U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
for the year ended October 31, 1995
Filed Pursuant to
THE SECURITIES EXCHANGE ACT OF 1934
DELTA COMPUTEC INC.
(Exact name of registrant as specified in its charter)
AMENDMENT NO. 1
The undersigned Registrant hereby amends the following items, financial state-
ments, exhibits or other portions of its Annual Report on Form 10-K for the
year ended October 31, 1995, as set forth in the pages attached hereto:
Item 1. Business.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Item 8. Consolidated Financial Statements and Supplementary Schedule.
Item 10. Directors and Executive Officers of the Registrant.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Item 13. Certain Relationships and Related Transactions.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: December 24, 1997 DELTA COMPUTEC INC.
By: /s/ John DeVito
John DeVito
President and
Chief Operating Officer
<PAGE>
PART I
Item 1. Business
THIS AMENDMENT NO. 1 TO THE REGISTRANT'S 1995 FORM 10-K ANNUAL REPORT
("AMENDMENT NO. 1 TO 1995 FORM 10-K") CONTAINS AUDITED FINANCIAL INFORMATION
WHICH IS PRESENTED ON A DIFFERENT BASIS THAN THE AUDITED FINANCIAL INFORMATION
CONTAINED IN THE REGISTRANT'S FORM 10-K ANNUAL REPORT FILING AS OF AND FOR THE
MOST RECENT FISCAL YEAR-END FOR WHICH AUDITED FIGURES ARE DUE TO BE FILED, THE
1996 FORM 10-K REPORT (AS HEREIN DEFINED). THIS DIFFERENT PRESENTATION BASIS IS
RELATED TO THE DISCONTINUED OPERATIONS OF A SUBSIDIARY AND OF A DIVISION OF THE
REGISTRANT. SEE ITEM 1, C, HEREAFTER FOR A MORE COMPLETE DESCRIPTION OF THIS
DIFFERENCE IN PRESENTATION.
Item 1 as originally written is deleted in its entirety, and the following
is added in its place and stead.
A. General
Delta Computec Inc. and its subsidiaries/divisions (collectively, the
"Registrant" or the "Company"), provide a wide array of Computer System, Data
Communication and Lan/Wan technical services and products to a customer base
which encompasses many industries and many geographic locations. Its 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.
While the Company maintains its corporate headquarters in Rochester, New
York, its main operation center is located in Teterboro, New Jersey. The
Northeast and Mid-Atlantic regions are both serviced from Teterboro while other
areas of the country are supported by branch locations in: Altamonte Springs,
Florida; Sunrise, Florida; Beltsville, Maryland (which operation was
subsequently moved to Newark, Deleware in September, 1997); Feasterville,
Pennsylvania (which operation was subsequently moved to Trevose, Pennsylvania in
June, 1996); Syracuse, New York (which operation was subsequently closed and
moved to the Company's main operation center in Teterboro, New Jersey in July,
1995); and Wilmington, Delaware (which operation was subsequently moved to
Newark, Delaware in March, 1995). The Company had locations in: Atlanta,
Georgia, subsequently closed in September, 1996; Escondido, California,
subsequently closed in September, 1997; and Waltham, Massachusetts, at which
location management decided, in the fourth quarter of Fiscal 1996, to terminate
operations in the Company's Intronet Division and eventually closed this office
in December,1996. 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.
As reported in the Registrant's Form 10-K for the fiscal year ended October
31, 1996 filed in August, 1997 (the "1996 Form 10-K Report"), in November, 1992,
the Company completed the acquisition of the assets of Willcox & Gibbs Data Net,
Inc. ("W&G Data Net") and Dataspan Systems, Inc. ("W&G Dataspan") from Willcox &
Gibbs through the Company's wholly-owned subsidiary, Delta Data Net, Inc. ("Data
Net" or the "Data Net Subsidiary"). The Company relocated its Data Net
Subsidiary to its main operations facility in Teterboro, New Jersey in March,
1993 and combined its operations with its computer hard- ware maintenance
organization. (See "Termination of Business of Delta Data Net, Inc.", 4, below).
As reported in the 1996 Form 10-K Report, in November, 1994, the Company
completed the acquisition of certain of the assets of Intronet, Inc.("Intronet,
Inc."), which assets formed the basis of the Company's Intronet Division
("Intronet" or the "Intronet Division"). Following the acquisition, the Company
assumed the lease on the Waltham, Massachusetts office of Intronet, Inc. (See
"Closing of the Intronet Division", 5, below).
In December, 1994, the Company acquired the balance of ownership in its
joint venture technical services company, SAI/Delta, Inc. ("SAI/Delta") and
operated from SAI/Delta's two Florida offices in Altamonte Spring and Sunrise.
During the fiscal year ended October 31, 1995 ("Fiscal 1995"), and also in
the fiscal year ended October 31, 1996("Fiscal 1996") and the fiscal year ended
October 31, 1997("Fiscal 1997"), certain significant events occurred, including
the following:
1. Changes in the Company's senior management
As reported in the 1996 Form 10-K Report,certain senior management changes
occurred during Fiscal 1995 and Fiscal 1996. These senior management
changes were described more fully in the 1996 Form 10-K Report and letters
of employment between the Company and certain senior management employees
were annexed to the 1996 Form 10-K Report.
2. A return to the Company's core business
As reported in the 1996 Form 10-K Report, in April, 1995, management and
the Board of Directors of the Registrant had 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.
3. References to 1995 Form 10-K As Previously Filed
The matters covered in the following subheadings in Item 1 of the
originally filed Form 10-K for the fiscal year ended October 31, 1995 filed
on February 13, 1996 (the "Original 1995 Form 10-K Filing") are referred to
elsewhere in this Amendment No. 1 to 1995 Form 10-K, or they remain as
stated in Item 1 of the Original 1995 Form 10-K Filing: "5. Relocation of
Functions" remains as stated in the Original 1995 Form 10-K Filing and "6.
Downsizing of the Intronet Division" is revised as stated in "5. Closing of
the Intronet Division", below.
4. Termination of Business of Delta Data Net, Inc.
As reported in the 1996 Form 10-K Report, 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 W&G Data
Net and W&G Dataspan, subsidiaries of Willcox & Gibbs, Inc. 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", 2, above, and "Additional Changes
In NCFC Financing Arrangements, NCFC Forbearance Agreement And Amendments
to NCFC Forbearance Agreement", 7, B, below).
5. Closing of the Intronet Division
As reported in the 1996 Form 10-K Report, 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.,
which assets thereafter formed the basis of the Company's Intronet
Division. Following the Intronet Acquisition, the Company operated the
Intronet Division from the former Intronet, Inc. office in Waltham,
Massachusetts. 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.
6. SAI/Delta Transaction
As reported in the Registrant's 1996 Form 10-K Report, 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.
<PAGE>
7. Changes In Registrant's Financing And Debt Position
A. $400,000 Lobozzo Commitment
As reported in the Registrant's 1996 Form 10-K Report, 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"). As
partial consideration for the Lobozzo Commitment (as herein defined), the
Company 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
amount owed to Lobozzo at October 31, 1995, excluding the amount owed to
Lobozzo under a subordinated debenture (See "Subordinated Debentures", E,
below) was $571,670, consisting of $400,000 principal outstanding under the
Lobozzo Commitment and $171,670 in the form of working capital advances.
The Overadvance Facility was originally 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
respective 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 Form 8-K Report"). (See Item 12, "Security
Ownership of Certain Beneficial Owners and Management", and Item 13,
"Certain Relationships and Related Transactions", below). 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. (See
also the July, 1997 Form 10-Q Report referred to in "C" and "D", herein.)
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 and 1996 Form 10-K Report.)
B. Additional Changes In NCFC Financing Arrangements, NCFC Forbearance
Agreement And Amendments to NCFC Forbearance Agreement
Forbearance Agreement
On April 1, 1994, the Company executed a credit agreement (the "NCFC Credit
Agreement") to provide a long-term credit facility (the "NCFC Credit
Facility"). Proceeds from this facility were utilized to refinance existing
credit facilities, to fund working capital requirements and to complete the
acquisition of certain assets of Intronet, Inc. This credit facility, which
was to have expired on April 30, 1997, was amended five times, the last
time having been on October 27, 1995.
As reported in the March, 1996 Form 8-K Report, 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. 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.
C. NCFC Restructuring
As discussed in a Form 8-K Report filed in October, 1996 regarding the
Company's restructuring of its lending arrangements (the "October, 1996
Form 8-K Report"), on October 10, 1996, the Company restructured its
principal lending relationship with NCFC. The Company's obligations under
the NCFC Credit Facility totalled $2,294,661 at that time. A portion of the
note payable to NCFC plus related fees and expenses, aggregating
$1,544,661, was assumed by Lobozzo, and the balance of the loan, in the
amount of $750,000, was restructured as a Term Loan from NCFC (the "Term
Loan"). The entire transactions are referred to as the "NCFC
Restructuring".
As reported in the 1996 Form 10-K Report, as part of the NCFC Restructuring
the Company entered into an Amended and Restated Credit Agreement with
Lobozzo (the "Lobozzo Credit Agreement", as amended, and as restated, which
provides for the "Lobozzo Loan"), which provides that: (1) the maximum loan
amount is $2,950,000, and, (a) from October 1, 1997 through December 31,
1997, up to $3,650,000, and, (b) from January 1, 1998 through June 30,
1998, up to $3,350,000, provided, as to the maximum loan amounts in (1),
(a) and (1), (b), respectively, that the Company meets its operating budget
targets as agreed between the Company's Board of Directors and the Lender
from time to time; (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. At
December 12, 1997, there was $3,058,000 outstanding on the Lobozzo Loan,
all of which principal outstanding represented Eligible Receivables which
came into existence from and after June 7, 1997 and as to which the Company
was permitted to borrow up to 100%.
The Lobozzo Credit Agreement was amended seven times, and, as of October
31, 1997, the Lobozzo Credit Agreement, Promissory Note, General Security
Agreement of the Company and Data Net, Unlimited Continuing Guaranty of
SAI/Delta and General Security Agreement of SAI/Delta were each restated
and, together with Amendment No. 7, are annexed as Exhibits to this
Amendment No. 1 to 1995 Form 10-K - (See Item 13, below).
As reported in the Registrant's Form 10-Q Quarterly Report for the period
ended July, 1997 (the "July, 1997 Form 10-Q Quarterly Report"), on
September 12, 1997, the Lender provided the Registrant with a letter
agreeing to raise the Maximum Loan Amount of the Lobozzo Loan from
$2,950,000, as included in the Amended and Restated Credit Agreement, as
amended, to a level that will accommodate the Company's anticipated revenue
growth associated working capital needs, provided that: (1) the Company
shall meet its operating budget targets as approved from time to time by
its Board of Directors; and (2) the Company's Loans in excess of the
available Borrowing Base shall not exceed $700,000 for the period October
1, 1997 to December 31, 1997 and $400,000 for the period January 1, 1998 to
June 30, 1998. This letter containing the aforesaid provisions was filed as
an Exhibit to the July, 1997 Form 10-Q Report. (See Item 13, below).
<PAGE>
D. Lobozzo Agreement To Provide Collateral For Performance And Payment
Bonds
As reported in the July, 1997 Form 10-Q Report, on September 11, 1997, in
connection with a request to a surety company to provide performance and
payment bonds to the Company totalling $1,000,000, singularly or in an
aggregate amount, Lobozzo signed a letter by which he agreed to provide
collateral in the amount of 25% of the awarded contract amount to
facilitate the possible issuance of performance and payment bonds for the
Company. Lobozzo's commitment pursuant to this Letter is in addition to the
Total Lobozzo Credit Facilities. This letter was filed as an Exhibit to the
July, 1997 Form 10-Q Report. (See Item 13, below).
E. Subordinated Debentures
In November, 1992, the Company and Data Net jointly issued an 8% subordin-
ated 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 (the
"November, 1996 Form 8-K 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.
As reported in the 1996 Form 10-K Report, 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. As more fully described
in the 1996 Form 10-K Report, the Lobozzo Debenture and the 1992 Lobozzo
Option Agreement were each restated in January, 1995 and were later further
restated in February, 1997 when Lobozzo transferred to Joanne Lobozzo half
of the agreements, and these documents have been reissued as the "Second
Restated Lobozzo Debentures" and the "Second Restated 1992 Lobozzo Option
Agreements". No payments of principal have been made on the Second Restated
Lobozzo Debentures, and the Second Restated 1992 Lobozzo Option Agreements
remain unexercised as of the date of this Amendment No. 1 to 1995 Form
10-K. Lobozzo has waived the $200,000 payments, due January 31, 1996 and
January 31, 1997, respectively, and the Lobozzo Debenture is now due in
annual installments of $200,000, commencing January 31, 1998.
8. Project overruns
As reported in the 1996 Form 10-K Report, at the time of the Intronet
Acquisition in November, 1994, the Company entered into a major contract in
excess of $4,000,000 with Hamilton College, located in Clinton, New York,
to provide extensive on-campus computer access to all of the college's
buildings. Actual costs incurred by the Company significantly exceeded
contractual estimates. The Company 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 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 subcontractor's litigation. The Company has acquired
from the subcontractor all of the subcontractor's claims against the
College. The Company has commenced a litigation against the College and one
of the College's employees asking compensatory and punitive damages. As of
the date of this Amendment No. 1 to 1995 Form 10-K, the matter remains
unresolved. (See Item 3, Legal Proceedings).
9. Election of New Director
In June, 1997, John T. Smith, age 50, was elected a director to fill an
existing vacancy on the Board of Directors.
B. Segment of Business Reporting
As of October 31, 1995, the operations of the Company were divided into the
following business segments for financial reporting purposes:
1. Delta Computec Inc. Core Technical And Maintenance Service Business
The Company's core technical and maintenance service business, conducted
through the parent entity, Delta Computec Inc., is based in providing
technical and maintenance services in direct support of its customers'
Computer Systems, Data Communication Systems and Lan/Wan Networks. Broadly,
these services include: network systems design; network analysis and
performance testing; network management; project management; premise
wiring; installation services; technical consulting services; maintenance
services help desk support; and complete outsourcing responsibility for all
or most of the foregoing. The Company's core business 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 are either charged at a predetermined 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.
2. Delta Data Net,Inc. Product Distribution/Cable And Accessory Business
Inaddition to the Company's core business, prior to the termination of
operations at its Data Net Subsidiary, the Company, through its Data Net
Subsidiary, distributed a wide variety of Computer System, Data
Communication and Networking products from over 40 manufacturers. Included
in this product group were modems, multiplexers, channel banks, CSU/DSU's,
workstations, terminal servers, hubs, bridges, routers, gateways, cable
assemblies, bulk cable and cabinets. The Company also offered a line of
high quality cables and accessories manufactured by the Data Net Subsidiary
through its Dataspan cable product line to service the extensive premise
wiring requirements of Data Communications installations. The Data Span
cable product line was terminated at the time the Company terminated the
business of its Data Net Subsidiary (See Section 1, A, 4, above).
3. Intronet Division
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 and
continuing losses in the Intronet Division's business, management 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 (See Section 1, A, 5, above).
Intersegment sales were not material. No single customer accounted for 10%
or more of the Company's sales. General corporate assets of the Data Net
Subsidiary principally consisted of cash, deferred taxes and other assets.
C. Services, Products and Markets
The Company operates in an extraordinarily large market. While the
Company's total sales and revenues are but a fractional percent of the dollars
spent each year for services and products related to Computer Systems, Data
Communications and Lan/Wan Networks, nevertheless the Company does have long-
standing relationships with major brokerage firms, banks and pharmaceutical
companies. By refocusing on its core business, the Company hopes to be able to
expand those relationships.
The Company's customers are not committed to fulfilling their Computer
System and Data Communication needs through a single manufacturer. 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 already outsourcing complete management of their Computer System and Data
Communication needs. By doing so, they 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 that are not able to provide higher level
technical services and continued margin pressure on companies that are
exclusively product/distribution oriented.
1. Technical Services
The Company's core business is based in providing technical and maintenance
services in direct support of its customers' Computer Systems, Data
Communication Systems and Lan/Wan Networks. As discussed in B,1, above,
broadly, these services include:
* 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
In Fiscal 1995, approximately 42% of the Company's total revenue was
generated from contractual Service Agreements. This compares to 42% in
Fiscal 1994 and 34% in Fiscal 1993. Technical services and maintenance are
performed either at the customer's site or at one of the Company's regional
offices or the Teterboro, New Jersey depot facility. 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
repair or replace the malfunctioning component or equipment. Frequently,
the Company's service personnel are permanently located at the customer's
site in order to ensure optimum response time to the customer's mission
critical 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 and
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 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 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 that 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 that are
either nationally-based or have a 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.
Backlog
As of October 31, 1995, the Company had service maintenance contracts
and technical Service Agreements in force with an annual volume of
approximately $5,772,000, subject to renewal on contract anniversary dates,
compared with approximately $6,558,000 at October 31, 1994 and $6,935,000
at October 31, 1993. The decreases of $786,000, or 12%, in Fiscal 1995 and
$377,000, or 5%, in Fiscal 1994 are indicative of the Company's customers'
preference for time and materials-based agreements. As of November, 1997,
the Company had service maintenance contracts and technical Service
Agreements in force with an annual volume of approximately $3,219,000
subject to renewal on contract anniversary dates. While this customer
preference for time and materials-based agreements is believed to still
exist, the dollar amount of technical Service Agreements in force has begun
to increase, which increase is believed to be attributable partially to
management's decisions and efforts to refocus on the Company's core
business. (See Section A, 2, above).
2. Products
In addition to the technical services provided, the Company, prior to the
termination of operations at its Data Net Subsidiary, distributed a wide
variety of Computer System, Data Communication and Networking products from
over 40 manufacturers. As discussed in B, 2, above, included in this
product group were modems, multiplexers, channel banks, CSU/DSU's,
workstations, terminal servers, hubs, bridges, routers, gateways, cable
assemblies, bulk cable and cabinets. The Company also offered a line of
high quality cables and accessories manufactured by the Company through the
Data Span Division of its Data Net Subsidiary to service the extensive
premise wiring requirements of Data Communications installations. The Data
Span Division of the Data Net Subsidiary was terminated at the time the
Company terminated the business of Data Net. (See Section A, 4, above).
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 sales of
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.
4. Government Regulation
To the best of the Company's knowledge, it is presently in compliance with
environmental statues and regulations.
5. Executive Officers Who Are Not Directors
John DeVito, President and Chief Operating Officer of the Company 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.
("R&M Associates") 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.
6. Employees
As of October 31, 1995, the Company had approximately 227 full and
part-time employees, consisting of 114 in its service maintenance business,
58 in its then operating, but now terminated, Data Net Subsidiary and 55 in
its then operating, but now terminated, Intronet Division. 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 IBEW Local 164 in
New Jersey to provide cable installers as needed. The number of employees
subject to this agreement fluctuates between 2 and 20. The Company
considers its relations with its employees to be good. As a result of the
Intronet Acquisition, the Company had agreements with Massachusetts IBEW
Local 1499 and, as of October 31, 1995, employed 12 union employees in the
northeast. With the closing of the Intronet Division's office, located in
Waltham, Massachusetts, in December, 1996, there are no union employees
from Massachusetts IBEW Local 1499 in the Company's employ. As of the date
of filing this Amendment No. 1 to 1995 Form 10-K, the Company had
approximately 136 employees.
D. Presentation of Certain Financial Statement Data
As reported in the 1996 Form 10-K Report, on February 13, 1996, the
Registrant made the Original 1995 Form 10-K Filing with unaudited, and
preliminary, financial statements for Fiscal 1995. The Registrant is filing this
Amendment No. 1 to 1995 Form 10-K to include the audited financial statements
for Fiscal 1995, which Fiscal 1995 audited financial statements were also
included in the 1996 Form 10-K Report. (See the discussion below with respect to
the accounting classification of the financial results of the Registrant's Data
Net Subsidiary and its Intronet Division).
As reported in the 1996 Form 10-K Report, because of several significant
occurrences in Fiscal 1995 and Fiscal 1996, the Company was delayed in
finalizing its audited results for Fiscal 1995. The Original 1995 Form 10-K
Filing which the Registrant filed on February 13, 1996 included unaudited, and
preliminary, financial statements for Fiscal 1995.
The 1996 Form 10-K Report contained the financial results for the Data Net
Subsidiary and the Intronet Division, as included in that 1996 Form 10-K Report,
under discontinued operations for all fiscal periods, and the decision by
management to terminate/discontinue the operations of the Data Net Subsidiary
and Intronet Division occurred during Fiscal 1996.
Each of the reports to which reference is made in this Amendment No. 1 to
1995 Form 10-K (except for the Original 1995 Form 10-K Filing as amended by this
Amendment No. 1 to 1995 Form 10-K), and each of the exhibits contained in these
reports, are herein incorporated by reference.
<PAGE>
Item 2. Properties
Item 2 as originally written is amended to add the following:
The final paragraph of Item 2 is deleted in its entirety, and the following
paragraph is added in its place and stead.
In September, 1997, the Company closed its office in Beltsville, Maryland,
and in June, 1996, the Company opened an office in Trevose, Pennsylvania.
<PAGE>
Item 3. Legal Proceedings
The following is added to Item 3 as originally written.
As reported in the 1996 Form 10-K Report, 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. All required payments to
date as stipulated in the agreement have been made. The amounts related to
this sales tax liability are reflected in the financial statements as of
October 31, 1995 and October 31, 1996, respectively.
As reported in the 1996 Form 10-K Report, 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. Based upon support provided by the Company, New York
State sent a revised determination in the amount of approximately $65,000,
excluding any interest and penalties. The Company is continuing to research
its records for the remainder of the affected sales. A final determination
has not been reached. The amount of the potential sales tax liability as of
October 31, 1996 is reflected in the financial statements. No such
provision existed in the financial statements as of October 31, 1995
because management was unaware of this potential liability at that time.
On December 12, l997, the Company commenced a litigation (the "Hamilton
Litigation") in New York State Supreme Court, Monroe County, against
Hamilton College and against one of Hamilton College's employees, seeking
compensatory and punitive damages based on several legal theories
including: breach of contract, quantum meruit, fraudulent inducement,
account stated and tortious interference with contractual relationships.
The Hamilton Litigation arose from claims of the Company that Hamilton
College failed to pay for work performed by the Company, and materials
ordered by Hamilton College and installed by the Company, all in connection
with a contract (the "Hamilton Contract") whereby the Company, through its
Intronet Division, installed at Hamilton College the infrastructure and
electronics for a campus-wide voice, data and telecommunications network.
Among other matters, the Hamilton Litigation alleges that the Company was
fraudulently induced to enter into the Hamilton Contract by inaccurate
documents provided by Hamilton College, that Hamilton College has failed to
make certain payments which it was required to make and has otherwise
breached the Hamilton Contract, and that Hamilton College has received the
benefit of work and materials provided by the Company for which Hamilton
College has not paid. The Hamilton Litigation also alleges that Hamilton
College's employees who is named as a defendant deliberately and
maliciously interfered with the Company's efforts to complete the Hamilton
Contract, that the Company complained about the employee's actions, but
that Hamilton College ignored these complaints and in fact acquiesced in
them, with the result that the Company's contractual relationships were
tortiously damaged.
Before the commencement of the Hamilton Litigation, one of the Company's
subcontractors under the Hamilton Contract, Marcy Excavation Company, Inc.
("Marcy"), had asserted claims against Hamilton College and against the
Company based on non-payment of statements rendered for subcontracting
work. Marcy had also filed a mechanic's lien (the "Mechanic's Lien")
against the College in Oneida County, New York (where Hamilton College is
located), and had commenced a litigation in Supreme Court, Oneida County,
New York against the Company's bonding company (the "Marcy Litigation").
Neither Hamilton College nor the Company was named as a party to the Marcy
Litigation. In November, 1997, the Company and Marcy settled the claim by
Marcy against the Company (but not Marcy's claim against Hamilton College)
in return for payments to be made to Marcy by the Company. As part of the
settlement, Marcy assigned to the Company all of Marcy's claims against
Hamilton College and assigned to the Company all of Marcy's rights under
the Mechanic's Lien. Marcy also agreed to discontinue the Marcy Litigation
at the time that Marcy received payment in full of the settlement payment
agreed to between Marcy and the Company.
Although the Hamilton Litigation has recently been commenced and no
responsive papers have yet been received from the defendants therein, the
Company does not anticipate (although it cannot guarantee) that it will
have any liability to the defendants as a result of the Hamilton
Litigation, or that it will have any liability as result of the Marcy
Litigation. As such, no accrual has been made in the financial statements
for either of those legal proceedings.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The first paragraph and accompanying charts of Item 5 as originally written
are deleted in their entirety, and the following paragraph and charts are
added in their place and stead.
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 trading price of the common
shares of the Registrant fell below the NASDAQ minimum bid price guidelines
and since then the common shares have traded only on local OTC markets. At
the end of Fiscal 1995, 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 and Fiscal 1994 were as follows:
<PAGE>
Fiscal 1994 Asked and Bid Prices
Asked Bid
1st Quarter $0.88 $0.75
2nd Quarter $0.75 $0.50
3rd Quarter $0.50 $0.50
4th Quarter $0.63 $0.50
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
Prices for the Company's common shares through the end of Fiscal 1996 are
set forth in the 1996 Form 10-K Report. As of December 19, 1997 the
Company's common shares were quoted at $.19 asked and $.13 bid.
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data Delta Computec Inc.
Item 6 as originally written and the attached chart and notes as originally presented are deleted in their entirety,
and the following are added in their place and stead. The selected data presented below for and as of the end of each
of the five years ended October 31, 1995, 1994, 1993, 1992 and 1991 are derived from the financial statements of the
Company which have been audited by Deloitte & Touche LLP, independent auditors. This data should be read in
conjunction with the related financial statements and notes included elsewhere in this Amendment No. 1 to 1995 Form
10-K.
STATEMENT OF OPERATIONS DATA:
1995 (1) 1994 1993 (2) 1992 1991
<S> <C> <C> <C> <C> <C>
Total Revenue $30,052,370 $25,361,745 $30,901,744 $8,468,566 $8,720,908
Earnings (Loss) Before
Extraordinary Items and (5,095,919) (643,426) (569,010) 242,954 199,369
Cumulative Effect of Accounting
Change
Extraordinary Items 156,000 (4) 110,000 (4)
Cumulative Effect of Accounting
Change 775,000 (3)
Net Earnings (Loss) (5,095,919) (643,426) 205,990 398,954 309,369
Earnings (Loss)/Share:
Continuing Operations
Extraordinary Items (.75) (.09) (.08) .07 .06
Cumulative Effect of
Accounting Change - - - - -
Net Earnings (Loss) - - .11 - -
(.75) (.09) .03 .12 .10
==========================================================================================================================
BALANCE SHEET DATA:
Total Assets $10,216,635 $13,521,285 $13,851,817 $ 6,174,750 $6,204,597
Short-Term Debt 3,813,925 3,624,339 708,663 500,193
Long-Term Debt 571,670 3,716,820 424,851 426,230 770,224
Subordinated Debentures 1,075,001 1,087,501 1,112,501 1,000,000 1,000,000
Stockholders' Investment (1,925,822) 3,170,097 3,813,398 1,532,943 1,133,293
==========================================================================================================================
(1) Operating results include the results of the Intronet Division from the date of the Intronet Acquisition of assets in
November, 1994.
(2) Operating results include the results of Delta Data Net, Inc. a wholly
owned subsidiary which acquired the assets of W&G Data Net Inc. and W&G
Dataspan Systems Inc. in November, 1992.
(3) The Company adopted the 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 $775,000 ($.11 per share) for the year
ended October 31, 1993.
(4) Utilization of Tax Loss Carryforwards.
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Item 7 as originally written is deleted in its entirety, and the following
is added in its place and stead.
Results of Operations
Operating results for the year ended October 31, 1995 (Fiscal 1995)
reflected a net loss of $5,095,919, or $.75 per share, compared with a net loss
of $643,426, or $.09 per share, for the year ended October 31, 1994 (Fiscal
1994) and net earnings of $205,990, or $.03 per share (after reflecting the
cumulative effect of a change in accounting of $775,000, or $.11 per share,
relating to income taxes) for the year ending October 31, 1993 (Fiscal 1993).
Operating results for Fiscal 1995 included relocation expenses and other
non-recurring charges associated with the move of the Company's operating
headquarters. Operating results for Fiscal 1994 and Fiscal 1993 included unusual
charges for obsolete inventory. The Fiscal 1995 operating loss also included
cost overruns on a major contract in the Company's Intronet Division and a
continued decline in revenue in its Data Net Subsidiary.
Revenues
Total revenues for Fiscal 1995, Fiscal 1994 and Fiscal 1993 were
$30,052,370, $25,361,745 and $30,901,744 respectively. Revenues increased
$4,690,625 or 18.5% in Fiscal 1995 over Fiscal 1994. This increase was primarily
due to the Intronet Acquisition concluded in November, 1994 and the related
revenues generated in Fiscal 1995 by the Intronet Division's business. Revenues
decreased $5,539,999 or 17.9% in Fiscal 1994 compared to Fiscal 1993. This
decrease was due to a $6,154,263 and 28.0% drop in revenues in the Company's
Data Net Subsidiary, reflecting the effect of the Company's tight cash flow upon
its ability to purchase hardware in the necessary volume and at competitive
prices.
Service revenues were $12,745,773 (42% of total revenues) in Fiscal 1995,
$10,572,860 (42%) in Fiscal 1994 and $10,485,117 (34%) in Fiscal 1993. The
increases in service revenues in Fiscal 1995 and Fiscal 1994 over each preceding
fiscal year were $2,172,913 (21%) and $87,743 (1%), respectively. Fiscal 1995's
growth reflects the benefit from the Intronet Acquisition, whereas Fiscal 1994's
modest increase came from the Company's service maintenance business.
Equipment sales were $17,306,598 (58% of total revenues) in Fiscal 1995,
$14,788,885 (58%) in Fiscal 1994 and $20,416,627 (66%) in Fiscal 1993. The
increase of $2,517,713 (17%) in Fiscal 1995's equipment sales came primarily
from the Intronet Acquisition. Fiscal 1994's equipment sales were $5,627,742, or
(28%), below Fiscal 1993's level, which reflected a downturn in the Company's
Data Net Subsidiary, caused by tight cash and the effect upon Data Net's ability
to purchase hardware in the necessary volume and at competitive prices.
Costs and Expenses
Service costs for Fiscal 1995, Fiscal 1994 and Fiscal 1993 were $11,052,935
(87% of service revenue), $7,654,062 (72%) and $7,341,708 (70%), respectively.
Service costs increased $3,398,873 or 44.4% in Fiscal 1995 compared to Fiscal
1994. Service costs in Fiscal 1994 increased $312,354 or 4.3% compared to Fiscal
1993. The deterioration in service costs over the three fiscal years as a
percentage of service revenue reflected the continued and increased losses in
the Data Net Subsidiary. The increase in Fiscal 1995's service costs was also
due to front-loaded costs associated with the Company's entry into the "high
end" Technical Consulting business, as well as the poor results in the Intronet
Division. Fiscal 1994 also reflected a decline in service contracts in the
Company's branch offices and high start-up costs associated with the Company's
entry into high volume laser printer maintenance.
Cost of equipment sold for Fiscal 1995, Fiscal 1994 and Fiscal 1993 was
$14,613,314 (84% of equipment sales), $12,492,382 (85%) and $16,638,212 (82%).
Cost of equipment sold increased $2,120,932 or 17.0% in Fiscal 1995 compared to
Fiscal 1994. This increase was due to the 17% increase in equipment sales. Cost
of equipment sold decreased $4,145,830 or 24.9% in Fiscal 1994 compared with
Fiscal 1993. This decrease was due to decreased equipment sales, partially
offset by lower margins on sales of Data Communication equipment sold due to
price pressure in the marketplace.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for Fiscal 1995, Fiscal 1994
and Fiscal 1993 were $7,102,284 (24% of total revenue), $5,682,689 (22%) and
$7,283,166 (24%), respectively. Selling, general and administrative expenses
increased $1,419,595 or 25.0% in Fiscal 1995 compared with Fiscal 1994,
primarily due to the acquisition of the Intronet Division's business. Selling,
general and administrative expenses decreased $1,600,477 or 22.0% in Fiscal 1994
compared with Fiscal 1993, which decrease was due to lower revenue as well as a
reduction in certain overhead expenses as a result of the continued integration
of the Data Net Subsidiary.
Inventory and Product Obsolescence
During Fiscal 1995, the Company accounted for normal product obsolescence
through inventory reserves. During the quarter ended October 31, 1994,
management made a decision to eliminate its stocking position of certain data
communication equipment in its Data Net Subsidiary. As a result, the Company
provided $846,527 as an unusual charge to write down certain data communication
equipment to its net realizable value. During the quarter and year ended October
31, 1993, an unusual charge was made in the amount of $700,866 to write down
certain inventories of data communication equipment of the Data Net Subsidiary,
which were assumed at the time of the Data Net Acquisition in November, 1992.
While Company personnel review obsolescence on a regular basis by reference to
historical movement and market conditions, the Fiscal 1993 charges were
recognized principally during the Company's fourth quarter of Fiscal 1993.
Interest Expense
Interest expense for Fiscal 1995, Fiscal 1994 and Fiscal 1993 was $563,100,
$390,343 and $460,649 respectively. Interest expense increased by $172,757 or
44.3% in Fiscal 1995 compared with Fiscal 1994, due to increased borrowing
caused by losses in the Company's Data Net Subsidiary and Intronet Division.
Interest expense decreased by $70,306 or 15.3% in Fiscal 1994 compared with
Fiscal 1993 due to reduced borrowing from the prior year.
Income Taxes
Income tax expense (benefit) for Fiscal 1995, Fiscal 1994 and Fiscal 1993
was $1,203,000, $(260,000) and $(249,000) respectively. There was an income tax
provision of $1,245,000 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. Income taxes are recognized
for the amount of taxes payable or refundable for the current tax year, and
deferred tax liabilities and assets for the future tax consequence of events
that have been recognized in the Company's consolidated financial statements or
tax returns.
The Company adopted the Statement of Financial Accounting Standards No.
109, (FAS 109) "Accounting for Income Taxes" effective November 1, 1992. This
statement superseded FAS No. 96 "Accounting for Income Taxes". The cumulative
effect of adopting FAS 109 on the Company's financial statements was to increase
income by $775,000 ($.11 per share) for the year ended October 31, 1993.
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 reserves
for the valuation of previously recorded deferred tax assets in the amount of
$2,997,000 at October 31, 1995. 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.
<PAGE>
Segment Reporting
Certain information by business segment is contained in Note 8 to the
accompanying Financial Statements. (See Item 1, B, above).
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, 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.
Liquidity and Capital Resources
As reported in the 1996 Form 10-K Report, on May 4, 1995, as a result of a
May, 1995 Lobozzo Commitment (the "Lobozzo Commitment"), the Company filed a
Form 8-K Current Report concerning an agreement with its commercial lender,
NCFC, and Lobozzo to provide for an additional $700,000 overdraft lending
facility. The purpose of the Lobozzo Commitment was to provide additional
financing to the Company (collectively, with the amount to be loaned by NCFC,
the "Overadvance Facility"). The Lobozzo Commitment was critical to providing
working capital to the Company during the period that it incurred losses in its
Data Net Subsidiary and its Intronet Division as well as the subsequent
termination of these businesses and the loan restructuring, as discussed in the
Company's respective Form 8-K filings (See Item 1, A, above, and Item 13,
below).
On April 1, 1994, the Company executed a credit agreement with NCFC to
provide the Company with a long-term credit facility (the "NCFC Credit
Facility"). Proceeds from this facility were utilized to refinance existing
credit facilities, to fund working capital requirements and to complete the
acquisition of certain assets of Intronet, Inc. As discussed in the October,
1996 Form 8-K Report regarding the Company's restructuring of its lending
arrangements, 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"). (See Item 1, A, above).
The Company has financed its working capital requirements, capital
expenditures and debt service from its financing arrangements and trade debt.
Cash provided by operations in Fiscal 1995, Fiscal 1994 and Fiscal 1993 totalled
$210,449, $1,232,188 and $1,803,185, respectively. 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. Net cash provided by operations in Fiscal 1993 of $1,803,185
resulted from the combined benefit from non-cash charges and net earnings, plus
net cash provided by changes in working capital investment .
The Company's working capital deficit of $3,827,646 at October 31, 1995
represented a decrease of $6,496,967 from working capital of $2,669,321 at
October 31, 1994, primarily due to: (1) the classification of $3,813,925 in bank
borrowing at October 31, 1995 as a current obligation; (2) an increase of
approximately $1,015,000 in accounts payable; and (3) an aggregate drop of
$1,292,000 in receivables and inventories. Working capital at October 31, 1994
improved by $2,601,120 over the October 31, 1993 level of $68,201, primarily due
to bank debt refinancing.
Cash provided/(used) by investing activities in Fiscal 1995, 1994 and 1993
was ($828,751), ($964,822) and $(5,281,282), respectively. Capital expenditures
for field spare parts and property and equipment were $828,751 in Fiscal 1995,
$964,822 in Fiscal 1994 and $1,167,669 in Fiscal 1993. In Fiscal 1993, funds of
$4,113,613 were also used to acquire certain of the assets of W&G Data Net and
W&G Dataspan in the Willcox & Gibbs Acquisition.
Cash provided/(used) by financing activities in Fiscal 1995, 1994 and 1993
was $625,306. ($357,245) and $3,575,028, respectively. Funds of $625,306 were
provided in Fiscal 1995 by proceeds from shareholder loans and bank financing.
Funds of $357,245 were used in Fiscal 1994 to pay bank and other debt. Funds of
$3,575,028 were provided in Fiscal 1993 by $637,501 in proceeds from issuance of
a debenture, $23,230 from issuance of equity and approximately $2,914,000 in
bank financing.
Inflation
Due to the significant losses in the Company's Data Net Subsidiary and in
its Intronet Division, and the attendant tight cash flow, increases in material,
subcontractors' and other service costs in those operations were not offset by
productivity improvements. The Company continues to monitor the impact of
inflation in its core service maintenance business in order to minimize its
effect through pricing strategies, productivity improvements and cost
reductions.
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Schedule
Item 8 as originally written is deleted in its entirety, and the following
is added in its place and stead.
CONSOLIDATED FINANCIAL STATEMENTS
DELTA COMPUTEC INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Form
10-K
Reference
Consolidated Financial Statements:
Independent Auditors' Report 29
Consolidated Balance Sheets, October 31, 1995 and 1994 30-31
Consolidated Statements of Operations for the Years Ended
October 31, 1995, 1994 and 1993 32
Consolidated Statements of Changes in Stockholders'
Investment(Deficit) for the Years Ended
October 31, 1995, 1994 and 1993 33
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1995, 1994 and 1993 34
Notes to Consolidated Financial Statements 35-47
Schedule:
VIII. Valuation and Qualifying Accounts for the Years
Ended October 31, 1995, 1994 and 1993 48
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>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Delta Computec Inc.
We have audited the accompanying consolidated balance sheets of Delta Computec
Inc. and subsidiaries as of October 31, 1995 and 1994, and the related consoli-
dated statements of operations, changes in stockholders' investment(deficit) and
cash flows for each of the three years in the period ended October 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1995 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.
As discussed in Note 5 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective November 1, 1992 to
conform with Statement of Financial Accounting Standards No. 109.
Deloitte & Touche LLP
Rochester, NY
May 16, 1997
(June 30, 1997 as to Note 1)
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1994
ASSETS
1995 1994
CURRENT ASSETS:
Cash $ 19,813 $ 12,809
Accounts receivable, less allowance for
doubtful accounts of $652,523 and $193,238
in 1995 and 1994, respectively 4,750,412 5,462,556
Inventories 1,681,805 2,201,339
Prepaid expenses and other current assets 216,110 222,484
Deferred income taxes current - 317,000
---------- ----------
Total current assets 6,668,140 8,216,188
FIELD SPARE PARTS, less accumulated
amortization of $587,125 and $911,493
in 1995 and 1994, respectively 2,060,361 2,378,698
PROPERTY AND EQUIPMENT:
Technical equipment 1,372,456 1,311,900
Office furniture & equipment 1,482,798 1,296,557
Vehicles 154,661 150,461
Leasehold improvements 268,490 227,046
---------- ----------
3,278,405 2,985,964
Less: accumulated depreciation and
amortization 2,301,255 1,970,132
---------- ----------
Property And Equipment, Net 977,150 1,015,832
INVESTMENT IN AFFILIATED COMPANY - 10,000
DEFERRED INCOME TAXES NON-CURRENT 150,000 1,035,000
OTHER ASSETS:
Goodwill, less accumulated amortization
of $353,555 and $171,216 in 1995 and 1994,
respectively 238,546 456,928
Other 122,438 408,639
---------- ----------
Total other assets 360,984 865,567
---------- ----------
Total assets $ 10,216,635 $ 13,521,285
========== ==========
See notes to consolidated financial statements.
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1995 AND 1994
LIABILITIES AND STOCKHOLDERS' DEFICIT
1995 1994
CURRENT LIABILITIES:
Accounts payable $ 4,157,236 $ 3,142,204
Current portion of long-term debt 3,813,925 -
Deferred service revenue 1,664,708 1,783,238
Accrued expenses:
Accrual for discontinuance of operations - -
Payroll and payroll taxes 424,738 404,791
Sales taxes payable 263,183 -
Interest 42,667 30,376
Other 129,329 186,258
----------- ----------
Total current liabilities 10,495,786 5,546,867
LONG-TERM DEBT - 3,716,820
DUE TO SHAREHOLDER 571,670 -
SUBORDINATED DEBENTURES 1,075,001 1,087,501
COMMITMENTS (Note 6) - -
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred shares, $ .01 par value; shares authorized
5,000,000 shares; issued and outstanding: None -
Common shares, $ .01 par value; shares authorized
20,000,000 shares; issued and outstanding:
6,811,575 in 1995 and 6,811,325 in 1994 68,116 68,116
Additional paid-in capital 4,916,093 4,916,093
Accumulated deficit (6,910,031) (1,814,112)
----------- ----------
Total stockholders' equity (deficit) (1,925,822) 3,170,097
----------- ----------
Total liabilities and stockholders' equity
(deficit) $ 10,216,635 $ 13,521,285
=========== ==========
See notes to consolidated financial statements.
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
1995 1994 1993
REVENUES:
Service revenues $12,745,773 $10,572,860 $10,485,117
Equipment sales 17,306,597 14,788,885 20,416,627
---------- ---------- ----------
Total revenues $30,052,370 $25,361,745 $30,901,744
COSTS AND OPERATING EXPENSES:
Service costs 11,052,935 7,654,062 7,341,708
Cost of equipment sold 14,613,314 11,645,855 15,937,346
Selling, general and administrative 7,102,284 5,682,689 7,283,166
Unusual Charges - 846,527 700,866
---------- ---------- ----------
Total costs and operating expenses 32,768,533 25,829,133 31,263,086
OTHER INCOME (EXPENSE), NET:
Interest expense (563,100) (390,343) ( 460,649)
Writedown of other assets (615,115)
Other, net 1,459 ( 45,695) 3,981
--------- ---------- ----------
Total other (expense) (1,176,756) (436,038) (456,668)
(LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE $(3,892,919) $ (903,426) $ (818,010)
INCOME TAXES(BENEFIT) 1,203,000 (260,000) (249,000)
---------- --------- ----------
(LOSS) BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $(5,095,919) $ (643,426) $ (569,010)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE - - 775,000
--------- -------- ----------
NET EARNINGS (LOSS) $(5,095,919) $ (643,426) $ 205,990
EARNINGS (LOSS) PER COMMON SHARE:
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE $ (.75) $ (.09) $ (.08)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE - - .11
------ ------ ------
NET EARNINGS (LOSS) $ (.75) $ (.09) $ .03
====== ====== ======
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
--- Common Stock --- Total
Additional Stockholders
Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1992 ..................... 3,073,325 $30,733 $2,878,866 $(1,376,676) $ 1,532,943
Acquisition of business ....................... 1,000,000 10,000 966,235 -- 976,235
Exercise of stock options ..................... 238,000 2,380 95,850 -- 98,230
Conversion of convertible debentures .......... 2,500,000 25,000 975,000 -- 1,000,000
Net earnings Fiscal 1993 ...................... -- -- -- 205,990 205,990
Balance, October 31, 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)
See notes to consolidated financial statements.
</TABLE>
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
1995 1994 1993
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(5,095,919) (643,426) 205,990
Adjustments to reconcile
net earnings(loss)
to net cash provided by operating
activities:
Depreciation & amortization 1,538,204 1,262,478 1,174,356
Loss on retirement of fixed assets - - 47,756
Deferred income taxes 1,202,000 (307,000) (270,000)
Accounts receivable 712,144 (475,761) 975,497
Inventories 519,534 972,978 652,563
Accounts payable & accrued expenses 1,284,493 516,642 (278,042)
Deferred service revenue (118,530) 153,497 (74,366)
Other - net 168,523 (247,220) 144,431
Cumulative effect of accounting change - - (775,000)
--------- --------- ---------
Net cash provided by operating
activities 210,449 1,232,188 1,803,185
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (292,441) (162,802) (347,753)
Additions to field spare parts (536,310) (802,020) (819,916)
Acquisition of business - - (4,113,613)
--------- --------- ---------
Net cash(used) by investing activities (828,751) (964,822) (5,281,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loans, net 571,670 - -
Borrowings from note payable to bank 66,136 - -
Proceeds from issuance of debenture - - 637,501
Proceeds from sale of common shares - 125 23,230
Net payments on bank borrowings - (203,350) 3,301,000
Repayments on debt (12,500) (154,020) (386,703)
--------- --------- ---------
Net cash (used)/provided by
financing activities 625,306 (357,245) 3,575,028
NET INCREASE (DECREASE) IN CASH 7,004 (89,879) 96,931
CASH - beginning of year 12,809 102,688 5,757
CASH - end of year $ 19,813 $ 12,809 $ 102,688
See notes to consolidated financial statements.
<PAGE>
DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
(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
8 below regarding: (1) the Company's subsidiary, Delta Data Net, Inc.
("Data Net", or the "Data Net Subsidiary") and management's decision in
Fiscal 1996 to terminate Data Net's operations and the subsequent
termination of this subsidiary's business and operations in March, 1996);
and (2) the Company's Intronet Division, management's decision in Fiscal
1996 to terminate the Intronet Division's operations and the subsequent
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 and divisions, R&M Associates-Electronic
Data Products Service Inc., Computer Support, Inc., Delta Data Net, Inc.
and the Company's Intronet Division. 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 1995 and 1994, had a working capital deficit and a
stockholders' deficit of $3,827,646 and $1,925,822, respectively, as of
October 31, 1995 and was in default under certain loan agreements as of
October 31, 1995. (See Note 3). On April 1, 1994, the Company executed a
credit agreement to provide a long-term credit facility (the "NCFC Credit
Facility"). Proceeds from this facility were utilized to refinance existing
credit facilities, to fund working capital requirements and to complete the
acquisition of certain assets of Intronet, Inc. On January 24, 1995,
certain debt covenants were amended based on the Company's business plan
for Fiscal 1995. Because of continuing defaults under the NCFC Credit
Facility, the Company found it necessary to seek additional financing. 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 Joseph M. Lobozzo II ("Lobozzo"),
and the balance of the loan from NCFC to the Registrant and Data Net was
restructured as a Term Loan.
In view of the continuing losses and related cash flow difficulties,
management initiated certain actions designed to provide additional cash
flows, specifically cost reductions associated with the centralization of
operations in its Teterboro, New Jersey location. Subsequent to October 31,
1995, management took steps to return the Company to its core business in
order to thereby eliminate the significant operating losses in Fiscal 1994
and Fiscal 1995. Among these actions were: (1) termination of operations of
the Data Net Subsidiary; (2) 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; (3) restructuring of its
primary lending relationship; (4) negotiation of a buy-out and settlement
of a debenture; and (5) obtaining an extension until June 30, 1998 in its
lending arrangement with its lenders. (See Note 3). Management believes
that these actions will improve profitability in the Company's core
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 over the following estimated useful lives:
<PAGE>
Estimated
Description Useful Lives
Technical equipment 5 - 7 years
Office furniture and equipment 5 - 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 betterments 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 fiscal 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 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 the recording of
additional amortization expense of approximately $505,000 relating to such
impairment.
Deferred Service Revenue
Service revenue is recognized ratably over the contract period. Deferred
service revenue represents billings made to customers 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,
1995, 1994 and 1993 totalled 6,811,575, 6,811,388 and 6,811,325,
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.
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
after 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 are 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.
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, 1994 and 1995.
(2) Acquisitions
On November 17, 1994, the Company acquired substantially all of the
operating assets of Intronet, Inc. The Company's Intronet Division
designed, installed and supported advanced computer networks with emphasis
on large campus and industrial facilities that required network hubbing
integrated with fiber and copper cabling. These assets were acquired from
Intronet, Inc. in exchange for $337,000 in cash and assumption of
approximately $588,000 in liabilities of the seller. The Company accounted
for the acquisition as a purchase and the operating results of the
acquisition from November 17, 1994 have been included in the consolidated
financial statements for the fiscal year ended October 31, 1995.
On December 1, 1994, the Company exercised an option to acquire the
remaining shares of SAI/Delta. The Company accounted for the acquisition as
a purchase and the operating results of the acquisition from December 1,
1994 have been included in the consolidated financial statements for the
fiscal year ended October 31, 1995.
(3) Long-Term Debt
Long-term debt and Debt Due to Shareholder consist of the following at
October 31:
1995 1994
---- ----
Due to shareholder $ 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 3,716,820
Notes payable 30,969 -
--------- ---------
4,385,595 3,716,820
Less: Current portion 3,813,925 -
--------- ---------
$ 571,670 $3,716,820
========= =========
On April 1, 1994, the Company executed a credit agreement with its
commercial lender to provide a long-term credit facility (the "NCFC Credit
Facility"). This NCFC Credit Facility provides for expiration on April 30,
1997 and bears interest at 2.0% above the bank's prime lending rate (8.75%
at October 31, 1995). Proceeds from this NCFC Credit Facility were utilized
to refinance existing credit facilities and to provide working capital.
This NCFC Credit Facility was amended in November 1994 to complete the
acquisition of certain of the assets of Intronet, Inc. (See note 2).
Availability of funds under this NCFC Credit Facility was limited to the
lesser of $4,500,000 or a percentage of eligible accounts receivable and
inventory. The credit agreement contained restrictive covenants, the more
significant of which required the maintaining of minimum net working
capital, minimum tangible net worth, minimum pre-tax income, maximum
debt-to-tangible net worth and a restriction on capital expenditures as
well as the prohibition of dividend payments. The Company was not in
compliance with certain of these restrictive covenants due to
lower-than-projected earnings for the period. Accordingly, the Company had
requested a waiver of non-compliance from NCFC and had classified this debt
as a current liability. As discussed in a Form 8-K Report filed in October,
1996 regarding the Company's restructuring of its lending arrangements, 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 (the "Lobozzo Loan"), 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").
On May 1, 1995, the Company reached an agreement with its commercial lender
for an additional $700,000 lending facility. Lobozzo, the Company's
controlling shareholder, an officer and a director, agreed with the Company
to provide funding for $400,000 of the $700,000 additional lending facility
(the "the Lobozzo Commitment"). In return, the Company agreed to issue to
Lobozzo an option to purchase 11,440,475 common shares, the balance of the
Company's available authorized but unissued common shares, which option was
exercisable between May 20, 1995 and May 20, 1999 at an aggregate exercise
price of $10. 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. The Lobozzo Credit Agreement and the
supporting documents were restated as of October 31, 1997. In February,
1997, the May, 1995 Option Agreement, as amended and restated, was
exercised in full by Lobozzo 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 considered to be
control persons of the Company. 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 for the fiscal years
ended October 31 was as follows:
1995 1994 1993
---- ---- ----
$ 550,799 $ 368,050 $ 462,468
Interest paid to Lobozzo for the fiscal years 1995, 1994 and 1993 was
$40,533, $48,000 and $58,833, 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, 1995, the principal balance on this
debenture was $475,000. As of October 31, 1996, the Sellers agreed to sell
the entire principal balance of the 8% subordinated debenture, together
with accrued interest, to the Company for $75,000.
As of October 31, 1995, The Company had also guaranteed an 8% subordinated
debenture of Data Net, as restated, due to Lobozzo (the "Lobozzo
Debenture") in the face amount of $600,001. Lobozzo has since transferred
half of his interest in the Lobozzo Debenture to Joanne Lobozzo in
February, 1997. The Lobozzo Debenture was due in annual installments of
$200,000 commencing January 31, 1996, subject to the Company's meeting
certain bank loan covenants as contained in the NCFC Credit Facility, and
was issued in connection with an option agreement entitling Lobozzo to
purchase 1,304,350 shares of the Company's common shares. Lobozzo has
waived the $200,000 payments due January 31, 1996 and 1997, and the
$200,000 annual installments will commence in January 31, 1998.
<PAGE>
(5) Income Taxes
The Company adopted the Statement of Financial Accounting Standards No.
109, (FAS 109)"Accounting for Income Taxes" in the first quarter of Fiscal
1993, effective November 1, 1992, recording a cumulative effect of an
accounting change that increased net income by $775,000 ($.11 per share)
for the quarter ended January 31, 1993 and for the year ended October 31,
1993.
The components of the income tax provision (benefit) are as follows:
Year Ended October 31
1995 1994 1993
---- ---- ----
Current:
Federal $ - $ - $ -
State 4,000 47,000 21,000
Deferred:
Federal 1,199,000 (307,000) (270,000)
State - - -
---------- --------- --------
$ 1,203,000 $ (260,000) $(249,000)
=========== ========== =========
A reconciliation of the income tax provision (benefit) with tax at the
effective federal statutory rate is as follows:
Year Ended October 31
1995 1994 1993
---- ---- ----
Federal provision
(benefit) based on $(1,324,000) $ (307,000) $ (278,000)
statutory tax rate
Permanent
book-to-tax
differences:
Goodwill amortization 195,000 13,000 14,000
Other permanent items (74,000) 3,000 15,000
Increase in valuation
allowance for deferred taxes 2,376,000 - -
State provision net of
federal tax effect 30,000 31,000 31,000
--------- --------- ---------
$1,203,000 $ (260,000) $ (249,000)
========= ========= =========
<PAGE>
The components of the net deferred tax assets as of October 31 were as follows:
- -----------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------
Nondeductible inventory reserves $ 228,000 $ 228,000 $ 174,000
Nondeductible bad debt reserves 121,000 66,000 36,000
Tax loss carryforwards 1,898,000 671,000 583,000
Accelerated book
amortization of field 200,000 379,000 252,000
spare parts
Investment tax credit carryforward 111,000 75,000 75,000
Other 6,000 (32,000) (37,000)
Less allocable valuation allowance (2,414,000) (35,000) (38,000)
----------- ----------- ----------
Total $ 150,000 $1,352,000 $1,045,000
- -----------------------------------------------------------------------------
At October 31, 1995 the Company has recorded a deferred tax asset of
approximately $671,000 reflecting the benefit of approximately $1,953,000
in loss carryforwards, which expire in varying amounts between 2001 and
2009. Realization of this deferred tax asset and other deferred assets is
dependent on the Company's ability to generate sufficient taxable income in
future periods. Management had believed that it was more likely than not
that the deferred tax asset as of October 31, 1994 was realizable. However,
as a result of an assessment of this deferred tax asset as of October 31,
1995 and the Company's ability to realize such loss carryforwards through
the generation of future income, management revised its estimates, with the
result that it believes that sufficient future income will exist to allow
utilization of $150,000 of the deferred tax asset. The appropriate
adjustment to reflect this revised estimate was recorded as of October 31,
1995.
Income taxes paid were as follows for the fiscal years ended October 31:
1995 1994 1993
---- ---- ----
$ 16,359 $ 63,419 $ 12,053
(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:
1995 1994 1993
---- ---- ----
Rental expense $ 427,473 $ 331,528 $ 388,277
Sub-lease income - - -
--------- --------- ---------
Net Rental expense $ 427,473 $ 331,528 $ 388,277
As of October 31, 1995, 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
----------- ------
1996................... $ 376,449
1997................... 322,342
1998................... 311,054
1999................... 305,488
2000................... 295,488
Thereafter............. 167,818
(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.
1995 1994 1993
---- ---- ----
Outstanding - beginning of
year 344,000 322,500 365,000
Granted 100,000 85,000 265,000
Exercised - (250) (225,000)
Canceled (213,500) (63,250) (82,500)
-------- ------- --------
Outstanding - end of year 230,500 344,000 322,500
======= ======= =======
Average exercise price of
outstanding and exercisable
options $.86 $ 1.08 $ 1.53
==== ====== ======
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:
1995 1994 1993
---- ---- ----
Outstanding - beginning of year 6,000 14,000 26,000
Granted - - -
Exercised - - (12,000)
Canceled 6,000 (8,000) -
----- ------- -------
Outstanding - end of year - 6,000 14,000
===== ======= =======
Average exercise price of
outstanding and exercisable
options - $ .65 $ .41
===== ===== =====
(8) Segment of Business Reporting
-----------------------------
As of October 31, 1995, for financial reporting purposes the operations of
the Company were divided into the business segments described below.
Besides the Company's core technical and maintenance service business, the
Company acquired certain assets and assumed certain liabilities which
acquisitions formed the basis for the establishment of its Data Net
Subsidiary and Intronet Division, respectively.
In November, 1992, the Company, through its wholly-owned subsidiary, Data
Net, completed the acquisition of certain of the assets, and the assumption
of certain of the liabilities (the "Willcox & Gibbs Acquisition"), of W&G
Data Net and W&G Dataspan, subsidiaries of Willcox & Gibbs, Inc. 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 Paragraph B, below).
On November 17, 1994, the Company acquired substantially all of the
operating assets of Intronet, Inc. These assets were acquired from
Intronet, Inc. in exchange for $337,000 in cash and assumption of
approximately $588,000 in liabilities of the seller. The Company accounted
for the acquisition as a purchase and the operating results of the
acquisition from November 17, 1994 have been included in the consolidated
financial statements for the fiscal year ended October 31, 1995. (See
Paragraph C, below).
A. Delta Computec Inc. Core Technical And Maintenance Service Business
-------------------------------------------------------------------
The Company's core technical and maintenance service business, conducted
through the parent entity, Delta Computec Inc., is based in providing
technical and maintenance services in direct support of its customers'
Computer Systems, Data Communication Systems and Lan/Wan Networks. Broadly,
these services include: network systems design; network analysis and
performance testing; network management; project management; premise
wiring; installation services; technical consulting services; maintenance
services help desk support; and complete outsourcing responsibility for all
or most of the foregoing. The Company's core business 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 are either charged at a predetermined 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 or, as in the case
of technical services, on a time and materials basis.
B. Delta Data Net, Inc. Product Distribution/Cable And Accessory Business
----------------------------------------------------------------------
In addition to the Company's core business, prior to the termination of
operations at its Data Net Subsidiary, the Company, through its Data Net
Subsidiary, distributed a wide variety of Computer System, Data
Communication and Networking products from over 40 manufacturers. Included
in this product group were modems, multiplexers, channel banks, CSU/DSU's,
workstations, terminal servers, hubs, bridges, routers, gateways, cable
assemblies, bulk cable and cabinets. The Company also offered a line of
high quality cables and accessories manufactured by the Data Net Subsidiary
through its Dataspan cable product line to service the extensive premise
wiring requirements of Data Communications installations. The Data Span
cable product line was terminated at the time the Company terminated the
business of the Data Net Subsidiary.
C. Intronet Division
-----------------
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 and
continuing losses in the Intronet Division's business, management 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.
Intersegment sales were not material. No single customer accounted for 10%
or more of the Company's sales. General corporate assets principally
consisted of cash, deferred taxes and other assets.
Interest income and non-cash items, other than depreciation and
amortization, were not material. Taxes are done on a consolidated basis and
are not analyzed on a segment basis.
<PAGE>
Financial information by business segments is as follows:
Net Income From Depreciation Capital
Customer Business Identifiable and Expendi-
Sales Segments Assets Amortization tures
----- -------- ------ ------------ --------
1995
- ----
DCI $10,292,270 $ (130,503) $ 5,078,394 $ 1,440,122 $ 559,870
Data Net 13,256,700 (3,154,307) 3,965,641 57,757 268,881
Intronet
Division 6,503,400 (1,811,110) 1,172,600 40,325 -
----------- ----------- ----------- ----------- ----------
Consolidated $30,052,370 $(5,095,919) $10,216,635 $ 1,538,204 $ 828,751
=========== =========== =========== =========== ==========
1994
- ----
DCI $ 9,553,737 $ 253,337 $ 6,541,412 $ 1,047,900 $ 822,460
Data Net 15.808,008 ( 896,763) 6,979,873 214,578 142,362
Intronet
Division - - - - -
----------- ---------- ----------- ----------- ----------
Consolidated $25,361,745 $( 643,426) $13,521,285 $ 1,262,478 $ 964,822
=========== ========== =========== =========== ==========
1993
- ----
DCI $ 8,939,473 $ 822,145 $ 6,431,211 $ 1,000,543 $4,944,661
Data Net 21,962,271 (616,155) 7,420,606 173,813 336,621
Intronet
Division - - - - -
----------- ---------- ----------- ----------- ----------
Consolidated $30,901,744 $ 205,990 $13,851,817 $ 1,174,356 $5,281,282
=========== =========== =========== =========== ==========
(9) Unusual Charges
During the quarter ended October 31, 1994, management made a decision to
eliminate its stocking position in certain data communication equipment. As
a result, the Company incurred an unusual charge of $846,527 to write down
certain inventories of data communication electronics at the Company's Data
Net Subsidiary to net realizable value.
During the quarter ended October 31, 1993, the Company incurred an unusual
charge of $700,866 to write down certain inventories of data communication
electronics at the Company's Data Net Subsidiary to net realizable value.
This charge was reflected in cost of equipment sold in the Fiscal 1993
consolidated statement of operations and had been reclassified to unusual
charges to conform with the Fiscal 1994 classification.
<PAGE>
<TABLE>
<CAPTION>
DELTA COMPUTEC INC.
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
Allowance for Doubtful Accounts
- -------------------------------
Balance Charged Charged Balance
Beginning to costs to other Net Amounts End of
of Period and Expenses Accounts Written Off Period
--------- ------------ -------- ----------- ------
Year ended October 31, 1995:
<S> <C> <C> <C> <C> <C>
$ 193,238 $ 631,701 $ - $ (172,416) $ 652,523
========= ========= ==== =========== =========
Year ended October 31, 1994:
$ 106,819 $ 144,181 $ - $ (57,762) $ 193,238
========= ========= ==== ========== =========
Year ended October 31, 1993:
$ 26,535 $ 103,229 $ - $ (22,945) $ 106,819
======== ========= ==== ========== =========
Allowance for Obsolete Inventory
- --------------------------------
Balance Charged Charged Balance
Beginning to costs to other Net Amounts End of
of Period and Expenses Accounts Written Off Period
--------- ------------ -------- ----------- ------
Year ended October 31, 1995:
$ 671,711 $ - $ - $ - $ 671,711
========= ==== ==== ==== ========
Year ended October 31, 1994:
$ 511,711 $ 846,527 $ - $(686,527) $ 671,711
========= ========= ==== ========== =========
Year ended October 31, 1993:
$ 99,696 $ 412,015 $ - $ - $ 511,711
======== ========= ==== ==== =========
</TABLE>
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The statement originally written in Item 10 is deleted in its entirety, and
the following is added in its place and stead.
DIRECTORS OF THE REGISTRANT
Year first
Elected
Director Name and Background
1995 Alfred C. Engelfried, Director and Assistant Secretary, age
51, 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 49, 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 15 years.
1988 Joseph M. Lobozzo II, Director and Chairman of the Board of
Directors, age 51, 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 as of the date of
filing this Amendment No. 1 to 1995 Form 10-K, Mr. Lobozzo was
considered to be, and continues to be considered to be, a
controlling person of the Company. (See "Principal
Shareholders" in Item 12 and "Control of the Company",
"Certain Transactions - Lobozzo Transactions" in Item 13).
1995 Michael McCusker, Director and Assistant Secretary, age 49,
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 18 years.
As reported in the 1996 Form 10-K Report: (a) Messrs. Engelfried, Julian,
Lobozzo and McCusker continue as directors of the Company as of the date of
filing this Amendment No. 1 to 1995 Form 10-K; (b) John T. Smith was added to
the Board of Directors during Fiscal 1997 to fill a vacancy then existing on the
Board of Directors; and (c) Lobozzo and Joanne Lobozzo are now each considered
to be controlling persons of the Company.
The Board of Directors held eleven (11) meetings during Fiscal 1995. 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 then 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.
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. 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 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.
As of the date of filing this Amendment No. 1 to 1995 Form 10-K, the current
members of the Executive Committee are Messrs. Engelfried, Julian, Lobozzo and
McCusker.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the identities and positions of each of the
executive officers of the Company, as of October 31, 1995:
Year First
Officer's Name Age Position with the Company Elected
John DeVito 39 President and Chief Operating
Officer 1995
Joseph M. Lobozzo II 52 Director and Chairman of the
Board of Directors 1988
Michael Julian 49 Director and Secretary 1995
Alfred C. Engelfried 52 Director and Assistant Secretary 1995
Michael McCusker 50 Director and Assistant Secretary 1995
Walter T. Struble 41 Acting Chief Financial Officer &
Acting Chief Accounting Officer 1995
Mary Metrick 48 Assistant Secretary 1995
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, 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.
Mr. Struble became the Acting Chief Financial Officer and Acting Chief
Accounting Officer of the Company following the resignation, in May, 1995, of
Peter Smith, the Registrant's former Chief Financial Officer. He had been an
employee of the Company since August, 1994 and, prior to then, was employed by
Willcox and Gibbs. He passed away unexpectedly in December, 1995.
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, Engelfried, 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.
In February, 1996, Frank Donnelly became the Chief Financial Officer and
Chief Accounting Officer of the Registrant, and, in August, 1996, Edward Drohan
was employed on a full-time basis as the Company's Vice President, Sales and
Marketing, all of which was reported in the 1996 Form 10-K 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
During Fiscal 1995, 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 or prior Fiscal Years. John DeVito, 2 late reports and 2
unreported transactions.
Item 11. Executive Compensation
The statement originally written in Item 11 is deleted in its entirety, and
the following is added in its place and stead.
The following table sets forth information with respect to the President
and Chief Operating Officer, and each executive officer of the Registrant whose
total annual salary and bonus for Fiscal 1995 exceeded $100,000.
<PAGE>
Summary Compensation Table
Annual Compensation Long-term Compensation
Name and
Principal Fiscal Option All other
Position Year Salary Bonus(1) (Shares) Compensation(2)
L. Rodger Loomis 1995(3) $ 71,346 $ - - 2,000
President and Chief
Executive Officer
from November, 1995 to
March, 1995
John DeVito 1995(3) $ 90,346 $ 8,767 100,000 $ 1,644
President and Chief
Operating Officer
from March, 1995 to
October, 1995
(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 bonus for Fiscal 1995 was awarded on a
basis other than as provided for in DeVito's Employment Agreement. DeVito's
Employment Agreement was annexed as an Exhibit to the 1996 Form 10-K Report and
is incorporated herein by reference.
(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 provided
for in that Plan. During Fiscal 1995, the Company made no matching
contributions.
(3) Partial year. Mr. Loomis' employment terminated during Fiscal 1995. Mr.
DeVito assumed his current position in Fiscal 1995.
The following table shows, as to the current President and Chief Operating
Officer, the Chairman of the Board of Directors and other executive officers of
the Company, information concerning stock options granted in Fiscal 1995.
<PAGE>
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) ($) ($)
DeVito 100,000 100% $.50 6/7/00 -
Lobozzo(1) 11,440,475 100%(2) -(3) 5/20/99 - (4)
(1) See Item 13, "Certain Transactions - Lobozzo Transactions", below.
(2) No similar options were granted to employees and the option grant was part
of a financing transaction and not because the recipient was an officer or
director. (See Item 13, "Certain Transactions - Lobozzo Transactions", below).
(3) The exercise price was an aggregate of $10.00 for all 11,440,475 common
shares. The shares have since been issued in Fiscal 1997 to Lobozzo and Joanne
Lobozzo. (See Item 13, "Certain Transactions - Lobozzo Transactions", below).
(4) The option was valued at an aggregate of $10 at the time of its 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.
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.
AGGREGATE 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, since, as noted in
footnote (4) to the above-referenced table, the option to purchase 11,440,475
common shares issued to Lobozzo in May, 1995, for an aggregate of $10.00, was
believed to be the then fair market value of that 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.
EMPLOYMENT AGREEMENTS
As reported in the 1996 Form 10-K Report, 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 provisions of the
DeVito Employment Agreement are fully described in the 1996 Form 10-K Report,
and the DeVito Employment Agreement was annexed as an Exhibit to the 1996 Form
10-K Report.
As reported in the 1996 Form 10-K Report, during Fiscal 1995, the Company
terminated employment agreements with three 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. 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. 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, DeVito was granted an option to
purchase 100,000 common shares for a five-year period at the then fair market
value of the Company's common shares, or, $0.50 per common share.
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, there were no options outstanding, and no
options had been exercised during Fiscal 1995. No options under the
Non-Qualified Plan have been issued or exercised since the commencement of
Fiscal 1995. No options are outstanding under the Non-Qualified Plan as of the
date of this Amendment No. 1 to 1995 Form 10-K.
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 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
The statement originally written in Item 12 is deleted in its entirety, and
the following is added in its place and stead.
PRINCIPAL SHAREHOLDERS
The following table sets forth as of October 31, 1995, 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)
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
Mary Metrick 5,000 .07
All Directors and
Officers as a Group 15,881,075 80.19
(6 persons) (10)
1. After the close of Fiscal 1995, 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 1995, 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),
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, 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 247,500 additional common shares, for a
total of 19,803,900 common shares. Also includes options committed to be issued
to Mr. DeVito pursuant to the DeVito Employment Agreement, but not issued as of
October 31, 1995. Does not include other options issued after the close of
Fiscal 1995. 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, 1995: 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, which 11,440,475 common shares were issued after the close of
Fiscal 1996. (See Item 13). As of October 31, 1995, 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 1995. (See "Control
of the Company" and "Certain Transactions - Lobozzo Transactions", in Item 13).
5. Includes 12,500 common shares held jointly with Mr. Julian's 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 1995. (See "Control of the Company" and "Certain Transactions -
Lobozzo Transactions", in Item 13).
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 1995. (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 78,000 common shares were issued in Fiscal 1997, and
options for an additional 22,000 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, 1995, to purchase
142,500 common shares pursuant to the Incentive 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
expired 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. As of October 31, 1995, there were 6,811,575 common shares outstanding. The
figure of 15,881,075 includes the common shares to which reference is made in
Notes 4, 5, 6, 7 and 8, above and assumes exercise of all options referred to
therein. (See Note 3, above).
As reported in the 1996 Form 10-K Report, following the close of Fiscal
1996, there was a change of control of the Company.
As more fully described in the 1996 Form 10-K Report, during Fiscal 1997,
Lobozzo transferred a portion of his common shares, half of certain debt
obligations owed to him by the Company, as well as certain Option Agreements, to
his wife, Joanne Lobozzo. This transaction was a portion of the transactions in
which Lobozzo engaged with regard to the 1,519,750 common shares then owned by
Lobozzo to which reference is made in Item 13, "Certain Transactions - Lobozzo
Transactions", below. Lobozzo also transferred certain of his 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 May, 1995 Lobozzo Options, Mr. DiProsa no longer held in excess
of 5% of the outstanding common shares of the Registrant.
As more fully described in the 1996 Form 10-K Report, in February, 1997,
Lobozzo and Joanne Lobozzo each executed their Second Restated May 1995 Lobozzo
Options 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.
As a result of these transactions, Lobozzo and Joanne Lobozzo are each
considered to be controlling persons of the Company as of the date of filing
this Amendment No. 1 to 1995 Form 10-K.
Item 13. Certain Relationships and Related Transactions
The statement originally written in Item 13 is deleted in its entirety, and
the following is added in its place and stead.
CONTROL OF THE COMPANY
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,
1995, the Company had issued the Restated 1992 Lobozzo Option Agreement 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, 1995, and is a control person of the
Company, as is Joanne Lobozzo, as of the date of filing of this Amendment No. 1
to 1995 Form 10-K. The change in control of the Company was reported in the
February, 1997 Form 8-K Report.
CERTAIN TRANSACTIONS
Lobozzo Transactions
1. As reported in the 1996 Form 10-K Report, to assist in the completion of the
Willcox & Gibbs Acquisition, Data Net and Lobozzo entered into a private
placement of the Lobozzo Debenture due October 28, 1995, in the face amount of
$600,001. 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 1992 Lobozzo Option Agreement was also
amended to extend its term through January 31, 1998. Lobozzo waived the $200,000
payments 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. 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 17, below.)
2. As reported in the 1996 Form 10-K Report, 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. 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. As reported in the 1996 Form 10-K Report, 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
a May, 1995 Letter Agreement (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, 6, (A) above). SAI/Delta was a
guarantor of the Borrower's obligations with NCFC. 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. As reported in the 1996 Form 10-K Report, pursuant to the May, 1995 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 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 May, 1995 Letter Agreement
thereafter became inapplicable. As of May 1, 1995, as of October 31, 1995 and as
of the date of the filing of this Amendment No. 1 to 1995 Form 10-K, the Company
had 20,000,000 common shares authorized, of which as of May 1, 1995, and October
31, 1995, 6,811,575 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
17, 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 resell immediately 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 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 "Original 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 October, 1996 Form
8-K 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 Original NCFC Loan, as amended by the Forbearance Agreement and the
Forbearance Amendments, as that Original 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 Restructuring,
Lobozzo purchased from NCFC, and NCFC assigned to Lobozzo, a principal portion
of the Original 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 Original 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
Original NCFC Loan, with rates of 3 percent over prime rate in the event NCFC
ever permitted an overadvance of funds in excess of the Original 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 Original 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 Original
NCFC Loan; and (f) Lobozzo agreed to take a reduced security position from that
which NCFC had under the Original Loan Agreement, by entering into an
Intercreditor Agreement with NCFC, whereby NCFC, with regard to the NCFC Term
Loan, 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, subject to increase
under certain circumstances; (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 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.
As reported in the Registrant's July, 1997 Form 10-Q Report, on September
12, 1997, the Lender agreed to raising the maximum Loan amount of the Lobozzo
Loan from $2,950,000, as included in the Lobozzo Credit Agreement, as amended,
to a level that will accommodate the Company's anticipated revenue growth
associated working capital needs, provided that: (1) the Company shall meet its
operating budget targets as approved from time to time by its Board of
Directors; and (2) the Company's Loans in excess of the available Borrowing Base
shall not exceed $700,000 for the period October 1, 1997 to December 31, 1997
and $400,000 for the period January 1, 1998 to June 30, 1998. This letter
containing the aforesaid provisions was filed as an Exhibit to the July, 1997
Form 10-Q Report. (See Section 17, below).
As reported in the July, 1997 Form 10-Q Report, on September 11, 1997, in
connection with a request to a surety company to provide performance and payment
bonds to the Company totalling $1,000,000, singularly or in an aggregate amount,
Lobozzo signed a letter by which he agreed to provide collateral in the amount
of 25% of the awarded contract amount to facilitate the possible issuance of
performance and payment bonds for the Company. Lobozzo's commitment pursuant to
this letter is in addition to the Total Lobozzo Credit Facilities (as herein
defined). This letter was filed as an Exhibit to the July, 1997 Form 10-Q
Report.
The balance of the Original 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 of the date of filing this
Amendment No. 1 to 1995 Form 10-K, no principal payments have been made on 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 (which, as of the date of filing this Amendment No. 1 to 1995
Form 10-K, did not occur), 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
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 and to change other provisions of those loan
agreements.
The annual interest rate applicable to: (i) the Lobozzo Commitment
contained in the May, 1995 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 Credit Agreement,
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 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 Credit Agreement, 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 Credit Agreement, 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 Credit
Agreement.
9. Amendment No. 2 to October 1996 Lobozzo Credit Agreement.
On December 10, 1996, the Registrant and Lobozzo amended the Lobozzo
Credit Agreement 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 M&T Account other
than by Michael Julian, the Registrant's Secretary, or Michael McCusker, the
Registrant's Assistant Secretary. By Amendment No. 2 to the Lobozzo Credit
Agreement, 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 Company's 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 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. 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 Lobozzo 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 Credit Agreement, 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 (collectively, the "Total Lobozzo
Credit Facilities").
(b) By Amendment No. 3 to the Lobozzo Credit Agreement, 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; and (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 common shares for $5.
(c) By Amendment No. 3 to the Lobozzo Credit Agreement, 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 Credit Agreement was annexed as an
Exhibit to the February, 1997 Form 8-K Report.
12. Exercise of Amended and Restated 1995 Lobozzo 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 October, 1996 Lobozzo Credit Agreement
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 those terms are defined in the Lobozzo
Credit Agreement) for the month of April, 1997. Amendment No. 4 to the Lobozzo
Credit Agreement was annexed as an Exhibit to the February, 1997 Form 8-K
Report.
14. Amendment No. 5 to October, 1996 Lobozzo Credit Agreement
By Amendment No. 5 to the Lobozzo Credit Agreement, 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 October, 1996 Lobozzo Credit Agreement
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 Credit Agreement,
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 Credit Agreement 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.
<PAGE>
16. Amendment No. 7 to October, 1996 Lobozzo Credit Agreement
By Amendment No. 7 to the Lobozzo Credit Agreement, the Lobozzo Credit
Agreement was amended: (a) to provide for "Operating Budget Targets" to be
prepared by management of the Borrower and as approved by the Board of Directors
and the Lender from time to time: and (b) to provide that the maximum loan
amount would be $2,950,000, and from October 1, 1997 through December 31, 1997,
up to $3,650,000, and from January 1, 1998 through June 30, 1998, up to
$3,350,000, provided in each instance that the Company meets it Operating Budget
Targets. The Lender also waived any non-compliance with regard to the Borrowing
Base through the date of Amendment No. 7.
17. Restatement of Lobozzo Credit Agreement Documents
As of October 31, 1997, the Lobozzo Credit Agreement, which had been
amended seven times, and several of the documents executed simultaneously with,
and as part of the transaction involving, the Lobozzo Credit Agreement (the
Promissory Note, General Security Agreement of the Company and Data Net, the
Unlimited Continuing Guaranty of SAI/Delta and the General Security Agreement of
SAI/Delta) were restated to incorporate in one set of documents the changes made
by the seven previous amendments. All restated documents are annexed as Exhibits
to this Amendment No. 1 to 1995 Form 10-K.
CONSULTING TRANSACTIONS
Alfred C. 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
consultant, Mr. Engelfried's consulting fees aggregated $69,102 in Fiscal 1995.
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. As of October 31, 1997, the Registrant was indebted to Mr. Engelfried
in the amount of $34,737. (See Section 10, 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
(the "Willcox & Gibbs Debenture"); (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 Section 2,
below).
Prior to the Willcox & Gibbs Acquisition, W&G Data Net was in the business
of selling and installing data-communication network products and related
engineering services and W&G 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).
2. Rexel Debenture Purchase. Purchase of $475,000 Debenture of Registrant and
Subsidiary.
As of October 31, 1995, the Willcox and Gibbs Debenture was outstanding, no
principal payments had been made thereon, and the Company was in default in
certain payments thereon. 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, 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
the rate of $1,000 per week for the period April, 1995 through March, 1997. As
of October 31, 1995, an aggregate net payment of $74,000 remained outstanding to
be made on the Loomis Employment Agreement. All payments as described herein
have been made as of the date of filing this Amendment No. 1 to 1995 Form 10-K.
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>
PART IV
The first paragraph of Item 14 as originally written is deleted in its
entirety, and the following is added in its place and stead.
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, 1995 and 1994
Consolidated Statements of Operations for the years ended October 31, 1995,
1994 and 1993
Consolidated Statements of Changes in Stockholders' Investment for the
years ended October 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended October 1995,
1994 and 1993
Notes to Consolidated Financial Statements
Financial Statements Schedule - Schedule VIII - Valuation and Qualifying
Accounts for the years ended October 31, 1995, 1994 and 1993.
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 10.75 through 10.91, 10.94, 10.98 through 10.100,
10.109-10.110, 10.113 and 10.115-10.120.
<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 on 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.
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.
The Exhibits denominated by (20) 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, 1996.
The Exhibits denominated by (21) 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 July 31, 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 Adjust-
ment)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)
(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.
(10.54) Credit Agreement, National Canada Finance Corporation, Amendment
No. 4.
(10.55) Credit Agreement, National Canada Finance Corporation, Amendment
No. 5.
(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)
(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)
(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).
(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).
(10.111) Letter Employment Agreement between Registrant and John DeVito
dated October 23, 1995 (20).
(10.112) Letter Employment Agreement between Registrant and Edward Drohan
dated March 25, 1996 (20).
(10.113) Letter dated September 12, 1997 from Joseph M. Lobozzo II and
Joanne M. Lobozzo relating to possible increase of maximum loan
amount (21).
(10.114) Letter dated September 11, 1997 from Joseph M. Lobozzo II
agreeing to provide collateral for performance and payment bonds
(21).
(A) (10.115) Amendment No. 7 to Amended and Restated Credit Agreement and
Other Agreements dated September 12, 1997.
(B) (10.116) First Restated Credit Agreement among the Registrant, Data Net
and Joseph M. Lobozzo II and Joanne M. Lobozzo.
(B) (10.117) First Restated Promissory Note from the Registrant and Data Net
to Joseph M. Lobozzo II and Joanne M. Lobozzo.
(D) (10.118) First Restated General Security Agreement among the Registrant,
Data Net and Joseph M. Lobozzo II and Joanne M. Lobozzo.
(E) (10.119) First Restated Unlimited Continuing Guaranty of SAI/Delta and
Joseph M. Lobozzo II and Joanne M. Lobozzo.
(F) (10.120) First Restated General Security Agreement between SAI/Delta and
Joseph M. Lobozzo and Joanne M. Lobozzo.
(11) Statement re: computation of per share earnings. (This document
will be filed pursuant to a Form 10-K (A) Amendment to this Form
10-K Annual 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.
(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>
Exhibit 21
21. Subsidiaries of the Company
Name Jurisdiction of Incorporation
R&M Associates Electronics New Jersey
Data Products Service Inc.
Computer Support Inc. Georgia
SAI/Delta, Inc. Florida
Delta Data Net, Inc. New York
<PAGE>
35
AMENDMENT No. 7
to
AMENDED AND RESTATED CREDIT AGREEMENT AND OTHER AGREEMENTS
This Amendment No. 7 to Amended and Restated Credit Agreement and
Other Agreements ("Amendment No. 7"), is made and entered into as of the 12th
day of September 1997 by and among JOSEPH M. LOBOZZO II, an individual having an
office at 690 Portland Avenue, Rochester, New York 14621 ("Lobozzo"), JOANNE M.
LOBOZZO, the wife of Lobozzo, with an address of 756 Rock Beach Road, Rochester,
New York 14617 ("Joanne Lobozzo", and, together with Lobozzo, the "Lender"),
DELTA COMPUTEC INC., a New York corporation having its principal place of
business located at 900 Huyler Street, Teterboro, New Jersey 07608 ("DCI"),
DELTA DATA NET, INC., a New York corporation having its principal place of
business located at 900 Huyler Street, Teterboro, New Jersey 07608 ("DDI", DCI
and DDI are referred to collectively as the "Borrower"), and SAI/Delta, Inc., a
Florida corporation and a wholly-owned subsidiary of DCI.
W I T N E S S E T H
A. This Amendment No. 7 is intended to amend in certain respects as set
forth herein, the terms and conditions of a certain Amended and Restated Credit
Agreement dated as of October 10, 1996 (the "October 1996 Credit Agreement",
which term refers to the original agreement issued on October 10, 1996, and as
amended by Amendments Nos. 1, 2, 3, 4, 5 and 6 thereto, as described below)
between the Borrower and Lobozzo and Joanne Lobozzo, whereby Lobozzo and Joanne
Lobozzo have agreed to provide the Borrower with Loans (as defined in the
October 1996 Credit Agreement) up to the maximum principal amount of $2,950,000.
B. Pursuant to a document entitled Amended No. 1 to Amended and Restated
Credit Agreement and Other Documents ("Amendment No. 1"), the interest rate
relative to the Lobozzo Commitment, the Additional Advances and the October 1996
Credit Agreement was reduced.
C. Pursuant to a document entitled Amended No. 2 to Amended and Restated
Credit Agreement and Other Documents ("Amendment No. 2"), among other matters
dealt with therein, the Maturity Date of the October 1996 Credit Agreement was
extended to March 31, 1997, and certain other amendments or waivers were made
with regard to any non-compliance which may have existed with the Borrowing Base
(as defined in the October 1996 Credit Agreement).
D. Pursuant to a document entitled Amended No. 3 to Amended and Restated
Credit Agreement and Other Documents ("Amendment No. 3"), Lobozzo transferred to
Joanne Lobozzo half of Lobozzo's rights, benefits, obligations and interest with
regard to: (i) an 8% Subordinated Debenture issued in October 1992 in the
original face amount of $600,001; (ii) A May 1995 Letter Agreement whereby
Lobozzo agreed to provide the Lobozzo Commitment to the Borrower in the original
amount of $400,000; (iii) The 1996 Additional Lobozzo Advances for the period
from July 25, 1996 through October 9, 1996 in the aggregate amount of $633,600;
(iv) The Loan and the October 1996 Credit Agreement in an amount of up to
$2,550,000; and (v) the Overbase Loans and the Overbase Loan Documents for the
amounts in whereby the Loans exceed the Borrowing Base as set forth in the
October 1996 Credit Agreement.
E. Pursuant to a document entitled Amendment No. 4 to Amended and Restated
Credit Agreement and Other Documents ("Amendment No. 4"), among other matters
dealt with therein, the Maturity Date of the October 1996 Credit Agreement was
extended to April 30, 1997, and certain other amendments or waivers were made
with regard to any non-compliance which may have existed with the Borrowing Base
(as defined in the October 1996 Credit Agreement.
F. Pursuant to a document entitled Amendment No. 5 to Amended and Restated
Credit Agreement and Other Documents ("Amendment No. 5"), among other matters
dealt with therein, the Maturity Date of the October 1996 Credit Agreement was
extended to June 30, 1998, and certain other amendments or waivers were made
with regard to any non-compliance which may have existed with the Borrowing Base
(as defined in the October 1996 Credit Agreement.
G. Pursuant to a document entitled Amendment No. 6 to Amended and Restated
Credit Agreement and Other Documents ("Amendment No. 6"), among other matters
dealt with therein, the maximum principal amount of all advances permitted
pursuant to the October 1996 Credit Agreement was increased from $2,550,000 to
$2,950,000 (subject to further limitation in accordance with the provisions of
Amendment No. 6), and certain other amendments or waivers were made with regard
to any non-compliance which may have existed with the Borrowing Base (as defined
in the October 1996 Credit Agreement).
NOW, THEREFORE, it is agreed as follows:
1. Incorporation of Recitals. The recitals set forth in the recital
paragraphs of this Amendment No. 7 are intended to be, and are, incorporated
into this Amendment No. 7 as a part hereof.
2. Amendments to October 1996 Credit Agreement.
(a) The parties hereto agree that, pursuant to a certain letter agreement
between Lender and Borrower dated September 11, 1997, from and after the
date hereof, the term "Operating Budget Targets" shall be added as a new
defined term to Section 1.1 of the October 1996 Credit Agreement in
alphabetical order and shall read as follows:
"Operating Budget Targets" means the operating budget targets as
prepared by management of the Borrower and as approved by the Board of
Directors of the Borrower and by the Lender from time to time.
(b) The parties hereto agree that, from and after the date hereof, Section
2.1 of the October 1996 Credit Agreement is deleted in its entirety, and
the following Section 2.1 is substituted in its place and stead:
"2.1 Borrowing Base. As long as neither DCI nor DDI are in default of
any of their obligations to the Lender, the Lender may lend to the
Borrower, and the Borrower may borrow from the Lender, from time to
time, up to an aggregate outstanding principal amount at any time of
$2,950,000, or such lesser amount which is 100% of DCI's, DDI's and
SAI/Delta's Eligible Receivables; provided, however, that in the event
that Borrower shall have met its Operating Budget Targets for the
immediately preceding one month period and three month period, the
Lender may lend to the Borrower, and the Borrower may borrow from the
Lender, from October 1, 1997 through December 31, 1997, up to an
aggregate outstanding principal amount at any time of $3,650,000, and
from January 1, 1998 through June 30, 1998, up to an aggregate
outstanding principal amount at any time of $3,350,000, or, in each
case, such lesser amount which is 100% of DCI's, DDI's and SAI/Delta's
Eligible Receivables. Borrower shall prepare and forward to Lender a
report of Eligible Receivables within 3 business days of the 15th day
and the last day of every month.
3. Lender hereby waives any non-compliance which may have existed with
regard to the Borrowing Base for the period between June 9, 1997, the date of
Amendment No. 6, and September 12, 1997, the date of this Amendment No. 7.
4. Except as amended by this Amendment No. 7, the terms and conditions of
the October 1996 Credit Agreement are hereby reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 7 to be duly
executed and delivered by the proper and duly authorized officers as of the date
first above written.
Joseph M. Lobozzo II
Joanne M. Lobozzo
DELTA COMPUTEC INC.
By:_____________________________
John DeVito, President and Chief
Operating Officer
<PAGE>
DELTA DATA NET, INC.
By:
SAI/DELTA, INC.
By:_____________________________
John DeVito, President and Chief
Operating Officer
<PAGE>
CONSENT AND AGREEMENT OF GUARANTOR
As of the date first above written, the undersigned hereby: (a) fully
consents to the terms and provisions of the above Amendment No. 7 to the October
1996 Credit Agreement and all previous Amendments to the October 1996 Credit
Agreement (all such previous Amendments hereinafter collectively referred to as
the "Previous Amendments") and the consummation of the transactions contemplated
thereby and agrees to all terms and provisions of the above Amendment No. 7; (b)
agrees that the Amended and Restated Unlimited Continuing Guaranty dated October
10, 1996 (the "Guaranty") which it previously delivered to Lobozzo as security
for the payment and performance of certain of the liabilities, obligations and
indebtedness of the Borrower to Lobozzo pursuant to the October 1996 Credit
Agreement and the Amended and Restated Promissory Note dated October 10, 1996
(the "Amended and Restated Note") is hereby ratified and confirmed and shall
remain in full force and effect, provided, however, that all references in the
Guaranty to the term "Lender" shall be deemed to refer to both Lobozzo and
Joanne Lobozzo, jointly and severally, and all references in the Guaranty to the
October 1996 Credit Agreement and to the Amended and Testated Note shall be
deemed to refer to such documents, as the same have heretofore or as the same
may hereinafter be amended, restated, modified or supplemented; (c) acknowledges
that it has no set-off, counterclaim or defense with respect to the Guaranty;
and (d) acknowledges that its consent and agreement hereto is a condition to the
Lender's obligations under Amendment No. 7 and it is in its interest and to its
financial benefit to execute this Consent and Agreement.
SAI/DELTA, INC.
By: __________________________
John DeVito, President and Chief
Operating Officer
<PAGE>
FIRST RESTATED CREDIT AGREEMENT
This First Restated Credit Agreement (this "Agreement") is made as
of the 31st day of October 1997 by and among JOSEPH M. LOBOZZO II, an individual
having an office at 690 Portland Avenue, Rochester, New York 14621 ("Lobozzo"),
JOANNE LOBOZZO, the wife of Lobozzo, with an address of 756 Rock Beach Road,
Rochester, New York 14617 ("Joanne Lobozzo", and, together with Lobozzo, the
"Lender"), DELTA COMPUTEC INC. a New York corporation having its principal place
of business at 900 Huyler Street, Teterboro, New Jersey 07608 ("DCI"), DELTA
DATA NET, INC., a New York corporation having its principal place of business at
900 Huyler Street, Teterboro, New Jersey 07608 ("DDI"), and SAI/Delta, a Florida
corporation and wholly-owned subsidiary of DCI ("SAI Delta"). DCI and DDI are
referred to collectively as the "Borrower".
W I T N E S S E T H:
WHEREAS, the Borrower and National Canada Finance Corp. ("NCFC")
entered into a certain Credit Agreement dated as of April 1, 1994, as amended by
Credit Agreement Amendment No. 1 dated November 17, 1994, Credit Agreement
Amendment No. 2 dated January 24, 1995, Credit Agreement Amendment No. 3 dated
April 3, 1995, Credit Agreement Amendment No. 4 dated May 1, 1995 and Credit
Agreement Amendment No. 5 dated October 27, 1995 (as amended, the Credit
Agreement"); and
WHEREAS, the Borrower executed and delivered to NCFC a Promissory Note
dated April 1, 1994, as amended and restated by an Amended and Restated
Promissory Note dated May 1, 1995 and as further amended and restated by a Third
Amended and Restated Promissory Note dated October 27, 1995 (as amended and
restated, the "Promissory Note"); and
WHEREAS, on October 10, 1996, NCFC assigned to Lobozzo all but
$750,000 of the indebtedness owed to NCFC by DCI evidenced by the Credit
Agreement and the Promissory Note; and
WHEREAS, by a certain Amended and Restated Credit Agreement dated
October 10, 1996 and a certain Amended and Restated Promissory Note dated
October 10, 1996 (the "October 1996 Promissory Note"), the Borrower and Lobozzo
amended and restated, in its entirety, the portions of the Credit Agreement and
the Promissory Note evidencing the indebtedness which NCFC assigned to the
Lender; and
WHEREAS, the October 1996 Credit Agreement, and certain other
agreements executed in connection therewith, have heretofore been amended seven
times, by Amendments Nos. 1, 2, 3, 4, 5, 6 and 7 to Amended and Restated Credit
Agreement and Other Agreements (as amended, the "October 1996 Credit
Agreement"); and
WHEREAS, simultaneously with the execution of this Agreement, the
parties are restating, in its entirety, the October 1996 Promissory Note (as
restated, and as the same may hereinafter be amended, supplemented or modified,
the "First Restated Promissory Note"); and
WHEREAS, the parties hereto desire to also restate, in its entirety,
the October 1996 Credit Agreement.
NOW, THEREFORE, it is agreed as follows:
1. Defined Terms.
1.1 Capitalized terms used but not otherwise defined herein have the
following meanings in this Agreement:
"Account Debtor" means a person or entity obligated to pay a
receivable.
"Additional Collateral" means (a) all general intangibles of the
Borrower of every kind and description, including without limitation federal,
state and local tax refund claims of all kinds, whether now existing or
hereafter arising; (b) all of the Borrower's deposit accounts, whether now owned
or hereafter credited, wherever located; (c) all monies, securities,
instruments, cash and other property of the Borrower and the proceeds thereof,
now or hereafter held or received by, or in transit to, the Lender from or for
the Borrower, and (d) all books, records, customer lists, ledger cards, computer
programs, computer tapes, disks, printouts and records, and other property and
general intangibles at any time evidencing or relating to any of the foregoing,
whether now in existence or hereafter created; and all proceeds of the foregoing
and all proceeds of any insurance on the foregoing.
"Collateral" means Receivables, Inventory, Equipment, Patents, Field
Spare Parts, Trademarks and Additional Collateral.
"Declaration" a declaration of the occurrence of an Event of Default.
"Eligible Receivables" means the net amount of those Receivables which
continually meet the following requirements: (a) the account is due and payable
not more than 90 days from the date of the invoice evidencing the Receivable;
(b) the Receivable arose from the performance of services by the Borrower which
have been fully and satisfactorily performed or from the absolute sale or lease
of goods by the Borrower in which the Borrower had the sole and complete
ownership and the goods have been shipped or delivered to the Account Debtor
evidencing which the Borrower or the Lender has the possession of shipping and
delivery receipts; (c) the Receivable is not subject to any prior or subsequent
assignment, claim, lien or security interest other than that of the Lender; (d)
the Receivable is not subject to setoff, counterclaim, defense, allowance or
adjustment other than discounts for prompt payment shown on the invoice, or to
dispute, objection or complaint by the Account Debtor concerning its liability
on the Receivable and the goods, the sale or lease of which gave rise to the
Receivable, have not been returned, rejected, lost or damaged; (e) the
Receivable arose in the ordinary course of business; (f) no petition in
bankruptcy or other application for relief under the Bankruptcy Code or other
insolvency law has been filed with respect to the Account Debtor, and the
Account Debtor has not made an assignment for the benefit of creditors, become
insolvent or suspended or terminated business, and the Account Debtor is
generally paying its debts as they become due; (g) the Account Debtor is not an
affiliate, subsidiary, officer, shareholder or employee of the Borrower, nor
owned or controlled by any such entity; (h) the Account Debtor maintains its
chief executive office in the United States and is organized under the laws of
the United States or a state thereof, or payment of the Receivable is secured by
a letter of credit acceptable to the Lender; (i) the full amount reflected on
the Borrower's books and on any invoice delivered to the Lender relating to any
Receivable is owing to the Borrower and no partial prepayments thereon have been
made; (j) the Lender's security interest in the Receivable is a perfected first
lien; (k) the Receivable does not arise from a consignment or other arrangement
pursuant to which the subject Inventory is returnable if not sold or otherwise
disposed of by the Account Debtor; and (l) the Receivable is not of a class,
type or category which the Lender hereafter reasonably determines, on notice to
the Borrower, is not eligible for inclusion in the Borrowing Base under Section
2.1 of this Agreement.
"Equipment" means all machinery, equipment, furniture, fixtures,
tools, parts, supplies and motor vehicles, now owned and hereafter acquired by
the Borrower of whatsoever name, nature, kind or description, wherever located,
and all additions and accessions thereto and replacements or substitutions
therefor, and all proceeds thereof and all proceeds of any insurance thereon.
"Loans" means all advances or loans made to the Borrower by the Lender
pursuant to this Agreement.
"Maturity Date" means June 30, 1998.
"Obligations" means all loans, advances, debts, liabilities,
obligations and duties owing by the Borrower to the Lender of every kind and
description, direct or indirect, absolute or contingent, due or to become due,
now existing or hereafter arising, pursuant to this Agreement and the Loans and
to no other transaction, whether such obligations are from time to time reduced
and thereafter increased, or entirely extinguished and thereafter reincurred,
including without limitation, all interest, fees, charges, expenses and
attorneys' fees chargeable to the Borrower or incurred by the Lender in
connection with this Agreement.
"Operating Budget Targets" means the operating budget targets as
prepared by management of the Borrower and as approved by the Board of Directors
of the Borrower and by the Lender from time to time.
"Patents" means all of the Borrower's right, title and interest,
present and future, in and to (a) all letters patent of the United States or any
other country, all right, title and interest therein and thereto, and all
registrations and recordings thereof, including without limitation applications,
registrations and recordings in the United States Patent and Trademark Office or
in any similar office or agency of the United States and any State thereof or
any other country or any political subdivision thereof; all whether now owned or
hereafter acquired by the Borrower; and (b) all reissues, continuations,
continuations-in-part or extensions thereof and all licenses thereof; and all
proceeds of the foregoing and all proceeds of any insurance on the foregoing.
"Receivables" means (a) all of the Borrower's now owned and hereafter
acquired accounts, chattel paper, documents and instruments, and all proceeds of
the foregoing and all proceeds of any insurance on the foregoing; (b) all of the
Borrower's rights, remedies, security and liens, in, to and in respect of the
accounts, including without limitation, rights of stoppage in transit, replevin,
repossession and reclamation and other rights and remedies of an unpaid vendor,
lienor or secured party, guarantees or other contracts of suretyship with
respect to the accounts, deposits or other security for the obligation of any
debtor or obligor in any way obligated on or in connection with any accounts and
credit and other insurance, and all proceeds of the foregoing and all proceeds
of any insurance on the foregoing; and (c) all of the Borrower's right, title
and interest, present and future, in, to and in respect of, all goods relating
to, or which by sale have resulted in, accounts, including without limitation
all goods described in invoices or other documents or instruments with respect
to, or otherwise representing or evidencing any accounts and all returned,
reclaimed or repossessed goods, and all proceeds of the foregoing and all
proceeds of any insurance on the foregoing.
"Subordinated Debenture" means the following outstanding Debenture
issued by the Borrower: 8% Subordinated Debenture dated October 28, 1992, in the
original principal amount of $600,001.00, payable to Joseph M. Lobozzo II, as
amended and restated, and now due on January 31, 1998.
"Supplemental Agreements" means any and all agreements, instruments,
documents, security agreements, guaranties, mortgages, financing statements,
assignment agreements, repurchase agreements and supplements thereto granting or
intending to grant to Lender any lien, security interest, pledge, assignment or
indemnification to secure the Obligations.
"Trademarks" means all of the Borrower's right, title and interest, in
and to (a) all trademarks, trade names, trade styles, service marks, prints and
labels on which said trademarks, trade names, trade styles and service marks
have appeared or appear, designs and general intangibles of like nature, now
existing or hereafter adopted or acquired, all right, title and interest therein
and thereto, and all registrations and recordings thereof, including without
limitation applications, registrations and recordings in the United States
Patent and Trademark Office or in any similar office or agency of the United
States, any State thereof, or any other country or any political subdivision
thereof, all whether now owned or hereafter acquired by the Borrower; (b) all
reissues, extensions or renewals thereof and all licenses thereof; and (c) the
goodwill of the business symbolized by each of the Trademarks, and all customer
lists and other records of the Borrower relating to the distribution of products
bearing the Trademarks; and all proceeds of the foregoing and all proceeds of
any insurance on the foregoing.
1.2 UCC Definitions. All other terms used in this Agreement which are
not specifically defined herein or the definitions of which are not incorporated
herein by reference shall have the meanings assigned to such terms in the
Uniform Commercial Code in effect in the State of New York as of the date first
above written ("UCC") to the extent such other terms are defined therein.
1.3 Accounting Terms. All accounting terms used but not defined in
this Agreement shall be construed in accordance with generally accepted
accounting principles consistently applied.
2. Terms of Borrowing.
2.1 Borrowing Base. As long as neither DCI nor DDI are in default of
any of their Obligations to the Lender, the Lender may lend to the Borrower, and
the Borrower may borrow from the Lender, from time to time, up to an aggregate
outstanding principal amount at any time of $2,950,000, or such lesser amount
which is 100% of DCI's, DDI's and SAI/Delta's Eligible Receivables; provided,
however, that in the event that Borrower shall have met its Operating Budget
Targets for the immediately preceding one month period and three month period,
the Lender may lend to the Borrower, and the Borrower may borrow from the
Lender, up to an aggregate principal amount of $3,650,000 from October 1, 1997
through December 31, 1997 and up to an aggregate principal amount of $3,350,000
from January 1, 1998 through June 30, 1998, or, in each case, such lesser amount
which is 100% of DCI's, DDI's and SAI/Delta's Eligible Receivables. Borrower and
SAI/Delta shall prepare and forward to Lender a report of all such Eligible
Receivables within 3 business days of the 15th day and the last day of every
month. The maximum principal amount of all advances or loans made to the
Borrower by the Lender pursuant to this Agreement, subject to the limitations
set forth in this Section 2.1, shall hereinafter be referred to as the
"Borrowing Base".
2.2 Borrowing Base Reports Etc. For purposes of computing the
Borrowing Base, the Borrower shall furnish to the Lender information adequate to
identify Receivables and Inventory at times and in form and substance as may be
required by the Lender. Without limiting the foregoing, the Borrower shall
provide to the Lender in form and content satisfactory to the Lender (a) a
Borrowing Certificate in the form mutually agreeable to Borrower and Lender to
be provided at least weekly and at such other intervals as the Lender may
request in the event a Loan would exceed the Borrowing Base as calculated by the
Lender; and (b) monthly, within 15 days after month-end, an Accounts Receivable
Aging based on invoice date and listed in sequence by number. From time to time,
the Borrower shall provide the Lender with such other schedules and information
as the Lender may reasonably request. Together with such schedules, the Borrower
shall, upon the reasonable request of the Lender, furnish copies of customers'
invoices or the equivalent, and original shipping or delivery receipts for all
merchandise sold, and the Borrower warrants the genuineness thereof. The
Borrower further warrants that all Receivables are and will be bona fide
existing obligations created by the sale and delivery of merchandise or the
rendition of services to customers in the ordinary course of business, free of
liens, encumbrances and security interests, except as permitted hereunder, and
unconditionally owed to the Borrower and, to the best of the Borrower's
knowledge, without defense, offset or counterclaim.
2.3 Loans.
(a) Subject to the terms of this Agreement, the Borrower may
receive Loans upon request made by a person authorized by the Borrower no later
than 1:00 p.m. Rochester, New York time in a writing satisfactory to the Lender;
provided that no Loan shall be made which, by itself or together with the
principal balance then outstanding of prior Loans, would cause the total
outstanding principal balance of the Loans to exceed the Borrowing Base
described in paragraph 2.1 of this Agreement.
(b) Subject to the required terms of payment set forth in
Paragraph 2.5 below, the Borrower may make principal payments upon its
indebtedness for Loans in its discretion and until maturity as provided in
Paragraph 2.5(a), may reborrow subject to the limits set forth in this
Agreement.
2.4 Interest.
(a) Until the Maturity Date, whether by acceleration or
otherwise, the Borrower agrees to pay interest on the outstanding principal
balance of the Loans at the rate of one and three quarters of one percent (1
3/4%) per annum above the highest prime rate published from time to time in the
"Money Rates" column of the Wall Street Journal or any successor to such
publication ("Prime Rate") as it may change from time to time based upon a
360-day year for the actual number of days the Loans are outstanding which may
result in a higher effective annual rate. After maturity, whether by
acceleration or otherwise, the Borrower agrees to pay interest on the
outstanding principal balance of the Loans at a rate equal to three and three
quarters percent (3 3/4%) per annum above the Prime Rate. Interest shall be
payable monthly on the first day of each month, commencing January 1, 1998 until
the Maturity Date and on the date the principal balance of the First Restated
Promissory Note is paid in full. The rate of interest shall change
simultaneously with a corresponding change in the Prime Rate. In no event shall
the rate of interest on the First Restated Promissory Note exceed the maximum
rate authorized by applicable law.
(b) Any change in the Prime Rate shall, without notice to the
Borrower, be effective hereunder commencing at the same time such new rate
becomes effective.
(c) In the event that, upon maturity, or whether by acceleration
or otherwise, the Borrower ever requests that the Lender provide, and the Lender
actually provides, Loans in excess of the Borrowing Base as defined in Section
2.1 (such excess loans being defined as "Excess Borrowing Base Loans"), then,
with regarding to such Excess Borrowing Base Loans, the Borrower agrees to pay
interest on the outstanding principal amounts of those Excess Borrowing Base
Loans at the rate of five percent (5%) per annum above the Prime Rate. All
Excess Borrowing Base Loans are a part of the definition of "Loans" as set forth
in Section 1. The provisions of Section 2.4(c) shall not diminish or revise the
provisions of Section 2.4 (providing for the payment of interest on the
outstanding principal amount of Loans both prior to (at one and three-quarters
of one percent (1 3/4%) above the Prime Rate) maturity and after (at three and
three-quarters percent (3 3/4%) above the Prime Rate) maturity, whether by
acceleration or otherwise.
2.5 Payments.
(a) The Borrower further agrees to pay the outstanding principal
and accrued interest on the Loans on the earlier of (i) the Maturity Date; or
(ii) the occurrence of an event of default under Paragraph 7.1 below in respect
of which the Lender has delivered a Declaration. In addition, the Borrower
agrees to make, on demand, such principal payments as are necessary so that the
unpaid principal balance of the Loans does not at any time exceed the Borrowing
Base. Without limiting the right of the Lender to demand payment as provided
herein, the Borrower shall pay accrued interest on the first day of each month
commencing the month following the date of this Agreement and continuing until
all of the Obligations are paid in full.
(b) Each payment received by the Lender shall be applied first to
interest accrued and billed and the balance, if any, to principal, provided that
if there has occurred an event of default under Paragraph 7.1 below, the Lender
may apply payments in the Lender's absolute discretion.
(c) Any non-cash payment of Loans, i.e, payment in other than
immediately available U.S. funds, shall be deemed paid, for purposes of
calculating the principal amount available for borrowing under this Agreement,
on the date such non-cash payments are received by the Lender; however, for the
purpose of calculating interest pursuant to Paragraph 2.4 of this Agreement,
such payments shall be deemed to have been received two (2) days after actual
receipt of such payment by the Lender. Notwithstanding the foregoing, if any
such non-cash payment presented for collection by the Lender is not paid in
full, the Lender may, without prior notice to the Borrower, reverse the
provisional credit which has been given, and make appropriate adjustments to the
amount of principal and interest due, and the amount of the Borrowing Base
available.
2.6 Prepayment. The Borrower shall have the right to prepay the
outstanding principal balance of the Loans in whole, at any time, or in part,
from time to time.
2.7 Fees and Expenses.
(a) Audit Fees. The Borrower shall pay to the Lender field
examination fees in the amount of $400 per day per examiner for all audits or
field examinations of the Borrower conducted in reasonable scope at reasonable
intervals and shall reimburse the Lender for all reasonable airfare, hotel
accommodations and other out-of-pocket expenses in connection with such audits
or examinations.
(b) Expenses. If the Obligations are placed in the hands of any
attorneys employed by the Lender for collection, the Borrower agrees to pay on
demand, the Lender's reasonable attorneys' fees, together with reasonable costs
and expenses, whether or not a legal proceeding or action is commenced,
including those incurred in a bankruptcy or insolvency proceeding.
2.8 Purpose of Line of Credit. The Borrower agrees to use the proceeds
of the Loans solely as working capital and for general corporate purposes.
2.9 Collection of Receivables. After the occurrence of an event of
default hereunder in respect of which the Lender has delivered a Declaration,
the Lender or its designee may notify Account Debtors that Receivables have been
assigned to the Lender or of the Lender's security interest therein and collect
them directly and charge the collection costs and expenses to the Borrower's
account; but, unless and until the Lender does so or gives the Borrower other
instructions, the Borrower shall make collection of all Receivables. Until
credited to the Borrower's account as hereinafter set forth, all payments of
Receivables through a lock box arrangement to be established with the Lender
shall be held by the Lender as collateral for payment and/or performance of the
Borrower's Obligations to the Lender.
2.10 Returns, Credits. Etc. Any merchandise which is returned by an
Account Debtor or otherwise recovered shall be set aside, marked with the
Lender's name and held by the Borrower as the Lender's trustee, and shall remain
part of the Lender's security. The Borrower shall notify the Lender promptly of
all returns and recoveries and, on request, deliver the merchandise to the
Lender. The Borrower shall also notify the Lender promptly of all disputes and
claims exceeding $25,000 in the aggregate, and settle or adjust them at no
expense to the Lender, but no discount, credit or allowance (other than in the
ordinary course of the Borrower's business) shall be granted to any Account
Debtor, and no returns of merchandise (other than in the ordinary course of the
Borrower's business) shall be accepted by the Borrower without the Lender's
consent. After the occurrence of an event of default hereunder in respect of
which the Lender has delivered a Declaration, the Lender may settle or adjust
disputes and claims directly with Account Debtors for amounts and upon terms
which the Lender reasonably determines, on notice to the Borrower, to be
advisable, and in all cases the Lender will credit the Borrower's account with
only the net amounts received by the Lender in payment of such Receivables.
2.11 Further Assurance. Upon the Lender's request, the Borrower shall
appropriately mark the Borrower's books of account to disclose the Lender's
security interest in all the Borrower's Receivables, and shall perform all other
steps reasonably requested by the Lender to create and maintain in the Lender's
favor a valid first priority security interest, or lien in or on all Receivables
and all other security held by or for the Lender.
2.12 Power of Attorney. The Borrower appoints the Lender, or any
person whom the Lender may designate as its attorney, with power of attorney to
sign the Borrower's name on such financing statements as may be necessary to
perfect the Lender's security interest in the Collateral; and, after the
occurrence of an event of default hereunder in respect of which the Lender has
delivered to the Borrower a Declaration to endorse the Borrower's name on any
checks, notes, acceptances, money orders, drafts or other forms of payment or
security that may come into the Lender's possession; to sign the Borrower's name
on any invoice or bill of lading relating to any Receivables, on verifications
of accounts, notices of assignment and notices to customers; to notify the post
office authorities to change the address for delivery of the Borrower's mail to
an address designated by the Lender; to send requests for verification of
Receivables to Account Debtors; and to do all things necessary to carry out this
Agreement. The Borrower ratifies and approves all acts of such attorney. Neither
the Lender nor the attorney will be liable for any acts or omissions nor for any
error of judgment or mistake of fact or law. This power, being coupled with an
interest, is irrevocable so long as any Receivables in which the Lender has a
security interest remain unpaid or until the Obligations have been fully
satisfied. The Lender may file one or more financing statements disclosing the
Lender's security interest without the Borrower's signature appearing thereon.
3. Collateral.
3.1 Security Interest. As security for payment and performance of all
Obligations, the Borrower hereby assigns and grants to the Lender a continuing
security interest in the Collateral. The Lender shall retain its security
interest in all Collateral, until all Obligations have been finally and
irrevocably satisfied.
3.2 Possession of Collateral. After the occurrence of an event of
default hereunder in respect of which the Lender has delivered to the Borrower a
Declaration, the Lender will at all times have the right to take physical
possession of the Collateral and to maintain such possession of the Collateral
on the Borrower's premises or to remove the Collateral or any part thereof to
such other places as the Lender may desire. If the Lender exercises its right to
take possession of the Collateral, the Borrower shall, upon the Lender's demand,
assemble the Collateral and make it available to the Lender at a place
reasonably convenient to the Lender.
3.3 Location of Collateral. All Collateral is owned by the Borrower
free of all other liens and encumbrances, except as set forth on Schedule 1
hereto and shall be kept by the Borrower at the location(s) set forth in
Schedule 2 hereto; and the Borrower will not (without the Lender's prior written
approval) remove the Collateral therefrom, except for the purposes of sale or
lease in the regular course of the Borrower's business.
3.4 Limitation on Disposition of Assets. The Borrower will not sell,
exchange or otherwise dispose of the Collateral, or any part thereof, or any
interest therein without the express written consent of the Lender other than
(a) finished products or field spare parts sold in the ordinary course of
business, and (b) fully depreciated obsolete equipment or equipment which is
replaced by items of comparable kind and value. In the event of any other sale,
exchange or other disposition of the Collateral or any part thereof or any
interest therein (and no such sale, exchange or other disposition is hereby
otherwise authorized or consented to), the security interest of the Lender shall
nevertheless continue in said Collateral (including all proceeds, cash and
non-cash) notwithstanding said sale, exchange or other disposition; all of said
proceeds shall remain Collateral hereunder and shall be transferred and paid
over to the Lender immediately following said sale, exchange or other
disposition, and shall be applied at the option of the Lender to the payment of
Obligations due hereunder; and the receipt by the Lender of all or any of said
proceeds shall not be deemed or construed to be an authorization or consent of
the Lender to such sale, exchange or other disposition of said Collateral.
3.5 Further Assurances Regarding Inventory. The Borrower shall perform
any and all steps reasonably requested by the Lender to perfect the Lender's
security interest in the Inventory, such as leasing warehouses to the Lender or
the Lender's designee, placing and maintaining signs, appointing custodians,
executing and filing financing or continuation statements in form and substance
satisfactory to the Lender, maintaining stock records and transferring Inventory
to warehouses. If any Inventory is in the possession or control of any of the
Borrower's agents or processors, the Borrower shall notify such agents or
processors of the Lender's security interest therein, and, upon request,
instruct them to hold all such Inventory for the Lender's account and subject to
the Lender's instructions. A physical listing of all Inventory, wherever
located, shall be taken by the Borrower at least annually and whenever requested
by the Lender, and a copy of each such physical listing shall be supplied to the
Lender. the Lender may examine and inspect the Inventory at any reasonable time
during regular business hours.
3.6 Compliance. The Borrower will comply with the terms and conditions
of any leases covering the premises wherein the Collateral is located and any
orders, ordinances, laws or statutes of any city, state or other governmental
department having jurisdiction with respect to such premises or the conduct of
business thereon.
3.7 Discharge of Liens. The Lender may, at its option, discharge any
taxes, liens, security interests or other encumbrances at any time levied or
placed on the Collateral, and the Lender may pay insurance premiums or procure
insurance and otherwise pay for the maintenance and preservation of the
Collateral and the Borrower will reimburse the Lender on demand for any payment
made or expense incurred by the Lender pursuant to the foregoing authority, with
interest at the rate provided in this Agreement.
3.8 Corporate Existence, Properties. The Borrower will at all times
maintain, preserve and protect all franchises, patents, and trade names and
preserve all the remainder of its property used or useful in the conduct of its
business and keep the same in good condition and repair (normal wear and tear
and obsolescence excepted), and from time to time make, or cause to be made, all
needed and proper repairs, renewals, replacements, betterments and improvements
thereto, and will pay or cause to be paid, except when the same may be contested
in good faith, all rent due on any premises where any property is held or may be
held, so that the business carried on in connection therewith may be
continuously conducted.
3.9 Insurance. The Borrower will have and maintain insurance at all
times with respect to all Collateral against risks of fire (including so-called
extended coverage), theft and such risks as the Lender may require containing
such terms, in such form, and for such periods, and written by such companies as
may be satisfactory to the Lender, such insurance to be payable to the Lender
and the Borrower as their interests may appear; each policy of insurance shall
have a loss payee endorsement in form satisfactory to the Lender providing (a)
that loss or damage, if any under the policy, shall be payable to the Lender, as
secured party, as its interests may appear; (b) that the insurance as to the
interest of the Lender shall not be invalidated by any act or neglect of the
insured or owner of the property described in said policy, nor by any
foreclosure, or other proceeding, nor by any change in the title of ownership of
said property, nor by the occupation of the premises where the property is
located for purposes more hazardous than are permitted by said policy; (c) that,
if the policy is canceled at any time by the insurance carrier, in such case the
policy shall continue in force for the benefit of the Lender for not less than
thirty (30) days after written notice of cancellation to the Lender from the
insurance carrier; and (d) that the policy will not be reduced or canceled at
the request of the insured nor will said loss payee endorsement be amended or
deleted without thirty (30) days' prior written notice to the Lender from the
insurance carrier. The Borrower will furnish the Lender with certificates or
other evidence satisfactory to the Lender of compliance with the foregoing
insurance provisions, and, after the occurrence of an event of default hereunder
in respect of which the Lender shall have delivered to the Borrower a
Declaration, the Lender may act as attorney for the Borrower in obtaining,
adjusting, settling, and canceling such insurance and receiving and endorsing
any drafts. The Borrower hereby assigns to the Lender any and all monies which
may become due and payable under any policy insuring the Collateral covered by
this Agreement, including return of unearned premiums, and hereby directs any
insurance company issuing any such policy to make payment directly to the Lender
and authorizes the Lender, at its option: (i) to apply such monies in payment on
account of any Obligation hereunder, whether or not due, and remit any surplus
to the Borrower; or (ii) to return said funds to the Borrower for the purpose of
replacement of the Collateral. The Borrower will also at all times maintain
necessary workers' compensation insurance and such other insurance as may be
required by law or as may be reasonably required in writing by the Lender.
3A. Guarantee of SAI/Delta. As further security for the payment and
performance of the Borrower's obligations to the Lender under this Agreement,
simultaneously with the execution of this Agreement, SAI/Delta shall execute and
deliver to the Lender a First Restated Unlimited Continuing Guaranty, pursuant
to which SAI/Delta guarantees to the Lender the Borrower's obligations under
this Agreement and the Restated Promissory Note.
4. Representations and Warranties.
4.1 Representations and Warranties. DCI and DDI each warrants and
represents to the Lender that (a) each Borrower is and shall at all times
hereafter be a corporation duly organized and existing in good standing under
the laws of the state of its incorporation and qualified and licensed to do
business in any other state in which its ownership of property or its conduct of
business requires it to be so qualified and/or licensed; (b) each Borrower has
the right and power and is duly authorized to enter into this Agreement and the
Supplemental Agreements; (c) the execution by each Borrower of this Agreement
and the Supplemental Agreements shall not constitute a breach of any provision
contained in either Borrower's Certificate of Incorporation or By-Laws or
contained in any agreement to which either Borrower is now or hereafter becomes
a party; (d) the performance by each Borrower of all of the terms and provisions
contained in this Agreement and in the Supplemental Agreements' shall not
constitute a default or an event of default under any agreement to which each
Borrower is now or hereafter a party; (e) the Borrower has good and indefeasible
title to the Collateral; (f) all financial statements and information relating
to each Borrower which have been or may hereafter be delivered by each Borrower
to the Lender are true and correct and have been prepared in accordance with
generally accepted accounting principles, and there has been no material adverse
change in the financial condition of either Borrower since the submission of any
such financial information to the Lender; and (g) there are no actions or
proceedings which are pending or threatened against either Borrower which might
result in any material adverse change in the Borrower's financial condition or
which might in any material way affect any of the assets of the Borrower.
[Intentionally left blank]
5. Affirmative Covenants. The Borrower agrees as follows:
5.1 Monthly Financial Reports. To furnish to the Lender, within thirty
(30) days after the end of each calendar month, internally prepared consolidated
and consolidating financial reports of the operations of the Borrower for such
month and for the fiscal year-to-date, certified by the Chief Financial Officer
of the Borrower.
5.2 Quarterly Financial Reports. To furnish to the Lender, within
forty-five (45) days after the end of each fiscal quarter, internally prepared
10Q financial consolidated reports of the Operations of the Borrower for such
quarter, certified by the Chief Financial Officer of the Borrower.
5.3 Annual Statements. To furnish to the Lender within the earlier to
occur of the date that such credited financial statement are filed by DCI with
the Securities and Exchange Commission or one hundred twenty (120) days after
the end of each of the Borrower's fiscal years, audited financial statements
consisting of a balance sheet, income statement and associated cash flows of the
Borrower for such year prepared on a consolidated and consolidating basis, in
accordance with generally accepted accounting principles, by a firm of
independent certified public accountants satisfactory to the Borrower and the
Lender and certified by the Borrower's Chief Financial Officer.
5.4 Forecast. For each fiscal year of the Borrower during the term
hereof, furnish to the Lender a consolidated and consolidating financial
forecast for the Borrower's upcoming fiscal year, consisting of monthly
projections of the Borrower's balance sheet, income statement, cash flows, and
Loan availability. Such reports shall be furnished to the Lender within the
first thirty (30) days of the Borrower's fiscal year. Anything to the contrary
notwithstanding, so long as DDI is not actively conducting business, the
financial reports, statements and forecasts to be furnished pursuant to
paragraphs 5.1 and 5.4 need not contain information concerning DDI.
5.5 Certification. The reports required under Paragraph 5.1 through
5.4 shall be accompanied by a certificate of the chief financial officer of the
Borrower (i) certifying that no event of default under Paragraph 7.1 of this
Agreement has occurred or, if such an event has occurred, the nature of the
event of default and the action which the Borrower proposes to take to cure it,
and (ii) with computations demonstrating compliance with the covenants contained
in this Agreement.
5.6 Securities Regulation Reports. Promptly after the sending or
filing thereof, to furnish copies of all proxy statements, financial statements
and reports which the Borrower sends to its stockholders, and copies of all
regular, periodic and special reports, and all registration statements which the
Borrower files with the Securities and Exchange Commission or any governmental
authority which may be substituted therefor, or with any national securities
exchange.
5.7 Management. To notify the Lender thirty (30) days prior to any
reasonably foreseeable change in the management of the Borrower.
5.8 Taxes. To pay promptly all tax assessments and other governmental
charges, provided, however, that nothing herein contained shall be interpreted
to require the payment of any tax assessments and other governmental charges
long as its validity is being contested in good faith in appropriate proceedings
diligently pursued, provided such contest does not impair the rights and
security of the Lender.
5.9 Maintenance of Property. To maintain and keep its real and
personal property in good condition and in compliance with applicable federal,
state and local laws, rules and regulations.
5.10 Litigation. To notify the Lender of any litigation instituted
against the Borrower and any judgments entered against the Borrower in any court
involving more than $250,000 in the aggregate at any one time which is not
covered by insurance or where the insurance coverage is questioned by the
carrier.
5.11 Corporate Existence. To maintain each Borrower's corporate
existence in good standing.
5.12 Other Information. To furnish such other information and at such
times as may be reasonably requested by the Lender.
5.13 Environmental Matters. To comply with all applicable
environmental laws and regulations, and to promptly correct any violation of any
applicable environmental law or regulation.
5.14 Audits. To permit the Lender and its agents at all reasonable
times and from time to time during normal business hours to examine, audit, and
make extracts from, or copies of, any of the Borrower's books, ledgers, reports
and other records and to otherwise verify all or any Collateral in any manner
the Lender considers appropriate.
5.15 Ownership. To notify the Lender within five (5) business days of
any change in voting control of either DCI or DDI.
6. Negative Covenants. The Borrower will not, without the prior written
consent of the Lender:
6.1 Capital Expenditures. Expend for fixed assets, or enter into
leases which must be capitalized under generally accepted accounting principles
(but excluding field spare parts), or make leasehold improvements during any one
fiscal year in an aggregate amount in excess of $100,000.
6.2 Liens. Create or permit to exist against any of its property or
assets, real or personal, tangible or intangible, now owned or hereafter
acquired, any mortgage or other lien or encumbrance, except (a) liens and
mortgages listed on Schedule l hereto; (b) liens for taxes not delinquent or
being contested in good faith and by appropriate proceedings; (c) liens granted
to the Lender; and (d) liens granted to NCFC.
6.3 Borrowed Money. Incur other indebtedness for borrowed money,
except (a) indebtedness described on Schedule 3 hereto, (b) indebtedness
permitted by Section 6.14 hereof, (c) indebtedness to the Lender, (d)
intercompany transfers between DCI, DDI and SAI/Delta; and (e) indebtedness to
NCFC.
6.4 Sell Real Property. Sell or dispose of any presently owned real
property.
6.5 Sell Fixed Assets. Sell or dispose of a substantial portion of
presently owned fixed assets, such as furniture, fixtures, and equipment, except
as required for normal replacement due to age and/or obsolescence, provided (a)
the same are replaced by fixed assets of equal value and quality or (b) the
Borrower delivers to the Lender written notice of such sale or disposition and
remits the proceeds of such sale or disposition to reduce the outstanding
principal balance of the Loans, and following such sale or disposition the
Borrower is in compliance with the Borrowing Base.
6.6 Declare Dividends. Declare any dividends or make any other
distribution on any shares of its capital stock or set apart any sum for the
payment of any such dividends.
6.7 Capital Stock. Purchase or retire any of its capital stock.
6.8 Purchase Other Business. Purchase or acquire all or substantially
all of the property, assets, or business of any other person, firm or
corporation.
6.9 Contingent Debt. Assume, guarantee, endorse, contingently agree to
purchase, or otherwise become liable upon the obligation of any person, firm, or
corporation, except (a) by the endorsement of negotiable instruments for deposit
or collection or similar transactions in the ordinary course of business, or (b)
guarantees of any obligations owed to the Lender.
6.10 Purchase Stock: Merge or Consolidate. Enter into any merger or
consolidation, or purchase or acquire the obligations or stock of, or any other
interest in, any person, firm, corporation, or other enterprise whatsoever,
except the purchase of direct obligations of the United States of America or of
any state, county, or municipality.
6.11 Sale-Leaseback. Directly or indirectly enter into any arrangement
whereby the Borrower shall sell or transfer all or any substantial part of its
fixed assets then owned by it and shall thereafter or thereupon rent or lease
such property or a substantial part thereof.
6.12 Accounts Receivable. Sell, assign, transfer, or dispose of any of
its Receivables, except to the Lender.
6.13 Loans. Make loans or advances to any person, firm, or
corporation.
6.14 Lease of Real and Personal Property. Enter into any arrangements
for the lease of real or personal property where the annual lease payments for
all such leases would exceed in the aggregate $350,000.00 in any fiscal year.
6.15 Prepay Debt. Make any prepayment in regard to any indebtedness
that is subordinated in any respect to indebtedness owing to the Lender.
6.16 ERISA Compliance.
(a) Engage in any "prohibited transaction" (as such term is
defined in Section 406 or Section 2003(a) of the Employee Retirement Income
Security Act of 1974 and the regulations thereunder, as now or hereafter in
effect, ("ERISA"));
(b) Incur any "accumulated funding deficiency" (as such term is
defined in Section 302 of ERISA) whether or not waived; or
(c) Terminate any pension plan in a manner which could result in
the imposition of a lien on any property of the Borrower or any affiliate
pursuant to Section 4068 of ERISA.
6.17 [Intentionally Omitted].
6.18 [Intentionally Omitted].
6.19 [Intentionally Omitted].
6.20 [Intentionally Omitted].
6.21 [Intentionally Omitted].
6.22 Subordinated Debenture. Make any principal payments on any of the
Subordinated Debenture prior to the dates upon which such payments are scheduled
to be made under the Subordinated Debenture.
7. Default.
7.1 Events of Default. If one or more of the following events of
default shall occur, the Lender, at its option, may terminate the Borrower's
right to receive any further Loans, and regardless of whether the Lender
exercises such option, the indebtedness of the Borrower under this Agreement and
any note or other agreement executed pursuant hereto shall become immediately
due and payable upon declaration to that effect delivered by the Lender to the
Borrower:
(a) Default shall be made by the Borrower (i) in the payment of
any principal or interest payable under this Agreement within ten (10) days when
due or (ii) in the payment of any fees or other expenses due and payable
pursuant to this Agreement or any other document executed and delivered to the
Lender in connection with this Agreement within ten (10) days after the Lender
notifies the Borrower that such fees or expenses are due;
(b) Default shall be made in (i) the due observance and
performance of any term, covenant, or agreement contained in this Agreement
(other than Section 6 of this Agreement) or in any other present or future
agreement, note, or instrument between or among the Borrower and the Lender,
including, without limitation, any default under any Supplemental Agreements
and, to the extent such default is capable of being cured, such default shall
remain uncured for a period of twenty (20) days after the Lender notifies the
Borrower in writing of such default, or (ii) the due observance and performance
of any term, covenant, or agreement contained in Section 6 of this Agreement;
(c) any representation or warranty made in this Agreement or any
certificate or statement furnished pursuant to or in connection with this
Agreement shall prove to have been false in any material respect at the date of
which the facts therein set forth were certified, or shall have omitted any
substantial contingent or unliquidated liability or claim against the Borrower,
or if upon the date of the execution of this Agreement there shall have been any
material adverse change in any of the material facts disclosed on any such
statement, which change shall not have been disclosed to the Lender in writing
at or prior to the time of such execution;
(d) the termination of existence or business, failure of, or the
making of an assignment for the benefit of creditors by, the Borrower;
(e) the entry of any judgment or judgments against the Borrower
aggregating as to any one of them at any one time in excess of $250,000 which
shall remain unsatisfied, undischarged, or unsecured for a period of thirty (30)
days or as to which a stay of execution shall not have been obtained within
thirty (30) days of the entry thereof; provided, however, the Borrower may not,
however, be declared in default by reason of the entry of any such judgment so
long as the same shall be contested in good faith by appropriate proceedings
diligently conducted, and proper security be given therefor;
(f) if any governmental agency or department shall take control
of a substantial part of the property of the Borrower and shall continue such
control for thirty (30) days;
(g) if any tax lien is filed against the property of the Borrower
and remains unsatisfied, undischarged, or unsecured for a period of thirty (30)
days unless such lien is contested in good faith by proper proceedings
diligently conducted;
(h) failure by the Borrower to generally pay its debts as such
debts become due;
(i) a material decrease in the value of the Collateral, or any
other collateral securing payment of the Obligations.
(j) if the Borrower (i) shall file a petition or request for
liquidation, reorganization, arrangement, adjudication as a bankrupt, relief as
a debtor or other relief under the bankruptcy, insolvency or similar laws of the
United States of America or any state or territory thereof or any foreign
jurisdiction, now or hereafter in effect; (ii) shall make a general assignment
for the benefit of creditors; (iii) shall consent to the appointment of a
receiver or trustee for the Borrower or any of its assets, including, without
limitation, the appointment of or taking possession by a "custodian" as defined
in the federal Bankruptcy Code; (iv) make any, or send notice of any intended,
bulk sale; or (v) shall execute a consent to any other type of insolvency
proceeding (under the federal Bankruptcy Code or otherwise) or any formal or
informal proceeding for the dissolution or liquidation of, or settlement of
claims against or winding up of affairs of, the Borrower; provided, however,
that the consent by DDI to the transfer of its assets to NCFC in March 1996, and
the subsequent sale and disposition of those assets by NCFC, and the termination
of DDI's business operations, is not deemed to be an event of default under
paragraph 7.1(d), (j) or (k).
(k) the appointment of a receiver, trustee, custodian or officer
performing similar functions for the Borrower or any of its assets, including,
without limitation, the appointment of or taking possession by a "custodian" as
defined in the federal Bankruptcy Code; or the filing against the Borrower of a
request or petition for liquidation, reorganization, arrangement, adjudication
as a bankrupt or other relief under the bankruptcy, insolvency or similar laws
of the United States of America or any state or territory thereof or any foreign
jurisdiction, now or hereafter in effect; or the institution against the
Borrower of any other type of insolvency (under the federal Bankruptcy Code
otherwise) or of any formal or informal proceeding for the dissolution or
liquidation of, settlement of claims against or winding up of affairs of the
Borrower, and the failure to have such appointment vacated or such petition or
proceeding dismissed within sixty (60) days after such appointment, filing or
institution.
7.2 Rights of the Lender. Upon the occurrence of an event of default
under Section 7.1 hereof: (a) the Lender shall have, in addition to all other
rights provided herein, the rights and remedies of a secured party under the New
York Uniform Commercial Code; and (b) the Lender may sell and deliver any or all
Receivables and any or all other security and Collateral held by the Lender or
for the Lender at public or private sale upon prior notice to the Borrower if
required by law, for cash, upon credit or otherwise, at such prices and upon
such terms as are commercially reasonable; and (c) in addition to all other sums
due the Lender, the Borrower will pay to the Lender upon demand all costs and
expenses incurred by the Lender, including reasonable attorneys' fees and
expenses, to obtain or enforce payment of Receivables or Obligations, or in the
prosecution or defense of any action or proceeding either against the Lender or
against the Borrower concerning any matter arising out of or connected with this
Agreement or the Collateral or Obligations and all Supplemental Agreements, if
any, or otherwise due pursuant to the terms of this Agreement. Any requirement
of reasonable notice shall be met if such notice is mailed postage prepaid to
the Borrower at the Borrower's address as set forth herein at least ten (10)
days before the time of sale or other disposition. The Lender may be the
purchaser at any such sale, if it is public, and, in the event the Lender is the
purchaser, the Lender shall have all the rights of a good faith, bona fide
purchaser for value from a secured party after default. The proceeds of sale
shall be applied first to all costs and expenses of sale, including reasonable
attorneys' fees and expenses, and second to the payment (in whatever order the
Lender elects) of all Obligations, and any remaining proceeds shall be applied
in accordance with the provisions of Part 5 of Article 9 of the New York Uniform
Commercial Code. The Borrower shall remain liable to the Lender for any
deficiency. Failure by the Lender to exercise any right, remedy or option under
this Agreement or any present or future Supplemental Agreement or in any other
agreement between the Borrower and the Lender, or delay by the Lender in
exercising the same will not operate as a waiver. No waiver by the Lender will
be effective unless it is in writing and then only to the extent specifically
stated. Neither the Lender nor any party acting as the Lender's attorney
pursuant to paragraph 2.12 hereof shall be liable for any good faith error of
judgment or mistake of fact or law. The Lender's rights and remedies under this
Agreement will be cumulative and not exclusive of any other right or remedy
which the Lender may have.
8. Other Provisions.
8.1 Joint and Several Obligations. The obligations of DCI and DDI
under this Agreement and the Supplemental Agreements shall be joint and several.
8.2 Notices. All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing and, unless
otherwise expressly provided herein, shall be deemed to have been duly given or
made when delivered by hand, or one (1) business day after being delivered to a
courier for overnight delivery, or five (5) business days after being deposited
in the mail, certified or registered mail, with return receipt requested,
addressed to the addresses set forth in the preamble to this Agreement, or to
such other address as may be hereafter notified by the respective parties
hereto.
8.3 Setoff. All sums at any time standing to the Borrower's credit on
the Lender's books and all of the Borrower's property at any time in the
Lender's possession, or upon or in which the Lender has a lien or security
interest shall be security for all Obligations. In addition to and not in
limitation of the above, with respect to any deposits or property of the
Borrower in the Lender's possession or control, now or in the future, the Lender
shall have the right after default and demand hereunder to setoff all or any
portion thereof, at any time, against any Obligations hereunder, without prior
notice or demand to the Borrower.
8.4 Counsel Fees and Expenses. The Borrower agrees to pay all
reasonable counsel fees and expenses, including recording and filing fees,
incurred by the Lender in connection with the financing evidenced by this
Agreement as well as any reasonable fees and expenses of counsel which the
Lender may hereafter reasonably incur in protecting, enforcing, increasing or
releasing any security held by the Lender. The Borrower specifically authorizes
the Lender to pay all such fees and expenses and charge the same to its loan
account.
8.5 Further Assurance. The Borrower agrees that at any time, or from
time to time, upon the written request of the Lender, the Borrower will execute
and deliver such further documents and do such other acts and things as the
Lender may reasonably request in order to fully effect the purposes of this
Agreement and the Supplemental Agreements.
8.6 Construction. This Agreement and the Supplemental Agreements may
not be amended orally.
8.7 Successors. All rights of the Lender hereunder shall inure to the
benefit of its successors and assigns, and all Obligations of the Borrower shall
bind the successors and assigns of the Borrower.
8.8 Duration of Lien. All Collateral described in this Agreement shall
remain Collateral as security for the performance of all Obligations of the
Borrower under this Agreement until all monies required to be paid under this
Agreement have been finally and irrevocably paid in full and all Obligations on
the part of the Borrower to be paid, kept and performed under this Agreement
have been paid, kept and performed.
8.9 Payments. The acceptance of any check, draft or money order
tendered in full or partial payment of any Obligation hereunder is conditioned
upon and subject to the receipt of final payment in cash.
8.10 Exhibits and Schedules. All exhibits and schedules referred to
herein and annexed hereto are hereby incorporated into this Agreement and made a
part hereof.
8.11 Governing Law. This Agreement shall be governed and construed in
accordance with the internal laws of the State of New York, without regard to
principles of conflicts of law.
8.12 WAIVER OF RIGHT TO TRIAL BY JURY. THE BORROWER AND THE LENDER
HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND
OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE COMMENCED ARISING OUT OF THIS
AGREEMENT, THE COLLATERAL AND SUPPLEMENTAL AGREEMENTS OR ANY ASSIGNMENT THEREOF
OR BY REASON OF ANY OTHER CAUSE OF DISPUTE BETWEEN THE BORROWER AND THE LENDER.
8.13 CONSENT TO JURISDICTION. THE BORROWER AND THE LENDER AGREE THAT
ANY ACTION OR PROCEEDING TO ENFORCE, OR ARISING OUT OF, THIS AGREEMENT OR ANY
DOCUMENT EXECUTED IN CONNECTION HEREWITH, MAY BE COMMENCED IN NEW YORK STATE IN
MONROE COUNTY, OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT
OF NEW YORK, AND THE BORROWER WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT
A SUMMONS AND COMPLAINT COMMENCING AN ACTION OR PROCEEDING IN ANY SUCH COURT
SHALL BE PROPERLY SERVED AND SHALL CONFER PERSONAL JURISDICTION IF SERVED BY
REGISTERED OR CERTIFIED MAIL TO THE BORROWER, OR AS OTHERWISE PROVIDED BY THE
LAWS OF NEW YORK STATE OR THE UNITED STATES.
<PAGE>
8.14 Reaffirmation.
(a) DDI hereby reaffirms its obligations to Lobozzo pursuant to a
Restated and Amended Subordinated Debenture in the face amount of $600,001, due
January 31, 1998 (the "Lobozzo Debenture"), and DCI reaffirms its guaranty of
the Lobozzo Debenture.
(b) [Intentionally Omitted].
9. Additional Requirements. In the event that the amount of the Loans
as outstanding from time to time ever exceed the amount of Loans which would
otherwise be permitted by the Borrowing Base by an amount of at least $300,000
(an "Overbase Amount"), then it is understood and agreed that, without the
written consent of the Lender, no checks will be written on the Borrower's
account with Manufacturers and Traders Trust Company (the "M&T Account") other
than by Michael Julian, the Borrower's Secretary or Michael McCusker, the
Borrower's Assistant Secretary. It is further understood and agreed that at the
time that the Overbase Amount again falls below $300,000, then checks may be
written on the M&T Account by any authorized signatory.
10. Restatement. This Agreement restates, in its entirety, the October
1996 Credit Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by the proper and duly authorized officers as of the date
first above written.
-------------------------------
JOSEPH M. LOBOZZO II
--------------------------------
JOANNE LOBOZZO
DELTA COMPUTEC INC.
By: ___________________________
Name:
Title:
<PAGE>
DELTA DATA NET, INC.
By: ____________________________
Name:
Title:
SAI/DELTA, INC.
By: ____________________________
Name:
Title:
<PAGE>
SCHEDULE 1
Secured Party Collateral Debtor
- --------------------- ------------------------------ ------------------------
Forsythe/McArthur
Assoc. Communications Equipment Delta Data Net, Inc.
First United Leasing Communications Equipment Delta Data Net, Inc.
VMX Credit Corp. Computer Equipment Delta Data Net, Inc.
Canon Financial
Services Communications Equipment Delta Data Net, Inc.
Bell Atlantic Systems
Leasing Computer Equipment Delta Computec Inc.
Oliver Allen Company Computer Equipment Delta Computec Inc.
National Canada
Finance Corp. Spare Parts Inventory Delta Computec Inc.
<PAGE>
SCHEDULE 2
Collateral Locations
Chicago
DCI c/o Harris Bank
311 West Monroe
3rd Floor
Chicago, Illinois 60606
Dallas
2100 N. Highway 360
Suite 1804
Grand Prarie, Texas 75050
Houston
14515 Briar Hills Parkway
Suite 117
Houston, Texas 77077
Philadelphia
1621 Loretta Avenue
Feasterville, Pennsylvania 19053
Rochester
366 White Spruce Boulevard
Rochester, New York 14623
Teterboro
900 Huyler Street
Teterboro, New Jersey 07608
Washington
122 Lafayette Avenue
Laurel, Maryland 20707
<PAGE>
SCHEDULE 3
Permitted Indebtedness (for Borrowed Money)
Bell Atlantic Systems Capital Lease.
8% Subordinated Debenture dated October 28, 1992, in the original principal
amount of $600,001.00, payable to Joseph M. Lobozzo II, as amended and restated,
and payable $200,000 per year, first payment due on January 31, 1998.
Amended and Restated Promissory Note dated as of October 10, 1996, of Delta
Computec Inc. in the original principal amount of $750,000, payable to National
Canada Finance Corp.
<PAGE>
SCHEDULE 3(f)
Trade Names
1. DCI
2. The DCI Companies
3. PC Reserve
4. R & M Associates
5. Data Net
6. Data Span
7. SAI/Delta
8. Computer Support Inc.
9. Delta CompuTec Inc.
<PAGE>
FIRST RESTATED PROMISSORY NOTE
$3,650,000 October 31, 1997
For value received, DELTA COMPUTEC INC. ("DCI") and DELTA DATA NET, INC.
("DDI"), each of which is a New York corporation with its principal office at
900 Huyler Street, Teterboro, New Jersey 07608 (collectively, the "Borrower"),
jointly and severally promise to pay to the order of JOSEPH M. LOBOZZO II and
JOANNE LOBOZZO (collectively, the "Lender") on or before the Maturity Date, as
such term is defined in that certain First Restated Credit Agreement dated the
date hereof by and between DCI, DDI, Joseph M. Lobozzo II, Joanne Lobozzo, and
SAI/Delta, Inc. ("SAI Delta"), as the same may hereinafter be amended, restated,
modified or supplemented from time to time (as the same may be amended,
restated, modified or supplemented from time to time, the "Credit Agreement"),
in lawful money of the United States of America, at 690 Portland Avenue,
Rochester, New York 14621 or, at Lender's option, at such other place as may be
designated from time to time by the Lender, the principal sum of Three Million
Six Hundred Fifty Thousand and 00/100 Dollars ($3,650,000.000), or, if less, the
aggregate unpaid principal amount of all Loans, as such term is defined in the
Credit Agreement, made by the Lender to the Borrower under the Credit Agreement,
together with interest thereon as set forth in the Credit Agreement.
The Lender shall inscribe on a schedule attached to this Restated Note, and
any continuation thereof, all Loans and payments made on account of principal
hereof and the dates thereof. Each such inscription shall be prima facie
evidence of facts so set forth. No failure by the Lender to make and no error by
the Lender in making such inscription shall affect the undersigned's obligation
to repay when due all sums advanced under this Restated Note.
No failure by the Lender hereof to exercise, and no delay in exercising,
any right or power hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise by the holder of any right or power hereunder
preclude any other right or power. The rights and remedies of the holder as
herein specified are cumulative and not exclusive of any other rights or
remedies which the holder may otherwise have.
No modification, rescission, waiver, release or amendment of any provision
of this Restated Note shall be made except by a written agreement subscribed by
duly authorized officers of the Borrower and the Lender.
Reference is hereby made to the Credit Agreement for provisions with
respect to prepayment, collateral and rights of acceleration of the principal
hereof on the occurrence of certain events.
Borrower agrees to pay all reasonable costs and expenses incurred by the
holder in enforcing this Restated Note or in collecting the indebtedness
evidenced hereby, including, without limitation, if the holder retains counsel
for any such purpose, reasonable attorneys' fees and expenses.
Borrower hereby waives diligence, presentment, protest and demand, and also
notice of protest, demand, dishonor and nonpayment of this Restated Note.
This Restated Note shall be construed under and governed by the internal
laws of the State of New York in effect from time to time without regard to
principles of conflicts of laws.
The obligations of the undersigned under this Restated Note are joint and
several.
THIS RESTATED NOTE IS ISSUED IN ORDER TO RESTATE, IN ITS ENTIRETY, AND
EVIDENCE AND TO BE A SUBSTITUTE FOR, BUT NOT TO BE A PAYMENT, SATISFACTION,
CANCELLATION OR A NOVATION OF THAT CERTAIN AMENDED AND RESTATED PROMISSORY NOTE
OF THE BORROWER TO JOSEPH M. LOBOZZO II DATED OCTOBER 10, 1996 IN THE MAXIMUM
PRINCIPAL AMOUNT OF $2,550,000 (THE "AMENDED AND RESTATED NOTE"); PROVIDED,
HOWEVER, THAT THE SUBSTITUTION OF THIS RESTATED NOTE FOR THE AMENDED AND
RESTATED NOTE DOES NOT EXTINGUISH THE INDEBTEDNESS EVIDENCED BY THE AMENDED AND
RESTATED NOTE OR ANY PORTION THEREOF AND THE LIABILITIES OF THE BORROWER
THEREUNDER AND HEREUNDER ARE CONTINUOUS.
DELTA COMPUTEC INC.
By: ______________________
Name:
Title:
DELTA DATA NET, INC.
By: ________________________
Name:
Title:
<PAGE>
SCHEDULE
Principal Amount Date Payments Additional Loans Balance
<PAGE>
FIRST RESTATED GENERAL SECURITY AGREEMENT
THIS FIRST RESTATED GENERAL SECURITY AGREEMENT (this "Restated Security
Agreement") is made as of the 31st day of October 1997 by and among DELTA
COMPUTEC INC. and DELTA DATA NET, INC., both New York corporations with their
principal offices and places of business at 900 Huyler Street, Teterboro, New
Jersey 07608 (collectively, "Debtor"), and JOSEPH M. LOBOZZO II, an individual
with an office and place of business at 690 Portland Avenue, Rochester, New York
("Lobozzo") and JOANNE LOBOZZO, the wife of Lobozzo ("Joanne Lobozzo", and,
together with Lobozzo, the "Secured Party").
W I T N E S S E T H :
WHEREAS, Debtor executed and delivered to National Canada Finance
Corporation ("NCFC") a General Security Agreement dated April 1, 1994 (the "1994
Security Agreement"); and
WHEREAS, on October 10, 1996, NCFC assigned to Lobozzo a portion of its
rights under the 1994 Security Agreement; and
WHEREAS, to the extent assigned to Secured Party, Debtor and Lobozzo
amended and restated the 1994 Security Agreement in its entirety by a certain
Amended and Restated General Security Agreement between Debtor and Lobozzo dated
October 10, 1996 (the "October 10, 1996 Security Agreement"); and
WHEREAS, the October 10, 1996 Security Agreement secures the payment of a
certain Amended and Restated Promissory Note dated October 10, 1996 between
Debtor and Lobozzo (the "October 10, 1996 Promissory Note"), which is governed
by the terms of a certain Amended and Restated Credit Agreement dated October
10, 1996 between the Debtor and Lobozzo (the October 10, 1996 Credit
Agreement"); and
WHEREAS, the October 10, 1996 Credit Agreement has heretofore been amended
seven times, by Amendment Nos. 1, 2, 3, 4, 5, 6 and 7, and, simultaneously with
the execution hereof, the parties hereto will restate, in its entirety: (a) the
October 10, 1996 Credit Agreement by a certain Restated Credit Agreement dated
the date hereof by and among the Debtor, the Secured Party and SAI/Delta, Inc.
(the "Restated Credit Agreement"); and (b) the October 10, 1996 Promissory Note
by a certain Restated Promissory Note dated the date hereof by and among the
Debtor and the Secured Party (the "Restated Promissory Note"); and
WHEREAS, the parties hereto desire to also restate, in its entirety, the
October 10, 1996 Security Agreement.
NOW, THEREFORE, Debtor and Secured Party agree as follows:
1. Security Interest. Debtor hereby grants to Secured Party a security
interest ("Security Interest") in all personal property and fixtures of Debtor,
of whatever kind and type and wherever located, whether now owned or hereafter
acquired, including, without limitation, all fixtures, equipment, inventory,
accounts, general intangibles, documents, instruments and chattel paper,
together with all proceeds and products thereof in any form, and parts,
accessories, attachments, special tools, additions and accessions thereto, and
all increases therein or profits received therefrom, and in all substitutions
therefor, and including any account items received by, or amounts deposited in,
an account maintained by Borrower at any Lock Box maintained for the benefit of
Secured Party (collectively, "Collateral").
2. Indebtedness Secured. The Security Interest secures payment of the
Restated Promissory Note and any amendment to, substitution for or replacement
or modification thereof, including principal, interest and other amounts (i.e.,
attorney's fees, costs and expenses) under the Restated Promissory Note (the
"Indebtedness"), which Restated Promissory Note is governed by the terms of the
Restated Credit Agreement, and any amendment to, substitution for or replacement
or modification thereof.
3. Representations and Warranties of Debtor. Debtor represents and
warrants, and so long as any Indebtedness remains unpaid shall be deemed
continuously to represent and warrant, that:
(a) Debtor is the owner of the Collateral free of all security
interests or other encumbrances, except the Security Interest and except as
shown on Schedule 3(a) annexed hereto (collectively, "Permitted Encumbrances"),
if any;
(b) Debtor is duly organized and validly existing under the laws of
the State of New York and is duly qualified and in good standing in every
jurisdiction in which failure to do so qualified would have a material adverse
effect on its business or assets;
(c) Debtor is authorized to enter into this Restated Security
Agreement and the execution, delivery and performance of this Agreement by
Debtor will not violate, or be in contravention of, Debtor's certificate of
incorporation, by-laws, or other corporate documents or any indenture, agreement
or undertaking to which Debtor is a party or by which Debtor may be bound;
(d) Debtor is engaged in business operations; Debtor's chief executive
office is specified in the first paragraph of this Agreement; and Debtor's
records concerning the Collateral are kept at one of the addresses specified on
Schedule 3(e) of this Agreement;
(e) All of the Collateral is located at one of the addresses specified
on Schedule 3(e) to this Agreement;
(f) Any and all tradenames, division names, assumed names and other
names under which Debtor transacts any part of its business are specified on
Schedule 3(f) annexed hereto, if any;
(g) Each account, general intangible and Chattel Paper constituting
Collateral is genuine and enforceable in accordance with its terms against the
party obligated to pay it "Account Debtor"); and
(h) The amount represented by Debtor to Secured Party as owing by each
Account Debtor or by all Account Debtors is the correct amount actually and
unconditionally owing by such Account Debtor or Debtors, except for normal cash
discounts where applicable.
4. Covenants of Debtor. So long as any Indebtedness remains unpaid, Debtor:
(a) Will defend the Collateral against the claims and demands of all
other parties including, without limitation, defenses, setoffs, claims and
counterclaims asserted by any Account Debtor against Debtor and/or Secured
Party, except, as to inventory, purchasers and lessees in the ordinary course of
Debtor's business; will keep the Collateral free from all security interests or
other encumbrances, except the Security Interest and except as shown of Schedule
3(a) hereto; and, except with respect to the sale or lease of Inventory in the
ordinary course of Debtor's business, will not sell, transfer, lease, assign,
deliver or otherwise dispose of any Collateral or any interest therein, or move
the Collateral to any location except those specified on Schedule 3(e) without
the prior written consent of Secured Party;
(b) Will keep, in accordance with generally accepted accounting
principles consistently applied, accurate and complete records concerning the
Collateral; at Secured Party's request, will mark any and all such records to
indicate the Security Interest; and will permit Secured Party or its agents at
any reasonable time during regular business hours to inspect the Collateral and
to audit and make extracts from such records or any of Debtor's books, ledgers,
reports, correspondence or other records;
(c) Will deliver to Secured Party upon demand, any Chattel Paper
constituting, representing or relating to the Collateral or any part thereof,
and any schedules, invoices, shipping, documents, delivery receipts, purchase
orders, contracts or other documents representing or relating to the Collateral
or any part thereof;
(d) Will notify Secured Party promptly in writing of any change in
Debtor's chief executive office, of any change in the address at which the
Collateral or records concerning the Collateral are kept and of any change in
Debtor's name, identity or corporate structure;
(e) Will not, without Secured Party's written consent which consent
will not be unreasonably withheld or delayed, make or agree to make any
alteration, modification or cancellation of, or substitution for, or credits,
adjustments or allowances on accounts, general intangibles or chattel paper
constituting any Collateral (other than in the ordinary course of Debtor's
business), and will notify Secured Party promptly of any material default by any
Account Debtor in payment or other performance of his obligations with respect
to any such Collateral;
(f) Will keep the tangible Collateral in good condition and repair;
and will not use the Collateral in violation of any provisions of this Security
Agreement, of any applicable statute, regulation or ordinance or of any policy
insuring the Collateral;
(g) Will pay all taxes, assessments and other charges of every nature
which may be levied or assessed against the Collateral; will insure the
Collateral against risks, and in coverage, form and amount, satisfactory to
Secured Party, and, will cause each policy to be payable additionally to Secured
Party and deliver each policy or certificate of insurance therefor to Secured
Party; and
(h) In connection herewith, will execute and deliver to Secured Party
such financing statements, assignments (including, without limitation, if any of
Debtor's accounts arise out of contracts with the United States or any
department, agency or instrumentality thereof, assignments required to comply
with the Federal Assignment of Claims Act) and other documents, do such other
things relating to the Security Interest as Secured Party may reasonably
request, pay all costs of title searches and filing financing statements,
assignments or other documents in all public offices requested by Secured Party;
but will not, without the prior written consent of Secured Party, file or
authorize or permit to be filed in any public office any financing statement
naming Debtor as debtor and not naming Secured Party as secured party, except in
connection with any Permitted Encumbrances.
5. Verification of Collateral. Secured Party shall have the right to verify
all or any Collateral in any reasonable manner and through any medium Secured
Party may consider reasonably appropriate, and Debtor agrees to furnish all
assistance and information and perform any acts which Secured Party may
reasonably require in connection therewith.
6. Notification and Payments. From time to time while the Lock Box
Operating Agreement dated the date hereof between the Debtor and Manufacturers
and Traders Trust Company is in force and effect, or any substitute arrangement,
and in any event, after the occurrence of an Event of Default, (a) Secured Party
may notify all or any Account Debtors of the Security Interest and may also
direct such Account Debtors to make all payments on Collateral to Secured Party
and (b) Secured Party may notify Debtor in writing, before or after notification
to Account Debtors and without waiving in any manner the Security Interest, that
any payment on and from the Collateral received by Debtor (i) shall be held by
Debtor in trust for Secured Party in the medium in which received; (ii) shall
not be commingled with any assets of Debtor; and (iii) shall be turned over to
Secured Party not later than the next business day following the day of their
receipt. All payments on and from Collateral received by Secured Party directly
or from Debtor shall be applied to the Indebtedness in such order and manner and
at such time as Secured Party shall, in its sole discretion, determine.
7. Events of Default.
(a) The occurrence of an Event of Default under the Restated Credit
Agreement shall constitute an Event of Default hereunder.
(b) Upon the happening of any Event of Default, Secured Party's rights
and remedies with respect to the Collateral shall be those of a Secured Party
under the Uniform Commercial Code and under any other applicable law, as the
same may from time to time be in effect, in addition to those rights granted
herein and in any other agreement now or hereafter in effect between Debtor and
Secured Party. Secured Party may require Debtor to assemble the Collateral and
make it available to Secured Party at a place or places designated by Secured
Party.
(c) Without in any way requiring notice to be given in the following
manner, Debtor agrees that any notice by Secured Party of sale or disposition of
any Collateral, whether required by the Uniform Commercial Code or otherwise,
shall constitute reasonable notice to Debtor if such notice is mailed by regular
mail, postage prepaid, at least ten (10) days prior to such action, to the
address of Debtor set forth in the first paragraph of this Restated Security
Agreement or to any other address which Debtor has specified in writing to
Secured Party as the address to which notices hereunder shall be given to
Debtor.
(d) Debtor agrees to pay on demand all reasonable costs and expenses
incurred by Secured Party in enforcing this Restated Security Agreement, in
realizing upon or protecting any Collateral, including, without limitation, if
Secured Party retains counsel for advise, suit, insolvency proceedings or any of
the above purposes, the reasonable attorneys' fees and expenses incurred by
Secured Party.
8. Miscellaneous.
(a) Debtor hereby authorizes Secured Party, at Debtor's expense, to
file such financing statement or statements relating to the Collateral without
Debtor's signature thereon as Secured Party at its option may reasonably deem
appropriate, and appoints Secured Party as Debtor's attorney-in-fact (without
requiring Secured Party) to execute any such financing statement or statements
in Debtor's name and to perform all other acts which Secured Party deems
reasonably appropriate to perfect and continue the Security Interest and to
protect and preserve the Collateral.
(b) After the occurrence of an Event of Default hereunder, Secured
Party may demand, collect and sue on any of the accounts, chattel paper and
general intangibles (in either Debtor's or Secured Party's name at the latter's
option) with the right to enforce, compromise, settle or discharge such
Collateral, and may indorse Debtor's name on any and all checks, commercial
paper, and any other instruments pertaining to or constituting such Collateral.
(c) Upon Debtor's failure to perform any of its duties hereunder,
Secured Party may, but shall not be obligated to, perform any or all such duties
in any reasonable manner, and Debtor shall pay an amount equal to the expense
thereof to Secured Party forthwith upon written demand by Secured Party.
(d) No course of dealing and no delay or omission by Secured Party in
exercising any right or remedy hereunder shall operate as a waiver thereof or of
any other right or remedy, and no single or partial exercise thereof shall
preclude any other or further exercise thereof or the exercise of any other
right or remedy. Secured Party may remedy any default by Debtor hereunder in any
reasonable manner without waiving the default remedied and without waiving any
other prior or subsequent default by Debtor. All rights and remedies of, Secured
Party hereunder are cumulative.
(e) The rights and benefits of Secured Party hereunder shall, if
Secured Party so agrees, inure to any party acquiring any interest in the
Indebtedness or any part thereof.
(f) Secured Party and Debtor as used herein shall include the heirs,
executors or administrators, or successors or assigns, of those parties.
(g) No modification, rescission, waiver, release or amendment of any
provisions of this Restated Security Agreement shall be binding except by a
written agreement subscribed by Debtor and by Secured Party.
(h) This Restated Security Agreement is made under, and shall be
governed by and construed under the laws of the State of New York applicable to
contracts made and to be performed entirely within the State of New York and
without giving effect to choice of law principles of the State of New York.
(i) All terms, unless otherwise defined in this Restated Security
Agreement or in any financing statement, shall have the definitions set forth in
the Uniform Commercial Code adopted in New York State, as the same may from time
to time be in effect.
(j) This Restated Security Agreement is and is intended to be a
continuing agreement and shall remain in full force and effect until all of the
Indebtedness shall be finally and irrevocably paid in full.
(k) This Restated Security Agreement amends and restates, in its
entirety, the October 10, 1996 Security Agreement.
DELTA COMPUTEC INC.
By:
Name:
Title:
<PAGE>
DELTA DATA NET, INC.
By:
Name:
Title:
----------------------------------
JOSEPH M. LOBOZZO II
-----------------------------------
JOANNE LOBOZZO
<PAGE>
SCHEDULE 3(a)
Permitted Liens and Encumbrances
Security Interest in spare parts inventory granted to NCFC.
<PAGE>
SCHEDULE 3(e)
Collateral Locations
Chicago
DCI c/o Harris Bank
311 West Monroe
3rd Floor
Chicago, Illinois 60606
Dallas
2100 N. Highway 360
Suite 1804
Grand Prairie, Texas 75050
Houston
14515 Briar Hills Parkway
Suite 117
Houston, Texas 77077
Philadelphia
1621 Loretta Avenue
Feasterville, Pennsylvania 19053
Rochester
366 White Spruce Boulevard
Rochester, New York 14623
Teterboro
900 Huyler Street
Teterboro, New Jersey 07608
Washington
122 Lafayette Avenue
Laurel, Maryland 20707
<PAGE>
SCHEDULE 3(f)
Trade Names
1. DCI
2. The DCI Companies
3. PC Reserve
4. R & M Associates
5. Data Net
6. Data Span
7. SAI/Delta
8. Computer Support Inc.
9. Delta CompuTec Inc.
<PAGE>
FIRST RESTATED
UNLIMITED CONTINUING GUARANTY
THIS FIRST RESTATED UNLIMITED CONTINUING GUARANTY, ("Restated Guaranty") is
dated as of the 31st day of October 1997 and is made by SAI/DELTA, INC. (the
"Guarantor"), a Florida Corporation, in favor of JOSEPH M. LOBOZZO II, an
individual with an office and place of business at 690 Portland Avenue,
Rochester, New York ("Lobozzo") and JOANNE LOBOZZO, the wife of Lobozzo with an
address of 756 Rock Beach Road, Rochester, New York ("Joanne Lobozzo"). Lobozzo
and Joanne Lobozzo are hereinafter collectively referred to as the "Lender".
WHEREAS, Delta Computec, Inc. and Delta Data Net, Inc. (collectively,
"Borrower") and National Canada Finance Corp. ("NCFC") entered into a certain
Credit Agreement dated as of April 1, 1994, as amended by Credit Agreement
Amendment No. 1 dated November 17, 1994, Credit Agreement Amendment No. 2 dated
January 24, 1995, Credit Agreement Amendment No. 3 dated April 3, 1995, Credit
Agreement Amendment No. 4 dated May 1, 1995 and Credit Agreement Amendment No. 5
dated October 27, 1995 (as amended, the "Credit Agreement"); and
WHEREAS, Borrower executed and delivered to NCFC a Promissory Note dated
April 1, 1994, as amended and restated by an Amended and Restated Promissory
Note dated May 1, 1995 and as further amended and restated by a Third Amended
and Restated Promissory Note dated October 27, 1995 (as amended and restated,
the "Promissory Note"); and
WHEREAS, Guarantor is a wholly owned subsidiary of the Borrower; and
WHEREAS, on March ___, 1995, Guarantor executed and delivered to NCFC its
Continuing Unlimited Guaranty (the "NCFC Guaranty") pursuant to which it
guarantied all of the obligations of Borrower to NCFC under the Credit Agreement
and the Promissory Note; and
WHEREAS, on October 10, 1996, NCFC assigned to the Lender all but $750,000
of the indebtedness owed to NCFC by Borrower evidenced by the Credit Agreement
and the Promissory Note and all of its right, title and interest in certain
documents executed in connection with the Credit Agreement and the Promissory
Note, including all of its right, title and interest in the NCFC Guaranty; and
WHEREAS, on October 10, 1996, Lobozzo and the Borrower amended and restated
the Credit Agreement (as amended and restated, the "October 10, 1996 Credit
Agreement") and the Promissory Note (as amended and restated, the "October 10,
1996 Promissory Note") as such documents related to the indebtedness assigned by
NCFC to Lender; and
WHEREAS, by an Amended and Restated Unlimited Continuing Guaranty dated
October 10, 1996 (the "October 10, 1996 Guaranty"), Lobozzo and the Guarantor
amended and restated the NCFC Guaranty; and
WHEREAS, the Amended and Restated Credit Agreement has heretofore been
amended seven times, by Amendment Nos. 1, 2, 3, 4, 5, 6 and 7, thereto, and,
simultaneously with the execution hereof, the parties hereto will restate, in
its entirety: (a) the October 10, 1996 Credit Agreement by a Restated Credit
Agreement dated the date hereof (the "Restated Credit Agreement") ; and (b) the
October 10, 1996 Promissory Note by a Restated Promissory Note dated the date
hereof (the "Restated Promissory Note"); and
WHEREAS, Lender and the Guarantor desire to also restate, in its entirety,
the October 10, 1996 Guaranty;
NOW, THEREFORE, the Guarantor hereby unconditionally guarantees to Lender
the full and prompt payment when due of all sums at any time owing by, and the
punctual performance of all liabilities and obligations of, the Borrower to the
Lender, now existing or hereafter arising, under the Restated Credit Agreement,
as the same may hereinafter be amended, supplemented, modified or replaced, and
the Restated Promissory Note, as the same may hereinafter be amended,
supplemented, modified or replaced, or in connection with any transaction
occurring pursuant thereto, however and whenever created, whether primary or
secondary, joint or several, absolute, contingent, or conditional, due or to
become due.
1. The Guarantor shall be liable to Lender for all reasonable
attorneys' and paralegals' fees and expenses reasonably incurred, if any action
or proceeding is brought to enforce this Restated Guaranty or if any claim
hereunder is referred to an attorney for collection.
2. This Restated Guaranty is a primary obligation of the Guarantor.
The liability of the Guarantor hereunder is direct and may be enforced without
requiring Lender first to resort to any other right, remedy or security. Nothing
shall discharge or satisfy the liability of the Guarantor hereunder except the
full payment and performance of all of the obligations hereby guaranteed, with
interest (as provided in the Restated Credit Agreement) until fully paid. This
Restated Guaranty shall not be impaired or affected by, nor shall the Guarantor
have any defense hereto based upon: (a) any modification, supplement, extension,
or amendment of any contract or agreement to which the parties thereto may
hereafter agree (including, without limitation, any modification, supplement,
extension, or amendment that has the effect of increasing the outstanding or
maximum amount of the obligations hereby guaranteed); (b) any modification,
release or other alteration of any of the obligations hereby guaranteed or of
any security therefore; (c) any agreement or arrangement whatsoever with the
Guarantor or anyone else; (d) any failure of Lender to perfect its security
interest in and liens on, or to preserve its rights to, any collateral; or (e)
the validity, legality, regularity, or enforceability of any of the obligations
hereby guaranteed, or of the Restated Credit Agreement, the Restated Promissory
Note or any other agreement or instrument relating to the obligations hereby
guaranteed. This Restated Guaranty is a continuing guaranty which shall remain
effective during the term of the Restated Credit Agreement and the Restated
Promissory Note, and any amendment, renewal, replacement or restatement thereof,
and until all obligations hereby guaranteed have been paid in full. The death,
dissolution, liquidation, merger, consolidation, or other change of form of the
Guarantor or any other guarantor of the obligations hereby guaranteed shall not
cause the termination of this Restated Guaranty. Any releases which may be given
by Lender to any one or more other guarantors of the obligations hereby
guaranteed shall not release the Guarantor from this Restated Guaranty.
Termination by any other guarantor of any guaranty of the obligations hereby
guaranteed shall not affect the continuing liability of the Guarantor hereunder.
3. Lender's books and records showing the accounts between Lender and
the Guarantor shall be admissible in any action or proceeding and shall
constitute prima facie proof thereof.
4. All rights of the Guarantor to subrogation, reimbursement or
indemnity of any kind, or to recourse to security for the debts and obligations
to Lender, arising from payment by the Guarantor hereunder, are hereby
subrogated to the rights of Lender under this Restated Guaranty until all
Obligations (as such term is defined in the Restated Credit Agreement) of
Borrower to Lender are paid in full.
5. All sums at any time to the credit of the Guarantor and any
property of the Guarantor at any time in the possession of Lender or any
affiliate may be held by Lender or such affiliate as security for any and all
obligations of the Guarantor to Lender, no matter how or when arising, whether
absolute or contingent, whether due or to become due and whether under this
Restated Guaranty or the Restated Credit Agreement, and the Restated Promissory
Note and other documents relating thereto. In addition, whenever the obligations
hereby guaranteed, or any part thereof, are due and payable by the Guarantor,
then Lender or any affiliate may without prior notice to or demand on the
Guarantor, elect in its sole discretion to set off against the obligations
hereby guaranteed any and all moneys then or thereafter owed to the Guarantor by
Lender or such affiliate, whether or not the indebtedness or the obligation to
pay such moneys is then due. Lender or such affiliate shall be deemed to have
exercised this right immediately at the time of its election even through any
charge therefor is made or entered on Lender's or such affiliate's records
subsequent to that time. All reasonable costs and expenses, including, without
limitation, attorneys' and paralegals' fees (based on hours expended at standard
hourly billing rates) paid or incurred by Lender or such affiliate in connection
with any such setoff shall be paid by the Guarantor upon demand.
6. All payments by the Guarantor pursuant to this Restated Guaranty
shall be made to Lender at the address for payments specified in the Restated
Credit Agreement. Any payment received by Lender from the Guarantor shall be
applied Lender as follows:
First, to the payment of the reasonable costs and expenses of
collection and all expenses (including, without limitation, any
reasonable legal fees and disbursements and the allocated costs of
in-house counsel), liabilities and advances made or incurred by Lender
in connection therewith;
Next, to Lender in accordance with the Restated Credit Agreement until
all Obligations shall have been indefeasibly paid in full; and
Finally, after payment in full of all Obligations and the termination
of the Restated Credit Agreement, to the payment to the Guarantor, or
its respective successors or assigns, or to whomsoever may be lawfully
entitled to receive the same or as a court of competent jurisdiction
may direct.
7. Upon the occurrence of an Event of Default as provided in the
Restated Credit Agreement, Lender may proceed to enforce this Restated Guaranty
against the Guarantor.
8. The Guarantor represents and warrants that it has adequate means to
obtain on a continuing basis information concerning the financial condition and
operating of the Borrower, and that it is not relying on Lender to provide such
information at any time.
9. The Guarantor acknowledges and agrees that it has received and
expects to continue to receive material benefits as a result of entering into
this Restated Guaranty and the transactions contemplated by the Restated Credit
Agreement. If, however, a court of competent jurisdiction finally determines
that, a to the Guarantor, the creation or the enforcement of this Restated
Guaranty to any extent constitutes a fraudulent transfer under applicable law,
then this Restated Continuing Guaranty shall thereupon be deemed modified so
that the liability of the Guarantor under this Restated Guaranty shall be
limited to the maximum amount for which this Restated Guaranty could be enforced
without constituting a fraudulent transfer by the Guarantor.
10. If, after receipt of any payment of all or any part of the
obligations hereby guaranteed, Lender is for any reason compelled to refund or
surrender such payment to any person or entity, because such payment is
determined to be void or voidable as a preference, impermissible setoff, or a
diversion of trust funds, or based on any claim of breach of contract, breach of
warranty, illegality, invalidity, or fraud, or for any other reason, then this
Restated Guaranty and the obligations intended to be paid by such payment shall
be reinstated, if necessary, and shall continue in full force notwithstanding
any contrary action which may have been taken by Lender in reliance upon such
payment. Any such contrary action so taken shall be without prejudice to
Lender's rights under this Restated Guaranty and shall be deemed to have been
conditioned upon such payment having become final and irrevocable. Lender may
defend, compromise, or pay any such claim to recover such payment as it elects
in its sole discretion. The provisions of this paragraph shall survive the
termination of this Restated Guaranty.
11. No election by Lender to proceed in one form of action or
proceeding, or against any party, or on any obligation, shall constitute a
waiver of Lender's right to proceed in any other form of action or proceeding or
against any other form of action or obligation. Specifically, but without
limiting the generality of the foregoing, no action or proceeding by Lender
against the Guarantor under any document or instrument evidencing or securing
indebtedness of the Guarantor to Lender shall serve to diminish the liability of
the Guarantor hereunder, except to the extent Lender realizes payment by such
action or proceeding. The Guarantor hereby waives any defense based upon an
election of remedies by Lender with respect to any property of the Guarantor or
any other person which now or hereafter secures the obligations of the Guarantor
to Lender, including but not limited to judicial foreclosure, exercise of power
of sale or taking a deed or assignment in lieu of foreclosure as to any
collateral, and the Guarantor shall be liable to Lender for any deficiency
resulting from the exercise by Lender of any such remedy, even though any right
of subrogation, reimbursement, or other right which the Guarantor may have
against others might be diminished or destroyed. The Guarantor agrees that
Lender shall not be under any obligation to marshal any assets in favor of the
Guarantor or against or in payment of any or all of the obligations hereby
guaranteed.
12. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, THE GUARANTOR
WAIVES: NOTICE OF ACCEPTANCE OF This RESTATED GUARANTY; THE RIGHT TO A JURY
TRIAL IN ANY ACTION HEREUNDER OR ARISING OUT OF LENDER'S TRANSACTIONS WITH THE
GUARANTOR, AND THE RIGHT TO ASSERT DEFENSES OTHER THAN PAYMENT, SETOFFS, AND
COUNTERCLAIMS IN ANY SUCH ACTION; PRESENTMENT, DEMAND, PROTEST AND NOTICE OF
DEMAND, DISHONOR, AND PROTEST AS TO ANY INSTRUMENT; NOTICE OF DEFAULT; NOTICE OF
ANY AND ALL FAVORABLE AND UNFAVORABLE INFORMATION, FINANCIAL OR OTHER, ABOUT THE
GUARANTOR HERETOFORE, NOW OR HEREAFTER LEARNED OR ACQUIRED BY LENDER; AND ALL
OTHER NOTICES TO WHICH THE GUARANTOR MIGHT OTHERWISE BE ENTITLED. THE GUARANTOR
CONFIRMS THAT THE FOREGOING WAIVER IS INFORMED AND VOLUNTARY.
13. The Guarantor hereby represents and warrants that: (a) it has the
corporate power and authority to execute, deliver, and perform this Restated
Guaranty; (b) it has taken all necessary corporate action (including without
limitation, obtaining any required approval of its stockholders) to authorize
its execution, delivery, and performance of this Restated Guaranty; (c) no
consent, approval, or authorization of, or filing with, any governmental
authority, and on consent of any other person, is required in connection with
its execution, delivery, and performance of this Restated Guaranty, except for
those already duly obtained or made; (d) this Restated Guaranty has been duly
executed and delivered by the Guarantor and constitutes its legal, valid, and
binding obligation, enforceable against it in accordance with its terms without
defense, setoff, or counterclaim; and (e) the Guarantor's execution, delivery,
and performance of this Restated Guaranty do not and will not conflict with, or
constitute a violation or breach of, or constitute a default under, or result in
the creation or imposition of any lien or encumbrance upon this property of the
Guarantor (except as contemplated by this Restated Guaranty) by reason of the
terms of (i) any mortgage, lease, agreement, or instrument to which it is a
party or which is binding upon it, (ii) any judgment, law, statute, rule, or
governmental regulation applicable to it, or (iii) its Certificate or Articles
of Incorporation or By-Laws.
14. This Restated Guaranty shall be binding upon the Guarantor's
successors and assigns. Upon any assignment by Lender of its rights and
obligations, or any part thereof, in accordance with the Restated Credit
Agreement, such assignee shall become vested with Lender's rights and benefits
hereunder to the extent of such assignment.
15. All acts and transactions hereunder and the rights and obligations
of the parties hereto shall be governed, construed and interpreted in accordance
with the laws of the State of New York, except that no doctrine of choice of law
shall be used to apply the laws of any other state or jurisdiction.
16. This Restated Guaranty constitutes the entire agreement of the
Guarantor and Lender with respect to the subject matter hereof, and represents a
restatement and replacement of the October 10, 1996 Guaranty in its entirety.
This Restated Guaranty may not be modified, nor may any provision hereof or the
observance thereof by waived, except in a written agreement signed by the
Guarantor and Lender.
17. The Guarantor agrees that, in addition to any other courts that
may have jurisdiction under applicable law and rules, the Supreme Court of the
State of New York in the County of Erie, and the United Stated District Court
for the Western District of New York shall each have jurisdiction to hear and
determine any claims or disputes pertaining directly or indirectly to this
Restated Guaranty or to any matter arising herefrom. The Guarantor expressly
submits and consents, in advance, to such jurisdiction in any action or
proceeding in such courts, and agrees that venue shall be proper in such courts
for all such matters, hereby waiving personal service of the summons and
complaint, or other process or papers issued therein, and agreeing that service
of such summons or complaint or other process or papers may be made by
registered or certified mail (return receipt requested) addressed to it at 900
Huyler Street, Teterboro, New Jersey 07608, or at such other address of which it
shall have notified Lender in writing.
18. Notwithstanding anything to the contrary in this Restated
Guaranty, Lender may exercise all rights and remedies provided for herein and by
law.
IN WITNESS WHEREOF, the parties hereto have executed this Restated Guaranty
on the date first above written.
SAI/DELTA, INC.
By:
Name:
Title:
----------------------------------
JOSEPH M. LOBOZZO II
----------------------------------
JOANNE LOBOZZO
<PAGE>
STATE OF NEW YORK )
COUNTY OF MONROE ) SS.:
On this _____ day of _________________ 1997, before me personally
came ________________________________, to me known, who, being by me duly sworn,
did depose and say that he resides in
____________________________________________, that he is the _____________ of
SAI/DELTA, INC., the corporation described in and which executed the above
instrument; that he signed his name thereto by order of the Board of Directors
of said corporation.
Notary Public
<PAGE>
STATE OF NEW YORK )
COUNTY OF MONROE ) ss.:
On this _____ day of _________________ 1997, before me personally
came JOSEPH M. LOBOZZO II, to me personally known and known to me to be the same
person described in and who executed the foregoing instrument, and he
acknowledged to me that he executed the same.
--------------------------------
Notary Public
<PAGE>
STATE OF NEW YORK )
COUNTY OF MONROE ) ss.:
On this _____ day of ___________________ 1997, before me personally
came JOANNE LOBOZZO, to me personally known and known to me to be the same
person described in and who executed the foregoing instrument, and she
acknowledged to me that she executed the same.
--------------------------------
Notary Public
<PAGE>
FIRST RESTATED
GENERAL SECURITY AGREEMENT
THIS FIRST RESTATED GENERAL SECURITY AGREEMENT (this "Restated Security
Agreement") is made as of the 31st day of October 1997 by and among SAI/DELTA,
INC., a Florida corporation with its principal office and place of business at
10258 N.W. 46th Street, Sunrise, Florida 33351 ("Debtor"), and JOSEPH M. LOBOZZO
II, an individual with an office and place of business at 690 Portland Avenue,
Rochester, New York ("Lobozzo") and JOANNE LOBOZZO, the wife of Lobozzo ("Joanne
Lobozzo", and, together with Lobozzo, the "Secured Party").
W I T N E S S E T H :
WHEREAS, Debtor executed and delivered to National Canada Finance Corp.
("NCFC") a General Security Agreement dated March ___, 1995 (the "1995 Security
Agreement");
WHEREAS, on October 10, 1996, NCFC assigned to Lobozzo a portion of its
rights under the 1995 Security Agreement; and
WHEREAS, to the extent assigned to Secured Party, Debtor and Lobozzo
amended and restated the 1995 Security Agreement in its entirety by a certain
Amended and Restated General Security Agreement between Debtor and Lobozzo dated
October 10, 1996 (the "October 1996 Security Agreement"); and
WHEREAS, the October 1996 Security Agreement secures the payment of any and
all obligations of the Debtor to Lobozzo under a certain Amended and Restated
Unlimited Continuing Guaranty dated October 10, 1996 from the Debtor to Lobozzo
(the "October 1996 Guaranty"), which October 1996 Guaranty guaranties payment of
a certain Amended and Restated Promissory Note dated October 10, 1996 from DELTA
COMPUTEC INC., a New York corporation, and DELTA DATA NET, INC., a New York
corporation (collectively, the "Borrower"), to Lobozzo (the "October 1996
Promissory Note") any substitution for or replacement or modification thereof,
which October 1996 Promissory Note is governed by the terms of a certain Amended
and Restated Credit Agreement dated October 10, 1996 between the Borrower and
Lobozzo (the "October 1996 Credit Agreement").
WHEREAS, the October 1996 Credit Agreement has heretofore been amended
seven times, by Amendment Nos. 1, 2, 3, 4, 5, 6 and 7, and, simultaneously with
the execution hereof, the parties hereto will restate, in its entirety: (a) the
October 1996 Credit Agreement by a certain Restated Credit Agreement dated the
date hereof by and among the Borrower, the Debtor and the Secured Party (the
"Restated Credit Agreement"); and (b) the October 10, 1996 Promissory Note by a
certain Restated Promissory Note dated the date hereof by and among the Borrower
and the Secured Party (the "Restated Promissory Note"); and
WHEREAS, the parties hereto desire to also restate, in its entirety, the
October 1996 Security Agreement.
NOW, THEREFORE, Debtor and Secured Party agree as follows:
1. Security Interest. Debtor hereby grants to Secured Party a security
interest ("Security Interest") in all personal property and fixtures of Debtor,
of whatever kind and type and wherever located, whether now owned or hereafter
acquired, including, without limitation, all fixtures, equipment, inventory,
accounts, general intangibles, documents, instruments and chattel paper,
together with all proceeds and products thereof in any form, and parts,
accessories, attachments, special tools, additions and accessions thereto, and
all increases therein or profits received therefrom, and in all substitutions
therefor (collectively, "Collateral").
2. Indebtedness Secured. The Security Interest secures payment of any
and all obligations of the Debtor to the Secured Party under a certain Restated
Unlimited Continuing Guaranty dated the date hereof from the Debtor to the
Secured Party, as the same may be amended from time to time (the
"Indebtedness"), which Restated Unlimited Continuing Guaranty guaranties payment
of the Restated Promissory Note dated the date hereof from the Debtor to the
Secured Party and any substitution for or replacement or modification thereof,
which Restated Promissory Note is governed by the terms of the Restated Credit
Agreement.
3. Representations and Warranties of Debtor. Debtor represents and
warrants, and so long as any Indebtedness remains unpaid shall be deemed
continuously to represent and warrant, that:
(a) Debtor is the owner of the Collateral free of all security
interests or other encumbrances, except the Security Interest and except as
shown on Schedule 3(a) annexed hereto (collectively, "Permitted Encumbrances"),
if any;
(b) Debtor is duly organized and validly existing under the laws
of the State of New York and is duly qualified and in good standing in every
jurisdiction in which failure to do so qualified would have a material adverse
effect on its business or assets;
(c) Debtor is authorized to enter into this Restated Security
Agreement and the execution, delivery and performance of this Agreement by
Debtor will not violate, or be in contravention of, Debtor's certificate of
incorporation, by-laws, or other corporate documents or any indenture, agreement
or undertaking to which Debtor is a party or by which Debtor may be bound;
(d) Debtor is engaged in business operations; Debtor's chief
executive office is specified in the first paragraph of this Agreement; and
Debtor's records concerning the Collateral are kept at one of the addresses
specified on Schedule 3(e) of this Agreement;
(e) All of the Collateral is located at one of the addresses
specified on Schedule 3(e) to this Agreement;
(f) Any and all tradenames, division names, assumed names and
other names under which Debtor transacts any part of its business are specified
on Schedule 3(f) annexed hereto, if any;
(g) Each account, general intangible and Chattel Paper
constituting Collateral is genuine and enforceable in accordance with its terms
against the party obligated to pay it "Account Debtor"); and
(h) The amount represented by Debtor to Secured Party as owing by
each Account Debtor or by all Account Debtors is the correct amount actually and
unconditionally owing by such Account Debtor or Debtors, except for normal cash
discounts where applicable.
4. Covenants of Debtor. So long as any Indebtedness remains unpaid,
Debtor:
(a) Will defend the Collateral against the claims and demands of
all other parties including, without limitation, defenses, setoffs, claims and
counterclaims asserted by any Account Debtor against Debtor and/or Secured
Party, except, as to inventory purchasers and lessees in the ordinary course of
Debtor's business; will keep the Collateral free from all security interests or
other encumbrances, except the Security Interest and except as shown of Schedule
3(a) hereto; and, except with respect to the sale or lease of Inventory in the
ordinary course of Debtor's business, will not sell, transfer, lease, assign,
deliver or otherwise dispose of any Collateral or any interest therein, or move
the Collateral to any location except those specified on Schedule 3(e) without
the prior written consent of Secured Party;
(b) Will keep, in accordance with generally accepted accounting
principles consistently applied, accurate and complete records concerning the
Collateral; at Secured Party's request, will mark any and all such records to
indicate the Security Interest; and will permit Secured Party or its agents at
any reasonable time during regular business hours to inspect the Collateral and
to audit and make extracts from such records or any of Debtor's books, ledgers,
reports, correspondence or other records;
(c) Will deliver to Secured Party upon demand, any Chattel Paper
constituting, representing or relating to the Collateral or any part thereof,
and any schedules, invoices, shipping, documents, delivery receipts, purchase
orders, contracts or other documents representing or relating to the Collateral
or any part thereof;
(d) Will notify Secured Party promptly in writing of any change
in Debtor's chief executive office, of any change in the address at which the
Collateral or records concerning the Collateral are kept and of any change in
Debtor's name, identity or corporate structure;
(e) Will not, without Secured Party's written consent which
consent will not be unreasonably withheld or delayed, make or agree to make any
alteration, modification or cancellation of, or substitution for, or credits,
adjustments or allowances on accounts, general intangibles or chattel paper
constituting any Collateral (other than in the ordinary course of Debtor's
business), and will notify Secured Party promptly of any material default by any
Account Debtor in payment or other performance of his obligations with respect
to any such Collateral;
(f) Will keep the tangible Collateral in good condition and
repair; and will not use the Collateral in violation of any provisions of this
Restated Security Agreement, of any applicable statute, regulation or ordinance
or of any policy insuring the Collateral;
(g) Will pay all taxes, assessments and other charges of every
nature which may be levied or assessed against the Collateral; will insure the
Collateral against risks, and in coverage, form and amount, satisfactory to
Secured Party, and, will cause each policy to be payable additionally to Secured
Party and deliver each policy or certificate of insurance therefor to Secured
Party; and
(h) In connection herewith, will execute and deliver to Secured
Party such financing statements, assignments (including, without limitation, if
any of Debtor's accounts arise out of contracts with the United States or any
department, agency or instrumentality thereof, assignments required to comply
with the Federal Assignment of Claims Act) and other documents, do such other
things relating to the Security Interest as Secured Party may reasonably
request, pay all costs of title searches and filing financing statements,
assignments or other documents in all public offices requested by Secured Party;
but will not, without the prior written consent of Secured Party, file or
authorize or permit to be filed in any public office any financing statement
naming Debtor as debtor and not naming Secured Party as secured party, except in
connection with any Permitted Encumbrances.
5. Verification of Collateral. Secured Party shall have the right to
verify all or any Collateral in any reasonable manner and through any medium
Secured Party may consider reasonably appropriate, and Debtor agrees to furnish
all assistance and information and perform any acts which Secured Party may
reasonably require in connection therewith.
6. Notification and Payments. From time to time while the Lock Box
Operating Agreement dated the date hereof between the Debtor and Manufacturers
and Traders Trust Company is in force and effect, or any substitute arrangement,
and in any event, after the occurrence of an Event of Default, (a) Secured Party
may notify all or any Account Debtors of the Security Interest and may also
direct such Account Debtors to make all payments on Collateral to Secured Party
and (b) Secured Party may notify Debtor in writing, before or after notification
to Account Debtors and without waiving in any manner the Security Interest, that
any payment on and from the Collateral received by Debtor (i) shall be held by
Debtor in trust for Secured Party in the medium in which received; (ii) shall
not be commingled with any assets of Debtor; and (iii) shall be turned over to
Secured Party not later than the next business day following the day of their
receipt. All payments on and from Collateral received by Secured Party directly
or from Debtor shall be applied to the Indebtedness in such order and manner and
at such time as Secured Party shall, in its sole discretion, determine.
7. Events of Default.
(a) The occurrence of an Event of Default under the Credit
Agreement shall constitute an Event of Default hereunder.
(b) Upon the happening of any Event of Default, Secured Party's
rights and remedies with respect to the Collateral shall be those of a Secured
Party under the Uniform Commercial Code and under any other applicable law, as
the same may from time to time be in effect, in addition to those rights granted
herein and in any other agreement now or hereafter in effect between Debtor and
Secured Party. Secured Party may require Debtor to assemble the Collateral and
make it available to Secured Party at a place or places designated by Secured
Party.
(c) Without in any way requiring notice to be given in the
following manner, Debtor agrees that any notice by Secured Party of sale or
disposition of any Collateral, whether required by the Uniform Commercial Code
or otherwise, shall constitute reasonable notice to Debtor if such notice is
mailed by regular mail, postage prepaid, at least ten (10) days prior to such
action, to the address of Debtor set forth in the first paragraph of this
Restated Security Agreement or to any other address which Debtor has specified
in writing to Secured Party as the address to which notices hereunder shall be
given to Debtor.
(d) Debtor agrees to pay on demand all reasonable costs and
expenses incurred by Secured Party in enforcing this Restated Security
Agreement, in realizing upon or protecting any Collateral, including, without
limitation, if Secured Party retains counsel for advise, suit, insolvency
proceedings or any of the above purposes, the reasonable attorneys' fees and
expenses incurred by Secured Party.
8. Miscellaneous.
(a) Debtor hereby authorizes Secured Party, at Debtor's expense,
to file such financing statement or statements relating to the Collateral
without Debtor's signature thereon as Secured Party at its option may reasonably
deem appropriate, and appoints Secured Party as Debtor's attorney-in-fact
(without requiring Secured Party) to execute any such financing statement or
statements in Debtor's name and to perform all other acts which Secured Party
deems reasonably appropriate to perfect and continue the Security Interest and
to protect and preserve the Collateral.
(b) After the occurrence of an Event of Default hereunder,
Secured Party may demand, collect and sue on any of the accounts, chattel paper
and general intangibles (in either Debtor's or Secured Party's name at the
latter's option) with the right to enforce, compromise, settle or discharge such
Collateral, and may indorse Debtor's name on any and all checks, commercial
paper, and any other instruments pertaining to or constituting such Collateral.
(c) Upon Debtor's failure to perform any of its duties hereunder,
Secured Party may, but shall not be obligated to, perform any or all such duties
in any reasonable manner, and Debtor shall pay an amount equal to the expense
thereof to Secured Party forthwith upon written demand by Secured Party.
(d) No course of dealing and no delay or omission by Secured
Party in exercising any right or remedy hereunder shall operate as a waiver
thereof or of any other right or remedy, and no single or partial exercise
thereof shall preclude any other or further exercise thereof or the exercise of
any other right or remedy. Secured Party may remedy any default by Debtor
hereunder in any reasonable manner without waiving the default remedied and
without waiving any other prior or subsequent default by Debtor. All rights and
remedies of, Secured Party hereunder are cumulative.
(e) The rights and benefits of Secured Party hereunder shall, if
Secured Party so agrees, inure to any party acquiring any interest in the
Indebtedness or any part thereof.
(f) Secured Party and Debtor as used herein shall include the
heirs, executors or administrators, or successors or assigns, of those parties.
(g) No modification, rescission, waiver, release or amendment of
any provisions of this Restated Security Agreement shall be binding except by a
written agreement subscribed by Debtor and by Secured Party.
(h) This Restated Security Agreement is made under, and shall be
governed by and construed under the laws of the State of New York applicable to
contracts made and to be performed entirely within the State of New York and
without giving effect to choice of law principles of the State of New York.
(i) All terms, unless otherwise defined in this Restated Security
Agreement or in any financing statement, shall have the definitions set forth in
the Uniform Commercial Code adopted in New York State, as the same may from time
to time be in effect.
(j) This Restated Security Agreement is and is intended to be a
continuing Security Agreement and shall remain in full force and effect until
all of the Indebtedness shall be finally and irrevocably paid in full.
(k) This Restated Security Agreement amends and restates, in its
entirety, the October 1996 Security Agreement.
SAI/DELTA, INC.
By:
Name:
Title:
-----------------------------
JOSEPH M. LOBOZZO II
------------------------------
JOANNE LOBOZZO
<PAGE>
SCHEDULE 3(a)
Permitted Liens and Encumbrances
None.
<PAGE>
SCHEDULE 3(e)
Collateral Locations
10258 N.W. 46th Street
Sunrise, Florida 33351
528 S. North Lake Boulevard
Ata Monte Springs, Florida 32701
900 Huyler Street
Teterboro, New Jersey 07608
366 White Spruce Boulevard
Rochester, New York 14623
<PAGE>
SCHEDULE 3(f)
Trade Names
None.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-START> NOV-01-1994
<PERIOD-END> OCT-31-1995
<CASH> 19,813
<SECURITIES> 0
<RECEIVABLES> 5,402,935
<ALLOWANCES> 652,523
<INVENTORY> 1,681,805
<CURRENT-ASSETS> 6,668,140
<PP&E> 5,925,891
<DEPRECIATION> 2,888,380
<TOTAL-ASSETS> 10,216,635
<CURRENT-LIABILITIES> 10,495,786
<BONDS> 0
0
0
<COMMON> 68,116
<OTHER-SE> (1,993,938)
<TOTAL-LIABILITY-AND-EQUITY> 10,216,635
<SALES> 30,052,370
<TOTAL-REVENUES> 30,052,370
<CGS> 25,666,249
<TOTAL-COSTS> 32,768,533
<OTHER-EXPENSES> (613,656)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (563,100)
<INCOME-PRETAX> (3,892,919)
<INCOME-TAX> 1,203,000
<INCOME-CONTINUING> (5,095,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,095,919)
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
