's loan, or a payment default under the Debentures, Mr.
Modlin may be able to elect all members of the Board of Directors not designated
by the holders of the 9% Preferred Stock, Ableco and the Trustee and determine
the outcome of certain corporate actions requiring stockholder approval, such as
mergers and acquisitions of the Company. This level of ownership by such persons
and entities could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common Stock,
thereby making it less likely that a stockholder will receive a premium in any
sale of shares. To date, the holders of the 9% Preferred Stock and Ableco have
not designated any directors.
ITEM 2. PROPERTIES
The principal facilities of the Company are as follows:
Naugatuck, Connecticut -- executive offices headquarters, a 360,000
square foot facility owned by the Company
(approximately 66% is vacant). The Company is
currently actively trying to sell this
property. If such sale were to occur, the
Company would intend to lease appropriate
facilities in the same geographical area.
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Item 1 of this Form 10-K, "Plan of Reorganization Approval
and Effectiveness".
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is quoted on The Pink Sheets under the symbol "GNRD".
The following table sets forth the range of high and low sales prices for the
Company's common stock for the periods indicated since October 1, 2001,
reflective of the 1 for 10 split:
Fiscal 2002 High Low
- ----------- ---- ---
First Quarter 1.50 0.20
Second Quarter 0.35 0.01
Third Quarter 2.40 0.01
Fourth Quarter 0.90 0.20
Fiscal 2003 High Low
- ----------- ---- ---
First Quarter 0.80 0.20
Second Quarter 0.30 0.10
Third Quarter 2.50 0.23
Fourth Quarter 4.04 1.50
As of December 15, 2003, the Company had 392 common stockholders of record. The
closing sales price of the Company's common stock on December 15, 2003 was $1.74
per share.
Dividend Policy
The Company has never paid cash dividends. GDC cannot declare or pay any
dividends on our common stock in the foreseeable future due to restrictions in
loan agreements and provisions governing the 9% Preferred Stock until all
arrearages are paid in full. In any event, the Company intends to retain all
earnings, if any, to invest in operations.
18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Annual Report on Form 10-K. The selected financial data set forth below as of
September 30, 2003, and the statements of operations data for the year then
ended are derived from our financial statements, which have been audited by
Eisner LLP, independent public accountants, and are included elsewhere in this
Annual Report on Form 10-K. The selected financial data for fiscal years 1999
through 2002 was derived from our financial statements that were audited by
PricewaterhouseCoopers LLP (PwC), who declined to stand for re-election as
independent accountants for the Company with respect to the audit of the
Company's financial statements as of and for the year ended September 30, 2003.
A copy of the report issued by PwC on our financial statements as of September
30, 2002 and for each of the two years in the period ended September 30, 2002 is
included elsewhere in this Annual Report on Form 10-K. The historical results
are not necessarily indicative of the results we expect for future periods.
19
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands except share data)
Years ended September 30, 2003 2002 2001 2000 1999
----------- ----------- ----------- ------------ ------------
Revenues:
Net sales $ 23,905 $ 27,681 $ 59,874 $ 114,941 $ 120,153
Service revenue - - 33,438 48,807 46,676
------------------------------------------------------------------------
23,905 27,681 93,312 163,748 166,829
Cost of revenues:
Cost of product sales 10,968 15,178 59,391 73,589 72,139
Cost of service revenue - - 29,108 36,140 32,538
------------------------------------------------------------------------
10,968 15,178 88,499 109,729 104,677
Gross margin 12,937 12,503 4,813 54,019 62,152
Operating expenses:
Selling, general and administrative 8,744 7,721 35,873 56,935 59,785
Research and product development 3,082 3,600 11,964 20,490 26,581
Impairment and restructuring charges - (446) 39,583 2,000 2,000
------------------------------------------------------------------------
11,826 10,875 87,420 79,425 88,366
Operating income (loss) 1,111 1,628 (82,607) (25,406) (26,214)
Other income (expense):
Interest expense (contractual interest of $4,097
in 2003 and $5,097 in 2002). (4,213) (3,399) (8,912) (8,660) (6,998)
Other financial expenses (2,202) - - - -
Gain on early extinguishment of mortgage debt - 1,967 - - -
Gain on sale of multimedia division - - 2,863 - -
Gain on sale of service division - - 11,289 - -
Gain on sale of technology division - - - - 9,001
Debt conversion expense - - - (2,403) -
Gain on sale of real estate 329 919 - - -
Gain on legal settlements 7,182 - 5,000 - -
Other, net 177 342 (475) 573 241
------------------------------------------------------------------------
1,273 (171) 9,765 (10,490) 2,244
Income (loss) from continuing operations before
reorganization items and income taxes 2,384 1,457 (72,842) (35,896) (23,970)
------------------------------------------------------------------------
Reorganization items:
Professional fees (3,462) (3,032) - - -
Claims adjustments 429 495 - - -
Gain on debt restructuring 5,283 - - - -
------------------------------------------------------------------------
2,250 (2,537) - - -
Income (loss) from continuing operations before
income taxes 4,634 (1,080) (72,842) (35,896) (23,970)
Income tax provision 10 10 100 1,800 1,150
------------------------------------------------------------------------
Income (loss) from continuing operations 4,624 (1,090) (72,942) (37,696) (25,120)
------------------------------------------------------------------------
Income (loss) from discontinued operations, net
of income taxes - - (592) 757 2,514
------------------------------------------------------------------------
Net income (loss) 4,624 (1,090) (73,534) (36,939) (22,606)
Dividends applicable to preferred stock (1,910) (1,914) (1,990) (1,343) (1,800)
------------------------------------------------------------------------
Net income (loss) applicable to common and
Class B stock $ 2,714 $ 824 $ (75,524) $ (38,282) $ (24,406)
========================================================================
Basic and diluted earnings (loss) per share:
From continuing operations $ 0.80 $ (0.89) $ (23.73) $ (15.40) $ (12.35)
From discontinued operations taxes - - (0.19) 0.30 1.15
------------------------------------------------------------------------
Total $ 0.80 $ (0.89) $ (23.92) $ (15.10) $ (11.20)
========================================================================
Average number of common and Class B
shares outstanding, basic and diluted 3,401,295 3,380,474 3,157,864 2,540,000 2,185,700
========================================================================
20
Five-Year Selected Financial Data
(in thousands)
2003 2002 2001 2000 1999
----------- ----------- ----------- ------------ ------------
Balance Sheet and Other Data:
Unrestricted Cash and Cash Equivalents $ 2,113 $ 3,235 $ 766 $ 3,572 $ 3,790
Total Current Assets 11,626 16,428 29,509 70,753 73,116
Total Current Liabilities 13,227 66,026 86,234 100,512 50,359
Working Capital (Deficit) (1,601) (49,598) (56,725) (29,759) 22,757
Total Assets 15,939 22,688 43,986 133,083 140,374
Long-term Debt, including current portion 39,817 30,986 48,964 54,982 69,065
Total Liabilities 52,698 66,026 86,234 106,920 118,281
Redeemable 5% Preferred Stock 1,825 2,825 2,875 5,000 -
Stockholders' Equity (Deficit) (38,584) (46,163) (45,123) 21,163 22,093
Employees, end of year 111 112 210 1,019 1,099
Summarized Quarterly Financial Data (Unaudited)
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. This unaudited information has been
prepared by the Company on a basis consistent with the Company's audited
financial statements and includes all adjustments, consisting of normal
recurring adjustments, that the Company considers necessary for a fair
presentation of the data. Reference is made to PricewaterhouseCooper's Report of
Independent Accountants presented in Item 8 of this Fom 10-K.
(in thousands, except per share amounts)
Fiscal 2003
--------------------------------------------------
Q4 Q3 Q2 Q1
Results of Operations Data:
Revenues $ 6,074 $ 6,992 $ 5,983 $ 4,856
Gross profit 3,649 3,732 2,969 2,587
Operating expenses 4,194 2,629 2,437 2,566
Operating income (loss) (545) 1,103 532 21
Net income (loss) 5,574 (655) (1,175) 880
Net income (loss) per share:
basic and diluted $ 1.50 $ (0.33) $ (0.49) $ 0.12
Fiscal 2002
--------------------------------------------------
Q4 Q3 Q2 Q1
Results of Operations Data:
Revenues $ 5,835 $ 6,922 $ 7,069 $ 7,855
Gross profit 2,924 3,061 3,075 3,443
Operating expenses 2,234 2,763 2,769 3,109
Operating income (loss) 690 298 306 334
Net income (loss) 999 (465) (1,332) (292)
Net income (loss) per share:
basic and diluted $ 0.15 $ (0.28) $ (0.54) $ (0.23)
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE COMPANY'S FINANCIAL CONDITION AND
THE RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE "SELECTED
FINANCIAL DATA" AND FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K.
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. FOR
THIS PURPOSE, STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL
FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE
FOREGOING, THE WORDS "BELIEVES", "ANTICIPATES", "PLANS", "EXPECTS" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES AND ARE NOT
GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE SET FORTH UNDER THE HEADING "RISK
FACTORS" IN ITEM 1 TO THIS FORM 10-K.
Overview
From 1994 through 2002, the Company incurred significant net losses and as of
September 30, 2003, the most recent fiscal year end, had an accumulated deficit
of $235.8 million. The majority of the Company's operating losses have resulted
from costs incurred developing and marketing Asynchronous Transfer Mode ("ATM")
technology in the former Broadband Systems Division ("BSD").
After implementing a number of restructuring and cost reduction programs in an
attempt to better align our operating cost structure with revenues, in 2001
three of the Company's business units were actively marketed for sale with the
objective of reducing outstanding debt and providing additional liquidity.
Between June and August 2001, three of the Company's four operating divisions
representing a significant portion of the assets of the Company, including BSD,
were sold. However, due to the impact of a general economic downturn and a
decline in the telecommunication industry in particular, the Company did not
realize sufficient proceeds from the sales to satisfy its secured debtors.
Revenues of divisions sold constituted 59% of consolidated revenues in fiscal
2001. By the end of fiscal 2001 the number of employees declined to 210
employees from 1,019 at the beginning of the year. Further cost-saving
reductions were implemented in fiscal 2002 and 2003 which reduced headcount to
111 employees at September 30, 2003.
On November 2, 2001 General DataComm Industries Inc. and its domestic
subsidiaries ("the Debtors") filed a voluntary petition for relief under Chapter
11 of Title 11 of the United States Code, 11 U.S.C. Section 101 et seq. (the
"Bankruptcy Code") of the Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware. The Company continued in possession of its
properties and the management of its business as debtors in possession pursuant
to sections 1107 and 1108 of the Bankruptcy Code.
During the year ended September 30, 2002, and in the aftermath of the sales of
three of its business units, the Company consolidated its remaining operations
into its owned facility in Naugatuck, Connecticut, and downsized its staff and
operating assets to more properly reflect current operating requirements for its
one remaining business unit.
22
On April 29, 2003, the Debtors and its secured lenders (the "Lenders") filed
their Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code (as amended, the "Plan") and accompanying disclosure statement (the
"Disclosure Statement"), both of which set forth the consensual Chapter 11 plan
that was agreed upon by and between the Lenders, the Creditors Committee and the
Debtors. On June 24, 2003, the Court authorized the Debtors to commence the
solicitation process for the approval of the Plan including mailing of the
Disclosure Statement. On August 5, 2003, the Court entered an order confirming
the Plan. The Plan became effective on September 15, 2003 (the "Effective
Date").
Results of Operations - Fiscal Years Ended September 30, 2003, 2002 and 2001
The Company's revenues were $23.9 million in fiscal 2003, down from $27.7
million in fiscal 2002, and the Company is operating on internally generated
cash flows only. No additional loan proceeds are available under the Company's
loan agreement and the lenders have a security interest in all assets of the
Company which substantially limits any ability to attract new financings without
the approval of the lenders or without replacing the entire existing loan
agreement. Furthermore, the Company is required to make monthly payments of
principal ($250,000) and interest (currently approximately $85,000) to its
secured lenders.
The Company's net revenues in fiscal 2003 and 2002 reflects the unstable
environment that the Company experienced while operating in Chapter 11.
Management efforts were focused on stabilizing relationships with customers and
suppliers, on managing cash flows and liquidating non-core assets, and
ultimately on emerging from Chapter 11 on September 15, 2003.
The Company has over the preceding two years demonstrated the ability to
generate cash flows from operations, and at the same time introduced new
products, re-established customer relationships and introduced manufacturing
cost efficiencies. However, the ability of the Company to generate sufficient
operating cash flow is dependent on achieving satisfactory revenue levels,
customer collections, new product and product feature development, ability to
operate with minimal investment in capital equipment and software and other
significant risks. Reference is made to Item 1, "Risk Factors" and the
"Liquidity" section below in this Form 10-K for further discussion of these
items.
The Company's net revenues in fiscal 2003 and 2002 were derived from the sale of
network access and wide area network equipment. The majority of the sales
(approximately 85%) were provided by the Company's legacy products, primarily
analog and digital data sets. The Company anticipates that net sales from legacy
products will decline over the next several years while sales of new products
will increase over the same period with significant fluctuations possible and
without assurance that sales of new products will increase over the same period.
Approximately 41% of sales of products have historically been through
distributors. Such distributors are responsible for warehousing products and
fulfilling product orders as well as identifying potential service provider
customers. In addition, significant portions (approximately 48%) of the sales of
products are made through direct sales to service provider customers.
The Company's results from operations have and may continue to fluctuate
significantly from period-to-period in the future. As a result, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance.
23
Revenues
Year Ended September 30,
-----------------------------------
(in thousands) 2003 2002 2001
---------- ---------- ----------
Revenues $ 23,905 $ 27,681 $ 93,312
Revenues for fiscal 2003 decreased 14% to $23,905,000 from revenues of
$27,681,000 in fiscal 2002. This decrease was predominately the result of lower
unit sales attributable to reduced capital spending by large telecommunication
infrastructure customers in the United States. This decline began in fiscal 2001
due to economic and industry-wide factors, including financial constraints
affecting customers and over-capacity in our customers' markets. The Company
anticipates that the current reduced capital spending levels by its customers
will continue to affect sales until an overall recovery in the
telecommunications market begins, which is not expected to significantly change
in 2004. Accordingly, the ability to forecast future revenue trends in the
current environment is difficult.
The Company's business is characterized by a concentration of sales to a limited
number of key customers. Sales to the Company's top five customers accounted for
61%, 62% and 46% of product sales in fiscal 2003, 2002 and 2001, respectively.
The Company's five largest customers in fiscal 2003 were Bell Canada, Verizon,
Sunbelt Telecommunications, Inc., Qwest Communications and Thomas Technologies.
See "Risk Factors" in Item 1 of this Form 10-K.
The Company sells its products primarily in the United States through a direct
sales force and through a variety of resellers, value-added resellers,
integrators and distributors. Sales to resellers, value-added resellers,
integrator and distributors accounted for approximately 37% of sales in fiscal
2003, as compared to approximately 46% in fiscal 2002 and 43% in fiscal 2001. In
fiscal 2003, direct sales outside of North America were not significant.
Fiscal 2001 revenues include $31,644,000 (34%) of revenues from the Vital
Network Services Division and $23,494,000 (25%) from the Broadband Systems
Division, both of which were sold in fiscal 2001.
Gross Profit
Year Ended September 30,
-----------------------------------
(in thousands) 2003 2002 2001
--------- --------- ---------
Gross profit $ 12,937 $ 12,503 $ 4,813
Percentage of revenues 54.1% 45.2% 5.2%
Gross profit, as a percentage of sales, in fiscal 2003 was 54.1% as compared to
45.2% in fiscal 2002 and 5.2% in fiscal 2001. The increase in gross profit
margin in fiscal year 2003 was attributable to lower negotiated material
component costs, lower subcontractor assembly costs and the benefit from cost
reduction measures enacted during fiscal 2003 and 2002.
24
The increase in gross profit margin in fiscal 2002 compared to fiscal 2001 was
primarily due to the change in the nature of the business that resulted toward
the end of fiscal 2001 when three of the Company's four operating divisions were
sold. In addition, in fiscal 2001 the Company recorded impairment and
restructuring charges affecting inventory in cost of sales of $15,891,000, which
had the effect of reducing gross profit as a percentage of sales by 17%.
In future periods, the Company's gross profit will vary depending upon a number
of factors, including the mix of products sold, the cost of products
manufactured at subcontract facilities, the channels of distribution, the price
of products sold, discounting practices, price competition, increases in
material costs and changes in other components of cost of sales. As and to the
extent the Company introduces new products, it is possible that such products
may have lower gross profit margins than other established products in higher
volume production. Accordingly, gross profit as a percentage of sales may vary.
Selling, General and Administrative
Year Ended September 30,
--------------------------------------
(in thousands) 2003 2002 2001
---------- ---------- ----------
Selling, general and administrative $ 8,744 $ 7,721 $ 35,873
Percentage of sales 36.6% 27.9% 38.4%
The Company's selling, general and administrative ("SG&A") expenses increased to
$8,744,000, or 36.6% of sales in fiscal 2003 from $7,721,000, or 27.9% of sales
in fiscal 2002. The increase in fiscal 2003 from fiscal 2002 was due primarily
to the value attributed to stock grants and awards to employees and directors
upon the Company's successful emergence from Chapter 11 bankruptcy proceedings
in September 2003. Such stock grants and awards, totaling $1,923,000, did not
involve any cash outlay and were approved as part of the Company's plan of
reorganization. Excluding this compensation expense, SG&A declined $900,000 in
fiscal 2003 due to lower payroll costs of $660,000 from reductions in
commissions and numbers of employees, lower facility costs resulting from
consolidating operations in fiscal 2002 and other expense reduction efforts.
The significant decease of SG&A in fiscal 2002 from fiscal 2001 was due
primarily to the aforementioned sales of the Company's divisions. Over the three
year period, the number of SG&A employees was reduced to 53 (at September 30,
2003) from 532 (at September 30, 2000). The decrease in SG&A as a percentage of
sales in fiscal 2002 was due to the impact of divisions sold in fiscal 2001. The
Company expects that SG&A expenses will stabilize in fiscal 2004 and decrease as
a percentage of sales if higher sales volumes are achieved.
Research and Product Development
Year Ended September 30,
--------------------------------------
(in thousands) 2003 2002 2001
---------- ---------- ----------
Research and product development $ 3,082 $ 3,600 $ 11,964
Percentage of sales 12.9% 13.0% 12.8%
Research and development ("R&D") expenses decreased to $3,082,000 or 12.9% of
sales in fiscal 2003 as compared to $3,600,000 or 13.0% of sales in fiscal 2002.
This decrease was due primarily to reductions in outside development costs in an
effort to reduce expenses in line with lower revenue levels. As a result, R&D
expense in fiscal 2003 as a percentage of sales compared to fiscal 2002 was
maintained at approximately the same level. The significant decrease in spending
in fiscal 2002 from fiscal 2001 was primarily due to the sale of three of the
Company's divisions toward the end of fiscal 2001. Over the three year period,
the number of R&D employees was reduced to 27 at September 30, 2003 from 170 at
September 30, 2000.
25
Impairment and Restructuring Charges
During fiscal 2001, the Company completed a review of the realization of its
assets and its restructuring obligations due to uncertainty in the general
business environment, particularly the telecommunications markets. As a result
of this review, the Company recorded impairment and restructuring charges of
$55,474,000 (of which $15,891,000 was reflected as a component of cost of sales,
see above). These charges included an impairment charge related to the Company's
facility located in Naugatuck, Connecticut of $2,100,000, BSD asset impairments
of $37,302,000, Mexico subsidiary asset impairment of $1,546,000, property and
equipment impairments of $1,562,000, intangible asset impairments of $6,397,000,
facility consolidation costs of $4,694,000 and employee termination costs of
$1,873,000.
The Naugatuck, Connecticut facility was initially marketed for sale in fiscal
2001 and the impairment charge represents an adjustment to fair market value
based on available appraisal information. Similarly, BSD and the Mexico
subsidiary were actively being marketed for sale and the asset values were
adjusted to reflect the assessment of the ultimate fair market value realized.
In the aftermath of the actual sales of the divisions, operations were
consolidated which resulted in a writedown of excess property and equipment.
Employee termination costs reflected the implementation of workforce reductions
of approximately 300 positions resulting in costs required to satisfy employment
contracts and extended health benefits.
In fiscal 2002, and in conjunction with the Company's decision to file for
bankruptcy protection, the Company amended its facility consolidation plans so
as to abandon a leased facility and to instead consolidate operations in its
owned facility in Naugatuck, Connecticut, with such decision resulting in a
reduction in restructuring charges for facility consolidation costs of
$1,396,000 and additional impairment charges for property and equipment of
$950,000.
For further discussion refer to Note 3 to the Notes to Financial Statements
included in Item 8 of this Form 10-K.
Interest Expense
Interest expense increased to $4,213,000 in fiscal 2003 from $3,399,000 in
fiscal 2002 due to higher adequate protection payments (payments authorized by
the bankruptcy court to be made to secured lenders) while the Company operated
in Chapter 11. Interest expense decreased in fiscal 2002 from 2001 due to lower
principal balances on the Company's debt obligations resulting from the proceeds
of the sales of divisions toward the end of fiscal 2001 having been utilized to
reduce such debt obligations and the lower adequate protection payments made
versus the default rate of interest charged by the secured lenders in fiscal
2001.
Other Income (Expense)
In fiscal 2003, the Company settled legal claims in its favor in the amount of
$7,182,000.
26
Other income in fiscal 2002 includes $919,000 from the sale of real estate in
Middlebury, Connecticut. In addition, in fiscal 2002 the Company negotiated a
reduction in and final payment of the mortgage on its Naugatuck, Connecticut
facility and recorded a gain of $1,967,000.
Other income in fiscal 2001 includes gains resulting from the sales of divisions
in the amount of $14,152,000 and a favorable legal settlement of $5,000,000.
Reorganization Items
Reorganization items include professional fees of $3,462,000 in fiscal 2003 and
$3,032,000 in fiscal 2002 associated with the Company's bankruptcy proceedings,
primarily related to the Company's unaffiliated legal advisors and the
Creditors' Committee's legal and financial advisors. Also included are claims
reductions of $429,000 in fiscal 2003 and $495,000 in fiscal 2002 as a result of
claims against the Company being reduced, through the bankruptcy proceedings.
The debt restructuring approved by the bankruptcy court resulted in a gain of
$5,283,000 in fiscal 2003.
Provision for Income Taxes
No federal income tax provisions or tax benefits were provided in fiscal 2003,
2002 and 2001 due to the valuation allowance provided against the net change in
deferred tax assets. The Company established a full valuation allowance against
its net deferred tax assets due to the uncertainty of realization of benefits of
the net operating loss carry forwards from prior years and the operating losses
incurred in fiscal 2001 and 2002. The Company has federal tax credit and net
operating loss carry forwards of approximately $12.2 million and $210.5 million,
respectively, as of September 30, 2003. Income tax provisions for fiscal 2003,
2002 and 2001 reflect minimum state taxes.
Income (Loss) from Discontinued Operations
Fiscal 2001 includes a net loss from discontinued operations of $592,000 as a
result of the discontinuance of the business of the Company's DataComm Leasing
business segment and the estimated future losses associated with that business.
Critical Accounting Policies
The Company's financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles in the United States of
America. Preparing financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses. Management bases its estimates and judgements on historical
experience and on various other factors that are believed to be reasonable under
the circumstances. Due to the inherent uncertainty involved in making estimates,
actual results reported in future periods might be based upon amounts that
differ from those estimates. The following represent what the Company believes
are among the critical accounting policies most affected by significant
management estimates and judgements. See Note 2 to Consolidated Financial
Statements in Item 8 of this Form 10-K for a summary of the Company's financial
accounting policies.
Revenue Recognition. The Company recognizes a sale when the product is shipped
and the following four criteria are met upon shipment: (1) persuasive evidence
of an arrangement exists; (2) title and risk of loss transfers to the customer;
(3) the selling price is fixed or determinable; and (4) collectibility is
reasonably assured. A reserve for future product returns is established at the
time of the sale based on historical return rates and return policies including
stock rotation for sales to distributors that stock the Company's products.
27
Warranty Reserves - The Company offers warranties of various lengths to our
customers depending on the specific product and the terms of our customer
purchase agreements. Standard warranties require the Company to repair or
replace defective product returned during the warranty period at no cost to the
customer. An estimate for warranty related costs is recorded based on actual
historical return rates and repair costs at the time of sale. On an on-going
basis, management reviews these estimates against actual expenses and makes
adjustments when necessary. While warranty costs have historically been within
expectations of the provision established, there is no guarantee that the
Company will continue to experience the same warranty return rates or repair
costs as in the past. A significant increase in product return rates or the
costs to repair our products would have a material adverse impact on the
Company's operating results.
Impairment of Long-Lived Assets and Goodwill. The Company assesses the
impairment of long-lived assets and goodwill whenever events or changes in
circumstances indicate that the carrying value may not be recoverable under the
guidance prescribed by SFAS No.'s 144 and 142, respectively. The Company's
long-lived assets include, but are not limited to, real estate, property and
equipment and software licenses.
In fiscal 2001 the Company assessed the recoverability of its long-lived assets
and recorded impairment charges for (1) the buildings held for sale based on
real estate market information then available, (2) property and equipment based
on diminished requirements of the business remaining after the sales of
divisions, (3) capitalized software development costs based on discontinuance of
products and lower calculations of net realizable value, and (4) division and
subsidiary assets held for sale based on valuing agreements with ultimate buyers
of these businesses. In fiscal 2002, there was an additional impairment of
property and equipment due to a further consolidation of the business.
On September 30, 2003, real estate represents the only significant remaining
long-lived asset that has not been fully impaired.
Inventories. The Company values inventory at the lower of cost or market. Cost
is computed using standard cost, which approximates actual cost on a first-in,
first-out basis. Agreements with certain customers provide for return rights.
The Company is able to reasonably estimate these returns and they are accrued
for at the time of shipment. Inventory quantities on hand are reviewed on a
quarterly basis and a provision for excess and obsolete inventory is recorded
based primarily on product demand for the preceding twelve months. Historical
product demand may prove to be an inaccurate indicator of future demand in which
case the Company may increase or decrease the provision required for excess and
obsolete inventory in future periods. The Company has possession of inventory
from its former Broadband Systems Division that was sold in 2001 which has been
written off for financial reporting purposes. If the Company is able to sell
inventory in the future that has been previously written off such sales will
result in higher than normal gross margin.
Allowance for Doubtful Accounts. The Company estimates losses resulting from the
inability of our customers to make payments for amounts billed. The
collectability of outstanding invoices is continually assessed. Assumptions are
made regarding the customer's ability and intent to pay, and are based on
historical trends, general economic conditions and current customer data. Should
our actual experience with respect to collections differ from these assessments,
there could be adjustments to our allowance for doubtful accounts.
28
Deferred Tax Assets. The Company has provided a full valuation allowance related
to its deferred tax assets. In the future, if sufficient evidence of the
Company's ability to generate sufficient future taxable income in certain tax
jurisdictions becomes apparent, the Company will be required to reduce its
valuation allowances, resulting in income tax benefits in the Company's
consolidated statement of operations. Management evaluates the realizability of
the deferred tax assets and assesses the need for the valuation allowance each
year.
Off Balance Sheet Arrangements. The Company has no off balance sheet
arrangements.
Recent Accounting Pronouncements
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 supercedes EITF Issue 94-3. Under
Issue 94-3, a liability for an exit cost as defined in Issue 94-3 was recognized
at the date of an entity's commitment to an exit plan. This Statement eliminates
the definition and requirements for recognition of exit costs in Issue 94-3, and
concludes that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability. This
Statement requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. This Statement
also establishes that fair value is the objective for initial measurement of the
liability. The Company is required to apply the provisions of SFAS No. 146 to
exit or disposal activities that are initiated after December 31, 2002. The
adoption of this statement is expected to impact the timing of expenses in
future periods should the Company commit to additional exit or disposal
activities.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FAS 123, which is
effective for financial statements for fiscal years ending after December 15,
2002. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
disclosure requirements of SFAS No. 148 are included in Note 2 of Notes to
Consolidated Financial Statements included in Item 8 of this Form 10-K.
In December 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 requires a guarantor to make
additional disclosures in its interim and annual financial statements regarding
the guarantor's obligations. In addition, FIN 45 requires, under certain
circumstances, that a guarantor recognize, at the inception of the guarantee, a
liability for the fair value of the obligation undertaken when issuing the
guarantee. The Company is not a guarantor and accordingly the adoption of FIN 45
does not currently have a material impact on the Company's financial position or
results of operations.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation of Accounting Research Bulletin
No. 51 Consolidated Financial Statements, addresses consolidation of variable
interest entities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary if the entity does not effectively
disperse risks among the parties involved. The provisions of FIN 46 are
effective immediately for those variable interest entities created after January
31, 2003. The provisions are effective for the first period beginning after
September 15, 2003, for those variable interests held prior to February 1, 2003.
The Company has no variable interest entities and accordingly the adoption of
this Interpretation does not currently have a material impact on the Company's
financial position or results of operations.
29
In April 2003, the FASB issued SFAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which amends SFAS 133 for certain
decisions made by the FASB Derivatives Implementation Group. In particular, SFAS
149 (1) clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of
underlying to conform it to language used in FASB interpretation number (FIN)
45, and (4) amends certain other existing pronouncements. SFAS 149 is effective
for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. In addition, most provisions of
SFAS 149 are to be applied prospectively. The Company has no derivative
contracts and accordingly the adoption of SFAS 149 does not currently have a
material impact on the Company's financial position or results of operations.
Liquidity and Capital Resources
September 30,
------------------------
(in thousands) 2003 2002
---------- ----------
Cash and cash equivalents $ 2,113 $ 3,235
Working capital (deficit) (1,601) (49,598)
Total assets 15,939 22,688
Long-term debt, including current portion 39,817 30,986
Other liabilities subject to compromise - 29,599
Total liabilities 52,698 66,026
Year Ended September 30,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Net cash provided (used) by:
Operating activities $ 2,671 $ 5,599 $ (6,479)
Investing activities 4,162 13,300 9,608
Financing activities (7,630) (16,430) (5,935)
Note: Significant risk factors exist due to the Company's limited financial
resources and dependence on achieving future positive cash flows in order to
satisfy its obligations and avoid a default under its loan and debenture
obligations. See Item 1, "Risk Factors" for further discussion.
Cash Flows
Net cash provided by operating activities totaled $2.7 million in fiscal 2003.
Net income in fiscal 2003 was $4.6 million. Non-cash items included in net
income were expenses for depreciation of $0.2 million, stock compensation of
$2.0 million and other financial expense of $2.2 million, and gains on sale of
real estate of $0.3 million, on debt restructuring of $5.3 million, and gain on
legal settlements of $4.7 million. Reductions in accounts receivable ($0.1
million), reductions in inventories ($0.9 million), reductions in net assets of
discontinued operations ($0.6 million), increases in accounts payable and
accrued payroll-related costs ($0.9 million) and other changes ($1.5 million)
account for the $2.7 million in cash from operating activities. Inventory levels
decreased to approximately $4.7 million at September 30, 2003 from approximately
$5.6 million at September 30, 2002. The decrease was due to reduced purchasing
in 2003 as some of the on-hand inventory was sold to satisfy customer orders
instead of producing new goods. We do not anticipate that inventory levels will
continue to decline in fiscal 2004 due to purchases required to launch new
products.
30
The cash generated from operating activities for fiscal 2002 of $5.6 million was
attributable to a net loss of $1.1 million adjusted for non-cash items:
depreciation expense of $0.4 million, impairment of property and equipment of
$1.0 million, the gain on sale of real estate of $0.9 million and a $2.0 million
gain on early extinguishment of debt. Accounts receivable collections
contributed $6.7 million due in large part to business units sold or transferred
in fiscal 2001. Inventories were reduced $1.6 million as the Company
concentrated on improving inventory turns. Net assets of discontinued operations
were reduced $1.7 million. Accounts payable and accrued payroll-related costs
were reduced $1.3 million also due to the business units sold or transferred in
fiscal 2001. Other changes required $0.5 million.
In fiscal 2001, net cash used by operating activities was $6.5 million, with a
net loss of $73.5 million increased for net non-cash items of $46.9 million
(depreciation and amortization of $12.2 million and asset impairments of $48.9
million, offset by a $14.2 million gain on sales of divisions) and for changes
in net current and long term assets of $20.1 million primarily due to the sale
or transfer of business units in fiscal 2001.
Cash provided by investing activities was $4.2 million for the year ended
September 30, 2003, compared to cash provided of $13.3 million for the year
ended September 30, 2002. Cash provided by investing activities in 2003 was the
result of the sale of the Company's UK real estate for net proceeds of $1.9
million and from the collection of $2.3 million of notes receivable related to
the sale and transfer of business units in fiscal 2001. In fiscal 2002 the
Company sold real estate in Middlebury, Connecticut and realized $6.8 million in
net proceeds. The Company also realized $6.5 million in notes receivable
collections. The $9.6 million of cash provided by investing activities in 2001
was due primarily to the net proceeds generated from the sale of the Company's
divisions, offset by the acquisition of equipment and internally developed
software.
Cash used by financing activities of $10.6 million in fiscal 2003, $16.4 million
in fiscal 2002 and $5.9 million in fiscal 2001 was attributable primarily to
payments of senior debt obligations in each such years.
Liquidity
The Company has virtually no current ability to borrow additional funds. It
must, therefore, fund operations from cash balances and cash generated from
operating activities. The Company has significant short-term obligations
including payment of professional fees and monthly payments of principal and
interest (currently such principal and interest totals approximately $335,000
each month) under its new agreement. Furthermore, the Company has significant
outstanding obligations to pay both interest and principal on total long-term
debt approximating $54.6 million (See the table and discussion on contractual
cash obligations below).
The Company's failure to make required payments under the new loan agreement
would constitute an event of default. In addition, the Company is required to
meet a financial covenant to avoid an event of default. (see Note 6 to Notes to
Financial Statements included in Item 8 to this Form 10-K)
The ability of the Company to meet cash flow and loan covenant requirements is
directly affected by the factors described in Item 1 of this Form 10-K in the
section titled "Risk Factors". There can be no assurance that the Company will
be able to avoid a default on the new loan agreement. If there is such a
default, the senior secured lenders may accelerate payment of the outstanding
debt ($17.3 million at September 30, 2003) and foreclose on their security
interests which likely would require the Company to again file for bankruptcy
protection.
31
The Company emerged from Chapter 11 bankruptcy on September 15, 2003. Under the
plan of emergence, the Company plans to pay all creditors 100% of their allowed
claims based upon a five year business plan. The ability to meet the objectives
of this business plan is directly affected by the factors described in the "Risk
Factors Section". The Company cannot assure investors that it will be able to
obtain new customers or to generate the increased revenues required to meet our
business plan objectives. In addition, in order to execute the business plan,
the Company may need to seek additional funding through public or private equity
offerings, debt financings or commercial partners. The Company cannot assure
investors that it will obtain funding on acceptable terms, if at all. If the
Company is unable to generate sufficient revenues or access capital on
acceptable terms, it may be required to (a) obtain funds on unfavorable terms
that may require the Company to relinquish rights to certain of our technologies
or that would significantly dilute our stockholders and/or (b) significantly
scale back current operations. Either of these two possibilities would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In fiscal 2003 and 2002, operations were funded primarily through cash generated
from operations. Proceeds realized from sales and liquidations of non-core
assets were required to pay down the secured debt. In prior years the Company
had obtained cash from a combination of loans, convertible debt, and sales of
common and preferred stock.
At September 30, 2003 the Company's principal source of liquidity included cash
and cash equivalents of approximately $2.1 million compared to $3.2 million at
September 30, 2002. At September 30, 2003, the Company's working capital was a
deficit of approximately $1.6 million. Fiscal 2002's larger negative working
capital of $49.6 million reflects the classification of all debt as current
liabilities due to default conditions which had accelerated payment obligations.
This changed when the secured lenders agreed to a new loan agreement as part of
the Company's Plan of Reorganization from bankruptcy and new 10% Debentures
issued by the Company to its unsecured creditors. See Note 6, the section on
"New Loan Agreement" of Notes to Consolidated Financial Statements included in
Item 8 in this Form 10-K.
The Company has significant unpaid professional fees ($2.1 million) at September
30, 2003 that are expected to be paid early in fiscal 2004. These include
independent auditors' fees, tax return preparation fees and remaining bankruptcy
attorney fees. In order to meet these and other future payments, the Company's
financial projections anticipate that revenue growth combined with minimal
inventory and capital asset investment will be required to sustain operations.
Because our operating results fluctuate significantly due to decreases in
customer demand or decreases in the acceptances of our future products, the
Company may be unable to generate positive cash flow from operations. Should the
need arise, it may become necessary to borrow additional funds or otherwise
raise additional capital. However, since the Company does not have any source of
additional funds or capital in place, any such requirement could have a material
adverse effect on the Company. See "Risk Factors" in Item 1 to this Form 10-K.
As a result of the potential liquidity and cash flow risks described above, the
Company's independent auditors for fiscal 2003 have expressed uncertainity about
the Company's ability to continue as a going concern in their opinion on the
Company's financial statements.
Management has responded to such risks as part of an ongoing strategy by
restructuring its sales force, increasing factory shutdown time, containing
expenses and reducing the size of the employee workforce. In addition, on
December 30, 2003 the Company obtained $600,000 from loans from related parties
to be used for working capital and general purposes (see Note 16 of the Notes to
Consolidated Financial Statements included in Item 8 in this Form 10-K). The
Company also is actively marketing for sale its land and building and pursuing
other asset recoveries, the proceeds of which would be used to reduce secured
debt and related interest.
32
The Company's contractual cash obligations as of September 30, 2003, are as
follows:
PAYMENTS DUE BY PERIOD
(in thousands)
Fiscal Years Fiscal Years Fiscal Years
Total Fiscal 2004 2005 and 2006 2007 and 2008 2009 and Later
---------- ----------- ------------- ------------- --------------
Long-Term Debt, including
interest $ 20,876 $ 4,150 $ 7,638 $ 9,088 $ -
Priority Tax Claims 3,023 551 1,046 970 456
Debentures 30,688 1,656 3,313 25,719 -
Operating Leases 12 9 3 - -
---------- ----------- ------------- ------------- -------
Total Contractual Cash
Obligations $ 54,599 $ 6,366 $ 12,000 $ 35,777 $ 456
========== =========== ============= ============= =======
Long-term debt above consists of the Term Loan Obligations in the principal
amount of $14.8 million and the PIK Note Obligations ($2.5 million) that were
agreed as part of the Company's Plan of Reorganization from bankruptcy which
became effective September 15, 2003. The Term Loan Obligations require monthly
payments of principal in the amount of $250,000 and interest (currently 7.25%)
with the balance due on December 31, 2007. The PIK Note Obligations accrue
interest at the same rate as the Term Loan obligation and the outstanding
balance of principal and interest are due December 31, 2007 unless forgiven
sooner if the Company achieves certain financial objectives. See Note 6 of Notes
to Consolidated Financial Statements included in Item 8 in this Form 10-K.
Debentures represent the balance of the unsecured claims against the Company
filed by its unsecured creditors, in the Chapter 11 bankruptcy proceedings. The
issuance of the Debentures was approved as part of the Company's Plan of
Reorganization and the amount listed consists of claims allowed as of September
30, 2003 and claims still subject to approval. In the event any pending claims
are not approved in the bankruptcy proceedings, at such time an appropriate
adjustment will be made in the amount of the Debentures. Interest accrues at
rates up to 10% and the outstanding balance of principal and interest becomes
payable on October 1, 2008.
ITEM 7A. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that impacts our financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and interest rates. Historically the Company has had
little or no exposure to market risk in the area of changes in foreign currency
exchange rates and interest rates as measured against the United States dollar,
except to the extent the Company invoices customers in foreign currencies and
is, therefore, subject to foreign currency exchange rate risk on any individual
invoice while it remains unpaid, a period that normally is less than 90 days. At
September 30, 2003 the Company had net accounts receivable denominated in
Canadian dollars of approximately $1,463,000 (equivalent to approximately
$1,051,000 U.S. dollars).
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
PAGE
----
REPORTS OF INDEPENDENT ACCOUNTANTS
. EISNER LLP......................................................................35
. PRICEWATERHOUSECOOPERS LLP......................................................36
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2003 AND 2002.........................37
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
SEPTEMBER 30, 2003, 2002 AND 2001....................................................38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001...............................39
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
SEPTEMBER 30, 2003, 2002 AND 2001....................................................40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................................41
SCHEDULE FOR EACH OF THE THREE FISCAL YEARS IN THE PERIOD ENDED SEPTEMBER 30,
2003 INCLUDED IN ITEM 15 (a):
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES..........................72
Schedules other than those listed above have been omitted since the required
information is not present or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
34
REPORT OF INDEPENDENT ACCOUNTANTS
The Stockholders and Board of Directors
General DataComm Industries, Inc.:
We have audited the accompanying consolidated balance sheet of General DataComm
Industries, Inc. and subsidiaries (the "Company") as of September 30, 2003, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. Our audit also included the
financial statement schedule for the year ended September 30, 2003 listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of General DataComm
Industries, Inc. and subsidiaries as of September 30, 2003, and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the financial statement schedule when considered
in relation to the basic financial statements as a whole presents fairly, in all
material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company, which on September 15, 2003 emerged from
bankruptcy proceedings pursuant to a Plan of Reorganization under Chapter 11 of
the Bankruptcy Code, has both a working capital and stockholders' deficit at
September 30, 2003 and in addition, has limited ability to obtain new financing,
as well as financial loan covenants related to its restructured secured
indebtedness which take effect in fiscal 2004, all of which raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/Eisner LLP
Eisner LLP
New York, NY
January 12, 2004
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of General DataComm Industries, Inc.
In our opinion, the consolidated balance sheet as of September 30, 2002, and the
related consolidated statements of operations, of stockholders' equity (deficit)
and of cash flows for each of the two years in the period ended September 30,
2002 (appearing on pages 37 through 63 of this Annual Report on Form 10-K )
present fairly, in all material respects, the financial position, results of
operations and cash flows of General DataComm Industries, Inc. and its
subsidiaries at September 30, 2002 and for each of the two years in the period
ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
September 30, 2002 and 2001 financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
On November 2, 2001, the Company and its U.S. subsidiaries filed voluntary
petitions for relief under Chapter 11 of Title 11 of the United States Code (the
Bankruptcy Code) in the United States Bankruptcy Court for the District of
Delaware. The Company and its U.S. subsidiaries continued in possession of their
properties and the management of their business as debtors in possession
pursuant to the Bankruptcy Code. On September 15, 2003, the Company's Plan of
Reorganization became effective and the Company and its U.S. subsidiaries
emerged from bankruptcy pursuant to the Plan approved on August 5, 2003. (see
Note 6 appearing on page 51 of the Company's fiscal 2003 audited financial
statements included in this Form 10-K). The accompanying fiscal 2002 and 2001
financial statements do not reflect any impact of the Company's emergence from
bankruptcy in 2003.
The fiscal 2002 selected quarterly financial data on page 21 contains
information that we did not audit, and , accordingly, we do not express an
opinion on that data. We also did not review the fiscal 2002 quarterly data in
accordance with standards established by the American Institute of Certified
Public Accountants.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Hartford, CT
January 12, 2004
36
General DataComm Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands except shares)
September 30, 2003 2002
- ----------------------------------------------------------------------------------------------------------
Assets:
Current assets:
Cash and cash equivalents $ 2,113 $ 3,235
Restricted cash 325 -
Accounts receivable, less allowance for doubtful
receivables of $514 in 2003 and $821 in 2002 3,431 3,545
Notes receivable 136 2,389
Inventories 4,744 5,632
Net current assets of discontinued operations - 509
Other current assets 877 1,118
- ----------------------------------------------------------------------------------------------------------
Total current assets 11,626 16,428
==========================================================================================================
Property, plant and equipment, net 4,309 6,181
Net assets of discontinued operations - 75
Other assets 4 4
- ----------------------------------------------------------------------------------------------------------
Total Assets $ 15,939 $ 22,688
==========================================================================================================
Liabilities and Stockholders' Deficit:
Current liabilities:
Current portion of long-term debt $ 3,000 $ -
Accounts payable 1,579 419
Accrued payroll and payroll-related costs 1,104 544
Other current liabilities 7,544 4,478
Liabilities subject to compromise:
Long-term debt - 30,986
Accounts payable - 18,364
Accrued payroll and payroll-related costs - 764
Other current liabilities - 10,471
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 13,227 66,026
==========================================================================================================
Long-term debt, less current portion ($2,682 owed to related parties) 36,817 -
Other liabilities 2,654 -
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 52,698 66,026
==========================================================================================================
Commitments and contingencies (Note 11) - -
Redeemable 5% preferred stock, par value $1.00 per share, issued and
outstanding 73,000 shares in 2003 and 113,000 shares in 2002; $2.0
million liquidation preference at September 30, 2003 1,825 2,825
- ----------------------------------------------------------------------------------------------------------
Stockholders' deficit:
9% Preferred stock, par value $1.00 per share, 3,000,000 shares
authorized; issued and outstanding: 787,900 shares: $25.5
million liquidation preference at September 30, 2003 788 788
Class B common stock, par value $.01 per share, 10,000,000 shares
authorized; issued and outstanding 664,978 in 2003 and
205,710 in 2002 7 2
Common stock, par value $.01 per share, 50,000,000 shares authorized;
issued 3,278,736 in 2003 and 3,213,889 in 2002 33 32
Capital in excess of par value 196,487 194,832
Accumulated deficit (235,754) (240,378)
Common stock held in treasury, at cost:
1,961 shares in 2003 and 19,461 shares in 2002 (145) (1,439)
==========================================================================================================
Total Stockholders' Deficit (38,584) (46,163)
==========================================================================================================
Total Liabilities and Stockholders' Deficit $ 15,939 $ 22,688
==========================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
37
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands except share data)
Year ended September 30, 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Revenues:
Net sales $ 23,905 $ 27,681 $ 59,874
Service revenue - - 33,438
- ----------------------------------------------------------------------------------------------------------------------------------
23,905 27,681 93,312
Cost of revenues:
Cost of product sales 10,968 15,178 59,391
Cost of service revenue - - 29,108
- ----------------------------------------------------------------------------------------------------------------------------------
10,968 15,178 88,499
Gross margin 12,937 12,503 4,813
Operating expenses:
Selling, general and administrative 8,744 7,721 35,873
Research and product development 3,082 3,600 11,964
Impairment and restructuring charges - (446) 39,583
- ----------------------------------------------------------------------------------------------------------------------------------
11,826 10,875 87,420
Operating income (loss) 1,111 1,628 (82,607)
Other income (expense):
Interest expense (contractual interest of $4,097 in 2003 and $5,097
in 2002) (4,213) (3,399) (8,912)
Other financial expense (2,202) - -
Gain on early extinguishment of mortgage debt - 1,967 -
Gain on sale of multimedia division - - 2,863
Gain on sale of service division - - 11,289
Gain on sale of real estate 329 919 -
Gain on legal settlements 7,182 - 5,000
Other, net 177 342 (475)
- ----------------------------------------------------------------------------------------------------------------------------------
1,273 (171) 9,765
Income (loss) from continuing operations before
reorganization items and income taxes 2,384 1,457 (72,842)
- ----------------------------------------------------------------------------------------------------------------------------------
Reorganization items:
Professional fees (3,462) (3,032) -
Claims adjustments 429 495 -
Gain on debt restructuring 5,283 -
- ----------------------------------------------------------------------------------------------------------------------------------
2,250 (2,537) -
Income (loss) from continuing operations before
income taxes 4,634 (1,080) (72,842)
Income tax provision 10 10 100
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 4,624 (1,090) (72,942)
- ----------------------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations,
net of income taxes - - (592)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4,624 (1,090) (73,534)
Dividends applicable to preferred stock (1,910) (1,914) (1,990)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common and Class B stock $ 2,714 $ (3,004) $ (75,524)
==================================================================================================================================
Basic and diluted earnings (loss) per share:
From continuing operations $ 0.80 $ (0.89) $ (23.73)
From discontinued operations - - (0.19)
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 0.80 $ (0.89) $ (23.92)
==================================================================================================================================
Average number of common and Class B shares outstanding, basic
and diluted 3,401,295 3,380,474 3,157,864
==================================================================================================================================
38
General DataComm Industries Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
(in Thousands, Except Share Data)
9% PREFERRED STOCK CLASS B STOCK COMMON STOCK CAPITAL IN
----------------------- -------------------------- ------------------------------ EXCESS
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT OF PAR
---------- ---------- ----------- ------------ --------------- ------------- ------------
Balance September 30, 2000 787,900 $ 788 205,710 $ 2 2,771,961 $ 27 $ 192,579
---------- ---------- ----------- ------------ --------------- ------------- ------------
Foreign translation loss
associated with the sale
of assets
Exercise of stock options 100 3
Employee stock purchase
plan 15,103 80
Conversion of redeemable 5%
preferred stock to common
stock 371,170 4 2,121
Net loss
---------- ---------- ----------- ------------ --------------- ------------- ------------
Balance September 30, 2001 787,900 788 205,710 2 3,158,334 31 194,783
---------- ---------- ----------- ------------ --------------- ------------- ------------
Conversion of redeemable 5%
preferred stock to common
stock 55,555 1 49
Net loss
---------- ---------- ----------- ------------ --------------- ------------- ------------
Balance, September 30, 2002 787,900 788 205,710 2 3,213,889 32 194,832
---------- ---------- ----------- ------------ --------------- ------------- ------------
Treasury stock issued (1,263)
Stock awards and grants 459,268 5 50,000 1 1,918
Conversion of redeemable 5%
preferred stock to common
stock 14,847 1,000
Net income
---------- ---------- ----------- ------------ --------------- ------------- ------------
Balance September 30, 2003 787,900 $ 788 664,978 $ 7 3,278,736 $ 33 $ 196,487
========== ========== =========== ============ =============== ============= ============
ACCUMULATED
TREASURY STOCK OTHER TOTAL
----------------------- ACCUMULATED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT DEFICIT INCOME (LOSS) EQUITY (DEFICIT) INCOME (LOSS)
---------- ---------- ----------- ------------- ---------------- -------------
Balance September 30, 2000 19,461 $ (1,439) $ (165,754) $ (5,040) $ 21,163
---------- ---------- ----------- ------------- ---------------- -------------
Foreign translation loss
associated with the sale
of assets 5,040 5,040 $ 5,040
Exercise of stock options 3
Employee stock purchase
plan 80
Conversion of redeemable 5%
preferred stock to common
stock 2,125
Net loss (73,534) (73,534) (73,534)
---------- ---------- ----------- ------------- ---------------- -------------
Balance September 30, 2001 19,461 (1,439) (239,288) - (45,123) (68,494)
---------- ---------- ----------- ------------- ---------------- -------------
Conversion of redeemable 5%
preferred stock to common
stock 50
Net loss (1,090) (1,090) (1,090)
---------- ---------- ----------- ------------- ---------------- -------------
Balance, September 30, 2002 19,461 (1,439) (240,378) - (46,163) (1,090)
---------- ---------- ----------- ------------- ---------------- -------------
Treasury stock issued (17,500) 1,294 - 32
Stock awards and grants 1,923
Conversion of redeemable 5%
preferred stock to common
stock 1,000
Net income 4,624 4,624 4,624
---------- ---------- ----------- ------------- ---------------- -------------
Balance September 30, 2003 1,961 $ (145) $ (235,754) $ - $ (38,584) $ 4,624
========== ========== =========== ============= ================ =============
The accompanying notes are an integral part of these
consolidated financial statements.
39
General DataComm Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year ended September 30, 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 4,624 $ (1,090) $ (73,534)
Adjustments to reconcile net income (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 180 373 12,191
Stock compensation expense 1,955 -- --
Other financial expense 2,202 -- --
Gain on debt restructuring (5,283) -- --
Gain on legal settlements (4,702) -- --
Impairment of divisions' assets -- -- 38,848
Capitalized software writedown -- -- 6,397
Gain on sales of divisions -- -- (14,152)
Impairment of real estate held for sale -- -- 2,100
Impairment of property and equipment -- 950 1,562
Gain on sale of real estate (329) (919) --
Gain on early extinguishment of debt -- (1,967) --
Changes in:
Accounts receivable 114 6,663 15,323
Inventories 888 1,617 1,016
Accounts payable 516 (545) 583
Accrued payroll and payroll-related costs 407 (558) (2,832)
Other net current assets 1,966 237 943
Other net long-term assets 133 838 5,076
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 2,671 5,599 (6,479)
===================================================================================================================================
Cash flows from investing activities:
Acquisition of property, plant and equipment, net (8) -- (604)
Capitalized software development costs -- -- (5,163)
Net proceeds from the sales and transfers of assets 1,917 6,821 15,375
Notes receivable collections 2,253 6,479 --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 4,162 13,300 9,608
===================================================================================================================================
Cash flows from financing activities:
Principal payments on revolving credit and term loan agreement (7,572) (8,912) (5,571)
Principal payments on mortgages (58) (7,518) (447)
Proceeds from issuing common stock -- -- 83
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (7,630) (16,430) (5,935)
===================================================================================================================================
Net (decrease) increase in cash and cash equivalents (797) 2,469 (2,806)
Cash and cash equivalents, beginning of year 3,235 766 3,572
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,438 $ 3,235 $ 766
===================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4,169 $ 3,746 $ 7,979
Income taxes $ -- $ -- $ 44
Reorganization items $ 1,519 $ 2,555 $ --
===================================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
40
Notes to Consolidated Financial Statements
1. Business Conditions
On November 2, 2001 General DataComm Industries, Inc. and its domestic
subsidiaries ("the Debtors") filed a voluntary petition for relief under Chapter
11 of the Bankruptcy Code in the United States Bankruptcy Court for the District
of Delaware. The Company continued in possession of its properties and the
management of its business as debtors in possession pursuant to sections 1107
and 1108 of the Bankruptcy Code.
Leading up to its Chapter 11 Bankruptcy filing on November 2, 2001, the Company
had experienced financial losses and resulting covenant defaults on its secured
loans. In addition, the Company had sold three divisions comprising a
significant portion of its business, in an effort to improve its debt and
liquidity position. However, because of a general economic downturn and a
depressed demand for high-technology products and businesses, the Company was
unable to realize a level of immediate proceeds in order to satisfy its secured
lenders and provide adequate liquidity to fund continuing operations. Therefore,
the Company sought protection from its creditors with its bankruptcy filing.
During the year ended September 30, 2002, and in the aftermath of the sales of
its business units, the Company consolidated its remaining operations into its
owned facility in Naugatuck, Connecticut and downsized its staff and operating
assets to more properly reflect current operating requirements for its one
remaining business unit.
On April 29, 2003, the Company and its secured lenders (the "Lenders") filed
their Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy
Code (as amended, the "Plan") and accompanying disclosure statement (the
"Disclosure Statement"), both of which set forth the consensual Chapter 11 plan
that was agreed upon by and between the Lenders, the Creditors Committee and the
Debtors. On June 24, 2003, the Court authorized the Debtors to commence the
solicitation process including mailing of the Disclosure Statement for the
approval of the Plan. On August 5, 2003 (the "Confirmation Date"), the Court
entered an order confirming the Plan. The Plan became effective on September 15,
2003 (the "Effective Date"). Under the plan of emergence, the Company plans to
pay all creditors 100% of their allowed claims based upon a five year business
plan. However, the Company cannot assure its investors that it will be able to
obtain new customers or to generate the increase in revenues required to meet
its business plan objectives.
The Company has virtually no current ability to borrow additional funds. It
must, therefore, fund operations from cash balances and cash generated from
operating activities. The Company has significant short term obligations
including payment of accrued professional fees (approximately $2 million at
September 30, 2003) and monthly payments of principal and interest (currently
such monthly principal and interest totals approximately $335,000) under its new
loan agreement. Furthermore, the Company has significant future outstanding
obligations as shown in the accompanying consolidated 2003 balance sheet. In
order to meet these and other future payments the Company's financial
projections anticipate that revenue growth combined with minimal inventory and
capital asset investment will be required to sustain operations.
The Company's failure to make required payments under the new loan agreement
would constitute an event of default. In addition, the Company is required to
maintain a minimum level of "EBITDA" each quarter to avoid an event of default
(see Note 6). The Company's quarterly operating results are subject to
fluctuations due to a number of factors resulting in more variability and less
predictability in the Company's quarter-to-quarter sales and operating results.
Such factors include (but are not limited to): dependence on a small number of
customers, short delivery times, dependence on subcontract manufacturers, low
order backlog, ability to timely develop new products and market acceptance of
new products. While the Company expects to meet the "EBITDA" covenant for the
quarter ended December 31, 2003, future compliance will require improved
quarterly operating results. There can be no assurance that the Company will be
able to avoid an event of default on the new loan agreement. If there is such a
default, the senior secured lenders may accelerate payment of the outstanding
debt ($17.3 million at September 30, 2003) and exercise their security
interests, which likely would require the Company to again file for bankruptcy
protection.
41
At September 30, 2003, the Company had a stockholders' deficit of approximately
$38.6 million. In addition, the Company's principal source of liquidity included
unrestricted cash and cash equivalents of approximately $2.1 million and it had
a working capital deficit of approximately $1.6 million. Fiscal 2002's larger
negative working capital of $49.6 million reflected the classification of all
debt as current liabilities due to default conditions which had accelerated
payment obligations. This changed when the secured lenders agreed to a new loan
agreement as part of the Company's Plan of Reorganization from bankruptcy and
when the unsecured obligations were converted into 10% Debentures.
Because operating results can fluctuate significantly due to decreases in
customer demand or decreases in the acceptance of future products, the Company
may be unable to generate positive cash flow from operations. Should the need
arise, it may become necessary to borrow additional funds or otherwise raise
additional capital. However, since the Company does not have any source of
additional funds or capital in place, any such requirement could have a material
adverse effect on the Company.
As a result of the potential liquidity and cash flow risks described above, the
Company's independent auditors for fiscal 2003 have expressed uncertainty about
the Company's ability to continue as a going concern in their opinion on the
Company's financial statements.
Management has responded to such risks as part of an ongoing strategy, by
restructuring the sales force, increasing factory shutdown time, containing
expenses and reducing the size of the employee workforce. In addition, on
December 30, 2003 the Company obtained $600,000 from loans from related parties
to be used for working capital and general purposes (see Note 17). The Company
also is actively marketing for sale its headquarters land and building and
pursuing other asset recoveries, the proceeds of which would be used to reduce
secured debt and related interest.
While the Company is aggressively pursuing opportunities and corrective actions,
there can be no assurance that the Company will be successful in its efforts to
generate sufficient cash from operations or obtain additional funding sources.
The Company's consolidated financial statements do not include any adjustments
that may result from the outcome of these uncertainties.
2. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company is a provider of networking and telecommunications products and
services to domestic and international customers. The Company designs,
assembles, markets, installs and maintains products and services that enable
telecommunications common carriers, corporations and governments to build,
upgrade and better manage their global telecommunications networks.
42
Prior to June 2001 the Company operated in three business segments: the
Broadband Systems Division ("BSD"), which designed and sold packet voice/data
gateway products including primarily ATM (asynchronous transfer mode)
technology; the Network Access Division ("NAD"), which designed and sold
carrier-class integrated access products, LAN extension devices, ethernet
devices and frame relay based products; and VITAL Network Services, L.L.C.
("Vital"), which provided a full range of professional and traditional support
services worldwide for the networking industry. In addition, the Multimedia
Division ("MMD") was launched as part of BSD in fiscal 2000 to develop and
market video network products. In fiscal year 2001, the Company sold MMD and all
except the Mexico operations of Vital, and exchanged the ATM portion of BSD for
a Note and a secured interest in ATM assets, leaving NAD and the remaining
multiplexer portion of BSD, which were combined, as the remaining operating
segment (see Notes 3, 4 and 13).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiary companies. Intercompany accounts, transactions and
profits have been appropriately eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market using a first-in,
first-out method (see Note 7).
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated or
amortized using the straight-line method over their estimated useful lives. The
cost of internally constructed assets (test fixtures) includes the cost of
materials, internal labor and overhead costs (see Notes 3 and 8).
Capitalized Software Development Costs
Software development costs were capitalized for those products that met the
requirements of technological feasibility. Such costs were being amortized using
the straight-line method, on a product-by-product basis, over the estimated
economic life of the product. Unamortized costs were reviewed for recoverability
and, if necessary, adjusted so as not to exceed estimated net realizable value.
Due to impairment adjustments described in Note 3, and ultimately the sale of
three of the Company's principal business units, there were no capitalized
software amounts remaining at September 30, 2001 and thereafter.
43
Equity Basis Investments
In April 2002 the Company sold 75% of its 100% interest in its Mexico subsidiary
for $800,000. The remaining 25% interest was accorded no value at the time of
sale due to the decline of the underlying business and the then outstanding
liabilities and obligations of the Mexico Company. The investment is accounted
for under the equity basis of accounting. The Company is not obligated to fund
future cash requirements of the investee.
Goodwill and Other Intangibles
The Company has no goodwill or unamortized portion of other intangible assets
recorded at September 30, 2003 or 2002 due to impairment charges recorded in
fiscal 2001 (see Note 3).
Revenue Recognition
Revenue from the sale of products is recognized at the date of shipment unless
the terms and conditions of the sale dictate recognition at a later date.
Agreements with certain customers provide for return rights. The Company is able
to reasonably estimate these returns and such returns are accrued for at the
time of shipment. Service revenue is either recognized when the service is
performed or, in the case of maintenance contracts, on a straight-line basis
over the term of the contract. Such service revenue amounted to $628,000 and
$456,000 for fiscal 2003 and 2002, respectively, which represented 2.6% and 1.7%
of total revenues in fiscal 2003 and 2002, respectively. All of the 2001 service
revenue was related to Vital, of which all but the Mexico operations were sold
in 2001 (see above "Description of Business" and Note 4).
Promotion and Advertising Costs
Promotion and advertising costs are charged to selling, general and
administrative expense in the period in which they are incurred. Promotion and
advertising costs amounted to $206,000, $397,000 and $1,726,000 in fiscal years
2003, 2002 and 2001, respectively.
Research and Product Development
Research and product development is expensed in the period incurred.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires the use of the asset and liability method of accounting for deferred
income taxes (see Note 10).
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and deferred taxes resulting from temporary differences
between the financial statement and tax basis of assets and liabilities. The
Company has sold, de-activated or is in the process of liquidating its former,
wholly owned foreign subsidiaries and does not anticipate any significant U.S.
federal tax consequences related to these actions.
44
Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (see
Note 15).
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash instruments and accounts receivable. The
Company places its cash investments with high-quality U.S. financial
institutions.
Approximately $3,313,000, or 96%, of consolidated accounts receivable at
September 30, 2003 ($2,806,000 or 82%, at September 30, 2002) were concentrated
in telephone companies or distributors to such companies in North America. These
receivables are not collateralized due to the Company's assessment of limited
risk and favorable history of payments from such customers.
Foreign Currency
Assets and liabilities of the Company's foreign subsidiaries were translated
using fiscal year-end exchange rates, and revenues and expenses were translated
using average exchange rates prevailing during the year. The effects of
translating such foreign subsidiaries' financial statements had historically
been recorded as a separate component of stockholders' deficit and reported in
other comprehensive income. Substantially all of the operations of such foreign
subsidiaries were eliminated as part of the sales of divisions in fiscal 2001.
Such translation amounts were recognized as a component of the gain or loss on
the sales or in impairment charges. Therefore, no translation amounts remain as
a separate component of stockholders' deficit at September 30, 2003 or 2002.
Post-Retirement and Post-Employment Benefits
The Company does not offer post-retirement and post-employment benefits to its
current employees.
The Company does provide health and long-term care benefits to five former
long-term executives of the Company who retired in November 2001. The Company
recorded the liability for such benefits based on actuary-provided life
expectancies, known fixed annual costs and estimated variable costs and adjusts
the liability based on actual experience. The liability for such expenses was
approximately $713,000 and $750,000 at September 30, 2003 and 2002,
respectively. In addition there are approximately five additional retirees who
participate in the Company's group health plan, but who are required to pay full
premiums for the right to participate.
Accounting for Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company has elected to continue
to measure costs for its employee stock compensation plans by using the
accounting methods prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", which allows that no compensation
cost be recognized provided the exercise price of options granted is equal to or
greater than fair market value of the Company's stock at date of grant. In
conjunction with the Company's Plan of Reorganization, on September 30, 2003,
the Company issued a combination of stock grants and below-market stock options
to employees and directors and recognized compensation expense in the amount of
$1,923,000 (see Note 14).
45
Proforma results, representative of financial results which would have been
reported by the Company if it had adopted the fair value based method of
accounting for stock-based compensation under SFAS No. 123, are summarized
below:
Year Ended September 30,
(Amounts in thousands, except per share data)
2003 2002 2001
--------------- ---------------- ---------------
Net income (loss), as reported $ 4,624 $ (1,090) $ (73,534)
Add: stock-based employee compensation expenses included in reported net
income (loss) 1,955 - -
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards (2,023) (216) (2,013)
===================================================================================================================================
Proforma net income (loss) $ 4,556 $ (1,306) $ (75,547)
===================================================================================================================================
Proforma earnings (loss) per share
(basic and diluted) $ 0.67 $ (0.95) $ (23.28)
===================================================================================================================================
The Black-Scholes method was used to compute the proforma amounts presented
above, utilizing the weighted average assumptions summarized below. No options
were granted fiscal 2002. The weighted-average fair value of options granted was
$3.52, and $0.80 for the fiscal years ended September 30, 2003 and 2001,
respectively.
Fiscal Years Ended September 30, 2003 2002 2001
---- ---- ----
Risk-free interest rate 2.19 N/A 4.62
Volatility (%) 4.05 N/A 2.01
Expected life (in years) 3.00 N/A 2.56
Dividend yield rate nil N/A nil
Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130) which establishes standards for
reporting comprehensive income and its components in a company's financial
statements. With the exception of foreign currency translation adjustments in
fiscal 2001 (see above), the Company had no other items of comprehensive income
as defined in SFAS 130.
Operating Segments
The Company has adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
131), which utilizes a "management" approach to segment reporting. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS 131 also requires
enterprise-wide disclosures about products and services, geographic areas, and
major customers (see Note 13).
46
Fair Values of Financial Instruments
Cash and cash equivalents -- The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents approximates fair value due to
their short-term nature.
Long-term debt -- The Company had $39.8 million of long-term debt at September
30, 2003 and $31.0 million total long-term debt plus additional liabilities
subject to compromise of $29.6 million (including current portion) at September
30, 2002. The balance at September 30, 2003 approximates the fair value of the
debt due to the arms-length negotiation that occurred to establish terms and
conditions of the debt upon the Company's emergence from bankruptcy on September
15, 2003. It is not feasible to estimate the fair value of such debt for periods
prior to the Company's emergence from Chapter 11 bankruptcy on September 15,
2003 due to the uncertainty of the Company's credit and future viability during
the period in bankruptcy.
Interest Expense
Interest expense for the period that the Company was in bankruptcy (November 2,
2001 to September 15, 2003) is recorded under the provisions of AICPA Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"), whereby interest expense was reported to the
extent that payments of debt service were made to the secured lenders during the
bankruptcy proceeding. See Note 6, "Reorganization Plan and Emergence from
Chapter 11" for discussion of the debt structure in the reorganization plan
approved by the bankruptcy court. The contractual amount and the recorded amount
of interest expense was $4,097,000 and $4,213,000, respectively, in fiscal 2003
and $5,097,000 and $3,399,000, respectively, in fiscal 2002.
Derivative Instruments and Hedging Activities
In the first quarter of fiscal year 2001, the Company adopted Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133") which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Company has no
such derivative instruments or hedging activities. As a result adoption of SFAS
133 did not have any impact on the Company's reported financial position or
results of operations.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. For example, 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 and certain other assets.
47
3. Impairment and Restructuring Charges
The following items are included in the loss from continuing operations for the
periods presented:
Year Ended September 30,
----------------------------------
(in thousands)
2002 2001
---------------- ---------------
Impairment of Broadband Systems Division assets $ - $ 37,302
Impairment of Mexico subsidiary assets - 1,546
Impairment of capitalized software development costs - 6,397
Employee termination costs - 1,873
Impairment of real estate assets held for sale - 2,100
Facility consolidation costs (1,396) 4,694
Impairment of property and equipment 950 1,562
---------------- ---------------
Subtotal (446) 55,474
Less: Inventory portion reported in "Cost of Sales" - (15,891)
---------------- ---------------
Portion reported in "Impairment and Restructuring Charges" $ (446) $ 39,583
================ ===============
Impairment of Broadband Systems Division ("BSD") and Mexico subsidiary assets -
In accordance with Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", the Company recorded non-cash charges of $37.3 million and $1.5
million in the fiscal year ended September 30, 2001 to write down the carrying
value of assets associated with the Broadband Systems Division and the Mexico
subsidiary, respectively, as the market for technology companies declined during
fiscal 2001.
The net realizable value of the Company's BSD assets was determined based upon
the Company's estimate of net proceeds to be realized in a transaction with
Ahead Communications Systems, Inc. dated August 13, 2001 (see Note 4). The net
realizable value of the Company's Mexico subsidiary was determined based upon
the Company's net proceeds realized in a subsequent sale of a majority of the
business in April 2002. The impairment loss for each material asset category is
summarized as follows:
Year Ended September 30, 2001
----------------------------------
(in thousands)
Mexico
BSD Subsidiary
---------------- ---------------
Goodwill $ 3,400 $ -
Capitalized software 13,730 -
Property, plant and equipment 4,109 196
Other assets 172 1,350
Inventory 15,891 -
---------------- ---------------
$ 37,302 $ 1,546
================ ===============
The inventory-related portion of the write-down was reported in cost of sales.
Refer to Note 4, "Division Sales and Discontinued Operations" for discussion
regarding the 2001 sale of the Company's MMD businesses and the exchange of ATM
assets for a note and secured interest in ATM assets.
Impairment of capitalized software development costs - During fiscal 2001 the
Company discontinued certain projects that had previously met the technological
feasibility stage but not the marketability stage based on resource constraints
(headcount reductions) and its financial inability to fund these costs. For
those projects identified as discontinued, any costs capitalized were written
off. In addition, certain capitalized costs were written down to net realizable
value.
48
Employee termination costs - During fiscal 2001, the Company implemented
workforce reductions of approximately 300 persons resulting in costs in the
amount of $1.9 million to satisfy employment contracts and for extended health
benefits offered to terminated employees. Approximately $400,000 remained unpaid
at September 30, 2002 due to the bankruptcy proceeding, and that amount is
reflected in "debentures" along with other unsecured creditor claims at
September 30, 2003 and included in long term debt on the accompanying balance
sheet.
Impairment of real estate assets held for sale - In fiscal 2001 the Company
initiated plans to sell its Naugatuck, Connecticut, facility due to announced
downsizing of operations and the sale of divisions. In conjunction therewith,
the Company determined that the fair market value of the Naugatuck, Connecticut
property was less than its carrying value based on appraisal information and
accordingly recorded a $2.1 million write-down in the carrying value of this
real estate. Although the Company has been actively trying to sell the building
since 2001, due to its inability to do so, such building is not reflected as an
asset held for sale in the accompanying balance sheets.
Facility Consolidation Costs - In fiscal 2001 the Company decided to consolidate
its remaining business operations into one facility and at that time selected
its leased facility in Middlebury, Connecticut for this purpose and as a result
recorded a $4.7 million charge associated with this consolidation. In fiscal
2002, and in conjunction with the Company's decision to file for bankruptcy
protection, the Company instead elected to move its operations into its owned
facility in Naugatuck, Connecticut and abandon its leased facility in
Middlebury, Connecticut. This change in restructuring plan had an impact of
reducing the facility consolidation cost by $1.4 million in fiscal 2002.
Impairment of property and equipment - In the aftermath of the sales of
substantial portions of the Company's businesses and in conjunction with its
decision to consolidate its remaining business unit into one location, the
Company evaluated the usefulness of its remaining property and equipment and
wrote down the value of such assets to net realizable value in fiscal 2002 and
2001.
4. Division Sales and Discontinued Operations
Vital Network Services
In 2001, the Company disposed of the United States, Europe and Asia portions of
its Vital Network Services business unit ("Vital"). The purchaser was given a
sixty day option to purchase Vital's Mexico operations. Subsequently, Vital's
Mexico operations were not purchased by the acquirer of the other Vital units.
Proceeds of the sale, before expenses, amounted to $13.0 million, comprised of
$6.0 million in cash and $7.0 million in notes receivable which were
subsequently collected. In addition the buyer assumed $9.1 million in
liabilities, including trade accounts payable and deferred service contract
obligations. After deducting net assets sold of $9.5 million and transaction
expenses of $1.2 million, the Company realized a net gain on the sale of
approximately $11.3 million.
A 75% controlling interest in the Company's Mexico subsidiary was sold to a
Mexico Company in April 2002 for proceeds of $800,000, which represented the
impaired carrying value of the net assets and accordingly no gain or loss was
recognized (see Note 2).
49
Primarily due to the Company's continuing ownership interest in the Mexico
subsidiary, the sale of Vital is not reflected as a discontinued operation in
the accompanying financial statements.
DataComm Leasing Corporation
The DataComm Leasing Corporation ("DLC") segment was discontinued in fiscal
2001. The Company no longer offers customers the option to lease products
through DLC.
DLC's net assets of $584,000 at September 30, 2002 (none at September 30, 2003)
are principally accounts receivable.
Revenues and net loss from the discontinued operations of DLC in fiscal 2001
were $1,912,000 and $(592,000), respectively (no interest expense was allocated
to such operating results). There was no DLC revenue or net income (loss) in the
years ended September 30, 2003 and 2002.
Broadband Systems Division ("BSD")
Asynchronous Transfer Mode
In fiscal 2001 the Company transferred its Asynchronous Transfer Mode ("ATM")
business to Ahead Communications Systems, Inc. (Ahead), in exchange for $3.0
million in cash and a $17.0 million note receivable. Shortly after the sale,
Ahead filed for bankruptcy protection and the full collection of the $17.0
million note was determined to be doubtful. Through September 30, 2003, the
amount of the $17.0 million note realized by the Company was $1.9 million.
Accordingly, the impairment charge recorded by the Company in fiscal 2001
related to these assets (see Note 3), was based on aggregate proceeds of $4.9
million. Under the terms of the $17.0 million note receivable, the ATM business
(and related assets, including inventory) were pledged as collateral.
Accordingly, there is the possibility that the Company will realize future
proceeds related to the transfer of assets to Ahead either through additional
cash collections or through the Company's ability to realize future value for
the underlying collateral . However, based on the risks associated with such
future realization, such potential proceeds have not been recognized within the
accompanying financial statements.
See Note 3, "Impairment and Restructuring Charges" for further details of the
BSD impairment charges in fiscal 2001.
Multimedia
In 2001, the Company sold technology and other assets applicable to its
Multimedia Division, which was previously reported as part of the Broadband
Systems Division, for $8.5 million and reported a gain of $2.9 million. Net
proceeds from the sale amounted to $6.4 million after related fees, expenses and
adjustments for liabilities assumed by the buyer. As part of the transaction,
the buyer purchased General DataComm, Ltd., the Company's Canadian subsidiary.
In addition to the sale price of $8.5 million, the Company was entitled to
receive payments equal to 20% of multimedia-related revenues, as defined, during
the two-year period ended June 30, 2003. Such amounts will be recorded as
revenue if and when received. No such amounts have been received to date and the
Company is currently in dispute with the buyer over amounts owed.
50
Multiplexer
The component of the BSD business segment that was not sold was the Multiplexer
Technology Product division, which was retained by the Company and combined with
NAD.
5. Settlement of Claims and Litigation
On July 18, 2003, the Company and U.S. Assemblies Raleigh, Inc., U.S. Assemblies
Georgia, Inc. and The Matco Electronics Group, Inc. (Matco) signed a stipulation
resolving the Company's objection to the claims of Matco whereby Matco was
allowed solely a General Unsecured Claim in the amount of $4 million and, in
addition, the Company agreed to purchase inventory from Matco for $600,000.
Litigation and claims between the two companies were withdrawn. As a result of
the settlement, the Company recorded a gain of $4.7 million in the quarter ended
September 30, 2003.
Earlier in fiscal 2003 (December 2002), the Company settled a legal claim in its
favor and recorded $2.5 million in proceeds net of expenses. The claim had
related to the Company's assertion of improper transfer and use of the Company's
technology.
In fiscal 2001, a subsidiary of the Company settled a legal claim its favor and
recorded $5.0 million in proceeds net of expenses. The claim also had related to
the Company's assertion of improper transfer and use of the Company's
technology.
The Company is involved in litigation in the ordinary course of business. There
are no pending items in the Company's opinion the outcome of which will have a
material adverse effect on the Company's financial condition or results of
operations.
6. Reorganization Plan and Emergence from Chapter 11
The Company's Reorganization Plan and emergence from Chapter 11 bankruptcy
proceedings became effective on September 15, 2003.
Debentures
The Plan provides for creditors to receive payment of 100% of their claims over
a five-year period. Payment of the unsecured creditors' claims (in the
approximate amount of $22.5 million) are being made in the form of new
Debentures. No principal will be payable on the new Debentures until the secured
lender's claim is paid in full. Interest shall accrue on the new Debentures at
an annual rate of 10%, but such rate shall be reduced (in increments to 7 1/4%)
if the new Debentures are paid in full within four years or less. The
outstanding balance of principal together with accrued interest becomes payable
on December 31, 2008.
Shareholders
Common and preferred stockholders will retain their shares subject to a
one-for-ten reverse stock split of outstanding shares effective as of the day
following the Effective Date. All common stock information in the accompanying
financial statements has been retroactively adjusted to reflect this reverse
stock split.
New Loan Agreement
Under the terms of the New Loan Agreement dated as of August 20, 2002, with the
secured lenders, that was agreed as part of the reorganization plan that became
effective September 15, 2003, the Company entered into a term loan in the amount
of $25 million due on December 31, 2007 (the "Term Obligation"). The Term
Obligation accrues interest at the annual rate of 7.25% through December 31,
2003, and thereafter at the greater of (i) 7.25% and (ii) the prime rate plus
2.5%. The Term Obligation requires principal payments at the rate of $250,000
per month, subject to adjustment after January 1, 2005.
51
The Company also entered into a loan in the original principal amount of $5
million, subject to adjustment, due December 31, 2007 (the "PIK Obligation").
Interest accrues at the same rates as the Term Obligation. The outstanding
principal and accrued interest thereon shall be forgiven in increments of $1.25
million if the Term Obligation was reduced by $5 million by June 30, 2003, by
$10 million by December 31, 2003, by $15 million by June 30, 2004 and by $25
million (in full) by December 31, 2004. Since by September 30, 2003 the Term
Obligation has been reduced by more than $10 million, the current balance owing
on the PIK Obligation was reduced to $2.5 million, plus accrued interest, in the
accompanying balance sheet at September 30, 2003.
An event of default will occur: (i) if the Company fails to pay when due and
payable or when declared due and payable, any portion of the Term Obligation or
PIK Obligation including principal and interest, or (ii) if the Company fails to
maintain Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"), measured on a fiscal quarter-end basis, of not less than (a) for the
fiscal quarter ending December 31, 2003, $0.01 and (b) for each fiscal quarter
ending thereafter, the greater of (i) $1,100,000 and (ii) $750,000 plus the
aggregate amount of all interest on the Term Obligation accrued during such
fiscal quarter. EBITDA shall be calculated on a cumulative basis by (i) adding
the aggregate amount of EBITDA for each fiscal quarter subsequent to December
31, 2003 and (ii) subtracting from such sum the aggregate amount of EBITDA
required to be maintained by the Borrowers for each fiscal quarter subsequent to
December 31, 2003. Notwithstanding the foregoing, Borrowers shall not be
required to maintain the applicable EBITDA for any particular fiscal quarter and
thereafter if Borrowers' loan availability based on the traditional asset-based
loan borrowing structure in the Pre-Petition Agreement (as in effect immediately
prior to the Filing Date), as determined on the last day of any fiscal quarter,
equals or exceeds the aggregate principal amount of the Term Obligation
outstanding as of such date.
In addition, the Company's secured lenders have warrants (1) to purchase up to
51% of the Common Stock at $.01 per share in the event of default under the New
Lender Loan and Security Agreement, and (2) to purchase 10% of the Common Stock
if the debt owing to them is not paid in full by December 31, 2004. However,
both such warrants and any Common Stock issued thereunder will be canceled if
the secured lender's outstanding debt is fully paid by December 31, 2007.
Since the initial bankruptcy filing on November 2, 2001, the Company has
recorded all adequate protection and debt service payments to secured lenders as
interest expense in accordance with SOP 90-7 (see Note 2, "Description of
Business and Summary of Significant Accounting Policies").
On September 15, 2003, the effective date of the New Loan Agreement, the excess
of the $30 million aggregate of the Term Obligation and the PIK Obligation over
the $27.9 million carrying value of the obligation to the secured lenders prior
to the New Loan Agreement has been recorded as an additional financing expense
of approximately 2.2 million in the accompanying 2003 statement of operations.
In addition, a debt restructuring gain of approximately 5.3 million was
recognized principally representing the reduction in the Term Obligation
resulting from the application of approximately 3.0 million of monthly principal
payments which had been accounted for as interest expense as referred to above
together with the $2.5 million reduction in the PIK Obligation.
No amounts have been ascribed to the warrants issued to the secured lenders. Due
to the nominal exercise price of the warrants, the underlying common shares are
being accounted for as contingent interest. Accordingly, upon an event of
default under the Term Obligation or the nonpayment of indebtedness in full by
December 31, 2007, the then quoted market price of the commmon shares which
become issuable will be charged to operations.
Priority Tax Claims
Prepetition tax claims are required to be paid in equal annual amounts together
with interest of 4.25% over a six-year period, or earlier at the option of the
Company (see Note 18).
52
7. Inventories
Inventories consist of (in thousands):
September 30, 2003 2002
- -----------------------------------------------------------------------------
Raw materials $ 1,674 $ 2,430
Work-in-process 1,501 1,579
Finished goods 1,569 1,623
- -----------------------------------------------------------------------------
$ 4,744 $ 5,632
=============================================================================
Inventories are stated at the lower of cost or market using a first-in-first out
method. Reserves in the amount of $4,177,000 and $6,199,000 were recorded at
September 30, 2003 and 2002 for excess and obsolete inventories.
8. Property, Plant and Equipment and Real Estate Sales
Property, plant and equipment consists of (in thousands):
Estimated
September 30, 2003 2002 Useful Life
- ------------------------------------------------------------------------------------------
Land $ 1,000 $ 1,000 --
Buildings and improvements 7,115 10,557 10 to 30 years
Test equipment, fixtures and field spares 4,679 5,113 3 to 10 years
Property and equipment 5,341 5,842 3 to 10 years
- ------------------------------------------------------------------------------------------
18,135 22,512
- ------------------------------------------------------------------------------------------
Less: accumulated depreciation 13,826 16,331
- ------------------------------------------------------------------------------------------
$ 4,309 $ 6,181
==========================================================================================
Depreciation expense amounted to $180,000, $373,000 and $4,194,000 in fiscal
2003, 2002 and 2001, respectively.
At September 30, 2001, land, buildings and improvements (three properties) with
a net book value of approximately $12,333,000 were being held for sale. In July,
2002, the Middlebury, Connecticut (former corporate headquarters) property was
sold for $7,175,000 and the Company reported a net gain on the sale of $919,000.
The remaining net book value of real estate held for sale at September 30, 2002
was $6,181,000. In May 2003 the Company's United Kingdom land and building,
which had been occupied by the Company's European businesses that were sold in
fiscal 2001, was sold for net proceeds of $1,917,000. Such amount was used to
pay down secured debt, and the Company recorded a gain of $329,000 net of taxes
in the United Kingdom. The remaining property, which is the Company's
headquarters and which has a net book value of $4,309,000 at September 30, 2003,
continues to be actively marketed (see Note 3).
9. Long-Term Debt
Long-term debt consists of (in thousands):
September 30, 2003 2002
- --------------------------------------------------------------------------
Term Obligation $ 14,775 $ -
PIK Obligation 2,500 -
Debentures (see Note 6) 22,542 -
Revolving credit and term loan agreement - 27,926
7 3/4% convertible subordinated debentures - 3,000
Real estate mortgages - 60
- --------------------------------------------------------------------------
39,817 30,986
Less current portion 3,000 30,986
- --------------------------------------------------------------------------
$ 36,817 $ -
- --------------------------------------------------------------------------
53
Due to previous payment and other loan defaults by the Company, at September 30,
2002, the maturity of all outstanding indebtedness was or could be accelerated
and, therefore, the total amount was classified as a current liability and
included in "liabilities subject to compromise" on the balance sheet.
Interest expense amounted to $4,213,000, $3,399,000 and $8,912,000 in fiscal
2003, 2002 and 2001, respectively.
Long-term debt matures in amounts totaling $3,000,000 per fiscal year through
fiscal 2007 and $27,817,000 in fiscal 2008.
Term Obligation and PIK Obligation
Under the terms of a new loan agreement which became effective September 15,
2003, minimum payments under the Term Obligation are $250,000 per month, or
$3,000,000 per year, and interest is payable monthly at the annual rate of 7.25%
through December 31, 2003, and thereafter at the greater of (i) 7.25% and (ii)
the prime rate plus 2.5%. In addition, proceeds from the potential sales of
non-core assets and certain other proceeds must be used to reduce the term
obligations. For further details of the new loan agreement and a description of
the PIK obligation, see Note 6, "Reorganization Plan and Emergence from Chapter
11".
Revolving Credit and Term Loan Agreement
At September 30, 2001, the Company was in default of the provisions of the
revolving credit and term loan agreement then in effect, including borrowings
exceeding formula levels and financial covenant violations. Substantially all
assets of the Company, including accounts receivable, inventories and property,
plant and equipment, were pledged as collateral under this loan agreement.
Thereafter (on November 2, 2001), the Company filed for Chapter 11 bankruptcy
protection in Delaware.
7 3/4 % Convertible Subordinated Debentures
A total of $3.0 million of convertible 7 3/4 % senior subordinated debentures
were outstanding at September 30, 2002 when the debentures matured. Under the
terms of the Reorganization Plan, these debentures and accrued interest were
classified as unsecured claims along with other general unsecured creditors. See
Note 6, "Reorganization Plan and Emergence From Chapter 11" for further
information regarding the new debentures issued to unsecured creditors.
Real Estate Mortgages and Gain on Early Extinquishment of Debt
Mortgages outstanding on the Company's properties in Middlebury, Connecticut and
Naugatuck, Connecticut bore interest at 90-day LIBOR plus 2%, and required
quarterly principal payments of $100,000 with the outstanding balance due at
maturity in 2003. In addition a mortgage in the amount of $60,000 at September
30, 2002 was outstanding on property in the United Kingdom. In fiscal 2001, the
Company defaulted on its payment obligations under all its mortgages.
During fiscal 2002, the domestic mortgage holders and the Company agreed to
reduce the total mortgage indebtedness to $7,450,000 if such amount was paid by
October 1, 2002. The Company thereafter sold its Middlebury, Connecticut
property on July 31, 2002, and used the net proceeds of $6,821,000, plus an
additional cash payment of $629,000, to fully retire its domestic mortgage
indebtedness. As a result, the Company recorded a gain of $1,967,000 on the
early extinguishment of debt.
54
The Company continues to market its Naugatuck, Connecticut property, which is
now free of the above-described mortgage obligations, but secures the
indebtedness under the new loan agreement and Debentures issued to unsecured
creditors. Any proceeds of such sale is required to first be used to reduce the
debt owed to secured lenders.
The mortgage on the United Kingdom property was satisfied upon the sale of the
property in April 2003. See Note 8, "Property, Plant and Equipment and Real
Estate Sales" for discussion of the Middlebury, Connecticut and United Kingdom
property sales.
10. Income Taxes
Income (loss) from continuing operations before income taxes consists of
domestic and foreign income (loss), as follows (in thousands):
Year ended September 30, 2003 2002 2001
- ----------------------------------------------------------------------------------------
United States $ 4,634 $ (1,080) $ (57,826)
Foreign - - (15,016)
- ----------------------------------------------------------------------------------------
$ 4,634 $ (1,080) $ (72,842))
The provision for income taxes consists of minimum state income taxes in the
following amounts (in thousands):
Year ended September 30, 2003 2002 2001
- ----------------------------------------------------------------------------------------
Current:
State $ 10 $ 10 $ 100
- ----------------------------------------------------------------------------------------
The following reconciles the U.S. statutory income tax rate to the Company's
effective rate:
Year ended September 30, 2003 2002 2001
- ----------------------------------------------------------------------------------------
Federal statutory rate (34.0)% (34.0)% (34.0)%
Gain on debt restructuring not subject to tax (90.0) - -
No benefit recognized for net operating loss 6.0 34.0 34.0
State income tax effects 0.2 (0.9) (0.1)%
- ----------------------------------------------------------------------------------------
0.2% (0.9)% (0.1)%
========================================================================================
For regular income tax reporting purposes at September 30, 2003, domestic tax
credit and net operating loss carryforwards amounted to approximately $12.2
million and $210.5 million, respectively. Domestic federal loss carryforwards
expire between fiscal 2004 and 2022; domestic state loss carryforwards of
approximately $73.3 million expire between fiscal 2004 and 2018. Tax credit
carryforwards expire between fiscal 2004 and 2015.
55
The tax effects of the significant temporary differences comprising the deferred
tax assets and liabilities at September 30, 2003 and 2002 are as follows (in
thousands):
2003 2002
---------- -----------
Deferred Tax Assets
Note receivable reserve $ 6,053 $ 6,053
Bad debt reserve 1,024 328
Inventory reserve 10,872 13,179
Impairment reserve on real estate 931 931
Other accruals 1,500 1,204
Loss carryforwards 77,362 84,610
Tax credits 12,203 14,500
- -----------------------------------------------------------------------------
109,945 120,805
Valuation allowance 109,745 120,533
- -----------------------------------------------------------------------------
Net deferred tax assets $ 200 $ 272
- -----------------------------------------------------------------------------
Deferred Tax Liabilities
Depreciation $ 200 $ 272
- -----------------------------------------------------------------------------
Gross deferred tax liability $ 200 $ 272
=============================================================================
The deferred tax asset related to inventory reserves includes inventory written
off for book purposes which is not yet deductible for tax reporting purposes.
Statement of Financial Accounting Standard No. 109, "Accounting For Income
Taxes," requires a valuation allowance against deferred tax assets if, based on
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company believes that uncertainty exists
with respect to the future realization of deferred tax assets and, as a result,
carries a valuation allowance for such items. The valuation allowances,
disclosed in the deferred tax summary above, decreased by $10,788,000 and
increased by $639,000 in fiscal 2003 and fiscal 2002, respectively.
11. Operating Leases
The Company had a non-cancelable operating lease through September 30, 2003 for
a facility in Middlebury, Connecticut which the Company abandoned in fiscal 2002
as allowed by the bankruptcy court. As a result, the Company recorded a
restructuring charge in 2002 to reflect the cost of the lease termination. The
obligation to the lessor is included in Debentures along with other unsecured
creditor obligations. See Note 6,"Reorganization Plan and Emergence from Chapter
11" and Note 3, "Impairment and Restructuring Charges" for further discussion.
At September 30, 2003, the Company had one non-cancelable lease for a sales
office with annual rent of $9,431 due through its expiration of January 31,
2005. Aggregate remaining rentals under this lease at September 30, 2003 amount
to approximately $12,600.
Net rental expense for fiscal 2003, 2002 and 2001, respectively which includes
divisions sold in fiscal 2001 and excludes the restructuring charge noted above,
was approximately $47,200, $55,550 and $2,571,000, respectively.
12. Stockholders' Deficit and Redeemable 5% Preferred Stock
In conjunction with the Company's Reorganization Plan, the common and Class B
stock was subject to a one-for-ten share reverse split on September 16, 2003.
All share amounts shown in these financial statements and notes have been
adjusted retroactively to reflect this change.
56
Common Stock
In addition to regular common stock, the Company's capital structure includes
Class B stock which, under certain circumstances, has greater voting power in
the election of directors. However, common stock is entitled to cash dividends,
if and when paid, 11.11% higher per share than Class B stock. The Company has
never declared or paid cash dividends on its common stock, and terms of the
Company's credit facility prohibit the Company from paying cash dividends,
including dividends on the Company's 9% Preferred Stock (referenced below). So
long as there are arrearages in payment of dividends of the Company's 9%
Preferred Stock the Company is prohibited from paying such cash dividends on its
common stock and Class B stock. Class B stock has limited transferability and is
convertible into common stock at any time on a share-for-share basis. At
September 30, 2003, and 2002, Class B stock outstanding amounted to 664,978 and
205,710 shares, respectively.
Non Redeemable 9% Preferred Stock
At September 30, 2003 and 2002, there were 787,900 shares of the Company's 9%
Cumulative Convertible Exchangeable Preferred Stock ("9% Preferred Stock")
outstanding. The 9% Preferred Stock accrues dividends at a rate of 9% per annum,
cumulative from the date of issuance and payable quarterly in arrears. Dividends
have been paid through June 30, 2000; dividends in arrears, which are not
accrued for financial reporting purposes since they have not been declared by
the Company, amounted to $5,761,519 at September 30, 2003 and are included in
the liquidation value disclosed in the accompanying 2003 balance sheet. Such
arrearages entitle the holders of the 9% Preferred Stock to elect two directors
until all arrearages are paid, but no such designation has been made or
requested. The 9% Preferred Stock can be converted into common stock at $136.50
per share, or the equivalent of .18315 shares of common stock for each share of
9% Preferred Stock. The Company has the option to exchange the 9% Preferred
Stock for 9% Convertible Subordinated Debentures due 2006, if there are no
arrearages in dividends.
Redeemable 5% Preferred Stock
At September 30, 2003 and 2002, there were 73,000 shares and 113,000 shares,
respectively, of the Company's Common Stock reserved for conversion of its 5%
Cumulative Convertible Preferred Stock ("5% Preferred Stock") outstanding.
Dividends at the rate of 5% per annum are payable quarterly in common stock or
cash. However, terms of the Company's credit facility prohibit payment of cash
dividends on the 5% Preferred Stock and, therefore, no dividends have been paid.
Dividends in arrears, which are not accrued for financial reporting purposes
since they have not been declared by the Company, amounted to $289,000 at
September 30, 2003 and are included in the liquidation values disclosed in the
accompanying 2003 balance sheet.
In accordance with the terms of the 5% Preferred Stock, the conversion price,
originally $5.00 per common share, was adjusted downward at predetermined reset
dates commencing on January 31, 2001, and each three months thereafter when the
average closing price of the Company's common stock during the ten trading days
preceding such predetermined dates fell below the conversion price then in
effect. However, the number of common shares to be issued on conversion was
limited since in no event could the conversion price drop below a point where
the 5% Preferred Stock would be convertible into more than 19.999% of common
stock shares outstanding, excluding Class B stock and treasury shares.
Through September 30, 2003, a total of 441,572 shares (adjusted for the
one-for-ten reverse split) of common stock have been issued on conversion of
127,000 shares of the 5% Preferred Stock. See Note 16 "Subsequent Events" for
discussion of the final conversion of the remaining 5% Preferred Stock into
common stock.
57
13. Segment and Geographical Information
For the years ended September 30, 2003 and 2002, the Company operated in one
reportable segment previously referred to as the Network Access Division (NAD).
For the year ended Septemer 30, 2001 the Company's reportable segments were
Broadband Systems Division ("BSD"), Vital Network Services Division ("Vital")
and NAD. Refer to Notes 2, 3 and 4.
The table below presents financial performance information by reportable
segment, (in thousands):
Year Ended September 30, 2001
-----------------------------
Revenue
NAD $ 36,380
BSD 23,494
Vital 33,438
---------
Total $ 93,312
=========
Operating Income (Loss):
NAD $ (2,345)
BSD (22,524)
Vital (2,264)
---------
Total $ (27,133)
=========
58
The reconciliation of operating loss to loss from continuing operations before
income taxes for fiscal 2001 is as follows:
Operating Loss per above $ (27,133)
Impairment and Restructuring Charges, including inventory
impairment included in Cost of Sales (55,474)
Interest Expense (8,912)
Gain on Sale of Vital Division 11,289
Gain on Sale of Multimedia Division 2,863
Legal Settlements 5,000
Other, Net (475)
---------
Loss from Continuing Operations before Income Taxes $ (72,842)
=========
See Note 3, "Impairment and Restructuring Charges", Note 4, "Division Sales and
Discontinued Operations", and Note 5, "Settlement of Claims and Litigation", for
discussion of the reconciling items noted above.
Consolidated revenue and long-lived asset information by geographic area is as
follows:
Revenue Long-Lived Assets
---------------------------------- -----------------------------
Year ended September 30, 2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------
United States $ 16,456 $ 20,608 $ 49,001 $ 4,313 $ 4,558 $ 12,394
Foreign $ 7,449 $ 7,073 $ 44,311 $ -0- $ 1,702 $ 2,083
Foreign revenue is based on the country in which the revenue originated (ie.
where the customer placing the order is domiciled).
In fiscal years 2001 and 2002, the Company owned a building in the UK. This
long-lived asset was respectively 12% and 27% of the Company's total long-lived
assets. In fiscal 2003 no individual foreign location accounted for more than
10% of the Company's long-lived assets.
The following table summarizes the percentage of total sales for customers
accounting for more than 10% of the Company's sales. In 2001, no customer
accounted for more than 10% of the Company's sales.
For Year Ended September 30,
2003 2002
---- ----
Bell Canada (Canada) 19% 13%
Sunbelt Telecommunications Inc. (United States) 12% 24%
Verizon (United States) 18% 17%
59
14. Employee Incentive Plans
Stock Awards, Grants and Options
Officers and key employees may be granted incentive stock options at an exercise
price equal to or greater than the market price on the date of grant and
non-incentive stock options at an exercise price equal to or less than the
market price on the date of grant. While individual options can be issued under
various provisions, most options, once granted, generally vest in increments of
25% per year over a four-year period and expire within five years (ten years for
options granted prior to fiscal 2002). Under the terms of these stock option
plans, the Company has reserved a total of 338,707 shares of common stock at
September 30, 2003.
All share amounts and exercise prices have been adjusted to reflect the
one-for-ten share reverse split which became effective September 16, 2003. The
following summarizes activity under these stock option plans for the three
fiscal years ended September 30, 2003:
Weighted Average
Shares Exercise Price
- ------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2000 (190,373 exercisable) 443,510 $ 49.53
Options granted 61,287 8.87
Options exercised (100) 24.38
Options canceled or expired (174,089) 45.13
- ------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2001 (235,491 exercisable) 330,608 $ 44.32
Options granted 0 0.00
Options exercised 0 0.00
Options canceled or expired (194,393) 38.49
- ------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2002 (114,239 exercisable) 136,215 $ 52.63
Options granted 232,061 0.64
Options exercised 0 0.00
Options cancelled or expired (84,966) 62.92
- ------------------------------------------------------------------------------------------------------
Options outstanding, September 30, 2003 (234,792 exercisable) 283,310 $ 6.96
======================================================================================================
The following summarizes additional information regarding options outstanding
and options exercisable as of September 30, 2003:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- -----------------------------
Weighted Contractual Weighted
Range of Number of Average Life Number of Average
Exercise Prices Shares Exercise Price (Years) Shares Exercise Price
- --------------------------------------------------------------------- -----------------------------
$ 0.01 - $ 0.01 195,400 $ 0.01 2.50 193,900 $ 0.01
3.50 - 3.55 4,000 3.53 7.62 2,000 3.53
4.00 - 4.00 46,661 4.00 9.48 5,000 4.00
4.35 - 24.38 9,271 18.33 6.31 7,920 20.60
26.88 - 37.50 10,601 30.97 5.20 10,100 31.18
40.00 - 65.00 9,072 50.58 6.44 7,617 50.22
66.25 - 82.50 4,150 72.52 3.73 4,150 72.52
96.25 - 96.25 300 96.25 3.08 300 96.25
100.94 - 100.94 200 100.94 6.45 150 100.94
123.13 - 123.13 3,295 123.13 2.03 3,295 123.13
155.00 - 155.00 360 155.00 0.82 360 155.00
=====================================================================================================
$ 0.01 $ 155.00 283,310 $ 6.96 4.09 234,792 $ 7.22
=====================================================================================================
60
The weighted average option price of exercisable options was $7.22, $59.20 and
$55.25 at September 30, 2003, 2002 and 2001, respectively.
On September 30, 2003, the Stock Option Committee of the Board of Directors
authorized certain awards, grants and options pursuant to the 2003 Stock and
Bonus Plan ("Plan") that was adopted as part of the Plan of Reorganization that
became effective September 15, 2003.
Pursuant to the Plan, the Committee awarded Howard S. Modlin, Chief Executive
Officer, 459,268 shares of the Corporation's Class B Stock and Lee M. Paschall
and John L. Segall, Directors, 25,000 shares each of the Corporation's Common
Stock. The shares issued under such grants are not registered under the
Securities Act of 1933 and must be held for investment unless so registered or
an exemption from registration exists. These awards increased the Company's
total Common Stock and Class B Stock outstanding at September 30, 2003 to
3,941,753 shares.
The Committee also awarded an aggregate of 195,400 stock options to purchase the
Corporation's Common Stock at $.01 per share to all current employees (a total
of 112 employees), including 25,000 each to William G. Henry, Vice President
Finance and Administration and Chief Financial Officer, George Gray, Vice
President Engineering and Manufacturing and George Best, Vice President Sales
and Marketing, which grants may be exercised at any time on or before March 31,
2006 except such grants for 1,500 shares may not be exercised until September
30, 2004. The shares issuable pursuant to the options and grants are not
registered under the Securities Act of 1933 and must be held for investment
until so registered or an exemption from registration exists.
The Company accounts for stock compensation expense in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". As a result of the stock awards and grants described above, the
Company recorded compensation expense in the quarter ended September 30, 2003 in
the amount of $1,923,000 which is included in selling, general and
administrative expense.
Employee Stock Purchase Plan
The Company's stock purchase plan was discontinued in March 2001. Previously the
plan provided that at the end of each six-month payment period, common stock was
purchased at 85 percent of the market value of the stock on the first or last
day of the payment periods, whichever was lower. However, the purchase of common
stock under this plan was prohibited if 85 percent of the market value of the
common stock is less than the book value per share.
Employee Retirement Savings and Deferred Profit Sharing Plan
Under the retirement savings provisions of the Company's retirement plan
established under Section 401(k) of the Internal Revenue Code, employees are
generally eligible to contribute to the plan after three months of continuous
service in amounts determined by the plan. In 2001 the Company discontinued its
previous policy of making matching contributions. Employees become fully vested
in the Company's contributions after three years of continuous service, death,
disability, or upon reaching age 65. No amounts were charged to expense for the
fiscal years ended September 30, 2003, 2002 and 2001.
61
The deferred profit sharing portion of the plan provides that the Company may
make contributions to the plan based upon a formula measuring profitability in
relation to revenues. Additional amounts may be contributed at the discretion of
the Company. There were no such contributions for fiscal 2003, 2002 or 2001.
15. Earnings (Loss) Per Share
Basic and diluted earnings (loss) applicable to common stock is computed as
follows (in thousands except share data);
Fiscal Year Ended 2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Numerator:
Net income (loss) $ 4,624 $ (1,090) $ (73,534)
Dividends applicable to preferred stock (1,910) (1,914) (1,990)
-------------------------------------------------------------------------------------------------------------
Earnings (loss) applicable to common and Class B stock $ 2,714 $ (3,004) $ (75,524)
=============================================================================================================
Denominator:
Weighted average common and Class B shares outstanding 3,401,295 3,380,474 3,157,864
=============================================================================================================
Basic and diluted earnings (loss) per common and Class B share $ 0.80 $ (0.89) $ (23.92)
=============================================================================================================
Dividends applicable to preferred stock represent accumulating dividends that
are not declared or accrued. Outstanding securities, not included in the
computation of earnings (loss) per share because of their antidilutive impact on
reported earnings (loss) per share, which could potentially dilute basic
earnings per share in the future, include contingent shares underlying warrants
granted to secured lenders, convertible preferred stock and employee stock
options and warrants. For additional disclosure information, including
conversion terms, refer to Notes 6, 12 and 14. Employee stock options and other
common stock equivalents were anti-dilutive in fiscal 2003, 2002 and 2001.
16. Subsequent Events
On November 5, 2003, the holder of the remaining 73,000 shares of 5% Preferred
Stock (see Note 12), surrendered such shares for conversion into 27,097
post-split shares of the Corporation's Common Stock, which surrender and
conversion had the effect of reducing the stockholders' deficit by $1,825,000.
On December 30, 2003, pursuant to authorization by the Board of Directors and
amendment of the New Loan Agreement, the Corporation borrowed $300,000 from each
of Howard S. Modlin, Chairman of the Board and John L. Segall, a Director, for
working capital purposes. The loans are for two years payable on December 29,
2005 and bear interest at the rate of 10% per annum payable monthly commencing
May 1, 2004. The notes are convertible into Common Stock at a conversion price
of $2.12 per share and are secured by all the assets of the Corporation behind
the first lien of the Corporation's senior lenders. Any shares issued on
conversion will not be registered and must be held for investment without a view
to distribution.
17. Related Party Transactions
Mr. Howard Modlin, Secretary and a Director of the Company since 1969 and
Chairman of the Board of Directors of the Company since November 2001 and
currently Chairman, President and Chief Executive Officer, is also President of
the law firm of Weisman, Celler Spett & Modlin, P.C. ("WCSM") to whom the
Company was indebted for legal services in excess of $2,179,000 for work
performed prior to November 2001 and in settlement for which the Company issued
subordinated debentures.WCSM has filed a claim for $294,000 for work performed
between November 2001 and September 15, 2003 which was approved and authorized
by the bankruptcy court subsequent to September 30, 2003. Furthermore, the
Company was indebted to Mr. Modlin for fees for company director meetings he
attended prior to November 2001 for which he received subordinated debentures in
the total amount of $16,400. WCSM was paid $690,000 by the Company in fiscal
2001 (none in fiscal 2002 and 2003) for services rendered.
62
On September 30, 2003 the Stock Option Committee of the Board of Directors
awarded Mr. Modlin 459,268 shares of the Corporation's Class B stock and Lee M.
Paschall and John L. Segall, Directors, 25,000 shares each of the Corporation's
Common Stock, all subject to registration restrictions. Refer to Note 14,
"Employee Incentive Plans" for further discussion. Messrs. Segall and Paschall
respectively received subordinated debentures in the total amount of $19,900 and
$17,900 in payment for directors fees for Company director meetings they
attended prior to November 2001. In addition, Messrs, Mr. William G. Henry, Vice
President, Finance and Administration, and Mr. George M. Gray, Vice President,
Manufacturing and Engineering have filed claims in Chapter 11 bankruptcy
proceedings for past services and bonuses in the amounts of $561,385 and
$50,000, respectively. These claims are still pending in the bankruptcy
proceedings and the amount of these claims are included in debentures in
long-term debt, along with other unsecured creditors at the time of the
bankruptcy filing, in the accompanying balance sheet. If these claims are not
allowed in the bankruptcy proceedings, at such time adjustments will be made in
the amount of debentures in long-term debt.
See Note 16 regarding loans made to the Company by Messrs. Howard Modlin and
John L. Segall.
18. Other Current and Other Long-Term Liabilities
Other current liabilities are comprised of the following (in thousands):
September 30, 2003 2002
- -----------------------------------------------------------------
Reserve for foreign tax obligations $ 2,421 $ 2,412
Accrued professional fees 2,118 1,576
Accrued post retirement benefits 713 750
Accrued property taxes 580 1,030
Other 1,712 9,181
---------- ----------
$ 7,544 $ 14,949
---------- ----------
Amounts for fiscal 2002 include both "other current liabilities" and "other
current liabilities subject to compromise" as reflected on the Company's balance
sheet.
Other long-term liabilities in fiscal 2003 in the amount of $2,654,000 (none in
fiscal 2002) consist of priority tax claims to be paid over six years in
accordance with the Company's Reorganization Plan and emergence from bankruptcy
(see Note 6).
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 1, 2003, the Company was advised by its independent accountants,
PricewaterhouseCoopers LLP ("PwC") that such accountants had declined to stand
for re-election as independent accountants for the Company with respect to the
audit of the Company's financial statements as of and for the year ended
September 30, 2003 and the Company received a letter from them that the
client-auditor relationship between the Company and such independent accountants
would cease upon the issuance of the report of PwC related to the audits of the
Company's financial statements as of September 30, 2002 and 2001 and for the
years then ended.
The Company was a debtor and debtor in possession under Chapter 11 of the
Federal Bankruptcy Code between November 2, 2001 and September 15, 2003 and had
not filed its Form 10-K reports or audited financial statements for the years
ended September 30, 2001 or 2002. While the Company had filed monthly operating
reports with the Bankruptcy Court during the bankruptcy period and included
financial results contained therein and additional consolidated results in Form
8-K filings, PwC performed no procedures whatsoever regarding such financial
information.
In this Form 10-K filing for the year ended September 30, 2003 the report of PwC
covering the financial statements as of and for the years ended September 30,
2002 and 2001 contains no adverse opinion or disclaimer of opinion and is not
qualified or modified as to uncertainty, audit scope, or accounting principle.
There were no disagreements with PwC on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PwC would cause them to
make reference thereto in their report on the Company's financial statements as
of and for the years ended September 30, 2002 and 2001. For the subsequent
period through October 1, 2003, there had been no disagreements with PwC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
There were no reportable events (as defined in Regulation S-K Item 304(a)(1)(v))
for the years ended September 30, 2002 and 2001, and for the subsequent period
through October 1, 2003.
Reference is made to Form 8-K dated this date with respect to material
weaknesses which previously existed, as identified by the Company's former
independent accountants (PwC) during the course of the audits for the fiscal
years ended September 30, 2002 and 2001.
On November 4, 2003, the Audit Committee of the Board of Directors of the
Company retained Eisner LLP as the Company's independent accountants for the
fiscal year ended September 30, 2003 to replace PwC.
During the Company's two most recent fiscal years and subsequent interim period
through November 3, 2003, the Company did not consult Eisner LLP, the newly
engaged auditors, on any matters regarding either (i) the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements by Eisner LLP that was an important factor considered by the Company
in reaching a decision as to any accounting, auditing or financial reporting
issue; or (ii) any matter that was either the subject of a disagreement, as that
term is used in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K, or a reportable event as that term
is defined in Item 304(a)(1)(v) of Regulation S-K.
64
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman, President and Chief Executive
Officer, and Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's
Chairman, President and Chief Executive Officer, and Vice President and Chief
Financial Officer, have concluded that the Company's disclosure controls and
procedures are effective.
65
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors will be filed by amendment within 120 days
after the end of the Company's fiscal year ended September 30, 2003.
Name Position Age
- ---- -------- ---
Howard S. Modlin Chairman of the Board of Directors, 72
Chief Executive Officer, President and Secretary
William G. Henry Vice President, Finance and Administration and 54
Chief Financial Officer
George M. Gray Vice President, Engineering and Manufacturing 53
George Best Vice President, Sales and Marketing 61
- ----------
Mr. Howard S. Modlin, Chairman of the Board and Chief Executive Officer was
elected to such position in November 2001 following the death of Charles P.
Johnson, the Company's founder. Mr. Modlin was also elected President in April
2003. Mr. Modlin is an attorney and President of the firm of Weisman Celler
Spett & Modlin P.C., and has been Secretary, a Director and counsel to the
Company since its formation.
Mr. William G. Henry, Vice President, Finance and Administration and Chief
Financial Officer, joined the Company as Corporate Controller in January 1984,
was appointed an officer of the Company in June 1989, was elected Vice President
in February 1996, was promoted to Vice President, Finance and Chief Financial
Officer in February 1999 and to his present positions in April, 2003.
Mr. George M. Gray, Vice President, Engineering and Manufacturing, has held
positions of major responsibility within the Company since September 18, 2000
and has served in executive capacities since September 15, 2003, the effective
date of its Plan of Reorganization.
Mr. George Best, Vice President, Sales and Marketing, has held positions of
major responsibility within the Company since April 22, 2001 and has served in
executive capacities since September 15, 2003, the effective date of its Plan of
Reorganization.
66
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Corporation's executive officers and directors are required under
Section 16(a) of the Securities Exchange Act of 1934 to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Copies of those reports must also be furnished to the Corporation.
Based solely on a review of the copies of reports furnished to the
Corporation and discussions with the Corporation's executive officers and
directors, the Corporation believes that during the proceeding year all filing
requirements applicable to executive officers and directors were met.
AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Lee Paschall, chairman of the
Company's audit committee, is an "audit committee financial expert." Mr.
Paschall is an independent director, as that term is used in Item 7 (d)(3)(iv)
of Schedule 14A under the Securities Exchange Act of 1934.
CODE OF CONDUCT AND ETHICS
We have adopted a Code of Conduct and Ethics ("Code") that applies to all
of the Company's employees. The Code is located on the Company's website
(www.gdc.com). Any amendments or waivers to the Code will be promptly disclosed
on our website as required by applicable laws, rules and regulations of the
Securities and the Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be filed by amendment.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 will be filed by amendment.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 will be filed by amendment.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable.
67
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements - The financial statements (including the Notes
thereto) listed in the Index to Consolidated Financial Statements and
Financial Statement Schedule (set forth in Item 8 of Part II of this
Form 10-K) are filed within this Annual Report on Form 10-K.
(2) Financial Statement Schedule - The Financial Statement Schedule listed
in the Index to Consolidated Financial Statements and Financial
Statement Schedule (set forth in Item 8 of Part II of this Form 10-K)
is filed as part of this Annual Report on Form 10-K.
(3) Exhibits - The exhibits listed under Item 15(c) hereof are filed as
part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the last quarter of
the period covered by this report:
(i) A report dated July 23, 2003 containing unaudited consolidated
financial results for the months of February, March, April and May,
2003 derived from the Company's monthly operating reports filed with
the United States Bankruptcy Court in Delaware and United States
Trustee.
(ii) A report dated August 8, 2003 reporting the confirmation on August 5,
2003 of the Company's Plan of Reorganization by the United States
Bankruptcy Court.
(iii) A report dated September 10, 2003 containing unaudited consolidated
financial reports for July 2003 derived from the Company's filings
with the United States Bankruptcy Court and United States Trustee.
(iv) A report dated September 17, 2003 reporting the Company's Plan of
Reorganization became effective September 15, 2003 and containing
certain exhibits including the Company's new loan agreement with
secured lenders.
(v) A report on Form 8-K/A dated September 18, 2003 amending the September
17, 2003 report on Form 8-K to add additional exhibits.
(c) Exhibits
68
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Corporation /1/
3.2 Amended 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 15, 2003 covering issued 10% Adjustable
Senior Subordinated Debentures due 2007 /6/
4.5 Form of Warrant issued with 5% Cumulative Convertible Preferred
Stock /7/
4.6 Common Stock Purchase Warrant W-1 issued to Secured Lenders /8/
4.7 Common Stock Purchase Warrant W-2 issued to Secured Lenders /9/
10.1 2003 Stock and Bonus Plan /10/
10.2 Form of Stock Option Under 2003 Stock and Bonus Plan
10.3 Form of Conditional Grant Under 2003 Stock and Bonus Plan
10.4 1984 Incentive Stock Option Plan, and related amendments /11/
10.5 1985 Stock Option Plan /12/
10.6 1991 Stock Option Plan /13/
10.7 1998 Stock Option Plan /14/
10.8 Non-Statutory Stock Option Agreement Form - employee /14/
10.9 Non-Statutory Stock Option Agreement Form - non-employee /14/
10.10 Retirement Savings and Deferred Profit Sharing Plan, and related
amendments /15/
10.11 Loan and Security Agreement dated as of August 20, 2002 between
General DataComm Industries, Inc., et al., and Ableco Finance,
LLC /16/
10.12 Registration Rights Agreement for 5% Preferred Stock /17/
10.13 Subordinated Security Agreement dated September 15, 2003 /18/
14.1 Code of Conduct and Ethics
21. Subsidiaries of the Registrant
31.1 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.
32.1 Section 1350 Certification by Chief Executive Officer.
32.2 Section 1350 Certification by Chief Financial Officer.
69
Exhibit footnotes
/1/ Incorporated by reference to Exhibit 3.1 to Form 8-K/A dated September 18,
2003.
/2/ Incorporated by reference to Exhibit 3.2 to Form 8-K/A dated September 18,
2003.
/3/ Incorporated by reference to Exhibit 4 to Form dated October 8, 1996.
/4/ Incorporated by reference to Exhibit 4.1 to Form 10-Q for quarter ended
September 30, 1997.
/5/ Incorporated by reference to Exhibit 4.3 to Form 10-K for the year ended
September 30, 1997.
/6/ Incorporated by reference to Exhibit 4.1 to Form 8-K dated September 17,
2003.
/7/ Incorporated by reference to Exhibit 4.2 to Form 8-K dated July 31, 2000.
/8/ Incorporated by reference to Exhibit 4.2 to Form 8-K dated September 17,
2003.
/9/ Incorporated by reference to Exhibit 4.3 to Form 8-K dated September 17,
2003.
/10/ Incorporated by reference to Exhibit 10.2 to Form 8-K/A dated September
18, 2003.
/11/ 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.
/12/ 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.
/13/ Incorporated by reference from Form S-8, Registration Statement No.
333-35299.
/14/ Incorporated by reference from Form S-8, Registration Statement No.
333-52302
/15/ 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.
/16/ Incorporated by reference to Exhibit 10.1 to Form 8-K dated September 17,
2003.
/17/ Incorporated by reference from Exhibit 10.2 to Form 8-K dated July 31,
2000.
/18/ Incorporated by reference to Exhibit 10.1 to Form 8-K/A dated September
18, 2003.
70
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/ HOWARD S. MODLIN Chairman of the Board and January 13, 2004
- -------------------- Chief Executive Officer
HOWARD S. MODLIN
/s/ WILLIAM G. HENRY Vice President, Finance January 13, 2004
- -------------------- Chief Financial Officer
WILLIAM G. HENRY
/s/ LEE M. PASCHALL Director January 13, 2004
- --------------------
LEE M. PASCHALL
/s/ JOHN L. SEGALL Director January 13, 2004
- ------------------
JOHN L. SEGALL
- ------------------
ALETTA RICHARDS Director January 13, 2004
71
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Additions Deductions Balance at
Beginning Charged to from End
of Year Income Reserves/2/ of Year
Inventory Reserves/1/:
Year ended September 30, 2003 $ 6,199 $ - $ 2,022 $ 4,177
Year ended September 30, 2002 6,223 - 24 6,199
Year ended September 30, 2001 22,007 2,710 18,494 6,223
Allowance for Doubtful Accounts/1/:
Year ended September 30, 2003 $ 821 $ 334 $ 641 $ 514
Year ended September 30, 2002 770 738 687 821
Year ended September 30, 2001 2,037 - 1,267 770
Allowance for Notes Receivable/1/:
Year ended September 30, 2003 $ 15,132 $ - $ - $ 15,132
Year ended September 30, 2002 15,132 - - 15,132
Year ended September 30, 2001 - 15,132 15,132
- ----------
/1/ Deducted from related asset in the balance sheet.
/2/ Deductions from reserves are due to:
(a) Inventory Reserves: Write-down and disposal of obsolete inventory
and, in addition, the charge off inventory related to businesses
sold in fiscal 2001.
(b) Allowance for Doubtful Accounts: write-off of uncollectable accounts
receivable.
72