SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-14733
DELTA COMPUTEC INC.
(Exact name of registrant as specified in its charter)
New York 16-1146345
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
366 White Spruce Blvd, Rochester, NY 14623
(Address of Principal Executive Offices) (Zip Code)
201-440-8585
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ ] No [x]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 11, 1998, there were 18,252,050 common shares outstanding of the
Registrant's Common Shares $.01 par value.
Index to Exhibits is located on page 18.
1
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DELTA COMPUTEC INC.
Form 10-Q
Quarter Ended January 31, 1998
INDEX
Part I: Financial Information Page
Item 1. Financial Statements
Consolidated balance sheets at January 31, 1998 and
October 31, 1997 3-4
Consolidated statements of operations for the three
months ended January 31, 1998 and 1997 5
Consolidated statements of cash flows for the three months
ended January 31, 1998 and 1997 6
Notes to consolidated financial statements 7-11
Item 1. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12-14
Part II: Other Information
Item 2. Changes in Securities and Use of Proceeds. 15
Item 3. Defaults Upon Senior Securities. 15
Item 6. Exhibits and Report on Form 8-K. 16
Signatures 17
Index to Exhibits 18
Exhibits 19-28
Calculation of Earnings Per Share 29
2
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DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
------
(Unaudited) (Audited)
January 31, October 31,
1998 1997
----------- -----------
Current Assets:
Cash $ (78,079) $ 18,944
Accounts receivable, less allowance for
doubtful accounts of $124,199 and $86,280
at January 31, 1998 and October 31, 1997,
respectively 1,783,167 1,673,643
Inventories 785,352 869,049
Prepaid expenses and other current assets 380,449 132,327
------- -------
Total current assets 2,870,889 2,693,963
Field spare parts, net of accumulated amortization
of $944,081 and $769,322 at January 31, 1998
and October 31, 1997, respectively 2,690,579 2,756,169
Property And Equipment, At Cost:
Vehicles 74,614 74,614
Office furniture and equipment 229,564 229,564
Technical equipment 131,893 131,893
Software 57,300 56,405
Leasehold improvements 71,092 71,092
------ ------
564,463 563,568
Less: Accumulated depreciation 388,613 369,784
------- -------
175,850 193,784
Deferred Income Taxes 150,000 150,000
Other Assets:
Goodwill, less accumulated amortization of
$345,893 and $333,966 at January 31, 1998
and October 31, 1997, respectively 131,200 143,128
Other assets 80,914 89,185
------ ------
212,114 232,313
$6,099,432 $6,026,229
========== ==========
See notes to consolidated financial statements.
3
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DELTA COMPUTEC INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(Unaudited) (Audited)
January 31, October 31,
1998 1997
----------- ------------
Current Liabilities:
Accounts payable $ 1,233,921 $ 1,805,342
Deferred service revenue 1,218,091 1,413,135
Accrued expenses:
Payroll and payroll taxes 327,936 282,764
Interest 87,281 64,658
Sales tax payable 223,023 210,197
Other 149,387 214,281
------- -------
Total current liabilities 3,239,639 3,990,377
Long-Term Debt 750,000 750,000
Due to Shareholder 3,425,000 2,865,000
Subordinated Debentures 600,001 600,001
Shareholders' Deficit:
Preferred shares, $ .01 par value; shares authorized
5,000,000 shares; issued and outstanding: none at
January 31, 1998 and October 31, 1997 - -
Common shares, $ .01 par value; shares authorized
20,000,000 shares; issued and outstanding:
18,252,050 at January 31, 1998 and October 31,
1997, respectively 182,521 182,521
Additional paid-in capital 4,801,698 4,801,698
Accumulated deficit (6,899,427) (7,163,368)
---------- ----------
Total shareholders' deficit (1,915,208) (2,179,149)
Total liabilities and shareholders' deficit $ 6,099,432 $ 6,026,229
========== ==========
See notes to consolidated financial statements.
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DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
----------------------------------------------------
1998 1997
---- ----
Revenues:
Service revenues $ 2,925,574 $ 3,187,790
Equipment sales 322,702 508,846
------- -------
Total revenues 3,248,276 3,696,636
Costs And Operating Expenses:
Service costs 2,114,445 2,083,047
Cost of equipment sold 250,819 384,738
Selling, general and administrative 624,372 880,860
------- -------
Total costs and operating expenses 2,989,636 3,348,645
Other Income (Expense), Net:
Interest expense (145,530) (72,635)
Other, net 177,902 (15,360)
------- -------
Total other income(expense) 32,372 (87,995)
Earnings(Loss) From Continuing Operations Before
Income Taxes 291,012 259,996
Income Taxes - -
------- -------
Earnings From Continuing Operations 291,012 259,996
Loss From Discontinued Operations:
Loss on disposal (27,071) -
Income taxes - -
------- -------
Net loss from discontinued operations (27,071) -
------- -------
Net Earnings $ 263,941 $ 259,996
=========== ===========
Basic Earnings Per Common Share (See note below):
Continuing Operations $ .02 $ .04
Discontinued Operations (.01) -
---- ---
Net Earnings $ .01 $ .04
==== ===
Note:
- -----
The number of weighted average common shares outstanding during the
quarters ended January 31, 1998 and January 31, 1997 were 18,252,050 and
6,811,575, respectively. In February, 1997, the Company issued an aggregate
11,440,475 common shares as a result of the exercise of certain options. (See
Note 2 to the Financial Statements).
See notes to consolidated financial statements.
5
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DELTA COMPUTEC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND 1997
----------------------------------------------------
1998 1997
---- ----
Cash Flows From Operating Activities:
Net earnings $ 263,941 $ 259,996
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Expenses charged to accrual for discontinued
operations - (77,375)
Depreciation & amortization 205,516 183,515
Accounts receivable (109,524) 768,571
Inventories 83,697 (44,498)
Accounts payable & accrued expenses (568,518) (598,985)
Deferred service revenue (195,044) (342,578)
Other - net (235,296) 190,291
-------- -------
Net cash (used) provided by operating activities (555,228) 338,937
-------- -------
Cash Flows From Investing Activities:
Additions to property and equipment (895) (29,444)
Additions to field spare parts (109,169) (252,756)
Reductions in (additions to) intangible assets 8,269 (43,970)
----- -------
Net cash (used) by investing activities (101,795) (326,170)
-------- --------
Cash Flows From Financing Activities:
(Payment on) subordinated debenture - (75,000)
Proceeds from (payments on) shareholder loans, net 560,000 (75,000)
------- -------
Net cash provided/(used) by financing activities 560,000 (150,000)
------- --------
Net (Decrease) In Cash (97,023) (137,233)
Cash - beginning of period 18,944 50,891
------ ------
Cash - end of period (78,079) (86,342)
======= =======
See notes to consolidated financial statements.
6
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DELTA COMPUTEC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED JANUARY 31, 1998 AND 1997
-----------------------------------------------
(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. 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. Management has refocused the Company's
efforts on its core business of providing Integrated Technology Solutions
for computer systems, network environments and telecommunication systems.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Delta Data Net, Inc. ("Data Net"), (See
Note 2), and SAI/Delta. All significant intercompany accounts and
transactions have been eliminated in consolidation. The unaudited interim
financial statements included herein reflect all normal and recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods.
As reported by the Company in the 1997 Form 10-K Report, the Company's Data
Net subsidiary terminated its business operations and ceased operations in
Fiscal 1996 due to economic conditions in its industry. As also reported in
the 1997 Form 10-K Report, in the fourth quarter of Fiscal 1996, the
Company decided to close its Intronet Division. Accordingly, the operating
results for continuing operations for the three months ended January 31,
1998 and 1997 are for the Company's core business and do not include the
losses on disposal for either the Company's Data Net subsidiary or its
Intronet Division during those respective periods. The $77,375 loss on
disposal incurred in discontinued operations for the three months ended
January 31, 1997 was charged to the accrual for losses on discontinued
operations established at October 31, 1996. For the three months ended
January 31, 1998, the Company incurred $27,071 in expenses related to
discontinued operations that exceeded the amount of the aforementioned
accrual. These expenses were charged to Fiscal 1998's results and are shown
under Losses From Discontinued 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.
7
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Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The audited
financial statements for Fiscal 1997, as set forth in this Form 10-Q
Report, reflect a decrease in the shareholders' deficit, from $2,753,412 as
of October 31, 1996 to $2,179,149 as of October 31, 1997, as a result of
the consolidated earnings reported for the year ended October 31, 1997
("Fiscal 1997"). The unaudited financial statements for the first quarter
of Fiscal 1998 show continued improvement in the Company's financial
position. These improved figures are not a guarantee that the improved
financial position will continue into the future.
Reclassifications
-----------------
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated using the
straight-line method based on estimated useful lives which are as follows:
Estimated
Description Useful Life
----------- -----------
Vehicles 2 - 3 years
Office furniture and equipment 5 - 7 years
Technical equipment 5 - 7 years
Software 3 - 5 years
Leasehold improvements 5 - 10 years
Maintenance and repairs are charged to expense as incurred. The cost of
renewals or improvements that increase the useful lives of the assets is
capitalized in the appropriate asset account. The gain or loss on property
retired or otherwise disposed of is credited or charged to operations and
the cost and accumulated depreciation are removed from the accounts.
Inventories
-----------
Inventories represent computer equipment and peripherals held for resale in
the normal course of business and consumable field spare parts. These
inventories are recorded at the lower of cost (first-in, first-out) or
market.
Field Spare Parts
-----------------
Field spare parts are stated at cost and are amortized using the
straight-line method over an estimated useful life of 5 years, beginning in
the year after acquisition.
Goodwill
--------
Goodwill, representing the excess of the cost of acquired businesses over
the fair value of net assets acquired, is generally amortized on a
straight-line basis over ten years. On an ongoing basis, the Company
assesses impairment of such assets by reviewing the operating performance
of the underlying business or customer relationships.
8
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Deferred Service Revenue
------------------------
Service revenue is recognized ratably over the contract period. Deferred
service revenue represents the portion of billings to customers for which
service will be provided in future periods.
Revenue Recognition
-------------------
Service revenues: Contract service revenue is recognized ratably over the
contractual period or as services are provided. Revenue from services
rendered on a "time and materials" basis and from projects 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
the dilutive effect of outstanding stock options and warrants using the
Treasury Stock Method. Weighted average shares outstanding for the three
months ended January 31, 1998 and 1997 totalled 18,252,050 and 6,811,575,
respectively.
New Accounting Standards Pronouncements
---------------------------------------
1. Earnings Per Share
------------------
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". The
new standard requires dual presentation of basic and diluted earnings per
share (EPS) on the face of the statement of operations and requires a
reconciliation of the numerators and denominators of basic and diluted EPS
calculations. The statement will be effective for periods ending after
December 15, 1997. Early adoption of the statement is not permitted. In the
opinion of management, the adoption of this standard will not have a
material impact on the Company's disclosures.
2. 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.
The Company's ten largest customers accounted for approximately 69% and 64%
of its total revenues in the three months ended January 31, 1998 and 1997,
respectively. Based upon management's evaluation of the Company's customer
base, the Company does not require collateral or other security to support
customers' receivables.
9
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(2) Registrant's Debt Position
--------------------------
Long-term debt and Debt Due to Shareholder consist of the following at
January 31, 1998 and October 31, 1997, respectively:
(Unaudited) (Audited)
January 31, October 31,
1998 1997
---- ----
Due to shareholder $ 3,425,000 $ 2,865,000
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
------- -------
4,175,000 3,615,000
========= =========
On October 10, 1996, the Company restructured the note payable to its bank.
The bank, National Canada Finance Corp. ("NCFC") was also its then primary
lending institution. A portion of the note payable to NCFC plus related
fees and expenses, aggregating $1,544,661, was assumed by the Company's
principal stockholder, Joseph M. Lobozzo II ("Lobozzo"), and the balance of
the loan, in the amount of $750,000, was restructured as a Term Loan. The
Company has an Amended and Restated Credit Agreement with Lobozzo (the
"Lobozzo Credit Agreement", as amended and as restated, and, as of October
31, 1997, the First Restated Credit Agreement ("FRCA"), which provides for
the "Lobozzo Loan"), which provides that: (1) the maximum loan amount was
increased from $2,550,000 to $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 and its Board of
Directors; (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; (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 NCFC Term Loan; (6) for any loans made 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 was due on June 30, 1998. In January, 1998, the lending
agreement with its commercial lenders was further amended ("Amendment No. 1
to the FRCA") to extend the terms of the lending agreement from June 30,
1998 to November 1, 1998. Simultaneously with the execution of Amendment
No. 1 to the FRCA, in January, 1998, the Lender executed a Waiver and
Consent (the "January 1998 Waiver"), a copy of which was annexed as an
Exhibit to the 1997 Form 10-K Report, whereby the Lender waived any
non-compliance, through and including the date of the January 1998 Waiver,
by the Company with certain provisions of the FRCA, including Section 2.1
relating to maximum loan amounts, borrowing amounts not supported by
Eligible Receivables or borrowing amounts permitted only if Operating
Budget Targets are met, without the Company's meeting those targets. Copies
of both Amendment No. 1 to the FRCA and the January 1998 Waiver were
annexed as Exhibits to the 1997 Form 10-K Report. In March, 1998, the FRCA
was further amended ("Amendment No. 2 to the FRCA") to extend its term from
November 1, 1998 to February 1, 1999. Simultaneously with the execution of
Amendment No. 2 to the FRCA, in March, 1998, the Lender executed a further
Waiver and Consent (the "March 1998 Waiver"), whereby the Lender waived
any non-compliance, through and including the date of the March 1998
Waiver, by the Company with certain provisions of the FRCA, including
Section 2.1 relating to maximum loan amounts, borrowing amounts not
supported by Eligible Receivables or borrowing amounts permitted only if
Operating Budget Targets are met, without the Company's meeting those
targets. Copies of Amendment No. 2 to FRCA and the March 1998 Waiver are
annexed as Exhibits A and B, respectively, to this Form 10-Q Quarterly
Report.
As of January 31, 1998 and October 31, 1997, there were principal balances
of $3,425,000 and $2,865,000, respectively, outstanding under the Lobozzo
Loan.
The agreement underlying the Term Loan requires the Company to maintain a
ratio of field spare parts inventory to outstanding indebtedness of at
least 2.5 to 1. The Company has been in compliance with this ratio
10
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requirement for all periods since inception of the Term Loan restructuring.
Lobozzo has pledged 480,000 of his shares of the Company's common shares 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. As described in Item 2, in February, 1997, Lobozzo
transferred half of this debt obligation to, Joanne Lobozzo, his wife.
Subordinated Debentures
-----------------------
In November, 1992 the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31, 1997
to the sellers ("the Sellers") of the assets acquired by Data Net on
November 1, 1992. As of October 31, 1996, the Sellers agreed to sell the
entire principal balance of the 8% subordinated debenture, together with
accrued interest of $55,384, to the Company for $75,000. This transaction,
which resulted in a $455,384 gain on purchase of debt, was reflected in the
Fiscal 1996 operating results as an extraordinary gain, and the payment of
the $75,000 to purchase the debenture was made in the first quarter of
Fiscal 1997.
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 at an exercise price of $.46 per
common share. The Restated Lobozzo Debenture and the Restated 1992 Lobozzo
Option Agreement were further restated in February, 1997 when Lobozzo
transferred to Joanne Lobozzo half of the Restated Lobozzo Debenture and
half of the Restated 1992 Lobozzo Option Agreement, and those documents
have been reissued as the "Second Amended and Restated Lobozzo Debentures"
and the "Second Amended and Restated Lobozzo Option Agreements". No
payments of principal have been made on the Second Amended and Restated
Lobozzo Debentures, as further amended, and the Second Amended and Restated
Lobozzo Option Agreements, as further amended, remain unexercised as of the
date of filing this Form 10-Q Report. The Second Amended and Restated
Lobozzo Debentures provided, with respect to each of the two debentures,
that $300,000.50 (an aggregate of $600,001) would be paid in full on
January 31, 1998. In January, 1998, the two Second Amended and Restated
Lobozzo Debentures were further amended ("Amendment No. 1 to Second Amended
and Restated Debentures") to provide that $300,000.50 (an aggregate of
$600,001) would be paid in full on January 31, 1999. Copies of Amendment
No. 1 to the Second Amended and Restated Lobozzo Debentures were annexed as
Exhibits to the 1997 Form 10-K Report. In March, 1998, the two Second
Amended and Restated Lobozzo Debentures were further amended ("Amendment
No. 2 to Second Amended and Restated Debentures"), which are filed as
Exhibits C and D to this Form 10-Q Report, to provide that $300,000.50 (an
aggregate of $600,001) would be paid in full on April 30, 1999. In January,
1998, the two Second Amended and Restated Lobozzo Option Agreements were
further amended ("Amendment No. 1 to Second Amended and Restated Option
Agreements") to provide that the exercise date of the options would be
extended from January 31, 1998 to January 31, 1999. Copies of Amendment No.
1 to the Second Amended and Restated Option Agreements were annexed as
Exhibits to the 1997 Form 10-K Report. In March, 1998, the two Second
Amended and Restated Lobozzo Option Agreements were further amended
("Amendment No. 2 to Second Amended and Restated Option Agreements"), which
are filed as Exhibits E and F to this Form 10-Q Report, to provide that the
exercise date of the options would be extended from January 31, 1999 to
April 30, 1999.
(3) Other Matters
-------------
As a result of the substantial losses incurred in the discontinued
operations in the Data Net Subsidiary and the Intronet Division, the
Company had suffered significant consolidated losses in the fiscal years
ended October 31, 1995 and 1996. As noted elsewhere in this Form 10-Q
Report, the Data Net subsidiary 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. These actions
of the Company were taken to effect management's plan to refocus the
Company's efforts on its core business of providing integrated technology
solutions for computer systems, network environments and telecommunication
systems. The audited financial statements for Fiscal 1997, as set forth in
this Form 10-Q Report, reflect a decrease in the shareholders' deficit,
from $2,753,412 as of October 31, 1996 to $2,179,149 as of October 31,
1997, as a result of the consolidated earnings reported for Fiscal 1997.
The unaudited financial statements for the first quarter of Fiscal 1998
show continued improvement in the Company's financial position. These
improved figures are not a guarantee that the improved financial position
will continue into the future.
11
<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 January 31, 1998 was $291,012 (9.0%), or $.02 per share, calculated
on 18,252,050 weighted average common shares outstanding, compared to net
income from continuing operations of $259,996 (7.0%), or $.04 per share,
calculated on 6,811,575 weighted average common shares outstanding, for the
three months ended January 31, 1997, an increase of $31,015 or 11.9%.
During the three months ended January 31, 1998, the Company incurred
$27,071 in losses on disposal of discontinued operations, which is included
in the income statement.
The Company's consolidated net income for the three months ended January
31, 1998 was $263,941 (8.1%), or $.01 per share, calculated on 18,252,050
weighted average common shares outstanding, compared to consolidated net
income from continuing operations of $259,996 (7.0%), or $.04 per share,
calculated on 6,811,575 weighted average common shares outstanding, for the
three months ended January 31, 1997, a decrease of $3,945 or 1.5%.
Revenues
--------
TOTAL REVENUES from continuing operations were $3,248,276 for the three
months ended January 31, 1998, compared to $3,696,536 for the three months
ended January 31, 1997, a decrease of $448,360 and 12.1%.
SERVICE REVENUES for the three months ended January 31, 1998 were
$2,925,574, compared to $3,187,790 for the three months ended January 31,
1997, a decrease of $262,216 and 8.2%. The decrease in service revenues
reflects the effect of service revenue realized in the first quarter of
Fiscal 1997 from a project performed for a municipality, which project had
been signed just prior to the beginning of Fiscal 1997 and completed by the
end of the second quarter of Fiscal 1997. The Company's 1997 Form 10-K
Report contained a statement with regard to the municipality referred to
above, to the effect that the municipality intended to award an additional
project to the Company in the near future. The Company has since learned
that it will not be awarded the additional project. Management was able to
offset approximately 66% of the absence of service revenue related to the
municipal project performed in the first quarter of Fiscal 1997 by
responding to project-based work at certain other major customers' sites in
order to meet an increase in demand for services at these locations, which
resulted in a net gain in revenue from this latter customer group.
EQUIPMENT SALES for the three months ended January 31, 1998 were $322,702,
compared to $508,846 for the three months ended January 31, 1997, a
decrease of $186,144 and 36.6%. The decline in equipment sales reflects
management's emphasis on its core service maintenance and installation
business.
Costs and Expenses
------------------
SERVICE COSTS in continuing operations were $2,114,445 (72.3% of service
revenues) for the three months ended January 31, 1998, compared to
$2,083,047 (65.3%) for the three months ended January 31, 1997. Service
costs as a percentage of service revenue for the three months ended January
31, 1998 increased 7.0 percentage points versus the three months ended
January 31, 1997 due to the 8.2% drop in service revenues without a
commensurate reduction in direct expenses.
COST OF EQUIPMENT SOLD in continuing operations was $250,819 (77.7% of
equipment sales) for the three months ended January 31, 1998, compared to
$384,738 (75.6%) for the three months ended January 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES in continuing operations were
$624,372 (19.2%) for the three months ended January 31, 1998, compared to
$880,860 (23.8%) for the three months ended January 31, 1997, a decrease of
$256,487 or 29.1%. The savings in SG&A costs were primarily due to salary
and associated costs as well as reduced professional fees.
12
<PAGE>
Total operating expenses in continuing operations were $2,989,636 (92.0%)
for the three months ended January 31, 1998, compared to $3,348,645 (90.6%)
for the three months ended January 31, 1997, a decrease of $359,009 or
10.7%. The increase in the ratio of total operating expenses to total
revenues resulted from the fact that the percentage decrease in those costs
did not completely offset the 12.1% drop in total revenues.
Non-operating income was $32,372 (1.0%) for the three months ended January
31, 1998, compared with expenses of $87,995 (2.4%) for the three months
ended January 31, 1997, an improvement of $120,367. This increase was
primarily due to approximately $199,000 income realized on settlement of
trade debt obligations, less $73,000 increased interest costs from higher
borrowings as well as financing costs associated with the NCFC Term Loan.
The Company's debt service costs are virtually wholly-related to its
discontinued operations.
Income from continuing operations was $291,012 (9.0%) for the three months
ended January 31, 1998, compared to $259,996 (7.0%) for the three months
ended January 31, 1997, an increase of $31,015 and 11.9%.
No tax provision was recorded for the three months ended January 31, 1998
and January 31, 1997. The Company recorded a deferred tax asset of
approximately $2,225,000 at October 31, 1997, reflecting the benefit of
$6,544,000 in loss carryforwards, which expire in varying amounts between
2001 and 2011. Realization of this and other deferred assets is dependent
upon generating sufficient taxable income in future periods. Management
believes that sufficient future income will exist to allow utilization of
$150,000 of the deferred tax asset.
Liquidity and Capital Resources
-------------------------------
As discussed in Note 2 to the Financial Statements, in March, 1998, the
FRCA was further amended to extend its term from November 1, 1998 to
February 1, 1999. Simultaneously with the execution of Amendment No. 2 to
the FRCA, in March, 1998, the Lender executed the March 1998 Waiver,
whereby the Lender waived any non-compliance, through and including the
date of the March 1998 Waiver, by the Company with certain provisions of
the FRCA, including Section 2.1 relating to maximum loan amounts, borrowing
amounts not supported by Eligible Receivables or borrowing amounts
permitted only if Operating Budget Targets are met, without the Company's
meeting those targets. Copies of Amendment No. 2 to FRCA and the March 1998
Waiver are annexed as Exhibits A and B, respectively, to this Form 10-Q
Report. In March, 1998, the two Second Amended and Restated Lobozzo
Debentures were further amended, which are filed as Exhibits C and D to
this Form 10-Q Report, to provide that $300,000.50 (an aggregate of
$600,001) would be paid in full on April 30, 1999. The Company believes
that its financing agreements are sufficient for its present operations.
However, management periodically reviews the Company's financial
performance and operational goals with its Lenders.
Cash (used by) operations for the three months ended January 31, 1998 was
($555,228), compared to $338,937 in cash provided by operations for the
three months ended January 31, 1997, a decrease of $894,165 in sources of
cash. This resulted primarily from an aggregate $1,303,682 comparative
increase in funds required for investment in accounts receivable and
prepaid charges, less the benefit to cash from funds provided by a
reduction in deferred service revenue plus increases in comparative trade
and sales tax liabilities for the two quarterly periods.
The Company had working capital deficits of ($368,750) and ($1,296,414) at
January 31, 1998 and October 31, 1997, respectively. The working capital
deficit at January 31, 1998 decreased $927,664 from October 31, 1997
primarily as a result of a $109,524 increase in net accounts receivable, a
$571,421 decline in accounts payable, a major portion of which was funded
through long-term debt, and a $248,122 increase in deferred charges. The
Company's working capital deficits were ($1,907,576) and ($1,974,918) at
January 31, 1997 and October 31, 1996, respectively, representing a
decrease of $67,342 in the working capital deficit during the first quarter
of Fiscal 1997.
13
<PAGE>
Cash (used) in investing activities for the three months ended January 31,
1998 was ($101,795), compared with ($326,170) for the three months ended
January 31, 1997, a decrease of $224,375 in uses of cash. Capital
expenditures for spare parts and property, plant and equipment were
$110,064 for the three months ended January 31, 1998, compared to $282,200
for the three months ended January 31, 1997, a decrease of $172,136 in uses
of cash. In addition, reductions in Long-Term Assets provided $8,269 in
funds during the three months ended January 31, 1998, a benefit of $52,239
compared to $43,970 in increases in Long-Term Assets in the prior year's
quarter ended January 31, 1997.
Cash provided by financing activities for the three months ended January
31, 1998 was $560,000, compared with ($150,000) cash used during the three
months ended January 31, 1997, an increase of $710,000 in sources of cash.
During the first quarter of Fiscal 1998, the Company took down a net
$560,000 in loans from the Lender, of which approximately $373,000 was
used to pay off trade debt related to discontinued operations, on which an
approximate $199,000 gain was realized. Cash used in financing activities
during the first quarter of Fiscal 1997 reflected the $75,000 payment on
the repurchase of certain subordinated debt and net payments on loans from
the Lender.
The net result of the above was a ($97,023) use of cash for the three
months ended January 31, 1998, compared to a ($137,233) use of cash for the
three months ended January 31, 1997.
14
<PAGE>
PART II
OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
As reported elsewhere in this Form 10-Q Report, in January, 1998, the
FRCA was amended to extend the term thereof from June 30, 1998 to November
1, 1998. In March, 1998, the FRCA was further amended to extend the terms
thereof from November 1, 1998 to February 1, 1999. (See Exhibit A hereto).
In January, 1998, the Second Restated Lobozzo Debentures were amended to
extend the term thereof to January 31, 1999. In March, 1998, the Second
Restated Lobozzo Debentures were further amended to extend the term thereof
from January 31, 1999 to April 30, 1999. (See Exhibits C and D hereto). In
January 1998, the Second Restated Lobozzo Option Agreements were amended to
extend the Expiration Date thereof to January 31, 1999. In March, 1998, the
Second Restated Lobozzo Option Agreements were further amended to extend
the Expiration Dates thereof from January 31, 1999 to April 30, 1999(See
Exhibits E and F hereto).
Item 3. Defaults Upon Senior Securities
-------------------------------
The FRCA, as amended, provides that the maximum amount of the Lobozzo
Loan will be $3,650,000 for the period from October 1, 1997 through
December 31, 1997, and $3,350,000 for the period from January 1, 1998
through, June 30, 1998. From time to time, there may have been instances
where the Borrower (defined as the Company and Data Net) may not have been
in compliance with the provisions of the FRCA including, without
limitation: (a) the borrowing by the Borrower of amounts which exceeded the
maximum loan amounts set forth in Section 2.1 of the FRCA; (b) the
borrowing by the Borrower of amounts which were not supported by adequate
Eligible Receivables, as such term is defined in the FRCA; and (c) the
borrowing by the Borrower of amounts which were only permissible in the
event that the Borrower met its Operating Budget Targets, as such term is
defined in the FRCA, for certain time periods, and the failure of the
Borrower to meet those Operating Budget Targets. In January, 1998, and
again in March, 1998, (See Exhibit B hereto), the Lender waived any such
non-compliance through the date of each Waiver and Consent.
15
<PAGE>
Item 6. Exhibits and Report on Form 8-K.
--------------------------------
(a) EXHIBITS
--------
EXHIBIT A - Amendment No. 2 to First Restated Credit Agreement and
Other Agreements dated March 12, 1998.
EXHIBIT B - Waiver and Consent to First Restated Credit Agreement
and Other Agreements dated March 12, 1998.
EXHIBIT C - Amendment No. 2 to Delta Data Net, Inc., Second Amended
and Restated 8% Subordinated Debenture due January 31,
1999 (Joseph M. Lobozzo II).
EXHIBIT D - Amendment No. 2 to Delta Data Net, Inc., Second Amended
and Restated 8% Subordinated Debenture due January 31, 1999
(Joanne M. Lobozzo).
EXHIBIT E - Amendment No. 2 to Delta Computec Inc. Second Amended
and Restated October 1992 Option Agreement (Joseph M.
Lobozzo II).
EXHIBIT F - Amendment No. 2 to Delta Computec Inc. Second Amended
and Restated October 1992 Option Agreement (Joanne M.
Lobozzo).
EXHIBIT 11 - Statement regarding calculation of earnings per share.
(b) REPORTS ON FORM 8-K filed during the quarter for which this Form
10-Q Report is filed: None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Dated: March 12, 1998 DELTA COMPUTEC INC.
By: /s/ John DeVito
------------------------------
John DeVito, President and
Chief Operating Officer
By: /s/ Frank J. Donnelly
------------------------------
Frank J. Donnelly
Chief Financial Officer and
Principal Accounting Officer
17
<PAGE>
INDEX TO EXHIBITS
-----------------
The following Exhibits are filed as part of this Quarterly Report on Form 10-Q
EXHIBIT A Amendment No. 2 to First Restated Credit Agreement and
Other Agreements dated March 12, 1998.
EXHIBIT B Waiver and Consent to First Related Credit Agreement and
Other Agreements dated March 12, 1998.
EXHIBIT C Amendment No. 2 to Delta Data Net, Inc., Second Amended and
Restated 8% Subordinated Debenture due January 31, 1999
(Joseph M. Lobozzo II).
EXHIBIT D Amendment No. 2 to Delta Data Net, Inc., Second Amended and
Restated 8% Subordinated Debenture due January 31, 1999
(Joanne M. Lobozzo).
EXHIBIT E Amendment No. 2 to Delta Computec Inc., Second Amended and
Restated October 1992 Option Agreement (Joseph M. Lobozzo
II).
EXHIBIT F Amendment No. 2 to Delta Computec Inc., Second Amended and
Restated October 1992, Option Agreement (Joanne M.
Lobozzo).
EXHIBIT 11 Calculation of Earnings Per Share.
18
<PAGE>
EXHIBIT A
---------
AMENDMENT NO. 2
to
FIRST RESTATED CREDIT AGREEMENT AND OTHER AGREEMENTS
----------------------------------------------------
This Amendment No. 2 to First Restated Credit Agreement and Other
Agreements ("Amendment No. 2"), is made and entered into as of the 12th day of
March, 1998 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 ("SAI/Delta").
W I T N E S S E T H:
--------------------
This Amendment No. 2 is intended to amend in certain respects as set forth
herein, the terms and conditions of a certain First Restated Credit Agreement
dated as of October 31, 1997, as amended by a certain Amendment No. 1 thereto
(as amended, the "FRCA") by and among the Borrower, the Lender and SAI/Delta,
whereby Lobozzo and Joanne Lobozzo agreed to provide the Borrower with Loans (as
defined in the FRCA) up to the current maximum principal amount of $3,350,000,
subject to certain limitations set forth in the FRCA.
NOW, THEREFORE, it is agreed as follows:
1. INCORPORATION OF RECITALS. The recitals set forth in the recital
paragraph of this Amendment No. 2 are intended to be, and are, incorporated into
this Amendment No. 2 as a part hereof.
2. AMENDMENT TO THE FRCA. The parties hereto agree that, from and after the
date hereof, the definition of the term Maturity Date as set forth in the FRCA
is deleted and replaced in its entirety by the following:
"Maturity Date" means February 1, 1999.
---------------
3. WAIVER. Lender hereby waives any non-compliance which may have existed
with regard to Section 2.1 of the FRCA for the period between October 31, 1997,
the date of the FRCA, and March 12, 1998, the date of this Amendment No. 2.
4. REAFFIRMATION. Except as amended by this Amendment No. 2, the terms and
conditions of the FRCA are hereby reaffirmed in their entirety.
19
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 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 &
Chief Operating Officer
DELTA DATA NET, INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
SAI/DELTA, INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
CONSENT AND AGREEMENT OF GUARANTOR
----------------------------------
As of the date first above written, the undersigned hereby: (a) fully
consents and agrees to the terms and provisions of the above Amendment No. 2 and
the consummation of the transactions contemplated by Amendment No. 2; (b) agrees
that the First Restated Unlimited Continuing Guaranty dated as of October 31,
1997 (the "Guaranty") which it previously delivered to the Lender as security
for the payment and performance of all of the liabilities, obligations and
indebtedness of the Borrower to the Lender pursuant to the FRCA and the First
Restated Promissory Note dated as of October 31, 1997 from the Borrower to the
Lender (the "FRPN") is hereby ratified and confirmed and shall remain in full
force and effect; (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.
2 and it is in its interest and to its financial benefit to execute this Consent
and Agreement.
SAI/DELTA, INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
20
<PAGE>
EXHIBIT B
---------
WAIVER AND CONSENT
------------------
This Waiver and Consent is made as of the 12th day of March, 1998, by Joseph M.
Lobozzo II and Joanne M. Lobozzo (collectively, the "Lender") to Delta Computec
Inc., and Delta Data Net, Inc. (collectively, the "Borrower") and is consented
to by SAI/Delta, Inc. ("SAI/Delta").
WITNESSETH:
-----------
WHEREAS, Section 2.1 of a certain First Restated Credit Agreement dated as
of October 31, 1997 by and among the Lender, the Borrower and SAI/Delta, as
amended by Amendment No. 1 and Amendment No. 2 thereto (the "FRCA"), sets forth
the maximum principal amount of all loans which the Borrower may borrow from the
Lender thereunder and the Borrower's required borrowing base for all such loans;
and
WHEREAS, under certain circumstances, there may have been instances where
non-compliance with Section 2.1 of the FRCA may have heretofore occurred,
including without limitation: (a) the borrowing by the Borrower of amounts which
exceeded the maximum loan amounts set forth in Section 2.1 of the FRCA; (b) the
borrowing by the Borrower of amounts which were not supported by adequate
Eligible Receivables, as such term is defined in the FRCA, and (c) the borrowing
by the Borrower of amounts which were only permissible in the event that the
Borrower met its Operating Budget Targets; as such term is defined in the FRCA,
for certain time periods, and the failure of the Borrower to meet those
Operating Budget Targets; and
WHEREAS, in addition to non-compliance with Section 2.1 of the FRCA which
may have heretofore occurred, certain violations of Section 2.1 of the FRCA may
also have occurred by virtue of the fact that the Borrower has recently settled
its accounts with 3Com Corporation ("3Com") and Vertex Technologies, Inc.
("Vertex"), and in connection with such settlements, the Borrower has made lump
sum payments to both 3Com and Vertex; and
WHEREAS, the Lender desires to: (a) waive any non-compliance with Section
2.1 of the FRCA, which may have heretofore occurred; (b) waive any
non-compliance with Section 2.1 of the FRCA which may have heretofore occurred
by virtue of the fact the Borrower has recently settled its accounts with 3Com
and Vertex; and (c) waive any non-compliance with the terms, covenants or
conditions of any of the other documents executed in connection with the FRCA
which may have heretofore occurred, by reason of any of the matters set forth in
this Waiver and Consent.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of all of which is hereby acknowledged, the Lender hereby agrees as
follows:
1. WAIVER OF PAST NON-COMPLIANCE. The Lender hereby waives any
non-compliance with Section 2.1 of the FRCA which may have heretofore occurred,
including, without limitation (a) the borrowing by the Borrower of amounts which
exceeded the maximum loan amounts set forth in Section 2.1 of the FRCA, (b) the
borrowing by the Borrower of amounts which were not supported by adequate
Eligible Receivables, as such term is defined in the FRCA, and (c) the Borrowing
by the Borrower of amounts which were only permissible in the event that the
Borrower met its Operating Budget Targets, as such term is defined in the FRCA,
for certain periods, and the failure of the Borrower to meet those Operating
Budget Targets.
2. WAIVER OF POSSIBLE ADDITIONAL NON-COMPLIANCE. The Lender hereby waives
any non-compliance with Section 2.1 of the FRCA which may hereinafter occur by
virtue of the fact that the Borrower recently settled its accounts with 3Com and
Vertex and made payments to 3Com and Vertex in settlement of its accounts.
21
<PAGE>
3. WAIVER OF NON-COMPLIANCE WITH OTHER DOCUMENTS. To the extent that there
may have been non-compliance with any of the terms, covenants and/or other
conditions of any of the other documents executed by the Borrower in connection
with the FRCA by reason of any of the matters set forth in Sections 1 and 2 of
this Waiver and Consent, such non-compliance with such other documents is hereby
waived in their entirety by this Waiver and Consent.
4. NO FUTURE WAIVERS. The waiver of non-compliance with certain possible
past non-compliance with the terms and conditions of the FRCA, and any of the
other documents executed by the Borrower in connection with the FRCA, does not,
under any circumstances, waive any future non-compliance with the FRCA or any of
the other documents executed by the Borrower in connection wit the FRCA.
IN WITNESS WHEREOF, the undersigned have executed this Waiver and
Consent as of the date first above written.
------------------------------
JOSEPH M. LOBOZZO II
------------------------------
JOANNE M. LOBOZZO
CONSENT OF GUARANTOR
--------------------
As of the date first above written, the undersigned Guarantor, SAI/Delta,
Inc. ("Guarantor"), hereby: (a) fully consents to the terms and provisions of
the above Waiver and Consent dated as of March 12, 1998; (b) agrees that the
First Restated Unlimited Continuing Guaranty dated as of October 31, 1997 (the
"Guaranty") which Guarantor previously delivered to the lender as security for
the payment and performance of all of the liabilities, obligations and
indebtedness of the Borrower to the Lender, pursuant to the FRCA and the First
Restated Promissory Note dated as of October 31, 1997, is hereby ratified and
confirmed and shall remain in full force and effect; (c) acknowledges that
Guarantor has no set-off, counterclaim or defense with respect to the Guaranty;
and (d) acknowledges that Guarantor's consent and agreement hereto is a
condition to the Lender's waiver of the violations of the FRCA set forth in the
above Waiver and Consent and it is in Guarantor's interest and the Guarantor's
financial benefit to execute this Waiver and Consent. All capitalized terms as
set forth in this Consent of Guarantor, unless otherwise defined herein, have
the meaning set forth in the Guaranty.
SAI/DELTA, INC.
By: __________________________
John DeVito, President and
Chief Operating Officer
22
<PAGE>
EXHIBIT C
---------
AMENDMENT NO. 2
TO
DELTA DATA NET, INC.
SECOND AMENDED AND RESTATED
8% SUBORDINATED DEBENTURE DUE JANUARY 31, 1999 - No. 1
------------------------------------------------------
This Amendment No. 2 ("Amendment No. 2") to Delta Data Net, Inc. Second
Amended and Restated 8% Subordinated Debenture Due January 31, 1999 - No. 1 is
made and entered into as of the 12th day of March, 1998 by and among DELTA DATA
NET, INC., a New York corporation having its principal place of business located
at 900 Huyler Street, Teterboro, New Jersey 07608 ("DDN") and JOSEPH M. LOBOZZO
II, an individual having an office at 690 Portland Avenue, Rochester, New York
14621 ("Lobozzo"), and is consented and agreed to by DELTA COMPUTEC INC., a New
York corporation having its principal place of business located at 900 Huyler
Street, Teterboro, New Jersey 07608.
W I T N E S S E T H:
--------------------
This Amendment No. 2 is intended to amend in certain respects as set forth
herein, the terms and conditions of that certain Delta Data Net, Inc. Second
Amended and Restated 8% Subordinated Debenture Due January 31, 1999 - No. 1,
dated February 19, 1997, as the same has heretofore been amended by Amendment
No. 1 thereto (as amended, "Debenture No. 1"), whereby DDN promised to pay to
Lobozzo the principal sum of Three Hundred Thousand and 50/100 Dollars
($300,000.50), plus interest thereon, in the manner and upon the terms set forth
in Debenture No. 1.
NOW, THEREFORE, it is agreed as follows:
1. INCORPORATION OF RECITALS. The recitals set forth in the recital
paragraph of this Amendment No. 2 are intended to be, and hereby are,
incorporated into this Amendment No. 2 as a part hereof.
2. AMENDMENT TO DEBENTURE NO. 1. The parties hereto agree that, from and
after the date hereof, the date on which payment in full of Debenture No. 1 is
due is extended from January 31, 1999 to April 30, 1999. Without limiting the
generality of the foregoing in any manner, all references in Debenture No. 1 to
a "repayment" date, "due" date or "stated maturity" date of "January 31, 1999"
are hereby deleted and replaced by "April 30, 1999".
3. REAFFIRMATION. Except as amended by this Amendment No. 2, the terms and
conditions of Debenture No. 1 remain unchanged and are hereby ratified and
reaffirmed in their entirety.
23
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be duly
executed and delivered as of the date first above written.
DELTA DATA NET, INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
-----------------------------------
JOSEPH M. LOBOZZO II
CONSENT AND AGREEMENT OF SUBORDINATED GUARANTOR
-----------------------------------------------
As of the date first above written, the undersigned hereby: (a) fully
consents and agrees to the terms and provisions of the above Amendment No. 2 and
the consummation of the transactions contemplated by Amendment No. 2; (b) agrees
that the Subordinated Guaranty which it delivered in connection with Debenture
No. 1 (the "Guaranty") as security for the payment and performance of all of the
liabilities, obligations and indebtedness of DDN to Lobozzo in connection with
Debenture No. 1 is hereby ratified and confirmed and shall remain in full force
and effect; (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 Lobozzo's obligations under Amendment No. 2
and it is in its interest and to its financial benefit to execute this Consent
and Agreement.
DELTA COMPUTEC INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
24
<PAGE>
EXHIBIT D
---------
AMENDMENT NO. 2
TO
DELTA DATA NET, INC.
SECOND AMENDED AND RESTATED
8% SUBORDINATED DEBENTURE DUE JANUARY 31, 1999 - No. 2
------------------------------------------------------
This Amendment No. 2 ("Amendment No. 2") to Delta Data Net, Inc. Second
Amended and Restated 8% Subordinated Debenture Due January 31, 1999 - No. 2, is
made and entered into as of the 12th day of March, 1998 by and among DELTA DATA
NET, INC., a New York corporation having its principal place of business located
at 900 Huyler Street, Teterboro, New Jersey 07608 ("DDN") and JOANNE M. LOBOZZO,
an individual with a residence address of 756 Rock Beach Road, Rochester, New
York 14617 ("Joanne Lobozzo"), and is consented and agreed to by DELTA COMPUTEC
INC., a New York corporation having its principal place of business located at
900 Huyler Street, Teterboro, New Jersey 07608.
W I T N E S S E T H:
--------------------
This Amendment No. 2 is intended to amend in certain respects as set forth
herein, the terms and conditions of that certain Delta Data Net, Inc. Second
Amended and Restated 8% Subordinated Debenture Due January 31, 1999 - No. 2,
dated February 19, 1997, as the same has heretofore been amended by Amendment
No. 1 thereto (as amended, "Debenture No. 2"), whereby DDN promised to pay to
Joanne Lobozzo the principal sum of Three Hundred Thousand and 50/100 Dollars
($300,000.50), plus interest thereon, in the manner and upon the terms set forth
in Debenture No. 2.
NOW, THEREFORE, it is agreed as follows:
1. INCORPORATION OF RECITALS. The recitals set forth in the recital
paragraph of this Amendment No. 2 are intended to be, and hereby are,
incorporated into this Amendment No. 2 as a part hereof.
2. AMENDMENT TO DEBENTURE NO. 2. The parties hereto agree that, from and
after the date hereof, the date on which payment in full of Debenture No. 2 is
due is extended from January 31, 1999 to April 30, 1999. Without limiting the
generality of the foregoing in any manner, all references in Debenture No. 2 to
a "repayment" date, "due" date or "stated maturity" date of "January 31, 1999"
are hereby deleted and replaced by "April 30, 1999".
3. REAFFIRMATION. Except as amended by this Amendment No. 2, the terms and
conditions of Debenture No. 2 remain unchanged and are hereby ratified and
reaffirmed in their entirety.
25
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be duly
executed and delivered as of the date first above written.
DELTA DATA NET, INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
-----------------------------------
JOANNE M. LOBOZZO
CONSENT AND AGREEMENT OF SUBORDINATED GUARANTOR
-----------------------------------------------
As of the date first above written, the undersigned hereby: (a) fully
consents and agrees to the terms and provisions of the above Amendment No. 2 and
the consummation of the transactions contemplated by Amendment No. 2; (b) agrees
that the Subordinated Guaranty which it delivered in connection with Debenture
No. 2 (the "Guaranty") as security for the payment and performance of all of the
liabilities, obligations and indebtedness of DDN to Joanne Lobozzo in connection
with Debenture No. 2 is hereby ratified and confirmed and shall remain in full
force and effect; (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 Joanne Lobozzo's obligations under Amendment
No. 2 and it is in its interest and to its financial benefit to execute this
Consent and Agreement.
DELTA COMPUTEC INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
26
<PAGE>
EXHIBIT E
---------
AMENDMENT NO. 2
TO
DELTA COMPUTEC INC.
SECOND AMENDED AND RESTATED
OCTOBER 1992 OPTION AGREEMENT
JOSEPH M. LOBOZZO II - 652,175 COMMON SHARES
--------------------------------------------
This Amendment No. 2 ("Amendment No. 2") to Delta Computec Inc. Second
Amended and Restated October 1992 Option Agreement, Joseph M. Lobozzo II -
652,175 Common Shares is made and entered into as of the 12th day of March, 1998
by and among DELTA COMPUTEC INC., a New York corporation having its principal
place of business located at 900 Huyler Street, Teterboro, New Jersey 07608
("DCI") and JOSEPH M. LOBOZZO II, an individual having an office at 690 Portland
Avenue, Rochester, New York 14621 ("Lobozzo").
W I T N E S S E T H:
--------------------
This Amendment No. 2 is intended to amend in certain respects as set forth
herein, the terms and conditions of the Delta Computec Inc. Second Amended and
Restated October 1992 Option Agreement, Joseph M. Lobozzo II - 652,175 Common
Shares dated February 19, 1997, as the same has heretofore been amended by
Amendment No. 1 thereto (as amended, the "Option Agreement"), whereby DCI
granted to Lobozzo an option to purchase 652,175 common shares of DCI pursuant
to the terms and conditions set forth in the Option Agreement.
NOW, THEREFORE, it is agreed as follows:
1. INCORPORATION OF RECITALS. The recitals set forth in the recital
paragraph of this Amendment No. 2 are intended to be, and hereby are,
incorporated into this Amendment No. 2 as a part hereof.
2. AMENDMENT TO THE OPTION AGREEMENT. The parties hereto agree that, from
and after the date hereof, the "Exercise Date" of the Option, as such term is
defined in the Option Agreement, is extended from 3:00 p.m. on January 31, 1999
to 3:00 p.m. on April 30, 1999.
3. REAFFIRMATION. Except as amended by this Amendment No. 2, the terms and
conditions of the Option Agreement remain unchanged and are hereby ratified and
reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be duly
executed and delivered as of the date first above written.
DELTA COMPUTEC INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
-----------------------------------
JOSEPH M. LOBOZZO II
27
<PAGE>
EXHIBIT F
---------
AMENDMENT NO. 2
TO
DELTA COMPUTEC INC.
SECOND AMENDED AND RESTATED
OCTOBER 1992 OPTION AGREEMENT
JOANNE M. LOBOZZO - 652,175 COMMON SHARES
-----------------------------------------
This Amendment No. 2 ("Amendment No. 2") to Delta Computec Inc. Second
Amended and Restated October 1992 Option Agreement, Joanne M. Lobozzo - 652,175
Common Shares, is made and entered into as of the 12th day of March, 1998 by and
among DELTA COMPUTEC INC., a New York corporation having its principal place of
business located at 900 Huyler Street, Teterboro, New Jersey 07608 ("DCI") and
JOANNE M. LOBOZZO, an individual having a residence address of 756 Rock Beach
Road, Rochester, New York 14617 ("Joanne Lobozzo").
W I T N E S S E T H:
--------------------
This Amendment No. 2 is intended to amend in certain respects as set forth
herein, the terms and conditions of the Delta Computec Inc. Second Amended and
Restated October 1992 Option Agreement, Joanne M. Lobozzo - 652,175 Common
Shares dated February 19, 1997, as the same has heretofore been amended by
Amendment No. 1 thereto (as amended, the "Option Agreement"), whereby DCI
granted to Joanne Lobozzo an option to purchase 652,175 common shares of DCI
pursuant to the terms and conditions set forth in the Option Agreement.
NOW, THEREFORE, it is agreed as follows:
1. INCORPORATION OF RECITALS. The recitals set forth in the recital
paragraph of this Amendment No. 2 are intended to be, and hereby are,
incorporated into this Amendment No. 2 as a part hereof.
2. AMENDMENT TO THE OPTION AGREEMENT. The parties hereto agree that, from
and after the date hereof, the "Exercise Date" of the Option, as such term is
defined in the Option Agreement, is extended from 3:00 p.m. on January 31, 1999
to 3:00 p.m. on April 30, 1999.
3. REAFFIRMATION. Except as amended by this Amendment No. 2, the terms and
conditions of the Option Agreement remain unchanged and are hereby ratified and
reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be duly
executed and delivered as of the date first above written.
DELTA COMPUTEC INC.
By: _______________________________
John DeVito, President &
Chief Operating Officer
-----------------------------------
JOANNE M. LOBOZZO
28
<PAGE>
Exhibit 11
DELTA COMPUTEC INC. - CALCULATION OF EARNINGS PER SHARE
-------------------------------------------------------
Three Months Ended
January 31,
1998 1997
---- ----
Primary
- -------
Net Earnings (Loss):
Continuing Operations $ 291,012 $ 259,996
Discontinued Operations (27,071) -
------- -------
Net Earnings(Loss) 263,941 259,996
------- -------
Weighted Average Common Shares Outstanding 18,252,050 6,811,575
Dilutive Effect of Stock Options - -
---------- ---------
Weighted Average Shares Outstanding 18,252,050 6,811,575
Basic Earnings (Loss) Per Common and Common
Equivalent Shares (See note below):
Continuing Operations $ .02 $ .04
Discontinued Operations (.01) -
---- ---
Total .01 .04
=== ===
Note:
- -----
The number of weighted average common shares outstanding during the
quarters ended January 31, 1998 and January 31, 1997 were 18,252,050 and
6,811,575, respectively. In February, 1997, the Company issued an aggregate
11,440,475 common shares as a result of the exercise of certain options. (See
Note 2 to the Financial Statements).
29
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> (78,079)
<SECURITIES> 0
<RECEIVABLES> 1,907,366
<ALLOWANCES> 124,199
<INVENTORY> 785,352
<CURRENT-ASSETS> 2,870,889
<PP&E> 4,024,364
<DEPRECIATION> 1,503,828
<TOTAL-ASSETS> 6,099,432
<CURRENT-LIABILITIES> 3,239,639
<BONDS> 0
0
0
<COMMON> 182,521
<OTHER-SE> (2,097,729)
<TOTAL-LIABILITY-AND-EQUITY> 6,099,432
<SALES> 3,248,276
<TOTAL-REVENUES> 3,248,276
<CGS> 2,365,264
<TOTAL-COSTS> 2,989,636
<OTHER-EXPENSES> (177,902)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,530
<INCOME-PRETAX> 291,012
<INCOME-TAX> 0
<INCOME-CONTINUING> 291,012
<DISCONTINUED> (27,071)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 263,941
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
