(Amendment No. 2)
FORM 10-Q/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 1998.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
__________.
Commission file number 1-13580
ALLIED DIGITAL TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
Delaware 38-3191597
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
140 Fell Court, Hauppauge, New York 11788
(Address of principal executive offices (Zip Code)
(516) 232-2323
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|.
As of March 13, 1998, 13,619,644 shares of the registrant's common stock
were outstanding.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 1998
and July 31, 1997 2
Condensed Consolidated Statements of Earnings for the three-and
six-month periods ended January 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended January 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 13
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14 - 17
PART II - OTHER INFORMATION 18
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
January 31, July 31,
ASSETS 1998 1997
------------ ------------
CURRENT ASSETS
Cash $ 2,566,000 $ 1,193,000
Accounts receivable, net 26,012,000 25,516,000
Inventories 5,133,000 4,380,000
Prepaid expenses 1,105,000 786,000
Deferred income taxes 2,207,000 3,422,000
------------ ------------
Total current assets 37,023,000 35,297,000
PROPERTY AND EQUIPMENT, net 27,218,000 26,783,000
OTHER ASSETS
Excess of cost over fair value of
net assets acquired, net of
accumulated amortization of $8,598,000
and $7,204,000 at January 31,
1998 and July 31, 1997, respectively 42,657,000 43,064,000
Deferred charges and other 3,007,000 2,737,000
------------ ------------
45,664,000 45,801,000
------------ ------------
$109,905,000 $107,881,000
============ ============
The accompanying notes are an integral part of these statements.
-2-
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
January 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- ------------
CURRENT LIABILITIES
Current maturities of long-term debt and
capitalized lease obligations $ 12,727,000 $ 9,837,000
Current maturities of subordinated notes
payable to stockholders 2,881,000
Accounts payable 17,820,000 14,781,000
Accrued liabilities 6,783,000 6,735,000
Income taxes payable 475,000
------------- ------------
Total current liabilities 40,686,000 31,353,000
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current maturities 20,564,000 26,711,000
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS, less current maturities 7,171,000 10,061,000
DEFERRED INCOME TAXES 1,112,000 1,112,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value;
1,000 shares authorized; no shares
issued and outstanding -- --
Common stock, $0.01 par value; 25,000,000
shares authorized; 13,619,644 shares issued
and outstanding 136,000 136,000
Additional paid-in capital 44,892,000 44,742,000
Accumulated deficit (4,656,000) (6,234,000)
------------- ------------
40,372,000 38,644,000
------------- ------------
$ 109,905,000 $107,881,000
============= ============
The accompanying notes are an integral part of these statements.
-3-
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Three-month periods Six-month periods
ended January 31, ended January 31,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales $ 39,554,000 $ 38,132,000 $ 88,592,000 $ 80,858,000
Cost of sales 30,992,000 30,538,000 69,820,000 64,665,000
------------ ------------ ------------ ------------
Gross profit 8,562,000 7,594,000 18,772,000 16,193,000
------------ ------------ ------------ ------------
Operating expenses
Selling, general and
administrative 5,448,000 5,413,000 11,474,000 10,946,000
Amortization of excess of
cost over fair value of
net assets acquired 648,000 595,000 1,294,000 1,240,000
------------ ------------ ------------ ------------
Total operating expenses 6,096,000 6,008,000 12,768,000 12,186,000
------------ ------------ ------------ ------------
Income from operations 2,466,000 1,586,000 6,004,000 4,007,000
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (1,263,000) (1,182,000) (2,561,000) (2,456,000)
Other, net 90,000 36,000 85,000 79,000
------------ ------------ ------------ ------------
Total other expense (1,173,000) (1,146,000) (2,476,000) (2,377,000)
------------ ------------ ------------ ------------
Income before income
taxes 1,293,000 440,000 3,528,000 1,630,000
Provision for income taxes 805,000 397,000 1,950,000 1,099,000
------------ ------------ ------------ ------------
NET INCOME $ 488,000 $ 43,000 $ 1,578,000 $ 531,000
============ ============ ============ ============
Earnings per common share -
basic and diluted $ 0.04 $ -- $ 0.12 $ 0.04
============ ============ ============ ============
Average common shares
outstanding
Basic 13,619,644 13,619,644 13,619,644 13,619,644
============ ============ ============ ============
Diluted 13,693,632 13,619,644 13,672,604 13,619,644
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
-4-
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
Six-month periods
ended January 31,
---------------------------
1998 1997
----------- -----------
Cash flows provided by operating activities $ 9,021,000 $ 1,583,000
Cash flows used in investing activities
Purchases of property and equipment (3,875,000) (577,000)
----------- -----------
Net cash used in investing activities (3,875,000) (577,000)
----------- -----------
Cash flows from financing activities
Net borrowings under revolving notes 1,306,000 8,477,000
Repayment of long-term debt (6,668,000) (9,043,000)
Borrowings of long-term debt 1,589,000 --
----------- -----------
Net cash used in financing activities (3,773,000) (566,000)
----------- -----------
Net increase in cash 1,373,000 440,000
Cash at beginning of period 1,193,000 831,000
----------- -----------
Cash at end of period $ 2,566,000 $ 1,271,000
=========== ===========
The accompanying notes are an integral part of these statements.
-5-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
January 31, 1998
(unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of January 31, 1998 and the
related condensed consolidated statements of earnings for the three- and
six-month periods ended January 31, 1998 and 1997 and the condensed
consolidated statements of cash flows for the six-month periods ended
January 31, 1998 and 1997 have been prepared by Allied Digital
Technologies Corp. ("Allied Digital"), including the accounts of its
wholly-owned subsidiaries, HMG Digital Technologies Corp. ("HMG") and
subsidiary, HRM Holdings Corp. ("Holdings"), and its wholly-owned
subsidiary, Allied Digital, Inc. (formerly known as Hauppauge Record
Manufacturing, Ltd.) ("Allied") (hereinafter referred to collectively as
the "Company") without audit. In the opinion of management, all
adjustments necessary to present fairly the financial position as of
January 31, 1998 and for all periods presented, consisting of normal
recurring adjustments, have been made. Results of operations for the
six-month period ended January 31, 1998 are not necessarily indicative of
the operating results expected for the full year.
The Company (i) provides videocassette duplication and fulfillment
services in addition to processing and duplicating commercial film and
offering post-production services, and (ii) replicates cassette tapes, VHS
videotapes and compact discs under production contracts with companies
primarily in the recorded music industry.
These statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been omitted pursuant to such rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the
annual audited consolidated financial statements and the accompanying
notes included in the Company's Form 10-K for the fiscal year ended July
31, 1997.
Certain amounts for the six-month period ended January 31, 1997 have been
reclassified to conform to the current year presentation.
-6-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE B - INVENTORIES
Inventories consist of the following classifications:
January 31, July 31,
1998 1997
---------- ----------
Raw materials $4,250,000 $3,416,000
Work-in-process 391,000 674,000
Finished goods 492,000 290,000
---------- ----------
$5,133,000 $4,380,000
========== ==========
NOTE C - LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS
Long-term debt, subordinated notes payable and capitalized lease
obligations consist of the following:
January 31, July 31,
1998 1997
------------ ------------
Loan and Security Agreement
Term loan $ 14,042,000 $ 18,782,000
Revolving loan 15,787,000 14,481,000
Additional term loan 1,020,000
Capital expenditure loan 1,456,000
Subordinated 10% Notes Payable to
Stockholder 7,171,000 7,180,000
Additional Subordinated 10% Notes
Payable to Stockholders 2,000,000 2,000,000
Subordinated 11% Series B Notes
Payable to Stockholders 881,000 881,000
Note Payable to VCA 926,000 1,171,000
Capitalized lease obligations 995,000 995,000
Other 85,000 99,000
------------ ------------
43,343,000 46,609,000
Less current maturities (15,608,000) (9,837,000)
------------ ------------
$ 27,735,000 $ 36,772,000
============ ============
-7-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
Loan and Security Agreement
The October 30, 1996 loan and security agreement provided the Company with
borrowings of up to $48,910,169 under credit facilities consisting of a
(i) $25,410,169 term loan, (ii) $22,000,000 revolving loan facility
(combined with a $1,500,000 letter of credit facility) and (iii)
$1,500,000 additional loan. On August 19, 1997, the Company entered into
an amendment to the October 30, 1996 loan and security agreement with the
bank which provides the Company with a $3,450,000 capital expenditure
credit facility.
The loan and security agreement (as amended) is collateralized by
substantially all of the assets of the Company. The agreement contains
covenants which, among other matters, (1) require the Company to (i)
maintain increasing levels of net worth, (ii) maintain a minimum debt
service ratio and (iii) limit its annual capital expenditures, and (2)
place limitations on (i) additional indebtedness, encumbrances and
guarantees, (ii) consolidations, mergers or acquisitions, (iii)
investments or loans, (iv) disposal of property, (v) compensation to
officers and others, (vi) dividends and stock redemptions, (vii) issuance
of stock, and (viii) transactions with affiliates, all as defined in the
agreement. As of January 31, 1998, there is no equity available for the
payment of dividends to stockholders. The agreement also contains
provisions for fees payable to the bank upon prepayment and an increased
rate of interest during periods of default. The term of this agreement
extends to November 30, 2000.
a. Term Loan
The $25,410,169 term loan dated October 30, 1996 is payable in an
initial scheduled installment aggregating $1,695,462 on October 31,
1996 (of which $1,179,000 was repaid on November 8, 1996), 30
consecutive monthly installments of $548,054 thereafter through
April 30, 1999 and a final installment on May 30, 1999 of $273,098
together with additional prepayments of principal of $2,000,000 on
October 31, 1997 and $5,000,000 on October 31, 1998. No prepayment
fees result from these scheduled prepayments. In addition, interest
is payable monthly at 1.5% over the bank's base rate (8.5% at
January 31, 1998).
-8-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
b. Revolving Loan
Under the revolving loan facility combined with a $1,500,000 letter
of credit facility, the Company may borrow up to a maximum of
$22,000,000 based upon a percentage of accounts receivable and
inventory, as defined, less the sum of the undrawn face amount of
any letters of credit outstanding. Interest is payable monthly at
1.25% over the bank's base rate. In addition, the Company is
required to pay, on a monthly basis, an unused facility fee of 0.5%
per annum. At January 31, 1998, the Company had approximately
$6,213,000 unused and available under the revolving loan facility.
c. Additional Term Loan
The $1,500,000 additional loan dated October 30, 1996 was payable in
25 consecutive monthly installments commencing December 31, 1996 of
$60,000 each plus interest at 1.5% over the bank's base rate. In the
event the additional loan was repaid in full on or before December
31, 1997 and the loan and security agreement had not been terminated
on or before such date, the Company would not be required to pay a
$100,000 fee to the bank on December 31, 1998. On December 31, 1997,
the Company repaid in full the remaining outstanding balance of
$720,000 on this additional loan to the bank.
d. Capital Expenditure Credit Facility
The $3,450,000 capital expenditure credit facility provides the
Company with a credit line through July 31, 1998 to finance up to
80% of the value of capital equipment purchases (as defined). Such
loans under the facility are payable based on a 36-month
amortization schedule with a final payment of the entire unpaid
principal balance on July 31, 2000. These loans bear interest at
1.5% over the bank's base rate. In addition, the Company is required
to pay a $103,500 fee to the bank, payable at a rate of 3% of each
advance with a final payment for any unpaid amount of the fee
payable on July 31, 1998. Through January 31, 1998, the Company
borrowed $1,589,000 from this credit facility. As of January 31,
1998, $1,456,000 was outstanding under this facility.
-9-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
Subordinated 10% Notes Payable to Stockholder
The subordinated 10% notes payable to stockholder are uncollateralized and
payable in full on January 1, 2001. Interest accrues only on the original
principal sum of $6,000,000 and is payable quarterly at 10% per annum (12%
upon default); however, through January 31, 1998, certain interest
payments were postponed pursuant to the terms of the loan and security
agreement with the bank. Partial payment of such accrued and unpaid
interest becomes periodically payable to the stockholder and is limited to
a stipulated percentage as defined in the loan and security agreement,
provided no default or event of default has occurred. The remaining
portion of the unpaid interest subject to this payment postponement
becomes payable on January 1, 2001. In accordance with the periodic
interest payment limitation provisions of the loan and security agreement,
the Company paid on December 5, 1997 approximately $316,000 of the accrued
interest payable on these notes.
Additional Subordinated 10% Notes Payable to Stockholders
The additional subordinated 10% notes payable to stockholders are
uncollateralized and payable in full on December 31, 1998 with interest
payable quarterly; however, payment of principal and interest may be
extended in full or in part to January 1, 2001 to the extent not permitted
to be paid pursuant to the terms of the loan and security agreement with
the bank.
Subordinated 11% Series B Notes Payable to Stockholders
These uncollateralized notes mature on January 1, 1999 with interest
payable quarterly.
Note Payable to VCA
This uncollateralized note is payable in annual installments of $385,374
beginning January 1995 through January 2001, including interest at 12%.
-10-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE C (continued)
Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for as
capital leases. The obligations for the equipment require the Company to
make monthly payments through December 2001 with implicit interest rates
from 5.27% to 19.48%.
The following is a summary of the aggregate annual maturities of long-term
debt, subordinated notes payable and capitalized lease obligations as of
January 31, 1998:
Twelve months ending January 31,
1999 $15,608,000
2000 3,643,000
2001 24,007,000
2002 85,000
-----------
$43,343,000
===========
NOTE D - EARNINGS PER SHARE
In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per
Share," which supersedes Accounting Principle Board Opinion No. 15. Under
SFAS No. 128, earnings per common share is computed by dividing net income
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock. Prior-period amounts have been
restated, where appropriate, to conform to the requirements of SFAS No.
128.
-11-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE D (continued)
The number of shares used in the Company's basic and diluted earnings per
share computations are as follows:
Three-month periods Six-month periods
ended January 31, ended January 31,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Weighted average common
shares outstanding for
basic earnings per share 13,619,644 13,619,644 13,619,644 13,619,644
Common stock equivalents for
stock options and warrants 73,988 -- 52,960 --
---------- ---------- ---------- ----------
Weighted average common
shares outstanding for
diluted earnings per share 13,693,632 13,619,644 13,672,604 13,619,644
========== ========== ========== ==========
NOTE E - ACQUISITION
On December 17, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Denver Dubbing, Inc., a videocassette
duplicator. The purchase price was $873,000 payable in cash of $170,000
and the assumption of net liabilities for the balance. The purchase
agreement contained a covenant not-to-compete for a period of three years.
Also, under the purchase agreement, the Company may pay additional
consideration of $270,000 in the event net sales for the acquired company
exceed certain predetermined amounts during 1998 and 1999. Such additional
consideration will be accounted for as compensation expense in the periods
in which the contingencies are satisfied. The Company accounted for the
acquisition as a purchase and as such, the fair values of the assets
acquired and liabilities assumed have been recorded on the date of the
acquisition and the results of operations are included in the Company's
statement of earnings since the acquisition date. The excess of
consideration paid over the estimated fair value of the net assets
acquired in the amount of $773,000
-12-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1998
(unaudited)
NOTE E (continued)
has been recorded as excess of fair value over the cost of net assets
acquired and is being amortized on a straight-line basis over 15 years.
Pro forma historical results of operations are not presented, as such
results would not be materially different from the historical results of
the Company.
In connection with this acquisition, the Company entered into a two year
employment agreement with an officer of the acquired company with an
annual base salary of approximately $150,000.
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three Month Period Ended January 31, 1998, compared to
Three Month Period Ended January 31, 1997.
Net sales for the three month period ended January 31, 1998 were $39.6 million,
an increase of $1.4 million or 4% as compared to the three month period ended
January 31, 1997. Although sales dollars remained relatively flat, the
continuing favorable growth trends in sales to the Company's CD Audio and CD ROM
customers was offset by a decline in audiocassette sales units of approximately
32% from the prior quarter ended January 31, 1997.
Gross profit for the three month period ended January 31, 1998 increased $1.0
million to $8.6 million, or 22% of net sales from $7.6 million, or 20% of net
sales for the three month period ended January 31, 1997. This increase in gross
profit was primarily attributable to the favorable (declining) trend in material
costs.
Operating expenses for the three month period ended January 31, 1998 were $6.1
million, or 15% of net sales compared to $6.0 million, or 16% of net sales for
the three month period ended January 31, 1997.
Income from operations of $2.5 million for the three month period ended January
31, 1998 compares to income from operations of $1.6 million for the three month
period ended January 31, 1997. This increase of $0.9 million primarily reflects
the effect of lower material costs net of the increased operating expenses
described above.
Non-operating expenses increased to $1.2 million for the three month period
ended January 31, 1998 from $1.1 million for the three month period ended
January 31, 1997.
For the three month period ended January 31, 1998, the Company realized income
before taxes of $1.3 million, compared to income before taxes of $0.4 million
for the three month period ended January 31, 1997.
A provision for Federal, state and local income taxes of $0.8 million was
recognized for the three month period ended January 31, 1998, compared to a tax
provision of $0.4 million for the three month period ended January 31, 1997.
After recognition of applicable income taxes, Allied Digital recognized net
income for the three months ended January 31, 1998, of $0.5 million compared to
net income of $43,000 for the three months ended January 31, 1997 for the
reasons noted above.
Results of Operations - Six Month Period Ended January 31, 1998, compared to Six
Month Period Ended January 31, 1997.
Net sales for the six month period ended January 31, 1998 were $88.6 million, an
increase of $7.7 million or 10% as compared to the six month period ended
January 31, 1997. There were several factors contributing to this increase. As
the Company continues to penetrate its existing market, there also continue to
be additions of new customers to its expanding customer base. The Company has
entered into an exclusive CD manufacturing agreement with a new customer, and is
currently experiencing favorable growth trends in sales to the Company's CD
Audio and CD ROM customers. This favorable trend was partially offset by a
decline in sales to the Company's audiocassette customers in the second quarter
of fiscal 1998.
-14-
Gross profit for the six month period ended January 31, 1998 increased $2.6
million to $18.8 million, or 21% of net sales, from $16.2 million, or 20% of net
sales, for the six month period ended January 31, 1997. Although the gross
profit dollars increased due to increased sales, the unpredictably strong demand
for audiocassettes and the demand for CDs exceeded the Company's internal
capacity in the first quarter of fiscal 1998, which caused the Company to source
additional capacity to outside contractors at lower margins. Despite the impact
of this outsourcing, the gross profit percentage increased slightly primarily
due to the favorable (declining) trend in material costs as well as fixed costs
being spread over higher production volumes.
Operating expenses for the six month period ended January 31, 1998 were $12.8
million or 14% of net sales compared to $12.2 million or 15% of net sales for
the six month period ended January 31, 1997. The $0.6 million increase was
primarily the result of additional costs incurred for professional fees, bad
debts and sales commissions and salaries.
Income from operations of $6.0 million for the six month period ended January
31, 1998 compares to $4.0 million for the six month period ended January 31,
1997.
Non-operating expenses increased to $2.5 million for the six month period ended
January 31, 1998 from $2.4 million for the six month period ended January 31,
1997.
For the six month period ended January 31, 1998, Allied Digital realized income
before income taxes of $3.5 million compared to income before income taxes of
$1.6 million for the six month period ended January 31, 1997 for the reasons
noted above.
A provision for Federal, state and local income taxes of $2.0 million was
recognized for the six months ended January 31, 1998, compared to a provision of
$1.1 million for the six months ended January 31, 1997.
After recognition of applicable income taxes, Allied Digital recognized net
income for the six months ended January 31, 1998 of $1.6 million, compared to
income of $0.5 million for the six months ended January 31, 1997.
Liquidity and Capital Resources
The Company's senior loan and credit facilities are with American National
Bank and Trust Company of Chicago ("ANB"). The October 30, 1996 ANB loan
agreement provides for (i) a revolving loan (the "ANB Revolving Loan") of $22
million (subject to certain borrowing base limitations based on Allied's
accounts receivable and inventory), which revolving loan includes a $1.5 million
letter of credit facility, (ii) a term loan (the "ANB Term Loan") in the
original principal amount of $25.4 million and (iii) an additional loan (the
"ANB Additional Loan") in the original principal amount of $1.5 million. On
August 19, 1997, the Company entered into an amendment to the Loan and Security
Agreement dated October 30, 1996 with ANB which provides the Company with a $3.5
million capital expenditure credit facility (the "ANB CAPEX Loans"). The ANB
Revolving Loan bears interest at the base rate published by ANB plus 1.25%. The
ANB Term Loan, the ANB Additional Loan and the ANB CAPEX Loans bear interest at
the base rate published by ANB plus 1.50%. At January 31, 1998, the ANB base
rate was 8.50%. The Revolving Facility carries an unused commitment fee of
0.50%. The obligations of Allied under the ANB Loan Agreement are secured by a
lien on substantially all of Allied's assets.
At January 31, 1998, the aggregate amount of total indebtedness
outstanding of $43.3 million was as follows: (i) the ANB Term Loan, $14.0
million, (ii) the ANB Revolving Loan, $15.8 million, (iii) the ANB CAPEX Loans,
$1.5 million, (iv) the 10% Notes Payable to Stockholder, $7.2 million, (v) the
Additional Subordinated 10% Notes payable to Stockholders, $2.0 million, (vi)
the 11% Series B Notes Payable to Stockholders, $0.9 million, and (vii) the Note
Payable to VCA (related to the VCA acquisition), $0.9 million, (ix) capitalized
lease obligations, $1.0 million.
-15-
The ANB Term Loan is payable in an initial installment aggregating
$1,695,462 on October 31, 1996 (of which $1,179,000 was repaid on November 8,
1996), 30 consecutive monthly installments of $548,054 thereafter through April
30, 1999 and a final installment of $273,098 on May 30, 1999, together with
additional prepayments of principal of $2,000,000 on October 31, 1997 and
$5,000,000, on October 31, 1998. No prepayment fees result from these scheduled
prepayments.
The $1,500,000 ANB Additional Loan ("Additional Loan") dated October 30,
1996 was payable in 25 consecutive monthly installments commencing December 31,
1996 of $60,000 each plus interest at 1.5% over ANB's base rate. In the event
the Additional Loan was repaid in full on or before December 31, 1997 and the
loan and security agreement had not been terminated on or before such date, the
Company would not be required to pay a $100,000 fee payable to ANB on December
31, 1998. On December 31, 1997, the Company repaid in full the remaining
outstanding balance of $720,000 on the Additional Loan to ANB.
The ANB capital expenditure credit facility provides the Company with a
credit line through July 31, 1998 to finance up to 80% of the value of capital
equipment purchases (as defined). The ANB CAPEX Loans are payable based on a
36-month amortization schedule with a final payment of the entire unpaid
principal balance on July 31, 2000. In addition, the Company is required to pay
a $103,500 fee to ANB, payable at a rate of 3% of each advance with a final
payment for any unpaid amount of the fee payable on July 31, 1998. Through
January 31, 1998, the Company borrowed $1,589,000 from this credit facility. As
of January 31, 1998, $1,456,000 was outstanding under this capital expenditure
credit facility.
The 10% Notes Payable to Stockholder (the "10% Notes") are unsecured
obligations which bear interest at 10% per annum. Interest accrues only on the
original principal sum of $6.0 million and is payable quarterly. Upon default,
the interest rate increases to 12% per annum. Through January 31, 1998, certain
interest payments were postponed pursuant to the terms of the loan and security
agreement with ANB. Partial payment of such accrued and unpaid interest is
periodically payable to the stockholder and is limited to a stipulated
percentage as defined in the loan and security agreement, provided no default or
event of default occurred. The remaining portion of the unpaid interest subject
to this payment postponement becomes payable on January 1, 2001. In accordance
with the periodic interest payment limitation provisions of the loan and
security agreement, the Company paid on December 5, 1997 approximately $316,000
of the accrued interest payable on these notes. Payment of these notes is
subordinated to the payment of the obligations under the ANB Loan Agreement. The
notes mature on January 1, 2001.
The Additional Subordinated 10% Notes Payable to Stockholders are
uncollateralized and payable in full on December 31, 1998 with interest payable
quarterly; however, payment of principal and interest may be extended in full or
in part to January 1, 2001 to the extent not permitted to be paid pursuant to
the terms of the ANB loan and security agreement.
The Series B Notes Payable to Stockholders are unsecured obligations which
bear interest at 11% per annum, payable quarterly. Payment of these notes is
subordinated to the payment of the obligations under the ANB Loan. The note
matures on January 1, 1999.
The note payable to VCA is unsecured and is payable in annual installments
beginning January 1995 through January 2001, including annual interest of 12%.
The capitalized lease obligations represent certain equipment leased by
the Company under agreements accounted for as capital leases. The obligations
for the equipment require the Company to make monthly payments through December
2001 with implicit interest rates from 5.27% to 19.48%.
Proceeds from the ordinary operations of Allied are applied to reduce the
principal amount of borrowings outstanding under the ANB Loan Agreement. Unused
portions of the Revolving Loan may be borrowed and reborrowed, subject to
availability in accordance with the then applicable commitment and borrowing
limitations.
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The ANB Loan Agreement contains covenants which, among other things, (a)
require the Company to (i) maintain increasing levels of net worth, (ii)
maintain minimum debt service ratios and (iii) limit its annual capital
expenditures, and (b) place limitations on (i) additional indebtedness,
encumbrances and guarantees, (ii) consolidations, mergers or acquisitions, (iii)
investments or loans, (iv) disposal of property, (v) compensation to officers
and others, (vi) dividends and stock redemptions, (vii) issuance of stock, and a
(viii) transactions with affiliates, all as defined in the ANB Loan Agreement.
Cash Requirements. The Company's current cash requirements, including
working capital and capital expenditure requirements, are funded from the
operations and the proceeds of borrowings by Allied under the ANB Loan
Agreement.
As of January 31, 1998, the Company had a net working capital deficiency
of $3.7 million and $6.2 million unused and available under the ANB Revolving
Loan. Net cash provided by operating activities during the six months ended
January 31, 1998 was $9.0 million. Net cash used in investing activities totaled
$3.9 million, of which substantially all was used for the purchase of
replication equipment and leasehold improvements. The net working capital
deficiency is primarily a result of the current classification of the ANB term
loan $5,000,000 prepayment due on October 31, 1998. One source of eliminating
such deficit might be the use of the $6.2 million available under the ANB
Revolving Loan.
The Company currently expects that capital expenditures will be divided
primarily between maintenance capital expenditures and capital projects.
Maintenance capital expenditures include those required to maintain production
performance, while capital projects relate primarily to extending the life of
existing equipment, increasing capacity, and decreasing production costs. The
Company incurs approximately $1.5 million per year in cost of sales for
maintenance and repairs.
The Company has not paid any dividends on the Company's Common Stock since
its inception. The payment of dividends, if any, will be contingent upon the
Company's revenues and earnings, if any, capital requirements and general
financial condition. It is the current policy of the Board of the Company, in
view of the Company's contemplated financial requirements, to retain all
earnings, if any, for use in the Company's business operation.
The Company is a legal entity separate and distinct from its subsidiaries.
As a holding company with no significant operations of its own, the principal
sources of its funds will be dividends and other distributions from its
operating subsidiary, borrowings and sales of equity. Restrictions contained in
the ANB Loan Agreement impose limitations on the amount of distributions that
Allied may make to the Company and prohibit the Company from using any such
distributions to pay dividends to its stockholders.
The year 2000 data management issue, which has received wide spread
publicity, is not expected to have a material impact on the Company.
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PART II - OTHER INFORMATION
Item 1. - Legal Proceedings - Not applicable
Item 2. - Changes in Securities - Not applicable
Item 3. - Defaults Upon Senior Securities - Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders - Not applicable
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - Not applicable.
(b) No Report on Form 8-K has been filed during the quarter for
which this report on Form 10-Q is being filed.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIED DIGITAL TECHNOLOGIES CORP.
Date: September 1, 1998 By: /s/ George N. Fishman
--------------------------------------
George N. Fishman
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: September 1, 1998 By: /s/ Charles A. Mantione
--------------------------------------
Charles A. Mantione
Vice President - Finance
(Principal Financial Officer and Principal
Accounting Officer)