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INTERNATIONAL DESIGN GROUP, INC.
1815 GRIFFIN ROAD
SUITE 402
DANIA, FLORIDA 33004
(305) 927-9119
________________________________________________________
INFORMATION STATEMENT
This Information Statement is being furnished to the
stockholders of International Design Group, Inc., a Delaware
corporation ("Company"), in connection with certain actions to be
taken by the written consent of the holders of a majority of the
issued and outstanding shares of the Company's Common Stock. Such
action is to be taken at 10:00 A.M., Eastern Time, on April __,
1997 at the offices of the Company located at 1815 Griffin Road,
Suite 402, Dania, Florida 33004.
Only stockholders of record at the close of business on March
__, 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 $.39 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
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Information Statement and the accompanying materials or otherwise
in connection with the proposed Reverse Stock Split.
Correspondence with respect to the proposed Reverse Stock
Split should be addressed to the Secretary of the Company at the
Company's principal executive offices at 1815 Griffin Road, Suite
402, Dania, Florida 33004.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND
US A PROXY.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS
DOCUMENT.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PROPOSED REVERSE STOCK SPLIT
Pursuant to a resolution adopted on October 22, 1996, the
Company's Board of Directors has unanimously recommended that the
Company "go private" by undertaking a reverse stock split pursuant
to which one new share of the Company's Common Stock will be issued
in exchange for each 12,500 shares of the Company's Common Stock
that are currently issued and outstanding (the "Reverse Stock
Split"). Shares of the Company's Common Stock that are currently
issued and outstanding are hereinafter referred to as the "Old
Shares," and the shares of Common Stock that will become issued and
outstanding upon consummation of the proposed reverse stock split
are hereinafter referred to as the "New Shares."
To the extent that this Reverse Stock Split results in any
stockholder owning less than a full New Share, the Company will pay
cash for each such fractional share in an amount equal to the
appropriate fraction of $.39 per whole share (which represents the
fair value of a whole share before the consummation of the proposed
reverse stock split as determined by the Company's Board of
Directors).
Reasons for the Reverse Stock Split
The Board of Directors has concluded that it is no longer in
the best interests of the Company or its stockholders to continue
as a publicly-held reporting entity due to the cost of preparing
and filing periodic and other reports with the Securities and
Exchange Commission, the cost of convening meetings of stockholders
to conduct even relatively routine germane corporate business and
the cost of communicating with stockholders. The Board of
Directors has estimated that such costs total approximately $50,000
in expenses annually and the expected expense reduction will be of
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a like amount. The cost of the Reverse Stock Split is estimated to
be approximately $517,093 (including $492,093 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.
Because of restrictions imposed on the trading of certain
securities under the Penny Stock Reform Act of 1990, there is
little likelihood that any viable trading market for the Company's
Common Stock will develop unless the Company qualifies for listing
on a recognized exchange. Although the Board has diligently
attempted for several years to position the Company for listing on
NASDAQ or some other national exchange, the efforts of the Board
have not been successful and it currently appears that it is
extremely unlikely that the Company would qualify for any such
listing in the foreseeable future.
Management also believes that it can reduce administrative
expenses and manage the Company more efficiently by significantly
reducing the number of its stockholders. Further, the Company is
in need of additional outside financing for the expansion of its
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, no additional equity financing is currently 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 be required to maintain certain
debt-to-equity ratios that would require the infusion of additional
equity 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
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convert his loan to a long term loan as long the Company remains a
public company. The current financial condition of the Company is
such that the Company is rapidly approaching the debt to equity
limit placed on it by its senior lender which would preclude any
further draw down on the line of credit with such lender regardless
of the dollar amount then existing under such line of credit.
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.
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.
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
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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 as a
percentage of sales, which rose from 16% for the nine months ended
November 30, 1995 to 20% for the same period in 1996. As a result
of competitive pressures, the Company must now pay its sales
representatives 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. Such bad debts were only 22% of revenues
in 1995 as compared to 30% in 1996. Overall, net income has fallen
to 4% of revenues for the nine months ended November 30, 1996 as
compared to 8% during the same period in 1995. Such results
include only four months of operations subsequent to the change in
the Florida insurance regulations.
Revenues during this period 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.
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.
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
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transaction but to cash out the minority stockholders at $.39 per
share.
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 $.39 per share), but such
proposals, in the Board's view, would result in more costs and were
not likely to accomplish the objective of "going private." The
Board also considered other matters in this regard, including
reports on discussions which some members had previously had with
investment bankers and Company counsel and alternatives to going
private.
The Company's Common Stock was at one time traded in the over-
the-counter market. In 1989, however, NASDAQ advised the Company
that the stock would no longer be quoted on the NASDAQ system due
to the Company's failure to meet NASDAQ's minimum listing
requirements. Since that time there has not been any established
trading market for the stock, other than limited or sporadic
trading. The Company's Preferred Stock has never been traded on
any public market or exchange. By effecting the Reverse Stock
Split, stockholders will be given the opportunity to liquidate
their holdings without paying brokerage fees.
Rule 13e-3 Transaction Statement. In connection with the
proposed Reverse Stock Split, the Company has filed with the
Securities and Exchange Commission (the "SEC") a Rule 13e-3
Transaction Statement on Schedule 13E-3. See "Other Information;
Documents Incorporated by Reference."
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 $2,700,000
(or $0.70 per share) must be adjusted appropriately to reflect the
approximate liquidation value of the business. The Board was aware
of the recent liquidation of three other entities that had
previously been engaged in the insurance premium finance business
in Florida. To the best of management's knowledge, the business of
these companies was comparable to that of the Company and no
distinguishing attributes were present. Although no public
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information was available to the Company with respect to the
liquidation of any of these entities, the Board was aware that
difficulties were encountered in the collection of accounts
receivable in each of the liquidations after it became known that
the subject businesses would not continue in existence, and that
the liquidation process was both expensive and time consuming.
The Board determined that on the basis of its general
knowledge of the business and its understanding of the problems
encountered by these other entities in conducting their
liquidations, the net realizable value of the Company's assets in
the event of a liquidation would be approximately $500,000 less
than the amount reflected as book value, or approximately
$2,200,000 ($0.58 per share). 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 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 six months and determined that the
average bid price of the Company's Common Stock during the past six
months was $0.172 per share, the average ask during the same period
was $.344 per share, and the average of the bid and ask for the six
month period was $.26 per share. In addition, during the period
beginning March 1, 1994 and ending November 30, 1996, 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 $0.29 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
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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, and it is expected that these agents will
not continue to make referrals to the Company unless they are paid
a fee for doing so, the Company's margins will be impacted
directly.
It was acknowledged by the Board that it was these same
regulatory changes and their negative impact on profit margins that
served as a major impetus for the Company to further reduce its
expenses by going private. The Board also acknowledged that the
future business prospects of the Company were not as promising as
they once were because of changes in state regulations which have
spawned 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 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 $136,000 for the fiscal year ended
February 29, 1996 and estimates pre-tax earnings of $178,512 for
the fiscal year ended February 28, 1997.
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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 estimated earnings would theoretically be taxed in the
hands of a prospective purchaser at a rate of 35%, the Board
determined that the estimated after tax earnings of the Company for
the fiscal year ended February 28, 1997 will be $116,033 (or $0.031
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 $1,160,330 (or approximately $0.31 per share).
In reviewing its analysis, the Board concluded that the
Company's common shares currently have a liquidation value of
approximately $0.58 per share which could probably be collected
over some period of time if the Company were to be liquidated in an
orderly manner, a current fair market value of approximately $0.29
per share as determined by the investing public, and a going
concern value of approximately $0.31 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 $0.39 per share (which amount
represents the average of the Board's determination of the $0.58
liquidation value, $.29 per share market value and $0.31 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
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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 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 $.39
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 $0.1875 per share, have a current
market value of less than $100), would otherwise sharply decrease
or even eliminate the actual net proceeds of the sale to the
stockholder.
Factors Considered in Fairness Determination. In reaching its
determination that the proposed Reverse Stock Split is fair to the
Company and its stockholders, the Board of Directors considered,
among other things, each of the directors' knowledge of and
familiarity with the Company's own business prospects, as well as
general economic, industry and market conditions and prospects.
The Board of Directors also considered the absence of a liquid
market for shares of its Common Stock, the opportunity that the
Reverse Stock Split would afford stockholders to liquidate their
investments in the Company without incurring brokerage costs and
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the future cost-savings that the Company and its continuing
stockholders will enjoy if, as a result of the Reverse Stock Split,
the Company ceases to be a reporting company under the Exchange
Act. Management estimates that the Company will be able to reduce
its expenses (including costs associated with meetings of
stockholders as required under state law) by approximately $50,000
per year by not being a reporting company.
Absence of Independent Third-Party Valuation of Arms'-Length
Negotiation. The Company has not received any report, opinion, or
appraisal from any outside party that is materially related to the
proposed Reverse Stock Split. In light of the circumstances,
including the directors' knowledge of and familiarity with the
Company's own business, financial condition, operating results,
cash flows, assets, liabilities and prospects, as well as with
general economic, industry, and market conditions and prospects and
the wide variety of factors considered in connection with its
valuation of the fairness of the proposed Reverse Stock Split, the
Board of Directors did not consider it necessary to retain either
an investment bank or financial adviser to render a report or
opinion with respect to the fairness of the proposed Reverse Stock
Split to the Company or its stockholders or an unaffiliated
representative to represent the unaffiliated stockholders of the
Company in negotiating the terms of the Reverse Stock Split. The
primary factor considered by the Board in determining not to retain
the services of such a financial adviser or unaffiliated
representative was its belief that the cost of such services would
be excessive relative to the size of the transaction and the
potential benefits to the Company and its stockholders. 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
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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
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Company Savings from no longer Expense of cashing out
being reporting company minority stockholders
($50K annually) ($407,000).
Greater flexibility in
obtaining outside financing.
Affiliated Own 100% of the Company. No public market for
Stockholders No minority stockholders. stock. Investment
(Officers & becomes virtually
Directors) 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 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
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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 29, 1996
and its quarterly report on Form 10-Q/SB for the quarter ended
November 30, 1996, copies of which may be obtained from the Company
upon request, and which are incorporated herein by reference.
Lack of Appraisal Rights
Pursuant to the Delaware Corporation Law, dissenting
stockholders will not have appraisal rights if the proposed Reverse
Stock Split is effected. Stockholders who believe that they may be
aggrieved by the Reverse Stock Split may have other rights under
federal law or common law, such as rights relating to the fairness
of the Reverse Stock Split and the fiduciary responsibilities of
the corporate officers, directors and stockholders. The nature and
-13-
<PAGE>
extent of such rights, if any, may vary depending upon the facts
and circumstances.
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
$.39 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
-14-
<PAGE>
The Company estimates that the maximum cost that the Company
will incur in connection with the proposed Reverse Stock Split will
be approximately $407,239, consisting of estimated cash payments in
lieu of shares of new Common Stock of approximately $382,239 and
estimated transactional expenses of approximately $25,000. The
Company intends to finance such costs from its working capital, and
does not intend to finance any part of such costs through
borrowings. To the extent that working capital is used to finance
the Reverse Stock Split, however, the Company will borrow on its
line of credit to replenish working capital. The Company's Board
of Directors may, however, postpone or abandon the Reverse Stock
Split at any time prior to its consummation, for any reason,
including without limitation, if in the Directors' sole judgment,
consummation of the Reverse Stock Split would unduly deplete the
Company's working capital.
Recent Purchases of Company Stock by the Company and/or Affiliates
Neither the Company nor any affiliate of the Company has made
any purchase of the Company's Common Stock during the past 60 days.
Resolutions to be Adopted
In connection with the proposed Reverse Stock Split,
resolutions in substantially the following form will be adopted by
the written consent of the holders of a majority of the Company's
issued and outstanding shares of Common Stock:
RESOLVED, that the Board of Directors is hereby
authorized, in its discretion, to effect a reverse stock split
pursuant to which each twelve thousand five hundred (12,500)
shares of the Company's Common Stock shall be exchanged for
one share of reclassified Common Stock (the "Reverse Split");
and
FURTHER RESOLVED, that the Directors and Officers of the
Company are hereby authorized and directed to execute, deliver
and file, as appropriate, such documents, if any, as may be
necessary or convenient with the Secretary of State of the
State of Delaware and such other Federal, state and local
authorities, and to take such other steps as are in their sole
judgment necessary or appropriate, to give effect to such
reclassification of shares; and
FURTHER RESOLVED, that if the Reverse Split is
effectuated by the Board of Directors, it shall be implemented
on the following terms and under the following procedures:
a. Immediately upon the Reverse Split becoming
effective, the shares of Common Stock outstanding prior to the
Reverse Split ("Old Stock") shall be converted at a ratio of
-15-
<PAGE>
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 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-
-16-
<PAGE>
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 StockholdersThe following discussion
assumes each stockholder holds his Old Shares of Common Stock as a
capital asset.
Exchange of Old Shares Solely for New Shares. A stockholder
---------------------------------------------
who exchanges all of his Old Shares solely for New Shares will not
recognize any gain or loss on the exchange . The aggregate tax
basis of the New Shares received will be equal to the aggregate tax
basis of the Old Shares exchanged, and the holding period of the
New Shares of Common Stock exchanged.
Exchange of Old Shares Solely for Cash. A stockholder who
---------------------------------------
exchanges all of his Old Shares (fractional New Shares of Common
Stock received in respect of Old Shares as a result of the Reverse
Stock Split) received in the transaction for cash will, assuming he
is not treated as owning any other New Shares immediately after the
Reverse Stock Split, recognize capital gain or loss equal to the
difference between the basis of the Old Shares surrendered and the
cash received. Such capital gain or loss will be long-term capital
gain or loss, if the stockholder's holding period for his Old
Shares exceeds one year; otherwise, it will be short-term capital
gain or loss.
For this purpose, stock "owned" immediately after the Reverse
Stock Split will include stock actually owned as well as stock
constructively owned pursuant to the rules of Section 318 of the
Code (which in general attributes to a taxpayer stock owned by
certain related individuals and entities and stock that the
taxpayer has the right to acquire upon the exercise of options.)
In the event such a stockholder actually or constructively owns New
Shares of Common Stock immediately after the Reverse Stock Split,
it is unclear whether the holder will automatically recognize
capital gain or loss or instead be required to treat the entire
amount of the cash received as a dividend unless the redemption of
the stockholder's shares is a substantially disproportionate
redemption of stock with respect to such stockholder or is
-17-
<PAGE>
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
-18-
<PAGE>
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
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
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<PAGE>
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.
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Nine Months Nine Months
Year Ended Year Ended Ended Ended
2/29/96 2/28/95 11/30/96 11/30/95
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Total Revenues 3,186,169 2,351,131 3,391,358 2,331,465
Income Before
Extraordinary
Items 136,015 338,208 133,884 185,243
Working
Capital 6,580,224 2,196,502 11,693,151 2,362,013
Total Assets 9,216,059 6,132,413 14,050,585 9,075,959
Total Assets
Less Deferred
Research and
Development
Charges and
Excess of
Cost of Assets
Acquired Over
Book Value 9,212,059 6,124,413 14,049,585 9,070,959
Stockholders'
Equity 2,620,766 2,441,140 2,754,650 2,601,270
Net Income
per Common
Share (and
Common Share
Equivalents) 0.04 0.11 0.04 0.06
Net Income
Per Share on
Fully Diluted
Basis 0.04 0.10 0.04 0.05
-20-
<PAGE>
Book Value for
Share as of
the Most Recent
Fiscal Year and
as of the Date
of the Latest
Interim
Balance Sheet 0.70 0.85 0.74 0.90
Shares
Outstanding 3,744,849 2,877,613 3,744,849 2,877,613
</TABLE>
-21-
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
Name Age Position
---- --- --------
Robert L. Gardner 63 Chairman of the Board
and Director
David Raymond 38 President, Treasurer,
Secretary and Director
Marilyn Gardner 54 Director
Each director is elected at the Company's 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, however, Marilyn Gardner receives $500
per month for consulting services performed for the Company.
Mr. Gardner has served as the Chairman of the Board of the
Company since December 1986 and as a director of the Company since
September 1986 and as the Treasurer of the Company from September
1986 through July 1988. From September 1986 to December 1986, Mr.
Gardner served as the President of the Company. Prior to
purchasing a substantial number of shares of the Company, Mr.
Gardner was a private investor. Mr. Gardner was the Chairman of
Griggs International, Inc., a publicly-held manufacturer of office,
school and theater seating from 1978 to 1983. In 1983, the
business was sold and the company liquidated.
Mr. Raymond has served as Treasurer of the Company since July,
1988 and was appointed President, Secretary and a Director on July
10, 1990. From 1981 until 1987, Mr. Raymond was employed by the
accounting firm of Touche Ross and Co. (currently Deloitte &
Touche). Mr. Raymond is a Certified Public Accountant licensed in
Florida and is a member of the American Institute of Certified
Public Accountants.
Marilyn Gardner was appointed as a Director of the Company on
February 22, 1993. Mrs. Gardner is a private investor who has made
investments in a wide variety of business ventures.
Marilyn Gardner is the wife of the Company's Chairman, Mr.
Robert Gardner. No other family relationship exists between any
director or executive officer and any other director or executive
officer.
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<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's officers and directors, and persons who own more than
ten percent of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, directors and greater than ten-percent
stockholders are required by SEC regulations to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received
by it, or written representations from certain reporting persons,
the Company believes that during the fiscal year ended February 29,
1996, all filing requirements applicable to its officers, directors
and greater than ten percent beneficial owners were complied with.
-23-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the
executive officers of the Company which individually earned more
than $60,000 for the year ended February 29, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
---------------------
(a) (b) (c) (d)
Name and
Principal Salary Bonus
Position Year ($) ($) (2)
- --------------- ---- ------ -------
<S> <C> <C> <C>
Robert Gardner1 1996 $135,000 $17,289
Chairman of the 1995 $125,000 $41,908
Board 1994 $115,000 $41,773
David Raymond1,3 1996 $110,000 $17,289
President, Secre- 1995 $100,000 $41,908
tary and Treasurer 1994 $ 90,000 $41,773
</TABLE>
_______________________
SUMMARY COMPENSATION TABLE
(CONT.)
<TABLE>
<CAPTION>
Long-Term Compensation
Awards Payouts
------------------------
(a) (b) (e) (f) (g)
Other
Annual Restricted Securities
Name and Compen- Stock Underlying
Principal sation Award(s) Options/
Position Year ($) ($) (3) SARs(#)
- --------------- ---- ------- --------- -----------
<S> <C> <C> <C> <C>
Robert Gardner1 1996 $8,115 0 0
Chairman of the 1995 $8,316 0 0
Board 1994 $8,393 0 0
David Raymond1,3 1996 $7,099 0 0
President, Secre- 1995 $7,078 0 0
tary and Treasurer 1994 $6,607 0 0
</TABLE>
_______________________
SUMMARY COMPENSATION TABLE
(CONT.)
<TABLE>
<CAPTION>
(a) (b) (h) (i)
All Other
Name and LTIP Compen-
Principal Payouts sation
Position Year ($)(3) ($) (4)
- --------------- ---- --------- -----------
<S> <C> <C> <C>
Robert Gardner1 1996 0 $7,607
Chairman of the 1995 0 $7,607
Board 1994 0 $6,555
David Raymond1,3 1996 0 $8,456
President, Secre- 1995 0 $7,303
tary and Treasurer 1994 0 $4,683
</TABLE>
1 On August 31, 1990, the Board of Directors approved a resolution
providing that in the event that there is a change in control of the
Company forcing the termination of any of the Company's officers,
those officers shall be entitled to severance pay of two times their
then current annual salary.
2 The Company has no written employment agreements with either Mr.
Gardner or Mr. Raymond. In addition to their base cash compensation
per annum, each of Mr. Gardner and Mr. Raymond is entitled to receive,
during his employment by the Company (i) an incentive bonus equal to
7-1/2% of the Company's annual consolidated pre-tax profits, and (ii)
a further incentive bonus equal to 2-1/2% of annual pre-tax profits of
the Company's wholly-owned subsidiaries. To the extent that employment
terminates prior to the end of any fiscal year, the incentive bonus
shall be pro-rated based on the period of time during the fiscal year
for which he was employed by the Company. Based on the foregoing, a
bonus of $17,289 was earned by each of Mr. Gardner and Mr. Raymond
for fiscal 1996. Both Mr. Gardner and Mr. Raymond devoted substantially
their full business time to the affairs of the Company.
3 On February 22, 1993, Mr. Raymond was granted 100,000 shares of
the Company's Common Stock as a condition of his continued employment.
These shares cannot be sold or transferred by Mr. Raymond for a period
of 10 years and are forfeited by Mr. Raymond if he ceases to be employed
by the Company. The shares were issued to Mr. Raymond in March 1993.
4 Included are automobile lease payments made for Robert Gardner
and David Raymond as well as Florida Prepaid College Fund payments made
for David Raymond's two children.
-24-
Stock Option Plans
In March, 1987, the Company adopted its 1987 Stock Option Plan
(the "Plan") covering 180,000 shares of Common Stock (subject to
adjustment to cover stock splits, stock dividends,
recapitalizations and other capital adjustments) for employees,
including officers and directors of the Company. The Plan provides
that options to be granted under the Plan will be designated as
incentive stock options or non-incentive stock options by the Board
of Directors or a committee thereof, which also will have
discretion as to the persons to be granted options, the number of
shares subject to the options and the terms of the option
agreements. The options to be granted under the Plan and
designated as incentive stock options are intended to receive
incentive stock option tax treatment pursuant to Section 422A of
the Code. Options will be granted to key employees or those
employees, officers or directors who the Company believes are or
will be important to its success.
The Plan provides that all options granted thereunder shall be
exercisable during a period of no more than ten years from the date
of grant (five years for options granted to holders of 10% or more
of the outstanding shares of Common Stock), depending upon the
specific stock option agreement, and that the option exercise price
shall be at least equal to 100% of the fair market value of the
Common Stock on the date of grant (110% for options granted to
holders of 10% or more of the outstanding shares of Common Stock).
Pursuant to the provisions of the Plan, the aggregate fair market
value (determined on the date of the grant) of the shares of Common
Stock for which incentive stock options are first exercisable under
the terms of the Plan by an option holder during any one calendar
year, cannot exceed $100,000.
If the employment of an optionee is terminated other than by
reason of death, disability or retirement at age 65, any options
granted to the optionee will immediately terminate. If employment
is terminated by reason of disability or retirement at age 65, the
optionee may, within one year from the date of termination, in the
event of termination by reason of disability, or three months from
the date of termination, in the event of termination by reason of
retirement at age 65 (but not after ten years from the date of
grant), exercise the option. If employment is terminated by death,
the person or persons to whom the optionee's rights under the
option are transferred by will or the laws of descent and
distribution shall have similar rights of exercise within three
months after such death (but not after ten years from the date of
grant). Options are not transferable otherwise than by will or the
laws of descent and distribution, and during the optionee's
lifetime are exercisable only by the optionee. Shares subject to
options which expire or terminate may be the subject of future
options. The Plan terminates on March 25, 1997.
-25-
<PAGE>
During the fiscal year ended February 28, 1991, stock options
to purchase 80,000 and 60,000 of the Company's common shares at a
purchase price of $.375 were granted to Robert Gardner and David
Raymond, respectively, pursuant to the provisions of the Plan.
None of these options had been exercised as of February 29, 1996.
No other stock options have been granted under the 1987 Plan.
Robert Gardner s options expired during the fiscal year ended
February 29, 1996.
In December 1992, the Company adopted its 1992 Stock Option
Plan (the "1992 Plan") covering 400,000 shares of Common Stock
(subject to adjustment to cover stock splits, stock dividends,
recapitalizations and other capital adjustments) for employees,
including officers and directors of the Company. The 1992 Plan
provides that options to be granted under the 1992 Plan will be
designated as incentive stock options or non-incentive stock
options by the Board of Directors or a committee thereof, which
also will have discretion as to the persons to be granted options,
the number of shares subject to the options and the terms of the
option agreements. The options to be granted under the 1992 Plan
and designated as incentive stock options are intended to receive
incentive stock option tax treatment pursuant to Section 422A of
the Code. Options will be granted to key employees or those
employees, officers or directors who the Company believes are or
will be important to its success.
The 1992 Plan provides that all options granted thereunder
shall be exercisable during a period of no more than ten years from
the date of grant (five years for options granted to holders of 10%
or more of the outstanding shares of Common Stock), depending upon
the specific stock option agreement, and that the option exercise
price shall be at least equal to 100% of the fair market value of
the Common Stock on the date of grant (110% for options granted to
holders of 10% or more of the outstanding shares of Common Stock).
Pursuant to the provisions of the 1992 Plan, the aggregate fair
market value (determined on the date of the grant) of the shares of
Common Stock for which incentive stock options are first
exercisable under the terms of the 1992 Plan by an option holder
during any one calendar year, cannot exceed $100,000.
If the employment of an optionee is terminated other than by
reason of death, disability or retirement at age 65, any options
granted to the optionee will immediately terminate. If employment
is terminated by reason of disability or retirement at age 65, the
optionee may, within one year from the date of termination, in the
event of termination by reason of disability, or three months from
the date of termination, in the event of termination by reason of
retirement at age 65 (but not after ten years from the date of
grant), exercise the option. If employment is terminated by death,
the person or persons to whom the optionee's rights under the
option are transferred by will or the laws of descent and
distribution shall have similar rights of exercise within three
-26-
<PAGE>
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 $.19 per share were granted to certain
employees of the Company, all of which have now expired. During
February 1996, Robert Gardner exercised options to purchase 150,000
shares of the Company s Common Stock. No other options have been
exercised as of February 29, 1996. No other stock options have
been granted under the 1992 Plan.
The following table shows certain information with respect to
stock options granted to the Company's executive officers during
the fiscal year ended 1996:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
-------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- ---- ------------ ------------ ----------------- ----------
<S> <C> <C> <C> <C>
Robert Gardner 300,000 N/A $.10 *
David Raymond -0- N/A N/A N/A
</TABLE>
* Option was exercised on February 26, 1996.
-27-
<PAGE>
The following table sets forth certain information with
respect to option exercises during the fiscal year ended February
29, 1996 by the executive officers of the Company and the value of
each such officer's unexercised options at February 29, 1996.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
----------------------------------------------------------------
Shares Number of Securities Underlying
Acquired Unexercised Options/SARs
on Value at Fiscal Year-End(#)
Exercise Realized ------------------------------
Name (#) ($) Exercisable Unexercisable
- ---- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Robert Gardner 450,000 $25,875* 0 0
David Raymond None None 210,000 0
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year - End Option/SAR Values
----------------------------------------------------------------
Value of Unexercised
in-the-Money
Options/SARs
at Fiscal Year-End($)*
Name Exercisable Unexercisable
- ---- ----------- --------------
<S> <C> <C>
Robert Gardner $ 0 0
David Raymond $ 0 0
</TABLE>
_______________
* Based on the closing bid price of the Company's common stock at
February 29, 1996 at $.1875 as reported by one of the Company's market
makers as the stock is not listed on an exchange.
<TABLE>
<CAPTION>
Performance
Number of or Other
Shares, Units Period Until
or Other Maturation or
Name Rights(#) Payout
- ----- ------------- --------------
<S> <C> <C>
Robert Gardner -0- -0-
David Raymond -0- -0-
</TABLE>
<TABLE>
<CAPTION>
Estimated Future Payouts under Non-Stock
Price-Based Plans
----------------------------------------
Threshold Target Maximum
Name ($ or #) ($ or #) ($ or #)
- ---- --------- -------- --------
<S> <C> <C> <C>
Robert Gardner N/A N/A N/A
David Raymond N/A N/A N/A
</TABLE>
Directors' Fees
The Company has not authorized the payment of fees to any
Directors for attendance at Directors' meetings, except for
payments to Marilyn Gardner, who receives $500 per month for her
services as an outside director.
-28-
<PAGE>
Employee Benefit Plans
On December 27, 1991, the Board of Directors approved a
Simplified Employee Pension Plan for all employees who have been
employees of the Company for at least 3 of the 5 prior years with
the Company. The annual contribution to the plan is at the
discretion of the Board and allocated to employees based on their
salary. Robert Gardner, David Raymond and two other employees
were eligible to participate in the plan during the fiscal year
ended February 29, 1996. During the prior fiscal year a total of
$18,000 was contributed to the SEP, including $8,115 and $7,099
to Mr. Gardner's and Mr. Raymond's accounts, respectively.
The Company has no other bonus, profit sharing, pension,
retirement, stock purchase, deferred compensation, or other
incentive plans.
During December 1993, the Board of Directors approved
payments for the cost of the Florida Prepaid College Program for
three children of Company employees. It is estimated that the
cost to the Company for one eligible child would be approximately
$7,000 payable over 55 months. The Company is not required to
make any further payments if the employee is terminated from the
Company.
-29-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 1, 1997, the
shares of Common Stock owned beneficially and of record (unless
otherwise indicated) by each person owning more than 5% of the
outstanding shares of Common Stock, each director of the Company
and all directors and officers of the Company as a group:
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
Title of Class of Beneficial Owner Beneficial Owner(1) Percentage
of Class
- -------------- ------------------- -------------------- ----------
<S> <C> <C> <C>
Common Robert L. Gardner(D) 2,326,073 58.5%
1815 Griffin Rd
Dania, Florida 33004
Common Kenneth Gardner(A) 200,000 5.0%
399 Winchester Place
Longwood, Florida 32779
Common David Raymond(D) 316,000(2) 7.9%
1815 Griffin Rd
Dania, Florida 33004
Common Marilyn Gardner(D)(B) 51,000 1.3%
1815 Griffin Rd
Dania, Florida 33004
Common All Officers and 2,693,073(2) 67.7%
Directors as a Group
(3 persons)
</TABLE>
_____________________________________________________________________
(1) The calculations set forth above assume that as of March 1, 1997,
there were 3,978,401 shares of common stock issued (which amount
includes 210,000 options to purchase shares and 23,552 shares held in
treasury).
(2) Includes outstanding stock options to purchase 210,000 shares of
common stock.
(D) Director of Company
(A) Kenneth Gardner is Robert Gardner's son.
(B) Marilyn Gardner is Robert Gardner's wife.
Changes in Control
On April 13, 1992, the Company entered into a revolving
credit agreement with the Company's Chairman, Mr. Robert Gardner.
The line of credit has been amended to change the termination
date to the discretion of Mr. Gardner prior to 30 days notice to
the Company and is collateralized by all of the Company's assets
(excluding the finance receivables) and by all of the common
stock of the Company. Borrowings under this revolving credit
agreement, as disclosed in Note 5 to the consolidated financial
statements, are subordinated to the Company's line of credit. In
the event of a default by the Company of its obligations under
-30-
<PAGE>
the agreement, Mr. Gardner would, in effect, have the power to
exercise complete control over the business and operations of the
Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 21, 1993, Finco Financial Corporation, a wholly
owned subsidiary of the Company, entered into a $500,000
revolving credit facility with Marilyn Gardner, a Director of the
Company. Loans under this agreement bear interest at Citibank
prime plus 4-1/2 % with a minimum of 12%. In consideration of
granting this loan, the Company has sold to Mrs. Gardner 500
shares of Class "A" 12% Convertible Redeemable Preferred Stock
for a total price of $75,000. These shares were sold to the
Company's chairman, Mr. Robert Gardner, who then converted them
into 500,000 shares of the Company's Common Stock on February 27,
1996. As of February 29, 1996 there was $500,000 outstanding
under this agreement and $39,629 of interest was paid during the
year ended February 29, 1996. During June 1996 the borrowings
were repaid and the agreement has been terminated. In addition,
during fiscal year 1996, the Company paid $9,000 as dividends on
the Preferred Stock held by Mrs. Gardner. Mrs. Gardner is the
wife of Robert Gardner.
On April 13, 1992, the Company entered into a $1 million
revolving credit facility with the Company's Chairman, Robert
Gardner. The revolving credit facility has been amended to
change the termination date to the discretion of Mr. Gardner
prior to 30 days notice to the Company. Loans under this
agreement bear interest at Citibank prime plus 4 1/2% with a minimum
of 12% and a maximum of 18% and are collateralized by all of the
Company's common stock, assets (excluding the finance
receivables) and business of the Company. Borrowing under this
line of credit as disclosed in Note 5 to the consolidated
financial statements are payable on demand and are subordinated
to a line of credit from a bank. As part of the agreement, the
Company gave an option to purchase 300,000 shares of the
Company's Common Stock to Mr. Gardner at a price of $.10 per
share. This option was exercised on February 28, 1996. As of
February 29, 1996, there was $1,000,000 outstanding under this
agreement; $133,245 of interest was paid by the Company to Mr.
Gardner during the year ended February 29, 1996. During June
1996 the Company repaid Mr. Gardner $500,000.
In connection with the maintenance of the Company's SEP Plan
and securities trading through Prudential Securities and as of
July 1996, Advest Securities, the Company uses Kenneth Gardner as
an account manager. Kenneth Gardner owns approximately 5.0% of
the Company's issued and outstanding shares, and is the son of
Robert Gardner, an officer, director and controlling stockholder
of the Company. Commissions paid to Prudential in connection
-31-
<PAGE>
with these activities for the years ended February 29, 1996 and
1995 were not significant.
The basic principle followed in determining rates and
amounts for each of the above transactions was whether or not the
transaction then under consideration by the Board of Directors
was on terms more favorable to the Company than it could
reasonably have expected to obtain from third parties. If the
Company could have received better terms from independent parties
with respect to the disclosed transactions, it would not have
entered into the subject transactions with related parties.
On February 26, 1996, Robert Gardner acquired a total of
450,000 shares of the Company's $0.05 par value common stock
pursuant to exercising options to purchase 150,000 shares at
$0.19 per share and 300,000 shares at $0.10 per share. The
options to purchase the 150,000 shares were granted to Mr.
Gardner on December 7, 1992 pursuant to the Company's 1992 Stock
Option Plan. The options to purchase the 300,000 shares were
granted to Mr. Gardner in 1995, in conjunction with a $1.0
million credit facility from Mr. Gardner to the Company. The
funds for the purchase price totals of $28,500 and $30,000,
respectively, were provided by the Company in the form of an
employee loan to Mr. Gardner, which loan is collateralized by an
offset against antecedent indebtedness. As of January 15, 1997,
Mr. Gardner has repaid $5,135.42 of the $58,500 loan.
On February 26, 1996 Mr. Gardner also purchased 500 shares
of the Company's Class "A" convertible redeemable preferred stock
from his wife, Marilyn Gardner, for an aggregate purchase price
of $75,000 or $.15 per share of Common Stock. Mr. Gardner
acquired the securities with funds from his personal bank
account. Such preferred shares were then immediately converted
into 500,000 shares of the Company's Common Stock.
Financial Information
See Pages F-1 through F-22 attached.
Other Information; Documents Incorporated by Reference
Pursuant to the Exchange Act, the Company files with the SEC
periodic 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
-32-
<PAGE>
business hours at the principal executive offices of the Company
at 1815 Griffin Road, Suite 402, Dania, Florida 33004.
ANNUAL REPORT
The Company's Annual Report to Stockholders accompanies this
Information Statement. Any stockholder who wishes to obtain
without charge a copy of the Company's Form 10-K/SB for the year
ended February 29, 1996, as filed with the Securities and
Exchange Commission, must address a written request to David
Raymond, President, International Design Group, Inc., 1815
Griffin Road, Suite 402, Dania, Florida 33004.
By Order of the Board of Directors
Dated: ____________, 1997 David Raymond, President
(IDG-3/INFO10.STM)
-33-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet as of February 29, 1996 F-2
Consolidated Statements of Operations for the years
ended February 29, 1996 and February 28, 1995 F-4
Consolidated Statements of Stockholders' Equity for
the years ended February 29, 1996 and
February 28, 1995 F-6
Consolidated Statements of Cash Flows for the years
ended February 29, 1996 and February 28, 1995 F-7
Notes to Consolidated Financial Statements F-9
Consolidated Balance Sheets for periods ended
August 31, 1996 and February 29, 1996 (Unaudited) F-18
Consolidated Statements of Operations for the six
months ended August 31, 1996 and August 31, 1995
(Unaudited) F-19
Consolidated Statements of Operations for the three
months ended August 31, 1996 and August 31, 1995
(Unaudited) F-20
Consolidated Statements of Cash Flows for the six
months ended August 31, 1996 and August 31, 1995
(Unaudited) F-21
Notes to Consolidated Financial Statements (Unaudited) F-22
-34-
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
of International Design Group, Inc.
We have audited the accompanying consolidated balance sheet of International
Design Group, Inc. as of February 29, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years
ended February 29, 1996 and February 28, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
International Design Group, Inc. at February 29, 1996 and the results of its
operations and its cash flows for the years ended February 29, 1996 and
February 28, 1995, in conformity with generally accepted accounting
principles.
BY(Signature) /s/ BDO Seidman, LLP
(Date) May 10, 1996
Miami, Florida
F-1
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
February 29, 1996
- ------------------------------------------------------------------------------
Assets (Notes 5 and 6)
<S> <C>
Current
Cash and cash equivalents $ 130,679
Trading securities 129,188
Finance receivables, less allowance for
doubtful accounts of $591,000 and unearned
income of $542,000 8,149,416
Drafts receivable 312,793
Current maturities of notes receivable (Note 2) 171,515
Prepaid expenses and other 18,316
- ------------------------------------------------------------------------------
Total current assets 8,911,907
Property and equipment - at cost, less accumulated
depreciation and amortization of $68,720 91,628
Notes receivable, less current maturities (Note 2) 189,579
Other assets, less accumulated amortization
of $16,000 22,945
- ------------------------------------------------------------------------------
$ 9,216,059
=====================================================================
=========
</TABLE>
F-2
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
February 29, 1996
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
<S> <C>
Current liabilities
Accounts payable and accrued expenses $ 230,234
Drafts payable 308,130
Notes payable (Note 6) 267,850
Liability under options sold 25,469
Notes payable to directors (Note 5) 1,500,000
- ------------------------------------------------------------------------------
Total current liabilities 2,331,683
Note payable to bank (Note 6) 4,263,610
- ------------------------------------------------------------------------------
Total liabilities 6,595,293
- ------------------------------------------------------------------------------
Commitments (Note 7)
- ------------------------------------------------------------------------------
Stockholders' equity (Note 3)
Common stock, $.05 par - 10,000,000 shares authorized,
3,768,401 issued and 3,744,849 outstanding 188,420
Additional paid-in capital 5,837,706
Deficit (3,338,571)
Treasury stock - 23,552 shares at cost (8,289)
Common stock subscriptions receivable for 450,000 shares
of common stock (58,500)
- ------------------------------------------------------------------------------
Total stockholders' equity 2,620,766
- ------------------------------------------------------------------------------
$ 9,216,059
=====================================================================
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Finance charge income $ 1,603,783 $ 1,056,042
Origination fees 780,480 655,721
Late fees and other charges 687,649 561,252
Gain (loss) on securities trading 58,212 (703)
Interest income 43,995 29,111
Other income 12,050 49,708
- -----------------------------------------------------------------------------
3,186,169 2,351,131
- -----------------------------------------------------------------------------
Expenses:
General and administrative 1,117,288 1,021,556
Sales and marketing 497,399 339,333
Provision for doubtful accounts 829,473 290,757
Depreciation and amortization 36,500 26,500
Interest 396,620 192,321
Interest to Directors 172,874 142,456
- -----------------------------------------------------------------------------
3,050,154 2,012,923
- -----------------------------------------------------------------------------
Net Income $ 136,015 $ 338,208
=====================================================================
========
Net Income Per Common Share:
Primary $ .04 $ .11
Fully diluted $ .04 $ .10
=====================================================================
========
</TABLE>
F-4
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Computation Of Fully Diluted Earnings:
Net income $ 136,015 $ 338,208
Less preferred dividends (9,000) (9,750)
- ------------------------------------------------------------------------------
Primary net income 127,015 328,458
Assumed conversions:
Preferred dividends eliminated 9,000 9,750
- ------------------------------------------------------------------------------
Fully diluted earnings $ 136,015 $ 338,208
- ------------------------------------------------------------------------------
Average Number of Common Shares
Primary 3,096,107 2,987,025
Fully Diluted 3,593,373 3,487,025
=====================================================================
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-in
Shares Amount Capital
--------- -------- ---------
<S> <C> <C> <C>
Balance, February 28, 1994 2,975,337 $148,767 $5,794,040
Net income for the year - - -
Payment of preferred dividend
to Director - - -
Retirement of treasury shares (97,724) (4,886) (28,310)
Purchase of treasury shares - - -
- ------------------------------------------------------------------------------
Balance, February 28, 1995 2,877,613 143,881 5,765,730
Net income for the year - - -
Payment of preferred dividend
to Director - -
- -
Conversion of preferred stock 500,000 25,000 50,000
Exercise of stock options 450,000 22,500 36,000
Retirement of treasury shares (59,212) (2,961) (14,024)
Purchase of treasury shares - -
- -
- -------------------------------------------------------------------------------
Balance, February 29, 1996 3,768,401 $188,420 $5,837,706
=====================================================================
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6A
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Subscriptions Treasury
Deficit Receivable Stock Total
------- ----------- -------- --------
<S> <C> <C> <C> <C>
Balance, February 28, 1994 $(3,794,044) $ - $ (8,211) $2,140,552
Net income for the year 338,208 - - 338,208
Payment of preferred
dividend to Director (9,750) - - (9,750)
Retirement of treasury shares - - 33,196 -
Purchase of treasury shares - - (27,870) (27,870)
- ------------------------------------------------------------------------------
Balance, February 28, 1995 (3,465,586) - (2,885) 2,441,140
Net income for the year 136,015 - - 136,015
Payment of preferred
dividend to Director (9,000) - - (9,000)
Conversion of preferred stock - - - 75,000
Exercise of stock options - (58,500) - -
Retirement of treasury shares - - 16,985 -
Purchase of treasury shares - - (22,389) (22,389)
- ------------------------------------------------------------------------------
Balance, February 29, 1996 $(3,338,571) $(58,500) $ (8,289) $2,620,766
=====================================================================
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6B
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Note 9)
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities:
Net income $ 136,015 $ 338,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 36,500 26,500
Provision for doubtful accounts 829,473 290,757
Changes in operating assets and liabilities:
Increase in unearned income 217,971 78
Increase in drafts receivable (26,393) (30,175)
(Increase) decrease in prepaid expenses
and other (34,194) 729
Increase in accounts payable
and accrued expenses 19,897 109,600
(Decrease) increase in drafts payable (66,218) 147,233
- ------------------------------------------------------------------------------
Net cash provided by operating activities 1,113,051 882,930
- -------------------------------------------------------------------------------
Investing Activities:
Premium finance loans originated (23,091,889) (14,568,623)
Payments received on premium finance loans 18,808,817 14,221,530
Capital expenditures (31,993) (41,141)
Increase in notes receivable (340,257) (325,763)
Payments received on notes receivable 372,748 194,125
Investment in marketable securities 88 (129,276)
(Decrease) increase in liability under
options sold (18,119) 16,897
- ------------------------------------------------------------------------------
Net cash used in investing activities (4,300,605) (632,251)
=====================================================================
=========
</TABLE>
F-7
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Note 9)
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities:
Purchase of treasury shares (22,389) (27,870)
Increase in notes payable to bank 9,283,112 1,161,000
Increase in notes payable 27,000 58,000
Paydowns in notes payable to bank (6,406,502) (1,654,000)
Paydowns in notes payable (210,150) (43,000)
Increase in notes payable to directors 350,000 -
Preferred dividends paid (9,000) (9,750)
- ------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 3,012,071 (515,620)
- ------------------------------------------------------------------------------
Net decrease in cash (175,483) (264,941)
Cash and cash equivalents, beginning of year 306,162 571,103
- ------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 130,679 $ 306,162
=====================================================================
=========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
- -----------------------------------------------
Company and Basis of Presentation:
- ----------------------------------
International Design Group, Inc. ("the Company") is in the insurance premium
finance business through its wholly-owned subsidiaries. The Company's main
business activity is to grant loans to customers, primarily to finance
automobile insurance policies. The majority of the business activity is in
Florida and South Carolina. Such loans are substantially collateralized by
unearned premiums of the insurance policy.
The consolidated financial statements include the accounts of the Company,
and
all of its wholly-owned subsidiaries. All intercompany transactions and
balances have been eliminated in consolidation.
Preparation of Financial Statements:
- ------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents:
- --------------------------
The Company considers all highly liquid investments with an original maturity
of
three months or less to be cash equivalents.
Marketable Securities:
- ----------------------
In fiscal 1995, the Company adopted Statement of Financial Accounting Standards
No. 115 (FAS 115), Accounting for Certain Investments in Debt and Equity
Securities. FAS 115 requires the Company's investments in securities to be
classified into three categories and accounted for as follows:
Trading Securities - Investment securities that are bought and held for
the purpose of selling them in the near term are carried at estimated market
F-9
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value. Unrealized holding gains and losses are reported as a component of
earnings.
Securities Held to Maturity - Investment securities for which the
Company
has the positive intention and ability to hold to maturity are reported at
cost.
Securities Available for Sale - Investment securities not classified as
trading or held to maturity securities are carried at estimated market value.
Unrealized holding gains and losses, net of income taxes, are reported as a
component of stockholders' equity.
Gains and losses realized from the sale of securities are determined on the
first-in first-out method. Investments are stated at market. Net unrealized
losses amounting to $13,819 and $18,517 have been included in the
determination of net income for the years ended February 29, 1996 and
February 28, 1995, respectively. The adoption of FAS 115 did not have a
material effect on the consolidated financial statements.
Additionally, the Company sells put and call options which may obligate the
Company to either purchase or sell a particular security at a stated price
through certain dates in the future. At February 29, 1996, the Company had
a liability resulting from options sold amounting to approximately $25,000.
Property and Equipment:
- -----------------------
Depreciation is computed on either a straight-line or an accelerated basis
over the estimated useful lives of the various assets, principally five
years.
Earnings Per Share:
- -------------------
Primary and fully diluted earnings per common share and common share
equivalents are computed based on the weighted average number of common
shares and common share equivalents outstanding. Accordingly, earnings per
share has been adjusted for the effects of the Company's dividend on the
F-10
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
convertible redeemable preferred stock and for conversion of the convertible
redeemable preferred stock for fully diluted purposes.
Revenue Recognition:
- --------------------
Finance charges and loan origination fees are amortized to income over the
life of the finance contracts using the interest method.
Bank Drafts:
- ------------
Drafts which have been paid by the Company where the finance contracts have
not yet been received are classified as Drafts Receivable. Drafts which have
not yet been presented for payment but where the finance contracts have been
received are classified as Drafts Payable.
Taxes on Income
- ---------------
The Company has adopted Statement No. 109, "Accounting for Income Taxes"
(FAS 109) which utilizes an asset and liability approach. Under FAS 109, the
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
Comparability
- -------------
Certain 1995 accounts have been reclassified to conform with 1996
presentation.
2. Notes Receivable
- ---------------------
Notes receivable consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Various 8%-19% notes receivable, interest and principal
due monthly, maturing through 1999 $ 361,094
Less current maturities 171,515
- ---------------------------------------------------------------------------
$ 189,579
=====================================================================
=======
</TABLE>
F-11
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Stockholders' Equity
- -------------------------
In December 1992, the Company's shareholders authorized the creation of
1,000,000 Preferred Shares with a par value of $.01. These shares may be
issued in one or more series at the discretion of the Board of Directors. On
February 27, 1996, Marilyn Gardner, a director of the Company, sold Robert
Gardner her 500 shares of Class "A" 12% Convertible Preferred Stock. Mr.
Gardner then, pursuant to the terms of original issuance, converted the 500
shares of preferred stock into 500,000 shares of the Company's common stock.
As of February 29, 1996, there were no shares of Class "A" 12% Convertible,
Redeemable Preferred Stock outstanding. (See Note 5).
The Company's 1992 and 1987 Stock Option Plans covering 400,000 shares and
180,000 shares of common stock, respectively (subject to adjustment to cover
stock splits, stock dividends, recapitalization, and other capital
adjustments) for employees, including officers and directors, of the Company
provide that options to be granted under the plans will be designated as
incentive stock options or non-incentive stock options by the Board of
Directors or a committee thereof. All options granted under the plans shall
be exercisable during a period of no more than ten years from the date of
grant (five years for options granted to holders of 10% or more of the
outstanding shares of common stock). The option exercise price shall be at
least equal to 100% of the fair market value of the common stock as of the
date of grant (110% for options granted to holders of 10% or more of the
Company's outstanding common stock).
On December 7, 1992, stock options to purchase 150,000 shares of the Company's
common stock at a price of $.19, were granted to each of Robert Gardner,
Chairman, and David Raymond, President, respectively, pursuant to the
provisions of the 1992 Plan. Additionally, stock options to purchase a total
of 12,500 shares at a price of $.19 per share were granted to certain
employees of the Company. On February 27, 1996, Robert Gardner exercised his
option to purchase 150,000 shares of the Company's common stock at a price of
$.19. The total purchase price of $28,500 has not yet been remitted to the
Company and is recorded as a Common Stock Subscription Receivable. No other
ptions have been exercised as of February 29, 1996. Upon the resignation of
F-12
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
one of the Company's employees, options to purchase 7,500 shares expired. No
other stock options have been granted under the 1992 Plan.
On August 31, 1990, stock options to purchase 80,000 and 60,000 of the
Company's common shares at a price of $.375, were granted to Robert Gardner,
Chairman, and David Raymond, President, respectively, pursuant to the
provisions of the 1987 Plan. Mr. Gardner's options expired on August 31,
1995. No options have been exercised as of February 29, 1996. No other
stock options have been granted under the 1987 Plan.
The Company purchased 72,764 treasury shares at various times during fiscal
1996 in the open market at a total price of $22,389. During fiscal 1996,
the Company retired 59,212 shares of treasury stock that it previously
purchased.
In March 1993, the Company issued 100,000 shares to the Company's President,
Mr. David Raymond. These shares revert to the Company if Mr. Raymond leaves
the Company's employment for a period of ten years from the date of grant,
for any reason other than death, disability or retirement. Additionally, the
shares cannot be sold or transferred during the ten year period.
At February 29, 1996, 350,000 shares of the Company's authorized and unissued
common stock were reserved for issuance upon exercise of options.
4. Retirement and Benefit Plans
- ---------------------------------
The Company maintains a Simplified Employee Pension Plan (SEP). Employees
who are at least 21 years old and have been employed by the Company for at
least three of the past five years, are eligible to participate in the SEP.
As of February 29, 1996, the Company's President, Chairman and two other
employees, were eligible to participate in the SEP. Under the terms of the
SEP, the Board of Directors decide if and how much to contribute to the plan
on an annual basis. The allocation to each employee's account is based upon
salary. For the years ended February 29, 1996 and February 28, 1995, the
Company contributed and expensed $18,000 each year to the SEP.
F-13
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1993, the Board of Directors approved payments for the cost of the Florida
Prepaid College Program for three children of certain Company employees,
including the Company's President. It is estimated that the cost to the
company for one child would be approximately $7,000 payable over 55 months.
The Company is not required to make any further payments if the employee is
terminated from the Company.
5. Notes Payable to Directors
- -------------------------------
On April 13, 1992, the Company entered into a $1 million revolving credit
agreement with Mr. Robert Gardner. All loans made prior to this date to the
Company by Mr. Gardner were made part of this agreement. Loans under this
agreement bear interest at Citibank prime plus 4.50% with a minimum of 12% and
a cap of 18% and are collateralized by all of the Company's accounts
receivable and all of the common stock, assets and business of a subsidiary.
The interest rate on this debt was 13.00% at February 29, 1996. Borrowings
under this line of credit are payable on demand and are subordinated to a
line of credit from a bank as described in Note 6. The Company was notified
in March 1996 by the Florida Department of Insurance that it is not
acceptable for Mr. Gardner to have a lien on the Company's accounts
receivable, as Mr. Gardner is not a licensed premium finance entity. The
Company is presently researching whether the Department's position is in
accordance with Florida statutes. The Company may be forced to seek to
renegotiate the credit facility with Mr. Gardner and there can be no assurance
that it can be successfully renegotiated. The line of credit expires July
31, 1996. In conjunction with a prior amendment, the Company gave to Mr.
Gardner an option to purchase 300,000 shares of the Company's Common Stock
at a price of $.10 per share. On February 27, 1996, Mr. Gardner exercised his
option to purchase the 300,000 shares of the Company's common stock for $.10
per share. The purchase price has not yet been remitted to the Company and is
recorded as a Common Stock subscription receivable. As of February 29, 1996,
there was $1,000,000 outstanding under the revolving credit agreement;
$133,245 and $123,825 of interest was incurred during the years ended
February 29, 1996 and February 28, 1995, respectively.
On April 21, 1993, the Company entered into a $500,000 revolving credit
agreement with Marilyn Gardner, a Director of the Company. Loans under this
agreement bear interest at prime plus 4.50% with a minimum of 12%. The
F-14
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest rate on this debt was 13.00% at February 29, 1996. In conjunction
with the agreement, the Company sold to Mrs. Gardner 500 shares of its Class
A 12% Convertible Redeemable Preferred Stock at a price of $150 per share.
As of February 29, 1996, there was $500,000 outstanding under this agreement
and $39,629 and $18,581 of interest was incurred during the years ended
February 29, 1996 and February 28, 1995, respectively. Borrowings are payable
on demand and the agreement expires July 31, 1996. Mrs. Gardner is the wife
of Robert Gardner, Chairman of the Company.
6. Notes Payable
- ------------------
On February 23, 1996, the Company and its subsidiaries entered into a
$8,000,000 revolving credit agreement with a bank. Borrowings under the
line are based on eligible finance receivables, interest payable monthly at
the Company's choice of LIBOR plus 3.25% or the bank's prime rate plus 1.25%
(9.75% at February 29, 1996). The note is collateralized by all of the assets
of the Company, matures in 1999 and requires the Company to maintain certain
financial ratios. At February 29, 1996 $4,263,610 was outstanding.
The Company and its subsidiaries have demand notes payable to unrelated
parties with interest at 12% per annum ($67,850) and prime plus 2.25% (10.75%
at
February 29, 1996) per annum ($200,000).
7. Commitments
- ----------------
The Company leases office space for its administrative facilities and two
automobiles. These leases expire through August 1996 and are accounted for as
operating leases. Rent expense for the years ended February 29, 1996 and
February 28, 1995 was $53,000 and $46,000, respectively.
In addition to their base cash compensation per annum, Mr. Gardner and Mr.
Raymond, are each entitled to receive, during their employment by the Company
(i) incentive bonuses equal to 7.50% of the Company's annual consolidated
pre-tax profits and (ii) further incentive bonuses equal to 2.50% of annual
pre-tax profits of the Company's wholly-owned subsidiaries. The President
and Chairman each earned bonuses for fiscal 1996 and 1995 of $17,289 and
$41,908, respectively.
In the event of a change in control of the Company forcing termination of
either Mr. Gardner or Mr. Raymond, he would be entitled to severance pay of
F-15
<PAGE>
INTERNATIONAL DESIGN GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
two times the then current annual salary.
Mrs. Gardner also receives $500 per month for her services as an outside
director for the Company.
8. Income Taxes
- -----------------
At February 29, 1996, the Company has net operating loss carryforwards
available to offset future taxable income of approximately $2,470,000, which
expire in the year 2005.
Deferred tax (liabilities) assets are comprised of the following at February
29, 1996:
<TABLE>
<CAPTION>
<S> <C>
Depreciation $ (9,481)
- -----------------------------------------------------------------------------
Gross deferred tax liability (9,481)
- -----------------------------------------------------------------------------
Loss carryforwards 929,651
Accounts receivable reserve 221,842
Other 12,904
- -----------------------------------------------------------------------------
Gross deferred tax asset 1,164,397
Deferred tax asset valuation allowance (1,154,916)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 9,481
- -----------------------------------------------------------------------------
Net $ 0
=====================================================================
========
</TABLE>
A reconciliation of the expected income taxes based on statutory rates applied
to income before taxes from continuing operations to the actual tax is as
follows:
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Expected federal tax $ 46,245 $ 114,982
State income taxes, net of
federal effect 4,937 18,600
Tax effect of net operating
losses utilized (51,182) (133,582)
- ------------------------------------------------------------------------------
$ 0 $ 0
=====================================================================
=========
</TABLE>
F-16
<PAGE>
9. Supplemental Cash flow Information
- ----------------------------------------
<TABLE>
<CAPTION>
February 29, February 28,
Year ended 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the year
for:
Interest $ 560,162 $ 334,778
</TABLE>
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
- -----------------------------------------------------------------------
During fiscal 1996 and 1995, the Company retired 59,212 and 97,724 treasury
shares, respectively.
On February 27, 1996, 500 shares of Class A 12% Convertible Redeemable
Preferred Stock were converted into 500,000 shares of the Company's common
stock.
On February 27, 1996, Mr. Gardner exercised two of his options to purchase
shares of the Company's common stock. Mr. Gardner purchased 150,000 shares
at a price of $.19 per share. He also purchased 300,000 at $.10 per share.
The total purchase price of $58,500 has not yet been remitted to the Company
and is recorded as a Common Stock Subscription Receivable.
10. Fair Value of Financial Instruments
- ----------------------------------------
The Company's financial instruments consist principally of cash and cash
equivalents, trading securities, finance receivables, drafts and notes
receivable, accounts and drafts payable, accrued expenses and borrowings.
The carrying amounts of such financial instruments as reflected in the
consolidated balance sheet approximate their estimated fair value as of
February 29, 1996. The estimated fair value is not necessarily indicative of
the amounts the Company could realize in a current market exchange or of
future earnings or cash flows.
F-17
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 29,
ASSETS 1996 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $204,704 $130,679
Trading Securities 22,812 129,188
Finance Receivables, less allowance
for doubtful accounts of $ 598,000
and $591,000 and unearned income of
$ 786,000 and $542,000 11,209,123 8,149,416
Drafts receivable 409,148 312,793
Current maturities of notes receivable 164,360 171,515
Prepaid expenses and other 33,325 18,316
----------- -----------
TOTAL CURRENT ASSETS
12,043,472 8,911,907
----------- -----------
PROPERTY AND EQUIPMENT- less
accumulated depreciation of $ 88,076
and $68,720 153,306 91,628
NOTES RECEIVABLE - less current maturities 201,048 189,579
OTHER ASSETS, less accumulated amortization
of $ 18,000 and $16,000 29,854 22,945
----------- ----------
$12,427,680 $9,216,059
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other $345,722 $230,234
Drafts Payable 633,532 308,130
Notes payable 276,850 267,850
Liability under options sold 0 25,469
Notes Payable to Directors 500,000 1,500,000
----------- ----------
TOTAL CURRENT LIABILITIES 1,756,104 2,331,683
----------- ----------
Notes payable to bank 7,942,933 4,263,610
----------- ----------
TOTAL LIABILITIES 9,699,037 6,595,293
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock $.05 par, shares authorized
10,000,000; 3,768,401 issued and 3,744,849
outstanding 188,420 188,420
ADDITIONAL PAID IN CAPITAL 5,837,706 5,837,706
DEFICIT (3,230,694) (3,338,571)
TREASURY STOCK ( 23,552 shares at cost ) (8,289) (8,289)
COMMON STOCK SUBSCRIPTIONS RECEIVABLE (58,500) (58,500)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 2,728,643 2,620,766
----------- ----------
12,427,680 9,216,059
========== =========
</TABLE>
See Notes to Condensed Financial statements
F-18
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
1996 1995
----------------------------
REVENUES:
<S> <C> <C>
Finance charge income $1,163,734 $748,540
Origination fees 458,622 375,617
Late fees and other charges 417,411 335,745
Interest income and Other 31,679 82,094
--------- ---------
2,071,446 1,541,996
--------- ---------
EXPENSES
General and administrative expenses 612,872 545,045
Sales and marketing 375,606 254,571
Provision for doubtful accounts 580,133 317,123
Interest expense 299,227 170,550
Interest expense to Directors 74,375 78,265
Depreciation and amortization 21,356 16,500
--------- ---------
1,963,569 1,382,054
--------- ---------
NET INCOME $ 107,877 $ 159,942
========= =========
Net Income per Common Share:
Primary: $0.03 $0.05
Fully Diluted: $0.03 $0.04
Computation Of Fully Diluted Earnings:
Net Income $107,877 $159,942
Less:Preferred Dividends 0 (4,500)
-------- --------
Primary net income 107,877 155,442
Assumed conversions:
Preferred dividends eliminated 0 4,500
-------- --------
Fully diluted earnings $107,877 $159,942
-------- --------
Average Number of Common Shares
Primary 3,793,063 3,088,577
Fully Diluted 3,793,063 3,588,577
</TABLE>
See Notes to Condensed Financial statements
F-19
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31,
1996 1995
-----------------------------
<S> <C> <C>
REVENUES:
Finance charge income $614,715 $395,334
Origination fees 238,942 196,022
Late fees and other charges 223,785 183,470
Interest income and Other 12,875 34,831
--------- -------
1,090,317 809,657
--------- -------
EXPENSES
General and administrative expenses 305,391 286,536
Sales and marketing 226,938 116,011
Provision for doubtful accounts 296,871 168,962
Interest expense 167,803 98,050
Interest expense to directors 26,562 39,453
Depreciation and amortization 11,078 9,300
--------- -------
1,034,643 718,312
--------- -------
NET INCOME 55,674 91,345
========= =======
Net Income per Commin Share:
Primary: $0.01 $0.03
Fully Diluted; $0.01 $0.03
Computation Of Fully Diluted Earnings:
Net Income 55,674 91,345
Less:Preferred Dividends (2,250)
------ ------
Primary net income 55,674 89,095
------ ------
Assumed conversions:
Preferred dividends eliminated 0 2,250
------- -------
Fully diluted earnings $55,674 $91,345
------- -------
Average Number of Common Shares
Primary 3,793,063 3,128,356
Fully Diluted 3,793,063 3,628,356
</TABLE>
See Notes to Condensed Financial Statements
F-20
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED AUGUST 31,
1996 1995
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $107,877 $159,942
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 21,356 16,500
Provision for doubtful accounts 7,000 48,496
Change in operating assets and
liabilities:
Increase in unearned income 244,000 80,240
Increase in prepaid expenses & other (23,918) (5,142)
Decrease in drafts receivable (96,355) (40,102)
Increase (Decrease) in accounts payable,
accrued expenses 115,488 (5,443)
Increase (Decrease) in drafts payable 325,402 (74,338)
-------- --------
Net cash provided by operating gactivities 700,850 180,153
-------- --------
INVESTING ACTIVITIES:
Premium finance loans - net of writeoffs (16,442,009) (10,318,864)
Payments received on premium finance loans 13,131,302 8,536,015
Increase in notes receivable (127,013) (82,008)
Payments received on notes receivable 122,699 110,398
Capital expenditures (81,034) (12,527)
Decrease in Marketable Securities 106,376 11,651
Increase (Decrease) in liability under options
sold (25,469) (36,432)
----------- -----------
Net Cash Used In Investing Activities (3,315,148) (1,791,767)
----------- -----------
FINANCING ACTIVITIES
Increase in notes payable to bank 19,947,000 2,236,150
Paydowns in notes payable to bank (16,267,677) (575,150)
Paydowns in notes payable 9,000 200,000
Paydowns to notes payable to Directors (1,000,000) 0
Preferred dividends paid 0 (4,500)
Purchase of treasury shares 0 (14,115)
Net Cash (Used In) Provided by Financing --------- ---------
Activities 2,688,323 1,842,385
--------- ---------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 74,025 $230,771
CASH AND CASH EQUIVALENTS,
beginning of the period 130,679 306,162
-------- --------
CASH AND CASH EQUIVALENTS,
end of period $204,704 $536,933
======== ========
</TABLE>
See Notes to Condensed Financial Statements
F-21
<PAGE>
International Design Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A -- Basis of Presentation
- -----------------------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six month period ended August 31, 1996 are not necessarily indicative of
the results that may be expected for the year ending February 28, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year ended
February 29, 1996.
The accompanying financial statements include the Company, its wholly owned
subsidiaries Finco Financial Corporation, Eagle Premium Finance, Inc., QRS
Acquisition, Inc., Reserve Funding Corporation, VoiceSoft Corporation and
Federal Funding Corporation. All intercompany transactions and balances have
been eliminated in consolidation.
F-22
<PAGE>
Item 1. Financial Statements Page
----
Condensed Consolidated Balance Sheets of
International Design Group, Inc. ("IDG") as of
November 30, 1996 and February 29,1996 F-1
Condensed Consolidated Statement of Operations
of IDG for the nine months ended November 30,
1996 and 1995 F-2
Condensed Consolidated Statement of Operations
of IDG for the three months ended November 30,
1996 and 1995 F-3
Condensed Consolidated Statement of Cash Flows of
IDG for the nine months ended November 30, 1996 and
1995 F-4
Notes to Financial Statements F-5 - F-8
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 29,
ASSETS 1996 1996
- ------------------------------- -------------- --------------
CURRENT ASSETS:
<S> <C> <C>
Cash and Cash Equivalents $ 142,270 $ 130,679
Trading Securities 0 129,188
Finance Receivables, less allowance
for doubtful accounts of $ 710,000
and $591,000 and unearned income of
$ 894,000 and $542,000 12,949,324 8,149,416
Drafts receivable 408,408 312,793
Current maturities of notes receivable 168,973 171,515
Prepaid expenses and other 30,638 18,316
---------- ---------
TOTAL CURRENT ASSETS 13,644,613 8,911,907
---------- ---------
PROPERTY AND EQUIPMENT- less
accumulated depreciation of
$ 98,579 and $68,720 154,401 91,628
NOTES RECEIVABLE -
less current maturities 169,620 189,579
OTHER ASSETS,
less accumulated amortization
of $ 19,000 and $16,000 26,951 22,945
------- -------
$14,050,585 $9,216,059
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses
and other $510,486 $230,234
Drafts Payable 719,126 308,130
Notes payable 276,850 267,850
Liability under options sold 0 25,469
Notes Payable to Directors 500,000 1,500,000
-------- ---------
TOTAL CURRENT LIABILITIES 2,006,462 2,331,683
--------- ---------
Notes payable to bank 9,289,473 4,263,610
--------- ---------
TOTAL LIABILITIES 11,295,935 6,595,293
STOCKHOLDERS' EQUITY:
Common stock $.05 par, shares
authorized 10,000,000; 3,768,401
issued and 3,744,849 outstanding 188,420 188,420
ADDITIONAL PAID IN CAPITAL 5,837,706 5,837,706
DEFICIT (3,204,687) (3,338,571)
TREASURY STOCK ( 23,552 shares at cost ) (8,289) (8,289)
COMMON STOCK SUBSCRIPTIONS RECEIVABLE (58,500) (58,500)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,754,650 2,620,766
--------- ---------
$14,080,585 $9,216,059
========== =========
</TABLE>
See Notes to Condensed Financial Statements
F-1
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
1996 1995
---------- ----------
REVENUES:
<S> <C> <C>
Finance charge income $ 1,870,504, $ 1,157,032
Origination fees 774,947 577,999
Late fees and other charges 689,191 512,791
Interest income and Other 56,716 83,643
-------- --------
3,391,358 2,331,465
--------- ---------
EXPENSES
General and administrative
expenses 958,563 849,646
Sales and marketing 678,130 368,085
Provision for doubtful accounts 999,672 502,599
Interest expense 497,940 275,728
Interest expense to Directors 90,313 123,664
Depreciation and amortization 32,856 26,500
-------- -------
3,257,474 2,146,222
--------- ---------
NET INCOME $133,884 $185,243
======== ========
Net Income per Common Share:
Primary: $0.04 $0.06
Fully Diluted: $0.04 $0.05
Computation Of Fully Diluted
Earnings:
Net Income $133,884 $185,243
Less:Preferred Dividends 0 (6,750)
-------- -------
Primary net income 133,884 178,493
Assumed conversions:
Preferred dividends eliminated 0 6,750
------- -------
Fully diluted earnings $133,884 $185,243
------- -------
Average Number of Common Shares
Primary 3,793,063 3,093,825
Fully Diluted 3,793,063 3,593,825
</TABLE>
See Notes to Condensed Financial statements
F-2
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30
1996 1995
----------- ----------
REVENUES:
<S> <C> <C>
Finance charge income $ 706,770 $ 408,492
Origination fees 316,325 202,382
Late fees and other charges 271,780 177,046
Interest income and Other 25,037 1,549
-------- --------
1,319,912 789,469
--------- --------
EXPENSES
General and administrative
expenses 345,691 304,601
Sales and marketing 302,524 113,514
Provision for doubtful accounts 419,539 185,476
Interest expense 198,713 105,178
Interest expense to directors 15,938 45,399
Depreciation and amortization 11,500 10,000
-------- --------
1,293,905 764,168
--------- --------
NET INCOME 26,007 25,301
========= ========
Net Income per Common Share:
Primary: $0.01 $0.01
Fully Diluted; $0.01 $0.01
Computation Of Fully Diluted
Earnings:
Net Income 26,007 25,301
Less:Preferred Dividends (2,250)
------- -------
Primary net income 26,007 23,051
------- -------
Assumed conversions:
Preferred dividends eliminated 0 2,250
------- -------
Fully diluted earnings $26,007 $25,301
------- -------
Average Number of Common Shares
Primary 3,793,063 3,104,434
Fully Diluted 3,793,063 3,618,356
</TABLE>
See Notes to Condensed Financial Statements
F-3
<PAGE>
INTERNATIONAL DESIGN GROUP, INC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED NOVEMBER 30,
1996 1995
--------- ----------
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $ 133,884 $ 185,243
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization 32,856 26,500
Provision for doubtful
accounts 119,000 152,481
Change in operating
assets and liabilities:
Increase in unearned income 352,000 57,000
Increase in prepaid expenses
& other (19,328) (6,861)
Decrease in drafts
receivable (95,615) 24,543
Increase (Decrease) in
accounts payable,accrued
expenses 280,252 36,511
(Increase) Decrease
in drafts payable 410,996 (93,044)
--------- -------
Net cash provided by
operating activities 1,214,045 382,373
--------- -------
INVESTING ACTIVITIES:
Premium finance loans -
net of writeoffs (26,147,794) (16,596,528)
Payments received on
premium finance loans 20,876,886 13,818,175
Increase in notes receivable (127,013) (104,508)
Payments received on notes
receivable 149,514 67,657
Capital expenditures (92,629) (23,096)
Decrease in Marketable
Securities 129,188 19,151
Increase (Decrease) in
liability under options
sold (25,469) (27,901)
--------- ---------
Net Cash Used In
Investing Activities (5,237,317) (2,847,050)
--------- ---------
FINANCING ACTIVITIES
Increase in notes payable
to bank 35,392,802 3,268,000
Paydowns in notes payable
to bank (30,366,939) (767,000)
Increase in notes payable
to Directors 0 350,000
Paydowns to notes payable
to Directors (1,000,000) 0
Preferred dividends paid 0 (6,750)
Purchase of treasury shares 0 (18,362)
Net Cash (Used In) Provided
by Financing Activities 4,034,863 2,842,738
--------- ---------
Increase in notes payable 9,000 16,850
NET INCREASE IN CASH
AND CASH EQUIVALENTS 11,591 $378,061
CASH AND CASH EQUIVALENTS,
beginning of the period 130,679 306,162
-------- -------
CASH AND CASH EQUIVALENTS,
end of period $142,270 $684,223
======== ========
</TABLE>
See Notes to Condensed Financial Statements
F-4
<PAGE>
International Design Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE A -- Basis of Presentation
- -----------------------------------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended
November 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending February 28, 1997. For
further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the
year ended February 29, 1996.
The accompanying financial statements include the Company, its wholly
owned subsidiaries Finco Financial Corporation, Eagle Premium Finance,
Inc., QRS Acquisition, Inc., Reserve Funding Corporation, VoiceSoft
Corporation and Federal Funding Corporation. All intercompany
transactions and balances have been eliminated in consolidation.
F-5
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
Results of Operations - General
- -------------------------------
Revenues increased to $3,391,358 during the nine months ended November
30, 1996 as compared to $2,331,465 during the comparable period in 1995
as a result of the Company's growth in the insurance premium finance
business. Insurance premiums financed increased to $26.7 million in 1996
compared to $16.6 million for the same period in 1995. The number of
contracts financed increased to 46,900 during 1996 as compared to 31,800
in 1995. This increase resulted primarily from the expansion of the
Company's premium finance business to South Carolina as well as increased
contract volume in Florida. In September of 1996, as a result of lower
than expected profits, the Company was no longer excepting business in
South Carolina or Maryland.
The following table reflects the company's expenses as a percentage of
revenues for the nine months ended November 30,:
1996 1995
------- -------
<TABLE>
<CAPTION>
<S> <C> <C>
General and Administrative Expenses 28% 36%
Sales and Marketing 20% 16%
Depreciation and Amortization 1% 1%
Provision for Doubtful Accounts 30% 22%
Interest Expense 17% 17%
Total Expenses 96% 92%
Net Income 4% 8%
</TABLE>
General and administrative expenses, as a percentage of revenue,
decreased as a substantial portion of these expenses are fixed and do
not directly correlate to revenue. The provision for doubtful accounts
has increased substantially as the Company has been accepting lower down
payments on its finance agreements in an effort to compete effectively.
Additionally, the Company expanded its finance operations to South
Carolina and Maryland where the average down payment on finance
contracts is significantly lower than in Florida. These lower down
payments translate into higher bad debt write-offs when an insurance
contract is canceled. In determining the provision for doubtful accounts,
management takes into account factors such as its average down payment
rate, cancellation rate, unrefunded canceled contracts, specific problems
with insurance agents, and financial condition of insurance companies
among other factors.
Until July 1, 1996, there was a statute in Florida which prohibited
insurance premium finance companies from rebating a portion of the
interest or origination fees to insurance brokers in an effort to induce
the brokers to refer finance business to the Company. This prohibition
expired on July 1, 1996. This has resulted in the Company's costs
increasing as the Company, in an effort to maintain its market share,
was forced to rebate a portion of its finance charges and origination
fees to the insurance brokers. This may have a negative impact on future
profitability.
Interest expense as a percentage of revenue remained constant even with
higher borrowing due to a more favorable interest rate with the Company's
lending bank. This is reflected by a higher interest Margin as shown
below.
1996 1995
------ -------
<TABLE>
<CAPTION>
<S> <C> <C>
Finance charge income $ 1,870,504 $1,157,032
Interest expense 588,253 399,392
Net interest margin 1,282,251 757,640
Margin Percent 69% 65%
</TABLE>
F-6
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS (Cont'd)
Overall, net income decreased to approximately $154,000 for the nine months
ended November 30, 1996 as compared to $185,000 during the same period in
1995. This decrease in net income is primarily attributable to a decrease
in income from the Companys' premium finance operations. Increased bad
debt, as well as higher marketing fees have both caused signifigantly
lower profit margins.
The Company recorded net income of $26,007 for the three months ended
November 30, 1996 as compared to $25,301 during the comparable period in
1995. Although the finance volume was signifigantly higher in 1996,
decreased profit margins as discussed above caused income to remain the
same.
Liquidity and Capital Resources
-------------------------------
The Company's working capital position at November 30, 1996 increased to
$11,723,151 as compared to $6,580,224 at February 29, 1996. This increase
was due primarily to an increased level of premium finance activity during
the period which was funded by long term debt.
The Company increased borrowings under its bank revolving line of credit by
approximately $5.0 million between February 29, 1996 and November 30, 1996.
This increase resulted from an increase in premium finance loans during
the period. Finance receivables increased to approximately $13.0 million
at August 31, 1996 from approximately $8.1 million at February 29, 1996.
As of November 30, 1996, the Company's revolving credit arrangements are
summarized as follows:
Description Lender Loan Balance Expiration Date
- ----------- ------ ------------ ---------------
$10,000,000 Revolving Credit Agreement Bank $ 9,289,473 Feb. 23, 1999
$1,000,000 Revolving Credit Agreement Chairman $ 500,000 On Demand
During June 1996, the Company repaid $500,000 of the $1 million revolving
credit agreement with the Company's Chairman as well as the $500,000
revolving credit agreement with one of the Company's Directors. These
repayments were funded with the Company's Revolving Credit Agreement with a
Bank. Both the revolving credit agreements with the Company's Chairman and
one of the Company's Directors expired in July 1996. The agreement with the
Chairman was extended on a month to month basis. The agreement with the
Director was not extended.
The Company extended its line of credit with a bank to $10.0 million in
August 1996 with an option to increase it to $11.0 million. The new
agreement, which matures in 1999, also requires the Company to maintain
certain financial ratios. Borrowings under the line are based on eligible
finance receivables, interest is payable monthly at the Company's choice of
LIBOR plus 3.25% or the bank's prime rate plus 1.25%.
As part of the Company's investment activities, the Company sells put
options. These options give the purchaser the right to sell to the
Company a certain security at a fixed price through a certain date. These
options involve a high degree of risk because if the value were to
substantially decrease on a security which the Company sold put options
on, the loss to the Company could greatly exceed the proceeds of the sale
of the option.
It is the opinion of management that the Company will have sufficient funds
to satisfy its cash requirements for at least the next 12 months .
F-7
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Cont'd)
Inflation and Foreign Currency Fluctuations:
- --------------------------------------------
Presently, inflation and foreign currency fluctuations do not have any
adverse effect on the Company's business. However, inflation would have an
adverse effect on the Company as its cost of money would increase while the
maximum interest rates the Company is allowed to charge are set by state
law.
F-8
<PAGE>
TABLE OF CONTENTS
Page
PROPOSED REVERSE STOCK SPLIT ..............................
Reasons for the Reverse Stock Split ..................
Fairness of the Reverse Stock Split...................
Conduct of the Company's Business After the
Reverse Stock Split ................................
Lack of Appraisal Rights .............................
Exchange of Stock Certificates; Receipt of
Cash Payments ......................................
Financing of the Reverse Stock Split .................
Recent Purchases of Company Stock by the Company
and/or Affiliates ................................
Resolutions to be Adopted ............................
Certain Federal Income Tax Consequences ..............
Effective Time .......................................
Further Stockholder Approval Not Required ............
PROPOSAL TO AMEND CERTIFICATE OF
INCORPORATION TO REDUCE AUTHORIZED SHARES ................
Further Stockholder Approval Not Required .................
PROPOSAL TO ADOPT RESOLUTION REGARDING STATED CAPITAL .....
Further Stockholder Approval Not Required ............
INTEREST OF CERTAIN PERSONS IN FAVOR OF OR
IN OPPOSITION TO MATTERS TO BE ACTED UPON ................
SUMMARY FINANCIAL INFORMATION .............................
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT ........................
Compliance with Section 16(a) of the Exchange Act ....
EXECUTIVE COMPENSATION ....................................
Stock Option Plans ...................................
Directors' Fees ......................................
Employee Benefit Plans ...............................
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT .........................
Changes in Control ...................................
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............
FINANCIAL INFORMATION .....................................
OTHER INFORMATION; DOCUMENTS INCORPORATED BY REFERENCE ....
INDEX TO FINANCIAL STATEMENTS .............................
