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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 30,68