SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 1
[ 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, 1996
[ ] 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
(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
(Address and zip code of principal executive office)
(914) 789-5000
(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)
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, 1996, was
5,328,303 shares.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates, as of December 31, 1996, was $7,824,776 *.
<PAGE>
* 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, 1996.
Documents incorporated by reference
None.
<PAGE>
V BAND CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
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 software-based
communications workstations, switching equipment, peripheral products, project
management services, technical services and wide-area network (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 communication control centers for
utilities, government and military agencies, emergency service E9-1-1 dispatch
centers, airlines, and railroads.
Beginning in 1994, the Company has implemented significant changes in the manner
in which it conducts business. During 1994, the Company established a direct
sales and service network in the United States and the United Kingdom by
acquiring four companies which distributed and serviced the Company's products
in the principal markets of New York, London and Boston. The Company further
increased its direct sales and service network in the United States by opening
sales offices in Atlanta, Chicago and San Francisco. In 1995, the Company
restructured its manufacturing process by out-sourcing the manufacture of many
sub-assemblies of the Company's products. In 1995, the Company also reorganized
its management, engineering, manufacturing and administrative organizations, and
reduced the number of its employees. During 1996, the Company established V Band
Asian Partners, a strategic alliance of thirteen distributors of the Company's
products in the Asian market.
In 1994, the Company acquired certain assets of Windmill Communications, Inc.
("Windmill"), Advantage Communications, Inc. ("Advantage"), ACT Computer
Support, LTD. ("ACT") and acquired the outstanding capital stock of Mercury
Dealing Systems ("Mercury"). The Windmill and Advantage acquisitions provided
the Company with a service presence and increased sales strength in the New York
City and Boston Markets, respectively. The Mercury and ACT acquisitions
increased the Company's sales and service presence in the London market. These
acquisitions, coupled with the opening of sales offices in Atlanta, Chicago and
San Francisco, implemented the Company's strategy of enhancing market share
through the direct sale and full service of its products, including project
management, maintenance and other services. The Company's sales offices are
complemented in certain regions of the domestic and global marketplace by
distributors which sell and service the Company's products.
<PAGE>
During 1995, the Company transferred the production of its printed circuit
boards from an internal manufacturing process to external contract
manufacturers. This action was undertaken to reduce the cost of the Company's
products and permitted the Company to substantially reduce the size of its
production facilities. The Company also reorganized its management, engineering,
manufacturing and administrative organizations and substantially reduced the
number of the Company's employees.
During 1996, the Company established V Band Asian Partners, a strategic
partnership with The Trade Wind Group, a long-time distributor of the Company's
products based in Australia. V Band Asian Partners is an alliance of thirteen
distributors whose marketing efforts and servicing capabilities are coordinated
and supported by The Trade Wind Group. Through this partnership, the Company has
improved its ability to capitalize on the current growth trend in the Asian
financial marketplace.
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 approximately $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 was installed and activated in July 1995. The project is expected to
be completed in 1997. The Company recognizes revenue from this contract under
the percentage-of-completion method.
In fiscal 1996, the Company executed an agreement with the Chicago Board of
Trade (through a general contractor) for a major expansion and relocation of the
Chicago Board of Trade's financial trading floor. This contract, which augmented
the agreement mentioned above, is valued in excess of $2.5 million and is
expected to be completed during the Company's second fiscal quarter of 1997.
In addition, in November 1996, the Company executed an agreement with the New
York Mercantile Exchange for the sale, installation and maintenance of a major
two-floor trading communications system that includes approximately 660
custom-designed exchange floor telephones and various peripheral equipment. This
transaction is valued, in aggregate, at over $5.0 million. This contract is
expected to be completed during 1997.
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, transportation companies, and emergency service
organizations.
The Company's United Kingdom operation, which carries on business under the name
of V Band PLC, performs assembly, sales, installation and maintenance services.
For the fiscal years ended October 31, 1996 and 1995, V Band PLC had sales of
$7.4 and $8.1, respectively. At October 31, 1996, V Band PLC had 47 employees.
<PAGE>
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, flexibility and network management
capabilities while reducing repair cost and space requirements.
In June 1990, the Company introduced the industry's first all digital voice
trading system, 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 BroadBand 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 BroadBand DN which is the latest generation
distributed digital switch system. BroadBand 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.
In 1995, the Company introduced DXi, a high speed digital communications
console. The DXi is fully compatible with the Company's BroadBand DN technology
platform and employs the same base technology as the Power Deck. The Company
also introduced its digital eXchange Phone which is 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 Asynchronous Transfer Mode ("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 Company installed GSM at several of its customer locations during 1996.
<PAGE>
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 provides a 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 allows 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.
In 1996, the Company re-engineered its eXchange Phone to meet the feature and
function requirements of the New York Mercantile Exchange, for which the Company
has an agreement to sell, install and maintain approximately 660 positions.
In 1996, the Company introduced the Clarity Speaker System. The Clarity Speaker
System allows traders and brokers to simultaneously monitor an unprecedented
number of lines without the need for numerous individual speaker cube arrays.
The Clarity Speaker System employs virtual stereo capabilities that helps users
to more readily manage incoming communications in a high traffic environment
while requiring minimal space at the trading desk. The Company also introduced a
DXi hard-key button module that will enable its Power Deck and DXi trading
consoles to support hard keys as well as softkeys, or a combination of both. The
Company expects to ship the Clarity Speaker System and its DXi Hard-key module
in 1997.
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.
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.
<PAGE>
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. This card enables the Company to decrease the
space requirements of its backroom cabinets and racks. 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. DXi, a new digital trading console
features an internal speaker phone and a streamlined, high-speed trader
interface. PassPort, a sophisticated UNIX-based suite of tools maintains large
systems in a cost-effective manner. 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.
In 1996, the Company introduced the Clarity Speaker System. Clarity allows
traders and brokers to simultaneously monitor an unprecedented number of lines
without the need for numerous individual speaker cube arrays. The Clarity
Speaker System employs virtual stereo capabilities that helps users to more
readily manage incoming communications in a high traffic environment while
requiring minimal space at the trading desk.
Also in 1996, a new digital exchange floor phone product was developed that
enables the use of up to eight handsets per phone. In November 1996, the New
York Mercantile Exchange entered into an agreement to purchase approximately 660
of these new exchange phones. The Company feels it is well positioned to compete
effectively for business in the exchange floor marketplace, which is expected to
be robust over the next two years.
In 1996, the Company developed a new hard key button module that will allow its
Power Deck and DXi trading consoles to support hard keys as well as softkeys, or
a combination of the both. In addition, numerous software feature enhancements
for the Broad Band DN system architecture were developed and released.
The Company continues its research efforts into the practical application of ATM
(Asynchronous Transfer Mode) technology to the trading room. Application
development efforts also continue on CTI (Computer Telephone Integration), which
unites the computer and the telephone. The Company believes the CTI 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.
<PAGE>
During the years ended October 31, 1996, 1995 and 1994, the Company's annual
research and development expenditures were $3.1 million, $3.9 million and $3.3
million or 9%, 13% and 11% 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 several distributors to support its
operations throughout other regions of the United States.
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. To accommodate the increased activity level of global
financial markets, V Band expanded its base of foreign distributors during 1996.
At present, there are 23 authorized V Band distributors worldwide, with new
digital systems recently placed in Russia, Greece and South Africa. During 1996,
V Band Corporation and Australia-based Trade Wind Group announced the formation
of V Band Asian Partners, a strategic partnership to expand distribution
channels for V Band's products in Pacific Rim countries. Licom uses direct and
distributor sales, service, project management and maintenance in the United
States and Canada, and uses independent distributors for international sales and
service.
Sales to Morgan Guaranty Trust Company of New York and affiliates represented
10%, 14% and 14% of sales in 1996, 1995 and 1994, respectively. Sales to the
Chicago Board of Trade and its general contractor represented 21% and 13% of
sales in 1996 and 1995, respectively.
Equipment sales, excluding Licom's ProMX, consisting of new systems installed
and modifications to existing systems, in all markets, were $25.3 million, $20.5
million and $23.0 million, representing 77%, 69% and 74% of the Company's sales
in 1996, 1995 and 1994, respectively. Licom sales represented 7%, 11% and 13% of
the Company's sales in 1996, 1995 and 1994, respectively. Service sales, which
consists of maintenance contract sales, support, service and miscellaneous
repairs accounted for 16%, 20% and 13%, of sales during 1996, 1995 and 1994,
respectively.
The Company's foreign sales for 1996, 1995 and 1994 were $9.7 million, $10.5
million and $8.7 million, or 29%, 36% and 27%, respectively, of total
consolidated sales. For further information regarding foreign sales, see Note 8
- -- Notes to Consolidated Financial Statements.
<PAGE>
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, 20%, 16% and 16% of the Company's sales for 1996, 1995
and 1994, 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
leased facility in Yonkers, New York. This new facility houses the Company's
purchasing, production control, final assembly, quality control, testing and
repair operations.
The Company primarily utilizes three outside subcontractors to manufacture 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 has
been be able to reduce some of its product cost due to the economies of scale
afforded by the outside contractors in the purchase of components.
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. During 1995, the Company
relocated its Licom facility to a nearby location, to provide better utilization
of space.
The Company's United Kingdom manufacturing operation, consisting of final
product assembly and addition of local content and testing, is located at its
facility in Beckton, England, approximately 20 miles southeast of London.
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 system. In 1993, the Company was granted a U.S. patent
relating to the design of the VIAX DN console system. 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
<PAGE>
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 competitors in the United States are IPC Information
Systems, Inc. ("IPCI"). and British Telecom plc. 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 for the Company's
products. 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, 1996, 1995 and 1994, the Company's backlog of purchase orders
that management believes to be firm was $8.3 million, $10.5 million and $2.8
million, respectively. The Company expects to deliver all products from its
October 31, 1996 backlog during fiscal 1997. 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.
<PAGE>
Employees
As of October 31, 1996, the Company had 199 full-time employees, of whom 29 were
product development personnel, 110 were sales, marketing and service support
personnel, 28 were production personnel, and 32 were administrative personnel.
This compares to 241 at October 31, 1995 and 288 at October 31, 1994. The
decrease from 1995 was primarily attributable to a reorganization of the
Company's engineering, manufacturing and administrative functions in November
1995. The reduction from 1994 was attributable to a reorganization of the
Company's management and restructuring of the Company's manufacturing
operations, which included the out-sourcing of the production of the Company's
printed circuit boards,
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, four employees of a wholly owned subsidiary of
the Company, 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 leases executive offices and engineering facilities of
approximately 22,800 square feet, located at 565 Taxter Road, Elmsford, New
York.
The Company conducts its assembly and quality assurance operations at a 15,000
square feet at Three Westchester Plaza, Elmsford, New York.
Leases for the Company's domestic sales and service support locations include
approximately: 5,900 and 2,500 square feet located in New York City; 1,300
square feet located in Boston, Massachusetts; 1,800 square feet in Chicago,
Illinois; and 1,800 square feet in San Francisco, California. Subsequent to the
fiscal year end October 31, 1996 the Company executed a lease for approximately
2,600 square feet of office space at its existing location in Chicago, Illinois.
The Company is currently re-negotiating its lease in San Francisco and expects
to either renew at its existing site or relocate to a similar space in the same
building.
Licom's headquarters consist of approximately 8,600 square feet of office and
production assembly space, located at 620 Herndon Parkway, Herndon, Virginia.
The Company leases office and production space related to its United Kingdom
operation. It has a leased sales office of approximately 1,700 square feet
located in London. The production facility and administrative offices with
approximately 20,000 square feet located within 20 miles southeast of London.
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
<PAGE>
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, 1996.
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, 1996.
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.
<TABLE>
<CAPTION>
Fiscal 1996 High Low
- ----------- ---- ---
<S> <C> <C>
Fourth Quarter $ 3.38 $ 1.88
Third Quarter $ 3.88 $ 1.63
Second Quarter $ 3.38 $ 1.63
First Quarter $ 2.38 $ 1.25
<CAPTION>
Fiscal 1995 High Low
- ----------- ---- ---
<S> <C> <C>
Fourth Quarter $ 2.75 $ 1.88
Third Quarter $ 3.50 $ 1.88
Second Quarter $ 3.25 $ 1.88
First Quarter $ 5.25 $ 2.75
</TABLE>
As of December 31, 1996, there were approximately 550 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,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in 000's, except per share data)
<S> <C> <C> <C> <C> <C>
Sales ................................. $ 32,886 $ 29,351 $ 31,078 $ 25,741 $ 28,888
Income (loss) before cumulative effect
of accounting change ............ 27 (11,594) 627 (1,134) 248
Cumulative effect of accounting change. -- -- 1,242 -- --
-------- -------- -------- -------- --------
Net income (loss) ..................... $ 27 $(11,594) $ 1,869 $ (1,134) $ 248
======== ======== ======== ======== ========
Per share data:
Income (loss) before cumulative
effect of accounting change ..... $ .01 $ (2.18) $ .12 $ (.21) $ .04
Cumulative effect of accounting change -- -- .23 -- --
-------- -------- -------- -------- --------
Net income (loss) ..................... $ .01 $ (2.18) $ .35 $ (.21) $ .04
======== ======== ======== ======== ========
Weighted average number of shares of
common stock and common stock
equivalent ........................ 5,323 5,322 5,311 5,285 6,069
Cash dividends per common share ....... $ .00 $ .00 $ .00 $ .00 $ .00
Working capital ....................... $ 10,619 $ 9,622 $ 18,935 $ 19,684 $ 19,931
Total assets .......................... $ 22,042 $ 21,212 $36,02 $ 30,639 $ 29,944
Shareholders' equity .................. $ 14,488 $ 14,398 $ 26,039 $ 23,963 $ 25,273
</TABLE>
<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,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Sales
Equipment .................................. 84.2 % 80.4 % 86.7 %
Service .................................... 15.8 19.6 13.3
----- ----- -----
Total sales .................................... 100.0 100.0 100.0
Cost of sales
Equipment(*) ............................... 59.2 85.7 55.4
Service(*) ................................. 62.2 61.0 71.6
----- ----- -----
Total cost of sales ............................ 59.7 80.8 57.5
----- ----- -----
Gross Profit ................................... 40.3 19.2 42.5
Selling, general and administrative expenses ... 31.0 44.6 30.7
Research and development expenses .............. 9.5 13.4 10.7
----- ----- -----
Operating income (loss) ........................ (0.1) (38.8) 1.1
===== ===== =====
Income (loss) before cumulative effect of
accounting change .......................... 0.1 (39.5) 2.0
Cumulative effect of accounting change ......... -- -- 4.0
----- ----- -----
Net income (loss) .............................. 0.1 % (39.5)% 6.0 %
===== ===== =====
* Presented as a percentage of the related sales categories.
</TABLE>
Sales
Sales for the year ended October 31, 1996 were $32.9 million, a $3.5 million, or
12%, increase from sales for 1995. The increase in sales was primarily
attributable to the increase in sales of the Company's Power Deck, DXi and
eXchange Phone products which increased to $15.4 million in 1996 from $9.9
million in 1995, or 56%, as product migration continued in favor of the
Company's newer products. Sales for the Company's older products, Viax DN and
Viax Analog, decreased to $4.9 million in 1996 from $9.4 million in 1995, or a
48% decrease. Sales for the Company's Licom ProMX decreased to $2.4 million from
$3.1 million, or 23%, due to increased competition in the market for the
Company's product. Excluding Licom's ProMX sales, the Company's sales were $30.5
million in 1996 compared to $26.3 in 1995, or an increase of 16%. Equipment
sales, which include new equipment installations plus moves, adds and changes
for customers' existing systems, were $27.7 million in 1996 as compared to $23.5
in 1995, or an increase of 18%. Excluding Licom's ProMX sales, the Company's
<PAGE>
equipment sales were $25.3 million in 1996 compared to $20.5 in 1995, or an
increase of 23%. Service sales decreased to $5.2 million in 1996 from $5.8
million in 1995, or a 10% decrease. This decrease is primarily attributable to
several factors - a reduction in the Company's repairs and other sales related
to E-911 products, older Viax products and miscellaneous products to $1.0
million in 1996 from $1.5 million in 1995. Maintenance sales remained level at
$4.2 million for 1996 and 1995 as several customers historically covered by
maintenance contracts upgraded to new systems during 1996 and those customers'
systems were covered under warranty contracts for all or part of the year.
Sales in 1996 to non-financial customers (i.e., communication control centers
for utilities and government agencies) accounted for $6.0 million, or 18% of
sales, a $1.2 million increase from 1995 non-financial customer sales. The
increase was related primarily to several specific sales of the Company's
product in diverse applications.
Sales for the year ended October 31, 1995 were $29.4 million, a $1.7 million or
a 5% decrease from sales for 1994. The decrease in sales was attributable to the
decrease in equipment sales. Equipment sales for the year, which included 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., communication control centers
for utilities and government agencies), which accounted for $4.8 million, or 15%
of sales, remained relatively unchanged from 1994 non-financial customer sales.
Since the Company sells products to its foreign customers and distributors for
U.S. dollars, it is unaffected by currency translations. The Company's United
Kingdom operation transacts sales in pounds sterling or US dollars. Those sales
transacted in pounds sterling were not materially impacted by foreign exchange
rate fluctuations during 1996 or 1995. 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, $28.4 million, or 86%
of total sales were direct in 1996, as compared to $24.1 million and $21.5
million, or 82% and 70% of sales in 1995 and 1994, respectively.
Gross Profit Margins
Gross profit margins for 1996 and 1995 were 40% and 19%, respectively. The
equipment gross profit margin was 41% in 1996, as compared to 14% in 1995. The
increase in equipment gross margins for 1996 were attributable to the matters
relating to 1995 described below. The equipment gross profit margin for 1995 was
adversely affected by the special fourth quarter adjustment of $3.8 million, the
manufacturing restructuring program initiated by the Company and competitive
discounting for the Company's products.
<PAGE>
The 1995 gross profit was affected by several special fourth quarter 1995
expense adjustments, including a $2.6 million charge for increases in inventory
reserves and inventory write-offs related to older product lines, a $.9 million
write-off of an intangible asset related to a license for product technology no
longer used, 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 restructuring enabled the
Company to reduce its gross manufacturing expenses by $3.0 million, from $5.3
million in 1995 to $2.3 million in 1996. Also, the Company found it necessary to
offer larger discounts for its products in order to meet competitive challenges.
The service gross profit margin decreased slightly to 38% in 1996 from 39% in
1995. This was primarily attributable to a decrease in the Company's repair
sales for older products, which have generally yielded higher gross profit
margins.
The gross profit margin was 19% in 1995 as compared to 42% in 1994. The
equipment gross profit margin was 14%, 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 products. The service gross profit margin
increased to 39%, in 1995 from 28% in 1994. Service sales increased 39% over
1994 levels as the Company transformed from a distributor-based network to a
direct sales and service network, while the service cost of sales decreased 6%,
due to economies of scale and better efficiencies brought about by a larger
customer base.
Operating Expenses
Total operating expenses for 1996 decreased to $13.3 million, representing a 22%
decrease from $17.0 million for 1995. Operating expenses as a percentage of
sales were 40% in 1996 as compared to 58% in 1995. The selling, general and
administrative expenses decrease as a percentage of sales to 31% in 1996 from
45% in 1995 was attributable primarily to the restructuring program initiated by
the Company during 1995.
Total operating expenses for 1995 increased to $17.0 million, representing a 33%
increase from $12.8 million for 1994. Operating expenses as a percentage 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.
Selling, general and administrative costs for 1996 decreased $2.9 million to
$10.2 million, or 22%, from $13.1 million in 1995. The decrease in selling,
general and administrative expenses was attributable to the Company's 1995
restructuring. Overall, the Company reduced the number of its full-time
employees to 199 at October 31, 1996 from 241 at October 31, 1995 and 288 at
October 31, 1994. Overall, sales, general and administrative payroll and
benefits were $2.2 million lower in 1996. Part of this reduction was
attributable to severance costs incurred in 1995 related to the aforementioned
restructuring. The Company was able to reduce headcount while increasing its
operational efficiency by implementing a new management information system
towards the end of 1995. This new system enabled the Company to streamline many
of its operational and administrative functions.
<PAGE>
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 severance accrual and other miscellaneous costs at
year-end of $.8 million.
Research and development expenses for 1996 of $3.1 million decreased $.8
million, or 21%, from $3.9 million in 1995. Research and development expenses as
a percentage of sales decreased to 9% in 1996 as compared to 13% in 1995. The
decrease in research and development expenses was primarily attributable to the
restructuring of the Company's engineering department which placed a greater
emphasis on software development as opposed to hardware development, which is
less costly. In addition, the products introduced during the year require less
development expense to bring to the market.
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, BroadBand DN, WAN
ONE and the eXchange phone, which is being installed at the Chicago Board of
Trade.
Other Income and Expense
Net investment income for 1996 and 1995 remained relatively unchanged at $.1
million.
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.
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.
During 1996, the Company reduced the deferred tax asset and valuation allowance
by $208,000. The total valuation allowance as of October 31, 1996 of $4,818,000
<PAGE>
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. There was no change in the
valuation allowance during 1996. The Company's 1996, 1995 and 1994 tax
provisions of $5,000, $301,000 and $150,000 reflect effective tax rates of 19%,
(3)% and 19%, respectively.
Net Income (Loss) Per Share
For 1996, the Company recorded net income of $27,000 or $.01 per share, as
compared to net loss of $11.6 million, or $2.18 per share in 1995. The Company's
Licom subsidiary recorded a net operating loss of $.5 million compared to a net
operating loss of $.1 million in 1995. Excluding Licom's results, the Company
had net income of $.5 million, or $.09 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. 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
The Company's aggregate of cash, cash equivalents and marketable securities at
October 31, 1996 declined $.7 million, to $2.3 million, compared to the balances
reported at October 31, 1995. Accounts receivable increased $1.9 million, to
$6.7 million in 1996 from $4.8 million in 1995, primarily due to the increase in
sales for the Company's fourth quarter compared to the fourth quarter of 1995
and an increase in amount outstanding, (including retainage) related to the
Chicago Board of Trade contracts. Total current liabilities increased due to the
timing of inventory purchases in the fourth quarter to support sales for the
fourth quarter of 1996 and the first and second quarters of 1997. Capital
expenditures were $.3 million in 1996 as compared to $.9 million in 1995.
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 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 has taken a number of steps to create additional liquidity for its
operations and to take advantage of marketing opportunities. The restructuring
of the Company's production operations in 1995 and the reduction of the number
of Company employees in 1995 and 1996 have contributed to the Company's
liquidity. The Company is also seeking to obtain a credit facility from a
lending institution. In January 1997, the Company borrowed $200,000 on a
short-term basis from the Company's Chairman and Chief Executive Officer. The
Company has no other indebtedness and believes it will be able to obtain a
credit facility which, together with other resources, would provide sufficient
liquidity to meet projected requirements.
<PAGE>
The Company's working capital was $10.6 million as of October 31, 1996, a $1.0
million increase from $9.6 million as of October 31, 1995. 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.
The Company has no significant commitments for capital expenditures as of
October 31, 1996.
Item 8. Financial Statements and Supplementary Data
The response to this item is incorporated by reference to pages F-1 through F-12
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) 55 Chairman, Chief Executive Officer, Director
Thomas Hughes 37 Chief Operating Officer
Mark R. Hahn 39 Vice President - Chief Financial Officer, Treasurer and Secretary
Gerald C. Walsh 50 Senior Vice President - Sales and Operations
Luke P. La Valle, Jr. (2)(3) 54 Director
Thomas H. Lenagh (2) 72 Director
Brian S. North (1) 45 Director
Joseph M. O'Donnell (3) 50 Director
A. Eugene Sapp, Jr. (1) 60 Director
J. Stephen Vanderwoude (2)(3) 53 Director
(1) Member of stock option committee.
(2) Member of audit committee.
(3) Member of compensation committee.
</TABLE>
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.
Mark R. Hahn was appointed Vice President and Chief Financial Officer of the
Company in August 1995. He was elected Secretary of the Company in December 1995
and elected Treasurer of the Company in May 1996. 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.
Gerald C. Walsh was appointed Senior Vice President, Sales and Operations of the
Company in May 1996. Prior to joining the Company, he was Eastern Regional
Manager, National Accounts at Executone Information Systems, Inc., From 1993 to
1995, Mr. Walsh served as Chief Operating Officer for Glasgal Communications,
Inc., in Northvale, New Jersey. From 1987 to 1992, he was Senior Vice President
and General Manager for Contel IPC.
<PAGE>
Luke P. La Valle, Jr. has served as a Director of the Company since June 1992.
Since 1980, Mr. La Valle has been President and Chief Investment Officer of
American Capital Management, Inc., a New York City based investment management
firm for individuals, trusts, pension and profit sharing accounts. Prior to
forming American Capital Management, Inc., Mr. La Valle 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.
He was formerly Chairman and Chief Executive Officer of Greiner Engineering from
1984 to 1986. Prior to that he was Financial Vice President of Aspen Institute
until 1984. Previously, he was Treasurer and Portfolio Manager of the Ford
Foundation. Mr. Lenagh is a retired Captain of the United States Naval Reserve.
Mr. Lenagh is also a Director of CML, Inc., Gintel Funds, Adams Express,
Clemente Growth Fund, ICN Pharmaceuticals, Inc., Irvine Sensors Corporation and
Franklin Quest.
Brian S. North has served as a Director of the Company since September 1988. Mr.
North has been an attorney with the law firm of White and Williams since 1995.
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.
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, Inc., 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
aftermarket. He is also a Director of Cincinnati Microwave, Inc., a publicly
held company and Boca Research.
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 its President, Chief
Operating Officer and Director 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 Chairman and Chief Executive Officer of Madison River
Telephone Company LLC. He was President, Chief Executive Officer and Director
for Video Lottery Technologies in Atlanta, Georgia from 1994 to 1995. 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.
<PAGE>
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.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years ended
October 31, 1996, 1995 and 1994 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 1996 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, 1996 $200,000 $-- $ -- $ -- $ 2,000
Chairman, Chief Executive 1995 199,000 -- -- -- 1,528
Officer and Director 1994 199,998 -- -- -- --
Thomas Hughes, (3) 1996 150,000 -- -- 90,000 1,500
Chief Operating Officer 1995 103,616 -- -- 16,000 1,036
1994 88,858 3,276 -- 6,000 889
Mark R. Hahn, (3) 1996 105,000 -- -- 60,000 1,050
Vice President- 1995 85,077 -- -- 17,000 285
Chief Financial Officer 1994 -- -- -- -- --
- --------------------------------
(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. Hughes and Mr. Hahn entered into agreements with the Company in January
1996 whereby they are each entitled to receive approximately one year's
compensation should there be a change of control of the Company within one
year from the date of the agreement.
</TABLE>
<PAGE>
STOCK OPTIONS
The following tables summarize option grants during the fiscal year ended
October 31, 1996 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, 1996. The Company does
not maintain any pension plans or any supplementary pension award plans.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
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 90,000 25% $1.88 2006 $142,326 $326,853
Mark Hahn 60,000 17% 1.88 2006 94,884 217,902
</TABLE>
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-end Option Value
<TABLE>
<CAPTION>
Value of Unexercised In-the
Number of Unexercised Options Money Options at
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 - - 26,900 88,667 2,917 20,833
Mark R. Hahn - - 15,667 61,333 1,708 13,917
</TABLE>
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.
Pursuant to the Company's Stock Compensation Plan for Non-Employee Directors,
each outside director may elect to have all or a portion of his compensation
paid by the Company by means of the issuance of the Company's Common Stock in
lieu of cash. 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.
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. La Valle, O'Donnell and Vanderwoude comprise the Compensation Committee.
Messrs. Feil, North and Sapp comprise the Stock Option Committee. Messrs. La
Valle, Lenagh and Vanderwoude comprise the Audit Committee. Mr. Feil is an
officer and employee of the Company, but is not eligible to receive stock
options while serving on the stock option committee.
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, 1996.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Name Beneficially Owned Class
- ---- ------------------ -----
<S> <C> <C>
Thomas E. Feil 1,461,472 (2)(4) 26.8%
565 Taxter Road, Elmsford, NY 10523
Thomas Hughes 29,900 (4) *
565 Taxter Road, Elmsford, NY 10523
Mark R. Hahn 29,549 (4) *
565 Taxter Road, Elmsford, NY 10523
Luke P. La Valle, Jr. 18,000 (1)(4) *
50 Broad Street, Suite 1609, New York, NY 10004
Thomas H. Lenagh 11,000 (1)(4) *
6 Greenwich Office Park, Greenwich, CT 06831
Brian S. North 101,000 (1)(3)(4) 1.9%
1800 One Liberty Place, Philadelphia, PA 19103
Joseph M. O'Donnell 18,000 (1)(4) *
7900 Glades Road, Suite 500, Boca Raton, FL 33434
A. Eugene Sapp, Jr. 4,000 (1)(4) *
2101 West Clinton Ave., Huntsville, AL 35807
J. Stephen Vanderwoude 6,000 (1)(4) *
2316 Young Road, Southern Pines, NC 28388
All directors and executive officers as a group (10 persons) 1,678,921 (4) 30.6%
- -----------------------------------------------------------------
* - less than 1%
</TABLE>
(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 1997 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.
<PAGE>
(3) Includes 80,000 shares held in an irrevocable trust for which Mr. North is
a 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 exercisable or are exercisable within 60 days, as follows: Mr.
Feil, 25,000 shares; Mr. Hughes, 28,900 shares; Mr. Hahn, 19,667 shares;
Mr. La Valle, 8,000 shares; Mr. Lenagh, 6,000 shares; Mr. North, 21,000
shares; Mr. O'Donnell, 18,000 shares; Mr. Sapp, 4,000 shares; Mr.
Vanderwoude, 4,000 shares; and all directors and executive officers as a
group, 134,567 shares.
Item 13. Certain Relationships and Related Transactions
On January 10, 1997, Mr. Thomas E. Feil, the Company's Chairman and Chief
Executive Officer, made a loan to the Company in the principal amount of
$200,000. The loan to the Company is payable upon demand, bears interest at an
annual rate of nine percent and is secured by a security interest in the
Company's accounts receivable.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) 1. Financial Statements:
Description
-----------
Independent Auditors' Report
Consolidated Balance Sheets as of October 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended October
31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Years
Ended October 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended October
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
VIII Valuation and Qualifying Accounts S-1 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. (10)
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)
<PAGE>
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)
10.14 Stock Compensation Plan for Non-Employee Directors.(10)
16 Letter regarding change in certifying accountant (3)
21 Subsidiaries
23.1 Consent of Deloitte & Touche 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 herein 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 annual Report on Form 10-K for
the period ended October 31, 1994, and incorporated herein by
reference.
(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, and incorporated herein by
reference.
(10) Filed as an exhibit to the Company's registration statement on Form
S-8 filed November 29, 1996, and incorporated herein by reference.
(11) Filed as an exhibit to the Company's registration statement on Form
S-8 filed November 29, 1996, and incorporated herein by reference.
<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 27, 1997 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 attorneys-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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Thomas E. Feil Chairman, Chief Executive Officer and January 27, 1997
- ------------------ Director (Principal Executive Officer)
Thomas E. Feil
/s/ Thomas Hughes Chief Operating Officer January 27, 1997
- -----------------
Thomas Hughes
/s/ Mark R. Hahn Chief Financial Officer (Principal January 27, 1997
- ---------------- Financial and Accounting Officer)
Mark R. Hahn
/s/ Luke P. La Valle, Jr. Director January 27, 1997
- -------------------------
Luke P. La Valle, Jr.
/s/ Thomas H. Lenagh Director January 27, 1997
- --------------------
Thomas H. Lenagh
/s/ Brian S. North Director January 27, 1997
- ------------------
Brian S. North
/s/ Joseph M. O'Donnell Director January 27, 1997
- -----------------------
Joseph M. O'Donnell
/s/ A. Eugene Sapp, Jr. Director January 27, 1997
- -----------------------
A. Eugene Sapp, Jr.
/s/ J. Stephen Vanderwoude Director January 27, 1997
- --------------------------
J. Stephen Vanderwoude
</TABLE>
<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, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended October 31, 1996. Our audits also
included the 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 consolidated financial statements present fairly, in all
material respects, the financial position of V Band Corporation and subsidiaries
as of October 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1996 in
conformity with generally accepted accounting principles. Also, in our opinion,
such 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 for accounting for income taxes during the year ended October
31, 1994.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
December 19, 1996
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
(in 000's, except share data)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ............................... $ 2,258 $ 2,740
Marketable securities, at cost
(approximates market) ............................... -- 187
Accounts receivable, less allowance for
doubtful accounts of $381 in 1996 and $456 in 1995 .. 6,737 4,783
Inventories, net ........................................ 7,798 7,596
Deferred tax asset ...................................... 700 700
Prepaid expenses and other current assets ............... 680 430
-------- --------
Total current assets ............ 18,173 16,436
-------- --------
Fixed Assets:
Furniture, fixtures, equipment and leasehold improvements 9,701 9,392
Less: Accumulated depreciation and amortization ......... (8,591) (7,821)
-------- --------
Total fixed assets .............. 1,110 1,571
-------- --------
Other Assets ............................................ 2,759 3,205
-------- --------
TOTAL ASSETS ........................................ $ 22,042 $ 21,212
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 3,196 $ 1,538
Accrued wages ........................................... 973 1,097
Customer deposits ....................................... 1,773 1,846
Other accrued expenses .................................. 1,612 2,333
-------- --------
Total current liabilities ...... 7,554 6,814
-------- --------
<PAGE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
(in 000's, except share data)
(continued)
<S> <C> <C>
Shareholders' Equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued 7,042,492 shares..... 70 70
Capital in excess of par value ...................... 19,776 19,776
Retained earnings.................................... 6,242 6,215
Cumulative translation adjustment.................... 168 105
------ -------
26,256 26,166
Less Treasury Stock, at cost; 1,719,322 shares....... (11,768) (11,768)
------- --------
Total shareholders' equity... 14,488 14,398
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 22,042 $ 21,212
========= =========
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(in 000's except per share data)
<S> <C> <C> <C>
Sales
Equipment ................................... $ 27,703 $ 23,591 $ 26,944
Service ..................................... 5,183 5,760 4,134
-------- -------- --------
Total sales .............................. 32,886 29,351 31,078
-------- -------- --------
Cost of Sales
Equipment ................................... 16,404 20,214 14,925
Service ..................................... 3,224 3,514 2,959
-------- -------- --------
Total cost of sales ...................... 19,628 23,728 17,884
-------- -------- --------
Gross profit ............................. 13,258 5,623 13,194
-------- -------- --------
Operating Expenses
Selling, general and administrative ......... 10,189 13,076 9,539
Research and development .................... 3,118 3,935 3,308
-------- -------- --------
Total operating expenses ................. 13,307 17,011 12,847
-------- -------- --------
Operating income (loss) .................. (49) (11,388) 347
Net Investment Income ............................ 54 73 427
Other Income (Expense) ........................... 27 22 3
-------- -------- --------
Income (loss) before cumulative
effect of accounting change ........... 32 (11,293) 777
Provision for Income Taxes ....................... 5 301 150
Income (loss) before cumulative
effect of accounting change ........... -- -- 1,242
-------- -------- --------
Net income (loss) ......................... $ 27 $(11,594) $ 1,869
======== ======== ========
Per share data
Income (loss) before cumulative
effect of accounting change ............ $ .01 $ (2.18) $ .12
Cumulative effect of accounting change ...... -- -- .23
-------- -------- --------
Net income (loss) ........................... $ 01 $ (2.18) $ .35
======== ======== ========
Weighted average number of shares of common
stock and common stock equivalents ........... 5,323 5,322 5,311
======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(in 000's)
Capital Cumulative
Common Excess of Par Retained Translation Treasury
Stock Value Earnings Adjustment Stock
----- ----- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1993 .. $ 70 $ 19,636 $ 15,940 $ 85 $(11,768)
Proceeds from 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 employee stock
purchase plan ............ -- 20 -- -- --
Net loss ................... -- -- (11,594) -- --
Translation adjustment ..... -- -- -- (67) --
-------- -------- -------- -------- --------
Balance, October 31, 1995 .. 70 19,776 6,215 105 (11,768)
Net income ................. -- -- 27 -- --
Translation adjustment ..... -- -- -- 63 --
-------- -------- -------- -------- --------
Balance, October 31, 1996 .. $ 70 $ 19,776 $ 6,242 $ 168 $(11,768)
======== ======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995 AND 1994
(in 000's)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ........................................ $ 27 $(11,594) $ 1,869
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Cumulative effect of accounting change ............... (1,242)
Depreciation ......................................... 742 731 836
Amortization and write off of other assets ........... 458 1,967 707
(Benefit) provision for doubtful accounts ............ (53) 237 133
Provision for inventory reserves ..................... 206 456
Deferred income taxes ................................ 551 (9)
Gain on disposal of fixed assets .................... (166)
Changes in assets and liabilities (net of business
acquisitions):
Accounts receivable ............................. (1,901) 2,649 (2,394)
Inventories ..................................... (202) 3,971 (2,512)
Prepaid expenses and other current assets ....... (250) 75 333
Other assets .................................... (9) 449 (952)
Accounts payable and other current liabilities .. 740 (3,174) 1,114
Foreign currency translation adjustment ......... 63 967) 87
-------- -------- --------
Net cash used in operating activities ...... (385) (4,165) (1,574)
-------- -------- --------
Cash Flows from Investing Activities
Purchases of marketable securities ....................... (3,530) (5,642)
Sales of marketable securities ........................... 187 7,946 12,150
Capital expenditures .................................... (284) (910) (570)
Proceeds from the sale of fixed assets ................... 257
Payments for business acquisitions ....................... (4,365)
-------- -------- --------
Net cash provided by investing
activities ................................. (97) 3,763 1,573
-------- -------- --------
Cash Flows from Financing Activities
Proceeds from issuance of common stock .................. 20 120
-------- -------- --------
Net (decrease) increase in cash and cash equivalents .... (482) (382) 119
Cash and Cash Equivalents, at beginnning of year ........ 2,740 3,122 3,003
-------- -------- --------
Cash and Cash Equivalents, at end of year ............... $ 2,258 $ 2,740 $ 3,122
======= ======== =======
Supplementary Disclosures
Income taxes paid ....................................... $ 65 $ 215 $ 146
======= ======== =======
See notes to consolidated financial statements.
</TABLE>
<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 companies, 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.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
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
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the income tax basis of the Company's assets and
liabilities using presently enacted tax rates.
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.
Note 3: Inventories
Inventories are as follows, at October 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Finished goods ....................... $ 4,757,000 $ 4,154,000
Parts and components ................. 5,144,000 5,586,000
----------- -----------
9,901,000 9,740,000
Less: Inventory reserves ............ (2,103,000) (2,144,000)
----------- -----------
$ 7,798,000 $ 7,596,000
=========== ===========
</TABLE>
<PAGE>
Note 4: Other assets
The Company capitalized software costs of $1,106,000 which were being amortized
on a straight-line basis over a five-year period. Such amounts were fully
amortized as of October 31, 1996.
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.
During the year ended October 31, 1995, the Company wrote off the remaining net
book value of certain intangible assets no longer being utilized in the amount
of $867,000.
The following schedule reflects other assets at October 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
MDS acquisition goodwill ............... $ 3,389,000 $ 3,389,000
Software capitalization ................ -- 1,106,000
Other .................................. 399,000 665,000
----------- -----------
3,788,000 5,160,000
Less: Accumulated amortization ........ (1,029,000) (1,955,000)
----------- -----------
$ 2,759,000 $ 3,205,000
=========== ===========
</TABLE>
If the MDS acquisition had occurred on November 1, 1993, management estimates,
on an unaudited pro forma consolidated basis, the following:
<TABLE>
<CAPTION>
1994
----
<S> <C>
Sales ................................................... $37,200,000
Income before cumulative effect of
accounting change ................................... $ 300,000
Net income .............................................. $ 1,500,000
Per share data
Income before cumulative effect of
accounting change ................................... $ .06
Net income .............................................. $ .28
</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.
<PAGE>
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.
(b) Operating leases
The Company leases office and production space under leases expiring through
2005. Certain of these lease agreements provide the option for renewals and
include escalations 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:
1997 $919,000
1998 858,000
1999 569,000
2000 327,000
2001 185,000
Thereafter 227,000
Rent expense for the fiscal years ended 1996, 1995, and 1994 was $1,007,000,
$1,152,000 and $1,011,000, respectively.
(c) Employment contracts
The Company has employment agreements with certain officers that provide for
compensation and other benefits upon change of control of the Company. The
aggregate compensation to be paid under existing employment agreements is
$255,000 as of October 31, 1996, and such future compensation has not been
reflected in the accompanying consolidated financial statements. These
agreements have an expiration date of January 1997.
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, 1996:
<TABLE>
<CAPTION>
Shares Exercise Prices
------ ---------------
<S> <C> <C>
Shares under option - November 1, 1994 752,028 $2.50 to $6.88
Options granted 77,500 2.00 to 5.00
Options canceled (149,333) 2.13 to 6.88
--------
Shares under option - October 31, 1995 680,195 2.00 to 6.88
--------
Options granted 358,700 1.88 to 2.50
Options canceled (169,637) 1.88 to 6.88
--------
Shares under option - October 31, 1996 869,258
=======
Options exercisable at:
October 31, 1995 546,894 $2.50 to $6.88
=======
October 31, 1996 634,393 1.88 to 5.00
=======
Options available for grant at:
October 31, 1995 245,526
=======
October 31, 1996 356,463
=======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which will be effective for the Company beginning November 1,
1996. SFAS No. 123 requires expanded disclosure of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share.
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. The valuation allowance 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.
<PAGE>
As of October 31, 1996, the Company had available net operating loss
carryfowards for tax return purposes of approximately $8,900,000 which begin to
expire in 2009. During 1995, the Company reversed $250,000 of prior years' tax
accruals which were no longer required.
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current
Federal .............. $ $(250,000) $ 101,000
State and local ...... 5,000 58,000
--------- --------- ---------
5,000 (250,000) 159,000
--------- --------- ---------
Deferred
Federal .............. 520,000 (1,000)
State and local ...... 31,000 (8,000)
--------- --------- ---------
551,000 (9,000)
--------- --------- ---------
$ 5,000 $ 301,000 $ 150,000
========= ========= =========
</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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. statutory rate applied to pretax
income (loss) ........................ $ 11,000 $(3,840,000) $ 264,000
Dividends received deduction and
tax-exempt interest .................. (15,000) (80,000)
Goodwill amortization .................... 127,000 127,000
State and local taxes, net of federal tax
benefit .............................. 3,000 (641,000) 33,000
(Decrease) increase in valuation allowance (208,000) 4,876,000
Reversal of current liability for taxes .. (250,000) (85,000)
Other, net ............................... 72,000 44,000 18,000
----------- ----------- -----------
$ 5,000 $ 301,000 $ 150,000
=========== =========== ===========
</TABLE>
<PAGE>
The components of the deferred income tax provision (benefit) for the years
ended October 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryfowards .............. $ $(2,931,000)
Bad debt reserve ............................. 26,000 (96,000)
Depreciation ................................. (50,000) (51,000)
Amortization ................................. (65,000) (7,000)
Inventory reserves ........................... 14,000 (117,000)
Accrued expenses ............................. 295,000 (464,000)
Capitalization of software development costs . (18,000) (18,000)
State taxes .................................. 6,000 (641,000)
----------- -----------
208,000 (4,325,000)
Less: Valuation allowance .................... (208,000) 4,876,000
----------- -----------
$ -- $ 551,000
=========== ===========
</TABLE>
The net deferred income tax asset at October 31, 1996 and 1995, consists of the
following:
<TABLE>
<CAPTION>
Deferred tax liabilities 1996 1995
---- ----
<S> <C> <C>
Capitalization of software development costs .... $ (48,000) $ (66,000)
Deferred tax assets
Depreciation .................................... 318,000 268,000
Amortization .................................... 130,000 65,000
Inventory reserves .............................. 715,000 729,000
Accrued expenses ................................ 321,000 616,000
Bad debt reserve ................................ 177,000 203,000
State and local taxes, net of federal tax benefit 781,000 787,000
Net operating loss carry forwards ............... 3,027,000 3,027,000
Tax credits ..................................... 97,000 97,000
----------- -----------
5,518,000 5,726,000
Valuation allowance ............................. (4,818,000) (5,026,000)
----------- -----------
$ 700,000 $ 700,000
=========== ===========
</TABLE>
Note 8: Segment information
(a) Significant customers
Morgan Guaranty Trust Company of New York and affiliates accounted for 10%, 14%
and 14% of the Company's sales in 1996, 1995 and 1994, respectively. During 1996
and 1995, the Chicago Board of Trade and its general contractor accounted for
21% and 13%, respectively, of the Company's sales.
<PAGE>
(b) Foreign sales
In 1996, 1995 and 1994, foreign sales represent 29%, 36% and 28%, respectively,
of consolidated sales and include the following geographical areas:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Pacific Rim ................. $ 1,900,000 $ 1,900,000 $ 3,300,000
Europe (including UK) ....... 6,900,000 7,200,000 3,300,000
All others .................. 900,000 1,400,000 2,100,000
----------- ----------- -----------
$ 9,700,000 $10,500,000 $ 8,700,000
=========== =========== ===========
</TABLE>
Note 9: Capital transactions
(a) 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.
(b) 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.
Note 10: Fourth quarter results
During the fourth quarter of 1995, the Company recorded the following expense
adjustments:
<TABLE>
<CAPTION>
<S> <C>
Inventory reserves and write-offs $ 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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule VIII
V BAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994
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, 1996 .. $ 456,000 $ (53,000) $ $ 22,000 (a) $ 381,000
October 31, 1995 .. 263,000 237,000 44,000 (a) 456,000
October 31, 1994 .. 243,000 133,000 20,000 (b) 133,000 (a) 263,000
Inventory reserve
October 31, 1996 .. $2,144,000 $ $ $ 41,000 (c) $2,103,000
October 31, 1995 .. 1,938,000 206,000 2,144,000
October 31, 1994 .. 830,000 456,000 652,000 (b) 1,938,000
Warranty reserve
October 31, 1996 .. $ 415,000 $ 289,000 $ $ 361,000 (d) $ 343,000
October 31, 1995 .. 189,000 607,000 381,000 (d) 415,000
October 31, 1994 .. 300,000 202,000 313,000 (d) 189,000
Reserve for Notes
Receivable
October 31, 1996 .. $ 110,000 $ $ $ $ 110,000
October 31, 1995 .. 110,000 110,000
October 31, 1994 .. 110,000 110,000
Valuation allowance
for deferred income
tax asset
October 31, 1996 .. $5,026,000 $ $ $ 208,000 $4,818,000
October 31, 1995 .. 150,000 551,000 4,325,000 (e) 5,026,000
October 31, 1994 .. 0 150,000 150,000
(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) Consumption of obsolete or slow moving inventory, which was reserved for in
the prior year.
(d) Warranty labor charges combined with actual cash payments.
(e) Additional valuation allowance appliable to deferred tax asset.
</TABLE>
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, 1996 and appearing on page F-1 of the Annual
Report on Form 10-K for the year ended October 31, 1996.
/s/Deloitte & Touche LLP
- ------------------------
DELOITTE & TOUCHE LLP
Stamford, Connecticut
January 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 2,258
<SECURITIES> 0
<RECEIVABLES> 6,737
<ALLOWANCES> 381
<INVENTORY> 7,798
<CURRENT-ASSETS> 18,173
<PP&E> 9,701
<DEPRECIATION> 8,591
<TOTAL-ASSETS> 22,042
<CURRENT-LIABILITIES> 7,554
<BONDS> 0
0
0
<COMMON> 19,846
<OTHER-SE> (5,358)
<TOTAL-LIABILITY-AND-EQUITY> 22,042
<SALES> 32,886
<TOTAL-REVENUES> 32,886
<CGS> 19,628
<TOTAL-COSTS> 10,189
<OTHER-EXPENSES> 3,118
<LOSS-PROVISION> (53)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 32
<INCOME-TAX> 5
<INCOME-CONTINUING> 27
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
