<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-14733
--------------------
DELTA COMPUTEC INC.
(Exact name of registrant as specified in its charter)
New York 16-1146345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
366 White Spruce Blvd, Rochester, NY 14623
(Address of Principal Executive Offices) (Zip Code)
201-440-8585
(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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ ] No [x]
As of January 31, 1996, there were 6,811,575 shares outstanding of the
Registrant's Common Stock $.01 par value.
1
<PAGE>
DELTA COMPUTEC INC.
Form 10-Q
Quarter Ended January 31, 1996
INDEX
Part I: Financial Information Page
Consolidated balance sheets at January 31, 1996 and
October 31, 1995 3-4
Consolidated statements of operations for the three
months ended January 31, 1996 and 1995 5
Consolidated statement of cash flows for the three months
January 31, 1996 and 1995 6
Notes to consolidated financial statements 7-18
Management's discussion and analysis of operations and
financial condition 19-22
Part II: Other Information
Item 3. Defaults Upon Senior Securities 23
Item 6. Other Information 23
Exhibits and Reports on Form 8-K 24-25
Signatures 24
2
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
January 31, October 31,
1996 1995
------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ (269,833) $ (245,249)
Accounts receivable, less allowance
for doubtful accounts of $593,608
and $525,139 at January 31, 1996
and October 31, 1995, respectively 4,922,307 5,005,240
Inventories 1,732,797 1,968,089
Deferred income taxes, current 100,000 100,000
------------- ------------
Total current assets $ 6,740,506 $ 7,083,489
FIELD SPARE PARTS, net of accumulated
amortization $ 2,208,246 $ 2,279,490
PROPERTY AND EQUIPMENT, at cost:
Technical equipment $ 1,413,792 $ 1,413,162
Office furniture and equipment 1,422,578 1,422,293
Vehicles 154,661 154,661
Leasehold improvements 289,496 283,121
Software 112,736 112,736
------------- ------------
$ 3,393,263 $ 3,385,973
Less: Accumulated depreciation 2,493,184 2,408,824
------------- ------------
$ 900,079 $ 977,149
DEFERRED INCOME TAXES $ 610,236 $ 610,236
OTHER ASSETS:
Goodwill, net $ 427,639 $ 444,427
Customer lists, net 129,844 136,366
Other assets 232,907 232,907
------------- ------------
790,390 $ 813,700
------------- ------------
$ 11,249,457 $ 11,764,064
============= ============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
(Unaudited) (Unaudited)
January 31, October 31,
1996 1995
------------ -------------
CURRENT LIABILITIES:
Accounts payable $ 3,489,345 $ 3,575,423
Deferred service revenue 1,841,327 1,571,226
Accrued expenses
Payroll and payroll taxes 461,639 424,738
Interest 57,667 42,667
Sales tax payable 397,056 190,642
Other 360,203 308,489
Due to Shareholder 748,732 602,639
Bank line of credit 3,225,446 3,782,956
------------ -------------
Total current liabilities $ 10,581,415 $ 10,498,780
LONG-TERM DEBT $ - $ -
SUBORDINATED DEBENTURES $ 1,075,001 $ 1,075,001
RESERVE FOR DISCONTINUANCE OF OPERATIONS 815,879 1,172,086
STOCKHOLDERS' INVESTMENT
Common stock, $ .01 par value;
authorized 20,000,000 shares;
issued and outstanding 6,811,575
at January 31, 1996 and
October 31, 1995 $ 68,116 $ 68,116
Additional paid-in capital 4,916,093 4,916,093
Accumulated deficit (6,207,047) (5,966,012)
------------ -------------
Total stockholders' investment (1,222,838) (981,803)
------------ -------------
$ 11,249,457 $ 11,764,064
============ =============
See notes to consolidated financial statements.
4
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
January 31,
--------------------------
1996 1995
REVENUES FROM CONTINUING OPERATIONS:
Service revenues $ 2,594,594 $ 3,322,548
Equipment sales 485,357 1,331,248
----------- -----------
$ 3,079,951 $ 4,653,796
COSTS AND EXPENSES:
Service costs $ 2,177,967 $ 2,519,164
Cost of equipment sold 393,860 983,143
Selling, general and
administrative 659,789 964,434
----------- -----------
TOTAL OPERATING EXPENSES $ 3,231,616 $ 4,466,741
OTHER EXPENSE, NET $ 89,370 $ 27,683
----------- -----------
EARNINGS(LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES $ (241,035) $ 159,372
INCOME TAXES $ -- $ 58,300
----------- -----------
NET EARNINGS(LOSS) FROM CONTINUING
OPERATIONS $ (241,035) $ 101,072
----------- -----------
NET EARNINGS(LOSS) FROM
DISCONTINUED OPERATIONS (356,207) (87,848)
----------- -----------
NET EARNINGS (LOSS) $ (597,242) $ 13,224
=========== ===========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
CONTINUING OPERATIONS $ (.04) $ .01
DISCONTINUED OPERATIONS (.05) (.01)
----------- -----------
COMBINED $ (.09) $ .00
=========== ===========
EARNINGS PER COMMON SHARE -
ASSUMING FULL DILUTION:
CONTINUING OPERATIONS $ (.04) $ .01
DISCONTINUED OPERATIONS (.05) (.01)
----------- -----------
COMBINED $ ( .09) $ .00
=========== ===========
See notes to consolidated financial statements.
5
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
January 31,
1996 1995
------------- ----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings(loss):
Continuing operations $ (241,035) $101,072
Discontinued operations, loss for three
months ended January 31, 1996 charged
to reserve for discontinued operations (356,207) (87,848)
Adjustments to reconcile net earnings(loss)
to net cash provided by operating
activities: Depreciation & amortization 320,439 307,230
Decrease in accounts receivable,
inventories, prepaid expenses, deferred
income taxes - current, net of accounts
payable, accrued expenses and sales taxes
payable 542,350 534,338
Increase(decrease)in deferred
service revenue 270,101 (179,031)
------------- ----------
Net cash flow from operating activities $ 535,648 $675,761
------------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including field
spare parts (172,125) (278,569)
Investment in intangibles and other assets 23,310
Acquisition of business (Note 6) - (337,000)
------------- ----------
Net cash flow from investing activities $ (148,815) $ (615,569)
------------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from Shareholder's Loan (Note 5) $ 146,093 $ -
Net proceeds (payment) on bank loan (557,510) (50,236)
Increase (payments) of long-term debt - (6,250)
------------- ----------
Net cash flow from financing activities $ (411,417) $ (56,486)
------------- ----------
NET INCREASE (DECREASE) IN CASH $ ( 24,584) $ 3,706
------------- ----------
CASH - beginning of year $ (245,249) 12,809
------------- ----------
CASH - end of period $ (269,833) $ 16,515
------------- ----------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Description of Business
Delta Computec Inc. ("the Registrant" or "the Company") provides a wide
array of Data Communication and LAN/WAN products consulting and services as well
as multi-vendor maintenance services for computer systems and peripheral
equipment. Subsequent to the close of the quarter ended January 31, 1996, the
operations of the Registrant's wholly-owned subsidiary, Delta Data Net, Inc.
("Data Net"), were discontinued (See Note 2).
Principles of Consolidation and Representation by Management
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries Data Net and SAI/Delta, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The unaudited interim financial statements included herein reflect all normal
and recurring adjustments that are, in the opinion of management, necessary for
fair presentation of the results for the interim periods.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
assuming the Registrant will continue as a going concern. The Registrant
incurred operating losses in fiscal 1993, 1994 and 1995 and was in default under
a certain Credit Agreement as of January 31, 1996 and continues to be in default
under the Credit Agreement (Note 3). As more fully described in Note 3
discussing the Registrant's borrowing arrangements, in fiscal 1994 the
Registrant had executed a Credit Agreement to provide a long-term credit
facility which was to expire April 30, 1997. Under amendments number one through
five to such Credit Agreement (collectively, the original Credit Agreement and
all amendments are referred to as the "Credit Agreement"), certain debt
covenants were amended based on the Registrant's business plan for fiscal 1995
and 1996, respectively, and certain other revisions were made to the credit
facility, including an additional advance for the November, 1994 purchase of
assets from Intronet, Inc. As previously reported by the Registrant in a Form
8-K dated March 8, 1996, the Registrant's Data Net subsidiary terminated its
business operations and ceased operations due to economic conditions in its
industry (Note 2). This termination of Data Net's business constituted an Event
of Default under the Credit Agreement with the Registrant's commercial lender,
National Canada Finance Corp. ("NCFC"). On March 8, 1996, the Registrant and
NCFC entered into a Forbearance Agreement under the provisions of which,
including Amendments Number One through Six (collectively, the original
Forbearance Agreement and all amendments are referred to as the "Forbearance
Agreement"), whereby, among other
7
<PAGE>
matters, NCFC agreed to forbear from exercising certain rights and remedies
under the Credit Agreement (Note 3).
If certain measures regarding cost savings and restructuring that management has
implemented prove unsuccessful and defaults continue to occur under the amended
Credit and Forbearance Agreements, then the Registrant will need additional
financing from outside sources (See Note 3).
In accordance with generally accepted accounting principles, the operating
results for all periods presented are for continuing operations and therefore do
not include the Registrant's Data Net subsidiary, with the operating results
for Data Net for the three months ended January 31, 1995 having been
accordingly restated.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method based on estimated useful lives which are as follows:
Estimated
Description Useful Life
----------- -----------
Technical equipment 5 - 7 years
Office furniture and equipment 5 - 7 years
Vehicles 2 - 3 years
Leasehold improvements 5 - 10 years
Software 3 - 5 years
Maintenance and repairs are charged to expense as incurred. The cost of renewals
or improvements that increase the useful lives of the assets is capitalized in
the appropriate asset account. The gain or loss on property retired or otherwise
disposed of is credited or charged to operations and the cost and accumulated
depreciation are removed from the accounts.
Inventories
Inventories represent computer equipment and peripherals held for resale in the
normal course of business and consumable field spare parts. These inventories
are recorded at the lower of cost (first-in, first-out) or market.
Field Spare Parts
Field spare parts are stated at cost and are amortized using the straight-line
method over an estimated useful life of 5 years, beginning in the year after
acquisition.
Goodwill
Goodwill, representing the excess of the cost of acquired business over the fair
value of net assets acquired, is being amortized on a straight-line basis over
periods ranging from ten to twenty years. The amount of goodwill related to the
Registrant's purchase in November, 1992 of
8
<PAGE>
certain assets of the Data Net business has been included in the Reserve for
Discontinuance of Operations as at October 31, 1995 (Note 2). In addition, and
as discussed more fully in Note 7, because of the significant and continuing
operating losses in the Company's Intronet Division, management has determined
that the earning potential of the Division, and hence the carrying value of its
investment, has been impaired. In accordance with generally accepted accounting
principles, management has therefore elected, effective October 31, 1995, to
write off the goodwill associated with its purchase of certain assets of
Intronet, Inc. in its entirety. The amount of goodwill at October 31, 1995
related to the acquisition of certain assets of Intronet, Inc. amounted to
approximately $330,000 (Note 6).
Customer Lists
Customer lists, representing the fair market value of customer lists for
business acquired, are being amortized on a straight-line basis over a ten-year
period.
Deferred Service Revenue
Service revenue is recognized ratably over the contract period. Deferred service
revenue represents billings in advance of the service period.
Revenue Recognition
Service revenues: Contract service revenue is recognized ratably over the
contractual period or as services are provided. Revenue from service rendered on
a "time and materials" basis is recognized in the period the work is performed.
Equipment sales: Revenue from equipment sales and the related cost of sales are
recognized when title to the equipment passes. Component repair revenue and
related costs are recognized upon completion of the repair.
Income Taxes
Income taxes are recognized for the amount of taxes payable or refundable for
the current tax year, and deferred tax liabilities and assets for the future tax
consequence of events that have been recognized in the Company's consolidated
financial statements or tax returns.
At January 31, 1996 the Registrant had loss carryforwards for tax purposes from
losses generated by its Intronet Division from the November 1, 1994 date of
acquisition. The Registrant had recognized the tax benefit of these losses, in
the form of deferred tax assets on its balance sheet,through April 30, 1995.
Generally accepted accounting principles procedure (FAS 109) establishes
guidelines to be used in valuing deferred tax assets. The Registrant
incorporated in the financial statements at January 31, 1996 reserves for the
valuation of previously recorded
9
<PAGE>
deferred tax assets in the amount of $710,236. As discussed in Note 2, effective
March 8, 1996 the Registrant terminated the operations of its Data Net
subsidiary and, accordingly, wrote off the portion of its deferred tax assets
relating to Data Net. This amount, aggregating $261,937 in current and
non-current charges, was written off in March, 1996. The Registrant will
continue to assess the value of the deferred tax assets. This assessment will
include, but not be limited to, the Registrant's ability to divest itself of
non-strategic business units and the ability to project adequate profits to
utilize the operating loss carryforward including that portion that has been
reserved during the period being reported.
Earnings Per Share
Earnings per common and common equivalent share are computed based upon the
weighted average of common shares outstanding during each year adjusted for
dilutive outstanding stock options and warrants using the Treasury Stock Method.
Earnings per common and common equivalent share assuming full dilution are
computed on the assumption that all outstanding convertible debentures, and all
stock options and warrants which were capable of being exercised, were exercised
on the issue date. Where the combined results from continuing and discontinued
operations yield a loss, under the Treasury Stock Method's calculation of
earnings per share the weighted average of common shares outstanding during each
year is not adjusted for the dilutive effect of outstanding stock options and
warrants.
(2) Termination of Operations in Data Net Subsidiary
As discussed in Note 1 above, and as previously reported by the Registrant in a
Form 8-K dated March 8, 1996, the Registrant's Data Net subsidiary terminated
its business operations and ceased operations due to the combined negative
effect of general economic conditions that existed in its industry as well as
operating inefficiencies that were not able to be overcome. These inefficiencies
included (1) its inability, due to cash flow constraints, to obtain products at
competitive prices, which, in turn, narrowed profit margins; (2) product
obsolescence from continuing technological enhancements in the goods being sold;
and (3) the lack of critical business mass and the related opportunity to
maximize employee utilization.
The termination by Data Net of its operations constituted an Event of Default
under the Credit Agreement with NCFC. Pursuant to the Credit Agreement, NCFC was
entitled to immediate possession of all of Data Net's collateral. In view of the
termination of business operations, Data Net voluntarily surrendered its
collateral to NCFC so that NCFC could liquidate such collateral and apply the
proceeds to all outstanding obligations to NCFC under the Credit Agreement. At
March 8, 1996, the Registrant and Data Net had outstanding loan obligations to
NCFC in excess of $2,600,000 and the Data Net accounts receivable in which NCFC
had a security interest amounted to $721,405. In addition,
10
<PAGE>
Data Net's inventory and fixed assets were sold at a public auction with the net
proceeds of approximately $122,000 applied to the NCFC loan balance (See Note 3,
Forbearance Agreement).
In accordance with generally accepted accounting principles, the Registrant's
unaudited financial statements as at and for fiscal period ended October 31,
1995 included a Reserve for Discontinuance of Operations in the amount of
appoximately $1,172,000, consisting of operating losses incurred subsequent to
October 31, 1995, expenses related to the termination of Data Net and the net
loss from disposal of assets, less liabilities not assumed, by the Company. The
amount of operating losses incurred and expenses related to the termination of
Data Net for the three months ended January 31, 1996 have been charged to the
reserve as at January 31, 1996.
(3) Registrant's Debt Position
April 1, 1994 Credit Agreement
On April 1, 1994, the Registrant executed a Credit Agreement to provide a
long-term credit facility. This facility will expire on April 30, 1997 and bears
interest at 2% above NCFC's prime lending rate (8.50%) at January 31, 1996, and
at 3% above NCFC's prime lending rate, on loans made under the Credit Agreement
and the Overadvance Facility, respectively. Proceeds from this credit facility
have been utilized to refinance existing credit facilities and provide working
capital. This credit facility was amended in November, 1994 to complete the
acquisition of the assets of Intronet, Inc. (Note 6) and at other times for
various purposes (See Amendments to Credit Agreement). As of January 31, 1996,
the availability of funds under this credit facility was limited to the lesser
of $3,750,000 or a percentage of eligible accounts receivable and inventory. The
Credit Agreement contains restrictive covenants, the more significant of which
require maintenance of minimum net working capital, minimum tangible net worth,
maximum debt-to-tangible net worth, pretax income and a restriction on capital
expenditures and prohibition of dividend payments. As of January 31, 1996 as
well as the date of this report, the Registrant was not in compliance with
certain of these restrictive covenants due to lower-than-projected earnings for
the respective periods.
Amendments to Credit Agreement
Amendment No. 1 to the Credit Agreement, dated November 17, 1994, increased the
maximum amount of the credit facility from $4,000,000 to $5,000,000 to enable
the Borrower (defined in the Credit Agreement as the Company and Data Net) to
acquire the assets of Intronet, Inc. (Note 6) and to provide additional working
capital. Certain financial covenants were also amended, the definition of the
term "Borrowing Base" was amended and the Credit Agreement was further amended
to provide for the issuance of standby letters of credit up to a maximum of
$500,000. There was a $5,000 closing fee paid to NCFC with regard to the
increase of the credit facility covered by Amendment No. 1.
11
<PAGE>
By Amendment No. 2 to the Credit Agreement, dated as of January 24, 1995, NCFC
waived the non-compliance of the Borrower with certain financial covenants of
the Credit Agreement and modified certain financial covenants of the Credit
Agreement for the fiscal year ended October 31, 1995. Amendment No. 2 required
as a condition precedent to the effectiveness of Amendment No. 2, including, but
not limited to, NCFC's waiver of non-compliance, that the October 28, 1992
$600,001 principal amount Subordinated Debenture issued by Data Net and
guaranteed by the Registrant, be surrendered and exchanged for an Amended and
Restated Subordinated Debenture in the same amount, and that Joseph M. Lobozzo
II ("Lobozzo"), Chairman, director and principal shareholder of the Registrant,
consent to that change. The condition precedent was met and the Subordinated
Debenture, Amended and Restated as at February 16, 1995 (the "Restated Lobozzo
Debenture"), changed the due date of the Restated Lobozzo Debenture from October
28, 1995 to January 31, 1998 and provided for a revised schedule of principal
payments. The Restated Lobozzo Debenture provided that principal payments of the
lesser of $200,000 or 100% of Consolidated Net Income of the Borrowers could be
made approximately 90 days after the close of the fiscal years ended October 31,
1995 and 1996, respectively, so long as the Borrower was not in default under
the Credit Agreement with NCFC and so long as the Borrowing Base under the
Credit Agreement had an availability of at least $200,000. The remaining balance
of the Restated Lobozzo Debenture, after any principal payments, is payable in
full on January 31, 1998. No principal payments have been made to date with
regard to the Restated Lobozzo Debenture. The Borrower paid a fee of $6,000 to
NCFC in consideration of NCFC's waiving Borrower's non-compliance with the
financial covenants and for NCFC's agreement to the amendment of certain
financial covenants.
Amendment No. 3 to the Credit Agreement dated as of April 3, 1995, was entered
into at the time that the Registrant acquired the remaining 66% of the stock of
its subsidiary, SAI Delta, Inc. ("SAI/Delta"), and was executed by NCFC for the
purpose of consenting to the purchase of the SAI/Delta common stock. In
addition, Amendment No. 3 redefined the Borrowing Base by increasing the amount
of the Registrant's Eligible Receivables to be included in the Borrowing Base,
decreasing the amount of Data Net's Eligible Inventory included in the Borrowing
Base, adding SAI/Delta's Eligible Receivables to the Borrowing Base and reducing
the maximum amount of the Revolving Credit Facility to $4,500,000. SAI/ Delta
also entered into an Unlimited Continuing Guaranty of the obligations of the
Registrant and Data Net under the Credit Agreement. Amendment No. 3 also
acknowledges NCFC's authorization of unplanned advances previously made to
Borrower totaling $250,000 in excess of the Borrowing Base expired as of April
3, 1995.
Amendment No. 4 to the Credit Agreement was dated as of May 1, 1995. In view of
the need of the Borrower for additional financing, and in recognition of the
commitment of Lobozzo to make loans of up to $400,000 to the Borrower, NCFC
agreed to lend an additional $300,000 to the Borrower pursuant to Amendment No.
4 (the "Overadvance Facilities"). The commitment of Lobozzo to participate in
the Overadvance Facilities is referred to as the "Lobozzo Commitment". The
Overadvance Facilities as set forth in Amendment No. 4 sets forth, as conditions
12
<PAGE>
precedent to NCFC's making additional advances of any funds under its portion of
the Overadvance Facilities, that the Borrower not be in default under the Credit
Agreement or the Lobozzo Commitment; that Lobozzo have fully funded the Lobozzo
Commitment to lend $400,000 and that the loans shall be outstanding; that the
total principal of the Overadvance Facilities not exceed $700,000 and that the
total amount of all loans made by NCFC to the Borrower under the Revolving
Credit Facility and the NCFC portion of the Overadvance Facilities not exceed
$4,500,000. Amendment No. 4 states that the NCFC Overadvance Facilities
terminate on April 30, 1996, and that NCFC may terminate its obligations under
the NCFC Overadvance Facilities if the Lobozzo Commitment is terminated prior to
April 30, 1996 or if there is a Declaration of Default as provided for in the
Credit Agreement. The NCFC Overadvance Facility provides for loans on the
balance at two and one-half percent per annum over the prime rate of NCFC; after
maturity, by acceleration or otherwise, the interest rate increases to four and
one-half percent per annum over the prime rate of NCFC. All loans under the NCFC
Overadvance Facilities are required to be paid before any repayment of loans
made pursuant to the Lobozzo Overadvance Facility. Amendment No. 4 also amended
certain financial covenants of the Credit Agreement. A $1,500 commitment fee was
required to be paid in connection with Amendment No. 4.
By Amendment No. 5 to the Credit Agreement, dated October 27, 1995, NCFC waived
non-compliance by the Borrower with certain financial covenants for the fiscal
quarter ended July 31, 1995. Amendment No. 5 also increased the interest rate on
Revolving Credit Loans to two percent per annum over NCFC's prime rate, and,
after maturity, by acceleration or otherwise, the interest rate increases to
four percent per annum over NCFC's prime rate. Amendment No. 5 also increased
the interest rate on loans made pursuant to the NCFC Overadvance Facilities to
three percent per annum over NCFC's prime rate and, after maturity, by
acceleration or otherwise, the interest rate increases to five percent per annum
over NCFC's prime rate. A waiver and amendment fee of $6,000 was required with
regard to Amendment No. 5.
By a letter agreement between NCFC and Lender dated March 6, 1996, NCFC reduced
the Borrowing Base and confirmed that the Maximum Loan Amount that could be
borrowed was $3,750,000.
Forbearance Agreement
As of March 8, 1996, NCFC and the Borrower entered into a Forbearance Agreement
whereby, among other matters, the Lender agreed to forbear from exercising
default remedies available to it against the Registrant and Data Net as a result
of defaults under the Credit Agreement. As stated in a Form 8-K filed March 20,
1996, the Forbearance Agreement was entered into as part of the procedure
whereby Data Net, due to economic conditions in its industry, ceased operations
and surrendered possession of the Data Net collateral under the Credit Agreement
to NCFC. (Note 2). As described in a Form 8-K dated March 20, 1996, under the
April 1, 1994, Credit Agreement, NCFC was entitled to immediate possession of
all of Data Net's collateral. Data Net's obligations to NCFC under the revolving
credit line with NCFC exceeded $2,600,000. In view of the
13
<PAGE>
termination of business operations, Data Net also voluntarily surrendered Data
Net's collateral to NCFC so that NCFC could liquidate that Data Net collateral
and apply the proceeds to reduce the indebtedness owing from Data Net to NCFC.
Data Net anticipated that there would be a deficiency owning from Data Net to
NCFC after liquidation of the Data Net collateral, leaving nothing for Data
Net's unsecured creditors. The collateral which was voluntarily surrendered by
Data Net included Data Net's inventory, equipment, patents, field spare parts,
trademarks, general intangibles, and proceeds of the forgoing and other
collateral as described in the General Security Agreement between NCFC and Data
Net.
The Registrant's own business operations did not terminate and, pursuant to the
Forbearance Agreement, NCFC continued its lending relationship with the
Registrant without waiving any rights against the Registrant. The Registrant and
NCFC intended to proceed to complete a definitive restructuring agreement with
regard to the continuing loan by NCFC to the Registrant.
Data Net supplied NCFC with a letter indicating Data Net's decision to terminate
its business operations which resulted in an Event of Default under the Credit
Agreement. The Borrower also supplied NCFC with a Release and Indemnification
Agreement; SAI/Delta supplied NCFC with a Reaffirmation of Guaranty; and Lobozzo
supplied NCFC with a Reaffirmation of Subordination with regard to the
Subordination Agreement which Lobozzo had entered into on April 1, 1994, in
connection with the original Credit Agreement.
The Forbearance Period set forth in the original Forbearance Agreement expired
on May 8, 1996.
Amendments to Forbearance Agreement
Amendment No. 1 to the Forbearance Agreement of May 9, 1996, reduced the Maximum
Loan Amount to $3,250,000 and extended the Forbearance Period to May 22, 1996. A
further Release and Indemnification Agreement, Reaffirmation of Guaranty of
SAI/Delta, and Reaffirmation of Subordination Agreement from Lobozzo were
required in connection with Amendment No. 1, as well as with regard to
Amendments No. 2, 3, 4, 5, and 6 to the Forbearance Agreement, referred to
below.
Amendment No. 2 to the Forbearance Agreement of May 23, 1996, revised the
collateral upon which NCFC would permit loans to be made to revise the percent
which NCFC would advance on the Registrant's Eligible Receivables, and extended
the Forbearance Period to June 14, 1996.
Amendment No. 3 to the Forbearance Agreement of June 14, 1996, conditioned the
Maximum Loan Amount of $3,250,000, including Letter of Credit Obligations, based
on a requirement that NCFC obtain a Loan participant in an amount not less than
$300,000. In the event NCFC does not obtain such a Loan participant, then the
Maximum Loan Amount shall not exceed $2,950.000 including Letter of Credit
Obligations. Amendment No. 3 extended the Forbearance Period to July 31, 1996.
14
<PAGE>
Amendment No. 4 to the Forbearance Agreement of July 31, 1996, continued the
Maximum Loan Amount of $3,250,000, including Letter of Credit Obligations, based
on a requirement that NCFC obtain a Loan participant in an amount not less than
$300,000. In the event NCFC does not obtain such a Loan participant, then the
Maximum Loan Amount shall not exceed $2,950,000 including Letter of Credit
Obligations. Amendment No. 4 extended the Forbearance Period to August 15, 1996.
Amendment No. 5 to the Forbearance Agreement of August 15, 1996, continued the
Maximum Loan Amount of $3,250,000, including Letter of Credit Obligations, based
on a requirement that NCFC obtain a Loan participant in an amount not less than
$300,000. In the event NCFC does not obtain such a Loan participant, then the
Maximum Loan Amount shall not exceed $2,950,000 including Letter of Credit
Obligations. Amendment No. 5 extended the Forbearance Period to September 3,
1996.
Amendment No. 6 to the Forbearance Agreement of September 9, 1996, reduced the
Maximum Loan Amount to $1,855,000, including Letter of Credit Obligations, until
such time as a Term Sheet relating to a proposed Buy-out of the NCFC Credit
Agreement had been agreed upon and executed by NCFC, the Registrant and Lobozzo,
and, upon such execution, the Maximum Borrowing Amount would increase to
$2,200,000 including Letter of Credit Obligations. The Term Sheet was executed
as of September 9, 1996. Amendment No. 6 extended the Forbearance Period to
September 30, 1996.
Term Sheet for Proposed NCFC Buyout
As of September 9, 1996, NCFC, the Registrant and Lobozzo executed a Term Sheet
(the "Term Sheet") relative to a proposed Buy-out (the "Buy-out") of the Credit
Agreement with NCFC. The Buy-out, among other matters, upon execution of
definitive agreements, will be to the effect that: (i) the Registrant will issue
a Five Year Note to NCFC in the amount of $750,000 (the "$750,000 Note"),
requiring payment of interest only at prime plus one percent, and will be
payable in full in five years, to be secured only by the Registrant's spare
parts inventory;(ii) provision will be made for a group to be formed by Lobozzo
(the "Lobozzo Group") to purchase the balance of the NCFC- Loan; (iii)provision
will be made for the issuance by Lobozzo of an assignment of a portion of
Lobozzo's option to purchase 11,440,475 common shares of the Registrant, which
assignment will enable NCFC to purchase up to seventeen and one-half percent
(17.5%) of the currently issued and outstanding common shares of the Registrant
(the "NCFC Warrant"), which NCFC Warrant will not be exercisable unless an Event
of Default occurs or if the $750,000 Note is not paid by the first day of the
thirty-seventh month after issuance; (iv) in the event of the issuance of
additional common shares of the Registrant, additional warrants may be required
to be issued; (v) prepayment of the $750,000 Note will carry no penalty for the
first twelve months but between the commencement of the thirteenth month and the
conclusion of the thirty- six month, any prepayment of the $750,000 Note will
require a prepayment penalty of $25,000 per quarter to a maximum of $200,000;
(vi) the $750,000 Note will permit partial payments which, during the first
thirty six months, will have the effect of reducing subsequent
15
<PAGE>
prepayment premium payments and which will also have the effect of reducing the
amount of common shares covered by the NCFC Warrant; and (vii) the purchase by
the Lobozzo Group of a portion of the NCFC Loan is to be made in such a manner
that the NCFC perfected security interest in the assets of the Registrant and
its subsidiaries (less the Registrant's spare parts inventory), is transferred
to the Lobozzo Group as of the date that the security interest was originally
perfected by NCFC. A copy or the Term Sheet is annexed as an Exhibit to this
10-Q Report.
Overadvance Agreement
As previously reported by the Registrant in a Form 8-K dated May 4,1995, on May
1, 1995 the Registrant reached an agreement with its commercial lender, NCFC,
for an additional $700,000 lending facility to enable the Registrant to obtain
overadvances above those which would otherwise be permitted under the terms of
the Credit Agreement ("the Overadvance Lending Facility"). Lobozzo agreed with
the Registrant and with NCFC to provide funding for $400,000 of the $700,000
Overadvance Lending Facility. In return, as part of the transaction whereby the
Registrant obtained a $700,000 Overadvance Facility, $400,000 of which was
supplied by Lobozzo (See Amendment No. 4 to the Credit Agreement above) the
Registrant agreed to issue to Mr. Lobozzo an option to purchase 11,440,475
common shares of the Registrant, the balance of its available authorized but
unissued common shares for a four-year period between May 20, 1995 and May 20,
1999. If Mr. Lobozzo exercises the option, Mr Lobozzo and affiliated parties
will hold or control 78 percent of the authorized common shares of the
Registrant. The option is cancelable under certain circumstances if the
Registrant's computer service business is sold by May 20, 1996. As of January
31, 1996, and as of the date of this Form 10-Q, the Registrant's computer
business was not sold and the aforementioned option had not been exercised.
(4) Subordinated Debentures
In November, 1992 the Company and Data Net jointly issued an 8% subordinated
debenture in the face amount of $475,000 due November 4, 1997 to the seller of
the assets which were acquired by Data Net. As of January 31, 1996, and as of
the date of this Form 10-Q, the Company was in default under the subordinated
debenture, including a failure to make certain payments thereunder.
In October, 1992, Data Net issued an 8% subordinated debenture (the "Lobozzo
Debenture") in the face amount of $600,001 to Mr Lobozzo, the proceeds of which
were used in the acquisition of the assets which were acquired by Data Net. The
Registrant guaranteed the Lobozzo Debenture. The Lobozzo Debenture is
convertible into 1,304,350 common shares of the Registrant at $.46 per common
share. As part of Amendment No. 2 to the NCFC Credit Agreement, in February,
1995 the Lobozzo Debenture was amended and restated to, among other matters,
extend its due date to January 31, 1998. As of January 31, 1996, and as of the
date of this Form 10-Q, the Restated Lobozzo Debenture remained outstanding and
had not been converted. As of January 31, 1996, and as of the date of this Form
10-Q, the Company was in default under the Restated Lobozzo Debenture, including
a failure to make certain payments thereunder.
16
<PAGE>
Principal payments under the Restated Lobozzo Debenture were due in three annual
installments of $200,000, commencing January 31, 1996 subject to meeting bank
loan covenants. No payments have been made.
(5) Other Matters
As previously discussed in a Form 8-K dated June 1, 1995, on June 1, 1995, the
Registrant signed preliminary letters of intent to sell certain of its business
units to a private investment group. Although the term of these letters has
expired and although the Registrant has discontinued discussions with this
group, the Registrant has had discussions with other parties in an attempt to
divest itself of non-performing operations in a timely manner.
In addition to the loans made by Mr. Lobozzo, specifically, his $400,000 funding
of the Overadvance Facility and the Lobozzo Debenture (Note 4), he has also made
working capital loans on a regular basis to the Registrant to assist in the
purchase of equipment for sale to customers and to meet its trade obligations.
For the current fiscal year, these loans have aggregated approximately $146,000
as at January 31, 1996 and $801,000 through September 17, 1996, of which
$146,000 plus a premium to be paid,representing approximately 50% of the gross
margin realized by the Registrant on such sales, was outstanding at January 31,
1996 and $355,000 plus accrued interest was outstanding at September 17, 1996.
(6) Acquisitions
On November 17, 1994, the Company acquired substantially all of the operating
assets of Intronet, Inc and since that date has operated those assets as its
Intronet Division. The Intronet Division designs, installs and supports advanced
computer networks with emphasis on large campus and industrial facilities
requiring network hubbing integrated with fiber and copper cabling. These assets
were acquired in exchange for $337,000 in cash and assumption of approximately
$588,000 in liabilities of the seller. The Company accounted for the acquisition
as a purchase and the operating results of the acquisition from November 17,
1994 have been included in the consolidated financial statements.
On December 1, 1994, the Company exercised an option to acquire the remaining
shares of SAI/Delta, Inc., thereby making SAI/Delta a wholly- owned subsidiary).
The Company accounted for the acquisition as a purchase and the operating
results of SAI Delta are included in the Company's net earnings (loss) from
continuing operations.
(7) Downsizing and Restructuring of the Intronet Division
In the fall of 1995, the Company reduced the size of its operating staff of the
Waltham, Massachusetts office of its Intronet Division. The Company and two of
its employees who had also been principal executives of Intronet, Inc. prior to
the acquisition reached agreement terminating employment agreements with those
employees. One employee has since become an independent agent for the Intronet
Division in the State of Connecticut.
17
<PAGE>
Faced with continuing losses in this division and finding such looses
unacceptable, management has restructured the operations. Beginning in August,
1996, the Intronet Division stopped accepting any new contracts or business for
which it would perform cable installation services which required using Intronet
Division employees. Any new contracts of this nature, if accepted by the
Intronet Division, will now be subcontracted to other parties on a fixed-price
basis, with the Intronet Division acting as a general contractor.
At the end of August, 1996, the management/administrative staff at the Intronet
Division was reduced from twenty-one to three people. As part of this
downsizing, this Division will now be refocused to pursue regional opportunities
in DCI's core business of providing computer system, data communication and
Lan/Wan technical services and products.
18
<PAGE>
Item 2.
Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Results of Operations
The Company's net loss from continuing operations for the three months ended
January 31, 1996 was $241,035 (8%), or $.04 per share, compared to net earnings
from continuing operations of $101,072 (2%), or $.01 per share, for the three
months ended January 31, 1995. Operating results for continuing operations for
the three months ended January 31, 1996 were negatively impacted by the
continued detrimental effects of the Company's cash flow and liquidity problems,
non-recurring costs associated with administrative staff turnover as well as the
continued restructuring and integration of its Intronet Division purchased in
November, 1994. The Intronet Division's net loss for the quarter ended January
31, 1996 was $218,349 (37%), compared to net income of $53,410 (3%) for the
three months ended January 31, 1995.
As discussed in Notes 2 and 3, on March 8, 1996 the Company terminated
operations in its Data Net subsidiary which had commenced operations in
November, 1992. In accordance with generally accepted accounting principles,
Data Net's operating results for the three months ended January 31, 1996 and
January 31, 1995 have been reported in the income statement under Loss from
Discontinued Operations. Data Net incurred a net loss of $356,207 (20%), or $.05
per share, for the quarter ended January 31, 1996 and $87,848 (2%), or $.01 per
share, for the quarter ended January 31, 1995.
As discussed in Note 7, the losses incurred by the Company's Intronet Division
have had a material impact upon operating results. The table below provides
segment information for the three months ended January 31, 1996 and January 31,
1995 for continuing operations, comprised of Delta CompuTec's core business and
the Intronet Division. As illustrated by the following figures, the $22,686 (1%)
net loss for DCI's core business for the three months ended January 31, 1996 was
$70,348 worse than the net earnings figure for the same period in the prior
year. Higher interest costs on increased borrowings required because of poor
operating results in the Registrant's Data Net subsidiary as well as in the
Intronet Division accounted for approximately $78,000 in additional expenses.
19
<PAGE>
Three Months Ended January 31,
DCI 1996 1995
Service revenues $ 2,273,553 $ 2,263,783
Equipment sales 214,032 299,756
-------------- --------------
Total Revenues 2,487,585 $ 2,563,539
Net profit (loss) (22,686) 47,662
Identifiable Assets 7,203,336 6,901,675
Intronet Division
Service revenues $ 321,041 $ 1,058,765
Equipment sales 271,325 1,031,492
-------------- --------------
Total Revenues 592,366 $ 2,090,257
Net profit (loss) (218,349) 53,410
Identifiable Assets 1,723,082 1,621,882
Revenues
Revenues from continuing operations were $3,079,951 for the three months ended
January 31, 1996 compared to $4,653,796 for the three months ended January 31,
1995, representing a decrease of $1,573,845 and 51%. Service revenues were
$2,594,594, compared to $3,322,548 for the three months ended January 31, 1995,
a decrease of $727,954 and 22%. Equipment sales for the three months ended
January 31, 1996 were $485,357 compared to $1,331,248 for the three months ended
January 31, 1995, a decrease of $845,891 and 64%. The decline in revenue was the
result of the impact of the significant operating losses in Data Net, as well as
in the Intronet Division, all of which placed an extensive burden upon the
Company's resources and its ability to nurture its existing business base as
well as develop new business.
Costs and Expenses
Service costs in continuing operations were $2,177,967 (84%) for the three
months ended January 31, 1996 compared with $2,519,164 (76%) for the three
months ended January 31, 1995. Service costs as a percentage of service revenue
increased from 76% to 84% due to the effect of the Company's fixed costs when
measured against the lower revenue, as well as lower-than-expected results from
lower margins in the Intronet Division occasioned by the impact of fixed
expenses upon a lower revenue base plus the impact of cost overruns on a major
contract undertaken by the Intronet Division.
20
<PAGE>
Costs of equipment sold in continuing operations were $393,860 (81%) for the
three months ended January 31, 1996 compared with $983,143 (74%) for the three
months ended January 31, 1995. The increase in cost of equipment sold as a
percentage of equipment sales from 74% to 81% was due to the detrimental effect
of the Company's tight cash flow upon its ability to purchase equipment at
competitive prices as well as the impact of contract cost overruns in the
Intronet Division.
Selling, general and administrative expenses in continuing operations were
$659,789 (21%) for the three months ended January 31, 1996 compared with
$964,434 (21%) for the three months ended January 31, 1995, a decrease of
$304,645 or 32%. This decrease was primarily due to savings from the cost
reduction plan instituted by management in April, 1995 which resulted in staff
reductions and associated expenses, offset in part by non-recurring costs
associated with administrative staff turnover.
Other expense was $89,370 (3%) for the three months ended January 31, 1996
compared with $27,683 (1%) for the three months ended January 31, 1995, an
increase of $61,687 and 223%. The increase was due to the rise in bank borrowing
and higher interest rates.
Income tax expense was $0 for the three months ended January 31, 1996 compared
with $58,300 for the three months ended January 31, 1995.
Liquidity and Capital Resources
The Company experienced sales growth and significant related working capital
requirements as a result of the Intronet acquisition in November, 1994. As
discussed in Note 3, the Company executed a Credit Agreement, as amended, the
Overadvance Lending Facility and the Forbearance Agreement, as amended, which
agreements and facility provided funding for the acquisition of the assets of
Intronet, Inc. in November, 1994 and the financing of ongoing working capital
requirements. The Credit Agreement expires on April 30, 1997 and bears interest
at 2% above NCFC's prime lending rate. Funds provided under the Overadvance
Lending Facility bear interest at 3% above NCFC's prime lending rate. At January
31, 1996, the availability of funds under the Credit Agreement was limited to
the lesser of $3,750,000 or a percentage of eligible accounts receivable and
inventory (Note 3).
Cash flow from operations for the three months ended January 31, 1996 was
$535,648 compared with $675,761 for the three months ended January 31, 1995, a
decrease of $140,113 and 21%. This resulted primarily from an aggregate $584,018
decrease in net earnings(loss) partially reduced by a $449,132 benefit from the
comparative change in deferred service revenue.
21
<PAGE>
Capital expenditures for spare parts and property, plant and equipment and other
investing activities were $148,815 for the three months ended January 31, 1996
compared with $615,569 for the three months ended January 31, 1995, a decrease
of $466,754 and 76%. This significantly lower outlay reflected $106,444 in lower
capital expenditures and $337,000 in costs relating to the assets for the
Intronet Division present in 1995.
Financing activities for the three months ended January 31, 1996 consumed
$411,417, an increase of 354,931 over the three months ended January 31, 1995.
This change was the net effect of $507,274 in higher paydowns on bank borrowing
less $152,343 in borrowing from the Company's principal shareholder.
The net result of the above was a $24,584 use of cash for the three months ended
January 31, 1996 compared to a $3,706 source of cash for the three months ended
January 31, 1995, a decrease of $28,290.
22
<PAGE>
DELTA COMPUTEC, INC.
PART II
OTHER INFORMATION
Item 3. Default Upon Senior Securities
See the following Notes to the accompanying Financial
Statements Notes 1, 2, 3 and 4
Item 5. Other Information
See the Notes to the accompanying Financial Statements
In September, 1996, the Registrant was advised that a minority
shareholder was questioning certain activities of the
Registrant's current and prior officers and directors. The
Registrant believes that all actions taken by its officers and
directors were proper.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Statement regarding computation of earnings per
share
(b) Term Sheet dated as of September 9, 1996
(c) Reports on Form 8-K - None
23
<PAGE>
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 thereto duly authorized.
Dated: September 18, 1996 DELTA COMPUTEC INC.
By: /s/ John DeVito
------------------------------
John DeVito, President
By: /s/ Frank J. Donnelly
------------------------------
Frank J. Donnelly
Chief Financial Officer and
Chief Accounting Officer
24
<PAGE>
Exhibit 11
DELTA COMPUTEC INC. - CALCULATION OF EARNINGS PER SHARE
Three
Months Ended January 31,
1996 1995
--------- ---------
Primary
Net Earnings (Loss):
Continuing Operations $ (241,035) $ 101,072
Discontinued Operations (356,207) (87,848)
--------- ---------
Net Earnings(Loss), Combined (597,242) 13,224
--------- ---------
Average Common Shares Outstanding 6,811,575 6,811,325
Dilutive Effect of Stock Options - 727,189
--------- ---------
Weighted Average
Shares Outstanding 6,811,575 7,538,514
--------- ---------
Earnings (Loss) Per Common and
Common Equivalent Shares:
Continuing Operations $ (.04) $ .01
Discontinued Operations (.05) (.01)
--------- ---------
Combined (.09) .00
--------- ---------
Assuming Full Dilution
Net Earnings (Loss):
Continuing Operations $ (241,035) $ 101,072
Discontinued Operations (356,207) (87,848)
--------- ---------
Net Earnings(Loss), Combined (597,242) 13,224
--------- ---------
Weighted Average
Shares Outstanding 6,811,575 7,538,514
Additional Dilutive Effect
Of Stock Options - -
--------- ---------
Weighted Average
Shares Outstanding 6,811,575 7,538,514
--------- ---------
Earnings (Loss) Per Common Share
Assuming Full Dilution:
Continuing Operations $ (.04) $ .01
Discontinued Operations (.05) (.01)
--------- ---------
Combined (.09) $ .00
========= =========
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> (269,833)
<SECURITIES> 0
<RECEIVABLES> 5,515,915
<ALLOWANCES> 593,608
<INVENTORY> 1,732,797
<CURRENT-ASSETS> 6,740,506
<PP&E> 5,601,509
<DEPRECIATION> 2,493,184
<TOTAL-ASSETS> 11,249,457
<CURRENT-LIABILITIES> 10,581,415
<BONDS> 0
0
0
<COMMON> 68,116
<OTHER-SE> (1,290,954)
<TOTAL-LIABILITY-AND-EQUITY> 11,249,457
<SALES> 3,079,951
<TOTAL-REVENUES> 3,079,951
<CGS> 2,571,827
<TOTAL-COSTS> 3,231,616
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,370
<INCOME-PRETAX> (241,035)
<INCOME-TAX> 0
<INCOME-CONTINUING> (241,035)
<DISCONTINUED> (356,207)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (356,207)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
