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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, 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 March 5, 1997, there were 18,252,050 common shares outstanding of the
Registrant's Common Shares $.01 par value.
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DELTA COMPUTEC INC.
Form 10-Q
Quarter Ended January 31, 1997
INDEX
Part I: Financial Information Page
----
Item 1. Financial Statements
Consolidated balance sheets at January 31, 1997 and
October 31, 1996 3-4
Consolidated statements of operations for the three
months ended January 31, 1997 and 1996 5
Consolidated statement of cash flows for the three months
January 31, 1997 and 1996 6
Notes to consolidated financial statements 7-12
Item 1. Management's Discussion and Analysis of Operations and
Financial Condition 13-15
Part II: Other Information
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Calculation of Earnings Per Share 21
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DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited) (Unaudited)
January 31, October 31,
1997 1996
----------- -----------
CURRENT ASSETS:
Cash $ - $ -
Accounts receivable, less allowance
for doubtful accounts of $337,683
and $337,721 at January 31, 1997
and October 31, 1996, respectively 1,932,412 2,824,054
Inventories 1,557,842 1,472,766
Prepaid expenses and other current assets 305,181 582,818
---------- ----------
Total current assets $3,795,435 $4,879,638
FIELD SPARE PARTS, net of accumulated
amortization $2,147,222 $2,034,266
PROPERTY AND EQUIPMENT, at cost:
Technical equipment $1,267,709 $1,267,709
Office furniture and equipment 585,916 580,182
Vehicles 74,614 74,614
Leasehold improvements 78,531 70,172
Software 15,350 -
---------- ----------
$2,022,120 $1,992,677
Less: Accumulated depreciation 1,819,880 1,791,527
---------- ----------
$ 202,240 $ 201,150
DEFERRED INCOME TAXES $ 150,000 $ 150,000
OTHER ASSETS:
Goodwill, less accumulated amortization of
$397,431 and $388,593 at January 31, 1997
and October 31, 1996, respectively $ 197,600 $ 206,438
Customer lists, less accumulated amortization
of $256,251 and $253,730 at January 31, 1997
and October 31, 1996, respectively - 2,588
Other assets 314,898 232,464
---------- ----------
512,498 $ 441,490
---------- ----------
$6,807,395 $7,706,544
========== ==========
See notes to consolidated financial statements.
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DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
(Unaudited) (Unaudited)
January 31, October 31,
1997 1996
----------- -----------
CURRENT LIABILITIES:
Accounts payable $ 2,181,146 $ 2,727,803
Deferred service revenue 1,788,914 2,131,491
Accrued expenses
Payroll and payroll taxes 237,198 221,573
Interest 107,409 136,895
Sales tax payable 468,861 513,806
Other 286,767 308,929
Short-term debt 2,655,461 2,682,141
----------- -----------
Total current liabilities $ 7,725,756 $ 8,722,638
LONG-TERM DEBT $ 750,000 $ 750,000
SUBORDINATED DEBENTURES $ 600,001 $ 675,001
RESERVE FOR DISCONTINUANCE OF OPERATIONS (5,481) (5,481)
STOCKHOLDERS' INVESTMENT
Common stock, $ .01 par value;
authorized 20,000,000 shares;
issued and outstanding 6,811,575
at January 31, 1997 and October 31, 1996 $ 68,116 $ 68,116
Additional paid-in capital 4,916,093 4,916,093
Accumulated deficit, beginning (7,419,823) (7,589,330)
Net Income (Loss), Current Period 172,733 169,507
----------- -----------
Total stockholders' investment (2,262,881) (2,435,614)
----------- -----------
$ 6,807,395 $ 7,706,544
=========== ===========
See notes to consolidated financial statements.
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DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
January 31,
-----------------------------
1997 1996
----------- -----------
REVENUES FROM CONTINUING OPERATIONS:
Service revenues $ 3,470,932 $ 2,273,553
Equipment sales 102,634 214,032
----------- -----------
$ 3,573,566 $ 2,487,585
COSTS AND EXPENSES:
Service costs $ 2,331,443 $ 1,828,202
Cost of equipment sold 81,196 156,450
Selling, general and administrative 913,888 476,280
----------- -----------
TOTAL OPERATING EXPENSES $ 3,326,527 $ 2,460,932
OTHER INCOME (EXPENSE), NET $ 3,069 $ (78,111)
----------- -----------
EARNINGS(LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES $ 250,108 $ (51,458)
INCOME TAXES $ - $ -
----------- -----------
NET EARNINGS(LOSS) FROM CONTINUING
OPERATIONS $ 250,108 $ (51,458)
----------- -----------
NET LOSSES FROM
DISCONTINUED OPERATIONS (77,375) (549,404)
----------- -----------
NET EARNINGS (LOSS) $ 172,733 $ (600,862)
=========== ===========
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
CONTINUING OPERATIONS $ .04 $ (.01)
DISCONTINUED OPERATIONS (.01) (.08)
----------- -----------
COMBINED $ .03 $ (.09)
=========== ===========
See notes to consolidated financial statements.
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DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
January 31,
-----------------------
1997 1996
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings(loss) 172,733 (600,862)
Adjustments to reconcile net earnings/(loss)
to net cash provided/(used) by operating
activities:
Depreciation & amortization 28,353 320,439
Accounts receivable 891,642 82,933
Inventories (216,253) 235,292
Prepaid and other current assets 322,407 174
Accounts payable (546,657) (86,078)
Accrued expenses (36,023) 107,235
Sales taxes payable (44,945) 206,414
Deferred service revenue (342,577) 270,101
--------- ---------
Net cash flow from operating activities $ 228,680 $ 535,648
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures, including field
spare parts (55,992) (172,125)
Investment in intangibles and other assets (71,008) 23,310
--------- ---------
Net cash flow from investing activities $(127,000) $(148,815)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from (payment on) short-term debt $ (26,680) $ 146,093
Net proceeds (payment) on bank loan - (557,510)
(Payment) on subordinated debenture (75,000) (-)
--------- ---------
Net cash flow from financing activities $(101,680) $(411,417)
--------- ---------
NET INCREASE (DECREASE) IN CASH $ - $ (24,584)
---------
CASH - beginning of year $ - (245,249)
CASH - end of period $ - $(269,833)
========= =========
See notes to consolidated financial statements.
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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. Effective March 8, 1996, the operations of the
Registrant's wholly-owned subsidiary, Delta Data Net, Inc. ("Data Net"),
were discontinued. As mentioned above, Data Net discontinued operations
effective March 8, 1996 and consequently had no financial transactions
during the three months ended January 31, 1997. Data Net's net loss of
$356,207 (20%) is included in the income statement for the three months
ended January 31, 1996 in losses from discontinued operations.
Management of the Registrant decided in the fourth quarter of Fiscal 1996 to
close the Intronet Division in Waltham, Massachusetts, the division's staff
was downsized to one employee by the end of Fiscal 1996 and termination of
the division's operation was completed in the first quarter of Fiscal 1997.
Management has refocused the Registrant's efforts on its core business of
providing Integrated Technology Solutions for computer systems, network
environments and telecommunication systems.
In November, 1994, the Company completed the acquisition of certain of the
assets, and the assumption of certain of the liabilities (the "Intronet
Acquisition"), of Intronet, Inc. ("Intronet, Inc."), 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. Until August,
1996, the Intronet Division's primary focus had been the design,
installation and support of advanced computer networks in such specialty
markets as large campuses and industrial facilities which require network
hubbing integrated with fiber and copper cabling.
Because of the significant losses in the Intronet business, in the fall of
1995 the Company reduced the size of the operating staff of the Intronet
Division. As a result of continuing losses, management subsequently decided,
in the fourth quarter of Fiscal 1996, to close the Intronet Division. The
Intronet Division's staff was downsized to one employee by the end of Fiscal
1996, and termination of the Intronet Division's operation was completed in
the first quarter of Fiscal 1997. 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 $77,375
(105%) for the three months ended January 31, 1997 and $193,197 (33%) for
the three months ended January 31, 1996 are included in the income statement
in losses from discontinued operations for those respective periods.
Management has refocused the Registrant's efforts on its core business of
providing Integrated Technology Solutions for computer systems, network
environments and telecommunication systems.
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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.
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 accompanying consolidated financial statements have been prepared
assuming the Registrant will continue as a going concern. The Registrant
incurred operating losses in fiscal 1994, 1995 and 1996. As previously
reported by the Registrant in a Current Form 8-K dated March 21, 1996, the
Registrant's Data Net subsidiary terminated its business operations and
ceased operations due to economic conditions in its industry.
As reported above (See "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 division's operation was completed in the first
quarter of Fiscal 1997.
The operating results for continuing operations for the three months ended
January 31, 1997 and for the three months ended January 31, 1996 are for the
Company's core business and do not include the Registrant's Data Net
subsidiary or its Intronet Division. The net losses in Data Net (for the
three months ended January 31, 1996 only) and Intronet are included in the
income statement in losses from discontinued operations for those respective
periods.
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
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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, peripherals and consumable parts
held for resale in the normal course of business. 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
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.
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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
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) Registrant's Debt Position
Long-term debt consists of the following at January 31, 1997 and October 31,
1996, respectively:
1/31/97 10/31/96
------- --------
Note payable to bank, due in full on October 10,
2001 with interest payable monthly at prime plus
1.0%, collateralized by field spare parts inventory
("the term loan") 750,000 750,000
-------- --------
Total Long-term Debt $750,000 $750,000
======== ========
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,
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 described above. The terms of the Lobozzo
Loan, as amended, provide that: (1) the maximum loan amount is $2,550,000;
(2) the interest rate is 1.75% above the prime lending rate; (3) the
borrowing base shall be initially equal to 105% of the eligible receivables
and shall be reduced at an agreed-upon rate; (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 April 30, 1997. 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. The
remaining amounts are included in short-term debt. As of January 31, 1997
there was $2,180,461 outstanding under the shareholder loan, which balance
included advances totaling $633,600 ("Overline Advances") received from
Lobozzo prior to the NCFC Restructuring. In addition, as of October 31, 1996
and January 31, 1997, the Company was obligated to Lobozzo in the principal
amount of $400,000 as a result of a May, 1995 Lobozzo Commitment to provide
additional financing to the Company. In connection with the Lobozzo
Commitment, the Company issued a May, 1995 Option Agreement
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entitling Lobozzo to purchase 11,440,475 shares of the Company's common
shares. Subsequent to January 31, 1997, the option, as amended and restated,
was exercised in full by Lobozzo and his spouse and 11,440,475 common shares
were issued.
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. Lobozzo has pledged 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, the shareholder transferred half of this debt
obligation to Joanne Lobozzo, his wife.
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 Seller 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 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 the shareholder to purchase 1,304,350 shares of the Company's
common shares. Lobozzo has waived the $200,000 payment due in Fiscal 1996.
Subsequent to January 31, 1997, Lobozzo transferred to his spouse half of
the Lobozzo Loan (as then outstanding), the Overline Advances, the Lobozzo
Debenture and the Lobozzo Commitment.
(3) Other Matters
The Company suffered significant losses for the 1995 Fiscal Year ended
October 31, 1995. 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 its 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 April 1997. The unaudited
financial statements for the 1996 Fiscal Year as set forth in this Form 10-Q
Quarterly Report indicate that the significant losses of the 1995 Fiscal
Year have abated. The unaudited financial statements for the first quarter
of Fiscal 1997 show continued improvement in the Company's financial
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position. These figures are not a guarantee that the improved financial
position can continue into the future.
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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
January 31, 1997 was $250,108 (7%), or $.04 per share, compared to a net loss
from continuing operations of $51,458 (2%), or $.01 per share, for the three
months ended January 31, 1996. The improvement of $301,566 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 terminated operations in
its Data Net subsidiary which had commenced operations in November, 1992. Data
Net incurred a net loss of $356,207 (20%), or $.05 per share, for the quarter
ended January 31, 1996 which is reported in the income statement 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's losses
of $77,375 (105%) for the three months ended January 31, 1997 and $193,197 (33%)
for the three months ended January 31, 1996 are included in the income statement
in losses from discontinued operations for those respective periods.
Revenues
Revenues from continuing operations were $3,573,566 for the three months ended
January 31, 1997, compared to $2,487,585 for the three months ended January 31,
1996, an increase of $1,085,981 and 44%. Service revenues for the three months
ended January 31, 1997 were $3,470,932, compared to $2,273,553 for the three
months ended January 31, 1996, an increase of $1,197,379 and 53%. The increase
in service revenue reflects the revenue derived in the first quarter of fiscal
1997 from a contract with a major municipality, which contract had been signed
just prior to the beginning of the current fiscal year, as well as a resurgence
in business with the Company's existing customers. Equipment sales for the three
months ended January 31, 1997 were $102,634, compared to $214,032 for the three
months ended January 31, 1996, a decrease of $111,398 and 52%. The decline in
equipment sales reflects the Registrant's emphasis on its core service
maintenance and installation business.
Costs and Expenses
Service costs in continuing operations were $2,331,443 (67%) for the three
months ended January 31, 1997, compared to $1,828,202 (80%) for the three months
ended January 31, 1996. Service costs as a percentage
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of service revenue decreased from 80% for the three months ended January 31,
1996 to 67% for the three months ended January 31, 1997 due to the stronger
revenue performance in the Company's core business in the first quarter of
fiscal 1997 without a commensurate increase in direct expenses.
Cost of equipment sold in continuing operations was $81,196 (79%) for the three
months ended January 31, 1997, compared with $156,450 (73%) for the three months
ended January 31, 1996. The increase in cost of equipment sold as a percentage
of equipment sales from 73% for the three months ended January 31, 1996 to 79%
for the three months ended January 31, 1997 was due to the detrimental effect of
the Company's tight cash flow upon its ability to purchase equipment at
competitive prices.
Selling, general and administrative expenses in continuing operations were
$913,888 (26%) for the three months ended January 31, 1997, compared with
$476,280 (19%) for the three months ended January 31, 1996, an increase of
$437,608 or 92%, as compared to the 53% rise in service revenue for the same
periods. The increase in SG&A costs was primarily due to additional personnel
and associated costs as well as increased recruitment fees for requisite hiring
in connection with new business as well as replacement hires.
Total operating expenses in continuing operations were $3,326,527 (93%) for the
three months ended January 31, 1997, compared with $2,460,932 (99%) for the
three months ended January 31, 1996, an increase of $865,595 or 35%.
Other income was $3,069 for the three months ended January 31, 1997, compared
with other expenses of $78,111 (3%) for the three months ended January 31, 1996,
an improvement of $81,180. The increase was due to income realized on settlement
of trade debt obligations.
Income from continuing operations was $250,108 (7%) for the three months ended
January 31, 1997, compared with a loss from continuing operations of $51,458
(2%) for the three months ended January 31, 1996, an improvement of $301,566.
Income tax expense was $0 for the three months ended January 31, 1997 and the
three months ended January 31, 1996. 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.
Liquidity and Capital Resources
The Company experienced significant operating losses as a result of both the
Data Net acquisition in November, 1992 and the Intronet acquisition in November,
1994. These operating losses incurred by the Company's Data Net subsidiary and
its Intronet Division have had a material, adverse effect on the Company's
liquidity and hampered its ability during Fiscal 1995 and Fiscal 1996 to develop
its core business. As discussed in Note 3 to the Financial Statements ("Other
Matters"), the significant losses incurred by the Company in Fiscal 1995 have
abated, and the Company has demonstrated a continued improvement in the first
quarter of Fiscal 1997. There is no guarantee that the improvement in the
Company's operating performance will continue into the future.
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Cash flow from operations for the three months ended January 31, 1997 was
$228,680, compared with $535,648 for the three months ended January 31, 1996, a
decrease in sources of cash of $306,968 and 57%. This resulted primarily from a
$612,678 decline in deferred service revenue, an aggregate $175,799 (32%)
decrease in funds from other sources of working capital and a $292,085 (91%)
decrease in non-cash charges from depreciation and amortization, offset in part
by a $773,595 increase in net income.
Cash used in investing activities for the three months ended January 31, 1997
was $127,000, compared with $148,815 for the three months ended January 31,
1996, a decrease in uses of cash of $21,815 and 15%. Capital expenditures for
spare parts and property, plant and equipment were $55,992 for the three months
ended January 31, 1997 compared with $172,125 for the three months ended January
31, 1996, a decrease in uses of cash of $116,133 and 68%. Investment in
Long-Term Assets used $71,008 in funds, an increase of $94,318 compared to
$23,310 in funds provided in the prior year's fiscal period.
Cash used in financing activities for the three months ended January 31, 1997
was $101,680, compared with $411,417 for the three months ended January 31,
1996, a decrease in uses of cash of $309,737 and 75%. This essentially reflects
the $75,000 payment in the first quarter of fiscal 1997 on a repurchase of
certain subordinated debt, a reduction of payments on bank debt as a result of
the conversion of the Registrant's prior debt to its then commercial lender into
a term loan in the fourth quarter of Fiscal 1996 as part of the restructuring of
its debt, offset in part by payments on short-term debt.
The net result of the above was a $0 use of cash for the three months ended
January 31, 1997, compared to a $24,584 use of cash for the three months ended
January 31, 1996.
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DELTA COMPUTEC, INC.
PART II
OTHER INFORMATION
Item 2. Changes in Securities.
As reported in a Form 8-K Current Report filed February 24, 1997, in
December, 1996, Joseph M. Lobozzo II ("Joseph Lobozzo"), a director, officer,
principal shareholder and control person of the Registrant, Delta Computec Inc.
("Registrant"), gifted a portion of his common shareholdings in the Registrant
to his adult children (an aggregate of 600,000 common shares), sold a portion of
his common shareholdings in the Registrant to certain business associates and
others (an aggregate of 750,000 common shares) and gifted 74,875 common shares
to his spouse, Joanne M. Lobozzo ("Joanne Lobozzo"). During January and
February, 1997, Joseph Lobozzo also transferred to Joanne Lobozzo, approximately
half of his interest in certain debt obligations of the Registrant to him, and
approximately half of the stock options which had been issued to him by the
Registrant from time to time. In February, 1997, Joseph Lobozzo and Joanne
Lobozzo exercised a Second Amended and Restated May 1995 Stock Option Agreement
(the "May 1995 Option Agreement") and received, for the payment of an aggregate
of $10.00, respectively 5,720,238 and 5,720,237 common shares of the Registrant.
As a result of the exercise of the May, 1995 Option Agreement, the Registrant
considers, in view of her other holdings of securities of the Registrant as
detailed below, that Joanne Lobozzo has become a control person of the
Registrant.
As a result of the exercise of the May 1995 Option Agreement, the number of
issued and outstanding common shares of the Registrant increased from 6,811,575
common shares to 18,252,050 common shares.
Following the above-referenced transfers, Joseph Lobozzo held the following
securities of the Registrant: (a) 6,730,113 common shares, of which 480,000
common shares are pledged to National Canada Finance Corp. ("NCFC"), the
Registrant's former commercial lender, and 435,000 are owned by JML Optical
Industries, Inc. ("JML"), of which Joseph Lobozzo is the chairman, a director
and principal shareholder; (b) a Second Amended and Restated October 1992 Stock
Option Agreement to purchase 652,175 common shares; (c) a Second Amended and
Restated 8% Subordinated Debenture due January 31, 1998, in the principal amount
of $300,000.50; (d) a portion of the Lobozzo Commitment in the face amount of
$200,000; (e) 1996 Additional Lobozzo Advances in the amount of $316,800; (f) a
portion of the Lobozzo Loan which was established pursuant to the Second Amended
and Restated October 1996 Credit Agreement (the "October 1996 Credit Agreement")
of up to $1,275,000, which, as at February 28, 1997, amounted to approximately
$1,196,000; and (g) half of the "Overbase Loans" as they may exist from time to
time, consisting of the amount of Loans permitted under the October 1996 Credit
Agreement which exceed by an amount of at least $300,000 over the amount which
would otherwise be permitted by the Borrowing Base (as those capitalized terms
are defined in the October 1996 Credit Agreement). As at February 28, 1997, such
Overbase Loans, included in the
Page 16 of 21
<PAGE>
Lobozzo Loan figure in subparagraph (f) above, attributable to Joseph Lobozzo,
were approximately $12,000.
Following the above-referenced transfers, Joanne Lobozzo held the following
securities of the Registrant: (a) 5,815,112 common shares; (b) a Second Amended
and Restated October 1992 Stock Option Agreement to purchase 652,175 common
shares; (c) a Second Amended and Restated 8% Subordinated Debenture due January
31, 1998, in the principal amount of $300,000.50; (d) a portion of the Lobozzo
Commitment in the face amount of $200,000; (e) 1996 Additional Lobozzo Advances
in the amount of $316,800; (f) a portion of the Lobozzo Loan which was
established pursuant to the October 1996 Credit Agreement of up to $1,275,000,
which, as at February 28, 1997, amounted to approximately $1,196,000; and (g)
half of the "Overbase Loans" as they may exist from time to time. As at February
28, 1997, such Overbase Loans, included in the Lobozzo Loan figure in
subparagraph (f) above, attributable to Joanne Lobozzo, were approximately
$12,000. Joanne Lobozzo has also agreed with Joseph Lobozzo to fulfill half of
Joseph Lobozzo's obligations under the various debt obligations and with regard
to Joseph Lobozzo's obligations to NCFC pursuant to a Pledge Security Agreement
dated October 10, 1996, to provide NCFC, under certain circumstances, if there
is a default under the $750,000 term loan from the Registrant to NCFC, with
securities which, when added to the 480,000 common shares which Joseph Lobozzo
has pledged to NCFC, would entitle NCFC to up to 17.5% of the issued and
outstanding common shares of the Registrant.
None of the security holdings of Joseph Lobozzo or Joanne Lobozzo as set
forth above include the 900,000 common shares held by their three adult children
(300,000 common shares each) as to which Joseph Lobozzo and Joanne Lobozzo
disclaim any control or beneficial interest.
The October 1996 Credit Agreement has been amended four times since its
execution to provide, in part, that the maturity date thereof has been extended
to April 30, 1997, and to provide for a reducing factor for Eligible Receivables
(as that term is defined in the October 1996 Credit Agreement) from 105% (for
the month of October 1996) to 97.5% for April, 1997. The amount previously
permitted by NCFC under its credit agreement with the Registrant was 80%. The
amount of interest rate under the October 1996 Credit Agreement is less than the
interest rate charged by NCFC and, subsequent to the execution of the October
1996 Credit Agreement, the interest rates on other debt obligations of the
Registrant to Joseph Lobozzo and Joanne Lobozzo have been reduced to match the
interest rate charged under the October 1996 Credit Agreement (except for the 8%
Subordinated Debenture which was already at a lower interest rate).
Item 3. Defaults Upon Senior Securities.
See Note 2 to the accompanying unaudited financial statements.
Page 17 of 21
<PAGE>
Item 5. Other Information.
As is reflected in this Form 10-Q Quarterly Report, Quarterly Reports for
the fiscal year ended October 31, 1996 ("Fiscal 1996"), and Form 8-K Current
Reports for May, 1995, June, 1995, March, 1996, October, 1996, November, 1996
and February 24, 1997 (collectively, the "8-K Reports"), the Registrant has
undergone a major transformation. The Registrant has downsized operations and
divested an unprofitable, wholly-owned subsidiary, Delta Data Net, Inc. ["Data
Net"]. Data Net terminated its business operations and surrendered its assets to
NCFC in March, 1996, pursuant to the NCFC Credit Agreement. The Registrant also
closed a division. Management of the Registrant decided in the fourth quarter of
Fiscal 1996 to close the Intronet Division in Waltham, Massachusetts, the
Intronet Division's staff was downsized to one employee by the end of Fiscal
1996 and termination of the Intronet Division's operation was completed in the
first quarter of Fiscal 1997. Management has refocused the Registrant's efforts
on its core business of providing Integrated Technology Solutions for computer
systems, network environments and telecommunication systems.
The Registrant no longer distributes computer hardware through Data Net,
manufactures custom computer cables for resale or installs data related premise
wiring through the former Intronet Division.
The Registrant does provide highly technical specialized computer/
telecommunication services that include: consulting services ranging from
systems administration to software development and integration; network
services, including design, installation administration and management; hardware
maintenance; Help Desk support; connectivity services (PDS, Telco circuit
procurement and custom cables); product procurement services; and project
management.
Many of the Registrant's customers have not only remained loyal to the
Registrant through the difficult transition period, but some customers have
expanded the amount of services which the Registrant provides to them.
Management has announced that two recent contract awards have occurred
which exemplify the Registrant's progress and, as a result, management is of the
opinion that the Registrant is in a much improved position going forward. The
two contracts are as follows:
- The Registrant has been awarded a five-phase system integration
project from the Town of Fairfield, Connecticut. The installation phase of this
project is expected to be completed in mid-March, 1997. The project includes
premises distribution wiring, installation of 121 Desktop Client Work Stations,
installation of network equipment, installation of file servers and a Network
Maintenance Station and installation of network printers. Upon completion of the
installation phase, the Registrant will also provide maintenance services and
Help Desk support for all equipment installed. The total project revenue is
expected to be approximately $1,000,000.
Page 18 of 21
<PAGE>
- A major, multi-location financial services firm has awarded the
Registrant a contract for hardware maintenance and software support of a 1,300
Work Station/10 related File Server and Printer environment. The Registrant will
assign 12 persons to the site to provide a continuum of services, hardware
maintenance, software support, Help Desk services, installation and upgrades.
The total project revenue is expected to be in excess of $1,000,000. The
Registrant also expects to provide project support to this client for inventory
asset management with bar coding and software control.
As was noted in a Form 8-K Current Report dated November 22, 1996, as of October
31, 1996, the Registrant signed a letter agreement, and later completed the
transaction contemplated by the letter agreement, whereby, an 8% Subordinated
Debenture of the Registrant and Data Net in the face amount of $475,000, due
October 31, 1997 (the "Debenture"), was purchased by the Registrant from the
holders of the Debenture for $75,000, which amount included all principal and
interest due on the Debenture. The Debenture was issued in 1992 to the two
corporations as part of a transaction whereby Data Net purchased from those
corporations certain of their assets. The parent of those two corporations,
Rexel, Inc. (formerly Willcox & Gibbs, Inc.), holds $1,000,000 common shares of
the Registrant. The Registrant and Data Net were, at the time of purchase of the
Debenture, in default under the Debenture in the amount of $55,384. The purchase
of the Debenture resulted in an extraordinary gain to the Registrant of
$455,384, which amount was recorded in Fiscal 1996 and is included in the
Registrant's consolidated balance sheet as an offset of a portion of the
Registrant's consolidated net loss for Fiscal 1996. The funds for the purchase
of the Debenture were made available as a result of a portion of the financing
provided to the Registrant by Lobozzo.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibit 11 - Statement regarding computation of earnings per share.
(b) Reports on Form 8-K which were filed during the quarter for which this
Form 10-Q Quarterly Report is filed are as follows:
November 24, 1996, Item 5, Other Information. No financial statements
were filed.
Subsequent to the close of the fiscal quarter for which this Form 10-Q Quarterly
Report is filed, the Registrant filed another Form 8-K Current Report as
follows:
February 24, 1997, Item 1, Change of Control of the Registrant and Item 5, Other
Information. No financial statements were filed.
Page 19 of 21
<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: March 7, 1997 DELTA COMPUTEC INC.
By: /s/ John DeVito
John DeVito, President
By: /s/ Frank J. Donnelly
Frank J. Donnelly
Chief Financial Officer and
Principal Accounting Officer
Page 20 of 21
<PAGE>
Exhibit 11
DELTA COMPUTEC INC. - CALCULATION OF EARNINGS PER SHARE
Three Months Ended
January 31,
---------------------------
1997 1996
----------- -----------
Primary
Net Earnings (Loss):
Continuing Operations $ 250,108 $ (51,458)
Discontinued Operations (77,375) (549,404)
----------- -----------
Net Earnings(Loss), Combined 172,733 (600,862)
=========== ===========
Average Common Shares Outstanding 6,811,575 6,811,575
Dilutive Effect of Stock Options - -
----------- -----------
Weighted Average Shares Outstanding 6,811,575 6,811,575
----------- -----------
Earnings (Loss) Per Common and
Common Equivalent Shares:
Continuing Operations $ .04 $ (.01)
Discontinued Operations (.01) (.08)
----------- -----------
Combined .03 (.09)
=========== ===========
Page 21 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 2,270,095
<ALLOWANCES> 337,683
<INVENTORY> 1,557,842
<CURRENT-ASSETS> 3,795,435
<PP&E> 4,169,342
<DEPRECIATION> 1,819,880
<TOTAL-ASSETS> 6,807,395
<CURRENT-LIABILITIES> 7,725,756
<BONDS> 0
0
0
<COMMON> 68,116
<OTHER-SE> (2,330,997)
<TOTAL-LIABILITY-AND-EQUITY> 6,807,395
<SALES> 3,573,566
<TOTAL-REVENUES> 3,573,566
<CGS> 2,412,639
<TOTAL-COSTS> 3,326,527
<OTHER-EXPENSES> (3,069)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 250,108
<INCOME-TAX> 0
<INCOME-CONTINUING> 250,108
<DISCONTINUED> (77,375)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 172,733
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
