<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO . ------------------
-------------------
Commission file number 1-13580
ALLIED DIGITAL TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3191597
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7375 WOODWARD AVENUE, DETROIT, MICHIGAN 48202-3121
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(313) 871-2222
--------------
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
As of June 10, 1996, 13,619,644 shares of the registrant's common
stock were outstanding.
Total number of pages 17.
<PAGE> 2
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of April 30, 1996
and July 31, 1995. 1
Condensed Consolidated Statements of Operations
for the three months and nine months ended
April 30, 1996 and April 30, 1995. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended April 30, 1996 and April 30, 1995. 3
Notes to Condensed Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION 16
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
--------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,653,000 $ 559,000
Accounts receivable, net 30,739,000 30,253,000
Inventories 5,545,000 9,412,000
Prepaid expenses 902,000 755,000
Deferred income taxes 1,643,000 1,643,000
------------ ------------
Total current assets 41,482,000 42,622,000
PROPERTY AND EQUIPMENT, net 33,148,000 30,245,000
OTHER ASSETS:
Excess of cost over fair value of net assets
acquired, net of accumulated amortization
of $3,977,000 and $2,040,000 at
April 30, 1996 and July 31, 1995, respectively 46,181,000 48,118,000
Deferred charges, deposits and other 3,845,000 4,882,000
------------ ------------
Total other assets 50,026,000 53,000,000
------------ ------------
TOTAL ASSETS $124,656,000 $125,867,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt 24,905,000 5,370,000
Accounts payable 22,028,000 22,328,000
Accrued liabilities 6,167,000 5,233,000
------------ ------------
Total current liabilities 53,100,000 32,931,000
LONG TERM DEBT, less current maturities 19,170,000 40,800,000
SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS 10,417,000 8,417,000
DEFERRED INCOME TAXES 31,000 157,000
STOCKHOLDERS' EQUITY:
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 44,742,000 44,742,000
Accumulated deficit (2,940,000) (1,316,000)
------------ ------------
Total stockholders' equity 41,938,000 43,562,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $124,656,000 $125,867,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -------------------------------
April 30, 1996 April 30, 1995 April 30, 1996 April 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $38,631,000 $36,185,000 $125,983,000 $81,591,000
COST OF SALES 31,975,000 28,677,000 103,674,000 61,307,000
----------- ----------- ------------ -----------
Gross Profit 6,656,000 7,508,000 22,309,000 20,284,000
----------- ----------- ------------ -----------
OPERATING EXPENSES
Selling, general & administrative 6,128,000 4,958,000 17,950,000 13,919,000
Amortization of excess of cost over fair
value of net assets acquired 646,000 646,000 1,937,000 923,000
----------- ----------- ------------ -----------
Total operating expenses 6,774,000 5,604,000 19,887,000 14,842,000
----------- ----------- ------------ -----------
INCOME (LOSS) FROM OPERATIONS (118,000) 1,904,000 2,422,000 5,442,000
OTHER INCOME (EXPENSE):
Interest expense (1,418,000) (1,373,000) (4,407,000) (2,753,000)
Other, net 152,000 180,000 177,000 541,000
----------- ----------- ------------ -----------
Total other expense (1,266,000) (1,193,000) (4,230,000) (2,212,000)
----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE TAXES (1,384,000) 711,000 (1,808,000) 3,230,000
PROVISION (CREDIT) FOR INCOME TAXES (372,000) 474,000 (184,000) (1,098,000)
----------- ----------- ------------ -----------
NET INCOME (LOSS) $(1,012,000) $ 237,000 $ (1,624,000) $ 4,328,000
=========== =========== ============ ===========
Net Income (Loss) per Common Share $ (0.07) $ 0.02 $ (0.12)
=========== =========== ============
PRO FORMA DATA (Unaudited)
AFL as a C Corporation subject to Federal
income tax for all periods presented:
Adjustment to income tax provision $ 2,529,000
-----------
Net Income $ 1,799,000
===========
Earnings per share reflecting consolidated
operations of AFL & HMG (Notes B and C):
Net Income per Common Share $ 0.16
===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE> 5
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
April 30, 1996 April 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $11,276,000 $ 5,826,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of and deposits on property and equipment (8,916,000) (3,127,000)
Proceeds from the sale of property and equipment - 415,000
----------- -----------
Net cash used in investing activities (8,916,000) (2,712,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving notes (3,790,000) (319,000)
Repayment of long term debt (5,332,000) (24,029,000)
Net borrowings under capital leases 36,000
Borrowings of long term debt and subordinated notes
payable to stockholders 8,992,000 23,175,000
Distributions to stockholders (667,000)
Increase in deferred charges (172,000) -
----------- -----------
Net cash used in financing activities (266,000) (1,840,000)
----------- -----------
NET INCREASE IN CASH 2,094,000 1,274,000
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD 559,000 811,000
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $ 2,653,000 $ 2,085,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
(A) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated balance sheet as of April 30, 1996 and the
related condensed consolidated statements of operations for the three
and nine month periods ended April 30, 1996 and 1995 and the condensed
consolidated statements of cash flows for the nine month periods ended
April 30, 1996 and 1995 have been prepared by Allied Digital
Technologies Corp. ("Allied Digital"), including the accounts of its
wholly-owned subsidiaries, Allied Film Laboratory, Inc. ("AFL") and
HMG Digital Technologies Corp. ("HMG") (hereinafter referred to
collectively as the "Company") without audit. The condensed
consolidated statements of operations include the results of HMG for
the periods presented since the date of merger (January 12, 1995) (See
Note B). In the opinion of management, all adjustments necessary to
present fairly the financial position as of April 30, 1996 and for all
periods presented, consisting of normal recurring adjustments, have
been made. Results of operations for the three and nine month periods
ended April 30, 1996 and 1995 are not necessarily indicative of the
operating results expected for the full year.
These statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission.
Certain information and footnote 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 Allied Digital's
Form 10-K for the period ended July 31, 1995.
(B) MERGER
Effective January 12, 1995, the Company 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. Upon consummation of these transactions (hereinafter
referred to collectively as the "Merger"), existing HMG warrants
totaling 3,067,000 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 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.
4
<PAGE> 7
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
The unaudited consolidated statements of operations on a pro forma
basis have been presented below as though HMG had been acquired as of
the beginning of the three and nine month periods ended April 30,
1995. This pro forma information does not purport to be indicative of
what would have occurred had the acquisition been made as of those
dates or of results which may occur in the future.
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended April 30, 1995 Ended April 30, 1995
-------------------- --------------------
<S> <C> <C>
Net sales $ 36,185,000 $ 123,078,000
Net income 237,000 2,166,000
Net earnings per common share 0.02 0.16
Weighted average shares 13,619,644 13,619,644
</TABLE>
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 Subchapter S
distribution 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 for HMG and AFL:
<TABLE>
<CAPTION>
Nine Month Period
Ended April 30, 1995
--------------------
<S> <C>
Net income as reported $ 4,328,000
HMG net earnings 768,000
Elimination of Merger costs 816,000
Amortization of costs in excess of fair
value of net assets acquired (1,013,000)
Interest expense (231,000)
Reversal of tax credit resulting
from revoking S election (1,625,000)
C Corp. tax provision for AFL (904,000)
Other 27,000
------
$ 2,166,000
=========
</TABLE>
5
<PAGE> 8
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
(C) SIGNIFICANT ACCOUNTING POLICIES
Earnings Per Share
Earnings per common share for the three and nine month periods ended
April 30, 1996 and the three month period ended April 30, 1995 has
been computed by dividing net earnings by the weighted average shares
of common stock and common stock equivalents outstanding during the
period. Weighted average shares outstanding were 13,619,644 for the
period.
Earnings per common share for the nine month period ended April 30,
1995 has not been presented for historical data due to the
recapitalization of AFL via Allied Digital. Pro forma presentation
has been made as if both the recapitalization and Merger had occurred
as of August 1, 1994 (See Note B).
Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform with fiscal 1996 presentation.
(D) LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
Long term debt and capitalized lease obligations of each of the
subsidiaries as of April 30, 1996 and July 31, 1995, are as follows:
<TABLE>
<CAPTION>
April 30, July 31,
Allied Film Laboratory, Inc. 1996 1995
------------ ------------
<S> <C> <C>
Term note payable in monthly installments
of $174,108 in February, 1996, $299,108
from March, 1996 through October, 1996 and
$174,108 from November, 1996 thereafter up
to a final installment of $4,233,240 on
December 31, 1999; plus interest at bank's
base rate plus 1.75% (Current debt as of $11,763,000 $ 13,580,000
April 30, 1996, see below)
Revolving note with interest payable in
monthly installments at bank's base rate
plus 1.50%, expiring December 31, 1999
(Current debt as of April 30, 1996, see below) 6,986,000 9,249,000
CAPEX note payable in 60 monthly installments
of $13,867 plus interest at bank's base
rate plus 1.75%, commencing September, 1995
(Current debt as of April 30, 1996, see below) 721,000 --
</TABLE>
6
<PAGE> 9
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
------------ -----------
<S> <C> <C>
CAPEX note payable in 60 monthly installments
of $25,987 plus interest at bank's base rate
plus 1.75%, commencing December, 1995
(Current debt as of April 30, 1996, see below) $ 925,000 --
Subordinated notes payable to stockholder
with interest payable quarterly at 10%
beginning July 1, 1994 with respect to
$4,000,000 and November 8, 1995 with respect
to $2,000,000, subject to subordination terms,
each of which is due January 1, 2000. 6,000,000 $ 4,000,000
Uncollateralized note payable to VCA
payable in annual installments of $385,374
beginning January 8, 1995 through January 8,
2001, including interest at 12% 1,389,000 1,570,000
---------- -----------
AFL Sub-Total 27,784,000 28,399,000
HMG Digital Technologies Corp.
Term notes payable in monthly installments
of $220,000, $33,334 and $22,750 respectively
beginning January 31, 1995, January 31, 1995
and November 31, 1995, respectively at
bank's base rate plus 1.75% 13,079,000 11,738,000
Revolving note with interest payable in
monthly installments beginning January
31, 1995 at bank's base rate plus
1.5%, expiring November 30, 2000 6,291,000 8,074,000
CAPEX notes payable in 60 monthly installments
of $26,667 and $35,666, respectively beginning
December 31, 1995 and January 31, 1996,
respectively at bank's base rate plus 1.75% 2,695,000 1,767,000
</TABLE>
7
<PAGE> 10
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
April 30, July 31,
1996 1995
------------ -----------
<S> <C> <C>
HMG uncollateralized subordinated Series A
Note with interest at 12% payable in quarterly
installments commencing March, 1995 $ 3,500,000 $ 3,500,000
HMG uncollateralized subordinated Series B
Notes with interest at 11% payable in quarterly
installments commencing March, 1995 917,000 917,000
Capital lease payable in monthly
installments of $7,828 including interest 226,000 192,000
----------- -----------
HMG Sub Total 26,708,000 26,188,000
TOTAL DEBT 54,492,000 54,587,000
Less Current Portion ($24,905,000) (5,370,000)
----------- -----------
$29,587,000 $49,217,000
=========== ===========
</TABLE>
The following is a summary of the aggregate annual maturities of long
term debt and capitalized lease obligations as of April 30, 1996:
<TABLE>
<CAPTION>
Twelve Months Ending April 30,
<S> <C>
1997 $ 24,905,000
1998 7,887,000
1999 5,280,000
2000 9,432,000
2001 6,988,000
-------------
$ 54,492,000
</TABLE>
8
<PAGE> 11
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
Separate senior loan credit facilities have been issued to each of the
subsidiaries by a bank. Each facility is collateralized by
substantially all of the assets of each subsidiary, respectively, and
each agreement contains various covenants specific to each subsidiary.
Each credit facility agreement contains covenants which, among other
matters (i) limit each subsidiary's ability to incur indebtedness,
merge, consolidate and acquire or sell assets, (ii) require each
subsidiary to satisfy certain ratios related to net worth and debt
coverage and (iii) limit the payment of cash dividends and capital
stock and the amount of capital stock repurchases. The maximum amount
available under each long-term revolving note is limited by a
calculation which focuses mainly on eligible accounts receivable and
inventory. At April 30, 1996, AFL and HMG had $0.8 million and $1.1
million available and unused under their revolvers, respectively. The
agreements also contain provisions for fees payable to the bank at an
annual rate ranging from 0.375% to 0.500% on the maximum amount
available under the revolving notes and capital expenditure loans,
fees payable to the bank upon prepayment and an increased rate of
interest during periods of default. Should either subsidiary have
excess cash flows, as defined, in any given year, additional principal
payments may become due.
The AFL credit facility as amended through June 14, 1996 provides for
borrowings under a term loan of $14,625,000; borrowings under a
long-term revolving note up to $ 8,000,000, including a letter of
credit facility of $1,000,000, and borrowings to purchase up to
$1,932,000 of new equipment. The HMG credit facility as amended
through June 14, 1996 provides for borrowings under a term loan of
$13,278,000 and borrowings under a long-term revolving note up to
$13,000,000, including a letter of credit facility of $500,000, and
borrowings to purchase up to $7,600,000 of new equipment. Under each
of the foregoing credit facilities, each loan to finance capital
expenditures is payable in 60 equal monthly installments.
The bank's base rate at April 30, 1996 was 8.25%.
AFL failed to meet certain covenant conditions set forth under the AFL
credit agreement as of July 31, 1995. On October 30, 1995, the AFL
credit agreement was amended to waive these defaults and to revise
certain financial covenants which resulted in modified net worth and
debt service coverage benchmarks. On November 8, 1995, a major
shareholder made a subordinated loan to AFL in the amount of
$2,000,000 bearing interest at 10.0% under terms substantially the
same as an existing AFL subordinated note payable to the same
stockholder. In addition, the interest rates on the AFL term note and
revolving note were increased by 0.50% and 0.75%, respectively.
At January 31, 1996, AFL again failed to meet certain financial
conditions set forth in the AFL credit agreement. On March 15, 1996
the AFL credit agreement was amended to waive these defaults, to again
revise certain financial covenants which resulted in modified net
worth and debt service coverage benchmarks, and to require additional
monthly principal repayments on the term loan of $125,000 per month
commencing March, 1996, through October 31, 1996 and an incremental
reduction of availability on the revolver of $142,000 each month
commencing March, 1996 through October 31, 1996.
9
<PAGE> 12
ALLIED DIGITAL TECHNOLOGIES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 1996
(UNAUDITED)
At April 30, 1996, AFL again failed to meet certain financial
conditions set forth in the AFL credit agreement. On June 14, 1996,
the bank agreed to waive these defaults provided however, that such
waiver shall cease to be effective July 31, 1996 if on or before such
date AFL and HMG have not merged and restructured their credit
facilities with the bank. In addition, on such date the AFL and HMG
credit agreements were amended to reduce the revolving note facilities
to $8,000,000 and $13,000,000, respectively. As a result of the
conditional waiver, the entire debt outstanding under the AFL credit
facility, $20,395,000 at April 30, 1996, has been reclassified as
current debt.
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed herein.
RESULTS OF OPERATIONS - THREE MONTH PERIOD ENDED APRIL 30, 1996, COMPARED TO
THREE MONTH PERIOD ENDED APRIL 30, 1995.
Net sales for the three month period ended April 30, 1996 were $38.6 million,
an increase of $2.4 million or 7% as compared to the three month period ended
April 30, 1995. The increase was due primarily to higher video unit volume
which was partially offset by lower unit selling prices. These declining
prices reflect continued intense competition and excess capacity in the
industry.
Gross profit for the three month period ended April 30, 1996 decreased to $6.7
million, or 17% of net sales from $7.5 million, or 21% of net sales for the
three month period ended April 30, 1995. Reduced margins as a result of
continued price pressures and a change in the Company's sales mix to include
more large customers whose contracts generate lower margins contributed to the
decline in gross profit.
Operating expenses for the three month period ended April 30, 1996 were $6.8
million, compared to $5.6 million for the three month period ended April 30,
1995. The 1995 quarter was favorably impacted by the following nonrecurring
events: (i) the capitalization of $0.6 million of costs associated with the
implementation phase of a computer system, (ii) lower depreciation expense of
$0.2 million resulting from AFL, a subsidiary of Allied Digital, switching to
the straight line depreciation method in order to establish a consistent method
of depreciation for both subsidiaries of Allied Digital, and (iii) the $0.2
million reversal of profit sharing contribution expense booked in an earlier
quarter. Without such nonrecurring events, operating expenses for the three
month period ended April 30, 1996 was substantially unchanged from the three
month period ended April 30, 1995. Included in operating expenses for the
three months ended April 30, 1996 and 1995 was $0.6 million of amortization
expense relating to the excess of cost over fair value of net assets acquired
in the Merger. Operating expenses as a percentage of net sales increased to
18% from 15% for the three months ended April 30, 1996 compared to the three
months ended April 30, 1995 for the reasons noted above.
Loss from operations of $0.1 million for the three month period ended April 30,
1996 compares to income from operations of $1.9 million for the three month
period ended April 30, 1995. This decrease of $2.0 million was primarily
caused by lower margins and higher operating expenses as described above.
Non-operating expenses were $1.3 million for the three month period ended April
30, 1996 compared to $1.2 million for the three month period ended April 30,
1995. This increase was primarily due to slightly increased
10
<PAGE> 13
interest expense of $0.1 million associated with an increase in debt levels.
As a result of the foregoing for the three month period ended April 30, 1996,
the Company realized a loss before income taxes of $1.4 million as compared to
income before income taxes of $0.7 million for the three month period ended
April 30, 1995.
Amortization of the excess of cost over the fair value of net assets acquired
associated with the Merger is not deductible for tax purposes. After
adjustment for this permanent difference between book and taxable income
(loss), the effective tax rate was approximately 40% for the three month
periods ended April 30, 1996 and April 30, 1995.
After giving effect to taxes on income, the Company had a net loss for the
three months ended April 30, 1996 of $1.0 million compared to net income of
$0.2 million for the three months ended April 30, 1995.
RESULTS OF OPERATIONS - NINE MONTH PERIOD ENDED APRIL 30, 1996, COMPARED TO
NINE MONTH PERIOD ENDED APRIL 30, 1995.
Net sales for the nine month period ended April 30, 1996 were $126.0 million,
an increase of $44.4 million or 54% as compared to the nine month period ended
April 30, 1995. Such increase was primarily due to an increase of $40.0
million in sales reported for the nine month period ended April 30, 1996 by
HMG, which was acquired on January 12, 1995 by Allied Digital. Accordingly,
HMG operating results were included in the entire nine month period ended April
30, 1996 as compared to approximately three and a half months for the period
ended April 30, 1995.
Revenue for the period August 1, 1994 through January 11, 1995 included
revenues from certain video reproduction work undertaken by AFL on a
subcontract basis for HMG. For the period August 1, 1994 through January 11,
1995, approximately 3.1 million units were produced by AFL on this basis. The
subcontract work was performed by AFL at an agreed upon rate that was
determined in arms' length negotiations. For the period August 1, 1994 through
January 11, 1995, AFL received revenues of approximately $4.0 million from HMG
under such arrangements (or approximately 10% of net sales of AFL for such
period). Gross profit from such revenues was approximately $1.2 million.
Gross profit for the nine month period ended April 30, 1996 increased 10% to
$22.3 million from $20.3 million in the corresponding 1995 period. Gross
profit as a percentage of sales decreased to 18% from 25% in the respective
periods. Reduced margins as a result of continued price pressures as well as a
change in the Company's sales mix to include more large customers whose
contracts generate lower margins contributed to the decline in gross profit
percentage.
Operating expenses for the nine month period ended April 30, 1996 increased 34%
to $19.9 million, compared to $14.8 million for the nine month period ended
April 30, 1995. The nine month period ended April 30, 1996 included $5.1
million of HMG operating expenses compared to $2.1 million for the nine month
period ended April 30, 1995. In addition, the nine month period ended April
30, 1995 was favorably impacted by the following nonrecurring expenses (i) $1.0
million lower amortization costs associated with the Merger due to the
inclusion of such costs for only the portion of the reporting period subsequent
to January 11, 1995, (ii) capitalization of $0.6 million of costs associated
with the implementation phase of a computer system, (iii) lower depreciation
expense of $0.2 million resulting from AFL switching to a straight line
depreciation method in order to establish a consistent basis of depreciation
for both subsidiaries of Allied Digital, and (iv) a $0.2 million reversal of
profit sharing contribution expense booked in an earlier quarter.
Income from operations decreased 56% to $2.4 million for the nine month period
ended April 30, 1996 from $5.4 million for the nine month period ended April
30, 1995. This decrease was due to lower margins on sales and higher operating
expenses as described above.
Non-operating expenses increased $2.0 million to $4.2 million for the nine
month period ended April 30, 1996
11
<PAGE> 14
from $2.2 million for the nine month period ended April 30, 1995. Of this
increase, $1.6 million was due to increased interest expense associated with an
increase in debt levels for the nine month period ended April 30, 1996 and $0.4
million was primarily the result of lower interest income paid by customers on
their past due accounts.
For the nine month period ended April 30, 1996, the Company realized a loss
before income taxes of $1.8 million compared to income before taxes of $3.2
million for the nine month period ended April 30, 1995.
AFL elected to be treated as a C Corporation under the Internal Revenue Code
effective January 12, 1995. Accordingly, appropriate provisions (credits) for
federal and state income taxes have been included in the financial statements
as of January 31, 1995. The primary impact on the income tax provision for the
nine month period ended April 30, 1995 is a one time recognition of a deferred
tax benefit of $1.6 million related to temporary differences in the recognition
of certain expenses on a book versus tax basis as of the election date of
January 12, 1995. In addition, the income tax provisions for the nine month
periods ended April 30, 1996 and 1995 reflect the fact that the amortization of
the excess of cost over the fair value of net assets acquired associated with
the Merger is not deductible for tax purposes.
After appropriate recognition of taxes on income, the Company posted a net loss
for the nine month period ended April 30, 1996 of $1.6 million compared to net
income of $4.3 million for the comparable 1995 period.
Subsequent to April 30, 1996, the Company began to explore various strategies to
reduce costs including reduction in employment levels and consolidation or
closure of certain operating locations. These strategies will lead to a
significant charge to operations beginning in the fourth quarter of fiscal 1996
which the Company anticipates may be recovered through cost savings in future
periods. Such cost savings are based on assumptions relating to various factors
involving the elimination of redundancies, including reductions in rent,
personnel costs and other costs currently being incurred by the Company. No
assurance can be given, however, as to the level and timing of such cost
savings.
LIQUIDITY AND CAPITAL RESOURCES
Separate senior credit facilities have been issued to AFL and Hauppauge Record
Manufacturing, Ltd. ("Hauppauge Records" or "HRM"), the operating subsidiary of
HMG, by American National Bank and Trust Company of Chicago ("ANB"). Each
facility is collateralized by substantially all of the assets of the respective
subsidiary and each agreement contains various covenants specific to each
subsidiary. The respective credit agreements are not cross-collateralized
against each other.
Both the AFL and the Hauppauge Records credit agreements contain covenants
which restrict, among other things and subject to certain exceptions, the
incurrence of indebtedness, the incurrence of liens, payments to officers,
directors and shareholders, investments or loans, the sale of assets, the
payment of dividends or redemptions, capital expenditures, certain fundamental
corporate changes and amendments to the corporate organization and governing
instruments of such companies. Both credit agreements also restrict the amount
of dividends that may be paid by AFL and Hauppauge Records to Allied Digital
(up to $750,000 per year in the case of AFL and $500,000 per year in the case
of Hauppauge Records if certain conditions are met) and provide that such
dividends may only be used for specific purposes including the payment of costs
and expenses of Allied Digital as a public company and related matters. No
dividends from AFL or Hauppauge Records may be used by Allied Digital to pay
dividends to its shareholders. Such restrictions are not expected to
materially impact Allied Digital's ability to meet its cash obligations.
12
<PAGE> 15
AFL Credit Facilities. On January 24, 1995, AFL entered into a senior credit
facility with ANB, receiving senior debt facilities that were used to refinance
a portion of the shareholder subordinated debt, repay other existing bank and
secured industrial revenue bond debt and provide availability for AFL's ongoing
working capital needs and other general corporate purposes. The facilities
were amended as of October 30, 1995 in connection with waiving certain
financial covenant defaults to be structured as a $14.6 million amortizing five
year term loan (the "AFL Term Facility"), an approximately $2.0 million
amortizing term loan (the "AFL CAPEX Facility"), and an $8.0 million five year
revolving credit facility (the "AFL Revolving Facility"). The AFL credit
facilities are secured by first priority liens on substantially all of the
assets of AFL. The availability of funds under the AFL Revolving Facility is
determined by a percentage of AFL's eligible accounts receivable and inventory
less certain reserves. The interest rates charged by ANB on the AFL Term
Facilities and AFL Revolving Facility are subject to change either up or down
based upon AFL's financial performance compared to specified performance
objectives during the term of the loans. The AFL Revolving Facility currently
carries an interest rate equal to 1.50% in excess of ANB's base rate (the "Base
Rate") and an unused commitment fee of .375%. The AFL Term Facility and AFL
CAPEX Facility (collectively the "AFL Term Facilities") currently carry an
interest rate equal to 1.75% in excess of the Base Rate. The AFL Revolving
Facility carries an unused commitment fee of .375%. The credit agreement
also contains covenants whereby AFL must meet thresholds related to minimum
adjusted net worth, debt service ratios and other financial performance
criteria.
As of July 31, 1995, AFL failed to meet certain financial convenants set forth
in the AFL credit agreement. As of October 30, 1995, the credit agreement was
amended to, among other things, waive these defaults, reduce the AFL Revolving
Facility from $20.0 million to $15.0 million, reduce the AFL CAPEX Facility to
approximately $2.0 million, increase the Base Rate premium applicable to the
AFL Revolving Facility by 0.75% to 1.50% and the AFL Term Facility and the AFL
CAPEX Facility by 0.50% to 1.75%, cancel a LIBOR interest rate option, require
a reduction in the AFL Term Facility of $2.4 million subsequent to the end of
Fiscal 1996, and reset existing covenant. In connection with the foregoing
waiver and amendments, William H. Smith, Co-Chairman and a major shareholder of
Allied Digital, made a subordinated loan ("Smith Note") to AFL on November 8,
1995 in the amount of $2.0 million bearing interest at 10.0% under terms
substantially the same as the then existing AFL subordinated debt to Mr. Smith
in the amount of $4.0 million as described below. The timing of AFL payments
of principal and interest to Mr. Smith on both notes is conditioned upon AFL
achieving certain financial benchmarks.
At January 31, 1996, AFL again failed to meet certain financial covenants set
forth in the AFL credit agreement. On March 15, 1996 the AFL credit agreement
was amended to (i) waive these defaults and to revise certain financial
covenants which resulted in modified aggregate net worth and debt service
coverage benchmarks, (ii) require monthly principal repayments on the AFL term
of $125,000 per month commencing March, 1996 through October 31, 1996 and (iii)
require an incremental reduction of availability on the revolver of $142,000
each month commencing March, 1996 through October 31, 1996. These
modifications are in part to satisfy the $2.4 million reduction in the AFL Term
Facility required by the October 30, 1995 amendment.
At April 30, 1996, AFL again failed to meet certain financial conditions set
forth in the AFL credit agreement. On June 14, 1996, the bank agreed to waive
these defaults provided however, that such waiver shall cease to be effective
July 31, 1996 if on or before such date AFL and HMG have not merged and
restructured their credit facilities with the bank. In addition, on such date
the AFL credit agreement was amended to reduce the AFL Revolving Facility to
$8,000,000. As a result of the conditional waiver, the entire debt outstanding
under the AFL credit facility, $20,395,000 at April 30, 1996, has been
reclassified as current debt.
At April 30, 1996, AFL had total indebtedness of $11.8 million under the AFL
Term Facility, $1.6 million under the AFL CAPEX facility, $7.0 million under
the AFL Revolving Facility, $1.4 million related to the acquisition of
VCA/Teletronics in 1993 ("VCA") and $6.0 million of subordinated debt to a
related shareholder comprised of the $2.0 million Smith Note described above,
and an earlier loan made by Smith to AFL in the principal amount of $4.0
million, each of which bears interest at the rate of 10% per annum. The note
payable to VCA is unsecured and is payable in annual installments beginning
January, 1995 through January 2000 at an annual interest rate of 12%.
13
<PAGE> 16
HMG Credit Facilities. Hauppauge Records has a credit agreement with ANB which
consists of $13.3 million amortizing five year term loan (the "HRM Term
Facility"), a $2 million amortizing term loan (the "HRM CAPEX Facility"), a $13
million five year revolving credit facility (the "HRM Revolving Facility") and,
as of August 31, 1995, an additional CAPEX loan (the "HRM Additional CAPEX
Facility") of up to $5.6 million. The facilities are secured by first priority
liens on substantially all of the assets of HRM. The availability of funds
under the HRM Revolving Facility is determined by a percentage of HRM's
eligible accounts receivable and inventory less certain reserves. The HRM
Revolving Facility currently carries an interest rate of 1.50% in excess of the
Base Rate. The HRM Term Facility, the HRM CAPEX Facility and the HRM
Additional CAPEX Facility currently carry an interest rate equal to 1.75% in
excess of the Base Rate. The HRM Revolving Facility and the HRM Additional
CAPEX Facility carry unused commitment fees of .50%. The interest rates
charged by the bank on all borrowing facilities is subject to increases or
decreases based upon Hauppauge Record's financial performance compared to
specified objectives during the term of the loans. The credit agreement also
contains covenants whereby Hauppauge Records is required to meet certain
thresholds related to minimum net worth, debt service ratio as well as other
financial performance criteria.
On June 14, 1996, in connection with the amendment to the AFL credit agreement,
the HMG credit agreement was amended to reduce the maximum borrowings under the
HMG Revolving Facility by $1,000,000.
In connection with the Merger, HMG Series A and Series B Cumulative Preferred
Stock were converted into the HMG Series A and Series B Notes having aggregate
principal balances of $3.5 million and $0.9 million, respectively.
The HMG Series A Note is an unsecured obligation of HMG Digital Technologies
Corp. and bears interest at 12% per annum, payable on the last day of March,
June, September and December of each year, maturing on December 1, 1997. In
the event that certain Allied Digital warrants are exercised, the proceeds from
the warrants, net of expenses, must be remitted to the holder of the HMG Series
A Note as prepayment of the indebtedness outstanding thereunder. Allied
Digital has unconditionally guaranteed the payment of this note. The HMG
Series A Note contains covenants which restrict, among other things and subject
to certain exceptions, the incurrence of indebtedness, the incurrence of liens,
sale of assets, payment of dividends, changes to terms of other indebtedness
and certain fundamental corporate changes.
The HMG Series B Notes are unsecured obligations of HMG Digital Technologies
Corp. which bear interest at 11% per annum, payable on the last day of March,
June, September and December of each year. Payment of these notes is
subordinated to the payment of the obligations under the HMG Series A Note.
The notes mature on January 1, 1999.
At April 30, 1996, the aggregate amount of indebtedness outstanding for HRM and
HMG was (i) $13.1 million under the HRM Term Facility, (ii) an aggregate of
$2.7 million under the HRM CAPEX Facility and the HRM Additional CAPEX
Facility, (iii) $6.3 million under the HRM Revolving Facility, (iv) $3.5
million under the HMG Series A Note, and (v) an aggregate of $0.9 million under
the HMG Series B Notes.
Cash Requirements. The Company's current cash requirements, including working
capital and capital expenditures requirements, are funded from the operations
and the proceeds of borrowings under the respective credit agreements.
14
<PAGE> 17
As of April 30, 1996, the Company had a net working capital deficit of $11.6
million and AFL and HRM had $0.8 million and $1.1 million unused and available
under their revolving credit facilities, respectively. Net cash provided by
operating activities during the nine months ended April 30, 1996, was $11.3
million. Net cash used in investing activities totaled $8.9 million for the
nine months ended April 30, 1996, of which all was used for the purchase of and
deposits on replication equipment.
The Company currently expects that capital expenditures will be divided
primarily between maintenance and expansion capital expenditures. 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 improving production costs.
The Company has incurred approximately $7.5 million in capital project costs
primarily relating to an expansion of capacity at its CD manufacturing facility
in Hauppauge, New York during the nine months ended April 30, 1996. No further
significant capital expenditures are expected prior to July 31, 1996.
Allied Digital currently estimates that maintenance capital expenditures will
average approximately $3.0 million in fiscal 1996 and 1997. In addition to
these capital expenditures, Allied Digital charges approximately $1.5 million
per year to cost of sales for maintenance and repairs, on a consolidated basis.
Allied Digital has not paid any dividends on the Allied Digital Common Stock
since its inception. The payment of dividends, if any, will be contingent upon
the Company's revenues and earnings, capital requirements, achievement of
benchmark financial performance under the terms of various loan agreements and
general financial condition. It is the current policy of the Allied Digital
Board to retain all earnings, if any, for use in Allied Digital's business
operations.
Allied Digital is a legal entity separate and distinct from its subsidiaries.
As a holding company with no significant operations of its own, the principal
sources of its funds will be dividends and other distributions from its
operating subsidiaries, borrowings and sales of equity. Restrictions contained
in credit agreements of Allied Digital's subsidiaries and the HMG Series A Note
impose limitations on the amount of distributions that such subsidiaries may
make to Allied Digital and prohibit Allied Digital from using any such
distributions to pay dividends to its shareholders.
Impact of Inflation
During recent years, Allied Digital has experienced decreasing margins as a
result of competitive pressures in its market segment. Allied Digital believes
that, historically, the decline in its margins has been partially offset by
increases in volume as well as decreases in the cost of components.
Allied Digital from time to time experiences increases in the costs of material
and labor, as well as other manufacturing and operating expenses. Allied
Digital's ability, consistent with that of its competitors, to pass along such
increased costs through increased prices has been difficult due to competitive
pressures. By attempting to control costs, Allied Digital attempts to minimize
any effects of inflation on its operations.
15
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings - Not applicable
Item 2. - Changes in Securities - Not applicable
Item 3. - Defaults Upon Senior Securities
At April 30, 1996, AFL again failed to meet certain financial
conditions set forth in the AFL credit agreement. On June 14,
1996, the bank agreed to waive these defaults provided however,
that such waiver shall cease to be effective July 31, 1996 if on or
before such date AFL and HMG have not merged and restructured their
credit facilities with the bank. In addition, on such date the AFL
credit agreement was amended to reduce the Revolving Facility to
$8,000,000. As a result of the conditional waiver, the entire debt
outstanding under the AFL credit facility, $20,395,000 at April 30,
1996, has been reclassified as current debt. In addition, as a
condition to the effectiveness of the waiver and amendments
discussed above, at such time the HMG credit agreement was amended
to reduce maximum borrowings under the HMG Revolving Facility by
$1,000.000.
Item 4. - Submission of Matters to a Vote of Security Holders - Not
applicable
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
(27) Financial Data Schedule
16
<PAGE> 19
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 17, 1996 ALLIED DIGITAL TECHNOLOGIES CORP.
By: /s/ Charles Kavanagh
------------------------------
Charles Kavanagh
Secretary and Principal
Financial Officer
<PAGE> 20
EXHIBIT INDEX
EXHIBIT EXHIBIT
NUMBER
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 2,653,000
<SECURITIES> 0
<RECEIVABLES> 31,451,000
<ALLOWANCES> 712,000
<INVENTORY> 5,545,000
<CURRENT-ASSETS> 41,482,000
<PP&E> 97,080,000
<DEPRECIATION> 63,932,000
<TOTAL-ASSETS> 124,656,000
<CURRENT-LIABILITIES> 53,100,000
<BONDS> 0
0
0
<COMMON> 136,000
<OTHER-SE> 41,802,000
<TOTAL-LIABILITY-AND-EQUITY> 124,656,000
<SALES> 38,631,000
<TOTAL-REVENUES> 38,631,000
<CGS> 31,975,000
<TOTAL-COSTS> 6,774,000
<OTHER-EXPENSES> 1,266,000
<LOSS-PROVISION> 1,307,000
<INTEREST-EXPENSE> 1,418,000
<INCOME-PRETAX> (1,384,000)
<INCOME-TAX> (372,000)
<INCOME-CONTINUING> (1,012,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,012,000)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
