<PAGE>
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 JANUARY 31, 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 March 17, 1997, 13,619,644 shares of the registrant's common
stock were outstanding.
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 1997
and July 31, 1996 2
Condensed Consolidated Statements of Earnings for the three- and
six-month periods ended January 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the six-
month periods ended January 31, 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>
January 31, July 31,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,271,000 $ 831,000
Accounts receivable, net 22,790,000 23,907,000
Inventories 4,443,000 5,374,000
Prepaid expenses 1,029,000 756,000
Deferred income taxes 2,214,000 3,313,000
------------- -------------
Total current assets 31,747,000 34,181,000
PROPERTY AND EQUIPMENT, net 29,933,000 32,225,000
OTHER ASSETS
Excess of cost over fair value of net assets acquired, net of accumulated
amortization of $5,860,000 and $4,620,000 at January 31,
1997 and July 31, 1996, respectively 44,298,000 45,538,000
Deferred income taxes 708,000 708,000
Deferred charges, deposits and other 1,153,000 1,226,000
------------- -------------
46,159,000 47,472,000
------------- -------------
$ 107,839,000 $ 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>
January 31, July 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 9,884,000 $ 9,154,000
Accounts payable 11,579,000 16,806,000
Accrued liabilities 6,793,000 8,712,000
------------- -------------
Total current liabilities 28,256,000 34,672,000
LONG-TERM DEBT, less current portion above 31,310,000 30,232,000
SUBORDINATED NOTES PAYABLE TO
STOCKHOLDERS 9,765,000 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 (6,370,000) (6,901,000)
------------- -------------
38,508,000 37,977,000
------------- -------------
$ 107,839,000 $ 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 Six-month periods
ended January 31, ended January 31,
-------------------------- -------------------------------
1997 1996 1997 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales $38,785,000 $ 40,016,000 $82,114,000 $87,352,000
Cost of sales 31,191,000 33,968,000 65,921,000 71,698,000
----------- ------------ ----------- -----------
Gross profit 7,594,000 6,048,000 16,193,000 15,654,000
----------- ------------ ----------- -----------
Operating expenses
Selling, general and administrative 5,413,000 5,863,000 10,946,000 11,825,000
Amortization of excess of cost over fair
value of net assets acquired 595,000 646,000 1,240,000 1,291,000
----------- ------------ ----------- -----------
Total operating expenses 6,008,000 6,509,000 12,186,000 13,116,000
----------- ------------ ----------- -----------
Income (loss) from operations 1,586,000 (461,000) 4,007,000 2,538,000
----------- ------------ ----------- -----------
Other income (expense)
Interest expense (1,182,000) (1,593,000) (2,456,000) (3,025,000)
Other, net 36,000 (71,000) 79,000 61,000
----------- ------------ ----------- -----------
Total other expense (1,146,000) (1,664,000) (2,377,000) (2,964,000)
----------- ------------ ----------- -----------
Income (loss) before taxes 440,000 (2,125,000) 1,630,000 (426,000)
Provision (credit) for income taxes 397,000 (660,000) 1,099,000 188,000
----------- ------------ ----------- ===========
NET INCOME (LOSS) $ 43,000 $ (1,465,000) $ 531,000 $ (614,000)
=========== ============ =========== ===========
Earnings (loss) per share $ - $(0.11) $0.04 $(0.05)
=========== ============ =========== ===========
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>
Six-month periods ended January 31,
-------------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows provided by operating activities $ 1,583,000 $ 4,761,000
Cash flows used in investing activities
Purchases of and deposits on property and equipment (577,000) (8,128,000)
Cash flows from financing activities
Borrowings of long-term debt and subordinated
notes payable to stockholders 8,477,000 8,992,000
Repayment of long-term debt and subordinated
notes payable to stockholders (9,043,000) (5,261,000)
Increase in deferred charges - (171,000)
----------- -----------
Net cash (used in) provided by financing
activities (566,000) 3,560,000
----------- ----------
Net increase in cash 440,000 193,000
Cash and cash equivalents,
at beginning of period 831,000 559,000
----------- -----------
Cash and cash equivalents,
at end of period $ 1,271,000 $ 752,000
=========== ===========
</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
January 31, 1997
(unaudited)
NOTE A - BASIS OF PRESENTATION
The condensed consolidated balance sheet as of January 31, 1997 and the
related condensed consolidated statements of earnings for the three- and
six-month periods ended January 31, 1997 and 1996 and the condensed
consolidated statements of cash flows for the six-month periods ended
January 31, 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 January 31, 1997 and for all
periods presented, consisting of normal recurring adjustments, have been
made. Results of operations for the six-month period ended January 31, 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
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 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.
-6-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 1997
(unaudited)
NOTE B - INVENTORIES
Inventories consist of the following classifications:
<TABLE>
<CAPTION>
January 31, July 31,
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $3,415,000 $3,882,000
Work-in-process 323,000 827,000
Finished goods 705,000 665,000
---------- ----------
$4,443,000 $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>
January 31, July 31,
1997 1996
----------- -----------
<S> <C> <C>
Loan and Security Agreement
Term loan $22,071,000 $27,112,000
Revolving loan 15,536,000 10,559,000
Additional loan 1,380,000 -
Subordinated 10% Notes Payable to Stockholders 6,884,000 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 1,036,000 326,000
----------- ------------
50,959,000 50,383,000
Less current portion (9,884,000) (9,154,000)
----------- -----------
$41,075,000 $41,229,000
=========== ===========
</TABLE>
-7-
<PAGE>
Allied Digital Technologies Corp.
and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (continued)
January 31, 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 $884,000
through January 31, 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)
January 31, 1997
(unaudited)
NOTE C (continued)
redemptions, (vii) issuance of stock, and (viii) transactions with
affiliates, all as defined in the agreement. As of January 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 term loan was 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 (8.25% at January 31, 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 January 31,
1997, the Company had approximately $342,000 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)
January 31, 1997
(unaudited)
NOTE C (continued)
Subordinated 10% Notes Payable to Stockholders
The subordinated 10% notes payable to stockholders are 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)
January 31, 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 January 31, 1997:
Twelve months ending January 31,
1998 $ 9,884,000
1999 15,600,000
2000 2,443,000
2001 22,952,000
2002 80,000
-------------
$ 50,959,000
=============
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three Month Period Ended January 31, 1997, compared to
Three Month Period Ended January 31, 1996.
Net sales for the three month period ended January 31, 1997 were $38.8 million,
a decrease of $1.2 million or 3.0% as compared to the three month period ended
January 31, 1996.
Gross profit for the three month period ended January 31, 1997 increased $1.6
million to $7.6 million, or 19.6% of net sales from $6.0 million, or 15.0% of
net sales for the three month period ended January 31, 1996. This increase in
gross profit, despite decreased sales, was primarily attributable to lower
material costs and a reduction in the direct labor force.
Operating expenses for the three month period ended January 31, 1997 were $6.0
million, or 15.5% of net sales compared to $6.5 million, or 16.3% of net sales
for the three month period ended January 31, 1996. The $0.5 million decrease was
primarily attributable to the integration of the legal, financial and accounting
processes.
Income from operations of $1.6 million for the three month period ended January
31, 1997 compares to a loss from operations of $0.5 million for the three month
period ended January 31, 1996. This increase of $2.1 million was a result of
reduced costs described above.
Non-operating expenses decreased to $1.1 million for the three month period
ended January 31, 1997 from $1.7 million for the three month period ended
January 31, 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 January 31, 1997, the Company realized income
before taxes of $0.4 million, compared to a loss before taxes of $2.1 million
for the three month period ended January 31, 1996.
A provision for Federal, state and local income taxes of $0.4 million was
recognized for the three month period ended January 31, 1997, compared to a tax
benefit of $0.7 million for the three month period ended January 31, 1996.
After recognition of applicable income taxes, Allied Digital recognized net
income for the three months ended January 31, 1997, of $43 thousand compared to
a net loss of $1.5 million for the three months ended January 31, 1996 for the
reasons noted above.
Results of Operations - Six Month Period Ended January 31, 1997, compared to Six
Month Period Ended January 31, 1996.
Net sales for the six month period ended January 31, 1997 were $82.1 million, a
decrease of $5.2 million or 6.0% as compared to the six month period ended
January 31, 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 six month period ended January 31, 1997 increased $0.5
million to $16.2 million, or 19.7% of net sales, from $15.7. million, or 17.9%
of net sales, for the six month period ended January 31, 1996. This increase in
gross profit dollars and percentage, despite decreased sales, was primarily
attributable to lower material costs and a reduction in the direct labor force.
12
<PAGE>
Operating expenses for the six month period ended January 31, 1997 were $12.2
million or 14.9% of net sales compared to $13.1 million or 15.0% of net sales
for the six month period ended January 31, 1996. The $0.9 million decrease was
primarily attributable to the integration of the legal, financial and accounting
processes.
Income from operations of $4.0 million for the six month period ended January
31, 1997 compares to $2.5 million for the six month period ended January 31,
1996. This increase of $1.5 was a result of reduced costs described above.
Non-operating expenses decreased to $2.4 million for the six month period ended
January 31, 1997 from $3.0 million for the six month period ended January 31,
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 six month period ended January 31, 1997, Allied Digital realized income
before income taxes of $1.6 million compared to a loss before income taxes of
$0.4 million for the six month period ended January 31, 1996 for the reasons
noted above.
A provision for Federal, state and local income taxes of $1.1 million was
recognized for the six months ended January 31, 1997, compared to a provision of
$0.2 million for the six months ended January 31, 1996.
After recognition of applicable income taxes, Allied Digital recognized net
income for the six months ended January 31, 1997 of $0.5 million, compared to a
net loss of $0.6 million for the six months ended January 31, 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 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 January 31,
1997, the ANB base rate was 8.25%. 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 January 31, 1997, the aggregate amount of total indebtedness
outstanding of $51.0 million was as follows: (i) under the ANB Term Loan, $22.1
million, (ii) under the ANB Revolving Loan, $15.5 million, (iii) under the ANB
Additional Loan, $1.4 million, (iv) the 10% Notes Payable to stockholders, $8.9
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 $1.0 million.
13
<PAGE>
The ANB Term Loan was 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 the
10% Notes is subordinated to the payment of the obligations under the ANB Loan
Agreement. The original principal sum of $6 million, plus unpaid interest
thereon of $0.9 million through January 31, 1997, were 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
are 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 beginning January 31, 1995 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 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 a
(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 January 31, 1997, the Company had a net working capital surplus
of $3.5 million and $0.3 million unused and available under the ANB Revolving
Loan. Net cash provided by operating activities during the six months ended
January 31, 1997 was $1.6 million. Net cash used in investing activities totaled
$0.6 million, of which substantially all was used for the purchase of
replication equipment.
14
<PAGE>
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 January 31, 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. 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 - Not
applicable
Item 5. - Other Information - Not applicable
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits - Not applicable.
(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: March 17, 1997 By:_______________________________
George N. Fishman
Co-Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date: March 17, 1997 By:________________________________
Charles P. Kavanagh
Secretary
(Principal Financial Officer
and Principal Accounting
Officer)
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