Notes
to Consolidated Financial
Statements
1. Liquidity
and Basis of
Presentation
On
November 2, 2001 General DataComm Industries, Inc. and its domestic subsidiaries
(the “Company”) filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. The Company continued in possession of its properties and
the management of its business as debtors in possession. The Company
emerged from Chapter 11 effective on September 15, 2003 pursuant to a
court-approved plan of reorganization. Under this plan, the Company
was to pay all creditors 100% of their allowed claims based upon a five year
business plan. Debentures were issued to unsecured
creditors as part of the plan of reorganization. However, the Company
has not met its business plan objectives since emerging from Chapter 11 and,
therefore, there can be no assurance that the Debentures will be
paid.
The
Company’s operating results are subject to fluctuations due to a number of
factors resulting in more variability and less predictability in the Company’s
sales and operating results. Such factors include (but are not
limited to): dependence on a small number of customers, short
delivery times, dependence on subcontract manufacturers, low order backlog,
ability to timely develop new products and market acceptance of new
products. Because operating results can fluctuate significantly the
Company may not be able to generate positive cash flow from operations in the
future. Should the need arise, it may become necessary to borrow
additional funds or otherwise raise additional capital. However, the
Company has no current ability to borrow additional funds. It must,
therefore, fund operations from cash balances and cash generated from operating
activities. In order to meet its obligations the Company must achieve
revenue growth while at the same time limiting investments in inventories and
capital assets.
At
September 30, 2006, the Company was in default under its senior loan agreement
as a result of not making certain required principal payments on its Term
Obligation. Accordingly, due to cross-default provisions, all long
term debt, including Debentures along with accrued interest thereon were
classified as current liabilities at such date. Such default was
waived by the senior lenders in January 2007 as part of a loan
amendment. Furthermore, on July 30, 2007, the Company obtained
mortgage financing in the amount of $4,500,000 which was used to refinance
and
replace the Term Obligation and PIK Obligation owed to the senior
lender. Such mortgage financing requires payments of interest only
until it matures on July 31, 2009 and contains no financial covenants (see
Note
3).
At
September 30, 2007 the Company had a stockholders’ deficit of approximately
$31.7 million and a working capital deficit of approximately $2.8
million. As a result of the refinancing and replacement of the
Company’s senior indebtedness, the Debentures in the principal amount of
$19,453,000 along with accrued interest thereon ($7,879,000) were classified
as
long-term liabilities in the accompanying balance sheet at September 30,
2007. However, the
Debentures and accrued
interest mature on October 1, 2008. While a
Subordinated Security Agreement signed by the Indenture Trustee on behalf of
the
Debenture holders provides that no payments may be made to Debenture holders
while senior secured debt is outstanding, in the absence of such payment
restrictions the Company does not presently have the ability to repay the
Debentures. A failure to pay the Debentures when due and payable
could result in an Event of Default being declared under the Indenture governing
the Debentures.
The
conditions described above raise substantial doubt about the Company’s ability
to continue as a going concern. Management has responded to its
liquidity and cash flow risks by first amending and later replacing its senior
debt. In addition, management has implemented operational changes:
restructuring the sales force, increasing factory shutdown time, constraining
expenses, and reducing and reallocating the employee workforce. The
Company also continues to pursue the sale or lease of its headquarters land
and
building in Naugatuck, CT.
While
the
Company is aggressively pursuing opportunities and corrective actions, there
can
be no assurance that the Company will be successful in its efforts to generate
sufficient cash from operations or asset sales, obtain additional funding
sources or successfully renegotiate the terms of the Debentures. The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern and do not include any adjustments
that may result from the outcome of this uncertainty.
2. Description
of
Business and Summary of Significant Accounting Policies
Description
of
Business
The
Company is a provider of networking
and telecommunications products and services to domestic and international
customers. The Company designs, assembles, markets, installs and maintains
products and services that enable telecommunications common carriers,
corporations and governments to build, upgrade and better manage their global
telecommunications networks.
Principles
of
Consolidation
The
consolidated financial statements include the accounts of General DataComm
Industries, Inc. and its majority-owned subsidiary
companies. Intercompany accounts, transactions and profits have been
eliminated in consolidation.
Cash
and Cash
Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories
are stated at the lower of cost or market using the first-in, first-out method
(see Note 4).
Property,
Plant and
Equipment
Property,
plant and equipment are stated at cost and are depreciated or amortized using
the straight-line method over their estimated useful lives. The cost
of internally constructed assets (test fixtures) includes the cost of materials,
internal labor and overhead costs (see Note 5).
Revenue
Recognition
The
Company recognizes a sale when the product is shipped or thereafter and the
following four criteria are met: (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.
Service
revenue is recognized either when the service is performed or, in the case
of
maintenance contracts, on a straight-line basis over the term of the
contract.
Promotion
and Advertising
Costs
Promotion
and advertising costs are charged to selling, general and administrative expense
in the period in which they are incurred. Promotion and advertising costs
amounted to $292,000 and $299,000 in fiscal years 2007 and 2006,
respectively.
Research
and Product
Development
Research
and product development is expensed in the period incurred.
Income
Taxes
The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes,” which requires the
use of the asset and liability method of accounting for deferred income taxes
(see Note 6).
The
provision for income taxes includes federal, foreign, state and local income
taxes currently payable and deferred taxes resulting from temporary differences
between the financial statement and tax bases of assets and
liabilities. Valuation allowances are recorded to reduce deferred tax
assets when it is more likely than not that a tax benefit will not be
realized.
Foreign
Currency
Transactions
denominated in foreign currencies are recorded on a monthly basis using the
average of the prior and current month end exchange rates. Assets and
liabilities denominated in foreign currencies are translated at the balance
sheet dates using the closing rates of exchange between those foreign currencies
and the U.S. dollar with any transaction gains or losses reported in
income. Adjustments that result from translating financial statements
of the Company’s subsidiary in France are recorded in accumulated other
comprehensive income or loss.
Earnings
(Loss) Per
Share
Basic
and
diluted earnings (loss) per share are computed in accordance with Statement
of
Financial Accounting Standards No. 128, “Earnings Per Share” (see Note
10).
Concentrations
of Credit
Risk
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist principally of cash instruments and accounts
receivable. The Company places its cash investments with high-quality
U.S. financial institutions. Approximately $808,000, or 41%, of
accounts receivable at September 30, 2007 ($742,000, or 30%, at September 30,
2006) were concentrated in telephone companies or distributors to such companies
primarily in North America and $894,000, or 45%, ($968,000, or 39%, at September
30, 2006) were concentrated in large integrators to government agencies in
North
America and Europe. Two integrators represented 15% and 14% of
accounts receivable at September 30, 2007 and one integrator represented 15%
of
accounts receivable at September 30, 2006. These receivables are not
collateralized due to the Company’s assessment of limited risk and favorable
history of payments from such customers.
Post-Retirement
and Post-Employment
Benefits
The
Company does not offer post-retirement and post-employment benefits to its
current employees other than federally required programs which are fully funded
by such employees.
The
Company does provide health and long-term care benefits to five former long-term
executives of the Company who retired in November 2001. The Company
recorded the liability for such benefits based on actuary-provided life
expectancies, known fixed annual costs and estimated variable costs and adjusts
the liability based on actual experience. The liability for such
expenses was $571,000 and $588,000 at September 30, 2007 and 2006,
respectively.
Accounting
for Stock-Based
Compensation
At
September 30, 2007, the Company has stock-based employee compensation plans
in
effect, which are described more fully in Note 9. Prior to October 1,
2006, the Company accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related Interpretations, as permitted by Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation. No stock-based employee compensation cost was
recognized in the Statement of Operations for the year ended September 30,
2006,
as all options granted under those plans had an exercise price equal to or
greater than the market value of the underlying common stock on the date of
grant.
Effective
October 1, 2006, the Company adopted the fair value recognition provisions
of
Statement of Financial Accounting Standards No. 123 (R), “Accounting for
Stock-Based Compensation” (“SFAS No. 123R”) using the modified prospective
transition method. Under that transition method, compensation cost
recognized in fiscal 2007 includes: (a) compensation cost for all
share-based payments (including stock options) granted prior to, but not yet
vested as of October 1, 2006, based on the grant date fair value estimated
in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all share-based payments granted subsequent to October 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of
SFAS No. 123R. Results for prior periods have not been
restated. Compensation cost is recorded over the stock options’
vesting periods. As a result of adopting SFAS No. 123R, compensation
cost recognized in the year ended September 30, 2007 was $269,000 ($0.06 per
share). The following table reflects the effect on net income (loss)
and per share data, if the fair value based method had been applied to all
outstanding and unvested stock options for the year ended September 30,
2006:
|
|
|
2006
|
|
|
|
|
|
|
|
Net
loss, as reported
|
|
$
|
(1,325
|
)
|
|
Add: stock-based
employee compensation expenses included in reported net
loss
|
|
|
|
|
|
|
|
|
|
|
|
Deduct: stock-based
employee compensation expense determined under fair value based method
for
all awards
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
Proforma
net loss
|
|
|
(1,637
|
)
|
|
Dividends
applicable to preferred stock
|
|
|
(1,760
|
)
|
|
Proforma
net loss applicable to common and Class B stock
|
|
$
|
(3,397
|
)
|
|
Proforma
net loss per share:
|
|
|
|
|
|
Basic
and diluted – common stock
|
|
$
|
(0.83
|
)
|
|
Basic
and diluted – Class B stock
|
|
$
|
(0.83
|
)
|
The
Black-Scholes method was used to compute the proforma amounts presented above,
utilizing the following weighted average assumptions for stock-based
compensation granted:
|
Risk-free
interest rate
|
|
|
4.40
|
|
|
Volatility
(%)
|
|
|
322
|
%
|
|
Expected
Life (in years)
|
|
|
5.00
|
|
|
Dividend
yield rate
|
|
Nil
|
|
Comprehensive
Income
The
Company has adopted Statement of Financial Accounting Standards No. 130,
“Reporting Comprehensive Income” (“SFAS 130”) which establishes standards for
reporting comprehensive income and its components in a Company’s financial
statements. The Company reported foreign currency translation gain as
other comprehensive income as defined in SFAS 130 in the fiscal years ended
September 30, 2007 and 2006.
“Accumulated
Other Comprehensive Income” is comprised solely of foreign currency translation
adjustments. There is no income tax expense or benefit associated
with such adjustments.
Operating
Segments
The
Company has adopted Statement of Financial Accounting Standards No. 131,
“Disclosures About Segments of an Enterprise and Related Information” (“SFAS
131”), which utilizes a “management” approach to segment reporting. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company’s reportable segments. For the years ended
September 30, 2007 and 2006, the Company operated in one reportable
segment. SFAS 131 also requires enterprise-wide disclosures
about products and services, geographic areas, and major customers (see Note
8).
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods presented. Actual results could differ from those
estimates. For example, the markets for the Company’s products are characterized
by intense competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of the Company’s
inventory and certain other assets.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty
in
Income Taxes,”
which clarifies the accounting for uncertainty in income
taxes recognized in the financial statements in accordance with FASB Statement
No. 109,
“ Accounting for
Income Taxes”
.
FIN 48 provides
guidance
on the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting
in
interim periods, disclosures, and transition. FIN 48 is effective for
fiscal years beginning after December 15, 2006. The Company is
currently evaluating the impact of this standard on the consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 157,
“Fair Value
Measurements”
. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair
value. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of
this standard on the consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 159,
“The Fair
Value Option for Financial Assets and Financial
Liabilities”
, SFAS No. 159 provides an option to report
selected financial assets and financial liabilities using fair
value. The standard establishes required presentation and disclosures
to facilitate comparisons with companies that use different measurements for
similar assets and liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007, with early adoption allowed only if
SFAS No. 157 is also adopted. The Company is currently evaluating the
impact of this standard on the consolidated financial statements.
3. Long-Term
Debt
Long-term
debt consists of (in thousands):
|
September
30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Term
Obligation
|
|
|
-
|
|
|
$
|
2,602
|
|
|
PIK
Obligation
|
|
|
-
|
|
|
|
2,500
|
|
|
Notes
Payable to Related Parties, net of debt discount of $19 in 2007 and
$54 in
2006
|
|
$
|
2,332
|
|
|
|
2,026
|
|
|
Note
Payable
|
|
|
23
|
|
|
|
-
|
|
|
Debentures
due October 1, 2008
|
|
|
19,453
|
|
|
|
21,923
|
|
|
Real
Estate Mortgage due July 31, 2009
|
|
|
4,500
|
|
|
|
-
|
|
|
|
|
|
26,308
|
|
|
|
29,051
|
|
|
Less
current portion
|
|
|
2,355
|
|
|
|
29,051
|
|
|
|
|
$
|
23,953
|
|
|
$
|
0
|
|
At
September 30, 2006, the Company was in default under its senior loan agreement
as a result of not making required principal payments on its Term
Obligation. Accordingly, due to cross-default provisions, all
long-term debt along with accrued interest ($7,525,245) thereon was classified
as current liabilities at such date. Such default was waived by the
senior lenders in January 2007 as part of a loan amendment (see Note
13). Furthermore, on July 30, 2007, GDC Naugatuck, Inc., a subsidiary
of General DataComm Industries, Inc., obtained mortgage financing on more
favorable terms (see below) in the amount of $4,500,000 which was used to
refinance and replace the Term Obligation and PIK Obligation owed to the senior
lender. As a result of the refinancing and replacement of the
Company’s senior indebtedness, the Debentures due October 1, 2008 and accrued
interest thereon of $7,879,000 were classified as long-term liabilities in
the
accompanying balance sheet at September 30, 2007.
The
Company believes that the values of the Note Payable and Mortgage Payable
approximate their respective fair values due to the recent placement of such
debt. Also, Notes Payable to Related Parties in the amounts of $2.3 million
and
$2.0 million at September 30, 2007 and 2006, respectively, which were issued
as
replacement debt for the senior secured debt on similar terms and conditions,
are considered to approximate fair value. However, the estimated fair
value of Debentures, with a face amount totaling $19.4 million at September
30,
2007 and $21.9 million at September 30, 2006, is considered to be substantially
lower than carrying value due to the Debentures being subordinated to both
the
senior secured and related party debt. However, due to the extremely
limited market (if any) for the Debentures, the Company is unable to determine
the current fair value.
Long-term
debt matures in amounts totaling $2,355,000 in fiscal 2008, and $23,953,000
in
fiscal 2009, of which $19,453,000 is due October 1, 2008, and $4,500,000 is
due
July 31, 2009.
Notes
Payable to Related
Parties
On
December 9, 2005, the Company entered into amendments of its loan arrangements
with Howard S. Modlin, Chairman of the Board and Chief Executive Officer, and
John Segall, a Director. Pursuant to such amendments, an aggregate of
$1,600,000 plus accrued interest thereon in secured loans from such directors
maturing between September 29, 2005 and September 29, 2006 were
extended. Such amendments generally provided that 50% of each such
amended and restated note was to be payable one and two years from the original
due dates. The conversion features of four notes held by Mr. Modlin,
which were convertible into an aggregate of 1,103,897 shares of common stock,
and three notes held by Mr. Segall, which were convertible into an aggregate
of
508,659 shares of common stock, were eliminated, and unpaid accrued interest
aggregating $230,945, was added to the amended and restated
notes. Interest accrues at the rate of 10% per annum from December 9,
2005 and the first interest payment on the amended and restated notes was due
May 1, 2006 (payment of interest on the amended loans has been deferred
indefinitely in agreement with Mr. Segall and Mr. Modlin). In
connection with the transactions, Mr. Modlin and Mr. Segall each received seven
year warrants expiring December 8, 2012 to purchase common stock at $0.575
per
share covering 2,084,204 shares and 1,100,047 shares, respectively. The
transactions were unanimously approved by the Company’s Board of Directors on
December 9, 2005. In connection with the restructuring of the loans,
the Company recorded a non-cash loss on extinguishment of debt of $389,000
in
fiscal 2006 representing the value of the warrants issued. Such
warrant value was determined based upon an appraisal by an outside
consultant.
On
February 17, 2006, the Company borrowed $250,000 from Mr. Modlin in the form
of
a demand note which bore interest at the rate of 10% per annum. On
April 20, 2006, the Corporation entered into an amendment of its loan
arrangement with Mr. Modlin whereby the $250,000 demand loan made by Mr. Modlin
on February 17, 2006 was amended and restated into a term note, 50% of which
was
payable February 17, 2007 (such payment was deferred indefinitely in agreement
with Mr. Modlin) and 50% of which is payable February 17, 2008. Mr.
Modlin received a seven year warrant expiring April 19, 2013 to purchase 909,000
shares of common stock at $0.275 per share. The warrant was valued at
$69,000 based upon an appraisal by an outside consultant and was recorded as
debt discount and is being amortized as additional interest expense over the
term of the debt.
In
the
quarter ended March 31, 2007, Mr. Modlin made demand loans to the Company
totaling $270,000.
No
principal or interest payments required under the terms of any of the above
loans have been made to Mr. Modlin or Mr. Segall under agreement with such
individuals. All loans made by Mr. Modlin and Mr. Segall are secured
by all the assets of the Company.
Debentures
Debentures
together with accrued interest mature on October 1, 2008. The
Debentures were issued to unsecured creditors in 2003 as part of the Company’s
Plan of Reorganization. No principal is payable on the Debentures
until the senior secured lenders’ claims are paid in full and no principal has
been paid at September 30, 2007. Interest accrues at the annual rate
of 10%.
Real
Estate
Mortgage
The
real
estate mortgage entered into July 30, 2007 in the amount of $4,500,000 is
secured by the Company’s premises in Naugatuck, CT. The mortgage
requires monthly payments of interest at the rate of 30-day LIBOR plus 6% (such
interest was 11.13% at September 30, 2007). No principal payments are
required until the full amount of the mortgage matures on July 30,
2009. The mortgage contains no financial covenants.
4. Inventories
Inventories
consist of (in thousands):
|
September
30,
|
|
2007
|
|
|
2006
|
|
|
Raw
materials
|
|
$
|
665
|
|
|
$
|
637
|
|
|
Work-in-process
|
|
|
1,020
|
|
|
|
945
|
|
|
Finished
goods
|
|
|
1,081
|
|
|
|
972
|
|
|
|
|
$
|
2,766
|
|
|
$
|
2,554
|
|
Inventories
are stated at the lower of cost or market using the first-in-first out
method. Reserves in the amount of $2,883,000 and $3,442,000 were
recorded at September 30, 2007 and 2006, respectively, for excess and obsolete
inventories.
5. Property,
Plant and
Equipment
Property,
plant and equipment consists of (in thousands):
|
September
30,
|
|
2007
|
|
|
2006
|
|
|
Estimated
Useful Life
|
|
|
Land
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
—
|
|
|
Buildings
and improvements
|
|
|
7,115
|
|
|
|
7,115
|
|
|
10
to 30 years
|
|
|
Test
equipment, fixtures and field spares
|
|
|
3,595
|
|
|
|
3,923
|
|
|
3
to 10 years
|
|
|
Other
equipment
|
|
|
4,349
|
|
|
|
5,352
|
|
|
2
to 10 years
|
|
|
|
|
|
16,059
|
|
|
|
17,390
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
12,372
|
|
|
|
13,417
|
|
|
|
|
|
|
|
|
$
|
3,687
|
|
|
$
|
3,973
|
|
|
|
|
|
Depreciation
expense amounted to $308,000 and $327,000, in fiscal 2007 and 2006,
respectively.
The
Company’s property in Naugatuck, Connecticut, which is the location of the
Company’s operations, has a net book value of $3,579,000 and $3,759,000 at
September 30, 2007 and 2006, respectively. Although the Company has
been actively trying to sell the building since 2001, due to its inability
to do
so, such building is not reflected as an asset held for sale in the accompanying
balance sheets. In addition such property is collateral for the
indebtedness under the Company’s Mortgage Note, which has a first lien, as well
as Notes Payable to Related Parties and Debentures.
6. Income
Taxes
Income
(loss) before income taxes in the years ended September 30, 2007 and 2006
consists primarily of domestic income (loss) generated in the United
States. The income tax benefits in fiscal 2007 and 2006 reflect a
benefit of $67,000 and $1,352,000 respectively, primarily due to foreign tax
liabilities deemed no longer required due to favorable resolution of claims
and
to expiration of time in which to make claims by the taxing authorities, offset
in part by current state tax provisions of $6,000 for fiscal 2007 and $12,000
for fiscal 2006.
The
following reconciles the U.S. statutory income tax rate to the Company’s
effective rate:
|
Year
ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
|
Reduction
of accruals for prior years’ taxes, principally foreign
|
|
|
(1.8
|
)
|
|
|
(50.7
|
)
|
|
Change
in valuation allowance
|
|
|
(34.0
|
)
|
|
|
34.0
|
|
|
State
income tax effects
|
|
|
0.1
|
|
|
|
0.4
|
|
|
Effective
income tax rate
|
|
|
(1.7
|
)%
|
|
|
(50.3
|
)%
|
For
regular income tax reporting purposes at September 30, 2007, domestic federal
tax credit and net operating loss carryforwards amounted to approximately $11.9
million and $214.3 million, respectively. Domestic federal tax credit
and net operating loss carryforwards expire in various amounts between fiscal
2008 and 2026. Domestic state loss carryforwards of approximately $53.8 million
expire in various amounts between fiscal 2008 and 2027, but most expire by
2022. Utilization of the net operating loss carryforwards may be
subject to limitation due to the changes in ownership provisions under section
382 of the Internal Revenue Code and similar state provisions. The
Company’s subsidiary in France has approximately $119,000 in net operating loss
carryforwards.
The
tax
effects of the significant temporary differences and carryforwards comprising
the deferred tax assets and liabilities at September 30, 2007 and 2006 were
as
follows (in thousands):
|
|
|
2007
|
|
|
2006
|
|
|
Deferred
Tax
Assets
|
|
|
|
|
|
|
|
Bad
debt reserve
|
|
$
|
100
|
|
|
$
|
144
|
|
|
Inventory
reserve
|
|
|
7,388
|
|
|
|
8,700
|
|
|
Other
accruals
|
|
|
568
|
|
|
|
716
|
|
|
Loss
carryforward
|
|
|
77,168
|
|
|
|
77,026
|
|
|
Tax
credits
|
|
|
11,991
|
|
|
|
11,872
|
|
|
|
|
|
97,215
|
|
|
|
98,458
|
|
|
Valuation
allowance
|
|
|
(97,215
|
)
|
|
|
(98,458
|
)
|
|
Net
deferred tax assets
|
|
|
0
|
|
|
|
0
|
|
The
deferred tax asset related to the inventory reserve includes inventory written
off for book purposes which is not yet deductible for tax reporting
purposes.
Statement
of Financial Accounting Standard No. 109, “Accounting For Income Taxes,”
requires a valuation allowance against deferred tax assets if, based on
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company believes that
uncertainty exists with respect to the future realization of deferred tax assets
and, as a result, carries a valuation allowance for such items. The valuation
allowances, disclosed in the deferred tax summary above, decreased by $1,243,000
and $293,000 in fiscal 2007 and fiscal 2006, respectively.
7. Capital
Stock
Common
Stock and Class B
Stock
In
addition to regular common stock, the Company’s capital structure includes Class
B stock which, under certain circumstances, has greater voting power in the
election of directors. However, common stock is entitled to cash
dividends, if and when paid, 11.11% higher per share than Class B
stock. The Company has never declared or paid cash dividends on its
common stock. So long as there are arrearages in payment of dividends
on the Company’s 9% Preferred Stock, the Company is prohibited from paying cash
dividends on its common stock and Class B stock. Class B stock has
limited transferability and is convertible into common stock at any time on
a
share-for-share basis. There were 647,715 and 653,947 shares of Class
B stock outstanding at September 30, 2007 and 2006, respectively.
9%
Preferred
Stock
At
September 30, 2007 and 2006, there were 781,996 shares of the Company’s 9%
Cumulative Convertible Exchangeable Preferred Stock (“9% Preferred Stock”)
outstanding. The 9% Preferred Stock accrues dividends at a rate of 9%
per annum, cumulative from the date of issuance and payable quarterly in
arrears. Dividends were paid through June 30, 2000; dividends in arrears, which
are not accrued for financial reporting purposes since they have not been
declared by the Company, amounted to $12,756,310 at September 30, 2007 ($14.07
per share) and are included in the liquidation value disclosed in the
accompanying fiscal 2007 balance sheet. Such arrearages entitle the
holders of the 9% Preferred Stock to elect two directors until all arrearages
are paid, but no such designation has been made or requested. The 9%
Preferred Stock can be converted into common stock at $136.50 per share, or
the
equivalent of .18315 shares of common stock for each share of 9% Preferred
Stock.
8.
Segment and Geographical
Information
For
the
years ended September 30, 2007 and 2006, the Company operated in one reportable
segment.
Consolidated
revenue and long-lived asset information by geographic area is as follows (in
thousands):
|
|
|
Revenue
|
|
|
Long-Lived
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
7,175
|
|
|
$
|
10,056
|
|
|
$
|
3,616
|
|
|
$
|
3,908
|
|
|
Foreign
|
|
|
6,965
|
|
|
|
4,048
|
|
|
|
71
|
|
|
|
65
|
|
|
Total
|
|
$
|
14,140
|
|
|
$
|
14,104
|
|
|
$
|
3,687
|
|
|
$
|
3,973
|
|
Foreign
revenue is determined based on the country in which the revenue originated
(where the customer placing the order is domiciled).
The
percentage of total sales for customers accounting for more than 10% of the
Company’s sales, in each case for the fiscal years ended September 30, 2007 and
2006, respectively, are: 30% and 3% for Thales Communications (France); 3%
and
10% for Bell Canada (Canada); 2% and 10% for GlobeComm Systems
(United States) and 7% and 10% for Burlington Northern Santa Fe Railroad (United
States).
9. Employee
Incentive
Plans
Stock
Awards, Grants and
Options
The
Company has adopted a 2003 Stock and Bonus Plan (“2003 Plan”) reserving 459,268
shares of Class B stock and 459,268 shares of common stock and a 2005 Stock
and
Bonus Plan (“2005 Plan”) reserving 2,400,000 shares of common
stock. No shares of Class B stock are authorized under the 2005
Plan. Officers and key employees may be granted incentive stock
options at an exercise price equal to or greater than the market price on the
date of grant and non-incentive stock options at an exercise price equal to,
greater than or less than the market price on the date of
grant. While individual options can be issued under various
provisions, most options, once granted, generally vest in increments of 20%
per
year over a five-year period and expire within ten years. At September 30,
2007
there were 775,926 options available for future issuance under the
plans.
On
November 22, 2005, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Company’s 2005 Plan to purchase 378,000 shares of
common stock at the quoted market price of $.45 per share, including grants
of
options for 30,000 shares to each of Lee M. Paschall, Aletta Richards and John
L. Segall, Directors, and George Best, then Vice President, Sales and Marketing,
William G. Henry, Vice President Finance and Administration and Principal
Finance Officer, and George Gray, Vice President, Operations and Chief
Technology Officer, and an aggregate of 187,750 of such options to all of its
employees other than its officers. The Committee also granted to
Howard S. Modlin, Chairman and Chief Executive Officer, a separate stock option
with terms substantially similar to the options granted under the 2005 Plan
to
purchase 551,121 shares at $.50 per share. The options vest in increments of
20%
a year over a five year period and expire ten years after grant. On
December 17, 2006, Mr. Lee M. Paschall, Director and Audit Committee Financial
Expert, died after a brief illness.
On
October 10, 2006, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Company’s 2005 Plan to purchase 363,400 shares of
Common Stock at the quoted market price of $.18 per share, including grants
of
30,000 Plan shares to each of Lee M. Paschall, Aletta Richards and John L.
Segall, Directors, William G. Henry, Vice President, Finance and Administration
and Principal Financial Officer and George Gray, Vice President, Operations
and
Chief Technology Officer, and an aggregate of 213,400 of such options to all
of
its employees other than its officers and directors. The committee
also granted to Howard S. Modlin, Chairman and Chief Executive Officer, a stock
option under the 2005 Plan to purchase 551,121 shares at $.20 a
share. All such options vest in increments of 20% a year over a five
year period and expire then years after grant.
See
Note
16 “Subsequent Events” for discussion of stock options granted after the
September 30, 2007 fiscal year end.
A
summary
of stock options outstanding under the Company’s stock plans as of September 30,
2007, and changes during the twelve months then ended, September 30, 2006 and
2007 is presented below:
|
|
|
Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (Yrs)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Options
outstanding, September 30, 2005
|
|
|
1,101,675
|
|
|
$
|
2.01
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
929,121
|
|
|
|
.48
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
(128,000
|
)
|
|
|
.01
|
|
|
|
|
|
|
|
|
Options
cancelled or expired
|
|
|
(120,570
|
)
|
|
|
3.35
|
|
|
|
|
|
|
|
|
Options
outstanding, September 30, 2006
|
|
|
1,782,226
|
|
|
$
|
1.26
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
914,521
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Options
cancelled or expired
|
|
|
(60,940
|
)
|
|
|
6.68
|
|
|
|
|
|
|
|
|
Options
outstanding, September 30, 2007
|
|
|
2,635,807
|
|
|
|
0.77
|
|
|
|
8.10
|
|
|
$
|
0
|
|
|
Vested
or expected to vest at September 30, 2007
|
|
|
2,396,693
|
|
|
|
0.71
|
|
|
|
8.09
|
|
|
|
0
|
|
|
Exercisable
at September 30, 2007
|
|
|
630,328
|
|
|
|
2.02
|
|
|
|
7.35
|
|
|
|
0
|
|
As
of
September 30, 2007, there was $285,780 of total unrecognized compensation cost
related to nonvested options which is expected to be recognized over a
weighted-average period of 1.65 years.
The
weighted-average grant-date fair value of options granted during the twelve
months ended September 30, 2007 was $0.19 per share, which was estimated using
the Black Scholes model and the following weighted average
assumptions:
|
Risk-free
interest rate (%)
|
|
|
4.54
|
%
|
|
Volatility
(%)
|
|
|
277
|
%
|
|
Expected
life (in years)
|
|
|
6.50
|
|
|
Dividend
yield rate
|
|
Nil
|
|
Expected
volatility is based on historical volatility in the Company’s stock price over
the expected life of the options. The risk-free interest rate is
based on the annual yield on the measurement date of a zero coupon U.S. Treasury
Bond, the maturity of which equals the options’ expected life. The
weighted average expected life of 6.50 years reflects the alternative simplified
method permitted by SEC Staff Accounting Bulletin No. 107, which defines the
expected life as the average of the contractual term of the options and the
weighted average vesting period for all option tranches. The dividend
yield assumption is based on the Company’s intent not to issue a
dividend.
Employee
Retirement Savings and
Deferred Profit Sharing Plan
Under
the
retirement savings provisions of the Company’s retirement plan established under
Section 401(k) of the Internal Revenue Code, employees are generally eligible
to
contribute to the plan after three months of continuous service in amounts
determined by the plan. The Company does not make matching
contributions and, therefore, no amounts have been charged to
expense.
The
deferred profit sharing portion of the plan provides that the Company may make
contributions to the plan out of profits at the discretion of the
Company. There were no such contributions in the two fiscal years
ended September 30, 2007.
10. Earnings
(Loss) Per
Share
Basic
earnings (loss) per share is computed by allocating net income (loss) available
to common stockholders to common and Class B shares based on their contractual
participation rights to share in such net income as if all the income for the
year had been distributed. Such allocation reflects that common stock
is entitled to cash dividends, if and when paid, 11.11% higher per share than
Class B stock. The income (loss) allocated to each security is
divided by the respective weighted average number of common and Class B shares
outstanding during the period. Diluted earnings per share gives
effect to all potential dilutive common shares outstanding during the
period. In computing diluted earnings per share, the average price of
the Company’s common stock for the period is used in determining the number of
shares assumed to be purchased from exercise of stock options and
warrants. Dividends applicable to preferred stock represent
accumulating dividends that are not declared or accrued. The
following table sets forth the computation of basic and diluted earnings (loss)
applicable to common and Class B stock for the years ended September 30, 2007
and 2006 (in thousands, except shares and per share data):
|
|
|
Year
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Net
income (loss)
|
|
$
|
3,582
|
|
|
$
|
(1,325
|
)
|
|
Dividends
applicable to preferred stock
|
|
|
(1,760
|
)
|
|
|
(1,760
|
)
|
|
Net
income (loss) applicable to common and Class B stock
|
|
$
|
1,822
|
|
|
$
|
(3,085
|
)
|
|
Net
income (loss) applicable to common stock – basic
|
|
$
|
1,560
|
|
|
$
|
(2,589
|
)
|
|
Net
income (loss) applicable to Class B stock – basic
|
|
$
|
262
|
|
|
$
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September
30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Common
Stock
|
|
|
Class
B
Stock
|
|
|
Numerator
for basic earnings per share - net income (loss)
|
|
|
1,560
|
|
|
|
(2,589
|
)
|
|
|
262
|
|
|
|
(496
|
)
|
|
Reallocation
of net income for potential dilutive common shares
|
|
|
262
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Numerator
for diluted earnings per share - net income (loss)
|
|
|
1,822
|
|
|
|
(2,589
|
)
|
|
|
262
|
|
|
|
(496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share - weighted average outstanding
shares
|
|
|
3,473,271
|
|
|
|
3,416,156
|
|
|
|
648,817
|
|
|
|
653,947
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
B stock
|
|
|
648,817
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
Denominator
for diluted earnings per share
|
|
|
4,122,088
|
|
|
|
3,416,156
|
|
|
|
648,817
|
|
|
|
653,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings (loss) per share
|
|
|
0.45
|
|
|
|
(0.76
|
)
|
|
|
0.40
|
|
|
|
(0.76
|
)
|
|
Diluted earnings
(loss) per share
|
|
$
|
0.44
|
|
|
$
|
(0.76
|
)
|
|
$
|
0.40
|
|
|
$
|
(0.76
|
)
|
In
fiscal
2007 and 2006, no effect has been given to certain outstanding options and
warrants, convertible securities and contingently issuable shares in computing
diluted income (loss) per common share as their effect would be
antidilutive. Such share amounts which could potentially dilute basic
earnings per share are as follows:
|
|
|
No.
of Shares
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Stock
warrants
|
|
|
4,093,251
|
|
|
|
4,093,251
|
|
|
Stock
options
|
|
|
2,635,807
|
|
|
|
1,782,226
|
|
|
Convertible
preferred stock
|
|
|
143,223
|
|
|
|
143,314
|
|
|
Contingently
issuable shares*
|
|
|
-
|
|
|
|
2,155,994
|
|
|
Total
|
|
|
6,872,281
|
|
|
|
8,174,785
|
|
* Common
stock contingently issuable to the Company’s senior secured lenders in the event
of default or if certain payment terms are not met were excluded from the
computation of earnings per share because the contingency defined in the loan
agreement had not taken place. On July 30, 2007, GDC Naugatuck, Inc.,
a subsidiary of General DataComm Industries, Inc., obtained mortgage financing
which was used to refinance and replace the Term obligation and PIK obligation
owed to the senior lender (see Note 3), thereby eliminating the contingently
issuable shares.
11. Related
Party
Transactions
Mr.
Howard Modlin, Secretary and a Director of the Company since 1969 and Chairman
of the Board of Directors of the Company since November 2001 and currently
Chairman, President and Chief Executive Officer, is also President of the law
firm of Weisman Celler Spett & Modlin, P.C. (“WCSM”) to whom the Company was
indebted for legal services of $2,179,000 for work performed prior to the
Company’s bankruptcy filing in November 2001 and in settlement for which the
Company issued subordinated debentures. The bankruptcy court also
approved $294,000 for work performed by WCSM while the Company operated in
bankruptcy. Furthermore, the Company was indebted to Mr. Modlin for
fees for Company director meetings for which he received subordinated debentures
in the total amount of $16,400. Thereafter, WCSM agreed to work on a
specific litigation matter on a contingency basis (see Note 13, “Recovery of
Lease Receivable and Related Party Transaction”). WCSM has
outstanding amounts owed totaling $1,047,000 for work performed for the Company
between September 15, 2003 and September 30, 2007.
See
Note
3 regarding loans made to the Company by Messrs. Howard Modlin and John L.
Segall, and Note 16 regarding stock options granted on October 11, 2007 to
directors and other employees.
12. Other
Current
Liabilities and Other Long-Term Liabilities
|
Other
current liabilities are comprised of the following (in
thousands):
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Liabilities
for foreign tax obligations
|
|
$
|
433
|
|
|
$
|
510
|
|
|
Accrued
professional fees (unbilled)
|
|
|
461
|
|
|
|
967
|
|
|
Accrued
post retirement benefits
|
|
|
70
|
|
|
|
528
|
|
|
Accrued
property taxes
|
|
|
241
|
|
|
|
728
|
|
|
Deferred
income
|
|
|
527
|
|
|
|
668
|
|
|
Priority
tax claims (short-term portion)
|
|
|
428
|
|
|
|
501
|
|
|
Other
|
|
|
891
|
|
|
|
798
|
|
|
|
|
$
|
3,051
|
|
|
$
|
4,700
|
|
Other
long-term liabilities at September 2007 and 2006 in the amounts of $722,000
and
$489,000, respectively, consist of priority tax claims which are being paid
in
annual installments over a six year period which began September 2003, in
accordance with the Company’s reorganization plan and emergence from bankruptcy
and $501,000 of accrued post retirement benefits at September 30,
2007.
13. Other
Income,
Net
Other
income, net is comprised of the following (in thousands):
|
Year
ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Gain
on restructuring of debt
|
|
$
|
4,062
|
|
|
$
|
-
|
|
|
Gain
on forgiveness of debt
|
|
|
1,500
|
|
|
|
-
|
|
|
Loss
on extinguishment of debt (see Note 3)
|
|
|
|
|
|
|
(389
|
)
|
|
Gain
on sale of subsidiary
|
|
|
|
|
|
|
1,074
|
|
|
Gain
on liquidation of subsidiary
|
|
|
|
|
|
|
575
|
|
|
Recovery
of lease receivable, net
|
|
|
|
|
|
|
425
|
|
|
Other,
net
|
|
|
319
|
|
|
|
201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,881
|
|
|
$
|
1,886
|
|
Gain
on Restructuring of
Debt
On
January 17, 2007, pursuant to an amendment to the senior loan agreement (“Loan
Agreement”), the Company and its senior secured lender, Ableco Finance LLC
(“Ableco”) agreed to the following changes:
|
|
(a)
|
to
reduce the principal amortization of the Term Obligation (and thereafter,
the PIK Obligation) to $100,000 a
month;
|
|
|
(b)
|
to
reduce and fix the outstanding amount of the PIK Obligation, including
principal and interest, at $3,000,000 as of January 16,
2007;
|
|
|
(c)
|
to
provide for a further reduction of the PIK Obligation by 50%, or
$1,500,000, if both the Term Obligation and $1,500,000 of the PIK
Obligation are repaid by December 31,
2007;
|
|
|
(d)
|
to
extend the maturity date of the Loan Agreement to December 31,
2008;
|
|
|
(e)
|
to
eliminate the minimum EBITDA (Earnings Before Interest, Taxes,
Depreciation and Amortization) financial
covenant;
|
|
|
(f)
|
to
waive any prior defaults related to required loan amortization payments
and to satisfying the minimum EBITDA financial
covenant;
|
|
|
(g)
|
to
provide for certain affiliates of Ableco to sell
Debentures with a face value approximating $2,471,000 together
with accrued interest of $824,694 to the Company for consideration
of
$1.00.
|
As
a
result of the Debenture purchase and the adjustment to the PIK Obligation,
the
Company recorded a gain on restructuring of debt in the amount of $4,062,000
in
the quarter ended March 31, 2007.
Gain
on Forgiveness of
Debt
As
described in Note 3, the proceeds of a mortgage were used to refinance and
replace the remaining balance owed on the senior secured debt to Ableco in
the
amount of $4,379,252. Pursuant to an amendment to the senior loan
agreement with Ableco dated January 17, 2007 as described above, the Company’s
loan obligations were reduced by $1,500,000 resulting in a gain of $1,500,000
on
forgiveness of debt in the quarter and fiscal year ended September 30,
2007. Also as a result of the satisfaction of the Ableco
debt, Ableco surrendered contingent warrants to purchase the Company’s common
stock that had been provided in the senior loan agreement.
Gain
on Sale of
Subsidiary
The
Company received a favorable decision in its case brought in the Superior Court
in Montreal, Quebec, Canada against Miranda Technologies Inc. and Miranda Media
Networks Inc. relating to the sale of the Company’s Multi-Media Division in
2001. As a result of the decision the Company received payment in the
amount of $1,211,000 Canadian dollars (approximately $1,074,000 U.S. dollars),
net of withholding taxes, and recorded a corresponding net gain in the quarter
and fiscal year ended September 30, 2006. Pursuant to an agreement
with the Company’s senior lender, $500,000 was paid to such lender to reduce the
Term Obligation. Of the balance, $154,000 was paid to Mr. Howard
Modlin, the Company’s CEO, without interest, in repayment of a $24,000 demand
loan made on August 10, 2006 and in repayment of another $130,000 demand loan
made on September 20, 2006 because of unexpected delays in receiving the
proceeds of the judgment. The balance of the judgment was used for
working capital purposes.
Gain
on Liquidation of
Subsidiary
In
July
2002 General DataComm Limited (UK), an inactive subsidiary, was turned over
to
liquidators for the purpose of finalizing the accounts. At that time,
the subsidiary’s estimated outstanding net amount due general creditors was
$338,000 and such amount was reflected as a liability in the Company’s
consolidated financial statements. Furthermore, the liquidators had
thereafter advised that there had been recoveries which would be used to pay
off
a portion or all of the creditors’ claims and the Company reported that it
intended to record such recoveries when finalized.
On
September 28, 2006 the Company was advised that the liquidators had paid all
outstanding claims and liquidation expenses and had forwarded excess funds
to
the Company in payment of its remaining stockholder interest. As a
result, the Company recorded a gain, including the reversal of associated
liabilities, of $575,000 in quarter and fiscal year ended September 30,
2006.
Recovery
of Lease Receivable
and Related Party Transaction
On
February 28, 2006, the Company concluded litigation pursuant to a settlement
agreement relating to amounts owed to its subsidiary, DataComm Leasing
Corporation under an equipment lease agreement. The Company recorded
a recovery gain in the amount of $425,000, which was net of legal fees and
expenses totaling $275,000. The law firm of Weisman Celler Spett
& Modlin, P.C. in which Mr. Howard S. Modlin is President, earned fees in
the amount of $231,399 (of which $81,399 remains unpaid) on this settlement,
under a contingency agreement that had been previously approved by the Company’s
Board of Directors. Mr. Modlin is Chairman, President and Chief
Executive Officer of the Company.
14. Litigation
The
Company is involved in litigation in the ordinary course of
business. There are no pending items the outcome of which in the
Company’s opinion will have a material adverse effect on the Company’s financial
condition or results of operations.
15. Operating
Leases
At
September 30, 2007 the Company had non-cancelable leases for sales offices
with
annual rent of $70,631 which expire through January 12,
2010.
Aggregate
remaining rentals under these leases at September 30, 2007 amount to
approximately $131,883.
Net
rental expense for fiscal 2007 and 2006 was approximately $79,688 and $94,514
respectively.
16. Subsequent
Events
On
October 11, 2007, the Stock Option Committee of the Board of Directors granted
stock options pursuant to the Corporation’s 2005 Stock and Bonus Plan (“Plan”)
to purchase 312,900 shares of Common Stock at the quoted market price of $.25
per share, including grants of 30,000 shares to Aletta Richards and John L.
Segall, Directors, William G. Henry, Vice President, Finance and Administration
and Principal Financial Officer and George Gray, Vice President, Operations
and
Chief Technology Officer, and an aggregate of 192,900 of such options to all
of
its employees other than its officers and directors. The Committee
also granted to Howard S. Modlin, Chairman and Chief Executive Officer, a stock
option with terms similar to options granted under the Plan to purchase 551,121
shares at $.275 a share. All such options vest in increments of 20%
one, two, three, four and five years after grant and expire ten years after
grant.