<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 0-14733
DELTA COMPUTEC INC.
(Exact name of registrant as specified in its charter)
New York 16-1146345
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
366 White Spruce Blvd, Rochester, NY 14623
(Address of Principal Executive Offices) (Zip Code)
201-440-8585
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [ ] No [x]
As of September 12, 1997, there were 18,252,050 common shares outstanding of the
Registrant's Common Shares $.01 par value.
Index to Exhibits is located on page 20.
Page 1 of 21
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DELTA COMPUTEC INC.
Form 10-Q
Quarter Ended July 31, 1997
INDEX
Part I: Financial Information Page
----
Item 1. Financial Statements
Consolidated balance sheets at July 31, 1997 and
October 31, 1996 3-4
Consolidated statements of operations for the three
months ended July 31, 1997 and 1996 and the nine
months ended July 31, 1997 and 1996 5
Consolidated statement of cash flows for the nine months
ended July 31, 1997 and 1996 6
Notes to consolidated financial statements 7-13
Item 2. Management's Discussion and Analysis of Operations
and Financial Condition 14-17
Part II: Other Information
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18-19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
Calculation of Earnings Per Share 23
Page 2 of 21
<PAGE>
DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(Unaudited) (Audited)
July 31, October 31,
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash $ (19,786) $ 50,891
Accounts receivable, less allowance for doubtful accounts of
$242,512 and $263,808 at July 31, 1997 and October 31, 1996,
respectively 1,542,180 2,634,039
Inventories 1,048,127 816,939
Prepaid expenses and other current assets 164,060 442,549
------------ ------------
Total current assets 2,724,367 3,944,418
Field Spare Parts, net of accumulated amortization 2,765,536 2,546,133
Property And Equipment, at cost:
Technical equipment 131,893 131,848
Office furniture and equipment 228,664 260,784
Vehicles 74,614 74,614
Leasehold improvements 70,792 60,072
Software 54,793 -
------------ ------------
560,756 527,318
Less: Accumulated depreciation (348,429) (291,751)
------------ ------------
212,327 235,567
Deferred Income Taxes 150,000 150,000
Other Assets:
Goodwill, less accumulated amortization of $322,038 and
$286,256 at July 31, 1997 and October 31, 1996, respectively 155,055 190,837
Other 113,002 104,431
------------ ------------
268,057 295,268
Total Assets $ 6,130,501 $ 7,171,386
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 3 of 21
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DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Audited)
July 31, October 31,
1997 1996
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable $ 1,875,936 $ 2,526,884
Short-term debt payable to shareholders 2,611,000 2,655,461
Current portion of long-term debt - 75,000
Deferred service revenue 1,627,705 2,131,491
Accrued expenses
Reserve for discontinuance of subsidiary - 102,375
Payroll and payroll taxes 246,537 176,959
Interest 28,152 96,563
Sales tax payable 287,458 499,782
Other 410,007 310,282
------------ ------------
Total current liabilities 7,086,795 8,574,797
Long-Term Debt 750,000 750,000
Subordinated Debenture 600,001 600,001
------------ ------------
Total long-term liabilities 1,350,001 1,350,001
Stockholders' Investment:
Common stock, $ .01 par value; authorized 20,000,000 shares; issued and
outstanding 18,252,050 and 6,811,575 at July 31, 1997 and
October 31, 1996, respectively 182,521 68,116
Additional paid-in capital 4,801,698 4,916,093
Accumulated deficit (7,290,514) (7,737,621)
------------ ------------
Total Stockholders' Investment (2,306,295) (2,753,412)
Total Liabilities And Shareholders Equity $ 6,130,501 $ 7,171,386
============ ============
</TABLE>
See notes to consolidated financial statements.
Page 4 of 21
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DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues From Continuing Operations:
Service revenues $ 3,002,561 $ 2,902,450 $ 9,762,366 $ 7,840,545
Equipment sales 162,490 133,038 433,132 778,531
------------ ----------- ------------ ------------
Total Revenues $ 3,165,051 $ 3,035,488 $ 10,195,498 $ 8,619,076
Costs And Expenses:
Service costs 2,250,146 1,755,722 6,521,671 5,401,652
Cost of equipment sold 122,735 284,075 601,634 837,882
Selling, general and administrative 594,656 794,695 2,332,418 2,051,724
------------ ----------- ------------ ------------
Total Operating Expenses 2,967,537 2,834,492 9,455,723 8,291,258
Other Income (Expense), Net (64,294) (72,912) (269,678) (190,833)
------------ ----------- ------------ ------------
Earnings From Continuing Operations
Before Income Taxes 133,220 128,084 470,097 136,985
Income Taxes / (Benefit) - - - -
------------ ----------- ------------ ------------
Earnings (Loss) From Continuing
Operations 133,220 128,084 470,097 136,985
------------ ----------- ------------ ------------
Loss From
Discontinued Operations (22,990) (694,930) (22,990) (1,698,229)
------------ ----------- ------------ ------------
Earnings (Loss) $ 110,230 $ (566,846) $ 447,107 $ (1,561,244)
============ =========== ============ ============
Earnings Per Common And Common
Equivalent Share:
Continuing Operations $ .01 .02 .03 .02
Discontinued Operations - (.10) - (.25)
----------- ---- --- ----
Combined $ .01 $ (.08) .03 (.23)
=========== ==== === ====
</TABLE>
See notes to consolidated financial statements.
Page 5 of 21
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DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
1997 1996
---- ----
<S> <C> <C>
Cash Flow From Operating Activities:
Net earnings (loss) $ 447,107 $ (1,561,244)
Adjustments to reconcile net earnings/(loss) to net cash provided/(used) by
operating activities:
Depreciation & amortization 56,678 788,967
Deferred taxes - 261,937
Expenses charged to accrual for discontinued operations (102,375) -
Accounts receivable 1,091,859 2,448,182
Inventories (231,188) 530,537
Prepaid and other current assets 278,489 7,840
Accounts payable and accrued liabilities (550,056) (1,443,331)
Sales taxes payable (212,324) 279,547
Deferred service revenue (503,786) 528,761
----------- --------------
Net cash flow from operating activities 274,404 1,841,196
----------- --------------
Cash Flow From Investing Activities:
Capital expenditures, including field spare parts (252,841) (466,501)
Fixed assets disposed of in discontinued business - 609,159
Investment in intangibles and other assets 27,211 81,787
----------- --------------
Net cash flow from investing activities (225,630) 224,445
----------- --------------
Cash Flow From Financing Activities:
Proceeds on exercise of option 10 -
Payment on short-term debt (44,461) (32,639)
Net proceeds (payment) on bank loan - (1,983,218)
(Payment) on subordinated debenture (75,000) -
----------- --------------
Net cash flow from financing activities (119,451) (2,015,857)
----------- --------------
Net Increase (Decrease) In Cash $ (70,677) $ 49,784
----------- --------------
Cash - beginning of period 50,891 (245,249)
----------- --------------
Cash - end of period $ (19,786) $ (195,465)
=========== ==============
</TABLE>
See notes to consolidated financial statements.
Page 6 of 21
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DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
General Description of Business
Delta Computec Inc. (the "Registrant" or "Company"), by itself and
through its wholly-owned subsidiary, SAI Delta, Inc. ("SAI/Delta"),
provides a wide array of Computer System, Data Communication and
Lan/Wan technical services and products to a customer base which
encompasses many industries and geographic locations. The Company's
customer base includes large brokerage houses, banks, pharmaceutical
companies, major hospitals and long distance carriers, located
principally in the Northeast but reaching as far as Florida and the
West Coast. Technical services offered include, but are not limited to,
design, product procurement, installation, service, maintenance and
on-site technical management and consulting.
As previously reported in a Form 10-K for the Fiscal Year ended October
31, 1996 (the "1996 Form 10-K Report") filed in August, 1997, the
operations of the Company's wholly-owned subsidiary, Delta Data Net,
Inc. ("Data Net") and the Company's Intronet Division ("Intronet") were
terminated during the fiscal year ended October 31, 1996 ("Fiscal
1996"). The results for Data Net and Intronet are reported under
Discontinued Operations.
Principles of Consolidation and Representation by Management
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries Data Net and SAI/Delta. All
significant intercompany accounts and transactions have been eliminated
in consolidation. The unaudited interim financial statements included
herein reflect all normal and recurring adjustments that are, in the
opinion of management, necessary for a fair presentation of the results
for the interim periods.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Basis of Presentation
The Registrant incurred operating losses, on a consolidated basis, in
Fiscal 1994, 1995 and 1996. As previously reported by the Registrant in
the 1996 Form 10-K Report, as well as above (See "General Description
of Business", above), the Registrant's Data Net subsidiary terminated
its business operations and ceased operations in Fiscal 1996 due to
economic conditions in its industry.
As reported in the 1996 Form 10-K Report and as discussed above (See
"General Description of Business"), in the fourth quarter of Fiscal
1996, the Registrant decided to close its Intronet Division. Effective
September 1, 1996, the Company assimilated the regional area and
certain customers serviced by the Intronet Division into the Company's
core business. Termination of the Intronet Division's operation was
completed in the first quarter of the fiscal year which will end
October 31, 1997 ("Fiscal 1997").
The operating results for continuing operations for the three months
ended July 31, 1997 and 1996 and for the nine months ended July 31,
1997 and 1996 are for the Company's core business and do not include
the operating losses for either the Registrant's Data Net subsidiary or
its Intronet Division during the three months ended July 31, 1996 and
the nine months ended July 31, 1996, respectively. The net losses
incurred by Data Net and the Intronet Division for those respective
periods are included in the income statement in losses from
discontinued operations. In Fiscal 1997, the Company incurred expenses
related to the termination of Data Net that exceeded the amount for
which a reserve had been established at October 31, 1996. These
expenses were charged to Fiscal 1997's results and are shown under
Losses From Discontinued Operations.
Page 7 of 21
<PAGE>
Property and Equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method based on estimated useful lives which are as
follows:
Estimated
Description Useful Life
----------- -----------
Technical equipment 5 - 7 years
Office furniture and equipment 5 - 7 years
Vehicles 2 - 3 years
Leasehold improvements 5 - 10 years
Software 3 - 5 years
Maintenance and repairs are charged to expense as incurred. The cost of
renewals or improvements that increase the useful lives of the assets
is capitalized in the appropriate asset account. The gain or loss on
property retired or otherwise disposed of is credited or charged to
operations and the cost and accumulated depreciation are removed from
the accounts.
Inventories
Inventories represent computer equipment and peripherals held for
resale in the normal course of business and consumable field spare
parts. These inventories are recorded at the lower of cost (first-in,
first-out) or market.
Field Spare Parts
Field spare parts are stated at cost and are amortized using the
straight-line method over an estimated useful life of 5 years,
beginning in the year after acquisition.
Goodwill
Goodwill, representing the excess of the cost of acquired businesses
over the fair value of net assets acquired, is generally amortized on a
straight-line basis over periods ranging from ten to twenty years. The
Company assesses impairment of such assets by reviewing on an ongoing
basis the operating performance of the underlying business or customer
relationships.
Deferred Service Revenue
Service revenue is recognized ratably over the contract period.
Deferred service revenue represents billings in advance of the service
period.
Revenue Recognition
Service revenues: Contract service revenue is recognized ratably over
the contractual period or as services are provided. Revenue from
service rendered on a "time and materials" basis is recognized in the
period the work is performed.
Equipment sales: Revenue from equipment sales and the related cost of
sales are recognized when title to the equipment passes. Component
repair revenue and related costs are recognized upon completion of the
repair.
Income Taxes
Income taxes are recognized for the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets
for the future tax consequence of events that have been recognized in
the Company's consolidated financial statements or tax returns.
Page 8 of 21
<PAGE>
Earnings Per Share
In March, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
per Share". The statement will be effective for Fiscal 1997. The new
standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of basic and diluted
EPS calculations. SFAS No. 128 will require the Company in its fourth
quarter and in its annual report to restate all previously reported
earnings per share information to conform with the new pronouncement's
requirements. Early adoption of the statement is not permitted. The
Company is currently evaluating what impact the adoption of this
standard will have on its disclosures.
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
three months ended July 31, 1997 and 1996 were 18,252,050 and
6,811,575, respectively. Weighted average shares outstanding for the
nine months ended July 31, 1997 and 1996 were 15,445,896 and 6,811,575,
respectively.
New Accounting Standards Pronouncements
A. 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.
B. 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.
C. Earnings Per Share
As discussed above (See "Earnings per Share"), in March, 1997, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". The
statement will be effective for Fiscal 1997.
Page 9 of 21
<PAGE>
D. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and disclosure of comprehensive income and its
components in financial statement format and is effective for financial
statements for fiscal years beginning after December 15, 1997.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. Items considered comprehensive
income include foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in
debt and equity securities. In the opinion of management, SFAS No. 130
will not have a material effect on the Company's financial statements.
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, 1996 and July 31,
1997.
(2) Discontinued Operations
As part of the Company's strategy of concentrating its focus on its
core business, the Company's subsidiary, Data Net, terminated its
business operations in Fiscal 1996 (See Note 1, "General Description of
Business", above). Prior to this termination, Data Net was in the
business of the sale and distribution of hardware and test equipment
and the sale and assembly of cables used in data communications
applications. Data Net's losses of $279,003 for the three months ended
July 31, 1996 and $980,563 for the nine months ended July 31, 1996 are
included in the statement of operations under losses from discontinued
operations for those respective periods. In addition, the Company
incurred $22,990 in expenses during the third quarter of Fiscal 1997
that were related to the termination of Data Net, which expenses
exceeded the amount for which a reserve had been established at October
31, 1996. These expenses were charged to Fiscal 1997's results and are
shown under Losses From Discontinued Operations.
As reported in the 1996 Form 10-K Report, in November, 1994, the
Company acquired substantially all of the operating assets, and assumed
certain of the liabilities, of Intronet, Inc. (the "Intronet
Acquisition"), which assets formed the basis of the Company's Intronet
Division ("Intronet" or "Intronet Division"). Following the Intronet
Acquisition, the Company operated from the former Intronet, Inc. office
in Waltham, Massachusetts. Subsequent to the acquisition and prior to a
downsizing and eventual termination of its operations, the Company's
Intronet Division designed, installed and supported advanced computer
networks with emphasis in large company and industrial facilities
requiring network hubbing integrated with fiber and copper cabling.
These assets were acquired in exchange for $337,000 in cash and the
assumption of approximately $588,000 in liabilities of Intronet, Inc.
In the fall of 1995, the Company reduced the size of its operating
staff of its Intronet Division. During the fourth quarter of Fiscal
1996, management decided to terminate operations of the Intronet
Division, substantially accomplished at October 31, 1996 with the
downsizing of the Intronet Division's staff to one employee by October
31, 1996, and termination of the Intronet Division's operation was
completed in the first quarter of Fiscal 1997 with the closing of its
office in December, 1996. Effective September 1, 1996, the Company
assimilated the regional area and certain customers serviced by the
Intronet Division into the Company's core business. Intronet's losses
of $415,927 for the three months ended July 31, 1996 and $717,666 for
the nine months ended July 31, 1996 are included in the statement of
operations in losses from discontinued operations for those respective
periods.
Page 10 of 21
<PAGE>
The consolidated financial statements have been reclassified to report
separately results from discontinued operations (Data Net and the
Intronet Division). The Company's operating results for the interim
three-month and nine-month periods ended July 31, 1996 have been
restated to reflect continuing operations, comprising the core business
of providing computer system, data communication and Lan/Wan technical
services and products. Interest expense allocated to discontinued
operations includes amounts directly related to such discontinued
businesses. Amounts allocated for interest in the three months ended
July 31, 1996 totaled $19,454. Revenues from discontinued operations in
the three months ended July 31, 1996 totaled $424,041, which were
earned in Intronet. Amounts allocated for interest in the nine months
ended July 31, 1996 totaled $133,156. Revenues from discontinued
operations in the nine months ended July 31, 1996 totaled $3,837,577,
which consisted of $2,307,945 and $1,529,632 for Data Net and Intronet,
respectively. The remaining net assets of discontinued operations at
October 31, 1996 were not significant.
(3) Debt and Debt Due to Shareholder
Long-term debt and Debt Due to Shareholder consist of the following
at July 31, 1997 and October 31, 1996:
<TABLE>
<CAPTION>
July 31, October 31,
1997 1996
---- ----
<S> <C> <C>
Due to shareholder $ 2,611,000 $ 2,655,461
Term loan, due in full on October 10, 2001, with interest payable
monthly at prime plus 1.0%, collateralized by field spare parts
(the "Term Loan") 750,000 750,000
Notes payable - 75,000
-------------- ---------------
3,361,000 3,480,461
Less: Current portion - 75,000
-------------- ---------------
$ 3,361,000 $ 3,405,461
============== ===============
</TABLE>
As reported in the Fiscal 1996 Form 10-K, during Fiscal 1996, the
Company was in default on certain provisions and covenants of its
long-term credit facility with its then primary lending institution,
National Canada Finance Corp. ("NCFC"). On October 10, 1996, the
Company restructured the note payable to its bank, National Canada
Finance Corp. ("NCFC"), which 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 the Company's principal
stockholder, Joseph M. Lobozzo II ("Lobozzo"), and the balance of the
loan, in the amount of $750,000, was restructured as a Term Loan. The
Company has an Amended and Restated Credit Agreement with Lobozzo (the
"Lobozzo Credit Agreement", as amended, which provides for the "Lobozzo
Loan"), which provides that: (1) the maximum loan amount is $2,950,000;
(2) the interest rate is 1.75% above the prime lending rate; (3) the
borrowing base shall be equal to 100% of the eligible receivables from
and after June 7, 1997 and 130% for those receivables which existed at
June 6, 1997; (4) certain financial covenant obligations with which the
Company was in default under its prior loan from NCFC were removed; (5)
all assets of the Company, other than field spare parts, were pledged
as collateral for the Lobozzo Loan with the pledged field spare parts
being subordinated to the prior pledge under the Term Loan; (6) for any
loans provided in excess of the available Borrowing Base, as defined in
the Lobozzo Credit Agreement, the interest rate is 5 percentage points
above the prime lending rate; and (7) payment is due on June 30, 1998.
(See Item 5 for additional information regarding a letter from the
Lenders to the effect that the Lenders are agreeable to raising the
maximum loan amount to a higher level under certain circumstances to
accommodate the Company's anticipated revenue growth and increased
working capital needs.
As of October 31, 1996 and July 31, 1997, there were principal balances
of $2,255,461 and $2,611,000, respectively, outstanding under the
Lobozzo Loan, both of which balances included advances totaling
$633,600 ("Overline Advances") received from Lobozzo prior to the loan
restructuring referred to above. As of September 12, 1997, there was
$2,669,500 outstanding under the Lobozzo Loan, which balance included
Overline Advances totaling $633,600.
The agreement underlying the Term Loan requires the Company to maintain
a ratio of field spare parts to outstanding indebtedness of at least
2.5 to 1. The Company has been in compliance with this ratio
requirement for all periods since inception of the Term Loan
restructuring. Lobozzo has pledged 480,000 of the Company's common
shares owned by him as additional collateral for the Term Loan.
Agreements have been made to provide NCFC with additional equity in the
Company (up to 17.5% of the Company's issued and outstanding common
shares) under certain circumstances.
Page 11 of 21
<PAGE>
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.
On September 12, 1997, the Lenders agreed to raising the maximum Loan
amount of $2,950,000 as included in the Amended and Restated Credit
Agreement, as amended; provided that: (1) the Company shall meet its
operating budget targets as approved by its Board of Directors; and (2)
the Company's Loans in excess of the Available Borrowing Base, as
defined in the Amended and Restated Credit Agreement, as amended, shall
not exceed $700,000 for the period October 1, 1997 through December 31,
1997 and $400,000 for the period January 1, 1998 thorugh June 30, 1998.
This letter is filed as Exhibit A to this Form 10-Q Quarterly Report.
In addition, as of October 31, 1996, the Company was obligated to
Lobozzo in the principal amount of $400,000 as a result of a May, 1995
Lobozzo Commitment (the "Lobozzo Commitment") in the original amount of
$400,000 to provide additional financing to the Company (collectively
with the amount to be loaned by NCFC, the "Overadvance Facility"). In
connection with the agreement whereby Lobozzo provided the Lobozzo
Commitment, the Company issued a May, 1995 Option Agreement entitling
Lobozzo to purchase 11,440,475 of the Company's common shares for an
aggregate exercise price of $10. In February, 1997, the May, 1995
Option Agreement, as amended and restated, (the "May, 1995 Option
Agreement") was exercised in full by the principal shareholder and by
Joanne Lobozzo, and 11,440,475 common shares were issued, of which
5,720,238 common shares were issued to Lobozzo and 5,720,237 common
shares were issued to Joanne Lobozzo. As a result of this transaction,
Lobozzo and Joanne Lobozzo are both now control persons of the
Registrant. In May, 1997, the principal balance outstanding on the
Lobozzo Commitment was paid in full, and the documents upon which it
was based were terminated.
(4) Subordinated Debentures
In November, 1992 the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31,
1997 to the sellers ("the Sellers") of the assets acquired by Data Net
on November 1, 1992. As of October 31, 1996, the Sellers agreed to sell
the entire principal balance of the 8% subordinated debenture, together
with accrued interest, to the Company for $75,000. This latter amount
was paid to the Sellers in November, 1996.
The Company has also guaranteed an 8% subordinated debenture of Data
Net in the face amount of $600,001, as restated, to Lobozzo and Joanne
Lobozzo (the "Lobozzo Debenture"). The Lobozzo Debenture was due in
annual installments of $200,000 commencing January 31, 1996 and was
issued in connection with an option agreement entitling Lobozzo to
purchase 1,304,350 shares of the 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 on January 31, 1998.
(5) Other Matters
The Company experienced a significant consolidated net loss in Fiscal
1996, which was attributable to the operating losses incurred by the
Data Net subsidiary and the Intronet Division. As noted elsewhere in
this Form 10-Q Quarterly Report, the Company's subsidiary, Data Net,
terminated its business operations in March 1996, and, in the fourth
quarter of Fiscal 1996, management decided to terminate the operations
of the Company's Intronet Division. The actions of the Company were
taken as a part of management's plan to refocus the Company's efforts
on its core business of providing integrated technology solutions for
computer systems, network environments and telecommunication systems.
(6) Income Taxes
For the three months ended July 31, 1997 and the nine months ended July
31, 1997, respectively, income taxes of $37,478 and $152,016,
respectively, have been offset by the use of the tax benefits
associated with the use of the Company's net operating loss
carry-forwards.
Page 12 of 21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Results of Operations
The Company's net income from continuing operations for the three
months ended July 31, 1997 was $133,320 (4.2%), or $.01 per share (on
18,252,050 weighted average common shares outstanding for the three
months ended July 31, 1997), compared to net income from continuing
operations of $128,084 (4.2%), or $.02 per share for the three months
ended July 31, 1996 (on 6,811,575 weighted average common shares
outstanding for the three months ended July 31, 1996). Net income from
continuing operations for the nine months ended July 31, 1997 was
$470,097 (4.6%), or $.03 per share (on 15,445,896 weighted average
common shares outstanding for the nine months ended July 31, 1997),
compared to net income from continuing operations of $136,985 (1.6%),
or $.02 per share, for the nine months ended July 31, 1996 (on
6,811,575 weighted average common shares outstanding for the nine
months ended July 31, 1996). The improvement of $333,112 in net income
from continuing operations for the nine months ended July 31, 1997
reflected the earnings benefit from new business plus a growth in the
Company's core business, reflecting management's ability to devote more
time to developing its continuing business with the termination of its
discontinued operations.
As discussed in Notes 1 and 2 to the financial statements, during
Fiscal 1996, the Company's Data Net subsidiary terminated its
operations which had commenced in November, 1992. Data Net incurred a
net loss of $279,003, or $.04 per share, for the three months ended
July 31, 1996 (on 6,811,575 weighted average common shares outstanding
for the three months ended July 31, 1996), and a net loss of $980,563
(42.5%), or $.14 per share for the nine months ended July 31, 1996 (on
6,811,575 weighted average common shares outstanding for the nine
months ended July 31, 1996), which losses are reported in the income
statement for those respective periods under Loss from Discontinued
Operations.
As discussed in Notes 1 and 2 to the financial statements, in the
fourth quarter of Fiscal 1996, the Registrant decided to close its
Intronet Division. Termination of the Intronet Division's operation was
completed in the first quarter of Fiscal 1997. Intronet incurred a net
loss of $415,927 (98.1%), or $.06 per share, for the three months ended
July 31, 1996 (on 6,811,575 weighted average common shares outstanding
for the three months ended July 31, 1996), and a net loss of $717,666
(46.9%), or $.11 per share, for the nine months ended July 31, 1996 (on
6,811,575 weighted average common shares outstanding for the nine
months ended July 31, 1996), which losses are reported in the income
statement for those respective periods under Loss from Discontinued
Operations. In addition, the Company incurred $22,990 in expenses
during the third quarter of Fiscal 1997 that were related to the
termination of Data Net, which expenses exceeded the amount for which a
reserve had been established at October 31, 1996. These expenses were
charged to Fiscal 1997's results and are shown under Losses From
Discontinued Operations.
Revenues
Revenues from continuing operations were $3,165,051 for the three
months ended July 31, 1997, compared to $3,035,488 for the three months
ended July 31, 1996, an increase of $129,563 and 4.3%. Service revenues
for the three months ended July 31, 1997 were $3,002,561, compared to
$2,902,450 for the three months ended July 31, 1996, an increase of
$100,111 and 3.4%. The increase in service revenue principally reflects
revenue derived from new business. Equipment sales for the three months
ended July 31, 1997 were $162,490, compared to $133,038 for the three
months ended July 31, 1996, an increase of $29,452 and 22.1%.
Revenues from continuing operations were $10,195,498 for the nine
months ended July 31, 1997, compared to $8,619,076 for the nine months
ended July 31, 1996, an increase of $1,576,422 and 18.3%. Service
revenues for the nine months ended July 31, 1997 were $9,762,366,
compared to $7,840,545 for the nine months ended July 31, 1996, an
increase of $1,921,821 and 24.5%. The increase in service revenue
reflects revenue derived from new business, as well as a growth in
business with the Company's existing customers. Equipment sales for the
nine months ended July 31, 1997 were $433,132, compared to $788,531 for
the nine months ended July 31, 1996, a decrease of $345,399 and 44.4%.
The decline in equipment sales reflects the Registrant's emphasis on
its core service maintenance and installation business.
Page 13 of 21
<PAGE>
Costs and Expenses
Service costs in continuing operations were $2,250,146 (74.9% of
service revenue) for the three months ended July 31, 1997, compared to
$1,755,722 (60.5% of service revenue) for the three months ended July
31, 1996. The service costs as a percentage of service revenue for the
third quarter reflects a cumulative adjustment relating to the
reclassification of certain personnel costs. Service costs in
continuing operations were $6,521,671 (66.8% of service revenue) for
the nine months ended July 31, 1997, compared to $5,401,652 (68.9% of
service revenue) for the nine months ended July 31, 1996. The favorable
variance in the percentage reflects the improvement in the Company's
core service business.
Cost of equipment sold in continuing operations was $122,735 (75.5% of
equipment sales) for the three months ended July 31, 1997, compared
with $284,075 (213.5%) for the three months ended July 31, 1996. Cost
of equipment sold in continuing operations was $601,634 (138.9% of
equipment sales) for the nine months ended July 31, 1997, compared with
$837,882 (107.6% of equipment sales) for the nine months ended July 31,
1996. The quarterly and nine-month results for Fiscal 1997 reflect
management's objective of deriving a greater share of revenue from
service-related revenue as opposed to purely equipment sales.
Gross profit for continuing operations was $792,170 (25.0%) for the
three months ended July 31, 1997, compared to $995,691 (32.8%) for the
three months ended July 31, 1996, a decline of $203,521 and 7.8
percentage points as a ratio of sales. The decline in Fiscal 1997's
third-quarter results from those of Fiscal 1996 is attributable to a
cumulative adjustment relating to the reclassification of certain
personnel costs. For the nine months ended July 31, 1997 and 1996,
gross profit for continuing operations was $3,072,193 (30.1%) and
$2,379,542 (27.6%), respectively, an improvement of $692,651 and 2.5
percentage points as a ratio of sales. The nine-month results reflect
the benefit from the improved sales performance in Fiscal 1997 versus
Fiscal 1996.
Selling, general and administrative expenses in continuing operations
were $594,656 (18.8%) for the three months ended July 31, 1997,
compared with $794,695 (26.2%) for the three months ended July 31,
1996, a decrease of $200,039 or 25.2%, as compared to a 3.4% increase
in service revenue for the same period. The benefit associated with the
decline in Fiscal 1997's third-quarter percentage from the Fiscal 1996
percentage is attributable to a cumulative adjustment relating to the
reclassification of certain personnel costs.
Selling, general and administrative expenses in continuing operations
were $2,332,418 (22.9%) for the nine months ended July 31, 1997,
compared with $2,051,724 (23.8%) for the nine months ended July 31,
1996, an increase of $280,694 or 13.7%, as compared to the 24.5%
increase in service revenue for the same period. The increase in SG&A
costs was primarily due to additional personnel and associated costs,
higher consulting and legal fees, as well as increases in other
administrative expenses.
Total operating expenses in continuing operations were $2,967,537
(93.8%) for the three months ended July 31, 1997, compared with
$2,834,492 (93.4%) for the three months ended July 31, 1996, an
increase of $133,045 or 4.7% and an increase of 0.4 percentage points
as a ratio of sales. Total operating expenses in continuing operations
were $9,455,723 (92.7%) for the nine months ended July 31, 1997,
compared with $8,291,258 (96.2%) for the nine months ended July 31,
1996, an increase of $1,164,465 or 14.0% and an improvement of 3.5
percentage points as a ratio of sales, the latter percentage reflecting
the benefit from the improvement in service revenue.
Non-operating expenses were $64,294 (2.0%) and $72,912 (2.4%) for the
three months ended July 31, 1997 and 1996, respectively, with the
Fiscal 1997 expenses reflecting a decrease of $8,618 or 11.8%.
Non-operating expenses were $269,678 (2.6%) and $190,833 (2.2%) for the
nine months ended July 31, 1997 and 1996, respectively, with the Fiscal
1997 expenses reflecting an increase of $78,845 or 41.3%. The increase
in debt service cost for the nine months ended July 31, 1997 was due to
increased borrowing incurred as a result of payments made related to
liabilities associated with discontinued operations.
Income from continuing operations was $133,220 (4.2%) for the three
months ended July 31, 1997, compared with $128,084 (4.2%) for the three
months ended July 31, 1996, an increase of $5,136 or 4.0%. Income from
continuing operations was $470,097 (4.6%) for the nine months ended
July 31, 1997, compared with $136,985
Page 14 of 21
<PAGE>
(1.6%) for the nine months ended July 31, 1996, an improvement of
$333,112. The increase in the nine-month results for Fiscal 1997
reflected the increase in revenue, with an associated benefit to gross
profit, partially offset by an increase in SG&A and non-operating
expenses.
For the three months ended July 31, 1997 and the nine months ended July
31, 1997, respectively, income taxes of $37,478 and $152,016,
respectively, have been offset by the use of the tax benefits
associated with the use of the Company's net operating loss
carry-forwards. At October 31,1996 the Company recorded a deferred tax
asset of approximately $2,461,000 reflecting the benefit of
approximately $7,241,000 in loss carryforwards, which expire in varying
amounts between 2001 and 2011. Realization of this and other deferred
assets is dependent on generating sufficient taxable income in future
periods. Management believes that sufficient taxable income will exist
in Fiscal 1997 to allow for the utilization of $150,000 of the deferred
tax asset.
Earnings Per Share
As discussed in Note 1 to the accompanying financial statements, in
March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings Per Share". This
new standard requires dual presentation of basic and diluted earnings
per share (EPS) on the face of the earnings statement and requires a
reconciliation of the numerators and denominators of basic and diluted
EPS calculations. The statement will be effective for Fiscal 1997.
Early adoption of the statement is not permitted.
As discussed in Note 3 to the accompanying financial statements, in
February, 1997, the Company issued 11,440,475 shares of its common
stock, representing an increase in the number of weighted average
shares outstanding during the three months ended July 31, 1997 and the
nine months ended July 31, 1997 of 168.0% and 126.8%, respectively,
versus the comparable periods in Fiscal 1996. The EPS results as shown
at the bottom of the Consolidated Statements of Operations as well as
in Exhibit 11 reflect the actual weighted average common shares. On a
pro-forma basis, using the number of common shares outstanding prior to
the exercise of the May, 1995 Option Agreement, the EPS figures for
continuing operations for the three months ended July 31, 1997 and the
nine months ended July 31, 1997 would have been $.02 (instead of $.01)
and $.07 (instead of $.03), respectively.
Liquidity and Capital Resources
The Company experienced a significant consolidated net loss in Fiscal
1996, which was attributable to the operating losses incurred by its
Data Net subsidiary and the Intronet Division. The Company has financed
its working capital requirements, capital expenditures and debt service
from its financing arrangements and trade debt, as well as, in Fiscal
1997, from earnings.
The unaudited financial statements for the period ended July 31, 1997,
as set forth in this Form 10-Q Quarterly Report, indicate that the
significant consolidated losses of Fiscal 1996 have ceased. The
unaudited financial statements for the nine months ended July 31, 1997
show an improvement in the Company's financial position. These figures
are not a guarantee that the improved financial position can continue
into the future.
The Lobozzo Credit Agreement between the Company and its commercial
Lenders, Joseph M. and Joanne Lobozzo, who are also its principal
shareholders and controlling persons, has been amended to, among other
matters, extend the term of the lending agreement to June 30, 1998. The
maximum amount of the Lobozzo Loan has also been increased from
$2,550,000 to $2,950,000. If any loans are ever made in excess of the
Available Borrowing Base (as defined in the Lobozzo Credit Agreement),
such excess amounts shall bear interest at 5% over the Prime Rate. The
Lenders and the Registrant have also revised the factors determining
the basis upon which the Company's receivables will be eligible for
inclusion in the Borrowing Base. Management believes that the maximum
amount of the loan, at $2,950,000, may not be adequate to cover the
Company's short-term financing needs through June 30, 1998. As of the
date of filing this Form 10-Q Quarterly Report, no arrangement
regarding additional short-term financing has been reached. For
additional information regarding the NCFC Restructuring and the Lobozzo
Loan, see Note 3, above.
Net cash provided from operations in the nine months ended July 31,
1997 and 1996 was $274,404 and $1,841,196, respectively. The decline of
$1,566,792 for the nine months ended July
Page 15 of 21
<PAGE>
31, 1997 versus the nine months ended July 31, 1996 was principally the
result of: (1) $732,289 in lower depreciation and amortization (2)
$102,375 in expenses charged against an accrual for discontinued
operations; (3) no funds provided from deferred taxes for the nine
months ended July 31, 1997, compared to $261,937 in funds provided for
the nine months ended July 31, 1996; (4) $589,104 in funds provided in
the nine months ended July 31, 1997 by accounts receivable, inventory,
prepaid and other current assets, accounts payable and accrued
expenses, compared to $1,543,228 in funds provided in the nine months
ended July 31, 1996 (a significant portion of which related to the
termination of Data Net), a decrease of $1,012,092 in funds provided;
(5) a $503,786 use of funds relating to deferred service revenue for
the nine months ended July 31, 1997, a decrease of $1,032,547 in funds
provided; (6) $212,324 in funds used associated with sales tax
liabilities, a decrease of $491,871 in funds provided; offset in part
by (7) a favorable difference of $2,008,351, resulting from cash
provided from net income of $447,107 in the nine months ended July 31,
1997 versus cash used by a net loss of $1,561,244 in the nine months
ended July 31, 1996.
The working capital deficits of $4,352,214 and $4,630,379 at July 31,
1997 and October 31,1996, respectively, represent a reduction of
$278,165 in negative working capital during the nine months ended July
31, 1997.
Cash (used)/ provided by investing activities in the nine months ended
July 31, 1997 and 1996 was ($225,630) and $224,445, respectively, or an
increase of $450,075 in additional funds used in the nine months ended
July 31, 1997. The need for additional funds was attributable to
$609,159 in gross fixed assets liquidated in the termination of Data
Net during the nine months ended July 31, 1996, with no similar event
occurring during the nine months ended July 31, 1997, partially offset
by lower expenditures for spare parts.
Cash used by financing activities in the nine months ended July 31,
1997 and 1996 was $119,451 and $2,015,857, respectively, or an
$1,896,406 reduction in funds used in the comparative nine-month
periods Fiscal 1997 versus Fiscal 1996. The cash benefit was realized
principally as a result of the absence in Fiscal 1997 of paydowns on
bank debt, as opposed to $1,983,218 of such payments in Fiscal 1996.
The net result of the foregoing was a $70,677 use of cash for the nine
months ended July 31, 1997, compared to $49,784 in cash provided for
the nine months ended July 31, 1996.
Page 16 of 21
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In May, 1997, the principal balance outstanding on the Overadvance
Facility was paid in full, and the documents upon which it was based were
terminated.
On June 9, 1997, by Amendment No. 6 to the Amended and Restated Credit
Agreement and Other Agreements, a copy of which amendment was annexed to the
Registrant's Form 10-Q Report for the quarter ended April 30, 1997 as Exhibit 2,
the Company and the Lender agreed to further amend the Lobozzo Loan in the
following respects: (a) the maximum amount was increased from $2,550,000 to
$2,950,000; (b) the Company was permitted to borrow up to 100% of Eligible
Receivables (as defined in the Lobozzo Credit Agreement) against all Eligible
Receivables which come into existence from and after June 7, 1997 and the
Company was further permitted to borrow up to 130% of Eligible Receivables for
Eligible Receivables which existed as of June 6, 1997; and (c) effective June 7,
1997, the rate of interest on all loans provided by the Lender which shall
exceed the Available Borrowing Base (or "Excess Borrowing Base Loans") (as
defined in the Lobozzo Credit Agreement) was increased to five percent (5%) over
Prime Rate (as defined in the Lobozzo Credit Agreement). The interest rate
applicable to all principal amounts under the Lobozzo Loan which are within the
available Borrowing Base remain at one and three quarters of one percent (1 and
3/4%) over Prime Rate, and the interest rate on the Lobozzo Loan in the event
of maturity, by acceleration or otherwise, remains at three and three quarters
of one percent (3 and 3/4%) over Prime Rate. (See Note 3 to the accompanying
financial statements.)
Item 3. Defaults Upon Senior Securities
(a) The Registrant and Lobozzo entered into an Amended and Restated
Credit Agreement and other Agreements dated October 10, 1996, which has since
been further amended six (6) times (collectively, the Original Agreement and all
six (6) amendments are referred to as the "Lobozzo Credit Agreement"). See Item
2, above and Item 5, below. The Lobozzo Credit Agreement, which provides for
loans of up to $2,950,000 to the Registrant, had an expiration date of April 30,
1997, which has since been extended to June 30, 1998, as discussed above. The
Lenders under the Lobozzo Credit Agreement waived any defaults which may have
occurred at the time of executing Amendment No. 6 to the Lobozzo Credit
Agreement.
(b) In addition to the Lobozzo Credit Agreement, Lobozzo has also
provided the Registrant with certain other credit facilities, including (i) a 8%
Subordinated Debenture issued October 28, 1992, in the face amount of $600,001
(as amended and restated, the "Second Restated Lobozzo Subordinated Debenture");
(ii) a commitment (the Lobozzo Commitment") pursuant to a letter agreement dated
May 1, 1995, to provide the Registrant with an overadvance facility of up to
$400,000 (which has since been paid in full and declared to be null and void and
of no further force and effect, as set forth above and below); (iii) individual
advances made by Lobozzo to the Registrant between July 25, 1996 and October 9,
1996, in the aggregate amount of $633,600, and (iv) Overbase Loans whereby the
amounts loaned under the Lobozzo Credit Agreement exceed the amount which would
otherwise be permitted by the Borrowing Base as defined in the Lobozzo Credit
Agreement. The Lobozzo Credit Agreement and the other credit facilities referred
to in this paragraph are referred to as the "Total Lobozzo Credit Facilities".
The Registrant is not in default with respect to any part of the Total Lobozzo
Credit Facilities. (See Item 5, below.)
(c) The Registrant, Lobozzo and Joanne Lobozzo executed Amendment No. 6
(See Item 2, above). Amendment No. 6 also waives any pre-existing defaults of
the Registrant which may have existed with regard to the
Lobozzo Credit Agreement.
(d) For a possible increase in the maximum Lobozzo Loan and for an
agreement by Lobozzo to provide collateral to a potential surety to facilitate a
possible issuance of performance and payment bonds for the Registrant, see Item
5, below.
Page 17 of 21
<PAGE>
Item 5. Other Matters
(a) On September 12, 1997, the Lenders agreed to raising 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 and increased working capital needs,
provided that: (1) the Company shall meet its operating budget targets as
approved by its Board of Directors; and (2) the Company's Loans in excess of the
Available Borrowing Base, as defined in the Amended and Restated Credit
Agreement, as amended, shall not exceed $700,000 for the period October 1, 1997
through December 31, 1997 and $400,000 for the period January 1, 1998 thorugh
June 30, 1998. This letter containing the provisions is filed as Exhibit A to
this Form 10-Q Quarterly Report.
(b) 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 of
Intent 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. The Letter of Intent is in addition to the Total
Lobozzo Credit Facilities. This Letter of Intent is filed as Exhibit B to this
Form 10-Q Quarterly Report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
No. 11 Earnings Per Share Information
Page 18 of 21
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delta Computec Inc.
-------------------
Registrant
Date: September 15, 1997 /s/ John DeVito
-------------------
John DeVito, President and
Chief Operating Officer
Date: September 15, 1997 /s/ Frank Donnelly
-------------------
Frank Donnelly
Chief Financial Officer and
Principal Accounting Officer
Page 19 of 21
<PAGE>
Index to Exhibits
The following Exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit A - Letter dated September 12, 1997 from Joseph M. Lobozzo II
and Joanne M. Lobozzo to Delta Computec Inc. and Delta
Data Net, Inc., relating to possible increase of maximum
loan amount.
Exhibit B - Letter dated September 11, 1997 from Joseph M. Lobozzo II
agreeing to provide collateral for performance and payment
bonds.
Exhibit 11 - Calculation of Earnings Per Share, page 21.
Page 20 of 21
<PAGE>
Exhibit A
JOSEPH M. LOBOZZO
JOANNE M. LOBOZZO
690 PORTLAND AVENUE
ROCHESTER, N.Y. 14623
September 12, 1997
John DeVito, President and Chief Operating Officer
Delta Computec Inc.
and Delta Data Net, Inc.
900 Huyler Street
Teterboro, N.J. 07608
Dear John:
With respect to the Loan (capitalized terms as used in this letter are as
defined in the Amended and Restated Credit Agreement, as amended, among Delta
Computec, Inc. ("DCI"), Delta Data Net, Inc. and the Lenders) for which the
maximum Loan amount is $2,950,000, this is to advise you that the undersigned
Lenders are agreeable to raising this maximum Loan amount to a level that will
accommodate DCI's anticipated sales growth and associated working capital needs,
provided that:
1. DCI shall meet its operating budget targets as approved from time to time by
its Board of Directors; and
2. DCI's Loans in excess of the Available Borrowing Base shall not exceed an
average of $700,000 for the period from October 1, 1997 through December 31,
1997 and $400,000 for the period from January 1, 1998 through June 30, 1998.
Very truly yours,
/s/ Joseph M. Lobozzo II
Joseph M. Lobozzo II
/s/ Joanne M. Lobozzo
Joanne M. Lobozzo
Accepted and agreed to
Delta Computec Inc. Delta Data Net, Inc.
/s/ John DeVito /s/ John DeVito
By: John DeVito By: John DeVito
President and Chief President and Chief
Operating Officer Operating Officer
<PAGE>
Exhibit B
JOSEPH M. LOBOZZO
690 PORTLAND AVENUE
ROCHESTER, NY 14621
Ref: Letter of Intent
To Provide Collateral and Place Performance and Payment Bonds
I, Joseph M. Lobozzo II, agree to provide collateral, in a form acceptable
to The Mountbatten Surety Company Inc. (hereinafter Called "surety") in support
at bonding capacity that has been requested. Such collateral shall be in the
amount of twenty-five percent (25%) of the awarded contract amount, and shall be
provided to the Surety prior to the issuance of performance and payment bonds
for the project. Acceptable forms of collateral are an Irrevocable Standby
Letter of Credit on the Mountbatten format, a cashier's check or other forms as
determined by surety.
In addition I represent and affirm that the performance and payment bonds
for this project shall be obtained exclusively from The Mountbatten Surety
Company, Inc. in consideration for providing the bid bond.
I acknowledge that the surety has the right to evaluate bid results and
other relevant factors, such as my financial condition, prior to issuance of
performance and payment bonds and may revise its terms depending on such
factors.
Very truly yours,
/s/ Joseph M. Lobozzo II
Joseph M. Lobozzo II Date: September 11, 1997
Witness:
BY /s/ Michael J. Jish Date: September 11, 1997
<PAGE>
Exhibit 11
DELTA COMPUTEC INC. - CALCULATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary:
Continuing Operations $ 133,220 $ 128,084 $ 470,097 $ 136,985
Discontinued Operations (22,990) (694,930) (22,990) (1,698,229)
------------- ------------ ---------- -------------
Combined $ 110,230 $ (566,846) $ 447,107 $ (1,561,244)
============= ============ ========== =============
Average Common Shares Outstanding 18,252,050 6,811,575 15,445,896 6,811,575
Dilutive Effect of Stock Options
- - - -
------------- ------------ ---------- -------------
Weighted Average Common Shares Outstanding 18,252,050 6,811,575 15,445,896 6,811,575
------------- ------------ ---------- -------------
Earnings (Loss) Per Common and Common
Equivalent Shares:
Continuing Operations $ .01 $ .02 $ .03 $ .02
Discontinued Operations - (.10) - (.25)
------ ------- ------ --------
Combined $ .01 $ (.08) $ .03 $ (.23)
====== ======= ======= =========
</TABLE>
Page 21 of 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,784,692
<ALLOWANCES> 242,512
<INVENTORY> 1,048,127
<CURRENT-ASSETS> 2,792,549
<PP&E> 560,756
<DEPRECIATION> 348,429
<TOTAL-ASSETS> 6,130,501
<CURRENT-LIABILITIES> 7,086,795
<BONDS> 0
0
0
<COMMON> 182,521
<OTHER-SE> (2,488,816)
<TOTAL-LIABILITY-AND-EQUITY> 6,130,501
<SALES> 3,573,566
<TOTAL-REVENUES> 10,195,498
<CGS> 7,123,305
<TOTAL-COSTS> 9,455,723
<OTHER-EXPENSES> 269,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 470,097
<INCOME-TAX> 0
<INCOME-CONTINUING> 470,097
<DISCONTINUED> (22,990)
<EXTRAORDINARY> 0
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