FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 14(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED APRIL 30, 1997.
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.)
140 Fell Court, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
(516) 232-2323
(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 13, 1997, 13,619,644 shares of the registrant's common stock
were outstanding.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Except for the historical information contained herein, 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 in Item 1 - "Business - Forward-Looking Statements"
and elsewhere in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1996.
Results of Operations - Three Month Period Ended April 30, 1997 compared to
Three Month Period Ended April 30, 1996.
Net sales for the three month period ended April 30, 1997 were $38.5 million,
an increase of $0.6 million or 1.5% as compared to the three month period ended
April 30, 1996.
Gross profit for the three month period ended April 30, 1997 increased $1.0
million to $7.7 million, or 20.0% of net sales from $6.7 million, or 17.6% of
net sales for the three month period ended April 30, 1996. This increase in
gross profit was primarily attributable to lower material costs, a reduction in
the direct labor force, maximizing plant efficiencies and increasing the amount
of higher margin non-entertainment business in the sales mix.
Operating expenses for the three month period ended April 30, 1997 were $6.3
million or 16.3% of net sales compared to $6.8 million or 17.9% of net sales
for the three month period ended April 30, 1996. The 1997 quarter was
favorably impacted by the capitalization of $0.4 million of work force
expenditures associated with the implementation phase of a computer software
system developed for internal use as well as an approximate $0.5 million
reduction primarily in administrative costs resulting from the Company's
restructuring plan placed in effect June 1996. These decreases were partially
offset by an additional $0.1 million in bad debt reserve, $0.1 million in
product development, $0.1 million in advertising expense and $0.1 million in
travel costs.
Income from operations of $1.4 million for the three month period ended
April 30, 1997 compares to a loss from operations of $0.1 million for the three
month period ended April 30, 1996. This increase of $1.5 million was a result
of increased gross profits coupled with the decrease in operating expenses
described above.
Non-operating expenses decreased to $1.0 million for the three month period
ended April 30, 1997 from $1.3 million for the three month period ended April
30, 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.
For the three month period ended April 30, 1997, the Company realized income
before taxes of $0.4 million, compared to a loss before taxes of $1.4 million
for the three month period ended April 30, 1996.
A provision for income taxes of $0.3 million was recognized for the three month
period ended April 30, 1997, compared to a tax benefit of $0.4 million for the
three month period ended April 30, 1996.
After recognition of applicable income taxes, Allied Digital recognized net
income for the three months ended April 30, 1997, of $25 thousand compared to a
net loss of $1.0 million for the three months ended April 30, 1996 for the
reasons noted above.
12
<PAGE>
Results of Operations - Nine Month Period Ended April 30, 1997 compared to
Nine Month Period Ended April 30, 1996.
Net sales for the nine month period ended April 30, 1997 were $119.4 million, a
decrease of $4.3 million or 3.5% as compared to the nine month period ended
April 30, 1996. Such decrease was primarily attributable to a large
promotional video sale to one customer which was recognized during the quarter
ended October 31, 1995.
Gross profit for the nine month period ended April 30, 1997 increased $1.6
million to $23.9 million or 20.0% of net sales, from $22.3 million or 18.0% of
net sales, for the nine month period ended April 30, 1996. This increase in
gross profit dollars and percentage, despite decreased sales, was primarily
attributable to lower material costs, a reduction in the direct labor force,
maximizing plant efficiencies and increasing the amount of higher margin
non-entertainment business in the sales mix.
Operating expenses for the nine month period ended April 30, 1997 were $18.5
million or 15.5% of net sales compared to $19.9 million or 16.1% of net sales
for the nine month period ended April 30, 1996. The $1.4 million decrease was
primarily attributable to the reductions in administrative costs resulting from
the Company's restructuring plan placed in effect June 1996 and $ 0.4 million
of capitalized work force expenditures associated with the implementation phase
of a computer software system developed for internal use.
Income from operations of $5.4 million for the nine month period ended April 30,
1997 compares to $2.4 million for the nine month period ended April 30, 1996.
This increase of $3.0 million resulted from an increase in gross profit and
certain reductions in the cost of operations described above.
Non-operating expenses decreased to $3.4 million for the nine month period ended
April 30, 1997 from $4.2 million for the nine month period ended April 30,
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.
For the nine month period ended April 30, 1997, Allied Digital realized income
before income taxes of $2.0 million compared to a loss before income taxes of
$1.8 million for the nine month period ended April 30, 1996 for the reasons
noted above.
A provision for income taxes of $1.4 million was recognized for the nine months
ended April 30, 1997, compared to a tax benefit of $0.2 million for the nine
months ended April 30, 1996. The Company's effective tax rate of 68.5% for the
nine month period ended April 30, 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, Allied Digital recognized net
income for the nine months ended April 30, 1997 of $0.6 million, compared to a
net loss of $1.6 million for the nine months ended April 30, 1996.
Liquidity and Capital Resources
In conjunction with Allied Digital's restructuring plan and merger of
Allied Film Laboratory, Inc. a Michigan corporation and wholly-owned
subsidiary of Allied Digital ("AFL") into Hauppauge Record Manufacturing Ltd.,
a New York corporation and indirect wholly- owned subsidiary of Allied Digital
("Hauppauge Record"), which was consummated on November 1, 1996, the separate
senior loan credit facilities previously maintained by AFL and Hauppauge Record
with American National Bank & Trust Company of Chicago ("ANB") were combined
under an amended and restated loan and security agreement
13
<PAGE>
dated as of October 30, 1996 between Hauppauge Record and ANB and effectuated
November 1, 1996 (the "ANB Loan Agreement"). The ANB Loan Agreement provides
for (i) a revolving loan (the "ANB Revolving Loan") of $22 million (subject to
certain borrowing base limitations based on Hauppauge Record's accounts
receivable and inventory), which revolving loan includes a $1.5 million letter
of credit facility, (ii) a term loan (the "ANB Term Loan") in the original
principal amount of $25.4 million and (iii) an additional loan (the "ANB
Additional Loan") in the original principal amount of $1.5 million. The ANB
Revolving Loan bears interest at the base rate published by ANB plus 1.25%. The
ANB Term Loan and the ANB Additional Loan bear interest at the base rate
published by ANB plus 1.50%. At April 30, 1997, the ANB base rate was 8.50%.
The Revolving Facility carries an unused commitment fee of 0.50%. The
obligations of Hauppauge Record under the ANB Loan Agreement are secured by a
lien on substantially all of Hauppauge Record's assets.
At April 30, 1997, the aggregate amount of total indebtedness
outstanding of $50.6 million was as follows: (i) under the ANB Term Loan, $20.4
million, (ii) under the ANB Revolving Loan, $16.7 million, (iii) under the ANB
Additional Loan, $1.2 million, (iv) the 10% Notes Payable to Stockholders, $9.0
million, (v) the 11% Series B Notes Payable to Stockholders, $0.9 million, (vi)
the Note Payable to VCA Teletronics Inc. ("VCA"), $1.2 million and (vii) other
debt of $1.2 million.
The ANB Term Loan 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 of $273,098 on May 30, 1999,
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.
The ANB Additional Loan is payable in 25 consecutive monthly
installments which commenced December 31, 1996 of $60,000 each plus interest at
1.5% over ANB's base rate.
The 10% Notes Payable to Stockholders (the "10% Notes") are unsecured
obligations which bear interest at 10% per annum. Interest accrues only on the
original principal sum of $6.0 million and is payable quarterly. Upon default,
the interest rate increases to 12% per annum. To the extent interest is not
permitted to be paid pursuant to the terms of the ANB Loan Agreement, such
accrued and unpaid interest becomes payable on January 1, 2001. Payment of
these notes is subordinated to the payment of the obligations under the ANB
Loan Agreement. Payment of the original principal sum of $6 million, plus
unpaid interest thereon of $1.0 million through April 30, 1997, has been
extended to January 1, 2001.
In connection with the Company's restructuring and merger referred to
above, the Subordinated 12% Series A Note Payable to Stockholder was repaid in
full on November 8, 1996 with the $1.5 million proceeds of the ANB Additional
Loan and $2 million advanced by certain other stockholders in the form of
additional subordinated 10% notes dated October 30, 1996 (the "Additional
Subordinated 10% Notes").
The Additional Subordinated 10% Notes are unsecured obligations 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 ANB.
The Series B Notes Payable to Stockholders are unsecured obligations
which bear interest at 11% per annum, payable quarterly. Payment of these
notes is subordinated to the payment of the obligation under the ANB Loan. The
notes mature on January 1, 1999.
The note payable to VCA is unsecured and is payable in annual
installments through January 1, 2001, including annual interest of 12%.
Proceeds from the ordinary operations of Hauppauge Record are applied
to reduce the principal amount of borrowing outstanding under the ANB Loan
Agreement. Unused portions of the Revolving
14
<PAGE>
Loan may be borrowed and reborrowed, subject to availability in accordance with
the then applicable commitment and borrowing limitations.
The ANB Loan Agreement contains covenants which, among other things,
(a) require the Company to (i) maintain increasing levels of net worth, (ii)
maintain minimum debt service ratios and (iii) limit its annual capital
expenditures, and (b) 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 ANB Loan
Agreement.
Cash Requirements. Allied Digital's current cash requirements,
including working capital and capital expenditure requirements, are funded from
the operations and the proceeds of borrowing by Hauppauge Record under the ANB
Loan Agreement.
As of April 30, 1997, the Company had working capital of $4.5 million
and $2.9 million unused and available under the ANB Revolving Loan. Net cash
provided by operating activities during the nine months ended April 30, 1997 was
$1.6 million. Net cash used in investing activities totaled $0.5 million, of
which substantially all was used for the purchase of replication equipment.
Allied Digital 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. Allied Digital incurs approximately $1.5 million per year in cost of
sales for maintenance and repairs.
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 Allied Digital's revenues and earnings, if any, capital
requirements and general financial condition. It is the current policy of the
Allied Digital Board, in view of Allied Digital's contemplated financial
requirements, to retain all earnings, if any, for use in Allied Digital's
business operations. As of April 30, 1997, there is no equity available for the
payment of dividends to stockholders.
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 subsidiary, borrowings and sales of equity. Restrictions
contained in the ANB Loan Agreement impose limitations on the amount of
distributions that Hauppauge Record may make to Allied Digital and prohibit
Allied Digital from using any such distributions to pay dividends to its
stockholders.
Impact of Inflation
During recent years, Allied Digital has experienced decreasing margins
as a result of competitive pressures in its market segment. However, in the
nine month period ended April 30, 1997, gross profit increased $1.6 million to
$23.9 million or 20.0% of net sales, from $22.3 million or 18.0% of net sales,
for the nine month period ended April 30, 1996, as a result of the Company
reducing labor costs, maximizing plant efficiencies and increasing the amount
of higher margin non-entertainment business in its sales mix. Additionally,
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 limited due to
competitive pressures. By attempting to control costs, Allied Digital attempts
to minimize any effects of inflation on its operations.
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings - Not applicable
Item 2. - Changes in Securities - Not applicable
Item 3. - Defaults Upon Senior Securities - Not applicable
Item 4. - Submission of Matters to a Vote of Security Holders -
Set forth below is a tabulation of the votes cast for, against or
withheld and the number of abstentions and broker non-votes as to each nominee
for election as a Class II Director at the Annual Meeting of Stockholders of
the Company held on February 13, 1997:
Seymour Leslie 10,554,469 shares for
58,542 shares against
0 shares withheld
0 abstentions
0 broker non-votes
John A. Morgan 10,554,469 shares for
58,542 shares against
0 shares withheld
0 abstentions
0 broker non-votes
Eugene A. Gargaro Jr. 10,554,469 shares for
58,542 shares against
0 shares withheld
0 abstentions
0 broker non-votes
Set forth below is a tabulation of the votes cast for, against or withheld and
the number of abstentions and broker non-votes as to the appointment of Grant
Thornton LLP as the Company's auditors for the fiscal year ending July 31, 1997
at the Annual Meeting of Stockholders of the Company held on February 13, 1997:
10,099,120 shares for
503,991 shares against
0 shares withheld
9,900 abstentions
0 broker non-votes
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits -
(27) Financial Data Schedule
(b) No Report on Form 8-K has been filed during the
quarter for which this report on Form 10-Q is being
filed.
16
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) 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.
ALLIED DIGITAL TECHNOLOGIES CORP.
Date: June 13, 1997 By: /s/ George N. Fishman
George N. Fishman
Co-Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: June 13, 1997 By: /s/ Charles Mantione
Charles Mantione
(Vice President of Finance)
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of April 30, 1997
and July 31, 1996 2
Condensed Consolidated Statements of Earnings for the three- and
nine-month periods ended April 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the nine-
month periods ended April 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6 - 11
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 15
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>
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
April 30, July 31,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 512,000 $ 831,000
Accounts receivable, net 27,479,000 23,907,000
Inventories 4,588,000 5,374,000
Prepaid expenses 1,133,000 756,000
Deferred income taxes 1,929,000 3,313,000
------------ ------------
Total current assets 35,641,000 34,181,000
PROPERTY AND EQUIPMENT, NET 28,071,000 32,225,000
OTHER ASSETS
Excess of cost over fair value of net assets
acquired, net of accumulated amortization of
$6,505,000 and $4,620,000 at April 30,
1997 and July 31, 1996, respectively 43,653,000 45,538,000
Deferred income taxes 708,000 708,000
Deferred charges, deposits and other 2,409,000 1,226,000
------------ ------------
46,770,000 47,472,000
------------ ------------
$110,482,000 $113,878,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
- 2 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(unaudited)
<TABLE>
<CAPTION>
April 30, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 9,845,000 $ 9,154,000
Accounts payable 13,032,000 16,806,000
Accrued liabilities 8,294,000 8,712,000
------------- -------------
Total current liabilities 31,171,000 34,672,000
LONG-TERM DEBT, less current portion above 30,790,000 30,232,000
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS 9,915,000 10,997,000
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 44,742,000 44,742,000
Accumulated deficit (6,272,000) (6,901,000)
------------- -------------
38,606,000 37,977,000
------------- -------------
$ 110,482,000 $ 113,878,000
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
- 3 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
Three-month periods Nine-month periods
ended April 30, ended April 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 38,509,000 $ 37,933,000 $ 119,367,000 $ 123,657,000
Cost of sales 30,833,000 31,277,000 95,500,000 101,348,000
------------- ------------- ------------- -------------
Gross profit 7,676,000 6,656,000 23,867,000 22,309,000
------------- ------------- ------------- -------------
Operating expenses
Selling, general and administrative 5,629,000 6,128,000 16,575,000 17,950,000
Amortization of excess of cost over fair
value of net assets acquired 645,000 646,000 1,885,000 1,937,000
------------- ------------- ------------- -------------
Total operating expenses 6,274,000 6,774,000 18,460,000 19,887,000
------------- ------------- ------------- -------------
Income (loss) from operations 1,402,000 (118,000) 5,407,000 2,422,000
------------- ------------- ------------- -------------
Other income (expense)
Interest expense (1,118,000) (1,418,000) (3,573,000) (4,407,000)
Other, net 83,000 152,000 162,000 177,000
------------- ------------- ------------- -------------
Total other expense (1,035,000) (1,266,000) (3,411,000) (4,230,000)
------------- ------------- ------------- -------------
Income (loss) before taxes 367,000 (1,384,000) 1,996,000 (1,808,000)
------------- ------------- ------------- -------------
Provision (credit) for income taxes 342,000 (372,000) 1,367,000 (184,000)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 25,000 $ (1,012,000) $ 629,000 $ (1,624,000)
============= ============= ============= =============
Earnings (loss) per share $ -- $ (0.07) $ 0.05 $ (0.12)
============= ============= ============= =============
Weighted average number of common
shares outstanding 13,619,644 13,619,644 13,619,644 13,619,644
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
- 4 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine-month periods ended April 30,
----------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows provided by operating activities $ 1,582,000 $ 11,276,000
Cash flows used in investing activities
Purchases of and deposits on property and equipment (507,000) (8,916,000)
Cash flows from financing activities
Borrowings of long-term debt and subordinated
notes payable to stockholders 9,606,000 9,028,000
Repayment of long-term debt and subordinated
notes payable to stockholders (11,000,000) (9,294,000)
------------ ------------
Net cash used in financing activities (1,394,000) (266,000)
------------ ------------
Net (decrease) increase in cash (319,000) 2,094,000
Cash and cash equivalents,
at beginning of period 831,000 559,000
------------ ------------
Cash and cash equivalents,
at end of period $ 512,000 $ 2,653,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
- 5 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
April 30, 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of April 30, 1997 and the
related condensed consolidated statements of earnings for the three- and
nine-month periods ended April 30, 1997 and 1996 and the condensed
consolidated statements of cash flows for the nine-month periods ended
April 30, 1997 and 1996 have been prepared by Allied Digital Technologies
Corp. ("Allied Digital"), including the accounts of its wholly-owned
subsidiaries, Allied Film Laboratories, Inc. ("AFL") and HMG Digital
Technologies Corp. ("HMG") and subsidiary, HRM Holdings Corp.
("Holdings"), and its wholly-owned subsidiary, Hauppauge Record
Manufacturing, Ltd. ("Hauppauge Record") (hereinafter referred to
collectively as the "Company") without audit. On November 1, 1996, AFL
merged with and into Hauppauge Record. In the opinion of management, all
adjustments necessary to present fairly the financial position as of April
30, 1997 and for all periods presented, consisting of normal recurring
adjustments, have been made. Results of operations for the nine-month
period ended April 30, 1997 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 postproduction services, and (ii) replicates cassette tapes, VHS
videotapes, compact discs and CD-ROMs under production contracts with
companies in both the entertainment and non-entertainment industries.
These statements have been prepared by the Company pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and 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 fiscal year ended
July 31, 1996.
Certain amounts for the three- and nine-month periods ended April 30, 1996
have been reclassified to conform to current period presentation.
- 6 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1997
(unaudited)
NOTE B - INVENTORIES
Inventories consist of the following classifications:
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $ 3,356,000 $ 3,882,000
Work-in-process 624,000 827,000
Finished goods 608,000 665,000
------------ ------------
$ 4,588,000 $ 5,374,000
============ ============
</TABLE>
NOTE C - LONG-TERM DEBT AND SUBORDINATED NOTES PAYABLE
Long-term debt and subordinated notes payable consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
1997 1996
------------ ------------
<S> <C> <C>
Loan and Security Agreement
Term loan $ 20,426,000 $ 27,112,000
Revolving loan 16,665,000 10,559,000
Additional loan 1,200,000 --
Subordinated 10% Notes Payable to Stockholders 7,034,000 6,580,000
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 881,000 917,000
Note Payable to VCA 1,171,000 1,389,000
Other 1,173,000 326,000
------------ ------------
50,550,000 50,383,000
Less current portion (9,845,000) (9,154,000)
------------ ------------
$ 40,705,000 $ 41,229,000
============ ============
</TABLE>
- 7 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1997
(unaudited)
NOTE C (continued)
Debt Refinancings
In conjunction with the Company's restructuring plan and merger of AFL
into Hauppauge Record referred to in Note A above, (i) the separate senior
loan credit facilities previously maintained by AFL and Hauppauge Record
with a bank were combined under an amended and restated loan and security
agreement between Hauppauge Record 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
$1,034,000 through April 30, 1997 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.
The loan and security agreement 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
- 8 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1997
(unaudited)
NOTE C (continued)
redemptions, (vii) issuance of stock, and (viii) transactions with
affiliates, all as defined in the agreement. As of April 30, 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 term loan 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 (8.50% at April 30, 1997).
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 .5% per annum. At April 30,
1997, the Company had approximately $2,893,000 unused and available
under the revolving loan facility.
c. Additional Loan
The $1,500,000 additional loan 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.
- 9 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1997
(unaudited)
NOTE C (continued)
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 the extent interest is not permitted
to be paid pursuant to the terms of the amended and restated loan and
security agreement with the bank, such accrued and unpaid interest becomes
payable on January 1, 2001.
Additional Subordinated 10% 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%.
- 10 -
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
April 30, 1997
(unaudited)
NOTE C (continued)
The following is a summary of the aggregate annual maturities of long-term
debt and subordinated notes payable as of April 30, 1997:
Twelve months ending April 30,
1998 $ 9,845,000
1999 15,504,000
2000 861,000
2001 24,307,000
2002 33,000
-----------
$50,550,000
===========
NOTE D - NEW ACCOUNTING PRONOUNCEMENT
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 Company's
financial statements.
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> APR-30-1997
<CASH> 512,000
<SECURITIES> 0
<RECEIVABLES> 27,479,000
<ALLOWANCES> 0
<INVENTORY> 4,588,000
<CURRENT-ASSETS> 35,641,000
<PP&E> 28,071,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 110,482,000
<CURRENT-LIABILITIES> 31,171,000
<BONDS> 0
0
0
<COMMON> 136,000
<OTHER-SE> 38,470,000
<TOTAL-LIABILITY-AND-EQUITY> 110,482,000
<SALES> 119,367,000
<TOTAL-REVENUES> 119,367,000
<CGS> 95,500,000
<TOTAL-COSTS> 113,960,000
<OTHER-EXPENSES> (162,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,573,000
<INCOME-PRETAX> 1,996,000
<INCOME-TAX> 1,367,000
<INCOME-CONTINUING> 629,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 629,000
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0
</TABLE>
