SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
--------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-13284
V BAND CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-2990015
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
565 Taxter Road, Elmsford, New York 10523
----------------------------------------------------
(Address and zip code of principal executive office)
(914) 789-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
The number of shares of Common Stock outstanding as of July 31, 1998 was
5,426,591 shares.
<PAGE>
V BAND CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1998
TABLE OF CONTENTS
PART I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
Consolidated balance sheets at July 31, 1998 (unaudited) and
October 31, 1997 ................................................ 1
Consolidated statements of operations for the three and nine
months ended July 31, 1998 and 1997 (unaudited).................. 2
Consolidated statements of cash flows for the nine months ended
July 31, 1998 and 1997 (unaudited) .............................. 3
Notes to consolidated financial statements (unaudited)........... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................... 6
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ............. 9
SIGNATURES ................................................................ 10
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND OCTOBER 31, 1997
(in 000's, except share data)
July 31, October 31,
1998 1997
-------- --------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................. $ 880 $ 336
Accounts receivable, less allowance for doubtful
accounts of $239 in 1998 and $498 in 1997 ....... 2,208 8,079
Inventories, net .......................................... 4,669 4,733
Prepaid expenses and other current assets ................. 445 458
-------- --------
Total current assets ................... 8,202 13,606
-------- --------
Fixed Assets:
Furniture, fixtures, equipment and leasehold improvements . 9,518 9,539
Less: Accumulated depreciation and amortization ........... (9,038) (8,786)
Total fixed assets ..................... 480 753
-------- --------
Other Assets .............................................. 167 193
-------- --------
TOTAL ASSETS .................................... $ 8,849 $ 14,552
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt ........................................... $ 833 $ 2,943
Accounts payable .......................................... 2,573 2,557
Accrued wages ............................................. 838 894
Customer deposits ......................................... 1,469 959
Other accrued expenses .................................... 990 1,102
-------- --------
Total current liabilities ............. 6,703 8,455
-------- --------
Shareholders' Equity:
Common stock, $.01 par value; authorized 20,000,000 shares;
issued 7,145,913 in 1998 and 7,131,913 in 1997 .. $ 71 $ 71
Capital in excess of par value ............................ 20,011 19,872
Accumulated deficit ....................................... (6,303) (2,270)
Cumulative translation adjustment ......................... 135 192
-------- --------
13,914 17,865
Less Treasury stock, at cost; 1,719,322 shares ............ (11,768) (11,768)
-------- --------
Total shareholders' equity ............. 2,146 6,097
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 8,849 $ 14,552
======== ========
</TABLE>
See notes to consolidated financial statements
-1-
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 1998 AND 1997 (unaudited)
(in 000's, except per share data)
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales
Equipment ............................ $ 2,669 $ 5,407 $ 9,352 $ 19,617
Service .............................. 1,750 1,448 4,611 4,196
-------- -------- -------- --------
Total sales ...................... 4,419 6,855 13,963 23,813
-------- -------- -------- --------
Cost of Sales
Equipment ............................ 1,637 3,406 6,639 12,228
Service .............................. 1,174 990 3,156 2,874
-------- -------- -------- --------
Total cost of sales .............. 2,811 4,396 9,795 15,102
-------- -------- -------- --------
Gross profit ..................... 1,608 2,459 4,168 8,711
-------- -------- -------- --------
Operating Expenses
Selling, general and administrative .. 1,636 2,470 6,465 6,990
Research and development ............. 369 787 1,560 2,478
-------- -------- -------- --------
Total operating expenses ......... 2,005 3,257 8,025 9,468
-------- -------- -------- --------
Operating loss ................... (397) (798) (3,857) (757)
Interest Expense .......................... (55) (19) (135) (15)
Other (Expense) Income .................... (6) 3 (45) (9)
-------- -------- -------- --------
Net loss ......................... $ (458) $ (814) $ (4,037) $ (781)
======== ======== ======== ========
Net loss per share ........................ $ (.08) $ (.15) $ (.74) $ (.15)
======== ======== ======== ========
Weighted average number of shares of common
stock and common stock equivalents .... 5,427 5,413 5,421 5,385
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
-2-
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997 (unaudited)
(in 000's)
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ..................................................... $ (4,037) $ (781)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation .............................................. 354 432
Amortization of other assets .............................. -- 309
Provision for doubtful accounts ........................... 9 2
Waiver of Chairman's salary ............................... 140 --
Changes in assets and liabilities:
Accounts receivable ................................... 5,862 (782)
Inventories ........................................... 64 596
Prepaid expenses and other current assets ............. 13 144
Other assets .......................................... 26 (26)
Accounts payable and other current liabilities ........ 358 (3,957)
Foreign currency translation adjustment ............... (55) 6
-------- --------
Net cash provided by (used in) operating activities 2,734 (4,057)
-------- --------
Cash Flows from Investing Activities
Capital expenditures ......................................... (81) (133)
-------- --------
Net cash used in investing activities ............. (81) (133)
-------- --------
Cash Flows from Financing Activities
Proceeds from short-term debt ................................ 14,080 3,032
Payments of short-tem debt ................................... (16,189) (718)
Proceeds from issuance of common stock ....................... -- 97
Debt issuance costs .......................................... -- (105)
-------- --------
Net cash (used in) provided by financing activities (2,109) 2,306
-------- --------
Net increase (decrease) in cash and cash equivalents ............. 544 (1,884)
Cash and cash equivalents, at beginning of period ................ 336 2,258
-------- --------
Cash and cash equivalents, at end of period ...................... $ 880 $ 374
======== ========
Supplementary Disclosures
Income taxes paid ............................................ $ 16 $ 230
======== ========
Interest paid ................................................ $ 135 $ 204
======== ========
</TABLE>
See notes to consolidated financial statements
-3-
<PAGE>
V BAND CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in 000's)
Note A -- Basis of Presentation
The accompanying consolidated financial statements include the accounts of V
Band Corporation and its wholly-owned subsidiaries (the "Company"). All
significant intercompany balances and transactions have been eliminated. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These consolidated financial statements should be read in
conjunction with the Company's audited financial statements for the fiscal year
ended October 31, 1997 as set forth in the Company's annual report on Form 10-K.
In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at July 31, 1998 and all periods presented
have been made.
Note B -- Significant accounting policies
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.
Note C -- Inventories
Inventories are summarized as follows:
July 31, October 31,
1998 1997
------- -------
Finished goods ......... $ 3,275 $ 3,374
Parts and components ... 3,568 3,935
------- -------
6,843 7,309
Less: Inventory reserves (2,174) (2,5760
------- -------
$ 4,669 $ 4,733
======= =======
Note D -- Short-term debt
In May 1997, the Company entered into a Credit Agreement with National Bank of
Canada, (the "Credit Agreement"). The Credit Agreement provides a revolving loan
and letter of credit facility of up to $4 million with an interest rate of prime
plus 2 percent. The Company's obligations under the Credit Agreement are secured
by a security interest in all of the assets of V Band Corporation and its
domestic subsidiaries. The prime rate was 8.5% at July 31, 1998. Due to the
Company's results of operations for 1997, the Company failed to satisfy the
financial covenants set forth in the Credit Facility. On February 9, 1998,
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<PAGE>
National Bank of Canada waived the Company's failure to satisfy those covenants
at October 31, 1997 and has amended them for fiscal year 1998. In addition, the
interest rate on the outstanding borrowings has been modified to prime plus 2
percent effective February 1, 1998. The amended financial covenants were not
satisfied for the three month period ended April 30, 1998. On June 4, 1998 the
National Bank of Canada waived the Company's failure to satisfy those covenants
at April 30, 1998 and has amended them for fiscal year 1998. The Company
satisfied the amended financial covenants for the three-month period ended July
31, 1998. The interest rate on the outstanding borrowings remains at prime plus
2 percent.
Note E -- Restructuring plan
On January 31, 1998, the Company established a plan to restructure its
operations. The restructuring plan involves consolidation of the Company's
office space in New York and London, the restructuring of its operations, the
establishment of a centralized customer service center and the reassignment of
various marketing and administrative personnel to field sales support functions
to open new sales and distribution channels. As a result of this plan, the
Company has reduced its headcount from its October 31, 1997 level of 186
employees to 170 employees at January 31, 1998. The Company recorded a $1,023
charge during the quarter ended January 31, 1998 relating to the restructuring
plan.
Note F - Related party transaction
In the nine months ended July 31, 1998, the Chairman of the Company waived $140
of his compensation. The Company has recorded such amount as compensation
expense and a capital contribution.
-5-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (in 000's except per share data)
Results of Operations
Sales for the third quarter of 1998, ended July 31, 1998, of $4,419 were $2,436,
or 36%, lower than the $6,855 reported in the third quarter of 1997. Equipment
sales of $2,669 in the third quarter of 1998 decreased by $2,738, or 51%, from
the equipment sales of $5,407 in the third quarter of 1997. The decrease in
equipment sales for the three months ended July 31, 1998 is primarily
attributable to a significant number of large installations in the U K and the
Northeast Region in 1997, as well as a reduction in sales at the Company's Licom
subsidiary. Sales from the Company's service business increased to $1,750 for
the third quarter of 1998, an increase of 21% compared to the third quarter of
1997. The increase was primarily due to a $257, or 21%, in the Company's
maintenance sales due to an increase in customers serviced by the Company, and a
$45, or 20%, increase in the Company's repair business due to an increase in out
of warranty repairs.
Sales for the nine months ended July 31, 1998 of $13,963 were $9,850, or 41%,
lower than the nine months reported in 1997. Equipment sales for the nine months
ended July 31, 1998 decreased $10,265, or 52%, compared to the nine months ended
July 31, 1997. Sales for the Company's core product decreased $3,252 and sales
for the eXchange phone decreased $7,013, primarily due to three large contracts
during the nine months ended July 31, 1997. The Company's service revenue for
the nine months ended July 31, 1998 increased by $415 to $4,611, or 10%,
compared to the nine months ended July 31, 1997. The increase compared to July
31, 1997 is attributable to an increase in maintenance revenue of $556, or 16%,
which was partially offset by a reduction in repairs. The increase in
maintenance revenue is attributable to an increase of customers serviced under
maintenance contracts.
Gross profit margin for the three and nine months ended July 31, 1998 was 36%
and 30% respectively as compared to 36% and 37% for the comparable periods in
1997. Equipment gross profit margin for the three and nine months ended July 31,
1998 was 39% and 29% respectively as compared to 37% and 38% for the comparable
periods in 1997. The increase in the gross profit margin for equipment sales
during the third quarter of 1998 was primarily attributable to a higher
percentage of modifications to existing systems at customer locations, which
historically generate higher margins than new system installations. The decrease
in the gross profit margin for equipment sales during the nine months ended July
31, 1998 was primarily due to an increase in distributor sales, which
historically generate lower margins, and increased competition. The gross profit
margin for service sales was 33% for the third quarter and 32% for the nine
months ended July 31, 1998 as compared to 32% for both periods in 1997. The
increase for the third quarter was attributable to increased volume for both
maintenance and repairs.
Operating expenses for the third quarter of 1998 were $2,005 or $1,252 lower
than the $3,257 reported for the third quarter of 1997. The decrease reflects
cost savings from the restructuring of the Company's operations. Operating
expenses for the nine months ended July 31, 1998 were $8,025, or a $1,443
decrease from the same period last year, including a $1,023 charge related to
the restructuring of the Company's operations. The Company consolidated office
space in New York and London and centralized administrative functions of the
Company's United States service operation into its New York operation. In
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<PAGE>
addition, the Company has reassigned several marketing and administrative staff
to field sales support functions as a further effort to enhance revenues. As a
result of this plan, the Company reduced the number of its employees from the
October 31, 1997 level of 186 to 170 at January 31, 1998. The employee headcount
as of July 31, 1998 is 114 . Excluding the restructuring charge, operating
expenses decreased by $2,466 for the nine months ended July 31, 1998. This
decrease was partially attributable to a decrease in research and development
expenses as 1997 expenses included development of the second generation of the
Company's eXchange phone. In addition, operating expenses for the Company's
Licom subsidiary decreased by $109, which was attributable to the downsizing and
relocation of its operations into the Company's corporate facility.
The net loss reported in the third quarter ended July 31, 1998 was $458, or $.08
per share, compared to a net loss of $814, or $.15 per share, for the third
quarter of 1997. The net loss reported for the nine months ended July 31, 1998
was $4,037, or $.74 per share, compared to a net loss of $781, or $.15 per
share, for the same period in 1997. The third quarter loss was primarily
attributable to a decrease in sales. The loss for the nine months ended July 31,
1998 includes a $1,023 non-recurring charge related to the restructuring . The
average shares outstanding for the quarter ended July 31, 1998 increased to
5,427 versus 5,413 for the same period in 1997.
Financial Condition
The Company's aggregate of cash and cash equivalents was $880 at July 31, 1998,
an increase of $544 from the October 31, 1997 balance of $336. Accounts
receivable decreased $5,862 primarily due to the payment of retainage balances
on several large customer contracts as well as a decrease in sales for the nine
months ended July 31, 1998 as compared to the same period in 1997. Short-term
debt decreased $2,059 as a result of the liquidation of accounts receivable.
The Company's loss for fiscal year 1997 and the first nine months of 1998 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"). The Credit Agreement provided a $4
million credit facility to the Company secured by substantially all of the
assets of the Company and its domestic subsidiaries. As a result of the
Company's results of operations for 1997, the Company failed to satisfy the
financial covenants set forth in the Credit Facility. The Bank has waived the
Company's failure to satisfy the financial covenants set forth in the Credit
Agreement and has amended those covenants for fiscal year 1998. The amended
financial covenants were not satisfied for the three-month period ended April
30, 1998. On June 4, 1998 the National Bank of Canada waived the Company's
failure to satisfy those covenants at April 30, 1998 and has amended them for
fiscal year 1998. The Company satisfied the financial covenants for the
three-month period ended July 31, 1998. 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 which require an improvement in the results of the
Company's operations for the remainder of 1998.
In the nine months ended July 31, 1998, the Chairman of the Company waived $140
of his compensation. The Company has recorded such amount as compensation
expense and a capital contribution.
-7-
<PAGE>
Year 2000
The Company utilizes software and related technologies throughout its business
that may be affected by the date change in the year 2000. System modifications
or replacements are underway or planned which will make all computer systems at
the Company compliant with the year 2000 requirement. Anticipated spending for
these modifications will be expensed as incurred and is not expected to have a
material impact on the Company's ongoing results of operations.
-8-
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1997 annual meeting of shareholders of the Company was held
on May 11, 1998.
The name of each director elected at the 1998 annual meeting of
shareholders, and the number of votes cast for, against or
withheld as to each such nominee is set forth below:
NAME FOR WITHHELD
---- --- --------
Thomas E. Feil 4,612,165 171,744
Luke P. La Valle, Jr. 4,646,215 137,694
Thomas H. Lenagh 4,645,715 138,194
Brian S. North 4,646,215 137,694
A. Eugene Sapp, Jr. 4,646,215 137,694
J. Stephen Vanderwoude 4,646,215 137,694
At the annual meeting, the shareholders voted to ratify the
retention of Deloitte & Touche LLP as independent auditors for
the 1998 fiscal year. The number of votes cast for, against or
abstaining with respect to the retention of Deloitte & Touche
LLP were:
FOR AGAINST ABSTAIN
--- ------- -------
4,459,990 197,900 126,019
At the annual meeting, the shareholders voted to approve an
amendment to the Company's Restated Certificate of Incorporation
to effect the reverse stock split. The number of votes cast for,
against or abstaining with respect to the Amendment were:
FOR AGAINST ABSTAIN
--- ------- -------
3,270,087 1,507,742 6,080
Item 5. Other Information
The NASDAQ Stock Market, Inc. delisted the Company's common
stock from the NASDAQ National Market effective with the close
of business on May 20, 1998. In connection with that action, the
NASDAQ Stock Market, Inc. determined that the Company would be
unable to sustain compliance with the requirements for continued
listing on the NASDAQ SmallCap Market over the long term. As a
result of NASDAQ's determination, the company elected not to
effect the reverse stock split approved by the Company's
shareholders.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.16 Agreement dated May 28, 1998 between the Company and
National Bank of Canada, New York Branch.
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<PAGE>
V BAND CORPORATION
SIGNATURES
Pursuant to the requirements 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
------------------
(Registrant)
Date: August 28, 1998
/s/ Thomas E. Feil
------------------
Thomas E. Feil
Chairman & Chief Executive Officer
(Duly Authorized Officer)
Date: August 28, 1998
/s/ Robert O. Riiska
--------------------
Robert O. Riiska
Chief Financial Officer
-10-
AMENDMENT AND WAIVER
to
CREDIT AGREEMENT
AMENDMENT AND WAIVER dated as of June 4, 1998 between V BAND
CORPORATION, a New York corporation (the "Borrower") and NATIONAL BANK OF
CANADA, NEW YORK BRANCH (the "Bank").
RECITALS
A. The Borrower and the Bank are party to the Credit Agreement dated
as of May 28, 1997 (as heretofore amended, the "Credit Agreement"), pursuant to
which the Bank agreed to extend credit to the Borrower in the form of revolving
loans and letters of credit upon the terms and subject to the conditions set
forth in the Credit Agreement.
B. The Borrower has advised the Bank that it was not in compliance
with the financial covenants set forth in Section 7.1 of the Credit Agreement on
April 30, 1998 (the "Financial Covenant Violations") and has requested that the
Bank waive the resulting Events of Default.
C. The Borrower has requested that the Bank permit it to borrow under
the Credit Agreement overadvances of up to $400,000 in the aggregate and allow
such overadvances to remain outstanding through August 17, 1998.
D. The Bank is willing to waive the Events of Default resulting from
the Financial Covenant Violations and to permit such overadvances, subject to
the terms and conditions set forth below.
ACCORDINGLY, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used in this Amendment, unless
otherwise defined, shall have the meanings given to them in the Credit
Agreement, as amended hereby. In addition, the following terms shall have the
following meanings:
"Credit Agreement" shall have the meaning specified in Recital A
hereto.
"Amendment Date" shall have the meaning specified in Section 7 hereof.
2. Amendments to Credit Agreement.
<PAGE>
(a) The definition of the term "Borrowing Base" set forth in Section
1.1 of the Credit Agreement (Defined Terms) is hereby amended in its entirety to
read as follows:
"Borrowing Base": at any time, an amount equal to the sum of:
(i) up to the A/R Advance Rate of the aggregate amount of the
Eligible Accounts at such time; plus
(ii) up to the lesser of (x) 40% of the aggregate value (at
the lower of cost or market value) at such time of Eligible
Inventory or (y) the Inventory Cap in effect at such time;
plus
(iii) up to the Permitted Overadvance Amount.
For purposes of this definition, (a) the terms "A/R Advance Rate" and
"Inventory Cap" mean, during each period specified below, the A/R
Advance Rate and Inventory Cap set forth below opposite such period:
<TABLE>
<CAPTION>
From To A/R Advance Rate Inventory Cap
---- -- ---------------- -------------
<S> <C> <C> <C>
Closing Date February 8, 1998 85.00% $750,000
February 9, 1998 March 8, 1998 82.50% 740,000
March 9, 1998 April 5, 1998 80.00% 730,000
April 6, 1998 May 3, 1998 77.50% 720,000
May 4, 1998 May 30, 1998 75.00% 710,000
June 1, 1998 June 28, 1998 72.50% 700,000
June 29, 1998 and thereafter 70.00% 690,000
</TABLE>
and (b) the term "Permitted Overadvance Amount" means (x) during the
period commencing on June 4, 1998 and ending on August 17, 1998, Four
Hundred Thousand Dollars ($400,000) and (y) thereafter, $0.00.
(b) Section 7.1 (Financial Covenants) of the Credit Agreement is
hereby amended in its entirety to read as follows:
7.1 Financial Covenants. The Borrower hereby covenants and agrees that
so long as the Commitment remains in effect or any Letter of Credit
remains outstanding and until the payment in full of the Obligations
and the complete performance of all of the Borrower's other
obligations hereunder and under the other Loan Documents, unless the
Bank shall otherwise consent in writing, the Borrower shall not:
<PAGE>
(a) Permit its Consolidated EBITDA for any fiscal quarter specified
below to be less than the amount set forth below for such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Year Ending First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
October 31, 1997 Not Applicable $228,000 $225,000 $456,000
October 31, 1998 ($2,000,000) ($50,000) ($500,000) ($200,000)
October 31, 1999 $185,000 $438,000 $438,000 $690,000
</TABLE>
(b) Permit its Leverage Ratio for any fiscal quarter specified below
to exceed the ratio set forth below for such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Year Ending First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
October 31, 1997 0.60:1.00 0.60:1.00 0.60:1.00 0.60:1.00
October 31, 1998 2.75:1.00 2.75:1.00 5.00:1.00 5.00:1.00
October 31, 1999 0.45:1.00 0.45:1.00 0.45:1.00 0.45:1.00
</TABLE>
(c) Permit its Consolidated Tangible Net Worth as at the end of any
fiscal quarter specified below to be less than the amount set forth below for
such fiscal quarter:
<TABLE>
<CAPTION>
Fiscal Year Ending First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
October 31, 1997 $11,655,000 $11,868,000 $12,053,000 $12,469,000
October 31, 1998 $ 3,500,000 $ 3,500,000 $ 1,500,000 $ 1,500,000
October 31, 1999 $13,693,000 $14,096,000 $14,449,000 $15,157,000
</TABLE>
(d) Permit its Interest Coverage Ratio to be less than 5.00 to 1.00
for any Calculation Period ending after October 31, 1998.
(e) Permit its Current Ratio to be (i) less than 2.50 to 1.00 as at
the end of any fiscal quarter of its fiscal year ending October 31, 1997, (ii)
less than 1.00 to 1.00 as at the end of any fiscal quarter of its fiscal year
ending October 31, 1998, or (iii) less than 3.00 to 1.00 as at the end of any
fiscal quarter ending thereafter.
(c) All references in the Credit Agreement to "this Agreement" or such
words as "hereof", "herein", "hereto" or "hereunder" shall be deemed to be
references to the Credit Agreement as amended by this Amendment.
<PAGE>
3 Reaffirmation of Obligations. The Borrower hereby acknowledges and
confirms to the Bank (a) that the amendments and modifications to the Credit
Agreement made pursuant hereto shall not affect or impair in any way the
validity, binding effect or enforceability of any Loan Document to which the
Borrower is a party or of any liens or security interests granted to the Bank
thereunder, or the Borrower's obligations or the Bank's rights and remedies
thereunder and (b) that the Loan Documents to which the Borrower is a party, any
liens and security interests granted to the Bank thereunder, and the Borrower's
obligations and the Bank's rights and remedies thereunder shall continue in full
force and effect, notwithstanding such amendments and modifications.
4 Waivers. The Bank hereby waives the Events of Default resulting from
the Financial Covenant Violations. The foregoing waiver shall be limited
precisely as drafted, shall be effective only for the dates and periods
specified therein and for no subsequent date or period, and shall not amend or
modify, or constitute a waiver of, any other term or provision of the Credit
Agreement or any other Loan Document, all of which shall continue in full force
and effect.
5 Amendment Fee. As consideration for the amendment of the Credit
Agreement as provided herein and the waivers set forth herein, the Borrower
shall pay to the Bank on or before the Amendment Date a fee (the "Amendment
Fee") in the amount of $15,000, which fee shall be nonrefundable and shall be
deemed earned when paid.
6 Representations and Warranties. The Borrower hereby represents and
warrants to the Bank that (a) it has full power and authority to execute and
deliver this Amendment, (b) this Amendment, and the Credit Agreement as amended
hereby, constitute the legal, valid and binding obligations of the Borrower,
enforceable against the Borrower in accordance with their respective terms, (c)
the Borrower's execution and delivery of this Amendment, and its performance of
this Amendment and of the Credit Agreement as amended hereby, have been duly
authorized by all requisite action of the Borrower and do not require the
approval of its shareholders, (d) the execution and delivery by the Borrower of
this Amendment and the performance by the Borrower of the Credit Agreement as
amended hereby do not and will not (i) violate the Borrower's Certificate of
Incorporation or By-Laws or any law or regulation applicable to the Borrower,
(ii) violate or constitute (with due notice or lapse of time or both) a default
under any indenture, agreement, license or other instrument to which the
Borrower is a party or by which the Borrower or any of its properties may be
bound or affected, (iii) violate any order of any court, tribunal or
governmental agency binding upon the Borrower or its properties, (iv) result in
the creation or imposition of any Lien of any nature whatsoever upon any
properties or assets of the Borrower, or (v) require any license, consent or
approval of any governmental agency or regulatory authority or any other third
party.
7 Conditions Precedent. This Amendment and Waiver shall become
effective on the date (the "Amendment Date") on which each of the following
conditions precedent shall have been satisfied or waived:
(a) The Borrower and the Bank shall have executed and delivered
counterpart originals or facsimiles hereof;
(b) The Bank shall have received payment in full of the Amendment Fee;
(c) The Borrower shall have executed and delivered to the Bank UCC
financing statements in form, substance and number sufficient for filing in all
offices specified by the Bank; and
<PAGE>
(d) All legal, documentary and other matters in connection with this
Amendment and the transactions contemplated hereby shall be satisfactory to the
Bank and its counsel.
The amendments to the Credit Agreement set forth in Section 2 hereof
and the Waiver set forth in Section 5 hereof shall become effective
automatically on the Amendment Date, without the need for any further action by
any party hereto.
8 Miscellaneous.
(a) THIS AMENDMENT AND WAIVER SHALL BE GOVERNED BY AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO ITS CONFLICT OF LAWS RULES (OTHER THAN SECTION 5-1401 OF THE GENERAL
OBLIGATIONS LAW).
(b) Except as expressly amended hereby, all terms and conditions of
the Credit Agreement and the other Loan Documents, and all rights of the Bank
and obligations of the Borrower thereunder and under all related documents,
shall remain in full force and effect. Without limiting the generality of the
foregoing, nothing herein contained shall be deemed to increase the Commitment.
(c) The Borrower hereby agrees to pay on demand all costs and expenses
(including without limitation the reasonable fees and expenses of outside
counsel to the Bank) incurred by the Bank in connection with the negotiation,
preparation, execution and delivery of this Amendment and Waiver and all related
documents, whether or not the transactions contemplated hereby are consummated.
(d) This Amendment and Waiver may be executed by one or more of the
parties hereto on any number of separate counterparts, and all of said
counterparts taken together shall be deemed to constitute one and the same
instrument. Delivery of an executed signature page to this Amendment and Waiver
by facsimile transmission shall be as effective as delivery of a manually signed
counterpart hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK;
SIGNATURE PAGE FOLLOWS]
<PAGE>
[SIGNATURE PAGE TO AMENDMENT AND WAIVER]
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Waiver to be duly executed by their duly authorized officers as of the day and
year first above written.
V BAND CORPORATION
By: /s/ Robert O. Riiska
--------------------
Name:Robert O. Riiska
Title:Chief Financial Officer
NATIONAL BANK OF CANADA, NEW YORK BRANCH
By: /s/ Gaetan R.Frosina
--------------------
Name:Gaetan R. Frosina
Title:Vice President
By: /s/ J. Michael Smith
--------------------
Name:J. Michael Smith
Title:Vice President
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