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 April 30, 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
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(Exact name of registrant as specified in its charter)
New York 13-2990015
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
565 Taxter Road, Elmsford, New York 10523
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(Address and zip code of principal executive office)
(914) 789-5000
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(Registrant's telephone number, including area code)
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 April 30, 1998, was
5,426,591 shares.
<PAGE>
V BAND CORPORATION
FORM 10-Q QUARTERLY REPORT
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1998
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets at April 30, 1998 (unaudited) and
October 31, 1997 Consolidated statements of operations for the
three and six months ended April 30, 1998 and 1997 (unaudited)
Consolidated statements of cash flows for the six months ended
April 30, 1998 and 1997 (unaudited)
Notes to consolidated financial statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1998 AND OCTOBER 31, 1997
(in 000's, except share data)
April 30, October 31,
1998 1997
-------- ---------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ................................. $ 1,576 $ 336
Accounts receivable, less allowance for doubtful
accounts of $237 in 1998 and $498 in 1997 ............ 3,447 8,079
Inventories, net .......................................... 5,438 4,733
Prepaid expenses and other current assets ................. 556 458
-------- --------
Total current assets ............. 11,017 13,606
-------- --------
Fixed Assets:
Furniture, fixtures, equipment and leasehold improvements . 9,599 9,539
Less: Accumulated depreciation and amortization ........... (9,028) (8,786)
-------- --------
Total fixed assets ............... 571 753
-------- --------
Other Assets .............................................. 176 193
-------- --------
TOTAL ASSETS ......................................... $ 11,764 $ 14,552
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt ........................................... $ 1,973 $ 2,943
Accounts payable .......................................... 2,953 2,557
Accrued wages ............................................. 1,158 894
Customer deposits ......................................... 1,577 959
Other accrued expenses .................................... 1,449 1,102
-------- --------
Total current liabilities ....... 9,110 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 ............................ 19,981 19,872
Accumulated deficit ....................................... (5,845) (2,270)
Cumulative translation adjustment ......................... 215 192
-------- --------
14,422 17,865
Less - Treasury stock, at cos; 1,719,322 shares............ (11,768) (11,768)
-------- --------
Total shareholders' equity ....... 2,654 6,097
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........... $ 11,764 $ 14,552
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED APRIL 30, 1998 AND 1997 (unaudited)
(in 000's, except per share data)
Three Months Ended Six Months Ended
April 30, April 30,
1998 1997 1998 1997
-------- -------- -------- --------
Sales
<S> <C> <C> <C> <C>
Equipment ............................ $ 3,453 $ 8,104 $ 6,681 $ 14,210
Service .............................. 1,366 1,352 2,862 2,748
-------- -------- -------- --------
Total sales ...................... 4,819 9,456 9,543 16,958
-------- -------- -------- --------
Cost of Sales
Equipment ............................ 2,577 5,053 5,000 8,822
Service .............................. 1,001 938 1,987 1,884
-------- -------- -------- --------
Total cost of sales .............. 3,578 5,991 6,987 10,706
-------- -------- -------- --------
Gross profit ..................... 1,241 3,465 2,556 6,252
-------- -------- -------- --------
Operating Expenses
Selling, general and administrative .. 1,890 2,360 4,854 4,520
Research and development ............. 589 896 1,191 1,691
-------- -------- -------- --------
Total operating expenses ......... 2,479 3,256 6,045 6,211
-------- -------- -------- --------
Operating income (loss) .......... (1,238) 209 (3,489) 41
Interest Expense .......................... (44) (10) (94) (7)
Other (Expense) Income .................... 29 8 8 (1)
-------- -------- -------- --------
Net loss ......................... $ (1,253) $ 207 $ (3,575) $ 33
======== ======== ======== ========
Net loss per share ........................ $ (.23) $ .04 $ (.66) $ .01
======== ======== ======== ========
Weighted average number of shares of common
stock and common stock equivalents .... 5,427 5,413 5,420 5,371
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
V BAND CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1998 AND 1997 (unaudited)
(in 000's)
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities
Net (loss) income ............................................ $ (3,575) $ 33
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation .............................................. 246 295
Amortization of other assets .............................. 17 208
Provision for doubtful accounts ........................... 6 6
Waiver of Chairman's salary ............................... 100 --
Changes in assets and liabilities:
Accounts receivable ................................... 4,626 (1,614)
Inventories ........................................... (705) (268)
Prepaid expenses and other current assets ............. (98) 347
Other assets .......................................... -- 8
Accounts payable and other current liabilities ........ 1,625 (1,122)
Foreign currency translation adjustment ............... 23 (12)
-------- --------
Net cash provided by (used in) operating activities 2,265 (2,119)
-------- --------
Cash Flows from Investing Activities
Capital expenditures ......................................... (64) (48)
-------- --------
Net cash used in investing activities ............. (64) (48)
-------- --------
Cash Flows from Financing Activities
Proceeds from short-term debt ................................ 10,794 200
Payments of short-tem debt ................................... (11,764) --
Proceeds from issuance of common stock ....................... 9 97
-------- --------
Net cash (used in) provided by financing activities (961) 297
-------- --------
Net increase (decrease) in cash and cash equivalents ............. 1,240 (1,870)
Cash and cash equivalents, at beginning of period ................ 336 2,258
-------- --------
Cash and cash equivalents, at end of period ...................... $ 1,576 $ 388
======== ========
Supplementary Disclosures
Income taxes paid ............................................ $ 16 $ 156
======== ========
Interest paid ................................................ $ 94 $ 162
======== ========
</TABLE>
See notes to consolidated financial statements
<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 April 30, 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:
<TABLE>
<CAPTION>
April 30, October 31,
1998 1997
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<S> <C> <C>
Finished goods ........................... $ 3,547 $ 3,374
Parts and components ..................... 3,869 3,935
------- -------
7,416 7,309
Less: Inventory reserves ................ (1,978) (2,576)
======= =======
$ 5,438 $ 4,733
======= =======
</TABLE>
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 April 30, 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,
<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 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. Therefore, 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 six months ended April 30, 1998, the Chairman of the Company waived $100
of his accrued compensation. The Company has recorded such amount as
compensation expense and a capital contribution.
<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 second quarter of 1998, ended April 30, 1998, of $4,819 were
$4,637, or 49%, lower than the $9,456 reported in the second quarter of 1997.
Equipment sales of $3,453 in the second quarter of 1998 decreased by $4,651, or
57%, from the equipment sales of $8,104 in the second quarter of 1997. Sales for
the Company's core product decreased 6% from $3,655 in 1997 to $3,453 in 1998.
The remaining decrease in equipment sales was primarily due to the decrease in
sales of $4,449 for the Company's eXchange phone for which the Company had three
large contracts during the second quarter of 1997. Sales from the Company's
service business increased to $1,366, or 1%, for the second quarter of 1998 from
$1,352 for the second quarter of 1997. This increase was primarily due to a $98,
or 9%, increase in the Company's maintenance sales due to an increase of
customers serviced by the Company, offset by a $82, or 36%, decrease in the
Company's repair business, primarily due to a lower amount of repairs of the
Company's older ViaX product line.
Gross profit margin for the three and six months ended April 30, 1998 was 26%
and 27% respectively as compared to 37% for both periods in 1997. Equipment
gross profit margin for both the three and six months ended April 30, 1998 were
25% compared to 38% for both periods in 1997. The decrease in the gross profit
margin for equipment sales was primarily attributable to an increase in
distributor sales, which historically generate lower margins, and increased
competition. The gross profit margin for service sales was 27% for the second
quarter and 31% for the six months ended April 30, 1998 as compared to 31% for
both periods in 1997. The decrease was partially attributable to a decrease in
repair sales.
Operating expenses for the second quarter of 1998 were $2,479 or $777 lower than
the $3,256 reported for the second quarter of 1997. The decrease reflects cost
savings from the restructuring of the Company's operations. Operating expenses
for the six months ended April 30, 1998 were $6,045, or a $166 decrease from the
same period last year, including a $1,023 charge related to the Company's plan
to restructure its operations. The plan includes consolidation of office space
in New York and London and the centralization of administrative functions of the
Company's United States service operation into its New York operation. In
addition, the Company has reassigned several marketing and administrative staff
to field sales support functions as a further effort to enhance revenues. As a
result of this plan, the Company reduced the number of its employees from the
October 31, 1997 level of 186 to 170 at January 31, 1998. Excluding this charge,
operating expenses decreased by $1,190 for the six months ended April 30, 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 $390, which was attributable to the
downsizing and relocation of its operations into the Company's corporate
facility.
<PAGE>
The net loss reported in the second quarter ended April 30, 1998 was $1,253, or
$.23 per share, compared to net income of $207, or $.04 per share, for the
second quarter of 1997. The net loss reported for the six months ended April 30,
1998 was $3,575, or $.66 per share, compared to net income of $33, or $.01 per
share, for the same period in 1997. The second quarter loss was primarily
attributable to lower gross margins and a decrease in sales. The loss for the
six months ended April 30, 1998 includes a $1,023 non-recurring charge related
to the restructuring plan. The average shares outstanding for the quarter ended
April 30, 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 $1,576 at April 30,
1998, an increase of $1,240 from the October 31, 1997 balance of $336. Accounts
receivable decreased $4,626 primarily due to the payment of retainage balances
on several large customer contracts as well as a decrease in sales for the six
months ended April 30, 1998 as compared to the same period in 1997. Short-term
debt decreased $970 as a result of the liquidation of accounts receivable.
Inventory increased $705 as a result of lower sales for the six months ended
April 30, 1998. Accrued expenses increased $347 primarily due to the Company's
restructuring accrual of $1,023.
The Company's loss for fiscal 1997 and the first six 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'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 second quarter of 1998, the Chairman of the Company waived $100 of the
compensation accrued to him during the quarter. The Company has recorded such
amount as compensation expense and a capital contribution.
<PAGE>
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1998 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.
<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: June 12, 1998
/s/ Thomas E. Feil
------------------
Thomas E. Feil
Chairman & Chief Executive Officer
(Duly Authorized Officer)
Date: June 12, 1998
/s/ Robert O. Riiska
--------------------
Robert O. Riiska
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 1,576
<SECURITIES> 0
<RECEIVABLES> 3,447
<ALLOWANCES> 237
<INVENTORY> 5,438
<CURRENT-ASSETS> 11,017
<PP&E> 9,599
<DEPRECIATION> 9,028
<TOTAL-ASSETS> 11,764
<CURRENT-LIABILITIES> 9,110
<BONDS> 0
20,052
0
<COMMON> 0
<OTHER-SE> (17,398)
<TOTAL-LIABILITY-AND-EQUITY> 11,764
<SALES> 4,724
<TOTAL-REVENUES> 4,724
<CGS> 3,409
<TOTAL-COSTS> 2,964
<OTHER-EXPENSES> 623
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> (50)
<INCOME-PRETAX> (2,322)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,322)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
