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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 29, 2000
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
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1 Industry Street, Poughkeepsie, New York 12603
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(Address of principal executive offices)
(845) 452-3000
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(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 16, 2000 was
17,621,081.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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ASD Group, Inc.
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Form 10-QSB
Quarterly Report
September 29, 2000
Index
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Page
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Part I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements............................... 1
Consolidated Balance Sheet:
September 29, 2000 (unaudited).................................. 1
Consolidated Statements of Operations (unaudited):
Three months ended September 29, 2000 and September 24, 1999.... 2
Consolidated Statements of Cash Flows (unaudited):
Three months ended September 29, 2000 and September 24, 1999.... 3
Notes to Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 6
Part II OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................. 10
Item 6. Exhibits and Reports on Form 8-K................................ 10
SIGNATURE
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PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
September 29,
2000
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ASSETS
Current assets:
Cash............................................................. $ 16,823
Accounts receivable, less allowance for doubtful accounts of
$350,171...................................................... 1,975,736
Inventory, less reserve of $229,814.............................. 2,752,721
Prepaid expenses and other current assets........................ 151,786
Asset held for sale.............................................. 727,690
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Total current assets.......................................... 5,624,756
Property, plant and equipment, net..................................... 3,136,466
Other assets........................................................... 51,423
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Total assets.................................................. $ 8,812,645
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long-term debt................................ $ 6,521,670
Accounts payable................................................. 2,360,259
Accrued expenses................................................. 605,437
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Total current liabilities..................................... 9,487,366
Long-term debt......................................................... 310,909
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Total liabilities............................................. 9,798,275
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Stockholders' deficiency:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
74,486 convertible shares issued and outstanding........... 1,646,182
Common stock, $.01 par value, 10,000,000 shares authorized,
17,621,081 shares issued and outstanding...................... 176,212
Paid-in capital.................................................. 8,293,914
Deficit.......................................................... (11,101,938)
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Total stockholders' deficiency................................ (985,630)
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Total liabilities and stockholders' deficiency......................... $ 8,812,645
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See notes to consolidated financial statements
1
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ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
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September 29, September 24,
2000 1999
Net sales ................................. $ 3,296,398 $ 2,913,055
Cost of goods sold ........................ 2,698,912 2,111,464
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Gross profit ..................... 597,486 801,591
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Operating expenses:
Sales and marketing ................. 91,172 134,490
General and administrative .......... 658,443 805,449
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Total operating expenses ......... 749,615 939,939
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Loss from operations ...................... (152,129) (138,348)
Interest expense .......................... 150,238 134,540
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Net loss ......................... $ (302,367) $ (272,888)
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Net loss per basic and diluted common share $ (.02) $ (.03)
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Weighted average common shares
outstanding ......................... 16,700,641 10,587,085
============ ============
See notes to consolidated financial statements
2
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ASD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
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September 29, September. 24,
2000 1999
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<S> <C> <C>
Operating activities:
Net loss ...................................................... $(302,367) $(272,888)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .............................. 59,539 66,922
Asset held for sale writedown .............................. 32,310 --
Interest accrued-stockholder advances ...................... 14,967 --
Changes in assets and liabilities:
Accounts receivable .................................... 440,357 (291,922)
Inventory .............................................. (255,375) 199,278
Prepaid expenses and other current assets .............. (124,197) 11,232
Other assets ........................................... 46,487 23,379
Accounts payable ....................................... 3,263 100,114
Accrued expenses ....................................... (85,401) 25,025
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Net cash used in operating activities ............... (170,417) (138,860)
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Investing activities:
Capital expenditures........................................... (534) --
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Financing activities:
Borrowings .................................................... 220,000 175,000
Payments of long-term debt (96,223) --
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Net cash provided by financing activities ........... 123,777 175,000
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Net increase (decrease) in cash ..................................... (47,174) 36,140
Cash, beginning of period ........................................... 63,997 4,961
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Cash, end of period ................................................. $ 16,823 $ 41,101
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Supplemental disclosure:
Cash paid during the period for:
Income taxes ............................................... $ -- $ --
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Interest ................................................... $ 136,553 $ 100,760
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</TABLE>
Notes to consolidated financial statements
3
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ASD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 30, 2000. 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.
The results for such interim period are not necessarily indicative of the
results to be expected for the entire year.
Note 2 - Inventory
The components of inventory are as follows:
Raw materials...................... $ 1,769,838
Work-in-process.................... 982,883
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$ 2,752,721
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NOTE 3 - DEBT
Included in the current portion of long-term debt is an outstanding
note payable of $818,000 to Peter C. Zachariou, the Company's President and
Chief Executive Officer, at an interest rate of 8% due on July 1, 2001. The
amount loaned during the period ended September 29, 2000 was $150,000. Interest
expense on this borrowing was $15,000 for the three months ended September 29,
2000.
In addition, during the period ended September 29, 2000, the Company
received a short-term loan of $70,000 from Benjamin Rabinovici, Director and
Co-Chairman of the Company. The loan is payable on demand and is non-interest
bearing. In November 2000, $35,000 of the outstanding amount was repaid.
On November 1, 2000, the Company received notice from PNC Bank that the
Company was in default on the line of credit, which expired October 30, 2000.
Such default constitutes a default under the Company's Option Agreement with
Bankers Trust Company. Management is currently negotiating with PNC Bank for an
extension of the line of credit. As part of the Company's negotiation with PNC
Bank for an extension of the expiration date of the line of credit, the Company
will also negotiate a waiver of any default on the line of credit.
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NOTE 4 - PREFERRED STOCK CONVERSION
During the quarter ended September 29, 2000, 300 shares of Series E
Convertible Preferred Stock were converted into 1,672,474 shares of the
Company's common stock and 200 shares of Series H Convertible Preferred Stock
were converted into 1,015,874 shares of the Company's common stock.
NOTE 5 - SUBSEQUENT EVENT - ASSET HELD FOR SALE
On November 11, 2000, the Company sold the land and building held for
sale. Net proceeds were $728,000, of which $410,000 was disbursed to reduce the
over-advance under the line of credit with PNC Bank.
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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 on a small number of large companies,
upon key personnel and upon certain industries as well as a company which has a
limited history of profitability and need for additional capital. 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 of 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
specializes in the fabrication, assembly and testing of complex industrial
products and non-invasive testing 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 automated test and production systems to less complex
products such as bicycle wheel hubs. Representative customers of the Company
include ENI Technologies, Inc., Karl Suss America, Inc., L3 Communications and
Van Dam Machine Co.
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. Moreover, 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, will result in an
expansion of its relationships with existing customers and the addition of new
customers.
6
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 29, 2000 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER 24, 1999
For the three months ended September 29, 2000, the Company's net sales
increased by $383,000 or 13.2% to $3,296,000 from $2,913,000 for the three
months ended September 24, 1999. The increase was primarily the result of higher
sales to existing customers and sales to new customers.
Cost of goods sold for the three months ended September 29, 2000
increased by $588,000 from $2,111,000 for the comparable period last year.
Increased sales, together with a greater mix of higher cost, lower margin
orders, resulted in the rise in cost of goods sold. Gross profit as a percentage
of net sales decreased from 27.5% for the three months ended September 24, 1999
to 18.1% for the three months ended September 29, 2000. In addition to the sales
mix changes in the current period, the comparable period last year benefited
from settlements with several vendors on past due amounts.
Operating expenses decreased for the three months ended September 29,
2000 by $190,000 or 20.2% to $750,000 from $940,000 for the three months ended
September 24, 1999. The decrease in operating expenses is primarily the result
of decreases in administrative functions at both the management and staff level.
Also contributing to the reduction was a continued focus on tightened cost
control and improved management of operating expenses. Included in general and
administrative expenses in the three months ended September 29, 2000 is a
write-down of the asset held for sale in the amount of $32,000. There was no
write-down for the comparable period in the previous year.
Earnings before interest, taxes, depreciation and amortization, or
EDITDA, reflected a loss of $93,000 for the three months ended September 29,
2000, as compared to a loss of $71,000 for the three months ended September 24,
1999.
Interest expense increased for the three months ended September 29,
2000 by $15,000 to $150,000 from $135,000 for the three months ended September
24, 1999. This resulted from an increase in average borrowing levels during the
period in support of higher sales volumes, combined with higher interest rates
as compared to the three months ended September 24, 1999.
The Company incurred a net loss of $302,000 or $.02 per share during
the three months ended September 29, 2000, as compared to a net loss of $273,000
or $.03 per share for the three months ended September 24, 1999.
LIQUIDITY AND CAPITAL RESOURCES
STATEMENTS OF CASH FLOWS
Net cash used in operations was $170,000 for the three months ended
September 29, 2000 as compared to $139,000 used in operations for the three
months ended September 24, 1999. The increase in cash used in operations during
the period results from higher investments in inventory, prepaid expenses, and
7
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account receivable levels. Net cash provided by financing activities during the
three months ended September 29, 2000 was $124,000 as compared to $175,000 for
the three months ended September 24, 1999. Working capital decreased to a
deficiency of $3,863,000 at September 29, 2000 from a deficiency of $3,145,000
at September 24, 1999. Over the comparable periods, net accounts receivable
increased $120,000 or 6.5% and net inventory increased $43,000 or 44%.
Offsetting these items was an increase in current portion of long-term debt of
$824,000 or 14.5% and an increase in accounts payable of $708,000 or 42.8%.
LIQUIDITY
The Company's immediate cash requirements are significant. No assurance
can be given that the Company will be able to successfully realize cash flow
from operations such that cash flow will be sufficient. Management believes that
the Company's existing and anticipated capital resources will not enable it to
fund its planned operations through Fiscal 2001. Management is currently
attempting to obtain additional financing and intends to raise additional funds
through equity and/or debt financings. The investors have committed to the
Company to fund the Company's working capital requirements through Fiscal 2001.
In addition, 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.
LINE OF CREDIT
As of September 24, 2000, the Company's revolving bank line of credit
(the "Line of Credit") permitted borrowings of up to $5,000,000. 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 up to $1,900,000. As
of September 29, 2000, $4,928,000 was outstanding under the Line of Credit and
the Company had no additional borrowings available.
As of September 29, 2000, the Company did not meet certain covenants
with respect to the line of credit with PNC Bank. PNC Bank has declared a
default on the line of credit. Such default also constitutes a default under the
Company's Option Agreement with Bankers Trust Company of $550,000, due February
2000.
8
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The Company's line of credit expired October 31, 2000. At this time,
management is negotiating with the bank for an extension of the line of credit.
The Company continues to borrow under the Line of Credit with certain
modifications. On November 15, 2000, PNC Bank permanently reduced the
overadvance by $410,000 to $1,090,0000, and reduced the Line of Credit to
$4,750,000.
As part of the Company's negotiation with PNC Bank for an extension of
the expiration date to the line of credit, the Company will also negotiate a
waiver of all defaults, including the covenant violations.
9
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PART II - OTHER INFORMATION
Item 3. Defaults upon Senior Securities
On November 1, 2000, the Company received notice from PNC Bank that the
Company was in default on the line of credit, which expired October 30, 2000.
Such default constitutes a default under the Company's Option Agreement with
Bankers Trust Company. Management is currently negotiating with PNC Bank for an
extension of the line of credit. As part of the Company's negotiation with PNC
Bank for an extension of the expiration date of the line of credit, the Company
will also negotiate a waiver of all defaults, including the covenant violations.
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.
Dated: November 20, 2000 /S/ Peter C. Zachariou
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Peter C. Zachariou, President
/S/ William Foote
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William Foote, Chief Financial Officer
11
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
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27 Financial Data Schedule
