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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended October 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
366 White Spruce Boulevard
Rochester, New York 14623
(Address of principal executive offices) (Zip Code)
201-440-8585
(Registrant's telephone number, including area code)
Securities registered pursuant of Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
------------------- -------------------
Common Stock $.01 par value --
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [_] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $474,897. Market value is determined by reference to the price
(average between bid and ask) of Registrant's Common Stock as reported on the
NASDAQ "Bulletin Board" as of the close of business on August 15, 1997.
The number of common shares outstanding as of August 15, 1997 was
18,252,050.
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DOCUMENTS INCORPORATED BY REFERENCE
Exhibit Index is located on Page 79.
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PART I
Item 1. Business
A. General
Delta Computec Inc. (the "Registrant" or the "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 Intronet Division and
the closing of this location in December, 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,
maintenance, help desk, premise wiring services, network administration and
on-site technical management and consulting.
While the Company maintains its corporate headquarters in Rochester, New
York, its main center of operations is located in Teterboro, New Jersey. The New
York Metropolitan area is serviced from the Teterboro office while other areas
of the country are supported by branch locations in: Escondido, California;
Altamonte Springs, Florida; Sunrise, Florida; Beltsville, Maryland;
Feasterville, Pennsylvania; and Wilmington, Delaware. The Company, a New York
Corporation, is qualified to do business in California, Connecticut, Georgia,
Illinois, Louisiana, Maryland, Massachusetts, Ohio, Pennsylvania, Texas and New
Jersey. SAI/Delta is a Florida corporation.
Termination of Business of Delta Data Net, Inc.
In November, 1992, the Company, through its wholly-owned subsidiary, Delta
Data Net, Inc. ("Data Net"), completed the acquisition of certain of the assets,
and the assumption of certain of the liabilities (the "Willcox & Gibbs
Acquisition") of Willcox & Gibbs Data Net, Inc. ("W&G Data Net"), and Dataspan
Systems, Inc. ("W&G Dataspan"), subsidiaries of Willcox & Gibbs, Inc. ("Willcox
& Gibbs"). The historical focus of W&G Data Net's business prior to the Willcox
& Gibbs Acquisition had been the sale of Data Communications hardware and test
equipment. W&G Dataspan had focused exclusively on the sale and assembly of
cables used in data communication applications. Because of the significant and
continuing losses in Data Net's business lines since the Willcox & Gibbs
Acquisition, on March 21, 1996 the Registrant filed a Form 8-K Current Report
(the "March, 1996 Form 8-K Report") announcing that, effective March 8, 1996,
Data Net had terminated its business operations and had surrendered all of its
assets to its commercial lender (See "A Return to the Company's Core Business",
and "Additional Changes In NCFC Financing
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Arrangements, NCFC Forbearance Agreement And Amendments to NCFC Forbearance
Agreement", below, and Item 13, "Certain Transactions - Lobozzo Transactions").
Closing of the Intronet Division
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 thereafter
formed the basis of the Company's Intronet Division ("Intronet" or the "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 college
campuses and industrial facilities which require network hubbing integrated with
fiber and copper cabling. Because of the significant losses in the Intronet
Division's business, in the fall of 1995 the Company reduced the size of the
operating staff of the Intronet Division. Management subsequently decided in the
fourth quarter of Fiscal 1996 to terminate operations at the Intronet Division.
The Company assimilated the regional area and certain customers serviced by the
Intronet Division into the Company's core business and closed the Intronet
Division in Waltham, Massachusetts in December, 1996.
SAI/Delta Transaction
In December, 1994, the Company acquired the balance of ownership (33%) in
the technical services company of which it had been the majority owner,
SAI/Delta, which operated from SAI/Delta's two Florida offices in Altamonte
Springs and Sunrise.
In addition to the termination of the business operations of Data Net and
the closing of the Intronet Division, other significant events which occurred in
Fiscal 1995 and Fiscal 1996, or subsequent thereto, included:
1. Changes In The Company's Senior Management
In March, 1995 and May, 1995, respectively, L. Rodger Loomis, President and
Chief Executive Officer, and Peter D. Smith, Chief Financial Officer,
resigned as officers of the Registrant and all of its subsidiaries.
Following these resignations, John T. DeVito ("DeVito") was named President
and Chief Operating Officer, and the Registrant's Board of Directors
performed services as an executive management committee. A copy of the
letter of employment between the Company and DeVito is annexed to this Form
10-K Report as Exhibit A. In April, 1995, the position of Chief Accounting
Officer was filled by Walter Struble, who sadly and unexpectedly died at
the age of 41 years in December, 1995. In February, 1996, the position of
Chief Financial Officer and Chief
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Accounting Officer was filled by Frank J. Donnelly. In order to assist in
the focusing of efforts on its core business operations as well as to
further its strategic objectives, Edward Drohan ("Drohan") joined the
Registrant in June, 1996 as its Vice President, Sales and Marketing. A copy
of the letter of employment between the Company and Drohan is annexed to
this Form 10-K Report as Exhibit B.
2. A Return To The Company's Core Business
In April, 1995, management and the Board of Directors determined to return
the Company's strategic direction back to its core business of providing
technical integration services to customers while de-emphasizing the
product and system engineering aspects of Data Net. The decision was based
on the large overhead costs necessary to support the business of Data Net
as well as anticipated changes in market conditions leading to increased
competition and lower gross margins.
Consistent with this shift in strategic direction, management instituted
approximately $1,200,000 in payroll reductions and approximately $300,000
to $400,000 of additional cost savings through expense reductions. The
impact of these cost reductions was partially recognized in the third
quarter of Fiscal 1995, with most of the balance of the cost reductions
being fully recognized in the fourth quarter of Fiscal 1995.
As reported in Item 1 (A) above, because of the significant and continuing
losses in Data Net's business lines since the Willcox & Gibbs Acquisition,
Data Net terminated its business operations effective March 8, 1996 and
surrendered all of its assets to its commercial lender.
As further reported in Item 1 (A) above, in August, 1996 management decided
to terminate operations at the Company's Intronet Division located in
Waltham, Massachusetts and closed the Intronet Division in December, 1996.
3. Changes In Registrant's Financing And Debt Position
Loan Agreements
On May 1, 1995, the Company entered into an agreement (the "May 1995 NCFC
Agreement") with its then commercial lender, National Canada Finance Corp.
("NCFC"), and with Joseph M. Lobozzo II ("Lobozzo"), an officer, Director
and the Company's controlling shareholder, to provide for an additional
$700,000 of financing through an Overadvance Lending Facility (the
"Overadvance Facility"). The May, 1995 NCFC Agreement required Lobozzo to
advance the first $400,000 (the "Lobozzo Commitment") before NCFC was
required to advance any of its $300,000 portion of the
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Overadvance Facility. As partial consideration for the Lobozzo Commitment,
the Company also issued an option to Lobozzo exercisable through May 20,
1999, to purchase an additional 11,440,475 of the Company's common shares
(the "May 1995 Lobozzo Option") at a total exercise price of $10. The
principal of the Lobozzo Commitment which was outstanding at October 31,
1995 and October 31, 1996 was $571,670 and $400,000, respectively. The
Lobozzo Commitment was critical in providing increased working capital to
the Company. The Overadvance Facility was reported in a Form 8-K Current
Report dated May 4, 1995. In February, 1997, Lobozzo transferred half of
the May 1995 Lobozzo Option to his wife, Joanne M. Lobozzo ("Joanne
Lobozzo"). In February, 1997, Lobozzo and Joanne Lobozzo exercised their
portions of the Second Restated May, 1995 Lobozzo Option (as herein
defined) and in February, 1997 received, respectively, 5,720,238 (Lobozzo)
and 5,720,237 (Joanne Lobozzo) common shares of the Registrant. 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. (See the Form 8-K Current Report dated February 20,
1997, the "February, 1997 8-K Report"). (See Item 12, "Security Ownership
of Certain Beneficial Owners and Management", and Item 13, "Certain
Relationships and Related Transactions", below). In April, 1997, the
Company paid $350,000 of the principal amount on the Lobozzo Commitment. In
May, 1997 the remaining principal balance outstanding on the Lobozzo
Commitment was paid in full, and the documents upon which it was based were
terminated.
The termination of the May, 1995 NCFC Agreement and of the Lobozzo
Commitment was reported in the Registrant's Form 10-Q Quarterly Report for
the period ended April 30, 1997 filed in June, 1997 (the "April, 1997 Form
10-Q Report"). The Registrant's lending agreement with its commercial
lenders, who are also its principal shareholders and controlling persons,
was amended several times to, among other matters, extend the term of the
lending agreement from December 10, 1996 to June 30, 1998. (See the April,
1997 Form 10-Q Report.)
In June, 1997, the Company and the Lender (as herein defined) agreed to
further amend the Lobozzo Loan (as herein defined) 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, as herein defined) was
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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. (See the April, 1997 Form 10-Q
Report.) At August 15, 1997, there was $2,719,500 outstanding on the
Lobozzo Loan.
As disclosed in Form 10-Q Quarterly Reports filed for the quarters ended
January, April and July of Fiscal 1995 and Fiscal 1996, respectively, the
original Credit Agreement between the Registrant and NCFC was executed on
April 1, 1994, to provide a long-term credit facility (as amended the "NCFC
Credit Agreement"). This credit facility, which was to expire on April 30,
1997, was amended five times, the last time being on October 27, 1995 (See
Section 4 below and Item 13, "Certain Transactions - Lobozzo
Transactions").
4. Additional Changes In NCFC Financing Arrangements, NCFC Forbearance
Agreement And Amendments to NCFC Forbearance Agreement
Forbearance Agreement
On March 8, 1996, NCFC, the Registrant and Data Net entered into a
Forbearance Agreement whereby, among other matters, NCFC agreed to forbear
from exercising default remedies available to it against the Registrant and
Data Net as a result of defaults under the NCFC Credit Agreement. The
Forbearance Agreement was entered into as part of the procedure whereby
Data Net, due to economic conditions in its industry, ceased operations and
surrendered possession of the Data Net collateral under the NCFC Credit
Agreement to NCFC. Under the NCFC Credit Agreement, NCFC was entitled to
immediate possession of all of Data Net's collateral. In view of the
termination of its business operations, Data Net voluntarily surrendered
its collateral to NCFC so that NCFC could liquidate that Data Net
collateral and apply the proceeds from the sale of such Data Net collateral
to reduce the indebtedness owing from Data Net to NCFC. The collateral
voluntarily surrendered by Data Net included Data Net's inventory,
equipment, patents, field spare parts, trademarks, general intangibles and
proceeds of the forgoing and other collateral as described in the General
Security Agreement between NCFC, the Registrant and Data Net. The
Forbearance Agreement was amended six times between March 8, 1996 and
October 10, 1996 (as amended, the "Forbearance Agreement") when the NCFC
Restructuring (as herein described) occurred.
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NCFC Restructuring
The entire NCFC Restructuring was reported in a Form 8-K Current Report
filed on October 24, 1996. On October 10, 1996, the Registrant restructured
its principal commercial lending relationship whereby a major portion of
the loan to the Registrant and Data Net from NCFC was purchased by Lobozzo,
and the balance of the loan from NCFC to the Registrant and Data Net was
restructured as a Term Loan (collectively, the entire transactions are
referred to as the "NCFC Restructuring"). At August 15, 1997, there was
$750,000 outstanding to NCFC under the Term Loan (the "Term Loan").
Pursuant to the various agreements comprising the NCFC Restructuring,
Lobozzo granted to the Registrant a loan (the "Lobozzo Loan") with a
maximum amount of $2,550,000 (which was an increase in the loan amount that
NCFC had committed to) and an interest rate which was lower than the
interest rate charged by NCFC pursuant to the NCFC Credit Agreement.
Lobozzo agreed to supply financing to the Registrant in the form of the
Lobozzo Loan for a period of 60 days and renewed the Lobozzo Loan on
December 10, 1996, and eventually extended the Lobozzo Loan through June
30, 1998. (See Item 3, "Changes In Registrant's Financing And Debt
Position, Loan Agreements", above and Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Item 13,
"Certain Transactions", below.)
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 Company has been in compliance with this ratio for all
periods since the inception of the Term Loan. As part of the NCFC
Restructuring, Lobozzo pledged 480,000 of his common shares of the Company
to NCFC. The Company agreed to present to its shareholders a proposal to
amend the Company's Restated Certificate of Incorporation to increase the
number of authorized common shares. Under certain circumstances, including
the non-payment of the Term Loan by October 9, 1999, NCFC has the right to
acquire up to 17.5% of the Company's common shares. If the Company does not
take steps to provide these common shares, Lobozzo has agreed to provide
those common shares by, among other means, the 480,000 common shares
pledged by Lobozzo to NCFC. Management intends to present such a proposal
to the shareholders at the next shareholder meeting. (See Item 5, "Market
for Registrant's Common Shares and Related Shareholder Matters", below). As
part of the transfer of half of his equity interest to Joanne Lobozzo,
Joanne Lobozzo agreed to fulfill half of any of Lobozzo's obligations to
NCFC. (See the February, 1997 Form 8-K Report.)
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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 W&G Data Net and W&G Dataspan (collectively, the "Sellers"), the Sellers
of the assets acquired by Data Net in the Willcox and Gibbs Acquisition
(the "Willcox and Gibbs Debenture"). As of October 31, 1995 and through
October 31, 1996, the Company was in default under the Willcox and Gibbs
Debenture, including the failure to make certain principal and interest
payments thereunder.
On November 25, 1996, the Registrant filed a Form 8-K Current Report
stating that, as of October 31, 1996, the Registrant and the Sellers had
signed a letter agreement (the "Rexel Letter Agreement"). Under the terms
of the Rexel Letter Agreement, the Registrant purchased the Willcox and
Gibbs Debenture, including principal and accrued interest, from the Sellers
for the payment of $75,000, which payment was made in early Fiscal 1997.
The purchase of the Willcox & Gibbs Debenture has been recorded in the
Registrant's Fiscal 1996 financial results as an extraordinary gain of
$455,384 associated with such purchase of debt. (See Item 13, "Certain
Transactions - Willcox & Gibbs Transactions").
As of October 31, 1995 and 1996, Data Net had issued to Lobozzo an 8%
subordinated debenture (the "Lobozzo Debenture") in the face amount of
$600,001. As originally issued, principal payments were due on the Lobozzo
Debenture in three annual installments of $200,000 commencing January 31,
1996, subject to meeting bank loan covenants under the NCFC Credit
Agreement. The Registrant guaranteed the Lobozzo Debenture. At the time of
issuance of the Lobozzo Debenture, the Registrant issued to Lobozzo an
Option Agreement (the "1992 Lobozzo Option Agreement") which entitled
Lobozzo to purchase up to 1,304,350 common shares of the Registrant at $.46
per common share. The Lobozzo Debenture and the 1992 Lobozzo Option
Agreement were each restated in January, 1995, to extend certain payment
provisions (respectively, the "Restated Lobozzo Debenture" and the
"Restated 1992 Lobozzo Option Agreement"). The Restated Lobozzo Debenture
and the Restated 1992 Lobozzo Option Agreement were later further restated
in February, 1997 when Lobozzo transferred to Joanne Lobozzo half of the
Restated Lobozzo Debenture and the Restated 1992 Lobozzo Option Agreement,
and those documents have been reissued as the "Second Restated Lobozzo
Debentures" and the "Second Restated Lobozzo Option Agreements" (See Item
13, "Certain Transactions - Lobozzo Transactions"). No payments of
principal have been made on the Second Restated Lobozzo Debentures, and the
Second Restated Lobozzo Option Agreements remain unexercised as of the date
of this Form 10-K Report. 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.
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Amendments to the Lobozzo Loan
In November, 1996, the Lobozzo Loan was amended ("Amendment No. 1 to the
Lobozzo Loan") to, among other matters, reduce the rate of interest on the
May 1995 NCFC Agreement relative to the Lobozzo Commitment and, with regard
to certain overline advances made by Lobozzo between July, 1996 and October
9, 1996 (the "1996 Additional Lobozzo Advances"), to reduce the rate of
interest to the annual rate of interest charged on the Lobozzo Loan. As of
December 10, 1996, the Lobozzo Loan was amended ("Amendment No. 2 to the
Lobozzo Loan") to, among other matters, extend the term of the Lobozzo Loan
to March 31, 1997, and subsequently to June 30, 1998. In February, 1997,
the Lobozzo Loan was amended ("Amendment No. 3 to the Lobozzo Loan") to,
among other matters, transfer half of the Lobozzo Loan, half of the 1996
Additional Lobozzo Advances, half of the Lobozzo Commitment, half of the
Restated Lobozzo Debenture and half of the Overline Advances (consisting of
amounts loaned in excess of the Borrowing Base provided by the Lobozzo
Loan, the "Overline Advances") from Lobozzo to his wife, Joanne Lobozzo. As
of February 18, 1997, the Lobozzo Loan was amended ("Amendment No. 4 to the
Lobozzo Loan") to, among other matters, extend the term of the Lobozzo Loan
to April 30, 1997. As of April 30, 1997, the Lobozzo Loan was amended
("Amendment No. 5 to the Lobozzo Loan") to, among other matters, extend the
term of the Lobozzo Loan to June 30, 1998. As of June 9, 1997, the Lobozzo
Loan was amended ("Amendment No. 6 to the Lobozzo Loan") to, among other
matters, make the changes described in Section 1 (A) (3) above. (See the
April, 1997 Form 10-Q Report.)
5. Termination Of Data Net's Operations
On March 21, 1996, the Registrant filed the March, 1996 Form 8-K Report
announcing that, effective March 8, 1996, Data Net had terminated its
business operations. (See "A Return to the Company's Core Business" and
"Additional Changes In NCFC Financing Arrangements, NCFC Forbearance
Agreement And Amendments To NCFC Forbearance Agreements", above, and Item
13, "Certain Transactions - Lobozzo Transactions").
6. Downsizing Of The Intronet Division
In the fall of 1995, the Company reduced the size of its operating staff,
and eventually closed, the Waltham, Massachusetts office of the Intronet
Division. (See "A Return to the Company's Core Business" and "Additional
Changes In NCFC Financing Arrangements, Forbearance Agreement And
Amendments To NCFC Forbearance Agreement", above).
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7. 1995 and 1996 Additional Lobozzo Advances
In addition to the above-discussed loans made by Lobozzo and Joanne Lobozzo
to the Registrant, specifically, the Second Restated Lobozzo Debenture, the
$400,000 Lobozzo Commitment, the Lobozzo Loan and the Overline Advances,
Lobozzo has also made working capital loans (the "1995 Additional Lobozzo
Advances") and the 1996 Additional Lobozzo Advances on a regular basis to
the Registrant to assist it in the purchase of equipment for sale to
customers and to meet its trade obligations. The 1995 Additional Lobozzo
Advances were in the maximum amount of $354,128, including interest
thereon, and have all been repaid. As of October 31, 1995, the amount due
to Lobozzo was $171,670 in principal plus accrued interest of $9,069 on the
1995 Additional Lobozzo Advances, in addition to $400,000 on the $400,000
Lobozzo Commitment discussed above. As of October 31, 1996, $633,600 in
principal plus accrued interest of $4,340 relating to such 1996 Additional
Lobozzo Advances was included in the total amount outstanding on the
Lobozzo Loan. As of the date of this Form 10-K Report, $633,600 is
outstanding on the 1996 Additional Lobozzo Advances. (See Item 13, "Certain
Transactions - Lobozzo Transactions".)
8. Project overruns
At the time of the Intronet Acquisition in November, 1994, the Company
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
Intronet Division, was essentially completed in Fiscal 1995. Certain other
"punch-list" items were completed in Fiscal 1996, and the obligations of
the Company under the contract have been completed. Actual costs incurred
by the Company significantly exceeded contractual estimates. The Company
has asserted certain claims against the college and a subcontractor has
asserted a claim against the Company (and has asserted a lien against the
college), and the subcontractor has commenced a litigation against the
Company's bonding company based upon the Company's performance bond)
seeking approximately $112,000 in damages. The college has rejected a
significant portion of the Company's claim, including the portion dealing
with the claim of the subcontractor. The Company has not been named in the
litigation. As of the date of this Form 10-K Report, the matter remains
unresolved. (See Item 3, Legal Proceedings)
9. Relocation of Functions
Following the resignations of Messrs. Loomis and Smith discussed above
under "Changes In The Company's Senior Management", in July, 1995 the
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Company closed its Syracuse, New York executive/administrative office. The
Company's principal executive offices were moved to Rochester, New York,
and the remainder of the administrative functions previously performed in
the Syracuse office were either terminated or moved to the Company's
operational headquarters in its Teterboro, New Jersey facility. The
remaining employees associated with the Syracuse office were either
terminated or moved to Teterboro, New Jersey.
B. Services, Products and Markets
The Company operates in an extraordinarily large market. While the
Company's total sales and revenues are a fractional percent of the dollars
spent each year for services and products related to Computer Systems Data
Communications and Lan/Wan Networks, the Company, nevertheless, does have
certain long-standing relationships with major brokerage firms, banks,
hospitals and pharmaceutical companies. By refocusing on its core business,
the Company is seeking to expand its existing relationships, has won
several new accounts and is attempting to enter into contracts with new
customers.
The Company's customers are not committed to fulfilling their Computer
System and Data Communication needs through a single supplier. Performance
differences as well as constant changes in technology make such a
commitment nearly impossible. As a result, service and integration needs
have become far more complex requiring knowledge of multiple manufacturers'
products, how they interact with each other and how they must be
serviced/maintained. This complexity has become significant enough that
many customers are now considering, or are already, outsourcing complete
management of their Computer System and Data Communication needs. By doing
so, such customers are no longer compelled to maintain internal resources
to perform the same or similar functions. The Company hopes to be able to
take advantage of these market opportunities.
Consequences of this trend are likely to include increased margin pressure
on third party maintenance providers which are not able to provide higher
level technical services and continued margin pressure on companies which
are exclusively product/distribution-oriented.
1. Technical Services
The Company's core business is based on providing technical and maintenance
services in direct support of its customers' Computer Systems, Data
Communication Systems and Lan/Wan Networks. Broadly, these services
include:
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* Network systems design
* Network analysis and performance testing
* Network management
* Project management
* Premise wiring
* Installation services
* Technical consulting services
* Maintenance Services
* Help desk support
* Complete outsourcing responsibility for all or most of the
above
Technical services are either charged at a pre-determined contractual
price or on the basis of labor and materials used. Maintenance services are
generally performed at a customer's site on an "on-call" basis, either
pursuant to a contract of a specified term and coverage ("Service
Agreement") or, as in the case of technical services, on a time and
materials basis.
In Fiscal 1996, approximately 92% of the Company's total revenue was
generated from contractual Service Agreements. This compares to 90% in both
Fiscal 1995 and Fiscal 1994. Technical services and maintenance are
performed either at the customer's site or at one of the Company's regional
offices or the Company's depot facility located at Teterboro, New Jersey.
Project-related technical services are most often initiated through an
authorization to proceed given by the customer following a competitive bid
process. A Service Agreement-related repair service is initiated by the
customer, usually by telephoning the Company's National Response Center
which then dispatches a field engineer to diagnose the source of the
problem and to repair or to replace the malfunctioning component or
equipment. The Company's service personnel are sometimes permanently
located at the customer's site in order to ensure optimum response time to
the customer's needs.
In the broader context of technical services offered by the Company, a
number of customers, actual and potential, are currently considering
complete outsourcing of the ongoing management of their Computer
System/Data Communications systems. Where such a commitment is made, the
nature of the agreement between the Company and its customer is similar to
that of a Service Agreement including a defined period of time (usually at
least one year) as well as predetermined billing rates for specific
functions performed or technical positions filled.
Customer Service Agreements generally have an initial term of one year
and continue thereafter until terminated by either the customer or the
Company, usually upon 90 days prior written notice. After the first year,
the Company may increase or decrease the prices related to this
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service, typically with 90 days advance written notice to the customer. In
some cases the Company provides service at customer sites as part of a
subcontracting agreement with another provider, usually a manufacturer or
reseller of equipment which has taken responsibility as prime contractor
for all maintenance services. In these cases, the provider (prime
contractor) is responsible for payment of all services rendered by the
Company to the end user. The Company currently is engaged in this type of
sub-contractor relationship with several large organizations.
The Company maintains a significant inventory of spare parts in order
to ensure prompt servicing of its customers' requirements. This inventory
is replenished on a regular basis based on the number of different systems
being supported, past parts usage and anticipated future requirements.
Marketing
The Company markets its technical services by direct development of
customers through its sales force and senior management and by initiating
and responding with technical and price proposals when customer needs are
specifically identified. Unique to the Company's approach is its emphasis
on custom-crafted solutions which focus on creating the resources to meet a
customer's specific needs instead of attempting to modify customer needs to
fit specific resources.
Competition
The Company competes both with third-party service providers which are
either nationally based or have strong regional presence and with
manufacturers and/or large distributors which have their own technical
service organizations. It is management's belief that the Company competes
with third-party providers on the basis of technical competence, customer
satisfaction, responsiveness and effectiveness of services as well as the
price at which such services are provided and with manufacturers on the
basis of its breadth of product availability as well as its ability to
service these multiple product lines. The Company also believes that its
scope of services, its presence in the industry and its specific expertise
in computer systems and networks gives it an advantage over traditional
maintenance companies and enables it to compete on a regional/national
basis.
In the third quarter of the fiscal year ended October 31, 1997
("Fiscal 1997"), a major customer canceled a network services agreement and
certain other agreements where the Company provided on-site services. The
Company is redeploying its resources from this customer's site to perform
services at certain other major customers' sites in order to meet an
increase in demand for services at these locations.
Page 14 of 91
<PAGE>
Deferred Revenue and Contracts in Force
As of October 31, 1996, 1995 and 1994, deferred service revenue to be
earned in subsequent periods was $2,131,000, $1,665,000 and $1,783,000,
respectively. As of October 31, 1996, the Company had service maintenance
contracts and technical service contracts in force with a total billed
volume for their respective billing cycles (monthly, quarterly,
semi-annually and annually) as of those respective dates of approximately
$3,930,000, subject to renewal on contract anniversary dates, compared with
approximately $5,772,000 at October 31, 1995 and $6,558,000 at October 31,
1994. The decreases of $1,842,000, or 32%, in Fiscal 1996 and $786,000, or
12%, in Fiscal 1995 are indicative of the Company's customers' preference
for time and materials-based agreements. As of July 31, 1997, the Company
had service maintenance contracts and technical service contracts in force
with a total billed volume for their respective billing cycles of
approximately $3,290,000 subject to renewal on contract anniversary dates.
(See Section (A) (2), above)
2. Products
Notwithstanding the Company's strategic decision to withdraw from the
product distribution business through the termination of Data Net's
business operations, in addition to the technical services provided and in
selected projects requiring the acquisition and installation as well as the
servicing of equipment, the Company continues to distribute a wide variety
of Computer System, Data Communication and Networking products from various
manufacturers. The types of equipment included are modems, multiplexers,
channel banks, CSU/DSU's, workstations, terminal servers, hubs, bridges,
routers, gateways, cable assemblies, bulk cable and cabinets.
3. Other Aspects Of The Company's Business
It is not believed that the Company's business is seasonal; however,
several large service and maintenance contracts are usually renewed near
the calendar year-end and at calendar mid-year. The Company does not
believe its business is dependent upon a single customer or a few
customers, the loss of any one or more of which would have a material,
adverse effect on the Company's business. No customer accounts for more
than ten percent (10%) of the Company's consolidated revenues. No
significant portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of
the government. Research and development activities are not considered to
be material to the Company's operations.
Page 15 of 91
<PAGE>
4. Recent Developments
Management has announced that two contract awards have occurred since
the close of Fiscal 1996 which exemplify the Registrant's progress. 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 was completed in mid-April, 1997. The project included 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. With the
completion of the installation phase, the Registrant is now providing
maintenance services and Help Desk support for all equipment installed. The
aggregate revenues from this customer are approximately $953,000. The
revenues on the project portion were recognized in the fourth quarter of
Fiscal 1996 and the first and second quarters of Fiscal 1997.
- 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 aggregate revenues from this customer, to be
earned over Fiscal 1996 and Fiscal 1997, are approximately $1,269,000. The
Registrant also expects to provide project support to this client for
inventory asset management with bar coding and software control.
For information regarding the cancellation of certain agreements by a major
customer, see Section (B) (1), above.
5. Government Regulation
To the best of the Company's knowledge, it is currently in compliance
with environmental statues and regulations.
6. Executive Officers Who Are Not Directors
John DeVito, President and Chief Operating Officer of the Registrant
and of each of its subsidiaries, joined the Company as a result of the
acquisition by the Company of R&M Associates Electronic Data Products
Service, Inc. in June, 1990. Frank J. Donnelly, Chief Financial Officer and
Chief Accounting Officer, and Edward Drohan, Vice President, Sales and
Marketing, each joined the Company during Fiscal 1996.
Page 16 of 91
<PAGE>
7. Employees
As of October 31, 1996 and October 31, 1995, the Company had 160 and
232 full and part-time employees, respectively. Total employees as of
October 31, 1995 included the Data Net employees whose employments were
terminated in March, 1996 and employees of the Intronet Division whose
employments were terminated in Fiscal 1996. As of August 15, 1997, the
Company had approximately 136 full-time employees. The reduction in
employees was principally the result of the termination of Data Net's and
the Intronet Division's operations, events to which reference has
previously been made in Section A of this Form 10-K Report.
Except as noted below, the employees of the Company are not covered by any
collective bargaining agreement, and the Company has never experienced a
strike or work-stoppage. The Company does have an agreement with a New
Jersey union to provide cable installers as needed. The number of employees
subject to this agreement fluctuates between 2 and 20 and includes career
managers of that division. The Company considers its relations with its
employees to be good.
C. Presentation of Certain Financial Statement Data
On February 13, 1996, the Registrant filed a Annual Report on Form 10-K
(the "Fiscal 1995 Form 10-K") with unaudited financial statements for the
fiscal year ended October 31, 1995 ("Fiscal 1995"). The financial results
for Fiscal 1995 included in the Fiscal 1995 Form 10-K had not been audited
due to the sudden death in December, 1995 of the Registrant's Controller
and Chief Accounting Officer and the resignation of another key financial
staff person, which also occurred in December, 1995. Thereafter, the
Registrant retained the services of interim financial personnel, including
an interim and Acting Chief Financial Officer until a permanent replacement
could be hired. The Registrant's Acting Chief Financial Officer was
responsible for managing the Registrant's cash resources and banking
relationships. Later, in February, 1996, the Registrant hired a Chief
Financial Officer and Principal Accounting Officer. The Registrant intends
to file an amendment to the Fiscal 1995 Form 10-K to include the audited
financial statements for Fiscal 1995, which Fiscal 1995 audited financial
statements are also included in this 1996 Form 10-K Report. (See above,
"Changes In The Company's Senior Management", and the discussion below with
respect to the accounting classification of the financial results of the
Registrant's Data Net subsidiary and its Intronet Division).
In March, 1996, the Registrant's wholly-owned subsidiary, Data Net
terminated its business operations and surrendered all of its assets to its
commercial lender (See Item 1, (A) (1), above). Accordingly, in the
Page 17 of 91
<PAGE>
Form 10-Q Quarterly Reports filed for the quarters ended January 31, 1996,
April 30, 1996 and July 31, 1996, respectively, the Registrant included the
financial results of Data Net under discontinued operations, with the
financial results for the Registrant's core business, which included its
Intronet Division located in Waltham, Massachusetts, included in the
aforementioned Form 10-Q Quarterly Reports under results from continuing
operations.
Because of the relocation in 1995 of the Registrant's operating
headquarters from Syracuse, New York to Teterboro, New Jersey, the turnover
in key financial and other administrative staff, as well as the termination
of operations in the Company's Data Net subsidiary and Intronet Division
and the resulting impact on management's ability to denote time to the core
operation, the Company was delayed in finalizing its audited results for
Fiscal 1995. The Fiscal 1995 Form 10-K which the Registrant filed on
February 13, 1996 with unaudited financial statements for Fiscal 1995
included the financial results for Data Net under continuing operations. In
accordance with an SEC interpretation announced in December, 1996, the
Registrant determined the need to file an amendment to its Fiscal 1995 Form
10-K, with audited financial statements for Fiscal 1995, and with Data
Net's results included in continuing operations, notwithstanding the fact
that, at the time of filing the amendment to the Fiscal 1995 Form 10-K
(which filing has not yet occurred), Data Net's business operations had
been terminated.
This 1996 Form 10-K Report contains the financial results for Data Net
included in this Form 10-K Report under discontinued operations for all
fiscal periods. This 1996 Form 10-K Report contains audited financial
statements for both Fiscal 1995 and Fiscal 1996, and a discussion of each
of these financial statements is contained in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
During the fourth quarter of Fiscal 1996 management decided to terminate
the business operations of its Intronet Division located in Waltham,
Massachusetts. Termination of the Intronet Division's business operations
was substantially completed by the end of Fiscal 1996, and the office was
closed in December, 1996 (See Item 1, A (1), above). As a result of the
termination of the Intronet Division's business activities in Fiscal 1996,
the financial results for the Intronet Division are also included in this
Form 10-K Annual Report under discontinued operations for all fiscal
periods.
Page 18 of 91
<PAGE>
Item 2. Properties
Offices
The Company maintains offices in the cities referred to below. In
addition to the locations listed below, customers provide, at no cost to
the Company, facilities at their premises in:
Jersey City, New Jersey Pompton Plains, New Jersey
Mahwah, New Jersey Toms River, New Jersey
King of Prussia, Pennsylvania White Plains, New York
Livingston, New Jersey Wilmington, Delaware
New York City, New York Lakehurst, New Jersey
Base
Monthly Expiration Approx.
Location Rent Date Sq.Ft.
-------- ---- ---- ------
Escondido, California $ 550 4/30/99 1,200
Wilmington, Delaware 355 2/28/97 400
Altamonte Springs, Fl. 642 11/30/97 800
Sunrise, Florida 1,166 1/31/98 1,200
Beltsville, Maryland 300 Monthly 510
Waltham, Mass. 3,700 3/15/97 1,250
Teterboro, New Jersey 23,974 7/31/01 38,000
Feasterville, Pa. 1,300 6/14/00 1,200
Management considers its present leased space to be adequate for
current operations. The Company relocated its Syracuse office/service
center to its Teterboro facility in July, 1995. The Company closed its
Syracuse location and terminated the lease. In September, 1996, and
simultaneously with the expiration of its lease, the Company closed its
office in Atlanta, Georgia. In December, 1996, the Company closed its
office in Waltham, Massachusetts where it had previously ceased all
operations at its Intronet Division. The Company subleases a portion of its
Teterboro, New Jersey leased premises to a cable manufacturing firm, such
sublease consisting of 5,355 square feet at a base monthly rent of
approximately $3,195 on a month-to-month basis without a written lease.
Item 3. Legal Proceedings
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. No litigation or administrative proceeding was commenced and
all required payments to date as stipulated in the agreement have been
made. The amounts related to this sales tax liability is reflected in the
financial statements as of October 31, 1995 and October 31, 1996,
respectively.
Page 19 of 91
<PAGE>
As a result of another sales tax audit, on January 10, 1997, New York
State asserted a claim, originally in the amount of approximately $125,000,
excluding any interest and penalties, against both the Company and Data Net
for alleged sales taxes owed, for the period September, 1993 through May,
1996. The Company and Data Net disagreed with the findings and communicated
such disagreement in writing to New York State. The Company instituted
efforts to obtain documentation supporting the validity of its
classification of certain sales made by both entities as non-taxable. As of
May 9, 1997, support for the validity of classifying approximately 74% of
such sales made by both entities as non-taxable had been obtained and sent
to New York State. New York State has sent a revised determination of
approximately $65,000, excluding any interest and penalties. The Company is
continuing to research its records for the remainder of the affected sales.
The Company and Data Net believe that, upon review of the records to be
submitted, New York State will reduce its claim accordingly. The amount of
the potential sales tax liability as of October 31, 1996 is reflected in
the financial statements.
A litigation has been commenced against the Company's bonding company
relative to a dispute relating to a contract with an eastern college. (See
"Item 1, A (8)", above). As of the date of this Form 10-K Report, neither
the litigation nor the dispute had been resolved. as of October 31, 1995
and October 31, 1996. The Company is in the early stages of this dispute
and does not anticipate that it will have any liability as a result of any
proceedings related to this matter, although no guaranty can be given that
some liability to the subcontractor might not accrue to the Company, in an
undeterminable amount, as a result of subcontractor's claim against the
Company's bonding company. Hence, no accrual has been made in the financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders for a vote during the fourth
quarter of Fiscal 1996.
PART II
Item 5. Market for Registrant's Common Shares and Related Stockholder Matters
During the period ending October 31, 1995, the common shares of the
Registrant were traded on the over-the-counter NASDAQ market under the
symbol "DCIS". As of November 10, 1995, the common shares of the Registrant
fell below the NASDAQ minimum bid price guidelines and, to the best
knowledge of management, since then, have traded only on local OTC markets.
There were approximately 450 and 450 holders of record of the Company's
common shares at the end of Fiscal 1996 and Fiscal 1995, respectively. As
of August 15, 1997, there were approximately 450 holders of record of the
Company's common shares. The high and low bid prices of the common shares
during each quarter of Fiscal 1995, Fiscal 1996 and the first three
quarters of Fiscal 1997 were as follows:
Page 20 of 91
<PAGE>
Fiscal 1995 Asked and Bid Prices
--------------------------------
Asked Bid
----- ---
1st Quarter $1.13 $0.86
2nd Quarter $0.75 $0.75
3rd Quarter $0.38 $0.13
4th Quarter $0.25 $0.13
Fiscal 1996 Asked and Bid Prices
--------------------------------
Asked Bid
----- ---
1st Quarter $0.08 $0.04
2nd Quarter $0.50 $0.28
3rd Quarter $0.25 $0.13
4th Quarter $0.10 $0.10
Fiscal 1997 Asked and Bid Prices
--------------------------------
Asked Bid
----- ---
1st Quarter $0.13 $0.13
2nd Quarter $0.13 $0.13
3rd Quarter $0.13 $0.08
As of August 15, 1997, the Company's common shares were quoted at $.08
bid and $.13 asked. The over-the-counter market quotations described above
reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
No cash dividends have been declared on Company's shares for Fiscal
1996, Fiscal 1995 or Fiscal 1994. The Company anticipates that, for the
foreseeable future, any earnings that may be generated from its operations
will be used to reduce debt and provide working capital. Payment of
dividends are prohibited under the terms of certain of the Company's loan
agreements. In any event, the payment of dividends in the future will
depend upon the Company's financial condition, capital requirements and
earnings and such other factors as the Board of Directors may deem
relevant.
The Company last held a shareholder meeting in March, 1995. The
Company intends to hold a special meeting of shareholders for the election
of directors and for certain other matters, such as increasing the number
of authorized common shares to enable it to comply with its obligations to
NCFC, following the filing of this Form 10-K Annual Report. (See Item 1,
(A) (4) "NCFC Restructuring", above).
Page 21 of 91
<PAGE>
Item 6. Selected Financial Data Delta Computec Inc.
The selected data presented below as of and for each of the five fiscal years
ended October 31, 1996, 1995, 1994, 1993 and 1992 are derived from the financial
statements of the Registrant which have been audited by Deloitte & Touche LLP,
independent auditors. Data as of and for the fiscal years ended October 31,
1995, 1994, 1993 and 1992 have been restated to reflect the termination of
operations effective March 8, 1996 in the Company's Data Net subsidiary, as well
as the termination of operations in the Company's Intronet Division effective
October 31, 1996. This data should be read in conjunction with the related
financial statements and notes included elsewhere in this Form 10-K Report.
<TABLE>
<CAPTION>
====================================================================================================================================
1996(1) 1995(1) 1994(4) 1993(4) 1992
STATEMENT OF OPERATIONS DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $ 12,213,933 $ 10,292,270 $ 9,553,737 $ 8,939,473 $ 8,468,566
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations 560,513 (130,502) 298,337 (129,485) 242,954
- ------------------------------------------------------------------------------------------------------------------------------------
Extraordinary Items 455,384(3) -- -- -- 156,000(3)
- ------------------------------------------------------------------------------------------------------------------------------------
Cumulative Effect of Accounting Change -- -- -- 730,630(2) --
- ------------------------------------------------------------------------------------------------------------------------------------
(Loss) from Discontinued Operations (1,843,487) (4,965,417) (941,763) (395,155) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Earnings (Loss) (827,590) (5,095,919) (643,426) 205,990 398,954
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (Loss)/Share:
Continuing Operations .08 (.02) .04 (.02) .04
Extraordinary Items .07 -- -- -- .02
Cumulative Effect of Accounting Change -- -- -- .11 --
Discontinued Operations (.27) (.73) (.13) (.06) --
Net Earnings (Loss) (.12) (.75) (.09) .03 .06
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA :
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 7,171,386 $ 10,216,635 $ 13,521,285 $ 13,851,817 $ 6,174,750
Short-Term Debt 75,000 3,813,925 -- 3,624,339 708,663
Long-Term Debt 3,405,461 571,670 3,716,820 424,851 426,230
Subordinated Debentures 600,001 1,075,001 1,087,501 1,112,501 1,000,000
Stockholders' (Deficit) Investment (2,753,412) (1,925,822) 3,170,097 3,813,398 1,532,943
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
</TABLE>
(1) Operating results include the results of the Intronet Division from the
date of the Intronet Acquisition in November, 1994.
(2) The Company adopted Statement of Financial Accounting Standards No. 109
(FAS 109) "Accounting for Income Taxes" effective November 1, 1992. This
statement supersedes FAS No. 96 "Accounting for Income Taxes". The
cumulative effect of adopting FAS No. 109 on the Company's financial
statements was to increase income by $730,630 ($.11 per share) for the year
ended October 31, 1993. (See Note 6 to the Financial Statements).
(3) Fiscal 1996 amount relates to gain on purchase of debenture. Fiscal 1992
amount relates to utilization of tax loss carryforwards.
(4) Statement of Operations data has been reclassified to reflect
discontinuance of operations of the Company's Delta Data Net subsidiary.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
As reported in the March, 1996 Form 8-K Report, and as discussed in Item 1
and Note 2 to the Consolidated Financial Statements, on March 8, 1996 the
Company's wholly-owned subsidiary, Data Net, terminated its business
activities and ceased all of its operations. Accordingly, Data Net's
operating results for Fiscal 1994, 1995 and 1996 are reported in the loss
from discontinued operations, and the prior years' income statements for
Fiscal 1994 and 1995 have been restated to exclude Data Net's results for
those respective years. As discussed in Item 1 A, management decided in the
fourth quarter of Fiscal 1996 to terminate operations in its Intronet
Division in Waltham, Massachusetts and closed the Intronet Division's
office in December, 1996. Accordingly, the Intronet Division's operating
results for Fiscal 1995 and 1996 are also reported in the loss from
discontinued operations. The financial results for continuing operations
for all fiscal periods are for the Company's core business operations,
specifically those operations relating to providing computer system, data
communication and Lan/Wan technical services and products.
Results of Operations
Operating results for Fiscal 1996 reflected net earnings from continuing
operations of $560,513 (5% of total revenues) or $.08 per share, excluding
a $455,384 extraordinary gain on purchase of debt (See below), compared
with a loss from continuing operations of $130,502 (1%) or $.02 per share
for Fiscal 1995 and earnings from continuing operations of $298,337 (3%) or
$.04 per share for Fiscal 1994. The turnaround in financial performance of
continuing operations as reflected in results for Fiscal 1996 showing an
improvement of $691,015 in earnings from continuing operations over Fiscal
1995 included the combined impact of the following: (1) a 22% increase in
service revenue and a 19% increase in total revenues; and (2) a five
percentage-point improvement in gross margin, partially offset by higher
operating expenses. Operating results for continuing operations for Fiscal
1995 were negatively impacted by the continued detrimental effects of the
Company's cash flow and liquidity problems and non-recurring costs
associated with administrative staff turnover. In addition, the Company's
operating results in Fiscal 1995 were adversely affected by: (1) a
writedown in its spare parts inventory for obsolescence charges of
approximately $427,000; (2) a writedown of approximately $285,000 in
intangible assets pertaining to the Company's core business to write off
certain of these assets as well as to adjust the estimated realizable
economic benefit period on certain other items; and (3) the writedown of
approximately $1,202,000 in deferred tax assets. These writedowns
aggregated $1,914,000. The profitable operating results for Fiscal 1994
were partially offset by the negative impact of charges for obsolete
inventory, litigation and relocation expenses.
Management adjusted the amount of the deferred tax assets, as included in
the Fiscal 1995 consolidated financial statements and as described in Note
5 to the consolidated financial statements, which are related to the
Company's net operating loss carryforwards and associated tax benefits
which can be utilized in future periods, in order to set the carrying value
of such assets at a conservative amount. The total amount of such tax
Page 23 of 91
<PAGE>
assets can be realized if the Company is able to generate sufficient
taxable income within the respective carryforward periods.
Extraordinary Gain
In Fiscal 1996, the Registrant realized an extraordinary gain of $455,384
on the purchase of the Willcox and Gibbs Debenture (See Item 1, A, (4)
"Subordinated Debentures" and Item 13, "Certain Transactions - Willcox and
Gibbs Transactions").
Discontinued Operations
As discussed above in Item 1 and Notes 1 and 2 to the Consolidated
Financial Statements, in March, 1996, the Company's wholly-owned
subsidiary, Delta Data Net, Inc., terminated its business operations. In
addition, in the fourth quarter of Fiscal 1996, management decided to
terminate operations in its Intronet Division in Waltham, Massachusetts and
closed the Intronet Division's office in December, 1996. Accordingly, Data
Net's operating results for Fiscal 1994, 1995 and 1996 are reported in the
loss from discontinued operations, and the prior years' income statements
for Fiscal 1994 and 1995 have been restated to exclude Data Net's results
for those respective years. The Intronet Division's operating results for
Fiscal 1995 and 1996 are also reported in the loss from discontinued
operations. As explained below, the losses incurred by both Data Net and
the Intronet Division have had a very material impact upon the Company's
overall operating results.
Data Net's operating losses in Fiscal 1996, incurred subsequent to October
31, 1995 through March 8, 1996, as well as expenses directly related to the
termination of Data Net, net of a gain realized on disposal of assets less
liabilities not assumed by the Company, and the operating losses for Fiscal
1995 and 1994, have been reported in the consolidated statements of
operations under Loss from Discontinued Operations for those respective
years. For Fiscal 1996, the aggregate Loss from Discontinued Operations was
$1,843,487 or $.27 per share, consisting of $933,843 relating to Data Net
and $909,644 relating to the Intronet Division, the latter of which
includes $102,375 in operating losses incurred subsequent to October 31,
1996. For Fiscal 1995 and 1994, Data Net incurred net losses of $1,821,307
(13% of Data Net's revenues) or $.27 per share and $1,355,763 (9%) or $.20
per share, respectively. The Intronet Division incurred a net loss of
$1,811,110 (28% of Intronet's revenues) in Fiscal 1995 or $.27 per share,
the latter including a $330,164 write-off of goodwill. During Fiscal 1996,
unbudgeted completion costs on a fixed price contract initiated in a
previous fiscal year, poor margins on two other major contracts and a
general downturn in this operation's business exacerbated the division's
poor results.
Revenues
Total revenues from continuing operations were $12,213,933 for Fiscal 1996,
$10,292,270 in Fiscal 1995 and $9,553,737 in Fiscal 1994. The increase of
$1,921,663 (19%) in Fiscal 1996 was the result of new business and the
renewal of business from the Company's existing customer base, as
management
Page 24 of 91
<PAGE>
refocused its energies on the Company's core business activities. Revenues
for Fiscal 1995 increased $738,533 or 8% over Fiscal 1994.
Service revenues were $11,282,558 (92% of total revenues) in Fiscal 1996,
$9,270,583 (90%) in Fiscal 1995 and $8,558,262 (90%) in Fiscal 1994. The
increases in service revenues in Fiscal 1996 and Fiscal 1995 over the
preceding fiscal years were $2,011,975 (22%) and $712,321 (8%),
respectively. Fiscal 1996's growth reflects the renewal of business from
the Company's existing customer base, as well as new customers, as
management refocused its energies on the Company's core business
activities.
Equipment sales were $931,375 (8% of total revenues) in Fiscal 1996,
$1,021,687 (10%) in Fiscal 1995 and $995,475 (10%) in Fiscal 1994. The
decrease of $90,312 (9%) in equipment sales in Fiscal 1996 reflects
management's decision to focus on service and project revenue in developing
the Company's core business. Fiscal 1995 equipment sales were $26,212 and
(3%) over Fiscal 1994.
Costs and Expenses
Service costs for Fiscal 1996, Fiscal 1995 and Fiscal 1994 were $7,524,523
(67% of service revenue), $6,569,363 (71%) and $6,115,600 (72%),
respectively. The improvement of four percentage points in service costs as
a percentage of service revenue in Fiscal 1996 reflects the benefit from
the significant increase in service revenue. The one percentage-point
improvement in service costs, as a percentage of service revenue, in Fiscal
1995 reflects the benefit derived from the increase in service revenue.
Costs of equipment sold for Fiscal 1996, Fiscal 1995 and Fiscal 1994 were
$1,155,711 (124% of equipment sales), $1,301,499 (127%) and $769,494 (77%),
respectively. Cost of equipment sold in Fiscal 1996 and Fiscal 1995 eroded
as a percentage of equipment sales from Fiscal 1994's percentage, resulting
in a negative gross margin, because of lower margins on sales of Data
Communication equipment sold due to price pressure in the marketplace and
the writedown in spare parts.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 1996, Fiscal 1995
and Fiscal 1994 were $2,878,456 (24%), $2,255,858 (22%) and $2,113,740
(22%), respectively. Selling, general and administrative expenses increased
$622,598 or 28% in Fiscal 1996 and $142,118 or 7% in Fiscal 1995. The
increase in Fiscal 1996 was due to higher personnel and associated benefit
costs, increased recruitment, professional and consulting fees.
Inventory and Product Obsolescence
In Fiscal 1995, the Company accounted for normal product obsolescence
through inventory reserves. The Company wrote down its spare parts by
approximately $427,000 for obsolescence. These charges were recognized
during the fourth quarter of Fiscal 1995. The Company took an additional
inventory reserve of $84,000 in Fiscal 1996.
Page 25 of 91
<PAGE>
Interest Expense
Interest expenses reported in continuing operations for Fiscal 1996, Fiscal
1995 and Fiscal 1994 were $87,241 (1%), $142,550 (1%) and $60,992 (1%),
respectively. Interest expense decreased by $55,309 and 39% in Fiscal 1996
due to the fact that the major portion of the Company's borrowing
requirements in Fiscal 1995 and Fiscal 1994 were related to the negative
cash flow from discontinued operations, which negative cash flows abated in
Fiscal 1996. Interest expense increased by $81,558 or 134% in Fiscal 1995
as a result of increased borrowing necessitated by the Company's cash flow
constraints.
Income Taxes
There was an income tax provision of $1,203,000 recorded for Fiscal 1995
relating to the writedown in deferred tax assets. An income tax credit of
$260,000 was recorded for Fiscal 1994. Income taxes are recognized for the
amount of taxes payable or refundable for the current tax year, and
deferred tax liabilities and assets for the future tax consequence of
events that have been recognized in the Registrant's consolidated financial
statements or tax returns.
At October 31, 1995, the Registrant had accumulated approximately
$6,506,000 of operating loss carryforwards for tax purposes which was
primarily the result of losses generated by its newly-acquired business
units over the three fiscal years ending October 31, 1993, 1994 and 1995,
respectively. The Registrant had recognized the tax benefit of these
losses, in the form of deferred tax assets on its balance sheet, through
October 31, 1994. The Registrant incorporated in its financial statements
at October 31, 1995 additional reserves in the amount of $2,376,000 for the
valuation of previously recorded deferred tax assets. The Registrant will
continue to assess, in future periods, the value of these deferred tax
assets which expire in varying amounts between the years 2001 and 2009.
This assessment will include the Registrant's ability to project adequate
profits to utilize the operating loss carryforwards.
New Accounting Standards Pronouncements
1. Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of", must be adopted by the Company in Fiscal 1997. The standard requires
that impairment losses be recognized when the carrying value of an asset
exceeds its fair value. The Company regularly assesses all of its
long-lived assets for impairment and, therefore, does not believe that the
adoption of the standard will have a material effect on its financial
position or results of operations.
2. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 123, "Accounting for Stock-Based Compensation,"
which requires adoption no later than fiscal years beginning December 15,
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<PAGE>
1995. The new standard defines a fair value method of accounting for stock
options and similar equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to the new standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but would be required to disclose in a note
to the financial statements pro forma net income and, if presented,
earnings per share as if the company had applied the new method of
accounting.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of adoption.
The Company has not yet determined if it will elect to change to the fair
value method, nor has it determined the effect the new standard will have
on net income and earnings per share should it elect to make such a change.
Management believes that adoption of the new standard will not have a
material effect on the Company's net income and earnings per share.
3. Earnings Per Share
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". The
new standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. The statement will be effective for Fiscal 1997. Early
adoption of the statement is not permitted. The Company is currently
evaluating what impact this standard will have on its disclosures.
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and disclosure of comprehensive income and its components in
financial statement format and is effective for financial statements for
fiscal years beginning after December 15, 1997. Comprehensive income is
defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. Items considered comprehensive income include foreign currency
items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. In the opinion
of management, SFAS No. 130 will not have a material effect on the
Company's financial statements.
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
Page 27 of 91
<PAGE>
capital requirements, capital expenditures and debt service from its
financing arrangements and trade debt.
The unaudited financial statements as set forth in the Registrant's April,
1997 Form 10-Q Report for the period ended April 30, 1997 indicated that
the significant consolidated losses of Fiscal 1996 have abated, according
to the unaudited financial statements for the first and second quarters of
Fiscal 1997, resulting in an improvement in the Company's financial
position. These improved, unaudited 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 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 Lobozzo Credit 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 Lobozzo Credit Agreement
will provide the Company with necessary liquidity and cash resources
through June 30, 1998. For additional information regarding the NCFC
Restructuring and the Lobozzo Loan. (See Item 1, above, Item 13, below and
Note 3 to the accompanying financial statements.)
The Registrant has financed its working capital requirements, capital
expenditures and debt service from its financing arrangements and trade
debt. Cash provided by operations in Fiscal 1996, 1995 and 1994 totaled
$2,093,318, $210,449 and $1,232,188, respectively. Net cash provided by
operations of $2,093,318 in Fiscal 1996 was the result of non-cash charges
plus working capital from the effect of reductions in accounts receivable
and inventory, coupled with an increase in deferred service revenue, offset
in part by the net loss plus reductions in accounts payable and accrued
expenses. Net cash of $210,449 provided by operations in Fiscal 1995 was
the result of non-cash charges plus working capital from reductions in
accounts receivable and inventory, an increase in accounts payable and
accrued liabilities, deferred taxes and sales taxes payable, most of which
was offset by the net loss, which included a full year of losses for Data
Net. Net cash provided by operations in Fiscal 1994 of $1,232,188 resulted
from the net effect of non-cash charges and the net loss, for net cash
provided of $619,052, and cash provided by changes in working capital
investment.
Working capital at October 31, 1996, 1995 and 1994 was ($1,974,918),
($3,827,646) and $2,669,321, respectively. The working capital deficit in
Fiscal 1996 decreased $1,852,728 from Fiscal 1995, reflecting the decline
in working capital investment as a result of the termination of Data Net,
additional deferred revenue and accrued interest, offset in part by lower
short-term borrowing. Fiscal 1995 working capital decreased $6,496,967 from
Fiscal 1994 due to a $4,385,595 increase in short-term debt, additional
trade debt and lower investment in accounts receivable and inventories.
Cash used by investing activities in Fiscal 1996, 1995 and 1994 totaled
($1,082,106), ($828,751) and ($964,822), respectively. These cash outlays
Page 28 of 91
<PAGE>
were incurred for capital expenditures plus expenditures for additions to
field spare parts.
Cash provided/(used) by financing activities in Fiscal 1996, 1995 and 1994
was ($980,134), $625,306 and ($357,245), respectively. Funds used in Fiscal
1996 resulted from payments on a bank note, subordinated debt and notes
payable, aggregating $1,519,264, less proceeds from borrowings from a
shareholder and from long-term bank financing, totaling $539,130. Funds of
$637,806 were provided in Fiscal 1995 by proceeds from shareholder loans
and bank debt. Funds of $357,245 were used in Fiscal 1994 to pay bank and
other debt.
During 1996, the Company restructured its note payable to the bank
resulting in a non-cash reduction of the note payable, such reduction
totaling $1,544,661, and a corresponding increase in the amount due to its
principal shareholder.
Inflation
Generally, increases in material, subcontractors' and other service costs
have been offset by productivity improvements. The Company continues to
monitor the impact of inflation in order to minimize its effect through
pricing strategies, productivity improvements and cost reductions.
Page 29 of 91
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Schedule
CONSOLIDATED FINANCIAL STATEMENTS
DELTA COMPUTEC INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form
10-K Ref.
Consolidated Financial Statements:
Independent Auditors' Report 32
Consolidated Balance Sheets, October 31, 1996 and 1995 33-34
Consolidated Statements of Operations for the Years Ended
October 31, 1996, 1995 and 1994 35
Consolidated Statements of Changes in Stockholders' Investment
(Deficit) for the Years Ended October 31, 1996, 1995 and 1994 36
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1996, 1995 and 1994 37
Notes to Consolidated Financial Statements 38-48
Schedule:
VIII. Valuation and Qualifying Accounts for the
Years Ended October 31, 1996, 1995 and 1994 49
All other schedules are not submitted because they are not applicable, are not
required or because the required information is included in the financial
statements or notes thereto.
Page 30 of 91
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of Delta Computec Inc. Rochester, New
York
We have audited the accompanying consolidated balance sheets of Delta Computec
Inc. and subsidiaries as of October 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' investment
(deficit) and cash flows for each of the three years in the period ended
October 31, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 8. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Delta Computec Inc. and
subsidiaries as of October 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
Rochester, N.Y.
May 16, 1997
(June 30, 1997 as to Note 1)
Page 31 of 91
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
ASSETS
1996 1995
----------- -----------
CURRENT ASSETS:
Cash $ 50,891 $ 19,813
Accounts receivable, less allowance for
doubtful accounts of $263,808 and $652,523
in 1996 and 1995, respectively 2,634,039 4,750,412
Inventories 816,939 1,681,805
Prepaid expenses and other current assets 442,549 216,110
----------- -----------
Total current assets 3,944,418 6,668,140
FIELD SPARE PARTS, less accumulated
amortization of $216,746 and $587,125
in 1996 and 1995, respectively 2,546,133 2,060,361
PROPERTY AND EQUIPMENT:
Technical equipment 131,848 1,372,456
Office furniture & equipment 260,784 1,482,798
Vehicles 74,614 154,661
Leasehold improvements 60,072 268,490
----------- -----------
527,318 3,278,405
Less: accumulated depreciation and
amortization 291,751 2,301,255
----------- -----------
Property And Equipment, Net 235,567 977,150
DEFERRED INCOME TAXES NON-CURRENT 150,000 150,000
OTHER ASSETS:
Goodwill, less accumulated amortization of
$286,256 and $353,555 in 1996 and 1995,
respectively 190,837 238,546
Other 104,431 122,438
----------- -----------
Total other assets 295,268 360,984
----------- -----------
Total assets $ 7,171,386 $10,216,635
=========== ===========
See notes to consolidated financial statements.
Page 32 of 91
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' DEFICIT
1996 1995
----------- -----------
CURRENT LIABILITIES:
Accounts payable $ 2,526,884 $ 4,157,236
Current portion of long-term debt 75,000 3,813,925
Deferred service revenue 2,131,491 1,664,708
Accrued expenses:
Accrual for discontinuance of operations 102,375 --
Payroll and payroll taxes 176,959 424,738
Sales taxes payable 499,782 263,183
Interest 96,563 42,667
Other 310,282 129,329
----------- -----------
Total current liabilities 5,919,336 10,495,786
LONG-TERM DEBT 750,000 --
DUE TO SHAREHOLDER 2,655,461 571,670
SUBORDINATED DEBENTURES 600,001 1,075,001
COMMITMENTS (Note 6) -- --
STOCKHOLDERS' DEFICIT:
Common stock, $ .01 par value; shares authorized
20,000,000 shares; issued and
outstanding: 6,811,575 in 1996 and 1995 68,116 68,116
Additional paid-in capital 4,916,093 4,916,093
Accumulated deficit (7,737,621) (6,910,031)
----------- -----------
Total stockholders' deficit (2,753,412) (1,925,822)
Total liabilities and stockholders' deficit $ 7,171,386 $10,216,635
=========== ===========
See notes to consolidated financial statements.
Page 33 of 91
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Service revenues $11,282,558 $ 9,270,583 $ 8,558,262
Equipment sales 931,375 1,021,687 995,475
----------- ----------- -----------
Total revenues 12,213,933 10,292,270 9,553,737
COSTS AND OPERATING EXPENSES:
Service costs 7,524,523 6,569,363 6,115,600
Cost of equipment sold 1,155,711 1,301,499 769,494
Selling, general and administrative 2,878,456 2,255,858 2,113,740
----------- ----------- -----------
Total costs and operating expenses 11,558,690 10,126,720 8,998,834
OTHER INCOME (EXPENSE), NET:
Interest expense (87,241) (142,550) (60,992)
Writedown of other assets -- (284,961) --
Other, net -- 1,459 (41,574)
Total other (expense) (87,241) (426,052) (102,566)
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 568,002 (260,502) 452,337
INCOME TAXES(BENEFIT) 7,489 (130,000) 154,000
----------- ----------- -----------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY GAIN 560,513 (130,502) 298,337
EXTRAORDINARY GAIN 455,384 -- --
----------- ----------- -----------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 1,015,897 (130,502) 298,337
LOSS FROM DISCONTINUED OPERATIONS:
Loss from operations (1,741,112) (3,632,417) (1,355,763)
Loss on disposal (102,375) -- --
Income taxes (benefit) -- 1,333,000 (414,000)
----------- ----------- -----------
Loss from discontinued
operations (1,843,487) (4,965,417) (941,763)
LOSS $(827,590) $(5,095,919) $(643,426)
=========== =========== ===========
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ .08 $(.02) $ .04
EXTRAORDINARY ITEM .07 -- --
DISCONTINUED OPERATIONS (.27) (.73) (.13)
----------- ----------- -----------
LOSS $(.12) $(.75) $(.09)
=========== =========== -----------
</TABLE>
See notes to consolidated financial statements.
Page 34 of 91
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' INVESTMENT (DEFICIT)
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- Additional Stockholders
Paid-in Accumulated Investment
Shares Amount Capital Deficit (Deficit)
--------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance, November 1, 1993 6,811,325 $ 68,113 $4,915,971 $(1,170,686) $ 3,813,398
Exercise of stock options 250 3 122 -- 125
Net loss fiscal 1994 -- -- -- (643,426) (643,426)
--------- ---------- ---------- ----------- -----------
Balance, October 31, 1994 6,811,575 68,116 4,916,093 (1,814,112) 3,170,097
Net loss fiscal 1995 -- -- -- (5,095,919) (5,095,919)
--------- ---------- ---------- ----------- -----------
Balance, October 31, 1995 6,811,575 68,116 4,916,093 (6,910,031) (1,925,822)
Net loss fiscal 1996 -- -- -- (827,590) (827,590)
--------- ---------- ---------- ----------- -----------
Balance, October 31, 1996 6,811,575 $ 68,116 $4,916,093 $(7,737,621) $(2,753,412)
========= ========== ---------- =========== ===========
</TABLE>
See notes to consolidated financial statements.
Page 35 of 91
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(827,590) $(5,095,919) $(643,426)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Extraordinary gain (455,384) -- --
Accrual for loss on discontinued operations 102,375 -- --
Depreciation & amortization 1,403,632 1,538,204 1,262,478
Deferred income taxes -- 1,202,000 (307,000)
Accounts receivable 2,116,373 712,144 (475,761)
Inventories 864,866 519,534 972,978
Accounts payable & accrued expenses (1,351,299) 1,284,493 516,642
Deferred service revenue 466,783 (118,530) 153,497
Other - net (226,438) 168,523 (247,220)
------------ ---------- ----------
Net cash provided by operating activities 2,093,318 210,449 1,232,188
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (37,133) (292,441) (162,802)
Additions to field spare parts (1,044,973) (536,310) (802,020)
------------ ---------- ----------
Net cash (used) by investing activities (1,082,106) (828,751) (964,822)
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loans, net 539,130 571,670 --
(Repayment)borrowings from note payable to bank (1,488,295) 66,136 --
Proceeds from sale of common stock -- -- 125
Net payments on bank borrowings -- -- (203,350)
Repayments on debt (30,969) (12,500) (154,020)
------------ ---------- ----------
Net cash (used)/provided by
financing activities (980,134) 625,306 (357,245)
------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH 31,078 7,004 (89,879)
CASH - beginning of year 19,813 12,809 102,688
------------ ---------- ----------
CASH - end of year $ 50,891 $ 19,813 $ 12,809
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
Supplemental Noncash Financing Transaction
During 1996, the Company restructured its note payable to the bank resulting in
a non-cash reduction in the note payable, such reduction totaling $1,544,661,
and a corresponding increase in the amount due to its principal shareholder.
Page 36 of 91
<PAGE>
DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(1) General Description of Business and Summary of Significant Accounting
Policies
Description of Business
The 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 Note
2 below regarding the Company's Intronet Division and the closing of this
operation which was completed in December, 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.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Delta Data Net, Inc. ("Data Net"), (see
Note 2), and SAI/Delta. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company incurred
net losses in Fiscal 1996, 1995 and 1994, had a working capital deficit and
a stockholders' deficit of $1,974,918 and $2,753,412, respectively, as of
October 31, 1996 and was in default under certain loan agreements as of
October 31, 1996. (See Note 3). In view of the continuing losses and
related cash flow difficulties, management initiated certain actions
designed to return the Company to its core business and provide additional
cash flows. Among these actions were (1) cost reductions associated with
the centralization of operations in its Teterboro, New Jersey location; (2)
termination of operations of the Data Net subsidiary; (3) the decision to
terminate operations of the Intronet Division, substantially accomplished
at October 31, 1996, followed by the closing of its office in December,
1996; (4) restructuring of its primary lending relationship; (5)
negotiation of a buy-out and settlement of a debenture; and (6) obtaining
of an extension until June 30, 1998 in its lending arrangement with its
lenders. Management believes that these actions will improve profitability
in the Company's core
Page 37 of 91
<PAGE>
business and increase cash flows, enabling the Company to maintain
operations.
Use of Estimates
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.
Reclassifications
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
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 3 - 7 years
Vehicles 2 - 3 years
Leasehold improvements 5 - 10 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. On an
ongoing basis, the
Page 38 of 91
<PAGE>
Company assesses impairment of such assets by reviewing the operating
performance of the underlying business or customer relationships. In Fiscal
1995, this assessment resulted in recording additional amortization expense
of approximately $505,000 relating to such impairment, $330,164 of which is
included in the Fiscal 1995 Loss From Discontinued Operations.
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
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. Weighted average shares outstanding for the years ended October 31,
1996, 1995 and 1994 totalled 6,811,575, 6,811,575 and 6,811,388,
respectively.
New Accounting Standards Pronouncements
1. Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of", must be adopted by the Company in Fiscal 1997. The standard requires
that impairment losses be recognized when the carrying value of an asset
exceeds its fair value. The Company regularly assesses all of its
long-lived assets for impairment and, therefore, does not believe that the
adoption of the standard will have a material effect on its financial
position or results of operations.
Page 39 of 91
<PAGE>
2. Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 123, "Accounting for Stock-Based Compensation,"
which requires adoption no later than fiscal years beginning December 15,
1995. The new standard defines a fair value method of accounting for stock
options and similar equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of
the award and is recognized over the service period, which is usually the
vesting period.
Pursuant to the new standard, companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," but would be required to disclose in a note
to the financial statements pro forma net income and, if presented,
earnings per share as if the company had applied the new method of
accounting.
The accounting requirements of the new method are effective for all
employee awards granted after the beginning of the fiscal year of adoption.
The Company has not yet determined if it will elect to change to the fair
value method, nor has it determined the effect the new standard will have
on net income and earnings per share should it elect to make such a change.
Management believes that adoption of the new standard will not have a
material effect on the Company's net income and earnings per share.
3. Earnings Per Share
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". The
new standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. The statement will be effective for Fiscal 1997. Early
adoption of the statement is not permitted. The Company is currently
evaluating what impact the adoption of this standard will have on its
disclosures.
4. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and disclosure of comprehensive income and its components in
financial statement format and is effective for financial statements for
fiscal years beginning after December 15, 1997. Comprehensive income is
defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from non-owner
sources. Items considered comprehensive income include foreign currency
items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. In the opinion
of management, SFAS No. 130 will not have a material effect on the
Company's financial statements.
Page 40 of 91
<PAGE>
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of accounts receivable.
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of customers comprising the Company's customer
base. The Company generally does not require collateral or other security
to support customers' receivables.
Fair Value of Financial Instruments
Short-term financial instruments are valued at their carrying amounts
included in the consolidated balance sheets, which are reasonable estimates
of fair value due to the relatively short period to maturity of the
instruments. This approach applies to cash and cash equivalents,
receivables, short-term borrowings and certain other current liabilities.
Management believes that the recently-completed financial transactions (see
Note 3) indicate that the fair value of long-term debt approximates its
carrying value at October 31, 1995 and 1996.
(2) Discontinued Operations
As part of the Company's strategy of concentrating its focus on its core
business, Data Net terminated its business operations on March 8, 1996.
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.
In November, 1994, the Company acquired substantially all of the operating
assets of Intronet, Inc. These assets were acquired in exchange for
$337,000 in cash and the assumption of approximately $588,000 in
liabilities of Intronet, Inc. Subsequent to the acquisition and prior to
the termination of operations of the Intronet Division, the 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. In the fourth quarter of
Fiscal 1996, management decided to terminate operations of the Intronet
Division, which was substantially accomplished at October 31, 1996,
followed by the closing of its office in December, 1996.
A provision of $1,843,487 for the loss on disposal of these discontinued
operations was recorded during the fiscal year ended October 31, 1996,
consisting of a $1,741,112 loss from operations and a $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 an
allocation of corporate interest expense and amounts directly related to
the discontinued businesses.
Page 41 of 91
<PAGE>
The allocation of corporate interest expense was based, in part, on a ratio
of the net assets of the discontinued operations to the sum of the
consolidated net assets and consolidated debt, adjusted accordingly.
Amounts allocated for interest in Fiscal 1996, 1995 and 1994 totaled
$367,892, $299,585 and $333,472, respectively. Revenues from discontinued
operations were $3,996,507, $20,064,694 and $15,808,008 in Fiscal 1996,
1995 and 1994, respectively. The remaining net assets of the discontinued
operations at October 31, 1996 were not significant.
(3) Debt and Debt Due to Shareholder
Long-term debt and Debt Due to Shareholder consist of the following at
October 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Due to shareholder $2,655,461 $ 571,670
Note payable to bank, interest at prime plus 2%
on main credit facility and at prime plus 3.0%
on overadvance portion ("the long-term credit
facility") -- 3,782,956
Term loan, due in full on October 10, 2001,
with interest payable monthly at prime plus
1.0%, collateralized by field spare parts
(the "Term Loan") 750,000 --
Notes payable 75,000 30,969
---------- ----------
3,480,461 4,385,595
Less: Current portion 75,000 3,813,925
---------- ----------
$3,405,461 $ 571,670
========== ==========
</TABLE>
On October 10, 1996, the Company restructured the note payable to its bank,
which totalled $2,294,661 at that time. The bank, National Canada Finance
Corp. ("NCFC") was also its then primary lending institution. A portion of
the note payable to NCFC plus related fees and expenses, aggregating
$1,544,661, was assumed by the Company's principal stockholder, Joseph M.
Lobozzo II ("Lobozzo"), and the balance of the loan, in the amount of
$750,000, was restructured as a Term Loan. The Company has an Amended and
Restated Credit Agreement with Lobozzo (the "Lobozzo Credit Agreement", as
amended, which provides for the "Lobozzo Loan"), which provides 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 equal to 100% of
the eligible receivables from and after June 7, 1997 and 130% for those
receivables which existed at June 6, 1997; (4) certain financial covenant
obligations with which the Company was in default under its prior loan from
NCFC were removed; (5) all assets of the Company, other than field spare
parts, were pledged as collateral for the Lobozzo Loan with the pledged
field spare parts being subordinated to the prior pledge under the Term
Loan; (6) for any loans provided in excess of the available Borrowing Base,
as defined in the Lobozzo Credit Agreement, the interest rate is 5
percentage points above the prime lending rate; and (7) payment is due on
June 30, 1998.
As of October 31, 1996 and August 15, 1997, there were principal balances
of $2,255,461 and $2,719,500, respectively, outstanding under the Lobozzo
Loan,
Page 42 of 91
<PAGE>
both of which balances included advances totaling $633,600 ("Overline
Advances") received from Lobozzo prior to the loan restructuring referred
to above.
The agreement underlying the Term Loan requires the Company to maintain a
ratio of field spare parts to outstanding indebtedness of at least 2.5 to
1. The Company has been in compliance with this ratio requirement for all
periods since inception of the loan restructuring. Lobozzo has pledged
480,000 of the Company's common shares owned by him as additional
collateral for the Term Loan. 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. 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" under the Lobozzo
Credit Agreement.
In addition, as of October 31, 1995 and October 31, 1996, the Company was
obligated to Lobozzo in the principal amount of $571,670 and $400,000,
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 (collectively with the amount to be loaned by
NCFC, the "Overadvance Facility"). In connection with the agreement whereby
Lobozzo provided the Lobozzo Commitment, the Company issued a May, 1995
Option Agreement entitling Lobozzo to purchase 11,440,475 of the Company's
common shares for an aggregate exercise price of $10. In February, 1997,
the May, 1995 Option Agreement, as amended and restated, was exercised in
full by the principal shareholder and by Joanne Lobozzo, and 11,440,475
common 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. As a
result of this transaction, Lobozzo and Joanne Lobozzo are both now control
persons of the Registrant. In May, 1997, the principal balance outstanding
on the Lobozzo Commitment was paid in full, and the documents upon which it
was based were terminated. Interest paid was as follows for the fiscal
years ended October 31:
1996 1995 1994
---- ---- ----
$ 405,869 $ 550,799 $ 368,050
Interest paid to Lobozzo for the fiscal years 1996, 1995 and 1994 was
$102,625, $40,533 and $48,000, respectively.
(4) Subordinated Debentures
In November, 1992 the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31, 1997
to the sellers ("the Sellers") of the assets acquired by Data Net on
November 1, 1992. As of October 31, 1996, the Sellers agreed to sell the
entire principal balance of the 8% subordinated debenture, together with
accrued interest of $55,384, to the Company for $75,000. This transaction,
which resulted in a $455,384 gain on purchase 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, as restated, to Lobozzo and Joanne Lobozzo
(the "Lobozzo Debenture"). The Lobozzo Debenture was 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
Page 43 of 91
<PAGE>
Company's common shares. Lobozzo has waived the $200,000 payments due
January 31, 1996 and 1997, and the $200,000 annual installments will
commence in January 31, 1998.
(5) Income Taxes
The components of the income tax provision (benefit) are as follows:
Year Ended October 31
---------------------
1996 1995 1994
---------- ---------- ----------
Current:
Federal $ -- $ -- $ --
State 7,489 4,000 47,000
Deferred:
Federal -- 1,199,000 (307,000)
State -- -- --
---------- ---------- ----------
$ 7,489 $1,203,000 $ (260,000)
========== ========== ==========
The income tax provision (benefit) is allocated as follows:
Year Ended October 31
---------------------
1996 1995 1994
------ ---------- -------
Income taxes related to
continuing operations $7,489 $(130,000) $ 154,000
Income taxes related to
extraordinary items -- -- --
Income taxes related to
discontinued operations -- 1,333,000 (414,000)
------ ---------- ---------
Total income taxes $7,489 $1,203,000 $(260,000)
====== ========== =========
A reconciliation of the income tax provision (benefit) with tax at the effective
federal statutory rate is as follows:
Page 44 of 91
<PAGE>
Year Ended October 31
---------------------
1996 1995 1994
---------- ----------- ---------
Federal provision (benefit) based on
statutory tax rate $ (279,000) $(1,324,000) $(307,000)
Permanent book-to-tax differences:
Goodwill amortization 16,000 195,000 13,000
Other permanent items (17,000) (74,000) 3,000
Increase in valuation allowance for
deferred taxes 282,000 2,376,000 --
State provision net of federal
tax effect 5,489 30,000 31,000
---------- ----------- ---------
$ 7,489 $ 1,203,000 $(260,000)
========== =========== =========
The components of the net deferred tax assets as of October 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Nondeductible inventory reserves $ 75,000 $ 228,000 $ 228,000
Nondeductible bad debt reserves 90,000 121,000 66,000
Nondeductible discontinued operations
reserves 35,000 -- --
Tax loss carryforwards 2,461,000 1,898,000 671,000
Accelerated book amortization of field
spare parts 74,000 200,000 379,000
Investment tax credit carryforward 111,000 111,000 75,000
Other -- 6,000 (32,000)
Less allocable valuation allowance (2,696,000) (2,414,000) (38,000)
---------- ---------- ----------
Total $ 150,000 $ 150,000 $1,349,000
========== ========== ==========
</TABLE>
At October 31,1996 the Company has recorded a deferred tax asset of
approximately $2,461,000 reflecting the benefit of approximately $7,241,000
in loss carryforwards, which expire in varying amounts between 2001 and
2011. Realization of this and other deferred assets is dependent on
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.
Page 45 of 91
<PAGE>
Income taxes paid were as follows for the fiscal years ended October 31:
1996 1995 1994
---- ---- ----
7,489 16,359 63,419
(6) Commitments
Operating Leases
The Company leases office space under various operating lease agreements
expiring through 2001. Net rental expense under these agreements was as
follows for the years ended October 31:
1996 1995 1994
-------- -------- --------
Rental expense $397,009 $427,473 $331,528
Sub-lease income (20,560) -- --
-------- -------- --------
Net Rental expense $376,449 $427,473 $331,528
As of October 31, 1996, the minimum future payments under non-cancelable
operating leases with initial or recurring terms for the next five years is
summarized as follows:
Fiscal Year Amount
----------- --------
1997 .................................................. $322,342
1998 .................................................. 311,054
1999 .................................................. 305,488
2000 .................................................. 295,488
2001 .................................................. 167,818
Thereafter ............................................ --
(7) Stockholders' Investment
Incentive Stock Option Plan -
The Company has an incentive stock option plan under which options to
purchase up to 600,000 of the Company's common shares may be granted to key
employees. Such options expire five years from the date of grant. The
exercise price shall not be less than the fair market value of the shares
on the date of grant. The following summarizes the activity of the stock
options under the plan as of October 31.
1996 1995 1994
-------- -------- --------
Outstanding - beginning of year 230,500 344,000 322,500
Granted 179,000 100,000 85,000
Exercised -- -- (250)
Canceled (44,000) (213,500) (63,250)
-------- -------- --------
Outstanding - end of year 365,500 230,500 344,000
======== ======== ========
Average exercise price of
outstanding and exercisable
options $ .40 $ .86 $ 1.08
======== ======== ========
Page 46 of 91
<PAGE>
Director Stock Option Plan -
The Company has a non-qualified stock option plan for eligible Board of
Director members. Under this plan, options to purchase up to 100,000 of the
Company's common shares may be granted to eligible directors with a maximum
of 8,000 common shares each year available to an individual member. Options
granted become exercisable one year after the date of grant and expire five
years after the date of grant. The following summarizes the activity of the
stock options under the plan as of October 31:
1996 1995 1994
---- ------- -------
Outstanding - beginning of year -- 6,000 14,000
Granted -- -- --
Exercised -- -- --
Canceled -- 6,000 (8,000)
---- ------- -------
Outstanding - end of year -- -- 6,000
==== ======= =======
Average exercise price of
outstanding and exercisable
options -- -- $ .65
==== ======= =======
Stock-Based Compensation - As discussed in Note 1, in October, 1995, the
Financial Accounting Standards Board issued Statement of Financial
Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", which
requires adoption in Fiscal 1997. Pursuant to this new standard, companies
are encouraged, but not required, to adopt the fair value method of
accounting for employee stock-based transactions. SFAS No. 123 defines a
fair value method of accounting for stock options and similar equity
instruments. Under the fair value method, compensation cost is measured at
the grant date based upon the fair value of the award and is recognized
over the service period, which is usually the vesting period. Companies are
also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees", but would be required to disclose in a note to the consolidated
financial statements pro forma net income and earnings per share as if the
Company had applied the new method of accounting. The Company has not yet
determined if it will elect to change to the fair value method, nor has it
determined the effect the new standard will have on net income and earnings
per share should it elect to make such a change. Adoption of SFAS No. 123
will have no effect on the Company's cash flows.
Page 47 of 91
<PAGE>
DELTA COMPUTEC INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Balance Charged Charged Balance
Beginning to costs to other Net Amounts End of
of Period and Expenses Accounts Written Off Period
--------- ------------ -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1996:
$ 652,523 $ 84,418 $ -- $ (473,133) $ (263,808)
========== ========== ========= =========== ==========
Year ended October 31, 1995:
$ 193,238 $ 631,701 $ -- $ (172,416) $ 652,523
========== ========== ========= =========== ==========
Year ended October 31, 1994:
$ 106,819 $ 144,181 $ -- $ (57,762) $ 193,238
========== ========== ========= =========== ==========
</TABLE>
Allowance for Obsolete Inventory
<TABLE>
<CAPTION>
Balance Charged Charged Balance
Beginning to costs to other Net Amounts End of
of Period and Expenses Accounts Written Off Period
--------- ------------ -------- ----------- ------
<S> <C> <C> <C> <C> <C>
Year ended October 31, 1996:
$ 671,711 $ 84,193 $ -- $ (535,000) $ 220,904
========== ========== ========= =========== ==========
Year ended October 31, 1995:
$ 671,711 $ -- $ -- $ -- $ 671,711
========== ========== ========= =========== ==========
Year ended October 31, 1994:
$ 511,711 $ 846,527 $ -- $ (686,527) $ 671,711
========== ========== ========= =========== ==========
</TABLE>
Page 48 of 91
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure .
None
Page 49 of 91
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
DIRECTORS OF THE REGISTRANT
Year first
Elected
Director Name and Background
1995 Alfred C. Engelfried, Director and Assistant Secretary, age 53,
is the President and owner of Market Sense, Inc. ("Market
Sense"), a management consulting organization located in
Rochester, New York, a position he has held since 1986. Mr.
Engelfried was elected a director of the Company in March, 1995.
Prior to joining Market Sense, Mr. Engelfried was President of
Fannon Metal Industries from 1976 to 1981.
1995 Michael A. Julian, Director and Secretary, age 50, is
Vice-President Operations/Finance of JML Optical Industries, Inc.
("JML"), with which Joseph M. Lobozzo II and Michael E. McCusker,
also directors and officers of the Company, are also associated.
Mr. Julian is the brother-in-law of Mr. Lobozzo, and the brother
of Joanne M. Lobozzo, the wife of Joseph M. Lobozzo II. Mr.
Julian was elected a director in April, 1995. Mr. Julian has been
associated with JML for over 17 years.
1988 Joseph M. Lobozzo II, Director and Chairman of the Board of
Directors, age 53, is the Chairman and Chief Executive Officer of
JML, a manufacturer, designer and importer of precision optical
systems. Messrs. Julian and McCusker, also directors and officers
of the Company, are also associated with JML. Mr. Lobozzo founded
JML and has been affiliated with JML for over 24 years. Mr.
Lobozzo is a general partner of several real estate partnerships
and has affiliations, including several directorships, with a
variety of professional and civic organizations, including FNB
Rochester Corp, a publicly-traded corporation, and the Greater
Rochester United Way. Mr. Lobozzo received his B.S. degree in
physics from the City University of New York. As of October 31,
1995 and October 31, 1996, Mr. Lobozzo was considered to be the
controlling person of the Company. As of the date of filing this
Form 10-K Report, Mr. Lobozzo and his wife, Joanne Lobozzo, are
considered to be controlling persons of the Company. (See
"Principal Shareholders" in Item 12 and "Control of the Company",
"Certain Transactions - Lobozzo Transactions" in Item 13).
Page 50 of 91
<PAGE>
1995 Michael McCusker, Director and Assistant Secretary, age 51, is
Senior Vice-President of JML, with which Messrs. Lobozzo and
Julian, also directors and officers of the Company, are also
associated. Mr. McCusker was elected a director in April, 1995.
Mr. McCusker has been associated with JML for over 20 years.
1997 John T. Smith, Director, age 50, was, through April, 1997, Chief
Executive Officer of JTS Computer Services, Inc. ("JTS"), a
company that he founded in 1980. JTS, which is engaged in the
business of software development and product sales, was sold to
Ajilon Corporation in April, 1997, and Mr. Smith is currently a
consultant to Ajilon. Mr. Smith is also currently associated
with private organizations in the areas of real estate
development, management consulting, media design and software
product development. Mr. Smith was elected a director in June,
1997 to fill an existing vacancy on the Board of Directors.
The Board of Directors held eleven (11) meetings during Fiscal 1995 and six
(6) meetings during Fiscal 1996. Each incumbent director attended at least 75%
of the total number of such Board meetings and Board Committees on which he
served which were held during his term of office.
The Board of Directors has standing Audit and Compensation Committees.
Following the resignation of prior directors who had been members of those
committees during Fiscal 1995, no replacements were made to fill those vacancies
and no meetings were held of those committees. Although the Company has no
standing Nominating Committee, the Board of Directors will consider director
nominees recommended by shareholders. In December, 1995, the Board designated an
Executive Committee which, at its outset, constituted the entire Board of
Directors.
The Audit Committee recommends the selection of, and confers with, the
Company's independent accountants regarding the scope and adequacy of annual
audits; reviews reports from the independent accountants; and meets with such
independent accountants and with the Company's internal auditors and financial
personnel to review the adequacy of the Company's accounting principles,
financial controls and policies. The sole current member of the Audit Committee
is Mr. Lobozzo. The Audit Committee held no meetings during Fiscal 1995 or
Fiscal 1996.
The Compensation Committee reviews the Company's compensation philosophy
and programs, and exercises authority with respect to the payment of direct
salaries and incentive compensation to directors and officers; loans to, or
guarantees of, obligations of such persons and some employee loans; and the
administration of the stock option plans of the Company. The sole current member
of the Compensation Committee is Mr. Lobozzo. The Compensation Committee held no
meetings during Fiscal 1995 or Fiscal 1996. During the portion of each fiscal
year in which each director served as a director, each director participated in
deliberations concerning executive officer compensation when such topics were
considered by the Board.
The Executive Committee was formed in December, 1995, following the close
of Fiscal 1995. The Executive Committee has such authority as is granted by
Page 51 of 91
<PAGE>
the Business Corporation Law of the State of New York. In addition, the
President and Chief Operating Officer is authorized to deal with any member of
the Executive Committee for advice and assistance as required or deemed
appropriate. The current members of the Executive Committee are Messrs.
Engelfried, Julian, Lobozzo and McCusker.
John T. Smith was elected a director in June, 1997, to fill a vacancy then
existing on the Board of Directors. Mr. Smith is expected to stand for
re-election as a director at the next meeting of shareholders. (See Item 5,
above.)
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the identities and positions of each of
the executive officers of the Company:
<TABLE>
<CAPTION>
Year First
Officer's Name Age Position with the Company Elected
- -------------- --- ------------------------- -------
<S> <C> <C> <C>
John DeVito 41 President and Chief Operating
Officer 1995
Joseph M. Lobozzo II 53 Director and Chairman of the
Board of Directors 1995
Michael Julian 50 Director and Secretary 1995
Frank J. Donnelly 57 Chief Financial Officer and Chief
Accounting Officer 1996
Alfred C. Engelfried 53 Director and Assistant Secretary 1995
Michael McCusker 51 Director and Assistant Secretary 1995
Edward J. Drohan 62 Vice President, Sales and Marketing 1996
Mary Metrick 48 Assistant Secretary 1995
</TABLE>
Mr. DeVito has been associated with the Company, or one or more of its
affiliates, and with one of the Company's predecessors in interest, R & M
Associates - Electronic Data Products Service, Inc. ("R&M Associates"), since
1978. During his tenure with R&M Associates and the Company, Mr. DeVito has held
various positions including: National Field Service Manager, Director of
Operations, Vice President of Operations and Vice President/General Manager. He
is currently President and Chief Operating Officer of the Company. (See Exhibit
A to this Form 10-K Annual Report.)
Mr. Donnelly has served as Chief Financial Officer and Chief Accounting
Officer of the Company since he joined the Company in February, 1996. Prior to
February, 1996, from 1993 to 1996 Mr. Donnelly served as financial consultant
Page 52 of 91
<PAGE>
to healthcare, manufacturing and publishing businesses. Mr. Donnelly was Vice
President of Finance for a healthcare business from 1990 to 1993. Prior to 1990,
he held similar positions with consumer products and healthcare businesses.
Ms. Metrick has been associated with the Company in various capacities
since 1989. During her tenure, Ms. Metrick has had responsibility for various
administrative and computer/software functions, assisted in the conversion of
the Company's reporting systems at the time of the relocation of the Company's
headquarters from Syracuse, New York to Teterboro, New Jersey, served as Acting
Corporate Controller and is currently MIS Manager.
The business experience of each of Messrs. Lobozzo, Englefried, Julian and
McCusker is set forth in "Directors of the Registrant", above. See also,
"Control of the Company" and "Certain Transactions - Lobozzo Transactions", Item
13, below.
Following the resignation in May, 1995 of Peter Smith, the Registrant's
former Chief Financial Officer, Walter Struble became the Acting Chief Financial
Officer of the Company and served in that capacity until his death in December,
1995.
In August, 1996, Edward Drohan was employed on a full-time basis as the
Company's Vice-President, Sales and Marketing, a position which is not an
elected corporate officership. Prior to becoming an employee, Mr. Drohan had
been a consultant to the Company since April, 1996. For the five-year period
prior to joining the Company, Mr. Drohan was self-employed as a consultant in
the computer maintenance field. During this period of time, Mr. Drohan's
principal client was Bankers Trust Company, located in New York, N.Y. Mr.
Drohan has also served for five years as the Vice President of Sales and
Marketing with Bell Atlantic Business System Services and for fifteen years with
Telex Computer Products and Storage Technology Corporation in various sales and
marketing capacities, ultimately serving as Vice President with both companies.
(See Exhibit B to this Form 10-K Annual Report.)
There is no family relationship between any executive officer, director or
person anticipated to be a nominee to become an executive officer or director,
except that Mr. Lobozzo and Mr. Julian are brothers-in-law.
Page 53 of 91
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During Fiscal 1995 and Fiscal 1996, the following persons were directors,
officers, or beneficial owners of more than 10 percent of any class of
securities of the Registrant registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any other person
subject to Section 16 of the Exchange Act with respect to the Company, who
failed to file, on a timely basis, as disclosed upon a review of Forms 3 and 4
and amendments thereto furnished to the Company, reports required by Section
16(a) of the Exchange Act during Fiscal 1995 and Fiscal 1996 or prior Fiscal
Years. John DeVito, 3 late reports and 3 unreported transactions; Edward Drohan,
2 late reports and 2 unreported transactions; Frank J. Donnelly, 1 late report
and 1 unreported transaction.
Item 11. Executive Compensation.
The following table sets forth information with respect to the President
and Chief Operating Officer, and each executive officer whose total annual
salary and bonus for Fiscal 1995 and Fiscal 1996 exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long-term Compensation
------------------- ----------------------
Name and
Principal Fiscal Option All other
Position Year Salary Bonus(1) (Shares) Compensation(2)
- -------- ---- ------ -------- -------- ---------------
<S> <C> <C> <C> <C> <C>
L. Rodger Loomis 1995(3) $ 71,346 $ -- -- $ 2,000
President and Chief
Executive Officer
from November, 1995 to
March, 1995
John DeVito 1995 $ 90,346 $ 8,767 100,000 $ 1,644
President and Chief
Operating Officer
from March, 1995 to
October, 1995
John DeVito 1996 $105,635 $ 16,922 10,000(6) $ 1,651
Edward Drohan 1996(3) $ 52,712(4) $ 20,000(5) --
</TABLE>
(1) Bonus pursuant to DeVito's Employment Agreement is set at 5% of the
consolidated net income of the Company and its subsidiaries as reported on the
Company's respective tax returns. The bonuses for Fiscal 1995 and Fiscal 1996
were awarded on a basis other than as provided for in DeVito's Employment
Agreement.
(2) The All Other Compensation column would include any amount of the Company's
match under the Delta Computec Inc. 401K Employee Retirement Plan, as
Page 54 of 91
<PAGE>
provided for in that Plan. During Fiscal 1995 and 1996, the Company made no
matching contributions.
(3) Partial year. Mr. Loomis' employment terminated during Fiscal 1995. Messrs.
DeVito and Drohan assumed their positions in Fiscal 1995 and Fiscal 1996,
respectively. Subsequent to the close of Fiscal 1996, Messrs. DeVito and Drohan
received options under the ISOP to purchase, respectively, an additional 50,000
and 50,000 common shares.
(4) Includes consultant compensation prior to becoming a full-time employee and
all draws (See "Employment Agreements", below).
(5) Does not include options issued in Fiscal 1997 to purchase an additional
50,000 common shares, or options to be issued in Fiscal 1998 to purchase an
additional 30,000 common shares. (See "Employment Agreements", below).
(6) Does not include options issued in Fiscal 1997 to purchase an additional
50,000 common shares, or options to be issued in Fiscal 1998 to purchase an
additional 50,000 common shares. (See "Employment Agreements", below).
The following table shows, as to the current Chief Operating Officer, the
Chairman of the Board of Directors, Chief Financial Officer, Vice President,
Sales and Marketing and other executive officers of the Company, information
concerning stock options granted in Fiscal 1995.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN FISCAL 1995
------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Full Option Term
- ----------------- ---------------------------------
% of Total Grant
Options Date
Options Granted to Exercise Expiration Present
Granted Employees in Price Date Value
Name (Shares) Fiscal 1995 (per share) ($) ($)(4)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DeVito 100,000 100% $.50 6/7/00 --
Lobozzo(1) 11,440,475 100%(2) -(3) 5/20/99 --
</TABLE>
(1) See "Certain Transactions - Lobozzo Transactions", below.
(2) No similar options were granted to employees and the grant was part of a
financing transaction and not because the recipient was an officer or director.
(3) The exercise price was an aggregate of $10.00 for all 11,440,475 common
shares. The shares have since been issued. (See Item 13, "Certain Transactions -
Lobozzo Transactions").
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<PAGE>
(4) The options were valued at an aggregate of $10 at the time of their
issuance, believed to be the then fair market value of the option in view of,
among other matters, the then financial condition of the Company. Neither the
Company nor the optionholder believe that the value of the option changed
significantly between the date of its issuance and October 31, 1995. As of
October 31, 1995, the Company's common shares were quoted at $0.13 bid and $0.25
asked. Neither the Company nor the optionholder represent that the option, or
the 11,440,475 common shares underlying the option, could be realized for a
value equivalent to the bid and asked price in an arms'-length transaction.
<TABLE>
<CAPTION>
OPTIONS GRANTED IN FISCAL 1996
Exercise Expiration Grant Present
Name Options % Price Date Date Value(4)
- ---- ------- - ----- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
DeVito 10,000 5.6 $ .13 4/29/01 (1) 4/30//96 --
Drohan 20,000 11.2 .13 4/29/01 (2) 4/30//96 --
Donnelly 10,000 5.6 .13 4/29/01 (3) 4/30//96 --
Metrick 5,000 2.8 .13 4/29/01 4/30//96 --
</TABLE>
(1) Does not include options for 100,000 shares called for to be issued pursuant
to the DeVito Employment Agreement (See "Employment Agreements", below), of
which options for 50,000 shares were issued in Fiscal 1997.
(2) Does not include options for 50,000 shares issued in Fiscal 1997 or options
for an additional 30,000 common shares called for to be issued in the future
pursuant to the Drohan Employment Agreement (See "Employment Agreements",
below).
(3) Does not include an option to purchase 25,000 common shares issued in Fiscal
1997.
(4) The options were valued at $0.13 at the time of their issuance, believed to
be the then fair market value of the option in view of, among other matters, the
then financial condition of the Company. Neither the Company nor the
optionholder believe that the value of the option changed significantly between
the date of its issuance and October 31, 1996. As of October 31, 1996, the
Company's common shares were quoted at a closing price of $0.10 per common
share. Neither the Company nor the optionholder represent that any option, or
the common shares underlying any option, could be realized for a value
equivalent to the bid and the asked price in an arms'-length transaction.
The following table shows aggregate option exercises in Fiscal 1995 and the
fiscal year end option values for the President and Chief Operating Officer, the
Chairman of the Board of Directors, and other executive officers of the Company.
Page 56 of 91
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL 1995
AND OCTOBER 31, 1995, OPTION VALUES
No options were exercised in Fiscal 1995. The Company believes that there
were no in-the-money options outstanding at October 31, 1995.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND OCTOBER 31, 1996, OPTION VALUES
No options were issued in Fiscal 1996. The Company believes that there were
no in-the-money options outstanding at October 31, 1996.
EMPLOYMENT AGREEMENTS
The Company has entered into a letter employment agreement (the "DeVito
Employment Agreement") with John DeVito ("DeVito"), the President and Chief
Operating Officer of the Company, dated October 23, 1995, pursuant to which
DeVito will serve as the President and Chief Operating Officer of the Company
through November 1, 1998. The DeVito Employment Agreement calls for a base
salary of $105,000 per year, plus a bonus of 5% of the net profits of the
Company and its subsidiaries as reported on the Company's tax return. In Fiscal
1995 and in Fiscal 1996, Mr. DeVito received bonuses of $8,767 and $16,922,
respectively, which bonuses were awarded on a basis other than as provided for
in the DeVito Employment Agreement. The DeVito Employment Agreement further
provided that, by July 1, 1996, the Board of Directors would consider a $15,000
increase in Mr. DeVito's base salary, based on factors which include changes in
net worth, cash flow, year-to-date profitability, projected profitability for
the full year, sales growth and employee satisfaction. In January, 1997,
DeVito's annual salary was increased from $105,000 to $120,000. The DeVito
Employment Agreement further provides that DeVito will receive stock options of
50,000 common shares at November 1, 1996 and November 1, 1997, for an aggregate
of 100,000 common shares. An option for 50,000 common shares of the November 1,
1996 option grant was issued as of the date of the filing of this Form 10-K
Annual Report. Options for the remaining 50,000 common shares will be issuable
in the future. (See Item 1 (A), (1), above).
The DeVito Employment Agreement also provides that, through November 1,
1998, in the event of a sale of 50.1% or more of the shares of the Company, or
Page 57 of 91
<PAGE>
a merger of the Company (a "Change of Ownership"), either of which results in a
non-voluntary termination of DeVito, DeVito will be entitled to receive his base
salary for one year; if DeVito is separated during the first year after a Change
of Ownership, DeVito's base salary will continue for the remainder of that year;
and, if DeVito accepts a position at another company during the first year after
a Change of Ownership, the Company will make up any difference in base salary in
the event of a salary reduction. In each instance, health plan benefits and life
insurance benefits will continue on the same terms. A copy of the DeVito
Employment Agreement is annexed to this Form 10-K Annual Report as Exhibit A.
(See Item 1 (A), (1), above).
During Fiscal 1996, the Company entered into a letter agreement (the
"Drohan Letter Agreement") with Edward Drohan ("Drohan"), its new Vice
President, Sales and Marketing, providing for the following: a base salary of
$90,000 annually with commission through October 31, 1996, at the Company's
standard commission rates on business personally generated by Drohan. In
accordance with the Company's standard policy, commissions are to be paid upon
receipt of payment from the customer. A $3,000 draw against commissions is
provided. Commencing November 1, 1996, the standard commission arrangement is
replaced by two programs designed to reward Drohan for contributions to the
Company's overall performance: (A) payment of 9% of the increase in pre-tax
profit from year to year, as reported for the Company's core business alone and,
therefore, excluding discontinued operations and the effect of extraordinary
items: the $3,000 per month draw will continue; pre-tax profit will be
calculated monthly and reconciled and remitted quarterly, with the entire
program to be reviewed annually; and (B) participation in the Company's "Senior
Management Profit Grid" which is designed to permit participants to earn a
portion of their compensation based on the pre-tax profitability the Company,
calculated on the percentage profitability and actual revenue. The Company is in
the process of finalizing this profit plan. A copy of the Drohan Letter
Agreement is annexed to this Form 10-K Annual Report as Exhibit B.
The Drohan Letter Agreement provides for the issuance of the following
stock options: options to purchase 40,000 common shares within ninety (90) days
of full-time employment (all of which have been issued); options to purchase
30,000 common shares within one year of the date of issue of the first option
and options to purchase 30,000 common shares within two years of the date of
issue of the second option. Options to purchase 70,000 common shares have been
issued as of the date of the filing of this Form 10-K Annual Report. Options for
the remaining 30,000 common shares will be issuable in the future. (See Item 1
(A), (1), above).
During Fiscal 1995, the Company terminated three employment agreements with
former employees: L. Rodger Loomis, the former President, Treasurer, Director,
Chairman of the Board of Directors, Chief Executive Officer and Chief Operating
Officer of the Company; Ronald Bulger, the former head of the Company's Intronet
Division, formed in November, 1994, upon the Intronet Acquisition and the former
President of Intronet, Inc.; and Robert Tripi, a former employee of the Company
associated with the Intronet Division, and a former Vice President of Intronet,
Inc. Messrs. Loomis and Bulger no longer have employment or consulting
relationships with the Company. The Company and
Page 58 of 91
<PAGE>
Mr. Loomis reached a resolution regarding Mr. Loomis' employment agreement (the
"Loomis Employment Agreement") stipulating that Mr. Loomis would receive weekly
payments covering a period of time from April, 1995 through March, 1997. (See
Item 13, "Certain Transactions - Loomis Transactions", below). These payments
have been completed. Mr. Tripi, through a corporation formed by Mr. Tripi, has
entered into a consulting agreement with the Company whereby Mr. Tripi and his
corporation assist the Company with a portion of the operations, as well as with
certain projects, related to its core business.
INCENTIVE STOCK OPTIONS
On November 1, 1983, the Company adopted an incentive stock option plan
pursuant to Section 442A of the Internal Revenue Code. The incentive stock
option plan was amended, effective September 28, 1985, again amended effective
January 1, 1987, and was thereafter restated in its entirety effective March 23,
1987, and was further amended by the shareholders at the 1992 and 1993 Annual
Meetings to increase the number of common shares covered by the Incentive Plan
to 600,000 common shares (such Incentive Plan, as initially adopted and as
amended and restated to date, is herein referred to as the "Incentive Plan").
Under the Incentive Plan, the Company's Stock Option Committee, which is
designated by the Board of Directors and currently consists solely of Lobozzo,
may grant options to key employees to purchase up to an aggregate of 600,000
common shares. Such options expire 5 years from the date of the grant. Pursuant
to law, the exercise price of the options will be equal to the fair market value
of the common shares on the date when the option is granted, except that
employees owning greater than ten percent (10%) of the issued and outstanding
common shares of the Company are only eligible for grants under the Incentive
Plan if the exercise price is 110% of such fair market value and if the term of
the option is not more than 5 years. A purpose of the Incentive Plan is to
assist the Company in attracting and holding valuable employees by providing
those employees with incentives to foster the growth of the Company. As of
October 31, 1995, options under the Incentive Plan covering an aggregate of
230,500 common shares had been issued and were outstanding. No exercises of
stock options occurred in Fiscal 1995. As of October 31, 1996, options under the
Incentive Plan covering an aggregate of 365,500 common shares had been issued
and were outstanding. No exercises of stock options occurred in Fiscal 1996. Of
the 600,000 common shares authorized to be issued under the Company's Incentive
Plan, options for 228,150 common shares have been exercised. During Fiscal 1995
and Fiscal 1996, DeVito, the President and Chief Operating Officer of the
Company, was granted an option to purchase, respectively, 100,000 and 10,000
common shares for a 5 year period at the then fair market value of the Company's
common shares, or, respectively, $0.50 and $0.13 per common share. From and
after the completion of Fiscal 1996, options covering an aggregate of 125,000
common shares have been reacquired under the Incentive Plan, and options
covering an aggregate of 125,000 common shares have been issued (including
50,000 to John DeVito, 25,000 to Frank J. Donnelly and 50,000 to Edward Drohan)
at the aggregate exercise price of between $0.17 and $.105 per common share.
Page 59 of 91
<PAGE>
NON-QUALIFIED STOCK OPTIONS
Effective September 28, 1985, the Company established a Non-Qualified Stock
Option Plan to be available to members of the Board of Directors who are not
otherwise employees of, or subject to, written employment or consulting
agreements with, the Company (the "Non-Qualified Plan"). The Non-Qualified Plan
is separate from, and in addition to, the Incentive Plan, and is administered by
the Stock Option Committee. The Non-Qualified Plan provides that: (1) no
individual is eligible to receive any option unless such individual has been a
member of the Board of Directors for a period of at least one year and also has
been designated as eligible for such receipt by the Stock Option Committee; (2)
the maximum number of common shares which each eligible director will be able to
acquire is 30,000; (3) the maximum aggregate number of common shares available
to eligible directors is 100,000; (4) no option granted will be exercisable for
a period of one year from the date such option is granted; and (5) the option
rights available to an eligible director will have a life of 5 years from the
date granted. As of October 31, 1995 and October 31, 1996, there were no options
outstanding, and no options had been exercised during either fiscal year. No
options under the Non-Qualified Plan have been issued or exercised since the
commencement of Fiscal 1995 or Fiscal 1996. No options are outstanding as of the
date of this Form 10-K Annual Report.
Long-Term Incentive Plans Awards In Last Fiscal Year
The Company is in the process of finalizing its Long-Term Incentive Plan.
Consequently, no awards have been made.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director $250 per each Board Meeting
attended by the director. During Fiscal 1996 and 1995, no fees were paid to any
non-employee directors, all of which fees were waived.
Item 12. Security Ownership of Certain Beneficial Owners and Management
PRINCIPAL SHAREHOLDERS
The following table sets forth as of October 31, 1996, certain information
concerning the Company's common shares held by: (i) each shareholder known by
the Company to own beneficially, or of record, more than 5% of the Company's
common shares, the only voting class of the Company's securities; (ii) each
director, and each nominee for director, of the Company; and (iii) all directors
and officers of the Company as a group. (1)
Page 60 of 91
<PAGE>
Name and address Amount and Nature of Percent of
Beneficial Owner(2) Beneficial Ownership Shares (3)
- ------------------- -------------------- ----------
Joseph M. Lobozzo II (4)
c/o JML Optical Industries, Inc. 15,499,575 79.26
690 Portland Avenue
Rochester, NY 14620
Michael A. Julian (5)
c/o JML Optical Industries, Inc. 23,000 .33
690 Portland Avenue
Rochester, NY 14620
Michael E. McCusker (6)
c/o JML Optical Industries, Inc. 10,000 .15
690 Portland Avenue
Rochester, NY 14620
Alfred C. Engelfried (7)
366 White Spruce Blvd 0 0
Rochester, NY 14623
John DeVito (8)
900 Huyler Street 343,500 4.87
Teterboro, NJ 07608
Willcox & Gibbs, Inc. (9) 1,000,000 14.68
Edward J. Drohan (10) 100,000 1.50
Frank J. Donnelly (11) 10,000 .15
Mary Metrick 5,000 .07
John T. Smith (12) 0 0
All Directors and
Officers as a group 16,066,075 80.58
(9 persons) (13)
1. After the close of Fiscal 1996, several transactions occurred involving
several of the persons listed hereafter. Reference is made to "Control of the
Company", "Certain Transactions - Lobozzo Transactions", and "Certain
Transactions - Willcox & Gibbs Transactions", in Item 13.
2. After the close of Fiscal 1996, certain other transactions occurred which may
require information to be provided by other persons for future reports, as
follows: Joanne M. Lobozzo, the wife of Joseph M. Lobozzo II (See "Certain
Transactions - "Control of the Company" and "Lobozzo Transactions" in Item 13),
Page 61 of 91
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and John DiProsa (See "Certain Transactions - Lobozzo Transactions" in Item 13).
3. The percentages shown on the table are based on 6,811,575 of the Company's
common shares issued and outstanding on October 31, 1996, the same number which
were outstanding on October 31, 1995, and include common shares which may be
acquired by the referenced shareholder within 60 days through the exercise of
options to purchase common shares, but such common shares are not included in
calculating the percentage of common shares beneficially owned by any other
shareholder, except for the percentage of shares applicable to Lobozzo, as to
which the number of common shares issued and outstanding is calculated at
19,556,400 common shares, and for the designation "All Directors and Officers as
a Group", as to which the number of common shares outstanding is calculated at
19,556,400 common shares plus common shares issuable upon exercise of options to
persons named in the table other than those issuable to Lobozzo, for an
aggregate of 382,500 additional common shares, for a total of 19,938,900 common
shares. Also includes options committed to be issued to Messrs. DeVito and
Drohan pursuant to their various letter agreements but not issued as of October
31, 1996 and other options issued in Fiscal 1997. Unless otherwise indicated,
each shareholder shown on the table has sole voting and investment power with
respect to the Common Shares beneficially owned by such shareholder.
4. Includes as of October 31, 1996: 1,999,750 common shares held in Mr.
Lobozzo's sole name; 1,304,350 common shares reserved for issuance upon exercise
of the 1992 Lobozzo Option Agreement issued concurrently with the Lobozzo
Debenture originally issued by the Company to Mr. Lobozzo on October 28, 1992,
and amended and restated on February 16, 1995, and on February 20, 1997; and
11,440,475 common shares reserved for issuance upon exercise of the May 1995
Lobozzo Option Agreement, which 11,440,475 common shares were issued after the
close of Fiscal 1996. (See Item 13). As of October 31, 1996, includes 435,000
common shares held in the name of JML, of which Mr. Lobozzo is the chairman,
chief executive officer and principal shareholder. Includes 20,000 common shares
held by Joanne Lobozzo and 300,000 common shares held by Mr. Lobozzo's three
adult children as to all of which Mr. Lobozzo disclaims voting power and
beneficial ownership. The number of common shares held by Mr. Lobozzo, Joanne
Lobozzo and their three adult children changed after the close of Fiscal 1996.
Also includes, as of October 31, 1996, 480,000 common shares pledged to NCFC as
part of the NCFC Restructuring. (See "Control of the Company" and "Certain
Transactions - Lobozzo Transactions", in Item 13).
5. Includes 12,500 common shares held jointly with his spouse and 1,000 common
shares held by his wife and minor son, jointly. Does not include any common
shares owned by JML of which Mr. Julian is an officer and minority shareholder,
all of which common shares are included in the calculation relating to Mr.
Lobozzo in Note 4 above, 1,000 common shares owned by his adult daughter, or
6,900 common shares owned by his adult son, who is also an employee of JML. The
number of common shares held by Mr. Julian and his wife changed after the close
of Fiscal 1996. (See "Control of the Company" and "Certain Transactions -
Lobozzo Transactions", in Item 13).
Page 62 of 91
<PAGE>
6. Does not include any common shares owned by JML of which Mr.McCusker is an
officer and minority shareholder, all of which common shares are included in the
calculation relating to Mr. Lobozzo in Note 4 above. The number of common shares
held by Mr. McCusker and his wife changed after the close of Fiscal 1996. (See
"Control of the Company" and "Certain Transactions - Lobozzo Transactions", in
Item 13).
7. The number of common shares held by Mr. Engelfried and his wife changed after
the close of Fiscal 1996. See "Certain Transactions - Lobozzo Transactions, in
Item 13.
8. Includes options to purchase 100,000 common shares agreed to be issued
pursuant to the DeVito Employment Agreement executed during Fiscal 1995, of
which options to purchase 50,000 common shares were issued in Fiscal 1997, and
options for an additional 50,000 common shares remain to be issued, gifts from
Lobozzo during Fiscal 1995 of 80,000 common shares and 20,000 common shares in
the name of DeVito and DeVito's spouse, respectively, an additional 1,000 common
shares owned by DeVito's spouse and options, as of October 31, 1996, options to
purchase 142,500 common shares pursuant to the Incentive Stock Option Plan, of
which an option to purchase 7,500 common shares at $.75 per share expired,
unexercised, on December 4, 1996, and an option to purchase 25,000 common shares
at $1.00 per share is scheduled to expire on September 18, 1997. During Fiscal
1996, options under the Incentive Stock Option Plan to purchase 25,000 common
shares were voluntarily surrendered by DeVito and an option to purchase 10,000
common shares was issued to Mr. DeVito. See "Certain Transactions - Lobozzo
Transactions, in Item 13, "Employment Agreements" and "Incentive Stock Options",
in Item 11.
9. Includes 1,000,000 common shares registered in the name of "Willcox & Gibbs
Data Net, Inc., and Dataspan Systems, Inc. Jt Ten", which organizations, under
amended names, are wholly-owned subsidiaries of Willcox & Gibbs. (See "Certain
Transactions - Willcox and Gibbs Transactions", in Item 13.
10. Includes 100,000 common shares agreed to be issued pursuant to the Drohan
Letter Agreement, 70,000 of which were issued in Fiscal 1997. (See "Employment
Agreements", above).
11. Does not include 25,000 common shares issuable pursuant to an option issued
in Fiscal 1997.
12. John T. Smith was elected a director during Fiscal 1997.
13. As of October 31, 1996, there were 6,811,575 common shares outstanding. The
figure of 15,991,075 includes the common shares to which reference is made in
Notes 4, 5, 6, 7, 8, 10 and 11, above and the option issued to Ms. Metrick and
assumes exercise of all options referenced to therein which were outstanding on
October 31, 1996. (See Note 3 above.)
Following the close of Fiscal 1996, there was a change of control of the
Company.
As of December 30, 1996, Lobozzo gave to his wife, Joanne Lobozzo, 74,875
common shares, bringing the number of common shares owned by Joanne Lobozzo in
her own name to 94,875 common shares. This transaction was a portion of the
transactions in which Lobozzo engaged with regard to the 1,519,750 common
Page 63 of 91
<PAGE>
shares owned by Lobozzo to which reference is made in Item 13, "Certain
Transactions - Lobozzo Transactions", below. Lobozzo transferred 635,000 common
shares to John DiProsa, who, as of the date of the transfer, became a holder of
in excess of 5% of the outstanding common shares of the Registrant. Following
the exercise of the Restated 1995 Lobozzo Options, Mr. DiProsa no longer held in
excess of 5% of the outstanding common shares of the Registrant.
In February, 1997, Lobozzo transferred to Joanne Lobozzo: (i) half of the
several debt obligations owed to him by the Company; (ii) half of the Restated
1992 Lobozzo Option Agreement to purchase 1,304,350 common shares; and (iii)
half of the Restated May 1995 Lobozzo Option to purchase 11,440,475 common
shares, as set forth in "Certain Transactions - Lobozzo Transactions", below.
In February, 1997, Lobozzo and Joanne Lobozzo each executed their Second
Restated May 1995 Lobozzo Option to purchase 5,720,238 and 5,720,237 common
shares, respectively, bringing their shareholdings in the Company to 6,730,113
and 5,815,112 common shares, respectively. The exercise of these Second Restated
May 1995 Lobozzo Options brought the number of issued and outstanding common
shares of the Company to 18,252,050 common shares. Following the February, 1997
transactions, Lobozzo and Joanne Lobozzo each owned, respectively, 36.87% and
31.86% of the issued and outstanding common shares of the Company. Lobozzo's
shareholdings include 480,000 common shares pledged to NCFC pursuant to the NCFC
Restructuring. Lobozzo and Joanne Lobozzo also each hold a Second Restated 1992
Lobozzo Option Agreement to purchase 652,175 common shares and, if exercised in
full, then the shareholdings and percentage of then 19,556,400 issued and
outstanding common shares of the Company for Lobozzo and Joanne Lobozzo would
increase to 7,382,288 (37.75%) and 6,467,287 (33.07%), respectively. If the
480,000 pledged common shares were returned to Lobozzo and divided equally with
Joanne Lobozzo, they would own 7,142,288 and 6,707,287 common shares,
respectively, 36.52% (Lobozzo) and 34.30% (Joanne Lobozzo) and in the aggregate
13,849,575 (70.82%) of the 19,556,400 issued and outstanding common shares.
As a result of these transactions, Lobozzo and Joanne Lobozzo are each
considered to be controlling persons of the Company.
Page 64 of 91
<PAGE>
Item 13. Certain Relationships and Related Transactions.
CONTROL OF THE COMPANY
As of October 31, 1996 Lobozzo had beneficial ownership of 15,499,575
common shares, or 79.26% of the common shares outstanding, either directly or
through control of JML, or beneficially through the shareholdings of his wife
and children (although Lobozzo disclaims beneficial ownership of the common
shares owned by his wife and children). Lobozzo was also the principal lender to
the Company by various loan agreements. (See Item 1, above, and Item 13,
"Certain Transactions - Lobozzo Transactions", below). As of October 31, 1995,
Lobozzo had beneficial ownership of 2,754,750 common shares, or 40.44% of the
then 6,811,575 common shares outstanding, either directly or thorough control of
JML, or beneficially through the shareholdings of his wife and children
(although Lobozzo disclaims beneficial ownership of the common shares owned by
his wife and children). In addition, as of October 31, 1996 and October 31,
1995, the Company had issued the Restated 1992 Lobozzo Option to Lobozzo which
was exercisable into 1,304,350 common shares and the Restated May 1995 Lobozzo
Option to purchase 11,440,475 common shares. If the Restated 1992 Lobozzo Option
Agreement were fully exercised and if the Restated May 1995 Lobozzo Option had
then been fully exercised, Lobozzo would then have had beneficial ownership of
15,499,575 Common Shares, or 79.26% of the outstanding Common Shares of the
Company. The Company believes that Lobozzo was a control person of the Company
as of October 31, 1996 and October 31, 1995, and is a control person of the
Company, as is Joanne Lobozzo, as of the date of filing of this Form 10-K Annual
Report. The change in control of the Company was reported in the February, 1997
Form 8-K Report.
CERTAIN TRANSACTIONS
Lobozzo Transactions
1. To assist in the completion of the Willcox & Gibbs Acquisition, Data Net and
Lobozzo, a director of both the Company and Data Net, entered into a private
placement of the Lobozzo Debenture due October 28, 1995, in the face amount of
$600,001 (the "Lobozzo Debenture"). The Lobozzo Debenture was later restated on
February 16, 1995, to extend its term through January 31, 1998. The Lobozzo
Debenture is guaranteed by a subordinated guaranty of the Company. The Company
also issued to Lobozzo the 1992 Lobozzo Option Agreement which entitles Lobozzo
to purchase 1,304,350 common shares of the Company at a price of $.46 per share
for a three-year period ending October 28, 1995. The 1992 Lobozzo Option
Agreement was also amended to extend its term through January 31, 1998. Lobozzo
waived the $200,000 payment due on January 31, 1996 and January 31, 1997, and
the Lobozzo Debenture is now due in annual installments of $200,000, commencing
January 31, 1998. In 1992, the Company also entered into a Registration Rights
Agreement with Lobozzo granting to Lobozzo certain registration rights with
regard to certain common shares of the Company which Lobozzo, at the time of the
Willcox & Gibbs Acquisition, had the right to purchase, and, subsequent to the
completion of the Willcox & Gibbs Acquisition, actually purchased, through the
conversion of a previously outstanding Non-
Page 65 of 91
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Negotiable Subordinated Debenture (as herein defined) of the Company. (See
Section 2, below). The Lobozzo Debenture and the 1992 Lobozzo Option Agreement
have each been amended and restated after the close of Fiscal 1996, to transfer
half of each security to Joanne Lobozzo. (See Sections 10 through 15, below.)
2. On June 1, 1990, the Company issued a $1,000,000 fluctuating rate
Non-Negotiable Subordinated Debenture due June 1, 1993 (the "Non-Negotiable
Subordinated Debenture"), to Lobozzo, then a director of the Company, and to
certain parties related to Lobozzo. The Non-Negotiable Subordinated Debenture
was convertible into common shares at the conversion price of $.40 per share.
Interest was payable quarterly at the interest rate offered on Jumbo
Certificates of Deposit on the interest payment date, 5.56% at October 31, 1991.
The proceeds from the Non-Negotiable Subordinated Debenture were used to acquire
R & M Associates in June, 1990. On December 23, 1992, all outstanding
Non-Negotiable Subordinated Debentures were converted, all such Non-Negotiable
Subordinated Debentures were cancelled, and on December 30, 1992, an aggregate
of 2,500,000 common shares were issued, of which 2,093,750 common shares were
issued to Lobozzo, an additional 300,000 common shares were issued to Lobozzo's
children, and the balance were issued to various other parties.
3. In May, 1995, the Company and its wholly-owned subsidiaries Data Net
(collectively, the Company and Data Net are referred to as the "Borrower") and
SAI/Delta and, collectively with the Borrower, "DCI"), and the Borrowers' then
commercial lender, NCFC, entered into the May 1995 Letter Agreement to provide
for the 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 NCFC Credit Agreement then existing
between the Borrower and NCFC. See Item 1 A, (3) above. SAI/Delta is a guarantor
of the Borrower's obligations with NCFC. Of the Overadvance Facility, $400,000
would be advanced to the Borrower by Lobozzo pursuant to an agreement (the "1995
Lobozzo Letter Agreement") and $300,000 by NCFC. The May 1995 Letter Agreement
and the 1995 Lobozzo Letter Agreement provided for a mechanism whereby, as the
Overadvance Facility was repaid, or additional advances on the Overadvance
Facility were required, Lobozzo and NCFC could be repaid or could advance
additional funds. On May 1, 1995, Lobozzo made the first $400,000 advance to the
Borrower on the Lobozzo Commitment to enable the Borrower to activate the
Overadvance Facility. Lobozzo was entitled to receive interest on the amount of
the outstanding Lobozzo Commitment at the same rate of interest that the
Borrower paid to NCFC. The interest rate was reduced following the end of Fiscal
1996 (See Section 8, below.) The participation of NCFC in the Overadvance
Facility was terminated on October 10, 1996, as a part of the NCFC Restructuring
(See Item 1 A, (4) above and Section 7, below). 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. The termination was reported
in the April, 1997 Form 10-Q Report.
4. Pursuant to the 1995 Lobozzo Letter Agreement, and in partial consideration
for the Lobozzo Commitment, the Company issued to Lobozzo the May 1995 Lobozzo
Option to purchase all of the Company's authorized, uncommitted, but unissued
common shares upon payment of $10. In the event the core business
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of the Company (representing essentially the service business of the Company,
but not including the business conducted by Data Net or the Intronet Division)
was sold prior to May 20, 1996, then, at the option of the Company's Board of
Directors, the May 1995 Lobozzo Option was cancelable (or if any common shares
were issued in the event of exercise of the option, those common shares could
have been repurchased by the Company at the exercise price) provided the Lobozzo
portion of the Overadvance Facility was paid in full with interest plus an
additional $100,000 payment. The core business of the Company was not sold by
May 20, 1996, and this portion of the 1995 Lobozzo Letter Agreement thereafter
became inapplicable. As of May 1, 1995, as of October 31, 1995, as of October
31, 1996, and as of the date of the filing of this Form 10-K Annual Report, the
Company had 20,000,000 common shares authorized, of which as of May 1, 1995,
6,811,325 common shares were issued and outstanding. Pursuant to various stock
option plans, an aggregate of 700,000 common shares have been reserved, of
which, on May 1, 1995, 256,150 common shares had been issued, leaving a balance
of 443,850 common shares reserved and unissued. The Company had also reserved
1,304,350 common shares for issuance upon exercise of the Restated 1992 Lobozzo
Option Agreement. The balance of the authorized, unreserved, but unissued common
shares, or 11,440,475 common shares, were agreed to be reserved for issuance
upon exercise of the option granted to Lobozzo by the May 1995 Lobozzo Option.
The period during which the option granted by the May 1995 Lobozzo Option could
be exercised was for four (4) years from May 20, 1995, through May 20, 1999. As
noted in Item 12 above, assuming exercise of the Restated 1992 Lobozzo Option
Agreement and the May 1995 Lobozzo Option, which has since been exercised,
Lobozzo and Joanne Lobozzo could hold an aggregate of 13,849,575 common shares,
or approximately 70.82% of the then issued common shares of the Registrant. (See
"Control of the Company" and Sections 10 through 15, below).
5. In September, 1995, Lobozzo made gifts of an aggregate of 100,000 common
shares to DeVito (80,000 common shares) and to Debra DeVito, DeVito's wife,
(20,000) common shares.
6. During Fiscal 1995, and in December, 1995, following the close of Fiscal
1995, in addition to the Lobozzo Commitment and the advances made by Lobozzo to
the Borrowers pursuant to the Overadvance Facility, Lobozzo and JML made the
1995 Additional Lobozzo Advances to the Company to enable the Company to take
advantage of business opportunities which, without the 1995 Additional Lobozzo
Advances, the Company would not have been able to engage in. The 1995 Additional
Lobozzo Advances were entered into pursuant to a procedure whereby Lobozzo
advanced to the Company funds to purchase specific products from vendors who
would not do business with the Company except on a COD basis. At the times when
the 1995 Additional Lobozzo Advances were made, the Company did not have a
sufficient borrowing base on the NCFC Credit Agreement, including the
Overadvance Facility, to make the required purchase of products on a COD basis.
The funds which the Company obtained from the 1995 Additional Lobozzo Advances
were then used to purchase products, and to immediately resell those products,
to customers of the Company pursuant to existing purchase orders. The Company
committed to repay the 1995 Additional Lobozzo Advances from the proceeds
received from the customers at the time the customers paid for the
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products, and the profits from the sale of those products were divided, on an
approximately 50/50 basis, between the Company and Lobozzo or JML. The procedure
whereby the 1995 Additional Lobozzo Advances were made was agreed to by NCFC
since NCFC then had a security interest in all of the assets of the Borrower.
These 1995 Additional Lobozzo Advances have since been repaid in full.
7. NCFC Restructuring
The original loan from NCFC to the Borrowers (the "Existing NCFC Loan"),
made pursuant to the NCFC Credit Agreement originally executed on April 1, 1994,
was amended five times thereafter. (See Item 1, above). On October 10, 1996, the
Registrant restructured its principal lending relationship with NCFC whereby a
portion of the loan from NCFC was purchased by Lobozzo and the balance of the
loan from NCFC to the Registrant was restructured as a term loan (collectively,
the entire transactions are referred to as the "NCFC Restructuring"). The NCFC
Restructuring Documents are each annexed to the Registrant's Form 8-K Current
Report dated October 24, 1996. (See Item 1 A, (3). The documents whereby the
NCFC Restructuring was accomplished are referred to as the "NCFC Restructuring
Documents". The description of the NCFC Restructuring is qualified in its
entirety by the NCFC Restructuring Documents.
As previously noted in Item 1, above, Data Net terminated its business
operations and voluntarily surrendered Data Net's collateral to NCFC so that
NCFC could liquidate that collateral and apply the proceeds of the liquidation
to reduce the indebtedness owing from Data Net to NCFC (the "Data Net Business
Termination"). NCFC completed that liquidation resulting in the application of
$122,128 to the Data Net obligation to NCFC. The documents relative to the Data
Net Business Termination, including the Forbearance Agreement, were filed with
the March, 1996 Form 8-K Report (the "Data Net Business Termination Documents").
The description of the Data Net Business Termination is qualified in its
entirety by the Data Net Business Termination Documents.
Following the Data Net Business Termination, NCFC, the Registrant, Data
Net, SAI/Delta and Lobozzo entered into a series of six amendments to the
Forbearance Agreement, and to the other Data Net Business Termination Documents,
which six amendments extended from time to time the Forbearance Period (as
defined in the Forbearance Agreement) and otherwise adjusted certain other terms
upon which NCFC continued to make loans to the Registrant. Following the
execution of Amendment No. 6 to the Forbearance Agreement dated September 9,
1996, NCFC issued three additional letters further extending the Forbearance
Period until, eventually, October 10, 1996. The six amendments to the
Forbearance Agreement, and the three subsequent extension of time letters, are
referred to, collectively, as the "Forbearance Amendments".
The Existing NCFC Loan, as amended by the Forbearance Agreement and the
Forbearance Amendments, as that Existing NCFC Loan existed immediately prior to
the NCFC Restructuring, provided the Registrant with the ability to borrow up to
a maximum of $2,200,000 subject to the Registrant's complying with certain
borrowing base requirements. Following, and as part of, the NCFC
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Restructuring, Lobozzo purchased from NCFC, and NCFC assigned to Lobozzo, a
principal portion of the Existing NCFC Loan in the amount of $1,449,816,
together with additional interest costs and expenses requiring a payment by
Lobozzo to NCFC of $1,544,661. Lobozzo purchased this portion of the Existing
NCFC Loan at face value, without discount. Pursuant to the Amended and Restated
Credit Agreement between the Registrant and Lobozzo (the "Lobozzo Credit
Agreement") and the Amended and Restated Promissory Note (the "Lobozzo Note"),
Lobozzo granted to Registrant the "Lobozzo Loan", whereby: (a) Lobozzo agreed to
increase the maximum amount which the Registrant could borrow from Lobozzo to
$2,550,000; (b) Lobozzo decreased the interest rate which the Registrant was
required to pay from the amount charged by NCFC which was 2 percent over prime
rate (and an increased rate of 4 percent over prime rate in the event of
maturity of the Existing NCFC Loan, with rates of 3 percent over prime rate in
the event NCFC ever permitted an overadvance of funds in excess of the Existing
NCFC Loan and a rate of 5 percent over prime rate in the event of a maturity of
an overadvance of funds) to 1 3/4 percent over prime rate with regard to the
entire Lobozzo Loan, with a rate of 3 3/4 percent over prime rate in the event
of a maturity of the Lobozzo Loan; (c) Lobozzo agreed to supply the Lobozzo Loan
for a period of 60 days with an intention to review the Lobozzo Loan during that
period to possibly extend it for a longer period of time as opposed to the
Existing NCFC Loan as to which NCFC had agreed to forebear with regard to
collection efforts, which Forbearance Period expired on October 10, 1996; (d)
Lobozzo agreed to restructure the borrowing base to permit the registrant to
borrow up to 105% of eligible receivables from the previous maximum amount of
80% of eligible receivables; (e) Lobozzo removed certain financial covenant
obligations of the Registrant as to which the Registrant had been in default
under the Existing NCFC Loan; and (f) Lobozzo agreed to take a reduced security
position from that which NCFC had under the Existing Loan Agreement, by entering
into an Intercreditor Agreement with NCFC, whereby NCFC, with regard to the NCFC
Term Loan (as herein defined), retained a first security position relative to
the Registrant's "Spare Parts Inventory" and Lobozzo, with regard to the Lobozzo
Loan, received by the Assignment and by an Amended and Restated General Security
Agreement, a security interest subordinated to NCFC with regard to the
Registrant's Spare Parts Inventory and a first security interest in all other
assets of the Registrant. Lobozzo received a security interest in the
Registrant's assets (subject to the Intercreditor Agreement) by the Amended and
Restated General Security Agreement.
The Registrant's lending agreement pursuant to the Lobozzo Loan was amended
to, among other matters, extend the term of the lending agreement from December
10, 1996 to March 31, 1997, and this expiration date was subsequently further
extended until April 30, 1997 and then to June 30, 1998. The terms of the
Amended and Restated Credit Agreement between the Company and Lobozzo (the
"Lobozzo Credit Agreement", as amended, which provides for 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 from and after June 7, 1997 and 130%
for those Eligible Receivables, as defined in Section 2.1 of the Credit
Agreement, as amended, which existed at June 6, 1997; (4) certain
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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; (6) for any loans provided in excess of the available
Borrowing Base, as defined in the Lobozzo Credit Agreement, the interest rate is
5 percentage points above the prime lending rate; and (7) payment is due on June
30, 1998. In February, 1997, Lobozzo transferred to Joanne Lobozzo half of his
interest in the Lobozzo Loan.
The balance of the Existing NCFC Loan was converted by NCFC to a five-year
Term Loan ("Term Loan") in the face amount of $750,000 by an Amended and
Restated Promissory Note ("NCFC Note"). The Term Loan provides for interest at
one percent over prime rate and requires payment of interest only for the five
years of the Term Loan with a payment of all principal five years after the date
of issuance of the Term Loan. The Term Loan provides that if any prepayment of
the Term Loan is made during the thirteenth through the thirty-sixth months, a
Quarterly Prepayment Premium (as defined in the NCFC Note) of $25,000 per
quarter (up to a maximum of $200,000) is required to be paid by the Registrant.
No prepayment premium is required for a prepayment prior to the thirteenth month
or after the thirty-sixth-month. The Term Loan is secured by the Spare Parts
Inventory of the Registrant pursuant to an Amended and Restated Security
Agreement. The Company has been in compliance with this ratio requirement for
all periods since inception of the Term Loan.
As an inducement to NCFC to enter into the NCFC Restructuring, Lobozzo,
pursuant to a Pledge Security Agreement: (a) pledged to NCFC 480,000 common
shares of the Registrant owned by Lobozzo (the "Pledged Shares") in his own
name; and (b) agreed to use his reasonable best efforts to cause the Registrant
to issue to NCFC before October 10, 1999, a warrant to be approved by the
shareholders of the Registrant (the "DCI Warrant"), to the effect that when the
common shares covered by the DCI Warrant are added to the Pledged Shares, NCFC
would have the right to own seventeen and one-half percent (17.5%) of the issued
and outstanding common shares of the Registrant. In the event Lobozzo is unable
to cause the Registrant to issue the DCI Warrant, Lobozzo agreed to assign to
NCFC a portion of the then existing May 1995 Lobozzo Option to purchase up to
11,440,475 Common Shares of the Registrant, which option to be assigned to NCFC
(the "NCFC Option"), when added to the Pledged Shares, would also enable NCFC to
purchase up to seventeen and one half percent (17.5%) of the issued and
outstanding common shares of the Registrant. The total amount of common shares
which NCFC may ever be entitled to receive pursuant to the aggregate of the
Pledged Shares and the DCI Warrant or the NCFC Option, are referred to in the
Pledge Security Agreement as the "NCFC Shares". Lobozzo also granted to NCFC a
Limited Non-Recourse Guaranty and Suretyship Agreement.
In the event the Term Loan is repaid in full prior to the thirteenth month
of the Term Loan, the Pledged Shares would be returned to Lobozzo (and, if ever
issued, the DCI Warrant would be cancelled, or, if ever issued, the assignment
of the NCFC Option would be cancelled). During the period from the thirteenth
month through the end of the thirty-sixth month of the Term Loan, the Term Loan
can be repaid, in whole or in part, but the Quarterly Prepayment
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Premiums referred to above, will be applicable. In the event of a partial
prepayment of the NCFC Note at any time prior to the end of the thirty-sixth
month, subsequent Quarterly Prepayment Premiums will be reduced on a pro rata
basis, and the total amount of NCFC Shares to which NCFC will have acquisition
rights will also be reduced proportionately.
If: (a) a default is ever made in payments required under the NCFC Note;
(b) Registrant fails to have, as of the last day of any month, a certified ratio
of Registrant's Spare Parts Inventory to the then outstanding principal amount
of the NCFC Note of at least 2.5 to 1; (c) Lobozzo ever declares an event of
default under his agreements with the Registrant; (d) Registrant raises capital
in an equity offering and does not remit fifty percent (50%) of the proceeds of
such an offering to NCFC to reduce the then outstanding Indebtedness (as defined
in the NCFC Note) of Registrant to NCFC; or (e) certain other events of default
as specified in the NCFC Note occur, in all events after certain applicable cure
periods, then, if any such event occurs, NCFC shall be entitled to acquire
immediately and to dispose of all NCFC Shares. In addition, if the NCFC Note is
not paid in full by the end of the thirty-sixth month after its issuance, NCFC
shall also be entitled to acquire immediately and to dispose of, all NCFC Shares
(subject in each instance to the provisions of the Pledge Security Agreement).
Management of the Registrant intends to call a shareholder meeting which
will provide for the election of directors of the Registrant and which will
address the issues raised by the NCFC Restructuring including, but not limited
to, taking such action as is necessary to have the Registrant's shareholders
approve the issuance of the DCI Warrant. (See Item 5, above).
8. Amendments to certain loan agreements.
The Registrant and Lobozzo agreed to amendments of certain loan agreements
between the Registrant and Lobozzo to effectuate reductions of the interest rate
payable on those loan agreements.
The annual interest rate applicable to: (i) the Lobozzo Commitment
contained in the Lobozzo Letter Agreement; and (ii) the 1996 Additional Lobozzo
Advances, were each originally charged at the same rate of interest as charged
by NCFC with regard to the former NCFC Credit Agreement which, prior to the
assignment of that agreement from NCFC to Lobozzo on October 10, 1996, were
three percent (3%) over the prime rate of NCFC, and five percent (5%) over the
prime rate of NCFC in the event of maturity, by acceleration or otherwise.
By a document entitled Amendment No. 1 to the Lobozzo Loan, which was
annexed as an Exhibit to the Form 8-K Report filed on November 25, 1996, Lobozzo
and the Registrant and Data Net agreed that, from and after October 10, 1996,
the interest rate applicable to both the Lobozzo Commitment and the 1996
Additional Lobozzo Advances would be reduced to one and three quarters of one
percent (1 and 3/4%) per annum over the Prime Rate (defined as the highest prime
rate published from time to time in the "Money Rates" column of the Wall Street
Journal, or any successor publication, as it may change from time to
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time, based on a 360 day year), and to three and three quarters of one percent
(3 and 3/4%) over the Prime Rate in the event of maturity, by acceleration or
otherwise. These are the same interest rates as are paid by the Registrant to
Lobozzo under the Lobozzo Credit Agreement. The Lobozzo Credit Agreement was
entered into between Lobozzo and the Registrant and Data Net simultaneously with
the assignment to Lobozzo of the NCFC Credit Agreement.
By Amendment No. 1 to the Lobozzo Loan, the Registrant and Lobozzo also
agreed to amend the definition of "Borrowing Base" as to which "Loans" (as those
terms are defined in the Lobozzo Credit Agreement) could be made to the
Registrant under the Lobozzo Credit Agreement, to increase the Borrowing Base
available to the Registrant from the applicable portion of the Registrant's
eligible receivables to include one hundred percent (100%) of any positive cash
balance per books as shown by the internal records of the Registrant relative to
the operating account of the Registrant maintained at Manufacturer's & Traders
Trust Company (the "M&T Account"), together with any checks or instruments of
payments in the possession of either the Registrant, or NCFC, and in transit for
deposit to the M&T Account. By Amendment No. 1 to the Lobozzo Loan, Lobozzo also
waived any non-compliance which may have existed with regard to the Borrowing
Base for the period between October 10, 1996, and November 18, 1996, the date of
Amendment No. 1 to the Lobozzo Loan.
9. Amendment No. 2 to October 1996 Lobozzo Credit Agreement.
On December 10, 1996, the Registrant and Lobozzo amended the Lobozzo Loan
to extend the maturity date from December 10, 1996, to March 31, 1997, to
provide for reductions in the Total Available Borrowing Base (as that term is
defined in the Lobozzo Credit Agreement) for the months of January, February and
March, 1997, and to provide that if the Overbase Amount, consisting of the
amount of Loans outstanding from time to time exceed the Borrowing Base by
$300,000, then no checks will be written on the Borrower's account at
Manufacturer's & Traders Trust Company other than by Michael Julian, the
Registrant's Secretary or Michael McCusker, the Registrant's Assistant
Secretary. By Amendment No. 2 to the Lobozzo Loan, which was annexed as an
Exhibit to the February, 1997 Form 8-K Report, Lobozzo also waived any
non-compliance with regard to the Borrowing Base through the date thereof.
10. December 30, 1996, Lobozzo transfers.
As of December 30, 1996, Lobozzo made certain transfers (the "December 1996
Transfers") of certain of the common shares which he held on that date by gifts
to certain family members, and by sales to certain other persons. Prior to the
December 1996 Transfers, Lobozzo held in his own name an aggregate of 1,999,750
common shares of the Company, 480,000 of which were the Pledged Shares
represented by a certificate pledged to, and held by, NCFC as part of the NCFC
Restructuring.
Of the 1,519,750 remaining common shares, Lobozzo transferred an aggregate
of 600,000 common shares to his three children and 74,875 common shares to
Joanne Lobozzo. Lobozzo also sold an aggregate of 750,000 common shares to,
among other persons, three directors and officers of the Company as
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follows: Alfred C. Engelfried (jointly with his wife), 50,000 common shares;
Michael Julian (jointly with his wife), 25,000 common shares and Michael
McCusker (jointly with his wife) 25,000 common shares. (See Section 12, below),
Lobozzo also sold 635,000 common shares to John DiProsa, who thereafter became a
holder of in excess of 5% of the issued and outstanding common shares of the
Company (See "Principal Shareholders" in Item 12, above). Following the exercise
of the Second Restated May 1995 Lobozzo Option Agreements, Mr. DiProsa ceased to
be a holder of 5% of the issued and outstanding common shares of the Company.
Following the December 1996 Transfers, Lobozzo held in his own name, in addition
to the 480,000 Pledged Shares, 94,875 common shares, the same number then held
by Joanne Lobozzo.
11. Amendment No. 3 to October 1996 Credit Agreement.
(a) In February, 1997, Lobozzo transferred to Joanne Lobozzo half of
Lobozzo's interest in all lending obligations of the Company to Lobozzo, and
half of all option agreements between the Company and Lobozzo (the "February,
1997 Transfers"). The February, 1997 Transfers were made pursuant to Amendment
No. 3 to the Lobozzo Loan, whereby Lobozzo transferred to Joanne Lobozzo half of
the following debt securities: (i) the Lobozzo Debenture in the face amount of
$600,001, $300,000.50 of which was transferred to Joanne Lobozzo; (ii) the
Lobozzo Commitment in the amount of $400,000, $200,000 of which was transferred
to Joanne Lobozzo; (iii) the 1996 Additional Lobozzo Advances, in the face
amount of $633,600 as of October 10, 1996, $316,800 of which was transferred to
Joanne Lobozzo; (iv) the Lobozzo Credit Agreement which then established the
Lobozzo Loan in the maximum amount of $2,550,000, $1,275,000 of which was
transferred to Joanne Lobozzo; and (v) the Overbase Loans, half of which were
transferred to Joanne Lobozzo.
(b) By Amendment No. 3 to the Lobozzo Loan, Lobozzo also transferred to
Joanne Lobozzo half of the following securities: (i) the Restated 1992 Lobozzo
Option Agreement to purchase 1,304,350 common shares, of which a Second Amended
and Restated 1992 Option Agreement was entered into which entitled Joanne
Lobozzo to purchase 652,175 common shares; (ii) the Restated May, 1995 Lobozzo
Option which entitled Lobozzo to purchase up to 11,440,475 common shares for an
aggregate of $10, of which a Second Restated May, 1995 Lobozzo Option was
entered into which entitled Joanne Lobozzo to purchase up to 5,720,237 common
shares for $5 and entitled Lobozzo to purchase the balance of 5,720,238 for $5.
(c) By Amendment No. 3 to the Lobozzo Loan, Lobozzo also transferred to
Joanne Lobozzo the right to receive half of the 480,000 Pledged Shares which are
ever returned by NCFC pursuant to the October 10, 1996 Pledge Security
Agreement, from the pledge by NCFC, and Joanne Lobozzo agreed to provide half of
any additional common shares which Lobozzo might ever be required to transfer to
NCFC in the event of a default under the NCFC Restructuring. Amendment No. 3 to
the Lobozzo Loan was annexed as an Exhibit to the February, 1997 Form 8-K
Report.
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12. Exercise of Amended and Restated 1995 Lobozzo Stock Option
In February, 1997, Lobozzo and Joanne M. Lobozzo (collectively, the
"Lender") exercised their Second Restated May 1995 Lobozzo Options, each paid
$5, and each became entitled to receive, respectively, 5,720,238 and 5,720,237
common shares of the Registrant, all of which are "restricted securities" as
defined in Regulation D under the Securities Exchange Act of 1934, as amended.
The aggregate of 11,440,475 common shares was issued on February 21, 1997.
13. Amendment No. 4 to Lobozzo Loan
By Amendment No. 4 to the Lobozzo Loan, Lobozzo and Joanne Lobozzo agreed
to amend the Lobozzo Credit Agreement 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 to the Lobozzo Loan was
annexed as an Exhibit to the February, 1997 Form 8-K Report.
14. Amendment No. 5 to Lobozzo Loan
By Amendment No. 5 to the Lobozzo Loan, the Maturity Date of the Lobozzo
Loan was extended to June 30, 1998. Amendment No. 5 to the Lobozzo Loan was
annexed as an Exhibit to the April, 1997 Form 10-Q Report.
15. Amendment No. 6 to Lobozzo Loan
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 Lobozzo Loan, a copy of which was
annexed to the April, 1997 Form 10-Q Report, 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 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.
CONSULTING TRANSACTIONS
Mr. Engelfried, who has served as a director of the Company since March,
1995, has been a consultant for the Company since November, 1993. As a
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consultant, Mr. Engelfried's consulting fees aggregated $69,102 in Fiscal 1995
and $55,871 in Fiscal 1996. A portion of Mr. Engelfried's consulting fees, in
the amount of approximately $36,149 for services performed during Fiscal 1995,
remained unpaid at October 31, 1995 and $60,681 in consulting fees remained
unpaid at October 31, 1996. As of August 15, 1997, the Registrant was indebted
to Mr. Engelfried in the amount of $38,652. (See Section 10, "Lobozzo
Transactions", above).
WILLCOX & GIBBS TRANSACTIONS
1. On October 31, 1992, Data Net, engaged in the Willcox & Gibbs Acquisition
(See Item 1 A, above). The Willcox & Gibbs Acquisition was accomplished pursuant
to the terms of a certain Sale and Purchase Agreement dated as of September 29,
1992, as amended (the "Purchase Agreement"). The assets which were acquired by
Data Net consisted of, among other matters, all accounts receivable, security
deposits, inventories, tangible properties, rights in intangible assets and
intellectual property, rights in certain specifically assumed contracts (but not
rights or obligations under certain excluded contracts), prepaid expenses,
claims against third parties relating to the Assets, permits and documents,
books and records of the Sellers. The liabilities which were specifically
assumed included liabilities for accounts payable, current liabilities and
accrued expenses, subject, however, to a limitation on the amount of the
Liabilities which were assumed.
The consideration given for the assets acquired in the Willcox & Gibbs
Acquisition included: (i) the payment to the Sellers, or in escrow at their
direction, of $3,500,000 of funds by wire transfer; (ii) the issuance to the
Sellers of 1,000,000 common shares (the "Delta Shares") of the Company; (iii)
the issuance to the Sellers of the Willcox & Gibbs Debenture due October 31,
1997, of the Company and Data Net in the amount of $475,000; (iv) the issuance
to the Sellers of a joint 8% Subordinated Short-Term Note dated October 31,
1992, of the Company and Data Net, in the face amount of $1,150,000 (subject to
adjustment); (v) the entry into an Assumption Agreement dated October 31, 1992,
whereby, among other matters, Data Net assumed certain of the liabilities of the
Sellers; and (vi) the entry into a certain Registration Rights Agreement between
the Company and the Sellers, whereby the Sellers obtained registration rights
with regard to the Delta Shares. The Willcox & Gibbs Debenture has been
repurchased by the Company in November, 1996, effective October 31, 1996. (See
Item 1 A,(4), above, and paragraph (2), below).
Prior to the Willcox & Gibbs Acquisition, Data Net was in the business of
selling and installing data-communication network products and related
engineering services and Dataspan was in the business of selling and assembling
connectorized cable and cable plant systems. Data Net continued in those
businesses following the Willcox & Gibbs Acquisition until March 8, 1996 when
Data Net discontinued its operations (See Item 1 A, (2) and (5), above).
Page 75 of 91
<PAGE>
2. Rexel Debenture Purchase. Purchase of $475,000 Debenture of Registrant and
Subsidiary.
The Registrant signed the Rexel Letter Agreement, dated as of October 31,
1996, with Rexel DS, Inc., f.k.a. Willcox & Gibbs DS, Inc., and Rexel DN, Inc.,
f.k.a. Willcox & Gibbs DN, Inc. (collectively, the corporations identified above
are the "Sellers", as previously defined), whereby the Sellers agreed to sell to
the Registrant the Willcox & Gibbs Debenture, as amended, which was issued in
the original face amount of $475,000, and which, as of the date of the purchase,
was held by the Sellers and was due on October 31, 1997. By the Rexel Letter
Agreement, the Buyers agreed to purchase the Willcox & Gibbs Debenture for
payment of $75,000. The purchase price included the principal and interest
payable on the Willcox & Gibbs Debenture, which interest payable was in arrears
as of October 31, 1996 in the aggregate amount of $55,384. The Rexel Letter
Agreement provides for the release of the Borrowers from any obligations under
the Willcox & Gibbs Debenture. The purchase of the Willcox & Gibbs Debenture and
the terms of the Rexel Letter Agreement were consented to by Lobozzo and by
NCFC. Rexel, Inc., formerly Willcox & Gibbs, Inc., the parent of the Sellers,
holds 1,000,000 common shares of the Registrant. (See Item 12, Principal
Shareholders, above).
The purchase of the Willcox & Gibbs Debenture, which has been recorded in
Fiscal 1996, resulted in an extraordinary gain to the Registrant of $455,384,
which gain is included in the consolidated balance sheet of the Registrant in
the Registrant's consolidated net loss.
LOOMIS TRANSACTIONS
At the time of his employment by the Company in 1987, Mr. L. Rodger Loomis,
then the President of the Company, was granted an option to purchase 200,000
common shares at a price of $.375 per share for a period of time which expired
on January 22, 1993 (the "Loomis Option"). In January, 1993, Mr. Loomis advised
the Board of Directors that he desired to exercise the Loomis Option. The Board
of Directors authorized a loan to Mr. Loomis in the amount of $75,000 to enable
him to exercise the Loomis Option which was approved by shareholders at the 1993
Annual Meeting. The loan was evidenced by a Time Payment Promissory Note which
bore interest at a rate of interest not less than imputed interest as published
by the Internal Revenue Service. As of January 19, 1993, the date of the Time
Payment Promissory Note, the rate of interest, and the rate of interest
applicable to the Time Payment Promissory Note, was 6.15% per annum.
In March, 1995, Mr. Loomis resigned as an officer of the Company (and all
subsidiaries), and in April, 1995, Mr. Loomis resigned as a director of the
Company (and all subsidiaries). Mr. Loomis and the Company agreed to cancel all
existing agreements between themselves, including Mr. Loomis' then existing
Loomis Employment Agreement, with the consideration for such cancellation being
the Company's agreeing to make periodic payments to Mr. Loomis at a gross amount
sufficient to amortize the Time Payment Promissory Note over a period of
twenty-four months commencing April, 1995 and provide him with a net payment at
Page 76 of 91
<PAGE>
the rate of $1,000 per week for the period April, 1995 through March, 1997. All
payments as described herein have been made.
SAGE, RUTTY & CO., INC.
Sage, Rutty & Co., Inc., of which Gary Russell, formerly a director of the
Company until September, 1995, was a Vice President, was the managing
underwriter of the Company's initial public offering and was a market-maker in
the Company's common shares. During the period of time that Mr. Russell served
as a director of the Company, he disclaimed any interest in the common shares
held by Sage, Rutty & Co., Inc.
During Fiscal 1995, the Company failed to meet the requirements of the
NASDAQ for listing of its Common Shares on the NASDAQ market and the Company's
common shares were subsequently delisted. The Company believes that Sage, Rutty
& Co., Inc., is no longer a market-maker of the Company's common shares.
Page 77 of 91
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Items 14(a)(1), 14(a)(2) and 14(d): The following financial statements and
financial statement schedules are filed herewith:
Independent Auditors' Report
Consolidated Balance Sheets - October 31, 1996 and 1995
Consolidated Statements of Operations for the years ended October 31, 1996,
1995, and 1994
Consolidated Statements of Changes in Stockholders' Investment for the
years ended October 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the years ended October 1996,
1995, and 1994
Notes to Consolidated Financial Statements
Financial Statements Schedule - Schedule VIII - Valuation and Qualifying
Accounts for the years ended October 31, 1996, 1995 and 1994.
See Index to Exhibits for a list of exhibits to this Annual Report.
All other schedules are not submitted because they are not applicable or
not required under Regulation S-X or because the required information is
included in the financial statements or notes thereto.
Individual financial statements of the Company have been omitted because
the Company is primarily an operating company and no subsidiary included in the
consolidated financial statements has minority equity interests and/or
non-current indebtedness not guaranteed by the Company in excess of 5% of total
consolidated assets.
Item 14(a)(3) 14(b) and 14(c): Not Applicable, incorporated by reference or
referred to in Exhibits 10.48 through 10.51.
Page 78 of 91
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1933, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 18, 1997 DELTA COMPUTEC INC.
By:/s/ John DeVito
------------------
John DeVito
President and Chief
Operating Officer
By:/s/Frank J. Donnelly
------------------
Frank J. Donnelly
Chief Financial Officer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: August 18, 1997 By:/s/ Alfred Engelfried
------------------------
Alfred Engelfried
Director and Assistant
Secretary
Dated: August 18, 1997 By:/s/ Michael Julian
------------------------
Michael Julian
Director and Secretary
Dated: August 18, 1997 By:/s/ Joseph M. Lobozzo II
------------------------
Joseph M. Lobozzo II
Director and Chairman of
the Board of Directors
Dated: August 18, 1997 By:/s/ Michael McCusker
------------------------
Michael McCusker
Director and Assistant
Secretary
Dated: August 18, 1997 By:/s/ John T. Smith
------------------------
Director
Page 79 of 91
<PAGE>
INDEX TO EXHIBITS
The Exhibits denominated by (1) were previously filed as part of, and are
hereby incorporated herein by reference to, the Exhibits in the Registrant's
Registration Statement on Form S-18 (File No. 33-389NY) as amended by Amendment
No. 1. The number contained in parentheses set forth opposite the Exhibit
hereunder (and where elsewhere incorporated by reference) refers to the Exhibit
number in the Registrant's Registration Statement on Form S-18 and amendments
thereto.
The Exhibits denominated by (3) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report of Form 10-K for the fiscal year ended October 31, 1987.
The Exhibits denominated by (4) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1988.
The Exhibits denominated by (7) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1991.
The Exhibits denominated by (8) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Form
8-K dated November 13, 1992.
The Exhibits denominated by (9) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1992.
The Exhibits denominated by (11) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1994.
The Exhibits denominated by (12) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated May 4, 1995.
The Exhibits denominated by (14) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated March 23, 1996.
The Exhibits denominated by (15) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Quarterly Report on Form 10-Q for the period ended January 31, 1996, and filed
on September 18, 1996.
The Exhibits denominated by (16) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated October 24, 1996.
The Exhibits denominated by (17) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated November 25, 1996.
Page 80 of 91
<PAGE>
The Exhibits denominated by (18) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated February 20, 1997.
The Exhibits denominated by (19) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Quarterly Report on Form 10-Q for the period ended April 30, 1997, and filed on
June 18, 1997.
(3) Certificate of Incorporation and By-Laws
(3.1) Restated Certificate of Incorporation.
(3.2) Amended and Restated By-Laws of the Registrant.(3)
(3.3) Certificate of Change, changing Registrant's address.
(4.1) Specimen Stock Certificates representing shares of the
Registrant's $.01 par value Common Stock.(1)
(4.2) Restated Incentive Stock Option Plan.(4)
(4.3) Non-Qualified Stock Option Plan.(1)
(10.24) Building Lease Teterboro, New Jersey (7)
(10.31) Sale and Purchase Agreement dated as of September 29, 1992 (8)
(10.32) Amendment to Sale and Purchase Agreement dated as of October
31, 1992 (8)
(10.33) 8% Subordinated Debenture due October 31, 1997 (8)
(10.34) 8% Subordinated Short-Term Note, $1,150,000 (Subject to
Adjustment) dated October 31, 1992 (8)
(10.35) Assignment and Assumption Agreement dated October 31, 1992 (8)
(10.36) Registration Rights Agreement dated as of October 31, 1992 (8)
(10.37) 8% Subordinated Debenture due October 28, 1995 (8)
(10.38) Option Agreement dated October 28, 1992 (8)
(10.39) Registration Rights Agreement dated October 28, 1992 (8)
(10.40) Letter from Richard J. Mackey, President and Chief Financial
Officer of Willcox & Gibbs, Inc., to Peter D. Smith, Chief
Financial Officer of Delta Computec Inc., dated October 13,
1992 (8)
(10.43) Employment Agreement between Delta Computec Inc., and
L. Rodger Loomis dated September 1, 1992 (9)
(10.44) Joint Venture Agreement between SAI/Delta, Inc., and Systems
Automation, Inc., dated March 10, 1992 (9)
Page 81 of 91
<PAGE>
(10.48) Credit Agreement, National Canada Finance Corporation (11)
(10.49) Credit Agreement, National Canada Finance Corporation,
Amendment No. 1 (11)
(10.50) Asset Purchase Agreement dated October 17, 1994 (11)
(10.51) Amendment No. 1 to Asset Purchase Agreement (11)
(10.52) Credit Agreement, National Canada Finance Corporation,
Amendment No. 2 (11)
(10.53) Credit Agreement, National Canada Finance Corporation,
Amendment No. 3 (12)
(10.54) Credit Agreement, National Canada Finance Corporation,
Amendment No. 4 (12)
(10.55) Credit Agreement, National Canada Finance Corporation,
Amendment No. 5 (12)
(10.56) Letter agreements dated, respectively, May 1, 1995, May 1,
1995, and May 4, 1995, with Joseph M. Lobozzo II, a Director,
Chairman of the Board of Directors and controlling person of
the Registrant, relative to providing a commitment to advance
up to $400,000 of the Overadvance Facility provided by
National Canada Finance corporation, and granting a stock
option to Joseph M. Lobozzo II (12)
(10.57) Letter between Data Net and NCFC dated March 8, 1996 (14)
(10.58) Forbearance Agreement between the Registrant, Data Net and
NCFC dated March 8, 1996 (14)
(10.59) Release and Indemnification Agreement between the Registrant,
Data Net and NCFC dated March 8, 1996 (14)
(10.60) Reaffirmation of Guaranty between the SAI/Delta and NCFC dated
March 8, 1996 (14)
(10.61) Letter between NCFC and Data Net dated March 6, 1996 (14)
(10.62) Reaffirmation of Subordination dated March 8, 1996 between
Lobozzo and NCFC, constituting documents relative to the
disposition of assets of Data Net (14)
(10.63) Amended and Restated Promissory Note from the Registrant to
NCFC dated May 1, 1995 (16)
(10.64) Third Amended and Restated Promissory Note from the Registrant
to NCFC dated October 27, 1995. (16)
(10.65) Amendment No. 1 to Forbearance Agreement dated May 9, 1996
(16)
(10.66) Amendment No. 2 to Forbearance Agreement dated May 21, 1996
(16)
Page 82 of 91
<PAGE>
(10.67) Amendment No. 3 to Forbearance Agreement dated June 14, 1996
(16)
(10.68) Amendment No. 4 to Forbearance Agreement dated July 31, 1996
(16)
(10.69) Amendment No. 5 to Forbearance Agreement dated August 15, 1996
(16)
(10.70) Amendment No. 6 to Forbearance Agreement dated September 9,
1996 (16)
(10.71) Letter from NCFC to the Registrant dated October 1, 1996,
extending the Forbearance Period to October 3, 1996 (16)
(10.72) Letter from NCFC to the Registrant dated October 4, 1996,
extending the Forbearance Period to October 9, 1996 (16)
(10.73) Letter from NCFC to the Registrant dated October 10, 1996,
extending the Forbearance Period to October 10, 1996 (16)
(10.74) Assignment from NCFC to Lobozzo dated October 10, 1996 (16)
(10.75) Amended and Restated Promissory Note from the Registrant to
NCFC dated October 10, 1996, in the principal face amount of
$750,000 (16)
(10.76) Intercreditor Agreement between NCFC and Lobozzo dated October
10, 1996 (16)
(10.77) Amended and Restated Security Agreement between the Registrant
and NCFC dated October 10, 1996 (16)
(10.78) Pledge Security Agreement between Lobozzo and NCFC dated
October 10, 1996 (16)
(10.79) Form of Warrant from the Registrant to Lobozzo (the "DCI
Warrant"), attached as Exhibit A to the Pledge Security
Agreement, Exhibit 16, above, to be used in the event the
shareholders of the Registrant approve the issuance thereof
(16)
(10.80) Form of Stock Option from the Registrant to NCFC (the
"Assigned Option"), attached as Exhibit B to the Pledge
Security Agreement, Exhibit 16, above, to be used in the event
the shareholders of the Registrant do not approve the issuance
of the DCI Warrant (16)
(10.81) Form of Assignment Agreement from Lobozzo to NCFC to be used
in the event Lobozzo issues to NCFC the Assigned Option (16)
(10.82) Form of Stock Option from the Registrant to Lobozzo to be
issued in the event Lobozzo issues to NCFC the Assigned Option
(16)
(10.83) Limited Non-Recourse Guaranty and Suretyship Agreement between
Lobozzo and NCFC dated October 10, 1996 (16)
Page 83 of 91
<PAGE>
(10.84) Document from NCFC showing the payoff amounts for the Existing
NCFC Loan as of October 10, 1996 (16)
(10.85) Letter from NCFC to the Registrant dated October 10, 1996,
acknowledging receipt from Lobozzo on October 10, 1996, of
$1,544,661.10, with regard to the NCFC Restructuring and
assignment of a portion of the Existing NCFC Loan to Lobozzo
(16)
(10.86) Form of letter sent to customers of the Registrant advising
the customers of a different lock box address (16)
(10.87) Amended and Restated Credit Agreement between the Registrant,
Data Net and Lobozzo dated October 10, 1996 (16)
(10.88) Amended and Restated Promissory Note from the Registrant to
Lobozzo in the principal maximum face amount of $2,550,000,
dated October 10, 1996 (16)
(10.89) Amended and Restated General Security Agreement between the
Registrant, Data Net and Lobozzo, dated October 10, 1996 (16)
(10.90) Amended and Restated Unlimited Continuing Guaranty from
SAI/Delta to Lobozzo, dated October 10, 1996 (16)
(10.91) Amended and Restated General Security Agreement from SAI/Delta
to Lobozzo, dated October 10, 1996 (16)
(10.92) Cash Management Services Agreement between the Registrant and
Manufacturers & Traders Trust Company (16)
(10.93) Letter from NCFC dated April 24, 1996, advising Data Net that
$122,182 had been applied by NCFC to the outstanding Data Net
loan as a result of the liquidation of the Data Net assets
(16)
(10.94) Amendment No. 1 to Amended and Restated Credit Agreement and
Other Agreements (17)
(10.95) Rexel Letter Agreement dated as of October 31, 1996 (17)
(10.96) Option Exercise Documents relative to the Second Restated May
1995 Option Agreement (18).
(10.97) Option Transfer Document relative to the Second Restated May
1995 Option Agreement (18).
(10.98) Amendment No. 2 to Amended and Restated Credit Agreement and
Other Agreements dated December 10, 1996 (18).
(10.99) Amendment No. 3 to Amended and Restated Credit Agreement and
Other Agreements dated January 13, 1997 (18).
(10.100) Amendment No. 4 to Amended and Restated Credit Agreement and
Other Agreements dated February 18, 1997 (18).
Page 84 of 91
<PAGE>
(10.101) Second Amended and Restated May 1995 Stock Option Agreement
(Joseph M. Lobozzo II) (18).
(10.102) Second Amended and Restated May 1995 Stock Option Agreement
(Joanne M. Lobozzo) (18).
(10.103) Securities Transfer Document (18).
(10.104) Second Amended and Restated October 1992 Option Agreement
(Joseph M. Lobozzo II) (18).
(10.105) Second Amended and Restated October 1992 Option Agreement
(Joanne M. Lobozzo) (18).
(10.106) Second Amended and Restated 8% Subordinated Debenture due
January 31, 1998 - No. 1 (Joseph M. Lobozzo II) (18).
(10.107) Second Amended and Restated 8% Subordinated Debenture due
January 31, 1998 - No. 2 (Joanne Lobozzo) (18).
(10.108) First Amended and Restated Promissory Note (18).
(10.109) Amendment No. 5 to Amended and Restated Credit Agreement and
Other Agreements dated April 30, 1997 (19).
(10.110) Amendment No. 6 to Amended and Restated Credit Agreement and
Other Agreements dated June 9, 1997 (19).
(A)(10.111) Letter Employment Agreement between Registrant and John
DeVito dated October 23, 1995
(B)(10.112) Letter Employment Agreement between Registrant and Edward
Drohan dated March 25, 1996
(11) Statement re: computation of per share earnings. (This
document will be filed pursuant to a Form 8 Amendment to this
report along with the audited financial statements for the
fiscal year ended October 31, 1995.
(12) Statement re: computation of ratios. Not Applicable
(13) Annual report to security holders, Form 10-Q or quarterly
report to security holders. Not Applicable
(16) Letter re: change in certifying accountant. Not Applicable
(18) Letter re: change in accounting principles. Not Applicable
(19) Report furnished to security holders. Not applicable
(21) Subsidiaries of the Registrant (See attached).
Page 85 of 91
<PAGE>
(22) Published report regarding matters submitted to vote of
security holders. Not applicable
(23) Consents of experts and counsel. Not applicable
(24) Power of Attorney. Not applicable
(28) Information from reports furnished to state insurance
regulatory authorities. Not applicable
(99) Additional Exhibits. None
Page 86 of 91
Exhibit 21
Subsidiaries of the Company
Name Jurisdiction of Incorporation
- --------------------------------- -----------------------------
Computer Support Inc. Georgia
R&M Associates-Electronics Data
Products Service, Inc. New Jersey
SAI/Delta, Inc. Florida
Delta Data Net, Inc. New York
Page 87 of 91
<PAGE>
DELTA COMPUTEC, INC.
October 23, 1995
Mr. John De Vito
19 Amherst Drive
Yonkers, NY 10710
Dear John:
In the interest of your continued leadership of DCI, this letter
will outline an employment agreement that will take effect in the event
of the sale of 50.1% (or more) of the shares of Delta Computec Inc.
(DCI), this will be considered a change of ownership, or in the event of
a merger of DCI into another company with the management of the other
firm assuming management duties of the surviving entity.
In the event of your non-voluntary separation from DCI anytime
starting at a point within six (6) months prior to a change of
ownership, as defined above, DCI will continue your base salary for a
period of one year. If the acquiring (or merging) firm separates your
employ anytime during that year, DCI will continue your base salary for
the balance of the year. If you accept a position with another company
during that one year period, DCI will make up the difference (if the new
salary is lower) between your base salary at DCI and your base salary at
the new company. DCI will continue your current health plan benefits and
life insurance benefits with the same terms (regarding any new position)
as outlined above in the compensation section.
This employment agreement is binding from this date until November
1, 1998. I hope this accurately reflects our understanding. If you have
any questions, please call. If you agree with the above terms please
sign and return one copy to me.
Very truly yours,
Delta Computec, Inc. John DeVito
/s/ John DeVito
Joseph M. Lobozzo II ____________________________
Chairman of the Board
Date: 10/23/95 Date: 11/9/95
____________________________
Page 88 of 91
<PAGE>
October 23, 1995
Mr. John De Vito
19 Amherst Drive
Yonkers, NY 10710
Dear John:
The board of DCI has been very pleased with the direction and
leadership that you have provided since you assumed the responsibilities
of President/COO. This letter will outline a compensation offer that I
suggest take effect on November 1, 1995.
BASE SALARY: -- $105,000 per year. By July 1, 1996, the board
will consider your request for an additional $15,000 in base
salary. Factors that will be considered include changes in net
worth, cash flow, year-to-date profitability, projected
profitability for the full year, sales growth and employee
satisfaction.
INCENTIVE BONUS: -- As an incentive for improved corporate
performance, you will receive 5% of the net profits of the full
group of companies as reported on our corporate tax return.
Distributions with respect to this incentive bonus will be made
in three consecutive monthly payments commencing the month
following the tax return filing. At the Board's discretion,
portions of the earned incentive may be paid-out earlier based
upon the confidence level in year-end projections. Pro-rata
incentive compensation will be earned and payable for partial
years, only under the conditions of change of control, change of
ownership, permanent disability or death. In those cases it will
be calculated until the end of the last month of services
completed.
STOCK OPTIONS: -- You will receive stock options of 50,000 shares
at the beginning of year 2 and year 3 following this letter
(total 100,000 shares.)
If you have any questions or comments please feel free to contact
Fred or me. We anticipate better results for the company and truly
believe that with your leadership these expectations will be achieved.
Very truly yours,
Delta Computec, Inc.
/s/ Joseph M. Lobozzo II
- ------------------------------------------
Joseph M. Lobozzo II-Chairman of the Board
Page 89 of 91
<PAGE>
Corporate Headquarters
900 Heydar Street, Trenton, NJ 07808
800 477-9505
DCI Delta CompuTec Inc. 201-440-8565 Fax 201-440-3985
- ----------------------------------------------------------------------------
Innovative Service Solutions
March 14, 1996
Mr. E. F. Drohan
85 Fair Street
Carmel, New York 10512
Dear Ed,
I'm pleased to offer you the position of Vice President, Sales and
Marketing, Delta Computec, Inc. Your background and experience in our
industry, coupled with our vision and positioning in the market should make
us an unbeatable combination, enabling both you and the Company to quickly
reach our compatible goals of dynamic profitable growth and market
leadership.
The scope of our offer is very similar to the concepts we discussed at our
last meeting. Specifically;
1. You will begin working with us on a "phase in" basis as you wind
down your consulting practice. This period would begin no later than
April 1, 1996 and be completed with you on board full time no later
than ninety to one hundred twenty days thereafter.
2. During this phase you will be paid pro rata for your time at the
equivalent of a $90,000 base salary i.e. if initially you work three
days per week you will be paid 60% of a week's pay (three out of
five days).
3. In addition to this base salary, through the period ending October
31, 1996 you will earn commission at our standard rates on
business you personally generate and be paid that earned commission
at time of payment by the customer. Once you are on board full time,
we will provide a monthly draw against this commission program in
the amount of $3,300.
4. Beginning November 1, 1996, your commission program will be replaced
by two profit oriented programs designed to reward you for your
contribution to the Company's overall performance.
A. You will earn 9% of the increase in pre tax profit from year to
year. Your draw will continue during this period but be against
your earnings on this program, not on commissions. The pre tax
profit incentive will be calculated monthly and
reconciled/remitted quarterly. This program will be reviewed at
the end of each year and of course will be subject to
modification or change in the event of any acquisitions.
Page 90 of 91
<PAGE>
B. You will participate in the Senior Management Profit Grid. This
grid will be intended to allow you to earn a portion of your
compensation based on the pre tax profitability of the Company.
It will be based both on percent profitability as well as
absolute dollars. The Board is currently structuring this
program and will have it completed well before the beginning of
the period being measured. Obviously, this portion of your
compensation can only be calculated and verified at year end as
part of the Company's audit and, as such, no advances can be
made against it.
5. As part of our offer we also include the following stock option
program;
40,000 share option to be issued following ninety days regular full
time employment defined for these purposes as thirteen consecutive
forty+hour weeks
30,000 share option issued one year from date of issue of first
option
30,000 share opition issued two years from date of issue of first
option
Because of the clinical nature of offer letters it is often difficult to
find the opportunity to express the enthusiasm and excitement that went into
making them up. We want you to know that we feel you will be an
integral/driving force in the Company's future success and look forward to
together building DCI into the profitable and dynamic enterprise that it is
so capable of becoming! I ask that you acknowledge your acceptance of this
offer by signing and returning one copy to me no later than Monday, March
19, 1996 and that you be prepared to start on a phase in basis as soon
thereafter as possible, being on board full time no later than August 1,
1996.
Very Truly Yours,
/s/ John De Vito, President
---------------------------
John De Vito, President
Accepted:
/s/ Edward F. Drohan
--------------------
E. F. Drohan Date 3/25/96
Page 91 of 91
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