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FORM 10-Q/A
(Amendment No. 1)
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 APRIL 30, 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.
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(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
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(Registrant's telephone number, including area code)
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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 June 15, 1998, 13,623,394 shares of the registrant's common stock
were outstanding.
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INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as
of April 30, 1998 and July 31, 1997 2
Condensed Consolidated Statements of Earnings
for the three-and nine-month periods ended
April 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash
Flows for the nine-month periods ended
April 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements 6 - 16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
PART II - OTHER INFORMATION
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)
April 30, July 31,
ASSETS 1998 1997
------------ ------------
CURRENT ASSETS
Cash $ 596,000 $ 1,193,000
Accounts receivable, net 25,078,000 25,516,000
Inventories 4,714,000 4,380,000
Prepaid expenses 872,000 786,000
Deferred income taxes 2,068,000 3,422,000
------------ ------------
Total current assets 33,328,000 35,297,000
PROPERTY AND EQUIPMENT, net 26,940,000 26,783,000
OTHER ASSETS
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$9,159,000 and $7,204,000 at April 30, 1998
and July 31, 1997, respectively 42,053,000 43,064,000
Deferred charges and other 2,964,000 2,737,000
------------ ------------
45,017,000 45,801,000
------------ ------------
$105,285,000 $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)
April 30, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------- -------------
CURRENT LIABILITIES
Current maturities of long-term debt and
capitalized lease obligations $ 12,737,000 $ 9,837,000
Current maturities of subordinated notes payable
to stockholders 2,881,000
Accounts payable 13,558,000 14,781,000
Accrued liabilities 5,709,000 6,735,000
Income taxes payable 835,000
------------- -------------
Total current liabilities 35,720,000 31,353,000
LONG-TERM DEBT AND CAPITALIZED LEASE
OBLIGATIONS, less current maturities 20,523,000 26,711,000
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS, less current maturities 7,251,000 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; 13,623,394 and 13,619,644
shares issued and outstanding at April 30, 1998
and July 31, 1997, respectively 136,000 136,000
Additional paid-in capital 44,901,000 44,742,000
Accumulated deficit (4,358,000) (6,234,000)
------------- -------------
40,679,000 38,644,000
------------- -------------
$ 105,285,000 $ 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 Nine-month periods
ended April 30, ended April 30,
---------------------------- ---------------------------------
1998 1997 1998 1997
------------ ------------ ------------- -------------
Net sales $38,518,000 $38,509,000 $127,110,000 $119,367,000
Cost of sales 30,048,000 30,833,000 99,868,000 95,500,000
------------ ------------ ------------- -------------
Gross profit 8,470,000 7,676,000 27,242,000 23,867,000
------------ ------------ ------------- -------------
Operating expenses
Selling, general and administrative 6,110,000 5,629,000 17,584,000 16,575,000
Amortization of excess of cost over fair
value of net assets acquired 661,000 645,000 1,955,000 1,885,000
------------ ------------ ------------- -------------
Total operating expenses 6,771,000 6,274,000 19,539,000 18,460,000
------------ ------------ ------------- -------------
Income from operations 1,699,000 1,402,000 7,703,000 5,407,000
------------ ------------ ------------- -------------
Other income (expense)
Interest expense (798,000) (1,118,000) (3,359,000) (3,573,000)
Other, net 77,000 83,000 162,000 162,000
------------ ------------ ------------- -------------
Total other expense (721,000) (1,035,000) (3,197,000) (3,411,000)
------------ ------------ ------------- -------------
Income before income taxes 978,000 367,000 4,506,000 1,996,000
Provision for income taxes 680,000 269,000 2,630,000 1,367,000
------------ ------------ ------------- -------------
NET INCOME $ 298,000 $ 98,000 $ 1,876,000 $ 629,000
============ ============= ============= =============
Earnings per common share - basic
and diluted $0.02 $ -- $0.14 $0.05
==== ====== ==== ====
Average common shares outstanding
Basic 13,621,394 13,619,644 13,620,227 13,619,644
============ ============= ============= =============
Diluted 13,785,073 13,619,644 13,709,852 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)
Nine-month periods ended April 30,
----------------------------------
1998 1997
------------ ------------
Cash flows provided by operating activities $ 8,771,000 $ 1,582,000
Cash flows used in investing activities
Purchases of and deposits on property and equipment (5,505,000) (507,000)
Cash flows from financing activities
Net borrowings under revolving loan 3,733,000 6,106,000
Borrowings of long-term debt 1,598,000 3,500,000
Repayment of long-term debt (9,194,000) (11,000,000)
------------ ------------
Net cash used in financing activities (3,863,000) (1,394,000)
------------ ------------
Net decrease in cash (597,000) (319,000)
Cash at beginning of period 1,193,000 831,000
------------ ------------
Cash at end of period $ 596,000 $ 512,000
============ ============
The accompanying notes are an integral part of these statements.
-5-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
April 30, 1998
(unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of April 30, 1998 and the
related condensed consolidated statements of earnings for the three- and
nine-month periods ended April 30, 1998 and 1997 and the condensed
consolidated statements of cash flows for the nine-month periods ended
April 30, 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 April 30, 1998 and for all periods
presented, consisting of normal recurring adjustments, have been made.
Results of operations for the nine-month period ended April 30, 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.
-6-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1998
(unaudited)
NOTE B - INVENTORIES
Inventories consist of the following classifications:
April 30, July 31,
1998 1997
---------- ----------
Raw materials $3,790,000 $3,416,000
Work-in-process 618,000 674,000
Finished goods 306,000 290,000
---------- ----------
$4,714,000 $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:
April 30, July 31,
1998 1997
---------- ----------
Loan and Security Agreement
Term loan $ 11,850,000 $ 18,782,000
Revolving loan 18,214,000 14,481,000
Additional term loan 1,020,000
Capital expenditure loan 1,280,000
Subordinated 10% Notes Payable to Stockholder 7,251,000 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 910,000 995,000
Other 80,000 99,000
------------ ------------
43,392,000 46,609,000
Less current maturities (15,618,000) (9,837,000)
------------ ------------
$ 27,774,000 $ 36,772,000
============ ============
-7-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 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 April 30, 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 (8.25% at April
30, 1998).
-8-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 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 April 30, 1998, the Company had approximately
$3,786,000 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 April 30, 1998, the Company
borrowed $1,589,000 from this credit facility. As of April 30, 1998,
$1,280,000 was outstanding under this facility.
-9-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 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 April 30, 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
in fiscal 1998 approximately $383,000 of the accrued interest payable on
these notes through April 30, 1998.
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.
-10-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1998
(unaudited)
NOTE C (continued)
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%.
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
April 30, 1998:
Twelve months ending April 30,
1999 $ 15,618,000
2000 1,422,000
2001 26,334,000
2002 18,000
-------------
$ 43,392,000
=============
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)
April 30, 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 Nine-month periods
ended April 30, ended April 30,
----------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Weighted average common shares
Outstanding for basic earnings
per share 13,621,394 13,619,644 13,620,227 13,619,644
Common stock equivalents for
stock options and warrants 163,679 -- 89,625 --
---------- ---------- ---------- ----------
Weighted average common shares
Outstanding for diluted earnings
per share 13,785,073 13,619,644 13,709,852 13,619,644
========== ========== ========== ==========
NOTE E - STOCKHOLDERS' EQUITY
In March 1998, options to acquire 3,750 shares of common stock at an
exercise price of $2.4375 per share were exercised.
-12-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1998
(unaudited)
NOTE F - 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 met in so far as the employment contract
term coincides with the contingency period and the amounts are considered
reasonable in relation to other compensation levels within the Company.
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 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.
NOTE G - SUBSEQUENT EVENTS
The Proposed Recapitalization
Pursuant to a merger agreement (the "Merger Agreement") dated as of May 5,
1998 between the Company and Analog Acquisition Corp. ("AAC"), an entity
organized solely to effect the merger (as defined) on behalf of 399
Venture Partners Inc., ("399"), and certain members of the Company's
management, and subject to shareholder approval, AAC will merge with and
into the Company, with the Company as the surviving corporation (the
"Merger"). Each issued and outstanding share (or fraction thereof) of
common stock of the Company immediately prior to the effective date of the
-13-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1998
(unaudited)
NOTE G (continued)
Merger will be canceled and converted into the right to receive $5.00 in
cash other than (i) 74,998 shares of common stock held by certain members
of the Company's management, which will remain outstanding and be
converted into one share of Class A Common Stock of the Company,
representing, in the aggregate, approximately 51% of the Class A Common
Stock; (ii) 1,100,110 shares of common stock of the Company owned by 399,
which will be converted into 73,999 shares of Class A Common Stock,
351,000 shares of Class B Common Stock of the Company and 33,375.55 shares
of redeemable Series A Preferred Stock; and (iii) shares of stockholders
who are entitled to, and who have perfected, their appraisal rights. In
addition, 399 will purchase 131,244.45 shares of preferred stock, par
value $.01 per share, of AAC for $13,124,445 in cash. Further, (i) each
share of common stock of AAC outstanding immediately prior to the
effective date of the Merger will be canceled and converted into one share
of Class A Common Stock and (ii) each share of preferred stock of AAC
outstanding prior to the effective date of the Merger will be canceled and
converted into one share of redeemable Series A Preferred Stock of the
Company.
As a result of the cancellation and conversion of the shares of AAC and
the conversion of 1,100,110 shares of Common Stock of 399 described above,
399 will own 165,000 shares of redeemable Series A Preferred Stock, 74,000
shares of Class A Common Stock and 351,000 shares of Class B Common Stock.
Members of management will own 75,000 shares of Class A Common Stock. As
part of the recapitalization, all of the existing long-term debt of the
Company (except for capitalized lease obligations) aggregating, at April
30, 1998, $42.5 million, including subordinated notes payable to the
stockholders aggregating $10.1 million (of which $9.5 million is payable
to the Company's Co-Chairmen) and a termination charge of approximately
$0.7 million, will be repaid with the proceeds from the funding described
below.
The recapitalization will be funded by (i) approximately $5.3 million of
borrowings under a proposed new $25.0 million senior revolving credit
facility, (ii) approximately $75.0 million of borrowings from two proposed
senior secured term loans with a bank, (iii) approximately $20.0 million
of borrowings from two proposed subordinated loans with an entity related
to 399, (iv) approximately $13.1 million from the purchase of the AAC
Series A Preferred Stock and (v) $0.2 million from the exercise of stock
options and purchase of Allied Common Stock by certain members of
management.
-14-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1998
(unaudited)
NOTE G (continued)
The 165,000 shares of Suriving Corporation Series A Preferred Stock will
have (i) a stated value of $100 per share, (ii) cumulative dividends
payable semianually at a rate of 12% per annum and (iii) a mandatory
redemption in 2009 or earlier upon either the sale of the Company or any
qualifying offering.
At the effective time, it is anticipated that the Company will enter into
a loan agreement with Fleet National Bank or a comparable financial
institution providing for a $25 million revolving credit facility and a
$25 million Term A facility, each maturing on December 31, 2003, and a $50
million Term B facility maturing on December 31, 2005. It is expected that
loans under the revolving credit facility and Term A facility will bear
interest for the initial six months at the applicable LIBOR rate plus
2.50% or Prime Rate plus 1.25% and loans under the Term B facility will
bear interest for the initial six months at the applicable LIBOR rate plus
3.00% or Prime Rate plus 1.50%, and thereafter, all loans under the Term
and revolving credit facility will bear interest at applicable margins
over the LIBOR and Prime rates determined on the basis of the Company's
ratio of total debt to twelve months trailing earnings before interest,
taxes, depreciation and amortization. It is expected that the senior Term
credit facilities will be secured by substantially all of the assets of
the Company and guaranteed by its subsidiaries. It is also anticipated
that at the effective time the Company will enter into a loan agreement
with Citicorp Mezzanine Partners, L.P. (CMP), an entity related to 399,
providing for an approximately $20 million unsecured senior subordinated
credit facility with a maturity date of ten years from the Closing Date
and an annual interest rate of 12%.
In connection with the $20 million unsecured senior subordinated credit
facility, CMP will be entitled to receive warrants to purchase up to
7-1/2% (subject to reduction by 50% in the event of a prepayment of the
unsecured senior subordinated credit facility prior to the first
anniversary of the Closing Date) of the fully diluted Surviving
Corporation Common Stock outstanding as of the Closing Date, after giving
effect to the Merger at an exercise price of $0.01 per share. These
warrants have been valued at approximately $103,000 using the minimum
value method in accordance with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation." A value of
$5.00 per share of the Company's common stock was the underlying value
used in assigning a value to the warrants derived from the application of
the minimum value method, which is justified in that the Company is
changing from a public to a nonpublic status. These deferred financing
costs of $103,000 will be amortized over 10 years, the term of the
unsecured senior subordinated credit facility.
-15-
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1998
(unaudited)
NOTE G (continued)
The Merger will be accounted for as a recapitalization for accounting
purposes as there will be a significant continuation of stockholder
ownership. Further, AAC, formed solely for the purpose of effectuating the
recapitalization, will merge with and into the Company. Accordingly, the
Merger will have no impact on the historical basis of the Company's assets
and liabilities.
The following non-recurring charges will be reflected in the Company's
statements of earnings in connection with the Transactions in the period
in which the Transactions close: (i) $1.026 million relating to the cash
settlement of unexercised stock options granted to employees, (ii) an
extraordinary charge of $1.132 million relating to a termination charge
and write-off of deferred financing costs relating to the repayment of
borrowings under the Company's existing credit agreement and (iii) related
tax effects.
In accordance with the terms of the Merger Agreement, the Company must pay
AAC $3,375,000, and reimburse AAC for its reasonable out-of-pocket
expenses up to a maximum of $1,000,000, if the Merger Agreement is
terminated for certain specified reasons (as defined).
Litigation
On May 12, 1998, a complaint purporting to state a class action was filed
in the Delaware Court of Chancery by Crandon Capital Partners, alleged to
be a stockholder of the Company, on behalf of itself and all others
similarly situated, against the Company and its directors. The plaintiffs
allege that the Merger is wrongful, unfair and harmful to holders of
Common Stock and that it has been effected with unfair dealing, that the
proposed consideration of $5.00 a share is unfair to the Company's
stockholders and that the directors of the Company have violated their
fiduciary obligations owed to the plaintiffs and other members of the
class. The complaint seeks to enjoin the Merger and an unspecified amount
of damages, in addition to payment of attorney's fees and reimbursement of
expenses. Management believes that this claim is without merit and does
not believe such claim will have a material adverse effect on the Merger
or on the Company's financial position, results of operations or
liquidity; however, there can be no assurance as to the outcome of such
claim.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
On May 5, 1998, the Company entered into a definitive merger agreement with
Analog Acquisition Corp., a corporation formed at the direction of 399 Venture
Partners, Inc., an affiliate of Citicorp Venture Capital, Ltd. In accordance
with the terms of the Merger Agreement, an investors' group consisting of 399
and certain members of management of the Company will acquire the Company in a
transaction structured as a leveraged recapitalization.
The Merger is subject to the customary conditions to closing, including approval
by a majority of the Company's stockholders, regulatory review and other
conditions. Under the terms of the Merger Agreement, each outstanding share of
the Company's common stock, except for treasury shares, shares held directly or
indirectly by 399 and shares held by certain members of management, will be
converted into the right to receive $5.00 in cash. Certain stockholders who,
together with 399, represent approximately 68.51% of the issued and outstanding
common stock of the Company have executed agreements to vote their shares in
favor of the Merger. Following the Merger, the capital stock of the Company will
no longer be publicly traded. The Merger is expected to be completed in early
August 1998.
Results of Operations - Three Month Period Ended April 30, 1998 compared to the
Three Month Period Ended April 30, 1997
Net sales for each of the three month periods ended April 30, 1998 and 1997 were
approximately $38.5 million. Although the Company continues to experience
favorable growth trends in sales for both CD Audio and CD ROM customers, the
decline in audiocassette sales kept the Company's consolidated net sales flat
for the quarter.
Gross profit for the three month period ended April 30, 1998 increased $0.8
million, or 22% of net sales from $7.7 million, or 19.9% of net sales from the
three month period ended April 30, 1997. This increase in gross profit was
primarily attributable to improvements in manufacturing efficiencies.
Operating expenses for the three month period ended April 30, 1998 were $6.8
million, or 17.6% of net sales compared to $6.3 million or 16.3% of net sales
for the three month period ended April 30, 1997. The 1997 quarter was favorably
impacted by the capitalization of $0.4 million of work force expenditures
associated with the implementation phase of a computer software system developed
for internal use.
Income from operations of $1.7 million for the three month period ended April
30, 1998 compares to income from operations of $1.4 million for the three month
period ended April 30, 1997. This increase of $0.3 million primarily reflects
the effect of lower material costs net of the increased operating expenses
described above.
Non-operating expenses decreased to $0.7 million for the three month period
ended April 30, 1998 from $1.0 million for the three months ended April 30,
1997. This decrease was primarily a result of a decrease in interest expense,
attributable to a reduction in the principal amount of interest bearing debt.
For the three month period ended April 30, 1998, the Company realized income
before income taxes of $1.0 million, compared to income before income taxes of
$0.4 million for the three month period ended April 30, 1997.
A provision for Federal, state and local income taxes of $0.7 million was
recognized for the three month period ended April 30, 1998, compared to a tax
provision of $0.3 million for the three month period ended April 30, 1997.
After recognition of applicable income taxes, Allied Digital recognized net
income for the three month period ended April 30, 1998 of $0.3 million compared
to net income of $0.1 million for the three month period ended April 30, 1997
for the reasons noted above.
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Results of Operations - Nine Month Period Ended April 30, 1998, compared to
Nine Month Period Ended April 30, 1997
Net sales for the nine month period ended April 30, 1998 were $127.1 million, an
increase of $7.7 million or 6.5% as compared to the nine month period ended
April 30, 1997. The sales increase attributable to volume was $21.6 million.
Several factors contributed to this increase. As the Company continues to
penetrate its existing market, there also continues 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 continues to
experience favorable growth trends in sales to the Company's CD Audio and CD ROM
customers. Partially offsetting this sales volume increase was the decline in
unit pricing of approximately $13.9 million due to price declines and a shift
in the sales mix.
Gross profit for the nine month period ended April 30, 1998 increased $3.4
million to $27.2 million, or 21.4% of net sales, from $23.9 million or 20.0% of
net sales, for the nine month period ended April 30, 1997. Although the gross
profit dollar increase was primarily 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 negative impact of this outsourcing, the gross profit percentage increased
slightly primarily due to improvements in the manufacturing efficiencies as well
as fixed costs being spread over higher production volumes.
Operating expenses for the nine months ended April 30, 1998 were $19.5 million
or 15.4% of net sales compared to $18.5 million or 15.5% of net sales for the
nine months ended April 30, 1997. The $1.0 million increase was primarily the
result of additional costs incurred for bad debt and sales commissions and
salaries.
Income from operations of $7.7 million for the nine months ended April 30, 1998
compares to $5.4 million for the nine months ended April 30, 1997. This increase
of $2.3 million resulted from an increase in gross profit partially offset by
increased operating expenses described above.
Non-operating expenses decreased to $3.2 million for the nine months ended April
30, 1998 from $3.4 million for the nine months ended April 30, 1997. This
decrease was primarily a result of a reduction in interest expense, attributable
to a reduction in the principal amount of interest bearing debt.
For the nine months ended April 30, 1998, Allied Digital realized income before
income taxes of $4.5 million compared to income before income taxes of $2.0
million for the nine months ended April 30, 1997 for the reasons noted above.
A provision for Federal, state and local income taxes of $2.6 million was
recognized for the nine months ended April 30, 1998, compared to a tax provision
of $1.4 million for the nine months ended April 30, 1997.
After recognition of applicable income taxes, Allied Digital recognized net
income for the nine months ended April 30, 1998 of $1.9 million, compared to
income of $0.6 million for the nine months ended April 30, 1997.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months ended April
30, 1998 was $8.8 million as compared to $1.6 million for the nine months ended
April 30, 1997. The increase was primarily attributable to a $1.2 million
increase in the net income and a $4.4 million decrease in working capital.
Cash used in investing activities for the nine months ended April 30, 1998
and 1997 was $5.5 million and $.5 million respectively. The use of cash for all
periods was primarily for the purchase of property and equipment. Cash used for
financing activities for the nine months ended April 30, 1998 and 1997 was $3.9
million and $1.4 million respectively, and consisted primarily of repayment of
long term debt offset principally, in part, by borrowings from a bank under long
term credit facilities and from stockholders of the Company under subordinated
note agreements.
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)
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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 April 30,
1998, the ANB base rate was 8.25%. 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 April 30, 1998, the aggregate amount of total indebtedness outstanding
of $43.4 million was as follows: (i) the ANB Term Loan, $11.9 million, (ii) the
ANB Revolving Loan, $18.2 million, (iii) the ANB CAPEX Loans, $1.3 million, (iv)
the 10% Notes Payable to Stockholder, $7.3 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, (vii) the Note Payable to
VCA (related to the VCA acquisition), $0.9 million and (viii) capitalized lease
obligations, $0.9 million.
The ANB Term Loan is payable in an initial installment aggregating
$1,695,462 on October 31, 1996 (of which $1,179,000 was paid 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 rate of 3% of each advance with a final
payment for any unpaid amount of the fee payable on July 31, 1998. Through April
30, 1998, the Company borrowed $1,589,000 from this credit facility. As of April
30, 1998, $1,280,000 was outstanding under this capital expenditure credit
facility.
The 10% Notes Payable to Stockholders (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 April 30, 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 in fiscal 1998 approximately $383,000 of
the accrued interest payable on these notes through April 30, 1998. Payment of
these notes is subordinated to the payment of the obligations under the ANB Loan
Agreement. These 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 amended and restated loan and security agreement with ANB.
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The Series B Notes Payable to Stockholders are unsecured obligations which
bear interest at 11% per annum, payable quarterly. Payment of these notes are
subordinated to the payment of the obligation under the ANB Loan. The notes
mature on January 1, 1999.
The note payable to VCA is unsecured and is payable in annual installments
beginning January 31, 1995 through January 1, 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 together with drawing down
on available funds on the Revolving Loan are applied to reduce the principal
amount of borrowing 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.
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 April 30, 1998, the Company had a net working capital deficiency of
$2.4 million and $3.8 million unused and available under the ANB Revolving Loan.
Net cash provided by operating activities during the nine months ended April 30,
1998 was $8.8 million. Net cash used in investing activities totaled $5.5
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 is
the use of the $3.8 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. Allied
Digital 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 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 Company expects to make the necessary modifications or changes to its
computer information systems to enable proper processing of transactions
relating to the Year 2000 and beyond. The Company does not currently have any
information concerning the Year 2000 compliance status of its suppliers and
customers. In the event that any of the Company's significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be adversely affected.
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PART II - OTHER INFORMATION
Item 1. - Legal Proceedings -
On May 12, 1998, a complaint purporting to state a class action was filed
in the Delaware Court of Chancery by Crandon Capital Partners, alleged to be a
stockholder of the Company, on behalf of itself and all others similarly
situated, against the Company and its directors. The plaintiffs allege that the
merger between the Company and Analog Acquisition Corp. (the "Merger") is
wrongful, unfair and harmful to holders of the Company common stock and that it
has been effected with unfair dealing, that the proposed consideration of $5.00
per share is unfair to the Company's stockholders and that the directors of the
Company have violated their fiduciary obligation owed to the plaintiffs and
other members of the class. The complaint seeks to enjoin the Merger and an
unspecified amount of damages, in addition to payment of attorneys' fees and
reimbursement of expenses. Management believes that this claim is without merit
and does not believe such claim will have a material adverse effect on the
Company; however, there can be no assurance as to the outcome of such claim.
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 -
Set forth below is a tabulation of the votes cast for, against or withheld
and the number of abstentions and broker non-votes as to each nominee for
election as a Class III Director at the Annual Meeting of Stockholders of the
Company held on February 26, 1998:
Werner H. Jean 8,065,378 shares for
11,150 shares against
100 shares withheld
0 abstentions
0 broker non-votes
H. Sean Mathis 7,781,265 shares for
295,363 shares against
100 shares withheld
0 abstentions
0 broker non-votes
Set forth below is a tabulation of the votes cast for, against or withheld
and the number of abstentions and broker non-votes as to the ratification of the
appointment of Grant Thornton LLP as the Company's auditors for the fiscal year
ending July 31, 1998 at the Annual Meeting of Stockholders of the Company held
on February 26, 1998:
7,716,215 shares for
354,113 shares against
0 shares withheld
6,300 abstentions
0 broker non-votes
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
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(a) Exhibits -
(27) Financial Data Schedule
(b) Reports on Form 8-K -
The only Current Report on Form 8-K filed by the Company during the
quarter for which this report on Form 10-Q is being filed was dated
May 15, 1998, reporting under Item 5, Other Events, and Item 7,
Financial Statements, Pro Forma Financial Information and Exhibits.
No financial statements were filed with that report.
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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)
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