SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended October 31, 1995
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-13284
V BAND CORPORATION
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(Exact name of registrant as specified in its charter)
New York 13-2990015
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
565 Taxter Road, Elmsford, New York 10523
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(Address and zip code of principal executive office)
(914) 789-5000
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(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
----------------------------
(Title of class)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 number of shares of Common Stock outstanding, as of December 31, 1995, was
5,323,170 shares.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates, as of December 31, 1995, was $6,153,947*.
* The Company has assumed that all of the outstanding shares were held by
non-affiliates except for the shares beneficially owned by any officer or
director of the Company who owns 1% or more of the Company's outstanding common
stock and persons known by the Company beneficially to own 10% or more of the
Company's outstanding common stock. The market value was based on the closing
price of these shares on December 31, 1995.
Documents incorporated by reference
- -----------------------------------
None.
<PAGE>
V BAND CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1995
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
<PAGE>
PART I
Item 1. Business
General
V Band Corporation, which commenced business operations in 1980, (together with
its subsidiaries, the "Company") is a leading supplier of instant access voice
communications systems. These systems include sophisticated communications
workstations, switching equipment, peripheral products, project management,
technical services and WAN solutions. V Band's products and services are used
worldwide by financial services organizations for the trading of stocks, bonds
and other financial instruments. Other applications include the mission critical
communications requirements of the electric power industry and emergency service
providers.
The largest share of the Company's sales derives from the sale of voice trading
systems to the financial services industry. Traders and dealers require instant
access communication to a large constituency, including peers, customers, and
market information providers. In contrast to conventional business telephone
systems, voice trading systems utilize more network access lines than telephone
handsets. Each workstation provides the user with immediate push button access
to as few as 30 and as many as 320 telephone lines along with a visual
indication of the current operational status of each line. The Company's voice
trading systems offer a distributed switching architecture (without a central
controller) and full software control for ease of moves, additions, and changes.
Other markets for these systems include government and military agencies,
emergency service E9-1-1 dispatch centers, power utilities, airlines, and
railroads.
Through a subsidiary, Licom, Inc. ("Licom"), the Company also designs,
manufactures and sells fiber optic-based voice and data multiplexers
specifically designed for the "mission critical" communications of the electric
power industry, such as inter-substation communications. Other markets for Licom
multiplexers include command and control applications for "right-of-way"
companies such as utilities and transportation, and emergency service
organizations.
In 1994, the Company completed the transformation of its distribution channels
into a direct sales and service network in the United States and United Kingdom
with the acquisition of certain assets of four unrelated companies distributing
and/or servicing the Company's products. The acquisitions of certain assets of
Windmill Communications, Inc. ("WCI") and Advantage Communications, Inc.,
("ACI") in the United States, provided the Company with a service presence and
increased its sales strengths in the New York City and Boston markets. The
acquisitions of Mercury Dealing Systems ("MDS"), formerly known as TR Financial
Communications plc, and certain assets of ACT Computer Support, Ltd., both in
the United Kingdom, increased the Company's sales and service presence in the
London market. These acquisitions advanced the Company's strategy to enhance
market share through the direct sale and full service of its products, which
includes project management, maintenance and other services in the United States
and United Kingdom. The Company utilizes a network of international distributors
to provide sales and service support in other global markets. In addition, the
Company further expanded its direct sales and service activities in the United
States by opening offices in Atlanta, Chicago and San Francisco.
The MDS operation, which was acquired in July 1994 and carries on business in
the United Kingdom under the name of V Band PLC, performs assembly, sales,
installation and maintenance services. For the fiscal year ended October 31,
1995, V Band PLC had sales of approximately $8.1 million. At October 31, 1995, V
Band PLC had 52 employees. See Note 4 -- Notes to Consolidated Financial
Statements for management's pro forma financial estimates of the impact of the
MDS acquisition on the Company's statements of operations, if the acquisition
had occurred on November 1, 1992.
During fiscal 1995, the Company executed an agreement with the Chicago Board of
Trade for the sale and installation of a major trading floor communications
system that includes approximately 1,700 custom-designed exchange floor
telephones and various peripheral equipment in transactions valued, in
aggregate, at over $9 million. The exchange phones employ the same advanced
technology base used in the Company's Power Deck product. The Company is
providing full installation services, including project management and cabling
for the 9,000 line communication system. Construction of the trading floor began
in the Company's second fiscal quarter of 1995 and the first group of phones
were installed and activated in July 1995. The project is expected to be
completed by the end of fiscal 1996. The Company recognizes revenue from this
contract under the percentage-of-completion method.
On October 11, 1995 the Company announced that it had engaged the services of
the New York investment banking firm of Benedetto, Gartland & Greene, Inc. to
assist the Company in the exploration of various strategic alternatives for
maximizing shareholder value.
Products and Markets
The Company introduced its first voice trading system in 1981. Since then, the
Company has developed, manufactured and distributed several new generations of
systems, increasing power, features and flexibility, while reducing repair cost
and space requirements.
In June 1990, the Company introduced the industry's first all digital console,
the VIAX DN. Digital connectivity reduces network costs, improves reliability,
and offers users the ability to program their station options directly from the
console. Digital technology has sharply reduced the space required for the
common equipment. The Company's current digital system, the "Broad Band DN",
requires as little as one-eighth of the space that was required by the systems
first introduced in 1987.
In 1993, the Company introduced Power Deck, a highly advanced digital
communications workstation for the financial community. The Power Deck user
interface is fully compatible with the Company's Broad Band DN technology
platform, and features state-of-the-art surface mount design. Significant
innovations include a high resolution graphics display, enhanced user
programmability and an ergonomically designed detachable keypad that improves
productivity and gives users precise control of critical phone functions.
In 1995, the Company introduced Broad Band DN which is the latest generation
distributed digital switch. Broad Band DN is built on a high-speed computing
platform allowing direct connection to the digital facilities of the public
network and providing digital connectivity to the desktop. The system's basic
architecture allows for software feature enhancements and reduces the risk of
future obsolescence. The administration software empowers the user with system
control and configuration capability, allows diagnostic reporting, and eases the
ability to perform moves, adds, and changes from a personal computer. The
Company's digital trading consoles give the users access to all system lines,
paperless button labeling and fully programmable loudspeaker monitoring of
multiple lines simultaneously.
Additionally in 1995, the Company introduced DXi, a high speed digital
communications console. The DXi is fully compatible with the Company's Broad
Band DN technology platform and employs the same base technology as the Power
Deck. The Company also introduced its eXchange Phone which is currently being
installed at the Chicago Board of Trade. The eXchange Phone employs the
technology base of the Power Deck product line. The eXchange Phone provides
state-of-the-art telecommunications designed specifically for the hectic and
demanding environment of an exchange. The eXchange Phone was ergonomically
designed to optimize trading floor space and maintain high efficiency for the
member brokers.
In 1995, the Company introduced a suite of highly sophisticated networking
products and tools designed to address the needs of its current and future
customers. These products, Global Switching Module ("GSM"), WAN ONE
inter-networking products, PassPort Network Management Platform and F.A.S.T.
(Fast Access Support Technology), represent the leading edge in networking
capabilities for the financial trading environment.
GSM allows firms to take advantage of advanced communications architectures such
as ATM. The GSM, which employs a one gigabit switch for information throughput,
can support a trading floor with over 2,400 user consoles and delivers access to
over 16,000 lines without system blocking.
The WAN ONE product enables remote trading floor communication systems to
operate as if they were located together. For example, traders in London can
have instant, local access to lines in New York, Canada, or virtually anywhere
in the world. The Company believes WAN ONE is the foundation for remote trading
and advanced network services of the next generation.
The PassPort Network Management Platform is a sophisticated UNIX-based suite of
tools that controls and maintains large systems in a cost-effective manner. True
multi-tasking and simultaneous multi-user operations will allow large system
managers to effectively administer distributed trading systems across existing
corporate LANs and WANs. Higher level protocols such as SNMP, CMIP/CMIS and
TCP/IP are all capable of being addressed.
The Company's F.A.S.T. service enables service technicians to troubleshoot and
modify system parameters remotely through phone lines, thereby increasing system
performance. Management believes that F.A.S.T. constitutes a competitive
advantage and no competitors have introduced similar service technology.
Through Licom's product ProMX, the Company is a leading supplier of fiber
optic-based multiplexers to the electric power industry. The ProMX is an
integrated, modular multiplexing unit designed to carry "mission critical"
communications and operate in circumstances and physical environments for which
conventional equipment is not usually designed to withstand. ProMX interfaces
with protective relays, supervisory control and data acquisition (SCADA), voice,
data and telemetry. The ProMX units, or nodes, communicate with fiber optic
networks at data transmission rates of 1.544 million bits per second (T1), 2.048
million bits per second (E1) or 51.84 million bits per second (SONET OC1). ProMX
nodes, common in transmission substations, are often located together with
console systems equipment in the command center. Licom, based in Herndon,
Virginia, continues to develop, market, test, ship and support the ProMX product
line, which is manufactured by a contract manufacturer. In 1995, sales to the
electric power industry were 11% of the Company's sales.
Product Development
The Company's product development strategy is to continually improve its current
product lines and to develop advanced new products and technologies to meet the
evolving needs of the markets it serves. The Company's emphasis is on software
and features that facilitate the integration of computer networks and digital
voice systems within the trading floor environment.
During 1995, the Company developed and implemented the second phase of the WAN
ONE product, which enables traders at remote sites, globally, to share telephone
lines and line status as if they were in the same location. In addition, a
remote system administration function was developed which allows modifications,
or moves, adds and changes (MAC's), to be performed from a remote location.
Combined with the Company's F.A.S.T. remote system servicing and WAN ONE
capabilities, the Company can provide service and enhancements to the customer's
system from remote locations.
The Company developed the APL (Audio Processing Line) card, which increases the
capacity of telephone lines that can be handled by each Broad Band DN node, by
combining the AP-ACC (Audio Processing-Analog Control Card) and ALC (Analog Line
Card) cards into a single card. Also, a new speaker interface was developed
which allows speakers to be dynamically programmed from the Power Deck and DXi
consoles. The Company also developed an ISDN PRI (private rate interface) for
Broad Band DN, advanced intercom features for its digital trading consoles and a
speakerphone for its Power Deck trading console.
During 1995, the Company finalized the development of several product
initiatives that were undertaken in 1994, such as DXi, a new digital trading
console that features an internal speaker phone and a streamlined, high-speed
trader interface; PassPort, a sophisticated UNIX-based suite of tools that
maintains large systems in a cost-effective manner; and the Global Switching
Module, which employs a one gigabit switch, can unite up to 2,400 digital voice
trading stations and is the centerpoint of the Company's Large System Support
package.
The Company is researching ATM (Asynchronous Transfer Mode) technology as it
applies to the trading room. Application development efforts also continue on
CTI (Computer Telephone Integration), which unites the computer and the
telephone, and will serve as the enabling technology for ATM in the trading
room. The Company has deployed CTI at several customer sites during 1995,
utilizing various client database applications.
The Company continues to develop hardware and software enhancements to its ProMX
product line such as the development of an interface for Synchronous Optical
Network (SONET), an international standard for very high speed digital
communications.
During the years ended October 31, 1995, 1994 and 1993, the Company's annual
research and development expenditures were $3.9 million, $3.3 million and $3.3
million or 13%, 11% and 13% of sales, respectively.
Sales, Service and Distribution
In 1994, the Company completed the transformation of its distribution channels
into a direct sales and service network in the United States and United Kingdom
with the acquisition of certain assets of four unrelated companies distributing
and or servicing the Company's products. These business acquisitions provided
the Company with a service presence and increased its sales strength in the New
York City, Boston and London markets. These acquisitions advanced the Company's
strategy to enhance market share through the direct sale and full service of its
products, which includes project management, maintenance and other services in
the United States and United Kingdom.
The Company currently maintains direct sales and service centers in New York
City, Boston, Chicago, San Francisco, Atlanta and London to provide sales,
services and support to customers in the United States and London markets.
Through these centers, the Company sells equipment, including modifications to
existing systems, and support services, including maintenance contracts and
project management.
The Company utilizes a network of international distributors to deliver sales
and service support in other global markets, such as Canada, the Pacific Rim,
South America and Europe. Licom uses direct sales, service, project management
and maintenance in the United States and Canada, and uses independent
distributors for international sales.
Sales to Morgan Guaranty Trust Company of New York and affiliates represented
14%, 14% and 5% of sales in 1995, 1994 and 1993, respectively. In addition,
sales to the Chicago Board of Trade represented 13% of sales in 1995. During
1993, there was no customer that represented 10% or more of the Company's sales.
Equipment sales, excluding Licom's ProMX, consisting of new systems installed
and modifications to existing systems, in all markets, were $20.5 million, $23.0
million and $21.2 million, representing 69%, 74% and 82% of the Company's sales
in 1995, 1994 and 1993, respectively. Licom sales represented 11%, 13%, and 10%
of the Company's sales in 1995, 1994 and 1993, respectively. Service sales,
which consist of maintenance contract sales, support, service and miscellaneous
repairs accounted for 20%, 13%, and 8% of sales during 1995, 1994 and 1993,
respectively.
The Company's foreign sales for 1995, 1994 and 1993 were $10.5 million, $8.7
million and $7.3 million, or 36%, 27% and 28%, respectively, of total
consolidated sales. For further information regarding foreign sales, see Note 8
- -- Notes to Consolidated Financial Statements.
The Company's sales of systems for application in "non-financial" communications
control centers of utilities, railroads and other "right-of-way" companies as
well as E9-1-1 emergency service centers and government/military applications
were, in the aggregate, 13%, 16% and 16% of the Company's sales for 1995, 1994
and 1993, respectively.
Manufacturing and Sources of Supply
During 1995, the Company restructured its manufacturing operations to reduce the
cost of its products by out-sourcing the production of its printed circuit
boards. As part of this restructuring, the Company significantly down-sized its
production facility by relocating its operations, in July 1995, to a 15,000
square foot facility in Elmsford, New York, from its former 67,000 square foot
facility in Yonkers, New York, for which the lease had expired. This new
facility houses the Company's purchasing, production control, final assembly,
quality control and testing operations. The lease for the Elmsford facility
expires in 2001, with an option to extend to 2003.
The Company currently uses three outside subcontractors to manufacture most of
its custom-fabricated, printed circuit boards. The Company provides the product
designs, engineering, bill of materials and testing procedures to ensure the
suppliers meet the Company's quality and reliability standards. The Company will
be able to further reduce its product cost due to the economies of scale
afforded by the outside contractors in the purchase of components, after current
inventories are consumed.
The Company's Licom subsidiary performs final assembly of sub-assemblies
received from one of the Company's outside contractors, tests and ships the
product at its headquarters in Herndon, Virginia. Licom relocated its facility
during 1995 to a nearby location, which provides better utilization. The lease
for this facility expires in 2000 with an option to extend for five years.
The Company's United Kingdom manufacturing operation, consisting of final
assembly product and addition of local content and testing, is located at its
facility in Beckton, England, approximately 20 miles southeast of London. The
lease for this facility expires in 2005.
The Company believes that relations with its subcontractors and suppliers are
good. Most components and parts used in the Company's products are available
from a number of different sources. A few components are currently available
from a single source of supply. The Company believes that alternative components
should be readily available; however, there can be no assurance that, in the
event of a supply shortage, such components will be available in the quality and
quantity necessary to meet the Company's needs. To date, the Company has not
experienced any significant delays in the delivery of material from either
subcontractors or vendors. The Company seeks to maintain inventory in quantities
sufficient to ship products within four to eight weeks of receipt of orders.
Patents
In 1994, the Company was granted a U.S. patent relating to the design of the
Power Deck console systems. In 1993, the Company was granted a U.S. patent
relating to the design of the VIAX DN console systems. In 1992, the Company
received patents on its system digital switch architecture and its power
supplies.
The Company believes that patent protection for its designs could enhance its
ability to successfully market its product technology at reduced risk to
competitors' imitation of the Company's products. However, no assurance can be
given that any patent issued will effectively limit competition for the
Company's products and the Company's protection of its market position through
technological development has, to date, derived primarily from the Company's
ability to keep secret its proprietary information and knowledge. The unique
design features of the Company's products may be susceptible to discovery by
third persons who have access to such products. Technological changes in the
telephone terminal equipment industry occur rapidly and new patents are
constantly being issued for products sold in the industry. No assurance can be
made that claims will not be brought against the Company alleging that the
Company's products, or aspects thereof, infringe on competitors' patents. The
Company has no such claims pending. The Company seeks to protect its proprietary
rights to computer software through copyright, non-disclosure agreements and
software licenses.
Distributor Support and Warranty Policy
The Company's service personnel, together with third-party service firms engaged
by the Company or by the Company's customers, perform all necessary maintenance
of products sold by the Company or by its distributors, including components
manufactured by others. The Company performs maintenance and assists
distributors and third-party maintenance companies under its standard warranty
policy. The Company generally warrants its products to be free from defects in
material and workmanship for a period of one year from the date of installation
and repairs or replaces defective products under warranty without charge to its
customers.
Competition
The market for the Company's products is highly competitive. The Company's
industry is characterized by advanced technology, rapid change and broad product
support. Many of the Company's competitors, both in the United States and
globally, are large companies that manufacture and distribute a wide range of
telephone products, and provide services such as installation and maintenance.
Management believes that the competitive factors in its product lines are price,
quality, reliability, product innovation, timely delivery, service and product
support.
The Company's largest competitor in the United States is IPC Information
Systems, Inc. ("IPCI", formerly known as Contel IPC, Inc.). In the United
Kingdom, the Company competes with British Telecom plc, IPCI and Wyatts (a
subsidiary of Reuters Holdings plc). The Company believes that these two
markets, the United States and United Kingdom, comprise 65% of the global market
of the Company's product. The competitors in markets served by ProMX products
are primarily RFL Technologies, Pulsar Technologies, Centronics Division of
NORTEL and ASEA Brown Boveri.
Backlog
As of October 31, 1995, 1994 and 1993, the Company's backlog of purchase orders
that management believes to be firm was $10.5 million, $2.8 million, and $5.1
million, respectively. The Company expects to deliver all products from its
October 31, 1995 backlog during fiscal 1996. The Company generally delivers
large system configured products to customers within six to eight weeks of its
receipt of firm orders. Where the Company makes direct end-user installations,
deliveries generally occur four to eight weeks from receipt of firm orders.
Management does not believe that the Company's backlog is a meaningful
indication of future sales.
Employees
As of October 31, 1995, the Company had 241 full-time employees, of whom 48 were
product development personnel, 66 were production personnel, 84 were sales,
marketing and service support personnel and 43 were administrative personnel.
This compares to 288 at October 31, 1994. The decrease from 1994 was primarily
attributable to a restructuring of the Company's manufacturing operations.
Subsequent to year-end, the Company further reduced its personnel to 216, with a
restructuring of production and administrative personnel.
Many of the Company's employees are highly skilled, and the Company's continued
success will depend, in part, on its ability to attract and retain such
employees. None of the Company's employees are covered by a collective
bargaining agreement; however, five of the Company's employees, all of whom work
in the Boston service center, are members of a local collective bargaining unit.
The Company believes its relations with its employees are good.
Item 2. Properties
The Company's executive offices and engineering facilities of approximately
22,800 square feet, located at 565 Taxter Road, Elmsford, New York, are subject
to a lease expiring in February 1999, with an option to further extend the lease
until February 2003. The Company, during 1995, relocated its production facility
from its 67,000 square foot facility in Yonkers, New York, and currently leases
approximately 15,000 square feet at Three Westchester Plaza, Elmsford, New York,
where it conducts its assembly and quality assurance operations, subject to a
lease expiring in 2001, with an option to renew into 2003.
During 1995, the Company relocated its Licom headquarters to a nearby facility
in Herndon, Virginia. The new facility consists of approximately 8,600 square
feet of office and production space with a lease expiring in June 2000, with an
option to renew for five years.
The Company leases office and production space related to its United Kingdom
operation. The Company has exercised an option to terminate the sales office
lease of approximately 1,700 square feet located in London effective May 1996
and is currently pursuing alternative locations to lease office space in the
same area in London. The production facility and administrative offices with
approximately 20,000 square feet located within 20 miles southeast of London,
are subject to a lease expiring in 2005.
Leases for the domestic sales and service support locations include
approximately: 5,900 and 2,500 square feet located in New York City, expiring in
April 1997 and July 1999, respectively; 1,300 square feet located in Boston,
Massachusetts, expiring in April 1996; and, 1,800 square feet in Chicago,
Illinois, expiring in November 1996. Subsequent to the fiscal year end the
company extended its lease for 1,800 square feet of office space in San
Francisco, California, for one year to expire in December 1996;
Management believes that all of its facilities are in good condition and working
order and have adequate capacity to meet its needs for the foreseeable future.
Item 3. Legal Proceedings
In October 1994, the Company commenced an action against Technical Telephone
Systems, Inc. ("TTSI") in New York State Supreme Court, Westchester County, for
minimum payments due to the Company in the amount of $650,000 under a
distribution agreement between the Company and TTSI. In November 1994, TTSI
filed a counterclaim against the Company denying all allegations stated in the
Company's complaint and alleging a breach of good faith and fair dealing by the
Company, claiming damages of $1 million. The Company believes its claim against
TTSI is meritorious and believes TTSI's counterclaim against the Company, which
the Company will vigorously defend, is without merit.
There are no other material pending legal proceedings as of December 31, 1995.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth fiscal
quarter of the year ended October 31, 1995.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
The Company's Common Stock is traded in the over-the-counter market and is
included in the National Association of Securities Dealers Automated
Quotation-National Market System ("NASDAQ") under the symbol VBAN. The following
table shows the high and low sales prices for the Company's Common Stock quoted
in the over-the-counter market for the fiscal quarters indicated as reported on
the NASDAQ. The quotations represent prices in the over-the-counter market
between dealers in securities and do not include retail markup, markdown, or
commissions.
Fiscal 1995 High Low
- ----------- ------ ------
Fourth Quarter $ 2.75 $ 1.88
Third Quarter $ 3.50 $ 1.88
Second Quarter $ 3.25 $ 1.88
First Quarter $ 5.25 $ 2.75
Fiscal 1994 High Low
- ----------- ------ ------
Fourth Quarter $ 5.63 $ 3.88
Third Quarter $ 4.75 $ 3.63
Second Quarter $ 6.25 $ 4.13
First Quarter $ 5.88 $ 4.38
As of December 31, 1995, there were approximately 600 holders of record of the
Company's Common Stock.
The Company has never paid a regular dividend on its shares, and does not
anticipate paying dividends in the near future.
<PAGE>
Item 6. Selected Financial Data
The selected financial data presented below have been derived from the audited
financial statements of the Company, and should be read in connection with those
statements, which are included herein.
<TABLE>
<CAPTION>
For the Year Ended October 31,
------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in 000's, except per share data)
<S> <C> <C> <C> <C> <C>
Sales ............... $ 29,351 $ 31,078 $ 25,741 $ 28,888 $ 24,155
Income (loss)
before cumulative
effect of
accounting change . (11,594) 627 (1,134) 248 1,253(1)
Cumulative effect
of accounting
change ............ -- 1,242 -- -- --
-------- -------- -------- -------- --------
Net income (loss) ... $(11,594) $ 1,869 $ (1,134) $ 248 $ 1,253(1)
======== ======== ======== ======== ========
Per share data:
Income (loss)
before
cumulative
effect of
accounting change $ (2.18) $ .12 $ (.21) $ .04 $ .19(1)
Cumulative effect
of accounting
change .......... -- .23 -- -- --
-------- -------- -------- -------- --------
Income (loss) per
share ........... $ (2.18) $ .35 $ (.21) $ .04 $ .19(1)
======== ======== ======== ======== ========
Weighted average
number of shares
of common stock
and common stock
equivalents ....... 5,322 5,311 5,285 6,069 6,640
Cash dividends per
common share ...... $ .00 $ .00 $ .00 $ .00 $ .00
Working capital ..... $ 9,622 $ 18,935 $ 19,684 $ 19,931 $ 27,008
Total assets ........ $ 21,212 $ 36,027 $ 30,639 $ 29,944 $ 39,708
Shareholders' equity $ 14,398 $ 26,039 $ 23,963 $ 25,273 $ 33,540
</TABLE>
(1) Includes the net effect of settling a claim made by the Company against its
United Kingdom distributor, Mercury Dealing Systems, of approximately $2.0
million, or $.17 per share.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
As an aid to understanding the Company's operating results, the following table
shows, for the periods indicated, the percentage relationship which each item
bears to sales.
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
-----------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Sales
Equipment ................................. 80.4% 86.7% 92.3%
Service ................................... 19.6 13.3 7.7
----- ----- -----
Total sales ................................. 100.0 100.0 100.0
Cost of sales
Equipment(*) .............................. 88.8 55.4 59.3
Service(*) ................................ 48.1 71.6 44.0
----- ----- -----
Total cost of sales ......................... 80.8 57.5 58.1
----- ----- -----
Gross Profit ................................ 19.2 42.5 41.9
Selling, general and
administrative expenses ................... 44.6 30.7 35.4
Research and development expenses ........... 13.4 10.7 12.7
----- ----- -----
Operating income (loss) ..................... (38.8) 1.1 (6.2)
===== ===== =====
Income (loss) before cumulative
effect of accounting change ............... (39.5) 2.0 (4.4)
Cumulative effect of accounting change ...... -- 4.0 --
----- ----- -----
Net income (loss) ........................... (39.5)% 6.0% (4.4)%
===== ===== =====
</TABLE>
* Presented as a percentage of the related sales categories.
Sales
Sales for the year ended October 31, 1995 were $29.4 million, a $1.7 million, or
5%, decrease from sales for 1994. The decrease in sales was attributable to the
decrease in equipment sales. Equipment sales for the year, which include new
equipment installations plus moves, adds and changes for customers' existing
systems, were $23.5 million in 1995 as compared to $27.0 in 1994. Sales of the
Company's Power Deck product increased from $2.6 million in 1994 to $9.9 million
in 1995, or a 281% increase as product migration continued in favor of the Power
Deck and away from older products. Sales for the Company's older products, Viax
DN and Viax Analog, decreased from $19.0 million in 1994 to $9.4 million in
1995, or a 51% decrease. Sales for the Company's Licom ProMX product decreased
from $3.3 million to $3.1 million, or 6%, primarily due to higher discounting
for the product. Service sales increased from $4.1 million in 1994 to $5.8
million in 1995, or a 39% increase reflecting the transformation of the
Company's distribution channels to a direct sales and service network.
Sales in 1995 to non-financial customers (i.e., government agencies, airlines,
public utilities) accounted for $3.7 million, or 13% of sales, a $1.1 million
decrease from 1994 non-financial customer sales. The decrease was related
primarily to lower sales of specially enhanced E9-1-1 products made under a
contract with a division of AT&T which expired in 1994.
Sales for the year ended October 31, 1994 were $31.1 million, a $5.4 million or
a 21% increase over sales for 1993. The increase in sales was attributable
primarily to the introduction of the Company's latest user interface product
named Power Deck, of $2.6 million. In addition, service sales increase of $2.1
million, from $2.0 million in 1993 to $4.1 million in 1994, was attributable
primarily to the sales and service operations acquired in 1994. Furthermore,
sales for Licom's ProMX product increased $.6 million, or 18%, in 1994 as
compared to 1993.
Sales in 1994 to non-financial customers (i.e., government agencies, airlines,
public utilities) accounted for $4.8 million, or 15% of sales, a $.8 million
increase from 1993 non-financial customer sales. The increase was related
primarily to increased business in the power utilities industry, offset by lower
E9-1-1 product sales.
Since the Company sells product to its foreign customers and distributors in
U.S. dollars, it is unaffected by currency translations. The Company's United
Kingdom operations transacts sales in pounds sterling or US dollars. Those sales
transacted in pounds sterling were not materially impacted by foreign exchange
rate fluctuations during 1995 or 1994. The Company has, from time to time,
hedged foreign currency transactions when deemed necessary.
Reflecting the transformation of the Company's distribution channels from third
party distributors to a direct sales and service network, $24.1 million, or 82%
of total sales were direct in 1995, as compared to $21.5 million and $13.5
million, or 70% and 53% of sales in 1994 and 1993, respectively.
Gross Profit Margins
Gross profit margins were 19% in 1995 as compared to 42% in 1994. Equipment
gross profit margins were 12% in 1995, as compared to 45% in 1994. The decrease
in equipment gross profit margins was attributable primarily to three factors --
$3.8 million of special fourth quarter expense adjustments, a manufacturing
restructuring program initiated by the Company, and competitive discounting for
the Company's product.
The Company recorded several special fourth quarter 1995 expense adjustments,
including a $2.3 million increase in inventory reserves related to older product
lines, a $.9 million write-off of an intangible asset related to a license for
product technology no longer used, a $.3 million of inventory charges, and a $.3
million increase in warranty reserves. Additionally, the Company restructured
its production operations during the year from an internal manufacturing process
to one which relies to a significant extent on out-sourcing of the Company's
sub-assemblies. This transition process yielded significant unfavorable
manufacturing variances during the year. Also, the Company found it necessary to
offer larger discounts for its products in order to meet competitive challenges.
Service gross profit margins increased to 52%, in 1995 from 28% in 1994. Service
sales increased 39% over 1994 levels as the Company transformed from a
distributor based network to that of a direct sales and service network, while
the service cost of sales decreased 6%, due to economies of scales and better
efficiencies brought about by a larger customer base.
Gross profit margins were 42% in both 1994 and 1993. Equipment gross profit
margins improved to 45%, in 1994, from 41%, in 1993, as a result of a higher
sales volume of the Company's Power Deck and VIAX DN product which typically
earn higher gross margins, combined with the effect of direct sales resulting in
higher gross margins and success of cost containment efforts in manufacturing.
Service gross profit margins declined to 28%, in 1994 from 56% in 1993 as a
result of a lower percentage of high-margin repair service sales, coupled with
costs related to the integration of the Company's newly transformed direct sales
and service network developed largely through acquisitions.
Operating Expenses
Total operating expenses for 1995 increased to $17.0 million, representing a 33%
increase from $12.8 million for 1994. Operating expenses as a percent of sales
were 58% in 1995 as compared to 41% in 1994. The selling, general and
administrative expenses increase as a percentage of sales to 45% in 1995 from
31% in 1994 was attributable primarily to the costs of the service businesses
acquired in 1994, combined with non-recurring charges related to the Company's
restructuring during the year.
Total operating expenses for 1994 increased to $12.8 million, representing a 3%
increase from $12.4 million for 1993. Operating expenses as a percent of sales
were 41% in 1994 as compared to 48% in 1993. Selling, general and administrative
expenses decreased as a percentage of sales from 35% in 1993 to 31% in 1994 as
the equipment and service sales, derived from the business acquisitions and
product introductions, increased 21%, while the related fixed operating costs
increased 13%. Although research and development costs were consistent with the
1993 level of $3.3 million, the sales increase of 21% from 1993 to 1994 brought
research and development expenses down to 11% of sales in 1994 as compared to
13% of sales in 1993.
Selling, general and administrative costs for 1995 increased $3.6 million to
$13.1 million, or 38%, from $9.5 million in 1994. Of the increase, $2.4 million
was attributable to the full year impact of the Company's London, New York and
Boston sales and service center operations which were acquired during 1994.
Additionally, the Company exercised its right to terminate its current lease for
67,000 square feet of manufacturing space in Yonkers, New York, relocating to a
15,000 square foot production and assembly facility in Elmsford, New York. The
Company recorded a $.4 million non-recurring restructuring charge related to
expenses to be incurred and assets to be disposed of during the transition of
the manufacturing facility to the new location. Additionally, the Company
further restructured its manufacturing, engineering and administrative
departments, resulting in a severance accrual and other miscellaneous costs at
year-end of $.8 million.
Selling, general and administrative costs for 1994 increased 5% to $9.5 million
from $9.1 million in 1993. In 1994, the level of selling, general and
administrative costs was positively affected by a reversal of the remaining
relocation reserve of $.4 million, originally established in 1990, which was
attributable to the renegotiation of the lease at the Company's executive
offices. Additionally, in 1993 the Company recorded a non-recurring executive
severance charge of $.5 million and an increase in reserves of $.2 million on
potentially uncollectible accounts and notes receivable. When excluding these
aforementioned non-recurring items, selling, general and administrative expenses
increased in 1994 by $1.5 million, or 13%, over 1993, which was attributable
primarily to increased expenses as a result of the newly-acquired service
operations in Boston and New York and manufacturing and service operations in
the United Kingdom.
Research and development expenses for 1995 of $3.9 million increased $.6
million, or 18%, from $3.3 million in 1994. Research and development expenses as
a percent of sales increased to 13% in 1995, as compared to 11% in 1994. This
increase was a result of the development of the new products and services
introduced during the latter part of the year including DXi, Broad Band DN, WAN
ONE and the exchange phone, which is being installed at the Chicago Board of
Trade.
Research and development expenses for 1994, $3.3 million, remained at the 1993
levels. Research and development expenses as a percent of sales decreased to 11%
in 1994, as compared to 13% in 1993. This decrease was a result of developing
the final stages of the Power Deck in 1993, while sales for that product did not
occur until 1994. Additionally, service sales, which increased from $2.0 million
in 1993 to $4.1 million in 1994, do not require significant research and
development related expenditures.
Other Income and Expense
Net investment income for 1995 was $.1 million, a decrease of $.3 million from
1994. The decrease was attributable primarily to the decrease in marketable
securities, of which $4.2 million was used to fund the current year's net
operating loss and net realized losses on certain securities sold.
Net investment income for 1994 was $.4 million, a decrease of $.2 million from
1993. The decrease was attributable primarily to the decrease in marketable
securities, of which $4.4 million was used for the Company's business
acquisitions.
Provision for Income Taxes
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109, the deferred tax provision is determined under the liability method.
Under this method, deferred tax assets and liabilities are recognized, based on
differences between the financial statement carrying amount and the tax basis of
assets and liabilities using presently enacted tax rates. The cumulative effect
of the adoption of SFAS 109 as of November 1, 1993, was $1,242,000, net of a
valuation allowance of $150,000. There was no change in the valuation allowance
during 1994. During 1995 the Company recorded an additional deferred tax asset
of $4,325,000 and also recorded an additional valuation allowance of $4,876,000.
The total valuation allowance as of October 31, 1995 of $5,026,000 reduces the
deferred tax asset to the amount that management believes will ultimately be
realized. During 1995, the Company reversed $250,000 of prior years' tax
accruals which are no longer required. The Company's 1995, 1994 and 1993 tax
provisions of $301,000, $150,000 and $50,000 reflect effective tax rates of
(3)%, 19%, and (5)%, respectively.
Net Income (Loss) Per Share
For 1995, the Company recorded a net loss of $11.6 million, or $2.18 per share,
as compared to net income of $.6 million, or $.12 per share, before the
cumulative effect in 1994 of the accounting change for income taxes, and a net
loss of $1.1 million in 1993, or $.21 per share. Inclusive of the cumulative
effect of the accounting change, net income was $1.9 million, or $.35 per share,
in 1994.
Liquidity and Capital Resources
In order to meet its liquidity demands during fiscal 1996, the Company may seek
to obtain a credit facility from a lending institution. The Company has no debt
outstanding and believes it will be able to obtain a credit facility which,
together with other resources, would provide sufficient liquidity to meet
projected requirements.
The Company's aggregate of cash, cash equivalents and marketable securities at
October 31, 1995, declined $4.8 million, to $2.9 million, compared to the
balances reported at October 31, 1994. This decline was largely attributable to
the use of funds to support the Chicago Board of Trade contract and to fund the
net operating loss. Inventory, net of accounts payable decreased $2.1 million,
from $8.2 million in 1994 to $6.1 million in 1995, as the Company reduced
inventory as part of the Company's restructuring plans during the year. Accounts
receivable decreased $2.9 million, from $7.7 million in 1994 to $4.8 million in
1995, primarily attributable to a decrease in fourth quarter sales of $2.3
million for 1995 as compared to 1994. Capital expenditures were $.9 million in
1995 as compared to $.6 million in 1994.
The Company's aggregate of cash, cash equivalents and marketable securities at
October 31, 1994 declined $6.4 million, to $7.7 million, compared to the
balances reported at October 31, 1993. This decline was largely attributable to
the use of funds for business acquisitions made in 1994. In addition, inventory
balances increased to support the introduction of Power Deck and the multiple
inventory locations to support direct sales and maintenance customers. Accounts
receivable balances increased as a result of a higher-than-normal volume of
sales in the latter part of the fourth quarter related to the introduction of
Power Deck. Cash levels were offset as a result of higher accounts payable due
to increased inventories to meet sales levels for the fourth quarter 1994.
Customer deposits increased during 1994 due to pre-payments received against
future large sales orders. Capital expenditures during 1994 were $.6 million as
compared to $.7 million in 1993.
The Company's working capital was $9.6 million as of October 31, 1995 a $9.3
million decrease from $18.9 million as of October 31, 1994. Working capital was
$18.9 million as of October 31, 1994, a $.8 million decrease from $19.7 million
as of October 31, 1993.
The Company has no significant commitments for capital expenditures as of
October 31, 1995.
The Company's cash management practice is to invest mainly in medium to
high-grade municipal securities and United States Treasury and United States
Government Agency securities, with maturities ranging from 90 days to 3 years.
Item 8. Financial Statements and Supplementary Data
The response to this item is incorporated by reference to pages F-1 through F-13
and S-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
<TABLE>
<CAPTION>
Name Age Office Held
---- --- -----------
<S> <C> <C>
Thomas E. Feil (1) 54 Chairman, Chief Executive Officer, Director
John E. Petronzi 47 Executive Vice President
Thomas Hughes 36 Chief Operating Officer
Mark R. Hahn 38 Vice President - Chief Financial Officer
Sven R. Englund (4) 42 Vice President - Engineering
George J. Rogers (5) 42 Vice President
Luke P. LaValle, Jr. (2)(3) 53 Director
Thomas H. Lenagh (2) 71 Director
Brian S. North (1) 44 Director
Joseph M. O'Donnell (1)(3) 49 Director
A. Eugene Sapp, Jr. 59 Director
Paul B. Twomey (6) 62 Director
J. Stephen Vanderwoude (3) 52 Director
</TABLE>
(1) Member of stock option committee.
(2) Member of audit committee.
(3) Member of compensation committee.
(4) Resigned as an Officer effective November 17, 1995.
(5) Resigned as an Officer effective November 3, 1995.
(6) Resigned as a Director effective October 31, 1995.
There is no family relationship among any of the directors or executive officers
of the Company. Information with respect to the directors and executive officers
of the Company, based upon information furnished by them, is set forth below.
Thomas E. Feil has served as Chairman of the Company from April 1985 to present,
as a Director since its inception and as Chief Executive Officer from April 1985
to August 1988 and from August 1993 to present. From the Company's inception
until April 1985, Mr. Feil was President of the Company.
Thomas Hughes was appointed Chief Operating Officer of the Company in August
1995. Previously, he served the Company as Vice President of Marketing and
Product Planning from 1993 to 1995. Mr. Hughes began his career with the Company
in 1988 as a Staff Engineer and held various engineering management positions of
increasing responsibility until his appointment as Vice President. Prior to
joining the Company, he worked as a researcher at CBS Laboratories' Technology
Center and a Systems Engineer at United Technologies.
John E. Petronzi has served as Executive Vice President of the Company since
January 1994. Prior to joining the Company, Mr. Petronzi was Vice President -
Sales and Marketing for JWP Telecom, Inc., from 1992. Prior to that he was Vice
President and General Manager for JWP Integrated Communications Services, from
1990. From 1982 through 1990, he held various positions with Centel Corporation
subsidiaries, most recently as Regional Vice President for Centel Communications
Systems.
Mark R. Hahn was appointed Vice President and Chief Financial Officer of the
Company in August 1995. Previously, he served as Controller of the Company since
November 1994. Prior to joining the Company, he was a consultant to American
Airlines in Fort Worth, TX. From 1991 to 1994, he served as Vice President of
Finance and Controller for Business Express Corporation in Westport, CT. He
joined Business Express in 1990 as Controller. From 1987 to 1990, he held the
positions of Corporate Controller and Director of Corporate Planning and
Accounting with Waldenbooks in Stamford, CT. He began his career as a certified
public accountant with Price Waterhouse.
Luke P. LaValle, Jr. has served as a Director of the Company since June 1992.
Since 1980, Mr. LaValle has been President and Chief Investment Officer of
American Capital Management, Inc., a New York City based management firm for
individuals, trusts, pension and profit sharing accounts. Prior to forming
American Capital Management, Inc., Mr. LaValle worked for United States Trust
Company of New York for 13 years specializing in small company investing in the
Pension and Institutional Investment Division.
Thomas H. Lenagh has served as a Director of the Company since June 1993. Mr.
Lenagh has served as an independent financial consultant for the last six years.
Mr. Lenagh is also a Director for CML, Inc., Gintel Funds, Adams Express,
Clemente Growth Fund, U.S. Life Co., SCI Systems, ICN Biomedicals, Irvine
Sensors Corporation, Franklin Quest and Styles on Videos.
Brian S. North has served as a Director of the Company since September 1988. Mr.
North has been a member of the law firm of White and Williams since 1994. From
1987 to 1994, he was a member of the law firm of Elliott, Reihner, Siedzikowski,
North & Egan, P.C. and predecessor law firms. From 1980 to 1987, he was Senior
Corporate Counsel of Sun Company, Inc., an energy resources company.
Joseph M. O'Donnell has served as a Director of the Company since June 1991.
Since July 1994, Mr. O'Donnell has been the Chief Executive Officer and a
Director of Computer Products, a manufacturer in Boca Raton, Florida. From 1993
to 1994, he was Chief Executive Officer for Savin Corporation, after one year of
being an independent business consultant. From 1990 to 1992 he served as
President and Chief Executive Officer of GO/DAN Industries Inc., a
Connecticut-based manufacturer of automobile parts sold primarily in the after
market. He is also a director of Cincinnati Microwave, Inc., a publicly held
company.
A. Eugene Sapp, Jr. has served as a Director of the Company since August 1994.
Mr. Sapp, employed by SCI Systems since 1962, has been the President, Chief
Operating Officer and Director of the company since 1981. Mr. Sapp also serves
as a Director of Irvine Sensors Corp., and CMS, Inc. of Tampa, Florida.
J. Stephen Vanderwoude has served as Director of the Company since May 1994. Mr.
Vanderwoude is currently President, Chief Executive Officer and Director for
Video Lottery Technologies in Atlanta, Georgia. Prior to that, he was the
President and Chief Operating Officer of Sprint Corporation's Local
Telecommunication Division until September 1993. Prior to the merger of Sprint
and Centel corporations in March 1993, Mr. Vanderwoude was President and a
Director of Centel Corporation from 1988 and held various executive and
management positions with Centel since joining the company in 1971. Mr.
Vanderwoude is a Director of First Midwest, a bank holding company.
Each officer is elected by and serves at the pleasure of the Board of Directors.
Directors are elected annually by the shareholders, except when the Board of
Directors may elect a director to fill a vacancy on the Board. The executive
officers of the Company are elected annually by the Board of Directors.
The Board of Directors has three standing committees: Stock Option, Executive
Compensation and Audit Committees. The Stock Option Committee exercises the
responsibilities of the Board in granting options under and administering the
Company's 1982 Incentive Stock Option Plan and its 1984 Stock Option Plan. The
Executive Compensation Committee's principal functions are to recommend to the
Board of Directors the compensation arrangements for the executive officers of
the Company. The Audit Committee's principal functions are to review with
internal financial staff and the Company's independent public accountant, the
Company's reporting process and internal controls and to recommend the
selection, retention or termination of the independent public accountants. The
Company has entered into Indemnity Agreements with each of its directors and
certain of its officers, pursuant to which the Company is obligated to reimburse
or pay certain expenses incurred by its directors and officers arising out of
claims made against them in connection with their services to the Company.
<PAGE>
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years ended
October 31, 1995, 1994 and 1993 concerning the compensation of the Company's
Chairman and Chief Executive Officer and each of its other executive officers
whose salary and bonus for fiscal 1995 exceeded $100,000:
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation (1)
----------------------------------------- ------------
Securities
Name/ Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options (#) Compensation (2)
- ------------------------- ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Feil, 1995 $199,000 $ -- $-- -- $ 1,528
Chairman, Chief Executive 1994 199,998 -- -- -- --
Officer and Director 1993 192,306 -- -- -- --
John E. Petronzi, (3) 1995 150,000 10,000 -- 10,000 --
Executive Vice President 1994 130,989 -- -- 45,000 --
1993 -- -- -- -- --
Thomas Hughes, (4) 1995 103,616 3,276 -- 16,000 1,036
Chief Operating Officer 1994 88,858 -- -- 6,000 889
1993 79,404 -- -- -- 794
George J. Rogers, (5) 1995 125,000 4,664 -- 10,000 1,250
Vice President 1994 123,076 -- -- 25,000 2,003
1993 99,824 -- -- -- 1,696
Sven R. Englund, (6) 1995 97,999 3,276 -- -- 980
Vice President 1994 95,656 -- -- 1,500 956
1993 95,346 -- -- -- 953
</TABLE>
- --------------------------------
1. Other than the Company's 401(k) Plan and its stock option and stock purchase
plans, the Company does not have any long-term incentive plans and does not
grant restricted stock awards.
2. Includes amounts contributed by the Company under the Company's 401(k) Plan
during the fiscal year and any additional discretionary annual contributions
related to the prior fiscal year.
3. Mr. Petronzi joined the Company in January 1994. Mr. Petronzi entered into an
employment agreement whereby he is entitled to one year's compensation should
he be terminated without cause. He was also provided a three-year loan in the
amount of $30,000 with interest at 6% per annum.
4. Mr. Hughes entered into an agreement with the Company in May 1995 whereby he
is entitled to receive one year's compensation should there be a change of
control of the Company within one year from the date of the agreement.
5. Mr. Rogers served as Vice President and Chief Financial Officer until August
29, 1995. He resigned from the Company as a Vice President effective November
3, 1995. He also served as a consultant to the Company through December 31,
1995.
6. Mr. Englund resigned from the Company as a Vice President effective November
17, 1995.
<PAGE>
STOCK OPTIONS
The following tables summarize option grants during the fiscal year ended
October 31, 1995 to the Named Officers and the value of the options held by such
persons at the end of such fiscal year. None of the Named Officers exercised any
stock options during the fiscal year ended October 31, 1995. The Company does
not maintain any pension plans or any supplementary pension award plans.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Potential Realizable value
at Assumed Annual Rates
of Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------------------------------------------
Number of Percentage of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted Fiscal Year (Per share) Date 5% 10%
- ---- ----------- ------------- -------------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Thomas Hughes 16,000 21% $2.00-$3.13 2005 $23,118 $59,782
John E. Petronzi 10,000 13% 3.13 01/13/2005 7,436 30,351
George J. Rogerss 10,000 13% 3.13 01/13/2005 7,436 30,351
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option value
<TABLE>
<CAPTION>
Value of Unexercised in-the
Number of Unexercised Money Options at
Options at FY-End FY-End
--------------------------------------------------------------
Shares
Acquired on Value
Name Exercise Realized Excercisable Unexercisable Excercisable Unexercisable
---- ----------- -------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Feil -- $ -- 25,000 -- $ -- $ --
Thomas Hughes -- $ -- 11,567 14,000 -- 3,750
John E. Petronzi -- $ -- 25,000 35,000 -- --
</TABLE>
<PAGE>
COMPENSATION OF DIRECTORS
The Company pays each outside director an annual director's fee of $7,500 plus
$500 for each board meeting attended (up to a limit of six meetings per year),
plus deferred cash compensation payable upon termination of service as a
director in an amount equal to $2,000 for each year of service as a director.
Additionally, each director is reimbursed for out-of-pocket travel expenses
incurred to attend a board meeting and may receive reasonable compensation for
chairing any committee of the board. Outside directors also receive, upon
election or re-election as a director, a grant of stock options under the
Company's 1984 Stock Option Plan covering 2,000 shares of the Company's Common
Stock, at an exercise price equal to the fair market value on the date of grant.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. LaValle, O'Donnell and Vanderwoude comprise the Compensation Committee.
Messrs. Feil, North and O'Donnell comprise the Stock Option Committee. Mr. Feil
is an officer and employee of the Company, but is not eligible to receive stock
options while serving on the committee.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is information concerning the stock ownership of all persons
known by the Company to own beneficially more than 5% of the Company's shares of
Common Stock, each director of the Company, each executive officer named in the
executive compensation table, and all directors and executive officers of the
Company as a group, as of December 31, 1995.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficially Owned Class
------------------ -------------
<S> <C> <C>
Thomas E. Feil 1,461,472 (2)(4) 26.3%
565 Taxter Road, Elmsford, NY 10523
Sven R. Englumd 17,054 (4) *
565 Taxter Road, Elmsford, NY 10523
Thomas Hughes 14,567 (4) *
565 Taxter Road, Elmsford, NY 10523
Luke P. LaValle, Jr. 16,000 (1)(4) *
460 East 79th Street, New York, NY 10021
Thomas H. Lenagh 9,000 (1)(4) *
1 Brookside Drive, Westport, CT 06880
Brian S. North 99,000 (1)(3)(4) 1.8%
213 Croft Ridge Drive, Broomall, PA 19008
Joseph M. O'Donnell 16,000 (1)(4) *
587 Shrub Oak Lane, Fairfield, CT 06430
John E. Petronzi 40,000 (4) *
565 Taxter Road, Elmsford, NY 10523
George J. Rogers 61,866 (4) 1.1%
565 Taxter Road, Elmsford, NY 10523
A. Eugene Sapp, Jr. 2,000 (1) *
528 Adams Street, Huntsville, AL 35801
Paul B. Twomey 16,000 (1)(4) *
Rt. # 1, Box 1028, Sly Brook Road, Soldier Pond, ME 04781
J. Stephen Vanderwoude 4,000 (1) *
Box 1735, 2316 Youngs Road, Southern Pines, NC 28388
All directors and executive officers as a group (13 persons) 1,760,959 (4) 31.7%
</TABLE>
- --------------------
* - less than 1%
<PAGE>
(1) Excludes options granted upon his election to serve as an outside director
at the last annual meeting of shareholders, covering 2,000 additional
shares, exercisable at and after the 1996 annual meeting of shareholders.
(2) Excludes 80,000 shares held in an irrevocable trust for Mr. Feil's daughter,
over which Mr. Feil holds no voting or investment power.
(3) Includes 80,000 shares held in an irrevocable trust for which Mr. North is
the trustee. Mr. North has no economic interest in the trust. However, he
holds investment and voting authority over such shares.
(4) Includes shares that may be acquired upon exercise of options, which are
currently excercisable or are excercisable within 60 days, as follows: Mr.
Feil, 25,000 shares; Mr. Englund, 16,400 shares; Mr. Hughes, 13,567 shares;
Mr. Sapp, 2,000 shares; Mr. LaValle, 6,000 shares; Mr. Lenagh, 6,000 shares;
Mr. North, 19,000 shares; Mr. O'Donnell, 16,000 shares; Mr. Twomey, 16,000
shares; Mr. Petronzi, 40,000 shares; Mr. Rogers, 60,866 shares; Mr.
Vanderwoude, 2,000 shares; and all directors and executive officers as a
group, 226,833 shares.
Item 13. Certain Relationships and Related ransactions
None.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) 1. Financial Statements:
Description
Independent Auditors' Report - 1995 and 1994
Report of Independent Public Accountants - 1993
Consolidated Balance Sheets as of October 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended
October 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the
Years Ended October 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
VIII Valuation and Qualifying Accounts
All other schedules not listed above have been omitted because the information
has been otherwise supplied in the financial statements or the notes thereto or
they are not applicable, or the amounts are insignificant or immaterial.
(b) Reports on Form 8-K:
None
(c) Exhibits:
3.1 Restated Certificate of Incorporation. (5)
3.2 Amended By-Laws. (1)
10.1 Lease dated April 22, 1988 between registrant and
URBCO, Inc. for premises at 565 Taxter Road, Elmsford,
New York. (2)
10.2 Amended and Restated 1982 Incentive Stock Option Plan,
as amended. (7)
10.3 1984 Stock Option Plan adopted by Registrant on
June 27, 1984, as amended. (7)
10.4 1986 Employee Stock Purchase Plan, as adopted by
Registrant in December 1985, as amended. (7)
10.5 Rights Agreement, dated as of February 20, 1989
between the Company and Registrar & Transfer Company,
as rights agent. (4)
10.6 Letter of Registrant to Thomas E. Feil dated
August 29, 1989. (1)
10.7 Adoption of Non-Standardized Retirement Plan and Trust
(401-K) dated January 1, 1989, as amended. (5)
10.8 Amendment dated October 14, 1991 to a lease dated
April 22, 1988 between the Company and URBCO, Inc.
for premises at 565 Taxter Road, Elmsford,
New York. (7)
10.9 Second Amendment dated February 20, 1992 to a lease
dated April 22, 1988 between the Company and
URBCO, Inc. for premises at 565 Taxter Road, Elmsford,
New York. (7)
10.10 Third Amendment dated May 28, 1993 to a lease dated
April 22, 1988 between the Company and URBCO, Inc.
for premises at 565 Taxter Road, Elmsford,
New York. (6)
10.11 Fourth Amendment dated June 8, 1994 to a lease dated
April 22, 1988 between the Company and URBCO, Inc.
for premises at 565 Taxter Road, Elmsford,
New York. (6)
10.12 Agreement dated July 1, 1992 between the Company and
California Institute of Technology. (9)
10.13 Share Acquisition Agreement dated July 28, 1994,
relating to TR Financial Communications plc, together
with Deed of Covenant of the same date between the
Company and Mercury Communications Limited. (8)
16 Letter regarding change in certifying accountant (3)
21 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Arthur Andersen LLP
Footnotes to Exhibits
1. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended October 31, 1989, and incorporated herein by reference.
2. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended October 31, 1988, and incorporated herein by reference.
3. Filed as an exhibit to the Company's Current Report on Form 8-K filed March
18, 1994, and incorporated herein by reference.
4. Filed as an exhibit to the Company's registration statement on Form 8-A filed
February 22, 1989, and incorporated by reference.
5. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended October 31, 1990, and incorporated herein by reference.
6. Filed as an exhibit to the Company's Quarterly Report on Form 10-K for the
period ended October 31, 1994.
7. Filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended October 31, 1992, and incorporated herein by reference.
8. Filed as an exhibit to the Company's Current Report on Form 8-K filed August
12, 1994, and incorporated herein by reference.
9. Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
period ended January 31, 1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized
V BAND CORPORATION
Dated: January 22, 1996 By: /s/ Mark R. Hahn
----------------------------------------------
Mark R. Hahn, Chief Financial Officer
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints each of Thomas E. Feil and Mark R. Hahn his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
each of said attorney-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitutes, may lawfully do or cause to be
done by virtue hereof.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Thomas E. Feil
- --------------------- Chairman, Chief January 25, 1996
Thomas E. Feil Executive Officer
and Director
(Principal
Executive Officer)
/s/ Mark R. Hahn
- --------------------- Chief Financial January 25, 1996
Mark R. Hahn Officer (Principal
Financial and
Accounting Officer)
/s/ Luke P. LaValle, Jr. Director January 25, 1996
- ------------------------
Luke P. LaValle, Jr.
/s/ Thomas H. Lenagh
- --------------------- Director January 25, 1996
Thomas H. Lenagh
/s/ Brian S. North
- --------------------- Director January 25, 1996
Brian S. North
/s/ Joseph M. O'Donnell Director January 25, 1996
- -----------------------
Joseph M. O'Donnell
/s/ A. Eugene Sapp, Jr. Director January 25, 1996
- -----------------------
A. Eugene Sapp, Jr.
/s/ J. Stephen Vanderwoude Director January 25, 1996
- --------------------------
J. Stephen Vanderwoude
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
V Band Corporation
We have audited the accompanying consolidated balance sheets of V Band
Corporation and subsidiaries as of October 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the years then ended. Our audits also included the 1995 and 1994 financial
statement schedule listed at Item 14(a)2. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 1995 and 1994 consolidated financial statements present
fairly, in all material respects, the financial position of V Band Corporation
and subsidiaries as of October 31, 1995 and 1994, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such 1995 and
1994 financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for income taxes during the year ended October
31, 1994.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
December 19, 1995
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To V Band Corporation:
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of V Band Corporation (a New York
Corporation) and subsidiaries for the year ended October 31, 1993. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of V Band
Corporation and subsidiaries for the year ended October 31, 1993 in conformity
with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index of financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
December 16, 1993
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1994
(in 000's, except share data)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,740 $ 3,122
Marketable securities, at cost (approximates market) 187 4,603
Accounts receivable, less allowance for doubtful
accounts of $456 in 1995 and $263 in 1994 4,783 7,669
Inventories. net 7,596 11,773
Deferred tax asset 700 1,251
Prepaid expenses and other current assets 430 505
-------- --------
Total current assets 16,436 28,923
-------- --------
Fixed Assets
Furniture, fixtures, equipment and leasehold improvements 9,392 10,019
Less: Accumulated depreciation and amortization (7,821) (8,536)
-------- --------
Total fixed assets 1,571 1,483
-------- --------
Other Assets 3,205 5,621
-------- --------
TOTAL ASSETS $ 21,212 $ 36,027
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 1,538 $ 3,600
Accrued wages 1,097 872
Customer deposits 1,846 2,842
Other accrued expenses 2,333 2,674
-------- --------
Total current liabilities 6,814 9,988
-------- --------
Commitments and Contingencies (see notes)
Shareholders' Equity
Common stock, $.01 par value; authorized 20,000,000 shares:
issued 7,042,492 in 1995 and 7,035,770 in 1994 70 70
Capital in excess of par value 19,776 19,756
Retained earnings 6,215 17,809
Cumulative translation adjustment 105 172
-------- --------
26,166 37,807
Less - Treasury stock, at cost; 1,719,322 shares (11,768) (11,768)
-------- --------
Total shareholders' equity 14,398 26,039
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 21,212 $ 36,027
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
(in 000's, except per share data)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Sales
Equipment $ 23,591 $ 26,944 $ 23,770
Service 5,760 4,134 1,971
-------- -------- --------
Total sales 29,351 31,078 25,741
-------- -------- --------
Cost of Sales
Equipment 20,958 14,925 14,091
Service 2,770 2,959 867
-------- -------- --------
Total cost of sales 23,728 17,884 14,958
-------- -------- --------
Gross profit 5,623 13,194 10,783
-------- -------- --------
Operating Expenses
Selling, general and administrative 13,076 9,539 9,116
Research and development 3,935 3,308 3,278
-------- -------- --------
Total operating expenses 17,011 12,847 12.394
-------- -------- --------
Operating income (loss) (11,388) 347 (1,611)
Net investment income 73 427 666
Other income (Expense) 22 3 (139)
-------- -------- --------
Income (loss) before Income taxes and
cumulative effect of accounting change (11,293) 777 (1,084)
Provision for Income Taxes 301 150 50
-------- -------- --------
Income (loss) before cumulative effect of
accounting change (11,594) 627 (1,134)
Cumulative Effect of Accounting Change -- 1,242 --
-------- -------- --------
Net Income (loss) $(11,594) $ 1,869 $ (1,134)
======== ======== ========
Per share data
Income (loss) before cumulative effect of
accounting change $ (2.18) $ .12 $ (.21)
Cumulative effect of accounting change -- .23 --
-------- -------- --------
Net income (loss) $ (2.18) $ .35 $ (.21)
======== ======== ========
Weighted average number of shares of common
stock and comxnon stock equivalents 5,322 5,311 5,285
======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31 1995, 1994 AND 1993
{in 000's)
<TABLE>
<CAPTION>
Capital in
Excess of Cumulative
Common Par Retained Translation Treasury
Stock Value Earnings Adjustment Stock
-------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1992 $ 70 $ 19,462 $ 17,074 $ 61 $(11,394)
Proceeds from the employee stock purchase
plan -- 88 -- -- --
Stock options exercised -- 86 -- -- --
Net loss -- -- (1,134) -- --
Purchase of treasury stock -- -- -- -- (374)
Translation adjustment -- -- -- 24 --
-------- -------- -------- ----- --------
Balance, October 31, 1993 70 19,636 15,940 85 (11,768)
Proceeds from the employee stock purchase
plan -- 25 -- -- --
Stock options exercised -- 95 -- -- --
Net income -- -- 1,869 -- --
Translation adjustment -- -- -- 87 --
-------- -------- -------- ----- --------
Balance, October 31, 1994 70 19,756 17,809 172 (11,768)
Proceeds from the employee stock purchase
plan -- 20 -- -- --
Net loss -- -- (11,594) -- --
Translation adjustment -- -- -- (67) --
-------- -------- -------- ----- --------
Balance, October 31, 1995 $ 70 $ 19,776 $ 6,215 $ 105 $(11,768)
</TABLE>
See notes to consolidated financial statements
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
(in 000's)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income (loss) $(11,594) $ 1,869 $ (1,134)
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Cumulative effect of accounting change -- (1,242) --
Depreciation 731 836 885
Amortization and write-off of other assets 1,967 707 613
Provision for doubtful accounts 237 133 266
Provision for inventory reserves 2,734 990 629
Deferred Income taxes 551 (9) --
(Gain) loss on disposat of fixed assets (166) -- 107
Changes in assets and liabilities (net of
business acquisitions):
Decrease (increase) in accounts receivable 2,649 (2,394) 2,104
Decrease (increase) in inventories 1,443 (3,046) (3,401)
Decrease in prepaid expenses and other
current assets 75 333 156
Decrease in other assets 449 (952) 61
(Decrease) Increase in accounts payable and
accrued expenses (3,174) 1,114 2,008
Foreign currency translation adjustment (67) 87 24
-------- -------- --------
Net cash (used in) provided by
operating activities (4,165) (1,574) 2,318
-------- -------- --------
Cash Flows from Investing Activities
Purchase of marketable securities (3,530) (5,642) (16,894)
Sale of marketable securities 7,946 12,150 16,684
Proceeds from the sale of fixed assets 257
Capital expenditures (910) (570) (717)
Payments for business acquisitions -- (4,365) --
-------- -------- --------
Net cash provided by (used in)
investing activities 3,763 1,573 (927)
-------- -------- --------
</TABLE>
(Continued)
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
(in 000's)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from issuance of common stock 20 120 174
Purchase of treasury stock -- -- (374)
-------- -------- --------
Net cash provided by (used in)
financing activities 20 120 (200)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (382) 119 1,191
Cash and Cash Equivalents, at beginning of year 3,122 3,003 1,812
-------- -------- --------
Cash and Cash Equivalents at end of year $ 2,740 $ 3,122 $ 3,003
======== ======== ========
Supplementary Disclosures
Income taxes paid $ 215 $ 146 $ 4,700
======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company
V Band Corporation and its wholly-owned subsidiaries (the "Company") designs,
manufactures, sells, installs and services specialized telephone systems
consisting of sophisticated telephone consoles and supporting common equipment
for switching and access to telephone network facilities. These systems are sold
primarily to financial services firms for use by traders in the trading and
dealing of stocks, bonds, commodities and other financial instruments. The
Company also designs, manufactures and distributes a family of digital
communications multiplexers specifically designed for the "mission critical"
communications of the electric power industry. Other markets include command and
control applications for "right-of-way" companies such as utilities and
transportation, and emergency service organizations.
Note 2: Significant accounting policies
Consolidation
The accompanying consolidated financial statements include the accounts of V
Band Corporation and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out method.
Furniture, fixtures, equipment and leasehold improvements
Furniture, fixtures, equipment and leasehold improvements are carried at cost.
Depreciation is computed using the straight-line method over 3-10 years, the
estimated useful lives of the assets. Leasehold improvements are amortized over
the lesser of the term of the related lease or the estimated useful lives of the
improvements.
Revenue recognition
Equipment revenue, which includes equipment and labor for new system
installations and modifications to existing systems at customer locations, is
recognized as the product is shipped. For long-term contracts, equipment revenue
is recognized under the percentage-of-completion method. Service revenue, which
includes maintenance contract revenue and repairs, is recognized when the
service has been completed.
Investment income
The Company's investment income is substantially comprised of interest earned on
tax-exempt municipal bonds and United States Treasury and United States
Government Agency securities. The Company primarily invests in medium-grade
(BBB) to high-grade (AAA) instruments with maturities ranging from 90 days to 3
years.
<PAGE>
Income taxes
During 1995 and 1994, deferred income taxes were provided for the temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities in accordance with Statement of Financial
Accounting Standards No. 109. During 1993, the provision for income taxes was
provided under Accounting Principles Board Opinion No. 11. See Note 7.
Income (loss) per share
Income (loss) per share has been computed using the weighted average number of
shares of common stock and common stock equivalents (stock options) outstanding,
unless anti-dilutive, during each year.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Foreign currency translation
For translation of the financial statements of its United Kingdom operations,
the Company has determined that the local currency is the functional currency.
Assets and liabilities of foreign operations are translated at year end exchange
rates and income statement accounts are translated at average exchange rates for
the year. The resulting translation adjustments are made directly to the
Cumulative Translation Adjustment component of Shareholders' Equity. Foreign
currency transactions are recorded at the exchange rate prevailing at the
transaction date.
Management estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
<PAGE>
Note 3: Inventories
Inventories are as follows, at October 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Finished goods $ 6,270,000 $ 5,920,000
Parts and components 5,761,000 8,607,000
------------ ------------
12,031,000 14,527,000
Less: Inventory reserves (4,435,000) (2,754,000)
------------ ------------
$ 7,596,000 $ 11,773,000
============ ============
</TABLE>
Note 4: Other assets
The Company has capitalized software costs of $1,106,000 which are being
amortized on a straight-line basis over a five year period.
In 1988, the Company entered into a license and development agreement with CXC
Corporation ("CXC") to develop and commercialize certain switching technology
for $2,031,000. The CXC license was being amortized over ten years, the
anticipated useful life of the technology. In March 1990, the Company amended
the 1988 licensing agreement with CXC. The terms of such amendment provide for,
among other things, a prepaid royalty of $1,040,000, which was capitalized and
was being amortized based on projected units of sales for both the VIAX DN and
Power Deck products that contain the licensed technology. The amortization
commenced upon shipment of the Company's first product unit in 1991. During the
year ended October 31, 1995, the Company reconfigured the components in their
products, whereby the CXC technology acquired was no longer utilized. As such,
the Company wrote-off the remaining net book value of the CXC intangible assets
in the amount of $867,000.
In July 1994, the Company acquired all of the issued share capital of Mercury
Dealing Systems ("MDS"), a subsidiary of Mercury Communications Limited. MDS had
been a distributor of the Company's products in the United Kingdom since 1987.
The aggregate purchase price for the share capital of MDS was $4,634,000,
inclusive of liabilities assumed. The acquisition was accounted for under the
purchase method, whereby the excess of the purchase price over the fair value of
the net assets acquired was $3,389,000, and is being amortized over a ten-year
period.
<PAGE>
If the MDS acquisition had occurred on November 1, 1992, management estimates,
on an unaudited pro forma consolidated basis, the following:
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Sales $ 37,200,000 $ 33,800,000
Net income (loss) before cumulative
effect of accounting change $ 300,000 $ (1,000,000)
Net income (loss) $ 1,500,000 $ (1,000,000)
Per share data
Net income (loss) before cumulative
effect of accounting change $ .06 $ (.18)
Net income (loss) $ .28 $ (.18)
</TABLE>
The following schedule reflects other assets at October 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
MDS acquisition goodwill $ 3,389,000 $ 3,389,000
CXC development -- 2,031,000
CXC royalty -- 1,040,000
Software capitalization 1,106,000 1,106,000
Other 665,000 985,000
------------ ------------
5,160,000 8,551,000
Less: Accumulated amortization (1,955,000) (2,930,000)
------------ ------------
$ 3,205,000 $ 5,621,000
============ ============
</TABLE>
The Company periodically evaluates the recoverability of goodwill and other
intangible assets by assessing whether the unamortized intangible assets can be
recovered through cash flows.
Note 5: Commitments and contingencies
(a) Litigation
In October 1994, the Company commenced an action against Technical Telephone
Systems, Inc. ("TTSI") in New York State Supreme Court, New York County, for
minimum payments due to the Company in the amount of $650,000 under a
distribution agreement between the Company and TTSI. In November 1994, TTSI
filed a counterclaim against the Company denying all allegations stated in the
Company's complaint and alleging a breach of good faith and fair dealing by the
Company, claiming damages of $1 million. The Company believes its claim against
TTSI is meritorious and believes TTSI's counterclaim against the Company, which
the Company will vigorously defend, is without merit and will not have a
material impact on the consolidated financial condition of the Company.
<PAGE>
(b) Leases
The Company leases office and production space under leases expiring between
1996 and 2005. Certain of these lease agreements provide the option for renewals
and include escalation's based on increases in certain costs. Based upon an
amendment to the Company's office lease agreement, executed in 1994, the Company
reversed a lease cancellation fee in the amount of $365,000 in 1994.
Future minimum annual rental payments under these leases are as follows:
1996 $1,028,000
1997 897,000
1998 833,000
1999 555,000
2000 329,000
Thereafter 420,000
Rent expense for 1995, 1994, and 1993 was $1,152,000, $1,011,000 and $1,215,000,
respectively.
(c) Employment contracts
The Company has employment agreements with certain officers that provide for
compensation and other benefits upon termination without cause or upon change of
control of the Company. The aggregate compensation to be paid under existing
employment agreements is $250,000 as of October 31, 1995, and such future
compensation has not been reflected in the accompanying consolidated financial
statements.
The agreement related to change of control has an expiration dates of May 1996.
The agreement related to the payment of severance upon termination without cause
has no expiration date.
Note 6: Stock options
The Company has stock option plans that provide for the granting of options, at
fair market value, to certain key employees and directors to acquire common
stock of the Company.
<PAGE>
The following is a summary of stock option transactions for the two years ended
October 31, 1995:
<TABLE>
<CAPTION>
Shares Exercise Prices
------ ---------------
<S> <C> <C>
Shares under option -- November 1, 1993 590,095 $2.50 to $12.75
Options granted 218,300 4.50 to 5.63
Options exercised (30,250) 2.50 to 4.00
Options canceled (26,117) 4.00 to 12.75
--------
Shares under option -- October 31, 1994 752,028 2.50 to 6.88
Options granted 79,500 2.00 to 5.00
Options canceled (149,333) 2.13 to 6.88
--------
Shares under option -- October 31, 1995 682,195 2.00 to 6.88
========
Options exercisable at:
October 31, 1994 533,128 2.50 to 6.88
========
October 31, 1995 546,894 2.50 to 6.88
========
Options available for grant at:
October 31, 1994 173,683
========
October 31, 1995 245,516
========
</TABLE>
Note 7: Income taxes
Effective November 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS 109, deferred income taxes reflect the tax consequences on future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts. The cumulative effect of the adoption of SFAS 109, as of
November 1, 1993, was to increase net income by $1,242,000, net of a valuation
allowance of $150,000. There was no change in the valuation allowance during
1994. During 1995, the Company recorded an additional deferred tax asset of
$4,325,000 and also recorded an additional valuation allowance of $4,876,000.
The total valuation allowance as of October 31, 1995 of $5,026,000 reduces the
deferred tax asset to the amount that management believes will ultimately be
realized. Realization of the deferred tax asset is dependent upon sufficient
future taxable income during the period that temporary differences and
carryfowards are expected to be available to reduce taxable income. Prior to
November 1, 1993, provisions were made for deferred income taxes where
differences existed between the time that transactions affected taxable income
and the time that these transactions entered into the determination of income
for financial statement purposes.
As of October 31, 1995, the Company had available net operating loss
carryfowards for tax return purposes of approximately $6,800,000 which begin to
expire in 2009. During 1995 the Company reversed $250,000 of prior years' tax
accruals which are no longer required.
<PAGE>
The income tax provision (benefit) consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal $(250,000) 101,000 $ 50,000
State and local
-- 58,000 --
--------- --------- ---------
(250,000) 159,000 50,000
--------- --------- ---------
Deferred
Federal 520,000 (1,000) --
State and local 31,000 (8,000) --
--------- --------- ---------
551,000 (9,000) --
--------- --------- ---------
$ 301,000 $ 150,000 $ 50,000
========= ========= =========
</TABLE>
The difference between the recorded income tax provision (benefit) and the
income taxes computed by applying the statutory Federal income tax rate was the
following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
U.S. statutory rate applied to pretax
income (loss) $(3,840,000) $ 264,000 $ (369,000)
Dividends received deduction and
tax-exempt interest (15,000) (80,000) (149,000)
Goodwill amortization 127,000 -- --
State and local taxes, net of
federal tax benefit (641,000) 33,000 --
Increase in valuation allowance 4,876,000 -- --
Reversal of current liability for taxes (250,000) (85,000) --
Alternative minimum tax -- -- 50,000
Losses producing no current tax benefit -- -- 504,000
Others, net 44,000 18,000 14,000
----------- ----------- -----------
$ 301,000 $ 150,000 $ 50,000
=========== =========== ===========
</TABLE>
<PAGE>
The components of the deferred income tax provision (benefit) for the years
ended October 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Net operating loss carryfowards $(2,241,000) $ --
Bad debt reserve (96,000) 13,700
Depreciation (51,000) (57,000)
Amortization (7,000) (55,000)
Inventory reserves (807,000) (184,000)
Accrued expenses (464,000) 339,000
Capitalization of software (18,000) (75,000)
development costs
Tax credits -- 18,000
State taxes (641,000) (8,700)
(4,325,000) (9,000)
Less: Valuation allowance 4,876,000 --
----------- -----------
$ 551,000 $ (9,000)
=========== ===========
</TABLE>
The net deferred income tax asset at October 31, 1995 and 1994, consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax liabilities
- ------------------------
Capitalization of software development costs $ (66,000) $ (84,000)
Deferred tax assets
- -------------------
Depreciation 268,000 216,000
Amortization 65,000 57,000
Inventory reserves 1,420,000 615,000
Accrued expenses 616,000 189,000
Bad debt reserve 203,000 106,000
State and local taxes, net of
federal tax benefit 787,000 151,000
Net operating loss carry forwards 2,336,000 135,000
Tax credits 97,000 16,000
----------- -----------
5,726,000 1,401,000
Valuation allowance (5,026,000) (150,000)
----------- -----------
$ 700,000 $ 1,251,000
=========== ===========
</TABLE>
Taxing authorities may periodically challenge positions taken by the Company on
its tax returns. On the basis of information presently available, it is the
opinion of management that any potential assessments resulting from current tax
audits will not have a material impact on the financial condition of the
Company.
<PAGE>
Note 8: Segment information
(a) Significant customers
Morgan Guaranty Trust Company of New York and affiliates accounted for 14% of
the Company's sales in 1995 and 1994. During 1995, the Chicago Board of Trade
accounted for 13% of the Company's sales. No customer accounted for more than
10% of sales in 1993.
(b) Foreign sales
In 1995, 1994 and 1993, foreign sales represent 36%, 28% and 28%, respectively,
of consolidated sales and include the following geographical areas:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Pacific Rim $ 1,900,000 $ 3,300,000 $ 3,500,000
Europe (including UK) 7,200,000 3,300,000 2,600,000
All others 1,400,000 2,100,000 1,200,000
----------- ----------- -----------
$10,500,000 $ 8,700,000 $ 7,300,000
=========== =========== ===========
</TABLE>
Note 9: Capital transactions
(a) Treasury stock
During the year ended October 31, 1993, the Company repurchased 82,600 shares of
its common stock at the market price in effect at the time of purchase. The cost
of these shares are reflected in treasury stock in the accompanying consolidated
balance sheets.
(b) Stock rights plan
On February 20, 1989, the Board of Directors of the Company adopted a common
share purchase rights plan and declared a dividend distribution of one common
share purchase right (the "Right") on each of its common shares to shareholders
of record on March 7, 1989. Each Right will entitle the registered holder to
purchase from the Company one outstanding common share, par value $.01 per
share, at a purchase price of $45.00 per share, subject to anti-dilutive
adjustments (the "Purchase Price"). The Rights generally become exercisable if a
person or group acquires, or tenders for, 20% or more of the Company's common
shares. In such event, the holder of a Right will have the right to receive,
upon exercise of the Right at the then current Purchase Price, a number of
common shares with a total market value of two times the Purchase Price. The
Rights will expire on February 19, 1999, unless they become exercisable before
then, but may be redeemed by the Company for $.01 per Right.
(c) Employee stock purchase plan
Under the Company's Employees 1986 Stock Purchase Plan (the "Purchase Plan"),
all eligible employees may authorize payroll deductions of up to 10% of their
base salary to purchase shares of the Company's Common Stock at 85% of the
market price. There are no charges or credits to income in connection with the
Purchase Plan. The Company may terminate the Purchase Plan at any time.
<PAGE>
Note 10: Fourth quarter results
During the fourth quarter of 1995, the Company recorded the following expense
adjustments:
Inventory reserves $ 2,300,000
Intangible asset write-off 900,000
Inventory charges 300,000
Warranty reserves 300,000
Deferred tax asset valuation 600,000
Severance and other 800,000
EXHIBIT 21
Subsidiaries
V Band PLC - organized under the laws of England
Licom, Inc. - incorporated under the laws of the State of Delaware
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in V Band Corporation's
Registration Statements Nos. 2-94923, 33-7540, 33-19146 and 33-62458 on Form S-8
of our report dated December 19, 1995 and appearing on page F-1 of the Annual
Report on Form 10-K for the year ended October 31, 1995
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 25, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated December 16, 1993 included in this Form 10-K,
into the Company's previously filed Registration Statements:
1. Form S-8 of V Band Corporation (File No. 2-94923)
2. Form S-8 of V Band Corporation (File No. 33-7540)
3. Form S-8 of V Band Corporation (File No. 33-19146)
4. Form S-8 of V Band Corporation (File No. 33-62458)
ARTHUR ANDERSEN LLP
New York, New York
January 25, 1996
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994, AND 1993
Column A Column B Column C -- Additions Column D Column E
---------- ----------------------------- ---------- ----------
(1) (2)
Balance at Charged to Charged to Balance at
Beginning of costs and other End of
Description Period expenses accounts Deductions Period
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
October 31, 1995 .................... $ 263,000 $ 237,000 $ 0 $ 44,000(a) $ 456,000
October 31, 1994 .................... $ 243,000 $ 133,000 $ 20,000(b) $ 133,000(a) $ 263,000
October 31, 1993 ..................... $ 149,000 $ 156,000 $ 0 $ 62,000(a) $ 243,000
Inventory reserve
October 31, 1995 ..................... $2,754,000 $2,734,000 $ -- $1,053,000(c) $4,435,000
October 31, 1994 ..................... $1,199,000 $ 990,000 $ 652,000(b) $ 87,000(c) $2,754,000
October 31, 1993 ..................... $ 830,000 $ 629,000 $ 0 $ 260,000(c) $1,199,000
Warranty reserve
October 31, 1995 ..................... $ 189,000 $ 607,000 $ 0 $ 381,000(d) $ 415,000
October 31, 1994 ..................... $ 300,000 $ 202,000 $ 0 $ 313,000(d) $ 189,000
October 31, 1993 ..................... $ 143,000 $ 632,000 $ 0 $ 475,000(d) $ 300,000
Reserve for Notes Receivable
October 31, 1995 ..................... $ 110,000 $ 0 $ 0 $ 0 $ 110,000
October 31, 1994 ..................... $ 110,000 $ 0 $ 0 $ 0 $ 110,000
October 31, 1993 ..................... $ 0 $ 110,000 $ 0 $ 0 $ 110,000
Valuation allowance for
deferred tax asset
October 31, 1995 ...................... $ 150,000 $ 551,000(e) $4,325,000(e) $ 0 $5,026,000
October 31, 1994 ...................... $ 0 $ 150,000 $ 0 $ 0 $ 150,000
- ----------------------
(a) Doubtful accounts written off, net of cash recovered.
(b) Reserve balances acquired in connection with the acquisition of Mercury Dealing Systems at July 28, 1994.
(c) Disposals of obsolete or slow moving inventory.
(d) Warranty labor charges combined with actual cash payments.
(e) Additional valuation allowance applicable to the deferred tax asset.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> OCT-31-1995
<CASH> 2,740
<SECURITIES> 187
<RECEIVABLES> 4,783
<ALLOWANCES> 456
<INVENTORY> 7,596
<CURRENT-ASSETS> 16,346
<PP&E> 9,392
<DEPRECIATION> 7,821
<TOTAL-ASSETS> 21,212
<CURRENT-LIABILITIES> 6,814
<BONDS> 0
0
0
<COMMON> 19,846
<OTHER-SE> (5,448)
<TOTAL-LIABILITY-AND-EQUITY> 21,212
<SALES> 29,351
<TOTAL-REVENUES> 29,351
<CGS> 23,728
<TOTAL-COSTS> 13,076
<OTHER-EXPENSES> 3,935
<LOSS-PROVISION> 237
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,293)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,594)
<EPS-PRIMARY> (2.18)
<EPS-DILUTED> (2.18)
</TABLE>
