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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Annual report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: February 28, 1997
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Commission File Number 0-13946
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INTERNATIONAL DESIGN GROUP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2521916
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3201 Griffin Road, Suite 210
Dania, Florida 33312
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 893-7555
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.05 Par Value None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. The aggregate
market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1997 was $233,591, based on the average
of the closing bid and asked prices.
As of April 30, 1997, there were 3,754,849 shares of the Registrant's
$.05 par value common stock issued and 3,744,849 were outstanding.
Revenues for the fiscal year ended February 28, 1997 were $4,817,147.
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CONTENTS
Page
Part I
Item 1 - DESCRIPTION OF BUSINESS .............................. 3
Item 2 - DESCRIPTION OF PROPERTY .............................. 8
Item 3 - LEGAL PROCEEDINGS .................................... 9
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .. 9
Part II
Item 5 - MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................. 9
Item 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION .................................... 10
Item 7 - FINANCIAL STATEMENTS ................................. 13
Item 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE ............... 13
Part III
Item 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT .................................. 13
Item 10 - EXECUTIVE COMPENSATION ............................... 15
Item 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ................................ 20
Item 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ....... 21
Item 13 - EXHIBITS AND REPORTS ON FORM 8-K ..................... 22
EXHIBIT INDEX .................................................. 22
SIGNATURE PAGE ................................................. 24
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PART I
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ITEM 1
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DESCRIPTION OF BUSINESS
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Business Development
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International Design Group, Inc. ("IDG" or the "Company") was formed
under the laws of the State of Delaware in March of 1985, and since
August of 1990 has been engaged in the insurance premium finance
business through its wholly owned subsidiary, Finco Financial
Corporation ("Finco"). During the fiscal year ended February 28, 1997,
Finco financed insurance premiums in the State of Florida. During
fiscal 1996, the Company began financing insurance premiums in South
Carolina, Maryland and Tennessee through its wholly owned subsidiary,
Eagle Premium Financing ("Eagle"). The Company ceased financing out
of state business in August 1996 as a result of unprofitable
operations. The Company currently offers financing primarily to
purchasers of automobile insurance within the State of Florida. The
Company will typically loan 70% to 80% of the amount of the total
insurance premiums and the loans are collateralized by the unexpired
premiums remaining on the insured's policy which have not yet been
earned by the insurance carrier. A substantial portion of the
Company's financing activities relate to non-standard automobile
insurance whereby the insured is most likely in a high risk category
causing the amount of the premium to be higher than standard
automobile insurance. During April 1997, the Company was notified by
a managing general agent that represents two affiliated insurance carriers
that it will no longer allow the Company to finance their policies. This
accounts for approximately 10% of the Company's finance business. This could
lead to further losses in finance business as insurance agents may switch to
other finance companies which are accepted by all insurance carriers.
Prior to fiscal 1997, there was a statute in Florida which prohibited
insurance premium finance companies from rebating a portion of the
interest or origination fees to insurance brokers in an effort to
induce the brokers to refer finance business to the Company. This
prohibition expired on July 1, 1996. See Regulation Section.
Insurance Premium Financing Services
- - ------------------------------------
Many insurance carriers require full payment of the policy premium
upon the issuance of an insurance policy. When a purchaser of an
insurance policy (the "insured") is unwilling or unable to pay the
entire premium in advance, he may seek financing for at least part of
the annual, or semi-annual, premium. The Company offers financing to
purchasers of predominantly automobile insurance policies. The
Company's down payment requirements usually range from 20% to 30% of
the entire annual premium, or 40% to 50% of the entire semi-annual
premium. Alternatively, the insured may be able to finance such
premium with either an affiliated company of the insurance carrier
(rather than the insurance carrier which is permitted to collect
certain service charges but is usually prohibited by law from imposing
interest charges), if available, or with an independent premium
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finance source such as the Company. The Company's agreements covering
annual policies generally provide for monthly payments over a period
of eight to nine months; agreements covering semi-annual policies
generally provide for monthly payments over a period of three months.
If the insured chooses to obtain financing from the Company, the
insurance broker will complete and have the insured sign one of the
Company's premium finance agreements. The premium finance agreement
discloses to the insured, among other things, the price of the total
premium; the amount of the cash down payment made; the amount
financed; the amount of the finance charges; the amount of the state
required documentary tax stamps, if any; the amount which will be paid
after the insured has made all payments as scheduled; the cost of the
credit in terms of an annual percentage rate; late and cancellation
charges; the insured's entitlement to a refund of part of the finance
charge in the event of prepayment; the giving of a security interest
to the Company in any and all unearned return premiums which may
become payable under the policy; and the insured's appointment of the
Company as his attorney-in-fact with authority to cancel the policy
and to receive all unearned premiums due under the policy.
The insurance broker will submit completed finance contracts to the
Company, which are input into the Company's computer system. The
computer system tracks all contracts and automatically generates late
notices and cancellation notices as well as correspondence with
insureds, brokers and insurance companies.
Although the insured is primarily liable on his finance contract, the
Company does not look to his creditworthiness for payment and no
investigations are performed on his credit history. Rather, the
insured assigns to the Company any unearned premium he may attain in
the financed insurance policy as collateral for his loan and grants to
the Company the authority to cancel the insurance policy and collect
the unearned premium if there is a default in payment on the finance
contract. Thus, the insurance company, and not the insured, is the
source of payment on a delinquent finance contract. Additionally, the
Company usually will collect the unearned commission from the broker
who acted as agent for the insured on policies that are canceled, in
the event that the insurance carrier returns the unearned premium to
the Company net of commission.
In most cases, the amount of unearned premiums returned by insurance
companies and the amount of unearned commissions returned from
insurance brokers will cover the majority of the amount loaned by the
Company, exclusive of finance charges and loan origination fees. Any
remaining balance will still be due from the insured. It is the
Company's policy to actively pursue all such balances although in most
instances these balances must be written off as uncollectible bad
debts.
From the inception of operations of the Company in September 1990
through February 28, 1997, the Company has financed the premiums of
approximately 215,000 insurance contracts and expects cancellations on
approximately 30%-40% of the policies it finances. The allowance for
doubtful accounts reflected in the Company's financial statements
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takes into account this anticipated rate of cancellations and the
resulting historical rate of defaults on loans. The Company currently
deals with more than 300 insurance brokers and more than 285 insurance
companies. The average amount financed per contract varies by state
but in most cases is less than $1,000. There are a few insurance
contracts for commercial insurance that exceed $10,000. No individual
insured accounts for a significant portion of the Company's
receivables. The largest contract outstanding is less than $18,000.
Approximately 27% of the Company's contracts receivable are generated
by referrals from five insurance brokers and approximately 38% of
receivables are written through five insurance companies. No
insurance company accounts for more than 13% of business financed.
All of the insurance brokers are referral sources from which the
Company obtains customers. These entities are not themselves
customers of the Company. The Company has no single customer, or a
few customers, the loss of any one or more of which would have a
material adverse effect on its business; however, the loss of any one
or more of the referral sources from which the Company obtains
customers could potentially have a material adverse effect.
Additionally, the loss of one of the Company's independent marketing
representatives may have a material adverse effect.
The Company generally has the authority to cancel an insurance policy
if payments due to it from the insured are more than fifteen to twenty
days late. After a payment exceeds the state mandated grace period
(usually five to ten days late), the Company mails out a Notice of
Intent to Cancel to the insured and charges the insured the
applicable late fee. If payment is not received within ten days
thereafter, the Company mails out a notice of cancellation of the
policy to the insurance company with a copy to both the insured and
the insurance broker. Under certain circumstances, the Company may
grant the insured additional time to make a delinquent payment, and
thus temporarily delay cancellation. Under certain state laws, the
Company must wait 60 to 90 days from the inception date of many types
of policies in order to cancel those policies. Any monies paid for
insurance coverage for time extending after the cancellation date
constitute "unearned premiums" and must be refunded by the insurance
company to the Company, which then applies it to the balance on the
insured s contract. Based upon management's experience, the time
period between the cancellation date and receipt of the refund of
unearned premiums averages between 30 and 90 days.
Most insurance carriers doing business in the states where Finco and
Eagle do business must participate in a state insurance guarantee
association which, in the event of the bankruptcy of any such
participant, will refund unearned premiums less a deductible. This
deductible may become significant due to the relatively low average
amount financed per contract. To minimize its risks, the Company does
substantially all of its financing with insurance companies covered by
these guarantee associations. The Company is also subject to risks
associated with administrative errors and fraudulent acts committed by
agents and policy holders in which event the Company may find it
difficult to collect from the insurer.
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Sales and Marketing
- - -------------------
Currently, the Company generates the majority of its business through
the services of independent sales representatives who solicit business
from independent insurance brokers. Additionally, the Company
generates business through attending trade shows.
The Company believes that it provides a better quality of service and
offers more flexibility with regard to late payments and policy
cancellations than affiliated companies of insurance carriers, as well
as other independent finance companies. It is the Company's policy to
notify the broker immediately when any payment is past due which
allows the broker to arrange with the insured for payment and to
prevent cancellation of the policy. Under certain circumstances, the
grace period can be extended, thereby avoiding cancellation of the
policy and the loss of part of the broker's commission which may
result from such cancellation. No assurances can be given that the
affiliated companies of insurance carriers, as well as companies
carrying non-standard insurance, will not add greater flexibility to
their insurance financing business practices, and in the event this
should occur, there may be a material adverse effect on the Company's
business operations. There also can be no assurance that brokers
presently directing financing business to the Company will continue to
do so, or that the Company will be able to locate and establish
relationships with additional brokers.
Regulation
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The Company's operations subject it to state regulation governing the
licensing, administration and supervision of insurance premium finance
companies. In a number of states, the Company's officers and 5%
stockholders are subject to an extensive background check and a
determination of their overall fitness to operate and manage a premium
finance company before state regulators allow them to operate the
Company. Any future officers or 5% stockholders will also require
approval in those states.
State statutes set maximums on all fees and charges which may be
imposed by the Company. Changes in the regulation of the Company's
activities, such as increased rate regulation, could have an adverse
effect on the Company's operations. In prior years, there was a
statute in Florida which prohibited insurance premium finance
companies from rebating a portion of the interest or origination fees
to insurance brokers in an effort to induce the brokers to refer
finance business to the Company. This prohibition expired on July 1,
1996. As a result the Company's costs increased substantially as the
Company, in an effort to maintain its market share, was forced to
rebate a portion of its finance charges and origination fees to the
insurance brokers. A number of premium finance companies which are
affiliated with insurance companies have been paying rebates to
insurance agents. This has adversely affected the Company's ability
to increase its market share.
State statutes also do not currently provide for automatic adjustments
in the rates a premium finance company may charge. Consequently,
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during periods of high prevailing interest rates on institutional
indebtedness and fixed statutory ceilings on the rates the Company may
charge, the Company's ability to operate profitably may be adversely
affected.
Competition
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The Company encounters intense competition from numerous other firms,
including companies affiliated with insurance carriers that carry
non-standard insurance and independent insurance brokers who provide
premium finance services. Many of the Company's competitors are
larger and have greater financial and other resources and are better
known to consumers than the Company. Insurance companies may also
elect to bill insureds directly and to collect service charges. This
practice has become much more predominant during the past several
years. The Company believes that it offers more flexibility with
regard to late payments and policy cancellations than affiliates of
insurance carriers. However, to the extent that affiliates of
insurance carriers add greater flexibility to their financing
practices in the future, the Company's operations could be adversely
affected.
Additionally, during the past several years, many new competitors have
entered into the premium finance industry as a result of low interest
rates. Management believes that as a result, the Company's growth may
be severely curtailed and profit margins may diminish. Additionally,
as a result of the expiration of the Florida rebate prohibition (see
Regulation section), the Company's costs of acquiring finance business
have substantially increased, causing profit margins to diminish.
Management is currently exploring the possibility of expanding the
premium finance business to other states as well as seeking other
business opportunities not in the premium finance industry in an
effort to diversify.
There can be no assurance that the Company will be able to continue to
compete successfully in its markets. During April 1997, the Company
was notified by a managing general agent that represents two affiliated
incurance carriers that it will no longer allow the Company to finance their
policies. This accounts for approximately 10% of the Company's finance
business. This could lead to further losses in finance business as insurance
agents may switch to other finance companies which are accepted by all
insurance carriers. There can be no assurances that other insurance carriers
will continue to accept the Company's finance contracts. This can
cause a significant loss in the volume of the business financed.
Investment Activities
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In October 1993, the Company's Board of Directors approved the opening
of an investment account to be used for the buying and selling of
stocks and options in an effort to increase the profitability of the
Company and to diversify its business activities. Although the
trading of such securities is subject to a high degree of risk, it
also offers the opportunity to earn a return that potentially could be
in excess of the rate of return generally received by the Company
through its insurance premium finance business for a similar amount
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invested. Further, as the Company has in recent years been engaged
solely in the insurance premium finance business ( which is becoming
increasingly competitive), this investment strategy provides some
degree of financial diversification in the event of a downturn in the
Company's primary business activities.
The Board has authorized the utilization of up to $500,000 to be
deposited in its investment account. Such amount is to be utilized
for investing purposes and to meet margin and capital requirements
necessary for the trading of these securities. The Company has no
present intentions to expand its current investment activities or to
engage in the investment advisory or broker-dealer business in the
future.
The Company sells options on equities as part of its investment
strategy. This method of trading involves a high degree of risk as
the losses which can be generated from this type of trading can far
exceed the value for which the option was sold. The Company places a
large emphasis on the selling of put options. If the value of a
security on which the Company sold put options were to substantially
decrease, the loss to the Company could greatly exceed the proceeds of
the sale of the option. This risk of loss includes the possibility
that the Company could be contractually obligated to go into the
market and purchase securities at losses significantly in excess of
the amount initially received for the option.
The Company believes that it has substantial experience in this area
of investing and will utilize various strategies to maximize
profitability and limit its losses. The Company also intends to
purchase securities of listed companies on margin. Management will
use its best efforts to limit the aggregate amount of its potential
liability from investing activities to an amount that does not exceed
the $500,000 that was initially authorized, although no assurance can
be given that management will ultimately be successful in such
efforts.
At February 28, 1997, the Company had a liability resulting from
options sold amounting to $17,218.
Employees
- - ---------
The Company presently has 19 employees. Robert Gardner is Chairman of
the Company and David Raymond is the President, Treasurer and
Secretary of the Company. Substantially all of the Company's
employees are involved in the administration of the Company s premium
finance operations.
ITEM 2
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DESCRIPTION OF PROPERTY
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The Company leases approximately 4,200 square feet of space located at
3201 Griffin Road, Suite 210, Dania, Florida 33312 which is utilized
as the Company's headquarters. This lease expires on January 2, 2000.
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ITEM 3
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LEGAL PROCEEDINGS
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None
ITEM 4
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
PART II
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ITEM 5
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock has been quoted in the "pink sheets" since
October 13, 1989, and is only traded sporadically. Accordingly, there
is no current established public trading market for the Common Stock.
Quotations have been obtained from the National Quotation Bureau.
Quotations represent inter-dealer quotations without adjustment for
retail mark-up, mark-down or commissions, and do not necessarily
represent actual transactions.
1995
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Low Bid High Bid
First Quarter.................... .125 .25
Second Quarter................... .1875 .25
Third Quarter.................... .1875 .25
Fourth Quarter................... .1875 .25
1996
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Low Bid High Bid
First Quarter.................... .1875 .25
Second Quarter................... .1875 .1875
Third Quarter.................... .1875 .1875
Fourth Quarter................... .125 .1875
1997
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Low Bid High Bid
First Quarter (through April 30). .04 .125
At February 28, 1997, the Company's Common Stock was held by 1,662
stockholders of record.
Dividend History and Policy
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The Company has not declared or paid any dividends on its common
shares since its inception and does not intend to pay dividends in the
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near future. All earnings, if any, which the Company may realize in
the future will be retained to finance the growth and expansion of the
Company.
ITEM 6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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Management's Discussion and Analysis of Financial Condition and
- - ---------------------------------------------------------------
Results of Operations
- - ---------------------
Years Ended February 28, 1997 and February 29, 1996
- - ---------------------------------------------------
The Company's growth in the insurance premium finance business during
fiscal 1997 increased substantially as compared to fiscal 1996. The
number of contracts financed during 1997 was 64,000 which was a 49%
increase from the 43,000 contracts financed during 1996. Premium
finance loans increased 41% to $32.6 million in 1997 from $23.1
million during 1996. Finance receivables increased to $13.5 million
as of February 28, 1997 as compared to $8.1 million as of February 29,
1996. These increases were primarily attributable to the Company's
increased marketing efforts which have lead to growth in the number of
contracts financed in Florida. Direct bill insurance companies, which
generally offer lower down payments than the Company, are increasing
their presence in Florida. If this trend continues, this could limit
the Company's future growth prospects. During April 1997, the Company
was notified by a managing general agent that represents two affiliate
insurance carriers that it will no longer allow the Company to finance
their policies. This accounts for approximately 10% of the Company's
finance business. This could lead to further losses in finance business
as insurance agents may switch to other finance companies which are accepted
by all insurance carriers. There can be no assurances that other insurance
carriers will continue to accept the Company's finance contracts. This can
cause a significant loss in the volume of the business financed.
The following table reflects the Company's expenses as a percentage of
total revenue during the current and prior fiscal year:
1997 1996
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General and Administrative 27% 35%
Sales and Marketing 20% 16%
Provision for Doubtful Accounts 32% 26%
Depreciation and Amortization 1% 1%
Interest 15% 12%
Interest to Directors 2% 5%
--- ---
Total Expenses 97% 95%
Sales and marketing expenses increased as a percentage of revenue as a
result of increased fees paid to independent sales representatives as
well as marketing fees paid to insurance agents subsequent to the
expiration of the State of Florida anti-rebate statute on July 1,
1996. See Regulation Section. The provision for doubtful accounts
has increased substantially as the Company has been accepting lower
down payments on its finance agreements in an effort to compete
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effectively. These lower down payments translate into higher bad debt
write-offs when an insurance contract is cancelled. In determining
the provision for doubtful accounts, management takes into account
factors such as its average down payment rate, cancellation rate,
unrefunded canceled contracts, specific problems with insurance
agents, and financial condition of insurance companies among other
factors. Interest expense increased primarily as a result of
increased borrowings during the current year.
Net interest margin is as follows:
1997 1996
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Finance charge income $2,593,686 $1,603,783
Interest expense 834,408 569,494
Net interest margin 1,759,278 1,034,289
Margin percent 68% 65%
Net income increased to approximately $158,000 for 1997 as compared to
approximately $136,000 for 1996. This resulted primarily from the increased
number of contracts financed, although profit per contract has decreased.
Liquidity and Capital Resources
- - -------------------------------
The Company's working capital position as of February 28, 1997 was
$12,428,376 as compared to $6,580,224 at February 29, 1996. This
increase is principally due to a substantial increase in finance
receivables which are funded by long term debt.
As of April 30, 1997, the Company's revolving credit arrangements and
availability are as follows:
Description Unused Expiration Date
- - ----------- ------ ---------------
$11 million Revolving Credit Agreement $1.0 million March 1, 1999
with bank
$1 million Revolving Credit Agreement $500,000 Demand
with Chairman
Additionally, the Company has approximately $300,000 in demand loans
with several private investors.
On February 23, 1996, the Company and its subsidiary entered into an
$8,000,000 revolving credit facility with a bank. Borrowings under
the line are based on certain levels of eligible finance receivables,
bear interest at LIBOR plus 3-1/4% or the bank's prime rate plus 1-
1/4%. The note is collateralized by all of the assets of the Company.
On August 16, 1996, the Company amended its revolving credit facility
with the bank to $10,000,000 with an option to extend the limit to
$11,000,000. On February 21, 1997, the revolving credit agreement was
amended to extend the borrowing limit to $11,000,000. In addition,
the Company must meet certain reporting requirements and restrictive
debt covenants, including, but not limited to a pre-established
tangible net worth ratio.
During July 1996, the Company extended the expiration date of its $1
million revolving credit facility with Robert Gardner, the Company's
Chairman to payable on demand. Borrowings under the facility bear
interest at prime plus 4 1/2% with a minimum of 12% and a cap of 18%.
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The facility is secured by all the assets of the Company (with
exception to the accounts receivable) and all of Finco Financial
Corporation's common stock; however this is subordinated to the
bank facility.
On June 28, 1996, the Company repaid its $500,000 revolving credit
facility with Marilyn Gardner, a Director of the Company. Mrs.
Gardner's facility expired on July 31, 1996. No new agreement has
been made.
The controlling stockholders of the Company plan to implement a
restructuring in the form of a one-for-twelve thousand five hundred
share reverse stock split which is expected to become effective July
10, 1997 and will result in the Company becoming privately-held as of
that date. Marilyn Gardner, Robert L. Gardner, Kenneth Gardner and
David Raymond own 72.7% of the Company's outstanding Common Stock and
intend to vote in favor of the transaction. The Board of Directors
has estimated that 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 total approximately $50,000 in expenses annually, and
believes that by becoming privately-held the Company will benefit from
an expense reduction in a like amount. The cost of the reverse stock
split is estimated to be approximately $439,000 (including $414,000 to
be paid to holders of fractional shares at a rate of $0.39 per
currently outstanding share, and $25,000 in estimated expenses), which
amount is expected to be paid from working 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 future transactions and to
facilitate further restructuring if necessary.
It is the opinion of management that the Company will have sufficient
funds to satisfy its cash requirements for the next 12 months.
Inflation
- - ---------
Inflation has not had a significant adverse effect on the Company's
business; however, the Company's finance operations may be adversely
affected if interest rates increase. The maximum interest rate that
the Company can charge on its finance contracts is fixed by law, while
its cost of borrowings may increase during periods of inflation.
Accordingly, during periods of high interest rates, the Company's
operating margins may be severely impacted.
New Pronouncements
- - ------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 128 "Earnings Per Share" FAS
No. 128 simplifies the standards for computing earnings per share ("EPS")
previously found in APB No. 15 Earnings Per Share. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted EPS
computation. The Company will adopt FAS No. 128 as of March 1, 1997 and its
implementation is not expected to have a material effect on the financial
statements.
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ITEM 7
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FINANCIAL STATEMENTS
--------------------
Index Page
----- ----
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet as of February 28, 1997 F-2
Consolidated Statements of Operations for
the years ended February 28, 1997 and February 29, 1996 F-4
Consolidated Statements of Stockholders' Equity for
the years ended February 28, 1997 and February 29, 1996 F-6
Consolidated Statements of Cash Flows for the
years ended February 28, 1997 and February 29, 1996 F-7
Notes to Consolidated Financial Statements F-9
ITEM 8
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
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ITEM 9
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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 64 Chairman of the Board
and Director
David Raymond 38 President, Treasurer,
Secretary and Director
Marilyn Gardner 55 Director
Each director is elected at the Company's annual 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 except for Marilyn Gardner who receives a fee of $500
per month for her services as an outside director.
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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.
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 28, 1997, all
filing requirements applicable to its officers, directors and greater
than ten percent beneficial owners were complied with.
-14-
<PAGE>
ITEM 10
-------
EXECUTIVE COMPENSATION
----------------------
The following table sets forth the compensation paid to the executive
officers of the Company which individually earned more than $100,000
for the year ended February 28, 1997:
<TABLE>
SUMMARY COMPENSATION TABLE
--------------------------
Annual Compensation Awards
------------------- ------
<CAPTION>
Other
Annual Restricted
Name and Compen- Stock
Principal Salary Bonus sation Award(s)
Position Year ($) ($)(2) ($) ($)(3)
- - -------- ---- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Robert
Gardner(1) 1997 $150,000 $20,043 $9,032 0
Chairman 1996 $135,000 $17,289 $8,115 0
of the 1995 $125,000 $41,908 $8,316 0
Board
David
Raymond(1)
(3) 1997 $125,000 $20,043 $8,438 0
President 1996 $110,000 $17,289 $7,099 0
Secre- 1995 $100,000 $41,908 $7,078 0
tary and
Treasurer
_______________________
</TABLE>
<TABLE>
SUMMARY COMPENSATION TABLE CONT.
--------------------------------
Long-Term Compensation
----------------------
Payouts
-------
<CAPTION>
Securities All Other
Name and Underlying LTIP Compen-
Principal Options/ Payouts sation
Position Year SARs(#) ($)(3) ($)(4)
- - -------- ---- -------- -------- ---------
<S> <C> <C> <C> <C>
Robert
Gardner(1) 1997 0 0 6,967
Chairman 1996 0 0 7,607
of the 1995 0 0 7,607
Board
-15-
<PAGE>
David
Raymond(1) 1997 0 0 9,443
(3)
President 1996 0 0 8,456
Secre- 1995 0 0 7,303
tary and
Treasurer
_______________________
</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 $20,043 was earned by each of Mr. Gardner and Mr. Raymond for
fiscal 1997. 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.
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
Internal Revenue Code of 1986 (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.
-16-
<PAGE>
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.
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 28, 1997. No other
stock options have been granted under the 1987 Plan. Robert Gardner's
options expired on August 31, 1996. The Plan terminated on March 25,
1997 without any of the remaining options being exercised.
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
-17-
<PAGE>
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 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 $.19 per share were granted to certain employees of the
Company, of which all have expired. During February 1996, Robert
Gardner exercised options to purchase 150,000 shares of the Company's
Common Stock. No other options have been exercised as of February 28,
1997. No other stock options have been granted under the 1992 Plan.
The following table shows certain information with respect to stock
options granted to the Company's executive officers during the fiscal
year ended 1997:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
-------------------------------------
Individual Grants
-----------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- - -------------- ----------- ------------ ----------------- ----
<S> <C> <C> <C> <C>
Robert Gardner -0- N/A N/A N/A
David Raymond -0- N/A N/A N/A
</TABLE>
-18-
<PAGE>
The following table sets forth certain information with respect to
option exercises during the fiscal year ended February 28, 1997 by the
executive officers of the Company and the value of each such officer's
unexercised options at February 28, 1997.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
- - ------------------------------------------------------------------
Value of
Unexercised
Shares Number of Securities Underlying in-the-Money
Acquired Unexercised Options/SARs Options/SARs
on Value at Fiscal Year-End(#) FiscalYear-End($)
Exercise Realized -------------------------------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- - ------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert
Gardner None None 0 0 $ 0 0
David
Raymond None None 150,000 0 $ 0 0
</TABLE>
<TABLE>
<CAPTION>
Estimated Future Payouts under Non-Stock
Price-Based Plans
----------------------------------------
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation or Threshold Target Maximum
Name Rights(#) Payout ($ or #) ($ or #) ($ or #)
- - ------- ------------ ------------- --------- -------- --------
<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.
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
-19-
<PAGE>
plan during the fiscal year ended February 28, 1997. During the
current fiscal year a total of $20,000 was contributed to the SEP,
including $9,032 and $8,438 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, including David Raymond. 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.
Currently the Company is making the payments for two children.
ITEM 11
-------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth, as of April 30, 1997, 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:
<TABLE>
<CAPTION>
Title of Name and Address Amount and Nature of Percentage
Class of Beneficial Owner Beneficial Owner(1) of Class (1)
- - -------- -------------------- --------------------- ------------
<S> <C> <C> <C>
Common Robert L. Gardner(D) 2,326,073 59.6%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common Kenneth Gardner(A) 200,000 5.1%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common David Raymond(D) 256,000(2) 6.5%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common Marilyn Gardner(D)(B) 51,000 1.3%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common All Officers and 2,633,073(2) 67.4%
Directors as a Group
(3 persons)
________________
</TABLE>
(1) The calculations set forth above assume that as of April 30,
1997, there were 3,904,849 shares of common stock issued and outstanding
(which amount includes 150,000 options to purchase shares).
(2) Includes outstanding stock options to purchase 150,000 shares of
common stock.
(D) Director of Company
-20-
<PAGE>
(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 on demand
and is collateralized by all of the Company's assets excluding the
accounts receivable and by all of the common stock of the Company.
Borrowings under this revolving credit agreement, as disclosed in Note
6 to the consolidated financial statements, are subordinated to the
Company's line of credit. In the event of a default by the Company of
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.
ITEM 12
-------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
On April 21, 1993, Finco, a wholly owned subsidiary of the Company,
entered into a $500,000 revolving credit facility with Marilyn
Gardner, a Director of the Company. The agreement with Mrs. Gardner
terminated as of July 31, 1996. The Company repaid the revolving
credit facility on June 28, 1996. During fiscal 1997 the Company paid
Mrs. Gardner $21,250 in interest. 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 on demand. Loans under this agreement bear interest at
Citibank prime plus 4 1/2% with a minimum of 12% and a maximum of 18%
and are collateralized by all of the Company's assets excluding
accounts receivable and all of the common stock and business of the
Company. Borrowing under this line of credit as disclosed in Note 6
to the consolidated financial statements are payable on demand and are
subordinated to a line of credit from a bank. As of February 28,
1997, there was $500,000 outstanding under this agreement; $84,823 of
interest was paid by the Company to Mr. Gardner during the year ended
February 28, 1997.
In connection with the maintenance of the Company's SEP Plan and
securities trading through Advest Securities, the Company uses Kenneth
Gardner as an account manager. Kenneth Gardner owns approximately 5%
of the Company's issued and outstanding shares, and is the son of
Robert Gardner, an officer, director and controlling stockholder of
the Company. Commissions paid to Advest in connection with these
activities for the year ended February 28, 1997 and those paid to
Prudential Securities (his former employer) in 1996 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
-21-
<PAGE?
transactions, it would not have entered into the subject transactions
with related parties.
The controlling stockholders of the Company plan to implement a
restructuring in the form of a one-for-twelve thousand five hundred
share reverse stock split which is expected to become effective July
10, 1997 and will result in the Company becoming privately-held as of
that date. The following stockholders own a majority of the shares
and intend to vote in favor of the transaction: Marilyn Gardner,
Robert L. Gardner, Kenneth Gardner and David Raymond. Together these
stockholders own 72.7% of the outstanding Common Stock. All such
stockholders own more than 12,500 shares each and therefore will
remain stockholders after the reverse stock split. Messrs. Raymond
and Robert L. Gardner and Marilyn Gardner are also the directors of
the Company and voted not only to approve the transaction but to cash
out the minority stockholders at $.39 per currently outstanding share.
ITEM 13
-------
EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits:
3(i) Certificate of Incorporation, as amended. (1)
(ii) By-Laws, as amended. (1)
4(i) Specimen of Common Stock Certificate. (1)
4(ii) Form of Warrant Agreement between the Company and American
Securities Transfer, Inc. and Specimen Warrant
Certificate. (1)
4(iii) Form of Stock Purchase Warrant between the Company and The
Stuart-James Company Incorporated. (1)
10(i) Copy of 1987 Stock Option Plan. (1)
(ii) Copy of Revolving Credit Facility between the Company
Financial Corp. and Robert Gardner dated April 13, 1992, as
amended March 28, 1995 and April 12, 1995 and as amended on
April 15, 1996. (2)(5)(6)
(iii) Copy of 1992 Stock Option Plan.
(iv) Copies of Revolving Credit Agreements between International
Design Group, Inc., Finco Financial Corporation, Eagle
Premium Finance, Inc. and Nations Bank, as of February 26,
1996 as amended on August 16, 1996. (6)
21. Subsidiaries of the Registrant
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed by the Registrant during the
fiscal year ended February 28, 1997.
- - --------------------
-22-
<PAGE>
(1) Incorporated by reference to the Company's Registration
Statement on Form S-l (No. 14236) filed with the Securities and
Exchange Commission which became effective on June 29,1987.
(2) Incorporated by reference to the Company's Form 8-K, dated April
13, 1992.
(3) Incorporated by reference to the Company's Forms 8-K, dated April
21, 1993 and May 11, 1993.
(4) Incorporated by reference to Company's Form 10-K dated February
28, 1993.
(5) Incorporated by reference to Company's Form 10-K dated February
28, 1995.
(6) Amendment included herewith.
-23-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
(Registrant) INTERNATIONAL DESIGN GROUP, INC.
(Date) May 29,1997
BY(Signature) /s/ Robert L. Gardner
(Name and Title) Robert L. Gardner, Chairman of the
Board (Principal Executive Officer)
(Date) May 29, 1997
BY(Signature) /s/ David Raymond
(Name and Title) David Raymond, President and
Treasurer (Principal Financial and
Accounting Officer)
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(Registrant) INTERNATIONAL DESIGN GROUP INC.
(Date)
BY(Signature) /s/ Robert L. Gardner
(Name and Title) Robert L. Gardner, Chairman of the
Board (Principal Executive Officer)
(Date)
BY(Signature) /s/ David Raymond
(Name and Title) David Raymond, President and
Treasurer (Principal Financial and
Accounting Officer)
-24-
<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 28, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the two years in the period ended February 28, 1997 and
February 29, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
presentation of the financial statements. 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 consolidated financial
position of International Design Group, Inc. at February 28, 1997 and the
results of its operations and its cash flows for each of the two years
in the period ended February 28, 1997 in conformity with generally accepted
accounting principles.
/s/ BDO Seidman, LLP
Miami, Florida BDO Seidman, LLP
May 9, 1997
F-1
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
February 28, 1997
- - ----------------------------------------------------------------------------
Assets (Notes 6 and 7)
<S> <C>
Current
Cash and cash equivalents $ 273,577
Finance receivables, less allowance for
doubtful accounts of $855,000 and unearned
income of $898,000 13,508,449
Drafts receivable 519,989
Current maturities of notes receivable
(Note 2) 153,696
Prepaid expenses and other 23,846
----------
Total current assets 14,479,557
Property and equipment - at cost, less
accumulated depreciation and amortization
of $73,318 156,258
Notes receivable, less current maturities
(Note 2) 111,341
Other assets, less accumulated amortization
of $20,000 49,311
--------
$14,796,467
==========
</TABLE>
F-2
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Balance Sheet
<TABLE>
<CAPTION>
February 28, 1997
- - --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C>
Current Liabilities
Accounts payable, accrued expenses and other $ 367,702
Drafts payable 889,411
Notes payable (Note 7) 276,850
Liability under options sold 17,218
Note payable to director (Note 6) 500,000
---------
Total current liabilities 2,051,181
Note payable to bank (Note 7) 9,961,635
---------
Total liabilities 12,012,816
----------
Commitments Contingency and Subsequent Event
(Notes 5, 8 and 11)
Stockholders' equity (Note 3)
Common stock, $.05 par - 10,000,000 shares
authorized, 3,754,849 issued and 3,744,849
outstanding 187,742
Additional paid-in capital 5,834,470
Deficit (3,180,820)
Treasury stock - 10,000 shares at cost (4,375)
Common stock subscriptions receivable
for 422,979 shares of common stock (53,366)
---------
Total stockholders' equity 2,783,651
---------
$14,796,467
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Statements of Operations
Year ended Year ended
February 28, February 29,
1997 1996
------------- -------------
Revenues:
Finance charge income $ 2,593,686 $ 1,603,783
Origination fees 1,164,044 780,480
Late fees and other charges 1,004,635 687,649
Gain on securities trading 17,096 58,212
Interest income 36,436 43,995
Other income 1,250 12,050
--------- ----------
4,817,147 3,186,169
--------- ----------
Expenses:
General and administrative expenses 1,277,796 1,117,288
Sales and marketing 955,540 497,399
Provision for doubtful accounts 1,547,296 829,473
Depreciation and amortization 44,356 36,500
Interest expense 728,335 396,620
Interest expense to Directors 106,073 172,874
--------- ---------
4,659,396 3,050,154
--------- ---------
Net Income $157,751 $136,015
========= =========
Net Income Per Common Share:
Primary $ .04 $ .04
Fully diluted $ .04 $ .04
========= =========
F-4<PAGE>
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Statements of Operations
Year ended Year ended
February 28, February 29,
1997 1996
------------ -------------
Computation Of Fully Diluted Earnings:
Net income $ 157,751 $ 136,015
Less preferred dividends - (9,000)
---------- ----------
Primary net income 157,751 127,015
Assumed conversions:
Preferred dividends eliminated - 9,000
---------- ----------
Fully diluted earnings $157,751 $136,015
---------- ----------
Average Number of Common Shares
Primary 3,744,849 3,096,107
Fully Diluted 3,744,849 3,593,373
========== ==========
See accompanying notes to consolidated financial statements.
F-5<PAGE>
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Statements of Stockholder' Equity
Additional
Common Stock Paid-in
Shares Amount Capital
---------- ---------- --------------
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 500,000 25,000 50,000
Exercised stock option 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
Net income for the year - - -
Payment of common stock
subscription receivable - - -
Retirement of Treasury Shares (13,552) (678) (3,236)
-------- --------- ---------
Balance, February 28, 1997 3,754,849 $ 187,742 $5,834,470
========= ========== ==========
INTERNATIONAL DESIGN GROUP INC.
Consolidated Statements of Stockholder' Equity Cont.
Subscriptions Treasury
Deficit Receivable Stock Total
-------- -------------- ---------- -------
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 - - - 75,000
Exercised stock option - (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
Net income for the year 157,751 - - 157,751
Payment of common stock
subscription receivable - 5,134 - 5,134
Retirement of Treasury
Shares - - 3,914 -
--------- -------- ------ --------
Balance, February 28,
1997 $(3,180,820) $(53,366) $ (4,375) $2,783,651
========== ======= ======== =========
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Statements of Cash Flows
(Note 10)
Year ended Year ended
February 28, February 29,
1997 1996
----------- -----------
Operating Activities:
Net income $ 157,751 $ 136,015
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 44,356 36,500
Provision for doubtful accounts 1,547,296 829,473
Changes in operating assets and
liabilities:
Increase in unearned income 471,378 217,971
Increase in drafts receivable (207,196) (26,393)
Increase in prepaid expenses
and other (35,896) (34,194)
Increase in accounts payable
and accrued expenses 137,468 19,897
Increase (decrease) in drafts
payable 581,281 (66,218)
--------- --------
Net cash provided by operating
activities 2,696,438 1,113,051
--------- ---------
Investing Activities:
Premium finance loans (32,567,205) (23,091,889)
Payments received on premium
finance loans 25,189,499 18,808,817
Capital expenditures (104,987) (31,993)
Increase in notes receivable (128,558) (340,257)
Payments received on notes receivable 224,615 372,748
Proceeds from sale of marketable
securities 129,188 88
Decrease in liability under options
sold (8,251) (18,119)
---------- ---------
Net cash used in investing activities (7,265,699) (4,300,605)
---------- ---------
F-7<PAGE>
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Statements of Cash Flows
(Note 10)
Year ended Year ended
February 28, February 29,
1997 1996
------------ -------------
Financing Activities:
Purchase of treasury shares - (22,389)
Increase in note payable to bank 42,789,100 9,283,112
Paydowns in note payable to bank (37,091,075) (6,406,502)
Increase in notes payable 27,000 27,000
Paydowns in notes payable (18,000) (210,150)
Increase in notes payable to directors - 350,000
Paydowns in notes payable to directors (1,000,000) -
Preferred dividends paid - (9,000)
Payment of common stock subscription 5,134 -
--------- --------
Net cash provided by financing activities 4,712,159 3,012,071
--------- ---------
Net increase (decrease) in cash 142,898 (175,483)
Cash and cash equivalents, beginning of
year 130,679 306,162
--------- ---------
Cash and cash equivalents, end of year $ 273,577 $ 130,679
========== =========
See accompanying notes to consolidated financial statements.
F-8<PAGE>
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Notes to Consolidated Financial Statements
1. Summary of Company and Basis of Presentation
Significant ---------------------------------
Accounting International Design Group, Inc. ("the
Policies Company") is in the insurance premium finance
business through its subsidiaries, Finco
Financial Corporation and Eagle Premium
Finance, Inc. The Company's main business
activity is to grant loans to customers,
primarily to finance automobile insurance
policies in the state of Florida. Such loans
are substantially collateralized by unearned
premiums of the insurance policy. Approximately
27% of the Company's customers are referrals
from five insurance brokers.
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
---------------------
Under the provisions of Statement of Financial
Accounting Standards No. 115 Accounting for
Certain Investments in Debt and Equity
Securities, the Company's investments in
securities are accounted for as follows:
Trading Securities - Securities are bought and
held for the purpose of selling them in the
near term and are carried at estimated market
value. Unrealized holding gains and losses are
reported as a component of earnings. Gains and
losses realized from the sale of securities are
determined on the first-in first-out method.
F-9
<PAGE>
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 28, 1997, the Company had
a liability resulting from options sold
amounting to approximately $17,000.
Fair Value of Financial Instruments
-----------------------------------
The Company's financial instruments consist
principally of cash, finance receivables,
drafts and notes receivable, accounts payable,
accrued expenses and drafts and notes payable.
The carrying amounts of such financial
instruments as reflected in the balance sheet
approximate their estimated fair value as of
February 28, 1997 due to their relatively short
maturities at market rates. The estimated fair
value is not necessarily indicative of the
amounts the Company could realize in a
current market exchange or of future earnings
of cash flow.
Property and Equipment
----------------------
Depreciation and amortization are computed on
either a straight- line or an accelerated basis
over the estimated useful lives of the various
assets, principally five years.
Long-Lived Assets
-----------------
In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121
"Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of"
("FAS No. 121"). FAS No. 121 requires, among
other things, impairment loss of assets to be
held and gains or losses from assets that are
expected to be disposed of be included as a
component of income from continuing operations
before taxes on income. The Company adopted
FAS No. 121 as of March 1, 1996 and its
implementation did not have a material effect
on the financial statements.
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, fiscal 1996 earnings
per share has been adjusted for the effects of
the Company's dividend on the convertible
redeemable preferred stock and for conversion
F-10
<PAGE>
of the convertible redeemable preferred stock
for fully diluted purposes.
In February 1997, the Financial Accounting
Standards Board ("FASB") issued Statements of
Financial Accounting Standards No. 128
"Earnings Per Share" FAS No. 128 simplifies the
standards for computing earnings per share
("EPS") previously found in APB No. 15 Earnings
Per Share. It replaces the presentation of
primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and
diluted EPS on the face of the income statement
for all entities with complex capital structures
and requires a reconciliation of the numerator
and denominator of the diluted EPS computation.
The Company will adopt FAS No. 128 as of March
1, 1997 and its implementation is not expected
to have a material effect on the financial
statements.
Stock Based Compensation
------------------------
In October 1995, FASB issued FAS No. 123,
"Accounting for Stock-Based Compensation." FAS
No. 123 establishes a fair value method for
accounting for stock-based compensation plans
either through recognition or disclosure. The
Company did not adopt the fair value based
method but instead will disclose the effects of
the calculation required by the statement.
Revenue Recognition and Finance Receivables
--------------------------------------------
Finance charges and loan origination fees are
amortized to income over the life of the
finance contracts generally ranging from eight
to nine months, using the interest method. An
allowance for doubtful accounts is established
to provide for finance receivable losses based
upon an evaluation of factors including
unearned premiums and commissions refundable
from insurance providers and their agents
and accounts receivable from the insured.
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.
F-11<PAGE>
<PAGE>
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.
2. Notes Notes receivable consist of the following:
Receivable
Various 12%-20.745% notes receivable, interest
and principal due monthly, maturing in 1997
through 1999
$ 265,037
Less current maturities 153,696
--------
$ 111,341
==========
3. Stockholders' In December 1992, the Company's shareholders
Equity 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. During
1996, the then outstanding 500 shares of Class
"A" 12% Convertible Preferred Stock were,
pursuant to the terms of original issuance,
F-12<PAGE>
<PAGE>
converted into 500,000 shares of the Company's
common stock. As of February 28, 1997, there
were no shares of preferred stock issued and
outstanding.
The Company purchased 72,764 treasury shares at
various times during fiscal 1996 in the open
market at a total price of $22,398. During
fiscal 1996, the Company retired 59,212 shares
of treasury stock that it previously purchased.
During fiscal 1997, the Company retired 13,552
shares of treasury stock that it previously
purchased.
On February 22, 1993, the Board of Directors
authorized the issuance of 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.
These shares were issued during March 1993.
4. Stock Based
Compensation
At February 28, 1997, the Company has two stock
option plans, which are described below. The
Company applies APB Opinion 25, Accounting for
Stock Issued to Employees, and related
interpretations in accounting for the plans.
Under APB Opinion 25, because the exercise price
of the Company's employees' stock options equal
the market price of the underlying stock on the
date of grant, no compensation cost is
recognized.
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
F-13<PAGE>
<PAGE>
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 remaining purchase price of $23,366 has not
yet been remitted to the Company and is record-
ed as a Common Stock Subscription Receivable.
No other options have been exercised as of
February 28, 1997. Upon the resignation of two
of the Company's employees, options to purchase
12,500 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 28, 1997.
No other stock options have been granted under
the 1987 Plan. The Plan expired on March 31,
1997 at which time Mr. Raymond's options
expired.
At February 28, 1997, 337,500 shares of the
Company's authorized and unissued common stock
were reserved for issuance upon exercise of
options.
FASB Statement 123, Accounting for Stock Based
Compensation , requires the company to provide
pro forma information regarding net income and
earnings per share as if compensation cost for
the Company's stock option plans had been
determined in accordance with the fair value
based method prescribed in FASB Statement 123.
The Company estimates the fair value
F-14
<PAGE>
of each stock option at the grant date by using
the Black-Scholes option-pricing model with the
following weighted-average assumptions used for
grants in fiscal year ended February 29, 1996;
expected volatility of .01 percent; risk free
interest rates of 6.5% ; and expected lives of
6.8 and .1 years for the 1992 and 1987 Plan
options respectively.
Under the accounting provisions of FSAB
Statement 123, the Company's net income and
earnings per share would have been reduced to
the pro forma amounts indicated below;
1997 1996
------------ -------------
Net income
As reported $ 157,751 $ 136,015
Pro forma $ 157,751 $ 106,015
Primary earnings per share
As reported $ .04 $ .04
Pro forma $ .04 $ .03
Fully diluted earnings per share
As reported $ .04 $ .04
Pro forma $ .04 $ .03
A summary of the status of the Company's two
fixed stock option plans as of February 28,
1997 and February 29, 1996 and changes
during the years ending on those dates is
presented below;
F-15<PAGE>
<PAGE>
February 28, 1997 February 29, 1996
---------------------- -------------------
Weighted- Weighted-
Average Average
Shares Exercise Shares Exercise
Price Price
--------- ----------- --------- ---------
Outstanding at beginning
of year 215,000 $ .24 445,000 $ .25
Granted - - 300,000 .10
Exercised - - (450,000) .13
Forfeited (5,000) .19 (80,000) .375
------- ------- ------- -----
Outstanding at end
of year 210,000 .24 215,000 .24
======= ====== ======= =====
Options exercisable
at year-end 210,000 $ .24 215,000 $ .24
Weighted average fair
value of options
during the year - $ .10
The following table summarizes information about fixed stock options
outstanding at February 28, 1997.
Options outstanding Options Exercisable
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 2/28/97 Life Price at 2/28/97 Price
- - --------------- ---------- ---------- ---------- ------------ ---------
$.19- .375 210,000 4.9 years $ .24 210,000 $ .24
5. Retirement
and
Benefit
Plans On December 27, 1991, the Board of Directors
approved the formation of 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 28, 1997, 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 28, 1997 and February 29, 1996,
F-16
<PAGE>
the Company contributed and expensed $20,000
and $18,000, respectively, to the SEP.
During December 1993, the Board of Directors
approved payments for the cost of the Florida
Prepaid College Program for two children of
Company employees. 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.
6. Notes
Payable to
Director On April 13, 1992, the Company entered into a $1
million revolving credit agreement with Mr.
Robert Gardner, Chairman of the Company. 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 1/2% with a minimum of 12%
and a cap of 18% and are collateralized by all
of the Company's assets (excluding the finance
receivables) and all of the issued and
outstanding common stock of FINCO Financial
Corporation. The interest rate on this debt
was 13.00% at February 28, 1997. 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. 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 of
$30,000 has not yet been remitted to the Company
and is recorded as a Common Stock subscrip-
tion receivable. As of February 28, 1997,
there was $500,000 outstanding under the revolv-
ing credit agreement; $84,823 and $133,254 of
interest was paid during the years ended Febru-
ary 28, 1997 and February 29, 1996, 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 bore interest at
prime plus 4 1/2% with a minimum of 12%. On
June 28, 1996, the Company repaid Mrs. Gardner
the $500,000. The revolving credit agreement
with Marilyn Gardner expired July 31, 1996.
During fiscal 1997 and 1996, the Company paid
Mrs. Gardner $21,250 and $39,629, respectively
in interest. Mrs. Gardner is the wife of
Robert Gardner, Chairman of the Company.
F-17
<PAGE>
6. Notes
Payable
February 28, 1997
------------ ------
Note payable to bank (1) $9,961,635
Notes payable to others (2) 276,850
--------------------------- ----------
$10,238,485
===========
(1) 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 certain levels of eligible
finance receivables, bear interest at LIBOR
plus 3 1/4% or the bank's prime rate plus 1 1/4%
(9.5% at February 28, 1997) maturing on March 1,
1999. The note is collateralized by all of the
assets of the Company. On August 16, 1996, the
Company amended its revolving credit facility
with the bank to $10,000,000 with an option to
extend the limit to $11,000,000. On February
21, 1997, the revolving credit agreement was
amended to extend the borrowing limit to
$11,000,000. In addition, the Company must meet
certain reporting requirements and restrictive
debt covenants, including, but not limited to a
pre-established tangible net worth and a funded
debt to tangible net worth ratio.
(2) The Company and its subsidiaries have a note
payable at 12% interest per annum due on demand
to an individual, who is the daughter of the
Chairman ($76,850). It also has a note payable
at 9% interest per annum due on demand
($200,000), payable to an unrelated entity.
7. Commitments The Company leases office space for its
and administrative facilities and three automobiles.
Contingency which are accounted for as operating leases
Two of the car leases expire during fiscal 1999.
The third car and administrative facilities
expire in fiscal 2000. Rent expense for the
years ended February 28, 1997 and February 29,
1996 was $55,000 and $53,000, respectively.
F-18
<PAGE>
The approximate future minimum lease payments
for the Company's operating leases are as
follows:
1998 $ 57,000
1999 $ 49,000
2000 $ 34,000
In addition to their base cash compensation per
annum, Mr. Gardner and Mr. Raymond, President of
the Company, are each entitled to receive,
during their employment by the Company (I)
incentive bonuses equal to 7-1/2% of the
Company's annual consolidated pre-tax profits
and (ii) further incentive bonuses equal to
2-1/2% of annual pre-tax profits of the
Company's wholly-owned subsidiaries. Based on
the foregoing, the President and Chairman each
earned bonuses for fiscal 1997 and 1996 of
$20,043 and $17,289, 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 two times the then current
annual salary.
During April 1997, the Company was notified by
a Managing General Agent that represents two
affiliated insurance carriers that it will no
longer allow the Company to finance their
policies. These this agent accounts for
approximately 10% of the Company's finance
business. This could lead to further losses in
finance business as insurance agents may switch
to other finance companies which are accepted
by all insurance carriers. There can be no
assurances that other insurance carriers will
continue to accept the Company's finance
contracts.
8. Income
Taxes At February 28, 1997, the Company has net
operating loss carryforwards available to offset
future taxable income of approximately
$2,100,000 which expire in the year 2006.
F-19
<PAGE>
Deferred tax (liabilities) assets are comprised
of the following at February 28, 1997:
Depreciation $ (16,205)
--------
Gross deferred tax liability (16,205)
--------
Loss carryforwards 780,254
Allowance on finance receivables 320,369
--------
Gross deferred tax asset 1,100,623
Deferred tax asset valuation
allowance
(1,084,418)
---------
Net deferred tax asset $ 16,205
---------
Net $ 0
=========
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:
February 28, February 29,
Year ended 1997 1996
---------- ------------ ------------
Expected federal tax $ 50,686 $ 46,245
State income taxes, net of
federal effect 8,676 4,937
Tax effect of net operating
losses utilized (59,362) (51,182)
-------- -------
$ 0 $ 0
======== =======
9. Supplemental
Cash flow
Information
February 28, February 29,
Year ended 1997 1996
- - ---------- ------------ ------------
Cash paid during the year
for:
Interest $ 834,408 $ 569,494
======== =======
F-20
<PAGE>
Supplemental Disclosure of Non-Cash Investing and
Financing Activities:
During fiscal 1997 and 1996, the Company retired
13,552 and 59,212 treasury shares, respectively.
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 was recorded as a
Common Stock Subscription Receivable. As of
February 28, 1997, $5,134 had been repaid.
10. Subsequent
Event On May 6, 1997, Shareholders controlling a
majority of the Company's shares approved by
written consent a one-for-twelve thousand five
hundred share reverse stock split which is
expected to become effective on July 10, 1997.
All fractional shares will be repurchased at $.39
per share, an aggregate of approximately $439,000
(including expenses of $25,000). As a result of
the transaction, the Company will no longer be
subject to the reporting requirements of the
Securities and Exchange Commission.
F-21
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> FEB-28-1997
<CASH> 273,577
<SECURITIES> 0
<RECEIVABLES> 14,363,449
<ALLOWANCES> 855,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,479,557
<PP&E> 229,576
<DEPRECIATION> 73,318
<TOTAL-ASSETS> 14,796,467
<CURRENT-LIABILITIES> 2,051,181
<BONDS> 0
0
0
<COMMON> 187,742
<OTHER-SE> 2,595,909
<TOTAL-LIABILITY-AND-EQUITY> 14,796,467
<SALES> 0
<TOTAL-REVENUES> 4,817,147
<CGS> 0
<TOTAL-COSTS> 4,659,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 728,335
<INCOME-PRETAX> 157,751
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,751
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
PAGE
<PAGE>
AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment") is
made and entered into as of the 16th day of August, 1996, between NationsBank,
N.A. (South) (hereinafter referred to as "Lender"), and International Design
Group, Inc., Eagle Premium Finance, Inc. and Finco Financial Corporation
(hereinafter collectively referred to as "Borrowers").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Lender and Borrowers are party to the Loan and Security
Agreement dated as of February 23, 1996 (the "Agreement"); and
WHEREAS, Lender and Borrowers desire to amend the Agreement as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which
is hereby acknowledged, the parties hereto hereby agree as follows:
1.All capitalized terms used herein and not otherwise expressly
defined herein shall have the respective meanings given to such terms in the
Agreement.
2. The Agreement is amended by as follows:
(a) Delete the definition of "Permitted Investments"
contained in Section 1.1 and replace it with the following:
"Permitted Investments" means: (a) Investments of any
Borrower in: (I) negotiable certificates of deposit, time
deposits and banker's acceptances issued by the Lender or any
Affiliate of the Lender or by any United States bank or trust
company having capital, surplus and undivided profits in excess
of $250,000,000, (ii) any direct obligation of the United States
of America or any agency or instrumentality thereof which has a
remaining maturity at the time of purchase of not more than one
year and repurchase agreements relating to the same, (iii) sales
on credit in the ordinary course of business on terms customary
in the industry, and (iv) notes, accepted in the ordinary course
of business, evidencing overdue accounts receivable arising in
the ordinary course of business, (b) Investments of IDG in money
market accounts, stocks, stock options, and other readily
marketable investments, in each case acceptable to the Lender,
in an amount not to exceed $250,000, provided such securities
are maintained in the Investment Account and are subject to the
Lender's perfected first priority security interest pursuant to
the Assignment of Investment Account, (c) loans and advances
from IDG to the Guarantor in an aggregate principal amount not
to exceed $750,000, to enable the Guarantor to make corresponding
loans and advances to insurance agents in an aggregate principal
amount not to exceed $500,000 and to finance consumer finance
agreements in an aggregate amount not to exceed $250,000, (d)
the financing and/or factoring of up to $250,000 of premium
finance agreements under which premium finance companies
acceptable to the Lender finance the payments of automobile
insurance premiums on terms acceptable to the Lender, (e) loans
<PAGE>
and advances between the Borrowers and their Affiliates existing
as of the Effective Date, (f) loans and advances between the
Borrowers and their Affiliates after the Effective Date in an
aggregate amount outstanding at any time not to exceed $25,000,
and (g) advances to QRS Acquisition Inc. for the payment of the
Borrowers' payroll in the ordinary course of business.
(b) Delete the definition of "Revolving Credit Facility" contained in
Section 1.1 and replace it with the following:
"Revolving Credit Facility" means the facility for the
Revolving Credit Loans in the principal sum of up to $10,000,000.
The Borrowers may, by written notice to the Lender, increase the
amount of the Revolving Credit Facility to $11,000,000, provided
that (a) no Default or Event of Default then exists, and (b)
there shall not have occurred any change which, in the Lender's
sole discretion, has had or may have a Materially Adverse Effect
as compared to the condition of any Borrower presented by the
May 31, 1996 unaudited financial statements of the Borrowers
delivered to the Lender pursuant to Section 9.1(b). Such
increase shall be effective upon the fifth Business Day following
the Lender's receipt of the Borrowers' written request, provided
the Borrowers shall pay the Lender a $3,500 closing fee as
consideration for the costs associated with structuring,
processing, approving and closing such increase.
(c) Delete Section 10.1(a) and replace it with the following:
(a) Maximum Liabilities to Tangible Net Worth. Permit the ratio of
the Borrowers' total Liabilities (minus Subordinated Indebtedness) to their
Tangible Net Worth (plus Subordinated Indebtedness), all measured on a
consolidated basis at any time:
(i) from the Effective Date to and including February 28, 1997,
to be greater than 4.0 to 1;
(ii) from March 1, 1997 to and including February 28, 1998, to be
greater than 3.75 to 1; and
(iii)thereafter, to be greater than 3.50 to 1.
(d) Delete Section 10.14 and replace it with the following:
Section 10.14 Minimum Availability. Permit Availability to be less than
$400,000 for any 10 consecutive Business Day period.
3. The Borrowers shall pay the Lender a closing fee of $4,500 on the date
hereof in consideration for the Lender approving and closing the
accommodations set forth herein. Such fee shall be fully earned by the Lender
when due and payable and shall not be subject to refund or rebate. Such fee
is for compensation for services and is not, and shall not be deemed to be,
interest or a charge for the use of money. The Borrowers authorize the Lender
to charge their loan account under the Revolving Credit Facility for the
amount of such fee.
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<PAGE>
4. The Borrowers hereby restate, ratify, and reaffirm each and
every term, condition, representation and warranty heretofore made by them
under or in connection with the execution and delivery of the Agreement as
amended hereby, and the other loan documents executed and/or delivered in
connection therewith (the "Loan Documents"), as fully as though such
representations and warranties had been made on the date hereof and with
specific reference to this Amendment and the Loan Documents.
5. Except as expressly set forth herein, the Agreement shall be
and remain in full force and effect as originally written, and shall
constitute the legal, valid, binding and enforceable obligations of the
Borrowers to the Lender.
6. The Borrowers agree to pay on demand all costs and expenses
of the Lender in connection with the preparation, execution, delivery and
enforcement of this Amendment and all other Loan Documents and any other
transactions contemplated hereby, including, without limitation, the fees
and out-of-pocket expenses of legal counsel to the Lender.
7. To induce the Lender to enter into this Amendment, the
Borrowers hereby (I) represent and warrant that, as of the date hereof, and
after giving effect to the terms hereof, there exists no Default or Event of
Default under the Agreement, and (ii) acknowledge and agree that no right of
offset, defense, counterclaim, claim or objection in favor of the Borrowers
against the Lender exists arising out of or with respect to any of the
Secured Obligations.
8. The Borrowers agree to take such further action as the Lender
shall reasonably request in connection herewith to evidence the amendments
herein contained to the Agreement.
9. This Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which, when
so executed and delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same
instrument.
10. This Amendment shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties hereto.
11. This Amendment shall be governed by, and construed in
accordance with, the laws of the State of Georgia.
IN WITNESS WHEREOF, the Borrowers and the Lender have caused this
Amendment to be duly executed under seal, all as of the date first above
written.
BORROWERS:
INTERNATIONAL DESIGN GROUP, INC.
[CORPORATE SEAL]
Attest: By:/s/ Robert L. Gardner
Name: Robert L. Gardner
By:/s/ David Raymond Title: Chairman of the Board
Name: David Raymond
Title: President
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<PAGE>
EAGLE PREMIUM FINANCE, INC.
[CORPORATE SEAL]
Attest: By:/s/ Robert L. Gardner
Name: Robert L. Gardner
By:/s/ David Raymond Title: Chairman of the Board
Name: David Raymond
Title: President
FINCO FINANCIAL CORPORATION
[CORPORATE SEAL]
Attest: By:/s/ Robert L. Gardner
Name: Robert L. Gardner
By:/s/ David Raymond Title: Chairman of the Board
Name: David Raymond
Title: President
LENDER:
NATIONSBANK, N.A. (SOUTH)
By:/s/ Stuart A. Hall
Name: Stuart A. Hall
Title:Vice President
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<PAGE>
AFFIDAVIT REGARDING DELIVERY
(attach to note or other written
obligation to pay money)
I, Stuart A. Hall hereby certify that I am a Vice President of
NationsBank, N.A. (South) and that the foregoing note or other
written obligation to pay money was delivered to me as a representative of
NationsBank, N.A. (South) in the State of Georgia, County of Fulton.
/s/ Stuart A. Hall
Signature of Officer or Agent of Lender
The undersigned acknowledge receipt of a copy of the foregoing Amendment
and consent to the terms thereof:
------------------------------ (L.S.)
David Raymond
/s/ Robert Gardner (L.S.)
Robert Gardner
Federal Funding Corporation
By:/s/ Robert Gardner
------------------------------
Chairman of the Board
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