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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______ to _______
Commission File Number 1-12873
ASD GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 14-1483460
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1 INDUSTRY STREET, POUGHKEEPSIE, NEW YORK 12603
(Address of principal executive offices)
(914) 452-3000
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: The number of shares of the issuer's
Common Stock, $.01 par value per share, outstanding as of November 5, 1998 was
1,979,934.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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1
<PAGE>
ASD GROUP, INC.
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FORM 10-QSB
QUARTERLY REPORT
SEPTEMBER 25, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements......................3-5
Consolidated Balance Sheet:
September 25, 1998 (unaudited)........................3
Consolidated Statements of Operations (unaudited):
Three months ended September 25, 1998 and
September 26, 1997.....................................4
Consolidated Statements of Cash Flows (unaudited):
Three months ended September 25, 1998 and
September 26, 1997.....................................5
Notes to Financial Statements........................6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................7-9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............10
Item 3. Defaults Upon Senior Securities......................10
Item 6. Exhibits and Reports on Form 8-K......................10
SIGNATURE 11
2
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 25,
1998
-----------
<S> <C>
ASSETS
Current assets:
Cash ....................................................... $ 14,310
Accounts receivable, less allowance for doubtful accounts of
$341,000 ................................................. 975,560
Inventory, less reserve of $345,826 ....................... 2,951,013
Prepaid expenses and other current assets .................. 198,981
-----------
Total current assets ................................ 4,139,864
Property, plant and equipment, net ........................... 4,516,567
Other assets ................................................. 183,064
-----------
Total assets ................................................. $ 8,839,495
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt .......................... $ 3,493,826
Accounts payable ........................................... 1,323,680
Accrued expenses ........................................... 732,441
-----------
Total current liabilities ........................... 5,549,947
Long-term debt ............................................... 3,848,197
Deferred compensation ........................................ 330,055
-----------
Total liabilities ................................... 9,728,199
-----------
Stockholders' deficiency:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, 736,759 convertible shares issued
and outstanding ........................................ 1,918,982
Common stock, $.01 par value, 10,000,000 shares authorized,
1,979,934 shares issued and outstanding ............... 19,799
Paid-in capital ............................................ 4,370,872
Deficit .................................................... (7,198,357)
-----------
Total stockholders' deficiency ...................... $ (888,704)
-----------
Total liabilities and stockholders' deficiency ............... $ 8,839,495
===========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------------
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------ -------------
<S> <C> <C>
Net sales ....................................... $ 2,028,487 $ 3,797,932
Cost of goods sold .............................. 1,561,942 2,825,490
----------- -----------
Gross profit ................................... 466,545 972,442
----------- -----------
Operating expenses:
Sales and marketing ............................. 97,967 50,019
General and administrative ................... 941,032 973,570
----------- -----------
Total operating expenses ....................... 1,038,999 1,023,589
----------- -----------
Loss from operations ........................... (572,454) (51,147)
Interest expense ................................ 228,187 274,036
----------- -----------
Loss before income taxes ........................ (800,641) (325,183)
Benefit for income taxes ....................... -- (136,576)
----------- -----------
NET LOSS ....................................... $ (800,641) $ (188,607)
=========== ===========
Net loss per basic and diluted common share .. $ (.40) $ (.12)
=========== ===========
Weighted average common shares
outstanding .................................. 1,979,934 1,577,917
=========== ===========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net loss ........................................... $ (800,641) $ (188,607)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ................ 96,707 130,907
Deferred compensation ........................ 9,383 8,691
Interest accrued-stockholder advances ........ 33,430 15,751
Deferred income taxes ........................ -- (136,576)
Changes in assets and liabilities:
Accounts receivable ...................... (77,879) (370,657)
Inventory ................................ 91,884 (164,850)
Prepaid expenses and other current assets (39,345) (145,157)
Other assets ............................. -- (38,967)
Accounts payable ......................... (128,217) 60,441
Accrued expenses ......................... (115,280) (208,897)
Payments of deferred compensation ........ -- (4,963)
----------- -----------
Net cash used in operating activities (929,958) (1,042,884)
----------- -----------
Investing activities:
Capital expenditures ............................... (13,480) (302,722)
----------- -----------
Financing activities:
Proceeds from financial restructuring .............. 1,909,982 --
Borrowings ......................................... 28,000 532,095
Payments of long-term debt ......................... (985,138) (166,733)
Financing costs .................................... -- (27,646)
----------- -----------
Net cash provided by
financing activities ............... 952,844 337,716
----------- -----------
Net increase (decrease) in cash ...................... 9,406 (1,007,890)
Cash, beginning of period ............................ 4,904 1,099,190
----------- -----------
Cash, end of period .................................. $ 14,310 $ 91,300
=========== ===========
Supplemental disclosure:
Cash paid during the period for:
Income taxes ................................... $ -- $ 6,132
=========== ===========
Interest ....................................... $ 104,863 $ 224,269
=========== ===========
</TABLE>
5
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ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission for reporting on Form 10-QSB.
Accordingly, certain information and footnote disclosures required for complete
consolidated financial statements are not included herein. It is recommended
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and related notes of ASD Group, Inc. and
subsidiaries (the "Company") contained in the Company's Annual Report on Form
10-KSB for the fiscal year ended June 26, 1998. In the opinion of management,
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of financial position, results of operations
and cash flows at the dates and for the periods presented have been included.
Certain account balances from the previous year presentation have
been reclassified to conform to the current years presentation.
NOTE 2 - FINANCIAL RESTRUCTURING
On June 26, 1998, the Company entered into an agreement with an investor
group (the "Investors") for a capital infusion and entered into agreements with
its primary lenders to restructure the Company's debt (the "Financial
Restructuring").
The Investors purchased $2,070,000 of securities consisting of 392,017
unregistered shares of common stock, 318,419 shares of series A Convertible
Preferred Stock ("Series A Stock"), 330,799 shares of Series B Convertible
Preferred Stock ("Series B Stock), and five year warrants to purchase 4,000,000
shares of common stock at an exercise price of $.75 per share. Of the capital
raised as part of the Financial Restructuring, $1,910,000 was received in the
three months ended September 25, 1998 and $160,000 was received thereafter.
As part of the Financial Restructuring, the Company reached agreements
with its three primary lenders; PNC Bank ("PNC"), Bankers Trust Company ("BT"),
and a group of private noteholders (the "Noteholders") to restructure its debt
as follows:
1. PNC agreed to maintain the Company's existing line of credit through June
2000 with a one year extension, provided certain conditions are met and no
events of default occur.
2. BT was paid $250,000 for an option to pay off the obligations owed to BT at a
discount in March 1999. The Company will not make principal and interest
payments to BT during this period, although the amounts owed will continue to
accrue interest. The Company also has the option to pay $100,000 in March 1999
for a six month extension of the option period.
3. Noteholders owed $1,210,000 settled for $220,000, 73,461 shares of Series C
Convertible Preferred Stock and the exchange of warrants.
The Financial Restructuring has been given effect to in the accompanying
consolidated financial statements. All securities issued by the Company have
been recorded at fair value.
NOTE 3 - INVENTORY
THE COMPONENTS OF INVENTORY ARE AS FOLLOWS:
<TABLE>
<S> <C>
RAW MATERIALS................ $ 304,230
WORK-IN-PROCESS.............. 2,646,783
----------
$2,951,013
==========
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ASD Group, Inc. (the "Company") cautions readers that certain important
factors may affect the Company's actual results and could cause such results to
differ materially from any forward-looking statements which may be deemed to
have been made in this Report or which are otherwise made by or on behalf of the
Company. For this purpose, any statements contained in this Report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "would," "estimate," or
"continue" or the negative other variations thereof or comparable terminology
are intended to identify forward-looking statements. Such factors include, but
are not limited to, the risks and uncertainties associated with a contract
manufacturing company which is dependent upon a small number of large companies,
a limited history of profitability, dependence upon key personnel, need for
future capital and dependence upon certain industries. Additionally, the Company
is subject to the risks and uncertainties associated with all contract
manufacturing companies including variability of customer requirements and
customer financing, limited availability components and a market characterized
by rapidly changing technology and continuing process development. The Company
is also subject to other risks detailed herein or detailed from time to time in
the Company's filings with the Securities and Exchange Commission.
OVERVIEW
The Company provides comprehensive contract manufacturing and
engineering services to original equipment manufacturers ("OEMs.") The Company
was formed in 1965 to provide design and engineering services to IBM's main
frame computer development and manufacturing operations in New York's Hudson
Valley ("IBM-Hudson Valley"). Over a 25-year period, the Company's relationship
with IBM-Hudson Valley evolved to the point where by the mid-1980's the Company
assembled, wired and tested a significant portion of IBM-Hudson Valley's main
frame computers. IBM Hudson Valley became the Company's principal customer,
providing over 90% of its revenues. Commencing in 1990, IBM-Hudson Valley's main
frame sales began to decline due to the recession and the shift in technology to
personal computer-based systems. In December 1992, IBM-Hudson Valley eliminated
the use of substantially all main frame assembly vendors, including the Company.
As a result, the Company had significant reductions in revenues and incurred
substantial losses. Accordingly, during 1993 and 1994 the Company undertook a
restructuring of its operations wherein it implemented a significant downsizing,
re-engineered its operations and commenced intensive efforts to market its
contract manufacturing services to other OEMs. While the IBM-Hudson Valley
downsizing greatly affected the Company, management believes that its
relationship with IBM-Hudson Valley permitted the Company to evolve into a
vertically integrated contract manufacturer with a well disciplined quality
control program.
Notwithstanding what management believes to be a positive climate for
contract manufacturers in the United States generally, the Company's sales were
and continue to be adversely effected by the situation in the Asian markets. The
Company has experienced a reduction in orders from several customers,
principally those effected by the Asian market. These cancellations resulted in
the Company recording an inventory write-off of $2,100,000, substantially
reducing gross profit for the Company's fiscal year ended June 26, 1998 and the
three months ended September 25, 1998 as compared to the prior periods. As a
result of the Financial Restructuring, the Company recorded a $1,717,000 tax
expense resulting from a one-time write-off of the previously established
deferred tax asset which would not be utilized. While management has taken
significant steps to improve the Company's financial condition, the Company's
immediate cash requirements are significant. Management is currently attempting
to obtain additional financing and intends to raise additional funds within the
next 12 months through equity and/or debt financings.
7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 25, 1998 AS
COMPARED TO THREE MONTHS ENDED SEPTEMBER 26, 1997
For the three months ended September 25, 1998, the Company's net sales
decreased by $1,770,000 or 46.6% to $2,028,000 from $3,798,000 for the three
months ended September 26, 1997. The decrease in sales was primarily the result
of a continued reduction in volume of orders by several large customers,
principally those affected by the Asian market.
Cost of goods sold for the three months ended September 25, 1998
decreased by $1,263,000 or 44.7% to $1,562,000 from $2,825,000 for the three
months ended September 26, 1997. The decrease in cost of goods sold is primarily
the result of the reduction of sales. Gross profit as a percentage of net sales
decreased by 2.6% from 25.6% for the three months ended September 26, 1997 to
23.0% for the three months ended September 25, 1998. The decreased gross profit
percentage was primarily due to the reduction in orders while a significant
portion of the Company's cost are fixed.
Selling, general and administrative expenses increased for the three
months ended September 25, 1998 by $15,000 or 1.5% to $1,039,000 from $1,024,000
for the three months ended September 26, 1997. Selling expenses increased
$48,000 due to additional sales force added to the staff. This was offset by a
reduction of $33,000 in general and administrative expenses. The general and
administrative expenses decreased slightly due to Management's attempts to
reduce operations to the minimum core possible.
Interest expense decreased for the three months ended September 25, 1998
by $46,000 or 16.8% to $228,000 from $274,000 for the three months ended
September 26, 1997. The decrease in interest expense results from a net
reduction in debt as a result of the restructuring on June 26, 1998.
The Company did not recognize any benefit for income tax for the three
months ended September 25, 1998 as compared to a benefit of $137,000 for the
three months ended September 26, 1997.
The Company incurred a loss before income tax and a net loss of $800,641
during the three months ended September 25, 1998, as compared to a loss before
income tax and a net loss of $325,000 and $189,000, respectively, during the
three months ended September 26, 1997 for the above reasons.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENTS OF CASH FLOWS
Net cash used in operations was $930,000 for the three months ended
September 25, 1998 as compared to $1,043,000 used in operations for the three
months ended September 26, 1997. The cash used in operations was the result of a
loss for the three months ended September 25, 1998, a decrease in accounts
payable and accrued expenses and an increase in accounts receivable, offset by a
reduction in inventory. Net cash provided by financing activities during the
three months ended September 25, 1998 was $953,000. During this period,
$1,910,000 was provided from the Financial Restructuring, offset by payments of
long-term debt of $985,000. Working capital decreased to a deficiency of
$1,410,000 at September 25, 1998 from a positive working capital of $4,810,000
at September 26, 1997. The decrease in working capital is due to the decrease in
inventory and a reclassification of the Bankers Trust note for $2,500,000 due
March 1999 as a current liability. In addition, the Company is in default on
the shareholder loans resulting in $777,000 being reclassified as current
liabilities.
8
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LINE OF CREDIT
The Company's revolving bank line of credit (the "Line of Credit")
currently permits borrowings of up to $4,500,000. The amount available for
borrowings under the Line of Credit is determined pursuant to a formula based
upon the Company's eligible machinery, equipment, accounts receivable and
inventory plus an overadvance by the bank of $900,000. As of September 25, 1998,
$3,682,000 was outstanding under the Line of Credit and the Company had $170,000
available for additional borrowings. PNC Bank has agreed to keep the Company's
existing credit facility in place at least through June 2000, with a one year
extension, provided that certain conditions are met and no events of default
occur.
YEAR 2000 READINESS
The Year 2000 issue refers to a condition in the computer software where
a two-digit field rather than a four-digit field is used to distinguish a
calendar year. Unless corrected, date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations. Such an uncorrected condition could significantly interfere with the
conduct of the Company's business, could result in disruption of its operations
and could subject it to potentially significant legal liabilities.
The Company has conducted an assessment of the Year 2000 issue and the
potential effect it will have on the Company and its business. The Company has
also prepared a formal plan for dealing with the Year 2000 issue. The Company is
in the process of updating much of its existing software for Year 2000
compliance by modifying existing internally developed software. The Company
intends to hire outside consultants and acquire new and upgraded third party
software packages to replace those currently used by the Company which cannot be
modified.
While the Company believes it has made substantial progress in resolving
any Year 2000 issues, sufficient testing to date has not been completed to fully
validate readiness. Additional testing is planned during Fiscal 1999 to
reasonably ensure Year 2000 readiness. The Company is planning to complete all
necessary Year 2000 upgrades of its systems in Fiscal 1999.
The possibility exists that the Company could inadvertently fail to
correct a Year 2000 problem. The Company believes the impact of such an
occurrence would be minor, as substantial Year 2000 compliant equipment
additions and upgrades have occurred in recent years. If such resolution does
not occur, the Company believes it will be able to conduct its business,
possibly at a reduced volume, using its already Year 2000 compliant server, and
personal computer software until resolution occurs.
The Company may also be affected by third-party suppliers and customers
who have not modified their systems to adequately address the Year 2000 issue.
While it has not already done so, the Company intends to survey its major
customers and suppliers regarding their progress on resolving Year 2000 issues.
It is contemplated that this survey will take place during the third and fourth
quarters of Fiscal 1999.
9
<PAGE>
To date, Year 2000 readiness has cost the Company an estimated $30,000
(including upgrades to existing systems) and will cost approximately $100,000 in
the aggregate to complete.
.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 26, 1998 the Company entered into an agreement with an investor
group (the "Investors") for a capital infusion and entered into agreements with
its primary lenders to restructure the Company's debt (the "Financial
Restructuring). The securities sold to the Investors were sold pursuant to a
private offering exemption under the Securities Act of 1933, as amended. During
the quarter ended September 25, 1998 the Company received gross proceeds on
$1,910,000 in connection with this financing. The Company incurred expenses of
approximately $258,000. These expenses were in the form of direct or indirect
payments to others and not direct or indirect payments to officers or directors
of the Company or to persons owning more than 10% of any class of securities of
the Company. From the net proceeds of approximately $1,652,000, the Company used
approximately $770,000 for repayment of indebtedness and $882,000 for working
capital. With the exception of the repayment of indebtedness to certain of the
Company's stockholders, none of the payments from the use of proceeds were made
to officers, directors or persons owning more than 10% of any class of
securities of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On August 10, 1998, the Company received notice that it was in default
of the Credit Agreement dated December 18, 1997 between Automatic Systems
Developers, Inc.; High Technology Computers; the Company; the financial
institutions which are now or hereafter become a party to the Credit Agreement
and PNC Bank, National Association, as amended by the Restructuring Agreement
dated as of June 26, 1998. On October 6, 1998 the Company received a
Notice of Cure of Default.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule (Edgar version only)
(b) Reports on Form 8-K: none
10
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ASD GROUP, INC.
SIGNATURES
In accordance with the requirement of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
/s/ Peter C. Zachariou
----------------------------------
Peter C. Zachariou
President
/s/ Kevin E. Homon
----------------------------------
Kevin E. Homon
Controller
Date: November 16, 1998
11
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-25-1999
<PERIOD-START> JUN-27-1998
<PERIOD-END> SEP-25-1998
<CASH> 14,310
<SECURITIES> 0
<RECEIVABLES> 1,316,560
<ALLOWANCES> (341,000)
<INVENTORY> 2,951,013
<CURRENT-ASSETS> 198,981
<PP&E> 8,181,794
<DEPRECIATION> (3,665,227)
<TOTAL-ASSETS> 8,839,495
<CURRENT-LIABILITIES> 5,549,947
<BONDS> 0
0
1,918,982
<COMMON> 19,799
<OTHER-SE> (2,827,485)
<TOTAL-LIABILITY-AND-EQUITY> 8,839,495
<SALES> 2,028,487
<TOTAL-REVENUES> 2,028,487
<CGS> 1,561,942
<TOTAL-COSTS> 1,038,999
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228,187
<INCOME-PRETAX> (800,641)
<INCOME-TAX> 0
<INCOME-CONTINUING> (800,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (800,641)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
