<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ALLIED DIGITAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
NEW YORK 11-2574949
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
140 FELL COURT
HAUPPAUGE, NEW YORK 11788
(516) 232-2323
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CHARLES A. MANTIONE
VICE PRESIDENT OF FINANCE
ALLIED DIGITAL TECHNOLOGIES CORP.
140 FELL COURT
HAUPPAUGE, NEW YORK 11788
(516) 232-2323
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
SEE TABLE OF ADDITIONAL REGISTRANTS BELOW
Copies to:
<TABLE>
<S> <C> <C>
STANLEY SCHLESINGER PHILIP WERNER DANIEL ZUBKOFF
WARSHAW BURSTEIN COHEN MORGAN, LEWIS & BOCKIUS LLP CAHILL GORDON & REINDEL
SCHLESINGER & KUH, LLP 101 PARK AVENUE 80 PINE STREET
555 FIFTH AVENUE NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10005
NEW YORK, NEW YORK 10017 (212) 309-6000 (212) 701-3000
(212) 984-7700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF SECURITIES AMOUNT TO BE AGGREGATE PRICE MAXIMUM AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER NOTE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Senior Subordinated Notes $100,000,000 $1,000 $100,000,000 $29,500
Guarantees of Senior Subordinated Notes (1) (1) (1) (2)
Total $100,000,000 $1,000 $100,000,000 $29,500
</TABLE>
- ------------------
(1) Not applicable.
(2) Pursuant to Rule 457(n) under the Securities Act, no separate fee is payable
for the Guarantees.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
TABLE OF ADDITIONAL REGISTRANTS
<TABLE>
<CAPTION>
ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER,
EXACT NAME OF GUARANTOR STATE OR OTHER I.R.S. EMPLOYER INCLUDING AREA CODE, OF
REGISTRANT AS SPECIFIED JURISDICTION OF IDENTIFICATION REGISTRANT'S PRINCIPAL
IN ITS CHARTER INCORPORATION NUMBER EXECUTIVE OFFICE
- ------------------------------- ---------------------------- --------------- ----------------------------
<S> <C> <C> <C>
Allied Digital Technologies Delaware 38-3191597 140 Fell Court
Corp. Hauppauge, New York 11788
(516) 232-2323
HMG Digital Technologies Corp. Delaware 13-3643843 140 Fell Court
Hauppauge, New York 11788
(516) 232-2323
HRM Holdings Corp. Delaware 11-3040949 140 Fell Court
Hauppauge, New York 11788
(516) 232-2323
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS
ALLIED DIGITAL, INC.
$100,000,000
% Senior Subordinated Notes Due 2008
Fully and Unconditionally Guaranteed by Allied Digital Technologies Corp.
and each of the other Guarantors named herein
Interest Payable and
Issue Price: %
The % Senior Subordinated Notes due 2008 (the 'Notes') are being offered
(the 'Offering') by Allied Digital, Inc., a New York corporation (the 'Issuer').
The Notes will mature on , 2008. Interest on the Notes will accrue
at the rate of % per annum and will be payable semiannually in arrears on
and of each year commencing , 1999.
The Notes will be redeemable at the option of the Issuer, in whole or in part,
at any time on or after , 2003, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon to the redemption date. In
addition, on or prior to , 2001, the Issuer may redeem up to
33 1/3% of the principal amount of the Notes at a redemption price of % of
the principal amount thereof, plus accrued and unpaid interest, if any, thereon
to the redemption date, with the net cash proceeds of one or more Public Equity
Offerings (as defined); provided, however, that at least $65 million in
aggregate principal amount of the Notes remains outstanding immediately after
the occurrence of each such redemption. Upon the occurrence of a Change of
Control (as defined), the Issuer will be required to make an offer to purchase
all outstanding Notes at an offer price in cash equal to 101% of the principal
amount thereof plus accrued and unpaid interest, if any, thereon to the date of
purchase. See 'Description of Notes.'
The Notes will be unsecured obligations of the Issuer subordinated in right of
payment to all existing and future Senior Debt (as defined) of the Issuer and
senior in right of payment to all existing and future Subordinated Indebtedness
(as defined) of the Issuer. The Notes will be fully and unconditionally
guaranteed (the 'Guarantees') by Allied Digital Technologies Corp. ('ADT'), HMG
Digital Technologies Corp. and HRM Holdings Corp. (collectively, the
'Guarantors'). The Guarantees will be general unsecured obligations of each of
the Guarantors subordinated in right of payment to all existing and future
Senior Debt of each such Guarantor and will rank senior in right of payment to
all existing and future Subordinated Indebtedness of each such Guarantor. At
January 31, 1998, after giving pro forma effect to the Transactions (as defined)
and the application of the net proceeds thereof, the aggregate amount of
outstanding Senior Debt of the Issuer would have been $3.7 million.
SEE 'RISK FACTORS' BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT IN THE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITERS' PROCEEDS TO
PUBLIC(1) DISCOUNT(2) ISSUER(3)
<S> <C> <C> <C>
Per Note..................................... % % %
Total........................................ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Issuer and the Guarantors have agreed to indemnify the Underwriters (as
defined) against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the 'Securities Act'). See
'Underwriting.'
(3) Before deducting expenses of the Offering payable by the Issuer estimated at
$ .
The Notes are being offered by J.P. Morgan Securities Inc. and Bear, Stearns &
Co. Inc., as underwriters (the 'Underwriters'), subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by Cahill Gordon & Reindel, counsel for the Underwriters.
The Underwriters reserve the right to withdraw, cancel or modify the offer and
reject orders in whole or in part. It is expected that delivery of the Notes
will be made against payment therefor, on or about , 1998 at the
offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York in
book-entry form through the facilities of The Depository Trust Company.
J.P. MORGAN & CO. BEAR, STEARNS & CO. INC.
, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
Prospectus Summary........................................................................................ 3
Risk Factors.............................................................................................. 11
Use of Proceeds........................................................................................... 16
Capitalization............................................................................................ 16
Selected Historical Consolidated Financial Data........................................................... 17
Pro Forma Unaudited Condensed Financial Data.............................................................. 19
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 24
Business.................................................................................................. 28
Management................................................................................................ 38
Security Ownership........................................................................................ 39
Certain Transactions...................................................................................... 40
Description of Credit Agreement........................................................................... 43
Description of Notes...................................................................................... 44
Underwriting.............................................................................................. 68
Legal Matters............................................................................................. 68
Experts................................................................................................... 68
Available Information..................................................................................... 69
Incorporation by Reference................................................................................ 69
Index to Consolidated Financial Statements................................................................ F-1
</TABLE>
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES 'FORWARD-LOOKING STATEMENTS' WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE
'PROSPECTUS SUMMARY,' 'THE COMPANY,' 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS' AND 'BUSINESS' AND LOCATED
ELSEWHERE HEREIN REGARDING THE COMPANY'S FINANCIAL POSITION AND BUSINESS
STRATEGY, MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE ISSUER
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ('CAUTIONARY STATEMENTS') ARE
DISCLOSED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS OFFERING MEMORANDUM AND UNDER
'RISK FACTORS.' ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, references
in this Prospectus to the 'Company' refer collectively to Allied Digital
Technologies Corp. and its consolidated subsidiaries. All references in this
Prospectus to 'fiscal year' refer to the Company's fiscal year which ends on
July 31 of the specified calendar year.
THE COMPANY
The Company is a leading independent multimedia manufacturer in the United
States. The Company replicates/duplicates audio cassettes, video cassettes, and
CD and CD-ROM products for the entertainment, publishing and special interest
markets. In addition, the Company provides value-added supply chain management
services such as distribution, telephone order fulfillment, packaging design and
outsourcing, electronic order-taking and all direct-mail services. Since its
founding in 1947, the Company (including its predecessors) has consistently and
successfully managed the transition from one media to another by adapting its
product line to match changing market trends. As the market has moved from vinyl
records and audio cassettes to CDs and CD-ROMs and from film to video, the
Company has successfully aligned its production and selling strategy around such
trends. The Company's strategy is to provide its customers with a wide variety
of turnkey solutions and options for delivering multimedia products to market.
The Company targets the fastest growing niche markets, including CD-ROM, spoken
word audio cassette, and special interest and premium/promotional use video. The
sell-through video market, which includes special interest and
premium/promotional use video, has grown at a rate in excess of 10% for each of
the past six years and the market for interactive digital media, such as CD-ROM,
has grown at a rate in excess of 20% for each of the past five years.
The Company sells its products to approximately 3,000 customers in a wide
range of industries including entertainment/publishing, special interest and
promotional video, and CD-ROM software. The Company's entertainment/ publishing
customers include: BMG Music Group, Inc. ('BMG'), PolyGram Group Distribution,
Inc. ('PGD'), Simon & Schuster, Sony Music Entertainment and Columbia House. The
Company's special interest and promotional customers include Anchor Bay
Entertainment ('Anchor Bay'), RJR Nabisco and Glaxo Wellcome. The Company's
CD-ROM software customers include Sofsource, Inc. ('Sofsource') and Video
Professor.
The Company has manufacturing and service facilities across the United
States and has a national distribution facility based in Tennessee, allowing it
to provide personalized local service as well as high volume mass production
capabilities throughout the continental United States. The Company markets its
products and services nationally through its internal sales force of
approximately 55 sales and marketing professionals. As the market for multimedia
applications continues to grow and the industry continues to undergo significant
consolidation, the Company believes it is well positioned to take advantage of
such opportunities. For the twelve months ended January 31, 1998, the Company
had total revenues of $159.1 million and EBITDA of $17.9 million.
COMPETITIVE STRENGTHS
The combination of the Company's products, customers and proven track
record distinguishes it as a leading manufacturer and distributor of packaged
media. The Company attributes this success and its continued opportunities for
growth and profitability to the following competitive strengths:
o Leading independent multimedia duplicator/replicator. The Company is the
leading independent multimedia duplicator/replicator in the United States
with both national distribution and manufacturing capabilities in all
audio cassette, video cassette and CD/CD-ROM configurations. The
Company's long-standing geographically distributed presence has allowed
it to provide personalized local service as well as high volume mass
production capabilities.
o Multimedia product offerings. The Company offers its services across all
three of the major multimedia product formats (i.e., audio cassettes,
video cassettes and CD/CD-ROM). The Company believes that offering a
complete line of multimedia products gives the Company a competitive
advantage by providing
3
<PAGE>
its customers with 'one-stop shopping' and affording the Company the
opportunity to cross-sell its other product offerings to customers of a
particular format.
o Value-added supply chain services. The Company's value-added supply
chain management services give it a competitive advantage by providing a
'one-stop' solution that differentiates the Company from its competitors
and by fulfilling key customer needs such as distribution, telephone
order fulfillment, packaging design and outsourcing, electronic order
taking, and direct mail services. These services enhance the
profitability of the Company's customers and generate higher profit
margins for the Company.
o High quality products and customer service. Success in the
replication/duplication business is dependent on repeat business. The
majority of the Company's customers are very sensitive to time pressures
and demand a supplier capable of providing large quantity orders in a
short period of time and at a consistent level of quality. The Company
believes that it has retained customer loyalty and achieved growth in new
markets due to its superior quality, distribution and reliability and its
strict adherence to protection of proprietary content.
o Experienced management team. The key members of the management team, led
by John K. Mangini, have extensive experience in all aspects of the
packaged media industry with an average of 25 years each in the industry.
The collective efforts of the management team have generated significant
innovations and efficiency improvements. The benefit of these changes has
been in the creation of a more cost effective and competitive company.
BUSINESS STRATEGY
o Focus on growing market segments. The Company intends to continue to
penetrate the growing segments of the packaged media market--CD-ROM,
spoken word audio cassette, and special interest and premium/promotional
video. Demand for CD-ROMs grew by over 56% in 1996 and by over 37% in
1997. Demand for spoken word audio cassettes increased by over 9% in 1996
and by over 8% in 1997. Demand for video cassettes of all categories
increased by 11.7% from 1994 to 1995, with the largest increases in the
premium/promotional category (25%). In addition, the Company believes
that the Digital Versatile Disc ('DVD') will represent the fastest
growing new product offering; however, the Company believes that
widespread DVD acceptance is several years away. In anticipation of a
migration to the DVD format, the Company plans to begin production of DVD
products in the coming year with the view of reaching a considerable
volume level by the year 2000.
o Expansion of customer base. With its national scope of manufacturing and
distribution, the Company is well-positioned to attract new customers by
capitalizing on its local presence. Similarly, the Company seeks to
attract larger customers with the value-added supply chain management
services it offers, as well as with its capabilities to handle customers'
needs on a national level.
o Further penetration of existing customer base. The Company intends to
further penetrate its existing customer base by cross-selling its
services to its current customers and by offering customers a 'one-stop
shop' for packaged media services.
o Expand supply chain management service offerings. Positioning the
Company as a world-class provider of value-added supply chain management
services specializing in the replication/duplication, assembly,
fulfillment, package design and procurement and distribution of software
products will allow the Company to provide 'one-stop' solutions for the
multimedia delivery of intellectual property. These offerings are
intended to enhance the Company's competitive position and provide
additional revenue streams and profit opportunities, through improved
response times and inventory turns, for both the Company and its
customers.
o Growth through acquisitions. The Company actively evaluates acquisition
candidates. Future strategic acquisitions may be undertaken to broaden
the Company's product and services offerings, expand its manufacturing
capacity and enhance the vertical integration of its supply chain.
4
<PAGE>
THE TRANSACTIONS
THE MERGER
Pursuant to a merger agreement (the 'Merger Agreement') dated May 5, 1998
between the Company and Analog Acquisition Corp. ('AAC'), an entity organized
solely to effect the Merger (as defined) on behalf of 399 Venture Partners,
Inc., a wholly owned subsidiary of Citibank, N.A. ('399'), and certain members
of the Company's management (the 'Management Shareholders'), and subject to
shareholder approval, AAC will merge with and into the Company, with the Company
as the surviving corporation (the 'Merger'). Each issued and outstanding share
(or fraction thereof) of Common Stock (the 'Common Stock') of the Company
immediately prior to the effective date of the Merger (the 'Effective Date')
will be canceled and converted into the right to receive $5.00 in cash other
than (i) 74,998 shares of Common Stock held by certain members of the Company's
management (the 'Management Shares'), which will remain outstanding and be
converted into one share of Class A Common Stock of the Company (the 'Class A
Common Stock'), representing, in the aggregate, approximately 51% of the Class A
Common Stock; (ii) 1,100,110 shares of Common Stock owned by 399, which will be
converted into 73,999 shares of Class A Common Stock, 351,000 shares of Class B
Common Stock of the Company (the 'Class B Common Stock') and 33,375.55 shares of
Series A Preferred Stock; and (iii) shares of stockholders who are entitled to,
and who have perfected, their appraisal rights. In addition, (i) each share of
common stock of AAC outstanding immediately prior to the Effective Date will be
canceled and converted into one share of Class A Common Stock and (ii) each
share of preferred stock, par value $.01 share, of AAC outstanding prior to the
Effective Date will be canceled and converted into one share of Series A
Preferred Stock of the Company (the 'Series A Preferred Stock').
As a result of the cancellation and conversion of the shares of AAC and the
conversion of 1,100,110 shares of Common Stock owned by 399 described above, 399
will own 165,000 shares of Series A Preferred Stock, 74,000 shares of Class A
Common Stock and 351,000 shares of Class B Common Stock. Members of management
will own 75,000 shares of Class A Common Stock. The Merger, the Offering, the
Credit Agreement (as defined), the Equity Contribution (as defined) and the
application of the proceeds therefrom are hereinafter collectively referred to
as the 'Transactions.' See 'Certain Transactions.'
FUNDING OF THE TRANSACTIONS
The Transactions will be funded by (i) approximately $2.7 million of
borrowings under a new $25.0 million senior revolving credit facility (the
'Credit Agreement'), (ii) $100.0 million from the Offering and (iii)
approximately $13.3 million from the issuance of capital stock (the 'Equity
Contribution').
The estimated sources and uses of cash in connection with the Transactions
assuming that the Transactions occurred on January 31, 1998 are set forth below
(dollars in thousands):
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SOURCES OF CASH:
Credit Agreement(1)......................................... $ 2,700
Proceeds from sale of Notes................................. 100,000
Proceeds from the sale of capital stock..................... 13,292
--------
Total sources............................................ $115,992
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USES OF CASH:
Purchase of equity and redemption of options(2)............. $ 64,116
Repayment of the Existing Debt(3)........................... 43,068
Working capital............................................. 2,308
Estimated transaction fees and expenses..................... 6,500
--------
Total uses............................................... $115,992
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--------
</TABLE>
(Footnotes on next page)
5
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(Footnotes from previous page)
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(1) Consists of funds drawn from the $25 million senior revolving credit
facility.
(2) Represents $62.6 million to be used toward the purchase of 12,516,054 shares
of Common Stock from the public and management at a price of $5.00 per share
and $1.5 million to settle unexercised stock options.
(3) 'Existing Debt' means the long term debt of the Company (except for
capitalized lease obligations) aggregating $32.3 million, subordinated notes
payable to the stockholders aggregating $10.1 million (of which $9.4 milion
is payable to the Company's Co-Chairmen) and a termination charge of
approximately $0.7 million.
6
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THE OFFERING
<TABLE>
<S> <C>
Issuer.................................... Allied Digital, Inc.
Securities Offered........................ $100,000,000 of % Senior Subordinated Notes due 2008.
Maturity Date............................. , 2008.
Interest Payment Dates.................... and , commencing , 1999.
Optional Redemption....................... The Notes will be redeemable at the option of the Issuer, in whole or
in part, at any time on or after , 2003, at the redemption
prices set forth herein, plus accrued and unpaid interest thereon to
the redemption date. In addition, on or prior to , 2001,
the Issuer may redeem up to 33 1/3% of the principal amount of the
Notes at a redemption price of % of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the redemption
date, with the net cash proceeds of one or more Public Equity
Offerings; provided, however, that at least $65 million in aggregate
principal amount of the Notes remains outstanding immediately after
the occurrence of each such redemption.
Ranking................................... The Notes will be unsecured obligations of the Issuer subordinated in
right of payment to all existing and future Senior Debt of the Issuer
and will rank senior in right of payment to all existing and future
Subordinated Indebtedness of the Issuer. At January 31, 1998, after
giving pro forma effect to the Transactions and the application of
the net proceeds thereof, the aggregate amount of outstanding Senior
Debt would have been $3.7 million.
Guarantees................................ The Notes will be fully and unconditionally guaranteed by ADT, HMG
Digital Technologies Corp. and HRM Holdings Corp. The Guarantees will
be general unsecured obligations of each of the Guarantors
subordinated in right of payment to all existing and future Senior
Debt of each such Guarantor and will rank senior in right of payment
to all existing and future Subordinated Indebtedness of each such
Guarantor.
Change of Control......................... Upon the occurrence of a Change of Control, the Issuer will be
required to make an offer to purchase all outstanding Notes, in whole
or in part, at a purchase price equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. See 'Description of Notes.'
Certain Covenants......................... The Indenture (as defined) under which the Notes will be issued will
contain certain covenants that, among other things, limit the ability
of the Company and its Restricted Subsidiaries (as defined) to incur
additional Indebtedness (as defined), pay dividends or make certain
other restricted payments, engage in transactions with affiliates,
incur liens and engage in certain asset sales. The Indenture will
also restrict the ability of the Company and its Restricted
Subsidiaries to consolidate or merge with, or transfer all or
substantially all of their assets to, another person. However, these
limitations are subject to a number of important qualifications and
exceptions. See 'Description of Notes--Certain Covenants.'
Use of Proceeds........................... The net proceeds from the Offering will be used to fund the purchase
of the Company's outstanding shares in connection with
</TABLE>
7
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<TABLE>
<S> <C>
the Merger, repay indebtedness, if any, of the Company under the
Existing Debt and certain other liabilities of the Company and pay
related transaction fees and expenses. Any remaining proceeds will be
used for working capital and other purposes. See 'Use of Proceeds.'
</TABLE>
RISK FACTORS
Prospective investors should carefully consider the specific matters set
forth under 'Risk Factors' as well as the other information and data included in
this Prospectus prior to making an investment in the Notes.
8
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SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data for the three years
ended July 31, 1997 have been derived from, and should be read in conjunction
with, the audited historical Consolidated Financial Statements, and related
notes thereto, of the Company. The summary historical and pro forma consolidated
financial data for the six months ended January 31, 1997 and the six months and
twelve months ended January 31, 1998 have been derived from the unaudited
consolidated financial statements of the Company and include, in the opinion of
the Company's management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the data for such periods. The
financial data for the six months and twelve months ended January 31, 1998 are
not necessarily indicative of the results to be expected for the year ending
July 31, 1998. The following table should be read in conjunction with the 'Pro
Forma Unaudited Condensed Financial Data' and 'Management's Discussion and
Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
PRO FORMA
UNAUDITED (UNAUDITED)
TWELVE SIX MONTHS ENDED YEAR YEAR YEAR
MONTHS ENDED JANUARY 31, ENDED ENDED ENDED
JANUARY 31, ------------------- JULY 31, JULY 31, JULY 31,
1998(A) 1998 1997 1997 1996 1995(B)
------------ -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net Sales..................................... $166,228 $ 88,592 $ 81,511 $159,147 $160,942 $116,564
Cost of Sales................................. 131,536 69,820 65,318 127,034 132,262 89,442
Nonrecurring Charge........................... -- -- -- -- 1,250(c) --
------------ -------- -------- -------- -------- --------
Gross Profit.................................. 34,692 18,772 16,193 32,113 27,430 27,122
Operating Expenses............................ 25,411 12,768 12,186 24,829 30,029(c) 23,815
------------ -------- -------- -------- -------- --------
Income (loss) from operations................. $ 9,281 $ 6,004 $ 4,007 $ 7,284 $ (2,599) $ 3,307
OTHER DATA:
EBITDA(d)..................................... $ 19,881 $ 11,471 $ 9,486 $ 17,897 $ 10,613 $ 12,501
Depreciation and amortization................. 10,427 5,382 5,400 10,445 11,297 8,432
Capital expenditures.......................... 5,026 4,021 1,414 2,419 9,410 7,888
Ratio of earnings to fixed charges(e)......... -- 2.05x 1.51x 1.36x -- 1.05x
PRO FORMA DATA:
Cash interest expense(f)...................... $ 10,795 -- -- -- -- --
Ratio of EBITDA to cash interest expense...... 1.8x -- -- -- -- --
BALANCE SHEET DATA:
Total assets.................................. $115,438 $109,905 $107,839 $107,880 $113,878 $125,867
Total debt.................................... 103,695 43,343 50,959 46,609 50,382 54,587
Redeemable preferred stock.................... 16,500 -- -- -- -- --
Total stockholders' equity (deficit).......... (30,472) 40,372 38,508 38,644 37,977 43,562
</TABLE>
- ------------------
(a) The pro forma unaudited financial data for the twelve-month period ended
January 31, 1998 were derived by adding the statement of earnings data for
the six months ended July 31, 1997 to the statement of earnings data for the
six months ended January 31, 1998, adjusted to reflect the effects of the
Transactions.
(b) On January 12, 1995, the Company acquired all of the outstanding capital
stock of Allied Film Laboratory, Inc. ('AFL') and HMG Digital Technologies
Corp. ('HMG') in exchange for approximately 55% and 45% of the outstanding
common shares of the Company, respectively (the 'Reorganization').
Consequently, the results of operations (i) for the year ended July 31, 1996
(and thereafter) include the consolidated operations of AFL and HMG for such
period and (ii) for the year ended July 31, 1995 include the operations of
AFL for the twelve months ended July 31, 1995 and the operations of HMG for
the period January 12, 1995 through July 31, 1995.
(Footnotes continued on next page)
9
<PAGE>
(Footnotes continued from previous page)
(c) For the year ended July 31, 1996, the results of operations were adversely
impacted by a $1.3 million nonrecurring charge associated with a customer
allowance and a restructuring charge of $3.1 million included in operating
expenses.
(d) EBITDA represents operating income and other income (expense), before
depreciation and amortization and excludes nonrecurring charges. While
EBITDA is not intended to represent cash flow from operations as defined by
generally accepted accounting principles or as a measure of liquidity, it is
included herein to provide additional information with respect to the
ability of the Company to meet future debt service, capital expenditures and
working capital requirements. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.' For the year ended July 31,
1996, EBITDA reflects, and accordingly is net of, a restructuring charge of
$3.1 million.
(e) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes and fixed charges. Fixed
charges consist of the total of (i) interest, whether expensed or
capitalized, (ii) amortization of debt expense, whether expensed or
capitalized and (iii) that portion of rental expense considered to represent
interest cost. On a pro forma basis for the twelve months ended January 31,
1998, giving effect to the Transactions as if they occurred on February 1,
1997, earnings were insufficient to cover fixed charges by $2 million. For
the year ended July 31, 1996, earnings were insufficient to cover fixed
charges by $8.1 million.
(f) Pro forma cash interest expense is comprised of interest expense excluding
non-cash amortization of debt issuance costs.
10
<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
factors as well as the other information and data included and incorporated by
reference in this Prospectus prior to making an investment in the Notes.
SUBSTANTIAL LEVERAGE
The Company will incur significant debt in connection with the
Transactions. As of January 31, 1998, after giving pro forma effect to the
Transactions, the Company would have had outstanding debt of $103.7 million. In
addition, the Company could have borrowed up to approximately $22.3 million
(subject to borrowing base limitations) under the anticipated terms of the
Credit Agreement, all of which would have constituted Senior Debt. On a pro
forma basis for the year ended July 31, 1997, giving effect to the Transactions
as if they occurred at the beginning of such annual period, earnings were
insufficient to cover fixed charges by $3.7 million. In addition, the ratio of
EBITDA to cash interest expense was 1.7 to 1 on a pro forma basis for the same
period. For the six months ended January 31, 1998, after giving pro forma effect
to the Transactions, the Company's ratio of earnings to fixed charges would have
been 1.03 to 1 and the ratio of EBITDA to cash interest expense was 2.15 to 1.
The Company's leveraged financial position poses substantial consequences to
holders of the Notes, including the risks that: (i) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of interest
on the Notes and the payment of principal and interest on other indebtedness;
(ii) the Company's leveraged position may impede its ability to obtain financing
in the future for working capital, capital expenditures and general corporate
purposes, including acquisitions; and (iii) the Company's leveraged position may
make it more vulnerable to economic downturns and may limit its ability to
withstand competitive pressures. The Company believes that, based on its current
level of operations, it will have sufficient capital to carry on its business
and will be able to meet its scheduled debt service requirements. However, there
can be no assurance that the future cash flow of the Company will be sufficient
to meet the Company's obligations and commitments. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
indebtedness and to meet its other commitments, the Company will be required to
adopt one or more alternatives, such as refinancing or restructuring its
indebtedness, selling material assets or operations or seeking to raise
additional debt or equity capital. There can be no assurance that any of these
actions could be effected on a timely basis or on satisfactory terms or that
these actions would enable the Company to continue to satisfy its capital
requirements. In addition, the terms of existing or future debt agreements,
including the Indenture and the Credit Agreement, may prohibit the Company from
adopting any of these alternatives. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources,'
'Description of Credit Agreement' and 'Description of Notes.'
SUBORDINATION OF NOTES AND THE GUARANTEES
The Notes will be contractually subordinated to all Senior Debt of the
Issuer including all obligations under the Credit Agreement. In certain
circumstances, holders of the Notes will not be entitled to receive payments,
and will have an obligation to pay over to holders of Senior Debt of the Issuer,
any payments they may receive in respect of the Notes. At January 31, 1998,
after giving pro forma effect to the Transactions, the aggregate amount of
consolidated indebtedness and other liabilities to which the Notes would have
been subordinated would have been approximately $3.7 million. The Guarantees
will be general unsecured obligations of each of the Guarantors subordinated in
right of payment to all existing and future Senior Debt of each such Guarantor,
including the Guarantors' obligations under their guarantees of the Credit
Agreement. Subject to certain limitations, the Indenture will permit the Issuer
and the Guarantors to incur additional indebtedness. See 'Summary--The
Transactions' and 'Description of Notes--Covenants--Limitation on Indebtedness.'
Substantially all of the assets of the Company will or may in the future be
pledged to secure other indebtedness of the Company. See 'Description of Credit
Agreement' and 'Description of Notes.'
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT AND THE INDENTURE
The Credit Agreement will require the Company to maintain specified
financial ratios and tests, among other obligations, including a minimum
interest coverage ratio, a minimum fixed charge coverage ratio, a maximum
leverage ratio, a minimum EBITDA requirement and maximum amounts of capital
expenditures. In addition, the Credit Agreement will restrict, among other
things, the Company's ability to incur additional
11
<PAGE>
indebtedness and make acquisitions and capital expenditures beyond a certain
level. A failure to comply with the restrictions contained in the Credit
Agreement could lead to an event of default thereunder which could result in an
acceleration of such indebtedness. Such an acceleration would constitute an
event of default under the Indenture relating to the Notes. In addition, the
Indenture restricts, among other things, the Company's ability to incur
additional indebtedness, sell assets, make certain payments and dividends or
merge or consolidate. A failure to comply with the restrictions in the Indenture
could result in an event of default under the Indenture. See 'Description of
Credit Agreement' and 'Description of Notes.'
DECLINING UNIT PRICES
In recent years, prices paid to packaged media manufacturers have declined
due to increased competition. The Company has been able to maintain
profitability by offsetting these declining prices through increases in sales
volume and improvements in manufacturing efficiencies, but may not be able to do
so in the future. It is expected that the entry of new manufacturers into the
market will continue, and there can be no assurance that the market for packaged
media will continue to grow at all or at the same rate. As a result, the prices
paid to packaged media manufacturers may continue to decline. Further, there can
be no assurance that the Company will be able to continue to reduce its costs or
increase its volume to offset this continued decline in prices. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
COMPETITION
The replication/duplication business is highly competitive. The
replication/duplication business has low barriers to entry, with virtually all
raw materials, machinery and equipment readily available on the open market. The
Company believes that the principal competitive factors in the
replication/duplication business are: price, terms of sale, quality of service,
range of pre- and post-production services, scope of graphics and packaging
capabilities, order turnaround time, large order capability, order fulfillment
capability, ability to customize small orders to customer specifications, and
certain other value-added service offerings.
In its budget planning process, the Company takes into account expected
price erosion, which occurs as competition for market share increases and
competitors lower prices to gain market share. The Company attempts to limit
margin erosion by lowering its material costs and by achieving unit volume sales
increases. While there can be no assurance that such a margin protection
strategy will be successful in the future, the Company's efforts to reduce
operating costs and its new series of marketing and sales initiatives are
intended to forestall and curtail such erosion of margins. See
'Business--Competition.'
DEPENDENCE ON KEY CUSTOMERS
For the six-month period ending January 31, 1998, the top four customers of
the Company accounted for 40% of total sales. During the six months ending
January 31, 1998, PGD and BMG each accounted for more than 10% of the Company's
net sales. The Company's revenues could be materially adversely affected if it
were to lose all or a significant portion of its major customers' business and
if such business were not replaced. In 1997, a competitor of the Company
acquired the European manufacturing facilities of PolyGram Entertainment. As a
result of such acquisition, the Company has experienced, and expects to continue
to experience, a reduction in the business it receives from PGD. While the
Company believes that it will be able to develop new business to replace any
such loss, there can be no assurance that it will be able to do so, or that the
Company will not incur significant costs associated with such business
development. See 'Business--Sales and Marketing--Significant Customers.'
DEPENDENCE ON THE ENTERTAINMENT INDUSTRY
Customers in the entertainment industry represent a large portion of the
Company's sales with respect to both audio and video products. Thus, the
Company's performance to a large degree is dependent on the financial conditions
existing from time to time in that industry and the factors that influence such
conditions. For example, sales by entertainment companies are influenced by,
among other things, the ability of record companies to identify, attract and
retain successful new talent, the ability to attract and retain established
recording artists, changing audience tastes, loss of sales from piracy and home
taping and general economic conditions, which affect levels of consumer
disposable income. The Company's sales and operating results may fluctuate
significantly as a result of these and other similar factors, all of which are
beyond its control.
12
<PAGE>
FLUCTUATING RESULTS; SEASONALITY
The Company's operating results have varied in the past, and may vary in
the future, depending on factors such as seasonal buying patterns, the timing of
new product and service introductions, increased competition, general economic
factors, and other factors. As a result, the Company believes that period to
period comparisons of its results of operations are not necessarily meaningful
and should not be relied upon as an indication of future performance. For
example, the Company's operating results have historically been significantly
influenced by variations in order size due to special orders, holiday seasons
and the varied performance inherent in the entertainment industry. See
'--Dependence on the Entertainment Industry.'
DEPENDENCE ON SUPPLIERS
The Company is dependent on suppliers for delivery of components. Although
the Company's practice is to seek competitive pricing and enhanced quality by
purchasing from a limited number of suppliers, all raw materials and components
necessary to manufacture packaged media are readily available from several
sources of supply at competitive prices. Blank audio cassettes, video cassettes,
magnetic tape and other component parts utilized by the Company in the
duplication/replication process generally are readily available in the
marketplace at prices that are generally stable. The Company purchases its
components from a variety of manufacturers, most of which are located in China,
South Korea, Mexico and the United States. The Company does not believe the loss
of any one of its current suppliers would have a material adverse effect on its
business because alternative sources of supply are generally readily available
at competitive prices. However, a significant change in the Company's ability to
obtain components at comparable prices from suppliers located in China, South
Korea, Mexico and the United States, whether through the imposition of tariffs
or other trade barriers or from any foreign or U.S. supplier for any other
reason, could have a material adverse effect on the Company. The Company does
not have long-term contracts with any such suppliers. See
'Business--Manufacturing--Raw Materials; Supplies.'
TECHNOLOGICAL CHANGE
Although the Company has historically been able to adapt its business to
changes in packaged media as a form of content distribution, there can be no
assurance that it will be able to do so in the future. Further, there can be no
assurance that, over time, packaged media will not be replaced by another form
of content distribution technology, such as on-line distribution services.
Failure by the Company to adapt to such technological changes in a timely manner
could have a material adverse effect on its operations and profitability. See
'Business-- Competition.'
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of its senior management
team. Although the Company believes it could replace key employees in an orderly
fashion should the need arise, the loss of such key personnel could have a
material adverse effect on the Company. See 'Management--Directors and Executive
Officers.'
YEAR 2000 COMPLIANCE
The Company has commenced a review of its computer systems and products in
order to assess its exposure to Year 2000 issues. The Company is currently in
the process of determining the full scope, related costs and action plan to
ensure that the Company's systems continue to meet its internal needs and those
of its customers. The Company expects to make the necessary modifications or
changes to its computer information systems to enable proper processing of
transactions relating to the Year 2000 and beyond. However, there can be no
assurance that Year 2000 costs and expenses will not have a material adverse
effect on the Company. In addition, the Company does not currently have any
information concerning the Year 2000 compliance status of its suppliers and
customers. In the event that any of the Company's significant suppliers or
customers do not successfully and timely achieve Year 2000 compliance, the
Company's business or operations could be materially adversely affected.
13
<PAGE>
CONTROLLING SHAREHOLDERS
Upon the consummation of the Transactions, it is expected that the
Management Shareholders and 399 will beneficially own substantially all of the
outstanding common stock of the Company and collectively will control the
affairs and policies of the Company. Circumstances may occur in which the
interests of these shareholders could be in conflict with the interests of the
holders of the Notes. In addition, these shareholders may have an interest in
pursuing acquisitions, divestitures or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risks to the holders of the Notes. See 'Security Ownership.'
LIMITATIONS ON CHANGE OF CONTROL
In the event of a Change of Control, the Issuer will be required to make an
offer for cash to purchase the Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the repurchase date. A
Change of Control will result in an event of default under the Credit Agreement
and may result in a default under other indebtedness of the Issuer that may be
incurred in the future. The Credit Agreement will prohibit the purchase of
outstanding Notes prior to repayment of the borrowings under the Credit
Agreement, and any requirement that the Issuer make an offer to purchase all
outstanding Notes will cause an event of default under the Credit Agreement.
Finally, there can be no assurance that the Issuer will have the financial
resources necessary to purchase the Notes upon a Change of Control. See
'Description of Notes--Covenants--Change of Control.'
RISK OF FRAUDULENT TRANSFER
Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance laws, if the Company, at
the time it issued the Notes, (i) incurred such indebtedness with intent to
hinder, delay or defraud creditors, or (ii)(a) received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and
(b)(1) was insolvent at the time of incurrence, (2) was rendered insolvent by
reason of such incurrence (and the application of the proceeds thereof), (3) was
engaged or was about to engage in a business or transaction for which the assets
remaining with the Company constituted unreasonably small capital to carry on
its businesses, or (4) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they mature, then, in each case, a court
of competent jurisdiction could void, in whole or in part, the Notes, or, in the
alternative, subordinate the Notes to existing and future indebtedness of the
Company. The measure of insolvency for purposes of the foregoing will vary
depending upon the law applied in such case. Generally, however, the Company
would be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at fair valuation or if the
present fair saleable value of its assets was less than the amount that would be
required to pay the probable liability on its existing debts, including
contingent liabilities, as they become absolute and matured. Management believes
that, for purposes of all such insolvency, bankruptcy and fraudulent transfer or
conveyance laws, the Notes are being issued without the intent to hinder, delay
or defraud creditors and for proper purposes and in good faith and that the
Company, after the issuance of the Notes and the application of the proceeds
thereof, will be solvent, will have sufficient capital for carrying on its
business and will be able to pay its debts as they mature. In addition, as a
condition to the Company's obligation to close the Merger, the Company will
receive an opinion of Houlihan, Lokey, Howard & Zubin to the effect that
consummation of the Transactions contemplated hereby will not render the Company
(i) insolvent, (ii) unable to pay its debts as they mature or (iii) left with an
unreasonably small capital. There can be no assurance, however, that a court
passing on such questions would agree with management's view.
Under applicable provisions of the U.S. Bankruptcy Code or comparable
provisions of state fraudulent transfer or conveyance laws, if any Guarantor, at
the time it issued a Guarantee, (i) issued such Guarantee with intent to hinder,
delay or defraud creditors, or (ii)(a) received less than reasonably equivalent
value or fair consideration for issuing such Guarantee and (b)(1) was insolvent
at the time of issuance, (2) was rendered insolvent by reason of such issuance,
(3) was engaged or was about to engage in a business or transaction for which
the assets remaining with such Guarantor constituted unreasonably small capital
to carry on its business, or (4) intended to incur, or believed that it would
incur, debts beyond its ability to pay such debts as they mature, then, in each
case, a court of competent jurisdiction could void, in whole or in part, such
Guarantee, or, in the alternative, subordinate such Guarantee to existing and
future indebtedness of such Guarantor. The measure of
14
<PAGE>
insolvency for purposes of the foregoing will vary depending upon the law
applied in such case. Generally, however, such Guarantor would be considered
insolvent if the sum of its debts, including contingent liabilities, was greater
than all of its assets at fair valuation or if the present fair saleable value
of its assets was less than the amount that would be required to pay the
probable liability on its existing debts, including contingent liabilities, as
they become absolute and matured. Management beleives that, for purposes of all
such insolvency, bankruptcy and fraudulent transfer or conveyance laws, the
Guarantees are being issued without the intent to hinder, delay or defraud
creditors and for proper purposes and in good faith and that each of the
Guarantors, after the issuance of its Guarantee, will be solvent, will have
sufficient capital for carrying on its business and will be able to pay its
debts as they mature. There can be no assurance, however, that a court passing
on such questions would agree with management's view.
LACK OF PUBLIC MARKET
There is currently no public market for the Notes and the Company has no
present plan to list any of the Notes on a national securities exchange or to
include any of the Notes for quotation through an interdealer quotation system.
There can be no assurance that such a market will develop or, if such a market
develops, as to the liquidity of such market. The Company has been advised by
the Underwriters that the Underwriters intend to make a market in the Notes
after consummation of the offering, as permitted by applicable laws and
regulations; however, the Underwriters are not obligated to do so and any such
market making activities may be discontinued at any time without notice. See
'Underwriting.'
15
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offering, together with other sources of funds in
connection with the Transactions will be used to (i) finance the cash
consideration to be paid to the holders of the Common Stock and holders of
options to purchase shares of the Common Stock, (ii) repay the Existing Debt,
(iii) pay fees and expenses incurred in connection with the Transactions and
(iv) provide for working capital. See 'Summary--The Transactions.'
CAPITALIZATION
The following table sets forth the unaudited consolidated cash and the
capitalization of the Company (i) at January 31, 1998 and (ii) giving pro forma
effect to the Transactions as if they had occurred on January 31, 1998. This
table should be read in conjunction with the 'Selected Historical Consolidated
Financial Data,' 'Pro Forma Unaudited Condensed Financial Data,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
the Consolidated Financial Statements and related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JANUARY 31, 1998
--------------------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt (including current maturities):
Existing debt............................................................................ $43,343 $ 995
Merger financing
Credit agreement(1)................................................................... -- 2,700
Notes................................................................................. -- 100,000
------- ---------
Total debt............................................................................... 43,343 103,695
Redeemable preferred stock................................................................. -- 16,500
Total stockholders' equity (deficit)....................................................... 40,372 (30,472 )
------- ---------
Total capitalization..................................................................... $83,715 $ 89,723
------- ---------
------- ---------
</TABLE>
- ------------------
(1) $25 million revolving credit facility.
16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial and other data for the three
fiscal years ended July 31, 1997, the seven months ended July 31, 1994, and the
two years ended December 31, 1993 have been derived from, and should be read in
conjunction with, the audited historical Consolidated Financial Statements and
related notes thereto, of the Company. The selected historical consolidated
financial and other data for the six month periods ended January 31, 1998 and
1997, and the seven months ended July 31, 1993 have been derived from the
unaudited consolidated financial statements of the Company and include, in the
opinion of the Company's management, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly such data for such periods.
The financial and other data for the six months ended January 31, 1998 are not
necessarily indicative of the results to be expected for the fiscal year ending
July 31, 1998. The following table should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED SEVEN MONTHS ENDED JULY
JANUARY 31, YEAR ENDED YEAR ENDED YEAR ENDED 31,
-------------------- JULY 31, JULY 31, JULY 31, -----------------------
1998 1997 1997 1996 1995(A) 1994 1993
-------- -------- ---------- ---------- ---------- -------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Net Sales........................ $ 88,592 $ 81,511 $159,147 $160,942 $116,564 $ 40,939 $ 54,898
Cost of Sales.................... 69,820 65,318 127,034 132,262 89,442 28,998 38,329
Nonrecurring Charge.............. -- -- -- 1,250(b) -- -- --
-------- -------- ---------- ---------- ---------- -------- -----------
Gross Profit..................... 18,772 16,193 32,113 27,430 27,122 11,941 16,569
Operating Expenses............... 12,768 12,186 24,829 30,029(b) 23,815 11,075(c) 11,986
-------- -------- ---------- ---------- ---------- -------- -----------
Income (loss) from operations.... 6,004 4,007 7,284 (2,599) 3,307 866 4,583
Interest Expense................. (2,561) (2,456) (5,025) (6,186) (3,816) (1,137) (565)
Other Income, Net................ 85 79 168 665 761 238 124
-------- -------- ---------- ---------- ---------- -------- -----------
Income (loss) before Income
Taxes.......................... 3,528 1,630 2,427 (8,120) 252 (33) 4,142
Income Tax Provision (Benefit)... 1,950 1,099 1,760 (2,535) (2,576) 85 160
-------- -------- ---------- ---------- ---------- -------- -----------
Net Income (loss)................ $ 1,578 $ 531 $ 667 $ (5,585) $ 2,828 $ (118) $ 3,982
-------- -------- ---------- ---------- ---------- -------- -----------
-------- -------- ---------- ---------- ---------- -------- -----------
BALANCE SHEET DATA:
Total Assets..................... $109,905 $107,839 $107,880 $113,878 $125,867 $ 38,604 $ 49,849
Working Capital (deficiency)..... (3,663) 3,491 3,944 (491) 9,691 13,999 9,344
Long-Term Debt and Capitalized
Lease Obligations.............. 33,291 41,194 36,548 39,386 46,170 16,898 12,547
Subordinated Notes Payable to
Stockholders................... 10,052 9,765 10,060 10,996 8,417 14,000 --
Total Liabilities................ 69,533 69,331 69,237 75,901 82,305 38,136 32,827
Total Stockholders' Eequity
(Deficit)...................... 40,372 38,508 38,644 37,977 43,562 467 17,022
OTHER DATA:
EBITDA (d)....................... $ 11,471 $ 9,486 $ 17,897 $ 10,613 $ 12,501 $ 4,389 $ 7,192
Depreciation and amortization.... 5,382 5,400 10,445 11,297 8,432 2,785 2,485
Capital expenditures............. 4,021 1,414 2,419 9,410 7,888 432 6,177
Ratio of earnings to fixed
charges(e)..................... 2.05x 1.51x 1.36x -- 1.05x -- 4.87x
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1993 1992
-------- --------
<S> <C> <C>
OPERATIONS DATA:
Net Sales........................ $ 93,191 $ 69,134
Cost of Sales.................... 63,862 46,553
Nonrecurring Charge.............. -- --
-------- --------
Gross Profit..................... 29,329 22,581
Operating Expenses............... 20,873 16,376
-------- --------
Income (loss) from operations.... 8,456 6,205
Interest Expense................. (984) (284)
Other Income, Net................ 230 537
-------- --------
Income (loss) before Income
Taxes.......................... 7,702 6,458
Income Tax Provision (Benefit)... 375 323
-------- --------
Net Income (loss)................ $ 7,327 $ 6,135
-------- --------
-------- --------
BALANCE SHEET DATA:
Total Assets..................... $ 41,096 $ 31,810
Working Capital (deficiency)..... 10,673 9,493
Long-Term Debt and Capitalized
Lease Obligations.............. 12,154 3,641
Subordinated Notes Payable to
Stockholders................... -- --
Total Liabilities................ 23,468 17,291
Total Stockholders' Eequity
(Deficit)...................... 17,628 14,519
OTHER DATA:
EBITDA (d)....................... $ 13,208 $ 10,059
Depreciation and amortization.... 4,522 3,317
Capital expenditures............. 7,191 2,708
Ratio of earnings to fixed
charges(e)..................... 5.12x 8.72x
</TABLE>
- ------------------
(a) On January 12, 1995, the Company acquired all of the outstanding common
stock of AFL and HMG in exchange for approximately 55% and 45% of the
outstanding common shares of the Company, respectively. Subsequently, on
March 10, 1995, the Company changed its fiscal year end from December 31, to
July 31. Consequently, the results of operation (i) for the year ended July
31, 1996 (and thereafter) include the consolidated operations of AFL and HMG
for such period, (ii) for the year ended July 31, 1995 include the
operations of AFL for the twelve months ended July 31, 1995 and the
operations of HMG for the period January 12, 1995 through July 31, 1995, and
(iii) for the seven months ended July 31, 1994 (and prior thereto) represent
the operations of AFL.
(b) For the year ended July 31, 1996, the results of operations were adversely
impacted by a $1.3 million nonrecurring charge associated with a customer
allowance and a restructuring charge of $3.1 million included in operating
expenses.
(Footnotes continued on next page)
17
<PAGE>
(Footnotes continued from previous page)
(c) For the seven months ended July 31, 1994, the results of operations were
adversely impacted by a $.5 million non-cash, nonrecurring charge included
in operating expenses for compensation associated with the issuance of AFL
common stock to certain employees in contemplation of the reorganization.
(d) EBITDA represents operating income and other income (expense), before
depreciation and amortization and excludes nonrecurring charges of $1.3
million and $.5 million for the year ended July 31, 1996 and for the seven
months ended July 31, 1994, respectively. While EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles or as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company to
meet future debt service, capital expenditures and working capital
requirements. See 'Management's Discussion and Analysis of Financial
Condition and Results of Operations.' For the year ended July 31, 1996,
EBITDA reflects, and accordingly is net of, a restructuring charge of $3.1
million.
(e) For the purpose of calculating the ratio of earnings to fixed charges,
earnings represent income before income taxes and fixed charges. Fixed
charges consist of the total of (i) interest, whether expensed or
capitalized, (ii) amortization of debt expense, whether expensed or
capitalized and (iii) that portion of rental expense considered to represent
interest cost. For the year ended July 31, 1996 and for the seven months
ended July 31, 1994, earnings were insufficient to cover fixed charges by
$8.1 million and $33 thousand, respectively.
18
<PAGE>
PRO FORMA UNAUDITED CONDENSED FINANCIAL DATA
The following Pro Forma Unaudited Condensed Financial Data is based upon
the historical audited consolidated financial statements of Allied for the year
ended July 31, 1997 and unaudited condensed consolidated financial statements as
of and for the six months ended January 31, 1998 included elsewhere in this
Prospectus, adjusted to give effect to (i) the issuance of $100 million
aggregate principal amount of Notes, (ii) the borrowings from the $25 million
senior revolving credit facility, (iii) the issuance of $16.5 million aggregate
stated value of redeemable preferred stock, (iv) the receipt of $167,000 from
exercise of stock options and purchase of common stock by certain members of
management, (v) the payment of (a) $62.580 million for the purchase of Company
common stock from the public and management and (b) $1.536 million for the
settlement of unexercised stock options, (vi) the repayment of existing debt
aggregating $42.348 million, plus the payment of a related termination charge
and the write-off of deferred financing costs, (vii) the payment of expenses
relating to the Transactions and (viii) the tax effects of certain of the
Transactions. The Pro Forma Unaudited Condensed Consolidated Statements of
Earnings gives effect to such Transactions as if they had occurred as of August
1, 1996 exclusive of non-recurring charges directly attributable thereto, and
the Pro Forma Unaudited Condensed Consolidated Balance Sheet gives effect to
such Transactions as if they had occurred as of January 31, 1998.
The Transactions and the related adjustments are described in the
accompanying notes. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable. The
Pro Forma Unaudited Condensed Financial Data does not purport to represent what
the Company's results of operations or financial position would actually have
been had such Transactions in fact occurred on such dates or to project the
Company's results of operations or financial position for any future period or
date. The Pro Forma Unaudited Condensed Financial Data should be read in
conjunction with the historical audited Consolidated Financial Statements, the
Unaudited Condensed Interim Consolidated Financial Statements and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations'
included elsewhere in this Prospectus.
The Pro Forma Unaudited Condensed Consolidated Statements of Earnings
exclude the following non-recurring charges which will be reflected in the
Company's statement of earnings in connection with the Transactions in the
period in which the Transactions close: (i) $1.036 million relating to the cash
settlement of unexercised stock options granted to employees, (ii) an
extraordinary charge of $1.140 million relating to a termination charge and
write-off of deferred financing costs relating to the repayment of borrowings
under the Company's existing credit agreement and (iii) related tax effects.
The Merger will be accounted for as a leveraged recapitalization as there
will be a significant continuation of stockholder ownership. Accordingly, the
Transactions will have no impact on the historical basis of the Company's assets
and liabilities.
19
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, 1997
------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
Net sales................................................................... $159,148 $159,148
Cost of Sales............................................................... 127,034 127,034
-------- ---------
Gross profit........................................................... 32,114 32,114
-------- ---------
Operating expenses:
Selling, general and adminstrative........................................ 22,246 22,246
Amortization of excess of cost over fair value of net assets acquired..... 2,584 2,584
-------- ---------
Total operating expenses............................................... 24,830 24,830
-------- ---------
Income from operations...................................................... 7,284 7,284
Other income (expense):
Interest expense.......................................................... (5,025) $ (6,157)(a) (11,182 )
Other, net................................................................ 168 168
-------- ----------- ---------
Income (loss) before income taxes........................................... 2,427 (6,157) (3,730 )
Provision (benefit) for income taxes........................................ 1,760 (2,463)(b) (703 )
-------- ----------- ---------
Net income (loss)........................................................... 667 (3,694) (3,027 )
Preferred stock dividends................................................... (1,980)(c) (1,980 )
-------- ----------- ---------
Net income (loss) available to common stockholders.......................... $ 667 $ (5,674) $ (5,007 )
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
JANUARY 31, 1998
-----------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
<S> <C> <C> <C>
Net sales.................................................................... $88,592 $88,592
Cost of sales................................................................ 69,820 69,820
------- ---------
Gross profit............................................................ 18,772 18,772
------- ---------
Operating expenses:
Selling, general and adminstrative......................................... 11,474 11,474
Amortization of excess of cost over fair value of net assets acquired...... 1,294 1,294
------- ---------
Total operating expenses................................................ 12,768 12,768
------- ---------
Income from operations....................................................... 6,004 6,004
Other income (expense):
Interest expense........................................................... (2,561) $(3,321)(a) (5,882)
Other, net................................................................. 85 85
------- ----------- ---------
Income before income taxes................................................... 3,528 (3,321) 207
Provision for income taxes................................................... 1,950 (1,328)(b) 622
------- ----------- ---------
Net income (loss)............................................................ 1,578 (1,993) (415)
Preferred stock dividends.................................................... (990)(c) (990)
------- ----------- ---------
Net income (loss) available to common stockholders........................... $ 1,578 $(2,983) $(1,405)
------- ----------- ---------
------- ----------- ---------
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Statements of Earnings.
20
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
(a) The pro forma adjustments to interest expense reflect the following:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JULY 31, 1997 JANUARY 31, 1998
------------- ----------------
<S> <C> <C>
Elimination of historical interest expense for amounts of existing
debt being retired as a result of the Transactions................ $(4,918) $ (2,217)
Interest expense on Notes, at an assumed rate of 10.75%
per annum......................................................... 10,750 5,375
Amortization of the estimated debt issuance costs related to
the Offering...................................................... 325 163
------------- --------
$ 6,157 $ 3,321
------------- --------
------------- --------
</TABLE>
(b) To reflect the estimated income tax benefit of the pro forma
adjustments to interest expense.
(c) Represents dividends on the Redeemable Preferred Stock at 12% per
annum.
21
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, 1998
------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................................... $ 2,566 $ 96,750(a) $ 4,874
2,700(b)
13,125(c)
167(d)
(65,830)(e)
(1,536)(f)
(43,068)(g)
Accounts receivable....................................................... 26,012 26,012
Inventories............................................................... 5,133 5,133
Prepaid expenses.......................................................... 1,105 395(h) 1,500
Deferred income taxes..................................................... 2,207 2,207
-------- ----------- ---------
Total current assets........................................................ 37,023 2,703 39,726
Property and equipment, net................................................. 27,218 27,218
Other assets:
Excess of cost over fair value of net assets acquired..................... 42,657 42,657
Deferred charges and other................................................ 3,007 3,250(a) 5,837
(420)(g)
-------- ----------- ---------
Total assets................................................................ $109,905 $ 5,533 $115,438
-------- ----------- ---------
-------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt and capitalized lease obligations.... $ 12,727 $ 2,700(b) $ 3,024
(12,403)(g)
Current maturities of subordinated notes payable to stockholders.......... 2,881 (2,881)(g) 0
Accounts payable.......................................................... 17,820 17,820
Accrued liabilities....................................................... 6,783 6,783
Income taxes payable...................................................... 475 (475)(h) 0
-------- ----------- ---------
Total current liabilities................................................... 40,686 (13,059) 27,627
Long-term debt and capitalized lease........................................ 20,564 100,000(a) 100,671
Obligations, less current maturities...................................... (19,893)(g)
Subordinated notes payable to stockholders, less current maturities......... 7,171 (7,171)(g) 0
Deferred income taxes....................................................... 1,112 1,112
Redeemable preferred stock.................................................. 0 16,500(c) 16,500
Stockholders' equity (deficit):
Preferred stock........................................................... 0 0
Common stock.............................................................. 136 (7)(c) 5
1(d)
(125)(e)
Additional paid-in capital.................................................. 44,892 (3,368)(c) 0
166(d)
(41,690)(e)
Accumulated deficit......................................................... (4,656) (24,015)(e) (30,477 )
(1,536)(f)
(1,140)(g)
870(h)
-------- ----------- ---------
Total stockholders' equity (deficit)........................................ 40,372 (70,844) (30,472 )
-------- ----------- ---------
Total liabilities and stockholders' equity (deficit)........................ $109,905 $ 5,533 $115,438
-------- ----------- ---------
-------- ----------- ---------
</TABLE>
See Notes to Pro Forma Unaudited Condensed Consolidated Balance Sheet.
22
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO PRO FORMA UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
(a) Reflects the issuance of $100,000 aggregate principal amount of Notes and payment of estimated debt
issuance costs of $3,250.
(b) Reflects borrowings of $2,700 under a new $25,000 senior revolving credit facility.
(c) Reflects the issuance of 165,000 shares of redeemable preferred stock ($100 stated value per-share)
consisting of 131,244.45 shares issued for cash and 33,755.55 shares issued in exchange for 675,111 shares
(from a total of 1,100,110 shares) of Company Common Stock owned by 399 having a value of $5.00 per-share.
(d) Reflects the exercise of stock options and the purchase of common stock by certain members of management
representing the Management Shares.
(e) Reflects the purchase of 12,516,054 shares of Company Common Stock from the public and management at a
price of $5.00 per share aggregating approximately $62,580 and the payment of related transaction costs of
$3,250.
(f) Reflects the cash payment made to settle unexercised stock options of which $1,036 pertain to options
granted to employees which will be charged to expense in the Company's statement of earnings.
(g) Reflects the payment of existing long term debt (except for capitalized lease obligations) and subordinated
notes payable to stockholders and termination charge of $720, and the write-off of related deferred charges
of $420. An extraordinary pre-tax charge of $1,140 to the Company's statement of earnings will be
recognized relating to the termination charge and write-off of the deferred charges resulting from the
early extinguishment of debt.
(h) Reflects the income tax benefit resulting from charges referred to in items (f) and (g) above.
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Effective January 12, 1995, the Company acquired all of the outstanding
common stock of AFL and HMG in exchange for approximately 55% and 45% of the
outstanding common shares of the Company, respectively. Subsequently, on March
10, 1995, the Company changed its fiscal year end from December 31 to July 31.
Consequently, the results of operations (i) for the twelve months ended July 31,
1996 (and thereafter) include the consolidated operations of AFL and HMG for
such period, and (ii) for the twelve month period ended July 31, 1995 include
the earnings of AFL for the twelve months ended July 31, 1995 and the earnings
of HMG for the period January 12, 1995 through July 31, 1995. Therefore, the
results of operations for the twelve month period ended July 31, 1995 are not
necessarily indicative of the performance of AFL and HMG expected for a full
(twelve month) year.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1998, COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
Net sales for the six-month period ended January 31, 1998 were $88.6
million, an increase of $7.1 million or 9% as compared to the six-month period
ended January 31, 1997. There were several factors contributing to this
increase. As the Company continues to penetrate its existing market, there also
continue to be additions of new customers to its expanding customer base. The
Company has entered into an exclusive CD manufacturing agreement with a new
customer and is currently experiencing favorable growth trends in sales to the
Company's audio CD and CD-ROM customers. This favorable trend was partially
offset by a decline in sales to the Company's audio cassette customers in the
second quarter of fiscal 1998.
Gross profit for the six-month period ended January 31, 1998 increased $2.6
million to $18.8 million, or 21% of net sales, from $16.2 million, or 20% of net
sales, for the six-month period ended January 31, 1997. Although the gross
profit dollars increased due to increased sales, the unpredictably strong demand
for audio cassettes and the demand for CDs exceeded the Company's internal
capacity in the first quarter of fiscal 1998, which caused the Company to source
additional capacity to outside contractors at lower margins. Despite the impact
of this outsourcing, the gross profit percentage increased slightly primarily
due to the favorable (declining) trend in material costs as well as fixed costs
being spread over higher production volumes.
Operating expenses for the six-month period ended January 31, 1998 were
$12.8 million or 14% of net sales compared to $12.2 million or 15% of net sales
for the six-month period ended January 31, 1997. The $0.6 million increase was
primarily the result of additional costs incurred for professional fees, bad
debts and sales commissions and salaries.
Income from operations of $6.0 million for the six-month period ended
January 31, 1998 compares to $4.0 million for the six-month period ended January
31, 1997.
Non-operating expenses increased to $2.5 million for the six-month period
ended January 31, 1998 from $2.4 million for the six-month period ended January
31, 1997.
For the six-month period ended January 31, 1998, Allied Digital realized
income before income taxes of $3.5 million compared to income before income
taxes of $1.6 million for the six-month period ended January 31, 1997 for the
reasons noted above.
A provision for federal, state and local income taxes of $2.0 million was
recognized for the six months ended January 31, 1998, compared to a provision of
$1.1 million for the six months ended January 31, 1997.
After recognition of applicable income taxes, the Company recognized net
income for the six months ended January 31, 1998 of $1.6 million, compared to
income of $0.5 million for the six months ended January 31, 1997.
24
<PAGE>
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Net sales for the twelve-month period ended July 31, 1997 ('Fiscal 1997')
were $159.1 million, a decrease of $1.8 million or 1% as compared to the twelve-
month period ended July 31, 1996 ('Fiscal 1996'). Such decrease was attributable
to a large promotional video sale to one customer which was recognized during
Fiscal 1996, partially offset by sales to new customers in Fiscal 1997.
Gross profit for Fiscal 1997 increased $4.7 million to $32.1 million or 20%
of net sales, from $27.4 million, or 17% of net sales for Fiscal 1996. The
increase in gross margin dollars and percentage, despite decreased sales, was
primarily attributable to the favorable (declining) trend in material costs, a
reduction in the direct labor force, and a $1.3 million non-recurring charge in
Fiscal 1996 resulting from a sales contract signing allowance with a large
customer and increased costs in Fiscal 1996 associated with the start-up efforts
in preparing to process orders for a large customer in the Company's Tennessee
manufacturing plant.
Operating expenses for Fiscal 1997 were $24.8 million, or 16% of net sales,
compared to $30.0 million, or 19% of net sales for Fiscal 1996. The $5.2 million
decrease was primarily a result of a $3.1 million restructuring charge recorded
in Fiscal 1996 in connection with the Company's June 1996 plan to streamline and
reduce resources utilized in the business, $1.3 million decrease in
administrative costs realized in Fiscal 1997 as a result of this restructuring
and $0.5 million of capitalized employee work force expenditures associated with
the implementation phase of a computer software system developed for internal
use.
The Company's interest expense decreased to $5.0 million for Fiscal 1997
from $6.2 million for Fiscal 1996. This decrease was primarily a result of a
reduction in interest expense attributable to a rate reduction and a reduction
in the principal amount of interest bearing debt.
Other income net of other expenses for Fiscal 1997 was $0.2 million
compared to $0.7 million in Fiscal 1996. The decrease of $0.5 million was
primarily attributable to a reduction in finance charges collected from the
Company's customers on past due invoices and a reduction in scrap material
sales.
For Fiscal 1997, the Company reported a pre-tax profit of $2.4 million,
compared to a pre-tax loss of $8.1 million for Fiscal 1996. The increase in
income of $10.5 million occurred for the reasons noted above.
A provision for income taxes of $1.8 million was recognized for Fiscal 1997
compared to a net tax credit of $2.5 million for Fiscal 1996. The Company's
effective tax rate of 72.5% for Fiscal 1997 is attributable to the
non-deductibility for tax purposes of a significant portion of the amortization
of excess of costs over fair value of net assets acquired.
After recognition of applicable income taxes, the Company reported net
income in Fiscal 1997 of $0.7 million as compared to a net loss of $5.6 million
in Fiscal 1996 for the reasons noted above.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Net sales for Fiscal 1996 were $160.9 million, an increase of $44.3 million
compared to the twelve-month period ended July 31, 1995 ('Fiscal 1995'). Such
increase was attributable primarily to the full year inclusion of HMG's
operations in the Fiscal 1996 results ($36.2 million) and increased sales volume
in Fiscal 1996 resulting primarily from the commencement of videocassette
duplication and order fulfillment services under a five-year sales contract
entered into with a customer in June 1995.
Gross profit for Fiscal 1996 increased $0.3 million to $27.4 million, or
17% of net sales, from $27.1 million, or 23% of net sales for Fiscal 1995. The
increase in gross margin dollars was primarily due to the full year inclusion of
HMG margin of $12.0 million in the Fiscal 1996 results as compared to a margin
contribution in Fiscal 1995 by HMG of $8.7 million for the period January 12,
1995 through July 31, 1995. This net $3.3 million gross margin increase was
partially offset by a $1.3 million non-recurring charge in Fiscal 1996 resulting
from a sales contract signing allowance with a large customer. The gross margin
was further reduced by the start-up efforts commencing in June 1995 in preparing
to process orders for this large customer in the Company's Tennessee
manufacturing plant. Moreover, declining unit prices to customers due to
continuing price pressures and a change in the Company's sales mix which
includes the adverse impact on average margins caused by a production and
fulfillment sales contract with a large customer further contributed to the 6%
gross margin decline in Fiscal 1996.
25
<PAGE>
Operating expenses for Fiscal 1996 were $30.0 million, or 18% of net sales,
compared to $23.8 million, or 20% of net sales for Fiscal 1995. Of the $6.2
million increase, $3.1 million resulted from a current year restructuring charge
in connection with the Company's June 1996 plan to streamline and reduce
resources utilized in the business and the full year inclusion of HMG operations
in Fiscal 1996 resulting in an incremental increase of approximately $2.3
million in operating expenses over Fiscal 1995 of which $1.0 million results
from the full year inclusion of the amortization of the excess cost over fair
value of the net assets acquired associated with the Reorganization. Operating
expenses for Fiscal 1996 also included a $0.4 million increase in bad debt
expense over the prior year.
The Company's non-operating expenses increased to $5.5 million for Fiscal
1996 from $3.1 million for Fiscal 1995. This $2.4 million increase was due to
increased interest expense primarily associated with the full year inclusion of
HMG in Fiscal 1996 results together with increased average borrowings for the
Company related to the additional debt required to finance capital expenditures.
For Fiscal 1996, the Company reported a pre-tax loss of $8.1 million,
compared to pre-tax earnings of $0.3 million for Fiscal 1995. The decrease in
income of $8.4 million occurred for the reasons noted above.
A net credit for federal, state and local income taxes of $2.5 million was
recognized for Fiscal 1996 compared to a net credit for federal, state and local
income taxes of $2.6 million for Fiscal 1995. This $2.5 million net credit
relates primarily to a net operating loss, restructuring costs and a
non-recurring charge which will be deductible in future periods, as well as
state investment tax credits realized during this period. The effective tax rate
was approximately 31%. Non deductible expenses related to the amortization of
excess of cost over fair value of net assets acquired arising from the
Reorganization were offset in part during the period by state income tax
benefits and investment tax credits resulting from purchase of equipment in the
State of New York. The effective tax rate is expected to be higher in future
periods due to the non-deductible amortization of costs in excess of net assets
acquired, net of non-recurring benefits from investment tax credits.
After recognition of applicable income taxes, the Company reported a net
loss in Fiscal 1996 of $5.6 million as compared to net income of $2.8 million in
Fiscal 1995 for the reasons noted above.
LIQUIDITY AND CAPITAL RESOURCES
The Company will incur a significant amount of indebtedness in connection
with the Transactions. As of January 31, 1998, after giving pro forma effect to
the Transactions, the Company would have had approximately $103.7 million of
consolidated debt, including $100.0 million of indebtedness pursuant to the
Notes. The Credit Agreement will provide for a $25.0 million senior revolving
credit facility. The Company expects to draw approximately $2.7 million under
the Credit Agreement on the Effective Date.
The Company historically has met its working capital needs and capital
expenditure requirements primarily through a combination of operating cash flow
and availability under the Existing Debt. Following the Transactions, the
Company anticipates satisfying its debt service requirements and meeting its
working capital and capital expenditure needs through a combination of operating
cash flow and availability under the Credit Agreement. See 'Summary--The
Transactions.'
The Company's ability to make scheduled payments of principal of, or to pay
the interest, if any, on, or to refinance, its indebtedness (including the
Notes), or to fund planned capital expenditures and finance acquisitions will
depend on its future performance, which to a certain extent is subject to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond its control. Based on the current and anticipated level
of operations, management believes that cash flow from operations and available
cash, together will available borrowings under the Credit Agreement, will be
adequate to meet the Company's anticipated future requirements for working
capital, budgeted capital expenditures, acquisition financing and scheduled
payments of principal and interest on its indebtedness, including the Notes, for
the foreseeable future. The Company, however, may need to refinance all or a
portion of the principal of the Notes on or prior to maturity. There can be no
assurance that the Company's business will generate sufficient cash flow from
operations or that future borrowings will be available under the Credit
Agreement in an amount sufficient to enable the Company to service its
indebtedness, including the Notes, or make anticipated capital expenditures and
fund future
26
<PAGE>
acquisitions. In addition, there can be no assurance that the Company will be
able to effect any refinancing on commercially reasonable terms or at all.
Cash Requirements. The Company currently expects that capital expenditures
will be divided primarily between maintenance capital expenditures and capital
projects. Maintenance capital expenditures include those required to maintain
production performance, while capital projects relate primarily to extending the
life of existing equipment, increasing capacity, and decreasing production
costs. The Company incurs approximately $1.5 million per year in cost of sales
for maintenance and repairs.
The Company has not paid any dividends on the Company's Common Stock since
its inception. The payment of dividends, if any, will be contingent upon the
Company's revenues and earnings, if any, capital requirements and general
financial condition. It is the current policy of the Board of the Company, in
view of the Company's contemplated financial requirements, to retain all
earnings, if any, for use in the Company's business operation.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended July 31, 1997 or for the
six-month period ending January 31, 1998.
27
<PAGE>
BUSINESS
GENERAL
The Company is a leading independent multimedia manufacturer in the United
States. The Company replicates/duplicates audio cassettes, video cassettes, and
CD and CD-ROM products for the entertainment, publishing and special interest
markets. In addition, the Company provides value-added supply chain management
services such as distribution, telephone order fulfillment, packaging design and
outsourcing, electronic order-taking and all direct-mail services. Since its
founding in 1947, the Company (including its predecessors) has consistently and
successfully managed the transition from one media to another by adapting its
product line to match changing market trends. As the market has moved from vinyl
records and audio cassettes to CDs and CD-ROMs and from film to video, the
Company has successfully aligned its production and selling strategy around such
trends. The Company's strategy is to provide its customers with a wide variety
of turnkey solutions and options for delivering multimedia products to market.
The Company targets the fastest growing niche markets, including CD-ROM, spoken
word audio cassette, and special interest and premium/promotional use video. The
sell-through video market, which includes special interest and
premium/promotional use video, has grown at a rate in excess of 10% for each of
the past six years and the market for interactive digital media, such as CD-ROM,
has grown at a rate in excess of 20% for each of the past five years.
The Company sells its products to approximately 3,000 customers in a wide
range of industries including entertainment/publishing, special interest and
promotional video, and CD-ROM software. The Company's entertainment/publishing
customers include: BMG, PGD, Simon & Schuster, Sony Music Entertainment and
Columbia House. The Company's special interest and promotional customers include
Anchor Bay, RJR Nabisco and Glaxo Wellcome. The Company's CD-ROM software
customers include Sofsource and Video Professor.
The Company has manufacturing and service facilities across the United
States and has a national distribution facility based in Tennessee, allowing it
to provide personalized local service as well as high volume mass production
capabilities throughout the continental United States. The Company markets its
products and services nationally through its internal sales force of
approximately 55 sales and marketing professionals. As the market for multimedia
applications continues to grow and the industry continues to undergo significant
consolidation, the Company believes it is well positioned to take advantage of
such opportunities. For the twelve months ended January 31, 1998, the Company
had total revenues of $159.1 million and EBITDA of $17.9 million.
COMPETITIVE STRENGTHS
The combination of the Company's products, customers and proven track
record distinguishes it as a leading manufacturer and distributor of packaged
media. The Company attributes this success and its continued opportunities for
growth and profitability to the following competitive strengths:
o Leading independent multimedia duplicator/replicator. The Company is the
leading independent multimedia duplicator/replicator in the United States
with both national distribution and manufacturing capabilities in all
audio cassette, video cassette and CD/CD-ROM configurations. The
Company's long-standing geographically distributed presence has allowed
it to provide personalized local service as well as high volume mass
production capabilities.
o Multimedia product offerings. The Company offers its services across all
three of the major multimedia product formats (i.e., audio cassettes,
video cassettes and CD/CD-ROM). The Company believes that offering a
complete line of multimedia products gives the Company a competitive
advantage by providing its customers with 'one-stop shopping' and
affording the Company the opportunity to cross-sell its product offerings
to customers of a particular format.
o Value-added supply chain services. The Company's value-added supply
chain management services give it a competitive advantage by providing a
'one-stop' solution that differentiates the Company from its competitors
and by fulfilling key customer needs such as distribution, telephone
order fulfillment, packaging design and outsourcing, electronic order
taking, and direct mail services. These services
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enhance the profitability of the Company's customers and generate higher
profit margins for the Company.
o High quality products and customer service. Success in the
replication/duplication business is dependent on repeat business. The
majority of the Company's customers are very sensitive to time pressures
and demand a supplier capable of providing large quantity orders in a
short period of time and at a consistent level of quality. The Company
believes that it has retained customer loyalty and achieved growth in new
markets due to its superior quality, distribution and reliability and its
strict adherence to protection of proprietary content.
o Experienced management team. The key members of the management team, led
by John K. Mangini, have extensive experience in all aspects of the
packaged media industry with an average of 25 years each in the industry.
The collective efforts of the management team have generated significant
innovations and efficiency improvements. The benefit of these changes has
been in the creation of a more cost effective and competitive company.
BUSINESS STRATEGY
o Focus on growing market segments. The Company intends to continue to
penetrate the growing segments of the packaged media market--CD-ROM,
spoken word audio cassette, and special interest and premium/promotional
video. Demand for CD-ROMs grew by over 56% in 1996 and by over 37% in
1997. Demand for spoken word audio cassettes increased by over 9% in 1996
and by over 8%. Demand for
video cassettes of all categories increased by 11.7% from 1994 to 1995,
with the largest increases in the premium/promotional category (25%). In
addition, the Company believes that DVD will represent the fastest
growing new product offering; however, the Company believes that
widespread DVD acceptance is several years away. In anticipation of a
migration to the DVD format, the Company plans to begin production of DVD
products in the coming year with the view of reaching a considerable
volume level by the year 2000.
o Expansion of customer base. With its national scope of manufacturing and
distribution, the Company is well-positioned to attract new customers by
capitalizing on its local presence. Similarly, the Company seeks to
attract larger customers with the value-added supply chain management
services it offers, as well as with its capabilities to handle customers'
needs on a national level.
o Further penetration of existing customer base. The Company intends to
further penetrate its existing customer base by cross-selling its
services to its current customers and by offering customers a 'one-stop
shop' for packaged media services.
o Expand supply chain management service offerings. Positioning the
Company as a world-class provider of value-added supply chain management
services specializing in the replication/duplication, assembly,
fulfillment, package design and procurement and distribution of software
products will allow the Company to provide 'one-stop' solutions for the
multimedia delivery of intellectual property. These offerings are
intended to enhance the Company's competitive position and provide
additional revenue streams and profit opportunities, through improved
response times and inventory turns, for both the Company and its
customers.
o Growth through acquisitions. The Company actively evaluates acquisition
candidates. Future strategic acquisitions may be undertaken to broaden
the Company's product and services offerings, expand its manufacturing
capacity and enhance the vertical integration of its supply chain.
CORPORATE ORGANIZATION
The corporate structure of ADT consists of its wholly-owned subsidiary, HMG
Digital Technologies Corp. ('HMG'), HMG's wholly-owned subsidiary, HRM Holdings
Corp. ('Holdings') and Holdings' wholly-owned subsidiary, the Issuer (formerly
known as Hauppauge Record Manufacturing, Ltd.). ADT is a holding company; all
assets, liabilities and operating activities are related to its wholly-owned
subsidiaries.
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MULTIMEDIA SOFTWARE INDUSTRY
General. The multimedia software industry is fragmented and seasonal.
Although the types and sizes of the businesses in the industry vary greatly, the
industry is generally categorized into specific sub-markets, including
theatrical (i.e., primarily movies), prerecorded music, spoken word, foreign
language, corporate communications, premium promotional, religious, educational,
instructional 'How To' and special interest.
Demand for Primary Products and Services.
Compact Discs--Audio. Consumer demand for audio compact discs ('CDs') has
been increasing steadily since their introduction to the marketplace in the
mid-1980's. Industry analysts estimate that the current U.S. installed CD-audio
player base is approximately 75%,, up from approximately 71% last year. Based on
information supplied by the Recording Industry Association of America (the
'RIAA'), total shipments in the United States net of returns ('Shipments') of
CDs remained flat from 1996 to 1997 at approximately 821 million units.
CD-ROM. CD-ROM drives were introduced to the marketplace in 1991. Industry
analysts estimate that in 1993, the year that CDs surpassed audio cassettes in
unit volume, household penetration of CD-ROM drives was approximately 2.5
million, or 8% of the 29 million home computers in the United States. By the end
of 1997, industry experts expect the number of CD-ROM drives to grow to 71
million.
Various industry sources estimate that Shipments of CD-ROM software
products were approximately 461 million units in 1997, up from approximately 338
million units in 1996. These products were concentrated in three major
categories: educational, entertainment and games.
Audio cassettes. Audio cassettes were the music market's most popular
audio medium until 1993 when they were surpassed in unit volume by CDs. Industry
analysts predict that because of the high existing penetration of the audio
cassette player in U.S. households and automobiles. Shipments of audio cassettes
in 1998 will remain stable as compared with 1997 with only a mild decline over
the next several years, despite the increasing demand for CDs. According to the
RIAA, aggregate Shipments of pre-recorded music cassettes declined by 23% in
1997 versus 1996. This decline was due in large part to the transition to the
CD-audio configuration as well as an overall slowing of growth in the
pre-recorded music industry. This decline has been offset in part by the
dramatic growth in the spoken word audio cassette business.
Video cassettes. Veronis, Suhler and Associates, a market analyst firm
specializing in media ('VS&A'), estimates that over 83% of households in the
U.S. own at least one videocassette recorder ('VCR'), with many households
owning multiple VCRs. According to VS&A and the RIAA, although theatrical video
software represents over 40% of video software sales, there is significant
growth being demonstrated in the corporate communications, premium/promotional
and special interest sub-markets.
There are two primary videocassette formats: standard play and extended
play. Standard play is used for virtually all movies, music videos and certain
other specialty applications. Extended play is used for many applications in
non-theatrical and non-music sub-markets where the superior playback quality of
standard play is not required. In these non-critical applications, the extended
play format is desirable because it uses one third of the tape required for
standard play and can utilize high speed duplication technology. These
characteristics make extended play less costly to produce than standard play.
SALES AND MARKETING
The Company markets its products and services nationally through the use of
its own internal staff of approximately 55 sales and marketing employees located
throughout the United States in key markets. In March 1997, the Company opened a
national sales office in Los Angeles, California to coordinate national sales
efforts in the western region of the United States. The Company coordinates its
national sales and marketing efforts from its office in New York and also
operates sales facilities in Landover (MD), Orlando, Elk Grove (IL), Detroit,
Dallas, Houston, Nashville, San Francisco, Los Angeles, Indianapolis and Denver.
Remote sales coverage exists in Philadelphia, Atlanta, Miami, Austin, Seattle,
Boston, Charlotte, Cooley (OH) and Tampa.
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The Company's manufacturing facilities are geographically distributed
throughout the United States. See '--Manufacturing.' The Company believes that
this geographic distribution of manufacturing facilities enhances its sales and
marketing efforts by giving the Company a regional and local presence, which
facilitates direct contact with customers.
Due to the highly competitive nature of the Company's core
duplication/replication business, the Company has developed additional
'value-added' services in an effort to gain a competitive advantage over its
competitors. These services include graphic design and special packaging,
component security and inventory management, retail order distribution and
direct-to-customer fulfillment.
In addition to the core duplication/replication and value-added services
described above, the Company also offers motion picture film processing,
film-to-tape transfer, video post-production services and recordable laser video
disc services.
The following sets forth the Company's market share and sales performance
for each of its primary product categories:
CD and CD-ROM. The Company replicates CDs and CD-ROMs (collectively, 'CD
Products') for which its most significant customers are the domestic music
recording companies. For Fiscal 1997, the Company produced approximately
41,800,000 units of CD Products which generated revenues of approximately
$31,905,000, or approximately 20.0% of the Company's sales revenues. These units
consisted of approximately 10,500,000 CD-ROM units and approximately 31,300,000
CD units, which generated revenues of approximately $7,240,000 and $24,665,000,
respectively. Based upon these results and externally generated market data, the
Company estimates that, on a consolidated basis, it currently holds a 3% market
share of all domestic production of CDs. The Company believes that there is
significant growth opportunity in CD Products, especially as CD-ROM drive
penetration into U.S. households increases and new applications such as DVD, a
new high-density compact disc format which allows for significantly greater data
storage than existing disc formats, are introduced to the marketplace.
Audio cassettes. The Company duplicates audio cassettes, for which its
most significant customers are the domestic music recording companies. In Fiscal
1997, the Company produced approximately 56,000,000 audio cassette units
(consisting of approximately 43,000,000 music audio cassette units and
13,000,000 spoken word audio cassette units), which generated revenues of
approximately $27,520,000, or approximately 17.3% of the Company's aggregate
revenues. Based on internal sales statistics and externally generated market
data, the Company believes it has a music audio cassette market share of
approximately 12%, the largest of any independent replicator. The Company
believes that despite the long-term trend toward replacing audio cassettes with
CDs, there remain opportunities for growth in this market, especially in the
non-music and special interest sectors.
In Fiscal 1997, the Company's spoken word audio cassette production
included books-on-tape and corporate communications, as well as products for the
foreign language and religious submarkets. The Company's most significant spoken
word audio cassette customers in Fiscal 1997 were domestic publishing companies.
Reliable external market data is not readily available for the spoken word
audio cassette submarket. Consequently, the Company's market share is difficult
to estimate. The Company believes there is significant growth opportunity in
spoken word audio cassettes because of the deep penetration of the audio
cassette player and the relatively low cost of duplicating audio cassettes.
Video cassettes. Based on a combination of industry data and data
generated by its own management, the Company believes it is one of the two
largest duplicators of music videos in the United States, with an estimated
current market share of approximately 25%, and is the largest independent
duplicator of video cassettes for non-theatrical, non-music video applications,
which include corporate communications, premium/promotional, educational,
instructional 'How-To,' special interest and religious applications. In total,
the Company believes its current share of the overall videocassette duplication
market in the United States is approximately 7%, based upon domestic sales of
video cassettes by the Company in Fiscal 1997 of approximately 56 million units
compared to approximately 800 million total domestic unit sales reported by the
entire industry for calendar 1996. In Fiscal 1997, the Company had total sales
of video cassettes of approximately $97,080,000, which represented approximately
61.0% of the Company's total revenues. The Company believes that there is
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significant growth opportunity in video cassettes because of the deep
penetration of the VCR into U.S. households and the extensive use of video
cassettes for entertainment and information software.
Other Services. Motion picture film processing, film-to-tape transfer,
video pre- and post-production and recordable laser disc services represented
approximately 1.7% of the Company's sales revenues during Fiscal 1997.
Marketing Strategy. The Company has allocated sufficient monies in the
coming year to support an aggressive and diversified series of marketing
initiatives designed to broaden and add depth to the Company's customer base.
The Company's sales and marketing plan consists of targeting the counter
seasonal consumption patterns typical of premium/promotional videos and spoken
word audio cassettes as well as increasing its penetration into the special
interest video and CD-ROM markets.
The Company has installed new sophisticated sales lead management software,
which has significantly improved tracking and management of sales leads and has
made possible the distribution of such leads for prompt review and follow-up to
the appropriate sales facility.
Significant Customers. For the six-month period ending January 31, 1998,
the top four customers accounted for 40% of total sales. The Company has more
than 3,000 accounts in its current customer base. During the six months ending
January 31, 1998, PGD and BMG each accounted for more than 10% of the Company's
net sales. See 'Risk Factors--Dependence on Key Customers.'
Most of the Company's customers operate without contractual obligations
except for commitments to purchase a certain percentage of their needs from the
Company. The commitments typically last one year or less. However, there are no
adverse consequences to customers with this type of commitment who do not
ultimately place orders with the Company or whose orders do not reach the
committed percentage.
In June 1995, the Company entered into a five-year agreement with Anchor
Bay to provide videocassette duplication and order fulfillment services. Under
this agreement, as modified in September 1997, the Company is Anchor Bay's
exclusive videocassette duplicator.
In September 1997, the Company entered into a three-year agreement with
Sofsource to provide CD replication and order fulfillment services. Under this
agreement, the Company is Sofsource's exclusive duplicator.
Seasonality. Although demand for the Company's products exists throughout
the year, there is an increase in demand from August through November due to the
extra requirements of customers for the holiday selling season, particularly
sales of theatrical video cassettes and pre-recorded musical CDs and audio
cassettes. See 'Risk Factors--Fluctuating Results; Seasonality.'
Backlog. As of July 31, 1997 and 1996, the Company had open orders on a
consolidated basis of approximately $3.3 million and $1.9 million, respectively.
As of April 30, 1998, the Company had open orders on a consolidated basis of
approximately $4.1 million. The Company expects that the open orders as of April
30, 1998 will be filled within a 60-day period.
Typically, the Company's customers demand turnaround times (the time from
which a duplicating/replicating order is received until that order is shipped)
of seven days or less. Because of this characteristic of the industry, the
Company does not believe that the size of the backlog at any given time in and
of itself is an effective indication of its ongoing revenues going forward.
MANUFACTURING
General. The Company's manufacturing facilities are geographically
distributed throughout the United States so that high volume manufacturing can
be accomplished in four facilities: Hauppauge (NY) (video cassettes, audio
cassettes and CDs), Clinton (TN) (video cassettes), Elk Grove (IL) (video
cassettes) and Denver (video cassettes). The Company has seven other facilities
for smaller volume video manufacturing: Landover (MD), Orlando, Detroit, Los
Angeles and San Francisco, as well as Dallas and Houston where film, in addition
to video, is duplicated.
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CD Products. The Company's production of CD Products begins with
pre-mastering and mastering in controlled 'clean room' environments that are
designed to eliminate airborne particles from the manufacturing process. Using
lasers and computer-based photo resist technology, the Company creates exact
digital replicas of the customer's original disc. These glass replicas, or
'masters,' are used in the replication process to manufacture duplicates through
an injection molding process using high grade, optical quality polycarbonate.
The polycarbonate is pressed against a metal stamper to create a replica of the
CD master at a rate of approximately one every four seconds. The clear
polycarbonate disc containing all of the data is then covered with a metallic
coating to provide for reflection of the reading laser beam in the CD player. A
thin layer of lacquer is applied over the metal to protect it and to serve as a
base for printing on the disc. The finished CD Products are then checked to
ensure they conform to strict standards established by the Company and the
industry. The finished CD Products are then released to the packaging department
where they are inserted into sleeves or boxes and processed through high speed
shrink-wrapping machines for distribution to the Company's customers.
As a result of the recent expansion of the Company's Hauppauge, New York
facility and the installation at such facility of production and multi-media
packaging equipment, the Company has increased its maximum annual capacity of CD
Products to approximately 85 million units per year.
Audio cassettes. The manufacturing process for audio cassettes utilizes
machines that duplicate a tape 80 times faster than normal listening speed.
Master transports are used to download master recordings through the use of
electronic signals to duplicating machines, which allow multiple copies of the
same recording to be duplicated simultaneously. At various points in the
manufacturing process, the tape goes through both a statistical quality control
procedure, to ensure that it meets the technical standards established by RIAA,
and the Company's quality control procedure, which includes a random sampling of
audio levels, physical characteristics, program content, signals and other
characteristics of the tape. The finished audio cassette products are then
released to the packaging department where they are inserted into sleeves or
boxes and processed through high speed shrink-wrapping machines for distribution
to the Company's customers.
The Company's audio cassette plant production capacity is between 250,000
and 275,000 audio tapes per 24-hour day, depending upon the length of the tapes.
The expansion of the Company's Hauppauge, New York manufacturing facility in
1995 provided the Company with the capability for multimedia packaging for audio
book and other spoken word audio cassettes. When necessary, the Company is able
to deliver finished product to its customers approximately 48 to 72 hours after
receipt of the sales order.
Video cassettes. The manufacturing process for video cassettes generally
utilizes duplicating machines that copy from a master in 'real time' speed,
i.e., the regular speed of the videocassette being duplicated. In this process,
high speed tape winders are used to wind blank tape loaded to specific program
lengths into video shells. The video shells are then loaded into the duplicating
machines which receive the program being copied from a master transport. In
addition, the Company utilizes high speed machines, which allow it to duplicate
a master 150 times faster than in 'real time' speed. Real time duplicating
machines are used to duplicate video cassettes in standard play mode. High speed
duplicating machines are capable of duplicating video cassettes in either the
extended play mode or the standard play mode. The extended play format utilizes
less tape than regular speed machines require for the same program content.
The entire video duplicating and winding process takes place in an
environment that is designed to eliminate airborne particles from the
duplicating process. These areas are air conditioned and pressurized to filter
out such particles. The Company believes that its use of these areas prolongs
the head life on videocassette recorders and results in a higher quality
product.
Once a videocassette is loaded with tape and duplicated, the finished
product is checked to ensure that it conforms to strict audio and visual
standards established by the Company and the industry. The video cassettes are
then released to the packaging department where they are labeled, inserted into
sleeves or boxes and processed through high speed shrink-wrapping machines for
distribution to the Company's customers.
In Fiscal 1997, the Company increased the production capacity of its
facilities in Clinton, Tennessee and Hauppauge, New York by a combined nine
million annual videocassette unit capacity. The Company's total videocassette
capacity is the equivalent of approximately 100 million 60-minute programs
annually. When
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necessary, the Company is able to deliver finished product to its customers
approximately 24 to 48 hours after receipt of the sales order.
Raw Materials; Supplies. Although the Company's practice is to seek
competitive pricing and enhanced quality by purchasing from a limited number of
suppliers, all raw materials and components necessary to manufacture CD Products
are readily available from several sources of supply at competitive prices.
Blank audio cassettes, video cassettes, magnetic tape and other component
parts utilized by the Company in the duplication/replication process generally
are readily available in the marketplace at prices that are generally stable.
The Company purchases its components from a variety of manufacturers, most of
which are located in China, South Korea, Mexico and the United States. The
Company does not believe the loss of any one of its current suppliers would have
a material adverse effect on its business because alternative sources of supply
are generally readily available at competitive prices. However, a significant
change in the Company's ability to obtain components at comparable prices from
suppliers located in China, South Korea, Mexico and the United States, whether
through the imposition of tariffs or other trade barriers or from any foreign or
U.S. supplier for any other reason, could have a material adverse effect on the
Company. The Company does not have long-term contracts with any such suppliers.
See 'Risk Factors--Dependence on Suppliers.'
LICENSES
CD Products. The Company, like most other CD Product manufacturers, uses
patented technology primarily under nonexclusive licenses from the holders of
patents which generally provide for the payment of royalties based upon the
number of CD Products sold. For Fiscal 1997, fees for these licenses of
approximately $2,261,000 were charged against earnings, related primarily to the
licenses with U.S. Philips Corporation and Discovision Associates.
Audio cassettes. The Company does not require any licenses for the
duplication of audio cassettes.
Video cassettes. The industry does not have established quality standards
for the duplication of video cassettes, although the Victor Company of Japan,
Ltd. ('JVC'), which owns the 'VHS' logo, has established standards for the
physical characteristics of the videocassette. Compliance with the JVC standards
ensures that the videocassette will be compatible with any VHS machine.
Duplicators whose product conforms to the JVC standards are permitted to apply
the 'VHS' logo to such product and pay JVC a license fee for such privilege. The
Company ensures that all of its video product conforms to the JVC standards and
pays JVC a license fee for the privilege of applying the 'VHS' logo to its video
product. For Fiscal 1997, fees for this license of approximately $523,000 were
charged against earnings.
Since 1986, the Company has had a license with Macrovision Corporation to
encode video cassettes with anti-piracy protection. The license is for a
one-year term, renewable annually by agreement of both parties. The Company pays
a license fee to Macrovision Corporation equal to a portion of the sublicense
fees received by the Company from its customers. For Fiscal 1997, the license
fees paid by the Company to Macrovision under this arrangement were
approximately $240,000, all of which was billed to the Company's customers.
COMPETITION
The Company's core business of replication/duplication is highly
competitive. Although the Company believes that it is the largest independent
manufacturer of pre-recorded multi-media products--audio cassettes, video
cassettes, audio CDs and CD-ROMs--it is in competition with approximately 50
audio cassette duplicators, approximately 100 videocassette duplicators and
approximately seven compact disc replicators. The Company believes it is one of
only three companies in the domestic replication/duplication industry in North
America that manufactures audio cassette, videocassette and CD Products for the
prerecorded music industry.
The Company believes that the principal competitive factors in the
replication/duplication business are: price, terms of sale, quality of service,
range of pre- and post-production services, scope of graphics and packaging
capabilities, order turnaround time, large order capability, order fulfillment
capability, ability to customize small orders to customer specifications, and
certain other value-added service offerings.
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Virtually all raw materials, machinery and equipment are readily available
on the open market, and no industry competitor holds proprietary rights or
positions with respect to these factors. Although this fact results in low
barriers to entry, the Company believes that the relatively low margins offered
by the core business and the number of competitors (including the Company) who
offer an array of value-added services, serve as deterrents to entry by most
potential competitors.
The Company also believes that the goodwill and loyalty of many of its
established relationships combined with the excellent reputation which the
Company believes it has in the marketplace give the Company a significant
competitive advantage. The Company further believes that its geographic
diversity, fulfillment capabilities, and national/regional/market-specific sales
and marketing and its geographically dispersed manufacturing and fulfillment
capabilities add to its competitive advantage.
In its budget planning process, the Company takes into account expected
price erosion, which occurs as competition for market share increases and
competitors lower prices to gain market share. The Company attempts to limit
margin erosion by lowering its material costs and by achieving unit volume sales
increases. While there can be no assurance that such a margin protection
strategy will be successful in the future, the Company's efforts to reduce
operating costs and its new series of marketing and sales initiatives are
intended to forestall and curtail such erosion of margins. See 'Risk
Factors--Competition.'
The Company believes that its principal competitors in each of its product
offerings are as follows:
CD Products. In music CD replication, the Company's competitors are major
independent replicators such as Cinram, Ltd., a publicly-traded Canadian-based
company with operations in the United States, and Denon, and the in-house
capacity of five of the six major domestic pre-recorded music companies: Sony
Music Entertainment, PGD, Warner-Elektra-Atlantic, BMG, and EMI, each of which
has CD manufacturing capacity to meet all its production needs except in times
of high demand. Additionally, there are approximately 70 small to medium-sized
(i.e., having an annual capacity of approximately five million to 75 million
units, as compared to an average annual capacity of 100-200 million units for
the major domestic pre-recorded music companies) CD Products manufacturers in
the marketplace. The Company believes it is among the largest of the
medium-sized companies in the CD Products replication industry segment. Among
the Company's competitors in the CD-ROM sector are Nimbus and Zomax.
Audio cassettes. In audio cassettes, the Company believes that it is the
largest independent duplicator of pre-recorded audio cassette products in the
United States. The Company's principal competitors are Cinram, Ltd. and
Sonopress Audio, a division of BMG.
Video cassettes. The Company believes it is the largest independent
duplicator of video cassettes for the non-theatrical market, which includes
corporate communications, premium/promotional, educational, instructional
'How-To,' and other special interest applications. The Company's principal
competitors in this market are Premier Video and Vaughan Communication.
EMPLOYEES
At January 31, 1998, the Company had approximately 1,271 full-time
employees of whom approximately 391 (representing those employees employed at
the Hauppauge location) are covered by a collective bargaining agreement between
the Company and Local 810, Steel, Metals, Alloys and Hardware Fabricators and
Warehousemen affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America. This agreement was renewed in
January 1997 and expires in January 2000. Management, supervisors and clerical
workers are not covered by the collective bargaining agreement. The Company has
never experienced a strike and believes its relationship with its employees is
satisfactory. The Company provides paid vacations, sick leave, group life,
disability, hospitalization and medical insurance for its employees. During
Fiscal 1997, eligible employees were able to participate in the Company's 401(k)
profit-sharing plan.
PROPERTIES
The Company's headquarters are located at 140 Fell Court, Hauppauge, New
York, where the Company leases approximately 7,165 square feet of office space
from Shivom Enterprises LLC for a term expiring October 31, 2001 at an annual
rate of approximately $109,000 in 1998.
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The Company's Long Island CD Products replication and audio cassette and
videocassette duplication operations are conducted at two locations. The first
location is at 15 Gilpin Avenue, Hauppauge, New York, where the Company leases
approximately 144,000 square feet of manufacturing, warehouse and office space
from Keelson Associates, a general partnership of which George N. Fishman,
Co-Chairman of the Company, is a partner, at an annual rental rate of
approximately $1,058,000 for a term expiring November 1, 2015. Future cumulative
rentals as of August 1, 1997 under this agreement are approximately $19,787,000.
The second location is at 30 Gilpin Avenue, Hauppauge, New York, where the
Company lease approximately 78,000 square feet of manufacturing warehouse and
office space from Lee Halpern for a term expiring January 31, 2008, at an annual
rental rate of approximately $489,000 in 1998.
The Company leases various facilities from Greenfield Land Company, a
Michigan co-partnership ('Greenfield Land') of which William H. Smith
(Co-chairman of the Board and a principal stockholder of the Company), members
of his family and Werner H. Jean (a Director of the Company) are partners. The
office and warehouse space for all locations leased from Greenfield Land
aggregates approximately 214,000 square feet. The 1997 annual rental payments
from the Company to Greenfield Land were approximately $548,000. Future
cumulative rentals as of August 1, 1997 due under existing leases with
Greenfield Land for 1998 and thereafter are approximately $8,871,000. The
existing leases are for properties located at: 7375 Woodward Avenue (office,
warehouse, and manufacturing), Detroit, Michigan; 7411 and 7371 Woodward Avenue
(parking lots), Detroit, Michigan; 35 W. Bethune (parking lot), Detroit,
Michigan; 4364 35th Street (office, warehouse and manufacturing facility),
Orlando, Florida; 370 JD Yarnell Industrial Parkway (office, warehouse, and
manufacturing facility), Clinton, Tennessee. In addition, the Company's leases
with Greenfield Land of 7375 Woodward Avenue (formerly an office, warehouse and
manufacturing facility), Detroit, Michigan; 7411 and 7371 Woodward Avenue
(formerly parking lots), Detroit, Michigan; and 35 W. Bethune (formerly a
parking lot), Detroit, Michigan were terminated without penalty by mutual
agrement on March 31, 1998.
The Company subleases approximately 22,160 square feet of manufacturing,
warehouse and office space located at 480 Valley Drive, Brisbane, California,
from Frase Enterprises Inc. for a term expiring June 30, 2008 at an annual
rental rate of approximately $166,200.
The Company also leases manufacturing, warehouse and office space from
Dallas Communications Complex at 6301 and 6305 N. O'Connor Road, Irving, Texas,
representing 18,712 square feet (manufacturing and office facilities), 11,936
square feet (warehouse facility) and 18,900 square feet (manufacturing and
office facilities), respectively. The aggregate annual rent payable under these
leases in 1998 is approximately $380,000. The current leases expire December 31,
1999, January 1, 2000, and December 31, 1999, respectively.
The Company leases approximately 70,000 square feet of property located at
7375 Woodward Avenue (office, warehouse, and manufacturing), Detroit, Michigan;
7411 and 7371 Woodward Avenue (parking lots), Detroit, Michigan; and 35 W.
Bethune (parking lot), Detroit, Michigan; from Woodlo, LLC for a term expiring
September 30, 1998 at an annual rental rate of approximately $45,000 in 1998.
The Company leases approximately 17,614 square feet of manufacturing and
office space located at 819 Brightseat Road, Landover, Maryland, from Centre
Pointe Business Park, L.P. for a term expiring October 24, 2001 at an annual
rental rate of approximately $103,000 in 1998.
On a month-to-month basis, the Company leases approximately 25,000 square
feet of warehouse space located at Highway 25 West, Clinton, Tennessee, from
HomeCrest Corporation for $5,000 per month.
On a month-to-month basis, the Company leases approximately 10,000 square
feet of warehouse space located at 101 Charles Seivers Boulevard, Clinton,
Tennessee from Clinch River Properties for $2,500 per month.
The Company leases approximately 51,000 square feet of warehouse space
located at 108 Centre Stage Business Park, Clinton, Tennessee from Joseph A.
Hollingsworth, Jr. for a term expiring July 2, 2000 at a rental rate of $13,750
per month.
The Company leases approximately 3,600 square feet of manufacturing,
warehouse and office space located at 4140B Directors Row, Houston, Texas, from
Weingarten Realty Investors for a term expiring December 31, 1999 at an annual
rate of approximately $23,000 in 1998.
36
<PAGE>
The Company leases 97,888 square feet of manufacturing, warehouse and
office space located at Elk Grove Industrial Park #33, Elk Grove Village,
DePage, Illinois, from Elk Grove Village Industrial Park Ltd. for a term
expiring May 31, 1999 at an annual rental rate of approximately $682,000 in
1998.
Effective December 17, 1997, the Company leases 39,700 square feet of
manufacturing, warehouse and office space located at 65 Inverness Drive,
Englewood, Colorado, from Guiette Holdings L.L.C. for a term expiring December
16, 2002 at an annual rental rate of approximately $185,000 in 1998.
The Company leases approximately 4,637 square feet of office space at 11835
West Olympic Blvd., Suite 750, West Los Angeles, California from Westside
Associates for a term expiring January 1, 2003 at an annual rental rate of
approximately $106,000 per year.
The Company leases approximately 950 square feet of office space at 1207
17th Avenue, Nashville, Tennessee from The Vanderbilt University for a term
expiring July 29, 1999 at an annual rental rate of approximately $14,000 per
year.
The Company leases approximately 590 square feet of office space at the
Massala Building, 310 Alabama Street, Indianapolis, Indiana from E & C
Properties for a term expiring June 30, 2000 at an annual rental rate of
approximately $5,880 per year.
The Company leases office space at 5825 Glenridge Drive, Atlanta, Georgia
from Premier Business Centers for a term expiring June 30, 1998 at an annual
rental rate of $5,160 for 1998.
The Company subleases approximately 4,832 square feet of office space at
1301 Avenue of the Americas, New York, New York from The Bibb Company for a term
expiring December 30, 2000 at an annual rental rate of approximately $149,000
per year.
In addition, from time to time, the Company leases temporary warehouse
space on a month-to-month basis for the storage of customer components and
finished goods.
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings which are incidental
to the conduct of its business. The Company does not believe that the outcome of
these matters, even if unfavorable to the Company, will have a material adverse
effect on its financial condition or results of operations.
On May 12, 1998, a complaint purporting to state a class action was filed
in the Delaware Court of Chancery by Crandon Capital Partners, alleged to be a
stockholder of the Company, on behalf of itself and all others similarly
situated, against the Company and its directors. The plaintiffs allege that the
Merger is wrongful, unfair and harmful to holders of Common Stock and that it
has been effected with unfair dealing, that the proposed consideration of $5.00
a share is unfair to the Company's Shareholders and that the directors of the
Company have violated their fiduciary obligation owed to the plaintiffs and
other members of the class. The complaint seeks to enjoin the Merger and an
unspecified amount of damages, in addition to payment of attorney's fees and
reimbursement of expenses. Management believes that this claim is without merit
and does not believe such claim will have a material adverse effect on the
Company, however, there can be no assurance as to the outcome of such claim.
37
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of April 30, 1998, and a
brief account of the business experience of each person who will be a director
or executive officer of the Company following the consummation of the
Transactions.
<TABLE>
<CAPTION>
NAME(1) AGE POSITION WITH THE COMPANY
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
John K. Mangini...................................... 56 Chief Operating Officer
Donald L. Olesen..................................... 55 President--National Sales and Marketing Division and
director
Charles A. Mantione.................................. 57 Vice President--Finance
Emily Hill........................................... 38 Vice President--Planning and Analysis
</TABLE>
- ------------------
(1) Upon consummation of the Merger, the Company expects to enter into an
Investors Agreement with 399 and certain other parties named therein (the
'Investors Agreement'), pursuant to which it is anticipated that the Board
of Directors of the Company will comprise five directors with 399 having the
right to nominate two directors, the Management Shareholders having the
right to nominate one director and the nominating committee having the right
to nominate the remaining two independent directors.
Mr. Olesen has been President--National Sales and Marketing Division and a
director of the Company since January 1995. Mr. Olesen also has been the
President of HMG since 1993 and President of Allied since July 1991. He also was
a director of HMG and Allied until January 1995. Mr. Olesen has been Allied's
primary sales executive since 1981. Mr. Olesen has 32 years of pre-recorded
music experience beginning in 1965 with RCA Records as a management trainee. In
1968, Mr. Olesen joined CBS Records where he spent 13 years in a variety of
positions. From 1971 to 1981, Mr. Olesen served as the East Coast Regional Sales
Manager of CBS Records.
Mr. Mangini has been Chief Operating Officer of the Company since January
15, 1996. Prior to his joining the Company, he spent five years with PolyGram
Group Distribution, Inc. as Senior Vice President of Operations. Mr. Mangini's
experience in the entertainment field includes 14 years with RCA Corporation
(1973-87) beginning as Director of Strategic Planning for the Entertainment
Companies (NBC, Random House and RCA Records) and then becoming Worldwide Chief
Financial Officer of RCA Records, then Vice President--General Manager of the
International Subsidiaries and Senior Vice President--Operations-- Worldwide. In
the non-entertainment area, Mr. Mangini was Executive Vice President--U.S.
Operations for Adidas USA (1988-89), Project Manager for Grace Corporation
(1969-73), specializing in acquisitions and mergers. He had similar experience
with Olin Chemical Corporation (1966-69). In 1995, Mr. Mangini plead guilty to
an information alleging tax evasion, paid a $7,500 fine and was placed on
probation for a period of five years. Mr. Mangini has 34 years of business
experience and for the past 16 years has concentrated on various turnaround
situations.
Mr. Mantione has been Vice President--Finance of the Company since June
1997. Mr. Mantione had been a financial consultant to the Company from June 1996
to June 1997. Mr. Mantione, who is a certified public accountant, was founder
and partner in Mantione and Rogan, CPAs from July 1969 until November 1983, and
a partner in Arthur Yorkes & Co., CPAs from January 1988 to October 1989.
Ms. Hill has been Vice President of Planning and Analysis since January
1998. Prior to that she was Director of Planning and Analysis and Financial
Operations Manager of the former Allied Film Group beginning her career with the
Company in June 1990 as Detroit Division Controller. From June 1987 to June
1990, Ms. Hill worked for Hoover Group, Inc., an OEM manufacturer, beginning as
a Sr. Financial Analyst and then becoming a Plant Controller. From September
1985 through June 1987, she worked as an independent consultant while obtaining
her Masters in Accountancy.
38
<PAGE>
SECURITY OWNERSHIP
The following table sets forth certain information with respect to the
beneficial ownership of the Preferred Stock, Class A Common Stock and non-voting
Class B Common Stock following consummation of the Transactions by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of either the Preferred Stock, Class A Common Stock or Class B Common
Stock, (ii) each director and Named Executive Officer of the Company who owns
shares of any class of the Company's capital stock and (iii) the directors and
executive officers as a group. Each of the shareholders identified in the table
has sole voting and investment power over the shares beneficially owned by such
person.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
OF CLASS A OF CLASS B BENEFICIAL OWNERSHIP
COMMON STOCK(1) COMMON STOCK(2) OF PREFERRED STOCK
-------------------- -------------------- --------------------
NUMBER OF NUMBER OF NUMBER OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT SHARES PERCENT
- ------------------------------------------------ --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
399 Venture Partners, Inc.(3)................... 74,000 49.66% 351,000 100% 165,000 100%
John K. Mangini(4)(5)........................... 26,250 17.62 -- -- -- --
Donald Olesen(5)................................ 26,250 17.62 -- -- -- --
Steven Granat(5)................................ 2,500 1.68 -- -- -- --
Brian Wilson(5)................................. 5,000 3.35 -- -- -- --
Emily M. Hill(5)................................ 3,750 2.52 -- -- -- --
David R. Conrad(5).............................. 3,750 2.52 -- -- -- --
Charles Mantione(5)............................. 2,500 1.68 -- -- -- --
John J. Mangini(5).............................. 2,500 1.68 -- -- -- --
Edward Simek(5)................................. 2,500 1.68 -- -- -- --
All executive officers and directors as a group
(9 persons)................................... 149,000 50.34 -- -- -- --
</TABLE>
- ------------------
(1) Does not include shares of Class A Common Stock issuable upon conversion of
shares of Class B Common Stock. Shares of Class B Common Stock are
convertible at any time into shares of Class A Common Stock on a
share-for-share basis.
(2) Does not include shares of Class B Common Stock issuable upon conversion of
shares of Class A Common Stock. Shares of Class A Common Stock are
convertible at any time into shares of Class B Common Stock on a
share-for-share basis.
(3) The business address of 399 is 399 Park Avenue, New York, New York 10043.
(4) Consists of 26,248 Common Shares plus conversion of two shares of AAC Common
Stock.
(5) The business address of each of the indicated holders of the Company's
securities is 140 Fell Court, Hauppauge, New York 11788.
39
<PAGE>
CERTAIN TRANSACTIONS
CERTAIN AGREEMENTS IN CONNECTION WITH THE MERGER
Stockholders' Voting Agreements. In connection with the Merger, each of
George Fishman, William H. Smith (and related entities) and Donald L. Olesen
(and related entities) (collectively, the 'Reporting Persons') entered into a
stockholder voting agreement (collectively, the 'Shareholder Voting Agreements')
with AAC dated as of May 5, 1998 representing in the aggregate 8,233,641 shares
of Common Stock, which together with the shares of Common Stock currently owned
by 399 represent approximately 66.58% of the shares of Common Stock issued and
outstanding.
Each Reporting Person has agreed that, until the date of termination
specified in the Stockholder Voting Agreements, such Reporting Person shall vote
(or cause to be voted) the shares of Common Stock held of record or beneficially
by such Reporting Person (i) in favor of the Merger, the execution and delivery
by the Company of the Merger Agreement and the approval of the terms thereof and
each of the other actions contemplated by the Merger Agreement and the
Stockholder Voting Agreement and any actions required in furtherance hereof and
thereof; (ii) against any action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or agreement of
the Company under the Merger Agreement or the Stockholder Voting Agreement; and
(iii) against the following actions (other than the Merger and the transactions
contemplated by the Merger Agreement or any such actions identified in writing
by AAC in advance): (A) any extraordinary corporate transaction, including,
without limitation, a merger, consolidation or other business combination
involving the Company or its Subsidiaries; (B) a sale, lease or transfer of a
material amount of assets of the Company or its Subsidiaries or a
reorganization, recapitalization, dissolution or liquidation of the Company or
its Subsidiaries; (C) any change in the majority of the board of directors of
the Company; (D) any material change in the present capitalization of the
Company or any amendment of the Company's Certificate of Incorporation or
By-Laws; (E) any other material change in the Company's corporate structure or
business; or (F) any other action which is intended, or could reasonably be
expected, to impede, interfere with, delay, postpone, discourage or materially
adversely affect the Merger or the transactions contemplated by the Merger
Agreement or the Stockholder Voting Agreement.
Rollover Agreements. Subject to the terms and provisions of the Merger
Agreement, in connection with the Merger, each of Charles A. Mantione, John K.
Mangini, John J. Mangini, Emily M. Hill, Steven Granat, Edward Simek, David R.
Conrad, Brian Wilson and Donald L. Olesen (and various parties related to Donald
L. Olesen) (the 'Management Shareholders') has entered into a Rollover Agreement
with AAC dated as of May 5, 1998 whereby the Management Shareholders agreed to
elect to retain an aggregate of 74,998 shares of Common Stock upon conversion
of, and with respect to, 74,998 shares owned by the Management Shareholder
immediately prior to the Effective Date (the 'Management Shares') unless
otherwise agreed with AAC.
Unless the shares of Common Stock held by any trust which are presently
subject to the terms of the Rollover Agreement are transferred to one or more
Management Shareholders (and remain subject in all respects to the terms of the
Rollover Agreement) or other transferee permitted by the Rollover Agreement who
upon receipt of such shares of Common Stock become signatories to the Rollover
Agreement, the Management Shareholders who are trustees shall not take any
action to terminate, close or liquidate any such trust and shall take all steps
necessary to maintain the existence thereof.
Each Management Shareholder has waived any rights of appraisal or rights to
dissent from the Merger that such Shareholder may have. The Management
Shareholders have represented that no beneficiary who is a beneficial owner of
shares of Common Stock under any trust has any right of appraisal or right to
dissent from the Merger which has not been so waived.
Investors Agreement. Upon consummation of the Merger, the Company, 399 and
certain other parties named therein expect to enter into the Investors
Agreement. It is anticipated that the Investors Agreement will provide for,
among other things, (i) transfer restrictions with respect to the shares subject
to the Investors Agreement and (ii) corporate governance issues.
40
<PAGE>
LOANS FROM CERTAIN SHAREHOLDERS
On April 1, 1994, AFL distributed to its shareholders approximately
$18,000,000 consisting of its accumulated previously-taxed earnings through
December 31, 1993. Mr. Smith, Mrs. Smith and certain members of their family and
Mr. Merkle, a former executive officer of the Company, loaned to AFL an
aggregate of approximately $14,000,000 received by them, pursuant to unsecured
promissory notes (the 'AFL Shareholder Notes'). The proceeds of these loans were
used to repay a portion of certain bank indebtedness incurred to fund the
distribution. The AFL Shareholder Notes had an original maturity date of January
1, 2000, bore interest at an annual rate of ten percent (10%), and were
subordinated to the payment of certain bank indebtedness of AFL. On January 24,
1995, the AFL Shareholder Notes were repaid by AFL with proceeds of new
financing provided by a lender, except for $4,000,000 of such AFL Shareholder
Notes issued to Mr. Smith (the 'Smith Note'). On November 8, 1995, Mr. Smith
made an additional $2,000,000 subordinated loan to AFL (the 'Additional Smith
Note') for working capital purposes. In connection with the Allied Merger and
the restructuring of the AFL and the Company's credit facilities into one credit
facility, each of the Smith Note and the Additional Smith Note (the 'Smith
Notes') was amended and restated. The Smith Notes are each due January 1, 2001,
are subordinated to the payment of the indebtedness to the senior lender, and
bear interest at 10% per annum. The payment of interest on the Smith Notes is
conditional upon the Company achieving certain financial benchmarks. To the
extent that interest is not paid when due, it is due and payable on the maturity
date of the Smith Notes. During Fiscal 1997, no interest was paid in respect of
the Smith Notes.
In connection with the Allied Merger and the restructuring of the credit
facilities of AFL and the Company, HMG prepaid certain indebtedness owed to 399,
then the Company's principal shareholder, in the aggregate principal amount of
$3,500,000. In order to help finance such prepayment, Mr. Smith, Mr. Fishman and
Mr. Olesen loaned HMG $1,600,000, $200,000 and $200,000, respectively, (the 'HMG
Loans'). The HMG Loans are evidenced by identical promissory notes, except for
the name of the payee and the principal amount (the 'HMG Notes'). The HMG Notes
are subordinated to the payment of the Company's indebtedness to its senior
lender, bear interest at the rate of 10% per annum, and are due December 31,
1998. The payment of interest and principal on the HMG Notes is conditional upon
the Company achieving certain financial benchmarks. To the extent that interest
is not paid when due, it is due and payable upon maturity of the HMG Notes. In
all events, principal and accrued but unpaid interest on the HMG Notes is due
and payable January 1, 2001. During Fiscal 1997, interest payments made to
Messrs. Smith, Fishman and Olesen in respect of the HMG Notes aggregated
$107,555, $13,445 and $13,445, respectively. No principal payments were made in
respect of the HMG Notes during Fiscal 1997.
HMG is indebted to certain shareholders of the Company, including Mr.
Fishman, Mr. Olesen, Mr. Kavanagh and 399 in the aggregate principal amount of
$880,640 (the 'Series B Debt'). The Series B Debt is evidenced by a series of
identical promissory notes, except for the name of the payee and the principal
amount (the 'Series B Notes'). The Series B Notes are subordinated to the
payment of the Company's indebtedness to its senior lender, bear interest at the
rate of 11% per annum, and are due January 1, 1999. The payment of interest and
principal on the HMG Notes is conditional upon the Company achieving certain
financial benchmarks. During Fiscal 1997, interest payments made to the holders
of the Series B Notes aggregated $86,870. No principal payments were made during
Fiscal 1997 in respect of the Series B Notes other than $36,020 which was paid
to a holder as a final payment in respect of his note upon his termination as an
employee of the Company.
GUARANTEE OF CERTAIN OBLIGATIONS OF GREENFIELD LAND
The Company has unconditionally guaranteed certain obligations of
Greenfield Land Company ('Greenfield Land') under certain bank financing that
was originally incurred by Greenfield Land in connection with its acquisition
and development of the facilities in Illinois, Michigan and Tennessee that are
leased to the Company. As of July 31, 1997, the aggregate amount of debt of
Greenfield Land which the Company has guaranteed under the bank financing for
Greenfield Land was $527,050 and the largest amount which the Company had
guaranteed since the beginning of Fiscal 1997 was $1,513,437. Greenfield Land
has unconditionally guaranteed certain obligations of the Company as part of
such bank financing.
41
<PAGE>
LEASES
The Company leases certain of its manufacturing, warehouse and office space
from affiliates. See 'Business--Properties.' The Company believes that the terms
of such leases are at least as favorable to the Company as those it would
receive from an unaffiliated third party.
INDEMNIFICATION FOR ENVIRONMENTAL LIABILITIES
Pursuant to a Global Indemnification Agreement dated June 17, 1994, among
Greenfield Land, Mr. Smith, Mr. Smith's revocable living trust (collectively,
the 'beneficiaries'), the Company as the successor to AFL), has agreed to
indemnify the beneficiaries against all liabilities, losses, costs and expenses
(including, without limitation, fines, penalties, judgments, and legal fees)
arising out of, or in anyway related to, (i) the presence, manufacturing or
processing of 'hazardous substances' in, on or about the properties leased or
subleased to the Company by the beneficiaries (where caused by the Company or a
predecessor occupier of the premises), or (ii) the violation of any
'environmental law' by the Company. For purposes of the foregoing: 'hazardous
substances' are materials or substances regulated under any environmental law
(including, without limitation, chemical wastes, radioactive materials, and
petroleum products and byproducts); and 'environmental laws' are any laws, rules
and regulations relating to the protection of human health, safety, or the
environment (including, without limitation, the Toxic Substances Control Act,
the Comprehensive Environment Response, Compensation and Liability Act, and the
Resource Conservation and Recovery Act of 1976). The beneficiaries paid $25,000
to AFL for this indemnification.
OTHER TRANSACTIONS
H. Sean Mathis, a director of the Company, provides strategic advisory
services to the Company pursuant to a five-year consulting agreement expiring in
January 2000. Pursuant to such agreement, Mr. Mathis received a fee of $96,000
payable in 24 monthly installments which ended in December 1996.
42
<PAGE>
DESCRIPTION OF CREDIT AGREEMENT
In connection with the Transactions, the Company expects to enter into the
$25.0 million revolving credit facility (the 'Credit Agreement') with
(the 'Lenders') [subject to borrowing base limitations].
The definitive Credit Agreement has not yet been fully negotiated and may
contain more or less restrictive provisions than those set forth below. The
information relating to the Credit Agreement is qualified in its entirety by
reference to the complete text of the documents entered into or to be entered
into in connection therewith. Borrowings under the Credit Agreement will be
available for working capital and general corporate purposes, including letters
of credit. The Credit Agreement will be secured by first priority liens on
substantially all of the Company's assets. The Company expects to draw
approximately $2.7 million under the Credit Agreement in connection with the
consummation of the Transactions.
The Credit Agreement will expire [three] years from the date of closing,
unless extended. The interest rate per annum applicable to the Credit Agreement
will be the prime rate, as announced by the Lenders plus a margin from [0.0% to
0.5%] or, at the Company's option, the Eurodollar rate plus a margin from [2.0%
to 3.0%] based on the Company's ratio of [FIFO EBITDA minus capital expenditures
to Interest Expense]. The Credit Agreement will permit the Company to prepay
loans and to permanently reduce credit commitments or letters of credit, in
whole or in part, at any time in certain minimum amounts. The Company will be
required to pay certain fees in connection with the Credit Agreement, including
a commitment fee of [0.5%] on the undrawn portion of the credit commitment.
The Credit Agreement will contain customary representations and warranties
and events of default and will require compliance with certain covenants by the
Company, including, among other things: (i) maintenance of certain financial
ratios and compliance with certain financial tests and limitations, (ii)
limitations on the payment of capital expenditures, dividends, incurrence of
additional indebtedness and granting of certain liens and (iii) restrictions on
mergers, acquisitions, asset sales and investments.
The availability of the Credit Agreement will be subject to various
conditions precedent. [Advances will be made under the Credit Agreement based on
a borrowing base comprised of eligible accounts receivable, inventory and net
fixed assets at the following advance rates: % of the value of eligible
accounts receivable, plus % of the value of eligible inventory, plus
approximately $ million on net fixed assets (which amortizes over time; minus
a reserve of $ million).]
43
<PAGE>
DESCRIPTION OF NOTES
As used below in this 'Description of Notes' section, the 'Company' means
Allied Digital Technologies Corp. but not any of its subsidiaries and the
'Issuer' means Allied Digital, Inc., the issuer of the Notes. The Notes are to
be issued under an Indenture, to be dated as of , 1998 (the
'Indenture'), among the Issuer, the Guarantors and IBJ Schroder Bank & Trust
Company, as Trustee (the 'Trustee'). The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the 'Trust Indenture Act'). The Notes are
subject to all such terms, and holders of the Notes are referred to the
Indenture and the Trust Indenture Act for a statement thereof. A copy of the
proposed form of the Indenture will be made available to prospective investors
upon request. The statements under this caption relating to the Notes and the
Indenture are summaries and do not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are qualified in their entirety by such
reference.
The Notes will be general unsecured obligations of the Issuer, limited to
$100,000,000 aggregate principal amount. The Notes will be senior subordinated
obligations of the Issuer, subordinated in right of payment to all Senior Debt
of the Issuer. The Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 and any integral multiple thereof. No
service charge will be made for any registration of transfer or exchange of
Notes, but the Issuer may require payment of a sum sufficient to cover any tax
or other governmental charge payable in connection therewith. Initially, the
Trustee will act as paying agent and registrar for the Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes will mature on , 2008 and will bear interest at the
rate per annum shown on the cover page hereof from the Issue Date or from the
most recent interest payment date to which interest has been paid or provided
for. Interest will be payable semiannually on and of
each year, commencing , 1999, to the Person in whose name a Note
is registered (a 'Holder') at the close of business on the preceding
or (each, a 'Record Date'), as the case may be.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30- day months. Holders must surrender the Notes to the paying agent for the
Notes to collect principal payments. The Issuer will pay principal and interest
by check and may mail interest checks to a Holder's registered address.
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of the Issuer, in
whole or in part, at any time on or after , 2003, upon not less
than 30 nor more than 60 days' notice mailed to each Holder of Notes to be
redeemed at his address appearing in the register for the Notes, in amounts of
$1,000 or an integral multiple of $1,000, at the following redemption prices
(expressed as percentages of principal amount) plus accrued interest to but
excluding the date fixed for redemption (subject to the right of Holders of
record on the relevant Record Date to receive interest due on an interest
payment date that is on or prior to the date fixed for redemption), if redeemed
during the 12-month period beginning of the years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------------------------------------- ----------
<S> <C>
2003.......................................................... %
2004..........................................................
2005..........................................................
2006 and thereafter........................................... 100.000%
</TABLE>
In addition, prior to , 2001, the Issuer may redeem up to
33 1/3% of the principal amount of the Notes with the net cash proceeds received
by the Company from one or more Public Equity Offerings at a redemption price
(expressed as a percentage of the principal amount) of % of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date fixed for
redemption; provided, however, that at least $65 million in aggregate principal
amount of the Notes remains outstanding immediately after any such redemption
(excluding any Notes owned by the Issuer or any of its Affiliates). Notice of
redemption pursuant to this paragraph must be mailed to Holders of Notes not
later than 60 days following the consummation of the relevant Public Equity
Offering.
44
<PAGE>
Selection of Notes for any partial redemption shall be made by the Trustee,
in accordance with the rules of any national securities exchange on which the
Notes may be listed or, if the Notes are not so listed, pro rata or by lot or in
such other manner as the Trustee shall deem appropriate and fair. Notes in
denominations larger than $1,000 may be redeemed in part but only in integral
multiples of $1,000. Notice of redemption will be mailed before the date fixed
for redemption to each Holder of Notes to be redeemed at his or her registered
address. On and after the date fixed for redemption, interest will cease to
accrue on Notes or portions thereof called for redemption.
The Notes will not have the benefit of any sinking fund.
RANKING
The Issuer's obligations with respect to the payment of the principal of,
premium, if any, and interest on, and all other obligations in respect of each
and all of the Notes shall be subordinated in right of payment, to the extent
and in the manner provided in the Indenture, to the prior payment in full in
cash of all Senior Debt of the Issuer.
Upon any payment or distribution of assets or securities of the Issuer of
any kind or character, whether in cash, property or securities, upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Issuer, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due with respect
to Senior Debt of the Issuer (including any interest accruing subsequent to an
event of bankruptcy to the extent that such interest is an allowed claim
enforceable against the debtor under the Bankruptcy Code) shall first be paid in
full, or payment provided for, in either case in cash or cash equivalents or
otherwise in a form satisfactory to the holders of Senior Debt of the Issuer,
before the Holders or the Trustee on their behalf shall be entitled to receive
any Note Payment (as defined below). Before any Note Payment may be made by, or
on behalf of, the Issuer of the principal of, premium, if any, or interest on,
or any other obligation in respect of, the Notes upon any such dissolution or
winding up or liquidation or reorganization, any payment or distribution of
assets or securities of the Issuer of any kind or character, whether in cash,
property or securities, to which the Holders or the Trustee on their behalf
would be entitled, but for the subordination provisions of the Indenture, shall
be made by the Issuer or by any receiver, trustee in bankruptcy, liquidating
trustee, agent or other person making such payment or distribution, directly to
the holders of Senior Debt of the Issuer (pro rata to such holders on the basis
of the respective amounts of Senior Debt held by such holders) or their
representatives or to the trustee or trustees under any indenture pursuant to
which any such Senior Debt may have been issued as their respective interests
may appear, to the extent necessary to pay all such Senior Debt in full, in
cash, after giving effect to any concurrent payment, distribution or provision
therefor to or for the holders of such Senior Debt.
No direct or indirect payment, deposit or distribution of any kind or
character, whether in cash, property or securities (including any payment made
to Holders of the Notes under the terms of Indebtedness subordinated to the
Notes, but excluding any payment or distribution of Permitted Junior Securities)
by or on behalf of the Issuer of principal of, premium, if any, or interest
(including Additional Interest) on, or any other obligation in respect of, the
Notes (other than payments to Holders from funds held in trust for the benefit
of Holders), whether pursuant to the terms of the Notes or upon acceleration, by
way of repurchase, redemption, defeasance or otherwise (all such payments,
deposits or distributions being referred to herein, individually and
collectively, as a 'Note Payment'), shall be made if, at the time of such Note
Payment, there exists a default in the payment when due of all or any portion of
the obligations under or in respect of any Designated Senior Debt, whether at
maturity, on account of mandatory redemption or prepayment, acceleration or
otherwise (and the Trustee has received written notice thereof), and such
default shall not have been cured or waived or the benefits of this sentence
waived by or on behalf of the holders of such Designated Senior Debt. In
addition, during the continuance of any non-payment default or non-payment event
of default with respect to any Designated Senior Debt pursuant to which the
maturity thereof may be accelerated immediately without the giving of any notice
(except such notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, and upon receipt by the Trustee of
notice (a 'Payment Blockage Notice') from a holder or holders of such Designated
Senior Debt or the trustee or agent acting on behalf of such Designated Senior
Debt, then, unless and until such default or event of default has been cured or
waived or has ceased to exist or such Designated Senior Debt has been discharged
or repaid in full, in cash, no Note Payment may be made by or on behalf of the
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Issuer on account of or with respect to the Notes, except payments to Holders
from funds held in trust for the benefit of Holders, during a period (a 'Payment
Blockage Period') commencing on the date of receipt of such Payment Blockage
Notice by the Trustee and ending 179 days thereafter. Notwithstanding anything
herein to the contrary, (x) in no event will a Payment Blockage Period extend
beyond 179 days from the date of the Payment Blockage Notice in respect thereof
was given and (y) there must be 180 days in any 365 day period during which no
Payment Blockage Period is in effect. Not more than one Payment Blockage Period
may be commenced with respect to the Notes during any period of 365 consecutive
days. No default or event of default that existed or was continuing on the date
of commencement of any Payment Blockage Period with respect to the Designated
Senior Debt initiating such Payment Blockage Period may be, or be made, the
basis for the commencement of any other Payment Blockage Period by the holder or
holders of such Designated Senior Debt or the trustee or agent acting on behalf
of such Designated Senior Debt, whether or not within a period of 365
consecutive days, unless such default or event of default has been cured or
waived for a period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indenture described under this section
will not be construed as preventing the occurrence of an Event of Default
described in clause (a), (b) or (c) of the first paragraph under '--Events of
Default.'
By reason of the subordination provisions described above, in the event of
insolvency of the Issuer, funds which would otherwise be payable to Holders will
be paid to holders of Senior Debt of the Issuer to the extent necessary to repay
such Senior Debt in full, and the Issuer may be unable to fully meet its
obligations with respect to the Notes. Subject to the restrictions set forth in
the Indenture, in the future the Issuer may incur additional Senior Debt.
At January 31, 1998, on a pro forma basis after giving effect to the
Transactions and the application of the net proceeds therefrom, there would have
been approximately $3.7 million of Senior Debt of the Issuer outstanding.
THE GUARANTEES
The Indenture will provide that the Guarantors will fully and
unconditionally guarantee, jointly and severally, on a senior subordinated basis
all of the obligations of the Issuer under the Indenture, including its
obligation to pay principal, premium, if any, and interest with respect to the
Notes.
The Indenture will provide that if the Notes are defeased in accordance
with the terms of the Indenture, or if all or substantially all of the assets of
a Guarantor or all of the Capital Stock of a Guarantor is sold (including by
issuance or otherwise) by the Company or any of its Restricted Subsidiaries in a
transaction constituting an Asset Disposition, and if (x) the Net Available
Proceeds from such Asset Dispositions are used in accordance with the covenant
described under '--Covenants--Limitation on Certain Asset Dispositions' or (y)
the Issuer delivers to the Trustee an Officers' Certificate to the effect that
the Net Available Proceeds from such Asset Disposition shall be used in
accordance with the covenant described under '--Covenants--Limitation on Certain
Asset Dispositions' and within the time limits specified by such covenant, then
such Guarantor (in the event of a sale or other disposition of all or
substantially all of its assets) shall be released and discharged from its
Guarantee obligations.
The obligations of each Guarantor under the Guarantee are subordinated to
the prior payment in full of all Senior Debt of such Guarantor on the same basis
as the obligations of the Issuer on the Notes are subordinated to Senior Debt of
the Issuer. The Guarantees will be pari passu in right of payment with any other
senior subordinated indebtedness of each Guarantor and senior to all existing
and future Subordinated Indebtedness of each Guarantor.
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COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness), except:
(i) Indebtedness of the Company or any of its Restricted Subsidiaries,
if immediately after giving effect to the Incurrence of such Indebtedness
and the receipt and application of the net proceeds thereof, the
Consolidated Cash Flow Ratio of the Company for the four full fiscal
quarters for which quarterly or annual financial statements are available
next preceding the Incurrence of such Indebtedness, calculated on a pro
forma basis in accordance with Article 11 of Regulation S-X under the
Securities Act of 1933 or any successor provision as if such Indebtedness
had been Incurred on the first day of such four full fiscal quarters, would
be greater than [ ] to 1.00;
(ii) [Indebtedness of the Company and its Restricted Subsidiaries,
Incurred under the Credit Agreement in an aggregate amount not to exceed $[
] million at any one time outstanding principal amount less the amount of
any such Indebtedness that is permanently repaid or, without duplication,
the amount by which commitments thereunder are permanently reduced, in
either case, from the proceeds of Asset Dispositions (it being understood
that the amount incurred under the Credit Agreement may be increased as a
result of the operation of clause (xi) below);]
(iii) Indebtedness owed by the Company to any direct or indirect
Wholly Owned Subsidiary of the Company or Indebtedness owed by a direct or
indirect Restricted Subsidiary of the Company to the Company or any direct
or indirect Wholly Owned Subsidiary of the Company; provided, however, upon
either (I) the transfer or other disposition by such direct or indirect
Wholly Owned Subsidiary or the Company of any Indebtedness so permitted
under this clause (iii) to a Person other than the Company or another
direct or indirect Wholly Owned Subsidiary of the Company or (II) the
issuance (other than directors' qualifying shares), sale, transfer or other
disposition of shares of Capital Stock or other ownership interests
(including by consolidation or merger) of such direct or indirect Wholly
Owned Subsidiary to a Person other than the Company or another such Wholly
Owned Subsidiary of the Company the provisions of this clause (iii) shall
no longer be applicable to such Indebtedness and such Indebtedness shall be
deemed to have been Incurred at the time of any such issuance, sale,
transfer or other disposition, as the case may be;
(iv) Indebtedness of the Company or any Restricted Subsidiary under
any interest rate or other similar agreement to the extent entered into to
hedge any other Indebtedness permitted to be Incurred under the Indenture
(including the Notes);
(v) Indebtedness of the Issuer under the Notes and Indebtedness
outstanding on the Issue Date;
(vi) Indebtedness Incurred to Refinance any Indebtedness outstanding
on the Issue Date, any Indebtedness Incurred under the prior clause (i)
above or the Notes and the Guarantee; provided, however, that (I) such
Indebtedness does not exceed the principal amount (or accreted value, if
less) of the Indebtedness so Refinanced plus the amount of any premium
required to be paid in connection with such Refinancing pursuant to the
terms of the Indebtedness being Refinanced or the amount of any premium
reasonably determined by the issuer of such Indebtedness as necessary to
accomplish such Refinancing by means of a tender offer, exchange offer, or
privately negotiated repurchase, plus the expenses of such issuer
reasonably Incurred in connection therewith and (II)(A) in the case of any
Refinancing of Indebtedness that is pari passu with the Notes, such
Refinancing Indebtedness is made pari passu with or subordinate in right of
payment to the Notes, and, in the case of any Refinancing of Indebtedness
that is subordinate in right of payment to the Notes, such Refinancing
Indebtedness is subordinate in right of payment to the Notes on terms no
less favorable to the Holders than those contained in the Indebtedness
being Refinanced, (B) in either case, the Refinancing Indebtedness by its
terms, or by the terms of any agreement or instrument pursuant to which
such Indebtedness is issued, does not have an Average Life that is less
than the remaining Average Life of the Indebtedness being Refinanced and
does not require redemption or other retirement (including pursuant to any
required offer to purchase to be made by the Company or a Restricted
Subsidiary)
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of such Indebtedness at the option of the holder thereof prior to the final
stated maturity of the Indebtedness being Refinanced, other than a
redemption or other retirement at the option of the holder of such
Indebtedness (including pursuant to a required offer to purchase made by
the Company or a Restricted Subsidiary) which is conditioned upon a change
of control of the Company or any Restricted Subsidiary pursuant to
provisions substantially similar to those contained in the Indenture
described under '--Change of Control' below and (C) any Indebtedness
Incurred to Refinance any Indebtedness is Incurred by the obligor on the
Indebtedness being Refinanced or by a Guarantor; provided, further, that
clause (II) of the immediately preceding proviso shall not apply to any
Indebtedness Incurred to Refinance term loans under the Credit Agreement
outstanding on the Issuer Date or to subsequent Refinancings of any such
refinancing Indebtedness;
(vii) Indebtedness of the Guarantors, under the Guarantees incurred in
accordance with the Indenture;
(viii) Indebtedness (including Capitalized Lease Obligations) incurred
by the Company or any of its Restricted Subsidiaries to finance the
purchase, lease or improvement of property (real or personal) or equipment
(whether through the direct purchase of assets or the Capital Stock of any
Person owning such assets) in an aggregate principal amount outstanding not
to exceed 10% of Tangible Assets at any time (which amount may, but need
not, be incurred in whole or in part under the Credit Agreement) provided
that the principal amount of such Indebtedness does not exceed the fair
market value of such property or equipment;
(ix) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims or self-insurance, and
obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary of the
Company in the ordinary course of business;
(x) guarantees by the Company or its Restricted Subsidiaries of
Indebtedness otherwise permitted to be incurred hereunder; and
(xi) Indebtedness of the Company or its Restricted Subsidiaries not
otherwise permitted to be Incurred pursuant to clauses (i) through (x)
above which, together with any other outstanding Indebtedness Incurred
pursuant to this clause (xi), has an aggregate principal amount not in
excess of $[ ] million at any time outstanding, which Indebtedness may be
incurred under the Credit Agreement or otherwise.
Limitation on Senior Subordinated Indebtedness
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness that by its terms would expressly rank senior in right of payment
to the Notes or the Guarantees, as the case may be, and expressly rank
subordinate in right of payment to any other Indebtedness of the Company or such
Restricted Subsidiary.
Limitation on Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly,
(i) declare or pay any dividend, or make any distribution of any kind
or character (whether in cash, property or securities), on or in respect of
any class of the Capital Stock of the Company or any of its Restricted
Subsidiaries or to the holders thereof, excluding any (x) dividends or
distributions payable solely in shares of Qualified Stock of the Company or
any of its Restricted Subsidiaries or in options, warrants or other rights
to acquire Qualified Stock of the Company or any of its Restricted
Subsidiaries, (y) in the case of any Restricted Subsidiary of the Company,
dividends or distributions payable to the Company or a Restricted
Subsidiary of the Company, or (z) in the case of any Guarantor, dividends
or distributions payable to the Issuer or another Guarantor,
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(ii) purchase, redeem, or otherwise acquire or retire for value shares
of Capital Stock of the Company or any of its Restricted Subsidiaries, any
options, warrants or rights to purchase or acquire shares of Capital Stock
of the Company or any of its Restricted Subsidiaries or any securities
convertible or exchangeable into shares of Capital Stock of the Company or
any of its Restricted Subsidiaries, excluding any such shares of Capital
Stock, options, warrants, rights or securities which are owned by the
Company or a Restricted Subsidiary of the Company,
(iii) make any Investment (other than a Permitted Investment) in, or
make any payment on a guarantee of any obligation of, any Person, other
than the Company or a direct or indirect Wholly Owned Subsidiary of the
Company, or
(iv) redeem, defease, repurchase, retire or otherwise acquire or
retire for value, prior to any scheduled maturity, repayment or sinking
fund payment, Subordinated Indebtedness (each of the transactions described
in clauses (i) through (iv) (other than any exception to any such clause)
being a 'Restricted Payment')
if at the time thereof:
(1) a Default or an Event of Default shall have occurred and be
continuing, or
(2) upon giving effect to such Restricted Payment, the Company
could not Incur at least $1.00 of additional Indebtedness pursuant to
the terms of the Indenture described in clause (i) of '--Limitation on
Indebtedness' above, or
(3) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments made on or after the Issue Date exceeds the sum
of: (a) 50% of cumulative Consolidated Net Income of the Company (or, in
the case cumulative Consolidated Net Income of the Company shall be
negative, less 100% of such deficit) since the end of the fiscal quarter
in which the Issue Date occurs through the last day of the fiscal
quarter ending on or prior to the date of such proposed Rendered Payment
for which financial statements are available; plus (b) 100% of the
aggregate net proceeds received after the Issue Date, including the fair
market value of property other than cash (determined in good faith by
the Board of Directors of the Company as evidenced by a resolution of
such Board of Directors filed with the Trustee), from the issuance of,
or equity contribution with respect to, Qualified Stock of the Company
and warrants, rights or options on Qualified Stock of the Company (other
than in respect of any such issuance to a Restricted Subsidiary of the
Company) and the principal amount of Indebtedness of the Company or any
of its Restricted Subsidiaries that has been converted into or exchanged
for Qualified Stock of the Company which Indebtedness was Incurred after
the Issue Date; plus (c) 100% of the aggregate after-tax net proceeds,
including the fair market value of property other than cash (determined
in good faith by the Board of Directors of the Company as evidenced by a
resolution of such Board of Directors filed with the Trustee) from the
sale or other disposition of any Investment constituting a Restricted
Payment made after the Issue Date; provided, however, that any gain on
the sale or disposition included in such after tax net proceeds shall
not be included in determining Consolidated Net Income for purposes of
clause (a) above; and provided, further, that amounts included in this
clause (c) shall not exceed the Net investment by the Company and its
Restricted Subsidiaries in the asset so sold or disposed.
The foregoing provision will not prohibit (i) any dividend on any class of
Capital Stock of the Company or any of its Restricted Subsidiaries paid within
60 days after the declaration thereof if, on the date when the dividend was
declared, the Company or such Restricted Subsidiary, as the case may be, could
have paid such dividend in accordance with the provisions of the Indenture, (ii)
the Refinancing of any Indebtedness otherwise permitted pursuant to the terms of
the Indenture described in clause (vi) of '--Limitation on Indebtedness' above,
(iii) the exchange or conversion of any Indebtedness of the Company or any of
its Restricted Subsidiaries for or into Qualified Stock of the Company, (iv) so
long as no Default or Event of Default has occurred and is continuing, any
Investment made with the proceeds of a substantially concurrent sale (other than
to a Restricted Subsidiary of the Company) of Qualified Stock of the Company;
provided, however, that the proceeds of such sale of Qualified Stock shall not
be (and have not been) included in subclause (b) of clause (3) of the preceding
paragraph, (v) the redemption, repurchase, retirement or other acquisition of
any Capital Stock of the Company in exchange for or out of the net cash proceeds
of the substantially concurrent sale (other than to a Restricted
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Subsidiary of the Company) of Qualified Stock of the Company; provided, however,
that the proceeds of such sale of Capital Stock shall not be (and have not been)
included in subclause (b) of clause (3) of the preceding paragraph, (vi) so long
as no Default or Event of Default has occurred and is continuing, other
Restricted Payments of up to $[ ] in the aggregate, and (vii) payments
in lieu of fractional shares in an amount not in excess of $100,000 in the
aggregate. Each Restricted Payment described in clauses (i) (to the extent not
already taken into account for purposes of computing the aggregate amount of all
Restricted Payments pursuant to clause 3 above), (vi) and (vii) of the previous
sentence shall be taken into account for purposes of computing the aggregate
amount of all Restricted Payments pursuant to clause (3) of the preceding
paragraph.
The Indenture will provide that for purposes of this covenant, (i) an
'Investment' shall be deemed to have been made at the time any Restricted
Subsidiary is designated as an Unrestricted Subsidiary in an amount
(proportionate to the Company's equity interest in such Subsidiary) equal to the
net worth of such Restricted Subsidiary at the time that such Restricted
Subsidiary is designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate of all Restricted Payments made as Investments since the Issue Date
shall exclude and be reduced by an amount (proportionate to the Company's equity
interest in such Subsidiary) equal to the net worth of an Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary, not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of Investments
previously made by the Company and the Restricted Subsidiaries in such
Unrestricted Subsidiary (in each case (i) and (ii) 'net worth' to be calculated
based upon the fair market value of the assets of such Subsidiary as of any such
date of designation which shall, in no event, be less than zero); and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
Limitations Concerning Distributions and Transfers by Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist any consensual encumbrance or restriction on
the ability of any Restricted Subsidiary of the Company (other than the Issuer)
to (i) pay, directly or indirectly, dividends or make any other distributions in
respect of its Capital Stock or pay any Indebtedness or other obligation owed to
the Company or any other Restricted Subsidiary of the Company, (ii) make loans
or advances to the Company or any other Restricted Subsidiary of the Company or
(iii) transfer any of its property or assets to the Company or any other
Restricted Subsidiary of the Company, except for such encumbrances or
restrictions existing under or by reason of (a) any agreement in effect on the
Issue Date as any such agreement is in effect on such date, (b) the Credit
Agreement, (c) any agreement relating to any Indebtedness Incurred by such
Restricted Subsidiary prior to the date on which such Restricted Subsidiary was
acquired by the Company and outstanding on such date and not Incurred in
anticipation or contemplation of becoming a Restricted Subsidiary and provided
such encumbrance or restriction shall not apply to any assets of the Company or
its Restricted Subsidiaries other than such Restricted Subsidiary, (d) customary
provisions contained in an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of a
Restricted Subsidiary; provided, however, that such encumbrance or restriction
is applicable only to such Restricted Subsidiary or assets, (e) an agreement
effecting a Refinancing or amendment of Indebtedness Incurred pursuant to an
agreement referred to in clause (a) above; provided, however, that the
provisions contained in such Refinancing or amendment agreement relating to such
encumbrance or restriction are no more restrictive in any material respect than
the provisions contained in the agreement that is the subject thereof in the
reasonable judgment of the Board of Directors of the Company as evidenced by a
resolution of such Board of Directors filed with the Trustee, (f) the Indenture,
(g) applicable law, (h) customary provisions restricting subletting or
assignment of any lease governing any leasehold interest of any Restricted
Subsidiary of the Company, (i) restrictions contained in Indebtedness permitted
to be incurred subsequent to the Issue Date pursuant to the provisions of the
covenant described under '--Limitation on Indebtedness'; provided, however that
any such restrictions are ordinary and customary with respect to the type of
Indebtedness incurred, (j) purchase money obligations for property acquired in
the ordinary course of business that impose restrictions of the type referred to
in clause (iii) of this covenant or (k) restrictions of the type referred to in
clause (iii) of this covenant contained in security agreements securing
Indebtedness of a Restricted Subsidiary of the Company to the extent that such
Liens were otherwise incurred in accordance with '--Limitation on Liens' below
and restrict the transfer of property subject to such agreements.
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LIMITATION ON LIENS
Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, incur any Lien on or with respect to any
property or assets of the Company or such Restricted Subsidiary owned on the
Issue Date or thereafter acquired or on the income or profits thereof, which
Lien secures Indebtedness, without making, or causing any such Restricted
Subsidiary to make, effective provision for securing the Notes and all other
amounts due under the Indenture (and, if the Company shall so determine, any
other Indebtedness of the Company or such Restricted Subsidiary, including
Subordinated Indebtedness; provided, however, that Liens securing the Notes and
any Indebtedness pari passu with the Notes are senior to such Liens securing
such Subordinated Indebtedness) equally and ratably with such Indebtedness or,
in the event such Indebtedness is subordinate in right of payment to the Notes
or the Guarantees prior to such Indebtedness, as to such property or assets for
so long as such Indebtedness shall be so secured.
The foregoing restrictions shall not apply to (i) Liens existing on the
Issue Date securing Indebtedness existing on the Issue Date; (ii) Liens securing
Senior Debt (including Liens securing Indebtedness outstanding under the Credit
Agreement) and any guarantees thereof to the extent that the Indebtedness
secured thereby is permitted to be incurred under the covenant described under
'--Limitation on Indebtedness' above; (iii) Liens securing only the Notes and
the Guarantees; (iv) Liens in favor of the Company or a Guarantor; (v) Liens to
secure Indebtedness Incurred by the Company or any Restricted Subsidiary for the
purpose of financing all or any part of the purchase price or the cost of
construction or improvement of the property (or any other capital expenditure
financing) subject to such Liens; provided, however, that (a) the aggregate
principal amount of any Indebtedness secured by such a Lien does not exceed 100%
of such purchase price or cost, (b) such Lien does not extend to or cover any
other property other than such item of property and any improvements on such
item, (c) the Indebtedness secured by such Lien is Incurred by the Company or
such Restricted Subsidiary within 180 days of the acquisition, construction or
improvement of such property and (d) the Incurrence of such Indebtedness is
permitted by the provisions of the Indenture described under '--Limitation on
Indebtedness' above; (vi) Liens on property existing immediately prior to the
time of acquisition thereof (and not created in anticipation or contemplation of
the financing of such acquisition); (vii) Liens on property of a Person existing
at the time such Person is acquired or merged with or into or consolidated with
the Company or any such Restricted Subsidiary (and not created in anticipation
or contemplation thereof); (viii) Liens to secure Indebtedness Incurred to
Refinance, in whole or in part, any Indebtedness secured by Liens referred to in
the foregoing clauses (i)-(vii) so long as such Liens do not extend to any other
property and the principal amount of Indebtedness so secured is not increased
except for the amount of any premium required to be paid in connection with such
Refinancing pursuant to the terms of the Indebtedness Refinanced or the amount
of any premium reasonably determined by the Company as necessary to accomplish
such Refinancing by means of a tender offer, exchange offer or privately
negotiated repurchase, plus the expenses of the issuer of such Indebtedness
reasonably incurred in connection with such Refinancing; (ix) Liens in favor of
the Trustee as provided for in the Indenture on money or property held or
collected by the Trustee in its capacity as Trustee; and (x) Liens incurred in
the ordinary course of business securing assets not having a fair market value
in excess of $[ ].
Limitation on Certain Asset Dispositions
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, make one or more
Asset Dispositions unless: (i) the Company or such Restricted Subsidiary, as the
case may be, receives consideration for such Asset Disposition at least equal to
the fair market value of the assets sold or disposed of as determined by the
Board of Directors of the Company in good faith and evidenced by a resolution of
such Board of Directors filed with the Trustee; (ii) not less than 75% of the
consideration for the disposition consists of cash or readily marketable cash
equivalents or the assumption of Indebtedness (other than non-recourse
Indebtedness or any Subordinated Indebtedness) of the Company or such Restricted
Subsidiary or other obligations relating to such assets (and release of the
Company or such Restricted Subsidiary from all liability on the Indebtedness or
other obligations assumed); and (iii) all Net Available Proceeds, less any
amounts invested within 360 days of such Asset Disposition in assets related to
the business of the Company (including the Capital Stock of another Person
(other than any Person that is a Restricted Subsidiary of the Company
immediately prior to such investment); provided, however, that immediately after
giving effect to any such investment (and not prior thereto) such Person shall
be a Restricted Subsidiary of the
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Company), are applied, on or prior to the 360th day after such Asset
Disposition, unless and to the extent that the Issuer shall determine to make an
Offer to Purchase, to the permanent reduction and prepayment of any Senior Debt
of the Issuer then outstanding (including a permanent reduction of commitments
in respect thereof). Any Net Available Proceeds from any Asset Disposition which
is subject to the immediately preceding sentence that are not applied as
provided in the immediately preceding sentence shall be used promptly after the
expiration of the 360th day after such Asset Disposition, or promptly after the
Issuer shall have earlier determined to not apply any Net Available Proceeds
therefrom as provided in clause (iii) of the immediately preceding sentence, to
make an Offer to Purchase outstanding Notes at a purchase price in cash equal to
100% of their principal amount plus accrued interest to the Purchase Date.
Notwithstanding the foregoing, the Issuer may defer making any Offer to Purchase
outstanding Notes until there are aggregate unutilized Net Available Proceeds
from Asset Dispositions otherwise subject to the two immediately preceding
sentences equal to or in excess of $[ ] million (at which time, the entire
unutilized Net Available Proceeds from Asset Dispositions otherwise subject to
the two immediately preceding sentences, and not just the amount in excess of
$[ ] million, shall be applied as required pursuant to this paragraph).
Any remaining Net Available Proceeds following the completion of the required
Offer to Purchase may be used by the Issuer for any other purpose (subject to
the other provisions of the Indenture) and the amount of Net Available Proceeds
then required to be otherwise applied in accordance with this covenant shall be
reset to zero, subject to any subsequent Asset Disposition. These provisions
will not apply to a transaction consummated in compliance with the provisions of
the Indenture described under '--Mergers, Consolidations and Certain Sales of
Assets' below.
In the event that the Issuer makes an Offer to Purchase the Notes, the
Company shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, (a) transfer, convey, sell or otherwise
dispose of any shares of Capital Stock of any Restricted Subsidiary of the
Company (other than to the Company or a Wholly Owned Subsidiary of the Company),
except that the Company and any such Restricted Subsidiary may, in any single
transaction, sell all, but not less than all, of the issued and outstanding
Capital Stock of any such Restricted Subsidiary to any Person, subject to
complying with the provisions of the Indenture described under '--Limitation on
Certain Asset Dispositions' above and '-- Change of Control' and 'Mergers,
Consolidations and Certain Sales of Assets' below and (b) issue shares of
Capital Stock of a Restricted Subsidiary of the Company (other than directors'
qualifying shares), or securities convertible into, or warrants, rights or
options to subscribe for or purchase shares of, Capital Stock of a Restricted
Subsidiary of the Company to any Person other than to the Company or a Wholly
Owned Subsidiary of the Company.
Limitation on Transactions with Affiliates and Related Persons
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, enter into directly or indirectly any
transaction with any of their respective Affiliates or Related Persons (other
than the Company or a Restricted Subsidiary of the Company), including, without
limitation, the purchase, sale, lease or exchange of property, the rendering of
any service, or the making of any guarantee, loan, advance or Investment, either
directly or indirectly, involving aggregate consideration in excess of
$[ ] unless a majority of the disinterested directors of the Board of
Directors of the Company determines, in its good faith judgment evidenced by a
resolution of such Board of Directors filed with the Trustee, that the terms of
such transaction are at least as favorable as the terms that could be obtained
by the Company or such Restricted Subsidiary, as the case may be, in a
comparable transaction made on an arms-length basis between unaffiliated
parties; provided, however, that if the aggregate consideration is in excess of
$[ ] the Company shall also obtain, prior to the consummation of the
transaction, the favorable opinion as to the fairness of the transaction to the
Company or such Restricted Subsidiary, from a financial point of view from an
independent financial advisor. The provisions of this covenant shall not apply
to (i) transactions permitted by the provisions of the Indenture described above
under the caption '--Limitation on Restricted Payments' above, (ii) reasonable
fees and compensation paid to, and indemnity provided on behalf of, officers,
directors and employees of the Company
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and its Restricted Subsidiaries as determined in good faith by the Board of
Directors of the Company, (iii) loans to employees in the ordinary course of
business which are approved in good faith by the Board of Directors of the
Company and (iv) transactions exclusively between or among the Issuer and the
Guarantors or exclusively between or among such Guarantors, provided such
transactions are not otherwise prohibited by the Indenture.
Change of Control
Within 30 days following the date of the consummation of a transaction
resulting in a Change of Control, the Issuer will commence an Offer to Purchase
all outstanding Notes at a purchase price in cash equal to 101% of their
principal amount plus accrued interest, if any, to the Purchase Date. Such Offer
to Purchase will be consummated not earlier than 30 days and not later than 60
days after the commencement thereof. Each Holder shall be entitled to tender all
or any portion of the Notes owned by such holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Note tendered must be
an integral multiple of $1,000 principal amount. A 'Change of Control' will be
deemed to have occurred in the event that (whether or not otherwise permitted by
the Indenture), after the Issue Date (a) any Person or any Persons acting
together that would constitute a group (for purposes of Section 13(d) of the
Exchange Act, or any successor provision thereto) (a 'Group'), together with any
Affiliates or Related Persons thereof, other than Permitted Holders, shall
'beneficially own' (as defined in Rule 13d-3 under the Exchange Act, or any
successor provision thereto) at least [ ]% of the voting power of the
outstanding Voting Stock of the Company or the Issuer; (b) any sale, lease or
other transfer (in one transaction or a series of related transactions) is made
by the Company or any of its Restricted Subsidiaries of all or substantially all
of the consolidated assets of the Company and its Restricted Subsidiaries to any
Person; (c) the Company consolidates with or merges with or into another Person
or any Person consolidates with, or merges with or into, the Company, in any
such event pursuant to a transaction in which immediately after the consummation
thereof Persons owning a majority of the Voting Stock of the Company immediately
prior to such consummation shall cease to own a majority of the Voting Stock of
the Company or the surviving entity if other than the Company; (d) Continuing
Directors cease to constitute at least a majority of the Board of Directors of
the Company; or (e) the stockholders of the Company or the Issuer approve any
plan or proposal for the liquidation or dissolution of the Company or the
Issuer.
In the event that the Issuer makes an Offer to Purchase the Notes, the
Issuer shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act.
With respect to the sale of assets referred to in the definition of 'Change
of Control,' the phrase 'all or substantially all' of the assets of the Company
will likely be interpreted under applicable law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of 'all or substantially
all' of the assets of the Company has occurred. In addition, no assurances can
be given that the Issuer will be able to acquire Notes tendered upon the
occurrence of a Change of Control. The ability of the Issuer to pay cash to the
holders of Notes upon a Change of Control may be limited by its then existing
financial resources. The Credit Agreement will contain certain covenants
prohibiting, or requiring waiver or consent of the lenders thereunder prior to,
the repurchase of the Notes upon a Change of Control and future debt agreements
of the Company and its Restricted Subsidiaries may provide the same. If such
waivers or consents are not obtained or such Indebtedness is not repaid, the
Issuer will remain prohibited from repurchasing the Notes. In such event, the
Issuer's failure to purchase tendered Notes would constitute an Event of Default
under the Indenture which would in turn constitute a default under the Credit
Agreement and possibly other Indebtedness. None of the provisions relating to a
repurchase upon a Change of Control are waivable by the Board of Directors of
the Company or the Trustee.
The foregoing provisions will not prevent the Company or its Restricted
Subsidiaries from entering into transactions of the types described above with
management or their affiliates. In addition, such provisions may not necessarily
afford the Holders of the Notes protection in the event of a highly leveraged
transaction, including a reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect the Holders because
such transactions may not involve a shift in voting power or beneficial
ownership, or even if they do, may not involve a shift of the magnitude required
under the definition of Change of Control to trigger the provisions.
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Additional Guarantors
The Indenture will provide that the Company will not create or acquire, nor
permit any of its Restricted Subsidiaries to create or acquire, any Restricted
Subsidiary after the Issue Date unless, at the time such Restricted Subsidiary
has either assets or stockholder's equity in excess of $25,000, such Restricted
Subsidiary (a) executes and delivers to the Trustee a supplemental indenture in
form reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Issuer's obligations under
the Notes and the Indenture on the terms set forth in the Indenture and (b)
delivers to the Trustee an opinion of counsel that such supplemental indenture
has been duly authorized, executed and delivered by such Restated Subsidiary and
continues a legal, valid, binding and enforceable obligation of such Restricted
Subsidiary.
Provision of Financial Information
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, the Company shall file with
the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
such Section 13(a) or 15(d) or any successor provision thereto if the Company
were so required, such documents to be filed with the Commission on or prior to
the respective dates (the 'Required Filing Dates') by which the Company would
have been required so to file such documents if the Company were so required.
Regardless of whether the Company files such reports or other documents with the
Commission, the Company shall (a) within 15 days of each Required Filing Date
(i) transmit by mail to all Holders of Notes, as their names and addresses
appear in the Note Register, without cost to such Holders, and (ii) file with
the Trustee, copies of such annual reports, quarterly reports and other
documents, and (b) if filing such documents by the Company with the Commission
is not permitted under the Exchange Act, promptly upon written request supply
copies of such documents to any prospective holder of Notes.
Mergers, Consolidations and Certain Sales of Assets
The Company will not consolidate or merge with or into any Person, or sell,
assign, lease, convey or otherwise dispose of (or cause or permit any Restricted
Subsidiary of the Company to consolidate or merge with or into any Person or
sell, assign, lease, convey or otherwise dispose of) all or substantially all of
the Company's assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries), whether as an entirety or substantially an entirety in
one transaction or a series of related transactions, including by way of
liquidation or dissolution, to any Person unless, in each such case: (i) the
entity formed by or surviving any such consolidation or merger (if other than
the Company or such Restricted Subsidiary, as the case may be), or to which such
sale, assignment, lease, conveyance or other disposition shall have been made
(the 'Surviving Entity'), is a corporation organized and existing under the laws
of the United States, any state thereof or the District of Columbia; (ii) the
Surviving Entity assumes by supplemental indenture all of the obligations of the
applicable Guarantor under its Guarantee and the Indenture or the Issuer on the
Notes and under the Indenture, as the case may be; (iii) immediately after
giving effect to such transaction and the use of any net proceeds therefrom on a
pro forma basis, the Company or the Surviving Entity, as the case may be, (A)
shall have a Consolidated Net Worth equal to or greater than the Consolidated
Net Worth of the Company immediately prior to such transaction and (B) could
Incur at least $1.00 of Indebtedness pursuant to clause (i) of the provisions of
the Indenture described under '--Limitation on Indebtedness' above; (iv)
immediately before and after giving effect to such transaction and treating any
Indebtedness which becomes an obligation of the Company or any of its such
Restricted Subsidiaries as a result of such transaction as having been incurred
by the Company or such Restricted Subsidiary, as the case may be, at the time of
the transaction, no Default or Event of Default shall have occurred and be
continuing; and (v) if, as a result of any such transaction, property or assets
of the Company or a Restricted Subsidiary would become subject to a Lien not
excepted from the provisions of the Indenture described under '--Limitation on
Liens' above, the Company, the Restricted Subsidiary or the Surviving Entity, as
the case may be, shall have secured the Notes as required by said covenant. The
provisions of this paragraph shall not apply to any merger of a Restricted
Subsidiary of the Company (other than the Issuer) with or into the Company or a
Wholly Owned Subsidiary of the Company.
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EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due (whether or not
prohibited by the provisions of the Indenture described under '--Ranking'
above); (b) failure to pay any interest on any Note when due and payable, and
the default continues for 30 days (whether or not prohibited by the provisions
of the Indenture described under '--Ranking' above); (c) default in the payment
of principal of and interest on Notes required to be purchased pursuant to an
Offer to Purchase as described under '--Covenants--Change of Control' and
'--Covenants-- Limitation on Certain Asset Dispositions' above when due and
payable (whether or not prohibited by the provisions of the Indenture described
under '--Ranking' above); (d) failure to perform or comply with any of the
provisions described under '--Covenants--Mergers, Consolidations and Certain
Sales of Assets' above; (e) failure to perform any other covenant or agreement
of the Company or its Restricted Subsidiaries under the Indenture or the Notes
and the default continues for 30 days after written notice to the Company by the
Trustee or Holders of at least 25% in aggregate principal amount of outstanding
Notes; (f) default under the terms of one or more instruments evidencing or
securing Indebtedness of the Company or any of its Restricted Subsidiaries
having an outstanding principal amount of $[ ] million or more
individually or in the aggregate that has resulted in the acceleration of the
payment of such Indebtedness or failure to pay principal when due at the stated
maturity of any such Indebtedness; (g) the rendering of a final judgment or
judgments (not subject to appeal) against the Company or any of its Subsidiaries
in an amount of $[ ] million or more which remains undischarged or
unstayed for a period of 60 days after the date on which the right to appeal has
expired; (h) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Subsidiaries; and (i) a Guarantee ceases to
be in full force and effect or is declared null and void and unenforceable or is
found to be invalid or a Guarantor denies its liability under the Guarantee
(other than by reason of a release of such Guarantor from the Guarantee in
accordance with the terms of the Indenture and the Guarantee).
If an Event of Default (other than an Event of Default with respect to the
Company or the Issuer described in clause (h) of the preceding paragraph) shall
occur and be continuing, either the Trustee or the Holders of at least 25% in
aggregate principal amount of the outstanding Notes may accelerate the maturity
of all Notes; provided, however, that after such acceleration, but before a
judgment or decree based on acceleration, the Holders of a majority in aggregate
principal amount of outstanding Notes may, under certain circumstances, rescind
and annul such acceleration if all Events of Default, other than the non-payment
of accelerated principal, have been cured or waived as provided in the
Indenture. If an Event of Default specified in clause (h) of the preceding
paragraph with respect to the Company or the Issuer occurs, the outstanding
Notes will ipso facto become immediately due and payable without any declaration
or other act on the part of the Trustee or any holder. For information as to
waiver of defaults, see '--Modification and Waiver.'
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Notes, give
the holders thereof notice of all uncured Defaults or Events of Default known to
it; provided, however, that, except in the case of an Event of Default or a
Default in payment with respect to the Notes or a Default or Event of Default in
complying with '--Covenants--Mergers, Consolidations and Certain Sales of
Assets,' the Trustee shall be protected in withholding such notice if and so
long as the Board of Directors or responsible officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
holders of the Notes.
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder shall
have previously given to the Trustee written notice of a continuing Event of
Default and unless the holders of at least 25% in aggregate principal amount of
the outstanding Notes shall have made written request, and offered reasonable
indemnity, to the Trustee to institute such proceeding as Trustee, and the
Trustee shall not have received from the holders of a majority in aggregate
principal amount of the outstanding Notes a direction inconsistent with such
request and shall have failed to institute such proceeding within 60 days.
However, such limitations do not apply to a suit instituted by a holder of a
Note for enforcement of payment of the principal of and premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
The Issuer will be required to furnish to the Trustee annually a statement
as to its performance of certain of its obligations under the Indenture and as
to any default in such performance.
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SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Issuer may terminate its substantive obligations in respect of the
Notes and the substantive obligations of the Guarantors in respect of the
Guarantees by delivering all outstanding Notes to the Trustee for cancellation
and paying all sums payable by the Issuer on account of principal of, premium,
if any, and interest on all Notes or otherwise. In addition to the foregoing,
the Issuer may, provided that no Default or Event of Default has occurred and is
continuing or would arise therefrom (or, with respect to a Default or Event of
Default specified in clause (h) of '--Events of Default' above, any time on or
prior to the 91st calendar day after the date of such deposit (it being
understood that this condition shall not be deemed satisfied until after such
91st day)) and provided that no default under any Senior Debt would result
therefrom, terminate its substantive obligations in respect of the Notes and the
substantive obligations of the Guarantors in respect of the Guarantees (except
for the Issuer's obligation to pay the principal of (and premium, if any, on)
and the interest on the Notes and such Guarantors' guarantee thereof) by (i)
depositing with the Trustee, under the terms of an irrevocable trust agreement,
money or United States Government Obligations sufficient (without reinvestment)
to pay all remaining indebtedness on the Notes, (ii) delivering to the Trustee
either an Opinion of Counsel or a ruling directed to the Trustee from the
Internal Revenue Service to the effect that the holders of the Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such deposit and termination of obligations, (iii) delivering to the Trustee an
Opinion of Counsel to the effect that the Issuer's exercise of its option under
this paragraph will not result in the Issuer, the Trustee or the trust created
by the Issuer's deposit of funds pursuant to this provision becoming or being
deemed to be an 'investment company' under the Investment Company Act of 1940,
as amended, and (iv) complying with certain other requirements set forth in the
Indenture. In addition, the Issuer may, provided that no Default or Event of
Default has occurred, and is continuing or would arise therefrom (or, with
respect to a Default or Event of Default specified in clause (h) of '--Events of
Default' above, any time on or prior to the 91st calendar day after the date of
such deposit (it being understood that this condition shall not be deemed
satisfied until after such 91st day)) and provided that no default under any
Senior Debt would result therefrom, terminate all of its substantive obligations
in respect of the Notes and all of the substantive obligations of the Guarantors
in respect of the Guarantees (including the Issuer's obligation to pay the
principal of (and premium, if any, on) and interest on the Notes and such
Guarantors' guarantee thereof by (i) depositing with the Trustee, under the
terms of an irrevocable trust agreement, money or United States Government
Obligations sufficient (without reinvestment) to pay all remaining indebtedness
on the Notes, (ii) delivering to the Trustee either a ruling directed to the
Trustee from the Internal Revenue Service to the effect that the holders of the
Notes will not recognize income, gain or loss for federal income tax purposes as
a result of such deposit and termination of obligations or an Opinion of Counsel
based upon such a ruling addressed to the Trustee or a change in the applicable
Federal tax law since the date of the Indenture, to such effect, (iii)
delivering to the Trustee an Opinion of Counsel to the effect that the Issuer's
exercise of its option under this paragraph will not result in the Company, the
Trustee or the trust created by the Issuer's deposit of funds pursuant to this
provision becoming or being deemed to be an 'investment company' under the
Investment Company Act of 1940, as amended, and (iv) complying with certain
other requirements set forth in the Indenture.
The Issuer may make an irrevocable deposit pursuant to this provision only
if at such time it is not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the instruments governing
Senior Debt and the Issuer has delivered to the Trustee and any Paying Agent an
Officers' Certificate to that effect.
GOVERNING LAW
The Indenture, the Notes and the Guarantee will be governed by the laws of
the State of New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Issuer and
the Trustee with the consent of the holders of a majority in aggregate principal
amount of the outstanding Notes; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Note affected thereby,
(a) change the Stated Maturity of the principal of or any installment of
interest on any Note or alter the optional redemption or repurchase provisions
of any Note or the Indenture in a manner adverse to the holders of the Notes,
(b) reduce the principal amount of (or the premium on) any Note, (c) reduce the
rate of or extend the time for
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payment of interest on any Note, (d) change the place or currency of payment of
principal of (or premium) or interest on any Note, (e) modify any provisions of
the Indenture relating to the waiver of past defaults (other than to add
sections of the Indenture subject thereto) or the right of the holders to
institute suit for the enforcement of any payment on or with respect to any Note
or the Guarantee or the modification and amendment of the Indenture and the
Notes (other than to add sections of the Indenture or the Notes which may not be
amended, supplemented or waived without the consent of each holder affected),
(f) reduce the percentage of the principal amount of outstanding Notes necessary
for amendment to or waiver of compliance with any provision of the Indenture or
the Notes or for waiver of any Default, (g) waive a default in the payment of
principal of, interest on, or redemption payment with respect to, any Note
(except a recision of acceleration of the Notes by the holders as provided in
the Indenture and a waiver of the payment default that resulted from such
acceleration), (h) modify the ranking or priority of the Notes or the Guarantee
or modify the definition of Senior Debt or Designated Senior Debt or amend or
modify the subordination provisions of the Indenture in any manner adverse to
the Holders, (i) release the Guarantors from any of their respective obligations
under the Guarantee or the Indenture otherwise than in accordance with the
Indenture, or (j) modify the provisions relating to any Offer to Purchase
required under the covenants described under '--Covenants--Limitation on Certain
Asset Dispositions' or '--Covenants--Change of Control' in a manner materially
adverse to the holders of Notes with respect to any Asset Disposition that has
been consummated or Change of Control that has occurred.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Company
and its Restricted Subsidiaries with certain restrictive provisions of the
Indenture. Subject to certain rights of the Trustee, as provided in the
Indenture, the Holders of a majority in aggregate principal amount of the
outstanding Notes, on behalf of all Holders of Notes, may waive any past default
under the Indenture, except a default in the payment of principal, premium or
interest or a default arising from failure to purchase any Note tendered
pursuant to an Offer to Purchase, or a default in respect of a provision that
under the Indenture cannot be modified or amended without the consent of the
holder of each outstanding Note affected.
THE TRUSTEE
The Indenture provides that, except during the continuance of a Default,
the Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture and
provisions of the Trust Indenture Act incorporated by reference therein contain
limitations on the rights of the Trustee, should it become a creditor of the
Company, the Guarantors, or any other obligor upon the Notes, to obtain payment
of claims in certain cases or to realize on certain property received by it in
respect of any such claim as security or otherwise. The Trustee is permitted to
engage in other transactions with the Company or an Affiliate of the Company;
provided, however, that if it acquires any conflicting interest (as defined in
the Indenture or in the Trust Indenture Act), it must eliminate such conflict or
resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form without interest coupons.
The Notes will be issued in the form of one or more fully registered Global
Notes (the 'Global Notes') that will be deposited with, or on behalf of, The
Depository Trust Company, New York, New York, as Depositary (the 'Depositary'),
and registered in the name of Cede & Co., the Depositary's nominee. Except as
set forth below, the Global Notes may be transferred, in whole and not in part,
only to another nominee of the Depositary or to a successor of the Depositary or
its nominee.
The Depositary has advised as follows: It is a limited-purpose trust
company which holds securities for its participating organizations (the
'Participants') and facilitates the settlement among Participants of securities
transactions in such securities through electronic book-entry changes in its
Participants' accounts. Participants include securities brokers and dealers
(including the Underwriters), banks and trust companies, clearing corporations
and certain other organizations. Access to the Depositary's system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a
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Participant, either directly or indirectly ('indirect participants'). Persons
who are not Participants may beneficially own securities held by the Depositary
only through Participants or indirect participants.
The Depositary advises that its established procedures provide that (i)
upon issuance of the Notes by the Issuer, the Depositary will credit the
accounts of Participants designated by the Underwriters with the principal
amounts of the Notes purchased by the Underwriters and (ii) ownership of
interests in the Global Notes will be shown on, and the transfer of the
ownership will be effected only through, records maintained by the Depositary,
the Participants and the indirect participants. The laws of some states require
that certain persons take physical delivery in definitive form of securities
which they own. Consequently, the ability to transfer beneficial interests in
the Global Notes is limited to that extent.
So long as a nominee of the Depositary is the registered owner of the
Global Notes, that nominee for all purposes will be considered the sole owner or
holder of such Global Notes under the Indenture. Except as provided below,
owners of beneficial interests in the Global Notes will not be entitled to have
Notes registered in their names, will not receive or be entitled to receive
physical delivery of Notes in definitive form and will not be considered the
owners or Holders thereof under the Indenture. Accordingly, each person owning a
beneficial interest in the Global Notes must rely on the procedures of the
Depositary and, if the beneficial owner is not a Participant, on the procedures
of the Participant through which the beneficial owner owns its interest, to
exercise any rights of a Holder under the Indenture. The Issuer understands that
under existing practice, if the Issuer requests any action of the Holders, or a
beneficial owner desires to take any action a holder is entitled to take, the
Depositary would act upon the instructions of, or authorize, the Participant to
take such action.
None of the Issuer, the Trustee, any Paying Agent or the Security Registrar
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Notes, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Principal and interest payments on the Notes registered in the name of the
Depositary's nominee will be made by the Trustee to the Depositary. Under the
terms of the Indenture, the Issuer and the Trustee will treat the persons in
whose names the Notes are registered as the owners of the Notes for the purpose
of receiving payment of principal of and interest on the Notes and for all other
purposes whatsoever. Therefore, none of the Issuer, the Trustee or any Paying
Agent has any direct responsibility or liability for the payment of principal of
or interest on the Notes to owners of beneficial interests in the Global Notes.
The Depositary has advised the Issuer and the Trustee that its present practice
is to credit the accounts of the Participants on the appropriate payment date in
accordance with their respective holdings in principal amount of beneficial
interests in the Global Notes as shown on the records of the Depositary, unless
the Depositary has reason to believe that it will not receive payment on the
payment date. Payments by Participants and indirect participants to owners of
beneficial interests in the Global Notes will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in 'street name,' and
will be the responsibility of the Participants or indirect participants.
If the Depositary is at any time unwilling or unable to continue as
depositary and a successor depositary is not appointed by the Issuer within 90
days, the Issuer will issue Notes in definitive form in exchange for the Global
Notes. In addition, the Issuer may at any time determine not to have the Notes
represented by Global Notes and, in such event, will issue Notes in definitive
form in exchange for the Global Notes. In either instance, an owner of a
beneficial interest in the Global Notes will be entitled to have Notes equal in
principal amount to such beneficial interest registered in its name and will be
entitled to physical delivery of such Notes in definitive form. Notes so issued
in definitive form will be issued in denominations of $1,000 and integral
multiples thereof and will be issued in registered form only, without coupons.
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SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. All payments of principal and interest to the Depositary will
be made by the Issuer in immediately available funds. The Notes will trade in
the Depository Trust Company's Same-Day Funds Settlement System until maturity,
and secondary market trading activity in the Notes will therefore settle in
immediately available funds. No assurance can be given as to the effect, if any,
of settlements in immediately available funds on trading activity in the Notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
'Acquired Indebtedness' means, with respect to any Person, Indebtedness of
such Person (i) existing at the time such Person becomes a Restricted Subsidiary
or (ii) assumed in connection with the acquisition of assets from another
Person, including Indebtedness Incurred in connection with, or in contemplation
of, such Person becoming a Restricted Subsidiary or such acquisition, as the
case may be.
'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with any specified Person. For purposes of this definition, 'control'
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
'controlling' and 'controlled' have meanings correlative to the foregoing.
'Asset Disposition' means any sale, transfer or other disposition
(including, without limitation, by merger, consolidation or sale-and-leaseback
transaction) of (i) shares of Capital Stock of a Restricted Subsidiary of the
Company (other than directors' qualifying shares) or (ii) property or assets of
the Company or any Restricted Subsidiary of the Company other than in the
ordinary course of business; provided, however, that an Asset Disposition shall
not include (a) any sale, transfer or other disposition of shares of Capital
Stock, property or assets by a Restricted Subsidiary of the Company (other than
the Issuer) to the Issuer or to any Guarantor, (b) any sale, transfer or other
disposition of defaulted receivables for collection or any sale, transfer or
other disposition of property or assets in the ordinary course of business, (c)
any isolated sale, transfer or other disposition that does not involve aggregate
consideration in excess of $[ ] individually, (d) the grant in the
ordinary course of business of any non-exclusive license of patents, trademarks,
registrations therefor and other similar intellectual property, (e) any Lien (or
foreclosure thereon) securing Indebtedness to the extent that such Lien is
granted in compliance with '--Covenants--Limitation on Liens' above, (f) any
Restricted Payment permitted by '--Covenants--Limitation on Restricted Payments'
above, (g) any disposition of assets or property in the ordinary course of
business to the extent such property or assets are obsolete, worn-out or no
longer useful in the Company's or its Restricted Subsidiaries' business, (h) the
sale, lease, conveyance or disposition or other transfer of all or substantially
all of the assets of the Company as permitted under '--Covenants--Mergers,
Consolidations and Certain Sales of Assets' above; provided, however, that the
assets not so sold, leased, conveyed, disposed of or otherwise transferred shall
be deemed an Asset Disposition or (i) any disposition that constitutes a Change
of Control.
'Average Life' means, as of the date of determination, with respect to any
Indebtedness for borrowed money or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the dates of each successive scheduled principal or liquidation
value payments of such Indebtedness or Preferred Stock, respectively, and the
amount of such principal or liquidation value payments, by (ii) the sum of all
such principal or liquidation value payments.
'Bankruptcy Code' means Title 11, United States Code.
'Capital Lease Obligations' of any Person means the obligations to pay rent
or other amounts under a lease of (or other Indebtedness arrangements conveying
the right to use) real or personal property of such Person
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which are required to be classified and accounted for as a capital lease or
liability on the face of a balance sheet of such Person in accordance with GAAP.
The amount of such obligations shall be the capitalized amount thereof in
accordance with GAAP and the stated maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
'Capital Stock' of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person (including any Preferred Stock outstanding on the Issue Date).
'Citicorp' means Citicorp, a Delaware corporation.
'Common Stock' of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
'Consolidated Cash Flow Available For Fixed Charges' of any Person means
for any period the Consolidated Net Income of such Person for such period
increased (to the extent Consolidated Net Income for such period has been
reduced thereby) by the sum of (without duplication) (i) Consolidated Interest
Expense of such Person for such period, plus (ii) Consolidated Income Tax
Expense of such Person for such period, plus (iii) the consolidated depreciation
and amortization expense included in the income statement of such Person
prepared in accordance with GAAP for such period, plus (iv) any other non-cash
charges to the extent deducted from or reflected in Consolidated Net Income
except for any non-cash charges that represent accruals of, or reserves for,
cash disbursements to be made in any future accounting period.
'Consolidated Cash Flow Ratio' of any Person means for any period the ratio
of (i) Consolidated Cash Flow Available for Fixed Charges of such Person for
such period to (ii) the sum of (A) Consolidated Interest Expense of such Person
for such period, plus (B) the annual interest expense with respect to any
Indebtedness proposed to be Incurred by such Person or its Restricted
Subsidiaries, minus (C) Consolidated Interest Expense of such Person to the
extent included in clause (ii)(A) with respect to any Indebtedness that will no
longer be outstanding as a result of the Incurrence of the Indebtedness proposed
to be Incurred, plus (D) the annual interest expense with respect to any other
Indebtedness Incurred by such Person or its Restricted Subsidiaries since the
end of such period to the extent not included in clause (ii)(A), minus (E)
Consolidated Interest Expense of such Person to the extent included in clause
(ii)(A) with respect to any Indebtedness that no longer is outstanding as a
result of the Incurrence of the Indebtedness referred to in clause (ii)(D);
provided, however, that in making such computation, the Consolidated Interest
Expense of such Person attributable to interest on any Indebtedness bearing a
floating interest rate shall be computed on a pro forma basis as if the rate in
effect on the date of computation (after giving effect to any hedge in respect
of such Indebtedness that will, by its terms, remain in effect until the earlier
of the maturity of such Indebtedness or the date one year after the date of such
determination) had been the applicable rate for the entire period; provided,
further, however, that, in the event such Person or any of its Restricted
Subsidiaries has made any Asset Dispositions or acquisitions of assets not in
the ordinary course of business (including acquisitions of other Persons by
merger, consolidation or purchase of Capital Stock) during or after such period
and on or prior to the date of measurement, such computation shall be made on a
pro forma basis as if the Asset Dispositions or acquisitions had taken place on
the first day of such period. Calculations of pro forma amounts in accordance
with this definition shall be done in accordance with Article 11 of Regulation
S-X under the Securities Act of 1933 or any successor provision and may include
reasonably ascertainable cost savings.
'Consolidated Income Tax Expense' of any Person means for any period the
consolidated provision for income taxes of such Person and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
'Consolidated Interest Expense' for any Person means for any period,
without duplication, (a) the consolidated interest expense included in a
consolidated income statement (without deduction of interest or finance charge
income) of such Person and its Restricted Subsidiaries for such period
calculated on a
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consolidated basis in accordance with GAAP and (b) dividend requirements of such
Person and its Restricted Subsidiaries with respect to Disqualified Stock and
with respect to all other Preferred Stock of Restricted Subsidiaries of such
Person (in each case whether in cash or otherwise (except dividends payable
solely in shares of Capital Stock of such Person or such Restricted Subsidiary))
paid, declared, accrued or accumulated during such period times a fraction the
numerator of which is one and the denominator of which is one minus the then
effective consolidated Federal, state and local tax rate of such Person,
expressed as a decimal.
'Consolidated Net Income' of any Person means for any period the
consolidated net income (or loss) of such Person and its Restricted Subsidiaries
for such period determined on a consolidated basis in accordance with GAAP;
provided, however, that there shall be excluded therefrom (a) the net income (or
loss) of any Person acquired by such Person or a Restricted Subsidiary of such
Person in a pooling-of-interests transaction for any period prior to the date of
such transaction, (b) the net income (but not net loss) of any Restricted
Subsidiary of such Person which is subject to restrictions which prevent or
limit the payment of dividends or the making of distributions to such Person to
the extent of such restrictions (regardless of any waiver thereof), (c) non-cash
gains and losses due solely to fluctuations in currency values, (d) the net
income of any Person that is not a Restricted Subsidiary of such Person, except
to the extent of the amount of dividends or other distributions representing
such Person's proportionate share of such other Person's net income for such
period actually paid in cash to such Person by such other Person during such
period, (e) gains but not losses on Asset Dispositions by such Person or its
Restricted Subsidiaries, (f) all gains and losses classified as extraordinary,
unusual or nonrecurring in accordance with GAAP and (g) in the case of a
successor to the referent Person by consolidation or merger or as a transferee
of the referent Person's assets, any earnings (or losses) of the successor
corporation prior to such consolidation, merger or transfer of assets.
'Consolidated Net Worth' of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
'Continuing Director' means a director who either was a member of the Board
of Directors of the Company on the Issue Date or who became a director of the
Company subsequent to the Issue Date and whose election, or nomination for
election by the Company's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Company, either by a
specific vote or by approval of the proxy statement issued by the Company on
behalf of the entire Board of Directors of the Company in which such individual
is named as nominee for director.
'Credit Agreement' means, collectively, (i) that certain Credit Agreement,
dated as of [ ], between the Company and [ ] and (ii) any Refinancings
thereof or any amendments, modifications or supplements thereto (including,
without limitation, any amendment increasing the amount borrowed or
reimbursement obligation thereunder) whether by or with the same or any other
lender, creditor, or group of creditors and including related notes, guarantee
agreements and other instruments and agreements executed in connection
therewith.
'CVC' means Citicorp Venture Capital, Ltd.
'Default' means any event that is, or after notice or lapse of time or both
would become, an Event of Default.
'Designated Senior Debt' means (i) so long as the Credit Agreement is in
effect, the Senior Debt incurred thereunder and (ii) thereafter, any other
Senior Debt which has at the time of initial issuance an aggregate outstanding
principal amount in excess of $25 million which has been so designated as
Designated Senior Debt by the Board of Directors of the Company at the time of
initial issuance in a resolution delivered to the Trustee.
'Disqualified Stock' of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final maturity of the Notes pursuant to
change of control provisions similar to those applicable to the Notes, provided,
however, that such provisions
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expressly provided that no payment can be made on such Capital Stock until any
Offer to Purchase the Notes required pursuant to the provisions described under
'--Change of Control' above shall have been consummated and paid in full).
'Exchange Act' means the Securities Exchange Act of 1934, as amended and
the rules and regulations promulgated by the Commission thereunder.
'GAAP' means generally accepted accounting principles, consistently
applied, as in effect on the Issue Date in the United States of America, as set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as is approved by a significant segment of the
accounting profession in the United States. All ratios and computations based on
GAAP contained in the Indenture shall be computed in conformity with GAAP
applied on a consistent basis.
'Guarantee' means the guarantee of the Notes by each Guarantor under the
Indenture.
'Guarantor' means the Company, each of its existing Restricted Subsidiaries
(other than the Issuer) and each Restricted Subsidiary of the Company formed or
acquired after the Issue Date, which pursuant to the terms of the Indenture
executes a supplement to the Indenture as a Guarantor.
'Incur' means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and 'Incurrence,' 'Incurred' and 'Incurring' shall have meanings
correlative to the foregoing). Indebtedness of any Person or any of its
Restricted Subsidiaries existing at the time such Person becomes a Restricted
Subsidiary of such Person (or is merged into or consolidates with such Person or
any of its Restricted Subsidiaries), whether or not such Indebtedness was
incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary of such Person (or being merged into or consolidated with
such Person or any of its Restricted Subsidiaries), shall be deemed Incurred at
the time any such Person becomes a Restricted Subsidiary of such Person or
merges into or consolidates with such Person or any of its Restricted
Subsidiaries.
'Indebtedness' means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (iv)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business which are not overdue or
which are being contested in good faith), (v) every Capital Lease Obligation of
such Person, (vi) every net obligation under interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements of such
Person and (vii) every obligation of the type referred to in clauses (i) through
(vi) of another Person and all dividends of another Person the payment of which,
in either case, such Person has guaranteed or is responsible or liable for,
directly or indirectly, as obligor, guarantor or otherwise. Indebtedness shall
include the liquidation preference and any mandatory redemption payment
obligations in respect of any Disqualified Stock of the Company, and any
Preferred Stock of a Subsidiary of the Company (other than Preferred Stock of a
Subsidiary of the Company issued to and held by the Company or a Restricted
Subsidiary of the Company). Indebtedness shall never be calculated taking into
account any cash and cash equivalents held by such Person. Indebtedness shall
not include obligations arising from agreements of the Company or a Restricted
Subsidiary of the Company to provide for indemnification, adjustment of purchase
price, earn-out, or other similar obligations, in each case, incurred or assumed
in connection with the disposition of any business or assets of a Restricted
Subsidiary of the Company.
'Investment' by any Person means any direct or indirect loan, advance,
guarantee or other extension of credit or capital contribution to (by means of
transfers of cash or other property to others or payments for
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property or services for the account or use of others, or otherwise), or
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
securities or evidence of Indebtedness issued by any other Person.
'Issue Date' means the original issue date of the Notes.
'Lien' means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, security interest, lien, charge,
easement (other than any easement not materially impairing usefulness or
marketability), encumbrance, preference, priority or other security agreement
with respect to such property or assets (including, without limitation, any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
'Management Investors' means any of [ ] and other full-time
members of management of the Company who acquire stock of the Company through
management stock purchase or option plans.
'Net Available Proceeds' from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Indebtedness or other obligations relating to such properties or
assets or received in any other non-cash form) therefrom by such Person,
including any cash received by way of deferred payment or upon the monetization
or other disposition of any non-cash consideration (including notes or other
securities) received in connection with such Asset Disposition, net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred and all federal, state, foreign and local taxes required to be accrued
as a liability as a consequence of such Asset Disposition, (ii) all payments
made by such Person or its Restricted Subsidiaries on any Indebtedness which is
secured by such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must by the terms of such Lien, or in order to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (iii) all payments made
with respect to liabilities associated with the assets which are the subject of
the Asset Disposition, including, without limitation, trade payables and other
accrued liabilities, (iv) appropriate amounts to be provided by such Person or
any Restricted Subsidiary thereof, as the case may be, as a reserve in
accordance with GAAP against any liabilities associated with such assets and
retained by such Person or any Restricted Subsidiary thereof, as the case may
be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, until such time as
such amounts are no longer reserved or such reserve is no longer necessary (at
which time any remaining amounts will become Net Available Proceeds to be
allocated in accordance with the provisions of clause (iii) of the covenant of
the Indenture described under '--Covenants--Limitation on Certain Asset
Dispositions') and (v) all distributions and other payments made to minority
interest holders in Restricted Subsidiaries of such Person or joint ventures as
a result of such Asset Disposition.
'Net Investment' means the excess of (i) the aggregate amount of all
Investments in Unrestricted Subsidiaries or joint ventures made by the Company
or any Restricted Subsidiary on or after the Issue Date (in the case of an
Investment made other than in cash, the amount shall be the fair market value of
such Investment as determined in good faith by the Board of Directors of the
Company or such Restricted Subsidiary) over (ii) the aggregate amount returned
in cash on or with respect to such Investments whether through interest
payments, principal payments, dividends or other distributions or payments,
provided, however, that such payments or distributions shall not be (and have
not been) included in subclause (b) of clause (3) of the first paragraph
described under '-- Covenants--Limitation on Restricted Payments,' provided,
further that with respect to all Investments made in any Unrestricted Subsidiary
or joint venture the amounts referred to in clause (ii) above with respect to
such Investments shall not exceed the aggregate amount of all such Investments
made in such Unrestricted Subsidiary or joint venture.
'Note Payment' has the meaning set forth in '-- Ranking.'
'Offer To Purchase' means a written offer (the 'Offer') sent by the Issuer
by first class mail, postage prepaid, to each holder at his address appearing in
the register for the Notes on the date of the Offer offering to purchase up to
the principal amount of Notes specified in such Offer at the purchase price
specified in such Offer
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(as determined pursuant to the Indenture). Unless otherwise required by
applicable law, the Offer shall specify an expiration date (the 'Expiration
Date') of the Offer to Purchase which shall be not less than 30 days nor more
than 60 days after the date of such Offer and a settlement date (the 'Purchase
Date') for purchase of Notes within five Business Days after the Expiration
Date. The Issuer shall notify the Trustee at least 15 Business Days (or such
shorter period as is acceptable to the Trustee) prior to the mailing of the
Offer of the Issuer's obligation to make an Offer to Purchase, and the Offer
shall be mailed by the Issuer or, at the Issuer's request, by the Trustee in the
name and at the expense of the Issuer. The Offer shall contain all the
information required by applicable law to be included therein. The Offer shall
contain all instructions and materials necessary to enable such holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such amount has been determined
pursuant to the Section of the Indenture requiring the Offer to Purchase)
(the 'Purchase Amount');
(4) the purchase price to be paid by the Issuer for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the 'Purchase Price');
(5) that the holder may tender all or any portion of the Notes
registered in the name of such holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by the Issuer pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note
at the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Note being, if the Issuer or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Issuer and the Trustee
duly executed by, the holder thereof or his attorney duly authorized in
writing);
(10) that holders will be entitled to withdraw all or any portion of
Notes tendered if the Issuer (or its Paying Agent) receives, not later than
the close of business on the fifth Business Day next preceding the
Expiration Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the holder, the principal amount of the Note the
holder tendered, the certificate number of the Note the holder tendered and
a statement that such holder is withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Issuer shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Issuer shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
(12) that in the case of any holder whose Note is purchased only in
part, the Issuer shall execute and the Trustee shall authenticate and
deliver to the holder of such Note without service charge, a new Note or
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Notes, of any authorized denomination as requested by such holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
'Permitted Holder' means any of (i) CVC and its Related Persons,
Affiliates, and Permitted Transferees, (ii) the Management Investors and their
Related Persons, Affiliates and Permitted Transferees, and (iii) with respect to
the Issuer, the Company and its direct and indirect Wholly Owned Subsidiaries.
'Permitted Investments' means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or any
governmental entity or agency or political subdivision thereof (provided, that
the good faith and credit of the United States of America is pledged in support
thereof), maturing within one year of the date of purchase; (ii) Investments in
commercial paper issued by corporations or financial institutions maturing
within 180 days from the date of the original issue thereof, and rated 'P-1' or
better by Moody's Investors Service or 'A-1' or better by Standard & Poor's
Corporation or an equivalent rating or better by any other nationally recognized
securities rating agency; (iii) Investments in certificates of deposit issued or
acceptances accepted by or guaranteed by any bank or trust company organized
under the laws of the United States of America or any state thereof or the
District of Columbia, in each case having capital, surplus and undivided profits
totalling more than $500,000,000, maturing within one year of the date of
purchase; (iv) Investments representing Capital Stock or obligations issued to
the Company or any of its Restricted Subsidiaries in the course of the good
faith settlement of claims against any other Person or by reason of a
composition or readjustment of debt or a reorganization of any debtor of the
Company or any of its Restricted Subsidiaries; (v) deposits, including
interest-bearing deposits, maintained in the ordinary course of business in
banks; (vi) any Investment in any Person; provided, however, that after giving
effect to any such acquisition such Person shall become a Restricted Subsidiary
of the Company or such Restricted Subsidiary; (vii) trade receivables and
prepaid expenses, in each case arising in the ordinary course of business;
provided, however, that such receivables and prepaid expenses would be recorded
as assets of such Person in accordance with GAAP; (viii) endorsements for
collection or deposit in the ordinary course of business by such Person of bank
drafts and similar negotiable instruments of such other Person received as
payment for ordinary course of business trade receivables; (ix) any interest
swap or hedging obligation with an unaffiliated Person otherwise permitted by
the Indenture; (x) Investments received as consideration for an Asset
Disposition in compliance with the provisions of the Indenture described under
'--Covenants--Limitation on Certain Asset Dispositions' above; (xi) loans and
advances to employees made in the ordinary course of business; and (xii)
Investments the sole consideration for which consists of Capital Stock of the
Company.
'Permitted Junior Securities' means (i) Qualified Stock of the Issuer, (ii)
securities of the Issuer or any other corporation authorized by an order or
decree giving effect, and stating in such order or decree that effect is given,
to the subordination of such securities to the Senior Debt of the Issuer, and
made by a court of competent jurisdiction in a reorganization proceeding under
any applicable bankruptcy, insolvency or other similar law, or (iii) any
securities of the Issuer provided for by a plan of reorganization or
readjustment that are subordinated in right of payment to all Senior Debt of the
Issuer that may at the time be outstanding to substantially the same extent as,
or to a greater extent than, the Notes are subordinated as provided in this
Indenture.
'Permitted Transferee' means, (a) with respect to any Management Investor
(i) any spouse or lineal descendant (including by adoption and stepchildren) of
such Management Investor and (ii) any trust, corporation or partnership, the
beneficiaries, stockholders or partners of which consist entirely of one or more
Management Investors or individuals described in clause (a)(i) above and (b)
with respect to CVC (i) Citicorp and any direct or indirect Wholly Owned
Subsidiary of Citicorp and any officer, director or employee of CVC, Citicorp or
any Wholly Owned Subsidiary of Citicorp, (ii) any spouse or lineal descendant
(including by adoption and stepchildren) of the officers, directors and
employees referred to in clause (b)(i) above and (iii) any trust, corporation or
partnership 100% in interest of the beneficiaries, stockholders or partners of
which consists of one or more of the persons described in clause (b)(i) or (ii)
above.
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'Person' means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
'Preferred Stock', as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
'Public Equity Offering' means an underwritten public offering of Common
Stock of the Issuer or ADT pursuant to an effective registration statement filed
under the Securities Act (excluding any registration statements filed on Form
S-8 or any successor form) provided, however, that in the event of a Public
Equity Offering by ADT, ADT contributes to the capital of the Issuer the portion
of the net cash proceeds of such Public Equity Offering necessary to pay the
aggregate redemption price (plus accrued interest to the redemption date) of the
Notes to be redeemed pursuant to '--Optional Redemption.
'Purchase Date' has the meaning set forth in the definition of 'Offer to
Purchase' above.
'Qualified Stock' means any Capital Stock of any Person other than
Disqualified Stock.
'Refinance' means refinance, renew, extend, replace or refund; and
'Refinancing' and 'Refinanced' have correlative meanings.
'Related Person' of any Person means any other Person directly or
indirectly owning (a) 5% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
'Restricted Subsidiary' means any Subsidiary of the Company other than an
Unrestricted Subsidiary and includes all of the Subsidiaries of the Company
existing on the Issue Date (including without reservation, the Issuer).
'Senior Debt' means, with respect to any Person at any date, (i) in the
case of the Company or the Guarantors, all Indebtedness under the Credit
Agreement, including principal, premium, if any, and interest on such
Indebtedness and all other amounts due on or in connection with such
Indebtedness including all charges, fees and expenses, (ii) all other
Indebtedness of such Person for borrowed money, including principal, premium, if
any, and interest on such Indebtedness, unless the instrument under which such
Indebtedness for money borrowed is created, incurred, assumed or guaranteed
expressly provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to the Notes, and all renewals, extensions,
modifications, amendments or refinancing thereof and (iii) all interest on any
Indebtedness referred to in clauses (i) and (ii) accruing during the pendency of
any bankruptcy or insolvency proceeding, whether or not allowed thereunder.
Notwithstanding the foregoing, Senior Debt shall not include (a) Indebtedness
which is pursuant to its terms or any agreement relating thereto or by operation
of law subordinated or junior in right of payment or otherwise to any other
Indebtedness of such Person; provided, however, that no Indebtedness shall be
deemed to be subordinate or junior in right of payment or otherwise to any other
Indebtedness of a Person solely by reason of such other Indebtedness being
secured and such Indebtedness not being secured, (b) the Notes, (c) any
Indebtedness of such Person to any of their Subsidiaries, (d) any Indebtedness
which, when incurred and without respect to any election under Section 1111(b)
of the Bankruptcy Code, is without recourse to the Company and (e) to the extent
that it may constitute Indebtedness, any obligations in respect of any trade
payable incurred for the purchase of goods or materials, or for services,
obtained, in the ordinary course of business.
'Subordinated Indebtedness' means any Indebtedness (whether outstanding on
the date hereof or hereafter incurred) which is by its terms expressly
subordinate or junior in right of payment to (i) the Notes, with respect to
Indebtedness of the Issuer, and (ii) the Guarantees with respect to Indebtedness
of a Guarantor.
66
<PAGE>
'Subsidiary' of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person and
one or more other Subsidiaries thereof or (ii) any other Person (other than a
corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and voting power relating to the
policies, management and affairs thereof.
'Tangible Assets' means the total amount of assets of the Company and the
Restricted Subsidiaries after deducting therefrom all good will, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangible assets, all as set forth on the most recent balance sheet of the
Company and its Subsidiaries and computed in accordance with GAAP.
'Unrestricted Subsidiary' means (i) any Subsidiary of the Company (other
than the Issuer) formed or acquired after the Issue Date that at the time of
determination is designated an Unrestricted Subsidiary by the Board of Directors
in the manner provided below and (ii) any Subsidiary of an Unrestricted
Subsidiary. Any such designation by the Board of Directors will be evidenced to
the Trustee by promptly filing with the Trustee a copy of the board resolution
giving effect to such designation and an officers' certificate certifying that
such designation complied with the foregoing provisions. The Board of Directors
of the Company may not designate any Subsidiary of the Company to be an
Unrestricted Subsidiary if, after such designation, (a) the Company or any other
Restricted Subsidiary (i) provides credit support for, or a guarantee of, any
Indebtedness of such Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) or (ii) is directly or indirectly
liable for any Indebtedness of such Subsidiary, (b) a default with respect to
any Indebtedness of such Subsidiary (including any right which the holders
thereof may have to take enforcement action against such Subsidiary) would
permit (upon notice, lapse of time or both) any holder of any other Indebtedness
of the Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its final scheduled maturity or (c) such Subsidiary owns any Capital Stock of,
or owns or holds any Lien on any property of, any Restricted Subsidiary which is
not a Subsidiary of the Subsidiary to be so designated.
'Voting Stock' of any Person means the Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
'Wholly Owned Subsidiary' of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person or by
such Person and one or more Wholly Owned Subsidiaries of such Person.
67
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof (the 'Underwriting Agreement'), J.P. Morgan
Securities Inc. and Bear, Stearns & Co. Inc. (collectively, the 'Underwriters')
have severally agreed to purchase from the Issuer, and the Issuer has agreed to
sell to them, severally, the principal amount of Notes set forth opposite their
names below. Under the terms and conditions of the Underwriting Agreement, the
Underwriters are obligated to take and pay for the entire principal amount of
the Notes if any Notes are purchased.
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
J.P. Morgan Securities Inc...................................................................... $
Bear, Stearns & Co. Inc.........................................................................
----------------
Total......................................................................................... $
----------------
----------------
</TABLE>
The Underwriters propose initially to offer the Notes directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at that price less a concession not in excess
of [ ]% of the principal amount of the Notes. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of [ ]% of the principal
amount of the Notes to certain other dealers. After the initial public offering
of the Notes offered hereby, the public offering price and such concession may
be changed.
In the Underwriting Agreement, the Issuer and each of the Guarantors, on a
joint and several basis have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the federal securities laws, or
to contribute to payments that the Underwriters may be required to make in
respect thereof.
In connection with this Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may over allot the offering, creating a
syndicate short position. In addition, the Underwriters may bid for, and
purchase, Notes in the open market to cover syndicate shorts or to stabilize the
price of the Notes. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing the Notes in the offering of the Notes, if
the syndicate repurchases previously distributed Notes in syndicate covering
transactions, stabilization transactions of otherwise. Any of these activities
may stabilize or maintain the market price of the Notes above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
There is currently no trading market for the Notes. The Issuer does not
intend to list the Notes on any securities exchange. The Company has been
advised by the Underwriters that the Underwriters currently intend to make a
market in the Notes; however, the Underwriters are not obligated to do so and
may discontinue any such market making activities at any time without notice. No
assurance can be given as to the development or liquidity of any trading market
for the Notes.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Morgan,
Lewis & Bockius LLP, New York, New York. Certain matters in connection with the
Offering will be passed upon for the Underwriters by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and schedule of Allied Digital
Technologies Corp. and subsidiaries as of and for the years ended July 31, 1997
and 1996 have been included in this Registration Statement and Prospectus of
which it forms a part in reliance upon the report of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere in this
Registration Statement and Prospectus, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements and schedule of Allied Digital
Technologies Corp. and subsidiaries as of and for the year ended July 31, 1995
have been included in this Registration Statement and Prospectus of which it
forms a part in reliance upon the report of Arthur Andersen LLP, independent
certified public accountants, appearing elsewhere in this Registration Statement
and Prospectus, and upon the authority of said firm as experts in accounting and
auditing.
68
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-2 (herein, together with all
amendments, exhibits and schedules thereto, referred to as the 'Registration
Statement') under the Securities Act with respect to the Notes offered hereby.
In accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the schedules and exhibits thereto. Each statement made in this Prospectus
concerning a document filed as an exhibit to the Registration Statement is
qualified in its entirety by reference to such exhibit for a complete statement
of its provisions. For further information pertaining to the Company and the
Notes, reference is made to such Registration Statement. The Registration
Statement may be inspected and copied at the public reference facilities
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, or at its regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at
Seven World Trade Center, Suite 1300, New York, New York 10048. Any interested
party may obtain copies of all or any portion of the Registration Statement and
the exhibits thereto at prescribed rates from the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
Room 1024, Washington, D.C. 20549. In addition, registration statements and
other filings made with the Commission through its Electronic Data Gathering,
Analysis and Retrieval ('EDGAR') system are publicly available through the
Commission's site on the Internet's World Wide Web, located at
http://www.sec.com.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite 1300, New
York, New York 10048. Copies of such material can be obtained from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The shares of Common Stock of the Company are listed on the American Stock
Exchange, and such reports, proxy statements and other information concerning
the Company are available for inspection and copying at the offices of the
American Stock Exchange, 86 Trinity Place, New York, New York 10006.
INCORPORATION BY REFERENCE
The following documents, heretofore filed with the Commission pursuant to
the Exchange Act, are hereby incorporated by reference:
(i) The Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, which includes the report of independent public accountants
on the financial statements included therein;
(ii) The Company's Quarterly Report on Form 10-Q for the quarterly
period ended October 31, 1997;
(iii) The Company's Quarterly Report on Form 10-Q for the quarterly
period ended January 31, 1998; and
(iv) The Company's Current Report on Form 8-K, as filed with the
Commission on May 15, 1998.
Any statement contained in a document incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owners, to whom this Prospectus is delivered, on the request of such
person, a copy (without exhibits, other than exhibits specifically incorporated
by reference) of any or all of the documents incorporated by reference in this
Prospectus. Written or oral requests for such copies should be directed to
Secretary, at 140 Fell Court, Hauppauge, New York 11788, telephone number (516)
232-2323.
69
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Certified Public Accountants........................................................ F-2
Consolidated Balance Sheets--July 31, 1997 and 1996........................................................ F-4
Consolidated Statements of Earnings for the Years Ended July 31, 1997, 1996 and 1995....................... F-5
Consolidated Statement of Stockholders' Equity for the Years Ended July 31, 1997, 1996 and 1995............ F-6
Consolidated Statements of Cash Flows for the Years Ended July 31, 1997, 1996 and 1995..................... F-7
Notes to Consolidated Financial Statements................................................................. F-9
Schedule II--Valuation and Qualifying Accounts............................................................. F-24
Condensed Consolidated Balance Sheets--January 31, 1998 and July 31, 1997 (unaudited)...................... F-25
Condensed Consolidated Statements of Earnings--Three- and Six-Month Periods Ended January 31, 1998 and 1997
(unaudited).............................................................................................. F-26
Condensed Consolidated Statements of Cash Flows--Six-Month Periods Ended January 31, 1998 and 1997
(unaudited).............................................................................................. F-27
Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Allied Digital Technologies Corp.
We have audited the accompanying consolidated balance sheets of Allied
Digital Technologies Corp. and subsidiaries (the 'Company') as of July 31, 1997
and 1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for the years then ended. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Allied Digital
Technologies Corp. and subsidiaries as of July 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
We have also audited Schedule II of Allied Digital Technologies Corp. and
subsidiaries as of and for the years ended July 31, 1997 and 1996. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Melville, New York
October 24, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To Allied Digital Technologies Corp.
We have audited the accompanying consolidated statements of earnings,
stockholders' equity and cash flows of Allied Digital Technologies Corp. (a
Delaware corporation) and subsidiaries for the year ended July 31, 1995. These
financial statements and the schedule referred to below are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
Allied Digital Technologies Corp. and subsidiaries for the year ended July 31,
1995 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statements is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule, as of and for the year ended July 31, 1995 has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Detroit, Michigan
November 9, 1995
F-3
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 1,192,827 $ 830,723
Accounts receivable, less allowance for doubtful accounts of $1,650,000 and
$1,515,000 at July 31, 1997 and 1996, respectively.......................... 25,516,385 23,906,859
Inventories.................................................................... 4,380,126 5,374,498
Prepaid expenses............................................................... 785,737 756,009
Deferred income taxes.......................................................... 3,422,006 3,312,869
------------ ------------
Total current assets............................................................. 35,297,081 34,180,958
------------ ------------
------------ ------------
Property and equipment, at cost:
Manufacturing equipment........................................................ 63,182,825 62,266,718
Leasehold improvements......................................................... 10,728,648 10,408,703
Furniture and fixtures......................................................... 8,154,766 8,072,625
Capitalized leased equipment................................................... 4,000,922 2,900,312
Automobiles.................................................................... 197,499 197,499
------------ ------------
86,264,660 83,845,857
Less accumulated depreciation and amortization................................... (59,481,974) (51,620,715)
------------ ------------
26,782,686 32,225,142
------------ ------------
------------ ------------
Other assets:
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $7,203,805 and $4,620,134 at July 31, 1997 and 1996,
respectively................................................................ 43,064,233 45,537,736
Deferred income taxes.......................................................... 708,173
Deferred charges and other..................................................... 2,736,392 1,225,624
------------ ------------
45,800,625 47,471,533
------------ ------------
$107,880,392 $113,877,633
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capitalized lease obligations......... $ 9,836,946 $ 9,153,641
Accounts payable............................................................... 14,780,703 16,805,887
Accrued liabilities............................................................ 6,735,393 8,712,456
------------ ------------
Total current liabilities........................................................ 31,353,042 34,671,984
Long-term debt and capitalized lease obligations, less current portion above..... 26,711,260 30,232,409
Subordinated notes payable to stockholders....................................... 10,060,366 10,996,386
Deferred income taxes............................................................ 1,111,946 --
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, $0.01 par value, 1,000 shares authorized, no shares issued and
outstanding................................................................. -- --
Common stock, $0.01 par value, 25,000,000 shares authorized, 13,619,644 shares
issued and outstanding...................................................... 136,196 136,196
Additional paid-in capital..................................................... 44,742,073 44,742,073
Accumulated deficit............................................................ (6,234,491) (6,901,415)
------------ ------------
38,643,778 37,976,854
------------ ------------
$107,880,392 $113,877,633
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales....................................................... $159,147,638 $160,941,632 $116,564,144
Cost of sales................................................... 127,034,302 132,261,644 89,442,592
Nonrecurring charge............................................. 1,250,000
------------ ------------ ------------
Gross profit............................................. 32,113,336 27,429,988 27,121,552
------------ ------------ ------------
Operating expenses:
Selling, general and administrative........................... 22,246,164 24,371,797 22,254,730
Amortization of excess of cost over fair value of net
assets acquired............................................ 2,583,671 2,580,314 1,559,878
Restructuring charge.......................................... 3,077,295
------------ ------------ ------------
Total operating expenses................................. 24,829,835 30,029,406 23,814,608
------------ ------------ ------------
Income (loss) from operations................................... 7,283,501 (2,599,418) 3,306,944
Other income (expense):
Interest expense.............................................. (5,024,905) (6,186,049) (3,816,376)
Other, net.................................................... 168,328 665,160 762,331
------------ ------------ ------------
Total other income (expense)............................. (4,856,577) (5,520,889) (3,054,045)
------------ ------------ ------------
Income (loss) before income taxes............................... 2,426,924 (8,120,307) 252,899
Provision (credit) for income taxes............................. 1,760,000 (2,534,847) (2,575,618)
------------ ------------ ------------
Net Income (Loss)........................................ 666,924 (5,585,460) 2,828,517
Pro forma data (unaudited):
AFL as a C Corporation subject to Federal income tax (Note 8)
Adjustment to income tax credit............................ 2,529,990
------------ ------------ ------------
Net income (loss)........................................ $ 666,924 $ (5,585,460) $ 298,527
------------ ------------ ------------
------------ ------------ ------------
Earnings (loss) per share reflecting consolidated operations
of AFL and HMG (Notes 2 and 3)................................
Net income (loss) per common share....................... $.05 $(.41) $.05
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ALLIED FILM LABORATORY, INC.
-------------------------------------
ALLIED DIGITAL TECHNOLOGIES CORP. RETAINED
------------------------------------- EARNINGS
COMMON PAID-IN (ACCUMULATED COMMON PAID-IN (ACCUMULATED
STOCK CAPITAL DEFICIT) STOCK CAPITAL DEFICIT) TOTAL
-------- ----------- ------------ -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of August 1,
1994..................... $ 2 $ 1,998 $ 23,715 $ 1,893,591 $(1,452,254 ) $ 467,052
Net income (loss).......... $(1,315,955 ) 4,144,472 2,828,517
Distributions to
stockholders............. (666,878 ) (666,878)
ADT organization costs..... (500,000) (500,000)
Recapitalization and
pooling of AFL and ADT... 74,907 3,867,739 (23,715) (1,893,591) (2,025,340 )
Stock issued to purchase
HMG...................... 61,287 41,372,336 41,433,623
-------- ----------- ------------ -------- ----------- ------------ -----------
Balance as of
July 31, 1995............ 136,196 44,742,073 (1,315,955 ) -- -- -- 43,562,314
Net loss................... (5,585,460 ) (5,585,460)
-------- ----------- ------------ -------- ----------- ------------ -----------
Balance as of
July 31, 1996............ 136,196 44,742,073 (6,901,415 ) -- -- -- 37,976,854
Net income................. 666,924 666,924
-------- ----------- ------------ -------- ----------- ------------ -----------
Balance as of
July 31, 1997............ $136,196 $44,742,073 $(6,234,491 ) $ -- $ -- $ -- $38,643,778
-------- ----------- ------------ -------- ----------- ------------ -----------
-------- ----------- ------------ -------- ----------- ------------ -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss).................................................. $ 666,924 $(5,585,460) $ 2,828,517
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Noncash accrued interest to stockholder....................... 600,000 579,726
Abandoned asset write-off..................................... 837,935
Depreciation and amortization of property and equipment....... 7,861,259 8,716,315 6,871,693
Amortization of excess of cost over fair value of net assets
acquired................................................... 2,583,671 2,580,314 1,559,878
Deferred income taxes......................................... 1,710,982 (2,534,847) (2,575,618)
Gain on sale of property and equipment........................ (19,662) (35,502)
Provision for doubtful accounts............................... 1,242,860 1,297,294 937,504
Changes in operating assets and liabilities, net of effect of
acquisitions and mergers
Accounts receivable........................................ (2,852,386) 5,048,617 (4,177,330)
Inventories................................................ 994,372 4,037,751 2,595,669
Prepaid expenses........................................... (29,728) (1,437) 41,009
Other assets............................................... (317,183) 1,403,582 (1,474,849)
Accounts payable and accrued liabilities................... (4,002,247) (2,042,770) 2,496,259
----------- ----------- -----------
Net cash provided by operating activities..................... 8,458,524 14,317,358 9,067,230
----------- ----------- -----------
Cash flows from investing activities
Purchases of property and equipment................................ (1,312,361) (9,304,407) (7,887,612)
Costs of HMG acquisition........................................... (1,520,856)
Proceeds from sale of property and equipment....................... 42,443 150,792
Proceeds from cash surrender value of life insurance............... 754,648
Internally developed software...................................... (1,303,753) (643,723)
----------- ----------- -----------
Net cash used in investing activities......................... (2,616,114) (9,261,964) (9,146,751)
----------- ----------- -----------
</TABLE>
F-7
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings (payments) under revolving loan.................... $ 3,922,348 $(6,764,383) $ 6,023,372
ADT organization costs............................................ (500,000)
Repayment of long-term debt and subordinated notes payable........ (12,588,107) (7,335,188) (27,472,086)
Borrowing of long-term debt and subordinated notes payable to
stockholders................................................... 3,500,000 9,470,620 23,174,729
Principal payments under capitalized lease obligations............ (314,547) (155,131)
Payment of deferred financing fees................................ (731,672)
Distributions to stockholders..................................... (666,878)
----------- ----------- -----------
Net cash used in financing activities........................ (5,480,306) (4,784,082) (172,535)
----------- ----------- -----------
Net Increase (Decrease) in Cash.............................. 362,104 271,312 (252,056)
Cash at beginning of year........................................... 830,723 559,411 811,467
----------- ----------- -----------
Cash at end of year................................................. $ 1,192,827 $ 830,723 $ 559,411
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest....................................................... $ 4,421,026 $ 5,671,786 $ 4,459,248
----------- ----------- -----------
----------- ----------- -----------
Income taxes................................................... $ 117,836 $ 8,978 $ 1,144,500
----------- ----------- -----------
----------- ----------- -----------
Supplemental schedule of noncash financing and investing activities:
Equipment under capitalized lease.............................. $ 1,106,442 $ 105,784
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The consolidated financial statements have been prepared by Allied Digital
Technologies Corp. ('Allied Digital'), including the accounts of its
wholly-owned subsidiaries, HMG Digital Technologies Corp. ('HMG') and
subsidiary, HRM Holdings Corp. ('Holdings') and its wholly-owned subsidiary,
Allied Digital, Inc. (formerly known as Hauppauge Record Manufacturing, Ltd.)
('Allied'), and Allied Film Laboratories Inc. ('AFL'), hereinafter referred to
collectively as the 'Company.' Allied Digital is a holding company; all assets,
liabilities and operating activities are related to its wholly-owned
subsidiaries. The consolidated statements of earnings include the operations of
Allied Digital and AFL (entities under common control through January 12, 1995)
for all periods presented. The results of operations of HMG, Holdings and Allied
have been included in the consolidated results of operations since the date of
merger (Note 2). In conjunction with the Company's restructuring plan (Note 10),
AFL merged with and into Allied on November 1, 1996 as a condition to the
Company's debt refinancings described in Note 4 below.
The Company (i) provides video cassette duplication and fulfillment
services in addition to processing and duplicating commercial film and offering
post-production services, and (ii) replicates cassette tapes, VHS video tapes
and compact discs under production contracts with companies primarily in the
recorded music industry.
2. MERGERS AND ACQUISITIONS
HMG Merger
Effective January 12, 1995, Allied Digital acquired all of the outstanding
common stock of AFL and HMG in exchange for approximately 55% and 45%,
respectively, of the then outstanding common shares of Allied Digital. In
addition, AFL stockholders were issued Class C warrants to purchase an
additional 1,250,000 shares of Allied Digital common stock (Note 7). Upon
consummation of the merger, existing HMG warrants totalling 3,067,500 shares,
were converted into Allied Digital warrants on similar terms. In addition,
options to acquire up to 400,000 shares of common stock were issued in
substitution for outstanding options of HMG. The acquisition of AFL stock was
accounted for as a merger under the pooling of interests method of accounting as
the companies were under common control. The merger of HMG was accounted for
under the purchase method of accounting as a reverse acquisition of HMG by AFL.
Accordingly, the assets acquired and liabilities assumed of HMG were recorded at
their estimated fair values of approximately $88,666,000 and $45,776,000,
respectively. The excess of fair value of HMG over the estimated fair value of
the net assets acquired was approximately $45,611,000. This asset has been
recorded as excess of cost over fair value of net assets acquired and is being
amortized on a straight-line basis over 20 years.
The unaudited consolidated results of operations on a pro forma basis for
the year ended July 31, 1995 as though HMG had been acquired as of August 1,
1994 are presented below. The pro forma information does not purport to be
indicative of what would have occurred had the acquisition been made as of that
date or of results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31, 1995
-------------
(UNAUDITED)
<S> <C>
Net sales..................................................................... $ 158,079,000
Income before extraordinary item.............................................. 667,000
Net income.................................................................... 667,000
Earnings per common share before extraordinary item........................... .05
Net earnings per common share................................................. .05
Weighted average shares....................................................... 13,621,113
</TABLE>
F-9
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
2. MERGERS AND ACQUISITIONS--(CONTINUED)
In preparing the pro forma data, adjustments have been made for: (i) the
amortization of the excess of cost over fair value of net assets acquired and
stepped-up property and equipment; (ii) the interest expense related to the
borrowings to finance the shareholder distributions of previously taxed income
and the conversion of preferred stock into subordinated debt; (iii) the
elimination of intercompany sales; (iv) the elimination of merger related costs
and redundant general and administrative costs; and (v) the related tax impacts
including the revocation of the Subchapter S election.
The following is a reconciliation from reported net income for Allied
Digital to pro forma consolidated operations of HMG and AFL:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
1995
-----------
(UNAUDITED)
<S> <C>
Net income as reported..................................... $ 2,829,000
HMG net earnings, pre-acquisition.......................... 768,000
Elimination of merger costs and redundancies............... 1,344,000
Amortization of cost in excess of fair value of net assets
acquired................................................. (1,013,000)
Interest expense........................................... (231,000)
Reversal of tax credit arising from revoking S election.... (1,625,000)
Pro forma tax provision.................................... (1,193,000)
Depreciation of excess of fair value over book for acquired
assets................................................... (212,000)
-----------
$ 667,000
-----------
-----------
</TABLE>
AFL provided certain video replication services to HMG. For the period from
August 1, 1994 through January 11, 1995, sales to HMG amounted to approximately
$4,000,000.
VCA Acquisition
Effective January 12, 1993, the Company acquired certain assets and assumed
certain liabilities of VCA/Teletronics, Inc. ('VCA') for cash of $1,000,000 and
a long-term note payable of $1,570,315 (Note 4). Also, under the purchase
agreement, the Company is contingently liable to VCA for certain royalty
payments payable for each of the calendar years ending December 31, 1996 through
and including December 31, 2000 in an amount based on the number of videotape
duplication units sold during those years. As the amount of videotape
duplication units to be sold during those open years is not reasonably
estimable, a liability has not been reflected in the accompanying financial
statements. The purchase agreement also contained a covenant not-to-compete for
a period of three years.
The Company accounted for the acquisition as a purchase. The initial excess
of consideration paid over the estimated fair value of the net assets acquired
in the amount of $4,546,842 has been recorded as excess of fair value over the
cost of net assets acquired and is being amortized on a straight-line basis over
15 years. Contingent purchase price consideration paid during fiscal 1997 of
approximately $119,000 pertaining to calendar year ended December 31, 1996 is
being amortized on a straight-line basis over the remaining amortization period.
F-10
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation
of the consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of Allied
Digital and its wholly-owned subsidiaries. Significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories utilized in the manufacturing and loading of videocassettes,
audiocassettes and manufacturing of compact discs are valued at the lower of
cost or market, using the first-in, first-out (FIFO) method. Elements included
in the determination of cost include direct materials, direct labor and certain
other manufacturing labor and overhead costs.
Inventories consist of the following classifications:
<TABLE>
<CAPTION>
JULY 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials............................................................... $3,415,970 $3,882,455
Work-in-process............................................................. 674,125 827,142
Finished goods.............................................................. 290,031 664,901
---------- ----------
$4,380,126 $5,374,498
---------- ----------
---------- ----------
</TABLE>
Property and Equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are provided for over the estimated service lives of the assets.
Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter. Straight-line and
accelerated methods are used for reporting purposes. Accelerated methods are
used for income tax purposes. Accumulated amortization on capitalized leased
equipment amounted to $3,006,637 and $2,685,744 as of July 31, 1997 and 1996,
respectively.
Long-Lived Assets
Management reviews and evaluates its long-lived assets (including the
excess of cost over fair value of net assets acquired and property and
equipment) for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. As part of this
review and evaluation, the Company considers the value of anticipated
undiscounted cash flow attributable to such long-lived assets in assessing
potential impairment.
Deferred Charges and Other
Deferred charges and other consist principally of customer allowances under
long-term contracts, internally developed software costs, and loan origination
fees associated with the Company's financing transactions. Customer allowances
are amortized over the term of the contract provided recoverability is assured
(Note 9). Internally developed software is being amortized on a straight-line
basis over a five-year expected useful life; however, internally developed
software costs incurred prior to fiscal 1997 were written off in fiscal 1996 as
an
F-11
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
abandoned asset in connection with the Company's restructuring plan (Note 10).
Loan origination fees are being amortized over the term of the underlying credit
agreement.
Revenue Recognition
Revenue from substantially all production contracts is generally recognized
upon shipment of the finished goods. In addition, for certain contracts, where
risk and rewards of ownership have passed to the customer, the Company
recognizes revenue when production is complete.
Significant Customers
During the year ended July 31, 1997, sales to two customers accounted for
17% and 14% of net sales with corresponding accounts receivable from these
customers totaling 11% and 9% of accounts receivable as of July 31, 1997,
respectively. During the year ended July 31, 1996, sales to two customers
accounted for 16% and 13% of net sales with corresponding accounts receivable
from these customers totaling 13% and 8% of accounts receivable as of July 31,
1996, respectively. During the year ended July 31, 1995, sales to one customer
accounted for 15% of net sales with corresponding accounts receivable from this
customer totaling 12% of accounts receivable as of July 31, 1995.
Other Income
Other income, net includes interest income, recovery of accounts receivable
previously written off as uncollectible and scrap material sales.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock-based compensation awards. Accordingly,
no compensation cost has been recognized for the awards granted under the Plan.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes by applying statutory tax rates in effect at the balance sheet date to
differences among the book and tax bases of assets and liabilities. The
resulting deferred tax liabilities or assets are adjusted to reflect changes in
tax laws or rates by means of charges or credits to income tax expense. A
valuation allowance is recognized to the extent a portion or all of a deferred
tax asset may not be realizable.
Earnings (Loss) Per Share
Net income (loss) per common share for the years ended July 31, 1997 and
1996 was computed by dividing the net income (loss) by the weighted average
shares outstanding. The effect of stock options and warrants on the fiscal 1997
and 1996 computation was not dilutive. Pro forma earnings per common share for
the year ended July 31, 1995 have been computed by dividing pro forma net
earnings by the pro forma weighted average shares of common stock issued as a
result of the recapitalization and merger. Pro forma presentation has been made
as if both the recapitalization and merger had occurred as of August 1, 1994
(Note 2). Actual and pro forma weighted average shares outstanding were
13,619,644 for the years ended July 31, 1997 and 1996 and 13,621,113 for the
year ended July 31, 1995.
F-12
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Financial Instruments
The Company's principal financial instruments consist of accounts
receivable, accounts payable, long-term debt and subordinated notes payable to
stockholders. The Company believes that the carrying amount of such instruments
approximates fair value.
Use of Estimates in the Preparation of Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management is required 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, as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Accounting Pronouncement Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share, which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997. Early adoption of the new standard is not permitted.
The new standard eliminates primary and fully diluted earnings per share and
requires presentation of basic and diluted earnings per share, together with
disclosure of how the per share amounts were computed. The adoption of this new
standard is not expected to have a material impact on the disclosure of earnings
per share in the financial statements.
Reclassifications
Certain reclassifications have been made to the prior years' amounts to
conform with the current year's presentation.
4. LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt, subordinated notes payable and capitalized lease
obligations consist of the following:
<TABLE>
<CAPTION>
JULY 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Loan and Security Agreement
Term loan........................................................................ $18,782,232 $27,112,055
Revolving loan................................................................... 14,480,840 10,558,492
Additional loan.................................................................. 1,020,000
Subordinated 10% Notes Payable to Stockholders..................................... 7,179,726 6,579,726
Additional Subordinated 10% Notes Payable to Stockholders.......................... 2,000,000
Subordinated 12% Series A Note Payable to Stockholder.............................. 3,500,000
Subordinated 11% Series B Notes Payable to Stockholders............................ 880,640 916,660
Note Payable to VCA................................................................ 1,170,514 1,389,186
Capitalized lease obligations...................................................... 995,137 203,252
Other.............................................................................. 99,483 123,065
----------- -----------
46,608,572 50,382,436
Less current portion............................................................... (9,836,946) (9,153,641)
----------- -----------
$36,771,626 $41,228,795
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
4. LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS--(CONTINUED)
Debt Refinancings
In conjunction with the Company's restructuring plan and merger of AFL into
Allied referred to in Note 1 above, (i) the separate senior loan credit
facilities previously maintained by AFL and Allied with a bank were combined
under an amended and restated loan and security agreement between Allied and
such bank dated as of October 30, 1996 and effectuated as of November 1, 1996,
(ii) the Subordinated 12% Series A Note Payable to Stockholder was repaid in
full on November 8, 1996 with funds of (a) $1.5 million available as an
additional loan under the October 30, 1996 amended and restated loan and
security agreement and (b) $2 million advanced by certain other stockholders in
the form of additional subordinated notes dated October 30, 1996 and (iii) the
payment terms of the Subordinated 10% Notes Payable to Stockholders having an
original principal sum of $6,000,000, plus unpaid interest thereon of $1,179,726
through July 31, 1997 ($579,726 as of July 31, 1996) were extended.
Loan and Security Agreement
The October 30, 1996 loan and security agreement provided the Company with
borrowings of up to $48,910,169 under credit facilities consisting of a (i)
$25,410,169 term loan, (ii) $22,000,000 revolving loan facility (combined with a
$1,500,000 letter of credit facility) and (iii) $1,500,000 additional loan. As
of August 19, 1997, Allied entered into an amendment to the October 30, 1996
loan and security agreement with the bank which provides the Company with a
$3,450,000 capital expenditure credit facility.
The loan and security agreement (as amended) is collateralized by
substantially all of the assets of the Company. The agreement contains covenants
which, among other matters, (1) require the Company to (i) maintain increasing
levels of net worth, (ii) maintain a minimum debt service ratio and (iii) limit
its annual capital expenditures, and (2) place limitations on (i) additional
indebtedness, encumbrances and guarantees, (ii) consolidations, mergers or
acquisitions, (iii) investments or loans, (iv) disposal of property, (v)
compensation to officers and others, (vi) dividends and stock redemptions, (vii)
issuance of stock, and (viii) transactions with affiliates, all as defined in
the agreement. As of July 31, 1997, there is no equity available for the payment
of dividends to stockholders. The agreement also contains provisions for fees
payable to the bank upon prepayment and an increased rate of interest during
periods of default. The term of this agreement extends to November 30, 2000.
a. Term Loan
The $25,410,169 term loan dated October 30, 1996 ($27,112,055 at July 31,
1996) is payable in an initial scheduled installment aggregating $1,695,462 on
October 31, 1996 (of which $1,179,000 was paid on November 8, 1996), 30
consecutive monthly installments of $548,054 thereafter through April 30, 1999
and a final installment on May 30, 1999 of $273,098, together with additional
prepayments of principal of $2,000,000 on October 31, 1997 and $5,000,000 on
October 31, 1998. No prepayment fees result from these scheduled prepayments. In
addition, interest is payable monthly at 1.5% over the bank's base rate (10% at
July 31, 1997). In the event the loan and security agreement has not been
terminated prior to October 31, 1997, a $125,000 fee due on such date to the
bank will not be required to be paid by the Company if on and as of such date no
default or event of default has occurred and is continuing and the Company has
made all principal and interest payments required to be paid on the term loan
when due.
b. Revolving Loan
Under the revolving loan facility combined with a $1,500,000 letter of
credit facility, the Company may borrow up to a maximum of $22,000,000 based
upon a percentage of accounts receivable and inventory, as
F-14
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
4. LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS--(CONTINUED)
defined, less the sum of the undrawn face amount of any letters of credit
outstanding. Interest is payable monthly at 1.25% over the bank's base rate. In
addition, the Company is required to pay, on a monthly basis, an unused facility
fee of .5% per annum. At July 31, 1997, the Company had approximately $7,270,000
unused and available under the revolving loan facility.
c. Additional Term Loan
The $1,500,000 additional loan dated October 30, 1996 is payable in 25
consecutive monthly installments which commenced December 31, 1996 of $60,000
each plus interest at 1.5% over the bank's base rate (10% at July 31, 1997). In
the event the additional loan is paid in full on or before December 31, 1997 and
the loan and security agreement has not been terminated on or before such date,
the Company will not be required to pay a $100,000 fee to the bank on December
31, 1998.
d. Capital Expenditure Credit Facility
The $3,450,000 capital expenditure credit facility provides the Company
with a credit line through July 31, 1998 to finance up to 80% of the value of
capital equipment purchases (as defined). Such loans under the facility are
payable based on a 36-month amortization schedule with a final payment of the
entire unpaid principal balance on July 31, 2000. These loans bear interest at
1.5% over the bank's base rate. In addition, the Company is required to pay a
$103,500 fee to the bank, payable at a rate of 3% of each advance with a final
payment for any unpaid amount of the fee payable on July 31, 1998. As of October
24, 1997, no amounts were outstanding under this capital expenditure credit
facility.
Subordinated 10% Notes Payable to Stockholders
The subordinated 10% notes payable to stockholders are uncollateralized and
payable in full on January 1, 2001. Interest accrues only on the original
principal sum of $6,000,000 and is payable quarterly at 10% per annum (12% upon
default); however, to date, interest is not permitted to be paid pursuant to the
terms of the amended and restated loan and security agreement with the bank,
and, accordingly, such accrued and unpaid interest becomes payable on January 1,
2001.
Additional 10% Subordinated Notes Payable to Stockholders
The additional 10% subordinated notes payable to stockholders are
uncollateralized and payable in full on December 31, 1998 with interest payable
quarterly; however, payment of principal and interest may be extended in full or
in part to January 1, 2001 to the extent not permitted to be paid pursuant to
the terms of the amended and restated loan and security agreement with the bank.
Subordinated 11% Series B Notes Payable to Stockholders
These uncollateralized notes mature on January 1, 1999 with interest
payable quarterly.
Note Payable to VCA
This uncollateralized note is payable in annual installments of $385,374
beginning January 1995 through January 2001, including interest at 12%.
F-15
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
4. LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS--(CONTINUED)
Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for as
capital leases. During fiscal 1997, the Company leased approximately $1,100,000
of equipment which were accounted for as capital leases. The obligations for the
equipment require the Company to make monthly payments through December 2002,
with implicit interest rates from 5.27% to 19.48%.
The following is a summary of the aggregate annual maturities of long-term
debt, subordinated notes payable and capitalized lease obligations as of July
31, 1997:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
- -----------------------------------------------------------
<S> <C>
1998....................................................... $ 9,836,946
1999....................................................... 13,955,946
2000....................................................... 579,547
2001....................................................... 22,231,494
2002....................................................... 4,639
-----------
$46,608,572
-----------
-----------
</TABLE>
5. EMPLOYEE BENEFIT PLANS
401(k)/Profit-sharing Plan
The Company has a 401(k)/profit-sharing plan. Contributions to the plan are
discretionary and are determined annually by the Board of Directors. No
contributions were made for the years ended July 31, 1997, 1996 and 1995.
Retirement Plan
Allied participates in a defined benefit multi-employer pension plan
covering union employees. Contributions for the years ended July 31, 1997 and
1996, and for the period from January 12, 1995 to July 31, 1995 totaled
$306,000, $308,000 and $153,000, respectively.
6. COMMITMENTS AND CONTINGENCIES
Related Party and Other Leases
The Company leases certain of its processing and administrative facilities
from affiliated companies under noncancellable operating leases which expire at
various dates between 1997 and 2015. Rent expense under these leases amounted to
approximately $2,594,000, $2,369,000 and $1,706,000 for the years ended July 31,
1997, 1996 and 1995, respectively. The Company has guaranteed certain mortgage
debt on these facilities totalling approximately $527,050 at July 31, 1997.
The Company also leases other processing facilities from various nonrelated
parties under noncancellable operating leases which expire at various dates
between 1997 and 2008 and provide for renewals at various rates and terms.
Amounts charged to operations for these facilities amounted to approximately
$2,448,000, $2,237,000 and $2,547,000 for the years ended July 31, 1997, 1996
and 1995, respectively.
F-16
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The minimum annual rental commitments required under all facility leases
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
- ---------------------------------------------------------------------
<S> <C>
1998.......................................................... $ 4,515,000
1999.......................................................... 4,429,000
2000.......................................................... 3,194,000
2001.......................................................... 2,822,000
2002.......................................................... 2,631,000
Thereafter.................................................... 23,496,000
-----------
$41,087,000
-----------
-----------
</TABLE>
Other Leases
The Company also leases various office equipment and automobiles under
noncancellable operating leases expiring through fiscal 2001. The minimum rent
commitments required under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
- ----------------------------------------------------------------------
<S> <C>
1998........................................................... $ 395,000
1999........................................................... 356,000
2000........................................................... 261,000
2001........................................................... 164,000
----------
$1,176,000
----------
----------
</TABLE>
Employment Agreements
The Company maintains employment agreements with certain executive
officers. Salary continuation is provided for any executive who is terminated
without cause, as defined. Effective August 1, 1997, the Company entered into an
employment agreement with an executive officer expiring July 31, 2000.
As of July 31, 1997, the aggregate minimum compensation obligation under
active employment agreements is as follows (taking into effect the August 1,
1997 agreement described above):
<TABLE>
<CAPTION>
YEAR ENDING JULY 31,
- ----------------------------------------------------------------------
<S> <C>
1998........................................................... $ 614,000
1999........................................................... 275,000
2000........................................................... 275,000
----------
$1,164,000
----------
----------
</TABLE>
Global Indemnification Agreement
On June 17, 1994, the Company entered into a Global Indemnification
Agreement with affiliates from whom it rents property. The Agreement indemnifies
the affiliates and holds them harmless for liabilities, if any, related to
environmental law and hazardous substance utilization on the leased properties.
This indemnification excludes any hazardous substance that may be placed on the
leased properties by someone other than the Company, after the Company ceases to
occupy the applicable property. In exchange for indemnifying the affiliates, the
Company received $25,000 from the affiliates.
F-17
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
6. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Litigation Matters
The Company is involved in various routine litigation which arise through
the normal course of business. Management believes that the resolution of these
matters will not have a material adverse effect on the consolidated financial
position or results of operations.
7. STOCKHOLDERS' EQUITY
The Company's issued and outstanding common stock warrants and options are
as follows:
Common Stock Warrants
The Company has 1,353,750 Class A redeemable warrants and 1,353,750 Class B
redeemable warrants outstanding as of July 31, 1997. Each Class A and Class B
redeemable warrant entitles the registered holder thereof to purchase one share
of common stock at a price of $6.75 and $7.50 per share, respectively, subject
to certain adjustment, until July 28, 1998 (originally July 28, 1997). The
Company, at its own option, may redeem the Class A redeemable warrants and the
Class B redeemable warrants, in each case as a class and not in part, at a price
of $.05 per warrant provided the reported closing bid price of the common stock
equals or exceeds $8.50 per share for a length of time as specified in the
agreements. The warrant holders have exercise rights until the close of business
on the date fixed for redemption.
The Company had 120,000 units exercisable through July 28, 1997 at an
exercise price of $9.90 per unit. Each unit consisted of one share of common
stock, one Class A redeemable warrant and one Class B redeemable warrant. The
exercise price of the Class A and the Class B redeemable warrants, in accordance
with these units, was $9.79 and $10.88, respectively. All of these units expired
on July 28, 1997.
The Company also has 1,250,000 Class C warrants outstanding as of July 31,
1997. Each Class C warrant entitles the registered holder thereof to purchase
one share of common stock at a price of $9.00 per share, beginning two years
after the date of the HMG merger (January 12, 1997) and expiring three years
after becoming exercisable.
Stock Options
The Company established an Amended and Restated 1994 Long-Term Incentive
Plan (the 'Plan') under which options to purchase shares of the Company's common
stock and other stock incentives may be granted to eligible participants. The
maximum number of shares available for awards under the Plan is 2,400,000
shares, of which no more than half may be newly-issued shares. Shares issued to
holders of HMG common stock or AFL common stock in the merger and subsequently
reacquired by Allied Digital, as well as any other shares acquired by Allied
Digital after the merger, in the public market or otherwise, would not be
considered newly-issued shares for this purpose. Options granted under the Plan
may be either incentive stock options or nonqualified stock options. Incentive
stock options may be granted only to employees of the Company. An incentive
stock option must expire within ten years from the date it is granted (five
years in the case of such options granted to a holder of more than 10% of the
outstanding common stock). Incentive stock options are first exercisable not
earlier than one year from the date of grant. The exercise price of an incentive
stock option must be at least equal to the fair market value of the common stock
on the date such incentive stock option is granted (or 110% of the fair market
value of the common stock in the case of such options granted to a holder of
more than 10% of the outstanding common stock). To the extent that the aggregate
fair market value of the common stock with respect to which incentive stock
options are exercisable for the first time by an optionee during any calendar
year exceeds $100,000, such options will be treated as nonqualified stock
options.
F-18
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
7. STOCKHOLDERS' EQUITY--(CONTINUED)
At July 31, 1997, the Company has 522,500 options outstanding (of which
423,750 are exercisable) at prices ranging from $2.875 to $8.63, vesting at
various dates through July 1999 and expiring at various dates between November
1998 and September 2003.
<TABLE>
<CAPTION>
INCENTIVE STOCK OPTIONS NONQUALIFIED STOCK OPTIONS
------------------------------ ---------------------------- WEIGHTED
EXERCISE EXERCISE AVERAGE
PRICE QUANTITY PRICE QUANTITY EXERCISE PRICE
------------------- -------- ----------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding as of August 1, 1995............ $5.5625-$6.94 349,500 $6.66-$8.63 275,000 $ 6.6185
Forfeited................................... 5.5625 (77,000) -- -- 5.5625
-------- --------
Outstanding as of July 31, 1996............. 5.5625-6.94 272,500 6.66-8.63 275,000 6.7670
Granted..................................... 2.875 25,000 -- -- 2.875
Expired..................................... 5.5625 (12,500) -- 5.5625
Forfeited................................... 5.5625 (37,500) -- -- 5.5625
-------- --------
Outstanding as of
July 31, 1997............................. $2.875-$6.94 247,500 $6.66-$8.63 275,000 $ 6.6140
------------------- -------- ----------------- -------- --------------
------------------- -------- ----------------- -------- --------------
Amounts exercisable as of July 31, 1997..... $5.5625-$6.94 148,750 $6.66-$8.63 275,000 $ 7.5541
------------------- -------- ----------------- -------- --------------
------------------- -------- ----------------- -------- --------------
</TABLE>
The following table summarizes information concerning currently exercisable
stock options under the Plan:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER REMAINING EXERCISE
RANGE OF EXERCISE PRICES EXERCISABLE LIFE (MONTHS) PRICE
- ------------------------------------------------------- ----------- ------------- --------
<S> <C> <C> <C>
$5.5625-$6.94.......................................... 298,750 37 months $ 6.34
$8.63.................................................. 125,000 74 months $ 8.63
</TABLE>
The weighted-average option fair value on the grant date was $1.38 for
options issued during the year ended July 31, 1997.
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, 'Accounting for Stock-Based Compensation' ('SFAS
No. 123'); it applies APB Opinion No. 25, 'Accounting for Stock Issued to
Employees,' and related interpretations in accounting for the Plan and does not
recognize compensation expense for such Plan. If the Company had elected to
recognize compensation expense based upon the fair value at the grant dates for
awards under these plans consistent with the methodology prescribed by SFAS No.
123, the Company's reported net income and earnings per share would be reduced
to the pro forma amount indicated below for the year ended July 31, 1997:
<TABLE>
<S> <C>
Net income
As reported..................................................................... $666,924
Pro forma....................................................................... 658,299
Earnings per common share
As reported..................................................................... .05
Pro forma....................................................................... .05
</TABLE>
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before fiscal 1996. The fair value of these options was estimated at
the date of grant using the Black-Scholes option-pricing model with the
following weighted-
F-19
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
7. STOCKHOLDERS' EQUITY--(CONTINUED)
average assumptions for the fiscal year ended July 31, 1997: expected volatility
of 45%; risk-free interest rate of 6.32% and expected term of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the use
of highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
In connection with a June 1995 sales contract (Note 9), the Company granted
to a customer 250,000 options to acquire shares of Company common stock at an
exercise price of $5.5625, equivalent to the quoted market price on such date.
In consideration for modifying certain provisions of the June 1995 sales
contract in September 1997, the Company repriced these options to an exercise
price of $3.00 per share for which the Company expects to recognize a noncash
pretax charge to earnings of approximately $150,000 during the fiscal 1998
period. These options expire in June 2000.
The following information summarizes the Company's stock options and
warrants at July 31, 1997:
<TABLE>
<CAPTION>
RANGE OF
EXERCISE
DESCRIPTION AUTHORIZED ISSUED EXERCISABLE PRICE
- ----------------------------------------------- ---------- --------- ----------- --------------
<S> <C> <C> <C> <C>
Class A warrants......................... 1,353,750 1,353,750 1,353,750 $ 6.75
Class B warrants......................... 1,353,750 1,353,750 1,353,750 7.50
Class C warrants......................... 1,250,000 1,250,000 1,250,000 9.00
Incentive stock options/nonqualified stock
options................................ 2,400,000 522,500 423,750 2.875-9.00
Options--other........................... 250,000 250,000 250,000 5.562
---------- --------- ----------- --------------
Balance as of July 31, 1997.............. 6,607,500 4,730,000 4,631,250 $ 2.875-$9.00
---------- --------- ----------- --------------
---------- --------- ----------- --------------
</TABLE>
In connection with the August 1, 1997 employment agreement described in
Note 6, the Company granted incentive stock options to an executive officer to
acquire 200,000 shares of common stock with an exercise price of $2.00
representing the quoted market price on such date. These options become
exercisable over a four-year period commencing August 1, 2001 at a rate of 25%
each year with possible acceleration based upon the market performance of the
Company's common stock.
On October 21, 1997, the Company: (i) repriced all outstanding incentive
stock options to an exercise price of $2.4375, representing the quoted market
price on such date and (ii) granted 27,500 incentive stock options to employees
which become exercisable equally over five years with an exercise price of
$2.4375.
F-20
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
8. INCOME TAXES
Prior to January 12, 1995, the stockholders of AFL had elected, under the
provisions of Subchapter S of the Internal Revenue Code, to have the income and
related tax benefits of AFL included in the taxable income of the individual
stockholders. As a result, no provision for Federal income taxes has been
included in the historical statements of earnings prior to January 12, 1995.
On January 12, 1995, AFL became disqualified, under the provisions of
Subchapter S of the Internal Revenue Code, to have the income of the Company
included in the taxable income of the individual stockholders. In connection
with this disqualification, the Company established net deferred tax assets of
approximately $1,625,000. The effect of establishing the deferred tax assets was
included in income for the year ended July 31, 1995. Subsequent to January 12,
1995, the Company has provided Federal income taxes in the statements of
earnings based on the effective tax rate. The unaudited pro forma adjustment to
income tax provision and net income have been presented in the consolidated
statement of earnings for the year ended July 31, 1995 as if the Subchapter S
election had been terminated prior to August 1, 1994.
The provision (credit) for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current................................................... $ 40,000 $ -- $ --
Deferred.................................................. 1,578,500 (1,758,663) (1,556,409)
---------- ----------- -----------
1,618,500 (1,758,663) (1,556,409)
---------- ----------- -----------
State:
Current................................................... 10,000
Deferred.................................................. 131,500 (776,184) (1,019,209)
---------- ----------- -----------
141,500 (776,184) (1,019,209)
---------- ----------- -----------
$1,760,000 $(2,534,847) $(2,575,618)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Deferred income tax assets (liabilities) resulting from differences between
accounting for financial statement purposes and tax purposes are as follows:
<TABLE>
<CAPTION>
JULY 31,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Restructuring costs........................................... $ 501,000 $ 1,115,000
Nonrecurring charge........................................... 293,000 391,000
Accounts receivable........................................... 637,000 585,000
Inventory..................................................... 121,000 144,000
Accrued salaries.............................................. 304,000 378,000
Net operating loss carryover.................................. 2,500,000 2,365,000
State investment tax credits.................................. 1,572,000 1,239,000
----------- -----------
5,928,000 6,217,000
----------- -----------
Property and equipment........................................ (2,747,000) (1,332,000)
Other accrued expenses........................................ 19,000 (133,000)
----------- -----------
(2,728,000) (1,465,000)
----------- -----------
Valuation allowance........................................... (890,000) (732,000)
----------- -----------
Net deferred tax asset........................................ $ 2,310,000 $ 4,020,000
----------- -----------
----------- -----------
</TABLE>
F-21
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
8. INCOME TAXES--(CONTINUED)
The Company's effective income tax rate was 72.5% in 1997, 31.2% in 1996
and (1,018)% in 1995. The components of the reconciliation of the Company's
effective tax provision (credit) to the tax provision (credit) pursuant to the
U.S. statutory rate of 34% are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Federal tax provision (credit) computed at statutory rate... $ 825,154 $(2,760,904) $ 85,986
S Corporation earnings...................................... (880,464)
Amortization of costs in excess of net assets acquired...... 637,989 625,949 427,582
Nondeductible entertainment expenses........................ 45,468 47,775 32,884
State tax expense (benefit) net of Federal tax.............. 425,738 (341,448) (202,370)
Recognition of investment tax credit........................ (332,349) (319,219) (414,401)
Increase in valuation allowance............................. 158,000 213,000 --
Reinstatement of deferred taxes............................. -- -- (1,624,835)
---------- ----------- -----------
Actual tax provision (credit)............................... $1,760,000 $(2,534,847) $(2,575,618)
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
HMG is in the process of undergoing an IRS tax examination. In connection
with this examination, management does not anticipate any material adverse
effect on the Company's consolidated financial position and results of
operations upon its ultimate resolution.
The Company has an NOL carryforward as of July 31, 1997 for Federal
purposes of approximately $6,585,000 which expires during the fiscal years
ending 2010 through 2012.
The Company uses the flow-through method of accounting for investment tax
credits. The Company has state investment tax credit carryforwards at July 31,
1997 approximating $2,035,000 which expire between fiscal 2003 and 2007.
9. NONRECURRING CHARGE
In June 1995, the Company, in connection with consummating a five-year
production and fulfillment sales contract, agreed to, among other things, a
customer signing allowance in the amount of $1,250,000 to be amortized over the
term of the contract. Based on the fiscal 1996 financial results relating
thereto and an assessment made in the fiscal 1996 fourth quarter of anticipated
future results of performing thereunder, the Company determined that the
unamortized balance of the deferred charge was not recoverable and, accordingly,
charged to operations the remaining unamortized balance.
10. RESTRUCTURING CHARGE
In June 1996, the Company adopted a plan to streamline and reduce resources
utilized in the business which resulted in recording a restructuring charge of
approximately $3.1 million in the fourth quarter of fiscal 1996. The
restructuring charge comprised of work force related expenses of $1,126,358,
idle plant lease costs of $863,000, abandoned asset write off of $837,935 and
other related costs of $250,000.
F-22
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 31, 1997 AND 1996
10. RESTRUCTURING CHARGE--(CONTINUED)
The status of the components of the restructuring charge was:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
JULY 31, FISCAL 1997 JULY 31,
1996 ACTIVITY 1997
---------- ----------- ----------
<S> <C> <C> <C>
Work force related expenses.................................... $1,126,000 $(1,022,000) $ 104,000
Idle plant lease costs......................................... 863,000 (452,500) 410,500
Other related costs............................................ 250,000 (62,500) 187,500
---------- ----------- ----------
$2,239,000 $(1,537,000) $ 702,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
11. QUARTERLY FINANCIAL DATA
Summarized quarterly financial data is as follows (unaudited and in
thousands):
<TABLE>
<CAPTION>
NET INCOME
GROSS (LOSS)
REVENUE MARGIN (II)(III)
------- ------ ----------
<S> <C> <C> <C>
1997:
First quarter....................................................... $43,329 $8,599 $ 488
Second quarter...................................................... 38,785 7,594 43
Third quarter....................................................... 38,509 7,676 98
Fourth quarter...................................................... 38,525 8,244 38
1996:
First quarter....................................................... $46,335 $9,606 $ 851
Second quarter...................................................... 39,389 6,048 (1,465)
Third quarter....................................................... 37,933 6,656 (1,012)
Fourth quarter...................................................... 37,284 5,120 (3,959)
1995:
First quarter....................................................... $20,968 $9,084 $ 2,513
Second quarter(iv).................................................. 22,694 6,171 1,578
Third quarter(i).................................................... 35,430 7,508 237
Fourth quarter...................................................... 37,472 4,359 (1,499)
</TABLE>
- ------------------
(i) Effective January 12, 1995, the Company consummated a reverse acquisition
merger of HMG (Note 2).
(ii) Historical earnings per share have not been presented due to the
recapitalization of AFL via Allied Digital (Note 3).
(iii) Prior to January 12, 1995, the Company was not taxable for Federal income
tax purposes under the provisions of Subchapter S of the Internal Revenue
Code (Note 8).
(iv) Upon becoming disqualified under the provision of Subchapter S on January
12, 1995, the Company established net deferred tax assets of $1,625,000 in
the second quarter of fiscal 1995 (Note 8).
F-23
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------------------------------------------------------------------------------------
ADDITIONS
------------------------
(1) (2)
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
For the year ended July 31, 1997........ $1,515,000 $1,242,860 $ 1,107,860(a) $1,650,000
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
For the year ended July 31, 1996........ $ 871,000 $1,297,294 $ 653,294(a) $1,515,000
---------- ---------- ------------ ----------
---------- ---------- ------------ ----------
For the year ended July 31, 1995........ $ 918,000 $ 937,504 $395,000(b) $ 1,379,504(a) $ 871,000
---------- ---------- ---------- ------------ ----------
---------- ---------- ---------- ------------ ----------
</TABLE>
- ------------------
(a) Write-off of uncollectible accounts.
(b) Attributable to HMG Merger.
F-24
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................................... $ 2,566,000 $ 1,193,000
Accounts receivable, net....................................................... 26,012,000 25,516,000
Inventories.................................................................... 5,133,000 4,380,000
Prepaid expenses............................................................... 1,105,000 786,000
Deferred income taxes.......................................................... 2,207,000 3,422,000
------------ ------------
Total current assets............................................................. 37,023,000 35,297,000
Property and equipment, net...................................................... 27,218,000 26,783,000
Other assets:
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $8,598,000 and $7,204,000 at January 31, 1998 and July 31,
1997, respectively.......................................................... 42,657,000 43,064,000
Deferred charges and other..................................................... 3,007,000 2,737,000
------------ ------------
45,664,000 45,801,000
------------ ------------
$109,905,000 $107,881,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capitalized lease obligations......... $ 12,727,000 $ 9,837,000
Current maturities of subordinated notes payable to stockholders............... 2,881,000
Accounts payable............................................................... 17,820,000 14,781,000
Accrued liabilities............................................................ 6,783,000 6,735,000
Income taxes payable............................................................. 475,000
------------ ------------
Total current liabilities........................................................ 40,686,000 31,353,000
Long-term debt and capitalized lease obligations, less current maturities........ 20,564,000 26,711,000
Subordinated notes payable to stockholders, less current maturities.............. 7,171,000 10,061,000
Deferred income taxes............................................................ 1,112,000 1,112,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000 shares authorized; no shares issued and
outstanding................................................................. -- --
Common stock, $0.01 par value; 25,000,000 shares authorized; 13,619,644 shares
issued and outstanding...................................................... 136,000 136,000
Additional paid-in capital..................................................... 44,892,000 44,742,000
Accumulated deficit............................................................ (4,656,000) (6,234,000)
------------ ------------
40,372,000 38,644,000
------------ ------------
$109,905,000 $107,881,000
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE-MONTH PERIODS SIX-MONTH PERIODS
ENDED JANUARY 31, ENDED JANUARY 31,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................... $39,554,000 $38,785,000 $88,592,000 $81,511,000
Cost of sales....................................... 30,992,000 31,191,000 69,820,000 65,318,000
----------- ----------- ----------- -----------
Gross profit................................. 8,562,000 7,594,000 18,772,000 16,193,000
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative............... 5,448,000 5,413,000 11,474,000 10,946,000
Amortization of excess of cost over fair value of
net assets acquired............................ 648,000 595,000 1,294,000 1,240,000
----------- ----------- ----------- -----------
Total operating expenses..................... 6,096,000 6,008,000 12,768,000 12,186,000
----------- ----------- ----------- -----------
Income from operations.............................. 2,466,000 1,586,000 6,004,000 4,007,000
----------- ----------- ----------- -----------
Other income (expense):
Interest expense.................................. (1,263,000) (1,182,000) (2,561,000) (2,456,000)
Other, net........................................ 90,000 36,000 85,000 79,000
----------- ----------- ----------- -----------
Total other expense.......................... (1,173,000) (1,146,000) (2,476,000) (2,377,000)
----------- ----------- ----------- -----------
Income before income taxes.......................... 1,293,000 440,000 3,528,000 1,630,000
Provision for income taxes.......................... 805,000 397,000 1,950,000 1,099,000
----------- ----------- ----------- -----------
Net Income................................... $ 488,000 $ 43,000 $ 1,578,000 $ 531,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share--basic and diluted........ $0.04 $-- $0.12 $0.04
Average common shares outstanding:
Basic............................................. 13,619,644 13,619,644 13,619,644 13,619,644
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted........................................... 13,693,632 13,619,644 13,672,604 13,619,644
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIODS ENDED
JANUARY 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities......................................... $ 9,021,000 $ 1,583,000
Cash flows used in investing activities:
Purchases of property and equipment............................................... (3,875,000) (577,000)
----------- -----------
Net cash used in investing activities.......................................... (3,875,000) (577,000)
----------- -----------
Cash flows from financing activities:
Net borrowings under revolving notes.............................................. 1,306,000 8,477,000
Repayment of long-term debt....................................................... (6,668,000) (9,043,000)
Borrowings of long-term debt...................................................... 1,589,000 --
----------- -----------
Net cash used in financing activities.......................................... (3,773,000) (566,000)
----------- -----------
Net increase in cash........................................................... 1,373,000 440,000
Cash at beginning of period......................................................... 1,193,000 831,000
----------- -----------
Cash at end of period............................................................... $ 2,566,000 $ 1,271,000
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The condensed consolidated balance sheet as of January 31, 1998 and the
related condensed consolidated statements of earnings for the three- and
six-month periods ended January 31, 1998 and 1997 and the condensed consolidated
statements of cash flows for the six-month periods ended January 31, 1998 and
1997 have been prepared by Allied Digital Technologies Corp. ('Allied Digital'),
including the accounts of its wholly-owned subsidiaries, HMG Digital
Technologies Corp. ('HMG') and subsidiary, HRM Holdings Corp. ('Holdings'), and
its wholly-owned subsidiary, Allied Digital, Inc. (formerly known as Hauppauge
Record Manufacturing, Ltd.) ('Allied') (hereinafter referred to collectively as
the 'Company') without audit. In the opinion of management, all adjustments
necessary to present fairly the financial position as of January 31, 1998 and
for all periods presented, consisting of normal recurring adjustments, have been
made. Results of operations for the
six-month period ended January 31, 1998 are not necessarily indicative of the
operating results expected for the full year.
The Company (i) provides videocassette duplication and fulfillment services
in addition to processing and duplicating commercial film and offering
post-production services, and (ii) replicates cassette tapes, VHS videotapes and
compact discs under production contracts with companies primarily in the
recorded music industry.
These statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations. These condensed consolidated financial
statements should be read in conjunction with the annual audited consolidated
financial statements and the accompanying notes included in the Company's Form
10-K for the fiscal year ended July 31, 1997.
Certain amounts for the six-month period ended January 31, 1997 have been
reclassified to conform to the current year presentation.
NOTE B--INVENTORIES
Inventories consist of the following classifications:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JULY 31, 1997
---------------- -------------
<S> <C> <C>
Raw materials.......................................................... $ 4,250,000 $ 3,416,000
Work-in-process........................................................ 391,000 674,000
Finished goods......................................................... 492,000 290,000
---------------- -------------
$ 5,133,000 $ 4,380,000
---------------- -------------
---------------- -------------
</TABLE>
NOTE C--LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS
Long-term debt, subordinated notes payable and capitalized lease
obligations consist of the following:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JULY 31, 1997
---------------- -------------
<S> <C> <C>
Loan and Security Agreement
Term loan............................................................ $ 14,042,000 $ 18,782,000
Revolving loan....................................................... 15,787,000 14,481,000
Additional term loan................................................. 1,020,000
Capital expenditure loan............................................. 1,456,000
Subordinated 10% Notes Payable to Stockholder.......................... 7,171,000 7,180,000
</TABLE>
F-28
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1998
(UNAUDITED)
NOTE C--LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS--(CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31, 1998 JULY 31, 1997
---------------- -------------
<S> <C> <C>
Additional Subordinated 10% Notes Payable to Stockholders.............. 2,000,000 2,000,000
Subordinated 11% Series B Notes Payable to Stockholders................ 881,000 881,000
Note Payable to VCA.................................................... 926,000 1,171,000
Capitalized lease obligations.......................................... 995,000 995,000
Other.................................................................. 85,000 99,000
---------------- -------------
43,343,000 46,609,000
Less current maturities................................................ (15,608,000) (9,837,000)
---------------- -------------
$ 27,735,000 $ 36,772,000
---------------- -------------
---------------- -------------
</TABLE>
Loan and Security Agreement
The October 30, 1996 loan and security agreement provided the Company with
borrowings of up to $48,910,169 under credit facilities consisting of a (i)
$25,410,169 term loan, (ii) $22,000,000 revolving loan facility (combined with a
$1,500,000 letter of credit facility) and (iii) $1,500,000 additional loan. On
August 19, 1997, the Company entered into an amendment to the October 30, 1996
loan and security agreement with the bank which provides the Company with a
$3,450,000 capital expenditure credit facility.
The loan and security agreement (as amended) is collateralized by
substantially all of the assets of the Company. The agreement contains covenants
which, among other matters, (1) require the Company to (i) maintain increasing
levels of net worth, (ii) maintain a minimum debt service ratio and (iii) limit
its annual capital expenditures, and (2) place limitations on (i) additional
indebtedness, encumbrances and guarantees, (ii) consolidations, mergers or
acquisitions, (iii) investments or loans, (iv) disposal of property, (v)
compensation to officers and others, (vi) dividends and stock redemptions, (vii)
issuance of stock, and (viii) transactions with affiliates, all as defined in
the agreement. As of January 31, 1998, there is no equity available for the
payment of dividends to stockholders. The agreement also contains provisions for
fees payable to the bank upon
prepayment and an increased rate of interest during periods of default. The term
of this agreement extends to November 30, 2000.
a. Term Loan
The $25,410,169 term loan dated October 30, 1996 is payable in an initial
scheduled installment aggregating $1,695,462 on October 31, 1996 (of which
$1,179,000 was repaid on November 8, 1996), 30 consecutive monthly installments
of $548,054 thereafter through April 30, 1999 and a final installment on May 30,
1999 of $273,098 together with additional prepayments of principal of $2,000,000
on October 31, 1997 and $5,000,000 on October 31, 1998. No prepayment fees
result from these scheduled prepayments. In addition, interest is payable
monthly at 1.5% over the bank's base rate (8.5% at January 31, 1998).
b. Revolving Loan
Under the revolving loan facility combined with a $1,500,000 letter of
credit facility, the Company may borrow up to a maximum of $22,000,000 based
upon a percentage of accounts receivable and inventory, as defined, less the sum
of the undrawn face amount of any letters of credit outstanding. Interest is
payable monthly at 1.25% over the bank's base rate. In addition, the Company is
required to pay, on a monthly basis, an unused facility fee of 0.5% per annum.
At January 31, 1998, the Company had approximately $6,213,000 unused and
available under the revolving loan facility.
F-29
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1998
(UNAUDITED)
NOTE C--LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS--(CONTINUED)
c. Additional Term Loan
The $1,500,000 additional loan dated October 30, 1996 was payable in 25
consecutive monthly installments commencing December 31, 1996 of $60,000 each
plus interest at 1.5% over the bank's base rate. In the event the additional
loan was repaid in full on or before December 31, 1997 and the loan and security
agreement had not been terminated on or before such date, the Company would not
be required to pay a $100,000 fee to the bank on December 31, 1998. On December
31, 1997, the Company repaid in full the remaining outstanding balance of
$720,000 on this additional loan to the bank.
d. Capital Expenditure Credit Facility
The $3,450,000 capital expenditure credit facility provides the Company
with a credit line through July 31, 1998 to finance up to 80% of the value of
capital equipment purchases (as defined). Such loans under the facility are
payable based on a 36-month amortization schedule with a final payment of the
entire unpaid principal balance on July 31, 2000. These loans bear interest at
1.5% over the bank's base rate. In addition, the Company is required to pay a
$103,500 fee to the bank, payable at a rate of 3% of each advance with a final
payment for any unpaid amount of the fee payable on July 31, 1998. Through
January 31, 1998, the Company borrowed $1,589,000 from this credit facility. As
of January 31, 1998, $1,456,000 was outstanding under this facility.
Subordinated 10% Notes Payable to Stockholder
The subordinated 10% notes payable to stockholder are uncollateralized and
payable in full on January 1, 2001. Interest accrues only on the original
principal sum of $6,000,000 and is payable quarterly at 10% per annum (12% upon
default); however, through January 31, 1998, certain interest payments were
postponed pursuant to the terms of the loan and security agreement with the
bank. Partial payment of such accrued and unpaid interest becomes periodically
payable to the stockholder and is limited to a stipulated percentage as defined
in the loan and security agreement, provided no default or event of default has
occurred. The remaining portion of the unpaid interest subject to this payment
postponement becomes payable on January 1, 2001. In accordance with the periodic
interest payment limitation provisions of the loan and security agreement, the
Company paid on December 5, 1997 approximately $316,000 of the accrued interest
payable on these notes.
Additional Subordinated 10% Notes Payable to Stockholders
The additional subordinated 10% notes payable to stockholders are
uncollateralized and payable in full on December 31, 1998 with interest payable
quarterly; however, payment of principal and interest may be extended in full or
in part to January 1, 2001 to the extent not permitted to be paid pursuant to
the terms of the loan and security agreement with the bank.
Subordinated 11% Series B Notes Payable to Stockholders
These uncollateralized notes mature on January 1, 1999 with interest
payable quarterly.
Note Payable to VCA
This uncollateralized note is payable in annual installments of $385,374
beginning January 1995 through January 2001, including interest at 12%.
Capitalized Lease Obligations
The Company leases certain equipment under agreements accounted for as
capital leases. The obligations for the equipment require the Company to make
monthly payments through December 2001 with implicit interest rates from 5.27%
to 19.48%.
F-30
<PAGE>
ALLIED DIGITAL TECHNOLOGIES CORP.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1998
(UNAUDITED)
NOTE C--LONG-TERM DEBT, SUBORDINATED NOTES PAYABLE AND CAPITALIZED LEASE
OBLIGATIONS--(CONTINUED)
The following is a summary of the aggregate annual maturities of long-term
debt, subordinated notes payable and capitalized lease obligations as of January
31, 1998:
<TABLE>
<S> <C>
Twelve months ending January 31,
1999......................................................................... $15,608,000
2000......................................................................... 3,643,000
2001......................................................................... 24,007,000
2002......................................................................... 85,000
-----------
$43,343,000
-----------
-----------
</TABLE>
NOTE D--EARNINGS PER SHARE
In the second quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ('SFAS No. 128'), 'Earnings Per Share,'
which supersedes Accounting Principle Board Opinion No. 15. Under SFAS No. 128,
earnings per common share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock. Prior-period amounts have been restated, where appropriate, to conform to
the requirements of SFAS No. 128.
The number of shares used in the Company's basic and diluted earnings per
share computations are as follows:
<TABLE>
<CAPTION>
THREE-MONTH PERIODS SIX-MONTH PERIODS
ENDED JANUARY 31, ENDED JANUARY 31,
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding for basic
earnings per share..................................... 13,619,644 13,619,644 13,619,644 13,619,644
Common stock equivalents for stock options and
warrants............................................... 73,988 -- 52,960 --
---------- ---------- ---------- ----------
Weighted average common shares outstanding for diluted
earnings per share..................................... 13,693,632 13,619,644 13,672,604 13,619,644
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
NOTE E--ACQUISITION
On December 17, 1997, the Company acquired substantially all of the assets
and assumed certain liabilities of Denver Dubbing, Inc., a videocassette
duplicator. The purchase price was $873,000 payable in cash of $170,000 and the
assumption of net liabilities for the balance. The purchase agreement contained
a covenant not-to-compete for a period of three years. Also, under the purchase
agreement, the Company may pay additional consideration of $270,000 in the event
net sales for the acquired company exceed certain predetermined amounts during
1998 and 1999. The Company accounted for the acquisition as a purchase and as
such, the fair values of the assets acquired and liabilities assumed have been
recorded on the date of the acquisition and the results of operations are
included in the Company's statement of earnings since the acquisition date. The
excess of consideration paid over the estimated fair value of the net assets
acquired in the amount of $773,000 has been recorded as excess of fair value
over the cost of net assets acquired and is being amortized on a straight-line
basis over 15 years. Pro forma historical results of operations are not
presented, as such results would not be materially different from the historical
results of the Company.
In connection with this acquisition, the Company entered into a two year
employment agreement with an officer of the acquired company with an annual base
salary of approximately $150,000.
F-31
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the Company in
connection with the offering described in this Registration Statement. All of
such amounts are estimated except for the SEC Registration Fee and the NASD fee.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 29,500
NASD Filing Fee............................................... 10,500
Printing and Engraving Costs.................................. *
Legal Fees and Expenses....................................... *
Accounting Fees and Expenses.................................. *
Fees and expenses (filing, legal fees) for qualification
under state securities laws................................. *
Trustee's Fees and expenses................................... *
Miscellaneous................................................. *
--------
Total.................................................... $ *
--------
--------
</TABLE>
- ------------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(A) ALLIED DIGITAL, INC.
Allied Digital, Inc. (the 'Issuer') is a New York corporation. The New York
Business Corporation Law (the 'NYBCL') authorizes a New York corporation to
indemnify any person who is, or is threatened to be made, a party in any civil
or criminal proceeding (other than an action by or in the right of the
corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another entity, against
judgments, fines, amounts paid in settlement and reasonable expenses (including
attorneys' fees), actually and reasonably incurred by such person as a result of
such action or proceeding or any appeal therein. With respect to actions by or
in the right of the corporation, the NYBCL authorizes indemnification of such
person against reasonable expenses, including attorneys' fees and amounts paid
in settlement. To be entitled to indemnification, a person must have acted in
good faith and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Court approval is required as a prerequisite to indemnification of expenses in
respect of any claim as to which a person has been adjudged liable to the
corporation. The NYBCL requires indemnification against expenses actually and
reasonably incurred by any director, officer, employee or agent in connection
with a proceeding against such person for action in such capacity to the extent
that the person has been successful on the merits or otherwise. Advancement of
expenses (i.e., payment prior to a determination on the merits) is permitted,
but not required, by the NYBCL, which further requires that any director or
officer must undertake to repay such expenses if it is ultimately determined
that he is not entitled to indemnification. The disinterested members of the
board of directors (or independent legal counsel or the shareholders) must
determine, in each instance where indemnification is not required by the NYBCL,
that such director, officer, employee or agent is entitled to indemnification.
The NYBCL provides that the indemnification provided by statute is not
exclusive.
The form of the Underwriting Agreement, filed as Exhibit 1 to this
Registration Statement, provides that the Issuer will indemnify and reimburse
the Underwriters and each controlling person of the Underwriters with respect to
certain expenses and liabilities, including liabilities under the Securities Act
of 1933 or other federal or state regulations or under the common law, which
arise out of or are based on certain material misstatements or omissions in the
Registration Statement. In addition, the Underwriting Agreement provides that
the Underwriters will similarly indemnify and reimburse the Issuer and each
director, each officer who signed the Registration Statement and each
controlling person of the Issuer with respect to certain material misstatements
or omissions in the Registration Statement which are based on certain written
information furnished by the Underwriters for use in connection with the
preparation of the Registration Statement.
II-1
<PAGE>
The Issuer has also entered into employment agreements with certain
executive officers, which agreements require that the Issuer maintain a
directors' and officers' liability policy for the benefit of such officers and
that the Issuer will indemnify such officers to the fullest extent permitted by
law.
The Issuer has adopted provisions in its Certificate of Incorporation and
Bylaws that provide that the Issuer shall indemnify its officers and directors
to the fullest extent permitted by the NYBCL.
(B) ALLIED DIGITAL TECHNOLOGIES CORP., HMG DIGITAL TECHNOLOGIES CORP. AND
HRM HOLDINGS CORP.
Allied Digital Technologies Corp., ('ADT') HMG Digital Technologies Corp.
('HMG') and HRM Holdings Corp. ('HRM') are Delaware corporations. Section 145 of
the Delaware General Corporation Law ('DGCL'), inter alia, empowers a Delaware
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of
another corporation or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interest of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is authorized for such person against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the defense
or settlement of any such threatened, pending or completed action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the shareholders or disinterested directors or by independent
legal counsel in a written opinion that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against such person, and incurred by such person
in any such capacity, or arising out of such person's status as such, whether or
not the corporation would otherwise have the power to indemnify such person
under Section 145.
ADT has adopted provisions in its Certificate of Incorporation and Bylaws
that provide that ADT shall indemnify its officers and directors to the fullest
extent permitted by the DGCL.
HMG and HRM have both adopted provisions in their respective Certificates
of Incorporation and Bylaws that provide that HMG and HRM (each a 'Corporation')
shall indemnify officers and directors as follows:
(a) Any person made a party or threatened to be made a party, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action or suit by or in the
right of the Corporation to procure a judgment in its favor) by reason of
the fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall be indemnified by the
Corporation against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith
and in a manner which he reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the Corporation, or, with respect
to any criminal action or proceeding, that the person had reasonable cause
to believe that his conduct was unlawful.
(b) Any person made a party or threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact
II-2
<PAGE>
that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise shall be indemnified by the
Corporation against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation,
except that no indemnification shall be made hereunder in respect of any
claim, issue or matter as to which the person shall be adjudged liable to
the Corporation unless and only to the extent that the Court of Chancery of
the State of Delaware or the court in which such action or suit was brought
shall determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which said
Court of Chancery or such other court shall deem proper.
(c) To the extent that any person referred to above has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in paragraphs (a) and (b) above, or in defense of
any claim, issue or matter therein, he shall be indemnified by the
Corporation against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) No indemnification shall be granted under paragraph (a) or (b)
above unless ordered by a court or unless it shall be specifically
determined that indemnification of the person is proper in the
circumstances because he has met the applicable standard of conduct set
forth in the applicable paragraph, which determination shall be made (i) by
the Board of Directors of the Corporation, by not less than a majority vote
of a quorum of the whole Board consisting of directors not parties to the
subject action, suit or proceeding; or (ii) if such quorum is not
obtainable, or even if obtainable if directed by such a quorum of
disinterested directors, by independent legal counsel selected by the Board
of Directors in a written opinion; or (iii) by the stockholders entitled to
vote at any meeting by majority vote of the quorum present.
(e) Expenses incurred in defending any action, suit or proceeding by a
person who may be entitled to indemnity under the above provisions may be
paid by the Corporation in advance of the final disposition of such action,
suit or proceeding if authorized under paragraph (d) above upon receipt of
an undertaking by or on behalf of the person to whom payment is to be made
that he will repay the amounts advanced if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation in
accordance with the above provisions.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the above provisions shall not be deemed exclusive of
any other rights to which those indemnified or advanced expenses may be
entitled under any provision of the Certificate of Incorporation, By-law,
agreement, vote of stockholders or disinterested directors, insurance
agreement, or otherwise, both as to action in his official capacity and as
to action in another capacity while holding such office.
(g) The indemnification and advancement of expenses, provided by, or
granted pursuant to, these provisions shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
In addition, pursuant to the Merger Agreement, ADT has agreed for a period
of six years following the effective time of the Merger to indemnify present and
former directors and officers of ADT and its subsidiaries with respect to acts
or omissions occurring prior to the effective time of the Merger to the maximum
extent permitted under the ADT's Certificate of Incorporation and Bylaws. ADT
has also agreed in the Merger Agreement to maintain for a period of six years
following the effective time of the Merger the directors' and officers'
liability insurance coverage maintained by ADT (or substantially equivalent
coverage under substitute policies) with respect to any claims arising out of
any actions or omissions occurring prior to the effective time of the Merger.
II-3
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
*1 -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Merger, dated May 5, 1998, by and between Analog Acquisition Corp. and Allied
Digital Technologies Corp. (Incorporated by reference to ADT's Current Report on Form 8-K dated May
15, 1998).
*2.2 -- Form of Stockholders' Voting Agreement.
*2.3 -- Form of Rollover Agreement.
*4.1 -- Form of Indenture among Allied Digital, Inc., IBJ Schroder Bank & Trust Company, as Trustee and the
Guarantors named therein.
*4.2 -- Form of Senior Subordinated Note (included in Exhibit 4.1).
*5 -- Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the securities being registered.
10.1 -- Amended and Restated Promissory Note, dated October 30, 1996, made by Hauppauge Record Manufacturing
Ltd. in favor of William H. Smith, Trustee, in the principal amount of $4,000,000 (herein
incorporated by reference to Exhibit 10(b)(i) to ADT's Annual Report on Form 10-K for the year ended
July 31, 1996).
10.2 -- Amended and Restated Promissory Note dated October 30, 1996, made by Hauppauge Record Manufacturing
Ltd. in favor of William H. Smith, in the principal amount of $2,000,000 (herein incorporated by
reference to Exhibit 10(b)(ii) to ADT's Annual Report on Form 10-K for the year ended July 31,
1996).
10.3 -- Global Indemnification Agreement dated June 17, 1994, among Allied Film Laboratory, Inc. and
Greenfield Land Company and William H. Smith, individually, d/b/a William H. Smith Realty and
William H. Smith, as Trustee, under the William H. Smith Trust Agreement dated November 13, 1978
(herein incorporated by reference to Exhibit (99)(j) filed as part of ADT's Registration Statement
on Form S-4, File No. 33-86530).
10.4 -- Consulting Agreement, dated June 16, 1994, between HMG and H. Sean Mathis (herein incorporated be
reference to Exhibit 10.22(ii) of HMG's Annual Report on Form 10-K for the fiscal year ended July
31, 1994, Commission File No. 0-20014).
10.5 -- Subordinated Promissory Note dated October 30, 1996, made by HMG in favor of George N. Fishman in
the principal amount of $200,000 (herein incorporated by reference to Exhibit 10(ee)(i) to ADT's
Annual Report on Form 10-K for the fiscal year ended July 31, 1996).
10.6 -- Subordinated Promissory Note dated October 30, 1996, made by HMG in favor of Donald L. Olesen in the
principal amount of $200,000 (herein incorporated by reference to Exhibit 10(ee)(ii) to ADT's Annual
Report on Form 10-K for the fiscal year ended July 31, 1996).
10.7 -- Subordinated Promissory Note dated October 30, 1996, made by HMG in favor of William H. Smith,
Trustee, in the principal amount of $1,600,000 (herein incorporated by reference to Exhibit
10(ee)(iii) to ADT's Annual Report on Form 10-K for the fiscal year ended July 31, 1996).
10.8 -- Agreement between Anchor Bay Entertainment and ADT for Videotape Duplication and Order Fulfillment,
dated June 16, 1995 (herein incorporated by reference to Exhibit (10)(ff) to ADT's Annual Report on
Form 10-K for the fiscal year ended July 31, 1996).
10.9 -- Modification Agreement between Anchor Bay Entertainment and ADT dated September 12, 1997 (herein
incorporated by reference to Exhibit 10(ff)(ii) to ADT's Annual Report on Form 10-K for the fiscal
year ended July 31, 1997).
10.10 -- Exclusive CD Manufacturing Agreement, dated as of September 12, 1997, between Sofsource, Inc. and
ADT (herein incorporated by reference to Exhibit 10(hh) to ADT's Annual Report on Form 10-K for the
fiscal year ended July 31, 1997).
*12 -- Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of Arthur Andersen LLP.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
*23.3 -- Consent of Morgan, Lewis & Bockius LLP (included as part of its opinion filed as Exhibit 5 hereto).
*25 -- Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of IBJ Schroder Bank & Trust
Company, as Trustee.
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to Item 15, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that the claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted form the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HAUPPAUGE, STATE OF NEW YORK, ON THE 4TH DAY OF JUNE,
1998.
ALLIED DIGITAL, INC.
By: /s/ GEORGE N. FISHMAN
----------------------------------
George N. Fishman
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned officers and directors of Allied Digital, Inc.
hereby constitutes and appoints John K. Mangini and Charles A. Mantione, and
each or any of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities to sign any or all amendments or
post-effective amendments to this Registration Statement and any registration
statement for the same offering filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, and to file the same, and with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON JUNE 4, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------ -------------------------------------------------
<S> <C> <C>
/s/ GEORGE N. FISHMAN Chairman of the Board, Chief Executive Officer
- ------------------------------------------ and Director
George N. Fishman
/s/ CHARLES P. KAVANAGH Vice President and Treasurer
- ------------------------------------------
Charles P. Kavanagh
/s/ WILLIAM H. SMITH Director
- ------------------------------------------
William H. Smith
</TABLE>
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HAUPPAUGE, STATE OF NEW YORK, ON THE 4TH DAY OF JUNE,
1998.
ALLIED DIGITAL TECHNOLOGIES CORP.
By: /s/ GEORGE N. FISHMAN
----------------------------------
George N. Fishman
Co-Chairman and Chief Executive
Officer
POWER OF ATTORNEY
Each of the undersigned officers and directors of Allied Digital
Technologies Corp. hereby constitutes and appoints John K. Mangini and Charles
A. Mantione, and each or any of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities to sign any or all
amendments or post-effective amendments to this Registration Statement and any
registration statement for the same offering filed pursuant to Rule 462 under
the Securities Act of 1933, as amended, and to file the same, and with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact and agents, or any of them or his substitute and
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON JUNE 4, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------ -------------------------------------------------
<S> <C>
/s/ WILLIAM H. SMITH Co-Chairman, President and Director
- ------------------------------------------
William H. Smith
/s/ GEORGE N. FISHMAN Co-Chairman, Chief Executive Officer and Director
- ------------------------------------------
George N. Fishman
/s/ CHARLES A. MANTIONE Vice President--Finance
- ------------------------------------------
Charles A. Mantione
Director
- ------------------------------------------
Donald L. Olesen
/s/ EUGENE L. GARGARO, JR. Director
- ------------------------------------------
Eugene L. Gargaro, Jr.
/s/ WERNER H. JEAN Director
- ------------------------------------------
Werner H. Jean
Director
- ------------------------------------------
Seymour Leslie
/s/ H. SEAN MATHIS Director
- ------------------------------------------
H. Sean Mathis
Director
- ------------------------------------------
John A. Morgan
</TABLE>
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HAUPPAUGE, STATE OF NEW YORK, ON THE 4TH DAY OF JUNE,
1998.
HMG DIGITAL TECHNOLOGIES CORP.
By: /s/ GEORGE N. FISHMAN
----------------------------------
George N. Fishman
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned officers and directors of HMG Digital Technologies
Corp. hereby constitutes and appoints John K. Mangini and Charles A. Mantione,
and each or any of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any or all amendments or
post-effective amendments to this Registration Statement and any registration
statement for the same offering filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, and to file the same, and with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them or his substitute and substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON JUNE 4, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------ -------------------------------------------------
<S> <C> <C>
/s/ GEORGE N. FISHMAN Chairman of the Board, Chief Executive Officer
- ------------------------------------------ and Director
George N. Fishman
/s/ CHARLES P. KAVANAGH Chief Financial Officer
- ------------------------------------------
Charles P. Kavanagh
/s/ WILLIAM H. SMITH Director
- ------------------------------------------
William H. Smith
</TABLE>
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-2 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF HAUPPAUGE, STATE OF NEW YORK, ON THE 4TH DAY OF JUNE,
1998.
HRM HOLDINGS CORP.
By: /s/ GEORGE N. FISHMAN
----------------------------------
George N. Fishman
Chief Executive Officer
and President
POWER OF ATTORNEY
Each of the undersigned officers and directors of HRM Holdings Corp. hereby
constitutes and appoints John K. Mangini and Charles A. Mantione, and each or
any of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any or all amendments or post-effective
amendments to this Registration Statement and any registration statement for the
same offering filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, and to file the same, and with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them or his substitute and substitutes, may lawfully do or cause to be
done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON JUNE 4, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ------------------------------------------ -------------------------------------------------
<S> <C> <C>
/s/ GEORGE N. FISHMAN Chief Executive Officer, President and Director
- ------------------------------------------
George N. Fishman
/s/ CHARLES P. KAVANAGH Vice President and Treasurer
- ------------------------------------------
Charles P. Kavanagh
/s/ WILLIAM H. SMITH Director
- ------------------------------------------
William H. Smith
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ------- ---------------------------------------------------------------------------------------------- ----------
<S> <C> <C> <C>
*1 -- Form of Underwriting Agreement.
2.1 -- Agreement and Plan of Merger, dated May 5, 1998, by and between Analog Acquisition Corp.
and Allied Digital Technologies Corp. (Incorporated by reference to Current Report on
Form 8-K dated May 15, 1998).
*2.2 -- Form of Stockholders' Voting Agreement
*2.3 -- Form of Rollover Agreement.
*4.1 -- Form of Indenture among Allied Digital, Inc. and IBJ Schroder Bank & Trust Company, as
Trustee and the Guarantors named therein.
*4.2 -- Form of Senior Subordinated Note (included in Exhibit 4.1).
*5 -- Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the securities being
registered.
10.1 -- Amended and Restated Promissory Note, dated October 30, 1996, made by Hauppauge Record
Manufacturing Ltd. in favor of William H. Smith, Trustee, in the principal amount of
$4,000,000 (herein incorporated by reference to Exhibit 10(b)(i) to ADT's Annual Report
on Form 10-K for the year ended July 31, 1996).
10.2 -- Amended and Restated Promissory Note dated October 30, 1996, made by Hauppauge Record
Manufacturing Ltd. in favor of William H. Smith, in the principal amount of $2,000,000
(herein incorporated by reference to Exhibit 10(b)(ii) to ADT's Annual Report on Form
10-K for the year ended July 31, 1996).
10.3 -- Global Indemnification Agreement dated June 17, 1994, among Allied Film Laboratory, Inc.
and Greenfield Land Company and William H. Smith, individually, d/b/a William H. Smith
Realty and William H. Smith, as Trustee, under the William H. Smith Trust Agreement
dated November 13, 1978 (herein incorporated by reference to Exhibit (99)(j) filed as
part of ADT's Registration Statement on Form S-4, File No. 33-86530).
10.4 -- Consulting Agreement, dated June 16, 1994, between HMG and H. Sean Mathis (herein
incorporated be reference to Exhibit 10.22(ii) of HMG's Annual Report on Form 10-K for
the fiscal year ended July 31, 1994, Commission File No. 0-20014).
10.5 -- Subordinated Promissory Note dated October 30, 1996, made by HMG in favor of George N.
Fishman in the principal amount of $200,000 (herein incorporated by reference to Exhibit
10(ee)(i) to ADT's Annual Report on Form 10-K for the fiscal year ended July 31, 1996).
10.6 -- Subordinated Promissory Note dated October 30, 1996, made by HMG in favor of Donald L.
Olesen in the principal amount of $200,000 (herein incorporated by reference to Exhibit
10(ee)(ii) to ADT's Annual Report on Form 10-K for the fiscal year ended July 31, 1996).
10.7 -- Subordinated Promissory Note dated October 30, 1996, made by HMG in favor of William H.
Smith, Trustee, in the principal amount of $1,600,000 (herein incorporated by reference
to Exhibit 10(ee)(iii) to ADT's Annual Report on Form 10-K for the fiscal year ended
July 31, 1996).
10.8 -- Agreement between Anchor Bay Entertainment and ADT for Videotape Duplication and Order
Fulfillment, dated June 16, 1995 (herein incorporated by reference to Exhibit (10)(ff)
to ADT's Annual Report on Form 10-K for the fiscal year ended July 31, 1996).
10.9 -- Modification Agreement between Anchor Bay Entertainment and ADT dated September 12, 1997
(herein incorporated by reference to Exhibit 10(ff)(ii) to ADT's Annual Report on Form
10-K for the fiscal year ended July 31, 1997).
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
10.10 -- Exclusive CD Manufacturing Agreement, dated as of September 12, 1997, between Sofsource,
Inc. and ADT (herein incorporated by reference to ADT's Annual Report on Form 10-K for
the fiscal year ended July 31, 1997).
*12 -- Computation of Ratio of Earnings to Fixed Charges.
23.1 -- Consent of Grant Thornton LLP.
23.2 -- Consent of Arthur Andersen LLP.
*23.3 -- Consent of Morgan, Lewis & Bockius LLP (included as part of its opinion filed as Exhibit
5 hereto).
*25 -- Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of IBJ Schroder
Bank & Trust Company, as Trustee.
</TABLE>
- ------------------
* To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated October 24, 1997 accompanying the consolidated
financial statements and schedule of Allied Digital Technologies Corp. and
subsidiaries contained in the Registration Statement and Prospectus. We consent
to the use of the aforementioned report in the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
'Experts.'
GRANT THORNTON LLP
Melville, New York
June 4, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated November 9, 1995 accompanying the consolidated
financial statements and schedule of Allied Digital Technologies Corp. and
subsidiaries contained in the Registration Statement and Prospectus. We consent
to the use of the aforementioned report in the Registration Statement and
Prospectus, and to the use of our name as it appears under the captions
'Experts.'
ARTHUR ANDERSEN LLP
Detroit, Michigan
June 4, 1998
