PROSPECTUS
945,000 SHARES
[ASD GROUP LOGO]
COMMON STOCK
----------------
ASD Group, Inc. (the "Company") hereby offers (the "Offering") 945,000
shares of common stock, par value $.01 per share (the "Common Stock"). Prior to
this Offering, there has been no public market for the Common Stock and no
assurance can be given that such a market will develop upon completion of this
Offering, or if developed, that it will be sustained. See "Underwriting" for a
discussion of the factors considered in determining the initial public offering
price. The Common Stock has been approved for quotation on The Nasdaq SmallCap
Market under the symbol "ASDG" and listing on the Pacific Stock Exchange under
the symbol "AGP."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
COMMENCING ON PAGE 7 AND "DILUTION."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) THE COMPANY(2)
Per Share ...... $5.75 $.575 $5.175
Total(3) ...... $5,433,750 $543,375 $4,890,375
- --------------------------------------------------------------------------------
(1) Does not include additional compensation payable to H.J. Meyers & Co., Inc.,
the representative of the several Underwriters (the "Representative"), in
the form of a non-accountable expense allowance. In addition, see
"Underwriting" for information concerning indemnification and contribution
arrangements with the Underwriters and other compensation payable to the
Representative.
(2) Before deducting estimated expenses of $514,000 payable by the Company,
excluding the non-accountable expense allowance payable to the
Representative.
(3) The Company has granted to the Underwriters an option exercisable within 30
days of this Prospectus to purchase up to an aggregate of 141,750 additional
shares of Common Stock upon the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If such over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to the Company will be $6,248,813, $624,881 and
$5,623,932, respectively. See "Underwriting."
----------------
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify this Offering and to reject any order in whole or in part. It is
expected that the delivery of the shares of Common Stock offered hereby will be
made against payment therefor at the offices of H.J. Meyers & Co., Inc., 1895
Mt. Hope Avenue, Rochester, New York 14620, on or about May 16, 1997.
----------------
H.J. MEYERS & CO., INC.
----------------
THE DATE OF THIS PROSPECTUS IS MAY 13, 1997
<PAGE>
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[INSIDE FRONT COVER]
ASD GROUP, INC. [LOGO]
An automatic over-labeling system which the Company engineered and manufactured
to address the production and quality needs of a medical products manufacturer.
DESIGN ENGINEERING SERVICES
<PAGE>
[INSIDE FRONT COVER]
A cleaning and drying system the Company helped re-design.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, FINANCIAL INFORMATION,
NUMBER OF SHARES AND PER SHARE DATA SET FORTH IN THIS PROSPECTUS (I) ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO AN
ADDITIONAL 141,750 SHARES OF COMMON STOCK, (II) ASSUMES NO EXERCISE OF THE
WARRANTS TO BE ISSUED BY THE COMPANY TO THE REPRESENTATIVE TO PURCHASE UP TO
94,500 SHARES OF COMMON STOCK (THE "REPRESENTATIVE'S WARRANTS"), (III) DOES NOT
GIVE EFFECT TO 658,533 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF CERTAIN
OUTSTANDING WARRANTS AND (IV) DOES NOT GIVE EFFECT TO 30,000 SHARES OF COMMON
STOCK ISSUABLE UPON THE EXERCISE OF OPTIONS TO BE GRANTED AS OF THE DATE OF THIS
PROSPECTUS PURSUANT TO THE COMPANY'S 1996 STOCK OPTION PLAN (THE "1996 PLAN")
AND 30,000 ADDITIONAL SHARES OF COMMON STOCK RESERVED FOR FUTURE ISSUANCE UNDER
THE 1996 PLAN. SEE "MANAGEMENT," "CERTAIN TRANSACTIONS" AND "UNDERWRITING."
UNLESS OTHERWISE INDICATED, THIS PROSPECTUS GIVES EFFECT TO THE 5,753.79 FOR ONE
STOCK SPLIT EFFECTED AS OF JUNE 10, 1996. UNLESS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES HEREIN TO THE "COMPANY" ARE TO ASD GROUP, INC. AND ITS SUBSIDIARIES
AND PREDECESSORS.
THE COMPANY
ASD Group, Inc. (the "Company") provides comprehensive contract
manufacturing and engineering services to original equipment manufacturers
("OEMs"). The Company specializes in the fabrication, assembly and testing of
complex industrial products and non-invasive medical equipment. The Company
manufactures complete systems, as well as assemblies, including printed circuit
boards, cable and wire harnesses and other electro-mechanical assemblies. The
Company complements its basic manufacturing services by providing its customers
with a broad range of sophisticated product engineering and design services.
Products manufactured by the Company range from highly sophisticated atomic
force microscopes (which measure the electrical field of an atom) to less
complex products such as sign plotting devices. Representative customers of the
Company include ENI (a division of Astec America, Inc.), General Electric Co.,
Gerber Scientific Co., International Business Machines Corporation ("IBM"),
Lockheed Martin Corporation (formerly Loral Federal Systems Company), Materials
Research Corporation (a division of Sony Corporation), Motorola Corporation, and
the United States Postal Service.
Downsizing by American industry, combined with rapid change, strong
competition and increasingly shorter product life cycles in various industries,
have made it considerably less attractive for OEMs to manufacture in-house,
particularly low unit volume products or short cycle electronic products. As a
result, many OEMs have adopted and are becoming increasingly reliant upon
manufacturing outsourcing strategies and on contract manufacturers to satisfy
their mainstream manufacturing requirements. Management of the Company believes
that this trend will continue. According to reports by Technology Forecasters,
Inc., a Berkeley, California research firm, contract manufacturers were expected
to do nearly $25 billion of business in the United States and Canada in 1996. In
addition, growth in this industry is forecasted at 26% a year through 1999.
Moreover, according to these reports, electronics contract manufacturing
worldwide was expected to be a $50 billion business in 1996 and will nearly
double in 1999.
The Company believes that its ability to produce high quality products and
deliver them on a timely basis combined with sophisticated engineering and
manufacturing capabilities has resulted in an expansion of its relationships
with existing customers and the addition of new customers. In addition, the
Company's proprietary Production Operation Management ("POM") manufacturing
software is an integral part of the Company's services as it assists the Company
in controlling its manufacturing operations from estimating to shipping to
billing. The POM manufacturing software is a real time system which allows the
Company to track specific projects as they move through the production cycle and
to make adjustments as necessary in order to control costs and achieve higher
levels of quality control and efficiencies.
3
<PAGE>
The Company focuses on servicing OEMs who produce complex, high dollar
value industrial products where high quality manufacturing is extremely
important. Management of the Company believes that profits for such products
tend to generate higher gross profit margins. The Company's objective is to
increase revenues and improve profitability through utilizing its POM
manufacturing software and sophisticated manufacturing, engineering and design
services to offer customers comprehensive manufacturing solutions. The Company
intends to realize its objective by implementing the following strategies:
INCREASE SALES FROM EXISTING CUSTOMERS AND ADD NEW CUSTOMERS. The Company
plans to expand existing relationships and seek new customers in the markets it
currently serves and in additional markets. The Company plans to increase the
amount of sales to existing customers by devoting more time to these customers
through an increased sales force and by offering improved and expanded services
such as faster metal cutting machining centers, faster sheet metal punching
equipment, expanded painting facilities and more rapid and less expensive
testing procedures and equipment. The Company also plans to add new customers by
increasing its marketing efforts, including attending more trade shows,
expanding the number of advertisements in trade journals, increasing the number
of sales personnel, expanding the number of customers who receive direct
mailings, providing new sales literature and conducting CD-ROM based interactive
electronic presentations. The Company also plans to use a portion of the net
proceeds of this Offering to refurbish a currently idle second plant owned by
the Company which will enable the Company to handle the requirements of
additional customers. The Company's objective is to obtain multiple customers in
the markets it currently serves and in additional markets.
INCREASE PROFITS BY REDUCING COSTS. The Company plans to reduce costs by
enhancing the POM manufacturing software to augment its real time productivity
and quality measurement system using bar codes and adding a feature to the POM
manufacturing software which will allow each customer a window into the POM
manufacturing software to monitor via the Internet the status of purchase orders
relating to their jobs. Management of the Company believes that the utilization
of bar codes will reduce the labor costs associated with the present manual
entry method of reporting. Although customers will not have the ability to
modify existing jobs or place new orders through the Internet, management
believes that allowing customers to access information themselves will also
enable the Company to reduce overhead.
FACILITATE GROWTH OF THE COMPANY THROUGH ACQUISITIONS. The contract
manufacturing industry is now going through consolidation. The Company may
acquire other contract manufacturers if management determines that such
acquisitions will enable the Company to improve net sales and profits. These
acquisitions may allow the Company to expand to other regions of the country and
possibly abroad. Management of the Company believes that the Company's
proprietary POM manufacturing software will enable the Company to realize
greater efficiencies with respect to any such acquisitions. The Company has no
current commitment or understanding with, and has not entered into negotiations
with, any acquisition candidates.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company ...... 945,000 shares(1)
Common Stock outstanding prior
to the Offering ........................ 632,917 shares
Common Stock to be outstanding
after the Offering ..................... 1,577,917 shares
Use of Proceeds ........................... For repayment of indebtedness, increase in
staffing and purchase of materials to fill
backlog requirements, capital expenditures,
sales and marketing activities, working capital
and other general corporate purposes. See
"Use of Proceeds."
Dilution ................................. An investment in the Common Stock involves
immediate and substantial dilution to the
purchasers in this Offering. See "Dilution."
Symbols:
Nasdaq SmallCap Market .................. ASDG
Pacific Stock Exchange .................. AGP
<FN>
- ----------------
(1) An additional 534,783 shares of Common Stock issuable by the Company upon
exercise of the Noteholder Warrants and Placement Agent Warrants (as defined
herein) are being registered by certain selling security holders (the
"Selling Security Holders") in a concurrent offering (the "Concurrent
Offering"). See "Concurrent Offering."
</FN>
</TABLE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk. Investors should consider carefully the
risks discussed elsewhere in this Prospectus under the caption "Risk Factors."
These risks include, but are not limited to: (i) the Company's dependence on a
limited number of customers; (ii) the Company's limited history of
profitability; (iii) the Company's dependence on key personnel; (iv) the
potential for fluctuation in the Company's annual and quarterly operating
results as a result of a number of factors; (v) the Company's dependence upon
the continued growth, viability and financial stability of its customers which
are in turn substantially dependent upon certain industries; (vi) the
variability of the requirements of the Company's customers and financing
available to the Company's customers; and (vii) the Company's dependence on its
ability to use and exploit its proprietary POM manufacturing software and, thus,
the Company's need to adquately protect its intellectual property rights. See
"Risk Factors."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information has been derived from the
consolidated financial statements of the Company. This information should be
read in conjunction with the consolidated financial statements, related notes
and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
------------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .............................. $18,655,000 $26,112,000 $13,326,000 $ 8,210,000
Income (loss) before income taxes ...... 301,000 404,000 266,000 (281,000)
Net income (loss) ........................ 172,000 407,000 327,000 (163,000)
Net income (loss) per common share ...... $.27 $.64 $.52 $(.26)
Weighted average number of common shares
outstanding ........................... 632,917 632,917 632,917 632,917
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1996
--------------------------------
ACTUAL AS ADJUSTED(1)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital .............................. $ 3,238,000 $ 6,028,000
Current assets .............................. 7,844,000 9,525,000
Total assets ................................. 14,768,000 16,807,000
Current liabilities ........................ 4,606,000 3,497,000
Long-term debt, net of current portion ...... 8,783,000 7,883,000
Stockholders' equity ........................ 1,077,000 5,125,000
<FN>
- ----------------
(1) Adjusted to give effect to (i) the sale by the Company of 945,000 shares of
Common Stock offered hereby after deducting the underwriting discount and
estimated expenses of this Offering, (ii) the initial application of the
estimated net proceeds therefrom, and (iii) a non-cash charge of $93,000,
net of income tax, for the unamortized portion of the debt costs relating to
the repayment of a portion of the Notes (as defined herein) and all of the
Bridge Notes (as defined herein) from a portion of the net proceeds of this
Offering. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources," and Notes to Consolidated Financial Statements.
</FN>
</TABLE>
6
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. IN ADDITION TO THE OTHER
INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED
CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED
HEREBY. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS
For the fiscal year ended June 30, 1995 ("Fiscal 1995"), the Company's four
largest customers accounted for approximately 71% of net sales. Sales to Gerber
Scientific Products ("Gerber"); ENI, a division of Astec America, Inc. ("ENI");
IBM; and S&K Products International, Inc. ("S&K") accounted for approximately
20%, 19%, 19% and 13%, respectively, of the Company's net sales during Fiscal
1995. For the fiscal year ended June 30, 1996 ("Fiscal 1996"), the Company's
five largest customers accounted for approximately 73% of net sales. Sales to
ENI, Gerber, S&K, Loral Federal Systems Company, Inc. ("Loral") and Bruce
Technologies International ("Bruce") accounted for approximately 20%, 16%, 14%,
13% and 10%, respectively, of the Company's net sales during Fiscal 1996. For
the six months ended December 27, 1996, the Company's four largest customers
accounted for approximately 57% of net sales. Sales to Lockheed Martin
Corporation, ENI, Gerber and S&K accounted for approximately 18%, 18%, 11% and
10%, respectively, of the Company's net sales for such period. While the Company
is pursuing a strategy of diversifying its customer base, the Company expects to
continue to depend upon a relatively small number of customers for a significant
percentage of its revenues for the foreseeable future. Significant reductions in
sales to any of the Company's large customers would have a material adverse
effect on the Company. There can be no assurance that present or future
customers will not terminate their manufacturing arrangements with the Company
or significantly change, reduce or delay the amount of manufacturing services
ordered from the Company. Any such termination of a manufacturing relationship
or change, reduction or delay in orders could have an adverse effect on the
Company. During the six months ended December 27, 1996, two of the Company's
largest customers temporarily reduced shipment levels due to their inventory
backlog. The Company anticipates that the reduced level of shipments combined
with delays in raising additional capital will adversely affect results for the
third quarter of the fiscal year ending June 30, 1997 ("Fiscal 1997"). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business-Customers, Sales and Marketing."
LIMITED HISTORY OF PROFITABILITY
Although the Company had income before income taxes of $301,000 and
$404,000 for Fiscal 1995, and Fiscal 1996, respectively, the Company had losses
before income taxes of $1,251,000 and $2,481,000 for the fiscal years ended June
30, 1994 and June 30, 1993 ("Fiscal 1993"), respectively. In addition, the
Company had a loss before income taxes of $281,000 for the six months ended
December 27, 1996 as a result in part of two large customers temporarily
reducing the level of shipments on outstanding orders due to their inventory
backlog. The Company anticipates the reduced shipment levels combined with
delays in raising additional capital will result in its incurring a loss in the
third quarter of Fiscal 1997. There can be no assurance that the Company will be
profitable in future periods. As of December 27, 1996, the Company had a net
operating loss carryforward ("NOL") for federal income tax purposes of
approximately $4,200,000 which expires in 2011, and no NOL for state income tax
purposes. Although the Offering is expected to result in a "change of control"
for federal tax purposes, the limitation on the Company's ability to utilize
such NOL will not be significant. Statement of Financial Accounting Standards
No. 109 requires that deferred tax assets be reduced by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that
some portion or all of such assets will not be realized. The Company monitors
the realizability of such assets and establishes a valuation allowance
7
<PAGE>
for all amounts that will not be realized. As of December 27, 1996, the total
valuation allowance was $228,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's present and future operations will depend to a
great extent on the collective experience, abilities and continued services of
certain executive officers including Gary D. Horne, the Company's Chief
Executive Officer; Stanley F. Zuk, the Company's Chief Operating Officer; and
Robert Lettieri, the Company's Chief Financial Officer. Although the Company is
party to employment agreements with Messrs. Horne and Zuk, the loss of the
services of either of such persons could have a material adverse effect on the
Company. The Company has obtained key man insurance in the amount of $1,000,000
on the lives of each of Messrs. Horne and Zuk. The Company's ongoing business
activities are dependent on highly skilled and experienced individuals. The
Company has devoted, and will continue to devote, considerable efforts to
recruiting skilled individuals. Competition for highly skilled personnel is
intense and the Company may have to provide qualified personnel with competitive
compensation packages, equity participation and other benefits, which may limit
the working capital available for the Company's operations. No assurance can be
given that the Company will be able to obtain such employees when needed or on
terms acceptable to the Company. See "Business-Employees" and "Management."
POSSIBLE ADDITIONAL FINANCING REQUIREMENTS
The Company believes that its existing and anticipated capital resources,
including the estimated net proceeds of this Offering, will enable it to fund
its planned operations for a period of at least 12 months from the date of this
Prospectus. There can be no assurance that the Company will realize cash flow
from operations or that such cash flow will be sufficient, in which case the
Company may require additional financing and may seek to raise funds through
subsequent equity or debt financings, or through other sources. Moreover, the
Company's existing credit facility places restrictions on the Company's ability
to obtain financing either through the offering of equity or incurrence of
additional debt. No assurance can be given that additional funds will be
available to the Company on acceptable terms, if at all. Additional financings
may result in dilution to existing stockholders. If funds are needed but are not
available in adequate amounts from additional financing sources or from
operations, the Company may be materially and adversely affected. As of the date
of this Prospectus, the Company is negotiating with a number of financial
institutions to refinance its existing credit facility. However, no assurance
can be given that the Company will be able to successfully refinance this credit
facility. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
On August 29, 1996, the Company issued $1,100,000 10% Original Issue
Discount Promissory Notes (the "Bridge Notes") to several investors (the "Bridge
Investors"). The Bridge Notes were due at the earliest of January 29, 1997, the
closing date of an initial public offering or upon the sale of the Company.
Although the Bridge Investors have not granted the Company a waiver with respect
to this matter, the Bridge Investors have advised the Company in writing that
they do not intend to take any action with respect to the Bridge Notes until the
earlier of consummation of this Offering at which time the Bridge Notes will be
repaid or May 23, 1997. The Bridge Notes also contain requirements as to the
Company maintaining a specified amount of stockholders' equity. At September 27,
1996, the Company was in default of this requirement and subsequently obtained a
waiver thereof. In connection with the waiver, the interest rate on the Bridge
Notes increased to 12.5% retroactively as of the date of issuance. However,
notwithstanding the foregoing, such defaults may have an adverse impact on the
Company's ability to refinance its credit facility. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
<PAGE>
The Company currently has an equipment line of credit (the "Equipment
Line"). As of December 27, 1996, $455,000 was outstanding under the Equipment
Line. The Equipment Line is due June 30, 1997. The Company intends to refinance
such indebtedness with its proposed new credit facility. There can be no
assurance that the Company will be able to refinance the Equipment Line. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In addition to the foregoing, $1,100,000 in principal amount of Bridge
Notes together with accrued interest thereon will be due and payable on the 13
month anniversary of the consummation of this Offering and commencing July 1,
1998, the Company may be required to repay $755,000 in advances to Gary D.
Horne, the Company's Chairman of the Board and Chief Executive Officer. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions-Advances from Stockholder."
POTENTIAL FLUCTUATIONS IN FINANCIAL RESULTS
The Company's annual and quarterly operating results may be affected by a
number of factors, including the Company's ability to manage inventories,
shortages of components or labor, the degree of automation used in the assembly
process, fluctuations in material costs and the mix of material costs versus
labor. Manufacturing and overhead costs are also significant factors affecting
the annual and quarterly operating results of the Company. Other factors include
price competition, the ability to pass on excess costs to customers, the timing
of expenditures in anticipation of increased sales and customer product delivery
requirements. The Company's primary pricing method is fixed price; however,
costs resulting from customer changes are typically passed on to the customer.
Any one of the foregoing factors, or a combination thereof, could adversely
affect the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON CERTAIN INDUSTRIES
The Company is dependent upon the continued growth, viability and financial
stability of its customers, which are in turn substantially dependent upon the
growth of the computer, computer peripherals, telecommunications, postal
equipment, semiconductor, environmental, test equipment, process equipment,
industrial equipment and other industries in which they operate. These
industries have been characterized by rapid technological change, short product
life cycles and have recently experienced pricing and margin pressures. In
addition, many of the Company's customers in these industries are affected by
general economic conditions. The factors affecting the industries in which the
Company's customers operate, and/or the Company's customers in particular, could
have a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business-Customers, Sales and Marketing."
VARIABILITY OF CUSTOMER REQUIREMENTS AND CUSTOMER FINANCING
The level and timing of orders placed by the Company's customers vary due
to the customers' attempts to balance their inventory, changes in customers'
manufacturing strategies and variations in demand for their products resulting
from, among other things, product life cycles, competitive conditions or general
economic conditions. Should the Company increase its expenditures in
anticipation of a future level of sales which does not materialize, its
profitability could be adversely affected. While a majority of the Company's net
sales are derived from several of the Company's customers who provide production
requirements for one year in the form of yearly purchase orders, the remaining
net sales are derived from others who do not commit to firm production schedules
for more than one quarter in advance. The Company does not assess any additional
fee or charge interest in connection with the financing of any customer orders.
Such financing is funded from and is limited in amount by available cash
generated from operations. The Company's inability to forecast the level of
customer orders with certainty makes it difficult to schedule production and
maximize utilization of manufacturing capacity. See "Business-Backlog."
9
<PAGE>
In the past, the Company has been required to increase staffing and other
expenses in order to meet the demands of firm purchase orders of its customers.
In addition, the total quantity requirements of purchase orders from some of the
Company's customers have been decreased and/or delivery schedules have been
deferred as a result of changes in the customer's business needs, thereby
adversely affecting the Company. On other occasions, customers have required
rapid increases in production which have placed excessive burdens on the
Company's resources. If a customer cancels an order, the customer is required to
pay for all materials purchased and labor expended to the date of cancellation.
The Company does not assess any additional fees or penalties. Such customers'
order fluctuations and deferrals have from time to time had an adverse effect on
the Company's results of operations in the past, and there can be no assurance
that the Company will not experience such effects in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
INTELLECTUAL PROPERTY RIGHTS
The Company's ability to compete successfully depends, in part, on its
ability to use and exploit its proprietary POM manufacturing software. To
maintain the secrecy of its proprietary POM manufacturing software, the Company
relies largely upon a combination of trade secret laws, copyright laws, internal
security systems and confidentiality procedures. Third parties may attempt to
exercise alleged rights in any of the copyrights or other intellectual property
rights or appropriate any copyrights or other intellectual property rights
established by the Company. The Company's failure or inability to establish
appropriate copyrights or to adequately protect any of its intellectual property
rights, may have a material adverse effect on the Company. See
"Business-Intellectual Property Rights."
LIMITED AVAILABILITY OF COMPONENTS; AGED INVENTORY
A substantial part of the Company's revenues is derived from turnkey
manufacturing in which the Company provides materials sourcing, procurement,
assembly and testing. In turnkey manufacturing, the Company could be exposed to
the risk of component price increases, which could adversely affect the
Company's gross profit margins. Some of the products and assemblies manufactured
by the Company require one or more components that are ordered from, or which
may be available from, only one source. Some of these components are allocated
in response to supply shortages. In some cases, supply shortages could
substantially curtail production of all assemblies using a particular component.
While the Company has not experienced material shortages of components in the
recent past, there can be no assurance that such shortages will not occur in the
future. Any such shortages could have a material adverse effect on the Company.
See "Business-Suppliers."
The Company does not maintain a large inventory of supplies and does not
place orders for supplies unless required for a specific customer purchase
order. If the Company does have any aged or obsolete inventory, it is
written-off immediately. Historically, aged or obsolete inventory has not had a
material adverse effect on the Company. See "Business-Suppliers".
MANAGEMENT OF GROWTH
One of the Company's strategies is to expand its relationships with its
existing customers and increase its customer base. In order to do this, the
Company will be required to continue to increase staffing as well as its
expenditures on capital equipment. The Company must continue to manage its staff
and capital properly to ensure that the increased costs of staffing and capital
expenditures do not increase at a faster rate than sales. In addition, as the
Company's business and customer base grows, the Company's accounts receivable
may increase. While the Company maintains accounts receivable insurance on
certain of its customers, if one or more of the Company's principal customers
were to become insolvent, or otherwise were unable to pay for the services
provided by the Company, the Company's operating results and financial condition
could be adversely affected. Moreover, increased levels of accounts receivable
may negatively impact the Company's cash flow. See "Business-Business Strategy."
10
<PAGE>
COMPETITION
The Company operates in a highly competitive environment and competes
against numerous domestic and foreign manufacturers. The Company also faces
competition from current and prospective customers which evaluate the Company's
capabilities against the merits of manufacturing products internally versus the
merits of contract manufacturing. Certain of the Company's competitors,
including SCI Systems, Inc., Solectron Corporation, Jabil Circuit, Inc., and
Avex Electronics, have substantially greater geographic breadth, and financial,
research and development and marketing resources than the Company. To remain
competitive, the Company must continue to provide and develop technologically
advanced manufacturing services, maintain quality levels, offer flexible
delivery schedules, deliver finished products on a reliable basis and compete
favorably on the basis of price. There can be no assurance that the Company will
be able to compete favorably with respect to these factors in the future. See
"Business-Competition."
TECHNOLOGICAL CHANGE AND PROCESS DEVELOPMENT
The market for the Company's manufacturing services is characterized by
rapidly changing technology and continuing process development. The Company
believes that its future success will depend in large part upon its ability to
develop and market manufacturing services which meet changing customer needs,
maintain technological leadership and successfully anticipate or respond to
technological changes in manufacturing processes on a cost-effective and timely
basis. There can be no assurance that the Company's process development efforts
will be successful. See "Business-Business Strategy."
ENVIRONMENTAL COMPLIANCE
The Company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous chemicals used during
its manufacturing process. While the Company believes it is in compliance with
all environmental regulations, any failure by the Company to comply with present
and future regulations could subject it to future liabilities or the suspension
of production. In addition, such regulations could restrict the Company's
ability to expand its facilities or could require the Company to acquire costly
equipment or to incur other significant expenses to comply with governmental
regulations. Historically, the Company's costs of compliance with environmental
regulations have not been material. See "Business-Government Regulation."
CONTROL OF THE COMPANY BY MANAGEMENT
After giving effect to the sale of the shares of Common Stock offered
hereby, the Company's directors and executive officers will beneficially own
approximately 30.3% of the outstanding shares of Common Stock (approximately
27.8% if the Underwriters' over-allotment option is exercised in full). As a
result, the Company's current management may continue to exert substantial
influence over the Company's affairs after the Offering and may have the ability
to substantially influence all matters requiring approval by the stockholders,
including the election of directors. See "Principal Stockholders" and
"Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the shares of Common Stock offered hereby will incur an
immediate dilution in net tangible book value of $2.81 (or 48.9%) per share of
Common Stock. See "Dilution."
11
<PAGE>
NO ASSURANCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF COMMON STOCK PRICES
Prior to this Offering, there has been no public market for the Common
Stock and no assurance can be given that such a market will develop upon
completion of this Offering or, if developed, that it will be sustained. The
initial public offering price of the Common Stock has been arbitrarily
determined by negotiations between the Company and the Representative and does
not necessarily bear any relationship to the Company's assets, book value,
results of operations or any other generally accepted criteria of value. See
"Underwriting."
The stock market has from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performances of
specific companies. Announcements of new technologies and changing policies and
regulations of the federal government and state governments and other external
factors, as well as potential fluctuations in the Company's financial results,
may have a significant impact on the price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have outstanding
1,577,917 shares of Common Stock. The 945,000 shares of Common Stock offered
hereby (1,086,750 shares if the Underwriters' over-allotment option is exercised
in full) will be freely transferable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 632,917 outstanding shares of Common Stock, which are owned by the
existing stockholders, will be "restricted securities," as that term is defined
in Rule 144 promulgated under the Securities Act ("Rule 144") and may only be
sold pursuant to a registration statement under the Securities Act or an
applicable exemption from registration thereunder, including exemptions provided
by Rule 144. Notwithstanding the foregoing, directors and executive officers of
the Company have agreed not to sell 250,000 of their shares for a period of five
years from the date of this Prospectus without the prior written consent of the
Representative. Holders of an additional 313,872 outstanding shares of Common
Stock have agreed not to sell their shares for a period of two years from the
date of this Prospectus without the prior written consent of the Representative.
The Representative does not have any general policy with respect to the release
of shares prior to the expiration of the lock-up period. No prediction can be
made as to the effect that future sales of Common Stock, or the availability of
shares of Common Stock for future sale, will have on the market price of the
Common Stock prevailing from time to time. See "Certain Transactions-Contingent
Shares," "Description of Securities" and "Shares Eligible for Future Sale."
EFFECT OF OUTSTANDING WARRANTS AND OPTIONS
As of the date of this Prospectus, the Company has outstanding warrants to
purchase 658,533 shares of Common Stock and options under the 1996 Plan to
purchase 30,000 shares of Common Stock. In addition, upon consummation of this
Offering the Company will sell to the Representative and/or its designees,
warrants (the "Representative's Warrants") to purchase up to 94,500 shares of
Common Stock at an exercise price equal to 145% of the public offering price of
the shares of Common Stock sold in this Offering. As long as the warrants,
options and Representative's Warrants remain unexercised, the terms under which
the Company could obtain additional capital may be adversely affected. Moreover,
the holders of the warrants, options and Representative's Warrants may be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital by a new offering of its securities on
terms more favorable than those provided by such securities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Management-Stock Option Plan" and "Underwriting."
12
<PAGE>
ANTI-TAKEOVER PROVISIONS; PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of holders of Common Stock will be subject to, and may
be adversely affected by, the rights of holders of any Preferred Stock that may
be issued in the future. Although the Company has no present intention to issue
shares of Preferred Stock, any issuance of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. Any issuance of the Preferred Stock within two years from the date of
this Prospectus will require written consent of the Representative.
Additionally, following this Offering, the Company will become subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
(the "DGCL"), which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
Section 203 could have the effect of delaying or preventing a change of control
of the Company. See "Description of Securities."
REPRESENTATIVE'S POTENTIAL INFLUENCE ON THE MARKET
A significant number of the shares of Common Stock offered hereby may be
sold to customers of the Representative. Such customers may engage in
transactions for the sale or purchase of such shares through or with the
Representative. Although it has no obligation to do so, the Representative
intends to make a market in the shares of Common Stock and may otherwise effect
transactions in such shares. If it participates in such market, the
Representative may influence the market, if one develops, for the shares of
Common Stock.
POTENTIAL CONFLICTS OF INTEREST ON THE PART OF OFFICERS AND DIRECTORS
The Company has, in the past, entered into transactions or contracts with
its officers and directors and/or their affiliates, and may continue to do so in
the future. In particular, the Company purchases computers, computer supplies
and services from Netcomp, Inc. ("Netcomp"), which operates the ComputerLand
franchise in Poughkeepsie, New York, and is owned by Gary D. Horne and Stanley
F. Zuk, the Company's Chief Executive Officer and Chief Operating Officer,
respectively. The Company believes that all of these arrangements are favorable
to the Company and were entered into on terms reflecting arms' length
negotiation; however, since no independent appraisals evaluating these
affiliated business transactions were obtained, there can be no assurance that
such transactions were based on terms no less favorable than could have been
obtained from unaffiliated third parties. Potential conflicts of interest could
arise between the Company and the affiliated parties in connection with the
future enforcement, amendment or termination of these arrangements. See "Certain
Transactions."
LACK OF INDEPENDENT DIRECTORS OR AUDIT COMMITTEE
As of the date hereof, the Company has no independent directors.
Accordingly, management directors control the Board of Directors. In addition,
the Board of Directors have not established an Audit Committee. See
"Management."
DEFERRED COMPENSATION AGREEMENTS
In January 1993, the Company entered into deferred compensation agreements
(the "Deferred Compensation Agreements") with John Halik and James Yessian, two
co-founders and former employees of the Company. Pursuant to the Deferred
Compensation Agreements, the Company agreed to pay each of Messrs. Halik and
Yessian $30,000 per year in deferred compensation for a 15-year period. These
individuals will not provide any additional services to the Company. See
"Certain Transactions."
13
<PAGE>
NO ASSURANCE OF NASDAQ SMALLCAP MARKET LISTING; RISK OF LOW-PRICED SECURITIES;
RISK OF APPLICATION OF PENNY STOCK RULES
The Board of Governors of the National Association of Securities Dealers,
Inc. has established certain standards for the initial listing and continued
listing of a security on The Nasdaq SmallCap Market ("Nasdaq"). The standards
for initial listing require, among other things, that an issuer have total
assets of $4,000,000 and capital and surplus of at least $2,000,000; that the
minimum bid price for the listed securities be $3.00 per share; that the minimum
market value of the public float (the shares held by non-insiders) be at least
$2,000,000, and that there be at least two market makers for the issuer's
securities. The maintenance standards require, among other things, that an
issuer have total assets of at least $2,000,000 and capital and surplus of at
least $1,000,000; that the minimum bid price for the listed securities be $1.00
per share; that the minimum market value of the "public float" be at least
$1,000,000 and that there be at least two market makers for the issuer's
securities. A deficiency in either the market value of the public float or the
bid price maintenance standard will be deemed to exist if the issuer fails the
individual stated requirement for ten consecutive trading days. If an issuer
falls below the bid price maintenance standard, it may remain on Nasdaq if the
market value of the public float is at least $1,000,000 and the issuer has
$2,000,000 in equity. Nasdaq has recently proposed new maintenance criteria
which, if implemented, would eliminate the exception to the $1.00 per share
minimum bid price and require, among other things, $2,000,000 in net tangible
assets, $1,000,000 market value of the public float and adherence to certain
corporate governance provisions. There can be no assurance that the Company will
continue to satisfy the requirements for maintaining a Nasdaq listing. If the
Company's Common Stock was to be excluded from Nasdaq, it would adversely affect
the prices of such securities and the ability of holders to sell them, and the
Company would be required to comply with the initial listing requirements to be
relisted on Nasdaq.
If the Company is unable to satisfy Nasdaq's maintenance requirements and
the price per share were to drop below $5.00, then unless the Company satisfied
certain net asset tests, the Company's Common Stock would become subject to
certain penny stock rules promulgated by the Securities and Exchange Commission
(the "Commission"). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document prepared by the Commission that provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. If the Common Stock becomes subject to the penny stock rules,
investors in the Offering may find it more difficult to sell their shares.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS
This Prospectus contains certain forward-looking statements regarding the
plans and objectives of management for future operations, including plans and
objectives relating to the development of the Company's business. The
forward-looking statements included herein are based on current expectations
that involve numerous risks and uncertainties. The Company's plans and
objectives are based on a successful execution of the Company's business
strategy and assumptions that the Company will be profitable, that the contract
manufacturing industry will not change materially or adversely, and that there
will be no unanticipated material adverse change in the Company's operations or
business. Assumptions relating to the foregoing involve judgments with respect
to, among other things, future economic, competitive and market conditions and
future business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
14
<PAGE>
the Company believes that its assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assuance that the forward-looking statements included
in this Prospectus will prove to be accurate. In light of the significant
uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved.
ABSENCE OF DIVIDENDS
The Company has never paid any cash dividends on the Common Stock and does
not expect to pay any cash dividends on the Common Stock in the foreseeable
future. See "Dividend Policy."
15
<PAGE>
THE COMPANY
The Company provides comprehensive contract manufacturing and engineering
services to original equipment manufacturers ("OEMs"). The Company initially
provided 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 the IBM-Hudson Valley main
frame computers that were produced. IBM-Hudson Valley became the Company's
principal customer, providing for 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 down-sizing 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 1996, the Company's quality
control program was certified as conforming to ISO 9002, an international
quality standard.
The Company was incorporated in New York in May 1965 under the name
Dutchess Design & Development, Inc. In July 1996, the Company was reincorporated
in Delaware under its present name. The Company maintains its executive offices
at 1 Industry Street, Poughkeepsie, New York 12603. The Company's telephone
number is (914) 452-3000.
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 945,000 shares of
Common Stock offered hereby are estimated to be approximately $4,141,000 (or
approximately $4,850,000 if the Underwriters' over-allotment option is exercised
in full), after deducting the underwriting discount, the non-accountable expense
allowance and other estimated Offering expenses payable by the Company. The
Company intends to use the estimated net proceeds of the Offering as follows:
<TABLE>
<CAPTION>
DOLLAR AMOUNT PERCENTAGE
---------------- ------------
<S> <C> <C>
Repayment of Bridge Notes(1) ........................ $2,000,000 48.4%
Increase staffing and purchase of materials(2) ...... 1,000,000 24.1
Purchase of new equipment(3) ........................ 700,000 16.9
Sales and Marketing(4) .............................. 200,000 4.8
Product Development(5) .............................. 100,000 2.4
Working Capital(6) ................................. 141,000 3.4
----------- -------
Total Net Proceeds ................................. 4,141,000 100%
<FN>
- ----------------
(1) Approximately $2,000,000 for repayment of certain indebtedness, consisting
of $900,000 in principal amount of the Company's 10% Senior Secured Notes
due June 30, 1999 (the "Notes") and $1,100,000 in principal amount of the
Bridge Notes.
(2) Approximately $1,000,000 to increase staffing and purchase materials to fill
backlog requirements during the next 12 months.
(3) Approximately $700,000 for the purchase of new capital equipment and making
other improvements to the Company's manufacturing facilities, including
approximately $300,000 which will be used to refurnish a currently inactive
plant.
(4) Approximately $200,000 for sales and marketing activities, including hiring
additional personnel for sales, purchasing multimedia laptop computers for
sales presentations, updating and printing new sales literature, increasing
the amount of advertisements, increasing the number of trade shows at which
the Company can make presentations and other related sales expenses.
(5) Approximately $100,000 for refining the Company's POM manufacturing software
(for the Company's own internal use as well as for marketing the product to
others) by hiring additional engineering and marketing personnel.
(6) The balance, approximately $141,000 (plus any proceeds received from the
exercise of the Underwriters' over-allotment option), for working capital
and other general corporate purposes (including approximately $75,000 for
payment of certain real estate taxes due).
</FN>
</TABLE>
The amounts and timing of the above expenditures may vary and will depend
on numerous factors, including, but not limited to, timing of orders from major
customers and timing of expenditures in response to such orders. Management of
the Company believes that the Company's existing and anticipated capital
resources, including the estimated net proceeds of this Offering, will enable it
to fund its planned operations for a period of at least 12 months from the date
of this Prospectus. There can be no assurance, however, that the Company will
realize cash flow from operations or that such cash flow will be sufficient to
satisfy the Company's requirements for any particular period of time.
Pending the aforementioned uses, the net proceeds from this Offering will
be invested in short-term, investment grade interest bearing obligations.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
December 27, 1996 and (b) on an as adjusted basis giving effect to (i) the sale
of shares of Common Stock offered hereby, less the underwriting discount, the
non-accountable expense allowance and the offering expenses payable by the
Company, (ii) the initial application of the estimated net proceeds therefrom,
and (iii) a non-cash charge of $93,000, net of income tax, for the unamortized
portion of the debt costs relating to the repayment of a portion of the Notes
and all of the Bridge Notes from a portion of the net proceeds of this Offering.
See "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 27, 1996
-----------------------------
ACTUAL(1) AS ADJUSTED
------------- -------------
<S> <C> <C>
Current portion of long-term debt(1) ........................... $1,938,000 $ 873,000
=========== ============
Long-term debt(1) ............................................. 8,783,000 7,883,000
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued ................................................... - -
Common stock, $.01 par value; 10,000,000 shares authorized;
632,917 shares issued and outstanding, actual; 1,577,917 shares
issued and outstanding, as adjusted ........................... 6,000 16,000
Additional paid-in capital .................................... 327,000 4,459,000
Retained earnings ............................................. 744,000 650,000
----------- ------------
Total stockholders' equity .................................... 1,077,000 5,125,000
----------- ------------
Total capitalization .......................................... $9,860,000 $13,008,000
=========== ============
<FN>
- ----------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Notes to Consolidated Financial Statements for
information regarding the Company's long-term debt.
</FN>
</TABLE>
18
<PAGE>
DILUTION
At December 27, 1996, the net tangible book value of the Company was
$173,000 or $.27 per share. Net tangible book value per share represents the
Company's total tangible assets, less total liabilities, divided by the number
of shares of Common Stock outstanding. After giving effect to the sale of the
945,000 shares of Common Stock offered hereby and the initial application of the
estimated net proceeds therefrom, the pro forma net tangible book value of the
Company at December 27, 1996 would have been $4,632,000, or $2.94 per share.
This represents an immediate increase in net tangible book value of $2.67 per
share to the existing stockholders and an immediate dilution in net tangible
book value to new investors of $2.81 per share. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share .............................. $5.75
Net tangible book value per share before the Offering ............... $ .27
Increase attributable to new investors .............................. 2.67
-------
Pro forma net tangible book value per share after the Offering ...... 2.94
-------
Dilution to new investors ............................................. $2.81
=======
</TABLE>
If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share of Common Stock after this Offering
would be $3.11 per share, which would result in dilution to new investors in
this Offering of $2.64 per share of Common Stock.
The following table summarizes on a pro forma basis, as of the date of this
Prospectus, the difference between the existing stockholders and new investors
with respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------------------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ---------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders ...... 632,917 40.1% $ 3,833 0.07% $ 0.006
New investors ............... 945,000 59.9% 5,433,750 99.93% $ 5.75
---------- ------- ----------- -------- ----------
Total ..................... 1,577,917 100.0% $5,437,583 100.00%
========== ======= =========== ========
</TABLE>
DIVIDEND POLICY
The Company has not paid any cash dividends since its inception and does
not intend to pay any cash dividends on its Common Stock in the foreseeable
future. The payment of any dividends in the future will depend on the evaluation
by the Company's Board of Directors of such factors as it deems relevant at the
time. Currently, the Board of Directors believes that all of the Company's
earnings, if any, should be retained for the development of the Company's
business.
19
<PAGE>
CONCURRENT OFFERING
Concurrently with this Offering, the Company is registering, (a) for the
account of holders of the Notes (the "Noteholders") (i) warrants to purchase
500,000 shares of Common Stock exercisable at a price of $2.73 per share for a
ten-year period from consummation of this Offering (the "Noteholder Warrants"),
and (ii) 500,000 shares of Common Stock issuable upon exercise of the Noteholder
Warrants (the "Underlying Shares"), and (b) for the account of the Company's
placement agent in connection with the offer and sale of the Notes, and its
assigns, (i) warrants to purchase 34,783 shares of Common Stock exercisable at a
price of $5.75 per share for a five-year period from consummation of this
Offering (the "Placement Agent Warrants"), and (ii) 34,783 shares of Common
Stock issuable upon exercise of the Placement Agent Warrants (the "Placement
Agent Shares"). These securities are not being underwritten in the Offering and
the Company will not receive any proceeds from the sale of these securities. The
Noteholder Warrants and Placement Agent Warrants will not be exercisable and may
not be sold for a period of 12 months from consummation of this Offering.
Furthermore, for the subsequent 12 month period, the Noteholder Warrants and
Placement Agent Warrants will not be exercisable and may not be sold without the
prior written consent of the Representative. The Company will not receive any
proceeds from the sale of such shares. Expenses of the Concurrent Offering,
other than fees and expenses of counsel to the Selling Security Holders and
selling commissions, will be paid by the Company. Sales of such shares by the
Selling Security Holders or the potential of such sales may have an adverse
effect on the market price of the Shares offered hereby. See "Risk
Factors-Shares Eligible for Future Sale."
20
<PAGE>
SELECTED FINANCIAL DATA
The statement of operations data set forth below for the years ended June
30, 1995 and 1996, and the balance sheet data set forth below as of June 30,
1996 have been derived from the Company's financial statements, which have been
audited by Deloitte & Touche LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. The balance sheet data
as of June 30, 1995 have been derived from the Company's audited balance sheet,
which is not included herein. The statement of operations data for the six
months ended December 29, 1995 and December 27, 1996 and the balance sheet data
as of December 27, 1996 are derived from the unaudited financial statements of
the Company included elsewhere in this Prospectus. In the opinion of management,
the unaudited financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the Company's
financial condition and results of operations for such periods. The results of
operations for the six months ended December 27, 1996 are not necessarily
indicative of the results to be expected for any other interim period or the
entire year. This data should be read in conjunction with the consolidated
financial statements and the notes thereto and other financial information
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................. $ 18,655,000 $ 26,112,000 $ 13,326,000 $ 8,210,000
Cost of goods sold ........................ 14,834,000 20,438,000 10,662,000 6,034,000
------------ ------------ ------------ -----------
Gross profit .............................. 3,821,000 5,674,000 2,664,000 2,176,000
Selling, general and
administrative expense .................. 2,757,000 4,492,000 2,240,000 1,742,000
------------ ------------ ------------ -----------
Income from operations ..................... 1,064,000 1,182,000 424,000 434,000
Other income (expense) ..................... (1,000) 199,000 216,000 51,000
Interest expense ........................... 762,000 977,000 374,000 766,000
------------ ------------ ------------ -----------
Income (loss) before income taxes ......... 301,000 404,000 266,000 (281,000)
Provision (benefit) for income taxes ...... 129,000 (3,000) (61,000) (118,000)
------------ ------------ ------------ -----------
Net income (loss) ........................... $ 172,000 407,000 327,000 (163,000)
------------ ------------ ------------ -----------
Net income (loss) per common share ......... $ .27 $ .64 $ .52 $ (.26)
============ ============ ============ ===========
Weighted average number of common
shares outstanding ........................ 632,917 632,917 632,917 632,917
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
DECEMBER 27,
1995 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .............................. $ 1,617,000 $ 4,482,000 $ 3,238,000
Current assets .............................. 8,502,000 9,520,000 7,844,000
Total assets ................................. 14,583,000 15,854,000 14,768,000
Current liabilities ........................ 6,885,000 5,038,000 4,606,000
Long-term debt, net of current portion ...... 6,897,000 9,602,000 8,783,000
Stockholders' equity ........................ 505,000 913,000 1,077,000
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides comprehensive contract manufacturing and engineering
services to OEMs. The Company was formed in 1965 to provide design and
engineering services to 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 down-sizing 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 1996, the Company's quality control program was
certified as conforming to the International Standards Organization 9002 ("ISO
9002"), a recognized international standard for quality management systems for
companies that manufacture, inspect and test products. Conformance to ISO 9002
is determined by third party agencies.
According to reports by Technology Forecasters, Inc., a Berkeley,
California research firm, contract manufacturers are expected to do nearly $25
billion of business in the United States and Canada in 1996. Moreover, according
to these reports, growth in this industry is forecasted at 26% a year through
1999. The overall market for the Company's services is diffuse with numerous
concerns engaged in various aspects thereof. However, management believes the
technological know-how and capital investment required to engage in contract
manufacturing and the development of software designed for this industry pose
relatively high barriers to entry into these markets. To date, foreign
competition has not played a significant role in the contract manufacturing
market. The Company believes that its ability to produce high quality products
and deliver them on a timely basis combined with sophisticated engineering and
manufacturing capabilities allows the Company to compete effectively. The
Company plans to market its POM manufacturing software to contract manufacturers
and, ultimately, to other concerns engaged in manufacturing operations.
Accordingly, the Company believes that the potential market for the POM
manufacturing software is large and varied.
The Company is currently dependent upon a small number of large customers.
For Fiscal 1995, the Company's four largest customers accounted for
approximately 71% of net sales and for Fiscal 1996, the Company's five largest
customers accounted for approximately 73% of net sales. While the Company is
pursuing a strategy of diversifying its customer base, the Company expects to
continue to depend upon a relatively small number of customers for a significant
percentage of its revenues for the foreseeable future. Significant reductions in
sale to any of the Company's large customers would have a material adverse
effect on the Company. There can be no assurance that present or future
customers will not terminate their manufacturing arrangements with the Company
or significantly change, reduce or delay the amount of manufacturing services
ordered from the Company. Any such termination of the manufacturing relationship
or change, reduction or delay in orders could have an adverse effect on the
Company. During the six months ended December 27, 1996, two of the Company's
largest customers temporarily reduced shipment levels due to their inventory
backlog. As a result, the Company's results of operations for the period were
adversely affected. The Company anticipates the reduced level of shipments
combined with delays in raising additional capital to adversely affect results
for the third quarter of Fiscal 1997.
While a majority of the Company's net sales are derived from several of the
Company's customers who provide production requirements for one year in the form
of yearly purchase orders, the remaining
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net sales are derived from others who do not commit to firm production schedules
for more than one quarter in advance. As a result, such customers' order
fluctuations and deferrals have from time to time in the past, had an adverse
effect on the Company's results of operations, and there can be no assurance
that the Company will not experience such effects in the future.
The Company typically provides services to customers which focus on the
computer, computer peripherals, telecommunications, postal equipment,
semiconductor, environmental, test equipment, process equipment and industrial
equipment industries. These industries are characterized by rapidly changing
technology, short product life cycles and continuing process development.
Accordingly, the Company must maintain technological leadership and successfully
anticipate or respond to technological changes in manufacturing processes. In
order to accomplish this, a portion of the proceeds from this Offering will be
utilized for purchasing new equipment and making capital improvements. Although
a portion of the proceeds from this Offering will be used to refine the
Company's POM manufacturing software, the Company has not yet finalized its
plans for licensing this software. The Company expects to focus on increasing
sales from existing customers and by adding new customers and increasing profits
by reducing costs. The Company may also grow by acquiring other contract
manufacturers. These acquisitions may allow the Company to expand into other
regions of the country and possibly abroad although management of the Company
has not identified any other regions or countries. The Company has no current
commitment or understanding with, and has not entered into negotiations with,
any acquisition candidates.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 27, 1996 AS COMPARED TO SIX MONTHS ENDED DECEMBER 29,
1995
For the six months ended December 27, 1996, the Company's net sales
decreased by $5,116,000 or 38.4% to $8,210,000 from $13,326,000 for the six
months ended December 29, 1995. The decrease in sales was, in part, a result of
a temporary reduction in shipments by two of the Company's largest customers due
to their inventory backlog and a delay in raising additional capital, which
resulted in an adverse effect on the Company's ability to obtain and fund new
orders.
Costs of goods sold for the six months ended December 27, 1996 decreased by
$4,629,000 or 43.4% to $6,033,000 from $10,662,000 for the six months ended
December 29, 1995. The decrease in cost of goods sold is primarily the result of
the reduction of sales. Gross profit as a percentage of net sales increased by
6.5% from 20% for the six months ended December 29, 1995. The improvement in
gross profit percentage reflects the efficiencies achieved by management through
cost reduction and selected price increases.
Selling, general and administrative expenses decreased for the six months
ended December 27, 1996 by $498,000 or 22.2% to $1,742,000 from $2,240,000 for
the six months ended December 29, 1995. The decrease in selling, general and
administrative expenses is primarily the result of reductions to support staff.
In addition, these expenses decreased in part as a result of a recovery of bad
debts of $90,000.
Other income decreased for the six months ended December 27, 1996 by
$165,000 or 76.6% to $51,000 from $216,000 for the six months ended December 29,
1995. Other income in the six months ended December 29, 1995 included a gain of
$167,000 on the August 1995 sale of a North Carolina facility owned by the
Company.
Interest expense increased for the six months ended December 27, 1996 by
$392,000 or 104.9% to $766,000 from $374,000 for the six months ended December
29, 1995. The increase in interest expense reflects both an increase in interest
rates and in amounts borrowed, including the $2,000,000 of the Notes, $1,100,000
raised from the issuance of the Bridge Notes and a $1,000,000 increase in the
Company's revolving bank line of credit (the "Line of Credit") with Banker's
Trust Company (the "Bank").
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Benefit for income tax increased for the six months ended December 27, 1996
by $57,000 or 93.4% to $118,000 from $61,000 for the six months ended December
29, 1995. The tax benefit provided during the period ended December 29, 1995
included a reduction of the previously established deferred tax asset valuation
allowance relating to the utilization of a capital loss carryforward of
$172,000, resulting from the sale of the Company's North Carolina facility in
August 1995. The Company realized a tax benefit from the loss during the period
ended December 27, 1996.
FISCAL 1996 AS COMPARED TO FISCAL 1995
During Fiscal 1996, the Company's net sales increased by $7,457,000 or
40.0% to $26,112,000 from $18,655,000 for Fiscal 1995. Sales growth was
primarily a result of the Company's broadening of its customer base and
expansion of its relationships with existing customers.
Cost of goods sold for Fiscal 1996 increased by $5,604,000 to $20,438,000
from $14,834,000 for Fiscal 1995, an increase of 37.8%. The increase in the cost
of goods sold was primarily related to an increase in sales and a corresponding
increase in variable costs, primarily material and direct labor. Gross profit as
a percentage of net sales increased by 1.2% to 21.7% in Fiscal 1996 from 20.5%
in Fiscal 1995. The improvement in gross profit reflects the efficiencies
achieved by management through cost reduction and the use of the Company's POM
manufacturing software and selected price increases in the fourth quarter of
Fiscal 1996.
Selling, general and administrative expenses increased by $1,735,000 or
62.9% to $4,492,000 for Fiscal 1996 from $2,757,000 for Fiscal 1995. The
increase in expenses was primarily due to increased staffing requirements and
related expenses resulting from increased demand for the Company's products. The
expenses for Fiscal 1995 were favorably impacted by recovery of bad debts which
reduced expenses by $205,000.
Other income (expense) for Fiscal 1996 consisted of income of $199,000 as
compared to expense of $1,000 for Fiscal 1995. The other income was primarily
the result of a gain in the amount of $167,000 on the sale of the Company's
North Carolina facility in August 1995.
Interest expense increased to $977,000 for Fiscal 1996 from $762,000 for
Fiscal 1995. The increase in interest expense reflects both an increase in
interest rates and amounts borrowed, including the $2,000,000 raised from the
sale of the Notes and a $1,000,000 increase in Line of Credit. Interest expense
was also affected by an agreement with the Bank to pay an additional interest
fee to the Bank, based upon the Company's obtaining the Note financing. Of the
$200,000 additional interest fee, $100,000 was expensed in Fiscal 1995 and
$60,000 was expensed in Fiscal 1996.
Net income increased by $235,000 or 137% to $407,000 for Fiscal 1996 from
$172,000 for Fiscal 1995. Contributing to the improvement in net income was a
lower income tax provision. This decrease resulted from a reduction of the
previously established deferred tax asset valuation allowance relating to the
utilization of a capital loss carryforward of $172,000 in August 1995.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENTS OF CASH FLOWS
Net cash provided by operations was $274,000 for the six months ended
December 27, 1996 as compared to $168,000 used in operations for the six months
ended December 29, 1995. The increase in cash provided by operations was the
result of a significant decrease in accounts receivable and inventory offset by
decreases in accounts payable and accrued expenses. The inventory reduction was
primarily a result of the implementation of a new feature in the POM
manufacturing software and a change of policy in the Company's purchasing
department. See "-Liquidity." Net cash used in financing activities during the
six months ended December 27, 1996 was $274,000. During this period $1,100,000
was provided from the issuance of the Bridge Notes, $1,043,000 of long-term debt
was repaid, $316,000 of
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financing costs were incurred and payments of deferred compensation of $15,000
were made. Working capital decreased to $3,238,000 at December 27, 1996 from
$3,324,000 at December 29, 1995.
Net cash used in operations was $1,944,000 for Fiscal 1996 as compared to
$637,000 for Fiscal 1995. The increase in cash used in operations was primarily
the result of an increase in inventory and a reduction in current liabilities.
Financing activities during Fiscal 1996 included $2,000,000 from the issuance of
the Notes as described below and $1,000,000 from an increase in borrowing under
the Line of Credit. During Fiscal 1996, the Company repaid $1,312,000 of
long-term debt and incurred $503,000 of financing costs.
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 December 27, 1996, $2,926,000 was outstanding under the Line of
Credit and the Company had $804,000 available for additional borrowings.
The Line of Credit currently bears interest at the rate of 9.75% (prime
plus 11/2%). 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 $3,347,000 as of December 27, 1996.
The Bank has extended to the Company the Equipment Line with an outstanding
principal balance as of December 27, 1996 of $455,000. The Equipment Line is due
June 30, 1997. The Company intends to refinance such indebtedness with a new
credit facility to be negotiated. There can be no assurance that the Company
will be able to refinance the Equipment Line.
The Line of Credit contains certain financial operating covenants,
including requirements that the Company maintain minimum net worth levels,
prohibitions on the ability of the Company to incur certain additional
indebtedness and restrictions on the ability of the Company to make capital
expenditures, to incur or suffer to exist certain liens and to take certain
other actions, including restricting the payment of dividends by certain
subsidiaries to the Company. The Company is currently in compliance with all
covenants under the Line of Credit.
Following consummation of this Offering, 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 option is exercised
on or before June 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
the repayment of the Line of Credit. As of the date of Prospectus, the Company
is negotiating with a number of financial institutions to refinance its existing
credit facility. There can be no assurance that the Company will be able to
successfully do so.
PRIVATE DEBT OFFERINGS
In December 1995 and February 1996, the Company sold an aggregate of
$2,000,000 in principal amount of Notes to the Noteholders in a private
placement. The proceeds of this private offering were used for purchase of
inventory and repayment of indebtedness. Interest on the Notes accrues at the
rate of 10% per annum and is payable quarterly. A portion of the Notes, which
are secured by a first lien on the Company's inventory, will be due and payable
upon consummation of this Offering and a portion of the net proceeds of this
Offering will be used to effect such repayment. See "Use of Proceeds." The
Agreement under which the Notes were issued (the "Note Purchase Agreement")
provided that the Noteholders would receive, upon consummation of an initial
public offering by the Company, such
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number of shares of Common Stock of the Company determined by dividing the
aggregate principal amount of the Notes sold in such offering by the public
offering price per share (the "Noteholder Shares") and Noteholder Warrants to
purchase an equal number of shares of Common Stock at an exercise price equal to
such public offering price per share. In December 1996, the Company and the
Noteholders amended the Note Purchase Agreement to, among other matters, (i)
provide that $900,000 in principal amount of the Notes will be paid upon
consummation of this Offering and the remaining $1,100,000 in principal amount
of the Notes shall be due and payable on the thirteen month anniversary of the
consummation of this Offering, (ii) release the Noteholders' security interest
in the Company's inventory upon consummation of this Offering, although the
Notes will continue to be senior to all indebtedness of the Company other than
bank or similar debt, (iii) eliminate the Noteholders' rights to receive the
Noteholder Shares and (iv) issue to the Noteholders 500,000 Noteholder Warrants.
Moreover, the Company and the Noteholders agreed that the Noteholder Warrants
will be exercisable at $2.73 per share for a ten year period from consummation
of this Offering. In addition to the foregoing, the investment banking firm that
assisted the Company in connection with the placement of the Notes, and its
assignees (which include the Noteholders), will be entitled to receive the
Placement Agent Warrants to purchase 34,783 Placement Agent Shares at a price
equal to $5.75 per share, exercisable for a five-year period from consummation
of this Offering. Notwithstanding the foregoing, the Noteholder Warrants and
Placement Agent Warrants will not be exercisable and may not be sold for a
period of 12 months from consummation of this Offering. In addition, for the
subsequent 12 month period the Noteholder Warrants and Placement Agent Warrants
will not be exercisable and may not be sold without the prior written consent of
the Representative. The Noteholder Warrants, the Underlying Shares, the
Placement Agent Warrants and the Placement Agent Shares are registered in the
Registration Statement of which this Prospectus forms a part. See "Concurrent
Offering."
In August 1996, the Company sold an aggregate of $1,100,000 in aggregate
principal amount of Bridge Notes to several investors in a private placement.
Interest on the Bridge Notes accrues at the rate of 10% per annum, subject to
certain events described in the Bridge Notes which would result in interest
accruing at a higher rate. The proceeds of this private offering were used for
purchase of inventory and repayment of indebtedness. The Bridge Notes were due
at the earliest of January 31, 1997, the closing date of an initial public
offering or upon the sale of the Company. Although the Bridge Investors have not
granted the Company a waiver with respect to this matter, the Bridge Investors
have advised the Company in writing that they do not intend to take any action
with respect to the Bridge Notes until the earlier of consummation of this
Offering at which time the Bridge Notes will be repaid or May 23, 1997. Holders
of the Bridge Notes received warrants to purchase an aggregate of 112,500 shares
of Common Stock (the "Bridge Warrants"). In addition, the investment banking
firm which assisted in the placement of the Bridge Notes received Bridge
Warrants to purchase 11,250 shares of Common Stock. The Bridge Warrants are
exercisable at a price equal to $2.96 per share for a five-year period
commencing six months after consummation of this Offering. Notwithstanding the
foregoing, the Bridge Warrants will not be exercisable and may not be sold for a
period of 18 months from consummation of this Offering. The holders of the
Bridge Warrants have been accorded registration rights under the Securities Act
with respect to the Bridge Warrants and the shares of Common Stock underlying
the Bridge Warrants. At September 27, 1996, the Company was in default under a
covenant contained in the Bridge Notes requiring the Company to maintain a
specified level of stockholders' equity. Such default has been waived by the
holders of the Bridge Notes, who have also agreed to lower the level of
stockholders' equity the Company is required to meet. In connection with the
waiver, the interest rate on the Bridge Notes increased to 12.5% retroactively
as of the date of issuance. See "Use of Proceeds."
Upon consummation of this Offering, the Company will record a non-cash
charge of $93,000, net of income tax, for the unamortized portion of the debt
costs relating to the repayment of a portion of the Notes and all of the Bridge
Notes from a portion of the net proceeds of this Offering.
LIQUIDITY
The Company's annual and quarterly operating results may be affected by a
number of factors, including the Company's ability to manage inventories,
shortages of components or labor, the degree of
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automation used in the assembly process, fluctuations in material costs and the
mix of material costs versus labor. Manufacturing and overhead costs are also
significant factors affecting the annual and quarterly operating results of the
Company. Other factors include price competition, the ability to pass on excess
costs to customers, the timing of expenditures in anticipation of increased
sales and customer product delivery requirements. Any one of these factors, or a
combination thereof, could adversely affect the Company. The Company's primary
pricing method is a fixed price; however, any costs in excess of the original
quotation or resulting from customer changes are typically passed on to the
customer.
For Fiscal 1995 and Fiscal 1996, the Company's growth in revenues and
corresponding increases in inventory were in excess of the increase in accounts
payable and decreases in accounts receivable. This has resulted in negative
operating cash flows for the Company. In order to remedy the negative operating
cash flows, management of the Company plans a reduction of inventory and a
reduction of costs combined with reduced spending in direct labor related areas
and parts purchased for inventory. Also impacting the growth in inventory was a
shift in scheduled shipments for a major customer. Once normal scheduling
resumes, the Company intends to liquidate the excess inventory related to this
customer. To accomplish a reduction of inventory, management of the Company has
enhanced the features of the POM manufacturing software to allow management to
parcel a large job into small production runs called manufacturing kits
("Kits"). The POM manufacturing software tracks the status of each Kit and
allows management to modify each Kit in the same manner as it is able to modify
the entire job. Any modifications to Kits are sent to the Company's purchasing
agents, expediters and suppliers. In addition, the Company's policies with its
suppliers have been modified to require that purchase orders are not to be
considered firm until 10 days within the date the materials are required to be
delivered to the Company. The Company plans to achieve a labor cost reduction
through improved efficiencies expected to result from improvements to the POM
manufacturing software and new equipment to be purchased from the proceeds of
this Offering. See "Use of Proceeds."
Management believes that consummation of this Offering, combined with the
measures described above, will remedy the Company's history of negative
operating cash flows. However, no assurance can be given that the Offering will
be consummated or, if it is consummated, that the Company will be able to
reverse its history of negative operating cash flows. Moreover, if this Offering
is not consummated, management believes that the negative operating cash flows
will have a material adverse effect on the Company's liquidity.
The Company anticipates that it will incur capital expenditures of
approximately $1,400,000 through the fiscal year ending June 30, 1998. Such
expenditures will be primarily for the acquisition of additional assembly and
manufacturing equipment and for refurbishment of the Company's currently idle
second plant. See "Use of Proceeds."
Management of the Company believes that the Company's existing and
anticipated capital resources, including the estimated net proceeds of this
Offering, will enable it to fund its planned operations for a period of at least
12 months from the date of this Prospectus. There can be no assurance that the
Company will realize cash flow from operations or that such cash flow will be
sufficient, in which case the Company may require additional financing, and may
seek to raise funds through subsequent equity or debt financings, or through
other sources. Moreover, the Line of Credit places restrictions on the Company's
ability to obtain financing either through the offering of equity or incurrence
of additional debt. No assurance can be given that additional funds will be
available to the Company to finance its development on acceptable terms, if at
all. Additional financings may result in dilution to existing stockholders. If
funds are needed but are not available in adequate amounts from additional
financing sources or from operations, the Company's business may be materially
and adversely affected.
NET OPERATING LOSS CARRYFORWARDS
As of December 27, 1996, the Company had an NOL for federal income tax
purposes of approximately $4,200,000 which expires in 2011, and no NOL for state
income tax purposes. Although
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the Offering is expected to result in a "change of control" for federal tax
purposes, the limitation on the Company's ability to utilize such NOL will not
be significant. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," requires that deferred tax assets be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of such assets will not be realized. The Company
monitors the realizability of such assets and establishes a valuation allowance
for all amounts that will not be realized. As of December 27, 1996, the total
valuation allowance was $228,000.
IMPACT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" and SFAS No. 123, "Accounting for Stock-Based Compensation." The
Company has adopted SFAS Nos. 121 and 123 during Fiscal 1997 and does not
believe that their adoption will have a material effect on the Company.
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BUSINESS
GENERAL
The Company provides comprehensive contract manufacturing and engineering
services to OEMs. The Company specializes in the fabrication, assembly and
testing of complex industrial products and non-invasive medical equipment. The
Company manufactures complete systems, as well as assemblies, including printed
circuit boards, cable and wire harnesses and other electro-mechanical
assemblies. The Company complements its basic manufacturing services by
providing its customers with a broad range of sophisticated product engineering
and design services. Products manufactured by the Company range from highly
sophisticated atomic force microscopes (which measure the electrical field of an
atom) to less complex products such as sign plotting devices. Representative
customers of the Company include ENI (a division of Astec America, Inc.),
General Electric Co., Gerber Scientific Co., IBM, Lockheed Martin Corporation
(formerly Loral Federal Systems Company), Materials Research Corporation (a
division of Sony Corporation), Motorola Corporation and the United States Postal
Service.
Downsizing by American industry, combined with rapid change, strong
competition and increasingly shorter product life cycles in various industries,
have made it considerably less attractive for OEMs to manufacture in-house,
particularly low unit volume products or short cycle electronic products. As a
result, many OEMs have adopted and are becoming increasingly reliant upon
manufacturing outsourcing strategies and on contract manufacturers to satisfy
their mainstream manufacturing requirements. Management of the Company believes
that this trend will continue. According to reports by Technology Forecasters,
Inc., contract manufacturers were expected to do nearly $25 billion of business
in the United States and Canada in 1996. In addition, growth in this industry is
forecasted at 26% a year through 1999. Moreover, according to these reports,
electronics contract manufacturing worldwide was expected to be a $50 billion
business in 1996 and will nearly double in 1999.
The Company believes that its ability to produce high quality products and
deliver them on a timely basis combined with sophisticated engineering and
manufacturing capabilities has resulted in an expansion of its relationships
with existing customers and the addition of new customers. In addition, the
Company's proprietary POM manufacturing software is an integral part of the
Company's services as it assists the Company in controlling its manufacturing
operations from estimating to shipping to billing. The POM manufacturing
software is a real time system which allows the Company to track specific
projects as they move through the production cycle and to make adjustments as
necessary in order to control costs and achieve higher levels of quality control
and efficiencies.
INDUSTRY OVERVIEW
OEMs originally utilized contract manufacturing sources primarily to reduce
labor costs in the production of electronic assemblies and to provide for
additional manufacturing capacity in times of peak demand. These early contract
manufacturers typically were employed on a consignment basis in which the OEM
provided the circuit and production designs, procured all components and
performed the final product listing.
During the early 1980's, the commercialization of the personal computer
began to fuel substantial growth in the electronics and other industries and,
with it, the growth of contract manufacturers. Despite rapid growth in the
electronics industry, the market soon became characterized by intense price
competition and demands for more frequent product introductions. In an effort to
survive and meet the requirements of the marketplace, OEMs were forced to
restructure and focus their resources on core strategic strengths, such as
product development, software design and marketing, and to outsource capital
intensive manufacturing operations to specialists. As contract manufacturers
began to perform more turnkey services, the relationship between OEMs and
contract manufacturers became more strategic in nature, with the two now linked
in a close relationship to deliver cost-effective, high quality products quickly
to the marketplace.
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OEMs utilize contract manufacturers for the following reasons:
REDUCE TIME TO MARKET. Due to intense competitive pressures in the
electronics, industrial products and medical equipment industries, OEMs are
faced with increasingly shorter product life-cycles and therefore have a growing
need to reduce the time required to bring a product to market. OEMs can
generally reduce their time to market by using the established manufacturing
expertise and infrastructure of contract manufacturers.
REDUCE CAPITAL INVESTMENT. As electronics, industrial products and medical
equipment have become more technologically advanced, the manufacturing process
has become increasingly automated requiring a greater level of investment in
capital equipment. Contract manufacturers enable OEMs to gain access to advanced
manufacturing facilities, thereby reducing the OEMs' overall capital equipment
requirements.
FOCUS RESOURCES. Because the electronics, industrial products and medical
equipment industries are experiencing greater levels of competition and more
rapid technological change, many OEMs increasingly are seeking to focus their
resources on activities and technologies in which they add the greatest value.
By offering comprehensive design, assembly and turnkey manufacturing services,
contract manufacturers allow OEMs to focus on core technologies and activities
such as product development, marketing and distribution.
ACCESS LEADING MANUFACTURING TECHNOLOGY. Products and manufacturing
technology have become increasingly sophisticated and complex, making it
difficult for OEMs to maintain the necessary technological expertise in process
development and control. OEMs are motivated to work with a contract manufacturer
in order to gain access to the contract manufacturer's process expertise and
manufacturing know-how.
IMPROVE INVENTORY MANAGEMENT AND PURCHASING POWER. OEMs are faced with
increasing difficulties in planning, procuring and managing their inventories
efficiently due to frequent design changes, short product life-cycles, large
investments in electronic components, component price fluctuations and the need
to achieve economies of scale in materials procurement. OEMs can generally
reduce production costs by using the procurement capabilities of the contract
manufacturer. By utilizing a contract manufacturer's expertise in inventory
management, OEMs can generally better manage inventory costs and increase their
return on assets.
BUSINESS STRATEGY
The Company focuses on servicing OEMs who produce complex, high dollar
value industrial products where high quality manufacturing is extremely
important. Management of the Company believes that profits for such products
tend to generate higher gross profit margins. The Company's objective is to
increase revenues and improve profitability by utilizing its POM manufacturing
software and sophisticated manufacturing, engineering and design services to
offer customers comprehensive manufacturing solutions. The Company intends to
realize its objective by implementing the following strategies:
INCREASE SALES FROM EXISTING CUSTOMERS AND ADD NEW CUSTOMERS. The Company
plans to expand existing relationships and seek new customers in the markets it
currently serves and in additional markets. The Company plans to increase the
amount of sales to existing customers by devoting more time to these customers
through an increased sales force and by offering improved and expanded services
such as faster metal cutting machining centers, faster sheet metal punching
equipment, expanded painting facilities and more rapid and less expensive
testing procedures and equipment. While the Company has an on-going quality
improvement program, the Company will intensify its efforts in educating its
employees on the Company's quality requirements and in measuring its employees
conformance to these requirements. Additionally, the Company will improve on its
monthly quality assurance technical audits in conformance with the international
quality process specification and have
30
<PAGE>
an outside certified auditor audit the quality management system every six
months. The Company also intends to increase the frequency of its customer
satisfaction surveys from quarterly to monthly. The Company is also planning to
publish a news letter quarterly to be mailed to customers. The Company plans to
diversify its customer base by increasing its marketing efforts. The Company
intends to do this by attending more trade shows, expanding the number of
advertisements in trade journals, expanding the number of sales personnel,
expanding the number of customers who receive direct mailings, and providing new
sales literature, conducting CD-ROM based interactive electronic presentations
and enhancing its presentation on the Internet world wide web. The Company also
plans to use a portion of the net proceeds of this Offering to refurbish a
currently idle second plant owned by the Company which will enable the Company
to handle the requirements of additional customers. The Company's objective is
to obtain multiple customers in the markets it currently serves and in
additional markets.
INCREASE PROFITS BY REDUCING COSTS. The Company plans to reduce costs by
enhancing the POM manufacturing software to augment its real time productivity
and quality measurement system using bar codes and adding a feature to the POM
manufacturing software which will allow each customer a window into the POM
manufacturing software to monitor via the Internet the status of purchase orders
relating to their jobs. Management of the Company believes that the utilization
of bar codes will reduce the labor costs associated with the present manual
entry method of reporting. Although customers will not have the ability to
modify existing jobs or place new orders through the Internet, management
believes that allowing customers to access information themselves will also
enable the Company to reduce overhead.
MARKETING OF POM MANUFACTURING SOFTWARE. Once the POM manufacturing
software has been upgraded, management of the Company plans to generate revenues
through the licensing of the POM manufacturing software initially, to contract
manufacturers and ultimately, to other concerns engaged in manufacturing
operations, in return for monthly usage fees. Management believes that its
knowledge of the needs of contract manufacturers, its historical experience in
marketing software and its experience developing the POM manufacturing software
will enable it to market and license the POM manufacturing software. However, no
assurance can be given that the Company will be able to successfully market and
license the POM manufacturing software.
FACILITATE GROWTH OF THE COMPANY THROUGH ACQUISITIONS. The contract
manufacturing industry is now going through consolidation. The Company may
acquire other contract manufacturers if management determines that such
acquisitions will enable the Company to improve net sales and profits. These
acquisitions may allow the Company to expand to other regions of the country and
possibly abroad. Management of the Company believes that the Company's
proprietary POM manufacturing software will enable the Company to realize
greater efficiencies with respect to any such acquisitions. The Company has no
current commitment or understanding with, and has not entered into any
negotiations with, any acquisition candidates.
POM MANUFACTURING SOFTWARE
The Company's proprietary POM manufacturing software is integral to the
Company's operations. The POM manufacturing software tracks all of the Company's
operations on a real time basis. As a result, the POM manufacturing software
assists the Company in controlling costs and achieving higher levels of quality
control and efficiencies.
Specifically, after an order is placed, the POM manufacturing software
allows the Company's industrial engineers and estimators to create a
hierarchical data base of the components of a customer's product in order to
estimate the total cost of the product and to produce a priced bill of materials
("BOM") which includes purchased items and labor broken down into sequenced
tasks. Thereafter, the POM manufacturing software automatically produces printed
requests for quotations to the appropriate supplier. As a result, the Company
can provide the customer with a printed BOM broken down by each assembly and
fabricated part which breakdown includes price of labor, raw materials and
purchased components.
31
<PAGE>
When the Company releases the product for manufacturing, the software
provides the Company's purchasing department with electronic purchase
requisitions automatically generated from the BOM. Once the purchasing
department negotiates final prices and selects the suppliers, the POM
manufacturing software automatically prints and sends purchase orders to the
suppliers and automatically prints lists of raw materials and components
("Kits") for each work center so that the Company's materials management
department can supply these items to the manufacturing department when
scheduled. The POM manufacturing software provides the purchasing department
lists of purchased items that must be expedited in order to satisfy the delivery
dates. If necessary, the POM manufacturing software will also provide the
purchasing department printed amendments to purchase orders to change the
quantity and delivery dates of Kits that have had delivery dates or quantities
to be manufactured which are altered by the Company's production management
department in response to customer demand. The POM manufacturing software
automatically prints bar-coded work orders listing sequenced labor tasks to be
performed for each work center in response to a production lot defined by the
Kit. As purchased items are received and entered into the POM manufacturing
software, the POM manufacturing software updates the appropriate Kit, updates
work-in-process values and electronically compares quantities to the POM
purchase orders. As labor is expended on each work order and recorded each day,
the POM manufacturing software updates the work-in-process values and compares
the actual labor hours per task to the estimated labor hours and then produces
reports to management of estimated compared to actual results to date for each
job showing purchasing efficiency and labor efficiency compared to the
estimating standard.
If requested, for a specified job, the POM manufacturing software can
produce a detailed report showing each purchase order received, each invoice
sent to the customer, each labor transaction and each receiving transaction. On
demand from production administration as verified by its shipping department,
the POM manufacturing software prints an invoice for services rendered or
product shipped. When an invoice is printed, the POM manufacturing software
updates the accounts receivable in the financial system and deducts the dollar
amount of parts and labor from the work-in-process system. On demand, the POM
manufacturing software prints a work-in-process report showing dollars in labor
and dollars in purchased parts for each active job, prints a statement for each
customer showing the invoices that are projected to become due through the next
week, prints projected accounts receivable collections by customer by week,
prints a rating letter to each supplier informing the supplier of its quality
rating based on comparison of purchase order quantity and delivery date
requirements compared to receiving transactions, and prints the productivity
performance measurement of each employee involved in this process.
There are numerous advantages to the Company and its customers through
utilization of the POM manufacturing software. First, the priced bill of
materials sent to the customer insures customer confidence in the Company as the
customer realizes the Company understands the customer's product and the
customer can evaluate the Company's pricing strategy in detail. In addition,
because POM manufacturing software automatically produces requests for
quotations, purchase requisitions and purchase orders, overhead costs are
reduced. Since the POM manufacturing software provides timely comparison of
actual costs to estimated costs as each job progresses, the Company's production
management team is more likely to spot inefficiencies early in the production
cycle and then take corrective action thereby maximizing profit. Moreover,
because POM manufacturing software evaluates, on a daily basis, the productivity
levels of all direct employees, management believes that greater productivity is
achieved. Finally, because the POM manufacturing software is used to provide
weekly statements to its customers, management believes that accounts receivable
collection is faster thereby enhancing cash flow.
The Company is developing upgrades for its POM manufacturing software on an
ongoing basis. Most recently, the Company enhanced the features of the POM
manufacturing software to allow management to parcel a large job into small
production runs called Kits. The POM manufacturing software tracks the status of
each Kit and allows management to modify each Kit in the same way as it is able
to modify the entire job. Any modifications to Kits are sent to the Company's
purchasing agents, expediters and suppliers.
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<PAGE>
Following consummation of this Offering, the Company intends to have the
POM manufacturing software upgraded to provide for the use of bar code tracking,
which will enhance the Company's ability to provide real time productivity
analysis of each direct worker and to provide the status of each order being
processed in the plant. The Company also plans to upgrade the POM manufacturing
software to add a feature which will allow each customer a window into the POM
manufacturing software to monitor via the Internet the status of each purchase
order relating to such customer's job and a cost breakdown of each of the
customer's products including a cost breakdown of each sub-assembly. As a
result, the Company's customers will have immediate access to information
regarding each purchase order relating to such customer's job. Management of the
Company believes that none of the Company's competitors have similar
capabilities.
The Company initially plans to market its POM manufacturing software to
other contract manufacturers and ultimately, to other concerns engaged in
manufacturing operations. From 1979 to 1989, the Company's management was
involved in the development of a major software system. At the peak of these
development efforts, approximately 30 programmers were employed by the Company
for this project. The system was ultimately marketed and sold to large
publishing companies. The Company has since focused its energies on the
development of the POM manufacturing software. The Company intends to use a
portion of the proceeds of this Offering to hire an additional two programmers
and two marketing persons. See "Use of Proceeds." The Company believes that its
software development staff will be able to provide sufficient customer support
during the initial phases of marketing the POM manufacturing software. The
Company also intends to enter into a joint venture with a partner for the
marketing and licensing of the POM manufacturing software. There are currently
no ongoing discussions with respect to establishment of any such joint venture.
Management of the Company believes it will take approximately two years from the
date of this Offering to achieve revenues from the marketing of the POM
manufacturing software. However, there can be no assurance that the Company will
be able to successfully enter into a joint venture or otherwise market and
license the POM manufacturing software.
INDUSTRIES AND PRODUCTS
The following table lists the industries in which the Company expects to
continue to conduct significant business and the products for which the Company
expects to provide manufacturing services (based on net sales for Fiscal 1996).
<TABLE>
<S> <C>
INDUSTRY SPECIFIC PRODUCT OR PRODUCT COMPONENT
- ------------------------- -------------------------------------------------------------------
Communications ............... Cellular telephone automated assembly components; printed circuit
cards for automated telephone attendants
Computer ..................... Chassis, frames, panels, wire harness and cables, jumpers, test
equipment, process equipment
Environmental ............... Cleaning equipment using environmentally friendly chemicals
Information Processing ...... Test equipment for copiers
Instrumentation ............ Printed circuit cards for laser measurement instruments
Medical ..................... Components for blood analyzers; power components for medical
equipment; automated process equipment
Semiconductor ............... Sputtering equipment components; loaders and elevator components
for ovens; power components for semiconductor equipment; atomic
force microscope inspection equipment; test equipment
Sign-Making .................. Sub-systems for plotters; sub-systems for four color process sign
making
Transportation ............... Electronic traffic display signs; airport control components
Other ........................ Letter sorting and handling components, parcel drop system,
electronic voting machine components; control systems for power
distribution; printed circuit boards for elevator control systems
</TABLE>
33
<PAGE>
SERVICES
The Company provides comprehensive contract manufacturing and engineering
services to OEMs. Such services include:
PRODUCT ENGINEERING AND DESIGN SERVICES. The Company assists its customers
in designing or evaluating designs of products. The Company designs or evaluates
designs for ease and quality of manufacture and, when appropriate, recommends
changes to reduce manufacturing costs or lead times or to increase the quality
of finished assemblies. The Company supports its customers with sophisticated
product engineering and design services using computer aided design equipment
with computer aided machinery software. Product engineering and design include
electrical design, electronic circuit design, mechanism design,
electro-mechanical design, printed circuit board design and software
engineering. The Company also assists its customers with overall product
redesign with the objective of reducing manufacturing costs. The goal of the
Company's engineering and product design services is to create a more stable
volume of turnkey manufacturing and an elevated level of strategic partnering
with principal customers.
MANUFACTURING. The Company custom manufactures complete systems, printed
circuit board assemblies, cable and wire harnesses and other electro-mechanical
assemblies. Manufacturing services offered by the Company include sourcing and
procurement of raw materials and parts, precision metal fabrication, welding,
precision machine parts, painting, silk screening, assembly and testing.
In order to achieve high levels of performance in its manufacturing
operations, the Company combines advanced manufacturing technology, such as
computer-aided manufacturing and testing, with state-of-the-art manufacturing
techniques. The Company's management is committed to quality control and seeks
to impart high levels of quality in every operation of the Company. This is
accomplished by setting the quality and labor efficiency objectives for every
operation, tracking performance against those objectives, identifying work flow
and policy changes required to deliver higher quality. The Company's quality
management system is certified as conforming to ISO 9002, the international
standard for quality.
In implementing its manufacturing approach, the Company emphasizes timely
delivery and accurate and up-to-date documentation for each product. The Company
develops an appropriate production process and a complete set of manufacturing
process instructions, inspection plans and a quality assurance plan for each
product. An analysis of each customer's materials specification is performed to
identify component suppliers. The Company then plans and executes purchase
orders, receives, inspects and warehouses components, expedites critical
components and delivers a complete set of components to the production floor for
assembly. The Company uses its POM manufacturing software to monitor and control
all aspects of the manufacturing process, including material resource planning,
shop floor control, work-in-process tracking, statistical process control and
activity based product costing.
Responsiveness to customers, particularly as to engineering changes once
manufacturing has commenced, is an important component of the Company's
manufacturing approach. Many products manufactured by the Company are in the
early stages of their product life cycle and therefore may have ongoing design
or engineering changes. Upon receiving an engineering change notice, the Company
identifies the impact of such changes in the production process, current
inventory and open purchase orders. To support continuous production flow while
minimizing excess and obsolete inventory costs for the customer, the Company
restructures bills of material and expedites orders for new components, as
authorized. The Company also identifies and implements changes to manufacturing
instructions and test plans. In order to assure prompt customer service, the
Company assigns each project a product manager, quality assurance engineer,
product engineer, test engineer and customer service representative. The Company
maintains regular contact with its customers to assure adequate information
exchange, document control and activities coordination necessary to support a
high level of quality and on-time delivery.
34
<PAGE>
SYSTEM ASSEMBLY. The Company's assembly activities range from assembly of
higher level sub-systems and systems to printed circuit board assembly and
assembly of complex electro-mechanical components. The Company specializes in
printed circuit board assembly, cable and wire harness assembly and
electro-mechanical assembly, all utilizing specialized tools and techniques.
QUALITY ASSURANCE. The Company's quality assurance procedures are an
integral part of providing customers with turnkey manufacturing solutions. The
Company provides computer-aided in-circuit and functional testing, which
contributes significantly to the Company's ability to deliver high quality
products on a consistent basis. The Company has developed specific strategies
and routines to test printed circuit board's and other assemblies. In-circuit
tests verify that all components have been properly inserted and that electrical
circuits are complete. Functional tests determine if the assembly is performing
to customer specifications. The Company either designs and procures test
fixtures and develops its own test software or utilizes the customer's existing
test fixtures and test software. In addition, the Company provides environmental
stress tests of the printed circuit board or system assemblies, when required by
its customers.
The Company's quality management system has recently been certified under
ISO 9002, an international quality standard. The Company's cable and wire
harnesses and assemblies are manufactured to Underwriters Laboratories and
Canadian Standards Association specifications and the Company has been certified
by both organizations. The Company's printed circuit board manufacturing process
has been certified by BBAC (a British communications equipment manufacturing
quality specification).
CUSTOMERS, SALES AND MARKETING
The Company serves a wide variety of markets, including the computer,
computer peripherals, telecommunications, postal equipment, semiconductor,
environmental, test equipment, process equipment, industrial equipment and other
industries. Representative customers of the Company include ENI, General
Electric Co., Gerber, IBM, Lockheed Martin Corporation (formerly Loral Federal
Systems Company), Materials Research Corporation (a division of Sony
Corporation), Motorola Corporation and the United States Postal Service. A
majority of the Company's customers are located in the Northeast.
For Fiscal 1995 the Company's four largest customers accounted for
approximately 71% of net sales. Sales to Gerber, ENI, IBM and S&K accounted for
approximately 20%, 19%, 19% and 13%, respectively, of the Company's net sales
during Fiscal 1995. For Fiscal 1996, the Company's five largest customers
accounted for approximately 73% of net sales. Sales to ENI, Gerber, S&K, Loral
and Bruce accounted for approximately 20%, 16%, 14%, 13% and 10%, respectively,
of the Company's net sales during Fiscal 1996. For the six months ended December
27, 1996, the Company's four largest customers accounted for approximately 57%
of net sales. Sales to Lockheed Martin Corporation, ENI, Gerber and S&K
accounted for approximately 18%, 18%, 11% and 10%, respectively, of the
Company's net sales for such period. Accordingly, in addition to expanding
existing relationships, the Company is pursuing a strategy of diversifying its
customer base. Currently, the Company contacts potential customers through
participation at contract manufacturing shows, strategically placed
advertisements, and direct mail campaigns which are then followed by telephone
sales and visits from the Company's sales representatives. The Company also
advertises over the Internet at its own website. Following consummation of this
Offering, the Company plans to expand its marketing efforts by attending more
trade shows, increasing the number of advertisements in trade journals,
increasing the number of sales personnel, increasing the number of customers who
receive direct mailings, and providing new sales literature and CD-ROM based
interactive electronic presentations. The Company's objective is to obtain
multiple customers in the markets it currently serves.
COMPETITION
The Company operates in a highly competitive environment and competes
against numerous domestic and foreign manufacturers. The Company's competitors
include SCI Systems, Inc., Solectron
35
<PAGE>
Corporation, Jabil Circuit, Inc., Avex Electronics Inc. (a privately-held
company), Plexus Corp., DOVatron International, Inc., IEC Electronics Corp.,
Sanmina Corporation and Benchmark Electronics, Inc. In addition, the Company may
encounter competition in the future from other large electronic manufacturers
which are selling, or may begin to sell, contract manufacturing services. The
Company may also face competition from the manufacturing operations of its
current and prospective customers, which the Company believes continually
evaluate the merits of manufacturing products internally versus the merits of
contract manufacturing.
The Company believes that the primary basis of competition in its targeted
markets are time to market, capability, price, manufacturing quality, advanced
manufacturing technology and reliable delivery. Management believes that it
generally competes favorably with respect to each of these factors. To remain
competitive, the Company must continue to provide technologically advanced
manufacturing services, maintain quality levels, offer flexible delivery
schedules, deliver finished products on a reliable basis and compete favorably
on the basis of price. There can be no assurance that the Company can compete
effectively with respect to these factors in the future.
BACKLOG
The Company's backlog at December 27, 1996 was approximately $14,035,000.
Backlog consists of firm purchase orders and commitments which are to be filled
within the next 12 months. However, since orders and commitments may be
rescheduled or canceled, management of the Company believes that backlog is an
inconclusive indicator of future financial performance.
The level and timing of orders placed by the Company's customers may vary
due to the customers' attempts to balance their inventory, changes in customers'
manufacturing strategies and variations in demand for the customers' products
resulting from, among other things, product life cycles, competitive conditions
or general economic conditions. While a majority of the Company's total revenues
are derived from several of the Company's customers who provide production
requirements in the form of yearly purchase orders, the Company's remaining
revenues are derived from customers who do not commit to firm production
schedules for more than one quarter in advance. The Company does not assess any
additional fee or charge interest in connection with the financing of any
customer orders other than what is included in its firm price. The Company's
inability to forecast the level of customer orders with certainty makes it
difficult to schedule production and maximize utilization of manufacturing
capacity.
SUPPLIERS
The Company procures components from a broad group of suppliers, determined
on an assembly-by-assembly basis. Some of the products and assemblies
manufactured by the Company require one or more components that may be available
from only a single source. Some of these components are allocated in response to
supply shortages. The Company attempts to ensure the continuity of supply of
these components. In cases where unanticipated customer demand or supply
shortages occur, the Company attempts to arrange for alternative sources of
supply, where available, or defers planned production to meet the anticipated
availability of the critical components. In some cases, supply shortages could
substantially curtail production of all assemblies using a particular component.
While the Company has not experienced material shortages in the recent past,
such shortages could produce significant short-term interruptions of the
Company's future operations. Some of the Company's material suppliers are
Madison Cable Corporation, Bishop-Wisecarver, Marshall Industries, Intest
Corporation, Apollo Display Technologies and Dutchess Metal Supply Corporation.
The Company currently has access to a number of alternative suppliers if any
such suppliers were to cease or materially decrease their business dealings with
the Company.
The Company does not maintain a large inventory of materials and does not
place orders for materials unless required in response to a specific customer
purchase order. If the Company does have any aged or obsolete inventory, it is
written-off immediately. Historically, aged or obsolete inventory has not had a
material adverse effect on the Company.
36
<PAGE>
INTELLECTUAL PROPERTY RIGHTS
The Company regards its manufacturing processes, proprietary software and
circuit designs as proprietary trade secrets and confidential information. To
maintain the trade secrecy of its proprietary software, the Company relies
largely upon a combination of trade secret laws, copyright laws, internal
security systems and confidentiality procedures. Third parties may attempt to
exercise alleged rights in any of the copyrights or other intellectual property
rights or any appropriate copyrights or other intellectual property rights
established by the Company, and the Company's failure or inability to establish
appropriate copyrights or to adequately protect any of its intellectual property
rights, may have a material adverse effect on the Company.
GOVERNMENT REGULATION
The Company's operations are subject to certain federal, state and local
regulatory requirements relating to environmental, waste management, health and
safety matters. Management believes that the Company's business is operated in
compliance with applicable regulations promulgated by the Occupational Safety
and Health Administration and the Environmental Protection Agency and
corresponding state agencies which, respectively, pertain to health and safety
in the workplace and the use, discharge and storage of chemicals employed in the
manufacturing process. Current costs of compliance are not material to the
Company. However, new or modified requirements, not presently anticipated, could
be adopted creating additional expenses for the Company.
EMPLOYEES
As of December 27, 1996, the Company employed 154 full-time employees. The
Company employs approximately 40 people in finance, sales and administration,
108 people in manufacturing operations and six people in various engineering
functions. Currently none of the Company's employees are members of a union.
Management considers its relationships with its employees to be good.
PROPERTIES
The Company's principal operations are conducted in Poughkeepsie, New York,
in an approximately 75,000 square foot plant situated on a 5.5 acre parcel of
land. The facility, which is owned by the Company, is subject to a $1,913,000
mortgage as of December 27, 1996. In addition, the Company owns a second 65,000
square foot plant in Poughkeepsie, which is subject to a mortgage in the amount
of $1,434,000 as of December 27, 1996. Within 12 months following consummation
of this Offering, the Company intends to refurbish and commence using this
second plant, which is situated on a 4.9 acre parcel of land and which is
currently inactive, for future expansion. See "Use of Proceeds." The Company
also owns approximately 55.76 acres of vacant land zoned for light industrial
use in Poughkeepsie. Management of the Company believes that the Company's
facilities are sufficient for its current and reasonably anticipated operations.
LEGAL PROCEEDINGS
The Company is involved in pending and threatened legal actions and
proceedings arising in the ordinary course of its business. In the opinion of
management, the outcome of such legal actions and proceedings will not have a
material adverse effect on the Company.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------- ------ -------------------------------------------------------------
<S> <C> <C>
Gary D. Horne ......... 60 Chairman of the Board, Chief Executive Officer and Director
Stanley F. Zuk ...... 59 President, Chief Operating Officer and Director
Robert Lettieri ...... 50 Chief Financial Officer and Director
Gregory Horne ......... 36 Vice President-Information Systems and Director
</TABLE>
GARY D. HORNE is a co-founder of the Company and has served as Chief
Executive Officer since the inception of the Company in 1965. Prior to joining
the Company, Mr. Horne worked from 1956 through 1957, serving IBM as a design
draftsman and then worked from 1957 through 1960 for Graphics Techniques, Inc.,
an IBM design engineering contractor, as a design engineer. From 1960 to 1965,
Mr. Horne worked for International Design, Inc., an IBM design engineering
contractor, as branch manager.
STANLEY F. ZUK is a co-founder of the Company and has served as Chief
Operating Officer since the inception of the Company in 1965. He is responsible
for all aspects of manufacturing. Prior to joining the Company, Mr. Zuk worked
for two years at General Electric and six years as design/drafting manager at
International Design, Inc.
ROBERT LETTIERI has been with the Company since 1995 as Chief Financial
Officer and has been a director since November 1, 1996. From 1987 to 1995, Mr.
Lettieri served as Chief Financial Officer for two mid-sized companies, Fine
Host Corporation, a concessionaire of food service and souvenirs at stadiums,
race tracks and other sports facilities, and S&S Companies, a distributor and
property manager of tobacco, confectionery and other products typically sold in
vending machines. From 1979 to 1987, Mr. Lettieri was Operations Controller for
the Cosmetic and Fragrance Division of Revlon and Group Director of Analysis and
Control of the Health Care Group of Revlon. Mr. Lettieri began his career at the
accounting firm of Deloitte & Touche LLP.
GREGORY HORNE was employed by the Company from 1979 to 1982 and has been
with the Company from 1991 to the present. He has served as Vice
President-Information Systems since January 1995. Mr. Horne was elected to the
Board of Directors in January 1994. Prior to this position, Mr. Horne served as
a software programmer, systems analyst and Network Administrator for the
Company. From 1982 to 1990, Mr. Horne was employed by Watchtower Bible and Tract
Society of New York, Inc. as a network operating system programmer.
Gregory Horne is Gary D. Horne's son. There are no other family
relationships among the Company's directors and executive officers.
Within 90 days of the consummation of this Offering, the Company intends to
secure the services of at least two non-employee directors.
Directors of the Company hold their offices until the next annual meeting
of the Company's stockholders and until their successors have been duly elected
and qualified or their earlier resignation, removal from office or death. There
are no committees of the Board of Directors. Upon consummation of this Offering,
the Company intends to establish audit and compensation committees, each
consisting of a majority of non-employee directors.
Officers of the Company serve at the pleasure of the Board of Directors and
until the first meeting of the Board of Directors following the next annual
meeting of the Company's stockholders and until their successors have been
chosen and qualified.
DIRECTOR COMPENSATION
The Company currently has no policy with respect to director compensation.
However, it is anticipated that non-employee directors will receive annual
grants of options under the 1996 Plan.
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<PAGE>
LIMITATION ON LIABILITY OF DIRECTORS
As permitted by Delaware law, the Company's Certificate of Incorporation
contains an article limiting the personal liability of directors. The
Certificate of Incorporation provides that a director of the Company shall not
be personally liable for monetary damages for a breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, which prohibits the unlawful payment of
dividends or the repurchase or redemption of stock, or (iv) for any transaction
from which the director derived an improper personal benefit. This article is
intended to afford directors additional protection, and limit their potential
liability, from suits alleging a breach of the duty of care by a director.
EXECUTIVE COMPENSATION
The following table provides information with respect to the compensation
paid or accrued by the Company and its subsidiaries to the Company's Chief
Executive Officer and Chief Operating Officer in all their capacities for Fiscal
1996 and Fiscal 1995. No other executive officer of the Company received salary
and bonus compensation in Fiscal 1996 and Fiscal 1995 in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------
ANNUAL COMPENSATION
------------------------ OTHER ANNUAL
SALARY BONUS COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
- ---------------------------------------- ------- ----------- -------- ------------------
<S> <C> <C> <C> <C>
Gary D. Horne, 1996 $144,240 $0 $0
Chairman and Chief Executive Officer 1995 $110,250 $0 $0
Stanley F. Zuk, 1996 $133,820 $0 $0
President and Chief Operating Officer 1995 $106,050 $0 $0
<FN>
- ----------------
(1) The table does not include amounts for personal benefits extended to Mr.
Horne or Mr. Zuk by the Company, such as health or life insurance. The
Company believes that the incremental cost of such benefits to Mr. Horne or
Mr. Zuk during Fiscal 1996 and Fiscal 1995 did not exceed the lesser of
$50,000 or 10% of his total annual salary and bonus.
</FN>
</TABLE>
EMPLOYMENT AGREEMENTS
Effective December 1, 1996, the Company entered into three-year employment
agreements with each of Gary D. Horne, the Company's Chairman Chief Executive
Officer and Stanley F. Zuk, the Company's President and Chief Operating Officer.
The terms of the employment agreements will automatically be extended for
successive one year terms unless the Company or the executive officer gives
written notice to the other at least 90 days prior to the then-scheduled
expiration date. The employment agreements provide for annual salaries initially
set at $160,000 and $140,000 (subject to annual cost-of-living adjustments) for
Messrs. Horne and Zuk, respectively.
Each employment agreement provides that the executive officer who is a
party thereto (the "Executive Officer") will continue to receive his salary for
a period of 12 months after termination of employment, if his employment is
terminated by the Company for any reason other than Cause (as defined in the
employment agreement), including death or disability (with such severance
payable in a lump sum in the case of death). The term Cause is defined in the
employment agreement to mean (a) an Executive Officer's act or omission which
constitutes a willful and material breach of the employment agreement which is
not cured within 30 days after the Executive Officer's receipt of notice of such
breach, (b) an Executive Officer's embezzlement or misappropriation of the
Company's assets for property or (c) an Executive Officer's conviction for a
criminal act that is a felony. Each employment agreement also prohibits the
Executive Officer from directly or indirectly competing with the Company for one
year after termination for any reason except Cause. If a Change of Control (as
defined in the employment agreement) occurs, the employment agreement provides
for the continued employment of the Executive Officer for a period of two years
following the Change of Control. The term Change of Control, as used in the
employment agreement, is defined to mean (a) any person's or group's
39
<PAGE>
acquisition of 15% or more of the combined voting power of the Company's
outstanding securities, or (b) in the event of any cash tender or exchange,
offer, merger or other business combination sale of assets or contested
election, the persons who were directors of the Company prior to such
transaction ceasing to constitute a majority of the Board of Directors following
the transaction. In addition, following the Change of Control, if the Executive
Officer's employment is terminated by the Company, or by the Executive Officer
for certain specified reasons (such as a reduction of compensation or a
diminution of duties), the Executive Officer will receive a lump sum cash
payment equal to the cash compensation received by the Executive Officer during
the 12 calendar months prior to termination.
The Company has obtained key man insurance in the amount of $1,000,000 on
the lives of each of Messrs. Horne and Zuk.
STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan (the "1996 Plan"), 60,000 shares
of Common Stock are reserved for issuance upon exercise of the options. The 1996
Plan is designed to serve as an incentive for retaining qualified and competent
directors, employees, consultants and independent contractors of the Company.
The Company's Board of Directors, or a committee thereof, administers and
interprets the 1996 Plan and is authorized to grant options thereunder to all
eligible employees of the Company, including directors and executive officers
(whether current or former employees) of the Company, as well as consultants and
independent contractors. The 1996 Plan provides for the granting of both
"incentive stock options" (as defined in Section 422 of the Internal Revenue
Code of 1986, as amended) and nonstatutory stock options. Incentive stock
options may only be granted, however, to employees. Options can be granted under
the 1996 Plan on such terms and at such prices as determined by the Board, or a
committee thereof, except that the per share exercise price of incentive stock
options granted under the 1996 Plan will not be less than the fair market value
of the Common Stock on the date of grant and, in the case of an incentive stock
option granted to a 10% stockholder, the per share exercise price will not be
less than 110% of such fair market value as defined in the 1996 Plan. In any
case, the exercise price of any stock option granted under the 1996 Plan will
not be less than 85% of the fair market value of the Common Stock on the date of
grant.
Options granted under the 1996 Plan that would otherwise qualify as
incentive stock options will not be treated as incentive stock options to the
extent that the aggregate fair market value of the shares covered by the
incentive stock options which are exercisable for the first time by any
individual during any calendar year exceeds $100,000.
Options granted under the 1996 Plan will be exercisable after the period or
periods specified in the option agreement. Options granted under the 1996 Plan
are not exercisable after the expiration of ten years from the date of grant and
are not transferable other than by will or by the laws of descent and
distribution. Adjustments in the number of shares subject to options granted
under the 1996 Plan can be made by the Board of Directors or the appropriate
committee in the event of a stock dividend or recapitalization resulting in a
stock split-up, combination or exchange of shares. Under the 1996 Plan, options
may become immediately exercisable in the event of a change in control. The 1996
Plan also authorizes the Company to make loans to optionees to enable them to
exercise their options.
As of the date of this Prospectus, the Company will grant options under the
1996 Plan to purchase 30,000 shares of Common Stock to three persons, including
options to purchase 10,000 shares of Common Stock to Robert Lettieri and options
to purchase 5,000 shares of Common Stock to Gregory S. Horne. Such options will
vest in three annual installments commencing one year from the date of grant,
will be exercisable at a price equal to the initial public offering price per
share of the shares of Common Stock offered hereby and will expire ten years
from the date of grant. In addition, exercise of the options is contingent on
the optionee's continued employment by the Company.
40
<PAGE>
CERTAIN TRANSACTIONS
ACQUISITION OF AFFILIATED ENTITY
On June 4, 1996, the Company acquired all the outstanding capital stock of
High Technology Computers, Inc. ("HTC") from Gary D. Horne and Stanley F. Zuk in
exchange for 155,352 and 40,277 shares of the Company's Common Stock,
respectively. The aggregate value of the shares of the Company's Common Stock
issued in exchange for all of the outstanding capital stock of HTC was
$2,566,808. HTC has conducted the Company's cable harness and other wire
technology product contract manufacturing operations for non-IBM customers since
1983. Management of the Company believes that this transaction was consummated
on terms no less favorable than could have been obtained from unaffiliated third
parties.
ADVANCES FROM STOCKHOLDER
In order to assist the Company with meeting its working capital needs, Gary
D. Horne has periodically advanced funds to the Company. Such advances,
including interest at the rate of 8% per annum, aggregated approximately
$605,000 at December 27, 1996. On March 4, 1997, Mr. Horne made an additional
advance of $150,000. Such advances are unsecured and repayable on demand;
however, Mr. Horne has agreed with the Company not to make demand until at least
July 1, 1998. The Company intends to repay such advances as cash flow permits.
No further advances from stockholders are contemplated after the consummation of
this Offering.
DEFERRED COMPENSATION AGREEMENTS
In January 1993, the Company entered into the Deferred Compensation
Agreements with John Halik and James Yessian, two co-founders and former
employees of the Company. Pursuant to the Deferred Compensation Agreements, the
Company agreed to pay each of Messrs. Halik and Yessian $30,000 per year in
deferred compensation for a 15-year period.
TRANSACTIONS WITH NETCOMP, INC.
The Company purchases computers, computer supplies and services from
Netcomp, which operates the ComputerLand franchise in Poughkeepsie, New York.
Netcomp is owned by Gary D. Horne and Stanley F. Zuk. Purchases from Netcomp
aggregated approximately $48,000 and $82,000 during Fiscal 1995 and Fiscal 1996,
respectively, and approximately $30,000 and $32,000 for the six months ended
December 29, 1995 and December 27, 1996, respectively.
TRANSACTION WITH GREGORY HORNE
In December 1995, the Company entered into an agreement with Gregory Horne
to sell 24 shares of the Company's Common Stock to Mr. Horne for $100,000, of
which $30,000 was paid upon execution of the agreement and the balance was
payable at the rate of $10,000 per year, without interest. In June 1996, the
Company and Mr. Horne mutually agreed to rescind the transaction, whereupon Mr.
Horne surrendered his stock certificates to the Company and the Company refunded
the $30,000 payment to Mr. Horne.
APPROVAL OF AFFILIATED TRANSACTIONS
Following completion of this Offering, all transactions between the Company
and its directors, executive officers and principal stockholders will be on
terms no less favorable than could be obtained from unaffiliated third parties
and have been and will be approved by a majority of the independent outside
directors of the Company, when elected.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of the Common Stock as of the date of this Prospectus, by (i) each person who
owns beneficially more than 5% of the outstanding Common Stock, (ii) each of the
Company's directors and executive officers, and (iii) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED
------------------------
NAME AND ADDRESS NUMBER OF SHARES PRIOR TO AFTER
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
- --------------------------------------- ------------------------ ----------- ----------
<S> <C> <C> <C>
Gary D. Horne(3) ..................... 197,407(3) 31.2% 12,5%
Stanley F. Zuk ........................ 109,322 17.3% 6.9%
Gregory Horne(4) ..................... 171,437 27.1% 10.9%
Robert Lettieri ..................... 0 0% 0%
William Becker
P.O. Box 170
Convent Station, NJ 07961(5)(6) ...... 181,086 22.2% 10.3%
Sanford I. Feld
Box 670, #12 Gumby Lane
Bernardsville, NJ 07095(5)(7) ......... 181,086 22.2% 10.3%
Marion L. Horne Turcot(8) ............ 85,706 13.5% 5.4%
Estate of Richard Backofen
c/o Edith Backofen
43 Mooress Hill Road
New Windsor, NY 12553 ............... 69,045 10.9% 4.4%
Frederic Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Drive
Woodbridge, NJ 07095(5) ............... 51,738 7.6% 3.2%
All directors and executive officers
as a group (four persons) ............ 478,166 75.5% 30.3%
<FN>
- ----------------
* Less than 1%.
(1) The business address of all directors and executive officers of the Company
and Marion L. Horne Turcot is c/o the Company, 1 Industry Street,
Poughkeepsie, New York 12603.
(2) The Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock beneficially
owned by them.
(3) Represents shares of Common Stock held by Horne Associates LLC. Gary D.
Horne disclaims beneficial ownership of the shares of Common Stock
benefically owned by Gregory Horne, his son, and Marion L. Horne Turcot, his
daughter.
(4) Gregory Horne disclaims beneficial ownership of the shares of Common Stock
benefically owned by Gary D. Horne, his father, and Marion L. Horne Turcot,
his sister.
(5) Represents shares of Common Stock issuable upon exercise of Noteholder
Warrants and Placement Agent Warrants. Does not give effect to the sale of
such securities upon consummation of this Offering. See "Concurrent
Offering."
(6) Includes securities held by a trust of which Mr. Becker is the trustee.
(7) Includes securities held by Mr. Feld's employee pension plan.
(8) Marion L. Horne Turcot disclaims beneficial ownership of the shares of
Common Stock beneficially owned by Gary D. Horne, her father, and Gregory
Horne, her brother.
</FN>
</TABLE>
42
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). Prior to the Offering, there are 632,917
shares of Common Stock and no shares of Preferred Stock issued and outstanding.
Upon consummation of the Offering, there will be 1,577,917 shares of Common
Stock and no shares of Preferred Stock issued and outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record and to a pro rata share of any dividends declared on the Common Stock by
the Board of Directors from funds legally available therefor. Upon liquidation
of the Company, each stockholder is entitled to share ratably in any assets
available for distribution after payment of all debts. Stockholders have no
preemptive, conversion or other subscription rights and there are no redemption
rights or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares to be issued in
connection with the exercise of the Underwriter's Warrants, when issued against
payment therefor, will be, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue a total of 1,000,000 shares of Preferred
Stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue Preferred Stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Company's Common Stock. In
the event of issuance, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. The Company has no present intention to issue any shares
of its Preferred Stock. In addition, the Company has agreed not to issue any
shares of Preferred Stock for a period of two years from the date of this
Prospectus without the prior written consent of the Representative.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the
stockholders. The rights of holders of Common Stock will be subject to, and may
be adversely affected by, the rights of holders of any Preferred Stock that may
be issued in the future. Although the Company has no present intention to issue
shares of Preferred Stock, any issuance of Preferred Stock, while potentially
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. Additionally, following this Offering, the Company will become subject
to the anti-takeover provisions of Section 203 of the DGCL, which will prohibit
the Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. Section 203 could have the
effect of delaying or preventing a change of control of the Company.
REGISTRATION RIGHTS
The Noteholders have one "demand" registration right (subject to certain
limitations) during the period the Noteholders Warrants are outstanding, as well
as unlimited "piggyback" registration rights (subject to certain limitations)
during that period. Moreover, until such time as the shares issuable upon
exercise of the Bridge Warrants may be sold without a registration statement,
Holders of the Bridge Warrants also have one "demand" registration right
(subject to certain limitations) and unlimited "piggyback" registration rights
(subject to certain limitations).
43
<PAGE>
TRANSFER AGENT
American Stock Transfer & Trust Company, New York, New York, has been
appointed as the transfer agent for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this Offering, the Company will have outstanding
1,577,917 shares of Common Stock. The 945,000 shares of Common Stock offered
hereby (1,086,750 shares if the Underwriters' over-allotment option is exercised
in full) will be freely transferable without restriction or further registration
under the Securities Act. The remaining 632,917 outstanding shares of Common
Stock, which are owned by the existing stockholders, will be "restricted
securities," as that term is defined in Rule 144 and may only be sold pursuant
to a registration statement under the Securities Act or an applicable exemption
from registration thereunder, including exemptions provided by Rule 144.
In general, under Rule 144, if a period of at least one year has elapsed
since the later of the date the "restricted securities" were acquired from the
Company or the date they were acquired from an Affiliate (as that term is
defined in Rule 144), then the holder of such restricted securities is entitled
to sell a number of shares within any three-month period that does not exceed
the greater of 1% of the then outstanding shares of the Common Stock
(approximately 15,779 shares immediately after this Offering) or the average
weekly reported volume of trading of the Common Stock on The Nasdaq SmallCap
Market during the four calendar weeks preceding such sale. The holder may only
sell such shares through unsolicited brokers' transactions or directly to market
makers. Sales under Rule 144 are also subject to certain requirements pertaining
to the manner of such sales, notices of such sales and the availability of
current public information concerning the Company. Affiliates may sell shares
not constituting restricted shares in accordance with the foregoing volume
limitations and other requirements but without regard to the one-year holding
period.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from the Company or the
date they were acquired from an Affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above.
Of the currently outstanding 632,917 shares of Common Stock, 69,045 shares
would be eligible for public sale pursuant to Rule 144 as of the date of this
Prospectus, and the remaining shares would become eligible for such public sale
commencing 90 days after the date of this Prospectus. Notwithstanding the
foregoing, officers and directors of the Company have agreed not to sell 250,000
of their shares for a period of five years from the date of this Prospectus
without the prior written consent of the Representative. Such period will be
reduced to two years, however, if the Company's cumulative net income, without
giving effect to any acquisitions or mergers subsequent to the date of this
Prospectus, equals or exceeds $2,800,000 for the two fiscal year period ending
June 30, 1998. Holders of an additional 313,872 outstanding shares of Common
Stock have agreed not to sell their shares for a period of two years from the
date of this Prospectus without the prior written consent of the Representative.
The Representative does not have any general policy with respect to the release
of shares prior to the expiration of the lock-up period. The Company's
directors, officers and stockholders beneficially owning more than 5% or more of
the Company's Common Stock have granted the Representative a right of first
refusal for five years from the date of this Prospectus with respect to any sale
of securities by them. In addition, the Noteholder Warrants and Placement Agent
Warrants will not be exercisable and may not be sold for a period of 12 months
from consummation of this Offering and the Bridge Warrants will not be
exercisable and may not be sold for a period of 18 months from consummation of
this Offering. Furthermore, the Noteholder Warrants and Placement Agent Warrants
will not be exercisable and may not be sold without the prior written consent of
the Representative for the subsequent 12 month period. No prediction can be made
as to the effect that future sales of Common Stock, or the availability of
shares of Common Stock for future sale, will have on the market price of the
Common Stock prevailing from time to time.
44
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom H.J. Meyers &
Co., Inc. is acting as representative (in such capacity, the "Representative"),
have severally and not jointly agreed, subject to the terms and conditions of
the Underwriting Agreement among the Company and the Underwriters (the
"Underwriting Agreement"), to purchase from the Company and the Company has
agreed to sell to the Underwriters on a firm commitment basis, the respective
number of shares of Common Stock set forth opposite their names below:
NUMBER OF SHARES
UNDERWRITER OF COMMON STOCK
- ------------------------------------------------- ------------------
H.J. Meyers & Co., Inc. ........................ 630,000
Brean Murray & Co., Inc. ........................ 35,000
Commonwealth Associates ........................ 35,000
Frederick & Company, Inc. ..................... 35,000
Hoefer & Arnett, Incorporated .................. 35,000
John G. Kinnard and Company, Incorporated ...... 35,000
LT Lawrence & Co., Inc. ........................ 35,000
Madison Securities Corporation .................. 35,000
Neidiger, Tucker, Bruner, Inc. .................. 35,000
Smith, Moore & Co. .............................. 35,000
---------
Total: ....................................... 945,000
=========
The Underwriters are committed to purchase all shares of Common Stock
offered hereby, if any of such shares of Common Stock are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to the approval of certain legal matters by their counsel and
various other conditions specified therein.
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock directly to the public at the initial public
offering price set forth on the cover page of this Prospectus and that the
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD") a selling concession of not in
excess of $0.28 per share of Common Stock. Such dealers may reallow a concession
not in excess of $0.10 per share of Common Stock to certain other dealers who
are NASD members. After the commencement of this Offering, the public offering
price, concession and re-allowance may be changed by the Representative.
The Representative has advised the Company that it does not anticipate
sales to discretionary accounts by the Underwriters to exceed 5% of the total
number of shares of Common Stock offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make. The Company has also
agreed to pay to the Representative a non-accountable expense allowance equal to
3% of the gross proceeds derived from the sale of the Common Stock underwritten,
$100,000 of which has been paid to date.
The Company has granted to the Underwriters an over-allotment option,
exercisable during the 30-day period from the date of this Prospectus, to
purchase from the Company up to an additional 141,750 shares of Common Stock at
the initial public offering price per share of Common Stock offered hereby, less
the underwriting discount and the non-accountable expense allowance. The
Underwriters may exercise such option only for the purpose of covering
over-allotments, if any, incurred in the sale of the Common Stock offered
hereby. To the extent the Underwriters exercise such option in whole or in part,
each Underwriter will have a firm commitment, subject to certain conditions, to
purchase the number of the additional shares of Common Stock proportionate to
its initial commitment and the Company will be obligated to sell such shares of
Common Stock to the Underwriters.
45
<PAGE>
Officers and directors of the Company have agreed not to sell 250,000 of
their shares for a period of five years from the date of this Prospectus without
the prior written consent of the Representative. Holders of an additional
313,872 outstanding shares of Common Stock have agreed not to sell their shares
for a period of two years from the date of this Prospectus without the prior
written consent of the Representative. In addition, the Noteholder Warrants and
Placement Agent Warrants will not be exercisable and may not be sold for a
period of 12 months from consummation of this Offering and the Bridge Warrants
will not be exercisable and may not be sold for a period of 18 months from
consummation of this Offering. Furthermore, for the subsequent 12 month period,
the Noteholder Warrants and Placement Agent Warrants will not be exercisable and
may not be sold without the prior written consent of the Representative. An
appropriate legend shall be marked on the face of the certificates representing
all such securities. The Representative has no general policy with respect to
the release of shares prior to the expiration of the lock-up period, and no
present intention to waive or modify any of these restrictions on the sale of
Company securities. However, the Representative may in the future consider such
waivers or modifications if, in its opinion, such waiver or modification would
not materially impact the market for the Company's securities.
The Underwriting Agreement provides that, other than the issuance of
options pursuant to the 1996 Plan, the Company will not offer any shares of
Common Stock, options to purchase Common Stock, warrants or any other equity or
debt security within one year from the date of this Prospectus without the
consent of the Representative. In addition, for a period of two years from the
date of this Prospectus, the Company will not issue or sell any securities
pursuant to Regulation S under the Securities Act without the prior written
consent of the Representative.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, the Representative's Warrants to
purchase from the Company up to 94,500 shares of Common Stock. The
Representative's Warrants are initially exercisable at a price of $8.3375 per
share of Common Stock, for a period of four years commencing one year from the
effective date of this Prospectus and are restricted from sale, transfer,
assignment or hypothecation for a period of 12 months from the date hereof,
except to officers of the Representative. The Representative's Warrants provide
for adjustment in the number of shares of Common Stock issuable upon exercise
thereof and in the exercise price of the Representative's Warrants as a result
of certain events, including subdivisions and combinations of the Common Stock.
The Representative's Warrants grant to the holders thereof certain rights of
registration with regard to the Common Stock issuable upon exercise thereof.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock has
been determined by negotiation between the Company and the Representative and
does not necessarily bear any relationship to the Company's asset value, net
worth, or other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, include the history
of and prospects for the industry in which the Company competes, an assessment
of the Company's management, the prospects of the Company, its capital
structure, the market for initial public offerings and certain other factors as
were deemed relevant.
The Company has agreed to pay the Representative a consulting fee of
$72,000 for financial consulting services to be performed over a one-year period
payable upon consummation of this Offering. The Company has also agreed that,
for a period of two years from consummation of this Offering, if it participates
in any merger, consolidation or other transaction which the Representative has
brought to the Company, or for which the Company retains the Representative for
consultation or other services in connection therewith (including an acquisition
of assets or stock in which it pays for the acquisition, in whole or in part,
with shares of Common Stock or other securities), then it will pay for the
Representative's services an amount based upon a percentage of the consideration
paid in the transaction ranging from 7% of the first $3,000,000 to 3% of any
consideration in excess of $5,000,000. There are no current plans, proposals,
arrangements or understandings with the Representative with respect to any
financing, merger, acquisition or other transaction. In addition, the
Representative has
46
<PAGE>
the right, for a period of three years from the date of this Prospectus, to
designate an observer to the Company's Board of Directors, which individual may
be a director, officer, employee or affiliate of the Representative.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 141,750 shares of Common Stock, by
exercising the over-allotment option referred to above. In addition, the
Representative may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer participating
in the Offering) for the account of other Underwriters, the selling concession
with respect to Common Stock that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued at
any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which is filed as an exhibit to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Broad and Cassel, a general partnership including
professional associations, Miami, Florida. Orrick, Herrington & Sutcliffe LLP,
New York, New York, has acted as counsel to the Underwriters in connection with
this Offering.
EXPERTS
The consolidated financial statements as of June 30, 1996 and for the years
ended June 30, 1995 and 1996, included in this Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (such report includes an explanatory paragraph that refers to the
restatement of the June 30, 1995 consolidated financial statements), and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (collectively with any amendments thereto, the "Registration Statement")
under the Securities Act, with respect to the securities being offered by this
Prospectus. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. The
statements contained in this Prospectus as to the contents of any contract or
other document identified as exhibits in this Prospectus are not necessarily
complete and, in each instance, reference is made to a copy of such
47
<PAGE>
contract or document filed as an exhibit to the Registration Statement, each
statement being qualified in any and all respects by such reference. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement and to the exhibits filed as a part
hereof.
This Registration Statement and all other information filed by the Company
with the Commission may be inspected without charge at the principal reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of all or any part thereof may be obtained upon payment of
fees prescribed by the Commission from the Public Reference Section of the
Commission at its principal office in Washington, D.C. set forth above. Such
material may also be accessed electronically by means of the Commission's home
page on the Internet at http://www.sec.gov.
48
<PAGE>
ASD GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
------
Independent Auditors' Report ...................................................... F-2
Consolidated Balance Sheets as of June 30, 1996 and December 27, 1996 (Unaudited) ... F-3
Consolidated Statements of Operations for the Years Ended June 30, 1995 (as restated)
and 1996 and the Six Months Ended December 29, 1995 and December 27, 1996
(Unaudited) ........................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1995
(as restated) and 1996 and the Six Months Ended December 29, 1995 and
December 27, 1996 (Unaudited) ...................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1995 (as restated)
and 1996 and the Six Months Ended December 29, 1995 and December 27, 1996
(Unaudited) ........................................................................ F-6
Notes to Consolidated Financial Statements .......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
ASD Group, Inc.
Poughkeepsie, New York
We have audited the accompanying consolidated balance sheet of ASD Group,
Inc. and subsidiaries as of June 30, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended June 30, 1995 and 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ASD Group, Inc. and
subsidiaries as of June 30, 1996, and the results of their operations and their
cash flows for the years ended June 30, 1995 and 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 11, the accompanying 1995 consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
August 15, 1996
(October 21, 1996 as to Note 11 and December 26, 1996 as to Note 12)
F-2
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 27,
1996 1996
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash ............................................................... $ 458,911 $ 451,783
Accounts receivable, less allowance for doubtful accounts of $383,000
and $63,000 respectively ............................................ 2,737,163 1,892,607
Inventory ......................................................... 5,954,571 5,258,896
Prepaid expenses and other current assets ........................... 56,372 121,224
Deferred tax asset ................................................ 313,449 119,212
------------- ------------
Total current assets ............................................. 9,520,466 7,843,722
Property, plant and equipment, net ................................. 4,736,779 4,613,589
Deferred tax asset ................................................... 959,499 1,271,736
Other assets ......................................................... 637,735 1,038,804
------------- ------------
Total assets ......................................................... $ 15,854,479 $14,767,851
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................................. $ 1,072,710 $ 1,937,537
Accounts payable ................................................... 2,693,452 1,791,198
Accrued expenses ................................................... 1,202,228 877,079
Deferred revenues ................................................... 69,666 -
------------- ------------
Total current liabilities ....................................... 5,038,056 4,605,814
Long-term debt ...................................................... 9,602,158 8,783,038
Deferred compensation ................................................ 301,085 302,007
------------- ------------
Total liabilities ................................................ 14,941,299 13,690,859
------------- ------------
Contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued ......................................................... - -
Common stock, $.01 par value, 10,000,000 shares authorized,
632,917 shares issued and outstanding .............................. 6,329 6,329
Paid-in capital ................................................... - 327,000
Retained earnings ................................................... 906,851 743,663
------------- ------------
Total stockholders' equity ....................................... 913,180 1,076,992
------------- ------------
Total liabilities and stockholders' equity ........................... $ 15,854,479 $14,767,851
============= ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
--------------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
--------------- --------------- --------------- --------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ........................ $ 18,655,383 $ 26,111,896 $ 13,326,327 $ 8,209,844
Cost of goods sold ............... 14,834,094 20,437,889 10,662,099 6,033,266
------------ ------------- ------------ -----------
Gross profit .................. 3,821,289 5,674,007 2,664,228 2,176,578
------------ ------------- ------------ -----------
Operating expenses:
Sales and marketing ............ 240,398 288,815 114,749 96,216
General and administrative ...... 2,516,413 4,203,060 2,125,938 1,645,966
------------ ------------- ------------ -----------
Total operating expenses ...... 2,756,811 4,491,875 2,240,687 1,742,182
------------ ------------- ------------ -----------
Income from operations ......... 1,064,478 1,182,132 423,541 434,396
Other income (expense) ............ (675) 199,118 216,110 50,553
Interest expense .................. 762,891 976,850 373,909 766,137
------------ ------------- ------------ -----------
Income (loss) before
income taxes .................... 300,912 404,400 265,742 (281,188)
Provision (benefit) for
income taxes ..................... 129,000 (3,000) (61,000) (118,000)
------------ ------------- ------------ -----------
NET INCOME (LOSS) ............... $ 171,912 $ 407,400 $ 326,742 $ (163,188)
============ ============= ============ ===========
Net income (loss) per
common share ..................... $ .27 $ .64 $ .52 $ (.26)
============ ============= ============ ===========
Weighted average common shares
outstanding ..................... 632,917 632,917 632,917 632,917
============ ============= ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- --------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1994 ...... - $- 632,917 $6,329 $ - $ 327,539 $ 333,868
Net income (restated) ...... - - - - - 171,912 171,912
-- --- --------- ------- --------- ---------- -----------
Balance, June 30, 1995
(restated) .................. - - 632,917 6,329 - 499,451 505,780
Net income .................. - - - - - 407,400 407,400
-- --- --------- ------- --------- ---------- -----------
Balance, June 30, 1996 ...... - - 632,917 6,329 - 906,851 913,180
Net loss (unaudited) ......... - - - - - (163,188) (163,188)
Fair value of warrants issued
(unaudited) (Note 12) ...... - - - - 327,000 - 327,000
-- --- --------- ------- --------- ---------- -----------
Balance, December 27, 1996
(unaudited) .................. - $- 632,917 $6,329 $327,000 $ 743,663 $ 1,076,992
== === ========= ======= ========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
------------------------------ --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
------------- -------------- --------------- --------------
(RESTATED) (UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) ..................... $ 171,912 $ 407,400 $ 326,742 $ (163,188)
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization ......... 365,321 383,449 157,222 315,589
Benefit for doubtful accounts ......... (204,945) (45,030) (45,000) (90,000)
Deferred compensation ............... 27,582 29,790 14,894 16,086
Interest accrued on advances from
stockholder ......................... 35,998 43,117 21,559 23,284
Deferred income taxes ............... 118,642 (26,594) (76,335) (118,000)
Gain on sale of plant ............... - (166,734) (166,734) -
Changes in assets and liabilities:
Accounts receivable .................. (639,883) 532,293 760,788 934,556
Inventory ........................... (3,269,755) (1,776,803) (437,828) 695,675
Prepaid expenses and other
current assets ...................... (19,903) 125,309 43,185 (64,852)
Other assets ........................ (20,090) (112,668) (26,425) 22,219
Accounts payable ..................... 2,264,592 (288,111) (508,876) (902,254)
Accrued expenses ..................... 729,276 (323,192) 392,825 (325,149)
Deferred revenues .................. (195,677) (725,899) (623,877) (69,666)
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities ............... (636,930) (1,943,673) (167,860) 274,300
------------ ------------ ------------ ------------
Investing activities:
Net proceeds from sale of plant ......... - 591,781 591,781 -
Capital expenditures .................. - (171,790) - (7,741)
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities ............... - 419,991 591,781 (7,741)
------------ ------------ ------------ ------------
Financing activities:
Borrowings .............................. 750,000 3,464,355 1,400,000 1,100,000
Payments of long-term debt ............ (216,591) (1,312,206) (1,028,517) (1,042,825)
Financing costs ........................ - (502,644) - (315,698)
Payments of deferred compensation ...... (22,662) (23,834) (12,756) (15,164)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities ............... 510,747 1,625,671 358,727 (273,687)
------------ ------------ ------------ ------------
Net increase (decrease) in cash ......... (126,183) 101,989 782,648 (7,128)
Cash, beginning of period ............... 483,105 356,922 356,922 458,911
------------ ------------ ------------ ------------
Cash, end of period ..................... $ 356,922 $ 458,911 $ 1,139,570 $ 451,783
============ ============ ============ ============
Supplemental disclosure:
Cash paid during the period for:
Income taxes ........................... $ 2,521 $ 32,631 $ 25,335 $ 4,510
============ ============ ============ ============
Interest .............................. $ 392,352 $ 1,268,779 $ 317,079 $ 493,048
============ ============ ============ ============
Notes exchanged for amounts owed
to vendors ............................. $ 553,389 $ 198,403 $ 90,920 $ -
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION
ASD Group, Inc. ("ASD") and its wholly-owned subsidiaries (the "Company")
operate in one business segment. The Company is a provider of contract
manufacturing and engineering services to domestic original equipment
manufacturers. The Company provides a wide range of services including product
engineering and design, procurement, precision fabrication of sheet metal and
machined parts, printed circuit board assembly, electro-mechanical assembly and
functional testing.
On June 4, 1996, ASD acquired all of the outstanding capital stock of High
Technology Computers, Inc. ("HTC") for 195,629 shares of the Company's common
stock. ASD and HTC were under common ownership. HTC conducts certain
manufacturing operations for ASD. The transaction has been accounted for similar
to a pooling of interests and the accompanying consolidated financial statements
include the historical accounts of HTC for all periods presented.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION-The accompanying consolidated financial
statements include the consolidated accounts of ASD Group, Inc. and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
REVENUE RECOGNITION-Sales are recorded as products are shipped or when
services are rendered.
FINANCING COSTS-During the year ended June 30, 1996 and six months ended
December 27, 1996, the Company incurred $373,851 and $160,433, respectively, in
connection with debt financings (see Note 4) and incurred $128,793 and $155,265,
respectively, in connection with an anticipated initial public offering. These
costs have been capitalized. The debt financing costs will be amortized over the
terms of the financings and the costs associated with the initial public
offering will be charged to paid-in capital upon consummation of the initial
public offering. Amortization of the financing costs for the year ended June 30,
1996 and six months ended December 27, 1996 was $22,500 and $136,158,
respectively. All of the above costs are included in other assets at June 30,
1996 and December 27, 1996.
PROPERTY, PLANT, AND EQUIPMENT-Property, plant and equipment are stated at
cost. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets which range from 5 to 40 years. The net realizable
value of the idle property approximates its carrying value.
INVENTORY-Inventory, consisting primarily of work-in-process, is determined
under the lower of cost (first-in, first-out method) or market. The Company does
not maintain a reserve for inventory impairment. Inventory that becomes obsolete
because of customer required changes or residual inventory is written-off at the
time the job is completed or when an engineering change is implemented.
INCOME TAXES-Deferred income taxes are provided for the temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities using presently enacted tax rates.
F-7
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES-(CONTINUED)
CONCENTRATION OF CREDIT RISK-Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
trade receivables. The Company performs ongoing credit evaluations of its
customers' financial conditions and generally does not require collateral.
Additionally, in November 1994 the Company acquired insurance for bad debts for
certain rated customers. The insurance policy assures a minimum recovery of 80%
of the maximum established by the insurer per customer insured. Customers that
accounted for 10% or more of the Company's consolidated sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE
30, SIX MONTHS ENDED
----------------- --------------------------------
DECEMBER 29, DECEMBER 27,
CUSTOMER 1995 1996 1995 1996
- ----------------------------------------- ------- ------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gerber Scientific Products ............ 20% 16% 17% 11%
ENI .................................... 19 20 18 18
IBM .................................... 19 - - -
S&K Products International, Inc. ...... 13 14 13 10
Lockheed Martin Corporation ............ - 13 17 18
Bruce Technologies International ...... - 10 10 -
--- ---- --- --
71% 73% 75% 57%
===== ===== ==== ====
</TABLE>
NET INCOME (LOSS) PER COMMON SHARE-Net income (loss) per common share is
computed using the weighted average number of common and common equivalent
shares (when dilutive) outstanding during each period.
STOCK SPLIT-On June 10, 1996 the Company effected a 5,753.79 for 1 split of
its common stock resulting in 632,917 shares outstanding. All references in the
accompanying consolidated financial statements to the number of common shares
and per share amounts have been retroactively restated to reflect the stock
split.
INTERIM FINANCIAL STATEMENTS-The accompanying consolidated balance sheet as
of December 27, 1996 and the statements of operations, stockholders' equity, and
cash flows for the six months ended December 29, 1995 and December 27, 1996 are
unaudited but, in the opinion of management, include all adjustments (consisting
of normal, recurring adjustments) necessary for a fair presentation of results
for these interim periods.
MANAGEMENT ESTIMATES-The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
F-8
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 30, DECEMBER 27,
1996 1996
--------------- --------------
(UNAUDITED)
Land ................................. $ 563,937 $ 563,937
Buildings ........................... 1,633,327 1,633,327
Leasehold improvements ............... 866,568 866,568
Machinery and equipment ............... 2,670,034 2,677,775
Automobiles ........................... 47,956 47,956
------------ -----------
5,781,822 5,789,563
Less: accumulated depreciation ...... (2,537,182) (2,651,901)
------------ ------------
3,244,640 3,137,662
------------ ------------
Idle property:
Land and building .................. 1,923,865 1,923,865
Less: accumulated depreciation ...... (431,726) (447,938)
------------ ------------
1,492,139 1,475,927
------------ ------------
$ 4,736,779 $ 4,613,589
============ ============
Idle property represents facilities that are temporarily not being used in
the Company's operations. The Company intends to use these facilities commencing
in fiscal 1998.
On August 1, 1995, the Company sold its North Carolina facility for net
cash proceeds of $591,781, which was used to repay outstanding borrowings. The
sale resulted in a net gain of $166,734 for financial statement purposes which
is included in other income in the accompanying consolidated statements of
operations for the year ended June 30, 1996 and six months ended December 29,
1995.
F-9
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 27,
1996 1996
------------- --------------
(UNAUDITED)
<S> <C> <C>
Original Issue Discount Promissory Notes-interest at 10%, due
April 28, 1997 (see Note 12) .................................... $ - $ 1,065,248
Senior Secured Notes- interest at 10%, interest only through
December 31, 1997, due June 30, 1999, secured by inventory
(see Note 12) ................................................... 2,000,000 2,000,000
Notes Payable-Bank of New York, interest at 60% of prime,
due May 1, 1997, secured by real property ........................ 56,951 33,118
Notes Payable-Key Bank, interest at prime plus 1%,
due December 1, 1998, secured by equipment ..................... 160,696 132,759
Notes Payable-Bankers Trust Company, interest at prime
plus 1.5%, due June 30, 1997, secured by equipment ............... 504,026 455,226
Revolving Line of Credit-Bankers Trust Company, interest at
prime plus 1.5%, due December 31, 1997. Collateralized by
accounts receivable, equipment and inventory .................... 3,674,146 2,926,480
Mortgage Payable-Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property ...... 1,946,369 1,912,969
Mortgage Payable-Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property ...... 1,466,013 1,434,413
Advances From Stockholder, plus accrued interest of $132,112
and $155,396-interest at 8%, repayable no earlier than July 1,
1998 ............................................................ 582,081 605,365
Notes Payable to Vendors-interest at various rates, secured by
certain assets ................................................... 266,158 138,231
Other ............................................................ 18,428 16,766
------------ ------------
10,674,868 10,720,575
Less: current portion .......................................... 1,072,710 1,937,537
------------ ------------
$ 9,602,158 $ 8,783,038
============ ============
</TABLE>
On August 17, 1995, the Company received a $400,000 increase to the
revolving line of credit (the "Line") with Poughkeepsie Savings Bank (the
"Bank") and the maturity date and interest rates were adjusted on all debt owed
to the Bank. The Company was required to make interest only payments to the Bank
until February 1, 1996, at which time principal payments commenced. The interest
rate on all debt was increased to 9% through December 31, 1995.
On December 28, 1995, the Company reached an agreement with the Bank
increasing the Line by $1,000,000 to $3,730,000 and extending the maturity date
to December 31, 1997. The interest rate is prime plus 1.5%. Additionally, the
interest rate on all other outstanding debt owed to the Bank is prime plus 1.5%.
The Line contains certain financial operating covenants.
The Company is required to pay the Bank as additional interest ("Additional
Interest") the lesser of a) $500,000 or b) ten percent (10%) of the net cash
proceeds received by the Company described in (i), (ii), (iii) or (iv) below:
The happening of any one or more of the following events will trigger the
F-10
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
4. LONG-TERM DEBT-(CONTINUED)
immediate obligation of the Company, but in no event more than $500,000 from (i)
the sale of all or any of its shares of capital stock, (ii) venture capital
funds raised, (iii) bridge loan financing obtained, or (iv) the successful
completion of an initial public offering. The obligation of the Company to make
such payments will continue until the full amount of Additional Interest is paid
in full.
On December 29, 1995, the Company issued $1,000,000 of senior secured notes
(the "Notes") to a group of investors. Interest at 10% is payable quarterly
commencing March 31, 1996. The Notes are secured by a first lien on the
Company's inventory. Monthly principal payments will commence in January 1998
until paid in full in June 1999. As a result of this financing, the Company is
required to pay 10% of the proceeds, or $100,000, in Additional Interest to the
Bank. This amount was included in accrued expenses at June 30, 1995. On February
16, 1996, the Company obtained an additional $1,000,000 from notes issued to the
same group of investors. The $100,000 Additional Interest due to the Bank as a
result of this financing is being charged to expense during the term of the
extended Line. The Notes are due and payable upon consummation of an initial
public offering of not less than $5,000,000. In addition, the investors will
receive upon consummation of an initial public offering, $2,000,000 in shares of
common stock (347,826 shares at an offering price of $5.75 per share) and
warrants to purchase $2,000,000 in shares of common stock (347,826 shares at an
offering price of $5.75 per share) exercisable over a five year period. In
connection with the issuance of the Notes, the investment banking firm which
assisted in the placement of the Notes received warrants to purchase $200,000 in
shares of common stock (34,783 shares at an offering price of $5.75 per share)
exercisable over a five year period. The warrants to be issued to the investors
and to the investment banking firm will be accounted for at the estimated fair
value of the warrants at the date of issuance. See Note 12.
In April 1996, the Bank notified the Company that it had sold the Company's
outstanding loan portfolio ($6,729,088 at December 27, 1996) to Bankers Trust
Company ("BTCo."). On May 31, 1996, the Company purchased an option for $76,748
from BTCo. that will allow the Company to buy-out the outstanding loans at a
discount of up to $460,487, as well as the exclusion of any Additional Interest
payable at the date of the exercise of the option. The option expires June 30,
1997 and can be exercised after the completion of an initial public offering or
bank refinancing. If the option is exercised on or before June 30, 1997, the
cost of the option will reduce the total indebtedness.
Annual principal payments are as follows:
12 MONTHS ENDING
DECEMBER
- -------------------
1997 ......... $ 1,937,537
1998 ......... 8,773,627
1999 ......... 4,142
2000 ......... 4,485
2001 ......... 784
-------------
$ 10,720,575
=============
The prime rate at December 27, 1996 was 8.25%.
5. DEFERRED COMPENSATION
The Company has a deferred compensation agreement with two former
employees. The agreement requires the payment of $450,000 to each employee over
a 15 year period. The obligations have been recorded at their net present value
using a discount rate of 8%.
F-11
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
On June 10, 1996, the Company's Board of Directors authorized 1,000,000
shares of preferred stock, $.01 par value. Designations, rights and preference
of the preferred stock will be determined by the Board of Directors. No shares
of preferred stock have been issued.
COMMON STOCK:
On June 10, 1996, the Company's Board of Directors increased the authorized
common stock to 10,000,000 shares and effected a 5,753.79 for 1 split of its
common stock resulting in 632,917 shares outstanding.
1996 STOCK OPTION PLAN:
On June 25, 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"). The 1996 Plan provides for the issuance of a maximum of 60,000 shares of
common stock pursuant to the future grant to employees and others of incentive
stock options and nonstatutory stock options.
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
-------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
---------- ------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal ...... $ 8,264 $ 19,111 $ 12,422 $ -
State ......... 2,094 4,483 2,913 -
--------- ---------- ---------- -----------
10,358 23,594 15,335 -
--------- ---------- ---------- -----------
Deferred:
Federal ...... 96,100 (21,541) (61,831) (95,580)
State ......... 22,542 (5,053) (14,504) (22,420)
--------- ---------- ---------- -----------
118,642 (26,594) (76,335) (118,000)
--------- ---------- ---------- -----------
$129,000 $ (3,000) $ (61,000) $ (118,000)
========= ========== ========== ===========
</TABLE>
F-12
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
7. INCOME TAXES-(CONTINUED)
A reconciliation of the income tax provision (benefit) to the amount
computed using the Federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, SIX MONTHS ENDED
---------------------------- --------------------------------
DECEMBER 29, DECEMBER 27,
1995 1996 1995 1996
----------- -------------- --------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income tax at statutory rate ......... $102,310 $ 137,496 $ 89,740 $ (95,332)
State income taxes and other (net of
Federal benefit) ..................... 26,690 31,504 21,260 (22,668)
Release of valuation allowance ...... - (172,000) (172,000) -
--------- ----------- ---------- -----------
$129,000 $ (3,000) $ (61,000) $ (118,000)
========= =========== ========== ===========
</TABLE>
The net deferred tax asset consists of the following:
JUNE 30, DECEMBER 27,
1996 1996
-------------- --------------
(UNAUDITED)
Net operating loss carryforward ...... $ 1,490,582 $ 1,793,544
Capital loss carryforward ............ 228,333 228,333
Allowance for doubtful accounts ...... 160,847 26,499
Deferred compensation ............... 126,456 126,843
Accrued vacation ..................... 46,729 19,209
Accrued interest ..................... 55,487 5,275
Other ................................. 77,122 94,794
Depreciation ........................ (684,275) (675,216)
------------ -----------
1,501,281 1,619,281
Valuation allowance .................. (228,333) (228,333)
------------ -----------
$ 1,272,948 $ 1,390,948
============ ===========
Deferred taxes result from temporary differences in the recognition of
revenues and expenses for income tax and financial statement purposes. Deferred
tax assets are reduced by a valuation allowance relating to the utilization of a
capital loss carryforward which management believes that it is more likely than
not will not be realized. During the year ended June 30, 1996, the Company sold
its North Carolina facility (see Note 3) thereby generating a capital gain for
income tax purposes of $528,000 on the sale. Therefore, the Company reduced the
valuation allowance by approximately $172,000 relating to the tax benefits from
this sale.
As of December 27, 1996, the Company has a Federal net operating loss
carryforward of approximately $4,200,000 which expires in 2011.
8. RELATED PARTY TRANSACTIONS
THE COMPANY PURCHASES COMPUTERS, COMPUTER SUPPLIES AND SERVICES FROM
NETCOMP, INC., A company under common ownership. Purchases during the years
ended June 30, 1995 and 1996 and the six months ended December 29, 1995 and
December 27, 1996 were approximately $48,000, $82,000, $30,000 and $32,000,
respectively.
F-13
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
9. PENSION PLAN
The Company has a defined contribution plan covering all full time
employees who have worked at least 1,000 hours during the plan year, who have
one year of service, and are age twenty-one or older. The Plan is subject to
provisions of the Employee Retirement Income Security Act of 1974. The Company
may contribute an amount up to 15% of compensation of all plan participants.
There was no pension expense attributed to this plan for the years ended June
30, 1995 and 1996 and the six months ended December 29, 1995 and December 27,
1996.
10. CONTINGENCIES
The Company is a defendant in various lawsuits which arose in the normal
course of business. In the opinion of management, none of the cases are expected
to have a material effect on the consolidated financial statements of the
Company.
11. RESTATEMENT
Subsequent to the original issuance of the accompanying consolidated
financial statements for the year ended June 30, 1995, the Company's management
determined that the inventory balance as of June 30, 1995 was overstated by
$406,000 and that $50,000 of depreciation was not recorded on idle property. As
a result, the accompanying 1995 consolidated financial statements have been
restated from the amounts previously reported to reflect the proper recording of
these assets. The significant effects of these restatements on the 1995
consolidated financial statements was to increase cost of goods sold by
$456,000, and to decrease income before income taxes, net income and net income
per common share by $456,000, $255,000 and $.40, respectively. The need for an
inventory adjustment was caused by a data entry error which occured during the
transition from the Company's old work-in-process accounting software to the POM
manufacturing software currently in use. As the Company has completed the
transition to the POM manufacturing software, which provides for more frequent
operating reports and detailed tracking of work-in-process, the Company believes
that the likelihood of a recurrence has been substantially reduced.
12. SUBSEQUENT EVENTS-FINANCINGS
OID NOTES:
On August 29, 1996, the Company issued $1,100,000 10% Original Issue
Discount Promissory Notes (the "OID Notes") to investors. The OID Notes were due
at the earliest of 150 days from the date of issuance, the closing date of an
initial public offering or upon the sale of the Company. The OID Notes agreement
contains requirements as to the Company maintaining a specified minimum amount
of stockholders' equity. At September 27, 1996, the Company was in default of
this requirement. The interest rate on the OID Notes increased to 12.5%
retroactively as of the date of issuance. Although the Bridge Investors have not
granted the Company a waiver with respect to this matter, the Bridge Investors
have advised the Company in writing that they do not intend to take any action
with respect to the OID Notes until the earlier of consummation of an initial
public offering at which time the OID Notes will be repaid or May 23, 1997.
In connection with the issuance of the OID Notes, the Company issued
112,500 and 11,250 warrants to purchase shares of common stock to the investors
and the placement agent, respectively. The warrants have an exercise price of
51.5% of an initial public offering price per share ($2.96 at an
F-14
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
12. SUBSEQUENT EVENTS-FINANCINGS-(CONTINUED)
offering price of $5.75 per share) and are exercisable during the five year
period commencing six months after the closing of an initial public offering;
provided, however, the warrants are not exercisable and may not be sold for 18
months following consummation of the initial public offering. In the event that
an initial public offering has not been completed within nine months from the
date of issuance of the OID Notes, the investors and the placement agent have
the right to put the warrants to the Company at $1.00 each. The fair value of
the warrants ($82,000) at the date of issuance was recorded as paid-in-capital
with a corresponding reduction to the OID Notes' balance. The discount on the
OID Notes is being amortized as additional interest expense over the term of the
OID Notes. Such amortization was $47,248 during the six months ended December
27, 1996.
If the principal amount of the OID Notes is not repaid at maturity, the
warrants will convert into common stock representing a 20% equity interest in
the Company.
SENIOR SECURED NOTES:
On December 20, 1996, the terms of the Notes (see Note 4) were amended to
eliminate the issuance of the $2,000,000 in shares of common stock (347,826
shares at an offering price of $5.75 per share) and warrants to purchase
$2,000,000 in shares of common stock (347,826 shares at an offering price of
$5.75 per share). The amended agreement provides, among other things, that
$900,000 in principal amount of the Notes is payable upon consummation of an
initial public offering, with the remaining $1,100,000 of the Notes, plus
accrued interest thereon, payable 13 months after consummation of an initial
public offering. In addition, the first lien on the Company's inventory was
released. In connection with the amended agreement, the Company issued warrants
to the investors to purchase 500,000 shares of common stock. The warrants have
an exercise price of 47.5% of the initial public offering price per share ($2.73
at an offering price of $5.75 per share). The warrants are exercisable over the
ten-year period; provided however, the warrants are not exercisable and may not
be sold for 12 months following consummation of the initial public offering. In
addition, for the subsequent 12 month period the warrants are not exercisable
and may not be sold without the prior written consent of the Company and H.J.
Meyers & Co., Inc., the representative of the several underwriters of the
Company's proposed public offering. The fair value of the warrants in excess of
the underlying common stock ($245,000) at the date of issuance will be amortized
over the term that the underlying debt remains outstanding.
FINANCING COMMITMENTS:
On December 26, 1996, a stockholder agreed to provide the Company with
additional loans of up to $150,000 until June 27, 1997 on the same terms and
conditions as disclosed in Note 4. In March 1997, the stockholder loaned the
Company $150,000.
On December 26, 1996, the investors in the OID Notes agreed to provide the
Company with additional loans of up to $250,000 at 10% interest rate if the
Company fails to consummate an initial public offering by March 31, 1997. This
loan would also be accompanied by an equity participation to be determined.
F-15
<PAGE>
[INSIDE BACK COVER]
A parcel drop system for which the Company's product design engineers assisted
the customer in final product design.
An atomic force microscope sub-system fabricated, assembled and tested to the
customer's specifications.
<PAGE>
[INSIDE BACK COVER]
A printed circuit board assembly.
A high speed transmission ribbon cable assembly (top), a wire harness assembly
(left), a molded cable assembly (right), and power jumper and signal jumper
assemblies (bottom).
<PAGE>
[INSIDE BACK COVER]
A control sub-system for a four-color process sign plotter.
A control sub-system for an automated letter cutting plotter.
<PAGE>
---------------------------- ----------------------------
---------------------------- ----------------------------
NO UNDERWRITER, DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
PAGE
------
PROSPECTUS SUMMARY ......... 3
RISK FACTORS ............... 7
THE COMPANY .................. 16
USE OF PROCEEDS ............ 17
CAPITALIZATION ............... 18
DILUTION ..................... 19
DIVIDEND POLICY ............ 19
CONCURRENT OFFERING ......... 20
SELECTED FINANCIAL DATA ...... 21
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS ... 22
BUSINESS ..................... 29
MANAGEMENT .................. 38
CERTAIN TRANSACTIONS ......... 41
PRINCIPAL STOCKHOLDERS ...... 42
DESCRIPTION OF SECURITIES ... 43
SHARES ELIGIBLE FOR
FUTURE SALE ............... 44
UNDERWRITING ............... 45
LEGAL MATTERS ............... 47
EXPERTS ..................... 47
ADDITIONAL INFORMATION ...... 47
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS ...... F-1
UNTIL JUNE 7, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[ASD GROUP LOGO]
945,000 SHARES
OF
COMMON STOCK
----------
PROSPECTUS
----------
H.J. MEYERS & CO., INC.
MAY 13, 1997
---------------------------- ----------------------------
---------------------------- ----------------------------
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
PROSPECTUS
534,783 SHARES OF COMMON STOCK
[ASD GROUP LOGO]
----------------
This Prospectus relates to 534,783 shares of common stock, par value $.01
per share (the "Common Stock"), of ASD Group, Inc. (the "Company"), which will
be held by certain stockholders of the Company upon exercise of (i) warrants to
purchase 500,000 shares of the Company's Common Stock at a price of $2.73 per
share exercisable for a ten-year period from consummation of the Company
Offering, as defined below (the "Noteholder Warrants"), and (ii) warrants to
purchase 34,783 shares of Common Stock at a price of $5.75 per share exercisable
for a five-year period from consummation of the Company Offering (the "Placement
Agent Warrants").
The Noteholders and the Placement Agent and its assignees are hereinafter
referred to as the "Selling Security Holders." The shares issuable upon exercise
of the Noteholder Warrants and Placement Agent Warrants are hereinafter
collectively referred to as the "Selling Security Holders' Securities." The
Selling Security Holders' Securities will not be underwritten in the Company
Offering (as defined below) and the Company will not receive any proceeds from
the sale of the Selling Security Holders' Securities. The Noteholder Warrants
and the Placement Agent Warrants will not be exercisable and may not be sold for
a period of 12 months from the consummation of the Company Offering. In
addition, for the subsequent 12 month period, the Noteholder Warrants and
Placement Agent Warrants will not be exercisable and may not be sold without the
prior written consent of H.J. Meyers & Co., Inc., the representative of an
offering (the "Representative"), by separate prospectus of 945,000 shares of
Common Stock (the "Company Offering").
The Common Stock has been approved for quotation on The Nasdaq SmallCap
Market under the symbol "ASDG" and listing on the Pacific Stock Exchange under
the symbol "AGP." Sales of any Noteholder Warrants, Placement Agent Warrants or
Selling Security Holders' Securities by the Selling Security Holders pursuant to
this offering (the "Selling Security Holders' Offering"), or even the existence
of the right to exercise such warrants, may depress the price of the Common
Stock in any market that may develop for the Common Stock. See "Company
Offering," "Selling Security Holders" and "Plan of Distribution."
(Continued on next page)
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
COMMENCING ON PAGE AND "DILUTION."
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
----------------
THE DATE OF THIS PROSPECTUS IS MAY 13, 1997
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
The sale of the Selling Security Holders' Securities may be effected from
time to time in transactions (which may include block transactions by or for the
account of the Selling Security Holders) in the over-the-counter market or in
negotiated transactions, through the writing of options on the Selling Security
Holders' Securities, through a combination of such methods of sale, or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices prevailing at the time of sale, or at negotiated prices. If any Selling
Security Holder sells his, her or its securities, or options thereon, pursuant
to this Prospectus at a fixed price or at a negotiated price which is, in either
case, other than the prevailing market price or in a block transaction to a
purchaser who resells, or if any Selling Security Holder pays compensation to a
broker-dealer that is other than the usual and customary discounts, concessions
or commissions or if there are any arrangements either individually or in the
aggregate that would constitute a distribution of the Selling Security Holders'
Securities, a post-effective amendment to the Registration Statement of which
this Prospectus is a part, would need to be filed and declared effective by the
Securities and Exchange Commission (the "Commission") before such Selling
Security Holders could make such sale, pay such compensation or make such a
distribution. The Company is under no obligation to file a post-effective
amendment to the Registration Statement of which this Prospectus is a part under
such circumstances.
A-2
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
THE SELLING SECURITY HOLDERS' OFFERING
<TABLE>
<S> <C>
Securities Offered ............... 534,783 shares of Common Stock issuable upon
exercise of Noteholder Warrants and
Placement Agent Warrants. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations"
and "Description of Securities."(1)
Common Stock outstanding prior
to the Company Offering ......... 632,917 shares
Common Stock to be outstanding
after the Company Offering ...... 1,577,917 shares(2)
Use of Proceeds .................. None of the proceeds of this offering will go to
the Company. The net proceeds from the
Company Offering will be used by the
Company for repayment of indebtedness,
increase in staffing and purchase of materials to
fill backlog requirements, capital expenditures,
sales and marketing activities, working capital
and other general corporate purposes. See
"Use of Proceeds."
Symbols:
Nasdaq SmallCap Market ............ ASDG
Pacific Stock Exchange ............ AGP
<FN>
- ----------------
(1) An additional 945,000 shares of Common Stock and up to 141,750 additional
shares of Common Stock to cover over-allotments, if any, are being offered
by the Company in the concurrent underwritten public offering. See "Company
Offering." Except as otherwise specifically set forth herein, all references
in this Prospectus to "this offering" refer to the offering of shares of
Common Stock by the Company in the underwritten offering.
(2) Does not include the shares of Common Stock registered hereunder for the
benefit of the Selling Security Holders.
</FN>
</TABLE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby is speculative
and involves a high degree of risk. Investors should consider carefully the
risks discussed elsewhere in this Prospectus under the caption "Risk Factors."
These risks include, but are not limited to: (i) the Company's dependence on a
limited number of customers; (ii) the Company's limited history of
profitability; (iii) the Company's dependence on key personnel; (iv) the
potential for fluctuation in the Company's annual and quarterly operating
results as a result of a number of factors; (v) the Company's dependence upon
the continued growth, viability and financial stability of its customers which
are in turn substantially dependent upon certain industries; (vi) the
variability of the requirements of the Company's customers and financing
available to the Company's customers; and (vii) the Company's dependence on its
ability to use and exploit its proprietary POM manufacturing software and, thus,
the Company's need to adquately protect its intellectual property rights. See
"Risk Factors."
A-3
<PAGE>
(ALTERNATE PAGE FOR SELLING SHAREHOLDER PROSPECTUS)
COMPANY OFFERING
On the date of this Prospectus, a registration statement under the
Securities Act with respect to an underwritten public offering by the Company of
945,000 shares of Common Stock and up to an additional 141,750 shares of Common
Stock to cover over-allotments, if any, was declared effective by the
Commission. Sales of Common Stock by the Company and the Selling Security
Holders, or even the potential of such sales, would likely have an adverse
effect on the market price of the Common Stock. See "Risk Factors-Shares
Eligible for Future Sale."
A-4
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
SELLING SECURITY HOLDERS
The following table sets forth certain information with respect to the
Selling Security Holders for whom the Company is registering the Selling
Security Holders Securities for resale to the public. None of the Selling
Security Holders has had any position with, held any office, or had any other
material relationship with the Company.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO SALE(1) AFTER THE SALE(1)(4)
----------------------- SHARES ----------------------
NAME AND ADDRESS SHARES TO BE SOLD SHARES
- ----------------------------------------- ----------------------- ------------ ----------------------
<S> <C> <C> <C>
William Becker(2)
P.O. Box 170
Convent Station, NJ 07961 181,086 181,086 0
Sanford I. Feld(3)
Box 670, #12 Quimby Lane
Bernardsville, NJ 07924 181,086 181,086 0
Frederic Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Dr.
Woodbridge, NJ 07095 51,738 51,738 0
Richard Becker
c/o Wilentz, Goldman & Spitzer
90 Woodbridge Center Dr.
Woodbridge, NJ 07095 20,696 20,696 0
Alan Jacobs
4 Hadwell Road
Short Hills, NJ 07078 31,044 31,044 0
Arnold Rifkin
60 Fairfield Drive
Short Hills, NJ 07078 31,044 31,044 0
Jules L. Marx
429 Harding Drive
South Orange, NJ 07079 30,435 30,435 0
William P. Dioguardi
c/o Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 1,740 1,740 0
Laura McNamara
c/o Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 696 696 0
Oshkim Limited Partners
c/o Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 1,044 1,044 0
Spencer Trask Holdings Incorporated
535 Madison Avenue, 18th Floor
New York, NY 10022 4,174 4,174 0
<FN>
- ----------------
(1) Represents shares of Common Stock issuable upon exercise of Noteholder
Warrants and Placement Agent Warrants, as the case may be.
(2) Includes securities held by a trust of which Mr. Becker is the trustee.
(3) Includes securities held by Mr. Feld's employee pension plan and trust.
(4) Assumes the sale of all shares of Common Stock registered hereby.
</FN>
</TABLE>
A-5
<PAGE>
(ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS)
PLAN OF DISTRIBUTION
The sale of the Selling Security Holders' Securities by the Selling
Security Holders may be effected from time to time in transactions (which may
include block transactions by or for the account of the Selling Security
Holders) in the over-the-counter market or in negotiated transactions, through
the writing of options on the Selling Security Holders' Securities, through a
combination of such methods of sale, or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. The Selling Security Holders may effect such transactions
by selling the Selling Security Holders' Securities directly to purchasers,
through broker-dealers acting as agents for the Selling Security Holders or to
broker-dealers who may purchase the Selling Security Holders' Securities as
principals and thereafter sell the Selling Security Holders' Securities from
time to time in the over-the-counter market, in negotiated transactions, or
otherwise. Such broker-dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers for whom such broker-dealers may act as agents or to whom they
may sell as principals or both (which compensation as to a particular
broker-dealer may be in excess of customary commissions).
The Selling Security Holders and broker-dealers, if any, acting in
connection with such sales, may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act and any commission received by
them and any profit on the resale of such securities might be deemed to be
underwriting discounts and commissions under the Securities Act.
The Noteholder Warrants and Placement Agent Warrants are not exercisable
and may not be sold for a period of 12 months from consummation of the Offering.
In addition, for the subsequent 12 month period, the Noteholder Warrants and
Placement Agent Warrants will not be exercisable and may not be sold without the
prior written consent of the Representative. The Representative does not have
any general policy with respect to the release of shares prior to the expiration
of the lock-up period and no present intention to waive or modify any of these
restrictions on the sale of the Company's securities. The Representative may in
the future consider such waivers or modifications if, in its opinion, such
waiver or modification would not materially impact the market for the Company's
securities. Sales of the Selling Security Holders Securities by the Selling
Security Holders, or even the existence of the right to exercise the Noteholder
Warrants or Placement Agent Warrants, may, however depress the price of the
Common Stock in any market that may develop for the Common Stock.
A-6
<PAGE>
---------------------------- ----------------------------
---------------------------- ----------------------------
NO UNDERWRITER, DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS
NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
PAGE
------
PROSPECTUS SUMMARY .........
RISK FACTORS ...............
THE COMPANY ...............
CAPITALIZATION ............
DILUTION ..................
DIVIDEND POLICY ............
COMPANY OFFERING ............
SELECTED FINANCIAL DATA ...
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS .................
BUSINESS ..................
MANAGEMENT ..................
CERTAIN TRANSACTIONS ......
PRINCIPAL STOCKHOLDERS ......
SELLING SECURITY HOLDERS ...
PLAN OF DISTRIBUTION ......
SHARES ELIGIBLE FOR
FUTURE SALE ...............
LEGAL MATTERS ...............
EXPERTS .....................
ADDITIONAL INFORMATION ......
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS ......
[ASD LOGO]
534,783 SHARES
OF
COMMON STOCK
----------
PROSPECTUS
----------
May 13, 1997
---------------------------- ----------------------------
---------------------------- ----------------------------
