===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from______________to_______________
Commission File Number 1-12873
ASD GROUP, INC.
(Exact name of small business issuer in its charter)
DELAWARE 14-1483460
-------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1 INDUSTRY STREET, POUGHKEEPSIE, NEW YORK 12603
-----------------------------------------------
(Address of principal executive offices, including Zip Code)
(914) 452-3000
--------------
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Check whether the issuer (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 [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: The number of shares of the issuer's
Common Stock, $.01 par value per share, outstanding as of November 5, 1997 was
1,577,917.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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1
<PAGE>
ASD GROUP, INC.
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FORM 10-QSB
QUARTERLY REPORT
SEPTEMBER 26, 1997
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements.................. 3-5
Consolidated Balance Sheet:
September 26, 1997 (unaudited)...................... 3
Consolidated Statements of Operations (unaudited):
Three months ended September 26, 1997 and September
27, 1996............................................ 4
Consolidated Statements of Cash Flows (unaudited):
Three months ended September 26, 1997 and September
27, 1996........................................... 5
Notes to Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation................. 7
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.......... 9
Item 6. Exhibits and Reports on Form 8-K................... 9
SIGNATURE 10
2
<PAGE>
PART 1
FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 26,
1997
--------------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . $ 91,300
Accounts receivable, less allowance for doubtful accounts of
$163,000 . . . . . . . . . . . . . . . . . . . . . . . . . 2,546,059
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 5,222,744
Prepaid expenses and other current assets. . . . . . . . . . 328,946
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . 309,934
-----------
Total current assets . . . . . . . . . . . . . . . . 8,498,983
Property, plant and equipment, net . . . . . . . . . . . . . 4,792,664
Deferred tax asset. . . . . . . . . . . . . . . . . . . . . . 1,664,174
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . 637,473
-----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $15,593,294
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . $ 1,759,466
Accounts payable . . . . . . . . . . . . . . . . . . . . . . 1,296,123
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . 633,526
-----------
Total current liabilities. . . . . . . . . . . . . . 3,689,115
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 7,427,149
Deferred compensation. . . . . . . . . . . . . . . . . . . . . 313,012
-----------
Total liabilities . . . . . . . . . . . . . . . . . . 11,429,276
-----------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued . . . . . . . . . . . . . . . . . . . . . . -
Common stock, $.01 par value, 10,000,000 shares authorized,
1,557,917 shares issued and outstanding . . . . . . . . 15,779
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . 4,206,892
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (58,653)
-----------
Total stockholders' equity. . . . . . . . . . . . . . 4,164,018
-----------
Total liabilities and stockholders' equity. . . . . . . . . . $15,593,294
===========
3
<PAGE>
<TABLE>
<CAPTION>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
SEPTEMBER 26, SEPTEMBER 27,
1997 1996
------------ ------------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,797,932 $ 4,481,775
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . 2,825,490 3,317,779
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 972,442 1,163,996
------------ ------------
Operating expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . 50,019 47,536
General and administrative. . . . . . . . . . . . . . . . . 980,849 846,504
------------ ------------
Total operating expenses. . . . . . . . . . . . . . . . . 1,030,868 894,040
------------ ------------
Income (loss) from operations . . . . . . . . . . . . . . (58,426) 269,956
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . 7,279 31,147
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 274,036 356,120
------------ ------------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . (325,183) (55,017)
Benefit for income taxes. . . . . . . . . . . . . . . . . . (136,576) (29,000)
------------ ------------
NET LOSS. . . . . . . . . . . . . . . . . . . . . . . . . . $ (188,607) $ (26,017)
============ ============
Net loss per common share . . . . . . . . . . . . . . . . . $ (.12) $ (.04)
============ ============
Weighted average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . 1,577,917 632,917
============ ============
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------
SEPTEMBER 26, SEPTEMBER 27,
1997 1996
------------ ------------
<S> <C> <C>
Operating activities:
Net loss .................................................... $ (188,607) $ (26,017)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .......................... 130,907 123,636
Deferred compensation .................................. 8,691 8,043
Interest accrued-stockholder advances ................. 15,751 11,642
Deferred income taxes ................................. (136,576) (29,000)
Changes in assets and liabilities:
Accounts receivable ................................ (370,657) 172,931
Inventory .......................................... (164,850) 413,028
Prepaid expenses and other current assets .......... (145,157) (110,901)
Other assets ....................................... (38,967) 19,817
Accounts payable ................................... 60,441 (701,192)
Accrued expenses ................................... (208,897) (92,319)
----------- -----------
Net cash used in operating activities ............ (1,037,921) (210,332)
----------- -----------
Investing activities:
Capital expenditures ......................................... (302,722) (7,741)
----------- -----------
Net cash used in investing activities ............ (302,722) (7,741)
----------- -----------
Financing activities:
Borrowings ................................................... 532,095 1,100,000
Payments of long-term debt .................................. (166,733) (217,187)
Financing costs .............................................. (27,646) (287,877)
Payments of deferred compensation ............................ (4,963) (5,605)
----------- -----------
Net cash provided by financing activities ........ 332,753 589,331
----------- -----------
Net increase (decrease) in cash ................................ (1,007,890) 371,258
Cash, beginning of period ...................................... 1,099,190 458,911
----------- -----------
Cash, end of period ............................................ $ 91,300 $ 830,169
=========== ===========
Supplemental disclosure:
Cash paid during the period for:
Income taxes ............................................. $ 6,132 $ 5,008
=========== ===========
Interest ................................................. $ 224,269 $ 368,864
=========== ===========
</TABLE>
5
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission for reporting on Form 10-QSB.
Accordingly, certain information and footnote disclosures required for complete
consolidated financial statements are not included herein. It is recommended
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and related notes of ASD Group, Inc. and
subsidiaries (the "Company") contained in the Company's Annual Report on Form
10-KSB for the fiscal year ended June 27, 1997. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of financial position, results of operations
and cash flows at the dates and for the periods presented have been included.
NOTE 2 - PUBLIC OFFERING OF COMMON STOCK
In May 1997, the Company completed an Initial Public Offering of 945,000
shares of common stock at $5.75 per share (the "Offering"). Prior to the
Offering, there was no public market for the Company's common stock. The net
proceeds of the Offering, after deducting applicable issuance costs and
expenses, were $3,889,342. The net proceeds of the Offering were used primarily
to repay certain indebtedness, increase staffing and purchase inventory and
capital assets.
NOTE 3 - REFINANCING
The Company intends to refinance its indebtedness to Bankers Trust
Company (the "Bank") and secure a new credit facility with an increased
borrowing limit. On May 31, 1996, the Company entered into an option agreement
(as amended) with the Bank which will permit the Company to repay its existing
indebtedness to the Bank at a discount of approximately $460,000, provided such
option is exercised on or before November 30, 1997 (extended from September 30,
1997). Management of the Company believes that the Bank agreed to accept
repayment of the Line of Credit at a discount in order to encourage the Company
to find another source for its financial needs as the Bank no longer provides
commercial lending on a short-term basis. There are no continuing obligations or
conditions imposed upon the Company in connection with repayment of the line of
credit. The Company is in negotiations with a financial institution to refinance
its existing credit facility; however, there can be no assurance that the
Company will be able to successfully conclude such negotiations.
NOTE 4 - INVENTORIES
The components of inventories are as follows:
Raw materials . . . . . . . $ 543,242
Work-in-process . . . . . . 4,679,502
-----------
$ 5,222,744
===========
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ASD Group, Inc. (the "Company") cautions readers that certain important
factors may affect the Company's actual results and could cause such results to
differ materially from any forward-looking statements which may be deemed to
have been made in this Report or which are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in this Report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "would," "estimate," or
"continue" or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. Such factors include, but
are not limited to, the risks and uncertainties associated with a contract
manufacturing company which is dependent upon a small number of large companies,
a limited history of profitability, dependence upon key personnel, need for
future capital and dependence upon certain industries. Additionally, the Company
is subject to the risks and uncertainties associated with all contract
manufacturing companies including variability of customer requirements and
customer financing, limited availability components and a market characterized
by rapidly changing technology and continuing process development. The Company
is also subject to other risks detailed herein or detailed from time to time in
the Company's filings with the Securities and Exchange Commission.
OVERVIEW
The Company provides comprehensive contract manufacturing and
engineering services to original equipment manufacturers ("OEMs.") The Company
was formed in 1965 to provide design and engineering services to IBM's main
frame computer development and manufacturing operations in New York's Hudson
Valley ("IBM-Hudson Valley"). Over a 25-year period, the Company's relationship
with IBM-Hudson Valley evolved to the point where by the mid-1980's the Company
assembled, wired and tested a significant portion of IBM-Hudson Valley's main
frame computers. IBM Hudson Valley became the Company's principal customer,
providing over 90% of its revenues. Commencing in 1990, IBM-Hudson Valley's main
frame sales began to decline due to the recession and the shift in technology to
personal computer-based systems. In December 1992, IBM-Hudson Valley eliminated
the use of substantially all main frame assembly vendors, including the Company.
As a result, the Company had significant reductions in revenues and incurred
substantial losses. Accordingly, during 1993 and 1994 the Company undertook a
restructuring of its operations wherein it implemented a significant downsizing,
re-engineered its operations and commenced intensive efforts to market its
contract manufacturing services to other OEMs. While the IBM-Hudson Valley
downsizing greatly affected the Company, management believes that its
relationship with IBM-Hudson Valley permitted the Company to evolve into a
vertically integrated contract manufacturer with a well disciplined quality
control program.
In May 1997, the Company completed an initial public offering (the
"IPO") of 945,000 shares of Common Stock at $5.75 per share. A portion of the
net proceeds of $3,890,000 were used to repay $1.1 million in principal amount
of bridge notes (the "Bridge Notes") and $900,000 in principal amount of the
Company's 10% Senior Secured Notes due June 30, 1999 (the "Secured Notes").
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 26, 1997 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 27, 1996
For the three months ended September 26, 1997, the Company's net sales
decreased by $684,000 or 15.3% to $3,798,000 from $4,482,000 for the three
months ended September 27, 1996. The decrease in sales was, in part, a result of
a continued reduction in volume of orders by two of the Company's largest
customers, due to their inventory backlog. Delays in raising capital also
adversely affected the Company's ability to obtain and fund new orders. Although
the Company generated additional capital from the IPO, such capital was not
received in time to affect results of operations for the quarter ended
September 26, 1997. Management believes, however, that such capital will have a
positive effect on sales in subsequent quarters.
Cost of goods sold for the three months ended September 26, 1997
decreased by $492,000 or 14.8% to $2,826,000 from $3,318,000 for the three
months ended September 27, 1996. The decrease in cost of goods sold is primarily
the result of the reduction of sales. Gross profit as a percentage of net sales
decreased by .4% from 26.0% for the three months ended September 27, 1996 to
25.6% for the three months ended September 26, 1997. The decrease in gross
profit as a percentage of sales reflects a change in project mix during the 1997
period.
Selling, general and administrative expenses increased for the three
months ended September 26, 1997 by $137,000 or 15.3% to $1,031,000 from $894,000
for the three months ended September 27, 1996. The increase in selling, general
and administrative expenses is primarily the result of a change in the rate of
overtime pay, additional insurance costs and legal and consulting fees related
to post-IPO items. It is anticipated that certain of these additional expenses
will be recurring
Interest expense decreased for the three months ended September 26, 1997
by $82,000 or 23.0% to $274,000 from $356,000 for the three months ended
September 27, 1996. The decrease in interest expense reflects a $2,000,000
reduction in debt. From the proceeds of the IPO, $2,000,000 was used to repay
$1,100,000 of Bridge Notes and $900,000 of Senior Secured Notes.
Benefit for income tax for the three months ended September 26, 1997 is
$137,000 as compared to a benefit of $29,000 for the three months ended
September 27, 1996. The Company realized a tax benefit from the loss during the
periods ended September 26, 1997 and September 27, 1996.
The Company incurred a loss before income tax and a net loss of $325,000
and $189,000, respectively, during the three months ended September 26, 1997, as
compared to a loss before income tax and a net loss of $55,000 and $26,000,
respectively, during the three months ended September 27, 1996.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENTS OF CASH FLOWS
Net cash used in operations was $1,038,000 for the three months ended
September 26, 1997 as compared to $210,000 used in operations for the three
months ended September 27, 1996. The increase in cash used in operations was the
result of a higher loss from operations, an increase in accounts receivable and
inventory and a decrease in accrued expenses. The increase in accounts
receivable and inventory was the result of an increase in production and
shipments that began in the last two weeks of the period and is expected to
continue through the next quarter. Net cash provided by financing activities
during the three months ended September 26, 1997 was $333,000. During this
period, $532,000 was provided from borrowings, $167,000 of long-term debt was
repaid, $28,000 of financing costs were incurred and payments of deferred
compensation of $5,000 were made. Working capital increased to $4,810,000 at
September 26, 1997 from $4,249,000 at September 27, 1996.
8
<PAGE>
LINE OF CREDIT
The Company's revolving bank line of credit (the "Line of Credit")
currently permits borrowings of up to $3,730,000. The amount available for
borrowings under the Line of Credit is determined pursuant to a formula based
upon the Company's eligible accounts receivable and inventory. As of September
26, 1997, $3,400,000 was outstanding under the Line of Credit and the Company
had $330,000 available for additional borrowings.
The Line of Credit currently bears interest at the rate of 10.0% (prime
plus 1.5 %). The Line of Credit is secured by a first lien on substantially all
of the Company's assets other than a second lien on inventory. In addition, the
Bank holds mortgages on two of the Company's properties, which mortgages had an
aggregate principal balance of approximately $3,169,000 as of September 26,
1997. The Bank has extended to the Company an equipment line with an outstanding
principal balance as of September 26, 1997 of $321,000. The equipment line is
due December 31, 1997.
The Company intends to refinance its indebtedness to the Bank and secure
a new credit facility with an increased borrowing limit. On May 31, 1996, the
Company entered into an agreement with the Bank which will permit the Company to
repay its existing indebtedness to the Bank at a discount of approximately
$460,000, provided such repayment is made on or before November 30, 1997.
Management of the Company believes that the Bank agreed to accept repayment of
the line of credit at a discount in order to encourage the Company to find
another source for its financial needs as the bank no longer provides commercial
lending on short-term basis. There are no continuing obligations or conditions
imposed upon the Company in connection with the repayment of the line of credit.
The Company is in negotiations with a financial institution to refinance its
existing credit facility; however, there can be no assurance that the Company
will be able to successfully conclude such negotiations.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 12, 1997, the U.S. Securities and Exchange Commission declared
effective the Company's Registration Statement on Form SB-2 (SEC File Number
333-7731). The offering of the securities registered pursuant to the
Registration Statement commenced on May 13, 1997. The IPO terminated after the
sale of 945,000 shares of the Company's Common Ctock, $.01 par value per share,
for $5.75 per share. The managing underwriter for the IPO was H. J. Meyers &
Co., Inc.
In connection with the IPO, the Company incurred expenses of
approximately $1,544,000. These expenses were in the form of direct or indirect
payments to others and not direct or indirect payments to directors or officers
of the Company or to persons owning more than 10% of any class of securities of
the Company. From the net proceeds of approximately $3,890,000, the Company has
used approximately $2,800,000 for repayment of indebtedness, $1,000,000 for the
purchase of materials and to increase staffing for the production of new
projects, and approximately $90,000 for working capital. With the exception of
payments to William Becker and Sanford Feld, persons beneficially owning more
than 10% of the Company's securities, none of the payments from the proceeds
were made to officers, directors or persons owning more than 10% of any class of
securities of the Company.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule (EDGAR Version only)
(b) Reports on Form 8-K: none
9
<PAGE>
ASD GROUP, INC.
SIGNATURES
In accordance with the requirement of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
therunto duly authorized.
By /S/ GARY HORNE
---------------------------------
Gary Horne
Chief Executive Officer
By /S/ ROBERT A. LETTIERI
---------------------------------
Robert A. Lettieri
Chief Financial Officer
Date: November 10, 1997
10
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-26-1998
<PERIOD-START> JUN-28-1997
<PERIOD-END> SEP-26-1997
<CASH> 91,300
<SECURITIES> 0
<RECEIVABLES> 2,709,059
<ALLOWANCES> 163,000
<INVENTORY> 5,222,744
<CURRENT-ASSETS> 638,880
<PP&E> 4,792,664
<DEPRECIATION> 0
<TOTAL-ASSETS> 15,593,294
<CURRENT-LIABILITIES> 3,698,115
<BONDS> 0
0
0
<COMMON> 15,799
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 15,593,294
<SALES> 3,797,932
<TOTAL-REVENUES> 3,797,932
<CGS> 2,825,490
<TOTAL-COSTS> 1,030,868
<OTHER-EXPENSES> (7,279)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 274,036
<INCOME-PRETAX> (325,183)
<INCOME-TAX> 136,576
<INCOME-CONTINUING> (188,607)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (188,607)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> 0
</TABLE>
