SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1997
[ ] 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, 1997, was
5,412,591 shares.
<PAGE>
The aggregate market value of the Common Stock of the registrant held by
non-affiliates, as of December 31, 1997, was $3,126,597 *.
* 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, 1997.
Documents incorporated by reference
None.
<PAGE>
V BAND CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
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 (together with its subsidiaries, the "Company"), was
incorporated in New York in 1977 and commenced business operations in 1980. It
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 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 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 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 growth trend in the Asian financial
marketplace.
During 1995, the Company executed an agreement with the Chicago Board of Trade
(CBOT) 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 (CBOT) exchange phone system employs
the same advanced technology base used in the Company's Broad Band DN switching
architecture and Power Deck product line. The Company provided full installation
services, including project management and cabling for the 9,000 line
communication system.
In 1996, the Company executed an agreement for a major expansion and relocation
of the Chicago Board of Trade's financial trading floor. This contract, which
augmented the agreement mentioned above, was valued in excess of $2.5 million
and was completed in 1997.
During 1997, the Company completed major system installations in several
non-traditional, emerging financial centers including Oslo, Norway and Moscow.
In 1997, 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 600 custom-designed exchange
floor telephones (with up to 8 handsets each) and various peripheral equipment.
This transaction, valued at over $4.9 million, was completed in 1997.
In January 1998, the Company established a plan to restructure its operations.
The plan include consolidation of office space in New York and London and the
centralization of the administrative functions of the Company's United States
service operation into its New York operation. In addition, the Company has
reassigned several marketing and administrative staff to field sales support
functions as a further effort to enhance revenues. As a result of this plan, the
Company reduced the number of its emplpyees from the October 31, 1997 level of
186 to 170 by the end of January 1998.
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, 1997 and 1996, V Band PLC had sales of
$7.1 and $7.4, respectively. At October 31, 1997, V Band PLC had 43 employees.
<PAGE>
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. In 1997, the Company consolidated the operations of its Licom
subsidiary into the operations of its core business in Elmsford, NY.
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 "BroadBand 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, the latest generation of its
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 that was installed successfully 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.
<PAGE>
In 1995, the Company developed the APL (Audio Processing Line) card, which
increases the capacity of telephone lines that can be handled by each BroadBand
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
increase the capacity and use of card space in 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 advanced intercom features for its digital trading consoles and a
speakerphone for its Power Deck trading console.
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.
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.
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 the remote
trading and advanced network services needs of the next generation.
The PassPort Network Management Platform is a sophisticated UNIX-based suite of
tools that control and maintain 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.
The Company's F.A.S.T. service enables service technicians to troubleshoot and
make moves, adds and changes (MACs) remotely through phone lines, thereby
increasing system performance.
In 1996, a second generation digital exchange floor phone product was developed
that enables the use of up to eight handsets per phone. The Company believes
that its products are well positioned to compete for business in the exchange
floor marketplace.
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 features that help 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.
In 1997, the Company redesigned and enhanced the physical attributes of its
Power Deck and DXi voice trading consoles to increase their visual appeal with
end users. This redesign involved new faceplates, rounded streamlined edging and
an all-new color scheme. In addition, the Company is developing a full-duplex
version of the Clarity speaker system and added numerous software enhancements
to the feature set of its line of digital trading consoles.
<PAGE>
Through Licom's product ProMX, the Company supplies 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 Elmsford, New York,
continues to market, test, ship and support the ProMX product line.
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.
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 that CTI will serve
as the enabling technology for ATM in the trading room. The Company has deployed
CTI at several customer sites, utilizing various client database applications.
The Company continues to develop specific customer hardware and software
enhancements to its ProMX product line.
During the years ended October 31, 1997, 1996 and 1995, the Company's annual
research and development expenditures were $3.6 million, $3.1 million and $3.9
million or 12%, 9% and 13% of sales, respectively.
Sales, Service and Distribution
In 1994, the Company completed the transformation of its distribution channels
into a direct sales and service network in the United States and United Kingdom
with the acquisition of certain assets of four unrelated companies distributing
and or servicing the Company's products. These business acquisitions provided
the Company with a service presence and increased its sales strength in the New
York City, Boston and London markets. These acquisitions advanced the Company's
strategy to enhance market share through the direct sale and full service of its
products, which includes project management, maintenance and other services in
the United States and United Kingdom.
<PAGE>
The Company currently maintains direct sales and service centers in New York
City, Boston, Chicago, San Francisco 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 25 authorized V Band distributors worldwide, with new
digital systems placed in emerging financial centers 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 (including
sales through its vendor, AT&T Solutions) represented 6%, 10% and 14% of sales
in 1997, 1996 and 1995, respectively. Sales to the Chicago Board of Trade and
its general contractor represented 10%, 21% and 13% of sales in 1997, 1996 and
1995, respectively. During 1997 sales to The New York Mercantile Exchange
accounted for 16% of the Company's sales.
Equipment sales, excluding Licom's ProMX, consisting of new systems installed
and modifications to existing systems, in all markets, were $24.4 million, $25.3
million and $20.5 million, representing 79%, 77% and 69% of the Company's sales
in 1997, 1996 and 1995, respectively. Licom sales represented 3%, 7% and 11% of
the Company's sales in 1997, 1996 and 1995, respectively. Service sales, which
consists of maintenance contract sales, support, service and miscellaneous
repairs accounted for 18%, 16% and 20%, of sales during 1997, 1996 and 1995,
respectively.
The Company's foreign sales for 1997, 1996 and 1995 were $11.4 million, $9.7
million and $10.5 million, or 37%, 29% and 36%, respectively, of total
consolidated sales. For further information regarding foreign sales, see Note 9
- -- Notes to Consolidated Financial Statements.
The Company's sales of systems for application in "non-financial" communications
control centers of utilities, railroads and other "right-of-way" companies as
well as E9-1-1 emergency service centers and government/military applications
were, in the aggregate, 8%, 20% and 16% of the Company's sales for 1997, 1996
and 1995, 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.
<PAGE>
The Company primarily utilizes two 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 that
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 operates from the Company's Elmsford, NY
facility.
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. In 1997, the Company experienced
several delays in the delivery of product, primarily related to the production
of Licom products. Otherwise, to date, the Company has not experienced any
significant delays in the delivery of material from either subcontractors or
vendors. In accordance with industry practice, the Company seeks to maintain
inventory in quantities sufficient to ship products within four to eight weeks
of receipt of orders. This requires the Company to maintain a significant
investment in inventory.
<PAGE>
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
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 and 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 NA. 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 60-65% 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.
<PAGE>
The Company believes that its primary competitive advantages are the quality and
features of its products and its service and product support. While the Company
is able to provide these advantages to all customers in the market places it
serves, the relatively greater size of the Company's competitors has been
perceived to be a competitive disadvantage for the Company.
Backlog
As of October 31, 1997, 1996 and 1995, the Company's backlog of purchase orders
that management believes to be firm was $3.8 million, $8.3 million and $10.5
million, respectively. The Company expects to deliver all products from its
October 31, 1997 backlog during fiscal 1998. The decrease in backlog from 1996
to 1997 is primarily due to the completion of two major exchange floor
contracts. The Company generally delivers large system configured products to
customers within six to twelve weeks of its receipt of firm orders. Where the
Company makes direct end-user installations, deliveries generally occur four to
eight weeks from receipt of firm orders. Management does not believe that the
Company's backlog is a meaningful indication of future sales.
Employees
As of October 31, 1997, the Company had 186 full-time employees, of whom 30 were
product development personnel, 101 were sales, marketing and service support
personnel, 29 were production personnel, and 26 were administrative personnel.
This compares to 199 at October 31, 1996 and 241 at October 31, 1995. The
decrease from 1996 was primarily attributable to the reduction of Licom
personnel, due to the relocation of Licom's operations in May 1997 to the
Company's corporate headquarters located at 565 Taxter Road, Elmsford, NY. The
decrease from 1995 was primarily attributable to a reorganization of the
Company's engineering, manufacturing and administrative functions in November
1995. In January 1998, the Company further reduced the number of its employees
to 170 as a result of a restructuring plan.
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.
Private Securities Litigation
Reform Act Safe Harbor Statement
When used in this Annual Report on Form 10-K and in other public statements by
the Company and Company officers, the words "expect", "estimate", "project",
"intend" and similar expressions are intended to identify forward looking
statements regarding events and financial trends which may affect the Company's
future operating results and financial condition. Such statements are subject to
risks and uncertainties that could cause the Company's actual results and
financial condition to differ materially. Such factors include, among others:
(i) the intense competition in the market places for the Company's products and
services; (ii) the sensitivity of the Company's business to general economic
conditions and the economic conditions of the industries which purchase the
Company's products and services; (iii) the performance of the Company's
suppliers and subcontractors (iv) changes in accounting principles, policies, or
guidelilnes; and (v) other economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services, and
prices. Additional factors are described in this Annual Report on Form 10-K and
in the Company's other reports filed with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these forward
<PAGE>
looking statements, which speak only as of the date made. The Company undertakes
no obligation to publicly release the result of any revision of these forward
looking statements to reflect events or circumstances after the date they are
made or to reflect the occurrence of unanticipated events.
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, quality assurance, and repair business
operations at a 15,000 square foot leased facility at Three Westchester Plaza,
Elmsford, New York.
Leases for the Company's domestic sales and service support locations include
approximately: 8,900 and 2,500 square feet located in New York City; 1,300
square feet located in Boston, Massachusetts; 2,600 square feet in Chicago,
Illinois; and 983 square feet in San Francisco, California.
The Company leases office and production space related to its United Kingdom
operation. It has a leased sales office of approximately 2,700 square feet
located in London. The production facility and administrative offices with
approximately 20,000 square feet are located within 20 miles southeast of
London.
Licom's headquarters and operations were relocated in May of 1997 to the
Corporate Headquarters located at 565 Taxter Road, Elmsford, New York.
In January 1998, the Company established a plan to reduce and/or consolidate its
office space in New York City and 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
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.
There is no other material pending legal proceedings as of December 31, 1997.
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, 1997.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is traded in the over-the-counter market and is
included in the National Association of Securities Dealers Automated
Quotation-National Market System ("NASDAQ") under the symbol VBAN. The following
table shows the high and low sales prices for the Company's Common Stock quoted
in the over-the-counter market for the fiscal quarters indicated as reported on
the NASDAQ. The quotations represent prices in the over-the-counter market
between dealers in securities and do not include retail markup, markdown, or
commissions.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
- ----------- ---- ---
<S> <C> <C>
Fourth Quarter $ 2.44 $ 1.50
Third Quarter $ 2.44 $ 1.38
Second Quarter $ 2.00 $ 1.25
First Quarter $ 2.50 $ 1.25
<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
</TABLE>
As of December 31, 1997, there were approximately 500 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.
Under the terms of the Credit Agreement, dated as of May 28, 1997, between the
Company and National Bank of Canada, New York Branch, the Company is restricted
from declaring or paying dividends if an event of default occurred and is
continuing thereunder.
<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,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in 000's, except per share data)
<S> <C> <C> <C> <C> <C>
Sales ................................ $ 31,081 $ 32,886 $ 29,351 $ 31,078 $ 25,741
Income (loss) before cumulative effect
of accounting change ............. (8,512) 27 (11,594) 627 (1,134)
Cumulative effect of accounting change -- -- -- 1,242 --
-------- -------- -------- -------- --------
Net income (loss) .................... $ (8,512) $ 27 $(11,594) $ 1,869 $ (1,134)
======== ======== ======== ======== ========
Per share data:
Income (loss) before cumulative
effect of accounting change .. $ (1.58) $ .01 $ (2.18) $ .12 $ (.21)
Cumulative effect of accounting
change ....................... -- -- -- .23 --
-------- -------- -------- -------- --------
Net income (loss) ................ $ (1.58) $ .01 $ (2.18) $ .35 $ (.21)
======== ======== ======== ======== ========
Weighted average number of shares of
common stock and common stock
equivalents ...................... 5,372 5,323 5,322 5,311 5,285
Cash dividends per common share ...... $ .00 $ .00 $ .00 $ .00 $ .00
Working capital ...................... $ 5,151 $ 10,619 $ 9,622 $ 18,935 $ 19,684
Total assets ......................... $ 14,552 $ 22,042 $ 21,212 $ 36,027 $ 30,639
Shareholders' equity ................. $ 6,097 $ 14,488 $ 14,398 $ 26,039 $ 23,963
</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,
------------------------------
1997 1996 1995
----- ----- ------
<S> <C> <C> <C>
Sales
Equipment .............................. 81.8 % 84.2% 80.4 %
Service ................................ 18.2 15.8 19.6
----- ----- ------
Total sales ................................ 100.0 100.0 100.0
Cost of sales
Equipment(*) ........................... 73.8 59.2 85.7
Service(*) ............................. 76.7 62.2 61.0
----- ----- ------
Total cost of sales ........................ 74.3 59.7 80.8
----- ----- ------
Gross Profit ............................... 25.7 40.3 19.2
Selling, general and administrative expenses 39.2 31.0 44.6
Research and development expenses .......... 11.5 9.5 13.4
----- ----- ------
Operating income (loss) .................... (25.0) (0.1) (38.8)
====== ===== =======
Net income (loss) .......................... (27.4)% 0.1% (39.5)%
====== ===== =======
</TABLE>
* Presented as a percentage of the related sales categories.
Sales
Sales for the year ended October 31, 1997 were $31.1 million, a $1.8 million, or
5% decrease from sales for 1996. The decline in 1997 sales was primarily due to
a decrease in sales of the Company's Licom subsidiary and was partially offset
by an increase in the Company's service sales. Equipment sales, which include
new equipment installations plus moves, adds, and changes for customers'
existing systems, decreased by 8% from $27.7 million in 1996 to $25.4 million in
1997. Of this $2.3 million decrease, $1.5 million was attributable to a decline
in the sales of Licom's products and $.8 million was attributable to a decrease
in the sale of the Company's other products. The decline in the sale of the
Company's Licom products was primarily due to a decline in the number of units
sold resulting from increased competition in the market for Licom's products and
the Company's emphasis on the sale of its other products.
The Company experienced a decline in demand for the Company's products during
the later part of 1997. This decline in demand, if continuing, could have
a material impact on the Company's sales for 1998.
<PAGE>
Sales in 1997 to non-financial customers (i.e., communication control centers
for utilities and government agencies) accounted for $2.5 million, or 8% of
sales, a $3.5 million decrease from 1996 non-financial customer sales. The
decrease was related primarily to several specific sales of the Company's
product in diverse applications in 1996.
Sales for the year ended October 31, 1996 were $32.9 million, a $3.5 million or
a 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 products. 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 equipment sales were $25.3 million in 1996 compared to $20.5 in 1995,
or an increase of 23%. Service sales decreased to $5.1 million in 1996 from $5.8
million in 1995, or a 10% decrease. This decrease was primarily attributable to
several factors - a reduction in the Company's repairs and other sales related
to E9-1-1 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), which 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.
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 primarily transacts sales in pounds sterling or US dollars.
Those sales transacted in pound sterling were not materially impacted by foreign
exchange rate fluctuations during 1997 or 1996. The Company has, from time to
time, hedged foreign currency transactions when deemed necessary.
Reflecting the transformation of the Company's distribution channels from third
party distributors to a direct sales and service network, $24.9 million, or 80%
of total sales were direct in 1997, as compared to $28.4 million and $24.1
million, or 86% and 82% of sales in 1996 and 1995, respectively.
Gross Profit Margins
Gross profit margins for 1997 and 1996 were 26% and 40% respectively. The
equipment gross profit margin was 26% in 1997 as compared to 41% in 1996. The
decrease in equipment gross profit margins for 1997 was attributable to special
fourth quarter 1997 expense adjustments, including an $.8 million write-down of
certain field and supplier inventory and a $.5 million increase in inventory
reserves related to components for older product lines. In addition, the gross
profit margin was unfavorably impacted by large customer contracts, for which
the Company obtained lower gross profit margins, large manufacturing variances,
<PAGE>
due to a lower volume of purchases during the year, service variances, due to
large contracts where the Company incurred additional warranty costs, and a
decrease in gross profit margins from the Company's Licom business due to
increased production costs. The service gross profit margin decreased to 23% in
1997 from 38% in 1996. This was primarily attributable to increased costs in the
Company's service operations and an increase in the amount of technicians
providing warranty services related to several large contracts.
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 was 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.
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 that 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.
Operating Expenses
Total operating expenses for 1997 increased to $15.8 million, representing an
18% increase from $13.3 million for 1996. Operating expenses as a percentage of
sales were 51% in 1997 as compared to 40% in 1996. The selling, general and
administrative expenses increased as a percentage of sales to 39% in 1997 from
31% in 1996.
Total operating expenses for 1996 decreased to $13.3 million, representing a 22%
decrease from $17 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 were attributable primarily to the restructuring program initiated
by the Company during 1995.
Selling, general and administrative costs for 1997 increased $2 million to $12.2
million, or 20%, from $10.2 million in 1996. The increase in selling, general
and administrative expense was primarily attributable to the Company writing-off
the remaining value of the goodwill of $2.3 million related to the Company's
London operation.
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
<PAGE>
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.
Research and development expenses for 1997 of $3.6 million increased $.5
million, or 15%, from $3.1 million in 1996. Research and development expenses as
a percentage of sales increased to 11% in 1997 as compared to 9% in 1996. The
increase is primarily due to prototype and development expenses for specific
customer contracts.
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 1996. 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.
Other Income and Expense
Interest expense was $61,000 for 1997, which was primarily due to the debt
acquired related to the credit facility obtained by the Company in May 1997. No
interest expense was reported in 1996 or 1995.
The Company reported no investment income for 1997 compared to $.1 million for
1996
Net investment income for 1996 and 1995 remained relatively unchanged at $.1
million.
Provision for Income Taxes
The Company accounts for income taxes in accordance with 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. 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.
During 1997, the Company increased the deferred tax asset and valuation
allowance by $3,105,000 and $3,805,000 respectively. The total valuation
allowance as of October 31, 1997 of $8,623,000 reduces the deferred tax asset to
zero. This reduction was made in light of the losses recognized by the Company
in two of the past three years. The Company's 1997, 1996, and 1995 tax
provisions of $700,000, $5,000, and $301,000 reflect effective tax rates of
(9)%, 16%, and (3)%, respectively.
Net Income (Loss) Per Share
For 1997, the Company recorded a net loss of $8.5 million or ($1.58) per share,
as compared to a net income of $27,000 or $.01 per share in 1996. The loss was
<PAGE>
primarily attributable to the write-off of goodwill related to the Company's
London operation, the write-down of spare and prototype inventory, the
write-down of the Company's deferred tax asset, and a reduction in the Company's
gross profit margin.
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 in 1996.
The Company believes that the implementation of the restructuring plan adopted
by the Company in January 1998 will result in the inclusion of a charge of
approximately $1 million in the results of operations of the Company for the
fiscal quarter ending January 31, 1998.
Liquidity and Capital Resources
The Company's aggregate of cash, cash equivalents and marketable securities at
October 31, 1997 declined $2 million, to $.3 million, compared to the balances
reported at October 31, 1996. Accounts receivable increased $1.4 million, to
$8.1 million in 1997 from $6.7 million in 1996 primarily due to retainage due on
large customer contract. Other current liabilities (excluding short-term debt)
decreased $2.1 million. Offsetting these items, short-term debt increased $2.9
million and inventory decreased $3.1 million.
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 large
customer 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 working capital was $5.2 million as of October 31, 1997, a $5.4
million decrease from $10.6 million as of October 31, 1996. The reduction in
working capital as of October 31, 1997 was primarily attributable to the
increase in short-term debt and decreases in inventory and cash and cash
equivalents. Working capital was $10.6 million as of October 31, 1996, a $1
million increase from $9.6 million as of October 31, 1995.
The Company's loss for 1997 has had a substantial impact on its working capital
and liquidity. On May 28, 1997 the Company entered into a Credit Agreement (the
"Credit Agreement") with National Bank of Canada, New York Branch. The Credit
Agreement provides a $4 million credit facility to the Company secured by
substantially all of the assets of the Company and its domestic subsidiaries. As
a result of the Company's results of operations for 1997, the Company failed to
satisfy the financial covenants set forth under the Credit Facility. The Bank
has waived the Company's failure to satisfy the financial covenants set forth in
the Credit Agreement and has amended those covenants for fiscal year 1998. The
Company's operations are dependant upon the continued availability of funding
under the Credit Agreement. The continued availability of funding under the
Credit Agreement is dependent, in turn, upon the Company's ability to satisfy
the amended financial covenants set forth in the Credit Agreement which require
an improvement in the results of the Company's operations for 1998.
<PAGE>
The Company has no significant commitments for capital expenditures as of
October 31, 1997. The Company is in the early stages of the development of a
suite of software and hardware products that integrates instant access voice
communications into a high bandwidth multimedia network through the use of CTI
applications. Further development of this suite of products will require
substantial capital in excess of that generated by the Company's existing
operations. As a result, the Company intends to obtain capital from external
sources to contribute to the funding of this project. There can be no assurance,
however, that such capital will be available to the Company.
Year 2000
The Company utilizes software and related technologies throughout its business
that may be affected by the date change in the year 2000. System modifications
or replacements are underway which will make all computer systems at the Company
compliant with the year 2000 replacement. Anticipated spending for these
modifications will be expensed as incurred and is not expected to have a
material impact on the Company's ongoing results of operations.
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) 56 Chairman, Chief Executive Officer, Director
Thomas Hughes 38 President, Chief Operating Officer
Mark R. Hahn 40 Vice President - Chief Financial Officer, Treasurer and Secretary
Gerald C. Walsh 51 Senior Vice President - Sales and Operations
Luke P. La Valle, Jr. (2)(3) 55 Director
Thomas H. Lenagh (2) 73 Director
Brian S. North (1) 46 Director
Joseph M. O'Donnell (3) 51 Director
A. Eugene Sapp, Jr. (1) 61 Director
J. Stephen Vanderwoude (2)(3) 54 Director
- ----------
</TABLE>
(1) Member of stock option committee.
(2) Member of audit committee.
(3) Member of compensation committee.
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 President and Chief Operating Officer of the Company
in May 1997. He has been the Chief Operating Officer of the company since 1995
and was its 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.
<PAGE>
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 1995 and
elected Treasurer of the Company in 1996. Previously, he served as Controller of
the Company since 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.
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 is an attorney with the law firm of Buchanan Ingersoll Professional
Corporation in Philadelphia. From 1995 to 1997 he practiced law with White and
Williams. 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., 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., Computer Products, Inc. of Boca Raton, Florida, and CMS,
Inc. of Tampa, Florida.
<PAGE>
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.
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 its
officers, pursuant to which the Company is obligated to reimburse or pay certain
expenses incurred by its directors and officers arising out of claims made
against them in connection with their services to the Company.
<PAGE>
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years ended
October 31, 1997, 1996 and 1995 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 1997 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, 1997 $200,000 $ - $ - - $ 1,627
Chairman, Chief Executive 1996 200,000 - - - 2,000
Officer and Director 1995 199,000 - - - 1,528
Thomas Hughes, (3) 1997 154,000 - - 30,000 1,570
President- 1996 150,000 2,000 - 90,000 1,500
Chief Operating Officer 1995 103,616 - - 16,000 1,036
-
Mark R. Hahn, (3) 1997 109,000 - - 20,000 1,100
Vice President - 1996 105,000 2,000 - 60,000 1,050
Chief Financial Officer 1995 85,077 - - 17,000 285
Gerald C. Walsh 1997 126,000 - - 50,000 -
Senior Vice President- 1996 63,000 - - 10,000 -
Sales and Operations 1995 - - - - -
- ---------------
</TABLE>
(1) Other than the Company's 401(k) Plan and its stock option and stock
purchase plans, the Company does not have any long-term incentive plans and
does not grant restricted stock awards.
(2) Includes amounts contributed by the Company under the Company's 401(k) Plan
during the fiscal year and any additional discretionary annual
contributions related to the prior fiscal year.
(3) Mr. Hughes and Mr. Hahn entered into agreements with the Company in
January 1998, whereby they are each entitled to receive approximately one
year's compensation should there be a change of control of the company
prior to January 31, 1999
<PAGE>
STOCK OPTIONS
The following tables summarize option grants during the fiscal year ended
October 31, 1997 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, 1997. The Company does
not maintain any pension plans or any supplementary pension award plans.
Option Grants in Fiscal 1997
<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 30,000 17% $1.44 2007 $42,317 $92,971
Mark R. Hahn 20,000 11% 1.44 2007 28,211 61,981
Gerald C. Walsh 10,000 6% 1.44 2007 14,106 30,990
</TABLE>
Aggregate Option Exercises in Fiscal 1997 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 Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas E. Feil - $ - 25,000 - $ - $ -
Thomas Hughes - - 72,233 73,334 9,375 -
Mark R. Hahn - - 44,334 52,666 6,250 -
Gerald C. Walsh - - 25,000 35,000 3,125 -
</TABLE>
<PAGE>
COMPENSATION OF DIRECTORS
The Company pays each outside director an annual director's fee of $7,500 plus
$500 for each board meeting attended (up to a limit of six meetings per year),
plus deferred cash compensation, payable upon termination of service as a
director, in an amount equal to $2,000 for each year of service as a director.
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.
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.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below is information concerning the stock ownership of all persons
known by the Company to own beneficially more than 5% of the Company's shares of
Common Stock. Each director of the Company, each executive officer named in the
executive compensation table and all directors and executive officers of the
Company as a group, as of December 31, 1997.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficially Owned Class
------------------ -----
<S> <C> <C>
Thomas E. Feil 1,461,472 (2)(4) 27.0%
565 Taxter Road, Elmsford, NY 10523
Thomas Hughes 73,733 (4) *
565 Taxter Road, Elmsford, NY 10523
Mark R. Hahn 58,216 (4) *
565 Taxter Road, Elmsford, NY 10523
Luke P. La Valle, Jr. 20,000 (1)(4) *
50 Broad Street, Suite 1609, New York, NY 10004
Thomas H. Lenagh 18,000 (1)(4) *
6 Greenwich Office Park, Greenwich, CT 06831
Brian S. North 103,000 (1)(3)(4) 1.9%
Eleven Penn Center, Philadelphia, PA 19103
Joseph M. O'Donnell 20,000 (1)(4) *
7900 Glades Road, Suite 500, Boca Raton, FL 33434
A. Eugene Sapp, Jr. 6,000 (1) (4) *
2101 West Clinton Ave., Huntsville, AL 35807
J. Stephen Vanderwoude 8,000 (1) (4) *
2316 Young Road, Southern Pines, NC 28388
Gerald C. Walsh 25,000 (4) *
565 Taxter Road, Elmsford, NY 10523
All directors and executive officers as a group (10 persons) 1,783,421 (4) 32.9%
</TABLE>
* - less than 1%
(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 1998 annual meeting of shareholders.
(2) Excludes 80,000 shares held in an irrevocable trust for Mr. Feil's
daughter, over which Mr. Feil holds no voting or investment power.
(3) Includes 80,000 shares held in an irrevocable trust for which Mr. North is
a trustee. Mr. North has no economic interest in the trust. However, he
shares investment and voting authority over such shares with a co-trustee.
<PAGE>
(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, 72,233 shares; Mr. Hahn, 44,334 shares;
Mr. La Valle, 10,000 shares; Mr. Lenagh, 8,000 shares; Mr. North, 23,000
shares; Mr. O'Donnell, 20,000 shares; Mr. Sapp, 6,000 shares; Mr.
Vanderwoude, 8,000 shares, Mr. Walsh, 25,000 shares; and all directors and
executive officers as a group, 239,567 shares.
Item 13. Certain Relationships and Related Transactions
In January 1997, Mr. Thomas E. Feil, the Company's Chief Executive Officer, made
a loan to the Company in the principal amount of $200,000. The loan to the
Company was payable upon demand, bore interest at an annual rate of nine percent
and was secured by a security interest in the Company's accounts receivable. The
loan was repaid in full, including interest of $6,855, in May 1997.
<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, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
October 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for the
Years Ended October 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
VIII Valuation and Qualifying Accounts
All other schedules not listed above have been omitted because the information
has been otherwise supplied in the financial statements or the notes thereto or
they are not applicable, or the amounts are insignificant or immaterial.
(b) Reports on Form 8-K:
On June 11, 1997, the Company filed a Current Report
on Form 8-K, reporting under Item 5, that the Company
entered into a $4 million secured credit facility
with the National Bank of Canada, New York Branch.
(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)
<PAGE>
10.7 Adoption of Non-Standardized Retirement Plan
and Trust (401-K) dated January 1, 1989, as
amended.(5)
10.8 Amendment dated October 14, 1991 to a lease
dated April 22, 1988 between the Company and
URBCO, Inc. for premises at 565 Taxter Road,
Elmsford, New York. (7)
10.9 Second Amendment dated February 20, 1992 to
a lease dated April 22, 1988 between the
Company and URBCO, Inc. for premises at 565
Taxter Road, Elmsford, New York. (7)
10.10 Third Amendment dated May 28, 1993 to a
lease dated April 22, 1988 between the
Company and URBCO, Inc. for premises at 565
Taxter Road, Elmsford, New York.6)
10.11 Fourth Amendment dated June 8, 1994 to a
lease dated April 22, 1988 between the
Company and URBCO, Inc. for premises at 565
Taxter Road, Elmsford, New York. (6)
10.12 Agreement dated July 1, 1992 between the
Company and California Institute of
Technology. (9)
10.13 Share Acquisition Agreement dated July 28,
1994, relating to TR Financial
Communications plc, together with Deed of
Covenant of the same date between the
Company and Mercury Communications Limited.
(8)
10.14 Stock Compensation Plan for Non-Employee
Directors. (10)
10.15 Agreement dated May 28, 1997 between the
Company and National Bank of Canada, New
York Branch. (11)
16 Letter regarding change in certifying
accountant (3)
21 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedules
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.
<PAGE>
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 Quarterly Report on Form
10-Q for the period ended July 31, 1997, 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: February 10, 1998 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 February 10, 1998
Thomas E. Feil Director (Principal Executive Officer)
/s/ Thomas Hughes President and
- ------------------ Chief Operating Officer February 10, 1998
Thomas Hughes
/s/ Mark R. Hahn
- ----------------- Chief Financial Officer (Principal February 10, 1998
Mark R. Hahn Financial and Accounting Officer)
/s/ Luke P. La Valle, Jr.
- ------------------------ Director February 10, 1998
Luke P. La Valle, Jr.
/s/ Thomas H. Lenagh
- -------------------- Director February 10, 1998
Thomas H. Lenagh
/s/ Brian S. North
- ------------------ Director February 10, 1998
Brian S. North
/s/ Joseph M. O'Donnell
- ----------------------- Director February 10, 1998
Joseph M. O'Donnell
/s/ A. Eugene Sapp, Jr.
- ----------------------- Director February 10, 1998
A. Eugene Sapp, Jr.
/s/ J. Stephen Vanderwoude
- -------------------------- Director February 10, 1998
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, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended October 31, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1997 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.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
December 17, 1997
(January 31, 1998 as to Note 4 and
February 9, 1998 as to Note 5)
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(in 000's, except share data)
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................ $ 336 $ 2,258
Accounts receivable, less allowance for doubtful
accounts of $498 in 1997 and $381 in 1996 .................. 8,079 6,737
Inventories, net ................................................. 4,733 7,798
Deferred tax asset ............................................... -- 700
Prepaid expenses and other current assets ........................ 458 680
-------- --------
Total current assets .................... 13,606 18,173
-------- --------
Fixed Assets:
Furniture, fixtures, equipment and leasehold improvements ........ 9,539 9,701
Less: Accumulated depreciation and amortization .................. (8,786) (8,591)
-------- --------
Total fixed assets ...................... 753 1,110
-------- --------
Other Assets ..................................................... 193 2,759
-------- --------
TOTAL ASSETS ............................................... $ 14,552 $ 22,042
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt .................................................. $ 2,943 $ --
Accounts payable ................................................. 2,557 3,196
Accrued wages .................................................... 894 973
Customer deposits ................................................ 959 1,773
Other accrued expenses ........................................... 1,102 1,612
-------- --------
Total current liabilities .............. 8,455 7,554
-------- --------
Commitments and Contingencies (Note 6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(in 000's, except share data)
1997 1996
-------- --------
<S> <C> <C>
Shareholders' Equity:
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 7,131,913 shares in 1997 and 7,042,492 shares in 1996 71 70
Capital in excess of par value ................................... 19,872 19,776
Retained earnings (deficit) ...................................... (2,270) 6,242
Cumulative translation adjustment ................................ 192 168
-------- --------
17,865 26,256
Less - Treasury stock, at cost; 1,719,322 shares................ (11,768) (11,768)
-------- --------
Total shareholders' equity............... 6,097 14,488
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 14,552 $ 22,042
========= ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(in 000's, except per share data)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales
Equipment .................................. $ 25,413 $ 27,703 $ 23,591
Service .................................... 5,668 5,183 5,760
-------- -------- --------
Total sales ........................... 31,081 32,886 29,351
-------- -------- --------
Cost of Sales
Equipment .................................. 18,748 16,404 20,214
Service .................................... 4,350 3,224 3,514
-------- -------- --------
Total cost of sales ................... 23,098 19,628 23,728
-------- -------- --------
Gross profit .......................... 7,983 13,258 5,623
-------- -------- --------
Operating Expenses
Selling, general and administrative ........ 12,188 10,189 13,076
Research and development ................... 3,573 3,118 3,935
-------- -------- --------
Total operating expenses .............. 15,761 13,307 17,011
-------- -------- --------
Operating loss ....................... (7,778) (49) (11,388)
Interest Expense .................................. (80)
Other Income (Expense) ............................ 46 81 95
-------- -------- --------
Income (loss) before income taxes ..... (7,812) 32 (11,293)
Provision for Income Taxes ........................ 700 5 301
-------- -------- --------
Net income (loss) ..................... $ (8,512) $ 27 $(11,594)
======== ======== ========
Net income (loss) per share ....................... $ (1.58) $ .01 $ (2.18)
======== ======== ========
Weighted average number of shares of common
stock and common stock equivalents -
primary and fully diluted ..................... 5,372 5,323 5,322
======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(in 000's)
Capital in Retained Cumulative
Common Excess of Par Earnings Translation Treasury
Stock Value (Deficit) Adjustment Stock
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 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)
Proceeds from employee
stock purchase plan ..... 1 96
Net loss ................... (8,512)
Translation adjustment ..... 24
-------- -------- -------- -------- --------
Balance, October 31, 1997 .. $ 71 $ 19,872 $ (2,270) $ 192 $(11,768)
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996 AND 1995
(in 000's)
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ............................................. $ (8,512) $ 27 $(11,594)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation .............................................. 566 742 731
Amortization and write-off of other assets ................ 2,598 458 1,967
Provision (benefit) for doubtful accounts ................ 117 (53) 237
Provision for inventory reserves .......................... 473 206
Deferred income taxes ..................................... 700 551
Gain on disposal of fixed assets .......................... (166)
Changes in assets and liabilities:
Accounts receivable ................................... (1,459) (1,901) 2,649
Inventories ........................................... 2,592 (202) 3,971
Prepaid expenses and other current assets ............. 222 (250) 75
Other assets .......................................... 73 (9) 449
Accounts payable and other current liabilities ........ (2,042) 740 (3,174)
Foreign currency translation adjustment ............... 24 63 (67)
-------- -------- --------
Net cash used in operating activities ............. (4,648) (385) (4,165)
-------- -------- --------
Cash Flows from Investing Activities:
Purchases of marketable securities ............................ (3,530)
Sales of marketable securities ................................ 187 7,946
Capital expenditures .......................................... (209) (284) (910)
Proceeds from the sale of fixed assets ........................ 257
-------- -------- --------
Net cash (used in) provided by investing activities (209) (97) 3,763
-------- -------- --------
Cash Flows from Financing Activities:
Debt issuance costs ........................................... (105)
Proceeds from issuance of common stock ........................ 97 20
Proceeds from short-term debt ................................. 9,007
Payments of short-term debt ................................... (6,064)
-------- -------- --------
Net cash provided by financing activities ......... 2,935 -- 20
-------- -------- --------
Net decrease in cash and cash equivalents...................... (1,924) (482) (382)
Cash and cash equivalents, at beginning of year................ 2,258 2,740 3,122
-------- -------- --------
Cash and cash equivalents, at end of year...................... $ 334 $ 2,258 $ 2,740
======== ======== ========
Supplementary Disclosures:
Income taxes paid ............................................. $ 384 $ 65 $ 215
======== ======== ========
Interest paid ................................................. $ 61 $ -- $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company
V Band Corporation and its wholly-owned subsidiaries (the "Company") designs,
manufactures, sells, installs and services specialized telephone systems
consisting of sophisticated telephone consoles and supporting common equipment
for switching and access to telephone network facilities. These systems are sold
primarily to financial services firms for use by traders in the trading and
dealing of stocks, bonds, commodities and other financial instruments. The
Company also designs, manufactures and distributes a family of digital
communications multiplexers specifically designed for the "mission critical"
communications of the electric power industry. Other markets include command and
control applications for "right-of-way" companies such as utilities and
transportation 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.
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, 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.
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.
<PAGE>
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.
Impact of recently issued accounting standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, Disclosures About Segments of
an Enterprise and Related Information, which will be effective for the Company
beginning November 1, 1998. SFAS 131 redefines how operating segments are
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has not yet
completed its analysis of which operating segments, if any, it will report on.
Note 3: Inventories
Inventories are as follows, at October 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Finished goods $ 3,374,000 $ 4,757,000
Parts and components 3,935,000 5,144,000
------------ ------------
7,309,000 9,901,000
Less: Inventory reserves (2,576,000) (2,103,000)
------------ ------------
$ 4,733,000 $ 7,798,000
============ ============
</TABLE>
<PAGE>
Note 4: Other assets
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 was amortized over a ten-year
period. On January 4, 1998, the Company decided that the future operations of
the MDS business could not support the carrying value of the goodwill and
therefore wrote-off the remaining net book value of $2.3 million. In addition,
the Company will incur approximately $500,000 of costs in the first quarter of
fiscal 1998 in connection with the restructuring of the MDS operation. See Note
6.
The following schedule reflects other assets at October 31:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
MDS acquisition goodwill $ 3,389,000
Other $ 208,000 399,000
---------- -----------
208,000 3,788,000
Less: Accumulated amortization (15,000) (1,029,000)
---------- -----------
$ 193,000 $ 2,759,000
========== ===========
</TABLE>
Note 5: Short-term Debt
In January 1997, the Company borrowed $200,000 from the Company's Chief
Executive Officer, payable on demand and bearing 9% interest. The loan was
secured by a security interest in the Company's account receivables. On May 29,
1997, the Company repaid the amount borrowed in full, including interest of
$6,855.
In May 1997, the Company entered into a Credit Agreement with the National Bank
of Canada, (the "Credit Agreement"). The Credit Agreement provides a revolving
loan and letter of credit facility of up to $4 million with interest rates (at
the Company's option) of prime plus 1/4 percent or LIBOR plus 2 1/4 percent. The
Company's obligations under the Credit Agreement are secured by a security
interest in all of the assets of V Band Corporation and its domestic
subsidiaries. The balance outstanding as of October 31, 1997 was $2,943,000. The
prime rate was 8.5% at October 31, 1997. As a result of the Company's results of
operations for 1997, the Company failed to satisfy the financial covenants set
forth in the Credit Agreement. On February 9, 1998, National Bank of Canada has
waived the Company's failure to satisfy those covenants at October 31, 1997 and
has amended them for fiscal year 1998. In addition, the interest rate, on the
outstanding borrowings, has been modified to prime plus 2 percent effective
February 1, 1998.
<PAGE>
Note 6: 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 has been in discussion with
TTSI and believes that a settlement will be agreed upon in the near future,
whereby both the claim and the counter claim will be nullified 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. Future minimum annual
rental payments under these leases are as follows:
1998 $1,084,000
1999 810,000
2000 574,000
2001 449,000
2002 224,000
Thereafter 148,000
Rent expense for the years ended 1997, 1996, and 1995 was $956,000, $1,007,000
and $1,152,000, respectively.
(c) Employment contracts
Subsequent to year-end, the Company entered into employment agreements with
certain officers and employees 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 $393,000, and such future compensation
has not been reflected in the accompanying consolidated financial statements.
These agreements have an expiration date of January 1999.
(d) Management restructuring plan
On January 31, 1998, the Company established a plan to restructure its
operations. The plans include consolidation of office space in New York and
London and the centralization of administrative functions of the Company's
United States service operations into its New York operation. In addition, the
Company has reassigned several marketing and administrative staff to field sales
support functions as a further effort to enhance revenues. As a result of this
plan, the Company reduced the number of its employees from the October 31, 1997
level of 186 to 170 by the end of January 1998. The Company believes that the
implementation of this plan will result in the inclusion of a $1 million charge
in its results of operations for the first quarter of fiscal 1998.
Note 7: 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 in the
period ended October 31, 1997:
<TABLE>
<CAPTION>
Shares Exercise Prices
------ ---------------
<S> <C> <C>
Shares under option - November 1, 1995 687,194 $ 2.00 to $ 6.88
Options granted 358,700 1.88 to 2.63
Options cancelled (169,637) 1.88 to 6.88
--------
Shares under option - October 31, 1996 876,257 1.88 to 6.00
--------
Options granted 180,000 1.44 to 1.75
Options cancelled (117,506) 1.44 to 5.00
--------
Shares under option - October 31, 1997 938,751 1.44 to 6.00
========
Options exercisable at:
October 31, 1996 634,393 1.88 to 6.00
========
October 31, 1997 648,151 1.88 to 6.00
========
</TABLE>
The following table summarizes information about stock options outstanding at
October 31, 1997:
<TABLE>
<CAPTION>
Options Granted Options Exercisable
-------------------------------------- ----------------------
Weighted Weighted Weighted
Year Range of Number Average Average Number Average
of Exercise Outstanding Remaining Exercise Exercisable Exercise
Grant Prices 10/31/97 Life (Years) Price 10/31/97 Price
- ----- ------ -------- ------------ ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
1989 $5.75 - $5.75 20,000 1.92 $ 5.75 20,000 $ 5.75
1990 $2.50 - $4.88 58,369 2.59 3.88 58,369 3.88
1991 $3.38 - $3.88 77,833 3.71 3.51 77.833 3.51
1992 $4.00 - $6.00 92.900 4.82 4.38 92,900 4.38
1993 $3.88 - $5.50 22,000 5.29 4.73 22,000 4.73
1994 $4.33 - $5.63 134,867 6.15 4.83 134,867 4.83
1995 $2.00 - $5.00 71,332 7.31 3.17 62,332 3.15
1996 $1.88 - $2.63 303,450 8.43 1.98 179,850 1.98
1997 $1.44 - $1.75 158,000 9.43 1.46 -- --
------- ---- ------ ------- ------
938,751 6.86 $ 3.02 648,151 $ 3.59
======= ==== ====== ======= ======
</TABLE>
The estimated fair value of options granted during 1997 and 1996 was 1.75 per
share and 1.88 per share, respectively. The Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its stock option and purchase plans. No compensation cost has been recognized
for the Company's fixed stock option plans and stock purchase plan. Had
<PAGE>
compensation costs for the Company's stock option plans and stock purchase plan
been determined based on the fair value, at the option grant dates for awards,
in accordance with the accounting provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 123") "Accounting for Stock-Based
Compensation", the Company's net income (loss) and net income (loss) per share
for the years ended October 31, 1997 and 1996, would have been reduced to the
pro forma amounts indicated in the following table:
Net income (loss) applicable to common shareholders: 1997 1996
---- ----
As reported $ (8,512) $ 27
Pro forma (8,655) (317)
Net income (loss) per common share and common share equivalent
As reported $ (1.58) $ .01
Pro forma (1.60) (.06)
The fair value of options granted under the Company's fixed stock option plans
during 1997 and 1996 was estimated on the dates of grant using the Black-Scholes
options-pricing model with the following weighted-average assumptions used:
dividend yield of zero, expected volatility of approximately 42%, risk free
interest rate of approximately 5.9%, and expected lives of option grants of
approximately 8.6 years. Pro forma compensation cost related to shares purchased
under the 1995 Incentive Stock Option Plan is measured based on the discount
from market value. The effects of applying SFAS 123 in this pro forma disclosure
are not indicative of future pro forma effects, SFAS 123 does not apply to
awards prior to 1996, and additional awards in future years are anticipated.
Note 8: Income taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." Under
SFAS109, 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 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 carryforwards are expected to be available
to reduce taxable income.
As of October 31, 1997, the Company had available net operating loss
carryforwards for tax return purposes of approximately $11,297,000 that begin to
expire in 2011.
<PAGE>
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current
Federal $ $ (250,000)
State and local 5,000
------------ ----------
5,000 (250,000)
------------ ----------
Deferred
Federal $ 658,000 520,000
State and local 42,000 31,000
------------ ------------ ----------
700,000 551,000
------------ ------------ ----------
$ 700,000 $ 5,000 $ 301,000
============ ============ ==========
</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>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
U.S. statutory rate applied to pretax
income (loss) .............................. $(2,657,000) $ 11,000 $(3,840,000)
Dividends received deduction and
tax-exempt interest ........................ (15,000)
Goodwill amortization .......................... 350,000 127,000 127,000
State and local taxes, net of federal
tax benefit ................................ (385,000) 3,000 (641,000)
Increase(decrease) in valuation allowance
3,359,000 (208,000) 4,876,000
Reversal of current liability for taxes ........ (250,000)
Other, net ..................................... 33,000 72,000 44,000
----------- ----------- -----------
$ 700,000 $ 5,000 $ 301,000
=========== =========== ===========
</TABLE>
<PAGE>
The net deferred income tax asset at October 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
Deferred tax assets(liabilities) 1997 1996
----------- -----------
<S> <C> <C>
Capitalization of software development cost ................... $ $ (48,000)
Depreciation .................................................. 280,000 318,000
Amortization .................................................. 624,000 130,000
Inventory reserves ............................................ 2,237,000 715,000
Accrued expenses .............................................. 190,000 321,000
Bad debt reserve .............................................. 169,000 177,000
State and local taxes, net of federal tax benefit ............. 1,282,000 781,000
Net operating loss carry forwards ............................. 3,841,000 3,027,000
Tax credits ................................................... 97,000
----------- -----------
8,623,000 5,518,000
Valuation allowance ........................................... (8,623,000) (4,818,000)
----------- -----------
$ -- $ 700,000
=========== ===========
</TABLE>
Note 9: Segment information
(a) Significant customers
Morgan Guaranty Trust Company of New York and affiliates (including sales
through its vendor, AT&T Solutions) accounted for 6%, 10% and 14% of the
Company's sales in 1997, 1996 and 1995, respectively. During 1997, 1996 and
1995, the Chicago Board of Trade and its general contractor accounted for 10%,
21% and 13%, respectively, of the Company's sales. During 1997 The New York
Mercantile Exchange accounted for 16% of the Company's sales.
(b) Foreign sales
In 1997, 1996 and 1995, foreign sales represent 37%, 29% and 36%, respectively,
of consolidated sales and include the following geographical areas:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Pacific Rim $ 2,600,000 $ 1,900,000 $ 1,900,000
Europe (including UK) 6,300,000 6,900,000 7,200,000
All others 2,500,000 900,000 1,400,000
----------- ----------- ------------
$11,400,000 $ 9,700,000 $ 10,500,000
=========== =========== ============
</TABLE>
<PAGE>
Note 10: 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 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 11: Fourth quarter results
During the fourth quarters of 1997 and 1995, the Company recorded the following
expense adjustments:
<TABLE>
<CAPTION>
1997 1995
----------- -----------
<S> <C> <C>
Inventory reserves and write-offs $ 1,300,000 $ 2,300,000
Intangible asset write-off 2,300,000 900,000
Cost of goods sold 800,000
Deferred tax asset valuation allowance 700,000 600,000
Warranty reserves 200,000 300,000
Severance and other 200,000 800,000
Allowance for doubtful accounts 200,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Schedule VIII
V BAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995
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, 1997 $ 381,000 $ 117,000 $ 498,000
October 31, 1996 $ 456,000 $ (53,000) $ 22,000(a) $ 381,000
October 31, 1995 $ 263,000 $ 237,000 $ 44,000(a) $ 456,000
Inventory reserve
October 31, 1997 $2,103,000 $ 473,000 $ 2,576,000
October 31, 1996 $2,144,000 $ 41,000(c) $ 2,103,000
October 31, 1995 $1,938,000 $ 206,000 $ 2,144,000
Warranty reserve
October 31, 1997 $ 343,000 $ 589,000 $ 659,000(d) $ 273,000
October 31, 1996 $ 415,000 $ 289,000 $ 361,000(d) $ 343,000
October 31, 1995 $ 189,000 $ 607,000 $ 381,000(d) $ 415,000
Reserve for Notes Receivable
October 31, 1997 $ 110,000 $ 110,000(e) $ 0
October 31, 1996 $ 110,000 $ 110,000
October 31, 1995 $ 110,000 $ 110,000
Valuation allowance for deferred
income tax asset
October 31, 1997 $4,818,000 $ 3,805,000 $ 8,623,000
October 31, 1996 $5,026,000 $ 208,000 $ 4,818,000
October 31, 1995 $ 150,000 $ 4,876,000 $ 5,026,000
</TABLE>
<PAGE>
(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) Note receivable written-off, net of cash received.
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 17, 1997 (January 31, 1998 as to Note 4 and
February 9, 1998 as to Note 5) appearing on page F-1 of the Annual Report on
Form 10-K for the year ended October 31, 1997.
/s/DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Stamford, Connecticut
February 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 336
<SECURITIES> 0
<RECEIVABLES> 8,079
<ALLOWANCES> 498
<INVENTORY> 4,733
<CURRENT-ASSETS> 13,606
<PP&E> 9,539
<DEPRECIATION> 8,786
<TOTAL-ASSETS> 14,552
<CURRENT-LIABILITIES> 8,455
<BONDS> 0
19,943
0
<COMMON> 0
<OTHER-SE> (13,846)
<TOTAL-LIABILITY-AND-EQUITY> 14,552
<SALES> 31,081
<TOTAL-REVENUES> 31,081
<CGS> 23,098
<TOTAL-COSTS> 12,188
<OTHER-EXPENSES> 3,619
<LOSS-PROVISION> 117
<INTEREST-EXPENSE> (80)
<INCOME-PRETAX> (7,812)
<INCOME-TAX> 700
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,512)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
