SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended October 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from .......... to ..........
Commission File No. 0-14733
DELTA COMPUTEC INC.
(Exact name of registrant as specified in its charter)
NEW YORK 16-1146345
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
366 WHITE SPRUCE BOULEVARD
ROCHESTER, NEW YORK 14623
(Address of principal executive offices) (Zip Code)
201-440-8585
(Registrant's telephone number, including area code)
Securities registered pursuant of Section 12(b) of the Act:
Name of exchange
Title of Each Class On Which Registered
------------------- -------------------
Common Stock $.01 par value ......
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _ NO X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $1,371,848. Market value is determined by reference to the
price (average between bid and ask) of Registrant's Common Stock as reported on
the NASD "Bulletin Board" as of the close of business on January 28, 1998.
The number of common shares outstanding as of January 28, 1998 was
18,252,050.
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DOCUMENTS INCORPORATED BY REFERENCE
Exhibit Index is located on Page 66
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PART I
Item 1. BUSINESS
--------
A. GENERAL
-------
Delta Computec Inc. (the "Registrant" or the "Company"), by itself and
through its wholly-owned subsidiary, SAI Delta, Inc. ("SAI/Delta"), provides a
wide array of Computer System, Data Communication and Lan/Wan technical services
and products to a customer base which encompasses many industries and geographic
locations. (See discussion below regarding the Company's Intronet Division and
the closing of this location in December, 1996). The Company's customer base
includes large brokerage houses, banks, pharmaceutical companies, major
hospitals and long distance carriers, located principally in the Northeast but
reaching as far as Florida and the West Coast. Technical services offered
include, but are not limited to, design, product procurement, installation,
maintenance, help desk, premise wiring services, network administration and
on-site technical management and consulting.
While the Company maintains its corporate headquarters in Rochester, New
York, its main operation center is located in Teterboro, New Jersey. The
Northeast and Mid-Atlantic regions are both serviced from Teterboro while other
areas of the country are supported by branch locations in: Altamonte Springs,
Florida; Sunrise, Florida; Beltsville, Maryland, which operation was
subsequently moved to Newark, Delaware in September, 1997; Feasterville,
Pennsylvania, which operation was subsequently moved to Trevose, Pennsylvania,
in June, 1996; Syracuse, New York, which operation was subsequently closed and
moved to the Company's main operation center in Teterboro, New Jersey in July,
1995; and Wilmington, Delaware, which operation was subsequently moved to
Newark, Delaware, in March, 1995. The Company also had locations in: Atlanta,
Georgia, subsequently closed in September, 1996, although the Company continues
to service customers through an employee located in the Atlanta area; Escondido,
California, subsequently closed in September, 1997; and Waltham, Massachusetts,
at which location management decided, in the fourth quarter of Fiscal 1996, to
terminate operations in the Company's Intronet Division and eventually closed
this office in December, 1996. The Company, a New York Corporation, is qualified
to do business in California, Connecticut, Georgia, Illinois, Louisiana,
Maryland, Massachusetts, Ohio, Pennsylvania, Texas and New Jersey.
The Company has commenced proceedings to dissolve Data Net and Computer
Support, Inc., a Georgia corporation, and R&M Associates - Electronic Data
Products Service, Inc., all of which are inactive, wholly-owned subsidiaries of
the Company. (See Item 3, Legal Proceedings).
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Termination of Business of Delta Data Net, Inc.
- -----------------------------------------------
In November, 1992, the Company, through its wholly-owned subsidiary, Delta
Data Net, Inc. ("Data Net"), completed the acquisition (the "Willcox & Gibbs
Acquisition") of certain of the assets, and the assumption of certain of the
liabilities of Willcox & Gibbs Data Net, Inc. ("W&G Data Net"), and Dataspan
Systems, Inc. ("W&G Dataspan"), subsidiaries of Willcox & Gibbs, Inc. ("Willcox
& Gibbs"). The historical focus of W&G Data Net's business prior to the Willcox
& Gibbs Acquisition had been the sale of Data Communications hardware and test
equipment. W&G Dataspan had focused exclusively on the sale and assembly of
cables used in data communication applications. Because of the significant and
continuing losses in Data Net's business lines since the Willcox & Gibbs
Acquisition, on March 21, 1996, the Registrant filed a Form 8-K Current Report
(the "March, 1996 Form 8-K Report") announcing that, effective March 8, 1996,
Data Net had terminated its business operations and had surrendered all of its
assets to its commercial lender. (See "A Return to the Company's Core Business",
and "Additional Changes In NCFC Financing Arrangements, NCFC Forbearance
Agreement And Amendments to NCFC Forbearance Agreement", below, and Item 13,
"Certain Transactions - Lobozzo Transactions"). The Company has commenced the
process of dissolving Data Net and two other inactive subsidiaries, Computer
Support, Inc. and R&M Associates - Electronic Data Product Services, Inc.
Closing of the Intronet Division
- --------------------------------
In November, 1994, the Company completed the acquisition of certain of the
assets, and the assumption of certain of the liabilities (the "Intronet
Acquisition"), of Intronet, Inc. ("Intronet, Inc."), which assets thereafter
formed the basis of the Company's Intronet Division ("Intronet" or the "Intronet
Division"). Following the Intronet Acquisition, the Company operated from the
former Intronet, Inc. office in Waltham, Massachusetts. Until August, 1996, the
Intronet Division's primary focus had been the design, installation and support
of advanced computer networks in such specialty markets as large college
campuses and industrial facilities which require network hubbing integrated with
fiber and copper cabling. Because of the significant losses in the Intronet
Division's business, in the fall of 1995 the Company reduced the size of the
operating staff of the Intronet Division. Management subsequently decided in the
fourth quarter of Fiscal 1996 to terminate operations at the Intronet Division.
The Company assimilated the regional area and certain customers serviced by the
Intronet Division into the Company's core business and closed the Intronet
Division in Waltham, Massachusetts in December, 1996.
SAI/Delta Transaction
- ---------------------
In December, 1994, the Company acquired the balance of ownership (33%) in
the technical services company of which it had been the majority owner,
SAI/Delta, which operated from SAI/Delta's two Florida offices in Altamonte
Springs and Sunrise.
In addition to the termination of the business operations of Data Net and
the closing of the Intronet Division, other significant events which occurred in
Fiscal 1995, Fiscal 1996 and Fiscal 1997 included:
1. Changes In The Company's Senior Management
------------------------------------------
In March, 1995 and May, 1995, respectively, L. Rodger Loomis, President and
Chief Executive Officer, and Peter D. Smith, Chief Financial Officer,
resigned as officers of the Registrant and all of its subsidiaries.
Following these resignations, John T. DeVito ("DeVito") was named President
and Chief Operating Officer, and the Registrant's Board of Directors
performed services as an executive management committee. A copy of the
letter of employment between the Company and DeVito was annexed to the
Registrant's Form 10-K Report for the year ended October 31, 1996 (the
"1996 Form 10-K Report"). In April, 1995, the position of Chief Accounting
Officer was filled by Walter Struble, who sadly and unexpectedly died at
the age of 41 years in December, 1995. In February, 1996, the position of
Chief Financial Officer and Chief Accounting Officer was filled by Frank J.
Donnelly ("Donnelly"). A copy of the letter of employment between the
Company and Donnelly is annexed as Exhibit A to this Form 10-K Report. In
order to assist in the focusing of efforts on its core business operations
as well as to further its strategic objectives, Edward Drohan ("Drohan")
joined the Registrant in June, 1996 as its Vice President, Sales and
Marketing. A copy of the letter of employment between the Company and
Drohan was annexed to the 1996 Form 10-K Report.
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2. A Return To The Company's Core Business
---------------------------------------
In April, 1995, management and the Board of Directors determined to return
the Company's strategic direction back to its core business of providing
technical integration services to customers while de-emphasizing the
product distribution aspects of Data Net. The decision was based on the
large overhead costs necessary to support the business of Data Net as well
as anticipated changes in market conditions leading to increased
competition and lower gross margins.
Consistent with this shift in strategic direction, management instituted
approximately $1,200,000 in payroll reductions and approximately $300,000
to $400,000 of additional cost savings through expense reductions. The
impact of these cost reductions was partially recognized in the third
quarter of Fiscal 1995, with most of the balance of the cost reductions
being fully recognized in the fourth quarter of Fiscal 1995.
As reported in Item 1, A, above, because of the significant and continuing
losses in Data Net's business lines since the Willcox & Gibbs Acquisition,
Data Net terminated its business operations effective March 8, 1996 and
surrendered all of its assets to its commercial lender.
As further reported in Item 1, A, above, in August, 1996, management
decided to terminate operations at the Company's Intronet Division located
in Waltham, Massachusetts and closed the Intronet Division in December,
1996.
3. Changes In Registrant's Financing and Debt Position
---------------------------------------------------
Loan Agreements
---------------
As reported in the 1996 Form 10-K Report, on May 1, 1995, the Company
entered into an agreement (the "May 1995 NCFC Agreement") with its then
commercial lender, National Canada Finance Corp. ("NCFC"), and with Joseph
M. Lobozzo II ("Lobozzo"), an officer, director and the Company's
controlling shareholder, to provide for an additional $700,000 of financing
through an Overadvance Lending Facility (the "Overadvance Facility"). The
May, 1995 NCFC Agreement required Lobozzo to advance the first $400,000
(the "Lobozzo Commitment") before NCFC was required to advance any of its
$300,000 portion of the Overadvance Facility. The Lobozzo Commitment was
critical in providing increased working capital to the Company. The
Overadvance Facility was reported in a Form 8-K Current Report dated May 4,
1995. As partial consideration for the Lobozzo Commitment, the Company also
issued an option to Lobozzo exercisable through May 20, 1999, to purchase
an additional 11,440,475 of the Company's common shares (the "May 1995
Lobozzo Option") at a total exercise price of $10. The principal of the
Lobozzo Commitment outstanding at October 31, 1996 was $400,000. In May,
1997, the remaining principal balance outstanding on the Lobozzo Commitment
was paid in full, and the documents upon which it was based were
terminated.
In February, 1997, Lobozzo transferred half of the May 1995 Lobozzo Option
to his wife, Joanne M. Lobozzo ("Joanne Lobozzo"). In February, 1997,
Lobozzo and Joanne Lobozzo exercised their portions of the Second Restated
May 1995 Lobozzo Option (as herein defined) and in February, 1997 received,
respectively, 5,720,238 (Lobozzo) and 5,720,237 (Joanne Lobozzo) common
shares of the Registrant. The Registrant considered that, as a result of
the issuance and subsequent exercise of the Second Restated May 1995 Option
Agreement and the issuance of the 5,720,237 common shares to Joanne
Lobozzo, Joanne Lobozzo also became a control person of the Registrant.
Lobozzo remains a control person of the Registrant. (See the Form 8-K
Current Report dated February 20, 1997, the "February, 1997 8-K Report").
(See Item 12, "Security Ownership of Certain Beneficial Owners and
Management", and Item 13, "Certain Relationships and Related Transactions",
below).
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The termination of the May, 1995 NCFC Agreement and of the Lobozzo
Commitment was reported in the Registrant's Form 10-Q Quarterly Report for
the period ended April 30, 1997 filed in June, 1997 (the "April, 1997 Form
10-Q Report"). The Registrant's lending agreement with its commercial
lenders, who are also its principal shareholders and controlling persons,
had been amended several times to, among other matters, extend the term of
the lending agreement from December 10, 1996 to June 30, 1998. (See the
April, 1997 Form 10-Q Report.) In October, 1997, the lending agreement with
its commercial lenders was restated and amended. (See Amended 1995 Form
10-K Report, as herein defined). In January, 1998, the lending agreement
with its commercial lenders was further amended to extend the terms of the
lending agreement from June 30, 1998 to November 1, 1998. A copy of
Amendment No. 1 to First Restated Credit Agreement is annexed as Exhibit B
to this Form 10-K Report.
In June, 1997, the Company and the Lender (as herein defined) agreed to
further amend the Lobozzo Loan (as herein defined) in the following
respects: (a) the maximum amount was increased from $2,550,000 to
$2,950,000; (b) the Company was permitted to borrow up to 100% of Eligible
Receivables (as defined in the Lobozzo Credit Agreement) against all
Eligible Receivables which come into existence from and after June 7, 1997,
and the Company was further permitted to borrow up to 130% of Eligible
Receivables for Eligible Receivables which existed as of June 6, 1997; and
(c) effective June 7, 1997, the rate of interest on all loans provided by
the Lender which shall exceed the available Borrowing Base (as defined in
the Lobozzo Credit Agreement, as herein defined) was increased to five
percent (5%) over Prime Rate (as defined in the Lobozzo Credit Agreement).
The interest rate applicable to all principal amounts under the Lobozzo
Loan which are within the available Borrowing Base remains at one and three
quarters of one percent (1 and 3/4%) over Prime Rate, and the interest rate
on the Lobozzo Loan in the event of maturity, by acceleration or otherwise,
remains at three and three quarters of one percent (3 and 3/4%) over Prime
Rate. (See the April, 1997 Form 10-Q Report.) At October 31, 1997, there
was $2,865,000 outstanding on the Lobozzo Loan. As of December 31, 1997,
there was $3,413,000 outstanding on the Lobozzo Loan.
The Lobozzo Credit Agreement had been amended seven times, and, as of
October 31, 1997, the Lobozzo Credit Agreement, Promissory Note, General
Security Agreement of the Company and Data Net, Unlimited Continuing
Guaranty of SAI/Delta and General Security Agreement of SAI/Delta were each
restated and, together with Amendment No. 7, were annexed as Exhibits to
Amendment No. 1 to 1995 Form 10-K (the "Amended 1995 10-K Report") - (See
Item 13, below). The Lobozzo Credit Agreement was amended: (a) to provide
for "Operating Budget Targets" to be prepared by management of the Borrower
and as approved by the Board of Directors and the Lender from time to time:
and (b) to provide that the maximum loan amount would be $2,950,000, and
from October 1, 1997 through December 31, 1997, up to $3,650,000, and from
January 1, 1998 through June 30, 1998, up to $3,350,000, provided in each
instance, that the Company meets it Operating Budget Targets. The Lender
also waived any non-compliance with regard to the Borrowing Base through
the date of Amendment No. 7. In January, 1998, the Lender executed a Waiver
and Consent as of January 29, 1998 (the "January 1998 Waiver"), a copy of
which is annexed as Exhibit C to this Form 10-K Report, whereby the Lenders
waived any non-compliance by the Company with certain provisions of the
First Restated Credit Agreement, 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 meeting those targets.
As reported in the Registrant's Form 10-Q Quarterly Report for the period
ended July, 1997 (the "July, 1997 Form 10-Q Quarterly Report"), on
September 12, 1997, the Lender provided the Registrant with a letter
agreeing to raise the Maximum Loan Amount of the Lobozzo Loan from
$2,950,000, as included in the Amended and Restated Credit Agreement, as
amended, to a level that will accommodate the Company's anticipated revenue
growth and associated working capital needs, provided that: (1) the Company
shall meet its Operating Budget Targets as approved from time to time by
its Board of Directors; and (2) the Company's Loans in excess of the
available Borrowing Base shall not exceed $700,000 for the period October
1, 1997 to December 31, 1997 and $400,000 for the period January 1, 1998 to
June 30, 1998. This letter containing the aforesaid provisions was filed as
an Exhibit to the July, 1997 Form 10-Q Report. (See Item 13, below). The
January 1998 Waiver also waived any non-compliance with the Operating
Budget Targets.
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Lobozzo Agreement To Provide Collateral For Performance And Payment Bonds
-------------------------------------------------------------------------
As reported in the July, 1997 Form 10-Q Report, on September 11, 1997, in
connection with a request to a surety company to provide performance and
payment bonds to the Company totalling $1,000,000, singularly or in an
aggregate amount, Lobozzo signed a letter by which he agreed to provide
collateral in the amount of 25% of the awarded contract amount to
facilitate the possible issuance of performance and payment bonds for the
Company. Lobozzo's commitment pursuant to this Letter is in addition to the
Total Lobozzo Credit Facilities (as herein defined). This letter was filed
as an Exhibit to the July, 1997 Form 10-Q Report. (See Item 13, below).
As disclosed in Form 10-Q Quarterly Reports filed for the quarters ended
January, April and July of Fiscal 1995 and Fiscal 1996, respectively, the
original Credit Agreement between the Registrant and NCFC was executed on
April 1, 1994, to provide a long-term credit facility (as amended the "NCFC
Credit Agreement"). This credit facility, which was to expire on April 30,
1997, was amended five times, the last time being on October 27, 1995 (See
Section 4 below and Item 13, "Certain Transactions - Lobozzo
Transactions").
4. Additional Changes In NCFC Financing Arrangements, NCFC Forbearance Agree-
--------------------------------------------------------------------------
ment And Amendments To NCFC Forbearance Agreement
-------------------------------------------------
Forbearance Agreement
---------------------
On March 8, 1996, NCFC, the Registrant and Data Net entered into a
Forbearance Agreement whereby, among other matters, NCFC agreed to forbear
from exercising default remedies available to it against the Registrant and
Data Net as a result of defaults under the NCFC Credit Agreement. The
Forbearance Agreement was entered into as part of the procedure whereby
Data Net, due to economic conditions in its industry, ceased operations and
surrendered possession of the Data Net collateral under the NCFC Credit
Agreement to NCFC. Under the NCFC Credit Agreement, NCFC was entitled to
immediate possession of all of Data Net's collateral. In view of the
termination of its business operations, Data Net voluntarily surrendered
its collateral to NCFC so that NCFC could liquidate that Data Net
collateral and apply the proceeds from the sale of such Data Net collateral
to reduce the indebtedness owing from Data Net to NCFC. The collateral
voluntarily surrendered by Data Net included Data Net's inventory,
equipment, patents, field spare parts, trademarks, general intangibles and
proceeds of the forgoing and other collateral as described in the General
Security Agreement between NCFC, the Registrant and Data Net. The
Forbearance Agreement was amended six times between March 8, 1996 and
October 10, 1996 (as amended, the "Forbearance Agreement") when the NCFC
Restructuring (as herein described) occurred.
NCFC Restructuring
------------------
The entire NCFC Restructuring was reported in a Form 8-K Current Report
filed on October 24, 1996. On October 10, 1996, the Registrant restructured
its principal commercial lending relationship whereby a major portion of
the loan to the Registrant and Data Net from NCFC was purchased by Lobozzo,
and the balance of the loan from NCFC to the Registrant and Data Net was
restructured as a Term Loan (collectively, the entire transactions are
referred to as the "NCFC Restructuring"). At October 31, 1997, and as of
the date of the filing of this Form 10-K Report, there was $750,000
outstanding to NCFC under the Term Loan (the "Term Loan").
Pursuant to the various agreements comprising the NCFC Restructuring,
Lobozzo granted to the Registrant a loan (the "Lobozzo Loan"). As discussed
in Item 3, above, the Lobozzo Credit Agreement had been amended seven
times, and, as of October 31, 1997, the Lobozzo Credit Agreement,
Promissory Note, General Security Agreement of the Company and Data Net,
Unlimited Continuing Guaranty of SAI/Delta and General Security Agreement
of SAI/Delta were each restated and, together with Amendment No. 7, was
annexed as an Exhibit to Amendment No. 1 to 1995 Form 10-K.
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The agreement underlying the Term Loan requires the Company to maintain a
ratio of field spare parts inventory to outstanding indebtedness of at
least 2.5 to 1. The Company has been in compliance with this ratio for all
periods since the inception of the Term Loan. As part of the NCFC
Restructuring, Lobozzo pledged 480,000 of his common shares of the Company
to NCFC. The Company agreed to present to its shareholders a proposal to
amend the Company's Restated Certificate of Incorporation to increase the
number of authorized common shares. Under certain circumstances, including
the non-payment of the Term Loan by October 9, 1999, NCFC has the right to
acquire up to 17.5% of the Company's common shares. If the Company does not
take steps to provide these common shares, Lobozzo has agreed to provide
those common shares by, among other means, the 480,000 common shares
pledged by Lobozzo to NCFC. Management intends to present such a proposal
to the shareholders at the next shareholder meeting. (See Item 5, "Market
for Registrant's Common Shares and Related Shareholder Matters", below). As
part of the transfer of half of his equity interest to Joanne Lobozzo,
Joanne Lobozzo agreed to fulfill half of any of Lobozzo's obligations to
NCFC. (See the February, 1997 Form 8-K Report.)
Subordinated Debentures
-----------------------
In November, 1992, the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31, 1997
to W&G Data Net and W&G Dataspan (collectively, the "Sellers"), the Sellers
of the assets acquired by Data Net in the Willcox and Gibbs Acquisition
(the "Willcox and Gibbs Debenture"). As of October 31, 1995 and through
October 31, 1996, the Company was in default under the Willcox and Gibbs
Debenture, including the failure to make certain principal and interest
payments thereunder.
On November 25, 1996, the Registrant filed a Form 8-K Current Report
stating that, as of October 31, 1996, the Registrant and the Sellers had
signed a letter agreement (the "Rexel Letter Agreement"). Under the terms
of the Rexel Letter Agreement, the Registrant purchased the Willcox and
Gibbs Debenture, including principal and accrued interest, from the Sellers
for the payment of $75,000, which payment was made in the first quarter of
Fiscal 1997. The purchase of the Willcox & Gibbs Debenture has been
recorded in the Registrant's Fiscal 1996 financial results as an
extraordinary gain of $455,384 associated with such purchase of debt. (See
Item 13, "Certain Transactions - Willcox & Gibbs Transactions").
As of October 31, 1996 and 1997, Data Net had issued to Lobozzo an 8%
subordinated debenture (the "Lobozzo Debenture") in the face amount of
$600,001. As originally issued, principal payments were due on the Lobozzo
Debenture in three annual installments of $200,000 commencing January 31,
1996, subject to meeting bank loan covenants under the NCFC Credit
Agreement. The Registrant guaranteed the Lobozzo Debenture. At the time of
issuance of the Lobozzo Debenture, the Registrant issued to Lobozzo an
Option Agreement (the "1992 Lobozzo Option Agreement") which entitled
Lobozzo to purchase up to 1,304,350 common shares of the Registrant at $.46
per common share. The Lobozzo Debenture and the 1992 Lobozzo Option
Agreement were each restated in January, 1995, to extend certain payment
provisions (respectively, the "Restated Lobozzo Debenture" and the
"Restated 1992 Lobozzo Option Agreement"). The Restated Lobozzo Debenture
and the Restated 1992 Lobozzo Option Agreement were later further restated
in February, 1997 when Lobozzo transferred to Joanne Lobozzo half of the
Restated Lobozzo Debenture and the Restated 1992 Lobozzo Option Agreement,
and those documents have been reissued as the "Second Restated Lobozzo
Debentures" and the "Second Restated Lobozzo Option Agreements" (See Item
13, "Certain Transactions - Lobozzo Transactions"). No payments of
principal have been made on the Amended Second Restated Lobozzo Debentures,
and the Second Restated Lobozzo Option Agreements remain unexercised as of
the date of this Form 10-K Report. The Second 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 to provide that the two Second Amended and Restated Lobozzo
Debentures would be due in full in the amount of $300,000.50 (an aggregate
of $600,001) on January 31, 1999. Copies of the two amended Second Amended
and Restated Lobozzo Debentures are annexed as Exhibits D and E to this
Form 10-K Report. The Second Amended and Restated Lobozzo Option Agreements
were also amended in January, 1998 to extend their expiration dates to
January 31, 1999. Copies of the two amended Second Amended and Restated
Lobozzo Option Agreements are annexed as Exhibits F and G to this Form 10-K
Report.
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Amendments To The Lobozzo Loan
------------------------------
In November, 1996, the Lobozzo Loan was amended ("Amendment No. 1 to the
Lobozzo Loan") to, among other matters, reduce the rate of interest on the
May 1995 NCFC Agreement relative to the Lobozzo Commitment and, with regard
to certain overline advances made by Lobozzo between July, 1996 and October
9, 1996 (the "1996 Additional Lobozzo Advances"), to reduce the rate of
interest to the annual rate of interest charged on the Lobozzo Loan. As of
December 10, 1996, the Lobozzo Loan was amended ("Amendment No. 2 to the
Lobozzo Loan") to, among other matters, extend the term of the Lobozzo Loan
to March 31, 1997, and then to June 30, 1998, and subsequently to November
1, 1998 (See Exhibit B to this Form 10-K Report). In February, 1997, the
Lobozzo Loan was amended ("Amendment No. 3 to the Lobozzo Loan") to, among
other matters, transfer half of the Lobozzo Loan, half of the 1996
Additional Lobozzo Advances, half of the Lobozzo Commitment, half of the
Restated Lobozzo Debenture and half of the Overline Advances (consisting of
amounts loaned in excess of the Borrowing Base provided by the Lobozzo
Loan, the "Overline Advances") from Lobozzo to his wife, Joanne Lobozzo. As
of February 18, 1997, the Lobozzo Loan was amended ("Amendment No. 4 to the
Lobozzo Loan") to, among other matters, extend the term of the Lobozzo Loan
to April 30, 1997. As of April 30, 1997, the Lobozzo Loan was amended
("Amendment No. 5 to the Lobozzo Loan") to, among other matters, extend the
term of the Lobozzo Loan to June 30, 1998. As of June 9, 1997, the Lobozzo
Loan was amended ("Amendment No. 6 to the Lobozzo Loan") to, among other
matters, make the changes described in Section 1, A, 3, above. (See the
April, 1997 Form 10-Q Report.) As of October 31, 1997, the Lobozzo Credit
Agreement was amended ("Amendment No. 7 to the Lobozzo Loan"): (a) to
provide for "Operating Budget Targets" to be prepared by management of the
Borrower and as approved by the Board of Directors and the Lender from time
to time: and (b) to provide that the maximum loan amount would be
$2,950,000, and from October 1, 1997 through December 31, 1997, up to
$3,650,000, and from January 1, 1998 through June 30, 1998, up to
$3,350,000, provided in each instance that the Company meets it Operating
Budget Targets. By the January 1998 Waiver, the Lenders also waived any
non-compliance with regard to the Borrowing Base through the January 1998
Waiver.
Restatement Of Lobozzo Credit Agreement Documents
-------------------------------------------------
As of October 31, 1997, the Lobozzo Credit Agreement, which had been
amended seven times, and several of the documents executed simultaneously
with, and as part of the transaction involving, the Lobozzo Credit
Agreement (the Promissory Note, General Security Agreement of the Company
and Data Net, the Unlimited Continuing Guaranty of SAI/Delta and the
General Security Agreement of SAI/Delta) were restated to incorporate in
one set of documents the changes made by the seven previous amendments. All
restated documents were annexed as Exhibits to the Amended 1995 Form 10-K
Report.
5. Termination Of Data Net's Operations
------------------------------------
On March 21, 1996, the Registrant filed the March, 1996 Form 8-K Report
announcing that, effective March 8, 1996, Data Net had terminated its
business operations. (See "A Return to the Company's Core Business" and
"Additional Changes In NCFC Financing Arrangements, NCFC Forbearance
Agreement And Amendments To NCFC Forbearance Agreements", above, and Item
13, "Certain Transactions - Lobozzo Transactions").
6. Downsizing Of The Intronet Division
-----------------------------------
In the fall of 1995, the Company reduced the size of its operating staff,
and eventually closed, the Waltham, Massachusetts office of the Intronet
Division. (See "A Return to the Company's Core Business" and "Additional
Changes In NCFC Financing Arrangements, Forbearance Agreement And
Amendments To NCFC Forbearance Agreement", above).
Page 9
<PAGE>
7. 1995 And 1996 Additional Lobozzo Advances
-----------------------------------------
In addition to the above-discussed loans made by Lobozzo and Joanne Lobozzo
to the Registrant, specifically, the Second Restated Lobozzo Debenture, the
$400,000 Lobozzo Commitment, the Lobozzo Loan and the Overline Advances,
Lobozzo has also made working capital loans (the "1995 Additional Lobozzo
Advances") and the 1996 Additional Lobozzo Advances on a regular basis to
the Registrant to assist it in the purchase of equipment for sale to
customers and to meet its trade obligations. The 1995 Additional Lobozzo
Advances were in the maximum amount of $354,128, including interest
thereon, and have all been repaid. The 1995 Additional Lobozzo Advances, in
addition to the $400,000 Lobozzo Commitment discussed above were both
repaid in full. As of October 31, 1996 and 1997, $633,600 in principal
relating to such 1996 Additional Lobozzo Advances was included in the total
amount outstanding on the Lobozzo Loan. (See Item 13, "Certain Transactions
Lobozzo Transactions".)
8. Project Overruns
----------------
As reported in the 1996 Form 10-K Report, at the time of the Intronet
Acquisition in November, 1994, the Company entered into a major contract in
excess of $4,000,000 with Hamilton College, located in Clinton, New York,
to provide extensive on-campus computer access to all of the college's
buildings. Actual costs incurred by the Company significantly exceeded
contractual estimates. The Company asserted certain claims against the
college and a subcontractor has asserted a claim against the Company (and
has asserted a lien against the college), and the subcontractor has
commenced a litigation against the Company's bonding company based upon the
Company's performance bond seeking approximately $112,000 in damages. The
College rejected a significant portion of the Company's claim, including
the portion dealing with the claim of the subcontractor. The Company has
not been named in the subcontractor's litigation. The Company has acquired
from the subcontractor all of the subcontractor's claims against the
College. The Company has commenced a litigation against the College and one
of the College's employees asking compensatory and punitive damages. The
College has asserted two counterclaims in the aggregate amount of $110,000.
As of the date of this Form 10-K Report, the matter remains unresolved.
(See Item 3, Legal Proceedings).
9. Relocation Of Functions
-----------------------
Following the resignations of Messrs. Loomis and Smith discussed above
under "Changes In The Company's Senior Management", in July, 1995 the
Company closed its Syracuse, New York executive/administrative office. The
Company's principal executive offices were moved to Rochester, New York,
and the remainder of the administrative functions previously performed in
the Syracuse office were either terminated or moved to the Company's
operational headquarters in its Teterboro, New Jersey facility. The
remaining employees associated with the Syracuse office were either
terminated or moved to Teterboro, New Jersey.
B. Services, Products And Markets
------------------------------
The Company operates in an extraordinarily large market. While the
Company's total sales and revenues are a fractional percent of the dollars
spent each year for services and products related to Computer Systems Data
Communications and Lan/Wan Networks, the Company, nevertheless, does have
certain long-standing relationships with major brokerage firms, banks,
hospitals and pharmaceutical companies. By refocusing on its core business,
the Company is seeking to expand its existing relationships, has won
several new accounts and is attempting to enter into contracts with new
customers.
The Company's customers are not committed to fulfilling their Computer
System and Data Communication needs through a single supplier. Performance
differences as well as constant changes in technology make such a
commitment nearly impossible. As a result, service and integration needs
have become far more complex requiring knowledge of multiple manufacturers'
products, how they interact with each other and how they must be
serviced/maintained. This complexity has become significant enough that
many customers are now considering, or are already, outsourcing complete
management of their Computer System and Data Communication needs. By doing
so, such customers are no longer compelled to maintain internal resources
to perform the same or similar functions. The Company hopes to be able to
take advantage of these market opportunities. Consequences of this trend
are likely to include increased margin pressure on third party maintenance
providers which are not able to provide higher level technical services and
continued margin pressure on companies which are exclusively
product/distribution-oriented.
Page 10
<PAGE>
1. Technical Services
------------------
The Company's core business is based on providing technical and maintenance
services in direct support of its customers' Computer Systems, Data
Communication Systems and Lan/Wan Networks. Broadly, these services
include:
* Network systems design
* Network analysis and performance testing
* Network management
* Project management
* Premise wiring
* Installation services
* Technical consulting services
* Maintenance Services
* Help desk support
* Complete outsourcing responsibility for all or most of the above
Technical services are either charged at a pre-determined contractual
price or on the basis of labor and materials used. Maintenance services are
generally performed at a customer's site on an "on-call" basis, either
pursuant to a contract of a specified term and coverage ("Service
Agreement") or, as in the case of technical services, on a time and
materials basis.
In Fiscal 1997, approximately 92% of the Company's total revenue was
generated from contractual Service Agreements. This compares to 89% in
Fiscal 1996 and 87% in Fiscal 1995. Technical services and maintenance are
performed either at the customer's site, at one of the Company's regional
offices or at the Company's depot facility located at Teterboro, New
Jersey. Project-related technical services are most often initiated through
an authorization to proceed given by the customer following a competitive
bid process. A Service Agreement-related repair service is initiated by the
customer, usually by telephoning the Company's National Response Center
which then dispatches a field engineer to diagnose the source of the
problem and to repair or to replace the malfunctioning component or
equipment. The Company's service personnel are sometimes permanently
located at the customer's site in order to ensure optimum response time to
the customer's needs.
In the broader context of technical services offered by the Company, a
number of customers, actual and potential, are currently considering
complete outsourcing of the ongoing management of their Computer
System/Data Communications systems. Where such a commitment is made, the
nature of the agreement between the Company and its customer is similar to
that of a Service Agreement including a defined period of time (usually at
least one year) as well as predetermined billing rates for specific
functions performed or technical positions filled.
Customer Service Agreements generally have an initial term of one year
and continue thereafter until terminated by either the customer or the
Company, usually upon 90 days prior written notice. After the first year,
the Company may increase or decrease the prices related to this service,
typically with 90 days advance written notice to the customer. In some
cases the Company provides service at customer sites as part of a
subcontracting agreement with another provider, usually a manufacturer or
reseller of equipment which has taken responsibility as prime contractor
for all maintenance services. In these cases, the provider (prime
contractor) is responsible for payment of all services rendered by the
Company to the end user. The Company currently is engaged in this type of
sub-contractor relationship with several large organizations.
The Company maintains a significant inventory of spare parts in order
to ensure prompt servicing of its customers' requirements. This inventory
is replenished on a regular basis based on the number of different systems
being supported, past parts usage and anticipated future requirements.
Marketing
---------
The Company markets its technical services by direct development of
customers through its sales force and senior management and by initiating
and responding with technical and price proposals when customer needs are
specifically identified. Unique to the Company's approach is its emphasis
on custom-crafted solutions which focus on creating the resources to meet a
customer's specific needs instead of attempting to modify customer needs to
fit specific resources. The Company has over twenty years experience in
providing technical and maintenance services.
Page 11
<PAGE>
Competition
-----------
The Company competes both with third-party service providers which are
either nationally based or have strong regional presence and with
manufacturers and/or large distributors which have their own technical
service organizations. It is management's belief that the Company competes
with third-party providers on the basis of technical competence, customer
satisfaction, responsiveness and effectiveness of services as well as the
price at which such services are provided and with manufacturers on the
basis of its breadth of product availability as well as its ability to
service these multiple product lines. The Company also believes that its
scope of services, its presence in the industry and its specific expertise
in computer systems and networks gives it an advantage over traditional
maintenance companies and enables it to compete on a regional/national
basis.
In the third quarter of the fiscal year ended October 31, 1997
("Fiscal 1997"), a major customer canceled a network services agreement and
certain other agreements where the Company provided on-site services. The
Company redeployed its resources from this customer's site to perform
services at certain other major customers' sites in order to meet an
increase in demand for services at these locations.
Backlog
-------
As of October 31, 1997, the Company had service maintenance contracts and
technical service contracts in force with an annual volume of approximately
$3,094,000, subject to renewal on contract anniversary dates, compared with
approximately $3,930,000 and $5,772,000 at October 31, 1996 and 1995,
respectively. The decreases of $836,000, or 21%, in Fiscal 1997 and
$1,842,000, or 32%, in Fiscal 1996 are indicative of the Company's
customers' preference for time and materials-based agreements. As of
December 31, 1997, the Company had service maintenance contracts and
technical service contracts in force with an annual volume of approximately
$3,433,000 subject to renewal on contract anniversary dates. While this
customer preference is believed to still exist, the dollar amount of
technical service contracts in force has begun to increase, and the
increase of $339,000 and 11% from October 31 to December 31, 1997 is
believed to be attributable partially to management's decisions and efforts
to refocus on the Company's core business. (See Section A, 2, above)
2. Products
--------
Notwithstanding the Company's strategic decision to withdraw from the
product distribution business through the termination of Data Net's
business operations, in addition to the technical services provided and in
selected projects requiring the acquisition and installation as well as the
servicing of equipment, the Company continues to distribute a wide variety
of Computer System, Data Communication and Networking products from various
manufacturers. The types of equipment included are modems, multiplexers,
channel banks, CSU/DSU's, workstations, terminal servers, hubs, bridges,
routers, gateways, cable assemblies, bulk cable and cabinets.
3. Other Aspects Of The Company's Business
---------------------------------------
It is not believed that the Company's business is seasonal; however,
several large service and maintenance contracts are usually renewed near
the calendar year-end and at calendar mid-year. The Company's top ten
customers accounted for approximately 65% of its total revenues in Fiscal
1997, and one of these customers accounted for approximately 12% of total
revenues in Fiscal 1997. No significant portion of the Company's business
is subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the government. Research and development
activities are not considered to be material to the Company's operations.
4. Recent Developments
----------------------
As discussed in the 1996 Form 10-K Report, management previously
announced that two contract awards have occurred during Fiscal 1997 which
exemplify the Registrant's progress. The two contracts are as follows:
Page 12
<PAGE>
- The Registrant was awarded a five-phase system integration project from
the Town of Fairfield, Connecticut. The installation phase of this project
was completed in mid-April, 1997. The project included premises
distribution wiring, installation of 121 Desktop Client Work Stations,
installation of network equipment, installation of file servers and a
Network Maintenance Station and installation of network printers. With the
completion of the installation phase, the Registrant is now providing
maintenance services and Help Desk support for all equipment installed. The
aggregate revenues from this customer are approximately $953,000. The
revenues on the project portion were recognized in the fourth quarter of
Fiscal 1996 and the first and second quarters of Fiscal 1997. The Company
has been advised that the Town of Fairfield intends to award an additional
project to the Company in the near future.
- A major, multi-location financial services firm has awarded the
Registrant a contract for hardware maintenance and software support of a
1,300 Work Station/10 related File Server and Printer environment. The
Registrant will assign 12 persons to the site to provide a continuum of
services, hardware maintenance, software support, Help Desk services,
installation and upgrades. The aggregate revenues from this customer are
approximately $1,269,000. The Registrant is providing project support to
this client for inventory asset management with bar coding and software
control. The Company has continued to expand its service operations with
this customer.
For information regarding the cancellation of certain agreements by a major
customer, see Section B, 1, above.
5. Government Regulation
---------------------
To the best of the Company's knowledge, it is currently in compliance
with environmental statutes and regulations.
6. Executive Officers Who Are Not Directors
-------------------------------------------
John DeVito, President and Chief Operating Officer of the Registrant
and of each of its subsidiaries, joined the Company as a result of the
acquisition by the Company of R&M Associates - Electronic Data Products
Service, Inc. in June, 1990. Frank J. Donnelly, Chief Financial Officer and
Chief Accounting Officer and Edward Drohan, Vice President, Sales and
Marketing, each joined the Company during Fiscal 1996.
7. Employees
------------
As of October 31, 1997 and October 31, 1996, the Company had 135 and
160 full and part-time employees, respectively. As of December 31, 1997,
the Company had approximately 138 full and part-time employees. The
reduction in employees from Fiscal 1996 to Fiscal 1997 was the result of
the Company's loss of service contract business at a former major customer,
the reduction of excess in-house support staff after the termination of
operations of Data Net and the Intronet Division were complete, and
management's decision to use a business partner in the western region
rather than direct employees. The Company redeployed its resources from
these customers' sites to perform services at certain other major
customers' sites in order to meet an increase in demand for services at
these locations; however, some reduction in staff was necessitated.
Reference to these events has previously been made in Section A of this
Form 10-K Report.
Except as noted below, the employees of the Company are not covered by any
collective bargaining agreement, and the Company has never experienced a
strike or work-stoppage. The Company does have an agreement with a New
Jersey union to provide cable installers as needed. The number of employees
subject to this agreement fluctuates between 2 and 20 and includes career
managers of that division. The Company considers its relations with its
employees to be good.
Page 13
<PAGE>
C. Presentation Of Certain Financial Statement Data
------------------------------------------------
Fiscal 1995 Financial Statement Data As Presented In Amendment No.1 To 1995
---------------------------------------------------------------------------
Form 10-K Report
----------------
On February 13, 1996, the Registrant filed an Annual Report on Form 10-K
(the "Original 1995 Form 10-K Report") with unaudited financial statements
for the fiscal year ended October 31, 1995 ("Fiscal 1995"). The financial
results for Fiscal 1995, as included in the Original 1995 Form 10-K Report,
had not been audited due to the sudden death in December, 1995 of the
Registrant's Controller and Chief Accounting Officer and the resignation of
another key financial staff person, which also occurred in December, 1995.
Thereafter, the Registrant retained the services of interim financial
personnel, including an interim and Acting Chief Financial Officer, until a
permanent replacement could be hired. The Registrant's Acting Chief
Financial Officer was responsible for managing the Registrant's cash
resources and banking relationships. In February, 1996, the Registrant
hired a Chief Financial Officer and Principal Accounting Officer.
Because of the relocation in 1995 of the Registrant's operating
headquarters from Syracuse, New York to Teterboro, New Jersey, the turnover
in key financial and other administrative staff, as well as the termination
of operations in the Company's Data Net subsidiary and Intronet Division
and the resulting impact on management's ability to devote time to its core
operations, the Company was delayed in finalizing its audited results for
Fiscal 1995. The Fiscal 1995 Form 10-K, which the Registrant filed on
February 13, 1996 with unaudited financial statements for Fiscal 1995,
included the financial results for Data Net under continuing operations. In
accordance with an SEC interpretation announced in December, 1996, the
Registrant determined that the audited financial statements for Fiscal
1995, as included in the Amended 1995 Form 10-K Report, include Data Net's
results in continuing operations, notwithstanding the facts that: (1) at
the time of filing the amendment to the Fiscal 1995 Form 10-K, Data Net's
business operations had been terminated; and (2) the 1996 Form 10-K Report
filed in August, 1997 appropriately included the financial results for Data
Net under discontinued operations for all fiscal periods. In December,
1997, the Registrant filed Amendment No. 1 to the Original 1995 Form 10-K
Report (the "Amended 1995 Form 10-K Report") to, among other matters,
include the audited financial statements for Fiscal 1995. (See above,
"Changes In The Company's Senior Management", and the discussion below with
respect to the accounting classification of the financial results of the
Registrant's Data Net subsidiary and its Intronet Division).
Fiscal 1996 And 1995 Financial Statement Data As Presented In 1996 Form
---------------------------------------------------------------------------
10-K Report And 1997 Form 10-K Report
-------------------------------------
In March, 1996, the Registrant's wholly-owned subsidiary, Data Net
terminated its business operations and surrendered all of its assets to its
commercial lender (See Item 1, A, 1, above). Accordingly, in the Form 10-Q
Quarterly Reports filed during Fiscal 1996 for the quarters ended January
31, 1996, April 30, 1996 and July 31, 1996, respectively, the Registrant
appropriately included the interim financial results of Data Net under
discontinued operations, with the financial results for the Registrant's
core business, which at that time included its Intronet Division located in
Waltham, Massachusetts, presented in the aforementioned Form 10-Q Quarterly
Reports under results from continuing operations. This Form 10-K Report, as
well as the 1996 Form 10-K Report, contains the financial results for Data
Net included in this Form 10-K Report under discontinued operations for all
fiscal periods. This Form 10-K Report contains audited financial statements
for both Fiscal 1996 and Fiscal 1997, and a discussion of each of these
financial statements is contained in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
During the fourth quarter of Fiscal 1996 management decided to terminate
the business operations of its Intronet Division located in Waltham,
Massachusetts. Termination of the Intronet Division's business operations
was substantially completed by the end of Fiscal 1996, and the office was
closed in December, 1996 (See Item 1, A (1), above). As a result of the
termination of the Intronet Division's business activities in Fiscal 1996,
the financial results for the Intronet Division are also included in this
1997 Form 10-K Report, as well as in the 1996 Form 10-K Report, under
discontinued operations for all fiscal periods.
Page 14
<PAGE>
Item 2. Properties
----------
Offices
-------
The Company maintains offices in the cities referred to below. In
addition to the locations listed below, customers provide, at no cost to
the Company, facilities at their premises in:
Florham Park, N.J. Pompton Plains, New Jersey
King of Prussia, Pennsylvania Toms River, New Jersey
Miami, Florida White Plains, New York
Morristown, New Jersey Jersey City, N.J.
New York City, New York Wilmington, Delaware
Base
Monthly Expiration Approx.
Location Rent Date Sq.Ft.
-------- ---- ---- ------
Escondido, California $ 550 4/30/99 1,200
Wilmington, Delaware 355 2/28/97 400
Altamonte Springs, Fl. 642 11/30/97 800
Sunrise, Florida 1,166 1/31/98 1,200
Beltsville, Maryland 300 Monthly 510
Waltham, Mass. 3,700 3/15/97 1,250
Teterboro, New Jersey 24,970 7/31/01 38,000
Feasterville, Pa. 1,300 6/14/00 1,200
Management considers its present leased space to be adequate for
current operations. The Company relocated its Syracuse office/service
center to its Teterboro facility in July, 1995. The Company closed its
Syracuse location and terminated the lease. In September, 1996, and
simultaneously with the expiration of its lease, the Company closed its
office in Atlanta, Georgia, although the Company continues to service
customers through an employee located in the Atlanta area. In December,
1996, the Company closed its office in Waltham, Massachusetts where it had
previously ceased all operations at its Intronet Division. In May, 1996,
the Company sublet a portion of its Teterboro, New Jersey leased premises
to a cable manufacturing firm, such sublease consisting of 5,355 square
feet at a base monthly rent of approximately $3,195 on a month-to-month
basis without a written lease. Effective January 1, 1998, the company
entered into a sublease with a manufacturing firm, such sublease,
consisting of approximately 18,500 square feet at a base monthly rent of
approximately $9,250 from January 1, 1998 through December 31, 1998, and at
a base monthly rent of approximately $9,635 from January 1, 1999 through
December 31, 1999. The sublessee has been granted an option to renew the
sublease for two option renewal periods, from January 1, 2000 through
December 31, 2000 as to the first option period and from January 1, 2001
through July 31, 2001 as to the second option period, at a base monthly
rent of approximately $10,020 for both option periods.
Page 15
<PAGE>
Item 3. Legal Proceedings
-----------------
A. In Fiscal 1996, an agreement was reached with the State of New York
("New York State") relative to payment of New York State sales taxes for
the period from July, 1995 through April, 1996, in the amount of $349,000
plus interest. The amounts related to this sales tax liability are
reflected in the financial statements as of October 31, 1996 and October
31, 1997, respectively, with approximately $7,000 remaining to be paid as
of the date of filing this Form 10-K Report. No litigation or
administrative proceeding was commenced and all required payments to date
as stipulated in the agreement have been made.
B. As a result of another sales tax audit, on January 10, 1997, New
York State asserted a claim, originally in the amount of approximately
$125,000, excluding any interest and penalties, against both the Company
and Data Net for alleged sales taxes owed, for the period September, 1993
through May, 1996. The Company and Data Net disagreed with the findings and
communicated such disagreement in writing to New York State. The Company
instituted efforts to obtain documentation supporting the validity of its
classification of certain sales made by both entities as non-taxable. As of
May 9, 1997, support for the validity of classifying approximately 74% of
such sales made by both entities as non-taxable had been obtained and sent
to New York State. New York State has sent a revised determination of
approximately $65,000, excluding any interest and penalties. The Company is
continuing to research its records for the remainder of the affected sales.
The Company and Data Net believe that, upon review of the records to be
submitted, New York State will reduce its claim accordingly. The amount of
the potential sales tax liability as of October 31, 1996 and 1997 is
reflected in the accompanying financial statements.
C. As part of the decision to dissolve Data Net, Data Net was advised
by New York State that there were taxes due for three tax periods ended
November 30, 1995, February 29, 1996 and May 31, 1996, respectively. The
liabilities asserted for the November 30, 1995 and February 29, 1996
periods consist of those liabilities which had already been covered by the
agreement with New York State referred to in Paragraph A, above. As such,
there is no independent liability for those assessments as asserted in the
notice from New York State received as part of the Data Net dissolution,
other than the amount remaining to be paid as set forth in Paragraph A,
above. The liability for the period ended May 31, 1996 was in the aggregate
amount (principal, interest and penalty) of approximately $108,000, and
the Company and Data Net believe that this asserted liability is included
in the revised liability referred to in Paragraph B, above. The Company and
Data Net dispute the amount of the assessment, the interest assessed and
the penalty assessed and intend to contest all such assessments, and to
discuss with New York State the further information which they have
obtained in an effort to negotiate with New York State a further reduction
in the assessment, a commensurate reduction in the amount of interest and
an abatement of the penalty. The Company has reflected $71,000 of the
potential liability in the accompanying financial statements.
D. On December 12, l997, the Company commenced a litigation (the
"Hamilton Litigation") in New York State Supreme Court, Monroe County,
against Hamilton College and against one of Hamilton College's employees,
seeking compensatory and punitive damages based on several legal theories
including: breach of contract, quantum meruit, fraudulent inducement,
account stated and tortious interference with contractual relationships.
The Hamilton Litigation arose from claims of the Company that Hamilton
College failed to pay for work performed by the Company, and materials
ordered by Hamilton College and installed by the Company, all in connection
with a contract (the "Hamilton Contract") whereby the Company, through its
Intronet Division, installed at Hamilton College the infrastructure and
electronics for a campus-wide voice, data and telecommunications network.
Among other matters, the Hamilton Litigation alleges that the Company was
fraudulently induced to enter into the Hamilton Contract by inaccurate
documents provided by Hamilton College, that Hamilton College has failed to
make certain payments which it was required to make and has otherwise
breached the Hamilton Contract, and that Hamilton College has received the
benefit of work and materials provided by the Company for which Hamilton
College has not paid. The Hamilton Litigation also alleges that Hamilton
College's employee who is named as a defendant deliberately and
maliciously interfered with the Company's efforts to complete the Hamilton
Contract, that the Company complained about the employee's actions, but
that Hamilton College ignored these complaints and in fact acquiesced in
them, with the result that the Company's contractual relationships were
tortiously damaged.
Page 16
<PAGE>
Before the commencement of the Hamilton Litigation, one of the Company's
subcontractors under the Hamilton Contract, Marcy Excavation Company, Inc.
("Marcy"), had asserted claims against Hamilton College and against the
Company based on non-payment of statements rendered for subcontracting
work. Marcy had also filed a mechanic's lien (the "Mechanic's Lien")
against the College in Oneida County, New York (where Hamilton College is
located), and had commenced a litigation in Supreme Court, Oneida County,
New York against the Company's bonding company (the "Marcy Litigation").
Neither Hamilton College nor the Company was named as a party to the Marcy
Litigation. In November, 1997, the Company and Marcy settled the claim by
Marcy against the Company (but not Marcy's claim against Hamilton College)
in return for payments to be made to Marcy by the Company. As part of the
settlement, Marcy assigned to the Company all of Marcy's claims against
Hamilton College and assigned to the Company all of Marcy's rights under
the Mechanic's Lien. Marcy also agreed to discontinue the Marcy Litigation
at the time that Marcy received payment in full of the settlement payment
agreed to between Marcy and the Company.
Hamilton has asserted counterclaims against the Company for $100,000
for unspecified breaches of the Hamilton Contract and for $10,000 for
failure to cause Marcy to release the Mechanics Lien. Despite these
counterclaims, the Company does not anticipate (although it cannot
guarantee) that it will have any liability to the defendants in the
Hamilton Litigation as a result of the Hamilton Litigation, or that it will
have any liability as result of the Marcy Litigation. As such, no accrual
has been made in the financial statements for either of those legal
proceedings.
Item 4. Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
No matters were submitted to shareholders for a vote during the fourth
quarter of Fiscal 1997.
PART II
Item 5. Market For Registrant's Common Shares And Related Stockholder Matters
---------------------------------------------------------------------
During the period ending October 31, 1995, the common shares of the
Registrant were traded on the over-the-counter NASDAQ market under the
symbol "DCIS". As of November 10, 1995, the common shares of the Registrant
fell below the NASDAQ minimum bid price guidelines and, to the best
knowledge of management, since then, have traded only on local OTC markets.
There were approximately 450 holders of record of the Company's common
shares at the end of Fiscal 1997 and Fiscal 1996, respectively. As of
January 28, 1998, there were approximately 450 holders of record of the
Company's common shares. The high and low bid prices of the common shares
during each quarter of Fiscal 1996 and Fiscal 1997 were as follows:
Fiscal 1996 Asked and Bid Prices
--------------------------------
Asked Bid
----- ---
1st Quarter $0.08 $0.04
2nd Quarter $0.50 $0.28
3rd Quarter $0.25 $0.13
4th Quarter $0.10 $0.10
Fiscal 1997 Asked and Bid Prices
--------------------------------
Asked Bid
----- ---
1st Quarter $0.13 $0.13
2nd Quarter $0.13 $0.13
3rd Quarter $0.13 $0.08
4th Quarter $0.10 $0.08
As of January 28, 1998, the Company's common shares were quoted at
$.40 asked and $.20 bid. The over-the-counter market quotations described
above reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Page 17
<PAGE>
No cash dividends have been declared on Company's shares for Fiscal
1997, Fiscal 1996 or Fiscal 1995. The Company anticipates that, for the
foreseeable future, any earnings that may be generated from its operations
will be used to reduce debt and provide working capital. Payment of
dividends are prohibited under the terms of certain of the Company's loan
agreements. In any event, the payment of dividends in the future will
depend upon the Company's financial condition, capital requirements and
earnings and such other factors as the Board of Directors may deem
relevant.
The Company last held a shareholder meeting in March, 1995. The
Company intends to hold a meeting of shareholders for the election of
directors and for certain other matters, such as increasing the number of
authorized common shares to enable it to comply with its obligations to
NCFC, following the filing of this Form 10-K Annual Report. (See Item 1,
A, 4, "NCFC Restructuring", above).
Page 18
<PAGE>
<TABLE>
<CAPTION>
Item 6. Selected Financial Data DELTA COMPUTEC INC.
The selected data presented below as of and for each of the five fiscal years ended October 31, 1997, 1996, 1995,
1994 and 1993 are derived from the financial statements of the Registrant which have been audited by Deloitte &
Touche LLP, independent auditors. Data as of and for the fiscal years ended October 31, 1995, 1994 and 1993 have
been restated to reflect the termination of operations effective March 8, 1996 in the Company's Data Net subsidiary,
as well as the termination of operations in the Company's Intronet Division effective October 31, 1996. This data
should be read in conjunction with the related financial statements and notes included elsewhere in this Form 10-K Report.
- --------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 (1) 1996 (1) 1995 (1) 1994 (5) 1993 (5)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues ..............................$ 13,376,134 $ 12,213,933 $ 10,292,270 $ 9,553,737 $ 8,939,473
Earnings (Loss) from Continuing Operations... 692,395 560,513 (130,502) 298,337 (129,485)
Extraordinary Items ......................... -- 455,384 (3) -- -- --
Cumulative Effect of Accounting Change....... -- -- -- -- 730,630 (2)
(Loss) from Discontinued Operations.......... (118,142) (1,843,487) (4,965,417) (941,763) (395,155)
Net Earnings (Loss) ......................... 574,253 (827,590) (5,095,919) (643,426) 205,990
Earnings (Loss)/Share:
Continuing Operations .................. .05 (4) .08 (4) (.02) .04 (.02)
Extraordinary Items .................... - .07 - - -
Cumulative Effect of Accounting Change.. - - - - .11
Discontinued Operations ................ (.01)(4) (.27)(4) (.73) (.13) (.06)
------- ------- ------- ------- ------
Net Earnings (Loss) .................... .04 (.12) (.75) (.09) .03
======= ======= ======= ======= ======
- --------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA :
- --------------------------------------------------------------------------------------------------------------------------
Total Assets.................................$ 6,026,229 $ 7,171,386 $ 10,216,635 $ 13,521,285 $ 13,851,817
Short-Term Debt.............................. -- 75,000 3,813,925 -- 3,624,339
Long-Term Debt............................... 3,615,000 3,405,461 571,670 3,716,820 424,851
Subordinated Debentures...................... 600,001 600,001 1,075,001 1,087,501 1,112,501
Stockholders' (Deficit) Investment........... (2,179,149) (2,753,412) (1,925,822) 3,170,097 3,813,398
- --------------------------------------------------------------------------------------------------------------------------
(1) Operating results include the results of the Intronet Division from the date of the Intronet Acquisition in November, 1994.
(2) The Company adopted Statement of Financial Accounting Standards No. 109 (FAS109) "Accounting for Income Taxes" effective
November 1, 1992. The cumulative effect of adopting FAS No. 109 on the Company's financial statements was to increase income by
$730,630 ($.11 per share) for the year ended October 31, 1993. (See Notes to the Financial Statements).
(3) The Fiscal 1996 amount relates to gain on purchase of debenture.
(4) Includes full dilution for an option to purchase 1,304,350 common shares issued in 1992 in connection with the Lobozzo
Debenture and for an option issued to Lobozzo in the fiscal year ended October 31, 1995 to acquire 11,440,475 common shares,
which option, as restructured and amended, was exercised in February, 1997. (See Item 13, "Certain Transactions - Lobozzo
Transactions").
(5) Statement of Operations data has been reclassified to reflect discontinuance of operations of the Company's Data Net
Subsidiary.
</TABLE>
Page 19
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
-----------------------------------------------------------------------
Of Operations
-------------
As reported in the 1996 Form 10-K Report, and as discussed in Item 1 and
Note 2 to the Consolidated Financial Statements, on March 8, 1996 the
Company's wholly-owned subsidiary, Data Net, terminated its business
activities and ceased all of its operations. Accordingly, Data Net's
operating results for Fiscal 1995 and 1996 are included in the loss from
discontinued operations for those respective years, and the prior year's
income statement for Fiscal 1995 has been restated to exclude Data Net's
results. As discussed in Item 1, A, management decided in the fourth
quarter of Fiscal 1996 to terminate operations in its Intronet Division in
Waltham, Massachusetts and closed the Intronet Division's office in
December, 1996. Accordingly, the Intronet Division's operating results for
Fiscal 1995 and 1996 are also reported in the loss from discontinued
operations, and the prior year's income statement for Fiscal 1995 has been
similarly restated to exclude Intronet's results. The financial results for
continuing operations for all fiscal periods are for the Company's core
business operations, specifically those operations relating to providing
computer system, data communication and Lan/Wan technical services and
products.
Results Of Operations
---------------------
Operating results for Fiscal 1997 reflected net earnings from continuing
operations of $692,395 (5.2% of total revenues), or $.05 per common share
on 14,741,548 weighted average common shares, compared with net earnings
from continuing operations of $560,513 (4.6% of total revenues) for Fiscal
1996, or $.08 per share on 6,811,575 weighted average common shares,
excluding a $455,384 extraordinary gain on purchase of debt (See below),
and a loss from continuing operations of $130,502 (1.3%) for Fiscal 1995,
or $.02 per share on 6,811,575 weighted average common shares.
The improvement of $131,882, or 23.5%, in Fiscal 1997 earnings from
continuing operations over Fiscal 1996 was the net effect of: (1) a 12.7%
increase in service revenue and a 9.5% increase in total revenue, the
latter providing a $1,162,000 benefit; (2) a 2.0 percentage-point
improvement in gross margin as a percentage of total revenue, as the
revenue mix between the more profitable service revenue, compared to
equipment sales, improved over the proportionate revenue mix for Fiscal
1996; (3) a 1.1 percentage-point improvement in selling, general and
administrative expense as a percentage of total revenue, the effect of
higher sublease income plus lower professional fees and recruitment costs;
less (4) a $336,000 increase in interest expense, as DCI's core operations
incurred the full effect in Fiscal 1997 of debt service costs attributable
to discontinued operations, most of which debt service costs had been
allocated to discontinued operations in Fiscal 1996 and Fiscal 1995. The
turnaround in the financial performance of continuing operations for Fiscal
1996, with the results showing an improvement of $691,015 in earnings from
continuing operations over Fiscal 1995, included the combined impact of the
following: (1) a 21.7% increase in service revenue and an 18.7% increase in
total revenues; and (2) a 5.4 percentage-point improvement in gross margin,
partially offset by higher operating expenses from personnel costs and
professional fees. Operating results for continuing operations for Fiscal
1995 were negatively impacted by the continued detrimental effects of the
Company's cash flow and liquidity problems and non-recurring costs
associated with administrative staff turnover. In addition, the Company's
operating results in Fiscal 1995 were adversely affected by: (1) a
writedown in its spare parts inventory for obsolescence charges of
approximately $427,000; (2) a writedown of approximately $285,000 in
intangible assets pertaining to the Company's core business to write off
certain of these assets as well as to adjust the estimated realizable
economic benefit period on certain other items; and (3) the writedown of
approximately $1,202,000 in deferred tax assets. These writedowns
aggregated $1,914,000.
Management maintained the amount of the deferred tax assets, as included in
the Fiscal 1997 consolidated financial statements and as described in Note
5 to the consolidated financial statements, at the same level as recorded
in the Fiscal 1996 statements which are related to the Company's net
operating loss carryforwards and associated tax benefits which can be
utilized in future periods, in order to set the carrying value of such
assets at a conservative amount. The total amount of such tax assets can be
realized if the Company is able to generate sufficient taxable income
within the respective carryforward periods.
Page 20
<PAGE>
Extraordinary Gain
------------------
In Fiscal 1996, the Registrant realized an extraordinary gain of $455,384
on the purchase of the Willcox and Gibbs Debenture (See Item 1, A, (4)
"Subordinated Debentures" and Item 13, "Certain Transactions Willcox and
Gibbs Transactions").
Discontinued Operations
-----------------------
As discussed above in Item 1 and Notes 1 and 2 to the Consolidated
Financial Statements, in March, 1996, the Company's wholly-owned
subsidiary, Data Net, terminated its business operations. In addition, in
the fourth quarter of Fiscal 1996, management decided to terminate
operations in its Intronet Division in Waltham, Massachusetts and closed
the Intronet Division's office in December, 1996. Accordingly, Data Net's
operating results for Fiscal 1995 and 1996 are reported in the loss from
discontinued operations, and the prior year's income statement for Fiscal
1995 has been restated to exclude Data Net's results. The Intronet
Division's operating results for Fiscal 1995 and 1996 are also reported in
the loss from discontinued operations, and the prior year's income
statement for Fiscal 1995 has been similarly restated to exclude the
Intronet Division's results. As explained below, the losses incurred by
both Data Net and the Intronet Division have had a very material impact
upon the Company's overall operating results, cash flow and financing
arrangements.
Losses on Discontinued Operations, incurred in Fiscal 1997, were $118,142,
or $.01 per share, and attributable to disposal costs related to Data Net
and the Intronet Division, which were greater than estimated at October 31,
1996. Data Net's operating losses in Fiscal 1996, incurred subsequent to
October 31, 1995 through March 8, 1996, as well as expenses directly
related to the termination of Data Net, net of a gain realized on disposal
of assets less liabilities not assumed by the Company, and the operating
losses for Fiscal 1995, have been reported in the consolidated statements
of operations under LOSS FROM DISCONTINUED OPERATIONS for those respective
years. For Fiscal 1996, the aggregate Loss from Discontinued Operations was
$1,843,487 or $.27 per share, consisting of $933,843 relating to Data Net
and $909,644 relating to the Intronet Division, the latter of which
includes $102,375 in operating losses incurred subsequent to October 31,
1996. For Fiscal 1995, Data Net incurred a net loss of $1,821,307 (13.4% of
Data Net's revenues) or $.27 per share. The Intronet Division incurred a
net loss of $1,811,110 (27.8% of Intronet's revenues) in Fiscal 1995 or
$.27 per share, the latter including a $330,164 write-off of goodwill.
During Fiscal 1996, unbudgeted completion costs on a fixed price contract
initiated in a previous fiscal year, poor margins on two other major
contracts and a general downturn in this operation's business exacerbated
the Intronet Division's poor results.
Revenues
--------
Total revenues from continuing operations were $13,376,134 in Fiscal 1997,
$12,213,933 for Fiscal 1996 and $10,292,270 in Fiscal 1995. Fiscal 1997
total revenues were $1,162,201 (9.5%) over Fiscal 1996, which included the
combined benefit from new business generated during the year and the
expansion of business from some of the Company's existing customers. The
increase of $1,921,663 (18.7%) in Fiscal 1996 resulted from new business
and the renewal of business from the Company's existing customer base, as
management refocused its energies on the Company's core business
activities.
Service revenues were $12,299,133 (91.9% of total revenues) in Fiscal 1997,
$10,911,153 (89.3%) in Fiscal 1996 and $8,965,335 (87.1%) in Fiscal 1995.
The increases in service revenues in Fiscal 1997 and Fiscal 1996 over the
preceding fiscal years were $1,387,980 (12.7%) and $1,945,818 (21.7%),
respectively. The growth in service revenue in both fiscal years reflects
the renewal of business from the Company's existing customer base as well
as new customers, as management refocused its energies on the Company's
core business activities.
Equipment sales were $1,077,001 (8.1% of total revenues) in Fiscal 1997,
$1,302,780 (10.7%) in Fiscal 1996 and $1,326,935 (12.9%) in Fiscal 1995,
representing decreases of $225,779 (17.3%) and $24,155 (1.8%) in purely
equipment sales, without any related service revenue, in Fiscal 1997 and
Fiscal 1996, respectively, which decreases reflect management's decision to
focus on service and project revenue in developing the Company's core
business.
Page 21
<PAGE>
Costs And Expenses
------------------
Service costs for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were $ 8,400,639
(68.3% of service revenue), $7,524,523 (69.0%) and $6,569,363 (73.3%),
respectively. The improvement of approximately one percentage point and
four percentage points in service costs as a percentage of service revenue
in Fiscal 1997 and 1996, respectively, reflected the benefit from the
significant increases in service revenue in both years.
Costs of equipment sold for Fiscal 1997, Fiscal 1996 and Fiscal 1995 were
$836,848 (77.7% of equipment sales), $1,155,711 (88.7%) and $1,301,499
(98.1%), respectively. Cost of equipment sold, as a percentage of equipment
sales, improved in Fiscal 1997 and Fiscal 1996 as, with the termination of
operations of its Data Net Subsidiary and Intronet Division, the Company's
cash constraints lessened, thereby enabling it to gain better pricing on
its purchases, which benefit was partially offset by additional inventory
reserves in Fiscal 1996. The Company also recorded a writedown in spare
parts in Fiscal 1995.
Selling, General and Administrative Expenses
--------------------------------------------
Selling, general and administrative expenses for Fiscal 1997, Fiscal 1996
and Fiscal 1995 were $3,005,243 (22.5% of total revenues), $2,878,456
(23.6%) and $2,255,858 (21.9%), respectively. Selling, general and
administrative expenses increased $126,787, or $4.4%, in Fiscal 1997 and
$622,598, or 27.6%, in Fiscal 1996, such increases reflecting higher
personnel and associated benefit costs, plus increased recruitment,
professional and consulting fees in Fiscal 1996 over the prior fiscal year.
The improvement in these costs as a percentage of sales in Fiscal 1997
reflects the Company's ability to hold its increase in this expense
category to within its increase in total revenues.
Inventory and Produce Obsolescence
----------------------------------
In Fiscal 1995, the Company accounted for normal product obsolescence
through inventory reserves. The Company wrote down its spare parts by
approximately $427,000 for obsolescence. These charges were recognized
during the fourth quarter of Fiscal 1995. The Company reduced its inventory
reserves by approximately $29,000 in Fiscal 1997.
Interest Expense
----------------
Interest expense reported in continuing operations for Fiscal 1997, Fiscal
1996 and Fiscal 1995 were $423,211 (3.2% of total revenues), $87,241 (0.7%)
and $142,550 (1.4%), respectively. Interest expense changed to continuing
operations increased by $335,970 in Fiscal 1997, as the Company's core
operations incurred the full effect in Fiscal 1997 of debt service costs
attributable to discontinued operations, most of which debt service costs
had been allocated to discontinued operations in Fiscal 1996 and Fiscal
1995. Interest expense decreased by $55,309 and 39% in Fiscal 1996 due to
the fact that the major portion of the Company's borrowing requirements in
Fiscal 1995 were related to the negative cash flow from discontinued
operations, which negative cash flows abated in Fiscal 1996.
Income Taxes
------------
There was an income tax provision of $1,245,000 recorded for Fiscal 1995
relating to the writedown in deferred tax assets. Income taxes are
recognized for the amount of taxes payable or refundable for the current
tax year, and deferred tax liabilities and assets for the future tax
consequence of events that have been recognized in the Registrant's
consolidated financial statements or tax returns. At October 31, 1995, the
Registrant had accumulated approximately $6,506,000 of operating loss
carryforwards for tax purposes which was primarily the result of losses
generated by its newly-acquired business units over the three fiscal years
ending October 31, 1993, 1994 and 1995, respectively. The Registrant had
recognized the tax benefit of these losses, in the form of deferred tax
assets on its balance sheet, through October 31, 1994. The Registrant
incorporated in its financial statements at October 31, 1995 reserves for
the valuation of previously recorded deferred tax assets in the amount of
$2,997,000 at October 31, 1995.
Page 22
<PAGE>
At October 31,1997 the Company has recorded a deferred tax asset of
approximately $2,225,000 reflecting the benefit of approximately $6,544,000
in loss carryforwards, which expire in varying amounts between 2001 and
2011. Realization of this and other deferred assets is dependent on
generating sufficient taxable income in future periods. Management believes
that sufficient future income will exist to allow utilization of $150,000
of the deferred tax asset. The Registrant will continue to assess, in
future periods, the value of these deferred tax assets which expire in
varying amounts between the years 2001 and 2011. This assessment will
include the Registrant's ability to project adequate profits to utilize the
operating loss carryforwards.
Year 2000
---------
The Company has conducted a review of its computer systems to identify
those areas that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. The Company
currently believes, with planned modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems and is not anticipated to be material to its financial
position or results of operations in any given year. The Company has
received confirmation from vendors of certain purchased software that
current releases or upgrades, if installed, will eliminate any issues.
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. The
Company is currently evaluating what impact this standard will have on its
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.
Page 23
<PAGE>
Liquidity and Capital Resources
-------------------------------
The Company had net earnings of $574,253 in Fiscal 1997, an improvement of
$1,401,843 over the net loss of $827,590 in Fiscal 1996, which improvement
was attributable to significantly stronger performance in results from
continuing operations as well as the substantially lower Losses From
Discontinued Operations incurred in Fiscal 1997, compared to the operating
losses incurred in Fiscal 1996 by its Data Net subsidiary and the Intronet
Division, such losses having been recorded in Losses From Discontinued
Operations. These improved figures are not a guarantee that the improved
financial position can continue into the future. The Company has financed
its working capital requirements, capital expenditures and debt service
from its financing arrangements and trade debt. The Company's debt service
costs relate almost wholly to its discontinued operations.
The Registrant's lending agreement with its commercial Lenders, who are
also its principal shareholders and controlling persons, had been amended
to, among other matters, extend the term of the lending agreement to June
30, 1998. The maximum amount of the lending agreement, as amended, and as
restated, was increased from $2,950,000 to (a) from October 1, 1997 through
December 31, 1997, $3,650,000 and (b) from January 1, 1998 through June 30,
1998, $3,350,000, provided, as to the maximum loan amounts in (a) and (b),
respectively, that the Company meets its Operating Budget Targets (as
defined in the Lobozzo Credit Agreement) as agreed between the Company and
its Board of Directors. If any loans are ever made in excess of the
available Borrowing Base (as defined in the Lobozzo Credit Agreement), such
excess amounts shall bear interest at 5% over the Prime Rate. The Lenders
and the Registrant have also revised the factors determining the basis upon
which receivables will be eligible for inclusion in the Borrowing Base. The
Registrant's management believes that this amended Lobozzo Credit
Agreement, as further extended in January, 1998 to November 1, 1998, will
provide the Company with necessary liquidity and cash resources through
November 1, 1998. For additional information regarding the NCFC
Restructuring and the Lobozzo Loan, see Item 1, above, Item 13, below and
Note 3 to the accompanying financial statements. In January, 1998, the
lending agreement with its commercial lenders was further amended to extend
the terms of the lending agreement from June 30, 1998 to November 1, 1998.
A copy of the amendment is annexed as Exhibit B to this Form 10-K Report.
In January, 1998, the Lender executed a waiver (the "January 1998 Waiver"),
a copy of which is annexed as Exhibit C to this Form 10-K Report, whereby
the Lenders waived any non-compliance by the Company with the following
provisions of the First Restated Credit Agreement including Section 2.1
relating to maximum loan amount, borrowing amounts not supported by
Eligible Receivables or borrowing amounts permitted only if Operating
Budget Targets are met, without meeting those targets.
Cash provided by operations in Fiscal 1997, 1996 and 1995 totalled
$624,120, $2,093,318 and $210,449, respectively. Net cash provided by
operations of $624,120 in Fiscal 1997 came from net earnings of $574,253,
non-cash charges of $685,319 and proceeds from accounts receivable, less
reductions in accounts payable and accrued expenses and deferred service
revenue. Net cash provided by operations of $2,093,318 in Fiscal 1996 was
the result of non-cash charges plus working capital provided from the
effect of reductions in accounts receivable and inventory, coupled with an
increase in deferred service revenue, offset in part by the net loss plus
reductions in accounts payable and accrued expenses. Net cash of $210,449
provided by operations in Fiscal 1995 was the result of non-cash charges
plus working capital provided from reductions in accounts receivable and
inventory, an increase in accounts payable and accrued liabilities,
deferred taxes and sales taxes payable, most of which was offset by the net
loss, which included a full year of losses for Data Net.
Working capital at October 31, 1997, 1996, 1995 was ($1,296,414),
($1,974,918) and ($3,827,646), respectively. The working capital deficit at
October 31, 1997 decreased $678,504 over October 31, 1996 due to reductions
principally in accounts payable, current portion of long-term debt,
deferred revenue and sales taxes payable, partly offset by reductions in
accounts receivable and prepaid expenses. The working capital deficit in
Fiscal 1996 decreased $1,852,728 from Fiscal 1995, reflecting the decline
in working capital investment as a result of the termination of Data Net,
additional deferred revenue and accrued interest, offset in part by lower
short-term borrowing. Fiscal 1995's working capital decreased $6,496,967
from Fiscal 1994 due to a $4,385,595 increase in short-term debt,
additional trade debt and lower investment in accounts receivable and
inventories.
Page 24
<PAGE>
Cash (used) by investing activities in Fiscal 1997, 1996 and 1995 totalled
($790,618), ($1,082,106) and ($828,751), respectively. These cash outlays
were incurred for additions to field spare parts and capital expenditures,
net of the effect of writing off Data Net's fixed assets in Fiscal 1996.
Cash provided/(used) by financing activities in Fiscal 1997, 1996 and 1995
was $134,549, ($980,134) and $625,306, respectively. Funds of $209,539 were
provided in Fiscal 1997 by proceeds from shareholder loans, offset in part
by $75,000 used to pay subordinated debt. Funds used in Fiscal 1996
resulted from payments on a bank note and notes payable, aggregating
$1,519,264, less proceeds from borrowings from a shareholder totaling
$539,130. Funds of $637,806 were provided in Fiscal 1995 by proceeds from
shareholder loans and bank debt.
During 1996, the Company restructured its note payable to its then
commercial lender, NCFC, resulting in a non-cash reduction of the note
payable, such reduction totaling $1,544,661, and a corresponding increase
in the amount due to its principal shareholder.
Inflation
---------
Generally, increases in material, subcontractors' and other service costs
have been offset by productivity improvements. The Company continues to
monitor the impact of inflation in order to minimize its effect through
pricing strategies, productivity improvements and cost reductions.
Page 25
<PAGE>
Item 8. Consolidated Financial Statements and Supplementary Schedule
------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
DELTA COMPUTEC INC.
-------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Form
10-K REF.
---------
Consolidated Financial Statements:
Independent Auditors' Report 27
Consolidated Balance Sheets, October 31, 1997 and 1996 28-29
Consolidated Statements of Operations for the Years Ended
October 31, 1997, 1996 and 1995 30
Consolidated Statements of Changes in Shareholders' Investment
(Deficit) for the Years Ended October 31, 1997, 1996 and 1995 31
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1997, 1996 and 1995 32
Notes to Consolidated Financial Statements 33-41
Schedule:
VIII. Valuation and Qualifying Accounts for the
Years Ended October 31, 1997, 1996 and 1995 42
All other schedules are not submitted because they are not applicable, are not
required or because the required information is included in the financial
statements or notes thereto.
Page 26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Delta Computec Inc.
Rochester, New York
We have audited the accompanying consolidated balance sheets of Delta
Computec Inc. and subsidiaries as of October 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' investment
(deficit) and cash flows for each of the three years in the period ended October
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 8. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and preform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Delta Computec Inc. and
subsidiaries as of October 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
January 9, 1998
Page 27
<PAGE>
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
OCTOBER 31, 1997 AND 1996
-------------------------
ASSETS
------
1997 1996
---- ----
CURRENT ASSETS:
Cash $ 18,944 $ 50,891
Accounts receivable, less allowance for
doubtful accounts of $124,199 and $263,808
in 1997 and 1996, respectively 1,673,643 2,634,039
Inventories 869,049 816,939
Prepaid expenses and other current assets 132,327 442,549
---------- ----------
Total current assets 2,693,963 3,944,418
FIELD SPARE PARTS, less accumulated
amortization of $ 769,322 and $ 216,746
in 1997 and 1996, respectively 2,756,169 2,546,133
PROPERTY AND EQUIPMENT:
Vehicles 74,614 74,614
Office furniture & equipment 229,564 228,311
Technical equipment 131,893 131,848
Purchased Software 56,405 32,472
Leasehold improvements 71,092 60,072
---------- ----------
563,568 527,317
Less: accumulated depreciation
and amortization 369,784 291,751
---------- ----------
Property and equipment, net 193,784 235,567
DEFERRED INCOME TAXES NON-CURRENT 150,000 150,000
OTHER ASSETS:
Goodwill, less accumulated amortization of
$333,966 and $286,256 in 1997 and 1996,
respectively 143,128 190,837
Other 89,185 104,431
---------- ----------
Total other assets 232,313 295,268
---------- ----------
Total assets $6,026,229 $7,171,386
========== ==========
See notes to consolidated financial statements.
Page 28
<PAGE>
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
OCTOBER 31, 1997 AND 1996
-------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
1997 1996
---- ----
CURRENT LIABILITIES:
Accounts payable $ 1,805,342 $ 2,526,884
Current portion of long-term debt - 75,000
Due to shareholder - -
Deferred service revenue 1,413,135 2,131,491
Accrued expenses:
Accrual for discontinuance of operations - 102,375
Payroll and payroll taxes 282,764 176,959
Sales taxes payable 210,197 499,782
Interest 64,658 96,563
Other 214,281 310,282
----------- -----------
Total current liabilities 3,990,377 5,919,336
LONG-TERM DEBT 750,000 750,000
DUE TO SHAREHOLDER 2,865,000 2,655,461
SUBORDINATED DEBENTURES 600,001 600,001
COMMITMENTS (Note 6) - -
SHAREHOLDERS' DEFICIT:
Preferred shares, $ .01 par value;
shares authorized 5,000,000 shares;
issued and outstanding: - -
none in 1997 and in 1996
Common shares, $ .01 par value;
shares authorized 20,000,000 shares; issued and
outstanding: 18,252,050 in 1997 and 6,811,575
in 1996 182,521 68,116
Additional paid-in capital 4,801,698 4,916,093
Accumulated deficit (7,163,368) (7,737,621)
----------- -----------
Total shareholders' deficit (2,179,149) (2,753,412)
Total liabilities and shareholders' deficit $ 6,026,229 $ 7,171,386
=========== ===========
See notes to consolidated financial statements.
Page 29
<PAGE>
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
1997 1996 1995
---- ---- ----
REVENUES:
Service revenues $12,299,133 $10,911,153 $ 8,965,335
Equipment sales 1,077,001 1,302,780 1,326,935
----------- ----------- -----------
Total revenues 13,376,134 12,213,933 10,292,270
COSTS AND OPERATING EXPENSES:
Service costs 8,400,639 7,524,523 6,569,363
Cost of equipment sold 836,848 1,155,711 1,301,499
Selling, general and administrative 3,005,243 2,878,456 2,255,858
----------- ------------ -----------
Total costs and operating expenses 12,242,730 11,558,690 10,126,720
OTHER INCOME (EXPENSE), NET:
Interest expense (423,211) (87,241) (142,550)
Writedown of other assets - - (284,961)
Other, net 18,202 - 1,459
Total other (expense) (405,009) (87,241) (426,052)
RESTART HERE
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN 728,395 568,002 (260,502)
INCOME TAXES(BENEFIT) 36,000 7,489 (130,000)
----------- ----------- ----------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE EXTRAORDINARY GAIN 692,395 560,513 (130,502)
EXTRAORDINARY GAIN - 455,384 -
----------- ----------- ---------
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS 692,395 1,015,897 (130,502)
LOSS FROM DISCONTINUED OPERATIONS:
Loss from operations - (1,741,112) (3,632,417)
Loss on disposal (118,142) (102,375) -
Income taxes - - (1,333,000)
----------- ----------- ---------
Net loss from discontinued
operations (118,142) (1,843,487) (4,965,417)
NET EARNINGS (LOSS) $ 574,253 $ (827,590) $(5,095,919)
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS $ .05 $ .08 $ (.02)
EXTRAORDINARY ITEM - .07 -
DISCONTINUED OPERATIONS (.01) (.27) (.73)
---- --- ---
LOSS $ .04 $ (.12) $ (.75)
=== === ===
See notes to consolidated financial statements.
Page 30
<PAGE>
<TABLE>
<CAPTION>
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT (DEFICIT)
------------------------------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
--- Common Stock --- Total
Additional Shareholders
Paid-in Accumulated Investment
Shares Amount Capital Deficit (Deficit)
------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 1, 1994................................. 6,811,575 $ 68,116 $4,916,093 $(1,814,112) $ 3,170,097
Net loss fiscal 1995...................................... - - - (5,095,919) (5,095,919)
--------- -------- ---------- ---------- -----------
Balance, October 31, 1995................................. 6,811,575 68,116 4,916,093 (6,910,031) (1,925,822)
Net loss fiscal 1996...................................... - - - (827,590) (827,590)
--------- -------- ---------- ---------- -----------
Balance, October 31, 1996................................. 6,811,575 68,116 4,916,093 (7,737,621) (2,753,412)
Exercise of stock option.................................. 11,440,475 114,405 (114,395) - 10
Net earnings fiscal 1997.................................. - - - 574,253 574,253
--------- -------- ---------- ---------- -----------
Balance, October 31, 1997................................. 18,252,050 182,521 4,801,698 (7,163,368) (2,179,149)
========== ======== ========== ========== ===========
See notes to consolidated financial statements.
</TABLE>
Page 31
<PAGE>
DELTA COMPUTEC INC.
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $574,253 $(827,590)$(5,095,919)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Extraordinary gain - (455,384) -
Accrual for loss on discontinued operations (102,375) 102,375 -
Depreciation & amortization 685,319 1,403,632 1,538,204
Deferred income taxes - - 1,202,000
Accounts receivable 960,397 2,116,373 712,144
Inventories (52,110) 864,866 519,534
Accounts payable & accrued expenses (743,645) (1,351,299) 1,284,493
Deferred service revenue (718,356) 466,783 (118,530)
Other - net 20,637 (226,441) 168,523
------ -------- -------
Net cash provided by operating activities 624,120 2,093,318 210,449
------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (36,252) (37,133) (292,441)
Additions to field spare parts (762,611) (1,044,973) (536,310)
Decrease in intangible assets 8,245 - -
-------- --------- -------
Net cash (used) by investing activities (790,618) 1,082,106 (828,751)
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from shareholder loans, net 209,539 539,130 571,670
Net (repayment) borrowings from note
payable to bank - (1,488,295) 66,136
Proceeds from sale of common shares 10 - -
Repayments on debt (75,000) (30,969) (12,500)
-------- -------- --------
Net cash (used)/provided by
financing activities 134,549 (980,134) 625,306
------- ------- -------
NET INCREASE (DECREASE) IN CASH (31,948) 31,078 7,004
CASH - beginning of year 50,891 19,813 12,809
------ ------ ------
CASH - end of year $ 18,943 $ 50,891 $ 19,813
====== ====== ======
See notes to consolidated financial statements.
SUPPLEMENTAL NONCASH FINANCING TRANSACTION
During 1996, the Company restructured its note payable to the bank resulting in
a non-cash reduction in the note payable, such reduction totaling $1,544,661,
and a corresponding increase in the amount due to its principal shareholder.
Page 32
<PAGE>
DELTA COMPUTEC INC.
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
(1) General Description Of Business and Summary Of Significant Accounting
--------------------------------------------------------------------------
Policies
--------
Description of Business
-----------------------
The Company, by itself and through its wholly-owned subsidiary, SAI Delta,
Inc. ("SAI/Delta"), provides a wide array of Computer System, Data
Communication and Lan/Wan technical services and products to a customer
base which encompasses many industries and geographic locations. (See Note
2 below regarding the Company's Intronet Division and the closing of this
operation which was completed in December, 1996). The Company's customer
base includes large brokerage houses, banks, pharmaceutical companies,
major hospitals and long distance carriers, located principally in the
Northeast but reaching as far as Florida and the West Coast. Technical
services offered include, but are not limited to, design, product
procurement, installation, service, maintenance and on-site technical
management and consulting.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Delta Data Net, Inc. ("Data Net"), (see
Note 2), and SAI/Delta. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company had net
earnings in Fiscal 1997. However, the Company incurred net losses in Fiscal
1996 and 1995, had a working capital deficit and a stockholders' deficit of
$1,296,414 and $2,179,149, respectively, as of October 31, 1997 and was in
default under certain loan agreements as of October 31, 1997. (See Note 3).
In view of the losses incurred in Fiscal 1996 and 1995 and related cash
flow difficulties, management initiated certain actions designed to return
the Company to its core business and profitability. Among these actions
were: (1) cost reductions associated with the centralization of operations
in its Teterboro, New Jersey location; (2) termination of operations of the
Data Net subsidiary; (3) the decision to terminate operations of the
Intronet Division, substantially accomplished at October 31, 1996, followed
by the closing of its office in December, 1996; (4) restructuring of its
primary lending relationship; (5) negotiation of a buy-out and settlement
of a debenture; (6) obtaining of an extension until November 1, 1998 in its
lending arrangement with its lenders; and (7) renegotiation of its lending
agreement with its commercial lenders whereby the maximum loan amounts have
been increased for the period October 1 through December 31, 1997 and
January 1 through June 30, 1998. These actions have resulted in the
realization of management's plan to improve profitability in the Company's
core business and increase cash flows in Fiscal 1997, enabling the Company
to maintain operations.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
Page 33
<PAGE>
Reclassifications
-----------------
Certain reclassifications have been made to the prior years' financial
statements in order to conform to the current year's presentation.
Property and Equipment
----------------------
Property and equipment are stated at cost and are depreciated using the
straight-line method based on estimated useful lives which are as follows:
Estimated
Description Useful Life
----------- -----------
Technical equipment 5 - 7 years
Office furniture and equipment 3 - 7 years
Vehicles 2 - 3 years
Purchased software 2 - 3 years
Leasehold improvements 5 - 10 years
Maintenance and repairs are charged to expense as incurred. The cost of
renewals or improvements that increase the useful lives of the assets is
capitalized in the appropriate asset account. The gain or loss on property
retired or otherwise disposed of is credited or charged to operations and
the cost and accumulated depreciation are removed from the accounts.
The Company regularly assesses all of its long-lived assets for impairment
and recognizes a loss when the carrying value of an asset exceeds its fair
value.
The Company determined that no impairment loss need be recognized for
applicable assets in Fiscal 1997 or 1996.
Inventories
-----------
Inventories represent computer equipment and peripherals held for resale in
the normal course of business and consumable field spare parts. These
inventories are recorded at the lower of cost (first-in, first-out) or
market.
Field Spare Parts
-----------------
Field spare parts are stated at cost and are amortized using the
straight-line method over an estimated useful life of 5 years beginning in
the year after acquisition.
Goodwill
--------
Goodwill, representing the excess of the cost of acquired businesses over
the fair value of net assets acquired, is generally amortized on a
straight-line basis over periods ranging from ten to twenty years. On an
ongoing basis, the Company assesses impairment of such assets by reviewing
the operating performance of the underlying business or customer
relationships. In Fiscal 1995, this assessment resulted in recording
additional amortization expense of approximately $505,000 relating to such
impairment, $330,164 of which is included in the Fiscal 1995 Loss From
Discontinued Operations.
Deferred Service Revenue
------------------------
Service revenue is recognized ratably over the contract period. Deferred
service revenue represents billings in advance of the service period.
Revenue Recognition
-------------------
Service revenues: Contract service revenue is recognized ratably over the
contractual period or as services are provided. Revenue from service
rendered on a "time and materials" basis is recognized in the period the
work is performed.
Equipment sales: Revenue from equipment sales and the related cost of sales
are recognized when title to the equipment passes. Component repair revenue
and related costs are recognized upon completion of the repair.
Page 34
<PAGE>
Income Taxes
------------
Income taxes are recognized for the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future
tax consequence of events that have been recognized in the Company's
consolidated financial statements or tax returns.
Earnings Per Share
------------------
Earnings per common and common equivalent share are computed based upon the
weighted average of common shares outstanding during each year adjusted for
dilutive outstanding stock options and warrants using the Treasury Stock
Method. Weighted average shares outstanding for the years ended October 31,
1997, 1996 and 1995 totalled 14,741,548, 6,811,575 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. The
Company is currently evaluating what impact the adoption of this standard
will have on its 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 top ten customers accounted for approximately 65% of its
total revenues in Fiscal 1997, and one of these customers accounted for
approximately 12% of total revenues in Fiscal 1997. The Company does not
require collateral or other security to support customers' receivables.
(2) Discontinued Operations
-----------------------
As part of the Company's strategy of concentrating its focus on its core
business, Data Net terminated its business operations on March 8, 1996.
Prior to this termination, Data Net was in the business of the sale and
distribution of hardware and test equipment and the sale and assembly of
cables used in data communications applications.
In November, 1994, the Company acquired substantially all of the operating
assets of Intronet, Inc. These assets were acquired in exchange for
$337,000 in cash and the assumption of approximately $588,000 in
liabilities of Intronet, Inc. Subsequent to the acquisition and prior to
the termination of operations of the Intronet Division, the Intronet
Division designed, installed and supported advanced computer networks with
emphasis in large company and industrial facilities requiring network
hubbing integrated with fiber and copper cabling. In the fourth quarter of
Fiscal 1996, management decided to terminate operations of the Intronet
Division, which was substantially accomplished at October 31, 1996,
followed by the closing of its office in December, 1996.
Page 35
<PAGE>
A loss of $118,142 on disposal of these discontinued operations was
recorded during the fiscal year ended October 31, 1997. A provision of
$1,843,487 for the loss on disposal of these discontinued operations was
recorded during the fiscal year ended October 31, 1996, consisting of a
$1,741,112 loss from operations and a $102,375 loss on disposal. Due to the
Company's accumulated deficit position, there was no tax benefit recorded.
The Company's operating results for all periods presented 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 for the fiscal years
ended October 31, 1996 and 1995 represents an allocation of corporate
interest expense and amounts directly related to the discontinued
businesses. The allocation of corporate interest expense was based, in
part, on a ratio of the net assets of the discontinued operations to the
sum of the consolidated net assets and consolidated debt, adjusted
accordingly. Amounts allocated for interest in Fiscal 1996 and 1995
totalled $367,892 and $299,585, respectively. Interest expense for the
fiscal year ended October 31, 1997, while almost wholly related to the
losses incurred in discontinued operations in prior fiscal years, was
absorbed in its entirety by the Company's core operations. Revenues from
discontinued operations were $3,996,507 and $20,064,694 in Fiscal 1996 and
1995, respectively. There were no remaining net assets of the discontinued
operations at October 31, 1997. However, additional expenses were incurred
in Fiscal 1997 above the amounts accrued in Fiscal 1996 related to the
discontinued operations.
(3) DEBT AND DEBT DUE TO SHAREHOLDER
--------------------------------
Long-term debt and Debt Due to Shareholder consist of the following at
October 31:
1997 1996
---- ----
Due to shareholder $ 2,865,000 $ 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
----------- -----------
$ 3,615,000 $ 3,480,461
Less: Current portion - 75,000
----------- -----------
$ 3,615,000 $ 3,405,461
=========== ===========
On October 10, 1996, the Company restructured the note payable to its bank,
which totalled $2,294,661 at that time. The bank, National Canada Finance
Corp. ("NCFC") was also its then primary lending institution. A portion of
the note payable to NCFC plus related fees and expenses, aggregating
$1,544,661, was assumed by the Company's principal stockholder, Joseph M.
Lobozzo II ("Lobozzo"), and the balance of the loan, in the amount of
$750,000, was restructured as a Term Loan. The Company has an Amended and
Restated Credit Agreement with Lobozzo (the "Lobozzo Credit Agreement", as
amended and as restated, which provides for the "Lobozzo Loan"), which
provides that: (1) the maximum 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 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
Page 36
<PAGE>
is due on June 30, 1998. In January, 1998, the lending agreement with its
commercial lenders was further amended to extend the terms of the lending
agreement from June 30, 1998 to November 1, 1998. A copy of the amendment
is annexed as Exhibit B to this Form 10-K Report. In January, 1998, the
Lender executed a waiver (the "January 1998 Waiver"), a copy of which is
annexed as Exhibit C to this Form 10-K Report, whereby the Lenders waived
any non-compliance by the Company with certain provisions of the First
Restated Credit Agreement, 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 meeting those targets.
As of October 31, 1997 and October 31, 1996, there were principal balances
of $2,865,000 and $2,255,461, 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.
The agreement underlying the Term Loan requires the Company to maintain a
ratio of field spare parts to outstanding indebtedness of at least 2.5 to
1. The Company has been in compliance with this ratio requirement for all
periods since inception of the loan restructuring. Lobozzo has pledged
480,000 of the Company's common shares owned by him as additional
collateral for the Term Loan. Agreements have been made to provide NCFC
with additional equity in the Company (up to 17.5% of the Company's issued
and outstanding common shares) under certain circumstances. In February,
1997, Lobozzo transferred to his spouse, Joanne M. Lobozzo ("Joanne
Lobozzo") half of his interest in the Lobozzo Loan and Lobozzo and Joanne
Lobozzo are collectively referred to as the "Lender" under the Lobozzo
Credit Agreement.
In addition, as of October 31, 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, was exercised in full by the principal shareholder and by Joanne
Lobozzo, and 11,440,475 common shares were issued, of which 5,720,238
common shares were issued to Lobozzo and 5,720,237 common shares were
issued to Joanne Lobozzo. As a result of this transaction, Lobozzo and
Joanne Lobozzo are both now control persons of the Registrant. In May,
1997, the principal balance outstanding on the Lobozzo Commitment was paid
in full, and the documents upon which it was based were terminated.
Interest paid was as follows for the fiscal years ended October 31:
1997 1996 1995
---- ---- ----
$ 471,385 $ 405,869 $ 550,799
Interest paid to Lobozzo and Joanne Lobozzo for Fiscal 1997, and to Lobozzo
for Fiscal 1996 and 1995, was $401,797, $102,625 and $40,533, respectively.
(4) SUBORDINATED DEBENTURES
-----------------------
In November, 1992 the Company and Data Net jointly issued an 8%
subordinated debenture in the face amount of $475,000 due October 31, 1997
to the sellers ("the Sellers") of the assets acquired by Data Net on
November 1, 1992. As of October 31, 1996, the Sellers agreed to sell the
entire principal balance of the 8% subordinated debenture, together with
accrued interest of $55,384, to the Company for $75,000. This transaction,
which resulted in a $455,384 gain on purchase of debt, is reflected in the
Fiscal 1996 operating results as an extraordinary gain.
Page 37
<PAGE>
The Company also has guaranteed an 8% subordinated debenture of Data Net in
the face amount of $600,001, as restated, to Lobozzo and Joanne Lobozzo
(the "Lobozzo Debenture"). The Lobozzo Debenture was due in annual
installments of $200,000 commencing January 31, 1996 and was issued in
connection with an option agreement entitling Lobozzo to purchase 1,304,350
shares of the 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 later further restated in February, 1997 when Lobozzo
transferred to Joanne Lobozzo half of the Restated Lobozzo Debenture and
the Restated 1992 Lobozzo Option Agreement, and those documents have been
reissued as the "Second Amended and Restated Lobozzo Debentures" and the
"Second Amended and Restated Lobozzo Option Agreements" (ee Item 13,
"Certain Transactions - Lobozzo Transactions"). No payments of principal
have been made on the Second Amended and Restated Lobozzo Debentures, and
the Second Amended and Restated Lobozzo Option Agreements remain
unexercised as of the date of this Form 10-K Report. The Second 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 to provide, 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, 1999. Copies of the two amended Second Amended
and Restated Lobozzo Debentures are annexed as Exhibits D and E to this
Form 10-K Report.
(5) INCOME TAXES
------------
The components of the income tax provision (benefit) are as follows:
Page 38
<PAGE>
Year Ended October 31
---------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ 11,000 $ - $ -
State 25,000 7,489 4,000
Deferred:
Federal - - 1,199,000
State - - -
--------- --------- ----------
$ 36,000 $ 7,489 $ 1,203,000
========= ========= ==========
The income tax provision (benefit) is allocated as follows:
Year Ended October 31
---------------------
1997 1996 1995
---- ---- ----
Income taxes related
to continuing operations $ 36,000 $ 7,489 $ (130,000)
Income taxes related
to discontinued operations - - 1,333,000
-------- ------- ----------
Total income taxes $ 36,000 $ 7,489 $ 1,203,000
======= ======= ==========
A reconciliation of the income tax provision (benefit) with tax at the
effective federal statutory rate is as follows:
Year Ended October 31
---------------------
1997 1996 1995
---- ---- ----
Federal provision (benefit)
based on statutory tax rate $ 214,000 $ (279,000) $ (1,324,000)
Permanent book-to-tax
differences:
Goodwill amortization 16,000 16,000 195,000
Other permanent items (72,000) (17,000) (74,000)
Increase (decrease) in
valuation allowance for
deferred taxes (138,000) 282,000 2,376,000
State provision net of
federal tax effect 16,000 5,489 30,000
--------- -------- ---------
$ 36,000 $ 7,489 $ 1,203,000
========== ========== ============
Page 39
<PAGE>
The components of the net deferred tax assets as of October 31 were as
follows:
- --------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------
Nondeductible inventory reserves $ 65,000 $ 75,000 $ 228,000
Nondeductible bad debt reserves 42,000 90,000 121,000
Nondeductible discontinued
operations reserves - 35,000 -
Tax loss carryforwards 2,225,000 2,461,000 1,898,000
Accelerated book amortization
of field spare parts 262,000 74,000 200,000
Investment tax credit carryforward 111,000 111,000 111,000
Other 3,000 - 6,000
Less allocable valuation allowance (2,558,000) (2,696,000) (2,414,000)
--------- ---------- ----------
Total $ 150,000 $ 150,000 $ 150,000
======= ======= =======
- --------------------------------------------------------------------------
At October 31,1997 the Company has recorded a deferred tax asset of
approximately $2,225,000 reflecting the benefit of approximately $6,544,000
in loss carryforwards, which expire in varying amounts between 2001 and
2011. Realization of this and other deferred assets is dependent on
generating sufficient taxable income in future periods. Management believes
that sufficient future income will exist to allow utilization of $150,000
of the deferred tax asset.
Income taxes paid were as follows for the fiscal years ended October 31:
1997 1996 1995
---- ---- ----
7,958 7,489 16,359
(6) Commitments
-----------
Operating Leases
----------------
The Company leases office space under various operating lease agreements
expiring through 2001. Net rental expense under these agreements was as
follows for the years ended October 31:
1997 1996 1995
---- ---- ----
Rental expense $ 329,109 $ 397,009 $ 427,473
Sub-lease income (41,120) (20,560) -
--------- -------- --------
Net Rental expense $ 287,989 $ 376,449 $ 427,473
As of October 31, 1997, the minimum future payments under non-cancelable
operating leases with initial or recurring terms for the next four years is
summarized as follows:
Page 40
<PAGE>
Fiscal Year Amount
----------- ------
1998................... $ 307,014
1999................... $ 317,440
2000................... $ 307,440
2001................... $ 176,782
(7) Stockholders' Investment
------------------------
Incentive Stock Option Plan -
The Company has an incentive stock option plan under which options to
purchase up to 600,000 of the Company's common shares may be granted to key
employees. Such options expire five years from the date of grant. The
Company has adopted the disclosures-only provision of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". Accordingly no compensation cost, if required, would have
been recognized for the Stock Option Plan as it relates to employees.
However, because the various prices at which the applicable incentive stock
options are exercisable are, and have been, in excess of the market price
of the Company's common shares at October 31, 1996 and 1997, there would
have been no compensation cost for the Company's stock option plan, as
would have been determined based on the fair value at the date of grant for
awards consistent with the provisions of SFAS No. 123. Accordingly, the
Company's net earnings and net earnings per common and common share
equivalents would not have been affected by the provisions of SFAS No.
123.
The exercise price shall not be less than the fair market value of the
shares on the date of grant. The following summarizes the activity of the
stock options under the plan as of October 31.
1997 1996 1995
---- ---- ----
Outstanding - beginning of
year 345,500 230,500 344,000
Granted 153,000 159,000 100,000
Exercised - - -
Canceled (127,500) (44,000) (213,500)
------- ------- -------
Outstanding - end of year 371,000 345,500 230,500
======= ======= =======
Average exercise price of
outstanding and exercisable
options $.26 $.42 $.86
=== === ===
Director Stock Option Plan -
The Company has a non-qualified stock option plan for eligible Board of
Director members. Under this plan, options to purchase up to 100,000 of the
Company's common shares may be granted to eligible directors with a maximum
of 8,000 common shares each year available to an individual member. Options
granted become exercisable one year after the date of grant and expire five
years after the date of grant. The following summarizes the activity of the
stock options under the plan as of October 31:
1997 1996 1995
---- ---- ----
Outstanding - beginning of year - - 6,000
Granted - - -
Exercised - - -
Canceled - - 6,000
- - -----
Outstanding - end of year - - -
==== ==== =====
Average exercise price of
outstanding and exercisable
options - - -
==== ==== =====
Page 41
<PAGE>
DELTA COMPUTEC INC.
-------------------
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
-------------------------------------------------
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
---------------------------------------------------
Allowance for Doubtful Accounts
- -------------------------------
Balance Charged Charged Balance
Beginning to costs to other Net Amounts End of
of Period and Expenses Accounts Written Off Period
--------- ------------ -------- ----------- ------
Year ended October 31, 1997:
$ 263,808 $ 30,361 $ - $ (169,970) $ 124,199
======= ====== ===== ======= =======
Year ended October 31, 1996:
$ 652,523 $ 84,418 $ - $ (473,133) $ 263,808
======= ====== ===== ======= =======
Year ended October 31, 1995:
$ 193,238 $ 631,701 $ - $ (172,416) $ 652,523
======= ======= ==== ======= =======
Allowance for Obsolete Inventory
- --------------------------------
Balance Charged Charged Balance
Beginning to costs to other Net Amounts End of
of Period and Expenses Accounts Written Off Period
--------- ------------ -------- ----------- ------
Year ended October 31, 1997:
$ 220,904 $ - $ - $ (28,613) $ 192,291
======= ====== ==== ====== =======
Year ended October 31, 1996:
$ 671,711 $ 84,193 $ - $ (535,000) $ 220,904
======= ====== ==== ======= =======
Year ended October 31, 1995:
$ 671,711 $ - $ - $ _ $ 671,711
======= ====== ==== ==== =======
Page 42
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosure
----------------------------------------------------
None
Page 43
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
---------------------------------------------------
DIRECTORS OF THE REGISTRANT
---------------------------
Year first
Elected
Director Name and Background
- -------- -------------------
1995 Alfred C. Engelfried, Director and Assistant Secretary, age 54,
is the President and owner of Market Sense, Inc. ("Market
Sense"), a management consulting organization located in
Rochester, New York, a position he has held since 1986. Mr.
Engelfried was elected a director of the Company in March, 1995.
Prior to joining Market Sense, Mr. Engelfried was President of
Fannon Metal Industries from 1976 to 1981.
1995 Michael A. Julian, Director and Secretary, age 51, is
Vice-President Operations/Finance of JML Optical Industries, Inc.
("JML"), with which Joseph M. Lobozzo II and Michael E. McCusker,
also directors and officers of the Company, are also associated.
Mr. Julian is the brother-in-law of Mr. Lobozzo, and the brother
of Joanne M. Lobozzo, the wife of Joseph M. Lobozzo II. Mr.
Julian was elected a director in April, 1995. Mr. Julian has been
associated with JML for over 17 years.
1988 Joseph M. Lobozzo II, Director and Chairman of the Board of
Directors, age 54, is the Chairman and Chief Executive Officer of
JML, a manufacturer, designer and importer of precision optical
systems. Messrs. Julian and McCusker, also directors and officers
of the Company, are also associated with JML. Mr. Lobozzo founded
JML and has been affiliated with JML for over 24 years. Mr.
Lobozzo is a general partner of several real estate partnerships
and has affiliations, including several directorships, with a
variety of professional and civic organizations, including FNB
Rochester Corp, a publicly-traded corporation, and the Greater
Rochester United Way. Mr. Lobozzo received his B.S. degree in
physics from the City University of New York. As of October 31,
1996 and October 31, 1997, Mr. Lobozzo was considered to be the
controlling person of the Company. As of the date of filing this
Form 10-K Report, Mr. Lobozzo and his wife, Joanne Lobozzo, are
considered to be controlling persons of the Company. (See
"Principal Shareholders" in Item 12 and "Control of the Company",
"Certain Transactions Lobozzo Transactions" in Item 13).
1995 Michael McCusker, Director and Assistant Secretary, age 52, is
Senior Vice-President of JML, with which Messrs. Lobozzo and
Julian, also directors and officers of the Company, are also
associated. Mr. McCusker was elected a director in April, 1995.
Mr. McCusker has been associated with JML for over 20 years.
1997 John T. Smith, Director, age 50, was, through April, 1997, Chief
Executive Officer of JTS ChequeOut Solutions, Inc. ("JTS"), a
company that he founded in 1980. JTS, which is engaged in the
business of software development and product sales, was sold to
Ajilon Corporation in April, 1997, and Mr. Smith is currently a
consultant to Ajilon. Mr. Smith is also currently associated with
private organizations in the areas of real estate development,
management consulting, media design and photo CD imaging. Mr.
Smith was elected a director in June, 1997 to fill an existing
vacancy on the Board of Directors.
The Board of Directors held six (6) meetings during Fiscal 1996 and seven
(7) meetings during Fiscal 1997. Each incumbent director attended at least 75%
of the total number of such Board meetings and Board Committees on which he
served which were held during his term of office.
The Board of Directors has standing Audit and Compensation Committees.
Following the resignation of prior directors who had been members of those
committees during Fiscal 1995, no replacements were immediately made to fill
those vacancies, but the vacancies have now been filled. Although the Company
has no standing Nominating Committee, the Board of Directors will consider
director nominees recommended by shareholders. In December, 1995, the Board
designated an Executive Committee which, at its outset, constituted the entire
Board of Directors.
Page 44
<PAGE>
The Audit Committee recommends the selection of, and confers with, the
Company's independent accountants regarding the scope and adequacy of annual
audits; reviews reports from the independent accountants; and meets with such
independent accountants and with the Company's financial personnel to review the
adequacy of the Company's accounting principles, financial controls and
policies. The current members of the Audit Committee are Messrs. Lobozzo, Julian
and McCusker. The Audit Committee held no meetings during Fiscal 1996 or Fiscal
1997, but the entire Board of Directors performed the functions of that
Committee during those time periods.
The Compensation Committee reviews the Company's compensation philosophy
and programs, and exercises authority with respect to the payment of direct
salaries and incentive compensation to directors and officers; loans to, or
guarantees of, obligations of such persons and some employee loans; and the
administration of the stock option plans of the Company. The current members of
the Compensation Committee are Messrs. Engelfred, Julian and McCusker. The
Compensation Committee held no meetings during Fiscal 1996 or Fiscal 1997, but
the entire Board of Directors performed the functions of that Committee during
those time periods. During the portion of each fiscal year in which each
director served as a director, each director participated in deliberations
concerning executive officer compensation when such topics were considered by
the Board.
The Executive Committee was formed in December, 1995, following the close
of Fiscal 1995. The Executive Committee has such authority as is granted by the
Business Corporation Law of the State of New York. In addition, the President
and Chief Operating Officer is authorized to deal with any member of the
Executive Committee for advice and assistance as required or deemed appropriate.
The current members of the Executive Committee are Messrs. Engelfried, Julian,
Lobozzo and McCusker.
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
The following table sets forth the identities and positions of each of the
executive officers of the Company:
Year First
Officer's Name Age Position with the Company Elected
- -------------- --- ------------------------- -------
John DeVito 41 President and Chief Operating
Officer 1995
Joseph M. Lobozzo II 54 Director and Chairman of the
Board of Directors 1995
Michael Julian 51 Director and Secretary 1995
Frank J. Donnelly 57 Chief Financial Officer and
Chief Accounting Officer 1996
Alfred C. Engelfried 54 Director and Assistant Secretary 1995
Michael McCusker 52 Director and Assistant Secretary 1995
Edward J. Drohan 63 Vice President, Sales and Marketing 1996
Mary Metrick 48 Assistant Secretary 1995
Mr. DeVito has been associated with the Company, or one or more of its
affiliates, and with one of the Company's predecessors in interest, R & M
Associates - Electronic Data Products Service, Inc. ("R&M Associates"), since
1978. During his tenure with R&M Associates and the Company, Mr. DeVito has held
various positions including: National Field Service Manager, Director of
Operations, Vice President of Operations and Vice President/General Manager. He
is currently President and Chief Operating Officer of the Company.
Mr. Donnelly has served as Chief Financial Officer and Chief Accounting
Officer of the Company since joining the Company in February, 1996. Prior to
February, 1996, from 1993 to 1996 Mr. Donnelly served as financial consultant to
healthcare, manufacturing and publishing businesses. Mr. Donnelly was Vice
President of Finance for a healthcare business from 1990 to 1993. Prior to 1990,
he held similar positions with consumer products and healthcare businesses. (See
Exhibit A to this Form 10-K Annual Report.)
Ms. Metrick has been associated with the Company in various capacities
since 1989. During her tenure, Ms. Metrick has had responsibility for various
administrative and computer/software functions, assisted in the conversion of
the Company's reporting systems at the time of the relocation of the Company's
headquarters from Syracuse, New York to Teterboro, New Jersey, served as Acting
Corporate Controller and is currently MIS Manager.
Page 45
<PAGE>
The business experience of each of Messrs. Lobozzo, Engelfried, Julian and
McCusker is set forth in "Directors of the Registrant", above. See also,
"Control of the Company" and "Certain Transactions - Lobozzo Transactions", Item
13, below.
Following the resignation in May, 1995 of Peter Smith, the Registrant's
former Chief Financial Officer, Walter Struble became the Acting Chief Financial
Officer of the Company and served in that capacity until his death in December,
1995.
In August, 1996, Edward Drohan was employed on a full-time basis as the
Company's Vice-President, Sales and Marketing, a position which is not an
elected corporate officership. Prior to becoming an employee, Mr. Drohan had
been a consultant to the Company since April, 1996. Mr. Drohan has also served
for five years as the Vice President of Sales and Marketing with Bell Atlantic
Business System Services and for fifteen years with Telex Computer Products and
Storage Technology Corporation in various sales and marketing capacities,
ultimately serving as Vice President with both companies. For the five-year
period prior to joining the Company, Mr. Drohan was self-employed as a
consultant in the computer maintenance field. During this period of time, his
principal client was Bankers Trust Company located in New York, N.Y.
There is no family relationship between any executive officer, director or
person anticipated to be a nominee to become an executive officer or director,
except that Messrs. Lobozzo and Julian are brothers-in-law.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
During Fiscal 1996 and Fiscal 1997, the following persons were directors,
officers, or beneficial owners of more than 10 percent of any class of
securities of the Registrant registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any other person
subject to Section 16 of the Exchange Act with respect to the Company, who
failed to file, on a timely basis, as disclosed upon a review of Forms 3 and 4
and amendments thereto furnished to the Company, reports required by Section
16(a) of the Exchange Act during Fiscal 1996 and Fiscal 1997 or prior Fiscal
Years. John DeVito, 4 late reports and 2 unreported transactions; Michael
Julian, 2 late reports and 1 unreported transaction; Michael McCusker, 2 late
reports and 1 unreported transaction; Alfred Engelfried, 2 late reports and 1
unreported transaction; Edward Drohan, 4 late reports and 2 unreported
transactions; Frank J. Donnelly, 4 late reports and 2 unreported transactions;
Joseph Lobozzo and Joanne Lobozzo 2 late reports and 1 unreported transaction;
and John T. Smith, 1 late report.
Item 11. Executive Compensation.
-----------------------
The following table sets forth information with respect to the President
and Chief Operating Officer, and each executive officer whose total annual
salary and bonus for Fiscal 1995, 1996 and 1997 exceeded $100,000.
Summary Compensation Table
--------------------------
Annual Compensation Long-Term Compensation
------------------------------------------
Name and
Principal Fiscal Option All other
Position Year Salary Bonus(1) (Shares) Compensation(2)
- -------- ---- ------ -------- -------- ---------------
L. Rodger Loomis 1995(3) $ 71,346 $ - - $ 2,000
President and Chief
Executive Officer
from November, 1994 to
March, 1995
John DeVito 1995(3) $ 90,346 $ 8,767 100,000 $ 1,644
President and Chief
Operating Officer
from March, 1995 to
October, 1995
John DeVito 1996 $105,635 $16,922 10,000 (6) $ 1,651
John DeVito 1997 $127,616 $20,026 78,000 (6) $ 1,644
Edward Drohan 1996(4) $ 52,712(4) $ - 40,000 (5) $ 1,644
Edward Drohan 1997 $130,099(4) $ - 30,000 (5) $ 5,100
Page 46
<PAGE>
(1) Bonus pursuant to DeVito's Employment Agreement is set at 5% of the
consolidated net income of the Company and its subsidiaries as reported on the
Company's respective tax returns. The bonuses for Fiscal 1995 and Fiscal 1996
were awarded on a basis other than as provided for in DeVito's Employment
Agreement. As of the date of filing this Form 10-K Report, no bonus payment has
been made for Fiscal 1997. However, a provision in the amount of $20,000 has
been accrued as of October 31, 1997.
(2) The All Other Compensation column would include any amount of the Company's
match under the Delta Computec Inc. 401K Employee Retirement Plan, as provided
for in that Plan. During Fiscal 1995, 1996 and 1997, the Company made no
matching contributions.
(3) Partial year. Mr. Loomis' employment terminated during Fiscal 1995. Messrs.
DeVito and Drohan assumed their positions in Fiscal 1995 and Fiscal 1996,
respectively.
(4) Includes consultant compensation prior to becoming a full-time employee and
all draws (See "Employment Agreements", below).
(5) Does not include options to be issued in Fiscal 1998 to purchase an
additional 30,000 common shares. (See "Employment Agreements", below).
(6) Does not include options to be issued in Fiscal 1998 to purchase an
additional 22,000 common shares. (See "Employment Agreements", below).
The following table shows, as to the current Chief Operating Officer, the
Chairman of the Board of Directors, Chief Financial Officer, Vice President,
Sales and Marketing and other executive officers of the Company, information
concerning stock options granted in Fiscal 1996.
STOCK OPTIONS GRANTED IN FISCAL 1996
------------------------------------
Exercise Expiration Grant Present
Name Options % Price Date Date Value
- ---- ------- - ---------- ---- -----
DeVito 10,000 22 $ .13 4/29/01 (1) 4/30//96 -
Drohan 20,000 45 .13 4/29/01 (2) 4/30//96 -
Donnelly 10,000 22 .13 4/29/01 (3) 4/30//96 -
Metrick 5,000 11 .13 4/29/01 4/30//96 -
(1) Does not include options for 100,000 shares called for to be issued pursuant
to the DeVito Employment Agreement (See "Employment Agreements", below), of
which options for 78,000 shares were issued in Fiscal 1997.
(2) Does not include options for 50,000 shares issued in Fiscal 1997 or options
for an additional 30,000 common shares called for to be issued in the future
pursuant to the Drohan Employment Agreement (See "Employment Agreements",
below).
(3) Does not include an option to purchase 25,000 common shares issued in Fiscal
1997.
The following table shows, as to the current Chief Operating Officer, the
Chairman of the Board of Directors, Chief Financial Officer, Vice President,
Sales and Marketing and other executive officers of the Company, information
concerning stock options granted in Fiscal 1997.
Page 47
<PAGE>
STOCK OPTIONS GRANTED IN FISCAL 1997
------------------------------------
Exercise Expiration Grant Present
Name Options % Price Date Date Value
- ---- ------- - ----- ----- ---- -----
DeVito 78,000 51 (1) (1) (1) -
Drohan 50,000 33 (2) (2) (2) -
Donnelly 25,000 16 $ .105 6/26/02 6/25/97 -
(1) Includes options for 50,000 common shares at $.105 per share issued on
August 12, 1997 (which options expire on August 13, 2002) and for 28,000 common
shares at $.10 per share issued on October 4, 1997 (which options expire on
October 5, 2002). Does not include options for an additional 22,000 common
shares to be issued in the future.
(2) Includes options for 20,000 common shares at $.17 per share issued on
November 4, 1996 (which options expire on November 5, 2001) and for 30,000
common shares at $.105 per share issued on August 12, 1997 (which options expire
on August 14, 2002). Does not include options for an additional 30,000 common
shares to be issued in the future.
The following table shows aggregate option exercises in Fiscal 1996 and
Fiscal 1997 and the fiscal year-end option values for the President and Chief
Operating Officer, the Chairman of the Board of Directors and other executive
officers of the Company.
AGGREGATED OPTION EXERCISES IN FISCAL 1996
AND OCTOBER 31, 1996 OPTION VALUES
----------------------------------
None
AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND OCTOBER 31, 1997 OPTION VALUES
----------------------------------
None
Employment Agreements
- ---------------------
The Company has entered into a letter employment agreement (the "DeVito
Employment Agreement") with John DeVito ("DeVito"), the President and Chief
Operating Officer of the Company, dated October 23, 1995, pursuant to which
DeVito will serve as the President and Chief Operating Officer of the Company
through November 1, 1998. The DeVito Employment Agreement calls for a base
salary of $105,000 per year, plus a bonus of 5% of the net profits of the
Company and its subsidiaries as reported on the Company's tax return. During
Fiscal 1995, 1996 and Fiscal 1997, Mr. DeVito received bonuses of $8,767,
$16,922 and $20,026, respectively, which bonuses were awarded on a basis other
than as provided for in the DeVito Employment Agreement. The DeVito Employment
Agreement further provided that, by July 1, 1996, the Board of Directors would
consider a $15,000 increase in Mr. DeVito's base salary, based on factors which
include changes in net worth, cash flow, year-to-date profitability, projected
profitability for the full year, sales growth and employee satisfaction. In
January, 1997, DeVito's annual salary was increased from $105,000 to $120,000.
The DeVito Employment Agreement further provides that DeVito will receive stock
options of 50,000 common shares at November 1, 1996 and November 1, 1997, for an
aggregate of 100,000 common shares. Options for an aggregate of 78,000 common
shares have been issued as of the date of the filing of this Form 10-K Annual
Report. Options for the remaining 22,000 common shares will be issuable in the
future. (See Item 1, A, 1, above).
The DeVito Employment Agreement also provides that, through November 1,
1998, in the event of a sale of 50.1% or more of the shares of the Company, or a
merger of the Company (a "Change of Ownership"), either of which results in a
non-voluntary termination of DeVito, DeVito will be entitled to receive his base
salary for one year; if DeVito is separated during the first year after a Change
of Ownership, DeVito's base salary will continue for the remainder of that year;
and, if DeVito accepts a position at another company during the first year after
a Change of Ownership, the Company will make up any difference in base salary in
the event of a salary reduction. In each instance, health plan benefits and life
insurance benefits will continue on the same terms. A copy of the DeVito
Employment Agreement was annexed to the 1996 Form 10-K Report as Exhibit A. (See
Item 1, A, 1, above).
Page 48
<PAGE>
During Fiscal 1996, the Company entered into a letter agreement (the
"Drohan Letter Agreement") with Edward Drohan ("Drohan"), its new Vice
President, Sales and Marketing, providing for the following: a base salary of
$90,000 annually with commission through October 31, 1996, at the Company's
standard commission rates on business personally generated by Drohan. In
accordance with the Company's standard policy, commissions are to be paid upon
receipt of payment from the customer. A $3,000 draw against commissions is
provided. Commencing November 1, 1996, the standard commission arrangement is
replaced by two programs designed to reward Drohan for contributions to the
Company's overall performance: (A) payment of 9% of the increase in pre-tax
profit from year to year, as reported for the Company's core business alone and,
therefore, excluding discontinued operations and the effect of extraordinary
items: the $3,000 per month draw will continue; pre-tax profit will be
calculated monthly and reconciled and remitted quarterly, with the entire
program to be reviewed annually; and (B) participation in the Company's "Senior
Management Profit Grid" which is designed to permit participants to earn a
portion of their compensation based on the pre-tax profitability the Company,
calculated on the percentage profitability and actual revenue. A copy of the
Drohan Letter Agreement was annexed to the 1996 Form 10-K Report as an Exhibit.
The Drohan Letter Agreement provides for the issuance of the following
stock options: options to purchase 40,000 common shares within ninety (90) days
of full-time employment (all of which have been issued); options to purchase
30,000 common shares within one year of the date of issue of the first option
(all of which have been issued) and options to purchase 30,000 common shares
within two years of the date of issue of the second option. Options to purchase
70,000 common shares have been issued as of the date of the filing of this Form
10-K Annual Report. Options for the remaining 30,000 common shares will be
issuable in the future. (See Item 1, A, 1, above).
During Fiscal 1997, the Company entered into a letter agreement (the
"Donnelly Letter Agreement") with Frank J. Donnelly ("Donnelly"), its Chief
Financial Officer and Principal Accounting Officer, providing for the following:
(A) a base salary of $80,000 annually; and (B) participation in the Company's
"Senior Management Profit Grid" which is designed to permit participants to earn
a portion of their compensation based on the pre-tax profitability the Company,
calculated on the percentage of profitability and actual revenue. A copy of the
Donnelly Letter Agreement is annexed to this 1996 Form 10-K Report as Exhibit A.
During Fiscal 1995, the Company terminated three employment agreements with
former employees: L. Rodger Loomis, the former President, Treasurer, Director,
Chairman of the Board of Directors, Chief Executive Officer and Chief Operating
Officer of the Company; Ronald Bulger, the former head of the Company's Intronet
Division, formed in November, 1994, upon the Intronet Acquisition and the former
President of Intronet, Inc.; and Robert Tripi, a former employee of the Company
associated with the Intronet Division, and a former Vice President of Intronet,
Inc. Messrs. Loomis and Bulger no longer have employment or consulting
relationships with the Company. The Company and Mr. Loomis reached a resolution
regarding Mr. Loomis' employment agreement (the "Loomis Employment Agreement")
stipulating that Mr. Loomis would receive weekly payments covering a period of
time from April, 1995 through March, 1997. (See Item 13, "Certain Transactions -
Loomis Transactions", below). These payments have been completed. Mr. Tripi,
through a corporation formed by Mr. Tripi, has entered into a consulting
agreement with the Company whereby Mr. Tripi and his corporation assist the
Company with a portion of the operations, as well as with certain projects,
related to its core business.
Incentive Stock Options
- -----------------------
On November 1, 1983, the Company adopted an incentive stock option plan
pursuant to Section 442A of the Internal Revenue Code. The incentive stock
option plan was amended, effective September 28, 1985, amended again effective
January 1, 1987, and was thereafter restated in its entirety effective March 23,
1987, and was further amended by the shareholders at the 1992 and 1993 Annual
Meetings to increase the number of common shares covered by the Incentive Plan
to 600,000 common shares (such Incentive Plan, as initially adopted and as
amended and restated to date, is herein referred to as the "Incentive Plan").
Under the Incentive Plan, the Company's Stock Option Committee, which is
designated by the Board of Directors and currently consists solely of Lobozzo,
may grant options to key employees to purchase up to an aggregate of 600,000
common shares. Such options expire 5 years from the date of the grant. Pursuant
to law, the exercise price of the options will be equal to the fair market value
of the common shares on the date when the option is granted, except that
employees owning greater than ten percent (10%) of the issued and outstanding
Page 49
<PAGE>
common shares of the Company are only eligible for grants under the Incentive
Plan if the exercise price is 110% of such fair market value and if the term of
the option is not more than 5 years. A purpose of the Incentive Plan is to
assist the Company in attracting and holding valuable employees by providing
those employees with incentives to foster the growth of the Company. As of
October 31, 1996, options under the Incentive Plan covering an aggregate of
345,500 common shares had been issued and were outstanding. No exercises of
stock options occurred in Fiscal 1996. As of October 31, 1997, options under the
Incentive Plan covering an aggregate of 371,000 common shares had been issued
and were outstanding. No exercises of stock options occurred in Fiscal 1997. Of
the 600,000 common shares authorized to be issued under the Company's Incentive
Plan, options for 228,150 common shares have been exercised. During Fiscal 1996
and Fiscal 1997, DeVito, the President and Chief Operating Officer of the
Company, was granted an option to purchase, respectively, 10,000 and 78,000
common shares for a 5 year period at the then fair market value of the Company's
common shares, or, respectively, $0.13 and $0.105 to $.10 per common share. From
and after the completion of Fiscal 1997, no options have been reacquired under
the Incentive Plan, and no options have been issued.
Non-Qualified Stock Options
- ---------------------------
Effective September 28, 1985, the Company established a Non-Qualified Stock
Option Plan to be available to members of the Board of Directors who are not
otherwise employees of, or subject to, written employment or consulting
agreements with, the Company (the "Non-Qualified Plan"). The Non-Qualified Plan
is separate from, and in addition to, the Incentive Plan, and is administered by
the Stock Option Committee. The Non-Qualified Plan provides that: (1) no
individual is eligible to receive any option unless such individual has been a
member of the Board of Directors for a period of at least one year and also has
been designated as eligible for such receipt by the Stock Option Committee; (2)
the maximum number of common shares which each eligible director will be able to
acquire is 30,000; (3) the maximum aggregate number of common shares available
to eligible directors is 100,000; (4) no option granted will be exercisable for
a period of one year from the date such option is granted; and (5) the option
rights available to an eligible director will have a life of 5 years from the
date granted. As of October 31, 1996 and 1997, there were no options
outstanding, and no options had been exercised during either fiscal year. No
options under the Non-Qualified Plan have been issued or exercised since the
commencement of Fiscal 1996 or Fiscal 1997. No options are outstanding as of the
date of this Form 10-K Annual Report.
Long-Term Incentive Plans Awards in Last Fiscal Year
----------------------------------------------------
The Company is in the process of finalizing its Long-Term Incentive Plan.
Consequently, no awards have been made. This Plan will become effective when new
accounting and operating software are implemented to provide senior management
with analysis of results by business unit.
Compensation of Directors
- -------------------------
The Company pays each non-employee director $250 per each Board Meeting
attended by the director. During Fiscal 1996 and 1997, no fees were paid to any
non-employee directors, all of which fees were waived.
Page 50
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
PRINCIPAL SHAREHOLDERS
----------------------
The following table sets forth as of October 31, 1997, certain information
concerning the Company's common shares held by: (i) each shareholder known by
the Company to own beneficially, or of record, more than 5% of the Company's
common shares, the only voting class of the Company's securities; (ii) each
director, and each nominee for director, of the Company; and (iii) all directors
and officers of the Company as a group. (1)
Name and address Amount and Nature of Percent of
Beneficial Owner(2) Beneficial Ownership Shares (3)
- ------------------- -------------------- ----------
Joseph M. Lobozzo II (4)
c/o JML Optical Industries, Inc. 14,749,575 75.42
690 Portland Avenue
Rochester, NY 14620
Michael A. Julian (5)
c/o JML Optical Industries, Inc. 48,000 .26
690 Portland Avenue
Rochester, NY 14620
Michael E. McCusker (6)
c/o JML Optical Industries, Inc. 35,000 .19
690 Portland Avenue
Rochester, NY 14620
Alfred C. Engelfried (7)
366 White Spruce Blvd. 50,000 .27
Rochester, NY 14623
John DeVito (8)
900 Huyler Street 311,000 1.69
Teterboro, NJ 07608
Joanne M. Lobozzo (9)
756 Rock Beach Road 7,607,287 40.24
Rochester, N.Y. 14617
Willcox & Gibbs, Inc. (10) 1,000,000 5.48
Edward J. Drohan (11) 100,000 0.55
Frank J. Donnelly (12) 35,000 .19
Mary Metrick 5,000 .03
----- ---
All Directors and
Officers as a group
(9 persons) (12) 15,333,575 77.23
1. During Fiscal 1997, several transactions occurred involving several of the
persons listed hereafter. Reference is made to "Control of the Company",
"Certain Transactions - Lobozzo Transactions", and "Certain Transactions -
Willcox & Gibbs Transactions", in Item 13.
2. During Fiscal 1997, certain other transactions occurred which may require
information to be provided by other persons for future reports, as follows:
Joanne M. Lobozzo, the wife of Joseph M. Lobozzo II (See "Certain Transactions -
"Control of the Company" and "Lobozzo Transactions" in Item 13), and John
DiProsa (See "Certain Transactions - Lobozzo Transactions" in Item 13).
3. The percentages shown on the table are based on 18,252,050 of the Company's
common shares issued and outstanding on October 31, 1997, and include common
shares which may be acquired by the referenced shareholder within 60 days
through the exercise of options to purchase common shares, but such common
shares are not included in calculating the percentage of common shares
beneficially owned by any other shareholder, except for the percentage of shares
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applicable to Lobozzo, as to which the number of common shares issued and
outstanding is calculated at 19,556,400 common shares, for John DeVito the
number is calculated at 18,440,050 common shares, for Joanne Lobozzo the number
is calculated at 18,904,225 common shares and for the designation "All Directors
and Officers as a Group", as to which the number of common shares outstanding is
calculated at 19,854,400 common shares, which number of common shares
outstanding includes in each instance common shares issuable upon exercise of
options to persons named in the table. Also includes options committed to be
issued to Messrs. DeVito and Drohan pursuant to their various letter agreements
but not issued as of October 31, 1997 and other options issued in Fiscal 1997.
Unless otherwise indicated, each shareholder shown on the table has sole voting
and investment power with respect to the Common Shares beneficially owned by
such shareholder.
4. Includes as of October 31, 1997: 5,815,113 common shares held in Mr.
Lobozzo's sole name; 652,175 common shares reserved for issuance upon exercise
of the amended Second Amended and Restated October 1992 Option Agreement
(Exhibit F hereto) issued concurrently with the amended Second Amended and
Restated October Lobozzo Debenture (Exhibit D hereto) originally issued by the
Company to Mr. Lobozzo on October 28, 1992, and amended and restated on February
16, 1995, on February 20, 1997 and in January, 1998. (See Item 13). As of
October 31, 1997, includes 435,000 common shares held in the name of JML, of
which Mr. Lobozzo is the chairman, chief executive officer and principal
shareholder. Includes 5,815,112 common shares held by Joanne Lobozzo; 652,175
common shares reserved for issuance upon exercise of Joanne Lobozzo's amended
Second Amended and Restated October 1992 Option Agreement; and 900,000 common
shares held by Mr. Lobozzo's three adult children as to all of which common
shares Mr. Lobozzo disclaims voting power and beneficial ownership. The number
of common shares held by Mr. Lobozzo, Joanne Lobozzo and their three adult
children changed during Fiscal 1997. Also includes, as of October 31, 1997,
480,000 common shares pledged to NCFC as part of the NCFC Restructuring, of
which, under certain circumstances, Mr. Lobozzo has agreed to transfer up to
240,000 common shares to Joanne Lobozzo. (See "Control of the Company" and
"Certain Transactions - Lobozzo Transactions", in Item 13).
5. Includes 20,000 common shares acquired by Mr. Julian and his wife from Mr.
Lobozzo in Fiscal 1997; 12,500 common shares held jointly with his spouse and
1,000 common shares held by his wife and minor son, jointly. Does not include
any common shares owned by JML of which Mr. Julian is an officer and minority
shareholder, all of which common shares are included in the calculation relating
to Mr. Lobozzo in Note 4 above, 1,000 common shares owned by his adult daughter,
or 6,900 common shares owned by his adult son, who is also an employee of JML.
(See "Control of the Company" and "Certain Transactions - Lobozzo Transactions",
in Item 13).
6. Includes 25,000 common shares acquired by Mr. McCusker and his wife from Mr.
Lobozzo in Fiscal 1997. Does not include any common shares owned by JML of which
Mr. McCusker is an officer and minority shareholder, all of which common shares
are included in the calculation relating to Mr. Lobozzo in Note 4 above. (See
"Control of the Company" and "Certain Transactions - Lobozzo Transactions", in
Item 13).
7. Includes 50,000 common shares acquired by Mr. Engelfried and his wife from
Mr. Lobozzo in Fiscal 1997. See "Certain Transactions - Lobozzo Transactions, in
Item 13.
8. Includes options to purchase 100,000 common shares agreed to be issued
pursuant to the DeVito Employment Agreement executed during Fiscal 1995, of
which options to purchase 78,000 common shares were issued in Fiscal 1997, and
options for an additional 22,000 common shares which remain to be issued; gifts
from Lobozzo during Fiscal 1995 of 80,000 common shares and 20,000 common shares
in the name of DeVito and DeVito's spouse, respectively; an additional 1,000
common shares owned by DeVito's spouse and other options to purchase 110,000
common shares pursuant to the Incentive Stock Option Plan, of which an option to
purchase 7,500 common shares at $.75 per share expired, unexercised, on December
4, 1996, and an option to purchase 25,000 common shares at $1.00 per share
expired on September 18, 1997. During Fiscal 1996, options under the Incentive
Stock Option Plan to purchase 25,000 common shares were voluntarily surrendered
by DeVito and an option to purchase 10,000 common shares was issued to Mr.
DeVito. See "Certain Transactions - Lobozzo Transactions, in Item 13,
"Employment Agreements" and "Incentive Stock Options", in Item 11.
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9. Includes as of October 31, 1997, 5,815,112 common shares held in Joanne
Lobozzo's own name; 652,175 common shares reserved for issuance upon exercise of
the Second Amended and Restated October, 1992 Option Agreement (Exhibit E
hereto) originally issued by the Company to Mr. Lobozzo on October 28, 1992, and
amended and restated on February 16, 1995, on February 20, 1997, (at which time
half of the original options agreement was transferred to Joanne Lobozzo) and in
January, 1998. (See Item 13). Also includes 900,000 common shares held by Joanne
Lobozzo's three adult children as to all of which common shares Joanne Lobozzo
disclaims voting power and beneficial ownership. Also includes 240,000 of the
480,000 common shares pledged by Mr. Lobozzo to NCFC as part of the NCFC
Restructuring which, under certain circumstances Mr. Lobozzo has agreed to
transfer to Joanne Lobozzo. Does not include: 5,815,113 common shares held in
the name of Mr. Lobozzo; 652,175 common shares reserved for issuance upon
exercise by Mr. Lobozzo's amended Second Amended and Restated October, 1992
Option Agreement; 435,000 common shares held in the name of JML Optical, or the
potential remaining 240,000 common shares pledged to NCFC as part of the NCFC
Restructuring. Joanne Lobozzo disclaims voting power and beneficial ownership in
Mr. Lobozzo's common shares and option.
10. Includes 1,000,000 common shares registered in the name of "Willcox & Gibbs
Data Net, Inc., and Dataspan Systems, Inc. Jt Ten", which organizations, under
amended names, are wholly-owned subsidiaries of Willcox & Gibbs. (See "Certain
Transactions - Willcox and Gibbs Transactions", in Item 13.
11. Includes 100,000 common shares agreed to be issued pursuant to the Drohan
Letter Agreement, 70,000 of which were issued in Fiscal 1997, and 30,000 of
which remain to be issued. (See "Employment Agreements", above).
12. Includes 25,000 common shares issuable pursuant to an option issued in
Fiscal 1997.
13. As of October 31, 1997, there were 18,252,050 common shares outstanding. The
figure of 15,333,575 includes the common shares to which reference is made in
Notes 4, 5, 6, 7, 8, 9, 11 and 12, above and assumes exercise of all options
referred to therein. (See Note 3, above).
During Fiscal 1997, there was a change of control of the Company. As of
December 30, 1996, Lobozzo gave to his wife, Joanne Lobozzo, 74,875 common
shares, bringing the number of common shares owned by Joanne Lobozzo in her own
name to 94,875 common shares. This transaction was a portion of the transactions
in which Lobozzo engaged with regard to the 1,519,750 common shares then owned
by Lobozzo to which reference is made in Item 13, "Certain Transactions -
Lobozzo Transactions", below. Lobozzo transferred 635,000 common shares to John
DiProsa, who, as of the date of the transfer, became a holder of in excess of 5%
of the outstanding common shares of the Registrant. Following the exercise of
the Restated 1995 Lobozzo Options, Mr. DiProsa no longer held in excess of 5% of
the outstanding common shares of the Registrant.
In February, 1997, Lobozzo transferred to Joanne Lobozzo: (i) half of the
several debt obligations owed to him by the Company; (ii) half of the Restated
1992 Lobozzo Option Agreement to purchase 1,304,350 common shares; and (iii)
half of the Restated May 1995 Lobozzo Option to purchase 11,440,475 common
shares, as set forth in "Certain Transactions - Lobozzo Transactions", below.
In February, 1997, Lobozzo and Joanne Lobozzo each executed their Second
Restated May 1995 Lobozzo Option to purchase 5,720,238 and 5,720,237 common
shares, respectively, bringing their shareholdings in the Company to 6,730,113
and 5,815,112 common shares, respectively. The exercise of these Second Restated
May 1995 Lobozzo Options brought the number of issued and outstanding common
shares of the Company to 18,252,050 common shares. Following the February, 1997
transactions, Lobozzo and Joanne Lobozzo each owned, respectively, 36.87% and
31.86% of the issued and outstanding common shares of the Company. Lobozzo's
shareholdings include 480,000 common shares pledged to NCFC pursuant to the NCFC
Restructuring. Lobozzo and Joanne Lobozzo also each hold an amended Second
Amended and Restated 1992 Lobozzo Option Agreement to purchase 652,175 common
shares and, if exercised in full, then the shareholdings and percentage of then
19,556,400 issued and outstanding common shares of the Company for Lobozzo and
Joanne Lobozzo would increase to 7,382,288 (37.75%) and 6,467,287 (33.07%),
respectively. If the 480,000 pledged common shares were returned to Lobozzo and
divided equally with Joanne Lobozzo, they would own 7,142,288 and 6,707,287
common shares, respectively, 36.52% (Lobozzo) and 34.30% (Joanne Lobozzo) and in
the aggregate 13,849,575 (70.82%) of the 19,556,400 issued and outstanding
common shares.
As a result of these transactions, Lobozzo and Joanne Lobozzo are each
considered to be controlling persons of the Company.
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Item 13. Certain Relationships and Related Transactions.
-----------------------------------------------
CONTROL OF THE COMPANY
----------------------
As of October 31, 1997, Lobozzo had beneficial ownership of 14,749,575
common shares, or 75.42% of the common shares outstanding, either directly or
through control of JML, or beneficially through the shareholdings of his wife
and children (although Lobozzo disclaims beneficial ownership of the common
shares, and options, owned by his wife, and children). Lobozzo and Joanne M.
Lobozzo were jointly also the principal lender to the Company by various loan
agreements. (See Item 1, above, and Item 13, "Certain Transactions - Lobozzo
Transactions", below). As of October 31, 1996, Lobozzo had beneficial ownership
of 15,499,575 common shares, or 79.26% of the common shares outstanding, either
directly or thorough control of JML, or beneficially through the shareholdings
of his wife and children (although Lobozzo disclaims beneficial ownership of the
common shares owned by his wife and children). In addition, as of October 31,
1996 and 1997, the Company had issued the Second Amended and Restated 1992
Lobozzo Options to Lobozzo and to Joanne Lobozzo which were exercisable into
1,304,350 common shares. If, as of October 31, 1997, the Second Amended and
Restated 1992 Lobozzo Option Agreements were fully exercised, Lobozzo and Joanne
Lobozzo would then have had beneficial ownership of 14,749,575 common shares, or
75.92% of the outstanding common shares of the Company. The Company believes
that Lobozzo was a control person of the Company as of October 31, 1996 and
October 31, 1997, as was Joanne Lobozzo at the latter date, and that both
Lobozzo and Joanne Lobozzo are control persons of the Company as of the date of
filing of this Form 10-K Report. The change in control of the Company was
reported in the February, 1997 Form 8-K Report.
CERTAIN TRANSACTIONS
--------------------
Lobozzo Transactions
- --------------------
1. To assist in the completion of the Willcox & Gibbs Acquisition, Data Net
and Lobozzo, a director of both the Company and Data Net, entered into a private
placement of the Lobozzo Debenture due October 28, 1995, in the face amount of
$600,001 (the "Lobozzo Debenture"). The Lobozzo Debenture was later restated on
February 16, 1995, to extend its term through January 31, 1998, and was again
amended as of January, 1998 to extend its term through January 31, 1999. The
Lobozzo Debenture is guaranteed by a subordinated guaranty of the Company. The
Company also issued to Lobozzo the 1992 Lobozzo Option Agreement which, as
originally issued, entitled Lobozzo to purchase 1,304,350 common shares of the
Company at a price of $.46 per share for a three-year period ending October 28,
1995. The 1992 Lobozzo Option Agreement was also amended to extend its term
through January 31, 1999. Lobozzo had waived the $200,000 payment due on January
31, 1996 and January 31, 1997. The Restated Lobozzo Debenture and the Restated
1992 Lobozzo Option Agreement were later further restated in February, 1997 when
Lobozzo transferred to Joanne Lobozzo half of the Restated Lobozzo Debenture and
the Restated 1992 Lobozzo Option Agreement, and those documents have been
reissued as the "Second Restated Lobozzo Debentures" and the "Second Restated
Lobozzo Option Agreements" (See Item 13, "Certain Transactions - Lobozzo
Transactions"). No payments of principal have been made on the Amended Second
Restated Lobozzo Debentures, and the Second Restated Lobozzo Option Agreements
remain unexercised as of the date of this Form 10-K Report. The Second 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 Restated Lobozzo Debentures were further
amended to provide that $300,000.50 (an aggregate of $600,001) would be paid in
full on January 31, 1999. Copies of the two Amended Second Restated Lobozzo
Debentures are annexed as Exhibits D and E to this Form 10-K Report.
In 1992, the Company also entered into a Registration Rights Agreement with
Lobozzo granting to Lobozzo certain registration rights with regard to certain
common shares of the Company which Lobozzo, at the time of the Willcox & Gibbs
Acquisition, had the right to purchase, and, subsequent to the completion of the
Willcox & Gibbs Acquisition, actually purchased, through the conversion of a
previously outstanding Non-Negotiable Subordinated Debenture (as herein defined)
of the Company. (See Section 2, below). The Lobozzo Debenture and the 1992
Lobozzo Option Agreement have each been amended and restated after the close of
Fiscal 1996, to transfer half of each security to Joanne Lobozzo. (See Sections
10 through 15, below.)
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2. On June 1, 1990, the Company issued a $1,000,000 fluctuating rate
Non-Negotiable Subordinated Debenture due June 1, 1993 (the "Non-Negotiable
Subordinated Debenture"), to Lobozzo, then a director of the Company, and to
certain parties related to Lobozzo. The Non-Negotiable Subordinated Debenture
was convertible into common shares at the conversion price of $.40 per share.
Interest was payable quarterly at the interest rate offered on Jumbo
Certificates of Deposit on the interest payment date, 5.56% at October 31, 1991.
The proceeds from the Non-Negotiable Subordinated Debenture were used to acquire
R & M Associates in June, 1990. On December 23, 1992, all outstanding
Non-Negotiable Subordinated Debentures were converted, all such Non-Negotiable
Subordinated Debentures were cancelled, and on December 30, 1992, an aggregate
of 2,500,000 common shares were issued, of which 2,093,750 common shares were
issued to Lobozzo, an additional 300,000 common shares were issued to Lobozzo's
children, and the balance were issued to various other parties.
3. In May, 1995, the Company and its wholly-owned subsidiaries, Data Net
(collectively, the Company and Data Net are referred to as the "Borrower") and
SAI/Delta and, collectively with the Borrower, "DCI"), and the Borrowers' then
commercial lender, NCFC, entered into the May 1995 Letter Agreement to provide
for the Overadvance Facility which permitted the Borrower to borrow up to an
additional $700,000 over the amount which would otherwise have been permitted by
the Borrower to borrow from NCFC under the NCFC Credit Agreement then existing
between the Borrower and NCFC. See Item 1 A, 3, above. SAI/Delta is a guarantor
of the Borrower's obligations with NCFC. Of the Overadvance Facility, $400,000
would be advanced to the Borrower by Lobozzo pursuant to an agreement (the "1995
Lobozzo Letter Agreement") and $300,000 by NCFC. The May 1995 Letter Agreement
and the 1995 Lobozzo Letter Agreement provided for a mechanism whereby, as the
Overadvance Facility was repaid, or additional advances on the Overadvance
Facility were required, Lobozzo and NCFC could be repaid or could advance
additional funds. On May 1, 1995, Lobozzo made the first $400,000 advance to the
Borrower on the Lobozzo Commitment to enable the Borrower to activate the
Overadvance Facility. Lobozzo was entitled to receive interest on the amount of
the outstanding Lobozzo Commitment at the same rate of interest that the
Borrower paid to NCFC. The interest rate was reduced following the end of Fiscal
1996 (See Section 8, below.) The participation of NCFC in the Overadvance
Facility was terminated on October 10, 1996, as a part of the NCFC Restructuring
(See Item 1 A, 4, above and Section 7, below). In May, 1997, the principal
balance outstanding on the Overadvance Facility was paid in full, and the
documents upon which it was based were terminated. The termination was reported
in the April, 1997 Form 10-Q Report.
4. Pursuant to the 1995 Lobozzo Letter Agreement, and in partial
consideration for the Lobozzo Commitment, the Company issued to Lobozzo the May
1995 Lobozzo Option to purchase all of the Company's authorized, uncommitted,
but unissued common shares upon payment of $10. In the event the core business
of the Company (representing essentially the service business of the Company,
but not including the business conducted by Data Net or the Intronet Division)
was sold prior to May 20, 1996, then, at the option of the Company's Board of
Directors, the May 1995 Lobozzo Option was cancelable (or if any common shares
were issued in the event of exercise of the option, those common shares could
have been repurchased by the Company at the exercise price) provided the Lobozzo
portion of the Overadvance Facility was paid in full with interest plus an
additional $100,000 payment. The core business of the Company was not sold by
May 20, 1996, and this portion of the 1995 Lobozzo Letter Agreement thereafter
became inapplicable. As of May 1, 1995, as of October 31, 1995, as of October
31, 1996, as of October 31, 1997 and as of the date of the filing of this Form
10-K Annual Report, the Company had 20,000,000 common shares authorized, of
which as of May 1, 1995, 6,811,325 common shares were issued and outstanding.
Pursuant to various stock option plans, an aggregate of 700,000 common shares
have been reserved, of which, on May 1, 1995, 256,150 common shares had been
issued, leaving a balance of 443,850 common shares reserved and unissued. The
Company had also reserved 1,304,350 common shares for issuance upon exercise of
the Restated 1992 Lobozzo Option Agreement. The balance of the authorized,
unreserved, but unissued common shares, or 11,440,475 common shares, were agreed
to be reserved for issuance upon exercise of the option granted to Lobozzo by
the May 1995 Lobozzo Option. The period during which the option granted by the
May 1995 Lobozzo Option could be exercised was for four (4) years from May 20,
1995, through May 20, 1999. As noted in Item 12 above, assuming exercise of the
Restated 1992 Lobozzo Option Agreement and the May 1995 Lobozzo Option, which
has since been exercised, Lobozzo and Joanne Lobozzo could hold an aggregate of
14,479,575 common shares, or approximately 75.42% of the then issued common
shares of the Registrant. (See "Control of the Company" and Sections 10 through
15, below).
5. In September, 1995, Lobozzo made gifts of an aggregate of 100,000 common
shares to DeVito (80,000 common shares) and to Debra DeVito, DeVito's wife,
(20,000) common shares.
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6. During Fiscal 1995, and in December, 1995, following the close of Fiscal
1995, in addition to the Lobozzo Commitment and the advances made by Lobozzo to
the Borrowers pursuant to the Overadvance Facility, Lobozzo and JML made the
1995 Additional Lobozzo Advances to the Company to enable the Company to take
advantage of business opportunities which, without the 1995 Additional Lobozzo
Advances, the Company would not have been able to engage in. The 1995 Additional
Lobozzo Advances were entered into pursuant to a procedure whereby Lobozzo
advanced to the Company funds to purchase specific products from vendors who
would not do business with the Company except on a COD basis. At the times when
the 1995 Additional Lobozzo Advances were made, the Company did not have a
sufficient borrowing base on the NCFC Credit Agreement, including the
Overadvance Facility, to make the required purchase of products on a COD basis.
The funds which the Company obtained from the 1995 Additional Lobozzo Advances
were then used to purchase products, and to immediately resell those products,
to customers of the Company pursuant to existing purchase orders. The Company
committed to repay the 1995 Additional Lobozzo Advances from the proceeds
received from the customers at the time the customers paid for the products, and
the profits from the sale of those products were divided, on an approximately
50/50 basis, between the Company and Lobozzo or JML. The procedure whereby the
1995 Additional Lobozzo Advances were made was agreed to by NCFC since NCFC then
had a security interest in all of the assets of the Borrower. These 1995
Additional Lobozzo Advances have since been repaid in full.
7. NCFC Restructuring
------------------
The original loan from NCFC to the Borrowers (the "Existing NCFC Loan"),
made pursuant to the NCFC Credit Agreement originally executed on April 1, 1994,
was amended five times thereafter. (See Item 1, above). On October 10, 1996, the
Registrant restructured its principal lending relationship with NCFC whereby a
portion of the loan from NCFC was purchased by Lobozzo and the balance of the
loan from NCFC to the Registrant was restructured as a term loan (collectively,
the entire transactions are referred to as the "NCFC Restructuring"). The NCFC
Restructuring Documents are each annexed to the Registrant's Form 8-K Current
Report dated October 24, 1996. (See Item 1, A, 3). The documents whereby the
NCFC Restructuring was accomplished are referred to as the "NCFC Restructuring
Documents". The description of the NCFC Restructuring is qualified in its
entirety by the NCFC Restructuring Documents.
As previously noted in Item 1, above, Data Net terminated its business
operations and voluntarily surrendered Data Net's collateral to NCFC so that
NCFC could liquidate that collateral and apply the proceeds of the liquidation
to reduce the indebtedness owing from Data Net to NCFC (the "Data Net Business
Termination"). NCFC completed that liquidation resulting in the application of
$122,128 to the Data Net obligation to NCFC. The documents relative to the Data
Net Business Termination, including the Forbearance Agreement, were filed with
the March, 1996 Form 8-K Report (the "Data Net Business Termination Documents").
The description of the Data Net Business Termination is qualified in its
entirety by the Data Net Business Termination Documents.
Following the Data Net Business Termination, NCFC, the Registrant, Data
Net, SAI/Delta and Lobozzo entered into a series of six amendments to the
Forbearance Agreement, and to the other Data Net Business Termination Documents,
which six amendments extended from time to time the Forbearance Period (as
defined in the Forbearance Agreement) and otherwise adjusted certain other terms
upon which NCFC continued to make loans to the Registrant. Following the
execution of Amendment No. 6 to the Forbearance Agreement dated September 9,
1996, NCFC issued three additional letters further extending the Forbearance
Period until, eventually, October 10, 1996. The six amendments to the
Forbearance Agreement, and the three subsequent extension of time letters, are
referred to, collectively, as the "Forbearance Amendments".
The Existing NCFC Loan, as amended by the Forbearance Agreement and the
Forbearance Amendments, as that Existing NCFC Loan existed immediately prior to
the NCFC Restructuring, provided the Registrant with the ability to borrow up to
a maximum of $2,200,000 subject to the Registrant's complying with certain
borrowing base requirements. Following, and as part of, the NCFC Restructuring,
Lobozzo purchased from NCFC, and NCFC assigned to Lobozzo, a principal portion
of the Existing NCFC Loan in the amount of $1,449,816, together with additional
interest costs and expenses requiring a payment by Lobozzo to NCFC of
$1,544,661. Lobozzo purchased this portion of the Existing NCFC Loan at face
value, without discount. Pursuant to the Amended and Restated Credit Agreement
between the Registrant and Lobozzo (the "Lobozzo Credit Agreement") and the
Amended and Restated Promissory Note (the "Lobozzo Note"), Lobozzo granted to
Registrant the "Lobozzo Loan", whereby: (a) Lobozzo agreed to increase the
maximum amount which the Registrant could borrow from Lobozzo to $2,550,000; (b)
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Lobozzo decreased the interest rate which the Registrant was required to pay
from the amount charged by NCFC which was 2 percent over prime rate (and an
increased rate of 4 percent over prime rate in the event of maturity of the
Existing NCFC Loan, with rates of 3 percent over prime rate in the event NCFC
ever permitted an overadvance of funds in excess of the Existing NCFC Loan and a
rate of 5 percent over prime rate in the event of a maturity of an overadvance
of funds) to 1 3/4 percent over prime rate with regard to the entire Lobozzo
Loan, with a rate of 3 3/4 percent over prime rate in the event of a maturity of
the Lobozzo Loan; (c) Lobozzo agreed to supply the Lobozzo Loan for a period of
60 days with an intention to review the Lobozzo Loan during that period to
possibly extend it for a longer period of time as opposed to the Existing NCFC
Loan as to which NCFC had agreed to forebear with regard to collection efforts,
which Forbearance Period expired on October 10, 1996; (d) Lobozzo agreed to
restructure the borrowing base to permit the registrant to borrow up to 105% of
eligible receivables from the previous maximum amount of 80% of eligible
receivables; (e) Lobozzo removed certain financial covenant obligations of the
Registrant as to which the Registrant had been in default under the Existing
NCFC Loan; and (f) Lobozzo agreed to take a reduced security position from that
which NCFC had under the Existing Loan Agreement, by entering into an
Intercreditor Agreement with NCFC, whereby NCFC, with regard to the NCFC Term
Loan (as herein defined), retained a first security position relative to the
Registrant's "Spare Parts Inventory" and Lobozzo, with regard to the Lobozzo
Loan, received by the Assignment and by an Amended and Restated General Security
Agreement, a security interest subordinated to NCFC with regard to the
Registrant's Spare Parts Inventory and a first security interest in all other
assets of the Registrant. Lobozzo received a security interest in the
Registrant's assets (subject to the Intercreditor Agreement) by the Amended and
Restated General Security Agreement.
The Registrant's lending agreement pursuant to the Lobozzo Loan was amended
to, among other matters, extend the term of the lending agreement from December
10, 1996 to March 31, 1997, and this expiration date was subsequently further
extended until April 30, 1997, then to June 30, 1998 and, in January, 1998, to
November 1, 1998. The terms of the Amended and Restated Credit Agreement between
the Company and Lobozzo (the "Lobozzo Credit Agreement", as amended, which
provides for the "Lobozzo Loan") provide that: (1) the maximum loan amount is
$2,950,000; (2) the interest rate is 1.75% above the prime lending rate; (3) the
borrowing base shall be initially equal to 100% of the Eligible Receivables from
and after June 7, 1997 and 130% for those Eligible Receivables, as defined in
Section 2.1 of the Credit Agreement, as amended, which existed at June 6, 1997;
(4) certain financial covenant obligations with which the Company was in default
were removed; (5) all assets of the Company, other than field spare parts, were
pledged as collateral with the pledged field spare parts being subordinated to
the prior pledge to NCFC; (6) for any loans provided in excess of the available
Borrowing Base, as defined in the Lobozzo Credit Agreement, the interest rate is
5 percentage points above the prime lending rate; and (7) payment is due on June
30, 1998. In February, 1997, Lobozzo transferred to Joanne Lobozzo half of his
interest in the Lobozzo Loan.
The Lobozzo Credit Agreement had been amended seven times, and, as of
October 31, 1997, the Lobozzo Credit Agreement, Promissory Note, General
Security Agreement of the Company and Data Net, Unlimited Continuing Guaranty of
SAI/Delta and General Security Agreement of SAI/Delta were each restated and,
together with Amendment No. 7, was annexed as an Exhibit to the Amended 1995
10-K Report. The Lobozzo Credit Agreement was amended: (a) to provide for
"Operating Budget Targets" to be prepared by management of the Borrower and as
approved by the Board of Directors and the Lender from time to time: and (b) to
provide that the maximum loan amount would be $2,950,000, and from October 1,
1997 through December 31, 1997, up to $3,650,000, and from January 1, 1998
through June 30, 1998, up to $3,350,000, provided in each instance that the
Company meets it Operating Budget Targets. In January, 1998, the Lender also
waived any non-compliance with regard to the Borrowing Base through the date of
Amendment No. 7. The Lender also waived any non-compliance with regard to the
Borrowing Base through the date of the January, 1998 Waiver.
As reported in the Registrant's Form 10-Q Quarterly Report for the period
ended July, 1997 (the "July, 1997 Form 10-Q Quarterly Report"), on September 12,
1997, the Lender provided the Registrant with a letter agreeing to raise the
Maximum Loan Amount of the Lobozzo Loan from $2,950,000, as included in the
Amended and Restated Credit Agreement, as amended, to a level that would
accommodate the Company's anticipated revenue growth and associated working
capital needs, provided that: (1) the Company shall meet its operating budget
targets as approved from time to time by its Board of Directors; and (2) the
Company's Loans in excess of the available Borrowing Base shall not exceed
$700,000 for the period October 1, 1997 to December 31, 1997 and $400,000 for
the period January 1, 1998 to June 30, 1998. This letter containing the
aforesaid provisions was filed as an Exhibit to the July, 1997 Form 10-Q Report,
and Amendment No. 7 was filed as an Exhibit to the Amended 1995 10-K Report.
(See Item 16, below).
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As disclosed in Form 10-Q Quarterly Reports filed for the quarters ended
January, April and July of Fiscal 1995 and Fiscal 1996, respectively, the
original Credit Agreement between the Registrant and NCFC was executed on April
1, 1994, to provide a long-term credit facility (as amended the "NCFC Credit
Agreement"). This credit facility, which was to expire on April 30, 1997, was
amended five times, the last time being on October 27, 1995.
The balance of the Existing NCFC Loan was converted by NCFC to a five-year
Term Loan ("Term Loan") in the face amount of $750,000 by an Amended and
Restated Promissory Note ("NCFC Note"). The Term Loan provides for interest at
one percent over prime rate and requires payment of interest only for the five
years of the Term Loan with a payment of all principal five years after the date
of issuance of the Term Loan. The Term Loan provides that if any prepayment of
the Term Loan is made during the thirteenth through the thirty-sixth months, a
Quarterly Prepayment Premium (as defined in the NCFC Note) of $25,000 per
quarter (up to a maximum of $200,000) is required to be paid by the Registrant.
As of October 31, 1997, a Quarterly Prepayment Premium of $25,000 has been
accrued in the Company's financial statements. As of the date of filing this
Form 10-K Report, Quarterly Prepayment Premiums totalling $50,000 have been
accrued in the Company's financial statements. No prepayment premium is required
for a prepayment prior to the thirteenth month or after the thirty-sixth-month.
The Term Loan is secured by the Spare Parts Inventory of the Registrant pursuant
to an Amended and Restated Security Agreement. The Company has been in
compliance with this ratio requirement for all periods since inception of the
Term Loan.
As an inducement to NCFC to enter into the NCFC Restructuring, Lobozzo,
pursuant to a Pledge Security Agreement: (a) pledged to NCFC 480,000 common
shares of the Registrant owned by Lobozzo (the "Pledged Shares") in his own
name; and (b) agreed to use his reasonable best efforts to cause the Registrant
to issue to NCFC before October 10, 1999, a warrant to be approved by the
shareholders of the Registrant (the "DCI Warrant"), to the effect that when the
common shares covered by the DCI Warrant are added to the Pledged Shares, NCFC
would have the right to own seventeen and one-half percent (17.5%) of the issued
and outstanding common shares of the Registrant. In the event Lobozzo is unable
to cause the Registrant to issue the DCI Warrant, Lobozzo agreed to assign to
NCFC a portion of the then existing May 1995 Lobozzo Option to purchase up to
11,440,475 Common Shares of the Registrant, which option to be assigned to NCFC
(the "NCFC Option"), when added to the Pledged Shares, would also enable NCFC to
purchase up to seventeen and one half percent (17.5%) of the issued and
outstanding common shares of the Registrant. The total amount of common shares
which NCFC may ever be entitled to receive pursuant to the aggregate of the
Pledged Shares and the DCI Warrant or the NCFC Option, are referred to in the
Pledge Security Agreement as the "NCFC Shares". Lobozzo also granted to NCFC a
Limited Non-Recourse Guaranty and Suretyship Agreement.
In the event that the Term Loan were repaid in full prior to the thirteenth
month of the Term Loan, the Pledged Shares would have been returned to Lobozzo
(and, if ever issued, the DCI Warrant would have been cancelled, or, if ever
issued, the assignment of the NCFC Option would have been cancelled). In that
the Term Loan was not repaid in full prior to the thirteenth month of the Term
Loan, these provisions became inapplicable. During the period from the
thirteenth month through the end of the thirty-sixth month of the Term Loan, the
Term Loan can be repaid, in whole or in part, but the Quarterly Prepayment
Premiums referred to above, will be applicable. In the event of a partial
prepayment of the NCFC Note at any time prior to the end of the thirty-sixth
month, subsequent Quarterly Prepayment Premiums will be reduced on a pro rata
basis, and the total amount of NCFC Shares to which NCFC will have acquisition
rights will also be reduced proportionately.
If: (a) a default is ever made in payments required under the NCFC Note;
(b) Registrant fails to have, as of the last day of any month, a certified ratio
of Registrant's Spare Parts Inventory to the then outstanding principal amount
of the NCFC Note of at least 2.5 to 1; (c) Lobozzo ever declares an event of
default under his agreements with the Registrant; (d) Registrant raises capital
in an equity offering and does not remit fifty percent (50%) of the proceeds of
such an offering to NCFC to reduce the then outstanding Indebtedness (as defined
in the NCFC Note) of Registrant to NCFC; or (e) certain other events of default
as specified in the NCFC Note occur, in all events after certain applicable cure
periods, then, if any such event occurs, NCFC shall be entitled to acquire
immediately and to dispose of all NCFC Shares. In addition, if the NCFC Note is
not paid in full by the end of the thirty-sixth month after its issuance, NCFC
shall also be entitled to acquire immediately and to dispose of, all NCFC Shares
(subject in each instance to the provisions of the Pledge Security Agreement).
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Management of the Registrant intends to call a shareholder meeting which
will provide for the election of directors of the Registrant and which will
address the issues raised by the NCFC Restructuring including, but not limited
to, taking such action as is necessary to have the Registrant's shareholders
approve the issuance of the DCI Warrant. (See Item 5, above).
8. Amendments to Certain Loan Agreements.
--------------------------------------
The Registrant and Lobozzo agreed to amendments of certain loan agreements
between the Registrant and Lobozzo to effectuate reductions of the interest rate
payable on those loan agreements.
The annual interest rate applicable to: (i) the Lobozzo Commitment
contained in the Lobozzo Letter Agreement; and (ii) the 1996 Additional Lobozzo
Advances, were each originally charged at the same rate of interest as charged
by NCFC with regard to the former NCFC Credit Agreement which, prior to the
assignment of that agreement from NCFC to Lobozzo on October 10, 1996, were
three percent (3%) over the prime rate of NCFC, and five percent (5%) over the
prime rate of NCFC in the event of maturity, by acceleration or otherwise.
By a document entitled Amendment No. 1 to the Lobozzo Loan, which was
annexed as an Exhibit to the Form 8-K Report filed on November 25, 1996, Lobozzo
and the Registrant and Data Net agreed that, from and after October 10, 1996,
the interest rate applicable to both the Lobozzo Commitment and the 1996
Additional Lobozzo Advances would be reduced to one and three quarters of one
percent (1 and 3/4%) per annum over the Prime Rate (defined as the highest prime
rate published from time to time in the "Money Rates" column of the WALL STREET
JOURNAL, or any successor publication, as it may change from time to time, based
on a 360 day year), and to three and three quarters of one percent (3 and 3/4%)
over the Prime Rate in the event of maturity, by acceleration or otherwise.
These are the same interest rates as are paid by the Registrant to Lobozzo under
the Lobozzo Credit Agreement. The Lobozzo Credit Agreement was entered into
between Lobozzo and the Registrant and Data Net simultaneously with the
assignment to Lobozzo of the NCFC Credit Agreement.
By Amendment No. 1 to the Lobozzo Loan, the Registrant and Lobozzo also
agreed to amend the definition of "Borrowing Base" as to which "Loans" (as those
terms are defined in the Lobozzo Credit Agreement) could be made to the
Registrant under the Lobozzo Credit Agreement, to increase the Borrowing Base
available to the Registrant from the applicable portion of the Registrant's
eligible receivables to include one hundred percent (100%) of any positive cash
balance per books as shown by the internal records of the Registrant relative to
the operating account of the Registrant maintained at Manufacturer's & Traders
Trust Company (the "M&T Account"), together with any checks or instruments of
payments in the possession of either the Registrant, or NCFC, and in transit for
deposit to the M&T Account. By Amendment No. 1 to the Lobozzo Loan, Lobozzo also
waived any non-compliance which may have existed with regard to the Borrowing
Base for the period between October 10, 1996, and November 18, 1996, the date of
Amendment No. 1 to the Lobozzo Loan.
9. Amendment No. 2 to October 1996 Lobozzo Credit Agreement.
---------------------------------------------------------
On December 10, 1996, the Registrant and Lobozzo amended the Lobozzo Loan
to extend the maturity date from December 10, 1996, to March 31, 1997, to
provide for reductions in the Total Available Borrowing Base (as that term is
defined in the Lobozzo Credit Agreement) for the months of January, February and
March, 1997, and to provide that if the Overbase Amount, consisting of the
amount of Loans outstanding from time to time exceed the Borrowing Base by
$300,000, then no checks will be written on the Borrower's account at
Manufacturer's & Traders Trust Company other than by Michael Julian, the
Registrant's Secretary or Michael McCusker, the Registrant's Assistant
Secretary. By Amendment No. 2 to the Lobozzo Loan, which was annexed as an
Exhibit to the February, 1997 Form 8-K Report, Lobozzo also waived any
non-compliance with regard to the Borrowing Base through the date thereof.
10. December 30, 1996, Lobozzo Transfers.
-------------------------------------
As of December 30, 1996, Lobozzo made certain transfers (the "December 1996
Transfers") of certain of the common shares which he held on that date by gifts
to certain family members, and by sales to certain other persons. Prior to the
December 1996 Transfers, Lobozzo held in his own name an aggregate of 1,999,750
common shares of the Company, 480,000 of which were the Pledged Shares
represented by a certificate pledged to, and held by, NCFC as part of the NCFC
Restructuring.
Of the 1,519,750 remaining common shares, Lobozzo transferred an aggregate
of 600,000 common shares to his three children and 74,875 common shares to
Joanne Lobozzo. Lobozzo also sold an aggregate of 750,000 common shares to,
among other persons, three directors and officers of the Company as follows:
Alfred C. Engelfried (jointly with his wife), 50,000 common shares; Michael
Julian (jointly with his wife), 25,000 common shares and Michael McCusker
Page 59
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(jointly with his wife) 25,000 common shares. (See Section 12, below), Lobozzo
also sold 635,000 common shares to John DiProsa, who thereafter became a holder
of in excess of 5% of the issued and outstanding common shares of the Company
(See "Principal Shareholders" in Item 12, above). Following the exercise of the
Second Restated May 1995 Lobozzo Option Agreements, Mr. DiProsa ceased to be a
holder of 5% of the issued and outstanding common shares of the Company.
Following the December 1996 Transfers, Lobozzo held in his own name, in addition
to the 480,000 Pledged Shares, 94,875 common shares, the same number then held
by Joanne Lobozzo.
11. Amendment No. 3 to October 1996 Credit Agreement.
-------------------------------------------------
(a) In February, 1997, Lobozzo transferred to Joanne Lobozzo half of
Lobozzo's interest in all lending obligations of the Company to Lobozzo, and
half of all option agreements between the Company and Lobozzo (the "February,
1997 Transfers"). The February, 1997 Transfers were made pursuant to Amendment
No. 3 to the Lobozzo Loan, whereby Lobozzo transferred to Joanne Lobozzo half of
the following debt securities: (i) the Lobozzo Debenture in the face amount of
$600,001, $300,000.50 of which was transferred to Joanne Lobozzo; (ii) the
Lobozzo Commitment in the amount of $400,000, $200,000 of which was transferred
to Joanne Lobozzo; (iii) the 1996 Additional Lobozzo Advances, in the face
amount of $633,600 as of October 10, 1996, $316,800 of which was transferred to
Joanne Lobozzo; (iv) the Lobozzo Credit Agreement which then established the
Lobozzo Loan in the maximum amount of $2,550,000, $1,275,000 of which was
transferred to Joanne Lobozzo; and (v) the Overbase Loans, half of which were
transferred to Joanne Lobozzo.
(b) By Amendment No. 3 to the Lobozzo Loan, Lobozzo also transferred to
Joanne Lobozzo half of the following securities: (i) the Restated 1992 Lobozzo
Option Agreement to purchase 1,304,350 common shares, of which a Second Amended
and Restated 1992 Option Agreement was entered into which entitled Joanne
Lobozzo to purchase 652,175 common shares; (ii) the Restated May, 1995 Lobozzo
Option which entitled Lobozzo to purchase up to 11,440,475 common shares for an
aggregate of $10, of which a Second Restated May, 1995 Lobozzo Option was
entered into which entitled Joanne Lobozzo to purchase up to 5,720,237 common
shares for $5 and entitled Lobozzo to purchase the balance of 5,720,238 for $5.
(c) By Amendment No. 3 to the Lobozzo Loan, Lobozzo also transferred to
Joanne Lobozzo the right to receive half of the 480,000 Pledged Shares which are
ever returned by NCFC pursuant to the October 10, 1996 Pledge Security
Agreement, from the pledge by NCFC, and Joanne Lobozzo agreed to provide half of
any additional common shares which Lobozzo might ever be required to transfer to
NCFC in the event of a default under the NCFC Restructuring. Amendment No. 3 to
the Lobozzo Loan was annexed as an Exhibit to the February, 1997 Form 8-K
Report.
12. Exercise of Amended and Restated 1995 Lobozzo Stock Option
----------------------------------------------------------
In February, 1997, Lobozzo and Joanne M. Lobozzo (collectively, the
"Lender") exercised their Second Restated May 1995 Lobozzo Options, each paid
$5, and each became entitled to receive, respectively, 5,720,238 and 5,720,237
common shares of the Registrant, all of which are "restricted securities" as
defined in Regulation D under the Securities Exchange Act of 1934, as amended.
The aggregate of 11,440,475 common shares was issued on February 21, 1997.
13. Amendment No. 4 to Lobozzo Loan
-------------------------------
By Amendment No. 4 to the Lobozzo Loan, Lobozzo and Joanne Lobozzo agreed
to amend the Lobozzo Credit Agreement to extend the Maturity Date and to revise
the factors for Eligible Receivables (as defined in the Lobozzo Credit
Agreement) for the month of April, 1997. Amendment No. 4 to the Lobozzo Loan was
annexed as an Exhibit to the February, 1997 Form 8-K Report.
14. Amendment No. 5 to Lobozzo Loan
-------------------------------
By Amendment No. 5 to the Lobozzo Loan, the Maturity Date of the Lobozzo
Loan was extended to June 30, 1998. Amendment No. 5 to the Lobozzo Loan was
annexed as an Exhibit to the April, 1997 Form 10-Q Report.
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15. Amendment No. 6 to Lobozzo Loan
-------------------------------
In May, 1997, the principal balance outstanding on the Overadvance Facility
was paid in full, and the documents upon which it was based were terminated. On
June 9, 1997, by Amendment No. 6 to the Lobozzo Loan, a copy of which was
annexed to the April, 1997 Form 10-Q Report, the Company and the Lender agreed
to further amend the Lobozzo Loan in the following respects: (a) the maximum
amount was increased from $2,550,000 to $2,950,000; (b) the Company was
permitted to borrow up to 100% of Eligible Receivables (as defined in the
Lobozzo Credit Agreement) against all Eligible Receivables which come into
existence from and after June 7, 1997 and the Company was further permitted to
borrow up to 130% of Eligible Receivables for Eligible Receivables which existed
as of June 6, 1997; and (c) effective June 7, 1997, the rate of interest on all
loans provided by the Lender which shall exceed the available Borrowing Base (or
"Excess Borrowing Base Loans", as defined in the Lobozzo Credit Agreement) was
increased to five percent (5%) over Prime Rate (as defined in the Lobozzo Credit
Agreement). The interest rate applicable to all principal amounts under the
Lobozzo Loan which are within the available Borrowing Base remain at one and
three quarters of one percent (1 and 3/4%) over Prime Rate, and the interest
rate on the Lobozzo Loan in the event of maturity, by acceleration or otherwise,
remains at three and three quarters of one percent (3 and 3/4%) over Prime Rate.
16. Amendment No. 7 to October, 1996 Lobozzo Credit Agreement
---------------------------------------------------------
By Amendment No. 7 to the Lobozzo Credit Agreement, the Lobozzo Credit
Agreement was amended: (a) to provide for "Operating Budget Targets" to be
prepared by management of the Borrower and as approved by the Board of Directors
and the Lender from time to time: and (b) to provide that the maximum loan
amount would be $2,950,000, and from October 1, 1997 through December 31, 1997,
up to $3,650,000, and from January 1, 1998 through June 30, 1998, up to
$3,350,000, provided in each instance that the Company meets it Operating Budget
Targets. The Lender also waived any non-compliance with regard to the Borrowing
Base through the date of Amendment No. 7.
17. Lobozzo Agreement to Provide Collateral for Performance and Payment Bonds
-------------------------------------------------------------------------
As reported in the July, 1997 Form 10-Q Report, on September 11, 1997, in
connection with a request to a surety company to provide performance and payment
bonds to the Company totalling $1,000,000, singularly or in an aggregate amount,
Lobozzo signed a letter by which he agreed to provide collateral in the amount
of 25% of the awarded contract amount to facilitate the possible issuance of
performance and payment bonds for the Company. Lobozzo's commitment pursuant to
this Letter is in addition to the Total Lobozzo Credit Facilities. This letter
was filed as an Exhibit to the July, 1997 Form 10-Q Report.
18. Restatement of Lobozzo Credit Agreement Documents
-------------------------------------------------
As of October 31, 1997, the Lobozzo Credit Agreement, which had been
amended seven times, and several of the documents executed simultaneously with,
and as part of the transaction involving, the Lobozzo Credit Agreement (the
Promissory Note, General Security Agreement of the Company and Data Net, the
Unlimited Continuing Guaranty of SAI/Delta and the General Security Agreement of
SAI/Delta) were restated to incorporate in one set of documents the changes made
by the seven previous amendments. All restated documents are annexed as Exhibits
to this Amendment No. 1 to 1995 Form 10-K.
19. Waiver
------
In January, 1998, the Lender executed the January 1998 Waiver, a copy of
which is annexed hereto as Exhibit C, whereby the Lender waived any
non-compliance with the Lobozzo Credit Agreement through the date of the January
1998 Waiver.
Consulting Transactions
- -----------------------
Mr. Engelfried, who has served as a director of the Company since March,
1995, has been a consultant for the Company since November, 1993. As a
consultant, Mr. Engelfried's consulting fees aggregated $69,102 in Fiscal 1995,
$55,871 in Fiscal 1996 and $34,737 in Fiscal 1997. A portion of Mr. Engelfried's
consulting fees, in the amount of approximately $36,149 for services performed
during Fiscal 1995, remained unpaid at October 31, 1995, $60,681 in consulting
fees remained unpaid at October 31, 1996 and $34,737 in consulting fees remained
unpaid at October 31, 1997. As of December 31, 1997, the Registrant was indebted
to Mr. Engelfried in the amount of $31,237. (See Section 10, "Lobozzo
Transactions", above).
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Willcox & Gibbs Transactions
- ----------------------------
1. On October 31, 1992, Data Net, engaged in the Willcox & Gibbs
Acquisition (See Item 1 A, above). The Willcox & Gibbs Acquisition was
accomplished pursuant to the terms of a certain Sale and Purchase Agreement
dated as of September 29, 1992, as amended (the "Purchase Agreement"). The
assets which were acquired by Data Net consisted of, among other matters, all
accounts receivable, security deposits, inventories, tangible properties, rights
in intangible assets and intellectual property, rights in certain specifically
assumed contracts (but not rights or obligations under certain excluded
contracts), prepaid expenses, claims against third parties relating to the
Assets, permits and documents, books and records of the Sellers. The liabilities
which were specifically assumed included liabilities for accounts payable,
current liabilities and accrued expenses, subject, however, to a limitation on
the amount of the Liabilities which were assumed.
The consideration given for the assets acquired in the Willcox & Gibbs
Acquisition included: (i) the payment to the Sellers, or in escrow at their
direction, of $3,500,000 of funds by wire transfer; (ii) the issuance to the
Sellers of 1,000,000 common shares (the "Delta Shares") of the Company; (iii)
the issuance to the Sellers of the Willcox & Gibbs Debenture due October 31,
1997, of the Company and Data Net in the amount of $475,000; (iv) the issuance
to the Sellers of a joint 8% Subordinated Short-Term Note dated October 31,
1992, of the Company and Data Net, in the face amount of $1,150,000 (subject to
adjustment); (v) the entry into an Assumption Agreement dated October 31, 1992,
whereby, among other matters, Data Net assumed certain of the liabilities of the
Sellers; and (vi) the entry into a certain Registration Rights Agreement between
the Company and the Sellers, whereby the Sellers obtained registration rights
with regard to the Delta Shares. The Willcox & Gibbs Debenture has been
repurchased by the Company in November, 1996, effective October 31, 1996. (See
Item 1 A,(4), above, and paragraph (2), below).
Prior to the Willcox & Gibbs Acquisition, Data Net was in the business of
selling and installing data-communication network products and related
engineering services and Dataspan was in the business of selling and assembling
connectorized cable and cable plant systems. Data Net continued in those
businesses following the Willcox & Gibbs Acquisition until March 8, 1996 when
Data Net discontinued its operations (See Item 1, A, (2) and (5), above).
2. Rexel Debenture Purchase. Purchase of $475,000 Debenture of Registrant and
---------------------------------------------------------------------------
Subsidiary.
-----------
The Registrant signed the Rexel Letter Agreement, dated as of October 31,
1996, with Rexel DS, Inc., f.k.a. Willcox & Gibbs DS, Inc., and Rexel DN, Inc.,
f.k.a. Willcox & Gibbs DN, Inc. (collectively, the corporations identified above
are the "Sellers", as previously defined), whereby the Sellers agreed to sell to
the Registrant the Willcox & Gibbs Debenture, as amended, which was issued in
the original face amount of $475,000, and which, as of the date of the purchase,
was held by the Sellers and was due on October 31, 1997. By the Rexel Letter
Agreement, the Buyers agreed to purchase the Willcox & Gibbs Debenture for
payment of $75,000, which payment was made to the Sellers in the first quarter
of Fiscal 1997. The purchase price included the principal and interest payable
on the Willcox & Gibbs Debenture, which interest payable was in arrears as of
October 31, 1996 in the aggregate amount of $55,384. The Rexel Letter Agreement
provided for the release of the Borrowers from any obligations under the Willcox
& Gibbs Debenture. The purchase of the Willcox & Gibbs Debenture and the terms
of the Rexel Letter Agreement were consented to by Lobozzo and by NCFC. Rexel,
Inc., formerly Willcox & Gibbs, Inc., the parent of the Sellers, holds 1,000,000
common shares of the Registrant. (See Item 12, Principal Shareholders, above).
The purchase of the Willcox & Gibbs Debenture, which has been recorded in
Fiscal 1996, resulted in an extraordinary gain to the Registrant of $455,384,
which gain is included in the consolidated balance sheet of the Registrant as of
October 31, 1996 in the Registrant's consolidated net loss as of that date.
Loomis Transactions
- -------------------
At the time of his employment by the Company in 1987, Mr. L. Rodger Loomis,
then the President of the Company, was granted an option to purchase 200,000
common shares at a price of $.375 per share for a period of time which expired
on January 22, 1993 (the "Loomis Option"). In January, 1993, Mr. Loomis advised
the Board of Directors that he desired to exercise the Loomis Option. The Board
of Directors authorized a loan to Mr. Loomis in the amount of $75,000 to enable
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him to exercise the Loomis Option which was approved by shareholders at the 1993
Annual Meeting. The loan was evidenced by a Time Payment Promissory Note which
bore interest at a rate of interest not less than imputed interest as published
by the Internal Revenue Service. As of January 19, 1993, the date of the Time
Payment Promissory Note, the rate of interest, and the rate of interest
applicable to the Time Payment Promissory Note, was 6.15% per annum.
In March, 1995, Mr. Loomis resigned as an officer of the Company (and all
subsidiaries), and in April, 1995, Mr. Loomis resigned as a director of the
Company (and all subsidiaries). Mr. Loomis and the Company agreed to cancel all
existing agreements between themselves, including Mr. Loomis' then existing
Loomis Employment Agreement, with the consideration for such cancellation being
the Company's agreeing to make periodic payments to Mr. Loomis at a gross amount
sufficient to amortize the Time Payment Promissory Note over a period of
twenty-four months commencing April, 1995 and provide him with a net payment at
the rate of $1,000 per week for the period April, 1995 through March, 1997. All
payments as described herein have been made.
Sage, Rutty & Co., Inc.
- -----------------------
Sage, Rutty & Co., Inc., of which Gary Russell, formerly a director of the
Company until September, 1995, was a Vice President, was the managing
underwriter of the Company's initial public offering and was a market-maker in
the Company's common shares. During the period of time that Mr. Russell served
as a director of the Company, he disclaimed any interest in the common shares
held by Sage, Rutty & Co., Inc.
During Fiscal 1995, the Company failed to meet the requirements of the
NASDAQ for listing of its Common Shares on the NASDAQ market and the Company's
common shares were subsequently delisted. The Company believes that Sage, Rutty
& Co., Inc., is no longer a market-maker of the Company's common shares.
Page 63
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
ITEMS 14(A)(1), 14(A)(2) and 14(D): The following financial statements and
- -------------------------------------
financial statement schedules are filed herewith:
Independent Auditors' Report
Consolidated Balance Sheets - October 31, 1997 and 1996
Consolidated Statements of Operations for the years ended October 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Investment for the
years ended October 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended October 1997,
1996 and 1995
Notes to Consolidated Financial Statements
Financial Statements Schedule - Schedule VIII - Valuation and Qualifying
Accounts for the years ended October 31, 1997, 1996 and 1995.
See Index to Exhibits for a list of exhibits to this Annual Report.
All other schedules are not submitted because they are not applicable or
not required under Regulation S-X or because the required information is
included in the financial statements or notes thereto.
Individual financial statements of the Company have been omitted because
the Company is primarily an operating company and no subsidiary included in the
consolidated financial statements has minority equity interests and/or
non-current indebtedness not guaranteed by the Company in excess of 5% of total
consolidated assets.
ITEM 14(A)(3) 14(B) and 14(C): Not Applicable, incorporated by reference or
------------------------------
referred to in Exhibits 10.111, 10.112 AND 10.121 through 10.127. No reports on
Form 8-K were filed during the last quarter of Fiscal 1997 covered by this Form
10-K.
Page 64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1933, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: January 29, 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
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: January 29, 1998 By: /S/ ALFRED ENGELFRIED
---------------------------
Alfred Engelfried
Director and Assistant Secretary
Dated: January 29, 1998 By: /S/ MICHAEL JULIAN
---------------------------
Michael Julian
Director and Secretary
Dated: January 29, 1998 By: /S/ JOSEPH M. LOBOZZO II
---------------------------
Joseph M. Lobozzo II
Director and Chairman of the
Board of Directors
Dated: January 29, 1998 By: /S/ MICHAEL MCCUSKER
--------------------------
Michael McCusker
Director and Assistant Secretary
Dated: January 29, 1998 By: /S/ JOHN T. SMITH
-----------------
Director
Page 65
<PAGE>
INDEX TO EXHIBITS
The Exhibits denominated by (1) were previously filed as part of, and are
hereby incorporated herein by reference to, the Exhibits in the Registrant's
Registration Statement on Form S-18 (File No. 33-389NY) as amended by Amendment
No. 1. The number contained in parentheses set forth opposite the Exhibit
hereunder (and where elsewhere incorporated by reference) refers to the Exhibit
number in the Registrant's Registration Statement on Form S-18 and amendments
thereto.
The Exhibits denominated by (3) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report of Form 10-K for the fiscal year ended October 31, 1987.
The Exhibits denominated by (4) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1988.
The Exhibits denominated by (7) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1991.
The Exhibits denominated by (8) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Form
8-K dated November 13, 1992.
The Exhibits denominated by (9) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1992.
The Exhibits denominated by (11) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 1994.
The Exhibits denominated by (12) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated May 4, 1995.
The Exhibits denominated by (14) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated March 23, 1996.
The Exhibits denominated by (15) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Quarterly Report on Form 10-Q for the period ended January 31, 1996, and filed
on September 18, 1996.
The Exhibits denominated by (16) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated October 24, 1996.
The Exhibits denominated by (17) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated November 25, 1996.
The Exhibits denominated by (18) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Current Report on Form 8-K dated February 20, 1997.
The Exhibits denominated by (19) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Quarterly Report on Form 10-Q for the period ended April 30, 1997, and filed on
June 18, 1997.
The Exhibits denominated by (20) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's Annual
Report on Form 10-K for the period ended October 31, 1996, and filed on August
19, 1997.
The Exhibits denominated by (21) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Quarterly Report on Form 10-Q for the period ended July 31, 1997, and filed on
September 15, 1997.
Page 66
<PAGE>
The Exhibits denominated by (22) were previously filed as part of, and are
hereby incorporated by reference herein, the Exhibits in the Registrant's
Amendment No. 1 to Form 10-K for the period ended October 31, 1995, and filed on
December 24, 1997.
(3) Certificate of Incorporation and By-Laws
(3.1) Restated Certificate of Incorporation.
(3.2) Amended and Restated By-Laws of the Registrant.(3)
(3.3) Certificate of Change, changing Registrant's address.
(4.1) Specimen Stock Certificates representing shares of the
Registrant's $.01 par value Common Stock.(1)
(4.2) Restated Incentive Stock Option Plan.(4)
(4.3) Non-Qualified Stock Option Plan.(1)
(10.24) Building Lease Teterboro, New Jersey (7)
(10.31) Sale and Purchase Agreement dated as of September 29, 1992 (8)
(10.32) Amendment to Sale and Purchase Agreement dated as of October 31,
1992 (8)
(10.33) 8% Subordinated Debenture due October 31, 1997 (8)
(10.34) 8% Subordinated Short-Term Note, $1,150,000 (Subject to Adjust-
ment)dated October 31, 1992 (8)
(10.35) Assignment and Assumption Agreement dated October 31, 1992 (8)
(10.36) Registration Rights Agreement dated as of October 31, 1992 (8)
(10.37) 8% Subordinated Debenture due October 28, 1995 (8)
(10.38) Option Agreement dated October 28, 1992 (8)
(10.39) Registration Rights Agreement dated October 28, 1992 (8)
(10.40) Letter from Richard J. Mackey, President and Chief Financial
Officer of Willcox & Gibbs, Inc., to Peter D. Smith, Chief
Financial Officer of Delta Computec Inc., dated October 13,
1992. (8)
(10.43) Employment Agreement between Delta Computec Inc., and L. Rodger
Loomis dated September 1, 1992 (9)
(10.44) Joint Venture Agreement between SAI/Delta, Inc., and Systems
Automation, Inc., dated March 10, 1992 (9)
(10.48) Credit Agreement, National Canada Finance Corporation (11)
(10.49) Credit Agreement, National Canada Finance Corporation, Amendment
No. 1 (11)
(10.50) Asset Purchase Agreement dated October 17, 1994 (11)
(10.51) Amendment No. 1 to Asset Purchase Agreement (11)
(10.52) Credit Agreement, National Canada Finance Corporation,
Amendment No. 2 (11)
(10.53) Credit Agreement, National Canada Finance Corporation,
Amendment No. 3 (12)
(10.54) Credit Agreement, National Canada Finance Corporation,
Amendment No. 4 (12)
(10.55) Credit Agreement, National Canada Finance Corporation,
Amendment No. 5 (12)
(10.56) Letter agreements dated, respectively, May 1, 1995, May 1, 1995,
and May 4, 1995, with Joseph M. Lobozzo II, a Director, Chairman
of the Board of Directors and controlling person of the
Registrant, relative to providing a commitment to advance up to
$400,000 of the Overadvance Facility provided by National Canada
Finance Corporation, and granting a stock option to Joseph M.
Lobozzo II. (12)
Page 67
<PAGE>
(10.57) Letter between Data Net and NCFC dated March 8, 1996 (14)
(10.58) Forbearance Agreement between the Registrant, Data Net and NCFC
dated March 8, 1996 (14)
(10.59) Release and Indemnification Agreement between the Registrant,
Data Net and NCFC dated March 8, 1996 (14)
(10.60) Reaffirmation of Guaranty between the SAI/Delta and NCFC dated
March 8, 1996 (14)
(10.61) Letter between NCFC and Data Net dated March 6, 1996 (14)
(10.62) Reaffirmation of Subordination dated March 8, 1996 between
Lobozzo and NCFC, constituting documents relative to the
disposition of assets of Data Net (14)
(10.63) Amended and Restated Promissory Note from the Registrant to NCFC
dated May 1, 1995 (16)
(10.64) Third Amended and Restated Promissory Note from the Registrant to
NCFC dated October 27, 1995. (16)
(10.65) Amendment No. 1 to Forbearance Agreement dated May 9, 1996 (16)
(10.66) Amendment No. 2 to Forbearance Agreement dated May 21, 1996 (16)
(10.67) Amendment No. 3 to Forbearance Agreement dated June 14, 1996 (16)
(10.68) Amendment No. 4 to Forbearance Agreement dated July 31, 1996 (16)
(10.69) Amendment No. 5 to Forbearance Agreement dated August 15, 1996
(16)
(10.70) Amendment No. 6 to Forbearance Agreement dated September 9, 1996
(16)
(10.71) Letter from NCFC to the Registrant dated October 1, 1996,
extending the Forbearance Period to October 3, 1996 (16)
(10.72) Letter from NCFC to the Registrant dated October 4, 1996,
extending the Forbearance Period to October 9, 1996 (16)
(10.73) Letter from NCFC to the Registrant dated October 10, 1996,
extending the Forbearance Period to October 10, 1996 (16)
(10.74) Assignment from NCFC to Lobozzo dated October 10, 1996 (16)
(10.75) Amended and Restated Promissory Note from the Registrant to NCFC
dated October 10, 1996, in the principal face amount of $750,000
(16)
(10.76) Intercreditor Agreement between NCFC and Lobozzo dated October
10, 1996 (16)
(10.77) Amended and Restated Security Agreement between the Registrant
and NCFC dated October 10, 1996 (16)
(10.78) Pledge Security Agreement between Lobozzo and NCFC dated October
10, 1996 (16)
(10.79) Form of Warrant from the Registrant to Lobozzo(the "DCI Warrant")
attached as Exhibit A to the Pledge Security Agreement, Exhibit
16, above, to be used in the event the shareholders of the
Registrant approve the issuance thereof (16)
(10.80) Form of Stock Option from the Registrant to NCFC (the "Assigned
Option"), attached as Exhibit B to the Pledge Security Agreement,
Exhibit 16, above, to be used in the event the shareholders of
the Registrant do not approve the issuance of the DCI Warrant(16)
(10.81) Form of Assignment Agreement from Lobozzo to NCFC to be used in
the event Lobozzo issues to NCFC the Assigned Option (16)
(10.82) Form of Stock Option from the Registrant to Lobozzo to be issued
in the event Lobozzo issues to NCFC the Assigned Option (16)
(10.83) Limited Non-Recourse Guaranty and Suretyship Agreement between
Lobozzo and NCFC dated October 10, 1996 (16)
(10.84) Document from NCFC showing the payoff amounts for the Existing
NCFC Loan as of October 10, 1996 (16)
Page 68
<PAGE>
(10.85) Letter from NCFC to the Registrant dated October 10, 1996,
acknowledging receipt from Lobozzo on October 10, 1996, of
$1,544,661.10, with regard to the NCFC Restructuring and
assignment of a portion of the Existing NCFC Loan to Lobozzo (16)
(10.86) Form of letter sent to customers of the Registrant advising the
customers of a different lock box address (16)
(10.87) Amended and Restated Credit Agreement between the Registrant,
Data Net and Lobozzo dated October 10, 1996 (16)
(10.88) Amended and Restated Promissory Note from the Registrant to
Lobozzo in the principal maximum face amount of $2,550,000,
dated October 10, 1996 (16)
(10.89) Amended and Restated General Security Agreement between the
Registrant, Data Net and Lobozzo, dated October 10, 1996 (16)
(10.90) Amended and Restated Unlimited Continuing Guaranty from SAI/Delta
to Lobozzo, dated October 10, 1996 (16)
(10.91) Amended and Restated General Security Agreement from SAI/Delta to
Lobozzo, dated October 10, 1996 (16)
(10.92) Cash Management Services Agreement between the Registrant and
Manufacturers & Traders Trust Company (16)
(10.93) Letter from NCFC dated April 24, 1996, advising Data Net that
$122,182 had been applied by NCFC to the outstanding Data Net
loan as a result of the liquidation of the Data Net assets (16)
(10.94) Amendment No.1 to Amended and Restated Credit Agreement and Other
Agreements (17)
(10.95) Rexel Letter Agreement dated as of October 31, 1996 (17)
(10.96) Option Exercise Documents relative to the Second Restated May
1995 Option Agreement (18).
(10.97) Option Transfer Document relative to the Second Restated May 1995
Option Agreement (18).
(10.98) Amendment No.2 to Amended and Restated Credit Agreement and Other
Agreements dated December 10, 1996 (18).
(10.99) Amendment No.3 to Amended and Restated Credit Agreement and Other
Agreements dated January 13, 1997 (18).
(10.100) Amendment No.4 to Amended and Restated Credit Agreement and Other
Agreements dated February 18, 1997 (18).
(10.101) Second Amended and Restated May 1995 Stock Option Agreement
(Joseph M. Lobozzo II) (18).
(10.102) Second Amended and Restated May 1995 Stock Option Agreement
(Joanne M. Lobozzo) (18).
(10.103) Securities Transfer Document (18).
(10.104) Second Amended and Restated October 1992 Option Agreement (Joseph
M. Lobozzo II) (18).
(10.105) Second Amended and Restated October 1992 Option Agreement (Joanne
M. Lobozzo) (18).
(10.106) Second Amended and Restated 8% Subordinated Debenture due January
31, 1998 - No. 1 (Joseph M. Lobozzo II) (18).
(10.107) Second Amended and Restated 8% Subordinated Debenture due January
31, 1998 - No. 2 (Joanne Lobozzo) (18).
(10.108) First Amended and Restated Promissory Note (18)
(10.109) Amendment No.5 to Amended and Restated Credit Agreement and Other
Agreements dated April 30, 1997 (19).
(10.110) Amendment No.6 to Amended and Restated Credit Agreement and Other
Agreements dated June 9, 1997 (19).
(10.111) Letter Employment Agreement between Registrant and John DeVito
dated October 23, 1995 (20).
(10.112) Letter Employment Agreement between Registrant and Edward Drohan
dated March 25, 1996 (20).
Page 69
<PAGE>
(10.113) Letter dated September 11, 1997 from Joseph M. Lobozzo II and
Joanne M. Lobozzo relating to possible increase of maximum loan
amount (21).
(10.114) Letter dated September 11, 1997 from Joseph M. Lobozzo II
agreeing to provide collateral for performance and payment bonds
(21).
(10.115) Amendment No. 7 to Amended and Restated Credit Agreement and
Other Agreements dated September 12, 1997 (22).
(10.116) First Restated Credit Agreement among the Registrant, Data Net
and Joseph M. Lobozzo II and Joanne M. Lobozzo (22).
(10.117) First Restated Promissory Note from the Registrant and Data Net
to Joseph M. Lobozzo II and Joanne M. Lobozzo (22).
(10.118) First Restated General Security Agreement among the Registrant,
Date Net and Joseph M. Lobozzo II and Joanne M. Lobozzo (22).
(10.119) First Restated Unlimited Continuing Guaranty of SAI/Delta and
Joseph M. Lobozzo II and Joanne M. Lobozzo (22).
(10.120) First Restated General Security Agreement between SAI/Delta and
Joseph M Lobozzo II and Joanne M Lobozzo (22).
(A)(10.121) Letter Employment Agreement between Registrant and Frank J.
Donnelly dated August 19, 1997
(B)(10.122) Amendment No. 1 to First Restated Credit Agreement and Other
Agreements dated January 29, 1998 .
(C)(10.123) Waiver and Consent to First Restated Credit Agreement dated as of
January 29, 1998.
(D)(10.124) Amendment No. 1 to Second Amended and Restated 8% Subordinated
Debenture due January 31, 1999 (Joseph M. Lobozzo II).
(E)(10.125) Amendment No. 1 to Second Amended and Restated 8% Subordinated
Debenture due January 31, 1999 (Joanne M. Lobozzo).
(F)(10.126) Amendment No. 1 to Second Amended and Restated October 1992
Option Agreement (Joseph M. Lobozzo II).
(G)(10.127) Amendment No. 1 to Second Amended and Restated October 1992
Option Agreement (Joanne M. Lobozzo).
(11) Statement re: computation of per share earnings. (This document
will be filed pursuant to a Form 8 Amendment to this report
along with the audited financial statements for the fiscal year
ended October 31, 1995.
(12) Statement re: computation of ratios.
Not Applicable
(13) Annual report to security holders, Form 10-Q or quarterly report
to security holders.
Not Applicable
(16) Letter re: change in certifying accountant.
Not Applicable
(18) Letter re: change in accounting principles.
Not Applicable
(19) Report furnished to security holders.
Not applicable
(21) Subsidiaries of the Registrant (See attached).
(22) Published report regarding matters submitted to vote of security
holders.
Not applicable
(23) Consents of experts and counsel.
Not applicable
(24) Power of Attorney.
Not applicable
(28) Information from reports furnished to state insurance regulatory
authorities.
Not applicable
Page 70
<PAGE>
(99) Additional Exhibits.
None
Page 71
<PAGE>
August 19, 1997
Mr. Frank Donnelly
39 Round Hill Rd.
Kinnelon, N.J. 07405
Dear Frank,
I want to thank you for the hard work and extraordinary effort put forth to
complete our 10K filing with the S.E.C. for fiscal 1996.
I am pleased to be able to put into effect a new compensation plan for you,
effective September 1, 1997. This plan supersedes any prior plans. The new plan
has two components:
1. Base salary of $1538.47 per week.
2. Participation in Senior Management Incentive Program (copy enclosed).
Eligibility for the quarterly profitability bonus will have a prerequisite,
which is that Internal Monthly Financial Reports must be submitted to the
President and Board of Directors no later than the 15th of the following month.
In the event that a monthly report is received late a 15% penalty (per each late
month) will be applied when calculating the profitability bonus for that
quarter.
i.e. 1 month late = 15% reduction to the bonus earned that quarter
3 months last = 45% reduction to the bonus earned that quarter
Frank, I believe that DCi is finally reaching the point where we can switch from
a reactive strategy to a proactive strategy. I am looking forward to working
with you and the Management team and I am convinced that our collective efforts
will enable DCi to reach new heights.
Sincerely,
/s/John DeVito
John DeVito
President, C.O.O.
Page 72
<PAGE>
AMENDMENT NO. 1
TO
FIRST RESTATED CREDIT AGREEMENT AND OTHER AGREEMENTS
----------------------------------------------------
This Amendment No. 1 to First Restated Credit Agreement and Other
Agreements ("Amendment No. 1"), is made and entered into as of the 29th day of
January, 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 refereed 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. 1 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 (the "FRCA") by and among the Borrower, the Lender
and SAI/Detla, whereby Lobozzo and Joanne Lobozzo agreed to provide the Borrower
with Loans (as defined in the FRCA) up to the maximum principal amount of
$3,650,000, 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 "Witnesseth"
paragraph of this Amendment No. 1 are intended to be, and are incorporated into
this Amendment No. 1 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 November 1, 1998.
3. REAFFIRMATION. Except as amended by this Amendment No. 1, the terms and
conditions of the FRCA are hereby reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be duly
executed and delivered by the proper and duly authorized officers as of the date
first above written.
_________________________________
Joseph M. Lobozzo, II
_________________________________
Joanne M. Lobozzo
DELTA COMPUTEC INC.
By: _____________________________
John DeVito, President and
Chief Operating Officer
DELTA DATA NET, INC.
By: _____________________________
John DeVito, President and
Chief Operating Officer
SAI/DELTA, INC.
By: _____________________________
John DeVito, President and
Chief Operating Officer
Page 73
<PAGE>
CONSENT AND AGREEMENT OF GUARANTOR
----------------------------------
As of the date first above written, the undersigned Guarantor, SAI/DELTA, Inc.,
("Guarantor") hereby: (a) fully consents and agrees to the terms and provisions
of the above Amendment No. 1 and the consummation if the transactions
contemplated by Amendment No. 1; (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 indebtendess of the
Borrower of the Lender pursuant to the FRCA and the First Restated Promissory
Note dates 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 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 conditions to the Lender's obligations under Amendment No. 1 and it
is in Guarantor's interest and to the Guarantor's financial benefit to execute
this Consent and Agreement.
SAI/DELTA, INC.
By: _____________________________
John DeVito, President and
Chief Operating Officer
Page 74
<PAGE>
WAIVER AND CONSENT
------------------
This Waiver and Consent is made as of the 29th day of January, 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").
W I T N E S S E T H:
--------------------
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 (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 that 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 Consent
and Agreement.
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.
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 with 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
Page 75
<PAGE>
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 January 29, 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 Guarantors 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 Guarantors interest and to Guarantors 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
Page 76
<PAGE>
AMENDMENT NO. 1
TO
DELTA DATA NET, INC.
SECOND AMENDED AND RESTATED
8% SUBORDINATED DEBENTURE DUE JANUARY 31, 1998 - NO. 1
------------------------------------------------------
This Amendment No. 1 ("Amendment No. 1") to Delta Data Net, Inc. Second
Amended and Restated 8% Subordinated Debenture Due January 31, 1998 - No. 1
("Debenture No. 1") is made and entered into as of the 29th day of January, 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.
WITNESSETH:
-----------
This Amendment No. 1 is intended to amend in certain respects as set forth
herein, the terms and conditions of Debenture No. 1 dated February 19, 1997,
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 RECITAL. The recital set forth in the recital paragraph
of this Amendment No. 1 is intended to be, and hereby is, incorporated into this
Amendment No. 1 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, 1998 to January 31, 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, 1998"
are hereby deleted and replaced by "January 31, 1999.
4. REAFFIRMATION. Except as amended by this Amendment No. 1, the terms and
conditions of Debenture No. 1 remain unchanged and are hereby ratified and
reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be duly
executed and delivered as of the date first above written.
DELTA DATA NET, INC.
By: ______________________________
John DeVito, President, C.O.O.
______________________________
Joseph M. Lobozzo II
Page 77
<PAGE>
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. 1 and
the consummation of the transactions contemplated by Amendment No. 1: (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. 1
and it is in its interest and to its financial benefit to execute this Consent
and Agreement.
DELTA COMPUTEC INC.
By: ______________________________
John DeVito, President, C.O.O.
Page 78
<PAGE>
AMENDMENT NO. 1
TO
DELTA DATA NET, INC.
SECOND AMENDED AND RESTATED
8% SUBORDINATED DEBENTURE DUE JANUARY 31, 1998 - NO. 2
------------------------------------------------------
This Amendment No. 1 ("Amendment No. 1") to Delta Data Net, Inc. Second
Amended and Restated 8% Subordinated Debenture Due January 31, 1998 - No. 2
("Debenture No. 2") is made and entered into as of the 29th day of January, 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.
WITNESSETH:
-----------
This Amendment No. 1 is intended to amend in certain respects as set forth
herein, the terms and conditions of Debenture No. 2 dated February 19, 1997,
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 RECITAL. The recital set forth in the recital paragraph
of this Amendment No. 1 is intended to be, and hereby is, incorporated into this
Amendment No. 1 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, 1998 to January 31, 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, 1998"
are hereby deleted and replaced by "January 31, 1999.
4. REAFFIRMATION. Except as amended by this Amendment No. 1, the terms and
conditions of Debenture No. 2 remain unchanged and are hereby ratified and
reaffirmed in their entirety.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be duly
executed and delivered as of the date first above written.
DELTA DATA NET, INC.
By: ______________________________
John DeVito, President, C.O.O.
______________________________
Joanne M. Lobozzo
Page 79
<PAGE>
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. 1 and
the consummation of the transactions contemplated by Amendment No. 1: (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. 1 and it is in its interest and to its financial benefit to execute this
Consent and Agreement.
DELTA COMPUTEC INC.
By: ______________________________
John DeVito, President, C.O.O.
Page 80
<PAGE>
AMENDMENT NO. 1
TO
DELTA COMPUTEC INC.
SECOND AMENDED AND RESTATED
OCTOBER 1992 OPTION AGREEMENT
JOSEPH M. LOBOZZO, II - 652,175 COMMON SHARES
---------------------------------------------
This Amendment No. 1 ("Amendment No. 1") to Delta Computec Inc. Second
Amended and Restated October 1992 Option Agreement, Joseph M. Lobozzo, II -
652,175 Common Shares (the "Option Agreement") is made and entered into as of
the 29th day of January, 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").
WITNESSETH:
-----------
This Amendment No. 1 is intended to amend in certain respects as set forth
herein, the terms and conditions of the Option Agreement dated February 19,
1997, whereby DCI granted to Lobozzo and 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 RECITAL. The recital set forth in the recital paragraph
of this Amendment No. 1 is intended to be, and hereby is, incorporated into this
Amendment No. 1 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, 1998
to 3:00 p.m. on January 31, 1999.
4. REAFFIRMATION. Except as amended by the Amendment No. 1 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. 1 to be duly
executed and delivered as of the date first above written.
DELTA COMPUTEC INC.
By: ______________________________
John DeVito, President, C.O.O.
______________________________
Joseph M. Lobozzo, II
Page 81
<PAGE>
AMENDMENT NO. 1
TO
DELTA COMPUTEC INC.
SECOND AMENDED AND RESTATED
OCTOBER 1992 OPTION AGREEMENT
JOANNE M. LOBOZZO - 652,175 COMMON SHARES
-----------------------------------------
This Amendment No. 1 ("Amendment No. 1") to Delta Computec Inc. Second
Amended and Restated October 1992 Option Agreement, Joanne M. Lobozzo - 652,175
Common Shares (the "Option Agreement") is made and entered into as of the 29th
day of January, 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").
WITNESSETH:
-----------
This Amendment No. 1 is intended to amend in certain respects as set forth
herein, the terms and conditions of the Option Agreement dated February 19,
1997, whereby DCI granted to Joanne Lobozzo and 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 RECITAL. The recital set forth in the recital paragraph
of this Amendment No. 1 is intended to be, and hereby is, incorporated into this
Amendment No. 1 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, 1998
to 3:00 p.m. on January 31, 1999.
4. REAFFIRMATION. Except as amended by the Amendment No. 1 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. 1 to be duly
executed and delivered as of the date first above written.
DELTA COMPUTEC INC.
By: ______________________________
John DeVito, President, C.O.O.
______________________________
Joanne M. Lobozzo
Page 82
<PAGE>
Exhibit 21
Subsidiaries of the Company
---------------------------
Name Jurisdiction of Incorporation
---- -----------------------------
Computer Support Inc. Georgia *
R&M Associates-Electronic Data
Products Service, Inc. New Jersey *
SAI/Delta, Inc. Florida
Delta Data Net, Inc. New York *
* Dissolution proceedings have been commenced but not yet completed.
Page 83
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<CASH> 18,944
<SECURITIES> 0
<RECEIVABLES> 1,797,842
<ALLOWANCES> 124,199
<INVENTORY> 869,049
<CURRENT-ASSETS> 2,693,963
<PP&E> 4,089,059
<DEPRECIATION> 1,139,106
<TOTAL-ASSETS> 6,026,229
<CURRENT-LIABILITIES> 3,990,377
<BONDS> 0
0
0
<COMMON> 182,521
<OTHER-SE> (2,361,670)
<TOTAL-LIABILITY-AND-EQUITY> 6,026,229
<SALES> 13,376,134
<TOTAL-REVENUES> 13,376,134
<CGS> 9,237,487
<TOTAL-COSTS> 12,242,730
<OTHER-EXPENSES> (18,202)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 423,211
<INCOME-PRETAX> 728,395
<INCOME-TAX> 36,000
<INCOME-CONTINUING> 692,395
<DISCONTINUED> (118,142)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 574,253
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
