SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
Amendment No. 1
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1998
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission file number 0-13284
V BAND CORPORATION
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(Exact name of registrant as specified in its charter)
New York 13-2990015
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3 Westchester Plaza, Elmsford, New York 10523
(Address and zip code of principal executive office)
(914) 789-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 January 31, 1999 was
5,428,621 shares.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of January 31, 1999 was $812,124.
* 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 January 31, 1999.
Documents incorporated by reference
None.
<PAGE>
V BAND CORPORATION
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
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 7A. Quantitative and Qualitative Disclosures About Market Risk
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 primarily 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 is derived from the sale and servicing
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 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 and network operations.
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.
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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 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. The project was completed in January 1998.
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 included 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
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 110 as of October 31, 1998.
In July 1998, the Company restructured the operations of its United Kingdom
subsidiary, V Band PLC. An agreement with Siemens Corporation allowed the
Company to outsource V Band PLC's service dispatch and spare parts inventory
functions, further reducing operating costs while improving overall service
levels and parts availability for V Band PLC's base of customers. The number of
field service personnel was held constant. For the fiscal years ended October
31, 1998 and 1997, V Band PLC had sales of $5.3 and $7.1, respectively. At
October 31, 1998, V Band PLC had 27 employees.
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In October 1998, the Company signed a joint sales and marketing agreement with
FORE Systems, Inc., a leading supplier of high bandwidth multimedia networking
solutions. The agreement calls for the two firms to work together on the
development and support of specific vertical markets for instant access
voice/data networks and ATM-based solutions that enable multimedia LANs. In
addition, FORE Systems and V Band have agreed to work collectively in the areas
of compatibility testing, customer field trial, demonstrations and ongoing
technical support.
Also in October 1998, the Company announced a strategic partnership agreement
with Bosch Telecom, Europe's fourth largest telecommunications manufacturer.
Through this agreement, V Band PLC has become the exclusive source for sales and
service of both Bosch's and V Band's product line for financial services firms
in the United Kingdom. In addition, the two companies will be combining
technical resources to begin exploring additional joint solutions for voice,
video and data as applied to the financial industry. The Company anticipates to
receive revenues from sales of Bosch communications systems and accompanying
service contract agreements in the first quarter of fiscal year 1999.
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 switching 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
<PAGE>
of future obsolescence. The administration software empowers the user with
system control and configuration capability, allows diagnostic reporting, and
eases the ability to perform moves, adds, and changes from a personal computer.
The Company's digital trading consoles give the users access to all system
lines, paperless button labeling and fully programmable loudspeaker monitoring
of multiple lines simultaneously.
In 1995, the Company introduced DXi, a high-speed digital communications
console. The DXi is fully compatible with the Company's BroadBand DN technology
platform and employs the same base technology as the Power Deck. The Company
also introduced its digital eXchange Phone, which was installed successfully at
the Chicago Board of Trade. The eXchange Phone employs the technology base of
the Power Deck product line and provides state-of-the-art communications
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 member firms.
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
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 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 allow 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
perform moves, adds and changes (MACs) remotely through phone lines, thereby
increasing system performance and serviceability.
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.
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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 advanced digital signal processing and
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 developed 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.
In 1998, numerous software enhancements were introduced for the Company's Broad
Band DN line of products. In addition, the Company finalized and deployed a
full-duplex "open microphone" version of the Clarity Speaker System. This
development allows hands-free monitoring of up to 24 lines simultaneously and
offers various communications features and options.
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.
During the years ended October 31, 1998, 1997 and 1996, the Company's annual
research and development expenditures were $1.7 million, $3.6 million and $3.1
million or 9%, 12% and 9% 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 approximately 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 15%, 6% and 10% of sales
in 1998, 1997 and 1996, respectively. Sales to the Chicago Board of Trade and
its general contractor represented 8%, 10% and 21% of sales in 1998, 1997 and
1996, respectively. During 1998 and 1997 sales to The New York Mercantile
Exchange accounted for 1% and 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 $10.9 million, $24.4
million and $25.3 million, representing 58%, 79% and 77% of the Company's sales
in 1998, 1997 and 1996, respectively. Licom sales represented 9%, 3% and 7% of
the Company's sales in 1998, 1997 and 1996, respectively. Service sales, which
consists of maintenance contract sales, support, service and miscellaneous
repairs accounted for 33%, 18% and 16%, of sales during 1998, 1997 and 1996,
respectively. The Company's Licom subsidiary operates from the Company's
Elmsford, NY facility.
The Company's foreign sales for 1998, 1997 and 1996 were $7.7 million, $11.4
million and $9.7 million, or 41%, 37% and 29%, 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, 21%, 8% and 20% of the Company's sales for 1998, 1997
and 1996, 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. The Elmsford facility houses the Company's
purchasing, production control, final assembly, quality control, testing and
repair operations.
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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.
While the Company believes that reduced equipment production volume has strained
its relationships with many of its subcontractors and suppliers, the Company did
not experience any significant delays in the delivery of material from either
subcontractors or suppliers in 1998. Due to the overall decline in equipment
revenue in 1998 and management's efforts to reduce the Company's investment in
inventory, the Company substantially reduced new purchases and also rescheduled
deliveries of goods previously ordered from its subcontractors and suppliers. To
achieve more favorable economies of scale, an increasing number of components
are currently sourced from single suppliers. There is, therefore, no assurance
that, in the event of a supply shortage, such components will be readily
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. 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.
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, been 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.
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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 and the United Kingdom
are IPC Information Systems, Inc. ("IPCI") and British Telecom NA. 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, the Centronics Division of NORTEL and ASEA Brown Boveri.
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, 1998, 1997 and 1996, the Company's backlog of purchase orders
that management believes to be firm was $4.3 million, $3.8 million and $8.3
million, respectively. The Company expects to deliver all products and services
from its October 31, 1998 backlog during fiscal 1999. 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, smaller to mid-sized system 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, 1998, the Company had 110 full-time employees, of whom 19 were
product development and production personnel, 69 were sales, marketing and
service support personnel, and 22 were administrative personnel. This compares
to 186 at October 31, 1997 and 199 at October 31, 1996. The decrease from 1997
was primarily attributable to the Company's restructuring plan.
Many of the Company's employees are highly skilled, and the Company's 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.
<PAGE>
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 guidelines; 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 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 executive offices, engineering, assembly, quality assurance, and
repair business operations are located at a 15,000 square foot leased facility
located at 3 Westchester Plaza, Elmsford, New York.
Leases for the Company's domestic sales and service support locations include
approximately: 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.
Licom's headquarters and operations were relocated in May of 1997 to the
corporate headquarters.
As part of a plan to reduce and consolidate its office space, the Company has
subleased its former 8,900 square foot sales office in New York City, has
relocated its executive offices and engineering facilities to 3 Westchester
Plaza, Elmsford, New York, and has signed a contract to assign the lease of a
former 20,000 square foot production facility located 20 miles southeast of
London.
Management believes that all of its facilities are in good condition and working
order and have adequate capacity to meet its needs for the foreseeable future.
<PAGE>
Item 3. Legal Proceedings
In October 1994, the Company commenced an action against Technical Telephone
Systems, Inc. ("TTSI") in New York State Supreme Court, Westchester County, for
minimum payments due to the Company in the amount of $650,000 under a
distribution agreement between the Company and TTSI. In November 1994, TTSI
filed a counterclaim against the Company denying all allegations stated in the
Company's complaint and alleging a breach of good faith and fair dealing by the
Company, claiming damages of $1 million. The Company has been in discussions
with TTSI and expects that a settlement of this proceeding will be concluded in
the near future which will not have a material impact on the consolidated
financial condition of the Company.
In June 1998, IEC Electronics Corp. ("IEC Electronics") commenced an action
against the Company in New York State Supreme Court, Wayne County, asserting
claims for the payment of $299,914 for products delivered to the Company,
$186,385 for inventory having that value, $12,404 for materials and labor in
work in progress, an unspecified amount for incidental expenses incurred in the
storage, transportation and sale of inventory and work in progress, and an
unspecified amount for the costs and disbursements of the action. The Company
has filed an answer denying liability for the claims and asserting a
counterclaim against IEC Electronics in an amount in excess of $500,000.
The Company is a party to other legal proceedings commenced against it by
suppliers and former employees. The Company believes that none of these
proceedings will have a material impact on the consolidated financial condition
of the Company.
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, 1998.
<PAGE>
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is listed for quotation in the National Association
of Securities Dealers OTC Bulletin Board under the symbol "VBAN". The following
table shows the high and low closing bid prices for the Company's Common Stock
during each of the fiscal quarters identified below. These bid prices were
obtained from IDD Information Services. The quotations represent prices in the
over-the-counter market between dealers in securities and do not include retail
markup, markdown, or commissions.
Fiscal 1998 High Low
- ----------- ---- ---
Fourth Quarter $ .41 $ .13
Third Quarter $ .38 $ .11
Second Quarter $ .88 $ .25
First Quarter $ 1.75 $ .63
Fiscal 1997 High Low
- ----------- ---- ---
Fourth Quarter $ 2.44 $ 1.50
Third Quarter $ 2.44 $ 1.38
Second Quarter $ 2.00 $ 1.25
First Quarter $ 2.50 $ 1.25
As of January 31, 1999, 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 has 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,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in 000's, except per share data)
<S> <C> <C> <C> <C> <C>
Sales ................................ $ 18,573 $ 31,081 $ 32,886 $ 29,351 $ 31,078
Income (loss) before cumulative effect
of accounting change ............. (4,369) (8,512) 27 (11,594) 627
Cumulative effect of accounting change -- -- -- -- 1,242
-------- -------- -------- -------- --------
Net income (loss) per basic and
diluted common share ................. $ (4,369) $ (8,512) $ 27 $(11,594) $ 1,869
======== ======== ======== ======== ========
Per share data:
Income (loss) before cumulative
effect of accounting change .. $ (.81) $ (1.58) $ .01 $ (2.18) $ .12
Cumulative effect of accounting
change ....................... -- -- -- -- .23
-------- -------- -------- -------- --------
Net income (loss) ................ $ (.81) $ (1.58) $ .01 $ (2.18) $ .35
======== ======== ======== ======== ========
Weighted average number of basic and
diluted common shares outstanding 5,423 5,372 5,323 5,322 5,311
Cash dividends per common share ...... $ .00 $ .00 $ .00 $ .00 $ .00
Working capital ...................... $ 1,395 $ 5,151 $ 10,619 $ 9,622 $ 18,935
Total assets ......................... $ 8,807 $ 14,552 $ 22,042 $ 21,212 $ 36,027
Shareholders' equity ................. $ 1,920 $ 6,097 $ 14,488 $ 14,398 $ 26,039
</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,
------------------------------
1998 1997 1996
------ ----- ------
<S> <C> <C> <C>
Sales
Equipment .............................. 66.8 % 81.8% 84.2 %
Service ................................ 33.2 18.2 15.8
------ ----- ------
Total sales ................................ 100.0 100.0 100.0
Cost of sales
Equipment(*) ........................... 69.0 73.8 59.2
Service(*) ............................. 67.8 76.7 62.2
------ ----- ------
Total cost of sales ........................ 68.6 74.3 59.7
------ ----- ------
Gross Profit ............................... 31.4 25.7 40.3
Selling, general and administrative expenses 44.6 39.2 31.0
Research and development expenses .......... 9.2 11.5 9.5
------ ----- ------
Operating loss ............................. (22.4) (25.0) (0.1)
====== ===== ======
Net income (loss) .......................... (23.5)% (27.4)% .01%
====== ===== ======
</TABLE>
* Presented as a percentage of the related sales categories.
Sales
Sales for the year ended October 31, 1998 were $18.6 million, a $12.5 million,
or 40% decrease from sales for 1997. The decline in 1998 sales was primarily due
to a decrease in large exchange floor installations and a general decline in
demand for the Company's products. Equipment sales, which include new equipment
installations plus moves, adds, and changes for customers' existing systems,
decreased by 51% from $25.4 million in 1997 to $12.4 million in 1998. Of this
$13.0 million decrease, $7.0 million was attributable to a decline in large
exchange floor installations and $6.0 million was attributable to a decrease in
the sale of the Company's other products.
<PAGE>
Sales in 1998 to non-financial customers (i.e., communication control centers
for utilities, and government agencies, etc.) accounted for $4.0 million, or 21%
of sales, a $1.5 million increase from 1997 non-financial customer sales. The
increase was attributable to a $0.7 million increase in sales of the Company's
Licom products and several specific sales of the Company's product in diverse
applications in 1998.
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.
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.
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 1998 or 1997.
Direct sales were $16.4 million, or 88% of total sales in 1998, as compared to
$24.9 million and $28.4 million, or 80% and 86% of sales in 1997 and 1996,
respectively.
Gross Profit Margins
Gross profit margins for 1998 and 1997 were 31% and 26% respectively. The
equipment gross profit margin was 31% in 1998 as compared to 26% in 1997. The
increase in equipment gross profit margins in 1998 was attributable to
modifications to existing systems and Licom new systems installed representing a
higher percentage of total equipment sales. In general, both of these types of
sales generate higher gross profit margins than new installations of the
Company's core products. The service gross profit margin increased to 32% in
1998 from 23% in 1997. This was primarily attributable to efficiencies gained as
a result of the January 1998 restructuring, and new maintenance contracts
entered into 1998.
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
<PAGE>
the Company obtained lower gross profit margins, large manufacturing variances,
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.
Operating Expenses
Total operating expenses for 1998 decreased to $10.0 million, representing a 37%
decrease from $15.8 million for 1997. Operating expenses as a percentage of
sales were 54% in 1998 as compared to 51% in 1997. The selling, general and
administrative expenses increase as a percentage of sales to 45% in 1998 from
39% in 1997 was attributable to a $1.0 million restructuring charge in 1998.
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.
Selling, general and administrative costs for 1998 decreased $3.9 million to
$8.3 million, or 32%, from $12.2 million in 1997. The decrease in selling,
general and administrative expenses was primarily attributable to cost
reductions initiated in the January 1998 restructuring program and the 1997
write-off of the remaining value of the goodwill of $2.3 million related to the
Company's London operation.
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.
Research and development expenses for 1998 of $1.7 million decreased $1.9
million, or 52% from $3.6 million in 1997. Research and development expenses as
a percentage of sales decreased to 9% in 1998 as compared to 11% in 1997. The
decrease is primarily due to the maturation of the Company's current product
line and the suspension of development of a new generation product line.
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 was primarily due to prototype and development expenses for specific
customer contracts.
Other Income and Expense
Interest expense was $195,000 for 1998 and $80,000 in 1997, which was primarily
due to the debt incurred related to the credit facility obtained by the Company
in May 1997. No interest expense was reported in 1996.
<PAGE>
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 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. During 1998, the Company
increased both the deferred tax asset and valuation allowance by $2,786,000. The
total valuation allowance as of October 31, 1998 of $11,409,000 reduces the
deferred tax asset to zero. The Company's 1998, 1997, and 1996 tax provisions of
$0, $700,000, and $5,000, reflect effective tax rates of 0%, (9)%, and 16%,
respectively.
Net Income (Loss) Per Basic and Diluted Common Share
For 1998, the Company recorded a net loss of $4.4 million or ($.81) per share,
as compared to a net loss of $8.5 million or ($1.58) per share in 1997. The loss
was primarily attributable to reduction in the overall sales level, partially
offset by a reduction in operating expenses.
For 1997, the Company recorded a net loss of $8.5 million or ($1.58) per share,
as compared to net income of $27,000 or $.01 per share in 1996. The loss was
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.
Liquidity and Capital Resources
The Company's cash at October 31, 1998 increased $.6 million, to $.9 million,
compared to the $.3 million balance reported at October 31, 1997. Accounts
receivable decreased $5.3 million, to $2.8 million in 1998 from $8.1 million in
1997 primarily due to retainage due on a large customer contract as of October
31, 1997, increased collection efforts, and a decline in the demand for the
Company's products. Short-term debt decreased $1.5 million, and inventories
decreased $.5 million.
The Company's cash 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 a 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 working capital was $1.4 million as of October 31, 1998, a $3.8
million decrease from $5.2 million as of October 31, 1997. The reduction in
working capital as of October 31, 1998 was primarily attributable to losses
incurred by the Company.
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.
<PAGE>
The Company's losses for 1998 and 1997 have 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 "Bank") which expires on May 28, 2000. The Credit Agreement provides a $2
million credit facility to V Band Corporation secured by substantially all of
the assets of the Company and its domestic subsidiaries. As a result of the
Company's results of operations in the past, the Bank amended the financial
covenants of the Credit Agreement. The Company's operations are dependent 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. The amended financial covenants require, among other
things, an improvement in the Company's results of operations during the second
fiscal quarter of 1999 and a return to profitability commencing in the third
fiscal quarter of 1999. There is no assurance that the Company will be able to
satisfy these requirements.
The Company has no significant commitments for capital expenditures as of
October 31, 1998.
Year 2000
The Company utilizes software and related technologies throughout its business
that may be affected by the date change in the year 2000. Systems modifications
or replacement are underway which are expected to make all computer systems at
the Company compliant with the year 2000 requirement. A committee consisting of
key employees from the engineering, IT, production, and finance and management
functions established procedures for testing all Company products, software and
vendors for year 2000 compliance. To date, major product lines have been tested
and found to be year 2000 compatible. Vendors have been formally contacted and
asked to certify that year 2000 issues will not interfere with delivery of goods
or services. A contingency plan will be finalized after the results of all
testing and vendor responses are received. The Company's financial software is
supported by an independent firm which licenses its products and services to the
Company. Although the vendor has certified that its applications are in
compliance with the year 2000 requirements, full testing coupled with a visit to
the vendor's facility are planned during the second quarter of 1999. In the
event major problems are discovered, the Company expects that new software can
be installed and tested during the year.
All applicable testing for year 2000 compliance is scheduled for completion by
June 30, 1999, which the Company believes will leave sufficient time to resolve
any problems that might be discovered. As most costs are associated with time
spent by employees or vendors, the Company expects to incur less than $50,000 of
costs for year 2000 compliance issues.
Although there can be no assurance that the Company, its vendors, third party
providers of goods and services (utilities, telecommunications etc.) or the
Company's customers will not discover year 2000 compliance problems, the Company
is currently unaware of any that would have an adverse affect on its operations
and financial conditions. Failure by the Company to identify and correct any
year 2000 issues on a timely basis could result in lost revenues, increased
operating expenditures, loss of customers coupled with related litigation
expenses and a business interruption, any of which could have a material adverse
effect on the Company's financial condition.
A contingency plan will be finalized after the results of all testing and vendor
responses are received.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Although the Company currently invoices its customers in US dollars or UK
pounds, exchange rates for these and other local currencies in countries where
the Company may operate in the future may fluctuate in relation to the US
dollar. Such fluctuations may have an adverse effect on the Company's earnings
or assets when local currencies are exchanged for US Dollars. Any weakening of
the value of such local currency against the US dollar could result in lower
revenues and earnings for the Company. To date, gains and losses related to
foreign currency transactions and foreign currency translation have not been
material for the Company. Included in the Company's consolidated balance sheet
at October 31, 1998 are net assets of the Company's United Kingdom subsidiary of
$816,000.
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) 57 Chief Executive Officer, Director
Thomas Hughes 39 President, Chief Operating Officer
Marc Teichman 57 Vice President - HR and Administration
Nicholas Nestora 48 Vice President - Sales and Operations
Luke P. La Valle, Jr. (2)(3) 56 Director
Thomas H. Lenagh (2) 74 Director
Brian S. North (1) 47 Director
Robert O. Riiska 37 Chief Financial Officer
A. Eugene Sapp, Jr. (1) 62 Director
J. Stephen Vanderwoude (2)(3) 55 Chairman, 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 served as Chairman of the Company from April 1985 to June 1998,
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.
Robert O. Riiska was appointed Chief Financial Officer in May 1998. Mr. Riiska
is employed by Morris-Anderson & Associates, Ltd., a management consulting firm
retained by the Company in April 1998.
Marc Teichman was appointed Vice President of HR and Administration in May 1998.
Mr. Teichman joined V Band in August 1996 as Director of Human Resources. Prior
to joining V Band, Mr. Teichman was Vice President and Senior Consultant at
Guidelines Management Consultants. Prior to his employment at Guidelines, he
served as Vice President of Human Resources for Cunard Line and The Chas P.
Young Company, a financial printer. Mr. Teichman also held various director
level human resource positions with Hilt AG and The Hertz Corporation, where his
last position was as Director of Personnel for Hertz Rent-A-Car.
<PAGE>
Nicholas Nestora was appointed Vice President, Sales and Operations of V Band in
May 1998. Previously, Mr. Nestora served the Company as Vice President of Field
Operations from 1997 to 1998. Prior to joining V Band, he was Director of
Operations at BT (British Telecom) North America, from 1989 to 1997.
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.
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.
J. Stephen Vanderwoude has served as Director of the Company since May 1994 and
as Chairman since June 1998. 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 1971.
Mr. Vanderwoude is a Director of First Midwest, a bank holding company.
Each officer is elected by and serves at the pleasure of the Board of Directors.
Directors are elected annually by the shareholders, except when the Board of
Directors may elect a director to fill a vacancy on the Board. The executive
officers of the Company are elected annually by the Board of Directors.
<PAGE>
The Board of Directors has three standing committees: Stock Option, Executive
Compensation and Audit Committees. The Stock Option Committee exercises the
responsibilities of the Board in granting options under and administering the
Company's 1982 Incentive Stock Option Plan and its 1984 Stock Option Plan. The
Executive Compensation Committee's principal functions are to recommend to the
Board of Directors the compensation arrangements for the executive officers of
the Company. The Audit Committee's principal functions are to review with
internal financial staff and the Company's independent public accountant, the
Company's reporting process and internal controls and to recommend the
selection, retention or termination of the independent public accountants. The
Company has entered into Indemnity Agreements with each of its directors and its
officers, pursuant to which the Company is obligated to reimburse or pay certain
expenses incurred by its directors and officers arising out of claims made
against them in connection with their services to the Company.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table sets forth information for each of the fiscal years ended
October 31, 1998, 1997 and 1996 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 1998 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, (3) 1998 $200,000 $ - $ - - $ 100
Chief Executive 1997 200,000 - - - 1,627
Officer and Director 1996 200,000 - - - 2,000
Thomas Hughes, (4) 1998 150,000 - 6,000 - 1,500
President- 1997 150,000 - 4,000 30,000 1,570
Chief Operating Officer 1996 150,000 2,000 - 90,000 1,500
Nicholas Nestora 1998 132,000 - 6,000 40,000 1,320
Vice President-
Sales and Operations
</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. Feil waived the receipt of $143,000 of his compensation during fiscal
year 1998.
(4) Mr. Hughes is a party to an agreement with the Company which entitles him
to receive approximately one year's compensation should there be a change
of control of the Company during the term of his employment or within six
months thereafter.
<PAGE>
STOCK OPTIONS
The following tables summarize option grants during the fiscal year ended
October 31, 1998 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, 1998. The Company does
not maintain any pension plans or any supplementary pension award plans.
<TABLE>
<CAPTION>
Option Grants in Fiscal 1998
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
-----------------------------------------------------------------------------------------------------
Percentage of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise Price Expiration
Name Options Granted Fiscal Year (per share) Date 5% 10%
---- --------------- ----------- ----------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Marc Teichman 40,000 8.6% $.25 - .50 2008 $ 1,212 $4,822
Nicholas Nestora 40,000 8.6% $.25 - .50 2008 $ 808 $3,572
</TABLE>
Aggregate Option Exercises in Fiscal 1998 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 Hughes - - 130,567 15,000 - -
Marc Teichman - - - 40,000 - -
Nicholas Nestora - - - 40,000 - -
</TABLE>
During the year ended October 31, 1998, the Company reduced the exercise price
of 145,567 of the above options to $.50 per share from original prices ranging
from $1.44 to $4.75 per share.
<PAGE>
COMPENSATION OF DIRECTORS
Each outside director of the Company is entitled to receive 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, 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 January 31, 1999.
<TABLE>
<CAPTION>
Number of Shares Percentage of
Beneficially Owned Class
------------------ -----
<S> <C> <C>
Thomas E. Feil 1,430,472 (1) 26.4%
3 Westchester Plaza, Elmsford, NY 10523
Thomas Hughes 130,567 (2) *
3 Westchester Plaza, Elmsford, NY 10523
Luke P. La Valle, Jr. 12,000 (2) *
50 Broad Street, Suite 1609, New York, NY 10004
Thomas H. Lenagh 10,000 (2) *
6 Greenwich Office Park, Greenwich, CT 06831
Brian S. North 25,000 (2) *
1400 Eleven Penn Center, Philadelphia, PA 19103
A. Eugene Sapp, Jr. 8,000 (2) *
2101 West Clinton Ave., Huntsville, AL 35807
J. Stephen Vanderwoude 8,000 (2) *
2316 Young Road, Southern Pines, NC 28388
All directors and executive officers as a group (10 persons) 1,624,039 (1) 29.9%
</TABLE>
- -------------------
* - less than 1%
(1) Excludes 80,000 shares held in an irrevocable trust for Mr. Feil's daughter,
over which Mr. Feil holds no voting or investment power.
(2) Includes shares that may be acquired upon exercise of options, which are
currently exercisable or are exercisable within 60 days, as follows: Mr. Hughes,
130,567 shares; Mr. LaValle, 12,000 shares; Mr. Lenagh, 10,000 shares; Mr.
North, 25,000 shares; Mr. Sapp, 8,000 shares; Mr. Vanderwoude, 8,000 shares; and
all directors and executive officers as a group, 193,567 shares.
Item 13. Certain Relationships and Related Transactions
During the year ended October 31, 1998, the Chief Executive Officer of the
Company waived $143,000 of his compensation. The Company has recorded such
amount as compensation expense and a capital contribution.
<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, 1998 and 1997
Consolidated Statements of Operations for the Years Ended October
31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years
Ended October 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended October
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule:
VIII Valuation and Qualifying Accounts S-1 All other schedules not listed above
have been omitted because the information has been otherwise supplied in the
financial statements or the notes thereto or they are not applicable, or the
amounts are insignificant or immaterial.
(b) Reports on Form 8-K:
None.
(c) Exhibits:
3.1 Restated Certificate of Incorporation. (5)
3.2 Amended By-Laws. (1)
10.1 Lease dated April 22, 1988 between registrant
and URBCO, Inc. for premises at 565 Taxter
Road, Elmsford, New York. (3)
10.2 Amended and Restated 1982 Incentive Stock
Option Plan, as amended. (10)
10.3 1984 Stock Option Plan adopted by Registrant
on June 27, 1984, as amended. (7)
10.4 1986 Employee Stock Purchase Plan, as adopted
by Registrant in December 1985, as amended.
(7)
10.5 Rights Agreement, dated as of February 20,
1989 between the Company and Registrar &
Transfer Company, as rights agent. (4)
10.6 Letter of Registrant to Thomas E. Feil dated
August 29, 1989. (1)
10.7 Adoption of Non-Standardized Retirement Plan
and Trust (401-K) dated January 1, 1989, as
amended. (5)
10.8 Amendment dated October 14, 1991 to a lease
dated April 22, 1988 between the Company and
URBCO, Inc. for premises at 565 Taxter Road,
Elmsford, New York. (7)
<PAGE>
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)
10.16 Agreement dated June 4, 1998 between the
Company and National Bank of Canada, New York
Branch. (12)
10.17 Fifth Amendment dated March 26, 1998 to a
lease dated April 22, 1988 between the
Company and Taxter Park Associates, as
successor in interest to URBCO, Inc., for
premises at 565 Taxter Road, Elmsford, New
York. (13)
16 Letter regarding change in certifying
accountant (3)
21 Subsidiaries
23.1 Consent of Deloitte & Touche LLP
27 Financial Data Schedules
<PAGE>
Footnotes to Exhibits
1. Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended October 31, 1989, and incorporated
herein by reference.
2. Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended October 31, 1988, and incorporated
herein by reference.
3. Filed as an exhibit to the Company's Current Report on Form
8-K filed March 18, 1994, and incorporated herein by
reference.
4. Filed as an exhibit to the Company's registration statement
on Form 8-A filed February 22, 1989, and incorporated herein
by reference.
5. Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended October 31, 1990, and incorporated
herein by reference.
6. Filed as an exhibit to the Company's Annual Report on Form
10-K for the period ended October 31, 1994, and incorporated
herein by reference.
7. Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended October 31, 1992, and incorporated
herein by reference.
8. Filed as an exhibit to the Company's Current Report on Form
8-K filed August 12, 1994, and incorporated herein by
reference.
9. Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended January 31, 1994, and incorporated
herein by reference.
10. Filed as an exhibit to the Company's registration statement
on Form S-8 filed November 29, 1996, and incorporated herein
by reference.
11. Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended July 31, 1997, and incorporated
herein by reference.
12. Filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended July 31, 1998, and incorporated
herein by reference.
13. Filed as an exhibit to the Company's Annual Report on Form
10-K for the year ended October 31, 1998, 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: March 17, 1999 By: /s/Robert O. Riiska
-------------------
Robert O. Riiska, 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 Robert O. Riiska 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.
Signature Title Date
- --------- ----- ----
/s/ Thomas E. Feil Chief Executive Officer and Director March 17, 1999
- ------------------ (Principal Executive Officer)
Thomas E. Feil
/s/ Thomas Hughes President and
- ----------------- Chief Operating Officer March 17, 1999
Thomas Hughes
/s/ Robert O. Riiska
- --------------------- Chief Financial Officer (Principal March 17, 1999
Robert O. Riiska Financial and Accounting Officer)
/s/ Luke P. La Valle, Jr. Director March 17, 1999
- -------------------------
Luke P. La Valle, Jr.
/s/ Thomas H. Lenagh Director March 17, 1999
- --------------------
Thomas H. Lenagh
/s/ Brian S. North Director March 17, 1999
- -------------------
Brian S. North
/s/ A. Eugene Sapp, Jr. Director March 17, 1999
- -----------------------
A. Eugene Sapp, Jr.
/s/ J. Stephen Vanderwoude Director March 17, 1999
- --------------------------
J. Stephen Vanderwoude
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
V Band Corporation
We have audited the accompanying consolidated balance sheets of V Band
Corporation and subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended October 31, 1998. 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, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended October 31, 1998 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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring losses
from operations. The Company's operations are dependent upon the continued
availability of funding under its bank credit agreement. These items raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
/s/DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 2, 1999
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
(in 000's, except share data)
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash ............................................................. $ 915 $ 336
Accounts receivable, less allowance for doubtful
accounts of $289 in 1998 and $498 in 1997 .................. 2,813 8,079
Inventories, net ................................................. 4,241 4,733
Prepaid expenses and other current assets ........................ 313 458
-------- --------
Total current assets .................... 8,282 13,606
-------- --------
Fixed Assets:
Furniture, fixtures, equipment and leasehold improvements ........ 7,811 9,539
Less: Accumulated depreciation and amortization .................. (7,444) (8,786)
-------- --------
Total fixed assets ...................... 367 753
-------- --------
Other Assets ..................................................... 158 193
-------- --------
TOTAL ASSETS ............................................... $ 8,807 $ 14,552
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt .................................................. $ 1,425 $ 2,943
Accounts payable ................................................. 2,434 2,557
Accrued wages .................................................... 842 894
Customer deposits ................................................ 1,389 959
Other accrued expenses ........................................... 797 1,102
-------- --------
Total current liabilities .............. 6,887 8,455
-------- --------
Commitments and Contingencies (Note 6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
(in 000's, except share data)
1998 1997
-------- --------
<S> <C> <C>
Shareholders' Equity:
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 7,147,943 shares in 1998 and 7,131,913 shares in 1997 71 71
Capital in excess of par value ................................... 20,016 19,872
Deficit ................... ...................................... (6,639) (2,270)
Cumulative translation adjustment ................................ 240 192
-------- --------
13,688 17,865
Less - Treasury stock, at cost; 1,719,322 shares................ (11,768) (11,768)
-------- --------
Total shareholders' equity............... 1,920 6,097
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 8,807 $ 14,552
======== =========
</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, 1998, 1997 AND 1996
(in 000's, except per share data)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales
Equipment ................................... $ 12,415 $ 25,413 $ 27,703
Service ..................................... 6,158 5,668 5,183
-------- -------- --------
Total sales ............................ 18,573 31,081 32,886
-------- -------- --------
Cost of Sales
Equipment ................................... 8,566 18,748 16,404
Service ..................................... 4,172 4,350 3,224
-------- -------- --------
Total cost of sales .................... 12,738 23,098 19,628
-------- -------- --------
Gross profit ........................... 5,835 7,983 13,258
-------- -------- --------
Operating Expenses
Selling, general and administrative ......... 8,287 12,188 10,189
Research and development .................... 1,708 3,573 3,118
-------- -------- --------
Total operating expenses ............... 9,995 15,761 13,307
-------- -------- --------
Operating loss ........................ (4,160) (7,778) (49)
Interest Expense ................................... (195) (80)
Other Income (Expense) ............................. (14) 46 81
-------- -------- --------
Income (loss) before income taxes ...... (4,369) (7,812) 32
Provision for Income Taxes ......................... 700 5
-------- -------- --------
Net income (loss) ...................... $ (4,369) $ (8,512) $ 27
======== ======== ========
Net income (loss) per basic and diluted common share $ (.81) $ (1.58) $ .01
======== ======== ========
Weighted average number of basic and diluted
common shares outstanding ...................... 5,423 5,372 5,323
======== ======== ========
</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, 1998, 1997 AND 1996
(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, 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)
Proceeds from employee
stock purchase plan .......................... 1
Waiver of Chief Executive Officer's compensation 143
Net loss ........................................ (4,369)
Translation adjustment .......................... 48
-------- -------- -------- -------- --------
Balance, October 31, 1998 ....................... $ 71 $ 20,016 $ (6,639) $ 240 $(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, 1998 AND 1997 and 1996
(in 000's)
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) .................................................. $ (4,369) $ (8,512) $ 27
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation .................................................... 443 566 742
Amortization and write-off of other assets ...................... 49 2,598 458
Provision (benefit) for doubtful accounts ...................... 142 117 (53)
Provision for inventory reserves ................................ 334 473
Deferred income taxes ........................................... 700
Waiver of Chief Executive Officer's compensation .............. 143
Changes in assets
and liabilities:
Accounts receivable ......................................... 5,124 (1,459) (1,901)
Inventories ................................................. 158 2,592 (202)
Prepaid expenses and other current assets ................... 145 222 (250)
Other assets ................................................ (14) 74 (9)
Accounts payable and other current liabilities .............. (49) (2,043) 740
Foreign currency translation adjustment ..................... 48 24 63
-------- -------- --------
Net cash provided by (used in) operating activities ..... 2,154 (4,648) (385)
-------- -------- --------
Cash Flows from Investing Activities
Sales of marketable securities ..................................... 187
Capital expenditures ............................................... (57) (209) (284)
-------- -------- --------
Net cash used in investing activities ................... (57) (209) (97)
-------- -------- --------
Cash Flows from Financing Activities
Debt issuance costs ................................................ (105)
Proceeds from employee stock purchase plan ......................... 1 97
Proceeds from short-term debt ...................................... 17,321 9,007
Payments of short-term debt ........................................ (18,840) (6,064)
-------- -------- --------
Net cash provided by (used in) financing activities ..... (1,518) 2,935 --
-------- -------- --------
Net increase (decrease) in cash ........................................ 579 (1,922) (482)
--------
Cash at beginning of year .............................................. 336 2,258 2,740
-------- -------- --------
Cash at end of year .................................................... $ 915 $ 336 $ 2,258
======== ======== ========
Supplementary Disclosures
Income taxes paid .................................................. $ -- $ 384 $ 65
======== ======== ========
Interest paid ...................................................... $ 195 $ 61 $ --
======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: The Company and basis of presentation
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.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company's ability to
continue as a going concern is uncertain based on the matters discussed below.
The consolidated financial statements do not include any adjustments relating to
the recoverability and classification of assets or the amounts of liabilities
that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon the
Company's ability to return to profitablity and to maintain compliance with its
amended bank covenants.
The Company has incurred recurring losses from operations. As a result of the
Company's results of operations, the bank amended the financial covenants of the
Credit Agreement (see Note 5).The amended financial covenants require, among
other things, an improvement in the Company's results of operations during the
second fiscal quarter of 1999 and a return to profitability commencing in the
third fiscal quarter of 1999. The Company's operations are dependent 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 and upon the ability of the Company to generate sufficient
revenue and results from operations to support such funding. The Company is
presently seeking additional sales orders in order to improve the results of its
operations. There is no assurance that the Company will be able to improve the
results of its operations to satisfy the amended financial covenants.
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.
<PAGE>
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
During 1998, the Company adopted Statement of Financial Accounting Standards No.
128 ("SFAS 128"), "Earnings Per Share". SFAS 128 replaces the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires dual presentation of basic and diluted earnings per share on the
face of the statement of operations. Diluted earnings per share is computed by
dividing net income by the weighted average number of common shares outstanding
and dilutive common equivalent shares (common stock options) outstanding.
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 (the "FASB") issued
Statement No. 130, Reporting Comprehensive Income and Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information. The Company
is in the process of evaluating the new statements, which are effective for
Fiscal 1999. The adoption of these statements is not expected to have a material
effect on the Company's consolidated financial statements.
Disclosure about Fair Value of Financial Instruments
The carrying value of the Company's credit facilities approximates fair value
and is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturities.
<PAGE>
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of trade receivables. The Company performs
ongoing credit evaluations of its customers' financial conditions and generally
does not require collateral.
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations when
indicators of impairment are present and the anticipated undiscounted operating
cash flows generated by these assets are less than the assets' carrying value.
Note 3: Inventories
Inventories are as follows, at October 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Finished goods ....................... $ 3,812,000 $ 3,374,000
Parts and components ................. 3,339,000 3,935,000
----------- -----------
7,151,000 7,309,000
Less: Inventory reserves ............ (2,910,000) (2,576,000)
----------- -----------
$ 4,241,000 $ 4,733,000
=========== ===========
</TABLE>
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 being amortized over a ten-year
period. During the year ended October 31, 1997, 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 to selling, general and administrative expense.
Note 5: Short-term Debt
In May 1997, the Company entered into a Credit Agreement with National Bank of
Canada (the "Credit Agreement"), which expires in May 2000. The Credit Agreement
provided a revolving loan and letter of credit facility of up to $4 million. 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. Under the terms of the Credit Agreement, the Company is restricted
from paying dividends if an event of default has occurred and is continuing
thereunder. Due to the Company's results of operations for 1997, the Company
<PAGE>
failed to satisfy the financial covenants set forth in the Credit Facility. On
February 9, 1998, National Bank of Canada waived the Company's failure to
satisfy those covenants at October 31, 1997 and amended the covenants for fiscal
year 1998. In addition, the interest rate on the outstanding borrowings was
modified to prime plus 2 percent effective February 1, 1998. The amended
financial covenants were not satisfied for the three-month period ended April
30, 1998. On June 4, 1998, National Bank of Canada waived the Company's failure
to satisfy those covenants at April 30, 1998 and amended the covenants for the
remainder of fiscal year 1998. The Company satisfied the amended financial
covenants for the three-month periods ended July 31, 1998 and October 31, 1998,
but was in violation of a non-financial covenant as of October 31, 1998. As of
October 31, 1998, the balance outstanding was $1,425,000 and the prime rate was
8%. On February 18, 1999, National Bank of Canada waived the non-financial
covenant default, amended the financial covenants for all periods through
expiration, and reduced the revolving loan and letter of credit facility to $2
million.
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,
Westchester County, for minimum payments due to the Company in the amount of
$650,000 under a distribution agreement between the Company and TTSI. In
November 1994, TTSI filed a counterclaim against the Company denying all
allegations stated in the Company's complaint and alleging a breach of good
faith and fair dealing by the Company, claiming damages of $1 million. The
Company has been in discussions with TTSI and expects that a settlement of this
proceeding will be concluded in the near future which will not have a material
impact on the consolidated financial condition of the Company.
In June 1998, IEC Electronics Corp. ("IEC Electronics") commenced an action
against the Company in New York State Supreme Court, Wayne County, asserting
claims for the payment of $500,000 for products delivered to the Company,
inventory, and an unspecified amount for incidental expenses and costs. The
Company has filed an answer denying liability for the claims and asserting a
counterclaim against IEC Electronics in an amount in excess of $500,000.
The Company is a party to other legal proceedings commenced against it by
suppliers and former employees. The Company believes that none of these
proceedings will have a material impact on the consolidated financial condition
of the Company.
<PAGE>
(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 for the years ended October 31 are as
follows:
1999 $743,000
2000 527,000
2001 448,000
2002 224,000
2003 99,000
Thereafter 165,000
The Company has subleased one facility and has signed a contract to assign the
lease of another facility. Future minimum payments of $1,300,000 relating to
these facilities are included in the table above. The Company anticipates that
the respective sublessee and assignee will actually make such payments.
Rent expense for the years ended 1998, 1997, and 1996 was $606,000, $956,000 and
$1,007,000, respectively.
(c) Employment arrangements
In December 1998, 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
these agreements is $365,000, and such future compensation has not been
reflected in the accompanying consolidated financial statements. Agreements with
aggregate compensation totaling $215,000 have an expiration date of December 31,
1999, while an agreement with compensation to be paid of $150,000 is in effect
during the term of the officer's employment and six months thereafter.
During the year ended October 31, 1998, the Chief Executive Officer of the
Company waived $143,000 of his compensation. The Company has recorded such
amount as compensation expense and a capital contribution.
(d) Accounts payable
During the year ended October 31, 1998, the Company entered into arrangements
with several vendors whereby each vendor agreed that the Company could satisfy
all or a portion of its existing accounts payable balance by remitting periodic
payments generally throughout fiscal year 1999. Certain of these arrangements
contain provisions for the payment of interest.
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. During the year ended October 31, 1998, the Company
reduced the exercise price of 145,567 options to $.50 per share from original
prices ranging from $1.44 to $4.75 per share. Such repricing has been reflected
below.
<PAGE>
The following is a summary of stock option transactions for the three years in
the period ended October 31, 1998:
Shares Exercise Prices
------ ---------------
Shares under option - November 1, 1995 ..... 687,194 $ .50 to $ 6.88
Options granted ........................ 358,700 .50 to 2.63
Options cancelled ...................... (169,637) 1.88 to 6.88
--------
Shares under option - October 31, 1996 ..... 876,257 .50 to 6.00
Options granted ........................ 180,000 .50 to 1.75
Options cancelled ...................... (117,506) 1.44 to 5.00
--------
Shares under option - October 31, 1997 ..... 938,751 .50 to 6.00
Options granted ...................... 462,933 .25 to .75
Options cancelled .................... .25 to 6.00
(407,316)
--------
Shares under option -October 31, 1998 ...... 994,368 .25 to 6.00
========
Options exercisable at:
October 31, 1997 ..................... 648,151 $ .50 to $ 6.00
========
October 31, 1998 ..................... 663,435 .25 to 6.00
========
The following table summarizes information about stock options outstanding at
October 31, 1998:
<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 10/31/98 Life (Years) Price 10/31/98 Price
- ----------------------------- ------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1989 $5.75 - $5.75 20,000 .92 $ 5.75 20,000 $ 5.75
1990 .50 - 4.00 31,202 1.74 3.12 31,202 3.12
1991 .50 - 3.88 70,633 2.70 3.50 70,633 3.50
1992 .50 - 6.00 79,350 3.71 4.75 79,350 4.75
1993 3.88 - 5.50 10,000 4.53 4.08 10,000 4.08
1994 .50 - 5.13 81,234 5.18 4.45 81,234 4.45
1995 .50 - 5.00 71,666 6.35 2.74 71,666 2.74
1996 .50 - 2.63 239,850 7.39 1.44 239,850 1.44
1997 .50 - 1.75 86,500 8.43 1.16 59,500 1.27
1998 .25 - .75 303,933 9.37 .47 - -
======= ==== ===== ======= =====
994,368 6.87 $ 2.04 663,435 $ 2.80
======= ==== ====== ======= ======
</TABLE>
<PAGE>
All stock options become exercisable upon a change of control, as defined.
The estimated fair value of options granted during 1998, 1997, and 1996 was $.33
per share, $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 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, 1998, 1997 and 1996 would have been reduced to
the pro forma amounts indicated in the following table:
Net income (loss) applicable to common shareholders:
1998 1997 1996
-------- -------- ------
As reported $ (4,369) $ (8,512) $ 27
Pro forma (4,520) (8,655) (317)
Net income (loss) per common share and common share equivalent
As reported $ (.81) $ (1.58) $ .01
Pro forma (.83) (1.60) (.06)
The fair value of options granted under the Company's fixed stock option plans
during 1998 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 49%, risk free
interest rate of approximately 5.5%, and expected lives of option grants of 10
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.
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
SFAS 109, deferred income taxes reflect the tax consequences on future years of
differences between the tax basis of assets and liabilities and their financial
reporting amounts. The 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, 1998, the Company had available net operating loss
carryforwards for tax return purposes of approximately $18,322,000 that begin to
expire in 2011.
<PAGE>
The income tax provision (benefit) consists of the following:
1997 1996
--------- --------
Current
Federal ............................. $
State and local ..................... 5,000
---------
5,000
Deferred ---------
Federal ............................. $ 658,000
State and local ..................... 42,000
---------
700,000
---------
$ 700,000 $ 5,000
========= ========
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
U.S. statutory rate applied to pretax
income (loss) ..................... $(1,478,000) $(2,657,000) $ 11,000
Dividends received deduction and
tax-exempt interest
Goodwill amortization ................. 350,000 127,000
State and local taxes, net of federal
tax benefit ....................... (385,000) 3,000
Increase (decrease) in valuation
allowance ......................... 1,438,000 3,359,000 (208,000)
Reversal of current liability for taxes
Other, net ............................ 40,000 33,000 72,000
----------- ----------- -----------
$ -- $ 700,000 $ 5,000
=========== =========== ===========
</TABLE>
<PAGE>
The net deferred income tax asset at October 31, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
Deferred tax assets(liabilities) 1998 1997
- -------------------------------- ------------ ------------
<S> <C> <C>
Depreciation .................................... $ 354,000 $ 280,000
Amortization .................................... 712,000 624,000
Inventory reserves .............................. 2,266,000 2,237,000
Accrued expenses ................................ 114,000 190,000
Bad debt reserve ................................ 82,000 169,000
State and local taxes, net of federal tax benefit -- 1,282,000
Net operating loss carry forwards ............... 7,881,000 3,841,000
------------ ------------
11,409,000 8,623,000
Valuation allowance ............................. (11,409,000) (8,623,000)
------------ ------------
$ - $ -
============ ============
</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 15%, 6% and 10% of the
Company's sales in 1998, 1997 and 1996, respectively. During 1998, 1997 and
1996, the Chicago Board of Trade and its general contractor accounted for 8%,
10% and 21%, 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 1998, 1997 and 1996, foreign sales represent 41%, 37% and 29%, respectively,
of consolidated sales and include the following geographical areas:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Pacific Rim $ 1,500,000 $ 2,600,000 $ 1,900,000
Europe (including UK) 5,300,000 6,300,000 6,900,000
All others 900,000 2,500,000 900,000
----------- ----------- ------------
$ 7,700,000 $ 11,400,000 $ 9,700,000
=========== ============ ============
</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 expired on February 19, 1999.
(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. In
January 1999, the Company discontinued the Purchase Plan for periods after
December 31, 1998.
Note 11: Employee 401(K) Savings Plan
The Company has a tax-deferred employee 401(k) savings plan covering
substantially all employees. Contributions by the Company are made at the
Company's discretion. Contributions to the plan in 1998, 1997 and 1996 were
$39,000, $40,000 and $49,000, respectively.
Note 12: Fourth quarter results
During the fourth quarter of 1997 the Company recorded the following expense
adjustments:
Inventory reserves and write-offs $ 1,300,000
Intangible asset write-off 2,300,000
Cost of goods sold 800,000
Deferred tax asset valuation allowance 700,000
Warranty reserves 200,000
Severance and other 200,000
Allowance for doubtful accounts 200,000
<PAGE>
<TABLE>
<CAPTION>
Schedule VIII
V BAND CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996
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, 1998 $ 498,000 $ 142,000 $ 351,000 (a) $ 289,000
October 31, 1997 $ 381,000 $ 117,000 $ 498,000
October 31, 1996 $ 456,000 $ (53,000) $ 22,000 (a) $ 381,000
Inventory reserve
October 31, 1998 $ 2,576,000 $ 334,000 $ 2,910,000
October 31, 1997 $ 2,103,000 $ 473,000 $ 2,576,000
October 31, 1996 $ 2,144,000 $ 41,000 (b) $ 2,103,000
Warranty reserve
October 31, 1998 $ 273,000 $ 247,000 $ 386,000 (c) $ 134,000
October 31, 1997 $ 343,000 $ 589,000 $ 659,000 (c) $ 273,000
October 31, 1996 $ 415,000 $ 289,000 $ 361,000 (c) $ 343,000
Reserve for Notes Receivable
October 31, 1997 $ 110,000 $ 110,000 (d)
October 31, 1996 $ 110,000 $ 110,000
Valuation allowance for deferred
income tax asset
October 31, 1998 $ 8,623,000 $ 2,786,000 $ 11,409,000
October 31, 1997 $ 4,818,000 $ 700,000 $ 3,105,000 $ 8,623,000
October 31, 1996 $ 5,026,000 $ 208,000 $ 4,818,000
</TABLE>
(a) Doubtful accounts written off, net of cash recovered.
(b) Consumption of obsolete or slow moving inventory, which was reserved for in
the prior year.
(c) Warranty labor charges combined with actual cash payments.
(d) Note receivable written off, net of cash received.
S -1
FIFTH AMENDMENT TO LEASE
This Fifth Amendment to Lease (the "Fifth Amendment"), made this 26th day of
March, 1998, by and between TAXTER PARK ASSOCIATES (hereinafter referred to as
"Landlord") and V BAND CORPORATION (hereinafter referred to as "Tenant").
WITNESSETH:
WHEREAS, Taxter Park Associates, as successor in interest to Urbco, Inc., is the
Landlord under an agreement of Lease entered into with Tenant, dated as of April
22, 1988 (the "Original Lease"), which has been previously amended via that
certain First Lease Amendment dated October 14, 1991, that certain Second Lease
Amendment dated February 20, 1992, that certain Third Amendment to Lease dated
May 28, 1993 and that certain Fourth Amendment to Lease dated June 8, 1994 (the
Original Lease, together with the First Lease Amendment, Second Lease Amendment,
Third Amendment to Lease, Fourth Amendment to Lease and this Fifth Amendment to
Lease are hereinafter collectively referred to s the "Lease"), pursuant to which
Landlord leased to Tenant certain premises (the "Demised Premises") consisting
of 22,801 rentable square feet on the sixth (6th) floor in the building located
at 565 Taxter Road in Elmsford, Westchester County, New York.
WHEREAS, Landlord and Tenant wish to further amend the Lease to provide that
Landlord shall pay to Tenant a sum of money in lieu of the Second Extension
Allowance and to delete the Renewal Option contained in the Lease and to revise
certain other provisions of the Lease in connection with such amendments, upon
and subject to the terms and conditions of this Fifth Amendment.
NOW, THEREFORE, in consideration of the promises herein made, the terms and
conditions contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
hereby agrees as follows:
1. Paragraph 5 of the Fourth Amendment to Lease is hereby deleted in its
entirety as though it had never been contained in the Lease and the following is
hereby inserted in its place:
"Landlord shall have no liability or obligation of any kind to pay or reimburse
Tenant for any alterations made or performed by Tenant to the Demised Premises.
In lieu thereof, Landlord hereby agrees that:
(a) So long as Tenant pays the monthly installment of Rent payable for April
1998 on or before April 1, 1998 then Landlord shall pay to Tenant no later than
April 15, 1998 an amount equal to Fifteen Thousand and 00/100 Dollars
($15,000.00).
(b) So long as Tenant pays the monthly installment of Rent payable for May 1998
on or before May 1, 1998 then Landlord shall pay to Tenant no later than May 15,
1998 an amount equal to Fifteen Thousand and 00/100 Dollars ($15,000.00).
(C) So long as Tenant pays the monthly installment of Rent payable for June 1998
on or before June 1, 19998 then Landlord shall pay to Tenant no later than June
15, 1998 an amount equal to Fifteen Thousand and 00/100 Dollars ($15,000.00).
(d) So long as Tenant pays the monthly installment of Rent payable for July 1998
on or before July 1, 1998 then Landlord shall pay to Tenant no later than July
15, 1998 an amount equal to One Hundred Five Thousand and 00/100 Dollars
($105,000).
<PAGE>
Except for the foregoing, Landlord shall have no liability or obligation to pay
to Tenant any allowance or sum of money of any kind whatsover.
2. Paragraph 6 of the Fourth Amendment to Lease is hereby deleted in its
entirety as though it had never been contained in the Lease and is hereby null
and void with absolutely no further force or effect whatsover. Tenant hereby
understands, acknowledges and agrees that Tenant has and shall have no right or
option of any kind to renew or extend the term of the Lease.
Notwithstanding the foregoing, Landlord hereby agrres that if, on or before July
31, 1998, Landlord receives written notice from Tenant of Tenant's desire to
renew or extend the term of the lease for all or a portion of the Demised
Premises, then Landlord shall negotiate the terms and conditions of such a
renewal or extension in good faith with Tenant for a period of thirth (30) days
from the receipt of such written notice from Tenant. Tenant understands,
acknowledges and agrees that such a renewal or extension shall be upon terms and
conditions satisfactory to Landlord, in Landlord's sole discretion, and that
Landlord shall have no obligation to renew or extend the Lease unless ther terms
and conditions of such renewal or extension are satisfactory to Landlord. Tenant
further understands, acknowledges and agrees that market rental rates are
significantly higher than tbe rental rate payable by Tenant as of the date of
this Fifth Amendment and that tenant concessions are lower than those available
at the time Tenant entered into the Fourth Amendment to Lease.
3. Landlord and Tenant each represent to the other that this Fifth Amendment was
not brought aboaut or procured by any real estate broker and Landlord and Tenant
agree to indemnify and hold the other harmless from and against any cost,
expenses or liability for any compensation, commissions or charges claimed by
any broker or agent with respect to this Fifth Amendment or the negotiation
hereof.
Except as specifically amended hereby, the terms, conditions and provisions of
the Lease shall remain unmodified and continue in full force and effect and, as
amended hereby, all of the terms, covenants, conditions and provisions of the
Lease are hereby ratified and confirmed in all respects.
This Fifth Amendment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
<PAGE>
TENANT: LANDLORD:
V BAND CORPORATION TAXTER PARK ASSOCIATES
a New York corporation a New York General Partnership
/s/Thomas E. Feil Dean Witter Realty Income Partnership II, L.P.,
- ----------------- its General Partner
Name: Thomas E. Feil
Title: CEO Dean Witter Realty Income Properties II, Inc.,
its managing partner
/s/Robert B. Austin
-------------------
Robert B. Austin
Vice President
Dean Witter Realty Income Partnership III, L.P.,
its General Partner
Dean Witter Realty Income Properties III., Inc.,
its Managing General Partner
/s/Robert B. Austin
-------------------
Robert B. Austin
Vice President
Dean Witter Realty Income Partnership IV, L.P.,
its General Partner
Dean Witter Realty Fourth Income Properties, Inc.,
its Managing General Partner
/s/Robert B. Austin
-------------------
Robert B. Austin
Vice President
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 March 2, 1999 (which expresses an unqualified opinion and
includes an explanatory paragraph relating to the Company's ability to continue
as a going concern) appearing on page F-1 of the Annual Report on Form 10-K for
the year ended October 31, 1998.
/s/DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Stamford, Connecticut
March 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 915
<SECURITIES> 0
<RECEIVABLES> 2,813
<ALLOWANCES> 289
<INVENTORY> 4,241
<CURRENT-ASSETS> 8,282
<PP&E> 7,811
<DEPRECIATION> 7,444
<TOTAL-ASSETS> 8,807
<CURRENT-LIABILITIES> 6,887
<BONDS> 0
0
0
<COMMON> 20,087
<OTHER-SE> (18,167)
<TOTAL-LIABILITY-AND-EQUITY> 8,807
<SALES> 18,573
<TOTAL-REVENUES> 18,573
<CGS> 12,738
<TOTAL-COSTS> 8,287
<OTHER-EXPENSES> 1,722
<LOSS-PROVISION> 142
<INTEREST-EXPENSE> (195)
<INCOME-PRETAX> (4,369)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,369)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
