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SCHEDULE 14C INFORMATION
Information Statement Pursuant to Section 14(c) of the
Securities Exchange Act of 1934
[Amendment No. _________]
Check the appropriate box:
_X_ Preliminary Information Statement
___ Confidential, for Use of the Commission Only (as permitted by
Rule 14c-5(d)(2))
___ Definitive Information Statement
INTERNATIONAL DESIGN GROUP, INC.
(Name of Registrant as Specified in Its Charter)
INTERNATIONAL DESIGN GROUP, INC.
(Name of Person(s) Filing Proxy Statement)
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PRELIMINARY COPY
INTERNATIONAL DESIGN GROUP, INC.
3201 GRIFFIN ROAD
SUITE 210
DANIA, FLORIDA 33312
(954) 893-8228
________________________________________________________
INFORMATION STATEMENT
This Information Statement is being furnished to the stockholders of
International Design Group, Inc., a Delaware corporation ("Company"), in
connection with certain actions to be taken by the written consent of the
holders of a majority of the issued and outstanding shares of the Company's
Common Stock. Such action is to be taken at 10:00 A.M., Eastern Time, on July
10, 1997 at the offices of the Company located at 3201 Griffin Road, Suite
210, Dania, Florida 33312.
Only stockholders of record at the close of business on June 10, 1997
(the "Record Date") are entitled to notice of the action to be taken by
written consent. At the close of business on the Record Date, the Company in
effect had 3,744,849 shares of its Common Stock issued and outstanding, each
share of which is entitled to one vote. A vote of the majority of the issued
and outstanding shares is required to approve each action to be considered in
connection herewith. All stockholders of record as of the Record Date may
submit written consents to the Company with respect to any or all of the
matters to be acted upon; however, no such consents are being solicited. No
appraisal or other similar rights are available to dissenters of the following
proposed actions.
The action to be taken will result in the Company ceasing to be a public
company. 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 $.38 per share.
The Company will bear all of the costs of the preparation and
dissemination of this Information Statement and the accompanying materials
which are estimated to be approximately $25,000. No consideration has been or
will be paid to any officer, director, or employee of the Company in
connection with the proposed Reverse Stock Split or the preparation and
dissemination of this Information Statement and the accompanying materials or
otherwise in connection with the proposed Reverse Stock Split. The
approximate date on which this Information Statement will be first sent or
given to security holders is June 13, 1997.
Correspondence with respect to the proposed Reverse Stock Split should
be addressed to the Secretary of the Company at the Company's principal
executive offices at 3201 Griffin Road, Suite 210, Dania, Florida 33312.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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TABLE OF CONTENTS
Page
PROPOSED REVERSE STOCK SPLIT .............................. 3
Reasons for the Reverse Stock Split .................. 3
Determination of Fair Value .......................... 7
Fairness of the Reverse Stock Split................... 9
Conduct of the Company's Business After the
Reverse Stock Split ................................ 11
Lack of Appraisal Rights ............................. 12
Exchange of Stock Certificates; Receipt of
Cash Payments ...................................... 12
Financing of the Reverse Stock Split ................. 13
Recent Purchases of Company Stock by the Company
and/or Affiliates ................................ 13
Resolutions to be Adopted ............................ 14
Certain Federal Income Tax Consequences .............. 15
Effective Time ....................................... 16
Further Stockholder Approval Not Required ............ 16
PROPOSAL TO AMEND CERTIFICATE OF
INCORPORATION TO REDUCE AUTHORIZED SHARES ................ 16
Further Stockholder Approval Not Required ............ 17
PROPOSAL TO ADOPT RESOLUTION REGARDING STATED CAPITAL ..... 17
Further Stockholder Approval Not Required ............ 17
INTEREST OF CERTAIN PERSONS IN FAVOR OF OR
IN OPPOSITION TO MATTERS TO BE ACTED UPON ................ 17
SUMMARY FINANCIAL INFORMATION ............................. 18
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT ........................ 19
Compliance with Section 16(a) of the Exchange Act .... 20
EXECUTIVE COMPENSATION .................................... 20
Stock Option Plans ................................... 21
Directors' Fees ...................................... 24
Employee Benefit Plans ............................... 24
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ......................... 24
Changes in Control ................................... 25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............ 25
FINANCIAL INFORMATION ..................................... 26
OTHER INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE .... 26
ANNUAL REPORT ............................................. 26
INDEX TO FINANCIAL STATEMENTS ............................. 27
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PROPOSED REVERSE STOCK SPLIT
Pursuant to a resolution adopted on October 22, 1996, the Company's
Board of Directors has unanimously recommended that the Company "go private"
by undertaking a reverse stock split pursuant to which one new share of the
Company's Common Stock will be issued in exchange for each 12,500 shares of
the Company's Common Stock that are currently issued and outstanding (the
"Reverse Stock Split"). Shares of the Company's Common Stock that are
currently issued and outstanding are hereinafter referred to as the "Old
Shares," and the shares of Common Stock that will become issued and
outstanding upon consummation of the proposed reverse stock split are
hereinafter referred to as the "New Shares."
To the extent that this Reverse Stock Split results in any stockholder
owning less than a full New Share, the Company will pay cash for each such
fractional share in an amount equal to the appropriate fraction of $.38 per
whole share (which represents the fair value of a whole share before the
consummation of the proposed reverse stock split as determined by the
Company's Board of Directors).
Reasons for the Reverse Stock Split
Cost of Being a Reporting Company. The Board of Directors has concluded
that it is no longer in the best interests of the Company or its stockholders
to continue as a publicly-held reporting entity due to the cost of preparing
and filing periodic and other reports with the Securities and Exchange
Commission, the cost of convening meetings of stockholders to conduct even
relatively routine germane corporate business and the cost of communicating
with stockholders. The Board of Directors has estimated that, including costs
associated with meetings of stockholders as required under state law, such
costs total approximately $50,000 in expenses annually and the expected
expense reduction will be of a like amount. The cost of the Reverse Stock
Split is estimated to be approximately $428,475 (including $403,475 to be paid
to holders of fractional shares and $25,000 in estimated expenses). The Board
of Directors cannot at this time accurately quantify the value to the Company
to be achieved in obtaining outside financing once the Company is no longer
public.
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.
Limited Market for Company's Stock. Because of restrictions imposed on
the trading of certain securities under the Penny Stock Reform Act of 1990,
there is little likelihood that any viable trading market for the Company's
Common Stock will develop unless the Company qualifies for listing on a
recognized exchange. Although the Board has diligently attempted for several
years to position the Company for listing on NASDAQ or some other national
exchange, the efforts of the Board have not been successful and it currently
appears that it is extremely unlikely that the Company would qualify for any
such listing in the foreseeable future.
Current Lack of Flexibility in Obtaining Outside Financing. Management
also believes that it can reduce administrative expenses and manage the
Company more efficiently by significantly reducing the number of its
stockholders. Further, the Company is in need of additional outside financing
for the expansion of its lending business in Florida, and perhaps diversifying
into other types of loans. Management has been advised by its current lender,
NationsBank that, given the Company's current debt to equity structure, the
Company is rapidly
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reaching a point where no additional debt financing will be available.
Further,
the Board has determined that the Company's current structure (given the large
number of stockholders and the lack of a viable market in its Common Stock for
an extended period) makes the Company an unattractive investment vehicle for
other types of outside funding. Management has been further advised by its
lender that in order for the Company to obtain significantly higher lines of
credit in the future (e.g. a senior credit line in excess of approximately $13
million), it will require the infusion of additional equity capital.
Limited Sources of Additional Capital. Robert L. Gardner, the
controlling stockholder of the Company and the Chairman of the Board of
Directors, has, for the past several years, provided additional capital to the
Company in the form of subordinated debt when requested to do so by the
Company or its senior lender. Such capital has been necessary in order to
increase the amount of the Company's credit facility with its senior lender
and thereby allow the Company to continuously expand the volume of its loans.
The failure of the Company to consistently obtain capital from some source
would eventually cause it to exhaust its ability to make additional loans and
would result in a curtailment of lending activities during periods of time
when insufficient funding was available. Mr. Gardner has informed the Company
that due to his perception of the increased risks involved in providing more
capital to the Company, he will not lend additional money to the Company in
the form of subordinated debt or convert his loan to a long term loan as long
the Company remains a public company.
After analysis, the Board of Directors determined that in order for the
Company to have any realistic chance of success in the future given the
challenges it will face from increased competition and declining profit
margins, it will be necessary for the number of public stockholders to be
reduced so as to avoid the requirements of a public company, even though such
a restructuring will require that otherwise available assets and resources be
utilized to accomplish the Reverse Stock Split.
No Current Arrangements for Outside Funding. While it is management's
view that a much more closely-held entity would be a better candidate to
obtain additional outside funding, no assurance can be given that any such
funding will be available to the Company under any circumstances. Although
there are no current arrangements, plans or understandings for outside
funding, it is possible that the Company's efforts to obtain outside funding
from some source may result in the occurrence of an extraordinary transaction
involving the Company such as the issuance of additional common or preferred
shares, a change in the present dividend policy of the Company, or the sale or
transfer of a material amount of the assets of the Company to a different
entity.
As stated above, management does not currently have any specific plans,
arrangements or understandings to obtain any funding from outside sources, but
intends to seek additional capital on commercially reasonable terms in the
future depending upon both the needs and prospects of the business at the time
such capital is sought. It is anticipated that this additional funding will
initially be in the form of an increase in the Company's current line of
credit which will result in the need for additional capital in order to
maintain the required debt to equity ratios. Such additional capital infusion
will most likely be in the form of an increase in the amount of the
subordinated debt to be provided by Mr. Gardner. Due to management's
perception of the uncertainties created by the currently changing competitive
and regulatory environments of the business in which the Company is engaged,
at the present time existing management cannot estimate the exact amount of
additional outside financing that will be required prior to the completion of
the current fiscal year.
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Effect of Recent Changes in Regulations for Insurance Premium Finance
Companies. While the Company has generally been able to maintain profitable
operations, revenues from operations have not provided the excess capital that
management believes is necessary to expand the focus of the Company's
business. Certain recently adopted regulatory changes in the State of Florida
(which is the state in which the Company currently conducts most of its
business) have significantly increased competition in the insurance premium
finance business and caused profit margins to decline precipitously. Such
increase in competition is evidenced by the increase in the Company's sales
and marketing expense (consisting primarily of fees paid to marketing
representatives over the two year period and referral fees paid to agents
after July 1, 1996) as a percentage of sales rose to approximately $956,000
(20%) for the year ended February 28, 1997, as compared to $497,000 (16%) for
the comparable period in 1996. As a result of competitive pressures, the
Company must now pay its sales representatives and insurance agents higher
fees in order to maintain its market share.
In addition, the competition is reducing the amount of the down payment
on contracts financed which has resulted in a much higher occurrence of bad
debt. As a result, the provision for doubtful accounts was increased to
$1,547,296 for the year ended February 28, 1997 from $829,473 for the
comparable period in 1996. Expressed as a percentage of revenues, such bad
debts were only 26% of revenues in 1996 as compared to 32% in 1997. This
increase in bad debts is further evidenced by the increase in write-offs to
approximately $832,000 during the year ended February 28, 1997 from $524,000
for the comparable period in 1996. Profitability was also adversely affected
by the large increase in the provision for doubtful accounts. Overall, net
income has fallen to 3% of revenues for the year ended February 28, 1997 as
compared to 4% during the same period in 1996. The results of operations
stated above include only seven months of operations subsequent to the change
in the Florida insurance regulations.
Revenues during the fiscal year ended February 28, 1997 have increased
due to the addition of two new marketing representatives as well as new
incentive programs designed to attract additional insurance agents. However,
because of the competitive pressure within the industry, profit margins have
been shrinking. The industry is shifting toward a lower margin business with
substantially less profit made on a per contract basis. Management believes
that in order for the Company to maintain or increase its profitability, the
Company must finance a larger number of insurance policies. The Company must
continuously obtain access to additional capital to fund this growth. While
management cannot reasonably estimate the amount of capital the Company will
require, management believes that the Company will be in a better position to
do so as a private company.
Management also determined recently that the Company's attempts to
conduct business activities in the states of South Carolina, Maryland,
Tennessee and Georgia should be immediately curtailed due to a lack of
profitable operations in those states, and the lack of available capital.
These operations, which were ceased in July 1996, accounted for a $10,000 loss
(after inter-company eliminations) for the fiscal year ended February 28, 1997
as compared to a loss of $32,000 for the comparable period in 1996.
Interest of Affiliated Stockholders. 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 and officers of the Company and voted not only
to approve the transaction but to cash out the minority stockholders at $.38
per share.
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Alternatives Considered. Alternative means to accomplish this purpose
have not been rejected (other than certain means which, in the opinion of
management, are more detrimental to minority stockholders); they simply have
not been available to the Company. These alternatives included a tender
offer at the same price per share, or a purchase of its shares in the open
market at the depressed market price (which is substantially less than $.38
per share), but such proposals, in the Board's view, would result in more
costs and were not likely to accomplish the objective of "going private."
In this regard the Board was advised by legal counsel that in order to
conduct a tender offer for the Company's shares, it would have been necessary
to effect compliance not only with the Williams Act, but also with the
separate tender offer laws, rules and regulations of each and every state in
which such a tender offer were made. In response to the Board's inquiry as to
the approximate added cost of proffering such a tender offer to the Company's
stockholders, the Company's legal counsel estimated at that time that since
there were (and still are) stockholders of record in nearly all fifty states,
the legal expenses and filing fees alone would very likely be well in excess
of $100,000, and cautioned that no assurance could be given that the
securities regulators of the various states in which the Company's
stockholders reside would ultimately allow such a tender offer to be
conducted, or, even if allowed, that the tender would successfully accomplish
the stated objective of causing the Company to become privately-held. On this
basis, the Board concluded that a tender offer would be much more expensive
and uncertain than a reverse stock split, that open market purchases with a
view to going private would probably require compliance with applicable tender
offer rules, and that, given the Company's small size and limited resources, a
tender offer was economically unfeasible and could not be justified under the
circumstances.
The Board also considered reports on discussions which some members had
previously had with investment bankers and Company counsel with respect to
alternatives to going private. None of the outside sources consulted
expressed any willingness to provide any additional funding to the Company
under any circumstances, regardless of its capital structure. Mr. Gardner,
however, has indicated to the Board that, depending upon the business and
prospects of the Company at the time, he might be willing to provide
additional funding in the future if the Company were privately-held.
Two investment banking firms were contacted with respect to the prospect
of the Company becoming privately-held. The Board requested each firm to
provide a cost estimate for obtaining a written opinion with respect to the
fairness of the reverse stock split to minority stockholders and the amount to
be paid to holders of fractional shares. Neither of the firms was willing to
conduct a thorough analysis of the fairness of the transaction unless it was
actually engaged to provide an opinion and could be assured that it would be
fully compensated for its time. The firms provided cost estimates of $50,000
and $25,000 for the issuance of their opinions. After some discussion, the
Board of Directors made a determination that, due to the cost involved, it
would not obtain an opinion from an investment banking firm with respect to
the fairness of the reverse stock split unless it became absolutely necessary
to do so.
Providing Shareholders with a Means of Liquidating Their Holdings. The
Company's Common Stock was at one time traded in the over-the-counter market.
In 1989, however, NASDAQ advised the Company that the stock would no longer be
quoted on the NASDAQ system due to the Company's failure to meet NASDAQ's
minimum listing requirements. Since that time there has not been any
established trading market for the stock, other than limited or sporadic
trading. The Company's Preferred Stock has never been traded on any public
market or exchange. By
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effecting the Reverse Stock Split, stockholders will be given the opportunity
to liquidate their holdings without paying brokerage fees.
Rule 13e-3 Transaction Statement. In connection with the proposed
Reverse Stock Split, the Company has filed with the Securities and Exchange
Commission (the "SEC") a Rule 13e-3 Transaction Statement on Schedule 13E-3.
See "Other Information; Documents Incorporated by Reference."
Determination of Fair Value
In making its determination of fair value, the Board of Directors
considered a number of methods of valuation in addition to the factors set
forth above, including the liquidation value, market value and going concern
value of the business. A discussion of each of these three methods of
valuation is set forth below.
Liquidation Value. The Board determined that for the purpose of
conducting its analysis of fair value with respect to this transaction, the
Company's book value of approximately $2,800,000 (or $0.74 per share) must be
adjusted appropriately to reflect the approximate liquidation value of the
business. The Board was aware of the recent liquidation of three other
entities that had previously been engaged in the insurance premium finance
business in Florida. All three companies financed all of their insurance
premiums within Florida and all financed policies with substantially the same
insurance companies with whom the Company deals. The three companies financed
fewer contracts than the Company is presently financing but did finance in the
range of 1,000 to 4,000 contracts per month. In the Form 10-K for one of the
companies, filed November 29, 1995, it was disclosed that such other company
experienced a net loss of $1,808,182 in 1995 as opposed to a net income in
fiscal 1994 of $54,900 (which included a non recurring gain of $500,000 on the
sale of intangible assets), and that the decline in profitability for such
company for its fiscal year 1995 was due to a combination of decreased volume,
higher write-offs and the costs associated with the company's decision to
withdraw from the premium finance business. Although no public information
was available to the Company with respect to the actual liquidation of any of
these entities, the Board was made aware, through informal discussions with
certain persons at other finance companies, that difficulties were encountered
in the collection of accounts receivable in each of the liquidations after it
became known that the subject businesses would not continue in existence, and
that the liquidation process was both expensive and time consuming in that it
required the companies to retain employees for the purpose of liquidation up
to one year after the company had ceased operations. In addition, it was
necessary for these companies to file a number of lawsuits to collect
receivables from insurance agents. Two of the companies found that the market
value of their computer equipment and furniture was much less than had been
anticipated.
The Board determined that on the basis of its general knowledge of the
business and its understanding of the problems encountered by these other
entities in conducting their liquidations, the net realizable value of the
Company's assets in the event of a liquidation would be approximately $500,000
less than the amount reflected as book value, or approximately $2,300,000
($0.61 per share). The $500,000 reduction in book value consists of a
$125,000 reserve
for the loss upon sale of fixed and other assets, an additional bad debt
reserve of $225,000 against finance receivables, agent receivables and notes
receivable, and $150,000 in personnel and other administrative expenses of a
liquidation. It was acknowledged that the Company is not currently
considering any such liquidation (which, absent the prior written consent of
the Company's senior lender, would not be permitted under the Company's
existing loan documents), and
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that the amount which might be received by stockholders in an actual
liquidation is an amount that is not capable of being forecast with any degree
of certainty.
Market Value. The Board considered the market value of the shares,
which the Board concluded should be determinative of the issue of the fair
value of the shares of a public company under ordinary market conditions. It
was acknowledged, however, that there currently exists no viable market for
the Company's shares and that recently there have been very few recorded
trades in the Company's shares. The Board analyzed the market prices for the
Company's shares for the past eight months and determined that the average bid
price of the Company's Common Stock during the past eight months was $0.127
per share, the average ask during the same period was $.305 per share, and the
average of the bid and ask for the eight month period was $.22 per share. In
addition, during the period beginning March 1, 1994 and ending February 28,
1997, the Company repurchased its shares at an average price of $.32 (the last
repurchase occurred on January 23, 1996 at a purchase price of $.29 per
share). On the basis of this analysis, the Board determined that $0.27
represents the current fair market value of the shares as determined by the
investing public.
Going Concern Value. The Board also analyzed the price at which the
business could reasonably be expected to be sold to a willing buyer as a going
concern based upon the Company's current price-earnings ratio. It was
acknowledged that management is not aware of any willing buyers, there is
currently considerable pessimism in the insurance premium finance business in
Florida because of recent regulatory changes and the resulting impact on
competitive conditions (see discussion below), the business is not currently
large enough to be desirable to most potential buyers and the business does
not offer sufficient liquidity to be attractive.
Management reported to the Board that, although the Company is not for
sale and no offers have been solicited, management is not aware of any firm
offers made by any unaffiliated persons during the preceding eighteen month
period for the merger or consolidation of the Company with or into such person
or of such person with the Company, for the sale or other transfer of all or
any substantial portion of the Company's assets, or of securities of the
Company that would enable the holder thereof to exercise control of the
Company.
To the contrary, due to recent regulatory changes governing the
insurance premium finance business in the State of Florida, the Board
acknowledged that there is a considerable lack of optimism in the industry
with respect to the future prospects of the Company's business. Effective
July 1, 1996, a new law in the State of Florida now makes it allowable for
those engaged in the insurance premium finance business to pay commissions to
insurance agents for referring business. As all of the Company's business
comes from referrals of this type, the Company's margins have been impacted
directly.
It was acknowledged by the Board that it was these same regulatory
changes and their negative impact on profit margins that served as a major
impetus for the Company to further reduce its expenses by going private. The
Board also acknowledged that the future business prospects of the Company were
not as promising as they once were because of changes in state regulations
which have spawned increased competition due to the ability of insurance
premium finance companies to provide rebates to insurance agents. This
increased competition and the payment of rebates to insurance agents have
reduced profit margins.
Management was not aware of any sales of businesses similar to that of
the Company since the recently adopted changes in the Florida insurance
premium finance regulations, but, based upon its general knowledge of the
business, the
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Board determined that without taking the subject changes into consideration,
the business could reasonably be expected to be sold to a willing buyer as a
going concern based upon an after tax price-earnings ratio of approximately
four to five, but that the absolute highest price that could possibly be
expected to be
obtained in such a sale would be an after tax earnings multiple of ten. The
Board acknowledged that according to its most recent audited financial
statements, the Company had pre-tax earnings of $158,000 for the fiscal year
ended February 28, 1997.
Since the Company has a tax loss carry-forward which would generally not
be available to a purchaser of the business, the Board determined that a
reasonable purchaser would have to reduce the earnings by the amount of tax
which would have been due had the business been owned by the purchaser instead
of the Company. As the subject earnings would theoretically be taxed in the
hands of a prospective purchaser at a rate of 35%, the Board determined that
the after tax earnings of the Company for the fiscal year ended February 28,
1997 would $102,538 (or $0.027 per share). Assuming that the business could
be sold to a willing buyer as a going concern for a price earnings multiple of
ten, the Board determined that the fair value of the business as a going
concern (without giving effect to recent regulatory changes) was approximately
$1,025,380 (or approximately $0.27 per share).
In reviewing its analysis, the Board concluded that the Company's common
shares currently have a liquidation value of approximately $0.61 per share
which could probably be collected over some period of time if the Company were
to be liquidated in an orderly manner, a current fair market value of
approximately $0.27 per share as determined by the investing public, and a
going concern value of approximately $0.27 per share. The Board determined in
its reasonable business judgment that while the liquidation value, market
value and going concern value of the shares are all important factors to be
considered in light of all of the circumstances of the proposed transaction,
none of these factors should be viewed in isolation as being determinative of
fair value for the purposes of this transaction, and that all of the factors
should be given equal weight by the Board in its analysis. In giving each of
the factors equal weight, the Board determined that the fair value of the
Company's shares for the purpose of determining the amount to be paid to
stockholders to eliminate fractional shares which would be created as the
result of the proposed Reverse Stock Split is $0.38 per share (which amount
represents the average of the Board's determination of the $0.61 liquidation
value, $.27 per share market value and $0.27 going concern value of the
Company's shares as set forth above).
This amount will be paid in cash for each Old Share to each stockholder
of record as of the Record Date who owns less than a full New Share after
consummation of the Reverse Stock Split, and who surrenders to the Company's
transfer agent one or more certificates representing ownership of such Old
Shares. See "Exchange of Stock Certificates; Receipt of Cash Payment."
No Further Vote is Required. The affirmative vote of a majority of the
currently outstanding shares of Common Stock of the Company is required for
approval of this proposal, and such vote has already been obtained by the
written
consent of the holders of a majority of the currently outstanding common
shares. Such consent is sufficient to approve the Reverse Stock Split under
the Delaware General Corporation Law, and no other vote or consent of
stockholders is necessary or will be sought in connection with the Reverse
Stock Split.
Fairness of the Reverse Stock Split
The Company's Board of Directors unanimously approved the above-described
proposal to effectuate a 1 for 12,500 reverse stock split of the
Company's Common
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Stock for submission to a vote of stockholders. The Company's management
believes that the proposed Reverse Stock Split is fair to stockholders because
of the challenges which must be overcome to sustain any expansion of its
business and the lack of a market for the Company's stock. The decisions to
proceed with
the transaction as well as the determination of the price to be paid to
minority stockholders and the decision not to hire an independent third party
advisor were made by the Board of Directors whose members are those
stockholders who will remain stockholders after the Reverse Stock Split. And,
while the Board believes it has met the requirements of the applicable
Delaware corporate law regarding voting on such matters as well as the
treatment of minority stockholders, at no point did the minority stockholders,
nor will such minority stockholders ever, have a voice in the transaction be
it a vote or representation by an independent third party. Consequently,
despite management's belief that the Reverse Stock Split along with the
cashout price is fair to the minority stockholders, the actual recipients have
no basis, other than the information contained herein, to analyze for
themselves the fairness of the transaction.
Fairness of Cash Payments in Lieu of Shares. The Board of Directors
believes that the payment of cash in the amount of $.38 per share of Old
Shares in lieu of issuance of New Shares to persons who hold less than one
full New Share after the Reverse Stock Split will enable stockholders to
liquidate their shares easily and at a fair price without incurring brokerage
costs that, especially in the case of small stockholders (the vast majority of
the Company's stockholders own fewer than 500 shares which, based on the
current bid price of $0.0625 per share, have a current market value of less
than $100), would otherwise sharply decrease or even eliminate the actual net
proceeds of the sale to the stockholder.
Factors Considered in Fairness Determination. In reaching its
determination that the proposed Reverse Stock Split is fair to the Company and
its stockholders, the Board of Directors considered, among other things, each
of the directors' knowledge of and familiarity with the Company's own business
prospects, as well as general economic, industry and market conditions and
prospects. The Board of Directors also considered the absence of a liquid
market for shares of its Common Stock, the opportunity that the Reverse Stock
Split would afford stockholders to liquidate their investments in the Company
without incurring brokerage costs and the future cost-savings that the Company
and its continuing stockholders will enjoy if, as a result of the Reverse
Stock Split, the Company ceases to be a reporting company under the Exchange
Act. Management estimates that the Company will be able to reduce its
expenses (including costs associated with meetings of stockholders as required
under state law) by approximately $50,000 per year by not being a reporting
company.
Absence of Independent Third-Party Valuation of Arms'-Length
Negotiation. The Company has not received any report, opinion, or appraisal
from any outside party that is materially related to the proposed Reverse
Stock Split. In light of the circumstances, including the directors'
knowledge of and familiarity with the Company's own business, financial
condition, operating results, cash flows, assets, liabilities and prospects,
as well as with general economic, industry, and market conditions and
prospects and the wide variety of factors considered
in connection with its valuation of the fairness of the proposed Reverse Stock
Split, the Board of Directors did not consider it necessary to retain either
an investment bank or financial adviser to render a report or opinion with
respect to the fairness of the proposed Reverse Stock Split to the Company or
its stockholders or an unaffiliated representative to represent the
unaffiliated stockholders of the Company in negotiating the terms of the
Reverse Stock Split. The primary factor considered by the Board in
determining not to retain the services of such a financial adviser or
unaffiliated representative was its belief that the cost of such services
would be excessive relative to the size of
10
<PAGE>
the transaction and the potential benefits to the Company and its
stockholders. The Board of Directors contacted two independent financial
advisers regarding the cost of a fairness opinion. The estimates from such
advisers ranged from $25,000 to $50,000.
Potential Conflicts of Interest. Those stockholders who own more than
12,500 shares of the Company's Common Stock and therefore will continue to be
stockholders after the proposed Reverse Stock Split are also the directors of
the Company who determined the fairness of the proposed Reverse Stock Split.
As stated above, such Board of Directors did not retain the services of an
investment banker or other financial adviser to render a report or opinion
with respect to the fairness of the proposed Reverse Stock Split to the
Company or its stockholders or an unaffiliated representative to represent the
unaffiliated stockholders of the Company in negotiating the terms of the
Reverse Stock Split.
Conduct of the Company's Business After the Reverse Stock Split
Affect on Continuing Business and Operations. The Company believes
that the proposed Reverse Stock Split will have only the effect on the
business and operations of the Company as discussed herein, that being the
ability to obtain outside funding, and expects to continue to conduct such
business and operations as they are currently being conducted. If the Reverse
Stock Split is affected, stockholders who receive cash payments in lieu of New
Shares will not remain as stockholders of the Company and therefore will not
participate in any future earnings or growth of the Company. Stockholders who
remain as stockholders will retain all of the rights and benefits possessed by
a stockholder prior to the Reverse Stock Split except those that result from
the Company's status as a publicly held reporting company.
Effect on Company, Affiliates and Unaffiliated Stockholders. The
following table sets forth the anticipated benefits and detriments of the
transaction for each of the affected parties.
Benefit Detriment
Company Savings from no longer Expense of cashing out
being reporting company minority stockholders
($50K annually) ($428,475).
Greater flexibility in
obtaining outside financing.
Affiliated Own 100% of the Company. No public market for
Stockholders No minority stockholders. stock. Investment
(Officers & Directors) becomes virtually
illiquid.
Unaffiliated Cash out of relatively No ability to share
Stockholders illiquid investment in future profits, if
at price higher than any, of Company. No
current market value. ability to dissent to
transaction.
Termination of Reporting Company Status. If the proposed Reverse Stock
Split is effected, it is anticipated that the Company will cease to be a
reporting company under the Exchange Act. As a result, the Company will no
longer file annual and quarterly reports, proxy statements, and other
documents with the SEC. In addition, the Company will no longer be required
to comply with the proxy rules of Regulation 14A promulgated under Section 14
of the Exchange Act, and its officers, directors and 10%-or-greater
stockholders will no longer
11
<PAGE>
be subject to the reporting requirements and "short-swing" security trading
restrictions under Section 16 of the Exchange Act. Continuing stockholders
will no longer be entitled to receive annual reports and will no longer have
the benefit of a public market for their shares of the Company's stock.
Changes to Authorized Capital Stock and Capital Account; Terms of Stock
Unchanged. If the proposed Reverse Stock Split is effected, the number of
authorized shares of the Company's Common Stock will be reduced from
10,000,000 to 350 shares and the number of authorized shares of the Company's
Preferred Stock will be reduced from 1,000,000 to 25 shares. Apart from such
changes, there will be no difference between the Old Shares and the New Shares
to be issued in exchange for them; however, it is anticipated that the
elimination of fractional shares will result in substantially fewer
stockholders of the Company.
The reverse stock split will cause the number of the Company's issued
and outstanding shares of Common Stock to decrease from 3,744,849 to
approximately 215. No shares of the Company's Preferred Stock are currently
issued or outstanding (following the conversion by Robert Gardner on February
26, 1996 of 500 shares of Preferred Stock owned by him into 500,000 shares of
Common Stock). The current stated capital will not be affected by the Reverse
Stock Split. See, "Proposal to Adopt Resolution Regarding Stated Capital."
Stockholders Eligible to Continue as Stockholders Without Additional
Purchases. The following persons will be eligible to continue to be
stockholders, and have indicated that they intend to continue as stockholders,
since each of these stockholders currently owns or has a right to acquire more
than 12,500 shares of Common Stock of the Company and will consequently be
eligible to continue to own at least one full New Share if the proposed
Reverse Stock Split is consummated:
Robert L. Gardner
Marilyn Gardner
Kenneth Gardner
David Raymond
Dividends. No cash dividends have been declared or paid on the
Company's Common Stock from the inception of the Company to the present, and
no cash dividends are contemplated to be paid in the foreseeable future.
Dividends have been paid, however, on the Company's Preferred Stock.
Further Information. For further information with respect to the
Company and its business and operations, see the Company's Annual Report on
Form 10-K/SB for the year ended February 28, 1997, a copy of which may be
obtained from the Company upon request, and which is incorporated herein by
reference.
Lack of Appraisal Rights
Pursuant to the Delaware Corporation Law, dissenting stockholders will
not have appraisal rights if the proposed Reverse Stock Split is effected.
Stockholders who believe that they may be aggrieved by the Reverse Stock
Split may have other rights under federal law or common law, such as rights
relating to the fairness of the Reverse Stock Split and the fiduciary
responsibilities of the corporate officers, directors and stockholders. The
nature and extent of such rights, if any, may vary depending upon the facts
and circumstances.
12
<PAGE>
Exchange of Stock Certificates; Receipt of Cash Payments
Letters of Transmittal. If the proposed Reverse Stock Split is
effected, the stock certificates formerly representing Old Shares will cease
to represent such shares and thereafter will represent the New Shares into
which they have been converted, or the right to receive a cash payment in lieu
of such shares, as the case may be, all as described below. Enclosed is a
Letter of Transmittal for use in exchanging old stock certificates for a new
stock certificate or cash payment.
Each stockholder who holds of record less than 12,500 Old Shares (the
equivalent of one New Share) should use the enclosed Letter of Transmittal to
surrender his old stock certificate(s) representing the Old Shares and elect
one of the following options:
(i) To request a cash payment in an amount equivalent to $.38 per
Old Share of Common Stock represented by such certificate(s); or
(ii) If the stockholder has purchased additional Old Shares in the
open market in an amount that, when added to his current holdings of Old
Shares, is sufficient to equal at least 12,500 Old Shares (the equivalent of
one whole New Share), to surrender the stock certificates representing such
shares for a new stock certificate representing New Shares.
PLEASE NOTE THAT ALL STOCK CERTIFICATES SENT TO THE COMPANY SHOULD BE DULY
ENDORSED FOR TRANSFER TO THE COMPANY, WITH A MEDALLION SIGNATURE GUARANTY,
WHICH MAY BE OBTAINED FROM MOST BANKS AND BROKERAGE FIRMS. DO NOT SEND IN
YOUR STOCK CERTIFICATES WITHOUT A MEDALLION SIGNATURE GUARANTY, AS THEY WILL
BE RETURNED TO YOU.
Each stockholder who holds of record at least 12,500 Old Shares (the
equivalent of one whole New Share) should use the enclosed Letter of
Transmittal to exchange his old stock certificate(s) for a new certificate
representing the New Shares into which the Old Shares of Common Stock formerly
represented by the old stock certificate are converted pursuant to the Reverse
Stock Split.
AGAIN, PLEASE NOTE THAT ALL STOCK CERTIFICATES SENT TO THE COMPANY SHOULD BE
DULY ENDORSED FOR TRANSFER TO THE COMPANY, WITH A MEDALLION SIGNATURE
GUARANTY. DO NOT SEND IN YOUR STOCK CERTIFICATES WITHOUT A MEDALLION
SIGNATURE GUARANTY, AS THEY WILL BE RETURNED TO YOU.
Financing of the Reverse Stock Split
The Company estimates that the maximum cost that the Company will incur
in connection with the proposed Reverse Stock Split will be approximately
$428,475, consisting of estimated cash payments in lieu of shares of new
Common Stock of approximately $403,475 and estimated transactional expenses of
approximately $25,000. The Company intends to finance such costs from its
working capital, and does not intend to finance any part of such costs through
borrowings. To the extent that working capital is used to finance the Reverse
Stock Split, however, the Company will borrow on its line of credit to
replenish working capital. The
Company's Board of Directors may, however, postpone or abandon the Reverse
Stock Split at any time prior to its consummation, for any reason, including
without limitation, if in the Directors' sole judgment, consummation of the
Reverse Stock Split would unduly deplete the Company's working capital.
13
<PAGE>
Recent Purchases of Company Stock by the Company and/or Affiliates
Neither the Company nor any affiliate of the Company has made any
purchase of the Company's Common Stock during the past 60 days.
Resolutions to be Adopted
In connection with the proposed Reverse Stock Split, resolutions in
substantially the following form will be adopted by the written consent of the
holders of a majority of the Company's issued and outstanding shares of Common
Stock:
RESOLVED, that the Board of Directors is hereby authorized, in its
discretion, to effect a reverse stock split pursuant to which each twelve
thousand five hundred (12,500) shares of the Company's Common Stock shall be
exchanged for one share of reclassified Common Stock (the "Reverse Split");
and
FURTHER RESOLVED, that the Directors and Officers of the Company are
hereby authorized and directed to execute, deliver and file, as appropriate,
such documents, if any, as may be necessary or convenient with the Secretary
of State of the State of Delaware and such other Federal, state and local
authorities, and to take such other steps as are in their sole judgment
necessary or appropriate, to give effect to such reclassification of shares;
and
FURTHER RESOLVED, that if the Reverse Split is effectuated by the Board
of Directors, it shall be implemented on the following terms and under the
following procedures:
a. Immediately upon the Reverse Split becoming effective, the shares of
Common Stock outstanding prior to the Reverse Split ("Old Stock") shall be
converted at a ratio of twelve thousand five hundred-to-one into shares of
fully-paid and non-assessable Common Stock ("New Stock"), so that each
stockholder who (after the Reverse Stock Split) is then the owner of less than
a single full share of New Stock will be eliminated as a stockholder of the
Company and shall be entitled to receive a cash payment from the Company in an
amount equal to the fair value of such fraction of a share as determined by
the Board of Directors in its sole and absolute discretion.
b. From and after the effective date of the Reverse Split, certificates
representing shares of Old Stock shall be deemed to represent only the right
to receive either (i) shares of New Stock to which an individual stockholder
would be entitled, or (ii) payment in cash of the fair value of the fractional
shares represented by such Old Stock.
c. The Company's Stock Option Plans shall be amended by the Board of
Directors to the extent necessary and appropriate, in the sole judgment of the
Directors, to adjust the beneficial interests in, and the cost of shares
issued pursuant to, such Plans in proportion to the exchange ratio, provided
that shares under any such stock plans shall be rounded to the nearest whole
share of New Stock; and
FURTHER RESOLVED, that the Board of Directors of the Company is hereby
authorized to adopt a resolution adjusting the capital accounts of the Company
as, in its judgment, shall be in the best interests of the Company in light of
the adoption of the foregoing resolutions; and
FURTHER RESOLVED, that the Board of Directors of the Company is hereby
authorized and directed to adopt any or all changes to the Bylaws of the
Company, and the officers of the Company are hereby authorized and directed to
do all
14
<PAGE>
other things and execute and file all documents, including amendments to the
Company's Certificate of Incorporation, as amended, which in their sole
judgment are deemed to be necessary and proper to carry out the intent of the
foregoing resolutions.
Certain Federal Income Tax Consequences
THE COMPANY HAS NOT SOUGHT, AND DOES NOT INTEND TO SEEK, A RULING FROM
THE INTERNAL REVENUE SERVICE OR AN OPINION OF COUNSEL AS TO ANY TAX
CONSEQUENCES OF THE PROPOSED REVERSE STOCK SPLIT. THE FOLLOWING SUMMARIZES
CERTAIN FEDERAL INCOME TAX CONSEQUENCES THAT THE COMPANY BELIEVES WOULD RESULT
TO STOCKHOLDERS WHO ARE RESIDENTS OF THE UNITED STATES AS A CONSEQUENCE OF THE
REVERSE STOCK SPLIT. THIS DISCUSSION IS BASED ON CURRENT LAW AND DOES NOT TAKE
INTO ACCOUNT ANY SPECIAL RULES THAT MAY AFFECT THE TREATMENT OF PARTICULAR
STOCKHOLDERS, SUCH AS DEALERS IN SECURITIES, TAX-EXEMPT ENTITIES, NON-RESIDENT
ALIENS, OR FOREIGN CORPORATIONS. THIS DISCUSSION IS INCLUDED FOR GENERAL
INFORMATION ONLY, WITHOUT REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES
OF ANY SPECIFIC STOCKHOLDER. EACH STOCKHOLDER SHOULD CONSULT HIS OWN TAX
ADVISOR WITH RESPECT TO THE FEDERAL INCOME TAX CONSEQUENCES IN HIS OWN
CIRCUMSTANCES, AND WITH RESPECT TO THE EFFECTS OF APPLICABLE STATE, LOCAL, AND
FOREIGN TAX LAWS AS TO WHICH NO INFORMATION IS PROVIDED HERE.
Tax Consequences to the Company. The proposed Reverse Stock Split is
intended to qualify for federal income tax purposes as a tax-free
reorganization of the Company pursuant to Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, the Company does
not expect that it will experience any tax consequences as a result of the
Reverse Stock Split.
Tax Consequences to Stockholders The following discussion assumes
each stockholder holds his Old Shares of Common Stock as a capital asset.
Exchange of Old Shares Solely for New Shares. A stockholder who
exchanges all of his Old Shares solely for New Shares will not recognize any
gain or loss on the exchange . The aggregate tax basis of the New Shares
received will be equal to the aggregate tax basis of the Old Shares exchanged,
and the holding period of the New Shares of Common Stock exchanged.
Exchange of Old Shares Solely for Cash. A stockholder who exchanges all
of his Old Shares (fractional New Shares of Common Stock received in respect
of Old Shares as a result of the Reverse Stock Split) received in the
transaction for cash will, assuming he is not treated as owning any other New
Shares immediately after the Reverse Stock Split, recognize capital gain or
loss equal to the difference between the basis of the Old Shares surrendered
and the cash received. Such capital gain or loss will be long-term capital
gain or loss, if the stockholder's holding period for his Old Shares exceeds
one year; otherwise, it will be short-term capital gain or loss.
For this purpose, stock "owned" immediately after the Reverse Stock
Split will include stock actually owned as well as stock constructively owned
pursuant to the rules of Section 318 of the Code (which in general attributes
to a taxpayer stock owned by certain related individuals and entities and
stock that the taxpayer has the right to acquire upon the exercise of
options.) In the event such a stockholder actually or constructively owns New
Shares of Common Stock immediately after the Reverse Stock Split, it is
unclear whether the holder will automatically recognize capital gain or loss
or instead be required to treat the entire amount of the cash received as a
dividend unless the redemption of the stockholder's shares is a substantially
disproportionate redemption of stock with
15
<PAGE>
respect to such stockholder or is essentially equivalent to a dividend, in
each case under the rules similar to the rules of Sections 356(a)(2) and 302
of the Code.
Backup Withholding. Each stockholder who receives cash for his Old
Shares will be required to provide the Company with a correct Taxpayer
Identification Number on the Form W-9 or substitute Form W-9 included with the
Letters of Transmittal and to certify that he is not subject to backup
withholding. Failure to provide the information and certification on the Form
W-9 (or substitute Form W-9) may subject the stockholder to 31% federal income
tax backup withholding with respect to any cash payment for the stockholder's
Old Shares.
Effective Time
Subject to the rights of the Board of Directors to abandon or postpone
the proposed Reverse Stock Split, the Reverse Stock Split will be effected by
filing an amendment to the Company's Certificate of Incorporation with the
Delaware Secretary of State and will be effective upon such filing.
Further Stockholder Approval Not Required
The affirmative vote of a majority of the currently outstanding shares
of Common Stock of the Company is required for approval of this proposal, and
such vote has already been obtained by the written consent of the holders of a
majority of the currently outstanding common shares. Such consent is
sufficient to approve the Reverse Stock Split under the Delaware General
Corporation Law, and no other vote or consent of stockholders is necessary or
will be sought in connection with the Reverse Stock Split. ACCORDINGLY, THE
COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND THE
COMPANY A PROXY.
PROPOSAL TO AMEND CERTIFICATE OF
INCORPORATION TO REDUCE AUTHORIZED SHARES
The Company's Certificate of Incorporation presently provides that there
are 10,000,000 shares of $0.05 par value Common Stock and 1,000,000 shares of
$0.01 par value Preferred Stock authorized, of which 3,744,849 shares of
Common Stock are currently issued and outstanding. There are currently no
shares of preferred stock outstanding. Upon consummation of the proposed 1
for 12,500 Reverse Stock Split (if such proposal is approved by the
stockholders as anticipated), there would then be approximately 215 shares of
Common Stock and no shares of Preferred Stock issued and outstanding. The
Board of Directors has determined that under such circumstances, it would be
in the best interests of the Company and all of its stockholders to amend the
Company's Certificate of Incorporation to reduce the number of the Company's
authorized shares of $0.05 par value Common Stock from 10,000,000 to 350
shares, and the number of shares of Preferred Stock would be reduced from
1,000,000 to 25. It is anticipated that the proposed reduction in the number
of authorized shares of both classes of stock would be more consistent with
the authorized capital of other companies similarly situated, and since only
approximately 215 shares of Common Stock and no shares of Preferred Stock
would be issued and outstanding after the proposed Reverse Stock Split, the
authorization of 350 and 25 shares of each class, respectively, would still
leave available for issuance in the future, at the discretion of the Board of
Directors, an adequate number of shares for any purpose(s) deemed to be in the
best interests of the Company and its stockholders. Accordingly, the Board of
Directors has unanimously recommended to the stockholders that immediately
upon consummation of the proposed Reverse Stock Split, the Company's
Certificate of Incorporation be amended to reduce the
16
<PAGE>
number of authorized shares of the Company's $0.05 par value Common Stock from
10,000,000 to 350 shares and the number of shares of Preferred Stock be
reduced from 1,000,000 to 25, and that the amount of stated capital on the
Company's books and records remain unchanged. If approved, the amendment
would become effective upon the filing of an appropriate Certificate of
Amendment with the Delaware Department of State, and effectiveness is
conditioned upon consummation of the Reverse Stock Split.
Further Stockholder Approval Not Required
The amendment of the Company's Certificate of Incorporation must be
approved by a majority of the shares entitled to vote thereon, and such vote
has already been obtained by the written consent of the holders of a majority
of the currently outstanding shares. Such consent is sufficient to approve the
amendment under the Delaware General Corporation Law, and no other vote or
consent of stockholders is necessary or will be sought in connection with the
amendment. ACCORDINGLY, THE COMPANY IS NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND THE COMPANY A PROXY.
PROPOSAL TO ADOPT RESOLUTION
REGARDING STATED CAPITAL
There is a proposal to adopt a resolution which provides that the stated
capital of the Company shall remain unchanged after the Reverse Stock Split
and that the Reverse Stock Split will not result in any modification of any
class of securities of the Company, nor in any modification of the
capitalization of the Company. The sole purpose for the adoption of such a
resolution, in fact, is for clarification of the particular element of the
recapitalization that the preceding proposal to effectuate a reverse stock
split will not in any way impair the capital of the Company.
The Company's Board of Directors unanimously approved the proposal to
adopt a resolution stating that the stated capital of the Company shall remain
unchanged for submission to a vote of stockholders.
Further Stockholder Approval Not Required
The affirmative vote of a majority of the currently outstanding shares
of Common Stock of the Company is required for approval of this proposal, and
such vote has already been obtained by the written consent of the holders of a
majority of the currently outstanding shares. Such consent is sufficient to
approve this proposal under the Delaware General Corporation Law, and no other
vote or consent of stockholders is necessary or will be sought in connection
with this proposal. ACCORDINGLY, THE COMPANY IS NOT ASKING YOU FOR A PROXY
AND YOU ARE REQUESTED NOT TO SEND THE COMPANY A PROXY.
INTEREST OF CERTAIN PERSONS IN FAVOR OF OR IN OPPOSITION TO
MATTERS TO BE ACTED UPON
Robert L. Gardner, Marilyn Gardner and David Raymond, comprising the
Company's current Board of Directors, all have a substantial interest in the
matters to be acted upon, in that after the proposed Reverse Stock Split is
effectuated, Mr. and Mrs. Gardner and Mr. Raymond will all remain stockholders
of the Company and will participate in any benefits to be derived therefrom.
17
<PAGE>
SUMMARY FINANCIAL INFORMATION
Year Ended Year Ended Year Ended
2/28/97 2/29/96 2/28/95
Total Revenues 4,817,147 3,186,169 2,351,131
Income Before Extra-
ordinary Items 157,751 136,015 338,208
Working Capital 12,428,376 6,580,224 2,196,502
Total Assets 14,796,467 9,216,059 6,132,413
Total Assets Less Deferred
Research and Development
Charges and Excess of
Cost of Assets Acquired
Over Book Value 14,796,467 9,212,059 6,124,413
Stockholders' Equity 2,783,651 2,620,766 2,441,140
Net Income per Common
Share (and Common Share
Equivalents) 0.04 0.04 0.11
Net Income Per Share on
Fully Diluted Basis 0.04 0.04 0.10
Book Value for Share as
of the Most Recent Fiscal
Year and as of the Date
of the Latest Interim
Balance Sheet 0.74 0.70 0.85
Shares Outstanding 3,744,849 3,744,849 2,877,613
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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<PAGE>
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.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the executive officers
of the Company which individually earned more than $100,000 for the year ended
February 28, 1997:
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Awards
<CAPTION>
Name and Annual Restricted Stock
Principal Salary Bonus Compen- Award(s)
Position Year ($) ($)<FN2> sation($) ($)<FN3>
- -------- ---- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Robert
Gardner<FN1> 1997 $150,000 $20,043 $9,032 0
Chairman of 1996 $135,000 $17,289 $8,115 0
of the Board 1995 $125,000 $41,908 $8,316 0
19
<PAGE>
David Raymond
<FN1><FN3> 1997 $125,000 $20,043 $8,438 0
President 1996 $110,000 $17,289 $7,099 0
Secretary 1995 $100,000 $41,908 $7,078 0
and Treasurer
</TABLE>
<TABLE>
Long-Term Compensation
Payouts
<CAPTION>
Securities All Other
Name and Underlying LTIP Compen-
Principal Options/ Payouts sation
Position Year SARs(#) ($)<FN3> ($)<FN4>
- -------- ---- ---------- ------- --------
<S> <C> <C> <C> <C>
Robert
Gardner<FN1> 1997 0 0 6,967
20
Chairman 1996 0 0 7,607
of the Board 1995 0 0 7,607
Board
20
<PAGE>
David
Raymond(1)(3) 1997 0 0 9,443
President 1996 0 0 8,456
Secretary 1995 0 0 7,303
and Treasurer
_______________________
(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.
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
21
<PAGE>
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 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
22
<PAGE>
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 $.19 per share were granted to
certain employees of the Company, of which all have expired. During February
1996, Robert Gardner exercised options to purchase 150,000 shares of the
Company's Common Stock. No other options have been exercised as of February
28, 1997. No other stock options have been granted under the 1992 Plan.
The following table shows certain information with respect to stock options
granted to the Company's executive officers during the fiscal year ended 1997:
Option/SAR Grants in Last Fiscal Year
Individual Grants
- ------------------------------------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- -------------- ----------- ------------ ----------------- ----------
Robert Gardner -0- N/A N/A N/A
David Raymond -0- N/A N/A N/A
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.
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
- ---------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Shares Underlying Unexercised in-the-Money
Acquired Options/SARs Options/SARs
on Value at Fiscal Year-End(#) Fiscal Year-End($)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- ------- -------- -------- ----------- ------------- ----------- -------------
Robert
Gardner None None 0 0 $ 0 0
David
Raymond None None 150,000 0 $ 0 0
23
<PAGE>
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 #)
- ------- ------------ ------------- --------- -------- --------
Robert
Gardner -0- -0- N/A N/A N/A
David
Raymond -0- -0- N/A N/A N/A
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 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
he 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.
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>
<TABLE>
<CAPTION>
Title of Name and Address Amount and Nature of Percentage
Class of Beneficial Owner Beneficial Owner<FN1> of Class<FN1>
- -------- ------------------------- --------------------- -----------
<S> <C> <C> <C>
Common Robert L. Gardner<FN2> 2,326,073 59.6%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
24
<PAGE>
Common Kenneth Gardner<FN4> 200,000 5.1%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common David Raymond<FN2> 256,000<FN3> 6.5%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common Marilyn Gardner<FN2><FN5> 51,000 1.3%
3201 Griffin Rd., Ste. 210
Dania, Florida 33312
Common All Officers and 2,633,073<FN3> 67.5%
Directors as a Group
(3 persons)
________________
<FN>
<FN1>
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).
<FN2>
Director of Company
<FN3>
Includes outstanding stock options to purchase 150,000 shares of common stock.
<FN4>
Kenneth Gardner is Robert Gardner's son.
<FN5>
Marilyn Gardner is Robert Gardner's wife.
</FN>
</TABLE>
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.
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
25
<PAGE>
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 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 $.38 per currently outstanding share.
FINANCIAL INFORMATION
See Pages F-1 through F-21 attached.
OTHER INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE
Pursuant to the Exchange Act, the Company files with the SEC periodic reports
and other documents relating to its business, financial condition and other
matters. In connection with the Reverse Stock Split, the Company has filed
with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3. The
Schedule 13E-3, including exhibits, and other filings made by the Company
including those listed above, may be inspected without charge, and copies
obtained at prescribed rates, at the public reference facilities maintained by
the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street NW, Washington, D.C.
20549. The Schedule 13E-3 is also available for inspection and copying during
the normal business hours at the principal executive offices of the Company at
3201 Griffin Road, Suite 210, Dania, Florida 33312.
ANNUAL REPORT
Any stockholder who wishes to obtain without charge a copy of the Company's
Form 10-K/SB for the year ended February 28, 1997, as filed with the
Securities and
26
<PAGE>
Exchange Commission, should address a written request to David Raymond,
President, International Design Group, Inc., 3201 Griffin Road, Suite 210,
Dania, Florida 33312.
By Order of the Board of Directors
Dated: June 5, 1997 David Raymond, President
27
<PAGE>
INDEX TO FINANCIAL STATEMENTS
-----------------------------
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
28
<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
February 28, 1997
- ----------------------------------------------------------------------------
Assets (Notes 6 and 7)
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
==========
F-2
<PAGE>
INTERNATIONAL DESIGN GROUP INC.
Consolidated Balance Sheet
February 28, 1997
- --------------------------------------------------------------------------
Liabilities and Stockholders' Equity
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
==========
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 $.38
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
