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PRELIMINARY COPY
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INTERNATIONAL DESIGN GROUP, INC.
1815 GRIFFIN ROAD
SUITE 402
DANIA, FLORIDA 33004
(305) 927-9119
________________________________________________________
INFORMATION STATEMENT
This Information Statement is being furnished to the stockholders of
International Design Group, Inc., a Delaware corporation ("Company"), in
connection with certain actions to be taken by the written consent of the
holders of a majority of the issued and outstanding shares of the Company's
Common Stock. Such action is to be taken at 10:00 A.M., Eastern Time, on
November __, 1996 at the offices of the Company located at 1815 Griffin Road,
Suite 402, Dania, Florida 33004.
Only stockholders of record at the close of business on October __, 1996
(the "Record Date") are entitled to notice of the action to be taken by
written consent. At the close of business on the Record Date, the Company in
effect had 3,744,849 shares of its Common Stock issued and outstanding, each
share of which is entitled to one vote. A vote of the majority of the issued
and outstanding shares is required to approve each action to be considered in
connection herewith. All stockholders of record as of the Record Date may
submit written consents to the Company with respect to any or all of the
matters to be acted upon; however, no such consents are being solicited. No
appraisal or other similar rights are available to dissenters of the
following
proposed actions.
The Company will bear all of the costs of the preparation and
dissemination of this Information Statement and the accompanying materials
which are estimated to be approximately $25,000. No consideration has been
or will be paid to any officer, director, or employee of the Company in
connection with the proposed Reverse Stock Split or the preparation and
dissemination of this Information Statement and the accompanying materials or
otherwise in connection with the proposed Reverse Stock Split.
Correspondence with respect to the proposed Reverse Stock Split should
be addressed to the Secretary of the Company at the Company's principal
executive offices at 1815 Griffin Road, Suite 402, Dania, Florida 33004.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
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THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PROPOSED REVERSE STOCK SPLIT
Pursuant to a resolution adopted on October 22, 1996, the Company's
Board of Directors has unanimously recommended that the Company "go private"
by undertaking a reverse stock split pursuant to which one new share of the
Company's Common Stock will be issued in exchange for each 12,500 shares of
the Company's Common Stock that are currently issued and outstanding (the
"Reverse Stock Split"). Shares of the Company's Common Stock that are
currently issued and outstanding are hereinafter referred to as the "Old
Shares," and the shares of Common Stock that will become issued and
outstanding upon consummation of the proposed reverse stock split are
hereinafter referred to as the "New Shares."
To the extent that this Reverse Stock Split results in any stockholder
owning less than a full New Share, the Company will pay cash for each such
fractional share in an amount equal to the appropriate fraction of $.36 per
whole share (which represents the fair value of a whole share before the
consummation of the proposed reverse stock split as determined by the
Company's Board of Directors).
Reasons for the Reverse Stock Split
The Board of Directors has concluded that it is no longer in the best
interests of the Company or its stockholders to continue as a publicly-held
reporting entity due to the cost of preparing and filing periodic and other
reports with the Securities and Exchange Commission, the cost of convening
meetings of stockholders to conduct even relatively routine germane corporate
business and the cost of communicating with stockholders. Because of
restrictions imposed on the trading of certain securities under the Penny
Stock Reform Act of 1990, there is little likelihood that any viable trading
market for the Company's Common Stock will develop unless the Company
qualifies for listing on a recognized exchange. Although the Board has
diligently attempted for several years to position the Company for listing on
NASDAQ or some other national exchange, the efforts of the Board have not
been successful and it currently appears that it is extremely unlikely that
the Company would qualify for any such listing in the foreseeable future.
Management also believes that it can reduce administrative expenses and
manage the Company more efficiently by significantly reducing the number of
its stockholders. Further, the Company is in need of additional outside
financing for the expansion of its
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lending business in Florida, and perhaps diversifying into other types of
loans. Management has been advised that given the size of the Company's
business, no additional equity financing is currently available, and further,
the Company's current structure (given the large number of stockholders and
the lack of a viable market in its Common Stock for an extended period) makes
the Company an unattractive investment vehicle for other types of outside
funding. Management has been further advised that in order for the Company
to obtain significantly higher lines of credit from financial institutions in
the future, it will be required to maintain certain debt-to-equity ratios that
would require the infusion of additional equity capital.
After analysis, the Board of Directors determined that in order for the
Company to have any realistic chance of success in the future given the
challenges it will face from increased competition and declining profit
margins, it will be necessary for the number of public shareholders to be
reduced so as to avoid the requirements of a public company, even though such
a restructuring will require that otherwise available assets and resources be
utilized to accomplish the Reverse Stock Split.
While it is management's view that a much more closely-held entity would
be a better candidate to obtain additional outside funding, no assurance can
be given that any such funding will be available to the Company under any
circumstances. Although no specific transaction is currently contemplated,
it is possible that the Company's efforts to obtain outside funding from some
source may result in the occurrence of an extraordinary transaction involving
the Company such as the issuance of additional common or preferred shares, a
change in the present dividend policy of the Company, or the sale or transfer
of a material amount of the assets of the Company to a different entity.
While the Company has generally been able to maintain profitable
operations, revenues from operations have not provided the excess capital
that management believes is necessary to expand the focus of the Company's
business. Certain recently adopted regulatory changes in the State of
Florida (which is the state in which the Company currently conducts most of its
business) have significantly increased competition in the insurance premium
finance business and caused profit margins to decline precipitously.
Management also determined recently that the Company's attempts to conduct
business activities in the states of South Carolina, Maryland, Tennessee and
Georgia should be immediately curtailed due to a lack of profitable
operations in those states and the lack of available capital.
The proposed Reverse Stock Split is designed to significantly decrease
the number of existing stockholders of the Company to reduce expenses, allow
flexibility in attempting to negotiate
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future transactions and to facilitate further restructuring if necessary.
Alternative means to accomplish this purpose have not been rejected
(other than certain means which in the opinion of management are more
detrimental to minority stockholders); they simply have not been available to
the Company. These alternatives included a tender offer at the same price
per share, or a purchase of its shares in the open market at the depressed
market price (which is substantially less than $.36 per share), but such
proposals, in the Board's view, would result in more costs and were not
likely to accomplish the objective of "going private." The Board also
considered other matters in this regard, including reports on discussions
which some members had previously had with investment bankers and Company
counsel and alternatives to going private.
The Company's Common Stock was at one time traded in the over-the-counter
market. In 1989, however, NASDAQ advised the Company that the stock would no
longer be quoted on the NASDAQ system due to the Company's failure to meet
NASDAQ's minimum listing requirements. Since that time there has not been
any established trading market for the stock, other than limited or sporadic
trading. The Company's Preferred Stock has never been traded on any public
market or exchange. By effecting the Reverse Stock Split, stockholders will
be given the opportunity to liquidate their holdings without paying brokerage
fees.
Rule 13e-3 Transaction Statement. In connection with the proposed
Reverse Stock Split, the Company has filed with the Securities and Exchange
Commission (the "SEC") a Rule 13e-3 Transaction Statement on Schedule 13E-3.
See "Other Information; Documents Incorporated by Reference."
Fairness of the Reverse Stock Split
The Company's Board of Directors unanimously approved the
above-described proposal to effectuate a 1 for 12,500 reverse stock split of
the Company's Common Stock for submission to a vote of stockholders. The
Company's management believes that the proposed Reverse Stock Split is fair
to stockholders because of the challenges which must be overcome to sustain
any expansion of its business and the lack of a market for the Company's
stock.
Fairness of Cash Payments in Lieu of Shares. The Board of Directors
believes that the payment of cash in the amount of $.36 per share of Old
Shares in lieu of issuance of New Shares to persons who hold less than one
full New Share after the Reverse Stock Split, will enable stockholders to
liquidate their shares easily and at a fair price without incurring brokerage
costs that, especially in the case of small stockholders (the vast majority
of the Company's stockholders own fewer than 500 shares which, based on the
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current bid price of $0.1875 per share, have a current market value of less
than $100), would otherwise sharply decrease or even eliminate the actual net
proceeds of the sale to the stockholder.
Factors Considered in Fairness Determination. In reaching its
determination that the proposed Reverse Stock Split is fair to the Company
and its stockholders, the Board of Directors considered, among other things,
each of the directors' knowledge of and familiarity with the Company's own
business prospects, as well as general economic, industry and market
conditions and prospects. The Board of Directors also considered the
absence of a liquid market for shares of its Common Stock, the opportunity
that the Reverse Stock Split would afford stockholders to liquidate their
investments in the Company without incurring brokerage costs and the future
cost-savings that the Company and its continuing stockholders will enjoy if
as a result of the Reverse Stock Split the Company ceases to be a reporting
company under the Exchange Act. Management estimates that the Company will
be able to reduce its expenses (including costs associated with meetings of
stockholders as required under state law) by approximately $50,000 per year
by not being a reporting company.
Absence of Independent Third-Party Valuation of Arms'-Length
Negotiation. The Company has not received any report, opinion, or appraisal
from any outside party that is materially related to the proposed Reverse
Stock Split. In light of the circumstances, including the directors'
knowledge of and familiarity with the Company's own business, financial
condition, operating results, cash flows, assets, liabilities and prospects,
as well as with general economic, industry, and market conditions and
prospects and the wide variety of factors considered in connection with its
valuation of the fairness of the proposed Reverse Stock Split, the Board of
Directors did not consider it necessary to retain either an investment bank
or financial adviser to render a report or opinion with respect to the
fairness of the proposed Reverse Stock Split to the Company or its
stockholders or an unaffiliated representative to represent the unaffiliated
stockholders of the Company in negotiating the terms of the Reverse Stock
Split. The primary factor considered by the Board in determining not to
retain the services of such a financial adviser or unaffiliated representative
was its belief that the cost of such services would be excessive relative to
the size of the transaction and the potential benefits to the Company and its
stockholders.
Potential Conflicts of Interest. Those stockholders who own more than
12,500 shares of the Company's Common Stock and therefore will continue to be
stockholders after the proposed Reverse Stock Split are also the directors of
the Company who determined the fairness of the proposed Reverse Stock Split.
As stated above, such Board of Directors did not retain the services of an
investment banker or other financial adviser to render a report or opinion
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with respect to the fairness of the proposed Reverse Stock Split to the
Company or its stockholders or an unaffiliated representative to represent
the unaffiliated stockholders of the Company in negotiating the terms of the
Reverse Stock Split.
Determination of Fair Value. In making its determination of fair value,
the Board of Directors considered a number of factors in addition to those
set forth above, including the book value, market value and going concern
value of the business.
The Board determined that for the purpose of conducting its analysis of
fair value with respect to this transaction, the Company's book value of
approximately $2,700,000 (or $0.70 per share) must be adjusted appropriately
to reflect the approximate liquidation value of the business. The Board was
aware of the recent liquidation of three other entities that had previously
been engaged in the insurance premium finance business in Florida. Although
no public information was available to the Company with respect to the
liquidation of any of these entities, the Board was aware that difficulties
were encountered in the collection of accounts receivable in each of the
liquidations after it became known that the subject businesses would not
continue in existence, and that the liquidation process was both expensive
and time consuming.
The Board determined that on the basis of its general knowledge of the
business and its understanding of the problems encountered by these other
entities in conducting their liquidations, the net realizable value of the
Company's assets in the event of a liquidation would be approximately
$500,000 less than the amount reflected as book value, or approximately
$2,200,000 ($0.58 per share). It was acknowledged that the Company is not
currently considering any such liquidation (which, absent the prior written
consent of the Company's senior lender, would not be permitted under the
Company's existing loan documents), and that the amount which might be
received by shareholders in an actual liquidation is an amount that is not
capable of being forecast with any degree of certainty.
The Board considered the market value of the shares, which the Board
concluded should be determinative of the issue of the fair value of the
shares of a public company under ordinary market conditions. It was
acknowledged, however, that there currently exists no viable market for the
Company's shares and that recently there have been very few recorded trades
in the Company's shares. The Board analyzed the market prices for the
Company's shares for the past six months and determined that the average bid
price of the Company's common stock during the past six months was $0.193 per
share, the average ask during the same period was $0.380 per share, and the
average of the bid and ask for the six month period was $0.29 per share. On
the basis of this analysis, the Board determined that $0.29 represents the
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current fair market value of the shares as determined by the investing public.
The Board also analyzed the price at which the business could reasonably
be expected to be sold to a willing buyer as a going concern based upon the
Company's current price-earnings ratio. It was acknowledged that management
is not aware of any willing buyers, there is currently considerable pessimism
in the insurance premium finance business in Florida because of recent
regulatory changes and the resulting impact on competitive conditions (see
discussion below), the business is not currently large enough to be desirable
to most potential buyers and the business does not offer sufficient liquidity
to be attractive.
Management reported to the Board that, although the Company is not for
sale and no offers have been solicited, management is not aware of any firm
offers made by any unaffiliated persons during the preceding eighteen month
period for the merger or consolidation of the Company with or into such
person or of such person with the Company, for the sale or other transfer of
all or any substantial portion of the Company's assets, or of securities of
the Company that would enable the holder thereof to exercise control of the
Company.
To the contrary, due to recent regulatory changes governing the
insurance premium finance business in the State of Florida, the Board
acknowledged that there is considerable pessimism in the industry with
respect to the future prospects of the Company's business. Effective July 1,
1996, a new law in the State of Florida now makes it allowable for those
engaged in the insurance premium finance business to pay commissions to
insurance agents for referring business. As all of the Company's business
comes from referrals of this type, and it is expected that these agents will
not continue to make referrals to the Company unless they are paid a fee for
doing so, the Company's margins will be impacted directly.
It was acknowledged by the Board that it was these same regulatory
changes and their negative impact on profit margins that served as a major
impetus for the Company to further reduce its expenses by going private. The
Board also acknowledged that the future business prospects of the Company
were not as promising as they once were because of changes in state
regulations which have spawned greatly increased competition and reduced
profit margins.
Management was not aware of any sales of businesses similar to that of
the Company since the recently adopted changes in the Florida insurance
premium finance regulations, but, based upon its general knowledge of the
business, the Board determined that without taking the subject changes into
consideration, the business could reasonably be expected to be sold to a
willing buyer as a going concern based upon an after tax price-earnings ratio
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of approximately four to five, but that the absolute highest price that could
possibly be expected to be obtained in such a sale would be an after tax
earnings multiple of ten. The Board acknowledged that according to its most
recent audited financial statements, the Company had pre-tax earnings of
$136,000 for the fiscal year ended February 29, 1996.
Since the Company has a tax loss carry-forward which would generally not
be available to a purchaser of the business, the Board determined that a
reasonable purchaser would have to reduce the earnings by the amount of tax
which would have been due had the business been owned by the purchaser
instead of the Company. As the subject earnings would have theoretically
been taxed in the hands of a prospective purchaser at a rate of 35%, the
Board determined that the after tax earnings of the Company were $88,400 (or
$0.022 per share). Assuming that the business could be sold to a willing
buyer as a going concern for a price earnings multiple of ten, the Board
determined that the fair value of the business as a going concern (without
giving effect to recent regulatory changes) was approximately $884,000 (or
approximately $0.22 per share).
In reviewing its analysis, the Board concluded that the Company's common
shares currently have a liquidation value of approximately $0.58 per share
which could probably be collected over some period of time if the Company
were to be liquidated in an orderly manner, a current fair market value of
approximately $0.29 per share as determined by the investing public, and a
going concern value of approximately $0.22 per share. The Board determined
in its reasonable business judgment that while the liquidation value, market
value and going concern value of the shares are all important factors to be
considered in light of all of the circumstances of the proposed transaction,
none of these factors should be viewed in isolation as being determinative of
fair value for the purposes of this transaction, and that all of the factors
should be given equal weight by the Board in its analysis. In giving each of
the factors equal weight, the Board determined that the fair value of the
Company's shares for the purpose of determining the amount to be paid to
shareholders to eliminate fractional shares which would be created as the
result of the proposed reverse stock split is $0.36 per share (which amount
represents the average of the Board's determination of the liquidation value,
market value and going concern value of the Company's shares as set forth
above).
This amount will be paid in cash for each Old Share to each stockholder
of record as of the Record Date who owns less than a full New Share after
consummation of the Reverse Stock Split, and who surrenders to the Company's
transfer agent one or more certificates representing ownership of such Old
Shares. See "Exchange of Stock Certificates; Receipt of Cash Payment."
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No Further Vote is Required. The affirmative vote of a majority of the
currently outstanding shares of Common Stock of the Company is required for
approval of this proposal, and such vote has already been obtained by the
written consent of the holders of a majority of the currently outstanding
common shares. Such consent is sufficient to approve the Reverse Stock Split
under the Delaware General Corporation Law, and no other vote or consent of
stockholders is necessary or will be sought in connection with the Reverse
Stock Split.
Conduct of the Company's Business After the Reverse Stock Split
Effect on Continuing Business and Operations. The Company believes
that the proposed Reverse Stock Split will have only the effect on the
business and operations of the Company as discussed herein, that being the
ability to obtain outside funding, and expects to continue to conduct such
business and operations as they are currently being conducted. If the
Reverse Stock Split is effected, stockholders who receive cash payments in
lieu of New Shares will not remain as stockholders of the Company and
therefore will not participate in any future earnings or growth of the
Company. Stockholders who remain as stockholders will retain all of the
rights and benefits possessed by a stockholder prior to the Reverse Stock
Split except those that result from the Company's status as a publicly held
reporting company.
Termination of Reporting Company Status. If the proposed Reverse Stock
Split is effected, it is anticipated that the Company will cease to be a
reporting company under the Exchange Act. As a result, the Company will no
longer file annual and quarterly reports, proxy statements, and other
documents with the SEC. In addition, the Company will no longer be required
to comply with the proxy rules of Regulation 14A promulgated under Section 14
of the Exchange Act, and its officers, directors and 10%-or-greater
stockholders will no longer be subject to the reporting requirements and
"short-swing" security trading restrictions under Section 16 of the Exchange
Act. Continuing stockholders will no longer be entitled to receive annual
reports and will no longer have the benefit of a public market for their
shares of the Company's stock.
Changes to Authorized Capital Stock and Capital Account; Terms of Stock
Unchanged. If the proposed Reverse Stock Split is effected, the number of
authorized shares of the Company's Common Stock will be reduced from
10,000,000 to 350 shares and the number of authorized shares of the Company's
Preferred Stock will be reduced from 1,000,000 to 25 shares. Apart from such
changes, there will be no difference between the Old Shares and the New
Shares to be issued in exchange for them; however, it is anticipated that the
elimination of fractional shares will result in substantially fewer
stockholders of the Company.
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The reverse stock split will cause the number of the Company's issued
and outstanding shares of Common Stock to decrease from 3,744,849 to
approximately 215. No shares of the Company's Preferred Stock are currently
issued or outstanding (following the conversion by Robert Gardner on February
26, 1996 of 500 shares of Preferred Stock owned by him into 500,000 shares of
Common Stock). The current stated capital will not be affected by the
reverse stock split. See, "Proposal to Adopt Resolution Regarding Stated
Capital."
Stockholders Eligible to Continue as Stockholders Without Additional
Purchases. The following persons will be eligible to continue to be
stockholders, and have indicated that they intend to continue as
stockholders, since each of these stockholders currently owns or has a right
to acquire more than 12,500 shares of Common Stock of the Company and will
consequently be eligible to continue to own at least one full New Share if
the proposed Reverse Stock Split is consummated:
Robert L. Gardner
Marilyn Gardner
Kenneth Gardner
David Raymond
Dividends. No cash dividends have been declared or paid on the
Company's Common Stock from the inception of the Company to the present, and
no cash dividends are contemplated to be paid in the foreseeable future.
Dividends have been paid, however, on the Company's Preferred Stock.
Further Information. For further information with respect to the
Company and its business and operations, see the Company's Annual Report on
Form 10-K/SB for the year ended February 29, 1996 and its quarterly report on
Form 10-Q/SB for the quarter ended August 31, 1996, copies of which may be
obtained from the Company upon request, and which are incorporated herein by
reference.
Lack of Appraisal Rights
Pursuant to the Delaware Corporation Law, dissenting stockholders will
not have appraisal rights if the proposed Reverse Stock Split is effected.
Stockholders who believe that they may be aggrieved by the Reverse Stock
Split may have other rights under federal law or common law, such as rights
relating to the fairness of the Reverse Stock Split and the fiduciary
responsibilities of the corporate officers, directors and stockholders. The
nature and extent of such rights, if any, may vary depending upon the facts
and circumstances.
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Exchange of Stock Certificates; Receipt of Cash Payments
Letters of Transmittal. If the proposed Reverse Stock Split is
effected, the stock certificates formerly representing Old Shares will cease
to represent such shares and thereafter will represent the New Shares into
which they have been converted, or the right to receive a cash payment in
lieu of such shares, as the case may be, all as described below. Enclosed is
a Letter of Transmittal for use in exchanging old stock certificates for a
new stock certificate or cash payment.
Each stockholder who holds of record less than 12,500 Old Shares (the
equivalent of one New Share) should use the enclosed Letter of Transmittal to
surrender his old stock certificate(s) representing the Old Shares and elect
one of the following options:
(i) To request a cash payment in an amount equivalent to $.36 per Old
Share of Common Stock represented by such certificate(s); or
(ii) If the stockholder has purchased additional Old Shares in the open
market in an amount that, when added to his current holdings of Old Shares,
is sufficient to equal at least 12,500 Old Shares (the equivalent of one whole
New Share), to surrender the stock certificates representing such shares for
a new stock certificate representing New Shares.
PLEASE NOTE THAT ALL STOCK CERTIFICATES SENT TO THE COMPANY SHOULD BE DULY
ENDORSED FOR TRANSFER TO THE COMPANY, WITH A MEDALLION SIGNATURE GUARANTY,
WHICH MAY BE OBTAINED FROM MOST BANKS AND BROKERAGE FIRMS. DO NOT SEND IN
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YOUR STOCK CERTIFICATES WITHOUT A MEDALLION SIGNATURE GUARANTY, AS THEY WILL
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BE RETURNED TO YOU.
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Each stockholder who holds of record at least 12,500 Old Shares (the
equivalent of one whole New Share) should use the enclosed Letter of
Transmittal to exchange his old stock certificate(s) for a new certificate
representing the New Shares into which the Old Shares of Common Stock
formerly represented by the old stock certificate are converted pursuant to
the Reverse Stock Split.
AGAIN, PLEASE NOTE THAT ALL STOCK CERTIFICATES SENT TO THE COMPANY SHOULD BE
DULY ENDORSED FOR TRANSFER TO THE COMPANY, WITH A MEDALLION SIGNATURE
GUARANTY. DO NOT SEND IN YOUR STOCK CERTIFICATES WITHOUT A MEDALLION
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SIGNATURE GUARANTY, AS THEY WILL BE RETURNED TO YOU.
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Financing of the Reverse Stock Split
The Company estimates that the maximum cost that the Company will incur
in connection with the proposed Reverse Stock Split will be approximately
$407,239, consisting of estimated cash payments in lieu of shares of new
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Common Stock of approximately $382,239 and estimated transactional expenses
of approximately $25,000. The Company intends to finance such costs from its
working capital, and does not intend to finance any part of such costs
through borrowings. To the extent that working capital is used to finance the
reverse stock split, however, the Company will borrow on its line of credit to
replenish working capital. The Company's Board of Directors may, however,
postpone or abandon the Reverse Stock Split at any time prior to its
consummation, for any reason, including without limitation, if in the
Directors' sole judgment, consummation of the Reverse Stock Split would
unduly deplete the Company's working capital.
Recent Purchases of Company Stock by the Company and/or Affiliates
Neither the Company nor any affiliate of the Company has made any
purchase of the Company's Common Stock during the past 60 days.
Resolutions to be Adopted
In connection with the proposed Reverse Stock Split, resolutions in
substantially the following form will be adopted by the written consent of
the holders of a majority of the Company's issued and outstanding shares of
Common Stock:
RESOLVED, that the Board of Directors is hereby authorized, in its
discretion, to effect a reverse stock split pursuant to which each twelve
thousand five hundred (12,500) shares of the Company's Common Stock shall be
exchanged for one share of reclassified Common Stock (the "Reverse Split");
and
FURTHER RESOLVED, that the Directors and Officers of the Company are
hereby authorized and directed to execute, deliver and file, as appropriate,
such documents, if any, as may be necessary or convenient with the Secretary
of State of the State of Delaware and such other Federal, state and local
authorities, and to take such other steps as are in their sole judgment
necessary or appropriate, to give effect to such reclassification of shares;
and
FURTHER RESOLVED, that if the Reverse Split is effectuated by the Board
of Directors, it shall be implemented on the following terms and under the
following procedures:
a. Immediately upon the Reverse Split becoming effective, the shares of
Common Stock outstanding prior to the Reverse Split ("Old Stock") shall be
converted at a ratio of twelve thousand five hundred-to-one into shares of
fully-paid and non-assessable Common Stock ("New Stock"), so that each
stockholder who (after the Reverse Stock Split) is then the owner of less
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than a single full share of New Stock will be eliminated as a stockholder of
the Company and shall be entitled to receive a cash payment from the Company
in an amount equal to the fair value of such fraction of a share as determined
by the Board of Directors in its sole and absolute discretion.
b. From and after the effective date of the Reverse Split,
certificates representing shares of Old Stock shall be deemed to represent
only the right to receive either (i) shares of New Stock to which an
individual stockholder would be entitled, or (ii) payment in cash of the
fair value of the fractional shares represented by such Old Stock.
c. The Company's Stock Option Plans shall be amended by the Board of
Directors to the extent necessary and appropriate, in the sole judgment of
the Directors, to adjust the beneficial interests in, and the cost of shares
issued pursuant to, such Plans in proportion to the exchange ratio, provided
that shares under any such stock plans shall be rounded to the nearest whole
share of New Stock; and
FURTHER RESOLVED, that the Board of Directors of the Company is hereby
authorized to adopt a resolution adjusting the capital accounts of the Company
as, in its judgment, shall be in the best interests of the Company in light
of the adoption of the foregoing resolutions; and
FURTHER RESOLVED, that the Board of Directors of the Company is hereby
authorized and directed to adopt any or all changes to the Bylaws of the
Company, and the officers of the Company are hereby authorized and directed
to do all other things and execute and file all documents, including amendments
to the Company's Certificate of Incorporation, as amended, which in their
sole judgment are deemed to be necessary and proper to carry out the intent
of the foregoing resolutions.
Certain Federal Income Tax Consequences
THE COMPANY HAS NOT SOUGHT, AND DOES NOT INTEND TO SEEK A RULING FROM
THE INTERNAL REVENUE SERVICE OR AN OPINION OF COUNSEL AS TO ANY TAX
CONSEQUENCES OF THE PROPOSED REVERSE STOCK SPLIT. THE FOLLOWING SUMMARIZES
CERTAIN FEDERAL INCOME TAX CONSEQUENCES THAT THE COMPANY BELIEVES WOULD
RESULT TO STOCKHOLDERS WHO ARE RESIDENTS OF THE UNITED STATES AS A
CONSEQUENCE OF THE REVERSE STOCK SPLIT. THIS DISCUSSION IS BASED ON CURRENT
LAW AND DOES NOT TAKE IN TO ACCOUNT ANY SPECIAL RULES THAT MAY AFFECT THE
TREATMENT OF PARTICULAR STOCKHOLDERS, SUCH AS DEALERS IN SECURITIES, TAX-
EXEMPT ENTITIES, NON-RESIDENT ALIENS, OR FOREIGN CORPORATIONS. THIS
DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY, WITHOUT REFERENCE TO
THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY SPECIFIC STOCKHOLDER. EACH
-13-
<PAGE>
STOCKHOLDER SHOULD CONSULT HIS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL
INCOME TAX CONSEQUENCES IN HIS OWN CIRCUMSTANCES, AND WITH RESPECT TO THE
EFFECTS OF APPLICABLE STATE, LOCAL, AND FOREIGN TAX LAWS AS TO WHICH NO
INFORMATION IS PROVIDED HERE.
Tax Consequences to the Company. The proposed Reverse Stock Split is
intended to qualify for federal income tax purposes as a tax-free
reorganization of the Company pursuant to Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company does
not expect that it will experience any tax consequences as a result of the
Reverse Stock Split.
Tax Consequences to Stockholders The following discussion assumes
each stockholder holds his Old Shares of Common Stock as a capital asset.
Exchange of Old Shares Solely for New Shares. A stockholder who
--------------------------------------------
exchanges all of his Old Shares solely for New Shares will not recognize any
gain or loss on the exchange . The aggregate tax basis of the New Shares
received will be equal to the aggregate tax basis of the Old Shares
exchanged, and the holding period of the New Shares of Common Stock exchanged.
Exchange of Old Shares Solely for Cash. A stockholder who exchanges all
--------------------------------------
of his Old Shares (fractional New Shares of Common Stock received in respect
of Old Shares as a result of the Reverse Stock Split) received in the
transaction for cash will, assuming he is not treated as owning any other New
Shares immediately after the Reverse Stock Split, recognize capital gain or
loss equal to the difference between the basis of the Old Shares surrendered
and the cash received. Such capital gain or loss will be long-term capital
gain or loss, if the stockholder's holding period for his Old Shares exceeds
one year; otherwise, it will be short-term capital gain or loss.
For this purpose, stock "owned" immediately after the Reverse Stock
Split will include stock actually owned as well as stock constructively owned
pursuant to the rules of Section 318 of the Code (which in general attributes
to a taxpayer stock owned by certain related individuals and entities and
stock that the taxpayer has the right to acquire upon the exercise of
options.) In the event such a stockholder actually or constructively owns
New Shares of Common Stock immediately after the Reverse Stock Split, it is
unclear whether the holder will automatically recognize capital gain or loss
or instead be required to treat the entire amount of the cash received as a
dividend unless the redemption of the stockholder's shares is a substantially
disproportionate redemption of stock with respect to such stockholder or is
essentially equivalent to a dividend, in each case under the rules similar to
the rules of Sections 356(a)(2) and 302 of the Code.
-14-
<PAGE>
Backup Withholding. Each stockholder who receives cash for his Old
Shares will be required to provide the Company with a correct Taxpayer
Identification Number on the Form W-9 or substitute Form W-9 included with
the Letters of Transmittal and to certify that he is not subject to backup
withholding. Failure to provide the information and certification on the
Form W-9 (or substitute Form W-9) may subject the stockholder to 31% federal
income tax backup withholding with respect to any cash payment for the
stockholder's Old Shares.
Effective Time
Subject to the rights of the Board of Directors to abandon or postpone
the proposed Reverse Stock Split, the Reverse Stock Split will be effected by
filing an amendment to the Company's Certificate of Incorporation with the
Delaware Secretary of State and will be effective upon such filing.
Further Stockholder Approval Not Required
The affirmative vote of a majority of the currently outstanding shares
of Common Stock of the Company is required for approval of this proposal, and
such vote has already been obtained by the written consent of the holders of
a majority of the currently outstanding common shares. Such consent is
sufficient to approve the Reverse Stock Split under the Delaware General
Corporation Law, and no other vote or consent of stockholders is necessary or
will be sought in connection with the Reverse Stock Split. ACCORDINGLY, THE
COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND THE
COMPANY A PROXY.
PROPOSAL TO AMEND CERTIFICATE OF
INCORPORATION TO REDUCE AUTHORIZED SHARES
The Company's Certificate of Incorporation presently provides that there
are 10,000,000 shares of $0.05 par value Common Stock and 1,000,000 shares of
$0.01 par value Preferred Stock authorized, of which 3,744,849 shares of
Common Stock are currently issued and outstanding. Upon consummation of the
proposed 1 for 12,500 Reverse Stock Split (if such proposal is approved by
the stockholders as anticipated), there would then be approximately 215
shares of Common Stock and no shares of Preferred Stock issued and
outstanding. The Board of Directors has determined that under such
circumstances, it would be in the best interests of the Company and all of
its stockholders to amend the Company's Certificate of Incorporation to reduce
the number of the Company's authorized shares of $0.05 par value Common Stock
from 10,000,000 to 350 shares, and the number of shares of Preferred Stock
would be reduced from 1,000,000 to 25. It is anticipated that the proposed
-15-
<PAGE>
reduction in the number of authorized shares of both classes of stock would
be more consistent with the authorized capital of other companies similarly
situated, and since only approximately 215 shares of Common Stock and no
shares of Preferred Stock would be issued and outstanding after the proposed
Reverse Stock Split, the authorization of 350 and 25 shares of each class,
respectively, would still leave available for issuance in the future, at the
discretion of the Board of Directors, an adequate number of shares for any
purpose(s) deemed to be in the best interests of the Company and its
stockholders. Accordingly, the Board of Directors has unanimously
recommended to the stockholders that immediately upon consummation of the
proposed Reverse Stock Split, the Company's Certificate of Incorporation be
amended to reduce the number of authorized shares of the Company's $0.05 par
value Common Stock from 10,000,000 to 350 shares and the number of shares of
Preferred Stock be reduced from 1,000,000 to 25, and that the amount of stated
capital on the Company's books and records remain unchanged. If approved,
the amendment would become effective upon the filing of an appropriate
Certificate of Amendment with the Delaware Department of State, and
effectiveness is conditioned upon consummation of the Reverse Stock Split.
Further Stockholder Approval Not Required
The amendment of the Company's Certificate of Incorporation must be
approved by a majority of the shares entitled to vote thereon, and such vote
has already been obtained by the written consent of the holders of a majority
of the currently outstanding shares. Such consent is sufficient to approve
the amendment under the Delaware General Corporation Law, and no other vote or
consent of stockholders is necessary or will be sought in connection with the
amendment. ACCORDINGLY, THE COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU
ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
PROPOSAL TO ADOPT RESOLUTION
REGARDING STATED CAPITAL
There is a proposal to adopt a resolution which provides that the stated
capital of the Company shall remain unchanged after the Reverse Stock Split
and that the Reverse Stock Split will not result in any modification of any
class of securities of the Company, nor in any modification of the
capitalization of the Company. The sole purpose for the adoption of such a
resolution, in fact, is for clarification of the particular element of the
recapitalization that the preceding proposal to effectuate a reverse stock
split will not in any way impair the capital of the Company.
The Company's Board of Directors unanimously approved the proposal to
adopt a resolution stating that the stated capital of the Company shall
remain unchanged for submission to a vote of stockholders.
-16-
<PAGE>
Further Stockholder Approval Not Required
The affirmative vote of a majority of the currently outstanding shares
of Common Stock of the Company is required for approval of this proposal, and
such vote has already been obtained by the written consent of the holders of
a majority of the currently outstanding shares. Such consent is sufficient to
approve this proposal under the Delaware General Corporation Law, and no
other vote or consent of stockholders is necessary or will be sought in
connection with this proposal. ACCORDINGLY, THE COMPANY IS NOT ASKING YOU
FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
INTEREST OF CERTAIN PERSONS IN FAVOR OF OR IN OPPOSITION TO
MATTERS TO BE ACTED UPON
Robert L. Gardner, Marilyn Gardner and David Raymond, comprising the
Company's current Board of Directors, all have a substantial interest in the
matters to be acted upon, in that after the proposed Reverse Stock Split is
effectuated, Mr. and Mrs. Gardner and Mr. Raymond will all remain stockholders
of the Company and will participate in any benefits to be derived therefrom.
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Year Ended Ended Ended
2/29/96 2/28/95 8/31/96 8/31/95
---------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Total Revenues 3,186,169 2,351,131 2,071,446 1,541,996
Income Before
Extra- ordinary
Items 136,015 338,208 107,877 159,942
Working Capital 6,580,224 2,196,502 10,287,368 2,317,601
Total Assets 9,216,059 6,132,413 12,427,680 8,018,527
Total Assets
Less Deferred
Research and
Development
Charges and
Excess of
Cost of Assets
Acquired
Over Book Value 9,212,059 6,124,413 12,425,680 8,012,527
Shareholders'
Equity 2,620,766 2,441,140 2,728,643 2,582,467
Net Income
per Common
Share (and
Common Share
Equivalents) 0.04 0.11 0.03 0.05
Net Income Per
Share on
Fully Diluted
Basis 0.04 0.10 0.03 0.04
Book Value for
Share as
of the Most
Recent Fiscal
Year and as of
the Date of the
Latest Interim
Balance Sheet 0.70 0.85 0.73 0.90
Shares
Outstanding 3,744,849 2,877,613 3,744,849 2,877,613
</TABLE>
-17-
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
Name Age Position
- ------------------ ----- ---------------------
Robert L. Gardner 63 Chairman of the Board
and Director
David Raymond 38 President, Treasurer,
Secretary and Director
Marilyn Gardner 54 Director
Each director is elected at the Company's meeting of stockholders, if
any, and serves until a successor is duly elected and qualified. Officers
are elected by and serve at the will of the Board of Directors. No director
receives any compensation for his services as a director. However, Marilyn
Gardner receives $500 per month for consulting services performed for the
Company.
Mr. Gardner has served as the Chairman of the Board of the Company since
December 1986 and as a director of the Company since September 1986 and as
the Treasurer of the Company from September 1986 through July 1988. From
September 1986 to December 1986, Mr. Gardner served as the President of the
Company. Prior to purchasing a substantial number of shares of the Company,
Mr. Gardner was a private investor. Mr. Gardner was the Chairman of Griggs
International, Inc., a publicly-held manufacturer of office, school and
theater seating from 1978 to 1983. In 1983, the business was sold and the
company liquidated.
Mr. Raymond has served as Treasurer of the Company since July, 1988 and
was appointed President, Secretary and a Director on July 10, 1990. From 1981
until 1987, Mr. Raymond was employed by the accounting firm of Touche Ross
and Co. (currently Deloitte & Touche). Mr. Raymond is a Certified Public
Accountant licensed in Florida and is a member of the American Institute of
Certified Public Accountants.
Marilyn Gardner was appointed as a Director of the Company on February
22, 1993. Mrs. Gardner is a private investor who has made investments in a
wide variety of business ventures.
Marilyn Gardner is the wife of the Company's Chairman, Mr. Robert
Gardner. No other family relationship exists between any director or
executive officer and any other director or executive officer.
-18-
<PAGE>
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent
of the Company's equity securities, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Officers, directors
and greater than ten-percent stockholders are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, the Company believes
that during the fiscal year ended February 29, 1996, all filing requirements
applicable to its officers, directors and greater than ten percent beneficial
owners were complied with.
-19-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the executive
officers of the Company which individually earned more than $60,000 for the
year ended February 29, 1996:
SUMMARY COMPENSATION TABLE
Long-Term Compensation
---------------------------
Annual Compensation Awards
------------------------ ----------------------------
(a) (b) (c) (d) (e) (f)
Other
Annual Restricted
Name and Compen- Stock
Principal Salary Bonus sation Award(s)
Position Year ($) ($) (2) ($) ($) (3)
- --------- ----- -------- ------- ------- ------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Robert Gardner1 1996 $135,000 $17,289 $8,115 0
Chairman of the 1995 $125,000 $41,908 $8,316 0
Board 1994 $115,000 $41,773 $8,393 0
David Raymond1,3 1996 $110,000 $17,289 $7,099 0
President, Secre- 1995 $100,000 $41,908 $7,078 0
tary and Treasurer 1994 $ 90,000 $41,773 $6,607 0
</TABLE>
SUMMARY COMPENSATION TABLE
(cont.)
Long-Term Compensation
---------------------------
Payouts
------------------------
(a) (b) (g) (h) (i)
Securities All Other
Name and Underlying LTIP Compen-
Principal Options/ Payouts sation
Position Year SARs(#) ($)(3) ($) (4)
- --------- ------ ---------- --------- --------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Robert Gardner1 1996 0 0 $7,607
Chairman of the 1995 0 0 $7,607
Board 1994 0 0 $6,555
David Raymond1,3 1996 0 0 $8,456
President, Secre- 1995 0 0 $7,303
tary and Treasurer 1994 0 0 $4,683
</TABLE>
______________________
1 On August 31, 1990, the Board of Directors approved a resolution providing
that in the event that there is a change in control of the Company forcing
the termination of any of the Company's officers, those officers shall be
entitled to severance pay of two times their then current annual salary.
2 The Company has no written employment agreements with either Mr. Gardner
or Mr. Raymond. In addition to their base cash compensation per annum, each
of Mr. Gardner and Mr. Raymond is entitled to receive, during his employment
by the Company (i) an incentive bonus equal to 7-1/2% of the Company's annual
consolidated pre-tax profits, and (ii) a further incentive bonus equal to
2-1/2% of annual pre-tax profits of the Company's wholly-owned subsidiaries.
To the extent that employment terminates prior to the end of any fiscal year,
the incentive bonus shall be pro-rated based on the period of time during the
fiscal year for which he was employed by the Company. Based on the foregoing,
a bonus of $17,289 was earned by each of Mr. Gardner and Mr. Raymond for
fiscal 1996. Both Mr. Gardner and Mr. Raymond devoted substantially their
full business time to the affairs of the Company.
3 On February 22, 1993, Mr. Raymond was granted 100,000 shares of the
Company's Common Stock as a condition of his continued employment. These
shares cannot be sold or transferred by Mr. Raymond for a period of 10 years
and are forfeited by Mr. Raymond if he ceases to be employed by the Company.
The shares were issued to Mr. Raymond in March 1993.
4 Included are automobile lease payments made for Robert Gardner and David
Raymond as well as Florida Prepaid College Fund payments made for David
Raymond's two children.
-20-
<PAGE>
Stock Option Plans
In March, 1987, the Company adopted its 1987 Stock Option Plan (the
"Plan") covering 180,000 shares of Common Stock (subject to adjustment to
cover stock splits, stock dividends, recapitalizations and other capital
adjustments) for employees, including officers and directors of the Company.
The Plan provides that options to be granted under the Plan will be
designated as incentive stock options or non-incentive stock options by the
Board of Directors or a committee thereof, which also will have discretion
as to the persons to be granted options, the number of shares subject to the
options and the terms of the option agreements. The options to be granted
under the Plan and designated as incentive stock options are intended to
receive incentive stock option tax treatment pursuant to Section 422A of the
Code. Options will be granted to key employees or those employees, officers
or directors who the Company believes are or will be important to its success.
The Plan provides that all options granted thereunder shall be
exercisable during a period of no more than ten years from the date of grant
(five years for options granted to holders of 10% or more of the outstanding
shares of Common Stock), depending upon the specific stock option agreement,
and that the option exercise price shall be at least equal to 100% of the
fair market value of the Common Stock on the date of grant (110% for options
granted to holders of 10% or more of the outstanding shares of Common Stock).
Pursuant to the provisions of the Plan, the aggregate fair market value
(determined on the date of the grant) of the shares of Common Stock for which
incentive stock options are first exercisable under the terms of the Plan by
an option holder during any one calendar year, cannot exceed $100,000.
If the employment of an optionee is terminated other than by reason of
death, disability or retirement at age 65, any options granted to the
optionee will immediately terminate. If employment is terminated by reason of
disability or retirement at age 65, the optionee may, within one year from
the date of termination, in the event of termination by reason of disability,
or three months from the date of termination, in the event of termination by
reason of retirement at age 65 (but not after ten years from the date of
grant), exercise the option. If employment is terminated by death, the person
or persons to whom the optionee's rights under the option are transferred by
will or the laws of descent and distribution shall have similar rights of
exercise within three months after such death (but not after ten years from
the date of grant). Options are not transferable otherwise than by will or
the laws of descent and distribution, and during the optionee's lifetime are
exercisable only by the optionee. Shares subject to options which expire or
terminate may be the subject of future options. The Plan terminates on March
25, 1997.
-21-
<PAGE>
During the fiscal year ended February 28, 1991, stock options to
purchase 80,000 and 60,000 of the Company's common shares at a purchase price
of $.375 were granted to Robert Gardner and David Raymond, respectively,
pursuant to the provisions of the Plan. None of these options had been
exercised as of February 29, 1996. No other stock options have been granted
under the 1987 Plan. Robert Gardner&WP1-9;s options expired during the fiscal
year ended February 29, 1996.
In December 1992, the Company adopted its 1992 Stock Option Plan (the
"1992 Plan") covering 400,000 shares of Common Stock (subject to adjustment
to
cover stock splits, stock dividends, recapitalizations and other capital
adjustments) for employees, including officers and directors of the Company.
The 1992 Plan provides that options to be granted under the 1992 Plan will be
designated as incentive stock options or non-incentive stock options by the
Board of Directors or a committee thereof, which also will have discretion as
to the persons to be granted options, the number of shares subject to the
options and the terms of the option agreements. The options to be granted
under the 1992 Plan and designated as incentive stock options are intended to
receive incentive stock option tax treatment pursuant to Section 422A of the
Code. Options will be granted to key employees or those employees, officers
or directors who the Company believes are or will be important to its success.
The 1992 Plan provides that all options granted thereunder shall be
exercisable during a period of no more than ten years from the date of grant
(five years for options granted to holders of 10% or more of the outstanding
shares of Common Stock), depending upon the specific stock option agreement,
and that the option exercise price shall be at least equal to 100% of the
fair market value of the Common Stock on the date of grant (110% for options
granted to holders of 10% or more of the outstanding shares of Common
Stock). Pursuant to the provisions of the 1992 Plan, the aggregate fair
market value (determined on the date of the grant) of the shares of Common
Stock for which incentive stock options are first exercisable under the terms
of the 1992 Plan by an option holder during any one calendar year, cannot
exceed $100,000.
If the employment of an optionee is terminated other than by reason of
death, disability or retirement at age 65, any options granted to the
optionee will immediately terminate. If employment is terminated by reason of
disability or retirement at age 65, the optionee may, within one year from
the date of termination, in the event of termination by reason of disability,
or three months from the date of termination, in the event of termination by
reason of retirement at age 65 (but not after ten years from the date of
grant), exercise the option. If employment is terminated by death, the
person or persons to whom the optionee's rights under the option are
transferred by will or the laws of descent and distribution shall have
similar rights of exercise within three months after such death (but not
-22-
<PAGE>
after ten years from the date of grant). Options are not transferable
otherwise than by will or the laws of descent and distribution, and during
the optionee's lifetime are exercisable only by the optionee. Shares subject
to options which expire or terminate may be the subject of future options.
The 1992 Plan terminates on July 31, 2002.
During the fiscal year ended February 28, 1993, stock options to
purchase 150,000 shares of the Company's common stock at a price of $.19,
were granted to Robert Gardner, Chairman, and David Raymond, President,
respectively, pursuant to the provisions of the 1992 Plan. Additionally,
stock options to purchase a total of 12,500 shares at a price of $.19 per
share were granted to certain employees of the Company, all of which have
now expired. During February 1996, Robert Gardner exercised options to
purchase 150,000 shares of the Company&WP1-9;s Common Stock. No other
options have been exercised as of February 29, 1996. No other stock options
have been granted under the 1992 Plan.
The following table shows certain information with respect to stock
options granted to the Company's executive officers during the fiscal year
ended 1996:
Option/SAR Grants in Last Fiscal Year
Individual Grants
-------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- -------------- ----------- ----------- ---------------- ----------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Robert Gardner 300,000 N/A $.10 *
David Raymond -0- N/A N/A N/A
</TABLE>
* Option was exercised on February 26, 1996.
-23-
<PAGE>
The following table sets forth certain information with respect to
option exercises during the fiscal year ended February 29, 1996 by the
executive officers of the Company and the value of each such officer's
unexercised options at February 29, 1996.
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
- ---------------------------------------------------------------
Shares Number of Securities Underlying
Acquired Unexercised Options/SARs
on Value at Fiscal Year-End(#)
Exercise Realized -------------------------------
Name (#) ($) Exercisable Unexercisable
- ----------- ---------- ---------- --------------- ---------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Robert Gardner 450,000 $25,875* 0 0
David Raymond None None 210,000 0
</TABLE>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
(cont.)
- ---------------------------------------------------------------
Value of Unexercised
in-the-Money
Options/SARs
at Fiscal Year-End($)*
-------------------------------
Name Exercisable Unexercisable
- ------------- --------------- ---------------
<TABLE>
<CAPTION>
<S> <C> <C>
Robert Gardner $ 0 0
David Raymond $ 0 0
</TABLE>
_______________
*Based on the closing bid price of the Company's common stock at February
29, 1996 at $.1875 as reported by one of the Company's market makers as the
stock is not listed on an exchange.
Estimated Future Payouts under Non-Stock
Price-Based Plans
Number of Performance
Shares, or Other
Units Period Until
or Other Maturation or Threshold Target Maximum
Name Rights(#) Payout ($ or #) ($ or #) ($ or #)
- ------------- --------- ------------- ----------- -------- ---------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Robert Gardner -0- -0- N/A N/A N/A
David Raymond -0- -0- N/A N/A N/A
</TABLE>
Directors' Fees
The Company has not authorized the payment of fees to any Directors for
attendance at Directors' meetings, except for payments to Marilyn Gardner,
who receives $500 per month for her services as an outside director.
-24-
<PAGE>
Employee Benefit Plans
On December 27, 1991, the Board of Directors approved a Simplified
Employee Pension Plan for all employees who have been employees of the
Company for at least 3 of the 5 prior years with the Company. The annual
contribution to the plan is at the discretion of the Board and allocated to
employees based on their salary. Robert Gardner, David Raymond and two other
employees were eligible to participate in the plan during the fiscal year
ended February 29, 1996. During the prior fiscal year a total of $18,000 was
contributed to the SEP, including $8,115 and $7,099 to Mr. Gardner's and Mr.
Raymond's accounts, respectively.
The Company has no other bonus, profit sharing, pension, retirement,
stock purchase, deferred compensation, or other incentive plans.
During December 1993, the Board of Directors approved payments for the
cost of the Florida Prepaid College Program for three children of Company
employees. It is estimated that the cost to the Company for one eligible
child would be approximately $7,000 payable over 55 months. The Company is
not required to make any further payments if the employee is terminated from
the Company.
-25-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1996, the shares of
Common Stock owned beneficially and of record (unless otherwise indicated) by
each person owning more than 5% of the outstanding shares of Common Stock,
each director of the Company and all directors and officers of the Company as
a group:
Name and Address Amount and Nature of Percentage
Title of Class of Beneficial Owner Beneficial Owner(1) of Class
- -------------- ------------------- ------------------------------------
Common Robert L. Gardner(D) 2,326,073 58.5%
1815 Griffin Rd
Dania, Florida 33004
Common Kenneth Gardner(A) 200,000 5.0%
399 Winchester Place
Longwood, Florida 32779
Common David Raymond(D) 316,000(2) 7.9%
1815 Griffin Rd
Dania, Florida 33004
Common Marilyn Gardner(D)(B) 51,000 1.3%
1815 Griffin Rd
Dania, Florida 33004
Common All Officers and 2,693,073(2) 67.7%
Directors as a Group
(3 persons)
______________________________________________________________________________
(1) The calculations set forth above assume that as of September 30,
1996, there were 3,978,401 shares of common stock issued (which
amount includes 210,000 options to purchase shares and 23,552 shares
held in treasury).
(2) Includes outstanding stock options to purchase 210,000 shares of
common stock.
(D) Director of Company
(A) Kenneth Gardner is Robert Gardner's son.
(B) Marilyn Gardner is Robert Gardner's wife.
Changes in Control
On April 13, 1992, the Company entered into a revolving credit agreement
with the Company's Chairman, Mr. Robert Gardner. The line of credit has been
amended to change the termination date to the discretion of Mr. Gardner prior
to 30 days notice to the Company and is collateralized by all of the
Company's assets (excluding the finance receivables) and by all of the common
stock of the Company. Borrowings under this revolving credit agreement, as
disclosed in Note 5 to the consolidated financial statements, are subordinated
to the Company's line of credit. In the event of a default by the Company of
-26-
<PAGE>
its obligations under the agreement, Mr. Gardner would, in effect, have the
power to exercise complete control over the business and operations of the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 21, 1993, Finco Financial Corporation, a wholly owned
subsidiary of the Company, entered into a $500,000 revolving credit facility
with Marilyn Gardner, a Director of the Company. Loans under this agreement
bear interest at Citibank prime plus 4-1/2 % with a minimum of 12%. In
consideration of granting this loan, the Company has sold to Mrs. Gardner 500
shares of Class "A" 12% Convertible Redeemable Preferred Stock for a total
price of $75,000. These shares were sold to the Company's chairman, Mr.
Robert Gardner, who then converted them into 500,000 shares of the Company's
Common Stock on February 27, 1996. As of February 29, 1996 there was
$500,000 outstanding under this agreement and $39,629 of interest was paid
during the year ended February 29, 1996. During June 1996 the borrowings
were repaid and the agreement has been terminated. In addition, during
fiscal year 1996, the Company paid $9,000 as dividends on the Preferred Stock
held by Mrs. Gardner. Mrs. Gardner is the wife of Robert Gardner.
On April 13, 1992, the Company entered into a $1 million revolving credit
facility with the Company's Chairman, Robert Gardner. The revolving credit
facility has been amended to change the termination date to the discretion of
Mr. Gardner prior to 30 days notice to the Company. Loans under this
agreement bear interest at Citibank prime plus 4½% with a minimum of 12%
and a maximum of 18% and are collateralized by all of the Company's common
stock, assets (excluding the finance receivables) and business of the
Company. Borrowing under this line of credit as disclosed in Note 5 to the
consolidated financial statements are payable on demand and are subordinated
to a line of credit from a bank. As part of the agreement, the Company gave
an option to purchase 300,000 shares of the Company's Common Stock to Mr.
Gardner at a price of $.10 per share. This option was exercised on February
28, 1996. As of February 29, 1996, there was $1,000,000 outstanding under
this agreement; $133,245 of interest was paid by the Company to Mr. Gardner
during the year ended February 29, 1996. During June 1996 the Company repaid
Mr. Gardner $500,000.
In connection with the maintenance of the Company's SEP Plan and
securities trading through Prudential Securities and as of July 1996, Advest
Securities, the Company uses Kenneth Gardner as an account manager. Kenneth
Gardner owns approximately 5.0% of the Company's issued and outstanding
shares, and is the son of Robert Gardner, an officer, director and controlling
-27-
<PAGE>
stockholder of the Company. Commissions paid to Prudential in connection
with these activities for the years ended February 29, 1996 and 1995 were not
significant.
The basic principle followed in determining rates and amounts for each
of the above transactions was whether or not the transaction then under
consideration by the Board of Directors was on terms more favorable to the
Company than it could reasonably have expected to obtain from third parties.
If the Company could have received better terms from independent parties with
respect to the disclosed transactions, it would not have entered into the
subject transactions with related parties.
On February 26, 1996, Robert Gardner acquired a total of 450,000 shares
of the Company's $0.05 par value common stock pursuant to exercising options
to purchase 150,000 shares at $0.19 per share and 300,000 shares at $0.10 per
share. The funds for the purchase price totals of $28,500 and $30,000,
respectively, were provided by the Company in the form of an employee loan to
Mr. Gardner, which loan is collateralized by an offset against antecedent
indebtedness.
On February 26, 1996 Mr. Gardner also purchased 500 shares of the
Company's Class "A" convertible redeemable preferred stock from his wife,
Marilyn Gardner, for a purchase price of $1.50 per share. Mr. Gardner
acquired the securities with funds from his personal bank account. Such
preferred shares were then immediately converted into 500,000 shares of the
Company's common stock.
Financial Information
See Pages F-1 through F-22 attached.
Other Information; Documents Incorporated by Reference
Pursuant to the Exchange Act, the Company files with the SEC periodic
and other documents relating to its business, financial condition and other
matters. In connection with the Reverse Stock Split, the Company has filed
with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3. The
Schedule 13E-3, including exhibits, and other filings made by the Company
including those listed above, may be inspected without charge, and copies
obtained at prescribed rates, at the public reference facilities maintained
by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street NW, Washington,
D.C. 20549. The Schedule 13E-3 is also available for inspection and copying
during the normal business hours at the principal executive offices of the
Company at 1815 Griffin Road, Suite 402, Dania, Florida 33004.
-28-
<PAGE>
ANNUAL REPORT
The Company's Annual Report to Stockholders accompanies this Information
Statement. Any stockholder who wishes to obtain without charge a copy of the
Company's Form 10-K/SB for the year ended February 29, 1996, as filed with
the Securities and Exchange Commission, must address a written request to
David Raymond, President, International Design Group, Inc., 1815 Griffin Road,
Suite 402, Dania, Florida 33004.
By Order of the Board of Directors
Dated: ____________, 1996 David Raymond, President
(96infor6.stm)
-29-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
------
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet as of February 29, 1996 F-2
Consolidated Statements of Operations for the years
ended February 29, 1996 and February 28, 1995 F-4
Consolidated Statements of Stockholders' Equity for
the years ended February 29, 1996 and
February 28, 1995 F-6
Consolidated Statements of Cash Flows for the years
ended February 29, 1996 and February 28, 1995 F-7
Notes to Consolidated Financial Statements F-9
Consolidated Balance Sheets for periods ended
August 31, 1996 and February 29, 1996 (Unaudited) F-18
Consolidated Statements of Operations for the six
months ended August 31, 1996 and August 31, 1995
(Unaudited) F-19
Consolidated Statements of Operations for the three
months ended August 31, 1996 and August 31, 1995
(Unaudited) F-20
Consolidated Statements of Cash Flows for the six
months ended August 31, 1996 and August 31, 1995
(Unaudited) F-21
Notes to Consolidated Financial Statements (Unaudited) F-22
-30-
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
of International Design Group, Inc.
We have audited the accompanying consolidated balance sheet of International
Design Group, Inc. as of February 29, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended February 29, 1996 and February 28, 1995. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Design Group, Inc. at February 29, 1996 and the results of its
operations and its cash flows for the years ended February 29, 1996 and
February 28, 1995, in conformity with generally accepted accounting
principles.
BY(Signature) /s/ BDO Seidman, LLP
(Date) May 10, 1996
Miami, Florida
F-1
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
February 29, 1996
- ------------------------------------------------------------------------------
Assets (Notes 5 and 6)
<S> <C>
Current
Cash and cash equivalents $ 130,679
Trading securities 129,188
Finance receivables, less allowance for
doubtful accounts of $591,000 and unearned
income of $542,000 8,149,416
Drafts receivable 312,793
Current maturities of notes receivable (Note 2) 171,515
Prepaid expenses and other 18,316
- ------------------------------------------------------------------------------
Total current assets 8,911,907
Property and equipment - at cost, less accumulated
depreciation and amortization of $68,720 91,628
Notes receivable, less current maturities (Note 2) 189,579
Other assets, less accumulated amortization
of $16,000 22,945
- ------------------------------------------------------------------------------
$ 9,216,059
==============================================================================
</TABLE>
F-2
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
February 29, 1996
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C>
Current liabilities
Accounts payable and accrued expenses $ 230,234
Drafts payable 308,130
Notes payable (Note 6) 267,850
Liability under options sold 25,469
Notes payable to directors (Note 5) 1,500,000
- ------------------------------------------------------------------------------
Total current liabilities 2,331,683
Note payable to bank (Note 6) 4,263,610
- ------------------------------------------------------------------------------
Total liabilities 6,595,293
- ------------------------------------------------------------------------------
Commitments (Note 7)
- ------------------------------------------------------------------------------
Stockholders' equity (Note 3)
Common stock, $.05 par - 10,000,000 shares authorized,
3,768,401 issued and 3,744,849 outstanding 188,420
Additional paid-in capital 5,837,706
Deficit (3,338,571)
Treasury stock - 23,552 shares at cost (8,289)
Common stock subscriptions receivable for 450,000 shares
of common stock (58,500)
- ------------------------------------------------------------------------------
Total stockholders' equity 2,620,766
- ------------------------------------------------------------------------------
$ 9,216,059
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Finance charge income $ 1,603,783 $ 1,056,042
Origination fees 780,480 655,721
Late fees and other charges 687,649 561,252
Gain (loss) on securities trading 58,212 (703)
Interest income 43,995 29,111
Other income 12,050 49,708
- -----------------------------------------------------------------------------
3,186,169 2,351,131
- -----------------------------------------------------------------------------
Expenses:
General and administrative 1,117,288 1,021,556
Sales and marketing 497,399 339,333
Provision for doubtful accounts 829,473 290,757
Depreciation and amortization 36,500 26,500
Interest 396,620 192,321
Interest to Directors 172,874 142,456
- -----------------------------------------------------------------------------
3,050,154 2,012,923
- -----------------------------------------------------------------------------
Net Income $ 136,015 $ 338,208
=============================================================================
Net Income Per Common Share:
Primary $ .04 $ .11
Fully diluted $ .04 $ .10
=============================================================================
</TABLE>
F-4
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Computation Of Fully Diluted Earnings:
Net income $ 136,015 $ 338,208
Less preferred dividends (9,000) (9,750)
- ------------------------------------------------------------------------------
Primary net income 127,015 328,458
Assumed conversions:
Preferred dividends eliminated 9,000 9,750
- ------------------------------------------------------------------------------
Fully diluted earnings $ 136,015 $ 338,208
- ------------------------------------------------------------------------------
Average Number of Common Shares
Primary 3,096,107 2,987,025
Fully Diluted 3,593,373 3,487,025
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-in
Shares Amount Capital
--------- -------- ---------
<S> <C> <C> <C>
Balance, February 28, 1994 2,975,337 $148,767 $5,794,040
Net income for the year - - -
Payment of preferred dividend
to Director - - -
Retirement of treasury shares (97,724) (4,886) (28,310)
Purchase of treasury shares - - -
- ------------------------------------------------------------------------------
Balance, February 28, 1995 2,877,613 143,881 5,765,730
Net income for the year - - -
Payment of preferred dividend
to Director - -
- -
Conversion of preferred stock 500,000 25,000 50,000
Exercise of stock options 450,000 22,500 36,000
Retirement of treasury shares (59,212) (2,961) (14,024)
Purchase of treasury shares - -
- -
- -------------------------------------------------------------------------------
Balance, February 29, 1996 3,768,401 $188,420 $5,837,706
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6A
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Subscriptions Treasury
Deficit Receivable Stock Total
------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance, February 28, 1994 $(3,794,044) $ - $ (8,211) $2,140,552
Net income for the year 338,208 - - 338,208
Payment of preferred
dividend to Director (9,750) - - (9,750)
Retirement of treasury shares - - 33,196 -
Purchase of treasury shares - - (27,870) (27,870)
- ------------------------------------------------------------------------------
Balance, February 28, 1995 (3,465,586) - (2,885) 2,441,140
Net income for the year 136,015 - - 136,015
Payment of preferred
dividend to Director (9,000) - - (9,000)
Conversion of preferred stock - - - 75,000
Exercise of stock options - (58,500) - -
Retirement of treasury shares - - 16,985 -
Purchase of treasury shares - - (22,389) (22,389)
- ------------------------------------------------------------------------------
Balance, February 29, 1996 $(3,338,571) $(58,500) $ (8,289) $2,620,766
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6B
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Note 9)
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 136,015 $ 338,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 36,500 26,500
Provision for doubtful accounts 829,473 290,757
Changes in operating assets and liabilities:
Increase in unearned income 217,971 78
Increase in drafts receivable (26,393) (30,175)
(Increase) decrease in prepaid expenses
and other (34,194) 729
Increase in accounts payable
and accrued expenses 19,897 109,600
(Decrease) increase in drafts payable (66,218) 147,233
- ------------------------------------------------------------------------------
Net cash provided by operating activities 1,113,051 882,930
- -------------------------------------------------------------------------------
Investing Activities:
Premium finance loans originated (23,091,889) (14,568,623)
Payments received on premium finance loans 18,808,817 14,221,530
Capital expenditures (31,993) (41,141)
Increase in notes receivable (340,257) (325,763)
Payments received on notes receivable 372,748 194,125
Investment in marketable securities 88 (129,276)
(Decrease) increase in liability under
options sold (18,119) 16,897
- ------------------------------------------------------------------------------
Net cash used in investing activities (4,300,605) (632,251)
==============================================================================
</TABLE>
F-7
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 9)
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities:
Purchase of treasury shares (22,389) (27,870)
Increase in notes payable to bank 9,283,112 1,161,000
Increase in notes payable 27,000 58,000
Paydowns in notes payable to bank (6,406,502) (1,654,000)
Paydowns in notes payable (210,150) (43,000)
Increase in notes payable to directors 350,000 -
Preferred dividends paid (9,000) (9,750)
- ------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 3,012,071 (515,620)
- ------------------------------------------------------------------------------
Net decrease in cash (175,483) (264,941)
Cash and cash equivalents, beginning of year 306,162 571,103
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 130,679 $ 306,162
==============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- -----------------------------------------------
Company and Basis of Presentation:
- ----------------------------------
International Design Group, Inc. ("the Company") is in the insurance premium
finance business through its wholly-owned subsidiaries. The Company's main
business activity is to grant loans to customers, primarily to finance
automobile insurance policies. The majority of the business activity is in
Florida and South Carolina. Such loans are substantially collateralized by
unearned premiums of the insurance policy.
The consolidated financial statements include the accounts of the Company,
and
all of its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Preparation of Financial Statements:
- ------------------------------------
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 period.
Actual results could differ from those estimates.
Cash and Cash Equivalents:
- --------------------------
The Company considers all highly liquid investments with an original maturity
of
three months or less to be cash equivalents.
Marketable Securities:
- ----------------------
In fiscal 1995, the Company adopted Statement of Financial Accounting Standards
No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity
Securities. FAS 115 requires the Company's investments in securities to be
classified into three categories and accounted for as follows:
Trading Securities - Investment securities that are bought and held for
the purpose of selling them in the near term are carried at estimated market
F-9
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value. Unrealized holding gains and losses are reported as a component of
earnings.
Securities Held to Maturity - Investment securities for which the
Company
has the positive intention and ability to hold to maturity are reported at
cost.
Securities Available for Sale - Investment securities not classified as
trading or held to maturity securities are carried at estimated market value.
Unrealized holding gains and losses, net of income taxes, are reported as a
component of stockholders' equity.
Gains and losses realized from the sale of securities are determined on the
first-in first-out method. Investments are stated at market. Net unrealized
losses amounting to $13,819 and $18,517 have been included in the
determination of net income for the years ended February 29, 1996 and
February 28, 1995, respectively. The adoption of FAS 115 did not have a
material effect on the consolidated financial statements.
Additionally, the Company sells put and call options which may obligate the
Company to either purchase or sell a particular security at a stated price
through certain dates in the future. At February 29, 1996, the Company had
a liability resulting from options sold amounting to approximately $25,000.
Property and Equipment:
- -----------------------
Depreciation is computed on either a straight-line or an accelerated basis
over the estimated useful lives of the various assets, principally five
years.
Earnings Per Share:
- -------------------
Primary and fully diluted earnings per common share and common share
equivalents are computed based on the weighted average number of common
shares and common share equivalents outstanding. Accordingly, earnings per
share has been adjusted for the effects of the Company's dividend on the
F-10
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
convertible redeemable preferred stock and for conversion of the convertible
redeemable preferred stock for fully diluted purposes.
Revenue Recognition:
- --------------------
Finance charges and loan origination fees are amortized to income over the
life of the finance contracts using the interest method.
Bank Drafts:
- ------------
Drafts which have been paid by the Company where the finance contracts have
not yet been received are classified as Drafts Receivable. Drafts which have
not yet been presented for payment but where the finance contracts have been
received are classified as Drafts Payable.
Taxes on Income
- ---------------
The Company has adopted Statement No. 109, "Accounting for Income Taxes"
(FAS 109) which utilizes an asset and liability approach. Under FAS 109, the
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
Comparability
- -------------
Certain 1995 accounts have been reclassified to conform with 1996
presentation.
2. Notes Receivable
- ---------------------
Notes receivable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Various 8%-19% notes receivable, interest and principal
due monthly, maturing through 1999 $ 361,094
Less current maturities 171,515
- ---------------------------------------------------------------------------
$ 189,579
============================================================================
</TABLE>
F-11
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Stockholders' Equity
- -------------------------
In December 1992, the Company's shareholders authorized the creation of
1,000,000 Preferred Shares with a par value of $.01. These shares may be
issued in one or more series at the discretion of the Board of Directors. On
February 27, 1996, Marilyn Gardner, a director of the Company, sold Robert
Gardner her 500 shares of Class "A" 12% Convertible Preferred Stock. Mr.
Gardner then, pursuant to the terms of original issuance, converted the 500
shares of preferred stock into 500,000 shares of the Company's common stock.
As of February 29, 1996, there were no shares of Class "A" 12% Convertible,
Redeemable Preferred Stock outstanding. (See Note 5).
The Company's 1992 and 1987 Stock Option Plans covering 400,000 shares and
180,000 shares of common stock, respectively (subject to adjustment to cover
stock splits, stock dividends, recapitalization, and other capital
adjustments) for employees, including officers and directors, of the Company
provide that options to be granted under the plans will be designated as
incentive stock options or non-incentive stock options by the Board of
Directors or a committee thereof. All options granted under the plans shall
be exercisable during a period of no more than ten years from the date of
grant (five years for options granted to holders of 10% or more of the
outstanding shares of common stock). The option exercise price shall be at
least equal to 100% of the fair market value of the common stock as of the
date of grant (110% for options granted to holders of 10% or more of the
Company's outstanding common stock).
On December 7, 1992, stock options to purchase 150,000 shares of the Company's
common stock at a price of $.19, were granted to each of Robert Gardner,
Chairman, and David Raymond, President, respectively, pursuant to the
provisions of the 1992 Plan. Additionally, stock options to purchase a total
of 12,500 shares at a price of $.19 per share were granted to certain
employees of the Company. On February 27, 1996, Robert Gardner exercised his
option to purchase 150,000 shares of the Company's common stock at a price of
$.19. The total purchase price of $28,500 has not yet been remitted to the
Company and is recorded as a Common Stock Subscription Receivable. No other
ptions have been exercised as of February 29, 1996. Upon the resignation of
F-12
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
one of the Company's employees, options to purchase 7,500 shares expired. No
other stock options have been granted under the 1992 Plan.
On August 31, 1990, stock options to purchase 80,000 and 60,000 of the
Company's common shares at a price of $.375, were granted to Robert Gardner,
Chairman, and David Raymond, President, respectively, pursuant to the
provisions of the 1987 Plan. Mr. Gardner's options expired on August 31,
1995. No options have been exercised as of February 29, 1996. No other
stock options have been granted under the 1987 Plan.
The Company purchased 72,764 treasury shares at various times during fiscal
1996 in the open market at a total price of $22,389. During fiscal 1996,
the Company retired 59,212 shares of treasury stock that it previously
purchased.
In March 1993, the Company issued 100,000 shares to the Company's President,
Mr. David Raymond. These shares revert to the Company if Mr. Raymond leaves
the Company's employment for a period of ten years from the date of grant,
for any reason other than death, disability or retirement. Additionally, the
shares cannot be sold or transferred during the ten year period.
At February 29, 1996, 350,000 shares of the Company's authorized and unissued
common stock were reserved for issuance upon exercise of options.
4. Retirement and Benefit Plans
- ---------------------------------
The Company maintains a Simplified Employee Pension Plan (SEP). Employees
who are at least 21 years old and have been employed by the Company for at
least three of the past five years, are eligible to participate in the SEP.
As of February 29, 1996, the Company's President, Chairman and two other
employees, were eligible to participate in the SEP. Under the terms of the
SEP, the Board of Directors decide if and how much to contribute to the plan
on an annual basis. The allocation to each employee's account is based upon
salary. For the years ended February 29, 1996 and February 28, 1995, the
Company contributed and expensed $18,000 each year to the SEP.
F-13
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1993, the Board of Directors approved payments for the cost of the Florida
Prepaid College Program for three children of certain Company employees,
including the Company's President. It is estimated that the cost to the
company for one child would be approximately $7,000 payable over 55 months.
The Company is not required to make any further payments if the employee is
terminated from the Company.
5. Notes Payable to Directors
- -------------------------------
On April 13, 1992, the Company entered into a $1 million revolving credit
agreement with Mr. Robert Gardner. All loans made prior to this date to the
Company by Mr. Gardner were made part of this agreement. Loans under this
agreement bear interest at Citibank prime plus 4.50% with a minimum of 12% and
a cap of 18% and are collateralized by all of the Company's accounts
receivable and all of the common stock, assets and business of a subsidiary.
The interest rate on this debt was 13.00% at February 29, 1996. Borrowings
under this line of credit are payable on demand and are subordinated to a
line of credit from a bank as described in Note 6. The Company was notified
in March 1996 by the Florida Department of Insurance that it is not
acceptable for Mr. Gardner to have a lien on the Company's accounts
receivable, as Mr. Gardner is not a licensed premium finance entity. The
Company is presently researching whether the Department's position is in
accordance with Florida statutes. The Company may be forced to seek to
renegotiate the credit facility with Mr. Gardner and there can be no assurance
that it can be successfully renegotiated. The line of credit expires July
31, 1996. In conjunction with a prior amendment, the Company gave to Mr.
Gardner an option to purchase 300,000 shares of the Company's Common Stock
at a price of $.10 per share. On February 27, 1996, Mr. Gardner exercised his
option to purchase the 300,000 shares of the Company's common stock for $.10
per share. The purchase price has not yet been remitted to the Company and is
recorded as a Common Stock subscription receivable. As of February 29, 1996,
there was $1,000,000 outstanding under the revolving credit agreement;
$133,245 and $123,825 of interest was incurred during the years ended
February 29, 1996 and February 28, 1995, respectively.
On April 21, 1993, the Company entered into a $500,000 revolving credit
agreement with Marilyn Gardner, a Director of the Company. Loans under this
agreement bear interest at prime plus 4.50% with a minimum of 12%. The
F-14
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest rate on this debt was 13.00% at February 29, 1996. In conjunction
with the agreement, the Company sold to Mrs. Gardner 500 shares of its Class
A 12% Convertible Redeemable Preferred Stock at a price of $150 per share.
As of February 29, 1996, there was $500,000 outstanding under this agreement
and $39,629 and $18,581 of interest was incurred during the years ended
February 29, 1996 and February 28, 1995, respectively. Borrowings are payable
on demand and the agreement expires July 31, 1996. Mrs. Gardner is the wife
of Robert Gardner, Chairman of the Company.
6. Notes Payable
- ------------------
On February 23, 1996, the Company and its subsidiaries entered into a
$8,000,000 revolving credit agreement with a bank. Borrowings under the
line are based on eligible finance receivables, interest payable monthly at
the Company's choice of LIBOR plus 3.25% or the bank's prime rate plus 1.25%
(9.75% at February 29, 1996). The note is collateralized by all of the assets
of the Company, matures in 1999 and requires the Company to maintain certain
financial ratios. At February 29, 1996 $4,263,610 was outstanding.
The Company and its subsidiaries have demand notes payable to unrelated
parties with interest at 12% per annum ($67,850) and prime plus 2.25% (10.75%
at
February 29, 1996) per annum ($200,000).
7. Commitments
- ----------------
The Company leases office space for its administrative facilities and two
automobiles. These leases expire through August 1996 and are accounted for as
operating leases. Rent expense for the years ended February 29, 1996 and
February 28, 1995 was $53,000 and $46,000, respectively.
In addition to their base cash compensation per annum, Mr. Gardner and Mr.
Raymond, are each entitled to receive, during their employment by the Company
(i) incentive bonuses equal to 7.50% of the Company's annual consolidated
pre-tax profits and (ii) further incentive bonuses equal to 2.50% of annual
pre-tax profits of the Company's wholly-owned subsidiaries. The President
and Chairman each earned bonuses for fiscal 1996 and 1995 of $17,289 and
$41,908, respectively.
In the event of a change in control of the Company forcing termination of
either Mr. Gardner or Mr. Raymond, he would be entitled to severance pay of
F-15
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
two times the then current annual salary.
Mrs. Gardner also receives $500 per month for her services as an outside
director for the Company.
8. Income Taxes
- -----------------
At February 29, 1996, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $2,470,000, which
expire in the year 2005.
Deferred tax (liabilities) assets are comprised of the following at February
29, 1996:
<TABLE>
<CAPTION>
<S> <C>
Depreciation $ (9,481)
- -----------------------------------------------------------------------------
Gross deferred tax liability (9,481)
- -----------------------------------------------------------------------------
Loss carryforwards 929,651
Accounts receivable reserve 221,842
Other 12,904
- -----------------------------------------------------------------------------
Gross deferred tax asset 1,164,397
Deferred tax asset valuation allowance (1,154,916)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 9,481
- -----------------------------------------------------------------------------
Net $ 0
=============================================================================
</TABLE>
A reconciliation of the expected income taxes based on statutory rates applied
to income before taxes from continuing operations to the actual tax is as
follows:
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Expected federal tax $ 46,245 $ 114,982
State income taxes, net of
federal effect 4,937 18,600
Tax effect of net operating
losses utilized (51,182) (133,582)
- ------------------------------------------------------------------------------
$ 0 $ 0
==============================================================================
</TABLE>
F-16
<PAGE>
9. Supplemental Cash flow Information
- ----------------------------------------
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the year
for:
Interest $ 560,162 $ 334,778
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
- -----------------------------------------------------------------------
During fiscal 1996 and 1995, the Company retired 59,212 and 97,724 treasury
shares, respectively.
On February 27, 1996, 500 shares of Class A 12% Convertible Redeemable
Preferred Stock were converted into 500,000 shares of the Company's common
stock.
On February 27, 1996, Mr. Gardner exercised two of his options to purchase
shares of the Company's common stock. Mr. Gardner purchased 150,000 shares
at a price of $.19 per share. He also purchased 300,000 at $.10 per share.
The total purchase price of $58,500 has not yet been remitted to the Company
and is recorded as a Common Stock Subscription Receivable.
10. Fair Value of Financial Instruments
- ----------------------------------------
The Company's financial instruments consist principally of cash and cash
equivalents, trading securities, finance receivables, drafts and notes
receivable, accounts and drafts payable, accrued expenses and borrowings.
The carrying amounts of such financial instruments as reflected in the
consolidated balance sheet approximate their estimated fair value as of
February 29, 1996. The estimated fair value is not necessarily indicative of
the amounts the Company could realize in a current market exchange or of
future earnings or cash flows.
F-17
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29,
ASSETS 1996 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $204,704 $130,679
Trading Securities 22,812 129,188
Finance Receivables, less allowance
for doubtful accounts of $ 598,000
and $591,000 and unearned income of
$ 786,000 and $542,000 11,209,123 8,149,416
Drafts receivable 409,148 312,793
Current maturities of notes receivable 164,360 171,515
Prepaid expenses and other 33,325 18,316
----------- -----------
TOTAL CURRENT ASSETS
12,043,472 8,911,907
----------- -----------
PROPERTY AND EQUIPMENT- less
accumulated depreciation of $ 88,076
and $68,720 153,306 91,628
NOTES RECEIVABLE - less current maturities 201,048 189,579
OTHER ASSETS, less accumulated amortization
of $ 18,000 and $16,000 29,854 22,945
----------- ----------
$12,427,680 $9,216,059
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other $345,722 $230,234
Drafts Payable 633,532 308,130
Notes payable 276,850 267,850
Liability under options sold 0 25,469
Notes Payable to Directors 500,000 1,500,000
----------- ----------
TOTAL CURRENT LIABILITIES 1,756,104 2,331,683
----------- ----------
Notes payable to bank 7,942,933 4,263,610
----------- ----------
TOTAL LIABILITIES 9,699,037 6,595,293
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock $.05 par, shares authorized
10,000,000; 3,768,401 issued and 3,744,849
outstanding 188,420 188,420
ADDITIONAL PAID IN CAPITAL 5,837,706 5,837,706
DEFICIT (3,230,694) (3,338,571)
TREASURY STOCK ( 23,552 shares at cost ) (8,289) (8,289)
COMMON STOCK SUBSCRIPTIONS RECEIVABLE (58,500) (58,500)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,728,643 2,620,766
----------- ----------
12,427,680 9,216,059
========== =========
</TABLE>
See Notes to Condensed Financial statements
F-18
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
1996 1995
----------------------------
REVENUES:
<S> <C> <C>
Finance charge income $1,163,734 $748,540
Origination fees 458,622 375,617
Late fees and other charges 417,411 335,745
Interest income and Other 31,679 82,094
--------- ---------
2,071,446 1,541,996
--------- ---------
EXPENSES
General and administrative expenses 612,872 545,045
Sales and marketing 375,606 254,571
Provision for doubtful accounts 580,133 317,123
Interest expense 299,227 170,550
Interest expense to Directors 74,375 78,265
Depreciation and amortization 21,356 16,500
--------- ---------
1,963,569 1,382,054
--------- ---------
NET INCOME $ 107,877 $ 159,942
========= =========
Net Income per Common Share:
Primary: $0.03 $0.05
Fully Diluted: $0.03 $0.04
Computation Of Fully Diluted Earnings:
Net Income $107,877 $159,942
Less:Preferred Dividends 0 (4,500)
-------- --------
Primary net income 107,877 155,442
Assumed conversions:
Preferred dividends eliminated 0 4,500
-------- --------
Fully diluted earnings $107,877 $159,942
-------- --------
Average Number of Common Shares
Primary 3,793,063 3,088,577
Fully Diluted 3,793,063 3,588,577
</TABLE>
See Notes to Condensed Financial statements
F-19
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
1996 1995
-----------------------------
<S> <C> <C>
REVENUES:
Finance charge income $614,715 $395,334
Origination fees 238,942 196,022
Late fees and other charges 223,785 183,470
Interest income and Other 12,875 34,831
--------- -------
1,090,317 809,657
--------- -------
EXPENSES
General and administrative expenses 305,391 286,536
Sales and marketing 226,938 116,011
Provision for doubtful accounts 296,871 168,962
Interest expense 167,803 98,050
Interest expense to directors 26,562 39,453
Depreciation and amortization 11,078 9,300
--------- -------
1,034,643 718,312
--------- -------
NET INCOME 55,674 91,345
========= =======
Net Income per Commin Share:
Primary: $0.01 $0.03
Fully Diluted; $0.01 $0.03
Computation Of Fully Diluted Earnings:
Net Income 55,674 91,345
Less:Preferred Dividends (2,250)
------ ------
Primary net income 55,674 89,095
------ ------
Assumed conversions:
Preferred dividends eliminated 0 2,250
------- -------
Fully diluted earnings $55,674 $91,345
------- -------
Average Number of Common Shares
Primary 3,793,063 3,128,356
Fully Diluted 3,793,063 3,628,356
</TABLE>
See Notes to Condensed Financial Statements
F-20
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
1996 1995
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $107,877 $159,942
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 21,356 16,500
Provision for doubtful accounts 7,000 48,496
Change in operating assets and
liabilities:
Increase in unearned income 244,000 80,240
Increase in prepaid expenses & other (23,918) (5,142)
Decrease in drafts receivable (96,355) (40,102)
Increase (Decrease) in accounts payable,
accrued expenses 115,488 (5,443)
Increase (Decrease) in drafts payable 325,402 (74,338)
-------- --------
Net cash provided by operating gactivities 700,850 180,153
-------- --------
INVESTING ACTIVITIES:
Premium finance loans - net of writeoffs (16,442,009) (10,318,864)
Payments received on premium finance loans 13,131,302 8,536,015
Increase in notes receivable (127,013) (82,008)
Payments received on notes receivable 122,699 110,398
Capital expenditures (81,034) (12,527)
Decrease in Marketable Securities 106,376 11,651
Increase (Decrease) in liability under options
sold (25,469) (36,432)
----------- -----------
Net Cash Used In Investing Activities (3,315,148) (1,791,767)
----------- -----------
FINANCING ACTIVITIES
Increase in notes payable to bank 19,947,000 2,236,150
Paydowns in notes payable to bank (16,267,677) (575,150)
Paydowns in notes payable 9,000 200,000
Paydowns to notes payable to Directors (1,000,000) 0
Preferred dividends paid 0 (4,500)
Purchase of treasury shares 0 (14,115)
Net Cash (Used In) Provided by Financing --------- ---------
Activities 2,688,323 1,842,385
--------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 74,025 $230,771
CASH AND CASH EQUIVALENTS,
beginning of the period 130,679 306,162
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $204,704 $536,933
======== ========
</TABLE>
See Notes to Condensed Financial Statements
F-21
<PAGE>
International Design Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A -- Basis of Presentation
- -----------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six month period ended August 31, 1996 are not necessarily indicative of
the results that may be expected for the year ending February 28, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
February 29, 1996.
The accompanying financial statements include the Company, its wholly owned
subsidiaries Finco Financial Corporation, Eagle Premium Finance, Inc., QRS
Acquisition, Inc., Reserve Funding Corporation, VoiceSoft Corporation and
Federal Funding Corporation. All intercompany transactions and balances have
been eliminated in consolidation.
F-22
