- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 27, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transaction period from____________to_____________
Commission File Number 1-12873
ASD GROUP, INC.
(Exact name of small business issuer in its charter)
Delaware 14-1483460
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1 INDUSTRY STREET, POUGHKEEPSIE, NEW YORK 12603
------------------------------------------------------------
(Address of principal executive offices, including Zip Code)
(914) 452-3000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or any
amendment to this Form 10-KSB.
State issuer's revenues for its most recent fiscal year: $15,870,988
The aggregate market value of the issuer's Common Stock, $.01 par value, held by
non-affiliates on October 6, 1997, was $4,843,125.
As of October 6, 1997, there were 1,577,917 shares of the issuer's Common Stock,
$.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
- -------------------------------------------------------------------------------
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and the notes thereto
included in Part II, Item 7 of this report.
RESULTS OF OPERATIONS
FISCAL 1997 AS COMPARED TO FISCAL 1996
For Fiscal 1997, the Company's net sales decreased by $10,241,000 or
39.2% to $15,871,000 from $26,112,000 for Fiscal 1996. The decrease in sales
was due, in part, to a reduction in volume of orders by two of the Company's
largest customers, due to their inventory backlog. Another major customer of the
Company reduced its orders due to softness in the semi-conductor industry.
Additionally, a delay in the Company's raising equity capital adversely affected
the Company's ability to obtain and fund new orders.
Costs of goods sold for Fiscal 1997 decreased by $8,548,000 or 41.4% to
$12,087,000 from $20,635,000 for Fiscal 1996. The decrease in cost of goods sold
is primarily the result of the reduction of sales. Gross profit as a percentage
of net sales increased by 2.8% from 21.0% for Fiscal 1996 to 23.8% for Fiscal
1997. The improvement in gross profit percentage reflects the efficiencies
achieved by management through cost reduction and selected price increases,
which offset the negative impact of the write-off in the fourth quarter of
Fiscal 1997 of residual inventory for low volume non-recurring jobs.
Selling, general and administrative expenses decreased for Fiscal 1997
by $635,000 or 14.8% to $3,660,000 from $4,295,000 for Fiscal 1996. The decrease
in selling, general and administrative expenses is primarily the result of
reductions to support staff.
Interest expense increased for Fiscal 1997 by $557,000 or 57.1% to
$1,534,000 from $977,000 for Fiscal 1996. The increase in interest expense
reflects both an increase in interest rates and in amounts borrowed, including
the $2,000,000 of Notes, $1,100,000 raised from the issuance of the Bridge Notes
(as described in "Liquidity and Capital Resources-Private Debt Offerings" below)
and $210,000 of amortization related to warrants issued in connection with
privately placed debt as more fully described below. The Fiscal 1997 interest
expense of $1,534,000 includes $430,000 of interest related to debt that was
repaid from the proceeds of the Initial Public Offering.
Other income decreased for Fiscal 1997 by $131,000 or 65.8% to $68,000
from $199,000 for Fiscal 1996. Other income in Fiscal 1996 included a gain of
$167,000 on the August 1995 sale of a North Carolina facility owned by the
2
<PAGE>
Company.
Benefit for income tax increased for Fiscal 1997 by $562,000 to
$565,000 from $3,000 for Fiscal 1996 as a result of the carryfoward tax benefits
of the Fiscal 1997 loss. The tax benefit provided during Fiscal 1996 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 for Fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Statements of Cash Flows
Net cash used in operations was $1,047,000 for Fiscal 1997 as compared
to $1,944,000 used in operations for Fiscal 1996. The decrease in cash used in
operations was the result of a decrease in accounts receivable and inventory
offset by decreases in accounts payable and accrued expenses. The inventory
reduction was primarily a result of implementation of a new feature in the POM
manufacturing software and a change of policy in the Company's purchasing
department. Net cash provided by financing activities during Fiscal 1997 was
$1,785,000. During this period $1,100,000 was provided from the issuance of 10%
Original Issue Discount Promissory Notes (the "Bridge Notes"), $3,889,000 was
provided from the Offering, $3,170,000 of long-term debt was
repaid, and $160,000 of financing costs were incurred. Working capital increased
to $4,767,000 at June 27, 1997 from $4,482,000 at June 30, 1996.
Line of Credit
The Company's revolving bank line of credit ("Line of Credit") with
Bankers Trust Company (the "Bank") currently permits borrowings of up to
$3,730,000 and is due July 1, 1998 (extended from September 30, 1997). 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 June 27, 1997 $3,129,000 was outstanding under the Line of
Credit and the Company had $601,000 available for additional borrowings.
The Line of Credit currently bears interest at the rate of 10.0% (prime
plus 1 1/2%). 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 $3,217,000 as of June 27, 1997. The
Bank has extended to the Company a line of credit secured by the Company's
equipment (the "Equipment Line") with an outstanding principal balance as of
June 27, 1997 of $358,000. The Equipment Line is due December 31, 1997 (extended
from Septebmer 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 Line of Credit and Equipment Line.
The Company intends to refinance its indebtedness to the Bank and
secure a new credit facility with increased borrowing limit. On May 31, 1996,
the Company entered into an agreement (as amended) with the Bank which will
permit the Company to repay its existing indebtedness to the Bank at a discount
of approximately $460,000, provided such option is exercised on or before
October 31, 1997 (extended from September 30, 1997). Management of the Company
believes that the Bank agreed to accept repayment of the Line of Credit at a
discount in order to encourage the Company to find another source for its
financial needs as the Bank no longer provides commercial lending on a
short-term basis. There are no continuing obligations or conditions imposed upon
the Company in connection with repayment of the Line of Credit. The Company is
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 10% Senior Secured Notes due June 30, 1999
(the "Notes") to certain investors (the "Noteholders") in a private placement.
The proceeds of this private placement 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 were secured by a
first lien on the Company's inventory, were due and payable upon consummation of
the Offering. A portion of the net proceeds of the Offering were used to effect
such repayment. The Agreement under which the Notes were issued (the "Note
Purchase Agreement") provided that the Noteholders would receive, upon
consummation of the initial public offering by the Company, such number of
shares of Common Stock of the Company determined by dividing the aggregate
principal amount of the Notes 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 (the "Noteholder Warrants"). In December 1996, the Company and the
Noteholders amended the Note Purchase Agreement to,
3
<PAGE>
among other matters, (i) provide that $900,000 in principal amount of Notes was
paid upon consummation of the Offering, (ii) release the Noteholders' security
interest in the Company's inventory upon consummation of the 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 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 the 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), received warrants to purchase 34,783
shares at a price equal to $5.75 per share, exercisable for a five-year period
from consummation of the Offering (the "Placement Agent Warrants").
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 accrued 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 paid upon consummation of the Offering. 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 the Offering. The holders of the Bridge Warrants have been accorded
registration rights under the Securities Act of 1993, as amended (the
"Securities Act"), with respect to the Bridge Warrants and the shares of Common
Stock underlying the Bridge Warrants. Officers and directors of the Company have
agreed not to sell 250,000 of their shares prior to May 13, 1999 without the
prior written consent of H.J. Meyers & Co., Inc., the representative of the
underwriters participating in the Offering (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 May 13, 1997,
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 prior to May 13, 1999 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.
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 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 original quotation or resulting from
customer changes are typically passed on to the customer.
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 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 or leased.
The Company anticipates that it will incur capital expenditures of
approximately $300,000 during Fiscal 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.
Management of the Company believes that the Company's existing and
anticipated capital resources, including the net proceeds of the Offering, will
enable it to fund its planned operations through July 1, 1998 when the existing
line of credit expires. However, management is currently in the process of
obtaining a new credit facility. This new credit facility, along with the
Company's existing capital resources, will enable the Company to fund its
planned operations through 1999.
4
<PAGE>
There can be no assurance that the Company will be able to successfully
negotiate a new credit facility, 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 adversely affected.
NET OPERATING LOSS CARRYFORWARDS
As of June 27, 1997, the Company had a net operating loss ("NOL") for
federal income tax purposes of approximately $4,900,000 which begins to expire
in 2008, and no NOL for state income tax purposes. Although the Offering
resulted 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 June 27, 1997, the total valuation allowance was
$228,000.
RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the years ended June 30, 1996 and June 27, 1997, the Company's
management determined that $285,000 of cash surrender value of life insurance
policies attributable to prior years had not been recorded by the Company. As a
result, the Company's consolidated financial statements have been restated from
the amounts previously reported to reflect the recording of these assets. The
significant effect of this restatement on the Company's consolidated financial
statements was to increase retained earnings and other assets by $165,000 and
$285,000, respectively, and to decrease the deferred tax asset by $120,000. The
effect of the restatement on the results of operations for 1996 and 1997 was not
material.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is incorporated by reference to pages F1-F13
herein.
5
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this amendment to be signed on its behalf by the undersigned,
thereunto duly authorized.
ASD GROUP, INC.
Date: April 10, 1998 By:/s/ GARY D. HORNE
---------------------------------
Gary D. Horne, Chairman of the Board
and Chief Executive Officer
6
<PAGE>
ASD GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report.................................................................... F-2
Consolidated Balance Sheet as of June 27, 1997 (As restated).................................... F-3
Consolidated Statements of Operations for the Years Ended June 27, 1997 and June 30, 1996....... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June 27, 1997 and
June 30,1996 (As restated)...................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 27 1997, and June 30, 1996....... F-6
Notes to Consolidated Financial Statements...................................................... F-7-F-13
</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 27, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended June 27, 1997. 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 27, 1997, and the results of their operations and their
cash flows for each of the two years in the period ended June 27, 1997 in
conformity with generally accepted accounting principles.
As discussed in Note 14, the accompanying consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Stamford, Connecticut
September 5, 1997
(October 7, 1997 as to Note 13 and February 25, 1998 as to Note 14)
F-2
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 27,
1997
(AS RESTATED,
SEE NOTE 14)
------------
ASSETS
<S> <C>
Current assets:
Cash ......................................................................... $ 1,099,190
Accounts receivable, less allowance for doubtful accounts of
$163,000 ................................................................... 2,175,402
Inventory .................................................................... 5,057,894
Prepaid expenses and other current assets .................................... 183,789
Deferred tax asset ........................................................... 500,453
-----------
Total current assets .................................................. 9,016,728
Property, plant and equipment, net ............................................. 4,561,127
Deferred tax asset ............................................................. 1,217,079
Other assets ................................................................... 915,583
-----------
Total assets ................................................................... $15,710,517
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................................... $ 1,828,770
Accounts payable ............................................................. 1,235,682
Accrued expenses ............................................................. 842,424
-----------
Total current liabilities ............................................. 3,906,876
Long-term debt ................................................................. 6,976,731
Deferred compensation .......................................................... 309,285
-----------
Total liabilities ..................................................... 11,192,892
===========
Contingencies (Note 11)
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued ............................................................... --
Common stock, $.01 par value, 10,000,000 shares authorized,
1,577,917 shares issued and outstanding ................................... 15,779
Paid-in capital .............................................................. 4,206,892
Retained earnings ............................................................ 294,954
-----------
Total stockholders' equity ............................................ 4,517,625
-----------
Total liabilities and stockholders' equity ..................................... $15,710,517
===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
-----------------------------
JUNE 27, JUNE 30,
1997 1996
------------ -------------
Net sales .......................... $ 15,870,988 $ 26,111,896
Cost of goods sold ................. 12,086,796 20,635,397
------------ ------------
Gross profit ...................... 3,784,192 5,476,499
------------ ------------
Operating expenses:
Sales and marketing ............. 186,888 251,036
General and administrative ...... 3,472,614 4,043,331
------------ ------------
Total operating expenses ...... 3,659,502 4,294,367
------------ ------------
Income from operations ....... 124,690 1,182,132
Other income ....................... 68,195 199,118
Interest expense ................... (1,534,366) (976,850)
------------ ------------
Income (loss) before income taxes (1,341,481) 404,400
Benefit for income taxes ........... (564,584) (3,000)
------------ ------------
NET INCOME (LOSS) ............... $ (776,897) $ 407,400
============ ============
Net income (loss) per common share . $ (1.03) $ .64
============ ============
Weighted average common shares
outstanding .................... 751,041 632,917
============ ============
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, 1995, as previously
reported .......................... $ -- $-- 632,917 $ 6,329 $ -- $ 499,451 $ 505,780
Prior period adjustment (See Note 14) -- -- -- -- -- 165,000 165,000
------ ----- ----------- ----------- ----------- ----------- -----------
Balance, July 1, 1995 (as restated) . -- -- 632,917 6,329 -- 664,451 670,780
Net income .......................... -- -- -- -- -- 407,400 407,400
------ ----- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 1996 (as restated) -- -- 632,917 6,329 -- $ 1,071,851 $ 1,078,180
Net loss ............................ -- -- -- -- -- (776,897) (776,897)
Issuance of IPO shares .............. -- -- 945,000 9,450 3,879,892 -- 3,889,342
Fair value of warrants issued ....... -- -- -- -- 327,000 -- 327,000
------ ----- ----------- ----------- ----------- ----------- -----------
Balance, June 27, 1997 (as restated) $ -- $-- 1,577,917 $ 15,779 $ 4,206,892 $ 294,954 $ 4,517,625
====== ===== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
JUNE 27, JUNE 30,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) ..................................................... $ (776,897) $ 407,400
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization .................................... 699,350 383,449
Provision (benefit) for doubtful accounts ........................ 10,000 (45,030)
Deferred compensation ............................................ 32,171 29,790
Interest accrued-stockholder advances ............................ 50,259 43,117
Deferred income taxes ............................................ (564,584) (26,594)
Gain on sale of plant ............................................ -- (166,734)
Changes in assets and liabilities:
Accounts receivable .......................................... 551,761 532,293
Inventory .................................................... 896,677 (1,776,803)
Prepaid expenses and other current assets .................... (127,417) 125,309
Other assets ................................................. 68,580 (112,668)
Accounts payable ............................................. (1,457,770) (288,111)
Accrued expenses ............................................. (359,804) (323,192)
Deferred revenues ............................................ (69,666) (725,899)
----------- -----------
Net cash used in operating activities ................... (1,047,340) (1,943,673)
----------- -----------
Investing activities:
Net proceeds from sale of plant ........................................ -- 591,781
Capital expenditures ................................................... (97,693) (171,790)
----------- -----------
Net cash (used in) provided by investing activities ...... (97,693) 419,991
----------- -----------
Financing activities:
Net proceeds from IPO .................................................. 3,889,342 --
Borrowings ............................................................. 1,250,000 3,464,355
Payments of long-term debt ............................................. (3,169,626) (1,312,206)
Financing costs ........................................................ (160,433) (502,644)
Payments of deferred compensation ...................................... (23,971) (23,834)
----------- -----------
Net cash provided by financing activities ................ 1,785,312 1,625,671
----------- -----------
Net increase in cash ..................................................... 640,279 101,989
Cash, beginning of year .................................................. 458,911 356,922
----------- -----------
Cash, end of year ........................................................ $ 1,099,190 $ 458,911
=========== ===========
Supplemental disclosure:
Cash paid during the year for:
Income taxes ....................................................... $ 6,484 $ 32,631
=========== ===========
Interest ........................................................... $ 1,132,354 $ 1,268,799
=========== ===========
Notes exchanged for amounts owed to vendors ............................ $ -- $ 198,403
=========== ===========
</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 years ended June 27, 1997 and June 30,
1996, the Company incurred $160,433 and $373,851, respectively, in connection
with debt financings (see Note 5). These costs have been capitalized and are
being amortized over the terms of the financings. Amortization of the financing
costs for the years ended June 27, 1997 and June 30, 1996 was $203,948 and
$22,500, respectively. In addition, the Company capitalized $128,793 during the
year ended June 30, 1996 in connection with the initial public offering. These
costs were charged to paid-in capital during the year ended June 27, 1997 upon
consummation of the initial public offering. All of the above costs are included
in other assets.
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 of work-in-progress and raw materials
($4,532,373 and $525,521, respectively), 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 of 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 and tax basis of the Company's
assets and liabilities using presently enacted tax rates.
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, the Company maintains 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.
F-7
<PAGE>
Customers that accounted for 10% or more of the Company's sales are as follows:
YEARS ENDED
----------------------------
JUNE 27, JUNE 30,
CUSTOMER 1997 1996
-------- ---- ----
Gerber Scientific Products......... 13% 16%
ENI Technologies................... 22 20
International Business Machines.... 10 --
S & K Products International, Inc.. 10 14
Lockheed Martin Corporation........ 11 13
Bruce Technologies International... -- 10
-- --
66% 73%
=== ===
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 year.
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.
ADOPTION OF STATEMENT OF FINANCIAL STANDARD ACCOUNTING NO. 123--In
1997, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 encourages, but does not require companies to record at fair value
compensation cost for stock-based compensation plans. The Company has chosen to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of
the Company's credit facilities approximates fair value and is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same remaining maturities.
RECLASSIFICATIONS--Certain reclassifications were made to the prior
year's financial statements to conform to the current year's presentation.
3. PUBLIC OFFERING OF COMMON STOCK AND RECAPITALIZATION
In May 1997, the Company completed an initial public offering of
945,000 shares of common stock at $5.75 per share ( the "Offering"). Prior to
the Offering, there was no public market for the Company's common stock. The net
proceeds of the Offering, after deducting applicable issuance costs and
expenses, were $3,889,342.
In connection with the Offering, the Company (a) increased its
authorized common stock to 10,000,000 shares, (b) effected a split of its common
stock, resulting in 632,917 shares outstanding, and (c) authorized 1,000,000
shares of new $.01 par value preferred stock. Designations, rights and
preference of the preferred stock will be determined by the Board of Directors.
No shares of preferred stock have been issued.
F-8
<PAGE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
JUNE 27,
1997
--------
Land.............................................$ 563,937
Buildings........................................ 1,633,327
Leasehold improvements........................... 892,025
Machinery and equipment.......................... 2,742,306
Automobiles...................................... 47,955
----------
5,879,550
Less: accumulated depreciation................... (2,760,562)
----------
3,118,988
----------
Idle property:
Land and building............................. 1,923,865
Less: accumulated depreciation................ (481,726)
----------
1,442,139
----------
Property, plant and equipment, net............$ 4,561,127
==========
Depreciation of property, plant and equipment was $273,382 and
$332,373 during the years ended June 27, 1997 and June 30, 1996, respectively.
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 statement of
operations for the year ended June 30, 1996.
F-9
<PAGE>
5. LONG-TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 27,
1997
--------
<S> <C>
Senior Secured Notes-interest at 10%, interest only through
December 31, 1997, due June 18, 1998, secured by inventory............. $ 1,100,000
Notes Payable-Bank of New York, interest at 60 % of prime,
due July 1, 1997, secured by real property............................. 4,194
Notes Payable-Key Bank, interest at prime plus 1%, due
December 1, 1998, secured by equipment................................. 103,637
Notes Payable-Bankers Trust Company, interest at prime plus
1.5%, due December 31, 1997, secured by equipment...................... 357,626
Revolving Line of Credit-Bankers Trust Company, interest at prime
plus 1.5%, due July 1, 1998, collateralized by accounts receivable,
equipment and inventory............................................... 3,129,388
Mortgage Payable-Bankers Trust Company, interest at prime
plus 1.5%, due September 1, 1998, secured by real property............. 1,846,169
Mortgage Payable-Bankers Trust Company, interest at prime
plus 1.5%, due December 1, 1998, secured by real property.............. 1,371,213
Advances From Stockholder, plus accrued interest of $182,371-
interest at 8%, repayable no earlier than July 1, 1998................. 782,340
Notes Payable to Vendors-interest at various rates, secured by
certain assets......................................................... 95,582
Other...................................................................... 15,352
------------
8,805,501
Less: current portion...................................................... 1,828,770
------------
$ 6,976,731
============
</TABLE>
The Company has a revolving line of credit of $3,730,000 with an
extended maturity date of December 31, 1997 (see Note 13). The amount available
for borrowings under the line of credit is determined pursuant to a formula
based upon eligible accounts receivable and inventory.
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 were secured by a first lien on
the Company's inventory. Monthly principal payments will commence January 1998
until paid in full in June 1999. As a result of this financing, the Company was
required to pay 10% of the proceeds, or $100,000, in additional interest to the
bank. 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 debt. The Notes were due and payable upon consummation of an
initial public offering of not less than $5,000,000. In addition, the investors
were to 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)
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.
F-10
<PAGE>
On December 20, 1996, the terms of the Notes were amended to eliminate
the issuance of the $2,000,000 in shares of common stock to the investors. The
amended agreement provides, among other things, that $900,000 in principal
amount of the Notes was payable upon consummation of the initial public
offering, with the remaining $1,100,000 of the Notes, plus accrued interest
thereon, payable by June 18, 1998. 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 the offering price of $5.75 per share). The warrants are
exercisable over a ten-year period: provided however, the warrants are not
exercisable and may not be sold for 12 months following the initial public
offering. In addition, for the subsequent 12 month period the warrants are not
exercisable and may not be sold without prior written consent of the Company and
the representative of the underwriters of the Company's public offering. The
fair value of the warrants in excess of the underlying common stock ($245,000)
at the date issuance is being amortized over the term that the underlying debt
is outstanding. Amortization expense was $128,216 during the year ended June 27,
1997.
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. To satisfy a certain
covenant that was in default, the interest rate on the OID Notes increased to
12.5% retroactively as of the date of issuance. 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 the initial public offering
price per share ($2.96 at the offering price of $5.75 per share) and are
exercisable during the five year period commencing six months after the closing
of the initial public offering; provided, however, the warrants are not
exercisable and may not be sold for 18 months following the initial public
offering. 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 OID Notes were repaid from the proceeds of the initial public
offering and the discount was charged to interest expense.
In April 1996, the bank notified the Company that it had sold the
Company's outstanding loan portfolio ($6,704,396 at June 27, 1997) 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
October 31, 1997 (see Note 13) and if exercised, the cost of the option will
reduce the total indebtedness.
Annual principal payments, as adjusted for the amended maturities (see
Note 13) are as follows:
12 MONTHS ENDING
JUNE
----------------
1998 .............................. $1,828,770
1999 .............................. 6,968,980
2000 .............................. 4,279
2001 .............................. 3,472
-------------
$8,805,501
=============
The prime rate at June 27, 1997 was 8.50 %.
6. DEFERRED COMPENSATION
The Company has a deferred compensation agreement with two former
employees. The agreement requires the payment of $450,000 over a 15 year period.
The obligations have been recorded at their net present value using a discount
rate of 8%.
F-11
<PAGE>
7. STOCKHOLDERS' EQUITY
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. In connection with the
Offering, the Company granted options to purchase 30,000 shares of common stock
at $5.75 per share. The stock options vest in three annual installments
commencing one year from the date of grant and will expire ten years from the
date of grant.
8. INCOME TAXES
The provision (benefit) for income taxes consists of the
following:
YEARS ENDED
------------------------
JUNE 27, JUNE 30,
1997 1996
-------- --------
Current:
Federal............................. $ - $ 19,111
State............................... - 4,483
--------- --------
- 23,594
--------- --------
Deferred:
Federal............................. (456,103) (21,541)
State............................... (108,481) (5,053)
--------- --------
(564,584) (26,594)
--------- --------
$ (564,584) $ (3,000)
========= ========
A reconciliation of the income tax provision (benefit) to the amount
computed using the Federal statutory rate as follows:
YEAR ENDED JUNE 30,
----------------------------
JUNE 27, JUNE 30,
1997 1996
-------- --------
Income tax at statutory rate................$ (456,103) $ 137,496
State income taxes and other (net of
Federal benefit)........................ (108,481) 31,504
Release of valuation allowance.............. - (172,000)
------------ -------------
$ (564,584) $ (3,000)
============ =============
The net deferred tax asset consists of the following:
JUNE 27, JUNE 30,
1997 1996
------------ -------------
Net operating loss carry forward........ $ 2,050,197 $ 1,490,582
Capital loss carryforward............... 228,333 228,333
Allowance for doubtful accounts......... 68,499 160,847
Deferred compensation................... 129,899 126,456
Accrued vacation........................ 19,359 46,729
Accrued interest........................ 76,595 55,487
Other................................... 44,471 77,122
Depreciation...... ..................... (671,488) (684,275)
------------ -------------
1,945,865 1,501,281
Valuation allowance..................... (228,333) (228,333)
------------ -------------
$ 1,717,532 $ 1,272,948
============ =============
F-12
<PAGE>
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 more than likely will not be
realized. During the year ended June 30, 1996, the Company sold its North
Carolina facility (see Note 4) 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 utilization of tax benefits
from this sale.
As of June 27, 1997, the Company has a Federal net operating loss
carryforward of approximately $4,900,000 which begins to expire in 2008.
9. 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 27, 1997 and June 30, 1996 were approximately $135,000 and $82,000,
respectively.
10. 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. There was no
pension expense attributed to this plan for the years ended June 27, 1997 and
June 30, 1996.
11. 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.
12. ADOPTION OF SFAS 128 AND SFAS 131
The Company will adopt the Statement of Financial Accounting Standards
No. 128 "Earnings Per Share" ("SFAS 128") during fiscal 1998, as required. The
Company will continue to apply APB Opinion No. 15, "Earnings Per Share" until
the adoption of SFAS 128. The new standard specifies the computation,
presentation and disclosure requirements for earnings per share. The proforma
earnings (loss) per common share computed under the provisions of SFAS 128 would
not be materially different as the amounts reported.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which will be effective for the
Company beginning July 1, 1998. SFAS No. 131 redefines how operating segments
are determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company has not yet
completed its analysis of which operating segments it will report on.
13. SUBSEQUENT EVENTS
On October 7, 1997, BTCo. agreed to extend the maturities of the
revolving line of credit and the notes payable to July 1, 1998 and December 31,
1997, respectively. The Company is currently negotiating with a major commercial
bank to provide a new credit facility that will replace all the credit
facilities currently with BTCo. The amended maturities of the debt have been
reflected in the accompanying consolidated balance sheet as of June 27, 1997. In
connection with the above agreement, the maturity of the buy-out option was
extended to October 31, 1997.
14. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the years ended June 30, 1996 and June 27, 1997, the Company's
management determined that $285,000 of cash surrender value of life insurance
policies attributable to prior years had not been recorded by the Company. As a
result, the Company's consolidated financial statements have been restated from
the amounts previously reported to reflect the recording of these assets. The
significant effect of this restatement on the Company's consolidated financial
statements was to increase retained earnings and other assets by $165,000 and
$285,000, respectively, and to decrease the deferred tax asset by $120,000. The
effect of the restatement on the results of operations for 1996 and 1997 was not
material.
F-13
