<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 April 30, 1997
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 June 16, 1997, there were 18,252,050 common shares outstanding of the
Registrant's Common Shares $.01 par value.
Index to Exhibits is located on page 24.
Page 1 of 32
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DELTA COMPUTEC INC.
Form 10-Q
Quarter Ended April 30, 1997
INDEX
Part I: Financial Information Page
Item 1. Financial Statements
Consolidated balance sheets at April 30, 1997 and
October 31, 1996 3-4
Consolidated statements of operations for the three
months ended April 30, 1997 and 1996 and the six
months ended April 30, 1997 and 1996 5
Consolidated statement of cash flows for the six months
ended April 30, 1997 and 1996 6
Notes to consolidated financial statements 7-12
Item 2. Management's Discussion and Analysis of Operations
and Financial Condition 13-17
Part II: Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 19-21
Item 3. Defaults Upon Senior Securities 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Index to Exhibits 24
Calculation of Earnings Per Share 25
Amendment Number 5 to Amended and Restated Credit
Agreement and Other Agreements 26-28
Amendment Number 6 to Amended and Restated Credit
Agreement and Other Agreements 29-32
Page 2 of 32
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
April 30, October 31,
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash $(174,769) $ 50,891
Accounts receivable, less allowance for doubtful accounts
of $130,264 and $263,808 at April 30, 1997 and October 31,
1996, respectively 2,017,551 2,634,039
Inventories 977,693 816,939
Prepaid expenses and other current assets 133,094 442,549
------- -------
Total current assets 2,953,569 3,944,418
Field Spare Parts, net of accumulated amortization 2,734,445 2,546,133
Property And Equipment, at cost:
Technical equipment 131,893 131,848
Office furniture and equipment 228,664 260,784
Vehicles 74,614 74,614
Leasehold improvements 69,781 60,072
Software 54,793 -
------ -------
559,745 527,318
Less: Accumulated depreciation (329,536) (291,751)
------- -------
230,209 235,567
Deferred Income Taxes 150,000 150,000
Other Assets:
Goodwill, less accumulated amortization of $310,111 and
$286,256 at April 30, 1997 and October 31, 1996, respectively 166,982 190,837
Customer lists, less accumulated amortization of $94,000 and
$90,500 at April 30, 1997 and October 31, 1996, respectively 3,500 7,000
Other 127,145 97,431
------- -------
297,627 295,268
Total Assets $6,365,850 $7,171,386
========= =========
</TABLE>
See notes to consolidated financial statements.
Page 3 of 32
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
April 30, October 31,
1997 1996
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable $1,972,841 $2,526,884
Short-term debt payable to shareholders 2,515,461 2,655,461
Deferred service revenue 1,800,053 2,131,491
Accrued expenses
Reserve for discontinuance of subsidiary 15,866 102,375
Payroll and payroll taxes 388,388 176,959
Interest 34,692 96,563
Sales tax payable 371,787 499,782
Other 333,296 310,282
------- -------
Total current liabilities 7,432,384 8,499,797
Long-Term Debt 750,000 750,000
Subordinated Debenture 600,001 600,001
------- -------
Total long-term liabilities 1,350,001 1,350,001
Stockholders' Investment:
Common stock, $ .01 par value; authorized 20,000,000 shares; issued and
outstanding 18,252,050 and 6,811,575 at April 30,
1997 and October 31, 1996, respectively 182,521 68,116
Additional paid-in capital 4,801,688 4,916,093
Accumulated deficit, beginning (7,737,622) (6,910,031)
Net Income (Loss), Current Period 336,878 (827,590)
------- ---------
Total Stockholders' Investment (2,416,535) (2,753,412)
Total Liabilities And Shareholders Equity $6,365,850 $7,171,386
========== =========
</TABLE>
See notes to consolidated financial statements.
Page 4 of 32
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
--------- ---------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues From Continuing Operations:
Service revenues $3,183,060 $2,613,070 $6,759,735 $ 4,886,623
Equipment sales 150,753 474,077 270,713 688,109
------- ------- ------- -------
Total Revenues 3,333,813 3,087,147 7,030,448 5,574,732
Costs And Expenses:
Service costs 2,081,200 1,937,204 4,063,898 3,765,406
Cost of equipment sold 134,738 336,055 478,899 492,505
Selling, general and administrative 964,180 698,811 1,945,389 1,171,471
--------- --------- --------- ---------
Total Operating Expenses 3,180,118 2,972,070 6,488,186 5,429,382
Other Income (Expense), Net (117,389) (56,113) (205,384) (134,728)
--------- --------- --------- ---------
Earnings From Continuing Operations
Before Income Taxes 36,306 58,964 336,878 10,622
Income Taxes/(Benefit) - - - -
--------- ---------- ---------- ----------
Net Earnings (Loss) From Continuing
Operations 36,306 58,964 336,878 10,622
------ ------ ------- ------
Net Loss From
Discontinued Operations - (415,809) - (1,023,331)
---------- -------- ------- ---------
Net Earnings (Loss) $ 36,306 $ (356,845) $ 336,878 $(1,012,709)
====== ======= ======= =========
Earnings Per Common And Common
Equivalent Share:
Continuing Operations $ .00 $ .01 $ .02 $ -
Discontinued Operations - (.06) - (.15)
--- --- --- ---
Combined $ .00 $ (.05) $ .02 $(.15)
=== === === ===
</TABLE>
See notes to consolidated financial statements.
Page 5 of 32
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
1997 1996
---- ----
<S> <C> <C>
Cash Flow From Operating Activities:
Net earnings(loss) $ 336,878 $(1,012,709)
Adjustments to reconcile net earnings/(loss) to net cash provided/(used) by
operating activities:
Depreciation & amortization 37,786 525,978
Deferred taxes - 261,937
Expenses charged to accrual for discontinued operations (86,509) -
Accounts receivable 616,488 1,913,517
Inventories (160,754) 837,838
Prepaid and other current assets 309,455 (31,588)
Accounts payable (554,043) (1,256,000)
Accrued expenses 172,571 (381,057)
Sales taxes payable (127,995) 274,772
Deferred service revenue (331,438) 95,551
------- ----------
Net cash flow from operating activities 212,439 1,228,239
------- ----------
Cash Flow From Investing Activities:
Capital expenditures, including field spare parts (220,740) (268,367)
Fixed assets disposed of in discontinued business - 609,159
Investment in intangibles and other assets (2,359) 84,335
---------- ----------
Net cash flow from investing activities (223,099) 425,127
---------- ----------
Cash Flow From Financing Activities:
Proceeds from (payment on) short-term debt (140,000) (127,122)
Net proceeds (payment) on bank loan - (1,452,131)
(Payment) on subordinated debenture ( 75,000) -
------- --------------
Net cash flow from financing activities (215,000) (1,579,253)
------- ---------
Net Increase (Decrease) In Cash $ (225,660) $ 74,113
------- ------
Cash - beginning of period 50,891 (245,249)
------ -------
Cash - end of period $ (174,769) $ (171,136)
======= =======
</TABLE>
See notes to consolidated financial statements.
Page 6 of 32
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DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
General Description of Business
Delta Computec Inc. (the "Registrant" or "Company"), by itself and
through its wholly-owned subsidiary, SAI Delta, Inc. ("SAI/Delta"),
provides a wide array of Computer System, Data Communication and
Lan/Wan technical services and products to a customer base which
encompasses many industries and geographic locations. (See discussion
below regarding the Company's Data Net subsidiary and its Intronet
Division and the termination of these operations during the year ended
October 31, 1996 ("Fiscal 1996"). The Company's customer base includes
large brokerage houses, banks, pharmaceutical companies, major
hospitals and long distance carriers, located principally in the
Northeast but reaching as far as Florida and the West Coast. Technical
services offered include, but are not limited to, design, product
procurement, installation, service, maintenance and on-site technical
management and consulting.
As discussed in Note 2 below, the Registrant terminated operations at
its wholly-owned subsidiary, Delta Data Net, Inc. ("Data Net") and its
Intronet Division (See discussion below regarding the Company's Data
Net subsidiary and its Intronet Division and the termination of these
operations during Fiscal 1996).
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. 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Basis of Presentation
The Registrant incurred operating losses, on a consolidated basis, in
Fiscal 1994, 1995 and 1996. As previously reported by the Registrant in
a Current Report on Form 8-K dated March 21, 1996, as well as above
(See "General Description of Business"), the Registrant's Data Net
subsidiary terminated its business operations and ceased operations due
to economic conditions in its industry.
Page 7 of 32
<PAGE>
As reported above (See "General Description of Business"), in the
fourth quarter of Fiscal 1996, the Registrant decided to close the
Intronet Division. Effective September 1, 1996, the Company assimilated
the regional area and certain customers serviced by the Intronet
Division into the Company's core business. Termination of the Intronet
Division's operation was completed in the first quarter of the fiscal
year ending October 31, 1997 ("Fiscal 1997").
The operating results for continuing operations for the three months
ended April 30, 1997 and 1996 and for the six months ended April 30,
1997 and 1996 are for the Company's core business and do not include
the operating losses for the Registrant's Data Net subsidiary or its
Intronet Division during the three months ended April 30, 1996 and the
six months ended April 30, 1996, respectively. The net losses incurred
by Data Net and the Intronet Division for those respective periods are
included in the income statement in losses from discontinued
operations.
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 businesses
over the fair value of net assets acquired, is generally amortized on a
straight-line basis over periods ranging from ten to twenty years. The
Page 8 of 32
<PAGE>
Company assesses impairment of such assets by reviewing on an ongoing
basis the operating performance of the underlying business or customer
relationships.
Customer Lists
Customer lists, representing the fair market value of customer lists
for businesses acquired, are generally amortized on a straight-line
basis over periods ranging from ten to twenty years. The Company
assesses impairment of such assets by reviewing on an ongoing basis the
operating performance of the underlying business or customer
relationships.
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 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.
Earnings Per Share
In March, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share", which will be effective during the fourth quarter of 1997.
SFAS No. 128 will require the Company in its fourth quarter and in its
annual report to restate all previously reported earnings per share
information to conform with the new pronouncement's requirements.
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.
(2) Discontinued Operations
As part of the Company's strategy of concentrating its focus on its
core business, the Company's subsidiary, Data Net, terminated its
business operations on March 8, 1996 (See Note 1, above). Prior to this
termination, Data Net was in the business of the sale and distribution
of hardware and test equipment and the sale and assembly of cables used
in data communications applications. Data Net's losses of $307,270
(56.7%) for the three months ended April 30, 1996 and $721,595 (31.3%)
for the six months ended April 30, 1996 are included in the statement
of operations in losses from discontinued operations for those
respective periods.
Page 9 of 32
<PAGE>
In November, 1994, the Company acquired substantially all of the
operating assets, and assumed certain of the liabilities, of Intronet,
Inc. (the "Intronet Acquisition"), which assets formed the basis of the
Company's Intronet Division ("Intronet" or "Intronet Division").
Following the Intronet Acquisition, the Company operated from the
former Intronet, Inc. office in Waltham, Massachusetts. Subsequent to
the acquisition and prior to a downsizing and eventual termination of
its operations, the Company's Intronet Division designed, installed and
supported advanced computer networks with emphasis in large company and
industrial facilities requiring network hubbing integrated with fiber
and copper cabling. These assets were acquired in exchange for $337,000
in cash and the assumption of approximately $588,000 in liabilities of
Intronet, Inc. In the fall of 1995, the Company reduced the size of its
operating staff of its Intronet Division. During the fourth quarter of
Fiscal 1996, management decided to terminate operations of the Intronet
Division, substantially accomplished at October 31, 1996 with the
downsizing of the Intronet Division's staff to one employee by October
31, 1996, and termination of the Intronet Division's operation was
completed in the first quarter of Fiscal 1997 with the closing of its
office in December, 1996. The amount of savings associated with the
termination of the Intronet Division was approximately $798,000.
Effective September 1, 1996, the Company assimilated the regional area
and certain customers serviced by the Intronet Division into the
Company's core business. Intronet's losses of $108,539 (21.1%) for the
three months ended April 30, 1996 and $301,736 (27.3%) for the six
months ended April 30, 1996 are included in the statement of operations
in losses from discontinued operations for those respective periods.
A provision of $1,843,487 for loss on disposal of discontinued
operations of Data Net and the Intronet Division was recorded at October
31, 1996, consisting of $1,741,112 loss from operations and $102,375
loss on disposal. Due to the Company's accumulated deficit position,
there was no tax benefit recorded.
The consolidated financial statements have been reclassified to report
separately results from discontinued operations (Data Net and the
Intronet Division). The Company's prior-year operating results have been
restated to reflect continuing operations, comprising the core business
of providing computer system, data communication and Lan/Wan technical
services and products. Interest expense allocated to discontinued
operations includes amounts directly related to the discontinued
businesses. Amounts allocated for interest in the three months ended
April 30, 1996 totaled $53,243. Revenues from discontinued operations in
the three months ended April 30, 1996 totaled $1,055,584, which
consisted of $542,359 and $513,225 for Data Net and Intronet,
respectively. Amounts allocated for interest in the six months ended
April 30, 1996 totaled $113,702. Revenues from discontinued operations
in the six months ended April 30, 1996 totaled $3,413,536, which
consisted of $2,307,945 and $1,105,591 for Data Net and Intronet,
respectively. The remaining net assets of discontinued operations at
October 31, 1996 were zero.
Management has refocused the Registrant's efforts on its core business
of providing Integrated Technology Solutions for computer systems,
network environments and telecommunication systems.
Page 10 of 32
<PAGE>
(3) Registrant's Debt Position
Debt consists of the following at April 30, 1997 and October 31, 1996,
respectively:
<TABLE>
<CAPTION>
April 30, October 31,
1997 1996
---- ----
<S> <C> <C>
Due to shareholder $2,515,461 $2,655,461
Note payable to bank, due in full on October 10, 2001 with
interest payable monthly at prime plus 1.75%, secured
by field spare parts inventory (the "Term Loan") 750,000 750,000
Subordinated debenture 600,001 600,001
------- -------
Total Debt $3,865,462 $4,005,462
========= =========
</TABLE>
Throughout Fiscal 1996, the Company was in default on certain
provisions and covenants of its long-term credit facility with its then
primary lending institution National Canada Finance Corp. ("NCFC").
After extensive discussion and negotiation, the lending relationship
was restructured on October 10, 1996, when a portion of the long-term
credit facility, such portion equivalent to $1,544,661, was purchased
by the Company's principal shareholder, Joseph M. Lobozzo II
("Lobozzo") and the balance of $750,000 was restructured as the term
loan to NCFC described above. The terms of the Amended and Restated
Credit Agreement between the Company and Lobozzo (the "Lobozzo Credit
Agreement", as amended) (the "Lobozzo Loan") provide that: (1) the
maximum loan amount is $2,950,000; (2) the interest rate is 1.75% above
the prime lending rate; (3) the borrowing base shall be initially equal
to 100% of the eligible receivables (130% for certain receivables, as
defined in Section 2.1 of the Credit Agreement, as amended); (4)
certain financial covenant obligations with which the Company was in
default were removed; (5) all assets of the Company, other than field
spare parts, were pledged as collateral with the pledged field spare
parts being subordinated to the prior pledge to NCFC; and (6) payment
is due on June 30, 1998. As a result of this transaction, that portion
of the Company's borrowings as at October 10, 1996 which were
restructured under the Term Loan is reported as long-term debt in the
accompanying October 31, 1996 balance sheet. In February, 1997, Lobozzo
transferred to his spouse, Joanne M. Lobozzo ("Joanne Lobozzo") half of
his interest in the Lobozzo Loan and Lobozzo and Joanne Lobozzo are
collectively referred to as the ("Lender"). The remaining amounts are
included in short-term debt payable to shareholder, a current
liability. As of April 30, 1997 and June 16, 1997, there was $2,515,461
and $2,423,500, respectively, outstanding under the Lobozzo Loan, which
balances included advances totaling $633,600 ("Overline Advances")
received from Lobozzo prior to the NCFC Restructuring. In addition, as
of October 31, 1996 and April 30, 1997, the Company was obligated to
the Lender in the principal amount of $400,000 and $50,000,
respectively, as a result of a May, 1995 Lobozzo Commitment (the
"Lobozzo Commitment ") in the original amount of $400,000 to provide
additional financing to the Company (the "Overadvance Facility"). In
connection with the Lobozzo Commitment, the Company issued a May, 1995
Option Agreement entitling Lobozzo to purchase 11,440,475 shares of the
Company's common shares. In February, 1997, the option, as amended and
restated, was exercised in full by Lobozzo and Joanne Lobozzo, and
11,440,475 common
Page 11 of 32
<PAGE>
shares were issued, of which 5,720,238 common shares were issued to
Lobozzo and 5,720,237 common shares were issued to Joanne Lobozzo.
In May, 1997, the principal balance outstanding on the Overadvance
Facility was paid in full, and the documents upon which it was based
were terminated. In June, 1997, the Company and the Lender agreed to
further amend the Lobozzo Loan in the following respects: (a) the
maximum amount was increased from $2,550,000 to $2,950,000; (b) the
Company was permitted to borrow up to 100% of Eligible Receivables (as
defined in the Lobozzo Credit Agreement) against all Eligible
Receivables which come into existence from and after June 7, 1997, and
the Company was further permitted to borrow up to 130% of Eligible
Receivables for Eligible Receivables which existed as of June 6, 1997;
and (c) effective June 7, 1997, the rate of interest on all loans
provided by the Lender which shall exceed the available Borrowing Base
(as defined in the Lobozzo Credit Agreement) was increased to five
percent (5%) over Prime Rate (as defined in the Lobozzo Credit
Agreement). The interest rate applicable to all principal amounts under
the Lobozzo Loan which are within the Available Borrowing Base remains
at one and three quarters of one percent (1 and 3/4%) over Prime Rate,
and the interest rate on the Lobozzo Loan in the event of maturity, by
acceleration or otherwise, remains at three and three quarters of one
percent (3 and 3/4%) over Prime Rate.
The agreement underlying the Term Loan requires the Company to maintain
a ratio of field spare parts inventory to outstanding indebtedness of at
least 2.5 to 1. The Registrant has been in compliance with this ratio
for all periods. Lobozzo has pledged to NCFC 480,000 of his shares of
the Company's common shares as additional collateral. Agreements have
been made to provide NCFC with additional equity in the Company (up to
17.5% of the Company's issued and outstanding common shares) under
certain circumstances. As described in Item 2, in February, 1997,
Lobozzo transferred half of this debt obligation to Joanne Lobozzo, and
Joanne Lobozzo agreed to provide half of the equity ever required to be
provided to NCFC by Lobozzo.
Subordinated Debentures
In November, 1992, the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31,
1997 to the sellers ("the Sellers") of the assets acquired by Data Net
on November 1, 1992. On October 31, 1996 the Sellers agreed to sell the
entire principal balance of the debenture, together with accrued
interest of $55,384, to the Company for $75,000. This transaction, which
resulted in a $455,384 gain on extinguishment of debt, is reflected in
the Fiscal 1996 operating results (which are not presented herein) as an
extraordinary gain. The Company also has guaranteed an 8% subordinated
debenture of Data Net in the face amount of $600,001 to Lobozzo (the
"Lobozzo Debenture"). This Lobozzo Debenture is due in annual
installments of $200,000 commencing January 31, 1996 and was issued in
connection with an option agreement entitling Lobozzo to purchase
1,304,350 shares of the Company's common shares. Lobozzo has waived the
$200,000 payment due January 31, 1996 and January 31, 1997, and the
Lobozzo Debenture is now due in annual installments of $200,000
commencing January 31, 1998.
Page 12 of 32
<PAGE>
In February, 1997, Lobozzo transferred to Joanne Lobozzo half of: the
Lobozzo Loan (as then outstanding); the Overline Advances; the Lobozzo
Debenture: the Lobozzo Commitment and all other debt and equity
instruments then issued to Lobozzo by the Registrant.
(4) Other Matters
The Company experienced a significant consolidated net loss in Fiscal
1996, which was attributable to the operating losses incurred by the
Data Net subsidiary and the Intronet Division. As noted elsewhere in
this Form 10 Q Quarterly Report, the Company's subsidiary, Data Net,
terminated its business operations in March 1996, and, in the fourth
quarter of Fiscal 1996, management decided to terminate the operations
of the Company's Intronet Division. The actions of the Company were
taken as a part of management's plan to refocus the Company's efforts on
its core business of providing integrated technology solutions for
computer systems, network environments and telecommunication systems.
The Company has not yet issued audited financial statements either for
Fiscal 1995 or Fiscal 1996, but management expects that those audited
statements will be available by the end of June, 1997.
(5) Income Taxes
For the three months ended April 30, 1997 and the six months ended April
30, 1997, respectively, income taxes of $12,344 and $114,539,
respectively, have been offset by the use of the tax benefits
associated with the use of the Company's net operating loss
carry-forwards.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Results of Operations
The Company's net income from continuing operations for the three
months ended April 30, 1997 was $36,306 (1.1%), or less than $.005 per
share (on 15,681,157 weighted average common shares outstanding for the
three months ended April 30, 1997), compared to net income from
continuing operations of $58,964 (1.9%), or $.01 per share for the
three months ended April 30, 1996 (on 6,811,575 weighted average common
shares outstanding for the three months ended April 30, 1996). Net
income from continuing operations for the six months ended April 30,
1997 was $336,878 (4.8%), or $.02 per share (on 13,769,539 weighted
average common shares outstanding for the six months ended April 30,
1997), compared to net income from continuing operations of $10,622, or
less than $.005 per share for the six months ended April 30, 1996 (on
6,811,575 weighted average common shares outstanding for the six months
ended April 30, 1996). The improvement of $326,256 in net income from
continuing operations for the six months ended April 30, 1997 reflected
the earnings benefit from a new project started in October, 1996 plus a
growth in the Company's core business as management was able to refocus
its energies and concentrate on developing its continuing business.
As discussed in Note 1, on March 8, 1996 the Company's Data Net
subsidiary terminated its operations which had commenced in November,
1992. Data Net incurred a net loss of $307,270 (56.7%), or $.05 per
share, for the three months ended April 30, 1996 (on 6,811,575 weighted
average common shares outstanding for the three months ended April 30,
1996), and $721,595 (31.3%), or $.11 per share for the six
Page 13 of 32
<PAGE>
months ended April 30, 1996 (on 6,811,575 weighted average common
shares outstanding for the six months ended April 30, 1996), which
losses are reported in the income statement for those respective
periods under Loss from Discontinued Operations.
As discussed in Note 1, in the fourth quarter of Fiscal 1996, the
Registrant decided to close its Intronet Division. Termination of the
Intronet Division's operation was completed in the first quarter of
Fiscal 1997. Intronet incurred a net loss of $108,539 (21.1%), or $.02
per share, for the three months ended April 30, 1996 (on 6,811,575
weighted average common shares outstanding for the three months ended
April 30, 1996), and $301,736 (27.3%), or $.04 per share, for the six
months ended April 30, 1996 (on 6,811,575 weighted average common
shares outstanding for the six months ended April 30, 1996), which
losses are reported in the income statement for those respective
periods under Loss from Discontinued Operations.
Revenues
Revenues from continuing operations were $3,333,813 for the three
months ended April 30, 1997, compared to $3,087,147 for the three
months ended April 30, 1996, an increase of $246,666 and 8.0%. Service
revenues for the three months ended April 30, 1997 were $3,183,060,
compared to $2,613,070 for the three months ended April 30, 1996, an
increase of $569,990 and 21.8%. The increase in service revenue
reflects revenue derived from a contract with a major municipality,
which contract had been signed just prior to the beginning of Fiscal
1997, as well as a resurgence in business with the Company's existing
customers. Equipment sales for the three months ended April 30, 1997
were $150,753, compared to $474,077 for the three months ended April
30, 1996, a decrease of $323,324 and 68.2%. The decline in equipment
sales reflects the Registrant's emphasis on its core service
maintenance and installation business, as well as increased market
competition, particularly with the introduction of retail computer
chains.
Revenues from continuing operations were $7,030,448 for the six months
ended April 30, 1997, compared to $5,574,732 for the six months ended
April 30, 1996, an increase of $1,455,716 and 26.1%. Service revenues
for the six months ended April 30, 1997 were $6,759,735, compared to
$4,886,623 for the six months ended April 30, 1996, an increase of
$1,873,112 and 38.3%. The increase in service revenue reflects revenue
derived from the contract with a major municipality described above, as
well as a resurgence in business with the Company's existing customers.
Equipment sales for the six months ended April 30, 1997 were $270,713,
compared to $688,109 for the six months ended April 30, 1996, a
decrease of $417,396 and 60.7%. The decline in equipment sales reflects
the Registrant's emphasis on its core service maintenance and
installation business, as well as increased market competition,
particularly with the introduction of retail computer chains.
Costs and Expenses
Service costs in continuing operations were $2,081,200 (65.4%) for the
three months ended April 30, 1997, compared to $1,937,204 (74.1%) for
the three months ended April 30, 1996. Service costs as a percentage of
service revenue for the three months ended April 30, 1997 decreased by
8.7 percentage points from the ratio for the three months ended April
30, 1996, reflecting the effect of the stronger revenue performance in
the Company's core business in the second quarter of Fiscal 1997 versus
the second quarter of Fiscal 1996 without a commensurate increase in
direct expenses.
Page 14 of 32
<PAGE>
Service costs in continuing operations were $4,063,898 (60.1%) for the
six months ended April 30, 1997, compared to $3,765,406 (77.1%) for the
six months ended April 30, 1996. Service costs as a percentage of
service revenue for the six months ended April 30, 1997 decreased by
17.0 percentage points from the ratio for the six months ended April
30, 1996, reflecting the effect of the stronger revenue performance in
the Company's core business in the first half of Fiscal 1997 versus the
same period last year without a commensurate increase in direct
expenses.
Cost of equipment sold in continuing operations was $134,738 (89.4%)
for the three months ended April 30, 1997, compared with $336,055
(70.9%) for the three months ended April 30, 1996. The increase of 18.5
percentage points in the ratio of cost of equipment sold as a
percentage of equipment sales for the three months ended April 30, 1997
compared to the three months ended April 30, 1996 was due to the
detrimental effect of the Company's tight cash flow upon its ability to
purchase equipment at competitive prices.
Cost of equipment sold in continuing operations was $478,899 (176.9%)
for the six months ended April 30, 1997, compared with $492,505 (71.6%)
for the six months ended April 30, 1996. The increase of 105.3
percentage points in the ratio of cost of equipment sold as a
percentage of equipment sales for the six months ended April 30, 1997
compared to the six months ended April 30, 1996 was due to the
detrimental effect of the Company's tight cash flow upon its ability to
purchase equipment at competitive prices.
Gross profit for continuing operations was $1,117,875 (33.5%) for the
three months ended April 30, 1997, compared to $813,888 (26.4%) for the
three months ended April 30, 1996, an improvement of $303,987 and 7.1
percentage points as a ratio of sales. For the six months ended April
30, 1997 and 1996, gross profit for continuing operations was
$2,487,651 (35.4%) and $1,316,821 (23.6%), respectively, an improvement
of $1,170,830 and 11.8 percentage points as a ratio of sales. These
results reflect the benefit from the improved sales performance in
Fiscal 1997 versus Fiscal 1996.
Selling, general and administrative expenses in continuing operations
were $964,180 (28.9%) for the three months ended April 30, 1997,
compared with $698,811 (22.6%) for the three months ended April 30,
1996, an increase of $265,369 or 38.0%, as compared to the 21.8% rise
in service revenue for the same period. The increase in SG&A costs was
primarily due to additional personnel and associated costs as well as
increased other administrative expenses.
Selling, general and administrative expenses in continuing operations
were $1,945,389 (27.7%) for the six months ended April 30, 1997,
compared with $1,171,471 (21.0%) for the six months ended April 30,
1996, an increase of $773,918 or 66.1%, as compared to the 38.3% rise
in service revenue for the same period. The increase in SG&A costs was
primarily due to additional personnel and associated costs, higher
consulting and legal fees, as well as increased other administrative
expenses.
Total operating expenses in continuing operations were $3,180,118
(95.4%) for the three months ended April 30, 1997, compared with
$2,972,070 (96.3%) for the three months ended April 30, 1996, an
increase of $208,048 or 7.0% and an improvement of 0.9 percentage
points as a ratio of sales.
Total operating expenses in continuing operations were $6,488,186
(92.3%) for the six months
Page 15 of 32
<PAGE>
ended April 30, 1997, compared with $5,429,382 (97.4%) for the six
months ended April 30, 1996, an increase of $1,058,804 or 19.5% and an
improvement of 5.1 percentage points as a ratio of sales.
Non-operating expenses were $117,389 (3.5%) and $56,113 (1.8%) for the
three months ended April 30, 1997 and 1996, respectively, an increase
of $61,276 or 109.2%. Non-operating expenses were $205,384 (2.9%) and
$134,728 (2.4%) for the six months ended April 30, 1997 and 1996,
respectively, an increase of $70,656 or 52.4%. These respective
increases in debt service costs were due to increased borrowing
incurred in prior periods as a result of the cumulative losses incurred
in the Company's discontinued operations.
Income from continuing operations was $36,306 (1.1%) for the three
months ended April 30, 1997, compared with $58,964 (1.9%) for the three
months ended April 30, 1996, a decrease of $22,658 or 38.4%. Income
from continuing operations was $336,878 (4.8%) for the six months ended
April 30, 1997, compared with $10,622 (or less than .005%) for the six
months ended April 30, 1996, an improvement of $326,256.
For the three months ended April 30, 1997 and the six months ended
April 30, 1997, respectively, income taxes of $12,344 and $114,539,
respectively, have been offset by the use of the tax benefits
associated with the use of the Company's net operating loss
carry-forwards. The Company has recorded a deferred tax asset of
approximately $2,002,000 reflecting the benefit of $5,880,016 in loss
carryforwards, which expire in varying amounts between 2001 and 2010.
Realization of this and other deferred assets is dependent upon
generating sufficient taxable income in future periods. Management
believes that sufficient future income will exist to allow utilization
of $150,000 of the deferred tax asset.
In March, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share". This new standard requires dual presentation of basic and
diluted earnings per share (EPS) on the face of the earnings statement
and requires a reconciliation of the numerators and denominators of
basic and diluted EPS calculations. The statement will be effective for
the Company's 1997 fiscal year. Early adoption of the statement is not
permitted.
Liquidity and Capital Resources
The Company experienced a significant consolidated net loss in Fiscal
1996, which was attributable to the operating losses incurred by its
Data Net subsidiary and the Intronet Division. The Company has financed
its working capital requirements, capital expenditures and debt service
from its financing arrangements and trade debt.
The unaudited financial statements for the period ended April 30, 1997
as set forth in this Form 10-Q Quarterly Report indicate that the
significant consolidated losses of Fiscal 1996 have abated. The
unaudited financial statements for the first and second quarters of
Fiscal 1997 show improvement in the Company's financial position. These
improved figures are not a guarantee that the improved financial
position can continue into the future.
The Registrant's lending agreement with its commercial lenders, who are
also its principal shareholders and controlling persons, has been
amended to, among other matters, extend the term of the lending
agreement to March 31, 1997, and this date was subsequently further
extended until April 30, 1997 and then to June 30, 1998. The maximum
amount of the loan has also been increased from $2,550,000 to
$2,950,000. If any loans are ever made in excess of the available
Borrowing Base (as defined in the lending agreement), such excess
amounts shall bear interest at 5% over the Prime Rate. The lenders and
the Registrant have also revised the factors determining the basis upon
which receivables will be eligible for inclusion in the Borrowing Base.
The Registrant's management believes that this amended lending
agreement will provide the Company with necessary liquidity and cash
resources. For additional information regarding the NCFC Restructuring
and the Lobozzo Loan, see Note 3, above.
Net cash provided from operations in the six months ended April 30,
1997 and 1996 was $212,439 and $1,228,239, respectively. The decline of
$1,015,800 for the six months ended April 30, 1997 versus the six
months ended April 30, 1996 was principally the result of: (1) $488,192
in lower depreciation and amortization (2) $86,509 in expenses charged
against an accrual for discontinued operations; (3) no funds provided
from deferred taxes for the six months ended April 30, 1997, compared
to $261,937 in funds provided for the six months ended April 30, 1996;
(4) $383,717 in funds provided in the first half of Fiscal 1997 by
accounts receivable, inventory, prepaid and other current assets,
accounts payable and accrued expenses, compared to $1,082,710 in funds
provided in the first half of Fiscal 1996 (a significant portion of
which related to the termination of Data Net), a decrease of $698,993
in funds provided; (5) a $426,989 decrease in deferred service revenue;
(6) $402,767 in less funds provided from sales tax liabilities; and (7)
offset in part by a favorable swing of $1,349,587, resulting from cash
provided from net income of $336,878 in the first half of Fiscal 1997
versus cash used by a net loss of $1,012,709 in the first half of
Fiscal 1996.
The working capital deficit was $4,478,815 and $4,555,379 at April 30,
1997 and 1996, respectively, representing a decrease of $76,564 in
negative working capital.
Page 16 of 32
<PAGE>
Cash (used)/ provided by investing activities in the six months ended
April 30, 1997 and 1996 was ($223,099) and $425,127, respectively, or
$648,226 in additional funds used in the first half of Fiscal 1997.
Most of this additional funds requirement was attributable to $609,159
in gross fixed assets liquidated in the termination of Data Net during
the first half of Fiscal 1996, with no such occurrence during the first
half of Fiscal 1997.
Cash (used) by financing activities in the six months ended April 30,
1997 and 1996 was ($215,000) and ($1,579,253), respectively, or
($1,364,253) less funds used in the first half of Fiscal 1997. In the
first half of Fiscal 1997, there were $12,878 in higher payments on
debt to shareholders and a $75,000 payment of a subordinated debenture,
but a $1,452,131 reduction in bank debt.
The net result of the above was a $225,660 use of cash for the six
months ended April 30, 1997, compared to $74,113 in cash provided
for the six months ended April 30, 1996.
Page 17 of 32
<PAGE>
PART II
OTHER INFORMATION
Item I. Legal Proceedings.
(a) In 1994, at the time that Delta Computec Inc. (the "Registrant"),
acquired certain of the assets and assumed certain of the liabilities of an
entity known as Intronet, Inc., the Registrant entered into a major contract for
in excess of $4,000,000 with a well-known eastern college to provide extensive
on-campus computer access to all of the college's buildings. The contract, to be
performed by the Registrant's Intronet Division, was essentially completed in
the Registrant's fiscal year ending October 31, 1995 ("Fiscal 1995"). Certain
other "punch-list" items were completed in the Registrant's fiscal year ending
October 31, 1996 ("Fiscal 1996"), and the obligations of the Registrant under
the contract have now been completed. Actual costs incurred by the Registrant
significantly exceeded contractual estimates. The Registrant has asserted
certain claims against the college and one of the Registrant's subcontractors
has asserted a claim against the Registrant (and has also asserted a lien
against the college and has commenced a litigation against the Registrant's
bonding company based on the Registrant's performance bond seeking approximately
$112,000 in damages). The college rejected a significant portion of the
Registrant's claim, including the portion dealing with the claim of the
subcontractor. The Registrant has not been named in the litigation commenced by
the subcontractor. The Registrant has submitted a restated claim to the college
and is attempting to resolve all claims through negotiation with the college and
the subcontractor. As of the date of this Form 10-Q Quarterly Report, the matter
remains unresolved.
(b) In Fiscal 1996, an agreement was reached with the State of New York
("New York State") relative to payment of New York State sales taxes for the
period from July, 1995, through April, 1996, in the amount of $349,000 plus
interest. Penalties were waived by New York State during the current fiscal
year. No litigation or administrative proceeding was commenced, and all payments
called for to date have been made.
As a result of a sales tax audit, on January 10, 1997, New York State
asserted a claim, originally in the amount of approximately $125,000, excluding
any interest or penalties, against both the Registrant and its wholly-owned
subsidiary, Delta Data Net, Inc. ("Data Net"), for alleged sales taxes owed for
the period September, 1993, through May, 1996. The Registrant and Data Net
disagreed with the findings and communicated such disagreement in writing to New
York State. The Registrant instituted efforts to obtain documentation supporting
the validity of its classification of certain sales made by both entities as
non-taxable transactions. Support for the validity of classifying approximately
74% of such sales as non-taxable transactions has since been submitted to New
York State. New York State has sent a revised determination of approximately
$65,000, excluding any interest and penalties. The Registrant is continuing its
efforts to provide documentation for the remainder of the affected transactions.
The Registrant and Data Net believe, but cannot guarantee, that, upon review of
the appropriate documentation, New York State will further reduce its claim.
Page 18 of 32
<PAGE>
Item 2. Changes in Securities
(a) In January, 1997, by a Securities Transfer Document (the
"Securities Transfer Document"), between the Registrant, Joseph M. Lobozzo II,
the Registrant's Chairman, a director, one of its principal shareholders and one
of its controlling persons ("Lobozzo"), and Lobozzo's spouse, Joanne M. Lobozzo
("Joanne Lobozzo"), now a principal shareholder and also a controlling person of
the Registrant, Lobozzo agreed to transfer to Joanne Lobozzo: (i) half of the
original October, 1992 Option Agreement which Lobozzo received from the
Registrant in October, 1992, which, as later amended, entitled Lobozzo to
purchase up to 1,304,350 common shares of the Registrant at $.46 per share
through January 31, 1998, the transfer to Joanne Lobozzo consisting of the right
to purchase up to 652,175 common shares; and (ii) half of the pledge obligation
which Lobozzo gave to National Canada Finance Corp. ("NCFC"), the Registrant's
former commercial lender, pursuant to a certain Pledge Security Agreement
between Lobozzo and NCFC dated October 10, 1996 (the "Pledge Security
Agreement"), issued as part of the restructuring of the Registrant's lending
facility with NCFC of October 10, 1996 (the "NCFC Restructuring"), which was
reported in a Form 8-K Current Report dated October 24, 1996 (the "October, 1996
8-K Report"). The documents constituting the NCFC Restructuring, including the
Pledge Security Agreement, were annexed as Exhibits to the October, 1996 8-K
Report. Pursuant to the Pledge Security Agreement, Lobozzo pledged to NCFC
480,000 common shares of the Registrant registered in Lobozzo's name (the
"Pledged Shares"), and under certain circumstances, if there is a default under
the $750,000 Amended and Restated Term Promissory Note from the Registrant to
NCFC dated October 10, 1996 (also part of the NCFC Restructuring), Lobozzo
agreed to assign to NCFC a portion of the Second Restated May, 1995 Option
Agreement (as hereinafter defined) for the number of common shares of the
Registrant which, when added to the Pledged Shares, would give NCFC the right to
17 1/2% of the issued and outstanding common shares of the Registrant. Pursuant
to the Securities Transfer Document, Joanne Lobozzo agreed to fulfill half of
Lobozzo's obligation to NCFC pursuant to the Pledge Security Agreement (whether
or not Joanne Lobozzo had exercised her portion of the Second Restated May 1995
Option Agreement), and Lobozzo agreed to transfer to Joanne Lobozzo half of the
Pledged Shares which Lobozzo ever received back from NCFC. Copies of the
Securities Transfer Document and of the two Second Restated May, 1995 Option
Agreements issued to, respectively Lobozzo and Joanne Lobozzo, were annexed as
Exhibits to a Form 8-K Current Report dated February 20, 1997 (the "February
1997 8-K Report").
(b) On February 21, 1997, the Registrant issued an aggregate of
11,440,475 common shares, of which 5,720,238 common shares were issued to
Lobozzo and 5,720,237 common shares were issued to Joanne Lobozzo, as a result
of the exercise of an Option originally granted by the Registrant to Lobozzo in
May, 1995, and thereafter amended and restated as of February 20, 1997 (the
"Second Restated May, 1995 Option Agreement"). The Second Restated May, 1995
Option Agreement was issued as a result of a certain Option Transfer Document
whereby Lobozzo agreed to transfer a portion of his interest in the then
existing May, 1995 Option Agreement to Joanne Lobozzo. As a result of the
issuance of the 11,440,475 common shares, the amount of authorized but unissued
common shares of the Registrant increased from 6,811,575 common shares to
18,252,050 common shares.
Page 19 of 32
<PAGE>
(c) The Registrant considered that, as a result of the issuance and
subsequent exercise of the Second Restated May, 1995 Option Agreement and the
issuance of the 5,720,237 common shares to Joanne Lobozzo, Joanne Lobozzo also
became a control person of the Registrant. Lobozzo remains a control person of
the Registrant.
The issuance of the common shares on February 21, 1997 raised Joanne
Lobozzo's common share ownership in the Registrant to 5,815,112 common shares of
the Registrant, or 31.86% of the now 18,252,050 issued and outstanding common
shares, thereby causing Joanne Lobozzo to become a control person of the
Registrant. The issuance to Lobozzo of the 5,720,238 common shares of the
Registrant caused his common share ownership to increase to 6,730,113 common
shares of the Registrant, or 36.87% of the common shares of the Registrant.
A description of the transactions relative to the issuance of the
11,440,475 common shares was set forth in the February, 1997 8-K Report.
(d) In February, 1997, Lobozzo, by a document entitled Amendment No. 3
to Amended and Restated Credit Agreement and Other Agreements dated February 19,
1997 ("Amendment No.3"), transferred to Joanne Lobozzo half of Lobozzo's
interest in each of the component parts or the "Total Lobozzo Credit
Facilities") (as defined herein in Item 3, below). The transfer of half of the
Total Lobozzo Credit Facilities were reported in, and a copy of Amendment No. 3
was annexed as an Exhibit to, the February, 1997 8-K Report.
(e) By Amendment No. 4 to the Amended and Restated Credit agreement
and Other Agreements dated February 20, 1997 ("Amendment No. 4"), Lobozzo and
Joanne Lobozzo agreed to amend the Lobozzo Credit Agreement (as hereinafter
defined) to extend the Maturity Date and to revise the factors for Eligible
Receivables (as defined in the Lobozzo Credit Agreement) for the month of April,
1997. Amendment No. 4 was annexed as an Exhibit to the February, 1997 Form 8-K
Report.
(f) By Amendment No. 5 to the Amended and Restated Credit Agreement
and Other Agreements dated April 30, 1997, annexed hereto as Exhibit 1, the
Maturity Date of the Lobozzo Loan was extended to June 30, 1998.
(g) In May, 1997, the principal balance outstanding on the Overadvance
Facility was paid in full, and the documents upon which it was based were
terminated. On June 9, 1997, by Amendment No. 6 to the Amended and Restated
Credit Agreement and Other Agreements, a copy of which is attached hereto as
Exhibit 2, the Company and the Lender agreed to further amend the Lobozzo Loan
in the following respects: (a) the maximum amount was increased from $2,550,000
to $2,950,000; (b) the Company was permitted to borrow up to 100% of Eligible
Receivables (as defined in the Lobozzo Credit Agreement) against all Eligible
Receivables which come into existence from and after June 7, 1997 and the
Company was further permitted to borrow up to 130% of Eligible Receivables for
Eligible Receivables which existed as of June 6, 1997; and (c) effective June 7,
1997, the rate of interest on all loans provided by the Lender which shall
exceed the Available Borrowing Base (or "Excess Borrowing Base Loans") (as
defined in the Lobozzo Credit Agreement) was increased to five percent (5%) over
Prime Rate (as defined in the Lobozzo Credit Agreement). The interest rate
applicable to all principal amounts under the Lobozzo Loan which are within the
available Borrowing Base remain at one and three quarters of one
Page 20 of 32
<PAGE>
percent (1 and 3/4%) over Prime Rate , and the interest rate on the Lobozzo Loan
in the event of maturity, by acceleration or otherwise, remains at three and
three quarters of one percent (3 and 3/4%) over Prime Rate.
Item 3. Defaults Upon Senior Securities
(a) The Registrant and Lobozzo entered into an Amended and Restated
Credit Agreement and other Agreements dated October 10, 1996, which has since
been further amended six (6) times (collectively, the Original Agreement and all
six (6) amendments are referred to as the "Lobozzo Credit Agreement"). See Item
2, above. The Lobozzo Credit Agreement, which provides for loans of up to
$2,950,000 to the Registrant, had an expiration date of April 30, 1997, which
has since been extended to June 30, 1998, as discussed above and below.
(b) In addition to the Lobozzo Credit Agreement, Lobozzo has also
provided the Registrant with certain other credit facilities, including (i) a 8%
Subordinated Debenture issued October 28, 1992, in the face amount of $600,001
(as amended and restated, the "Second Restated Lobozzo Subordinated Debenture");
(ii) a commitment (the Lobozzo Commitment") pursuant to a letter agreement dated
May 1, 1995, to provide the Registrant with an overadvance facility of up to
$400,000 (which has since been paid in full and declared to be null and void and
of no further force and effect, as set forth above and below); (iii) individual
advances made by Lobozzo to the Registrant between July 25, 1996 and October 9,
1996, in the aggregate amount of $633,600, and (iv) Overbase Loans whereby the
amounts loaned under the Lobozzo Credit Agreement exceed the amount which would
otherwise be permitted by the Borrowing Base as defined in the Lobozzo Credit
Agreement. The Lobozzo Credit Agreement and the other credit facilities referred
to in this paragraph are referred to as the "Total Lobozzo Credit Facilities".
(c) The Registrant, Lobozzo and Joanne Lobozzo executed an
Amendment No. 5 (See Item 2, above). Amendment No. 5 also waives any
pre-existing defaults of the Registrant which may have existed with regard to
the Lobozzo Credit Agreement.
(d) The Registrant, Lobozzo and Joanne Lobozzo executed Amendment
No. 6 (See Item 2, above). Amendment No. 6 also waives any pre-existing defaults
of the Registrant which may have existed with regard to
the Lobozzo Credit Agreement.
Page 21 of 32
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
No. 1 Amendment No. 5 to Amended and Restated Credit
Agreement and Other Agreements dated as of
April 30, 1997.
No. 2 Amendment No. 6 to Amended and Restated Credit
Agreement and Other Agreements dated as of
June 9, 1997.
No. 11 Earnings Per Share Information
(b) Reports on Form 8-K
Form 8-K Current Report dated February 20, 1997, reported on:
Item 1. Changes In Control of Registrant; Item 5. Other Events, including:
A. Amendment to Credit Agreement and Other Lending Agreement; and B. Amendment
to Option Agreements; and Item 7. Financial Statements and Exhibits consisting
of Exhibits 1 through 13.
Page 22 of 32
<PAGE>
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.
Delta Computec, Inc.
Registrant
Date: June 16, 1997 /s/ John DeVito
John DeVito, President and
Chief Operating Officer
Date: June 16, 1997 /s/ Frank Donnelly
Frank Donnelly
Chief Financial Officer and
Principal Accounting Officer
Page 23 of 32
<PAGE>
Index to Exhibits
-----------------
The following Exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit 11 - Calculation of Earnings Per Share, page 25.
Exhibit 1 - Amendment No. 5 to Amended and Restated Credit Agreement
and Other Agreements of April 30, 1997, page 26.
Exhibit 2 - Amendment No. 6 to Amended and Reinstated Credit
Agreement and Other Agreements of June 9, 1997,
page 29.
Page 24 of 32
<PAGE>
Exhibit 11
DELTA COMPUTEC INC. - CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Continuing Operations $ 36,306 $ 58,964 $ 336,878 $ 10,622
Discontinued Operations -- (415,809) -- (1,023,331)
------------ ------------ ------------ ------------
Combined $ 36,306 $ (356,845) $ 336,878 $ (1,012,709)
Average Common Shares Outstanding 15,681,157 6,811,575 13,769,539 6,811,575
Dilutive Effect of Stock Options - - - -
------------ ------------ ------------ ------------
Weighted Average Common Shares Outstanding
15,681,157 6,811,575 13,769,539 6,811,575
------------ ------------ ------------ ------------
Earnings (Loss) Per Common and Common
Equivalent Shares:
Continuing Operations $ .00 $ .01 $ .02 $ -
Discontinued Operations - (.06) - (.15)
------------ ------------ ------------ ------------
Combined $ .00 $ (.05) $ .02 $ (.15)
============ ============ ============ ============
</TABLE>
<PAGE>
AMENDMENT NO. 5
to
AMENDED AND RESTATED CREDIT AGREEMENT AND OTHER AGREEMENTS
This April 30, 1997, Amendment No. 5 to Amended and Restated
Credit Agreement and Other Agreements (the "Amendment No. 5"), is made by and
among JOSEPH M. LOBOZZO II, an individual having an office at 690 Portland
Avenue, Rochester, New York 14621 (the "Lender" or "Lobozzo"), JOANNE M.
LOBOZZO, the wife of Lobozzo, with an address of 756 Rock Beach Road, Rochester,
New York 14617 ("Joanne Lobozzo"), DELTA COMPUTEC INC., a New York corporation
having its principal place of business located at 900 Huyler Street, Teterboro,
New Jersey 07608 ("DCI"), DELTA DATA NET, INC., a New York corporation having
its principal place of business located at 900 Huyler Street, Teterboro, New
Jersey 07608 ("DDI", DCI and DDI are referred to collectively as the
"Borrower"), and SAI/Delta, Inc., a Florida corporation and a wholly-owned
subsidiary of DCI.
W I T N E S S E T H
A. This Amendment No. 5 is intended to amend in certain respects as set
forth herein, the terms and conditions of a certain Amended and Restated Credit
Agreement (the "October 1996 Credit Agreement", which term refers to the
original agreement issued on October 10, 1996, and as amended by Amendments Nos.
1, 2, 3 and 4, thereto, as described below) between the Borrower and Lobozzo and
Joanne Lobozzo whereby Lobozzo and Joanne Lobozzo have agreed to provide the
Borrower with Loans (as defined in the October 1996 Credit Agreement) up to
$2,550,000.
B. Pursuant to a document entitled Amended No. 1 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 1"), the interest
rate relative to the Lobozzo Commitment, the Additional Advances and the October
1996 Credit Agreement was reduced.
C. Pursuant to a document entitled Amended No. 2 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 2"), among other
matters dealt with therein, the Maturity Date of the October 1996 Credit
Agreement was extended to March 31, 1997, and certain other amendments or
waivers were made with regard to any non-compliance which may have existed with
the Borrowing Base (as defined in the October 1996 Credit Agreement.
D. Pursuant to a document entitled Amended No. 3 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 3"), Lobozzo
transferred to Joanne Lobozzo half of Lobozzo's rights, benefits, obligations
and interest with regard to: (i) an 8% Subordinated Debenture issued in October
1992 in the original face amount of $600,001; (ii) May, 1995 Letter Agreement
whereby Lobozzo agreed to provide the Lobozzo Commitment to the Borrower in the
original amount of $400,000; (iii) 1996 Additional Lobozzo Advances for the
period from July 25, 1996 through October 9, 1996 in the aggregate amount of
$633,600; (iv) Loan and the October 1996 Credit Agreement in an amount of up to
$2,550,000; and (v) Overbase Loans and the Overbase Loan Documents for the
amounts in whereby the Loans exceed the Borrowing Base as set forth in the
October 1996 Credit Agreement.
Page 26 of 32
E. Pursuant to a document entitled Amendment No.4 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 4"), among other
matters dealt with therein, the Maturity Date of the October 1996 Credit
Agreement was extended to April 30, 1997, and certain other amendments or
waivers were made with regard to any non-compliance which may have existed with
the Borrowing Base (as defined in the October 1996 Credit Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Incorporation of Recitals. The recitals set forth in the
recital paragraphs of this Amendment No. 5 are intended to be, and are,
incorporated into this Amendment No. 5 as a part hereof.
2. Amendment to Loan and October 1996 Credit Agreement.
(a) The parties hereto agree that, from and after the date
of this Amendment No. 5, the definition of the term "Maturity Date" set forth in
paragraph 1.1 of the October 1996 Credit Agreement be, and it hereby is, amended
to read as follows: "Maturity Date" means June 30, 1998.
(b) Schedule 2.1 of the October 1996 Credit Agreement is
hereby revised by adding eligibility factors for Eligible Receivables (as that
term is defined in the October 1996 Credit Agreement) for the month of April,
1997, as follows: "98.75% for the month of April, 1997".
3. Certain Waivers. Lender hereby waives any non-compliance
which may have existed with regard to the Borrowing Base for the period between
February 20, 1997, the date of Amendment No. 4, and April 30, 1997, the date of
this Amendment No. 5.
4. Reaffirmation of Terms. Except as amended by this
Amendment No. 5, and by the previous Amendments Nos. 1, 2, 3 and 4, the terms
and conditions of the original October 1996 Credit Agreement are hereby
reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 5 to
be duly executed and delivered by individual signatories and by the proper and
duly authorized officers of the Borrower as of the date first above written.
/s/ Joseph M. Lobozzo II
Joseph M. Lobozzo II
/s/ Joanne M. Lobozzo
Joanne M. Lobozzo
DELTA COMPUTEC INC.
By: /s/ John DeVito
John DeVito, President
Page 27 of 32
<PAGE>
DELTA DATA NET, INC.
By: /s/ John DeVito
John DeVito, President
SAI/DELTA, INC.
By: /s/ John DeVito
John DeVito, President
Page 28 of 32
<PAGE>
AMENDMENT No. 6
to
AMENDED AND RESTATED CREDIT AGREEMENT AND OTHER AGREEMENTS
This June 9, 1997, Amendment No. 6 to Amended and Restated
Credit Agreement and Other Agreements (the "Amendment No. 6"), is made by and
among JOSEPH M. LOBOZZO II, an individual having an office at 690 Portland
Avenue, Rochester, New York 14621 (the "Lender" or "Lobozzo"), JOANNE M.
LOBOZZO, the wife of Lobozzo, with an address of 756 Rock Beach Road, Rochester,
New York 14617 ("Joanne Lobozzo"), DELTA COMPUTEC INC., a New York corporation
having its principal place of business located at 900 Huyler Street, Teterboro,
New Jersey 07608 ("DCI"), DELTA DATA NET, INC., a New York corporation having
its principal place of business located at 900 Huyler Street, Teterboro, New
Jersey 07608 ("DDI", DCI and DDI are referred to collectively as the
"Borrower"), and SAI/Delta, Inc., a Florida corporation and a wholly-owned
subsidiary of DCI.
W I T N E S S E T H
A. This Amendment No. 6 is intended to amend in certain respects as set
forth herein, the terms and conditions of a certain Amended and Restated Credit
Agreement and Other Agreements (the "October 1996 Credit Agreement", which term
refers to the original agreement issued on October 10, 1996, and as amended by
Amendments Nos. 1, 2, 3, 4 and 5 thereto, as described below) between the
Borrower and Lobozzo and Joanne Lobozzo whereby Lobozzo and Joanne Lobozzo have
agreed to provide the Borrower with Loans (as defined in the October 1996 Credit
Agreement) up to $2,950,000.
B. Pursuant to a document entitled Amended No. 1 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 1"), the interest
rate relative to the Lobozzo Commitment, the Additional Advances and the October
1996 Credit Agreement was reduced.
C. Pursuant to a document entitled Amended No. 2 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 2"), among other
matters dealt with therein, the Maturity Date of the October 1996 Credit
Agreement was extended to March 31, 1997, and certain other amendments or
waivers were made with regard to any non-compliance which may have existed with
the Borrowing Base (as defined in the October 1996 Credit Agreement.
D. Pursuant to a document entitled Amended No. 3 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 3"), Lobozzo
transferred to Joanne Lobozzo half of Lobozzo's rights, benefits, obligations
and interest with regard to: (i) an 8% Subordinated Debenture issued in October
1992 in the original face amount of $600,001; (ii) May, 1995 Letter Agreement
whereby Lobozzo agreed to provide the Lobozzo Commitment to the Borrower in the
original amount of $400,000; (iii) 1996 Additional Lobozzo Advances for the
period from July 25, 1996 through October 9, 1996 in the aggregate amount of
$633,600; (iv) Loan and the October 1996 Credit Agreement in an amount of up to
$2,550,000; and (v) the Overbase Loans and the Overbase Loan Documents for the
amounts in whereby the Loans exceed the Borrowing Base as set forth in the
October 1996 Credit Agreement.
Page 29 of 32
<PAGE>
E. Pursuant to a document entitled Amendment No. 4 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 4"), among other
matters dealt with therein, the Maturity Date of the October 1996 Credit
Agreement was extended to April 30, 1997, and certain other amendments or
waivers were made with regard to any non-compliance which may have existed with
the Borrowing Base (as defined in the October 1996 Credit Agreement).
F. Pursuant to a document entitled Amendment No. 5 to Amended and
Restated Credit Agreement and Other Agreements ("Amendment No. 5"), among other
matters dealt with therein, the Maturity Date of the October 1996 Credit
Agreement was extended to June 30, 1998, and certain other amendments or waivers
were made with regard to any non-compliance which may have existed with the
Borrowing Base (as defined in the October 1996 Credit Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Incorporation of Recitals. The recitals set forth in the
recital paragraphs of this Amendment No. 6 are intended to be, and are,
incorporated into this Amendment No. 6 as a part hereof.
2. Amendment to Loan and October 1996 Credit Agreement.
(a) The parties hereto agree that, from and after the
date of this Amendment No. 6, Section 2.1 of the October 1996 Credit Agreement
is deleted in its entirety, and the following Section 2.1 is substituted in its
place and stead:
"2.1 Borrowing Base. As long as neither DCI
nor DDI are in default of any of their obligations to the Lender, the Lender may
lend to the Borrower, and the Borrower may borrow from the Lender, from time to
time, up to an aggregate outstanding principal amount at any time of $2,950,000,
or such lesser amount which is, with regard to Eligible Receivables which were
outstanding as of June 6, 1997 ("Pre-June 7 Eligible Receivables"), 130%, and,
with regard to Eligible Receivables which are created from and after June 7,
1997 ("Post-June 6 Eligible Receivables"), 100% of DCI's, DDI's and SAI/Delta's
Eligible Receivables. Borrower shall prepare and forward to Lender a report of
the Pre-June 7 Eligible Receivables and the Post-June 6 Eligible Receivables
within 3 business days of the 15th day and the last day of every calendar
month."
(b) Schedule 2.1 of the October 1996 Credit Agreement is
hereby revised by adding eligibility factors for Eligible Receivables (as that
term is defined in the October 1996 Credit Agreement) for the Pre-June 7
Eligible Receivables, as follows: "130%", and for "Post-June 6 Eligible
Receivables, as follows: "100%".
(c) A new Section 2.4(c) is added to the Credit Agreement as
follows:
"(c) In the event that, without maturity,
whether by acceleration or otherwise, the Borrower ever requests that the Lender
provide, and the Lender actually provides, Loans in excess of the Borrowing Base
as defined in Section 2.1 (such excess loans being defined as "Excess Borrowing
Base Loans", then, with regard to those Excess Borrowing Base Loans, the
Page 30 of 32
<PAGE>
Borrower agrees to pay interest on the outstanding principal amounts of those
Excess Borrowing Base Loans at the rate of five percent (5%) per annum above the
Prime Rate. All Excess Borrowing Base Loans are a part of the definition of
"Loans" as set forth in Section 1. The provisions of this Section 2.4(c) shall
not diminish or revise the provisions of Section 2.4 (providing for the payment
of interest on the outstanding principal amount of Loans both prior to maturity
(at one and three quarters of one percent [1 and 3/4% prior to maturity) and
after maturity (at three and three quarters percent [3 and 3.4%] after maturity)
by acceleration or otherwise."
3. Termination of May 1, 1995, Letter Agreement.
(a) As of May 1, 1995, Borrower, and DCI's subsidiary DDI
SAI/Delta, Inc. ("SAI/Delta", and together with Borrower, "Delta"), entered into
a letter agreement (the "Overadvance Letter Agreement") with National Canada
Finance Corp. ("NCFC"), then the Borrower's commercial lender, to provide for an
overadvance facility which permitted the Borrower to borrow up to an additional
$700,000 over the amount which would otherwise have been permitted by the
Borrower to borrow from NCFC under the then existing Credit Agreement between
the Borrower and NCFC. The overadvance facility whereby the Borrower was
permitted to exceed its borrowing base is referred to as the "Overadvance
Facility". Of the Overadvance Facility, the Overadvance Letter Agreement
provided that $400,000 would be advanced to the Borrower by Lobozzo prior to the
time that any funds were advanced by NCFC.
(b) As of October 10, 1996, Delta, Lobozzo and NCFC entered
into a series of agreements (collectively the "NCFC Restructuring") whereby,
among other matters, Lobozzo acquired from NCFC a portion of its various credit
facilities provided to Borrower, including, but not limited to, the then
outstanding portion of the Overadvance Facility then provided by NCFC to the
Borrower. As such, the NCFC portion of the Overadvance Facility was then
terminated.
(c) In 1997, Lobozzo transferred to his spouse, Joanne M.
Lobozzo ("Joanne Lobozzo"), half of his interest in the Overadvance Facility and
half of his interest in the Overadvance Letter Agreement, and Lobozzo and Joanne
Lobozzo became the "Lender" under the October 1996 Credit Agreement.
(d) As of May 1, 1997, the Borrower repaid the Lender the
balance of the then outstanding portion of the Overadvance Facility then
provided by the Lender to the Borrower. As such, as of May 1, 1997, the
Overadvance Facility then provided by the Lender to the Borrower was terminated.
The Overadvance Letter Agreement is also acknowledged by the parties to this
Amendment No. 6 to be null and void and of no further force and effect.
4. Certain Waivers. Lender hereby waives any non-compliance
which may have existed with regard to the Borrowing Base for the period between
April 30, 1997, the date of Amendment No. 5, and June 9, 1997, the date of this
Amendment No. 6.
5. Reaffirmation of Terms. Except as amended by this
Amendment No. 6, and by the previous Amendments Nos. 1, 2, 3, 4 and 5, the terms
and conditions
Page 31 of 32
<PAGE>
of the original October 1996 Credit Agreement are hereby reaffirmed in their
entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 6 to
be duly executed and delivered by individual signatories and by the proper and
duly authorized officers of the Borrower as of the date first above written.
/s/ Joseph M. Lobozzo II
Joseph M. Lobozzo II
/s/ Joanne M. Lobozzo
Joanne M. Lobozzo
DELTA COMPUTEC INC.
By: /s/ John DeVito
John DeVito, President
DELTA DATA NET, INC.
By: /s/ John DeVito
John DeVito, President
SAI/DELTA, INC.
By: __________________
John DeVito, President
Page 32 of 32
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,147,815
<ALLOWANCES> 130,264
<INVENTORY> 977,693
<CURRENT-ASSETS> 2,953,569
<PP&E> 559,745
<DEPRECIATION> 329,536
<TOTAL-ASSETS> 6,365,850
<CURRENT-LIABILITIES> 7,432,384
<BONDS> 0
0
0
<COMMON> 182,521
<OTHER-SE> (2,599,056)
<TOTAL-LIABILITY-AND-EQUITY> 6,365,850
<SALES> 3,573,566
<TOTAL-REVENUES> 7,030,448
<CGS> 4,542,797
<TOTAL-COSTS> 6,488,186
<OTHER-EXPENSES> 205,384
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 336,878
<INCOME-TAX> 0
<INCOME-CONTINUING> 336,878
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 336,878
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
